View PDF

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

F ederal

reserve

Bank

DALLAS, TE X A S

of

Dallas

75222

C irc u la r No. 79-73
A p ril 11, 1979

PROPOSED AMENDMENTS TO REGULATION Q— IN TE R ES T ON DEPOSITS
C reation of New Deposit Categories

TO A L L MEMBER BANKS
AND OTHERS CONCERNED IN THE
ELEVENTH FEDERAL RESERVE D IS T R IC T :
T h e Board of G overnors of the Federal Reserve System has proposed
to amend Regulation Q to p erm it member banks to p ro v id e additional re tu rn s for
small sav ers. T h e Board is considering one o r more of the follow ing actions:
(1)

C reation of a new time deposit category w ith a 5 -y e a r m atu rity and
a minimum denom ination o f $500.

(2)

C reation of a new 8 -y e a r category o f ris in g ra te time deposit w ith a
minimum denomination of $500.

(3)

A u tho rizatio n fo r member banks to pay an in te re st bonus on savings
funds held by in d iv id u als o r c e rtain non profit o rg an izatio n s.

(4)

Reduction of th e $1,000 minimum denomination requirem ents c u rre n tly
imposed on certain time deposits by Regulation Q to $500.

P rin ted on the follow ing pages is a copy of the Federal R eg ister docu­
ment announcing these proposals. Comments should be d irected to the S e c re ta ry ,
Board of G overnors of the Federal R eserve System , W ashington, D .C . 20551. Com­
ments should re fe r to Docket No. R -0215 and must be received by May 4, 1979.
Questions on the proposals o r on other aspects of Regulation Q should
be d irected to our Consum er A ffa irs Section o f the Bank S u pervisio n and Regula­
tions D epartm ent, E x t. 6171.
S in c e re ly y o u rs ,
Robert H . Boykin
F irs t V ice President

Banks and others are encouraged to use the follow ing incoming W A T S numbers in contacting this Bank:
1-8 0 0 -4 9 2 -4 4 0 3 (intrastate) and 1-8 0 0 -5 2 7 -4 9 7 0 (interstate). F o r calls placed locally, please use 651 plus
the extension referred to above.

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTB1
[12 CFR Pact 217]
(Docket No. R-0215)
Notice of Proposed Rulemaking
Creation of New Deposit Categories

AGENCY:

Board of Governors of the Federal Reserve System.

ACTION:

Proposed rulemaking.

SUMMARY:

In order to provide additional returns to savers, the Board

of Governors of the Federal Reserve System is considering one or more
of the following four actions concerning the payment of interest on
deposits by member banks under Regulation Q:
(1) Creation of a new time deposit category with a 5-year
maturity and a minimum denomination of $500. Member banks would be
authorized to pay interest on this new deposit at a ceiling rate of
one and one-quarter per cent below the average 5-year rate based on
the yield curve for United States Treasury securities as determined
by the United States Treasury.
The minimum penalty required to be imposed
upon the withdrawal of funds prior to maturity from this category of
time deposit would be a forfeiture of six-months interest.
(2) Creation of a new 8-year category of rising rate time
deposit with a minimum denomination of $500. The ceiling rate of interest
on this time deposit would increase periodically over the life of the
instrument from an initial rate of six per cent during the first year
to a rate of eight per cent during the final 3 years.
The penalty for
early withdrawal during the first year would be a forfeiture of threemonths interest. There would be no penalty for withdrawals after the
£irst year.
(3) Authorization for member banks to pay an interest bonus
on savings funds held by individuals or certain nonprofit organizations.
Member banks would be permitted to pay on such savings funds a lump
sum interest bonus of up to one-half of one per cent on the minimum
balance on deposit for a 12-month period.
(4) Reduction of the $1,000 minimum denomination requirements
currently imposed on certain time deposits by Regulation Q to $500.
The $10,000 minimum denomination requirement on the 26-week money market
time deposit, however, would be retained.

DATE:

Conments must be received by Nay 4, 1979.

ADDRESS:

Theodore E. Allison, Secretary, Board of Governors of the

Federal Reserve System, Washington, D.C. 20551.

All material submitted

should include the Docket Number R-0215.
FOR FURTHER INFORMATION, CONTACT:

Gilbert T. Schwartz, Assistant General

Counsel (202/452-3623) or Anthony F. Cole, Attorney (202/452-3711),
Legal Division, Board of Governors of the Federal Reserve System, Washington
D.C. 20551.
SUPPLEMENTARY INFORMATION:

The Board of Governors proposes to amend

its regulations concerning the payment of interest on deposits (Regulation Q
12 CFR 217) to permit member banks to provide additional returns for
small savers.

