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FEDERAL RESERVE BANK
OF N EW YORK
("Circular No. 7144*1
May 17, 1973 J
L
Changes in Reserve Requirements; Suspension of Interest Rate Ceilings
on Certain Large Certificates of Deposit
To A ll Member Banks, and Others Concerned,
in the Second Federal Reserve District:
Following is the text of a statement issued May 16 by the Board of Governors of the Federal Reserve
System:
The Board o f Governors o f the Federal Reserve System announced today a series of actions designed to
curb the rapid expansion in bank credit and help moderate inflationary pressures, and at the same time to
assure the availability of credit on a reasonable scale.
The measures will:
1. Impose an 8 per cent marginal reserve requirement (the regular 5 per cent plus a supplemental 3
per cent) on further increases in the total of (a) outstanding certificates of deposit of $ 100,000 and over
issued by member banks, and (b) outstanding funds obtained by a bank through issuance by an affiliate
of obligations subject to the existing reserve requirement on time deposits. The 8 per cent marginal reserve
would not apply to banks whose obligations of these types aggregate less than $10 million.
2. Reduce from 20 per cent to 8 per cent the reserve requirement on certain foreign borrowings of
U.S. banks, primarily Euro-dollars, thus affording roughly parallel treatment at present with the marginal
reserve requirement on large-denomination certificates o f deposit and bank-related commercial paper. The
Board also acted to eliminate gradually the reserve-free bases still held by some banks subject to this
measure.
3. Suspend the ceilings that apply to the rate o f interest commercial banks may pay on certificates of
deposit o f $100,000 and over (large CDs) that mature in 90 days or more, effective immediately.
4. At the same time, the Board proposed a regulatory amendment that would apply reserve require
ments to funds raised by banks through sales of finance bills (sometimes called working capital accept
ances). If adopted, the amendment would subject the amount of finance bills currently outstanding to a 5
per cent reserve requirement. (There is presently no reserve requirement on finance bills.) In addition,
under this proposal, finance bills would be part of the total obligations subject to the 8 per cent marginal
reserve requirement.
Comment on the finance bills proposal will be received by the Board through June 4.
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For purposes o f computing the 8 per cent reserve requirement, a bank would compare its daily average out
standing amount o f finance bills, large CDs and bank-related commercial paper to the daily average amount
outstanding on the base date— the week ended May 16, 1973, or to $10 million, whichever is larger. Under the
present regulation as amended today, however, marginal reserve requirements will be based on the total amount
of large CDs and bank-related commercial paper.
The marginal reserve requirement on large time deposits and covered commercial paper issued by affiliates
will apply to the excess o f deposits over the base period beginning in the statement week starting June 7. These
reserves will have to be held in the week starting June 21.
The actions were taken against the background of an unusually strong expansion in bank credit, stimulated
to a considerable extent by increased business spending for capital investment and inventory accumulation. The
actions will help the present policy o f monetary restraint to moderate this expansion. Recent growth in bank
credit to major business corporations has been financed in large part by increases in the issuance o f money
market-type instruments of the kinds covered by the action taken today by the Board.
Business borrowing from commercial banks increased by about $15 billion during the first four months of
this year. This increase was only partially offset by the reduced use of commercial paper by businesses to obtain
funds. Commercial banks obtained funds to meet the demand for a rising volume of business loans largely
through the sale of large negotiable CDs, which also increased by about $15 billion over this period.
Marginal reserve on large denomination CDs
The new 8 per cent marginal reserve requirement will apply to the total of single-maturity, large-denomination CDs and bank-related commercial paper issued by a member bank beginning Thursday, June 7, to the
extent that this volume exceeds the average amount outstanding in the statement week ending Wednesday, May
16. In no case will the marginal reserve apply to an amount outstanding of less than $10 million.
For example, if a member bank had outstanding a total of $20 million of large CDs and bank-related com
mercial paper on average during the week ended May 16, 1973, and increased that amount to $25 million by the
week ended Wednesday, June 13, the bank would be subject to an 8 per cent reserve requirement on the
additional $5 million— or a $400,000 reserve. Without this change in the regulation, the reserve requirement on
the additional $5 million would be 5 per cent— or $250,000.
The base for computing the marginal reserve requirement will remain the same for each individual bank—
the week ended May 16, 1973 or $10 million, whichever is greater— regardless of the level of its CD and com
mercial paper holdings in the future.
Under the lagged reserve system now in effect, a member bank is required to hold reserves during any given
week based on the level o f its deposits two weeks earlier. Thus, a bank in this instance will be required to hold
the 8 per cent marginal reserve during the week of June 21 -27, based on the level o f its deposits during the week
of June 7-13. It will hold the 8 per cent marginal reserve only to the extent that its aggregate total of large CDs
and bank-related commercial paper exceeds the total amount outstanding during the week ending today, May
16, 1973.
Euro-dollar reserve requirement
Last September 7, the Board proposed to reduce its marginal reserve requirement on certain foreign borrow
ings o f U.S. banks, primarily Euro-dollars, from 20 per cent to 10 per cent and to eliminate the reserve-free bases
available to banks subject to this reserve requirement. A reserve requirement on Euro-dollar transactions was
first imposed in 1969 to moderate short-term dollar flows between the United States and other countries.
