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FEDERA L RESERVE BANK OF DALLAS
DALLAS, TEXAS
75222
Circular No. 81-205
October 28, 1981
DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE
All Savers Certificate Rate and
Proposals for Short-Term Time Deposits
TO ALL MEMBER BANKS
AND OTHERS CONCERNED IN THE
ELEVENTH FEDERAL RESERVE DISTRICT:
In an effort to assist depository institutions that issued All Savers
Certificates on Sunday, October 4, 1981, with annual investment yields of
12.61 percent, the staff of the Federal financial institutions regulatory
agencies represented on the Depository Institutions Deregulation Committee
(DIDC) is advising those institutions to contact depositors holding those
certificates and offer them a choice of options. The options are listed and
explained in the enclosed press release dated October 14, 1981.
Also, the DIDC is considering amending its rules to establish a new
short-term deposit instrument to permit federally insured commercial banks,
mutual savings banks and savings and loan associations to compete more
effectively. The Committee is requesting public comment on the desirability
of authorizing such an instrument. Comments should be received by the DIDC
on or before Monday, November 16, 1981.
Enclosed are copies of the press release dated October 14, 1981,
and the Federal Register notice which will more fully explain the proposed
new rule. Interested parties are invited to submit written data, views or
arguments concerning the proposed rules to Steven L. Skancke, Executive
Secretary, Depository Institutions Deregulation Committee, Room 1054,
Department of the Treasury, 15th Street and Pennsylvania Avenue, N.W.,
Washington, D.C. 20220. All material submitted should include the Docket
No. D-0023.
Questions regarding this circular should be directed to this Bank's
Legal Department, Ext. 6171.
Additional copies of this circular will be furnished upon request to
the Department of Communications, Financial and Community Affairs of this
Bank, Ext. 6289.
Sincerely yours,
William H. Wallace
First Vice President
B a n k s a n d o t h e r s a r e e n c o u r a g e d to u s e th e fo llo w in g in c o m in g W A T S n u m b e r s in c o n t a c t in g th is B ank:
1-800-442 -714 0 (in tr a s t a te ) a n d 1-800-527-9200 (in te rs ta te ). Fo r c a lls p la c e d lo cally, p l e a s e u s e 651 plus th e
e x te n s io n referred to ab ove.
This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)
DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE
Washington, D.C. 20220
PRESSRELEASE
October 14, 1981
Press Contact:
Robert Levine
(202)566-5158
All Savers Certificate Rate for Sales on Sunday, October 4, 1981
The Committee has been advised that some depository
institutions issued All-Savers Certificates ("ASCs") on
Sunday, October 4, with investment yields of 12.61 percent.
Depository institutions are reminded that under the Committee's
regulations the new ceilings for ASCs are effective at the
beginning of the calendar week following the Treasury auction
of 52-week U.S. Treasury bills.
(12 C.F.R.
§ 1204.116(a)). A
calendar week begins on Sunday.
Consequently, ASCs issued
on Sunday, October 4, must have an annual investment yield
of 12.14 percent in order to qualify for the interest exclusion
for Federal income tax purposes.
In view of the apparent confusion about when the new rate for
ASCs went into effect, the staff of the Federal financial
institutions regulatory agencies represented on the Committee
have advised that the depository institutions that issued
ASCs on October 4 with annual investment yields of 12.61
percent should contact depositors holding these certificates
and offer them a choice of the following options:
(1) The ASC may continue to have an annual investment
yield of 12.61 percent, but the interest earned on the
certificate will not be tax-exempt.
(2) The depositor may rescind the deposit contract and
withdraw the funds penalty-free.
Any interest paid to
date of recession will not be tax-exempt.
(3) The annual investment yield on the ASC may be
lowered from 12.61 percent to 12.14 percent as of
October 4, 1981, the date of deposit, in which event
the interest will be tax-exempt.
If a depository institution has not received a response
from an affected depositor within a reasonable period of
time, the institution should amend the ASC to provide for an
annual investment yield of 12.14 percent and should inform
the depositor of this fact.
This action will preserve the
dominant characteristic of the deposit's tax-exempt status
for the interest income, to the benefit of the depositor.
