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Federal Reserve Bank of St. Louis
Collection: Paul A. Volcker Papers
Call Number: MC279
Box 25
Preferred Citation: Fact Book: Monetary Improvement Program Testimony, 1979; Paul A. Volcker
Papers, Box 25; Public Policy Papers, Department of Rare Books and Special Collections, Princeton
University Library
Find it online: http://findingaids.princeton.edu/collections/MC279/c158 and
https://fraser.stlouisfed.org/archival/5297
The digitization ofthis collection was made possible by the Federal Reserve Bank of
St. Louis.
From the collections of the Seeley G. Mudd Manuscript Library, Princeton, NJ
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Federal Reserve Bank of St. Louis
FACT BOOK
MONETARY IMPROVEMENT
PROGRAM TESTIMONY
9/26/79
MONETARY IMPROVEMENT LEGISLATION
TITLE I
EMERGENCY UNIVERSAL RESERVES
1.
Universal reserve requirements on transactions and non-personal
time deposit accounts, at all depository institutions.
2.
Reserve ratios and reservable liabilities same as S. 85, i.e.,
Transactions balances:
Non-personal time:
37, < $10 mm.
127 > $10 mm.
07 < $10 mm.
370 > $10 MM.
3.
Pricing and access same 13 S. 85, i.e., discount window open to
all institutions having transactions accounts; all other services
priced competitively.
4.
Interest paid on reserves against interest-bearing transactions
accounts at maximum of 2 percent below portfolio rate.
TITLE II
PERMANENT VOLUNTARY RESERVE SYSTEM
1.
Title II takes effect only when all conditions of Title III are met.
2.
Any bank eligible to be a member. Any other institution eligible to
be affiliate member if reserve balances held voluntarily.
3.
Affiliate members not subject to Federal Reserve supervision.
4.
Reserve requirements same as in Title I.
5.
Interest paid on all required reserves at portfolio rate, subject to
limitations of Title III.
6.
Supplemental reserve authority provided as "safety net":
Up to 57 on all deposits.
Interest at 1-1/27 below portfolio rate.
7.
Access and pricing as in Title I.
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Federal Reserve Bank of St. Louis
4,
-2-
TITLE III
TRANSITIONAL CONDITIONS
1.
When Regulation Q ceilings on all time and savings deposit rates are
lifted, interest may be paid at up to the portfolio rate on reserves
held against such deposits.
2.
When Regulation Q ceilings on interest-bearing transactions deposits
are lifted, interest may be paid at up to the portfolio rate on
reserves held against such deposits.
3.
When the prohibition of interest on demand deposits and all Regulation Q
ceilings are removed, interest may be paid on all reserves at up to the
portfolio rate.
4.
By January 1, 1982, Board and Treasury to prepare a joint report on
possible changes in the income tax paid by depository institutions to
ensure that such institutions are paying their fair share.
5.
Both Regulation Q and the prohibition of interest on demand deposits are
to be phased out by the end of five years from enactment.
6.
Voluntary reserve system of Title II will supersede the temporary universal reserve system when
Interest paid on all reserves, and
At least 757 of transactions deposits and 607 of total
deposits are at members or affiliate members.
7.
Universal reserve requirements would be reinstated if, under the
voluntary system
Less than 657 of transactions balances, or
507 of total deposits are at members anTaffiliate members.
8.
Total amount of interest that may be paid on reserves limited:
less
less
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Federal Reserve Bank of St. Louis
Total interest paid on reserves (excluding supplemental balances),
income taxes paid on such interest received by the private sector,
revenues from service charges may not exceed 67 of the amount the
Federal Reserve pays to the Treasury in that year as interest on
Federal Reserve notes.
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Federal Reserve Bank of St. Louis
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1
The following is offered as a s!lbstitute to Title XI of U.n. 4986
("Depository Institutions Deregulati()ri Act of 1979"). The new Title XI follows:
TITLE XI - MONETARY POLILY IMPROVEMENT
ACT of 1980
DEHNITtoNs
2
Sc. noi.. Section 19(a) of the Federal Reserve Act (12
3 II.S.C. 461(a)) is amended by adding at the end thereof the
follnwing new paragraphs:
'Hie term 'depository institution' means—
'(1) any insured bank as defined in section 3 of
7
8
9
10
11
12
13
14
15
the Federal Deposit Insurance Act;
"(2) any mutual savings bank as defined in section
3 of the Federal Deposit Insurance Act;
"(3) any savings hank as defined in section 3 of
the Federal Deposit Insurance Act;
"(4) any insured credit union as defined in section
101 of the Federal Credit Union Act;
"(5) any member as defined in section 2 of the
Federal Home Loan Bank Act;
'((;) any insured institution as defined in section
r
17
.101 of the National Housing Act; and
8
"(7) for the purpose of section 13 and the four-
19
ternlh paragraph of section 16, any association or
20
entity which is wholly owned by or which consists only
21
of institutions referred to in clauses (1) through (6).
02
"The term 'bank' means any insured or noninsured
23 bank, as defined in section 3 of the Federal Deposit Insur24 fine(' Act, other than a mutual savings bank or a sayings
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Federal Reserve Bank of St. Louis
111•••--_
• go
2
1 bank as defined in section :3 of the Federal Deposit Insurance
i)
A tt .
'The term 'transaction account' means a deposit or ac1 turn!! ()11 which the depositor or account holder is allowed to
5 make withdrawals hy negotiable or transferable instrument,
G payment orders
or
withdrawal, or other similar item for the
7 purpose of making payments or transfers to third persons or
8 others. Such term includes demand deposits, negotiable order
of wit hdrawal accounts, savings deposits subject to automatic
lo transfers, and share draft accounts.
"'Re term 'nonpersonal time deposits' means a time de12 posit or account representing funds deposited to the credit of,
13
or
in which anv beneficial interest is held by a depositor who
It is not a natural person.
15
•
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Federal Reserve Bank of St. Louis
"In order to prevent evasions of the reserve require-
16 merits imposed by this Act, after consultation with the Board
17 of Directors of the Federal Deposit Insurance Corporation,
18 the Federal Home Loan Bank Board, and the National
19 Credit Union Administration Board, the Board of Governors
20 of the Federal Reserve System is further authorized to deter21
mine, by regulation or order, that an account or deposit is a
22
transaction account if such account. or deposit may be used to
23 provide funds directly or indirectly for the purpose of making
21
payments or tiansfers to thiid persons or others.".
;
•
•
3
REPoicriNG itEQuiltEmENTs
•• •
,)
,•
4 •
sf!,:. 1102. SN'11011 11(n) of the Federal Reserve Act (12
11.S.C. 2.18(a)) is amended—
(I) by inserting "Or immediately after "(n)"; and
5
(2) by adding al the eml thereof the following new
paragraph:
7
"(2) Ti) require any depository institution specified in
8 this paragraph to make, at such intervals as the Board may
9 prescribe, such reports of its liabilities and assets as the
10 Board 111:1 V determine to be necessary or desirable to enable
11 the Board to discharge its responsibility to monitor and con12
monetary and credit aggregates. Such reports shall be
13 made (A) directly to the Board in the case of member banks
11 and in the rose of other depository institutions whose reserve
15 requirements under section 19 of this Act exceed zero, and
16 (1) for all other reports to the Board through the (i) Federal
17 Deposit Insurance Corporation in the case of insured State
18 nonmember hanks, savings banks, and mutual savings banks,
(ii) National Credit Union Administration Board in the case
20 of insured credit unions, (iii) Federal !Ionic Loan Bank Board
21 in the case of ally institution insured by the Federal Savings
22 011(1 Loan Insnrance Corporation or which is a member RS
23 defined in section 2 of the Federal Home Loan Bank Act,
gr.
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Federal Reserve Bank of St. Louis
21 and (iv) such State officer or agency as the Board may desig,)r• nate in the rose of any other type of
hank, savings and loan
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Federal Reserve Bank of St. Louis
F
4
association, or credit union. The Board shall endeavor to
2 avoid the imposition of unnecessary burdens on reporting institutions and the duplication of other reporting requirements.
.1 Any data provided to any department, agency, or instrumen5 Wily of the United States pursuant to other
reporting ref; quirrments shall be made available to the Board. The Board
7 may classify depository institutions for the purposes of this
8 paragraph and may impose different requirements on each
9 such class.".
10
11
19
13
RESERVE REQUIREMENTS
Sec. 1103.
Section 19(h) of the Federal Reserve Act (12
461(1))) is amended to read
''(h)( 1) H
RS
follows:
ti itvE H EQUIUEMENTS.—(A) Each deposi-
tory institution shall maintain reserves against its transaction
15 accounts as the Board may by regulation prescribe solely for
le) the purpose of implementing monetary policy—
17
(i) in the ratio of 3 per centum for that portion
18
of its total transaction accounts of $10,000,000 or less;
19
and
20
"(ii) iii the ratio of 12 per centum, or in such
21
other ratio as the Board may prescribe not greater
.)•)
than 13 per cent umimu and not less than 11 per ccntum,
for that portion of its total transactions accounts in
2.1
excess of $10,000,000.
S
"HO Encii dcpotillrny
IIM111111011
sliiill
maintain reserves
against its nonpersonal time deposits as the Board may by
3 regulation prescribe solely for the purpose of implementing
monetarv policy5
"(1) in the ratio of zero per centum for that por-
e)
lion of its nonpersonal time deposits if $10,000,000 or
7
less; and
"(ii) in the ratio of 3 per centum, or in such other
8
ratio not greater than 12 per centum and not less than
I()
zero per mown, for that portion of its nonpersonal
11
time deposits in excess of the $10,000,000.
12
"(2) WAIVER
OF
RATio IJIMITS.—Upon a finding by
13 the Board that extraordinary circumstances require such
1.1 action, the Board, after consultation with the appropriate
15 committees of the Congress, may impose reserve require1G
above or below the limits otherwise prescribed by this
17 section for a period not exceeding thirty days, and for further
18 periods not exceeding thirty days each by affirmative action
19 by the Itomd in each instance. The Board shall promptly
20 transmit to the Congress a report of any exercise of its
,• authority under this paragraph and the reasons for such
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
"(
SUPPLEMENTARY DEPOSIT.--In addition to the requirements
of this section, upon an affirmative vote of five or more
memhets of
the Boatd, every depository institution shall maintain
with the Federal Rerve Dank of which it is a member or at
which it maintains an account or with another institution
pursuant to subsection (c)(2) of this section, a supplementary
deposit of up to 3 per cent of the total of its transaction
accounts and nonpersonal time deposits, or up to 5 per cent
of its transaction accounts.
The supplementary deposit shall
be required only after consultation by the Board with the
Boards of Directors of the Federal Deposit Insurance Corporation,
the Federal Home Loan Bank Board and the National Credit Union
Administration Board and upon a finding by the Board that
such deposit is necessary to effectuate the purposes of monetary
policy, or
tor the efficient operation of the payments mechanism.
The Board shall promptly transmit to the Congress a report
of an exercise of its authority to require supplementary deposits
and the reasons for such exercise.
The supplementary deposit
shall be maintained by the Federal Reserve Banks in an Earnings
Participation Account which shall receive earnings to be paid
by the Federal Reserve Banks quarterly at a rate equal to
the rate earned on the securities portfolio of the Federal
Reserve System during the previous calendar quarter.
The
Board may prescribe rules or regulations concerning the payment
of earnings on Earninys Participation Accounts by Federal
•
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Reserve Banks under this section.
The Board shall review
and determine the need for continued maintenance of supplementary
deposits if a supplementary deposit has been required of depository
Ir;
V.
institutions continuously for a one year period and shall
promptly tiansmit a report to the Congress on the continued
need for the supplementary deposit.
(4) PuivtiarGEs
INsTrruTioNs
MAINTAINING 14:-
SEIO Es.—During any period that a depository institution is
Maintoining reserves pursuant to this section, such depository
• •.
••••••
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
8
institution shall be entitled to all the privileges of member'ship in the l'ederal Heserve System, except (lint, if it. is not
3 otherwise a member, it may not hold stock
in, Or vote
for any
director of, a Federal Reserve bank.
"(5) REsEuvEs REI,ATED To FOREIGN 0111JIOATIONS
5
OR
AssETs.—Foreign branches, subsidiaries, and interna-
7 tional banking facilities of nonmember depository institutions
8
1 11 maintain reserves to the same extent required by the
Board of foreign branches, suhsidiarics, and international
to
banking facilities of member banks. In addition to any re-
1 1 serves otherwise required to be maintained pursuant to this
10 subsection, any depository institution shall maintain reserves
13 in such ratios as the Board may prescribe against—
"(A) net balances owed by domestic offices of
1:5
such depository institution in the United States to its
16
directly related foreign offices and to nonrelated foreign
17
depository institutions,
"(1) loans to !hiked States residents made by
overseas offices of such depository institution if such
depository institution has one or more offices in the
91
.11.• ••••
linited States, and
'V') assets (including participations) held by for-
23
eign offices of a depository institution in the United
24
States N‘ hich were acquired from its domestic offices
WM.
9
•••
.
11 6
, I
(other than assets representing credit extended to persons not residents of the United Sta(es).
3
"(6) Ext.:NIP-I-10N FoR CERTAIN 1)EPOSIT8.—Tile Tequirements imposed by paragraph ( Yojf IlrilirStifiSreaellahdU 3)
not apply to deposits payable only outside the States of the
6 United States and the District of Columbia, but nothing in
7 this subsection limits the authority of the Board to impose
conditions and requirements on member banks under section
9 25 of this Act or the authority of the Board under section 7
I() of the International Ranking Act of 1978 (12 U.S.C. 3105).
11
"(7) DiscouNT AND BOR!WW1 NO.—Ally depository in-
19
stitution in which transaction accounts are held shall be entitled to the same discount and borrowing privileges as
1 1 member banks.
15
ts
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Federal Reserve Bank of St. Louis
"(8) TuANsrrioNm, AruJUSTM ENTS.-
16
"(A) Any depository institution required to main-
17
tam reserves under this section which was engaged in
18
business on Julv 1, 1980, but was not a member of the
19
Federal Reserve System on that date, shall maintain
20
reserves against its deposits during the first twelve-
21
month period following the effective date of this para-
22
graph in antounts equal to one-f if th of thoSV other-
23
wise required by this section, during the second such
2.1
Nel‘(-month period in amounts equal to two-Iaths of
25
those otherwise required, and during the third such
9
10
twelve-month period in amounts equal to three-f if ths
9
of
those otherwise required.
"(II) With respcel to any bank which was a
member of the Federal Reserve System on July
1,
19 no, the amount of required reserves imposed pursu-
ant to this section on the effective date of this section
7
that exceeds the amount of required reserves maintained by the member institution during the reserve
computation period immediately preceding the effective
10
date of such paragraphs may, at the discretion of the
11
Board and in accordance with such rules and regula-
12
tions as it may adopt, be reduced by
80
per centum
during the first year which begins after such effective
per centum during the second year, and
1.1
date,
15
per ccntum during the third year.
60
40
"(() In order to provide for an orderly transition
17
period, the Board shall implement the reduction in re-
18
serve requirements resulting from the amendment of
19
this subsection by the Monetary Policy Improvement
'20
Act of 1980 with respect to member banks over a
21
period not greater than
•29
fcctive date of such paragraph.
.,3
I
•••
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Federal Reserve Bank of St. Louis
sixty
months after the ef-
"(I)) Any depository institution
which is a
meifihrr bank on ink. 1, 1980, and leaves the Federal
Reserve Svslem after such dale shall continue to be
11
required to maintain reserves against its deposits after
9
the effective date of this section as if it
FORM
5
were a member
OF RESERVES
sce. 1104. Section 19(c) of the Federal Reserve Act, as
I; a mended ( 1 2 U.S.C. Ci 1) is amended to read
7
"(c) Reserves held by
a
RS
follows:
depository institution to meet
8 the requirements imposed pursuant to subsection (b) of this
9 section shall be in the form of—
f()
''(1) balances maintained for such purposes by
II
such depository in
12
of which it is a member or at which it maintains
1 :1
account. However, the Board may, by regulation or
1.1
order, permit depository institutions to maintain all or
15
a portion of their required reserves in the form of vault
1 ti
cash, except that any portion so permitted shall be
17
identical for all depository institutions; and
in the Federal Reserve bank
an
18
"(2) balances maintained by a nonmember deposi-
19
tor y i nstit u tion i n a depository institution that maina ins required reserve balances at a Federal Reserve
hank. in a Federal home loan bank, or in a central ii00
quidit V heility for credit 'mini's, if such depository in-
2.3stitution, Federal home loan bank, or central liquidity
soch foods in the form of balances in
•••
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Federal Reserve Bank of St. Louis
rrdera I It cscrve hank of Min]) it is a member or
at
-
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I
which it maintains an account. Balances received by
a
depository institution from another depository institut in nml used to satisfy t he reserve requirement 411-
3
posed mi such (h.pository institution by this section
shall not be subject to the reserve requirements of this
5
4
section imposed on such bank, and shall not be subject
".•••••••.1.16
1.1194
7
to assessment imposed on such bank, pursuant to see-
8.
lion 7 of the Federal Deposit Insurance Act.".
•••4
441;J
INTEREST ON RESERVES
• .r.th..1
.1,t0
:111
Sec. 1105.
Section 19 of the Federal Reserve Act, as
amended
(12 U.S.C. 461), is amended to add a new
subsection to read as follows:
"(L)
PAYMENT OF INTEREST ON RESERVES.--(1)
Five years after
the effective date of the Monetary Policy
Improvement Act of 1980, the
Board is authorized to pay interest on
any reserve balances held against
deposits that are not subject to interest
rate ceilings.
The rate of
interest paid on such reserve balances
shall not exceed the rate of
return on the securities held in the
Federal Reserve System Open Market
Account.
"(2)
Upon the °Elective date of the
repeal of section 1832
of Title 12 of the United States Code,
the Board is authorized to pay
interest on reserve balances held against
interest earning transactions
.4
accounts.
The rate of interest paid on such
reserve balances shall
not exceed seventy-five per centum of
the ceiling rate of interest payable
on such transactions accounts.
If no such ceiling rate is in effect,
the rate or intere:;l paid on uu(Al reserve
balances shall not exceed
the rate of return on the securities
held in the Federal Reserve System
open Maiket Account.
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Federal Reserve Bank of St. Louis
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"(3)
olm)n the eflective d.Ite of
the repeal of neclions 371a
and 1828(g) of Title 12 of the United States Code, the Board is authocized
to pay interest on the reserve 1)(31am:en held alainst deposits that arc
payable on demand.
The rate of interest paid on such reserve balances
shall not exceed seventy-five per centum of the ceiling rate of interest
payable on demand deposits.
If no such ceiling rate is in effect, the
rate of interest paid on such reserve balances shall not exceed the
rate of return on the securities held in the Federal Reserve System
Open Market.
"(4)
The total annual interest payments authorized by this
section (excluding interest payments on supplemental reserve balances
held pursuant to section 1103(b)(3)) shall not exceed 10 per centum of
the interest earned on the Federal Reserve System Open Market Account.
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Sec. 1106. (a) The
N I.:01 IS AMEN
-
ENTS
first paragraph of section 13 of the Fed-
Ii cr:11 Rescr‘p Ari (1'2 U.S.(. 3.12) is amended as follows:
12
:1
44:4
(1) by inserting after the words "member banks"
thy ‘‘ olds "or other (h.p),itorv institntions";'
11
(2) hv inserting after the words "payable upon
15
presentatifm" the lirst and third tunes they appear, the
lt;
‘‘ords "or other items";
17
(31 by inserting after "payable upon presentation
ithin its district," the words "or other items";
bv inserting after "nonmember bank or trust
tom pa ny,„ \\ miniver it appears the words "or other
(
.44:4
2()
•))
(5) by striking out "sufficient to offset the items in
•
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Federal Reserve Bank of St. Louis
9:3
transit held for its account bv the Federal Reserve
2.1
hank" and inserting in lieu thereof the words "in such
ainnunt as the Bnard determines taking into account
f
15
items in transit, scrvices provided by the Federal Re-
1
\ I'
b1111(, 1111(1
fithrr
Inctnrs RR the Itniirt1 nifty deem
appropriate"; and
3
(( .1)
by ',ladling liftcr
worilm
I
nonmember
bank" aftcr tlic second colon the Nvords "or other depoitorv institution".
(b)(1) The second paragraph of section 16 of the
Federal
Reserve Act (12 U.S.C. 412) is amended (1) by
adding at the
end of the third sentence the following:
or assets that Federal Reserve Banks may purchase
or hold
under S 14 of this Act." and (2) by adding at the
end thereof
the following:
"Collateral shall not be required for Federal
Reserve notes that are held in the vaults of Federal
Reserve
banks.
(2) Section 14(b)(1) of the Federal Reserve Act
(12 U.S.C.
355) is amended by inserting after the words"
United States"
the first time it appears the following:
'and obligations of, or fully guaranteed as to
principal and
interest by, a foreign government or agency thereof,
".
21
•10
":1
21
thiitecnth paragraph of section 16 of the Feder-
(c)
1(1.,ti‘c Act (12 (1.S.C. 3(()) is amended—
(1)
shiLing mu
11n. Nvords "member banks"
‘vhdt.‘ cr 1111.v npriar owl inserting in lieu thereof "de:11111 .
\
1111,
61\1 it iiiiiiiiS"
;
••••
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Federal Reserve Bank of St. Louis
•-4
16
(2) by st! iking out the words "member bank"
..4)
wherever they appear and inserting in lieu thereof "depositorv institution"; and
(3) hy inserting after "checks" wherever it ap-
•1
pears the words "and other items, including negotiable
1;
orders of withdrawal and share drafts".
(d) The fourteenth paragraph of section 16 of the 1"eder-
8 al Reserve Act (12 11.S.C. 248(o)) is amended by striking out
"its member banks" and inserting in lieu thereof "depository
I() institutions".
11
(e) The first sentence of section 19(e) of the Federal
I° Reserve Act (12 11.5.0. 4(3) is amended to read as follows:
13 "No !windier hank shall keep on deposit with any depository
14 institution which is not authorized to have access to Federal
15 licsprvr advances under section 10(1,) of this Act a sum in
16 excess of 10 per centum of its own paid-up capital and sur17 plus.".
IR
19
A1101,ITION OF PEN, 1,TY HATE
Sec. 1107.
Section 10(1) of the Federal Reserve Act (12
2() I 1.5.C. 34 710 is amended bv striking out the second sentence
°I of the first paragraph thereof.
02
93
21
No.
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Federal Reserve Bank of St. Louis
Putut NG 01,sEnvIcEs
Sec. 1108.
The Federal Reserve Act is amended by insert-
after section
I
1 Ibp follow tug m'w section:
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Federal Reserve Bank of St. Louis
17
"SEC. 11A. (a) Not later than the first day of the sixth
calendar month after the date of enactment of the Monetary
3 Policy Improvement Act of 1979, the Board shall publish for
,1 piddle comment a set of, pricing principles in accordance with
5 this section and a proposed schedule of fees based upon those
principles for Federal Reserve bank services to depository
7 institutions, and not later than the first day of the eighteenth
8 calendar month after the dale of enactment of the Monetary
9 Policy Improvement Act of 1980, the Board shall
ting
a schedule of fees
begin implemen.
-
for such services which is basf
(d on
11 those principles.
1°
"(h) The services which shall be covered by the sched-
13 tile Of fees under subsection (a) are14
"(1) currency and coin services;
15
"(2) check clearing and collection services;
1G
"(3) wire transfer services;
17
"(1) automated clearinghouse services;
18
"(5) settlement services;
19
"ifil securities safekeeping services;
11(7)
Federal Reserve float; and
‘)()
2I
"(8) any ncw serv ices which (lie Federal Reserve
22
System offers, including hut not limited to payment
03
services to effectuate the electronic transfer of funds.
21
"(c) The schedule of fees prescribed pursuant to this
05 section shall be based on the following principles:
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Federal Reserve Bank of St. Louis
18
All Federal Reserve bank services covered
_
,
:3
by the fee schedule shall be priced explicitly.
"(2) All Federal Reserve bank services covered
:?
e
,
.,
• ,...4.0
v41,113
..,.
,
shall be available to nonmember
..
5
depository institutions and such services shall be priced
...
6
at the same fee schedule applicable to member banks,
7
except that nonmembers shall be subject to any other
8
terms, including a requirement of balances sufficient for
1
by the (cc schrthlie
clearing purposes, that the Board may determine are
I()
applicable to mewber banks.
11
"(3) Over the long run, fees shall be established
12
on the basis of all direct and indirect costs actually in-
3
curred in
providing the Federal Reserve services
1.1
priced, including interest on items credited prior to
15
actual collection, overhead, and
all
allocation of imput-
ed costs which takes into account the taxes that would
17
have been paid and the return on capital that
would
18
have been provided had the services been furnished
by
a private business firm, except that the pricing
principhis shall give due regard to competitive factors
and
21
the provision of 01) adequate level of such
services
2:3
"(1) Interest on items credited prior to
collection
21
shall be charged at the current rate applicable in
the
25
market for Federal funds.
.1-v•
4,
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Federal Reserve Bank of St. Louis
19
-(d) The Board shall require reductions in the operating
inIllgets of dui redeial Reserve hanks commensurate with
I
`HIV
actual or projected decline in the volume of services to be
pi m
idril liv slich banks. The full amount of any savings so
5 rraliiod shall be paid into the Ilnited States Treasury.".
AtiTttourev cm,STATE
7
Sec. 1107. Nothillg
HANK
sormtvisons
in this Act or in the amendments made
8 hv this Art shall he construed in derogation of the authority
9 of atIV officer or agency of State over any institutions orgato
or existing under the laws of such State.
I1
11
EFFEcTivE DATES
Sec. 1110.
ltw date
This Title shall take effect six months
or enaclment of this Act.
0
APPENDIX B
QUESTIONS FOR NIP TESTIMONY
9/26/79
1.
If we had given the Fed this extended control 10 years ago, would the
Fed have been able to prevent the dangerous inflation we're now
suffering?
2.
Won't covering nonmembers and sterilizing their reserves reduce the
funds they have available for lending in their communities?
3.
If this bill passes, will the Board commit to shift to a reserve
aggregate operating procedure?
4.
Thrift deposits are not money, why should they be covered for
monetary control purposes?
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Federal Reserve Bank of St. Louis
B-2
5.
Would you favor passage of this bill as part of a reform package that
includes eliminating the Fed's supervisory and regulatory functions?
6.
Under these bills, the largest banks in the country will reap millions
of dollars in increased profits.
7.
Do you think that is justified?
Last Sunday on Face the Nation, you answered a question by saying that
the Fed had all the tools necessary to conduct monetary policy, yet
today you are pressing for extending your control over nonmember banks
on the ground you need more tools.
8.
How do you explain this conflict?
The correspondent banking system and private armored carriers can provide
virtually all the payments and money services that the Federal Reserve
does, and probably more efficiently.
If this bill is passed, there
will be no need for the Fed to provide services to members.
Will
you commit to reducing the scale of Federal Reserve Bank services?
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Federal Reserve Bank of St. Louis
B-3
9.
You have proposed weakening the collateral underpinning of the currency.
With inflation running at its current rate, why should we give you
authority to print money even more readily?
10.
Why shouldn't we continue to rely on a voluntary Federal Reserve
System, which has worked so well in the past?
such a system that would halt attrition?
Can we construct
Why wouldn't the Stanton
amendment to H.R. 7 do the job?
11.
These bills seem directed to short-run monetary control improvements.
Mr. Miller and Mr. Burns have both said that short-run fluctuations
in money growth are of little significance.
for better long-run control?
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Federal Reserve Bank of St. Louis
Do you need these bills
Possible Questions by Members of the Senate Banking Committee
on the Reserve Requirement
1.
Why is this legislation needed at all? What kind of decline in
membership has there been in terms of numbers of banks and amount
of deposits, and why does a decline have an adverse effect on monetary
policy?
Anpar.ntly th. Board was willing to acc,pt a
in r•sarv bas.
cov.rag. to 67.5 p.rc.nt--why don't wø wait rath.r than push forward with 1.ris1a
2.
Suppose the Congress does not choose to pass legislation to pay interest
on reserves, what legislation would you suggest? Would the Proxmire
bill achieve your objectives? Would the Federal Reserve support the
House bill, H.R. 7?
3.
Why do you favor a mandatory system requiring banks to keep reserves
with the Federal Reserve? Why doesn't this conflict with the concept
of the dual banking system? Won't this destroy the dual banking system?
4.
Why don't we try the voluntary system first and see if it works? That
was the judgment of the House and many bankers favor that. Why don't
we try it? How much would it cost to ease the burden?
5.
Wouldn't the voluntary system work if we reduced reserves substantially
and permitted access to the discount window only to members?
6.
Wouldn't the voluntary system work if we paid interest on reserves?
You are recommending paying interest on reserves. Why can't we devise a
bill with interest on reserves but a voluntary system?
Why ar you sip hung
up on less to th. Tr.asuryi Isn't our c.ntrel bank worth nor. than $300 million's'
7.
What would be your recommendation for the exemption level in the bill?
Suppose we do not adopt the supplemental reserve concept, what would
be your recommendation for an exemption level in that context?
8.
Would you feel S. 85 was adequate if amended so that there would be no
reserves on time deposits? What would be the total of reserves under
S. 85 without reserves on time deposits? Wouldn't that suffice for
monetary policy?
9.
What specifically would call for use of the supplemental reserve?
Suppose Congress wanted to write some specific standards into the law
as to when the Fed could invoke it, such as when the Fed misses its
monetary targets over X number of quarters. Some would be concerned
about giving a carte blanche to the Fed. What additional standards
would you suggest?
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Federal Reserve Bank of St. Louis
•
-2-
10.
Would there be an exemption for the supplemental reserve or would it
apply to every single institution? How many reserves would it raise?
11.
Why are you concerned about including in this bill credit unions with
only $2 billion in share drafts and not concerned about money market
mutual funds with some $35 billion in transaction balances?
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
August 9, 1979
TO:
Board of Governors
DATE:
FROM:
Staff
(Messrs. Axilrod, Brundy,
and Quick)
SUBJECT:
H.R. 7
To facilitate Board discussion of H.R. 7 as passed by the House,
this memorandum summarizes the main provisions of the bill and reviews their
implications for such concerns as membership attrition, monetary control,
and balances required for use of Federal Reserve services.
