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Authorized for public release by the FOMC Secretariat on 8/21/2020

BOARD OF GOVERNORS
OF THE

FEDERAL RESERVE SYSTEM
WASHINGTON, D C 20551

May 10, 1973
CONFIDENTIAL (FR)

To:

Federal Reserve Bank Presidents

From:

Arthur L. Broida
Attached for your confidential information is a staff

memorandum dated May 10, 1973, entitled "Reserve Requirements on
CD's,Eurodollars, and related proposals," which outlines possible
actions the Board might take in the interest of further and more
equitable restraint of bank credit.
cal changes.

A number of these are techni-

However, they all move in the general direction of

using higher reserve requirements rather than interest rate
ceilings for purposes of restraint.
The FOMC meeting on Tuesday, May 15, might well be lengthy,
but the Board Members would appreciate hearing, in the go-around,
the views of each President as to the desirability of adopting
this type of general approach, particularly in the most important
application of large-denomination CD's.

The Board currently plans

to act on this approach on Wednesday, May 16, and we ask that you
hold this document in strictest confidence at this time.

Arthur L. Broida
Deputy Secretary

Federal Open Market Committee
Attachment

Authorized for public release by the FOMC Secretariat on 8/21/2020

CONFIDENTIAL (FR)
DATE:

TO:

Board of Governors

FROM: Divisions of Research and
Statistics and International Finance

May 10, 1973

SUBJECT: Reserve Requirements on
CD's, Eurodollars, and related
proposals

The staff proposals to be described below have been discussed
at one or more of the Board meetings on contingency planning.

They are

presented now for possible action because continued inflationary expansion in the economy suggests the need for further overt measures of
restraint in credit policy.
The basic proposal is to impose marginal reserve requirements

on the increase in outstanding domestic money market-type liabilities of
banks.

The proposal would apply not only to large time certificates of

deposits and commercial paper issued by the bank, but also to funds directly
or indirectly channeled by bank affiliates and subsidiaries to the bank,
and to ineligible acceptances (now termed finance bills by the market).
Along with the reserve requirement proposal on domestic money market
liabilities of banks, this memorandum also proposes action to adjust reserve requirements on Eurodollar borrowings,

At the same time, the

Board might wish to consider suspending current interest rate ceilings
on large CD's across the board.
These interrelated proposals have the objectives of:

increasing

the cost of those funds likely to be used by large banks to finance business loans in coming months; closing certain existing loopholes by which
banks can now avoid reserve requirements; developing more equitable
regulatory treatment for similar instruments used by banks to obtain funds;

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-2and reversing the increasing distortion of the maturity structure of
outstanding negotiable CD's.
I.

THE GENERAL PROPOSALS FOR DOMESTIC INSTRUMENTS

The recent rapid increase in bank credit--particularly business
loans--has been a significant factor fueling expansion in the economy.
The record growth in business loans earlier this year was in part associated with a shift in corporate borrowing from the commercial paper market
to the banking system and the financing of foreign currency positions.
While the latest data suggest that such demands for bank funds have moderated--and we may be on the verge of some reverse movement from bank loans
back to the commercial paper market--underlying business loan demands
nevertheless remain quite strong.

Staff projections showing strong

continuing increases for inventory and capital investment in the period
ahead suggest that business loan demands on banks will continue large.
And banks remain relatively aggressive issuers of large negotiable time
certificates of deposit, although the rate of increase of these deposits
has slowed from the record rate of the first quarter.
In order to reduce banks' willingness to tap money markets to

finance loan demands, the staff is proposing a three percentage point
reserve requirement, over and above the existing five per cent reserve
requirement, on the increase above the amounts outstanding in some base
period of outstanding large CD's and other domestic money-market type

liabilities.

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-3The advantage of a marginal reserve requirement is that it
focuses restraint on the specific instruments by which a major portion
of excess aggregate demands are now being,and in the future are likely
to be, financed--i.e., bank credit expansion taking place particularly
at large banks using money market instruments.

Such a marginal reserve

requirement provides a high degree of automatic flexibility.

