Federal Reserve: Observations on Regulation D and the Use of Reserve Requirements
Published: 2016-10-06T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Section 19 of the Federal Reserve Act requires depository institutions to maintain reserves against a portion of their transaction accounts solely for the implementation of monetary policy. Regulation D implements section 19, and it also requires institutions to limit certain kinds of transfers and withdrawals from savings deposits to not more than six per month or statement cycle if they wish to avoid having to maintain reserves against these accounts. The transaction limit allows the Federal Reserve to distinguish between transaction accounts and savings deposits for reserves purposes.
GAO was asked to review certain effects of Regulation D. This report's objectives include examining depository institutions' implementation of Regulation D's requirements, the effect of the transaction limit on their customers, and central banks' varying dependence on reserve requirements and the monetary policy implications.
To examine these issues, GAO conducted a generalizable survey of 892 depository institutions (with a response rate of 71 percent); analyzed consumer complaint data from federal financial regulators; reviewed federal statutes and regulations, Federal Reserve System publications, and academic literature; and interviewed regulatory agency officials, representatives from banking and credit union associations, and depository institutions selected based on institution type and size.
The Federal Reserve and other federal banking regulators provided technical comments on a draft of this report, which we incorporated as appropriate.
section_title: What GAO Found
paragraphs: The methods by which depository institutions can implement Regulation D (Reserve Requirements of Depository Institutions) include maintaining reserves against transaction accounts and enforcing a numeric transfer and withdrawal (transaction) limit for savings deposits if they wish to avoid classifying those accounts as reservable transaction accounts. GAO estimates that 70–78 percent of depository institutions limit savings deposit transactions. Other methods include automatically transferring balances from transaction (e.g., checking) accounts to savings deposits in order to reduce reserve requirements. Institutions may choose to maintain transaction account reserves against savings deposits to eliminate the need to enforce the transaction limit. But some institutions GAO surveyed indicated that they had operational burdens associated with monitoring and enforcing the transaction limit (for example, 63–73 percent cited challenges, such as creating forms and converting and closing accounts). Available data indicate that few customers exceeded or expressed concerns about the limit.
Monetary policy—actions taken to influence the availability and cost of money and credit (i.e., interest rates)—can be conducted with varying dependence on reserve requirements. While many central banks around the world use reserve requirements, some have reduced their reliance on them due, in part, to the associated cost and administrative burdens. GAO reviewed how different central banks rely on reserve requirements and found a wide range of frameworks, including those with: (1) different mandatory reserve requirements (as compared to the United States), (2) voluntary reserve requirements, and (3) no reserve requirements at all. For example, countries with different mandatory reserves frameworks require maintaining reserves against all deposits, which eliminate the need to impose limits on transfers and withdrawals from specific accounts. While the Board of Governors of the Federal Reserve System (Federal Reserve) has used reserve requirements to help achieve the interest rate targets it sets in the market for reserves (federal funds market), central banks of other developed countries such as Canada, Australia, Sweden, and Denmark, among others, do not rely on reserve requirements. Instead, they use interest rates under their direct control to restrict interest rates from moving outside of a targeted range (corridor operating approach).
The authority for the Federal Reserve to pay interest on reserves has reduced some of the costs associated with reserve requirements in the United States. One of the alternatives to the current reserve requirement framework that GAO examined would require legislative change to further reduce some of these costs and burdens. Other approaches, while proven feasible for some foreign central banks, have implications for the conduct of monetary policy (e.g., require the pursuit of a corridor operating approach). Given the differences in financial systems across the globe, it is unclear whether the practices used by other nations would translate to the United States. Moreover, lowering or eliminating reserve requirements would raise a number of operational and technical issues for monetary policy implementation. For example, lowering or eliminating reserve requirements could introduce the need to manage potential volatility in short-term interest rates. Therefore, minimizing the burdens associated with reserve requirements would have to be weighed against the costs and monetary policy implications of any alternative framework when considering changes.

section_title: Letter
paragraphs: Millions of households and businesses collectively have more than $7  trillion in savings and money market deposit accounts (savings deposits)  at over ten thousand depository institutions—commercial banks, savings  banks, and credit unions—across the United States. By federal  regulation, depository institutions must limit the number of certain types of  transfers and withdrawals per month or statement cycle from such  savings deposits (transaction limit). This transaction limit is part of the  reserve requirement framework in the United States, which requires  depository institutions to hold a portion of customers’ deposits as  reserves solely for the implementation of monetary policy.
Specifically, section 19 of the Federal Reserve Act, as amended, requires  the Board of Governors of the Federal Reserve System (Board of  Governors) to impose reserve requirements on balances in transaction  accounts, such as checking accounts, as well as on nonpersonal time  deposits and Eurocurrency liabilities, but does not authorize imposing  reserve requirements on balances in other types of accounts, such as  savings deposits. Pursuant to section 19 of the Federal Reserve Act, the  Board of Governors established Regulation D, Reserve Requirements of  Depository Institutions, to implement the statutory reserve requirements  and to aid in the implementation of monetary policy. Implementing and  adhering to the regulation can present administrative burdens to  depository institutions in their operations and inconvenience to  consumers in managing their accounts. Industry associations and  depository institutions have questioned the reasonableness of the  regulatory limit on certain transfers and withdrawals from savings  deposits in today’s banking environment in which many customers rely on  Internet banking for most transactions, including online transfers and  payments from savings deposits.
You asked us to review depository institutions’ implementation of  Regulation D’s requirements, the effect of the regulation on institutions’  customers, and alternatives to the maintenance of transaction account  reserves the Federal Reserve System (Federal Reserve) may have to  affect monetary policy. Specifically, this report examines: (1) the purpose  of reserve requirements and Regulation D; (2) how depository institutions  implement Regulation D’s requirements and the effect of the regulation on  operations; (3) the effect on customers of the Regulation D transaction  limit on certain transfers and withdrawals from savings deposits; and (4)  foreign central banks’ varying dependence on reserve requirements and  the monetary policy implications. We did not include in our scope an  assessment of depository institutions’ compliance with Regulation D. For  the purposes of this report, we define depository institutions as  commercial and savings banks (banks) and credit unions that offer at  least one type of deposit product—savings deposits, including savings or  money market deposit (money market) accounts, or checking transaction  accounts.
To examine the purpose of reserve requirements and Regulation D, we  reviewed relevant statutes, Regulation D, and agency publications and  interviewed Board of Governors officials. To describe how depository  institutions implement Regulation D and the regulation’s effect on their  operations, we surveyed a generalizable sample of depository institutions  in the United States. We identified a population of 12,135 institutions, as  of second quarter 2015, and stratified the population (into subpopulations)  by institution type (bank and credit union) and the reserve requirement  ratios (0 percent, 3 percent, and 10 percent) specified in Regulation D.  We also included a subpopulation for depository institutions that are  subject to Regulation D’s requirements but are required to neither submit  reports on deposit balances (deposit reports) to the Board of Governors  nor maintain reserves due to their low amounts of total deposits  (nonreporters). We then randomly sampled each subpopulation (e.g.,  institution type and reserve requirement ratio) for a total sample size of  892 depository institutions that we surveyed. We obtained a response  rate of 71 percent. To develop our survey questionnaire, we interviewed  representatives from 10 depository institutions for information on their  experiences implementing Regulation D’s requirements. We selected  these depository institutions to achieve variation in type of institution  (bank and credit union) and asset size (small, medium, and large).  Finally, we interviewed: agency officials from the bank and credit union  regulators—the Board of Governors, Federal Deposit Insurance  Corporation (FDIC), Office of the Comptroller of the Currency (OCC), and  National Credit Union Administration (NCUA)—and representatives from  bank and credit union associations to obtain their perspectives on  depository institutions’ implementation of Regulation D’s requirements.
To determine any effect on customers of the Regulation D limit on certain  transfers and withdrawals from savings deposits, we reviewed consumer  complaint data from the federal financial regulators, including the bank  and credit union regulators and the Bureau of Consumer Financial  Protection (commonly known as the Consumer Financial Protection  Bureau or CFPB) from January 2010 to June 2015. We supplemented  and corroborated this information with data from our survey of depository  institutions and interviews with representatives of depository institutions,  industry associations, and a consumer group. In addition, we reviewed  our reports on financial literacy and consumer protection.
To examine foreign central banks’ varying dependence on reserve  requirements and the monetary policy implications, we reviewed  academic literature and Federal Reserve publications and documents on  the role of reserve requirements and other monetary policy tools as well  as on alternative approaches to monetary policy implementation,  including operating frameworks used by foreign central banks. We  reviewed several options for the conduct of monetary policy with varying  dependence on reserve requirements and Regulation D. The purpose of  this review is to illustrate various alternative options to the current system  of reserve requirements in the United States and is not meant to offer  concrete suggestions or opine on monetary policy matters. We also  interviewed Federal Reserve officials and other experts on monetary  policy. See appendix I for additional details about our scope and  methodology.
We conducted this performance audit from February 2015 to October  2016 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
subsections: section_title: Background
subsections: section_title: Federal Reserve and Monetary Policy
paragraphs: The Federal Reserve Act established the Federal Reserve as the central  bank of the United States. The Federal Reserve comprises the Board of  Governors—an agency of the federal government in Washington, D.C.,  the 12 Reserve Banks, and the Federal Open Market Committee  (FOMC). FOMC comprises all members of the Board of Governors and  five Reserve Bank presidents who serve on a rotating basis.  The  Federal Reserve Act gives the Federal Reserve responsibility for setting  and implementing monetary policy—actions taken to influence the  availability  and cost of money and credit—to promote full employment  and ensure stable prices. To this end, section 19 of the Federal Reserve  Act requires the Board of Governors to impose reserve requirements  within certain ratios on specified liabilities—transaction accounts,  nonpersonal time deposits, and Eurocurrency liabilities—of all depository  institutions, solely for the purpose of implementing monetary policy. The  definition  of “transaction account” was added to section 19 in 1980 and  defines “transaction account” to mean an account that permits the account  holder to make withdrawals by negotiable or transferable instruments (such  as checks), payment orders of withdrawal, telephone transfers, and other  similar items for the purpose of making payments to third parties or  others. The Board of Governors promulgated Regulation D pursuant to  section 19’s authorization “to prescribe such regulations as it may deem  necessary to effectuate the purposes of this section and to prevent  evasions thereof.” The Federal Reserve Act also assigns other  responsibilities to the Board of Governors and to the Reserve Banks in  addition to monetary policy responsibilities, including supervising and  regulating certain financial institutions and activities, providing banking  services to depository institutions and the federal government, and  ensuring consumer protection in the banking system.
The Federal Reserve Act requires the Board of Governors and FOMC to  take measures aimed at promoting the goals of maximum employment,  stable prices, and moderate long-term interest rates. Accordingly,  before the financial crisis of 2007–2009, the Board of Governors and  FOMC set monetary policy to promote national economic goals by  targeting the cost of overnight loans between depository institutions  (interbank loans), which influence other interest rates, and then adjusting  the supply of reserve balances in the banking system to achieve that  target. The relevant cost of interbank loans in this approach is the federal  funds rate—the interest rate at which depository institutions lend reserve  balances to other depository institutions overnight.  According to the  Federal Reserve, FOMC has targeted the federal funds rate since roughly  1984. Before the financial crisis, the Federal Reserve’s toolkit for  implementing monetary policy primarily comprised three tools:
Reserve requirements: The minimum amount of funds that  depository institutions must hold against transaction account balances  (determined by applying a specified reserve requirement ratio).  Currently, only transaction accounts are subject to a reserve  requirement ratio greater than zero. As noted previously, the Federal  Reserve Act authorizes the Board of Governors to impose reserve  requirements only on certain deposit liabilities that do not include  savings deposits. Depository institutions may satisfy reserve  requirements by holding vault cash or reserve balances at Reserve  Banks. The Board of Governors is responsible for establishing  reserve requirements, and can adjust reserve requirements by  changing reserve requirement ratios within limits established by the  Federal Reserve Act.
Open market operations: The purchase and sale of federal  government and federal agency securities in the open market by the  Reserve Banks at the direction of FOMC. The Federal Reserve can  use open market operations to adjust the supply of reserve balances  in the banking system overall in order to control the federal funds rate  within the target range set by FOMC. Open market operations directly  affect the total supply of reserves: purchases of securities (such as  Treasury securities) by the Federal Reserve increase reserve  balances; the sale of securities has the opposite effect on reserve  balances. Adjusting the supply of reserve balances in the banking  system through open market operations helps the Federal Reserve  control the federal funds rate. To lower the federal funds rate, the  Federal Reserve increases the supply of reserve balances;  decreasing the supply of reserve balances has the opposite effect on  the federal funds rate. Lower interest rates lower the cost of  borrowing, generally leading to increases in consumption and  business investment.
