Fed Says Pass the Money

WASHINGTON (CN) -The Board of Governors of the Federal Reserve System is accelerating implementation of Title II of the Financial Services Regulatory Relief Act of 2006 authorizing Federal Reserve Banks to pay interest on balances maintained at Reserve Banks by banks required to maintain reserve balances.

Originally the Fed was to begin paying interest on reserve balances in 2011 but the Emergency Economic Stabilization Act of 2008 moved the effective date of the Fed's authority to Oct. 1, 2008, and the Reserve Banks will begin paying interest July 2, 2009.

The Fed also will allow member and nonmember banks (respondents) who are required to maintain reserve balances, to do so in the accounts of second party member institutions who act as clearinghouses or correspondents to the Reserve Banks for the respondents. These changes will create excess balance accounts, managed by correspondents on behalf of their respondent institutions so that any amount over the required balance will count as a liability of the Fed to the respondent. Currently, balances managed by a correspondent are counted as their own assets and the Fed places limits on the ratio of liabilities to assets with each correspondent, which acts as a disincentive for correspondents to manage respondent accounts.

Finally, the board is increasing from three to six the permissible monthly number of transfers or withdrawals from savings deposits by check, debit card, or similar order payable to third parties. The board believes that technological advancements have eliminated the distinction between transfers by these means and other types of pre-authorized or automatic transfers subject to the six-per-month limitation.

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