[Federal Register Volume 62, Number 124 (Friday, June 27, 1997)]
[Rules and Regulations]
[Pages 34613-34617]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-16872]


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FEDERAL RESERVE SYSTEM

12 CFR Parts 204 and 209

[Regulations D and I; Docket No. R-0963]


Reserve Requirements of Depository Institutions and Issue and 
Cancellation of Capital Stock of Federal Reserve Banks

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Final rule.

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SUMMARY: The Board is amending Regulations D and I, Reserve 
Requirements of Depository Institutions and Issue and Cancellation of 
Capital Stock of Federal Reserve Banks, respectively, to define the 
location of a depository institution for purposes of Federal Reserve 
membership and reserve account maintenance. These amendments will 
facilitate interstate banking.


[[Page 34614]]


EFFECTIVE DATE: October 1, 1997.

FOR FURTHER INFORMATION CONTACT: Oliver Ireland, Associate General 
Counsel, (202/452-3625) or Stephanie Martin, Senior Attorney (202/452-
3198), Legal Division. For the hearing impaired only, contact Diane 
Jenkins, Telecommunications Device for the Deaf (TDD) (202/452-3544), 
Board of Governors of the Federal Reserve System, 20th and C Streets, 
N.W., Washington, D.C. 20551.

SUPPLEMENTARY INFORMATION: Recent statutory changes have eliminated 
many barriers to interstate banking.1 Consequently, the 
number of depository institutions that operate branches in more than 
one Federal Reserve District is expected to increase. On January 2, 
1998, the Federal Reserve Banks will begin to implement a new account 
structure that will provide a single Federal Reserve account for each 
domestic depository institution.
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    \1\ See, the Riegle-Neal Interstate Banking and Branching 
Efficiency Act, Pub. L. 103-328, 108 Stat. 2338 (1994).
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    The advent of interstate banking raises questions as to how certain 
provisions of the Federal Reserve Act (FRA) 2 will apply to 
banks with interstate branches. Many of these questions are related to 
a bank's ``location.'' To date, the Board and the Federal Reserve Banks 
generally have interpreted the term ``location,'' as used in the FRA, 
to mean the geographic location of a bank, heavily influenced by the 
location specified in the bank's charter, or if no charter location is 
specified, the location of the bank's head office. This interpretation, 
however, may not always be appropriate in an interstate branching 
environment, where a bank may have offices in multiple Federal Reserve 
Districts and do most of its business in places other than its charter 
or head office location. In March 1997, the Board proposed amendments 
to its Regulation D (12 CFR part 204, Reserve Requirements of 
Depository Institutions) and Regulation I (12 CFR part 209, Issue and 
Cancellation of Capital Stock of Federal Reserve Banks) to define 
``location'' for purposes of the Federal Reserve membership and reserve 
account maintenance (62 FR 11117, March 11, 1997).
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    \2\ 12 U.S.C. 221 et seq.
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Background

    A member bank, even if it has interstate branches, must be a member 
of a particular Federal Reserve Bank. The membership question is 
closely related to other location issues such as where reserve accounts 
are located and where account entries are posted. Every national bank 
is required to become a member and stockholder of the Federal Reserve 
Bank of its district (FRA section 2(1)). State banks may apply to the 
Board to subscribe to the stock of the Federal Reserve Bank organized 
within the district in which the applying bank is located (FRA section 
9(1)). These provisions suggest that membership is limited to one 
Federal Reserve Bank and that membership is to be determined by the 
geographical location of the bank.
    A bank must hold reserves at the Federal Reserve Bank of which it 
is a member or where it maintains an account (FRA section 19(c)(1)). 
Therefore, a nonmember bank would hold its reserve account at the 
Reserve Bank where it maintains an account for purposes of check 
collection and other payments services. FRA section 13(1) provides that 
the nonmember bank may maintain this clearing account with the Federal 
Reserve Bank of its district.
    Charter or head office location is the status quo under the FRA as 
to where a bank is located for membership purposes and nonmember 
reserve account purposes. The National Bank Act requires a national 
bank's organization certificate to state the place where its operations 
of discount and deposit are to be carried on, designating the state, 
territory, or district, and the particular county and city, town, or 
village (12 U.S.C. 22). State laws may be less specific with respect to 
state-chartered banks, and the determination of the bank's location may 
not be ascertainable from the bank's charter.
    Under a strict interpretation of the charter/head office rule, a 
bank could be a member only of the Reserve Bank whose district 
encompasses the location specified in its charter or, in the case of a 
state bank with no specific charter location, the location of its head 
office. For a bank with interstate branches, however, this location 
test may not be the appropriate means of determining where the bank is 
located for membership or reserve account purposes. An interstate bank 
may have its main office or do the bulk of its business somewhere other 
than its charter location and may wish to establish a Federal Reserve 
Bank relationship closer to its business headquarters. Similarly, a 
bank holding company with subsidiary banks in multiple Federal Reserve 
Districts that manages those banks as a combined business may wish to 
centralize operations in a single district. In addition, the Board and 
the Federal Reserve Banks may find it more efficient to administer a 
bank's account and perform other functions in a district other than the 
district encompassing the charter or head office location.