Should de-

mands prove to be less strong than we expect, the marginal reserve requirement will be less onerous

in its impact than would a more general reserve

requirement action, such as an increase in the average reserve requirement.
The marginal reserve requirement will increase bank costs only to the
extent that rising credit demands on banks lead to increased efforts by
these institutions to tap money markets.
The three percentage point marginal reserve requirement would
result in a modest increase in the

bank costs incurred in selling large

time deposit obligations, and would leave the Board scope to raise the
amount at a later date should economic conditions warrant.

The cost

effect is not likely to be so large that it would significantly stimulate

efforts by banks to shift lending activities to their affiliates.

The

Board has no present authority directly to affect the lending and borrowing of bank affiliates (except to the extent borrowed funds are channeled
directly or indirectly back to the bank),and a small marginal reserve
requirement thus has the advantage of permitting the Board to gauge the
reaction of banks and their affiliates to its actions without greatly
increasing the inducement of banks to increase their affiliate activity.
In this context, though, the need to monitor affiliate activity becomes
even more pressing.

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-4-

A bank does have considerable flexibility in managing its own

liability structure.

Thus, even a modest marginal reserve requirement

only on large time certificates of deposits would produce an incentive for
banks to raise funds through lower cost
bank obligations.

substitutes that can be issued as

The need to constrain efforts of banks to seek such

loopholes suggests that marginal reserve requirements be

extended to all

money-market type instruments used by banks to obtain funds for the
banking business.
Therefore, it is proposed that the Board extend the same three
per cent marginal reserve requirement to the increase in those funds
obtained through commercial paper issued by the bank or through issuance
of obligations by affiliates and subsidiaries and channeled to the bank;
there instruments are already subject to the same reserve requirements

1/ To extend marginal reserve requirements to all
as time deposits.1/
domestic money market-type instruments used to raise funds for bank lending also suggests that ineligible acceptances, or finance bills, be made
subject to

both average and marginal reserve requirements; under current

regulations, such instruments are not subject to any reserve requirement.
Since Eurodollar borrowings by banks are also a close substitute for
large CD issuance, logic suggests that they should be treated in as nearly
a parallel fashion as possible to domestic money market instruments.
1/

A

The marginal reserve requirement would apply only to those obligations
with a maturity of 30 days to 7 years; less than 30 day obligations
are subject to the higher demand deposit requirement.

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-5subsequent section of this memorandum discusses special problems in the
Eurodollar area.
All of the instruments proposed for inclusion in the marginal
reserve requirement action are free of regulatory interest rate ceilings
with the exception of large certificates of deposits with maturities of
90 days or more.

As part of the package of proposed policy actions, the

Board might wish to consider extending the suspension of Regulation Q
ceilings to such deposits.

The maturity banks have been able to offer

on large negotiable CD's has progressively shortened as market rates have
risen above the Regulation Q ceiling on 90 day and longer CD's, and
there would seem to be little reason not to permit banks to seek a more
balanced maturity structure for their outstanding certificates of
deposit, which are the principal money market instrument by which funds

are raised from the public.
In 1972, new CD's issued

with an original maturity of 90 days

or more averaged a little less than 30 per cent of total CD's sold.
market rates rose

As

earlier this year, banks found it increasingly diffi-

cult to sell CD's in the area subject to effective Regulation Q ceilings,
and by March (the latest month for which data are available) the proportion
of CD's sold with a maturity of 90 days or more had dropped to 14 per
cent for all banks and to 8 per cent for New York City banks--the lowest
ratios since the late summer of 1970.

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- 6II.

SPECIFICS OF THE PROPOSALS

In this section, the specifics of the proposals as they pertain
to domestic instruments are presented for the the Board's consideration.
Coverage
The marginal reserve requirement of 3 percentage points would
apply to the aggregate amount by which the sum of the following instru-

ments exceed the aggregate outstanding amount of such instruments in the
base period:
(1)

single maturity time certificates of deposits in denomination
of $100,000 or more; 1/

(2)

promissory notes, acknowledgments of advance, due bills and
similar instruments issued by the bank in denomination of

$100,000 more;
(3)

funds channeled directly or indirectly to the bank through
issuance of obligations by bank affiliates or subsidiaries;

(4)

funds channeled to the bank by its sale of ineligible
acceptances.

The first three of these instruments are now subject to a 5 per
cent reserve requirement.

