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FEDERAL RESERVE BANK OF NEW YORK [ Circular No. 9 2 7 6 ~l April 12, 1982 PROPOSED AMENDMENT TO REGULATION J Weekday Closings and Nonstandard Holidays To A ll Depository Institutions, and Others Concerned, in the Second Federal Reserve District: The Board of Governors of the Federal Reserve System has requested comment on a proposal to amend its Regulation J, “ Collection of Checks and Other Items,’’ to require depository institu tions that are closed on days on which their Reserve Bank is open to pay that day for checks drawn on the closed institution. The following is quoted from the text of the Board’s announcement: The Board asked for comment by May 20, 1982. Under the proposed amendment the account at the Federal Reserve of the closed institution would be charged for checks that it would otherwise pay for that day if it were open. The Federal Reserve estimates that this proposed action would reduce daily average Federal Reserve float — checks sent to the Federal Reserve for collection but not yet collected — by approximately $157 million. The Board asked also for comment on the question whether the proposed amendment should apply to institutions closed on nonstandard holidays — State or local holidays not observed nationally or regionally — in areas where the institution’s Reserve Bank is open. Printed on the following pages is the text of the proposed amendment to Regulation J. Com ments thereon should be submitted by May 20, 1982, and may be sent to James O. Aston, Vice President, Check Processing Function. Anthony M. Solomon, President. FEDERAL RESERVE SYSTEM REGULATION J [12 C.F.R. PART 210] [Docket No. R-0392] COLLECTION OF CHECKS AND OTHER ITEMS AND WIRE TRANSFER OF FUNDS Midweek Closings and Nonstandard Holidays AGENCY; Board of Governors of the Federal Reserve System. ACTION: Proposed rule. SUMMARY: The Board proposes to amend subpart A of Regulation J, governing the co llec tio n of checks and other items by Federal Reserve Banks, to require a paying bank to pay for cash items made available to i t by a Reserve Bank on a weekday that is a banking day for the Reserve Bank but not for the paying bank. Such payment would be required as a condi tion of Reserve Bank handling of items payable by the paying bank. This amendment would be implemented i n it ia lly only to require a paying bank to pay for cash items made available on regular weekday closing days. Regular weekday closing days are days on which some depository in stitu tio n s in certain sta tes choose, but are not required, to close on a regular b asis. The amendment would elim inate the flo a t generated when a depository in stitu tio n regularly closes on a weekday and promote equity with other depository in stitu tio n s that open on such days. A paying bank would not be required to open or to begin processing a cash le tte r on such a weekday closing day, because the time for return of the items would not begin to run u n til the paying bank's next banking day. L ist of Subjects in 12 C.F.R. Part 210 Banks, banking; Federal Reserve System DATE: Comments must be received by May 20, 1982. ADDRESS: Comments, which should refer to Docket No. R-0392, may be mailed to William W. W iles, Secretary, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue, N.W., Washington, D. C. 20551, or delivered to Room B-2223 between 8:45 a.m. and 5:15 p.ra. Comments received may also be inspected at Room B-1122 between 8:45 a.m. and 5:15 p.m ., except as provided in section 261.6(a) of the Board's Rules Regarding A vailab ility of Information, 12 C.F.R. $ 261.6(a). -2POR FURTHER INFORMATION CONTACT: G ilbert T. Schwartz, Associate General Counsel (202/452-3625), or Joseph R. Alexander, Attorney (202/452-2489), Legal Division? or Lorin S. Meeder, Associate Director (202/452-2738), D ivision of Federal Reserve Bank Operations, Board of Governors of the Federal Reserve System, Washington, D. C. 20551. SUPPLH4ENTARY INFORMATION: For the past several years, the Federal Reserve System has been actively pursuing methods of reducing flo a t to the lowest possible le v e l by making operational improvements and by improving the transportation of cash items. (Federal Reserve flo a t i s the dollar amount that has been credited by Reserve Banks to depository in stitu tio n s for cash items that have not been provisionally paid by the paying banks.) These flo a t reduction e ffo r ts have been quite success ful? the le v e l of check co llec tio n flo a t has dropped by more than 50% since 1979. One element of flo a t is generated when a paying bank closes on a day when the Reserve Bank from which i t receives items is open? the paying bank thereby avoids paying for items on that day. On such days, credit is passed to depositors for cash le tte r s that include items payable by such closed in s titu tio n s, and flo a t r esu lts. The closing by the paying bank may be on a regular weekday closing day or on a holiday that is not observed by the Reserve Bank, because they are located in d ifferen t sta te s. The Reserve Banks estimate that regular weekday closin gs generate $156.7 m illion of average daily flo a t, or approximately 3.9% of Federal Reserve daily flo a t. The majority of such flo a t is generated in the Cleveland, Atlanta, Chicago, St. Louis, and Kansas City Federal Reserve D istr ic ts. The Reserve Banks also estimate that nonstandard holidays contribute $110 m illion or 2.7% of Federal Reserve daily average flo a t. Hie Board recognizes that a paying bank that has regularly closed on weekdays may lose the use of funds as a resu lt of th is require ment. I t may also have to bear the inconvenience of arranging to make payment on a day on when i t is closed. N evertheless, the Board is proposing the amendment for a number of reasons. F ir st, depository in stitu tio n s that regularly close on weekdays do receive credit on such days for cash items deposited with Reserve Banks. In the in terest of equity the Board believes that a ll depository in stitu tio n s should be treated sim ilarly. The Board understands that many depository in s t i tutions that close regularly on weekdays conduct lim ited business on those days, e .g ., acceptance of customer deposits and A*M transactions, and some in stitu tio n s actually post checks received on their closed days. Depository in stitu tio n s are not generally prohibited from paying for items made available to them on such days, regardless of whether they are closed for other