COMPTROLLER O F THE CURRENCY
FEDERAL RESERVE BOARD
FEDERAL DEPOSIT INSURANCE CORPORATION
NATIONAL CREDIT UNION ADMINISTRATION
FEDERAL HOME LOAN BANK BOARD
DEPARTMENT OF THE TREASURY
DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE
Washington, D.C. 20220
PRESSRELEASE
October 14, 1981
Press Contact:
Robert Levine
(202)566-5158
DIDC Proposals for Short-Term Time Deposits
The Depository Institutions Deregulation Committee is
requesting public comment on the desirability of authorizing
a new short-term deposit instrument to permit Federally
insured commercial banks, mutual savings banks and savings
and loan associations to compete more effectively, especially
with money market mutual funds, for short-term deposits.
To facilitate comment, the Committee staff is proposing
three separate instruments:
(1)
A $5,000 minimum denomination transactions account
with no interest rate ceiling;
(2)
A $10,000 minimum denomination 91-day account with
a 14-day required notice for withdrawal thereafter,
and a floating interest rate tied to the 13-week
Treasury bill discount rate; and
(3)
A $25,000 minimum denomination account with no
interest rate ceiling.
Comment is requested not only on these specific pro
posals, but also on the features of each, suggested changes,
and other short-term instruments that members of the public
would like the Committee to consider.
The issue of a new short-term deposit instrument will be
discussed at the December 16, 1981 DIDC meeting.
To permit
timely analysis, all comments must be received by the DIDC
staff by Monday, November 16, 1981.
COMPTROLLER O F THE CURRENCY
FEDERAL RESERVE BOARD
FE D E R A L DEPOSIT INSURANCE CORPORATION
NATIONAL CREDIT UNION ADMINISTRATION
FEDERAL HOME LOAN BANK BOARD
DEPARTMENT OF THE TREASURY
DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE
12 CFR Part 1204
[Docket No. D-0023]
Short-Term Time Deposit Instruments
AGENCY:
Depository Institutions Deregulation Committee.
ACTION:
Proposed rulemaking.
SUMMARY: The Depository Institutions Deregulation Committee (the
"Committee") is considering amending its rules to establish a new short
term deposit instrument that would enable federally insured commercial
banks, mutual savings banks, and savings and loan associations to
compete more effectively for short-term funds. The Committee requests
comments on the desirability of authorizing a new short-term deposit
instrument and, in particular, comments on the following instruments:
(1) a $5,000 minimum denomination transactions account with no interest
rate ceiling; (2) a $10,000 minimum denomination 91-day account with a
14-day required notice for withdrawal thereafter, and a floating
interest rate tied to the 13-week Treasury bill discount rate; and (3) a
$25,000 minimum denomination account with no interest rate ceiling and a
1-day notice requirement. The Committee also requests comments or ideas
on any other short-term instrument or combination of instruments which
respondents believe would be desirable.
DATE:
Comments must be received by (30 days from date of publication).
ADDRESS:
Interested parties are invited to submit written data, views,
or arguments concerning the proposed rules to Steven L. Skancke,
Executive Secretary, Depository Institutions Deregulation Committee,
Room 1054, Department of the Treasury, 15th Street and Pennsylvania
Avenue, N.W., Washington, D. C.
20220. All material submitted should
include the Docket Number D-0023 and will be available for inspection
and copying upon request, except as provided in § 1202.5 of the
Committee's Rules Regarding Availability of Information (12 CFR §
1202.5).
FOR FURTHER INFORMATION CONTACT: David Ansell, Attorney, Office of the
Comptroller of the Currency (202/447-1880); F. Douglas Birdzell,
Counsel, Federal Deposit Insurance Corporation (202/389-4324); Rebecca
Laird, Senior Associate General Counsel, Federal Home Loan Bank Board
(202/377-6446); Paul S. Pilecki, Senior Attorney, Board of Governors of
the Federal Reserve System (202/452-3281); Randall J. Miller, Acting
Director, Office of Policy Analysis, National Credit Union
Administration (202/357-1090); or Allan Schott, Attorney-Adviser,
Treasury Department (202/566-6798).
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SUPPLEMENTARY INFORMATION: The Depository Institutions Deregulation Act
of 1980 (Title II of P.L. 96-221; 12 U.S.C. §§ 3501 et sej.) ("Act") was
enacted to provide for the orderly phaseout and ultimate elimination of
the limitations on the maximum rates of interest and dividends that may
be paid on deposit accounts by depository institutions as rapidly as
economic conditions warrant. Under the Act, the Committee is authorized
to phase out interest rate ceilings by any one of a number of methods
including the creation of new account categories not subject to interest
rate limitations or with interest rate ceilings set at market rates of
interest.
