View original document

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

F ederal Reserve Bank of Dallas
DALLAS, TEXA S

75222

Circular No. 72-61
March 27, 1972
TO THE CHIEF EXECUTIVE OFFICER OF ALL BANKS
IN THE ELEVENTH FEDERAL RESERVE DISTRICT:

By the attached releases, the Federal Reserve System is
announcing for comment a further move in its effort to modernize and
improve the Nation's check-collection system. The proposals described
in these releases point the way toward faster payment of checks and,
thus, a more effective use of deposit balances for the general public.
This Regulation J change, to require payment for cash letters on day of
presentment, is smother in a series of programs designed to lead to the
ultimate reduction in checkwriting and faster transfers of credits.
Because the change in Regulation J will mean a reduction in
float, the Board of Governors of the Federal Reserve System is proposing
a simultaneous change in Regulation D governing reserve requirements of
member banks. Nationwide, the reduction in reserve requirements, re­
leasing about $2.9 billion, will more than offset the reduction in float
of about $2 billion. Of course, there will not be perfect equality of
offset for each member bank, partly because some banks have been keeping
higher reserves, and partly because some are already paying for cash
letters on the day of presentment. It is believed that the effect of
these two changes will make major headway toward equality of reserve
and float positions.
It is hoped that all banks in the Eleventh District will recog­
nize the need for payments system improvement and will actively support
the Board's actions.
Should you or your officers have questions concerning any
element of these proposals, please feel free to write or call collect
to any of our senior staff, especially the following:
Regulation J
Tony J. Salvaggio, Senior Vice President
T. E. Spreng, Assistant Vice President
Jack Clymer, Transit Coordinator
Regulation D
Robert H. Boykin, Senior Vice President and Secretary
E. W. Vorlop, Jr., Vice President and Controller
C. L. Vick, Operations Officer
Our branch officers stand ready to assist any bank in their respective
territories.

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

- 2 -

I hope that you will give these proposals your thoughtful con­
sideration. T. W. Plant, First Vice President, and I would be pleased
to talk with you and would particularly appreciate the opportunity of
discussing the matter if you have any major problems.
The Board of Governors has requested that comments on its
proposals be sent to the Board's offices in Washington, D. C., by May 15»
1972. I would appreciate receiving copies of any comments that you would
care to make because I am keenly interested in the ways these changes
might affect banking in the District.
Yours very truly,
P. E. Coldwell
President
Enclosures

BOARD STATEMENT

The Board of Governors of the Federal Reserve System today
proposed two changes in its regulations designed to make reserve require­
ments of member banks and Federal Reserve check-collection procedures
more equitable and more efficient.

The proposals are intended to be

neutral with respect to monetary policy.
The proposals would strengthen current efforts fostered by the
Federal Reserve and commercial banks to modernize the Nation's checkcollection system.

The Board proposed:

1.

To restructure reserve requirements applicable
to net demand deposits of Federal Reserve member
banks by instituting a system of requirements
based on the amount of such deposits, regardless
of the bank’s location.

2.

To require all banks served by the Federal Reserve
check-collection system--again, regardless of loca­
tion- -to pay for checks drawn upon them, in imme­
diately available funds, the same day the Federal
Reserve presents the checks for payment.

In announcing its proposals, which are being published for
public comment to assist the Board in appraising them, the Board said:
The proposals would facilitate the development of a more
efficient and less costly check-collection system, and at the same time
would increase equity among banks and enhance their ability to render
better financial service to the public.

These proposed changes would

involve putting all banks, city and country, member and nonmember, upon
the same payment basis as regards Federal Reserve check collection and
giving member banks of equal size equal reserve requirements.

- 2 -

The Board said that in many cases banks receiving earlier credit
under the new rules for checks due to them would be able to give their
customers' accounts earlier availability of funds.
In considering these proposals, particularly the proposed change
in the check-collection procedure, two things should be kept in mind:
First, the proposed new check-collection procedures
would eliminate approximately $2 billion in "float"
arising out of the present practice which involves
country banks paying for checks presented by the
Federal Reserve in funds that are not available
until the next business day after presentment of
the checks.
Second, the proposed revision of the check-collection
schedules in an integral step in the movement being
fostered by the Federal Reserve, in cooperation with
the commercial banking system, to increase the effi­
ciency of the payments system in the face of the
rapidly rising volume of checks.
The present system results in some individuals, businesses,
and banks having to wait longer than others to receive credit for funds
beingtransferred to them
ble basis

by check.

