[Federal Register Volume 61, Number 252 (Tuesday, December 31, 1996)]
[Rules and Regulations]
[Pages 69020-69026]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-33158]


=======================================================================
-----------------------------------------------------------------------

FEDERAL RESERVE SYSTEM

12 CFR Part 204

[Regulation D; Docket No. R-0929]


Reserve Requirements of Depository Institutions

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: The Board of Governors of the Federal Reserve System is 
amending its Regulation D regarding reserve requirements of depository 
institutions issued pursuant to section 19 of the Federal Reserve Act 
in order to simplify and update it and reduce regulatory burden. The 
amendments to modernize Regulation D are in accordance with the Board's 
policy of regular review of its regulations and the Board's review of 
its regulations under section 303 of the Riegle Community Development 
and Regulatory Improvement Act of 1994.

EFFECTIVE DATE: April 1, 1997.

FOR FURTHER INFORMATION CONTACT: Ann Owen, Economist, Division of 
Monetary Affairs (202/736-5671); Sue Harris, Economist, Division of 
Research and Statistics (202/452-3490); or Rick Heyke, Staff Attorney, 
Legal Division (202/452-3688), Board of Governors of the Federal 
Reserve System. For the hearing impaired only, Telecommunications 
Device for the Deaf (TDD), Dorothea Thompson (202/452-3544), Board of 
Governors of the Federal Reserve System, 20th Street and Constitution 
Avenue, N.W., Washington, DC 20551.

SUPPLEMENTARY INFORMATION:

Background

    As part of its policy of regular review of its regulations, and 
consistent with section 303 of the Riegle Community Development and 
Regulatory Improvement Act of 1994 (Riegle Act), the Board of Governors 
of the Federal Reserve System (Board) is amending its Regulation D 
regarding reserve requirements of depository institutions (12 CFR part 
204) issued pursuant to section 19 of the Federal Reserve Act. Section 
303 of the Riegle Act requires each federal banking agency to review 
and streamline its regulations and written policies to improve 
efficiency, reduce unnecessary costs, and remove

[[Page 69021]]

inconsistencies and outmoded and duplicative requirements. The 
amendments are designed to reduce regulatory burden and simplify and 
update the Regulation.
    The Board published a notice of proposed rulemaking in the Federal 
Register on June 17, 1996 (61 FR 30545) that solicited comments on the 
proposed amendments described below. In general, the amendments deleted 
transitional rules relating to the expansion of reserve requirements to 
nonmember depository institutions, the authorization of NOW accounts 
nationwide, and other matters that no longer have a significant effect. 
The Board received a total of 22 comments on the proposal. Comments 
were received from 9 banking organizations, 8 trade associations, 4 
Federal Reserve banks, and one savings bank. Of the comments, 17 
generally expressed agreement with the proposal as far as it went.
    An issue by issue discussion follows.

Time Deposits

    Section 204.2(c)(1) currently defines time deposits as deposits 
from which the depositor may not make withdrawals within six days after 
the date of deposit (or notice of withdrawal) or partial withdrawal 
unless such withdrawals are subject to an early withdrawal penalty. 
Under certain circumstances specified in footnote 1, a time deposit may 
be paid before maturity without imposing the early withdrawal penalty. 
A time deposit generally may be paid without penalty from the seventh 
day after deposit through maturity, absent partial withdrawals. The 
imposition of an early withdrawal penalty is required under the time 
deposit definition only during the first six days after deposit. The 
proposal clarified that the footnote is not intended to impose a 
prohibition on withdrawals before maturity, but to permit penalty-free 
withdrawals under certain circumstances during the period when the 
imposition of an early withdrawal penalty otherwise would otherwise be 
required.
    Six commenters supported the proposal to reword footnote 1 in order 
to avoid any implication that time deposits generally may not be paid 
before maturity without penalty, while three others, without 
disagreeing with the proposal, noted that they had no experience of 
confusion resulting from the footnote. The final rule adopts the 
proposal as proposed.

