[Federal Register Volume 74, Number 102 (Friday, May 29, 2009)]
[Rules and Regulations]
[Pages 25620-25629]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-12432]
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FEDERAL RESERVE SYSTEM
12 CFR Part 204
[Regulation D; Docket Nos. R-1334 and R-1350]
Reserve Requirements for Depository Institutions
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Final rule.
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SUMMARY: The Board is adopting, with certain revisions, its interim
final rule that amended Regulation D (Reserve Requirements of
Depository Institutions) to direct Federal Reserve Banks to pay
interest on certain balances held at Federal Reserve Banks by or on
behalf of certain depository institutions. The Board is also amending
Regulation D to authorize the establishment of limited-purpose
accounts, called ``excess balance accounts,'' at Federal Reserve Banks
for the maintenance of excess balances of eligible institutions. These
excess balance accounts are intended to permit eligible institutions to
earn interest on their excess balances without significantly disrupting
established business relationships with their correspondents.
DATES: This final rule is effective July 2, 2009.
FOR FURTHER INFORMATION CONTACT: Sophia H. Allison, Senior Counsel
(202/452-3565), or Dena L. Milligan, Attorney (202/452-3900), Legal
Division, or Seth Carpenter, Deputy Associate Director (202/452-2385),
or Margaret Gillis DeBoer, Section Chief (202/452-3139), Division of
Monetary Affairs; for information with respect to the clearing balance
policy and float calculations, contact Jonathan Mueller, Senior
Financial Analyst (202/530-6291), Division of Reserve Bank Operations
and Payment Systems; for users of Telecommunications Device for the
Deaf (TDD) only, contact 202/263-4869; Board of Governors of the
Federal Reserve System, 20th and C Streets, NW., Washington, DC 20551.
SUPPLEMENTARY INFORMATION:
I. Interest on Balances at Federal Reserve Banks
A. Background
For monetary policy purposes, section 19 of the Federal Reserve Act
(``the Act'') imposes reserve requirements on certain types of deposits
and other liabilities of depository institutions. Title II of the
Financial Services Regulatory Relief Act of 2006 (the ``2006 Act'')
(Pub. L. 109-351, 120 Stat. 1966 (Oct. 13, 2006)) amended section 19 of
the Act by authorizing the Federal Reserve Banks (``Reserve Banks'') to
pay earnings on balances maintained at the Reserve Banks by or on
behalf of certain depository institutions. The original effective date
of this authority was October 1, 2011. Section 128 of the Emergency
Economic Stabilization Act of 2008 (the ``2008 Act'') (Pub. L. 110-343,
122 Stat. 3765 (Oct. 3, 2008)) accelerated the effective date of this
authority to October 1, 2008.
Section 19 of the Act now provides that Reserve Banks may pay
earnings on balances held at the Reserve Banks by or on behalf of
certain depository institutions at least once each quarter at a rate
not to exceed the general level of short-term interest rates.
Depository institutions that are eligible to receive earnings on their
balances held at Reserve Banks include the institutions described in
section 19(b)(1)(A) of the Act \1\ and ``any trust company, corporation
organized under section 25A or having an agreement with the Board under
section 25, or any branch or agency of a foreign bank (as defined in
section 1(b) of the International Banking Act of 1978).'' \2\ The Act
also provides that the Board may prescribe regulations concerning the
payment of earnings, the distribution of earnings to the depository
institutions that maintain balances or on whose behalf balances are
maintained, and ``the responsibilities of depository institutions,
Federal Home Loan Banks, and the National Credit Union Administration
Central Liquidity Facility with respect to the crediting and
distribution of earnings attributable to balances maintained * * * in a
Federal Reserve bank by any such entity on behalf of depository
institutions.'' \3\
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\1\ Section 19(b)(1)(A) defines ``depository institution'' as
``(i) any insured bank as defined in section 3 of the Federal
Deposit Insurance Act or any bank which is eligible to make
application to become an insured bank under section 5 of such Act;
(ii) any mutual savings bank as defined in section 3 of the Federal
Deposit Insurance Act or any bank which is eligible to make
application to become an insured bank under section 5 of such Act;
(iii) any savings bank as defined in section 3 of the Federal
Deposit Insurance Act or any bank which is eligible to make
application to become an insured bank under section 5 of such Act;
(iv) any insured credit union as defined in section 101 of the
Federal Credit Union Act or any credit union which is eligible to
make application to become an insured credit union pursuant to
section 201 of such Act; (v) any member as defined in section 2 of
the Federal Home Loan Bank Act; [and] (vi) any savings association
(as defined in section 3 of the Federal Deposit Insurance Act) which
is an insured depository institution (as defined in such Act) or is
eligible to apply to become an insured depository institution under
the Federal Deposit Insurance Act.'' 12 U.S.C. 461(b)(1)(A).
\2\ Federal Reserve Act section 19(b)(12)(C), 12 U.S.C.
461(b)(12)(C).
\3\ Federal Reserve Act section 19(b)(12), 12 U.S.C. 461(b)(12).
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Regulation D, which implements the provisions of section 19 of the
Act, also provides that a depository institution must maintain its
required reserves in the form of cash in its vault, or if vault cash is
insufficient, in the form of a balance in an account at a Reserve
Bank.\4\ A depository institution may maintain balances at a Reserve
Bank in an account in its own name, or it may choose another
institution as its ``pass-through correspondent.'' \5\ Under a
[[Page 25621]]
``pass-through correspondent'' arrangement, the pass-through
correspondent holds its respondent's required reserve balances in the
correspondent's account at a Reserve Bank. The pass-through
correspondent is responsible for holding sufficient balances in its
account at the Reserve Bank to satisfy its own reserve balance
requirement (if any), its own contractual clearing balance (if any),
and the aggregate reserve balance requirements of its respondents. The
Reserve Bank's debtor-creditor relationship is solely with the pass-
through correspondent and not with any of the correspondent's
respondents. Accordingly, Regulation D provides that the balance in a
pass-through correspondent's account at a Reserve Bank represents a
liability of the Reserve Bank solely to the correspondent,
notwithstanding the fact that part or all of that balance may represent
the funds of the correspondent's respondents.\6\ Consequently, a pass-
through correspondent must show the entire balance in its Reserve Bank
account on the correspondent's own balance sheet as an asset, even if
the balance consists, in whole or in part, of amounts that are passed
through on behalf of a respondent.\7\
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\4\ 12 CFR 204.5(a)(1) (formerly 12 CFR 204.3(b)(1)).
\5\ The 2006 Act amended section 19 of the Act to authorize
member banks to enter into pass-through account arrangements. Prior
to the 2006 Act, only nonmember banks were authorized to enter into
such arrangements. As published in today's Federal Register, the
Board is also amending Regulation D to conform the regulation to the
2006 Act.
\6\ 12 CFR 204.5(d)(3) (formerly 12 CFR 204.3(i)(2)).
\7\ Similarly, a correspondent that is not acting in a pass-
through capacity must also show its entire account balance at the
Reserve Bank as an asset on its own balance sheet. Regulation D,
however, does not specifically address correspondents other than
pass-through correspondents.