purposes. Second, in an e x p lic it pricing environment, a ll in stitu tio n s would have to bear the pro rata costs of the additional expense and flo a t generated by weekday closin gs. This would resu lt in additional inequity, because a large majority of depositors in Reserve Banks would subsidize the flo a t for the sn ail -3 - number of in stitu tio n s that observe regular weekday c lo sin g s. Changing depositor a v a ila b ility schedules for the flo a t generated by weekday clo sin g s does not appear p ractical, because i t would require the Reserve Barnks and co llec tin g banks to undertake the operationally complex task o f keeping lis t in g s of the in stitu tio n s that close and the days they c lo se to permit the depositors to compute the credit a v a ila b ility of their cash le t t e r s . The proposed amendment to Regulation J would be implemented by an amendment to the uniform Reserve Bank operating circu lars govern ing the c o llec tio n of cash items which would specify the cases in which payment would be required i f the paying bank chooses to c lo se. The requirement of payment would be imposed only i f sta te law permits the bank to pay for cash items on a regular weekday closing day. Cash items would be made available to the paying banks so that they may begin processing i f they desire to do so, but the items would not be considered to be received for purposes of accountability under section 210.9(a) of Regulation J, or for purposes of beginning the running of the time for return under section 210.12(a) of Regulation J, u n til the in s ti tution opens to the public for carrying on su b stan tially a ll of it s banking functions, as provided in section 210.2(d) of Regulation J, and actually receives i t s cash le t t e r . Accordingly, the proposed amend ment would not a ffec t the rights of drawers or owners of items. Nor would the amendment require the paying bank to open on a weekday closing day, since payment w ill be made through a charge to an account at the Reserve Bank maintained or used by the paying bank. The proposed amendment to Regulation J would also permit the Reserve Banks to amend their operating circu lars at a later time to require payment, as a condition of Reserve Bank handling of items, on a holiday observed by a paying bank but not by i t s lo ca l Reserve Bank, such as regional holidays that are not mandatory upon the paying bank. While the Reserve Banks do not contemplate implementing such an amend ment at th is time, public comment also is requested on th is aspect of the proposed change. In view of the factors discussed above, the Board believes that requiring a depository in stitu tio n that closes when other in s t i tutions in i t s area are open to pay for cash items made available to them is a reasonable condition that the Reserve Banks may impose upon the co llec tio n of items payable at depository in stitu tio n s through the national c o llec tio n system provided by the Reserve Banks. The following information is supplied pursuant to the Regulatory F le x ib ility Act, 5 D.S.C. 601-612. 1. Of the 1,327 depository in stitu tio n s that observe mid week clo sin g s, Board s ta ff estimates that about one-third (approximately 450 in stitu tio n s) have deposits of $20 m illion or le s s . -4 - 2. The proposed amendment will not impose any additional reporting, recording, or other compliance requirements on any institutions. 3. The proposed amendment will not duplicate, overlap, or conflict with any other federal rule. The most sig n ifica n t economic impact of the proposal on any depository in stitu tio n w ill be the reduction of earnings on funds that could have been invested in the federal funds market had the Reserve Bank not charged the in s titu tio n 's account u n til the next banking day. The amount of such reductions will vary greatly among all of the insti tutions affected, regardless of an institution's size; therefore any estimate of an average reduction would be meaningless. Nevertheless, the Board recognizes that in some instances the economic impact on an institution may be significant. However, the Board does not believe that alternatives to the proposed amendment designed to lessen this impact, such as exempting small depository institutions from its coverage, would serve the regulatory aims of the Monetary Control Act (such as equal treatment for all depository institutions and reduction of Federal Reserve float). Pursuant to its authority under section 13 of the Federal Reserve Act (12 U.S.C. § 342), section 16 of the Federal Reserve Act (12 U.S.C. 5 248(o), 12 U.S.C. $ 360), and section ll(i) of the Federal Reserve Act (12 U.S.C. § 248(i)), and other provisions of law, the Board proposes to amend Regulation J (12 C.F.R. part 210) as follows: In g 210.9, paragraph (a) is revised to read as follows: SECTION 210.9 — PAYMENT (a) Cash items. A paying bank becomes accountable for the amount of a cash item received directly or indirectly from a Reserve Bank, at the close of the paying bank's banking day on which it receivesJ the item if it retains the item after the close of that bank ing day, unless, prior to that time, it pays for the item by: A paying bank is deemed to receive a cash item on its next banking day if it receives the item: (1) on a day other than a banking day for it; or (2) on a banking day for it, but (i) after its regular banking hours; (ii) after a "cut-off hour" established by it in accordance with state law; or (iii) during afternoon or evening periods when it is open for limited functions only. (1) debit to an account on the Reserve Bank's books; (2) cash; or (3) in the discretion of the Reserve Bank, any other form of payment. The proceeds of any payment shall be available to the Reserve Bank by the close of the Reserve Bank's banking day on the bemking day of receipt of the item by the paying bank. If the banking day of reciept is not a baulking day for the Reserve Bank, payment shall be made on the next day that is a banking day for the Reserve Bank. A paying bank that chooses to close on a weekday, designated in its Reserve Bank's operating circular, that is banking day for the Reserve Bank, must pay on that day for a cash item made available to it on that day by the Reserve Bank, but the paying bank is not considered to receive the item until its next banking day. * * * * * Order of the Board of Governors, April 5, 1982. (signed) William W. Wiles William W. Wiles Secretary of the Board
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