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F ederal Reserve Bank DALLAS, TEXAS of Dallas 75222 Circular No. 73-323 December lU, 1973 AMENDMENTS TO REGULATION Q To All Member Banks and Others Concerned in the Eleventh Federal Reserve District: The Board of Governors of the Federal Reserve System has amended Regulation Q, "Interest on Deposits", effective January 1, 197^-? to permit customers of member banks in Massachusetts and New Hampshire to write negotiable orders of withdrawal against interest-bearing savings accounts. The amendments were adopted pursuant to new legislation permitting all depository institutions in the two states to allow customers to write NOWs which function as checks on savings accounts. The customary type of check may be written only against non-interest-paying demand deposits. A copy of the press release and amendments to the regulation are enclosed. Yours very truly, P. E. Coldwell, President Enclosures 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 SYSTEM SUPPLEMENT TO REGULATION Q Effective January 1 , 1 9 7 4 SECTION 217.7 — MAXIMUM RATES OF INTEREST PAYABLE BY MEMBER BANKS ON TIME AND SAVINGS DEPOSITS Pursuant to the provisions of section 19 of the Federal Reserve Act and § 217.3, the Board of Governors of the Federal Reserve System hereby prescribes the following maximum rates1 of inter est per annum payable by member banks of the Federal Reserve System on time and savings deposits: (a) Time deposits of $100,000 or more. There is no maximum rate of interest presently pre scribed on any time deposit of $100,000 or more. (b) Time deposits of less than $100,000. excess of the applicable rate under the following schedule: 30 days or more but less than 90 days 90 days or more but less than 1 year 5V 2 1 year or more but less than 30 months 6 30 months or (1) Except as provided in paragraph (a) and (2) Member subpart (2) of this paragraph, no member bank time deposit of shall pay interest on any time deposit at a rate in of four years or per cent. 1The limitations on rates of interest payable by member banks of the Federal Reserve System on time and savings deposits, as prescribed herein, are not applicable to any deposit which is payable only at an office of a member bank located outside the States of the United States and the District of Columbia. Maximum per cent Maturity more 6 V2 banks may pay interest on any $1,000 or more, with a maturity more, at a rate not to exceed IV a (c) Savings deposits. No member bank shall pay interest at a rate in excess of 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 law. BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM INTEREST ON DEPOSITS AMENDMENTS TO REGULATION Q t 1. Effective January 1, 1974, section 217.1 is sued in the states of Massachusetts and New Hampshire which shall be subject to the limita amended by adding a new subparagraph (3) to tion that no member bank may accept more than paragraph (e) of that section to read as follows: 150 negotiable orders of withdrawal during any calendar year on any deposit subject to such SECTION 217.1 — DEFINITIONS. orders. * * * * * (e) Savings Deposits. * * * * * (3) In those states where banks are permitted to offer deposits subject to negotiable orders of withdrawal, such deposits may be maintained only by individuals and organizations permitted to maintain savings deposits under subparagraph (1) of this paragraph. 