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B. Interim Final Rule on Payment of Interest on Balances at Federal
Reserve Banks
On October 9, 2008, the Board published an interim final rule
amending Regulation D to direct the Reserve Banks to pay interest on
balances held at Reserve Banks to satisfy reserve requirements
(``required reserve balances'') and balances held in excess of required
reserve balances and clearing balances (``excess balances'') (73 FR
5948 (Oct. 9, 2008)). The interim final rule directed Reserve Banks to
pay interest on such balances held by or on behalf of ``eligible
institutions.'' The interim final rule defined the new term ``eligible
institution'' to mean an institution eligible to earn interest on
balances held at the Federal Reserve Banks under the 2006 Act.
The interim final rule provided that Reserve Banks would pay
interest on required reserve balances at a rate equal to the average
targeted federal funds rate over the reserve maintenance period less 10
basis points and that Reserve Banks would pay interest on excess
balances at a rate equal to the lowest targeted federal funds rate
during the maintenance period less 75 basis points. Since publishing
the interim final rule, the Board has adjusted the method for
determining the rate of interest on excess balances three times (73 FR
65506 (Nov. 4, 2008), 73 FR 67713 (Nov. 17, 2008), 73 FR 78616 (Dec.
23, 2008)) and the method for determining the rate of interest on
required reserves balances twice (73 FR 67713 (Nov. 17, 2008), 73 FR
78616 (Dec. 23, 2008)). Currently, the rate of interest on both
required reserve balances and excess balances is \1/4\ percent.\8\
Additionally, in its December amendments, the Board amended the
regulation to specify that it may from time to time determine any other
rate for payment of interest on required reserve balances and excess
balances.
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\8\ 12 CFR 204.10(b).
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The interim final rule deemed any excess balance held by a pass-
through correspondent in the correspondent's account, when the
correspondent was not itself an eligible institution, to be held on
behalf of the pass-through correspondent's respondents. Further, the
interim final rule permitted, but did not require, pass-through
correspondents to pass back to their respondents the interest paid on
balances held on behalf of respondents. The interim final rule also
provided that when a pass-through correspondent passes back interest to
its respondents, such a payment is not a payment of interest on a
demand deposit for purposes of Regulation Q (12 CFR part 217). The
interim final rule also defined the new terms used therein.
C. Request for Public Comment and Summary of Comments
The Board requested comment on all aspects of the interim final
rule. In response, the Board received 19 comments, consisting of
comments from eight depository institutions, four financial institution
trade associations, two research organizations, and five individuals.
Two commenters fully supported the interim final rule, but made
suggestions regarding other aspects of Regulation D. Six commenters
expressed concerns about the potential adverse impact of the interim
final rule on correspondent-respondent relationships. Other commenters
expressed monetary policy concerns related to paying interest on
balances.
D. General Comments and Analysis
Two commenters supported paying interest on balances held at the
Reserve Banks by or on behalf of eligible institutions as a monetary
policy tool. One commenter noted that payment of interest on balances
at Reserve Banks provides depository institutions with ``a reasonable
option [for] needed liquidity.'' In contrast, six commenters stated
that paying interest on excess balances encouraged banks to remove
funds from the federal funds market, and thus, reduced inter-bank
lending and liquidity. One commenter suggested that, in order to avoid
negative effects on liquidity, the Federal Reserve should pay interest
on required reserve balances, but not on excess balances. One commenter
stated that paying interest on excess balances could encourage
financial institutions to neglect other markets where those
institutions could obtain higher returns. The Board also received one
comment on market conditions in general, but not specifically related
to paying interest on balances held at the Reserve Banks.
The Board has carefully considered the comments about the effects
of paying interest on balances at Reserve Banks. In the past, the
absence of interest payments on required reserve balances acted as a
tax on depository institutions' issuance of deposits subject to reserve
requirements. To the extent that depository institutions could not
satisfy reserve requirements with vault cash, they were required to
hold more balances than they otherwise would in a non-interest bearing
account at a Reserve Bank. Further, the absence of interest payments on
excess balances meant that, when reserve supply significantly exceeds
demand, the federal funds rate could fall to as low as zero.
The Board continues to believe that the ability to pay interest on
balances held at Reserve Banks promotes efficiency and stability of the
banking sector. Paying interest on required reserve balances also
eliminates much of the implicit reserve tax and lessens the incentives
for depository institutions to engage in reserve-avoidance behavior,
which absorbs real resources and diminishes the efficiency of the
banking system. By paying interest on excess balances, the Federal
Reserve can expand its balance sheet as necessary to provide sufficient
liquidity to support financial stability while implementing monetary
policy that is appropriate in light of macroeconomic objectives of
maximum employment and price stability.
[[Page 25622]]
In order to help foster trading in the federal funds market, the
Board has made adjustments to the rates at which the Reserve Banks pay
interest on required reserve balances and excess balances, and will
continue to evaluate, and make any necessary adjustments to, the
appropriate rate in light of evolving market conditions. Accordingly,
the Board has determined that the Reserve Banks will continue to pay
interest on required reserve and excess balances held at Reserve Banks
by or on behalf of eligible institutions.
One commenter expressed concern that under the interim final rule,
excess balances held by a correspondent on behalf of respondents
``would become demand deposits on the correspondent's balance sheet,''
and thus the correspondent would be required to hold reserves against
those balances. Prior to the implementation of the interim final rule,
a correspondent was required to hold reserves against any respondent
excess funds held as a deposit subject to immediate withdrawal by the
respondent. The implementation of paying interest on balances at
Reserve Banks has not changed the accounting and reporting treatment of
such balances for purposes of reserve requirements.
The remaining comments concerned reserve requirements generally,
limits on transfers from savings deposit accounts, and member-bank
pass-through arrangements. Two comments addressed Regulation D's
limitation on certain convenient transfers from savings deposits: One
comment suggested broadening the definition of ``in person'' transfer,
while the other comment suggested removing the numeric limitations on
certain convenient transfers from savings deposits. One commenter
recommended eliminating reserve requirements, while another commenter
recommended increasing reserve requirements ratios.
The Board is not exercising its authority at this time to eliminate
reserve requirements or to change any required reserve ratios at this
time, even though the 2008 Act made both authorities effective in 2008.
The Board may consider such changes in the future in the context of a
broader review of the role of reserve requirements in the conduct of
monetary policy. Finally, as explained in the companion Regulation D
rulemaking announced today, the Board is eliminating the prohibition on
member bank pass-through accounts and is amending the numeric
limitations on convenient transfers from savings deposits to remove the
sublimit that applied to checks and drafts.\9\
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\9\ See final amendments to Regulation D elsewhere in today's
Federal Register.
