80 FR 35565 - Regulation D: Reserve Requirements for Depository Institutions

FEDERAL RESERVE SYSTEM

Federal Register Volume 80, Issue 119 (June 22, 2015)

Page Range		35565-35568
FR Document		2015-15238
The Board is amending Regulation D (Reserve Requirements of Depository Institutions) regarding the payment of interest on certain balances maintained at Federal Reserve Banks by or on behalf of eligible institutions. Specifically, the amendments permit interest payments on certain balances to be based on a daily rate rather than on a maintenance period average rate. The amendments should help to enhance the role of such rates of interest in moving the Federal funds rate into the target range established by the FOMC, particularly on occasions when changes in those rates do not coincide with the beginning of a maintenance period.
Federal Register, Volume 80 Issue 119 (Monday, June 22, 2015)
[Federal Register Volume 80, Number 119 (Monday, June 22, 2015)]
[Rules and Regulations]
[Pages 35565-35568]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2015-15238]



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                                                Federal Register
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having general applicability and legal effect, most of which are keyed 
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under 50 titles pursuant to 44 U.S.C. 1510.

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Federal Register / Vol. 80, No. 119 / Monday, June 22, 2015 / Rules 
and Regulations

[[Page 35565]]



FEDERAL RESERVE SYSTEM

12 CFR Part 204

[Docket No. R-1513; RIN 7100 AE-31]


Regulation D: Reserve Requirements for Depository Institutions

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Final rule.

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SUMMARY: The Board is amending Regulation D (Reserve Requirements of 
Depository Institutions) regarding the payment of interest on certain 
balances maintained at Federal Reserve Banks by or on behalf of 
eligible institutions. Specifically, the amendments permit interest 
payments on certain balances to be based on a daily rate rather than on 
a maintenance period average rate. The amendments should help to 
enhance the role of such rates of interest in moving the Federal funds 
rate into the target range established by the FOMC, particularly on 
occasions when changes in those rates do not coincide with the 
beginning of a maintenance period.

DATE: The final rule is effective July 23, 2015.

FOR FURTHER INFORMATION CONTACT: Sophia H. Allison, Special Counsel 
(202-452-3565), Legal Division, or Thomas R. Keating, Financial Analyst 
(202-973-7401), or Jeffrey W. Huther, Senior Economist (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. Statutory and Regulatory Background

