US Bank Reserve Requirements and Regulations

In the US, banks are required to hold a certain percentage of their deposits in reserve, rather than lending them out. This reserve requirement is set by the Federal Reserve.

The reserve requirement is currently set at 10% for most depository institutions. This means that for every $100 deposited into a bank, $10 must be held in reserve.

Banks are also subject to capital requirements, which dictate the minimum amount of capital they must hold in relation to their assets. This is to ensure that banks have enough capital to absorb potential losses.

The Federal Reserve uses a combination of reserve requirements and capital requirements to regulate banks and maintain financial stability.

The history of US Bank reserve requirements dates back to the 1930s, when the Federal Reserve first implemented reserve requirements to regulate the money supply.

In 1936, the Federal Reserve Board set reserve requirements at 7.5% for member banks, which was a significant increase from the previous requirement of 3%.

Reserve requirements were raised to 8% in 1937 and remained at that level until 1942, when they were temporarily suspended due to World War II.

After the war, reserve requirements returned to 8% in 1947 and remained at that level until 1959, when they were increased to 14%.

The maximum reserve requirement was set at 14% in 1962, where it remained until 1980, when it was lowered to 10%.

The Federal Reserve has maintained a reserve requirement of 10% since 1980, with some minor adjustments over the years.

The reserve requirement exemption for depository institutions with less than $10 million in deposits was introduced in 1968.

In 1994, the Federal Reserve Board exempted depository institutions with less than $50 million in deposits from reserve requirements.

The exemption was further expanded in 2010 to include depository institutions with less than $9.5 billion in deposits, but was later repealed in 2011.

The Federal Reserve Act authorizes the Board to establish reserve requirements within specified ranges for purposes of implementing monetary policy on certain types of deposits and other liabilities of depository institutions.

The Board may impose reserve requirements on transaction accounts, nonpersonal time deposits, and Eurocurrency liabilities. The dollar amount of a depository institution's reserve requirement is determined by applying the reserve requirement ratios specified in the Board's Regulation D to an institution's reservable liabilities.

Prior to the change effective March 26, 2020, reserve requirement ratios on net transactions accounts differed based on the amount of net transactions accounts at the depository institution. A certain amount of net transaction accounts, known as the "reserve requirement exemption amount", was subject to a reserve requirement ratio of zero percent.

The Board may also impose a supplemental reserve requirement on every depository institution of not more than 4 percent of its total transaction accounts, but there are currently no supplemental reserve requirements imposed under this section.

Regulation D Requirements are a set of rules that govern the reserve requirements of depository institutions. These requirements are outlined in Regulation D, which is enforced by the Federal Reserve System.

An Edge Corporation or Agreement Corporation must comply with Regulation D in the same manner as a member bank. This means they are subject to the same reserve requirements and rules as a member bank.

Some financial institutions are exempt from Regulation D, including those that issue IBF time deposits meeting certain requirements. These institutions do not have to comply with the reserve requirements of Regulation D.

The early withdrawal penalty rule applies to affiliates of a depository institution as well as the institution itself. This means that if an affiliate purchases a CD issued by the depository institution, it is considered an early withdrawal and is subject to the penalty rule.

Required reserves are computed by applying reserve requirement ratios to net transaction accounts, nonpersonal time deposits, and Eurocurrency liabilities. The reserve requirement ratios are as follows:

Deposits at foreign branches of depository institutions are guaranteed by a domestic office in some cases.

The Federal Reserve Act establishes reserve requirements, but Section 19 of the Act does not apply to deposits payable only at an office outside the United States and the District of Columbia.

The Board rule from 1918 states that reserve requirements do not apply to foreign branches, and this rule is still in effect.

Deposits in foreign branches are exempt from reserve requirements only if the depositor is entitled to demand payment only outside the United States.

The exemption is intended to enable foreign branches of U.S. depository institutions to compete with banks in foreign countries.

A customer who makes a deposit at a foreign branch assumes the risk of restrictions on withdrawals imposed by the foreign country.

However, if the deposit is guaranteed by a promise of payment at a U.S. office, the depositor enjoys substantially the same rights as if the deposit had been made in a U.S. office.

To prevent evasions of Regulation D, guaranteed foreign-branch deposits are subject to the reserve requirements of the regulation.

The reserve requirement is a crucial tool for central banks to manage a nation's money supply. It's essentially a percentage of deposits that banks must keep in reserve, rather than lending it out.

Banks must maintain a minimum balance of reserve deposits, which can be held in their vaults or on deposit with the central bank. For example, if the reserve requirement is 10%, a bank with $1 million in deposits must keep $100,000 in reserve.

The reserve requirement affects the amount of money banks are permitted to lend, which in turn affects the growth in the money supply. The money multiplier estimates the amount the money supply increases following an increase in reserves.

If the reserve requirement is increased, banks have less money to lend, as they must hold more in reserve. For instance, if the reserve requirement is raised to 15%, a bank with $1 million in deposits must keep $150,000 in reserve, reducing its lending capacity to $850,000.

The maximum increase in the money supply, or monetary multiplier, can be calculated using the formula: MM = 1 / (1 - RR), where MM is the monetary multiplier and RR is the reserve requirement.

An Edge Corporation or an Agreement Corporation is required to comply with the provisions of Regulation D in the same manner and to the same extent as a member bank.

These institutions must comply with the reserve requirements, just like member banks. This means they must maintain a certain level of reserves against their net transaction accounts, nonpersonal time deposits, and Eurocurrency liabilities.

The reserve requirement ratios are applied to net transaction accounts, nonpersonal time deposits, and Eurocurrency liabilities during the computation period.

The reserve requirement exemption amount is $36.1 million.

