The powerful American Bankers Association yesterday approved a protions from the Federal Reserve system. Chairman Paul A. Volcker designed to halt the flight of financial institutions from the federal reserve system.
Addressing the association's banking leadership conference in Washington, Volcker said the central bank should be given legislative standby authority to establish an interest bearing supplemental reserve requirement for all financial institutions. Volcker suggested that the supplemental reserve requirement by no more than 2 percent, a proposal also accepted by the bankers.
Volcker and the Congress have been concerned with the increasing number of banks fleeing the Federal Reserve system because of the Fed's reserve requirement. Many bankers feel that by withdrawing from the central bank membership they can use the money formerly held in reserves to earn interest elsewhere.
The Federal Reserve is claiming that the flight of banks is lowering its reserves to such a point that it is difficult for them to implement monetary policy.
To help solve the problem, the House and Senate have proposed legislation that would make uniform the percentage of deposits each bank holds in the Fed. That percentage now varies according to the bank's size.
But Volcker had said that those proposals would also leave reserves too low. Next week at a Senate Banking Committee hearing on its legislation Volcker is expected to recommend that his proposal be made an amend- ment to such legislation, a federal reserve spokesman said yesterday.
For instance, the spokesman said that the House bill would lower reserves from $30 billion to about $7.5 billion which would "leave too little for us to work with."
The bank leaders' unanimous approval of Volcker's proposal removes a significant barrier to passage of such an amendment.
"The chairman is very gratified by this ABA action, the spokesman said last night. "It should contribute toward prompt Senate and Congressional consideration of the idea. It's one major interest group saying, 'full speed ahead, we're with you,' and I think that's very significant."
Volcker is asking that he be given authority to call in the supplemental reserves whenever they are needed to conduct monetary policy, the spokesman said. He is also seeking to have the supplemental reserves bear interest, "so it doesn't cost banks that much money," the spokesman said. A specific interest rate has not been decided, the spokesman said, but it would probably be at the Fed's portfolio rate which is near the market rate.
The reserves would be called in on all accounts of financial institutions-checking, savings and time accounts, the spokesman said.
Volcker also recommended that a vote of a larger-than-usual majority of the fed's board of governors be mandatory to trigger the supplemental requirements. The board should also be required to review its vote periodically.
The bankers, in approving Volcker's recommendations, "affirmed the importance of preserving the strength, independence and monetary effectiveness of our nation's central bank."
The bankers differed from Volcker, however, in one respect. Rather than applying the supplemental reserve policy to all financial institutions, they suggested it cover all financial intermediaries to include money market mutual funds in the program.