Nonpersonal Time Deposits

    The definition of nonpersonal time deposit in Sec. 204.2(f)(1)(iii) 
and (iv) distinguishes between transferable time deposits originally 
issued before October 1, 1980, and those issued on or after that date. 
Since the Board believes that most of these deposits have since 
matured, the Board believes that this distinction is no longer 
meaningful and proposed to delete it. Three commenters specifically 
supported the proposal on the basis that this was an obsolete 
distinction. The Board is adopting this proposal as proposed.
    Section 204.2(f)(3) requires that a nonpersonal time deposit with a 
stated maturity or notice period of 1\1/2\ years or more either be 
subject to a minimum withdrawal penalty of 30 days' interest (if 
withdrawn more than six days but within 1\1/2\ years after the date of 
deposit) or be treated as a deposit with an original maturity or notice 
period of less than 1\1/2\ years. Since 1991, the reserve requirement 
ratio has been set at zero for all time deposits regardless of 
maturity. Moreover, since 1991, the form for reporting reservable 
liabilities (Form FR 2900) has not required depository institutions to 
report the amount of time deposits by category of maturity. The 
requirement to treat time deposits not subject to a minimum penalty of 
30 days' interest as having an initial maturity of less than 1\1/2\ 
years is thus of no practical significance. The Board therefore 
proposed to delete it and footnote 2 to Sec. 204.2(c)(1)(i), which 
refers to it.
    Three commenters specifically supported this proposal. Another 
commenter expressed concern that by eliminating the requirement, the 
Board would be unable to distinguish between maturities of time 
deposits in the future. If, in the future, the Board should wish to 
distinguish between time deposits based on maturity, the Board could 
amend Regulation D and/or its reporting forms as appropriate, and could 
consider at that time whether an additional early withdrawal penalty 
would be warranted for longer-term deposits. Therefore, the Board is 
adopting this proposal as proposed.

Eurocurrency Liabilities

    The definition of Eurocurrency liabilities in Sec. 204.2(h)(1) 
includes an amount equal to certain assets that were held by a 
depository institution's International Banking Facility or by non-
United States offices of the depository institution or of an affiliated 
Edge or agreement corporation and that were acquired from the 
depository institution's United States offices on or after October 7, 
1979. The Board proposed to delete the exclusion of assets acquired 
before October 7, 1979, because the Board believes that the amount of 
these assets is immaterial. The Board received no specific comments on 
this proposal and is adopting it as proposed.

Allocation of Reserve Requirements Exemption

    The allocation of the reserve requirements exemption specified in 
Sec. 204.3(a)(3)(i) requires that the exemption be allocated first to 
net transaction accounts in the form of NOW (and similar) accounts and 
second to other transaction accounts. This provision was related to the 
phase-in of reserve requirements for nonmember banks and the 
authorization of NOW and similar transaction accounts nationwide. Since 
the phase-in is now complete and nonmember institutions are subject to 
the same reserve requirements as member banks, the provision has ceased 
to have any effect, and the Board proposed to delete it. Two commenters 
expressed support for the proposed deletion. Another commenter, while 
noting that the requirement is obsolete, described its elimination as 
entirely technical. The Board is adopting this proposal as proposed.

Deductions Allowed in Computing Reserves

    The deduction in Sec. 204.3(f)(1) limits the amount of cash items 
in process of collection and balances subject to immediate withdrawal 
due from domestic depository institutions that may be subtracted from 
an institution's NOW accounts. Amounts in excess of this limit may be 
subtracted from other transaction accounts. Since the phase-in of 
reserve requirements for nonmember banks is now complete, all types of 
transaction accounts are subject to the same reserve requirements. 
Therefore, this limitation has ceased to have any effect and the Board 
proposed to delete it. One commenter specifically supported the Board's 
proposed deletion, and the Board is adopting this proposal as proposed.

Federal Reserve Credit for Depository Institutions Maintaining Pass-
Through Balances

    Section 19(e) of the Federal Reserve Act prohibits member banks 
from acting as the medium or agent of a nonmember bank in applying for 
or receiving discounts from a Federal Reserve Bank except by permission 
of the Board. Regulation A, Extensions of Credit by Federal Reserve 
Banks (12 CFR Part 201), was amended in 1993 to delegate authority for 
granting this permission to the Federal Reserve Bank that extends the 
credit. 12 CFR 201.6(d). The Board

[[Page 69022]]

correspondingly proposed to amend Sec. 204.3(i)(5)(iv) of Regulation D 
effectively to complete the delegation of this authority to the Federal 
Reserve Bank that extends the credit. One commenter specifically 
supported this proposal, and the Board is adopting it as proposed.

