Full text of Federal Reserve Notes : May 1982

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Federal Reserve Notes
FEDERAL RESERVE BANK OF SAN FRANCISCO

•

May 1982

Serving Alaska, Arizona, California, Hawaii, Idaho, Nevada, Oregon, Utah & Washington

FED BOARD DEFERS
RESERVE RULES

FED TO PHASE-OUT
ACH INCENTIVE PRICING

The Federal Reserve plans to
phase-out its incentive pricing for
Automated Clearinghouse (ACH)

The Federal Reserve Board of Gov

ernors has again deferred reserve
requirements for an estimated
17,500 financial institutions (mostly
credit unions) in anticipation of Con
gressional action to exempt those
small institutions permanently. By
this action, the fourth deferral of this
type, the Board allowed non-mem
ber depository institutions with less
than $2 million in deposits as of De
cember 31, 1979, to avoid reporting
deposits and posting reserves until

services by 1985, but it plans to con
tinue operating ACHs as long as it
processes direct-deposit payments
for the Treasury Department. An
nouncement of the change came in
a letter from Federal Reserve Gov

ernor Lyle Gramley to Senator John
J. Chafee, Chairman of the Sub
committee on Consumer Affairs of

the Senate Banking Committee.
Governor Gramley said that the Fed
will raise its prices for ACH services
in four steps. New ACH prices, to be
announced later this year, will
amount to 40 percent of the current
cost plus the "private-sector adjust
ment factor." (This factor is an ad
justment for costs that would have
been incurred if the services had

been provided by a private business
firm.) The ratio will rise to 60 percent
in 1983, 80 percent in 1984, and 100
percent in 1985.

Describing the reason for the
change, Gramley said that auto
mated clearinghouses were still in a
developmental stage and needed
encouiagement to grow at the time
the Board established its pricing
policies in accordance with the
Monetary Control Act of 1980.
"Consequently, the Board estab
lished an incentive-pricing policy for
ACH operations to encourage this
growth to the point where econo
mies of scale could be realized. We

believe that this is still the proper
decision, but we also recognize that
the development of business plans
in the private sector would benefit

December 31, 1982. At the same

time, the board subjected currentlydeferred institutions to reserve re

Lyle Gramley

from knowledge of when full-cost
pricing of ACH services by the Fed
eral Reserve will begin."

The Fed governor cited several rea
sons why incentive pricing should
be phased-out rather than ended
abruptly. The present ACH prices of
one cent for local ACH items and 1 Vz

cents for interregional items are
quite low—according to some esti
mates, only about one-fifth of the
Fed's actual cost to provide this ser

vice. If fully-costed prices were
implemented immediately, these
substantial price increases could
cause many users of the service to
revert to paper checks. "Since com
mercial ACH volume is growing at a
rapid pace, although it still consti
tutes only a small fraction of total
payments, we believe such an ac
tion would jeopardize the future of a

quirements if their total deposits
had reached $15 million as of
December31,1981.
Institutions with less than $2 million

in deposits represent about 42 per
cent of all depository institutions,

but they hold only about four-tenths
of one percent of total deposits
(about $9 billion). For that reason,
exempting these institutions from
reserve requirements would not
create problems for the Federal
Reserve in controlling the nation's
money supply.

The Monetary Control Act imposes
reserve requirements on transaction

(checkable) accounts and non-per
sonal time deposits of all depository
institutions. However, when the

Federal Reserve amended its Reg
ulation D to implement the Act, it
deferred for six months the require
ments of small non-member institu

cost-effective and efficient service."

tions. The Board felt that requiring
such institutions to comply immedi
ately would pose significant opera-

(Continued on page 2)

(Continued on page 4)

ACH INCENTIVE PRICING
(Continued from page 1)
In addition, the Federal Reserve's
ACH unit costs should be lower than

those of the private sector because
of the economies of scale inherent

in ACH operations, and also

because of the large volumes of
transactions processed for the U.S.
Treasury. The Treasury Department

originates more than 60 percent of
all payments processed through the
ACH system, and the Federal Re