This is not an efficient and equita­

for an improved payments system moving in the direction of

the

transfer of funds by electronic means.
By itself, the proposed change making all banks liable to
immediate effective payment for their checks upon presentment would
reduce the reserves available to the banking system as the base of their
lending activity.

Consequently, the Board has linked this proposal to

another desirable reform, changing the structure of reserve requirements
for member banks from a geographical basis to one placing equal reserve
requirements upon banks of equal size, regardless of location.
These proposals--the restructuring of reserve requirements and
improvements in the check-collection procedures--if implemented as proposed,

- 3 -

would result initially in a net release of reserves to the banking
system, but it is intended that Federal Reserve open market operations
would be adapted as needed, when the proposals are put into effect, to
neutralize the effects on monetary policy.
Effects of these actions on the reserve positions of individual
banks will vary and there may be some transitional imbalances.

The Board

expects that discount officers at the Reserve Banks will be responsive to
requests of any member banks temporarily in need of credit to tide them
over a period of adjustment to the new check-collection basis.
The changes being proposed by the Board are significant not
only in their direct effects, but also as a means to the larger end of a
more efficiently functioning banking system, able to provide the public
with better and more economical services.
The Board's proposals are described separately in attached news
releases and Federal Register documents.
the Board by May 15.

-

0

-

Comment should be submitted to

For use in morning papers
Tuesday, March 28, 1972

March 27, 1972

RESERVE REQUIREMENTS
(REGULATION D)

The Board of Governors of the Federal Reserve System today
proposed a restructuring of reserve requirements applicable to the net
demand deposits of member commercial banks.

Comments on the proposal

should be submitted to the Board by May 15.
The proposed revision would modernize the system of reserve
requirements in the light of banking patterns that have evolved over
the last 25 years.

Under the plan, reserve requirements on net demand

deposits would be based on the amount of such deposits held by a member
bank without regard to its location in any particular city.

No change

is planned in the application of reserves on time and savings deposits,
commercial paper issued by bank affiliates, or Euro-dollar borrowings.
The proposal to restructure reserve requirements was made
simultaneously with another proposal to amend the Board's Regulation J
relating to the check-collection process.

Both proposals would be made

effective at a date to be determined later.

The proposal affecting check-

collection procedures is described in a separate news release.
The restructuring plan is intended to produce a more consistent
and equitable system for computing reserves and would apply the following
ratios to all member banks:
Amount of Net Demand Deposits

Reserve Percentages Applicable

First $2 million or less

8 percent

Over $2 million to $10 million

10 percent

Over $10 million to $400million

13 percent

Over $^00 million

17 l/2 percent

- 2 -

At present, member banks are divided into two classes for the
purpose of computing reserve requirements on demand deposits.

The ratios

for reserve city banks--typically the large banks in the large cities—
are currently 17 percent on the first $5 million of demand deposits and
17 1/2 percent on demand deposits exceeding $5 million.

The reserve

ratios for all other member banks--often called "country banks"— are
currently 12 l/2 percent and 13 percent, respectively.
The proposed ratios would result in a net reduction of required
reserves totaling about $2.9 billion if no other action were taken by the
Board.

However, the Board said that if the proposal is adopted, this re­

duction in required reserves would be timed to coincide approximately
with the absorption of reserves that would result from the companion
action--also proposed today--to require all banks to pay in immediately
available funds for checks drawn on them on the same day such checks are
presented for payment by the Federal Reserve.

This latter action would

reduce available reserves by approximately $2 billion.

Other improve­

ments in the check-collection process, such as the faster movement of
checks between Federal Reserve Districts, the establishment of Regional
Check Processing Centers, and the greater use of the Federal Reserve
communications system for the wire transfer of funds, will also reduce
the availability of reserves as the improvements are implemented.