Table 1 to Paragraph (f) provides the reserve requirement ratios for different types of reservable liabilities:

Purchases by affiliates of a depository institution are also subject to the reserve requirements. If an affiliate purchases a CD issued by the depository institution, the purchase is treated as if the depository institution made the purchase directly.

The authority for us bank reserve requirements can be found in 12 U.S.C. 248(a), 248(c), 461, 601, 611, and 3105.

To compute required reserves, depository institutions can deduct cash items in process of collection and balances due from other depository institutions, but only up to the amount of gross transaction accounts.

United States branches and agencies of foreign banks cannot deduct balances due from another branch or agency of the same foreign bank, and Edge and Agreement corporations cannot deduct balances due from another office of the same corporation.

Reserve requirements are computed based on the institution's daily average balances of deposits and Eurocurrency liabilities during a specific computation period, which varies depending on the institution's reporting frequency.

For institutions that file a report of deposits weekly, the computation period is 14 days, ending every second Monday. For institutions that file a report of deposits quarterly, the computation period is 7 days, beginning on the third Tuesday of March, June, September, and December.

Here's a breakdown of the reserve requirement ratios:

Authority is established through specific laws and regulations, including 12 U.S.C. 248(a), 248(c), 461, 601, 611, and 3105.

These laws provide a foundation for understanding the scope of authority in various contexts.

Regulation D, as mentioned in 74 FR 25639, May 29, 2009, and amended at 77 FR 21854, Apr. 12, 2012, plays a significant role in defining authority.

Computation of required reserves is a crucial step in determining the reserve requirement under this part. The amount of cash items in process of collection and balances due from other depository institutions located in the United States can be deducted from the amount of gross transaction accounts.

This deduction may not exceed the amount of gross transaction accounts, so institutions need to be mindful of their cash flow and balances. United States branches and agencies of a foreign bank, for example, cannot deduct balances due from another branch or agency of the same foreign bank.

Balances "due from other depository institutions" do not include balances due from Federal Reserve Banks, pass-through accounts, or balances due from banking offices located outside the United States. This is an important distinction to make when computing required reserves.

Institutions that file a report of deposits weekly will have their reserve requirements computed on the basis of their daily average balances of deposits and Eurocurrency liabilities during a 14-day computation period ending every second Monday. This computation period is different for institutions that file a report of deposits quarterly.

For all depository institutions, Edge and Agreement corporations, and United States branches and agencies of foreign banks, required reserves are computed by applying the reserve requirement ratios in Table 1 to net transaction accounts, nonpersonal time deposits, and Eurocurrency liabilities of the institution during the computation period.

Here is a summary of the reserve requirement ratios in Table 1:

The Federal Reserve may impose a supplemental reserve requirement on depository institutions if the sole purpose is to increase the amount of reserves maintained to a level essential for the conduct of monetary policy.

To qualify, the requirement must be imposed for a specific purpose and not for other reasons such as reducing cost burdens or increasing clearing balances.

A supplemental reserve requirement may be imposed if the total amount of basic reserve requirements is not less than the amount of reserves that would be required on transaction accounts and nonpersonal time deposits under the initial reserve ratios established by the Monetary Control Act of 1980.

The requirement will terminate at the close of the first 90-day period after it is imposed if the average amount of supplemental reserves required are less than the amount of reserves which would be required if the ratios in effect on September 1, 1980, were applied.

The Board shall review and determine the need for continued maintenance of supplemental reserves after a period of one year or more.

The Board shall transmit annual reports to the Congress regarding the need for continuing such requirement.

A depository institution's supplemental reserve requirement shall be maintained by the Federal Reserve Banks in an Earnings Participation Account, which shall receive earnings to be paid by the Federal Reserve Banks during each calendar quarter.

The earnings paid on the account shall not exceed the rate earned on the securities portfolio of the Federal Reserve System during the previous calendar quarter.

Table 1 to Paragraph (f) of Section 204.4 outlines the reserve requirement ratios for different types of liabilities:

The Board may impose additional reserve requirements on depository institutions if they deem it necessary due to extraordinary circumstances. This decision requires the approval of at least five members of the Board.

These reserve requirements can be imposed for a maximum period of 180 days, and can be extended for further periods of up to 180 days each by affirmative action of at least five members of the Board.

The Board must transmit a report to Congress explaining the reasons behind their decision to impose emergency reserve requirements.

US Bank may treat multiple savings accounts as a single savings deposit for Regulation D purposes if it discovers that the accounts are being used to increase transfer limits, as long as the bank didn't suggest or promote the arrangement.

The bank can deduct the balances it maintains in another depository institution located in the US if those balances are subject to immediate withdrawal by the depositing depository institution, commonly known as the "due from" deduction.

This exemption from the definition of "deposit" includes federal funds or "fed funds" transactions, which are transactions falling within the exemption from the definition of "deposit" that include federal funds or "fed funds" transactions.

Example 3 is a scenario where X opens four savings accounts with Bank and regularly draws up to three checks against each account, transferring funds between accounts to ensure coverage. X's Bank may treat the multiple accounts as savings deposits for Regulation D purposes.

X's Bank did not suggest or promote the arrangement, and this is a key factor in determining how the accounts are treated. The Board requires reserves of zero, three, or ten percent on transaction accounts, depending on the amount of transaction deposits in the depository institution.

A depository institution may deduct the balances it maintains in another depository institution if those balances are subject to immediate withdrawal by the depositing institution, known as the "due from" deduction. This deduction is allowed under Regulation D at § 204.3(f).

Regulation D also exempts from the definition of "deposit" any liability on a promissory note or similar obligation issued or undertaken for the account of an office in the United States of another depository institution.

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