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F ederal
reserve
Bank
DALLAS. TEXAS
of
Dallas
75222
Circular No. 80-170 (A)
September 9, 1980
REVISED REGULATION D
TO THE CHIEF EXECUTIVE OFFICER
OF ALL CREDIT UNIONS IN THE
ELEVENTH FEDERAL RESERVE DISTRICT:
As you may already be aware, with the passage of the Monetary
Control Act of 1980 (Public Law 96-221), all depository institutions—including
credit unions—offering transaction accounts or nonpersonal time deposits will
become subject to the Federal Reserve's Regulation D, Reserve Requirements.
I am glad to inform you that, in the interest of reducing regulatory burden, the
Federal Reserve Board in its revised Regulation D has deferred until May 1981
all reserve deposit and reporting requirements for institutions with total deposits
of less than $1 million.
This decision was based, among other things, on the large number of
small institutions being brought under Federal reserve requirements for the first
time by the Monetary Control Act.
We estimate that more than 11,000
institutions (mostly credit unions) will be affected by the Board's deferral
decision. Since these institutions collectively control less than 1 percent of all
the deposits in the United States, the immediate imposition of Federal reserve
requirements on them does not seem necessary for monetary control.
In addition to the deferral for very small institutions, the Board has
adopted a procedure of quarterly rather than weekly reporting and reserve
maintenance for institutions with total deposits of $1 million or more but less
than $5 million.
This procedure will begin in January 1981.
Detailed
information on reporting and reserve maintenance will be provided to these
institutions later this year.
Institutions with total deposits of $5 million or more will report and
maintain reserves on a weekly basis. Reporting will begin for deposits as of
October 30, 1980, and reserve maintenance on November 13, 1980. Detailed
information on both reporting and reserve maintenance will be provided to these
institutions within the next several weeks.
For purposes of the deferral or for quarterly rather than weekly
reporting, the size of your institution is to be determined on the basis of total
deposits as of December 31, 1979. For institutions that have commenced
operations since December 31, 1979, the latest available data should be used. To
determine the amount of your credit union's total deposits, all regular share
accounts, share draft accounts, share certificates and certificates of indebt
edness shall be aggregated, regardless of maturity and whether personal or
nonpersonal.
Banks and others are encouraged to use the following incoming W ATS 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.
This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)
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2
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Enclosed is the press release containing the highlights of the new
reserve requirement structure, as well as more information on the deferral for
small institutions and the preamble to Regulation D as submitted for publication
in the Federal Register. Also enclosed are the press release and Federal
Register document detailing the pass-through guidelines and a brochure regarding
the Monetary Control Act of 1980. A copy of Regulation D is not enclosed.
However, if your institution has $1 million or over in deposits, or if you
otherwise wish to have a copy of the regulation, please return the enclosed card.
For additional information, contact Richard D. Ingram, Assistant Vice
President, Ext. 6333.
We look forward to a pleasant association with your institution.
Sincerely yours,
Ernest T. Baughman
President •
Enclosures
FEDERALRESERVEpressrelease
For immediate release
August 15, 1980
The Federal Reserve Board today announced that it has revised its
Regulation D -- reserve requirements of depository institutions —
to carry out
provisions of the Monetary Control Act of 1980.
The first period for reporting deposits under the new regulation begins
October 30, 1980 for all institutions whose requirements have not been deferred.
The amount of initial reserves required beginning November 13 under the Act's
new reserve ratios will be calculated from these reports.
The Board amended Regulation D to conform to the Act after consideration
of conment on proposed new reserve requirement rules published in June.
The Monetary Control Act, which became law March 31, is designed to
improve the effectiveness of monetary policy by applying new uniform reserve
requirements, set by the Federal Reserve, to member and nonmember commercial
banks, savings banks, savings and loan associations and credit unions that offer
transaction accounts or nonpersonal time deposits.
By the terms of the Act, the reserve requirement on the first $25
million of an institution's transactions accounts will be 3 percent.
requirement on remaining transactions accounts will be 12 percent.
The initial
The reserve
requirement on nonpersonal time deposits with original maturities of less than
four years will be 3 percent.
Nonpersonal time deposits with original maturities
of four years or more will be zero percent.
have reserve requirements of 3 percent.
Eurocurrency liabilities will
The new requirements are, by law, to be
phased in gradually in order to provide an orderly transition.
The new regulation
includes phase-in schedules, with requirements varying according to the
status of the institution, and other factors.
Reporting requirements, and further details, are set forth in the
Board's official notice of these actions, which is available upon request from
the Federal Reserve Board and from the Federal Reserve Banks.
The Federal
Reserve Banks will send the notice to all affected depository institutions.
The major provisions of the new regulation are summarized below,
beginning with key definitions.
Definition of transaction account
The Act defines transaction
1/
NOW—
9/
accounts, ATS—
accounts to include demand deposits,
accounts, share draft accounts and accounts permitting
telephone or similar transfers for payments to third parties and some other
payments.
Regulation D as revised permits up to three telephone or preauthorized
transfers a month (to another account of the depositor in the same institution
or to a third party) before such accounts are regarded as transaction accounts.
Accounts that permit more than three such transfers monthly are subject to
reserve requirements even
if not actively used.
Accounts that permit the
customer to make third party payments by means of automatic tellers or remote
service units are also included among transaction accounts.
Transfers authorized in connection with loans made by the institution
holding the deposit do not make the account subject to reserve requirements.
.1/ Negotiable Order o f Withdrawal.
2/ Automatic Transfer Service (f o r tr a n s fe r s o f funds from savings to
demand acco u nts).
-3All cash items (check or check-like items) in process of collection or
due from other depository institutions may be deducted in computing transaction
account reserve requirements.
Time deposits
Nonpersonal time deposits are subject to reserve requirements under
the Act, but personal time deposits are not subject to reserve requirements.
The Act defines nonpersonal time deposits as a transferable time
deposit or account, or a time deposit or account in which any beneficial interest
is held by a depositor that is not a natural persona natural person as an individual or sole proprietor.
Regulation D defines
A personal time deposit
is one that is not transferable and in which the entire beneficial interest
is held by a natural person.
The regulation includes Individual Retirement
Accounts (IRAs) and Keogh Accounts among personal time deposits, as well as
time deposits held by trustees when the entire beneficial interest is held for
a natural person.
The regulation specifies that time deposits do not become transferable
by reason of being pledged for a loan, or due to transfer following death,
bankruptcy, judicial attachment or the like.
As a transitional measure, the Board said it would regard all time
deposits (over or under $100,000) issued to individuals prior to October 1,
1980 as personal time deposits, even if they are transferable.
On or after that date, to be a personal time deposit, the instrument
must be issued to and held by a natural person
and bear a legend (which may
be hand stamped or printed on the instrument) indicating that it is not
transferable.
The Board expects issuing institutions to follow normal practices
-4 -
and to take steps designed to ensure that deposits are not issued to nonpersonal
entities through individuals in order to escape reserve requirements.
As a further transitional measure, the new rules permit institutions
to estimate —
using standard sampling methods —
the breakdown between personal
and nonpersonal fixed maturity time deposits issued prior to October 30 (the
beginning of the first reporting period for deposits).
Institutions must, however,
identify all existing savings deposits and time deposit open accounts as
personal or nonpersonal.
All time deposits (open or fixed maturity) and savings
accounts issued on or after October 30, 1980 must be classified as personal or
nonpersonal.
A new type of time deposit
New Regulation D establishes, effective October 30, 1980 a new type
of time deposit with a minimum maturity of 14 days, to help improve the ability
of domestic depository institutions to compete with banking offices located
abroad and with short-term domestic issues.
The minimum maturity for time
deposits has been 30 days.
Small institutions
The Board deferred reserve and reporting requirements for nonmember
depository institutions other than branches and agencies of foreign banks and
Edge corporations of less than $1 million in
order to relieve potential operating problems.
institutions, mostly credit unions.
whether to extend this deferral.
total deposits until May 1981, in
This applies to over 11,400
The Board will determine at a later date
-5 To ease the reporting burden of small institutions and Reserve Bank
administration, the Board adopted a procedure for quarterly reporting of
deposits and reserve maintenance for institutions between $1 million and $5
million in total deposits.
This procedure will begin January 1, 1981.
It
does not apply to branches and agencies of foreign banks or to Edge corporations.
Reserve requirements on domestic borrowings
Subordinated notes with maturities of seven years or more, federal
funds, repurchase agreements against U.S. Treasury and Federal agency securities
and certain other domestic borrowings are not regarded as deposits subject to
reserve requirements.
Revised Regulation D specifies that the 3 percent reserve requirement
applies only to nonpersonal time deposits that have original maturities of
less than four years.
Nonpersonal time deposits with maturities of four years
or more are subject to reserve requirements, but they will have an initial zero
reserve ratio.
Eurocurrency reserves
Gross borrowings by institutions in the United States from unaffiliated
foreign depository institutions and net borrowing from an institution's own
foreign offices are subject to a 3 percent reserve ratio.
This ratio applies
also to the proceeds of sales of domestic or foreign assets to an institution's
own foreign offices and to loans to U.S. residents made by foreign offices of U.S.
depository institutions.
Such reserve requirements will be computed on the
seven-day reserve maintenance period in effect for all other deposits.
-6 -
The Eurocurrency reserve requirements are designed to eliminate any
artifical incentives favoring the raising of funds offshore as compared with
raising funds in the domestic market.
The basic reserve requirement on
Eurocurrency deposits is currently zero.
Other deposits subject to reserve requirements
Regulation D requires that the following also be treated as deposits
subject to reserve requirements:
— Commercial paper, including that issued by savings and loan
associations.
--Credit union certificates of indebtedness.
--Ineligible acceptances
(marketable time drafts on a bank's customer).
--Due bills that remain uncollateralized by similar securities
within three days. (A due bill is a promise by a depository
institution to deliver at a future date a security bought
by the institution's customer.)
--Mortgaged-backed bonds with an original maturity of less than
four years.
Reserve requirement calculations for branches and
agencies of foreign banks, and Edge corporations
Only one $25 million tranche at the 3 percent reserve ratio on transaction
accounts will be permitted for each foreign bank or Edge or Agreement corporation
regardless of the number of their U.S. offices.
The U.S. branches and agencies
of foreign banks and offices of the same Edge or Agreement corporation will report
on a statewide basis.
Eligible reserve assets
All vault cash (except silver and gold coins) and balances held directly
or on a pass-through basis at Reserve Banks (above clearing balance requirements)
can be used to satisfy reserve requirements.
-7Phasing in reserve requirements
Nonmember depository institutions
These institutions -- other than those affected by the Board's actions
with respect to small institutions, and branches and agencies of foreign
banks -- will post, on November 13, 1980, one-eighth of the reserve requirements
applicable to them.
Subsequently, they will post an additional one-eighth of the
reserve requirements applicable to them during the first reserve maintenance
week following each September 1, until, in the eighth year, they are posting
their full required reserves.
Member banks
Member banks will phase down their required reserves over a period
of approximately 3 1/2 years from September 1, 1980, with the first reserve
reduction beginning in November 1980.
The reserves that member banks will be required to post while phasing
down to the lower new structure of required reserves under the Monetary Control
Act will be the amount required under the new structure, plus a percentage of
the difference between the lower new requirements and the higher requirements
in effect on August 31, 1980.
The table below shows the percentages of this
difference to be used in each phase-down period.
The phase down will begin
during the reserve maintenance period starting November 13, 1980.
Reserve maintenance periods
occurring between
November 13, 1980-September 2, 1981
September 3, 1981-March 3, 1982
March 4-September 1, 1982
September 2, 1982-March 2, 1983
March 3-August 31, 1983
September 1, 1983-February 29, 1984
March 1, 1984 forward
Percentage of the difference
to be applied________
75
62.5
50
37.5
25
12.5
0
-8To simplify this process, and to reduce the reporting burden of member
banks, a member's required reserves on time deposits used in calculating
requirements under the
old structure will be the average ratio in effect on
the bank's time deposits of all maturities during the 14-day period from July 24
to August 6 , 1980.
New banks, new members
and agencies and branches of foreign banks
Such U.S. institutions will have a 24-month transitional period during
which to phase-in to the reserve requirements under the Act.
also to new Edge corporations.
This applies
These institutions will begin by posting one-
eighth of their required reserves; and will add an eighth each quarter.