Highlights of Bill
The version of H.R. 7 passed by the House on July 20th is a
hybrid bill containing both the provisions of the Reuss-Moorhead -Barnard
1/
(R-M-B) version of H.R. 7 and the Stanton amendment.
The Stanton amendment,
which goes into effect immediately upon enactment of the bill, continues the
existing voluntary system for member banks at substantially reduced reserve
ratios.
If the voluntary system is not adequate to stop attrition from
membership, the R-M-B version of mandatory universal reserve requirements
will be triggered.
The Stanton amendment is applicable to members only.
Reserve
requirements on transactions accounts of member banks are reduced substantially.
A 3 percent reserve ratio is imposed on the first $35 million in transactions
deposits at a member bank.
applies.
Above $35 million an ll percent reserve ratio
The Board is permitted to adjust these ratios within a range of
4 to 12 percent (sic).
The $35 million breakpoint for the lower reserve
ratio is indexed to the rate of growth of total transactions deposits.
1/
The provisions of H.R. 7 are summarized in Appendix 1.
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Federal Reserve Bank of St. Louis
The Foard has authority under the bill to vary reserve requirements
on short-term (less than 6 months to maturity) non-personal time deposits
in a range of zero to 8 percent, but there is no authority --other than
emergency powers--to set reserve requirements on other domestic time and savings deposits.
The reserve ratio on short-term non-personal time deposits is
initially set at zero.
In the House debate, Representative St. Germain, whose
amendment reduced that ratio to zero, stated that the ratio should remain
at zero unless the Board were 1) to negotiate a Eurodollar reserves agreement
with other central banks, and in addition, 2) to find that economic conditions
required the imposition of reserve requirements on time deposits.
These reserve requirement provisions from the Stanton amendment
are phased in over a three-year period, with 50 percent of the resulting
reduction in reserve requirements occurring in the first year and 25 percent
in each of the two subsequent years.
Access to the discount window is provided
at the time of enactment to all institutions having transactions accounts, or
short-term non-personal time deposits, whether or not they hold reserves at the
All other services are to be made available to all depository institutions
Fed.
on equal terms, and a price schedule for services is to be published within six
months after enactment.
In addition, the Stnnton amendment contains certain
transition provisions designed to make it less attractive to withdraw from the
1/
System during the period after enactment. —
In the event that the Stanton amendment does not arrest attrition
from the System, coverage of deposits by Federal reserve requirements will
1/
For example, the required reserves of a bank that withdraws after
enactment will be reduced in three equal annual installments rather
than immediately. "
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Federal Reserve Bank of St. Louis
-3continue to decline.
When deposits at member banks as a proportion of
total deposits at all commercial banks eligible to apply for FDIC insurance
/
2 percent, the mandatory provisions of the R-M-B version of
drops be7ow 671
H.R. 7 come into effect.
At the end of 1978 this trigger ratio was 70.6
percent, down from 71.8 percent at the end of 1977.
The mandatory provisions of H.R. 7 are those of the R-M-B version.
They become effective 180 days after the Board determines that the trigger
point has been reached.
Federal reserve requirements would then apply to
transactions accounts at all depository institutions.
A $35 million exemp-
tion would be provided, indexed at 80 percent of the growth rate of
transactions deposits.
An 11 percent reserve ratio would be initially
imposed above the exemption.
For purposes of monetary policy the Board
could adjust the reserve ratio within the range of 4 to 12 percent.
The
reserve requirement provisions for time or savings deposits are the same
as under the Stanton amendment.
The provision of the R-M-B version of H.R. 7 permitting all
financial assets of the Federal Reserve to count as collateral behind the
note issne was struck on the floor of the House.
As will be discussed,
this raises questions about the feasibility cf implementing the reserve
requirement reductions.
Appendix 2 presents an analysis of the cost and coverage of the
bill using both 1977 and 1978 data.
The Stanton amendment provisions,
which go into effect on enactment, are shown in column 3 and column 6 of
the table.
The R-M-B provision, that go into effect after the trigger
point has been reached, are shown in columns 2 and 5 of the table.
Using
1977 data, the cost to the Treasury of the bill is estimated at roughly
$280 million annually when the phase-in of reserve requirement changes,
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Federal Reserve Bank of St. Louis
•,
been completed.
prices and access has
Reserves at the Federal Reserve Banks
are reduced by approximately $20 billion, based on. 1977 data.
Some 1,450
banks would hold reserves at the Fed under the Stanton provisions, while only
about 450 banks would hold balances at the Federal Reserve after the mandatory
provisions took. effect.
On enactment, when the Stanton amendment becomes effective, the
proportion of all transactions balances at banks subject to Federal reserve
requirements will be roughly 74 percent, the same as under the current
1/
reserve structure.
At present, also about 74 percent of all transactions
balances are held by banks holding balances at the Federal Reserve.
Once
the reserve reductions in the Stanton amendment become fully effective the latter
ratio will drop to 55 percent.
After large nonmember banks were brought
under Federal reserve requirements by the triggering of the mandatory
provisions, the coverage would be 56.percent.
Implications
Membership attrition.
Whether a bank withdraws from membership
under the Stanton amendment obviously will depend on its assessment of
benefits vs. costs.
The net effect on bank earnings of H.R. 7 (including
pricing of services) nearly offsets the burden of membership as earlier
calculated by the staff.
This earlier calculation, however, is not relevant
to the present bill because it assumed that access to services and the
discount window under a voluntary plan remained limited to members (or
to institutions holdings balances equal to member batik required reserves).
Under the Stanton provision, by contrast, any depository institution,
whether or not a member bank, can obtain the services of the Reserve
1/
The coverage estimates shown are based on deposits and membership for
December 1977.
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Federal Reserve Bank of St. Louis
-5
Banks (though the discount window i; available only if it has transactions
or short-term non-personal time balances).
Thus, an institution would be
able to withdraw from membership, obtain all the services, and not be
required to hold sterile Federal reserves (although the Fed could require
the gaffe clearing balances applicable to members as a condition of use of
payments services).
With equal access to services by members and nonmembers alike, the
burden of membership in effect becomes the total amount of balances at the Fed
required to be held above the beyond what are needed for operating or
precautionary purposes.
Under the Stanton amendment, existing member banks
would Ee required to hold approximately $16 billion in required reserves, of
which about $8 billion probably would be held in vault cash for operating
purposes and $8 billion as balances at the Fed.
It is not likely that banks
would voluntarily hold balances of this size at the Fed--and lose about
$700 million per year in earnings--unless the System allowed these balances
to serve as compensation for services received by the bank.
However, it
is not clear that permitting payment for services by a credit against reserve
balances is consistent with the spirit of discussion surrounding the pricing
provisions of H.R. 7.
Moreover, such a reserve credit would significantly
increase .the costs to the Treasury.
On the basis of this analysis, further significant membership
attrition might be expected during the voluntary phase of H.R. 7, unless
banks believe there are substantial public relations, supervisory, or other
technical benefits to membership.
The timing with which banks might in
practice leave the System depends on a very complicated calculation involving
the net gain in earnings from receiving one-third of required reserves per
year for three years on withdrawal as compared with the scheduled phase-down
of required r2serves for existing members.
As a rough estimate, under the
circumstances, the mandatory phase of H.R. 7 may become effective within
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Federal Reserve Bank of St. Louis
two or three years (unless, to repeat, the bill can be administered in such
a way as to permit payment for services by treating reserves as compensating
balances).
Once reserve requirements become mandatory, financial calculations
about the burden of membership become by and large irrelevant.
It seems
likely that banks which found it desirable to be a member when holding
significant quantities of reserves on voluntary basis will continue to do
so when reserve requirements are reduced by two-thirds.
Indeed, the state
bank supervisors have expressed concern that the H.R. 7 reserve ratios are
so low, especially for the smallest banks, that many banks will seek to
convert to a national charter to avoid state requirements.
Moreover, it
is thought that dual examination by the state and by the FDIC is a significant
burden that banks will seek to avoid by converting to a national charter.
Monetary control.
Although H.R. 7 as passed probably would not
make the task of monetary control more difficult, it is not clear that it
would improve the ability of the Federal Reserve to control the money supply.
If the System seeks to control growth of the aggregates by affecting reserve
availability in such a way as to establish a particular interest rate range
consistent with that growth rate, it seems unlikely that H.R. 7 would have
any effect'at all on monetary control.
If the System were to attempt to control an M-1 type monetary
aggregate
using a reserves target, it is not clear whether monetary control
would be facilitated or not.
On the one hand, reserve requirements on demand
deposits at member banks (or non-exempt banks) would be somewhat more uniform.
Thus, the potential complications for monetary control caused by graduated
reserve requirement ratios might be reduced.
On the other hand, the large reduction in reserve requirements would
increase substantially the number of banks at which vault cash needed for
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Federal Reserve Bank of St. Louis
operations would exceed required rescrves.
Thus, the proportion of deposits
at banks wl-ich do not hold reserve balances at the Fed and which are not
subject to binding Federal reserve requirements would be increased.
Con-
sequently, there would be an increased likelihood of deposit shifts between
banks with binding Federal reserve requirements and those banks not bound
and whose desired reserve ratios would differ from the stipulated Federal
requirement, causing additional variability in the M-1/reserves multiplier.
Moreover, the Large reduction in required reserves greatly increases the
M-1/reserves multiplier, so the effect on the money stock of any change
in reserves is amplified.
Thus, any errors in projections of reserve avail-
ability would introduce more slippage into the monetary control process.
Other effects of the bill on monetary policy would arise from the
omission of reserve requirements on time and savings deposits.
Zero reserve
requirements on time and savings deposits would act to stabilize the M-1/
reserves multiplier and thus would improve contro7_ of this aggregate under a
reserves operating target.
However, the System could not—without invoking
emergency provisions--use changes in reserve requirements on time deposits to
affect the cost of managed liabilities (except on non-personal, short-term
time under quite limited conditions).
In addition, lack of reserve requirements
on any class of time deposits would make it more difficult to control an M-2
type monetary aggregate through an aggregate reserve target.
Adegliacy of balances for elcar Ina_
purposes
tioSt incinher
bank ti under
the Stanton amendments and most non-exempt banks under the R-M-B provisions
will have very small balances at the Federal Reserve, particularly in relation
to the services thaL they are likely to use.
As a percent of total depcsits
at banks with reserves at the Fed, reserve balances will drop from the present
4-1/2 percent to a little over 1 percent; as a percent of demand deposits at
those banks, these ratios are 14-1/2 and 3-1/2 percent, respectively.
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Federal Reserve Bank of St. Louis
The
-8-
amount of buffer provided by the resi.rve balances against the possibility of
overdrafts in reserve accounts will be decreased.
Increased overdrafts may
be the outcome.
Should balances from required reserves prove inadequate in practice,
the System would have a number of alternatives, none of which are entirely
satisfactory.
The Fed could ask for additional clearing balances, but an
equitable formula may be difficult to construct.
Or banks without adequate
balances could be required to settle through those with an adequate balance-which might impose a penalty on some banks.
A third possibility would be to
require no specific balance for access to clearing services, but to levy a
substantial penalty for overdrawing the account.
Collateral.
As noted earlier, H.R. 7 no longer has a provision
that permits all financial assets held by Federal Reserve Banks to stand
behind the Fed's currency liability.
As a result, it may not be possible
to implement the reserve requirement provisions of H.R. 7 in full.
In terms
of deposits at the end of 1978, required reserve balances at the Fed would
be reduced by about $24 billion.
Free note collateral at that time was
/
2 billion.
about $191
/
2 billion; in mid-1979 free note collateral was only $131
Thus, the reduction in Government security holdings in the Fed portfolio
that would accompany the decline in required reserves would probably leave
the System without adequate collateral for Federal Reserve notes.
_Reportiny.
As passed, H.R. 7 permits the Fed to obtain asset and
1f nbi 1.1 ty roportn from n11 doponitory inntitutiontl as noodod for monelnry
policy purposes.
Member banks are required to make such reports directly
to the Federal Reserve, but other classes of depository institutions are
required only to report directly their transactions balances and short-term
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Federal Reserve Bank of St. Louis
- 9non-personal time deposits.
All other reports that the Board may require
for monetary policy purposes are to be provided through each institution's
primary federal or state regulator.
This procedure is likely to be cumbersome both from the point of
view of the Board and of the depository institutions that would be required
to report to the Board through two channels.
Moreover, the delays and
communications problem inherent in passing data through the other regulators
is likely to make such data of limited value for guiding day-to-day open
market operations.
While the preceding analysis has focused on certain problem areas,
there are a number of clear benefits for the financial system in the bill.
All depository institutions with transactions accounts receive access tc
the discount window.
And all depository institutions, whether or not they
have transactions accounts, obtain access to System services at a price-which should encourage efficiency in the payments mechanism.
Once the
mandatory reserve requirement provisions go into effect, there will be no
discrimination between classes of institutions with regard to reserve
requirements.
Also, the Board will obtain authority to set reserves on
resources obtained abroad by nonmember depository institutions in the
mandatory phase of the bill.
Finally, the bill does contain an emergency
reserve requirement provision giving the Board authority over all liabilities
of all depository institutions, but applicable only alter consultation with
Congress in extraordinary circumstances for short, renewable periods of time.
Some of these benefits depend on triggering the mandatory
provisions, but there is always the risk that Congress may lower the trigger
point as the actual coverage ratio approaches it,and pressures from nonmember
institutions mount.
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Federal Reserve Bank of St. Louis
Other benefits--such as the "level playing field"
or
-110reserve requirements--are achieved without any clear gain for monetary
control, except possibly over the long-run.
Finally, it should be noted that the bill does have longer-run
implications for the structure of the Federal Reserve System.
Once the
mandatory provisions become effective, they may in practice appear to
conflict with the voluntary nature of membership in the Federal Reserve
System.
Thus, pressures could develop to modify the structure of the System,
perhaps eliminating membership, and questions would be raised in the process
about the role of the System in supervisory matters and the role of Reserve
Banks and their Boards of Directors in monetary matters.
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Federal Reserve Bank of St. Louis
APPENPIX 1
H.R. 7 As Enact, A by The House
Summary of Major Provisions
Sec. 1
Title—Monetary Control Act of 1979.
Sec. 2
Requires all depository institutions to make reports on assets
and liabilities as the Board determines necessary to monitor
and control monetary and credit aggregates.
All member bank
reports are to be made directly to the Board as are reports
for Category A and B deposits of all nonmember depository
institutions.
All other reports by nonmembers are to be through
the principal supervisor.
Sec. 3
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Federal Reserve Bank of St. Louis
(1) The Board may exercise its authority to define the term "deposit"
as applied to required reserves of nonmembers after consultation
with the FDIC, FHLBB, and NCUA.
(2) The term "Category A deposit" means all forms of transactional
accounts (e.g. WYgs and demaPO deposits) except deposits
subject to six or fewer telephone transfers per month.
(3) The term "Category B deposit" means all nonpersonal time
deposits of less than 180 days.
Personal time deposits
are nonnegotiable, nontransferable deposits of a natural
pe.:son.
(4) Graduated reserve ratios may be imposed within the ranges
provided.
- 2-
(5) Domestic reserve requirewents shall not apply to deposits
payable only outside the U.S.
However, Eurodollar reserve
requirements may be applied on such deposits.
(6) Reserve requirements may be imposed or changed for the
sole purpose of implementing monetary policy.
(7) A depository institution that is owned by other institutions
and does not do business with the public shall not be
required to maintain reserves.
(8)
[Numbers (8)
(16)
through
below apply only
after the 67.5%
trigger is reached
as provided by the
Stanton Amendment
(see (17) through
(25) below). However, access to
(9)
the discount
window is
immediately
available to all
institutions with
Category A or
(10)
Category B
deposits.]
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Federal Reserve Bank of St. Louis
The Category A and Category B exemptions for 1979 are
$35 million and $10 million, respectively, plus 80 percent of the
growth of Category A and Category B deposits from December 31,
1977, to June 30, 1978.
Thereafter, the exemption is
indexed to 80 percent of the growth of deposits.
The principal supervisor determines which institutions
will not have deposits above the exemption levels and
thus will not be required to maintain reserves.
Category A deposit reserve requirements shall he 11 percent
initially, within a range of 4-12 percent.
Different
reserve ratios may be established for dirrerent types
of that 7:ategoLy of deposits.
(11) Category B deposit reserve requirements shall be 0 percent
in
within a range of 0-8 percent.
[The leghllativo
history indicates that Mr. St Germain intended this authority
to he used only if (1) there is agreement with the central
banks of other industrialized countries to impose Eurodollar
reserve requirements equally, and (2) economic conditions
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Federal Reserve Bank of St. Louis
warrant such reserve requirements to control Eurodollar
borrowings, after Board consultation with the appropriate
Congressiowil committees.]
(12) Reserves may be imposed on Eurodollar borrowings or nonmember
foreign branches, subsidiaries, and IBP's to the same extent
that may be imposed on member bank foreign branches subsidiaries and IBF's.
The Board may impose reserves on
borrowings from, loans to U.S. residents by, and purchases
of assets from domestic offices by foreign offices of any
depository institution.
[But se (23) below.]
(13) Upon a vote of five Board members that extraordinary circumstances exist, after consultation with the appropriate
Congressional committees, the Board may impose reserve
requirements on all types of liabilities outside the ranges
specified elsewhere tor 30-day periods.
However, the Category A
and Category B exemptions cannot be reduced.
[But see (24)
below.]
(14) A nonmember depository institution maintaining reserves
is entitled to ailL the privileges of membership, except
holding stock in or voting for directors of a Reserve
Bank.
(15) Any depository institution possessing either Category A
or Category B deposits shall be given access to the discount
window.
The Reserve Banks shall take into consideration
the special needs of savings institutions.
-1-
(16) Phase-in Provisions
(a) Required reserves of those institutions who were
nonmembers on August 1, 1978 are phased in over a
10-year period.
(b) Reserve reductions and increases for member banks
on August 1, 1978 are permitted to he phased-in over
a 48-month period.
(c) Any institution that was a nonmember on August 1,
1978 that subsequently becomes a member shall meet
reserve requirements equal to those of a member bank
that is in the process of having its required reserves
reduced under (b).
[The provision is intended to
discourage small nonmembers from switching to national
charter to escape State reserve requirements.]
(d) The phase-in for nonmembers in Hawaii begins in five
years and extends for ten years thereafter.
Stanton
Am?ndments
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Federal Reserve Bank of St. Louis
(17) Each calendar quarter after enactment the noard shall
determine the ratio of total member bank deposits to
all bank deposits ("coverage ratio").
The Board must
publish this determination in the Federal Register and
inform Congress and each member hank of the determination.
(18) Reserve requirements on Category A and Ti deposits shall
apply only to member hanks unless the coverage ratio
is less than 67.5 percent.
When the coverage falls below
67.5 percent, the reserve requirements on Category A
and 13 deposits shall apply to all depository institutions
180 days after the determination is made.
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Federal Reserve Bank of St. Louis
1
-
(19) During the period betweeP enactment and the end of 180
days after the date the 67.5 percent figure is determined
by the Board, every member bank shall keep reserves against
the first $35 million of its Category A deposits initially
in the ratio of 3 percent.
ratio up to 12 percent.
The Board can increase the
The $35 million amount is indexed
100 percent to the growth of total Category A deposits
of all institutions.
Category A deposits in excess of
the indexed amount are reservable initially at 11 percent,
variable within a range of 4-12 percent.
[Category B reserve
requirements are at 0 percent in accordance with (11)
above.]
(20) During the period between enactment and the end of 180
days after the date the 67.5 percent cweraye ratio is
determined, the amount of reduced reserves that a member
bank maintains shall be phased-down over a three-year
period.
The phase-down, however, ends 180 days after
the 67.5 percent figure is achieved, and the four-year
phase-in provision in (16) applies.
(21) Any bank that leaves the System after the date of enactment
shall receive a refund of its required reserve balances
in three equal annual payments.
(22) Banks that were members on May 24, 1979, that leave the
System thereafter shall not be entitled to the ten-ye,Ir
phase-in of reserve requirements that will apply to nonmembers
after the 67.5 percent coverage ratio is reached.
(23) Reserves on foreign branches of U.S. banks, subsidiaries
and IBF's of nonmembers shall not be permitted until
180 days after the 67.5 percent coverage ratio is determined.
(24) The authority of the Board to impose reserve requirements
under extraordinary circumstances (see (13) above) applies
only to member banks until 180 days after the 67.5 percent
coN7erage ratio is determined.
(25) The Board shall not approve applications for withdrawals
from membership made beginning May 24, 1979, and ending
Member banks may
on the date of enactment of the Act.
withdraw after the date of enactment.
End of
Stanton
Amendments
(26) Reserves are satisfied by maintaining vault cash or reserve
baLances at a Federal Reserve Bank.
Reserves may be
passed to the Reserve Bank through a correspondent or
a Federal Home Loan Bank.
Sec. 4
Authority of state supervisors over state-chartered depository
institutions is unaffected by the Act.
Sec. 5
Eliminates 10(h) penalty rate for Federal Reserve advances
on ineligible collateral.
Sec. 6
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Federal Reserve Bank of St. Louis
Requires the Board to prepare and publish for comment a set
of pricing principles and proposd fee schedules for virtually
all Federal Reserve Bank services within six months after
the Act is enacted.
1.
The fees shall be based upon these principles:
Competitive and explicit pricing.
2.
Services to nonmembeis and members at same fee schedule;
nonmembers may be required to comply with any terms, including
holding of ,clearing balances, that are applicable to members.
3.
Long-run prices shall be based on all direct and indirect
costs, including imputed costs of capital and taxes, except
where the Board finds that the public interest requires
a departure from the principle, after giving due regard
to competitive factors and to the provision of an adequate
level of services nationwide.
Sec. 7
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Federal Reserve Bank of St. Louis
The provision of the Act is effective upon enactment.
1"
.A
APPENDIX 2
ANALYSIS OF MONETARY IMPROVEMENT PROGRAM PLANS
AUGUST 6, 1979
PLAN:
Exemptions:
Ratios:
Transactions
Savings
Short-time
Long-time
Reserves (billions)
Members
Nonmembers
Total
1977
35/0
Actual
1977
(1)
27.3
27.3
Reserves Released
Cost of Reserve Requirement Changes (millions) 3/
Revenue from Service Charges
Revenue from Float Charge
3,11 2/
0
Actual
1978
(4)
0
R-M-B
(5)
0
Stanton
(6)
31.6
0
31.6
6.9
.8
7.7
7.3
19.7
23.9
24.3
1281
(410)
(247)
1798
(410)
(425) 5/
1821
(410)
(425) 5/
3,11 2/
R-M-B
(2)
Stanton
(3)
7.2
.6
7.8
7.6
0
7.6
19.5
1269
(410)
(247) 4/
444
0
8948
4913
8675
0
8948
5662
0
5558
0
645
273
5555
0
332
117
1456
0
5485
0
313
123
1506
0
64.0
53.8
73.1
53.1
72.3 6/
72.2
65.0
52.8
72.3
52.6
0
8868
5044
8633
0
8868
With Required Reserves
Members
Nonmembers
5664
0
620
235
With Reserves at Fed
Members
Nonmembers
5587
73.1
72.9
Percent of Total Deposits
At Banks with Required Reserves
At Banks Holding Balances at Reserve Banks
4/
7.3
433
281
Number of Commercial Banks
Exempt
Members
Nonmembers
0/0
11
0
11
0
0
275
Net Cost after Taxes
1978 1/
35/0
0/0
Percent of Transaction Deposits
72.3
65.6
72.3
73.7
65.4
73.7
At Banks with Required Reserves
53.1
53.7
72.2
54.5
6
55
73.5
Banks
Reserve
at
At Banks Holding Balances
levels and then reducing them to the
1/ Imposing reserve requirements on U.S. branches of foreign banks at current
taxes. Reducing their reserve
after
million
$37
additional
an
cost
would
plan
level of the Reuss-Moorhead -Barnard
million after taxes. Of the 105 U.S.
requirements to the level of the Stanton plan would cost an additional $33
reserves at the Fed under R-M-B, while 72 would
branches of foreign banks in operation in 1978, 27 would have held
the percentage of total deposits at banks with
covered,
branches
With
Stanton.
under
Fed
at
the
have held reserves
under Stanton. The percentage of total
72.7
and
R-M-B,
for
65.0
1978,
actual
for
required reserves would be 73.0
1978, 53.1 for R-M-B, and 53.8 for
actual
for
73.0
be
would
Fed
the
deposits at banks holding reserve balances at
Stanton.
3 percent, while all transactions deposits
2/ The first $35 million of transactions deposits are reservable at
percent.
11
at
above $35 million are reservable
to the Federal Reserve from reduced
3/ The figures for 1978 include an estimate of the additional loss in revenue
holdings of vault cash by member banks.
4/ Based on float outstanding of $3.8 billion in December 1977
5/ Based on average float outstanding of $5.8 billion in 1978.
6-/ The Stanton trigger ratio was 71.8 percent on December 31, 1977 and 70.6 percent on December 31, 1978.
The Reuss-Moorhead-Barnard plan goes into effect when this ratio falls below 67.5 percent.
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Federal Reserve Bank of St. Louis
September 6, 1979
To:
Board of Governors
From:
Ken Guenther
Attached is Chairman Proxmire's Congressional Record insert
introducing the revised Monetary Policy Improvement Act of 1979.
This legislation is presently being analyzed and the Board will be
supplied with this analysis in the near future.
Attachment
cc:
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Federal Reserve Bank of St. Louis
Messrs. Axilrod, Ettin, Brundy, Quick, Petersen, Schwartz, Coyne,
Allison, Wallace, Ryan, Kichline and Ms. Hart
S 11886
CONGRESSIONAL RECORD-SENATE
Scc 9. Pursuant to subsection 310(a) of the
Congressional Budget Act of 1974. the Committees on Veterans' Affairs shall reduce
spending for fiscal year 1980 in reported or
enacted laws, bills, and resolutions by $100,000,000 In budget authority and $200,000.000
in outlays and are instructed to report
promptly. In accordance with section 310 of
such Act. recommendations for changes in
new budget authority for nacal year 1980.
budget authority initially provided for prior
fiscal years, and new spending authority
which is to become effective during fiscal year
1960 contained in reported or enacted laws,
bills, and resolutions within the Jurisdictions
of those committees sufficient to accomplish
the reduction required by this section.
SEC. 10. Pursuant to section 300 and 310 of
the Congressional Budget Act of 1974. the
committees specified In sections 3 to 9 herein
shall report the recommendations required
by this resolution not later than September
25. 1979, or ten days after Congress completes action on this resolution, whichever
first occurs.
AMENDMENTS SUBMITTED FOR
PRINTING
MONETARY POLICY IMPROVEMENT
ACT OF 1979—S. 85
AMENDMENT NO. 398
(Ordered to be printed and referred
to the Committee on Banking, Housing,
and Urban Affairs)
Mr. PROXMIRE (for himself, Mr.
13easicK, and Mr. BUMPERS) submitted
an amendment intended to be proposed
by them jointly, to S. 85, a bill to amend
the Federal Reserve Act to provide for
maintenance of reserves in order to facilitate the implementation of monetary
policy, to promote competitive equality
among depository institutions, to require
the imposition of service charges for
services by Federal Reserve banks, and
for other purposes.
Mr. PROXMIRE. Mr. President, I am
today introducing an amendment to S.
85, the Monetary Policy Improvement
Act of 1979, which incorporates many of
the ideas that have been talked about
during the course of extensive hearings
on the so-called Fed membership problem, during meetings on this subject by
various groups within the banking community, and during the evolution of HR.
7 through the House of Representatives.
This amendment is being offered as a
substitute for the original text of S. 85
and will be considered by the Banking
Committee along with H.R. 7 at hearings
that have been scheduled for September
26 and 27, 1979.
This issue has been before the Congress for a considerable time and if no
consensus can be reached during this
session it will be an ongoing issue until
it is resolved. To call it the Fed membership issue is incorrect for the issue goes
far beyond the problem of the continued
erosion of membership in the Federal
ResenT System. That is, of course, the
problem which brought the broader issues out into the open. But, in my view,
and in the view of former Chairman G.
William Miller, membership in the central bank is not essential. The evolution
of banking and the financial markets in
the past 30 years has been dramatic, and
it is time to consider needed and fundamental reforms in the Federal Reser"Ye
System to make it truly our Nation's cen-
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Federal Reserve Bank of St. Louis
September 5, 1979
tral bank unencumbered by worries charge, by encouraging faster clearing
and less float, and by providing access
about membership:
The primary responsibility of the Fed- to Federal Reserve services to all deposieral Reserve today Ls the conduct of tory institutions at the same price;
monetary policy, a function that was
Sixth, to free the Federal Reserve
not even envisioned in 1913 when the Board from any overbearing concern it
Congress passed the Federal Reserve Act. may have that its decisions with regard
In fact, the most important monetary to issues of monetary policy, or superpolicy committee within the Federal Re- vision and regulation of banks or bank
serve, the Federal Open Market Commit- holding companies may adversely affect
tee, was not created until 1933. And since membership in the Federal Reserve SVS-.
then the importance of monetary pclicy tem and, therefore, weaken its ability
to the well-being of the Nation has ex- to act; and
Seventh, to accomplish the above obpanded dramatically. If the Congress is
to continue to depend on the Federal jectives in a manner that provides the
Reserve to manage our money and credit maximum benefit at a reasonable and
needs, it is the Congress responsibility to justifiable cost to the U.S. Treasury and
make sure that the Fed has both the the American taxpayers.
Mr. President, on July 18, 1979 the
necessary tools and a broad base within
the financial system from which those Banking Leadership Conference of the
tools can be used. The continued reduc- American Bankers Association Issued a
tion of the proportion of deposits cov- consensus statement in which it afered by reserve requirements could weak- firmed the importance of preserving
en the Fed's ability to implement mone- the strength, independence, and monetary effectiveness of the Federal Reserve.
tary policy.
The innovativeness of the financial The statement also indicated that the
system has developed an expanded pay- ABA would be willing to support legislaments mechanism which goes far beyond tion which established reserve requirethat of 1913, 1933, or even 1970. Our ments set by the Federal Reserve on all
basic money supply used to be composed transactions accounts offered by any and
of only currency, coin, and demand de- all financial intermediaries, with some
posits at banks checking accounts. But, allowance for size considerations. This
in recent years, our means of payments structure has been called the level-playhave expanded to include negotiable or- ing field because all depositories would be
der of withdrawal accounts (NOW's), treated in the same manner. The legiscredit union share drafts, telephone lation that I am introducing today satistransfer and billpayer accounts, remote fies those requirements.
