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FED ER A L R E S E R V E BANK OF N EW YORK r C ircu la r N o . 6 3 5 6 ~ l L Ju n e 27, 1969 i PROPOSED AM ENDM ENTS TO R E G U L A T IO N S M A N D D R e s e r v e R e q u ir e m e n ts o n C e rta in E u r o -D o lla r T ra n s a ctio n s To the Member Banks of the Second Federal Reserve District: F o llo w in g is th e te x t o f a s ta te m e n t is s u e d y e s t e r d a y b y th e B o a r d o f G o v e r n o r s o f th e F e d e r a l R e s e r v e S y s t e m : The B oard of Governors of the Federal Reserve System today proposed to amend its regulations in order to moderate the flow o f Euro-dollars between U. S. banks and their fo r eign branches and also between U. S. and foreign banks. Comments on the proposed amend ments should be submitted to the Board within 30 days. Proposed amendments to Regulation M, which governs the foreign activities o f member banks, w ould: 1. Establish a 10 per cent reserve requirement on borrowings o f U. S. banks from their foreign branches to the extent that these borrowings exceed the daily average amounts out standing in the four weeks ending May 28, 1969. This marginal reserve requirement would also apply to assets acquired by the foreign branch from U. S. offices of the bank. To reduce potential inequities that may be involved in use of a base period under this proposal, the Board suggested a minimum base equal to 3 per cent of total deposits subject to reserve requirements fo r any bank with a foreign branch regardless o f the magnitude of its previous use of Euro-dollars. 2. Establish a 10 per cent reserve requirement on branch loans to U. S. residents to the extent such loans exceed those in a base period defined as either (a) the amount out standing on June 25, 1969, or (b ) the daily average o f amounts outstanding in the fou r weeks ending M ay 28, 1969. The choice o f base would be left to the member bank. A n exemption fo r branches with small amounts of loans to U. S. residents (less than $5 million on any day o f a relevant com putation period) is included in the proposal. In a companion measure, the Board proposed to define as deposits subject to Regula tion D, which governs reserves o f member banks, any borrow ing by a member bank from a foreign bank. The Board proposed a 10 per cent reserve requirement against deposits of this class. The reserve requirements proposed in these amendments would remove a special advan tage to U. S. banks o f using Euro-dollars fo r adjustment to domestic credit restraint, The Board noted that these reserve-free liabilities of U. S. banks to their foreign branches have risen by more than $7 billion since the beginning of 1969, and by about $3 billion during the first three weeks o f June. Increases o f these magnitudes in liabilities to foreign branches by a few large banks have had a distorting influence on credit flows in the United States and abroad. The Board proposed that banks’ reserve-free bases be subject to automatic reduction unless such reduction is waived by B oard action at the time. Under the automatic reduc tion feature, a new base would be established when, in any period used to calculate a reserve requirement, these claims o f foreign branches subject to reserve requirements fall below the original base. P r in t e d on th e r e v e r s e s id e is th e t e x t o f the p r o p o s e d a m e n d m e n ts . C o m m e n ts o n th e p r o p o s e d a m e n d m e n ts s h o u ld b e s u b m itte d b y J u l y 26 a n d s h o u ld b e se n t to o u r B a n k E x a m in a tio n s D e p a r tm e n t. A d d it io n a l c o p ie s o f th is c ir c u la r w ill b e f u r n is h e d u p o n re q u e s t. A lfred H ayes, President. ( over) [Regs. D and M] RESERVES OF MEMBER BANKS; FOREIGN ACTIVITIES OF N A T IO N A L BANKS1 Reserves Against Foreign Transactions The Board of Governors is considering amending P art 204 and Part 213 to impose reserve requirements against certain transactions usually involving so-called “ E u ro-dollars” — deposits o f United States dollars with banks located outside the United States, includ ing overseas branches of United States banks. The proposed amendments are designed to remove a. special advantage to member banks o f using E u ro dollars fo r adjustment to domestic credit restraint. The increasing magnitude o f this practice has had a distorting influence on credit flows in the United States and abroad. Specifically, the proposed amendments w o u ld : (1 ) Establish a 10 per cent reserve requirement against (a ) borrowings by domestic offices o f member banks from their foreign branches and (b ) assets o f foreign branches acquired from domestic offices o f its parent member bank, to the extent that such borrow ings and assets exceed the daily average amounts out standing in the fou r weeks ending M ay 28, 1969. (2 ) Establish a 10 per cent reserve requirement against credit extended by a foreign branch of a mem ber bank to United States residents, to the extent such credits exceed those in a base period defined as either (a) the amount outstanding on June 25, 1969, or (b ) the daily average amount outstanding in the fou r weeks ending M ay 28, 1969. (3 ) Establish a 10 per cent reserve requirement on borrowings by member banks from banks abroad that are not denominated as deposits. Each of the reserve requirements would be main tained by member bank head offices in a manner similar to that applicable to their deposit liabilities generally. The first two o f the proposed requirements would be accomplished by adding a new section to Part 213, as follow s: S E C T IO N 213.7— M A R G IN A L R E S E R V E R E Q U IR E M E N T S ( a) Member bank transactions with foreign branches.— D uring each week o f the four-week period beginning [the seventh Thursday after the effective date o f this paragraph] and each week of each suc cessive four-week ( “ m aintenance” ) period, a member bank having one o r more foreign branches shall, in addition to the requirements o f Part 204 of this chap ter (Regulation D ), keep on deposit with the Reserve Bank o f its district a daily average balance equal to i Despite the title of Part 213, the conditions, limitations, and restrictions therein are applicable to foreign activities of State chartered member banks as well as national banks (12 U.S.C. 321,601). 10 per cent o f the amount by which the daily average net total o f ( ) outstanding assets held b y its foreign branches which were purchased from its domestic offices and ( ) balances due from its domestic offices to its foreign branches, for the four-week ( “ com puta tio n ” ) period ending on the W ednesday fifteen days before the beginning o f each maintenance period, ex ceeds the greater o f either (i) the corresponding daily average total fo r either the four-week period ending M ay 28, 1969 or any com putation period beginning on or after [the effective date of this paragraph] whichever is least, or (ii) three per cent of the mem ber ban k’s average total deposits subject to reserve requirements during the com putation period. 1 2 (&) Credit extended by foreign branches to United States residents.— D uring each week o f the four-week period beginning [the seventh Thursday after the effective date o f this paragraph] and each week o f each successive four-week maintenance period, a mem ber bank having one or more foreign branches shall, in addition to the requirements o f Part 204 o f this chapter (Regulation D ) and of the preceding para graph, keep on deposit with the Reserve Bank o f its district a daily average balance equal to per cent of the amount b y which daily average credit outstand ing from its foreign branches to United States resi dents (other than assets purchased and balances due from its domestic offices) fo r the four-week com puta tion period ending on the W ednesday fifteen days before the beginning of each maintenance period ex ceeds either the corresponding daily average total during the four-week period ending May 28, 1969 or the total outstanding on June 25, 1969: Provided, That this paragraph does not apply with respect to any foreign branch which did not have credit out standing to United States residents exceeding $5 mil lion on any day during the relevant computation period. 10 * * * The third of the proposed requirements would be accom plished: (1 ) B y amending the exemption enumerated (1) in § 204.1 ( / ) (relating to certain promissory notes as deposits) by changing “ that is issued to another bank” to read “ that is issued to a domestic office of another bank” ; (2 ) B y amending § 204.5(a) by changing “ subject to paragraph (& )” to read “ subject to paragraphs (&) and (c ) ” ; and (3 ) B y adding to § 204.5 the follow ing new para graph : (c) Reserve percentage against certain deposits of foreign banks.— Deposits represented b y promissory notes, acknowledgments o f advance, due bills, or simi lar obligations of the kind described in § 204.1 ( / ) that are issued to, or undertaken with respect to, a foreign office of another bank shall not be subject to the re quirements of paragraph (a) o f this section, but a member bank shall maintain on deposit with the Reserve Bank o f its district a balance equal to 10 per cent o f such deposits.