The
24-month phase-in applies also to a new branch or agency of a foreign bank when
the office is the foreign bank's first in the United States.
NOW accounts
By the terms of the Act, there is no phase-in period for reserve
requirements on NOW accounts of nonmembers outside states where NOW accounts are
currently permitted (New York, New Jersey and New England).
Similarly, no
phase-in is provided for NOW accounts of member banks outside these current
NOW account states.
Coverage of the Act
Regulation D specifies that in addition to member banks, nonmember
banks, U.S. branches and agencies of foreign banks and Edge and Agreementcorporations, savings and loan associations, savings banks and credit
unions, the reserve requirement provisions of the Act apply also to industrial
banks, but not to New York Investment Companies and "banker's banks" (banks
doing business only with other banks).
The latter two types of institutions,
however, may continue to sell federal funds.
Contemporaneous reserve accounting
The Board is disposed toward returning to contemporaneous reserve
accounting, prossibly by September 1, 1981, if further investigation indicates
that such a system is operationally practical.
possible change in June.
The Board proposed such a
At present, reserves are posted on the basis of
deposits held two weeks earlier.
Business-day reserve computation period
The Board has determined not to adopt a business-day computation
period at this time.
Nevertheless, the Board expects that depository institutions
will not engage in reserve avoidance practices under which reserve requirements
are lowered by transactions that increase artifically cash items and due-from
deductions.
Such practices include so-called "weekend Eurocurrency exchange"
transactions and borrowing arrangements involving recept of uncollected funds and
repayment in collected (or federal) funds.
To ensure compliance, the Federal
Reserve will monitor individual institutions and will consider the need for
implementation of additional measures, including adoption of a business-day
(in place of the current seven-day) reserve computation week.
Due-from/due-tos
In view of comment
received regarding the additional operational
difficulties institutions would encounter, the Board has determined not to adopt
-10at this time a proposal made in June to eliminate the reserve requirement against
due-to accounts nor to require changes in the use of due-from balances.
The Board
indicated that it would continue to study this matter.
Educational Activities
Representatives of the Federal Reserve Banks will carry out an
intensive educational program on the requirements of the Act and Regulation D
in meetings with groups of representatives of depositories, expected to reach
all institutions affected by the new reserve requirements, before the new
requirements go into effect.
# # * # # # # # # # # # #
#
T I T L E 1 2 — BANKS AND BANKING
CHAPTER II— FEDERAL RESERVE SYSTEM
SUBCHAPTER A— BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
[Regulation D]
(Docket No. R-0306)
Part 204— RESERVE REQUIREMENTS OF DEPOSITORY INSTITUTIONS
AGENCY:
Board of Governors of the Federal Reserve System.
ACTION:
Final rule.
SUMMARY: The Monetary Control Act of 1980 (Title I of P. L. 96-221)
imposes Federal reserve requirements on depository institutions that
maintain transaction accounts or nonpersonal time deposits. The Act
authorizes the Federal Reserve to require reports from depository institutions
as necessary or desirable to monitor and control monetary and credit
aggregates, provides access to the Federal Reserve discount window for
depository institutions with transaction accounts or nonpersonal time
deposits, and requires the Federal Reserve to price its services and
provide access to system services to all depository institutions. The
Board has adopted a revised Regulation D— Reserve Requirements of Depository
Institutions (12 CFR Part 204) to implement the reserve requirement
provisions of the Monetary Control Act. The revised reserve requirement
regulation will also apply to Edge Act and Agreement Corporations and
United States branches and agencies of foreign banks.
DATE: November 13, 1980. On that date, depository institutions, U. S.
branches and agencies of foreign banks, and Edge and Agreement Corporations
will be required to commence maintaining required reserves under revised
Regulation D based upon deposits held during the seven-day reserve computation
period beginning October 30, 1980.
FOR FURTHER INFORMATION CONTACT: Gilbert T. Schwartz, Assistant General
Counsel (202/452-3625), Paul S. Pilecki, Attorney (202/452-3281), or
Thomas D. Simpson, Senior Economist (202/452-3361), Board of Governors
of the Federal Reserve System, Washington, D. C. 20551.
SUPPLEMENTARY INFORMATION: The Monetary Control Act of 1980 ("Act")
(Title I of Pub. L. 96-221; 94 Stat. 132) imposes Federal reserve requirements
on depository institutions that maintain transaction accounts or nonpersonal
time deposits. Depository institutions subject to reserve requirements
include any Federally-insured commercial or savings bank, or any such
-2 -
bank that is eligible to become insured by the Federal Deposit Insurance
Corporation; any mutual or stock savings bank; any savings and loan
association that is a member of a Federal Home Loan Bank, insured by,
or eligible to apply for insurance with, the Federal Savings and Loan
Insurance Corporation; and any credit union that is insured by, or eligible
to apply for insurance with, the National Credit Union Administration
Board. The reserve requirements of the Act will apply to United States
branches and agencies of foreign banks with total worldwide consolidated
bank assets in excess of $1 billion, and to Edge and Agreement Corporations.
In this regard, the Act provides that nothing in the reserve requirement
provisions of the Act limits the authority of the Board under section 7
of the International Banking Act of 1978 ("IBA") (12 U.S.C. § 3105).
On March 19, 1980, the Board adopted amendments to Regulation D to impose
reserve requirements on such branches and agencies (45 Fed . Reg. 19216);
however, as discussed below, the revised regulation modifies certain
aspects of that action in view of the enactment of the Monetary Control
Act.
In addition, since U.S. branches of foreign banks are eligible
to apply for Federal deposit insurance, Regulation D also will apply
to foreign banks with total worldwide consolidated bank assets of $1
billion or less in the same manner as applicable to other nonmember
depository institutions.
In light of the enactment of the Monetary Control Act, on
June 4, 1980, the Board requested public comment (45 Fed. Reg. 38388)
on a revised Regulation D to implement the provisions of the Act. The
period for public comment expired on July 15, 1980. After consideration
of the more than 750 comments received from the public (primarily from
depository institutions and financial institution trade groups), the
Board has adopted a revised Regulation D substantially in the form proposed.
However, certain modifications were made, as discussed below, relating
primarily to the definition of a transaction account and in the area
of nonpersonal time deposits.
In addition, certain technical changes
were made in order to clarify regulation.
DIGEST OF BOARD ACTIONS
The following is a general description of certain aspects
of the Board's actions with respect to the imposition of reserve requirements
that are broadly applicable to all depository institutions. A detailed
discussion of the reserve requirements and various technical issues
follows this digest.
General Requirement. A depository institution is required
to maintain reserves against its transaction accounts and nonpersonal
time deposits. An institution's reserve requirements are computed on
the basis of the institution's average daily net deposit balances during
a seven-day period beginning each Thursday (the "computation period").
-3 -
Required reserve balances must be maintained at a Federal Reserve Bank
during a corresponding seven-day period (the "maintenance period") which
begins on the second Thursday following the end of the computation period.
However, in determining the reserve balance to be held with the Federal
Reserve during the maintenance period, the average daily United States
currency and coin held during the computation period is deducted from
the institution's reserve requirements. The first reserve maintenance
period under revised Regulation D will begin November 13, 1980 based
on deposits held during the reserve computation period beginning October 30,
1980.
Transaction Accounts. A "transaction account" is defined
to include demand deposits, negotiable order of withdrawal (NOW) accounts,
savings accounts subject to automatic transfers (ATS), share draft accounts,
accounts that permit payments to third parties through use of a check,
draft, negotiable instrument, debit card or other similar items, accounts
under the terms of which a depositor is permitted to make more than
three preauthorized or telephone transfers per month (whether to another
account of the depositor or to a third party), and accounts that permit
a depositor to make payments to third parties through automated teller
machines or remote service units. An account is not regarded as a transaction
account merely because it permits repayments or transfers in connection
with loans made by the institution itself (as originator or servicer).
Whether an account is a transaction account by virtue of the number
of telephone or preauthorized transfers (excluding loan repayments)
permitted is to be determined based upon the terms of the account contract
or by practice of the depository institution and not on the basis of
the actual number of transfers made in a particular calendar month.
Institutions are expected to establish adequate monitoring procedures
or systems to insure that the number of transfers made in a calendar
month does not exceed the permissible amount in order for such accounts
not to be regarded as transaction accounts.
The reserve ratio on transaction accounts will be 3 per cent
on amounts of $25 million or less and 12 per cent on amounts in excess
of $25 million.
In computing the amount of its transaction accounts,
a depository institution is permitted to deduct all cash items in process
of collection and balances due on demand from other depository institutions.
Nonpersonal Time Deposits. The Act defines "nonpersonal time
deposit” as a (1 ) time deposit or account that is transferable or (2 )
a time deposit or account representing funds deposited to the credit
of, or in which any beneficial interest is held by, a depositor that
is not a natural person. Under the regulation, a time deposit includes
certificates of deposit, certificate accounts, credit union share certificates,
notice accounts, and regular accounts, savings deposits and share accounts that
are not regarded as transaction accounts. Time deposits issued to and held
by natural persons are not subject to reserve requirements if they are
-4 -
not transferable. Time deposits that are issued in transferable form
on or after October 1, 1980 will be regarded as nonpersonal time deposits
because of the transferability feature. The definition of nonpersonal
time deposit excludes a time deposit issued to and held by a natural
person on or after October 1, 1980, if it includes on the deposit instrument
or other document evidencing the account a specific statement that it
is not transferable, or is transferable only on the books of, or with
the permission of, the depository institution. To meet this requirement,
a depository institution may use the following terminology or any other
statement of equivalent legal effect:
"Not transferable;" "Nontransferable;"
"Not transferable, as defined in 12 CFR Part 204;" or "Not transferable
except on the books of the depository institution." However, the words
"Not negotiable” and "Nonnegotiable" will not meet this requirement.
Depository institutions may stamp the required terminology on existing
stocks of deposit documents.
A transferable time deposit issued before October 1, 1980,
to a natural person will not be regarded as a nonpersonal time deposit.
Prior to that date, depository institutions shall refrain from issuing
transferable time deposits to natural persons that might otherwise be
issued in the name of a corporation or other organization for the purpose
of avoiding reserve requirements.
Since the provision of the Act defining transferable time
deposits as nonpersonal time deposits was intended to prevent the evasion
of reserve requirements through the transfer of time deposits from individuals
to organizations or governmental units, the Board will not regard as
"transfers” a number of transactions that normally would not be undertaken
as reserve avoidance devices. A time deposit will not be regarded as
"transferable" because it can be pledged as collateral for a loan, or
because title or beneficial interest in the deposit can be passed in
circumstances involving death, bankruptcy, divorce, marriage, judicial
attachment, incompetency, or by operation of law.
In addition, the
reissuance of a time deposit by a depository institution in the name
of another will not be regarded as a transfer.
NOntransferable time deposits representing funds held pursuant
to Individual Retirement Accounts (IRA) and Keogh (H. R. 10) Plans will
be regarded as personal time deposits. Escrow accounts, such as funds
held for tax or insurance payments, will be regarded as personal time
deposits if the depositor is a natural person and the other conditions
of a time deposit are met, even though the funds are held by the depository
institution or other organization as escrow agent.
In addition, the
Board will regard nontransferable time deposits held by fiduciaries
as personal time deposits exempt from reserve requirements where the
entire beneficial interest in the funds is held by natural persons.
A natural person is an individual or a sole proprietorship. A partnership,
-5-
corporation (including one solely owned by an individual), governmental
unit, or other association or organization (including a not-for-profit
organization) is not a natural person.
Depository institutions will be permitted to estimate (using
standard sampling methods) the breakdown between personal and nonpersonal
categories of fixed maturity time deposits issued prior to October 30,
1980, the beginning of the first deposit reporting period under the
revised regulation. All existing savings deposits, time deposit open
accounts and notice accounts, as well as fixed maturity time deposits
issued on or after October 30, 1980, are required to be classified as
either personal or nonpersonal.
Savings deposits, time deposit open
accounts and notice accounts may not be estimated since these accounts
do not have a stated maturity and if estimation were permitted for such
accounts, they would always be reported on the basis of estimates rather
than actual amounts.
Nonpersonal time deposits with original maturities of 14 days
or more but less than four years will be subject to a reserve requirement
ratio of 3 per cent. Nonpersonal time deposits in the form of borrowings
from non-U.S. offices of unrelated depository institutions with original
maturities of less than four years also will be subject to a reserve
requirement of 3 per cent. All nonpersonal time deposits with original
maturities of four years or more will be subject to a zero per cent
reserve requirement.
