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F ed er a l Reser ve Ba n k
DALLAS, TEXAS

of

Dallas

75222

Circular No. 7^-32
January 25, 197^

PROPOSAL FOR
UNIFORM RESERVE REQUIREMENTS

To the Chief Executive Officers of all Banks
in the Eleventh Federal Reserve District:

Enclosed are the press release, transmittal letter, and draft of
legislation released by the Board of Governors of the Federal Reserve System
designed to request congressional action on legislation to create a system
of uniform reserve requirements. This legislation, if enacted, -would mean
that reserves set by the Federal Reserve would be applicable to all financial
institutions accepting deposits against which third-party payments are made.
Thus, nonmember banks having more than $2 million in demand deposits would be
required to hold at the Reserve Banks specified reserves against such deposits
unless vault cash meets those requirements.
This move by the Federal Reserve System has been under discussion
for many months and reflects the implications for policy effectiveness of the
increasing erosion of the member bank reserve base on which monetary policy
actions must be taken. It also reflects similar implications from the broaden­
ing authority of savings institutions in accepting third-party transactions,
especially the NOW accounts. In the System’s view, all financial institutions
processing demand deposits— a primary part of the Nation's money supply— should
bear some of the responsibility and cost of reserves for monetary policy action.
Moreover, it is felt that equity demands such participation, since the brunt of
monetary policy actions has been primarily upon member banks for a nationwide
and universal policy. It has become increasingly important that differences
among financial institutions with comparable authority be reduced to increase
participation in and strengthen our Nation's monetary policy program.
It is hoped that each of you will carefully analyze this drafted
legislation to permit a full discussion of its merits when Congress begins its
cons iderat ion.
Yours very truly,
P. E. Coldwell
President
Enclosures (3)

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

Press Release

For use in morning papers
Monday, January 28, 197^

January 25 9 197^

The Board of Governors of the Federal Reserve System today sent
to Congress draft legislation designed to implement its recommendations for
uniform reserve requirements.

The proposed legislation has the following

purposes:
To achieve better management of money and credit, to provide a
more equitable system of reserve requirements among financial institutions
that offer similar deposit services, and to permit Federal Reserve lending
assistance to a broader range of financial institutions when and as they
come under unusual liquidity pressures.
The draft legislation would extend reserve requirements set by the
Federal Reserve to the demand deposits and Negotiable Orders of Withdrawal
(NOWs), at all financial institutions —
associations and mutual savings banks.

commercial banks, savings and loan
The proposal would also provide a

widening of the permissible range of reserve requirements.
The Board said the basic principle underlying the proposed legis­
lation is that equivalent cash reserve requirements should apply to all de­
posits that effectively serve as a part of the public’s money balances, re­
gardless of the type institution in which those balances are held.
While providing a greater measure of monetary control in the
economy, the draft legislation would at the same time preserve the balance of
supervisory powers inherent in a dual banking system.

More than 3,000 of the

smaller nonmember banks will be effectively exempt from the new requirements.
The proposal does not require membership in the Federal Reserve System on
the part of State banks.

As at present, State-chartered banks may join the

- 2 -

Federal Reserve System or not, as they choose.

Regardless of their member­

ship status, however, State banks under the legislation would be subject to
Federal Reserve reserve requirements on demand deposits and NOW accounts and
would have access to Federal Reserve credit at the discount window.

Super­

vision of thrift institutions also would remain unchanged.
Reserve requirements set by State authorities under State law
vary from state to state.

In about half the states, the percentage require­

ments for demand deposits are identical or differ very little (except for
large banks) from the percentages now set by the Federal Reserve.

Percentages

in 15 states are higher while in 7 other states they are lower.
The major difference between State requirements and reserve re­
quirements set by the Federal Reserve, however, is in the form in which re­
quirements are held.

Reserve requirements set by the Federal Reserve must

be held, under law, in the form of vault cash or funds deposited with a
Federal Reserve Bank.

State requirements can be satisfied not only by

holding cash but also in a number of other ways — by holding deposits with
other banks or by holding interest-bearing Federal or state securities.
Reserves held in this manner do not contribute to the monetary policy
function of reserves, since the funds are available to finance additional
deposit and credit expansion.

Thus, the principal thrust of the proposed

legislation would be to change the form in which nonmember banks hold
their reserves —

that is by holding reserves in the form of cash or

balances with Federal Reserve Banks.
The proposal, which differs in some details from earlier recom­
mendations by the Board, would provide a four-year transition period —
during which reserve requirements would gradually be phased in —

for

institutions not now subject to Federal Reserve reserve requirements.

- 3 Details of the draft legislation are as follows:
1.

Demand deposits would be subject to a

reserve requirement, set by the Board, ranging from
5 per cent to 22 per cent.
7 per cent to 22 per cent —

The present range is from
from 10 to 22 per cent

at reserve city banks and from 7 to 14 per cent at
other banks.

Under the proposal, no distinction

would be made between reserve city and other banks.
2.