The fourth is not now subject to any reserve

requirement.
1/

This includes negotiable as well as non-negotiable certificates.
Most of those issued are negotiable. Attempting to confine the
marginal requirement only to negotiable certificates would invite
evasion from those banks able to convince their customers to accept

a non-negotiable form.

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- 7 -

Of the instruments proposed for coverage, only the large

certificates of deposit would have a specific size cut-off.

Banks would

be able to avoid the reserve requirement to the extent they were able to
issue single-denomination time certificates of less than $100,000 in size.
They are prevented from utilizing this obvious loophole, though, because
the smaller denomination certificates are subject to the small

Q ceiling

rates, which in today's market are an effective deterrent to issuance of
CD's to buyers interested in money market investments.

When market

interest rates fall to a favorable relationship to the small Q ceiling,
the proposed marginal reserve requirement could then easily be evaded
by issuing obligations in smaller denominations.

Market rates are not

likely to drop sufficiently to make that possible until the present
inflationary phase is over and clear signs of economic weakness emerge.
At that point, the Board in any event, would probably be willing to
eliminate the marginal requirement.
Ineligible acceptances.

The outstanding amount of ineligible

acceptances has increased from around $380 million in mid-January to
about $1.1 billion most recently, and 15 banks are reported to be selling
them.

If left free of reserve requirements, while a higher marginal

reserve requirement was placed on money market instruments now subject
to reserve requirements, banks would surely take further advantage of
the loophole and this instrument would become even more actively used.

(A discussion of ineligible acceptances is contained in a memorandum
to the Board from the Division of Research and Statistics, "Analysis

of Working Capital Acceptances (Finance Bills ", dated January 26, 1973.)

Authorized for public release by the FOMC Secretariat on 8/21/2020

- 8Because ineligible acceptanceshave never been subject to
reserve requirements, it is proposed that the necessary amendments to
Regulation D extending reserve requirements to these instruments 1/ be
published in the Federal Register for comment within 15 days.

The typi-

cal comment period for Board regulations is 30 days, but since only 15
large banks are reported to be selling ineligible acceptances, and they
can be expected to respond rapidly to the Board's proposals, the staff
feels that the comment period can be shortened to 15 days from the date
of publication in the Federal Register without creating hardships for
any bank.

After the comment period is closed, and if the Board then takes

final action on the proposal, there would ordinarily be a 30 day deferred
effective date.

Should the Board wish to shorten the length of the deferral

period, or eliminate it altogether, a finding of the Board must be published
to indicate the reasons why such shortening or elimination was necessary.
While there are lags in effectuating the reserve requirement
proposal for ineligible acceptances, it is proposed that banks be

asked

to submit to the Board the outstanding dollar amount of ineligible
acceptances on the date the proposal is announced, and that this amount
be included in the base at the time final action
acceptances proposal becomes effective.

on the ineligible

This procedure could forestall

a sharp increase in outstanding ineligible acceptances during the comment
and

deferral period; any increased amount of acceptances carrying total

money market borrowing above the base would become subject to an 8 per
1/

The reserve requirement would be 5 per cent for those with a maturity
of 30 days or more and the applicable demand deposit reserve ratio for
those with maturities of less than 30 days.

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- 9-

cent reserve requirement at the time the acceptance proposal went into
effect.

In any event, it is possible that use of ineligible acceptances

would fade if large Q ceilings were suspended, because this acceptance
market was developed in large part as a safety valve against such ceilings.
It should be pointed out, though, that none of the proposals
here curb use by banks of letters of credit that they attach to commercial
paper market obligations marketed by corporate borrowers.

This practice

might possibly be encouraged if use of direct money market borrowing by
banks is made more expensive.

One would doubt,though, that the current

proposals are so onerous as to provide a significant further stimulus to
the practice.

Nevertheless, the activity appears to be of doubtful

legality, and could be curbed administratively.

The letters cannot be

made subject to reserve requirements since they represent no more than
a bank guarantee and the bank does not raise funds through them.
Base
The staff proposes that the dollar base used for the calculation
of marginal

reserve requirements on domestic money market instruments

should be the outstanding aggregate amount, on a daily average basis,
for some selected statement week, of the liabilities noted above--or
$10 million, whichever is larger.

