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federal

Reserve

bank

of

Dallas

DALLAS, TEXAS 7 5 2 2 2

Circular No. 68-137
June 13, 1968

To All Member Banks
in the Eleventh Federal Reserve D istrict:

There is enclosed a statem ent issued by the Board of
Governors of the Federal Reserve System on June 5, 1968, for
the purpose of clarifying certain provisions o f Regulation Q.
Additional copies are available upon request.
Yours very truly,

P. E. Coldwell
President

Enclosure (1)

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

FEDERAL RESERVE

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release

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For immediate release.

June 5, 1968.

The Board of Governors of the Federal Reserve System, in
an interpretation of its Regulation Q, said today that a member bank
may pay interest on a multiple maturity time deposit at the maximum
allowable rate--presently 5 per cent--only if the deposit is payable
at intervals of at least 90 days.
The interpretation was issued for clarification purposes
following receipt of inquiries on the conditions under which banks
may pay the maximum 5 per cent rate on time deposits having mere than
one maturity date.
The text of the interpretation is attached.

5% Multiple Maturity Time Deposits

From time to time the Board of Governors receives inquiries
relating to the payment of Interest of 5 per cent per annum on "multiple
maturity time deposits" as defined in § 217.1(g) of Regulation Q.

In

view of the variety of deposit contracts that have conoe into use
in recent years, the Board considers it advisable tc clarify, for banks
and their depositors, certain limitations on the authority of a membetf bank
to pay 5 per cent interest on funds deposited with it.

The underlying

principle is that a member bank may pay Interest on a multiple maturity
time deposit at the rate of 5 per cent only if the deposit is payable at
intervals of at least 90 days.
90-day certificate of deposit.

One major category of multiple

maturity time deposits is certificates of deposit that (1 ) mature on a
series of specified dates or (2 ) are automatically renewed at maturity
without any action by the depositor.

Certificates that mature at spec­

ified dates that are 90 days apart and certificates that mature 90 days
after the date of Issuance and are automatically renewable for succes­
sive 90-day periods until the depositor withdraws his funds constitute
multiple maturity time deposits in certificate form with the shortest
intervals between payment dates that are permissible if interest thereon
is to be paid at a rate of 5 per cent.

2

90-day notice account.

Another major category of multiple

maturity time deposits is deposits that are payable only after written notice
of withdrawal.
wise,

Such deposits may be in the form of a passbook or other­

Funds may be added to the account either at specified times or

whenever the depositor wishes, depending on the terms of the contract,
A member bank may pay interest at the rate of 5 per cent on
funds in such an account, on two conditions.

The first is that funds must

not be withdrawable within 90 days of the date they are deposited.

The

second is that funds must not be withdrawable less than 90 days after
the date of written notice of intention to withdraw.

In other words, a

member bank may pay 5 per cent only on deposits that are payable solely
at intervals of at least 90 days.
If a depositor gives 90-days1 notice of intention to withdraw
and then decides that he will not need the funds at the specified date,
he may cancel his notice, either explicitly, or impliedly by a new
90-day notice.

He may not, however, retain his right to withdraw at the

expiration of the first notice while giving a simultaneous or subsequent
notice, unless the latter expires at a date at least 90 days after the
expiration of the first.
90-day notice account coupled with provision for automatic
renewal.

Recently, a few banks have offered a 5 per cent multiple matu­

rity time deposit contract that authorizes withdrawal by the depositor
on more than one basis.

For example, the contract may provide that funds

-3 -

received on or before January 1 may be withdrawn March 31 and, with
respect to funds not withdrawn on that date, the deposit will be auto­
matically renewed until June 30, and so forth.

The contract also

provides that funds may be withdrawn on 90 days' notice in writing.