Interest-bearing deposits from which with­

drawals may be made by negotiable instrument (such as
NOWs) would be subject to a reserve requirement rang­
ing from 3 per cent to 20 per cent.

NOW accounts at

member banks in Massachusetts and New Hampshire -­
the only states where such accounts are permissible -­
are at present subject to the reserve requirement that
applies to

time

and savings deposits,which may range

from 3 per

cent

to 10 per

3.

cent.

There would be no required reserves against

the first $2 million of net demand deposits and NOWs
at nonmember institutions.
4.

Time and savings deposits of member banks

would be subject to a reserve requirement ranging
from 1 per

cent

to 10 per

cent (instead of 3 per

cent to 10per cent as at present).

Time and savings

deposits of nonmember institutions would not be sub­
ject to Federal Reserve reserve requirements.

-4 5.

Every institution that receives demand

deposits or offers NOW accounts would be required to
report its deposit liabilities and required re­
serves, if any, as the Board requested.

6. Nonmember institutions that would be re­
quired to maintain Federal Reserve reserve require­
ments would be able to obtain credit through the
Federal Reserve discount window, subject to regu­
lations issued by the Board.
7.

A transition period of four year would

apply to the total amount of demand deposits held by
nonmember institutions at the time of enactment of the
new law.

During the first calendar year following the date

of enactment, an institution would be required to
carry 20 per cent of the required reserve on these
base period demand deposits, 40 per cent during the
second year, 60 per cent during the third year, 80
per cent during the fourth year and 100 per cent
after that.

Additions to demand deposits beyond

the base period amount would be subject to the full
reserve requirement.

8. The new law would become effective at the
beginning of the first calendar year following its
enactment.

- 5 -

The essential function of Federal Reserve reserve requirements is
to serve as a fulcrum for monetary policy.

Such reserve requirements provide

a known and controllable base through which the reserve-supplying and
reserve-absorbing actions of the Federal Reserve can affect the supply of
money and credit.

The different reserve requirements set by the various

states do not serve this purpose.
Federal Reserve reserve requirements, however, presently apply
only to banks that are members of the Federal Reserve System —

about 5,700

out of 14,000 total commercial banks in the country.
The proportion of demand deposits held by member banks has been
declining over the years, however, so that the Federal Reserve’s control
over bank reserves (and the money supply) has been eroding.

In 1960,

member banks held about 83 per cent of the demand deposits that make up
the money supply.

Presently, about 75 per cent of the demand deposit

component of the money supply is held at member banks.

Also, the demand

deposit component of the money supply has gown more rapidly at nonmember
banks than at member banks, and the rate of growth at nonmember banks has
varied much more from year to year.

Since 1960, the demand deposit component

of the money supply held at nonmember banks has grown by about 164 per
cent, while the growth at member banks has been about 61 per cent.
In a letter transmitting the draft legislation to Congress, Board
Chairman Arthur F. Burns described the situation in this way:
"Recent trends in nonmember demand deposits and in
the development of NOW accounts surely presage a
continued, and perhaps accelerated, growth of money-type
deposits at nonmember financial institutions. No
one can be certain at what exact point this growth will
make control over monetary aggregates ineffective, but
erosion of the reserve base progressively weakens the
reliability of our present monetary instruments.

- 6 "The proposed legislation extends reserve require­
ments set by the Federal Reserve only to accounts which
are directly employed in making money payments — that
is, to demand deposits and to savings accounts with third
party payment features. The proposal does not recommend
applying Federal reserve requirements to time and savings
deposits other than NOW accounts. These deposits do in
some degree serve a money-like function, but they are not
highly active deposits. Also, under present conditions,
there do not appear to be frequent, or large-scale, shifts
of funds back and forth between demand and time (or savings)
accounts. Shifts among demand deposits, NOW accounts, and
other time deposits would become more prevalent in the
future, however.
"The proposed legislation is not intended to alter the
existing chartering options for banking institutions, to
favor or disadvantage different types of institutions, or
to change the balance among supervisory authorities. Statechartered institutions may continue either to join the
Federal Reserve System or not, as they choose. Whether
they do or do not — and it is anticipated that many would
remain outside the System — they would become subject to
reserve requirements set by the Federal Reserve on demand
deposits and on NOW and similar savings accounts.
"Thus,
a way as to
more equity
banking and

the specific proposals have been drawn in such
achieve more precision in monetary control and
in competition without altering the diversified
financial structure that now serves the country..."