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E. Section-by-Section Analysis
1. Section 204.2(v) Definition of Clearing Balance
The interim final rule defined the new term ``clearing balance'' as
``the amount that an eligible institution holds to satisfy a
contractual clearing balance with a Federal Reserve Bank, in addition
to any required reserve balance.'' The Board received no comments on
this provision of the interim final rule. As part of the final rule,
the Board is adopting a definition of ``clearing balance'' that more
accurately reflects calculations of account balances and interest
payments. The final rule defines ``clearing balance'' as ``the average
balance held in an account at a Federal Reserve Bank by an institution
over a reserve maintenance period to satisfy its contractual clearing
balance with a Reserve Bank.'' Thus, the amount of funds an institution
actually maintains for clearing purposes may be different from its
``contractual clearing balance,'' which is the amount that the
institution has agreed to maintain, on average, over the reserve
maintenance period. Further, the phrase ``in addition to any required
reserve balance'' is unnecessary in light of the new definition of
``contractual clearing balance,'' which specifies that such amount is
in addition to the institution's reserve balance requirement.\10\
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\10\ See final amendments to Regulation D elsewhere in today's
Federal Register that define ``contractual clearing balance'' as
``an amount that an institution agrees or is required to maintain in
its account at a Federal Reserve Bank in addition to balances the
institution may hold to satisfy its reserve balance requirement.''
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As stated in the interim final rule, only certain institutions are
eligible to receive earnings on their balances at Reserve Banks
(``eligible institutions''). Accordingly, the interim final rule's
definition of ``clearing balance'' was restricted to ``eligible
institutions.'' Institutions that are not ``eligible institutions,''
however, may hold balances for clearing purposes in the institution's
Reserve Bank account. Therefore, the Board is adopting a definition of
``clearing balance'' that is not limited to institutions that are
eligible to receive earnings on balances at Reserve Banks. For ease of
reference, the final rule places all the definitions in a single
section of Regulation D (Sec. 204.2), and thus, the rule redesignates
Sec. 204.10(d)(1) as Sec. 204.2(v).
2. Section 204.2(y) Definition of Eligible Institution
Section 19(b)(12) of the Act permits Reserve Banks to pay interest
on balances held by or behalf of ``depository institutions.'' Because
section 19(b)(12)(C)'s definition of ``depository institution'' is
broader than the definition of that term in section 19(b)(1)(A) of the
Act and in Regulation D, the interim final rule used the new term
``eligible institution'' to refer to those ``depository institutions''
listed in section 19(b)(12)(C) that are eligible to receive interest on
their balances. The Board received no comment on this definition and is
retaining the current provision but moving it to the definitions
section of the regulation, redesignated as Sec. 204.2(y).
3. Section 204.2(z) Definition of Excess Balance
The interim final rule defined ``excess balance'' as ``the average
balance held in an account at a Federal Reserve Bank by or on behalf of
an eligible institution over a reserve maintenance period that exceeds
the sum of the required reserve balance and any clearing balance.'' The
Board received no comments on this definition and is retaining the
current provision but moving it to the definitions section of the
regulation, redesignated as Sec. 204.2(z), with one technical
amendment. Like the definition of ``clearing balance,'' discussed
supra, the interim final rule's definition of ``excess balance'' was
limited to eligible institutions. Because institutions other than
eligible institutions may maintain excess balances at Reserve Banks,
the Board is adopting a definition of ``excess balances'' in the final
rule that is not limited to ``eligible institutions.''
4. Section 204.2(bb) Definition of Required Reserve Balance
The interim final rule defined ``required reserve balance'' as
``the average balance held in an account at a Federal Reserve Bank by
or on behalf of an eligible institution over a reserve maintenance
period to satisfy the reserve requirements of this part.'' The Board
received no comments on this definition and is retaining the current
provision but moving it to the definitions section of the regulation,
with one technical amendment, redesignated as section 204.2(bb).
Because the term ``required reserve balance'' is used in Regulation D
in contexts other than paying earnings on balances at Reserve Banks,
the definition of the term in the final rule is not limited to
``eligible institutions.''
[[Page 25623]]
5. Section 204.2(cc) Definition of Targeted Federal Funds Rate
The interim final rule defined ``targeted federal funds rate'' as
``the federal funds rate established from time to time by the Federal
Open Market Committee.'' The Board received no comments on this
definition and is retaining the current provision but moving it to the
definitions section of the regulation, redesignated as Sec. 204.2(cc).
6. Section 204.10(a) Payment of Interest on Balances
The Board amended Regulation D to direct the Reserve Banks to pay
interest on required reserve balances and excess balances maintained at
Reserve Banks by or on behalf of an eligible institution. The Reserve
Banks make interest payments within the existing framework for reserve
computation and maintenance, which includes reserve averaging,
carryover provisions, and reserve deficiency charges. For both excess
balances and required reserve balances, Reserve Banks pay interest on
average balances maintained over the reserve maintenance period. This
approach is consistent with the current reserves framework under which
compliance with reserve requirements is measured over either a seven-
day or a fourteen-day reserve maintenance period, depending on the size
of the institution. Interest is credited to eligible institutions after
the close of the maintenance period (usually 15 days thereafter) in
order to apply reserve carryover provisions.
One commenter stated that paying interest on required reserve
balances rendered useless the current ``as-of adjustment'' process for
correction of errors from previous reserve maintenance periods. An as-
of adjustment is a memorandum item used by the Federal Reserve to
correct the effect of errors made in processing of checks or other
transactions on an institution's reserve position. These technical
adjustments are used when determining a depository institution's
required reserve balance and clearing balance for the payment of
interest and therefore remain useful.\11\ Accordingly, the Board is
adopting the current language in Sec. 204.10(a) as part of its final
rule.
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\11\ More detailed information about the ``as-of adjustment''
process is available in the Reserve Maintenance Manual, available at
http://www.frbservices.org/files/regulations/pdf/rmm.pdf.
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7. Section 204.10(b) Rate
The Board received no comments on the initial rate of interest on
required reserve balances. The Board received two comments on the
formula for the rate on excess balances. One commenter stated that the
initial rate paid on excess balances (the lowest targeted federal funds
rate during the reserve maintenance period less 75 basis points) and
the rate after the first adjustment to the formula for calculating the
interest rate on excess balances (the lowest targeted federal funds
rate during the reserve maintenance period less 35 basis points) were
too high in a ``dysfunctional market.'' The Board received one comment
that reducing the 75-basis point difference between the rate of
interest on excess balances and the targeted federal funds rate over
the reserve maintenance period exacerbated the ``untimely
implementation'' of the payment of interest on balances at Reserve
Banks, but that commenter did not propose an alternative rate. One
commenter suggested that the Board set the rate of interest on excess
balances at the effective federal funds rate, rather than the targeted
federal funds rate, so as to avoid artificially drawing funds to the
Reserve Banks.
The Board has continued to evaluate the rate of interest on
required reserve and excess balances and is not at this time changing
the rates from the current amount of \1/4\ percent. Flexibility to make
adjustments to the rates of interest in response to evolving market
conditions continues to be necessary. Accordingly, the Board is
retaining the current language of Sec. 204.10(b)(3), which provides
that the Board may revise from time to time the rates for payment of
interest on balances at Reserve Banks.
8. Section 204.10(c) Pass-Through Balances
a. Background
As noted above, the 2006 Act authorized Reserve Banks to pay
earnings on balances maintained at a Reserve Bank by or on behalf of
certain depository institutions. The 2006 Act also authorized the Board
to prescribe regulations concerning ``the responsibilities of
depository institutions, Federal Home Loan Banks, and the National
Credit Union Administration Central Liquidity Facility with respect to
crediting and distribution of earnings attributable to balance
maintained * * * in a Federal Reserve bank by any such entity on behalf
of depository institutions.'' \12\ Thus, the 2006 Act contemplated that
certain institutions (such as Federal Home Loan Banks) could hold
balances on behalf of depository institutions that were eligible to
earn interest on those balances, even if the correspondent institutions
were not themselves eligible to receive earnings on their own balances.
