CUNA Regulatory Comment Call
January 7, 2010
Establishment of Term Deposits at Federal Reserve Banks
- The Federal Reserve Board (Fed) has issued a proposed rule that would amend Regulation D, Reserve Requirements of Depository Institutions, to authorize the establishment of term deposits.
- Term deposits would be similar to certificates of deposit and earn interest.
- The proposal would permit institutions that are eligible to receive earnings on balances held at Reserve Banks-"eligible institutions"-to hold term deposits.
- An institution's term deposits would be maintained in a Reserve Bank account separate from its master account and excess balance account.
- Term deposits could not be applied toward an institution's required reserve balance or contractual clearing balance. In addition, the deposits would not be available to clear payments or to cover daylight or overnight overdrafts.
- However, term deposits could be used as collateral to borrow from the Fed's discount window.
- The Fed's stated objective in proposing term deposits is to address inflation by encouraging more financial institutions to maintain balances at the Fed, rather than releasing the funds into the general circulation.
- Comments are due to the Fed by February 1, 2010. Please submit your comments to CUNA by January 27.
Please feel free to fax your responses to CUNA at (202) 638-7052, or e-mail them to Senior Vice President and Deputy General Counsel Mary Dunn at firstname.lastname@example.org and to Regulatory Counsel Luke Martone at email@example.com. You may also contact us at (800) 356-9655, ext. 6743, if you have questions. Click here for the proposed rule in the Federal Register.
The Federal Reserve Act authorizes "eligible institutions"-including credit unions-to earn interest on balances held at Reserve Banks. In 2008, the Fed amended Regulation D to direct Reserve Banks to pay interest on the required reserve balances of eligible institutions as well as on balances held in excess of the required reserve. The Fed currently pays an interest rate of 25 basis points on these balances.
BRIEF DESCRIPTION OF THE PROPOSED RULEMAKING
The Fed's rule would amend Regulation D to authorize the establishment of term deposits. These deposits would be similar to certificates of deposit and would be held at the Reserve Bank at which the eligible institution maintains its master account, or its correspondent's master account-if applicable. Term deposits would be separate and distinct from balances held in the institution's master account and excess balance account.
Term deposits would not satisfy required reserve balances or contractual clearing balances. In addition, term deposits would not be available to clear payments or cover daylight or overnight overdrafts. However, participating institutions would be able to use term deposits as collateral to borrow from the Fed's discount window. The Fed has indicated that term deposits would likely be available as collateral for any discount window advances that the institution might request, including for daylight overdraft purposes.
The interest rate for term deposits could be set through an auction mechanism, administratively, or by a formula. Regardless of the method the Fed ultimately chooses, the rate could not exceed the general level of "short-term interest rates." Short-term interest rates would be defined as the primary rate on obligations with maturities of up to one year in which eligible institutions may invest, such as term federal funds and term purchase agreements.
Under the proposed auction process, the Fed would conduct regularly scheduled auctions, offering a fixed quantity of term deposits with relatively short maturities. Eligible institutions would indicate both the interest rate they would accept and the amount of money they would deposit at that rate. Term deposit maturities would not exceed one year and would likely range from one to six months. An institution would be permitted to hold term deposits of more than one maturity simultaneously, but would not be permitted to withdraw deposits prior to maturity.
QUESTIONS TO CONSIDER REGARDING THE PROPOSED RULEMAKING
- As proposed, is credit union participation in term deposits likely? Why or why not? If it is likely, what size credit unions are most likely to participate?
- Is it necessary to place any limitations on the maximum amount of term deposits that an institution may hold or on the maximum portion of a single offering that an institution may win at auction?
- What maturity or maturities would you recommend as appropriate for term deposits, and should more than one maturity be offered?
- Are there basic terms and structures for term deposits other than those described above that should be considered?
- The proposal includes a possible auction mechanism for obtaining term deposits. Would smaller credit unions be able to compete with larger financial institutions under such a process?
- Any other questions or concerns regarding the proposed rule?
Eric Richard General Counsel (202) 508-6742 firstname.lastname@example.org |
Mary Mitchell Dunn SVP & Deputy General Counsel (202) 508-6736 email@example.com
Jeffrey Bloch Assistant General Counsel (202) 508-6732 firstname.lastname@example.org
Luke Martone Senior Regulatory Counsel (202) 508-6743 email@example.com