[Federal Register Volume 62, Number 218 (Wednesday, November 12, 1997)]
[Proposed Rules]
[Pages 60671-60672]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-29761]


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 Proposed Rules
                                                 Federal Register
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 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
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  Federal Register / Vol. 62, No. 218 / Wednesday, November 12, 1997 / 
Proposed Rules  

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FEDERAL RESERVE SYSTEM

12 CFR Parts 204

[Regulation D; Docket No. R-0988]


Reserve Requirements of Depository Institutions

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Proposed rule.

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SUMMARY: The Board is proposing amendments to Regulation D, Reserve 
Requirements of Depository Institutions, to move from the current 
system of contemporaneous reserve maintenance for institutions that are 
weekly reporters to a system under which reserves are maintained on a 
lagged basis by such institutions. Under a lagged reserve maintenance 
system, the reserve maintenance period for a weekly reporter will begin 
30 days after the beginning of a reserve computation period. Under the 
current system, the reserve maintenance period begins only two days 
after the beginning of the computation period.

DATES: Comments must be submitted on or before January 12, 1998.

ADDRESSES: Comments, which should refer to Docket No. R-0988, may be 
mailed to Mr. William W. Wiles, Secretary, Board of Governors of the 
Federal Reserve System, 20th Street and Constitution Avenue, N.W., 
Washington, D.C. 20551. Comments addressed to Mr. Wiles also may be 
delivered to the Board's mail room between 8:45 a.m. and 5:15 p.m. and 
to the security control room outside of those hours. Both the mail room 
and the security control room are accessible from the courtyard 
entrance on 20th Street between Constitution Avenue and C Street, N.W. 
Comments may be inspected in Room MP-500 between 9:00 a.m. and 5:00 
p.m.

FOR FURTHER INFORMATION CONTACT: William Whitesell, Section Chief, 
Money and Reserves Projections Section, Division of Monetary Affairs 
(202/452-2967); Oliver Ireland, Associate General Counsel, (202/452-
3625) or Lawranne Stewart, Senior Attorney (202/452-3513), 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: In order to satisfy the reserve requirements 
imposed under Regulation D (Reserve Requirements of Depository 
Institutions), depository institutions that file detailed deposit 
reports with the Federal Reserve once a week (``weekly reporters'') are 
required to maintain reserves against their deposits on a virtually 
contemporaneous basis.1 Weekly reporters are required to 
maintain average reserve balances over a 14-day reserve maintenance 
period that begins only two days after the beginning of the 14-day 
computation period.2 The requirement for contemporaneous 
reserve maintenance was implemented in 1984 to enhance the conduct of 
monetary policy by strengthening the ability of the Board to control 
M1, the narrowest measure of the money supply, through operations 
directed at the supply of reserves.3
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    \1\ Weekly reporters include domestic depository institutions 
with total reservable liabilities greater than the exemption amount 
provided by the zero-reserve tranche, currently $4.4 million, and 
total deposits at or above the deposit cut-off established for 
institutions that are not fully exempt from reserve requirements, 
currently $75 million. U.S. branches and agencies of foreign banks 
and Edge and Agreement corporations, regardless of their size, must 
report weekly.
    Institutions that are not weekly reporters file deposit reports 
on either a quarterly or annual basis, depending on the size of 
their total deposits and their total reservable liabilities. This 
proposal will have no effect on those institutions.
    \2\ In the past, the threshold deposit level for weekly 
reporters has been indexed to the growth of total deposits and 
revised annually. As part of the Board's most recent review of the 
deposit reporting forms, however, the threshold deposit level for 
weekly reporting of deposits was raised to $75 million, effective as 
of the reporting week ending September 15, 1997.
    \3\ See 47 FR 44705 (October 12, 1982).
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    Since that time, however, the Federal Reserve's operating 
procedures have changed and it no longer maintains target ranges for 
M1. Additionally, the use of contemporaneous reserve maintenance 
requires depositories and the Federal Reserve to estimate and project 
the quantity of reserves that will be needed to meet reserve 
requirements during the current maintenance period. These estimates 
have become increasingly difficult to formulate with any precision on a 
timely basis, in part because of the implementation by many depository 
institutions of retail sweep programs. Such programs have lowered 
required reserves for institutions that have implemented them and have 
increased uncertainties regarding the reserve balances depository 
institutions must hold at the Reserve Banks. For example, for some 
large institutions, required reserves are sometimes above and sometimes 
below their holdings of vault cash, with the result that it is 
difficult to project reliably the extent to which reserves in excess of 
applied vault cash will be required by these institutions.
    The Board therefore is requesting comment on a proposal to amend 
Regulation D to return to a system of lagged reserve requirements. 
Under the proposal, a lag of thirty days (two full maintenance periods) 
would be introduced between the beginning of a reserve computation 
period and the beginning of the maintenance period during which 
reserves for that computation period must be maintained. The reserve 
maintenance period therefore would not begin until seventeen days after 
the end of the computation period. The proposal also provides for a 
two-period lag in the computation of the vault cash to be applied to 
satisfy reserve requirements.4 Providing a two-period lag 
for both required reserves and applied vault cash will allow the 
Federal Reserve, as well as the depository institutions, to calculate 
the level of required reserve balances before the beginning of the 
maintenance period. The increased lag also should reduce the level of 
resources that depository institutions and the Federal Reserve 
currently must devote to estimating and projecting required reserve 
balances.
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    \4\ Applied vault cash for an individual institution is equal to 
the lesser of total vault cash or required reserves.
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    The Board's proposal will not affect the provisions of Regulation D 
concerning the carryover of excess or deficiencies in a depository 
institution's reserve account.
    The Board proposes to implement the shift to a lagged reserve 
requirement in July 1998. The Board believes that the transition to the 
new system could be

