Reserve Requirements for Depository Institutions, 25620-25629 [E9-12432]
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Federal Register / Vol. 74, No. 102 / Friday, May 29, 2009 / Rules and Regulations
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[FR Doc. E9–12513 Filed 5–28–09; 8:45 am]
BILLING CODE 9111–14–P
FEDERAL RESERVE SYSTEM
12 CFR Part 204
[Regulation D; Docket Nos. R–1334 and
R–1350]
Reserve Requirements for Depository
Institutions
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AGENCY: Board of Governors of the
Federal Reserve System.
ACTION: Final rule.
SUMMARY: The Board is adopting, with
certain revisions, its interim final rule
that amended Regulation D (Reserve
Requirements of Depository Institutions)
to direct Federal Reserve Banks to pay
interest on certain balances held at
Federal Reserve Banks by or on behalf
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of certain depository institutions. The
Board is also amending Regulation D to
authorize the establishment of limitedpurpose accounts, called ‘‘excess
balance accounts,’’ at Federal Reserve
Banks for the maintenance of excess
balances of eligible institutions. These
excess balance accounts are intended to
permit eligible institutions to earn
interest on their excess balances without
significantly disrupting established
business relationships with their
correspondents.
DATES:
This final rule is effective July 2,
2009.
FOR FURTHER INFORMATION CONTACT:
Sophia H. Allison, Senior Counsel (202/
452–3565), or Dena L. Milligan,
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 information with respect to
the clearing balance policy and float
calculations, contact Jonathan Mueller,
Senior Financial Analyst (202/530–
6291), Division of Reserve Bank
Operations and Payment Systems; 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. Interest on Balances at Federal
Reserve Banks
A. 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.
Title II of the Financial Services
Regulatory Relief Act of 2006 (the ‘‘2006
Act’’) (Pub. L. 109–351, 120 Stat. 1966
(Oct. 13, 2006)) amended section 19 of
the Act by authorizing the Federal
Reserve Banks (‘‘Reserve Banks’’) to pay
earnings on balances maintained at the
Reserve Banks by or on behalf of certain
depository institutions. The original
effective date of this authority was
October 1, 2011. Section 128 of the
Emergency Economic Stabilization Act
of 2008 (the ‘‘2008 Act’’) (Pub. L. 110–
343, 122 Stat. 3765 (Oct. 3, 2008))
accelerated the effective date of this
authority to October 1, 2008.
Section 19 of the Act now provides
that Reserve Banks may pay earnings on
balances held at the Reserve Banks by
or on behalf of certain depository
institutions at least once each quarter at
a rate not to exceed the general level of
short-term interest rates. Depository
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institutions that are eligible to receive
earnings on their balances held at
Reserve Banks include the institutions
described in section 19(b)(1)(A) of the
Act 1 and ‘‘any trust company,
corporation organized under section
25A or having an agreement with the
Board under section 25, or any branch
or agency of a foreign bank (as defined
in section 1(b) of the International
Banking Act of 1978).’’ 2 The 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 depository
institutions, Federal Home Loan Banks,
and the National Credit Union
Administration Central Liquidity
Facility with respect to the crediting
and distribution of earnings attributable
to balances maintained * * * in a
Federal Reserve bank by any such entity
on behalf of depository institutions.’’ 3
Regulation D, which implements the
provisions of section 19 of the Act, also
provides that a depository institution
must maintain its required reserves 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.4 A depository institution may
maintain balances at a Reserve Bank in
an account in its own name, or it may
choose another institution as its ‘‘passthrough correspondent.’’ 5 Under a
1 Section 19(b)(1)(A) defines ‘‘depository
institution’’ as ‘‘(i) 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; (ii) 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; (iii) 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; (iv) 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; (v) any member as defined in section 2
of the Federal Home Loan Bank Act; [and] (vi) 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.’’ 12 U.S.C. 461(b)(1)(A).
2 Federal Reserve Act section 19(b)(12)(C), 12
U.S.C. 461(b)(12)(C).
3 Federal Reserve Act section 19(b)(12), 12 U.S.C.
461(b)(12).
4 12 CFR 204.5(a)(1) (formerly 12 CFR
204.3(b)(1)).
5 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. As published in today’s Federal
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‘‘pass-through correspondent’’
arrangement, the pass-through
correspondent holds its respondent’s
required reserve balances in the
correspondent’s account at a Reserve
Bank. The pass-through correspondent
is responsible for holding sufficient
balances in its account at the Reserve
Bank to satisfy its own reserve balance
requirement (if any), its own contractual
clearing balance (if any), and the
aggregate reserve balance requirements
of its respondents. The Reserve Bank’s
debtor-creditor relationship is solely
with the pass-through correspondent
and not with any of the correspondent’s
respondents. Accordingly, Regulation D
provides that the balance in a passthrough correspondent’s account at a
Reserve Bank represents a liability of
the Reserve Bank solely to the
correspondent, notwithstanding the fact
that part or all of that balance may
represent the funds of the
correspondent’s respondents.6
Consequently, a pass-through
correspondent must show the entire
balance in its Reserve Bank account on
the correspondent’s 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.7
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B. Interim Final Rule on Payment of
Interest on Balances at Federal Reserve
Banks
On October 9, 2008, the Board
published an interim final rule
amending Regulation D 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 5948 (Oct. 9, 2008)). The interim
final rule directed Reserve Banks to pay
interest on such balances held by or on
behalf of ‘‘eligible institutions.’’ The
interim final rule defined the new term
‘‘eligible institution’’ to mean an
institution eligible to earn interest on
balances held at the Federal Reserve
Banks under the 2006 Act.
The interim final rule provided that
Reserve Banks would pay interest on
required reserve balances at a rate equal
to the average targeted federal funds rate
over the reserve maintenance period
Register, the Board is also amending Regulation D
to conform the regulation to the 2006 Act.
6 12 CFR 204.5(d)(3) (formerly 12 CFR 204.3(i)(2)).
7 Similarly, a correspondent that is not acting in
a pass-through capacity must also show its entire
account balance at the Reserve Bank as an asset on
its own balance sheet. Regulation D, however, does
not specifically address correspondents other than
pass-through correspondents.
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less 10 basis points and that Reserve
Banks would pay interest on excess
balances at a rate equal to the lowest
targeted federal funds rate during the
maintenance period less 75 basis points.
Since publishing the interim final rule,
the Board has adjusted the method for
determining the rate of interest on
excess balances three times (73 FR
65506 (Nov. 4, 2008), 73 FR 67713 (Nov.
17, 2008), 73 FR 78616 (Dec. 23, 2008))
and the method for determining the rate
of interest on required reserves balances
twice (73 FR 67713 (Nov. 17, 2008), 73
FR 78616 (Dec. 23, 2008)). Currently,
the rate of interest on both required
reserve balances and excess balances is
1⁄4 percent.8 Additionally, in its
December amendments, the Board
amended the regulation to specify that
it may from time to time determine any
other rate for payment of interest on
required reserve balances and excess
balances.
The interim final rule deemed any
excess balance held by a pass-through
correspondent in the correspondent’s
account, when the correspondent was
not itself an eligible institution, to be
held on behalf of the pass-through
correspondent’s respondents. Further,
the interim final rule permitted, but did
not require, pass-through
correspondents to pass back to their
respondents the interest paid on
balances held on behalf of respondents.
The interim final rule also provided that
when a pass-through correspondent
passes back interest to its respondents,
such a payment is not a payment of
interest on a demand deposit for
purposes of Regulation Q (12 CFR part
217). The interim final rule also defined
the new terms used therein.
C. Request for Public Comment and
Summary of Comments
The Board requested comment on all
aspects of the interim final rule. In
response, the Board received 19
comments, consisting of comments from
eight depository institutions, four
financial institution trade associations,
two research organizations, and five
individuals. Two commenters fully
supported the interim final rule, but
made suggestions regarding other
aspects of Regulation D. Six commenters
expressed concerns about the potential
adverse impact of the interim final rule
on correspondent-respondent
relationships. Other commenters
expressed monetary policy concerns
related to paying interest on balances.
8 12
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CFR 204.10(b).
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D. General Comments and Analysis
Two commenters supported paying
interest on balances held at the Reserve
Banks by or on behalf of eligible
institutions as a monetary policy tool.
One commenter noted that payment of
interest on balances at Reserve Banks
provides depository institutions with ‘‘a
reasonable option [for] needed
liquidity.’’ In contrast, six commenters
stated that paying interest on excess
balances encouraged banks to remove
funds from the federal funds market,
and thus, reduced inter-bank lending
and liquidity. One commenter suggested
that, in order to avoid negative effects
on liquidity, the Federal Reserve should
pay interest on required reserve
balances, but not on excess balances.
One commenter stated that paying
interest on excess balances could
encourage financial institutions to
neglect other markets where those
institutions could obtain higher returns.
The Board also received one comment
on market conditions in general, but not
specifically related to paying interest on
balances held at the Reserve Banks.
The Board has carefully considered
the comments about the effects of
paying interest on balances at Reserve
Banks. In the past, the absence of
interest payments on required reserve
balances acted as a tax on depository
institutions’ issuance of deposits subject
to reserve requirements. To the extent
that depository institutions could not
satisfy reserve requirements with vault
cash, they were required to hold more
balances than they otherwise would in
a non-interest bearing account at a
Reserve Bank. Further, the absence of
interest payments on excess balances
meant that, when reserve supply
significantly exceeds demand, the
federal funds rate could fall to as low as
zero.
The Board continues to believe that
the ability to pay interest on balances
held at Reserve Banks promotes
efficiency and stability of the banking
sector. Paying interest on required
reserve balances also eliminates much
of the implicit reserve tax and lessens
the incentives for depository
institutions to engage in reserveavoidance behavior, which absorbs real
resources and diminishes the efficiency
of the banking system. By paying
interest on excess balances, the Federal
Reserve can expand its balance sheet as
necessary to provide sufficient liquidity
to support financial stability while
implementing monetary policy that is
appropriate in light of macroeconomic
objectives of maximum employment
and price stability.
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In order to help foster trading in the
federal funds market, the Board has
made adjustments to the rates at which
the Reserve Banks pay interest on
required reserve balances and excess
balances, and will continue to evaluate,
and make any necessary adjustments to,
the appropriate rate in light of evolving
market conditions. Accordingly, the
Board has determined that the Reserve
Banks will continue to pay interest on
required reserve and excess balances
held at Reserve Banks by or on behalf
of eligible institutions.
One commenter expressed concern
that under the interim final rule, excess
balances held by a correspondent on
behalf of respondents ‘‘would become
demand deposits on the correspondent’s
balance sheet,’’ and thus the
correspondent would be required to
hold reserves against those balances.
Prior to the implementation of the
interim final rule, a correspondent was
required to hold reserves against any
respondent excess funds held as a
deposit subject to immediate
withdrawal by the respondent. The
implementation of paying interest on
balances at Reserve Banks has not
changed the accounting and reporting
treatment of such balances for purposes
of reserve requirements.
The remaining comments concerned
reserve requirements generally, limits
on transfers from savings deposit
accounts, and member-bank passthrough arrangements. Two comments
addressed Regulation D’s limitation on
certain convenient transfers from
savings deposits: One comment
suggested broadening the definition of
‘‘in person’’ transfer, while the other
comment suggested removing the
numeric limitations on certain
convenient transfers from savings
deposits. One commenter recommended
eliminating reserve requirements, while
another commenter recommended
increasing reserve requirements ratios.
The Board is not exercising its
authority at this time to eliminate
reserve requirements or to change any
required reserve ratios at this time, even
though the 2008 Act made both
authorities effective in 2008. The Board
may consider such changes in the future
in the context of a broader review of the
role of reserve requirements in the
conduct of monetary policy. Finally, as
explained in the companion Regulation
D rulemaking announced today, the
Board is eliminating the prohibition on
member bank pass-through accounts
and is amending the numeric
limitations on convenient transfers from
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savings deposits to remove the sublimit
that applied to checks and drafts.9
2. Section 204.2(y) Definition of Eligible
Institution
E. Section-by-Section Analysis
Section 19(b)(12) of the Act permits
Reserve Banks to pay interest on
balances held by or behalf of
‘‘depository institutions.’’ Because
section 19(b)(12)(C)’s definition of
‘‘depository institution’’ is broader than
the definition of that term in section
19(b)(1)(A) of the Act and in Regulation
D, the interim final rule used the new
term ‘‘eligible institution’’ to refer to
those ‘‘depository institutions’’ listed in
section 19(b)(12)(C) that are eligible to
receive interest on their balances. The
Board received no comment on this
definition and is retaining the current
provision but moving it to the
definitions section of the regulation,
redesignated as § 204.2(y).
1. Section 204.2(v) Definition of
Clearing Balance
The interim final rule defined the new
term ‘‘clearing balance’’ as ‘‘the amount
that an eligible institution holds to
satisfy a contractual clearing balance
with a Federal Reserve Bank, in
addition to any required reserve
balance.’’ The Board received no
comments on this provision of the
interim final rule. As part of the final
rule, the Board is adopting a definition
of ‘‘clearing balance’’ that more
accurately reflects calculations of
account balances and interest payments.