Public comment is requested by May 4, 1979, on the following

four proposed actions:
I

Five-year fixed rate, variable ceiling time deposits
The Board proposes to create a new category of time deposit.

The new time deposit would be nonnegotiable and would have a maturity
of exactly five years from the date of deposit.

The ceiling rate on

this new time deposit would be established monthly for new deposits
at one and one-quarter per cent below the average 5-year rate based
on the yield curve for United States Treasury securities.

Beginning

the first Thursday of every month, a member bank would be permitted
to pay interest at a ceiling rate of one and one-quarter per cent below
the average 5-year rate based on the yield curve for the preceding week.
This ceiling rate would remain in effect for all instruments issued
during the month until the first Thursday of the next month when a new
ceiling rate would go into effect for instruments issued on or after
that date.

The rate of interest established at the time of issue would

-3-

not change during the five years the deposit is outstanding.
denomination of $500 would be required for this deposit.

A minimum

Member banks

would be permitted to compound and compute interest on this deposit
in accordance with any of the methods currently authorized by § 217.3
of Regulation Q.

The average 5-year rate based on the yield curve for

United States Treasury securities would be determined by the United
States Treasury, and the ceiling rate for member banks would be announced
monthly generally on the Monday preceding the Thursday effective date.
Regulation Q currently provides that where a member bank agrees
to pay a time deposit prior to maturity, the bank must impose an early
withdrawal penalty

on the funds withdrawn (12 CFR 217.4(d)).

The minimum

required penalty is a reduction in the rate of interest paid on the
funds withdrawn to a rate not to exceed the rate currently prescribed
for a savings deposit (5 per cent) plus a forfeiture of three-months
interest at such rate.

Under the current structure, the amount of the

early withdrawal penalty increases significantly the longer the deposit
is maintained.

In order to alleviate the severity of this penalty with

respect to the new 5-year time deposit category, the Board proposes
to create a new early withdrawal penalty that would require member banks
to impose a minimum penalty of six-months forfeiture of interest at
the rate being paid on the deposit.

No reduction of interest to the

savings rate would be

required.

If the amount withdrawn has been

on

deposit for less than

six months, however, all interest would be forfeited.

This penalty would apply only to the new 5-year time deposit category,
and, with the exception of the proposed
current penalty would

rising rate time deposit,

the

continue to apply to all other time deposit categories.

-4-

The Board believes that this proposed penalty would encourage depositors
to agree

to leave funds on deposit for longer periods
The Board believes that the

of time.

ceiling rate on this new deposit

category, in conjunction with the proposed amendment of the early withdrawal
penalty, offers substantial additional benefits to small savers over
existing

deposit options available at

this time.

Public comment is requested on the following aspects

of

the

proposed new deposit category:
(1)

the five-year maturity; would a shorter maturity, such
as four years, be preferable;

(2)

tying the ceiling rate to the average 5-year rate based
on the yield curve for United States Treasury securities;

(3)

establishing the ceiling rate at one and one-quarter
per cent below the average 5-year yield curve;

(4)

establishing the new ceiling rate monthly as opposed
to weekly or quarterly;

(5)

permitting compounding of interest;

(6)

the $500 minimum denomination; and

(7)

the six-month interest penalty for early withdrawals.

Public comment also is requested concerning whether the proposed six
month early withdrawal interest penalty should be adopted for all categories
of time deposits.

-5 -

II

Rising rate time deposits
The Board proposes to amend Regulation Q to create a nonnegotiable

time deposit with a maturity of exactly eight years and a minimum denomination
of $500.

Member banks would be authorized to pay interest on this deposit

in accordance with the following schedule:

Period of time from date of
issuance
1 year
over 1
over 2
over 4
over 5

Ceiling rate during the period
indicated
6
6
7
7
8

or less
year to 2 1/2 years
1/2 years to 4 years
years to 5 years
years to 8 years

per
1/2
per
1/2
per

cent
per cent
cent
per cent
cent

Additional funds could be deposited to the account only during
the first year.

Consequently, during the first year a member bank could

pay interest at a rate of up to 6 per cent on the original deposit and
on any additions to the account.

For the period over 1 to 2 1/2 years

from the date of issuance only, a member bank could pay interest at
a ceiling rate of 6 1/2 per cent on all the funds in the account.

