[Federal Register Volume 74, Number 19 (Friday, January 30, 2009)]
[Proposed Rules]
[Pages 5628-5631]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-1996]
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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. 74, No. 19 / Friday, January 30, 2009 /
Proposed Rules
[[Page 5628]]
FEDERAL RESERVE SYSTEM
12 CFR Part 204
[Regulation D; Docket No. R-1350]
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 is requesting public comment on proposed amendments
to Regulation D, Reserve Requirements of Depository Institutions, to
authorize the establishment of limited-purpose accounts at Federal
Reserve Banks (``Reserve Banks'') for the maintenance of excess
balances of eligible institutions (both as defined in Regulation D).
These excess balance accounts (``EBAs'') would contain only the excess
balances of the eligible institutions participating in such accounts,
although the participating eligible institutions (``EBA Participants'')
would authorize another institution (``EBA Agent'') to manage the EBA
on their behalf. The authorization of EBAs is intended to allow
eligible institutions to earn interest on their excess balances at the
excess balance rate in an account relationship directly with the
Federal Reserve Bank as counterparty without disrupting established
business relationships with their correspondents. Continuing strains in
financial markets and the configuration of interest rates support the
implementation of EBAs; however, the Board will evaluate the continuing
need for EBAs when more normal market functioning is restored. The
Board seeks comment on all aspects of the proposal.
DATES: Comments must be submitted by March 2, 2009.
ADDRESSES: You may submit comments, identified by Docket No. R-1350, by
any of the following methods:
Agency Web Site: http://www.federalreserve.gov. Follow the
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm. Federal eRulemaking Portal: http://www.regulations.gov. Follow the instructions for submitting comments.
E-mail: [email protected]. Include the docket number
in the subject line of the message.
Fax: (202) 452-3819 or (202) 452-3102.
Mail: Jennifer J. Johnson, 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 Web site at
http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as
submitted, unless modified for technical reasons. Accordingly, your
comments will not be edited to remove any identifying or contact
information.
Public comments may also be viewed electronically or in paper in
Room MP-500 of the Board's Martin Building (20th and C Streets, NW.)
between 9 a.m. and 5 p.m. on weekdays.
FOR FURTHER INFORMATION CONTACT: Sophia H. Allison, Senior Counsel
(202/452-3565), or Dena L. Milligan, Staff Attorney (202/452-3900),
Legal Division, or Seth Carpenter, Deputy Associate Director (202/452-
2385), or Margaret Gillis DeBoer, Section Chief (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. Background--Interest on Reserves
Section 128 of the Emergency Economic Stabilization Act of 2008,
enacted on October 3, 2008 (the ``2008 Act''), accelerated the
effective date of the authority for the Reserve Banks to pay earnings
on balances maintained at the Reserve Banks by or on behalf of
depository institutions. The 2008 Act made this authority effective on
October 1, 2008. This authority was originally enacted in Title II of
the Financial Services Regulatory Relief Act of 2006 (the ``2006 Act'')
(Pub. L. 109-351, 120 Stat. 1966 (Oct. 13, 2006)), with an original
effective date of October 1, 2011. The 2006 Act provides that such
earnings must be paid at least once each quarter at a rate or rates not
to exceed the general level of short-term interest rates. The 2006 Act
also provides that the Board may prescribe regulations concerning the
payment of earnings, the distribution of earnings to the depository
institutions that maintain balances or on whose behalf balances are
maintained, and the responsibilities of correspondents to distribute
and credit earnings on balances maintained by the respondent on a pass-
through basis with the correspondent.
On October 9, 2008, the Board published in the Federal Register an
interim final rule amending Regulation D (Reserve Requirements of
Depository Institutions) to direct the Reserve Banks to pay interest on
balances held at Reserve Banks to satisfy reserve requirements
(``required reserve balances'') and balances held in excess of required
reserve balances and clearing balances (``excess balances'') (73 FR
59482) (Oct. 9, 2008). At that time, the Board announced two formulas
by which the amount of earnings payable on required reserve balances
and excess balances would be calculated. For required reserve balances,
the Board set the initial formula for the rate of interest to be the
average federal funds rate target established by the Federal Open
Market Committee (the ``FOMC'') over the reserve maintenance period
less 10 basis points. For excess balances, the Board set the initial
formula for the rate of interest to be the lowest federal funds rate
target established by the FOMC in effect during the reserve maintenance
period minus 75 basis points. The Board stated that it might adjust the
formula for the interest rate on excess balances in light of experience
and evolving market conditions. The Board has subsequently adjusted the
formula for the rate of interest for excess balances three times and
the rate of interest on required reserve balances twice. The rate of
interest on both required reserve balances and on excess balances
currently is equal to \1/4\ percent. The Board may from time to time
determine any other rate or rates for such balances, which would be
announced when determined.
