Financial Institution Services further explains the benefits of deposit reclassification.
(emphasis mine) [my comment]
Deposit Reclassification: Benefits and Strategies
By Joe Moss
Deposit reclassification offers financial institutions a way to dramatically lower their reserve requirements. This opportunity was approved by the Federal Reserve Board (Fed) in 1994 and has been implemented by most large banks. Now, as transactional deposits are increasing in small and medium-sized financial institutions, community banks are also able to reap the benefits of deposit reclassification. We examine the benefits and the way reclassification works in this article.
What Is Deposit Reclassification
Deposit reclassification represents a significant change in the method by which transaction accounts (both interest and non-interest) are reported for reserve requirement calculations under the Fed's Regulation D. As a result of deposit reclassification, interest and non-interest checking accounts are segmented into separate subaccounts unique to each account. The savings subaccount of the combined account balance is not subject to the 10 percent reserve requirement. The net impact is that your bank's reserve requirements fall to insignificant levels [we are so screwed]. Other than an initial, non-adverse notice to the customer, this process of transferring funds to the savings subaccount is invisible to your customer. [Creating invisible checking and savings sub-accounts. This might just outrank "subprime CDOs squared" as the stupidest thing Wall Street has ever done]
The checking and savings sub-accounts are evaluated daily. Funds are automatically transferred from the savings sub-account to the checking subaccount if required to cover activity in the account. Concurrent with the sixth such transfer during a calendar month, the entire balance is transferred to the checking subaccount to remain in compliance with restrictions on savings accounts imposed by Regulation D.
Threshold percentages are established by checking product type and by balance range to identify relative volatility of checking accounts. A high balance and low volatility account (e.g., a high balance senior NOW account) would use a high threshold percentage. A low balance, high volatility account (e.g., a small business account) would use a low threshold percentage. On a macro level, the threshold percentage matrix should allow no more than 5 percent of total checking accounts to achieve the maximum of six transfers.
The impact on reserve requirements is dramatic. Before deposit reclassification, the entire checking account balance would be reserved at 10 percent. After deposit reclassification, only the checking subaccount is subject to reserve requirements.
On a macro level, 80 percent of the transaction accounts of a financial institution can be reported as savings deposits, and all the calculations and transfers are invisible to the customer! [Wonderful! Thank you for helping wreck our financial system!]
The Fed allows the use of deposit reclassification only if it is properly disclosed to the customer, which means proper disclosure is critical to the process. In the Fed's opinion, the savings subaccount must be interpreted as a legally separate savings account to qualify as a savings account for purposes of Reg D. Since this process is invisible to the customer, the disclosure is the process by which the savings subaccount becomes legally separate.
There has been considerable debate about this issue among the Reg D purists. Since the customer is unaffected [bank keeps no reserves against your checking account without your knowledge. How could that affect you?] and no adverse change is being made to the customer's account, the need for disclosure has been questioned [Banks want to rip us off without giving any warning]. However, the Fed has been quite adamant on this issue [evidence of a tiny bit of sanity left in the system]. This process is a contractual change in the way the customer's account is processed [which allows banks to reduce their reserve requirements to zero.]. To effect this change to the contract, the customer must be notified. Continued use of the account after disclosure constitutes acceptance [if you missed the vague and confusing disclosure, your checking account could be linked to an invisible savings account, and you would never be the wiser].
We know of financial institutions that have chosen not to disclose deposit reclassification to their customers [Some banks don't even notify customers about their invisible saving accounts]. But after their regulatory compliance examination, some have had to suspend deposit reclassification and restate reserve requirements with penalties as a result of not disclosing.
Financial institutions have also tried to disclose to the customer without truly informing the customer of the entire process. Disclosures referring to deposit reclassification as "an internal bookkeeping process only" or "an internal reclassification of deposit accounts" have also been denied by the Fed. The customer must be told that checking and savings subaccounts will be created and maintained and that transfers may occur between these subaccounts. However, the customer may be told that it will not negatively affect their account.
Many financial institutions have been concerned that the disclosure may create substantial dissension among their customers. The empirical evidence from actual disclosures suggests that negative customer reaction has been minimal, probably because they can be assured that the change is a non-adverse change to their account.
