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F E D E R A L R E S E R V E B A N K OF D A L L A S Station K, Dallas, Texas 7 5 2 2 2 Circular No. 84-83 July 31, 1984 TO: All depository Reserve District institutions in the Eleventh Federal ATTENTION: Operations Officer SUBJECT: Request for public comment on a proposal to eliminate the "fractional availability crediting" option for the recovery of interterritory check float SUMMARY: The Board of Governors of the Federal Reserve System is requesting public comment on a proposal to eliminate one of the options that Federal Reserve Banks currently offer to depository institutions for the recovery of interterritory check float. Under the proposal, the "fractional availability crediting" option would be eliminated. No additional depository institutions will be permitted to begin using the fractional availability option, pending final Board action on this proposal. Interested parties are invited to submit comments to William W. Wiles, Secretary, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue, N.W., Washington, D.C., 20551. Comments must be received by September 7, 1984, and should refer to Docket No. R-0525. ATTACHMENTS: Board's press release and material as submitted for publication in the Federal Register MORE INFORMATION: Robert Office; El Paso at the 224-2141 ADDITIONAL COPIES: Public Affairs Department, Extension 6289 L. Whitman, (214) 698-4357 at the Head Robert W. Schultz, (915) 544-4730 at the Branch; Vernon L. Bartee, (713) 659-4433 Houston Branch; or John A. Bullock, (512) at the San Antonio Branch This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) Banks and others are encouraged to use the following incoming WATS numbers in contacting this Bank: 1-800-442-7140 (intrastate) and 1-800-527-9200 (interstate). For calls placed locally, please use 651 plus the extension referred to above. FEDERALRESERVEpressrelease For immediate release July 17, 1984 The Federal Reserve Board today published for public comment a proposal to eliminate the “fractional availability crediting" option for the recovery of interterritory check float. The Board requests comment by September 7. The Board acted under the provisions of the Monetary Control Act of 1980 which provides that any Federal Reserve float that remains after operational improve ments must be priced. Federal Reserve float is the value of checks for which the Federal Reserve has given credit to the institution that deposited the checks with the Federal Reserve for collection, but for which the Federal Reserve has not yet received payment. Under the fractional crediting procedures, credit is given to depository institutions on the basis of an availability schedule^/— based on past collection experience--unique to each institution that has opted to use this method of per mitting the Federal Reserve to recover the value of float the institution's checks generate. Float is recovered on an average basis over time, resulting in an over- or underrecovery at any given period of time that should be offset by under- or overrecoveries in other periods. Experience suggests that a significant amount of float generated by depository institutions selecting this crediting option will not be recovered. Pending final Board action on this proposal, no additional depository institutions will be permitted to use the fractional availability option. (over) 1_/ An availability schedule is a time schedule under which credit is given for checks deposited with the Federal Reserve based on average collection times. Institutions depositing interterritory checks with the Federal Reserve may continue to use the "fixed availability" method for the recovery by the Federal Reserve of the value of interterritory check float they generate. Under this option a depository is given credit on the basis of a fixed schedule for depositing its checks and the amount of float generated is determined based upon actual performance This float is then recovered by the Federal Reserve through accounting adjustments, clearing balance earnings credits, or explicit charges. The Board's notice is attached. - Attachment 0- FEDERAL RESERVE SYSTEM [Docket No. R-0525] Federal Reserve Services AGENCY: Board of Governors of the Federal Reserve System. ACTION: Request for comment. SUMMARY:’ The Board of Governors of the Federal Reserve System is requesting' public comment on a proposal to eliminate one of the options depository that Federal institutions check float. Under Reserve for the option" would be depository institutions fractional availability option, currently recovery the proposal, crediting Banks the of be to interterritory "fractional availability eliminated. will offer No permitted pending additional to begin final using the Board action on this proposal. DATE: Comments must be received by September 7, 1984. ADDRESS: may be Comments, mailed Governors of Constitution delivered to to the which should refer Mr. William W. Wiles, Federal Reserve Avenue, Room N.W., System, 8:45 No. R-0525, Secretary, Washington, B-2223 between toDocket 20th D.C. a.m. and Board of Street 20551, 5:15 and or p.m. Comments received^may b e inspected at Room B-112 2 between 8:45 a.m. and Board's 5:15 p.m., Rules § 261.6(a). except as provided Regarding Availability of in § 261.6(a) Information, of the 12 C.F.R. 2- - FOR FURTHER INFORMATION CONTACT: Director (202-452-22 31), (202-452-3760), Daniel L. Attorney or Division of Gilbert T. Schwartz, Rhoads, William Brown, Federal Associate Attorney (202-452-326 5), Elliott C. McEntee, Reserve General Legal Division, the Federal Reserve System, Washington, SUPPLEMENTARY Act of 1980 established that the remains INFORMATION: (Pub. for Banks Board of Governors of Background. 96-221) (“MCA") price operational 20551. The Monetary requires that to Reserve reduce Control fees The MCA also for Federal means (202-452-362 5), or Robert G. Ballen, D.C. Reserve Bank services. Reserve after L. Manager Bank Operations; Counsel (202-452-3711), Associate be requires float float that are implemented^ In February 19 83, the eliminate or price Federal through changes in Board Reserve Reserve Bank interterritory check deposits. institutions that Reserve serving choice Bank between send the crediting Under paying institution the program, float fixed for depository directly were to to offered the a availability or the fixed availability option, is given "fixed" availability schedule. program procedures institution two crediting options: Under a interterritory check interterritory checks fractional availability. a depository approved credit on the basis of a The amount of float generated i/ 126 Cong. Rec. S3167 (daily (statement of Senator P ro x m i r e ) . ed. March 27, 1980) under this option is then determined based upon actual delivery performance. The adjustments, clearing charges to float. Under given to float the fractional depository recovered unique collection through earnings account "as-of" credits, for the or to on each the of the credit basis of institution, experience. explicit value availability option, institutions schedule based on past balance institution's the availability is is an which Consequently, is under the fractional availability option float is recovered on an average basis over time, resulting given time period of in an over or underrecovery at any that should be