Eligible Reserve Assets. The reserves of a depository institution
may be held in the form of vault cash or a balance maintained at the
Federal Reserve Bank, either directly or indirectly on a pass-through
basis. A depository institution that is a member of the Federal Reserve
System must hold its required reserve balances directly with its Federal
Reserve Bank. A nonmember depository institution may hold its required
reserve balance directly with its Federal Reserve Bank or, alternatively,
it may pass its required reserve balance to the Federal Reserve through
a correspondent.
Such a correspondent may be a depository institution
that holds a required reserve balance directly with the Federal Reserve,
a Federal Hone Loan Bank, or the National Credit Union Administration
Central Liquidity Facility. A depository institution is permitted to
use all of its vault cash, that is, United States currency and coin,
as eligible reserve assets. However, silver and gold coin and other
currency and coin whose numismatic or bullion value is substantially
in excess of face value will not be regarded as vault cash.
On June 26, 1980, the Board announced (45 Fed. R e g . 44962)
proposed procedures for nonmember depository institutions to follow
if they maintain required reserves under a pass-through arrangement.
The Board's final pass-through procedures will be announced shortly.
Phase-in of Reserve Requirements. (1) Member banks will
be phased down to the new structure of reserve requirements over a three
and one-half year period from the effective date of the Act, September 1,
1980. During this period, reserves required to be maintained will equal
-6 required reserves under the reserve structure in effect on August 31,
1980 ("old structure") less a portion of the difference between reserves
calculated under the structure of the Act ("new structure") and the
old structure.
In order to relieve the reporting burden during the
phase-in period, a member bank's required reserves will be computed
under the old structure using its average reserve ratio on time deposits
during the 14-day period from July 24 - August 6 , 1980. This average
ratio will be used throughout the phase-in period to compute required
reserves on time deposits under the old structure.
Member banks will begin to phase down to the new reserve requirement
structure during the reserve maintenance period beginning November 13,
1980. At that time, required reserves will be reduced by 1/4 of the
difference between reserves under the old structure and the new structure.
The phase-down adjustment will increase by 1/8 of the difference between
reserves computed under the old and new structures beginning in September 1981,
and at each six-month interval thereafter until the new reserve structure
is phased in fully.
(2) Nonmember depository institutions will be required to
hold an amount equal to 1/8 of reserve requirements calculated under
the Act beginning with the reserve maintenance period beginning November 13,
1980. During the seven-day maintenance period beginning on that date,
a nonmember depository institution will maintain reserves based on its
deposits and vault cash outstanding during the seven-day computation
period beginning October 30, 1980. Thereafter, the amount of required
reserves will increase by an additional 1/8 of the reserve requirements
under the Act on the first maintenance period beginning after September 1,
of each succeeding year until the new reserve structure is implemented
fully.
(3) United States branches and agencies of foreign banks
will phase in to the new reserve requirements on a quarterly basis over
a two-year period beginning November 13, 1980.
(4) Reserve requirements on NOW accounts outside New England,
New York and New Jersey, authorized pursuant to Federal law on December 31,
1980, will not be subject to the phase-in provisions.
Quarterly Reporting and Reserve Maintenance. To ease the
reporting burden and Reserve Bank administration, the Board has adopted
a procedure of quarterly reporting and reserve maintenance for institutions
that have less than $5 million in total deposits. This procedure will
begin in January 1981. This procedure will not apply to Edge or Agreement
Corporations or to U.S. branches and agencies of foreign banks.
Deferred Effective Date for Smaller Institutions. To further
relieve potential operational problems during the initial period of
reserve maintenance by depository institutions, the Board has deferred
-7 until May 1981 reserve requirements and reporting for institutions with
total deposits of less than $1 million. At that time, the Board will
make a determination as to whether to continue to defer reserve requirements
on such institutions.
Contemporaneous Reserve Accounting. The Board is disposed
toward returning to contemporaneous reserve accounting, possibly by
September 1981, if a further investigation indicates that such a system
is operationally practical.
DETAILED DISCUSSION
Transaction Accounts
Definition. The Board proposed to define transaction accounts
to include all demand deposits, negotiable order of withdrawal (NOW)
accounts, savings accounts subject to automatic transfer (ATS), share
draft accounts, accounts subject to preauthorized or telephone transfer
or withdrawal and all accounts that permit the account holder to make
third-party payments using automated teller machines (ATMs) or remote
service units (RSUs). The Board invited comment on the desirability
and feasibility of exempting from reserve requirements those accounts
subject to preauthorized or telephone transfers that are limited to
a minimal number of transfers per month for special purposes, such as
loan repayments and occasional transfers or withdrawals by telephone
from a savings account to a checking account.
Comments from the public indicated that the proposed definition
of a transaction account was too broad, that accounts that were not
normally used for transaction purposes would be covered and that the
proposal could adversely affect the level of services offered by depository
institutions. Consequently, the Board has narrowed the definition of
the term "transaction account" so as not to interfere with occasional
withdrawal or payment arrangements. Under the regulation, "transaction
account" includes demand deposits, NOW accounts, ATS accounts, share
draft accounts, accounts that permit payments to third parties through
use of checks, drafts, negotiable instruments, debit cards or other
similar items, accounts that permit a depositor to make payments to
third parties through ATMs or RSUs, and accounts that permit a depositor
to make more than three telephone or preauthorized transfers per calendar
month. Under this approach, those accounts that are actively used for
transaction purposes will be subject to transaction account reserve
requirements.
With regard to accounts subject to telephone or preauthorized
transfer, the determination of whether such an account is a transaction
account must be made on the basis of the number of transfers authorized
-8in a calendar month under the terms of the account agreement rather
than on the basis of the number of transfers actually made in a particular
month. A preauthorized transfer includes any arrangement by the depository
institution to pay a third party from the account of a depositor upon
written or oral instruction (including an order received through an
automated clearing house (ACH)), or any arrangement by a depository
institution to pay a third party from the account of the depositor at
a predetermined time or on a fixed schedule.
For example, if under
the terms of a savings account agreement (written or oral) or if permitted
by custom or practice of the institution a depositor is allowed to make
more than three telephone transfers during a calendar month, including
transfers to third parties for purposes of making payments or transfers
to another account, then such an account would be a transaction account.
This account would be a transaction account at all times even if a depositor
never made more than three transfers during a particular calendar month.
In order for an account that permits telephone or preauthorized
transfers to be exempt from transaction account reserve requirements,
the account must provide that no more than three such transfers per
calendar month are permitted and the account must not otherwise meet
the definition of a transaction account. A depository institution is
required to establish a system or other procedure to insure that no
more than three such transfers are made during any calendar month from
such accounts. A savings account will not be regarded as a transaction
account merely because it permits the depositor to make loan repayments
and pay associated expenses, such as insurance and escrow requirements,
to the institution itself (as servicer or originator). (Arrangements
providing for credit extended to cover checks drawn on a zero balance
or low balance account are regarded as ATS accounts.)
In addition,
an account would not be regarded as a transaction account because withdrawals
to be paid directly to the depositor could be effected by telephone
or preauthorized order. All other telephone and preauthorized transfers,
including those made to third parties or to another deposit account
of the same depositor, would count toward the three permissible transfers
per month.
Summary of Transaction Account Classifications
Always Regarded as Transaction Accounts
1.
Demand deposits
2.
NOW accounts
3.
Share draft accounts
4.
ATS accounts
5.
Accounts that permit third party payments through ATMs
or RSUs
-9 -
6.
Accounts that permit third party payments through use
of checks, drafts, negotiable instruments, debit cards
or other similar items.
Accounts Regarded as Transaction Accounts If More Than Three of the
Following Transactions Per Calendar Month Are Permitted to Be Made by
Telephone or Preauthorized Order or Instruction
1.
Payments or transfers to third parties
2.
Transfers to another account of the depositor at the
same institution
3.
Transfers to an account at another depository institution
Not Regarded as Transaction Accounts
(Unless Specified Above)
1.
Accounts that permit telephone or preauthorized transfers
or transfers by ATMs or RSUs to repay loans made or serviced
by the same depository institution
2.
Accounts that permit telephone or preauthorized withdrawals
where the proceeds are to be mailed to or picked up by
the depositor
3.
Accounts that permit transfers to other accounts of the
depositor at the same institution through ATMs or RSUs
4.
Accounts that permit three or less telephone or preauthorized
payments or transfers to third parties or to other accounts
Bona Fide Cash Management Arrangements. In determining the
amount of outstanding transaction accounts to which the reserve ratio
will apply, a depository institution shall not treat overdrafts in a
demand deposit account as negative demand deposits.
Since overdrafts
are properly reflected on an institution's books as assets, they shall
not be netted against positive balances in other transaction accounts;
for purposes of reporting deposits, accounts in overdraft status shall
be regarded as having a zero balance. However, under present interpretations,
in cases where a customer has multiple demand deposit accounts with
a member bank, overdrafts in one account pursuant to a bona fide cash
management arrangement are permitted to be netted against demand balances
in other accounts for reserve requirement purposes. Under revised Regulation D,
depository institutions will be permitted to continue this practice.
-1 0 -
Computation of Net Transaction Accounts. In computing demand
deposit reserve requirements, member banks currently are permitted to
deduct from their gross demand deposits cash items in the process of
collection ("CIPCs") and demand balances due from other banks. The
purpose of this deduction is to prevent situations in which more than
one institution holds required reserves against the same deposit liability
to the nonbank public.
The Board requested comment on the desirability of substituting
an exemption from reserve requirements for balances "due to" depository
institutions for a "due from" deduction.
It was noted that such a treatment
of "due frcm's" and "due to's" is more consistent with an institutional
environment in which all depository institutions are subject directly
to Federal reserve requirements and, in such an environment, there is
no longer a need to control the deposits of nonmember institutions indirectly
through reserve requirements on the deposits nonmembers hold with their
member bank correspondents. Moreover, it was suggested that such a
treatment of interbank transactions would reduce the risk that distortions
in measures of the monetary aggregates could arise from the clearing
of checks and improve monetary control by removing one source of disturbance
to the multiplier connecting reserves to the money stock.
Comment from the public generally was adverse on this issue,
indicating that such an approach would be operationally burdensome.
In view of the comments received, the Board has determined not to adopt
this procedure at this time, but will continue to study the matter.
Consequently, a depository institution generally will be permitted to
deduct all cash items in process of collection and all balances due
on demand from U. S. offices of other institutions subject to Federal
reserve requirements from the sum of all transaction accounts in computing
reserve requirements.
Although requests have been received by the Board
to expand the definition of CIPC to include credit card sales slips,
the Board has determined that credit card sales slips will continue
not to be regarded as cash items in process of collection.
Reserve Requirement Ratio. The Act specifies that any reserve
requirement imposed by the Board shall be solely for the purpose of
implementing monetary policy and shall be applied uniformly to all transaction
accounts at all depository institutions. A reserve ratio of 3 per cent
on transaction accounts of $25 million or less is established by the
Act. This low reserve requirement tranche will be adjusted annually
beginning in 1982 based on the change in the total of transaction accounts
at all depository institutions during the previous year. With regard
to transaction accounts in excess of $25 million, the Board has established
a reserve ratio of 12 per cent, the initial ratio established by law.
This ratio may be varied within a range of from 8 to 14 per cent.
-1 1 -
Nonpersonal Time Deposits
Definition. The Act defines "nonpersonal time deposit" as
a (1 ) transferable time deposit or account, or (2 ) a time deposit or
account representing funds deposited to the credit of or in which any
beneficial interest is held by a depositor that is not a natural person.
Nontransferable time deposits solely in the name of, or in which the
entire beneficial interest is held by, a natural person are not be subject
to reserve requirements. Under the revised Regulation D, the term "savings
deposit" will continue to be included in the definition of "time deposit;"
thus any savings deposit that is not otherwise regarded as a transaction
account and that is held by a business or nonprofit organization or
a domestic governmental unit would be regarded as a nonpersonal time
deposit.
Time deposits that are issued in transferable form on or after
October 1, 1980 will be regarded as nonpersonal time deposits because
of the transferability feature. The provision of the Act that defines
transferable time deposits as nonpersonal time deposits was intended
to prevent the evasion of reserve requirements through the transfer
of time deposits from individuals to organizations or governmental units.