Board's Proposal

    Section 9(1) of the FRA authorizes the Board to prescribe rules and 
regulations governing applications by state banks to subscribe to the 
stock of the Federal Reserve Bank organized within the district in 
which the applying bank is located. Section 2(1) of the FRA requires 
national banks to become member banks in accordance with the provisions 
of the FRA, and section 11(i) gives the Board general authority to 
write rules necessary to perform its duties, functions, and services 
under the FRA. Accordingly, the Board proposed to amend Regulation I to 
set forth a definition of ``location'' for the purpose of acquiring 
Federal Reserve Bank stock. This amendment also would help answer other 
member bank location questions related to reserve account maintenance, 
supervision, and other issues.
    The proposed Regulation I provision stated a general rule that, for 
membership purposes, a bank is considered to be located in the Federal 
Reserve District specified in the bank's charter or organizing 
certificate, or, if no such location is specified, the location of its 
head office. The Board could make exceptions to the general rule for a 
particular bank after considering certain criteria. Thus, if the bank's 
location were uncertain or its location based on its charter, 
organizing certificate, or head office differed from the location where 
it conducted most of its business, the Board, after consultation with 
the relevant Reserve Banks, could designate the appropriate location 
for membership purposes. (The relevant Reserve Banks are the Reserve 
Bank whose district contains the bank's charter or head office location 
and the Reserve Bank in whose district the bank is proposed to be 
located.)
    One consideration in making this determination would be whether any 
other laws would require the bank to have a relationship with a 
particular Reserve Bank. For example, Massachusetts and Nebraska laws 
provide that state banks may become members of the Boston and Kansas 
City Reserve Banks, respectively.3 The Board could also 
consider other criteria, such as the business needs of the bank, where 
the head office of the bank is located, where the bank does the bulk of 
its business, and the location that would allow the bank, the Board, 
and the Reserve Banks to perform their

[[Page 34615]]

functions most efficiently and effectively. For example, the Board 
might consider the efficiency of bank supervisory functions, account 
management, and Federal Reserve monetary policy. Generally, these 
amendments would not affect current relationships between banks and 
Federal Reserve Banks. A bank that already owns stock in or has an 
account at a Federal Reserve Bank may, but need not, seek a Board 
determination to change its location. The Board anticipates that the 
``location'' issue will arise principally from mergers of existing 
banks or other changes in the organization or management of bank 
holding companies. Ordinarily, the Board expects that ``location'' 
decisions would be worked out between the Reserve Banks and the bank.
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    \3\ Mass. Gen. L. ch. 167F, section 8 (1996) and Neb. Rev. Stat. 
section 8-130 (1996).
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    Although the proposed Regulation I amendment would be sufficient to 
determine where a member bank's reserve account would be located, the 
Board also proposed to amend Regulation D to clarify the location of 
nonmember bank reserve accounts. The Board proposed this amendment 
under the authority of section 19(c)(1) of the FRA, which provides that 
depository institutions must hold reserves subject to such rules and 
regulations that the Board may prescribe. The Regulation D amendment is 
similar to the Regulation I proposal and would, in effect, assure that 
nonmember banks are treated comparably to member banks for account 
location purposes.
    Regulation D also applies to Edge and agreement corporations and 
U.S. branches and agencies of foreign banks. Section 25A of the FRA 
requires Edge corporations to carry reserves in the same amounts as the 
Board prescribes for member banks and authorizes the Board to write 
rules governing the operations of such corporations. Section 25 of the 
FRA also authorizes the Board to require agreement corporations to 
maintain reserves. Section 7 of the International Banking Act provides 
that Federal branches and agencies of foreign banks are subject to the 
FRA's reserve requirement provisions (including section 19(c)) as if 
they were member banks. That Act also provides that the Board may 
impose the same requirements on state-licensed branches and agencies of 
foreign banks after consultation and in cooperation with the state bank 
supervisory authorities. The Board requested comment on whether it 
should apply the same or similar criteria for determining the location 
of reserve accounts for U.S. branches and agencies of foreign banks and 
Edge and agreement corporations as it does for depository institutions.