SUMMARY OF MAIN FEATURES
service units, automatic transfer accounts, and others. If control of the
Reserve requirements: All depository
money supply is important to this econ- Institutions would be required to hold
omy, and there is almost nobody that reserves against their transaction acsays it is not, then the Federal Reserve counts and nonpersonal time deposits.
must be in a position to use its policy There would be no reserve requirements
tools to the growth of currency, demand against personal time and savings dedeposits and the new types of money, posits. For transaction accounts the reregardless of whether those components serve requirement would be 3 percent on
of money are deposits at member banks, the first $5 million and 12 percent on
nonmember banks, credit unions, mutual such accounts in excess of $5 million. The
savings banks, or savings and loan as- Federal Reserve Board would be given
sociations.
the authority to vary the reserve ratio on
Mr. President, important and benefi- accounts above $5 million within a range
cial changes are needed if the Federal of 11 to 13 percent solely for the purpose
Reserve System is to continue to remain of implementing monetary policy. For
strong and effective. I have tried to in- nonpersonal time deposits the reserve recorporate these into the legislation I am quirement would be zero percent on the
submitting today. The broad objectives first $5 million and 6 percent on such
which are sought by this legislation are: 'deposits above $5 million. The Board
First, to insure on a permanent basis would have the authority to vary the
that the Federal Reserve has the ability reserve ratio on such deposits in excess
to control money and credit in a rapidly of $5 million within a range of 0 to 12
changing financial environment;
percent, again solely for the purpose of
Second, to promote greater competi- implementing monetary policy. The
tive equality among financial institu- Board would also be given flexibility to
tions;
impose reserve requirements above or beThird, to provide for changes in the low the prescribed limits in extraordinary
reserve requirement structure that pro- circumstances for a period of 30 days.
vide for a lower, more uniform, and
This simplified and lower reserve remore equitable structure while at the quirement structure would permit a resame time providing the necessary cover duction in reserves maintained by memto strengthen the ability of the Fed to ber banks at the Federal Reserve banks
control both money and credit;
of more than $10 billion, while total reFourth, to enhance the safety and serves of the banking system would be
soundness of the banking system by reduced by about $7 billion. At the same
providing direct access to the Federal time the proportion of total bank deposits
Reserve's discount window for all deposi- held at those banks subject to reserve
tory institutions offering transaction ac- requirements would be increased from
counts based on need, not affiliation;
72 percent to approximately 87 percent.
Fifth, to improve the efficiency of the The number of banks holding reserves
payments mechanism by the establish- would increase from 5,062, total number
ment of a system of fees for Federal of members bank.s, to 6,872.
Reserve services, now offered without
Reporting requirements: The Federal
Mit
01.04
• ‘'
•-.-M1
r
• •
September 5, 1979
CONGRESSIONAL RECORD-SENATE
Reserve Board would be authorized to
require periodic reporting of liabilities
and as.sets from all depository institutions whose reserve requirements are
greater than zero as may be necessary or
desirable to enable the Board to monitor
and control the monetary and credit aggregates. Institutions not subject to reserve requirements would provide such
reports to their respective supervisory
agencies.
Discount window: Any depository institution in which transaction accounts
are held would be entitled to access to the
Federal Reserve's discount window on the
same terms and conditions as member
banks.
Federal Reserve services: The Federal
Reserve would be required to publish for
public comment a set of pricing principles and a proposed schedule of fees
based on those principles for services offered by Federal Reserve banks to depository institutions within 6 months
after enactment of the legislation. The
Board would also be required to put into
effect a schedule of fees for such services
within 18 months after the date of enactment of the legislation.
All Federal Reserve services covered
by the fee schedule would be made available to nonmember depository institutions at the same fee applicable to member banks.
The fees are to be established on the
basis of all direct and indirect costs actually incurred including overhead and
an allocated or imputed cost for taxes
and the rate of return on capital that
would have applied if such services were
provided by private business firms, except where the Board determines that it
Is necessary to depart from this principle
In order to prevent a serious and long
lasting impairment of the Nation's payments system.
One of the services that the Federal Reserve provides—Federal Reserve
float—arises from the clearing of checks
and other paper items. The Fed is attempting to reduce the level of float by
operational means and is studying possible changes in rules for clearing that
may be needed to further reduce float.
The legislation would require that any
float remaining al ter such reductions be
charged for at the current rate of interest applicable in the market for Federal
funds.
Treasury revenues: The legislation
would affect the revenues of the Federal
Reserve System and ultimately the
Treasury and, therefore, the budget deficit in a number of ways. First, the revised reserve requirement structure
would reduce reserve requirements for
member banks by $10.2 billion. This
would increase member banks earnings
and cost the Treasury approximately
$060 million in pretax revenues. Second,
the application of reserve requirements
to insured and noninsured nonmember
banks will result in an increase of reserves of $3.3 billion and an increase in
pretax revenues to the Treasury of $213.4
million. Thircl, the mandate to begin
charging for Federal Reserve services
would produce an additional $410 million in pretax revenues to the Treasury
at current service levels. Fourth, assuming reduction of float to end-of-year
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Federal Reserve Bank of St. Louis
1977 levels, the Federal Reserve would
collect on additional $247 million in fees
for the remaining float.
The combined effect of these changes
would result in a pretax revenue gain to
the Treasury of $210 million. However,
these net gains in revenue to the Treasury would be subject to offsetting taxes
against increased earnings and writeoffs against increased expenses. The
Treasury has estimated that the revenue loss would be at a 55-percent rate.
Therefore, the net revenue gains to the
Treasury would be approximately $116
million. This is a net gain in revenue, not
a loss as would be the case with all other
proposals. The revenue loss to the Treasury after taking into consideration of the
amount to be recaptured by taxes of
H.R. 7 is over $300 million and could be
much more, perhaps more than $1 billion. depending on how the pricing of
Federal Reserve services is handled.
Given the President's commitment to
hold down the deficit and to balance the
budget, we must be mindful of the effects
that this legislation will have on Treasury revenues. In our inflationary environment, with the CPI increasing at 13
percent, the use of Treasury revenues to
provide additional revenues for the
banks, will be extremely diflicWt to justify to the voters of the Nation.
Mr. President, I had an opportunity to
meet with Chairman Volcker yesterday
to discuss the Fed membership legislation. Several different approaches were
the subject of our meeting, including
some new ideas that Chairman Volcker
has put forth. He will be discussing this
issue with various groups over the next
2 or 3 weeks prior to our committee hearings on September 26 and 27.
Mr. President, I ask unanimous consent that the text of my amendment and
the section-by-sectIon analysis of the
amendment be included in the RECORD.
There being no objection, the amendment and analysis were ordered to be
printed in the RECnRD, as follows:
AMENDMENT No. 398
Strike out all after the enacting clause
and Insert in lieu thereof the following:
That this Act may be cited as the "Monetary
Policy Improvement Act of 1979".
DEFINITIONS
SEC. 2. Section 19(a) of the Federal Reserve
Act (12 U.S.C. 461(a)) is amended by adding
at the end thereof the following new paragraphs:
e'The term 'depository institution' means—
"(1) any insured bank as defined in section 3 of the Federal Deposit Insurance Act;
"(2) any mutual savings bank as defined
In section 3 of the federal Deposit Insurance
Act;
"(3) any savings bank as defined in section 3 of the Federal Deposit Insurance Act;
"(4) any insured credit union as defined
In section 101 of the Federal Credit Union
Act;
"(5) any member as defined in section 2
of the Federal Home Loan Bank Act:
"(6) any insured institution as defined In
section 401 of the National Housing Act; and
"(7) for the purpose of section 13 and the
fourteenth paragraph of section 16, any association or entity which is wholly owned by
or which consists only of institutions referred
to In clauses (1) through (6).
"The term 'bank' means any insured or
noninsured bank, as defined in section 3 of
the Federal Deposit Insurance Act, other
than a mutual savings bank or a savings
S 11887
bank as defined In section 3 of the Federal
Deposit Insurance Act.
'The term 'transaction account' means a
deposit or account on which the depositor
or account holder is allowed to make withdrawals by negotiable or transferable instrument, payment orders of withdrawal, or other
similar item for the purpose of making payments or transfers to third persons or others.
Such term includes demand deposits, negotiable order of withdrawal accounts, savings deposits subject to automatic transfers,
and share draft accounts.
"The term 'nonpersonal time deposits'
means a time deposit or account representing funds deposited to the credit of. or in
which any beneficial Interest is held by a
depositor who is not a natural person.
"In order to prevent evasions of the
reserve requirements imposed by this Act,
after consultation with the Board of Directors of the Federal Deposit Insurance Corporation. the 'Federal Home Loan Bank
Board, and the National Credit Union Administration Board. the Board of Governors
of the Federal Reserve System Is further authorized to determine, by regulation or order,
that an account or deposit Is a transaction
account If such account or deposit may be
used to provide funds directly or indirectly
for the purpose of making payments or
transfers to third persons or others.".
REPORTING REQUIREMENTS
SEC. 3 Section 11(a) of the Federal Reserve Act (12 U.S.C. 248(a)) is amended—
(1) by inserting "(I)" itrunediately after
"(a)"; and
(2) by adding at the end thereof the following new paragraph:
"(2) To require any d.'pository Institution
specified in this paragraph to make, at such
intervals as the Board may prescribe, such
reports of its liabilities and assets as the
Board may determine to be necessary or desirable to enable the Board to discharge its
responsibility to monitor and control monetary and credit aggregates. Such reports shall
be made (A) directly to the Board in the case
of member banks and in the case of other
depository institutions whose reserve requirements under section 19 of this Act exceed
7ero, and (B) for all other reports to the
Board through the (I) Federal Deposit Insurance Corporation in the case of insured
State nonmember banks, savings banks, and
mutual savings banks. (it) National Credit
Union Administration Board in the case of
insured credit unions, (ill) Federal Home
Loan Bank Board in the case of any institution insured by the Federal Savings and Loan
Insurance Corporation or which is a member as defined in section 2 of the Federal
Home Loan Bank Act, and (iv) such State
officer or agency as the Board may designate
in the'case of any otheetype of bank, savings and loan association, or credit union.
The Board shall endeavor to avoid the imposition of unnecessary burdens on reporting institutions and the duplication of other
reporting requirements. Any data provided
to any department, agency, or instrumenta.ity of the United States pursuant to other
reporting reouirements shall be made available to the Poard. The Board may classify
depository in.tltutions for the purposes of
this paraeranh and may impose different requirements on each such class.".
RESERVE REQUIREMFNTS
SEC. 4. Section 19(h) of the Federal Reserve
Act (12 U.S.C. 461(b)) is amended to read
as follows:
"(b)(1)
RESERVE
REQUIREMENTS.—(A)
Each depository institution shall maintain
reserves against its transaction accounts as
the Board may by regulation prescribe solely
for the purpose of implementing monetary
policy—
"W. in the ratio of 3 per centum for that
portion of its total transaction accounts of
$5.000,000 or les.s; and
"(11) in the ratio of 12 per centum, or In
S 11888
CONGRESSIONAL P ECORD-SENATE
September 5, 1979
such other reins as the Board may prescribe first twelve-month period following the ef- trust company," wherever it appears the
not greater than 13 per centum and not less fective date of this parograph in amounts words "or other depository institution";
than 11 per centum, for that portion of its equal to one-fourth of those otherwise re(5) by striking out "sufficient to offset the
total transactions accounts in excess of $5,- quired by this section, during. the second Items in transit held for its account by the
On 000.
such twelve-month period in amounts equal Federal Reserve bank" and Inserting in lieu
"(B) Each depository institution shall to one-half of those otherwise required, and thereof the words "In such amount as the
maintain reserves against its nonpersonal; during the third such twelve-month period Board determines taking Into account items
time deposits as the Board may by regulation In amounts equal to three-fourths of those in transit, services provided by the Federal
prescribe solely for the purpose of Imple- otherwise required.
Reserve bank, and other factors as the Board
menting monetary policy—
"(B) With respect to any bank which was may deem appropriate"; and
"(I) In the ratio of 0 per centum for that a member of the Federal Reserve System on
(8) by inserting after the
portion of its lionpersoual time deposits if July 1. 1979, the amount of required re- member bank" after the tos
I . so( the
serves imposed pursuant to this section on words "or other depository losiltoo ion".
$5,000,000 or less. End
"(11) In the ratio of 8 per centum. or in the effective date of this section that ex(b) The second paragraph of section le of
such other ratio not greater than 12 per cen- ceeds the amount of required reserves main- the Federal Reserve Act (12 U.S.C. 412) is
turn and not less than 0 per centurn, for that tained by the member institution during amended to read as follows:
the reserve computation period Immediately
portion of its nonpersons' time deposits in
"Each Federal Reserve bank shall mainpreceding the effective date of such para- tain with the local
excess of the $5.000,000.
Federal Reserve agent
"(2) WAIVER OF RATIO costrrs.—Upon a find- graphs may, at the discretion of the Board collateral in the form of financial
assets In
ing by the Board that extraordinary circum- and In accordance with such rules and reg- an amount not less than the amount
of
ulations as it may adopt, be reduced by 75 Federal Reserve
stances require such action. the Board, after
notes issued by such bank
consultation with the appropriate commit- per centum during the first year which and outstanding. Collateral shall not
be
rebegins after such effective date, 50 per centees of the Congress, may impose reserve required for Federal Reserve notes that are
quirements above or below the limits other- turn during the second year, and 25 per held in the vaults of Federal Reserve
banks.
wise prescribed by this section for a period centum during the third year.
The Federal Reserve agent shall each day
"(C) In order to provide for an orderly
not exceeding thirty days, and for further
notify the Board of Governors of the Federal
periods not exceeding thirty days each by transition period. the Board shall implement Reserve System
of all issues and withdrawals
affirmative action by the Board in each in- the reduction in reserve requirements result- of Federal Reserve notes
to and by the Fedstance. The Board shall promptly transmit to ing from the amendment of this subsection eral Reserve bank to
which he is accredited.
by the Monetary Policy Improvement Act of
the Congress a report of any exercise of its
The Board of Governors may at any time call
authority under this paragraph and the rea- 1979 with respect to member banks over a upon a Federal
Reserve bank for additional
period not greater than 48 months after the
sons for such exercise.
security to protect the Federal Reserve notes
"(3) PRIVILEGES OF INSTITUTIONS MAIN- effective date of such paragraph.
"(D) Any depository institution which is issued by In".
TAMING RESFRVES.—DurIng any period that
(c) The thirteenth paragraph of section 10
a depository institution is maintaining re- a member bank on July 1, 1979, and leaves
serves pursuant to this section, such depos- the Federal Reserve System after such date of the Federal Reserve Act (12 U.S.C. 360) is
itory institution shall be entitled to all the shall continue to be required to maintain amended—
(1) by striking out the words "member
privileges of membership in the Federal Re- reserves against its deposits after the effective date of this section as If it were a mem- banks" wherever they appear and inserting
serve System, except that, if it is not otherIn lieu thereof "depository Institutions";
ber bank.".
wise a member, it may not hold stock in, or
FORM OF RESERVES
(2) by striking out the words "member
vote for any director of, a Federal Reserve
SEC. 5. Sestion 19(c) of the Federal Re- bank" wherever they appecir and inserting in
bank.
"(4) RESERVES RFLATED TO FORFIGN comics- serve Act, as amended (12 U.S.C. 461) is lieu thereof "depository institution"; and
(3) by inserting after "checks" wherever It
YIONS OR Assrrs.—Foreign branches, aubsicii- amended to read as follows:
"(c) Reserves held by a depository institu- appears the words "and other items, includnries, and loternstional banking facilities of
ing
negotiable orders of withdrawal and share
nonmember depository institutions shall tion to meet the requirements imposed purmaintain reserves to the same extent required suant to subsection (b) of this section shall drafts".
(d)
The fourteenth paragraph of section
form
the
of—
by the Board of forelsn branches, subsidi- be in
"(1) balances maintained for such pur- 10 of the Federal Reserve Act (12 U.S.C. 248
aries, and international banking facilities of
member banks. In addition to any reserves poses by such depository institution in the (o)) is amended by striking out "Its member
otherwise required to be malt- Lathed pursu- Federal Reserve bank of which it Is a mem- banks" and inserting in lieu thereof "deposant to this subsection, any depository insti- ber or at which It maintains an account. itory institutions".
(e) The first sentence of section 19(e) of s
tution shall maintain rererves in such ratios However, the Board may, by regulation or
order, permit depository institutions to the Federal Reserve Act (12 U.S.C. 463) is
as the Board may prescribe aesinst—
maintain
all
portion
or
their
amended
a
of
required
to read as follows: "No member
"(A) net balances owed by domestic offices
bank shall keep or deposit with any deposiof such depository institution in the United reserves in the form of vault cash, except
States to its directly related foreign offices that saly portion so permitted shall be iden- tory institution which is not authorized to
have access to Federal Reserve advances
and to nonrelateci foreign depository institu- tical for all depository institutions; and
"(2) balances maintained by a nonmember under section 10(b) of this Act a sum In
tions,
depository
institution
depository
in
a
insti- excess of 10 per centum of its own paid-up
"(B) loans to United States residents made
by overseas offices of such depository insti- tution that msintains required reserve bal- capital and surplus.".
ances
at
a
bank,
Reserve
Federal
in
a
Federal
tution if such depository institution has one
ABOLITION Or PENALTY RATE
home loan bank, or in a central liquidity faor more offices in the United States. and
SEC. 7. Section 10(b) of the Federal Reserve
"(C) assets (including participations) cility for credit unions, if such depository
Act (12 U.S.C. 347b) is amended by striking
held by foreign offices of a depository insti- institution, Federal home loan bank, or cen- out
the second Sentence of the first parstution in the United States which were ac- tral liquidity facility maintains such funds
in the form of balances in a Federal Reserve graph thereof.
quired from its domestic offices (other than
PRICING Or SERVICES
assets representing credit extended to per- bank of which It is a member or at which it
maintains an account. Balances received by a
sons not residents of the United States).
SEC. 8. The Federal Reserve Act is amended
"(5) EXEMPTION FOR CERTAIN DEPOSITS.— depository institution from another deposi- by inserting after section 11 the following
The requirements imposed by paragraph (1) tory Institution and used to satisfy the re- new section:
of this subsection do not apply to deposits serve requirement imposed on such deposi"Src. 11A. (a) Not later than the first day
payable only outside the States of the tory institution by this section shall not be of the sixth calendar month after the date
subject
to
the
requirements
reserve
of
this
United States and the District of Columhla,
of enactment of the Monetary Policy Imbut nothing in this subsection limits the (section imposed on such bank, and shall not provement Act of 1979, the Board shall
pubauthority of the Board to impose conditions be subject to assessment imposed on such
lish for public comment a set of pricing prinand requirements on member bi.nks under hank, pursuant to section 7 of the Federal ciples in accordance with this
section and a
section 25 of this Act or the authority of Deposit Insurance Act.".
proposed schedule of fees based upon those
suseretsolrotre AMENDMENTS
the Board under section 7 of the Internaprinciples for Federal Reserve bank services
tional Eirtnking Act of 1978 (12 U.S.C. 3105).
Sro. 6. (1) The first paragraph of section to depository Institutions, and not later than
"(6) DISCOUNT AND BORROWING.—Any de- 13 of the Federal Reserve Act (12 U.S.C. 342) the first day of the eighteenth calendar
pository Institution in which transaction Is amended a.s follows:
month after the date of enactment of the
accounts are held shall be entitled to the
(1) by Inserting after the words "member Monetary Policy Improvrment Act of 1979,
same discount and borrowing privileges as
banks" the words "or other depository insti- the Board shall put into effect a schedule of
member banks.
fees for such services which is based on those
tutions";
"(7) TesNstrroNso ADJUSTMENTS.—
principles.
(2) by inserting after the words "payable
"(A) Any depository institution required upon presentation" the first and third times
"(b) The services which shall- be covered
t,o maintain reserves under this section they appear. the words "or other items";
by the schedule of fees under subsection (a)
which was engaged in business on July 1,
(3) by inserting after "payable upon pre- are—
1979, but was not a member of the Federal sentation within its district," the words "or
"(1) currency and coin services:
Reserve System on that date, shall main- other items";
"(2) check clearing and collection services;
tain reserves against its deposits during the
(4) by inserting after "nonmember bank or
"(3) wire transfer services;
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Federal Reserve Bank of St. Louis
ted
September 5, 1979
CONGRESSIONAL RECORD-SENATE
"(4) automated clearinghouse services;
"(5) settlement services;
"(6) securities safekeeping services;
"(7) Federal Reserve float; and
"(8) any new services which the Federal
"onerve system offers. Including but not
!rifted to payment services to effectuate the
;ectronic transfer of funds.
"(c) The schedule of fees prescribed puruant to this section shall be based on the
!allowing principles:
"(1) Ail Federal Reserve bank services coyred by the fee schedule shall be priced ex"(2) All Federal Reserve bank services
overed by the fee schedule shall be available to nonmember depository Institutions
id such services shall be priced at the same
ne schedule applicable to member banks,
scept that nonmembers shall be subject to
trip other terrn.s, including a requirement of
.alances sufficient for clearing purposes, that
le Board may determine are applicable to
'ember banks.
"(3) Over the long run, fees shall be estab.,shed on the basis of all direct and indirect
• oats actually incurred In providing the
iederal Reserve services priced. including
siterest on items credited prior to actual
Alection, overhead, and an allocation of
inputed costs which takes into account the
axes that would have been paid and the
turn on capital that would have been pro%Med had the services been furnished by a
private business firm, except that the pricing principles shall give due regard to cornetitive factors and the provision of an ade, tate level of such services nationwide.
"(4) Interest on Hein% credited prior to
liection shall be charged at the current
e applicable In the market for Federal
Ind.s.
"(d) The Board shall require reduct lon.s in
se operating budge's of the Federal Reserve
inks commensurate with any actual or
rojected decline in the volume of services
be provided by such banks. The full
• -lount of any savings so realized shall be
Lid into the United States Treasury.".
AUTHORITY OF STATE BANK SUPER VII,t,RS
Src. 9. Nothing in the thLs Act or in the
niendments made by this Art shall be conrued in derogation of the authority of
sny officer or agency of State over any inututions organized or existing under the
.1,,vs of such State.
EFFECTIVE DATES
SEC. 10. TIILS Act shall take effect on the
sae of enactment, except that the amendsrents made by sections 4 and 5 of this Act
hall take effect on the first day of the sixth
ntooth which begins after the date of enactsient of this Act.
SECTION-BY-SECTION ANALYSIS
Section 1. Title. Title of the bill in the
Nisnetary Policy Improvement Act of 1979".
Section 2. Definitions. Defines the terms
depository institution", "bank", "trrinsecion account", and "nonpersonal time &reel's". The section also gives the Federal Resrve 'Board the authority to determine
nether an account or deposit is a transecon account after consoltation with the
sderal Dep It 'lista:rice Corporation, the
Jere] Home Loan Bank Board, and the Naeini Credit Union Administration Board.
section 3. Reporting Requirements. Gives
0 Federal Ite-,rye lionld the authority to
leet reports of liabiliths and az.
,ets from
TosItory Institutions as may be nece•:,lry
,r desirable to enable the Board to (11.-,':Likr-re
's responsibility to monitor and control
nonetary and credit aggregates.
Section 4. Reserve Requirements. This see)fl establishes rules pertaining to reser.es
• 0 be held against deposits held by depository
iistitutions.
Every depository institution would have rerye requirements against its transaction
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Federal Reserve Bank of St. Louis
S 118S9
accounts of lees than $5,000,000 in a ratio of within 18 months after the date of enact33, and In excess of $3,000,000 in a ratio of ment.
121 ,or within a range of 11'1. to 137S. as deThe services to be priced include currency
termined by the Board for the purpose of Im- and coin, check clearing and collection, wire
plementing monetary policy. Also, every transfers. ACH services, settlement. securities
depesitery institution would have reserve re- safekeeping. and Federal Resers'e float with
quirements against its non personal time de- float to be valued at the Federal funds rate.
pcsits In excess of $5,000,000 In a ratio of 6%,
This section specifies a set of principals on
which prices are to be based. It also indior within a range of 0% to 12%
The Board would be given the authority cates that if adherence to the pr1eing princito impose reserve requirements outside statu- pals for system services results in an increase
tory limits for a period of 30 days in extraor- In the performance of such service by the
dinary circumstances. The exercise of this au- private sector the Board would make commensurate reductions in system expendithority would require the Board to report the
- reasons for such actions from the Congress. tures for the provision of such services.
Any depository institution maintaining reSection 9. Authority of State Bank Superserves would be entitled to all the privileges
visors. This section provides that nothing In
of membership in the Federal Reserve Sys- the bill Is to be construed in derogation of
tem, except nonmembers could not hold stock
the authority of any state bank supervisor
in or vote for directors of a Federal Reserve over any Institution It supervises by state
Bank.
law.
The Board's authority to apply reserve reSection 10. Effective Dates. The new requirements against foreign obligations or serve requirement Included In Section 4 and
assets of member banks is classified and such
5 takes effect on the first day of the sixth
authority as extended to nonmember deposi- calendar month after enactment. All other
tory institutions. Reserves could be pre- sections 'take effect on the date Of enactscribed against net balances owed by domes- ment.
tic offices to foreign offices, loans to LIZ.
Mr. PROXMIRE. Mr. President. I ask
residents made by overseas offices, and assets
held by foreign offices of a U.S. depository unanimous consent that the Senator
institution acquired from its domestic oflices. from North Dakota (Mr. BuRerck) and
The authority of the Board to Lmpose con- the
Senator from Arkansas (Mr.
ditions and requirements in member banks BIIMPFRS) be added as cosponsors
to the
under Section 25 of the Federal Reserve Act amendment.
and section 7 of the International Banking
The PRFSIDING OFFICER. Without
Act of 1978 is not limited by this Act.
Any depository institution in which trans- objection,it is so ordered.
action accounts are held would have access to
the discount window on the same basis as
NOTICES OF HEARINGS
member banks.
There would be a four-year phase-in of
SUBCOMMTITTE ON TAXATION AND DEBT
reserve requirements for any depository inMANAGEMENT
stitution that was not a member as of July 1,
1979. Similarly, any member bank as of July • Mr. HARRY F. BYP.D, JR. Mr. Presi1, 1979 with an increase in reserve require- dent, I wish to announce that the Subments imposed pursuant to this iegislation committee on Taxation and Debt Manwould have a four-year phase-in of the ad- agement of the Committee on Finance
ditional requirements.
will hold a hearing on extension of the
The reduction of reserve requirements for temporary limit on the public debt
has
member banks would be made over a fourbeen scheduled. The Honorable Wilyear period.
A nonmember depository institution, or- liam G. Miller, Secretary of the Treasganized under state law, with the principal ury, Mr. James T. McIntyre, Director
offices of which are outside the continental of the Office of Management and Budget,
limit of the U.S. would not be required to and Alice M. Rivlin. Director of the Conheld reserves against its deposits until six
gressional Budget Office, will testify on
years after the enactment of the legislation, the nubile debt at 2 pm.. Tuesday,
Sepand then the reserve requirements would be tember
11, 1979. in room 2221, Dirksen
phased-in over an additional 10 years.
Any bank which is a member bank as of Senate Office
The temoorary debt limit of $836 bilJuly 1, 1979 and leaves the Federal Reserve
System would continue to be required to lion which the Congress enacted in
maintain reserves as if it were a member.
February of 1979 is due to expire on SepSection 5. Form of Reserves. The reserves tember 30.
held by a depository institution to meet its
By lair, the budget is required to be in
reserve requirements would be required to
balance by fiscal year 1581.
be held ea (I) balances for that purpose at
The hearings will give Congress an opa Federal Reserve bank. (2) vault cash. or
(3) balances maintained by a nonmember portunity to review the work of the Office
depository institution in a depository insti- of Management and Budget in prepartution that maintains required reserve bal- ing a balanced budget and implementing
ances at a Federal Reserve bank. In a Fed- the requirements established by prior
eral Home Loan hank, or In a central liquid- debt ceiling legislation.
ity facility for credit unions, provided such
The subcommittee would be pleased to
balances are maintained In the form of balrgccive written testimony from those
ances with a Federal Reserve bank.
Section 6. Miscellaneous Amendments. This persons or organigations who wish to
section amends the Federal Reserve Act to submit statements for the record. Statepermit the Federal Reserve bank to accept ments submitted for inclusion in the
deposits and to el ar checks or similar In- record should be typewritten, not more
struments received from nonmember depos- than 25 double-spaced pages in length
itory institutions. It also amends the collat- and mailed with
five conies by October
eral requirements for Federal Reserve notes.
1, 1979. to Michael Stern, staff director,
Section 7. Abolition of Penalty Rate. Eliminates the penalty rate on advances to mem- Committee on Finance, room 2227,
Dirksen Senate Office Building, Washber banks.
Section 8. Pricing of Services. This section ington, D.C.•
requires that the Federal Reserve Board
SUBCOM MIT TEE ON FNFRGY REGULATION
publish for comment a set of pricing prin•
Mr.
JOHNSTON. Mr. President. I wish
cipals for Fedensi Itererve services within
six months after the date of enactment of to announce that the Subcommittee on
the legislation. The Board would also be Energy Regulation of the Committee on
required to put a fee schedule into effect Energy and Natural Re,ources will hold
61•111.1116i1
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siksIrsasfe
-
Monetary
Improvement
Program
A Comparison of P DC1 posals Before Congress
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Federal Reserve Bank of St. Louis
Major Provisions
H.R. 7
Introduced January 15 by Rep. Henry S. Reuss
H.R. 7 as modified January 24 by
testimony of Federal Reserve Board Chairman
G. William Miller
S.85
Introdued January 18 by
Sen. William Proxmire
Universal Reserve Requirements
Ranges
8-10% on transaction accounts including automatic
transfer and NOW accounts (9.5% initially)
3-8% on short-term time deposits (8% initially)
1-3% on savings deposits (3% initially)
1-3% on long-term time deposits (1% initially)
Same as H.R. 7
12-14% on transaction deposits (13% initially)
Commercial banks for all categories; thrift institutions for
transaction accounts only.
