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ZQ >< — O What Funds Qualify as Reserves? Cash on hand in a d e p o s ito ry in s titu tio n m ay be used to satis fy th e reserve re q u ire m e n t. W hen cash is n o t s u ffic ie n t, th e balance o f re q uire d reserves m ust be m a in ta in e d at a Federal ® C/5 c o rp o ra te , o r business loan re la tio n s h ip ; and in o th e r ways 7 5‘ ~ CD expands th e pow ers o f t h r if t in s titu tio n s . 05 " CD c Discount Window C/5 (D 05 C/5 £ CD C/3 O oo o =t 0) ■ 3 CQ r+ O ZJ n o CD -*» D O 30 3 (D O ro a» r* Reserve Bank in an a cco u n t th a t earns no in te re st. In s titu tio n s A n y d e p o s ito ry in s titu tio n h o ld in g reservable tra n s a c tio n th a t are m em bers o f th e Federal Reserve System m ust m a in accounts o r nonpersonal tim e de po sits is e n title d to th e same ta in th e ir reserves d ire c tly w ith a Federal Reserve B ank. N o n b o rro w in g privileges at th e Federal Reserve d is c o u n t w in d o w cn m em ber in s titu tio n s m ay keep th e balance o f th e ir reserves as m em b er banks. O) at a Federal Reserve Bank in one o f tw o w ays. T h e y m ay h o ld th e ir reserves e ith e r d ire c tly w ith a Federal Reserve Bank or in d ire c tly in an acco un t w ith a n o th e r in s titu tio n th a t passes the reserves th ro u g h a Federal Reserve Bank. T h is second ty p e o f a cco u n t is called a pass-through a cco u n t. T he o w n e r o f a pass-through a cco u n t is k n o w n as th e respon d e n t and the a d m in is tra to r is k n o w n as th e c o rre sp o n d e n t. U n de r a pass-through arrangem ent, the resp on den t in s titu tio n provides its co rre sp o n d e n t w ith th e fu n d s needed to m eet its cn 0 CD 3 Reserve Bank services. T he fo llo w in g services w ill be covered b y th e fee schedule: 1. C u rre n cy and co in services o f a n o n g o ve rn m e n ta l na ture. 2. C heck-clearing and c o lle c tio n . 3. W ire tra n s fe r. Expanded Powers of Depository Insti tutions Under the Monetary Control Act CD « a set o f p ric in g p rin c ip le s and a schedule o f fees fo r Federal 4. A u to m a te d clearinghouse. use a pass-through arrangem ent. 0 01 < A SERIES ON THE STRUCTURE OF THE FEDERAL RESERVE SYSTEM The M o n e ta ry C o n tro l A c t re q u ire d th e Board to establish Federal Reserve B ank. A resp on den t m ay have o n ly one pass have to decide w h e th e r to m a in ta in its reserves d ire c tly o r to O O Pricing of Services reserves. T he co rre sp o n d e n t th e n passes th e reserves on to a th ro u g h a cco u n t at a tim e . Each n o n m e m b e r in s titu tio n w ill GO 5 The Monetary Control Act of 1980 5. S e ttle m e n t. 6. S ecu ritie s safekeeping. 7. Federal Reserve flo a t. 8. A n y new service th e Federal Reserve o ffe rs , in c lu d in g b u t n o t lim ite d to , p a ym e n t services t o e ffe c tu a te e le c tro n ic fu n d s tra n sfe r. The M o n e ta ry C o n tro l A c t exte nde d n a tio n w id e th e a u th o r ity fo r d e p o s ito ry in s titu tio n s to o ffe r NO W (N e g o tia b le O rd e r o f In d e te rm in in g th e fee schedule, th e Board m ust p rice e x p li W ith d ra w a l) accounts. A NO W a cco u n t is an in te rest earning c it ly all services covered by th e fee schedule, and m ust price a cco u n t on w h ic h checks m ay be d ra w n . all services covered by th e fee schedule to n o n m e m b e r d e The A c t also a u th o riz e d banks to c o n tin u e to p ro vid e a u to m a p o s ito ry in s titu tio n s at th e same fee schedule a p p lica b le to tic tra n s fe r services fro m savings to che ckin g acco un ts; a u th o m em b er banks. N o nm e m b ers m ay be re q u ire d to h o ld clearing rized savings and loan associations to establish re m o te service balances and m ay be subject to any o th e r te rm s th a t th e Board u n its to c re d it and d e b it savings accounts, o r c re d it pa ym en ts applies to m em ber banks. on loans, and p ro vid e related fin a n c ia l tra n s a c tio n s ; and a u th o 2 _.