[Federal Register Volume 61, Number 117 (Monday, June 17, 1996)]
[Proposed Rules]
[Pages 30545-30548]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-15120]



=======================================================================
-----------------------------------------------------------------------

FEDERAL RESERVE SYSTEM

12 CFR Part 204

[Regulation D; Docket No. R-0929]


Reserve Requirements of Depository Institutions

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Notice of proposed rulemaking.

-----------------------------------------------------------------------

SUMMARY: The Board of Governors of the Federal Reserve System is 
proposing to amend its Regulation D regarding reserve requirements of 
depository institutions issued pursuant to section 19 of the Federal 
Reserve Act in order to reduce regulatory burden and simplify and 
update requirements. This proposal to modernize Regulation D is in 
accordance with the Board's policy of regular review of its regulations 
and the Board's review of its regulations under section 303 of the 
Riegle Community Development and Regulatory Improvement Act of 1994.

DATES: Comments must be received by August 16, 1996.

ADDRESSES: Comments, which should refer to Docket No. R-0929, may be 
mailed to Mr. William W. Wiles, Secretary, Board of Governors of the 
Federal Reserve System, 20th Street and Constitution Avenue, N.W., 
Washington, DC 20551. Comments addressed to Mr. Wiles also may be 
delivered to the Board's mail room between 8:45 a.m. and 5:15 p.m., and 
to the security control room outside of those hours. Both the mail room 
and the security control room are accessible from the courtyard 
entrance on 20th

[[Page 30546]]

Street between Constitution Avenue and C Street, N.W. Comments may be 
inspected in Room MP-500 between 9:00 a.m. and 5:00 p.m. weekdays, 
except as provided in Sec. 261.8 of the Board of Governors' Rules 
Regarding Availability of Information, 12 CFR 261.8.

FOR FURTHER INFORMATION CONTACT: Brian Reid, Economist, Division of 
Monetary Affairs (202/452-3589); Sue Harris, Economist, Division of 
Research and Statistics (202/452-3490); or Rick Heyke, Staff Attorney, 
Legal Division (202/452-3688). For the hearing impaired only, 
Telecommunications Device for the Deaf (TDD), Dorothea Thompson (202/
452-3544).

SUPPLEMENTARY INFORMATION:

Background

    As part of its policy of regular review of its regulations, and 
consistent with section 303 of the Riegle Community Development and 
Regulatory Improvement Act of 1994 (``Riegle Act''), the Board of 
Governors of the Federal Reserve System (``Board'') is proposing to 
amend its Regulation D regarding reserve requirements of depository 
institutions (12 CFR Part 204) issued pursuant to section 19 of the 
Federal Reserve Act. Section 303 of the Riegle Act requires each 
federal banking agency to review and streamline its regulations and 
written policies to improve efficiency, reduce unnecessary costs, and 
remove inconsistencies and outmoded and duplicative requirements. The 
proposed amendments are designed to reduce regulatory burden and 
simplify and update the Regulation.
    The principal amendments being proposed are described below. In 
general, the amendments delete transitional rules relating to the 
expansion of reserve requirements to nonmember depository institutions, 
the authorization of NOW accounts nationwide, and other matters that no 
longer have a significant effect.

Time Deposits

    Section 204.2(c)(1) defines time deposits as deposits from which 
the depositor may not make withdrawals within six days after the date 
of deposit (or notice of withdrawal) or partial withdrawal unless such 
withdrawals are subject to an early withdrawal penalty. Under certain 
circumstances specified in footnote 1, a time deposit may be paid 
before maturity without imposing the early withdrawal penalty. A time 
deposit generally may be paid without penalty from the seventh day 
after deposit through maturity, absent partial withdrawals, as the 
imposition of an early withdrawal penalty is required under the time 
deposit definition only during the first six days after deposit. The 
Board proposes to clarify that the footnote is not intended to impose a 
prohibition on withdrawals before maturity, but to permit penalty-free 
withdrawals under certain circumstances during the period when the 
imposition of an early withdrawal penalty otherwise would be required.

