[Federal Register Volume 86, Number 5 (Friday, January 8, 2021)]
[Proposed Rules]
[Pages 1303-1306]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-28755]


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 Proposed Rules
                                                 Federal Register
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 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
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  Federal Register / Vol. 86, No. 5 / Friday, January 8, 2021 / 
Proposed Rules  

[[Page 1303]]



FEDERAL RESERVE SYSTEM

12 CFR Part 204

Docket No. R-1737
RIN 7100-AG07


Regulation D: Reserve Requirements of 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 of Governors of the Federal Reserve System 
(``Board'') proposes to amend its Regulation D (Reserve Requirements of 
Depository Institutions) to eliminate references to an ``interest on 
required reserves'' rate and to an ``interest on excess reserves'' rate 
and replace them with a reference to a single ``interest on reserve 
balances'' rate. The Board also proposes to simplify the formula used 
to calculate the amount of interest paid on balances maintained by or 
on behalf of eligible institutions in master accounts at Federal 
Reserve Banks, and to make other conforming changes.

DATES: Comments must be received on or before March 9, 2021.

ADDRESSES: You may submit comments, identified by Docket Number R-1737; 
RIN 7100-AG07, by any of the following methods:
     Agency Website: http://www.federalreserve.gov. Follow the 
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
     Email: [email protected]. Include the 
docket number and RIN in the subject line of the message.
     Fax: (202) 452-3819 or (202) 452-3102.
     Mail: Ann E. Misback, Secretary, Board of Governors of the 
Federal Reserve System, 20th Street and Constitution Avenue NW, 
Washington, DC 20551.
    All public comments are available from the Board's website at 
http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as 
submitted, unless modified for technical reasons or to remove 
personally identifiable information at the commenter's request. 
Accordingly, comments will not be edited to remove any identifying or 
contact information. Public comments may also be viewed electronically 
or in paper in Room 146, 1709 New York Avenue NW, Washington, DC 20006, 
between 9:00 a.m. and 5:00 p.m. on weekdays.

FOR FURTHER INFORMATION CONTACT: Sophia H. Allison, Senior Special 
Counsel, (202-452-3565), Legal Division, or Matthew Malloy (202-452-
2416), Division of Monetary Affairs, or Heather Wiggins (202-452-3674), 
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

    Section 19(b)(2) of the Federal Reserve Act (``Act'') \1\ requires 
each depository institution to maintain reserves against its 
transaction accounts, nonpersonal time deposits, and Eurocurrency 
liabilities within ratios prescribed by the Board for the purpose of 
implementing monetary policy. Reserve requirement ratios for 
nonpersonal time deposits and Eurocurrency liabilities have been set at 
zero percent since 1990. Effective March 24, 2020, the Board amended 
Regulation D to set all reserve requirement ratios for transaction 
accounts to zero percent, eliminating all reserve requirements.\2\
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    \1\ 12 U.S.C. 461(b)(2).
    \2\ Regulation D (Reserve Requirements of Depository 
Institutions) Interim Final Rule, 85 FR 16525 (March 24, 2020).
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    Section 19(b)(12) of the Act provides that balances maintained by 
or on behalf of ``eligible institutions'' in accounts at Federal 
Reserve Banks 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.\3\ Eligible institutions include 
depository institutions and certain other institutions as specified in 
the Act.\4\ Section 19(b)(12) also provides that the Board may 
prescribe regulations concerning the payment of earnings on balances at 
a Reserve Bank.\5\
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    \3\ 12 U.S.C. 461 (b)(12)(A).
    \4\ See 12 U.S.C. 461(b)(1)(A) & (b)(12)(C); see also 12 CFR 
204.2(y).
    \5\ See 12 U.S.C. 461(b)(12)(B).
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    Regulation D currently establishes an ``interest on required 
reserves'' (``IORR'') rate of 0.10 percent and an ``interest on excess 
reserves'' (``IOER'') rate of 0.10 percent.\6\ Regulation D also 
applies the IORR rate and the IOER rate to balances maintained by or on 
behalf of eligible institutions based on whether such balances are or 
are not maintained to satisfy reserve balance requirements. 
Specifically, the IORR rate applies to balances that an eligible 
institution maintains, on average over the maintenance period, that are 
equal to or lower than ``the top of the penalty-free band.'' \7\ The 
``top of the penalty-free band'' is defined 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.'' \8\ A ``reserve balance requirement'' is defined as ``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.'' \9\ 
Regulation D applies the IOER rate to balances maintained in excess of 
the top of the penalty-free band.\10\
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    \6\ 12 CFR 204.10(b)(5).
    \7\ 12 CFR 204.10(b)(1)-(3).
    \8\ 12 CFR 204.2(gg).
    \9\ 12 CFR 204.2(ee).
    \10\ 12 CFR 204.2(z).
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    With the setting of transaction account reserve requirement ratios 
to zero, depository institutions no longer have to maintain balances to 
satisfy a reserve balance requirement. To account for such changes, the 
Board is proposing to amend Regulation D in two ways. First, the 
proposed amendments would replace references to an IORR rate and an 
IOER rate with references to a single ``interest on reserve balances'' 
(``IORB'') rate. Second, the proposed amendments would streamline the 
calculation of interest by multiplying the IORB rate on a day by the 
balances maintained on that day. The proposed amendments would 
eliminate the unnecessary distinction between institutions that 
maintain balances above or below an amount related to reserve 
requirements.

