[Federal Register Volume 80, Number 119 (Monday, June 22, 2015)]
[Rules and Regulations]
[Pages 35565-35568]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-15238]
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Rules and Regulations
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains regulatory documents
having general applicability and legal effect, most of which are keyed
to and codified in the Code of Federal Regulations, which is published
under 50 titles pursuant to 44 U.S.C. 1510.
The Code of Federal Regulations is sold by the Superintendent of Documents.
Prices of new books are listed in the first FEDERAL REGISTER issue of each
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Federal Register / Vol. 80, No. 119 / Monday, June 22, 2015 / Rules
and Regulations
[[Page 35565]]
FEDERAL RESERVE SYSTEM
12 CFR Part 204
[Docket No. R-1513; RIN 7100 AE-31]
Regulation D: Reserve Requirements for Depository Institutions
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Final rule.
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SUMMARY: The Board is amending 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 amendments permit interest
payments on certain balances to be based on a daily rate rather than on
a maintenance period average rate. The 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.
DATE: The final rule is effective July 23, 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, by maintaining 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 depository
institutions and certain other institutions.\2\ Section 19 also
provides that the Board may prescribe regulations concerning the
payment of earnings on balances at a Reserve Bank.\3\
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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 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). Eligible institution also includes 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). 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'').
\3\ See Federal Reserve Act section 19(b)(12), 12 U.S.C.
461(b)(12).
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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 above that level at a rate of \1/4\
percent.\4\
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\4\ See Sec. 204.10(b)(1)-(2) of Regulation D, 12 CFR
204.10(b)(1)-(2). 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. Section
204.2(gg) of Regulation D, 12 CFR 204.2(gg). 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 that exceeds the top of the
penalty free band. Section 204.2(z) of Regulation D, 12 CFR
204.2(z).
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For purposes of computing the interest to be paid, an average of
relevant balances over a 14-day maintenance period is multiplied by an
average of the applicable interest rate in effect for each day of a
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
to 50 basis points may not show through to market rates until some
number of days following the announcement of the new rate.
II. Request for Public Comment and Summary of Comments Received
The Board published its request for public comment on proposed
amendments to Regulation D in the Federal Register on April 16,
2015.\5\ Under the proposal, Regulation D would define an ``IORR \6\
rate'' and would 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.
Regulation D would also define an ``IOER \7\ 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
[[Page 35566]]
IOER rate, reduced by an adjustment to avoid double payment of interest
on balances up to the top of the penalty-free band.
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\5\ 80 FR 20448 (Apr. 16, 2015).
\6\ 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.''
\7\ I.e., ``interest on excess reserves.''
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The Board stated in the proposal that the purpose of this proposed
amendment was to 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. The Board proposed other amendments to Regulation D to conform
certain provisions to current practices as well as to improve
organization and make other clarifications.
Summary of Public Comments Received
The Board received four comments on the proposal, three from
depository institutions and one from a trade association. One commenter
expressed general support for the proposal without additional
elaboration. Another commenter expressed support for the proposal
because the proposal would improve the Federal Reserve System's
responsiveness to economic trends and new market data. A third
commenter expressed support for the proposal generally but recommended
that depository institutions receive account statements that would
provide itemization of the balances and calculations of IORR and IOER
under Regulation D as amended. Itemization of interest payments along
with information on balances held will be available to depository
institutions through the Reserves Central-Reserves Account
Administration application.\8\
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\8\ See https://www.frbservices.org/centralbank/reservescentral/index.html.
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A fourth commenter did not address the matters raised by the
proposal but expressed concerns more generally regarding the role of
the payment of interest on excess balances at Reserve Banks and the
interaction between those payments, the Federal Reserve Payment System
Risk policy for measuring daylight overdrafts, and the Liquidity
Coverage Ratio (LCR) treatment of federal funds and financial
institution deposits. The commenter also requested that the Federal
Reserve clearly articulate the policy use and long-term goals of
interest bearing reserves and conduct a policy review in two years. The
commenter suggested the current level of interest paid on excess
balances encourages banks to remove funds from the federal funds
market, thereby reducing volumes and liquidity in inter-bank lending
markets. In addition, the commenter argued that the payment of interest
on reserves along with the Federal Reserve's access to transaction-
level data on borrowing by individual depository institutions in the
federal funds and Eurodollar markets provides a competitive advantage
to Reserve Banks over private sector correspondent institutions.
The Board believes that the payment of interest on excess balances
plays an important role in the implementation of monetary policy by
contributing to the Federal Reserve's ability to influence the level of
the federal funds rate and other short-term interest rates. As clearly
articulated by the Federal Open Market Committee (FOMC) in its Policy
Normalization Principles and Plans, the Federal Reserve intends to use
the payment of interest on excess balances to move the federal funds
rate into the target range established by the FOMC.\9\ The purpose of
adjusting the rate of interest paid on reserves is not in any way to
provide the Federal Reserve with a competitive advantage in the
payments system. Moreover, the proposed changes to Regulation D
underscore and support the monetary policy role that these rates serve.
