[Federal Register Volume 77, Number 71 (Thursday, April 12, 2012)]
[Rules and Regulations]
[Pages 21846-21854]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-8562]
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FEDERAL RESERVE SYSTEM
12 CFR Part 204
[Regulation D; Docket No. R-1433]
RIN 7100-AD83
Reserve Requirements of Depository Institutions: Reserves
Simplification
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Final rule.
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SUMMARY: The Board is amending Regulation D, Reserve Requirements of
Depository Institutions, to simplify the administration of reserve
requirements. The final rule creates a common two-week maintenance
period for all depository institutions, creates a penalty-free band
around reserve balance requirements in place of carryover and routine
penalty waivers, discontinues as-of adjustments related to deposit
report revisions, replaces all other as-of adjustments with direct
compensation, and eliminates the contractual clearing balance program.
The amendments are designed to reduce the administrative and
operational costs associated with reserve requirements for depository
institutions, the Board, and Federal Reserve Banks.
DATES: Effective Date: This rule is effective on July 12, 2012, except
that effective on January 24, 2013, the following sections are further
amended: Sec. 204.2(z), (ff), (gg) and (hh); Sec. 204.5 (b)(2),
(d)(4)(i), and (e); Sec. 204.6 (a) and (b); Sec. 204.10 (b)(1),
(b)(3), and (c).
FOR FURTHER INFORMATION CONTACT: Kara Handzlik, Senior Attorney (202)
452-3852, Legal Division, or Margaret Gillis DeBoer, Assistant Director
(202) 452-3139, or Heather Wiggins, Senior Financial Analyst (202) 452-
3674, Division of Monetary Affairs, or for questions regarding the
Private Sector Adjustment Factor, Gregory Evans, Deputy Associate
Director (202) 452-3945, or Brenda Richards, Manager (202) 452-2753,
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
[[Page 21847]]
Federal Reserve System, 20th and C Streets NW., Washington, DC 20551.
SUPPLEMENTARY INFORMATION:
I. Background
Section 19 of the Federal Reserve Act (Act) \1\ authorizes the
Board of Governors of the Federal Reserve System (Board) to impose
reserve requirements on certain deposits and other liabilities of
depository institutions for the purpose of implementing monetary
policy. The Board's Regulation D (Reserve Requirements of Depository
Institutions, 12 CFR part 204) implements section 19 of the Act and
establishes reserve requirement ratios within the limits mandated by
the Act. Under Regulation D currently, transaction account balances
maintained at each depository institution are subject to reserve
requirement ratios of zero, three, or ten percent, depending on the
level of transaction accounts at that institution.\2\ A depository
institution satisfies its reserve requirement by its holdings of vault
cash and, if vault cash is insufficient to meet the requirement, by
maintaining balances in an account at a Federal Reserve Bank (Reserve
Bank). An institution may maintain balances either in the institution's
own account at a Reserve Bank or in a pass-through correspondent's
Reserve Bank account. The amount of balances that an institution must
maintain if its reserve requirement is not satisfied by vault cash is
referred to as the institution's reserve balance requirement. An
institution satisfies its reserve balance requirement on average over a
specified period of time, referred to as a maintenance period.
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\1\ 12 U.S.C. 461.
\2\ 12 CFR 204.4(f) (reserve requirement ratios).
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Currently, an institution may also enter into an agreement with its
Reserve Bank under which the institution agrees to maintain a specific
minimum balance in its account (referred to as a contractual clearing
balance). Contractual clearing balances generate earning credits that
the institution can use to offset service charges it incurs through its
use of Federal Reserve priced services. In addition, an institution may
also maintain excess balances. Excess balances are balances maintained
by an institution in its account at a Reserve Bank that are in excess
of the balances maintained to satisfy its reserve balance requirement
and the contractual clearing balance requirement (if any).
Congress amended the Act in 2008 to authorize the Reserve Banks to
pay interest on balances of eligible institutions at a rate or rates
determined by the Board and not to exceed the general level of short-
term interest rates.\3\ The Board amended Regulation D in 2008 to allow
Reserve Banks to pay interest on balances maintained to satisfy reserve
balance requirements and excess balances. Both types of balances
currently earn interest at the rate of 25 basis points.\4\ Contractual
clearing balances generate earnings credits, as noted above, but they
do not earn explicit interest payments.\5\
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\3\ Emergency Economic Stabilization Act of 2008, Public Law
110-343, Sec. 128, 122 Stat. 3765 (2008).
\4\ 12 CFR 204.10(b) (rates of interest paid on balances
maintained by eligible institutions at Reserve Banks).
\5\ Earnings credits currently are computed as 80 percent of the
rolling 13-week average of the three-month Treasury bill rate.
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II. Request for Public Comment and Summary of Comments Received
On October 18, 2011, the Board requested public comment on proposed
amendments to Regulation D and on several issues related to the
methodology used to create the Private Sector Adjustment Factor (76 FR
64250 (Oct. 18, 2011)). One comment was received on the Private Sector
Adjustment Factor; the comment will be addressed in a future Federal
Register notice along with previous comments to the Board's proposal to
replace the current ``correspondent bank model'' with a model based on
publicly traded firms.\6\
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\6\ 74 FR 15481 (April 6, 2009).
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The Board received 43 comments in response to its request for
comment on the Regulation D amendments. The responses consisted of
comments from 4 depository institutions, 19 employees of financial
institutions, 12 financial institution trade associations, and 8
individuals. Thirteen commenters addressed the proposed amendments to
Regulation D; 8 of these 13 commenters also addressed issues not raised
by the proposal. Thirty commenters addressed only issues not raised by
the proposal. All but one of the 13 commenters on the proposed
Regulation D amendments generally supported the proposal, but suggested
(sometimes conflicting) amendments, provided support contingent on
certain conditions, or requested that the Board delay the
implementation date(s) of one or more of the proposed amendments. These
comments are discussed in more detail below.