    For monetary policy purposes, section 19 of the Federal Reserve Act 
(``the Act'') imposes reserve requirements on certain types of deposits 
and other liabilities of depository institutions. Regulation D, which 
implements section 19 of the Act, requires that a depository 
institution meet reserve requirements by holding cash in its vault, or 
if vault cash is insufficient, by maintaining a balance in an account 
at a Federal Reserve Bank (``Reserve Bank'').\1\ Section 19 also 
provides that balances maintained by or on behalf of certain 
institutions in an account at a Reserve Bank may receive earnings to be 
paid by the Reserve Bank at least once each quarter, at a rate or rates 
not to exceed the general level of short-term interest rates. 
Institutions that are eligible to receive earnings on their balances 
held at Reserve Banks (``eligible institutions'') include depository 
institutions and certain other institutions.\2\ Section 19 also 
provides that the Board may prescribe regulations concerning the 
payment of earnings on balances at a Reserve Bank.\3\
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    \1\ 12 CFR 204.5(a)(1).
    \2\ Section 19(b)(1)(A) defines ``depository institution'' as 
any insured bank as defined in section 3 of the Federal Deposit 
Insurance Act or any bank which is eligible to make application to 
become an insured bank under section 5 of such Act; any mutual 
savings bank as defined in section 3 of the Federal Deposit 
Insurance Act or any bank which is eligible to make application to 
become an insured bank under section 5 of such Act; any savings bank 
as defined in section 3 of the Federal Deposit Insurance Act or any 
bank which is eligible to make application to become an insured bank 
under section 5 of such Act; any insured credit union as defined in 
section 101 of the Federal Credit Union Act or any credit union 
which is eligible to make application to become an insured credit 
union pursuant to section 201 of such Act; any member as defined in 
section 2 of the Federal Home Loan Bank Act; [and] any savings 
association (as defined in section 3 of the Federal Deposit 
Insurance Act) which is an insured depository institution (as 
defined in such Act) or is eligible to apply to become an insured 
depository institution under the Federal Deposit Insurance Act. See 
12 U.S.C. 461(b)(1)(A). Eligible institution also includes any trust 
company, corporation organized under section 25A or having an 
agreement with the Board under section 25, or any branch or agency 
of a foreign bank (as defined in section 1(b) of the International 
Banking Act of 1978). Federal Reserve Act section 19(b)(12)(C), 12 
U.S.C. 461(b)(12)(C), see 12 CFR 204.2(y) (definition of ``eligible 
institution'').
    \3\ See Federal Reserve Act section 19(b)(12), 12 U.S.C. 
461(b)(12).
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    Regulation D currently requires Reserve Banks to pay interest on 
balances up to the top of the penalty-free band at a rate of \1/4\ 
percent, and on excess balances above that level at a rate of \1/4\ 
percent.\4\
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    \4\ See Sec.  204.10(b)(1)-(2) of Regulation D, 12 CFR 
204.10(b)(1)-(2). Regulation D defines ``top of the penalty free 
band'' to mean an amount equal to an institution's reserve balance 
requirement plus an amount that is the greater of 10 percent of the 
institution's reserve balance requirement or $50,000. Section 
204.2(gg) of Regulation D, 12 CFR 204.2(gg). Regulation D defines 
``excess balances'' to mean the average balance maintained in an 
account at a Federal Reserve Bank by or on behalf of an institution 
over a reserve maintenance period that exceeds the top of the 
penalty free band. Section 204.2(z) of Regulation D, 12 CFR 
204.2(z).
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    For purposes of computing the interest to be paid, an average of 
relevant balances over a 14-day maintenance period is multiplied by an 
average of the applicable interest rate in effect for each day of a 
maintenance period. For example, if the interest rate on excess 
balances were to increase in the middle of a maintenance period from 25 
basis points (\1/4\ percent) to 50 basis points (\1/2\ percent), the 
interest on excess balances for that maintenance period would be the 
average excess balances maintained over the maintenance period 
multiplied by the average excess balance rate, i.e., 37.5 basis points. 
As a result, the full effect of the increase in the excess balance rate 
to 50 basis points may not show through to market rates until some 
number of days following the announcement of the new rate.

II. Request for Public Comment and Summary of Comments Received

    The Board published its request for public comment on proposed 
amendments to Regulation D in the Federal Register on April 16, 
2015.\5\ Under the proposal, Regulation D would define an ``IORR \6\ 
rate'' and would calculate interest on balances maintained up to the 
top of the penalty-free band as the average IORR rate over a 
maintenance period multiplied by the average balances maintained up to 
the top of the penalty-free band over the maintenance period. 
Regulation D would also define an ``IOER \7\ rate'' and, for 
institutions that maintain balances in excess of the top of the 
penalty-free band on average over the maintenance period, would 
calculate interest as daily total balances multiplied by the daily

[[Page 35566]]

IOER rate, reduced by an adjustment to avoid double payment of interest 
on balances up to the top of the penalty-free band.
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    \5\ 80 FR 20448 (Apr. 16, 2015).
    \6\ I.e., ``interest on required reserves.'' ``Required 
reserves'' is a term that historically referred to the amount that 
an institution must maintain on average over a maintenance period to 
satisfy its reserve balance requirement. Because Regulation D 
currently provides for a penalty-free band around an institution's 
reserve balance requirement, an institution's balances up to the top 
of the penalty-free band is the current equivalent of what was 
previously meant by ``required reserves.''
    \7\ I.e., ``interest on excess reserves.''
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    The Board stated in the proposal that the purpose of this proposed 
amendment was to allow the full effect of an increase in the IOER rate 
to show through to the daily level of short-term market rates when an 
IOER rate change does not coincide with the beginning of a maintenance 
period. The Board proposed other amendments to Regulation D to conform 
certain provisions to current practices as well as to improve 
organization and make other clarifications.

