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https://fraser.stlouisfed.org 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 These documents can only be used for educational and research purposes ("fair use") as per United States copyright law. By accessing this file, all users agree that their use falls within fair use as defined by the copyright law of the United States. 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Mudd Manuscript Library 65 Olden Street Princeton, NJ 08540 609-258-6345 609-258-3385 (fax) muddaprinceton.edu   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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.  epfiv 0,2kosa, 002-11#1 0fetk, 171444)2di4 444 ritt,v4i - dm"- eid /14.40u c4 144 etc /&sat/At 1441 C4ffr)   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Pic  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   https://fraser.stlouisfed.org 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 •   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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 s)•) ,x( • r( is(,. ••••   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis   https://fraser.stlouisfed.org 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  •  •4,_••Ia • • '  •  ••  .  •• •••Il • f" ••  J. -64 -.P. •: I* •  ,*.  4'441%4% 00 : 0 11.1:1 ‘ tiliZaC  -rn  •",,  re-N -444 . 14S*1.e...%•.e—ik&N . , ..r. .0124 .  7  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  • •.  ••••••   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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 •••   https://fraser.stlouisfed.org 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 •••   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  rrdera I It cscrve hank of Min]) it is a member or at  -  ,  f  . .• .  '• '  ... •,... .S • •*61 • A 4 4 •' ••4 - g'7--2... . ....A....5. - ,f' . .•ti •'''' •.. • 1...•••`. .•.• •••• • 111 •. ..........••••• .....'  : is'. 17.... '7..'7....N. ; • C1•....r  4:110r.  •• . , ••••• ..... ..••• 4.14.  _  12  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.  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  inn..1.,.  .0..‘....Z.N...1%..... ‘ . .:SI %.':°• r Cr14.) ' 4. r'...3""17 4'. r4.4.1'. •2 4S .... •  11  eft  "(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.  .  Y  : '. : "-- -, "--.. '4 ..), • • . 7T  ..  •  .. ,  0  •  C."!te:A.a.„,:L...P"'......'..1-...4.e.'-';',..-C.7;),•I'N.'",,,,...40--1.••:......"`-".%.' ..A1/4..... ..  .--._  .......... _   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  .  .  _ _ .. _.-. .  • -_  .  .  ..  .... - . .- . ., .42: %.',..: e. 4.....L...". I. !....•..•- •%.• • •• ...., .' '  -  ••  -.....................-........  • ..‘  ,  ,  •  Ws.4 %  ;  .1.44 e  ZNO  14  !I 10  II ISCE1,1,A  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  •   https://fraser.stlouisfed.org 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" ;  ••••   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org 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:   https://fraser.stlouisfed.org 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:   https://fraser.stlouisfed.org 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,   https://fraser.stlouisfed.org 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?   https://fraser.stlouisfed.org 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?   https://fraser.stlouisfed.org 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?   https://fraser.stlouisfed.org 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?   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org 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. "   https://fraser.stlouisfed.org 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,   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org 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  https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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.  https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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.]   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org 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:   https://fraser.stlouisfed.org 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-   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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;   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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  f'S.**4.* P46 4446.1.  ••  --.V....sow,  lcSCP'ss.5t : IsSiatfiss.  :*.••••••  s It'sa•  •  tst.;.:14 ,,r'ss siksIrsasfe  -  Monetary Improvement Program A Comparison of P DC1 posals Before Congress   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  I CHAIRMAN VOICKElk  3  For Consideration at a Board Session   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org 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,   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org 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  https://fraser.stlouisfed.org 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  https://fraser.stlouisfed.org 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.  https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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.  https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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.]   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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.]   https://fraser.stlouisfed.org 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.]   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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 ---   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org 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/   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org 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,   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  ---.''..-----.'""'"''.-11111.111101111111   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -  ,  _   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org 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.   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org 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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -10-  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.  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  %  -11--  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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  %  -12-  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  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -13-  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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -14-  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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -15-  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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  at$  -16-  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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  % -17-  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,   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 6,  %  %  -18-  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   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  %  -19-  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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -20--  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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  The net drain on Treasury revenues from H.R. 7 or  -21--  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:   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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:   https://fraser.stlouisfed.org 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."  -23-  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.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  *  •  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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)  •   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  S. 85  • Reserve Requirements :   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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%  •   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  [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.  •   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  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
Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102