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RESERVE BAN K O F DALLAS DALLAS. TEXAS 75222 C irc u lar No. 76-158 November 23, 1976 A m e ric a n R e v o lu tio n B ic en ten n ia l PROPOSED INTERPRETATION OF SECTION 19 OF THE FEDERAL RESERVE ACT Member Bank Deposits with Nonmember Banks TO ALL MEMBER BANKS AND OTHERS CONCERNED IN THE ELEVENTH FEDERAL RESERVE DISTRICT: The Board of Governors of the Federal R eserve System is considering the adoption of an interpretation to the Federal R eserve Act to apply the term "deposit" as used in section 19(e) of the Act (12 U .S .C . 463) to include amounts arisin g out of certain check collection tran sactions in volving banks that a r e members of the Federal R eserve System and non member State banks and tr u s t companies. P rinted on the following pages is the B o ard's proposal as s u b mitted for publication in the FEDERAL REGISTER. Interested p ersons a r e invited to submit written comments concern ing the proposed interpretation to the S e c re ta ry , Board of G overnors of the Federal R eserve System, Washington, D .C. 20551, to be received not later than F e b ru ary 7, 1977. Comments should include a reference to Docket No. R-0062. Sincerely yours, T . W. Plant First Vice President This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) correspondent to p a rtic ip a te in th e col lection arran g e m en t since i t re ta in s some co rresp on d ent balances of th e respondent m em ber b an k a n d th e nonm em ber an d [Docket No. Rr-0062] since i t h a s available to i t th e “due fro m ” MISCELLANEOUS INTERPRETATION deductions fro m gross dem and deposits. Proposed Interpretation of Section 19 of T h e nonm em ber is a ttra c te d to th e a r the Federal Reserve Act Member Bank ran g em en t since it is able to cre d it m em Deposits with Nonmember Banks b er b an k deposits to th e correspondent’s T h e B oard of G overnors is consider acco u n t held by th e nonm em ber, thereby ing th e ad option of an in te rp re ta tio n to avoiding th e lim itatio n im posed by sec th e F ederal R eserve A ct to apply th e tio n 1 9 (e). In actu ality , th e correspond te rm "deposit” as used in section 19(e) e n t is m erely lending its n am e to th e of th e A ct (12 U.S.C. 463) to include a rran g e m en t fo r th e prim ary purpose am ounts arisin g o u t of c e rtain check col of o b taining artificial com pliance w ith lection tran sa ctio n s involving banks th a t th e section 19(e) lim itatio n s since th e balances th a t th e respo n den t m em ber a re m em bers of th e F ederal R eserve Sys b ank s hav e a t th e correspo n den t a re off tem a n d nonm em ber S ta te banks and s e t by th e co rrespondent’s acco u n t a t th e tru s t com panies. T h is actio n is proposed nonm em ber b an k in th is tran sactio n . u n d er th e B oard’s a u th o rity to define th e U nder th e proposed in te rp re ta tio n of term s used in section Id, to determ ine section 19(e), a m em ber b an k will be w h at sh all be deem ed a deposit a n d to regarded as keeping o n “deposit” w ith a prescribe su ch reg u latio n s as it m ay nonm em ber bank (1) th ose am ounts deem necessary to effectuate th e p u r ac tu ally m a in ta in ed in its acco u n t a t th e poses a n d p rev e n t evasions of section 19. nonm em W r bank, an d (2) those addi Section 19(e) 'provides th a t tio n al am o u n ts th a t a re credited to th e No member bank shall keep on deposit acco u nt of a n o th er b an k a t th a t n o n w ith any S tate bank or tr u s t com pany which m em ber to th e e x te n t th a t such am ounts Is n o t a member bank a sum In excess of ten a re determ in ed w ith resp ect to (a) th e percentum of its own paid-up capital and to ta l d o llar am o u n t of checks th a t th e surplus. m em ber h a s se n t to th e nonm em ber for T h e B oard h as reviewed a check col collection an d (b) th e am ou nt in (1) lection arran g em en t under w hich a n o n above. T h e B oard believes th a t section 19(e) m em ber b an k collects checks for m em b er