ARLINGTON, Va. — Allowing the Federal Reserve to pay interest inthe Reg D–or so-called sterile–reserves that credit unions andothers hold at the Fed could mean capturing a lot of previouslymissed opportunity income. The Financial Services Regulatory ReliefActs (H.R. 3505 and S. 2856) would grant the Fed this authority.The original purpose of the reserves, NAFCU Chief Economist Tun Waisaid, was to control money creation by forcing the funds to be heldas sterile. That was OK when transaction accounts were thecenterpiece of the money in circulation, but the idea has not beenkeeping up with the times. Development of new products and thecreation of sweep accounts have evolved as well as the concept ofmoney and cash, Wai explained. Using the current Fed funds rate of5.25% and the Regulation D reserve ratios of 3% for transactionbalances between $7.8 million and $48.3 million and, for accountsover $48.3 million, $1,215,000 plus 10% of the deposits above $48.3million, federally insured credit unions as of March were out anestimated $250 million in annual interest. Wai pointed out thoughthat the legislation would only permit the Fed to pay interest, butnot require it, nor would it have to pay the full Fed funds rate.But reserves held by credit unions at the Fed do continue to growfrom $3.4 billion as of December 2004 to nearly $4.8 billion as ofMarch 2006, he said.

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