Con­

sequently, the over-all effect of check-collection improvements on reserve
availability should be considerably greater than $2 billion with the
greatest share stemming from the change in Regulation J proposed today.
These proposals--the restructuring of reserve requirements and
improvements in check-collection procedures— if implemented as proposed,

- 3 -

would result initially in a net release of reserves to the banking system,
although the effects of these actions on the reserve position of indivdual
banks will vary.

It is intended, however, that Federal Reserve open

market operations would be adapted as needed, when the proposals are
put into effect, to neutralize the effects on monetary policy.
Each bank that is a member of the Federal Reserve System is
required to keep reserves equal to a prescribed percentage of its deposits.
Reserves may be held by its Federal Reserve Bank or as cash in its vault.
For example, if a bank receives a demand deposit of

$100 and is required

to hold a 13-percent reserve, it must add $13 to its reserves and is free
to lend or invest the remaining $87.
An integral part of the over-all restructuring plan is a change
in the designation of "reserve city banks."

Under the plan, a bank would

become a reserve city bank automatically whenever the average of its net
demand deposits for the reserve period rose above $1+00 million.
Under existing law, the Board has authority to set reserve
requirements against demand deposits between 7 and l4 percent for "country
banks" and between 10 and 22 percent for reserve city banks.
The Board normally does not offer proposed changes in reserve
requirements for public comment.

It is doing so in

of the basic structural nature of the plan.

this case because

The proposal would take the

form of an amendment to the Board's Regulation D, which governs the re­
serve requirements applicable to member banks.

-

0

-

FEDERAL RESERVE SYSTEM
(12 CFR Part 20k)
(Reg. D)
RESERVES OF MEMBER BANKS
Reserve Requirements

The Board of Governors proposes to adopt a system of reserve
requirements against the demand deposits of all member banks based on
the amount of such deposits held by a member bank.
The purpose of the proposal is to adopt a more equitable system
of reserve requirements.

Under it, reserve percentages would be based on

a member bank's deposits without regard to the location of the bank.
The proposal is not intended to signal any change in monetary
policy.

The net anticipated effect of the proposal, if adopted, would

be an over-all reduction in reserve requirements.

The effect of the

resulting increase in funds available for use by member banks would be
substantially offset by adoption of the Board's proposed amendment to
Regulation J, also announced today.

It is intended that Federal Reserve

open market operations would be adapted as needed, when the proposals are
put into effect, to neutralize the effects on monetary policy.
An integral part of the proposal is a redefinition of the term
"reserve city."

Such redefinition is essential to eliminate major in­

equities in the present system of reserve requirements under which several
large "country banks" are required to maintain less reserves than com­
petitor reserve city banks with comparable size and characteristics.
Under the proposal, a city would become a reserve city auto­
matically as the net demand deposits of a member bank with its head office

- 2 -

located in that city rise above $400 million.

Unless a Federal Reserve

office is located in that city, it would cease to be a reserve city if
no member bank headquartered in the city has average net demand deposits
of that amount.

The amount of reserves that a bank having deposits of

$U00 million or less must maintain would not be affected by the bank
being located in a city that is classified as a reserve city.

Permission

to carry reduced reserves would be extended to all banks located in a
reserve city having deposits of $400 million or less.
Normally, the Board does not offer proposed changes in reserve
requirement percentages for public comment.
Rules of Procedure.)

(See § 262.2(e) of the Board's

However, because of the basic structural nature of

this proposal, the Board believes that comment by the public can be help­
ful.

Accordingly, to aid in the consideration by the Board of the matter,

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

Any such material should be submitted in writing to the Secretary,

Board of Governors of the Federal Reserve System, Washington, D. C.
to be received not later than May 15, 1972.

20551>

Such material will be made

available for inspection and copying upon request, except as provided in
§ 261.6(a) of the Board's Rules Regarding Availability of Information.
To implement its proposal, the Board proposes to amend Regula­
tion D (12 CFR 20U) in the following respects:
1.
2.
follows:

Section 20^.51 through § 20U.57 would be revoked.
Section 2 0 k . 2 ( a ) ( 2 ) and (3 ) would be amended to read as

- 3 § 20U.2

Computation of reserves.
*

*

*

(2) A member bank in a reserve city is deemed to have a char­
acter of business similar to banks outside of reserve cities whenever
it has average net demand deposit balances of $1+00 million or less for
the second computation period preceding the current reserve maintenance
period.

