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FED E R A L R ES ER V E BANK OF NEW YORK r Circular No. 7 3 2 6 L January 25, 1974 ~1 J PROPOSED LEGISLATION REGARDING UNIFORM RESERVE REQUIREMENTS T o A ll Banking Institutions and O thers Concerned, in the Second Federal R eserve D istrict: Printed below is the text of a statement issued January 25 by the Board of Governors of the Federal Reserve System, the text of a proposed bill sent to the chairmen of the committees respon sible for banking legislation in the United States Senate and the House of Representatives, and the text of the Board of Governors’ letter transmitting the proposed legislation. I strongly support the proposed legislation and urge you to consider carefully — in the interests of the banking com munity and the economy — the reasons given for the proposal. Additional copies of this circular will be furnished upon request. A lfred H a y e s , President. Statement by Board of Governors T he Board o f G overnors o f the Federal R eserve System today sent to Congress draft legislation designed to implement its recom m endations fo r u n iform reserve requirements. T he proposed legislation has the fo llo w ing p u rp oses: T o achieve better management o f m oney and credit, to provide a m ore equitable system o f reserve require ments am ong financial institutions that offer similar deposit services, and to permit Federal R eserve lending assistance to a broader range o f financial institutions when and as they com e under unusual liquidity pressures. T he draft legislation w ould extend reserve requirements set by the Federal R eserve to the demand deposits and N egotiable O rd ers o f W ithdraw al ( N O W s ) , at all financial institutions — com m ercial banks, savings and loan associations and mutual savings banks. T h e proposal would also provide a w idening o f the permissible range o f reserve requirements. T h e B oard said the basic principle underlying the proposed legislation is that equivalent cash reserve requirements should apply to all deposits that effectively serve as a part o f the public’s m oney balances, regard less o f the type institution in which those balances are held. W h ile provid in g a greater measure o f m onetary control in the econom y, the draft legislation w ould at the same time preserve the balance o f supervisory pow ers inherent in a dual banking system. M ore than 3,000 o f the smaller nonm em ber banks will be effectively exem pt from the new requirements. T he proposal does not require mem bership in the Federal R eserve System on the part o f State banks. A s at present, State-chartered banks may jo in the Federal Reserve System or not, as they choose. Regardless o f their m em bership status, how ever, State banks under the legislation would be subject to Federal R eserve reserve requirements on demand deposits and N O W accounts and would have access to Federal Reserve credit at the discount w indow . Super vision o f thrift institutions also w ould remain unchanged. R eserve requirements set by State authorities under State law vary from State to State. In about half the States, the percentage requirements fo r demand deposits are identical or differ very little (e x ce p t fo r large banks) from the percentages now set by the Federal Reserve. Percentages in 15 States are higher while in 7 other States they are low er. T he m a jor difference between State requirements and reserve requirements set by the Federal Reserve, how ever, is in the fo rm in which requirements are held. R eserve requirements set by the Federal R eserve must be held, under law, in the fo rm o f vault cash or funds deposited with a Federal R eserve Bank. State require ments can be satisfied not on ly by holding cash but also in a number o f other ways — by holding deposits with other banks or by holding interest-bearing Federal or State securities. R eserves held in this manner do not contribute to the m onetary p olicy function o f reserves, since the funds are available to finance additional deposit and credit expansion. Thus, the principal thrust o f the proposed legislation w ould be to change the form in which nonm em ber banks hold their reserves — that is, by holding reserves in the form o f cash or balances with Federal R eserve Banks. T he proposal, which differs in some details from earlier recom m endations by the B oard, would provide a fou r-y ear transition period — during which reserve requirements w ould gradually be phased in — fo r institu tions not now subject to Federal Reserve reserve requirements. Details o f the d ra ft legislation are as fo llo w s : 1. Dem and deposits would be subject to a reserve requirement, set by the B oard, ranging from 5 per cent to 22 per cent. T h e present range is from 7 per cent to 22 per cent — ■fro m 10 to 22 per cent at reserve city banks and fro m 7 to 14 per cent at other banks. U n d er the proposal, no distinction w ould be made between reserve city and other banks. 