[[Page 1304]]

In addition, the Board is proposing to amend Regulation D to refer to 
balances maintained in ``excess balance accounts'' \11\ (``EBAs'') as 
``balances'' rather than as ``excess balances'' and to apply the 
proposed ``IORB'' rate and proposed interest calculation to such 
balances.
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    \11\ See 12 CFR 204.2(aa) (definition of excess balance 
account).
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II. Discussion

A. Section-by-Section Analysis

1. Section 204.2(aa)
    Section 204.2(aa) currently defines an EBA as ``an account at a 
Reserve Bank pursuant to Sec.  204.10(d) of this part that is 
established by one or more eligible institutions through an agent and 
in which only excess balances of the participating eligible 
institutions may at any time be maintained. An excess balance account 
is not a ``pass-through account'' for purposes of this part.'' \12\ The 
Board proposes to amend section 204.2(aa) to delete the word ``excess'' 
from the first sentence of this definition. As revised, the first 
sentence of section 204.2(aa) would define an EBA as ``an account at a 
Reserve Bank pursuant to Sec.  204.10(d) of this part that is 
established by one or more eligible institutions through an agent and 
in which only balances of the participating eligible institutions may 
at any time be maintained.''
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    \12\ The Board authorized excess balance accounts in 2009 to 
permit eligible institutions to maintain established correspondent-
respondent relationships while mitigating the implications for the 
correspondent's balance sheet and its leverage ratio for capital 
adequacy purposes. Proposed Rule, 74 FR 5628, 5629 (Jan. 30, 2009); 
see Final Rule, 74 FR 25620, 25625-25628 (May 29, 2009).
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2. Section 204.10(b)
    Section 204.10(b) establishes the interest paid on different types 
of balances maintained by or on behalf of eligible institutions at 
Reserve Banks. Sections 204.10(b)(1)-(3) describe how the IORR and IOER 
rates apply to balances of eligible institutions above and below the 
top of the penalty-free band and how interest is calculated on those 
balances. Section 204.10(b)(5) sets forth the current IORR and IOER 
rates. (Section 204.10(b)(4) addresses term deposits; the Board is not 
proposing any amendments to this section other than the redesignation 
discussed below.)
a. Proposed Section 204.10(b)(1)
    The Board proposes to delete current 204.10(b)(1) through (3) and 
replace them with a new section 204.10(b)(1) that would establish 
interest on balances maintained in a master account at a Reserve Bank 
by or on behalf of an eligible institution and describe how that 
interest is calculated. The Board proposes to establish interest on 
such balances as the amount equal to the IORB rate on a day multiplied 
by the total balances maintained on that day.\13\ Finally, proposed 
section 204.10(b)(1) would establish the IORB rate.
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    \13\ The amount of a balance in an account maintained by or on 
behalf of an eligible institution at a Reserve Bank is determined at 
the close of the Reserve Bank's business day. 12 CFR 204.10(a)(2).
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    Section 204.10(b)(5) of Regulation D currently sets forth the IORR 
rate and the IOER rate. In light of the proposed replacement of such 
rates with a proposed IORB rate set forth in proposed section 
204.10(b)(1), the Board proposes to delete current section 204.10(b)(5) 
in its entirety.
b. Proposed Section 204.10(b)(2)
    The Board proposes to redesignate current section 204.10(b)(4), 
dealing with term deposits, as proposed section 204.10(b)(2). No 
changes to the content of current section 204.10(b)(4) are proposed.
a. Proposed Section 204.10(b)(3)
    The Board proposes to add a new section 204.10(b)(3) defining 
``master account'' for purposes of section 204.10 as ``the record 
