[Federal Register Volume 80, Number 73 (Thursday, April 16, 2015)]
[Proposed Rules]
[Pages 20448-20454]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-08743]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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Federal Register / Vol. 80, No. 73 / Thursday, April 16, 2015 /
Proposed Rules
[[Page 20448]]
FEDERAL RESERVE SYSTEM
12 CFR Part 204
[Docket No. R-1513]
RIN 7100-AE31
Regulation D: Reserve Requirements for Depository Institutions
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Notice of proposed rulemaking; request for public comment.
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SUMMARY: The Board is requesting comment on proposed amendments to
Regulation D (Reserve Requirements of Depository Institutions)
regarding the payment of interest on certain balances maintained at
Federal Reserve Banks by or on behalf of eligible institutions.
Specifically, the Board proposes to amend Regulation D to permit
interest payments on certain balances to be based on a daily rate
rather than on a maintenance period average rate. The proposed
amendments should help to enhance the role of such rates of interest in
moving the federal funds rate into the target range established by the
FOMC, particularly on occasions when changes in those rates do not
coincide with the beginning of a maintenance period.
DATES: Comments must be received by May 18, 2015.
FOR FURTHER INFORMATION CONTACT: Sophia H. Allison, Special Counsel
(202/452-3565), Legal Division, or Thomas R. Keating, Financial Analyst
(202/973-7401), or Jeffrey W. Huther, Senior Economist (202/452-3139),
Division of Monetary Affairs; 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. Statutory and Regulatory 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. Regulation D, which
implements section 19 of the Act, requires that a depository
institution meet reserve requirements by holding cash in its vault, or
if vault cash is insufficient, in the form of a balance in an account
at a Federal Reserve Bank (``Reserve Bank'').\1\ Section 19 also
provides that balances maintained by or on behalf of certain
institutions in an account at a Reserve Bank may receive earnings to be
paid by the Reserve Bank at least once each quarter, at a rate or rates
not to exceed the general level of short-term interest rates.
Institutions that are eligible to receive earnings on their balances
held at Reserve Banks (``eligible institutions'') include the
institutions described in section 19(b)(1)(A) of the Act \2\ 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).\3\ Section 19 also provides that the Board may prescribe
regulations concerning the payment 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.\4\
Regulation D currently requires Reserve Banks to pay interest on
balances up to the top of the penalty-free band at a rate of \1/4\
percent, and on excess balances at a rate of \1/4\ percent.\5\
Regulation D defines ``top of the penalty-free band'' to mean 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.\6\ Regulation D defines ``excess balances'' to
mean the average balance maintained in an account at a Federal Reserve
Bank by or on behalf of an institution over a reserve maintenance
period (``maintenance period'') that exceeds the top of the penalty-
free band.\7\ As such, the balances on which interest is currently
payable under Regulation D are balances that are defined as maintenance
period average balances.
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\1\ 12 CFR 204.5(a)(1).
\2\ Section 19(b)(1)(A) defines ``depository institution'' as
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; 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; 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; any insured credit union as defined in
section 101 of the Federal Credit Union Act or any credit union
which is an eligible to make application to become an insured credit
union pursuant to section 201 of such Act; any member as defined in
section 2 of the Federal Home Loan Bank Act; and 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. See
12 U.S.C. 461(b)(1)(A).
\3\ Federal Reserve Act section 19(b)(12)(C), 12 U.S.C.
461(b)(12)(C), see 12 CFR 204.2(y) (definition of ``eligible
institution'').
\4\ See Federal Reserve Act section 19(b)(12), 12 U.S.C.
461(b)(12).
\5\ See Sec. 204.10(b)(1) and (2) of Regulation D, 12 CFR
204.10(b)(1) and (2).
\6\ See Sec. 204.2(gg) of Regulation D, 12 CFR 204.2(gg).
\7\ See Sec. 204.2(z) of Regulation D, 12 CFR 204.2(z).
