E8-30471. Reserve Requirements of Depository Institutions

AGENCY:

Board of Governors of the Federal Reserve System.

ACTION:

Interim final rule.

SUMMARY:

The Board is amending Regulation D, Reserve Requirements of Depository Institutions, to revise the rate for earnings on required reserve balances and excess balances of eligible institutions and to provide that the rates may be revised by the Board from time to time.

DATES:

The amendments to Regulation D are effective on December 23, 2008. The applicability date for the revised rates for earnings on required reserve balances and excess balances is December 18, 2008.

FOR FURTHER INFORMATION CONTACT:

Sophia H. Allison, Senior Counsel (202/452-3565), or Dena L. Milligan, Staff Attorney (202/452-3900), Legal Division, or Margaret Gillis DeBoer, Chief, Monetary and Reserve Analysis Section, (202/452-3139), Division of Monetary Affairs; for users 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:

I. Background

On October 9, 2008, the Board published in the Federal Register an interim final rule amending Regulation D (Reserve Requirements of Depository Institutions) to direct the Federal Reserve Banks to pay interest on balances held at Reserve Banks to satisfy reserve requirements (“required reserve balances”) and balances held at Reserve Banks in excess of required reserve balances and clearing balances (“excess balances”) (73 FR 59482) (Oct. 9, 2008). At that time, the Board announced two formulas by which the amount of earnings payable on required reserve balances and excess balances would be calculated. For required reserve balances, the Board initially set the rate of interest at the average federal funds rate target established by the Federal Open Market Committee (“FOMC”) over the reserve maintenance period less 10 basis points. For excess balances, the Board initially set the rate of interest at the lowest federal funds rate target established by the FOMC in effect during the reserve maintenance period less 75 basis points. The Board stated that it may adjust the formula for the interest rate on excess balances in light of experience and evolving market conditions.

Since that time, the Board has adjusted the formula for the rate of interest for excess balances twice (73 FR 65506 (Nov. 4, 2008), 73 FR 67713 (Nov. 17, 2008)). When the Board adjusted the formula for the interest rate for excess balances the second time, the Board also adjusted the formula for the rate of interest on required reserve balances (73 FR 67713) (Nov. 17, 2008). The formula for the rate of interest on required reserve balances currently is equal to the average target federal funds rate over the maintenance period, and the formula for the rate of interest on excess balances currently is equal to the lowest target federal funds rate over the maintenance period.

In light of weak economic conditions, the FOMC decided, on December 16, 2008, to specify a target range for the federal funds rate as the objective for open market operations, rather than a single target rate. As a result, the previous rate formulas for interest on required reserve balances and excess balances were no longer workable. The Board has accordingly judged that setting the rate on required reserve balances and on excess balances at 1/4 percent (0.25 percent) will best support the Federal Reserve's objectives. These revised rates of interest will be applicable with the reserve maintenance periods beginning on Thursday, December 18, 2008.

The Board will continue to evaluate the appropriate level of the rates of interest for required reserve balances and for excess balances in light of evolving market conditions, and will make further adjustments as needed. In order to provide needed flexibility in making these adjustments to the rates of interest, the Board is amending Regulation D to provide that the rates of interest on required reserve balances and excess balances may be rates as determined by the Board from time to time, rather than the rates stated in revised sections 204.10(b)(1) and 204.10(b)(2) of Regulation D.

Administrative Procedure Act

The Board has adopted this rule in light of, and to help address, the continuing unusual strains in the financial markets. This rule provides tools for carrying out monetary policy more effectively. The Board believes that any delay in implementing the rule would be contrary to the public interest because any delay would hamper the Board's ability to make timely rate adjustments in order to address existing credit and liquidity pressures in the financial markets and future developments in these markets. Delay in implementing changes to the rates of interest payable on required reserve balances and excess balances could retard the effective implementation of monetary policy. Therefore, in accordance with the Administrative Procedure Act (“APA”) section 553(b) (5 U.S.C. 553(b)), the Board finds, for good cause, that providing notice and an opportunity for public comment before the effective date of this rule would be contrary to the public interest. In addition, pursuant to APA section 553(d) (5 U.S.C. 553(d)), the Board finds good cause for making this amendment effective without 30 days advance publication.

Regulatory Flexibility Act

The Regulatory Flexibility Act (the “RFA”) requires an agency that is issuing a final rule to prepare and make available a regulatory flexibility analysis that describes the impact of the final rule on small entities. 5 U.S.C. 603(a). The RFA provides that an agency is not required to prepare and publish a regulatory flexibility analysis if the agency certifies that the final rule will not have a significant economic impact on a substantial number of small entities. 5 U.S.C. 605(b).

Pursuant to section 605(b) of the RFA, the Board certifies that this interim final rule will not have a significant adverse economic impact on a substantial number of small entities. The rule continues the payment of interest on certain balances held by eligible institutions at the Federal Reserve Banks and will benefit all institutions, small and large, that receive such interest. There are no new reporting, recordkeeping, or other compliance requirements associated with this rule.

Paperwork Reduction Act

In accordance with the Paperwork Reduction Act (44 U.S.C. 3506; 5 CFR Part 1320 Appendix A.1), the Board has reviewed the interim final rule under authority delegated to the Board by the Office of Management and Budget. The rule contains no collections of information pursuant to the Paperwork Reduction Act.

List of Subjects in 12 CFR Part 204

• Banks
• Banking
• Reporting and recordkeeping requirements

Authority and Issuance

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. In § 204.10, paragraph (b) is revised to read as follows:

§ 204.10

Payment of interest on balances.

* * * * *

(b) Except as provided in paragraph (c) of this section, Federal Reserve Banks shall pay interest at the following rates—

(1) For required reserve balances, at 1/4 percent;

(2) For excess balances, at 1/4 percent; or

(3) For required reserve balances or excess balances, at any other rate or rates as determined by the Board from time to time.

* * * * *

By order of the Board of Governors of the Federal Reserve System, December 18, 2008.

Jennifer J. Johnson,

Secretary of the Board.