A copy of the draft legislation and transmittal letter to Congress
is attached.
- 0 -

CHAIRMAN OF THE BOARD OF GOVERNORS
FEDERAL RESERVE SYSTEM
Washington, D. C. 20551

Dear Mr. Chairman:
The Board of Governors herewith submits for Congressional
consideration legislation that would extend reserve requirements set
by the Federal Reserve System to nonmember institutions— commercial
banks, mutual savings banks, savings and loan associations and the
like— to the extent that such institutions issue demand or other
types of deposits that perform a checking account function. The
proposed bill also makes certain other revisions in related Federal
Reserve powers, including a widening of the permissible range of
reserve requirements and expanded authority for the Federal Reserve
Banks to lend directly to nonmember institutions encompassed by the
extended reserve requirement system. The Board strongly recommends
adoption of the proposed legislation.
The purposes of the proposed legislation are to make the
nation's monetary system more responsive to Federal Reserve .actions,
to facilitate better management of money and credit, to provide a
more equitable system of reserve requirements for financial institu­
tions offering similar deposit services, and to permit Federal Reserve
credit assistance to a broader range of financial institutions when
and as they come under unusual liquidity pressures. At the same time,
it should be noted that the bill does not require membership in the
Federal Reserve System on the part of State commercial banks or other
nonmember institutions, nor does it contemplate any change in present
supervisory arrangements.
Background
The principle that underlies the proposed legislation is
simple and straightforward— namely, that equivalent cash reserve
requirements should apply to all deposits that effectively serve as
a part of the public's money balances, whether held at member banks,
nonmember banks or other financial institutions. Recent growth of
nonmember banks and recent efforts by nonbank depository institutions
to evolve new arrangements for money transfers make adoption of this
principle a matter of some urgency.

-2Proposals for uniform reserve requirements are not new.
Comparable reserve treatment for member and nonmember banks was embodied
in the recommendations of a Congressional committee chaired by Senator
Douglas in 1950, repeated in 1952 in the recommendations of a Congres­
sional committee chaired by Congressman Patman, endorsed by the Commis­
sion on Money and Credit in 1961, reaffirmed by the President's Committee
on Financial Institutions in 19^39 and urged again in the 1971 report
of the President’s Commission on Financial Structure and Regulation.
Since I96U the Board has repeatedly urged the application
of reserve requirements set by the Federal Reserve to nonmember banks
as well as member banks. In 1970 the Board requested that such reserve
requirements be placed on deposits subject to withdrawal by check at
all financial institutions. By 1972 the rapid evolution of the finan­
cial system made it clear that reserve requirements set by the Federal
Reserve would need also to be extended to so-called NOW (negotiable
order of withdrawal) accounts, which serve a function similar to demand
deposits.
A main benefit to be derived from the legislation proposed
by the Board is that it would buttress the basic role of reserve
requirements in the functioning of monetary and credit policy. Before
the Federal Reserve System was founded, reserve requirements were imposed
by legislation at the national and State levels as a means of protecting
bank liquidity. That philosophy was reflected in the original structure
of reserve requirements established for Federal Reserve member banks.
Higher requirements were set for reserve city banks than for country
members, and still higher requirements were imposed on central reserve
city banks. Vestiges of that initial structure remain, even today.
Required reserves, however, have not proved in practice to be
an important source of operating liquidity for banks, except as they can
be used within the weekly reserve accounting period to absorb large
fluctuations in check clearings. The reserves required to back deposits
cannot be withdrawn to finance a rise in loan demand, and they are avail­
able to supply only a small portion of the funds needed to accommodate
deposit losses. The essential function of reserve requirements today
is not to provide liquidity, but to serve as a fulcrum for monetary policythat is, to provide a known and controllable base through which the reserve
supplying and reserve-absorbing actions of the Federal Reserve can affect
the supply of money and credit.
To achieve good management over the supply of money and credit,
reserve requirements must be met by holding assets which are outside the
payments stream and whose aggregate volume is under the control of the
Federal Reserve. Whatever their role may be in protecting bank liquidity,
the reserve requirements set by the various States do not meet this test.

-3State-determined reserve requirements on nonmember banks
vary from one jurisdiction to another, ranging for net demand deposits
around the level of reserve requirements set by the Federal Reserve.
More important, however, is the form in which these reserves are held.
State requirements can be satisfied not only by the holding of cash
but also in a number of other ways— for example, by holding deposits
with other banks or by holding interest-bearing securities. Holdings
in the last two forms do not contribute to the monetary policy func­
tion of reserves, since the funds so used remain available to finance
additional deposit and credit expansion. When a nonmember bank sat­
isfies all or part of its State reserve requirement by holding deposits
at a member bank, that member bank is of course required by the Federal
Reserve to hold cash reserves at a Federal Reserve Bank or in the bank
vault against these deposits in the same way as for any of its deposits.
But, in this case, the size of cash reserve held by the member bank is
quite small relative to the initial deposit at the nonmember bank. The
minor degree to which deposits in nonmember institutions are indirectly
backed by reserves that satisfy reserve requirements of the Federal
Reserve— as well as the lack of uniformity in reserve requirements a­
mong the States— complicates the task and reduces the precision of
monetary control. Thus, the principal thrust of the proposed legis­
lation is to change the form in which nonmember banks may hold their
reserves— that is by meeting Federal Reserve regulations with respect
to vault cash and reserve balances held with Federal Reserve Banks.
The task of monetary policy is complicated because shifts
in deposits between member banks and nonmember institutions alter the
relationship between reserves under the control of the Federal Reserve
and the nation's deposits. For example, if the Federal Reserve is
attempting to restrain monetary growth during an inflationary period,
it will be providing bank reserves more slowly. If the public's
preferences for deposits at nonmember institutions as compared with
member banks were unchanged, the increase in the nation's bank depos­
its and money supply would be about in line with the slower growth in
bank reserves. But if the public is at the same time shifting depos­
its into nonmember banks— as has often occurred, and to a large and
unpredictable extent— there would be a greater monetary expansion than
desired. This would happen because deposits at nonmember institutions
require less cash reserves than at member banks, and thus, the total of
deposits that could be supported by the available total of cash reserves
would be enlarged.
The growing dimension of this problem can be indicated
statistically. Since i960 the demand deposit component of the nation's
money supply held at nonmember banks has grown by 16b per cent, while
such deposits held at member banks have grown by only 6l per cent. By
the end of 1973, about 25 per cent of demand deposits in the money
supply were held at nonmember banks.