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Currently, interest on balances up to the top of the penalty-free
band and on excess balances of eligible institutions at Reserve Banks
is, in each case, calculated by multiplying the average applicable
interest rate over the maintenance period by the amount that the
institution maintains, on average, over the maintenance period. If the
rate of interest on excess balances were to change at a time other than
at the beginning of a maintenance period, the interest on excess
balances would be the average interest rate for excess balances over
the maintenance period multiplied by the average excess balances
maintained over the maintenance period. For example, if the interest
rate on excess balances were to increase in the middle of a maintenance
period from 25 basis points (\1/4\ percent) to 50 basis points (\1/2\
percent), the interest on excess balances for that maintenance period
would be the average excess balances maintained over the maintenance
period multiplied by the average excess balance rate, i.e., 37.5 basis
points. As a result, the full effect of the increase in the excess
balance rate
[[Page 20449]]
to 50 basis points may not show through to market rates until some
number of days following the announcement of the new rate.
II. Summary of Proposal
In General
The Board proposes to amend Regulation D to permit interest
payments on certain balances to be based on a daily rate rather than on
a maintenance period average rate. The proposed amendments would define
an ``IORR \8\ rate'' and calculate interest on balances maintained up
to the top of the penalty-free band as the average IORR rate over a
maintenance period multiplied by the average balances maintained up to
the top of the penalty-free band over the maintenance period. The
proposed amendments would also define an ``IOER \9\ rate'' and, for
institutions that maintain balances in excess of the top of the
penalty-free band on average over the maintenance period, would
calculate interest as daily total balances multiplied by the daily IOER
rate, reduced by an adjustment to avoid double payment of interest on
balances up to the top of the penalty-free band. The proposed
amendments would therefore facilitate the calculation of interest paid
at the IOER rate on a daily basis applied to a daily balance, while
preserving the calculation of interest paid at the IORR rate as a
maintenance period average rate applied to a maintenance period average
balance. The proposed amendments should allow the full effect of an
increase in the IOER rate to show through to the daily level of short-
term market rates when an IOER rate change does not coincide with the
beginning of a maintenance period.
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\8\ I.e., ``interest on required reserves.'' ``Required
reserves'' is a term that historically referred to the amount that
an institution must maintain on average over a maintenance period to
satisfy its reserve balance requirement. Because Regulation D
currently provides for a penalty-free band around an institution's
reserve balance requirement, an institution's balances up to the top
of the penalty-free band is the current equivalent of what was
previously meant by ``required reserves.''
\9\ I.e., ``interest on excess reserves.''
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The proposed amendments would make other changes to Regulation D to
conform certain provisions to current practices as well as to improve
organization and make other clarifications. Currently, Sec.
204.10(b)(3) of Regulation D provides for payment of interest on 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. The proposed amendments would reflect current practices for term
deposit offerings by providing that interest on term deposits is either
the amount equal to the principal amount of the term deposit multiplied
by a rate specified in advance, or multiplied by the rate determined by
a term deposit auction. The proposed amendments would also make a
conforming change to current Sec. 204.10(d), governing ``excess
balance accounts,'' \10\ to provide for interest on such balances to be
paid at the IOER rate.
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\10\ An excess balance account as an account at a Reserve Bank
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.'' See Regulation D 12 CFR 204.2(aa).
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The proposed amendments would make other changes to improve the
organization of the section, including placing provisions generally
applicable to payments of interest together into one section (proposed
Sec. 204.10(a)). The proposed amendments would also add a new
provision to proposed Sec. 204.10(a) specifying that the amount of a
balance maintained in a Reserve Bank account is determined at the close
of the Reserve Bank's business day. This provision would eliminate
potential confusion over which balance (e.g., intra-day balance or end-
of-day balance) would be used as the basis for the calculation of
interest.
Finally, the proposed amendments would delete the provision
currently in Sec. 204.10(b) of Regulation D providing that interest
rates are as determined by the Board from time to time. The Board
proposes to announce future changes to the IORR rate or the IOER rate,
or to the mechanisms for calculating the interest on term deposits,
through amendments to Regulation D. The proposed amendments would add
Sec. 204.10(f) to Regulation D, providing that generally no public
comment will be sought on future changes to such rates or mechanisms,
and that the effective date of such future changes will generally not
be delayed.
