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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.
@FedFRASER