Discount rate: The interest rate that Reserve Banks charge on loans  to depository institutions. The Reserve Bank lending function is often  generically referred to as “the discount window.” The discount window  allows the Federal Reserve Banks to extend credit to depository  institutions under certain conditions. This complements open market  operations in achieving the target federal funds rate by making  balances available to depository institutions when the supply of  balances falls short of demand, and by serving as a backup source of  liquidity for individual depository institutions. If a depository institution  needs to borrow funds to meet reserve requirements or for other  operational needs, it typically will try to borrow at (or near) the federal  funds rate from another depository institution in the federal funds  market. If it has established borrowing privileges at the discount  window, a depository institution may borrow directly from its Reserve  Bank at the discount rate, which is set above the target federal funds  rate. There are three discount window programs: primary credit,  secondary credit, and seasonal credit, each with its own interest  rate. A generic reference to “the discount rate” usually refers to the  primary credit rate. The rate for each lending program is established  by each Reserve Bank’s board of directors, subject to the review and  determination of the Board of Governors.
Pre-crisis, FOMC would set a target for the federal funds rate consistent  with its monetary policy objectives of maximum employment and price  stability and then direct the use of open market operations to achieve a  federal funds rate at or very close to the target rate. The Federal Reserve  conducted open market operations to maintain the federal funds rate  within the target range. Specifically, the Federal Reserve implemented  monetary policy by affecting the demand for and supply of reserves  (reserve balances held at Reserve Banks). In the federal funds market,  depository institutions and other eligible entities, including the  government-sponsored enterprises (GSE), trade reserves (federal funds)  with each other. By conducting open market operations, imposing reserve  requirements, and extending credit through the discount window, the  Federal Reserve exercised considerable control over the demand for and  supply of reserves and in turn the federal funds rate. Since changes in the  federal funds rate are transmitted to other short-term interest rates, which  affect longer-term interest rates and overall financial conditions, the  Federal Reserve used its three main policy tools to influence inflation and  overall economic activity and to achieve its monetary policy goals.
According to Board of Governors officials, in response to the 2007–2009  financial crisis, the Federal Reserve expanded its monetary policy toolkit.  First, in 2008, the Federal Reserve began to use its authority to pay  interest on reserves, enabling the Board of Governors to break the strong  link between the quantity of reserves and the level of the federal funds  rate allowing for control over short-term interest rates with a large amount  of reserves in the system. The Federal Reserve also added two other  major tools to its toolkit: large-scale asset purchases and increasingly  explicit forward guidance. Both of these tools were used to provide further  monetary policy accommodation after short-term interest rates fell close  to zero. The Federal Reserve used its open market operations purchase  authority to purchase longer-term government securities and agency  securities to put downward pressure on longer-term interest rates, ease  broader financial market conditions, and support economic activity.  During the crisis, the Federal Reserve also established emergency  lending programs to lend directly to banks and other financial institutions  in disrupted markets to improve the flow of credit to U.S. households and  businesses. Currently, the Federal Reserve’s monetary policy approach  involves FOMC setting a target range for the federal funds rate consistent  with achieving the monetary policy goals of maximum employment and  stable prices and directing the use of the Federal Reserve’s monetary  policy toolkit to meet this target.
section_title: Regulation D Is Designed to Facilitate the Implementation of Reserve Requirements for the Implementation of Monetary Policy
paragraphs: Regulation D, pursuant to section 19 of the Federal Reserve Act, imposes  reserve requirements on transaction accounts solely for the purpose of  implementing monetary policy. For example, according to officials from  the Board of Governors, before 2008, reserve requirements were useful  for implementing monetary policy because they provided the Federal  Reserve with a predictable demand for reserves against which the supply  of reserves could be adjusted to control interest rates (i.e., move or  maintain the federal funds rate to or at the target set by FOMC). Given  the Federal Reserve’s mandate of promoting maximum employment and  stable prices, a predictable demand for reserves allowed the Federal  Reserve to have a predictable effect on interest rates through its targeting  of the federal funds rate and conducting open market operations to adjust  the supply of reserves, according to officials. As noted previously, the  Federal Reserve Act requires the Board of Governors to impose reserve  requirements on specified deposit liabilities of depository institutions, but  provides in most cases for a range of reserve requirement ratios that the  Board of Governors may apply to such liabilities.
subsections: section_title: Regulation D Specifies Reserve Requirement Ratios, Which Have Not Changed since 1992
paragraphs: Reserve requirements on transaction accounts are based on ratios that  the Board of Governors has specified in Regulation D within ranges  established in the Federal Reserve Act, and these ratios have not  changed since 1992. The reserve requirement ratios are graduated—zero  percent, 3 percent, and 10 percent—depending on the aggregate level of  a depository institution’s net transaction accounts (see table 1). The  dollar amount of a depository institution’s reserve requirement is  determined by applying the applicable reserve requirement ratios to the  balances held in its net transaction accounts. The reserve requirement  ratios correspond to three ranges for net transaction account balances:  “exemption amount” (amount of net transaction accounts subject to a zero  percent reserve requirement), “low reserve tranche” (amount of net  transaction accounts subject to a 3 percent reserve requirement ratio),  and “over low reserve tranche” (amount of net transaction accounts  subject to a 10 percent reserve requirement).
The Depository Institutions Deregulation and Monetary Control Act of  1980 (Monetary Control Act) requires that the Board of Governors apply  transaction account reserve requirements uniformly to all transaction  accounts at all depository institutions. As shown in table 2, transaction  account reserve requirement ratios have not changed since 1992, when  the Board of Governors reduced the reserve requirement ratio on  transaction accounts over the low reserve tranche amount from 12  percent to 10 percent. In 1990, the Board of Governors reduced the  reserve requirement ratio on short-term nonpersonal time deposits and  Eurocurrency liabilities from 3 percent to 0 percent.
The Board of Governors is required to adjust the maximum amount of  transaction account balances subject to the 3 percent ratio (the low  reserve tranche) and exemption amounts annually, according to formulas  specified in the Monetary Control Act and the Garn-St Germain Act,  respectively. The Board of Governors is not required by law to adjust  reserve requirement ratios annually or on any other schedule.
The adjustments to the annual tranche and exemption amounts affect the  amount of net transaction accounts subject to the low reserve tranche  and exemption amounts. An increase in the low reserve tranche or  exemption amount reduces a depository institution’s overall reserve  requirement, all else being equal, by reducing or eliminating reserve  requirements on additional deposit dollars. The low reserve tranche  amount may increase or decrease depending on the change in deposit  levels specified in the statutory formula. The exemption amount, however,  may only increase or remain unchanged. An increase depends on an  increase in deposit levels specified in the statutory formula. In the event  of a decrease in those deposit levels, however, the exemption amount  remains unchanged. Thus, as total deposits increase, the tranche and  exemption adjustments have the effect of keeping the overall effective  reserve ratio (the percentage of all depository institutions’ total transaction  deposit balances held as reserves) approximately constant, as reflected  in figure 1. In particular, figure 1 shows that the exemption amount has  remained fairly steady since 1982 while the tranche amount increased  significantly between 2008 and 2016. The figure also shows that the trend  for the overall effective reserve ratio of all depository institutions has  remained relatively constant from 2004–2016.
Annual tranche adjustments moderately affect the effective reserve ratio  of the banking sector, and therefore can influence, in theory, the money  supply. Over the last 10 years, the effective reserve ratio has been  around 8 percent, suggesting that the formulas in the Monetary Control  Act and the Garn-St Germain Act keep the adjustments relatively neutral  in their effect on the money supply. According to Board of Governors  officials, before 2008 when the Federal Reserve adjusted the supply of  bank reserves to target the federal funds rate, a stable demand for  reserves allowed the Federal Reserve to have greater control over the  federal funds rate in the conduct of monetary policy.
section_title: Transaction Limit Originated from Statutory and Regulatory Factors and Provides a Distinction Between Transaction Accounts and Savings Deposits
paragraphs: The Regulation D six-transaction limit (on certain types of transfers and  withdrawals) for savings deposit accounts helps implement reserve  requirements. According to the Board of Governors, the transaction limit  is critical for implementing reserve requirements because it allows the  Board of Governors to distinguish between transaction (e.g., checking)  accounts, which are subject to reserve requirements, and savings  deposits, which are not subject to reserve requirements.
Reaffirmation of Transaction Limit  In 2009, the Board of Governors of the  Federal Reserve System (Board of  Governors) amended Regulation D’s  transaction limit rule for savings deposits. The  Board of Governors eliminated a “sublimit” on  check and debit card transfers or withdrawals  (previously, only three out of six transfers and  w ithdrawals per month or statement cycle  could be made by check, debit card or similar  order). By eliminating  the sublimit, the Board  of Governors included such transfers and  w ithdrawals within the overall limit  of six  convenient transfers or withdrawals  (preauthorized, automatic, or telephonic  transactions that provide ease in making  payments to third parties) from savings  deposits per month or statement cycle. The  Board of Governors thus clarified that any  convenient transfer or withdrawal from a  savings deposit must be limited  to not more  than six per month or statement cycle. In  response to public comments requesting an  increase of the overall limit,  the Board of  Governors affirmed that section 19 of the  Federal Reserve Act requires imposition of  reserve requirements on transaction accounts  and not on other types of account.  Accordingly, the Board of Governors must  maintain the capacity to distinguish betw een  transaction accounts and savings deposits.  The distinction is based on convenience: the  greater the number of convenient transfers  and w ithdrawals permitted per month from a  “savings deposit,” the greater the difficulty in  distinguishing such an account from a  transaction account. Thus, the Board of  Governors determined it w ould neither  increase the number of convenient transfers  and w ithdrawals permitted from savings  deposits per month nor eliminate  numeric  limits entirely (on online transfers in particular  or all convenient transfers and w ithdrawals  from savings deposits in general).
The Board of Governors has specified in Regulation D the manner of  distinguishing between transaction accounts and savings deposits.  Regulation D currently requires that for an account to be classified as a  “savings deposit,” it must permit the depositor to make no more than six  convenient transfers or withdrawals per month (or statement cycle of at  least 4 weeks) from the account.
According to the Board of Governors, the six-transaction limit originated  from a mix of statutory and regulatory factors. Title II of the Monetary  Control Act, the Depository Institutions Deregulation Act of 1980, created  the Depository Institution Deregulation Committee to oversee the phase- out of limitations on interest rates previously applicable to various types of  deposit accounts. In 1982, Congress passed the Garn-St Germain Act,  which required the committee to authorize a new deposit account—the  money market account. Specifically, the Garn-St Germain Act directed  the committee to issue a regulation authorizing the money market  account, which was intended to be a deposit account that was directly  equivalent to and competitive with money market mutual fund accounts.  The Garn-St Germain Act provided that money market accounts were not  to be considered transaction accounts, even if such accounts permitted  “up to three preauthorized or automatic transfers and three transfers to  third parties” monthly. The committee interpreted this provision as  permitting up to six preauthorized or automatic transfers to third parties  per month or statement cycle from the money market account, not more  than three of which could be made by check. This was sometimes  referred to as the “six-three limit” on payments and transfers from such  accounts, according to the Board of Governors.
Based on the committee’s interpretation, in Regulation D, the Board of  Governors determined that a money market account would not be subject  to transaction account reserve requirements if the account did not permit  more than six convenient (i.e., preauthorized, automatic, or telephonic)  transfers and withdrawals per month, where not more than three of such  transfers or withdrawals could be made by check or draft drawn by the  depositor. Before 1982, there was no monthly numeric limit on transfers  and withdrawals for savings deposits though such accounts were  included in the definition of “transaction accounts,” which were subject to  reserve requirements. The committee ceased to exist after 1986;  however, the Board of Governors subsequently retained the “six-three”  transaction limit by incorporating it into the definition of “savings deposits”  in Regulation D, in part, because the limit was a feature of an account  type authorized by Congress that was still in use by depository  institutions. In 2009, the Board of Governors amended Regulation D to  eliminate the “three” component from the “six-three limit” to make all  convenient payments and transfers from savings deposits, including  those made by check, debit card, or similar order, subject to the monthly  limit of six.   According to the Board of Governors, Regulation D currently  distinguishes between types of transfers and withdrawals from savings  deposits for purposes of the six-transaction limit (see table 3). The types  of transfers and withdrawals that are subject to the six-transaction limit  are those that are convenient, such as preauthorized, automatic or  telephonic  transfers or withdrawals (including by fax, email, or through an  Internet banking service) by check or debit card. Other types of transfers  and withdrawals that are less convenient, such as those made in person  or at an ATM, may be made in an unlimited number, according to the  Board of Governors.