Following the detailed description of the proposal below are
numerical examples illustrating the key features of the proposed
amendments in cases when the IORR and IOER rates change in the middle
of the reserve maintenance period.
Detailed Description of Proposal
1. Proposed Calculation of Interest
Currently, the amount of interest payable on balances maintained at
a Reserve Bank by or on behalf of an eligible institution is equal to
the sum of IORR and IOER. IORR is currently calculated as the
arithmetic average of the daily IORR rates in effect over a maintenance
period multiplied by the average level of balances up to the top of the
penalty-free band maintained over that maintenance period. IOER is
currently calculated as the arithmetic average of the daily IOER rate
in effect over a maintenance period multiplied by the institution's
average level of excess balances maintained over that maintenance
period.
As discussed above, the current methodology for calculating IOER
implies that an increase in the IOER rate may not immediately show
through fully to short-term market rates in cases when an IOER rate
change does not coincide with the beginning of a maintenance period. To
address this issue, for institutions that maintain balances on average
over the maintenance period in excess of the top of the penalty-free
band, the proposed amendments to Regulation D would implement the IOER
rate by multiplying the IOER rate in effect each day of the maintenance
period by the institution's total balances that day, less an adjustment
to avoid the double payment of interest on balances maintained up to
the top of the penalty-free band. The proposed amendments would make no
changes to the calculation of IORR under the current provisions of
Regulation D--that is, IORR would continue to be implemented by
multiplying the average IORR rate over the maintenance period by the
average level of balances up to the top of the penalty-free band
maintained over the maintenance period.
The implementation of IOER as set forth in the proposed
amendments--that is, calculating IOER based on the daily IOER rate
rather than the average of the daily rates--should support the
implementation of monetary policy in cases when changes in policy rates
are implemented in the middle of a maintenance period. For example,
under the proposed amendments, if the Board raised the IOER rate from
25 basis points to 50 basis points in the middle of a maintenance
period, eligible institutions would likely base their asset-liability
management decisions on the effective IOER rate of 50 basis points for
the remainder of that maintenance period.
2. Addressing a Special Case: A Floor on Interest Payments for
Institutions That Maintain Balances on Average Over a Maintenance
Period in Excess of the Top of the Penalty-Free Band
Under the proposed amendments, an institution's daily pattern of
balances maintained over the maintenance period
[[Page 20450]]
in a Reserve Bank account would determine its IOER. There is a special
case, however, in which an institution that maintained positive excess
balances on average over a maintenance period could end up receiving
less in total interest payments than if it had held balances equal to
the top of the penalty-free band on average over the maintenance
period. This special case would arise only in those maintenance periods
in which a rate change does not coincide with the beginning of a
maintenance period and the institution maintains relatively high levels
of total balances in its Reserve Bank account on days when the IORR
rate and the IOER rate are lower.
To address this special case, the proposed amendments specify a
minimum interest payment, or floor, applicable to total interest
payments for any institution that maintains balances on average over
the maintenance period in excess of the top of the penalty-free band.
Specifically, the proposed amendments set the floor for institutions
maintaining excess balances \11\ at an amount that would be equal to
the interest payment that the institution would have received if it had
maintained balances up to the top of its penalty-free band on average
over the maintenance period. Including the interest payment floor in
the proposed amendments for these institutions means that any
institution that maintained balances in excess of the top of the
penalty-free band on average over the maintenance period, but
maintained balances each day of the period in a manner that would cause
the special case above to apply, would be assured that it would receive
interest payments no lower than the interest payments it would have
received if it had maintained balances up to the top of the penalty-
free band on average over the maintenance period.
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\11\ Specifically, institutions that maintain balances that are,
on average over the maintenance period, in excess of the top of the
penalty-free band.
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At present and for the foreseeable future, the proposed floor is
one that likely will have little practical significance for most
institutions or for federal funds market activity. Given the very large
quantities of excess balances currently in the banking system, the
Board believes that there are very few institutions for which this
special case would be relevant. Nonetheless, the inclusion of the
interest payment floor in the proposed amendments avoids penalizing an
institution that maintained positive excess balances on average over a
maintenance period, but nevertheless would receive less in interest
under the proposed methodology than it would if it had maintained
balances up to the top of the penalty-free band.
