CUNA Regulatory Comment Call

October 7, 2008

EXECUTIVE SUMMARY

• The Federal Reserve Board (Board) will begin to pay interest on depository institutions’ required and excess reserve balances, effective October 9, 2008.
• The initial rate of interest for required reserve balances will be the average targeted federal funds rate over the reserve maintenance period less 10 basis points.
• The interest rate for excess balances will be the lowest targeted federal funds rate during the reserve maintenance period less 75 basis points.
• Interest will be paid on correspondent balances, which does not have to be passed back to the respondent.
• The transitional adjustments to reserve requirements when two or more institutions merge or consolidate have been eliminated.
• The Board is eliminating the “imputed reserve requirement adjustment” and the “marginal reserve requirement adjustment,” used to calculate earnings credits on clearing balances.
• Please submit your comments to CUNA by November 1, 2008. Comments are due to Federal Reserve Board by November 21, 2008

Please feel free to send your comments to CUNA SVP & Deputy General Counsel Mary Dunn at mdunn@cuna.com or to Assistant General Counsel Lilly Thomas at lthomas@cuna.com; or mail them to Lilly c/o CUNA’s Regulatory Advocacy Department, 601 Pennsylvania Avenue, NW, South Building, Suite 600, Washington, D.C. 20004. Click here for a copy of the full rule.

BACKGROUND

The Federal Reserve Act imposes reserve requirements on certain types of deposits and other liabilities of depository institutions. Currently, reserve requirement ratios for “transaction accounts” are graduated between three and ten percent. Reserve requirement ratios for “nonpersonal time deposits” are zero percent.

Depository institutions must maintain required reserves in the form of a balance maintained in a non- interest bearing account at a Federal Reserve Bank or in the form of vault cash. Non-member banks could maintain required reserves in an account at a depository institution that itself maintained required reserve balances at a Federal Reserve Bank, known as a “pass-through account.”

The Financial Services Regulatory Relief Act of 2006 (Regulatory Relief Act) originally authorized the Federal Reserve to begin paying interest on balances held by or on behalf of depository institutions beginning October 1, 2011. The effective date was moved up to October 1, 2008, by the Emergency Economic Stabilization Act of 2008.

DISCUSSION

• The Reserve Banks will begin to pay interest on required reserve balances and excess reserve balances held by or on behalf of an eligible institution, effective October 9, 2008.
• Interest will be paid on average required reserve balances and average excess balances maintained over a reserve maintenance period. Interest will be calculated beginning with the biweekly reserve maintenance period ending October 22, 2008, and the weekly reserve maintenance period ending October 15, 2008.
• The initial rate of interest for required reserve balances will be the average targeted federal funds rate over the reserve maintenance period less 10 basis points.
• The interest rate for excess balances will be the lowest targeted federal funds rate during the reserve maintenance period less 75 basis points. The Board may adjust this formula in light of experience and evolving market conditions.
• The Reserve Banks will pay interest on correspondent balances, even if the pass-through correspondent for the eligible institution is itself not an eligible institution.
• A pass-though correspondent may pass back to its respondent the interest paid on balances held on behalf of that respondent, but is not required to do so.
• When a pass-through correspondent passes back to its respondent interest paid on balances held on behalf of that respondent, that payment will not be considered a “payment of interest on a demand deposit” for purposes of Regulation Q, which prohibits certain institutions from paying interest on demand deposits.
• The Board is eliminating the provisions in Regulation D that phase-in the higher reserve amount when two or more institutions merge or consolidate.
• Clearing balances, held at Reserve Banks to meet contractual clearing balance agreements, earn credits that can be used to cover the cost of Federal Reserve services, called “earnings credits.”
• The Board is eliminating two adjustments to the calculation of earnings credits, which previously had been made to ensure that respondents viewed balances at the Federal Reserve Banks and at a private-sector correspondent as equivalent.
• The first eliminated earnings credit adjustment, called the “imputed reserve requirement adjustment” imputes a 10% reserve requirement ratio to the Reserve Banks. The “marginal reserve requirement adjustment,” which adjusts for the fact that the respondent could deduct from its reservable liabilities the balance held at a correspondent, but not at the Reserve Bank, is also eliminated.
• Additionally, the Reserve Banks are no longer entitled to an adjustment for cash items and will now have to recover 100% of float costs.

ANNUAL ADJUSTMENT FOR RESERVE REQUIREMENTS

• The Board also published the annual adjustments for reserve requirements and reporting requirements for depository institutions, which is available here.
• For 2009, the first $10.3 million in net transaction accounts will be exempt from the reserve requirements. This figure is the reservable liabilities exemption adjustment. Transaction account amounts over $10.3 million up to and including $44.4 million will have a three percent reserve requirement. Transaction account amounts over $44.4 million will have a ten percent reserve requirement. This figure, $44.4 million, is known as the low reserve tranche.
• The chart below identifies a depository institution’s reporting requirements for 2009. Weekly and quarterly reports are filed on FR 2900, called the Report of Transaction Accounts, Other Deposits and Vault Cash. Annual reporting is filed on FR 2910a – Total Deposits and Reserveable Liabilities.

• The following compliance dates will apply for the new requirements. For depository institutions that report weekly, the low reserve tranche adjustment and the reservable liabilities exemption adjustment will apply to the 14-day reserve computation period that begins Tuesday, December 2, 2008, and the corresponding 14 day reserve maintenance period that begins Thursday, January 1, 2009. For institutions that report quarterly, the low reserve tranche adjustment and the reservable liabilities exemption adjustment will apply to the 7-day reserve computation period that begins Tuesday, December 16, 2008, and the corresponding reserve maintenance period that begins Thursday, January 15, 2009. For all depository institutions, the deposit cutoff level, the reserve requirement exemption amount, and the reduced reporting limit will be used to determine reporting frequency at which a depository institution submits deposit reports effective in either June or September 2009.

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