Transition Rules

    The regulation currently includes in Sec. 204.4(a) a transition 
rule for depository institutions outside of Hawaii that were nonmembers 
of the Federal Reserve System on July 1, 1979, and that remained 
nonmembers. With the completion of the phase-in of reserves for such 
nonmembers on September 10, 1987, this rule ceased to have any effect. 
Section 204.4(b) contains a transition rule for depository institutions 
that were not members between July 1, 1979, and September 1, 1980, and 
that subsequently became members; since reserve requirements for 
nonmember institutions are fully phased in, this rule also has ceased 
to have any effect. Section 204.4(d) contains a transition rule for 
nonmember depository institutions that were engaged in business in 
Hawaii on August 1, 1978, and that remained nonmembers; this rule 
ceased to have any effect on January 7, 1993. Therefore, the Board 
proposed to delete these rules. The Board received three comments 
supporting the proposed deletion of Secs. 204.4(a) and (b), and no 
comments on its proposed deletion of Sec. 204.4 (d). The Board is 
adopting these proposals as proposed.
    Section 204.4(c) sets forth a transition rule for de novo 
depository institutions with daily average reservable liabilities of 
less than $50 million whereby their reserve requirement is 40 percent 
of the reserves otherwise required in maintenance periods during the 
first quarter after commencing business, increasing to 100 percent in 
maintenance periods during the eighth and succeeding quarters. The low 
reserve tranche of a depository institution's net transaction accounts 
is currently subject to a reserve requirement of 3 percent, as compared 
with 10 percent for its net transaction accounts in excess of the low 
reserve tranche. The de novo transition rules precede creation of the 
low reserve tranche in 1982. The low reserve tranche cutoff is indexed 
to net transaction accounts of all depository institutions; as a 
result, the cutoff has increased from $25 million initially to $49.3 
million for 1997. Thus, almost all transaction accounts of de novo 
depository institutions that could avail themselves of this transition 
rule are now covered by the low reserve tranche. Moreover, beginning in 
1982, $2 million of reservable deposits have been subject to a zero 
percent reserve requirement; this exemption is indexed to total 
reservable liabilities of all depository institutions and has increased 
to $4.4 million for 1997.
    In addition, a depository institution's vault cash may be used to 
meet its reserve requirement. Since de novo depository institutions 
generally have relatively low levels of deposits in relation to the 
reserve requirement exemption and the low reserve tranche cutoff, most 
are able to meet reserve requirements with vault cash and the others 
maintain minimal reserve balances. (Currently 56 depository 
institutions are receiving de novo phase-ins, and 52 of them are fully 
meeting their reserve requirements with vault cash.) This rule provides 
minimal benefits in terms of reducing required reserve balances of de 
novo institutions and unnecessarily complicates the processing of 
deposit reporting and reserve calculations. Consequently, the Board 
proposed to delete it. In order to avoid disrupting economic 
expectations based on the de novo transition rule, however, the Board 
proposed to grandfather any institution covered by the de novo 
transition rule on the effective date of the amendments for purposes of 
determining its required reserves. The Board received two comments 
supporting its proposal to delete Sec. 204.4(c) and is adopting this 
proposal as proposed. As proposed, the Board will also grandfather any 
institution covered by the de novo transition rule on the effective 
date of the amendments.
    Section 204.4(e) governs transition requirements in cases of 
mergers and consolidations. Paragraph (e)(1) covers ``similar'' 
mergers, where all depository institutions are subject to the same 
transition rules, and paragraph (e)(2) covers ``dissimilar'' mergers, 
where the institutions are subject to different transition rules. 
Currently, no institution is subject to the ``dissimilar'' merger 
transition rules. With the phase-in of reserve requirements for 
nonmember institutions, the transition rules (other than the merger and 
de novo rules) have become inoperative. Moreover, as discussed above, 
the de novo rules no longer have a significant effect in most cases. 
Therefore, the difference between the ``similar'' and ``dissimilar'' 
merger rules is minimal. In addition, the de novo rules would be 
eliminated under the proposal, with the result that all mergers would 
be ``similar'' mergers and the ``dissimilar'' merger rule would be 
inapplicable. Therefore, the Board proposed to delete the 
``dissimilar'' merger transition rule and apply the current ``similar'' 
merger transition rule to all mergers. The Board received two comments 
supporting its proposed deletion of Sec. 204.4(e), and is adopting this 
proposal as proposed.