[[Page 5629]]
II. Maintenance of Required Reserve Balances and Excess Balances
Under Regulation D, a depository institution must maintain reserves
against its reservable liabilities in the form of cash in its vault or,
if vault cash is insufficient, in the form of a balance in an account
at a Reserve Bank.\1\ 12 CFR 204.3(b)(1). A depository institution may
maintain such balances in an account in its own name at a Reserve Bank,
or it may choose a pass-through correspondent through which it may pass
through its required reserve balance. The pass-through correspondent
holds its respondents' required reserve balances in an account of the
correspondent at a Reserve Bank. Under Regulation D, the balance in a
pass-through correspondent's account at a Reserve Bank is deemed to be
the property of the pass-through correspondent exclusively, and the
account balance represents a liability of the Reserve Bank solely to
the pass-through correspondent, regardless of whether the funds
represent the required reserve balances of another institution that
have been passed through the pass-through correspondent. 12 CFR
204.3(i)(2).
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\1\ The 2006 Act amended section 19 of the Act to authorize
member banks to enter into pass-through account arrangements. Prior
to the 2006 Act, only nonmember banks were authorized to enter into
such arrangements. See Notice of Proposed Rulemaking, Request for
Public Comment, 73 FR 8009 (Feb. 12, 2008).
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Under the Board's October interim final rule, any excess balances
in a pass-through correspondent's account are deemed to be balances
held on behalf of its respondents. Reserve Banks credit the pass-
through correspondent's account with the interest on the required
reserve balances and excess balances of the pass-through
correspondent's respondents. The October interim final rule permits,
but does not require, correspondents to pass back the interest earned
to their respondents.
III. Implications in the Current Market Environment
The respondents of a pass-through correspondent can, by agreement
with the correspondent, receive earnings on their excess balances by
directing the correspondent to sell those balances in the federal funds
market, or by having the correspondent hold those balances in the
correspondent's account at a Reserve Bank under a pass-through
arrangement. These two approaches have different implications for the
correspondent's balance sheet and its leverage ratio for capital
adequacy purposes.
As noted above, Regulation D currently deems the entire balance in
a pass-through correspondent's account at a Reserve Bank to be the
exclusive property of the pass-through correspondent and to represent a
liability of that Reserve Bank to the pass-through correspondent
exclusively. Therefore, the pass-through correspondent must show the
entire balance in its Reserve Bank account on its own balance sheet as
an asset, even if the balance consists, in whole or in part, of amounts
that are passed through on behalf of a respondent.\2\
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\2\ The same would be true of a correspondent that was not
acting in a pass-through capacity: its entire account balance at the
Reserve Bank would be an asset on the correspondent's own balance
sheet. Regulation D, however, does not specifically address
correspondents other than pass-through correspondents.
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Accordingly, when a correspondent's respondents want to earn
interest on excess balances by leaving them with their correspondent
(which in turn passes those balances through to the Reserve Bank), the
correspondent has a larger balance at the Reserve Bank. As a result,
the correspondent has more assets on its balance sheet and a lower
leverage ratio for capital adequacy purposes.
In contrast, when the correspondent sells the respondent's federal
funds on the respondent's behalf, the respondent directs its
correspondent to transfer funds to the entity purchasing federal funds.
This transaction is effected by a debit to the correspondent's account
at a Reserve Bank and a credit to the purchaser's account at a Reserve
Bank. On the correspondent's balance sheet, all other things being
equal, the correspondent's assets decline (as does its liability to its
respondent) because the correspondent's account balance at the Reserve
Bank is lower and therefore its regulatory leverage ratio would be
higher.
