The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
FEDERAL
OF
RESERVE
NEW
BANK
YORK
Circular No. 7999
November 26, 1976
PROPOSED INTERPRETATION OF THE FEDERAL RESERVE ACT
Member Bank Deposits With Nonmember Banks
To A l l M e m b e r H an ks, a n d O th e rs C o n ce rn ed ,
in th e S e co nd f e d e ra l Resers'e D is tr ic t
The Board of Governors of the Federal Reserve System has issued for comment a
proposed interpretation of Section 19 of the Federal Reserve Act regarding member bank
deposits with nonmember banks.
Printed on the reverse side is an excerpt from the Federal Register of November 12,
1976, containing the text of the proposed interpretation and of the Board of Governors’
introductory statement thereon. Comments on the proposed interpretation should be sub
mitted by February 7, 1977, and may be sent to our Legal Department.
Additional copies of this circular will be furnished upon request.
PAUL A. VOLCKER,
President.
(Over)
FEDERAL RESERVE SYSTEM
[ 12 CFR Part 250 ]
(Docket No. R-0062]
MISCELLANEOUS INTERPRETATION
Proposed Interpretation of Section 19 qf
the Federal Reserve Act Member Bank
Deposits with Nonmember Banks
The Board of Governors is consider
ing the adoption of an interpretation to
the Federal Reserve Act to apply the
term “deposit” as used in section 19(e)
of the Act <12 U S.C 463> to include
amounts arising out of certain check col
lection transactions involving banks that
are members of the Federal Reserve Sys
tem and nonmember State banks and
trust companies. This action is proposed
under the Board’s authority to define the
terms used in section 19. to determine
what shall be deemed a deposit and to
prescribe such regulations as it may
deem necessary to effectuate the pur
poses and prevent evasions of section 19.
Section 19(e) provides that
No m em ber bank shall keep on deposit
w ith any S ta te bank or tr u s t eom pany w hich
Is n o t a m em ber bank a sum In excess of ten
p e rce n tu m of its own paid -u p capital and
surplus.
The Board has reviewed a check col
lection arrangement under which a non
member bank collects checks for mem
ber banks (hereafter “respondents”).
Under that arrangement, at the end of
each business day. each respondent in
forms the nonmember of the total of its
incoming transit letter. The nonmem
ber does not deposit the amount of the
transit letter ta the respondent’s ac
count, however. Rather, on a daily basis,
the nonmember monitors respondents’
cash letters and credits the account of
another large member bank (hereafter
“correspondent”) that is maintained at
the nonmember in the amount of the to
tal or some proportion of respondents’
transit letters. The nonmember then in
forms the correspondent of the credit. In
turn, the correspondent immediately
credits the respondents’ accounts main
tained at the correspondent and debits
the account “due from” the nonmember.
This procedure assures that in no case
will the nominal balance of any respond
ent maintained at the nonmember ever
exceed the 10 percent statutory limit
imposed by section 19(e). Because of the
size of the member correspondent par
ticipating in this arrangement, its de
posit limit with a nonmember band under
section 19(e) is extremely large. This col
lection arrangement has been estab
lished with the stated purpose of avoid
ing the limits imposed by section 19(e).
The correspondent has been partici
pating in this check collection arrange
ment without incurring any additional
reserve requirement liability since section
204.2(b) of the Board’s Regulation D
provides that amounts in the member
bank’s “due from” account may be de
ducted from “gross demand deposits” in
determining the net deposits subject to
reserve requirements. The availability of
this deduction makes it attractive for the
correspondent to participate in the col
lection arrangement since it retains some
correspondent balances of the respondent
member bank and the nonmember and
since it has available to it the “due from”
deductions from gross demand deposits.
The nonmember is attracted to the ar
rangement since it is able to credit mem
ber bank deposits to the correspondent’s
account held by the nonmember, thereby
avoiding the limitation imposed by sec
tion 19<e> In actuality, the correspond
ent is merely lending its name to the
arrangement for the primary purpose
of obtaining artificial compliance with
the section 19(e) limitations since the
balances that the respondent member
banks have at the correspondent are off
set by the correspondent’s account at the
nonmember bank in this transaction.
Under the proposed interpretation of
section 19(e), a member bank will be
regarded as keeping on "deposit” with a
nonmember bank (1) those amounts
actually maintained in its account at the
nonmember bank, and (2) those addi
tional amounts that are credited to the
account of another bank at that nonmember to the extent that such amounts
are determined with respect to (a) the
total dollar amount of checks that the
member has sent to the nonmember for
collection and (b) the amount in (1)
above.