2. Effective January 1, 1974, section 217.5 is amended by amending paragraph (c) of that sec tion to read as follows: (4) Where a savings deposit is evidenced by a passbook, every withdrawal made upon presen tation of the passbook shall be entered in the pass book at the time of withdrawal, and every other withdrawal from such a deposit shall be entered in the passbook as soon as practicable after with drawal is made. 3. Effective January 1, 1974, section 217.6 is amended by adding a new paragraph (i) to read as follows: SECTION 217.6— ADVERTISING OF INTEREST ON DEPOSITS. * * * * * (i) Negotiable Orders of Withdrawal. In addi tion to compliance with the other paragraphs of this section, member banks offering accounts sub ject to negotiable orders of withdrawal, to the ♦ H* ^ extent practicable, shall limit every advertisement, announcement or solicitation made in any news paper, magazine, radio, television or other media (c) Manner of payment of savings deposits. to such facilities directed toward residents of (1) Subject to the provisions of subparagraphs New Hampshire and Massachusetts. All other ad (2) and (3) of this paragraph, * * * vertisements, announcements and solicitations of such accounts, including direct mailing, circu lars, and notices, whether written or oral, to the * * * * * extent practicable, shall be directed only to per sons residing or employed in New Hampshire and (3) The provisions of this paragraph do not Massachusetts and to persons who are customers apply to deposits subject to negotiable orders of of member banks in those states on the effective withdrawal authorized by Federal law to be is date of this amendment. SECTION 217.5 — WITHDRAWAL OF SAVINGS DEPOSITS. t For this Regulation to be complete as amended effective January 1, 1974, retain: 1) Printed Regulation pamphlet containing Regulation Q dated January 1, 1971. 2) Amendment effective September 10, 1973. 3) Amendments effective September 18, 1973. 4) Slipsheets containing the supplement and amendments effective on the dates as shown herein. k 9 FEDERAL press RESERVE release For Im m ediate R e le a s e December 7 , 1973 The B oard o f G o vernors o f th e F e d e ra l R eserv e System to d ay is s u e d an amendment to i t s R e g u la tio n Q - - g o v e rn in g paym ent o f i n t e r e s t on d e p o s it s u n d e r w hich c u s to m e rs o f member b anks i n M a s s a c h u s e tts and New H am pshire may w r i t e n e g o ti a b le o r d e r s o f w ith d ra w a l (NOWs) a g a i n s t i n t e r e s t - b e a r i n g s a v in g s a c c o u n ts . The am endm ent, e f f e c t i v e J a n u a ry 1, 1974, was a d o p te d p u r s u a n t to new l e g i s l a t i o n p e r m i tt in g a l l d e p o s ito r y i n s t i t u t i o n s i n th e two s t a t e s to a llo w c u sto m e rs to w r i t e NOWs - - w hich f u n c tio n a s c h e c k s - - on s a v in g s a c c o u n ts . The c u sto m a ry ty p e o f c h e ck may be w r i t t e n o n ly a g a i n s t n o n i n t e r e s t - p a y i n g demand d e p o s i t s . The new r u l e s f o r th e u s e o f NOWs by s a v in g s d e p o s it o r s i n F e d e ra l R e se rv e member b an k s i n M a s s a c h u s e tts and New H am pshire a r e : - - Maximum i n t e r e s t p a y a b le on NOW a c c o u n ts i s 5 p e r c e n t . - - NOW a c c o u n ts may be owned o n ly by n a t u r a l p e rs o n s ( o r f i d u c i a r y a c c o u n ts f o r i n d i v i d u a l s ) and n o n - p r o f i t a s s o c i a t i o n s e l i g i b l e to m a in ta in s a v in g s a c c o u n ts . - - To a v o id u n f a i r c o m p e titio n f o r d e p o s it s w ith i n s t i t u t i o n s