maintained by a Federal Reserve Bank of the debtor-creditor 
relationship between the Federal Reserve Bank and a single eligible 
institution with respect to deposit balances of the eligible 
institution that are maintained with the Federal Reserve Bank. A 
`master account' is not a `term deposit,' an `excess balance account,' 
a `joint account,' \14\ or any deposit account maintained with a 
Federal Reserve Bank governed by an agreement that states the account 
is not a master account.''
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    \14\ See Final Guidelines for Evaluating Joint Account Requests, 
82 FR 41951 (Sep. 5, 2017).
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3. Section 204.10(d)
a. Current Section 204.10(d)
    Current section 204.10(d)(1) authorizes the establishment of EBAs 
and specifies that balances in an EBA represent a liability of the 
Reserve Bank holding the EBA solely to the participating eligible 
institutions. Current section 204.10(d)(2) requires eligible 
institutions participating in an EBA to authorize another institution 
to act as agent of the participating institutions for purposes of 
general account management (including transferring balances in and out 
of the EBA), and requires an EBA to be established at the Reserve Bank 
holding the agent's master account. Current section 204.10(d)(2) also 
prohibits the agent from maintaining any of its own balances in the 
EBA. Current section 204.10(d)(3) provides that balances in an EBA do 
not satisfy any institution's reserve balance requirement, and current 
section 204.10(d)(4) provides that EBAs are solely for the purpose of 
maintaining ``excess balances'' of participating institutions and may 
not be used for general payments or other activities. Current section 
204.10(d)(5) establishes interest on balances in an EBA as ``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.'' Current section 204.10(d)(6) authorizes Reserve Banks to 
establish additional terms and conditions with respect to the operation 
of EBAs.
b. Proposed Section 204.10(d)
    Proposed section 204.10(d) would remove references to ``excess 
balances'' when describing the balances in an EBA and replace them with 
references to ``balances.'' The Board proposes to retain the name 
``excess balance account.'' Specifically, the second sentence of 
proposed section 204.10(d)(1) would delete the reference to ``excess 
balances of eligible institutions'' in an EBA and replace it with a 
reference to ``balances maintained by eligible institutions'' in an 
EBA. Proposed section 204.10(d)(2) would delete the word ``excess'' 
from the reference to ``transferring the excess balances of 
participating institutions in and out'' of an EBA.
    Current section 204.10(d)(3) provides that ``balances maintained in 
an excess balance account will not satisfy any institution's reserve 
balance requirement.'' The Board proposes to delete current section 
204.10(d)(3) and redesignate current section 204.10(d)(4) as section 
204.10(d)(3). Current section 204.10(d)(4) provides that an EBA ``must 
be used exclusively for the purpose of maintaining the excess balances 
of participants'' and may not be used for general payments or other 
activities. Proposed section 204.10(d)(3) would provide that 
``[b]alances maintained in an [EBA] may not be used for general 
payments or other activities.'' Finally, proposed section 204.10(d)(4) 
would delete the references in current section 204.10(d)(5) to the 
``IOER rate'' in establishing interest paid on EBAs and replace it with 
a reference to the ``IORB rate.'' Proposed section 204.10(d)(4) would 
also revise the reference to the rate ``in effect each day'' and to 
``total balances maintained on that day for each day of the maintenance 
period'' to provide that interest on balances in an EBA is the amount 
equal to ``the IORB rate in effect on a day

[[Page 1305]]

multiplied by the total balances maintained on that day.''

III. Request for Comment

    The Board seeks comment on all aspects of the proposed rule.