The majority of comments on issues not raised by the proposal
concerned limits on the number of certain convenient transfers that may
be made each month from savings deposit accounts. The Board most
recently addressed this issue in its May 2009 Regulation D rulemaking
(72 FR 25629, 25631 (May 29, 2009)) when it finalized amendments to
increase from three to six the permissible monthly number of transfers
or withdrawals from savings deposits by check, debit card, or similar
order payable to third parties. As noted in the May 2009 rulemaking,
the Board must impose reserve requirements on transaction accounts and
not on other types of accounts, such as savings deposits, pursuant to
section 19 of the Federal Reserve Act.\7\ The Board believes the
current numeric limitation is necessary for the Board to maintain the
ability to distinguish between reservable and non-reservable types of
deposit accounts.
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\7\ The Act requires the Board to impose reserve requirements in
a ratio from zero to fourteen percent on reservable liabilities.
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III. Analysis of Proposed Simplifications and Comments
The Board proposed amendments to Regulation D that would implement
the following four simplifications related to the administration of
reserve requirements:
1. Create a common two-week maintenance period for all depository
institutions;
2. Create a penalty-free band around reserve balance requirements
in place of using carryover and routine penalty waivers;
3. Discontinue as-of adjustments related to deposit report
revisions and replace all other as-of adjustments with direct
compensation; and
4. Eliminate the contractual clearing balance program.
The Board also proposed to make changes to various terms used
throughout Regulation D in order to clarify the meaning, enhance the
accuracy, and ensure the consistent application of those terms. These
proposed changes included replacing the term ``required reserve
balance'' with ``balances maintained to satisfy the reserve balance
requirement,'' adding a definition of ``reserve balance requirement,''
and making conforming revisions throughout the regulation.
After consideration of the comments received, the Board is adopting
the amendments to Regulation D substantially as proposed, with minor
technical changes. The Board considers the final amendments to
Regulation D appropriate given the current approach to implementing
monetary policy. If the Federal Reserve changes its monetary policy
framework, which includes the payment of interest on balances held
[[Page 21848]]
with Reserve Banks, the entire framework, including the provisions of
Regulation D, would be reassessed. As a result of the Board's adoption
of these final amendments to Regulation D, related Federal Reserve Bank
operating circulars and manuals affected by the final amendments to
Regulation D will be updated accordingly.
Create a Common Two-Week Maintenance Period for All Depository
Institutions
As noted above, a depository institution satisfies its reserve
balance requirement on average over a period of time that is known as a
maintenance period. Currently, Regulation D provides for two types of
maintenance periods: a one-week maintenance period and a two-week
maintenance period. The determination of which maintenance period
applies to an institution depends primarily on the frequency with which
it is required to report its deposits to the Federal Reserve. The Board
requires depository institutions to submit deposit reports at different
frequencies depending on the amount of their reservable liabilities
over the previous year. Depository institutions that have reservable
liabilities above a certain amount (exemption amount) are required to
submit deposit data either weekly or quarterly. Regulation D currently
subjects weekly reporters to a two-week maintenance period and
quarterly reporters to a one-week maintenance period. Institutions that
have reservable liabilities below the exemption amount either submit
deposit reports annually or are not required to report at all. Annual
reporters and nonreporters with a contractual clearing balance are
currently subject to a one-week maintenance period. Institutions that
have neither reserve requirements nor clearing balance requirements
receive interest payments at the excess balance rate because they do
not maintain balances to satisfy reserve balance requirements.
From one year to another, some depository institutions switch
reporting frequency because of changes in the levels of the
institution's reservable liabilities. Specifically, some depository
institutions may switch from a two-week maintenance period to a one-
week maintenance period, or vice versa. In certain instances,
depository institutions that become eligible to shift to a quarterly
instead of weekly reporting frequency elect to remain at the higher
reporting frequency in order to maintain the flexibility of satisfying
reserve requirements over a two-week maintenance period instead of a
one-week maintenance period.
The Board proposed to create a common two-week maintenance period
for all depository institutions. Accordingly, the Board proposed to
retain the two-week maintenance period requirement for weekly reporters
in Sec. 204.5(b)(1) of Regulation D, but to amend Sec. 204.5(b)(2) to
include quarterly reporters in the two-week maintenance period
requirement. As set forth in the proposal, the common two-week
maintenance period would tend to benefit depository institutions,
Reserve Banks, and the Board by (1) providing greater flexibility to
depository institutions that currently satisfy reserve balance
requirements over a one-week maintenance period; (2) reducing
unnecessary complexity in the existing maintenance period structure;
(3) reducing administrative and operational costs for depository
institutions that may otherwise have had to change maintenance periods
when deposit reporting categories (and therefore length of maintenance
period) changed; and (4) reducing the operational and administrative
cost for Reserve Banks and the Board by eliminating business processes
and controls associated with maintaining two maintenance periods.
The Board received 12 comments on the proposed common two-week
maintenance period. Of these comments, 11 supported the creation of a
common two-week maintenance period, and generally agreed that a common
two-week maintenance period would reduce burden. One commenter
expressed concern that annual reporters would face increased burden
under the common two-week maintenance period if they were required to
submit two weeks of data rather than a single day of data. The proposed
common two-week maintenance period, however, does not change the
frequency or the amount of data an institution must report, but rather
changes the period of time over which an institution would satisfy its
reserve balance requirement (if any). Annual reporters will continue to
be required to report one day's worth of data, once a year, and have a
reserve requirement of zero.
The Board is adopting the common two-week maintenance period as
proposed. As noted in the proposal, for depository institutions that
report their deposits weekly, the relationship between weekly reporting
periods and two-week maintenance periods will be maintained in Sec.