The Board grants permission to any such bank or banks to main­

tain for the current period the reserve balances that are in effect for
member banks not located in reserve cities.

Such permission and any other

permission granted by the Board to maintain reduced reserves is auto­
matically suspended for the current reserve maintenance period with
respect to any member bank in a reserve city that has average net demand
deposit balances of more than $1+00 million for the second computation
period preceding the current reserve maintenance period.

Any such bank

shall maintain for the current period the reserve balances in effect for
banks located in reserve cities.
(3) For the purposes of this part, each city having a Federal
Reserve office is a reserve city.

In addition, any city, town, village,

or other community, whether or not incorporated, is a reserve city for
a reserve computation period if it contains a head office of any member
bank that had average daily net demand deposit balances of more than
$1+00 million for the second computation period preceding the current
reserve maintenance period.
3.
read as follows:

Section 20l+.5(a) (l) (iii) and (2)(iii) would be amended to

-

§ 20k.5

k

-

Reserve requirements.
(a) Reserve percentages. Pursuant to the provisions of

section 19 of the Federal Reserve Act and § 20U.2(a) and subject to
paragraph (c) of this section, the Board of Governors of the Federal
Reserve System hereby prescribes the following reserve balances that
each member bank, of the Federal Reserve System is required to maintain
on deposit with the Federal Reserve Bank of its District:
(1) If not in a reserve city—
*

*

*

(iii) (a) 8 percent of its net demand deposits if its
aggregate net demand deposits are $2 million or less, (b) $160,000 plus
10 percent of its net demand deposits in excess of $2 million if its
aggregate net demand deposits are in excess of $2 million but less than
$10 million, or (c) $960,000 plus 13 percent of its net demand deposits
in excess of $10 million.
(2) If in a reserve city (except as to any bank located in
such a city that is permitted by the Board of Governors of the Federal
Reserve System, pursuant to § 20^.2(a)(2), to maintain the reserves
specified in subparagraph (l) of this paragraph)—
*

*

*

(iii) $51,660,000 plus 17 l/2 percent of its net demand
deposits in excess of $H00 million.
(12 U.S.C. 2U8(l) and U6l.)
By order of the Board of Governors, March 20, 1972.

(Signed) Tynan Smith
Tynan Smith
Secretary of the Board
[SEAL]

For use in morning papers
Tuesday, March 28, 1972

March 27, 1972

CHECK COLLECTION
(REGULATION J)

The Board of Governors of the Federal Reserve System today
proposed a technical change in its regulations governing the payment for
checks cleared through the Federal Reserve System.

Henceforth, all banks

would be required to pay in immediately available funds for checks drawn
on them.

The payment would be due on the same day the checks were pre­

sented for payment.
This change would make universal an already widespread practice
of prompt settlement for checks presented through the Federal Reserve
clearing system.

The great bulk of the dollar value of check transactions

is made through banks that are now, and have been for some years, on an
immediate payment basis.
In terms of its effects on bank customers, the proposed change
in check-collection procedures should enable more depositors to receive
earlier availability of funds being transferred to them by check.

Because

banks under the new procedures would be credited earlier for some checks,
a person or business depositing such checks could find it possible to make
earlier use of the funds.
The Board said that in many cases banks receiving earlier credit
under the new rules for checks due to them would be able to give their
customers' accounts earlier availability of funds.
The proposal would amend the Board's Regulation J, governing
collection of checks on behalf of the public by the Federal Reserve.

- 2 -

The affected checks would be those that are drawn on banks located
outside cities with Federal Reserve offices and collected through the
Federal Reserve System.

Such checks are estimated to be about 15 per­

cent of the dollar volume of all check transactions at present.

Thus,

approximately 85 percent of the dollar volume of check transactions
would be unaffected by the proposed change.
The proposal to amend Regulation J was made simultaneously
with another proposal to restructure the reserve requirements of Federal
Reserve member banks, relating reserve requirements applicable to demand
deposits to the size of those deposits.
fective at a date to be determined later.

