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FEDERAL RESERVE BANK OF DALLAS DALLAS. TEXAS 75222 Circular No. 80-170 (D) Septem ber 9, 1980 REVISED REGULATION D TO THE CHIEF EXECUTIVE OFFICER OF THE INSTITUTION ADDRESSED 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 offering transaction accounts or nonpersonal time deposits will become subject to the Federal Reserve's Regulation D, Reserve Requirements. The highlights of the new reserve requirement structure are contained in the enclosed press release, Federal Register document, and copy of Regulation D. The press release and Federal Register document detailing the pass-through guidelines and a brochure regarding the Monetary Control Act of 1980 are also enclosed. Reporting under the new structure will begin for deposits as of October 30, 1980, and reserve maintenance under the new structure will begin on November 13, 1980. Detailed information on both reporting and reserve maintenance will be provided to your institution within the next several weeks. 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 B a n k s and o th e r s are e n c o u r a g e d to us e th e fo llo w in g in c o m in g W A T S n u m b e r s in c o n ta c tin g this Bank: 1-800-442-714 0 (in tr a s ta te ) an d 1-800-527-920 0 (in te rstate ). Fo r ca lls p la c e d locally, p le a s e use 651 plu s th e ex te n s io n refe rred to above. This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) Mr. Eldon Miller Vice President First Dallas International Banking Corp. P. O. Box 8 3 7 2 5 Dallas, Texas 7 5 2 8 3 Mr. Barry J . Mason President Republic International Company P. 0 . Box 2 2 5 9 6 1 Dallas, Texas 7 5 2 6 5 FEDERAL RESERVE BANK OF DALLAS MISC-125 Rev. 5 - 7 5 DAT] 'f H - t 1 ,o: of Mr. Elvis Mason Chief Executive Officer First International Banking Corp. F irst International Bank Bldg. 1 8 0 1 Main S treet Houston, Texas 7 7 0 0 2 Mr. Gerald R. Williams Executive Vice President and Chief Financial O fficer First City International Corp. of Texas P. 0 . Box 2 5 5 7 Houston, Texas 7 7 0 0 1 Mr. Yuichi Kuraishi Vice President Tokyo Bancorp. International 2 Houston C enter, Suite 1 1 0 0 Houston, Texas 7 7 0 0 2 Security Pacific International Bank 2 Allen Center, Suite 3 0 3 0 1 2 0 0 Smith S tre e t Houston, Texas 7 7 0 0 2 F0n ,,; Please: □ □ □ Attend to Note and return Note and forward to Fites □ See (phone) me re attached □ Prepare reply for □ □ D ^ s requested □ □ D m y signature □ President's s ig n a tu re □ O F . V . P / s sign atu re □ For your information Other remarks: For your file s A s ^ e r conversation □ For your comments and suggestions D oes attach ed meet with your approval? For signature. i f you approve Supply S ecretariat with copy o f response Mr. Robert V. Silva ' President Chase Bank International-Houston Iio o Milam, Suite 2 3 4 5 Houston, Texas 7 7 0 0 2 Mr. Robert S. Devens President Morgan Guaranty International Bank of Houston 1 1 0 0 Milam, Suite 8 3 0 Houston, Texas 7 7 0 0 2 Mr. Tin L. Conner Vice President and General Manager Continental Bank International (Texas) 1 1 0 0 Milam, Suite 3 5 0 0 Houston, Texas 7 7 0 0 2 Mr. Ephrim Graff Assistant Vice President Citibank International-Houston 2 Allen Center, Suite 2 1 0 0 Houston, Texas 7 7 0 0 2 Mr. Omer Rifai Manager Banque De Paris Et Des Pays-Bas International (Houston) Co. 6 0 1 Jefferson Houston, Texas 7 7 0 0 2 Mr. Horst Kaiser A ssistant Vice President First Chicago International (Southwest) 1 2 0 0 Milam, Suite 5 1 5 Houston, Texas 7 7 0 0 2 Mr. Kenneth E. Stallman Vice President and Manager Bank of America International of Texas 5 0 0 Dallas Avenue, Suite 3 1 0 0 Houston, Texas 7 7 0 0 2 1 x , \ Mr. Douglas Cornwell Vice President and Controller Bankers Trust International (Southwest) Corp. 1 1 0 0 Milam, Suite 2 6 3 0 Houston, Texas 7 7 0 0 2 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 comment 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 -2- 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 accounts to include demand deposits, 1 ?/ NOW- / accounts, ATS— ' 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 of Withdrawal. 2/ Automatic Transfer Service (for transfers of funds from savings to demand accounts). -3- All 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 person. a 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 _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 -8 - To 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 nonmetnbers 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 Agreement corporations, savings and loan associations, savings banks and credit unions, the reserve requirement provisions of the Act apply also to industrial -9- 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 -10- at 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. # # # # # # # # # # # # # # 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-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 ( ) time deposit or account that is transferable or (2 ) 1 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 Home 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. Reg. 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) Pnited 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 -8 in 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. -10- 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 from'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. -11- Nonpersonal Time Deposits Definition. The Act defines "nonpersonal time deposit" as a ( ) transferable time deposit or account, or (2 ) a time deposit or 1 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 Fed. Reg. 47846). This date has been modified further to October 1, 1980. -12- 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. -13- 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. -14- 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-U.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 -15- o£ 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 will be 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 adebt obligation would be exempt from reserve requirements if itwould 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 -16- 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 f y the shorter of the maturity c 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 f y the institution's c 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 uncoilateralized 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 f y non-U.S. c 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 -18- offshore 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 -19- 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. However, if possible, the lew 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 am aggregated report of deposits, the unused portion may be assigned to other offices. Reassignment of the low 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 by 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. -20- 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 on 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 iimediately applies -21- 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 Eeserve 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 NOW accounts to its total transaction accounts. In order to provide the most benefit to depository institutions, the Board will permit the the $25 million lew 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. -22- 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 < e novo member or a nonmember joining t 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 f y section 103 of the Act). This interpretation applies c 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 -23- function are 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. Onder 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. 24- 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 0. 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 frcm issuance of obligations by affiliates and from the sale of ineligible bankers' acceptances have remaining maturities of less than 14 days. -2618. 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 frcm 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 frcm 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 frcm 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. -27- 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. s 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 FEDERA^RESERVEpressrelease 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. -31. 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 pass-through rules V 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 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 institution1 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 hold a correspondent responsible for guaranteeing the accuracy of the reports of deposits submitted by its respondents to their local Federal Reserve Banks. -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) (iv) (v) (5) 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. The Federal Reserve Bank may terminate any pass-through relationship in which the correspondent is deficient in its recordkeeping or other responsibilities. 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] B O A R D O F G O V E R N O R S O F T H E F E D E R A L R E SE R V E SY ST E M RESERVE REQUIREMENTS OF DEPOSITORY INSTITUTIONS SUPPLEMENT TO REGULATION D t As amended effective for reserves required to be maintained during the seven-day period begin ning November 13, 1980, against deposits outstanding during the seven-day period beginning on October 30, 1980. SECTION 204.8— RESERVE REQUIREM ENT RATIOS over $2 million$10 million (a) Reserve percentages. The following reserve ratios are prescribed for all depository institutions, Edge and Agreem ent C orporations and United States branches and agencies of foreign banks: Category $140,000 + 9 '/2% of amount over $2 million over $10 million- $900,000+ 113 /4% of $100 million amount of over $10 million over $100 million-$11,475,000+ 12%% of $400 million amount over $10 million Reserve requirements over $400 million $49,725,000+ \6'A% of amount over $400 million Net transaction accounts $0-$25 million Over $25 million 3% of amount $750,000 plus 12% o f am ount over $25 million Savings deposits Nonpersonal time deposits Time deposits By original maturity (or notice period) (subject to 3% minimum specified by law) less than 4 years 4 years or more 3% 0% Eurocurrency liabilities By initial maturity: 3% (b) Reserve ratios in effect during last compu tation period prior to September 1, 1980. Category Less than 180 days $0-5 million over $5 million 180 days to 4 years 4 years or more 3% 6% 2'A% 1% Reserve Requirement Accounts authorized pursuant to Section 303 of Public Law 96-221 offered by member banks located in States outside Connecticut, Maine, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island and Vermont 12% Net Demand Deposits Deposit Tranche: $0-$2 million 7% t Club accounts For this Regulation to be com plete retain: 1) Printed Regulation pam phlet dated N ovem ber 13, 1980. 2) This Supplement. A U G U ST 1980 3% For purposes of computing the reserves under this Part, that would have been required using the reserve ratios that were in effect on August 31, 1980, the reserve ratio on time deposits of a mem ber bank shall be the average time deposit ratio of the member bank during the 14-day period ending August 6, 1980, except that the reserve ratio on time deposits o f a nonm em ber bank that was a member bank on or after July 1, 1979, but which became a nonmember bank before March 31, 1980, may be the average time deposit ratio of the non member during the 14-day period ending August 27, 1980. BOARD OF GOVERNORS of the FEDERAL RESERVE SYSTEM RESERVE REQUIREMENTS OF DEPOSITORY INSTITUTIONS REGULATION D (12 CFR 204) As revised effective November 13, 1980 Any inquiry relating to this regulation should be addressed to the Federal Reserve Bank of the Federal District in which the inquiry arises. CONTENTS Pg ae S e c . 2 0 4 .1 — A u t h o r it y , P u r p o s e .................................................................................................................... 5 S e c . 2 0 4 .2 — D e f i n i t i o n s .................................................................................................................................................................. 5 S e c . 2 0 4 .3 — C o m p u t a t io n Sc o pe a i n t e n a n c e .................................................................................................................... 12 S e c . 2 0 4 .4 — T r a n s it io n a l A d j u s t m e n t s ............................................................................................................................... 16 and M and S e c . 2 0 4 .5 — E m e r g e n c y R e s e r v e R e q u i r e m e n t ............................................................................................................... 2 0 S e c . 2 0 4 .6 — S u p p l e m e n t a l R e s e r v e R e q u ir e m e n t ..........................................................................................................2 0 S e c . 2 0 4 .7 — P e n a l t i e s ........................................................................................................................................................................2 1 S t a t u t o r y A p p e n d i x .......................................................................................................................................................................... 2 1 [S e c . 