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\12\ Federal Reserve Act Sec. 19(b)(12)(B)(iii), 12 U.S.C.
461(b)(12)(B)(iii).
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b. Correspondents That Are Eligible Institutions
Under the interim final rule, Reserve Banks paid interest on
required reserve balances maintained on behalf of an eligible
institution. Where a pass-through correspondent is an eligible
institution, the required reserve balances in the correspondent's
account may include those balances held by the correspondent to meet
its own reserve requirement (if any), as well as those balances held to
meet its respondents' reserve requirements. The interim final rule also
permitted, but did not require, a pass-through correspondent to pass
back to its respondent interest paid on behalf of that respondent's
required reserve balances.
The Board requested comment on whether it should permit or require
a correspondent to pass back interest to its respondents. In response,
the Board received four comments. Two commenters supported permissive
passing back of interest in order to preserve the parties' flexibility
in negotiating contractual relationships. One commenter supported
requiring passing back of interest, stating that permitting
correspondents to retain the interest would be unfair. This commenter
also suggested delaying the effective date of a pass-back requirement
to two years after adoption of a final rule in order to provide
correspondents with an opportunity ``to modify accounting systems and
business models.'' Finally, one commenter stated that paying interest
on pass-through balances as a lump-sum was a poor service because doing
so places responsibility on the correspondent to calculate the amount
of interest to be passed back to each respondent.
Under the final rule, correspondents that are eligible institutions
will continue to be permitted, but not required, to pass back to their
respondents interest earned on balances held on behalf of the
respondents. As these correspondents are eligible to earn interest on
their own account balances, permitting them to make arrangements with
their respondents with respect to passing back of interest is
consistent with the statutory provisions. In addition, permissive, but
not required, passing back of interest avoids interfering with existing
correspondent-respondent arrangements. Correspondents structure their
[[Page 25624]]
relationships with respondents in a variety of ways, depending on
factors such as services provided or balances held. Respondents may
adjust the level of balances held with a correspondent in response to
changes in the rates received on those balances, as well as in response
to other factors. Respondents that are not satisfied with their
existing correspondent arrangements may take steps to renegotiate the
terms of the relationship or enter into a relationship with a different
correspondent.
Additionally, permitting, but not requiring, the passing back of
interest to respondents is consistent with the treatment of reserve
deficiency charges in Regulation D.\13\ Reserve Banks assess deficiency
charges to the account of the pass-through correspondent for any
deficiency in its account balances, even if the deficiency is
attributable to the correspondent's respondent. Then, the pass-through
correspondent determines whether to assess a deficiency charge on its
respondent, or whether to make adjustments to other aspects of the
correspondent-respondent relationship in response to the deficiency.
Accordingly, the Board has determined to continue permitting, but not
requiring, correspondents that are eligible institutions to pass back
to respondents earnings on both required reserve balances and excess
balances held on behalf of the respondents.
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\13\ See 12 CFR 204.5(d)(4)(i) (formerly 12 CFR
204.3(i)(3)(ii)).
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c. Correspondents That Are Not Eligible Institutions
Under the interim final rule, Reserve Banks paid interest on
required reserve balances maintained on behalf of an eligible
institution, even if the pass-through correspondent was not an eligible
institution. Where a pass-though correspondent is not an eligible
institution, the required reserve balances held in the correspondent's
account are solely those balances held to meet its respondent's reserve
requirements.
The interim final rule also provided that Reserve Banks pay
interest on excess balances maintained on behalf of an eligible
institution, even if the pass-through correspondent is not an eligible
institution but has excess balances in its account. Because Reserve
Banks cannot determine whether all or part of the excess balances in a
pass-through correspondent's account are held on behalf of respondents
without imposing additional reporting or accounting requirements, the
interim final rule deemed all of the excess balances held in an account
of a correspondent that is not an eligible institution to be held on
behalf of the correspondent's respondents.
The Board requested comment on alternative methods for determining
whether all or part of the excess balances in a correspondent's account
at a Reserve Bank are held on behalf of the respondent where the
correspondent is not an eligible institution. The Board received one
comment in support of deeming all excess balances held in an account of
a pass-through correspondent that is not an eligible institution to be
held on behalf of the correspondent's respondents. This commenter
stated that deeming the excess balances to be held on behalf of the
respondents would avoid imposing ``unnecessarily burdensome'' reporting
requirements on correspondents and provide flexibility in structuring
correspondent-respondent relationships. One commenter, however,
indicated that additional reporting requirements would not be
burdensome because correspondents already maintain records of excess
balances held on behalf of respondents.
Since the implementation of paying interest on balances at Reserve
Banks, some correspondents that are not eligible institutions are
holding extremely high excess balances relative to the total assets of
their respondents, indicating that these balances may not be held on
behalf of those respondents. In order to carry out the intent of the
2006 Act with respect to institutions that are and are not eligible to
receive interest on balances held at Reserve Banks, the final rule will
no longer deem any excess balance in the account of a correspondent
institution that is not an eligible institution to be held on behalf of
respondents. Thus, any excess balance in the account of a correspondent
that is not an eligible institution will be attributable to the
correspondent, and no earnings will be paid on the excess balance in
that account. The respondents of a correspondent that is not an
eligible institution may elect to participate in an excess balance
account (discussed infra) in order to receive earnings on excess
balances.
Required reserve balances held on behalf of respondents by
correspondents that are not eligible institutions, however, will
continue to receive interest, which will be posted to the
correspondent's master account. As discussed supra, where a pass-
through correspondent is not an eligible institution, the required
reserve balances held in the correspondent's account will be solely
those held to meet its respondent's reserve requirements. Further,
because any excess balance held in the account of a correspondent that
is not an eligible institution will not receive interest, any earnings
received on balances in such an account will be attributable solely to
the required reserve balances of the correspondent's respondents.
Unlike the interim final rule, the final rule will require
correspondents that are not eligible institutions to pass back to their
respondents all interest credited to the correspondent's accounts. The
correspondent is responsible for calculating the amount of interest
apportioned to each of its respondents.
d. Exemption From Regulation Q
Under the interim final rule, passing back interest to respondents
is not a payment of interest on a demand deposit for purposes of
Regulation Q (12 CFR part 217). One commenter stated that by paying
interest on ``transaction accounts,'' the Board has ``created an unfair
playing field'' by not allowing other correspondent banks to do the
same for the same types of accounts held with them. Another commenter
expressed concern that requiring a correspondent to hold excess
balances on its balance sheet negated the FDIC's insurance coverage of
the respondent's demand deposit account by transforming the
respondent's account from a non-interest-bearing transaction account to
an interest-bearing transaction account.