Implementation Action Steps
Implementation of deposit reclassification is much more than a data processing change because it involves a contractual change in the way a customer's account is processed, using a unique interpretation of Reg D [that is funny! Deposit reclassification is "unique interpretation" of regulations. By the way, accounting fraud = a "unique interpretation" of accounting rules]. It also represents a dramatic change in the way transaction accounts are reported to the Fed [Before deposit reclassification, reporting to fed is accurate. After deposit reclassification, reporting to fed is completely bogus]. As a result, the steps required for implementation go beyond the installation of a new piece of software. Use of this action plan ensures the proper implementation of deposit reclassification, consistent with Fed directives.
1. Obtain Federal Reserve Bank "No Objection." [The fed is completely aware and complicit in this scheme] We recommend highly that a letter be delivered to your Federal Reserve bank outlining in detail how the program will work in your institution. You will receive a verbal confirmation if your program is consistent with programs previously approved. Included in this letter should be the actual customer disclosure developed in the next work step.
2. Develop disclosure strategy and complete the disclosure. Disclosure language must be developed and included in your letter to the Fed. It is critical that your disclosure be consistent with Federal Reserve bank directives. A statement stuffer can be used as the disclosure for existing accounts [Do you read all your "statement stuffers"?]. You need to modify your Terms and Conditions sheet for new accounts [Did you closely read the "Terms and Conditions" when you opened your last checking account?].
3. Develop algorithm to maximize the balance of the savings subaccount. The algorithm used to maximize the savings subaccount should contain threshold percentages allowing only 5 percent to 10 percent of accounts to reach six transfers by the end of month. These threshold percentages should be established by balance range and account type to carefully match the volatility of specific account types. This provides a smooth reserve reduction across the entire month. A three-month sampling of actual account activity is required to develop the threshold percentage matrix.
4. Develop systems solution and implement the process. The database approach using existing download extract language from DDA systems allows the most efficient implementation. Implementation can typically begin immediately upon completion of the disclosure, since it is a nonadverse change. [Deposit reclassification allows for "efficient implementation". Isn't that wonderful?]
Deposit reclassification represents a major opportunity for your bank to improve its net interest margins [by misleading customers and taking on a horrific level of risk]. You would be remiss not to consider it.
Fiserv further explains deposit reclassification.
What is Deposit Reclassification: The Concept and Process
A financial institution with large Reserve Requirement can use Deposit Reclassification to significantly lower its Federal Reserve Balance. A large balance is immediately returned to the financial institution, and Deposit Reclassification keeps its Reserve Requirement to a minimum from then on.
Deposit Reclassification splits each transaction account into two separate subaccounts, a transaction (checking) subaccount and a non-transaction (savings) subaccount. This distinction only exists in the Deposit Reclassification program. Your host processor and your members do not see any change. [Meaning that in your bank statement, you will only see your checking account. The saving account where most of your money is being kept will be invisible to you]
Throughout each month, as the account holder deposits and withdraws money, the Deposit Reclassification program automatically transfers the balances in each subaccount to reflect the transactions in the original account [deposit reclassification is a glorified accounting trick that allows banks to avoid nearly all reserve requirements]. The new transaction subaccount is fully reserved on, while the new non-transaction account does not carry a reserve requirement.
Transfer Threshold Levels
The savings subaccounts, like all non-transaction accounts, carry no reserve requirement, but are limited to six electronic withdrawls per month.
Deposit Reclassification is therefore limited to six withdrawls per month from the non-transaction subaccount. Because these transfers are used to keep the transaction subaccount to a minimum positive balance, the optimal timing and amount of these transfers (the transfer threshold) is key to a successful Deposit Reclassification system.
Fiserv promotes Premier MoneyVest, its deposit reclassification software.
Deposit Reclassification Software
Premier MoneyVest provides all banks, large or small, with an extraordinary [and morally bankrupt] solution to manage reserve requirements to increase investment income. Based on Federal Reserve Regulation D, banks using MoneyVest have the opportunity to transfer transaction-based account balances into non-transaction-based account balances to lower reserve requirements, turning non-earning assets into earning assets.
For example, the optimum method for an account that typically has less than six transfers each month is to transfer the entire balance to the non-transaction account at the beginning of each calendar month, thus eliminating any reserve requirements for the month. If the account should reach the regulatory requirement limit of six transfers per month, the accounts' non-transaction account balance is transferred to its transaction account. The non-transaction account remains active for the remainder of the calendar month.