2 0 4 .8 — S u p p l e m e n t , R e s e r v e R e q u ir e m e n t R a t io s , 3 is p r in t e d s e p a r a t e l y .] REGULATION D (1 2 C F R 204) As revised effective November 13, 1980 RESERVE REQUIREMENTS OF DEPOSITORY INSTITUTIONS* SECTION 204.1— AUTHORITY, PURPOSE AND SCOPE (a) Authority. This Part is issued under the au thority of section 19 (12 U .S.C. §§ 461 et seq.) and other provisions of the Federal Reserve Act and of section 7 of the International Banking Act of 1978 (12 U.S.C. § 3105). (b) Purpose. This Part relates to reserves that depository institutions are required to maintain for the purpose of facilitating the implementation of monetary policy by the Federal Reserve System. (c) Scope. (1) The following depository institu tions are required to maintain reserves in accord ance with this Part: (i) Any insured bank as defined in section 3 of the Federal Deposit Insurance Act (12 U .S.C. § 1813(h)) or any bank that is eligible to apply to become an insured bank under section 5 of such Act (12 U.S.C. § 1815); (ii) Any savings bank or m utual savings bank as defined in section 3 of the Federal Deposit Insurance Act (12 U.S.C. § 1813(0, (g)); (iii) Any insured credit union as defined in section 101 of the Federal Credit Union Act (12 U.S.C. § 1752(7)) or any credit union that is eligi ble to apply to become an insured credit union un der section 201 of such Act (12 U.S.C. § 1781); (iv) Any member as defined in section 2 of the Federal Home Loan Bank Act (12 U .S .C . § 1422(4)); and (v) Any insured institution as defined in sec tion 401 of the National Housing Act (12 U .S.C. § 1724(a)) or any institution which is eligible to ap ply to become an insured institution under section 403 of such Act (12 U.S.C. § 1726). *The text corresponds to the Code of Federal Regulations, Title 12, Chapter II, Part 204; cited as 12 CFR 204. The words “ this Part” , as used herein, mean Regulation D. (2) Except as may be otherwise provided by the Board, a foreign bank’s branch or agency lo cated in the United States is required to comply with the provisions of this Part in the same manner and to the same extent as if the branch or agency were a member bank, if its parent foreign bank (i) has total worldwide consolidated bank assets in ex cess of $1 billion; or (ii) is controlled by a foreign company or by a group of foreign companies that own or control foreign banks that in the aggregate have total worldwide consolidated bank assets in excess of $1 billion. In addition, any other foreign bank’s branch located in the United States that is eligible to apply to become an insured bank under section 5 of the Federal Deposit Insurance Act (12 U.S.C, § 1815) is required to maintain reserves in accordance with this Part as a nonmember de pository institution. (3) Except as may be otherwise provided by the Board, an Edge Corporation (12 U.S.C. § 611 et seq.) or an Agreement Corporation (12 U.S.C. § 601 et seq.) is required to comply with the provi sions of this Part in the same manner and to the same extent as a member bank. (4) This Part does not apply to any financial institution that (i) is organized solely to do business with other financial institutions; (ii) is owned pri marily by the financial institutions with which it does business; and (iii) does not do business with the general public. (5) The provisions of this Part do not apply to any deposit that is payable only at an office located outside the United States. SECTION 204.2— DEFINITIONS For purposes of this Part, the following defini tions apply unless otherwise specified: (a)(1) “ Deposit” means: §§ 2 0 4 .2 (i) the unpaid balance o f m oney or its equivalent received or held by a depository institu tion in the usual course of business and for which it has given or is obligated to give credit, either con ditionally or unconditionally, to an account, includ ing interest credited, or which is evidenced by an instrument on which the depository institution is primarily liable; (ii) money received or held by a depository institution, or the credit given for money or its equivalent received or held by the depository insti tution in the usual course of business for a special or specific purpose, regardless of the legal relation ships established thereby, including escrow funds, funds held as security for securities loaned by the depository institution, funds deposited as advance payment on subscriptions to United States govern ment securities, and funds held to meet its accept ances; (iii) an outstanding draft, cashier’s check, money order, or officer’s check drawn on the de pository institution and issued in the usual course of business for any purpose, including payment for services, dividends, or purchases; (iv) any due bill or other liability or under taking on the part of a depository institution to sell or deliver securities to, or purchase securities for the account of, any customer (including another de pository institution), involving either the receipt of funds by the depository institution, regardless of the use of the proceeds, or a debit to an account of the customer before the securities are delivered. A deposit arises thereafter, if after three business days from the date of issuance of the obligation, the de pository institution does not deliver the securities purchased or does not fully collateralize its obliga tion with securities similar to the securities pur chased. A security is similar if it is o f the same type and if it is of comparable maturity to that pur chased by the customer; (v) any liability of a depository institution’s affiliate that is not a depository institution, on any promissory note, acknowledgment of advance, due bill, or similar obligation (written or oral), with a maturity of less than four years, to the extent that the proceeds are used to supply or to maintain the availability of funds (other than capital) to the de pository institution, except any such obligation that, had it been issued directly by the depository institu tion, would not constitute a deposit. If an obliga tion of an affiliate of a depository institution is re REGULATION D garded as a deposit and is used to purchase assets from the depository institution, the maturity of the deposit is determined by the shorter of the maturity of the obligation issued or the remaining maturity of the assets purchased. If the proceeds from an affiliate’s obligation are placed in the depository in stitution in the form of a reservable deposit, no re serves need be maintained against the obligation of the affiliate since reserves are required to be main tained against the deposit issued by the depository institution. However, the maturity of the deposit is sued to the affiliate shall be the shorter of the ma turity of the affiliate’s obligation or the maturity of the deposit; (vi) credit balances; (vii) any liability of a depository institution on any promissory note, acknowledgment of ad vance, bankers’ acceptance, or similar obligation (written or oral), including mortgage-backed bonds, that is issued or undertaken by a depository institu tion as a means of obtaining funds, except any such obligation that: (A) is issued or undertaken and held for the account of: (1) an office located in the United States of another depository institution, foreign bank, Edge or Agreement Corporation, or New York Investment (Article XII) Company; (2) the United States government or an agency thereof; or (3) the E xport-lm port Bank o f the United States, Minbanc Capital Corporation, the Government Development Bank for Puerto Rico, a Federal Reserve Bank, a Federal Home Loan Bank, or the National Credit Union Administration Cen tral Liquidity Facility; (B) arises from a transfer of direct obliga tions of, or obligations that are fully guaranteed as to principal and interest by, the United States gov ernment or any agency thereof that the depository institution is obligated to repurchase; (C) is not insured by a Federal agency, is subordinated to the claims of depositors, has a weighted average maturity of seven years or more, is not subject to Federal interest rate limitations, and is issued by a depository institution with the approval of, or under the rules and regulations of, its primary Federal supervisor; (D) arises from a borrowing by a deposi tory institution from a dealer in securities, for one business day, of proceeds of a transfer of deposit REGULATION D credit in a Federal Reserve Bank or other immedi ately available funds, (commonly referred to as “ Federal funds” ), received by such dealer on the date of the loan in connection with clearance of se curities transactions; or (E) arises from the creation, discount and subsequent sale by a depository institution of its bankers’ acceptance of the type described in para graph 7 of section 13 of the Federal Reserve Act (12 U.S.C. § 372). (2) “ Deposit” does not include: (i) trust funds received or held by the depos itory institution that it keeps properly segregated as trust funds and apart from its general assets or which it deposits in another institution to the credit of itself as trustee or other fiduciary. If trust funds are deposited with the commercial department of the depository institution or otherwise mingled with its general assets, a deposit liability of the institu tion is created; (ii) an obligation that represents a condi tional, contingent or endorser’s liability; (iii) obligations, the proceeds of which are not used by the depository institution for purposes of making loans, investments, or maintaining liquid assets such as cash or “ due from” depository insti tutions or other similar purposes. An obligation is sued for the purpose of raising funds to purchase business premises, equipment, supplies, or similar assets is not a deposit; (iv) accounts payable; (v) hypothecated “ deposits” created by pay m ents on an installm ent loan where (A) the amounts received are not used immediately to re duce the unpaid balance due on the loan until the sum of the payments equals the entire amount of loan principal and interest; (B) and where such amounts are irrevocably assigned to the depository institution and cannot be reached by the borrower or creditors of the borrower; (vi) dealer reserve and differential accounts that arise from the financing of dealer installment accounts receivable, and which provide that the dealer may not have access to the funds in the ac count until the installment loans are repaid, as long as the depository institution is not actually (as dis tinguished from contingently) obligated to make credit or funds available to the dealer; (vii) a dividend declared by a depository in stitution for the period intervening between the date §§ 2 0 4 .2 of the declaration of the dividend and the date on which it is paid; (viii) an obligation representing a “ pass through account,” as defined in this section; (ix) an obligation arising from the retention by the depository institution of no more than a 10 per cent interest in a pool of conventional 1-4 fam ily mortgages that are sold to third parties; (x) an obligation issued to a State or munic ipal housing authority under a loan-to-lender pro gram involving the issuance of tax exempt bonds and the subsequent lending of the proceeds to the depository institution for housing finance purposes; (xi) shares of a credit union held by the Na tional Credit Union Administration or the National Credit Union Administration Central Liquidity Fa cility under a statutorily authorized assistance pro gram; and (xii) any liability of a United States branch or agency o f a foreign bank to another United States branch or agency of the same foreign bank, or the liability o f the United States office of an Edge Corporation to another United States office of the same Edge Corporation. (b)(1) “ Demand deposit” means a deposit that is payable on demand, or a deposit issued with an original maturity or required notice period of less than 14 days, or a deposit representing funds for which the depository institution does not reserve the right to require at least 14 days’ written notice of an intended withdrawal. The term includes all deposits other than time and savings deposits. De mand deposits may be in the form of (i) checking accounts; (ii) certified, ca sh ier’s and o ffic e r’s checks (including checks issued by the depository institution in payment of dividends); (iii) traveler’s checks and money orders that are primary obliga tions of the issuing institution; (iv) checks or drafts drawn by, or on behalf of, a non-United States of fice of a depository institution on an account main tained at any of the institution’s United States of fices; (v) letters of credit sold for cash or its equivalent; (vi) withheld taxes, withheld insurance and other withheld funds; (vii) time deposits that have matured or time deposits upon which the re quired notice of withdrawal period has expired and have not been renewed (either by action of the de positor or automatically under the terms of the de posit agreement); and (viii) an obligation to pay on demand or within 14 days a check (or other instru §§ 2 0 4 .2 REGULATION D notice accounts issued by savings and loan associa ment, device, or arrangement for the transfer of funds) drawn on the depository institution, where tions. (d)(1) “ Savings deposit” means a deposit or ac the account of the institution’s customer already has count with respect to which the depositor is not re been debited. The term does not include an obliga quired by the deposit contract but may at any time tion that is a tim e deposit under section be required by the depository institution to give 204.2(c)(l)(ii). written notice o f an intended withdrawal not less (2) A “ dem and d e p o sit” does not include than 14 days before withdrawal is made, and that is checks or drafts drawn by the depository institution not payable on a specified date or at the expiration on the Federal Reserve or on another depository in of a specified time after the date of deposit. A de stitution. posit may continue to be classified as a savings de (c)(1) “ Time deposit” means (i) a deposit that posit even if the depository institution exercises its the depositor does not have a right to withdraw for right to require notice of withdrawal. A “ savings a period of 14 days or more after the date of de deposit” includes a regular share account at a posit. “ Time deposit” includes funds: credit union and a regular account at a savings and (A) payable on a specified date not less loan association. than 14 days after the date of deposit; (2) For depository institutions subject to 12 (B) payable at the expiration of a speci fied time not less than 14 days after the date of de CFR 217 or 12 CFR 329, funds deposited to the posit; credit of, or in which any beneficial interest is held by, a corporation, association, partnership or other (C) payable upon written notice which ac tually is required to be given by the depositor not organization operated for profit may be classified as less than 14 days before the