Summary of Public Comments

    The Board received 12 comments on the proposed amendments from the 
following categories of entities:

Federal Reserve Banks..............................................    4
Bank holding companies.............................................    3
Commercial banks...................................................    2
Trade associations.................................................    2
Credit unions......................................................    1
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  Total............................................................   12
                                                                        

All of the commenters supported the Board's proposed amendments in 
general and agreed that the amendments would provide operational 
efficiencies and flexibility that will be necessary in an interstate 
banking environment.

Role of Affected Bank

    Three commenters asked the Board to clarify that, when making a 
location determination, the Board will consult with the affected 
depository institution as well as the affected Reserve Banks, as the 
decision could have a significant impact on the depository 
institution's operations. On a related point, two commenters suggested 
that the Board clarify that a depository institution may request a 
location determination. The Board had always intended that a location 
determination would involve consideration of the views of, and in many 
cases would be made at the initiation of, the affected institution. The 
Board has modified the final regulatory language to provide that the 
Board could make a location determination if it believes such a 
determination is necessary to enable the institution operate 
efficiently. The final amendments also provide that the Board will 
consult with the affected institution, as well as the relevant Reserve 
Banks, before making a location determination.

Limited Relocations

    One commenter suggested that Board should avoid ``forum-shopping'' 
by limiting the number of times a bank may change its designated 
location and by allowing relocations only when undertaken in good faith 
and on a showing of good cause. As frequent relocations would probably 
not allow the Board and the Reserve Banks to perform their functions 
efficiently and effectively, the Board does not expect to allow 
frequent relocations for a single institution.

Multiple Federal Reserve Memberships

    One commenter stated that, should the Board consider accommodating 
interstate banking and branching by allowing banks to become members of 
two or more Reserve Banks, such a proposal would require careful 
analysis, further public comment, and perhaps a legislative change. The 
Board is not at this time considering allowing multiple Federal Reserve 
memberships for a single bank.

Pass-Through Provisions

    One commenter encouraged the Board to consider additional 
amendments to Regulation D's pass-through provisions related to member 
banks and out-of-district correspondents. The Board is in the process 
of reviewing the pass-through provisions in light of the Reserve Banks' 
single-account structure.

Obtaining Payments Services From Other Reserve Banks

    Two commenters asked what effect, if any, the proposed amendments 
would have on the ability of a depository institution to obtain 
payments and other financial services from a Reserve Bank other than 
the Reserve Bank at which it holds an account. The Board has proposed 
amendments to Regulation J (12 CFR part 210), governing the collection 
and return of checks through Federal Reserve Banks, that would allow an 
institution to use the check collection services of any Reserve Bank, 
regardless of where the institution maintains an account (62 FR 27547, 
May 20, 1997). The Reserve Banks are currently revising their operating 
circulars to provide institutions with similar flexibility for all 
Federal Reserve services. These amendments to Regulations D and I, 
therefore, would not affect the ability of an institution to obtain 
services from any Reserve Bank.
    One of these commenters also asked whether an institution's account 
relationship and supervisory relationship could be with different 
Reserve Banks. Absent unusual circumstances, the Board expects that the 
most efficient and effective administration of Federal Reserve 
functions generally would require the account and supervisory functions 
for a particular depository institution to be located at a single 
Reserve Bank.

U.S. Branches and Agencies of Foreign Banks; Edge and Agreement 
Corporations

    The Board received four comments on the treatment of U.S. branches 
and agencies of foreign banks and Edge and agreement corporations under 
the proposed amendments to Regulation D. All four commenters believed 
that it would be logical to determine the location of these entities in 
the same manner as for domestic institutions. The commenters also 
raised questions related to the number of Federal Reserve

[[Page 34616]]

accounts that a foreign bank family (or Edge or agreement corporation 
family) should maintain. The Board is currently reviewing the 
appropriate treatment for accounts of these entities for reserve 
purposes.

Effective Date

    The effective date of the amendments to Regulations D and I is 
October 1, 1997. This will allow institutions to request location 
determinations three months in advance of the single account 
implementation date. Although the Board may make determinations during 
this three-month period, these determinations generally would not be 
effective until January 2, 1998.

Delegation of Authority

    In conjunction with the final amendments discussed above, the Board 
is also amending its Rules Regarding the Delegation of Authority (12 
CFR part 265) to provide that the Secretary of the Board may determine 
an institution's location under Regulation D or Regulation I if the 
relevant Federal Reserve Banks and the institution agree on the 
specific Reserve Bank in which the institution should hold stock or 
with which the institution should maintain a reserve account, and the 
agreed-upon location does not raise any significant policy issues. See 
Docket R-0973, elsewhere in today's Federal Register.

