[Federal Register Volume 63, Number 60 (Monday, March 30, 1998)]
[Rules and Regulations]
[Pages 15069-15072]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-8190]
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FEDERAL RESERVE SYSTEM
12 CFR Part 204
[Regulation D, Docket No. R-0988]
Reserve Requirements of Depository Institutions
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Final rule.
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SUMMARY: The Board of Governors of the Federal Reserve System is
amending its Regulation D, Reserve Requirements of Depository
Institutions, issued pursuant to section 19 of the Federal Reserve Act,
in order to move from the current system of contemporaneous reserve
maintenance for institutions that are weekly deposits reporters to a
system under which reserves are maintained on a lagged basis by such
institutions. Under a lagged reserve maintenance system, the reserve
maintenance period for a weekly deposits reporter will begin thirty
days after the beginning of a reserve computation period. Under the
current system, the reserve maintenance period begins only two days
after the beginning of a reserve computation period.
DATES: Effective date: The final rule will be effective on July 30,
1998.
Applicability date: The final rule will be applicable as of the
maintenance period beginning July 30, 1998. For that maintenance
period, required reserves and the vault cash that can be used to meet
reserve requirements will be based on the computation period that
begins on June 30, 1998.
FOR FURTHER INFORMATION CONTACT: William Whitesell, Section Chief,
Money and Reserves Projections Section, Division of Monetary Affairs
(202/452-2967); Oliver Ireland, Associate General Counsel, (202/452-
3625) or Lawranne Stewart, Senior Attorney (202/452-3625), Legal
Division. For the hearing impaired only, contact Telecommunications
Device for the Deaf (TDD), Diane Jenkins (202/452-3544).
SUPPLEMENTARY INFORMATION:
Background
The Board of Governors of the Federal Reserve System (Board)
published a notice of proposed rulemaking in the Federal Register on
November 12, 1997 (62 FR 60671) that solicited comments
[[Page 15070]]
on proposed amendments to its Regulation D, Reserve Requirements of
Depository Institutions (12 CFR Part 204). Under the proposal, a lag of
thirty days (two full maintenance periods) would be introduced between
the beginning of a reserve computation period and the beginning of the
maintenance period during which reserves for that computation period
must be maintained. The reserve maintenance period therefore would not
begin until seventeen days after the end of the computation period. The
proposal also provides for the same two-period lag in the computation
of the vault cash to be applied to satisfy reserve requirements.
Providing a two-period lag for both required reserves and applied
vault cash will allow the Federal Reserve, as well as depository
institutions, to calculate the level of required reserve balances
before the beginning of the maintenance period. It has become
increasingly difficult to estimate the quantity of balances that
depositories must hold at Reserve Banks to meet reserve requirements in
the concurrent maintenance period, largely because of the
implementation of retail sweep programs by many institutions. In
addition to improving the ability of depository institutions and the
Federal Reserve to estimate and project required reserve balances, the
increased lag also should reduce the level of resources that must be
devoted to these tasks.
The Board received a total of thirty written comments on its
November proposal. Comments were received from eleven banking
organizations, one savings bank, eight depository industry
associations, seven Reserve Banks, a university professor, and a member
of a research institution; the comment list also contains a Board staff
summary of a briefing of Reserve Bank presidents on the issue.
Four Reserve Banks, all but one of the depository institutions, and
all but one of the depository industry associations expressed support
for the proposal. These commenters agreed that lagged reserve
requirements would provide earlier, more accurate information about the
level of required reserves. The improvement in information would make
depositories better able to manage their reserve positions, and would
allow savings on the resources now used to estimate reserve needs.
Better information about the required reserve balances of the banking
system as a whole also would facilitate the implementation of monetary
policy by the Open Market Desk.
While a majority of the commenters supported the proposal, some
commenters, including a depository institution, three Reserve Banks,
and two individuals were opposed to it.
One small bank opposed lagged reserve requirements (LRR) because of
the seasonal surge in deposit inflows it experiences during a single
week in both May and November. With LRR, it would have to wait ``three
weeks to keep the required reserves.'' However, it should not be too
difficult for this institution to find a means of investing its excess
reserves temporarily, and then, if needed, borrow funds from its
correspondent or from market sources in order to meet reserve
requirements. If such funding is unavailable, the institution
presumably would be eligible to apply for a loan from the discount
window.
One Reserve Bank argued that, before abandoning contemporaneous
reserve requirements, the Federal Reserve should explore the
possibility of reducing funds rate volatility by conducting multiple
open market operations in a single day. Careful consideration has
indeed been given to this idea. For the first time since the 1970s, the
Open Market Desk in 1997 began conducting multiple repurchase agreement
operations within a day, when needed. In practice, however, such
operations cannot be undertaken very late in the day, when much of the
volatility in the funds rate arises, because the securities wire for
book entry transactions closes at 3:30 p.m., and because of a limited
availability of collateral for repurchase agreement transactions late
in the business day.