The Board of Governors notes that the rationale for limiting the number of  convenient transactions from savings deposits is to ensure that such  accounts are not used as transaction accounts without their balances  being subject to the reserve requirements for transaction accounts. The  Board of Governor’s criteria for distinguishing between transaction  accounts and savings deposits under Regulation D are based on the  ease with which the depositor may make transfers (payments to third  parties) or withdrawals (payments directly to the depositor) from the  account. The critical element of the rationale is the nature of the  instruction for the transaction (that is, the instruction directing the third  party payment or transfer to be made), according to Board of Governors  officials. They noted that the more convenient the manner of instructing  withdrawals or transfers to be made from an account is—such as  preauthorized or automatic transfers—the more likely it is that the account  will be used for making payments or transfers to third parties rather than  for holding savings. Therefore, Regulation D limits the number of certain  convenient types of transfers or withdrawals that an account holder may  make in a single month or statement cycle from an account if that account  is to be classified as a savings deposit and exempt from reserve  requirements.
A retail banking industry association and representatives from depository  institutions have noted that there may be a disconnect between this  rationale and its application—because automated teller machine (ATM)  transactions may be viewed as convenient, but they are unlimited.  According to the Board of Governors, Regulation D does not limit ATM  transactions partly because ATMs formerly were considered to be  “branches” of a depository institution. Therefore, appearing at an ATM  was substantially similar to appearing in person at a brick and mortar  branch of the depository institution. In addition, a withdrawal from an ATM  is generally considered to be a payment or transfer directly to the  depositor, rather than a payment to a third party as contemplated under  the statutory definition of transaction account. Furthermore, an ATM  withdrawal requires the account holder to appear physically at the ATM  location. Therefore, the Board of Governors does not deem an ATM  transaction to be a convenient method for making third-party payments,  and transfers and withdrawals initiated at an ATM have not been subject  to the numeric limits on transfers and withdrawals from savings deposits.
section_title: Implementing Reserve Requirements Primarily Involves Depository Institutions and the Federal Reserve and Can Affect Customers
paragraphs: Implementing and enforcing transaction account reserve requirements  (and therefore the distinction between reservable transaction accounts  and nonreservable savings deposits through the “savings deposit”  definition in Regulation D) imposes administrative responsibilities for  depository institutions, the Board of Governors, and Reserve Banks and  can affect the customers of depository institutions. As previously noted,  not all deposit balances are subject to reserve requirements; therefore,  not all depository institutions are required by Regulation D to maintain  reserves. For example, depository institutions with less than the  exemption amount in net transaction deposits (which do exist in the U.S.  banking system) are subject to a reserve requirement ratio of zero  percent on those accounts. However, all depository institutions are  required to enforce the six-transaction limit on convenient transfers and  withdrawals for all accounts that they classify as savings deposits and not  transaction accounts. Figure 2 outlines how depository institutions may  implement the Regulation D six-transaction limit. To comply with  Regulation D’s definition of “savings deposit”:
Depository institutions must ensure that no more than six convenient  transfers and withdrawals are made each month or statement cycle  from accounts classified as savings deposits. Institutions must either  prevent transfers that are in excess of the limit or monitor the  accounts for compliance with the limit and contact customers who  violate the limit on a more than occasional basis.
Depository institutions must close the savings account and place the  funds in another account that the deposit customer is eligible to  maintain or take away the transfer and draft capabilities of the  account, if customers continue to make more than six transfers and  withdrawals per month or statement cycle from the account after they  have been contacted by the depository institution. However,  Regulation D neither requires depository institutions to charge  customers a fee for violating the transaction limit nor prohibits  institutions from charging a fee for such violations.
The Federal Reserve needs accurate information on deposit balances to  calculate reserve requirements, and it requires many depository  institutions to submit deposit reports. (Currently, reserve requirements are  calculated as a ratio of reservable liabilities). Generally, the Federal  Reserve Act authorizes the Board of Governors to require reports of  liabilities and assets, and the Federal Reserve requires institutions to  submit a Report of Transaction Accounts, Other Deposits and Vault Cash  (Form FR 2900) to gather data for the calculation of reserve requirements  and to construct the monetary aggregates (e.g., M1 M2 and M3).  However, the Board of Governors has reduced the reporting burden on  depository institutions based on size, such that depository institutions  may be required to report deposit balances annually, quarterly, weekly, or  not at all. Depository institutions that have total deposits less than or  equal to the exemption amount ($15.2 million in 2016) are not required to  submit deposit reports (referred to as “nonreporters”). Each year, the  Federal Reserve determines depository institutions’ reporting categories  and the Reserve Banks inform institutions of their appropriate reporting  categories.
In addition to the Board of Governors, other regulators enforce depository  institutions’ compliance with Regulation D’s requirements for those  institutions subject to their regulatory jurisdiction. OCC, FDIC, and NCUA  are responsible for supervising depository institutions’ compliance with  federal laws and regulations, including Regulation D. However, officials  from these regulators told us that because they employ a risk-based  approach to oversight, they do not regularly conduct Regulation D- specific examinations. For example, OCC officials told us that they  examine Regulation D compliance when changes in the regulation or  bank policy occurs, when emerging risks in the industry have been  identified, or when customer complaints about the regulation have  increased. Furthermore, CFPB does not examine compliance with  Regulation D specifically, but consumers may bring related complaints to  CFPB’s attention through its consumer complaint database. For example, a consumer might submit a complaint to CFPB about a bounced check  resulting from a transfer from a savings deposit that was denied due to  the Regulation D six-transaction limit for convenient transfers or  withdrawals.
section_title: Depository Institutions Subject to Regulation D’s Requirements
paragraphs: Based on 2015 call report data, we identified 12,135 depository  institutions that were subject to Regulation D’s requirements because they  offered transaction or savings deposits or both, to the general public.  Overall,
Fifty-three percent of the 12,135 depository institutions (banks and  credit unions) were required to satisfy reserve requirements  because  their level of net transaction account balances exceeded the then- applicable exemption amount of $14.5 million or more in 2015.
Forty-one percent of the depository institutions had transaction  accounts reservable at the 3 percent reserves ratio because their  level of net transaction accounts ranged from $14.5 million to $103.6  million (the low reserve tranche in 2015). These institutions did not  have to satisfy reserve requirements on amounts up to $14.5 million  because those amounts were subject to a zero percent reserve  requirement.
Twelve percent of the depository institutions had transaction accounts  reservable at the 10 percent ratio because their level of net  transaction accounts was greater than $103.6 million in 2015. These  institutions did not have to satisfy reserve requirements on amounts  up to $14.5 million because those amount were subject to a zero  percent reserve requirement ratio, and they were subject to a 3  percent reserve requirement ratio on amounts greater than $14.5  million up to $103.6 million.
Reserve requirements, and therefore obligations under Regulation D,  affect a larger percentage of banks than credit unions in 2015. Eighty- six percent of banks were required to satisfy reserve requirements in  contrast to 23 percent of credit unions. Thus, more than three-quarters of  credit unions were exempt from reserve requirements because their net  transaction accounts were less than the exemption amount. Furthermore,  the majority of transaction, savings, and money market account balances  were concentrated among banks. Most banks (65 percent) had net  transaction account balances reservable at the 3 percent ratio (which  applied to amounts greater than $14.5 million and up to $103.6 million in  2015). A smaller proportion of banks (20 percent) held the majority of total  transaction account balances ($1.68 trillion), which were reservable at the  10 percent ratio (which applied to amounts greater than $103.6 million in  2015). Of the 23 percent of credit unions that were required to satisfy  reserve requirements, the majority (79 percent) had net transaction  deposits reservable at the 3 percent ratio.
section_title: Depository Institutions Implement Regulation D’s Requirements in Various Ways
paragraphs: Depository institutions may implement Regulation D requirements using  one or more of the following approaches:
Satisfy reserve requirements on transaction accounts only and enforce the transaction limit on savings deposits (by requiring customers to adhere to the limit). Depository institutions offer both transaction accounts (which are subject to reserve requirements) and accounts that they classify as savings deposits (which are not subject to reserve requirements). For accounts classified as savings deposits, they ensure that customers adhere to the monthly six-transaction limit on convenient transfers and withdrawals. Depository institutions inform customers of the limit and, as previously discussed, they must prevent convenient transfers and withdrawals in excess of the limit from savings deposits or must monitor such transfers on an ex post (i.e., after the fact) basis and contact those customers who exceed the  limit on a more than occasional basis.
Reduce transaction account balances subject to reserve  requirements and enforce the transaction limit on savings  deposits (by requiring customers to adhere to the limit).  Depository institutions can offer both transaction accounts and  savings deposits and employ methods—such as transferring balances  from transaction accounts (subject to reserve requirements) to  savings deposits (not subject to reserve requirements)—to reduce  balances subject to reserve requirements. They also can offer only  savings deposits on which they would not be required to satisfy  transaction account reserve requirements. Under this approach,  depository institutions would have to enforce the transaction limit for  savings deposits, ensuring that customers adhere to the monthly six- transaction limit on convenient transfers and withdrawals.
Satisfy reserve requirements on balances in both transaction  accounts and savings deposits that are classified as transaction  accounts and avoid enforcing the transaction limit for savings  deposits. Depository institutions can offer both transaction accounts  and accounts called “savings deposits” to customers but classify  balances in both types of accounts as transaction accounts.  Transaction accounts are not subject to the transaction limit on  convenient transfers and withdrawals. Therefore, institutions would  not need to enforce the transaction limit on balances in accounts  marketed to customers as savings deposits but are classified as  transaction deposits in their deposit reports. For deposits classified as  transaction accounts, depository institutions must meet applicable  transaction account reserve requirements.
Although the consideration and determination of deposit product offerings  are complex and more driven by factors other than Regulation D’s  requirements, depository institutions must balance the administrative and  opportunity costs of maintaining reserves against their transaction  accounts with the operational costs (and benefit) of enforcing the six- transaction limit on convenient transfers and withdrawals for savings  deposits. The administrative costs of the deposit reporting that supports  the implementation of reserve requirements and the publication of  measures of the money supply (monetary aggregates) include preparing  and submitting reports on deposit balances weekly, quarterly, or annually  to the Board of Governors, and these reporting categories can change  annually for institutions. The opportunity cost of satisfying reserve  requirements varies based on the profitability of the alternative uses of  the funds, and is essentially an implicit tax on depository institutions— often referred to as a “reserves tax.” The tax is equal to the difference  between the interest paid on balances maintained at Reserve Banks and  the interest those institutions could have earned on alternative  investments (such as making loans to customers and collecting interest)  in the absence of reserve requirements. Board of Governors officials  noted that reducing this opportunity cost was one of the reasons that the  Federal Reserve sought explicit authority from Congress to pay interest  on reserves. This authority was granted in 2006 and made effective in  2008. According to representatives from selected depository institutions  we interviewed, the operational costs associated with enforcing the  transaction limit for savings deposits include acquiring and maintaining  monitoring and tracking systems, training staff, and educating customers  about the limit. According to Board of Governors officials, Regulation D  was amended in 2012 with the goal of reducing administrative and  operational costs for depository institutions and the Federal Reserve  Banks. Finally, enforcing the transaction limit has the benefit of reducing  the amount of liabilities subject to transaction account reserve  requirements and, therefore, reducing an institution’s reserve  requirement.
subsections: section_title: Most Depository Institutions Implemented Regulation D’s Requirements by Enforcing the Transaction Limit on Savings Deposits
paragraphs: Most depository institutions used the approach of enforcing the six- transaction limit to implement Regulation D’s requirements, and  enforcement methods varied among institutions. Based on our 2015  survey, we estimate that 74 percent of depository institutions we identified  as subject to Regulation D’s requirements implemented the regulation’s  requirements by enforcing the six-transaction limit on convenient transfers  and withdrawals from all savings deposits that they offered (one of the  three approaches previously discussed). Depository institutions required  to neither submit deposit reports nor satisfy reserve requirements  (nonreporters) were the least likely to implement Regulation D’s  requirements by enforcing the transaction limit while those subject to the  10 percent reserve requirement ratio on transaction accounts  were the  most likely to enforce the limit. Finally, banks were more likely than  credit unions to enforce the transaction limit to implement Regulation D’s  requirements, with an estimate of 89 percent versus an estimate of 59  percent. See table 4 for responses to selected survey questions (which  are also discussed later), and see appendix II for results for all of our  closed-ended survey questions.