3. Proposed Formulas for the Calculation of Interest and Examples
The proposed methodology calculates IOER by multiplying the IOER
rate in effect each day of the maintenance period by the institution's
total balances that day, less an adjustment to avoid the double payment
of interest on balances maintained up to the top of the penalty-free
band. Under the proposed methodology, the formulas used in determining
interest payments distinguish between two basic cases--one in which
institutions maintain, on average over the maintenance period, balances
in excess of the top of the penalty-free band, and a second in which
the institution maintains, on average over the maintenance period,
balances that are equal to or lower than the top of the penalty-free
band. In the first case, the proposed methodology would result in
calculating the interest on balances in an account at a Reserve Bank as
follows:
[GRAPHIC] [TIFF OMITTED] TP16AP15.003
Where:
14 = the number of days in a reserve maintenance period
360 = the number of days in the year used to annualize interest
Avg. IORR rate = arithmetic average of the daily IORR rates in
effect over a maintenance period
BMRBR = average balances maintained to satisfy a reserve balance
requirement (up to the top of the penalty-free band) over a
maintenance period
Avg. IOER rate = arithmetic average of the daily IOER rates in
effect over a maintenance period
Total Balances = daily total balance held
In the second case, the proposed methodology would result in
calculating the interest as follows:
[GRAPHIC] [TIFF OMITTED] TP16AP15.004
The following are examples of the application of the key features
of the proposed amendments to a case where the IORR and IOER rates
change in the middle of a maintenance period. Each of the examples
assumes:
The top of the penalty-free band is $100,000;
[[Page 20451]]
Balances maintained are the same for each day of the
calendar week of the two-week maintenance period. Thus, the average
daily balance for each week is equal to the daily amount of balances
maintained;
The IORR and IOER annual rates are set at 0.36 percent in
week one and at 0.72 percent in week two; and
Interest is calculated based on a 360-day year.
As a baseline, Example 1 applies the current methodology for
calculating IORR and IOER interest payments for an eligible institution
that maintains an average daily balance of $150,000 throughout the
maintenance period:
Example 1--Current Calculation of IORR and IOER
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Week Balance IORR Rate IOER Rate
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1...................................................... 150,000 0.0036 0.0036
2...................................................... 150,000 0.0072 0.0072
IORR Payment........................................... ................. 21.00
IOER Payment........................................... ................. 10.50
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In Example 1, the institution maintains a balance of $150,000 each
day of the maintenance period. IORR is calculated as the average IORR
rate (annualized using a 360-day year) over the maintenance period
(0.54 percent) multiplied by average balances up to the top of the
penalty free band over the maintenance period ($100,000) times the
number of days in the maintenance period (14), resulting in an IORR
payment of $21.00. IOER is similarly calculated as the average IOER
rate (annualized using a 360-day year) over the maintenance period
(0.54 percent) multiplied by average excess balances over the
maintenance period ($50,000) times the number of days in the
maintenance period (14), resulting in an IOER payment of $10.50. The
institution thus receives $31.50 in total interest payments for the two
week maintenance period.
Example 2--Proposed Amendments: Week 1 Balances = Week 2 Balances
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Week 1 Balance IORR Rate IEOR Rate
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1...................................................... 150,000 0.0036 0.0036
2...................................................... 150,000 0.0072 0.0072
IORR Payment........................................... ................. 21.00
IOER Payment........................................... ................. 10.50
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In Example 2, the institution again maintains a balance of $150,000
each day of the maintenance period, but interest payments are
calculated according to Equation (1) under the proposed amendments. The
calculation of IORR is the same as in Example 1: The average IORR rate
over the maintenance period (0.54 percent) multiplied by average
balances up to the top of the penalty free band over the maintenance
period ($100,000) times the number of days in the maintenance period
(14), resulting in an IORR payment of $21.00. However, the calculation
of IOER is based on the application of proposed Sec.