®o "T oJ 5 “ w ® “ ■ST rized fe d e ra lly insured c re d it u n io n s to o ffe r share d ra ft Phase-Out of Interest Rate Ceilings accounts. T he A c t pro vid es fo r th e o rd e rly phase-out o f lim ita tio n s on T he insurance o f accounts o f fe d e ra lly insured savings and loan th e m a x im u m rates o f in te rest and d ivid e n d s th a t m ay be paid associations and c re d it un io ns was increased fro m $ 4 0 ,0 0 0 to on de po sits. A D e p o s ito ry In s titu tio n s D e re g u la tio n C o m $ 100,000. m itte e —w ith th e S ecretary o f th e T re a su ry, C h airm a n o f th e T he A c t also a u th o rize d various new in ve stm e n t a u th o ritie s Federal Reserve B oard, C h airm a n o f th e Board o f D ire c to rs o f fo r fe d e ra lly chartered savings and loan associations. It p e rm its th e Federal D e p o sit Insurance C o rp o ra tio n , C h airm a n o f the I* 2 to ® CP r + o ® O CD cn < CD -O 05 ^ Ni Federal H om e Loan Bank B oa rd, and C h airm a n o f th e N a tio n al C re d it U n io n A d m in is tra tio n , as v o tin g m em bers, and a u th o rize s Federal m u tu a l savings banks to m ake c o m m e rc ia l, C o m p tro lle r o f th e C u rre n cy as a n o n -v o tin g m e m b e r—is ^ c o rp o ra te and business loans, sub je ct to lim ita tio n s , and to re q u ire d to m eet at least q u a rte rly in o rd e r to achieve the -i* V * \ H CD CD the m to o ffe r c re d it card services and to exercise tru s t and phase-out. a C/5 fid u c ia ry pow ers; expands a u th o rity to m ake real estate loans; acceptfordem and deposits in c o n n e c tio n w ith a c o m m e rc ia l, Digitized FRASER >4 ® S 13 — (t> C L 3) 3 <r> o m CL (/) (/) ^ 05 . \ >■ \ ^ ^ C t* ' s ^ C ^ * <b <V , *z « V' ^ * * T h e D epository In stitu tio ns D eregulation and M o n e ta ry C o ntro l A c t o f 1 9 8 0 (P .L . 9 6 -2 2 1 ), enacted on M arch 3 1 , 1 9 8 0 , brought about a num ber o f changes in th e w ay financial institutions and the Federal Reserve System do business. First, it applied u n ifo rm reserve requirem ents, set by the Federal Reserve Board w ith in lim its specified by th e A c t, to all d e pository institutions w ith certain types o f accounts and required reports fro m these depo sito ry in s titu tions. T h e reserve req uirem en t is th e percentage o f custom er deposits th a t in stitu tio ns must set aside in the fo rm o f reserves and affects the expansion o f de posits th a t can be supported by each ad d itio n al d o llar o f reserves. In general, reserve requirem ents are low er now fo r all depository institutions than th e y were before the A c t fo r banks th a t were members o f the Federal Reserve System . T h e A c t also extended access to the Federal Reserve discount w in d o w and to o th e r Federal Reserve ser vices in step w ith im p le m e n ta tio n o f a fee schedule; provided fo r th e gradual phase-out o f interest rate ceilings on tim e and savings deposits; and broadened the powers o f depository institutio ns, p erm ittin g them all to o ffe r accounts sim ilar to checking ac counts. Taken