Summary of Public Comments Received

    The Board received four comments on the proposal, three from 
depository institutions and one from a trade association. One commenter 
expressed general support for the proposal without additional 
elaboration. Another commenter expressed support for the proposal 
because the proposal would improve the Federal Reserve System's 
responsiveness to economic trends and new market data. A third 
commenter expressed support for the proposal generally but recommended 
that depository institutions receive account statements that would 
provide itemization of the balances and calculations of IORR and IOER 
under Regulation D as amended. Itemization of interest payments along 
with information on balances held will be available to depository 
institutions through the Reserves Central-Reserves Account 
Administration application.\8\
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    \8\ See https://www.frbservices.org/centralbank/reservescentral/index.html.
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    A fourth commenter did not address the matters raised by the 
proposal but expressed concerns more generally regarding the role of 
the payment of interest on excess balances at Reserve Banks and the 
interaction between those payments, the Federal Reserve Payment System 
Risk policy for measuring daylight overdrafts, and the Liquidity 
Coverage Ratio (LCR) treatment of federal funds and financial 
institution deposits. The commenter also requested that the Federal 
Reserve clearly articulate the policy use and long-term goals of 
interest bearing reserves and conduct a policy review in two years. The 
commenter suggested the current level of interest paid on excess 
balances encourages banks to remove funds from the federal funds 
market, thereby reducing volumes and liquidity in inter-bank lending 
markets. In addition, the commenter argued that the payment of interest 
on reserves along with the Federal Reserve's access to transaction-
level data on borrowing by individual depository institutions in the 
federal funds and Eurodollar markets provides a competitive advantage 
to Reserve Banks over private sector correspondent institutions.
    The Board believes that the payment of interest on excess balances 
plays an important role in the implementation of monetary policy by 
contributing to the Federal Reserve's ability to influence the level of 
the federal funds rate and other short-term interest rates. As clearly 
articulated by the Federal Open Market Committee (FOMC) in its Policy 
Normalization Principles and Plans, the Federal Reserve intends to use 
the payment of interest on excess balances to move the federal funds 
rate into the target range established by the FOMC.\9\ The purpose of 
adjusting the rate of interest paid on reserves is not in any way to 
provide the Federal Reserve with a competitive advantage in the 
payments system. Moreover, the proposed changes to Regulation D 
underscore and support the monetary policy role that these rates serve. 
The Board believes that the proposed change in the methodology for the 
calculation of interest on balances at Reserve Banks as set forth in 
the final rule will have no significant impact on the issues noted by 
the commenter. Furthermore, as has been the case in the past, the role 
of interest payments on excess balances will continue to be publicly 
articulated by the Board and FOMC, such as through FOMC statements and 
minutes, Board and FOMC policy statements, and testimony and speeches 
by Federal Reserve officials.
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    \9\ See http://www.federalreserve.gov/newsevents/press/monetary/20140917c.htm.
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III. Section by Section Analysis

Section 204.10(a) General

    The Board proposed to amend Sec.  204.10(a) to incorporate certain 
provisions of current Sec.  204.10(b) and to add a new provision 
describing the amount of a ``balance'' in an account at a Reserve Bank 
for purposes of the section. The Board received no comments on this 
provision and is adopting it as proposed.

Section 204.10(b) Payment of Interest

    The Board proposed to amend Sec.  204.10(b)(1) and (2) to set forth 
the amount of interest to be paid on balances of institutions that, on 
average over the maintenance period, maintain balances in excess of the 
top of the penalty-free band. These two subsections provide for 
interest at the IORR rate, interest at the IOER rate, the adjustment to 
interest at the IOER rate, and the minimum interest amount. The Board 
also proposed to amend Sec.  204.10(b)(3) to provide that interest for 
institutions that, on average over the maintenance period, maintain 
balances that are equal to or lower than the top of the penalty-free 
band is the average IORR rate over the maintenance period multiplied by 
the average balances maintained over the maintenance period. The Board 
proposed to amend Sec.  204.10(b)(4) to provide for interest on term 
deposits and proposed to add Sec.  204.10(b)(5) to specify the IORR 
rate and the IOER rate. The Board did not receive any comments on these 
specific provisions and is adopting them as proposed.

Section 204.10(c) Pass-Through Balances

    The Board proposed to amend Sec.  204.10(c) to change the word 
``shall'' to ``may'' in the second sentence to conform the paragraph 
with the provisions of Sec.  204.10(b). The Board did not receive any 
comments on this provision and is adopting it as proposed.

Section 204.10(d) Excess Balance Accounts

    The Board proposed to amend Sec.  204.10(d)(5) to specify that 
interest on excess balance accounts is the amount equal to the IOER 
rate in effect each day multiplied by the total balances maintained on 
that day for each day of the maintenance period. The Board received no 
comments on this specific provision and is adopting it as proposed.

