This will allow them to raise rates simply by paying interest on reserves and not require them to first ‘unwind’ their portfolio as was the case in Japan.
Press Release
May 20 — The Federal Reserve Board on Wednesday announced the approval of final amendments to Regulation D (Reserve Requirements of Depository Institutions) to liberalize the types of transfers consumers can make from savings deposits and to make it easier for community banks that use correspondent banks to receive interest on excess balances held at Federal Reserve Banks.
The amendments would also ensure that correspondents that are not eligible to receive interest on their own balances at Reserve Banks pass back to their respondents any interest earned on required reserve balances held on behalf of those respondents. The Board is also making other clarifying changes to Regulation D and Regulation I (Issue and Cancellation of Federal Reserve Bank Capital Stock).
The Board has revised Regulation D’s restrictions on the types and number of transfers and withdrawals that may be made from savings deposits. The final amendments increase from three to six the permissible monthly number of transfers or withdrawals from savings deposits by check, debit card, or similar order payable to third parties. Technological advancements have eliminated any rational basis for the distinction between transfers by these means and other types of pre-authorized or automatic transfers subject to the six-per-month limitation.
The Board also approved final amendments to Regulation D to authorize the establishment of excess balance accounts at Federal Reserve Banks. Excess balance accounts are limited-purpose accounts for maintaining excess balances of one or more institutions that are eligible to earn interest on their Federal Reserve balances. Each participant in an excess balance account will designate an institution to act as agent (which may be the participant’s current pass-through correspondent) for purposes of managing the account. The Board is authorizing excess balance accounts to alleviate pressures on correspondent-respondent business relationships in the current unusual financial market environment, which has led some respondents to prefer holding their excess balances in an account at the Federal Reserve, rather than selling them through a correspondent in the federal funds market. A correspondent could hold its respondents’ excess balances in its own account at the Federal Reserve Bank; however, doing so may adversely affect the correspondent’s regulatory leverage ratio. As market conditions evolve, the Board will evaluate the continuing need for excess balance accounts.
In October 2008, the Board adopted an interim final rule amending Regulation D that directed Federal Reserve Banks to pay interest on balances held by eligible institutions in accounts at Reserve Banks. The final rule revises those provisions as they apply to balances of respondents maintained by “ineligible” pass-through correspondents–that is, entities such as nondepository institutions that serve as correspondents but are not eligible to receive interest on the balances they maintain on their own behalf at the Federal Reserve. Specifically, the final rule provides that only required reserve balances maintained in an ineligible correspondent’s account on behalf of its respondents will receive interest. Ineligible correspondents will be required to pass back that interest to their respondents. Both required reserve and excess balances in the account of an eligible pass-through correspondent will continue to receive interest and those correspondents are permitted, but not required, to pass back that interest to their respondents.
The final amendments to Regulations D and I will become effective 30 days after publication in the Federal Register. Excess balance accounts will be available for the reserve maintenance period beginning July 2, 2009.
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