Final Regulatory Flexibility Analysis

    Two of the three requirements of a final regulatory flexibility 
analysis (5 U.S.C. 604), (1) a succinct statement of the need for and 
the objectives of the rule and (2) a summary of the issues raised by 
the public comments, the agency's assessment of the issues, and a 
statement of the changes made in the final rule in response to the 
comments, are discussed above. The third requirement of a final 
regulatory flexibility analysis is a description of significant 
alternatives to the rule that would minimize the rule's economic impact 
on small entities and reasons why the alternatives were rejected.
    The final amendments will apply to all depository institutions, 
regardless of size, and represent relatively minor changes to the 
existing rules. The amendments should not have a negative economic 
impact on small institutions, and, therefore, there were no significant 
alternatives that would have minimized the economic impact on those 
institutions. The amendments will clarify the location of an 
institution for Federal Reserve membership and reserve account 
maintenance purposes and, in some cases, could reduce economic burden 
on affected institutions by allowing them to establish that location 
more conveniently.

List of Subjects

12 CFR Part 204

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

12 CFR Part 209

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

    For the reasons set out in the preamble, 12 CFR parts 204 and 209 
are amended as set forth below.

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. In Sec. 204.3, paragraph (b) is revised to read as follows:


Sec. 204.3  Computation and maintenance.

* * * * *
    (b) Form and location of reserves. (1) A depository institution, a 
U.S. branch or agency of a foreign bank, and an Edge or agreement 
corporation shall hold reserves in the form of vault cash, a balance 
maintained directly with the Federal Reserve Bank in the Federal 
Reserve District in which it is located, or a pass-through account. 
Reserves held in the form of a pass-through account shall be considered 
to be a balance maintained with a Federal Reserve Bank.
    (2) (i) For purposes of this section, a depository institution is 
located in the Federal Reserve District that contains the location 
specified in the institution's charter or organizing certificate, or, 
if no such location is specified, the location of its head office, 
unless otherwise determined by the Board under paragraph (b)(2)(ii) of 
this section.
    (ii) If the location specified in paragraph (b)(2)(i) of this 
section, in the Board's judgment, is ambiguous, would impede the 
ability of the Board or the Federal Reserve Banks to perform their 
functions under the Federal Reserve Act, or would impede the ability of 
the institution to operate efficiently, the Board will determine the 
Federal Reserve District in which the institution is located, after 
consultation with the institution and the relevant Federal Reserve 
Banks. The relevant Federal Reserve Banks are the Federal Reserve Bank 
whose District contains the location specified in paragraph (b)(2)(i) 
of this section and the Federal Reserve Bank in whose District the 
institution is proposed to be located. In making this determination, 
the Board will consider any applicable laws, the business needs of the 
institution, the location of the institution's head office, the 
locations where the institution performs its business, and the 
locations that would allow the institution, the Board, and the Federal 
Reserve Banks to perform their functions efficiently and effectively.
* * * * *

PART 209--ISSUE AND CANCELLATION OF CAPITAL STOCK OF FEDERAL 
RESERVE BANKS (REGULATION I)

    3. The authority citation for part 209 continues to read as 
follows:

    Authority: 12 U.S.C. 248, 321-338, 486, 1814, 1816.

    4. A new Sec. 209.15 is added to read as follows:


Sec. 209.15  Location of bank.

    (a) General rule. For purposes of this part, a national bank or a 
state bank is located in the Federal Reserve District that contains the 
location specified in the bank's charter or organizing certificate, or, 
if no such location is specified, the location of its head office, 
unless otherwise determined by the Board under paragraph (b) of this 
section.
    (b) Board determination. If the location of a bank as specified in 
paragraph (a) of this section, in the Board's judgment, is ambiguous, 
would impede the ability of the Board or the Federal Reserve Banks to 
perform their functions under the Federal Reserve Act, or would impede 
the ability of the bank to operate efficiently, the Board will 
determine the Federal Reserve District in which the bank is located, 
after consultation with the bank and the relevant Federal Reserve 
Banks. The relevant Federal Reserve Banks are the Federal Reserve Bank 
whose District contains the location specified in the paragraph (a) of 
this section and the Federal Reserve Bank in whose District the bank is 
proposed to be located. In making this determination, the Board will 
consider any applicable laws, the business needs of the bank, the 
location of the bank's head office, the locations where the bank 
performs its business, and the locations that would allow the bank, the 
Board, and the Federal Reserve Banks to perform their functions 
efficiently and effectively.


[[Page 34617]]


    By order of the Board of Governors of the Federal Reserve 
System, June 23, 1997.
William W. Wiles,
Secretary of the Board.
[FR Doc. 97-16872 Filed 6-26-97; 8:45 am]
BILLING CODE 6210-01-P