Both proposals would become ef­
The proposal affecting reserve

requirements is described in a separate news release.
Interested parties are invited to submit comment on either or
both of the proposals to the Secretary of the Board not later than May 15.
The Board will appraise its proposals in the light of comment received.
The proposed change in Federal Reserve check-collection procedures
would:
--Put all banks on an equal footing as regards payments for checks
drawn on them.
— Make it possible, in certain cases, for individuals and businesses,
and others receiving payments by checks, to use amounts due them earlier than
at present.
--Facilitate efforts by the Federal Reserve, such as the establish­
ment of Regional Check Processing Centers, to increase the speed and efficiency,
and hold down the cost, of check processing and collection.

Any small sav­

ings per check are important as an average of 100 million checks are written

- 3 per business day.

This volume is expected to at least double by the end

of the decade.
--Drastically reduce--by approximately $2 billion daily average-the more than $3 billion daily average Federal Reserve float.

Such float

is, in effect, an advance to some banks for checks for which the Federal
Reserve has not yet received payment.

About $2 billion of float would be

eliminated by requiring all banks to make payment in immediately available
funds for their checks on the day of presentment.
Other improvements in the check-collection process, such as the
faster movement of checks between Federal Reserve Districts, the estab­
lishment of Regional Check Processing Centers, and the greater use of
wire transfers, will reduce Federal Reserve float further as these im­
provements are implemented.

Consequently, the over-all effect of check-

collection improvements on the amount of float in the form of uncollected
checks should be considerably greater than $2 billion.
The difference in check settlement practices arose in past years
due to differences in proximity of commercial banks to city clearing
facilities.

Most banks outside of such cities in effect have paid for

their checks on the day after checks were presented to them for payment.
The proposal to put all banks on an immediate settlement basis
has been made possible by the fact that in recent years modern accounting
and communications systems for the transfer of funds have made it entirely
feasible for all banks to pay for their checks immediately upon presentment.
Under the new procedures, banks would be permitted to pay for
their checks in any form satisfactory to a Federal Reserve Bank, so long
as the funds are available before the close of business on the day the
checks are presented for payment.

- b -

The Federal Reserve will facilitate such same-day payment by
presenting checks to banks for payment as early in the day as practicable.
The effect of the proposed change on depositors arises from
the fact that writing a check merely authorizes the checking account of
the writer to be charged for the amount of the check.

The transaction

is not completed until funds have actually been transferred from the
writer's account to the depositor's account.
When the check writer and the depositor have accounts in
different banks, the depositor may not actually be able to use the pro­
ceeds of the check he deposits until his bank has received the funds from
the other bank.

Of course, his bank may advance funds to him, antici­

pating payment later.

If it does not do so, he may have to wait several

days to receive funds while the check is being processed and cleared,
and until payment is actually received.
Thus, amendment of Regulation J to require all banks to pay for
checks presented to them by the Federal Reserve in immediately available
funds on the day of presentment can accelerate completion of check trans­
actions, because the sooner the check is collected, the sooner funds will
be available.

- 0 -

FEDERAL RESERVE SYSTEM
(12 CFR Part 210)
(Reg. J)
COLLECTION OF CHECKS AND OTHER ITEMS BY FEDERAL RESERVE BANKS
Payment of Cash Items Upon Presentment

The Board of Governors proposes to amend its Regulation J to
require banks— member and nonmember--to pay cash items presented by a
Federal Reserve Bank on the day of presentment in funds available to
the Reserve Bank on that day.

The Board anticipates that payment -will

be by debit to an account on the books of a Reserve Bank.
The proposal is designed to provide an arrangement for immediate
payment of checks presented by Federal Reserve offices and to promote
earlier availability of funds to depositors.

At present, commercial banks

in zones of immediate payment in and around cities with a Federal Reserve
office, a clearing house, or in areas served by Regional Check Processing
Centers are paying checks on the day of presentment, while other banks
make actual payment on the day following receipt of the checks.
The Reserve Banks follow the practice of presenting checks to
paying banks early in the day, often before the opening of business.
Until the mid-1960's many banks outside Federal Reserve cities paid for
these checks by drawing and dispatching a draft on the day of receipt of
the checks.