Coverage same as H.R. 7
Coverage essentially same as H.R. 7
Exemption Levels
$50 million of transaction deposits and $50 million of total
time and savings deposits
Same as H.R. 7 (See Earnings Participation Account below)
$40 million of transaction deposits and $40 million of total
time and savings deposits
Indexation
Exemption level indexed by Federal Reserve each year to
maintain constant the percentage of deposits at
institutions with reservable deposits
No Indexation
No Indexation
Earnings Participation Account (EPA)
Not included
The first $10 million of transaction deposits and the first
$10 million of other deposits would be excluded. An EPA
would be held against deposits exempted by H.R. 7 from
reserve requirements. The size of the EPA for each category
of deposits would be the amount of deposits between
$10 million and $50 million multiplied by the reserve ratio
that would apply. The return on the account would be
equal to the average return on the Federal Reserve portfolio
(about 6.75% last year).
Not included
Phase in of Reserve Requirements
Reductions for member banks phased in over two years.
Increases phased in over 4 years
Same as H.R. 7
Essentially the same as H.R. 7
Pricing of Federal Reserve Services
By July 1, 1979, Board must publish jar comment a set of
pricing principles and proposed fee schedule
Same as H.R. 7
By July 1, 1979, Board must publish for comment a set of
pricing principles and fee schedule; fees must go into
effect by July 1,1980
Access to Services
Services covered by fee schedule available to all depository
institutions
Same as H.R. 7
Services covered by fee schedule available to all depository
institutions
Access to Discount Window
For all institutions with transaction accounts
Same as H.R. 7
For all commercial banks and thrift institutions having
reservable deposits but Board can request a certification
of solvency from FDIC for non-member banks
Institutions Affected
Member Banks
Covered (Holding Balances at Fed)
Exempt (Not Holding Fed Balances)
Non-Earning
424
5240
Non -Earning
424
5240
232
8722
232
8722
Institutions covered
Non-Member Banks
Covered
Exempt
4-8% on short-term time deposits (6% initially)
1-5% on savings deposits (3% initially)
1/2-2% on long-term time deposits (1% initially)
Including EPA
2091
3573
1541
7413
Non -Earning
516
5048
280
8674
Thrift Institutions Covered
Credit Unions Covered
0
0
Reserve Coverage
71% of total bank deposits
94% of total bank deposits
75% of total bank deposits
Total Reserve Reductions
$12.2 billion
$6.3 billion
$8.4 billion
Net Cost to Treasury
$173 million; declining in future because loss from attrition
avoided.
$173 million; declining in future because loss from attrition
avoided
$60 million; declining in future because loss from attrition
avoided
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Federal Reserve Bank of St. Louis
Decline in Membership in the
Federal Reserve System
From testimony of G. William Miller,
Chairman of the Federal Reserve Board,
before the House Banking Committee,
January 24, 1979
Number of Member Banks
Percent of Deposits
6884
86.3
1950
6873
85.7
1955
6543
85.2
1945
1960
6174
84.0
1965
6221
82.9
1970
5767
80.1
1975
5787
75.1
1976
5758
73.8
1977
5664
71.8
1978
5593
70.8
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Federal Reserve Bank of St. Louis
"It is essential that the Federal Reserve maintain adequate
control over the monetary aggregates if the nation is to
succeed in its efforts to curb inflation, sustain economic
growth, and maintain the value of the dollar in international
exchange markets. The attrition in deposits subject to
reserve requirements set by the Federal Reserve weakens
the linkage between member bank reserves and the
monetary aggregates..."
Board of Governors of the Federal Reserve System
Washington, D.C. 20551
February 9,1979
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
To
Chairman Volcker
From
Nancy Teeters
47.,q(I.
DeeAugust 6, 1979
Subject: H.R. 7:
Monetary
Improvement Bill
I find H.R. 7 as passed by the House acceptable primarily as
a device to bring the proposal to serious consideration in
the Senate. Features that I would like to see changed are:
Reserves should be mandatory, with no or a very
small exemption, on transaction accounts
NOW or ATS accounts would be considered
transaction accounts
The trigger mechanism embodied in the Stanton
amendment should be removed
A somewhat wider range on the level of reserve
requirements would be desirable
Even if the initial reserve requirement
is set at 12 percent, the permissible
range should allow us to raise as well as
lower reserves
If the range were 8 to 16 percent
we could again use required reserves
as a policy instrument
The compromise in the reserves behind savings and time deposits
is acceptable. My primary concern was to achieve evenhanded
treatment among the various financial institutions for the
transaction accounts. It would be desirable to have a range of
reserve requirements for policy purposes, even if initially the
reserves were set at zero.
What the implications of a mandatory reserve requirement would
be for membership in the System are not clear. Obviously, the
incentives to leave the System are greatly reduced. The only
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Federal Reserve Bank of St. Louis
1
,
To:
Chairman Volcker
- 2 _
remaining differentials between members and nonmembers would
be ownership of stock in the District banks and which agency
was responsible for bank examination. The major disadvantage
of owning Federal Reserve stock is the six percent dividend.
Our General Counsel has recently interpreted the six percent
figure that is in the statute as a "minimum," an interpretation that I gathered is a departure from previous positions.
It may be possible to pay rates of return closer to those
available in the market in the future. With examination
council, differences between regulatory agencies in examination procedures are rapidly disappearing. Selection of an
examination agency should not be a factor.
On balance, if the rate of return on the stock remains at six
percent, we might lose a few members. However, with mandatory
reserves, we pick up members, simply for the prestige associated
with membership. I have not heard of a bank leaving the System
for reasons other than those associated with the cost of membership. If the cost factor disappears, it seems to me likely that
former members will rejoin.
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
197911W3 -6 P',.! 1.: 27
BOARD OF GOVERNORS
OF THU
FEDERAL RESERVE SYSTEM
Office Correspondence
To
Distribution
From
James Brundy
Date July 31,_1979
Effects of H.R. 7
Subject:
The attached table contains cost and coverage estimates for
H.R. 7 based on 1977 and on 1978 year-end data.
Because H.R. 7 as passed
by the House contains two approaches to solving the membership problem-the Stanton Amendment and the Reuss-Moorhead -Barnard plan--the table shows
the effects of both approaches.
The Stanton Amendment is analyzed in
columns (3) and (6) and the Reuss-Moorhead -Barnard version, which would
be triggered only if coverage of total deposits fell below 67.5 percent,
in columns (2) and (5).
The rate of return on the System portfolio used to calculate
the cost of reserves released and of float was 6.5 percent for 1977 and
7.33 percent for 1978.
Reserves on December 31, 1978 would have been
$5.7 billion higher than on the same date in 1977, and the estimated
reserve release is much larger.
The estimates for 1977 do not include reserves on U.S. branches
of foreign banks, but they are included for 1978.
This change in treat-
ment reflects enactment during 1978 of the International Banking Act.
It
is assumed that branches have reserve requirements that are the same as
member banks.
Therefore, in spite of an increase of about $180 million in
the value of float recouped, the cost of the plans is substantially (about
$175 million) higher when calculated using December 31, 1978 data.
Distribution
Axilrod
Ettin
Guenther
Coyne
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Federal Reserve Bank of St. Louis
Schwartz
Brady
Quick
Humphrey
Keyt
Rudolph
Hamilton
JULY 31, 1979
ANALYSIS OF MONETARY IMPROVEMENT PROGRAM PLANS
Exemptions:
Ratioa:
Transactions
Savings
Short-time
Long-time
1977
35/0
1978 1/
35/0
0/0
3,11 2/
0
0
0
Stanton
(3)
0/0
11
0
0
0
R-M-B
(5)
3,11 2/
0
0
0
Stanton
(6)
6.9
.8
.3
8.0
7.3
0
.4
7.7
Actual
1977
(1)
11
0
0
0
R-M-B
(2)
27.3
0
n.a,
27.3
7.2
.6
.n_2_ a.
7.8
7.6
0
n.a.
7.6
Reserves Released
19.5
19.7
25.0
25.3
6/
Cost of Reserve Requirement Changes (millions)-Charges
Service
Revenue from
Revenue from Float Charge
1269
(410)
(247) 3/
1281
(410)
(247) 3/
1879
(410)
(425)4/
1894
(410)
(425)4/
PLAN:
Reserves (billions)
Members
Nonmembers
Foreign Bank Branches
Total
Actual
1978
(4)
31.6
0
1.4
33.0
470
477
n.a.
0
8948
0
4913
8675
77
0
8948
0
620
235
n.a.
5662
0
n.a.
5558
0
105
645
273
28
5555
5587
0
n. a.
332
117
n.a.
1456
0
n. a.
5485
0
101
313
123
27
1506
0
72
Percent of Total Deposits
At Banks with Required Reserves
At Banks Holding Balances at Reserve Banks
73.1
72.9
64 0
53.8
73.1
53.1
73.0
72.9
65.0 5/
53.1
72.7
53 8
Percent of Transaction Deposits
At Banks with Required Reserves
At Banks Holding Balances at Reserve Banks
73.7
73.5
65.4
55.6
73.7
54.5
72.8
72.7
66 0
54.3
72.5
53.2
275
281
0
8868
n.a.
5044
8633
n.a.
0
8868
5664
0
n.a.
Net Cost after Taxes
Number of Commercial Banks
Exempt
Members
Nonmembers
Foreign Bank Branches
With Required Reserves
Members
Nonmembers
Foreign Bank Branches
With Reserves at Fed
Members
Nonmembers
Foreign Bank Branches
85
1 The results for 1977 and 1978 are not comparable because foreign bank branches were excluded for 1977.
2/ The first $35 million of transactions deposits are reservable at 3 percent, while all transactions deposits
above $35 million are reservable at 11 percent.
3/ Based on float outstanding of $3.8 billion in December of 1977.
4/ Based on average float outstanding of $5.8 in 1978.
5/ The Stanton trigger ratio was 70.6 percent of December 31, 1978. The Reuss-Moorhead-Barnard plan goes into effect
when this ratio falls below 67.5 percent.
6/ The figures for 1978 include an estimate of the additional loss in revenue to the Federal Reserve from reduced holdings
of vault cash by member banks.
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Federal Reserve Bank of St. Louis
I
CHAIRMAN VOICKElk
3
For Consideration at a Board Session
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Federal Reserve Bank of St. Louis
03
TO:
Board of Governors
DATE:
FROM:
Staff
(Messrs. Axilrod, Brundy,
and Quick)
SUBJECT:
August 9, 1979
H.R. 7
To facilitate Board discussion of H.R. 7 as passed by the House,
this memorandum summarizes the main provisions of the bill and reviews their
implications for such concerns as membership attrition, monetary control,
and balances required for use of Federal Reserve services.
Highlights of Bill
The version of H.R. 7 passed by the House on July 20th is a
hybrid bill containing both the provisions of the Reuss-Moorhead-Barnard
1/
(R-M-B) version of H.R. 7 and the Stanton amendment.
The Stanton amendment,
which goes into effect immediately upon enactment of the bill, continues the
existing voluntary system for member banks at substantially reduced reserve
ratios.
If the voluntary system is not adequate to stop attrition from
membership, the R-M-B version of mandatory universal reserve requirements
will be triggered.
The Stanton amendment is applicable to members only.
Reserve
requirements on transactions accounts of member banks are reduced substantially.
A 3 percent reserve ratio is imposed on the first $35 million in transactions
deposits at a member bank.
applies.
Above $35 million an 11 percent reserve ratio
The Board is permitted to adjust these ratios within a range of
4 to 12 percent (sic).
The $35 million breakpoint for the lower reserve
ratio is indexed to the rate of growth of total transactions deposits.
1/
The provisions of H.R. 7 are suummrized in Appendix 1.
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Federal Reserve Bank of St. Louis
o•
-2The Board has authority under the bill to vary reserve requirements
on short-term (less than 6 months to maturity) non-personal time deposits
in a range of zero to 8 percent, but there is no authority--other than
emergency powers--to set reserve requirements on other domestic time and savings deposits.
The reserve ratio on short-term non-personal time deposits is
initially set at zero.
In the House debate, Representative St. Germain, whose
amendment reduced that ratio to zero, stated that the ratio should remain
at zero unless the Board were 1) to negotiate a Eurodollar reserves agreement
with other central banks, and in addition, 2) to find that economic conditions
required the imposition of reserve requirements on time deposits.
These reserve requirement provisions from the Stanton amendment
are phased in over a three-year period, with 50 percent of the resulting
reduction in reserve requirements occurring in the first year and 25 percent
in each of the two subsequent years.
Access to the discount window is provided
at the time of enactment to all institutions having transactions accounts, or
short-term non-personal time deposits, whether or not they hold reserves at the
Fed.
All other services are to be made available to all depository institutions
on equal terms, and a price schedule for services is to be published within six
months after enactment.
In addition, the Stanton amendment contains certain
transition provisions designed to make it less attractive to withdraw from the
1/
System during the period after enactment.—
In the event that the Stanton amendment does not arrest attrition
from the System, coverage of deposits by Federal reserve requirements will
1/
For example, the required reserves of a bank that withdraws after
enactment will be reduced in three equal annual installments rather
than immediately.
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Federal Reserve Bank of St. Louis
-3continue to decline.
When deposits at member banks as a proportion of
total deposits at all commercial banks eligible to apply for FDIC insurance
2 percent, the mandatory provisions of the R-M-B version of
/
drops below 671
H.R. 7 come into effect.
At the end of 1978 this trigger ratio was 70.6
percent, down from 71.8 percent at the end of 1977.
The mandatory provisions of H.R. 7 are those of the R-M-B version.
They become effective 180 days after the Board determines that the trigger
point has been reached.
Federal reserve requirements would then apply to
transactions accounts at all depository institutions.
A $35 million exemp-
tion would be provided, indexed at 80 percent of the growth rate of
transactions deposits.
An 11 percent reserve ratio would be initially
imposed above the exemption.
For purposes of monetary policy the Board
could adjust the reserve ratio within the range of 4 to 12 percent.
The
reserve requirement provisions for time or savings deposits are the same
as under the Stanton amendment.
The provision of the R-M-B version of H.R. 7 permitting all
financial assets of the Federal Reserve to count as collateral behind the
note issue was struck on the floor of the House.
As will be discussed,
this raises questions about the feasibility of implementing the reserve
requirement reductions.
Appendix 2 presents an analysis of the cost and coverage of the
bill using both 1977 and 1978 data.
The Stanton amendment provisions,
which go into effect on enactment, are shown in column 3 and column 6 of
the table.
The R-M-B provision, that go into effect after the trigger
point has been reached, are shown in columns 2 and 5 of the table.
Using
1977 data, the cost to the Treasury of the bill is estimated at roughly
$280 million annually when the phase-in of reserve requirement changes,
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Federal Reserve Bank of St. Louis
-4prices and access has
been completed.
Reserves at the Federal Reserve Banks
are reduced by approximately $20 billion, based on 1977 data.
Some 1,450
banks would hold reserves at the Fed under the Stanton provisions, while only
about 450 banks would hold balances at the Federal Reserve after the mandatory
provisions took effect.
On enactment, when the Stanton amendment becomes effective, the
proportion of all transactions balances at banks subject to Federal reserve
requirements will be roughly 74 percent, the same as under the current
1/
reserve structure.—
At present, also about 74 percent of all transactions
balances are held by banks holding balances at the Federal Reserve.
Once
the reserve reductions in the Stanton amendment become fully effective the latter
ratio will drop to 55 percent.
After large nonmember banks were brought
under Federal reserve requirements by the triggering of the mandatory
provisions, the coverage would be 56 percent.
Implications
Membership attrition.
Whether a bank withdraws from membership
under the Stanton amendment obviously will depend on its assessment of
benefits vs. costs.
The net effect on bank earnings of H.R. 7 (including
pricing of services) nearly offsets the burden of membership as earlier
calculated by the staff.
This earlier calculation, however, is not relevant
to the present bill because it assumed that access to services and the
discount window under a voluntary plan remained limited to members (or
to institutions holdings balances equal to member bank required reserves).
Under the Stanton provision, by contrast, any depository institution,
whether or not a member bank, can obtain the services of the Reserve
1/
_
The coverage estimates shown are based on deposits and membership for
December 1977.
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Federal Reserve Bank of St. Louis
_5_
Banks (though the discount window is available only if it has transactions
or short-term non-personal time balances).
Thus, an institution would be
able to withdraw from membership, obtain all the services, and not be
required to hold sterile Federal reserves (although the Fed could require
the same clearing balances applicable to members as a condition of use of
payments services).
With equal access to services by members and nonmembers alike, the
burden of membership in effect becomes the total amount of balances at the Fed
required to be held above the beyond what are needed for operating or
precautionary purposes.
Under the Stanton amendment, existing member banks
would be required to hold approximately $16 billion in required reserves, of
which about $8 billion probably would be held in vault cash for operating
purposes and $8 billion as balances at the Fed.
It is not likely that banks
would voluntarily hold balances of this size at the Fed--and lose about
$700 million per year in earnings--unless the System allowed these balances
to serve as compensation for services received by the bank.
However, it
is not clear that permitting payment for services by a credit against reserve
balances is consistent with the spirit of discussion surrounding the pricing
provisions of H.R. 7.
Moreover, such a reserve credit would significantly
increase the costs to the Treasury.
On the basis of this analysis, further significant membership
attrition might be expected during the voluntary phase of H.R. 7, unless
banks believe there are substantial public relations, supervisory, or other
technical benefits to membership.
The timing with which banks might in
practice leave the System depends on a very complicated calculation involving
the net gain in earnings from receiving one-third of required reserves per
year for three years on withdrawal as compared with the scheduled phase-down
of required reserves for existing members.
As a rough estimate, under the
circumstances, the mandatory phase of H.R. 7 may become effective within
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Federal Reserve Bank of St. Louis
-S two or three years (unless, to repeat, the bill can be administered in such
a way as to permit payment for services by treating reserves as compensating
balances).
Once reserve requirements become mandatory, financial calculations
about the burden of membership become by and large irrelevant.
It seems
likely that banks which found it desirable to be a member when holding
significant quantities of reserves on voluntary basis will continue to do
so when reserve requirements are reduced by two-thirds.
Indeed, the state
bank supervisors have expressed concern that the H.R. 7 reserve ratios are
so low, especially for the smallest banks, that many banks will seek to
convert to a national charter to avoid state requirements.
Moreover, it
is thought that dual examination by the state and by the FDIC is a significant
burden that banks will seek to avoid by converting to a national charter.
Monetary control.
Although H.R. 7 as passed probably would not
make the task of monetary control more difficult, it is not clear that it
would improve the ability of the Federal Reserve to control the money supply.
If the System seeks to control growth of the aggregates by affecting reserve
availability in such a way as to establish a particular interest rate range
consistent with that growth rate, it seems unlikely that H.R. 7 would have
any effect at all on monetary control.
If the System were to attempt to control an M-1 type monetary
aggregate
using a reserves target, it is not clear whether monetary control
would be facilitated or not.
On the one hand, reserve requirements on demand
deposits at member banks (or non-exempt banks) would be somewhat more uniform.
Thus, the potential complications for monetary control caused by graduated
reserve requirement ratios might be reduced.
On the other hand, the large reduction in reserve requirements would
increase substantially the number of banks at which vault cash needed for
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Federal Reserve Bank of St. Louis
-7-
operations would exceed required reserves.
Thus, the proportion of deposits
at banks which do not hold reserve balances at the Fed and which are not
subject to binding Federal reserve requirements would be increased.
Con-
sequently, there would be an increased likelihood of deposit shifts between
banks with binding Federal reserve requirements and those banks not bound
and whose desired reserve ratios would differ from the stipulated Federal
requirement, causing additional variability in the M-1/reserves multiplier.
Moreover, the large reduction in required reserves greatly increases the
M-1/reserves multiplier, so the effect on the money stock of any change
in reserves is amplified.
Thus, any errors in projections of reserve avail-
ability would introduce more slippage into the monetary control process.
Other effects of the bill on monetary policy would arise from the
omission of reserve requirements on time and savings deposits.
Zero reserve
requirements on time and savings deposits would act to stabilize the M-1/
reserves multiplier and thus would improve control of this aggregate under a
reserves operating target.
However, the System could not--without invoking
emergency provisions--use changes in reserve requirements on time deposits to
affect the cost of managed liabilities (except on non-personal, short-term
time under quite limited conditions).
In addition, lack of reserve requirements
on any class of time deposits would make it more difficult to control an M-2
type monetary aggregate through an aggregate reserve target.
Adequacy of balances for clearing purposes.
Most member banks under
the Stanton amendments and most non-exempt banks under the R-M-B provisions
will have very small balances at the Federal Reserve, particularly in relation
to the services that they are likely to use.
As a percent of total deposits
at banks with reserves at the Fed, reserve balances will drop from the present
4-1/2 percent to a little over 1 percent; as a percent of demand deposits at
those banks, these ratios are 14-1/2 and 3-1/2 percent, respectively.
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Federal Reserve Bank of St. Louis
The
-8-
amount of buffer provided by the reserve balances against the possibility of
overdrafts in reserve accounts will be decreased.
Increased overdrafts may
be the outcome.
Should balances from required reserves prove inadequate in practice,
the System would have a number of alternatives, none of which are entirely
satisfactory.
The Fed could ask for additional clearing balances, but an
equitable formula may be difficult to construct.
Or banks without adequate
balances could be required to settle through those with an adequate balance-which might impose a penalty on some banks.
A third possibility would be to
require no specific balance for access to clearing services, but to levy a
substantial penalty for overdrawing the account.
Collateral.
As noted earlier, H.R. 7 no longer has a provision
that permits all financial assets held by Federal Reserve Banks to stand
behind the Fed's currency liability.
As a result, it may not be possible
to implement the reserve requirement provisions of H.R. 7 in full.
In terms
of deposits at the end of 1978, required reserve balances at the Fed would
be reduced by about $24 billion.
Free note collateral at that time was
/
2 billion.
about $191
/
2 billion; in mid-1979 free note collateral was only $131
Thus, the reduction in Government security holdings in the Fed portfolio
that would accompany the decline in required reserves would probably leave
the System without adequate collateral for Federal Reserve notes.
Reporting.
As passed, H.R. 7 permits the Fed to obtain asset and
liability reports from all depository institutions as needed for monetary
policy purposes.
Member banks are required to make such reports directly
to the Federal Reserve, but other classes of depository institutions are
required only to report directly their transactions balances and short-term
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Federal Reserve Bank of St. Louis
,
,
-9non-personal time deposits.
All other reports that the Board may require
for monetary policy purposes are to be provided through each institution's
primary federal or state regulator.
This procedure is likely to be cumbersome both from the point of
view of the Board and of the depository institutions that would be required
to report to the Board through two channels.
Moreover, the delays and
communications problem inherent in passing data through the other regulators
is likely to make such data of limited value for guiding day-to-day open
market operations.
While the preceding analysis has focused on certain problem areas,
there are a number of clear benefits for the financial system in the bill.
All depository institutions with transactions accounts receive access to
the discount window.
And all depository institutions, whether or not they
have transactions accounts, obtain access to System services at a price-which should encourage efficiency in the payments mechanism.
Once the
mandatory reserve requirement provisions go into effect, there will be no
discrimination between classes of institutions with regard to reserve
requirements.
Also, the Board will obtain authority to set reserves on
resources obtained abroad by nonmember depository institutions in the
mandatory phase of the bill.
Finally, the bill does contain an emergency
reserve requirement provision giving the Board authority over all liabilities
of all depository institutions, but applicable only after consultation with
Congress in extraordinary circumstances for short, renewable periods of time.
Some of these benefits depend on triggering the mandatory
provisions, but there is always the risk that Congress may lower the trigger
point as the actual coverage ratio approaches it,and pressures from nonmember
institutions mount.
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Federal Reserve Bank of St. Louis
Other benefits--such as the "level playing field" for
-10reserve requirements--are achieved without any clear gain for monetary
control, except possibly over the long-run.
Finally, it should be noted that the bill does have longer-run
implications for the structure of the Federal Reserve System.
Once the
mandatory provisions become effective, they may in practice appear to
conflict with the voluntary nature of membership in the Federal Reserve
System.
Thus, pressures could develop to modify the structure of the System,
perhaps eliminating membership, and questions would be raised in the process
about the role of the System in supervisory matters and the role of Reserve
Banks and their Boards of Directors in monetary matters.
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Federal Reserve Bank of St. Louis
APPENDIX 1
H.R. 7 As Enacted by The House
Summary of Major Provisions
Sec. 1
Title--Monetary Control Act of 1979.
Sec. 2
Requires all depository institutions to make reports on assets
and liabilities as the Board determines necessary to monitor
and control monetary and credit aggregates.
All member bank
reports are to be made direc3tly to the Board as are reports
for Category A and B deposits of all nonmember depository
institutions.
All other reports by nonmembers are to be through
the principal supervisor.
Sec. 3
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Federal Reserve Bank of St. Louis
(1) The Board may exercise its authority to define the term "deposit"
as applied to required reserves of nonmembers after consultation
with the FDIC, FHLBB, and NCUA.
(2) The term "Category A deposit" means all forms of transactional
accounts (e.g. NOWs and demanil leposits) except deposits
subject to six or fewer telephone transfers per month.
(3) The term "Category B deposit" means all nonpersonal time
deposits of less than 180 days.
Personal time deposits
are nonnegotiable, nontransiclble deposits of a natural
person.
(4) Graduated reserve ratios may be imposed within the ranges
provided.
-2--
(5) Domestic reserve requirements shall not apply to deposits
payable only outside the U.S.
However, Eurodollar reserve
requirements may be applied on such deposits.
(6) Reserve requirements may be imposed or changed for the
sole purpose of implementing monetary policy.
(7) A depository institution that is owned by other institutions
and does not do business with the public shall not be
required to maintain reserves.
(8)
(Numbers (8)
through (16)
below apply only
after the
trigger is reached
as provided by the
Stanton Amendment
(see (17) through
(25) below). However, access to
(9)
;-)le discount
window is
immediately
available to all
institutions with
Category A or
(10)
Category B
deposits.]
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Federal Reserve Bank of St. Louis
The Category A and Category B exemptions for 1979 are
$35 million and $10 million, respectively, plus 80 percent of the
growth of Category A and Category B deposits from December 31,
1 377, to June 30, 1978.
Thereafter, the exemption is
indexed to 80 percent of the growth of deposits.
The principal supervisor determines which institutions
will not have deposits above the exemption levels and
thus will not be required to maintain reserves.
Category A deposit reserve requirements shall be 11 percent
initially, within a range of 4-12 percent.
Different
reserve ratios may be established for diEF.erent types
of that category of deposits.
(11) Category B deposit reserve requirements shall be 0 percent
initially, within a range of 0-8 percent.
[The legislative
history indicates that Mr. St Germain intended this authority
to be used only if (1) there is agreement with the central
banks of other industrialized countries to impose Eurodollar
reserve requirements equally, and (2) economic conditions
S.
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Federal Reserve Bank of St. Louis
-3-
warrant such reserve requirements to control Eurodollar
borrowings, after Board consultation with the appropriate
Congressional committees.]
(12) Reserves may be imposed on Eurodollar borrowings or nonmember
foreign branches, subsidiaries, and IBF's to the same extent
that may be imposed on member bank foreign branches subsidiaries and IBF's.
The Board may impose reserves on
borrowings from, loans to U.S. residents by, and purchases
of assets from domestic offices by foreign offices of any
depository institution.
[But see (23) below.]
(13) Upon a vote of five Board members that extraordinary circumstances exist, after consultation with the appropriate
Congressional committees, the Board may impose reserve
requirements on all types of liabilities outside the rages
3pecified elsewhere for 30-day periods.
However, the Category A
and Category B exemptions cannot be reduced.
[But see (24)
below.]
(14) A nonmember depository institution maintaining reserves
is entitled to all the privileges of membership, except
holding stock in or voting for directors of a Reserve
Bank.
(15) Any depository institution possessing either Category A
or Category B deposits shall be given access to the discount
window.
The Reserve Banks shall take into consideration
the special needs of savings institutions.
-4-
(16) Phase-in Provisions
(a) Required reserves of those institutions who were
nonmembers on August 1, 1978 are phased in over a
10-year period.
(b) Reserve reductions and increases for member banks
on August 1, 1978 are permitted to be phased-in over
a 48-month period.
(c) Any institution that was a nonmember on August 1,
1973 that subsequently becomes a member shall meet
reserve requirements equal to those of a member bank
that is in the process of having its required reserves
reduced under (b).
[The provision is intended to
discourage small nonmembers from switching to national
charter to escape State reserve requirements.]
(d) The phase-in for nonmembers in Hawaii begins in five
years and extends for ten years thereafter.
Stanton
Amendments
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Federal Reserve Bank of St. Louis
(17) Each calendar quarter after enactment the Board shall
determine the ratio of total member bank deposits to
all bank deposits ("coverage ratio").
The Board must
publish this determination in the Federal Register and
inform Congress and each member bank of the determination.
(18) Reserve requirements on Category A and B deposits shall
apply only to member banks unless the coverage ratio
is less than 67.5 percent.
When the coverage falls below
67.5 percent, the reserve requirements on Category A
and B deposits shall Apply to all depository institutions
180 days after the determination is made.
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Federal Reserve Bank of St. Louis
-5-
(19) During the period between enactment and the end of 180
days after the date the 67.5 percent figure is determined
by the Board, every member bank shall keep reserves against
the first $35 million of its Category A deposits initially
in the ratio of 3 percent.
ratio up to 12 percent.
The Board can increase the
The $35 million amount is indexed
100 percent to the growth of total Category A deposits
of all institutions.
Category A deposits in excess of
the indexed amount are reservable initially at 11 percent,
variable within a range of 4-12 percent.
[Category B reserve
requirements are at 0 percent in accordance with (11)
above.]
(20) During the period between enactment and the end of 180
days after the date the 67.5 percent cover:dye ratio is
determined, the amount of reduced reserves that a member
bank maintains shall be phased-down over a three-year
period.
The phase-down, however, ends 180 days after
the 67.5 percent figure is achieved, and the four-year
phase-in provision in (16) applies.
(21) Any bank that leaves the System after the date of enactment
shall receive a refund of its required reserve balances
in three equal annual payments.
(22) Banks that were members on May 24, 1979, that leavP th..!
System thereafter shall not be entitled to the ten-yelr
phase-in of reserve requirements that will apply to nonmembers
after the 67.5 percent coverage ratio is reached.
-6-
(23) Reserves on foreign branches of U.S. banks, subsidiaries
and IBF's of nonmembers shall not be permitted until
180 days after the 67.5 percent coverage ratio is determined.
