[Federal Register Volume 72, Number 66 (Friday, April 6, 2007)]
[Rules and Regulations]
[Pages 16987-16990]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-6473]
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FEDERAL RESERVE SYSTEM
12 CFR Part 204
[Regulation D; Docket No. R-1262]
Reserve Requirements of Depository Institutions
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Final rule.
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SUMMARY: The Board of Governors is revising its 1980 interpretation of
Regulation D (Reserve Requirements of Depository Institutions) setting
forth criteria for the ``bankers' bank'' exemption from reserve
requirements. The interpretation sets forth the standards that the
Board uses in applying the statutory and regulatory requirements for
the bankers' banks exemption to specific institutions. The revised
interpretation specifies that the Board may determine, on a case-by-
case basis, whether certain entities not already expressly listed in
the interpretation may become customers to a limited extent of bankers'
banks that remain exempt from reserve requirements.
DATES: Effective Date: May 7, 2007.
FOR FURTHER INFORMATION CONTACT: Heatherun Allison, Senior Counsel,
(202) 452-3565; or Kara Handzlik, Attorney, (202) 452-3852, Legal
Division, Board of Governors of the Federal Reserve System, Washington,
DC 20551. For users of Telecommunications Device for the Deaf (TDD)
only, contact (202) 263-4869.
SUPPLEMENTARY INFORMATION:
I. Statutory Background
Section 19(b) of the Federal Reserve Act (Act) imposes reserve
requirements on certain deposits and other liabilities of depository
institutions for monetary policy purposes. 12 U.S.C. 461(b). The
Board's Regulation D, ``Reserve Requirements of Depository
Institutions'' (12 CFR part 204), implements Section 19(b). Section
19(b)(9) of the Act, commonly referred to as the ``bankers' bank
exemption,'' exempts from reserve requirements certain institutions
that would otherwise be subject to them. Specifically, Section 19(b)(9)
provides that reserve requirements ``shall not apply with respect to
any financial institution which--(A) is organized solely to do business
with other financial institutions; (B) is owned primarily by the
financial institutions with which it does business; and (C) does not do
business with the general public.'' 12 U.S.C. 461(b)(9). ``Bankers'
banks'' for purposes of Section 19(b)(9) of the Act and Regulation D
include bankers' banks for commercial banks and thrifts chartered under
state or federal law authorities as well as corporate credit unions.
II. Issuance of Original Interpretation
In November 1980, the Board issued an interpretation of Regulation
D specifying certain standards to be used in determining whether
institutions qualify for the bankers' bank exemption from reserve
requirements. 12 CFR 204.121 (Interpretation). Under the
Interpretation, an institution may be regarded as ``organized solely to
do business with other depository institutions even if, as an
incidental part to [sic] its activities, it does business to a limited
extent with entities other than depository institutions.'' Id. In
addition, a depository institution will be regarded as ``being owned
primarily by the institutions with which it does business'' if ``75 per
cent or more of its capital is owned by other depository institutions *
* * regardless of the type of depository institution.'' Id.
Finally, the Interpretation states that a depository institution
will be regarded as ``not do[ing] business with the general public'' if
the depository institution has satisfied two requirements. First, the
depository institution must limit the range of customers with which it
does business to: depository institutions; subsidiaries or
organizations owned by depository institutions; directors, officers or
employees of the same or other depository institutions; individuals
whose accounts are required at the request of the institution's
supervisory authority due to the actual or impending failure of another
depository institution; share insurance funds; and depository
institution trade associations. Second, the depository institution's
loans to or investment in that range of customers (other than
depository institutions) cannot exceed 10 percent of total assets, and
the extent to which it receives shares or deposits from or issues other
liabilities to those same entities (other than depository institutions)
cannot exceed 10 percent of total liabilities or net worth. Id.
III. Proposed Revisions
On August 14, 2006, the Board published for comment a proposal to
revise the Interpretation to specify that
[[Page 16988]]
the Board may determine, on a case-by-case basis, whether certain
entities not already expressly listed in the Interpretation may become
customers to a limited extent of bankers' banks. (71 FR 46411.) This
proposal was issued pursuant to Section 19(a) of the Act, which
authorizes the Board to define the terms used in that section and to
prescribe such regulations as it may deem necessary to effectuate the
purposes of the section and to prevent evasions thereof.