For accounts classified as savings deposits, Regulation D requires  depository institutions either to prevent convenient withdrawals and  transfers that exceed the six-transaction limit or to adopt procedures to  monitor transactions ex post (i.e., after the fact) and contact customers  whose accounts exceed the transaction limit on a more than occasional  basis. Under the CFPB’s Regulation DD, Truth in Savings, depository  institutions are required to inform customers of the transaction limit. To  examine the administrative and cost burdens associated with  implementing these requirements, we surveyed depository institutions.  Almost all depository institutions reported on our survey that they inform  customers of the transaction limit by providing a hard copy or online  disclosure about the Regulation D transaction limit before a savings  deposit account is opened in person or online. For accounts opened in  person or online, an estimated 19 percent of depository institutions mail  Regulation D disclosures to customers.
Depository institutions used different methods to monitor the transaction  limit. We estimate that slightly more than half of all depository institutions  monitored transactions through fully automated methods using a software  program. Banks and credit unions differed in how they monitored accounts to enforce the transaction limit. We estimate that 41 percent of  banks monitored accounts through a fully automated method using a  software program while 53 percent used an automated method for some  reporting and a manual method for reviewing accounts/transactions.  Conversely, we estimate that 72 percent of credit unions monitored  accounts through a fully automated method using a software program and  14 percent used an automated method for some reporting and a manual  method for reviewing accounts/transactions.
Depository institutions that implement Regulation D’s requirements by  monitoring transactions must take one of two actions if customers make  more than six transfers or withdrawals per month or statement cycle on a  more than occasional basis: (1) close the savings deposit account and  place the funds in another account or (2) take away the transfer and draft  capabilities from the savings deposit account. Institutions may also  reclassify a savings deposit account as a transaction account (the  effective equivalent of closing the savings deposit account and placing  the funds in a transaction account). Regulation D requires depository  institutions that use ex post monitoring rather than preventing excess  transfers and withdrawals to adopt procedures to enforce the transaction  limit.
Institutions also told us that, in practice, they may close the account and send the customer a check for the funds  remaining in the account (another form of account closure), or maintain the same account but indefinitely reclassify the account as a  transaction account without a change in account number (account  conversion).
Regulation D does not prohibit employing other mechanisms to  discourage transactions in excess of the transaction limit. For example,  some survey respondents that used the approach of enforcing the  transaction limit indicated that they charged fees as a mechanism to  discourage additional transfers. That is, if a customer makes six transfers  or withdrawals in savings deposits in a month or statement cycle, they  allow additional transfers and withdrawals but charge a fee(s) and may  temporarily reclassify the savings deposit account as a transaction  account (and realize a commensurate temporary increase in their reserve  requirement) in order to allow more than six transactions in a month or  statement cycle (see fig. 2).
According to our survey results, the majority of depository institutions  charged fees when customers exceeded six or more transactions in  savings deposits (savings accounts or money market accounts).  Specifically, for savings accounts, we estimate that 60 percent of  institutions charged fees after the sixth transaction and 7 percent charged  fees after the seventh transaction. For money market accounts, an  estimate of 83 percent of institutions charged fees after the sixth  transaction and an estimate of 2 percent charged fees after the seventh  transaction. In addition, broken out by institution type, we estimate that  63 percent of banks charged fees after the sixth transaction in savings  accounts compared with an estimate of 55 percent of credit unions. We  estimate that 8 percent of banks charged fees after the seventh  transaction in savings accounts compared with an estimate of 4 percent  of credit unions. For money market accounts, we estimate that 90  percent of banks charged fees after sixth transaction compared with an  estimate of 63 percent of credit unions. However, nearly equal  percentages of banks and credit unions charged fees after the seventh  transaction for money market accounts.
Based on our survey results, the estimated median fee amounts reported  by all depository institutions were about $3 for savings accounts and $5  for money market accounts. Banks tended to report lower fees for  savings accounts, with an estimated median of about $2 for banks and an  estimated median of about $4 for credit unions. The median fee for  money market accounts was about $5 for both banks and credit unions.  In addition, we estimate that about a quarter of all depository institutions  prohibited the seventh transaction when the transaction limit was reached  in a month or statement cycle. However, more credit unions than banks  (an estimated 54 percent versus an estimated 6 percent for savings  accounts and an estimated 55 percent versus an estimated 4 percent for  money market accounts) prohibited the seventh transaction when the six- transaction limit was reached.
Depository institutions also reported on the change in costs associated  with monitoring accounts to enforce the Regulation D transaction limit,  such as establishing and maintaining information technology and creating  disclosure form letters (to comply with the CFPB’s Regulation DD  requirements). According to our survey results, most depository  institutions reported that costs associated with monitoring accounts for  compliance with the transaction limit stayed the same over the last two  years. However, we estimate that 20 percent of depository institutions  had their costs increase over the same time period. For those  depository institutions that indicated that their costs increased, reasons  commonly cited included institutional growth, information technology and  software costs, mailing costs (related to complying with the CFPB’s  Regulation DD requirements), and staff time to review automated  compliance reports.
Depository institutions reported that steps taken to enforce the transaction  limit contribute to operational burden or challenges. (Institutions have  noted publicly that operational burden is created by the need to monitor  accounts as required by Regulation D, create and mail disclosure forms  required by the CFPB’s Regulation DD, and inform customers of the  transaction limit as required by the CFPB’s Regulation DD.) For those  depository institutions we surveyed that indicated there were challenges  associated with monitoring and enforcing the transaction limit, the  challenges most cited were getting customers to read their Regulation D  notices (82 percent), operational challenges such as creating forms and  converting and closing accounts (68 percent), and addressing customer  complaints related to the six-transaction limit (64 percent). About equal  percentages (and numbers) of credit unions and banks (84 percent  versus 80 percent) cited getting customers to read Regulation D notices  as a challenge. However, more banks than credit unions (78 percent  versus 55 percent) reported operational challenges related to creating  forms and converting and closing accounts, and more credit unions than  banks (76 percent versus 55 percent) cited addressing customer  complaints as a challenge.
section_title: Some Depository Institutions Reduced Transaction Account Balances Subject to Reserve Requirements
paragraphs: Retail Sweeps to Reduce Transaction  Accounts Subject to Reserve  Requirements or to Allow Unlimited  Access to Savings Deposits  A retail sw eeps (also known as deposit  reclassification) program is an arrangement in  w hich a depository institution divides a  customer’s transaction account into tw o  legally distinct subaccounts—a transaction  account subaccount and a savings deposit  subaccount—for deposit reporting and  reserve requirements purposes.  The program  does not affect the customer’s use of the  account.  The depository institution  automatically transfers funds between a  customer’s transaction (i.e., checking)  subaccount and savings deposit subaccount  so that there are not more than six transfers  per month from the savings deposit  subaccount to the transaction account  subaccount. This is typically done to reduce  transaction account reserve requirements, or  in some cases to exempt customers from the  six-transaction limit and allow  unlimited  access to savings deposits.
Based on our survey of depository institutions, we estimate that 9 percent  of depository institutions reduced transaction account reserve  requirements by using a retail sweeps program to automatically transfer  balances from transaction accounts to savings deposits (one of the  approaches described previously). See the sidebar for further details on  retail sweeps programs. As discussed previously, depository institutions’  deposit liabilities maintained as vault cash or in accounts at Reserve  Banks to satisfy reserve requirements cannot be used for other purposes,  such as loans or securities holdings, to generate higher returns than  those obtained through the Federal Reserve’s payment of interest on  reserve balances. Before 2008, reserve requirements led institutions to  expend resources and efforts to reduce transaction account balances  subject to reserve requirements. According to some estimates, the  cumulative amounts swept within retail sweeps programs grew from $5  billion in 1994 to $800 billion in 2008. In October 2008, the Federal  Reserve Act amendment authorizing the payment of interest on reserve  balances became effective. Currently, the Federal Reserve’s payment  of interest on reserve balances has significantly reduced the reserves tax  associated with reserve requirements and, therefore, the incentives of   depository institutions to engage in activities to minimize reserve  requirements.
Broken out by type of institution, we estimate that 15 percent of banks  and 2 percent of credit unions employed the approach of reducing  transaction account reserves. Of the institutions that used a retail  sweeps program to reduce transaction account reserve requirements,  about a fourth (27 percent) had transaction account balances subject to  the 10 percent reserve requirement ratio. Reasons cited by individual  respondents for employing this strategy (at the time of implementation)  included a high interest rate environment and the amount of transaction  account balances (for instance, balances grew into a higher reserve  tranche). Prior to the payment of interest on reserves and the expansion  of the total supply of reserves, depository institutions preferred to closely  manage their reserve balances to their reserve requirement; therefore,  having fewer deposit balances subject to reserve requirements reduced  their reserve requirement and made more funds available for alternative  investments, such as loan provision to customers. Because they shifted  funds from transaction accounts to savings deposits to reduce balances  in transaction accounts subject to reserve requirements, these institutions  had to enforce the transfer and withdrawal limit for savings deposits  (ensuring that the automatic transfers from savings deposits did not  exceed six times per month). However, as described in the sidebar, the  customer is not able to initiate transfers directly from savings deposits in  retail sweeps programs. Therefore, for institutions that used a retail  sweeps program, no ex post monitoring to enforce customers’ adherence  to the six-transaction limit was required.
section_title: Few Depository Institutions Satisfied Reserve Requirements on Both Transaction Accounts and Savings Deposits
paragraphs: A few depository institutions said that they satisfied reserve requirements  for balances in transaction accounts and savings deposits to implement  Regulation D requirements and avoid enforcing the transaction limit for  savings deposits (one of the aforementioned approaches). As  previously discussed, institutions can choose to market accounts as  savings deposits to customers but classify them as transaction accounts  for deposit reporting and reserve requirements purposes. Because  transaction accounts are subject to reserve requirements, in effect, this  approach results in institutions satisfying reserve requirements on both  transaction accounts and savings deposits. This also means that  institutions would not have to enforce the transaction limit otherwise  necessary to classify an account as a “savings deposit” and can permit  customers to make more than six convenient transfers and withdrawals  from their savings deposits.
A slight variation to the approach that allows customers unlimited access  to their savings deposits is the use of a retail sweeps program whereby  institutions would satisfy reserve requirements for balances in savings  deposits only when customers exceed the transaction limit. To use a retail  sweeps program to eliminate the need to enforce the transaction limit, an  institution transfers some or all of its customers’ balances from savings  deposits (no reserves required) to transaction accounts (reserves  required) once six transfers or withdrawals are made from the savings  deposits. The reasons depository institutions cited for maintaining  reserves on savings deposits (i.e., classifying both transaction accounts  and savings deposits as transaction accounts) to eliminate the need to  enforce the transaction limit included: (1) net transaction account  balances were low enough that holding additional reserves did not  increase the institution’s required reserve ratio, (2) customer feedback  (questions or concerns about the transaction limit), and (3) the Federal  Reserve’s payment of interest on reserves.
Even with the payment of interest on reserve balances, administrative  burdens associated with reserve requirements remain for depository  institutions. As mentioned previously, depository institutions face  administrative burdens associated with classifying deposit liabilities  subject to reserve requirements, calculating and reporting deposit levels,  and ensuring they maintain enough vault cash or balances at Federal  Reserve Banks to meet their reserve requirements. In addition, because  reserve requirements only apply to depository institutions and do not  apply to nondepository financial institutions, a potential competitive  disadvantage for depository institutions exists. This can distort the credit  allocation process by pushing financial resources away from the banking  system.
section_title: Relatively Few Customers Exceeded or Expressed Concerns about the Regulation D Transaction Limit
paragraphs: Based on our survey results, we estimate that relatively few customers  exceeded the Regulation D six-transaction limit. Additionally,  relatively  few customers had questions or concerns about the limit, consistent with  the findings from our review of regulatory data. This low occurrence of  customers’ savings deposits exceeding the transaction limit may be due,  in part, to depository institutions’ efforts to inform customers about the  transaction limit. In addition, the questions and concerns depository  institutions received from customers were generally about lack of  understanding that a transaction limit applied to their accounts.
subsections: section_title: Most Depository Institutions That Enforced the Transaction Limit Reported Few Customers’ Accounts Exceeded the Transaction Limit
paragraphs: Based on our survey results, relatively few customers appeared to have  exceeded the six-transaction limit in their savings deposits. Based on  responses to our survey, we estimate the following:  For the majority of depository institutions (59 percent) that enforced the transaction limit, less than 1 percent of their customers’ savings deposits—combined savings and money market accounts—exceeded the transaction limit in a month or statement cycle (between December 2014 to March 2016). For two-thirds (66 percent) of banks, few customers’ savings deposits exceeded the limit while about half of credit unions noted this.
Twenty-one percent of depository institutions said that 1–5 percent of customers’ savings deposits exceeded the transaction limit, which was consistent with percentages for banks and credit unions. For 24 percent of banks and 18 percent of credit unions, 1-5 percent of customers’ savings deposits exceeded the transaction limit.
