To: All Member Banks and Others Concerned in the Third Federal Reserve District

Attention: Chief Executive Officer and Chief Compliance Officer

Subject: CURRENCY RECIRCULATION POLICY - REQUEST FOR COMMENT ON PROPOSED CHANGES

Summary:

The Board of Governors of the Federal Reserve has requested comment on proposed changes to its cash services policy. The changes would address a shift by depository institutions away from traditional patterns of currency activity toward greater reliance on Reserve Bank cash processing and provide incentives for depository institutions to recirculate currency among their customers.


To reduce depository institutions’ overuse of Reserve Bank cash-processing services that are provided at no charge, the Board proposes revising its cash services policy by adding two elements: (1) a custodial inventory program that provides an incentive to depository institutions to hold currency in their vaults to meet customers’ demand; and (2) a fee to depository institutions that deposit fit currency to, and order currency from, Reserve Banks within the same week. Initially the policy changes would apply only to the $5, $10, and $20 denominations. The Reserve Banks estimate that the proposed changes would affect approximately 100 of their largest cash customers.

The Board proposes to implement the recirculation policy in phases. In early 2004, the Reserve Banks will accept applications for a custodial inventory proof-of concept, or trial, program. The Board will evaluate the results of the program after about six months of operation and will decide whether to implement a permanent custodial inventory program in 2005. Reserve Banks would begin assessing the recirculation fee in 2006. In 2007, the Board would extend the recirculation policy to one-dollar notes if the Reserve Banks are unable, by working collaboratively with depository institutions, to achieve significant savings.

The Board’s notice, which contains information on how to submit a comment and which appeared in the Federal Register for October 14, 2003, is attached (276 KB, 16 pages).

Date: The Board requests comment by January 15, 2004.

For Further Information: Eugenie E. Foster, Project Leader (202/736-5603), or Michael Lambert, Manager (202/452-3376), Cash Section, Division of Reserve Bank Operations and Payment Systems; for the hearing impaired only: Telecommunications Device for the Deaf, Dorothea Thompson (202/452-3544).