Nonpersonal Time Deposits

    The definition of nonpersonal time deposit in Sec. 204.2(f)(1) 
(iii) and (iv) distinguishes between transferable time deposits 
originally issued before October 1, 1980, and those issued on or after 
that date. Since the Board believes that most of these deposits have 
since matured, this distinction is no longer meaningful and the Board 
proposes to delete it.
    Section 204.2(f)(3) requires that a nonpersonal time deposit with a 
stated maturity or notice period of 1\1/2\ years or more either be 
subject to a minimum withdrawal penalty of 30 days' interest (if 
withdrawn more than six days but within 1\1/2\ years after the date of 
deposit) or be treated as a deposit with an original maturity or notice 
period of less than 1\1/2\ years. Since 1991, the reserve requirement 
ratio has been set at zero for all time deposits regardless of 
maturity. Moreover, the form for reporting reservable liabilities (Form 
FR 2900) no longer requires depository institutions to report the 
amount of time deposits by category of maturity. The requirement to 
treat time deposits not subject to a minimum penalty of 30 days' 
interest as having an initial maturity of less than 1\1/2\ years is 
thus of no practical impact. The Board therefore proposes to delete it 
and footnote 2 to Sec. 204.2(c)(1)(i), which refers to it.

Eurocurrency Liabilities

    The definition of Eurocurrency liabilities in section 204.2(h)(1) 
includes an amount equal to certain assets that were held by a 
depository institution's International Banking Facility or by non-
United States offices of the depository institution or of an affiliated 
Edge or agreement corporation and that were acquired from the 
depository institution's United States offices on or after October 7, 
1979. The Board proposes to delete the exclusion of assets acquired 
before October 7, 1979, because it believes that the amount of these 
assets is immaterial.

Allocation of Reserve Requirements Exemption

    The allocation of the reserve requirements exemption specified in 
Sec. 204.3(a)(3)(i) requires that the exemption be allocated first to 
net transaction accounts in the form of NOW (and similar) accounts and 
second to other transaction accounts. This provision was related to the 
phase-in of reserve requirements for nonmember banks and the 
authorization of NOW and similar transaction accounts nationwide. Since 
the phase-in is now complete and nonmember institutions are subject to 
the same reserve requirements as member banks, the provision has ceased 
to have any effect, and the Board proposes to delete it.

Deductions Allowed in Computing Reserves

    The deduction in Sec. 204.3(f)(1) limits the amount of cash items 
in process of collection and balances subject to immediate withdrawal 
due from domestic depository institutions that may be subtracted from 
an institution's NOW accounts. Amounts in excess of this limit may be 
subtracted from other transaction accounts. Since the phase-in of 
reserve requirements for nonmember banks is now complete, all types of 
transaction accounts are subject to the same reserve requirements. 
Therefore, this limitation has ceased to have any effect and the Board 
proposes to delete it.

Federal Reserve Credit for Depository Institutions Maintaining Pass-
Through Balances

    Section 19(e) of the Federal Reserve Act prohibits member banks 
from acting as the medium or agent of a nonmember bank in applying for 
or receiving discounts from a Federal Reserve Bank except by permission 
of the Board. Regulation A, Extensions of Credit by Federal Reserve 
Banks (12 CFR Part 201), was amended in 1993 to delegate authority for 
this permission to the Federal Reserve Bank that extends the credit. 12 
CFR 201.6(d). The proposal would correspondingly amend 
Sec. 204.3(i)(5)(iv) of Regulation D effectively to complete the 
delegation of this authority to the Federal Reserve Bank that extends 
the credit.