2. Interest-bearing deposits from which withdrawals may be made by negotiable instrument (su ch as N O W s ) would be subject to a reserve requirement ranging from 3 per cent to 20 per cent. N O W accounts at m em ber banks in M assachusetts and N ew H am pshire — the on ly States where such accounts are perm is s ib le — are at present subject to the reserve requirement that applies to time and savings deposits, which may range from 3 per cent to 10 per cent. 3. T here w ould be no required reserves against the first $2 million o f net demand deposits and N O W s at nonm em ber institutions. 4. T im e and savings deposits o f member banks would be subject to a reserve requirement ranging from 1 per cent to 10 per cent (instead o f 3 per cent to 10 per cent as at presen t). T im e and savings deposits o f nonm em ber institutions w ould not be subject to Federal R eserve reserve requirements. 5. E very institution that receives demand deposits or offers N O W accounts w ould be required to report its deposit liabilities and required reserves, if any, as the B oard requested. 6. N onm em ber institutions that w ould be required to maintain Federal R eserve reserve requirements w ould be able to obtain credit through the Federal R eserve discount w indow , subject to regulations issued by the Board. 7. A transition period o f fo u r years would apply to the total amount o f demand deposits held by nonm em ber institutions at the time o f enactment o f the new law. D u ring the first calendar year follow in g the date o f enactment, an institution w ould be required to carry 20 per cent o f the required reserve on these base period demand deposits, 40 per cent during the second year, 60 per cent during the third year, 80 per cent during the fou rth year and 100 per cent a fter that. A dditions to demand deposits beyond the base period amount w ould be subject to the full reserve requirement. 8. T h e new law w ould becom e effective at the beginning o f the first calendar year follow in g its enactment. T h e essential function o f Federal R eserve reserve requirements is to serve as a fulcrum fo r monetarv policy. Such reserve requirements provide a know n and controllable base through which the reserve-supplying and reserve-absorbing actions o f the Federal Reserve can affect the supply o f m oney and credit. T he different reserve requirements set by the various States do not serve this purpose. Federal R eserve reserve requirements, how ever, presently apply only to banks that are members o f the F ederal R eserve System — about 5,700 out o f 14,000 total com m ercial banks in the country. T h e prop ortion o f demand deposits held by mem ber banks has been declining over the years, how ever, so that the Federal R eserve’ s control over bank reserves (an d the m oney su pply) has been eroding. In 1960, m em ber banks held about 83 per cent o f the demand deposits that make up the m oney supply. Presently, about 75 per cent o f the demand deposit com ponent o f the m oney supply is held at member banks. A lso, the demand deposit com ponent o f the m oney supply has grow n m ore rapidly at nonm em ber banks than at mem ber banks, and the rate o f grow th at nonm em ber banks has varied much m ore from year to year. Since 1960, the demand deposit com ponent o f the m oney supply held at nonm em ber banks has grow n by about 164 per cent, while the grow th at mem ber banks has been about 61 per cent. 2 p In a letter transmitting the d ra ft legislation to C ongress, B oard Chairman A rth ur F . Burns described the situation in this w a y : “ R ecent trends in nonm em ber demand deposits and in the develpom ent o f N O W accounts surely presage a continued, and perhaps accelerated, grow th o f m oney-type deposits at nonm em ber financial institutions. N o one can be certain at what exact point this grow th w ill make control over m onetary aggre gates ineffective, but erosion o f the reserve base progressively weakens the reliability o f our present m onetary instruments. “ The proposed legislation extends reserve requirements set by the Federal R eserve only to accounts \Vhich are directly em ployed in making m oney payments — that is, to demand deposits and to savings accounts with third party payment features. T h e proposal does not recom m end applying Federal R eserve reserve requirements to time and savings deposits other than N O W accounts. These deposits do in some degree serve a m oney-like function, but they are not highly active deposits. A