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ARLINGTON, Va. — Allowing the Federal Reserve to pay interest in the Reg D–or so-called sterile–reserves that credit unions and others hold at the Fed could mean capturing a lot of previously missed opportunity income. The Financial Services Regulatory Relief Acts (H.R. 3505 and S. 2856) would grant the Fed this authority. The original purpose of the reserves, NAFCU Chief Economist Tun Wai said, was to control money creation by forcing the funds to be held as sterile. That was OK when transaction accounts were the centerpiece of the money in circulation, but the idea has not been keeping up with the times. Development of new products and the creation of sweep accounts have evolved as well as the concept of money and cash, Wai explained. Using the current Fed funds rate of 5.25% and the Regulation D reserve ratios of 3% for transaction balances between $7.8 million and $48.3 million and, for accounts over $48.3 million, $1,215,000 plus 10% of the deposits above $48.3 million, federally insured credit unions as of March were out an estimated $250 million in annual interest. Wai pointed out though that the legislation would only permit the Fed to pay interest, but not 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 grow from $3.4 billion as of December 2004 to nearly $4.8 billion as of March 2006, he said.

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