The Board recognizes that, although Reserve Banks may pay interest
on balances that are subject to immediate withdrawal, many private
sector banks are prohibited by law from doing so.\14\ The Board has
long sought statutory amendments to eliminate the prohibition against
interest on demand deposits. The 2006 Act, however, expressly
authorizes the Board to prescribe regulations to allow pass-through
correspondents to pass back interest to respondents. Congress,
therefore, contemplated that pass-through correspondents could pass
back part or all of the interest received in a correspondent's Reserve
Bank account to its respondents, even though the payment of interest on
demand deposit accounts is otherwise prohibited. Accordingly, the Board
has specified in the final rule that when a pass-through correspondent
passes back to its respondent any interest paid on balances held on
behalf of the
[[Page 25625]]
respondent, such a payment is not a payment of interest on a demand
deposit for purposes of Regulation Q.\15\ The Board received no other
comments on this provision and is retaining the current language in the
final rule, with the exception of one technical amendment for clarity.
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\14\ For example, section 19(i) of the Act provides: ``[no]
member bank shall, directly or indirectly, by any device whatsoever,
pay any interest on any deposit which is payable on demand * * * ''
See Regulation Q (Prohibition Against Payment of Interest on Demand
Deposits), which implements section 19(i) (12 CFR 217).
\15\ See 12 CFR 329.2 (Payment of interest) and 12 CFR 329.3
(Exception to prohibition on payment of interest) for implications
to FDIC regulations regarding payment of interest.
---------------------------------------------------------------------------
II. Excess Balance Accounts
A. Background
1. Correspondent-Respondent Relationship
Since the implementation of the payment of interest on excess
balances of eligible institutions, eligible institutions that are
respondents of a pass-through correspondent may receive earnings on
excess balances in two ways. First, the respondents of a pass-through
correspondent may direct the correspondent to sell the respondent's
excess funds in the federal funds market. Second, under the interim
final rule adopted in October, the respondents may direct the
correspondent to hold the respondent's excess funds as excess balances
in the correspondent's account at a Reserve Bank. These two approaches
have different implications for the correspondent's balance sheet and
its leverage ratio for capital adequacy purposes. If a correspondent
holds its respondents' excess balances in the correspondent's account
at a Reserve Bank, the correspondent's account balance at the Reserve
Bank increases. Accordingly, the correspondent has more assets on its
balance sheet, resulting in a lower leverage ratio for capital adequacy
purposes. In contrast, if the correspondent sells the funds in the
federal funds market on the respondent's behalf, the balances are
transferred to the entity purchasing them. This transaction is effected
by a debit to the correspondent's account at a Reserve Bank and a
credit to the purchaser's account at a Reserve Bank. All other things
being equal, the correspondent's Reserve Bank account balance is lower.
The correspondent has fewer assets on its balance sheet, and therefore,
has a higher regulatory leverage ratio.
When the federal funds rate is below the rate the Reserve Banks pay
on excess balances, respondents have an incentive to shift the
investment of their excess funds away from sales of federal funds
through their correspondents, and toward holding those funds as excess
balances in accounts at the Reserve Banks. Although correspondents may
hold those funds as excess balances at a Reserve Bank on behalf of the
respondent, doing so could result, in some cases, in a significant
reduction in a correspondent's regulatory leverage ratio for capital
adequacy purposes. Alternatively, a respondent could open its own
account at a Reserve Bank; doing so, however, could potentially disrupt
part or all of the respondent's established relationship with its
correspondent.
2. Comments Received on Paying Interest on Excess Balances Held by
Correspondents on Behalf of Respondents
In response to its interim final rule that implemented payment of
interest on balances at Reserve Banks, the Board received comments
concerning the effects of paying interest on excess balances on
correspondent-respondent relationships. Five commenters stated that
paying interest on excess balances, in conjunction with unusual market
conditions, was causing respondents to shift funds away from
correspondents to the Reserve Banks; thus, disrupting correspondent-
respondent relationships. Three commenters stated that respondents'
increasing demands to have correspondents hold funds as excess balances
(as opposed to selling the funds in the federal funds market) was not
only decreasing the availability of federal funds, but was also
requiring correspondents to maintain more capital to raise their
leverage ratio for capital adequacy purposes. One commenter expressed
concern that, without changes to the interim final rule, the long-term
viability of correspondent-respondent relationships would be
jeopardized.
The Board received five comments proposing solutions to mitigate
the adverse effects on correspondent-respondent relationships of paying
interest on excess balances. Four commenters proposed that the Board
authorize new accounts for the purpose of holding excess balances that
did not require correspondents to hold the respondents' excess balances
on their balance sheets. One commenter suggested that the Reserve Banks
purchase excess funds directly from correspondents at the rate of
interest on excess balances.
B. Excess Balance Account Proposed Rule
In response to these concerns, the Board requested comment in
January 2009 on a proposal to amend Regulation D to authorize the
creation of excess balance accounts (``EBAs'') (74 FR 5628 (Jan. 30,
2009)). The proposal would authorize the establishment of EBAs for
maintaining the excess balances of participating eligible institutions
(``EBA Participants''). The EBA Participants would designate another
institution to act as their agent (``EBA Agent'') for purposes of
general account management, including transferring excess balances in
and out of the EBA and apportioning the interest paid on excess
balances. The Board proposed that the EBA Agent could not comingle its
funds in the EBA. The excess balances in the EBA would represent a
liability of the Reserve Bank solely to the EBA Participants. Neither
the EBA Participants nor the EBA Agent could maintain required reserve
or clearing balances in the EBA or use the EBA for general payment or
other activities. The Board stated in the proposal that it would re-
evaluate the continuing need for EBAs when more normal market
functioning resumes.
C. General Comments and Analysis
In response to its request for comment on the EBA proposal, the
Board received 61 comments, representing comments from 44 depository
institutions, two financial holding companies, one Federal Home Loan
Bank, five financial institution trade associations, and three
individuals. Sixteen commenters supported the proposal in its entirety.
Two of these commenters sought clarification on technical aspects of
the proposed rule on EBAs. Several commenters supported EBAs in
general, but suggested that EBA Participants be able to designate more
than one institution to act as EBA Agent. One commenter found no
significant value in the EBA proposed rule, citing high administrative
costs and few benefits. One commenter raised concerns about the impact
of EBAs on existing business models if balances are moved into Reserve
Bank accounts. Two commenters encouraged the Board to evaluate the
continuing need for EBAs when more normal market functioning resumes;
one of these commenters suggested the Board seek public comment as part
of its re-evaluation.
The Board has carefully considered the comments and has determined
to authorize the establishment of EBAs, largely as described in the
proposal. The Board believes that authorizing EBAs should reduce the
potential for significant disruptions to long-standing correspondent-
respondent relationships in the current market environment. Because the
excess balances of EBA Participants in EBAs would be Reserve Banks'
direct liabilities to EBA Participants, correspondents would not
[[Page 25626]]
show those balances on their balance sheets. Therefore, the adverse
leverage ratio impact of correspondents of holding respondent excess
balances in the correspondent's account would be mitigated. Further,
participation in an EBA, either as a participant or agent, is
voluntary. Thus, if an institution does not believe that an EBA will
provide additional value, the institution does not have to participate
in an EBA or act as an EBA Agent. As stated in the proposal, the Board
will re-evaluate the continuing need for EBAs when more normal market
functioning resumes.
D. Section-by-Section Analysis
1. Section 204.2(aa) Definition of Excess Balance Account
The Board proposed to define ``excess balance account'' as ``an
account at a Reserve Bank pursuant to Sec. 204.10(e) of this part that
is established by one or more eligible institutions and in which only
excess balances of the participating eligible institutions may at any
time be maintained.'' The proposed rule explicitly excludes excess
balance accounts from the definition of ``pass-through accounts.''
