View PDF

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

federal

reserve

bank

DALLAS, T E X A S

of

Dallas

75222

Circular No. 72-212
September 21, 1972

PROPOSED AMENDMENT FOR RESERVE REQUIREMENTS
ON CERTAIN FOREIGN BORROWINGS
(Reduced. Reserve Requirement)

To All Banks, Other Creditors, and Others
Concerned in the Eleventh Federal Reserve District:

On September 7? 1972, the Board of Governors of the
Federal Reserve System proposed to reduce its reserve require­
ments on certain foreign borrowings of U. S. banks.
This amendment would involve primarily Euro-dollars and.
would reduce the reserve requirements from 20 percent to 10 per­
cent and it would eliminate the reserve-free bases now available
to banks subject to these requirements.
Interested persons are invited to submit written views
or information to the Secretary, Board of Governors of the
Federal Reserve System, Washington, D. C. 20551. Comments should
be received not later than December 6 , 1972.
A copy of the proposed amendment is enclosed.

Yours very truly,
P. E. Coldwell,
President

Enclosure

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

pf COWa V ^ = 5 r- '< /'/V

^
$

FEDERALRESERVE
press

release

For Immediate release

September 7, 1972

The Board of Governors of the Federal Reserve System proposed
today to reduce its reserve requirements on certain foreign borrowings
of U.S. banks, primarily Euro-dollars, from 20 per cent to 10 per cent
and to eliminate the reserve-free bases now available to banks subject
to these requirements.
Normally, the Board does not offer proposed changes in reserve
requirement percentages for public comment but is doing so in this case
because the proposal involves a restructuring of the reserve requirement
on Euro-dollar borrowings.
The proposal would simplify the regulations in this field and
provide parallel treatment for all member banks subject to reserve re­
quirements on Euro-dollar transactions, irrespective of their past use
of Euro-dollar borrowings.

The Euro-dollar reserve requirement was im­

posed in 1969 to moderate short-term dollar flows between the U.S. and
other countries.
Comment on the proposal should be submitted to the Board within
90 days.
The reserve requirement was set in 1969 at 10 per cent to the
extent that borrowings exceeded the daily average amount of foreign
borrowings in a specified base period (or, alternatively, a specified
percentage of total deposits)— the so-called reserve-free base.

The

regulation provided that as Euro-dollar borrowings were repaid a b a n k ’s
reserve-free base would be lowered automatically, and thus served to
moderate the outflow of repayments to foreign banking systems.

-2 -

In November of 1970, the reserve ratio was increased to 20
per cent to give banks an added incentive to preserve their bases at
substantial levels.

At that time, the Board indicated it would review

the reserve ratio as circumstances warranted.
At the time of the original action in 1969, liabilities of
U.S. banks to their foreign branches had more than doubled over a sevenmonth period and had reached $14.6 billion by July 30, 1969.

As monetary

conditions in the U.S. eased, U.S. banks repaid their Euro-dollar borrow­
ings, and repayments accelerated after mid-1970.

In recent months, such

borrowings have been relatively small, fluctuating in the range of $1
billion and $1-3/4 billion.

On Wednesday, August 30, gross liabilities

of U.S. banks to their foreign branches totaled $1-1/4 billion.
Elimination of the reserve-free base would have little practical
effect for most banks.

Only a few U.S. banks have continued to borrow

in the Euro-dollar market this year.
The proposal would amend the B oard1s Regulation I which governs
I
foreign activities of member banks, and Regulation D which governs reserves
of member banks.

A copy of the proposal is attached.

-0 -

TITLE 12— BANKS AND BANKING
CHAPTER II--FEDERAL RESERVE SYSTEM
SUBCHAPTER A — BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
[Regs. D, M]
PART 204--RESERVES OF MEMBER BANKS
PART 213--FOREIGN ACTIVITIES OF NATIONAL BANKS
Reserves Against Eurodollar Borrowings
Notice of Proposed Rule Making

The Board of Governors is considering amending Parts 204 and
213 to reduce reserve requirements against certain transactions usually
involving so-called nEurodollars"--deposits of U. S. dollars with banks
located outside the United States, including overseas branches of U.S.
banks.

The proposed amendments would apply a general reserve require­

ment of 10 per cent to liabilities of member banks upon Eurodollar
borrowings from foreign banks and to foreign branch deposits of member
banks that support transactions of such branches with the domestic
offices of their parent banks and credits extended by such branches to
United States residents.

This reserve requirement would replace a margin­

al reserve requirement of 20 per cent which applies to the excess of such
liabilities over reserve-free bases that are provided for under current
regulations.

The changes would eliminate such reserve-free bases and

would also eliminate a special exemption--affecting small amount? of
credit to U.S. residents— that had been granted for the purpose of
moderating the administrative burden on the banks in adjusting the
operations of their foreign branches to a new type of reserve require­
ment.