204.5(b)(1) of Regulation D. For depository institutions that report
their deposits quarterly, the quarterly reporting periods will not
change, but the relationship of quarterly reporting periods to two-week
maintenance periods will be new. Revised Sec. 204.5(b)(2) provides
that, for quarterly reporters, each quarterly report will be used to
calculate the reporter's reserve balance requirement for an interval of
either six or seven consecutive two-week maintenance periods, depending
on when the interval begins and ends. The interval will begin on the
fourth Thursday following the end of each quarterly reporting period if
that Thursday is the first day of a two-week maintenance period. If the
fourth Thursday following the end of a quarterly reporting period is
not the first day of a two-week maintenance period, then the interval
will begin on the fifth Thursday following the end of the quarterly
reporting period. The interval will end on the fourth Wednesday
following the end of the subsequent quarterly reporting period if that
Wednesday is the last day of a two-week maintenance period. If the
fourth Wednesday following the end of the subsequent quarterly
reporting period is not the last day of a two-week maintenance period,
then the interval will conclude on the fifth Wednesday following the
end of the subsequent quarterly reporting period.\8\
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\8\ The Board currently provides quarterly reporters with
reserve maintenance calendars that link quarterly reporting periods
to a group of one-week maintenance periods. See http://www.frbservices.org/centralbank/reservescentral/index.html#rmc. The
Board will update these reserve maintenance calendars to reflect the
new rule.
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Annual reporters and nonreporters will continue to receive interest
on their average balances maintained with Reserve Banks; however, the
interest payments will be calculated on the average balance maintained
over a two-week period at the excess balance rate instead of a one-week
period at the excess balance rate.
Create a Penalty-Free Band Around Reserve Balance Requirements in Place
of Carryover and Routine Penalty Waivers
As noted above, Regulation D requires a depository institution to
satisfy its reserve balance requirement on average over that depository
institution's maintenance period. Currently, Sec. 204.5(e) of
Regulation D permits a depository institution that has a modest
deficiency in its balances maintained to satisfy a reserve balance
requirement over a given maintenance period to make up that deficiency
by holding a higher level of balances in the subsequent maintenance
period. Correspondingly, Sec. 204.5(e) also permits
[[Page 21849]]
a depository institution that has a modest excess of balances
maintained to satisfy its reserve balance requirement over a
maintenance period to use that excess by holding a lower level of
balances in the next maintenance period. This ``carryover'' provision
(the ability to carry an excess or deficiency from one maintenance
period over to the next) essentially prevents a Reserve Bank from
determining whether a depository institution has satisfied its reserve
balance requirement, or is in an excess or deficient position, until
the completion of the subsequent maintenance period. As a result,
Reserve Banks must delay the payment of interest and assessment of
deficiency charges on eligible institutions' balances. Section 204.6(a)
currently authorizes Reserve Banks to assess deficiency charges against
depository institutions that fail to satisfy their reserve balance
requirements. Section 204.6(b) currently permits Reserve Banks to waive
the imposition of these charges under certain conditions through the
use of ``routine penalty waivers.''
The Board proposed to create a penalty-free band around each
depository institution's reserve balance requirement and to eliminate
the carryover and routine penalty waiver provisions of Regulation D.
Specifically, proposed Sec. 204.2(gg) defined the top of the penalty-
free band as an amount equal to an institution's reserve balance
requirement plus an amount that is the greater of 10 percent of the
institution's reserve balance requirement or $50,000. Proposed Sec.
204.2(hh) defined the bottom of the penalty-free band as an amount
equal to an institution's reserve balance requirement less an amount
that is the greater of 10 percent of an institution's reserve balance
requirement or $50,000. For pass-through correspondents, the Board
proposed setting the dollar amount used to establish the top and bottom
of the penalty-free band at an amount that is equal to the greater of
10 percent of the aggregate reserve balance requirement of the
correspondent (if any) and all of its respondents or $50,000.
Proposed Sec. 204.2(z) revised the definition of ``excess
balance'' to mean the average balance maintained in a Reserve Bank
account by or on behalf of an institution over a reserve maintenance
period that exceeds the top of the penalty-free band, and proposed
Sec. 204.2(ff) defined ``deficiency'' as the bottom of the penalty-
free band less the average balance maintained in a Reserve Bank account
by or on behalf of an institution over a reserve maintenance period.
Under the proposed structure, a depository institution that maintained
balances that exceeded the reserve balance requirement, but fell within
the band, would be remunerated at the interest rate paid on balances
maintained to satisfy a reserve balance requirement. Balances that
exceeded the top of the penalty-free band would be remunerated at the
interest rate paid on excess balances. A depository institution that
maintained balances below its reserve balance requirement would not be
assessed a deficiency charge unless the balances fell below the bottom
of the penalty-free band. The Board also proposed to remove Sec.
204.5(e) and amend Sec. Sec. 204.6(a) and (b) to eliminate the
application of carryover and routine penalty waivers, respectively.
Reserve Banks would, however, retain the authority to waive charges for
deficiencies based on an evaluation of the circumstances in each
individual case. Finally, the Board proposed conforming amendments to
Sec. 204.10(b)(1) and (b)(3), and (c) to replace ``required reserve
balances'' with ``balances up to the top of the penalty-free band.''
Six commenters generally supported the Board's proposal to create a
penalty-free band around each depository institution's reserve balance
requirement and to eliminate the carryover and routine waiver
provisions of Regulation D. However, two of the commenters that
supported this simplification requested different dollar amounts be
used to establish the top and bottom of the penalty-free band. One
commenter suggested a smaller dollar amount equal to the greater of
$50,000 or 6 percent of a depository institution's reserve balance
requirement. This commenter stated that institutions would be provided
with sufficient flexibility if the band were defined in this manner.
The other commenter requested the dollar amount be calculated similarly
to the current carryover amount, using the greater of $50,000 or 4
percent of a depository institution's total reserve requirement (as
opposed to 10 percent of its reserve balance requirement). This
commenter was concerned that a band based on a reserve balance
requirement may affect the Federal Reserve's ability to implement
monetary policy in the event that all depository institutions' reserve
balance requirements were zero.