We estimate that with a $10 million

cut-off, the additional 3 per cent marginal reserve requirement would
affect about 350 member banks--of which over 200 would have total deposits
in excess of $250 million and only a handful would have total deposits
of less than $50 million (see appended table 1).
1/

1/

This table reflects only large time deposits (in denominations
of $100,000 or more) held by individuals, partnerships, and
corporations in October 1972, the latest date for available universe
data. The staff feels, however, that there would be only a few banks
subject to the proposal that are not captured in the table.

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- 10 These 350 banks would pay a 3 per cent marginal reserve requirement
on the aggregate amount by which the sum of the money market instruments
discussed above exceeded the base amount.

If the total outstanding amount

of such instruments were to decline below its base, a bank's marginal
reserve requirement would cease unless and until the total of such instruments once again exceeded its original base.

The base amount could only

be changed by Board action.
Between the effective date of the proposal for marginal reserve
requirements and the effective date for reserve requirements on ineligible
acceptances, the base would reflect only large time deposits and funds
obtained by the bank from obligations issued by affiliates and subsidiaries;
increases in the total of these two sources of funds above that outstanding
in the base period would be subject to an 8 per cent reserve requirement
(5 per cent average plus 3 per cent marginal reserve requirement).

If

and when ineligible acceptances become subject to reserve requirements,
the base would increase by the amount of such obligations outstanding
during the base period, and the marginal reserve requirements would apply
to the excess over the new base of the total of three sources of funds:
large time deposits, funds obtained by the bank from obligations issued
by affiliates and subsidiaries, and ineligible acceptances.

Timing
If the Board approved these proposals by May 16, we would
recommend the announcement of its actions at the close of business that
day, with the base determined by the daily average amount of outstanding

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- 11 -

money market instruments noted above for the statement week ended May 16.
However, in order to permit time for preparations of forms and instructions,
time to fully explain the new regulations to member banks, and time to work
out the complicated processing procedures, we would suggest that the
proposal be effective for the statement week beginning June 7.

The addi-

tional reserveswould then have to be held in the week beginning June 21.
As noted earlier, if the proposal for ineligible acceptances
is implemented, reserve requirements could not be effective on this instrument before mid-June at the earliest,and mid-July if the 30 day deferral
period is used, but the proposals could be implemented, as discussed above,
for the other instruments.
Regulation Q
The restrictive effect of additional marginal reserve on large
time certificates would present the Board with an opportunity to remove
ceiling rates on all single maturity certificates of deposit in denominations
of $100,000 or more without this seeming to be an easing action.

These

certificates are now exempt from Regulation Q for 30 to 89 day maturities.
As noted earlier, market rates are so high currently that banks are
effectively blocked from issuing longer-term certificates, with deleterious
effects on the maturity structure of such deposits.
would permit

Suspension of ceilings

a more balanced maturity structure, while the concurrent

imposition of marginal reserve requirements would make it clear that the
Board's monetary policy remained on a restrictive course.

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- 12 III.

EURODOLLAR REGULATIONS

If the Board adopts a marginal reserve requirement for large
time deposits and other money market liabilities, it may wish to amend
its Eurodollar Regulations.

Two possible types of amendments might be

considered.
(1)

The Board might reduce the reserve requirement ratio on

Eurodollar borrowings above the reserve-free base levels from 20 per cent
to 8 per cent.

At the same time, the reserve-free bases would gradually

be phased out over a period of ten months.

(This is the recommendation

of the Division of International Finance in its memo of April 16, 1973.)

(2)

Alternatively, the Board might retain existing Eurodollar

bases, but subject them gradually to a reserve requirement of 5 per cent.
Borrowings in excess of the base amounts would be subject to a requirement
of 8 per cent instead of 20 per cent.

This alternative would establish

the appearance of symmetry between the treatment of Eurodollar bases and
bases established on domestic money market liabilities under the proposals
in section II of this memorandum.
If the Board adopts either amendment, it is recommended that the
Board leave open the possibility of raising the average and/or marginal
rate of requirement on Eurodollar borrowing should massive capital inflows
appear likely (see memo
1973, pages 12-13).

from Division of International Finance, January 31,

For the same reason, it would not be desirable to

combine bases for Eurodollar borrowings (once the 5 per cent requirement
was in place) with bases for other types of liabilities.