At its June 25, 1981 meeting, the Committee considered the issue of
short-term time deposit instruments and decided to request public
comments on the desirability of authorizing a new deposit instrument
having characteristics similar to money market mutual funds (MMFs). 44
Fed. Reg. 36712 (July 15, 1981). The Committee did not put forth a
specific proposal at that time.
Over 400 comments were received by the
Committee on this issue.
(An analysis of the comments is contained in
the DIDC staff paper "Proposals to Change the Method of Calculating the
Ceiling Rate on MMCs and Consideration of Creation of a New Short-Term
Deposit Instrument", September 16, 1981 which is available upon request
from the Executive Secretary of the Committee). Approximately half of
the respondents favored creation of a new short-term instrument and half
were opposed. Those against the authorization of a new short-term
instrument, generally thrift institutions, argued that the higher costs
associated with a new deposit instrument and the potential shifts from
savings accounts would add to their current earnings problem.
At its September 22, 1981 meeting, the Committee decided to solicit
comments on several new deposit alternatives so that the public would
have an opportunity to present their views on the instruments under
consideration.
In light of the previous comment period on the same
issue and the desire to consider this issue at the December 16, 1981
meeting, the Committee believes that a period of 30 days is sufficient
time for public comment on the current proposal.
The Committee has considered the potential effect on small entities of
the proposal to establish a new short-term instrument, as required by
the Regulatory Flexibility Act (5 U.S.C. § 603 e _ seq.). In this regard,
t
the Committee's action would not impose any new reporting or
recordkeeping requirements.
Consistent with the Committee's statutory
mandate to eliminate deposit interest rate ceilings, this proposal would
enable all depository institutions to compete more effectively in the
marketplace for short-term funds. Depositors generally should benefit
from the Committee's proposal, since the new instrument would provide
them a market rate of return.
If low-yielding deposits shift into the
new account, depository institutions might have increased costs as a
result of this action. However, their competitive position vis-a-vis
nondepository competitors would be enhanced by their ability to offer a
-3 -
competitive short-term instrument at market rates. The new funds
attracted by the new instrument (or the retention of deposits that might
otherwise have left the institution) could be invested at a positive
spread and would therefore at least partially offset the higher costs
associated with the shifting of low-yielding accounts.
In structuring a regulation authorizing a new short-term instrument, the
relevant variables for the Committee to consider are yield, minimum
denomination, maturity, and transactions characteristics. At one
extreme, the creation of an account with no interest rate ceiling, no
minimum denomination, no minimum maturity requirement and a transactions
capability, would provide depository institutions with an instrument
which would be competitive with MMF shares, and would thereby help stem
deposit outflows and indeed might induce deposit inflows. Such an
account could also result in substantial shifting of deposit funds from
low-yield deposit accounts, resulting in increased costs to depository
institutions. The introduction of another interest-bearing transaction
account could also have an adverse effect on the conduct of monetary
policy.
Creation of an account with a high minimum denomination and/or a longer
term-to-maturity, however, might minimize shifting, but would be less
competitive with MMFs and therefore less effective in attracting new
deposits.
In creating any short-term deposit category, major factors
that must be taken into account include potential operational problems,
the effect on earnings of depository institutions and the competitive
viability of the instrument.
Because of the need to consider all of the variables discussed above,
the Committee requests comments concerning desirable short-term
instrument characteristics.
In particular, the Committee requests
comments on the following aspects of a new short-term instrument:
(a)
What should be the minimum denomination requirement on the
short-term instrument?
(b)
Should the account be ceilingless or indexed to market rates?
Should the ceiling be equal to the market rate? Should the
institution be allowed to offer a floating rate?
(c)
If indexed, should the regulation include a thrift-commercial
bank interest rate ceiling differential?
(d)
Should a minimum maturity or notice requirement be imposed on
the account?
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(e)
Should third-party transfers be permitted?
[Federal Reserve
Board Regulation D (12 CFR Part 204) stipulates that the
account would be subject to higher reserve requirements than
for other time deposits if the institution permits more than
three transfers per month to another account or to a third
party.]
Should transfers be limited by regulation to some
maximum number per month?
(f)
Should the eligibility for this account be restricted in any
way, for example, to individuals only?
(g)
What is the preferred combination of the above features?
(h)
Is the authorization of a short-term instrument with
characteristics similar to MMF shares desirable at this time?
What would be the impact of introducing such an instrument on
the earnings of depository institutions?
(i)
Would an alternative to a short-term instrument, such as
lowering the minimum denomination on MMCs, be preferable to
introducing a new short-term instrument at this time?
