donald l kohn : regulatory reform proposals remarks by mr donald l kohn, member of the board of governors of the us federal reserve system, before the committee on banking, housing, and urban affairs, u. s. senate, 22 june 2004. * * * chairman shelby, senator sarbanes, and members of the committee, thank you for the opportunity to testify on issues related to regulatory relief. the federal reserve strongly supports this and other efforts to review the federal banking laws periodically to determine whether they may be streamlined without jeopardizing the safety and soundness of this nation ’ s insured depository institutions or undermining consumer protection or other important policy principles that congress has established to guide the development of our financial system. earlier this spring, chairman shelby and senator crapo asked the federal reserve board to identify its top two or three legislative priorities for regulatory relief. in his letter of april 23, chairman greenspan highlighted three proposals that the board has supported for many years : authorization for the federal reserve to pay interest on balances held by depository institutions in their accounts at federal reserve banks, repeal of the prohibition against the payment of interest on demand deposits by depository institutions, and increased flexibility for the federal reserve in setting reserve requirements. as we have previously testified, unnecessary legal restrictions on the payment of interest on demand deposits at depository institutions and on balances held at reserve banks distort market prices and lead to economically wasteful efforts by depository institutions to circumvent these artificial limits. in addition, authorization of interest on all types of balances held at reserve banks would enhance the toolkit available for the continued efficient conduct of monetary policy. and the ability to pay interest on a variety of balances, together with increased authority to lower or even eliminate reserve requirements, could allow the federal reserve to reduce the regulatory and reporting burden on depository institutions of reserve requirements. let me explore each of these topics at greater length. interest on reserves and reserve requirement flexibility for the purpose of implementing monetary policy, the federal reserve is obliged by law to establish reserve requirements on certain deposits held at depository institutions. banks, thrifts, and credit unions may satisfy their reserve requirements either by holding cash in their vaults and atm machines, which they need in any case for normal business activities, or by holding balances at reserve banks. because no interest is paid on the balances held at reserve banks to meet reserve requirements, depositories have an incentive to reduce their reserve

gas production in the gulf are operating at less than 50 percent of pre - katrina levels. since the first evacuations of oil and gas facilities were ordered before katrina, cumulative shortfalls represented almost 4 percent of the nation's annual production of crude oil and 2 percent of our output of natural gas. the combination of flooding, wind damage, and a lack of electric power also forced many crude oil refineries and natural gas processing plants to shut down. the restoration of production at the affected natural gas processing facilities has proceeded particularly slowly, in part because of the lack of natural gas feedstocks and infrastructure problems. most refineries, however, will be back on line within the next month or so, though a few may take longer. in the interim, a greater output of refined petroleum products in other areas of the country and much higher imports, especially of gasoline, are making up for the production shortfalls in gulf refining. the temporary lifting of some environmental regulations and the suspension of the jones act facilitated those adjustments. in addition, refiners have shifted the mix of production toward more gasoline and less heating oil and jet fuel. that shift has had benefits in the short run, though the longer it continues, the greater the possibility of upward pressure on distillate fuel oil prices during the winter heating season. releases from the nation's strategic petroleum reserve relieved much of the upward pressure on crude oil prices, and imports of refined products responded rapidly to ease the price pressures stemming from the loss of refinery production in the gulf. as a consequence, the nationwide retail price of gasoline for all grades has declined 60 cents per gallon from its peak of $ 3. 12 per gallon in the week of september 5. motorists appear to have economized on their driving, and gasoline demand appears to be off a bit. however, it will take time and an appreciable increase in the fuel economy of our stock of motor vehicles to fundamentally change the amount of motor fuel used on our nation's highways. 1 / 3 the far more severe reaction of natural gas prices to the production setbacks that have occurred in the gulf highlights again the need to expand our nation's ability to import natural gas. in contrast to the fall in crude oil prices and the sharp narrowing of refinery margins during the past two months, natural gas prices have remained high. moreover, judging from elevated distant futures prices, traders expect natural gas prices to edge lower but to stay high for the foreseeable