Transition Rules

    The regulation currently includes in Sec. 204.4(a) a transition 
rule for depository institutions outside of Hawaii that were nonmembers 
of the Federal Reserve System on July 1, 1979, and that remained 
nonmembers. With the completion of the phase-in on September 10, 1987, 
this rule ceased to

[[Page 30547]]

have any effect. Section 204.4(b) contains a transition rule for 
depository institutions that were not members between July 1, 1979, and 
September 1, 1980, and that subsequently became members; since reserve 
requirements for nonmember institutions are fully phased in, this rule 
also has ceased to have any effect. Section Sec. 204.4(d) contains a 
transition rule for nonmember depository institutions that were engaged 
in business in Hawaii on August 1, 1978, and that remained nonmembers; 
this rule ceased to have any effect on January 7, 1993. Therefore, the 
Board proposes to delete these rules.
    Section 204.4(c) sets forth a transition rule for de novo 
depository institutions with daily average reservable liabilities of 
less than $50 million whereby their reserve requirement is 40 percent 
of the reserves otherwise required in maintenance periods during the 
first quarter after entering into business, increasing to 100 percent 
in maintenance periods during the eighth and succeeding quarters. The 
low reserve tranche of a depository institution's net transaction 
accounts is currently subject to a reserve requirement of 3 percent, as 
compared with 10 percent for its net transaction accounts in excess of 
the low reserve tranche. Since 1982, the low reserve tranche cutoff has 
been indexed to net transaction accounts of all depository 
institutions; as a result, the cutoff has increased from $25 million to 
$52 million. Thus, all transaction accounts of de novo depository 
institutions that could avail themselves of this transition rule are 
now covered by the low reserve tranche. Moreover, beginning in 1982, $2 
million of reservable deposits have been subject to a zero percent 
reserve requirement; this exemption is indexed to total reservable 
liabilities of all depository institutions and is currently $4.3 
million.
    In addition, a depository institution's vault cash may be used to 
meet its reserve requirement. Since de novo depository institutions 
generally have relatively low levels of deposits in relation to the 
reserve requirement exemption and the low reserve tranche cutoff, most 
are able to meet reserve requirements with vault cash and the others 
maintain minimal reserve balances. (Currently 18 depository 
institutions are receiving de novo phase-ins, and 14 of them are fully 
meeting their reserve requirements with vault cash.) Thus, this rule 
provides minimal benefits in terms of reducing required reserve 
balances of de novo institutions and unnecessarily complicates the 
processing of deposit reporting and reserve calculations. Consequently, 
the Board proposes to delete it. In order to avoid disrupting economic 
expectations based on the de novo transition rule, however, any 
institution covered by the de novo transition rule on the effective 
date of the amendments will be grandfathered for purposes of 
determining its required reserves.
    Section 204.4(e) governs transition requirements in cases of 
mergers and consolidations. Paragraph (e)(1) covers ``similar'' 
mergers, where all depository institutions are subject to the same 
transition rules, and paragraph (e)(2), ``dissimilar'' mergers, where 
the institutions are subject to different transition rules. Currently, 
no institution is subject to the ``dissimilar'' merger transition 
rules. With the phase-in of reserve requirements for nonmember 
institutions, the transition rules (other than the merger and de novo 
rules) have become inoperative. Moreover, as discussed above, the de 
novo rules no longer have a significant effect in most cases, and the 
Board is proposing to delete them. Therefore, the difference between 
the ``similar'' and ``dissimilar'' merger rules is minimal, and would 
be eliminated under the proposal. As a result, all mergers would be 
``similar'' mergers. Therefore, the Board proposes to delete the 
``dissimilar'' merger transition rule and apply the current ``similar'' 
merger transition rule to all mergers.

Reserve Ratios

    Section 204.9(b) sets forth the reserve ratios in effect during the 
last reserve computation period prior to September 1, 1980, for use in 
transition adjustments that are no longer applicable. The Board 
proposes to delete the section.

