Bill would give CUs interest on their Fed reserves

WASHINGTON - There hasn't been much talk about it in credit union land, but another "modernization" bill in the congressional pipeline has "interest" implications for larger credit unions that have a lot of transactional accounts. At press time, H.R. 4209, the Bank Reserves Modernization Act, was approved by the House Banking and Financial Services Committee. The bill would allow the Federal Reserve to pay interest on reserves maintained by financials at the Fed. The reserves the bill affects are known as "sterile" reserves. They are the reserves financial must keep at the Fed if they have a certain number of transactional accounts (a Reg D requirement). Credit unions are required to keep funds equal to 10% of the balances in those accounts at the Fed. Currently, financials are not paid interest on that money sitting at the Fed, so many financials keep only what they are statutorily required to keep. "A primary result of the ... legislation would be to give the Fed additional leverage in managing monetary policy, chiefly by eliminating a major disincentive for holding funds at the Fed, said Committee Chairman Jim Leach (R-Iowa),regarding the legislation. "Because of the constraint imposed on depository institutions in their ability to earn a return on these assets, depository institutions understandably have undertaken considerable effort in recent years to find methods to reduce their reserve requirements and have thus undercut this key monetary policy tool," said Leach. He noted that sterile reserves held at Federal Reserve banks have dropped to $6 billion, from $28 billion, in the last seven years. While about 1,700 banks are required to keep sterile reserves at the Fed, only about 129 credit unions (mostly larger CUs), according to NCUA, are required to do so. -pgentile@cutimes.com