Banking in the Ninth

Reserves Simplification Status Update

Simplifying Reserves Administration - September 2012

Published September 1, 2012  | September 2012 issue

The Federal Reserve is in the process of simplifying the administration of reserve requirements. The Federal Reserve eliminated as-of adjustments and contractual clearing balances in early July of this year. At the end of January of next year, we will complete two other important changes. In this article, we will highlight the upcoming changes and respond to questions we have received or expect to receive regarding the changes.

1. Creating a common two-week maintenance period
Currently, some depository institutions (DIs) satisfy their reserve requirements on a one-week maintenance period, while others satisfy their requirements on a two-week maintenance period. This change will eliminate the one-week maintenance period and move all DIs to a two-week period beginning January 24, 2013. This change will not alter the reporting frequency or the method of reporting the FR 2900 report.

2. Creating a penalty-free band around reserve balance requirements in place of carryover and routine penalty waivers
Some DIs rely on the carryover provision to meet their reserve requirements. This will change going forward, and DIs should pay particular attention to the new structure. The carryover provision—which allows a small amount of a reserve deficiency or excess to be carried into the next maintenance period—will be eliminated and replaced with a penalty-free band that will give institutions similar flexibility. A penalty-free band is a range on both sides of a reserve balance requirement that is equal to the greater of $50,000 or 10 percent of an institution’s reserve balance requirement. A DI that maintains balances above its reserve balance requirement, but within the penalty-free band, will be remunerated at the interest rate paid on balances maintained to satisfy reserve balance requirements. Balances maintained above the top of the penalty-free band will be remunerated at the interest rate paid on excess balances. The change to a band will allow the payment of interest to be accelerated.

Any delays in the January 24, 2013, implementation date will be announced no later than November 1, 2012. If you have any questions, please contact Jean Garrick at 612-204-5862.