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- 13 Phasing Our Reserve-Free bases
The phasing out of bases under the first alternative could be
accomplished by reducing reserve-free bases by 10 per cent (from the levels
in the computation period that runs from

April 12 to May 9) successively

in each computation period beginning with the period that starts on July 5,
1973.

According to this schedule, bases would be eliminated as of the

period that ends on March 13, 1974, unless eliminated sooner under the
automatic downward adjustment feature.

This schedule would provide the

Chase Manhattan Bank with about 80 per cent of their request (see memo
of Division of International Finance, January 31, 1973, page 9).

A table

for calculating alternative schedules for phasing out bases is shown in
Table 2, attached.

Once bases were phased out, all Eurodollar borrowings

would bear the same 8 per cent reserve requirement.
Removal of the reserve-free bases would simplify the Board's
regulations in an orderly fashion--eliminating from the regulations a
feature that applies only to a handful of banks.

The gradual reduction

of bases during the phase out period could avoid a possible bank relations
problem as well as possible capital outflows that could stem from immediate

elimination of bases.
Phasing in Reserve Requirement on Eurodollar Bases (Alternative 2)
If the Board does not wish to phase out Eurodollar bases at a
time that it is creating bases for large time deposits, it might instead
apply a 5 per cent reserve requirement to the amount of Eurodollar borrowings equal to the bank's current Eurodollar reserve-free base, and a
requirement of 8 per cent to amounts of borrowings in excess of this

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- 14 base.

Under this alternative, the 5 per cent requirement might be phased

in at one percentage point a month over a 5 month period (see Table 2).
Eurodollar bases might then be eliminated at the time when the domestic
marginal reserve requirement was no longer required, and the domestic
bases eliminated.
Under this second alternative, historical bases would carry a
reserve requirement of 5 per cent in both domestic and international
regulations.

This apparent symmetry would only exist, however, for the

few banks that still have Eurodollar bases.
Moreover, the two types of bases have quite different origins.
The Eurodollar reserve-free bases, while initially established according
to historical amounts of borrowings, have been preserved by banks at some
cost, whereas the domestic historical bases that would be created by the

marginal reserve requirement on large time deposits and similar instruments
would represent only currently-outstanding amounts of bank liabilities.
In view of these considerations, and the desirability of being able
to set the reserve requirement under Regulation M primarily on the basis of
international considerations, the appearance at the present time of symmetrical treatment of Eurodollar borrowings with treatment of large CD's and
other

similar

sources of funds may not be a significant advantage,

if indeed it is an advantage at all.
Avoidance of Early Capital Outflow
Under either alternative, Eurodollar borrowings up to the amounts
of base-levels will ultimately be made less attractive than under their
present reserve-free status.

So long as some Eurodollar rates remain below

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- 15 -

comparable U.S. rates (at present overnight Eurodollars are cheaper than
Federal funds), substantial repayments of existing borrowings are unlikely-and some increase in borrowings is possible.

But if Eurodollar rates

should rise above U.S. rates (as occurred in February/March), Eurodollar
borrowings of about $1 billion might be repaid unless banks had special
incentives to retain them.
Automatic downward adjustment.

The Board's existing regulations

provide an incentive by specifying that a bank's base is eliminated if
unused--the automatic downward adjustment feature.

It is recommended that

such a feature be retained under either alternative as insurance against
a sizable outflow, although it should be recognized that the "lock-in"
effect will become less over time, as the base is phased out or the 5 per
cent reserve requirement phased in.
Four-week computation period.

If the automatic downward adjust-

ment feature is retained, it is probably also desirable to retain a fourweek computation period for Eurodollar borrowings.

Substitution of the

one-week period to establish symmetry with domestic reserve calculations
would involve the risk that banks would find it

unprofitable to retain

bases because of temporary upward pressures in the Eurodollar market (e.g.,
around mid-year window-dressing time).

This risk would have to be weighed

against possible ease in administration that might result from shifting
reserve-accounting for Eurodollar borrowings from a four-week period
to a weekly basis.