The final rule defines ‘‘clearing
balance’’ as ‘‘the average balance held in
an account at a Federal Reserve Bank by
an institution over a reserve
maintenance period to satisfy its
contractual clearing balance with a
Reserve Bank.’’ Thus, the amount of
funds an institution actually maintains
for clearing purposes may be different
from its ‘‘contractual clearing balance,’’
which is the amount that the institution
has agreed to maintain, on average, over
the reserve maintenance period.
Further, the phrase ‘‘in addition to any
required reserve balance’’ is
unnecessary in light of the new
definition of ‘‘contractual clearing
balance,’’ which specifies that such
amount is in addition to the institution’s
reserve balance requirement.10
As stated in the interim final rule,
only certain institutions are eligible to
receive earnings on their balances at
Reserve Banks (‘‘eligible institutions’’).
Accordingly, the interim final rule’s
definition of ‘‘clearing balance’’ was
restricted to ‘‘eligible institutions.’’
Institutions that are not ‘‘eligible
institutions,’’ however, may hold
balances for clearing purposes in the
institution’s Reserve Bank account.
Therefore, the Board is adopting a
definition of ‘‘clearing balance’’ that is
not limited to institutions that are
eligible to receive earnings on balances
at Reserve Banks. For ease of reference,
the final rule places all the definitions
in a single section of Regulation D
(§ 204.2), and thus, the rule redesignates
§ 204.10(d)(1) as § 204.2(v).
9 See final amendments to Regulation D
elsewhere in today’s Federal Register.
10 See final amendments to Regulation D
elsewhere in today’s Federal Register that define
‘‘contractual clearing balance’’ as ‘‘an amount that
an institution agrees or is required to maintain in
its account at a Federal Reserve Bank in addition
to balances the institution may hold to satisfy its
reserve balance requirement.’’
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3. Section 204.2(z) Definition of Excess
Balance
The interim final rule defined ‘‘excess
balance’’ as ‘‘the average balance held in
an account at a Federal Reserve Bank by
or on behalf of an eligible institution
over a reserve maintenance period that
exceeds the sum of the required reserve
balance and any clearing balance.’’ The
Board received no comments on this
definition and is retaining the current
provision but moving it to the
definitions section of the regulation,
redesignated as § 204.2(z), with one
technical amendment. Like the
definition of ‘‘clearing balance,’’
discussed supra, the interim final rule’s
definition of ‘‘excess balance’’ was
limited to eligible institutions. Because
institutions other than eligible
institutions may maintain excess
balances at Reserve Banks, the Board is
adopting a definition of ‘‘excess
balances’’ in the final rule that is not
limited to ‘‘eligible institutions.’’
4. Section 204.2(bb) Definition of
Required Reserve Balance
The interim final rule defined
‘‘required reserve balance’’ as ‘‘the
average balance held in an account at a
Federal Reserve Bank by or on behalf of
an eligible institution over a reserve
maintenance period to satisfy the
reserve requirements of this part.’’ The
Board received no comments on this
definition and is retaining the current
provision but moving it to the
definitions section of the regulation,
with one technical amendment,
redesignated as section 204.2(bb).
Because the term ‘‘required reserve
balance’’ is used in Regulation D in
contexts other than paying earnings on
balances at Reserve Banks, the
definition of the term in the final rule
is not limited to ‘‘eligible institutions.’’
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5. Section 204.2(cc) Definition of
Targeted Federal Funds Rate
The interim final rule defined
‘‘targeted federal funds rate’’ as ‘‘the
federal funds rate established from time
to time by the Federal Open Market
Committee.’’ The Board received no
comments on this definition and is
retaining the current provision but
moving it to the definitions section of
the regulation, redesignated as
§ 204.2(cc).
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6. Section 204.10(a) Payment of Interest
on Balances
The Board amended Regulation D to
direct the Reserve Banks to pay interest
on required reserve balances and excess
balances maintained at Reserve Banks
by or on behalf of an eligible institution.
The Reserve Banks make interest
payments within the existing framework
for reserve computation and
maintenance, which includes reserve
averaging, carryover provisions, and
reserve deficiency charges. For both
excess balances and required reserve
balances, Reserve Banks pay interest on
average balances maintained over the
reserve maintenance period. This
approach is consistent with the current
reserves framework under which
compliance with reserve requirements is
measured over either a seven-day or a
fourteen-day reserve maintenance
period, depending on the size of the
institution. Interest is credited to
eligible institutions after the close of the
maintenance period (usually 15 days
thereafter) in order to apply reserve
carryover provisions.
One commenter stated that paying
interest on required reserve balances
rendered useless the current ‘‘as-of
adjustment’’ process for correction of
errors from previous reserve
maintenance periods. An as-of
adjustment is a memorandum item used
by the Federal Reserve to correct the
effect of errors made in processing of
checks or other transactions on an
institution’s reserve position. These
technical adjustments are used when
determining a depository institution’s
required reserve balance and clearing
balance for the payment of interest and
therefore remain useful.11 Accordingly,
the Board is adopting the current
language in § 204.10(a) as part of its
final rule.
7. Section 204.10(b) Rate
The Board received no comments on
the initial rate of interest on required
11 More detailed information about the ‘‘as-of
adjustment’’ process is available in the Reserve
Maintenance Manual, available at https://
www.frbservices.org/files/regulations/pdf/rmm.pdf.
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reserve balances. The Board received
two comments on the formula for the
rate on excess balances. One commenter
stated that the initial rate paid on excess
balances (the lowest targeted federal
funds rate during the reserve
maintenance period less 75 basis points)
and the rate after the first adjustment to
the formula for calculating the interest
rate on excess balances (the lowest
targeted federal funds rate during the
reserve maintenance period less 35 basis
points) were too high in a
‘‘dysfunctional market.’’ The Board
received one comment that reducing the
75-basis point difference between the
rate of interest on excess balances and
the targeted federal funds rate over the
reserve maintenance period exacerbated
the ‘‘untimely implementation’’ of the
payment of interest on balances at
Reserve Banks, but that commenter did
not propose an alternative rate. One
commenter suggested that the Board set
the rate of interest on excess balances at
the effective federal funds rate, rather
than the targeted federal funds rate, so
as to avoid artificially drawing funds to
the Reserve Banks.
The Board has continued to evaluate
the rate of interest on required reserve
and excess balances and is not at this
time changing the rates from the current
amount of 1⁄4 percent. Flexibility to
make adjustments to the rates of interest
in response to evolving market
conditions continues to be necessary.
Accordingly, the Board is retaining the
current language of § 204.10(b)(3),
which provides that the Board may
revise from time to time the rates for
payment of interest on balances at
Reserve Banks.
8. Section 204.10(c) Pass-Through
Balances
a. Background
As noted above, the 2006 Act
authorized Reserve Banks to pay
earnings on balances maintained at a
Reserve Bank by or on behalf of certain
depository institutions. The 2006 Act
also authorized the Board to prescribe
regulations concerning ‘‘the
responsibilities of depository
institutions, Federal Home Loan Banks,
and the National Credit Union
Administration Central Liquidity
Facility with respect to crediting and
distribution of earnings attributable to
balance maintained * * * in a Federal
Reserve bank by any such entity on
behalf of depository institutions.’’ 12
Thus, the 2006 Act contemplated that
certain institutions (such as Federal
Home Loan Banks) could hold balances
12 Federal Reserve Act § 19(b)(12)(B)(iii), 12
U.S.C. 461(b)(12)(B)(iii).
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on behalf of depository institutions that
were eligible to earn interest on those
balances, even if the correspondent
institutions were not themselves eligible
to receive earnings on their own
balances.
b. Correspondents That Are Eligible
Institutions
Under the interim final rule, Reserve
Banks paid interest on required reserve
balances maintained on behalf of an
eligible institution. Where a passthrough correspondent is an eligible
institution, the required reserve
balances in the correspondent’s account
may include those balances held by the
correspondent to meet its own reserve
requirement (if any), as well as those
balances held to meet its respondents’
reserve requirements. The interim final
rule also permitted, but did not require,
a pass-through correspondent to pass
back to its respondent interest paid on
behalf of that respondent’s required
reserve balances.
The Board requested comment on
whether it should permit or require a
correspondent to pass back interest to
its respondents. In response, the Board
received four comments. Two
commenters supported permissive
passing back of interest in order to
preserve the parties’ flexibility in
negotiating contractual relationships.
One commenter supported requiring
passing back of interest, stating that
permitting correspondents to retain the
interest would be unfair. This
commenter also suggested delaying the
effective date of a pass-back requirement
to two years after adoption of a final
rule in order to provide correspondents
with an opportunity ‘‘to modify
accounting systems and business
models.’’ Finally, one commenter stated
that paying interest on pass-through
balances as a lump-sum was a poor
service because doing so places
responsibility on the correspondent to
calculate the amount of interest to be
passed back to each respondent.
Under the final rule, correspondents
that are eligible institutions will
continue to be permitted, but not
required, to pass back to their
respondents interest earned on balances
held on behalf of the respondents. As
these correspondents are eligible to earn
interest on their own account balances,
permitting them to make arrangements
with their respondents with respect to
passing back of interest is consistent
with the statutory provisions. In
addition, permissive, but not required,
passing back of interest avoids
interfering with existing correspondentrespondent arrangements.
Correspondents structure their
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relationships with respondents in a
variety of ways, depending on factors
such as services provided or balances
held. Respondents may adjust the level
of balances held with a correspondent
in response to changes in the rates
received on those balances, as well as in
response to other factors. Respondents
that are not satisfied with their existing
correspondent arrangements may take
steps to renegotiate the terms of the
relationship or enter into a relationship
with a different correspondent.
Additionally, permitting, but not
requiring, the passing back of interest to
respondents is consistent with the
treatment of reserve deficiency charges
in Regulation D.13 Reserve Banks assess
deficiency charges to the account of the
pass-through correspondent for any
deficiency in its account balances, even
if the deficiency is attributable to the
correspondent’s respondent. Then, the
pass-through correspondent determines
whether to assess a deficiency charge on
its respondent, or whether to make
adjustments to other aspects of the
correspondent-respondent relationship
in response to the deficiency.
Accordingly, the Board has determined
to continue permitting, but not
requiring, correspondents that are
eligible institutions to pass back to
respondents earnings on both required
reserve balances and excess balances
held on behalf of the respondents.
c. Correspondents That Are Not Eligible
Institutions
Under the interim final rule, Reserve
Banks paid interest on required reserve
balances maintained on behalf of an
eligible institution, even if the passthrough correspondent was not an
eligible institution. Where a pass-though
correspondent is not an eligible
institution, the required reserve
balances held in the correspondent’s
account are solely those balances held
to meet its respondent’s reserve
requirements.
The interim final rule also provided
that Reserve Banks pay interest on
excess balances maintained on behalf of
an eligible institution, even if the passthrough correspondent is not an eligible
institution but has excess balances in its
account. Because Reserve Banks cannot
determine whether all or part of the
excess balances in a pass-through
correspondent’s account are held on
behalf of respondents without imposing
additional reporting or accounting
requirements, the interim final rule
deemed all of the excess balances held
in an account of a correspondent that is
13 See 12 CFR 204.5(d)(4)(i) (formerly 12 CFR
204.3(i)(3)(ii)).
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not an eligible institution to be held on
behalf of the correspondent’s
respondents.
The Board requested comment on
alternative methods for determining
whether all or part of the excess
balances in a correspondent’s account at
a Reserve Bank are held on behalf of the
respondent where the correspondent is
not an eligible institution. The Board
received one comment in support of
deeming all excess balances held in an
account of a pass-through correspondent
that is not an eligible institution to be
held on behalf of the correspondent’s
respondents. This commenter stated
that deeming the excess balances to be
held on behalf of the respondents would
avoid imposing ‘‘unnecessarily
burdensome’’ reporting requirements on
correspondents and provide flexibility
in structuring correspondent-respondent
relationships. One commenter, however,
indicated that additional reporting
requirements would not be burdensome
because correspondents already
maintain records of excess balances
held on behalf of respondents.
Since the implementation of paying
interest on balances at Reserve Banks,
some correspondents that are not
eligible institutions are holding
extremely high excess balances relative
to the total assets of their respondents,
indicating that these balances may not
be held on behalf of those respondents.
In order to carry out the intent of the
2006 Act with respect to institutions
that are and are not eligible to receive
interest on balances held at Reserve
Banks, the final rule will no longer
deem any excess balance in the account
of a correspondent institution that is not
an eligible institution to be held on
behalf of respondents. Thus, any excess
balance in the account of a
correspondent that is not an eligible
institution will be attributable to the
correspondent, and no earnings will be
paid on the excess balance in that
account. The respondents of a
correspondent that is not an eligible
institution may elect to participate in an
excess balance account (discussed infra)
in order to receive earnings on excess
balances.
