Aggregate Reserves of Depository Instutions and the Monetary Base - H.3
About the Release Archives: Annual Review of Break and Seasonal Factors for Reserves and the Monetary Base
Prior to 2013, the historical data on reserves and the monetary base were revised on an annual basis to reflect the annual review of seasonal and break factors. Break factors removed discontinuities (or "breaks") associated with regulatory changes in reserve requirements, such as the annual indexation of the low reserve tranche and the reserve requirement exemption.1 Seasonal factors for required reserves and the surplus vault cash component of the monetary base were then reestimated using the revised break-adjusted data. The following section explains the now discontinued process of adjusting for breaks caused by changes in reserve requirements. All historical break-adjusted and seasonally adjusted reserves and monetary base data have been archived and are available through the Data Download Program.
Changes in reserve requirements have been associated with: (1) regulatory actions affecting Regulations D, J, K, and M; (2) the transitional phase in of required reserves under the Monetary Control Act of 1980 (MCA); (3) the initial implementations of the low reserve tranche on transaction deposits pursuant to the MCA and the reserve requirement exemption pursuant to the Garn-St Germain Act of 1982, respectively; and (4) the annual indexation of the low reserve tranche and the reserve requirement exemption; the break adjustments for the indexation are performed with the method discussed in the next section.
Adjustments for such breaks involve estimating the required reserves that would have prevailed in past reserve maintenance periods had the new reserve requirements been in effect. The procedure is as follows:
- For the reserve maintenance period in which a required reserve ratio is changed, required reserves are calculated according to both the old and the new ratios, respectively, for each of the weekly and quarterly respondents to the FR 2900 report. The calculated required reserves are then aggregated according to the following six entity types: large commercial banks, small commercial banks, thrift institutions, Edge Act and agreement corporations, U.S. branches and agencies of foreign banks, and all FR 2900 quarterly reporters. For data before 1991, the first two entity types are classified as member banks and nonmember banks.
- For each of the six entity types, the break adjustment factor is estimated as the ratio of "new" required reserves to "old" required reserves obtained from step 1. Actual required reserves for each entity type in all reserve maintenance periods before the change date are multiplied with that entity type's break-adjustment factor to get break-adjusted required reserves.
- Historical break-adjusted required reserves for each entity type are, therefore, the result of cumulative multiplications of actual required reserves by the break adjustment factors associated with the regulatory changes in reserve requirements between each date and the present.
- Aggregate break-adjusted required reserves against transaction deposits are the sum of break-adjusted required reserves against transaction deposits for each of the six entity types. Monthly data are pro rata averages of weekly or biweekly data.
- The required reserve ratio against nontransaction deposits was reduced to zero in December 1990. Therefore, break-adjusted required reserves against nontransaction deposits are equal to zero.
- Required clearing balances and adjustments to compensate for float are subtracted from the break-adjusted monetary base.
- Before the implementation of contemporaneous reserve requirements (CRR) in February 1984, required reserves on certain obligations of domestic affiliates and ineligible acceptances (finance bills) are excluded from break-adjusted reserves and the monetary base. Under CRR, the break-adjusted required reserves against transactions deposits include required reserves on certain obligations of domestic affiliates and on finance bills issued by the reporting institution that have an original maturity of less than seven days; these required reserves are no longer reported separately and are estimated to be very small.
Break adjustments for annual indexation of the low reserve tranche and the reserve requirement exemption continue to employ the technique adopted in 1989. Unlike the break adjustments described above, break adjustments for the indexation are made to required reserves and to applied vault cash only in the maintenance periods between any two adjacent annual indexations. The break adjustment procedures for annual indexation of the low reserve tranche and the reserve requirement exemption are as follows:
- Using the method described in the previous section, break adjustment factors for each indexation are first estimated as ratios of required reserves (or applied vault cash) from micro data reported on the FR 2900 in the first effective maintenance period of the indexation; the estimation is based on the tranche and exemption levels after and before the indexation. Break adjustment factors for required reserves are derived for each of the six entity types described earlier. For applied vault cash, a break adjustment factor is derived for all weekly reporting depository institutions.2
- For maintenance periods between any two adjacent annual indexation dates, break factors are estimated under the assumption that the indexation is phased in at a constant growth rate throughout the year. Thus, break factors for these maintenance periods are produced by interpolating between 1.0 for the first effective maintenance period of the earlier indexation and the value of the break factor (calculated in the previous step) for the first effective period of the following indexation. Hence, break factors are equal to 1.0 for the first effective period of each indexation.