lso, under present conditions, there do not appear to be frequent, or large-scale, shifts o f funds back and forth between demand and time (o r savings) accounts. S h ifts am ong dem and deposits, N O W accounts, and other time deposits w ould becom e m ore prevalent in the future, however. “ T he proposed legislation is not intended to alter the existing chartering options fo r banking institu tions, to fa vor or disadvantage different types o f institutions, or to change the balance am ong supervisory authorities. State-chartered institutions may continue either to jo in the Federal R eserve System or not, as they choose. W h eth er they do or do not — and it is anticipated that many would remain outside the System — they would becom e subject to reserve requirements set by the Federal R eserve on demand deposits and on N O W and similar savings accounts. “ Thus, the specific proposals have been drawn in such a way as to achieve m ore precision in m onetary control and m ore equity in com petition without altering the diversified banking and financial structure that now serves the country. . .” Transmittal Letter to Congress Dear M r. C hairm an : Background T he B oard o f G overnors herewith submits fo r C o n gressional consideration legislation that would extend reserve requirements set by the Federal Reserve System to nonm em ber institutions — com m ercial banks, mutual savings banks, savings and loan associations and the like _ to the extent that such institutions issue demand or other types o f deposits that p erform a checking account function. T h e proposed bill also makes certain other revisions in related Federal Reserve pow ers, including a widening o f the permissible range o f reserve requirements and expanded authority fo r the Federal Reserve Banks to lend directly to nonm em ber institutions encom passed by the extended reserve re quirement system. T h e B oard strongly recom m ends adoption o f the proposed legislation. T h e principle that underlies the proposed legislation is simple and straightforw ard — namely, that equiva lent cash reserve requirements should apply to all deposits that effectively serve as a part o f the p u blic’s m oney balances, whether held at m em ber banks, n on mem ber banks or other financial institutions. Recent grow th o f nonm em ber banks and recent efforts by nonbank depository institutions to evolve new arrange ments fo r m oney transfers make adoption o f this principle a matter o f some urgency. T h e purposes o f the proposed legislation are to make the nation’s monetary system m ore responsive to F e d eral R eserve actions, to facilitate better management o f m oney and credit, to provide a m ore equitable system o f reserve requirements fo r financial institutions o ffe r ing similar deposit services, and to permit Federal R eserve credit assistance to a broader range o f financial institutions when and as they com e under unusual liquidity pressures. A t the same time, it should be noted that the bill does not require mem bership in the Federal R eserve System on the part o f State com m ercial banks or other nonm em ber institutions, nor does it contem plate any change in present supervisory arrangements. Proposals fo r u niform reserve requirements are not new. Comparable reserve treatment fo r mem ber and nonm em ber banks was em bodied in the recom m enda tions o f a Congressional com m ittee chaired by Senator Douglas in 1950, repeated in 1952 in the recom m enda tions o f a Congressional comm ittee chaired by C on gressman Patman, endorsed by the C om m ission on M on ey and Credit in 1961, reaffirmed by the P resident’s Com m ittee on Financial Institutions in 1963, and urged again in the 1971 report o f the P resident’s C om m ission on Financial Structure and R egulation. Since 1964 the Board has repeatedly urged the appli cation o f reserve requirements set by the Federal R e serve to nonm em ber banks as well as m em ber banks. In 1970 the Board requested that such reserve require ments be placed on deposits subject to w ithdrawal by check at all financial institutions. B y 1972 the rapid evolution o f the financial system made it clear that reserve requirements set by the Federal R eserve would need also to be extended to so-called N O W (negotiable order o f w ithdraw al) accounts, which serve a function similar to demand deposits. initial deposit at the nonm em ber bank. T h e m inor degree to which deposits in nonm em ber institutions are indirectly backed by reserves that satisfy reserve re quirements o f the Federal R eserve — as well as the lack o f uniform ity in reserve requirements am ong the States — complicates the task and reduces the precision o f m onetary control. Thus, the principal thrust o f the