Reserve Ratios

    Section 204.9(b) sets forth the reserve ratios in effect during the 
last reserve computation period prior to September 1, 1980, for use in 
transition adjustments that are no longer applicable. The Board 
proposed to delete the section, and received two comments supporting 
its proposal. The Board is adopting this proposal as proposed.

Deposit Definitions

    Many commenters also commented on provisions of Regulation D other 
than the proposed changes. Nine commenters suggested that the Board 
clarify the definition of ``savings deposit,'' and a number of them 
also suggested that the Board also rewrite the definitions of ``time 
deposit,'' ``demand deposit,'' and/or ``transaction account.'' One 
commenter suggested the use of bullet points to distinguish limitations 
on transfers from exceptions to such limitations. Two commenters 
appended suggested language designed to clarify the definition of 
savings account, principally by shortening the sentences.
    The Board is publishing concurrently with this notice in the 
Federal Register a notice of proposed rulemaking to amend the 
definition of ``savings deposit'' in order to clarify it, and to amend 
the definition of ``transaction account'' in order to clarify it and 
conform it to the amended definition of ``savings account.''
    One commenter, a trade association, pointed out that many of the 
questions that it receives regarding the savings deposit definition 
reflect increased interest in home banking and a consequent desire to 
avoid any limitation on transfers effected by means of a home computer. 
Another commenter opined that aggregating the different types of 
transfers and withdrawals affected by the limitation adds to consumer 
confusion and increases the monitoring problem for depository 
institutions, and, together with two other commenters, suggested that 
the Board eliminate all restrictions on point-of-sale and telephone 
transfers.1
---------------------------------------------------------------------------

    \1\ One of these commenters also suggested that the Board pay 
interest on reserve balances or support legislation to that effect.

---------------------------------------------------------------------------

[[Page 69023]]

    On the issue of transfers by means of home computers, the current 
regulation states explicitly that any ``telephonic (including data 
transmission) agreement, order, or instruction'' is included in the six 
transfers and withdrawals limitation. Therefore home banking transfers 
are included in the limitation.
    One commenter requested guidance on the requirement for a penalty 
of 7 days' simple interest in the event of a withdrawal from a time 
deposit within 6 days. In particular, this commenter expressed 
confusion in the case of a second withdrawal within 6 days after a 
partial withdrawal. In the case of a time deposit account deposited in 
one lump sum, the Board regards a partial withdrawal from the time 
deposit as a withdrawal of the entire deposit followed by a new deposit 
of the balance retained. The regulation therefore provides that a 
``time deposit from which partial early withdrawals are permitted must 
impose additional early withdrawal penalties of at least seven days' 
simple interest on amounts withdrawn within six days after each partial 
withdrawal.'' 12 CFR 204.2(c)(1)(i).
    The same commenter, in reliance upon a service purporting to 
explain the Board's regulations, believed that 7 days' simple interest 
must be charged on withdrawals within 6 days of an additional deposit 
to the same time deposit. The Board believes that a bank may account 
for deposits and withdrawals either in order of deposit (FIFO) or in 
inverse order of deposit (LIFO).2 Therefore, the regulation does 
not prescribe an accounting policy to be applied to such withdrawals. 
However, the Board does expect that a depository institution will be 
consistent in its choice of policy in this regard.
---------------------------------------------------------------------------

    \2\ The Board proposed in 1991 to require LIFO accounting in the 
case of multiple credits. See 56 FR 15522, 15526. In response to 
comments opposing the proposal, the Board withdrew it.
---------------------------------------------------------------------------