The Board is adopting the penalty-free band as proposed, with one
technical addition, and is eliminating the use of carryover and routine
penalty waivers as proposed. The Board is clarifying that in no case
will the bottom of the penalty-free band be less than zero. The Board
believes that the proposed width of the penalty-free band will roughly
replicate the amount of flexibility currently provided under the
carryover provision. On average, reserve balance requirements are just
under half of total reserve requirements. Therefore, the flexibility
provided by the existing 4 percent carryover provision, when expressed
in terms of reserve balance requirements, equates to roughly 10 percent
of the reserve balance requirement for a typical depository
institution. In addition, the Board believes a band constructed in
terms of reserve balance requirements (rather than reserve
requirements) is appropriate. Reserve balance requirements are more
relevant than reserve requirements for implementing monetary policy and
controlling the federal funds rate, because reserve balance
requirements determine the amount of balances depository institutions
are required to maintain in Reserve Bank accounts. The Board also
acknowledges that the penalty-free band is applicable only in monetary
policy frameworks where reserve balance requirements are non-zero. If
in the future all reserve balance requirements were zero, which could
result from either a significant change to the Federal Reserve's
monetary policy framework or from depository institutions' limiting the
amount of their reservable liabilities, the Board would reassess the
penalty-free band and other aspects of the monetary policy framework
accordingly.
The Board received four comments on the proposed elimination of the
carryover provision. These commenters supported the elimination
provided that interest is paid soon after a maintenance period ends on
balances maintained to satisfy a reserve balance requirement and excess
balances. The Board anticipates that the elimination of carryover will
allow for faster crediting of interest payments.
Discontinue as-of Adjustments Related to Deposit Report Revisions and
Replace All Other as-of Adjustments With Direct Compensation
As-of Adjustments for Deposit Report Revisions
Depository institutions are required to submit revisions to past
deposit reports to correct for reporting errors. Currently, when those
revisions result in a change in the depository institution's reserve
balance requirement, an as-of adjustment is used to correct the
depository institution's level of balances maintained. For example, if
a reserve balance requirement for a given period is revised upwards,
the as-of adjustment is used so that the depository institution
[[Page 21850]]
must hold a greater level of balances in a future maintenance period in
order to meet its reserve balance requirement.
The Board proposed to eliminate the use of as-of adjustments for
deposit report revisions. The payment of interest on balances
maintained to satisfy reserve balance requirements essentially
eliminates the need for as-of adjustments for deposit report revisions,
because the interest rate paid effectively removes the implicit tax
imposed by reserve requirements. The Board received no comments
opposing the elimination of as-of adjustments for deposit report
revisions and is adopting this provision as proposed. The Board notes
that revisions to deposit reports to correct for reporting errors will
still be required, because these reports are used to calculate and
publish the monetary aggregates.
All As-of Adjustments Other Than Those Related to Deposit Report
Revisions
In addition to use for deposit report revisions, as-of adjustments
are currently used for other purposes as well. These purposes include,
but are not limited to, correcting transaction errors, recovering
float, and penalizing an institution for a reserve deficiency in lieu
of assessing monetary charges. An as-of adjustment for a transaction-
based error corrects the average level of balances maintained by the
depository institution to the level that would have resulted had the
error not occurred. An as-of adjustment to recover float compensates
the Reserve Bank for the float that is created by an institution's
request to defer check and ACH charges for days in which the
institution is closed. Finally, an as-of adjustment to penalize an
institution for a reserve deficiency can be used instead of imposing an
explicit monetary charge to the institution's Reserve Bank account.
The Board proposed replacing as-of adjustments for transaction-
based errors with direct compensation (that is, either a debit or
credit applied to an account to offset the effect of an error). The
Board proposed replacing as-of adjustments for recovering float with
explicit billing charges when float arises from temporary institution
closings. Finally, the Board proposed eliminating the use of as-of
adjustments for reserve deficiency penalties and relying solely on the
assessment of explicit deficiency charges. The Board proposed to pay
(or charge) an institution in these situations at a rate based on the
federal funds rate.\9\
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\9\ The federal funds rate is used in other instances of direct
compensation by Reserve Banks. See, e.g., Sec. 210.32(b)(1)(ii) of
Regulation J (federal funds rate applies if compensation interest
rate not otherwise determined by agreement or rule).
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Three commenters supported the replacement of as-of adjustments
with direct compensation for all as-of adjustments other than those
related to deposit report revisions, provided that institutions may
continue to obtain detailed information on the error that occurred and
the calculation of the compensation amount. These commenters stated
that such detailed information is needed to verify the error, to
reconcile accounts, and to allocate charges (or payments) by
correspondents to the appropriate respondents. Five commenters
supported the use of the federal funds rate to compensate depository
institutions for transaction-based errors. No alternative compensation
rate was suggested.
The Board is adopting the final rule as proposed.\10\ The Board
anticipates that the Reserve Banks will make the appropriate
information and documentation available to depository institutions as
may be needed to permit institutions to reconcile accounts and allocate
charges or payments. For example, information will be available that
helps describe the calculation of direct compensation entries including
the error amount, the start and end date of the error, and
identification of the originating service area. The Board also
anticipates that Reserves Banks will provide institutions with contact
information for service areas processing direct compensation entries so
that inquiries can be addressed.
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\10\ Consistent with these amendments to Regulation D, elsewhere
in the Federal Register the Board is finalizing conforming changes
to the provisions in Regulation J that refer to as-of adjustments.
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Eliminate the Contractual Clearing Balance Program
As noted above, a depository institution may voluntarily agree with
a Reserve Bank to maintain a level of balances in excess of the amount
necessary to satisfy its reserve balance requirement. The actual amount
that a depository institution maintains under such an agreement is
known as a clearing balance.\11\ Reserve Banks do not pay explicit
interest on clearing balances. Instead, clearing balances generate
earnings credits that a depository institution may then use to pay for
Reserve Bank priced services.
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\11\ 12 CFR 204.2(v) (definition of clearing balance).
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The Board proposed to eliminate the contractual clearing balance
program. The Board proposed to amend Regulation D to remove the
definitions of ``clearing balance'' (Sec. 204.2(v)), ``clearing
balance allowance'' (Sec. 204.2(w)), and ``contractual clearing
balance'' (Sec. 204.2(x)), along with the removal of any other
references to clearing balances and contractual clearing balances
elsewhere in Regulation D.
