Managing Required Reserves Copyright 2014 by Diane Scott Docking 1

Reg D – Deposit Reporting Categories Deposit Reporting Categories, Sept 2014 – Sept 2015 Nonexempt Institutions (Detailed Reporting) Exempt Institutions (Reduced Reporting) Net transaction accts > Exemption amount 1 OR Total deposits ≥ Reduced reporting limit 2 Net transaction accts ≤ Exemption amount AND Total deposits < Reduced reporting limit Total deposits ≥ Nonexempt deposit cutoff 3 Total deposits < Nonexempt deposit cutoff Total deposits > Exemption amount Total deposits ≤ Exemption amount Category 1Category 2Category 3Category 4 Weekly reports FR2900 Quarterly reports FR2900 Annual reports FR2910a each June 30 No reports 1 Exemption amount = $13.3 million as of 12/24/13 Reg D requirements effective through 12/31/15.htmlReg D requirements effective through 12/31/15.html 2 Reduced reporting limit = $1.719 billion as of 12/24/13 3 Nonexempt deposit cutoff = $ million as of 12/24/13 2 Copyright 2014 by Diane Scott Docking

Reg D - Determining Legal Reserves Summary of Reg D Requirements (as of 11/5/13) is effective for maintenance period beginning 1/23/14:  All depository institutions with reservable deposits above $13.3 million must file FR2900 This dollar cut-off is known as the “reserve requirement amount.”  FR2900 must be filed weekly (Tues. – Mon.) by all commercial banks with total reservable deposits at or above $306.7 million. This dollar cut-off is known as the “. deposit cutoff level.” Copyright 2014 by Diane Scott Docking 3

Reg D - Determining Legal Reserves (cont.) Summary of Reg D Requirements (cont.):  The 2-Week “Reserve. period” goes from Tuesday to following second Monday (day 1 – 14) for transaction deposits and for or vault cash  Look at deposit balances during this period on which to base reserve requirements  Form FR2900.html Form FR2900.html Copyright 2014 by Diane Scott Docking 4

Reg D - Determining Legal Reserves (cont.) Summary of Reg D Requirements (cont.):  “Reserve period” is 2 weeks and begins 30 days (on a Thursday) after the 1 st Tuesday in the Reserve Computation period (days 31 – 44).  Reserves include: vault cash, balances at Fed (Due from Fed) Copyright 2014 by Diane Scott Docking 5

Reserve Maintenance and Computation Periods Copyright 2014 by Diane Scott Docking 6

Reserve Maintenance and Computation Periods Copyright 2014 by Diane Scott Docking 7

Reg D - Determining Legal Reserves (cont.) Summary of Reg D Requirements:  No more carry overs.  Two penalty free bands: Top band = RBR + (maximum of $50,000 or 10% of RBR) Bottom band = RBR – (maximum of $50,000 or 10% of RBR) RBR = Reserve balance requirement  If maintained balance at Fed is between bands, then in compliance  If maintained balance at Fed > Top band, then have an “excess balance”. Fed pays interest on average balance maintained at the Fed.  If maintained balance at Fed < Bottom band, then have an “reserve deficiency amount”. Penalty of 1% + primary credit rate on the deficiency amount. Copyright 2014 by Diane Scott Docking 8

Legal Reserve Requirements Sec Reserve requirement ratios. (effective 8/20/14) The following reserve requirement ratios are prescribed for all depository institutions, banking Edge and agreement corporations, and United States branches and agencies of foreign banks: CategoryReserve Requirement Net transaction accounts: $0 to $13.3 million0 percent of amount. Over $13.3 million and up to $89.0 million 3 percent of amount Over $89.0 million$2,271,000 plus 10 percent of amount over $89.0 million. Nonpersonal time deposits0 percent. Eurocurrency liabilities0 percent $13.3 million is the exemption amount. $89.0 million is the amount of the low reserve tranche 9 Copyright 2014 by Diane Scott Docking