proposed legislation is to change the form in which n on member banks may hold their reserves — that is, by meeting Federal R eserve regulations with respect to vault cash and reserve balances held with Federal R e serve Banks. A main benefit to be derived from the legislation proposed by the Board is that it would buttress the basic role o f reserve requirem ents in the functioning o f m onetary and credit policy. B e fo re the Federal R eserve System was fou n ded, reserve requirements w ere im posed by legislation at the national and State levels as a means o f protecting bank liquidity. That philosophy was reflected in the original structure o f reserve requirements established fo r Federal Reserve m em ber banks. H igher requirements were set fo r reserve city banks than fo r country members, and still higher requirements were im posed on central reserve city banks. V estiges o f that initial structure remain, even today. T h e task o f m onetary policy is com plicated because shifts in deposits between member banks and nonm em ber institutions alter the relationship between reserves under the control o f the Federal Reserve and the nation’s deposits. F or exam ple, if the Federal Reserve is attempting to restrain m onetary grow th during an inflationary period, it will be p rovidin g bank reserves m ore slow ly. I f the public’s preferences fo r deposits at nonm em ber institutions as com pared with member banks were unchanged, the increase in the nation’s bank deposits and m oney supply w ould be about in line with the slow er grow th in bank reserves. But if the public is at the same time shifting deposits into nonm em ber banks — as has often occurred, and to a large and unpredictable extent — there would be a greater m one tary expansion than desired. T his w ould happen because deposits at nonm em ber institutions require less cash reserves than at member banks, and thus the total o f deposits that could be supported by the available total o f cash reserves would be enlarged. R equired reserves, how ever, have not proved in prac tice to be an im portant source o f operating liquidity fo r banks, except as they can be used within the weekly reserve acounting period to absorb large fluctuations in check clearings. T he reserves required to bank deposits cannot be withdrawn to finance a rise in loan demand, and they are available to supply only a small portion o f the funds needed to accom m odate deposit losses. T he essential function o f reserve requirements today is not to provide liquidity, but to serve as a fulcrum fo r m onetary p olicy — that is, to provide a know n and controllable base through which the reserve-supplying and reserve-absorbing actions o f the Federal R eserve can affect the supply o f m oney and credit. T he g row in g dim ension o f this problem can be indi cated statistically. Since 1960 the demand deposit com ponent o f the nation’s m oney supply held at non member banks has grow n by 164 per cent, while such deposits held at mem ber banks have grow n by only 61 per cent. B y the end o f 1973, about 25 per cent o f demand deposits in the m oney supply were held at nonm em ber banks. T o achieve good management over the supply o f m on ey and credit, reserve requirements must be met by holding assets which are outside the payments stream and whose aggregate volum e is under the control o f the Federal Reserve. W h atever their role may be in p ro tecting bank liquidity, the reserve requirements set by the various States do not meet this test. N ot only are the demand deposits at nonm ember banks grow in g m ore rapidly than at member banks, but the available evidence indicates that deposit growth at nonm em ber banks has varied much m ore from year to year than at mem ber banks. This is shown in the at tached Table 1. T he m ore erratic growth rates at n on member banks com pound the difficulties o f monetary control under the prevailing reserve structure. State-determined reserve requirements on nonm em ber banks vary from one jurisdiction to another, ranging fo r net demand deposits around the level o f reserve requirements set by the Federal Reserve. M ore im portant, how ever, is the form in which these reserves are held. State requirements can be satisfied not only by the holding o f cash but also in a num ber o f other w a y s — fo r exam ple, by holding deposits with other banks or by holding interest-bearing securities. H old in gs in the last tw o form s d o not contribute to the m onetary policy function o f reserves, since the funds so used remain available to finance additional deposit and credit expansion. W h en a nonm em ber bank satisfies all or part o f its State reserve requirement by holding deposits at a m em ber bank, that mem