together, these provisions o f the A c t serve tw o vital purposes. T h e first is c o m p etitive e q u ity among financial institutions w h ich , given u n iform reserve requirem ents, w ill be placed on a m ore equal fo o tin g and, given these new auth o rities, w ill be able to o ffe r more equivalent services to th e ir customers. T h e second purpose is im p ro vem en t o f the e ffe c tiv e ness o f m o n etary p olicy by m aking th e fu lcru m on which th a t p olicy operates m ore stable. Who Is Covered? U n ifo rm reserve re q u ire m e n ts are im posed on all d e p o s ito ry in s titu tio n s —in c lu d in g c o m m e rcia l banks, savings banks, sav ings and loan associations, c re d it u n io n s, and in d u s tria l ba n ks— and on th e ty p e o f d e p o s ito r. N o n tra n s fe ra b le tim e deposits E urocurrency Liabilities. T he Board has set a 3 percent reserve (in c lu d in g personal savings deposits) w ith m a tu ritie s o f less re q u ire m e n t on ce rta in E u ro c u rre n c y lia b ilitie s (the same ra tio tha n fo u r years do n o t have to be backed b y reserves w hen as on nonpersonal tim e d e po sits). These are deposits arising th e y are ow ne d by na tural persons. (A n a tu ra l person is an fro m : net b o rro w in g s fro m related fo re ig n o ffic e s ; gross in d iv id u a l o r a sole p ro p rie to rs h ip .) N o np erson al tim e deposits b o rro w in g s fro m u n related fo re ig n d e p o s ito ry in s titu tio n s ; th a t have tra n s a c tio n accounts o r no np erson al tim e deposits. ow ned by anyone else and tra n sfe ra b le tim e de po sits, how ever, loans to U.S. residents made b y overseas branches o f d o m e stic U n de r th e te rm s o f th e In te rn a tio n a l B a n kin g A c t o f 1978, are sub je ct to a 3 pe rcen t reserve re q u ire m e n t. d e p o s ito ry in s titu tio n s ; and sales o f assets by d e p o s ito ry in T im e de po sits are deposits o r c e rtific a te s w ith o rig in a l m a tu ri s titu tio n s in th e U n ite d States to th e ir overseas o ffic e s . th e same reserve re q u ire m e n ts are also e x te n d e d to U.S. agencies and branches o f fo re ig n banks. T he revised reserve re q u ire m e n t rules also a ffe c t Edge A c t and A gre e m e n t c o r ties o f at least 14 days, and savings acco un ts (in c lu d in g regular share acco un ts at c re d it u n io n s and regular accounts at th r ifts ) p o ra tio n s . th a t a llo w th e in s titu tio n to re q u ire at least 14 days n o tice Reporting of Deposits and Require ments for Maintaining Reserves be fore a w ith d ra w a l is m ade, o r regular share accounts at c re d it u n io ns. T he reserve re q u ire m e n ts fo r tra n s a c tio n ac co u n ts and those fo r tim e deposits are sum m a rized in th e tables b e lo w . M em ber banks w ith to ta l de po sits o f less th a n $1 5 m illio n and n o n m e m b e r in s titu tio n s w ith deposits o f $ 2 m illio n o r m ore b u t less th a n $ 1 5 m illio n re p o rt and m a in ta in reserves on a q u a rte rly basis. N o n m e m b e r in s titu tio n s w ith to ta l de po sits o f less th a n $2 m illio n have had re p o rtin g and reserve ... m u st keep th is p o rtio n in a m o u n t o f ne t tra n sa ctio n cash o r in a reserve a c c o u n t. balances... 