Accordingly, the Board has determined that a transferable time deposit
issued before October 1, 1980, to a natural person in a denomination
.
of less than $ 100,000 would not be regarded as a nonpersonal time deposit.—
In addition, a transferable time deposit of any denomination issued
to a natural person before that date will be regarded as exempt from
the reserve requirement on nonpersonal time deposits. The definition
of nonpersonal time deposit excludes a time deposit issued to and held
by a natural person on or after October 1, 1980, if it includes on its
face a statement that it is not transferable or if it is transferable
only on the books of, or with the permission of, the depository institution.
To meet this requirement, a depository institution may use the following
terminology or any other statement of equivalent legal effect:
"Not
transferable;" "Nontransferable;" "Not transferable, as defined in 12
CFR Part 204;" or "Not transferable except on the books of the depository
institution." However, the words "Not negotiable" and "Nonnegotiable"
will not meet this requirement since such terms would not prohibit the
depositor from engaging in certain types of transactions that could
1/ The date was originally proposed as July 15, 1980. However, in
response to numerous comments expressing concern over the ability of
institutions to meet this deadline, the Board modified the date to Septem
ber 1, 1980 (see 45 F e d . Re g . 47846).
This date has been modified further
to October 1, 1980.
-1 2 -
lead to an evasion of reserve requirements.
In this regard, the transferee
of a nonnegotiable time deposit would not be a holder in due course
and would not have the ability to cut off certain defenses of an obligor.
Although such a transferee would be in a less desirable position visa-vis a transferee of a negotiable time deposit, an exchange for value
can be made and reserve avoidance transactions would be possible. Consequently,
in order to prevent this possibility, a time deposit issued to a natural
person on or after October 1, 1980 must be nontransferable in order
to be exempt from reserve requirements.
Depository institutions may stamp, type or otherwise affix
the required legend to existing stocks of deposit documents. Any personal
time deposit or account originally issued before October 1, 1980, would
not require a legend to be exempt from reserve requirements, including
time deposits that automatically renew after that date and accounts
to which additional funds can be added. The required legend must appear
on the document that evidences an account issued on or after October 1,
1980 whether in certificate, passbook, statement, or book-entry form.
Depository institutions should not issue time deposits in
the name of a natural person prior to October 1 that normally would
be issued in the name of a corporation or other organization.
The Board
expects that depository institutions will observe the grandfather date
for transferable personal time deposits in good faith.
Transferability. A number of comments received from the public
raised questions concerning the potential limitations that could be
imposed by designating a time deposit "not transferable." As stated
above, the provision of the Act including transferable time deposits
as nonpersonal time deposits was intended to prevent the evasion of
reserve requirements by transferring time deposits from natural persons to
nonexempt entities. Accordingly, the Board will not regard a time deposit as
"transferable" although it can be pledged as collateral for a loan from
any lender, or even if title or beneficial interest in the deposit or
account can be passed on in circumstances arising from death, bankruptcy,
divorce, marriage, incompetency, attachment or otherwise by operation
of law.
In addition, the reissuance of a time deposit by an institution
in the name of another or the addition or subtraction of names on the
time deposit will not be regarded as a transfer.
In this regard, a
depository institution's involvement in the transaction would enable
it to know if any beneficial interest in the time deposit is being acquired
by other than a natural person, and, thus, the appropriate reserve requirement
change could be made.
-1 3 -
IRA and Keogh Plan Time Deposits and Escrow Funds. The Monetary
Control Act provides that any time deposit held in the name of a depositor
that is not a natural person is subject to reserve requirements on nonpersonal
time deposits. Under this provision IRA and Keogh Plan time deposits,
which can only be issued to individuals, would be treated as nonpersonal
time deposits since they are held by the depository institution as trustee
or custodian due to the technical requirements of the Internal Revenue
Code.
Since these deposits are indistinguishable from other personal
time deposits and are regarded by the depositor as his own funds subject
to his direct control, the Board will regard such funds as personal
time deposits.
In addition, escrow accounts, such as funds held for tax or
insurance payments, will be regarded as personal time deposits if the
depositor is a natural person and the other conditions of a time deposit
are met, notwithstanding that the funds are held by the depository institution
or other organization as escrow agent.
(If escrow funds are held in
any other type of deposit account, they will be regarded as a transaction
account.)
Time Deposits Held by Trustees. A number of commentators
raised the issue as to the appropriate treatment of time deposits held
by trustees and other fiduciaries where the entire beneficial interest
is held by natural persons.
The Board believes that the imposition
of reserve requirements on such funds is not necessary for the conduct
of monetary policy. Therefore, any nontransferable time deposit held
in the name of a trustee or other fiduciary, whether or not a natural
person, will be regarded as a personal time deposit if the entire beneficial
interest is held by natural persons. A nontransferable time deposit
that is an asset of a pension fund would normally be regarded as a personal
time deposit since the entire beneficial interest of such funds normally
is held by natural persons.
Definition of Natural Person. Consistent with its longstanding
positions currently embodied in Regulations D and Q as to what constitutes
an individual for purposes of maintaining a NOW, ATS, or savings account,
the Board will regard a "natural person" to consist of an individual
and a sole proprietorship.
"Natural person" will not include a partnership,
corporation (including one solely owned by an individual), governmental
unit, or other association or organization.
Estimation of Personal Time Deposits. A number of depository
institutions inquired during the comment period whether they would be
permitted to estimate the breakdown between the amount of outstanding
personal and nonpersonal time deposits.
The Board has determined to
permit depository institutions to estimate (using standard sampling
methods) funds held in fixed maturity time deposits issued before October 30,
1980, the beginning of the first computation period for reserve requirements
under the revised regulation.
-1 4 -
Amounts of personal and nonpersonal time deposits held in
savings accounts, time deposit open accounts and notice accounts may
not be estimated since such accounts do not have a stated maturity and
reliance on estimates of such accounts, therefore, would continue indefinitely
into the future.
An institution will be required to classify as personal
or nonpersonal all existing savings, time deposit open accounts and
notice accounts as well as new fixed maturity time deposits issued on
or after October 30, 1980.
Maturity of Time Deposits. The Board has adopted its proposal
to shorten the minimum maturity of time deposits for purposes of Regulations D
and Q from the present 30 days to 14 days.
The Board believes that
the shorter minimum maturity on time deposits will improve the competitive
position of domestic depository institutions vis-a-vis open market instruments
and foreign banking offices.
Beginning October 30, 1980, member banks
and U. S. branches and agencies of foreign banks that are subject to
Regulation Q (12 CFR Part 217) may issue time deposits with original
maturities between 14 and 29 days issued in denominations of $100,000
or more and pay interest on such deposits at any rate since there are
no Federal interest rate limitations on time deposits issued in such
denominations.
It is anticipated that the other Federal financial institu
tion regulatory agencies will consider taking similar action with respect
to the definition of the term time deposit and that the Depository Institu
tions Deregulation Committee will consider the establishment of an interest
rate ceiling on time deposits under $100,000 with maturities of 14 to
29 days.
Gross Borrowings From Non-P.S. Offices of Unrelated Institutions.
The Board has determined that the term time deposit also will include,
regardless of maturity, a promissory note, an acknowledgment of advance,
or a similar obligation that is issued to any office located outside
the United States of another depository institution or another foreign
bank, or to institutions whose time deposits are exempt from interest
rate limitations under § 217.3(g) of Regulation Q (12 CFR Part 217.3(g)).
Reserve Requirement Ratio. The Board has established a reserve
ratio of 3 per cent on nonpersonal time deposits with original maturities
of less than four years. Nonpersonal time deposits with original maturities
of four years or more will be subject to a zero per cent reserve ratio.
Treatment of Promissory Notes, Due Bills and Other Miscellaneous Obligations
of Depository Institutions
Regulation D currently defines as deposits a number of sources
of funds that frequently are not classified as deposits for other purposes.
The Board will continue to regard as deposits promissory notes (commercial
paper), ineligible acceptances (finance bills), due bills, acknowledgments
-1 5 -
of advance, repurchase agreements against assets other than obligations
of, or fully-guaranteed as to principal and interest by, the United
States government and its agencies, and funds supplied from nondepository
affiliates. Generally, such obligations having original maturities
of less than 14 days will be regarded as demand deposits and will be
subject to the reserve requirement on transaction accounts; those having
maturities of 14 days or more will be regarded as nonpersonal time deposits,
if transferable or held by a depositor other than a natural person.
Under this approach, certificates of indebtedness issued by credit unions
and mortgage-backed bonds and commercial paper issued by all depository
institutions including savings and loan associations will be defined
as deposits. While such obligations with original maturities of four
years or more
will be regarded as time deposits, they
willbe subject
to a zero per
cent reserve requirement.
Subordinated Notes. Under Regulations D and Q (Interest on
Deposits) subordinated capital debt of member banks is not regarded
as a deposit subject to reserve requirements or interest rate limitations
provided that certain conditions are met, including a minimum maturity
of seven years or more.
The Board proposed to retain these conditions
for depository institutions.
In this regard, the Federal Deposit Insurance
Corporation has similar rules concerning issuance of subordinated notes
exempt from interest rate limitations by insured nonmember commercial
banks (see 12 CFR Part 329).
For thrift institutions, the Board proposed
a similar exemption from reserve requirements for subordinated capital
debt.
Such a debt obligation would be exempt from reserve requirements
if it would have a minimum original maturity of seven
years or more
and was approved by the institution's
primary Federal supervisor or
was issued under the rules of the primary Federal supervisor.
The Board
has adopted these proposals as published.
Obligations of Nondepository Affiliates. The Board has adopted
its proposal to revise the reserve treatment of funds advanced by affiliates
to depository institutions. At present, deposits of member banks include
the liability of an affiliate that it
has issued to the extent that
the proceeds are used for the purpose of supplying funds to the affiliated
institution.
However, these rules relating to determination of deposit
status of such obligations are complex.
In order to simplify the determination
of the deposit status of affiliate obligations, the Board will apply
the following rules.
An obligation issued by the affiliate will not
be regarded as a deposit of the affiliated depository institution if
the obligation has a maturity of four years or more.
In addition, an
obligation issued by an affiliate will not be regarded as a deposit
of the affiliated depository institution if the obligation would not
have been a deposit had it been issued directly by the affiliated depository
institution.
For example, a borrowing by an affiliate from an unaffiliated
depository institution will not be regarded as a deposit of the affiliated
depository institution.
However, if the proceeds from such obligations
-1 6 -
are placed with the affiliated depository institution in the form of
a deposit or other nonexempt borrowing, then such funds are reservable
to the affiliated depository institution.
An obligation of a nondepository
affiliate will be regarded as a deposit if the obligation issued by
the affiliate would have been a deposit had it been issued directly
by the affiliated depository institution.
For example, a borrowing
by an affiliate from a nondepository business organization will be regarded
as a deposit of the affiliated depository institution if the funds are
supplied to the depository institution by the affiliate.
If the affiliate's
obligation is determined to be a deposit, then the appropriate reserve
ratio to be applied will be determined by the shorter of the maturity
of the affiliate's obligation or the maturity of the obligation issued
to the affiliate by its affiliated depository institution.
If the affiliate's
obligation is determined to be a deposit and the proceeds are used to
purchase assets, then the appropriate reserve ratio to be applied will
be determined by the shorter of the affiliate's obligation or the remaining
maturity of the assets purchased.
Due Bills. A due bill is a promise by the depository institution
to deliver at some future date a security purchased by the institution's
customer.
Under existing provisions, due bills issued or undertaken
by a member bank principally as a means of obtaining funds to be used
in its banking business are regarded as deposits subject to reserves.
However, due bills that are not issued principally as a means of obtaining
funds to be used in the banking business are deposits only if they are
not collateralized with a similar security within three days after issuance.
The principal questions that arise in connection with these transactions
involve whether a member bank is utilizing due bill transactions as
a means of obtaining funds principally for use in its banking business
and whether such obligations are collateralized with a "similar" security.
In order to minimize compliance and enforcement problems involving
due bills, the Board proposed to revise Regulation D so that all due
bills would be reservable deposits from the date of issuance without
regard to the purpose of the due bill unless collateralized within three
days from date of issuance by a security identical to the security purchased
by the depository institution's customer.
Comments from the public indicated that the requirement that
securities identical to those purchased be used as collateral would
place dealer banks at a significant competitive disadvantage to nonbank
dealers and could impair the market for U. S. government securities.