    Another commenter, a trade association, asked if all demand 
deposits should contain the right to require 7 days' notice of 
withdrawal pursuant to Sec. 204.2(b)(2). The demand deposits described 
in Sec. 204.2(b)(2) are in addition to the demand deposits described in 
Sec. 204.2(b)(1), which do not require 7 days' notice of withdrawal. 
The demand deposits described in Sec. 204.2(b)(2) are considered demand 
deposits despite the fact that they may require 7 days' notice of 
withdrawal.
    The Board, in light of the comments received, also considered 
whether substantive revisions to the definitions of the different types 
of deposits could be implemented in an effort to simplify the 
regulation further. It concluded that the practical scope for any such 
redefinitions is limited. The Board notes that Section 19 of the 
Federal Reserve Act establishes separate ranges for required reserve 
ratios on transaction accounts and nonpersonal time and savings 
deposits, and provides no authority for imposing reserve requirements 
on personal time and savings deposits. This statutory requirement for 
different reserve treatment of the various types of deposits creates a 
need for regulatory definitions to distinguish between the various 
types of deposits. Moreover, technological change and financial 
innovation have led to a proliferation of types of deposits and 
transfer arrangements. Many depository institutions have implemented 
so-called ``retail sweep'' programs in order to reduce their reserve 
requirements. These programs have already resulted in a substantial 
decline in transaction accounts and required reserves. The more 
widespread adoption of these programs that is evidently in process 
could impair the predictability of overall reserve demand and hence 
adversely affect the ability of the Federal Reserve to gauge the supply 
of reserves consistent with its intended monetary policy stance. These 
developments could eventually suggest changes in the structure of 
reserve requirements, potentially including changes in deposit 
definitions. Depending on the type of change that might be found 
appropriate, such a change could require legislation or be implemented 
administratively. The Federal Reserve will continue to monitor closely 
developments in the federal funds market for evidence about how lower 
levels of required reserves may influence the implementation of 
monetary policy and the appropriate structure of reserve requirements. 
Under the circumstances, the Board believes that a major revision of 
the definitions that serve as the basis for determining the liabilities 
against which reserves are required is not appropriate at the present 
time.

Other Comments

    One commenter suggested that Regulation D contain an explicit cross 
reference to the Board Interpretation on multiple savings accounts 
treated as transaction accounts (12 CFR 204.133, FRRS 2-286). Another 
believed that the Board's notice of August 25, 1992 (57 Federal 
Register 38417) discussing several Regulation D issues should be 
included in the regulation because of difficulty in obtaining a copy. A 
third suggested that Board Interpretations and Staff Opinions related 
to Regulation D be streamlined and made consistent with the final rule. 
Two others suggested that this guidance be replaced with an official 
staff commentary. The Board will consider streamlining its guidance 
related to Regulation D or issuing an official staff commentary.
    However, the Board believes that specific cross references in the 
regulation to selected interpretations could be construed to mean that 
the other guidance is of less importance, and therefore the Board 
believes that such cross references generally should be avoided.
    A Federal Reserve Bank commented that sweeps into and out of retail 
savings accounts should be prohibited, because of the economic waste 
involved in this form of avoidance of the transaction limitations 
otherwise applicable to savings accounts. Alternatively, if the Board 
permits these sweep accounts, the applicable limitations should be 
spelled out in the regulation. Another commenter and an industry trade 
association similarly requested clarification on sweep accounts in the 
regulation. Regulation D currently limits transfers from savings 
accounts, with certain exceptions, to six per month or monthly 
statement cycle. The Board believes that the regulation is clear that 
two separate accounts, established by agreement with the depositor, one 
of which is a transaction account and the other of which is a savings 
account, can be structured so that transfers between the two accounts 
can take place provided that no more than six transfers and/or 
withdrawals from the savings account will take place in any month or 
statement cycle, and so that the savings account will otherwise meet 
the qualifications required by Regulation D.
    A bank holding company objected to the transfer limitations on 
savings accounts, stating that competitive pressures in the market for 
business deposits combine with these limitations to make necessary 
alternative products such as sweep repurchase agreements, with 
consequent additional legal and system support costs that serve no 
economic purpose. The commenter suggested that the Board support 
possible legislation to remove some of these restrictions. Section 19 
of the Federal Reserve Act requires the Board to distinguish 
transaction accounts from other accounts, because it requires different 
reserve requirements for transaction accounts and other accounts. 
(Currently, net transaction accounts in excess of the low reserve 
tranche are subject to a 10 percent