In

such event, to be consistent with the principle that the depositor may
not have access to a 5 per cent multiple maturity deposit at intervals
of less than 90 days, such a contract should inform the depositor that,
when notice is given with respect to all or a portion of the funds on
deposit, such notice automatically cancels any other provision for with­
drawal that is inconsistent with said principle.
Consequently, if the depositor gives notice on March 1 of
his intention to withdraw $1000 from his account on June 1, the contract
should make clear that this automatically cancels his right to withdraw
such amount on March 31, since such amount would otherwise be payable
at intervals of less than 90 days*

Also, his right under the specified

maturity (or automatic-renewal maturity) provision to withdraw such
amount on June 30 should be suspended, for the same reason.

The latter

right might be reinstated by the depositor revoking before April 1 his
notice of intention to withdraw, since that would be at least 90 days
before the specified June 30 maturity.
on March 31 could not be reinstated.

However, the right to withdraw
If it could, the depositor would

be in a position to acquire access to the amount involved at intervals
of less than 90 days.

-4-

As in a "straight" 90-day notice account, the depositor may
supersede his notice of intention to withdraw by a subsequent SO-day
notice.

Again, such notice would have the effect of canceling any other

right to withdraw that is inconsistent with the 90-day interval principle.
Withdrawal "grace period".

There is one exception to the rule

that a member bank may not pay 5 per cent interest on multiple maturity
deposits that are payable at intervals of less than 90 days.

A bank may

permit a depositor to withdraw his funds within ten days after a specified
maturity, even if there is a provision for automatic renewal for 90 days
if not withdrawn at said maturity.

If he does so, no interest may be

paid for the period from the maturity date to the date of withdrawal, for
during that time the deposit is a "demand deposit", on which payment of
interest is prohibited by law.

If he does not so withdraw, the deposit

remains a time deposit, with a term running from the maturity date until

1/
a subsequent specified date or for a specified number of days.
"Emergency" withdrawal.

In accordance with section 217.4(d) of

Regulation Q, a bank may pay a time deposit before maturity where that is
"necessary to prevent great hardship to the depositor", but in that case
the depositor forfeits accrued and unpaid (uncredited) interest.
sions for such withdrawals are exceptional.

Occa­

Unless the depositor is

confronted with an actual emergency, a bank may not permit withdrawal of

1/ A single maturity time deposit also may be renewed by action of the
depositor within 10 days after maturity.
In such event, as in the case of
the multiple maturity time deposit, a member bank may pay interest on the
deposit between the maturity date and renewal thereof at the applicable
maximum rate.

-5-

funds before maturity of the deposit or termination of the specified
period of notice*

If the depositor simply has a need for funds, the bank

may extend credit to him on the security of his time deposit, but the
rate of interest on such loan must be at least 2 per cent per annum in
excess of the rate of interest paid on the time deposit*
Advertising time deposits*

Some recent advertisements by

member banks might be interpreted as offering withdrawal privileges from
a 5 per cent multiple maturity time deposit at intervals of less than
90 days*
In December 1966, the Board was joined by the Comptroller of
the Currency, the Federal Deposit Insurance Corporation, and the Federal
Home Loan Bank Board in a statement of principles directed against mis­
leading advertising practices in the solicitation of deposits.

The

third principle states that "If an advertised rate is payable only on
investments or deposits that meet fixed time or amount requirements, such
requirements should be stated."

An advertisement by a member bank that

permits the reader to infer that the bank will pay interest at the rate
of 5 per cent on funds that may be withdrawn at intervals of less than
90 days is inconsistent with that principle and is regarded by the Board
as misleading*
The Board heretofore has refrained, in the definition of "time
deposit" in Regulation Q, from prescribing permissible designations for
such deposits, and has not objected to banks offering time deposit con­
tracts that are called "savings certificates" or "savings bonds "0

However, use of such designations without explanation might have a mis­
leading tendency, because of the public's impression that "savings" in
a bank will be paid at any time.

Consequently, the greater the possibility

that the name given to an account may mislead, the more imperative is the
bank's obligation to direct the depositor's attention to the withdrawal
restrictions that govern the particular account offered.

Board of Governors of the
Federal Reserve System
June 5, 1968,

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