ber bank is o f course required by the Federal R eserve to hold cash reserves at a Federal R eserve Bank o r in the bank vault against these deposits in the same way as fo r any o f its deposits. But, in this case, the size o f cash reserve held by the m em ber bank is quite small relative to the T he net increase in the number o f nonm ember banks is shown in Table 2. Overall since 1960, about 750 banks have left the Federal R eserve System through withdrawal or mergers. A b ou t 140 State-chartered banks have elected to join the System since 1960. Just over 1,700 others receiving new State charters chose to remain outside the System. T he increase in relative im portance o f both the num ber o f nonm em ber banks and their deposit holdings has accelerated since 1968, with growth particularly rapid in the past three years. T he main reason fo r this trend toward avoidance o f Federal R eserve m em bership is the earnings loss that 4 banks conclude they suffer in meeting Federal R eserve reserve requirements. Banks must fo re g o earning assets to build up a reserve balance in the Federal R eserve. That reserve balance pays no interest, al though member banks do receive some services from the Federal R eserve. and m ore equity in com petition without altering the diversified banking and financial structure that now serves the country. K ey specific proposals, and their purposes, are indicated below. T he potential developm ent at thrift institutions o f savings accounts with transfer features similar to checking accounts poses a new risk o f slippage in m on e tary control. In 1973, experim entation with N O W accounts was authorized by the Congress under certain regulatory conditions in tw o States. These accounts in im portant degree are capable o f substituting fo r demand deposits, since, unlike ordinary savings or time accounts, depositors can make payment to third parties on the basis o f withdrawals in the form o f transferable or negotiable instruments. It may well com e to the point where the average householder makes a sizable share o f his ordinary payments through these accounts. U nder present law, these accounts are not subject to reserve requirements set by the Federal R eserve, except at member banks. But in the tw o States affected, all kinds o f depository institutions are authorized to issue these accounts. A part from exem ptions o f im portance to small n on m em ber institutions, the bill proposes that every insti tution receiving demand deposits be required to m ain tain reserves as determined by the B oard o f G overnors o f the Federal R eserve System in a ratio o f not less than 5 per cent nor greater than 22 per cent o f such deposits. W ith regard to interest-bearing deposits from which the depositor is allowed to make withdrawals by negotiable or transferable instrument, the reserve requirement range w ould be from 3 per cent to 20 per cent, as determined by the Board. Provisions of the proposed legislation Institutions covered would include mem ber and n on member banks and savings and depository institutions generally. A lso included would be U .S . located, foreign owned banking institutions that accept demand deposits. This would encom pass institutions chartered under State o r Federal law and ow ned by foreign individuals or by foreign banks and U .S . branches o f foreign banks. A ll o f these institutions would be required to hold reserves on demand deposits or N O W accounts at Federal R e serve Banks or in the form o f vault cash. Recent trends in nonm em ber demand deposits and in the developm ent o f N O W accounts surely presage a continued, and perhaps accelerated, grow th o f m oneytype deposits at nonm em ber financial institutions. N o one can be certain at what exact point this grow th will make control over m onetary aggregates ineffective, but erosion o f the reserve base progressively weakens the reliability o f our present m onetary instruments. T he proposed range o f reserve requirements fo r demand deposits is slightly w ider than the present range o f requirements permitted by law. T he present range o f net demand deposits is from 7 per cent to 22 per cent. T he B oard’ s effective reserve requirements are currently graduated by size o f deposit, so that smaller banks have low er reserve requirements than larger banks with generally m ore active accounts. T he proposed legislation extends reserve require ments set by the Federal Reserve only to accounts which are directly em ployed in making m oney payments — that is, to demand deposits and to savings accounts with third party payment features. T he proposal does not recom m end applying Federal R eserve reserve re quirements to time and savings deposits other than N O W accounts. T