Few (1 percent) depository institutions indicated that more than 10 percent of their customers’ savings deposits exceeded the transaction limit in a month or during a statement cycle.
Based on our survey results and interviews, some depository institutions  took additional steps on their own, beyond those required by Regulation  D, to help customers stay informed and avoid exceeding the transaction  limit. For example, we estimate that 7 percent of depository institutions’  staff made customer service calls after an account is opened to advise  customers of the limit and answer questions. Ten percent of institutions  notified customers of the number of transactions made before their  accounts reached the transaction limit. Methods that individual  institutions reported using to notify customers before they reached the  limit included mailing notification letters, texting alerts, calling customers,  and providing ATM alerts. In addition, representatives from depository  institutions we interviewed said that they notified customers by labeling  applicable transactions as a Regulation D transaction online (viewable as  customers’ account activity). Representatives from one depository  institution we interviewed also told us that they temporarily classified  savings deposits as transaction accounts (for reserves purposes) to  permit customers to make unlimited transfers and withdrawals from such  accounts for a limited time during tax season.
section_title: Most Depository Institutions and Others Report That Few Customers Had Concerns about Regulation D
paragraphs: Based on our survey, we estimate that most depository institutions  received few customer questions or concerns related to the Regulation D  transaction limit. Specifically, the Regulation D-related questions or  concerns represented approximately less than 1 percent of all questions  or concerns about deposit accounts received from customers. This low  rate of customer questions or concerns was more common among banks  than credit unions, with estimates of 72 percent versus 55 percent,  respectively. For the depository institutions that indicated less than 1  percent of customer questions or concerns were related to Regulation D,  the complaints were generally about lack of understanding about the  types of transactions subject to the limit (26 percent), lack of  understanding that a transaction limit applied to their accounts (26 percent), and fees charged (12 percent). In addition, we estimate that  for a relatively sizeable minority of depository institutions (22 percent), 1– 10 percent of questions or concerns they received were related to  Regulation D. For these institutions, the Regulation D-related questions  or concerns were generally about customers’ lack of understanding that a  transaction limit applied to their accounts (36 percent) and the types of  transactions subject to the limit (28 percent). Generally, depository  institutions perceived the burden that Regulation D’s requirements placed  on customers to be minimal based on the feedback they received from  customers.
As previously discussed, depository institutions must close or convert  savings deposits (to transaction accounts) or remove transfer or  withdrawal capabilities from savings deposits for customers who continue  to violate the six-transaction limit after having been contacted by the  depository institution for exceeding the transaction limit on a more than  occasional basis. Based on our survey results, we estimate that, from  December 2014 to February 2016, around 35 percent of depository  institutions received customer questions or concerns about account  closures (closing accounts and transferring the funds into a new  transaction account or sending a check to the customer) or denied  transactions. Account closures could result in new account numbers  (which can interrupt how customers manage their accounts), and denied  transactions may cause inconvenience for customers—both of which  could lead to customers expressing questions or concerns related to the  Regulation D transaction limit. We estimate that the depository institutions  that received customer questions or concerns about account closures or denied transactions generally did not convert customers’ savings deposits  when they more than occasionally exceeded the transaction limit. The  institutions that did not receive customer questions or concerns about  account closures or denied transactions may have converted accounts.  Overall, we estimate that about 30 percent of depository institutions  converted savings accounts, and 47 percent converted money market  accounts when a customer more than occasionally exceeded the  transaction limit. Those institutions that converted accounts may have  matched customer needs with appropriate deposit account products and  thus may have removed a basis for questions or concerns.
Findings from other sources about the effect of Regulation D’s transaction  limit on customers were consistent with our survey results. We reviewed  complaint data collected by the Board of Governors, CFPB, FDIC, NCUA,  and OCC. The regulators’ data indicated that less than 0.5 percent of all  deposit product complaints pertained to Regulation D. In the case of  NCUA, we did not find any complaints collected that pertained to  Regulation D. Complaint data from some of the regulators also  indicated that the Regulation D-related complaints generally were about  fees charged or a lack of understanding about the transaction limit.
In one instance, representatives from a depository institution we  interviewed also told us that a change in policy (from classifying savings  deposits as transaction accounts and maintaining reserves against them  to avoid enforcing the transaction limit to classifying those accounts as  savings deposits and enforcing the transaction limit) caused confusion  among their customers and prompted complaints. In addition,  representatives from three trade associations for banks and credit unions  told us that the feedback they have received from their members about  Regulation D was generally about customers’ confusion and lack of  understanding of the regulation’s requirements. Specifically, they said that  customers of banks and credit unions do not understand why there is a  limit on the number and types of transactions that can be made from their  savings deposits.
section_title: Options to Reduce or Eliminate Reserve Requirements Have Monetary Policy Implications
paragraphs: Internationally,  many central banks have taken steps to reduce their  reliance on reserve requirements, including eliminating them completely  in some cases.  Many of the approaches that facilitate monetary policy  implementation in an environment of low or no reserve requirements have  been employed by central banks in other countries for a number of years.  While the ability to extend these experiences to the United States context  is unclear, they provide examples of monetary policy implementation  frameworks that do not involve mandatory reserve requirements.  However, in reducing reserve requirements to zero, a number of potential  operational and technical issues emerge that can complicate that conduct  of monetary policy. The Federal Reserve has acknowledged the costs  and burden associated with reserve requirements and has evaluated, and  continues to evaluate various monetary policy implementation  frameworks. Using this work and the experiences of foreign central  banks, we outline various reserve requirement frameworks for illustrative  purposes, including those where reserve requirements are nonexistent.  GAO’s presentation and discussion of the various frameworks should not  be interpreted as a judgement or policy position on monetary policy  implementation or related decisions in the United States, where, like  many other countries, reserve requirements remain an important  monetary policy tool.
subsections: section_title: A Number of Central Banks Have Reduced Their Reliance on Reserve Requirements
paragraphs: Due, in part, to concerns about the cost, burdens and market distortions  associated with their use, there has been a decline in the level and use of  reserve requirements globally. For example, while internationally most  central banks still impose reserve requirements, the requirements have  been reduced over the last several decades in some high- and moderate- income countries. As a result, several central banks now operate  monetary policy in an environment in which reserve requirements are  zero or so low that they do not constrain the behavior (lending or  investment activity) of depository institutions.  A 2010 International  Monetary Fund (IMF) survey found that 9 of 121 central banks did not  impose reserve requirements on financial institutions.  Other developed  and emerging countries have operated with a reserve requirement  imposed on all deposits, which eliminates the need for measures like  transaction limits on certain kinds of transfers and withdrawals from  certain deposit liabilities to distinguish between reservable and  nonreservable deposits. As mentioned previously, the Federal Reserve  Act authorizes the Board of Governors to impose reserve requirements  on a narrow base of deposit liabilities and does not authorize imposing  reserve requirements on savings deposits.
Among central banks that operate with a range of reserve requirements  like the Federal Reserve, some have requirements that appear relatively  small. For example, as table 5 illustrates, reserve requirement ratios in  Japan range from .05 percent to 1.3 percent depending on the type of  bank liability (deposit account). However, because the reservable base  (types of accounts covered) differs across central banks, reserve  requirement levels across central banks are not strictly comparable  without accounting for these differences, which can be large.
Although reserve requirement ratios in the United States have not  changed since 1992, the Board of Governors has acknowledged the  costs associated with the mandatory reserves framework, including the  required differential treatment of transaction and other types of accounts.  In fact, the Federal Reserve had advocated for legislation authorizing it to  pay interest on reserves to eliminate some of the costs on depository  institutions well before the passage of the Financial Services and  Regulatory Relief Act of 2006 (FSRRA). As discussed earlier, FSRRA  permitted the payment of interest on reserve balances and gave the  Board of Governors greater flexibility in establishing reserve  requirements, including the ability to reduce transaction account reserve  requirement ratios to zero. Like the Federal Reserve, central banks in  some other countries also remunerate reserve balances, including the  Bank of England, the European Central Bank, Norges Bank (Norway),  Bank of Canada, and Bank of Japan, and some have done so for many  years.
section_title: Importance of Reserve Requirements Varies in Relation to the Operating Procedures Used to Implement Monetary Policy
paragraphs: While central banks generally view reserve requirements as an important  monetary policy tool, changes to reserve requirement ratios are seldom  used in the day-to-day operations employed by a central bank to achieve  monetary policy objectives. This is largely because direct manipulation of  reserve requirements is a less efficient way for a central bank to influence  economic activity relative to the other tools at its disposal, such as open  market operations. Additionally,  changes to reserve requirement ratios  can significantly affect a depository institution’s operations. However,  reserve requirements have played an important role in the implementation  of monetary policy, principally facilitating various operating procedures  and supporting open market operations by creating a predictable demand  for reserves. Operating procedures refer to the day-to-day policy actions,  or tactics, a central bank employs to achieve its long-run monetary policy  objectives, including technical measures and administrative activities.  The key component of an operating procedure is the central bank’s  operating target, which can be a price (short-term interest rate) or a  quantity (reserves) target. For example, when a central bank uses monetary policy tools to target interest rates, it is said to be employing an  interest rate operating procedure.
The importance of reserve requirements varies in relation to the operating  procedure used to implement monetary policy objectives. For example, a  reserve operating procedure—which most central banks moved away  from decades ago—depends on having control over the supply of money.  Reserve requirements played a role in controlling such growth when  these procedures were in place (see table 6). When a reserves-based  operating procedure is in place, control over the money supply suffers  when reserve requirements are lowered. Most central banks in  developed countries abandoned these approaches by the early 1980s for  interest rate-based operating procedures—a common approach to  monetary policy that involves targeting the level of a short-term interest  rate to achieve policy objectives. For example, the Federal Reserve  transitioned to targeting an interest rate (federal funds rate) roughly by  1984. The movement away from reserves operating procedures and  the adoption of interest rate targeting approaches has allowed some  central banks to reduce their reliance on reserve requirements and  eliminate them in some instances.
As shown in table 6, interest rate-based operating procedures provide  central bankers with more flexibility  in the use of reserve requirements. In  the interest rate-based operating procedure employed in the United  States during 1984–2008 (single target approach), the Federal Reserve  forecasted the demand for reserves, and then supplied the quantity of  reserves necessary to clear the federal funds market at the interest rate  target set by FOMC. For this type of operating procedure to be effective,  the demand for central bank balances must be reasonably stable and  predictable. Reserve requirements, by helping to establish a stable and  predictable demand for such balances, ensure that changes in short-term  interest rates are primarily the result of the central bank’s actions to  achieve a policy rate within the interest rate target range. While the  amount of central bank balances needed for payment and settlement  purposes is determined by financial institutions’ needs and can vary  significantly from day to day, reserve requirements that are substantial  enough—relative to other factors influencing demand—ensure that a  stable and predictable level of demand for central bank balances.  Therefore, reserve requirements facilitate interest-rate operating  procedures and remain an important tool for establishing control over  short-term interest rates.
Other central banks use alternative interest-rate operating strategies to  achieve monetary policy objectives, using frameworks that place less  reliance on reserve requirements or render them nonessential (see table  6, corridor approach). Central banks generally have several tools— outside of reserve requirements—that they can use to influence  conditions in interbank markets. Approaches that use these tools to  establish upper and lower limits on a short-term interest rate (policy rate)  are referred to as “channel” or “corridor” operating frameworks. In  general, fluctuations in the targeted interest rate are bounded within a  “corridor” by a rate of interest on central bank lending and a rate of  interest on balances held at the central bank. Open market operations  can also be conducted as necessary to keep the market interest rate near  the target. When properly constructed and calibrated to the institutional  features and financial market structures of a given economy, this  “corridor” operating procedure can allow a central bank to achieve an  operating target rate without the cost and administrative burdens  associated with reserve requirements. Hence, the corridor operating  framework can be viewed as an alternative to the required maintenance  of reserves. Currently, several central banks without reserve requirements use corridor operating frameworks, including the central  banks of the United Kingdom, New Zealand, Canada, Sweden and  Australia and were able to achieve sufficient control over short term  interest rates.  (See app. IV for additional details on select corridor  operating frameworks used globally.) It is important to note that reserve  requirements can be useful even in a corridor system as they can smooth  daily shocks and be leveraged to limit volatility within the corridor without  relying on daily open market operations. The European Central Bank  operates a corridor operating framework with reserve requirements.
