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Federal R eserve Bank OF DALLAS T O N Y J . SA L V A G G IO F IR S T V IC E PR E S ID E N T August 26 , 1992 d a lle s , te x a s 75222 Notice 92-79 TO: The Chief Executive Officer of each member bank and others concerned in the Eleventh Federal Reserve District SUBJECT Final Amendments to Regulation D (Reserve Requirements of Depository Institutions) Concerning Computation and Maintenance of Reserve Requirements DETAILS The Federal Reserve Board has announced adoption of amendments to Regulation D (Reserve Requirements of Depository Institutions) to change the way depository institutions compute and maintain their reserve requirements. The amendments will • Shorten by two weeks the lag in counting vault cash toward required reserves in order to reduce the decline in required reserve balances early in the year; and, • Double the carryover allowance for reserve balances to the larger of $50,000.00 or 4% of required re serves plus required clearing balances. This will provide institutions with more flexibility in manag ing reserves from one maintenance period to another. The reduction in the lag in application of vault cash will be effective for the maintenance period beginning November 12, 1992, for weekly reporting institutions. Quarterly reporting institutions will be unaffected by the change. The carryover allowance will be effective in the maintenance period beginning September 3, 1992, for both weekly and quarterly reporting institu tions. ATTACHMENT A copy of the B o a r d ’s notice (Federal Reserve System Docket No. R-0750) is attached. For additional copies, bankers and others are encouraged to use one of the following toll-free numbers in contacting the Federal Reserve Bank of Dallas: Dallas Office (800) 333-4460; El Paso Branch Intrastate (800) 592-1631, Interstate (800) 351-1012; Houston Branch Intrastate (800) 392-4162, Interstate (800) 221-0363; San Antonio Branch Intrastate (800) 292-5810. This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) - 2 - MORE INFORMATION For more information, please contact the Reserve Maintenance Division at (214) 922-5646. Depository institutions in the Houston territory should contact the Reserve Maintenance Division in the Houston Office at (713) 652-1538. For additional copies of this B a n k ’s notice, please contact the Public Affairs Department at (214) 922-5254. Sincerely, FEDERAL RESERVE SYSTEM 12 CFR Part 204 [Regulation D; Docket No. R-0750] Reserve Requirements of Depository Institutions AGENCY: Board of Governors of the Federal Reserve System. ACTION: Final rule. SUMMARY: The Board has adopted two amendments to its Regulation D to facilitate the computation and maintenance of reserves. The Board is reducing the lag in the application of vault cash to reserve requirements in order to damp the seasonal variations in required reserve balances. Reducing the lag in application should decrease the probability that reserve balances will drop seasonally to levels that would cause depository institutions difficulty in managing their reserve balances. The Board is also increasing from the greater of 2 percent or $25,000 to the greater of 4 percent or $50,000 the amount of excesses or deficiencies in reserve balances that may be carried over from one reserve maintenance period to the next to give depositories greater flexibility in managing reserve balances. EFFECTIVE DATE: The reduction in the lag in application of vault cash will be effective for the maintenance period beginning November 12, 1992, for weekly reporting institutions. Quarterly reporting institutions will be unaffected by the change. The increase in carryover of reserve deficiencies or surpluses will be effective for surpluses or deficiencies in the maintenance period beginning September 3, 1992, for both weekly and quarterly reporting institutions. FOR FURTHER INFORMATION CONTACT: Patrick J. McDivitt, Attorney (202/4523818), or Lawranne Stewart, Attorney (202/452-3513), Legal Division; or Joshua Feinman, Economist (202/452-2841), Division of Monetary Affairs, Board of Governors of the Federal Reserve System. For the hearing impaired only, Telecommunications Device for the Deaf (TDD), Dorothea Thompson (202/4523544), Board of Governors of the Federal Reserve System, 20th and C Streets, NW., Washington, DC. SUPPLEMENTARY INFORMATION: On March 6, 1992, the Board published for comment revisions to its Regulation D, Reserve Requirements of Depository Institutions, 12 CFR part 204, concerning the computation and maintenance of reserves.1 The proposed changes, which concerned vault cash and carryover of reserve deficiencies and excesses, were intended to improve the ability of depository institutions to manage their reserve balances. Comments were due by April 6, 1992. The Board has reviewed the comments received on the proposals and is now adopting final amendments to Regulation D. 1 57 FR 8096, March 6.1992. 2 Summary of comments The Board received comments on the proposed rule changes from the following 39 commenters: Type Commercial B a n k s..................... Bank holding com panies........... Federal Reserve Banks ............ Trade a sso o a a o n s..................... Credit nnmn* Clearing h o u s e ...................... .. Savings and loans ..................... Number 20 8 5 2 2 1 1 Vault cash Currently, reserve requirements for depository institutions that report weekly are assessed against transaction accounts on a roughly contemporaneous basis,2 but offsetting vault cash is applied to the required reserves with a lag of two reserve maintenance periods. The Board proposed to amend Regulation D to reduce the lag in the application of vault cash to reserve requirements from two periods to one in order better to synchronize movements in required reserves and applied vault cash. The Board requested comment on whether a reduction in the lag in the application of vault cash would improve the ability of depository institutions to manage their required reserve balances and whether the proposal would have any adverse effects on their ability to predict required reserve balances. The Board also requested comment concerning the costs of implementing a shift in vault cash application, and whether these costs would be considered significant in relation to the benefits of the proposed amendment to the depository institution. Thirty-five commenters supported the proposal generally, with twenty-four of these commenters indicating that the proposed amendment would improve their ability to manage their reserve positions. Of the fourteen commenters that addressed the question of costs, all indicated that the costs to depository institutions associated with the shift would be minimal. Four of the commenters, while supporting the proposed shift in the application of vault cash, recommended that vault cash be applied to reserve requirements on a contemporaneous basis, that is, with no lag in application. The Board has not adopted this recommendation, as the lagged application of vault cash provides information needed to estimate the demand for reserves in the current maintenance period. Such estimates are essential to the conduct of open market operations. Two other commenters pointed out that the proposed amendment would not reduce the lag in the computation period for deposits other than transaction accounts, and indicated that if reserve requirements for 2 Weekly reporters generally are depository institutions with total deposits of $44.8 million or more. Required reserves for weekly reporters are assessed based on daily average balances for a period beginning on a Tuesday and ending on the second Monday thereafter. This period is known as the “ computation period.” Reserves against the daily average balances for the computation period must be maintained throughout the “ maintenance period,” which begins on the Thursday following the beginning of the computation period and ends on the second Wednesday thereafter. See 12 CFR 204.3(c). 3 nonpersonal time deposits and Eurocurrency liabilities were to be reimposed, depository institutions would have to maintain reserves based on three computation periods. At the time that the reserve ratios relating to nonpersonal time deposits and Eurocurrency liabilities were reduced to zero, however, the provisions of Regulation D providing for lagged maintenance of reserves against such deposits also were removed.3 Should these ratios be raised above zero in the future, the Board would determine the appropriate period for reserve maintenance on such deposits at that time. Another commenter suggested that depository institutions be divided into two groups, with the reserve maintenance period for each group ending on alternating Wednesdays. The Board previously considered alternating maintenance periods, but concluded that such a system was not operationally feasible. Although none of the commenters specifically opposed the proposed amendment, two commenters urged that reserve requirements be eliminated altogether. The Board does not have the authority to eliminate reserve requirements completely, as section 19(b) of the Federal Reserve Act establishes minimum reserve ratios for reserves on transaction account balances. Two other commenters expressed support for legislative proposals to permit interest to be paid on reserve balances. In view of the comments received, the Board has adopted the amendment to reduce the lag in the application of vault cash to meet reserve requirements from two periods to one period as a final rule. The amendment will be effective for the reserve maintenance period beginning on November 12, 1992.4 The delayed effective date has been provided in order to permit the necessary modifications to the reserve computation systems of depository institutions and the Federal Reserve Banks. Carryover of excesses or deficiencies The Board proposed an increase in the amount of reserve deficiencies or surpluses that a depository institution would be permitted to carry forward into the next maintenance period to the greater of 4 percent of required reserves and clearing balances5 or $50,000. Currently, carryover of reserve surpluses or deficiencies into the next maintenance period is permitted up to the greater of 2 percent of the sum of required reserves and required clearing balances or $25,000. In either case, the carryover is reduced by the amount of an institution’s required clearing balance penalty-free band, if applicable.6 In proposing the 3 55 FR 50540, Dec. 7, 1990. 4 For the reserve maintenance period beginning Thursday, November 12th and ending Wednesday, November 25th, depository institutions will apply to their reserve requirements vault cash from the computation period beginning on Tuesday, October 27th, and ending on Monday, November 9th. 3 Required clearing balances are set by agreement between a depository institution and its Federal Reserve Bank, based on clearing needs of the depository and its account overdraft record. Information on clearing balance requirements may be obtained from a depository institution’s local Reserve Bank. 6 The required clearing balance penalty-free band is currently equal to the greater of $25,000 or 2 percent of the depository institution’s required clearing balance. 