-2 -

The change would reduce the rate of reserve requirements to
the rate that prevailed before a special increase instituted in
November of 1970, and at the same time would simplify the regulations
and apply the reserve requirements equally to all member banks regard­
less of their past use of Eurodollar borrowings.
Normally the Board does not offer proposed changes in reserve
requirement percentages for public comment (see section 262.2(e) of the
Board*s Rules of Procedure),

in this case, the amendments are being pro­

posed for comment because they involve a restructuring of the reserve require­
ments,

To aid in the consideration by the Board of this matter,

interested persons are invited to submit relevant data, views, or
arguments.

Any such material should be submitted in writing to the

Secretary, Board of Governors of the Federal Reserve System, Washing­
ton, D, C.

20551, to be received not later than December 6, 1972,

Such material will be made available for inspection and copying upon
request, except as provided in § 261.6(a) of the Board*s rules regard­
ing availability of information.
To implement its proposal,

the Board proposes to amend

Regulations D and M in the following respects:
1.

Section 204.5(c) of Regulation D would be amended to

read as follows:
(c)
foreign banking offices,

Reserve percentages against certain deposits by
Deposits represented by promissory notes,

acknowledgements of advance, due bills, or similar obligations described

-3 £/
in § 204.1(f) to foreign offices of other banks,

or to institutions

the time deposits of which are exempt from the rate limitations of
Regulation Q pursuant to § 217.3(g) thereof, shall not be subject to
paragraph (a) of this section or to § 204.3(a)(1) and (2); but during
each week of the four-week period beginning

[

, 1973] and

during each successive four-week ("maintenance") period, a member bank
shall maintain with the Reserve Bank of its district a daily average
balance equal to 10 per cent of the daily average amount of such deposits
during the four-week computation period ending on the Wednesday fifteen
days before the beginning of the maintenance period.

An excess or

deficiency in reserves in any week of a maintenance period under this
paragraph shall be subject to § 204.3(a)(3), as if computed under
§ 204.3(a)(2), and deficiencies under this paragraph shall be subject
9/
to § 204„3(b).
2.

Section 213.7(a) of Regulation M would be amended to

read as follows:
(a)
the four-week period beginning [

Transactions with parent b a n k .

During each week of

, 1973] and during each

8/
Any banking office located outside the States of the United
States and the District of Columbia of a bank organized under
domestic or foreign law.
9j

The term "computation period" in § 204.(a)(3) and (b) shall, for
this purpose, be deemed to refer to each week of a maintenance period
under this paragraph.

-4 -

weelc of each successive four-week ('’
maintenance”) period, a member bank
having one or more foreign branches shall maintain with the Reserve Bank
of its district, as a reserve against its foreign branch deposits, a
daily average balance equal to 10 per cent of the daily average total of
(1)

net balances due from its domestic offices
to such branches, and

(2)

assets (including participations) held by such
branches which were acquired from its domestic
offices (other than assets representing credit
extended to persons not residents of the United
States)

during the four-week computation period ending on the Wednesday fifteen
days before the beginning of the maintenance period.
3.

Section 213.7(b) of Regulation M would be amended to

read as follows:
(b)

Credit extended to United States residents.

each week of the four-week period beginning [

, 1973] and

during each week of each successive four-week maintenance period, a
member bank having one or more foreign branches shall maintain with
the Reserve Bank of its district, as a reserve against its foreign branch
deposits, a daily average balance equal to 10 per cent of the daily
average credit outstanding from such branches to United States

During

-5 7/
residents

(other than assets acquired and net balances due from its

domestic offices) during the four-week computation period ending on
the Wednesday fifteen days before the beginning of the maintenance
period;

Provided,

That this paragraph does not apply to credit ex­

tended (1) to enable the borrower to comply with the requirements of

y
the Office of Foreign Direct Investments, Department of Commerce,
or (2) under binding commitments entered into before September 8, 1972.
By order of the Board of Governors, September 7, 1972.

______Michael A. Crppnap^n-----Michael A. Greenspan
Assistant Secretary of the Board

7/
(a)Any individual residing
(at the
time the credit is extended)
in any State of the United States or the District of Columbia; (b) any
corporation, partnership, association or other entity organized therein
("domestic corporation"); and (c) any branch or office located therein
of any other entity wherever organized.
Credit extended to a foreign
branch, office, subsidiary, affiliate or other foreign establishment
("foreign affiliate") controlled by one or more such domestic corpora­
tions will not be deemed to be credit extended to a United States resi­
dent if the proceeds will be used in its foreign business or that of
other foreign affiliates of the controlling domestic corporation(s).
8/
that

The branch may in good faith rely on
the funds will
be so used.

the borrowerfs certification

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