hese deposits do in some degree serve a m oney-like function, but they are not highly active deposits. A lso, under present conditions, there do not appear to be frequent, or large-scale, shifts o f funds back and forth between demand and time fo r savings) accounts. S h ifts am ong demand deposits, N O W accounts, and other tim e deposits would becom e m ore prevalent in the future, however. A w ide range within which the B oard can set reserve requirements permits m axim um flexibility in the use o f the reserve requirement instrument. T h e structure o f reserve requirements can be m ore readily keyed to the size o f bank, with reserve requirements graduated by size o f deposit. M oreover, with reserve require ments applicable to both member and nonm em ber insti tutions, it would be practical fo r changes in reserve requirements to be utilized m ore frequently as an in strument o f policy. T h is instrument has the advantage o f perm itting m onetary policy to affect the reserve p osi tion o f all banks immediately and thus to attain a prom pt change in bank credit availability. In the past, use o f the reserve requirement instrument has been quite limited, in part because it applied only to member banks and changes would therefore tend to distort existing com petitive relationships between mem ber and other banks. T he proposed legislation is not intended to alter the existing chartering options fo r banking institutions, to fa v or or disadvantage different types o f institutions, or to change the balance am ong supervisory authorities. State-chartered institutions may continue either to join the Federal R eserve System or not, as they choose. W hether they do or do not — and it is anticipated that many w ould remain outside the System — they would becom e subject to reserve requirements set by the F ed eral Reserve on demand deposits and on N O W and similar savings accounts. T he low er range o f reserve requirements proposed fo r savings accounts with third-party tran sfer p rivi leges would permit low er reserve requirements on these accounts than on demand deposits with fu ll checking account pow ers. W hether there should be such a re serve requirement differential, and the extent o f it, would depend on experience with N O W accounts and, T hus, the specific proposals have been drawn in such a way as to achieve m ore precision in m onetary control 5 in particular, with the degree to which they begin to assume the function o f active m oney. A t present the Federal R eserve cannot set reserve requirements on such accounts at nonm em ber institutions. Reserve requirem ents on N O W accounts at member banks in the tw o States where they currently can be offered are the same as the reserve requirement on ordinary savings deposits at member banks. control by the Federal R eserve over the rate at which the nation’ s m oney supply increases. N onm em ber institutions and their comm unities would also benefit from a provision that permits Federal R eserve credit to be made available to institutions that maintain reserves with Federal R eserve Banks, subject to such limitations as the B oard m ay by regulation pre scribe. U nder present law, credit to nonm embers is extended only in highly unusual circumstances, and under restrictive conditions as to the type o f collateral that may be accepted by the Federal R eserve Bank. T he proposed legislation would make it possible fo r n on m em ber institutions to have greater access to the F ed eral R eserve discount w indow , particularly at times o f strong pressures on their liquidity positions. In devel opin g regulations govern in g such borrow ing, however, it w ould be fair and proper fo r the B oard to give recognition to the remaining differences in the amounts o f reserves held at Federal R eserve Banks as between m em ber and nonm em ber institutions. T h e Board recognizes that u n iform reserve require ments may im pose some burden on nonm em ber institu tions, depending on the level at which requirements are set and on the extent to which they are not satisfied by existin g vault cash holdings. T his is so because under the proposed legislation, m ore o f the assets o f such in stitutions may need to be held in non-interest-bearing form . In recognition o f this possible impact on the earnings o f nonm em ber institutions, the legislation includes a provision which effectively exem pts the first $2 million o f the total o f net demand deposits and N O W accounts at these institutions from reserve requirements set by the Federal Reserve. F o r nonm em ber banks, which hold sizeable amounts o f time and savings deposits in addi tion to their demand accounts, the average size o f insti tution below which there will be a total