Remittance drafts were usually not received and collected

until the following day, resulting in a deferment of payment.
In recent years the use of modern accounting and communications
systems has led to payment of checks on the day of presentment.

Roughly

- 2 -

80 percent of the total amount of payments by paying banks on checks
presented by Reserve Banks is through direct charges to reserve accounts.
Now it is feasible to make universal the practice of paying in immedi­
ately available funds on the day of presentment.
In addition to being a major transitional step toward a more
fully automated payments mechanism, the Board’s proposal has three im­
mediate goals:
First, requiring payment on the day of presentment will eliminate
the long-standing inequities that operate to the disadvantage of banks
located in Federal Reserve office cities or in cities served by clearing
houses.

Until now, banks located outside of these cities have had an

additional day to invest funds owed to the collecting bank.
Second, checks drawn on country banks located in the same Federal
Reserve territory as depositing banks will be collected a day earlier.
Federal Reserve Banks will amend their operating circulars to provide that
such amounts will also be credited to depositing banks a day earlier.

The

Board expects that, in many cases, the depositing member bank will make the
credit received from its Reserve Bank available to its depositor at an
earlier time than under present practice.
Finally, for checks drawn on country banks located in other
Federal Reserve territories, a major component of Federal Reserve float
will be eliminated.
free advance.

Federal Reserve float is the equivalent of an interest-

It arises when the collecting bank is given credit on checks

for which the Federal Reserve Bank has not received payment.

Adoption of

the Board’s proposal would eliminate approximately 60 percent ($2 billion)
of Federal Reserve float.

- 3 -

To aid in the consideration of this matter by the Board, inter­
ested 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, Washington, D. C. 20551? to
be received not later than May 15, 1972.

Such material will be made avail­

able for inspection and copying upon request, except as provided in § 261. (a)
6
of the Board's Rules Regarding Availability of Information.
To implement its proposal, the Board is considering amending
Regulation J as follows:
1.
§ 210.9

Section 210.9(a) would be amended to read:

Remittance and payment.
(a) (l) Cash item. A paying bank becomes accountable for the

amount of each cash item received by it from or through a Federal Reserve
Bank at the close of the paying bank's banking day on which the cash item

y

was so received

if it retains such item after the close of such banking

day, unless, prior to such time, it pays or remits for the item as herein
provided.

Payment or remittance therefor shall be effected on such day

of receipt by:
(i) debit to an account on the books of a Federal Reserve
Bank; or

h f A cash item received by a paying bank shall be deemed to have been re­
ceived by the bank on its next banking day if the item is received under
one of the following circumstances: (l) on a day other than a banking
day for it, or (2) on a banking day for it, but (a) after its regular
banking hours, or (b) after a "cut-off hour" established by it in accord­
ance with applicable State law, or (c) during afternoon or evening periods
when it is open for limited functions only.

-

h

-

(ii) payment in cash; or
(iii) in the discretion of the Federal Reserve Bank, any other
form of payment or remittance:
Provided, That the proceeds of any such payment or remittance in any form
herein stated shall be available to the Federal Reserve Bank not later
than the close of the banking

day for such Federal ReserveBank on the

day on which such item was so

received by the paying bank. If the banking

day on which an item is received by a paying bank is not a banking day for
the Federal Reserve Bank from

-which the item was received,any payment

or

remittance made hereunder shall be effected on the banking day of both
such Federal Reserve Bank and such paying bank next following the day of
receipt of such item.

*

(2) Noncash item. A Federal Reserve Bank may require the paying
bank or collecting bank

to which it has presented, sent, or forwarded

any noncash item pursuant to § 210.7 to pay or remit for

such item in

cash, but is authorized, in its discretion, to permit such paying bank
or collecting bank to authorize or cause payment or remittance therefor
to be made by a debit to an account on the books of such Federal Reserve
Bank or to pay or remit

therefor in any of the following which is in a

form acceptable to such

Federal Reserve Bank: bank draft, transfer of

funds or bank credit, or any other form of payment or remittance authorized
by applicable State law.
(3)

Nonbank payor. A Federal Reserve Bank may require the non­

bank payor to which it has presented any cash item or noncash item pursuant
to § 210.7 to pay therefor in cash, but is authorized, in its discretion,
to permit such noribank payor to pay therefor in any of the following which

- 5 is in a form acceptable to such Federal Reserve Bank:

cashier's check,

certified check, or other bank draft or obligation.
2.