Required reserve balances held on
behalf of respondents by correspondents
that are not eligible institutions,
however, will continue to receive
interest, which will be posted to the
correspondent’s master account. As
discussed supra, where a pass-through
correspondent is not an eligible
institution, the required reserve
balances held in the correspondent’s
account will be solely those held to
meet its respondent’s reserve
requirements. Further, because any
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excess balance held in the account of a
correspondent that is not an eligible
institution will not receive interest, any
earnings received on balances in such
an account will be attributable solely to
the required reserve balances of the
correspondent’s respondents. Unlike the
interim final rule, the final rule will
require correspondents that are not
eligible institutions to pass back to their
respondents all interest credited to the
correspondent’s accounts. The
correspondent is responsible for
calculating the amount of interest
apportioned to each of its respondents.
d. Exemption From Regulation Q
Under the interim final rule, passing
back interest to respondents is not a
payment of interest on a demand
deposit for purposes of Regulation Q (12
CFR part 217). One commenter stated
that by paying interest on ‘‘transaction
accounts,’’ the Board has ‘‘created an
unfair playing field’’ by not allowing
other correspondent banks to do the
same for the same types of accounts
held with them. Another commenter
expressed concern that requiring a
correspondent to hold excess balances
on its balance sheet negated the FDIC’s
insurance coverage of the respondent’s
demand deposit account by
transforming the respondent’s account
from a non-interest-bearing transaction
account to an interest-bearing
transaction account.
The Board recognizes that, although
Reserve Banks may pay interest on
balances that are subject to immediate
withdrawal, many private sector banks
are prohibited by law from doing so.14
The Board has long sought statutory
amendments to eliminate the
prohibition against interest on demand
deposits. The 2006 Act, however,
expressly authorizes the Board to
prescribe regulations to allow passthrough correspondents to pass back
interest to respondents. Congress,
therefore, contemplated that passthrough correspondents could pass back
part or all of the interest received in a
correspondent’s Reserve Bank account
to its respondents, even though the
payment of interest on demand deposit
accounts is otherwise prohibited.
Accordingly, the Board has specified in
the final rule that when a pass-through
correspondent passes back to its
respondent any interest paid on
balances held on behalf of the
14 For example, section 19(i) of the Act provides:
‘‘[no] member bank shall, directly or indirectly, by
any device whatsoever, pay any interest on any
deposit which is payable on demand * * * ’’ See
Regulation Q (Prohibition Against Payment of
Interest on Demand Deposits), which implements
section 19(i) (12 CFR 217).
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respondent, such a payment is not a
payment of interest on a demand
deposit for purposes of Regulation Q.15
The Board received no other comments
on this provision and is retaining the
current language in the final rule, with
the exception of one technical
amendment for clarity.
II. Excess Balance Accounts
A. Background
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1. Correspondent-Respondent
Relationship
Since the implementation of the
payment of interest on excess balances
of eligible institutions, eligible
institutions that are respondents of a
pass-through correspondent may receive
earnings on excess balances in two
ways. First, the respondents of a passthrough correspondent may direct the
correspondent to sell the respondent’s
excess funds in the federal funds
market. Second, under the interim final
rule adopted in October, the
respondents may direct the
correspondent to hold the respondent’s
excess funds as excess balances in the
correspondent’s account at a Reserve
Bank. These two approaches have
different implications for the
correspondent’s balance sheet and its
leverage ratio for capital adequacy
purposes. If a correspondent holds its
respondents’ excess balances in the
correspondent’s account at a Reserve
Bank, the correspondent’s account
balance at the Reserve Bank increases.
Accordingly, the correspondent has
more assets on its balance sheet,
resulting in a lower leverage ratio for
capital adequacy purposes. In contrast,
if the correspondent sells the funds in
the federal funds market on the
respondent’s behalf, the balances are
transferred to the entity purchasing
them. 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.
All other things being equal, the
correspondent’s Reserve Bank account
balance is lower. The correspondent has
fewer assets on its balance sheet, and
therefore, has a higher regulatory
leverage ratio.
When the federal funds rate is below
the rate the Reserve Banks pay on excess
balances, respondents have an incentive
to shift the investment of their excess
funds away from sales of federal funds
through their correspondents, and
toward holding those funds as excess
15 See 12 CFR 329.2 (Payment of interest) and 12
CFR 329.3 (Exception to prohibition on payment of
interest) for implications to FDIC regulations
regarding payment of interest.
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balances in accounts at the Reserve
Banks. Although correspondents may
hold those funds as excess balances at
a Reserve Bank on behalf of the
respondent, doing so could result, in
some cases, in a significant reduction in
a correspondent’s regulatory leverage
ratio for capital adequacy purposes.
Alternatively, a respondent could open
its own account at a Reserve Bank;
doing so, however, could potentially
disrupt part or all of the respondent’s
established relationship with its
correspondent.
2. Comments Received on Paying
Interest on Excess Balances Held by
Correspondents on Behalf of
Respondents
In response to its interim final rule
that implemented payment of interest
on balances at Reserve Banks, the Board
received comments concerning the
effects of paying interest on excess
balances on correspondent-respondent
relationships. Five commenters stated
that paying interest on excess balances,
in conjunction with unusual market
conditions, was causing respondents to
shift funds away from correspondents to
the Reserve Banks; thus, disrupting
correspondent-respondent relationships.
Three commenters stated that
respondents’ increasing demands to
have correspondents hold funds as
excess balances (as opposed to selling
the funds in the federal funds market)
was not only decreasing the availability
of federal funds, but was also requiring
correspondents to maintain more capital
to raise their leverage ratio for capital
adequacy purposes. One commenter
expressed concern that, without changes
to the interim final rule, the long-term
viability of correspondent-respondent
relationships would be jeopardized.
The Board received five comments
proposing solutions to mitigate the
adverse effects on correspondentrespondent relationships of paying
interest on excess balances. Four
commenters proposed that the Board
authorize new accounts for the purpose
of holding excess balances that did not
require correspondents to hold the
respondents’ excess balances on their
balance sheets. One commenter
suggested that the Reserve Banks
purchase excess funds directly from
correspondents at the rate of interest on
excess balances.
B. Excess Balance Account Proposed
Rule
In response to these concerns, the
Board requested comment in January
2009 on a proposal to amend Regulation
D to authorize the creation of excess
balance accounts (‘‘EBAs’’) (74 FR 5628
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25625
(Jan. 30, 2009)). The proposal would
authorize the establishment of EBAs for
maintaining the excess balances of
participating eligible institutions (‘‘EBA
Participants’’). The EBA Participants
would designate another institution to
act as their agent (‘‘EBA Agent’’) for
purposes of general account
management, including transferring
excess balances in and out of the EBA
and apportioning the interest paid on
excess balances. The Board proposed
that the EBA Agent could not comingle
its funds in the EBA. The excess
balances in the EBA would represent a
liability of the Reserve Bank solely to
the EBA Participants. Neither the EBA
Participants nor the EBA Agent could
maintain required reserve or clearing
balances in the EBA or use the EBA for
general payment or other activities. The
Board stated in the proposal that it
would re-evaluate the continuing need
for EBAs when more normal market
functioning resumes.
C. General Comments and Analysis
In response to its request for comment
on the EBA proposal, the Board received
61 comments, representing comments
from 44 depository institutions, two
financial holding companies, one
Federal Home Loan Bank, five financial
institution trade associations, and three
individuals. Sixteen commenters
supported the proposal in its entirety.
Two of these commenters sought
clarification on technical aspects of the
proposed rule on EBAs. Several
commenters supported EBAs in general,
but suggested that EBA Participants be
able to designate more than one
institution to act as EBA Agent. One
commenter found no significant value
in the EBA proposed rule, citing high
administrative costs and few benefits.
One commenter raised concerns about
the impact of EBAs on existing business
models if balances are moved into
Reserve Bank accounts. Two
commenters encouraged the Board to
evaluate the continuing need for EBAs
when more normal market functioning
resumes; one of these commenters
suggested the Board seek public
comment as part of its re-evaluation.
The Board has carefully considered
the comments and has determined to
authorize the establishment of EBAs,
largely as described in the proposal. The
Board believes that authorizing EBAs
should reduce the potential for
significant disruptions to long-standing
correspondent-respondent relationships
in the current market environment.
Because the excess balances of EBA
Participants in EBAs would be Reserve
Banks’ direct liabilities to EBA
Participants, correspondents would not
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show those balances on their balance
sheets. Therefore, the adverse leverage
ratio impact of correspondents of
holding respondent excess balances in
the correspondent’s account would be
mitigated. Further, participation in an
EBA, either as a participant or agent, is
voluntary. Thus, if an institution does
not believe that an EBA will provide
additional value, the institution does
not have to participate in an EBA or act
as an EBA Agent. As stated in the
proposal, the Board will re-evaluate the
continuing need for EBAs when more
normal market functioning resumes.
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D. Section-by-Section Analysis
1. Section 204.2(aa) Definition of Excess
Balance Account
The Board proposed to define ‘‘excess
balance account’’ as ‘‘an account at a
Reserve Bank pursuant to § 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.’’ The proposed rule
explicitly excludes excess balance
accounts from the definition of ‘‘passthrough accounts.’’
The Board received three comments
seeking clarification as to whether each
EBA Participant needed to open an EBA
or whether the EBA Participants could
designate an EBA Agent to open an EBA
on behalf of the EBA Participants. To
establish an EBA, eligible institutions
that desire to become EBA Participants
must designate one other institution to
act as the EBA Agent for that EBA. EBA
Participants will be required to execute
EBA agreements with the Reserve Bank
where the EBA Agent maintains its own
master account (‘‘Administrative
Reserve Bank’’). Similarly, the EBA
Agent will be required to execute an
EBA agreement with its Administrative
Reserve Bank. In order to facilitate
establishing EBAs and to reduce
administrative burdens, EBA
Participants will deliver their executed
EBA agreement to their EBA Agent. The
EBA Agent then will deliver the
executed EBA agreements of all the EBA
Participants for which it acts as EBA
Agent to its Administrative Reserve
Bank. The Board is adding language to
the definition of ‘‘excess balance
account’’ to clarify that eligible
institutions establish an EBA through
the EBA Agent. The Board is also
making a technical amendment to the
definition to reflect renumbering of
sections elsewhere in Regulation D. The
Board is also redesignating the
definition as § 204.2(aa) (from
§ 204.10(d)(6) in the proposed rule) in
connection with moving the definition
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The proposed rule (at § 204.10(e)(1))
provided that a Reserve Bank may
establish an excess balance account for
eligible institutions. The proposed rule
also provided that the excess balances
in the EBA are the property of the
eligible institutions that participate in
the EBA and represent a liability of the
Reserve Bank solely to the participating
institution. The Board received no
comments on this portion of the
proposal.
The Board is deleting the phrase that
states the excess balances are the
property of the eligible institutions. This
phrase is not necessary and its deletion
does not change the substance of the
provision, which continues to state that
excess balances represent a liability of
the Reserve Bank solely to the
participating institutions. The Board is
otherwise adopting the provision as
proposed.
provide that the EBA Agent may retain
part or all of the interest paid as part of
the EBA Agent’s compensation for
providing EBA Agent services or other
services for the EBA Participant. Thus,
the EBA Agent is not required by
regulation to utilize the same formula
for the disposition of earnings to EBA
Participants as the Reserve Banks use
for calculating interest on the EBA’s
aggregate balance. Moreover, the Board
anticipates that the Reserve Banks will
establish terms and conditions such that
each EBA Agent will manage only one
EBA.16 Because acting as an EBA Agent
is voluntary, the Board does not believe
it necessary to delay the effective date
of the rule. The Board is making one
additional technical amendment to the
final rule to replace the proposed phrase
‘‘agent of the eligible institutions’’ with
the phrase ‘‘agent of the participating
institutions.’’ This amendment is
intended to provide consistent usage of
terms throughout the final rule and does
not represent a substantive change to
the provision.
3. Section 204.10(d)(2) EBA Agent
b. Participation in One EBA
a. General Account Management
The proposed rule provided that the
EBA Participants would authorize
another institution to act as its EBA
Agent with respect to an EBA. The
proposed rule, however, did not specify
whether an EBA Participant could
participate in more than one EBA. One
commenter recommended removing the
requirement that an EBA Participant
designate only one institution as its EBA
Agent, while not specifically suggesting
that an EBA Participant be able to
designate more than one institution as
EBA Agent or to participate in more
than one EBA. This commenter stated
that requiring an EBA Participant to
designate only one EBA Agent was
unnecessary as most respondents ‘‘do
not participate in multiple
correspondent agency programs.’’ Some
commenters, however, suggested that
the final rule should permit EBA
Participants to participate in more than
one EBA.17 These commenters stated
that respondents currently use more
than one correspondent institution for
selling funds in the Federal funds
market, among other services, in order
to diversify credit risk, obtain better
into the general definition section of
Regulation D.
2. Section 204.10(d)(1) Establishing an
EBA
The proposed rule on EBAs provided
that the EBA Participants would
authorize another institution, the EBA
Agent, to act as agent to perform general
account management, including
transferring excess balances of EBA
Participants into and out of the EBA.
One commenter expressed concerns
about the feasibility for the EBA Agent
of passing back interest. Specifically,
the commenter sought clarification as to
whether an EBA Agent could distribute
the earnings to the EBA Participants at
a different rate than the Reserve Banks
paid out the earnings, as using the same
formula as the Reserve Banks would
require significant programming efforts.