204.10(b)(1)(B)(i) and (ii), where the amount of IOER is equal to the
IOER rate in effect each day multiplied by the total balances
maintained on that day for each day of the maintenance period, reduced
by the amount specified in Sec. 204.10(b)(1)(B)(ii). The amount of the
reduction prescribed by proposed Sec. 204.10(b)(1)(B)(ii) is equal to
the average IOER rate over the maintenance period multiplied by the
average balance up to the top of the penalty-free band maintained over
the maintenance period. The proposed amendments described in Example 2
yield a total IOER payment of $10.50. Thus, the total interest payments
in this case are exactly the same as in Example 1. For any institution
that maintains excess balances, this is a general result: If balances
are constant across all days of the maintenance period, the proposed
methodology generates exactly the same interest payments as the
calculation under current provisions of Regulation D.
Example 3--Proposed Amendments: Week 2 Balances Exceed Week 1 Balances
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Week 1 Balance IORR Rate IOER Rate
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1...................................................... 100,000 0.0036 0.0036
2...................................................... 200,000 0.0072 0.0072
IORR Payment........................................... ................. 21.00
IOER Payment........................................... ................. 14.00
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In Example 3, the eligible institution's maintenance of excess
balances during the course of the maintenance period is tilted toward
Week 2, when the higher IOER rate is in effect. The calculation for
IORR under the proposed amendments is unchanged from Example 1 (current
methodology), resulting in an IORR payment of $21.00. The calculation
for IOER under the proposed amendments, however, results in an IOER
payment of $14.00 calculated as follows:
IOER = ($100,000 * 0.0036) * 7/360 + ($200,000 * 0.0072) * 7/360 -
(100,000 * 0.0054) * 14/360 [(Daily Balance Week 1 * IOER Week 1) +
(Daily Balance Week 2 * IOER Week 2) - (Avg. Required Reserve Balance *
Average IOER rate)].
IOER is higher under the proposed amendments as shown in Example 3
($14.00) than under the current provisions of Regulation D as shown in
[[Page 20452]]
Example 1 ($10.50). This illustrates a key feature of the proposed
amendments: when an IOER rate change occurs in the middle of a
maintenance period, eligible institutions immediately begin receiving
interest on balances in excess of the penalty-free band at the new IOER
rate. In Example 3, the eligible institution begins earning the higher
IOER rate of 0.72 percent as soon as the higher IOER rate becomes
effective in the middle of the maintenance period. In contrast, as
shown in Example 1, the effective IOER rate on balances in excess of
the penalty-free band under the current provisions of Regulation D is
0.54 percent--the average of the IOER rates in weeks 1 and 2. In
Example 1, the full effect of the increase in IOER to 72 basis points
would not be reflected in interest payments until the beginning of a
new maintenance period.
Example 4--Role of the Floor on Interest Payments in Proposed Methodology
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Week 1 Balance IORR Rate IOER Rate
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1...................................................... 130,000 0.0036 0.0036
2...................................................... 80,000 0.0072 0.0072
IORR Payment........................................... ................. 21.00
IOER Payment........................................... ................. 0.00
Memo: IOER Payment (without Floor)..................... ................. -0.69
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In Examples 2 and 3, the provision in the proposed amendments for a
floor on interest payments did not come into play. In Example 4, the
institution's average total balances over the period are $105,000
(implying only $5,000 in excess), and the institution ends up holding
higher balances during the first week of the maintenance period when
the IOER rate is lower. As shown in the Example 4 table above, the
institution maintains $130,000 in the first week of the maintenance
period and $80,000 in the second week of the maintenance period.
Calculating IOER under the proposed amendments would result in a ``pre-
floor'' interest payment on excess balances of -$0.69. The negative
``interest payment'' results from the end of period adjustment factor
in proposed Sec. 204.10(b)(1)(B)(ii). That adjustment factor is equal
to the average IOER rate over the maintenance period multiplied by the
average balance up to the top of the penalty-free band maintained over
the maintenance period. Since the institution held the majority of its
balances that would receive the daily IOER rate when the daily IOER
rate was below the average IOER rate, the adjustment factor in proposed
Sec. 204.10(b)(1)(B)(ii) was greater than the interest attributable to
balances over the top of the penalty-free band in proposed Sec.