-kNot only are the demand deposits at nonmember hanks growing
more rapidly than at member banks, but the available evidence indicates
that deposit growth at nonmember banks has varied much more from year
to year than at member banks. This is shown in the attached Table 1.
The more erratic growth rates at nonmember banks compound the diffi­
culties of monetary control under the prevailing reserve structure.
The net increase in the number of nonmember banks is shown
in Table 2. Overall since I960, about 750 banks have left the Federal
Reserve System through withdrawal or mergers. About lUO State-chartered
banks have elected to join the System since i960. Just over 1,700
others receiving new State charters chose to remain outside the System.
The increase in relative importance of both the number of nonmember
banks and their deposit holdings has accelerated since 1968, with growth
particularly rapid in the past three years.
The main reason for this trend toward avoidance of Federal
Reserve membership is the earnings loss that banks conclude they suffer
in meeting Federal Reserve reserve requirements. Banks must forego
earning assets to build up a reserve balance in the Federal Reserve.
That reserve balance pays no interest, although member banks do receive
some services from the Federal Reserve. The increase in relative impor­
tance of both the number of nonmember banks and their deposit holdings
has accelerated since 1968, with growth particularly rapid in the past
three years.
The potential development at thrift institutions of savings
accounts with transfer features similar to checking accounts poses a
new risk of slippage in monetary control. In 1973, experimentation
with NOW accounts was authorized by the Congress under certain regu­
latory conditions in two States. These accounts in important degree
are capable of substituting for demand deposits, since, unlike ordinary
savings or time accounts, depositors can make payment to third parties
on the basis of withdrawals in the form of transferable or negotiable
instruments. It may well come to the point where the average house­
holder makes a sizable share of his ordinary payments through these ac­
counts. Under present law, these accounts are not subject to reserve
requirements set by the Federal Reserve, except at member banks. But
in the two States affected, all kinds of depository institutions are
authorized to issue these accounts.
Recent trends in nonmember demand deposits and in the develop­
ment of NOW accounts surely presage a continued, and perhaps accelerated,
growth of money-type deposits at nonmember financial institutions. No
one can be certain at what exact point this growth will make control over
monetary aggregates ineffective, but erosion of the reserve base progres­
sively weakens the reliability of our present monetary instruments.
The proposed legislation extends reserve requirements set by
the Federal Reserve only to accounts which are directly employed in
making money payments— that is, to demand deposits and to savings
accounts with third party payment features. The proposal does not

-5 -

reconimend applying Federal reserve requirements to time and savings
deposits other than NOW accounts. These deposits do in some degree serve
a money<-like function, but they are not highly active deposits. Also,
under present conditions, there do not appear to be frequent, or largescale, shifts of funds back and forth between demand and time (or savings)
accounts. Shifts among demand deposits, NOW accounts, and other time deposits
would become more prevalent in the future, however.
The proposed legislation is not intended to alter the existing
chartering options for banking institutions, to favor or disadvantage
different types of institutions, or to change the balance among supervi­
sory authorities. State-chartered institutions may continue either to join
the Federal Reserve System or not, as they choose. Whether they do or do
not--and it is anticipated that many would remain outside the System--they
would become subject to reserve requirements set by the Federal Reserve on
demand deposits and on NOW and similar savings accounts.
Thus, the specific proposals have been drawn in such a way as to
achieve more precision in monetary control and more equity in competition
without altering the diversified banking and financial structure that now
serves the country. Key specific proposals, and their purposes, are indi­
cated below.
Provisions of the proposed legislation
Apart from exemptions of importance to small nonmember insti­
tutions,
the bill proposes that every institution receiving demand deposits
be required to maintain reserves as determined by the Board of Governors
of the Federal Reserve System in a ratio of not less than 5 per cent nor
greater than 22 per cent of such deposits. With regard to interest-bearing
deposits from which the depositor is allowed to make withdrawals by negoti­
able or transferable instrument, the reserve requirement range would be from
3 per cent to 20 per cent, as determined by the Board.
Institutions covered would include member and nonmember banks
and savings and depository institutions generally. Also included would be
U. S. located, foreign-owned banking institutions that accept demand deposits.
This would encompass institutions chartered under State or Federal law and
owned by foreign individuals or by foreign banks and U. S. branches of foreign
banks. All of these institutions would be required to hold reserves on demand
deposits or NOW accounts at Federal Reserve Banks or in the form of vault cash,.
The proposed range of reserve requirements for demand deposits
is slightly wider than the present range of requirements permitted by law.
The present range of net demand deposits is from 7 per cent to 22 percent.

