CUNA Regulatory Comment Call

February 14, 2008

EXECUTIVE SUMMARY

• The Federal Reserve Board is proposing to amend Regulation D to enable all depository institutions to maintain required reserves in a pass-through account with a correspondent depository institution if they choose.

• The proposal would also revise the definition of “savings deposit” by removing the provision that limits withdrawals by checks, drafts, or debit cards to three per month resulting in a provision that limits all types of “convenient” withdrawals to six per month.

• The definition of “vault cash” would be amended to incorporate prior staff guidance on when currency and coin that is not held at a physical location of the depository institution can count as “vault cash”.

• The proposal would clarify that withdrawals cannot be made more than every seven days from a “time deposit” unless a penalty of at least seven days’ simple interest is charged.

• Please submit your comments to CUNA by March 14, 2008. Comments are due to the Fed by March 28, 2008.

Please feel free to fax your responses to CUNA at 202-638-7052; Assistant General Counsel Lilly Thomas at lthomas@cuna.com; or mail them to Lilly c/o CUNA’s Regulatory Advocacy Department, 601 Pennsylvania Avenue, NW, South Building, Suite 600, Washington, D.C. 20004. Click here for a copy of the proposed rule.

BACKGROUND

The Federal Reserve Act imposes reserve requirements on certain types of deposits and other liabilities of depository institutions. Currently, reserve requirement ratios for “transaction accounts” are graduated between three and ten percent. Reserve requirement ratios for “nonpersonal time deposits” are zero percent.

Depository institutions must maintain required reserves in the form of a balance maintained in an account at a Federal Reserve Bank or in the form of vault cash. Non-member banks could maintain required reserves in an account at a depository institution that itself maintained required reserve balances at a Federal Reserve Bank, known as a “pass-through account.”

The Financial Services Regulatory Relief Act of 2006 (Regulatory Relief Act) amended the Federal Reserve Act to remove the language restricting pass-through arrangements to non-member banks.

DISCUSSION OF PROPOSAL

The Federal Reserve Board (Board), implementing the pass-through provisions of the Regulatory Relief Act, is amending its Regulations to enable all depository institutions to maintain required reserves in a pass-through account with a correspondent depository institution if they choose.

The Board is also proposing to eliminate the provision in the “savings deposit” definition limiting certain kinds of transfers to not more than three per month. Regulation D currently distinguishes “transaction accounts” from “savings deposits” by the ease with which a depositor may make transfers or withdrawals from the account. Savings deposits are limited in the number of certain convenient kinds of transfers or withdrawals that may be made in a single month. Convenient transfers or withdrawals include preauthorized or automatic transfers, telephone transfers, and transfers made by check, debit card, or similar order payable to third parties.

The number of “convenient” transfers and withdrawals from savings deposits is limited to a maximum of six per month. Within the limit of six, not more than three transfers or withdrawals may be made by check, debit card, or similar order payable to third parties. This is referred to as the “six-three distinction.”

The Board is proposing to amend the definition of “savings deposit” to eliminate the provision that limits withdrawals by checks, drafts, or debit cards to three per month. As a result, all types of “convenient” transfers and withdrawals from a savings deposit, would have the same limit of six per month.

The Board is also proposing several amendments to Regulation D for clarification. One such amendment is to the definition of “vault cash” to incorporate several prior staff opinions explaining when currency and coin that are not held at a physical location of the depository institution can count as “vault cash”. This would include clarifying the circumstances under which vault cash held at ATMs and in other arrangements can qualify as “vault cash” for purposes of meeting reserve requirements.

The proposed definition of “vault cash” would be divided into two subsections: one dealing with vault cash held at a physical location of the depository institution from which depositors can make cash withdrawals, and the other dealing with vault cash ‘held at an alternate physical location.” The proposed amendment would codify the following staff opinions, clarifications and requirements into new subsections applicable to vault cash held at an alternate physical location:

1. The depository institution at all times retains full rights of ownership in and to the currency and coin;
2. The depository institution at all times books the currency and coin as an asset ;
3. No other depository institution claims the currency and coin held at the alternate physical location in satisfaction of that other depository institution’s reserve requirement;
4. the currency and coin held at the alternate physical location is reasonably nearby a location of the depository institution. “Reasonably nearby” means that the currency and coin can be recalled by 10:00 A.M. and, relying solely on ground transportation, be received not later than 4:00 P.M. on the same calendar day.
5. The depository institution has a written cash delivery plan, and written contractual arrangements necessary to implement that plan, that demonstrates the currency and coin can be recalled and received as required.

Staff guidance would also be incorporated into the definition of “time deposit” by clarifying the application of early withdrawal penalties when there is more than one partial early withdrawal. Currently, an early withdrawal penalty must be charged on any amount withdrawn from a time deposit “from within six days after the date of deposit” and an additional early withdrawal penalty of at least seven days’ simple interest must be imposed on amounts withdrawn within six days after each partial withdrawal. The proposal would clarify that withdrawals cannot be made more than every seven days from a “time deposit” unless a penalty of at least seven days’ simple interest is charged.

The Board is also proposing several technical amendments that reorganize the existing provisions of Regulation D relating to deposit reporting, computation and maintenance of required reserves.

QUESTIONS REGARDING THE PROPOSAL

1. Do you support eliminating the language in the definition of “pass-through account” that restricts pass-through account arrangements to non-member banks?
   
   a. Yes _____
   b. No _____
   
   Please explain.
   
   

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2. Do you agree with the elimination of the sub-limit of a maximum of three check, draft, or debit card withdrawals per month from the definition of savings deposit?
   
   a. Yes _____
   b. No _____
   
   Please explain.
   
   

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3. Do you agree with the amendments that divide the definition of “vault cash” into two subsections: one dealing with vault cash held at a physical location of the depository institution and the other held at an alternate physical location ?
   
   a. Yes _____
   b. No _____
   
   Please explain.
   
   

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4. Do you agree with incorporating prior written staff guidance into the definition of “vault cash” to explain the circumstances under which vault cash held at ATMs and in other arrangements can qualify as vault cash for purposes of meeting reserve requirements?
   
   a. Yes _____
   b. No _____
   
   Please explain.
   
   

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5. The proposed amendments do not include the “legitimate business purpose” specification previously issued as staff guidance to qualify vault cash held in alternate physical locations. Do you believe that full compliance with the other five specifications proposed should be sufficient to establish the legitimacy of an arrangement?
   
   a. Yes _____
   b. No _____
   
   Please explain.
   
   

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6. Do you agree with the changes to the definition of “time deposit”?
   
   a. Yes _____
   b. No _____
   
   Please explain.
   
   

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7. Please share any suggestions for alternatives to the proposal that would minimize the impact to small credit unions?
   
   

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8. Please provide any additional comments.
   
   

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