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F ederal r eser ve Bank of D allas DALLAS, TEXAS 7S222 C ircular No. 77-140 December 16, 1977 FURTHER EXPLANATION OF REGULATION Q AMENDMENT TO ALL MEMBER BANKS AND OTHERS CONCERNED IN THE ELEVENTH FEDERAL RESERVE DISTRICT: The Board of Governors of the Federal Reserve System amended section 217.4(d) of Regulation Q to permit extensions in the maturity of time deposits ef fective December 1, 1977. The amendment was mailed to you u n d e r Circular No. 77-139, dated December 8, 1977. This letter is intended to provide fu rth er explanation as to the circum stances u n d e r which the maturity of existing time deposit agreements may be ex tended without imposition of an early withdrawal penalty. Section 217.4(d) of Regulation Q cu r re n tly provides that any amend ment of a time deposit contract that results in either an increase in the rate of interest paid or a change in the maturity of the deposit constitutes a payment of the time deposit before maturity that is subject to the early withdrawal penalty provision. As a result of the Board's amendment, effective December 1, 1977, §217.4(d) will provide that any amendment resulting either in an increase in the rate of interest paid or in a reduction in the maturity of the time deposit consti tutes a payment of the deposit before maturity requiring imposition of the early withdrawal penalty. T h erefore, the amendment enables a member b a n k , at the request of its deposito r, to extend the maturity of an outstanding time deposit without treating such extension of maturity as an early withdrawal so long as the rate of interest paid is not increased. Consistent with longstanding Board policy, if a member bank extends the maturity of an outstanding time deposit, that new certificate must have a ma turity from the date of extension at least equal to the minimum period necessary und er §217.7 of Regulation Q to obtain the rate of interest to be paid u n d e r the e x tended deposit agreement. For example, a time certificate of deposit with an original maturity of four y e a r s that has two y ears remaining until maturity and earns interest at a rate of 7 1/4 percent must be extended for at least an additional Banks and others are encouraged to use the fo llo w in g incoming W ATS numbers in contacting this Bank: 1-800-492-4403 (intrastate) and 1-800-527-4970 (interstate). For 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) - 2 - two y ears so that the total maturity of the certificate from the date of extension is at least four y e a r s , in o r d e r for the certificate to continue to earn interest at 7 1/4 percent. The fact that the deposit has already been on deposit for two years is not relevant in determining the minimum maturity from the date of extension. In the same situation, should the depositor d e s ire to increase the maturity for only one additional y e a r , leaving a total of th re e y ears remaining to maturity after ex tension, the maximum permissible rate on such a deposit would be 6 1/2 percent. Without a restriction of the kind describ ed above, the maturity of an outstanding certificate could be extended so as to enable the depositor to obtain interest at a rate higher than that permitted for the additional time the funds will remain on deposit and thus could r e s u lt in evasions of the limitations on maximum interest rates p r e s c r ib e d by the Board. T h u s , if a fo u r-y ear certificate could be amended to extend its maturity for an additional month and could continue to earn interest at the fo u r- y e a r rate, successive extensions would make it possible for the depositor, after an initial four y e a r s , to continue to obtain the maximum rate of 7 1/4 percent while in effect being able to withdraw his deposit at the end of each additional month. Therefore, und er the Board's amendment, this type of extension is not permitted without imposition of a penalty. The amendment to the penalty rule also enables a member bank to con solidate a customer's outstanding certificates of deposit into one new certificate so long as the rate of interest paid on the consolidated time deposit is not hig h er than the lowest rate of interest paid on any of the certificates being consolidated. Of co u rse, as in the case of an extension of maturity of a single time deposit, it is r e q u ire d that from the date of consolidation the new certificate possess a minimum maturity at least equal to the minimum period n ecessary u n d e r §217.7 of Regula tion Q to obtain the rate of interest to be paid on the consolidated deposit. In no event may the maturity of any of the time deposits being consolidated be reduced as the result of the consolidation unless an early withdrawal penalty is imposed. Additional examples of the application of the new rule follow. Example 1 The depositor holds a time certificate of deposit earn in g interest a t a rate of 7 1/2 percent with an original maturity of six y e a r s . The certificate has three y ears remaining until maturity. In this situation, the maturity of the c e r ti ficate must be extended for at least th ree y e a r s so that the maturity of the certifi cate from the date of extension is at least six y e a r s , in o r d e r for the bank to continue to pay interest on the certificate at a rate of 7 1/2 percent. If the maturity of the certificate is extended for only one year so that the maturity from the date of extension is four y e a r s , the maximum rate of interest that may be paid on the certificate from the date of extension is 7 1/4 percent. - 3 - Example 2 The depositor holds several certificates obtained on different dates all with original maturities of four y e a r s and earn in g interest at the rate of 7 1/4 p ercen t. These certificates may be consolidated into one new certificate with a maturity from the date of consolidation of four y ears that earn s interest at the rate of 7 1/4 p ercent. Example 3 The depositor holds two certificates with original maturities of four years and six y e a r s earning interest at rates of 7 1/4 and 7 1/2 percen t, r e s p e c tively. The certificates have remaining maturities of two y ears and four y e a r s , respectively. In this case, the certificates could be consolidated into one new certificate with a maturity of four or more y e a r s from the date of consolidation earning interest at the maximum rate of 7 1/4 percent. Consolidation into one new certificate earning interest at the rate of 7 1/2 percen t would not be possible with out imposing an early withdrawal penalty even if the maturity were six y ears or more from the date of consolidation since such action would result in an increase in the rate of interest paid on one of the original deposits from 7 1/4 to 7 1/2 p e r cent. In o r d e r to pay interest on the new certificate at the rate of 7 1/2 percent, the bank would be re q u ire d to impose the early withdrawal penalty only upon the funds represented by the certificate with the original maturity of four years e a r n ing interest at the rate of 7 1/4 percent. If you have any additional questio ns, you may contact our Examination Department, Consumer Affairs Section, at Ext. 6169 or Ext. 6171. Sincerely y o u r s , Robert H . Boykin First Vice President
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