Yesterday, the Federal Reserve Board proposed "amendments to Regulation D that would enable the establishment of a term deposit facility," according to a statement. It says, "Under the proposal, the Federal Reserve Banks would offer interest-bearing term deposits to eligible institutions through an auction mechanism. Term deposits would be one of several tools that the Federal Reserve could employ to drain reserves to support the effective implementation of monetary policy. This proposal is one component of a process of prudent planning on the part of the Federal Reserve and has no implications for monetary policy decisions in the near term."
The Fed's full proposal says, "The Board is requesting public comment on proposed amendments to Regulation D, Reserve Requirements of Depository Institutions, to authorize the establishment of term deposits. Term deposits are intended to facilitate the conduct of monetary policy by providing a tool for managing the aggregate quantity of reserve balances. Institutions eligible to receive earnings on their balances in accounts at Federal Reserve Banks could hold term deposits and receive earnings at a rate that would not exceed the general level of short-term interest rates. Term deposits would be separate and distinct from those maintained in an institution's master account at a Reserve Bank as well as from those maintained in an excess balance account. Term deposits would not satisfy required reserve balances or contractual clearing balances and would not be available to clear payments or to cover daylight or overnight overdrafts. The proposal also would make minor amendments to the posting rules for intraday debits and credits to master accounts as set forth in the Board's Policy on Payment System Risk to address transactions associated with term deposits."
It explains, "The Federal Reserve has addressed the financial market turmoil of the past two years in part by greatly expanding its balance sheet and by supplying an unprecedented volume of reserves to the banking system. Term deposits could be part of the Federal Reserve's tool kit to drain reserves, if necessary, and thus support the implementation of monetary policy. Term deposits would be distinct from balances held by eligible institutions in their master accounts. Term deposits could not be withdrawn prior to maturity, would not satisfy required reserve balances or contractual clearing balances, and would not be available to clear payments or cover daylight or overnight overdrafts. Term deposits would, however, be eligible to collateralize discount window advances."
The Fed says, "Term deposits could be structured in many different ways. For example, term deposits could be offered at one maturity or several maturities. Moreover, the interest rate or rates paid on term deposits could be set through an auction mechanism or, alternatively, could be set administratively or by a formula.... The maximum-allowable rate for each auction of term deposits would be no higher than the general level of short-term interest rates. For these purposes, 'short-term interest rates' would be defined as the primary credit rate and rates on obligations with maturities of up to one year in which eligible institutions may invest, such as rates on term federal funds, term repurchase agreements, commercial paper, term Eurodollar deposits, and other similar rates."
Finally, they say, "Any 'eligible institution' could hold term deposits.... Branches and agencies of foreign banks are included within the definition of 'eligible institution' and could therefore hold term deposits. Unlike branches of domestic banks, branches and agencies of the same foreign bank that are located in different Reserve Bank Districts may have separate master accounts at the corresponding Reserve Banks. The proposal anticipates that each affiliated branch of a foreign bank would be eligible to bid separately at term deposit auctions and maintain separate term deposits at that branch's Reserve Bank unless the Board determines otherwise."