4 amendment, the Board noted that reductions in reserve requirements have resulted in a decline in the maximum dollar value of the carryover, reducing the ability of a depository institution to cushion a given dollar shock to its reserve position late in maintenance period. The proposed amendment was intended to provide depository institutions with more flexibility in managing their reserve positions. The Board also proposed to amend the language of the carryover provision to clarify and more accurately reflect the method used to calculate the maximum carryover permitted. Thirty-seven commenters stated that they supported the Board’s proposed amendment. Of these thirty-seven, twenty-eight commenters indicated that the increase in permitted carryover would improve their ability to manage their reserve positions. No commenters opposed the amendment. Two commenters suggested that the Board consider further increases in permitted carryover. While the Board would consider a further increase if it appeared necessary to permit depository institutions to manage their reserve positions adequately, the Board believes that carryover generally must be limited in order to permit accurate estimates of required reserves. Another commenter suggested that the penalty-free band for clearing balances also be increased in order to provide similar benefits to depository institutions that maintain required clearing balances but are not bound by reserve requirements. Since these institutions hold no reserve balances, their ability to manage their reserve accounts has not been adversely affected by the recent cuts in reserve requirements. The Board believes that the current penalty-free band provides these institutions with adequate leeway in managing their clearing balance accounts. Based on the comments received, the Board has adopted the amendment as a final rule. For both weekly and quarterly reporting institutions, the amendment will be effective for the maintenance period beginning September 3,1992, with reserve surpluses or deficiencies from this maintenance period carried over into the maintenance period beginning September 17, 1992, based on the amended carryover provisions. Regulatory Flexibility Act Analysis Pursuant to section 605(b) of the Regulatory Flexibility Act (Pub. L. 96354, 5 U.S.C. 601 et seq.), the Board certifies that the amendments will not have a significant economic impact on a substantial number of small entities. The Board does not believe that the amendments would impose any additional reporting or recordkeeping requirements. To the extent changes in recordkeeping procedures may be required by the vault cash proposal, this will affect only weekly reporters, that is, depository institutions with total deposits of $44.8 million or more, and should enable these depository institutions to manage their required reserves more efficiently. Smaller institutions, which report only quarterly, will not be affected by the vault cash amendment. Notice of final rule A final rule generally is required to be published at least thirty days prior to its effective date. 5 U.S.C. 553(d). An exception is provided, however, for 5 a substantive rule that grants or recognizes an exemption or relieves a restriction. 5 U.S.C. 553(d)(1). Although the amendment relating to carryover has an effective date less than thirty days after publication of this notice, the amendment permits a depository institution to carry over larger reserve balance deficiencies or surpluses than previously permitted. Because the amendment provides depository institutions with greater relief from reserve requirements, a thirty-day notice is not required for the amendment to become effective. List of Subjects 12 CFR Part 204 Banks, banking, Federal Reserve System, Reporting and recordkeeping requirements. For the reasons set forth in the preamble, and pursuant to the Board’s authority under section 19 of the Federal Reserve Act, 12 U.S.C. 461 et seq., the Board is amending 12 CFR part 204 as follows: PART 204— RESERVE REQUIREMENTS OF DEPOSITORY INSTITUTIONS 1. The authority citation for part 204 continues to read as follows: Authority: Sections 11(a), 11(c), 19, 25, 25(a) of the Federal Reserve Act (12 U.S.C. 248(a), 248(c), 371a, 371b, 461, 601, 611); section 7 of the International Banking Act of 1978 (12 U.S.C. 3105); and section 411 of the Gam St-Germain Depository Institutions Act of 1982 (12 U.S.C. 461). 2. Section 204.3 is amended by revising paragraphs (c)(3) and (h) to read as follows: § 204.3 * * Computation and maintenance. * * * (c ) * * * (3) In determining the reserve balance that is required to be maintained with the Federal Reserve, the daily average vault cash held during the computation period that ended 3 days prior to the beginning of the maintenance period is deducted from the amount of the institution’s required reserves. * * * * * (h) Carryover of excesses or deficiencies. Any excess or deficiency in a depository institution’s account that is held directly or indirectly with a Federal Reserve Bank shall be carried over and applied to that account in the next maintenance period as specified in this paragraph. The amount of any such excess or deficiency that is carried over shall not exceed the greater of: (1) the amount obtained by multiplying .04 times the sum of the depository institution’s required reserves and the depository institution’s required clearing balance, if any, and then subtracting from this product the depository institution’s required clearing balance penalty-free band, if any; or 6 (2) $50,000, minus the depository institution’s required clearing balance penalty-free band, if any. Any carryover not offset during the next period may not be carried over to subsequent periods. * * * * * By order o f the Board o f Governors o f the Federal Reserve System, August 17, 1992. (signed) William W. Wiles William W. Wiles, Secretary of the Board. [FR Doc. 92-00000 Filed 00-00-92; 8:45 am] BILLING CODE 6210-01 -F
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