Commenters generally supported the elimination of the contractual
clearing balance program. However, one commenter stated that the
elimination of the program may increase the possibility of overdrafts
in depository institutions' Reserve Bank accounts if it was ever the
case that the rate paid on balances held at Reserve Banks is below the
federal funds rate and trading in the federal funds market is more
active. This commenter suggested the Board announce its intent to
continue the payment of interest on such balances at a rate equal to or
greater than the federal funds rate.
The Board is adopting the elimination of the contractual clearing
balance program as proposed. The elimination of the contractual
clearing balance program will enhance the Federal Reserve's ability to
carry out monetary policy by eliminating the complexities associated
with maintaining different balance requirements for different kinds of
balances and different kinds and levels of interest rates (explicit and
implicit). The elimination of the contractual clearing balance program
will not have any effect on a Reserve Bank's ability to require
institutions to maintain a minimum level of balances in their Reserve
Bank accounts in order for Reserve Banks to protect against
overdrafts.\12\ The Board established the rate of interest paid on
balances maintained to satisfy reserve balance requirements at a level
that implements monetary policy and that eliminates the implicit tax
imposed by reserve requirements. The Board will continue to evaluate
the appropriate level of interest rates to achieve these stated
objectives and will communicate changes when necessary.
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\12\ See Reserve Bank Operating Circulars at http://www.frbservices.org/regulations/operating_circulars.html.
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Effective Dates
The Board proposed to eliminate the contractual clearing balance
program and the use of as-of adjustments no earlier than the first
quarter of 2012, and to implement a common maintenance period and the
penalty-free band around reserve balance requirements no earlier than
the third quarter of 2012. Four commenters stated that the proposed
effective date for the elimination of
[[Page 21851]]
clearing balances and as-of adjustments was too aggressive in light of
other regulatory changes, and suggested implementation of these
simplifications no earlier than the beginning of the third quarter of
2012, 90 days after publication of the final rule, or a period of nine
months. Four other commenters requested that the implementation of all
simplifications be delayed for either a period of nine months or at
least until the first quarter of 2013. Additionally, a subset of these
commenters requested that the Board provide for a staggered
implementation of the simplifications.
The Board will eliminate the contractual clearing balance program
and the use of as-of adjustments earlier than it will implement the
common maintenance period and the penalty-free band. Given that
commenters generally noted that few operational changes would be
necessary to prepare for the proposed amendments, the Board will
eliminate the contractual clearing balance program on July 12, 2012.
Also on this date, as-of adjustments will no longer be created and
issuance of direct compensation will begin. This date is approximately
90 days after the publication of the final rule and is within the time
period suggested by some commenters as appropriate to prepare for the
amendments. The Board will implement the common two-week maintenance
period, the penalty-free band, and the elimination of carryover and
routine penalty waivers on January 24, 2013. The Board will provide
public notice no later than November 1, 2012, if the January 24, 2013
date will be delayed.
IV. Final Regulatory Flexibility Analysis
The Regulatory Flexibility Act (the ``RFA'') (5 U.S.C. 601 et seq.)
requires agencies either to provide a final regulatory flexibility
analysis with a final rule or to certify that the rule will not have a
significant economic impact on a substantial number of small entities.
In accordance with the RFA, the Board reviewed the final rule, which
would apply to all depository institutions. Based on current
information, the Board believes that, although a significant number of
``small banking organizations'' will be affected by the rule, the rule
will not have a significant economic impact on these small entities
because the Board expects the amendments to decrease costs for all
institutions, including smaller institutions. The Board prepared an
initial regulatory flexibility analysis in accordance with 5 U.S.C. 603
of the RFA in its notice of proposed rulemaking and sought comment on
the potential impact of the proposed rule on small entities. The Board
did not receive any comments on the initial regulatory flexibility
analysis.
1. Statement of the need for, objectives of, and legal basis for,
the final rule. The Board proposed to amend Regulation D to simplify
the administration of reserve requirements. Section 19 of the Federal
Reserve Act requires the Board to impose reserve requirements on
certain deposits and other liabilities of depository institutions
solely for the purposes of implementing monetary policy. The Board's
Regulation D implements section 19 of the Act. The Board believes that
the amendments to Regulation D will reduce the administrative and
operational costs associated with reserve requirements for depository
institutions.
2. Summary of significant issues raised by public comment on the
Board's initial analysis of issues, and a statement of any changes made
as a result. The Board did not receive any public comments on the
proposed rule addressing matters relating to the Board's initial
regulatory flexibility analysis.
3. Small entities affected by the final rule. The final rule
applies to all depository institutions. Pursuant to regulations issued
by the Small Business Administration (the ``SBA'') (13 CFR 121.201), a
``small banking organization'' includes a depository institution with
$175 million or less in total assets. Based on data reported as of
December 31, 2011, the Board believes that there are approximately
10,313 small depository institutions. Out of these small depository
institutions, the Board believes that small institutions affected by
the final rule include approximately 3,181 small depository
institutions that maintain balances to satisfy reserve balance
requirements over a one-week maintenance period; approximately 1,775
small depository institutions with contractual clearing balances; and
approximately 197 small depository institutions that received at least
one as-of adjustment in 2011.
4. Recordkeeping, reporting, and other compliance requirements.
Although the final rule imposes certain compliance requirements on
depository institutions, the Board believes that the overall effect of
the final rule on depository institutions, including small depository
institutions, will be positive. Under new Sec. 204.5(b)(2), small
depository institutions that satisfy their reserve balance requirement
on a one-week maintenance period (approximately 3,181) will be subject
to a two-week maintenance period. A depository institution may choose,
however, not to change its internal systems accordingly, because it
could continue to satisfy its requirement weekly within the two-week
maintenance period. The final rule will also eliminate the contractual
clearing balance program, currently used by approximately 1,775 small
depository institutions. Although the contractual clearing program will
be eliminated, the Board does not anticipate that small depository
institutions will be negatively affected because small depository
institutions will receive explicit interest payments on excess balances
instead of earnings credits on clearing balances. Small depository
institutions can then use this explicit interest to pay for Reserve
Bank priced services or for other purposes, providing them with
increased flexibility. In addition, the final rule eliminates the use
of as-of adjustments for deposit revisions. The Board does not believe
the elimination of as-of adjustments for deposit revisions will
negatively affect small depository institutions because the interest
rate paid on balances maintained to satisfy a reserve balance
requirement effectively removes the implicit tax imposed by reserve
requirements.