To make 2012 data comparable with historical data, the break adjustments to the 2012 data use the low reserve tranche and the reserve requirement exemption that will take effect in January 2013. To break adjust 2013 data, it is assumed that the percent change in required reserves (and applied vault cash) due to the indexation effective January 2014 is the same as that in January 2013.
Seasonal factors are estimated only for break-adjusted series. Excess reserves and borrowed reserves are neither break adjusted nor seasonally adjusted.
For reserve maintenance periods before February 2, 1984, when old lagged reserve requirements (LRR) were in effect, seasonally adjusted aggregate required reserves consist of the sum of seasonally adjusted required reserves at member commercial banks and those at nonmember institutions. Seasonally adjusted total reserves are equal to excess reserves plus seasonally adjusted aggregate required reserves. Seasonally adjusted nonborrowed reserves consist of seasonally adjusted total reserves minus borrowed reserves. The monetary base, less excess reserves, is seasonally adjusted as a whole, rather than by component, and excess reserves are added without seasonal adjustment. Weekly seasonal factors are estimated from weekly time series models. Monthly levels of (both seasonally adjusted and not seasonally adjusted) reserves and the monetary base are derived as pro rata averages of the weekly levels.
Beginning with the implementation of CRR on February 2, 1984, required reserves against net transaction deposits for all depository institutions are seasonally adjusted as a whole. Seasonally adjusted total reserves and nonborrowed reserves after CRR are constructed the same way as those before CRR. The seasonally adjusted monetary base is equal to the sum of three components: (1) seasonally adjusted total reserves (including excess reserves, which are not seasonally adjusted), (2) the seasonally adjusted currency component of M1, and (3) the seasonally adjusted surplus vault cash component of the monetary base.
For the purpose of estimating seasonal factors, historical data for required reserves have been adjusted for a few events such as the September 11, 2001 terrorist attacks, that are believed to have distorted the seasonal patterns of deposits and required reserves. Such adjustments to required reserves are equal to the prevailing marginal required reserve ratio (10 percent since April 2, 1992) times the estimated effects on net transaction deposits in the corresponding computation periods in which deposits were adjusted.
Effective July 30, 1998, the required reserve regime for weekly deposit reporters was shifted from CRR to new LRR, in which biweekly reserve maintenance periods lag their corresponding computation periods by thirty days.3 The shift to new LRR did not cause breaks in reserve data. However, the peaks and troughs of seasonal fluctuations for required reserves under new LRR lag those under CRR by four weeks. Previous seasonal reviews thus estimated seasonal factors for required reserves after the implementation of CRR (February 2, 1984) from two biweekly regression models: one for the entire CRR period (February 2, 1984 through July 29, 1998) and another for the new LRR period (beginning July 30, 1998).
Similarly, the length of the lag in counting vault cash toward required reserves for weekly reporters has been changed twice since February 1984. One was a shortening of the lag from thirty days to sixteen days, effective from November 12, 1992 through July 29, 1998; the second was a lengthening of the lag from sixteen days to thirty days, beginning July 30, 1998. While these changes did not create breaks in the surplus vault cash component of the monetary base, they did affect seasonal patterns in this series. Previous seasonal reviews thus estimated seasonal factors for the surplus vault cash component of the monetary base after the implementation of CRR from three biweekly models: one for the period from February 2, 1984 through November 11, 1992; the second for the period from November 12, 1992 through July 29, 1998; and the third for the new LRR regime (beginning July 30, 1998).
1. The Monetary Control Act of 1980 established a reserve ratio of 3 percent against the first $25 million in net transaction deposits (low reserve tranche) at each depository institution. Since 1982, the low reserve tranche has been indexed each January by 80 percent of the previous year's (June 30 to June 30) growth rate of net transaction deposits at all depository institutions. For more history on the changes to the low reserve tranche and exemption amounts, see "Reserve Requirements" under "Monetary Policy," available on this website. Return to text.
2. Break adjustment factors for applied vault cash were used to compute the break-adjusted series for the surplus vault cash component of the monetary base. Return to text.
3. The current regime is designated "new LRR" to distinguish it from the regime of lagged reserve requirements that prevailed from September 12, 1968 to February 1, 1984 (old LRR). Return to text.