IV. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') \15\ generally requires an 
agency, in connection with a proposed rule, to prepare and make 
available for public comment an initial regulatory flexibility analysis 
that describes the impact of a proposed rule on small entities. 
However, a regulatory flexibility analysis is not required if the 
agency certifies that the rule will not have a significant economic 
impact on a substantial number of small entities. The Small Business 
Administration has defined ``small entities'' to include banking 
organizations with total assets of less than or equal to $600 million.
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    \15\ 5 U.S.C. 601 et seq.
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    The Board has considered the potential impact of the proposal on 
small entities in accordance with the RFA. The Board believes that the 
proposal will not have a significant economic impact on a substantial 
number of small entities. As discussed in the Supplementary Information 
above, the proposed rule would apply to all eligible institutions 
regardless of size. The Board's proposed rule would also not impose any 
new recordkeeping, reporting, or compliance requirements. The Board 
does not believe that the proposed rule duplicates, overlaps, or 
conflicts with any other Federal rules. The Board also does not believe 
that there are any significant alternatives to the proposal which 
accomplish its stated objectives. In light of the foregoing, the Board 
does not believe that the proposal, if adopted in final form, would 
have a significant economic impact on a substantial number of small 
entities. Nonetheless, the Board seeks comment on whether the proposal 
would impose undue burdens on, or have unintended consequences for, 
small banking organizations and whether there are ways such potential 
burdens or consequences could be minimized in a manner consistent with 
the purpose of the proposal.

V. Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act,\16\ the Board has 
reviewed the proposed rule under authority delegated to the Board by 
the Office of Management and Budget. The proposed rule contains no 
collections of information pursuant to the Paperwork Reduction Act.
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    \16\ 44 U.S.C. 3506.
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VI. Plain Language

    Section 772 of the Gramm-Leach-Bliley Act \17\ requires the Board 
to use ``plain language'' in all proposed and final rules. In light of 
this requirement, the Board has sought to present the interim final 
rule in a simple and straightforward manner. The Board invites comment 
on whether the Board could take additional steps to make the rule 
easier to understand.
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    \17\ Public Law 106-102, section 722, 113 Stat. 1338, 1471 
(1999).
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List of Subjects in 12 CFR Part 204

    Banks, banking, Reporting and recordkeeping requirements.

Authority and Issuance

    For the reasons set forth in the SUPPLEMENTARY INFORMATION, 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), 461, 601, 611, and 3105.

0
2. Amend Sec.  204.2 by revising paragraph (aa) to read as follows:


Sec.  204.2   Definitions.

* * * * *
    (aa) Excess balance account means an account at a Reserve Bank 
pursuant to Sec.  204.10(d) that is established by one or more eligible 
institutions through an agent and in which only 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.
0
3. Amend Sec.  204.10 by revising paragraphs (b) introductory text 
through (b)(3) and paragraphs (d) introductory text through (d)(4) to 
read as follows:


Sec.  204.10   Payment of interest on balances.

* * * * *
    (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) and (b)(2) of this section.
    (1) For balances maintained in an eligible institution's master 
account, interest is the amount equal to the interest on reserve 
balances rate (``IORB rate'') on a day multiplied by the total balances 
maintained on that day. The IORB rate is 0.10 percent.
    (2) 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.
    (3) For purposes of Sec.  204.10(b), a ``master account'' is the 
record maintained by a Federal Reserve Bank of the debtor-creditor 
relationship between the Federal Reserve Bank and a single eligible 
institution with respect to deposit balances of the eligible 
institution that are maintained with the Federal Reserve Bank. A 
``master account'' is not a ``term deposit,'' an ``excess balance 
account,'' a ``joint account,'' or any deposit account maintained with 
a Federal Reserve Bank governed by an agreement that states the account 
is not a master account.
* * * * *
    (d) Excess balance accounts. (1) A Reserve Bank may establish an 
excess balance account for eligible institutions under the provisions 
of this paragraph (d). Notwithstanding any other provisions of this 
part, the balances maintained by eligible institutions in an excess 
balance account represent a liability of the Reserve Bank solely to 
those participating eligible institutions.
    (2) The participating eligible institutions in an excess balance 
account shall authorize another institution to act as agent of the 
participating institutions for purposes of general account management, 
including but not limited to transferring the balances of participating 
institutions in and out of the excess balance account. An excess 
balance account must be established at the Reserve Bank where the agent 
maintains its master account, unless otherwise determined by the Board. 
The agent may not commingle its own funds in the excess balance 
account.
    (3) Balances maintained in an excess balance account may not be 
used for general payments or other activities.
    (4) Interest on balances of eligible institutions maintained in an 
excess balance account is the amount equal to the IORB rate in effect 
on a day multiplied by the total balances maintained on that day.
* * * * *


[[Page 1306]]


    By order of the Board of Governors of the Federal Reserve 
System.
Margaret McCloskey Shanks,
Deputy Secretary of the Board.
[FR Doc. 2020-28755 Filed 1-7-21; 8:45 am]
BILLING CODE 6210-01-P