FED NOTES PROBLEMS WITH RETAIL REPOS
The Federal Reserve Bank of San

The customer also should be ad

Francisco has notified member insti

vised that the interest paid is not

tutions that they should make cus
tomers fully aware of the nature of
retail-repurchase agreements (repos)

necessarily related to the yield on
the underlying collateral, that the
bank will pay a fixed amount at ma
turity (including interest) regardless
of any fluctuation in the market val
ue of the underlying collateral, and
that general banking assets will
most likely be used to satisfy the

involving U.S. Government or agen
cy securities. The volume of activity
in retail repos has increased dramat
ically in recent months, frequently
involving customers who do not nor
mally engage in large denomination
money-market transactions.

serve is obligated to disburse those
payments in its role as fiscal agent

The Reserve Bank stated that all

for the U.S. Government. "Because

action should be disclosed to each

of this responsibility, we would con
tinue to operate ACH facilities re
gardless of our policy towards com
mercial payments," said Gramley in

customer, partly because of their
possible confusion with insured de
posits. The face of all retail-repur
chase agreements should state
conspicuously and in bold-face type
that "the oligation is not a deposit
and is not insured by the Federal
Deposit Insurance Corporation."

his letter to Chafee.

Gramley added that the private sec
tor would not offer ACH services un

less it could do so profitably. "At
present, however, commercial vol
ume appears to be too low for any
one to produce ACH services and
sell them profitably."

Corporations and consumers still
find checks more efficient than ACH

payments despite the security, con
venience and potential cost savings
available from ACH services. For

example, the value of float resulting
from the check-collection process is
lost to originators when payments
are initiated electronically—and
that value can be substantial at

today's interest rates.

Moreover, depository institutions do
not currently price check services
on a fully-costed basis. These
check-processing costs tend to
range from 24 cents to 59 cents per
item, whereas institutions' fees

range from minimum-balance re
quirements to explicit fees of around
10 cents to 20 cents per check. "Be
cause originators pay very little of
the cost of making check payments,
they currently do not have an eco
nomic incentive to change their pay
ment practices," in Gramley's view.

The Fed governor said that the in
dustry could be moderately optimis
tic about the future of ACHs, despite

material facts of a retail-repo trans

Also, institutions should be careful

to avoid the potential misrepresen
tation that retail repos are guar
anteed by the U.S. Government.
The Reserve Bank also listed a

number of other pieces of informa
tion that institutions should com
municate to customers. These in
clude the nature and terms of retail

repos, including interest rates paid,
maturities and any prepayment
fees, as well as a description and
the approximate market value of the
underlying security (or fractional in
terest thereof) collateralizing the
agreements.

bank's obligation rather than pro
ceeds from the sale of the underly

ing security. The institution should
state that the market value of the

collateral could depreciate before
the maturity of the agreement, thus
making the investor an unsecured
creditor of the bank for the differ

ence between the repurchase price
and the market value of the underly
ing collateral. In addition, the cus
tomer should be advised as to

whether he or she has a perfected
lien on the underlying collateral
under state law and whether it is

being held by an independent trust
ee or custodian. If not, the legal con
sequences should be described.
The customer should expect to find
this information printed on the
agreement or specifically referred
to in a prospectus, offering circular,
or other document containing such
disclosures.

