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, NOW, 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 _|__! _! __ !_____ l -____ _-_____' ' ---i---ii _ _____L - !-- U i— "1---i-I--1'---il---i --i---i-!______! --i---i---i --i---i---i ---i ---i4----T 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
@FedFRASER