The Board received three comments seeking clarification as to
whether each EBA Participant needed to open an EBA or whether the EBA
Participants could designate an EBA Agent to open an EBA on behalf of
the EBA Participants. To establish an EBA, eligible institutions that
desire to become EBA Participants must designate one other institution
to act as the EBA Agent for that EBA. EBA Participants will be required
to execute EBA agreements with the Reserve Bank where the EBA Agent
maintains its own master account (``Administrative Reserve Bank'').
Similarly, the EBA Agent will be required to execute an EBA agreement
with its Administrative Reserve Bank. In order to facilitate
establishing EBAs and to reduce administrative burdens, EBA
Participants will deliver their executed EBA agreement to their EBA
Agent. The EBA Agent then will deliver the executed EBA agreements of
all the EBA Participants for which it acts as EBA Agent to its
Administrative Reserve Bank. The Board is adding language to the
definition of ``excess balance account'' to clarify that eligible
institutions establish an EBA through the EBA Agent. The Board is also
making a technical amendment to the definition to reflect renumbering
of sections elsewhere in Regulation D. The Board is also redesignating
the definition as Sec. 204.2(aa) (from Sec. 204.10(d)(6) in the
proposed rule) in connection with moving the definition into the
general definition section of Regulation D.
2. Section 204.10(d)(1) Establishing an EBA
The proposed rule (at Sec. 204.10(e)(1)) provided that a Reserve
Bank may establish an excess balance account for eligible institutions.
The proposed rule also provided that the excess balances in the EBA are
the property of the eligible institutions that participate in the EBA
and represent a liability of the Reserve Bank solely to the
participating institution. The Board received no comments on this
portion of the proposal.
The Board is deleting the phrase that states the excess balances
are the property of the eligible institutions. This phrase is not
necessary and its deletion does not change the substance of the
provision, which continues to state that excess balances represent a
liability of the Reserve Bank solely to the participating institutions.
The Board is otherwise adopting the provision as proposed.
3. Section 204.10(d)(2) EBA Agent
a. General Account Management
The proposed rule on EBAs provided that the EBA Participants would
authorize another institution, the EBA Agent, to act as agent to
perform general account management, including transferring excess
balances of EBA Participants into and out of the EBA. One commenter
expressed concerns about the feasibility for the EBA Agent of passing
back interest. Specifically, the commenter sought clarification as to
whether an EBA Agent could distribute the earnings to the EBA
Participants at a different rate than the Reserve Banks paid out the
earnings, as using the same formula as the Reserve Banks would require
significant programming efforts. One commenter requested that the Board
delay the effective date of the rule 120 days after publication to
provide sufficient time to adjust operating systems to accommodate the
new EBA Agent services.
The EBA program contemplates that Reserve Banks will calculate
interest on the aggregate balance in the EBA, rather than calculate the
amount of interest attributable to each EBA Participant's balances in
the EBA. The EBA Participants will be responsible for instructing the
EBA Agent with respect to the disposition of the interest. For example,
an EBA Participant and an EBA Agent may by agreement provide that all
interest attributable to an EBA Participant should be paid to the EBA
Participant, or may by agreement provide that the EBA Agent may retain
part or all of the interest paid as part of the EBA Agent's
compensation for providing EBA Agent services or other services for the
EBA Participant. Thus, the EBA Agent is not required by regulation to
utilize the same formula for the disposition of earnings to EBA
Participants as the Reserve Banks use for calculating interest on the
EBA's aggregate balance. Moreover, the Board anticipates that the
Reserve Banks will establish terms and conditions such that each EBA
Agent will manage only one EBA.\16\ Because acting as an EBA Agent is
voluntary, the Board does not believe it necessary to delay the
effective date of the rule. The Board is making one additional
technical amendment to the final rule to replace the proposed phrase
``agent of the eligible institutions'' with the phrase ``agent of the
participating institutions.'' This amendment is intended to provide
consistent usage of terms throughout the final rule and does not
represent a substantive change to the provision.
---------------------------------------------------------------------------
\16\ An EBA Agent that wishes to segregate different types of
respondents from one another can set up subaccounts for the EBA.
---------------------------------------------------------------------------
b. Participation in One EBA
The proposed rule provided that the EBA Participants would
authorize another institution to act as its EBA Agent with respect to
an EBA. The proposed rule, however, did not specify whether an EBA
Participant could participate in more than one EBA. One commenter
recommended removing the requirement that an EBA Participant designate
only one institution as its EBA Agent, while not specifically
suggesting that an EBA Participant be able to designate more than one
institution as EBA Agent or to participate in more than one EBA. This
commenter stated that requiring an EBA Participant to designate only
one EBA Agent was unnecessary as most respondents ``do not participate
in multiple correspondent agency programs.'' Some commenters, however,
suggested that the final rule should permit EBA Participants to
participate in more than one EBA.\17\ These commenters stated that
respondents currently use more than one correspondent institution for
selling funds in the Federal funds market, among other services, in
order to diversify credit risk, obtain better
[[Page 25627]]
rates, and for liquidity contingency planning purposes.
---------------------------------------------------------------------------
\17\ Because the proposed rule on EBAs limits EBA Participants
to designating one institution as EBA Agent for the EBA, an EBA
Participant that wished to designate multiple institutions as EBA
Agent would need to participate in multiple EBAs to do so.
---------------------------------------------------------------------------
While the Board recognizes that certain respondents may wish to
maintain relationships with more than one correspondent for various
purposes, the Board believes that permitting each eligible institution
to participate in only one EBA is appropriate. Specifically, multiple
EBAs are not necessary in order to diversify credit risk, as with
federal funds sales, because there is no credit risk associated with
maintaining a balance in an account at a Reserve Bank. Similarly, the
need to use multiple agents to manage liquidity risk does not exist in
the context of EBAs, because excess balances in an EBA are highly
liquid. Moreover, any potential disruption to existing correspondent-
respondent relationships is lessened by the fact that each EBA
Participant can choose each day whether to sell funds in the federal
funds market (through any number of correspondent institutions), to
place the funds at a Federal Reserve Bank through their (single) EBA
Agent, or to select a combination of the two. Accordingly, EBA
Participants may maintain relationships with more than one
correspondent notwithstanding the fact that an EBA Participant
participates in only one EBA at a Reserve Bank.