Key aspects of the Federal Reserve’s current monetary policy  approach—which leverages its ability to pay interest on reserves—are  similar to the approaches used by many central banks that operate  without reserve requirements. In 2008, because of the increase in the  size of its balance sheet, the Federal Reserve had difficulty influencing  the federal funds rate through the typical shifts in the supply of reserves,  resulting in a revision in its operational framework for implementing  monetary policy. The Federal Reserve’s response to the financial crisis  resulted in a significant expansion of its balance sheet and hundreds of  billions in excess balances in the banking system. For example, at the  end of 2008, balances maintained to satisfy reserve requirements  amounted to $53.6 billion, while excess balances totaled $767.3 billion  and by March 2016 excess balances increased to $2.4 trillion.  This  limited the Federal Reserve’s ability to achieve the target set by FOMC  solely by varying the supply of reserves. Given its expanded authority  granted in 2008, the Federal Reserve was able to use the rate of interest  on reserves, with support from other monetary policy tools, to help  establish a lower bound on the federal funds rate to keep it closer to  FOMC’s target. This approach allowed the Federal Reserve to expand  its balance sheet to promote financial stability while maintaining control  over the federal funds rate. While the Federal Reserve’s revised  operational approach leverages the tools used by central banks operating  without reserve requirements, it was designed specifically to enhance its  control over the federal funds rate within a framework using reserve  requirements. (See app. IV for more information on the current  operational framework in the United States.)
section_title: Conduct of Monetary Policy in an Environment of Low or Zero Reserve Requirements Raises a Number of Issues
paragraphs: Implementing monetary policy without reserve requirements raises a  number of structural, operational, and technical issues, in cases in which  the operational approach (corridor operating approach) theoretically  allows for such an implementation, as the following examples illustrate.
Because of the unique features of the U.S. financial system, it is  unclear that the practices used by other countries would translate to  the United States. Specifically, the unique structure and size of U.S.  financial markets—characterized by a large number of depository  institutions and by important nondepository institutions that account  for a large share of credit intermediation—would influence the  structure of a corridor operating approach in the United States. For  example, while operating without reserve requirements would likely  require the payment of interest on reserves to influence market  behavior, some important nondepository participants in the federal  funds market are not eligible to receive interest on reserves.  Therefore, as discussed below, a corridor operating approach in the  United States could be more challenging to achieve and would need  to be structured to account for nondepository institution activity in the  short-term funding markets.
Moreover, eliminating reserve requirements and the infrastructure for  their implementation would result in less flexibility  for changing  operating approaches (such as approaches that rely on scarce  reserves and calibrated open market operations) should a central  bank find such approach desirable. Also, the federal funds market  could be significantly affected and could experience illiquidity  in some  economic environments, which could complicate monetary policy  approaches reliant on federal funds rate targeting.
Eliminating reserve requirements could require more joint decision  making between FOMC and the Board of Governors. FOMC  determines the direction of monetary policy, but by statute, the Board  of Governors has the authority to set the rate for interest on reserves,  which is critical to the corridor operating approach. Federal Reserve  staff noted that FOMC and the Board of Governors cooperate closely  in all aspects of the conduct of monetary policy, which effectively  eliminates any coordination concerns.
A number of operational and technical issues would emerge in a zero  reserve requirement environment, particularly if balances in the  banking system were scarce or if excess balances consisted largely of  payment and clearance balances (funds used to make payments to  other banks). When reserve requirements are set at zero or so low  that they are nonbinding on the behavior of depository institutions,  central bank balances will be maintained to make payments, settle  and clear transactions, and meet liquidity needs. While central  banks can still influence short-term interest rates in such an  environment, balances held for these purposes are behaviorally  different than balances maintained to satisfy reserve requirements  and can be less stable and predictable and potentially less sensitive  to interest rates. All else equal, in the absence of the payment of  interest on reserves, these factors would result in greater volatility of  short-term interest rates, underscoring the importance of the payment  of interest on reserves in any framework with low or zero reserve  requirements.  Also, the experiences of foreign countries relying on  settlement balances to implement monetary policy suggest the  structure of the payment system can become more important in the  conduct of monetary policy.
The implementation of monetary policy in an environment of low or zero  reserve requirements raises particular concerns about potential short- term interest rate volatility. A key objective in an interest rate targeting  procedure—which includes corridor operating approaches—is to limit the  volatility of the interest rate around the targeted level because of the cost  associated with the signals it sends to market participants about the  ability of the central bank to achieve its target. A relatively stable  overnight interest rate (e.g., federal funds rate) enhances monetary policy  transmission and transparency and maximizes a central bank’s influence  on market expectations. If the experiences of other central banks are a  guide, the absence of reserve requirements would likely involve  implementing or retaining one or more of the following actions or  structures to limit interest volatility and better ensure the effectiveness of  a corridor operating framework:
Large central bank balances even in normal times. One way to  limit interest rate volatility is to set the interest paid on reserves near  or equal to the target rate and supply sufficient reserves to match  demand at a level consistent with monetary policy objectives. This  variant of the corridor operating framework is referred to as a “floor  system” (or asymmetric corridor) and is used by the Reserve Bank  of New Zealand and several others. Nevertheless, this may require a  larger Federal Reserve balance sheet than might otherwise exist with  the current mandatory reserve requirements framework.
Standing facilities serving depository and nondepository  institutions. Having Federal Reserve facilities that are available to a  broad array of financial institutions would be important for avoiding  cases in which the federal funds rate can fluctuate outside of the  established corridor. FSRRA (which amended the Federal Reserve  Act) did not authorize the payment of interest on reserves to  nondepository participants, such as the government-sponsored  enterprises (GSEs), in the federal funds market. Because GSEs do  not receive interest on their reserves held at Federal Reserve Banks,  they are willing to lend their balances at rates below the interest rate  paid on reserves. As a result, transactions by entities such as GSEs  may have contributed to the federal funds rates falling below the  interest rate on reserves, which in a corridor approach is designed to  contain the federal funds rate from below. To help control the federal  funds rate and keep it in the target range set by FOMC, the Federal  Reserve established a supplementary tool—the overnight reverse  repurchase agreement facility. The facility is available to an expanded  list of counterparties, which limits the incentives for GSEs and other  qualified institutions to lend funds at rates less than the Federal  Reserve’s overnight reverse repurchase agreement rate. Therefore,  the interest rate offered in reverse repurchase agreements is set  lower than the interest on reserves and helps establish a floor for the  federal funds rate.
More frequent market intervention. Depending on the type of the  corridor operating system in place and the tolerance for interest rate  volatility, open market operations may be needed at higher  frequencies and in larger magnitudes to steer the market interest rate  to the targeted rate.
Policies to reduce any perceived stigma associated with  borrowing from the discount window. Because of the perceived  stigma associated with using the discount window, the federal funds  rate might not be effectively bounded from above by the discount rate  in a corridor system. The reluctance by institutions to use the discount  window is driven by institutions’ fears that such borrowing would  signal financial weakness to financial markets. As a result, banks  might be willing to borrow elsewhere at rates outside of the targeted  range, contributing to interest rate volatility.
section_title: Alternative Operating Frameworks Involving Reduced or Zero Reserve Requirements
paragraphs: International  experiences with a wide range of reserve requirement  frameworks and the challenges associated with them illustrate that  consensus has not emerged on what constitutes the optimal role of  reserve requirements in monetary policy implementation. The corridor  operating frameworks employed in other countries theoretically would  allow for the simplification or elimination of reserve requirements and  therefore some of the cost associated with them, including a central  bank’s administrative overhead. However, determining the ideal  reserve requirement framework in the United States is ultimately a  monetary policy decision and we take no position on the suitability of the  frameworks presented for the United States.
For illustrative purposes only, we differentiated a few reserve requirement  frameworks, focusing narrowly on the main cost and administrative  burdens associated with each and the implications for monetary policy  (see table 7). The examples are informed by the experiences of several  foreign central banks and the analysis conducted by the Federal Reserve  prior to the adoption of the payment of interest on reserve balances. In  response to the authorities granted by FSRRA to pay interest on reserves  and reduce transaction account reserve requirements to zero in 2008, the  Federal Reserve began studying a broader range of options to achieve  monetary policy objectives. FOMC meeting minutes of July 2015  indicated that the Federal Reserve would be evaluating potential long-run.  implementation frameworks for monetary policy and would be considering  a wider range of issues than those considered in 2008.
Key features of the alternative frameworks (B through E in table 7) are the  remuneration of reserves (payment of interest on reserves) or the  elimination of reserve requirements. While the ability to lower or eliminate  reserve requirements ultimately depends on the monetary policy strategy  pursued by the central bank, the alternatives include:
Reserve requirements on transaction accounts only, with  payment of interest on reserves. Because reserves are required on  transaction accounts only, this approach includes a reliance on  distinguishing between accounts (e.g., with the six-transaction limit for  savings deposits in the United States). This approach retains some of  the costs and burdens associated with reserve requirements, but it  reduces or eliminates the implicit reserves tax (through the payment  of interest on balances held at Reserve Banks).
Lower reserve requirements on all accounts, with interest on  reserves. This approach introduces administrative simplicity by  eliminating the need to distinguish between transaction accounts and  savings deposits and reduces the implicit reserves tax (through the  payment of interest on reserves) and the associated burdens on  depository institutions and the central bank. The European Central  Bank has used this framework with a corridor operating procedure for  monetary policy implementation. In the United States, this option  would require legislative change as the Federal Reserve Act  authorizes the Board of Governors to impose reserve requirements on  transaction accounts, nonpersonal time deposits and Eurocurrency  liabilities only.
Zero reserve requirements, with voluntary reserves obligations.
While reserves are not required, depository institutions would be  allowed to set their own reserve targets—receiving a higher rate of  interest on balances held to meet that target—and penalized for failing  to meet them. This framework would be less burdensome on  depository institutions than one requiring reserves such as in the  United States since it would eliminate the need for some  administrative reports and the monitoring of deposits for compliance  with the six-transaction limit. The central bank’s administrative  overhead could decline as well, although it would still need to monitor  reserve targets and balances, and maintain corresponding systems.  This option approximates the approach that has been employed by  the Bank of England (with a corridor operating procedure for monetary  policy implementation).
Zero reserve requirements. Regulation D’s definitions that define  reserveable liabilities for reserve requirements purposes in the United  States would not be needed and all costs and administrative burdens  associated with reserve requirements would be eliminated. Some  provisions of Regulation D relating to deposit reporting, however,  would likely still be necessary, together with any deposit definitions  necessary to support the reporting of different kinds of deposits, to  continue to permit construction of the monetary aggregates. In cases  we reviewed in which central banks implemented monetary policy  without reserve requirements, corridor operating frameworks were  used to achieve monetary policy objectives. To the extent that reserve  requirements place significant burdens on banks and central banks,  eliminating reserve requirements and employing a corridor operating  approach appear to be feasible alternatives in these select cases.  However, the feasibility of this approach in the United States is an  open question. (See discussion above on operational and technical  issues that could emerge in such an environment.)
As a benchmark comparison, table 7 also includes the reserve  requirement framework in place in the United States before October 2008  (framework A) in which the six-transaction limit is necessary and interest  is not paid on reserves. It is the most administratively burdensome of the  reserve requirement regimes illustrated. In contrast, options C, D, and E,  result in cost and burden reductions for both depository institutions and  the central bank.
However, the approaches described have important implications for the  implementation of monetary policy—which is the only authorized rationale  for reserve requirements in the United States under the Federal Reserve  Act. As a result, the ability to minimize the cost and administrative burdens associated with reserve requirements is ultimately constrained  by the monetary policy consequences of these changes.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report for review and comment to the Board of  Governors of the Federal Reserve System (Board of Governors), the  Comptroller of the Currency (OCC), the Federal Deposit Insurance  Corporation (FDIC), the National Credit Union Administration (NCUA),  and the Consumer Financial Protection Bureau. The Board of Governors,  OCC and FDIC provided technical comments, which we incorporated into  the report as appropriate. We received formal comments from NCUA that  are reprinted in app. V. NCUA recognized the complexities to changing  the current reserve requirement framework and the potential impact on  implementing monetary policy. CFPB did not provide comments on a draft  of this report.
As agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to the Board of Governors,  OCC, FDIC, NCUA and interested congressional committees and  members. In addition, the report will be available at no charge on the  GAO website at http://www.gao.gov.This report is also available at no  charge on our website at http://www.gao.gov.
If you or your staff have any questions about this report, please contact  me at (202) 512-8678 or evansl@gao.gov. Contact points for our Offices  of Congressional Relations and Public Affairs may be found on the last  page of this report. Key contributors to this report are listed in appendix  VI.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: The objectives of this report were to examine: (1) the purpose of reserve  requirements and Regulation D; (2) how depository institutions  implement Regulation D’s requirements and the effect of the regulation on  operations; (3) the effect on customers of the Regulation D transaction  limit on certain transfers and withdrawals from savings deposits; and (4)  foreign central banks’ varying dependence on reserve requirements and  the monetary policy implications. We did not include within our scope an  assessment of depository institutions’ compliance with Regulation D. For  the purposes of this report, we define depository institutions as  commercial and savings banks (banks) and credit unions that offer at  least one type of deposit product (savings deposits, including savings  accounts and money market deposit accounts, or checking transaction  accounts).
