View PDF

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

F ederal

reserve

Bank

DALLAS. T E X A S

of

Da lla s

75222

Circular No. 81-227
Decem ber 3, 1981

PROPOSAL REGARDING
CONTEMPORANEOUS RESERVE REQUIREMENTS
ON TRANSACTION ACCOUNTS

TO ALL DEPOSITORY INSTITUTIONS IN THE
ELEVENTH FEDERAL RESERVE DISTRICT:
Printed on the following pages are copies o f a press release dated
November 9, 1981, and related Federal Register document announcing a
proposal by the Board of Governors of the Federal Reserve System to change
the method by which depository institutions maintain reserves. The proposed
change would introduce essentially contemporaneous reserve requirements
(CRR) on transaction accounts for m edium-size and large depository in­
stitutions instead of the lagged reserve system now in e ffe c t.
CRR have some potential for improving the implementation of
monetary policy by strengthening the linkage betw een the reserves held by
depository institutions and the money supply.
However, the Board is also
cognizant o f potential added costs to depository institutions in shifting to
CRR. Consequently, the Board is concerned that the design and desirability
of a CRR system must balance gains in monetary control against potential
costs.
Comments are requested on various aspects of the CRR proposal
by January 15, 1982. Your com m ents, which should refer to Docket No. R0371, may be mailed to William W. Wiles, Secretary, Board o f Governors of
the Federal Reserve System, 20th Street and Constitution Avenue, N.W.,
Washington, D.C. 20551.
Questions regarding these proposals may be directed to Richard D.
Ingram at the Head O ffice, Ext. 6333; William L. Wilson, El Paso Branch, (915)
544-4730; C. O. Holt, Jr., Houston Branch, (713) 659-4433; or Tony G.
Valencia, San Antonio Branch, (512) 224-2141.
Additional copies o f this circular will be furnished upon request to
the Department of Communications, Financial and Community Affairs, Ext.
6289.
Sincerely yours,

William H. Wallace
First Vice President

Banks and others are encouraged to use the following incoming W A T S num bers in contacting this Bank:
1-800-442-7140 (intrastate) and 1-800-527-9200 (interstate). For calls placed locally, please use 651 plus the
extension referred to above.

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)

FEDERAL RESERVE press release

For immediate release

(iwSsll

November 9, 1981

The Federal Reserve Board today requested public comment on a s t a f f
proposal to change the way depository i n s t i t u t i o n s maintain reserv e s.

Comment

should be received by January 15, 1982.
The proposed change, i f adopted by the Board, would introduce
e s s e n t ia l ly contemporaneous reserve requirements on transactio ns accounts
fo r medium-size and la r g e r depository i n s t i t u t i o n s instead of the lagged
reserve system now in e f f e c t .

Transactions accounts include checking, N W
O ,

and automatic tr a n s f e r accounts.
Specific comment was requested by the Board on the implications
of the proposed change f o r the functioning of the money markets and the
operations of depository i n s t i t u t i o n s , including the probable impact on
reserve management and deposit monitoring systems.

Where po ssib le, the

Board would like sp e c ific estimates of the costs involved, both sta rt-u p
and continuing.
The Board emphasized t h a t i t s decision to seek public comment on
the proposal in no way commits i t to approve a final ru le a t some time in
the futu re.
Under the present lagged reserve system, depository i n s t i tu t i o n s
must post t h e i r required reserves in any given week, based on t h e i r deposit
lev els two weeks e a r l i e r .
Contemporaneous reserve requirements (CRR) have some potential
fo r improving the implementation of monetary policy by strengthening the linkage
between the reserves held by depository i n s t i t u t i o n s and the money supply.

-2 -

There is some question, however, whether such potential gains would increase
short-run v o l a t i l i t y in the money market.

The Board noted t h a t any potential

gains in monetary control should not be exaggerated, in view of the sizable
remaining slippages between reserves and money, and in view of the inherent
v o l a t i l i t y of short-run money flows.
There are also added costs to depository in stitu tio n s in s h if tin g
to CRR—the cost of a lte r in g deposit information systems and the complications
th a t might r e s u l t in reserve management.

Consequently, the design and

d e s i r a b i l i t y of a CRR system must balance gains in monetary control against
potential c osts.
Comments are requested on the following proposal which is depicted
in the attached chart:
--CRR would apply only to i n s t i t u t i o n s th a t report t h e i r deposit
levels weekly to the Federal Reserve.

Certain i n s t i t u t i o n s with $15 million

or less in to ta l deposits may report q u a rte rly , while c ertain others with
deposits under $2 m illion do not repo rt.
—Reserves would be maintained over two-week periods.

These periods

would continue to end on Wednesday, and a ll i n s t i t u t i o n s would s e t t l e t h e i r
reserve accounts a t the same time.
—Required reserves would be computed on the basis of average deposit
levels over a two-week period ending on Monday.

Reserves required against

transactions deposits would be maintained in the two-week maintenance period
ending on the Wednesday two days a f t e r the end of the computation period.

