25620 Federal Register / Vol. 74, No. 102 / Friday, May 29, 2009 / Rules and Regulations 

1Section 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). 

2Federal Reserve Act section 19(b)(12)(C), 12 

U.S.C. 461(b)(12)(C). 

3Federal 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)). 

5The 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 

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 

AGENCY: Board of Governors of the 

Federal Reserve System. 

ACTION: Final rule. 

SUMMARY: The Board is adopting, with 

certain revisions, its interim final rule 

that amended Regulation D (Reserve 

Requirements of Depository Institutions) 

to direct Federal Reserve Banks to pay 

interest on certain balances held at 

Federal Reserve Banks by or on behalf 

of certain depository institutions. The 

Board is also amending Regulation D to 

authorize the establishment of 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 

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 


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Federal Register / Vol. 74, No. 102 / Friday, May 29, 2009 / Rules and Regulations 25621 

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)). 

7Similarly, 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. 8 12 CFR 204.10(b). 

‘‘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

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. 

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 reserveavoidance behavior, which absorbs real 

resources and diminishes the efficiency 

of the banking system. By paying 

interest on excess balances, the Federal 

Reserve can expand its balance sheet as 

necessary to provide sufficient liquidity 

to support financial stability while 

implementing monetary policy that is 

appropriate in light of macroeconomic 

objectives of maximum employment 

and price stability. 


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25622 Federal Register / Vol. 74, No. 102 / Friday, May 29, 2009 / Rules and Regulations 

9See final amendments to Regulation D 

elsewhere in today’s Federal Register. 

10See 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.’’ 

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 

savings deposits to remove the sublimit 

that applied to checks and drafts.9

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

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). 

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 § 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 § 204.2(z), with one 

technical amendment. Like the 

definition of ‘‘clearing balance,’’ 

discussed supra, the interim final rule’s 

definition of ‘‘excess balance’’ was 

limited to eligible institutions. Because 

institutions other than eligible 

institutions may maintain excess 

balances at Reserve Banks, the Board is 

adopting a definition of ‘‘excess 

balances’’ in the final rule that is not 

limited to ‘‘eligible institutions.’’ 

4. Section 204.2(bb) Definition of 

Required Reserve Balance 

The interim final rule defined 

‘‘required reserve balance’’ as ‘‘the 

average balance held in an account at a 

Federal Reserve Bank by or on behalf of 

an eligible institution over a reserve 

maintenance period to satisfy the 

reserve requirements of this part.’’ The 

Board received no comments on this 

definition and is retaining the current 

provision but moving it to the 

definitions section of the regulation, 

with one technical amendment, 

redesignated as section 204.2(bb). 

Because the term ‘‘required reserve 

balance’’ is used in Regulation D in 

contexts other than paying earnings on 

balances at Reserve Banks, the 

definition of the term in the final rule 

is not limited to ‘‘eligible institutions.’’ 


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Federal Register / Vol. 74, No. 102 / Friday, May 29, 2009 / Rules and Regulations 25623 

11More 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. 

12Federal Reserve Act § 19(b)(12)(B)(iii), 12 

U.S.C. 461(b)(12)(B)(iii). 

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). 

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 

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 

on behalf of depository institutions that 

were eligible to earn interest on those 

balances, even if the correspondent 

institutions were not themselves eligible 

to receive earnings on their own 

balances. 

b. Correspondents That Are Eligible 

Institutions 

Under the interim final rule, Reserve 

Banks paid interest on required reserve 

balances maintained on behalf of an 

eligible institution. Where a passthrough correspondent is an eligible 

institution, the required reserve 

balances in the correspondent’s account 

may include those balances held by the 

correspondent to meet its own reserve 

requirement (if any), as well as those 

balances held to meet its respondents’ 

reserve requirements. The interim final 

rule also permitted, but did not require, 

a pass-through correspondent to pass 

back to its respondent interest paid on 

behalf of that respondent’s required 

reserve balances. 

The Board requested comment on 

whether it should permit or require a 

correspondent to pass back interest to 

its respondents. In response, the Board 

received four comments. Two 

commenters supported permissive 

passing back of interest in order to 

preserve the parties’ flexibility in 

negotiating contractual relationships. 

One commenter supported requiring 

passing back of interest, stating that 

permitting correspondents to retain the 

interest would be unfair. This 

commenter also suggested delaying the 

effective date of a pass-back requirement 

to two years after adoption of a final 

rule in order to provide correspondents 

with an opportunity ‘‘to modify 

accounting systems and business 

models.’’ Finally, one commenter stated 

that paying interest on pass-through 

balances as a lump-sum was a poor 

service because doing so places 

responsibility on the correspondent to 

calculate the amount of interest to be 

passed back to each respondent. 