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- 16 -

Foreign Branch Loans to U.S. Residents
Foreign branch loans to U.S. residents are covered by separate
historical reserve-free bases that are not subject to automatic downward
adjustment.

Loans in excess of amounts of historical bases are presently

subject to the 20 per cent reserve requirement, and under either of the
above alternatives would be subject to a requirement of 8 per cent.

In

its proposal published for comment last September, the Board proposed to
eliminate those bases, and this would be the recommended action if the
Board were to adopt Alternative I.
However, if the Board were to adopt Alternative II, it might
wish to retain the historical bases for branch loans without automatic downward adjustment (which aggregate about $1/4 billion) until such time as
all Eurodollar bases could be eliminated.
Agencies and Branches of Foreign Banks.
Agencies and branches of foreign banks are, at times,

major

borrowers of Eurodollars for use in the United States, and the Board will
need to ensure that its policy actions are not undermined by stepped-up
U.S. operations by them.
If the Board makes a request for voluntary cooperation to nonmember banks generally (Section IV), it might well be feasible to adapt
the techniques used to provide some restraint on foreign agencies and
branches.

Failing this, it is recommended that the agencies and branches

be approached and requested to conform with guidelines that would prevent
excessive growth in their U.S. business (either loans to U.S. commercial
banks or loans to U.S. nonbank customers).

Details of these guidelines

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- 17 could be worked out with the Federal Reserve Bank of New York.

(In 1969,

agencies and branches were requested to exercise restraint in expanding
their loans to U.S. banks, and in general they cooperated with this request.)

IV.

NONMEMBER BANKS

The Board may also wish to consider obtaining voluntary compliance with the marginal reserve requirements by nonmember banks.
letter to nonmember banks is attached.

A proposed

This letter notes that:

The reserve requirement action was taken by the Board in
an effort to restrain bank credit growth as part of the
nation's anti-inflationary program.

The effectiveness

of this proposal in the essential task of combatting
inflation would be enhanced, and equity would be served,
if it applied generally throughout the banking community.
This letter could be signed by the Chairman and sent to each nonmember
bank having outstanding money market-type borrowing in excess of $10
million.
all

We estimate that this would cover less than 100 banks--virtually

with deposits over $100 million (see appended Table 3).1/
The letter, as drafted, suggests that the "required" reserve

balance be deposited with a

member bank who would then be asked to

maintain 100 per cent of these balances on deposit with the Federal
Reserve Bank in his District.

1/

This table reflects only a sample of nonmember banks, and covers
only large time deposits (in denominations over $100,000) issued to
individuals, partnerships, corporations in January 1973. The estimate of 100 nonmember banks that could be covered is based on staff
analysis of sample data.

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- 18 -

V.

COST ESTIMATE

The staff estimates that System-wide costs of implementing the
proposals would be around $360 thousand.

About $333 thousand of these

costs would be one-time costs and $28 thousand would be annual recurring
costs.

These estimates are detailed in Table 4, appended.
The cost estimates, it should be noted, are rough, and could be

as much as $100,000 higher than projected, depending on Reserve Bank
decisions on programming.

Authorized for public release by the FOMC Secretariat on 8/21/2020
TABLE 1
Frequency Distribution of Member Banks Issuing
TIME DEPOSITS in denominations of $100,000 or more to Individuals,
Partnerships, and Corporations
By Size of Bank

As of October 31, 1972
Aggregates Amount of
TIME DEPOSITS in Denominations

Time

With Total Deposits (Demand

and Savings)

of

of $100,000 or

Total

25.1

50.1

100.1

more issued to IPC

Number of

Under

to

to

to

Member Banks

25 mil.

50 mil.

None

2,495

2,317

154

20

4

0

0

0.1 to 5.0 million
5.1 to 10 million

2,771
184

1,527
4

746
16

380
64

107
79

10
18

1
3

10.1 to 25 million
25.1 to 50 million

151

0

1

19

63

48

20

68
55
57
3,286

0
0
0
1,531

0
0
0
763

2
0
0
465

20
3
0
272

23
13
1
113

23
39
56
142

(Dollars)

50.1 to 100 million
Over 100 million
TOTAL ISSUING SUCH DEPOSITS
Total number of Banks with
aggregate time deposits in
denominations of $100,000 or
more issued to IPC of:
Over $100 million

to

250 mil.