5. Identification of duplicative, overlapping, or conflicting
Federal rules. The Board has not identified any Federal rules that
duplicate, overlap, or conflict with the final rule. In a separate
rulemaking, the Board is finalizing amendments to Regulation J to
remove references to as-of adjustments in order to conform that
regulation to this rule.
6. Significant alternatives to the proposed rule. The Board
designed the reserve simplifications to reduce administrative and
operational burdens on depository institutions. Commenters did not
suggest any alternatives to the final rule that accomplish that
objective.
V. Paperwork Reduction Act Analysis
In accordance with the Paperwork Reduction Act (PRA) 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 (OMB). Although the mandatory data collected on
the deposits reporting forms \13\ are used by the Federal Reserve for
administering Regulation D and for constructing, analyzing, and
monitoring
[[Page 21852]]
the monetary and reserve aggregates, none of the revisions in this
rulemaking change the deposits reporting forms. The rule contains no
collections of information under the PRA. See 44 U.S.C. 3502(3).
Accordingly, no paperwork burden is associated with the rule. The Board
received no comments on this analysis.
---------------------------------------------------------------------------
\13\ Report of Transaction Accounts, Other Deposits and Vault
Cash (FR 2900; OMB No. 7100-0087), Annual Report of Total Deposits
and Reservable Liabilities (FR 2910a; OMB No. 7100-0175), Report of
Foreign (Non-U.S.) Currency Deposits (FR 2915; OMB No. 7100-0237),
and Allocation of Low Reserve Tranche and Reservable Liabilities
Exemption (FR 2930; OMB No. 7100-0088).
---------------------------------------------------------------------------
List of Subjects in 12 CFR Part 204
Banks, banking, Federal Reserve System, Reporting and recordkeeping
requirements.
For the reasons stated 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), 461, 601, 611, and 3105.
0
2. Effective July 12, 2012, Sec. 204.1 paragraph (b) is revised to
read as follows:
Sec. 204.1 Authority, purpose and scope.
* * * * *
(b) Purpose. This part relates to reserve requirements imposed on
depository institutions for the purpose of facilitating the
implementation of monetary policy by the Federal Reserve System.
* * * * *
0
3. Effective July 12, 2012, Sec. 204.2 is amended by:
0
A. Removing and reserving paragraphs (v) through (x);
0
B. Revising paragraphs (z) and (bb); and
0
C. Adding paragraphs (ee) and (ff).
The additions and revisions read as follows:
Sec. 204.2 Definitions.
* * * * *
(z) Excess balance means the average balance maintained in an
account at a Federal Reserve Bank by or on behalf of an institution
over a reserve maintenance period that exceeds the balance maintained
to satisfy a reserve balance requirement.
* * * * *
(bb) Balance maintained to satisfy a reserve balance requirement
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 a reserve balance requirement of this part.
* * * * *
(ee) Reserve balance requirement means the balance that a
depository institution is required to maintain on average over a
reserve maintenance period in an account at a Federal Reserve Bank if
vault cash does not fully satisfy the depository institution's reserve
requirement imposed by this part.
(ff) Deficiency means the reserve balance requirement less the
average balance maintained in an account at a Federal Reserve Bank by
or on behalf of an institution over a reserve maintenance period.
* * * * *
0
4. Effective January 24, 2013, Sec. 204.2 is further amended by:
0
A. Revising paragraphs (z) and (ff); and
0
B. Adding paragraphs (gg) and (hh).
The additions and revisions read as follows:
Sec. 204.2 Definitions.
* * * * *
(z) Excess balance means the average balance maintained in an
account at a Federal Reserve Bank by or on behalf of an institution
over a reserve maintenance period that exceeds the top of the penalty-
free band.
* * * * *
(ff) Deficiency means the bottom of the penalty-free band less the
average balance maintained in an account at a Federal Reserve Bank by
or on behalf of an institution over a reserve maintenance period.
(gg) Top of the penalty-free band means an amount equal to an
institution's reserve balance requirement plus an amount that is the
greater of 10 percent of the institution's reserve balance requirement
or $50,000. The top of the penalty-free band for a pass-through
correspondent is an amount equal to the aggregate reserve balance
requirement of the correspondent (if any) and all of its respondents
plus an amount that is the greater of 10 percent of that aggregate
reserve balance requirement or $50,000.
(hh) Bottom of the penalty-free band means an amount equal to an
institution's reserve balance requirement less an amount that is the
greater of 10 percent of the institution's reserve balance requirement
or $50,000. The bottom of the penalty-free band for a pass-through
correspondent is an amount equal to the aggregate reserve balance
requirement of the correspondent (if any) and all of its respondents
less an amount that is the greater of 10 percent of that aggregate
reserve balance requirement or $50,000. In no case will the penalty-
free band be less than zero.
0
5. Effective July 12, 2012, in Sec. 204.4 revise paragraphs (d) and
(e), and the introductory text of paragraph (f), to read as follows:
Sec. 204.4 Computation of required reserves.
* * * * *
(d) For institutions that file a report of deposits weekly, reserve
requirements are computed on the basis of the institution's daily
average balances of deposits and Eurocurrency liabilities during a 14-
day computation period ending every second Monday.
(e) For institutions that file a report of deposits quarterly,
reserve requirements are computed on the basis of the institution's
daily average balances of deposits and Eurocurrency liabilities during
the 7-day computation period that begins on the third Tuesday of March,
June, September, and December.
