Full text of Federal Reserve Bank of New York Circulars : 6429. Notice of Proposed Rule Making

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FEDERAL RESERVE BANK OF NEW YORK
C i r c u l a r N o . 6429
O ctob er 2 9,1 96 9

NOTICE OF PROPOSED RULE MAKING
Regulation Q — Interest on Deposits
To the Mem ber Banks o f the Second F ed era l R e s e r v e D istr ic t:

Following is the text
Federal Reserve System:

of a statement issued today by the Board of Governors of the

The Board of Governors of the Federal Reserve System announced today it is con­
sidering amending its rules governing the payment of interest on deposits (Regulation Q)
to apply to funds received by member banks from the issuance of commercial paper or
sim ilar obligations by bank affiliates. Comments on the proposal should be received by
the Board not later than December 1.
Included within the coverage of the proposal is commercial paper issued by a mem­
ber bank's parent— either a one-bank holding company or a company registered under
the Bank Holding Company Act — or by a collateral affiliate of a member bank in a hold­
ing company system.
Governors Mitchell and Maisel would have preferred to deal with the issuance of
commercial paper by bank holding companies and their affiliates by looking to expanded
legislative authority which would specifically include the power to make reserve re­
quirements applicable in an appropriate fashion to funds raised by these means.
Printed below is the text of the proposed amendment. Comments on the proposed amend­
ment should be submitted by December 1, and should be sent to our Bank Examinations De­
partment. Additional copies of this circular will be furnished upon request.
Alfred Hayes, President.

F E D E R A L R E S E R V E SYSTEM
(12 C F R P A R T 217)
[Reg. Q]
Certain Borrowings by Bank Affiliates as Deposits

The Board of Governors is considering
amending section 217.1(f) of Regulation Q
to add the following sentence: ’’ For the pur­
poses of this Part, 'deposits' of a member
bank also include the liability of (i) an
organization that controls a majority of the
stock of the bank or (ii) a corporation that is
majority-controlled by such an organization,
on any prom issory note, acknowledgment of
advance, due bill, or sim ilar obligation
(written or oral), with a maturity of two
years or le ss, that is issued or undertaken
principally as a means of supplying funds to
the bank for use in its banking business, or
maintaining the availability of such funds."
The main purpose of this proposal is to
apply the rules governing payment of interest
on deposits (Regulation Q) to funds received
by member banks as the result of issuance,
by affiliates of the banks, of obligations com ­
monly described as commercial paper.



Types of obligations within the coverage
of this proposal are commercial paper issued
for the specified purpose by a member bank's
parent company — either one-bank or reg­
istered under the Bank Holding Company Act­
or by a collateral affiliate of a member bank
in such a holding company system.
In the Board's judgment, adoption of a
proposal along these lines is necessary be­
cause the purposes of section 19 of the
Federal Reserve Act are in danger of being
frustrated, to a substantial degree, as a re­
sult of the issuance of commercial paper by
bank affiliates of the types described, the
proceeds being channeled to the bank for
lending and investing.
The proposal does not refer to issuance
of obligations by subsidiaries of member
banks. In a related action, on which Governor
Maisel dissented, the Board determined that
obligations of such subsidiaries are, under
present provisions of both Regulations Q and
D, in the same status as obligations issued
directly by the bank and, accordingly, covered
by section 217.1(f) of Regulation Q and
section 204.1(f) of Regulation D. See 12 CFR
250.141; 1968 Fed. Res. Bulletin 681.