One commenter requested that the
Board delay the effective date of the rule
120 days after publication to provide
sufficient time to adjust operating
systems to accommodate the new EBA
Agent services.
The EBA program contemplates that
Reserve Banks will calculate interest on
the aggregate balance in the EBA, rather
than calculate the amount of interest
attributable to each EBA Participant’s
balances in the EBA. The EBA
Participants will be responsible for
instructing the EBA Agent with respect
to the disposition of the interest. For
example, an EBA Participant and an
EBA Agent may by agreement provide
that all interest attributable to an EBA
Participant should be paid to the EBA
Participant, or may by agreement
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16 An EBA Agent that wishes to segregate
different types of respondents from one another can
set up subaccounts for the EBA.
17 Because the proposed rule on EBAs limits EBA
Participants to designating one institution as EBA
Agent for the EBA, an EBA Participant that wished
to designate multiple institutions as EBA Agent
would need to participate in multiple EBAs to do
so.
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rates, and for liquidity contingency
planning purposes.
While the Board recognizes that
certain respondents may wish to
maintain relationships with more than
one correspondent for various purposes,
the Board believes that permitting each
eligible institution to participate in only
one EBA is appropriate. Specifically,
multiple EBAs are not necessary in
order to diversify credit risk, as with
federal funds sales, because there is no
credit risk associated with maintaining
a balance in an account at a Reserve
Bank. Similarly, the need to use
multiple agents to manage liquidity risk
does not exist in the context of EBAs,
because excess balances in an EBA are
highly liquid. Moreover, any potential
disruption to existing correspondentrespondent relationships is lessened by
the fact that each EBA Participant can
choose each day whether to sell funds
in the federal funds market (through any
number of correspondent institutions),
to place the funds at a Federal Reserve
Bank through their (single) EBA Agent,
or to select a combination of the two.
Accordingly, EBA Participants may
maintain relationships with more than
one correspondent notwithstanding the
fact that an EBA Participant participates
in only one EBA at a Reserve Bank.
Restricting eligible institutions to
participating in only one EBA is
consistent with Regulation D’s treatment
of correspondent-respondent
relationships in pass-through
arrangements, where each respondent
uses a single correspondent to pass
through the respondent’s required
reserve balances.18 This singlecorrespondent structure also reflects the
current Federal Reserve policy that
permits each chartered depository
institution to maintain a single master
account at one Reserve Bank. Such a
structure provides streamlined control
and a single coordination point for the
Reserve Banks to manage the debtorcreditor relationship with each
depository institution. This structure
also helps minimize the risk of loss to
the Federal Reserve in the event the
account holder becomes insolvent.
Authorizing the establishment of EBAs
loosens such control and coordination
to the extent that it potentially permits
EBA Participants to have accounts at
two Reserve Banks: one account in the
district where the EBA Participant itself
is located, and an EBA in the district
where the EBA Agent is located. Given
that offering EBAs is motivated largely
by unusual financial market conditions
in which the effective federal funds rate
18 12
CFR 204.5(d)(1) (formerly 12 CFR
204.3(i)(1)).
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has been below the rate on excess
balances, and given that EBAs are being
offered on a temporary basis, staff
believes that permitting EBA
Participants to potentially have an EBA
and a master account at different
Reserve Banks is appropriate to ensure
that respondents are able to hold excess
balances within their existing
correspondent-respondent relationships.
A more significant expansion, however,
involving multiple account
relationships by permitting eligible
institutions to participate in more than
one EBA, introduces further complexity
into the oversight and coordination for
the Reserve Banks for managing the
debtor-creditor relationship without a
substantial justification for doing so.
The Board believes that permitting
eligible institutions to participate in one
EBA, but not more, at this time benefits
both correspondent and respondent by
allowing respondents to place excess
balances at a Reserve Bank in a way that
does not increase the leverage ratio for
the correspondent, therefore mitigating
disruption to correspondent-respondent
relationships. This approach also does
not significantly increase the
complexity for the Reserve Banks in
managing these accounts and the
associated debtor-credit relationships.
In addition, the significance of the
demand for participation in multiple
EBAs is not clear from the comments
received, because only a few
commenters expressed an interest in
multiple EBAs. Accordingly, the Board
expects that, absent a compelling reason
to do otherwise at this time, the Reserve
Banks will set terms and conditions
with respect to EBAs that will limit each
eligible institution to participation in
one EBA.
c. EBA Agent Must Maintain Separate
Master Account
The proposed rule also provided that
the EBA Agent ‘‘must maintain its own
separate account at a Reserve Bank’’ and
that the EBA Agent may not commingle
its own funds in the EBA. The proposal
indicated that the EBA would be
established at the Reserve Bank where
the EBA Agent maintains its own master
account, although the proposed
regulatory text did not reflect this.
Accordingly, the final rule adds
language to the regulatory text to specify
that the EBA must be held at the
Reserve Bank where the EBA Agent
maintains its master account.
d. Record-Keeping
The supplementary information to the
proposed rule stated that the EBA Agent
would be responsible for maintaining
records adequate to demonstrate the
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25627
level of excess balances in the EBA of
each EBA Participant. The Board
received five comments regarding
record-keeping requirements for the
EBA Agent. One commenter suggested
the Board clarify the record-keeping
requirements of an EBA Agent with
respect to the EBA. Three commenters
stated that EBA Agents should be
responsible for maintaining adequate
records that could demonstrate the level
of excess balances in the EBA of each
EBA Participant. Additionally, one
commenter indicated that maintaining
such records would not be difficult for
EBA Agents because correspondents
maintain daily, detailed records of
respondents’ ‘‘agency’’ funds. Because
the informational needs of each Reserve
Bank with respect to each EBA may
vary, the Board has not included such
specifications in the final rule. Rather,
the Board believes that setting forth the
EBA Agent’s record-keeping
responsibilities is more appropriately
done through account agreements with
the Reserve Banks or through account
terms and conditions.
4. Section 204.10(d)(3) Balances
Maintained in EBA
The proposed rule provided that, at
any given time, only excess balances of
an eligible institution may be
maintained in an EBA. The proposed
rule also provided that balances
maintained in an EBA would not satisfy
any institution’s reserve balance
requirement or contractual clearing
balance. The Board received two
comments on this provision, both
seeking clarification on how EBA
Participants should classify balances
held in an EBA.
Balances held in an EBA by an EBA
Participant represent a liability of the
Reserve Bank to the EBA Participants
and not to the EBA Agent. Therefore, for
reporting and accounting purposes, an
EBA Participant should treat balances
held in an EBA as balances held at a
Reserve Bank and should report such
balances as ‘‘balances due from a
Federal Reserve Bank’’ for purposes of
FR 2900 deposit reporting.19 The Board
received no other comments on this
provision and is adopting the proposed
provision, with minor editorial
revisions, redesignated as § 204.10(d)(3).
5. Section 204.10(d)(4) Restrictions on
Use of EBA
The proposed rule provided that
neither EBA Participants nor the EBA
Agent may use the EBA for general
19 See Instructions for Form FR 2900 (Sep. 2003)
at p. 39, no. 1 (https://www.federalreserve.gov/
reportforms/forms/FR_2900cb20071001_i.pdf).
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payments or other activities. The Board
received one comment on this
provision, seeking clarification on
restrictions as to when the EBA Agent
would be required or allowed to move
excess balances into the account.
The final rule imposes no regulatory
restrictions on when an EBA Agent may
or must transfer funds into and out of
an EBA. The EBA Agent, however, must
manage the EBA such that the account
does not incur either intra-day or
overnight overdrafts. The Board is
adopting this provision as proposed,
redesignated as § 204.10(d)(4).
6. Section 204.10(d)(5) Payment of
Interest on Balances in EBA
The Board proposed that interest
would be paid on excess balances in
accordance with section 204.10(b)(2).
The Board received no comments on
this provision. In light of the
amendments to Regulation D since the
proposed rule on EBAs setting forth the
Board’s authority to provide that
interest on excess balances be paid at a
different rate than the rate set forth in
section 204.10(b)(2), the final rule will
reflect that authority set forth in current
section 204.10(b)(3).
tjames on PRODPC75 with RULES
7. Section 204.10(d)(6) Additional
Terms and Conditions
The proposed rule on EBAs was silent
about the authority of Reserve Banks to
establish additional terms and
conditions with respect to the operation
of an EBA. The Board, however, is
adding new § 204.10(d)(6) to the final
rule to clarify that the Reserve Banks
have the authority to set additional
terms and conditions with respect to the
operation of EBAs, to the extent that
such terms and conditions are
consistent with provisions in Regulation
D. Such terms and conditions include,
but are not limited to, terms of service,
fees for services, conditions under
which an institution may act as agent
for an EBA, restrictions on the EBA
Agent’s account management, penalties
for noncompliance with the terms of
Regulation D’s provisions on EBAs or
with the additional terms and
conditions established by the Reserve
Banks, and termination of EBAs. The
provision provides examples of the
operational aspects for which the
Reserve Banks may set forth additional
terms and conditions, but indicates that
those categories of additional terms and
conditions are illustrative.
III. Clearing Balance Policy
Adjustments
At the time it adopted the interim
final rule, the Board made adjustments
to its clearing balance policy so as to
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15:25 May 28, 2009
Jkt 217001
discontinue practices related to reserve
requirements that were no longer
necessary in light of the amendments to
Regulation D. First, the Board
eliminated the ‘‘imputed reserve
requirement adjustment’’ to earnings
credits because reserves on respondents’
balances would earn interest at the rate
on required reserve balances. Second,
the Board eliminated the ‘‘marginal
reserve requirement adjustment’’
because respondents would be
indifferent between holding balances at
a Reserve Bank (and earning the rate on
required reserves balances) and
maintaining the balance at a privatesector correspondent (taking a due from
deduction, and investing those funds).
Finally, the Board eliminated the
imputed reserve requirement
adjustment and the adjustment for cash
items in the process of collection that
are applied when measuring float costs
to be recovered by Reserve Bank priced
services. The Board received no
comments on its adjustments to the
clearing balance policy and is retaining
that policy as previously adopted.
IV. Transitional Adjustments in
Mergers
The interim final rule eliminated the
provisions in Regulation D associated
with merger-related adjustments to
reserve requirements, applicable to
mergers completed on or after October
9, 2008. The provisions were set forth in
§ 204.4. The Board received no
comments on this issue and is not
reinstating the provisions.
V. Solicitation of Comments Regarding
Use of ‘‘Plain Language’’
Section 722 of the Gramm-LeachBliley Act of 1999 (12 U.S.C. 1408)
requires the Board to use ‘‘plain
language’’ in all final rules. The Board
has sought to present this final rule in
a simple and straightforward manner.
The Board received no comments on
whether the interim final rule and
proposed rule were clearly stated and
effectively organized or on how the
Board might make the text easier to
understand.
VI. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA)
requires an agency that is issuing a final
rule to prepare and make available a
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
PO 00000
Frm 00014
Fmt 4700
Sfmt 4700
substantial number of small entities. 5
U.S.C. 605(b).
Pursuant to section 605(b), the Board
certifies that this final rule will not have
a significant economic impact on a
substantial number of small entities.
The rule implements a program for
paying interest on certain balances held
by eligible institutions at the Federal
Reserve Banks and will benefit small
institutions that receive such interest.
Additionally, the rule permits, 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, 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,
not adverse, on institutions that choose
to establish EBAs but that are not
currently in correspondent-respondent
relationships, 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. There are no new
reporting, recordkeeping, or other
compliance requirements associated
with this rule.
VII. Paperwork Reduction Act
In accordance with the Paperwork
Reduction Act 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. No
collections of information pursuant to
the Paperwork Reduction Act are
contained in the final rule.
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 amending 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 3105.
2. Amend § 204.2 by adding
paragraphs (v), (y), (z), (aa), (bb), and
(cc) to read as follows:
■
§ 204.2
*
E:\FR\FM\29MYR1.SGM
*
Definitions.
*
29MYR1
*
*
Federal Register / Vol. 74, No. 102 / Friday, May 29, 2009 / Rules and Regulations
(v) Clearing balance means the
average balance held in an account at a
Federal Reserve Bank by an institution
over a reserve maintenance period to
satisfy its contractual clearing balance
with a Reserve Bank.
*
*
*
*
*
(y) Eligible institution means—
(1) Any depository institution as
described in § 204.1(c) of this part;
(2) Any trust company;
(3) Any corporation organized under
section 25A of the Federal Reserve Act
(12 U.S.C. 611 et seq.) or having an
agreement with the Board under section
25 of the Federal Reserve Act (12 U.S.C.
601 et seq.); and
(4) Any branch or agency of a foreign
bank (as defined in section 1(b) of the
International Banking Act of 1978, 12
U.S.C. 3101(b)).
(z) Excess balance means the average
balance held in an account at a Federal
Reserve Bank by or on behalf of an
institution over a reserve maintenance
period that exceeds the sum of the
required reserve balance and any
clearing balance.
(aa) Excess balance account means an
account at a Reserve Bank pursuant to
§ 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.
(bb) Required reserve balance means
the average balance held in an account
at a Federal Reserve Bank by or on
behalf of an institution over a reserve
maintenance period to satisfy the
reserve requirements of this part.
