Section 19 of the Federal Reserve Act (the Act) authorizes the Board of Governors of the Federal Reserve System (the Board) to impose reserve requirements on certain deposits and other liabilities of depository institutions for the purpose of implementing monetary policy. The Board’s Regulation D (Reserve Requirements of Depository Institutions, 12 CFR part 204) implements section 19 of the Act. Transaction account balances maintained at each depository institution are subject to reserve requirement ratios of zero, three, or ten percent, depending on the level of transaction accounts at that institution.

On October 11, the Board requested public comment on its proposed amendments to Regulation D to simplify the administration of reserve requirements. The proposed amendments would create a common two-week maintenance period for all depository institutions (eliminating the one-week maintenance period generally used by smaller institutions), create a penalty free band around reserve balance requirements in place of carryover and routine penalty waivers, discontinue as-of adjustments related to deposit revisions, replace all other as-of adjustments with direct compensation, and, somewhat more significantly, eliminate the contractual clearing balance program. Although the contractual clearing program would be eliminated, the Board does not anticipate that small depository institutions (those institutions with assets of $175 million or less) would be negatively affected because small depository institutions would receive explicit interest on excess balances instead of earnings credits on clearing balances. Small depository institutions could then use this explicit interest to pay for Reserve Bank priced services or for other purposes.

The proposed amendments are designed to reduce the administrative burdens and operational costs associated with reserve requirements for both depository institutions and the Federal Reserve. The Board is requesting comment on all aspects of the proposal. In connection with the proposed elimination of the contractual clearing balance program, the Board is requesting comment on several issues related to the methodology used for the Private Sector Adjustment Factor that is part of the pricing of Federal Reserve Bank services.

The Board proposes to eliminate the contractual clearing balance program and the use of as-of adjustments no earlier than the first quarter of 2012 and to implement a common reserves maintenance period and the penalty-free band around reserve balance requirements no earlier than the third quarter of 2012. The Board requests comment on whether the proposed effective dates are appropriate. The Board specifically seeks comment on the time that depository institutions will need to effect the changes in their systems to adapt to these changes and whether the cost of adapting to these changes will be material.

Proposed amendments to Regulation J (Collection of Checks and Other Items by Federal Reserve Banks and Funds Transfers through Fedwire) would eliminate references in Regulation J to "as-of adjustments," consistent with the proposed amendments to Regulation D, and make clarifications about the handling of checks and funds transfers sent to the Federal Reserve Banks.

To view the press release, click here.

For those seeking a broader understanding of the manner in which the Board currently administers Regulation D, it is recommended that they link to the Board’s Background and Overview sections of the proposal, which begin on page 2 and end on page 15. They may be found here.

For further information on the proposed changes to Regulation J, click here.