The

rate of interest that a member bank could pay on funds remaining on
deposit thereafter would increase in accordance with the above schedule.
Interest at the scheduled ceiling rates would be payable only during
the appropriate holding periods as indicated above.

Member banks would

be permitted to compound and compute interest on this deposit in accordance
with any of the methods currently authorized by § 217.3 of Regulation Q.
The Board proposes to create a special early withdrawal penalty
for the new 8-year time deposit.

As previously indicated, the current

minimum penalty is a reduction in the rate of interest paid on the funds

-6-

withdrawn

to a rate not to exceed the rate prescribed for a savings

deposit plus a forfeiture of three-months interest

at suchrate.

The

proposed penalty for the new 8-year time deposit would require member
banks to impose a minimum penalty of three-months forfeiture of interest
on funds withdrawn during the first year from date of issuance.

If

the funds withdrawn have been on deposit for less than three months,
all interest would be forfeited.

No reduction of interest to the savings

rate would be required, and withdrawals after the first year could be
made without penalty, although a member bank would be permitted to impose
a penalty on such withdrawals.
Public comment is requested on the following aspects of the
proposed new deposit category:
(1)
(2)

the rising rate ceiling schedule;

(3)

the $500 minimum denomination;

(4)

permitting additions to the account during the first year;

(5)

operational difficulties, if any, associated with the
proposed deposit category; and

(6)

Ill

the eight-year maturity;

the three-month early withdrawal interest penalty; should
the penalty be six-months loss of interest as proposed
for the new five-year time deposit.

Bonus savings deposits
The Board proposes to amend Regulation Q to create a new category

of savings deposit on which member banks would be authorized to pay
a lump sum interest bonus of up to one-half of 1 per cent on the minimum
balance held in the savings deposit for the preceding 12-month period.
Member banks could pay the bonus of up to one-half of 1 per cent annually
in addition to other interest payable at a rate of up to a 5 per cent
ceiling.

Consequently, under this proposal a depositor could earn up

-7-

to 5 1/2 per cent on savings deposits held for one year.
The bonus would be available only on savings funds in which
the entire beneficial interest is held by individuals or by nonprofit
corporations, associations or other organizations operated primarily
for religious, philanthropic, charitable, educational, fraternal, or
other similar purposes.

Member banks would be authorized to modify

the terms of existing savings accounts in which the entire beneficial
interest is held by individuals or qualifying nonprofit organizations
to incorporate the interest bonus feature.

Under the proposal, a member

bank could inform the depositor that it will pay such bonus once every
12 months on savings funds that will remain on deposit continuously
for a subsequent 12-month period.

The member bank could pay the bonus

only at the end of the 12-month period.

Examples of how the new bonus

savings plan could operate follow:
Example 1
The bank notifies depositors that it will pay a bonus of onehalf of 1 per cent on all qualifying savings deposits maintained for
a one-year period beginning July 1.
savings account balance is $500.

On July 1, the depositor's existing

During the next 12 months, the depositor

makes several additional deposits to the account totaling $250 and no
withdrawals are made.
balance is $750.

As of June 30 of the following year, the account

The member bank, as of July 1,

may pay a bonus of

one-half of 1 per cent on

$500, the minimum balance on deposit

the period July 1 to June

during

30.

Example 2
A depositor opens a new bonus savings account on December
1 with a deposit of $500.

It is understood that the 12-month holding

period will begin on January 1.

During the month of December,

the depositor

-8adds $250 to the account.

As of January 1 the account balance is $750,

which remains on deposit through December 31.

As of January 1 of the

following year, the member bank may pay a bonus of one-half of 1 per
cent on $750, the minimum balance on deposit during the period January 1
to December 31.
Example 3
A depositor opens a new bonus savings account on September 1
with a deposit of $500.

The bank has informed depositors that the 12-

month holding period will begin on September 1.

On October 1 the depositor

withdraws $200 from the account leaving a balance of $300.

On November 1

the depositor places $300 in the account, raising the balance to $600.
As of September 1 of the following year, the member bank may pay a bonus
of one-half of 1 per cent on $300, the minimum balance on deposit during
the period September 1 to August 31.
Public comment is requested on the following aspects of the
proposed new bonus savings deposit category:
(1)

Should the bonus be an annual payment of one-half of 1 per
cent on savings deposits held for a one-year period, or should
the bonus be a semi-annual payment of one-quarter of 1 per
cent for deposits held for a six-month period;

(2)

Should the bonus rate be increased if the savings funds are
held for periods in excess of one year;

(3)

Should member banks be authorized to
permit depositors to
withdraw funds from such accounts by automatic transfer, telephone
transfer, third-party bill payor service and by negotiable
order of withdrawal (where authorized by law). Under the
Board's regulations such withdrawals are currently authorized
from regular savings accounts;

(4)

Should member banks be permitted, as proposed, to modify the
terms of existing savings accounts to incorporate the interest
bonus feature; and

(5)

What operational difficulties may be
encountered if the proposed
new savings deposit category is adopted, including an estimate
of the time necessary to implement appropriate changes.