date of repayment; a savings deposit if such funds do not exceed $150,000 per depositor at the depository institution. (D) such as “ Christmas club” accounts and “ vacation club” accounts, that are deposited (3) “ Savings deposit” does not include funds under w ritten contracts providing that no w ith deposited to the credit o f the depository drawal shall be made until a certain number of pe institution’s own trust department where the funds involved are utilized to cover checks or drafts. riodic deposits have been made during a period of not less than three months even though some of the Such funds are “ transaction accounts.” deposits may be made within 14 days from the end (e) “ Transaction account” means a deposit or of the period; or account on which the depositor or account holder is (E) that constitute a “ savings deposit” permitted to make withdrawals by negotiable or which is not regarded as a “ transaction account.” transferable instrument, payment orders of with drawal, telephone transfers, or other similar device (ii) borrowings, regardless of maturity, rep resented by a promissory note, an acknowledgment for the purpose of making payments or transfers to of advance, or similar obligation described in sec third persons or others. “ Transaction account” in tion 204.2(a)(l)(vii) that is issued to any office lo cludes: cated outside the United States of another deposi (1) demand deposits; tory institution or Edge or Agreement Corporation (2) deposits or accounts subject to check, organized under the laws of the United States, to draft, negotiable order of withdrawal, share draft, any office located outside the United States of a or other similar item; foreign bank, or to institutions whose time deposits (3) savings deposits or accounts in which with are exempt from interest rate limitations under sec drawals may be made automatically through pay tion 217.3(g) of Regulation Q (12 CFR 217.3(g)). ment to the depository institution itself or through (2) A time deposit may be represented by a transfer of credit to a demand deposit or other ac transferable or nontransferable, or a negotiable or count in order to cover checks or drafts drawn upon nonnegotiable, certificate, instrument, passbook, the institution or to maintain a specified balance in, statement, or otherwise. A “ time deposit” includes or to make periodic transfers to, such accounts (au share certificates and certificates of indebtedness is tomatic transfer accounts); sued by credit unions, and certificate accounts and (4) deposits or accounts in which payments REGULATION D may be made to third parties by means of an auto mated teller machine, remote service unit or other electronic device; and (5) deposits or accounts in which payments may be made to third parties by means of a debit card; (6) deposits or accounts under the terms of which, or which by practice of the depository insti tution, the depositor is permitted or authorized to make more than three withdrawals per month for purposes of transferring funds to another account or for making a payment to a third party by means of preauthorized or telephone agreement, order or in struction. An account that permits or authorizes more than three such withdrawals in a calendar month is a “ transaction account” whether or not more than three such withdrawals actually are made in a calendar month. A “ preauthorized transfer” includes any arrangement by the depository institu tion to pay a third party from the account of a de positor 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. An account is not a “ transaction ac count” by virtue of an arrangement that permits withdrawals for the purpose of repaying loans and associated expenses at the same depository institu tion (as originator or servicer). (f)(1) “ Nonpersonal time deposit” means: (i) a time deposit, including a savings de posit, that is not a transaction account, representing funds in which any beneficial interest is held by a depositor which is not a natural person; (ii) a time deposit, including a savings de posit that is not a transaction account, that repre sents funds deposited to the credit of a depositor that is not a natural person, other than a deposit to the credit of a trustee or other fiduciary if the entire beneficial interest in the deposit is held by one or more natural persons; (iii) a time deposit that is transferable, ex cept a time deposit originally issued before Octo ber 1, 1980, to and held by one or more natural persons, including a deposit to the credit of a trustee or other fiduciary if the entire beneficial in terest in the deposit is held by one or more natural persons; (iv) a time deposit that is transferable, is sued on or after October 1, 1980, to and held by §§ 2 0 4 .2 one or more natural persons, including a deposit to the credit of a trustee or other fiduciary if the entire beneficial interest is held by one or more natural persons. A time deposit is transferable unless it contains a specific statement on the certificate, in strument, passbook, statement or other form repre senting the account that it is not transferable. A time deposit that contains a specific statement that it is not transferable is not regarded as transferable even if the following transactions can be effected: a pledge as collateral for a loan; a transaction that oc curs due to circumstances arising from death, in competency, marriage, divorce, attachment or oth erwise by operation of law or a transfer on the books or records of the institution; and (v) a time deposit represented by a promis sory note, an acknowledgment of advance, or a sim ilar obligation described in section 204.2(a)(l)(vii) that is issued to any office located outside the United States of another depository in stitution or Edge or Agreement Corporation orga nized under the laws of the United States, to any office located outside the United States of a foreign bank, or to institutions whose time deposits are ex empt from interest rate limitations under section 217.3(g) of Regulation Q (12 CFR 217.3(g)). (2) “ Nonpersonal time deposit” does not in clude nontransferable time deposits to the credit of or in which the entire beneficial interest is held by an individual pursuant to an Individual Retirement Account or Keogh (H. R. 10) Plan under 26 U.S.C. (I.R.C. 1954) §§ 408, 401. (g) “ N atural person” means an individual or a sole proprietorship. The term does not mean a cor poration owned by an individual, a partnership or other association. (h) “ E urocurrency liabilities” means the sum of the following: (1) Transactions with related offices outside the United States. (i) In the case of a depository institution or an Edge or Agreement Corporation organized under the laws of the United States, (A) positive net balances due to its non United States offices from its United States offices, and (B) assets (including participations) held by its non-United States offices or by non-United States offices of an affiliated Edge or Agreement Corporation that were acquired from its United States offices. §§ 2 0 4 .2 REGULATION D are (ii) In the case of a United States branch payable immediately upon presentation in the and agency of a foreign bank, United States, including checks forwarded to a Fed eral Reserve Bank in process of collection and (A) positive net balances due to its for checks on hand that will be presented for payment eign bank (including offices thereof located outside or forwarded for collection on the following busi the United States) after deducting an amount equal ness day; to 8 per cent of the following: the United States (ii) government checks drawn on the Trea branch’s or agency’s total assets less the sum of sury of the United States that are in the process of United States coin and currency, cash items in the collection; and process of collection and unposted debits, balances (iii) such other items in the process of col due from domestic banks and other foreign banks, balances due from foreign central banks, and net lection, that are payable immediately upon presen tation in the United States and that are customarily balances due from its foreign bank and the foreign cleared or collected by depository institutions as bank’s United States and non-United States offices; however, the amount that may be deducted may not cash items, including: exceed net balances due to the foreign bank (in (A) drafts payable through another depos cluding offices thereof located outside the United itory institution; States), and (B) redeemed bonds and coupons; (B) assets (including participations) held (C) food coupons and certificates; by its foreign bank (including offices thereof lo (D) postal and other money orders, and cated outside the United States) or by its parent traveler’s checks; (E) amounts credited to deposit accounts holding company that were acquired from the in connection with automated payment arrange United States branch or agency (other than assets ments where such credits are made one business required to be sold by Federal or State supervisory day prior to the scheduled payment date to insure authorities) or from an affiliated Edge or Agree ment Corporation. that funds are available on the payment date; (2) Foreign branch credit extended to United (F) commodity or bill of lading drafts States residents. Credit outstanding from the non payable im m ediately upon presentation in the United States office of a depository institution orga United States; (G) returned items and unposted debits; nized under United States law to United States resi dents (other than assets acquired and net balances and due from its United States offices), except credit (H) broker security drafts. extended (i) in the aggregate amount of $100,000 (2) “ Cash item in process of collection” does or less to any United States resident, (ii) by a non not include items handled as noncash collections United States office that at no time during the com and credit card sales slips and drafts. putation period had credit outstanding to United (J) “ Net transaction accounts” means the total States residents exceeding $1 million, or (iii) to an amount of a depository institution’s transaction ac institution that will be maintaining reserves on such counts less the deductions allowed under the provi credit pursuant to this Part. Credit extended to a sions of § 204.3. foreign branch, office, subsidiary, affiliate or other (k)(l) “ Vault cash” means United States cur foreign establishment ( “ foreign affiliate” ) con rency and coin owned and held by a depository in trolled by one or more domestic corporations is re stitution that may, at any time, be used to satisfy garded as credit extended to a United States resi depositors’ claims. dent unless the proceeds will be used in its foreign business or that of other foreign affiliates of the (2) “ Vault cash” includes United States cur controlling domestic corporation(s). This subpara rency and coin in transit to a Federal Reserve Bank graph does not apply to United States branches and or a correspondent depository institution for which agencies of foreign banks. the reporting depository institution has not yet re (i)(l) “ Cash item in process of collection” ceived credit, and United States currency and coin means: in transit from a Federal Reserve Bank or a corre (i) checks in the process of collection, spondent depository institution when the reporting drawn on a bank or other depository institution that depository institution’s account at the Federal Re REGULATION D §§ 2 0 4 .2 tion that is a member of the Federal Reserve Sys serve or correspondent bank has been charged for such shipment. tem. “ Foreign bank” means any bank or other (3) Silver and gold coin and other currency (o) similar institution organized under the laws of any and coin whose numismatic or bullion value is sub country other than the United States or organized stantially in excess of face value is not vault cash for purposes of this Part. under the laws o f Puerto Rico, Guam, American Samoa, the Virgin Islands, or other territory or pos (1) “ Pass through account” means a balance session of the United States. maintained by a depository institution that is not a (p) “ De novo depository institution” means a member bank, by a U.S. branch or agency of a for depository institution that was not engaged in busi eign bank, or by an Edge or Agreement Corpora ness on July 1, 1979, and is not the successor by tion, (1) in an institution that maintains required re merger or consolidation to a depository institution serve balances at a Federal Reserve Bank, (2) in a that was engaged in business prior to the date of Federal Home Loan Bank, (3) in the N ational Credit Union Administration Central Liquidity Fa merger or consolidation. (q) “ Affiliate” includes any corporation, associ cility, or (4) in an institution that has been autho rized by the Board to pass through required reserve ation, or other organization: (1) Of which a depository institution, directly balances if the institution, Federal Home Loan or indirectly, owns or controls either a majority of Bank, or National Credit Union Administration the voting shares or more than 50 per cent of the Central Liquidity Facility maintains the funds in the numbers of shares voted for the election of its di form of a balance in a Federal Reserve Bank of rectors, trustees, or other persons exercising similar which it is a member or at which it maintains an functions at the preceding election, or controls in account in accordance with rules and regulations of any manner the election of a majority of its direc the Board. tors, trustees, or other persons exercising similar (m)(l) “ Depository institution” means: (i) any insured bank as defined in section 3 functions; (2) Of which control is held, directly or indi of the Federal Deposit Insurance Act (12 U.S.C. rectly, through stock ownership or in any other § 1813(h)) or any bank that is eligible to apply to manner, by the shareholders of a depository institu become an insured bank under section 5 of such tion who own or control either a majority of the Act (12 U.S.C. § 1815); shares of such depository institution or more than (ii) any savings bank or mutual savings 50 per cent of the number of shares voted for the bank as defined in section 3 of the Federal Deposit election of directors of such depository