As an example of how the minimum denomination, maturity and transaction
features of a short-term account might be combined, the Committee has
developed three specific proposals. Comments are requested on the
desirability of each of these instruments, including the operational
feasibility, the cost implications, and the expected benefits to be
provided by the instruments.
These comments should address the
proposals, both individually and in relation to one another, as well as
any other proposed instruments.
1.)
A $5,000 minimum denomination transaction account with no interest
rate ceiling.
If the balance on this account falls below $5,000 at any time
during a monthly period, the maximum rate payable on this account
would be reduced for the period to the rate in effect for NOW
accounts (currently 5-1/4%). Any withdrawals, including transfers
to third parties, could be made only in amounts of $500 or more.
It should be noted that if a depository institution would elect to
permit more than three transfers per month to another account or to
a third party, the instrument would be subject to transaction
account reserve requirements as stipulated by Federal Reserve
Regulation D.
In addition to addressing the desirability of the above account,
respondents are requested to address the following questions:
(a)
What would be the effect of this account on deposit flows
(both on the expected inflows and internal shifts of funds)
and on the earnings of depository institutions?
/
-5 -
(b)
(c)
Should there be an interest rate ceiling on this account? If
so, should the ceiling rate be indexed to a market rate such
as the yield on 30-day Treasury Bills? Should institutions be
given the option of using a moving average of past T-bill
rates as an interest rate ceiling? Should a thrift-commercial
bank ceiling differential be imposed?
(d)
2.)
Should the minimum withdrawal amount be smaller or larger?
Should the number of third-party transfers be limited?
how many transfers per month should be permitted?
If so,
A $10,000 minimum denomination time deposit with an initial
maturity of 91-days and a 14-day notice period thereafter, and an
interest rate ceiling tied to the 13-week Treasury bill discount
rate.
It would be the institution's option to offer this instrument with
the interest rate fixed for periods of 91 days or on a floating
rate basis (e.g., set daily or weekly). Depositors would be
required to keep their funds on deposit for at least 91 days.
Depositors could maintain funds in the account after the initial
maturity of 91 days, and the withdrawal of those funds would be
subject to a 14-day notice requirement. Under this option the
institution could offer a fixed or floating rate on the account for
the initial 91 days, and a floating rate thereafter. No additions
to this account or partial withdrawals from principal would be
permitted, and the account would not be permitted to function as a
transaction account.
In addition to commenting on the desirability of authorizing such an
account, respondents are requested to address the following issues:
(a)
Would this account serve to lessen the outflow of deposits at
depository institutions? Would there be substantial shifting
from other accounts within the same institution? How
effective would the new account be in attracting new funds?
What would be the effect on earnings?
(b)
Should depository institutions be given the option of using a
moving average of past T-bill rates as an interest rate
ceiling? Should there be a differential between the thrift
and commercial bank ceilings? Should the account have a
ceiling rate at all?
(c)
Should additions or partial withdrawals be permitted after the
initial 91-day maturity?
If partial withdrawals are
permitted, should the balance in the account be permitted to
fall below $10,000? Should there be a minimum withdrawal
amount, such as $500? Would it be preferable to structure the
account so that additional deposits after the first $10,000
would reset the 91-day initial maturity?
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(e)
3.)
Should the 14-day notice period be required or should
depository institutions be permitted to establish alternative
maturity dates at least 14 days apart?
A $25,000 minimum denomination account with no interest rate
ceiling, a minimum 1-day notice requirement, and no additions or
withdrawals.
Comments are requested on the general desirability of this account as
well as on the following specific issues:
(a)
What is the estimated effect of this account on deposit
flows (both in terms of internal shifts and expected inflows
of deposits) and on earnings?
(b)
Would a notice requirement of a different length be preferred:
7 days? 14 days? More than 14 days? Should the imposition of
the notice requirement be at the institution's option, similar
to the current rules on passbook accounts?
(c)
Should there be an interest rate ceiling?
Ifso,should
there
be a bank-thrift differential? Should depository institutions
be given the option of using a moving averageof past market
rates as a ceiling?
In addition to addressing the specific short-term instrument proposals,
above the Comroitee requests comments on whether or not a new short-term
deposit instrument should be introduced at this time. Respondents are
requested to specify their relative preferences for the above
instruments, and what modifications, if any, would be desirable.
By Order of the Committee, October 9, 1981.
Steven L. Skancke
Executive Secretary
@FedFRASER