[[Page 69024]]

reserve requirement whereas nonpersonal time deposits are subject to a 
zero percent reserve requirement and personal time deposits are exempt 
from reserve requirements by statute.) The Board has based the 
distinction between transaction accounts and other accounts on the 
depositor's convenience of access and consequent ability to use savings 
deposits for transactional purposes.
    Another bank requested additional guidance on sweeps from major 
accounts, principally those held by corporations and partnerships. The 
commenter has implemented a master repurchase agreement for these 
accounts to replace a previous arrangement involving funds secured by 
Treasury and federal agency securities, and requested guidance with 
respect to agreements and collateral. Regulation D clearly excludes 
from the definition of deposit any obligation that ``arises from a 
transfer of direct obligations of, or obligations that are fully 
guaranteed as to principal and interest by, the United States 
government or any agency thereof that the depository institution is 
obligated to repurchase.'' 12 CFR 204.2(a)(1)(vii)(B). In order for a 
repurchase obligation to qualify under this exclusion and be thus 
exempted, in effect, from the requirements of Regulations D and Q, the 
transaction generally must meet regulatory requirements for agreements 
to repurchase government securities under the Government Securities Act 
of 1986 (as amended). See, e.g., 17 CFR parts 403, 404, and 450.
    A trade association suggested that the Regulation D definition of 
demand deposit should preempt a state law provision applicable to its 
members, which defines demand deposit to include any deposit 
withdrawable within 30 days. The definition in Regulation D is for the 
purpose of calculating reserve requirements (since demand deposits are 
included in transaction accounts) and is also employed in Regulation Q. 
The Board is not aware of any circumstances under which the state law 
impairs the effectiveness of these regulations.
    One Federal Reserve bank reported receiving a number of requests 
from depository institutions and bank holding companies for the 
elimination of member bank pass-through restrictions and of the 
requirement that reserves passed through a correspondent be held in the 
Federal Reserve district where the respondent is located. The pass-
through restrictions are based on section 19(c) of the Federal Reserve 
Act, which states that reserve balances of member banks must be held at 
the Federal Reserve bank of which the bank maintaining the balance is a 
member, and on operating considerations. The Board will be considering 
these issues further in light of the growth in interstate banking 
arrangements that span Federal Reserve district lines.
    Finally, Sec. 204.3(i)(1)(ii), which specifies procedure for 
changes in correspondent-respondent relationships for required reserve 
balances, incorrectly refers to Reserve Banks' operating circulars that 
do not exist; Sec. 204.3(i)(4)(ii), which assigns to correspondents 
responsibility for respondents' required reserve balances, incorrectly 
refers to ``penalties'' for reserve deficiencies rather than 
``charges''; and Sec. 204.7(a)(1), which discusses charges for reserve 
deficiencies, incorrectly refers to ``the 2 percent carryover provided 
in Sec. 204.3(h),'' whereas Sec. 204.3(h) provides a carryover of 4 
percent or $50,000, whichever is greater. Accordingly, the Board is 
replacing ``in its operating circular'' by ``in its discretion,'' 
replacing ``penalties'' by ``charges'' in Sec. 204.3(i)(4)(ii) and 
simplifying Sec. 204.7(a)(1) to refer to ``the carryover provided in 
Sec. 204.3(h).'' Similarly, the references to ``penalty-free band'' in 
Sec. 204.3(h) are replaced by references to ``charge-free band.''

Final Rule

    The Board is adopting the revisions to Regulation D substantially 
as proposed. In addition, the Board is correcting the references to 
penalties in the sections on correspondent's responsibility and reserve 
deficiencies, and clarifying the carryover reference in the section on 
reserve deficiencies. No substantive change to these two sections is 
intended.