Example in Appx 13 E: Calculating Reserve Requirement CALCULATING RESERVE REQUIREMENTS FOR COMMERCIAL BANKS (Total Net Transaction Deposits = $1, million) Table in text redone with current regs Type of Deposit and Deposit Interval Average Dollar Amount (in millions) in Computation Period Percentage Reserve Requirement Average Dollar Reserves Required (in millions) in Maintenance Period Net transactions accounts: Exempt up to $13.3 mill.$ %$ 0.0 Over $13.3 up to $89.0 mill.$ %$ Over $89.0 million$1, %$ Total$1, Gross reserves requirement$ Less vault cash ( ) Reserve balance requirement (RBR) $ * The first $13.3 million of transactions accounts are exempt from reserve requirements. This cutoff and the 3% reserve requirement cutoff are amended by the Federal Reserve System from time to time. For an update, see Copyright 2014 by Diane Scott Docking 10

Example in Appx 13 E: Calculating Reserve Requirement (cont.) The following information is available: Copyright 2014 by Diane Scott Docking 11 (in millions) RBR $ Top penalty-free band $ * Bottom penalty-free band $ ** DAB at Fed during reserve mtnce period $ Balance maintained to satisfy RBR $ Excess balance $ - Reserve deficiency amount $ - * (.1 x ) = = $ ** (.1 x ) = = $

Example: Calculating Reserve Requirement At the close of Business on Tuesday, October 28, 2014, Garden National Bank is concerned if it will meet its legal reserve requirements. The following information is available:  Daily Average Balances during 2-week Reserve Computation period from September 16 – 29, 2014 (in thousands): Gross Transaction accounts $416,500 Demand deposits due from U.S. depository institutions 15,145 Cash items in the process of collection 5,600 Vault cash 3,552 Copyright 2014 by Diane Scott Docking 12

Example: Calculating Reserve Requirement (cont.) The following information is available: Copyright 2014 by Diane Scott Docking 13

Example: Calculating Reserve Requirement (cont.) Answer the following questions: 1) What is the amount of Net transaction accounts? 2) What is the Gross reserve requirement? 3) What is the Reserve Balance Requirement? 4) As of close of day on Tuesday, October 28, 2014, is the Bank over- or under-reserved? By how much? 5) If the bank is under-reserved, what must it do to remedy the situation on Wednesday, October 29, 2014 to avoid any penalties? Copyright 2014 by Diane Scott Docking 14

Solution to Example: Calculating Reserve Requirement 1) What is the amount of Net transaction accounts? Copyright 2014 by Diane Scott Docking 15 $395,755,000 or $ million Deductions

Solution to Example: Calculating Reserve Requirement (cont.) 2) What is the Gross reserve requirement? 3) What is the Reserve Balance Requirement? Copyright 2014 by Diane Scott Docking 16 Type of Deposit and Deposit Interval Average Dollar Amount (in millions) in Computation Period Percentage Reserve Requirement Average Dollar Reserves Required (in millions) in Maintenance Period Net transactions accounts: Exempt up to $13.3 mill.$ %$ 0.0 Over $13.3 up to $89.0 mill.$ %$ Over $89.0 million$ %$ Total$ Gross reserves requirement$ Less vault cash ( ) Reserve Balance Requirement$

Solution to Example: Calculating Reserve Requirement (cont.) 4) As of close of day on Tuesday, October 28, 2014, is the Bank over- or under- reserved? By how much? Bank has a reserve deficiency of $1,934,980 Copyright 2014 by Diane Scott Docking 17

Solution to Example: Calculating Reserve Requirement (cont.) 5) If the bank is under-reserved, what must it do to remedy the situation on Wednesday, November 27,2013 to avoid any penalties? Bank must borrow enough money on Wednesday to bring the closing balance at the Fed on Wednesday =, which will give the bank a DAB at the Fed over the 14 –day maintenance period = $26, (in thousands), the bottom penalty-free band.  Can use SOLVER or GOAL SEEK in Excel to do this. (See next slide) Copyright 2014 by Diane Scott Docking 18

Solution to Example: Calculating Reserve Requirement (cont.) Copyright 2014 by Diane Scott Docking 19