Section 204.10(f) Procedure for Determination of Rates

    The Board proposed to amend Regulation D to add a new provision, 
proposed Sec.  204.10(f), to govern the procedure for determination of 
rates. The Board received no comments on this provision and is adopting 
it as proposed.

IV. Solicitation of Comments Regarding Use of ``Plain Language''

    Section 722 of the Gramm-Leach-Bliley Act of 1999 requires the 
Board to use ``plain language'' in all final rules. 12 U.S.C. 1408. The 
Board sought to present the proposed amendments in a simple and 
straightforward manner. The Board received no comments on whether the 
proposed rule was clearly stated and effectively organized or on how 
the Board might make the proposed text easier to understand.

[[Page 35567]]

V. Final Regulatory Flexibility Analysis

    An initial regulatory flexibility analysis (IRFA) was included in 
the Board's proposed rule in accordance with the Regulatory Flexibility 
Act (RFA) (5 U.S.C. 601 et seq.). In the IRFA, the Board specifically 
solicited comment on whether the proposed rule would have a significant 
economic impact on a substantial number of small entities. The Board 
received no comments in response to its request for comments on its 
IRFA.
    Section 4 of the RFA requires an agency to provide a final 
regulatory flexibility analysis with a final rule. Banks and other 
depository institutions are considered ``small'' if they have less than 
$550 million in assets. For the reasons stated below, the Board 
believes that the final rule will not have a significant impact on a 
substantial number of small entities.
    1. Statement of the objectives of the proposal. The Board is 
publishing final amendments to Regulation D in order to facilitate the 
conduct of monetary policy. Section 19 of the Act was enacted to impose 
reserve requirements on certain deposits and other liabilities of 
depository institutions for monetary policy purposes. The Board is 
publishing final amendments to Regulation D to facilitate the 
transmission of monetary policy through the rates of interest paid on 
balances of eligible institutions at Reserve Banks by permitting 
interest payments on certain balances to be based on a daily rate 
rather than on a maintenance period average rate. The Board believes 
that these amendments should help to enhance the role of such rates of 
interest in moving the federal funds rate into the target range 
established by the FOMC. The more effective implementation of monetary 
policy that the rule supports benefits all entities, including small 
entities. The potential costs for eligible institutions associated with 
the amendments are low because the amendments do not require any 
changes to their existing processes and operations. Moreover, the 
amendments are not likely to harm small eligible institutions or other 
eligible institutions because they will continue to receive earnings on 
their balances at Reserve Banks.
    2. Small entities affected by the proposal. The final rule will 
affect all eligible institutions that maintain balances to satisfy 
reserve balance requirements or excess balances at a Reserve Bank. The 
Board estimates that there are currently approximately 8,725 eligible 
institutions that maintain such balances. The Board estimates that 
approximately 6,950 of these institutions could be considered small 
entities with assets of $550 million or less.
    3. Other federal rules. The Board has not identified any other 
federal rules that duplicate, overlap, or conflict with the final rule.
    4. Significant alternatives to the proposed amendments. The Board 
believes that the final rule does not impose any burden on depository 
institutions of any size. The final rule relates to payment of earnings 
on balances of eligible institutions and does not provide for any new 
or additional reporting or other obligations.

VI. Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act (PRA) of 1995 (44 
U.S.C. 3506; 5 CFR part 1320 Appendix A.1), the Board reviewed the 
final rule under the authority delegated to the Board by the Office of 
Management and Budget (OMB). The final rule contains no requirements 
subject to the PRA.

List of Subjects in 12 CFR Part 204

    Banks, Banking, Reporting and recordkeeping requirements.

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

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

0
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.


0
2. Section 204.10 is amended by revising paragraphs (a), (b), (c), and 
(d)(5), and adding paragraph (f) to read as follows:


Sec.  204.10  Payment of interest on balances.