Other objections to a shift to LRR were expressed by three Reserve
Banks, a university professor, and a member of a research institution.
Some argued that LRR would make it more difficult to return to a regime
of monetary targeting. However, there appears to be only a remote
chance that the FOMC would move away from its current eclectic
policymaking, involving review of a wide variety of macroeconomic
indicators, in order to return to a regime of strict monetary
targeting. The monetary aggregates have not proved to be sufficiently
reliable to perform such a role. M1, the aggregate against which
reserves currently are required, is no longer a candidate for monetary
targeting in part because of its heightened interest sensitivity
following the deregulation of deposit interest rates in the 1980s, and
also because of uncertainties related to retail sweep programs and
overseas demand for United States currency. M2 has also suffered from
an unstable relationship to income and interest rates in this decade.
Broad monetary aggregates like M2 may again become useful as
indicators, but they are not likely to be employed as strictly targeted
variables to be closely controlled over short time periods.
Even if M2 growth were used as a strict target for monetary policy,
a federal funds rate instrument would be more appropriate than a
reserve quantity instrument to hit that target. The reason is that the
bulk of M2 is not by law subject to reserve requirements, and as a
result, its relationship to reserve quantities is quite loose. With a
federal funds rate instrument, rather than a reserve quantity
instrument, there is no advantage to contemporaneous reserve
requirements; in fact, monetary policy is more easily implemented with
LRR.
Some of those objecting to LRR emphasized the advantage that
contemporaneous requirements have over LRR in a regime of both strict
monetary targeting and use of predetermined reserve quantities to hit
those monetary targets. It is indeed the case that contemporaneous
reserve requirements have a timing advantage compared with LRR in this
type of operating regime, although the chance of returning to such a
regime appears remote. In particular, when using a reserve quantity
instrument, the response of short-term interest rates to unexpected
changes in money demand is quicker by a week or two with
contemporaneous requirements.
However, as one Reserve Bank argues, this advantage for
contemporaneous requirements is rather small: ``[E]xperience suggests
that, in practice, the deposit adjustment mechanism * * * would be
essentially the same under both contemporaneous accounting and the lag
proposed by the Board.'' In particular, ``transaction deposits do not
appear to respond to changes in cost within a time frame as short as
the current, two-week maintenance period.''
While contemporaneous requirements would have an advantage under
monetary targeting with a reserve quantity instrument, LRR does not
preclude such a regime, as one Reserve Bank mentioned. In fact, reserve
requirements were lagged during the 1979-to-1982 period, when the
Federal Reserve used a nonborrowed reserve instrument to hit targets
for intermediate-term M1 growth.
One Reserve Bank commented that the Federal Reserve should employ a
system that helps in the implementation of monetary policy under the
operating regime it is using at the time. And LRR is ``more consistent
with our current regime.'' If the Federal Reserve returned
[[Page 15071]]
``to reserve targeting at some point in the future and * * * desired a
slightly more rapid response of interest rates to variations in the
money stock,'' it could then reinstitute contemporaneous requirements.
Another Reserve Bank commented that, while the likelihood of
returning to a reserve-based operating regime was remote, ``the Federal
Reserve would have a much easier time converting from lagged to
contemporaneous reserve accounting than it did in the past,'' because
``[o]ur statistical processing systems have become much more
sophisticated and flexible.'' Accounting and information systems at
banks and thrifts have also improved substantially in recent years, as
pointed out by some commenters, and therefore depositories should also
find it less difficult than in 1984 to return to contemporaneous
requirements, if it became necessary.
In summary, while contemporaneous reserve requirements would have
an advantage over LRR in a situation in which the FOMC both returned to
monetary targeting and switched from an interest rate to a reserve
quantity operating instrument, the probability of that situation
occurring appears to be exceedingly small and the advantage would be
modest.1 Under the operating procedures employed currently
and likely to be employed prospectively by the Federal Reserve, LRR is
preferable to contemporaneous reserve requirements for the purpose of
monetary policy implementation. Lagged requirements would also allow
resource cost savings both for the Federal Reserve and for
depositories, and would permit depositories to cut some of the
financial losses owing to the holding of reserve balances that are at
times insufficient and at times too high. For these reasons, the Board
is implementing lagged reserve requirements as proposed.
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\1\ Should the Federal Reserve determine that effective monetary
policy required that a reserve instrument be employed to hit a money
supply target, it could consider whether the shorter lag of
contemporaneous reserve requirements would again be useful; it would
need also to consider whether to ask Congress for permission to
impose reserve requirements on personal time and savings deposits in
order to better align required reserves with the monetary aggregate
most likely to be targeted, M2.
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Some of the comments received included suggestions that were
unrelated to the issue of lagged versus contemporaneous reserve
requirements. One Reserve Bank argued that abolishing reserve
requirements, ``would free up resources spent by depository
institutions on sweep accounts and other devices that minimize reserve
requirements.'' This is a legislative issue, however, rather than an
issue for a Board decision.