Final Regulatory Flexibility Analysis

    The Regulatory Flexibility Act (5 U.S.C. 601-612) requires an 
agency to publish a final regulatory flexibility analysis with any 
notice of proposed rulemaking. One of the requirements of a final 
regulatory flexibility analysis (5 U.S.C. 604(a))--a statement of the 
need for, and the objectives of, the rule--is contained in 
``Background'' above. The Regulation D amendments being proposed 
require no additional reporting or recordkeeping requirements and do 
not overlap with other federal rules.
    A second requirement for the final regulatory flexibility analysis 
is a summary of the issues raised by the public comments in response to 
the initial regulatory flexibility analysis that was included in the 
notice of proposed rulemaking. The Board received no comments 
specifically related to the initial regulatory flexibility analysis, 
and the comments it received on the rule are discussed in 
``Background'' above.
    The third requirement for the final regulatory flexibility analysis 
is a description of any significant alternatives to the rule consistent 
with the stated objectives of the applicable statutes and designed to 
minimize any significant impact of the rule on small entities. The rule 
will apply to all depository institutions regardless of size, except 
that the transition rule for de novo institutions applies only to 
institutions with total transaction accounts, nonpersonal time 
deposits, and Eurocurrency liabilities of less than $50 million.
    Except for the transition rules relating to dissimilar mergers and 
de novo institutions, the amendments are burden-reducing and no 
appropriate alternatives to the provisions in the proposal were found 
which would further reduce burdens. (The Board considered whether 
substantive revisions to the definitions of deposits could be 
implemented in an effort to simplify the regulation further, and 
concluded that a major revision of the definitions is not appropriate 
at present. See ``Background'' above.) The current transition rules for 
dissimilar mergers provide a minor temporary potential reduction in 
reserve requirements for certain merged institutions. However, no 
institution is currently benefitting from the dissimilar merger rules. 
The transition rules for de novo institutions, which are only 
applicable to institutions with reservable liabilities of less than $50 
million and provide only a temporary benefit, have become much less 
significant with the increase in the low-reserve tranche cutoff ($49.3 
million for 1997). Partly for this reason, only 56 institutions are 
currently receiving de novo phase-in benefits and only 4 of these 
institutions are not fully meeting their reserve requirements with 
vault cash. In order to avoid disrupting economic expectations based on 
the de novo transition rule, any institution covered by the de novo 
transition rule on the effective date of the amendments will be 
grandfathered for the purpose of determining its required reserves. 
Therefore, the Board believes that the amendments will not have a 
significant adverse economic impact on a substantial number of small 
entities.
    A number of the comments included suggestions with respect to other 
provisions of Regulation D that could reduce burdens on all depository 
institutions, especially with respect to distinguishing time and 
savings deposits from transaction accounts. The

[[Page 69025]]

Board's responses to these comments are set forth under ``Background'' 
above.

Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act notice of 1995 (44 
U.S.C. Ch. 3506; 5 CFR Part 1320, Appendix A.1), the Board has reviewed 
the rule under the authority delegated to the Board by the Office of 
Management and Budget. No collection of information pursuant to the 
Paperwork Reduction Act is contained in the rule.

List of Subjects in 12 CFR Part 204

    Banks and banking, Federal Reserve System, Reporting and 
recordkeeping requirements.

Authority and Issuance

    For the reasons set forth in the preamble, the Board is amending 
part 204 of chapter II of title 12 as follows:

PART 204--RESERVE REQUIREMENTS OF DEPOSITORY INSTITUTIONS 
(REGULATION D)

    1. The authority citation for part 204 continues to read as 
follows:

    Authority: 12 U.S.C. 248(a), 248(c), 371a, 461, 601, 611, and 
3105.

    2. Section 204.2 is amended as follows:
    a. In paragraph (c)(1)(i) introductory text, the introductory text 
of footnote 1 is amended by removing ``before maturity'' and adding in 
its place ``during the period when an early withdrawal penalty would 
otherwise be required under this part'', removing ``the'' after 
``imposing'' and adding in its place ``an'', removing ``penalties'' and 
adding in its place ``penalty'', and footnote 2 is removed.
    b. In paragraphs (c)(1)(iv)(C), (c)(1)(iv)(E), and (d)(2), 
footnotes 3 through 5 are redesignated as footnotes 2 through 4, 
respectively, and footnote 6 is removed.
    c. Paragraph (f)(1)(iii) is revised.
    d. Paragraph (f)(1)(iv) is removed and paragraph (f)(1)(v) is 
redesignated as paragraph (f)(1)(iv).
    e. In newly redesignated paragraphs (f)(1)(iv)(C) and 
(f)(1)(iv)(E), footnotes 7 and 8 are redesignated as footnotes 5 and 6, 
respectively.
    f. Paragraph (f)(3) is removed and footnote 9 is removed.
    g. In paragraph (h)(1)(ii)(A), footnote 10 is redesignated as 
footnote 7 and is amended by removing ``(1) that were acquired before 
October 7, 1979, or (2)''.
    h. In paragraph (h)(2)(ii), footnote 11 is redesignated as footnote 
8 and is amended by revising ``Footnote 10'' to read ``footnote 7''.
    i. In paragraph (t), footnote 12 is redesignated as footnote 9, and 
footnote reference 2 is redesignated as footnote reference 9. The 
revisions are as follows:


Sec. 204.2  Definitions.