[[Page 60672]]

made most easily after completion of the changeover of software used by 
the Federal Reserve to process most data flows, currently projected for 
March 1998, and prior to the annual deposit panel shifts that will take 
place in September 1998.

Initial Regulatory Flexibility Analysis

    The Regulatory Flexibility Act (5 U.S.C. 601-612) requires an 
agency to publish an initial regulatory flexibility analysis with any 
notice of proposed rulemaking. An initial regulatory flexibility 
analysis must include: (1) A description of the reasons why action by 
the agency is being considered; (2) a statement of the objectives of, 
and legal basis for, the proposed rule; (3) a description of and, where 
feasible, an estimate of the number of small entities to which the 
proposed rule will apply; (4) a description of the projected reporting, 
recordkeeping, and other compliance requirements of the proposed rule; 
and (5) an identification, to the extent practicable, of all relevant 
Federal rules that may duplicate, overlap, or conflict with the 
proposed rules. 5 U.S.C. 603(b).
    As discussed above, the Board is considering this action to improve 
the ability of the Federal Reserve to estimate accurately the need for 
reserves on a timely basis, with the objective of ensuring greater 
effectiveness of the Federal Reserve's open market operations. Under 
section 19 of the Federal Reserve Act, the Board is authorized to 
promulgate rules concerning the maintenance of reserves. 12 U.S.C. 
461(c). The Board does not believe that there are any Federal rules 
that duplicate, overlap, or conflict with the proposed rule.
    The proposal will affect only institutions that are weekly deposit 
reporters, which generally include depository institutions that have 
total deposits of $75 million or greater, as only these institutions 
currently are required to maintain reserves on a contemporaneous 
basis.5 The proposed amendments will not increase reporting 
or recordkeeping requirements associated with Regulation D for 
institutions that are weekly reporters, but will significantly simplify 
compliance with the rule for these institutions. The proposal therefore 
will not increase regulatory burden on small institutions generally and 
will reduce regulatory burden for those small institutions that are 
affected.
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    \5\ While weekly reporters that are Edge or Agreement 
corporations or U.S. branches or agencies of a foreign bank may have 
deposits of less than $75 million, the deposits of these entities 
represent only a portion of the total deposits of the larger 
organizations to which they belong.
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List of Subjects in 12 CFR Part 204

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

    For the reasons set out in the preamble, the Board proposes to 
amend part 204 of chapter II of title 12 of the Code of Federal 
Regulations 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. In Sec. 204.3, paragraph (c) is revised to read as follows:


Sec. 204.3  Computation and maintenance.

* * * * *
    (c) Computation of required reserves for institutions that report 
on a weekly basis. (1) Required reserves are computed on the basis of 
daily average balances of deposits and Eurocurrency liabilities during 
a 14-day period ending every second Monday (the ``computation 
period''). Reserve requirements are computed by applying the ratios 
prescribed in Sec. 204.9 to the classes of deposits and Eurocurrency 
liabilities of the institution. In determining the reserve balance that 
is required to be maintained with the Federal Reserve, the average 
daily vault cash held during the computation period is deducted from 
the amount of the institution's required reserves.
    (2) The reserve balance that is required to be maintained with the 
Federal Reserve shall be maintained during a 14-day period (the 
``maintenance period'') that begins on the third Thursday following the 
end of a given computation period.
* * * * *
    By order of the Board of Governors of the Federal Reserve 
System, November 6, 1997.
William W. Wiles,
Secretary of the Board.
[FR Doc. 97-29761 Filed 11-10-97; 8:45 am]
BILLING CODE 6210-01-P