in n e ig h b o r in g s t a t e s , a d v e r t i s i n g and s o l i c i t a t i o n o f NOW a c c o u n t d e p o s it s s h o u ld be d i r e c t e d to w ard r e s i d e n ts o f M a s s a c h u s e tts and New H am p sh ire. In t h i s c o n n e c t i o n , member b an k s a r e r e q u e s te d to o f f e r MOW a c c o u n ts o n ly to p erm anent o r tem p o rary r e s i d e n t s o f M a s s a c h u s e tts and New H am pshire, p e rs o n s who w ork i n th o s e s t a t e s , and c u r r e n t c u s to m e rs . - - The num ber o f n e g o ti a b le o r d e r s o f w ith d ra w a l t h a t may be p ro c e s s e d a g a i n s t an i n d i v i d u a l NOW a c c o u n t may n o t ex ceed 150 p e r y e a r . The B o a r d 's r u l e s g o v e rn in g th e u s e o f NOWs i n th e two s t a t e s w ere fo rm u la te d f o llo w in g c a r e f u l c o n s id e r a t i o n o f th e h i s t o r y o f th e - 2 - l e g i s l a t i o n and o f a l l comment r e c e iv e d on a t e n t a t i v e s ta te m e n t o f p ro p o se d p o l i c i e s is s u e d by th e B oard on S eptem ber 14. The B oard a ls o c o n s u l t e d w ith th e o t h e r F e d e ra l r e g u l a t o r y a g e n c ie s th ro u g h th e In te r-A g e n c y C o o r d in a tin g C om m ittee. The F e d e ra l D e p o s it I n s u ra n c e C o r p o r a tio n and th e F e d e ra l Home Loan Bank B oard a r e a ls o i s s u i n g r e g u l a t i o n s c o v e rin g i n s t i t u t i o n s u n d e r t h e i r j u r i s d i c t i o n I n M a s s a c h u s e tts and New H am p sh ire. The new r u l e s do n o t r e q u i r e th e im p o s itio n o f s e r v i c e c h a rg e s by member b a n k s on NOW t r a n s a c t i o n s . But th e B oard s u g g e s te d t h a t each i n d i v id u a l b ank c h a rg e a fe e f o r t r a n s a c t i o n s i f i t s e a r n in g s from NOW a c c o u n ts do n o t f u l l y c o v e r th e c o s t o f e s t a b l i s h i n g and s e r v i c i n g su ch a c c o u n ts . NOW d r a f t s w i l l c o n tin u e to be c l e a r e d , f o r a l l d e p o s ito r y i n s t i t u t i o n s , by th e F e d e ra l R e se rv e Bank o f B o sto n th ro u g h member b a n k s . In c o o p e r a tio n w ith th e o t h e r r e g u l a to r y a g e n c ie s , th e B oard - th ro u g h th e F e d e ra l R e se rv e Bank o f B o sto n - - i s e s t a b l i s h i n g a sy ste m f o r m o n ito r in g , on a m o n th ly b a s i s , th e u s e and a c t i v i t y i n NOW a c c o u n ts . The p u rp o se i s to g e n e r a te tim e ly in fo r m a tio n on p u b lic u s e and a c c e p ta n c e o f such a c c o u n ts and to u n c o v e r any i n s t i t u t i o n a l w e a k n e sse s t h a t may a r i s e from e x c e s s iv e p ro m o tio n a l schem es and a c t i v i t i e s . The B oard h a s w r i t t e n th e c h a irm e n and ra n k in g m in o r ity members o f th e co m m itte es and su b c o m m ittee s t h a t c o n s id e r e d th e r e c e n t NOW a c c o u n t l e g i s l a t i o n , to in fo rm them o f th e r e a s o n s u n d e r ly in g th e B o a r d 's a c t i o n . F o llo w in g a r e e x c e r p ts from th o s e l e t t e r s : The B oard h a s p r e d ic a te d i t s a c t i o n s on th e b e l i e f t h a t th e b a s i c p u rp o se o f th e NOW a c c o u n t e x p e rim e n t i s to make money t r a n s f e r s a f e a t u r e o f s a v in g s a c c o u n ts owned by i n d i v i d u a l s . The p rim a ry , b u t n o t e x c lu s i v e , b e n e f i c i a r i e s o f t h i s p