(24) The authority of the Board to impose reserve requirements
under extraordinary circumstances (see (13) above) applies
only to member banks until 180 days after the 67.5 percent
coverage ratio is determined.
(25) The Board shall not approve applications for withdrawals
from membership made beginning May 24, 1979, and ending
on the date ot enactment of the Act.
Member banks may
withdraw after the date of enactment.
End of
Stanton
Amendments
(26) Reserves are satisfied by maintaining vault cash or reserve
balances at a Federal Reserve Bank.
Reserves may be
passed to the Reserve Bank through a correspondent or
a Federal Home Loan Bank.
Sec. 4
Authority of state supervisors over state-chartered depository
institutions is unaffected by the Act.
Sec. 5
Eliminates 10(b) penalty rate for Federal Reserve advances
on ineligible collateral.
Sec. 6
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Federal Reserve Bank of St. Louis
Requires the Board to prepare and publish for comment a set
of pricing principles and proposed Cee schedules for virtually
all Federal Reserve Bank services within six months after
the Act is enacted.
1.
The fees shall be based upon these principles:
Competitive and explicit pricing.
-7-
2.
Services to nonmembers and members at same fee schedule;
nonmembers may be required to comply with any terms, including
holding of clearing balances, that are applicable to members.
3.
Long-run prices shall be based on all direct and indirect
costs, including imputed costs of capital and taxes, except
where the Board finds that the public interest requires
a departure from the principle, after giving due regard
to competitive factors and to the provision of an adequate
level of services nationwide.
Sec. 7
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Federal Reserve Bank of St. Louis
The provisions of the Act are effective upon enactment.
APPENDIX 2
ANALYSIS OF MONETARY EMPROVENENT PROGRAM PLANS
AUGUST 6, 1979
Exemptions:
Ratios:
Transactions
Savings
Short-time
Long-time
1977
35/0
Actual
1977
(1)
11
0
0
0
R-M-B
(2)
3,11 2/
0
0
0
Stanton
(3)
27.3
0
27.3
7.2
.6
7.8
7.6
0
7.6
Reserves Released
19.3
Cost of Reserve Requirement Changes (millions) 3/
Revenue from Service Charges
Revenue from Float Charge
1269
(410)
(247) 4/
PLAN.
• •
Reserves (billions)
Members
Nonmembers
Total
Net Cost after Taxes
1978 1/
35/0
0/0
0/0
Actual
1978
(4)
11
0
0
0
R-M-B
(5)
3,11 2/
0
0
0
Stanton
(6)
31.6
0
31.6
6.9
.8
7.7
7.3
0
7.3
19.7
23.9
24.3
1281
(410)
(247) 4/
1798
(410)
(425) 5/
1821
(410)
(425) 5/
275
281
433
444
Number of Commercial Banks
Exempt
Members
Nonmembers
0
8868
5044
8633
0
8868
0
8948
4913
8675
0
8948
With Required Reserves
Members
Nonmembers
5664
0
620
235
5662
0
5558
0
645
273
5555
0
With Reserves at Fed
Members
Nonmembers
5587
0
332
117
1456
0
5485
0
313
123
1506
0
73.1
72.9
64.0
53.8
73.1
53.1
72.3 6/
7.7./
65.0
52.8
72.3
52.6
Percent of Total Deposits
At Banks with Required Reserves
At 3anks Holding Balances at Reserve Banks
Percent of Transaction Deposits
65.4
73.7
73.7
72.3
65.6
At Banks with Required Reserves
72.3
SS 6
73.5
54.5
72.2
53.7
At Banks Holding Balances at Reserve Banks
53.1
1/ Imposing reserve requirements on U.S. branches of foreign banks at current levels and then reducing them to the
level of the Reuss-Moorhead-Barnard plan would cost an additional 837 million after taxes. Reducing their reserve
requirements to the level of the Stanton plan would cost an additional 833 million after taxes. Of the 105 U.S.
branches of foreign banks in operation in 1978, 27 would have held reserves at the Fed under R-M-B, while 72 would
have held reserves at the Fed under Stanton. With branches covered, the percentage of total deposits at banks with
required reserves would be 73.0 for actual 1978, 65.0 for R-M-B, and 72.7 under Stanton. The percentage of total
deposits at banks holding reserve balances at the Fed would be 73.0 for actual 1978, 53.1 for R-M-B, and 53.8 for
Stanton.
2/ The first $35 million of transactions deposits are reservable at 3 percent, while all transactions deposits
above $35 million are reservable at 11 percent.
3/ The figures for 1978 include an estimate of the additional loss in revenue to the Federal Reserve from reduced
holdings of vault cash by member banks.
4/ Based on float outstanding of 83.8 billion in December 1977
5/ Based on average float outstanding of 85.8 billion in 1978.
-g/ The Stanton trigger ratio was 71.8 percent on December 31, 1977 and 70.6 percent on December 31, 1978.
The Reuss-Moorhead -Barnard plan goes into effect when this ratio falls below 67.77 percent.
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Federal Reserve Bank of St. Louis
H.R. 7 As Enacted by The House
Sec. 1
Title--Monetary Control Act of 1979.
Sec. 2
Requires all depository institutions to make reports on assets
and liabilities as the Board determines necessary to monitor
and control monetary and credit aggregates.
All member bank
reports are to be made directly to the Board as are reports
for Category A and B deposits of all nonmember depository
institutions.
All other reports by nonmembers are to be through
the principal supervisor.
Sec. 3(a) The Board may exercise its authority to define the term "deposit
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Federal Reserve Bank of St. Louis
as applied to required reserves of nonmembers after consultation
with the FDIC, FHLBB, and NCUA.
(b)(1)
The term "Category A deposit" means all forms of transactional
accounts (e.g. NOWs and demand deposits) except deposits
subject to six or fewer telephone transfers per month.
(2)
The term "Category B deposit" means all nonpersonal time
deposits of less than 180 days.
Personal time deposits
are nonnegotiable, nontransferable deposits of a natural
person.
(3)
Graduated reserve ratios may be imposed within the ranges
provided.
(4)
Domestic reserve requirements shall not apply to deposits
payable only outside the U.S.
However, Eurodollar reserve
requirements may be applied on such deposits.
-2-
(5)
Reserve requirements may be imposed or changed for the
sole purpose of implementing monetary policy.
(6)
A depository institution that is owned by other institutions
and does not do business with the public shall not be
required to maintain reserves.
[Sections (7)
(7)
through (15) below
apply only after
the 67.5% trigger
is reached as provided by the Stanton
Amendment (see (16)
through (24) below).
However, access to
the discount window
(8)
is immediately
available to all
institutions with
Category A deposits.]
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Federal Reserve Bank of St. Louis
The Category A and Category B exemptions for 1979 are
$35 million for each category plus 80 percent of the
growth of Category A and Category B deposits from December 31,
1977, to June 30, 1978.
Thereafter, the exemption is
indexed to 80 percent of the growth of deposits.
The principal supervisor determines which institutions
will not have deposits above the exemption levels and
thus will not be required to maintain reserves.
(9)
Category A deposit reserve requirements shall be 11 percent
initially, within a range of 4-12 percent.
Different
reserve ratios may be established for different types
of that category of deposits.
(10)
Category B deposit reserve requirements shall be 0 percent
initially, within a range of 0-8 percent.
[The legislative
history indicates that Mr. St Germain intended this authority
to be used only if (1) there is agreement with the central
banks of other industrialized countries to impose Eurodollar
reserve requirements equally, and (2) economic conditions
warrant such reserve requirements to control Eurodollar
borrowings, after Board consultation with the appropriate
Congressional committees.]
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Federal Reserve Bank of St. Louis
-3-
(11)
Reserves may be imposed on Eurodollar borrowings on nonmember
foreign branches, subsidiaries, and IBF's to the same
extent that may be imposed on member bank foreign branches
subsidiaries and IBF's.
(12)
[But see (22) below.]
Upon a vote of five Board members that extraordinary
circumstances exist, after consultation with the appropriate
Congressional committees, the Board may impose reserve
requirements on all types of liabilities outside the
ranges specified elsewhere for 30-day periods.
[But
see (23) below.]
(13)
A nonmember depository institution maintaining reserves
is entitled to all the privileges of membership, except
holding stock in or voting for directors of a Reserve
Bank.
(14)
Any depository institution possessing Category A deposits
shall be given access to the discount window.
The Reserve
Banks shall take into consideration the special needs
of savings institutions.
(15)
Phase-in Provisions
(a) Required reserves of those institutions who were
nonmembers on August 1, 1978 are phased in over a
10-year period.
(b) Reserve reductions and increases for banks that were
members on August 1, 1978 are permitted to be phase-in
over a 48-month period.
-4-
(c) Any institution that was a nonmember on August 1,
1978 that subsequently becomes a member shall meet
reserve requirements equal to those of a member bank
that is in the process of having its required reserves
reduced under (b).
[The provision is intended to
discourage small nonmembers from switching to national
charter to escape State reserve requirements.]
(d) The phase-in for nonmembers in Hawaii begins in five
years and extends for ten years thereafter.
Stanton
(16)
Amendments
Each calendar quarter after enactment the Board shall
determine the ratio of total member bank deposits to
all bank deposits ("coverage ratio").
The Board must
publish this determination in the Federal Register and
inform Congress and each member bank of the determination.
(17)
Reserve requirements on Category A and B deposits shall
apply only to member banks unless the coverage ratio
is less than 67.5 percent.
When the coverage falls below
67.5 percent, the reserve requirements on Category A
and B deposits shall apply to all depository institutions
180 days after the determination is made.
(18)
During the period between enactment and the end of 180
days after the date the 67.5 percent figure is determined
V
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Federal Reserve Bank of St. Louis
by the Board, every member bank shall keep reserves against
the first $35 million of its Category A deposits initially
in the ratio of 3 percent.
ratio up to 12 percent.
The Board can increase the
The $35 million amount is indexed
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Federal Reserve Bank of St. Louis
-5-
100 percent to the growth of total Category A deposits
of all institutions.
Category A deposits in excess of
the indexed amount are reservable initially at 11 percent,
within a range of 4-12 percent.
[Category B reserve
requirements are at 0 percent in accordance with (10)
above.]
(19)
During the period between enactment and the end of 180
days after the date the 67.5 percent coverage ratio is
determined, the amount of reduced reserves that a member
bank maintains shall be phased-down over a three-year
period.
The phase-down, however, ends 180 days after
the 67.5 percent figure is achieved, and the four-year
phase-in provision in (15) applies.
(20)
Any bank that leaves the System after the date of enactment
shall receive a refund of its required reserve balances
in three equal annual payments.
(21)
Banks that were members on May 24, 1979, that leave the
System thereafter shall not be entitled to the ten-year
phase-in of reserve requirements that will apply to nonmembers
after the 67.5 percent coverage ratio is reached.
(22)
Reserves on foreign branches of U.S. banks, subsidiaries
and IBF's of nonmembers shall not be permitted until
180 days after the 67.5 percent coverage ratio is determined.
(23)
The authority of the Board to impose reserve requirements
under extraordinary circumstances (see (12) above) applies
only to member banks until 180 days after the 67.5 percent
coverage ratio is determined.
-6-
I
(24)
The Board shall not approve applications for withdrawals
from membership made beginning May 24, 1979, and ending
on the date of enactment of the Act.
Member banks may
End of Stanton
withdraw after the date of enactment.
Amendments
(25)
Reserves are satisfied by maintaining vault cash or reserve
balances at a Federal Reserve Bank.
Reserves may be
passed to the Reserve Bank through a correspondent or
a Federal Home Loan Bank.
Sec. 4
Authority of state supervisors over state-chartered depository
institutions is unaffected by the Act.
Sec. 5
Eliminates 10(b) penalty rate for Federal Reserve advances
on ineligible collateral.
Sec. 6
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Federal Reserve Bank of St. Louis
Requires the Board to prepare and publish for comment a set
of pricing principles and proposed fee schedules for virtually
all Federal Reserve Bank services within six months after
the Act is enacted.
The fees shall be based upon these principles:
1.
Competitive and explicit pricing.
2.
Services to nonmembers and members at same fee schedule;
nonmembers may be required to comply with any terms, including
holding of clearing balances, that are applicable to members.
3.
Long-run prices shall be based on all direct and indirect
costs, including imputed costs of capital and taxes, except
where the Board finds that the public interest requires
a departure from the principle, after giving due regard
to competitive factors and to the provision of an adequate
level of services nationwide.
__,
-7-
Sec. 7
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Federal Reserve Bank of St. Louis
The Act is effective upon enactment.
H.R. 7 as Passed by the House
1.
Reporting Requirements
Gives the Board authority to require from any depository institution
reports of assets and liabilities as are necessary for the purposes
of monetary policy.
2.
Initial Voluntary Reserve Requirement System
Reduces reserves on transactions accounts at member banks as follows:
transaction accounts
--
a 3 per cent reserve ratio on the first
$35 million of transaction accounts
an 11 per cent reserve ratio (or within
the ranges of 4-12) on transaction
account deposits above $35 million
Time & Savings accounts
3.
no reserves on time and savings accounts
except that there is a reserve ratio of
0-8 on short-term (less than 180 days)
nonpersonal or personal negotiable time
deposits. But the initial ratio is 0
and it cannot be increased unless there
is international agreement on the need
to control Eurodollar borrowings via
the imposition of reserve requirements
and consultation with Congress.
Trigger Mechanism
Provides that a mandatory reserve requirement system is triggered
if the ratio of the amount of total deposits held by all member
banks to the amount of total deposits at all banks becomes less than
67.5 per cent.
4.
Mandatory Reserve Requirements
---
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Federal Reserve Bank of St. Louis
Applies to all depository institutions.
Imposes reserve requirements as follows:
on transaction accounts -- no reserves on the first $35 million
of transaction accounts
-- an 11 per cent reserve ratio (or within
the range of 4-12) on transaction
account deposits over $35 million
-2-
5.
Services
--
6.
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Federal Reserve Bank of St. Louis
Provides prices for Federal Reserve services.
All services covered by the fee schedule are to be available
to non-member depository institutions at the same fees and terms
as to member banks.
Discount Window
There is some confusion as a result of Floor amendments but it appears
that before the trigger mechanism is reached access to the discount
window will be limited to member banks. After the trigger mechanism
is reached, the discount window is available to all institutions
with transaction accounts.
NIP PLAN RUN ON JULY 23, 1979
PLAN:‹
35710
Exemptions:
Ratios:
Transactions
Savings
Short-time
Long-time
Current
Reserves (billions)
Members
Nonmembers
Total
0/0
3,1121
11
0
0
0
31/
0
0
4/
(H. R. 7)— Bill Passed on
July 20, 1979
8.4
.7
9.1
7.6
0
7.6
Reserves Released
18.2
19.7
Cost of Reserve Requirement Changes (millions)
Revenue from Service Changes
Net Cost before Taxes
Net Cost after Taxes (No Float Adjustment)
1187
(410)
777
349
1281
(410)
871
392
Revenue from Float Charge (Net of Tax)!"
Net Cost after Taxes (With Float Adjustment)
(111)
238
(111)
281
27.3
0
27.3
Number of Commercial Banks
Exempt
Members
Nonmembers
0
8868
4954
8599
0
8868
With Required Reserves
Members
Nonmembers
5664
0
710
269
5664
0
With Reserves at Fed
Members
Nonmembers
5587
0
348
126
1456
0
Percent of Total Deposits
At Banks with Required Reserves
71.8
65.4
71.8
Percent of Transaction Deposits
At Banks with Required Reserves
73.0
66.6
73.0
Requested By:
1/ Based on float outstanding of $3.8 billion in December of 1977. Average float for the
year 1977 was $3.6 billion, and for the year 1978, $5.8 billion.
.)./ Only non-individual time deposits are reservable.
3/ The first $35 million of transactions deposits has a 3 percent reserve requirempnt,
while all transactions deposits above $35 million are reservable at 11 percent.
4/ This version of H.R. 7 was passed out of the House Banking Committee.
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Federal Reserve Bank of St. Louis
BOARD OF
NOVERNORS
Of 'HE
FEDERAL RESERVE SYSTEM
Office Correspondence
To
Distribution
From
James Brundy
Date
Subject:
July 24, 1979
Passage of H.R.7 by the
House of Representatives
As most of you probably already know, H.R.7 (the membership
bill) was passed by the House of Representatives on July 20, 1979, by
a vote of 340-20.
The bill as passed by the House was substantially
different from the bill that was reported to the House by the Banking
Committee.
The major difference that may not be obvious from the attached
daily report is that the House-passed version applies to member banks
only until such time as less than 67.57 of total deposits are held at
banks with Federal reserve requirements.
to that reported by the House
In this event, a version similar
Banking Committee would come into effect.
At the end of 1978, 717 of total deposits were held at member banks
(institutions with Federal reserve requirements), and the ratio has been
decreasing about one percentage point per year.
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Federal Reserve Bank of St. Louis
Exemptions:
Ratios:
Transactions
Savings
Short-time
Long-time
MIP PLANS RUN ON JULY 24, 1979
33110
0/0
5/5
6/
4,120
2/
60
12
0
2/
6-0
11
0
2/
30
(H.R. 7)2/
8.4
.7
9.1
7.6
0
7.6
14.2
2.9
17.1
13.7
2.4
16.1
Reserves Released
18.2
19.7
10.2
11.2
Cost of Reserve Requirement Changes (millions)
Revenue from Service Changes
Net Cost before Taxes
Net Cost after Taxes (No Float Adjustment)
1187
(410)
777
349
1281
(410)
871
392
663
(410)
253
114
729
(410)
319
143
Revenue from Float Charge (Net of Tax)!"
Net Cost after Taxes (With Float Adjustment)
(111)
238
(111)
281
(111)
3
(111)
32
Current
Reserves (billions)
Members
Nonmembers
Total
27.3
0
27.3
Number of Commercial Banks
Exempt
Members
Nonmembers
0
8868
4954
8599
0
8868
2
110
2086
5611
With Required Reserves
Members
Nonmembers
5664
0
710
269
5664
0
5662
8758
3578
3257
With Reserves at Fed
Members
Nonmembers
5587
0
348
126
1456
0
3726
4353
2252
1602
71.8
65.4
71.8
100
91.5
73.0
66.6
73.0
100
92.6
Percent of Total Deposits
At Banks with Required Reserves
Percent of Transaction Deposits
At Banks with Required Reserves
Requested By:
1/
and
2/
3/
4/
5/
6/
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Federal Reserve Bank of St. Louis
0/5
4/
3,110
0
0
(H.R.7)21
Roberts
ABA
Based on float outstanding of $3.8 billion in December of 1977. Average float for the year 1977 was $3.6
billion,
for the year 1978, $5.8 billion.
Only non-individual time deposits are reservable.
As passed by the House Banking Committee.
The first $35 million of transactions deposits are reservable at 37., while
all transactions deposits above $35
million are reservable at 117.
As passed by the House of Representatives on July 20, 1979.
The first $35 million of transactions deposits are reservable at 47., while all transactions deposits above $35
million are reservable at 12%.
Current
System
1)
2)
3)
5664
Unknown
Number of banks holding
reserves at Fed
5664
800
4)
Indexing
5)
Reserve Ratios
(initial ratios in
parenthesis)
Transactions
Savings
Short Time
Long Time
6)
7)
H.R. 14072
9/14/78
Number of banks subject
to reserve requirements
Exemptions
Coverage of Thrifts
Transaction Deposits
Time and Savings Deposits
Reduction in non-earning
reserves at the Fed
Members
Non-members
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Federal Reserve Bank of St. Louis
111/1
111/1
EVOLUTION OF HOUSE BANKING COMMITTEE RESERVE REQUIREMENT PROPOSALS
III/1
0
Grandson of
H.R. 7
5/22/79
Stanton
Amendment
H.R. 7 as Passed By the House
7/20/79
Voluntar S stem
Mandator S stem, if tri!!ered
H.R. 7
1/15/79
Son of
H.R. 7
4/12/79
1526
2302
1015
5,664
5,664
656
699
510
1,648
1,648
a) none
a) none
a) $35M transactions
b) none
b) none
b) $10M non-personal
short time
1015
510
a) $50M
demand &
savings
b) $50M time
a) $50M
demand &
savings
b) $50M time
a) $35M
transactions
b) $35M
time &
savings
a) $S5M
transactions
b) $10M nonpersonal
short time
full
full
partial
partial
full
full
partial
4-8% (7)
0-3% (1)
4-8% (7)
4-12% (11)
4-12% (3) under $35M
4-12% (11) over $35M
4-12% (3) under $35M
4-12% (11) over $35M
N/A
N/A on consumer
0-8% (0) on non-personal
4-12% (11)
N/A
N/A on consumer
0-8% (0) on non-personal
0-3% (1)
7-16'4%
3%
3-6
6-8% (7)
1-6% (6)
8-10% (9.5)
1-3% (3)
3-8% (8)
1-21
/
2%
1-3% (1)
1-3% (1)
no
no
no
no
yes
no
$14.58
-1.38
$13.98
-1.78
yes
no
$18.58
- .8B
N/A on consumer
0-8% (3) on
non-personal
N/A
yes
yes
$18.98
-0.98
N/A o /iLnsumer
0-8% on non-personal
N/A
N/A
N/A
no
no
no
no
yes
yes
$18.48
none
$18.48
none
$18.98
- 0.98
July IS, 1979
G LEADERSHIP CONFERENCE
CONSENSUS STATEMENT -- RANKIN
pating
Leadership Conference, antici
The members of the Banking
and later
the House of Representatives
further legislative acfion in
tance
;or
.
Reserve issue, affirmed the i7in the Senate on the Federal
ectiveness
independence and monetary eff
of preserving the strength,
practical
The bankers concluded that the
of our nation's central bank.
g community is the folio in
legislative goal for the bankin
be
es, the Federal Reserve should
O For monetary policy purpos
ts
uirements on transaction accoun
authorized to impose reserve rea
requirements
ial intermediaries. Reserve
offered by any and all financ
t deposits
uld apolv to transaction acccun
set by the Federal Reserve sho
only.
ancial
size considerations a=ng fin
Recognizing that allowance of
reserve
resolution of the issue, these
intermediaries may facilitate
io to each
d to apply a lower reserve rat
requirements could be structure
n level,
account deposits below a certai
intermediary's net transaction
that leve.
net transaction deposits above
with a higher reserve ratio on
transs inherent in interest-bearing
O Recognizing the cost factor
ablished for
er reserve rate should he est
action account balances, a low
transablished for non-interest-bearing
such accounts than the level est
Q
action account balances.
*
*
*
*
*
*
*
*
*
*
*
. 7
Representatives will vote on H.R
Recognizing that the House of
ore the
or options which will he -cut bef
this week, and that the two maj
members
edom of Choice Amendment, the
House will be H.R. 7 and the Fre
the Freedom
ence voted strong sulDr,ort of
of the Banking Leadership Confer
erior alternative to H.R. 7.
of Choice Amendment as a much sup
ationship
ty to retain the voluntary rel
Preservation of the opportuni
accomplished
erve System, which would he
between banks and the Federal res
e as the
ent, is essential until such tim
by the Freedom of Choice Amendm
ultimate
option of achieving hankers'
legislative process presents the
itive equality.
legislative goal of true compet
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Federal Reserve Bank of St. Louis
#
Removal Notice
The item(s) identified below have been removed in accordance with FRASER's policy on handling
sensitive information in digitization projects due to copyright protections.
Citation Information
Document Type: Newsletters
Citations:
Number of Pages Removed: 6
American Bankers Association. Perspectives, No. 418, July 24, 1979.
American Bankers Association. Capital, No. 418, July 24, 1979.
Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
https://fraser.stlouisfed.org
TO:
Board of Governors
FROM:
Staff
(Messrs. Axilrod, Brundy,
and Quick)
DATE:
SUBJECT:
August 8, 1979
H.R. 7
To facilitate Board discussion of H.R. 7 as passed by the House,
this memorandum summarizes the main provisions of the bill and reviews their
implications for such concerns as membership attrition, monetary control,
and balances required for use of Federal Reserve services.
Highlights of Bill
The version of H.R. 7 passed by the House on July 20th is a
hybrid bill containing both the provisions of the Reuss-Moorhead-Barnard
(R-M-B) version of H.R. 7 and the Stanton amendment.'
The Stanton amendment,
which goes into effect immediately upon enactment of the bill, continues the
existing voluntary system for member banks at substantially reduced reserve
ratios.
If the voluntary system were not adequate to stop attrition from
membership, the R-M-B version of mandatory universal uniform reserve requirements would be triggered.
The Stanton amendment is applicable to members only.
Reserve
requirements on transactions accounts of member banks are reduced substantially.
A 3 percent reserve ratio is imposed on the first $35 million in transactions
deposits at a member bank.
applies.
Above -$35 million an 11 percent reserve ratio
The Board is permitted to adjust these ratios within a range of
4 to 12 percent (sic).
The $35 million breakpoint for the lower reserve
ratio is indexed to the rate of growth of total transactions deposits.
1/
The provisions of H.R. 7 are summarized in Appendix 1.
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Federal Reserve Bank of St. Louis
-2The Board has authority under the bill to vary reserve requirements
on short-term (less than 6 months to maturity) non-personal time deposits
in a range of zero to 8 percent, but there is no authority--other than
emergency powers--to set reserve requirements on other domestic time and
savings deposits.
The reserve ratio on short-term non-personal time is
initially set at zero.
In the House debate, Representative St. Germain, whose
amendment reduced that ratio to zero, stated that the ratio should remain
at zero unless the Board were 1) to negotiate a Eurodollar reserves agreement
with other central banks, and in addition, 2) to find that economic conditions
required the imposition of reserve requirements on time deposits.
These reserve requirement provisions from the Stanton amendment
are phased in over a three-year period, with 50 percent of the resulting
reduction in reserve requirements occurring in the first year and 25 percent
in each of the two subsequent years.
Access to the discount window is provided
at the time of enactment to all institutions having transactions accounts,
whether or not they hold reserves at the Fed.
All other services are to
be made available to all depository institutions on equal terms, and a price
schedule for services is to be published within six months after enactment.
In addition, the Stanton amendment contains certain transition provisions
designed to make it less attractive to withdraw from the System during the
lj
period after enactment.
In the event that the Stanton amendment does not arrest attrition
from the System, coverage of deposits by Federal reserve requirements will
1/
For example, the required reserves of a bank that withdraws after
enactment will be reduced in three equal annual installments rather
than immediately.
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Federal Reserve Bank of St. Louis
continue to decline.
When deposits at member banks as a proportion of
total deposits at all commercial banks eligible to apply for FDIC insurance
drops below 671
/
2 percent, the mandatory provisions of the R-M-B version of
H.R. 7 come into effect.
At the end of 1978 this trigger ratio was 70.6
percent, down from 71.8 percent at the end of 1977.
The mandatory provisions of H.R. 7 are those of the R-M-B version.
They become effective 180 days after the Board determines that the trigger
point has been reached.
Federal reserve requirements would then apply to
transactions accounts at all depository institutions,
A $35 million exemp-
tion would be provided, indexed at 80 percent of the growth rate of
transactions deposits.
An 11 percent reserve ratio would be initially
imposed above the exemption.
For purposes of monetary policy the Board
could adjust the reserve ratio within the range of 4 to 12 percent.
The
reserve requirement provisions for time or savings deposits are the same
as under the Stanton amendment.
The provision of the R-M-B version of H.R. 7 permitting all
financial assets of the Federal Reserve to count as collateral behind the
note issue was struck on the floor of the House.
As will be discussed,
this raises questions about the feasibility of implementing the reserve
requirement reductions.
Appendix 2 presents an analysis of the cost and coverage of the
bill using both 1977 and 1978 data.
The Stanton amendment provisions,
which go into effect on enactment, are shown in column 3 and column 6 of
the table.
The R-M-B provision, that go into effect after the trigger
point has been reached, are shown in columns 2 and 5 of the table.
Using
1977 data, the cost to the Treasury of the bill is estimated at roughly
$280 million annually when the phase-in of reserve requirement changes,
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Federal Reserve Bank of St. Louis
-4prices and access has
been completed.
Reserves at the Federal Reserve Banks
are reduced by approximately $20 billion, based on 1977 data.
Some 1,450
banks would hold reserves at the Fed under the Stanton provisions, while only
about 450 banks would hold balances at the Federal Reserve after the mandatory
provisions took effect.
On enactment, when the Stanton amendment becomes effective, the
proportion of all transactions balances at banks subject to Federal reserve
requirements will be roughly 74 percent, the same as under the current
reserve structure.
At present, also about 74 percent of all transactions
balances are held by banks holdings balances at the Federal Reserve.
Once,
the reserve reductions in the Stanton amendment become fully effective the latter
ratio will drop to 55 percent.
After large nonmember banks were brought
under Federal reserve requirements by the triggering of the mandatory
provisions, the coverage would be 56 percent.
Implications
Membership attrition.
Whether a bank withdraws from membership
under the Stanton amendment obviously will depend on its assessment of
benefits vs. costs.
The net effect on bank earnings of H.R. 7 (including
pricing of services) nearly offsets the burden of membership as earlier
calculated by the staff.
This earlier calculation, however, is not relevant
to the present bill because it assumed that access to services and the
discount window under a voluntary plan remained limited to members (or
to institutions holdings balances equal to member bank required reserves).
Under the Stanton provision, by contrast, any depository institution,
whether or not a member bank, can obtain the services of the Reserve
1/
The coverage estimates shown are based on deposits and membership for
December 1977.
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Federal Reserve Bank of St. Louis
-5Banks (though the discount window is available only if it has transactions
balances).
Thus, an institution would be able to withdraw from membership,
obtain all the services, and not be required to hold sterile Federal
reserves (although the Fed could require clearing balances for use of
payments services).
With equal access to services by members and nonmembers alike, the
burden of membership in effect becomes the total amount of balances at the Fed
required to be held above the beyond what are needed for operating or
precautionary purposes.
Under the Stanton amendment, existing member banks
would be required to hold approximately $16 billion in required reserves, of
which about $8 billion probably would be held in vault cash for operating
purposes and $8 billion as balances at the Fed.
It is not likely that banks
would voluntarily hold balances of this size at the Fed--and lose about
$700 million per year in earnings--unless the System allowed these balances
to serve as compensation for services received by the bank.
However, it
is not clear that permitting payment for services by a credit against reserve
balances is consistent with the spirit of discussion surrounding the pricing
provisions of H.R. 7.
Moreover, such a reserve credit would significantly
increase the costs to the Treasury.