To address our first objective, we reviewed relevant statutes, Regulation  D, and agency publications as well as interviewed officials from the Board  of Governors of the Federal Reserve System (Federal Reserve). To  address our second objective, we surveyed a generalizable sample of  depository institutions in the United States. We identified a population of  12,135 depository institutions that we defined as subject to Regulation D’s  requirements in 2015; that is, those that offered transaction accounts,  savings deposits, or both. (See app. II for aggregate results of responses  to the closed-ended questions on our survey.) To address our third  objective, we reviewed consumer complaint data from the federal  financial regulators: the banking regulators—Federal Reserve, Office of  the Comptroller of the Currency (OCC), Federal Deposit Insurance  Corporation (FDIC), and National Credit Union Administration (NCUA)— and the Bureau of Consumer Financial Protection, also known as the  Consumer Financial Protection Bureau (CFPB), for 2010 to 2015 and  interviewed agency officials. We supplemented and corroborated these  data with responses to our survey of depository institutions. In addition,  we reviewed our reports on financial literacy and consumer protection.
For our second and third objectives, we also interviewed agency officials  and selected representatives from 10 depository institutions that included  banks and credit unions of different sizes, industry associations (the  National Association of Federal Credit Unions, Credit Union National  Association, American Bankers Association, Consumer Bankers  Association, and Independent Community Bankers of America), a  consumer advocacy group (U.S. Public Interest Research Group), and a  financial services technology firm (CetoLogic). We selected banks and  credit unions to obtain variation in size and institution type, and we  interviewed industry associations that were nationally representative of  depository institutions or consumers or had a national focus. Finally, to  examine foreign central banks’ varying dependence on reserve  requirements and the monetary policy implications, we reviewed  academic literature and Federal Reserve publications on the role of  reserve requirements and other tools in conducting monetary policy,  recent innovations in the conduct of monetary policy that may change that  role, and other developed countries’ approaches to implementing  monetary policy. We also interviewed Federal Reserve officials and other  experts on monetary policy.
We determined that the total deposit account balances and the consumer  complaint data used in our analysis were sufficiently reliable for the  purposes of our reporting objectives. All dollar values for account  balances are nominal (unadjusted for inflation). Our data reliability  assessment included reviewing relevant documentation, conducting  interviews with knowledgeable officials at the Federal Reserve, FDIC,  OCC, NCUA, and CFPB, and conducting electronic testing of the data to  identify obvious errors or outliers.
subsections: section_title: Methodology for Survey of Depository Institutions
subsections: section_title: Interviews with Selected Depository Institutions
paragraphs: To inform our methodology approach and our survey development, we  conducted interviews with representatives from five selected depository  institutions. From these interviews, we gathered information on depository  institutions’ experiences implementing Regulation D’s requirements,  including methods used to implement Regulation D’s requirements and  how the methods affect their operations and customers, if at all. We  selected institutions to obtain variation in asset size (small and large) and  type of institution (bank, credit union, and online depository institution).  We interviewed representatives from a small credit union, a large credit  union, a small bank, a large bank, and an online bank.
section_title: National Survey of Depository Institutions
subsections: section_title: Overview
paragraphs: To obtain information on how depository institutions implement  Regulation D’s requirements and the effect on their operations and  customers, we administered a web-based survey to a nationally  representative sample of banks and credit unions. In the survey, we  asked banks and credit unions about their approach to implementing  reserve requirements, their Regulation D monitoring and enforcement  methods, and the effect of monitoring and enforcement methods on their  operations and customers. Due to insufficient sample sizes, we were not  able to report results by all subpopulations. We administered the survey  from December 2015 to February 2016. Aggregate responses for all  close-ended questions from the survey are included in appendix II.  The  practical difficulties of conducting any survey may introduce errors,  commonly referred to as nonsampling errors. For example, difficulties in  interpreting a particular question or sources of information available to  respondents can introduce unwanted variability into the survey results.  We took steps in developing the questionnaire, collecting the data, and  analyzing the results to minimize such nonsampling error (see below).
section_title: Sample Frame and Selection of Banks and Credit Unions
paragraphs: We identified the population of depository institutions that we defined as  subject to Regulation D’s requirements using Reports of Condition and  Income (call report) data for second quarter 2015 from the Federal  Financial Institutions Examination Council (FFIEC), FDIC’s Statistics on  Depository Institutions (SDI), and NCUA. FFIEC was our primary source  for bank and thrift call report data because it includes all call report fields,  such as information on the fraction of deposits in accounts intended  primarily for individuals or households. FFIEC data are also released  more quickly than SDI data and therefore had the most current data at the  time of our sample selection (second quarter 2015). We did, however,  use bank demographic data from SDI (as of first quarter 2015) since this  information was not available in the FFIEC data. NCUA was our sole  source of data on credit unions.
FFIEC compiles call report data for FDIC-insured institutions that includes  all of the call report fields. The FFIEC data do not have information about  the institutions’ charter classification and their regulator. SDI reports data  on a subset of call report fields and includes demographic data on  institutions. These data include information on the bank holding company,  primary regulator, and bank charter classification. There is also data on  the primary specialization of the institution and whether it has trust  powers, is organized as a Subchapter S corporation, or is a Mutual  Association.
We used the call report data from FFIEC and merged onto it the  demographic data provided by SDI, in order to create the initial sample  frame of FDIC-insured institutions. When building the dataset, FFIEC’s  most recent quarter was second quarter 2015 (2015Q2), but SDI’s was  first quarter 2015 (2015Q1). Therefore, we used the 2015Q2 data for  FFIEC and we pulled forward the demographic data from SDI. The most  recent NCUA data on credit unions were from 2015Q1. We added the  NCUA data to the rest of the call report data as completely as was  feasible. Finally, we added to the data on depository institutions the  Federal Reserve’s tranche cut-offs.
Our initial population list contained a total of 12,135 depository institutions  that we defined as subject to Regulation D’s requirements. We stratified  the population using two design variables—one for the type of depository  institution and the other for the level of required reserves ratio. The  depository institution variable had two levels (bank and credit union) while  the required reserves ratio variable had four levels (nonreporter, 0  percent required reserves ratio, 3 percent required reserves ratio, and 10  percent required reserves ratio). This resulted in 8 sampling strata. Our  initial sample size allocation was designed to achieve a margin of error no  greater than plus or minus 10 percentage points for an attribute level at  the 95 percent level of confidence. Before and during the administration  of our survey, we identified a total of 52 depository institutions that were  either no longer in business or that had been bought and acquired by  another depository institution. We treated these sample cases as out-of- scope; this adjusted our final sample size to 892. We obtained an  unweighted survey response rate of 71 percent.
Because we followed a probability procedure based on random  selections, our sample is only one of a large number of samples that we  might have drawn. Since each sample could have provided different  estimates, we express our confidence in the precision of our particular  sample’s results as a 95 percent confidence interval (e.g., plus or minus 7  percentage points). This is the interval that would contain the actual  population value for 95 percent of the samples we could have drawn.  Confidence intervals are provided along with each sample estimate in the  report. All survey results presented in the body of this report are  generalizable to the estimated population of 11,953 in-scope depository  institutions, except where otherwise noted.
section_title: Survey Development and Administration
paragraphs: To inform the development of our survey instrument, we met with  individual banks and credit unions. We conducted 11 pretests with 8  banks and credit unions to ensure that survey questions were clear, to  obtain any suggestions for clarification, and to determine whether  representatives would be able to provide responses to questions with  minimal burden. We also interviewed the federal banking regulators—the  Federal Reserve, FDIC, OCC, and NCUA—as well as bank and credit  union associations to obtain their perspectives on depository institutions’  experience with Regulation D.
To encourage survey participation, we conducted pre-administration  notification and followed up with depository institutions. Before  administering the survey, we obtained contact information (phone  numbers and e-mail addresses) for the sample of depository institutions  from their primary regulators. We then sent notification e-mails to these  institutions, and for those whose e-mails were undeliverable, we called  representatives to correct the e-mail addresses and confirm the points of  contact. During survey administration, we called sampled institutions that  had not completed the survey (nonrespondents) to update their contact  information, answer any questions or concerns they had about taking the  survey, and obtain their commitment to take the survey. We also sent e- mails and letters to nonrespondents with instructions for taking the web- based survey.
We conducted this performance audit from February 2015 to October  2016 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
section_title: Appendix II: Estimates from GAO Survey of Depository Institutions on Regulation D
paragraphs: From December 2015 through February 2016, we administered a web- based survey to a nationally representative sample of banks and credit  unions. The survey included questions on (1) the implementation of  reserve requirements; (2) Regulation D monitoring and compliance; (3)  actions banks and credit unions take when the transaction limit is  reached; and (4) impact on banks’ and credit unions’ operations and  customers. All survey results presented in this appendix are generalizable  to the population of depository institutions, except where otherwise noted.  We received valid responses from 71 percent of our sample. Because our  estimates are from a generalizable sample, we express our confidence in  the precision of our particular estimates as 95 percent confidence  intervals. The questions we asked in our survey of depository institutions  are shown below. Our survey was comprised of closed- and open-ended  questions. In this appendix, we include all survey questions and  aggregate results of responses to the closed-ended questions; we do not  provide information on responses provided to the open-ended questions.  For the purposes of the survey, we use nontransaction account(s) to refer  to deposits that are not transaction accounts  For a more detailed  discussion of our survey methodology, see appendix I.
subsections: section_title: Regulation D Monitoring and Compliance
paragraphs: Tables 15-19 present estimates for question 5: If a customer opens an  account in person or online, how do you inform him/her of the Regulation  D six-transaction limit?
Table 20-25 present estimates for question 6: If a customer opens an  account via other means (telephone, email, etc.), how do you inform  him/her of the Regulation D six-transaction limit?
Tables 28-34 present estimates for question 8A:  Which of the  following methods do you use to notify customers?
section_title: Appendix III: The Role of Reserve Requirements over Time
paragraphs: Before the establishment of the Federal Reserve System (Federal  Reserve), reserve requirements, imposed by other laws, were used to  ensure the liquidity of bank notes (negotiable instruments issued by  depository institutions that could be redeemed for gold or silver), which  were the primary medium of exchange in the mid- to late-1800s. To  facilitate more widespread use of bank notes, the National Bank Act of  1863 allowed depository institutions to organize under a national charter  and created a network of institutions to easily circulate their bank notes  across the country. In exchange for a charter that promoted widespread  use of their notes, nationally chartered institutions were required to hold  25 percent reserves against their notes and customer deposits.
The role of reserve requirements continued to change after the Federal  Reserve was created in1913 with the passage of the Federal Reserve Act  (see fig. 4). When the Federal Reserve was created, reserve  requirements did not have a stated role in influencing the availability  and  cost of money and credit. In the years before the Federal Reserve Act, a  series of bank runs and financial panics made evident the need for a  mechanism to accommodate temporary variations in the public’s demand  for cash. Accordingly, the Federal Reserve Act created a system of  Reserve Banks to act as lenders of last resort and thereby provide  temporary liquidity relief to the nationwide banking system during times of  financial crisis. Among other provisions, the Federal Reserve Act sought  to establish more effective supervision of banking, and the Federal  Reserve was given the responsibility of supervising state-chartered and  nationally-chartered depository institutions that chose to be members of  the Federal Reserve. All member institutions were subject to reserve  requirements.
Beginning in the 1920s, reserve requirements gradually became  important for implementing monetary policy as the Federal Reserve  moved toward a more proactive role in influencing credit conditions. As  borrowing increased rapidly in the 1920s, the Federal Reserve  determined that reserve requirements could be used to constrain the  expansion of credit by requiring reserves against deposits used to fund  loans. However, this objective was complicated in practice because  reserve requirement ratios were established in the Federal Reserve Act  and not by the Board of Governors of the Federal Reserve System (Board  of Governors) and by the reliance on the discount rate as the primary tool  for influencing the availability  and cost of money and credit at the time.  The discount window rate was set below market, which provided  depository institutions the incentive to borrow from the Reserve Banks to  finance operations. This meant reserve requirements placed no  significant constraint on lending. In addition, the Federal Reserve did not  have the authority to raise reserve requirements at the time to make them  a more binding constraint on credit expansion.