Customer Accounting and Notification
All activity generated by Premier MoneyVest is invisible to customers. Customer statements, interest earning, availability of funds and statements are unaffected by the transferring of funds between sub-accounts. Disclosure to customers is required by the Federal Reserve. Consult with your compliance officer to determine the required regulatory disclosures to customers.
Ceto and Associates promotes deposit reclassification.
Deposit Reclassification is a revenue enhancement strategy representing a unique opportunity to convert your non-liquid Federal Reserve Balance. Deposit Reclassification is a process by which a portion of your institution's transaction accounts can be classified as savings deposits, which are not subject to Reserve Requirements. The conversion process can be completed within 45 days and requires very little time from your bank personnel. The process is completely under your control since it uses your existing personal computer (PC) software. Ther e is a one time fee with unlimited future support. Most important, the Deposit Reclassification project is approved by your local Federal Reserve Bank, in advance, in order to comply with FRB Regulation D.
We have over 1,500 clients for this service in all 50 states. ["1,500 clients for this service in all 50 states". We are doomed]
What is Deposit Reclassification?
Obtain Federal Reserve Bank "No Objection"
Develop and deploy Disclosure
Below are pictures from a Ceto and Associates powerpoint promoting deposit reclassification.
Deposit Reclassification used by the entire banking industry
Citibank explains how its checking accounts are maintained
How Checking Accounts are Maintained
For accounting purposes, all Citibank consumer checking accounts (Regular Checking, Citigold Interest Checking, Interest Checking and Basic Banking Account) consist of two sub-accounts; a transaction sub-account to which all financial transactions are posted; and a holding sub-account into which available balances above a pre-set level are transferred daily. Funds will be transferred to your transaction sub-account to meet your transactional needs. For Regular Checking and Basic Banking Account, both sub-accounts are non-interest bearing. For Citigold Interest Checking and Interest Checking, both sub-accounts pay the same interest rate.
Transfers can occur on any business day. Transfers to the holding sub-account will be made whenever available balances in the transaction sub-account exceed a preset level. Transfers from the holding sub-account to the transaction sub-account will be made whenever transaction sub-account balances fall below a predetermined level. Because banking regulations limit the number of transfers between these types of sub-accounts, all balances in the holding sub-account will be transferred to the transaction sub-account in the sixth transfer in any calendar month.
Both sub-accounts are treated as a single account for purposes of the client's deposits and withdrawals, access and information [ie: your statements], tax reporting, fees, etc.
For accounting purposes, all checking accounts consist of two sub-accounts: a transaction sub-account to which all financial transactions are posted, and a holding sub-account into which available balances above a preset level are transferred daily. Funds will be retransferred to your transaction sub-account to meet your transactional needs; however, all balances in the holding sub-account will be transferred to the transaction sub-account with the sixth transfer in any calendar month or monthly statement period.
Both sub-accounts are treated as a single account for purposes of your deposits and withdrawals, access and information [ie: your statements], tax reporting, fees, etc.
Below is Bank of America's Deposit Agreement & Disclosure
For regulatory accounting purposes we may classify checking accounts as two sub—accounts: a checking subaccount and a savings sub—account. For interest—bearing checking accounts, we calculate and pay interest at the same rate and in the same way on both sub—accounts. For non—interest bearing checking accounts, we do not pay interest on either sub—account [Banks keep your deposits in a "savings" account that pays no interest without you knowing about it!]. We may transfer funds between these sub accounts. We record the sub—accounts and any transfers between them on our internal accounting records only. Otherwise, the sub—accounts are subject to the same terms as the checking and savings accounts described in this Agreement.
My reaction: I have to congratulate Wall Street. I didn't think there was anything that could surprise me anymore. I was wrong. Apparently, financial institution decided that reducing their reserve requirements to zero was a smart thing to do.
Deposit reclassification is a glorified accounting trick that allows banks to avoid nearly all reserve requirements.
Check the terms and conditions of your checking account. Odds are 99 percent that you too have one of these "two sub-accounts" Frankenstein monstrosities. Isn't it nice that your bank is making extra money and taking extra risks with your money by lying to you?
Look at the slide below: it should be obvious that even if the Federal Reserve lower reserve requirements to 0%, there would be no impact on the banking system. By using deposit reclassification, the entire financial sector is already operating without any reserve requirements at all.
I will have more on America's (lack of) reserve requirements in my next entry.