institution Insurance Act (12 U.S.C. § 1813(f), (g)); at the preceding election, or by trustees for the (iii) any insured credit union as defined in benefit of the shareholders of any such depository section 101 of the Federal Credit Union Act (12 U.S.C. § 1752(7)) or any credit union that is institution; (3) O f which a m ajority of its directors, eligible to apply to become an insured credit union trustees, or other persons exercising similar func under section 201 of such Act (12 U.S.C. § 1781); tions are directors of any one depository institution; (iv) any member as defined in section 2 of the Federal Home Loan Bank Act (12 U .S .C . or (4) Which owns or controls, directly or indi § 1422(4)); and rectly, either a majority of the shares of capital (v) any insured institution as defined in sec stock of a depository institution or more than 50 tion 401 of the National Housing Act (12 U .S.C. per cent of the number of shares voted for the elec § 1724(a)) or any institution which is eligible to ap tion of directors, trustees or other persons exercis ply to become an insured institution under section ing similar functions of a depository institution at 403 of such Act (12 U.S.C. § 1726). the (2) “ Depository institution” does not include preceding election, or controls in any manner the election of a majority of the directors, trustees, international organizations such as the World Bank, or other persons exercising similar functions of a the Inter-American Development Bank, and the depository institution, or for the benefit of whose Asian Development Bank. shareholders or members all or substantially all the (n) “ Member bank” means a depository institu §§ 2 0 4 .2 — 2 0 4 .3 REGULATION D tranche may be assigned to other offices o f the same foreign bank until the amount o f the tranche or net transaction accounts is exhausted. The for eign bank shall determine this assignment subject to the restriction that if a portion of the tranche is as signed to an office in a particular State, any unused portion must first be assigned to other offices lo cated within the same State and within the same Federal Reserve District, that is, to other offices in cluded on the same aggregated report of deposits. The designation of office(s) to which the low re serve tranche is assigned may be changed at the be ginning of a calendar year. SECTION 204.3— COMPUTATION AND (2) Edge and Agreement Corporations. M AINTENANCE (i) An Edge or Agreement Corporation’s of (a) Maintenance of required reserves. A depos fices operating within the same State and within the itory institution, a U.S. branch or agency of a for same Federal Reserve District* shall prepare and file eign bank, and an Edge or Agreement Corporation a report of deposits on an aggregated basis. shall m aintain reserves against its deposits and (ii) An Edge or A greem ent Corporation Eurocurrency liabilities in accordance with the pro shall, if possible, assign the low reserve tranche on cedures prescribed in this section and section 204.4 transaction accounts (§ 204.8(a)) to only one office and the ratios prescribed in section 204.8. Penalties or to a group of offices filing a single aggregated shall be assessed for deficiencies in required re report of deposits. If the low reserve tranche cannot serves in accordance with the provisions of section be fully utilized by a single office or by a group of 204.7. Every institution holding transaction ac offices filing a single report of deposits, the unused counts or nonpersonal time deposits shall file a re portion of the tranche may be assigned to other of port of deposits each week with the Federal Re fices of the same institution until the amount of the serve Bank of its District (see section 204.3(d) for tranche or net transaction accounts is exhausted. An the special rule for depository institutions with total Edge or Agreement Corporation shall determine deposts of less than $5 million) and any other re this assignment subject to the restriction that if a ports that the Board may require by rule, regulation portion of the tranche is assigned to an office in a or order. For purposes of this Part, the obligations particular State, any unused portion must first be of a majority owned (50% or more) U.S. subsidiary assigned to other offices located within the same (except an Edge or Agreement Corporation) o f a State and within the same Federal Reserve District, depository institution shall be regarded as obliga that is, to other offices included on the same aggre tions of the parent depository institution. gated report o f deposits. The designation o f (1) U nited States branches and agencies o f office(s) to which the low reserve tranche is as foreign banks. signed may be changed at the beginning of a calen (i) A foreign bank’s United States branches dar year. and agencies operating within the same State and (b) Form of reserves. Reserves shall be held in within the same Federal Reserve District shall pre the form of (i) vault cash, (ii) a balance maintained pare and file a report of deposits on an aggregated directly with the Federal Reserve Bank in the Dis basis. trict in which it is located, or (iii) a pass through (ii) United States branches and agencies of account. R eserves held in the form o f a pass the same foreign bank shall, if possible, assign the through account shall be considered to be a balance low reserve tranche on transaction accounts maintained with the Federal Reserve. (§ 204.8(a)) to only one office or to a group of of (c) C om putation o f required reserves. Re fices filing a single aggregated report of deposits. If quired reserves are computed on the basis of the the low reserve tranche cannot be fully utilized by daily average deposit balances during a seven-day a single office or by a group of offices filing a sin period ending each Wednesday (the “ computation gle report of deposits, the unused portion of the period” ). Reserve requirements are computed by capital stock of a depository institution is held by trustees. (r) “ United S tates” means the States of the United States and the District of Columbia. (s) “ United States resident” means (1) any in dividual residing (at the time of the transaction) in the United States; (2) any corporation, partnership, association or other entity organized in the United States ( “ dom estic co rporatio n” ); and (3) any branch or office located in the United States of any entity that is not organized in the United States. REGULATION D applying the ratios prescribed in section 204.8 to the classes of deposits and Eurocurrency liabilities of the institution. In determining the reserve bal ance that is required to be maintained with the Fed eral Reserve, the average daily vault cash held dur ing the computation period is deducted from the amount of the institution’s required reserves. The reserve balance that is required to be maintained with the Federal Reserve shall be maintained during a corresponding seven-day period (the “ mainte nance period” ) which begins on the second Thurs day follow ing the end o f a given com putation period. (d) Special rule for depository institutions that have total deposits of less than $5 million. (1) A depository institution with total deposits of less than $5 million shall file a report of deposits once each calendar quarter for a seven-day compu tation period that begins on the third Thursday of a given month during the calendar quarter. Each Re serve Bank shall divide the depository institutions in its District that qualify under this paragraph into three substantially equal groups and assign each group a different month to report during each cal endar quarter. (2) Required reserves are computed on the basis of the depository institution’s daily average deposit balances during the seven-day computation period. In determining the reserve balance that a depository institution is required to maintain with the Federal Reserve, the average daily vault cash held during the com putation period is deducted from the amount of the institution’s required re serves. The reserve balance that is required to be maintained with the Federal Reserve shall be main tained during a corresponding period that begins on the second Thursday follow ing the end of the institution’s computation period and ends on the first Wednesday after the close of the institution’s next computation period. (3) A depository institution that has less than $5 million in total deposits as o f December 31, 1979, shall qualify under this paragraph until it re ports total deposits of $5 million or more for two consecutive calendar quarters. (4) A depository institution that qualifies under this paragraph may elect at the beginning of a cal endar year to report deposits and maintain reserves on a weekly basis. (5) This paragraph shall not apply to an Edge §§ 2 0 4 .3 or A greem ent C orporation o r a United States branch or agency of a foreign bank. (e) C om putation o f transaction accounts. Overdrafts in demand deposit or other transaction accounts are not to be treated as negative demand deposits or negative transaction accounts and shall not be netted since overdrafts are properly reflected on an institution’s books as assets. However, where a customer maintains multiple transaction accounts with a depository institution, overdrafts in one ac count pursuant to a bona fide cash management ar rangement are permitted to be netted against bal ances in other related transaction accounts for reserve requirement purposes. (0 Deductions allowed in computing reserves. (1) In determining the reserve balance required under this Part, the amount of cash items in process of collection and balances subject to immediate withdrawal due from other depository institutions located in the U nited States (including such amounts due from United States branches and agen cies of foreign banks and Edge and Agreem ent Corporations) may be deducted from the amount of gross transaction accounts. The amount that may be deducted may not exceed that am ount o f gross transaction accounts. However, if a depository in stitution maintains any transaction accounts that are first authorized under Federal law after April 1, 1980, it may deduct from these balances cash items in process of collection and balances subject to im mediate withdrawal due from other depository insti tutions located in the United States only to the ex tent of the proportion that such newly authorized transaction accounts are of the institution’s total transaction accounts. The remaining cash items in process of collection and balances subject to imme diate withdrawal due from other depository institu tions located in the United States shall be deducted from the institution’s rem aining transaction ac counts. (2) United States branches and agencies o f a foreign bank may not deduct balances due from an other United States branch or agency of the same foreign bank, and United States offices of an Edge or Agreement Corporation may not deduct balances due from another United States office of the same Edge Corporation. (3) Balances “ due from other depository insti tutions” do not include balances due from Federal Reserve Banks, pass through accounts, or balances §§ 2 0 4 .3 REGULATION D fice. The correspondent placing funds with the Fed eral Reserve on behalf o f respondents will be responsible for reserve account maintenance as de scribed in subparagraphs (3) and (4) below. (ii) Respondent depository institutions or pass-through correspondents may institute, termi nate, or change pass-through arrangements for the maintenance of required reserve balances by pro viding all documentation required for the establish ment 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 non member 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 o f a foreign bank or offices of an Edge and Agreement Corporation fil ing a single aggregated report of deposits may des ignate any one o f the other U .S. offices of the same institution to serve as a pass-through corre spondent for all of the offices filing such a single aggregated report of deposits. (2) Reports (i) Every depository institution that main tains transaction accounts or nonpersonal time de posits is required to file its report of deposits (or (i) Pass-through rules. any other required form or statement) directly with (1) Procedure the Federal Reserve Bank of its District, regardless (i) A nonmember depository institution of the manner in which it chooses to maintain re re quired to maintain reserve balances (“ respondent” ) quired reserve balances. may select only one institution to pass through its (ii) The Federal Reserve Bank receiving required reserves. Eligible institutions through such reports shall notify the reporting depository in stitution of its reserve requirements. Where a pass which respondent required reserve balances may be through arrangement exists, the Reserve Bank will passed (“ correspondents” ) are Federal Home Loan also notify the correspondent passing respondent re Banks, the National Credit Union Administration Central Liquidity Facility, and depository institu serve balances through to the Federal Reserve of its respondent’s required reserve balances. tions that maintain required reserves at a Federal Reserve office. In addition, the Board reserves the (iii) The Federal Reserve will not hold a correspondent responsible for guaranteeing the ac right to permit other institutions, on a case-by-case basis, to serve as pass-through correspondents. The curacy of the reports of deposits submitted by its correspondent chosen m ust subsequently pass respondents to their local Federal Reserve Bank. through the required reserve balances of its respon (3) Account Maintenance dents directly to the appropriate Federal Reserve of (i) A correspondent that passes through re (payable in dollars or otherwise) due from banking offices located outside the United States. An insti tution exercising fiduciary powers may not include in “ balances due from other depository institu tions” amounts of trust funds deposited with other banks and due to it as a trustee or other fiduciary. (g) Availability of cash items as reserves. Cash items forwarded to a Federal Reserve Bank for col lection and credit shall not be counted as part of the reserve balance to be carried with the Federal Reserve until the expiration