Initial Regulatory Flexibility Analysis

    The Regulatory Flexibility Act (5 U.S.C. 601-612) requires an 
agency to publish an initial regulatory flexibility analysis with any 
notice of proposed rulemaking. Two of the requirements of an initial 
regulatory flexibility analysis (5 U.S.C. 603(b))--a description of the 
reasons why the agency is considering the action and a statement of the 
objectives of, and legal basis for, the proposed rule--are contained in 
``Supplementary Information--Background'' above. The Regulation D 
amendments being proposed require no additional reporting or 
recordkeeping requirements and do not overlap with other federal rules.
    Another requirement for the initial regulatory flexibility analysis 
is a description of and, where feasible, an estimate of the number of 
small entities to which the proposed rule will apply. The proposal will 
apply to all depository institutions regardless of size, except that 
the transition rule for de novo institutions applies only to 
institutions with total transaction accounts, nonpersonal time 
deposits, and Eurocurrency liabilities of less than $50 million. 
Currently there are 18 institutions subject to the de novo transition 
rule.
    Except for the transition rules relating to dissimilar mergers and 
de novo institutions, the amendments are burden-reducing. The current 
transition rules for dissimilar mergers provide a minor temporary 
potential reduction in reserve requirements for certain merged 
institutions. However, no institutions are currently benefiting from 
the dissimilar merger rules. The transition rules for de novo 
institutions, which are only applicable to institutions with reservable 
liabilities of less than $50 million and provide only a temporary 
benefit, have become much less significant with the increase in the 
low-reserve tranche cutoff to $52.0 million. Partly for this reason, 
only 4 of the 18 institutions currently receiving de novo phase-in 
benefits are not fully meeting their reserve requirements with vault 
cash. If the de novo transition rule were eliminated, the number of de 
novo institutions with required reserves in excess of vault cash would 
not change, and the additional required reserves of these 4 
institutions would be small. Moreover, in order to avoid disrupting 
economic expectations based on the de novo transition rule, any 
institution covered by the de novo transition rule on the effective 
date of the amendments will be grandfathered for the purpose of 
determining its required reserves. Therefore, the Board believes that 
the amendments will not have a significant adverse economic impact on a 
substantial number of small entities.

Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act notice of 1995 (44 
U.S.C. Ch. 3506; 5 CFR part 1320, Appendix A.1), the Board has reviewed 
the proposed rule under the authority delegated to the Board by the 
Office of Management and Budget. No collection of information pursuant 
to the Paperwork Reduction Act are contained in the proposed rule.

List of Subjects in 12 CFR Part 204

    Banks, banking, Reporting and recordkeeping requirements.

    For the reasons set forth in the preamble, the Board proposes to 
amend part 204 of chapter II of title 12 as follows:

[[Page 30548]]

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. Section 204.2 is amended as follows:
    a. In paragraph (c)(1)(i), the introductory text of footnote 1 is 
amended by removing ``before maturity'' and adding in its place, 
``during the period when an early withdrawal penalty would otherwise be 
required under this part'', removing ``the'' after ``imposing'' adding 
in its place, ``an'', removing ``penalties'' and adding in its place 
``penalty'', and footnote 2 is removed.
    b. In paragraphs (c)(1)(iv)(C), (c)(1)(iv)(E), and (d)(2), 
footnotes 3 through 6 are redesignated as footnotes 2 through 5, 
respectively.
    c. Paragraph (f)(1)(iii) is revised.
    d. Paragraph (f)(1)(iv) is removed and paragraph (f)(1)(v) is 
redesignated as paragraph (f)(1)(iv).
    e. In newly redesignated paragraphs (f)(1)(iv)(C) and 
(f)(1)(iv)(E), footnotes 7 and 8 are redesignated as footnotes 6 and 7, 
respectively.
    f. Paragraph (f)(3) is removed.
    g. In paragraph (h)(1)(ii)(A), footnote 10 is redesignated as 
footnote 8 and is amended by removing ``(1) that were acquired before 
October 7, 1979, or (2)''.
    h. In paragraphs (h)(2)(ii) and (t), footnotes 11 and 12 are 
redesignated as footnotes 9 and 10, respectively, and newly 
redesignated footnote 9 is amended by revising ``Footnote 10'' to read 
``footnote 8''. The revisions are as follows:


Sec. 204.2  Definitions.