banks (h erea fter "resp on d ents”). is intended, in p a rt, to re stric t m em ber U nder th a t arran g em en t, a t th e en d of b ank use of nonm em ber bank in stitu tio n s each business day, each respo n den t in fo r deposit tran sactio n s. T h e B oard re form s th e nonm em ber of th e to ta l of its gards th e proposed in te rp re ta tio n as incom ing tr a n s it le tte r. T he nonm em necessary in o rd e r to enforce th e n o n m em ber ban k im by b er does n o t deposit th e am o un t of th e section 19(e) deposit lim it o n posed ber of th e A ct m em tra n s it le tte r to th e resp on d en t’s ac banks. U nder th e a rran g e m en t described count, however. R a th e r, on a daily basis, above, a nonm em ber b an k m ay ob tain th e nonm em ber m onitors respondents’ co n trol over an u n lim ited am o u n t of cash le tte rs a n d cred its th e account of deposits o f m em ber banks, thereby a n o th e r la rg e m em ber b an k (h erea fter avoiding th e restrictio n of section 19(e) “co rresp on d ent”) th a t is m a in ta in ed a t by m erely creatin g acco u nting en tries on th e nonm em ber in th e am o u n t of th e to its books. ta l or some p ro p o rtio n of respo n den ts’ A ccordingly, p u rsu a n t to its au th o rity tra n s it letters. T he nonm em ber th e n in u n d e r section 19(a) of th e F ederal R e form s th e correspondent of th e credit. In serve A ct (12 U.S.C. 461) "to define th e tu rn , th e correspondent im m ediately term s used in th is section * * * to d e cred its th e respo nd en ts’ accounts m a in term in e w h at types of obligations, ta in ed a t th e co rrespondent a n d debits w h eth er Issued directly by a m em ber th e accou n t “due from ” th e nonm em ber. b ank or indirectly by an affiliate of a T h is procedure assures th a t in no case m em ber bank o r by any o th e r m eans, will th e nom inal balance of any respond and, regardless of th e use of th e pro e n t m ain tain ed a t th e nonm em ber ever ceeds, sh all be deem ed a deposit, an d to exceed th e 10 p ercen t sta tu to ry lim it prescribe such reg ulations as it m ay d e a n Im posed by section 1 9 (e). Because of th e necessary to effectuate th e purposes of size of th e m em ber co rrespondent p a r th is section a n d to p rev en t evasions ticip a tin g in th is arran g em en t, its de th e re o f” a n d section 19(e) (12 U.S.C. p o sit lim it w ith a nonm em ber b an d u n d er 463), th e B o ard proposes to ad o p t an section 19(e) is extrem ely large. T his col in te rp re ta tio n to define th e te rm “de lection arran g e m en t h a s been estab posit” fo r purposes of section 19(e) in lished w ith th e sta te d purpose of avoid o rd er to lim it th e am o u n t of deposits ing th e lim its im posed by section 1 9 (e). held by a m em ber a t th e nonm em ber T h e correspo n den t h as been p a rtic i bank. T h e B oard’s proposed in te rp re ta p atin g in th is check collection a rra n g e tio n read s as follows: m e n t w ith o u t in cu rrin g an y ad d itio n al reserve req u irem en t liability since section § 2 5 0 .1 5 0 M em ber b an k d ep osits ut n o n m em b er banks. 204.2(b) of th e B oard’s R egulation D p ro v id e s-th a t am o u nts in th e m em ber (a) T h e B oard h a s been requested to b an k ’s “due fro m ” accou nt m ay be de review a relatio n sh ip betw een a n o n d ucted from “gross dem and deposits” in determ in ing th e n e t deposits su b ject to m em ber b an k a n d a m em ber bank to de reserve requirem ents. T h e availability of term in e w h eth er th e m em ber b ank is th is deduction m akes it a ttra c tiv e fo r th e keeping "deposits" in excess of 10 per FEDERAL RESERVE SYSTEM [1 2 CFR Part 2 5 0 ] Extract From FEDERAL REGISTER, VOL. 41, NO. 220, F rid a y , November 12, 1976 p p . 