Restricting eligible institutions to participating in only one EBA
is consistent with Regulation D's treatment of correspondent-respondent
relationships in pass-through arrangements, where each respondent uses
a single correspondent to pass through the respondent's required
reserve balances.\18\ This single-correspondent structure also reflects
the current Federal Reserve policy that permits each chartered
depository institution to maintain a single master account at one
Reserve Bank. Such a structure provides streamlined control and a
single coordination point for the Reserve Banks to manage the debtor-
creditor relationship with each depository institution. This structure
also helps minimize the risk of loss to the Federal Reserve in the
event the account holder becomes insolvent. Authorizing the
establishment of EBAs loosens such control and coordination to the
extent that it potentially permits EBA Participants to have accounts at
two Reserve Banks: one account in the district where the EBA
Participant itself is located, and an EBA in the district where the EBA
Agent is located. Given that offering EBAs is motivated largely by
unusual financial market conditions in which the effective federal
funds rate has been below the rate on excess balances, and given that
EBAs are being offered on a temporary basis, staff believes that
permitting EBA Participants to potentially have an EBA and a master
account at different Reserve Banks is appropriate to ensure that
respondents are able to hold excess balances within their existing
correspondent-respondent relationships. A more significant expansion,
however, involving multiple account relationships by permitting
eligible institutions to participate in more than one EBA, introduces
further complexity into the oversight and coordination for the Reserve
Banks for managing the debtor-creditor relationship without a
substantial justification for doing so.
---------------------------------------------------------------------------
\18\ 12 CFR 204.5(d)(1) (formerly 12 CFR 204.3(i)(1)).
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The Board believes that permitting eligible institutions to
participate in one EBA, but not more, at this time benefits both
correspondent and respondent by allowing respondents to place excess
balances at a Reserve Bank in a way that does not increase the leverage
ratio for the correspondent, therefore mitigating disruption to
correspondent-respondent relationships. This approach also does not
significantly increase the complexity for the Reserve Banks in managing
these accounts and the associated debtor-credit relationships. In
addition, the significance of the demand for participation in multiple
EBAs is not clear from the comments received, because only a few
commenters expressed an interest in multiple EBAs. Accordingly, the
Board expects that, absent a compelling reason to do otherwise at this
time, the Reserve Banks will set terms and conditions with respect to
EBAs that will limit each eligible institution to participation in one
EBA.
c. EBA Agent Must Maintain Separate Master Account
The proposed rule also provided that the EBA Agent ``must maintain
its own separate account at a Reserve Bank'' and that the EBA Agent may
not commingle its own funds in the EBA. The proposal indicated that the
EBA would be established at the Reserve Bank where the EBA Agent
maintains its own master account, although the proposed regulatory text
did not reflect this. Accordingly, the final rule adds language to the
regulatory text to specify that the EBA must be held at the Reserve
Bank where the EBA Agent maintains its master account.
d. Record-Keeping
The supplementary information to the proposed rule stated that the
EBA Agent would be responsible for maintaining records adequate to
demonstrate the level of excess balances in the EBA of each EBA
Participant. The Board received five comments regarding record-keeping
requirements for the EBA Agent. One commenter suggested the Board
clarify the record-keeping requirements of an EBA Agent with respect to
the EBA. Three commenters stated that EBA Agents should be responsible
for maintaining adequate records that could demonstrate the level of
excess balances in the EBA of each EBA Participant. Additionally, one
commenter indicated that maintaining such records would not be
difficult for EBA Agents because correspondents maintain daily,
detailed records of respondents' ``agency'' funds. Because the
informational needs of each Reserve Bank with respect to each EBA may
vary, the Board has not included such specifications in the final rule.
Rather, the Board believes that setting forth the EBA Agent's record-
keeping responsibilities is more appropriately done through account
agreements with the Reserve Banks or through account terms and
conditions.
4. Section 204.10(d)(3) Balances Maintained in EBA
The proposed rule provided that, at any given time, only excess
balances of an eligible institution may be maintained in an EBA. The
proposed rule also provided that balances maintained in an EBA would
not satisfy any institution's reserve balance requirement or
contractual clearing balance. The Board received two comments on this
provision, both seeking clarification on how EBA Participants should
classify balances held in an EBA.
Balances held in an EBA by an EBA Participant represent a liability
of the Reserve Bank to the EBA Participants and not to the EBA Agent.
Therefore, for reporting and accounting purposes, an EBA Participant
should treat balances held in an EBA as balances held at a Reserve Bank
and should report such balances as ``balances due from a Federal
Reserve Bank'' for purposes of FR 2900 deposit reporting.\19\ The Board
received no other comments on this provision and is adopting the
proposed provision, with minor editorial revisions, redesignated as
Sec. 204.10(d)(3).
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\19\ See Instructions for Form FR 2900 (Sep. 2003) at p. 39, no.
1 (http://www.federalreserve.gov/reportforms/forms/FR_2900cb20071001_i.pdf).
---------------------------------------------------------------------------
5. Section 204.10(d)(4) Restrictions on Use of EBA
The proposed rule provided that neither EBA Participants nor the
EBA Agent may use the EBA for general
[[Page 25628]]
payments or other activities. The Board received one comment on this
provision, seeking clarification on restrictions as to when the EBA
Agent would be required or allowed to move excess balances into the
account.
The final rule imposes no regulatory restrictions on when an EBA
Agent may or must transfer funds into and out of an EBA. The EBA Agent,
however, must manage the EBA such that the account does not incur
either intra-day or overnight overdrafts. The Board is adopting this
provision as proposed, redesignated as Sec. 204.10(d)(4).
6. Section 204.10(d)(5) Payment of Interest on Balances in EBA
The Board proposed that interest would be paid on excess balances
in accordance with section 204.10(b)(2). The Board received no comments
on this provision. In light of the amendments to Regulation D since the
proposed rule on EBAs setting forth the Board's authority to provide
that interest on excess balances be paid at a different rate than the
rate set forth in section 204.10(b)(2), the final rule will reflect
that authority set forth in current section 204.10(b)(3).
7. Section 204.10(d)(6) Additional Terms and Conditions
The proposed rule on EBAs was silent about the authority of Reserve
Banks to establish additional terms and conditions with respect to the
operation of an EBA. The Board, however, is adding new Sec.
204.10(d)(6) to the final rule to clarify that the Reserve Banks have
the authority to set additional terms and conditions with respect to
the operation of EBAs, to the extent that such terms and conditions are
consistent with provisions in Regulation D. Such terms and conditions
include, but are not limited to, terms of service, fees for services,
conditions under which an institution may act as agent for an EBA,
restrictions on the EBA Agent's account management, penalties for
noncompliance with the terms of Regulation D's provisions on EBAs or
with the additional terms and conditions established by the Reserve
Banks, and termination of EBAs. The provision provides examples of the
operational aspects for which the Reserve Banks may set forth
additional terms and conditions, but indicates that those categories of
additional terms and conditions are illustrative.
III. Clearing Balance Policy Adjustments
At the time it adopted the interim final rule, the Board made
adjustments to its clearing balance policy so as to discontinue
practices related to reserve requirements that were no longer necessary
in light of the amendments to Regulation D. First, the Board eliminated
the ``imputed reserve requirement adjustment'' to earnings credits
because reserves on respondents' balances would earn interest at the
rate on required reserve balances. Second, the Board eliminated the
``marginal reserve requirement adjustment'' because respondents would
be indifferent between holding balances at a Reserve Bank (and earning
the rate on required reserves balances) and maintaining the balance at
a private-sector correspondent (taking a due from deduction, and
investing those funds). Finally, the Board eliminated the imputed
reserve requirement adjustment and the adjustment for cash items in the
process of collection that are applied when measuring float costs to be
recovered by Reserve Bank priced services. The Board received no
comments on its adjustments to the clearing balance policy and is
retaining that policy as previously adopted.