The Board proposed to amend the Interpretation by adding to the
list of non-depository institution customers with which bankers' banks
may do business and remain exempt from reserve requirements the
language ``and such others as the Board may determine on a case-by-case
basis consistent with the purposes of the Act and the bankers' bank
exemption.'' The proposal would require that such customers still be
subject to the percentage limitations specified in the Interpretation
relating to ownership and doing business (i.e., not more than 25
percent of bankers' bank capital may be owned by non-depository
institution customers and bankers' bank business with non-depository
institution customers may not exceed 10 percent of total assets/
liabilities). The Board did not propose to specify any standards under
which it would make such case-by-case determinations. The proposal
stated, however, that the Board would not expect to exercise the
authority under the proposal to expand the range of permissible
bankers' bank customers to include the general public. The proposal
also stated that the Board expects to obtain more experience over time
with requests for determinations under the proposal and, based on that
experience, may find that proposing further amendments to the
Interpretation (such as specifications or standards by which the Board
would make such determinations) are warranted. Comment was solicited on
all aspects of the proposal.
IV. Analysis of Comments
Overview of Comments Received
The Board received seventeen comments on the proposal. Commenters
included five bankers' banks (including corporate credit unions); five
associations or councils representing bankers' banks, corporate credit
unions, or community banks; two individuals not associated with any
institution, one professor, one bank, one credit union, one financial
holding company, and one bank holding company. Two commenters fully
supported the proposal, while eleven commenters supported the proposal
but raised concerns and/or offered suggestions about various aspects of
the proposal. Three commenters opposed the proposal. One commenter did
not address the issue set forth by proposal but instead commented on a
separate aspect of Regulation D.\1\
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\1\ This commenter was concerned with Sec. 204.2(d)(2) of
Regulation D (12 CFR 204.2(d)(2)) and ``how consumer banking
institutions are interpreting the Regulation to allow them to
collect `excess transaction fees' from banking patrons.''
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A. Structure of Bankers' Banks; Competitive Concerns
A few commenters favored the flexibility that would be given to the
Board so that the Board could allow banks to structure their operations
optimally and increase services to the financial community. Many
commenters, however, were concerned that the proposal would erode or
eliminate the unique characteristics of a bankers' bank. Some of these
commenters stated that adopting the proposal would increase competition
between bankers' banks and their bank customers. These commenters
emphasized that bankers' banks are not established to compete with
community banks, but instead established to do business with community
banks.
One commenter stated that the bankers' banks should not be
permitted to increase their activities to the point where the bank
clients and shareholders of bankers' banks perceive these activities as
directly competing with their own interest. This commenter stressed
that the term bankers' bank should be ``restricted to banks [that] have
chosen to be owned by banks, to offer services only to other banks and
to embrace the concept of serving only community banks so that they in
turn can compete effectively with the largest financial institutions.''
On the other hand, two commenters suggested increasing the extent to
which bankers' banks could do business with non-depository institution
customers while remaining exempt from reserve requirements. These
commenters urged the Board to increase the percentage limitations
specified in the Interpretation relating to ownership and doing
business.
The Board believes that adopting the proposal is not likely to
erode the unique characteristics of bankers' banks. The Board cannot
under Regulation D authorize activities that are not authorized by a
bankers' bank's chartering authority; rather, the Board can determine
only whether a bankers' bank may be exempt from reserve
requirements.\2\ Any given bankers' bank activity or customer must be
authorized by the bankers' bank chartering authority before the Board
can consider whether a bankers' bank may remain exempt from reserve
requirements while undertaking such an activity or serving such a
customer. In addition, as stated in the proposal, the Board does not
anticipate permitting the reserve exemption to apply to a bankers' bank
that does business with the general public.
The Board is not revising the percentage limitations on the extent
to which bankers' banks may serve non-depository institution customers
while remaining exempt from reserve requirements. The Board does not
believe that it is appropriate to increase those percentage limitations
because to do so would reduce the extent to which bankers' banks serve
primarily depository institution customers. Any new non-depository
institution customers that would be permitted under the revised
Interpretation will still be subject to the existing percentage
limitations specified in the Interpretation relating to ownership and
doing business.
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\2\ For a bankers' bank that is a state member bank, the Board
would have to approve any change in the general character of its
business or in the scope of the corporate powers it exercises in
accordance with Section 208.3(d)(2) of Regulation H (Membership of
State Banking Institutions in the Federal Reserve System, 12 CFR
part 208).
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Finally, the purpose of reserve requirements under Section 19 is to
facilitate the conduct of monetary policy. Accordingly, the Board
believes that exemptions from reserve requirements are to be narrowly
construed so as not to impede the effective conduct of monetary policy.
The more a bankers' bank's activities resemble those of a commercial
bank or other depository institution, the less appropriate the reserve
requirement exemption would be for that bankers' bank. The Board
believes that these considerations will keep the bankers' bank
exemption from reserve requirements from undue expansion under the
revised Interpretation.