of the time specified in the appropriate time schedule established under Regulation J, “ Collection of Checks and Other Items and Transfers of Funds” (12 CFR 210). If a depository institution draws against items before that time, the charge will be made to its reserve ac count if the balance is sufficient to pay it; any re sulting impairment of reserve balances will be sub ject to the penalties provided by law and by this Part. However, the Federal Reserve Bank may, at its discretion, refuse to permit the withdrawal or other use of credit given in a reserve account for any time for which the Federal Reserve bank has not received payment in actually and finally col lected funds. (h) C a rry o v e r o f deficiencies. Any excess or deficiency in a required reserve balance for any maintenance period that does not exceed -2 per cent o f institution’s required reserves shall be carried forward to the next maintenance period. Any car ryover not offset during the next period may not be carried forward to additional periods. REGULATION D quired reserve balances of respondents whose main offices are located in the same Federal Reserve ter ritory 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 bal ances in a single commingled account at the Fed eral Reserve Bank office in whose territory the correspondent’s main office is located; or (B) A correspondent may maintain its own required re serve balance in an account with the Federal Re serve Bank office in whose territory its main office is located. The correspondent, in addition, would maintain in a separate commingled account the re quired reserve balances passed through for respon dents whose main office is located in the same Fed eral Reserve territory as that of the main office of the correspondent. (ii) A correspondent that passes through re quired reserve balances of respondents whose main offices are located outside the Federal Reserve ter ritory in which the main office of the correspondent is located shall maintain such required reserve bal ances in a separate com mingled account at each Federal Reserve office in whose territory the main offices of such respondents are located. (iii) 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. (4) Responsibilities o f Parties (i) Each individual depository institution is responsible for maintaining its required reserve bal ance with the Federal Reserve Bank either directly or through a pass-through correspondent. (ii) A pass-through correspondent shall be responsible for assuring the maintenance of the ap propriate aggregate level of its respondents’ re quired reserve balance. A Reserve Bank will com pare the total reserve balance required to be maintained in each reserve account with the total actual reserve balance held in such reserve accounts for purposes of determining required reserve defi ciencies, imposing or waiving penalties for defi ciencies in required reserves, and for other reserve maintenance purposes. A penalty for a deficiency in the aggregate level of the required reserve bal ance will be imposed by the Reserve Bank on the correspondent maintaining the account. §§ 2 0 4 .3 (iii) Each correspondent is required to main tain detailed records for each of its respondents in a manner that permits Reserve Banks to determine whether the respondent has provided a sufficient re quired reserve balance to the correspondent. A cor respondent passing through a respondent’s reserve balance shall maintain records and make such re ports as the Federal Reserve System requires in or der to insure the correspondent’s compliance with its responsibilities for the m aintenance o f a respondent’s reserve balance. Such records shall be available to the Federal Reserve Banks as required. (iv) The Federal Reserve Bank may termi nate any pass-through relationship in which the cor respondent is deficient in its recordkeeping or other responsibilities. (v) 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. (5) Services (i) A depository institution maintaining its reserve balances on a pass-through basis may ob tain available Federal Reserve System services di rectly 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 ex ample, access to the wire transfer, securities trans fer, and settlement services that involve charges to the commingled reserve account at the Reserve Bank will require authorization from the correspon dent and the Reserve Bank for the type of transac tion that is occurring. (ii) In addition, in obtaining Federal Re serve services, respondents maintaining their re quired reserves on a pass-through basis may choose to have entries arising from the use of Federal Re serve services posted to: (A) with the prior authori zation 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 respon dent. (iii) A ccounts at Federal Reserve Banks consisting only of respondents’ reserve balances REGULATION D §§ 2 0 4 .3 — 2 0 4 .4 that are passed through by a correspondent to a Federal Reserve Bank may be used only for trans actions 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 Federal Reserve credit on behalf of a respondent. Rather, a respondent should apply directly to its Federal Reserve Bank for credit. Any Federal Re serve credit obtained by a respondent may be cred ited, at the respondent’s option and with the ap proval of the parties concerned, to the reserve account in which its required reserves are main tained 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. SECTION 204.4— TRANSITIONAL ADJUSTMENTS The following transitional adjustments for com puting Federal Reserve requirements shall apply to all member and nonmember depository institutions, except for reserves imposed under sections 204.5 and 204.6. (a) Nonmembers. Except as provided below, the required reserves of a depository institution that was engaged in business on July 1, 1979, but was not a member of the Federal Reserve System on or after that date shall be determined by reducing the amount of required reserves computed under sec tion 204.3 in accordance with the following schedReserve maintenance periods occurring between November 13, 1980 to September 2, 1981 September 3, 1981 to September 1, 1982 September 2, 1982 to August 31, 1983 September 1, 1983 to September 5, 1984 September 6, 1984 to September 4, 1985 September 5, 1985 to September 3, 1986 September 4, 1986 to September 2, 1987 September 3, 1987 forward However, an institution shall not reduce the amount of required reserves on any category of deposits or accounts that are first authorized under Federal law in any State after April 1, 1980. (b) M embers and form er m em bers. The re for quired reserves of any depository institution that is a member bank on September 1, 1980, or was a member bank on or after July 1, 1979 and with drew from membership before March 31, 1980, or withdraws from membership on or after March 31, 1980, shall be determined as follows: (1) A depository institution whose required re serves are higher using the reserve ratios in effect during a given computation period (§ 204.8(a)) than its required reserves using the reserve ratios in effect on August 31, 1980 (§ 204.8(b)) (without re gard to required reserves on any category o f de posits or accounts that are first authorized under Federal law in any State after April 1, 1980): (i) shall maintain the full amount of required reserves on any category of deposits or accounts that are first authorized under Federal law in any State after April 1, 1980; and (ii) shall reduce the amount of its required reserves on all other deposits computed under sec tion 204.3 by an amount determined by multiplying the amount by which required reserves computed under section 204.3 exceeds the amount of required reserves com puted using the reserve ratios that were in effect on August 31, 1980 (§ 204.8(b)), times the appropriate percentage specified below in accordance with the following schedule: Percentage that computed reserves will be reduced 87.5 75 62.5 50 37.5 25 12.5 0 Reserve maintenance periods occurring between November 13, 1980 to September 2, 1981 September 3, 1981 to September 1, 1982 September 2, 1982 to August 31,1983 September 1, 1983 forward Percentage applied to difference to compute amount to be subtracted 75 50 25 0 REGULATION D §§ 2 0 4 .4 (2) A depository institution whose required serves are lower using the reserve ratios in effect during a given com putation period (§ 204.8(a)) (than its required reserves computed using the re serve ratios in effect on A ugust 31, 1980) (§ 204.8(b)) (without regard to required reserves on any category of deposits or accounts that are first authorized under Federal law in any State after April 1, 1980): (i) shall maintain the full amount of required reserves on any category o f deposits or accounts that are first authorized under Federal law in any State after April 1, 1980; and (ii) shall increase the amount of its required reserves on all other deposits computed under sec tion 204.3 by an amount determined by multiplying the amount by which required reserves computed using the reserve ratios that were in effect on Au gust 31, 1980 (§ 204.8(b)), exceeds the amount of required reserves computed under section 204.3, times the appropriate percentage specified below in accordance with the following schedule: Reserve maintenance periods occurring between November 13, 1980September 2, 1981 September 3, 1981March 3, 1982 March 4, 1982September 1, 1982 September 2, 1982March 2, 1983 March 3, 1983August 31, 1983 September 1, 1983February 29, 1984 March 1, 1984 forward Percentage applied to difference to compute amount to be added re commenced business between July 2, 1979, and September 1, 1980, and any United States branch or agency of a foreign bank with total worldwide consolidated bank assets in excess of $1 billion shall be determined by reducing the amount of its required reserves computed under section 204.3 in accordance with the following schedule: Reserve maintenance periods occurring between November 13, 1980February 11, 1981 February 12-May 13, 1981 May 14-August 12, 1981 August 13November 11, 1981 November 12, 1981February 10, 1982 February 11-May 12, 1982 May 13-August 11, 1982 August 12, 1982 forward Percentage that computed reserves will be reduced 87.5 75.0 62.5 50.0 37.5 25.0 12.5 0 However, an institution shall not reduce the amount of required reserves on any category of deposits or accounts that are first authorized under Federal law in any State after April 1, 1980. An additional United States branch or agency of a foreign bank operating a branch or agency in the United States as of September 1, 1980, shall be entitled only to the remaining phase-in available to the existing U.S. branch or agency. (d) New members. The required reserves of a nonmember depository institution that was engaged in business but was not a member bank during the period between July 1, 1979 and Septem ber 1, 1980, inclusive, and which becomes a member of the Federal Reserve System after Septem ber 1, 1980, shall be determined under paragraph (a) or (c), as applicable, as if it had remained a nonmem ber and adding to this amount an amount deter mined by multiplying the difference between its re quired reserves computed using the ratios specified in § 204.8(a) and its required reserves computed as if it had remained a nonmember times the percent age specified below in accordance with the follow ing schedule: 75 62.5 50 37.5 25 12.5 0 (c) C ertain nonm em bers and branches and agencies of foreign banks. The required reserves of a nonmember depository institution that was not engaged in business on or before July 1, 1979, but 17 REGULATION D §§ 2 0 4 .4 shall not maintain reserves against its deposits im posed under this Part until January 2, 1986. On or after January 2, 1986, the required reserves of such a depository institution shall be determined by re ducing the amount of required reserves computed under section 204.3 in accordance with the follow ing schedule: Percentage applied to Maintenance periods occurring difference to during successive quarters after compute amount becoming a member bank to be added 1 2 ■3 4 5 6 7 8 and succeeding 12.5 25.0 37.5 50.0 62.5 75.0 87.5 100.0 Maintenance periods occurring between (e) De novo institutions. The required reserves of any depository institution that was not engaged in business on September 1, 1980, shall be com puted under section 204.3 in accordance with the following schedule: Maintenance periods occurring during successive quarters after entering into business 1 2 3 4 5 6 7 8 and succeeding Percentage o f reserve requirement to be maintained 40 45 50 55 65 75 85 100 January 2 to December 31, 1986 January I, 1987 to January 6, 1988 January 7, 1988 to January 4, 1989 January .5, 1989 to January 3, 1990 January 4, 1990 to January 2, 1991 January 3, 1991 to January 1, 1992 January 2, 1992 to January 6, 1993 January 7, 1993 forward Percentage that compared reserves will be reduced 87.5 75 62.5 50 37.5 (g) Mergers and consolidations. The following rules concerning transitional adjustments apply to mergers and consolidations of depository institu tions: (1) Nonmembers. Where the surviving institu tion of a merger or consolidation between nonmcmber depository institutions that were engaged in business on July I, 1979, and were not members of This paragraph shall also apply to a United the Federal Reserve System on or after that date is States branch or agency of a foreign bank if such a nonmember institution, it shall compute its transi branch or agency is the foreign bank’s first office tional adjustment of required reserves under para in the United States. Additional branches or agen graph (a), except that the amount of required re cies of such a foreign bank shall be entitled only to serves shall be reduced by an amount determined the remaining phase-in available to the initial of by multiplying the amount by which the required fice. (f) Certain nonmembers chartered under laws reserves during the computation period immediately preceding the date of the merger (computed as if of Hawaii. Any State-chartered depository institu the institutions had merged) exceeds the sum of the tion that was engaged in business on August 1, actual required reserves of each bank during the 1978, which was not a member of the Federal Re same computation period times the