Recall that back in Oct. 2008, the
Federal Reserve (Fed) adopted a rule that
allowed interest to be paid on reserves
held at the Fed. The problem with that rule
as it existed at that time is that it missed
some key components critical to bankers'
banks such as Pacific Coast Bankers'
Bank (PCBB). The idea of paying interest
on excess reserves was a good one from 80k feet, but down in
the weeds, Regulation D forced correspondent banks that
passed along such reserves through the proverbial meat grinder.
Basically, Reg. D required correspondent banks to report
customer balances left with the Fed on their own balance sheet,
which artificially ballooned assets and resulted in a strain on the
leverage capital ratio.
This problem has now been solved, as the Fed has approved
final amendments to Reg. D making it much simpler for
community banks that use correspondent banks to capture this
value, without straining the correspondent banks themselves. It
took 231 days from the date interest was allowed to be paid, a
visit to Washington DC to see the Board of Governors, lots of
Q&A sessions and a bunch of behind-the-scenes legal and
technical wrangling/discussion by Fed staff to get this done, but it
is finally here and it rolls out on July 2. This really was a
collaborative effort by bankers' banks, banking associations and
the Fed to fix something that was obviously broken and we thank
one and all for their tireless efforts to assist community bankers.
What this all boils down to is that beginning in July, community
banks can leave money as usual with PCBB and as your agent,
PCBB will automatically reinvest that money on your behalf with
either the Fed in excess balances (currently at 25bp) or in
Federal Funds (rate can vary), based on your wishes and the
structure of the program itself. In short, this ensures community
banks get the highest possible rate for overnight funds available
in the market on any given day. That is great news for community
banks and we are very pleased to say we will be announcing a
revised program in the next week or so that will provide more
details well in advance of the July 2 launch date.
For the technical folks reading today, the new ruling will no
longer have excess balances reported in the FR 2900 report
under "Report of Transaction Accounts, Other Deposits, and
Vault Cash" as was done in the past. Instead, community banks
will report excess balances as "Balances due from a Federal
Reserve Bank." The new ruling clearly identifies balances in an
excess account as a liability of the Fed to the participants alone
and not to the agent, so any credit risk under the structure has
also been eliminated.
Another piece of good news as part of the new ruling - when
PCBB passes back to our community bank customers interest
paid on balances held on your behalf, the payment is not
considered a payment of interest on a demand deposit for
purposes of Reg. Q.
Finally, for the really technical types, the new ruling also
resulted in the Fed making adjustments to its clearing balance
policy that it deemed no longer necessary. Changes included:
eliminating the "imputed reserve requirement adjustment" to
earnings credits, eliminating the "marginal reserve requirement
adjustment" and eliminating the adjustment for cash items in the
process of collection applied when measuring float costs.
There is some new paperwork that will be required by the Fed
to make this happen and some minor nuances to the process,
but don't worry about any of it because we'll help ease that
burden all the way through.
In addition to these changes, the Fed lifted restrictions on
consumer savings account transactions to allow 6 withdrawals or
transfers from a savings account in the form of a check.
Previously, only 3 checks each month were allowed.
We close by saying thank you to the Federal Reserve for
easing the process and allowing community banks to receive this
interest. It certainly helps level the playing field with the large
national banks.