(f) For all depository institutions, Edge and Agreement
corporations, and United States branches and agencies of foreign banks,
reserve requirements are computed by applying the reserve requirement
ratios below to net transaction accounts, nonpersonal time deposits,
and Eurocurrency liabilities of the institution during the computation
period.
* * * * *
0
6. Effective July 12, 2012, Sec. 204.5 is amended by revising
paragraphs (a)(1), (b), (c), (d), and (e) to read as follows:
Sec. 204.5 Maintenance of required reserves.
(a)(1) A depository institution, a U.S. branch or agency of a
foreign bank, and an Edge or Agreement corporation shall satisfy
reserve requirements by maintaining vault cash and, if vault cash does
not fully satisfy the institution's reserve requirement, in the form of
a balance maintained
(i) In the institution's account at the Federal Reserve Bank in the
Federal Reserve District in which the institution is located, or
(ii) With a pass-through correspondent in accordance with Sec.
204.5(d).
* * * * *
(b)(1) For institutions that file a report of deposits weekly, the
balances maintained to satisfy reserve balance requirements shall be
maintained during a 14-day maintenance period that begins on the third
Thursday following the end of a given computation period.
(2) For institutions that file a report of deposits quarterly, the
balances maintained to satisfy reserve balance requirements shall be
maintained during each of the 7-day maintenance periods during the
interval that begins on the fourth Thursday following the end of the
institution's computation
[[Page 21853]]
period and ends on the fourth Wednesday after the close of the
institution's next computation period.
(c) Cash items forwarded to a Federal Reserve Bank for collection
and credit are not included in an institution's balance maintained to
satisfy its reserve balance requirement until the expiration of the
time specified in the appropriate time schedule established under
Regulation J, ``Collection of Checks and Other Items by Federal Reserve
Banks and Funds Transfers Through Fedwire'' (12 CFR part 210). If a
depository institution draws against items before that time, the charge
will be made to its account if the balance is sufficient to pay it; any
resulting deficiency in balances maintained to satisfy the
institution's reserve balance requirement will be subject to the
penalties provided by law and to the deficiency charges provided by
this part. However, the Federal Reserve Bank may, at its discretion,
refuse to permit the withdrawal or other use of credit given in an
account for any time for which the Federal Reserve Bank has not
received payment in actually and finally collected funds.
(d)(1) A depository institution, a U.S. branch or agency of a
foreign bank, or an Edge or Agreement corporation with a reserve
balance requirement (``respondent'') may select only one pass-through
correspondent under this section, unless otherwise permitted by the
Federal Reserve Bank in whose District the respondent is located.
Eligible pass-through correspondents are Federal Home Loan Banks, the
National Credit Union Administration Central Liquidity Facility, and
depository institutions, U.S. branches or agencies of foreign banks,
and Edge and Agreement corporations that maintain balances to satisfy
their own reserve balance requirements which may be zero, in an account
at a Federal Reserve Bank. In addition, the Board reserves the right to
permit other institutions, on a case-by-case basis, to serve as pass-
through correspondents.
(2) Respondents or correspondents may institute, terminate, or
change pass-through correspondent agreements by providing all
documentation required for the establishment of the new agreement or
termination of or change to the existing agreement to the Federal
Reserve Banks involved within the time period specified by those
Reserve Banks.
(3) Balances maintained to satisfy reserve balance requirements of
a correspondent's respondents shall be maintained along with the
balances maintained to satisfy a correspondent's reserve balance
requirement (if any), in a single commingled account of the
correspondent at the Federal Reserve Bank in whose District the
correspondent is located. Balances maintained in the correspondent's
account are the property of the correspondent and represent a liability
of the Reserve Bank solely to the correspondent, regardless of whether
the funds represent the balances maintained to satisfy the reserve
balance requirement of a respondent.
(4)(i) A pass-through correspondent shall be responsible for
maintaining balances to satisfy its own reserve balance requirement (if
any) and the reserve balance requirements of all of its respondents. A
Federal Reserve Bank will compare the total reserve balance requirement
to be satisfied by the correspondent with the total balance maintained
to satisfy a reserve balance requirement by the correspondent for
purposes of determining deficiencies, imposing or waiving charges for
deficiencies and for other reserve maintenance purposes. A charge for a
deficiency in the correspondent's account will be imposed by the
Reserve Bank on the correspondent maintaining the account.
(ii) Each correspondent is required to maintain detailed records
for each of its respondents that permit Reserve Banks to determine
whether the respondent has provided a sufficient funds to the
correspondent to satisfy the reserve balance requirement of the
respondent. The correspondent shall maintain such records and make such
reports as the Board or Reserve Bank may requires in order to ensure
the correspondent's compliance with its responsibilities under this
section and shall make them available to the Board or Reserve Bank as
required.
(iii) The Federal Reserve Bank may terminate any pass-through
agreement under which the correspondent is deficient in its
recordkeeping or other responsibilities.
(iv) Interest paid on supplemental reserves (if such reserves are
required under Sec. 204.7) held by a respondent will be credited to
the account maintained by the correspondent.
(e) Any excess or deficiency in an institution's balance maintained
to satisfy its reserve balance requirement shall be carried over and
applied against the balance maintained in the next maintenance period
as specified in this paragraph. The amount of any such excess or
deficiency that is carried over shall not exceed the greater of:
(1) The amount obtained by multiplying 0.04 times the depository
institution's reserve requirement; or
(2) $50,000. Any carryover not offset during the next period may
not be carried over to subsequent periods.
0
7. Effective January 24, 2013, Sec. 204.5 is further amended by:
0
A. Revising paragraphs (b)(2) and (d)(4)(i); and
0
B. Removing paragraph (e).
The additions and revisions read as follows:
Sec. 204.5 Maintenance of required reserves.
* * * * *
(b) * * *
(2) For institutions that file a report of deposits quarterly, the
balances maintained to satisfy reserve balance requirements shall be
maintained during an interval of either six or seven consecutive 14-day
maintenance periods, depending on when the interval begins and ends.
