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Fed Plans to Simplify Reserve Requirements

WASHINGTON (CN) - The Federal Reserve Board plans to streamline administration and monitoring of reserve requirements for banks. The Fed's new plan would create a common two-week maintenance period for all depository institutions and allow a penalty-free band around reserve balance requirements, instead of having banks apply for waivers, which are routinely granted.

Reserve requirements are the amount of money reserves banks are required to have on hand at the end of each business day to clear transactions that occur overnight, and are commonly called clearing balances.

The Fed also plans to eliminate its contractual clearing balance program, which has allowed banks to use the Fed to hold and distribute their clearing balances in exchange for giving the Fed a cut of any interest accrued on those accounts.

The contractual clearing balance program will be replaced by a pay-as-you-go system in which banks will be billed for the service. The Fed is asking for comments on how it should price its services to remain affordable for smaller banks but not compete with private clearing houses.

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