In view of these comments, the Board has adopted the proposed simplifications
concerning due bills in modified form, that is, eliminating the distinction
between bona fide and other due bills, but requiring that the collateral
provided be similar to, rather than identical to, the securities purchased.
In this regard, a security will be regarded as "similar" if it is of
-1 7 -
the same type and if its maturity is comparable to that of the obligation
purchased by the customer. A due bill that remains uncollateralized
after three business days is a deposit from that time forward.
In addition,
the Board is reviewing other aspects relating to due bills and may adopt
additional operational safeguards on due bills at some future date.
Eurocurrency Reserve Requirement
Under the Act, the Board's authority to establish a reserve
requirement necessary for the implementation of monetary policy on Euro
currency transactions is extended to cover all domestic depository institutions.
In addition to imposing basic reserve requirements on all depository
institutions, the Board is authorized also to place reserve requirements
on: net borrowings from related foreign offices, net borrowings from
unaffiliated foreign depository institutions, loans to United States
residents made by overseas offices of depository institutions located
in the United States, and sales of assets by depository institutions
in the United States to their overseas offices. With the exception
of net borrowings from unaffiliated foreign depository institutions,
these are essentially the same categories that are reservable under
Regulation D currently.
As explained beicw, using its basic reserve
requirement authority as well as a portion of its Eurocurrency reserve
requirement authority, the Board has determined to continue to subject
to reserve requirements the same categories of transactions that currently
are reservable as Eurocurrency transactions, except that the proceeds
of sales to foreign branches of all assets— rather than only domestic
assets— will be reservable.
Loans to U.S. residents made by non-U.S.
offices of foreign banks will not be reservable.
Under the Board's proposed regulations, borrowings from foreign
offices of unaffiliated depository institutions would continue to be
reservable on a gross rather than a net basis. U. S. agencies and branches
of foreign banks and some large domestic banks objected to the proposal
to reserve such liabilities on a gross basis.
These institutions indicated
their view that the Monetary Control Act authorizes the Board to impose
reserve requirements on borrowings from unaffiliated institutions only
on a net basis.
The Board has determined to treat these borrowings
on a gross basis as time deposits under the basic reserve
requirement authority of the Board rather than under the Board's additional
Eurocurrency reserve requirement authority.
The Board intends to review
the matter of gross versus net borrowings from unaffiliated
depository institutions in the context of proposals to establish Domestic
International Banking Facilities.
The Board has adopted a reserve ratio of 3 per cent on Eurocurrency
transactions, the same ratio applied to nonpersonal time deposits.
The Board believes that this action will eliminate any artificial incentive
through the reserve requirement structure that favors raising funds
-1 8 -
off shore as compared with the domestic market.
As a technical matter,
the revised Regulation D reflects a change in the four-week computation
and maintenance period for Eurocurrency reserves to one week periods
coinciding with normal reserve computation and maintenance periods,
as proposed.
Eligible Reserve Assets
The reserves of a depository institution may be held in the
form of vault cash or a balance maintained at the Federal Reserve Bank,
either directly or indirectly on a pass-through basis. A depository
institution that is a member of the Federal Reserve System must hold
its required reserve balances directly with its Federal Reserve Bank.
A nonmember depository institution may hold its required reserve balance
directly with its Federal Reserve Bank or, alternatively, it may pass
its required reserve balance to the Federal Reserve through a correspondent.
Such a correspondent may be a depository institution that holds a required
reserve balance directly with the Federal Reserve, a Federal Home
Loan
Bank, or the National Credit Union Administration Central Liquidity
Facility.
The Board has the authority to specify the portion of vault
cash that a depository institution may use to meet its reserve require
ments. Under Regulation D, a depository institution will be permitted
to use all of its vault cash as eligible reserve assets.
Vault cash
consists of United States currency and coin, and does not include securities
or earning assets of any type.
In addition, all silver and gold coin
and other currency and coin whose numismatic or bullion value is sub
stantially in excess of face value will not be regarded as vault cash.
Reserve Requirement Calculation by United States Branches and Agencies
of Foreign Banks
The Board has determined to continue the system of statewide
aggregation for reserve computation and maintenance for branches and
agencies.
This procedure was adopted by the Board on March 19, 1980,
in regulations (45 Fed. Reg. 19216) implementing section 7 of the IBA
(12 U.S.C. § 3105), which authorizes the Board to impose reserve requirements
on United States branches and agencies of foreign banks with total worldwide
consolidated assets in excess of $1 billion.
However, only one $25
million low reserve requirement tranche on transaction accounts will
be permitted for each foreign bank, since its U.S. branches and agencies
compete primarily with domestic money center banks, which, by statute,
have only one low reserve requirement tranche. Allowing a foreign bank
only one low reserve tranche is consistent with the IBA's goal of promoting
competitive equality between branches and agencies and domestic depository
-1 9 -
institutions.
The Board also will allow an Edge or Agreement Corporation
only one lew reserve tranche on transaction accounts regardless of the
number of its branches.
Under the Board's rules, a foreign bank or an Edge or Agreement
Corporation will be allowed to assign its low reserve requirement tranche
to any of its offices. Hcwever, if possible, the low reserve tranche
must be assigned to a single office or to a group of offices filing
a single aggregated report of deposits.
In the event that the low reserve
tranche cannot be fully utilized by a single office or by a group of
offices filing an aggregated report of deposits, the unused portion
may be assigned to other offices. Reassignment of the lew reserve requirement
tranch will be permitted on an annual basis.
Phase-in of Reserve Requirements
Member Banks. Member banks will be phased down to the new
structure of reserve requirements over a three and one-half year period
from the effective date of the Act, September 1, 1980.
During this
period, reserves required to be maintained will equal required reserves
under the reserve structure in effect on August 31, 1980 ("old structure"),
less a portion of the difference between reserves calculated under the
structure of the Act ("new structure") and the old structure.
In order to relieve the reporting burden during the phasein period, the Board has adopted a simplified procedure for computing
reserve requirements under the old structure during this period.
The
Board believes that this procedure will be beneficial to the Federal
Reserve and to member banks and is consistent with Congressional intent
concerning transitional adjustments. Under this approach, required
reserves of a member bank on time deposits under the old structure will
be computed fcy using its average reserve ratio on total time deposits
during the 14-day period from July 24 - August 6 , 1980.
This average
ratio will be used throughout the entire phase-in period. A former
member bank that did not maintain Federal reserves during this period
and, thus, did not report deposits to the Federal Reserve may use the
period from August 14-27, 1980 as its base period for purposes of determining
its average reserve ratio on time deposits. Required reserves on remaining
deposits (including savings deposits) will be computed using the existing
ratios.
The current reserve ratios on time deposits are as follows:
By original maturity
less than 180 days
- $0 - 5 million
- over $5 million
180
days to less than 4 years
4 years or more
3%
6%
2-1/2%
1%
Time deposits are subject, at present under the Federal Reserve Act,
to a 3% minimum reserve ratio.
The average reserve ratio on time deposits
will be computed by dividing the daily average total amount of required
reserves on such deposits by the daily average total time deposits for
the 14-day period.
-2 0 -
Member banks will begin to phase-down to the new reserve requirement
structure during the reserve maintenance period beginning November 13,
1980.
Required reserves computed under the old structure will be reduced
at that time by 1/4 of the difference between required reserves under
the old structure and required reserves under the new structure.
By
having an initial reserve reduction of 25 per cent rather than 1/8 as
originally proposed, member banks will be compensated for the two-month
delay in implementation of the new reserve requirements.
The phasedown adjustment will increase by 1/8 of the difference between reserves
computed under the old and new structures, beginning in September 1981,
and at each six-month interval thereafter until the new reserve structure
is fully implemented.
Nonmember Banks and Thrift Institutions. Reserve requirements
of nonmember banks and thrift institutions will be phased in over an
eight-year period. Nonmember institutions (other than U.S. branches
and agencies of foreign banks) will be required to hold an amount equal
to 1/8 of reserve requirements calculated under the Act, starting with
the reserve maintenance period which begins on Thursday, November 13,
1980.
During the seven-day maintenance period beginning on that date,
a nonmember depository institution will maintain reserves based on its
deposits and vault cash outstanding during the seven-day computation
period beginning October 30, 1980.
Thereafter, the amount of required
reserves will increase by an additional 1/8 of the reserve requirements
under the Act c h i the first maintenance period beginning after September 1
of each succeeding year until the new reserve structure is fully implemented.
The Act provides a special phase-in provision for certain
State-chartered nonmember depository institutions located in a State
outside the continental United States.
The Board's proposed Regulation D
would have applied this provision to such institutions located in Alaska
and Hawaii.
However, because the Alaska Omnibus Act (Pub. L. 86-70)
provides that Alaska is part of the "continental United States," the
special phase-in provision of the Monetary Control Act can only apply
to certain State-chartered nonmember depository institutions in Hawaii.
State-chartered nonmembers in Alaska that were engaged in business on
July 1, 1979, and that were not Federal Reserve members will receive
the eight-year phase-in applicable to other depository institutions.
Deposits or Accounts Authorized After April 1, 1980. The
Act exempts from the transitional phase-in provisions any category of
deposits or accounts that are first authorized pursuant to Federal law
in any State after April 1, 1980.
This provision most imnediately applies
-2 1 -
to interest-bearing negotiable order of withdrawal (NOW) accounts that
are authorized in States outside of New England,-' New York and New
Jersey on December 31, 1980.
Therefore, depository institutions outside
of New England, New York and New Jersey maintaining NOW accounts will
be required to maintain reserves against such accounts at the full transaction
account reserve ratio.
In computing reserves required to be maintained on net NOW
accounts, a depository institution located outside of New England, New
York and New Jersey will be permitted to deduct from its total NOW accounts
a portion of its cash items in process of collection and balances due
on demand from other depository institutions equal to the ratio of its
N OW accounts to its total transaction accounts.
In order to provide
the most benefit to depository institutions, the Board will permit the
the $25 million low reserve tranche for transaction accounts to apply
to transaction accounts subject to the highest reserve ratio. Under
this approach, a nonmember depository institution outside of New England,
New York and New Jersey phasing in reserves may apply the $25 million
tranche to its NOW accounts initially with any remaining portion applied
to other transaction accounts subject to the phase-in.
Transaction
accounts in excess of $25 million (other than NOW accounts) will be
subject to a reserve ratio of 12 per cent, but the effective reserve
ratio applicable to these accounts will be lower than 12 per cent because
of the phase-in.
A member bank may apply the $25 million low reserve
tranche to demand deposits or NOW accounts in computing its reserve
requirements.
Branches and Agencies. Under the amendments to Regulation D
adopted in connection with implementation of the IBA, branches and agencies
were granted a phase-in of reserve requirements over a two-year period.
This phase-in period is similar to that allowed to nonmember banks joining
the Federal Reserve System.
The Board has determined to allow branches
and agencies to phase-in to the new reserve requirement structure that
becomes effective on November 13, 1980, rather than requiring a more
complicated and burdensome procedure of phasing up to member bank actual
reserve requirements by the end of two years, and then phasing down
to the new structure over the next two years in line with member banks.
On November 13, when revised Regulation D becomes effective, branches
and agencies will begin to maintain reserves subject to a two-year phasein schedule similar to that proposed in June. Reporting will not be
required of branches and agencies until the reserve computation period
that begins on October 30, 1980.
The deposits of new branches and agencies
of a foreign bank that has existing United States branches or agencies
will be entitled only to the remaining phase-in, if any, available to
the existing United States branches or agencies.
The amendments to Regulations D and Q (Interest on Deposits
(12 CFR Part 217)) that were adopted in March in connection with implementa
tion of the IBA will go into effect on September 4, 1980, as originally
2/ Massachusetts, New Hampshire, Connecticut, Rhode Island, Vermont
and Maine.
-2 2 -
scheduled, although reserves will not be required to be held until November 13
1980.
Federal Reserve credit facilities also will be available beginning
September 4, 1980.
System services will be made available to branches
and agencies beginning in November 1980 when they actually begin holding
reserves. However, clearing balances may be required commensurate with
the level of services provided.
This will promote competitive equality
with member banks and take into account the shorter reserve requirement
phase-in period applicable to branches and agencies.
De Novo Banks and New Members. The Act provides an eightyear phase-in only for nonmember depository institutions engaged in
business on July 1, 1979.
Consequently, a de novo nonmember depository
institution opening after July 1, 1979, would be required to maintain
full reserve requirements beginning on the effective date of the Act.