B. Determination Process
Some commenters raised concerns about the process by which the
Board would make determinations under the proposal. Many of these
commenters suggested that the Board publish requests for determinations
and permit public comment on them. Among the commenters' reasons for
this request was so that bankers' banks chartered by other authorities
could concomitantly seek authorization of the same activities.
[[Page 16989]]
Other commenters urged the Board to disclose the business reasons
giving rise to requests for determinations as well as the Board's
reasoning in granting any such requests. A few commenters asked that
the Board issue its determinations in the form of an order. These
commenters argued that this would afford the bankers' bank industry the
opportunity to learn the ``business rationale and the business
opportunity'' contained in such requests and orders until formal
guidelines have been established by the Board.
One commenter asked that the Board clearly set forth in the revised
Interpretation the standards which will be used in making its future
case-by-case determinations to preclude arbitrary or capricious
determinations. On the other hand, another commenter urged the Board to
relax standards for granting such requests and to clarify whether all
entities with which the bankers' bank is permitted to do business under
the Interpretation will qualify as ``financial institutions.''
One commenter urged the Board to specify the length of time for
making determinations under the revised Interpretation, claiming that
the flexibility granted by the proposal could be offset by overly
lengthy determination time periods. This commenter also urged the Board
to address the extent to which individual Federal Reserve Banks will be
involved with the decision making process, asserting that the
individual Reserve Banks are in the best position to develop
understanding of a company's risk profile and management team which is
necessary for making such determinations.
The Board anticipates that determinations under the revised
Interpretation will generally be made public and will include a
description of the determination, the business and other reasons behind
the request, and the Board's reasoning in granting (or denying) the
request. Although the Board does not anticipate publishing requests for
such determinations prior to the time that the determination is made,
the Board anticipates that all requests will be handled in a timely
manner and that the input of the appropriate Federal Reserve Bank or
Banks, if any, will be solicited as part of that process.
Finally, the Board continues to believe that publishing more
detailed criteria by which the Board would review requests under the
revised Interpretation would be premature at this time. As noted above,
the Board cannot under Regulation D authorize activities that are not
authorized by a bankers' bank's chartering authority. The Board cannot
predict the kinds of changes that may or may not occur in activities or
customers that chartering authorities may permit. Accordingly, the
Board cannot predict the details of the criteria under which it would
evaluate such activities or customers for consistency with the Act and
the purposes of the bankers' bank exemption. Over time, however, the
Board expects that it may be possible after further experience with
requests under the Interpretation to articulate standards or guidelines
for the further exercise of that authority by the Board.
C. Miscellaneous
One commenter supported the proposal, but asked for clarification
of the ``consistent with the purposes of the Act and the bankers' bank
exemption'' language. Another commenter asked the Board to clarify the
phrase ``do business with'' as that phrase appears in the Act and the
Interpretation. As noted above, the Board believes that it cannot
predict the manner in which chartering authorities may change the
permissible activities and customers of bankers' banks. Therefore, the
Board believes that it cannot at this time provide greater specificity
in these areas. As also noted above, however, the Board expects that it
may be able to provide greater specificity in the future as an
increasing amount of experience with requests and determinations under
the proposal is obtained.
One commenter supported the proposal but believed that the Board
inadvertently removed language from the original Interpretation when
issuing the proposal for comment. The Board has corrected this
inadvertent omission in the final Interpretation.
Another commenter suggested that adopting the proposal would make
the regulation less specific and that this could impair any relief
granted to bankers' banks by adopting the proposal. This commenter also
stated that the proposal violates ``Plain Language'' provisions of the
Gramm-Leach-Bliley Act (Section 722 of Pub. L. 106-102, 113 Stat. 1338,
1471 (Nov. 12, 1999)). Finally, this commenter argued that the proposal
provides such expansive authority to the Board that there can be little
Congressional oversight of the Board's activities in this area. As
noted above, the Board cannot itself expand bankers' bank authority to
serve new kinds of customers and undertake new lines of activities. As
also noted above, the Board believes that it can only issue
determinations under the revised Interpretation that are consistent
with the purposes of Section 19 of the Act and of the bankers' bank
exemption, and that the revised Interpretation clearly states the
Board's authority and objectives. As also noted above, the Board does
not anticipate exercising its authority under the revised
Interpretation to expand the reserves exemption to bankers' banks that
do business with the general public. As further noted above, the Board
anticipates that determinations made under the revised Interpretation
will be publicly available. For these reasons, the Board does not
believe that the Interpretation poses the risks or violations suggested
by the commenter.
V. Regulatory Analysis
A. Regulatory Flexibility Act
In accordance with Section 604 of the Regulatory Flexibility Act
(RFA) (5 U.S.C. 601 et seq.), the Board has reviewed the proposed
amendments to the Interpretation of Regulation D. For the reasons set
out below, the Board certifies that the amendments to the
Interpretation will not have a significant economic impact on a
substantial number of small entities.