appropriate per serve System on that date, and whose principal of centage as specified in the following schedule: fice was located in Hawaii on and after that date 18 §§ 204.4 REGULATION D Reserve maintenance periods occurring during quarterly periods following merger Percentage applied to difference to compute amount to be subtracted 1 2 3 4 5 6 7 8 and succeeding 87.5 75.0 62.5 50.0 37.5 25.0 12.5 0 (2) Member with surviving nonmember. Where the surviving institution of a merger or consolida tion between a nonmember bank and a bank that was a member bank on or after July 1, 1979, is a nonmember bank, it shall apply the transitional rules for member banks in paragraphs (b) or (d), as applicable, on the proportion of its deposits attrib utable to the absorbed member bank. This propor tion will be the ratio that daily average deposits of the absorbed member bank were to the daily aver age deposits of the combined banks during the re serve computation period immediately preceding the date of the merger. The bank will compute and maintain reserves against the remaining proportion of deposits applying the transitional rules applicable to nonmember depository institutions in paragraphs (a), (c) or (e), as applicable. A ratio of vault cash also will be computed and applied. (3) De novo with surviving nonmember. Where the surviving institution of a merger or consolida tion between a depository institution that was en gaged in business on July 1, 1979, and was not a member of the Federal Reserve System on or after that date, and a de novo depository institution is a nonmember depository institution, it shall compute and maintain reserves applying the transitional rules for de novo depository institutions in paragraphs (c) or (e), as applicable, on a proportion of its deposits attributable to the absorbed de novo bank. This pro portion will be the ratio that daily average deposits of the absorbed de novo institution were to the daily average deposits of the combined institutions during the reserve computation period immediately preceding the date of the merger. The institution will compute and maintain reserves against the re maining proportion of its deposits by applying the transitional rules applicable to nonmember deposi tory institutions in paragraph (a). A ratio of vault cash also will be computed and applied. (4) Nonmember with surviving member. Where the surviving institution of a merger oi consolida tion between a member bank and a nonm em ber bank is a member bank, it shall apply the transi tional rules under paragraphs (a), (c) or (e), as ap plicable, only on the amount of deposits o f the nonmember bank outstanding on a daily average basis during the computation period immediately preceding the date of the merger. Reserves will be computed and maintained against the balance of the deposits of the surviving member bank under para graphs (b), (d) or (e), as applicable. (5) Members. Where a merger or consolidation involves member banks, required reserves shall be computed and maintained applying the transitional rules in paragraph (b), except that the amount of reserves which shall be maintained shall be reduced by an am ount determ ined by m ultiplying the amount by which the required reserves during the computation period immediately preceding the date of the m erger (computed as if the banks had merged) exceeds the sum of the actual required re serves of each bank during the same computation period times the appropriate percentage as specified in the following schedule: Reserve maintenance periods occurring during quarterly period following merger Percentage applied to difference to compute amount to be subtracted 1 2 3 4 5 6 7 8 and succeeding 87.5 75.0 62.5 50.0 37.5 25.0 12.5 0 (6) D e novo with surviving member. Where the surviving institution of a merger or consolida tion between a bank that was a member bank at any time between July 1, 1979, and September 1, 1980, or that was engaged in business on July 1, 1979 and became a member after Septem ber 1, 1980, and a de novo depository institution is a member bank, it shall compute and maintain re §§ 2 0 4 .4 — 2 0 4 .6 REGULATION D serves by applying paragraph (e) only to the and may be extended for further periods of up to amount of deposits of the de novo institution out 180 days each by affirmative action of at least five standing on a daily average basis during the com members of the Board for each extension. putation period immediately preceding the date of (c) Reports to Congress. The Board shall trans the merger. Reserves will be computed and main mit promptly to Congress a report of any exercise tained against the remaining deposits of the surviv of its authority under this paragraph and the reasons ing member bank under paragraphs (b) or (d), as for the exercise of authority. applicable. (d) Reserve requirements. At present, there are (7) D e novos. W here a merger involves deno emergency reserve requirements imposed under novo depository institutions, required reserves shall this section. be computed and maintained in accordance with section 204.3, except that the amount of reserves which shall be maintained shall be reduced by an amount determined by multiplying the amount by which the required reserves during the computation SECTION 204.6— SUPPLEMENTAL period immediately preceding the date of the merg RESERVE REQUIREMENT er (computed as if the depository institutions had merged) exceeds the sum of the actual required re serves o f each depository institution during the (a) Finding by Board. Upon the affirmative same computation period, times the appropriate vote of at least five members of the Board and after percentage as specified in the following schedule: consultation with the Board of Directors of the Fed eral Deposit Insurance Corporation, the Federal Maintenance periods Percentage applied Home Loan Bank Board, and the National Credit occurring during quarterly compute amount to Union Administration Board, the Board may im periods following merger be subtracted pose a supplemental reserve requirement on every depository institution of not more than 4 per cent of 1 87.5 its total transaction accounts. A supplemental re 2 75.0 serve requirement may be imposed if: 3 62.5 (1) the sole purpose of the requirement is to 4 50.0 increase the amount of reserves maintained to a 5 37.5 level essential for the conduct of monetary policy; 6 25.0 (2) the requirement is not imposed for the pur 7 12.5 pose of reducing the cost burdens resulting from 8 and succeeding 0 the imposition of basic reserve requirements; (3) such requirement is not imposed for the purpose of increasing the amount o f balances needed for clearing purposes; and (4) on the date on which supplemental reserve SECTION 204.5— EM ERGENCY RESERVE requirements are imposed, the total amount of basic REQUIREM ENT reserve requirements is not less than the amount of reserves that would be required on transaction ac (a) Finding by Board. The Board may impose, counts and nonpersonal time deposits under the ini after consulting with the appropriate committees of tial reserve ratios established by the Monetary Con Congress, additional reserve requirements on de trol Act o f 1980 (Pub. L. 96-221) in effect on pository institutions at any ratio on any liability September 1, 1980. upon a finding by at least five m embers of the (b) Term. Board that extraordinary circumstances require such (1) If a supplemental reserve requirement has action. been imposed on for a period of one year or more, (b) Term. Any action taken under this section the Board shall review and determine the need for shall be valid for a period not exceeding 180 days, continued maintenance of supplemental reserves 20 §§ 2 0 4 . 6 — 2 0 4 .7 REGULATION D and shall transmit annual reports to the Congress penalty for reserve deficiencies except when the de regarding the need for continuing such requirement. ficiency arises out of a depository institution’s gross negligence or conduct that is inconsistent (2) Any supplem ental reserve requirem ent shall terminate at the close of the first 90-day pe with the principles and purposes of reserve require riod after the requirement is imposed during which ments. Each Reserve Bank has adopted guidelines the average amount of supplemental reserves re that provide for waivers o f small penalties. The quired are less than the amount of reserves which guidelines also provide for waiving the penalty would be required if the ratios in effect on Septem once during a two-year period for any deficiency ber 1, 1980, were applied. that does not exceed a certain percentage of the de (c) Earnings Participation Account. A deposi pository institution’s required reserves. Decisions tory institution’s supplemental reserve requirement by Reserve Banks to waive penalties in other situa tions are based on an evaluation of the circum shall be maintained by the Federal Reserve Banks stances in each individual case and the depository in an Earnings Participation Account. Such bal institution’s reserve maintenance record. If a depos ances shall receive earnings to be paid by the Fed itory institution has demonstrated a lack of due re eral Reserve Banks during each calendar quarter at gard for the proper maintenance of required re a rate not to exceed the rate earned on the securi ties portfolio of the Federal Reserve System during serves, the Reserve Bank may decline to exercise the waiver privilege and assess all penalties regard the previous calendar quarter. Additional rules and less of amount or reason for the deficiency. regulations may be prescribed by the Board con (ii) In individual cases, where a Federal su cerning the payment of earnings on Earnings Partic ipation Accounts by Federal Reserve Banks. pervisory authority waives a liquidity requirement, (d) Report to Congress. The Board shall trans or waives the penalty for failing to satisfy a liquid ity requirement, the Reserve Bank in the District mit promptly to the Congress a report stating the where the involved depository institution is located basis for exercising its authority to require a sup shall waive the reserve requirement imposed under plemental reserve under this section. this Part for such depository institution when re (e) Reserve requirements. At present, there are quested by the Federal supervisory authority in no supplemental reserve requirements imposed un der this section. volved. (b) Penalties for Violations. Violations of this Part may be subject to assessment of civil money S E C T IO N 204.7— PE N A L T IE S penalties by the Board under authority of section (a) Penalties for Deficiencies. 19(1) of the Federal Reserve Act (12 U .S .C . (1) Assessment o f Penalties. Deficiencies in a § 505) as implemented in 12 CFR 263. In addi depository institution’s required reserve balance, af tion, the Board and any other Federal financial in ter application of the 2 per cent carryover provided stitution supervisory authority may enforce this Part in section 204.3(h) are subject to penalties. Federal with respect to depository institutions subject to Reserve Banks are authorized to assess penalties for their jurisdiction under authority conferred by law deficiencies in required reserves at a rate of 2 per to undertake cease and desist proceedings. cent per year above the lowest rate in effect for borrowings from the Federal Reserve Bank on the first day of the calendar month in which the defi ciencies occurred. Penalties shall be assessed on the STATUTORY APPENDIX basis of daily average deficiencies during each computation period. Reserve Banks may, as an al ternative to levying monetary penalties, after con Section 19 of the Federal Reserve Act provides in sideration of the circumstances involved, permit a part as follows: depository institution to eliminate deficiencies in its (a) The Board is authorized for the purposes of required reserve balance by maintaining additional this section to define the terms used in this section, reserves during subsequent reserve maintenance to determine what shall be deemed a payment of periods. interest, to determine what types of obligations, (2) Waivers, (i) Reserve Banks may waive the 21 STATUTORY APPENDIX REGULATION D a deposit or account on which the depositor or ac whether issued directly by a member bank or indi count holder is permitted to make withdrawals by rectly by an affiliate of a member bank or by other negotiable or transferable instrument, payment or means, shall be deemed a deposit, and to prescribe ders of withdrawal, telephone transfers, or other such regulations as it may deem necessary to effec tuate the purposes of this section and to prevent similar items for the purpose of making payments or transfers to third persons or others. Such term evasions thereof. includes demand deposits, negotiable order of with (b) Reserve R equ irem en ts.