3% Over $ 2 5 m illio n 3% o f fir s t $ 2 5 m illio n plus 12% o f th e rest Reserves Required fo r T im e Deposits Nonpersonal Time Deposits. T im e de po sits w ith o rig in a l m a tu ritie s o f fo u r years o r m ore d o n o t have to be backed by reserves. Those w ith sh o rte r m a tu ritie s m ay have to be backed by reserves, de pe nd ing on th e tra n s fe ra b ility o f th e a cco u n t Revised June 1981 ...n o n m e m b e rs m u st m eet th is m u ch o f th e ir N ovem ber 13, 1980 S epte m be r 2, 1981 12.5% S eptem ber 3, 1981 S epte m be r 1, 1982 25.0% S eptem ber 2, 1982 A u g u st 3 1 ,1 9 8 3 37.5% S eptem ber 1, 1983 S epte m be r 5, 1984 50.0% S eptem ber 6, 19 84 S epte m be r 4 , 1 9 85 6 2.5% S eptem ber 5, 1 9 85 S epte m be r 3, 1986 75.0% S eptem ber 4, 1986 S epte m be r 2, 1987 87.5% ...w h ic h have ...m u s t be b a c k ...a nd b y th is held by th is ty p e th is le n g th o f ed by reserves p o rtio n o f the o f d e p o s ito r... m a tu rity ... equal to th is de p o sits th a t p o rtio n o f th e are n o t tra n s d e posits th a t are tra n s fe r fe ra b le (in c lu d S eptem ber 1, 1980 o r banks th a t were m em bers between ing personal J u ly 1, 1979 and S eptem ber 1, 19 80 , w ill have new reserve able... savings de req uire m en ts phased-in over a p p ro x im a te ly 3 1/2 years. T o p o sits)... In d iv id u a ls Less th a n 4 years 3% 0% 4 years o r m o re 0% 0% sole p ro p rie to rs ) Member Banks. M em bers o f th e Federal Reserve System on calculate th e reserves d u rin g th is p e rio d , banks m ust firs t c o m p u te th e o ld reserve re q u ire m e n ts and th e n co m p u te the new one. T he d iffe re n c e betw een th e o ld re q u ire m e n t and th e (N a tu ra l persons, accounts, share d ra ft accounts, savings acco un ts th a t a llo w a u th o riz e d pa ym en ts each m o n th . ...to ... T im e de posits fir s t $ 2 5 m illio n o f net tra n s a c tio n balances and 12 pe rcen t o f and accounts th a t p e rm it m ore th a n th re e te le p h o n e o r p re D u rin g th e p e rio d fro m ... m e n t. $2 5 m illio n o r less Transaction A ccounts. T he reserve ra tio is 3 pe rcen t o f the a u to m a tic transfe rs o r p a ym en ts by a u to m a te d te lle r m achines, m en t in N o vem b er, 1980 and increasing by one-eighth in fu ll reserve re q u ire Reserve Requirements m ents to o th e rs. T h e y in clu d e che ckin g a cco un ts, NOW p e rio d , beginning w ith one eig h th o f th e fu ll reserve re q u ire Phase-In Schedule fo r Nonm em bers A n in s titu tio n w ith th is m ainten ance de ferred te m p o ra rily . th e rest. T ra n s a c tio n accounts are those used to m ake p a y tio n s, reserve re q u ire m e n ts are phased in over an eigh t-ye ar Reserves Required fo r Transaction A ccounts some o f these deposits. In s titu tio n s w ith to ta l deposits o f $1 5 m illio n o r m ore re p o rt and m a in ta in reserves w e e k ly , as do Edge A c t and A gre em e nt C o rp o ra tio n s and U.S. agencies and branches o f fo re ig n banks. Nonmembers. F or m ost n o n m e m b e r banks and t h r if t in s titu S eptem ber o f each year a fte r 1980. D e p o s ito ry in s titu tio n s are req uire d to re p o rt ce rta in deposits d ire c tly to th e Federal Reserve and to m a in ta in reserves on Phase-In of Reserve Requirements new re q u ire m e n t w ill be e lim in a te d g ra d u a lly. On N o v e m ber 13, 1980, re q u ire d reserves were adjusted by on e -q u a rte r Businesses (p a rtn e rsh ip s. Less th a n 4 years 3% 3% c o rp o ra tio n s , n o n p r o fit o rg a n i- 4 years o r m o re 0% 0% za tio n s, g o v e rn m e ntal u n its ) o f th e d iffe re n c e betw een o ld and new reserve re q u ire m e n ts. A t certain subsequent in te rva ls, re q u ire d reserves w ill be ad justed by an a d d itio n a l fra c tio n o f th is d iffe re n c e .