(cc) Targeted federal funds rate means
the federal funds rate established from
time to time by the Federal Open Market
Committee.
■ 3. Revise § 204.10 to read as follows:
tjames on PRODPC75 with RULES
§ 204.10
Payment of interest on balances.
(a) Payment of interest. The Federal
Reserve Banks shall pay interest on
balances maintained at Federal Reserve
Banks by or on behalf of an eligible
institution as provided in this section
and under such other terms and
conditions as the Board may prescribe.
(b) Rate. Except as provided in
paragraph (c) of this section, Federal
Reserve Banks shall pay interest at the
following rates—
(1) For required reserve balances, at 1⁄4
percent;
(2) For excess balances, at 1⁄4 percent;
or
(3) For required reserve balances or
excess balances, at any other rate or
VerDate Nov<24>2008
15:25 May 28, 2009
Jkt 217001
rates as determined by the Board from
time to time.
(c) Pass-through balances. A passthrough correspondent that is an eligible
institution may pass back to its
respondent interest paid on balances
held on behalf of that respondent. In the
case of balances held by a pass-through
correspondent that is not an eligible
institution, a Reserve Bank shall pay
interest only on the required reserve
balances held on behalf of one or more
respondents, and the correspondent
shall pass back to its respondents
interest paid on balances in the
correspondent’s account. Any passing
back of interest by a correspondent to a
respondent under this subsection is not
a payment of interest on a demand
deposit for purposes of Part 217 of this
chapter (Regulation Q).
(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 excess
balances of 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 excess
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) No required reserve balances or
clearing balances 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 reserve balance
requirement or contractual clearing
balance.
(4) An excess balance account 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.
(5) Interest shall be paid on excess
balances of eligible institutions
maintained in an excess balance
account in accordance with paragraph
(b)(2) or (b)(3) of this section.
(6) A Reserve Bank may establish
additional terms and conditions
consistent with this part with respect to
the operation of an excess balance
PO 00000
Frm 00015
Fmt 4700
Sfmt 4700
25629
account, including, but not limited to,
terms of and fees for services,
conditions under which an institution
may act as agent for an account,
restrictions on the agent with respect to
account management, penalties for
noncompliance with this section or any
terms and conditions, and account
termination.
By order of the Board of Governors of the
Federal Reserve System, May 22, 2009.
Robert deV. Frierson,
Deputy Secretary of the Board.
[FR Doc. E9–12432 Filed 5–28–09; 8:45 am]
BILLING CODE 6210–01–P
FEDERAL RESERVE SYSTEM
12 CFR Parts 204 and 209
[Regulations D and I; Docket No. R–1307]
Reserve Requirements of Depository
Institutions; Issue and Cancellation of
Federal Reserve Bank Capital Stock
AGENCY: Board of Governors of the
Federal Reserve System.
ACTION: Final rule.
SUMMARY: The Board is amending
Regulation D (Reserve Requirements of
Depository Institutions) and Regulation
I (Issue and Cancellation of Federal
Reserve Bank Capital Stock) to make
two substantive changes and other
clarifying amendments. The first
substantive amendment conforms
Regulation D to Section 603 of the
Financial Services Regulatory Relief Act
of 2006 (Pub. L. 109–351, Oct. 13, 2006)
by authorizing member banks of the
Federal Reserve System to enter into
pass-through arrangements. Previously,
member banks were statutorily
prohibited from passing required
reserve balances through a
correspondent institution. The second
substantive amendment eliminates the
provision in Regulation D’s definition of
‘‘savings deposit’’ that limits certain
kinds of transfers from savings deposits
to not more than three per month. As a
result, all transfers and withdrawals
from a savings deposit that are subject
to a monthly limit will be subject to the
same limit of not more than six per
month. The remaining clarifying
amendments reorganize the provisions
relating to deposit reporting and the
calculation and maintenance of required
reserves, clarify the definition of ‘‘vault
cash,’’ and make other minor editorial
changes.
DATES: This final rule is effective July 2,
2009.
FOR FURTHER INFORMATION CONTACT:
Sophia H. Allison, Senior Counsel (202/
E:\FR\FM\29MYR1.SGM
29MYR1
]]>Agencies
[Federal Register Volume 74, Number 102 (Friday, May 29, 2009)]
[Rules and Regulations]
[Pages 25620-25629]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-12432]
=======================================================================
-----------------------------------------------------------------------
FEDERAL RESERVE SYSTEM
12 CFR Part 204
[Regulation D; Docket Nos. R-1334 and R-1350]
Reserve Requirements for Depository Institutions
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: The Board is adopting, with certain revisions, its interim
final rule that amended Regulation D (Reserve Requirements of
Depository Institutions) to direct Federal Reserve Banks to pay
interest on certain balances held at Federal Reserve Banks by or on
behalf of certain depository institutions. The Board is also amending
Regulation D to authorize the establishment of limited-purpose
accounts, called ``excess balance accounts,'' at Federal Reserve Banks
for the maintenance of excess balances of eligible institutions. These
excess balance accounts are intended to permit eligible institutions to
earn interest on their excess balances without significantly disrupting
established business relationships with their correspondents.
DATES: This final rule is effective July 2, 2009.
FOR FURTHER INFORMATION CONTACT: Sophia H. Allison, Senior Counsel
(202/452-3565), or Dena L. Milligan, 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 information with respect to the clearing balance
policy and float calculations, contact Jonathan Mueller, Senior
Financial Analyst (202/530-6291), Division of Reserve Bank Operations
and Payment Systems; 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. Interest on Balances at Federal Reserve Banks
A. 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. Title II of the
Financial Services Regulatory Relief Act of 2006 (the ``2006 Act'')
(Pub. L. 109-351, 120 Stat. 1966 (Oct. 13, 2006)) amended section 19 of
the Act by authorizing the Federal Reserve Banks (``Reserve Banks'') to
pay earnings on balances maintained at the Reserve Banks by or on
behalf of certain depository institutions. The original effective date
of this authority was October 1, 2011. Section 128 of the Emergency
Economic Stabilization Act of 2008 (the ``2008 Act'') (Pub. L. 110-343,
122 Stat. 3765 (Oct. 3, 2008)) accelerated the effective date of this
authority to October 1, 2008.
Section 19 of the Act now provides that Reserve Banks may pay
earnings on balances held at the Reserve Banks by or on behalf of
certain depository institutions at least once each quarter at a rate
not to exceed the general level of short-term interest rates.
Depository institutions that are eligible to receive earnings on their
balances held at Reserve Banks include the institutions described in
section 19(b)(1)(A) of the Act \1\ and ``any trust company, corporation
organized under section 25A or having an agreement with the Board under
section 25, or any branch or agency of a foreign bank (as defined in
section 1(b) of the International Banking Act of 1978).'' \2\ The 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 depository institutions,
Federal Home Loan Banks, and the National Credit Union Administration
Central Liquidity Facility with respect to the crediting and
distribution of earnings attributable to balances maintained * * * in a
Federal Reserve bank by any such entity on behalf of depository
institutions.'' \3\
---------------------------------------------------------------------------
\1\ Section 19(b)(1)(A) defines ``depository institution'' as
``(i) 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;
(ii) 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;
(iii) 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;
(iv) 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; (v) any member as defined in section 2 of
the Federal Home Loan Bank Act; [and] (vi) 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.'' 12 U.S.C. 461(b)(1)(A).
\2\ Federal Reserve Act section 19(b)(12)(C), 12 U.S.C.
461(b)(12)(C).
\3\ Federal Reserve Act section 19(b)(12), 12 U.S.C. 461(b)(12).
---------------------------------------------------------------------------
Regulation D, which implements the provisions of section 19 of the
Act, also provides that a depository institution must maintain its
required reserves 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.\4\ A depository institution may maintain balances at a Reserve
Bank in an account in its own name, or it may choose another
institution as its ``pass-through correspondent.'' \5\ Under a
[[Page 25621]]
``pass-through correspondent'' arrangement, the pass-through
correspondent holds its respondent's required reserve balances in the
correspondent's account at a Reserve Bank. The pass-through
correspondent is responsible for holding sufficient balances in its
account at the Reserve Bank to satisfy its own reserve balance
requirement (if any), its own contractual clearing balance (if any),
and the aggregate reserve balance requirements of its respondents. The
Reserve Bank's debtor-creditor relationship is solely with the pass-
through correspondent and not with any of the correspondent's
respondents. Accordingly, Regulation D provides that the balance in a
pass-through correspondent's account at a Reserve Bank represents a
liability of the Reserve Bank solely to the correspondent,
notwithstanding the fact that part or all of that balance may represent
the funds of the correspondent's respondents.\6\ Consequently, a pass-
through correspondent must show the entire balance in its Reserve Bank
account on the correspondent's 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.\7\
---------------------------------------------------------------------------
\4\ 12 CFR 204.5(a)(1) (formerly 12 CFR 204.3(b)(1)).
\5\ 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. As published in today's Federal Register, the
Board is also amending Regulation D to conform the regulation to the
2006 Act.
\6\ 12 CFR 204.5(d)(3) (formerly 12 CFR 204.3(i)(2)).
\7\ Similarly, a correspondent that is not acting in a pass-
through capacity must also show its entire account balance at the
Reserve Bank as an asset on its own balance sheet. Regulation D,
however, does not specifically address correspondents other than
pass-through correspondents.
---------------------------------------------------------------------------
B. Interim Final Rule on Payment of Interest on Balances at Federal
Reserve Banks
On October 9, 2008, the Board published an interim final rule
amending Regulation D 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
5948 (Oct. 9, 2008)). The interim final rule directed Reserve Banks to
pay interest on such balances held by or on behalf of ``eligible
institutions.'' The interim final rule defined the new term ``eligible
institution'' to mean an institution eligible to earn interest on
balances held at the Federal Reserve Banks under the 2006 Act.
The interim final rule provided that Reserve Banks would pay
interest on required reserve balances at a rate equal to the average
targeted federal funds rate over the reserve maintenance period less 10
basis points and that Reserve Banks would pay interest on excess
balances at a rate equal to the lowest targeted federal funds rate
during the maintenance period less 75 basis points. Since publishing
the interim final rule, the Board has adjusted the method for
determining the rate of interest on excess balances three times (73 FR
65506 (Nov. 4, 2008), 73 FR 67713 (Nov. 17, 2008), 73 FR 78616 (Dec.
23, 2008)) and the method for determining the rate of interest on
required reserves balances twice (73 FR 67713 (Nov. 17, 2008), 73 FR
78616 (Dec. 23, 2008)). Currently, the rate of interest on both
required reserve balances and excess balances is \1/4\ percent.\8\
Additionally, in its December amendments, the Board amended the
regulation to specify that it may from time to time determine any other
rate for payment of interest on required reserve balances and excess
balances.
---------------------------------------------------------------------------
\8\ 12 CFR 204.10(b).
---------------------------------------------------------------------------
The interim final rule deemed any excess balance held by a pass-
through correspondent in the correspondent's account, when the
correspondent was not itself an eligible institution, to be held on
behalf of the pass-through correspondent's respondents. Further, the
interim final rule permitted, but did not require, pass-through
correspondents to pass back to their respondents the interest paid on
balances held on behalf of respondents. The interim final rule also
provided that when a pass-through correspondent passes back interest to
its respondents, such a payment is not a payment of interest on a
demand deposit for purposes of Regulation Q (12 CFR part 217). The
interim final rule also defined the new terms used therein.
C. Request for Public Comment and Summary of Comments
The Board requested comment on all aspects of the interim final
rule. In response, the Board received 19 comments, consisting of
comments from eight depository institutions, four financial institution
trade associations, two research organizations, and five individuals.
Two commenters fully supported the interim final rule, but made
suggestions regarding other aspects of Regulation D. Six commenters
expressed concerns about the potential adverse impact of the interim
final rule on correspondent-respondent relationships. Other commenters
expressed monetary policy concerns related to paying interest on
balances.
D. General Comments and Analysis
Two commenters supported paying interest on balances held at the
Reserve Banks by or on behalf of eligible institutions as a monetary
policy tool. One commenter noted that payment of interest on balances
at Reserve Banks provides depository institutions with ``a reasonable
option [for] needed liquidity.'' In contrast, six commenters stated
that paying interest on excess balances encouraged banks to remove
funds from the federal funds market, and thus, reduced inter-bank
lending and liquidity. One commenter suggested that, in order to avoid
negative effects on liquidity, the Federal Reserve should pay interest
on required reserve balances, but not on excess balances. One commenter
stated that paying interest on excess balances could encourage
financial institutions to neglect other markets where those
institutions could obtain higher returns. The Board also received one
comment on market conditions in general, but not specifically related
to paying interest on balances held at the Reserve Banks.
The Board has carefully considered the comments about the effects
of paying interest on balances at Reserve Banks. In the past, the
absence of interest payments on required reserve balances acted as a
tax on depository institutions' issuance of deposits subject to reserve
requirements. To the extent that depository institutions could not
satisfy reserve requirements with vault cash, they were required to
hold more balances than they otherwise would in a non-interest bearing
account at a Reserve Bank. Further, the absence of interest payments on
excess balances meant that, when reserve supply significantly exceeds
demand, the federal funds rate could fall to as low as zero.