    (a) General. (1) Except as provided in paragraph (c) of this 
section, interest on balances maintained at Federal Reserve Banks by or 
on behalf of an eligible institution shall be established by the Board 
in accordance with this section, at a rate or rates not to exceed the 
general level of short-term interest rates.
    (2) For purposes of this section, the amount of a ``balance'' in an 
account maintained by or on behalf of an eligible institution at a 
Federal Reserve Bank is determined at the close of the Federal Reserve 
Bank's business day.
    (3) For purposes of this section, ``short-term interest rates'' are 
rates on obligations with maturities of no more than one year, such as 
the primary credit rate and rates on term federal funds, term 
repurchase agreements, commercial paper, term Eurodollar deposits, and 
other similar instruments.
    (4) The payment of interest on balances under this section shall be 
subject to such other terms and conditions as the Board may prescribe.
    (b) Payment of interest. Interest on balances maintained at Federal 
Reserve Banks by or on behalf of an eligible institution is established 
as set forth in paragraphs (b)(1) through (4) of this section. The 
rates for IORR and IOER are set forth in paragraph (b)(5) of this 
section.
    (1) For institutions that maintain balances that are, on average 
over the maintenance period, in excess of the top of the penalty-free 
band, interest is:
    (i) The amount equal to the average IORR rate over the maintenance 
period multiplied by the average balance up to the top of the penalty-
free band maintained over the maintenance period; plus
    (ii)(A) The amount equal to the IOER rate in effect each day 
multiplied by the total balances maintained on that day for each day of 
the maintenance period; minus
    (B) The amount equal to the average IOER rate over the maintenance 
period multiplied by the average balance up to the top of the penalty-
free band maintained over the maintenance period.
    (2) The interest amount under paragraph (b)(1) of this section 
shall not be less than an amount equal to the amount specified in 
paragraph (b)(1)(i) of this section.
    (3) For institutions that maintain balances that are, on average 
over the maintenance period, equal to or lower than the top of the 
penalty-free band, interest is the amount equal to the average IORR 
rate over the maintenance period multiplied by the average balance 
maintained over the maintenance period.
    (4) For term deposits, interest is:
    (i) The amount equal to the principal amount of the term deposit 
multiplied by a rate specified in advance by the Board, in light of 
existing short-term market rates, to maintain the federal funds rate at 
a level consistent with monetary policy objectives; or
    (ii) The amount equal to the principal amount of the term deposit 
multiplied by a rate determined by the auction through which such term 
deposits are offered.
    (5) The rates for IORR and IOER are:

[[Page 35568]]



------------------------------------------------------------------------
                                         Rate
                                      (percent)         Effective
------------------------------------------------------------------------
IORR................................     \1/4\   12/18/2008
IOER................................     \1/4\   12/18/2008
------------------------------------------------------------------------

    (c) Pass-through balances. A pass-through correspondent that is an 
eligible institution may pass back to its respondent interest paid on 
balances maintained to satisfy a reserve balance requirement of that 
respondent. In the case of balances maintained by a pass-through 
correspondent that is not an eligible institution, a Reserve Bank may 
pay interest only on the balances maintained to satisfy a reserve 
balance requirement of one or more respondents up to the top of the 
penalty-free band, and the correspondent shall pass back to its 
respondents interest paid on balances in the correspondent's account.
    (d) * * *
    (5) Interest on balances of eligible institutions maintained in an 
excess balance account is the amount equal to the IOER rate in effect 
each day multiplied by the total balances maintained on that day for 
each day of the maintenance period.
* * * * *
    (f) Procedure for determination of rates. The Board anticipates 
that notice and public participation with respect to changes in the 
rate or rates of interest to be paid under this section will generally 
be impracticable, unnecessary, contrary to the public interest, or 
otherwise not required in the public interest, and that there will 
generally be reason and good cause in the public interest why the 
effective date should not be deferred for 30 days. The reason or 
reasons in such cases are generally expected to include that such 
notice, public participation, or deferment of effective date would 
prevent the action from becoming effective as promptly as necessary in 
the public interest, would permit speculators or others to reap unfair 
profits or to interfere with the Board's actions taken with a view to 
accommodating commerce and business and with regard to their bearing 
upon the general credit situation of the country, would provoke other 
consequences contrary to the public interest, would not aid the persons 
affected, or would otherwise serve no useful purpose.

    By order of the Board of Governors of the Federal Reserve 
System, June 17, 2015.
Robert deV. Frierson,
Secretary of the Board.
[FR Doc. 2015-15238 Filed 6-19-15; 8:45 am]
 BILLING CODE 6210-01-P
35565