Since the implementation of interest on excess balances through the
October interim final rule, the actual federal funds rate has generally
averaged significantly below the interest rate paid by the Reserve
Banks on excess balances, although this spread narrowed significantly
after the FOMC established a range for the federal funds rate of 0 to
\1/4\ percent on December 16. When the market rate of interest on
federal funds is below the rate paid by the Reserve Banks on excess
balances, respondents have an incentive to shift the investment of
their surplus funds away from sales of federal funds (through their
correspondents acting as agents), and toward holding funds directly as
excess balances with the Reserve Banks, potentially disrupting
established correspondent-respondent relationships. A correspondent
could offer to purchase federal funds directly from its respondents and
hold those funds as excess balances at a Reserve Bank; however, such
transactions could result in a significant reduction in regulatory
leverage ratios for some correspondents. The Board believes that the
disparity between the actual federal funds rate and the rate paid by
Reserve Banks on excess balances may partly be caused by the leverage
incentives imposed on correspondent institutions to sell excess
balances into the federal funds market rather than maintaining those
balances in an account at a Reserve Bank.
IV. EBA Proposal
The Board is proposing to authorize the establishment of EBAs to
reduce disruptions in established relationships between correspondents
and their respondents that would result from a shift by those
respondents away from federal funds sales and toward holding excess
balances in individual accounts at the Reserve Banks. These disruptions
appear to be directly related to the current configuration of interest
rates and the unprecedented volume of excess balances provided through
the Federal Reserve's open market operations and liquidity facilities.
When more normal market functioning resumes, the Board would re-
evaluate the continuing need for EBAs.
The Board proposes to authorize EBAs with the following
characteristics.
A. Account Structure
EBAs would be established by the EBA Participants. One possible
application of this structure would be that the respondent institutions
of a particular correspondent could become EBA Participants by
establishing an EBA for the maintenance overnight of their aggregate
excess balances. The EBA would be established at the Reserve Bank where
the EBA Agent (discussed below) maintains its own master account. All
EBA Participants would be required to be the type of institution that
is eligible, as defined in the 2008 Act, to receive interest on their
excess balances.\3\ Any eligible institution could be an EBA
Participant.
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\3\ The 2008 Act permits Federal Reserve Banks to pay interest
on balances held by or on behalf of ``depository institutions,'' but
the 2008 Act's definition of ``depository institution'' has a
broader meaning than the definition of that term in section
19(b)(1)(A) of the Act and Regulation D. Therefore, the Board
believed that a different term would be useful to refer only to
those institutions included in the 2008 Act's broader definition of
``depository institution.'' In its October 9, 2008 notice of
proposed rulemaking, the Board proposed using the term ``eligible
institution'' to refer to institutions that are eligible to receive
interest on their balances maintained at Federal Reserve Banks.
``Eligible institution'' includes the depository institutions
defined in section 19(b)(1)(A) of the Act, including banks, savings
associations, savings banks and credit unions that are federally
insured or eligible to apply for federal insurance. ``Eligible
institution'' also includes trust companies, Edge and agreement
corporations, and U.S. agencies and branches of foreign banks. The
definition does not include all entities for which the Reserve Banks
hold accounts, such as entities for which the Reserve Banks act as
fiscal agents, including Federal Home Loan Banks.
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[[Page 5630]]
As noted above, Regulation D currently provides that balances in a
pass-through correspondent's account at a Reserve Bank represent a
liability of the Reserve Bank solely to that pass-through
correspondent, even though that account may also contain funds that are
attributable to one or more of the pass-through correspondent's
respondent institutions. With the EBA, however, all balances in the EBA
would be deemed to be the property solely of the EBA Participants, and
to represent a liability of the Reserve Bank to the EBA Participants
alone and not to the EBA Agent. Because the excess balances of EBA
Participants in EBAs would be the Reserve Bank's direct liability to
the EBA Participants, the adverse leverage impact of such arrangements
on correspondents would be mitigated.
B. Authority to Manage Account
The EBA Participants of an EBA would be required to authorize one
institution (which may or may not be an ``eligible institution'' but
that must have its own account at a Reserve Bank) to manage the EBA on
behalf of the EBA Participants, including giving instructions for the
transfer of EBA Participants' excess balances in and out of the EBA.