The Board continues to believe that the ability to pay interest on
balances held at Reserve Banks promotes efficiency and stability of the
banking sector. Paying interest on required reserve balances also
eliminates much of the implicit reserve tax and lessens the incentives
for depository institutions to engage in reserve-avoidance behavior,
which absorbs real resources and diminishes the efficiency of the
banking system. By paying interest on excess balances, the Federal
Reserve can expand its balance sheet as necessary to provide sufficient
liquidity to support financial stability while implementing monetary
policy that is appropriate in light of macroeconomic objectives of
maximum employment and price stability.
[[Page 25622]]
In order to help foster trading in the federal funds market, the
Board has made adjustments to the rates at which the Reserve Banks pay
interest on required reserve balances and excess balances, and will
continue to evaluate, and make any necessary adjustments to, the
appropriate rate in light of evolving market conditions. Accordingly,
the Board has determined that the Reserve Banks will continue to pay
interest on required reserve and excess balances held at Reserve Banks
by or on behalf of eligible institutions.
One commenter expressed concern that under the interim final rule,
excess balances held by a correspondent on behalf of respondents
``would become demand deposits on the correspondent's balance sheet,''
and thus the correspondent would be required to hold reserves against
those balances. Prior to the implementation of the interim final rule,
a correspondent was required to hold reserves against any respondent
excess funds held as a deposit subject to immediate withdrawal by the
respondent. The implementation of paying interest on balances at
Reserve Banks has not changed the accounting and reporting treatment of
such balances for purposes of reserve requirements.
The remaining comments concerned reserve requirements generally,
limits on transfers from savings deposit accounts, and member-bank
pass-through arrangements. Two comments addressed Regulation D's
limitation on certain convenient transfers from savings deposits: One
comment suggested broadening the definition of ``in person'' transfer,
while the other comment suggested removing the numeric limitations on
certain convenient transfers from savings deposits. One commenter
recommended eliminating reserve requirements, while another commenter
recommended increasing reserve requirements ratios.
The Board is not exercising its authority at this time to eliminate
reserve requirements or to change any required reserve ratios at this
time, even though the 2008 Act made both authorities effective in 2008.
The Board may consider such changes in the future in the context of a
broader review of the role of reserve requirements in the conduct of
monetary policy. Finally, as explained in the companion Regulation D
rulemaking announced today, the Board is eliminating the prohibition on
member bank pass-through accounts and is amending the numeric
limitations on convenient transfers from savings deposits to remove the
sublimit that applied to checks and drafts.\9\
---------------------------------------------------------------------------
\9\ See final amendments to Regulation D elsewhere in today's
Federal Register.
---------------------------------------------------------------------------
E. Section-by-Section Analysis
1. Section 204.2(v) Definition of Clearing Balance
The interim final rule defined the new term ``clearing balance'' as
``the amount that an eligible institution holds to satisfy a
contractual clearing balance with a Federal Reserve Bank, in addition
to any required reserve balance.'' The Board received no comments on
this provision of the interim final rule. As part of the final rule,
the Board is adopting a definition of ``clearing balance'' that more
accurately reflects calculations of account balances and interest
payments. The final rule defines ``clearing balance'' as ``the average
balance held in an account at a Federal Reserve Bank by an institution
over a reserve maintenance period to satisfy its contractual clearing
balance with a Reserve Bank.'' Thus, the amount of funds an institution
actually maintains for clearing purposes may be different from its
``contractual clearing balance,'' which is the amount that the
institution has agreed to maintain, on average, over the reserve
maintenance period. Further, the phrase ``in addition to any required
reserve balance'' is unnecessary in light of the new definition of
``contractual clearing balance,'' which specifies that such amount is
in addition to the institution's reserve balance requirement.\10\
---------------------------------------------------------------------------
\10\ See final amendments to Regulation D elsewhere in today's
Federal Register that define ``contractual clearing balance'' as
``an amount that an institution agrees or is required to maintain in
its account at a Federal Reserve Bank in addition to balances the
institution may hold to satisfy its reserve balance requirement.''
---------------------------------------------------------------------------
As stated in the interim final rule, only certain institutions are
eligible to receive earnings on their balances at Reserve Banks
(``eligible institutions''). Accordingly, the interim final rule's
definition of ``clearing balance'' was restricted to ``eligible
institutions.'' Institutions that are not ``eligible institutions,''
however, may hold balances for clearing purposes in the institution's
Reserve Bank account. Therefore, the Board is adopting a definition of
``clearing balance'' that is not limited to institutions that are
eligible to receive earnings on balances at Reserve Banks. For ease of
reference, the final rule places all the definitions in a single
section of Regulation D (Sec. 204.2), and thus, the rule redesignates
Sec. 204.10(d)(1) as Sec. 204.2(v).
2. Section 204.2(y) Definition of Eligible Institution
Section 19(b)(12) of the Act permits Reserve Banks to pay interest
on balances held by or behalf of ``depository institutions.'' Because
section 19(b)(12)(C)'s definition of ``depository institution'' is
broader than the definition of that term in section 19(b)(1)(A) of the
Act and in Regulation D, the interim final rule used the new term
``eligible institution'' to refer to those ``depository institutions''
listed in section 19(b)(12)(C) that are eligible to receive interest on
their balances. The Board received no comment on this definition and is
retaining the current provision but moving it to the definitions
section of the regulation, redesignated as Sec. 204.2(y).
3. Section 204.2(z) Definition of Excess Balance
The interim final rule defined ``excess balance'' as ``the average
balance held in an account at a Federal Reserve Bank by or on behalf of
an eligible institution over a reserve maintenance period that exceeds
the sum of the required reserve balance and any clearing balance.'' The
Board received no comments on this definition and is retaining the
current provision but moving it to the definitions section of the
regulation, redesignated as Sec. 204.2(z), with one technical
amendment. Like the definition of ``clearing balance,'' discussed
supra, the interim final rule's definition of ``excess balance'' was
limited to eligible institutions. Because institutions other than
eligible institutions may maintain excess balances at Reserve Banks,
the Board is adopting a definition of ``excess balances'' in the final
rule that is not limited to ``eligible institutions.''
4. Section 204.2(bb) Definition of Required Reserve Balance
The interim final rule defined ``required reserve balance'' as
``the average balance held in an account at a Federal Reserve Bank by
or on behalf of an eligible institution over a reserve maintenance
period to satisfy the reserve requirements of this part.'' The Board
received no comments on this definition and is retaining the current
provision but moving it to the definitions section of the regulation,
with one technical amendment, redesignated as section 204.2(bb).
Because the term ``required reserve balance'' is used in Regulation D
in contexts other than paying earnings on balances at Reserve Banks,
the definition of the term in the final rule is not limited to
``eligible institutions.''
[[Page 25623]]
5. Section 204.2(cc) Definition of Targeted Federal Funds Rate
The interim final rule defined ``targeted federal funds rate'' as
``the federal funds rate established from time to time by the Federal
Open Market Committee.'' The Board received no comments on this
definition and is retaining the current provision but moving it to the
definitions section of the regulation, redesignated as Sec. 204.2(cc).
6. Section 204.10(a) Payment of Interest on Balances
The Board amended Regulation D to direct the Reserve Banks to pay
interest on required reserve balances and excess balances maintained at
Reserve Banks by or on behalf of an eligible institution. The Reserve
Banks make interest payments within the existing framework for reserve
computation and maintenance, which includes reserve averaging,
carryover provisions, and reserve deficiency charges. For both excess
balances and required reserve balances, Reserve Banks pay interest on
average balances maintained over the reserve maintenance period. This
approach is consistent with the current reserves framework under which
compliance with reserve requirements is measured over either a seven-
day or a fourteen-day reserve maintenance period, depending on the size
of the institution. Interest is credited to eligible institutions after
the close of the maintenance period (usually 15 days thereafter) in
order to apply reserve carryover provisions.
One commenter stated that paying interest on required reserve
balances rendered useless the current ``as-of adjustment'' process for
correction of errors from previous reserve maintenance periods. An as-
of adjustment is a memorandum item used by the Federal Reserve to
correct the effect of errors made in processing of checks or other
transactions on an institution's reserve position. These technical
adjustments are used when determining a depository institution's
required reserve balance and clearing balance for the payment of
interest and therefore remain useful.\11\ Accordingly, the Board is
adopting the current language in Sec. 204.10(a) as part of its final
rule.
---------------------------------------------------------------------------
\11\ More detailed information about the ``as-of adjustment''
process is available in the Reserve Maintenance Manual, available at
https://www.frbservices.org/files/regulations/pdf/rmm.pdf.
---------------------------------------------------------------------------
7. Section 204.10(b) Rate
The Board received no comments on the initial rate of interest on
required reserve balances. The Board received two comments on the
formula for the rate on excess balances. One commenter stated that the
initial rate paid on excess balances (the lowest targeted federal funds
rate during the reserve maintenance period less 75 basis points) and
the rate after the first adjustment to the formula for calculating the
interest rate on excess balances (the lowest targeted federal funds
rate during the reserve maintenance period less 35 basis points) were
too high in a ``dysfunctional market.'' The Board received one comment
that reducing the 75-basis point difference between the rate of
interest on excess balances and the targeted federal funds rate over
the reserve maintenance period exacerbated the ``untimely
implementation'' of the payment of interest on balances at Reserve
Banks, but that commenter did not propose an alternative rate. One
commenter suggested that the Board set the rate of interest on excess
balances at the effective federal funds rate, rather than the targeted
federal funds rate, so as to avoid artificially drawing funds to the
Reserve Banks.
The Board has continued to evaluate the rate of interest on
required reserve and excess balances and is not at this time changing
the rates from the current amount of \1/4\ percent. Flexibility to make
adjustments to the rates of interest in response to evolving market
conditions continues to be necessary. Accordingly, the Board is
retaining the current language of Sec. 204.10(b)(3), which provides
that the Board may revise from time to time the rates for payment of
interest on balances at Reserve Banks.
8. Section 204.10(c) Pass-Through Balances
a. Background
As noted above, the 2006 Act authorized Reserve Banks to pay
earnings on balances maintained at a Reserve Bank by or on behalf of
certain depository institutions. The 2006 Act also authorized the Board
to prescribe regulations concerning ``the responsibilities of
depository institutions, Federal Home Loan Banks, and the National
Credit Union Administration Central Liquidity Facility with respect to
crediting and distribution of earnings attributable to balance
maintained * * * in a Federal Reserve bank by any such entity on behalf
of depository institutions.'' \12\ Thus, the 2006 Act contemplated that
certain institutions (such as Federal Home Loan Banks) could hold
balances on behalf of depository institutions that were eligible to
earn interest on those balances, even if the correspondent institutions
were not themselves eligible to receive earnings on their own balances.
---------------------------------------------------------------------------
\12\ Federal Reserve Act Sec. 19(b)(12)(B)(iii), 12 U.S.C.
461(b)(12)(B)(iii).
---------------------------------------------------------------------------
b. Correspondents That Are Eligible Institutions
Under the interim final rule, Reserve Banks paid interest on
required reserve balances maintained on behalf of an eligible
institution. Where a pass-through correspondent is an eligible
institution, the required reserve balances in the correspondent's
account may include those balances held by the correspondent to meet
its own reserve requirement (if any), as well as those balances held to
meet its respondents' reserve requirements. The interim final rule also
permitted, but did not require, a pass-through correspondent to pass
back to its respondent interest paid on behalf of that respondent's
required reserve balances.
The Board requested comment on whether it should permit or require
a correspondent to pass back interest to its respondents. In response,
the Board received four comments. Two commenters supported permissive
passing back of interest in order to preserve the parties' flexibility
in negotiating contractual relationships. One commenter supported
requiring passing back of interest, stating that permitting
correspondents to retain the interest would be unfair. This commenter
also suggested delaying the effective date of a pass-back requirement
to two years after adoption of a final rule in order to provide
correspondents with an opportunity ``to modify accounting systems and
business models.'' Finally, one commenter stated that paying interest
on pass-through balances as a lump-sum was a poor service because doing
so places responsibility on the correspondent to calculate the amount
of interest to be passed back to each respondent.
Under the final rule, correspondents that are eligible institutions
will continue to be permitted, but not required, to pass back to their
respondents interest earned on balances held on behalf of the
respondents. As these correspondents are eligible to earn interest on
their own account balances, permitting them to make arrangements with
their respondents with respect to passing back of interest is
consistent with the statutory provisions. In addition, permissive, but
not required, passing back of interest avoids interfering with existing
correspondent-respondent arrangements. Correspondents structure their
[[Page 25624]]
relationships with respondents in a variety of ways, depending on
factors such as services provided or balances held. Respondents may
adjust the level of balances held with a correspondent in response to
changes in the rates received on those balances, as well as in response
to other factors. Respondents that are not satisfied with their
existing correspondent arrangements may take steps to renegotiate the
terms of the relationship or enter into a relationship with a different
correspondent.
Additionally, permitting, but not requiring, the passing back of
interest to respondents is consistent with the treatment of reserve
deficiency charges in Regulation D.\13\ Reserve Banks assess deficiency
charges to the account of the pass-through correspondent for any
deficiency in its account balances, even if the deficiency is
attributable to the correspondent's respondent. Then, the pass-through
correspondent determines whether to assess a deficiency charge on its
respondent, or whether to make adjustments to other aspects of the
correspondent-respondent relationship in response to the deficiency.