On the basis of this analysis, further significant membership
attrition might be expected during the voluntary phase of H.R. 7, unless
banks believe there are substantial public relations, supervisory, or other
technical benefits to membership.
The timing with which banks might in
practice leave the System depends on a very complicated calculation involving
the net gain in earnings from receiving one-third of required reserves per
year for three years on withdrawal as compared with the scheduled phase-down
of required reserves for existing members.
As a rough estimate, under the
circumstances, the mandatory phase of H.R. 7 may become effective within
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Federal Reserve Bank of St. Louis
-6two or three years (unless, to repeat, the bill can be administered in such
a way as to permit payment for services by treating reserves as compensating
balances).
Once reserve requirements become mandatory, financial calculations
about the burden of membership become by and large irrelevant.
It seems
likely that banks which found it desirable to be a member when holding
significant quantities of reserves on voluntary basis will continue to do
so when reserve requirements are reduced by two-thirds.
Indeed, the state
bank supervisors have expressed concern that the H.R. 7 reserve ratios are
so low, especially for the smallest banks, that many banks will seek to
convert to a national charter to avoid state requirements.
Moreover, it
is thought that dual examination by the state and by the FDIC is a significant
burden that banks will seek to avoid by converting to a national charter.
Monetary control.
Although H.R. 7 as passed probably would not
make the task of monetary control more difficult, it is not clear that it
would improve the ability of the Federal Reserve to control the money supply.
If the System seeks to control growth of the aggregates by affecting reserve
availability in such a way as to establish a particular interest rate range
consistent with that growth rate, it seems unlikely that H.R. 7 would have
any effect at all on monetary control.
If the System were to attempt to control an M-1 type monetary
aggregate
using a reserves target, it is not clear whether monetary control
would be facilitated or not.
On the one hand, reserve requirements on demand
deposits at member banks (or non-exempt banks) would be somewhat more uniform.
Thus, the potential complications for monetary control caused by graduated
reserve requirement ratios might be reduced.
On the other hand, the large reduction in reserve requirements would
increase substantially the number of banks at which vault cash needed for
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Federal Reserve Bank of St. Louis
-7operations would exceed required reserves.
Thus, the proportion of deposits
at banks which do not hold reserve balances at the Fed and which are not
subject to binding Federal reserve requirements would be increased.
Con-
sequently, there would be an increased likelihood of deposit shifts between
banks with binding Federal reserve requirements and those banks not bound
and whose desired reserve ratios would differ from the stipulated Federal
requirement.
Thus, it is probable that additional variability in the
reserves multiplier could be introduced into the monetary control process
from this source.
Other effects of the bill on monetary policy would arise from the
omission of reserve requirements on time and savings deposits.
Zero reserve
requirements on time and savings deposits would act to stabilize the M-1
reserves ratio and thus would improve control of this aggregate under a
reserves target.
However, the System could not--without invoking emergency
provisions--use changes in reserve requirements on time deposits to affect
the cost of managed liabilities (except on non-personal, short-term time
under quite limited conditions).
In addition, lack of reserve requirements
on any class of time deposits would make it more difficult to control an
M-2 type monetary aggregate through an aggregate reserve target.
Adequacy of balances for clearing purposes.
Most member banks
under the Stanton amendments and most non-exempt banks under the R-M-B
provisions will have very small balances at the Federal Reserve, particularly
in relation to the services that they are likely to use.
As a percent of
total deposits, reserve balances at the Fed would drop from the present
41
/
2 percent to a little over 1 percent; as a percent of demand deposits,
/
2 and 31
/
2 percent, respectively.
these ratios are 141
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Federal Reserve Bank of St. Louis
The amount of buffer
-8-
provided by the reserve balances against the possibility of overdrafts in
reserve accounts will be decreased.
Increased overdrafts may be the outcome.
Should balances from required reserves prove inadequate in practice,
the System would have a number of alternatives, none of which are entirely
satisfactory.
The Fed could ask for additional clearing balances, but an
equitable formula may be difficult to construct.
Or banks without adequate
balances could be required to settle through those with an adequate balance-which might impose a penalty on some banks.
A third possibility would be to
require no specific balance for access to clearing services, but to levy a
substantial penalty for overdrawing the account.
Collateral.
As noted earlier, H.R. 7 no longer has a provision
that permits all financial assets held by Federal Reserve Banks to stand
behind the Fed's currency liability.
As a result, it may not be possible
to implement the reserve requirement provisions of H.R. 7 in full.
In terms
of deposits at the end of 1978, required reserve balances at the Fed would
be reduced by about $24 billion.
about $19
Free note collateral at that time was
billion; in mid-1979 free note collateral was only $13
billion.
Thus, the reduction in Government security holdings in the Fed portfolio
that would accompany the decline in required reserves would probably leave
the System without adequate collateral for Federal Reserve notes.
Reporting.
As passed, H.R. 7 permits the Fed to obtain asset and
liability reports from all depository institutions as needed for monetary
policy purposes.
Member banks are required to make such reports directly
to the Federal Reserve, but other classes of depository institutions are
required only to report directly their transactions balances and short-term
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Federal Reserve Bank of St. Louis
-9non-personal time deposits.
All other reports that the Board may require
for monetary policy purposes are to be provided through each institution's
primary federal or state regulator.
This procedure is likely to be cumbersome both from the point of
view of the Board and of the depository institutions that would be required
to report to the Board through two channels.
Moreover, the delays and
communications problem inherent in passing data through the other regulators
is likely to make such data of limited value for guiding day-to-day open
market operations.
While the preceding analysis has focused on certain problem areas,
there are a number of clear benefits for the financial system in the bill.
All depository institutions with transactions accounts receive access to
the discount window.
And all depository institutions, whether or not they
have transactions accounts, obtain access to System services at a price-which should encourage efficiency in the payments mechanism.
Once the
mandatory reserve requirement provisions go into effect, there will be no
discrimination between classes of institutions with regard to reserve
requirements.
Also, the Board will obtain authority to set reserves on
resources obtained abroad by nonmember depository institutions in the
mandatory phase of the bill.
Finally, the bill does contain an emergency
reserve requirement provision giving the Board authority over all liabilities
of all depository institutions, but applicable only after consultation with
Congress in extraordinary circumstances for short, renewable periods of time.
Some of these benefits depend on triggering the mandatory
provisions, but there is always the risk that Congress may lower the trigger
point as the actual coverage ratio approaches it,and pressures from nonmember
institutions mount.
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Federal Reserve Bank of St. Louis
Other benefits--such as the "level playing field" for
-10reserve requirements--are achieved without any clear gain for monetary
control, except possibly over the long-run.
Finally, it should be noted that the bill does have longer-run
implications for the structure of the Federal Reserve System.
Once the
mandatory provisionsbecome effective, they may in practice appear to
conflict with the voluntary nature of membership in the Federal Reserve
System.
Thus, pressures could develop to modify the structure of the System,
perhaps eliminating membership, and questions would be raised in the process
about the role of the System in supervisory matters and the role of Reserve
Banks and their Boards of Directors in monetary matters.
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Federal Reserve Bank of St. Louis
AUGUST 7, 1979
ANALYSIS OF MONETARY IMPROVEMENT PROGRAM PLANS
MIP
PLAN:
Exemptions:
Ratios:
Transactions
Savings
Short-time
Long-time
Reserves (billions)
Members
Nonmembers
Total
Actual
1977
35/0
1977
0/0
11
0
0
0
R-M-B
3,11 1/
0 0
0
Stanton
3,12 •2/
0
6 3/
0
Senate Staff
0/5
27.3
0
27.3
7.2
.6
7.8
7.6
0
7.6
17.2
3.3
20.5
Reserves Released
__
19.5
19.7
6.8
Cost of Reserve Requirement Changes (millions)
Revenue from Service Charges
Revenue from Float Charge
---
1281
1269
(410)
(410)
(247)4/ (247) 4/
Net Cost after Taxes (55 percent marginal rate)
275
281
446
(410)
(247) 4/
(95)
Number of Commercial Banks
Exempt
Members
Nonmembers
0
8868
5044
8633
0
8868
0
0
With Required Reserves
Members
Nonmembers
5664
0
620
235
5664
0
5664
8868
With Reserves at Fed
Members
Nonmembers
5587
0
332
117
1456
0
3382
3467
73.1
72.9
64.0
53.8
73.1
53.1
100
86.7
Percent of Total Deposits
At Banks with Required Reserves 5/
At Banks Holding Balances at Reserve Banks
Percent of Transaction Deposits
100
73.7
65.4
73.7
At Banks with Required Reserves
88.5
54.5
55.6
73.5
At Banks holding Balances at Reserve Banks
(ROBERTS)
Requested By:
1/ The first $35 million of transactions deposits are reservable at 3 percent, while
all transactions deposits above $35 million are reservable at 11 percent.
2/ The first $5 million of tr.,,nsactions deposits are reservable at 3 percent, while
all transactions deposits above $5 million are reservable at 12 percent.
3/ All corporate time deposits are reservable at 6 percent.
4/ Based on float outstanding of $3.8 billion in December of 1977.
5/ The Stanton trigger ratio was 71.8 percent of December 31, 1977 because deposits
of branches of foreign banks were incThddfithe denominator. The Reuss-Moorhead Barnard plan goes into effect when this ratio falls below 67.5 percent.
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Federal Reserve Bank of St. Louis
ANALYSIS OF MONETARY IMPROVEMENT PROGRAM PLANS
AUGUST 6, 1979
Exemptions:
Ratios:
Transactions
Savings
Short-time
Long-time
1977
35/0
Actual
1978
(4)
3,11 2/
0
0
0
Stanton
(6)
31.6
0
31.6
6.9
.8
7.7
7.3
0
7.3
19.7
23.9
24.3
1281
(410)
(247) 4/
1798
(410)
(425) 5/
1821
(410)
(425) 5/
Actual
1977
(1)
3,11 2/
0
0
0
Stanton
(3)
27.3
0
27.3
7.2
.6
7.8
7.6
0
7.6
Reserves Released
19.5
Cost of Reserve Requirement Changes (millions) 3/
Revenue from Service Charges
Revenue from Float Charge
1269
(410)
(247) 4/
Reserves (billions)
Members
Nonmembers
Total
Net Cost after Taxes
0/0
11
0
0
0
R-M-B
(5)
11
0
0
0
R-M-B
(2)
PLAN:
1978 1/
35/0
0/0
275
281
433
444
Number of Commercial Banks
Exempt
Members
Nonmembers
0
8868
5044
8633
0
8868
0
8948
4913
8675
0
8948
With Required Reserves
Members
Nonmembers
5664
0
620
235
5662
0
5558
0
645
273
5555
0
5587
0
332
117
1456
0
5485
0
313
123
1506
0
73.1
72.9
64.0
53.8
73.1
53.1
72.3 6/
72.2
65.0
52.8
72.3
52.6
,With Reserves at Fed
Members
Nonmembers
Percent of Total Deposits
At Banks with Required Reserves
At Banks Holding Balances at Reserve Banks
Percent of Transaction Deposits
72.3
72.3
65.6
73.7
65.4
73.7
At Banks with Required Reserves
53.1
72.2
53.7
54.5
6
55
73.5
Banks
At Banks Holding Balances at Reserve
reducing them to the
1/ Imposing reserve requirements on U.S. branches of foreign banks at current levels and then
reserve
level of the Reuss-Moorhead-Barnard plan would cost an additional $37 million after taxes. Reducing their
requirements to the level of the Stanton plan would cost an additional $33 million after taxes. Of the 105 U.S.
Fed under R-M-B, while 72 would
branches of foreign banks in operation in 1978, 27 would have held reserves at the
of total deposits at banks with
percentage
the
covered,
branches
With
Stanton.
under
have held reserves at the Fed
percentage of total
required reserves would be 73.0 for actual 1978, 65.0 for R-M-B, and 72.7 under Stanton. The
and 53.8 for
deposits at banks holding reserve balances at the Fed would be 73.0 for actual 1978, 53.1 for R-M-B,
Stanton.
deposits
2/ The first $35 million of transactions deposits are reservable at 3 percent, while all transactions
above $35 million are reservable at 11 percent.
from reduced
3/ The figures for 1978 include an estimate of the additional loss in revenue to the Federal Reserve
holdings of vault cash by member banks.
4/ Based on float outstanding of $3.8 billion in December 1977
5/ Based on average float outstanding of S5.8 billion in 1978.
-6/ The Stanton trigger ratio was 71.8 percent on December 31, 1977 and 70.6 percent on December 31, 1978.
The Reuss-Moorhead -Barnard plan goes into effect when this ratio falls below 67.5 percent.
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Federal Reserve Bank of St. Louis
-
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
---.''..-----.'""'"''.-11111.111101111111
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Federal Reserve Bank of St. Louis
-
,
_
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k
Federal Reserve Bank of St. Louis
,
,
For release on delivery
September 26, 10:00 AM (E.D.T.)
Statement by
Paul A. Volcker
Chairman, Board of Governors of the Federal Reserve System
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Federal Reserve Bank of St. Louis
before the
Committee on Banking, Housing, and Urban Affairs
United States Senate
September 26, 1979
s
I am pleased to be here today to testify on several
bills designed to assure the capacity of the Federal Reserve
to conduct effective monetary policy over the years ahead.
Each of these bills aims to achieve that objective in a manner
consistent with fair and equitable ground rules for financial
institutions competing in providing deposiLzory services to the
public.
The issues involved are old ones.
There have been many
proposals to deal with the so-called Federal Reserve membership problem and to restructure Federal reserve requirements
through the years, going back in my personal experience on the
Commission on Money and Credit twenty years ago.
The matter
has been under active, and sometimes contentious, consideration
in the Congress for more than three years, as the need has
become more evident.
Financial innovations, shifting competitive
patterns, strong inflationary pressures and related high interest
rates have all exacerbated existing competitive inequities,
have led to declines in membership in the Federal Reserve, and
ultimately threaten our ability to conduct effective monetary
policy.
Now, it is time to act.
Moreover, it is possible to act
with a minimum of controversy and maximum effectiveness.
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Federal Reserve Bank of St. Louis
4
-2-
I reach that conclusion in large part because of the
substantial progress that has been made in the past year,
through hearings and debate in the Congress and through
discussions among interested parties, in achieving a consensus
on the essential elements of a solution.
As I will discuss
later, that solution can be reached within acceptable limits
of cost to the Treasury; indeed, failure to act would also
cost revenues, and in cumulating amounts as attrition of
Federal Reserve membership continues.
Those issues which
remain are being addressed by virtually all parties in a
constructive atmosphere, with awareness of the central need
to maintain a strong Federal Reserve, equipped with adequate
tools to do its job.
It is my judgment, and that of many others, that only
expeditious handling of this legislation can forestall a new
wave of withdrawals from Federal Reserve membership.
Many
banks understandably have been willing to carry the burden of
voluntary membership only so long as they felt that legislation
could be foreseen that would provide more equitable competitive
conditions.
Failure to act now will not make the issue go away;
we would only be forced to return to it in still more urgent,
and potentially more contentious and divisive, circumstances.
All the legislative proposals need to be judged first of
all against the central objective:
We need to strengthen our
ability to implement monetary policy in a variety of possible
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Federal Reserve Bank of St. Louis
-3-
circumstances -- not just in the immediate future, but for
decades ahead.
This legislation would provide the most
important structural change in the Federal Reserve since its
foundation; once passed, it will not be lightly amended.
As
we look ahead in that long perspective, effective monetary
control will significantly benefit from broad coverage of
competing depository institutions and a reserve base sufficient
to support and transmit the effects of Federal Reserve monetary
actions through the financial system.
At the same time, we need to work toward evenhanded
treatment of all depository institutions insofar as they
compete directly and bear a reserve burden.
a matter of fairness.
It is not only
Evenhanded treatment, including broader
access to System services, rationally priced, can bring about
greater efficiency and more effective competition in financial
markets.
We should also assure that institutions bearing the
implicit cost of reserves do not gradually lose, for that
reason, business to others, thus narrowing the scope of Federal
Reserve control.
The manner in which reserves are presently applied is the
source of our present problem.
Members of the Federal Reserve
System are currently subject to a special burden -- from their
point of view, the equivalent of a special tax -- because they
must maintain substantial levels of reserves in non-interest
bearing balances at Federal Reserve Banks.
Nonmember commercial
banks or other depository institutions -- even when their
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Federal Reserve Bank of St. Louis
-4-
business overlaps -- have no comparable requirement.
Member
banks receive some offset to this burden due to their access
to System services, but all studies that have been made indicate
the value of these services is, for the bulk of members, not
sufficient to compensate for the earnings foregone on required
sterile balances.
In these circumstances, members leave the
System, narrowing our base of control.
The specific bills before you originating with members
of this committee have very different points of departure in
dealing with these issues.
S. 85, proposed by Chairman
Proxmire, would place mandatory reserve requirements on all
depository institutions, at the same time opening access to
Federal Reserve services to all depository institutions.
S. 353, proposed by Senator Tower, would instead preserve a
fully voluntary system, but would attempt to remove the burden
of membership by mandating that all balances held with the
Federal Reserve to meet such requirements earn interest at
nearly a market rate; access to System services would remain
restricted to members and other depository institutions
voluntarily maintaining reserves.
The legislation passed
by the House, H.R. 7, is a hybrid, initiating a mandatory
reserve structure and open access to services if a revised
voluntary structure fails to stem membership attrition.
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Federal Reserve Bank of St. Louis
W
-5-
This threshold question -- mandatory against voluntary -has been at the center of much past debate.
The voluntary
approach has always had a certain appeal to me and others -it is the way the Federal Reserve has operated, and I suspect
it has helped encourage professionalism and efficiency within
the Federal Reserve.
I would not want to see those attributes lost.
But a
purely voluntary approach toward reserve requirements does
not seem to be practicable or possible at this time.
The
cost of eliminating the burden of reserves -- as would be
necessary in a voluntary system -- would be relatively
high -- apparently higher than the Administration or the
Congress would find tolerable.
to our services
Full pricing and open access
a key consideration to many in Congress
and elsewhere -- would not be feasible.
Consequently, I
believe it is more fruitful to concentrate attention on the
mandatory approaches to reserves: S. 85, and the basic provisions
of H.R. 7.
That is consistent with the preferred position of
the Federal Reserve Board over a long period of time.
These two bills have consistent common elements.
Those
common elements, with one important exception, provide an
appropriate framework for speedy resolution of the remaining
issues.
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Federal Reserve Bank of St. Louis
%
w
-6-
To the extent reserves are required, both
bills would apply them on a consistent basis
against comparable deposits or other accounts
in competing depository institutions.
The reserve structure would focus mainly on
transactions balances, the central element
in the money supply and monetary control.
Access to Federal Reserve services would be
open to all depository institutions, and the
Federal Reserve would be expected to recover
the full cost of those services from pricing.
Voluntary membership in the Federal Reserve
System, which would continue to have implications
for certain supervisory and regulatory matters
and for election of Federal Reserve Bank directors,
would remain.
My own understanding is that these basic, common approaches
have wide support among affected institutions.
What remains
to be done is to reconcile remaining differences and to provide
e
assurance that the Federal Reserve will in fact have an adequat
ve
base of reserves in all foreseeable circumstances for the effecti
conduct of monetary policy.
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Federal Reserve Bank of St. Louis
%
-7-
The Treatment of Transactions Balances
Both bills would extend reserve coverage of transactions
balances to all established depository institutions.
The
change is clearly consistent with the emergence of transactions
accounts at thrift institutions, the growth of which can be
expected to accelerate as the powers of those institutions
to operate such accounts are enlarged.
Such coverage assures,
first, that larger and larger portions of the basic money
supply of the nation will not escape direct Federal Reserve
influence; and second, that future competition in markets for
transactions deposits will be conducted without one institution
or another enjoying an unfair competitive advantage.
I would
note in that connection that financial technology does not
stand still, and the definition of a transactions balance -in principle, an account from which payments to third parties
can be made -- is critical.
For instance, we can now observe
burgeoning growth of money market mutual funds, many of which
now offer facilities for transfer by draft, raising the question
of whether such funds do not perform the economic function of
a transactions account.
Providing the Federal Reserve has authority to define
transactions balances, I believe concentrating the focus of
reserve requirements on those accounts is appropriate.
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Federal
Reserve Bank of St. Louis
I
They
-%
-8-
are, together with currency, the most active element in the
nation's money supply.
However, we need to remember that
non-interest bearing reserves do have the characteristic of
a tax on those deposits; a high tax will discourage use of
transactions accounts over time relative to other outlets for
liquid funds, lead to innovations in payment
mechanisms
outside the perimeter of the definition of defined transactions accounts, and promote the growth of money substitutes
entirely outside the traditional domestic banking system,
gradually impairing the base upon which the Federal Reserve
operates.
For that reason we should be wary of setting the
requirement too high.
The 12 percent ratio initially set
in S. 85 is slightly higher than the 11 percent of H.R. 7.
Even if the initial ratio were to be set as high as provided
in S. 85 in the interests of preserving Treasury revenue, I
believe that should also be the top of the permissible range,
as already specified in the House bill.
An important difference in the two bills lies in exemption
levels.
In S. 85, the reserve requirement would apply to all
transactions deposits regardless of the aggregate size of the
balances in an institution, although the reserve ratio is set
at only 3 percent for the first $5 million of such deposits.
In H.R. 7 the first $35 million of transactions deposits in
an institution are exempt from reserve requirements, and that
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Federal Reserve Bank of St. Louis
-9-
exemption would be ratcheted upward as deposits grow.
The
universal, virtually uniform ratio of S. 85 seems to us in
the Federal Reserve more congenial to the basic thrust of
both bills toward placing competing institutions on an equal
footing.
In practice, monetary control would not be significantly
impaired by exemption of a very small amount of transactions
balances for each institution.
However, at some point, an
exemption does have adverse implications for the reserve base
and effective monetary control.
This Committee and the Congress will need to resolve
this practical and philosophical question about the exemption
level; a requirement graduated downward for small balances is
one obvious possibility.
I would emphasize that most institutions
holding relatively small amounts of transactions balances -for commercial banks up to $10 to $15 million -- will in practice
be able to use cash held in their vaults to satisfy the requirements of S. 85 without cost; a more smoothly graduated reserve
ratio would in practice exempt even more.
Treatment of Time and Savings Deposits
Both bills would exempt all savings and personal time
accounts from reserve requirements.
Because of the strong
competition from other savings outlets outside the banking
system, that approach is strongly and understandably urged
by both banking and thrift institutions and is acceptable to
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the Federal Reserve.
Both bills also provide authority to
apply such reserves against nonpersonal time deposits, but
there are important differences.
S. 85 seems to envisage a more or less permanent requirement on nonpersonal time deposits, starting at the substantial
initial level of 6 percent.
Such a permanent requirement poses
an important substantive problem.
Competition for funds flowing
into nonpersonal time deposits is intense and growing.
The
competitive handicap for covered institutions would be significant,
as it is today, when the commercial paper market, the Eurodollar market, and money market funds are growing rapidly.
A substantial permanent reserve requirement would also place
new burdens on thrift institutions.
For these reasons, the more practicable and desirable
approach would be to maintain limited authority for the use
of reserve requirements on short-term nonpersonal time deposits
on a standby basis as seemed to be contemplated by H.R. 7.
The circumstances for use should be exceptional, but not so
extreme as stated by a colloquy on the House floor which would
confine such use only to circumstances in which other countries
agreed with the U.S. to impose parallel requirements on Eurodollars.
For instance, there may be occasions when such authority
would be extremely useful to restrain excessively rapid growth
near-money and of bank credit, particularly by large institutions.
Moreover, the borderline between a transactions balance and a
very short-time deposit may become so fuzzy as to suggest more
equal reserve treatment.
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The Question of Monetary Control and the Reserve Base
The key problem I have with the reserve structure
specified in H.R. 7 or in S. 85 (assuming, in the latter
case, no initial requirement on time deposits) concerns the
volume and distribution of reserve balances that would be held
in Federal Reserve Banks.
It is these balances, and only these
balances, that provide the "fulcrum" for the efficient conduct
of monetary policy.
A few numbers will give you a sense of the potential
problem.
Today, some 5,600 banks hold about $30 billion of
reserves at the Federal Reserve Banks, and those banks account
for some 70 percent of all commercial bank deposits.
Under
H.R. 7, only 450 banks would keep any required reserves with
the Federal Reserve; reserve balances would total only about
$7-1/2 billion; and those 450 banks, while the largest in the
country, would account for only 54 percent of total commercial
bank deposits.
While S. 85 would provide much higher coverage, it would
achieve that result in large part by extending substantial
reserves to time deposits.
That arrangement, as I have just
noted, would create other serious problems if contemplated as
permanent.
Viewed in another light, the ratio of reserve balances
at the Federal Reserve Banks to the total of deposits at all
commercial banks would drop to well below 1 percent under H.R. 7 I
and to about 1-1/2 percent under S. 85 (without time deposits
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reserves).
These percentages are uncomfortably low, even on
operational grounds, considering the enormous volume of
clearings that go through the Federal Reserve Banks every
day.
Large and erratic day-to-day fluctuations in such
operational factors as currency in circulation or "float"
arising from check clearings could, with a relatively low
reserve base, have magnified effects on the money supply
and weaken monetary control.
I know that the Committee has already heard theoretical
debates about whether reserve requirements are essential at
all to the conduct of monetary policy -- indeed I have engaged
in such theorizing myself.
But we in the Federal Reserve
have the practical responsibility of operating monetary policy,
and you will properly hold us accountable.
We are not interested
in committing ourselves to the conduct of monetary policy on the
basis of untested and controversial theorizing.
In that connection, foreign experience has often been
cited, including the fact that some industrial countries do
not impose legal reserve requirements.
A few of those countries
approach monetary control either by keeping their banks continuously in debt to the central banks, and maintaining close
control over the level of indebtedness as a method of control,
on
or by relying heavily on direct, quantitative controls
bank liabilities on assets.
experience and traditions.
Both methods are foreign to our
Other leading countries, whether
a
by statute, convention, or tradition, de facto maintain
significantly higher proportion of total commercial bank
deposits in central bank balances than would be provided by
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Federal Reserve Bank of St. Louis
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the transactions account requirements of either H.R. 7 or
S. 85.
We cannot be certain precisely how large reserve balances
need to be to assure effective monetary control and a well
functioning banking system.
I feel quite sure we can do with
a smaller reserve base than we now have.
It is conceivable
that the reserve requirements implicit in a modified S. 85 or
in H.R. 7 may be sufficient, but I have grave doubts.
Under
H.R. 7, 97 percent of the nation's banks would either be
exempt entirely or hold more than enough reserves in the form
of vault cash to meet their requirements.
Some technically
covered banks would voluntarily wish to hold more reserves
than required, and that uncertain "excess," differing from
bank to bank and varying over time, would loosen the relationship between reserves and deposits.
As a consequence, the
ability of the Federal Reserve to control deposits by adjusting
the reserve base could deteriorate, perhaps severely.
I have discussed both with members of this Committee and
with representative industry leaders a practical approach for
dealing with this problem.
This approach would provide the
Federal Reserve with the assurance we need that reserve balances
will be adequate for monetary control and to support the nation's
depository system, while not significantly adding to costs of
banks and other depository institutions, disturbing competitive
relationships among them, or draining revenue from the Treasury.
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More specifically, I propose adding a provision to the
legislation for standby authority to the Board to call for
"supplementary deposits" to be held at Reserve Banks by all
depository institutions up to a specified maximum.
The
Federal Reserve would be required to provide banks with a
market yield on those deposits, the formula for which should
be fixed in law to be comparable to the yields on U.S. Government securities.
One simple way of providing such a return
would be to provide that the supplementary deposits be
invested in earnings participation certificates in the
Federal Reserve's own portfolio of U.S. Government and
agency securities.
I would not expect this authority to be used unless the
Federal Reserve found that, in practice, monetary policy could
not be effectively implemented with the reserve balances
required under the other provisions of the legislation.
Consequently, the authority should be viewed as an "insurance
policy" or "safety net," to be used only in the event experience
demonstrates the need for a larger reserve base than would be
produced by other provisions of the bill.
Thus, the percentage
of deposits to be held as supplementary deposits probably would
change infrequently, if at all, over time, if the authority were
used at all.
As further assurance that the supplementary deposits would
not be introduced lightly, I would suggest that the Board not
be permitted to call for such deposits unless five members of
the Board vote affirmatively, a report is issued to this
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Committee, and the determination by the Board is renewed at,
say, 2 year intervals.
Arrangements would be made for nonmember banks and
thrift institutions to respond to a call for supplementary
deposits by dealing through established banking correspondents.
The law should, for instance, specify that such supplemental deposits
could be held with the Federal Home Loan Banks, in the case of
their member institutions, or the Central Liquidity Facility
of the credit unions.
The thrift institutions could, in turn,
be permitted to count these deposits toward meeting their
existing liquidity requirements, but the deposits would be
"passed through" to the Federal Reserve Banks so the funds
could become part of the reserve base.
Possible arrangements
of this kind have been reviewed with, and in principle are
supported by, the Federal Home Loan Bank Board and the National
Credit Union Administration Board.
It would make relatively little difference from the standpoint of monetary control whether these supplementary deposits
are determined as a percentage of transactions balances or of
all deposits held at institutions.
The maximum percentage
requirement would, of course, have to be judged against the
base of deposits to which it applied. For instance, a limit as
low as 2 percent would be adequate if the base were to be total
deposits, transactions and time. If transactions balances alone
are covered -- which account for only about 20 percent of the
whole -- the upper limits would need to be proportionately
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Federal Reserve Bank of St. Louis
at$
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higher, depending on exemptions and the level of requirements
determined elsewhere in the legislation, to assure an equivalent
We would be glad to work with the Committee in
reserve base.
developing precise legislative language to meet the need in
the way best suited to all interests.
I would emphasize the receipt of earnings on the supplementary deposits at a market rate will, over time, mean
that institutions should suffer very little, if any, loss in
earnings from any call for such balances.
If earnings are
determined by the return in the Federal Reserve portfolio,
those earnings will reflect a mix of long- and short-term
securities.
Yield fluctuations would be less volatile than
the yield on shorter-term securities alone because the portfolio yield varies less over time than does, say, the 3-month
bill rate.
In years of relatively high short-term rates,
banks would be able to earn more by investing in the market
short-term, but the reverse is likely to be true in years of
relatively low short-term rates.