Section 210.12(a) would read:

§ 210.12 Return of cash items.
(a)

A paying bank that receives a cash item from or through a

Federal Reserve Bank, otherwise than for immediate payment over the
counter, and that pays or remits for such item as provided in § 210.9(a)
of this part shall have the right to recover any payment or remittance
so made if, before it has finally paid the item, it returns the item
before midnight of its banking day next following the banking day of
receipt or takes such other action to recover such payment or remittance
within such time and by such means as may be provided by applicable state
law:

Provided, That the foregoing provisions shall not extend, nor shall

the time herein provided for return be extended by, the time for return
of unpaid items fixed by the rules and practices of any clearing house
through which the item was presented or fixed by the provisions of any
special collection agreement pursuant to which it was presented.
(12 U.S.C. 248(i) and (o) and 3^2.)
By order of the Board of Governors, March 20, 1972.

(Signed) Tynan Smith
Tynan Smith
Secretary of the Board
[SEAL]

For use in morning papers
Tuesday, March 28, 1972

March 27, 1972

The Board of Governors of the Federal Reserve System today
issued the attached questions and answers relating to proposed changes
in the check-clearing process and the structure of reserve requirements.
These questions and answers are intended to supplement the Board's for­
mal announcements of these matters, also issued today.

-

0

-

March 27, 1972

CHECK COLLECTION
REGULATION J

1.

What is the legal responsibility of the Federal Reserve System for check
collection?
Congress has charged the Federal Reserve System with responsi­
bility for providing a nationwide mechanism for the transfer
of funds and collection of checks.

(See Federal Reserve Act,

Section 13, paragraph 1, and Section l6, paragraph lU.)
2.

What does the proposed amendment to Regulation J do?
Regulation J establishes the rules, including the time schedule
for payment and the availability of credits with respect to checks
and other cash items, under which the Federal Reserve Banks
collect checks deposited with one commercial bank and payable
at another such bank.

Under present arrangements, some banks pay for checks in im­
mediately available funds on the day they are presented for
payment by the Federal Reserve, while payments from other
banks are received a day or two days later.

The proposal

would require all payor banks to pay in immediately available
funds for all checks and cash items presented to them by the
Federal Reserve Bank.

The Federal Reserve Bank would thus be able

to speed up the availability of some credits to the depositing
bank.

- 2 -

3.

What is the reason for amending Regulation J?
To accelerate the settlement of transactions effected by
check and thus reduce Federal Reserve float and commercial
bank float as well.
Will there be a public benefit?
Yes.

The funds that are received by Reserve Banks on the days

of presentment will be made available to depositing banks, and
thus, in many cases, can be passed on to their individual, busi­
ness, and other depositors on that day.
5.

Would this change affect all payments?
Wo. Many banks are now meeting this requirement by paying in
immediately available funds through participation in clearing
houses and in regional check clearing arrangements operated
by the Federal Reserve Banks in various parts of the Nation.
About 85 percent of the dollar value of checks presented for
payment are handled on this basis.

Banks not participating

in an arrangement culminating in overnight presentment and
immediate payment usually make payment for their checks in funds
not available until the day following presentment.

Since the

checks usually are charged to the accounts of depositors on the
day of receipt, these banks have temporary use of funds for which
the Federal Reserve has not yet received payment.
6.

What is meant by "immediately available funds"?
These are funds that may be used by the collecting bank on the
day the checks are presented to the payor bank for payment.

- 3 7.

What forms of payment will constitute immediately available funds?
The most convenient form of immediately available payment
is a pre-authorized charge to the account of a member bank
on the books of a Federal Reserve Bank.

In the case of nonmember banks, this would require an agree­
ment between a nonmember bank, a correspondent member bank,
and the Federal Reserve Bank if the nonmember bank elects
to make immediately available payment for its checks in this
way.

This agreement would authorize a Reserve Bank to charge,

on the day of presentment, the account of a designated cor­
respondent member bank for checks presented to a nonmember
bank.