In addition, under the Act, a de novo member or a nonmember joining
the System ("new member") would be required to maintain full present
member bank reserve requirements, and then phase down to the new requirements
of the Act. Current Board policy provides a two-year transitional period
to full reserve requirement levels for de novo and new member banks.
The Board believes that, in order to provide an orderly adjustment
to reserve requirements, it is appropriate for the Federal Reserve to
continue its policy of providing a 24-month transitional phase-in for
all de novo depository institutions and new members. Under the Board's
action, de novo institutions and new members will be phased in to the
new reserve requirements under the Act rather than to present member
bank reserve requirements.
New member banks on or after September 1,
1980, will not be required to report deposits or maintain reserves until
the revised regulation becomes effective.
This transition policy will
also apply to a newly formed Edge or Agreement Corporation, or a foreign
bank establishing its initial branch or agency in the United States.
Former Members and Mergers. On April 23, 1980, the Board
announced an interpretation (12 CFR 204.120; 45 Fed. Reg. 28305) of
section 19(b)(8)(D) of the Federal Reserve Act (12 U.S.C. § 461(b),
as amended by section 103 of the A c t ) . This interpretation applies
to the reserves required of any bank that was a member of the Federal
Reserve System on July 1, 1979, and which subsequently withdraws from
membership.
That interpretation also establishes a System policy for
reserve requirements of depository institutions involved in mergers.
Coverage of the Act
During the comment period, several questions were received
concerning the scope of institutions covered by the Act.
The Board
has determined that industrial banks that engage in a deposit-taking
-2 3 -
function ace covered by the Act and are subject to reserve requirements
on their transaction accounts and nonpersonal time deposits, since they
are eligible for Federal deposit insurance.
New York Investment (Article XII) Companies, on the other
hand, are not subject to reserve requirements under the IBA, and since
they accept credit balances rather than deposits, they are not eligible
for Federal deposit insurance. Consequently, the Board has concluded
that New York Investment Companies are not depository institutions subject
to the Act.
Under the Act, bankers' banks are not subject to Federal reserve
requirements. Bankers' banks are defined as depository institutions
that are organized solely to do business with other financial institutions,
do not do business with the general public, and are owned primarily
by the financial institutions with which they do business. Questions
have arisen with respect to how the Board will apply these criteria
in individual cases, particularly with regard to corporate central credit
unions. The Board will consider in the near future the issue of what
institutions qualify for the exemption.
Quarterly Reporting for Certain Depository Institutions
The Board recognizes that many very small depository institu
tions— especially credit unions— may not be equipped to report to the
Federal Reserve and to maintain reserves on a weekly basis. Moreover,
given the substantial number of such very small institutions that might
have small amounts of reservable liabilities, the Federal Reserve could
encounter operational difficulty in processing reports of these institutions
on a weekly basis.
In an effort to reduce the reporting and reserve
management burdens of very small depository institutions and to reduce
the processing burden of the Reserve Banks, depository institutions
with total deposits of less than $5 million will report their deposits
to the Federal Reserve for a 7-day computation period only once each
calendar quarter and maintain reserves over a subsequent three-month
period based on such deposits reported.
Quarterly reporting will be staggered so that each month onethird of all quarterly reporters will report deposit data for one week.
Reserves will be maintained during a period beginning two weeks after
the start of the computation period and ending one week after the end
of the institution's next computation period. Balances to be held at
the Federal Reserve over the three-month maintenance period, either
directly or indirectly on a pass-through basis, would equal required
reserves based on the deposit report for one week less vault cash held
during the seven-day reporting period. An institution will remain eligible
for quarterly reporting until its total deposits are $5 million or more
for two consecutive quarterly reports. Depository institutions eligible
for quarterly reporting and reserve maintenance would retain the option
of reporting and maintaining required reserves on a weekly rather than
quarterly basis. Additional details will be supplied to depository
institutions in the near future.
-2 4 The quarterly reporting system will commence in January 1981.
Small member banks will continue to report deposits and maintain reserves
on a weekly basis until that time. Eligible nonmember institutions
will not be required to report or maintain reserves until the quarterly
procedure begins.
It should be noted that Edge and Agreement Corporations
and U.S. branches and agencies of foreign banks will not be eligible
for quarterly reporting and reserve maintenance.
Rather, all such institutions
will— regardless of size— be required to report and to maintain reserves
on a weekly basis.
In addition, the Board has deferred reserve requirements for
institutions that have less than $1 million in total deposits as of
December 31, 1979. These institutions will be exempt from reporting
and reserve maintenance until May 1981, at which time the Board will
determine whether a further delay is warranted.
Contemporaneous Reserve Accounting
The Federal Reserve Board is disposed toward returning to
contemporaneous reserve accounting, possibly by September 1981, if a
further investigation of potential operational difficulties indicates
that such a system is practical. Under contemporaneous reserve accounting,
the reserve computation and reserve maintenance weeks would coincide.
Reserve computation would be based on daily opening-of-business balances
while reserves maintained would be based on daily close-of-business
balances. Among the issues to be studied are the feasibility of such
a reserve accounting system for all types of depository institutions,
potential complications arising from pass-through arrangements, and
the relation to reserve carryover.
Business Day Computation Period
The Board has determined not to adopt a business-day computation
period at this time. However, the Federal Reserve Board expects that
depository institutions will not engage in reserve avoidance practices
under which reserve requirements are lowered by transactions that artificially
increase cash items in the process of collection and "due from" deductions.
Included among such practices are so-called "week-end Eurodollar arbitrage"
transactions and borrowing arrangements involving the receipt of uncollected
funds and repayment in collected (or Federal) funds. To ensure compliance,
the Federal Reserve will monitor individual institutions and consider
the need for implementation of additional measures, including adoption
of a business-day reserve computation week.
*
*
*
*
*
The following table presents reporting categories that will
be required of depository institutions, Edge and Agreement Corporations
and United States branches and agencies of foreign banks.
-25-
Table
Reporting categories for institutions subject to reserve requirements:
1.
Demand deposits due to banks.
2.
Demand deposits due to other depository institutions.
3.
Demand deposits due to the U. S.
4.
Other demand deposits (including
noninterest-bearing
negotiable orders of withdrawal).
Government.
5.
Savings deposits authorized for automatic transfer (ATS
accounts).
6.
Savings deposits that permit more than three telephone
or preauthorized transfers or payments per calendar month
or that permit payments to third parties through automated
teller machines, including remote service units.
7.
Negotiable order of withdrawal (NOW) accounts; share
drafts.
8.
Demand deposits due from depository institutions.
9.
Cash items in
10.
process of collection.
Other savings deposits (i.e., all savings deposits other
than those included in items 5, 6 , or 7 above)— personal.
11.
Other savings
deposits— nonpersonal.
12.
Personal time
deposits.
13.
Nonpersonal time deposits with original maturities of
14 days or more but less than 4 years.
14.
Nonpersonal time deposits with original maturities of
4 years or more.
15.
Time deposits
16.
Vault cash.
17.
of $100,000 or more.
Funds received from issuance of obligations by affiliates
and from the sale of ineligible bankers' acceptances
have remaining maturities of less than 14 days.
-26-
18.
Funds received from issuance of obligations by affiliates
and from the sale of ineligible bankers' acceptances
that have remaining maturities of 14 days or more but
less than 4 years— personal.
19.
Funds received from issuance of obligations by affiliates
and from the sale of ineligible bankers' acceptances
that have remaining maturities of 14 days or more but
less than 4 years— nonpersonal.
20.
Borrowings from offices of other depository institutions
outside the United States, foreign national governments,
and international institutions.
*21.
Gross balances
due to own non-U. S. branches.
*22.
Gross balances
due from own non-U. S. branches.
*23.
Assets sold to and held by own non-U. S. branches acquired
from U. S. offices (including assets that are claims
on both U. S. and non-U. S. residents).
*24.
Credit extended by own non-U. S. branches to U. S. residents
**25.
Gross liabilities to the foreign bank (including its
offices located outside the United States).
**26.
Gross claims on the foreign bank (including its offices
located outside the United States).
**27.
Total assets less the sum of United States coin and currency
cash items in process of collection and unposted debits,
balances due from domestic banks and other foreign banks,
balances due from foreign central banks and net balances
due from the foreign bank and the foreign bank's United
States and non-United States offices.
**28.
Assets sold by a branch or agency to its foreign bank
(including its offices located outside the United States)
or its foreign parent bank holding company.
*
To be reported only by U. S. depository institutions and Edge and
Agreement Corporations.
**
To be reported only by U. S. branches and agencies of foreign banks.
-2 7 Effective November 13, 1980, pursuant to the Board's authority
under sections 19, 25, and 25(a) of the Federal Reserve Act (12 U.S.C.
SS 461 et seq., 601 et seq., 611 et seq.) and section 7 of the International
Banking Act of 1978 (12 U.S.C. § 3105) , Regulation D (12 CFR Part 204)
is revised to read as follows:
PART 204— RESERVE REQUIREMENTS OF DEPOSITORY INSTITUTIONS
Sec.
204.1
204.2
204.3
204.4
204.5
204.6
204.7
204.8
Authority, Purpose and Scope
Definitions
Computation and Maintenance
Transitional Adjustments
Emergency Reserve Requirement
Supplemental Reserve Requirement
Penalties
Reserve Ratios
FEDERAL RESERVE press release
For immediate release
August 27, 1980
The Federal Reserve Board today announced rules for nonmember
depository institutions to follow if they pass required reserve balances
through another institution to the Federal Reserve, and rules for these
intermediaries to follow in handling the reserve balances of others.
The new rules will become effective November 13, 1980.
The
pass-through rules amend the Board's Regulation D (reserve requirements of
depository institutions).
Under the Monetary Control Act of 1980, depository institutions
are required to satisfy reserve requirements fixed by the Federal Reserve on
their transaction accounts and nonpersonal time deposits.
These reserves
may be held in vault cash, or if vault cash is not large enough to satisfy
reserve requirements, balances must be held with Federal Reserve Banks.
Depository institutions that are members of the Federal Reserve
System will continue to hold their reserves directly with the Federal Reserve
Bank in their Federal Reserve District.
Nonmembers may hold their reserves
directly with the Federal Reserve or indirectly, by passing the reserves
through another institution ("pass-through correspondent").
The Board's pass-through rules are described in the attached
notice.
Some highlights are:
--Correspondent institutions that may receive and pass through the
reserve balances of nonmember depositories are the Federal Home Loan Bank, the
National Credit Union Administration Central Liquidity Facility, or a
depository institution (member or nonmember) that holds a required reserve
-2-
balance directly at a Federal Reserve Bank.
The Board reserves the right
to permit other institutions, on a case-by-case basis, to be pass-through
correspondents.
U.S. branches and agencies of foreign banks and Edge and
Agreement corporations may pass their required reserves through other
institutions or may themselves act as pass-through correspondents.
--A respondent will be able to choose one pass-through correspondent,
and that correspondent must pass the reserve balances through directly to
the Federal Reserve.
Such arrangements may be initiated, terminated or
changed upon notification satisfactory to the Reserve Bank involved.
--In pass-through arrangements, it is the responsibility of the
correspondent to assure the maintenance of the correct level of its
respondent's reserve balances.
The pass-through rules approved by the Board
clarify the precise responsibilities of the parties to a pass-through
arrangement.
Reserve Banks will compare only the aggregate required reserve
balance with the total actual balance held in each reserve account maintained
by the correspondent for determination of reserve deficiencies, penalty
liability, and other reserve maintenance purposes.
--The correspondent institution passing balances through will
maintain the reserve balances it receives, dollar-for-dollar, with the
Federal Reserve Bank in whose territory!/ the main office of the respondent
is located.
--Under the rules adopted by the Board, a correspondent may choose
one of the two following options with respect to handling its own required
reserves and those of its respondents in the same Federal Reserve territory.
— ^ The service area of a Federal Reserve office.
-3-
1.
The correspondent may maintain its own required
reserve balances, as well as those of its respondents
whose head office is located in the same territory as
the correspondent's head office, in a single,
commingled reserve account at the Federal Reserve
Bank or Branch serving the territory, or
.2.
The correspondent may maintain its own reserve
balance in the Federal Reserve Bank or Branch serving
its territory, and, in addition, maintain a separate
commingled reserve account for its respondents
located in the same Federal Reserve territory.