Rules and Regulations Federal Register
Vol. 80, No. 119

Monday, June 22, 2015

This section of the FEDERAL REGISTER liabilities of depository institutions. For purposes of computing the
contains regulatory documents having general Regulation D, which implements section interest to be paid, an average of
applicability and legal effect, most of which 19 of the Act, requires that a depository relevant balances over a 14-day
are keyed to and codified in the Code of institution meet reserve requirements by maintenance period is multiplied by an
Federal Regulations, which is published under holding cash in its vault, or if vault cash average of the applicable interest rate in
50 titles pursuant to 44 U.S.C. 1510.
is insufficient, by maintaining a balance effect for each day of a maintenance
The Code of Federal Regulations is sold by in an account at a Federal Reserve Bank period. For example, if the interest rate
the Superintendent of Documents. Prices of (‘‘Reserve Bank’’).1 Section 19 also on excess balances were to increase in
new books are listed in the first FEDERAL provides that balances maintained by or the middle of a maintenance period
REGISTER issue of each week. on behalf of certain institutions in an from 25 basis points (1⁄4 percent) to 50
account at a Reserve Bank may receive basis points (1⁄2 percent), the interest on
earnings to be paid by the Reserve Bank excess balances for that maintenance
FEDERAL RESERVE SYSTEM at least once each quarter, at a rate or period would be the average excess
rates not to exceed the general level of balances maintained over the
12 CFR Part 204 short-term interest rates. Institutions maintenance period multiplied by the
[Docket No. R–1513; RIN 7100 AE–31] that are eligible to receive earnings on average excess balance rate, i.e., 37.5
their balances held at Reserve Banks basis points. As a result, the full effect
Regulation D: Reserve Requirements (‘‘eligible institutions’’) include of the increase in the excess balance rate
for Depository Institutions depository institutions and certain other to 50 basis points may not show through
institutions.2 Section 19 also provides to market rates until some number of
AGENCY: Board of Governors of the that the Board may prescribe regulations days following the announcement of the
Federal Reserve System. concerning the payment of earnings on new rate.
ACTION: Final rule. balances at a Reserve Bank.3
Regulation D currently requires II. Request for Public Comment and
SUMMARY: The Board is amending Reserve Banks to pay interest on Summary of Comments Received
Regulation D (Reserve Requirements of balances up to the top of the penalty- The Board published its request for
Depository Institutions) regarding the free band at a rate of 1⁄4 percent, and on public comment on proposed
payment of interest on certain balances excess balances above that level at a rate amendments to Regulation D in the
maintained at Federal Reserve Banks by of 1⁄4 percent.4 Federal Register on April 16, 2015.5
or on behalf of eligible institutions. Under the proposal, Regulation D would
Specifically, the amendments permit 1 12 CFR 204.5(a)(1). define an ‘‘IORR 6 rate’’ and would
interest payments on certain balances to 2 Section 19(b)(1)(A) defines ‘‘depository calculate interest on balances
be based on a daily rate rather than on institution’’ as any insured bank as defined in
section 3 of the Federal Deposit Insurance Act or maintained up to the top of the penalty-
a maintenance period average rate. The any bank which is eligible to make application to free band as the average IORR rate over
amendments should help to enhance the become an insured bank under section 5 of such a maintenance period multiplied by the
role of such rates of interest in moving Act; any mutual savings bank as defined in section average balances maintained up to the
the Federal funds rate into the target 3 of the Federal Deposit Insurance Act or any bank
which is eligible to make application to become an top of the penalty-free band over the
range established by the FOMC, insured bank under section 5 of such Act; any maintenance period. Regulation D
particularly on occasions when changes savings bank as defined in section 3 of the Federal would also define an ‘‘IOER 7 rate’’ and,
in those rates do not coincide with the Deposit Insurance Act or any bank which is eligible
for institutions that maintain balances
beginning of a maintenance period. to make application to become an insured bank
under section 5 of such Act; any insured credit in excess of the top of the penalty-free
DATE: The final rule is effective July 23, union as defined in section 101 of the Federal band on average over the maintenance
2015. Credit Union Act or any credit union which is period, would calculate interest as daily
eligible to make application to become an insured
FOR FURTHER INFORMATION CONTACT: credit union pursuant to section 201 of such Act;
total balances multiplied by the daily
Sophia H. Allison, Special Counsel any member as defined in section 2 of the Federal
(202–452–3565), Legal Division, or Home Loan Bank Act; [and] any savings association amount that is the greater of 10 percent of the
(as defined in section 3 of the Federal Deposit institution’s reserve balance requirement or
Thomas R. Keating, Financial Analyst $50,000. Section 204.2(gg) of Regulation D, 12 CFR
Insurance Act) which is an insured depository
(202–973–7401), or Jeffrey W. Huther, institution (as defined in such Act) or is eligible to 204.2(gg). Regulation D defines ‘‘excess balances’’ to
Senior Economist (202/452–3139), apply to become an insured depository institution mean the average balance maintained in an account
Division of Monetary Affairs; for users under the Federal Deposit Insurance Act. See 12 at a Federal Reserve Bank by or on behalf of an
U.S.C. 461(b)(1)(A). Eligible institution also institution over a reserve maintenance period that
of Telecommunications Device for the exceeds the top of the penalty free band. Section
includes any trust company, corporation organized
Deaf (TDD) only, contact 202–263–4869; under section 25A or having an agreement with the 204.2(z) of Regulation D, 12 CFR 204.2(z).
Board of Governors of the Federal Board under section 25, or any branch or agency of 5 80 FR 20448 (Apr. 16, 2015).