50001 - 50002 c e n t of its p a id -in c a p ita l a n d surplus, se n t to th e nonm em ber for collection an d w ith th e nonm em ber, a violation of S 19 (b) th e am o u nt in (1) above, (e) of th e F ed eral R eserve A ct (12 U.S.C. » » * * * 463). T h a t section provides, in p a rt T o aid in th e co n sideration of th is No member bank shall keep o n deposit m a tte r by th e B oard, in tereste d persons w ith any S tate bank or tr u s t com pany which a re invited to sub m it rele v an t d ata, is n o t a member bank a sum In excess of ten views, o r argum ents. Any such m a teria l per centum of Its own paid-up capital and should be su b m itted in w ritin g to th e surplus. S ecretary, B oard of G overnors of th e (b> T h e relatio n sh ip is as follows: A F ed eral R eserve System , W ashington, nonm em ber b an k collects checks fo r one D.C. 20551. to be received n o t la te r th a n o r m ore m em ber banks (h e re a fte r “re F eb ru ary 7, 1977. R eferen ce sh a ll be sp on d ents”) . A t th e en d of ea ch business m ade to D ocket R-0062. Such m a te ria l day. each respo n den t info rm s th e n o n will be m ade available for inspection a n d m em ber of th e to ta l of its incom ing copying upon request, except as provided tr a n s it le tte r. T h e nonm em ber does n o t in | 261.6(a) of th e B o ard’s R ules R e deposit th e am o u n t of th e tr a n s it le tte r g ard in g A vailability of In fo rm atio n . to th e resp o n d en t’s account, however. B oard of G overnors of th e F ederal R a th e r, o n a d aily basis, th e nonm em ber Reserve System , Novem ber 3, 1976. m onitors resp on d ents' cash le tte rs an d T heodore E. Alliso n , credits th e acco un t of a n o th e r la rg e Secretary o f th e Board. m em ber b an k (h e re a fte r “correspond e n t”) th a t is m a in ta in ed a t th e n o n [FR Doc.76-33417 Filed 11-11-76:6:46 am i m em ber in th e am ou n t of th e to ta l or some proportion of respondents’ tra n s it le tters, an d in fo rm s th e correspondent of th e credit. I n tu rn , th e correspondent im m ediately credits th e respo n den t ac counts m ain tain ed a t th e correspondent an d debits th e account ‘‘due from " th e nonm em ber. T h is procedure assures th a t in no case w ill th e n om inal b alance of an y respo n den t m a in ta in ed a t th e n o n m em ber ever exceed th e 10 p ercen t sta tu to ry lim it im posed by section 1 9 (e). T his collection arra n g e m e n t h a s been established w ith th e sta te d purpose of avoiding th e lim its im posed by section 19(e). (c) Section 19(e) of th e F ederal R e serve Act was designed, in p a rt, to lim it m em ber b an ks’ deposit tran sa ctio n s w ith nonm em ber banks n o t regtilated by th e F ed eral Reserve. Because th e re la tio n ship described above perm its a nonm em ber bank to m a in ta in con tro l of deposits of a m em ber in excess of th e 10 p erc en t lim its found in § 19(e), th e relatio nship co nstitu tes a violation of th e in ten d ed purpose of th a t section of th e Act. T h ere fore, w here a m em ber b an k enters in to a check collection arra n g e m e n t w ith a nonm em ber, a s described above, th e B oard believes th a t section 19(e) requires su ch funds represen ted by checks being collected by a nonm em ber to be aggre gated w ith deposits o f th e m em ber d i rectly held a t th e nonm em ber, under th e B oard’s a u th o rity (12 U.S.C. 461) to d e term in e w h at sh a ll be deem ed a deposit an d to prescrib e regu latio n s a t i t m ay deem necessary to effectuate th e p u r poses of section 19 of th e F ed eral Reserve Act a n d p rev en t evasions th ereof, a n d in o rd er to effectively apply th e lim itatio n on m em ber ban k deposits w ith nom nem ber banks, th e B oard h a s determ in ed th a t a m em ber b an k w ill be regarded as keeping on “deposit” w ith a nonm em ber ban k (1) th o se am o un ts ac tu ally m a in ta in ed in its acco u n t a t th e nonm em ber b an k an d (2) tho se ad d itio n al am ounts th a t a re cred ited to th e acco u n t of a n o th e r b an k w ith th a t nonm em ber to th e e x ten t th a t such am o un ts a re determ ined w ith resp ect to (a) th e to ta l do llar am o u n t of checks th a t th e m em ber h as
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