204.10(b)(1)(B)(i). With the inclusion in the proposed amendments of
the interest payment floor, however, the interest payment on excess
balances is revised upwards to 0 and the eligible institution's total
interest payment is $21.00--the same as the interest payments the
institution would have earned had it held balances on average exactly
equal to the top of the penalty-free band ($100,000) over the
maintenance period.
Example 5--Balances Equal to or Lower Than Top of Penalty-Free Band
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Week 1 Balance IORR Rate IOER Rate
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1...................................................... 90,000 0.0036 0.0036
2...................................................... 106,000 0.0072 0.0072
IORR Payment........................................... ................. 20.58 .................
IOER Payment........................................... ................. 0.00 .................
----------------------------------------------------------------------------------------------------------------
The first four examples involve eligible institutions that
maintained balances, on average over the maintenance period, in excess
of the top of their penalty-free bands. Example 5 involves an eligible
institution that maintained balances on average over the maintenance
period equal to $98,000, slightly lower than the top of the penalty-
free band. Under the proposed amendments, the interest calculation
method for institutions that hold average balances over the maintenance
period equal to or lower than the top of the penalty-free band would
not change from the current practice. For these institutions, interest
would be calculated by taking the average IORR rate over the
maintenance period (0.54 percent) multiplied by average balances up to
the top of the penalty free band over the maintenance period ($98,000)
times the number of days in the maintenance period (14), resulting in
an IORR payment of $20.58. The institution does not hold balances above
the top of the penalty-free band and thus would not receive an IOER
payment nor would it benefit from holding larger balances on days when
the higher IOER rate was in effect.
III. Section by Section Analysis
Section 204.10(a) General
The Board proposes to amend Sec. 204.10(a) to incorporate certain
provisions of current Sec. 204.10(b) and to add a new provision
describing the amount of a ``balance'' in an account at a Reserve Bank
for purposes of the section.
Proposed Sec. 204.10(a)(1) incorporates part of current Sec.
204.10(b)(3) into current Sec. 204.10(a) and provides that, except as
provided in Sec. 204.10(c), interest on balances maintained at Reserve
Banks by or on behalf of an eligible institution is established by the
Board in accordance with this section, at a rate or rates not to exceed
the general level of short-term interest rates.
Proposed Sec. 204.10(a)(2) adds a new provision to Regulation D
specifying that the amount of a ``balance'' in an account at a Reserve
Bank for purposes of Sec. 204.10 is determined at the close of the
Reserve Bank's business day.
Proposed Sec. 204.10(a)(3) moves the definition of ``short-term
interest rates'' from current Sec. 204.10(b)(3) into proposed Sec.
204.10(a)(3).
Proposed Sec. 204.10(a)(4) moves the provision in current Sec.
204.10(a) regarding other terms and conditions for interest payments as
the Board may prescribe into proposed Sec. 204.10(a)(4).
[[Page 20453]]
Section 204.10(b) Payment of interest
Proposed Sec. 204.10(b) relates to payments of interest on
balances at Reserve Banks: excess balances, balances up to the top of
the penalty-free band, and term deposits.
Proposed Sec. 204.10(b)(1) and (2) set forth the amount of
interest to be paid on balances of institutions that, on average over
the maintenance period, maintain balances in excess of the top of the
penalty-free band. These two paragraphs provide for interest at the
IORR rate, interest at the IOER rate, the adjustment to interest at the
IOER rate, and the minimum interest amount.
Proposed Sec. 204.10(b)(3) provides that interest for institutions
that, on average over the maintenance period, maintain balances that
are equal to or lower than the top of the penalty-free band is the
average IORR rate over the maintenance period multiplied by the average
balances maintained over the maintenance period.
Proposed Sec. 204.10(b)(4) provides for interest on term deposits.