* * * * *
    (f)(1) * * *
    (iii) A transferable time deposit. A time deposit is transferable 
unless it contains a specific statement on the certificate, instrument, 
passbook, statement or other form representing the account that it is 
not transferable. A time deposit that contains a specific statement 
that it is not transferable is not regarded as transferable even if the 
following transactions can be effected: a pledge as collateral for a 
loan, a transaction that occurs due to circumstances arising from 
death, incompetency, marriage, divorce, attachment, or otherwise by 
operation of law or a transfer on the books or records of the 
institution; and
* * * * *
    3. Section 204.3 is amended as follows:
    a. Paragraph (a)(3)(i) is removed and the paragraph designation 
(a)(3)(ii) is removed.
    b. Paragraph (f)(1) is revised.
    c. In paragraphs (h)(1) and (h)(2), the words ``required clearing 
balance penalty-free band'' are revised to read ``required charge-free 
band''.
    d. Paragraph (i)(1)(ii) is amended in the last sentence by removing 
``in its operating circular'' and adding in its place ``in its 
discretion''.
    e. Paragraph (i)(4)(ii) is amended by removing ``penalties'' in the 
second sentence and ``penalty'' in the third sentence and adding in 
their place ``charges'' and ``charge'', respectively.
    f. Paragraph (i)(5)(iv) is removed.
    The revisions are as follows:


Sec. 204.3  Computation and maintenance

* * * * *
    (f) Deductions allowed in computing reserves. (1) In determining 
the reserve balance required under this part, the amount of cash items 
in process of collection and balances subject to immediate withdrawal 
due from other depository institutions located in the United States 
(including such amounts due from United States branches and agencies of 
foreign banks and Edge and agreement corporations) may be deducted from 
the amount of gross transaction accounts. The amount that may be 
deducted may not exceed the amount of gross transaction accounts.
* * * * *
    4. Section 204.4 is revised to read as follows:


Sec. 204.4  Transitional adjustments in mergers

    In cases of mergers and consolidations of depository institutions, 
the amount of reserves that shall be maintained by the surviving 
institution shall be reduced by an amount determined by multiplying the 
amount by which the required reserves during the computation period 
immediately preceding the date of the merger (computed as if the 
depository institutions had merged) exceeds the sum of the actual 
required reserves of each depository institution during the same 
computation period, times the appropriate percentage as specified in 
the following schedule:

------------------------------------------------------------------------
                                                              Percentage
                                                              applied to
                                                              difference
   Maintenance periods occurring during quarters following    to compute
                   merger or consolidation                     amount to
                                                                  be    
                                                              subtracted
------------------------------------------------------------------------
1...........................................................        87.5
2...........................................................        75.0
3...........................................................        62.5
4...........................................................        50.0
5...........................................................        37.5
6...........................................................        25.0
7...........................................................        12.5
8 and succeeding............................................         0  
------------------------------------------------------------------------

Sec. 204.7  [Amended]

    5. Section 204.7 is amended in paragraph (a)(1) by removing ``after 
application of the 2 percent carryover provided in Sec. 204.3(h)'' and 
adding in its place ``after application of the carryover provided in 
Sec. 204.3(h)''.
    6. Section 204.8 is amended as follows:
    a. In paragraph (a)(2)(i)(B)(5), footnotes 13 and 14 are 
redesignated as footnotes 10 and 11, respectively.
    b. In paragraph (a)(3)(v), footnotes 15 and 16 are redesignated as 
footnotes 12 and 13, respectively, and revised to read as follows:


Sec. 204.8  International banking facilities.

    (a) Definitions. * * *
    (3) * * *
    (v) * * * \12\ * * * \13\ * * *
---------------------------------------------------------------------------

    \12\ See footnote 10.
    \13\ See footnote 11.
---------------------------------------------------------------------------

* * * * *


Sec. 204.9  [Amended]

    7. Section 204.9 is amended by removing paragraph (b), by 
redesignating paragraphs (a)(1) and (a)(2) as paragraphs (a) and (b), 
respectively.

[[Page 69026]]

    By order of the Board of Governors of the Federal Reserve System, 
December 24, 1996.
William W. Wiles,
Secretary of the Board.
[FR Doc. 96-33158 Filed 12-30-96; 8:45 am]
BILLING CODE 6210-01-P