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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.