I must also emphasize a call for supplementary deposits
would have no effect on Treasury revenues.
In effect, the
Federal Reserve would simply add to existing security holdings
to match the increased liabilities to banks and other depository
institutions incurred from supplementary deposits held at
Reserve Banks.
These new security purchases would provide the
income to be transferred to the banks.
And, the banks would
pay taxes to the Treasury in about the same amount as if there
had been no supplementary deposits.
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Provision and Charge for Services
Both S. 85 and H.R. 7 provide broadened access to System
services, including the discount window, and a mandate to
charge for those services at prices adequate to cover costs,
including imputed capital costs and taxes.
In principle,
these provisions are acceptable to the Federal Reserve.
Intelligently implemented, we believe this approach can contribute to the efficiency, competition, and safety of the
financial system.
I would emphasize, however, that open
access and pricing is practicable only after reserve requirements are restructured and applied to all depository institutions
if we are to avoid exacerbating the cost burdens now placed on
member banks.
Substantial progress has been made within the Federal
Reserve toward developing pricing policies and schedules for
Reserve Bank services.
vigor.
Those efforts will be pursued with
I should note that in this process, a number of dif-
ficult technical and policy problems -- problems familiar to
those engaged in the pricing of other public services where
there is an obligation not only to cover costs but to maintain
a minimum service level -- are apparent.
For that reason, I
would urge that the legislative language not unduly limit our
flexibility in pricing particular services, while retaining the
goal of full cost coverage.
Open access and pricing of System services likely will
induce major changes in existing banking relationships.
It may
have differential effects on large and small, or city and rural,
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Federal
Reserve Bank of St. Louis
6,
%
%
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institutions.
Moving too precipitously to put this new system
into place could cause disruptions in banking markets.
Con-
sequently, I would urge that the pricing provision allow some
flexibility in timing and implementation.
Moreover, it should
be clear that the Federal Reserve need not precisely match
costs and revenues for every service.
Indeed, the Board
questions whether a charge for the receipt and disbursement
of currency is appropriate at all.
The Government might
normally be expected to provide that service, and in any event,
the Treasury already earns some $7 billion per year from the
provision of currency through securities held by the Federal
Reserve as collateral.
Collateral for Federal Reserve Notes
A technical problem regarding collateral against Federal
Reserve notes does arise in the bill.
Under existing law,
currency issued by the Federal Reserve must be secured by
certain assets of the Federal Reserve specified in the Federal
Reserve Act.
If no changes were to be made in this requirement,
the reserve reductions implied by the bills before you could be
technically unworkable for they might result in insufficient
amounts of government securities and other eligible financial
assets to meet the collateral requirements against these notes.
In mid-1979, for instance, collateral in excess of currency was
only $13 billion.
In terms of deposits outstanding at that
time, balances at Federal Reserve Banks would be reduced about
$24 billion under H.R. 7 and roughly $14 billion under S. 85
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Federal Reserve Bank of St. Louis
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without the reserve requirement on time deposits.
The
reduction in government security holdings in the Fed portfolio
that would have to accompany the decline in reserve requirements would leave the System with too few eligible securities
to meet the legal collateral requirements.
S. 85 would meet this collateral problem by permitting all
financial assets held by Federal Reserve Banks to stand behind
the Federal Reserve's currency liability and by eliminating the
requirement to collateralize notes remaining in the vaults of
Federal Reserve Banks.
This approach, while clearly meeting
the need, was rejected by the House apparently on the grounds
that it might open the way to the Federal Reserve acquiring a
broader range of assets.
To meet that objection, assets
eligible for collateralizing currency might be confined to
certain enumerated market-type assets that may already be held
by the Federal Reserve.
I would suggest adding to the present list only
assets acquired abroad arising from time to time out of our
foreign currency operations -- a relatively small but fluctuating
amount -- while removing the requirement for collateral against
notes held by the Federal Reserve itself.
In that connection,
the Federal Reserve Act already permits us to hold foreign
bank deposits and bills of exchange; it would be helpful to us
operationally if short-term foreign government securities could
be added to our authorized holdings -- an omission at the time
of the original Federal Reserve Act when such securities were
not widely available.
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The Phase-in
S. 85 and H.R. 7 differ substantially in phase-in time
for the application of reserves to transaction balances of
nonmember institutions:
the latter.
4 years for the former, 10 years for
The Board feels the S. 85 approach -- which itself
provides considerable time, is more in keeping with the purposes
of the legislation, particularly for institutions newly
entering or rapidly expanding transaction account business.
At the same time, we are aware that this Committee and the
Congress may be in a better position to appraise the equities
of particular situations and develop an appropriate compromise.
Effect on Treasury Revenue
There is understandable sensitivity to the implication
for Treasury revenue from alternative monetary improvement
plans, particularly in these inflationary times when the budget
is under pressure.
An attachment to this statement
revenue input from H.R. 7 and S. 85.
shows the
As can be seen, the bill
acceptable to the House had a cost of around $300 million, using
1977 data.
S. 85 would not cost the Treasury any revenue, but
at the cost of increasing the reserve burden of many depository
institutions.
Without a reserve requirement on time deposits,
as I have suggested, the revenue loss would be significantly
smaller than in the House bill.
I would emphasize these calculations are artificial because,
contrary to all expectations,they assume no revenue loss from
rapid attrition of Federal Reserve membership, if no bill is
passed.
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The net drain on Treasury revenues from H.R. 7 or
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S.85 as modified would be quite moderate, if there were any
drain at all, after account is taken of the losses that would
be incurred by the Treasury due to that attrition.
the modification
Indeed,
I have proposed to S. 85 would probably
still leave the Treasury with a net gain in revenue over a
reasonable period of time.
Moreover, I would also note that
the Federal Reserve has indicated its willingness to transfer
to the Treasury part of its $1 billion surplus to cover revenue
losses during the transition period.
Conclusion
This Committee has before it, in S. 85 and H.R. 7, nearly
all of the essential elements of constructive legislation.
I
hope you will agree that the major new provision I have proposed
today -- standby authority for "supplementary deposits" -- is
a useful and possibly essential "insurance policy" for monetary
policy.
I do not believe it should be controversial.
Consequently, the way seems to me clear for promptly
enacting legislation with the following main features:
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First, reserve requirements should be placed
on transactions balances at all depository institutions.
Both S. 85 and H.R. 7 adopt this principle; what remains
is only satisfactory resolution of exemption levels and
the price level of the requirement.
Second, to assure an adequate reserve base for
monetary control and to support the nation's depository
-22-
system, legislation should provide an insurance policy
in the form of standby authority for "supplementary
deposits" at Federal Reserve Banks, with those
deposits earning a market rate of return.
Third, initial reserve ratios on nonpersonal time
deposits should be set at zero, as in H.R. 7, but with
the understanding that the Federal Reserve would have
some flexibility to apply reserves to short-term nonpersonal time deposits if needed to "protect" the
dividing line between transactions and time accounts
or for cyclical purposes.
There should be no reserves
on personal or long-term time deposits.
Finally, there should be full pricing and open
access to Federal Reserve services, with adequate
flexibility, in timing and application, to minimize
the risk of disruptions in banking markets and to
protect the availability of a basic level of payments
services to all institutions.
In passing through the lobby of the Federal Reserve Building
recently, I read again a quotation from Woodrow Wilson on the
wall referring to the original Federal Reserve Act:
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Federal Reserve Bank of St. Louis
"We shall deal with our economic system as it is
and as it may be modified, not as it might be if we had
a clean sheet of paper to write upon, and step-by-step
we shall make it what it should be."
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A constructive blending of S. 85 and H.R. 7, combined
with the safety valve I have requested, can take a big step
toward developing a reserve structure as it should be.
The
basic issue is preserving a strong and effective central
bank able to discharge its responsibties for monetary
policy.
The questions have been long debated, and I sense a
convergence of views.
Now, this Committee has the chance to
bring the long process to the edge of conclusion.
you to seize that chance.
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I urge
1
APPENDIX A
RESERVE COVERAGE AND TREASURY REVENUE EFFECTS OF
MONETARY IMPROVEMENT PROGRAM PROPOSALS
(Based on December 1977 deposits; does not include effect
on Treasury revenue of halting membership attrition)
PLAN:
Exemptions:
Ratios:
Transactions
Savings
Nonpersonal Time
Other Time
35/0
Actual
1977
Reserves (billions)
Members
Nonmembers
Total
35/0a/
3,11
11
0
0
0
0
0
0
H.R. 7
H.R. 7
Mandatory Voluntary
Plan
Plan
5/5
5/0
3,12
0
6
0
3,12
0
0
0
S. 85
Mod. 85
7.2
.6
7.8
7.6
0
7.6
17.2
1
3.52./
20.7
11.4
2.5
13.9
Reserves Released
19.5
19.7
6.8
13.4
Cost of Reserve Requirement Changes (millions)-2I
Revenue from Service Charps
Revenue from Float Chargea/
1307
(410)
(247)
1315
(410)
(247)
428
(410)
(247)
874
(410)
(247)
293
296
-99
103
27.3
0
27.3
21
Net Cost after Taxes (55 percent marginal rate)
Number of Commercial Banks
Exempt
Members
Nonmembers
0
8868
5044
8633
0
8868
2
109
2
110
With Required Reserves
Members
Nonmembers
5664
0
620
235
5664
0
5662
8759
5662
8758
With Reserves at Fed
Members
Nonmembers
5587
0
332
117
1456
0
3382
3467
3279
3403
72.9
53.8
53.1
86.7
84.7
Percent of Total Deposits
At Banks holding balances at Reserve Banks
Percent of Transactions Deposits
87.0
54.5
88.5
73.5
55.6
At Banks holding balances at Reserve Banks
a/ Members only.
b/ Includes $300 million of reserve balances of thrifts.
c/ Includes vault cash shift for members.
'a/ Based on float outstanding of $3.8 billion in December of 1977.
e/ Cost estimate does not include offsetting benefit of halting membership attrition which
would result in a loss of Treasury revenues of about $200 million annually by 1985, assuming
attrition at midway between that experienced in the nation and that in New England during
1974-1978.
September 25, 1979
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•
*
•
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Comparison of S.85, H.R. 7, and S.353 (Tower Bill)
•
S.85
H. R.7
S.353
Title:
Monetary Policy Improvement
Act of 1979
Monetary Control Act of 1979
Federal Reserve Modernization
Act of 1979
Reporting:
Authorizes the Board to require
reports from all depository
institutions. The Board can receive
reports on all assets and liabilities
directly from member banks and others
whose reserve requirements exceed
zero and indirectly through the
primary supervisor for all others.
The Board can require reports as are
"necessary or desirable" to control
or monitor monetary or credit
aggregates. (sec. 3)
H.R. 7 enables the Board to obtain
reports directly from nonmembers only
on reservable liabilities. All other
reports from nonmembers can be obtained only indirectly. Only reports
"necessary" to control or monitor
monetary or credit aggregates are
authorized. (sec. 2)
H. R. 7 enables the Board to reports
directly from nonmembers only on
reservable liabilities. All other
reports from nonmembers can be
obtained only indirectly. Only
reports "necessary" to control
or monitor monetary or credit
aggregates are authorized. (sec. 2)
Coveraie:
Covers insured commercial banks,
savings banks, S&L's, and credit
unions. (sec. 2)
H.R. 7 covers insured and noninsured
depository institutions. (sec. 3)
Covers member banks only; Nonmembers
may put up reserves voluntarily.
(sec. 3)
Definitions:
(1) A transaction account is defined
as a deposit that can be withdrawn by a
negotiable or transferable instrument,
payment orders of withdrawal or other
similar item for the purpose of making
transfers to third parties or others.
While NOWs, share drafts and automatic
transfers are covered, the bill is
silent concerning coverage of telephone
transfers. However, it appears that
the language can be read to include
most, if not all, telephone transfers.
However, it appears that the language
can be read to include most, if not
all, telephone transfers that are
used to make payments. (sec. 2)
H.R. 7 provides a substantially
similar definition of transaction
account, but specifically exempts
accounts subject to six or fewer
telephone transfers per month.
(sec. 2)
S. 353 applies reserve requirements
to demand deposits. (sec. 3)
•
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S. 85
•
Reserve
Requirements :
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H.R. 7
(2)
(2) Nonpersonal time deposits
(2) H.R. 7 covers only nonpersonal
of all maturities are covered.
time deposits with initial maturities
(sec. 2)
of less that 180 days. (sec.3)
(3) Authorizes the Board, after
(3) H.R. 7 authorizes the Board, after
(3)
consultation with other agencies, to
consultation with the other agencies,
determine an account to be a
to define the term "deposit" for all
transaction account. (sec. 2)
institutions. (sec. 3)
(sec. 3)
S. 353
S. 353 applies reserve requirements
to time deposits of less that 180
days and savings deposits. (sec. 3)
S. 353 does not affect the Board's
present broad authority to define
terms.
(sec. 3)
Pre 67.5% Trigger
(sec. 3)
Covers all depository
institutions.
Covers only member banks
Covers only member banks.
Nonmembers may put up reserves
voluntarily.
Transaction accounts:
Transaction accounts:
De7and DePosits
Up to $5 million--3%
Over $5 million--12%
initially, within a
range of 11-13%
Up to $35 million--3%
initially, within a range
of up to 12 %. (Indexed
at 100%)
Over $35 million--11%
initially, within a range of 4-12%
3-10%
Nonpersonal time deposits:
Nonpersonal time deposits
(short-term):
Ti7e (short-term) and savings
deposits
Up to S5 million--0%
Over $5 million--6%
initially, within a
range of 0-12 %
0% initially, within a
range of 0-8%
1-7%
S.85
H.R. 7
Post 67.5% Trigger
•
Covers all depository institutions:
Transaction accounts:
$35 million exemption.--0%
indexed at 80% of growth of
transaction balances
Above Exemption level.-11% initially, within a
range of 4-12%
Nonpersonal time deposits (short-term):
$10 million exemption.-indexed at 80% of growth
of short term nonpersonal
time deposits
Above exemption level.-0% initially, within a
range of 0-8%
•
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[Legislative history:
a positive reserve requirement
is to be imposed only after
agreement is reached on
Eurodollar reserve requirements]
S.353
4
S. 85
H.R. 7
S. 353
Extraordinary
Circumstances:
Under extraordinary circumstances, the
Board can impose higher or lower reserve
requirements outside the ranges
specified above on depository
institutions for 30 day periods after
consultation with the appropriate
Committees of Congress. (sec. 4)
H.R. 7 is similar, except H.R. 7
requires a finding of extraordinary
circumstances by at least five Board
members and permits reserves on all
liabilities. (sec. 3)
No similar provision.
Privileges of
Membership:
Institutions maintaining reserves are
entitled to all privileges of membership except holding Federal Reserve
stock or voting for directors. (sec. 4)
H.R. 7 is similar.
(sec. 3)
No similar provision
E'lrodollar Reserve
Requirements:
Authorizes the Board to impose reserve
requirements on foreign branches,
subsidiaries, and IBF's of nonmember
depository institutions to the same
extent required to members. (sec. 4)
H.R. 7 is similar.
(sec. 3)
No similar provision.
Foreign Deposits:
Deposits payable outside the U.S. are
not subject to domestic reserve
requirements (Eurodollar reserve
requirements, however, can be
imposed). (sec. 4)
H.R. 7 is similar.
(sec. 3)
No similar provision.
The bill does not affect the ability
H.R. 7 is similar.
of the Board to impose conditions on
foreign branches of member banks under
§25 of the Federal Reserve Act or on U.S.
branches or agencies of foreign banks
under the International Banking Act.
(sec. 3)
No similar provision.
•
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5
S.85
S.353
Discount Window:
Any depository institution with
transactionaccounts shall be entitled
to the same discount window access
as member banks. However, under the
"Privileges of Membership" provision,
access to the discount window would be
available to any institution maintaining
reserves, which includes thrift institutions that possess only nonpersonal
time deposits. (sec. 4)
H.R. 7 provides discount window
privileges to institutions with
transaction or short-term nonpersonal
time deposits and requires the Board to
take into account the special needs
of thrifts. (sec. 3)
Except on an emergency basis, the
discount window is not available to
anyone that does not maintain
reserve requirements. (sec. 3)
Phase-in of Reserve
Requirements:
(1) For nonmembers on July 1, 1979
provides for a 4 year phase-in of
reserve requirements. (sec. 4)
H.R. 7 provides for a 10 year phase-in
for nonmembers as of August 1, 1978
and a 15 year phase in for nonmembers
in Hawaii. (sec. 4)
H.R. 7 is similar. (sec. 3)
Provides a 4-year phase-in.
•
(2) For members as of July 1, 1979
authorizes the Board to hase-in the
change in reserve requirements over
4 years. (sec. 4)
(3) A nonmember that was a member on
July 1, 1979 must maintain reserves
as if it were a member bank. (sec. 4)
411
H.R. 7
Form of Reserves:
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
H.R. 7 provides that the phase-in
No similar provision.
provisions do not apply to nonmembers
that were members as of May 24, 1979
and a member leaving after the date of
enactment shall receive a refund of
reserve balances in three equal annual
payments. H.R. 7 also prohibits the
approval of an application for withdrawal
from membership filed between May 24, 1979,
and the date of enactment. (sec. 3)
Reserves can be held in the form of:
H.R. 7 is similar, however H.R. 7 does
1)
not provide for the pass through of
vault cash (or that proportion
permitted by the Board),
2) balances held at Federal Reserve
Banks, or
3) balances held at a Federal Home Loan
Bank, central liquidity facility
or at a depository institution
maintaining reserve balances with a
Reserve Bank provided the balances
are passed through to the Reserve
Bank. (sec. 5)
Provides a 4-year phase-in.
reserves by a central liquidity
facility. (sec. 3)
Reserves can be held in the form
of vault cash and balances at
Reserve banks. (sec. 3)
S. 85
H.R. 7
S. 353
Interest on Reserves:
No provision
Clearing Services:
Provides technical amendments to the
H.R. 7 has similar language concerning
clearing services provisions of the
requiring clearing balances from
Federal Reserve Act and authorizes
nonmembers. (sec. 6)
the Board to require a clearing
balance of nonmembers "insuch amount
as the Board determines taking into
account items in transit, services
provided by the Federal Reserve bank, and
other factors as the Board may deem
appropriate." (sec. 6)
Federal Reserve Note
Collateral:
Authorizes use of all financial
assets to collateralize Federal Reserve
notes and provides that notes in
Reserve Bank vaults need not be
collateralized. (sec. 6)
A similar provision in H.R. 7 was
struck on the House floor.
No similar provision
Deposits with
Nonmembers:
Permits members to maintain a deposit in
excess of 10% of its capital with
a nonmember that has access to the
discount window. (sec. 6)
No similar provision in H.R. 7.
No similar provision.
Penalty Rate:
Eliminates the required 1/2% penalty
rate of § 10(b) advances on
ineligible collateral. (sec. 7)
H.R. 7 is similar.
No similar provision.
Pricing:
(sec. 8)
1) requires pulbication of pricing
principles and fee schedule six months
after enactment.
2) Requires implementation of fee
schedule within 1 8 months after
enactment.
(sec. 6)
H. R. 7 is similar.
No similar provision.
No similar provision in H.R. 7.
No similar provision.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
No provision
(sec. 5)
Provides for a investment of
reserve balances (less vault
cash) in an Earnings Participation
Account that earns interest
at a rate of 1/2% below the
System's portfolio.
No similar provision.
S.85
•
H.R. 7
S.353
3) Services covered include currency
and coin, check collection, wire
transfer, settlement, ACH, float,
safekeeping, and all new services
offered.
4) Requires explicit pricing:
services are to be made available to
members and nonmembers on same terms,
including a requirement for sufficient
clearing balances.
H.R. 7 is similar.
No similarprovision.
H.R. 7 is similar
No Federal Reserve services are
to be made available to nonmembers
unless reserves are held by such
nonmember. (However, services
obtained indirectly through
correspondents are not affected).
5) Over the long run fees shall be
based on direct and indirect costs,
including imputed costs of capital and
taxes, except that the principles shall
give due regard to competitive factors
and the provision of an adequate level
of services nationwide.
H.R. 7 is similar except H.R. 7
provides that a departure from the
principle is permitted where the Board
determines that the public interest
requires so after giving due regard to
competitive factors and the provision
of an adequate level of services
nationwide.
No similar provision in H.R. 7.
6) Float is to be priced based upon
the Federal funds rate.
7) Federal Reserve Bank operating
No similar provision in H.R. 7.
budgets are to be reduced commensurate
with any actualor projected decline
due to pricing in the folume of services,
provided such savings are to be passed
on to the Treasury.
Effective Date:
•
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Reserve requirement provision is
effective six months after enactment.
Remaining provisions are effective
upon enactment.
H.R. 7 is effective upon enactment.
S.353 is effective 90 days after
enactment.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
CoIriev et* d
September 21, 1979
•
ANALYSIS OF MONETARY IMPROVEMENT PROGRAM PLANS
Exemptions:
Ratios:
Transactions
c
Savings
PLAN:
Nonpersonal Time
Other Time
35/0
11
0
0
0
R-M-B
a/
35/03,11
0
0
0
Stanton
7.2
.6
7.8
7.6
0
7.6
Reserves Released
19.5
19.7
6.8
13.4
13.6
Cost of Reserve Requirement Changes (millions)
Revenue from Service Charges
Revenue from Float Chargef/
1307
(410)
(247)
1315
(410)
(247)
428
(410)
(247)
874
(410)
(247)
1710'
(410
293
296
-99
103
585
2
110
0
8868
Reserves (billions)
Members
Nonmembers
Total
Actual
1977
27.3
0
27.3
Net Cost after Taxes (55 percent marginal rate)
ber of Commercial Banks
xempt
Members
Nonmembers
*E
5/5
3,12
0
6
0
S.85
5/0
3,12
0
0
0
Mod. 85
11.4
17.2
/
2.5
3.5L
13.9
20.7
13.7
0
13.7
0
8868
5044
8633
8868
2
109
With Required Reserves
Members
Nonmembers
5664
620
235
5664
0
5562
8759
5562
8758
5562
0
With Reserves at Fed
Members
Nonmembers
5587
0
332
117
1456
0
3382
3467
3279
3403
5448
0
Percent of Total Deposits
At Banks with Required Reserves
At Banks Holding Balances at Reserve Banks
73.1
72.9
64.0
53.8
73.1
53.1
100.0
86.7
100.0
84.7
73.1
71.9
Percent of Transactions Deposits
At Banks with Required Reserves
At Banks Holding Balances at Reserve Banks
73.7
73.5
65.4
55.6
73.7
54.5
100.0
88.5
100.0
87.0
73.7
72.6
h/
Members only.
Short maturity time deposits.
Includes $300 million of reserve balances of thrifts.
Includes vault cash shift for members.
Includes payment of 6 percent interest on remaining balances at Fed.
Based on float outstanding of $3.8 billion in December of 1977.
The Stanton trigger ratio was 71.8 as deposits of branches of foreign banks were
included in denominator. R -M-B plan goes into effect when this ratio falls below 67.5.
h/ When S. 353 was introduced there was no agreement to price float.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
August 22, 1979
NEW TRANCHES ON TF,ANSACTIONS BALANCES
1977
Exemptions:
Ratios:
Transactions
Savings
Nonpersonal time
Other time
35/0
10,35/0
10,25/0
Actual
1977
11
0
0
0
R-M-B
0,7,11
0
0
0
0,6,11
0
0
0
27.3
0
27.3
7.2
.6
7.8
7.9
1.0
8.9
Reserves Released
19.5
Cost of Reserve Requirement Changes (millions)
Revenue from Service Charges
Revenue from Float Charge
PLAN:
Reserves (billions)
Members
Nonmembers
Total
35/0
0
0
0
8.1
1.0
9.1
7.4
.7
8.1
18.4
18.2
19.2
1307
(410)
(247)
1228
(410)
(247)
1217
(410)
(247)
1284
(410)
(247)
-
293
257
252
282
0
8868
5044
8633
3571
7444
3571
7444
0
110
5664
0
620
235
2093
1424
2093
1424
5664
8758
5587
0
332
117
700
394
670
377
781
784
Percent of Total Deposits
At Banks with Required Reserves
At Banks holding Balances at Reserve Banks
73.1
72.9
64.0
53.8
82.0
62.2
82.0
62.3
100
57.5
Percent of Transaction Deposits
At Banks with Required Reserves
At Banks holding Balances at Reserve Banks
73.7
73.5
65.4
55.6
83.5
64.5
83.5
64.6
100
59.6
Net Cost after Taxes (55 percent marginal rate)
Number of Commercial Banks
Exemp t
Members
Nonmembers.
•
With Required Reserves
Members
Nonmembers
With Reserves at Fed
Members
Nonmembers
•
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
All Depository Institutions
Reservable Balances
($ billions, December 1977)
Other
Time
All
Transactions
Savings
Nonpersonal
Time
0
257.0
439.6
159.9
465.6
1322.1
5
203.0
369.9
120.4
392.6
1085.9
10
178.3
330.4
108.8
351.1
968.3
15
164.2
303.6
102.2
322.6
892.6
25
147.4
266.7
93.9
282.6
790.6
35
137.1
241.5
88.2
254.9
721.7
262.4
448.7
174.0
501.4
1386.5
271.5
446.2
190.7
549.7
1458.1
Exemption of:
Memo: Updated
Deposit Estimates
(No Exemption)
11111une 1978
December 1978
•
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
I
Number of Depository Institutions with Deposits
Above Selected Levels of Transactions Balances
(Based on December 1977 Deposits)
•
•
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
CBs
MSBs
S&Ls
CUs
0
14,422
408
186
1,007
5
6,832
88
20
10
3,517
40
10
7
15
2,258
21
n.a.
4
20
1,535
12
n.a.
2
25
1,259
8
n.a.
1
30
1,057
5
n.a.
0
35
855
0
0
n. a.
0
•
Transactions Balances at Selected Depository Institutions
($ Billions, Not Seasonally Adjusted)
Demand Deposits
NOWs 2/
MSBs &
S&Ls
CBs
CU
Share Drafts
CBs
MSBs
1975
228.8
0.2
0
0.4
0.5
0
1976
240.5
0.5
0
1.3
0.8
0.1
1977
258.1
0.7
0
1.9
1.1
0.4
1978
272.2
1.0
2.8
2.5
1.3
0.7
1979-July
270.9
1.0
6.7
4.4
1.4
0.9
Year-End
•
ATS
a/
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Figures include NOW accounts in New York State, which were essentially
zero at the end of 1978. By the end of July 1979, CBs in New York
had $2.0 billion in NOWs and thrifts had about $0.2 billion.
Estimated Loss in Treasury Revenues
From Attrition Colltinuing
After 1974/
($ millions)
If Member Bank
Share of Deposits
Drops 1.2 Percent4ge
Points Per Yearl/
If Member Bank
Share of Deposits
Drops 3 Percentage
Points Per Yearil
14.8
37.0
1981
29.7
74.3
1982
44.5
111.3
1983
59.3
148.3
1984
74.2
185.5
89.0
1985
II
,
222.5
1/
2/
3/
Based on reported reserves at Fed of $30 billion, with no adjustment
for any vault cash reductions from change from member to nonmember
status. Earnings calculated using return of 6.5 percent and an average
marginal tax rate of 55 percent.
Estimated average annual decline for the nation, 1974-1978.
Assumes member bank attrition would accelerate to midway between that of
New England and that of the nation during the 1974-78 period.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
410
Rates of Return on the System's Portfolio and Selected Interest Rates
(quarterly averages; annual effective rate
System
Open
Market
1/
Account
•
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Federal
funds 2/
3-month
Treasury
bill 3/
1970--QI
WI
QIII
QIV
6.55
6.73
6.89
6.73
9.05
8.30
7.02
5.80
7.58
7.00
6.63
5.58
1971--QI
QII
QIII
QIV
6.77
5.68
5.82
5.78
3.98
4.70
5.69
4.92
3.97
4.41
5.21
4.38
1972--QI
QII
QIII
QIV
5.45
5.33
5.46
5.69
3.65
4.45
4.92
5.32
3.55
3.90
4.37
5.05
1973--QI
QII
QIII
QIV
5.85
6.31
6.88
7.35
6.84
8.22
11.28
10.66
5.95
6.92
8.81
7.90
1974--QI
QII
QIII
QIV
7.09
7.35
7.67
7.85
9.89
12.05
13.03
9.93
8.03
8.62
8.66
7.75
1975--QI
QII
QIII
QIV
7.35
7.00
7.14
7.18
6.58
5.62
6.43
5.62
6.00
5.62
6.63
5.87
1976--QI
QII
QIII
QIV
7.03
6.91
6.99
6.93
4.99
5.40
5.47
5.03
5.11
5.37
5.36
4.85
1977--QI
WI
QIII
QIV
6.62
6.59
6.72
6.95
4.81
5.36
6.06
6.80
4.81
5.03
5.73
6.39
1978--QI
QII
QIII
QIV
7.09
7.31
7.69
7.80
7.06
7.66
8.52
10.20
6.70
6.79
7.69
9.08
1979--QI
QII
8.25
8.76
10.74
10.85
9.98
S.
System
Open
Market
•
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Account
11
Federal
funds 2/
3-month
Treasury
bill 3/
1965--QI
QII
QIII
QIV
3.94
4.02
4.06
4.12
4.08
4.19
4.19
4.30
4.02
4.01
4.00
4.32
1966--QI
QII
QIII
QIV
4.17
4.41
4.68
4.85
4.70
5.10
5.62
5.80
4.79
4.76
5.25
5.42
1967--QI
QII
QIII
QIV
4.84
4.74
4.70
4.91
4.99
4.12
4.01
4.30
4.68
3.78
4.46
4.94
1968--QI
QII
QIII
QIV
5.08
5.23
5.46
5.56
4.96
6.24
6.21
6.17
5.25
5.76
5.41
5.83
1969--QI
QII
QIII
QIV
5.68
5.93
6.11
6.52
6.87
8.79
9.51
9.47
6.37
6.48
7.38
7.74
Quarterly rate of return, converted to an anual
effective rate. Rate of return equals earnings on
System's holdings of Government and agency securities
.(including earnings on repurchase agreements and profits
and losses from sales of Government securities) divided
by book value of those holdings (quarterly average of
daily figures).
2/ Effective federal fund rate, converted to an annual
effective rate.
3/ 3-month Treasury bill rate (market yield on a bank
discount basis), converted to an annual effective rate.