-9-

IV

Reduction of minimum denomination requirements
Regulation Q currently requires a deposit of

on time deposits with maturities of 4 years or more in

$1,000 or more
order to earn

interest at a ceiling rate of 7 1/4 per cent or more (see 12 CFR 217.7(b)(2),
(3), and (4)).

The Board proposes to reduce these minimum denomination

requirements to $500.

A member bank, however, would be permitted to

establish higher minimum denomination requirements.

At present, a $10,000

minimum denomination requirement is imposed on 26-week
certificates by section 217.7(f)

ofRegulation Q

money market

(12 CFR 217.7(f)).

This minimum denomination requirement would not be reduced.

After receipt and consideration of public comment, the Board
may adopt one or more of the four proposed actions.

None of the proposed

actions, however, would change the current ceiling rates of interest
for existing deposit categories, which would remain in effect.

In this

connection, Regulation Q currently provides that member banks may pay
interest on governmental unit time deposits under $100,000 with maturities
of 30 days or more (12 CFR 217.7(d)) and Individual Retirement Account
and Keogh (H.R. 10) Plan time deposits of less than $100,000 with maturities
of 3 years or more (12 CFR 217.7(e)) at a rate of up to 8 per cent.
These ceiling rates would remain in effect and would not be determined
by the ceiling rates established for the proposed new 5-year fixed rate,
variable ceiling and 8-year rising rate time deposit categories.

However,

member banks would be permitted to offer the two new time deposit instruments
to governmental units and to Individual Retirement Account and Keogh
(H.R. 10) Plan participants so long as the instruments have maturities
of exactly five years and eight years, respectively, and a minimum denomination
of $500.

-10All comments and information on these four proposals should
be submitted in writing to the Secretary, Board of Governors of the
Federal Reserve System, Washington, D.C. 20551,. to be received by May 4,
1979.

All material submitted should include the Docket Number R-0215.

Such material will be made available for inspection and copying upon
request except as provided in section 261.6(a) of the Board's Rules
Regarding Availability of Information (12 CFR 261.6(a)).
Pursuant to its authority under section 1 9 (j) of the Federal
Reserve Act to prescribe rules governing the payment of interest on
deposits, the Board proposes to amend Regulation Q (12 CFR §§ 217.4 and
217.7) as follows:
(1)

Amend § 217.4(d) by adding "(c)" after "§ 217.7" in the first sentence

and by deleting the fifth through seventh sentences and substituting
in lieu thereof the following:

§ 217.4— PAYMENT OF TIME DEPOSITS BEFORE MATURITY
*

(d)

*

*

*

*

Penalty for early withdrawals.

* * *

Notwithstanding

the above, vftere a time deposit issued pursuant to § 217.7(g), or any
portion thereof,

is paid before maturity, the depositor shall forfeit

six months of interest on the amount withdrawn at the rate being paid
on the deposit.

If the amount withdrawn has remained on deposit for

six months or less, all interest on the amount withdrawn shall be forfeited.
Where funds are withdrawn from a time deposit issued pursuant to § 217.7(h)
within one year from the date of issuance, the depositor shall forfeit
three months of interest on the amount withdrawn at the rate being paid

-li­
on the deposit.

If the amount withdrawn has remained on deposit for

three months or less, all interest on the amount withdrawn shall be
forfeited.

No interest penalty is required on a time deposit issued

pursuant to § 217.7(h) for early withdrawals made more than one year
after the date of issuance.

