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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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.) 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. 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. 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. 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. 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. 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). 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. 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. 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. 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? 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. 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. 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.

Summary: 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. 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.