o lic y w ould be th o s e who do n o t have c h e c k in g a c c o u n ts b u t keep t h e i r fu n d s in a s a v in g s a c c o u n t i n a com m ercial b a n k , a m u tu a l s a v in g s b a n k , a s a v in g s and lo a n a s s o c i a t i o n o r o t h e r t h r i f t i n s t i t u t i o n . The B oard d o es n o t b e l i e v e t h a t NOW a c c o u n ts s h o u ld be made so a v a i l a b l e and a t t r a c t i v e a s to r e s u l t i n th e w h o le s a le c o n v e rs io n o f demand d e p o s it s i n t o such a c c o u n ts . In f o r m u la tin g i t s r u l e s , th e B oard h a s g iv e n c lo s e a t t e n t i o n to comment i t r e c e iv e d on i t s t e n t a t i v e p r o p o s a ls p u b lis h e d S eptem ber 14, j u s t b e f o r e th e new l e g i s l a t i o n w ent i n t o e f f e c t . The B oard h a s c o n s id e r e d th e view s o f th e o t h e r F e d e ra l r e g u l a t o r y a g e n c ie s c o n c e rn e d , and o f th e b a n k in g o f f i c i a l s i n th e two s t a t e s i n w hich C o n g ress a u th o r iz e d th e e x p e rim e n t i n m aking c h e c k - l ik e w ith d ra w a ls from in te r e s t- b e a r in g d e p o s its . The B oard h a s a l s o so u g h t to be g u id e d by th e l e g i s l a t i v e h i s t o r y o f PL 9 3 -1 0 0 p e r m i tt in g NOW t r a n s f e r s from s a v in g s a c c o u n ts . T h is l e g i s l a t i v e h i s t o r y i n d i c a t e s t h a t th e NOW a c c o u n t e x p e rim e n t was m eant by C o n g ress to b e c o n fin e d to M a s s a c h u s e tts and New H am p sh ire. C o n s e q u e n tly , th e B oard i s r e q u e s t in g member b an k s i n M a s s a c h u s e tts and New H am pshire to l i m i t th e o w n e rsh ip o f NOW a c c o u n ts to perm an en t o r te m p o ra ry r e s i d e n t s o f th o s e s t a t e s , to p e rs o n s who w ork i n th e two s t a t e s and to c u r r e n t c u s to m e rs . S i m i l a r l y , th e B oard h a s lim it e d d i r e c t s o l i c i t a t i o n o f NOW a c c o u n t d e p o s it s by member b an k s t o th e two s t a t e s c o n c e rn e d . The l e g i s l a t i v e h i s t o r y a ls o im p lie s t h a t e l i g i b l e h o ld e r s sh o u ld be l im it e d to n a t u r a l p e r s o n s . S a v in g s a c c o u n ts a t com m ercial b anks a r e l im it e d to i n d i v i d u a l s , to f i d u c i a r y a c c o u n ts f o r th e b e n e f i t o f i n d i v i d u a l s , and to c e r t a i n n o n - p r o f i t a s s o c i a t i o n s . The B oard h a s c o n c lu d e d t h a t c o n f in in g th e u se o f NOW a c c o u n ts a t member b an k s to th o s e who h av e s a v in g s a c c o u n ts a t th o s e b an k s c a r r i e s o u t th e i n t e n t o f C o n g re s s . The B oard does n o t b e li e v e t h a t C o n g ress in te n d e d f o r c o r p o r a tio n s and s t a t e and l o c a l g o v e rn m ents to h a v e a c c e s s to NOW a c c o u n ts , and i t s e e s no p r e s e n t re a s o n f o r p e r m i tt in g su ch a c c e s s . The B oard b e l i e v e s t h a t a l l d e p o s ito r y i n s t i t u t i o n s o f f e r i n g t h i s s e r v i c e sh o u ld b e p e r m itte d to pay th e same r a t e s o f I n t e r e s t on th e d e p o s i t s supporting.N O W a c c o u n ts . I n i t s p u b l i c a t i o n o f S eptem ber 14 s o l i c i t i n g comment on t e n t a t i v e p r o p o s a ls f o r th e u s e o f NOW a c c o u n ts , th e B oard im p lie d c o n c e rn o v e r th e p o s s i b i l i t y t h a t