Interstate Branching: New Account Structure
Questions and Answers

Introduction
Effective January 1, 1998, the Federal Reserve will implement a flexible new approach to providing accounting services. This approach is geared to meet the needs of depository institutions for consolidated account management and flexible information as they branch interstate. It also will provide improved accounting services for those institutions that do not expect to participate in interstate branching.

The new approach facilitates account management. Under the approach, institutions will be provided with a single (master) account at a designated Reserve Bank. This account is defined to be a record of financial transactions that reflects financial rights and obligations of an account holder and the Reserve Bank with respect to each other, where opening and closing balances are determined. All credits and debits resulting from the use of Federal Reserve services will be booked to this one account at one Reserve Bank for each separately chartered institution. All overnight and daylight credit will be disbursed and repaid through this account, and the Reserve Bank holding the account will manage the credit risk posed by the use of services. Reserve administration also will be managed through this account.

From the institution's perspective, the new account structure preserves a single account management relationship with the Federal Reserve, while continuing to support access to financial services from any location. The new structure replicates the features and flexibility of a multiple account structure through the use of subaccounts, in which information on financial services can be segregated, but which do not reflect actual Reserve Bank balances. In fact, it is precisely because they do not provide balances, and therefore do not raise risk and account management concerns, that these subaccounts ultimately become more flexible than multiple accounts. Subaccounts are basically information subsets and can be organized in any way to meet varying information needs and organizational structures.

The following set of questions and answers are intended to assist depository institutions in preparing for the new account structure. For additional information, please contact your local Federal Reserve Business Development account representative.

Answer: Effective January 1, 1998, the Federal Reserve will implement its new account structure. A series of educational materials and training seminars will be offered to depository institutions starting in early 1997.

Answer: The new account structure is applicable to all depository institutions eligible to maintain an account with the Federal Reserve ¹ with the exception of those institutions currently required to have multiple accounts pursuant to regulation (e.g., U.S. branches and agencies of foreign banks, Edge and agreement corporations, and correspondents with out-of-District respondents).

Answer: Under the new account structure, each separately chartered depository institution will be provided with a single (master) account at a designated Reserve Bank, with the exception of those institutions required to maintain multiple accounts pursuant to regulation (refer to Question I-2). Any additional accounts not required pursuant to regulation will be phased out or can be "restructured" as subaccounts. Multiple account arrangements that are not required to support merger-related transition periods (see Question III-1) or that are not required pursuant to regulation must be phased out by no later than December 31, 1998.

Answer: No. Under the new account structure, there will no longer be a distinction between "clearing accounts" and "reserve accounts." Reserve balances and clearing balances (to the extent required) will be commingled in one master account held with one Reserve Bank. As such, all "commingled" balances maintained in this one account will be used by an institution to satisfy its reserve requirement as well as any clearing balance requirement.

Answer: Depository institutions will still be permitted, and in some cases required, to maintain clearing balances in a commingled (master) account with reserve balances. If the depository institution is not bound by required reserves, it may still establish a master account for the purpose of maintaining clearing balances with a Federal Reserve Bank. The calculation and application of earnings credits will not change under the new account structure. Earnings credits will be calculated based on the level of clearing balances maintained in the master account and may continue to be used to pay for Federal Reserve financial services.

Answer: There is no plan to restrict the number of subaccounts that a depository institution may own. However, this issue may be revisited as experience is gained under the new account structure. Beyond a certain number of subaccounts, depository institutions may find that the difficulty in reconciling subaccount information outweighs the benefits of the additional transaction information. Industry feedback has indicated that ten or fewer subaccounts should be sufficient.

Answer: Yes. The current limitation of supporting up to three tiers of correspondent/respondent relationships still applies under the new account structure.

Answer: Yes. Information on respondent activity may be segregated by "attaching" respondent relationships to subaccounts, as long as the respondent does not, in turn, act as correspondent for other respondents (which would result in four tiers of relationships).

Answer: U.S. branches and agencies of foreign banks and Edge and agreement corporations must continue to maintain one account per state in which they have a presence. This requirement is being reevaluated in light of the changing interstate branching environment.

Answer: Yes. The ABA's Routing Transit Number Policy is consistent with the new account structure, particularly with respect to the allowable number of additional presentment points and the use of multiple numbers for a single presentment point.

Answer: The ABA's Routing Transit Number Policy provides the latitude for allowing the RTNs of non-surviving entities to be used indefinitely to identify subaccounts.

Answer: The entity representing the subaccount can receive a summary or detail of items processed through its master account. In addition, a subaccount can receive information on any of their respective respondents as applicable (limited to three tiers-the correspondent, or ultimate settlement point, plus two additional tiers). These statements are formatted the same as the account holder statement, except that subaccount statements only include debit and credit totals, since account balances are not relevant.

Answer: This limit will be reevaluated based on evolving information requirements in an interstate branching environment.

Answer: Subaccounts may be used to segregate financial transactions according to geographic region, business type, or other criteria.

Answer: Yes. Transitional multiple account arrangements will be offered for a period of up to one year to support organizational and operational restructuring in the aftermath of bank mergers, whether in-state or interstate. To support transition periods, the surviving entity will be allowed to operate the non-surviving entity's account as an independent account for a period of up to one year, subject to a zero or other allocated cap for risk management daylight overdraft purposes. The 12 month transition period will be triggered by each merger/acquisition. Transition periods will begin on the effective date of the merger/acquisition. Alternatively, the surviving institution may set the non-survivor up as a subaccount.