E6-17737. Reserve Requirements of Depository Institutions

AGENCY:

Board of Governors of the Federal Reserve System.

ACTION:

Final rule.

SUMMARY:

The Board is amending Regulation D, Reserve Requirements of Depository Institutions, to reflect the annual indexing of the reserve requirement exemption amount and the low reserve tranche for 2007. The Regulation D amendments set the amount of total reservable liabilities of each depository institution that is subject to a zero percent reserve requirement in 2007 at $8.5 million, up from $7.8 million in 2006. This amount is known as the reserve requirement exemption amount. The Regulation D amendment also sets the amount of net transaction accounts at each depository institution that is subject to a three percent reserve requirement in 2007 at $45.8 million, down from $48.3 million in 2006. This amount is known as the low reserve tranche. The adjustments to both of these amounts are derived using statutory formulas specified in the Federal Reserve Act.

The Board is also announcing changes in two other amounts, the nonexempt deposit cutoff level and the reduced reporting limit, that are used to determine the frequency at which depository institutions must submit deposit reports.

DATES:

Effective date: November 24, 2006.

Compliance dates: For depository institutions that report deposit data weekly, the new low reserve tranche and reserve requirement exemption amount will apply to the fourteen-day reserve computation period that begins Tuesday, November 21, 2006, and the corresponding fourteen-day reserve maintenance period that begins Thursday, December 21, 2006. For depository institutions that report deposit data quarterly, the new low reserve tranche and reserve requirement exemption amount will apply to the seven-day reserve computation period that begins Tuesday, December 19, 2006, and the corresponding seven-day reserve maintenance period that begins Thursday, January 18, 2007. For all depository institutions, these new values of the nonexempt deposit cutoff level, the reserve requirement exemption amount, and the reduced reporting limit will be used to determine the frequency at which a depository institution submits deposit reports effective in either June or September 2007.

FOR FURTHER INFORMATION CONTACT:

Heatherun Allison, Senior Counsel (202/452-3565), Legal Division, or Margaret Gillis, Financial Analyst (202/452-3139), Division of Monetary Affairs; for user of Telecommunications Device for the Deaf (TDD) only, contact (202/263-4869); Board of Governors of the Federal Reserve System, 20th and C Streets, NW., Washington, DC 20551.

SUPPLEMENTARY INFORMATION:

Section 19(b)(2) of the Federal Reserve Act (12 U.S.C. 461(b)(2)) requires each depository institution to maintain reserves against its transaction accounts and nonpersonal time deposits, as prescribed by Board regulations, for the purpose of implementing monetary policy. Section 11(a)(2) of the Federal Reserve Act (12 U.S.C. 248(a)(2)) authorizes the Board to require reports of liabilities and assets from depository institutions to enable the Board to conduct monetary policy. The Board's actions with respect to each of these provisions are discussed in turn below.

1. Reserve Requirements

Pursuant to section 19(b) of the Federal Reserve Act (Act), transaction account balances maintained at each depository institution are subject to reserve requirement ratios of zero, three, or ten percent. Section 19(b)(11)(A) of the Act (12 U.S.C. 461(b)(11)(A)) provides that a zero percent reserve requirement shall apply at each depository institution to total reservable liabilities that do not exceed a certain amount, known as the reserve requirement exemption amount. Section 19(b)(11)(B) provides that, before December 31 of each year, the Board shall issue a regulation adjusting the reserve requirement exemption amount for the next calendar year if total reservable liabilities held at all depository institutions increase from one year to the next. No adjustment is made to the reserve requirement exemption amount if total reservable liabilities held at all depository institutions should decrease during the applicable time period. The Act requires the percentage increase in the reserve requirement exemption amount to be 80 percent of the increase in total reservable liabilities of all depository institutions over the one-year period that ends on the June 30 prior to the adjustment.