offset by under or overrecoveries in other periods. Pi s cu s si on . A. Federal Experience with fractional a va i la bi li t y. Reserve's significant amount institutions experience that collection fractions the float selecting the fractional the fractions experience for each and do suggests generated not a depository availability precisely collection match patterns are crediting based on actual change. The historical using a four month moving average. For fractions effective in January are based on collection experience from August to November. The January fractions will likely be more favorable than the actual because by that This underrecovery is due to the institution collection experience, example, date of option will not be recovered. fact to of the increased likelihood experience for poorer in January weather 4- - conditions in January. January will April, May be and collection expected reflected June. experience underrecovery to However, in be offset in the the experienced collection fractions Since in the than January the spring underrecovery will not be offset effect likelihood spring in in is in would in March, for better January, the be However, this value of checks sent for collection does not remain fairly constant over time. the fractions experience, shift used are less favorable in ordinarily months. if the experience than actual When collection depository institutions have economic incentives to to other collection options that enable them to obtain better availability. The institutions other underrecovery of interterritory check using availability institutions because the value fractional depositing checks of this with underrecovered is the float from inequitable Federal float must to Reserve be incorporated into the cost base that is used to determine check collection Board's 2/ fees.— float practicable, This recovery the cost of institution that benefits situation principle float is inconsistent that, should be to the recovered with the extent from the from the float. 2/ The fractional availability method creates an additional inequity because the same fraction applies to all depository institutions using any given route of the ITS network. Accordingly, if a depository institution with large dollar volumes uses the ITS network o n l y during bad weather, this would have a significant negative impact upon the fractions applicable to the other depository institutions that routinely use the ITS network. 5- - B. Modification availability m e t h o d o l o g y . some advantages availability float costs to back The Board recognizes fractional to institutions their own depositors current fractional that there are availability. depository assists of Fractional in and allocating it provides depository institutions with predictability with respect to the cost of float they will incur. In whether view it eliminate is based for these possible the methodology. periods of each revise the the institutions pa y ITS, for scheduled and the with Board (i.e., intervals, of the shorter separate that as time fractions fractions depository unrecovered such to current calculate requirement value analyzed availability considered experience), a Board fractional fractions the prior month's of the associated Specifically, user regularly to inequities to calculate upon advantages, float quarterly. The at first modification would not eliminate the incentive for institutions to change their collection patterns depending upon the fraction in effect? the second modification would onl y for those institutions have no effect transportation. upon each the problem that use the ITS network and would institutions that arrange their own The only modification that would eliminate all of the inequities associated with require resolve depository scheduled intervals for resulting from the checks fractional availability would institution the value to of it deposited. pay at regularly unrecovered However, float this pay-up - provision would make fractional functional equivalent of institutions what their fractional would availability in practice the fixed availability because depository not know at costs float 6- would availability would the time be. In result they deposit addition, in checks modifying increased operational costs to^depository institutions and the Federal Reserve. It does not appear that option can be modified to ensure using this option bear the full check float while fractional public at the same availability. the fractional that depository costs of time the their preserve Nevertheless, comment on whether availability interterritory the benefits the fractional institutions Board of requests availability option could be modified. C. eliminate the Board fractional currently offered of inequities, additional the availability to depository interterritory check Board float. has In order also until a final The crediting institutions for Board proposes option the recovery to avoid additional determined depository institutions availability proposal. to begin determination not to to use is made permit fractional on this proposal. The Board anticipates industry of eliminating minimal. As of June 22, institutions fractional depositing availability. that the fractional 1984, checks To impact on availability the banking will be on l y 85 of the 5,000 depository with the minimize Federal the Reserve impact on used the to 7- - institutions currently fractional Banks provide fractions to depository institutions using depositors. the if requested, availability, Reserve continue would, using fractions Further, under to the continue allocate to calculate to enable float proposal, the these to and them to their institutions could continue to pay for float through fractional availability until December 1984. With regard to depository interterritory checks directly with credit is currently basis. Under this approach, the historical provided on a institutions their local calculated that deposit Reserve Banks, availability credit is provided on the basis of collection experience of the ITS network. The inequities discussed above have not arisen with regard to these checks because institutions time and small. the collection that use the dollar patterns of the this option are generally constant over value of these deposits is relatively (Approximately 10 percent of the dollar amount of total interterritory checks collected it would be operationally cumbersome at checks. fixed However, proposes availability to ensure their Federal Moreover, the with the by extend institutions by deposited Board depository float that local Reserve are Banks.) this time to recovery option to such inequities do not arise, that any underrecovery of from such checks be recovered Reserve the float costs arising from the depository institutions specifically using this service. - 8- The impact of this proposal on small entities has been considered (Pub. L. in accordance 96-354; institutions with their new U.S.C. the § typically deposit local affected by 5 with this reporting or Reserve Banks proposal. Regulatory 603). and accordingly would the proposal requirements on directly not imposes be no depository institutions. By order of the Board of Governors, Act depository interterritory checks Finally, recordkeeping Small Flexibility July 16, 1984. (signed) William W. Wiles William W. Wiles Secretary of the Board