1/
d Reserve Balances
Deposits and Re
er 1977)
11
e111
(Dec
Reserves at Fed
($ millions)
Current H.R. 7
Earnings on
Released Reserves
($ millions)
Service
Charges
($ millions)
Earnings Gain
Before Float Charge
($ millions)
Charge
Net
for Float
Earnings Gair
($ millions) ($ millions)
1,714
456
81.8
10.9
70.9
6.6
64.3
Citibank
897
448
29.2
5.8
23.4
3.5
19.9
Chase Manhattan
831
421
26.7
6 2
20.5
3 7
16.8
Manufacturers Hanover
623
338
18.5
7.5
11.0
4.5
6.5
Morgan Guaranty
424
348
4.9
2.7
2.2
1.6
0.6
Chemical Bank
611
301
20.2
5.9
14.3
3.6
10.7
Continental Illinois
398
152
16.0
6.1
9.9
3.7
6.2
Bankers Trust
252
82
11.1
3.5
7.6
2.1
5.5
First National of Chicago
416
115
19.6
4.6
15.0
2.8
6.0
Security Pacific
477
153
21.1
4.5
16.6
2.0
14.6
Bank of America
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
September 25, 1979
r_
MOIIIUILIV
•
•
•
•
•
•
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
•
Table.
Change in the Number of Member Banks as a Result of On-going
Banks Joining and Withdrawing from the Federal
Reserve System, 1960-79 1/
Year
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
19783/
1979—
Total
National
Joining
State
Member
Total
6
5
8
18
19
2/
12-10
7
6
9
5
7
12
8
8
8
8
5
3
0
7
4
5
3
4
1
4
1
3
1
0
4
6
4
9
4
10
5
11
4
13
9
13
21
23
13
14
8
9
10
5
11
18
12
17
12
18
10
14
4
90
254
164
Withdrawing
State
Member
National
2/
-25
-9--16
-1
-26
-6
-22
-13
-19
-5
-22
-7
-32
-7
-21
-5
-40
-12
-41
-28
-38
-39
-20
-21
-36
-22
-28
-21
-98
-20
-32
-10
-23
-23
-26
-43
-37
-62
-14
-27
-381
-546
Total
Net Change
State
Member
National
Total
-34
-17
-32
-35
-24
-29
-39
-26
-52
-69
-77
-41
-58
-49
-48
-42
-46
-69
-99
-41
-3
4
2
5
14
5
3
2
-6
-19
-34
-14
-10
-13
-12
-2
-15
-38
-59
-27
-18
-12
-21
-19
-15
-21
-28
-20
-37
-40
-38
-16
-30
-24
-19
-28
-13
-21
-26
-10
-21
-8
-19
-14
-1
-16
-25
-18
-43
-59
-72
-30
-40
-37
-31
-30
-28
-59
-85
-37
-927
-217
-456
-673
from these figures.
1/ De novo banks, bank closures, and merging banks are excluded
2/ Figure taken from summary table published by FDIC. Detailed listing of banks by name indicated one bank less
than summary figure shown.
3/ Data through June 1979.
SOURCE:
FDIC, Annual Reports, 1960-77, and Changes Amon2 Operating Banks and Branches, 1960-78.
Data for 1979 compiled from records at the Federal Reserve Board.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Tablf0
Deposits Acquired by the Member Sector As a Result
of Banks Joining and Withdrawing from the
Federal Reserve System, 1960-79 1/2/
Year
National
($mil)
S.
1961
1962
1 963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1q78
-- 3/
19/9Total
Joining
State
Member
($mil)
Total
($mil)
Withdrawinz
State
National
Member
($mil)
($mil)
Total
(Smil)
56.6
168.8
97.3
181.7
59.2
225.2
72.4
•
83.2
49.3
103.3
52.4
132.2
117.7
125.6
140.5
254.4
71.0
107.1
0.0
10.7
49.9
19.8
84.7
35.6
56.5
16.3
64.7
1.6
-0139.5
406.8
106.0
627.0
191.4
439.7
202.8
448.3
33.2
67.3
218•.7
117.1
S.
94.8
281.7
88.7
147.9
50.9
103.3
191.9
539.0
223.7
752.6
331.9
694.1
273.8
555.4
33.2
-1.7
•
-30.9
-143.3
-34.0
-61.4
-67.5
-15.7
-65.6
-1,046.7
-558.7
-400.0
-563.1
-498.6
-1,640.5
-239.9
00.0
-2,433.5
-3,170.7
-1,754.1
-98.6
-357.7
-138.1
-232.7
-320.3
-432.9
-330.1
-399.2
-616.2
-393.7
-263.2
-1,302.9
-1,392.1
-1,349.1
-728.1
-953.2
-2,049.6
-2,418.0
- 595.6
-100.3
-388.6
-281.9
-266.7
-381.7
-500.4
-395.8
-464.8
-1,662.9
-952.4
-663.2
-1,866.0
-1,890.7
-2,989.6
-968.0
-2,053.2
-4,483.1
-5,588.7
-2,349.7
2,097.9
2,934.5
5,032.4
-13,826.4
-14,421.3
-28,247.7
National
54.9
137.9
-46.5
147.7
-2.2
157.7
56.7
17.6
-997.4
-455.4
-347.6
-430.9
-380.9
-1,514.9
-99.4
-845.6
-2,362.5
-3,063.6
-1,754.1
-11,728.5
Net Change
State
Member
Total
9
-307.8
-118.3
-148.0
-284.7
-376.4
-363.8
-334.5
-614.6
-393.7
-123.7
-896.1
-1,286.1
-722.1
-536.7
-513.5
-1,846.8
-1,969.7
- 562.4
0
-169.9
-164.8
-.3
-286.9
-218.7
-307.1
-316.9
-1,612.0
-849.1
-471.3
-1,327.0
-1,667.0
-2,237.0
-636.1
-1,359.1
09.3
-5,033.3
-2,316.5
-11,486.8
-23,215.3
(1/ Deposit data correspond to bank data in Table 1.
2/ Deposit data are based on total deposit size as of year-end prior to the year in which a bank changed its charter_
membership class. In five instances the banks changed their charter-membership class later in the same year in which
they were organized; hence, deposit data were not available. Deposit data were also unavailable for those banks that
changed their charter-membership class in 1960.
3/ Data through June 1979.
SOURCE:
Deposit data from Reports of Condition (Call Reports).
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
•
•
•
Table 3
1/
Number of Commercial Banks Withdrawing from
the Federal Reserve System, 1968-79
(Banks Grouped by Deposit Size Class as of the
Beginning of Each Year)
-)
Deposit
Size Class
$ millions)
1968
1969
1970
1971
1972
1973
1974
1975
0-2
5
3
7
3
3
1
1
1
2-5
18
18
.27
8
11
4
2
10
5-10
17
21
15
11
11
15
5
10-25
8
16
16
11
21
12
25-50
3
4
10
5
5
50-100
1
3
2
3
100-500
4
1976
1977
Ave. Size Bank
($ mil. deposits)
4
1
4
5
2
7
9
11
14
3
18
9
13
19
25
12
7
9
10
13
13
23
11
2
5
3
5
5
5
18
7
5
5
10
5
15
9
6
1
52
69
77
41
58
49
48
42
46
69
99
41
8.9
24.1
12.4
16.2
32.2
38.6
62.3
23.0
44.6
65.0
56.5
57.3
1/
Includes both national banks and state member banks.
2/
Data through June 1979.
SOURCE:
FDIC, Changes Among Operating Banks and Branches, 1968-78, and records at the Federal Reserve Board.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
l979
2
500-1000
Total
1978
Table 4
1/
Number, of. Commercial Banks- Joining
the Federal Reserve System, 1968-79
(Banks Grouped by Deposit Size Class as of the
Beginning of Each Year)
Deposit
Size Class
($ millions)
1968
1969
0-2
1
2
2-5
3
4
2
5-10
10-25
3
25-50
2
1973
2/
3--
1
2/
i-
2
1
2
1
2
1
7
3
4
3
1
1
3
1
1
1
2
2
50-100
1974
1972
1970
1971
100-500
1975
1976
1977
1978
2/
1
2/
1
3
2
2
1
5
3
3
4
1
2
3
2
6
2
5
4
3
2
1
1
1
1
1
2
5
1
1
1
3
1
1
l994/
2
• 500+
Total
Ave. Size Bank
($ mil. deposits)
9
10
5
11
18
12
17
12
18
10
14
4
16.4
5.1
20.7
17.4
29.9
18.6
44.3
27.7
38.6
27.4
39.7
8.3
1/
Includes both national ban.Ks and state member banKs.
2/
Includes one bank which joined the System later in the same year in
3/
Data through June 1979.
which it was organized.
Includes one bank which was organized in 1978 but for which year-end 1978 deposit data are unavailable.
Reserve Board.'
SOURCE: FDIC, Changes Among Operating Banks and Branches, 1968-78, and records at the Federal
4/
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
111
Estimated Loss in Treasury Revenues from Attrition in Federal Reserve Membership
1973 - 1978
(4)
(6)
(2)
(5)
(3)
(1)
Member Bank
Deposits if
1972
Proportion
Maintained
Year
($ billion)
Difference
0 billion)
(7)
Amount by
Which Fed
Security
Holdingsv
are Lower-
Amount by
Which Fed
Earnings 2/
are Lower-
Amount by
Which Treasury
Revenues
3/
are Lower-
($ million)
($ million)
($ million)
1972
616.8
482.5
482.5
1973
S.
527.2
533.8
6.6
271
17.4
9.6
1974
748.2
575.8
585.3
9.5
355
25.9
14.3
1975
786.5
591.0
615.3
24.3
838
57.7
31.7
1976
838.2
618.9
655.6
36.7
1171
78.3
43.0
1977
900.2
652.3
710.5
58.2
1862
122.0
67.1
1978
786.8
70.5
1005.8
716.3
2256
165.0
90.9
1/ Column (4) times average reserve requirement against all deposits for member banks with deposits less
than $100 million in each year less average nonmember bank holdings of vault cash. Latter amount is
w fr edthe
even if a member bank were o wit
b eca u
i
subtracted
o m m ber. S hndcre he mF
o
q ual o
System, it
holds securities against Federal Reserve notes, System earnings would only be reduced by the amount
of reserve balances withdrawn plus excess cash held by members over and above that of nonmembers.
2/ Column (5) times
rn
the average rate of return on System portfolio in each year.
.55. Latter figure assumes the average marginal tax rate against banks is 35 per
i
3/ Column (6) times
cent and an additional 10 per cent in tax revenue is collected from dividends. Thus, of each dollar
reduction in System payment, an estimated 45 cents is returned to the Treasury through higher taxes
and 55 cents is lost.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
S
Estimated Loss in Treasury Revenues
From Attrition Cogtinuing
After 1974/
($ millions)
If Member Bank
Share of Deposits
Drops 1.2 Percentqge
Points Per Year2/
•
If Member Bank
Share of Deposits
Drops 3 Percentage
Points Per Year-/
1980
14.8
37.0
1981
29.7
74.3
1982
44.5
111.3
1983
59.3
148.3
1984
74.2
185.5
1985
89.0
222.5
1/
2/
3/
Based on reported reserves at Fed of $30 billion, with no adjustment
for any vault cash reductions from change from member to nonmember
status. Earnings calculated using return of 6.5 percent and an average
marginal tax rate of 55 percent.
Estimated average annual decline for the nation, 1974-1978.
Assumes member bank attrition would accelerate to midway between that of
New England and that of the nation during the 1974-78 period.
•
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
•
•
•
•
•
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
•
•
111
Larry Promise]
August 29, 1979
(II
RATIOS OF RESERVE BALANCES AT CENTRAL BANKS TO TOTAL DEPOSIT LIABILITIES
NOTES
COUNTRY
RATIO
ITALY
.149
Average 1978Q4; interest is paid on central bank balances;
reserves can be held in other forms, as well.
GERMANY
.070
Average 1979Q2; ratio of reserve balances at Bundesbank to
all deposits against which reserves are required; central
bank balances do not bear interest.
UNITED STATES
.040
Average 1979Q2; ratio of reserves with Federal Reserve Banks
to total deposit-44abilities of member banks; reserves do not
bear interest.
CANADA
.044
Average 1979H1; ratio of Chartered Banks' balances at Bank of
Canada to their total deposit liabilities (including Government
of Canada deposits); central bank balances do not bear interest.
FRANCE
.024
Average January-February 1979; central bank balances do not
bear interest.
SWEDEN
.016
End-April 1979.
UNITED KINGDOM
.008
Mid-May 1979; ratio of balances (other than Special and Supplementary
deposits) at Bank of England to total sterling deposits of banking
system; only London Clearing Banks are required to maintain balances
at Bank of England, equal to 1-1/2 percent of their eligible liabilities (these balances do not bear interest); all banks must observe
liquid asset ratios. Note: if Special and Supplementary deposits
were included, ratio would be .016.
JAPAN
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
less than .015 but
more than .0025
In May 1979 the ratio of all financial institutions' deposits
Bank of Japan to total deposit liabilities was .015; however,
numerator includes many items that are not reserves against
deposits. The smallest reserve ratio, which is applicable to
of less than Y500 billion, is .0025; central bank balances do
bear interest.
at
the
deposits
not
•
-
•
RATIOS OF RESERVE BALANCES AT CENTRAL BANKS TO TOTAL DEPOSIT LIABILITIES
COUNTRY
RATIO
BELGIUM
less than .001
NETHERLANDS
less than .001
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
NOTES
Footnotes
_
* Cash Reserve Requirements whenever applicable.
11 Actual requirements vary according to size of bank and term of time
deposit. Reserve requirements only on net foreign liabilities.
2/ The 20% maximum applies to deposits with a maturity of one month
or less. Reserve restrictions were imposed on October 1978. There exists
a 100' marginal primary reserve requirement on credits beyond same threshold.
Bank holdings of secondary reserves as a ratio of total liabilities is
frozen at some base period.
3/ New Bank Act may be in effect by end of 1979. Reserve requirements,
in general, will be slightly lower. Foreign-currency deposits used domestically will be treated slightly differently from domestic-currency deposits.
The minimum required ratio for secondary reserves is uniform -- currently
5 per cent for all Canadian dollar deposit liabilities.
4/ Maximum reserve requirements are not statutory. They are fixed by
National Credit Council and Banque de France is free to set requirements
below ceiling. The first FF15 million is subject to 2 the actual reserve
requirement shown.
5/ Actual reserve requirements on demand and time deposits increase with
size of commercial banks. There exists a 50', marginal reserve requirement
on non-resident yen deposits (above February 1978 level).
6/ Maximum apply to deposits in excess of 15 million guilders. Secondary
reserve requirements are 10.57 for short-term deposit liabilities and
for long-term deposit liabilities.
7/ There exists separate "liquidity" requirements. The maximum liquidity
ratio (LR) is 50'7'• and the minimum is Cr. The actual LR is 23-24% for small
banks to 45' for large savings banks. For commercial banks, the actual LR
ranges from 26-50-: (depending on size of bank).
8/ The actual reserve requirements were dropped to V on February 1977
for foreign deposits and on November 1974 for domestic deposits. Maximum
reserve requirements are higher for time deposits than savings deposits.
9/ Reserve requirements for London Clearing Banks are l',;7/, for the actual
and minimum. Reserve requirements on net position of foreign-currency deMost of reserve requirements held in various public debt
posits only.
securities.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
•
•
••••
a: legal maximum
The Primdry4 Reserve Fcluirements In The
Leading Industrial Countries
b: requirements in force as of January 1, 1979 c: legal minimum
Savings and Other
Time Deposits
Demand Deposits
Foreign
Domestic
\
Domestic
Foreign
Austria-1/
(a.
(b.
(c.
157
5_9
IX
BelgiumP
(a.
(b.
(c.
20%
r
0%
ar
0%
0%
77
07,
0%
7%
0%
0%
1/
(a.
(b.
(c.
1)%
lr
12%
127
12%
12%
4%
4%
4%
4%
4%
4%
(a.
(b.
(c.
257:
0'7
10V
007
257!
0';',
0%
100%
0%
0%
Germany
(a.
(b.
(c.
30
14%
0%
100%
147
0%
10-20%
6.2-9.8%
0%
100%
6.2-9.8%
0%
Italy
(a.
(b.
(c.
20:'
15.87
10%
20'
15.87
107;
(a.
(b.
(c.
207
0.25-2.5
07
100'
0.25Y,
0-:
Canada
France
Japan
y
5/
Netherlands
Sweden
21
Switzer1and
8/
United Kingdom
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
15
5-97
0%
157
4-7%
0%
20::
15.87
10%
207
0.125-1.625%
0::
15%
11-7%
0%
20%
15.8%
10%
100'4
0.25%
0%
(a.
(b.
(c.
15';
0
0
15'2;
0^;
0%
157,
07
0%
15%
1,F;
0%
(a.
(b.
(c.
152::
0-
15',
2:
0%
15",:
27
0%
15%
2%
0%
(a.
(h.
(c.
40^.
0'
0;
40%
0'
0/
0-307
fr.
0/
0-30%
V.
OA
9/(a.
(b.
(c.
12V,
12'2.;
12'27
12':.;
12'i%
•
January 1979
--(1)
MandatorrMembershiir
of Commercial Banks
Canada
France
Germany
(4)
(3)
Access to Discount Window
Interest an Reserves or Reservcs
Held in Interest-Bearin Assets
Yes
Chartered banks required to maintain!
Quebec
-interest
bearing cash reserves; Access restricted to chartered banks and
non
however, secondary reserve require- savings Banks merits may be satisfied by interestbearing assets. "Near banks" required to hold some proportion cf
...in liquid (interest 0111!
.
.1
l1
(2)
Universal Reserve Requirements
Yes
Yes
Mandatory for Chartered Banks (which Reserve requirements uniform for
Different
Banks.
Chartered
all
of
cent
65
per
deposits),
account for
requirements for Quebec Savings
and Quebec Savings Banks (a commerBanks and "near banks".
cial bank). Not mandatory for
other deposit-accepting institutions ("near banks").
Yes
Yea
Yee
Yes
All banks are controlled by the
Bank of Italy.
No
--Open marke t opera:Jona is major instrument;
--"moral suasion" has large rcle;
--discount ,i-icow used as a signal to market;
--primary reserve requirements may not be varied;
--direct control, not used.
a
Banks are not required to establish
a correspondent relationship with
the Bank of Japan. However, all
commercial banks are controlled by
the Bank of Japan,
Yes
Since 1975 there are universal reserve requirements for increases
in deposit liabilities.
Yes
Existing holdings of some assets
other than central bank balances
count as reserves, but increases in
required reserves all take farm of
(interest-bearing) deposits at the
Bank of Italy.
No
There are higher reserve requirements for large city banks; lower,
for smaller banks,
Required reserves are exclisively
non-interest bearing currentaccount deposits at the Bank of
Japan; vault cash is not counted
as a reserve.
611 commercial banks subject to
central bank control.
No
United Eingdoe
No formal relationship between
Bank of England and commercial
banks. In practice an informal
relationship exists.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
--Open market operations is the major instrument;
--direct control over credit expansion important;
in the discount rate often used bur small
Allccmizercial banks have access to discount window, --changes
effect;
--regulation of banks foreign position occasionally
used;
--changes in reserve requirements rarely used.
Financial institutions seeking access to the Bank
of Japan's borrowing facilities must satisfy
certain requirements -- including sound financial
standing and significant size. Large city banks
are the principal borrowers,
--Central bank lending, primarily via rationing of
credit to banks, is major instrument;
--open market operations, mainly on long-term gavernment securities;
--changes in reserve requirements have been used in
recent years;
--"window guidance", a form of "moral suasion", has
dininished in importance recently.
All commercial banks have access to discount
window.
--Open market operations, via currency swaps and
cterilization bonds, is the major instrument;
--credit controls, such as negative interest rates
on foreign deposits and bane on foreign purchases
of Swiss securities, are less frequently used;
--changes in discount rates and reserve requirements of minor importance.
---4
No
Yes
Switzerland
, (5)
Major Monetary Policy Instruments
No
--Credit ceiling is major instrument (norms for
All commercial banks and certain other financial
for
uniform
credit expansion posted for all banks, and diffcr
Reserve requirements
.
have
access
All banks controlled by the Bank
ions
stitut
different;in -intere t
according to size of banks);
all banks; sometimes apply
All reserves hold in non
of France,
--reserve requirements and discount windowof
ratios for residents and non-resi,. bearing form.
dent accounts. Requirements differ
,scondary importance.
according to type of deposit. Also,
requirements on bank assets differ
--i-jai MIS of bank--Changes in reserve requirements and the use of
No
Yes
Yes
•
conditions
to
rediscount quotas are major instruments;
Access theoretically can be tied
reserves held In -'at-interest
Reserve requirements differ accord- All
--open market operations not large, but frequently '
All deposit-taking institutions are
has
never
this
such as credit ceilings; however,
bearing forts,
bank
and
the
the
of
the
to
size
used;
subject to Bundesbank regulatory
been done,
type of deposit,
--changes in the discount rate, the use of foreign
instruments, and can use credit
regulations, capital controls and "moral
exchange
facilities.
suasion" used occasionally.
Italy
Japan
ers and Practiced of Foreign C.atral Banks
-4
All commercial banks subject to
reserve requirements that vary
with the size of the bank,
All reserves held in non-interest
bearing form.
Yes
Yes
The 1-1/2 Per cent LCB requirement
London Clearing Banks (LCB), which
does not blear interest; however,
account for about one-half of
take
total deposits, must keep 1-1/2 per. all other required reserve,
-bearcent of eligible liabilities at me the form of liquid (interest
Bank of England. 411 bisnks (imcl..v.ring) assets.
ing LCB)must have 12-1/2 per cent of
eligibAe liabilities in "liquid
assets .
Prepared by Federal Reserve Board Staff
Banks have access to discount window through the
Discount houses.
--Open market operations, via trading of bonds —
,tad Treasury bills, is major instrument;
--variations in the Minimum Lending Rate at which
the Bank of England lends to Diacount houses frequently used;
--reserve requirements affected by special deposits
and supplementary special deposits ("the corset.")
occasionally used;
i --"moral suasicn" else has a role.
•
•
•
•
----
MONEY MARKET
MUTUAL FUNDS
-
•111
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Notes on Money Market Mutual Fund Tables
•
Table 1
a.
MMMFs were first offered in 1974 and grew rapidly through early
1975.
Octstanding shares did not decline when interest rates
fell in 1975 and 1976.
b.
Outstanding shares of MMNFs have tripled since year-end, reaching
nearly $34.0 billion on September 12.
c.
Fund managers have channelled most of the cash inflows into
domestic and Eurodollar CDs and commercial paper.
Table 2
At year-end 1978 about half of MMMF shares were held by institutions,
with most of the institutional total in bank trust accounts or pension
and related funds.
•
Table 3
a.
A disproportionate share of money fund growth this year has
occurred in stockbroker sponsored funds.
b.
The average size of general purpose and stockbroker sponsored funds
is around $19,000.
Transactions
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
a.
All funds offer wire transfer facilities, and most offer check
writing privileges which usually required minimum checks of $500.
b.
Conversation with industry representatives suggest that thus far
accounts have had a very low level of checking activity.
Volume
of redemptions relative to assets suggest a level of activity
similar to a savings account.
•
•
•
Table 1
Average Maturity, and Average Yield
Composition,
Portfolio
Assets,
of Money 7.4arket Mutual Funds
(dollar amounts in billions)
Portfolio Composition
Commercial
Euro
Paper
CDs
CDs
RPs
0.4
2.1
n.a.
0.9
1.5
n.a.
1.0
0.7
1.7
0.3
Number
of
Funds
33
39
46
Total Net
Assets
3.6
3.7
4.0
Treas.
0.9
0.9
0.4
Other
n.a.
0.3
0.3
1978-Q1
Q2
Q3
Q4
46
46
49
49
5.4
6.3
8.2
11.0
0.5
0.4
0.2
0.4
0.6
0.7
0.9
1.0
0.2
0.3
0.3
0.4
2.4
3.0
3.7
4.8
0.3
0.2
0.3
0.5
1979-Jan.
Feb.
Mar.
Apr.
May
June
July
Aug.
SeP.12
54
55
56
56
60
62
63
68
68
13.2
15.5
17.7
20.0
23.2
26.0
30.2
32.7
33.9
0.4
0.2
0.3
0.3
1.2
1.5
0.9
0.6
2.4
1.1
2.1
2.0
2.5
2.1
2.1
2.4
2.4
9.7
0.4
0.7
0.7
0.5
1.2
0.6
0.3
1.0
0.9
5.6
6.3
6.3
6.8
7.0
7.8
9.9
12.1
12.1
0.8
1.1
1.4
1.7
2.1
2.6
3.1
3.7
3.5
End of
Period
1975
1976
1977
U.S.
1/ 30-day average weighted by assets.
2/ 30-day average.
n.a. - not available.
Source:
Donoghue's Money Fund Report.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
BAs
__
Average 1/
Maturity(days)
93
94
75
Averate,
Yield =
(percent)
n.a.
4.7
5.7
0.1
Other
0.2
0.1
0.1
1.9
1.8
2.2
2.9
0.1
0.4
0.5
0.3
0.1
0.1
0.1
0.1
77
67
66
48
6.2
6.5
7.3
9.3
3.6
3.8
5.1
5.8
6.2
7.8
9.8
9.1
10.2
1.0
1.1
1.6
2.3
3.3
3.1
2.9
3.4
3.6
0.3
0.2
0.3
0.2
0.1
0.4
0.4
0.4
0.2
41
51
49
47
49
50
53
46
50
9.3
9.6
9.6
9.4
9.5
9.7
9.4
9.7
9.8
Table 2
Ownership of Money Market Mutual Funds
December 31, 1978
Total Assets
in billions of dollars
Total
Individual
Institutional
Fiduciary
Business
Employee Plans
•
Pension
Profit Sharing
IRA and Keogh
Insurance Companies
Other
Note:
Percent of
Total Assets
Average Account Size
10.86
4.94
5.92
100
45
55
23,215
15,544
40,375
3.07
.61
.45
28
6
4
38,499
46,793
18,494
.14
.14
.17
1
1
2
24,412
28,317
12,451
.41
1.38
4
13
34,713
79,660
Classification by Individual or Institutional made on basis of nearly complete
coverage. Classification by type of institution made on basis of 56 percent
coverage of institutional accounts.
Source:
Investment Company Institute Estimates.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
•
Table 3
Money Market Mutual Fund Assets
by Type of Fund
General
Purpose
•
Stockbroker/
Gen'l. Purpose
Institutions
Only
Total
Assets, billions
of dollars
December 1978
Sept. 12, 1979
3.8
9.4
3.6
16.4
3.3
8.1
10.7
33.9
Percent of total
assets
December 1978
Sept. 12, 1979
35.5
27.7
33.6
48.4
30.8
23.9
100.0
100.0
Number of accounts
December 1978
July 1979
189,297
423,067
216,852
725,097
60,088
104,311
466,237
1,252,475
19.5
19.1
77.6
24.1
Average account size,
thousands of dollars
July 1979
Source:
•
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Donoghue's Money Fund Report.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
ISSUES REGARDING MONETARY CONTROL
•
o
Theoretically, Federal control the money stock without any reserve requirements.
•
Control could be based on more active use of discount window or
--
open market intervention similar to current operating procedure.
-•- However, relationship is not stable in the short run so that
IIIere would be too much slippage in monetary control
• Higher reserve balances and greater coverage more important under reserves aggregate operating procedure.
•
-Under current balances and coverage, monetary control is about as
precise under federal funds procedure as under reserve aggregate
procedure.
-- With increased coverage, reserves aggregate procedure would be
superior to federal funds procedure.
•
o
Under reserve operating procedure, higher reserve balances and greater bank coverage
improve short-run monetary control.
-- Based on M-1/reserves multiplier relationship.
-- Higher reserves reduce size of multiplier, thus ameliorate impact
of errors in provision of reserves.
•
Greater coverage increases proportion of deposits at same reserve
--
requirement and reduces excess reserves in banking system, thus
making multiplier more stable.
-- Paying interest on required reserve balances (or special supplementary
deposits) would not affect multiplier relationship.
•
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
- 2 -
o
•
Exact amount of required reserves necessary for monetary policy is uncertain
-- Reserve ratio should be high enough to make reserve requirements
binding at most banks.
-- Based on statistics for nonmember banks, Board staff estimate that
using modified S.85 structure, the special supplementary deposit
ratio would have to be 4 to 5 percent on all transactions balances
in order to put 80 percent of transactions balances at banks with
binding reserve requirements.
--- Such a reserve structure would yield about $20 to $25 billion in
reserves at the Fed.
o
Required reserve balances of nonmembers should be held at other regulatory institutions only if these regulators pass through these reserves to the Fed.
-- Fed must have control over total reserves availability in system.
-- If other regulators have independent control they can offset our
monetary policy actions.
•
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
PRICING ISSUES IN S. 85
o
o
Add public interest criterion to section 11A(b)(3).
--
Need additional flexibility.
--
Allow Board to preserve efficient effective payments mechanism.
Drop requirement that prices be fully implemented within 18 months.
--
Replace with requirement to begin in 18 months.
--
May need longer time to avoid disruption to correspondent
banking system.
--
Reserve Banks must construct an accounts receivable facility
that they don't now have.
o
•
--
Allow time for orderly change.
--
Suggest time comparable to 4-year phasing of reserve requirements.
Do not require pricing of all new services.
--
Only new payments services should be priced.
--
Congressional objectives can be accomplished without requiring
pricing of non-payments services, e.g., publications.
-
Prices intended to promote private sector.
If private sector
can't provide the service, no purpose served by charges.
Unreasonable to require reductions in operating budgets of Reserve
o
Banks commensurate with volume declines.
Not all costs variable in short-run.
--
Impossible to do.
--
Could restrict ability of Fed to serve public interest by
adapting to changes in marketplace.
•
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
-2-
a
--
Could make it impossible to continue to promote efficient
effective payments mechanism.
--
For example, suppose items left to Fed after pricing were
high unit cost.
Expenses could not decrease as rapidly
as volume.
-o
Impossible to tell what amount to return to Treasury would be.
Impact of Fed charging on correspondent banking.
--
Greater opportunity to compete.
--
Promote explicit pricing of correspondent services.
--
Should have minor cost and profit impact on banking system.
--
Create an alternative provider of services for depository
institutions now non-member.
•
•
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
@FedFRASER