— drawal accounts, saving deposits subject to auto (1) Definitions. The following definitions and rules apply to this subsection, subsection (c), sec matic transfers, and share draft accounts. (D) The term ‘nonpersonal time deposits’ tion 11 A, the first paragraph of section 13, and the second, thirteenth, and fourteenth paragraphs of means a transferable time deposit or account or a section 16: time deposit or account representing funds depos (A) The term ‘depository in stitu tio n’ ited to the credit of, or in which any beneficial in terest is held by, a depositor who is not a natural means— (i) any insured bank as defined in sec person. tion 3 of the Federal Deposit Insurance Act or any (E) In order to prevent evasions of the re bank which is eligible to make application to be serve requirements imposed by this subsection, af come an insured bank under section 5 of such Act; ter consultation with the Board of Directors of the (ii) any mutual savings bank as defined Federal Deposit Insurance Corporation, the Federal in section 3 of the Federal Deposit Insurance Act or Home Loan Bank Board, and the National Credit any bank which is eligible to make application to Union Administration Board, the Board of Gover become an insured bank under section 5 of such nors of the Federal Reserve System is authorized to Act; determine, by regulation or order, that an account (iii) any savings bank as defined in or deposit is a transaction account if such account section 3 of the Federal Deposit Insurance Act or or deposit may be used to provide funds directly or any bank which is eligible to make application to indirectly for the purpose of making payments or become an insured bank under section 5 of such transfers to third persons or others. Act; (2) Reserve requirements. (A) Each deposi (iv) any insured credit union as defined tory institution shall maintain reserves against its in section 101 of the Federal Credit Union Act or transaction accounts as the Board may prescribe by any credit union which is eligible to make applica regulation solely for the purpose of implementing tion to become an insured credit union pursuant to monetary policy— section 201 of such Act; (i) in the ratio of 3 per centum for that por (v) any member as defined in section 2 tion of its total transaction accounts of $25,000,000 of the Federal Home Loan Bank Act; or less, subject to subparagraph (C); and (vi) any insured institution as defined (ii) in the ratio of 12 per centum, or in such in section 401 of the National Housing Act or any other ratio as the Board may prescribe not greater institution which is eligible to make application to than 14 per centum and not less than 8 per centum, become an insured institution under section 403 of for that portion of its total transaction accounts in such Act; and excess of $25,000,000, subject to subparagraph (vii) for the purpose of section 13 and (C). the fourteenth paragraph of section 16, any associa (B) Each depository institution shall tion or entity which is wholly owned by or which maintain reserves against its nonpersonal time de consists only of institutions referred to in clauses (i) posits in the ratio of 3 per centum, or in such other through (vi). ratio not greater than 9 per centum and not less (B) The term ‘bank’ means any insured than zero per centum as the Board may prescribe or noninsured bank, as defined in section 3 of the by regulation solely for the purpose of implement Federal Deposit Insurance Act, other than a mutual ing monetary policy. savings bank or a savings bank as defined in such section. (C) Beginning in 1981, not later than De (C) The term ‘transaction account’ means cember 31 of each year the Board shall issue a reg- REGULATION D STATUTORY APPENDIX illation increasing for the next succeeding calendar members, impose a supplemental reserve require year the dollar amount which is contained in sub ment on every depository institution of not more paragraph (A) or which was last determined pursu than 4 per centum of its total transaction accounts. ant to this subparagraph for the purpose of such Such supplemental reserve requirement may be im posed only if— subparagraph, by an amount obtained by multiply ing such dollar amount by 80 per centum of the (i) the sole purpose of such requirement is percentage increase in the total transaction accounts to increase the amount of reserves maintained to a of all depository institutions. The increase in such level essential for the conduct of monetary policy; transaction accounts shall be determined by sub (ii) such requirement is not imposed for the tracting the amount on such accounts on June 30 of purpose of reducing the cost burdens resulting from the preceding calendar year from the amount of the imposition of the reserve requirements pursuant such accounts on June 30 of the calendar year in to paragraph (2); volved. In the case of any such 12-month period in (iii) such requirement is not imposed for the which there has been a decrease in the total trans purpose of increasing the am ount o f balances action accounts of all depository institutions, the needed for clearing purposes; and Board shall issue such a regulation decreasing for (iv) on the date on which the supplemental the next succeeding calendar year such dollar reserve requirement is imposed, the total amount of amount by an amount obtained by multiplying such reserves required pursuant to paragraph (2) is not dollar amount by 80 per centum of the percentage less than the amount of reserves that would be re decrease in the total transaction accounts of all de quired if the initial ratios specified in paragraph (2) pository institutions. The decrease in such transac were in effect. tion accounts shall be determined by subtracting the (B) The Board may require the supple mental reserve authorized under subparagraph (A) amount of such accounts on June 30 of the calendar year involved from the amount of such accounts on only after consultation with the Board of Directors June 30 of the previous calendar year. of the Federal Deposit Insurance Corporation, the Federal (D) Any reserve requirement imposed un Home Loan Bank Board, and the National Credit Union A dm inistration Board. The Board der this subsection shall be uniformly applied to all transaction accounts at all depository institutions. shall promptly transmit to the Congress a report with respect to any exercise of its authority to re Reserve requirements imposed under this subsection quire supplemental reserves under subparagraph (A) shall be uniformly applied to nonpersonal time de posits at all depository institutions, except that such and such report shall state the basis for the determi nation to exercise such authority. requirements may vary by the maturity of such de posits. (C) The supplemental reserve authorized under subparagraph (A) shall be maintained by the (3) Waiver of ratio limits in extraordinary cir cumstances. Upon a finding by at least 5 members Federal Reserve Banks in an Earnings Participation of the Board that extraordinary circumstances re Account. Except as provided in subsection (c)(l)(A)(ii), such Earnings Participation Account quire such action, the Board, after consultation with the appropriate committees of the Congress, shall receive earnings to be paid by the Federal Re may impose, with respect to any liability of deposi serve Banks during each calendar quarter at a rate tory institutions, reserve requirements outside the not more than the rate earned on the securities port limitations as to ratios and as to types of liabilities folio of the Federal Reserve System during the pre vious calendar quarter. The Board may prescribe otherwise prescribed by paragraph (2) for a period rules and regulations concerning the payment of not exceeding 180 days, and for further periods not exceeding 180 days each by affirmative action by earnings on Earnings Participation Accounts by at least 5 members of the Board in each instance. Federal Reserve Banks under this paragraph. (D) If a supplemental reserve under sub The Board shall promptly transmit to the Congress a report of any exercise of its authority under this paragraph (A) has been required of depository insti tutions for a period of one year or more, the Board paragraph and the reasons for such exercise of au thority. shall review and determine the need for continued maintenance of supplemental reserves and shall (4) Supplem ental reserves. (A) The Board transmit annual reports to the Congress regarding may, upon the affirmative vote of not less than 5 23 STATUTORY APPENDIX REGULATION D for access to discount and borrowing facilities con the need, if any, for continuing the supplemental sistent with their long-term asset portfolios and the reserve. sensitivity of such institutions to trends in the na (E) Any supplemental reserve imposed under subparagraph (A) shall terminate at the close tional money markets. of the first 90-day period after such requirement is (8) Transitional adjustments. (A) Any depository institution required to imposed during which the average amount of re maintain reserves under this subsection which was serves required under paragraph (2) are less than engaged in business on July 1, 1979, but was not a the amount o f reserves which would be required member of the Federal Reserve System on or after during such period if the initial ratios specified in that date, shall maintain reserves against its de paragraph (2) were in effect. posits during the first twelve-month period follow (5) Reserves related to foreign obligations or ing the effective date of this paragraph in amounts assets. Foreign branches, subsidiaries, and interna equal to one-eighth of those otherwise required by tional banking facilities of nonmember depository this subsection, during the second such tw elve institutions shall maintain reserves to the same ex month period in amounts equal to one-fourth of tent required by the Board o f foreign branches, those otherw ise required, during the third such subsidiaries, and international banking facilities of twelve-month period in amounts equal to threemember banks. In addition to any reserves other eighths of those otherw ise required, during the wise required to be maintained pursuant to this sub fourth twelve-month period in amounts equal to section, any depository institution shall maintain re one-half of those otherwise required, and during the serves in such ratios as the Board may prescribe fifth twelve-month period in amounts equal to fiveagainst— eighths o f those otherw ise required, during the (A) net balances owned by domestic of sixth tw elve-m onth period in am ounts equal to fices of such depository institution in the United three-fourths of those otherwise required, and dur States to its directly related foreign offices and to ing the seventh twelve-month period in amounts foreign offices of nonrelated depository institutions; equal to seven-eighths of those otherwise required. (B) loans to United States residents made This subparagraph does not apply to any category by overseas offices of such depository institution if such depository institution has one or more offices of deposits or accounts which are first authorized pursuant to Federal law in any State after April 1, in the United States; and (C) assets (including participations) held 1980. by foreign offices of a depository institution in the (B) With respect to any bank which was a member of the Federal Reserve System during the United States which were acquired from its domes tic offices. entire period beginning on July 1, 1979, and end (6) Exemption for certain deposits. The re ing on the effective date o f the Monetary Control quirements imposed under paragraph (2) shall not Act of 1980, the amount o f required reserves im posed pursuant to this subsection on and after the apply to deposits payable only outside the States of the United States and the District of Columbia, ex effective date of such Act that exceeds the amount cept that nothing in this subsection limits the au o f reserves which would have been required o f thority of the Board to impose conditions and re such bank if the reserve ratios in effect during the reserve computation period immediately preceding quirements on member banks under section 25 o f such effective date were applied may, at the discre this Act or the authority of the Board under sec tion 7 o f the International Banking Act o f 1978 tion of the Board and in accordance with such rules (12 U.S.C. 3105). and regulations as it may adopt, be reduced by 75 per centum during the first year which begins after (7) Discount and borrowing. Any depository institution in which transaction accounts or nonper such effective date, 50 per centum during the sec sonal time deposits are held shall be entitled to the ond year, and 25 per centum during the third year. (C)(i) With respect to any bank which is same discount and borrowing privileges as member banks. In the administration of discount and bor a member of the Federal Reserve System on the ef fective date of the Monetary Control Act of 1980, rowing privileges, the Board and the Federal Re serve Banks shall take into consideration the special the amount of reserves which would have been re needs of savings and other depository institutions quired o f such bank if the reserve ratios in effect REGULATION D STATUTORY APPENDIX during the reserve computation period immediately subsection, pursuant to subparagraphs (B) and preceding such effective date were applied that ex (C)(i). ceeds the amount of required reserves imposed pur (E) This subparagraph applies to any de suant to this subsection shall, in accordance with pository institution which was engaged in business such rules and regulations as the Board may adopt, on August 1, 1978, as a depository institution orga be reduced by 25 per centum during the first year nized under the laws of a State, which was not a which begins after such effective date, 50 per cen member o f the Federal Reserve System on that tum during the second year, and 75 per centum date, and the principal office of which was outside during the third year. the continental limits of the United States on that date and (ii) If a bank becomes a member bank has remained outside the continental limits during the four-year period beginning on the effec of the United States ever since. Such a depository institution shall not be required to maintain reserves tive date of the Monetary Control Act of 1980, and against its deposits pursuant to this subsection until if the amount of reserves which would have been the first day of the sixth calendar year which begins required of such bank, determined as if the reserve after the effective date of the Monetary Control Act ratios in effect during the reserve computation peri of 1980. Such a depository institution shall main od immediately preceding such effective date were tain reserves against its deposits during the sixth applied, and as if such bank had been a member calendar year which begins after such effective date during such period, exceeds the amount of reserves in an amount equal to one-eighth of that otherwise required pursuant to this subsection, the amount of required by paragraph (2), during the seventh such reserves required to be maintained by such bank year in an amount equal to one-fourth of that other beginning on the date on which such bank becomes wise required, during the eighth such year in an a member of the Federal Reserve System shall be amount equal to three-eighths of that otherwise re the amount of reserves which would have been re quired, during the ninth such year in an amount quired of such bank if it had been a member on the equal to one-half of that otherwise required, during day before such effective date, except that the amount of such excess shall, in accordance