Total reservable liabilities of all depository institutions grew by 10.4 percent (from $3,361.8 billion to $3,712.7 billion) between June 30, 2005, and June 30, 2006. Accordingly, the Board is amending Regulation D to increase the reserve requirement exemption amount by $0.7 million, from $7.8 million for 2006 to $8.5 million for 2007.^[1]

Pursuant to Section 19(b)(2) of the Act (12 U.S.C. 461(b)(2)), transaction account balances maintained at each depository institution over the reserve requirement exemption amount and up to a certain amount, known as the low reserve tranche, are subject to a three percent reserve requirement. Transaction account balances over the low reserve tranche are subject to a ten percent reserve requirement. Section 19(b)(2) also provides that, before December 31 of each year, the Board shall issue a regulation adjusting the low reserve tranche for the next calendar year. The Act requires the adjustment in the low reserve tranche to be 80 percent of the percentage increase or decrease in total transaction accounts of all depository institutions over the one-year period that ends on the June 30 prior to the adjustment.

Currently, the low reserve tranche is $48.3 million. Net transaction accounts of all depository institutions declined 6.4 percent (from $714.9 billion to $669.1 billion) between June 30, 2005 and June 30, 2006. Accordingly, the Board is amending Regulation D (12 CFR part 204) to decrease the low reserve tranche for net transaction accounts by $2.5 million, from $48.3 million for 2006 to $45.8 million for 2007.

For depository institutions that file deposit reports weekly, the new low reserve tranche and reserve requirement exemption amount will be effective for the fourteen-day reserve computation period beginning Tuesday, November 21, 2006, and for the corresponding fourteen-day reserve maintenance period beginning Thursday, December 21, 2006. For depository institutions that report quarterly, the new low reserve tranche and reserve requirement exemption amount will be effective for the seven-day reserve computation period beginning Tuesday, December 19, 2006, and for the corresponding seven-day reserve maintenance period beginning Thursday, January 18, 2007.

2. Deposit Reports

Section 11(b)(2) of the Federal Reserve Act authorizes the Board to require depository institutions to file reports of their liabilities and assets as the Board may determine to be necessary or desirable to enable it to discharge its responsibility to monitor and control the monetary and credit aggregates. The Board screens depository institutions each year and assigns them to one of four deposit reporting panels (weekly reporters, quarterly reporters, annual reporters, or nonreporters). The panel assignment for annual reporters is effective in June of the screening year; the panel assignment for weekly and quarterly reporters is effective in September of the screening year.

In order to ease reporting burden, the Board permits smaller depository institutions to submit deposit reports less frequently than larger depository institutions. In the past, the Board used the level of a depository institution's total deposits as one of the measures for determining the frequency at which a depository institution files deposit reports. With the elimination of M3, the Board announced in July 2006 that it would use a measure of deposits based on M2 instead of total deposits. That measure of deposits is the sum of total transaction accounts, savings deposits, and small time deposits.^[2]

The Board permits depository institutions with net transaction accounts above the reserve requirement exemption amount but with a sum of total transaction accounts, savings deposits, and small time deposits below a specified level (the “nonexempt deposit cutoff”) to report deposit data quarterly. The Board requires certain large depository institutions to report weekly regardless of the level of their net transaction accounts if the sum of total transaction accounts, savings deposits, and small time deposits exceeds a specified level (the “reduced reporting limit”). The nonexempt deposit cutoff level and the reduced reporting limit are adjusted annually, by an amount equal to 80 percent of the increase, if any, in the sum of total transaction accounts, savings deposits, and small time deposits of all depository institutions over the one-year period that ends on the June 30 prior to the adjustment. In the past, the Board has adjusted the nonexempt deposit cutoff level and the reduced reporting limit above their indexed levels as a part of its triennial review of the reports of deposit.

