Reserve Requirements for Depository Institutions, 25620-25629 [E9-12432]

Download as PDF 25620 Federal Register / Vol. 74, No. 102 / Friday, May 29, 2009 / Rules and Regulations and process by which Ontario will make available EDLs to qualified Canadian citizens residing in the Province of Ontario. On May 11, 2009, CBP determined that, contingent upon successful technical testing, Ontario EDL’s produced in accordance with the Province of Ontario’s business plan were anticipated to be designated as documents denoting identity and Canadian citizenship for purposes of entering the United States by land or sea. Following successful field and technical testing, the Commissioner of CBP has determined that the EDLs issued by the Province of Ontario according to the terms of the business plan approved by CBP meet the requirements of section 7209 of the IRTPA and are acceptable documents to denote identity and Canadian citizenship for purposes of entering the United States at land and sea ports of entry from within the Western Hemisphere under the final rule. Designation This notice announces that the Commissioner of CBP has designated the EDLs issued by the States of Vermont and Michigan and the Provinces of Quebec, Manitoba, British Columbia, and Ontario as acceptable documents to denote identity and citizenship for purposes of entering the United States at land and sea ports of entry from within the Western Hemisphere, pursuant to section 7209 of IRTPA and the final rule, 8 CFR 235.1(d) Dated: May 20, 2009. Jayson P. Ahern, Acting Commissioner, Customs and Border Protection. [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 tjames on PRODPC75 with RULES 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 VerDate Nov<24>2008 15:25 May 28, 2009 Jkt 217001 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 PO 00000 Frm 00006 Fmt 4700 Sfmt 4700 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 E:\FR\FM\29MYR1.SGM 29MYR1 Federal Register / Vol. 74, No. 102 / Friday, May 29, 2009 / Rules and Regulations ‘‘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 tjames on PRODPC75 with RULES 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. VerDate Nov<24>2008 15:25 May 28, 2009 Jkt 217001 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 PO 00000 CFR 204.10(b). Frm 00007 Fmt 4700 Sfmt 4700 25621 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. E:\FR\FM\29MYR1.SGM 29MYR1 tjames on PRODPC75 with RULES 25622 Federal Register / Vol. 74, No. 102 / Friday, May 29, 2009 / Rules and Regulations 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 VerDate Nov<24>2008 15:25 May 28, 2009 Jkt 217001 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.’’ PO 00000 Frm 00008 Fmt 4700 Sfmt 4700 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.’’ E:\FR\FM\29MYR1.SGM 29MYR1 Federal Register / Vol. 74, No. 102 / Friday, May 29, 2009 / Rules and Regulations 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). tjames on PRODPC75 with RULES 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 http:// www.frbservices.org/files/regulations/pdf/rmm.pdf. VerDate Nov<24>2008 15:25 May 28, 2009 Jkt 217001 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). PO 00000 Frm 00009 Fmt 4700 Sfmt 4700 25623 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 E:\FR\FM\29MYR1.SGM 29MYR1 25624 Federal Register / Vol. 74, No. 102 / Friday, May 29, 2009 / Rules and Regulations tjames on PRODPC75 with RULES 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)). VerDate Nov<24>2008 15:25 May 28, 2009 Jkt 217001 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 PO 00000 Frm 00010 Fmt 4700 Sfmt 4700 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). E:\FR\FM\29MYR1.SGM 29MYR1 Federal Register / Vol. 74, No. 102 / Friday, May 29, 2009 / Rules and Regulations 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 tjames on PRODPC75 with RULES 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. VerDate Nov<24>2008 15:25 May 28, 2009 Jkt 217001 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 PO 00000 Frm 00011 Fmt 4700 Sfmt 4700 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 E:\FR\FM\29MYR1.SGM 29MYR1 25626 Federal Register / Vol. 74, No. 102 / Friday, May 29, 2009 / Rules and Regulations 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. tjames on PRODPC75 with RULES 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 VerDate Nov<24>2008 15:25 May 28, 2009 Jkt 217001 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 PO 00000 Frm 00012 Fmt 4700 Sfmt 4700 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. E:\FR\FM\29MYR1.SGM 29MYR1 tjames on PRODPC75 with RULES Federal Register / Vol. 74, No. 102 / Friday, May 29, 2009 / Rules and Regulations 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)). VerDate Nov<24>2008 15:25 May 28, 2009 Jkt 217001 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 PO 00000 Frm 00013 Fmt 4700 Sfmt 4700 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 (http://www.federalreserve.gov/ reportforms/forms/FR_2900cb20071001_i.pdf). E:\FR\FM\29MYR1.SGM 29MYR1 25628 Federal Register / Vol. 74, No. 102 / Friday, May 29, 2009 / Rules and Regulations 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 VerDate Nov<24>2008 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]


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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.

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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 
http://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).
---------------------------------------------------------------------------

    \19\ See Instructions for Form FR 2900 (Sep. 2003) at p. 39, no. 
1 (http://www.federalreserve.gov/reportforms/forms/FR_2900cb20071001_i.pdf).
---------------------------------------------------------------------------

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