with the tenth such year in an amount equal to fiveeighths of that otherwise required, during the elev such rules and regulations as the Board may adopt, enth such year in an amount equal to three-fourths be reduced by 25 per centum during the first year of that otherwise required, and during the twelfth which begins after such effective date, 50 per cen such year in an amount equal to seven-eighths of tum during the second year, and 75 per centum during the third year. that otherwise required. (D)(i) Any bank which was a member (9) Exemption. This subsection shall not apply bank on July 1, 1979, and which withdraws from with respect to any financial institution which— membership in the Federal Reserve System during (A) is organized solely to do business the period beginning on July 1, 1979, and ending with other financial institutions; on the day before the date of enactment of the De (B) is owned primarily by the financial pository Institutions Deregulation and Monetary institutions with which it does business; and Control Act of 1980, shall maintain reserves begin (C) does not do business with the general ning on such date of enactment in an amount equal public. to the amount of reserves it would have been re (10) W aivers. In individual cases, where a quired to maintain if it had been a member bank on Federal supervisory authority waives a liquidity re such date of enactment. After such date of enact quirement, or waives the penalty for failing to sat ment, any such bank shall maintain reserves in the isfy a liquidity requirement, the Board shall waive same amounts as member banks are required to the reserve requirement, or waive the penalty for maintain under this subsection, pursuant to subpara failing to satisfy a reserve requirement, imposed graphs (B) and (C)(i). pursuant (ii) Any bank which withdraws from to this subsection for the depository insti tution involved when requested by the Federal su membership in the Federal Reserve System on or pervisory authority involved. after the date of enactment of the Depository Insti tutions Deregulation and Monetary Control Act of (c)(1) Reserves held by a depository institu 1980 shall maintain reserves in the same amount as tion to meet the requirements imposed pursuant to subsection (b) shall, subject to such rules and regu member banks are required to maintain under this STATUTORY APPENDIX lations as the Board shall prescribe, be in the form o f— REGULATION D ( 0 The required balance carried by a member bank with a Federal Reserve Bank may, under the regulations and subject to such penalties as may be prescribed by the Board of Governors of the Fed eral Reserve System, be checked against and with drawn by such member bank for the purpose of meeting existing liabilities. (A) balances m aintained for such pur poses by such depository institution in the Federal Reserve Bank of which it is a member or at which it maintains an account, except that (i) the Board may, by regulation or order, permit depository in stitutions to maintain all or a portion of their re [U.S.C., title 12, sec. 464.| quired services in the form of vault cash, except (g) In estimating the reserve balances required that any portion so permitted shall be identical for by this Act, member banks may deduct from the all depository institutions, and (ii) vault cash may amount of their gross demand deposits the amounts be used to satisfy any supplemental reserve require of balances due from other banks (except Federal ment imposed pursuant to subsection (b)(4), except Reserve Banks and foreign banks) and cash items that all such vault cash shall be excluded from any in process of collection payable immediately upon computation o f earnings pursuant to subsection presentation in the United States, within the mean (b)(4)(C); and ing of these terms as defined by the Board of Gov (B) balances maintained by a depository ernors of the Federal Reserve System. institution which is not a member bank in a deposi tory institution which maintains required reserve (U.S.C., title 12, see. 465.) balances at a Federal Reserve Bank, in a Federal Section 11 of the Federal Reserve Act provides, in Home Loan Bank, or in the National Credit Union part, as follows: Administration Central Liquidity Facility, if such depository institution, Federal Home Loan Bank, or The Board of Governors of the Federal Reserve National Credit Union Administration Central Li System shall be authorized and empowered: quidity Facility maintains such funds in the form of * * * * % balances in a Federal Reserve Bank of which it is a member or at which it maintains an account. Bal (c) To suspend for a period not exceeding thirty ances received by a depository institution from a days, and from time to time to renew such suspen second depository institution and used to satisfy the sions for periods not exceeding fifteen days, any reserve requirement imposed on such second depos reserve requirements specified in this Act. itory institution by this section shall not be subject (U.S.C., title 12, sec. 248<c).| to the reserve requirements of this section imposed on such first depository institution, and shall not be * * * * * subject to assessments or reserves imposed on such first depository institution pursuant to section 7 of (e) To add to the number of cities classified as the Federal D eposit Insurance Act (12 U .S.C . reserve cities under existing law in which national 1817), section 404 of the National Housing Act (12 banking associations are subject to the reserve re U.S.C. 1727), or section 202 of the Federal Credit quirements set forth in section [nineteen] of this Union Act (12 U.S.C. 1782). Act; or to reclassify existing reserve cities or to ter (2) The balances maintained to meet the re minate their designation as such. serve requirements of subsection (b) by a deposi IU.S.C., title 12, sec. 248(e).! tory institution in a Federal Reserve Bank or passed through a Federal Home Loan Bank or the National * * * * * Credit Union Administration Central Liquidity Fa cility or another depository institution to a Federal Section 25 of the Federal Reserve Act provides, in Reserve Bank may be used to satisfy liquidity re part, as follows: quirements which may be imposed under other pro 1. Capital and surplus required to exercise powers visions of Federal or State law. IU.S.C., tide 12, sec. 461.] * * * * * Sec. 25. Any national banking association pos sessing a capital and surplus of $1,000,000 or more may file application with the Board of Governors REGULATION D of the Federal Reserve System for permission to exercise, upon such conditions and under such reg ulations as may be prescribed by the said board, the following powers: [U.S.C., title 12, sec. 601.] Section 25(a) of the Federal Reserve Act provides, in part, as follows: 6. Banking powers (a) To purchase, sell, discount, and negotiate, with or without its indorsement or guaranty, notes, drafts, checks, bills of exchange, acceptances, in cluding bankers’ acceptances, cable transfers, and other evidences of indebtedness; to purchase and sell with or without its indorsement or guaranty, se curities, including the obligations of the United States or of any State thereof but not including shares of stock in any corporation except as herein provided; to accept bills or drafts drawn upon it subject to such limitations and restrictions as the Board of Governors of the Federal Reserve System may impose; to issue letters of credit; to purchase and sell coin, bullion, and exchange; to borrow and to lend money; to issue debentures, bonds, and promissory notes under such general conditions as to security and such limitations as the Board of Governors of the Federal Reserve System may pre scribe; to receive deposits outside of the United States and to receive only such deposits within the United States as may be incidental to or for the purpose of carrying out transactions in foreign countries or dependencies or insular possessions of the United States; and generally to exercise such powers as are incidental to the powers conferred by this Act or as may be usual, in the determination of the Board of Governors of the Federal Reserve Sys tem, in connection with the transaction of the busi ness of banking or other financial operations in the countries, colonies, dependencies, or possessions in which it shall transact business and not inconsistent with the powers specifically granted herein. Noth ing contained in this section shall be construed to prohibit the Board of Governors of the Federal Re serve System, under its power to prescribe rules and regulations, from limiting the aggregate amount of liabilities of any or all classes incurred by the corporation and outstanding at any one time. Whenever a corporation organized under this sec tion receives deposits in the United States autho rized by this section it shall carry reserves in such amounts as the Board of Governors of the Federal STATUTORY APPENDIX Reserve System may prescribe for member banks of the Federal Reserve System. [U.S.C., title 12, sec. 615 ] Section 7 of the International Banking Act of 1978 provides, in part, as follows: Sec. 7. (a)(1)(A) Except as provided in para graph (2) of this subsection, subsections (a), (b), (c), (d), (f), (g), (i), (j)> 0 0 . and the second sen tence of subsection (e) of section 19 of the Federal Reserve Act shall apply to every Federal branch and Federal agency of a foreign bank in the same manner and to the same extent as if the Federal branch or Federal agency were a member bank as that term is defined in section 1 of the Federal Re serve Act; but the Board either by general or spe cific regulation or ruling may waive the minimum and maximum reserve ratios prescribed under sec tion 19 of the Federal Reserve Act and may pre scribe any ratio, not more than 22 per centum, for any obligation of any such Federal branch or Fed eral agency that the Board may deem reasonable and appropriate, taking into consideration the char acter of business conducted by such institutions and the need to maintain vigorous and fair competition between and among such institutions and member banks. The Board may impose reserve requirements on Federal branches and Federal agencies in such graduated manner as it deems reasonable and ap propriate. (B) After consultation and in cooperation with the State bank supervisory authorities, the Board may make applicable to any State branch or State agency any requirement made applicable to, or which the Board has authority to impose upon, any Federal branch or agency under subparagraph (A) of this paragraph. (2) A branch or agency shall be subject to this subsection only if (A) its parent foreign bank has total worldwide consolidated bank assets in excess of $1,000,000,000; (B) its parent foreign bank is controlled by a foreign company which owns or controls foreign banks that in the aggregate have total worldwide consolidated bank assets in excess of $1,000,000,000; or (C) its parent foreign bank is controlled by a group of foreign companies that own or control foreign banks that in the aggregate have total worldwide consolidated bank assets in excess of $1,000,000,000. [U.S.C., tide 12, sec. 3105.] 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 INTEREST RATE CEILINGS The Act provides for the orderly phase-out o f 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 o f the Board o f Directors of the Federal Deposit Insurance Cor poration, Chairman o f 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— required to meet at least quarterly is in order to achieve the phase-out. POWERS OF DEPOSITOR Y INSTITUTIONS 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 o f thrift institutions. FOR FURTHER INFORMATION The MONETARY CONTROL ACT ______________________________ o f 1980 For more detailed information about the Act and implementing regulations, a depository institution may write to the Board of Governors o f 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 o f 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 o f meetings with depository institutions to familiarize them with the new regulations and procedures. 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 31,1 9 8 0 . NOW accounts may consist solely o f 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 o f accounts o f federally insured banks, savings and loan associations, and credit unions has been increased from $40,000 to $100,000. 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. Among 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 offees for Federal Re serve services; and 4) provides for the gradual phase-out o f deposit interest rate ceilings, coupled with broader powers for 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 o f 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 REQUIREMENTS 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 o f 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 o f October 30, 1980, and will begin maintaining reserves on November 13,1980. Member banks will begin 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. RESER VE REQUIREMENTS 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 o f not more than 4 percent on every depository institution. Interest will be paid on supplemen tal reserves. What Reserve Requirements are Established? Transaction Accounts. The reserve requirement on the first $25 million o f transaction accounts is 3 percent. A reserve requirement o f 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 o f 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 m onth. 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 m onth; 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 o f less than 4 years at a ratio o f 3 percent. Nontransferable personal time deposits will not be subject to reserve require ments. Time deposits with maturities o f 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. 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 o f domestic depository institutions; and sales of assets by depository institutions in the United States to their overseas offices. H ow Will Reserve R equirem 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 o f 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 o f 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 o f 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