From June 30, 2005 to June 30, 2006, the sum of total transaction accounts, savings deposits, and small time deposits at all depository institutions increased 4.8 percent (from $5,598.0 billion to $5,867.1 billion). Accordingly, the Board is adjusting the nonexempt deposit cutoff level to $207.7 million for 2007. The Board is also adjusting the reduced reporting limit to $1.163 billion for 2007.^[3]

Beginning in September 2007, the boundaries of the four deposit reporting panels will be defined as follows. Those depository institutions with net transaction accounts over $8.5 million (the reserve requirement exemption amount) or with the sum of total transaction accounts, savings deposits, and small time deposits greater than or equal to $1.163 billion (the reduced reporting limit) are subject to detailed reporting, and must file a Report of Transaction Accounts, Other Deposits and Vault Cash (FR 2900 report) either weekly or quarterly. Of this group, those with the sum of total transaction accounts, savings deposits, and small time deposits greater than or equal to $207.7 million (the nonexempt deposit cutoff level) are required to file the FR 2900 report each week, while those with the sum of total transaction accounts, savings deposits, and small time deposits less than $207.7 million are required to file the FR 2900 report each quarter. Those depository institutions with net transaction accounts less than or equal to $8.5 million (the reserve requirement exemption amount) and with the sum of total transaction accounts, savings deposits, and small time deposits less than $1.163 billion (the reduced reporting limit) are eligible for reduced reporting, and must either file a deposit report annually or not at all. Of this group, those with total deposits greater than $8.5 million (but less than $1.163 billion) are required to file the Annual Report of Deposits and Reservable Liabilities (FR 2910a) report annually, while those with total deposits less than or equal to $8.5 million are not required to file a deposit report. A depository institution that adjusts reported values on its FR 2910a report in order to qualify for reduced reporting will be shifted to an FR 2900 reporting panel.

Notice and Regulatory Flexibility Act. The provisions of 5 U.S.C. 553(b) relating to notice of proposed rulemaking have not been followed in connection with the adoption of these amendments. The amendments involve expected, ministerial adjustments prescribed by statute and by the Board's policy concerning reporting practices. The adjustments in the reserve requirement exemption amount, the low reserve tranche, the nonexempt deposit cutoff level, and the reduced reporting limit serve to reduce regulatory burdens on depository institutions. Accordingly, the Board finds good cause for determining, and so determines, that notice in accordance with 5 U.S.C. 553(b) is unnecessary. Consequently, the provisions of the Regulatory Flexibility Act, 5 U.S.C. 601, do not apply to these amendments.

List of Subjects in 12 CFR Part 204

• Banks, banking
• Reporting and recordkeeping requirements

For the reasons set forth in the preamble, the Board is amending 12 CFR part 204 as follows:

PART 204—RESERVE REQUIREMENTS OF DEPOSITORY INSTITUTIONS (REGULATION D)

1. The authority citation for part 204 continues to read as follows:

Authority: 12 U.S.C. 248(a), 248(c), 371a, 461, 601, 611, and 3105.

2. Section 204.9 is revised to read as follows:

§ 204.9

Reserve requirement ratios.

The following reserve requirement ratios are prescribed for all depository institutions, banking Edge and agreement corporations, and United States branches and agencies of foreign banks:

Category	Reserve requirement
Net transaction accounts:
$0 to $8.5 million	0 percent of amount.
Over $8.5 million and up to $45.8 million	3 percent of amount.
Over $45.8 million	$1,119,000 plus 10 percent of amount over $45.8 million.
Nonpersonal time deposits	0 percent.
Eurocurrency liabilities	0 percent.

By order of the Board of Governors of the Federal Reserve System, October 18, 2006.

Jennifer J. Johnson,

Secretary of the Board.

Footnotes

1.  Consistent with Board practice, the low reserve tranche and reserve requirement exemption amounts have been rounded to the nearest $0.1 million.

2.  This measure also includes ineligible acceptances and obligations issued by affiliates maturing in less than seven days.

3.  Consistent with Board practice, the nonexempt deposit cutoff level has been rounded to the nearest $0.1 million, and the reduced reporting limit has been rounded to the nearest $1 million.