--A depository institution maintaining a reserve balance on a
pass-through basis is eligible for Federal Reserve System services provided
separately from its local Federal Reserve office (but where reserve balances
of nonmember institutions are zero or small, it may be necessary for the
institution also to maintain an adequate clearing balance).
The Board's notice setting forth
is attached.
Attachment
the Board's piss-through rules
TITLE 12— BANKS AND BANKING
CHAPTER II— FEDERAL RESERVE SYSTEM
SUBCHAPTER A— BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
[Regulation D]
(Docket No. R-0309)
Part 204— RESERVE REQUIREMENTS OF DEPOSITORY INSTITUTIONS
Required Reserve Balance Pass-Through Rules
AGENCY:
Board of Governors of the Federal Reserve System.
ACTION:
Final rule.
SUMMARY: The Monetary Control Act of 1980 (Title I of P.L. 96-221)
imposes Federal reserve requirements on all depository institutions
that maintain transaction accounts or nonpersonal time deposits. A
depository institution can satisfy its reserve requirements with a com
bination of vault cash and balances held at a Federal Reserve Bank.
The Act authorizes a depository institution that is not a member of
the Federal Reserve System to hold its required reserve balance at the
Federal Reserve in one of two ways. It may deposit its required reserve
balance directly with the Federal Reserve Bank of its District. Alternatively,
in accordance with procedures adopted by the Board, it may elect to
pass through its required reserve balance to the Federal Reserve through
a correspondent. In order to implement the pass-through provisions
of the Monetary Control Act, the Board is amending Regulation D to establish
rules under which pass-through arrangements may be maintained.
EFFECTIVE DATE:
November 13, 1980.
FOR FURTHER INFORMATION, CONTACT: Benjamin Wolkowitz, Section Chief
(202/452-2686), Paul P. Burik, Economist (202/452-2556), Gilbert T.
Schwartz, Assistant General Counsel (202/452-3625), Lee S. Adams, Senior
Attorney (202/452-3623) or Paul S. Pilecki, Attorney (202/452-3281),
Board of Governors of the Federal Reserve System, Washington, D.C. 20551.
SUPPLEMENTARY INFORMATION: Under the provisions of the Monetary Control
Act of 1980 (Title I of P.L. 96-221), Federal reserves are required
for all depository institutions with transaction accounts or nonpersonal
time deposits, as those terms are defined in Section 103 of the Act.
If these reserve requirements are not met in full by holdings of vault
cash, a depository institution that is a member of the Federal Reserve
-2 -
System must satisfy its remaining requirement by directly maintaining
a balance at its local Federal Reserve Bank. A depository institution
that is not a member of the Federal Reserve System and does not completely
satisfy its reserve requirement with vault cash must satisfy its remaining
requirement by maintaining a balance with the Federal Reserve. Such
a required balance can be held in one of two ways at the nonmember institution's
discretion. It may deposit its required reserve balance directly with
the Federal Reserve Bank of its District, just as member banks do.
Alternatively, a nonmember depository institution may elect to pass
its required reserve balance through a correspondent. The correspondent
will pass through this required reserve balance dollar-for-dollar
to
the Federal Reserve Bank in the District in which the main office
of
the respondent institution is located. A correspondent may be (i) a
Federal Home Loan Bank, (ii) the National Credit Union Administration
Central Liquidity Facility, or (iii) a depository institution that maintains
a required reserve balance directly at a Federal Reserve Bank. In addition,
the Board reserves the right to permit other institutions, on a caseby-case basis, to serve as pass-through correspondents.
The Federal Reserve Board is amending its Regulation D to
provide rules for the holding of nonmember depository institution
(respondent) reserve balances. The rules as adopted by the Board are
very similar to the guidelines published for comment on June 26, 1980
(45 Fed. Reg. 44962). The Board determined to adopt these provisions
as part of Regulation D rather than as guidelines in order to clarify
the relationships between, and responsibilities of, the parties involved
in pass-through arrangements. Included in the rules are requirements
for reporting and maintaining pass-through reserve accounts and the
responsibilities of the various parties in a pass-through arrangement.
The rules also provide the conditions for using a pass-through account
to post entries arising from transactions involving the use of Federal
Reserve services.
Two modifications to the proposed guidelines were adopted
by the Board. First, the Board determined that a Reserve Bank, at its
discretion, may require a pass-through correspondent to consolidate
in a single account the reserve balances of its respondents whose head
offices are located in that Federal Reserve District rather than maintain
separate accounts at each office within that Federal Reserve District.
Secondly, the Board decided to reserve the right to permit institutions
other than the Federal Home Loan Banks, the Central Liquidity Facility,
and institutions holding Federal reserves, on a case-by-case basis,
to serve as pass-through correspondents.
In response to the comments that were received, the Board
clarified the rules to indicate that U.S. branches and agencies of foreign
banks and Edge and Agreement Corporations could serve as pass-through
correspondents or respondents. The Board also decided that a pass-through
correspondent would have the option either to commingle its own reserve
-3 balance with the reserve balances of its respondents located in the
same Federal Reserve territory as the correspondent in a single account
or to maintain two accounts— one for its own reserve balance and a second
commingled account for the reserve balances of its respondents located
in the same territory as the correspondent. The rules also contain
more specific procedures that a correspondent is expected to follow
in managing its pass-through accounts. For example, for purposes of
determining required reserve deficiencies and imposing or waiving penalties
for deficiencies in required reserves, Reserve Banks will compare the
total reserve balance required to be maintained in each reserve account
with the total actual reserve balance held in such reserve account by
the correspondent.
Effective November 13,
under sections 19, 25, and 25(a)
§§ 461 et seq., 601 et seq., 611
Banking Act of 1978 (12 U.S.C. §
is revised to read as follows:
1.
1980, pursuant to the Board's authority
of the Federal Reserve Act (12 U.S.C.
et seq.) and section 7 of the International
3105), Regulation D (12 CFR Part 204)
Section 204.3 is amended to read as follows:
§ 204.3 —
*
COMPUTATION AND MAINTENANCE
*
*
*
*
(i) Pass-through rules.
(1)
Procedure
(i)
A nonmember depository institution required to maintain
reserve balances ("respondent") may select only one
institution to pass through its required reserves.
Eligible institutions through which respondent required
reserve balances may be passed ("correspondents")
are Federal Home Loan Banks, the National Credit Union
Administration Central Liquidity Facility, and depository
institutions that maintain required reserve balances at a
Federal Reserve office. In addition, the Board reserves
the right to permit other institutions, on a caseby-case basis, to serve as pass-through correspondents.
The correspondent chosen must subsequently pass through
the required reserve balances of its respondents directly
to the appropriate Federal Reserve office. The correspondent
placing funds with the Federal Reserve on behalf of
respondents will be responsible for reserve account
maintenance as described in subparagraphs (3) and
(4) below.
-4 (ii)
Respondent depository institutions or pass-through
correspondents may institute, terminate, or change
pass-through arrangements for the maintenance of required
reserve balances by providing all documentation required
for the establishment of the new arrangement and/or
termination of the existing arrangement to the Federal
Reserve Bank in whose territory the respondent is
located. The time period required for such a change
to be effected shall be specified by each Reserve
Bank in its operating circular.
(iii)
U.S. branches and agencies of foreign banks and Edge
and Agreement Corporations may (a) act as pass-through
correspondents for any nonmember institution required
to maintain reserves or (b) pass their own required
reserve balances through correspondents. In accordance
with the provision set forth in subparagraph (3) below,
the U.S. branches and agencies of a foreign bank or
offices of an Edge and Agreement Corporation filing
a single aggregated report of deposits may designate
any one of the other U.S. offices of the same institution
to serve as a pass-through correspondent for all of
the offices filing such a single aggregated report
of deposits.
(2)
Reports
(i) Every depository institution that maintains transaction
accounts or nonpersonal time deposits is required
to file its report of deposits (or any other required
form or statement) directly with the Federal Reserve
Bank of its District, regardless of the manner in
which it chooses to maintain required reserve balances.
(ii) The Federal Reserve Bank receiving such reports shall
notify the reporting depository institution of its
reserve requirements. Where a pass-through arrangement
exists, the Reserve Bank will also notify the correspon
dent passing respondent reserve balances through to
the Federal Reserve of its respondent's required reserve
balances.
(iii) The Federal Reserve will not
responsible for guaranteeing
of deposits submitted by its
local Federal Reserve Banks.
hold a correspondent
the accuracy of the reports
respondents to their
-5-
(3)
Account Maintenance
(i)
(ii)
(iii)
(4)
A correspondent that passes through required reserve
balances of respondents whose main offices are located
in the same Federal Reserve territory in which the
main office of the correspondent is located shall
have the option of maintaining such required reserve
balances in one of two ways:
(a) A correspondent
may maintain such balances, along with the correspondent's
own required reserve balances, in a single commingled
account at the Federal Reserve Bank office in whose
territory the correspondent's main office is located,
or (b) A correspondent may maintain its own required
reserve balance in an account with the Federal Reserve
Bank office in whose territory its main office is
located. The correspondent, in addition, would maintain
in a separate commingled account the required reserve
balances passed through for respondents whose main
offices are located in the same Federal Reserve territory
as that of the main office of the correspondent.
A correspondent that passes through required reserve
balances of respondents whose main offices are located
outside the Federal Reserve territory in which the
main office of the correspondent is located shall
maintain such required reserve balances in a separate
commingled account at each Federal Reserve office
in whose territory the main offices of such respondents
are located.
A Reserve Bank may, at its discretion, require a pass
through correspondent to consolidate in a single account
the reserve balances of all of its respondents whose
main offices are located in any territory of that
Federal Reserve District.
Responsibilities of Parties
(i)
(ii)
Each individual depository institution is responsible
for maintaining its required reserve balance with
the Federal Reserve Bank either directly or through
a pass-through correspondent.
A pass-through correspondent shall be responsible
for assuring the maintenance of the appropriate aggregate
level of its respondents' required reserve balances. A
Reserve Bank will compare the total reserve balance
required to be maintained in each reserve account
with the total actual reserve balance held in such
reserve account for purposes of determining required
-6 -
reserve deficiencies, imposing or waiving penalties
for deficiencies in required reserves, and for other
reserve maintenance purposes. A penalty for a deficiency
in the aggregate level of the required reserve balance
will be imposed by the Reserve Bank on the correspondent
maintaining the account.
(iii)
Each correspondent is required to maintain detailed
records for each of its respondents in a manner that
permits Reserve Banks to determine whether the respondent
has provided a sufficient required reserve balance
to the correspondent. A correspondent passing through
a respondent's reserve balance shall maintain records
and make such reports as the Federal Reserve System
requires in order to insure the correspondent's compliance
with its responsibilities for the maintenance of a
respondent's reserve balance. Such records shall
be available to the Federal Reserve Banks as required.
(iv) The Federal Reserve Bank may terminate any pass-through
relationship in which the correspondent is deficient
in its recordkeeping or other responsibilities.
(v)
(5)
Interest paid on supplemental reserves (if such reserves
are required under section 204.6 of this Part) held
by respondent(s) will be credited to the commingled
reserve account(s) maintained by the correspondent.
Services
(i)
A depository institution maintaining its reserve balances
on a pass-through basis may obtain available Federal
Reserve System services directly from its local Federal
Reserve office. For this purpose, the pass-through
account in which a respondent's required reserve balance
is maintained may be used by the respondent for the
posting of entries arising from transactions involving
the use of such Federal Reserve services, if the posting
of these types of transactions has been authorized
by the correspondent and the Federal Reserve. For
example, access to the wire transfer, securities transfer,
and settlement services that involve charges to the
commingled reserve account at the Reserve Bank will
require authorization from the correspondent and the
Reserve Bank for the type of transaction that is occurring.
-7 (ii)
In addition, in obtaining Federal Reserve services,
respondents maintaining their required reserves on
a pass-through basis may choose to have entries arising
from the use of Federal Reserve services posted to:
(a) with the prior authorization of all parties concerned,
the reserve account maintained by any institution
at a Federal Reserve Bank, or (b) an account maintained
for clearing purposes at a Federal Reserve Bank
by the respondent.
(iii) Accounts at Federal Reserve Banks consisting only
of respondents' reserve balances that are passed through
by a correspondent to a Federal Reserve Bank may be
used only for transactions of respondents. A correspondent
will not be permitted to use such pass-through accounts
for purposes other than serving its respondents' needs.
