Simplified Reserve Requirements
by Donna Wilson, Credit and Risk Management Specialist
The current set of rules governing the administration of reserve requirements for depository institutions and Federal Reserve Banks is quite complex. These complexities have developed over time; for example, there are the rules governing as-of adjustments for check errors and FR2900 data revisions, as well as using an excess or deficient reserve balance in a future maintenance period. In addition, some depository institutions are on a 7-day maintenance period, but only report FR2900 data quarterly, while some depository institutions are on a 14-day maintenance period, but report FR2900 data weekly.
Given the various complexities that have developed over time, the Federal Reserve has recognized the need to simplify them and has identified four changes to the rules that will do so. These changes, or simplifications, will significantly reduce the complexity, administrative burden, and operational costs associated with reserve requirements. They will coincide with changes being made to Regulation D, which governs reserve requirements, and Regulation J, which relates to check collections, including references to as-of adjustments. Not only will these changes reduce the administration of reserve requirements, but they will also maintain the integrity of reserve requirements in the implementation of monetary policy.
The Simplifications
The four simplifications are:
- The contractual clearing balance program will end.
- Direct compensation will replace as-of adjustments.
- All depository institutions will have a common maintenance period.
- A reserve balance requirement band will replace carryover and routine waivers.
These four simplifications will be implemented in a phased-in approach. In April 2012, depository institutions received written communications about the first two changes to be implemented on July 12, 2012: the termination of contractual clearing balances and the elimination of the as-of adjustments. Additional communications will be sent out later this year on the common maintenance periods for all depository institutions and the reserve balance requirement band to replace carryover and routine waivers for deficiencies.
The Termination of Contractual Clearing Balances
Federal Reserve Banks will be ending the contractual clearing balance program on July 12, 2012. A contractual clearing balance is the amount a depository institution agrees to maintain in its Federal Reserve master account, which is in addition to its reserve requirement balance. Balances held under a contractual clearing balance generate earnings credits. The earnings credits are used to offset Federal Reserve Bank service charges. Operating Circular 1, Account Relationships, will be amended with the clearing balance legal agreement termination authority.
Since the implementation in 2008 of the Federal Reserve paying interest on required and excess reserve balances, clearing balances have declined. Unlike earnings credits, there are no restrictions on how institutions use the interest on reserves. Although the clearing balance program will be ending, any unused earnings credits will expire 12 months from issuance and will continue to be applied on a first-in, first-out basis.
Elimination of As-of Adjustments
As-of adjustments are memorandum items that are used to correct the reserve balance position of a depository institution. These adjustments are caused primarily by errors in processing check cash letters and incorrect FR2900 data reporting. The amount of the as-of adjustment is usually determined by the impact back to the day the error occurred, and it is applied in the calculation of the reserve/clearing position of a depository institution. Historically, the Federal Reserve Bank was in the best position to correct reporting and transaction-based errors and to process the as-of adjustment associated with the correction.
Starting with the maintenance period on July 12, 2012, the Federal Reserve will no longer issue as-of adjustments for FR2900 deposit revisions to correct for data reporting errors by the depository institution. However, in order to maintain the integrity and accuracy of monetary aggregate calculations, depository institutions will still be required to submit FR2900 deposit revisions. As-of adjustments to correct for transaction and Reserve Bank errors will be replaced with direct compensation. Compensation will be calculated using the daily average federal funds rate and will result in either a direct debit or credit entry to an institution’s Federal Reserve account. All operating circulars are being revised to remove references to as-of adjustments and, where appropriate, add terms and conditions of direct compensation.
Common Maintenance Period
Today, institutions are required to manage their required reserves over either a one- or two-week maintenance period. In early 2013, all institutions will use a two-week maintenance period. The common maintenance period simplifies the existing maintenance period structure and reduces administrative and operational costs for institutions by eliminating the need to change maintenance periods in association with changes in deposit reporting frequency. The two-week maintenance gives institutions that previously had a one-week maintenance period greater flexibility to meet their reserve requirement. It should be noted that the common maintenance period only affects how the institution meets its reserve requirement and will not affect an institution’s FR2900 deposit reporting frequency.
Reserve Balance Requirement Band
The final simplification is the creation of a reserve balance requirement band to replace a specific dollar amount to satisfy the reserve requirement and eliminate carryover and routine waivers for deficiencies. The current rules for carryover recognize the challenges with managing required reserves to a specific dollar amount. Carryover is the amount of excess (credit) or deficient (debit) balances that depository institutions are allowed to move to the next maintenance period. Institutions can use that carryover amount in meeting their reserve requirement in the next maintenance period by either holding additional balances or decreasing the amount held.
Routine waivers are waivers for deficiencies under $25.00. Other routine waivers include waivers that were given once every two years if a depository institution met certain criteria. At this time, the details regarding how the band will be determined have not been finalized; however, it is envisioned that the band will be applied in a similar manner as it is today for contractual clearing balances. If an institution’s average balance falls below the band, a penalty would be assessed for reserve deficiency; balances above the band will be treated as excess balance and subject to interest on excess reserves. More information will be provided as it becomes available.
Summary
These four changes will help to simplify the rules for reserve requirements: eliminating as-of adjustments and replacing them with direct compensation, ending the contractual clearing balance program, introducing a common maintenance period for all depository institutions, and implementing a reserve balance requirement band to replace carryover and routine waivers.
In early April 2012, written notice was sent out regarding the elimination of as-of adjustments and the termination of the contractual clearing balances. Information on the last two simplifications, the common maintenance periods for all depository institutions and the reserve balance requirement band, will be provided later in 2012.
Information will also be available on the Reserves Central Resource Center. For more information on the simplifications, see the Federal Reserve notice.