The interval will begin on the fourth Thursday following the end of
each quarterly reporting period if that Thursday is the first day of a
14-day maintenance period. If the fourth Thursday following the end of
a quarterly reporting period is not the first day of a 14-day
maintenance period, then the interval will begin on the fifth Thursday
following the end of the quarterly reporting period. The interval will
end on the fourth Wednesday following the end of the subsequent
quarterly reporting period if that Wednesday is the last day of a 14-
day maintenance period. If the fourth Wednesday following the end of
the subsequent quarterly reporting period is not the last day of a 14-
day maintenance period, then the interval will conclude on the fifth
Wednesday following the end of the subsequent quarterly reporting
period.
* * * * *
(d) * * *
(4)(i) A pass-through correspondent shall be responsible for
maintaining balances to satisfy its own reserve balance requirement (if
any) and the reserve balance requirements of all of its respondents. A
charge for any deficiency in the correspondent's account will be
imposed by the Reserve Bank on the correspondent maintaining the
account.
* * * * *
0
8. Effective July 12, 2012, Sec. 204.6 is amended by revising the
section heading and paragraphs (a) and (b), to read as follows:
Sec. 204.6 Charges for deficiencies.
(a) Deficiencies in a depository institution's balance maintained
to satisfy its reserve balance requirement after application of the
carryover
[[Page 21854]]
provided in Sec. 204.5(e), are subject to deficiency charges. Federal
Reserve Banks are authorized to assess charges for deficiencies at a
rate of 1 percentage point per year above the primary credit rate, as
provided in Sec. 201.51(a) of this chapter, in effect for borrowings
from the Federal Reserve Bank on the first day of the calendar month in
which the deficiencies occurred. Charges shall be assessed on the basis
of daily average deficiencies during each maintenance period.
(b) Reserve Banks may waive the charges for deficiencies except
when the deficiency arises out of a depository institution's gross
negligence or conduct that is inconsistent with the principles and
purposes of reserve requirements. Decisions by Reserve Banks to waive
charges are based on an evaluation of the circumstances in each
individual case and the depository institution's reserve maintenance
record. For example, a waiver may be appropriate for a small charge or
once during a two-year period for a deficiency that does not exceed a
certain percentage of the depository institution's reserve requirement.
If a depository institution has demonstrated a lack of due regard for
the proper maintenance of balances to satisfy its reserve balance
requirement, the Reserve Bank may decline to exercise the waiver
privilege and assess all charges regardless of amount or reason for the
deficiency.
* * * * *
0
9. Effective January 24, 2013, Sec. 204.6 is further amended by
revising paragraphs (a) and (b) to read as follows:
Sec. 204.6 Charges for deficiencies.
(a) Federal Reserve Banks are authorized to assess charges for
deficiencies at a rate of 1 percentage point per year above the primary
credit rate, as provided in Sec. 201.51(a) of this chapter, in effect
for borrowings from the Federal Reserve Bank on the first day of the
calendar month in which the deficiencies occurred. Charges shall be
assessed on the basis of daily average deficiencies during each
maintenance period.
(b) Reserve Banks may waive the charges for deficiencies based on
an evaluation of the circumstances in each individual case.
* * * * *
0
10. Effective July 12, 2012, Sec. 204.10 is amended by revising
paragraphs (b)(1), (b)(3), (c), (d)(3) and (e)(2) to read as follows:
Sec. 204.10 Payment of interest on balances.
* * * * *
(b) * * *
(1) For balances maintained to satisfy reserve balance
requirements, at \1/4\ percent;
* * * * *
(3) For balances maintained to satisfy reserve balance
requirements, excess balances, and term deposits, at any other rate or
rates as determined by the Board from time to time, not to exceed the
general level of short-term interest rates. For purposes of this
paragraph (b), ``short-term interest rates'' are rates on obligations
with maturities of no more than one year, such as the primary credit
rate and rates on term federal funds, term repurchase agreements,
commercial paper, term Eurodollar deposits, and other similar
instruments.
(c) Pass-through balances. A pass-through correspondent that is an
eligible institution may pass back to its respondent interest paid on
balances maintained to satisfy a reserve balance requirement of that
respondent. In the case of balances maintained by a pass-through
correspondent that is not an eligible institution, a Reserve Bank shall
pay interest only on the balances maintained to satisfy a reserve
balance requirement of one or more respondents, and the correspondent
shall pass back to its respondents interest paid on balances in the
correspondent's account.
(d) * * *
(3) Balances maintained in an excess balance account will not
satisfy any institution's reserve balance requirement.
* * * * *
(e) * * *
(2) A term deposit will not satisfy any institution's reserve
balance requirement.
* * * * *
0
11. Effective January 24, 2013, Sec. 204.10 is further amended by
revising paragraphs (b)(1), (b)(3), and (c) to read as follows:
Sec. 204.10 Payment of interest on balances.
* * * * *
(b) * * *
(1) For balances up to the top of the penalty-free band, at \1/4\
percent;
* * * * *
(3) For balances up to the top of the penalty-free band, excess
balances, and term deposits, at any other rate or rates as determined
by the Board from time to time, not to exceed the general level of
short-term interest rates. For purposes of this subsection, ``short-
term interest rates'' are rates on obligations with maturities of no
more than one year, such as the primary credit rate and rates on term
federal funds, term repurchase agreements, commercial paper, term
Eurodollar deposits, and other similar instruments.
(c) Pass-through balances. A pass-through correspondent that is an
eligible institution may pass back to its respondent interest paid on
balances maintained to satisfy a reserve balance requirement of that
respondent. In the case of balances maintained by a pass-through
correspondent that is not an eligible institution, a Reserve Bank shall
pay interest only on the balances maintained to satisfy a reserve
balance requirement of one or more respondents up to the top of the
penalty-free band, and the correspondent shall pass back to its
respondents interest paid on balances in the correspondent's account.
* * * * *
By order of the Board of Governors of the Federal Reserve
System, April 5, 2012.
Robert deV. Frierson,
Deputy Secretary of the Board.
[FR Doc. 2012-8562 Filed 4-11-12; 8:45 am]
BILLING CODE 6210-01-P