Payment can be made in other forms acceptable to a Reserve
Bank that will result in the Reserve Bank receiving immedi­
ately available funds.
8.

Does the proposed change in Regulation J affect both member and nonmember
banks?
Regulation J affects all banks that either send checks to a
Federal Reserve Bank for collection, or that receive checks
from a Federal Reserve Bank for payment.

9.

Will the proposed revision result in faster presentment of checks by the
Federal Reserve?
No.

The proposal relates to the way in which checks are paid

for after they are presented for payment.

Other operational

changes now in progress, such as overnight processing and

-

k

-

clearing of checks in Regional Check Processing Centers, will
result in faster presentment, but this is not part of the
Regulation J proposal.
10.

Will member banks that have difficulty in adjusting to the new check
collection procedures be assisted by the Federal Reserve?
Yes.

Although the Board is simultaneously proposing changes

in reserve requirements that, together with other actions,
are aimed at neutralizing the monetary effect of the pro­
posed change in Regulation J, it is realized that effects
on particular banks will vary.

Consequently, Federal Reserve

discount officers will be responsive to requests for assist­
ance by member banks to tide them over the period of adjustment
to the new procedures.
11.

Does the proposal affect the right of a bank to return unpaid checks, or
the time available for doing so?
Wo.

A bank that makes conditional payment for checks by the

close of business upon the day of presentment in immediately
available funds would continue to have until midnight of the
business day following that day of presentment to return items.
12.

What happens when checks being presented for payment are delayed in transit?
Wo bank would be required to pay for its checks prior to
receipt.

It is the practice of the Federal Reserve not to

charge a bank for checks that are not delivered for payment
at the scheduled time.

Accounting adjustments will be made

in special circumstances.

Do the amendments to Regulation J being proposed affect the handling of
noncash items?
No.

RESERVE REQUIREMENTS
REGULATION D

Why is the Board proposing to restructure reserve requirements applicable
to demand deposits?
The present structure of reserve requirements has resulted in
inequities among member banks.

The criteria presently used

for designating reserve cities and reserve city banks are re­
lated basically to the location of banks and the nature of
their business.

It has also been difficult to apply in prac­

tice the criteria for granting reduced reserves to small- and
medium-sized banks in reserve cities.

There are banks of

similar size in different localities that conduct similar
types of business but which have different reserve require­
ments.

This is unfair to the banks that have the higher

reserve requirements.

The proposal would eliminate these

inequities because reserve requirements on demand deposits
would be based on the amount of such deposits without re­
gard to the location of a bank.
What is a reserve city and what relationship does it have to reserve
requirements?
The Federal Reserve Act gives the Board authority to classify
cities as reserve cities or to end that classification.

- 6 Banks located in reserve cities are called reserve city banks
and are required generally to carry a higher percentage of
reserves on demand deposits than banks located elsewhere— the
so-called "country banks."

There are presently k6 reserve

cities.

The Board has authority to set reserve requirements on demand
deposits between 10 and 22 percent for reserve city banks
and between 7 and 14 percent for "country banks."

The Board

also may permit small- and medium-sized banks located in re­
serve cities to carry the same reserves as "country banks"
because they engage in a type of business similar to banks
located outside reserve cities.
3.

How would the proposal affect the designation of a reserve city bank?
A bank would become a reserve city bank automatically
whenever its net demand deposits rose above $400 million.

4.

How would member banks be affected by the proposed restructuring in reserve
requirements?
The following tables would apply:
Present
Requirement

Proposed
Requirement

For banks presently designated
as reserve city banks
First $2 million in net demand
deposits
$2 million to $5 million
$5 million to $10 million
$10 million to $400 million
Over $400 million

17
17
17 1/2
17 1/2
17 1/2

8
10
10
13
17 1/2

- 7 Present
Requirement

Proposed
Requirement

For banks presently designated
as country banks and banks in
reserve cities that have per­
mission to carry reduced reserves
First $2 million in net demand
deposits
$2 million to $5 million
$5 million to $10 million
$10 million to $^00 million
Over $400 million

-0-

12 l/2
12 1/2
13
13
13

8

10
10
13
17 1/2