1. Statement of the objectives of the proposal. The Board is
revising its Interpretation of Regulation D in order to authorize the
Board to determine, on a case-by-case basis, whether non-depository
institutions that are not already listed in the Interpretation may be
bankers' bank customers without the bankers' bank losing its exemption
from reserve requirements. Section 19 of the Act was enacted to impose
reserve requirements on certain deposits and other liabilities of
depository institutions for monetary policy purposes. Section 19
exempts certain institutions from reserve requirements as ``bankers'
banks'' provided the institutions meet the characteristics specified in
the statute. Section 19 also authorizes the Board to promulgate such
regulations as it may deem necessary to effectuate the purposes of the
section. The Board believes the revisions to the Interpretation are
within Congress' broad grant of authority to the Board to adopt
provisions that carry out the purposes of section 19 of the Act.
2. Public comments in response to initial regulatory flexibility
analysis. There were no public comments in response to the initial
regulatory flexibility analysis.
3. Description and estimate of number of small entities to which
revised Interpretation will apply. The Board estimates that there are
eleven bankers' banks qualifying as ``small entities'' to which the
revised Interpretation could apply.
[[Page 16990]]
4. Projected reporting, recordkeeping, and other compliance
requirements. There are no reporting, recordkeeping, or other
compliance requirements associated with the revised Interpretation.
5. Minimizing significant economic impact of the revised
Interpretation on small entities. There were no public comments that
suggested a significant alternative that would minimize the impact of
the proposal on small entities. There are eleven bankers' banks
qualifying as ``small entities'' under RFA. The revised Interpretation
provides all bankers' banks with the ability to maintain their
exemption from reserve requirements, if any, while undertaking certain
additional bankers' bank activities or customers as authorized by their
chartering authorities. No bankers' bank is required to seek a
determination under the revised Interpretation. The revised
Interpretation imposes no economic burdens on bankers' banks, and
instead only offers the opportunity to bankers' banks that are exempt
from reserve requirements to maintain the economic benefits of that
exemption under the specified circumstances. Accordingly, the Board
believes that the revised Interpretation will not have a significant
impact on a substantial number of small entities.
B. Paperwork Reduction Act
In accordance with the Paperwork Reduction Act (PRA) of 1995 (44
U.S.C. 3506; 5 CFR part 1320 Appendix A.10), the Board reviewed the
proposal under the authority delegated to the Board by the Office of
Management and Budget (OMB). The proposal contains no requirements
subject to the PRA.
VI. Plain Language
The Board received one comment on whether the proposal was in plain
language. This commenter stated that the Board's failure to propose
standards for its exercise of authority under the proposal amounted to
a failure to comply with the ``Plain Language'' provisions of the
Gramm-Leach-Bliley act. This commenter stated that the Board should
instead say that it proposes to do whatever it wants given its view of
the purposes of the Act. For the reasons stated above, the Board
believes that the revised Interpretation is stated in plain language to
the greatest extent possible at this point in time. As also stated
above, the Board expects to publish further guidance and standards as
it obtains additional experience in the future with requests for
determinations under the revised Interpretation. Accordingly, the Board
believes that the revised Interpretation complies with applicable plain
language requirements.
List of Subjects in 12 CFR Part 204
Banks, banking, Reporting and recordkeeping requirements.
0
For the reasons set forth in the preamble, the Board is amending 12 CFR
part 204 as follows:
PART 204--RESERVE REQUIREMENTS OF DEPOSITORY INSTITUTIONS
(REGULATION D)
0
1. The authority citation for part 204 continues to read as follows:
Authority: 12 U.S.C. 248(a), 248(c), 371a, 461, 601, 611, and
3105.
0
2. The second sentence of paragraph (a)(2)(iii) of Sec. 204.121 is
revised to read as follows:
Sec. 204.121 Bankers' banks.
(a) * * *
(2) * * *
(iii) * * * First, the range of customers with which the
institution does business must be limited to depository institutions,
including subsidiaries or organizations owned by depository
institutions; directors, officers or employees of the same or other
depository institutions; individuals whose accounts are acquired at the
request of the institution's supervisory authority due to the actual or
impending failure of another depository institution; share insurance
funds; depository institution trade associations; and such others as
the Board may determine on a case-by-case basis consistent with the
purposes of the Act and the bankers' bank exemption. * * *
* * * * *
By order of the Board of Governors of the Federal Reserve
System, April 3, 2007.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. E7-6473 Filed 4-5-07; 8:45 am]
BILLING CODE 6210-02-P