The Board believes that, section 19(e)
is intended, in part, to restrict member
bank use of nonmember bank institutions
for deposit transactions. The Board re
gards the proposed interpretation as
necessary in order to enforce the nonmember bank deposit limit imposed by
section 19(e) of the Act on member
banks. Under the arrangement described
above, a non member bank may obtain
control over an unlimited amount of
deposits of member banks, thereby
avoiding the restriction of section 19(e)
by merely creating accounting entries on
its books.
Accordingly, pursuant to its authority
under section 19(a) of the Federal Re
serve Act (12 U.S.C. 461) “to define the
terms used in this section * • * to de
termine what types of obligations,
whether issued directly by a member
bank or indirectly by an affiliate of a
member bank or by any other means,
and, regardless of the use of the pro
ceeds, shall be deemed a deposit, and to
prescribe such regulations as it may deem
necessary to effectuate the purposes of
this section and to prevent evasions
thereof” and section 19(e) (12 U.S.C.
463), the Board proposes to adopt an
interpretation to define the term “de
posit” for purposes of section 19(e) in
order to limit the amount of deposits
held by a member at the nonmember
bank. The Board’s proposed interpreta
tion reads as follows:
§ 2 5 0 .1 5 0 Member bank
nonmem ber bank’s.
deposits
at
(a) The Board has been requested to
review a relationship between a non
member bank and a member bank to de
termine whether the member bank is
keeping “deposits” in excess of 10 per
cent of its paid-in capital and surplus,
with the nonmember, a violation of § 19
te) of the Federal Reserve Act (12 U.S.C.
463). That section provides, in part
No member bank shall keep on deposit
with any State bank or trust company which
is n o t a member bank a sum In excess of ten
per centum of its own paid-up capital and
surplus.
(b> The relationship is as follows A
nonmember bank collects checks for one
or more member banks (hereafter “re
spondents”) At the end of each business
day. each respondent informs the non
member of the total of its incoming
transit letter. The nonmember does not
deposit the amount of the transit letter
to the respondent’s account, however.
Rather, on a daily basis, the nonmember
monitors respondents’ cash letters and
credits the account of another large
member bank (hereafter “correspond
ent") that is maintained at the nonmember in the amount of the total or
some proportion of respondents’ transit
letters, and informs the correspondent
of the credit. In turn, the correspondent
immediately credits the respondent ac
counts maintained at the correspondent
and debits the account “due from” the
nonmember. This procedure assures that
in no case will the nominal balance of
any respondent maintained at the non
member ever exceed the 10 percent
statutory limit imposed by section 19(e).
This collection arrangement has been
established with the stated purpose of
avoiding the limits imposed by section
I9<e>.
(c> Section 19(e) of the Federal Re
serve Act was designed, in part, to limit
member banks’ deposit transactions with
nonmember banks not regulated by the
Federal Reserve. Because the relation
ship described above permits a nonmem
ber bank to maintain control of deposits
of a member in excess of the 10 percent
limits found in § 19(e), the relationship
constitutes a \iolation of the intended
purpose of that section of the Act. There
fore. where a member bank enters into
a check collection arrangement with a
nonmember, as described above, the
Board believes that section 19 (e) requires
such funds represented by checks being
collected by a nonmember to be aggre
gated with deposits of the member di
rectly held at the nonmember. Under the
Board’s authority (12 U.S.C. 461) to de*
termine what shall be deemed a deposit
and to prescribe regulations at it may
deem necessary to effectuate the pur
poses of section 19 of the Federal Reserve
Act and prevent evasions thereof, and in
order to effectively apply the limitation
on member bank deposits with nonmem
ber banks, the Board has determined
that a member bank will be regarded as
keeping on "deposit" with a nonmember
bank (D those amounts actually main
tained in its account at the nonmember
bank and (2) those additional amounts
that are credited to the account of an
other bank with that nonmember to the
extent that such amounts are determined
with respect to (a) the total dollar
amount of checks that the member has
sent to the nonmember for collection and
(b> the amount in (l) above.
*
*
*
*
*
To aid in the consideration of this
matter by the Board, interested persons
are invited to submit relevant data,
views, or arguments. Any such material
should be submitted in writing to the
Secretary, Board of Governors of the
Federal Reserve System, Washington,
D.C. 20551, to be received not later than
February 7, 1977. Reference shall be
made to Docket Rr-0062. Such material
will be made available for Inspection and
copying upon request, except as provided
in § 261.6(a) of the Board's Rules Re
garding Availability of Information.
Board of Governors of the Federal
Reserve System, November 3, 1976.
T heodore E. Al liso n ,
S ecretary o f th e Board.
{FR Doc.76-33417 Filed 11-11-70:8:46 am]
FEDERAL REGISTER, VOL. 41, NO. 220— FRIDAY, NOVEMBER 12, 1474
@FedFRASER