A major clearinghouse did not appear to object to lagged reserve
requirements, but recommended that, to reduce uncertainties about
reserves positions, the Federal Reserve should restrict the last
fifteen minutes of trading on the funds wire each day to direct trades
among depositories for their own account at a Reserve Bank. The Board
will continue to review this and other ideas for reducing volatility in
the market for reserves in order to determine whether any further
adjustments in its procedures are appropriate.
A banking association argued that the implementation of lagged
reserve requirements should allow elimination of the costly ``Daily
Advance Report of Deposits,'' which collects deposit and vault cash
data daily from large banks and thrifts. This report is indeed used to
estimate the level of required reserve balances in the current
maintenance period, and with lagged requirements, it would no longer be
needed for this purpose. However, the report also provides an early
indication of the weekly changes in the monetary aggregates. For this
reason, the Board does not plan to eliminate this report at the present
time. In the future, however, the Board could evaluate whether this
report from large depositories and a similar report from a sample of
small banks might be trimmed to reduce burdens on depository
institutions and the Federal Reserve.
Final Regulatory Flexibility Analysis
The Regulatory Flexibility Act (5 U.S.C. 601-612) requires an
agency to publish a final regulatory flexibility analysis (5 U.S.C.
604) containing: (1) A succinct statement of the need for and the
objectives of the rule; and (2) a summary of the issues raised by the
public comments, the agency's assessment of the issues, and a statement
of the changes made in the final rule in response to the comments; (3)
a description of significant alternatives to the rule that would
minimize the rule's economic impact on small entities and reasons why
the alternatives were rejected.
As discussed above, the purpose of the amendment is to improve the
ability of the Federal Reserve and depository institutions to estimate
accurately the quantity of reserves that will be needed to meet reserve
requirements. The amendments will affect only institutions that are
weekly deposits reporters, which generally include depository
institutions that have total deposits of $75 million or greater, as
only these institutions currently are required to maintain reserves on
a contemporaneous basis.2 The amendments will not increase
reporting or recordkeeping requirements associated with Regulation D
for institutions that are weekly reporters, but will significantly
simplify compliance with the rule for these institutions. The
amendments therefore will not increase regulatory burden on small
institutions generally.
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\2\ While weekly reporters that are Edge or Agreement
corporations or U.S. branches or agencies of a foreign bank may have
deposits of less than $75 million, the deposits of these entities
represent only a portion of the total deposits of the larger
organizations to which they belong.
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For those small institutions that are affected, the amendments
generally will reduce regulatory burden. Although a few institutions
with large seasonal variations in their deposit bases may experience a
greater temporary mismatch between their levels of maintained versus
required reserves, these mismatches can be managed without undue burden
through the money markets in the same manner that depository
institutions currently manage their reserve positions.
As discussed above, the Board also has considered and continues to
consider other methods for reducing uncertainties in the market for
reserves. The Board recognizes that the amendments considered here do
not address all issues related to such uncertainties, but believes that
the adoption of a lagged reserve maintenance system will provide a
significant improvement in information regarding the level of required
reserve balances for both the Federal Reserve and for depository
institutions.
List of Subjects in 12 CFR Part 204
Banks, banking, Federal Reserve System, Reporting and recordkeeping
requirements.
For the reasons set out in the preamble, the Board is amending part
204 of chapter II of title 12 of the Code of Federal Regulations as
follows:
PART 204--RESERVE REQUIREMENTS OF DEPOSITORY INSTITUTIONS
(REGULATION D)
1. The authority citation for part 204 continues to read as
follows:
Authority: 12 U.S.C. 248(a), 248(c), 371a, 461, 601, 611, and
3105.
2. In Sec. 204.3, paragraph (c) is revised to read as follows:
Sec. 204.3 Computation and maintenance.
* * * * *
(c) Computation of required reserves for institutions that report
on a weekly basis. (1) Required reserves are
[[Page 15072]]
computed on the basis of daily average balances of deposits and
Eurocurrency liabilities during a 14-day period ending every second
Monday (the computation period). Reserve requirements are computed by
applying the ratios prescribed in Sec. 204.9 to the classes of deposits
and Eurocurrency liabilities of the institution. In determining the
reserve balance that is required to be maintained with the Federal
Reserve, the average daily vault cash held during the computation
period is deducted from the amount of the institution's required
reserves.
(2) The reserve balance that is required to be maintained with the
Federal Reserve shall be maintained during a 14-day period (the
``maintenance period'') that begins on the third Thursday following the
end of a given computation period.
* * * * *
By order of the Board of Governors of the Federal Reserve
System, March 24, 1998.
Jennifer J. Johnson,
Deputy Secretary of the Board.
[FR Doc. 98-8190 Filed 3-27-98; 8:45 am]
BILLING CODE 6210-01-P