-6-

The Board’s effective reserve requirements are currently graduated by size
of deposit, so that smaller banks have lower reserve requirements than larger
banks with generally more active accounts.
A wide range within which the Board can set reserve require­
ments permits maximum flexibility in the use of the reserve requirement
instrument. The structure of reserve requirements can be more readily keyed
to the size of bank, with reserve requirements graduated by size of deposit.
Moreover, with reserve requirements applicable to both member and non­
member institutions, it would be practical for changes in reserve require­
ments to be utilized more frequently as an instrument of policy. This in­
strument has the advantage of permitting monetary policy to affect the re­
serve position of all banks immediately and thus to attain a prompt change
in bank credit availability. In the past, use of the reserve requirement
instrument has been quite limited, in part because it applied only to mem­
ber banks and changes would therefore tend to distort existing competitive
relationships between member and other banks.
The lower range of reserve requirements proposed for savings
accounts with third-party transfer privileges would permit lower reserve
requirements on these accounts than on demand deposits with full checking
account powers. Whether there should be such a reserve requirement differ­
ential, and the extent of it, would depend on experience with NOW accounts
and, in particular, with the degree to which they begin to assume the
function of active money. At present, the Federal Reserve cannot set
reserve requirements on such accounts at nonmember institutions. Reserve
requirements on NOW accounts at member banks in the two States where they
currently can be offered are the same as the reserve requirement on ordi­
nary savings deposits at member banks.
The Board recognizes that uniform reserve requirements may impose
some burden on nonmember institutions, depending on the level at which
requirements are set and on the extent to which they are not satisfied by
existing vault cash holdings. This is so because under the proposed legis­
lation, more of the assets of such institutions may need to be held in non­
interest-bearing form.
In recognition of this possible impact on the earnings of nonmember
institutions, the legislation includes a provision which effectively exempts
the first $2 million of the total of net demand deposits and NOW accounts
at these institutions from reserve requirements set by the Federal Reserve.
For nonmember banks, which hold sizeable amounts of time and savings deposits
in addition to their demand accounts, the average size of institution below
which there will be a total exemption from reserve requirements set by the
Federal Reserve is on the order of
million. Nonmember institutions this
small are very numerous, but they hold so little of the nation’s demand
deposits (only about 2-1/2 per cent) that their exemption from reserve
requirements of the Federal Reserve would not be a significant handicap for
monetary policy.

-7Given this exemption provision, only about 38 per cent of
present nonmember banks would be subject, under the proposed legislation,
to reserve requirements that exceeded their own vault cash holdings. Assuming
prevailing reserve requirements of the Federal Reserve on demand deposits,
the excess of required reserves over vault cash for all nonmembers taken to­
gether is estimated to aggregate about $2.3 billion, or less than l-l/2 per
cent of their total resources.
As a further measure to ease any burden on nonmember financial
institutions from the transition to uniform requirements, the required
reserves on demand deposits over $2 million existing at the time of
enactment of the legislation would be phased in over a Ij-year period-at the rate of 20 per cent of the total requirement per year, so that
by the fifth year the bank would be meeting the full reserve require­
ment. Any increase in deposits above those existing at time of enact­
ment would, however, be immediately subject to the full reserve require­
ment. The latter provision is essential because it would promptly permit
more effective control by the Federal Reserve over the rate at which the
nation's money supply increases.
Nonmember institutions and their communities would also benefit
from a provision that permits Federal Reserve credit to be made available
to institutions that maintain reserves with Federal Reserve Banks, subject
to such limitations as the Board may by regulation prescribe. Under
present law, credit to nonmembers is extended only in highly unusual cir­
cumstances, and under restrictive conditions as to the type of collateral
that may be accepted by the Federal Reserve Bank. The proposed legislation
would make it possible for nonmember institutions to have greater access to
the Federal Reserve discount window, particularly at times of strong
pressures on their liquidity positions. In developing regulations governing
such borrowing, however, it would be fair and proper for the Board to give
recognition to the remaining differences in the amounts of reserves held
at Federal Reserve Banks as between member and nonmember institutions.
The legislation does not propose extension to nonmember institu­
tions of reserve requirements on time and savings deposits apart from
NOW accounts. The Board proposes, however, that the lower end of the
permissible range within which those requirements can be set for member
banks be reduced from the present 3 per cent to 1 per cent, with the
upper end remaining at 10 per cent. This change would provide needed
flexibility in the administration of reserve requirement policy, since
the reserve percentage for passbook savings accounts has been at the
permissible minimum for a number of years. Whether and to what extent the
Board might use this additional latitude would depend on the evolving
structure of the deposit system and the impact that various kinds of
deposits are judged to have on public behavior with regard to spending and
saving.