500 mil.

Over

500 mil.

57

0

0

0

0

1

56

Over $ 50 million
Over $ 25 million
Over $ 10 million

112
180
331

0
0
0

0
0
1

0
2
21

3
23
86

14
37
85

95
118
138

Over $

515

4

17

85

165

103

141

40,919

827

1,028

1,421

2,711

2,659

32,272

5 million

Memo: Total of TIME DEPOSITS
in denominations of $100,000 or
more issued to IPC (millions of
dollars) by all banks
Note:

100 mil.

250.1

Includes Negotiable CD's, Non-negotiable

CD's, and open account time deposits.

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- 20 -

Schedule for Phasing Out Reserve Free Bases
(Alternative 1)
Percentage reduction
in base per
computation period

Reduction starting in
computation period
beginning on (1973)

Base phased out by
computation period
ending on (1974)

Per cent of
Chase Manhattan
Bank's request

May 10

Jan. 16

60

July

Mar. 13

80

Sept. 27

June 5

100

May 10

June 5

80

May 10

Nov. 20

100

5

Schedule for Phasing in Reserve Requirement on
Reserve Free Bases of Eurodollar Borrowings
(Alternative 2)
Requirement phased in at one percentage point per computation
period until maximum requirement of 5 per cent applies.
Alternatives for
beginning requirement
(1 per cent)
phased in on

Maximum requirement
(5 per cent)
effective beginning

June 7, 1973

September 27, 1973

July 5, 1973

October 25, 1973

August 2, 1973

November 21, 1973

Per cent of
Chase Manhattan
Bank's request

Authorized for public release by the FOMC Secretariat on 8/21/2020
TABLE 3
Frequency Distribution of Non-Member Banks in Sample Issuing
TIME DEPOSITS in denominations of $100,000 or more to Individuals,
Partnerships, and Corporations
By Size of Bank
As of January 31, 1973
Aggregates Amount of

Total

TIME DEPOSITS in Denominations
of $100,000 or more issued to
IPC
(Dollars)

Number of
Non-Member
Banks

None
0.1 to 5.0 million
5.1 to 10 million
10.1 to 25 million
25.1 to 50 million
50.1 to 100 million
Over 100 million
TOTAL ISSUING SUCH DEPOSITS

418
497
56
39
16
8
7
623

With Total De osits (Demand, Time and Savings)

Under
25 mil.

25.1
to
50 mil.

50.1
to
100 mil.

381
245
0
0
0
0
0
245

27
128
9
1
0
0
0
138

9
87
20
4
0
0
0
111

100.1
to
250 mil.

of

250.1
to
500 mil.

Over
500 mil.

1
32
25
26
9
0
1
93

0
5
2
6
2
1
2
18

0
0
0
2
5
7
4
18

TOTAL number of banks with
aggregate time deposits in
denominations of $100,000 or
more issued to IPC of:
over $100 million
over $ 50 million
over $ 25 million

7
15
31

0
0
0

0
0
0

0
0
0

1
1
10

2
3
5

4
11
16

over $ 10 million
over $ 5 million

70
126

0
0

1
10

4
24

36
61

11
13

18
18

226

363

1,088

532

1,215

Memo: Total of TIME DEPOSITS
in denominations of $100,000

or more issued to IPC (millions
of dollars)

Note:

3,564

139

Includes Negotiable CD's, Non-negotiable CD's, and open account time deposits.
There are a total of 1,041 non-member insured banks in the Survey of Time and Savings Deposits sample.