The EBA Agent would not be allowed to commingle its own funds in the
EBA. The EBA Agent would be required to have its own account at a
Federal Reserve Bank. The EBA Agent could be, but need not be, a
correspondent institution that serves the EBA Participants as its
respondents under a correspondent, or pass-through correspondent,
arrangement. This EBA Agent would be authorized to place EBA
Participant excess balances into the EBA, remove those excess balances,
and generally manage the EBA (which may include facilitating the
opening of the EBA on behalf of EBA Participants). The EBA Agent would
be responsible for determining amounts of excess balances to deposit
into the EBA and for maintaining adequate records to demonstrate the
level of excess balances in the EBA of each EBA Participant. The
Reserve Banks would calculate interest on an EBA on an aggregate basis
and would not calculate an interest amount for each EBA Participant.
The EBA Participants would be responsible for instructing the EBA Agent
with respect to the disposition of the interest and the balances, of
the EBA Participant in the EBA--presumably within the context of any
applicable correspondent-respondent agreement, taking into account all
of the services and other terms and conditions of the relationship.
C. Limited-Purpose Properties of Account
The EBA would exist for the sole purpose of holding excess balances
of EBA Participants, generally on an overnight basis. The EBA would not
be permitted to be overdrawn at any time, either intra-day or
overnight. Balances maintained overnight in an EBA would not satisfy a
required reserve balance or a contractual clearing balance for any EBA
Participant or for the EBA Agent. The EBA could not be used for general
payments or other activities.
D. Payment of Interest on EBAs
Excess balances maintained in an EBA would earn interest at the
excess balances rate specified in section 204.10(b)(2) of Regulation D.
The Board's interim final rule published in the Federal Register on
October 9 defines ``excess balances'' as an institution's balances in
an account at a Reserve Bank in excess of the institution's required
reserve balance (which may be zero) and the institution's contractual
clearing balance (if any). The October 9 interim final rule also
provides that interest on required reserve balances and excess balances
is credited to eligible institutions 15 days after the close of the
applicable reserve maintenance period. Under Regulation D, the reserve
maintenance period is the period during which a depository institution
must maintain, on average, its required reserve balance. For
institutions with reservable liabilities below the exemption amount or
those with only a contractual clearing balance, the reserve maintenance
period is one week long. The Board would compute average balances in an
EBA during a one-week maintenance period that begins on Thursday and
ends the following Wednesday and would credit interest to the EBA
fifteen (15) days after the close of the one-week maintenance period.
The EBA Agent would be responsible for disbursing interest in the EBA
in accordance with the directions given by each EBA Participant to the
EBA Agent for such disbursements.
V. Section-by-Section Analysis
Section 204.10(d)(6)
Proposed section 204.10(d)(6) adds a new subsection to section
204.10(d), which sets forth definitions relating to the payment of
interest on reserves and other balances maintained at Reserve Banks.
Proposed section 204.10(d)(6) adds the term ``excess balance account''
as a defined term in Regulation D. Section 204.10(d) defines ``excess
balance account'' as an account at a Reserve Bank established by one or
more eligible institutions and in which only excess balances of the
participating eligible institutions may at any time be maintained.
Proposed section 204.10(d)(6) also clarifies that such an account is
not a ``pass-through account'' for purposes of Regulation D. This
clarification is appropriate because a pass-through account represents
a liability of a Reserve Bank solely to a correspondent institution,
whereas the liability represented by an EBA represents a liability of
the Reserve Bank solely to the institutions whose excess balances are
maintained in the EBA.
Section 204.10(e)(1)
Proposed section 204.10(e)(1) provides that eligible institutions
may establish an EBA at a Reserve Bank when the EBA is (A) established
by the eligible institutions and is (B) established solely for the
purpose of maintaining overnight excess balances of the participating
eligible institutions. Proposed section 204.10(e)(1) also provides that
balances maintained in such an account are the property of the eligible
institutions that participate in the EBA, and represent a liability of
the Reserve Bank solely to those institutions. Proposed section
204.10(e)(1) is intended to distinguish such account arrangements from
the definition and operation of the term ``pass-through account''
elsewhere in Regulation D.
Section 204.10(e)(2)
Proposed section 204.10(e)(2) sets forth the regulatory provisions
relating to the appointment and authorization of an EBA Agent to manage
an EBA on behalf of EBA Participants. The EBA Agent must have its own
account at a Reserve Bank unless otherwise determined by the Board.
Proposed section 204.10(e)(2) also provides that an EBA Agent must not
commingle any of its own funds in an EBA at any time, either intra-day
or overnight.
