Banking in the Ninth

Reserves Simplification Proposal

Simplifying Reserves Administration - December 2011

Published December 1, 2011  |  December 2011 issue

The Federal Reserve is proposing to simplify the rules governing the administration of reserve requirements in order to reduce the administrative and operational cost for both depository institutions and the Federal Reserve. These changes should reduce the burden on community banks. The Federal Reserve greatly values input from banks and the public more generally. We encourage you to comment on the Federal Register notice documenting the four proposed reserve simplifications. It was published for public comment on Oct. 18, 2011, with a 60-day comment period. We highlight the key changes below. If you want additional information, please call Jean Garrick (612-204-5862).

Proposed simplifications:

1. Create a common maintenance period for all depository institutions.
Currently, some depository institutions satisfy their reserve requirements on a one-week maintenance period while others satisfy their requirements on a two-week maintenance period. Managing the dual system imposes costs on depository institutions that switch between maintenance periods as well as on the Federal Reserve. Adopting a common two-week maintenance period would provide greater flexibility for depository institutions that currently have a one-week maintenance period.

2. Sunset the contractual clearing balance program.
The Federal Reserve pays interest on reserve balances. The ability to pay cash to depositories eliminates the need to provide earnings credits redeemable for Federal Reserve services. Earnings credits existing on the sunset date would remain in effect and would be allowed to be used over the following 52 weeks.

3. Create a “penalty-free band” around reserve requirements to replace carryover.
A “band“ of either a percentage or a dollar amount around each depository institution’s reserve requirement would be more straightforward than the current arrangement of carryover and routine waiving of deficiency fees for small or infrequent deficiencies. Only balances that fall outside the “band” would be considered either deficiencies or excesses. The proposed simpler calculation would allow interest on reserves payments to be made more quickly.

4. Replace as-of adjustments with “direct compensation.”
Explicit payments and charges are less administratively burdensome for depository institutions and the Federal Reserve than as-of adjustments. Eliminating transaction-based as-of adjustments and replacing them with direct compensation would allow the Federal Reserve to remedy transaction errors in a more timely manner. As-of adjustments resulting from deposit report revisions would be eliminated.