-8-

The legislation also contains a provision that would require
reporting of deposit liabilities by member and nonmember institutions
subject to reserve requirements set by the Federal Reserve. This information
is needed for monitoring purposes and will permit comparative analysis
of the various financial institutions as the proposed reserve structure goes
into effect.
I
and other members of the Board would be pleased to discuss
these proposals more fully with you and other members of your Committee.
I urge that you consider scheduling public hearings on the matter at an
early date.
Sincerely yours,

Arthur F. Burns
Attachments

Table 1

Member and Nonmember Demand Deposit Components of the Money Supply
Nonmember

Member

4th Quarter
Amount— ^
($ billions)

Growth— ^
(per cent)

1/3/
Amount--($ billions)
a

Growth— ^
(per cent)

1960

96.2

0.4

20. 1

1.3

1961

99.2

3. 1

21.0

4.2

1962

99. 2

0.0

2 2 .

1

5.3

1963

102.0

2.9

23.6

6. 6

1964

105.7

3.6

25.2

7. 1

1965

109.0

3. 1

27. 1

7.4

1966

110.4

1.3

28.2

3.9

1967

117.7

6.6

30.2

7. 1

1968

125.3

6.5

33.4

10.9

196$

128.1

2.2

36.5

9.0

1970

135.2

5.5

38.4

5.3

1971

142. 1

5.1

43. 1

12.3

1972

149.9

5.5

49. 1

14. 1

1973

154.6

3. 1

53.0

7.9

1/

Average of daily figures, not seasonally adjusted.

2/

Fourth quarter to fourth quarter annual rate of growth.

3/

Nonmember data are based on the ratios of member to nonmember deposits at Call dates and are
interpolated between such dates*

Table 2
Nonmember Banks Compared to All Commercial Banks

Nonmember
Per cent of
Banks
Number of All
Number
Commercial Banks
(As of December 31)

Per cent of Demand
Deposits in Money
Supply at Nonmembers
(December Average)

1960

7,300

54.2

17.2

1961

7,320

54.5

17.5

1962

7,380

55.0

18.1

1963

7,461

55.0

18.7

1964

7,536

54.8

19.4

1965

7,583

54.9

19.9

1966

7,620

55.3

20.2

1967

7,650

55. 8

20.3

1968

7,701

56.3

21.0

1969

7,791

57.0

22. 1

1970

7,920

57. 9

22.1

1971

8.056

58.4

23.3

1972

8,223

59.0

24.6

1973

8 , 261/
4

5 9 .6 1 /

25.4

U

As of Nover.ber 30.

D R A F T

A BILL
To modify reserve requirements of member banks of the Federal Reserve
System; to extend such requirements to other institutions that accept
demand deposits or certain other types of deposits; to authorize
Federal Reserve Banks to extend credit to such institutions; and
for other purposes.
Be it enacted by the Senate and House of Representatives
of the United States in Congress assembled,
Short Title
Section 1.

This Act may be cited as the Reserve Require­

ments Act of 1974.
Reserve Requirements for Member Banks and Other Institutions
Sec. 2.

The last sentence of subsection (b) of section 19

of the Federal Reserve Act (12 U.S.C. 461) is designated as paragraph
(6) and that part of such subsection (b) that precedes such sentence
is amended to read as follows:
"(b)(1) Every institution that receives demand deposits
shall maintain reserves against such deposits in such ratio, not less
than 5 per centum nor more than 22 per centum, as may be determined
by the Board.

-

1
1

(2)

2

­

Every institution that receives interest-bearing

deposits from which the depositor is allowed to make withdrawals by
negotiable or transferable instrument for the purpose of making
payments to third persons (referred to in this Act as 'negotiable
order of withdrawal accounts') shall maintain reserves against such
deposits in such ratio, not less than 3 percentum nor more than 20
per centum, as may be determined by the Board.
"(3)

Notwithstanding the foregoing provisions, for each

institution that is not a member bank or a corporation operating or
organized under section 25 or section 25(a) of this Act there shall
be no required reserves against the first $2 million of its net
demand deposits or of its negotiable order of withdrawal accounts
or of a combination of both.
1
1

(4)

Every member bank shall maintain reserves against its

time deposits and its savings deposits (other than negotiable order
of withdrawal accounts) in such ratio, not less than 1 per centum
nor more than 10 per centum, as may be determined by the Board.
"(5)

Every institution that receives demand deposits or

offers negotiable order of withdrawal accounts shall make reports
concerning its deposit liabilities and required reserves at such
times

and in such manner and form as the Board may require."
Credit to Nonmember Institutions
Sec. 3.

by adding

Section 13 of the Federal Reserve Act is amended

atthe end thereof the following new paragraph:

-3"Each Federal Reserve Bank may make advances to any nonmember
institution in its district that maintains reserves as prescribed by
section 19(b) of this Act with due regard to the proportion of its
assets held as such reserves and subject to such limitations as the
Board may by regulation prescribe."
Conforming Amendments
Sec.