By 1931, the Federal Reserve moved from using reserve requirements as  a source of liquidity for deposits held at depository institutions to using  reserve requirements to proactively affect the cost and availability  of  money and credit. The Banking Act of 1935 gave the Board of Governors  authority to increase reserve requirements and the Board of Governors  doubled the required reserve ratios on demand deposits and time  deposits. During World War II, the emphasis on proactive monetary  policy was temporarily superseded by a focus on helping fund the war  through “pegging” interest rates and purchasing Treasury securities (that  is, finance government debt through open market operations).
In 1951, the Federal Reserve returned to proactive monetary policy,  focusing on financial conditions in short-term money and credit markets.  From this period to 1980, reserve requirements for member institutions  were based on geography and were adjusted numerous times. Reserve  requirements were adjusted to reinforce or supplement the effects of  open market operations and discount policy on credit conditions as well  as in response to financial innovation that created new sources of funding  operations to circumvent reserve requirements on deposits. For example,  the Board of Governors imposed marginal reserve requirements— additional requirements on each new increment of deposits—on large  time deposits and Eurocurrency liabilities (net balances of depository  institutions organized in the United States but with non-U. S. offices and  international banking facilities).
Reserve requirement computation methods also changed in the 1960s  and 1970s. In 1968, the Board of Governors adopted a system of lagged  reserve requirements. Under this system, an institution’s required  reserves were computed based on its deposit levels from the preceding 2  weeks, replacing contemporaneous computation occurring during a  reserve maintenance period. Contemporaneous computation provides for  a real-time link between reserve requirements and M1 (the sum of  currency held by the public plus transaction deposits of depository  institutions). Four years later in 1972, the Board of Governors adopted a  graduated reserve requirements schedule—varying reserve requirements  depending on deposit levels regardless of geographic location. Because  reserve requirements were imposed only on the liabilities of member  institutions, some state-chartered institutions that chose to be members  began to leave the Federal Reserve. The graduated reserve  requirements were intended to reduce reserve requirements for smaller  banks, which were more likely to leave the Federal Reserve, but it further  weakened the link between M1 and aggregate reserve balances. In  response, the Federal Reserve adopted a quantity operating procedure  (targeting the amount of reserve balances in the banking system overall  through open market operations) designed to maintain close, short-run  control of M1 in 1979. According to the Federal Reserve, the ability to  control M1 depended on the strength and stability of the link between  reserves at member banks and the level of M1 deposits in the entire  banking system—a link that was being weakened by the decline in  Federal Reserve membership and a complicated system for determining  reserve requirements. The Federal Reserve feared that continuing  declines in Federal Reserve membership would diminish and undermine  the effectiveness of monetary policy under a quantity operating  procedure.
In response to declining Federal Reserve membership and to strengthen  the Federal Reserve’s control over the implementation of monetary policy,  Congress passed the Depository Institutions Deregulation and Monetary  Control Act of 1980 (Monetary Control Act). The Monetary Control Act  amended the Federal Reserve Act to require “all depository institutions,”  not just member banks, to satisfy reserve requirements, thereby  increasing the Federal Reserve’s ability to influence money market  conditions. It also simplified the graduated reserve requirement  schedule. Furthermore, the Monetary Control Act initially set a basic  reserve requirement ratio of 3 percent on transaction accounts below a  specified level (the “low reserve tranche”) and specified a reserve  requirement ratio of 12 percent on all transaction accounts over that  amount and provided that the Board of Governors could adjust the latter  ratio between 8 percent and 14 percent. The Monetary Control Act also  imposed reserve requirements on two other types of liabilities:  nonpersonal time deposits, and Eurocurrency liabilities. This effectively  broadened the reserves base and allowed the Federal Reserve to  improve control over the supply of reserves. The Board of Governors  amended Regulation D in 1980 to implement the reserve requirements  provisions of the Monetary Control Act. Two years later, Congress  passed the Garn-St Germain Depository Institutions Act of 1982 (Garn-St  Germain Act), which amended the Federal Reserve Act to provide that  transaction accounts at depository institutions below a certain level,  known as the “exemption amount” were to be subject to a reserve  requirement ratio of zero percent. This amendment provided for the  exemption amount to be adjusted each year by a statutory formula that  takes into account the percentage increase or decrease in all reservable  liabilities at all depository institutions over the previous year.
Roughly beginning in 1984, the Federal Reserve shifted from targeting  M1 towards targeting the cost of reserves (federal funds rate) and then  adjusting the supply of balances in the banking system relative to the  demand for balances to achieve the target federal funds rate. That same  year, the Board of Governors moved from a system of lagged reserve  requirements (reserve requirements computation based on institutions’  deposit levels from the preceding 2 weeks) to a system of  contemporaneous reserve requirements (reserve requirements computed  during the reserves maintenance period). Although the focus was not on  M1, this change tightened the link between reserves and M1, allowing the  Federal Reserve to achieve a stable, predictable demand for reserves  and estimate the supply of reserves needed to achieve the target federal  funds rate. In 1998, the Board of Governors returned to a system of  lagged reserve requirements, which is still in place. The Federal Reserve  Act as originally enacted neither explicitly authorized the payment of  interest on reserve balances maintained at Reserve Banks nor  specifically prohibited the payment of interest. However, Congress  passed the Financial Services Regulatory Relief Act of 2006, which  amended the Federal Reserve Act to provide specific authorization for  balances at Reserve Banks to receive earnings (interest on reserves).  This effectively broadened the set of monetary policy tools available to  the Federal Reserve.
section_title: Appendix IV: Monetary Policy Implementation without Reserve Requirements
paragraphs: Central banks have generally transitioned from reserve operating  procedures where reserve requirements are critical to achieving monetary  policy objectives. Although not necessarily generalizeable to the United  States, the experiences of central banks in several countries suggest that  it is possible to achieve monetary policy objectives in an environment of  zero reserve requirements—or when these requirements are nonbinding.  The common element in each of these cases is the use of interest rate  operating procedures, where monetary policy tools are used to contain  policy targets within a specific range. The primary instruments that enable  these operating procedures are mechanisms to influence the demand for  central bank balances, such as the payment of interest on reserves and  lending facilities similar to the discount window. Approaches that use  these tools to establish upper and lower limits on a policy rate (e.g., the  federal funds rate) are referred to as “channel” or “corridor” operating  frameworks. In general, the targeted interest rate is bounded within a  “corridor” by a rate of interest on central bank lending at the top and a  rate of interest on deposits at the central bank at the bottom to limit  fluctuation in that targeted rate. The payment of interest on reserves is  critical to successful implementation of monetary policy in an operating  framework where required reserves are set to zero or are nonexistent.
Useful lessons about the implementation of monetary policy in a zero  reserve requirement environment come from the experiences of countries  that have elected to eliminate or significantly reduce reserve  requirements. Many of these approaches have been employed for a  number of years. For example, Canada phased out reserve requirements  by 1994 while the Bank of England did so by 1981. While there are  consequences for reducing or eliminating reserve requirements on the  implementation of monetary policy, including potential short-term interest  rate volatility  and the cost associated with other frameworks, the corridor  operating frameworks in these and other counties also provide examples  of dealing with those consequences without reliance on the required  maintenance of reserves. However, the ability to extend the experiences  of other countries to the United States is unclear given a number of  differences, including the size of the banking systems and type of  institutions operating in the financial system. For example, the Canadian  financial system consists of roughly 80 banks according to the IMF  compared to several thousand banks in the United States.
Corridor operating systems without reserve requirements can vary by the  key features and structural elements that reflect each nation’s unique  institutional and financial market structure as well as key decisions about  tradeoffs and preferences. The institutional details of the corridor system  also can vary over time at a given central bank. The global financial crisis  resulted in a number of nonconventional monetary policy measures by  central banks and deviations from the operational frameworks in place  pre-crisis. Therefore, while not necessarily reflective of the exact  operational procedures currently in place at the given central bank, some  examples include the following:
Bank of Canada and Reserve Bank of Australia. Before the global  financial crisis, these central banks implemented monetary policy  using a simple (or “symmetric”) corridor framework where the target  interest rate is bounded by central bank deposit and lending  facilities—and the aim is to keep short-term rates in the center of the  corridor. In the absence of reserve requirements, central bank  balances are largely composed of payment and settlement balances  and balances held for precautionary purposes. Payment and  settlement balances, which are generally less predictable and stable  than required reserves, are also not as sensitive to short-term interest  rates. As a result, to help keep short-term rates from fluctuating  undesirably, the Bank of Canada and Bank of Australia operated  relatively narrow corridors and made frequent use of open market  operations to manage the overnight rate, among other things. In 2009,  the Bank of Canada began temporarily operating what could be  characterized as an “asymmetric” corridor or “floor system” (see  Reserve Bank of New Zealand below).
Bank of England. Before 2009, the United Kingdom implemented a  monetary policy approach based on a system of voluntary reserves.  When active, banks must establish a reserve target and maintain that  target to earn interest and are penalized for holding an amount  outside the target range. Banks can ensure the target is reached by  using the Bank of England’s standing lending and borrowing facilities.  These standing facilities form a ceiling and floor (interest rate corridor)  around the policy rate. Open market operations were conducted  several times during the day to meet the demand for central bank  balances and supply appropriate levels of reserves to meet banks’  target level of reserves. The Bank of England suspended voluntary  reserves targets in March 2009 and moved to an asymmetric corridor  system in which the targeted rate is close to the Bank of England  lending rate.
Reserve Bank of New Zealand. In 1999, the Reserve Bank of New  Zealand began implementing monetary policy through a symmetric  corridor system, relying on standing lending and deposit facilities, and  open market operations. As in the systems described above, payment  and clearance balances factor heavily in the conduct of monetary  policy. In response to concerns about the effectiveness of the corridor  framework, the central bank began substantially increasing the  volume of central bank balances in the system in 2006. This approach  of providing abundant balances (reserves) serves to reduce interest  rate volatility  within the corridor. It is important to note that there are  very few financial institutions operating in New Zealand and the  majority of these are foreign owned.
The Federal Reserve currently operates a monetary policy approach that  is similar to the type of framework it could employ if it were to significantly  reduce or eliminate reserve requirements. However, the Federal Reserve  revised its operational framework for monetary policy implementation to  enhance its control over the federal funds rate given the amount of  excess reserves in the system. The high volume of reserves is a  consequence of actions taken by the Federal Reserve to address the  recent global financial crisis. As figure 7 shows, balances maintained to  satisfy reserve requirements are so low relative to the total balances in  the banking system that reserve requirements are considered  “nonbinding” on the behavior of depository institutions. As of March 2016,  balances maintained to satisfy reserve requirements totaled $152 billion  while total reserve balances totaled $2.52 trillion—indicating that excess balances are more than $2 trillion. Under these conditions, reserve  requirements do not play the typical facilitating role in the implementation  of monetary policy in the United States. More importantly, because of the  size of its balance sheet, the Federal Reserve had difficulty influencing  the federal funds rate through the typical shifts in the supply of reserves,  which warranted a revision in its operational framework for implementing  monetary policy.
To retain flexibility  in its treatment of assets purchased in response to the  financial crisis, since 2008, the Federal Reserve has been influencing the  federal funds rate using tools that include the payment of interest of  reserves (which also would be necessary to implement monetary policy in  an operating framework with reserve requirements set to zero). The  Federal Reserve’s current approach is anchored by the rate of interest it  pays on reserves and the interest rate on the overnight reverse  repurchase agreement (RRP) facility that is also accessible to  nondepository financial institutions. A key feature of this operating  procedure is that it allows the Federal Reserve to significantly increase  the supply of reserves while keeping the short-term interest rate close to  its target.
While the Federal Reserve uses key elements of the corridor operating  approaches used by foreign central banks, it has not formally adopted a  corridor system. Nevertheless, the U.S and foreign experiences illustrate  that monetary policy can be implemented in an environment in which  reserve requirements are not binding (due to low or zero reserve  requirements or abundant excess reserves). However, the operational  framework in the United States has not been tested in an environment of  scarce reserves. In such an environment, a number of technical,  operational, and practical issues would need to be addressed. GAO offers  no policy conclusions on the appropriate approach for the United States  and this presentation should not be interpreted as a judgement on how  monetary policy should be conducted.
section_title: Appendix V: Comments from the National Credit Union Administration
section_title: Appendix VI: GAO Contact and Staff Acknowledgements
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact listed above, Karen Tremba (Assistant Director),  Vida Awumey (Analyst-in-Charge), and Abigail Brown made major  contributions to this report. Also contributing to this report were Carl  Barden, Bethany Benitez, Rudy Chatlos, Andrew Furillo, Farrah Graham,  John Karikari, Jill Lacey, Kristeen McLain, Roberto Pinero, Barbara  Roesmann, and Jena Sinkfield.