Accordingly, the Board has determined to continue permitting, but not
requiring, correspondents that are eligible institutions to pass back
to respondents earnings on both required reserve balances and excess
balances held on behalf of the respondents.
---------------------------------------------------------------------------
\13\ See 12 CFR 204.5(d)(4)(i) (formerly 12 CFR
204.3(i)(3)(ii)).
---------------------------------------------------------------------------
c. Correspondents That Are Not Eligible Institutions
Under the interim final rule, Reserve Banks paid interest on
required reserve balances maintained on behalf of an eligible
institution, even if the pass-through correspondent was not an eligible
institution. Where a pass-though correspondent is not an eligible
institution, the required reserve balances held in the correspondent's
account are solely those balances held to meet its respondent's reserve
requirements.
The interim final rule also provided that Reserve Banks pay
interest on excess balances maintained on behalf of an eligible
institution, even if the pass-through correspondent is not an eligible
institution but has excess balances in its account. Because Reserve
Banks cannot determine whether all or part of the excess balances in a
pass-through correspondent's account are held on behalf of respondents
without imposing additional reporting or accounting requirements, the
interim final rule deemed all of the excess balances held in an account
of a correspondent that is not an eligible institution to be held on
behalf of the correspondent's respondents.
The Board requested comment on alternative methods for determining
whether all or part of the excess balances in a correspondent's account
at a Reserve Bank are held on behalf of the respondent where the
correspondent is not an eligible institution. The Board received one
comment in support of deeming all excess balances held in an account of
a pass-through correspondent that is not an eligible institution to be
held on behalf of the correspondent's respondents. This commenter
stated that deeming the excess balances to be held on behalf of the
respondents would avoid imposing ``unnecessarily burdensome'' reporting
requirements on correspondents and provide flexibility in structuring
correspondent-respondent relationships. One commenter, however,
indicated that additional reporting requirements would not be
burdensome because correspondents already maintain records of excess
balances held on behalf of respondents.
Since the implementation of paying interest on balances at Reserve
Banks, some correspondents that are not eligible institutions are
holding extremely high excess balances relative to the total assets of
their respondents, indicating that these balances may not be held on
behalf of those respondents. In order to carry out the intent of the
2006 Act with respect to institutions that are and are not eligible to
receive interest on balances held at Reserve Banks, the final rule will
no longer deem any excess balance in the account of a correspondent
institution that is not an eligible institution to be held on behalf of
respondents. Thus, any excess balance in the account of a correspondent
that is not an eligible institution will be attributable to the
correspondent, and no earnings will be paid on the excess balance in
that account. The respondents of a correspondent that is not an
eligible institution may elect to participate in an excess balance
account (discussed infra) in order to receive earnings on excess
balances.
Required reserve balances held on behalf of respondents by
correspondents that are not eligible institutions, however, will
continue to receive interest, which will be posted to the
correspondent's master account. As discussed supra, where a pass-
through correspondent is not an eligible institution, the required
reserve balances held in the correspondent's account will be solely
those held to meet its respondent's reserve requirements. Further,
because any excess balance held in the account of a correspondent that
is not an eligible institution will not receive interest, any earnings
received on balances in such an account will be attributable solely to
the required reserve balances of the correspondent's respondents.
Unlike the interim final rule, the final rule will require
correspondents that are not eligible institutions to pass back to their
respondents all interest credited to the correspondent's accounts. The
correspondent is responsible for calculating the amount of interest
apportioned to each of its respondents.
d. Exemption From Regulation Q
Under the interim final rule, passing back interest to respondents
is not a payment of interest on a demand deposit for purposes of
Regulation Q (12 CFR part 217). One commenter stated that by paying
interest on ``transaction accounts,'' the Board has ``created an unfair
playing field'' by not allowing other correspondent banks to do the
same for the same types of accounts held with them. Another commenter
expressed concern that requiring a correspondent to hold excess
balances on its balance sheet negated the FDIC's insurance coverage of
the respondent's demand deposit account by transforming the
respondent's account from a non-interest-bearing transaction account to
an interest-bearing transaction account.
The Board recognizes that, although Reserve Banks may pay interest
on balances that are subject to immediate withdrawal, many private
sector banks are prohibited by law from doing so.\14\ The Board has
long sought statutory amendments to eliminate the prohibition against
interest on demand deposits. The 2006 Act, however, expressly
authorizes the Board to prescribe regulations to allow pass-through
correspondents to pass back interest to respondents. Congress,
therefore, contemplated that pass-through correspondents could pass
back part or all of the interest received in a correspondent's Reserve
Bank account to its respondents, even though the payment of interest on
demand deposit accounts is otherwise prohibited. Accordingly, the Board
has specified in the final rule that when a pass-through correspondent
passes back to its respondent any interest paid on balances held on
behalf of the
[[Page 25625]]
respondent, such a payment is not a payment of interest on a demand
deposit for purposes of Regulation Q.\15\ The Board received no other
comments on this provision and is retaining the current language in the
final rule, with the exception of one technical amendment for clarity.
---------------------------------------------------------------------------
\14\ For example, section 19(i) of the Act provides: ``[no]
member bank shall, directly or indirectly, by any device whatsoever,
pay any interest on any deposit which is payable on demand * * * ''
See Regulation Q (Prohibition Against Payment of Interest on Demand
Deposits), which implements section 19(i) (12 CFR 217).
\15\ See 12 CFR 329.2 (Payment of interest) and 12 CFR 329.3
(Exception to prohibition on payment of interest) for implications
to FDIC regulations regarding payment of interest.
---------------------------------------------------------------------------
II. Excess Balance Accounts
A. Background
1. Correspondent-Respondent Relationship
Since the implementation of the payment of interest on excess
balances of eligible institutions, eligible institutions that are
respondents of a pass-through correspondent may receive earnings on
excess balances in two ways. First, the respondents of a pass-through
correspondent may direct the correspondent to sell the respondent's
excess funds in the federal funds market. Second, under the interim
final rule adopted in October, the respondents may direct the
correspondent to hold the respondent's excess funds as excess balances
in the correspondent's account at a Reserve Bank. These two approaches
have different implications for the correspondent's balance sheet and
its leverage ratio for capital adequacy purposes. If a correspondent
holds its respondents' excess balances in the correspondent's account
at a Reserve Bank, the correspondent's account balance at the Reserve
Bank increases. Accordingly, the correspondent has more assets on its
balance sheet, resulting in a lower leverage ratio for capital adequacy
purposes. In contrast, if the correspondent sells the funds in the
federal funds market on the respondent's behalf, the balances are
transferred to the entity purchasing them. 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. All other things
being equal, the correspondent's Reserve Bank account balance is lower.
The correspondent has fewer assets on its balance sheet, and therefore,
has a higher regulatory leverage ratio.
When the federal funds rate is below the rate the Reserve Banks pay
on excess balances, respondents have an incentive to shift the
investment of their excess funds away from sales of federal funds
through their correspondents, and toward holding those funds as excess
balances in accounts at the Reserve Banks. Although correspondents may
hold those funds as excess balances at a Reserve Bank on behalf of the
respondent, doing so could result, in some cases, in a significant
reduction in a correspondent's regulatory leverage ratio for capital
adequacy purposes. Alternatively, a respondent could open its own
account at a Reserve Bank; doing so, however, could potentially disrupt
part or all of the respondent's established relationship with its
correspondent.
2. Comments Received on Paying Interest on Excess Balances Held by
Correspondents on Behalf of Respondents
In response to its interim final rule that implemented payment of
interest on balances at Reserve Banks, the Board received comments
concerning the effects of paying interest on excess balances on
correspondent-respondent relationships. Five commenters stated that
paying interest on excess balances, in conjunction with unusual market
conditions, was causing respondents to shift funds away from
correspondents to the Reserve Banks; thus, disrupting correspondent-
respondent relationships. Three commenters stated that respondents'
increasing demands to have correspondents hold funds as excess balances
(as opposed to selling the funds in the federal funds market) was not
only decreasing the availability of federal funds, but was also
requiring correspondents to maintain more capital to raise their
leverage ratio for capital adequacy purposes. One commenter expressed
concern that, without changes to the interim final rule, the long-term
viability of correspondent-respondent relationships would be
jeopardized.
The Board received five comments proposing solutions to mitigate
the adverse effects on correspondent-respondent relationships of paying
interest on excess balances. Four commenters proposed that the Board
authorize new accounts for the purpose of holding excess balances that
did not require correspondents to hold the respondents' excess balances
on their balance sheets. One commenter suggested that the Reserve Banks
purchase excess funds directly from correspondents at the rate of
interest on excess balances.
B. Excess Balance Account Proposed Rule
In response to these concerns, the Board requested comment in
January 2009 on a proposal to amend Regulation D to authorize the
creation of excess balance accounts (``EBAs'') (74 FR 5628 (Jan. 30,
2009)). The proposal would authorize the establishment of EBAs for
maintaining the excess balances of participating eligible institutions
(``EBA Participants''). The EBA Participants would designate another
institution to act as their agent (``EBA Agent'') for purposes of
general account management, including transferring excess balances in
and out of the EBA and apportioning the interest paid on excess
balances. The Board proposed that the EBA Agent could not comingle its
funds in the EBA. The excess balances in the EBA would represent a
liability of the Reserve Bank solely to the EBA Participants. Neither
the EBA Participants nor the EBA Agent could maintain required reserve
or clearing balances in the EBA or use the EBA for general payment or
other activities. The Board stated in the proposal that it would re-
evaluate the continuing need for EBAs when more normal market
functioning resumes.
C. General Comments and Analysis
In response to its request for comment on the EBA proposal, the
Board received 61 comments, representing comments from 44 depository
institutions, two financial holding companies, one Federal Home Loan
Bank, five financial institution trade associations, and three
individuals. Sixteen commenters supported the proposal in its entirety.
Two of these commenters sought clarification on technical aspects of
the proposed rule on EBAs. Several commenters supported EBAs in
general, but suggested that EBA Participants be able to designate more
than one institution to act as EBA Agent. One commenter found no
significant value in the EBA proposed rule, citing high administrative
costs and few benefits. One commenter raised concerns about the impact
of EBAs on existing business models if balances are moved into Reserve
Bank accounts. Two commenters encouraged the Board to evaluate the
continuing need for EBAs when more normal market functioning resumes;
one of these commenters suggested the Board seek public comment as part
of its re-evaluation.
The Board has carefully considered the comments and has determined
to authorize the establishment of EBAs, largely as described in the
proposal. The Board believes that authorizing EBAs should reduce the
potential for significant disruptions to long-standing correspondent-
respondent relationships in the current market environment. Because the
excess balances of EBA Participants in EBAs would be Reserve Banks'
direct liabilities to EBA Participants, correspondents would not
[[Page 25626]]
show those balances on their balance sheets. Therefore, the adverse
leverage ratio impact of correspondents of holding respondent excess
balances in the correspondent's account would be mitigated. Further,
participation in an EBA, either as a participant or agent, is
voluntary. Thus, if an institution does not believe that an EBA will
provide additional value, the institution does not have to participate
in an EBA or act as an EBA Agent. As stated in the proposal, the Board
will re-evaluate the continuing need for EBAs when more normal market
functioning resumes.
D. Section-by-Section Analysis
1. Section 204.2(aa) Definition of Excess Balance Account
The Board proposed to define ``excess balance account'' as ``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.'' The proposed rule explicitly excludes excess
balance accounts from the definition of ``pass-through accounts.''
The Board received three comments seeking clarification as to
whether each EBA Participant needed to open an EBA or whether the EBA
Participants could designate an EBA Agent to open an EBA on behalf of
the EBA Participants. To establish an EBA, eligible institutions that
desire to become EBA Participants must designate one other institution
to act as the EBA Agent for that EBA. EBA Participants will be required
to execute EBA agreements with the Reserve Bank where the EBA Agent
maintains its own master account (``Administrative Reserve Bank'').
Similarly, the EBA Agent will be required to execute an EBA agreement
with its Administrative Reserve Bank. In order to facilitate
establishing EBAs and to reduce administrative burdens, EBA
Participants will deliver their executed EBA agreement to their EBA
Agent. The EBA Agent then will deliver the executed EBA agreements of
all the EBA Participants for which it acts as EBA Agent to its
Administrative Reserve Bank. The Board is adding language to the
definition of ``excess balance account'' to clarify that eligible
institutions establish an EBA through the EBA Agent. The Board is also
making a technical amendment to the definition to reflect renumbering
of sections elsewhere in Regulation D. The Board is also redesignating
the definition as Sec. 204.2(aa) (from Sec. 204.10(d)(6) in the
proposed rule) in connection with moving the definition into the
general definition section of Regulation D.
2. Section 204.10(d)(1) Establishing an EBA
The proposed rule (at Sec. 204.10(e)(1)) provided that a Reserve
Bank may establish an excess balance account for eligible institutions.