Under the final rule, correspondents 

that are eligible institutions will 

continue to be permitted, but not 

required, to pass back to their 

respondents interest earned on balances 

held on behalf of the respondents. As 

these correspondents are eligible to earn 

interest on their own account balances, 

permitting them to make arrangements 

with their respondents with respect to 

passing back of interest is consistent 

with the statutory provisions. In 

addition, permissive, but not required, 

passing back of interest avoids 

interfering with existing correspondentrespondent arrangements. 

Correspondents structure their 


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25624 Federal Register / Vol. 74, No. 102 / Friday, May 29, 2009 / Rules and Regulations 

13See 12 CFR 204.5(d)(4)(i) (formerly 12 CFR 

204.3(i)(3)(ii)). 

14For 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). 

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 

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 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 


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15See 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. 

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 

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 

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 

(Jan. 30, 2009)). The proposal would 

authorize the establishment of EBAs for 

maintaining the excess balances of 

participating eligible institutions (‘‘EBA 

Participants’’). The EBA Participants 

would designate another institution to 

act as their agent (‘‘EBA Agent’’) for 

purposes of general account 

management, including transferring 

excess balances in and out of the EBA 

and apportioning the interest paid on 

excess balances. The Board proposed 

that the EBA Agent could not comingle 

its funds in the EBA. The excess 

balances in the EBA would represent a 

liability of the Reserve Bank solely to 

the EBA Participants. Neither the EBA 

Participants nor the EBA Agent could 

maintain required reserve or clearing 

balances in the EBA or use the EBA for 

general payment or other activities. The 

Board stated in the proposal that it 

would re-evaluate the continuing need 

for EBAs when more normal market 

functioning resumes. 

C. General Comments and Analysis 

In response to its request for comment 

on the EBA proposal, the Board received 

61 comments, representing comments 

from 44 depository institutions, two 

financial holding companies, one 

Federal Home Loan Bank, five financial 

institution trade associations, and three 

individuals. Sixteen commenters 

supported the proposal in its entirety. 

Two of these commenters sought 

clarification on technical aspects of the 

proposed rule on EBAs. Several 

commenters supported EBAs in general, 

but suggested that EBA Participants be 

able to designate more than one 

institution to act as EBA Agent. One 

commenter found no significant value 

in the EBA proposed rule, citing high 

administrative costs and few benefits. 

One commenter raised concerns about 

the impact of EBAs on existing business 

models if balances are moved into 

Reserve Bank accounts. Two 

commenters encouraged the Board to 

evaluate the continuing need for EBAs 

when more normal market functioning 

resumes; one of these commenters 

suggested the Board seek public 

comment as part of its re-evaluation. 

The Board has carefully considered 

the comments and has determined to 

authorize the establishment of EBAs, 

largely as described in the proposal. The 

Board believes that authorizing EBAs 

should reduce the potential for 

significant disruptions to long-standing 

correspondent-respondent relationships 

in the current market environment. 

Because the excess balances of EBA 

Participants in EBAs would be Reserve 

Banks’ direct liabilities to EBA 

Participants, correspondents would not 


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16An EBA Agent that wishes to segregate 

different types of respondents from one another can 

set up subaccounts for the EBA. 

17Because 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. 

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 § 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 

into the general definition section of 

Regulation D. 

2. Section 204.10(d)(1) Establishing an 

EBA 

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. 

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. 

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 


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18 12 CFR 204.5(d)(1) (formerly 12 CFR 

204.3(i)(1)). 

19See Instructions for Form FR 2900 (Sep. 2003) 

at p. 39, no. 1 (http://www.federalreserve.gov/ 

reportforms/forms/FR_2900cb20071001_i.pdf). 

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 

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 

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 


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payments or other activities. The Board 

received one comment on this 

provision, seeking clarification on 

restrictions as to when the EBA Agent 

would be required or allowed to move 

excess balances into the account. 

The final rule imposes no regulatory 

restrictions on when an EBA Agent may 

or must transfer funds into and out of 

an EBA. The EBA Agent, however, must 

manage the EBA such that the account 

does not incur either intra-day or 

overnight overdrafts. The Board is 

adopting this provision as proposed, 

redesignated as § 204.10(d)(4). 

6. Section 204.10(d)(5) Payment of 

Interest on Balances in EBA 

The Board proposed that interest 

would be paid on excess balances in 

accordance with section 204.10(b)(2). 

The Board received no comments on 

this provision. In light of the 

amendments to Regulation D since the 

proposed rule on EBAs setting forth the 

Board’s authority to provide that 

interest on excess balances be paid at a 

different rate than the rate set forth in 

section 204.10(b)(2), the final rule will 

reflect that authority set forth in current 

section 204.10(b)(3). 

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 

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 

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 Definitions. 

* * * * * 


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(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: 

§ 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 

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 

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/ 


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