New Sec. 204.10(b)(4)(A) provides for interest on term deposits at a
rate specified in advance by the Board, in light of existing short-term
market rates, to maintain the federal funds rate at a level consistent
with monetary policy objectives. Section 204.10(b)(4)(B) provides for
interest on term deposits at a rate determined by the auction through
which such term deposits are offered.
Proposed Sec. 204.10(b)(5) specifies the IORR rate used in
proposed Sec. 204.10(b)(1) and (3), and the IOER rate used in proposed
Sec. 204.10(b)(1)(B)(i) and (ii).
Section 204.10(c) Pass-Through Balances
Proposed Sec. 204.10(c) sets forth the language of current Sec.
204.10(c), with one change. In the second sentence of proposed Sec.
204.10(c), the word ``shall'' is changed to ``may'' to conform the
paragraph with the provisions of Sec. 204.10(b).
Section 204.10(d) Excess Balance Accounts
Proposed Sec. 204.10(d)(5) revises current Sec. 204.10(d)(5) by
specifying that interest on excess balance accounts is the amount equal
to the IOER rate in effect each day multiplied by the total balances
maintained on that day for each day of the maintenance period.
Section 204.10(f) Procedure for Determination of Rates
Proposed Sec. 204.10(f) sets forth a provision not previously
appearing in Regulation D governing the procedure for determination of
rates. Specifically, proposed Sec. 204.10(f) provides that the Board
anticipates that it generally will not seek advance notice, public
comment, or delayed effective dates with respect to changes in the
rates of interest set forth in Sec. 204.10. Proposed Sec. 204.10(f)
also specifies the reasons that the Board generally expects to apply in
such cases.
IV. Form of Comment Letters
Comment letters should refer to Docket No. R-1513 and, when
possible, should use a standard typeface with a font size of 10 or 12;
this will enable the Board to convert text submitted in paper form to
machine-readable form through electronic scanning, and will facilitate
automated retrieval of comments for review. Comments may be mailed
electronically to [email protected].
V. Solicitation of Comments Regarding Use of ``Plain Language''
Section 722 of the Gramm-Leach-Bliley Act of 1999 requires the
Board to use ``plain language'' in all proposed and final rules
published after January 1, 2000. The Board invites comments on whether
the proposed rule is clearly stated and effectively organized, and how
the Board might make the proposed text easier to understand.
VI. Initial Regulatory Flexibility Analysis
In accordance with Section 3(a) of the Regulatory Flexibility Act
(RFA) (5 U.S.C. 601, et seq.), the Board has reviewed the proposed
amendments to Regulation D. A final regulatory flexibility analysis
will be conducted after consideration of comments received during the
public comment period.
1. Statement of the objectives of the proposal. The Board is
proposing to amend Regulation D in order to facilitate the conduct of
monetary policy. Section 19 of the Act was enacted to impose reserve
requirements on certain deposits and other liabilities of depository
institutions for monetary policy purposes. The Board proposes to amend
Regulation D to facilitate the transmission of monetary policy through
the rates of interest paid on balances of eligible institutions at
Reserve Banks. Specifically, the Board proposes to amend Regulation D
to permit interest payments on certain balances to be based on a daily
rate rather than on a maintenance period average rate. The proposed
amendments should help to enhance the role of such rates of interest in
moving the federal funds rate into the target range established by the
FOMC.
2. Small entities affected by the proposal. The proposal would
affect all eligible institutions that maintain balances to satisfy
reserve balance requirements or excess balances at a Reserve Bank. The
Board estimates that there are currently approximately 8,725 eligible
institutions that maintain such balances. The Board estimates that
approximately 6,950 of these institutions could be considered small
entities with assets of $550 million or less.
3. Other federal rules. The Board believes that no federal rules
duplicate, overlap, or conflict with the proposed amendments.
4. Significant alternatives to the proposed amendments. The
proposed amendments do not impose any burden on depository institutions
of any size. The proposed amendments relate to payment of earnings on
balances of eligible institutions and do not provide for any new or
additional reporting or other obligations.
VI. Paperwork Reduction Act
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
proposed rule under the authority delegated to the Board by the Office
of Management and Budget (OMB). The proposed rule contains no
requirements subject to the PRA.