The proposed rule also provided that the excess balances in the EBA are
the property of the eligible institutions that participate in the EBA
and represent a liability of the Reserve Bank solely to the
participating institution. The Board received no comments on this
portion of the proposal.
The Board is deleting the phrase that states the excess balances
are the property of the eligible institutions. This phrase is not
necessary and its deletion does not change the substance of the
provision, which continues to state that excess balances represent a
liability of the Reserve Bank solely to the participating institutions.
The Board is otherwise adopting the provision as proposed.
3. Section 204.10(d)(2) EBA Agent
a. General Account Management
The proposed rule on EBAs provided that the EBA Participants would
authorize another institution, the EBA Agent, to act as agent to
perform general account management, including transferring excess
balances of EBA Participants into and out of the EBA. One commenter
expressed concerns about the feasibility for the EBA Agent of passing
back interest. Specifically, the commenter sought clarification as to
whether an EBA Agent could distribute the earnings to the EBA
Participants at a different rate than the Reserve Banks paid out the
earnings, as using the same formula as the Reserve Banks would require
significant programming efforts. One commenter requested that the Board
delay the effective date of the rule 120 days after publication to
provide sufficient time to adjust operating systems to accommodate the
new EBA Agent services.
The EBA program contemplates that Reserve Banks will calculate
interest on the aggregate balance in the EBA, rather than calculate the
amount of interest attributable to each EBA Participant's balances in
the EBA. The EBA Participants will be responsible for instructing the
EBA Agent with respect to the disposition of the interest. For example,
an EBA Participant and an EBA Agent may by agreement provide that all
interest attributable to an EBA Participant should be paid to the EBA
Participant, or may by agreement provide that the EBA Agent may retain
part or all of the interest paid as part of the EBA Agent's
compensation for providing EBA Agent services or other services for the
EBA Participant. Thus, the EBA Agent is not required by regulation to
utilize the same formula for the disposition of earnings to EBA
Participants as the Reserve Banks use for calculating interest on the
EBA's aggregate balance. Moreover, the Board anticipates that the
Reserve Banks will establish terms and conditions such that each EBA
Agent will manage only one EBA.\16\ Because acting as an EBA Agent is
voluntary, the Board does not believe it necessary to delay the
effective date of the rule. The Board is making one additional
technical amendment to the final rule to replace the proposed phrase
``agent of the eligible institutions'' with the phrase ``agent of the
participating institutions.'' This amendment is intended to provide
consistent usage of terms throughout the final rule and does not
represent a substantive change to the provision.
---------------------------------------------------------------------------
\16\ An EBA Agent that wishes to segregate different types of
respondents from one another can set up subaccounts for the EBA.
---------------------------------------------------------------------------
b. Participation in One EBA
The proposed rule provided that the EBA Participants would
authorize another institution to act as its EBA Agent with respect to
an EBA. The proposed rule, however, did not specify whether an EBA
Participant could participate in more than one EBA. One commenter
recommended removing the requirement that an EBA Participant designate
only one institution as its EBA Agent, while not specifically
suggesting that an EBA Participant be able to designate more than one
institution as EBA Agent or to participate in more than one EBA. This
commenter stated that requiring an EBA Participant to designate only
one EBA Agent was unnecessary as most respondents ``do not participate
in multiple correspondent agency programs.'' Some commenters, however,
suggested that the final rule should permit EBA Participants to
participate in more than one EBA.\17\ These commenters stated that
respondents currently use more than one correspondent institution for
selling funds in the Federal funds market, among other services, in
order to diversify credit risk, obtain better
[[Page 25627]]
rates, and for liquidity contingency planning purposes.
---------------------------------------------------------------------------
\17\ Because the proposed rule on EBAs limits EBA Participants
to designating one institution as EBA Agent for the EBA, an EBA
Participant that wished to designate multiple institutions as EBA
Agent would need to participate in multiple EBAs to do so.
---------------------------------------------------------------------------
While the Board recognizes that certain respondents may wish to
maintain relationships with more than one correspondent for various
purposes, the Board believes that permitting each eligible institution
to participate in only one EBA is appropriate. Specifically, multiple
EBAs are not necessary in order to diversify credit risk, as with
federal funds sales, because there is no credit risk associated with
maintaining a balance in an account at a Reserve Bank. Similarly, the
need to use multiple agents to manage liquidity risk does not exist in
the context of EBAs, because excess balances in an EBA are highly
liquid. Moreover, any potential disruption to existing correspondent-
respondent relationships is lessened by the fact that each EBA
Participant can choose each day whether to sell funds in the federal
funds market (through any number of correspondent institutions), to
place the funds at a Federal Reserve Bank through their (single) EBA
Agent, or to select a combination of the two. Accordingly, EBA
Participants may maintain relationships with more than one
correspondent notwithstanding the fact that an EBA Participant
participates in only one EBA at a Reserve Bank.
Restricting eligible institutions to participating in only one EBA
is consistent with Regulation D's treatment of correspondent-respondent
relationships in pass-through arrangements, where each respondent uses
a single correspondent to pass through the respondent's required
reserve balances.\18\ This single-correspondent structure also reflects
the current Federal Reserve policy that permits each chartered
depository institution to maintain a single master account at one
Reserve Bank. Such a structure provides streamlined control and a
single coordination point for the Reserve Banks to manage the debtor-
creditor relationship with each depository institution. This structure
also helps minimize the risk of loss to the Federal Reserve in the
event the account holder becomes insolvent. Authorizing the
establishment of EBAs loosens such control and coordination to the
extent that it potentially permits EBA Participants to have accounts at
two Reserve Banks: one account in the district where the EBA
Participant itself is located, and an EBA in the district where the EBA
Agent is located. Given that offering EBAs is motivated largely by
unusual financial market conditions in which the effective federal
funds rate has been below the rate on excess balances, and given that
EBAs are being offered on a temporary basis, staff believes that
permitting EBA Participants to potentially have an EBA and a master
account at different Reserve Banks is appropriate to ensure that
respondents are able to hold excess balances within their existing
correspondent-respondent relationships. A more significant expansion,
however, involving multiple account relationships by permitting
eligible institutions to participate in more than one EBA, introduces
further complexity into the oversight and coordination for the Reserve
Banks for managing the debtor-creditor relationship without a
substantial justification for doing so.
---------------------------------------------------------------------------
\18\ 12 CFR 204.5(d)(1) (formerly 12 CFR 204.3(i)(1)).
---------------------------------------------------------------------------
The Board believes that permitting eligible institutions to
participate in one EBA, but not more, at this time benefits both
correspondent and respondent by allowing respondents to place excess
balances at a Reserve Bank in a way that does not increase the leverage
ratio for the correspondent, therefore mitigating disruption to
correspondent-respondent relationships. This approach also does not
significantly increase the complexity for the Reserve Banks in managing
these accounts and the associated debtor-credit relationships. In
addition, the significance of the demand for participation in multiple
EBAs is not clear from the comments received, because only a few
commenters expressed an interest in multiple EBAs. Accordingly, the
Board expects that, absent a compelling reason to do otherwise at this
time, the Reserve Banks will set terms and conditions with respect to
EBAs that will limit each eligible institution to participation in one
EBA.
c. EBA Agent Must Maintain Separate Master Account
The proposed rule also provided that the EBA Agent ``must maintain
its own separate account at a Reserve Bank'' and that the EBA Agent may
not commingle its own funds in the EBA. The proposal indicated that the
EBA would be established at the Reserve Bank where the EBA Agent
maintains its own master account, although the proposed regulatory text
did not reflect this. Accordingly, the final rule adds language to the
regulatory text to specify that the EBA must be held at the Reserve
Bank where the EBA Agent maintains its master account.
d. Record-Keeping
The supplementary information to the proposed rule stated that the
EBA Agent would be responsible for maintaining records adequate to
demonstrate the level of excess balances in the EBA of each EBA
Participant. The Board received five comments regarding record-keeping
requirements for the EBA Agent. One commenter suggested the Board
clarify the record-keeping requirements of an EBA Agent with respect to
the EBA. Three commenters stated that EBA Agents should be responsible
for maintaining adequate records that could demonstrate the level of
excess balances in the EBA of each EBA Participant. Additionally, one
commenter indicated that maintaining such records would not be
difficult for EBA Agents because correspondents maintain daily,
detailed records of respondents' ``agency'' funds. Because the
informational needs of each Reserve Bank with respect to each EBA may
vary, the Board has not included such specifications in the final rule.
Rather, the Board believes that setting forth the EBA Agent's record-
keeping responsibilities is more appropriately done through account
agreements with the Reserve Banks or through account terms and
conditions.
4. Section 204.10(d)(3) Balances Maintained in EBA
The proposed rule provided that, at any given time, only excess
balances of an eligible institution may be maintained in an EBA. The
proposed rule also provided that balances maintained in an EBA would
not satisfy any institution's reserve balance requirement or
contractual clearing balance. The Board received two comments on this
provision, both seeking clarification on how EBA Participants should
classify balances held in an EBA.
Balances held in an EBA by an EBA Participant represent a liability
of the Reserve Bank to the EBA Participants and not to the EBA Agent.
Therefore, for reporting and accounting purposes, an EBA Participant
should treat balances held in an EBA as balances held at a Reserve Bank
and should report such balances as ``balances due from a Federal
Reserve Bank'' for purposes of FR 2900 deposit reporting.\19\ The Board
received no other comments on this provision and is adopting the
proposed provision, with minor editorial revisions, redesignated as
Sec. 204.10(d)(3).
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\19\ See Instructions for Form FR 2900 (Sep. 2003) at p. 39, no.
1 (https://www.federalreserve.gov/reportforms/forms/FR_2900cb20071001_i.pdf).
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5. Section 204.10(d)(4) Restrictions on Use of EBA
The proposed rule provided that neither EBA Participants nor the
EBA Agent may use the EBA for general
[[Page 25628]]
payments or other activities. The Board received one comment on this
provision, seeking clarification on restrictions as to when the EBA
Agent would be required or allowed to move excess balances into the
account.
The final rule imposes no regulatory restrictions on when an EBA
Agent may or must transfer funds into and out of an EBA. The EBA Agent,
however, must manage the EBA such that the account does not incur
either intra-day or overnight overdrafts. The Board is adopting this
provision as proposed, redesignated as Sec. 204.10(d)(4).
6. Section 204.10(d)(5) Payment of Interest on Balances in EBA
The Board proposed that interest would be paid on excess balances
in accordance with section 204.10(b)(2). The Board received no comments
on this provision. In light of the amendments to Regulation D since the
proposed rule on EBAs setting forth the Board's authority to provide
that interest on excess balances be paid at a different rate than the
rate set forth in section 204.10(b)(2), the final rule will reflect
that authority set forth in current section 204.10(b)(3).
7. Section 204.10(d)(6) Additional Terms and Conditions
The proposed rule on EBAs was silent about the authority of Reserve
Banks to establish additional terms and conditions with respect to the
operation of an EBA. The Board, however, is adding new Sec.
204.10(d)(6) to the final rule to clarify that the Reserve Banks have
the authority to set additional terms and conditions with respect to
the operation of EBAs, to the extent that such terms and conditions are
consistent with provisions in Regulation D. Such terms and conditions
include, but are not limited to, terms of service, fees for services,
conditions under which an institution may act as agent for an EBA,
restrictions on the EBA Agent's account management, penalties for
noncompliance with the terms of Regulation D's provisions on EBAs or
with the additional terms and conditions established by the Reserve
Banks, and termination of EBAs. The provision provides examples of the
operational aspects for which the Reserve Banks may set forth
additional terms and conditions, but indicates that those categories of
additional terms and conditions are illustrative.
III. Clearing Balance Policy Adjustments
At the time it adopted the interim final rule, the Board made
adjustments to its clearing balance policy so as to discontinue
practices related to reserve requirements that were no longer necessary
in light of the amendments to Regulation D. First, the Board eliminated
the ``imputed reserve requirement adjustment'' to earnings credits
because reserves on respondents' balances would earn interest at the
rate on required reserve balances. Second, the Board eliminated the
``marginal reserve requirement adjustment'' because respondents would
be indifferent between holding balances at a Reserve Bank (and earning
the rate on required reserves balances) and maintaining the balance at
a private-sector correspondent (taking a due from deduction, and
investing those funds). Finally, the Board eliminated the imputed
reserve requirement adjustment and the adjustment for cash items in the
process of collection that are applied when measuring float costs to be
recovered by Reserve Bank priced services. The Board received no
comments on its adjustments to the clearing balance policy and is
retaining that policy as previously adopted.
IV. Transitional Adjustments in Mergers
The interim final rule eliminated the provisions in Regulation D
associated with merger-related adjustments to reserve requirements,
applicable to mergers completed on or after October 9, 2008. The
provisions were set forth in Sec. 204.4. The Board received no
comments on this issue and is not reinstating the provisions.
V. Solicitation of Comments Regarding Use of ``Plain Language''
Section 722 of the Gramm-Leach-Bliley Act of 1999 (12 U.S.C. 1408)
requires the Board to use ``plain language'' in all final rules. The
Board has sought to present this final rule in a simple and
straightforward manner. The Board received no comments on whether the
interim final rule and proposed rule were clearly stated and
effectively organized or on how the Board might make the text easier to
un