exem ption from reserve requirements set by the Federal R eserve is on the order o f $4 million. N onm em ber institutions this small are very num erous, but they hold so little o f the nation’ s demand deposits (o n ly about 2 y2 per cen t) that their exem ption from reserve requirements o f the F ed eral R eserve w ould not be a significant handicap fo r m onetary policy. T he legislation does not propose extension to non m ember institutions o f reserve requirements on time and savings deposits apart from N O W accounts. The B oard proposes, however, that the lov/er end o f the permissible range within which those requirements can be set fo r member banks be reduced from the present 3 per cent to 1 per cent, with the upper end remaining at 10 per cent. T his change would provide needed flexibility in the administration o f reserve requirement policy, since the reserve percentage fo r passbook sav ings accounts has been at the permissible minimum for a num ber o f years. W h eth er and to what extent the B oard might use this additional latitude would depend on the evolving structure o f the deposit system and the impact that various kinds o f deposits are judged to have on public behavior with regard to spending and saving. Given this exem ption provision, only about 38 per cent o f present nonm em ber banks w ould be subject, under the proposed legislation, to reserve requirements that exceeded their ow n vault cash holdings. A ssu m in g prevailing reserve requirements o f the Federal R eserve on demand deposits, the excess o f required reserves over vault cash fo r all nonm em bers taken to gether is estimated to aggregate about $2.3 billion, or less than 1 ^ per cent o f their total resources. T he legislation also contains a provision that would require reporting o f deposit liabilities by member and nonm em ber institutions subject to reserve requirements set b y the Federal Reserve. T his inform ation is needed fo r m onitoring purposes and will permit comparative analysis o f the various financial institutions as the pro posed reserve structure goes into effect. A s a further measure to ease any burden on non m em ber financial institutions from the transition to u n iform requirements, the required reserves on demand deposits over $2 million existing at the time o f enact ment o f the legislation w ould be phased in over a 4year period — at the rate o f 20 per cent o f the total requirem ent per year, so that bv the fifth year the bank would be m eeting the full reserve requirement. A n y in crease in deposits above those existing at time o f enact ment w ould, how ever, be immediately subject to the full reserve requirement. T h e latter provision is essen tial because it would prom ptly permit m ore effective I and other mem bers o f the Board would be pleased to discuss these proposals m ore fu lly with you and other members o f you r Committee. I urge that you consider scheduling public hearings on the matter at an early date. Sincerely yours, A rth u r 6 F. B u r n s DRAFT A BILL required reserves at such times and in such manner and fo rm as the B oard may require.” T o m o d ify reserve requirements o f mem ber banks o f the Federal Reserve S y ste m ; to extend such require ments to other institutions that accept demand deposits or certain other types o f d e p o sits; to authorize Federal R eserve Banks to extend credit to such institutions; and fo r other purposes. Credit to Nonmember Institutions Section 3. Section 13 o f the Federal R eserve A ct is amended by adding at the end thereof the follow in g new p a ra gra p h : B e it enacted by the Senate and H ouse o f R epre sentatives o f the United States in Congress assembled. “ Each Federal Reserve Bank may make advances to any nonm em ber institution in its district that maintains reserves as prescribed by section 1 9 (b ) o f this A ct with due regard to the p roportion o f its assets held as such reserves and subject to such limitations as the B oard m ay by regulation prescribe.” Short Title Section 1. T his A ct may be cited as the R eserve Requirem ents A ct o f 1974. Conforming Amendments Reserve Requirements for Member Banks and Other Institutions Section 4. Subsection ( c ) o f section 19 o f the F ed eral R eserve A ct is amended by striking “ m em ber bank” and inserting “ institution” ; by striking “ o f w hich it is a m em ber” and inserting “ o f the Federal R eserve d is trict in which its head office is located o r such other Federal R eserve Bank as the B oard m ay designate” ; and by striking “ such bank” each time it appears and inserting “ such institution” . Subsection ( f ) o f that section is amended by striking out “ a m em ber bank” and inserting “ an institution” and by striking out “ such member bank” and inserting “ such institution” . Sub section ( g ) o f that section is am ended by striking out “ member banks” and inserting “ institutions” . Section 1 1 (e ) o f the Federal R eserve A ct, relating to reclassi fication o f reserve cities, is repealed. Section 2. T h e last sentence o f subsection ( b ) o f section 19 o f the Federal R eserve A ct (1 2 U .S .C . 