[[Page 5631]]
Section 204.10(e)(3)
Proposed section 204.10(e)(3) specifies that balances maintained in
an EBA must consist solely of excess balances of EBA Participants, and
that such balances will not satisfy any institution's required reserve
balance or contractual clearing balance.
Section 204.10(e)(4)
Proposed section 204.10(e)(4) specifies that an EBA is for the
exclusive purpose of maintaining EBA Participants' excess balances and
is not be used for general payments or other activities.
Section 204.10(e)(5)
Proposed section 204.10(e)(5) provides that balances in an EBA
would earn interest at the rate specified for ``excess balances'' in
current section 204.10(b)(2) of Regulation D.
VI. Form of Comment Letters
Comment letters should refer to Docket No. R-1350 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].
VII. Solicitation of Comments Regarding Use of ``Plain Language''
Section 722 of the Gramm-Leach-Bliley Act of 1999 (12 U.S.C. 4809)
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 interim final rule is clearly stated and effectively
organized, and how the Board might make the text of the rule easier to
understand.
VIII. Regulatory Flexibility Act
The Regulatory Flexibility Act, 5 U.S.C. 601 et seq. (RFA),
requires an agency that is issuing a proposed rule to prepare and make
available an initial regulatory flexibility analysis that describes the
impact of the final rule on small entities. 5 U.S.C. 603(a). The RFA
provides that an agency is not required to prepare and publish a
regulatory flexibility analysis if the agency certifies that the final
rule will not have a significant economic impact on a substantial
number of small entities.
Pursuant to section 605(b) of the RFA, the Board certifies that
this interim final rule will not have a significant adverse economic
impact on a substantial number of small entities. The proposed rule
would permit, but does not require, institutions to establish EBAs at
Reserve Banks. The impact on institutions choosing to establish EBAs at
Reserve Banks would be positive and not adverse, because EBA
Participants would be able to earn the rate payable on excess balances
in a debtor-creditor relationship directly with a Reserve Bank without
disrupting established correspondent-respondent relationships.
Likewise, the impact would be positive and not adverse on institutions
that choose to establish EBAs but are not currently in a correspondent-
respondent relationship, as such institutions would be expected to
establish EBAs only to the extent that EBA Agents and EBA Participants
found it mutually beneficial to do so.
IX. Paperwork Reduction Act
In accordance with the Paperwork Reduction Act (PRA) of 1995 (44
U.S.C. 3506; 5 CFR 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 Part 204
Banks, banking, Reporting and recordkeeping requirements.
Authority and Issuance
For the reasons set forth in the preamble, the Board is proposing
to amend 12 CFR part 204 as follows:
PART 204--RESERVE REQUIREMENTS OF DEPOSITORY INSTITUTIONS
(REGULATION D)
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
6105.
2. Section 204.10 is amended by adding new paragraphs (d)(6) and
(e) to read as follows:
Sec. 204.10 Payment of interest on balances.
* * * * *
(d) * * *
(6) Excess balance account means an account at a Reserve Bank
pursuant to Sec. 204.10(e) of this part that is established by one or
more eligible institutions 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.
(e) Excess balance accounts. (1) Establishing an excess balance
account. A Reserve Bank may establish an excess balance account for
eligible institutions under the provisions of this paragraph.
Notwithstanding any other provisions of this part, the excess balances
of eligible institutions in an excess balance account are the property
of the eligible institutions that participate in the account, and
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
eligible institutions for purposes of general account management,
including but not limited to transferring the excess balances of
participating institutions in and out of the excess balance account.
The agent must maintain its own separate account at a Reserve Bank
unless otherwise determined by the Board. The agent may not commingle
its own funds in the excess balance account.
(3) No reserve balances or clearing balances of any institution may
be maintained at any time in an excess balance account, and balances
maintained in an excess balance account will not satisfy any
institution's required reserve balance or contractual clearing balance.
(4) An excess balance account may be used exclusively for the
purpose of maintaining the excess balances of participants and may not
be used for general payments or other activities.
(5) Interest shall be paid on excess balances of eligible
institutions maintained in an excess balance account in accordance with
Sec. 204.10(b)(2) of this part.
By order of the Board of Governors of the Federal Reserve
System, January 25, 2009.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. E9-1996 Filed 1-29-09; 8:45 am]
BILLING CODE 6210-01-P