The Board believes that the proposed change in the methodology for the
calculation of interest on balances at Reserve Banks as set forth in
the final rule will have no significant impact on the issues noted by
the commenter. Furthermore, as has been the case in the past, the role
of interest payments on excess balances will continue to be publicly
articulated by the Board and FOMC, such as through FOMC statements and
minutes, Board and FOMC policy statements, and testimony and speeches
by Federal Reserve officials.
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\9\ See http://www.federalreserve.gov/newsevents/press/monetary/20140917c.htm.
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III. Section by Section Analysis
Section 204.10(a) General
The Board proposed 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. The Board received no comments on this
provision and is adopting it as proposed.
Section 204.10(b) Payment of Interest
The Board proposed to amend Sec. 204.10(b)(1) and (2) to 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 subsections 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. The Board
also proposed to amend Sec. 204.10(b)(3) to provide 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. The Board
proposed to amend Sec. 204.10(b)(4) to provide for interest on term
deposits and proposed to add Sec. 204.10(b)(5) to specify the IORR
rate and the IOER rate. The Board did not receive any comments on these
specific provisions and is adopting them as proposed.
Section 204.10(c) Pass-Through Balances
The Board proposed to amend Sec. 204.10(c) to change the word
``shall'' to ``may'' in the second sentence to conform the paragraph
with the provisions of Sec. 204.10(b). The Board did not receive any
comments on this provision and is adopting it as proposed.
Section 204.10(d) Excess Balance Accounts
The Board proposed to amend Sec. 204.10(d)(5) to specify 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. The Board received no
comments on this specific provision and is adopting it as proposed.
Section 204.10(f) Procedure for Determination of Rates
The Board proposed to amend Regulation D to add a new provision,
proposed Sec. 204.10(f), to govern the procedure for determination of
rates. The Board received no comments on this provision and is adopting
it as proposed.
IV. 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 final rules. 12 U.S.C. 1408. The
Board sought to present the proposed amendments in a simple and
straightforward manner. The Board received no comments on whether the
proposed rule was clearly stated and effectively organized or on how
the Board might make the proposed text easier to understand.
[[Page 35567]]
V. Final Regulatory Flexibility Analysis
An initial regulatory flexibility analysis (IRFA) was included in
the Board's proposed rule in accordance with the Regulatory Flexibility
Act (RFA) (5 U.S.C. 601 et seq.). In the IRFA, the Board specifically
solicited comment on whether the proposed rule would have a significant
economic impact on a substantial number of small entities. The Board
received no comments in response to its request for comments on its
IRFA.
Section 4 of the RFA requires an agency to provide a final
regulatory flexibility analysis with a final rule. Banks and other
depository institutions are considered ``small'' if they have less than
$550 million in assets. For the reasons stated below, the Board
believes that the final rule will not have a significant impact on a
substantial number of small entities.
1. Statement of the objectives of the proposal. The Board is
publishing final amendments to 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 is
publishing final amendments to Regulation D to facilitate the
transmission of monetary policy through the rates of interest paid on
balances of eligible institutions at Reserve Banks by permitting
interest payments on certain balances to be based on a daily rate
rather than on a maintenance period average rate. The Board believes
that these 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. The more effective implementation of monetary
policy that the rule supports benefits all entities, including small
entities. The potential costs for eligible institutions associated with
the amendments are low because the amendments do not require any
changes to their existing processes and operations. Moreover, the
amendments are not likely to harm small eligible institutions or other
eligible institutions because they will continue to receive earnings on
their balances at Reserve Banks.
2. Small entities affected by the proposal. The final rule will
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 has not identified any other
federal rules that duplicate, overlap, or conflict with the final rule.
4. Significant alternatives to the proposed amendments. The Board
believes that the final rule does not impose any burden on depository
institutions of any size. The final rule relates to payment of earnings
on balances of eligible institutions and does 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
final rule under the authority delegated to the Board by the Office of
Management and Budget (OMB). The final rule contains no requirements
subject to the PRA.
List of Subjects in 12 CFR Part 204
Banks, Banking, Reporting and recordkeeping requirements.
For the reasons set forth in the preamble, the Board amends 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, 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:
(i) 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
(ii)(A) 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
(B) 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)(i) 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:
(i) 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
(ii) 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:
[[Page 35568]]
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Rate
(percent) Effective
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IORR................................ \1/4\ 12/18/2008
IOER................................ \1/4\ 12/18/2008
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(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, June 17, 2015.
Robert deV. Frierson,
Secretary of the Board.
[FR Doc. 2015-15238 Filed 6-19-15; 8:45 am]
BILLING CODE 6210-01-P