Reduction o f this reserve requirement to 8 per cent will provide roughly parallel treatment at the present
tjme— so far as reserve requirements are concerned— among Euro-dollars, large CDs and bank-related com
mercial paper. At some future time, o f course, it may be desirable to depart from such parallel treatment.
The Board also decided to phase out the reserve-free bases available to banks subject to this marginal
reserve requirement. Bases will be reduced by 10 per cent in each four week computation period beginning with
the period starting July 5. This schedule will result in elimination of the bases in the computation period
beginning March 14, 1974.
Suspension o f large CD ceilings
The Board suspended interest rate ceilings on large CDs maturing in 90 days or more, in order to permit
member commercial banks to maintain a balanced structure of deposits. Ceilings previously had been suspended
on CDs issued for 30-89 days, and had ranged from 6 3A per cent to IVi per cent on longer-maturity deposits of
$100,000 and over. Because of recent advances in market rates, the ceiling rates on longer maturity deposits now
practically preclude banks from using long-term CDs and the great bulk of large CDs being issued mature in
less than 90 days. Ceilings on large CDs with maturities of less than 90 days were suspended in June of 1970.
Interest rate ceilings will remain in place on all other types o f bank deposits, including passbook accounts
and consumer-type certificates of deposit (those of less than $ 100 ,000).
Proposed amendment on finance bills
The proposed amendment would apply reserve requirements against funds obtained by the bank for use in
its banking business through sale of bankers acceptances that are not eligible for discount at a Federal Reserve
Bank. The traditional type o f bank acceptances which apply to specific transactions in goods would continue to
be exempt from reserve requirements and eligible for discount by a Federal Reserve Bank. Under the proposal,
the Board would treat the sale of finance bills as equivalent to deposits subject to reserve requirements. At
present, about $1.1 billion in such bills are outstanding. Under the proposal, funds received by a bank would be
treated as a deposit if the member bank (1) makes an acceptance that is not eligible for discount at a Federal
Reserve Bank, (2) then sells the acceptance, and (3) uses the proceeds in its banking business.
In a related matter, the Board said only acceptances eligible for discount at a Federal Reserve Bank would
be subject to limitations on amounts outstanding set forth in Section 13 o f the Federal Reserve Act.
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The Board urged all banks to observe the spirit, as well as the letter, of the the Board’s actions in a con
certed effort to curb bank credit expansion and to moderate inflationary pressures. In this connection, the
attached letter is being sent to about 190 o f the largest nonmember banks, seeking their assistance and coopera
tion in ensuring the effectiveness of this program.
Following is the letter to large nonmember banks:
Dear Sir:
I earnestly seek your assistance and cooperation in ensuring that actions taken by the Federal Reserve
System today in the interest of a healthy national economy can effectively accomplish this objective.
The Board o f Governors o f the Federal Reserve System has taken two actions that affect large time
certificates o f deposit issued by member banks. One action is to suspend maximum interest rate ceilings
on such deposits with maturities o f 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 o f 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 require
ment on the total of funds raised from the issuance of ( 1 ) single-maturity time deposits o f $ 100,000 or more,
(2 ) deposits represented by certain commercial paper obligations such as promissory notes, acknowledge
ments of advances, and due bills, and (3) funds obtained by the bank from obligations issued by affiliates
and subsidiaries o f the bank. The board has also published for comment a proposal to establish reserve re
quirements, including marginal reserve requirements, on funds obtained from the sale of finance bills (also
termed ineligible acceptances), the proceeds of which are used by the bank.
The marginal reserve requirement action means that member banks must maintain additional reserves
equal to 3 per cent o f any growth in the total of deposits and liabilities specified above in excess of a base
amount. The base for computing the marginal reserve will be the amount outstanding in the week ended
May 16, 1973, or $10 million, whichever is greater. Thus, for a member bank the reserve requirement ap
plicable to the excess of such deposits above the base 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 o f the Nation’s anti-inflationary program. The effectiveness of this proposal in the essential task o f
combating inflation would be enhanced if it applied generally throughout the banking community. Accord
ingly, I very much hope you will see fit to conform to the additional 3 per cent marginal requirement as
described above. A copy o f the Federal Reserve notice implementing the marginal reserve 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 o f your choosing. The member bank receiving the deposit will be expected to re
deposit these balances with its Federal Reserve Bank. Operating procedures will be provided by the Federal
Reserve Bank and your designated correspondent.
I assure you that the request I am now making of you will be withdrawn at the earliest possible time
consistent with the national interest. Your cooperation can play a significant role in restraining inflation
and in returning the economy to a more normal course.
I look forward to receiving your response.
Sincerely yours,
Arthur F. Burns
Copies of amendments to the Board of Governors’ regulations, reflecting the actions announced in the
above statement, will be sent to you shortly; in addition, instructional material and forms relating to the
new marginal reserve requirements will soon be sent to banks maintaining reserve accounts with this Bank.
Comments on the finance bills proposal should be submitted by June 4, and may be sent to our
Regulations and Bank Analysis Department.
Additional copies of this circular will be furnished upon request.
Alfred Hayes,
President.
@FedFRASER