NOW a c c o u n ts m ig h t be o f f e r e d a s a lo s s le a d e r fo r a t t r a c t i n g d e p o s its . In th e i n t e r e s t o f m a in ta in in g sound b a n k in g , i n s t i t u t i o n s i n th e s e two s t a t e s sh o u ld a v o id p r e d a to r y c o m p e titio n i m p l i c i t i n l o s s l e a d e r p ro m o tio n . The B oard s u g g e s ts t h a t f e e s s h o u ld be c h a rg e d w here th e c o s t s o f m a in ta in in g and s e r v i c i n g NOW a c c o u n ts , i n c lu d in g th e i n t e r e s t p a id to th e h o l d e r o f th e a c c o u n t, a r e n o t f u l l y c o v e re d by th e b a n k 's e a r n in g s on th e d e p o s it s s u p p o r tin g th e a c c o u n t. One r e a s o n f o r t h i s c o n c e rn i s th e f a c t t h a t s a v in g s a c c o u n ts a t a l l th e d e p o s ito r y i n s t i t u t i o n s i n M assa c h u s e t t s and New H am pshire a r e s m a ll on th e a v e ra g e - l e s s th a n $250 — and t h a t th e l a r g e m a jo r ity o f a l l s a v in g s a c c o u n ts i n th e two s t a t e s i s u n d e r $ 1 ,0 0 0 . T hus, a b a n k 's o p p o r t u n i t i e s f o r e a r n in g s on su ch a c c o u n ts a r e l i m i t e d . When one k e e p s i n mind th e i n t e r e s t p a id to h o ld e r s o f su ch a c c o u n ts , th e c o s ts o f s e t t i n g up a c c o u n ts and th e s e r v i c i n g o f t r a n s a c t i o n s , i t i s c l e a r t h a t u n l e s s f e e s a r e c h a rg e d f o r NOW t r a n s f e r s m any, i f n o t m o st, such a c c o u n ts w ould be o p e ra te d a t a l o s s to th e i n s t i t u t i o n o f f e r i n g them . T h is w ould te n d to u n d erm in e th e v i a b i l i t y o f th e e x p e rim e n t by u n d e rm in in g th e e a r n in g c a p a c ity and u l t i m a t e l y th e so u n d n e ss o f i n s t i t u t i o n s c a u g h t i n a c o m p e titiv e b i n d . The B oard i s r e l u c t a n t to d e a l w ith t h i s p o s s i b i l i t y by f i x i n g th e money e q u iv a l e n t o f th e c o s ts o f h a n d lin g a fu n d s t r a n s f e r i n a NOW a c c o u n t, s in c e t h i s w i l l v a ry from i n s t i t u t i o n to i n s t i t u t i o n o r c u sto m e r to c u s to m e r, o r even from t r a n s a c t i o n to t r a n s a c t i o n . The b e s t s o l u t i o n , t h e r e f o r e , a p p e a rs t o be f o r an i n d i v i d u a l bank to c h a rg e f e e s i n th e l i g h t o f i t s own know ledge o f th e r e l a t i o n o f i t s c o s t s t o i t s e a r n in g s on NOW a c c o u n ts . The NOW a c c o u n t may become th e v e h ic l e f o r w h o le s a le c o n v e rs io n o f c h e c k in g a c c o u n ts to NOW a c c o u n ts u n le s s some l i m i t a t i o n i s im posed upon th e u s e o f NOW t r a n s fers. The B oard h a s t h e r e f o r e s e t a tw e lv e m onth l i m i t o f 150 su ch t r a n s f e r s p e r a c c o u n t. The NOW a c c o u n t s h o u ld be o f p a r t i c u l a r b e n e f i t to t h a t segm ent o f th e p u b lic t h a t d o es n o t m a in ta in c h e c k in g a c c o u n ts , a n d , t h e r e f o r e , d o es n o t make l a r g e num bers o f paym ents i n some form o t h e r th a n c u r r e n c y . The l i m i t o f 150 t r a n s f e r s p e r y e a r , c o n s e q u e n tly , seem s a p p r o p r i a t e a t th e o u t s e t to s e r v e t h a t segm ent o f th e p u b lic t h a t th e B oard e x p e c ts w i l l d e r i v e th e p rim a ry b e n e f i t from th e NOW a c c o u n t.
@FedFRASER