Subsection (c) of section 19 of the Federal

Reserve Act is amended by striking "member
"institution"; by striking "of

bank" and inserting

which it is a member" and inserting

"of the Federal Reserve district in which its head office is located
or such other Federal Reserve Bank as the Board may designate"; and
by striking "such bank" each time it appears and inserting "such
institution".

Subsection (f) of that section is amended by striking

out "a member bank" and inserting "an institution" and by striking out
"such member bank" and inserting "such institution".

Subsection (g)

of that section is amended by striking out "member banks" and inserting
"institutions".

Section 11(e) of the Federal Reserve act, relating

to reclassification of reserve cities, is repealed.
Transition Provisions
Sec. 5*

With respect to any institution, other than a

corporation operating or organized under section 25 or section 25(a)
of the Federal Reserve A c t , that is not a member of the Federal Reserve
System and was not a member on

January -31, 197^# the reserve against its

base demand deposits otherwise

required by reason of the enactment

this Act shall be reduced by 80 per centum during the first calendar
year that begins after its enactment, 60 per centum during the second
year, Uo per centum during the third year, and 20 per centum during

of

-4the fourth year.

For the purposes of this section, the term

"base demand deposits" means that portion of an institution's demand
deposits that does not exceed the average daily amount of its demand
deposits during the calendar month immediately preceding the date of
enactment of this A c t .
Sec. 6.

This Act shall take effect on the first day of

the first calendar year beginning after the date of its enactment.

January 22, 1974
SECTION-BY-SECTION SUMMARY OF
RESERVE REQUIREMENTS BILL
PROPOSED BY THE BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM
SECTION 1.

Citation of Act

This section provides that the Act may be cited as the
Reserve Requirements Act of 1974.
SECTION 2.

Reserve Requirements for Member Banks and Other

Institutions.
This section would rewrite subsection (b) of section 19 of the
Federal Reserve Act, regarding reserves of member banks, with the
exception of the last sentence.

That sentence, which would be desig­

nated as paragraph (6) of such subsection (b), would remain unchanged;
it authorizes the Board of Governors of the Federal Reserve System
(the "Board") in effect to prescribe any reserve ratio, not more than

22 percent, with respect to any indebtedness of a member bank of the
Federal Reserve System to banks organized in foreign countries or dependendies or possessions of the United “
States.
The changes made in subsection (b) of section 19 of the
Federal Reserve Act preceding the last sentence would be as follows:
(1)

Paragraph (1) of the new subsection (b) would require every

"institution" that receives demand deposits to carry reserves against
such deposits in such ratio, not less than 5 per cent nor more than
22 per cent, as may be determined by the Board.

The present l a w } which

-2 -

applies only to member banks, requires such banks to maintain
reserves against demand deposits in such ratio

as shall be

determined by the Board by the affirmative vote of not less than
4 of its members, provided that for banks in reserve cities the
minimum and maximum ratios are fixed at 10 per cent and 22 per cent,
respectively, and for banks outside of reserve cities at 7 per cent
and 14 per cent, respectively.

Thus, as to reserves against demand

deposits the bill would make the following changes:
(a) Such reserves would be required to be maintained
not only by member banks but by any other institutions
that receive demand deposits, including nonmember banks,
mutual savings banks, savings and loan associations, and
U. S. branches of foreign banks.
(b) A single range of reserve ratios from 5 to 22
per cent that could be fixed by the Board would apply to
all institutions receiving demand deposits, in lieu of the
present range of from 10 to 22 per cent for member banks
in reserve cities and a range of from 7 to 14 per cent
for banks located elsewhere;
(c)

The present requirement that reserve ratios be

determined by the affirmative vote of not less than 4 members
of the Board would be omitted; action by a majority of a
quorum of the Board would be sufficient.
(2)

Paragraph (2) of the rewritten section 19(b) would require every

institution that receives interest-bearing deposits from which

-3 depositors may make withdrawals by negotiable or transferable instru­
ments in order to make payments to third persons to maintain reserves
against such deposits in such ratio, not less than 3 nor more than
20 per cent, as may be determined by the Board.

