The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
FE D E R A L R E S E R V E BANK O F N EW YORK ("Circular N o. 5 6 4 51 L April 27, 1965 J INTERPRETATION OF REGULATION Q To A ll M em ber Banks in the Second Federal Reserve D istrict: Printed below is an excerpt from the Federal R egister of A pril 20, 1965, containing an inter pretation, issued by the Board of Governors of the Federal Reserve System, of Regulation Q, Payment of Interest on Deposits, with respect to loans by a member bank secured by time deposits o f such bank. Additional copies of this circular will be furnished upon request. A lfred H ayes, President. a lesser rate o f interest on the deposit while a loan on the deposit is outstanding. There fore, b y agreement, the rate o f interest paid Chapter li— Federal Reserve System on the deposit could be reduced to 4 percent SUBCHAPTER A— BOARD OF GO VERN ORS OF (b ) Section 19 o f the Federal Reserve during the period o f the loan, with interest THE FEDERAL RESERVE SYSTEM A ct (12 U.S.C. 371b) prohibits member on the loan fixed at 6 percent. This would [R eg. Q] banks from paying any time deposit before not be a circumvention o f this part as the its m aturity, except upon such conditions PART 217— P A Y M EN T OF INTEREST customer would still be paying 2 percent and in accordance with such rules and regu O N DEPOSITS more interest on the loan than he would lations as may be prescribed b y the Board. receive on the deposit. The rate o f interest Loan on Security of Time Deposit The above-mentioned $ 217.4 (e ) is intended that the bank could pay on the deposit before § 217.140 Reduction in rate of interest on to implement the law and prevent evasion and a fter the loan would not be affected. time deposit during period of loan made thereof. The specified 2 percent penalty is (12 U.S.C. 248 ( i ) . Interprets or applies 12 on security of such deposit. designed to discourage loans on time depos U.S.C. 371b) its that would, in effect, enable the depositor (a ) The opinion o f the B oard o f Govern to obtain his funds before maturity. F or D ated at W ashington, D.C., this 2d day ors has been requested with respect to loans this reason, retention o f the 2 percent differ o f A p ril 1965. b y a member bank secured b y time deposits ential seems desirable. in such bank. I t is stated that many banks B oard of G overnors of are now paying interest on time deposits at (e ) Since banks in some States are p ro t h e F ederal R eserve hibited from charging more than 6 percent the maximum rate o f 4 % percent, and the System , on loans, a member bank in such States that legal rate o f interest in some States fo r ordinary bank loans is fixed b y statute at 6 pays 4 y<2, percent on a time deposit m ay not [ seal] M e r r it t S h e r m a n , make a loan on such deposit without violat percent. The specific question is whether the Secretary. ing this part. However, there is nothing in bank m ay make the loan as § 217.4 (e ) re [F .R . D oc. 65-4055; Filed, Apr. 19, 1965; the regulation to prevent a bank and its quires a member bank to charge a rate o f 8 :4 5 a.m.] customer from agreeing to the paym ent o f interest not less than 2 percent in excess o f Title 1 2 -B A N K S AND BANKING the rate o f interest paid on its time deposit when such deposit is used as security fo r a loan.