(iv)
A correspondent may not apply for Federal Reserve
credit on behalf of a respondent. Rather, a respondent
should apply directly to its Federal Reserve Bank
for credit. Any Federal Reserve credit obtained by
a respondent may be credited, at the respondent's
option and with the approval of the parties concerned,
to the reserve account in which its required reserves
are maintained by a correspondent, to a clearing account
maintained by the respondent, or to any account to
which the respondent is authorized to post entries
arising from the use of Federal Reserve services.
By order of the Board of Governors of the Federal Reserve
System, August 27, 1980.
(Signed)
Theodore E. Allison
Theodore E. Allison
Secretary of the Board
[SEAL]
The
MONETARY
CONTROL
ACT
of 1980
Federal Reserve Publication—August 15, 1980
The Monetary Control A ct o f 1980 (P.L. 96-221),
enacted on March 31, 1980, is designed to improve the
effectiveness o f monetary policy by applying new reserve
requirements set by the Federal Reserve Board to all de
pository institutions. Am ong its other key provisions, the
A ct 1) authorizes the Federal Reserve to collect reports
from all depository institutions; 2) extends access to Fed
eral Reserve discount and borrowing privileges and other
services to non-member depository institutions; 3) requires
the Federal Reserve to set a schedule o f fees for Federal R e
serve services;and 4 )provides fo r the gradual phase-out o f
deposit interest rate ceilings, coupled with broader powers
fo r thrift institutions.
WHO IS COVERED?
Uniform reserve requirements are imposed on
all depository institutions, including commercial banks,
savings banks, savings and loan associations, credit unions,
and industrial banks that have transaction accounts or
nonpersonal time deposits. Under the terms of the Inter
national Banking Act of 1978, the same reserve require
ments will also be extended to U.S. agencies and branches
of foreign banks. The revised reserve requirement rules also
affect Edge Act and Agreement corporations.
REPORTING REQU IREM ENTS
The Act requires all depository institutions to file
reports which the Board determines to be necessary or de
sirable for the control or monitoring of the monetary and
credit aggregates. All reports are to be made directly to the
Federal Reserve.
The Board has deferred until May 1981 all reserve
requirements and reporting for institutions with total
deposits of less than $1 million. The Board has also a
dopted quarterly rather than weekly reporting and reserve
maintenance for institutions with total deposits of $1
million to $5 million. The quarterly reporting and mainte
nance procedures will begin in January 1981. Reporting
forms, manuals, and other materials will be sent to quarterly
respondents later this year.
All other nonmember institutions will report de
posits as of October 30,1980, and will begin maintaining
reserves on November 13, 1980. Member banks will begin
Thrift Institutions
The Act also authorizes various new investment
authorities for federally chartered savings and loan associ
ations and permits them to offer credit card services and to
exercise trust and fiduciary powers; expands authority to
make real estate loans; authorizes Federal mutual savings
banks to make commercial, corporate and business loans,
subject to limitations, and to accept demand deposits in
connection with a commercial, corporate, or business loan
relationship; and in other ways expands the powers of thrift
institutions.
FOR FU RTH ER INFO RM ATIO N
For more detailed information about the Act and
implementing regulations, a depository institution may
write to the Board of Governors of the Federal Reserve
System or to its District Reserve Bank. Press releases will
be issued in connection with proposals and final action on
the provisions of the Act. If your institution has not been
receiving such releases, please ask your District Bank to
add your name to its mailing list.
In mid-September, Reserve Banks will begin a series
of meetings with depository institutions to familiarize them
with the new regulations and procedures.
phasing down their reserve requirements at that time also
Reporting forms, manuals, and other materials will be
sent to these institutions within the next several weeks.
RE SER VE REQUIREM ENTS
What Reserve Requirem ents are Established?
Transaction Accounts. The reserve requirement on
the first $25 million of transaction accounts is 3 percent.
A reserve requirement of 12 percent is established on that
portion of total transaction accounts above $25 million.
The Board is required to index the $25 million tranche an
nually, beginning in 1982, at 80 percent of increases or
decreases in transaction accounts of all depository insti
tutions for the previous year.
Transaction accounts are defined to include demand
deposits, NOW accounts, ATS accounts, share draft accounts,
and accounts subject to telephone or pre-authorized transfer
when the depositor is authorized to make more than three
transfers per calendar month. Accounts that permit the de
positor to make third party payments through automated
teller machines or remote service units are also covered.
Telephone and preauthorized transfers made to third parties
or to another deposit account of the same depositor are
counted toward the three permissible transfers per month;
telephone or preauthorized withdrawals paid directly to
the depositor are not. Further, a savings account is not
regarded as a transaction account merely because it permits
a depositor to make loan and associated payments to the
institution itself.
Nonpersonal Time Deposits. All depository insti
tutions are required to maintain reserves against nonperson
al time deposits (including savings deposits) with maturities
of less than 4 years at a ratio of 3 percent. Nontransferable
personal time deposits will not be subject to reserve require
ments. Time deposits with maturities of four years or more
are subject to a zero percent reserve ratio.
The Act defines a nonpersonal time deposit as any
time deposit or account that is transferable, or any time de
posit or account held by a party other than a natural person.
Under the Board’s regulation, all time deposits issued to
natural persons prior to October 1, 1980 are to be re
garded as personal time deposits even if they are transfer
able. A time deposit issued on or after that date, to be a
personal time deposit, must be held by a natural person
and bear a statement indicating that it is not transferable.
In determining the fee schedule, the Board must
price explicitly all services covered by the fee schedule, and
must price all services covered by the fee schedule to non
member depository institutions at the same fee schedule
applicable to member banks. However, nonmembers may
be required to hold balances sufficient for clearing purposes
and may be subject to any other terms that the Board
applies to member banks.
PHASE-OUT OF
IN T E R E ST R A TE CEILINGS
The Act provides for the orderly phase-out of limi
tations on the maximum rates of interest and dividends that
may be paid on deposits. A Depository Institutions Deregu
lation Committee—with the Secretary of the Treasury,
Chairman of the Federal Reserve Board, Chairman of the
Board of Directors of the Federal Deposit Insurance Cor
poration, Chairman of the Federal Home Loan Bank Board,
and Chairman of the National Credit Union Administration,
as voting members, and Comptroller of the Currency as a
non-voting member—is required to meet at least quarterly
in order to achieve the phase-out.
POWERS OF
DEPOSITOR Y IN STITU TIO N S
General
The Act authorizes banks to continue to provide
automatic transfer services from savings to checking ac
counts; authorizes savings and loan associations to establish
remote service units to credit and debit savings accounts,
or credit payments on loans, and provide related financial
transactions; and authorizes federally insured credit unions
to offer share draft accounts.
The Act also extends nationwide the authority for
depository institutions to offer NOW accounts, effective
December 31,1980. NOW accounts may consist solely of
funds in which the entire beneficial interest is held by one
or more individuals or by an organization operated primar
ily for religious, philanthropic, charitable, educational, or
other similar purposes and not operated for profit.
The insurance of accounts of federally insured banks,
savings and loan associations, and credit unions has been
increased from $40,000 to $100,000.
The Board has also shortened the minimum maturity of
all time deposits to 14 days from the present 30 days.
Supplemental Reserves. Under certain conditions,
and after consultation with other depository institution
regulators, the Board is authorized to impose a supplemen
tal reserve requirement of not more than 4 percent on every
depository institution. Interest will be paid on supplemen
tal reserves.
Eurocurrency Reserve Requirements. The Board
has set a 3 percent reserve requirement on certain Eurocur
rency activity, the same ratio as on nonpersonal time de
posits. These are: net borrowings from related foreign
offices; gross borrowings from unrelated foreign depos
itory institutions; loans to U.S. residents made by overseas
branches of domestic depository institutions; and sales of
assets by depository institutions in the United States to
their overseas offices.
H ow Will Reserve Requirem ents be Phased In?
Larger nonmember institutions will begin posting
reserves on November 13,1980; smaller institutions in early
January; reserve and reporting requirements have been
deferred for institutions with deposits of less than $1
million until May 1981. Until November, member banks
will continue to post reserves under existing requirements.
The Board has proposed to phase in reserve requirement
provisions of the Act as follows:
Nonmember Institutions. The Act provides for an
eight-year phase-in period of reserve requirements for non
member banks and thrift institutions. During the first tenmonth period beginning in November 1980 the amount of
required reserves will be one-eighth of the full requirement
and will increase by one-eighth in September of each of the
following 7 years. NOW accounts, other than those previ
ously authorized in New England, New York and New Jersey,
will be subject immediately to the full reserve requirement
on transactions accounts.
Member Banks. Reserve requirements for member
banks on transaction accounts and time and savings de
posits will be phased down by one-fourth of the difference
between the amount under the old and new reserve require
ment structures on November 13, 1980; by an additional
one-eighth in September, 1981; and by an additional oneeighth at six-month intervals thereafter. To reduce report
ing and processing burdens, reserve requirements on time
deposits under the old structure will be determined by
applying the average reserve ratio on time deposits for the
two week period ending August 6,1980 to the total amount
of time deposits. This fixed average reserve ratio on time
deposits will be used throughout the phase-in period. NOW
accounts, other than those previously authorized in New
England, New York and New Jersey, will be subject imme
diately to the full reserve requirement on transaction ac
counts.
De novo banks and banks that become member
banks after March 31, 1980, will have a two-year phasein period.
Former Member Banks. Under the Act any bank
that withdrew from membership on or after July 1, 1979,
must maintain reserves beginning on the date of enactment
as if it had been a member bank on that date. Reserve re
quirements for these banks have been deferred by the Board
until August 28, 1980. The date of withdrawal from
membership for a state member bank will be determined
by the date on which the Federal Reserve Bank received
notice of the decision of the bank’s board of directors
(and shareholders when required by state law) to with
draw from membership. For national banks, the with
drawal date is the date on which a state charter was
issued.
What are Eligible Reserves?
Reserve requirements may be met with funds de
posited directly at the Federal Reserve, funds held at the
Federal Reserve that are passed through a correspondent,
and vault cash. A depository institution that is a member
of the Federal Reserve System must hold its required
reserves directly with the Federal Reserve. A nonmember
institution may deposit its required reserve balance directly
with the Federal Reserve or pass its required reserve balance
through a correspondent. Such a correspondent may be a
Federal Home Loan Bank; the National Credit Union
Administration Central Liquidity Facility; or a depository
institution that holds a reserve balance with the Federal
Reserve.
Vault cash means United States currency and coin
(with the exception of silver and gold coins) owned by a
depository institution that may, at any time, be used to
satisfy depositors’ claims. It includes United States currency
and coin in transit to a Federal Reserve Bank or a corres
pondent depository institution for which the reporting de
pository institution has not yet received credit, and United
States currency and coin in transit from a Federal Reserve
Bank or a correspondent depository institution when the
reporting depository institution’s account at the Federal
Reserve or correspondent bank has been charged for such
shipment.
DISCOUNT WINDOW
Any depository institution holding reservable
transaction accounts or nonpersonal time deposits is
entitled to the same borrowing privileges as member banks.
In administering the borrowing privileges, the Fed
eral Reserve is to take into consideration the special needs
of savings and other depository institutions for access con
sistent with their long-term asset portfolios and their sensi
tivity to national money market trends. In general, access
is available only after they have fully used reasonable alter
native sources of funds. However, the discount window will
be available on a temporary basis to cover immediate cash
or reserve needs, when institutions are unable to gain timely
access to their special industry lenders.
PRICING OF SERVIC ES
The Monetary Control Act requires the Board to
publish for comment a set of pricing principles and a pro
posed schedule of fees for Federal Reserve Bank services
by September 1,1980. The Board will begin actual pricing
of some services in January 1981 and price all services by
September 1981.
The following services are covered by the fee schedule:
1. Currency and coin services of a nongovernmental nature.
2. Check-clearing and collection.
3. Wire transfer.
4. Automated clearinghouse.
5. Settlement.
6. Securities safekeeping.
7. Federal Reserve float.
8. Any new service the Federal Reserve System offers,
including but not limited to, payment services to effectuate
electronic funds transfer.
BANK AND PUBLIC INFORMATION DEPARTMENT
FEDERAL RESERVE BANK OF DALLAS
STATION K
DALLAS, TEXAS 75222
©USPS 197*
PLEASE FORWARD OUR INSTITUTION ____ COPIES
OF REGULATION D.
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ADDRESS
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