Full text of Federal Reserve Bank of New York Circulars : 6342. Notice of Proposed Rule Making

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FEDERAL RESERVE BANK
O F N E W YO RK
C ircu lar N o.
May 29,

6342

1969

NOTICE OF PROPOSED RULE MAKING
Regulation D— Reserves of Member Banks
To the Member Banks o f the Second Federal Reserve District:

Following is the text of a statement issued today by the Board of Governors
of the Federal Reserve System:
The Board of Governors of the Federal Reserve System today proposed an
amendment to its rules governing member bank reserves (Regulation D) designed
to ensure that checks resulting from transfers involving foreign branches are
not used to effect a reduction in required reserves.
Specifically, the proposed amendment would prevent a member bank from
deducting from demand deposits, for purpose of computing reserve require­
ments, any ’’ cash items in process of collection” or ’’balances due from other
banks” involving any account with or in a foreign branch of the member bank.
"The effect of the proposal relates principally to the practice of bidding for
Euro-dollar deposits by foreign branches of member banks,” the Board said in
explanation of the proposal. ’’ For example, when a foreign depositor in a domes­
tic office of a U.S. bank instructs that bank to transfer funds to another U.S.
bank for his account in the latter's foreign branch, the transfer is sometimes
effected by a cashier's check. Upon its receipt by the second bank, that check
has been treated as a 'cash item in process of collection' that is credited to
the depositor's account in the foreign branch. Such accounts are not subject to
reserve requirements under Regulation D.
"A major reason for permitting deduction of cash items in process of co l­
lection in computing deposits subject to reserves is to avoid duplication of
reserves against the same funds. In a purely domestic transaction of the kind
described, a member bank issuing a cashier's check maintains reserves against
the funds involved while the check is in process of collection. The receiving
bank is normally permitted, during the collection process, to deduct the item
from its deposits subject to reserve requirements in order to avoid duplication
of reserves in such instances. In the case of Euro-dollar transactions, however,
the receiving bank credits the funds to an account that is not subject to reserve
requirements, and therefore there appears to be no reason to permit items
credited to a foreign branch account to be deducted from the parent bank's
deposits in the calculation of reserve requirements under Regulation D.”
The amendment would eliminate one element of attractiveness of Euro­
dollar deposits to those member banks that have made frequent use of the de­
duction of such items in connection with their Euro-dollar transactions.
The Board asks that any comments on the proposal be sent to the Board's
offices no later than July 15, 1969.
Printed on the reverse side is the text of the proposed amendment.




Alfred Hayes,
President.
(Over)

[Reg. D]

RESERVES OF M EM BER B A N K S
Certain Cash Items in Process of Collection

The Board of Governors is considering amending the last
sentence of section 204.1(h) to read: "Items handled as noncash
collections and items the amounts of which are credited to any
account with or in a foreign branch of the member bank may not be
treated as ’ cash items in process of collection' within the meaning
of this part."
In conjunction with such amendment, the last sentence of
section 204.2 (b) would be amended to read: " 'Balances due from
other banks' do not include balances due from Federal Reserve
Banks, balances (payable in dollars or otherwise) due from
foreign banks or branches thereof wherever located or from foreign
branches of other domestic banks,6 or balances representing
checks received o r forwarded for collection and not yet paid by
the drawee the amounts of which are credited to any account with
or in a foreign branch of the member bank." (Footnote 6 would
remain unchanged.)
The purpose of these proposed amendments is to disallow as a
deduction from deposits in computing a member bank's reserve
requirements any "cash item in p rocess of collection" or "balance
due from other bank" that is credited to any account with or in a
foreign branch of such bank.