Authorized for public release by the FOMC Secretariat on 8/21/2020

- 22 -

TABLE 4
ESTIMATED COSTS
Of
IMPLEMENTING RESERVE REQUIREMENT PROPOSALS

Reserve Banks

Board

$ 3,600

--

Total

ONE TIME
Trip to Washington of Accounting

and deposit personnel to explain
changes
To obtain Base Data
Art work for forms
Reproduction of forms
Programming
Total One-Time

$

3,600

18,000

2,000

20,000

--

1,000

1,000

--

8,500

8,500
228,000

15,000

243,000

$258,100

$18,000

$276,100

$ 75,000

$10,000

$ 85,000

$333,100

$28,000

$361,100

Continuing Costs (Annual Rate)
Processing

TOTAL COSTS

Authorized for public release by the FOMC Secretariat on 8/21/2020

- 23 Draft of a Letter Which Might Request Non-Me mber Banks to Voluntarily
Comply with Marginal Reserve Requirements
I am writing to enlist your assistance in ensuring that actions
taken by the Federal Reserve today in the interest of a healthy economy
and a sound banking system accomplish these objectives in an effective
and equitable manner.
The Board of Governors of the Federal Reserve System has taken
two actions that affect large time certificates of deposit issued

by member banks.

One action is to suspend maximum interest rate ceilings

on such deposits with maturities of more than 89 days; the ceiling rate
on deposits of 30-89 day maturity had been suspended since June 27, 1970.
The Federal Deposit Insurance

Corporation has taken a similar action with

respect to insured banks that are not members of the Federal Reserve
System.

With market interest rates relatively high, the suspension of

ceilings across the board will enable banks to compete in all maturity
sectors, of the short-term market and thereby permit them to establish a
balanced maturity structure for outstanding large certificates of deposit.
The other action taken by the Federal Reserve Board has been to
impose a marginal reserve requirement on the total of funds raised from
the issuance of (1) single-maturity time deposits of $100,000 or more,
(2) deposits represented by promissory notes, acknowledgements of advances,
due bills, or similar obligations as provided in paragraph 204.1(f) of
the Board's Regulation D, and (3) funds obtained by the bank from obligations issued by affiliate and subsidiaries of the bank.

The Board has also

published for a comment a proposal to establish reserve requirements,
including marginal reserve requirements, on funds obtained from the sale of

ineligible acceptances.

Authorized for public release by the FOMC Secretariat on 8/21/2020

- 24 The marginal reserve requirement action means that member banks
must maintain additional reserves equal to 3 per cent of any growth in
the total of deposits and liabilities specified above in excess of the
average total amount of these obligations outstanding in the week ending
May 16, 1973.

Thus, for a member bank, the reserve requirement applicable

to the excess of such deposits above the base data level would generally
be 8 per cent--the continuing 5 per cent requirement on large denomination
time deposits and other similar domestic money market instruments, plus

the marginal 3 per cent requirement.
The reserve requirement action was taken by the Board in an
effort to restrain bank credit growth as part of the nation's antiinflationary program.

The effectiveness of this proposal in the essential

task of combatting inflation would be enhanced, and equity would be served,
if it applied generally throughout the banking community.

Accordingly, I

am asking you voluntarily to adhere to the additional 3 per cent marginal
requirement applicable to the amount of deposits and related instruments, as
defined above, in excess of the average of those outstanding in the base week
of May 16, 1973.1/

A copy

of

the

Federal

Register

notice

implementing

the marginal reserve requirement proposal is attached for your information
and guidance.
For a nonmember bank, the additional marginal reserve should
be maintained with a member of the Federal Reserve System.

In the latter case,

1/ This phrasing assumes the letter is sent to each nonmember in excess of
$25 million in deposits. If the letter were sent to State supervisors
instead, the sentence could read as follows: "Thus, I am asking you to
take action so that nonmember banks within your jurisdiction will adhere
to the 3 per cent marginal requirement, etc."

Authorized for public release by the FOMC Secretariat on 8/21/2020

- 25 the member bank receiving the deposit will be asked to maintain 100 per cent
of these balances with its Federal Reserve Bank.2/
It is our hope that this additional reserve requirement can be
removed at the earliest possible time consistent with the national
interest.

Your compliance with this requirement will play a significant

role in restraining inflation and in returning the economy to a more
normal course.
I look forward to receiving your response.

2/ If the letter were written to State supervisors, a first sentence
could be added to this paragraph as follows: "To increase the general
effectiveness of the marginal reserve requirement, we believe it would
be best implemented outside of the general framework of the reserve
requirement regulations of your State. Accordingly, we request that
you notify nonmember banks under your jurisdiction to maintain the
additional marginal reserves in the form of either, etc."