The Board of Governors of the Federal Reserve System (the “Board”) issued a notice of proposed rulemaking and request for public comment on February 7, 2008, with respect to proposed amendments to the Board’s Regulation D and Regulation I to reflect certain provisions of the Financial Services Regulatory Relief Act of 2006 (the “Reg Relief Act”) and to otherwise clarify, reorganize and modernize existing provisions of the regulations.

The public comment period ends on March 28, 2008.

Regulation D

Section 19 of the Federal Reserve Act (the “FRA”) imposes reserve requirements on transaction and other liability accounts of depository institutions “for the purpose of implementing monetary policy.” The required reserves may be maintained in an account at a Federal Reserve Bank and in vault cash. The provisions of section 19 of the FRA are implemented by the Board’s Regulation D.

The Board is proposing two substantive amendments to Regulation D.

  • Pass-Through Arrangements. Prior to the Reg Relief Act, only nonmember banks were permitted to maintain required reserves in accounts at depository institutions that themselves maintained required reserve at a Federal Reserve Bank. In order to implement section 603 of the Reg Relief Act, the Board is proposing to amend section 204.2(l) of Regulation D to reflect the new authority for member banks to enter into such pass-through arrangements.
  • Savings Deposit Transfers. Regulation D distinguishes between “transaction accounts,” which require reserves, and “savings deposits,” which do not require reserves, based on the convenience of transfer from the account to third parties or the depositor. Regulation D currently limits the number of “convenient” transfers from a savings deposit to not more than six per month, and only three of those six transfers may be transfers “by check, debit card or similar order made by the depositor and payable to third parties.” This “six-three distinction” is considered burdensome by the private sector and is inconsistent with developing electronic payment technologies. As a result, the Board is proposing to amend the “savings deposit” definition in Regulation D to provide a simpler six per month rule for all types of “convenient” transfers.

The Board is proposing additional amendments designed to reflect prior staff guidance.

  • Vault Cash. Regulation D currently defines “vault cash” as United States currency and coin owned or held by a depository institution that may, at any time, be used to satisfy depositors’ claims. The Board is proposing to amend the definition of “vault cash” to reflect prior staff guidance relating to when currency and coin held at an alternate physical location may be considered vault cash for purposes of meeting reserve requirements. The proposed rule confirms that currency and coin at an alternate physical location qualifies as “vault cash” if:

(1) the institution at all times retains full rights of ownership in and to the currency and coin;

(2) the currency and coin is at all times booked as an asset of the institution;

(3) no other depository institution claims the currency and coin at the alternate physical location as vault cash to satisfy its reserve requirements;

(4) the alternate physical location is reasonably nearby such that the institution can recall the currency and coin from the location at 10:00 a.m. and, relying solely on ground transportation, receive it the same day not later than 4 p.m. at a location at which its depositors may make cash withdrawals; and

(5) the institution has in place a written cash delivery plan, and written contractual arrangements necessary to implement the plan, that demonstrates the currency and coin can be so recalled. 

  • Time Deposit. The Board is proposing to amend the definition of “time deposit” to clarify that withdrawals cannot be made more frequently than every seven days unless a penalty of at least seven days’ simple interest is charged on amounts so withdrawn.

Additionally, the Board is proposing to discontinue the use of the undefined terms “required chargefree band” and “required clearing balance allowance” and replace these terms with the defined terms “clearing balance allowance” and “contractual clearing balance,” respectively. This amendment is proposed to better reflect current usage.

Among other nonsubstantive amendments, the Board is proposing to reorganize the reporting, location, computation and maintenance provisions of Regulation D.

Regulation I

The Board is proposing to amend Regulation I to provide that a depository institution is located, for purposes of Federal Reserve Bank accounts and stock, at the location specified in the institution’s articles of incorporation or as specified by the institution’s primary regulator. This proposed amendment is designed to reflect the fact that an institution may move its location and that new location may not, thereafter, be reflected in the institution’s charter.

Conclusion

The proposed substantive amendments to Regulation D and Regulation I are designed to incorporate the relevant provisions of the Reg Relief Act and to modernize definitions to reflect existing burdens and developing technologies. Most importantly, the proposed amendments to Regulation D would affect all depository institutions currently subject to transaction account reserve requirements. If adopted, the proposed rules may reduce the level of reservable transaction account balances for all depository institutions because accounts permitting more than three but less than six transfers by check or debit card may qualify as nonreservable “savings deposits.”