The Federal Reserve Board will ask Congress to allow it to pay interest on reserves member banks are required to keep with the central bank in an effort to stop the decline in Federal Reserve membership.
In a letter to House Banking Committee Chairman Henry Reuss (D-Wis.), Fed Chairman G. William Miller said the Fed plan would also reduce the amount of reserves banks are required to keep on deposit with the Fed as well as charge banks for services the Fed now provides free.
About 5,600 of the nation's 14,500 banks are members of the Fed system, but membership has been declining as member banks find that the benefits of remaining a member banks find that the benefits of remaining a member are often outweighed by the costs, according to the Fed proposal. Over the last 10 years 551 banks have left the system and many new banks have chosen not to join.
Miller apparently has decided not to buck Reuss, the Democratic majority on the House Banking Committee and Senate Banking Committee Chairman William Proxmire (D-Wis.). Miller had told Reuss and Proxmire that he thought the Fed had the authority to pay interest to member banks without congressional approval.
But in his letter, dated June 26, Miller said he would ask the seven member Fed board to approve the proposal Thursday and then submit it to the banking committees for "appropriate legislative review."
Under the proposal to slow or halt the decline in Fed membership, the central bank would:
Pay interest on all balances member banks are required to keep at the Fed. For the first $25 million in required reserves the interest would be equal to 0.5 percentage points below the average return the Fed earns on its portfolio of government securities. That would have been 6 percent last year.
For all reserves above $25 million, the interest would be 2 percent. A bank of about $800 million to $1 billion in deposits has required reserves of about $25 million. The Fed says only 170 of its member banks are bigger than $500 million.
Restructure its reserve requirements in such a way as to reduce by about $2.5 billion at first and $5 billion eventually the amount of deposits banks are required to maintain at the central bank.
Charge for services such as check clearing and settlement that member banks do not now have to pay for. The Fed estimates the charges would boost revenue to the system $225 million at first and about $410 million a year after that. The interest costs to the Fed of paying on member bank deposits would be "about $400 million in the first phase and about $765 million thereafter."
The Fed would also permit non-member banks to use some of its services and pay for them just like member banks.
The Fed is concerned about banks leaving the system because it feels it makes the conduct of monetary policy more difficult when there are fewer banks subject to its reserve regulations.