IV. Transitional Adjustments in Mergers
The interim final rule eliminated the provisions in Regulation D
associated with merger-related adjustments to reserve requirements,
applicable to mergers completed on or after October 9, 2008. The
provisions were set forth in Sec. 204.4. The Board received no
comments on this issue and is not reinstating the provisions.
V. Solicitation of Comments Regarding Use of ``Plain Language''
Section 722 of the Gramm-Leach-Bliley Act of 1999 (12 U.S.C. 1408)
requires the Board to use ``plain language'' in all final rules. The
Board has sought to present this final rule in a simple and
straightforward manner. The Board received no comments on whether the
interim final rule and proposed rule were clearly stated and
effectively organized or on how the Board might make the text easier to
understand.
VI. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) requires an agency that is
issuing a final rule to prepare and make available a regulatory
flexibility analysis that describes the impact of the final rule on
small entities. 5 U.S.C. 603(a). The RFA provides that an agency is not
required to prepare and publish a regulatory flexibility analysis if
the agency certifies that the final rule will not have a significant
economic impact on a substantial number of small entities. 5 U.S.C.
605(b).
Pursuant to section 605(b), the Board certifies that this final
rule will not have a significant economic impact on a substantial
number of small entities. The rule implements a program for paying
interest on certain balances held by eligible institutions at the
Federal Reserve Banks and will benefit small institutions that receive
such interest. Additionally, the rule permits, but does not require,
institutions to establish EBAs at Reserve Banks. The impact on
institutions choosing to establish EBAs at Reserve Banks would be
positive, not adverse, because EBA Participants would be able to earn
the rate payable on excess balances in a debtor-creditor relationship
directly with a Reserve Bank without disrupting established
correspondent-respondent relationships. Likewise, the impact would be
positive, not adverse, on institutions that choose to establish EBAs
but that are not currently in correspondent-respondent relationships,
as such institutions would be expected to establish EBAs only to the
extent that EBA Agents and EBA Participants found it mutually
beneficial to do so. There are no new reporting, recordkeeping, or
other compliance requirements associated with this rule.
VII. Paperwork Reduction Act
In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.
3506; 5 CFR Part 1320 Appendix A.1), the Board reviewed the final rule
under the authority delegated to the Board by the Office of Management
and Budget. No collections of information pursuant to the Paperwork
Reduction Act are contained in the final rule.
List of Subjects in 12 CFR Part 204
Banks, banking, Reporting and recordkeeping requirements.
Authority and Issuance
0
For the reasons set forth in the preamble, the Board is amending 12 CFR
part 204 as follows:
PART 204--RESERVE REQUIREMENTS OF DEPOSITORY INSTITUTIONS
(REGULATION D)
0
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.
0
2. Amend Sec. 204.2 by adding paragraphs (v), (y), (z), (aa), (bb),
and (cc) to read as follows:
Sec. 204.2 Definitions.
* * * * *
[[Page 25629]]
(v) Clearing balance means the average balance held in an account
at a Federal Reserve Bank by an institution over a reserve maintenance
period to satisfy its contractual clearing balance with a Reserve Bank.
* * * * *
(y) Eligible institution means--
(1) Any depository institution as described in Sec. 204.1(c) of
this part;
(2) Any trust company;
(3) Any corporation organized under section 25A of the Federal
Reserve Act (12 U.S.C. 611 et seq.) or having an agreement with the
Board under section 25 of the Federal Reserve Act (12 U.S.C. 601 et
seq.); and
(4) Any branch or agency of a foreign bank (as defined in section
1(b) of the International Banking Act of 1978, 12 U.S.C. 3101(b)).
(z) Excess balance means the average balance held in an account at
a Federal Reserve Bank by or on behalf of an institution over a reserve
maintenance period that exceeds the sum of the required reserve balance
and any clearing balance.
(aa) Excess balance account means an account at a Reserve Bank
pursuant to Sec. 204.10(d) of this part that is established by one or
more eligible institutions through an agent and in which only excess
balances of the participating eligible institutions may at any time be
maintained. An excess balance account is not a ``pass-through account''
for purposes of this part.
(bb) Required reserve balance means the average balance held in an
account at a Federal Reserve Bank by or on behalf of an institution
over a reserve maintenance period to satisfy the reserve requirements
of this part.
(cc) Targeted federal funds rate means the federal funds rate
established from time to time by the Federal Open Market Committee.
0
3. Revise Sec. 204.10 to read as follows:
Sec. 204.10 Payment of interest on balances.
(a) Payment of interest. The Federal Reserve Banks shall pay
interest on balances maintained at Federal Reserve Banks by or on
behalf of an eligible institution as provided in this section and under
such other terms and conditions as the Board may prescribe.
(b) Rate. Except as provided in paragraph (c) of this section,
Federal Reserve Banks shall pay interest at the following rates--
(1) For required reserve balances, at \1/4\ percent;
(2) For excess balances, at \1/4\ percent; or
(3) For required reserve balances or excess balances, at any other
rate or rates as determined by the Board from time to time.
(c) Pass-through balances. A pass-through correspondent that is an
eligible institution may pass back to its respondent interest paid on
balances held on behalf of that respondent. In the case of balances
held by a pass-through correspondent that is not an eligible
institution, a Reserve Bank shall pay interest only on the required
reserve balances held on behalf of one or more respondents, and the
correspondent shall pass back to its respondents interest paid on
balances in the correspondent's account. Any passing back of interest
by a correspondent to a respondent under this subsection is not a
payment of interest on a demand deposit for purposes of Part 217 of
this chapter (Regulation Q).
(d) Excess balance accounts. (1) A Reserve Bank may establish an
excess balance account for eligible institutions under the provisions
of this paragraph (d). Notwithstanding any other provisions of this
part, the excess balances of eligible institutions in an excess balance
account represent a liability of the Reserve Bank solely to those
participating eligible institutions.
(2) The participating eligible institutions in an excess balance
account shall authorize another institution to act as agent of the
participating institutions for purposes of general account management,
including but not limited to transferring the excess balances of
participating institutions in and out of the excess balance account. An
excess balance account must be established at the Reserve Bank where
the agent maintains its master account, unless otherwise determined by
the Board. The agent may not commingle its own funds in the excess
balance account.
(3) No required reserve balances or clearing balances may be
maintained at any time in an excess balance account, and balances
maintained in an excess balance account will not satisfy any
institution's reserve balance requirement or contractual clearing
balance.
(4) An excess balance account must be used exclusively for the
purpose of maintaining the excess balances of participants and may not
be used for general payments or other activities.
(5) Interest shall be paid on excess balances of eligible
institutions maintained in an excess balance account in accordance with
paragraph (b)(2) or (b)(3) of this section.
(6) A Reserve Bank may establish additional terms and conditions
consistent with this part with respect to the operation of an excess
balance account, including, but not limited to, terms of and fees for
services, conditions under which an institution may act as agent for an
account, restrictions on the agent with respect to account management,
penalties for noncompliance with this section or any terms and
conditions, and account termination.
By order of the Board of Governors of the Federal Reserve
System, May 22, 2009.
Robert deV. Frierson,
Deputy Secretary of the Board.
[FR Doc. E9-12432 Filed 5-28-09; 8:45 am]
BILLING CODE 6210-01-P