(2)

Amend § 217.7 as follows:

§ 217.7— MAXIMUM RATES OF INTEREST PAYABLE BY MEMBER BANKS ON TIME AND
SAVINGS DEPOSITS

(b)

Time deposits of less than $100,000.

in paragraphs (a),

Except as provided

(d), (e), (f), (g), and (h), no member bank shall

pay interest on any time deposit at a rate in excess of the applicable
rate under the following schedule:

Maturity

Maximum per cent

30 days or more but less
than 90 days

5

90 days or more but less
than 1 year

5 1/2

1 year or more but less
than 30 months

6

30 months or more but
less than 4 years

6 1/2

4 years or more but^.
less than 6 years-^

7 1/4

6 years or more .but less
than 8 years-

7 1/2

2/

8 years or more—

7 3/4

2/ A $500 minimum denomination is required.
This minimum denomination
requirement does not apply to time deposits representing funds contributed
to an Individual Retirement Account or Keogh (H.R. 10) Plan established
pursuant to 26 U.S.C. (I.R.C. 1954) SS 408, 401.

-12-

(c)

Savings deposits.

Except as provided in paragraph (i),

a member bank may pay interest at a rate not to exceed 5 per cent on
any savings deposit including savings deposits that are subject to negotiable
orders of withdrawal, the issuance of which is authorized by Federal

(d)

Governmental unit time deposits of less than $100,000.

Except as provided in paragraphs (a), (f),

(g), and (h), no member bank

shall pay interest on any time deposit which consists of funds deposited
to the credit of, or in which the entire beneficial interest is held
by, the United States, any State of the United States, or any county,
municipality or political subdivision thereof, the District of Columbia,
the Commonwealth of Puerto Rico, the Virgin Islands, American Samoa,
Guam, or political subdivision thereof, at a rate in excess of 8 per
cent.
(e)

Individual Retirement Account and Keogh

deposits of less than $100,000.

(H.R. 10) Plan

Except as provided in paragraphs (a),

(g), and (h), a member bank may pay interest on any time deposit with
a maturity of three years or more that consists of funds deposited to
the credit of, or in which the entire beneficial interest is held by,
an individual pursuant to an Individual Retirement Account agreement
or Keogh

(H.R. 10) Plan established pursuant to 26 U.S.C.

(I.R.C. 1954)

§§ 408, 401, at a rate not in excess of 8 per cent.
(f)

26-week money market time deposits of less than $100,000.

A member bank may pay interest on any nonnegotiable time deposit of
$10,000 or more, with a maturity of 26 weeks, at a rate not to exceed
the rate established (auction average on a discount basis)

for United

-13States Treasury bills with maturities of 26 weeks issued on or immediately
prior to the date of deposit.
rate is not permitted.

Rounding such rate to the next higher

A member bank may not compound interest during

the term of this deposit.

A member bank may offer this category of

time deposit to all depositors.
(g)

Five-year money market time deposits of less than $100,000

A member bank may pay interest on any nonnegotiable time deposit of
$500 or more with a maturity of exactly five years that is issued on
or after the first Thursday of every month at a rate not to exceed one
and one-quarter per cent below the average 5-year rate based on the
yield curve for United States Treasury securities as determined by the
United States Department of the Treasury immediately prior to such first
Thursday.

The average 5-year rate based on the yield curve will be

rounded by the United States Department of the Treasury to the nearest
5 basis points.

A member bank may offer this category of time deposit

to all depositors.
(h)

Rising rate time deposits of less than $100,000.

During

the period indicated below, a member bank may pay interest on any non­
negotiable time deposit of $500 or more with a maturity of exactly eight
years at a rate not to exceed the following:
Period of time from date
of issuance
1 year
ever 1
over 2
over 4
over 5

or less
year to 2 1/2 years
1/2 years to 4 years
years to 5 years
years to 8 years

Ceiling rate during
the period indicated
6
6
7
7
8

per
1/2
per
1/2
per

cent
per cent
cent
per cent
cent

-1 4 -

Add itional funds may be deposited to the account during the first year
from date of issuance.

Any such addition shall not affect the scheduled

maturity date of the deposit.

A member bank may offer this category

of time deposit to all depositors.
(i)

Bonus savings deposits.

A member bank may pay interest

at a rate not to exceed 5 per cent on a bonus savings deposit that con­
sists of funds in which the entire beneficial interest is held by one
or more individuals or by a corporation, association, or other organi­
zation operated primarily for religious, philanthropic, charitable,
educational, fraternal, or other similar purposes and not operated for
profit.

A member bank may inform such depositors that it will pay,

once every 12 months, additional interest at a rate not to exceed onehalf of one per cent on savings funds that will remain on deposit con­
tinuously for a subsequent 12-month period.

However, a member bank

may pay such bonus only after such savings funds have been on deposit
continuously for the 12-month period.
By order of the Board of Governors, April 3, 1979.

(Signed) Theodore E. Allison

Theodore E. Allison
Secretary of the Board

[SEAL]


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102