4 6 1 ) is designated as paragraph ( 6 ) and that part o f such subsection ( b ) that precedes such sentence is amended to read as fo llo w s : “ ( b ) ( 1 ) E very institution that receives demand de posits shall maintain reserves against such deposits in such ratio, not less than 5 per centum nor m ore than 22 per centum, as may be determ ined by the Board. “ ( 2 ) E very institution that receives interest-bearing deposits from which the depositor is allowed to make withdrawals by negotiable or transferable instrument fo r the purpose o f m aking payments to third persons (referre d to in this A ct as ‘ negotiable order o f w ith drawal accounts’ ) shall maintain reserves against such deposits in such ratio, not less than 3 per centum nor m ore than 20 per centum, as may be determined by the Board. Transition Provisions Section 5. W ith respect to any institution, other than a corporation operating or organized under section 25 or section 2 5 ( a ) o f the Federal R eserve A ct, that is not a mem ber o f the Federal R eserve System and was not a mem ber on January 31, 1974, the reserve against its base demand deposits otherw ise required by reason o f the enactment o f this A ct shall be reduced by 80 per centum during the first calendar year that begins after its enactment, 60 per centum during the second year, 40 per centum during the third year, and 20 per centum during the fou rth year. F or the purposes o f this section, the term “ base demand de posits” means that portion o f an institution’ s demand deposits that does not exceed the average daily amount o f its demand deposits during the calendar month im mediately preceding the date o f enactment o f this A ct. “ ( 3 ) N otw ithstanding the fore g o in g provisions, fo r each institution that is not a member bank or a corp ora tion operating or organized under section 25 or section 2 5 ( a ) o f this A ct there shall be no required reserves against the first $2 m illion o f its net demand deposits or o f its negotiable order o f withdrawal accounts or o f a com bination o f both. “ ( 4 ) E very mem ber bank shall maintain reserves against its time deposits and its savings deposits (other than negotiable order o f withdrawal accounts) in such ratio, not less than 1 per centum nor m ore than 10 per centum, as may be determined by the Board. “ ( 5 ) E very institution that receives demand d ep os its o r offers negotiable order o f withdrawal accounts shall make reports concerning its deposit liabilities and Section 6. T his A ct shall take effect on the first day o f the first calendar year beginning after the date o f its enactment. 7 Table 1 Member and Nonmember Demand Deposit Components of the Money Supply M em b er N onm em ber 4th Q uarter A m ou n t1 ($ billion s) G row th2 ( per cent) A m ou n t1*3 ($ billions) G row th 2 ( per cent) 1960 96.2 0.4 20.1 1.3 1961 99.2 3.1 21.0 4.2 1962 99.2 0.0 22.1 5.3 6.6 1963 102.0 2.9 23.6 1964 105.7 3.6 25.2 7.1 1965 109.0 3.1 27.1 7.4 ...................... 110.4 1.3 28.2 3.9 1967 , ............................................ 1966 117.7 6.6 30.2 7.1 1968 125.3 6.5 33.4 10.9 1969 128.1 2.2 36.5 9.0 1970 135.2 5.5 38.4 5.3 1971 142.1 5.1 43.1 12.3 1972 149.9 5.5 49.1 14.1 19734 ............................................ 154.5 3.1 53.0 7.9 1 A verage o f daily figures, not seasonally adjusted. 2 Fourth quarter to fourth quarter annual rate o f growth. 3 Nonmem ber data are based on the ratios o f member to nonmember deposits at Call dates and interpolated between such dates. 4 Partially estimated. Table 2 Nonmember Banks Compared to A ll Commercial Banks N um ber o f N onm em ber Banks P e r cent o f N um ber o f A ll Com m ercial Banks ( A s o f D ecem ber 31) ( D ecem b er A v era g e) 1960 ........... 7,300 54.2 17.2 1961 ........... 7,320 54.5 17.5 1962 ........... 7,380 55.0 18.1 1963 ............7,458 55.0 18.7 1964 ............7,536 54.8 19.2 1965 ............7,583 54.9 19.9 1966 ............7,617 55.3 20.2 1967 ............7,651 55.8 20.3 1968 ............7,701 56.3 21.0 1969 ............ 7,792 57.0 22.1 1970 .................................. ............ 7,919 57.9 22.1 1971 ............ 8,056 58.4 23.3 1972 ............ 8,223 59.0 24.6 1973 ............ 8,412! 59.51 25.42 A s o f O ctober 31. Partially estimated. P e r cent o f Demand D eposits in M on ey Supply at N onm em bers
@FedFRASER