Reserve System, 20th and C Streets a foreign bank (as defined in section 1(b) of the 6 I.e., ‘‘interest on required reserves.’’ ‘‘Required

NW., Washington, DC 20551. International Banking Act of 1978). Federal Reserve reserves’’ is a term that historically referred to the
Act section 19(b)(12)(C), 12 U.S.C. 461(b)(12)(C), see amount that an institution must maintain on
SUPPLEMENTARY INFORMATION: 12 CFR 204.2(y) (definition of ‘‘eligible
tkelley on DSK3SPTVN1PROD with RULES

average over a maintenance period to satisfy its
institution’’). reserve balance requirement. Because Regulation D
I. Statutory and Regulatory Background 3 See Federal Reserve Act section 19(b)(12), 12 currently provides for a penalty-free band around
For monetary policy purposes, section U.S.C. 461(b)(12). an institution’s reserve balance requirement, an
4 See § 204.10(b)(1)–(2) of Regulation D, 12 CFR institution’s balances up to the top of the penalty-
19 of the Federal Reserve Act (‘‘the 204.10(b)(1)–(2). Regulation D defines ‘‘top of the free band is the current equivalent of what was
Act’’) imposes reserve requirements on penalty free band’’ to mean an amount equal to an previously meant by ‘‘required reserves.’’
certain types of deposits and other institution’s reserve balance requirement plus an 7 I.e., ‘‘interest on excess reserves.’’

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35566 Federal Register / Vol. 80, No. 119 / Monday, June 22, 2015 / Rules and Regulations