Existing law contains

no special requirement for reserves against deposits of this kind —
deposits that would be described by the bill as "negotiable order of
withdrawal accounts" and are now generally referred to as NOW accounts.
Such deposits, which in effect are savings deposits on which checks may
be drawn, have developed in Massachusetts and New Hampshire and were
specifically authorized for institutions in those States by Federal
legislation enacted in August of 1973.
(3)

Notwithstanding the authority given the Board to impose reserve

requirements on demand deposits and NOW accounts received by any insti­
tutions, paragraph (3) of the amended section 19(b) of the Federal
Reserve Act would prohibit the Board from requiring any reserves to be
carried by any nonmember institution (except Edge Act and Agreement
Corporations) against the first $2 million of its demand deposits or its
NOW accounts or a combination of both; in other words, the reserve ratio
for such deposits or accounts in the case of such a nonmember institution
would be zero per cent up to $2 million,
(4) Present law requires all member banks wherever located to carry
reserves against their time and savings deposits in a ratio of not less
than 3 nor more than 10 per cent as determined by the Board,

Paragraph

(4) of section 19(b) of the Federal Reserve Act, as rewritten by the
\

-4 bill, would substitute a range of from one to 10 per cent for such
deposits, other than NOW accounts, but reserves against such deposits
would continue to apply only to member banks; they would not be
extended to-nonmember institutions.
(5)

Paragraph (5) of the new section 19(b) of the Federal Reserve Act

would require every institution, member or nonmember,

that receives

demand deposits or NOW accounts to make reports concerning its deposit
liabilities and required reserves at such times and in such manner
and form as the Board may require.
SECTION 3.

Credit to Nonmember Insitutions.

This section of the bill would add a new paragraph to
section 13 of the Federal Reserve Act.

It v?ould authorize the Federal

Reserve Banks to make advances to nonmember institutions that maintain
reserves as prescribed by section 19(b) as revised by the bill, but
with due regard to the proportion of the assets held by any such insti­
tution as such reserves and subject to such limitations as the Board
may by regulation prescribe.

Present law authorizes Reserve Bank

advances to nonmember institutions only in emergency circumstances or.
subject to restrictive limitations as to security.
SECTION 4.

Conforming Amendmen t s .

Section 4 of the bill would make conforming amendments to
certain provisions of the Federal Reserve Act as follows:
Subsection (c) of section 19 of the Federal Reserve Act now
requires a member bank subject to the reserve requirements of that

- 5 section to hold

its reserves in the form of balances maintained by

it with the Federal Reserve Bank of which it is a member and currency
and coin held by the member bank (vault cash).

Since the amended

subsection (b) of section 19 would require nonmember institutions as
well as member banks to carry reserves against demand deposits and
NOW accounts, subsection (c) would be amended by substituting any
"institution" for any "member bank", by substituting "such institution"
for "such bank", and by changing the reference to the Federal Reserve
Bank "of which it is a member" to refer to the Reserve Bank "of the
Federal Reserve

district in which its head office is located or such other

Federal Reserve

Bank as the Board may designate"; the bill would make

no

change in the present requirement that required reserves be held in the
form of balances with Reserve Banks or in vault cash.
Subsection (f) of section 19 of the Federal Reserve Act
presently provides that a member bank's required balance with its
Reserve Bank may, under regulations and subject to penalties prescribed
by the Board, be checked against and withdrawn by the member bank to
meet existing liabilities.

The bill would amend this provision by sub­

stituting "institution" for "member bank".
Subsection (g) of section 19 of the Federal Reserve Act
presently permits member banks, in estimating their reserve requirements,
to deduct from their gross demand deposits the amounts of balances due
from other banks (except Reserve Banks and foreign banks) and cash items
in process of collection.

The bill would amend this provision by sub­

stituting "institutions" for "member banks".

- 6 Finally, the bill would repeal subsection (e) of section 11
of the Federal Reserve Act which authorizes the Board to add to the
number of cities classified as reserve cities, to reclassify reserve
cities, or terminate their designation as such.

This provision would

no longer serve any purpose since the amended section 19(b) would
omit any reference to reserve cities and would make no distinction
between institutions located in or outside such cities in providing
for reserve requirements.
SECTION 5.

Transition Provisions.

Section 5 allows every nonmember institution (except Edge Act
and Agreement Corporations) that receives demand deposits a period of
four calendar years after enactment of the bill in which to adjust to
the new reserve requirements with respect to such deposits, but only if
such institution was not a member of the Federal Reserve System on
January 31, 1974.

The average daily amount of the institution's

demand deposits during the calendar month preceding enactment of the
legislation would constitute its "base demand deposits".

Its reserves

against that portion of its demand deposits equal to this "base" amount
would be reduced by 80 per cent during the first year after enactment,
60 per cevt during the second year, 40 per cent during the third year,
and 20 per cent during the fourth year.

At the end of the four-year

period it would be required to maintain full reserves against all of
its demand deposits.

In the meantime, full reserves would be required

during that period against any increase in its demand deposits above
the particular institution's "base".

-7SECTION 6.

Effective D a t e .

The new law would become effective on the first day of the
calendar year following its enactment.

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