List of Subjects in 12 CFR Parts 204
Banks, Banking, Reporting and recordkeeping requirements.
Authority and Issuance
For the reasons set forth in the preamble, the Board proposes to
amend 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. Section 204.10 is amended by revising paragraphs (a), (b), (c), and
(d)(5), and adding paragraph (f) to read as follows:
Sec. 204.10 Payment of interest on balances.
(a) General. (1) Except as provided in paragraph (c) of this
section, interest on balances maintained at Federal Reserve Banks by or
on behalf of an eligible institution shall be established by the Board
in accordance with this section,
[[Page 20454]]
at a rate or rates not to exceed the general level of short-term
interest rates.
(2) For purposes of this section, the amount of a ``balance'' in an
account maintained by or on behalf of an eligible institution at a
Federal Reserve Bank is determined at the close of the Federal Reserve
Bank's business day.
(3) For purposes of this section, ``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.
(4) The payment of interest on balances under this section shall be
subject to such other terms and conditions as the Board may prescribe.
(b) Payment of interest. Interest on balances maintained at Federal
Reserve Banks by or on behalf of an eligible institution is established
as set forth in paragraphs
(b)(1) through (4) of this section. The rates for IORR and IOER are
set forth in paragraph (b)(5) of this section.
(1) For institutions that maintain balances that are, on average
over the maintenance period, in excess of the top of the penalty-free
band, interest is:
(A) The amount equal to the average IORR rate over the maintenance
period multiplied by the average balance up to the top of the penalty-
free band maintained over the maintenance period; plus
(B)(i) The amount equal to the IOER rate in effect each day
multiplied by the total balances maintained on that day for each day of
the maintenance period; minus
(ii) The amount equal to the average IOER rate over the maintenance
period multiplied by the average balance up to the top of the penalty-
free band maintained over the maintenance period.
(2) The interest amount under paragraph (b)(1) of this section
shall not be less than an amount equal to the amount specified in
paragraph (b)(1)(A) of this section.
(3) For institutions that maintain balances that are, on average
over the maintenance period, equal to or lower than the top of the
penalty-free band, interest is the amount equal to the average IORR
rate over the maintenance period multiplied by the average balance
maintained over the maintenance period.
(4) For term deposits, interest is:
(A) The amount equal to the principal amount of the term deposit
multiplied by a rate specified in advance by the Board, in light of
existing short-term market rates, to maintain the federal funds rate at
a level consistent with monetary policy objectives; or
(B) The amount equal to the principal amount of the term deposit
multiplied by a rate determined by the auction through which such term
deposits are offered.
(5) The rates for IORR and IOER are:
------------------------------------------------------------------------
Rate Effective
------------------------------------------------------------------------
IORR............................ \1/4\ percent.....
IOER............................ \1/4\ percent.....
------------------------------------------------------------------------
(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 may
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.
(d) * * *
* * * * *
(5) Interest on balances of eligible institutions maintained in an
excess balance account is the amount equal to the IOER rate in effect
each day multiplied by the total balances maintained on that day for
each day of the maintenance period.
* * * * *
(f) Procedure for determination of rates. The Board anticipates
that notice and public participation with respect to changes in the
rate or rates of interest to be paid under this section will generally
be impracticable, unnecessary, contrary to the public interest, or
otherwise not required in the public interest, and that there will
generally be reason and good cause in the public interest why the
effective date should not be deferred for 30 days. The reason or
reasons in such cases are generally expected to include that such
notice, public participation, or deferment of effective date would
prevent the action from becoming effective as promptly as necessary in
the public interest, would permit speculators or others to reap unfair
profits or to interfere with the Board's actions taken with a view to
accommodating commerce and business and with regard to their bearing
upon the general credit situation of the country, would provoke other
consequences contrary to the public interest, would not aid the persons
affected, or would otherwise serve no useful purpose.
By order of the Board of Governors of the Federal Reserve
System, April 13, 2015.
Michael Lewandowski,
Associate Secretary of the Board.
[FR Doc. 2015-08743 Filed 4-15-15; 8:45 am]
BILLING CODE 6210-01-P