IOER rate, reduced by an adjustment to Federal Reserve’s access to transaction- adjustment to interest at the IOER rate,
avoid double payment of interest on level data on borrowing by individual and the minimum interest amount. The
balances up to the top of the penalty- depository institutions in the federal Board also proposed to amend
free band. funds and Eurodollar markets provides § 204.10(b)(3) to provide that interest for
The Board stated in the proposal that a competitive advantage to Reserve institutions that, on average over the
the purpose of this proposed Banks over private sector correspondent maintenance period, maintain balances
amendment was to allow the full effect institutions. that are equal to or lower than the top
of an increase in the IOER rate to show The Board believes that the payment of the penalty-free band is the average
through to the daily level of short-term of interest on excess balances plays an IORR rate over the maintenance period
market rates when an IOER rate change important role in the implementation of multiplied by the average balances
does not coincide with the beginning of monetary policy by contributing to the maintained over the maintenance
a maintenance period. The Board Federal Reserve’s ability to influence period. The Board proposed to amend
proposed other amendments to the level of the federal funds rate and § 204.10(b)(4) to provide for interest on
Regulation D to conform certain other short-term interest rates. As term deposits and proposed to add
provisions to current practices as well clearly articulated by the Federal Open § 204.10(b)(5) to specify the IORR rate
as to improve organization and make Market Committee (FOMC) in its Policy and the IOER rate. The Board did not
other clarifications. Normalization Principles and Plans, the receive any comments on these specific
Federal Reserve intends to use the provisions and is adopting them as
Summary of Public Comments Received
payment of interest on excess balances proposed.
The Board received four comments on to move the federal funds rate into the
the proposal, three from depository target range established by the FOMC.9 Section 204.10(c) Pass-Through
institutions and one from a trade The purpose of adjusting the rate of Balances
association. One commenter expressed interest paid on reserves is not in any
general support for the proposal without way to provide the Federal Reserve with The Board proposed to amend
additional elaboration. Another a competitive advantage in the § 204.10(c) to change the word ‘‘shall’’
commenter expressed support for the payments system. Moreover, the to ‘‘may’’ in the second sentence to
proposal because the proposal would proposed changes to Regulation D conform the paragraph with the
improve the Federal Reserve System’s underscore and support the monetary provisions of § 204.10(b). The Board did
responsiveness to economic trends and policy role that these rates serve. The not receive any comments on this
new market data. A third commenter Board believes that the proposed change provision and is adopting it as
expressed support for the proposal in the methodology for the calculation proposed.
generally but recommended that of interest on balances at Reserve Banks Section 204.10(d) Excess Balance
depository institutions receive account as set forth in the final rule will have Accounts
statements that would provide no significant impact on the issues
itemization of the balances and noted by the commenter. Furthermore, The Board proposed to amend
calculations of IORR and IOER under as has been the case in the past, the role § 204.10(d)(5) to specify that interest on
Regulation D as amended. Itemization of of interest payments on excess balances excess balance accounts is the amount
interest payments along with will continue to be publicly articulated equal to the IOER rate in effect each day
information on balances held will be by the Board and FOMC, such as multiplied by the total balances
available to depository institutions through FOMC statements and minutes, maintained on that day for each day of
through the Reserves Central-Reserves Board and FOMC policy statements, and the maintenance period. The Board
Account Administration application.8 testimony and speeches by Federal received no comments on this specific
A fourth commenter did not address Reserve officials. provision and is adopting it as
the matters raised by the proposal but proposed.
III. Section by Section Analysis
expressed concerns more generally
regarding the role of the payment of Section 204.10(a) General Section 204.10(f) Procedure for
interest on excess balances at Reserve Determination of Rates
The Board proposed to amend
Banks and the interaction between those § 204.10(a) to incorporate certain The Board proposed to amend
payments, the Federal Reserve Payment provisions of current § 204.10(b) and to Regulation D to add a new provision,
System Risk policy for measuring add a new provision describing the proposed § 204.10(f), to govern the
daylight overdrafts, and the Liquidity amount of a ‘‘balance’’ in an account at procedure for determination of rates.
Coverage Ratio (LCR) treatment of a Reserve Bank for purposes of the The Board received no comments on
federal funds and financial institution section. The Board received no this provision and is adopting it as
deposits. The commenter also requested comments on this provision and is proposed.
that the Federal Reserve clearly adopting it as proposed.
articulate the policy use and long-term IV. Solicitation of Comments Regarding
goals of interest bearing reserves and Section 204.10(b) Payment of Interest Use of ‘‘Plain Language’’
conduct a policy review in two years. The Board proposed to amend
The commenter suggested the current § 204.10(b)(1) and (2) to set forth the Section 722 of the Gramm-Leach-
level of interest paid on excess balances amount of interest to be paid on Bliley Act of 1999 requires the Board to
encourages banks to remove funds from balances of institutions that, on average use ‘‘plain language’’ in all final rules.
the federal funds market, thereby over the maintenance period, maintain 12 U.S.C. 1408. The Board sought to
reducing volumes and liquidity in inter- balances in excess of the top of the present the proposed amendments in a
tkelley on DSK3SPTVN1PROD with RULES

bank lending markets. In addition, the penalty-free band. These two simple and straightforward manner. The
commenter argued that the payment of subsections provide for interest at the Board received no comments on
interest on reserves along with the IORR rate, interest at the IOER rate, the whether the proposed rule was clearly
stated and effectively organized or on
8 See https://www.frbservices.org/centralbank/ 9 See http://www.federalreserve.gov/newsevents/ how the Board might make the proposed
reservescentral/index.html. press/monetary/20140917c.htm. text easier to understand.

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Document Created: 2018-02-22 11:14:00
Document Modified: 2018-02-22 11:14:00
Category		Regulatory Information
Collection		Federal Register
sudoc Class		AE 2.7: GS 4.107: AE 2.106:
Publisher		Office of the Federal Register, National Archives and Records Administration
Section		Rules and Regulations
Action		Final rule.
Dates		The final rule is effective July 23, 2015.
Contact		Sophia H. Allison, Special Counsel (202-452-3565), Legal Division, or Thomas R. Keating, Financial Analyst (202-973-7401), or Jeffrey W. Huther, Senior Economist (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.
FR Citation		80 FR 35565
CFR Associated		Banks; Banking and Reporting and Recordkeeping Requirements