The Reserve Bank noted that retail

repos are in many respects equiva
lent to short-term borrowings at
market rates of interest. Thus, it ar

gued that "banks engaging in repur

chase agreements should carefully
evaluate their interest-rate risk ex

posure at various maturity levels,
formulate policy objectives in light of
the potential initial setback to vol
ume caused by the Fed's decision to
phase-out incentive pricing. The in
dustry's moves towards explicit
pricing of services may help stimu
late rapid growth of automated clear
inghouses over the next several
years. He said, "By that time, the
marketplace should be in a position

the institution's entire asset and lia

to evaluate the cost and benefits of

funds in the event of a run-off of

the ACH service, and thus to decide

whether competitive ACH facilities
and networks would provide an ade

quate return on investment." Ip

bility mix, and adopt procedures to
control mismatches between assets

and liabilities. The degree to which a
bank borrows through repurchase
agreements also should be ana
lyzed with respect to its liquidity
needs, and contingency plans should
provide for alternate sources of

repurchase agreement liabilities." 1j|j)

FED ASKS FOR DATA
ON LOAN TERMS
The Federal Reserve Board of Gov
ernors has asked banks to file addi

tional information beginning in Au

gust through the quarterly survey of
terms of bank lending. The Board
also has approved other reporting
changes, including a simplification
of a survey of debits to demand- and
savings-deposit accounts.

The survey provides information
about the priced and non-priced
terms of business loans made by

commercial banks during one busi
ness week each quarter. One form
obtains information on commercial-

SAN FRANCISCO FED CHANGES ACH CLOSING HOURS
The Federal Reserve Bank of San Francisco has adopted new closing
hours for certain ACH items in an effort to improve services to customers.

Effective May 1, depository institutions in the San Francisco (Twelfth)
District will have 1Vz extra hours to originate local intraregional ACH items.

As another benefit of the new closing hours, depository institutions will be
able to include reversal files and automated-return items in the night cycle.

In the past, those items had to be included in earlier cycles.
For further information on this amendment to Circular 4, Automated Clear

inghouse Items, please contact the following ACH officers:
San Francisco—Robert B. O'Donoghue (415) 544-2135
Los Angeles —Robert Taylor (213) 683-8354
Portland
—H. William Pennington (513) 221-5903
Salt Lake City —Robert R. Richards (801) 322-7887
Seattle

—Kenneth L. Peterson (206) 442-5105

industrial construction and land-de

velopment loans from a sample of

FED DROPS RESERVES FOR 3V2-YEAR DEPOSITS

about 340 commercial banks. The

second form, covering farm loans, is

The Federal Reserve Board of Gov

The Fed reasoned that with the im

collected from about 250 institu
tions that handle a substantial

ernors has amended its Regulation

position of reserve requirements,

D so that depository institutions will

institutions would have little incen

amount of agricultural lending. The

not have to post reserves on non-

final form deals with prime-rate
data, and is collected from all the
banks in the sampling.

personal time deposits with original
maturities of 31/2 years or more. The
Fed thus brought its rules into line

tive to offer the new time deposits
with 31/2 to four-years maturity.

The reporting changes in the quar
terly survey will require that banks
provide the date on which a loan
matures, and not just the month and

ity granted by the Depository Insti
tutions Deregulation Committee

Under the Monetary Control Act of
1980, a negotiable time deposit is
defined as non-personal, and thus
subject to reserve requirements re
gardless of ownership. On the other

(DIDC).

hand, non-transferrable time de

year. The report also will seek infor

The Committee recently authorized
federally-insured commercial banks,
savings banks, and S&L's to issue
ceiling-free time deposits of 3V2
years or more beginning May 1. How
ever, Reg D previously had imposed
a three-percent reserve requirement
on non-personal time deposits of
four years or less. Those with matu

entire beneficial interest) of a natu
ral person are not subject to reserve

rities of more than four years were
subject to a zero percent reserve
requirement.

D "should not be regarded as a
commitment by the Board to con
tinue shortening the maturity of time
deposits subject to this reserve
requirement in line with the an

mation on the frequency of interest
compounding.

However, the reporting burden will
be reduced for banks. Specifically,
the number of days for which banks
must report loans will be reduced to
two days for large banks, and four

days for smaller banks. According
to staff estimates, the reduction

should decrease the reporting bur
den by roughly one-third.