* * * * *
    (f)(1) Nonpersonal time deposit * * *
* * * * *
    (iii) A transferable time deposit. A time deposit is transferable 
unless it contains a specific statement on the certificate, instrument, 
passbook, statement or other form representing the account that is not 
transferable. A time deposit that contains a specific statement that it 
is not transferable is not regarded as transferable even if the 
following transactions can be effected: a pledge as collateral for a 
loan, a transaction that occurs due to circumstances arising from 
death, incompetency, marriage, divorce, attachment, or otherwise by 
operation of law or a transfer on the books or records of the 
institution; and
* * * * *
    3. Section 204.3 is amended as follows:
    a. Paragraph (a)(3)(i) is removed and the paragraph designation 
(a)(3)(ii) is removed.
    b. Paragraph (f)(1) is revised.
    c. Paragraph (i)(5)(iv) is removed.
The revisions are as follows:


Sec. 204.3  Computation and maintenance.

* * * * *
    (f) Deductions allowed in computing reserves. (1) In determining 
the reserve balance required under this part, the amount of cash items 
in process of collection and balances subject to immediate withdrawal 
due from other depository institutions located in the United States 
(including such amounts due from United States branches and agencies of 
foreign banks and Edge and agreement corporations) may be deducted from 
the amount of gross transaction accounts. The amount that may be 
deducted may not exceed the amount of gross transaction accounts.
* * * * *
    4. Section 204.4 is revised to read as follows:


Sec. 204.4  Transitional adjustments in mergers.

    In cases of mergers and consolidations of depository institutions, 
the amount of reserves that shall be maintained by the surviving 
institution shall be reduced by an amount determined by multiplying the 
amount by which the required reserves during the computation period 
immediately preceding the date of the merger (computed as if the 
depository institutions had merged) exceeds the sum of the actual 
required reserves of each depository institution during the same 
computation period, times the appropriate percentage as specified in 
the following schedule:

------------------------------------------------------------------------
                                                              Percentage
                                                              applied to
                                                              difference
   Maintenance periods occurring during quarters following    to compute
                   merger or consolidation                     amount to
                                                                  be    
                                                              subtracted
------------------------------------------------------------------------
1...........................................................        87.5
2...........................................................        75.0
3...........................................................        62.5
4...........................................................        50.0
5...........................................................        37.5
6...........................................................        25.0
7...........................................................        12.5
8 and succeeding............................................         0  
------------------------------------------------------------------------

    5. Section 204.8 is amended as follows:
    a. In paragraph (a)(2)(i)(B)(5), footnotes 13 and 14 are 
redesignated as footnotes 11 and 12, respectively.
    b. In paragraph (a)(3)(v), footnotes 15 and 16 are redesignated as 
footnotes 13 and 14, respectively, and revised to read as follows:


Sec. 204.8  International banking facilities.

    (a) Definitions. * * *
* * * * *
    (3) International banking facility extension of credit or IBF loan 
* * *
* * * * *
    (v) * * * \13\ * * * \14\ * * *
---------------------------------------------------------------------------

    \13\ See footnote 11.
    \14\ See footnote 12.
---------------------------------------------------------------------------


Sec. 204.9  [Amended]

    6. Section 204.9 is amended by removing paragraph (b), by 
redesignating paragraph (a)(1) as paragraph (a), and by redesignating 
paragraph (a)(2) as paragraph (b).

    By order of the Board of Governors of the Federal Reserve 
System, June 10, 1996.
William W. Wiles,
Secretary of the Board.
[FR Doc. 96-15120 Filed 6-14-96; 8:45 am]
BILLING CODE 6210-01-P