This

two-day interval i s provided to f a c i l i t a t e the computation of required reserves
by affected i n s t i t u t i o n s .
—Required reserves
computed

f o r other reservable l i a b i l i t i e s would also be

for two-week periods ending on Monday,

but the actual reserves would

-

3

-

be posted in the two-week maintenance period beginning 17 days l a t e r , on a
Thursday.
—Vault cash

e l i g i b l e to be counted as a

reserve in a maintenance

period would continue to be lagged and would be equal to vault cash holdings
during the computation period ending 17 days p rio r to the beginning of th at
maintenance period.
—No change would be made in the current l im i t of plus or minus 2
percent of daily average required reserves th a t applies to the carry-over of
reserve surpluses or

d efic ie n c ie s into the next reserve period.

However,

lengthening the reserve period from one week to two weeks provides the same
additional f l e x i b i l i t y fo r managing reserve positions as would a doubling of
the carry-over lim it with a one-week period.
The Board also desires comment on variations of the proposal such
as staggering reserve periods fo r d i f f e r e n t se ts of i n s t i t u t i o n s with h a lf
s e t t l i n g every other week, lengthening reserve computation and maintenance
periods to three or four weeks, and increasing the percentage of allowable
carry-over.
-0 -

PRESENT AND PROPOSED RESERVE ACCOUNTING SYSTEMS

Present Reserve Accounting System
week 1

week 2

I
T W

Th

F S SuM

T W

II

Th

F

_
_ !___ I___!______ I___I__!_____!_ I_____1 '

I

week 3

II

I I

I I I

t

I

I

I

S SuM

T W

'___ !__I____ !_________

'

I I

I

I

1-week computa­
tion period for
all reservable
liabilities and
vault cash

I

ThF
II

I

S

SuM

T W

I

I

I

I

I

1-week mainte­
nance period
for all reservable liabilities
and vault cash

Proposed Reserve Accounting System
week 2

week 1

!

week 3

I I

T W

ThF

S

SuM

T W

week 4

I I
ThF

S

SuM

1 i i i i i i i i i I i r

T W

I !
ThF

S

SuM

T W

week 5

week 6

‘i r

I f
ThF

S SuM

T

Th F

S

Su M

T

W

Th F

___! ! _ ! "---i I '--i --i ____ ---i --i --i_____' ---i --i --i --i --T- U i—
| _ _ _____---1 l l ---i --i! - - _---i --i --i - i _____L !
_ - 4- 1
- - ______! - -'
-

i—

S
i—

Su M
i—

T

i
—

2-week computation period for all
reservable liabilities and vault
cash
2-week maintenance period for trans­
actions deposits____________________

2-week maintenance period for non­
transactions liabilities and vault
cash

i—

W
r

November 23,
FEDERAL RESERVE SYSTQ4
Request for Comments on Contemporaneous
Reserve Requirements Proposal

The Federal Reserve Board has requested public comment on
a proposal pertaining to the maintenance of required reserves.
The proposal would introduce essentially contemporaneous reserve
requirements (CRR) on transactions accounts for medium-size and larger
depository institutions instead of the lagged reserve system now in
effect. Transactions accounts include checking, NOW/ and automatic
transfer accounts. Under the present lagged reserve system, depository
institutions must post their required reserves in any given week, based
on their deposit levels two weeks earlier.
Specific comment is requested by the Board on the implications
of this proposal regarding the functioning of the money markets and the
operations of depository institutions, including the probable impact
on reserve management and deposit monitoring systems. Where possible,
the Board would like specific estimates of the costs involved, both
start-up and continuing. There may be additional costs to depository
institutions in shifting to CRR— the cost of altering deposit information
systems and the complications that might result in reserve management.
Consequently, the design and desirability of a CRR system must balance
gains in efficiency against potential costs.
Comments are requested on the following proposal;
— CRR would apply only to institutions that report their deposit
levels weekly to the Federal Reserve. Certain institutions with $15 million
or less in total deposits may report quarterly, while certain others
with deposits under $2 million do not report.
— Reserves would be maintained over two-week periods.
periods would continue to end on Wednesday, and all institutions
settle their reserve accounts at the same time.

These
would

— Required reserves would be computed on the basis of average
deposit levels over a two-week period ending on Monday. Reserves required
against transactions deposits would be maintained in the two-week main­
tenance period ending on the Wednesday two days after the end of the
computation period. This two-day interval is provided to facilitate
the computation of required reserves by affected instititions.
— Required reserves for other reservable liabilities would
also be computed for two-week periods ending on Monday but the actual
reserves would be posted in the two-week maintenance period beginning
17 days later, on a Thursday.

-2 -

— Vault cash eligible to be counted as a reserve in a maintenance
period would continue to be lagged and would be equal to vault cash holdings
during the computation period ending 17 days prior to the beginning of
that maintenance period.
— No change would be made in the current limit of plus or
minus 2 percent of daily average required reserves that applies to the
carry-over of reserve surpluses or deficiencies into the next reserve
period. However, lengthening the reserve period from one week to two
weeks provides the same additional flexibility for managing reserve
positions as would a doubling of the carry-over limit with a one-week
period.
The Board also desires comment (Hi variations of the proposal
such as staggerinq reserve periods for different sefs of institutions
with half settling every other weekr lengthening reserve computation
and maintenance periods to three or four weeks, and increasing the percentage
of allowable carry-over.
Any person wishing to comment on the proposal should submit
views in writing to the Secretary, Board of Governors of the Federal
Reserve System, Washington, D.C. 20551, to be received not later than
January 15, 1981.
Board of Governors of the Federal Reserve System, November 23,
1981.

(signed) James McAfee
James McAfee
Assistant Secretary of the Board


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102