A second survey change, affecting
the survey of debits to demand- and
savings-deposit accounts, will elim
inate two of five reporting require
ments. The Fed will continue to ask

for monthly data on total monthly
withdrawals from demand deposits,

total savings accounts, automatic
transfer accounts and negotiable or

with new certificate-issuing author

The Act empowers the Federal Re
serve to impose reserve require
ments in order to implement mone

tary policy. In its announcement, the
Fed said that its modification of Reg

nounced schedule of DIDC for ceil

ing-free deposits." It said that future

adopted a survey which will require
money-market mutual funds to re
port every week on their holdings of
overnight Eurodollar deposits. This
report probably will affect less than
a dozen money-market funds. In

decisions of this nature will depend
on experience and prevailing mone

addition, the Fed liberalized the

the Fed will no longer seek infor

types of security used for margin re
quirements and also changed cri

accounts.

requirements.

In another action, the Board

der of withdrawal accounts. However,

mation on debits to, and deposit
balances of, business savings

posits held in the name (or for the

teria for inclusion on the list of over-

the-counter margin stocks.Ijflji

tary and credit conditions. Under
DIDC's present deregulation sched
ule, the minimum maturity of a new

time deposit will decrease by one
year annually until March 31, 1986,
when the minimum maturity for any
time deposit will be that specified for
any time deposit— currently 14

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BANK BOARD GIVES S&L's BROKER ROLE
In a historic widening of the powers
of savings-and-loan associations,
the Federal Home Loan Bank Board

loan service corporations. Under its
proposal, S&L service corporations
would be given more powers than

RESERVE RULES
(Continued from page 1)

tional problems for both the Federal
Reserve and these smaller institu

has approved a plan presented last
August by a consortium of four

commercial banks now have. Such

tions. It has extended its deferral

powers would be even broader than

several times because of pending

associations to offer brokerage ser

those envisioned in Senate legisla
tion to expand the powers of all
financial institutions. For example,

legislation to exempt those institu
tions completely from the Act's
requirements.

vices and investment advice to the

public from offices set up in the
lobbies of participating institutions.
The services would be offered

through a so-called Invest network,
operated by a jointly-held subsidi
ary called the Savings Association
Financial Corporation.
Associations participating in the In
vest network would execute orders

the subsidiaries would be able to

offer money-market-mutual funds
(as commercial banks cannot), en
gage in insurance underwriting ac
tivities, and participate in the manu
facture of mobile homes. Also, they
could engage in options trading and
in securities and leasing activities.

to buy or sell stocks and other secu
rities through representatives regis

In response to the Bank Board's
initial request for comments, Fed

tered as securities brokers with the

eral Reserve Chairman Volcker said

National Association of Securities

that any issue relating to expanded
powers for thrifts should be ad
dressed by Congress and not han

Dealers. The corporation projects a
membership of 500 associations by
the end of its second year, with a
brokerage force of 8,000 registered
representatives. Many financial
analysts see the move as part of a
nation-wide trend to provide onestop supermarket-type financial
services—a trend led by such enter
prises as Merrill Lynch, Prudential
Insurance, and Sears Roebuck.
The Bank Board's new action is in

line with an earlier proposal to ex
pand the activities of savings-and-

In another action, the Board re

quired currently-deferred depository
institutions with deposits of $15
million or more on December 31,

1981, to begin reporting their de
posits beginning with the reserve
computation period of May 21-26.
District Reserve Banks have noti
fied these institutions of their re

serve responsibilities. "^§

dled as a policy matter by a thrift

agency. Moreover, the Justice De
partment said that the Bank Board
should be "cautious and deliberate

in its expansion of powers available

Responding to the Bank Board's
move to grant brokerage services to
S&L service corporations, the Secu

for a review of the matter by the Se
curities and Exchange Commission
as well as state securities regula
tors. The Wall Street trade group
argued that the move would be a
breach of the Glass-Steagall Act,
which keeps banks out of most se

rities Industries Association called

curities activities. 1j|ji

to thrifts," so as to reduce the risk it

could pose to such institutions and
their depositors.