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federal Reserve Ba n k o f D allas DALLAS, TEXAS 75222 Circular No. 77-52 April 28, 1977 R E G U LA TIO N Q — IN T E R E S T ON DEPOSITS T O A L L MEMBER BANKS A N D O TH E R S CO NCERNED IN TH E ELE VE NTH FE D E R A L RESERVE D IS T R IC T : T h e Board of G o v e rn o rs of the F e d e ra l R e s e rv e System has adopted an am endm ent to its R e g ulation Q , " In te r e s t on D e p o s its ," to e stab lis h a new c a te g o ry of tim e deposits for In d iv id u a l R e tirem e n t Accounts and Keogh p la n s . T h e a m end ment becomes e ffe ctive J u ly 6, 1977. In announcing th is action the Board issued the fo llo w in g statem ent to the press: T h e Board of G o v e rn o rs of the F e d e ra l R e s e rv e System announced today th a t it is e s ta b lis h in g a new c a te g o ry of tim e de p o s it accounts to b e n e fit in d iv id u a ls s av ing fo r t h e i r r e tir e m e n t. T h e B o ard's action am ended R e gu latio n Q (In te r e s t on Deposits) to c re a te a c ateg o ry of deposits u n d e r w h ic h m ember banks could pay m axim um in te r e s t rates fo r c o n s u m e r-ty p e tim e deposits to s a v e rs in In d iv id u a l R e tire m e n t A c c o u n ts !/ and Keogh P l a n ! / R e tire m e n t A c c o u n ts . T h e main fe a tu res of th e new class of r e tir e m e n t s av in g s deposits a re : — It w i l l become e ffe c tiv e a fte r 90 days (J u ly 6 , 1977) . V T h e E m ployee R e tire m e n t Income S e c u r ity A c t of 1974 (E R IS A ) p e rm its i n d i v i d uals not c o ve re d b y a r e tir e m e n t p lan to d eposit in In d iv id u a l R e tire m e n t Accounts (IR A s ) for r e tir e m e n t p u r p o s e s , t a x - d e f e r r e d c o n trib u tio n s up to $1, 500 a y e a r , or 15 p e r c e n t of g ro ss incom e, w h ic h e v e r is less. 2 / Keogh ( H . R . 10) p la n accounts w e r e a u th o r iz e d u n d e r the S e lf-E m p lo y e d I n d i v id u a ls T a x R e tire m e n t A c t of 1962. T h e A c t c u r r e n t ly p e rm its a s e lf-e m p lo y e d p e rson to deposit in a Keogh p la n account t a x - d e f e r r e d c o n trib u tio n s u p to $ 7,500 a y e a r , o r 15 p e rc e n t of g ros s income, w h ic h e v e r is less. Banks and others are encouraged to use the follo w in g to ll-fr e e incoming WATS numbers in contact g th is Bank: 1-8 0 0 -49 2 -4 40 3 (intra s ta te ) and 1 -8 0 0 -52 7 -4 97 0 (in te rs ta te ). For c a lls placed lo c a lly , p lease 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 - — M em ber banks may pay in te re s t on IRA and Keogh plan time deposits at a rate of in te re s t equal to the h ig h e s t rate p e rm is s ib le u n d e r R e gu lation Q , for time deposits of any m a tu rity or denom ination u n d e r $ 1 0 0 ,0 0 0 , by a F e d e r a lly in s u re d commer cial b a n k , mutual s av in g s b a n k or savings and loan association. T h is is p r e s e n tly 7 .7 5 p e r c e n t. — No minimum denom ination w ould be r e q u ir e d for this class of d e p o s it. — A m a tu r ity of th re e y e a r s o r more w o uld be r e q u i r e d . — H o w e v e r , as w ith o th e r types of IRA or Keogh accounts, w i t h d r a w a ls may be made before m a tu r ity w ith o u t p e n a lty for e a r ly w ith d r a w a l if the d e p o s ito r reaches the age of 59?, o r is d is a b le d . — M em ber b a nks may m odify e x is tin g IRA o r Keogh p la n agreem ents to p e r m it re tire m e n t s a v e rs to take a d v a n ta g e of this new r u le . R e tire m e n t s a v e rs may elect to use o th e r types of tim e deposits for t h e i r IRA o r Keogh p la n fu n d s , such as o r d i n a r y s av in g s accounts or time deposits w ith m a tu ritie s of less than th re e y e a r s . In such cases, the accounts w i ll be s u bject to the e x is tin g c e ilin g rates of in te re s t p r e s c rib e d by R egulation Q . In ta k in g its action the B oard noted a C o n g re s sio n a l re p o rt in d ic a t ing th a t about h a lf of a ll em ployees in p r iv a t e em plo ym en t a re not c o ve re d b y r e tir e m e n t p la n s . T h e Board estim ated th a t fo r r e tir e m e n t s a v e rs c o n trib u tin g the maximum y e a r l y amount u n d e r a Keogh p lan at a m ember b a n k for 30 y e a r s , the h ig h e r in te r e s t a llo w a b le u n d e r the new c ateg o ry could in c re a s e re tir e m e n t s av in g s by up to $ 50,000 and that the in crease for p a rtic ip a n ts u n d e r IRAs could be up to $ 1 0 ,0 0 0 . A t p r e s e n t, R e g u la tion Q p e rm its t h r i f t in s titu tio n s to pay a q u a r t e r of one p e rc e n t more in te re s t on such deposits than com m ercial b a nks may p a y . "Such a p e n a lty fo r choosing deposits at a p a r t i c u l a r type of in s titu tion is c le a r ly inconsistent w ith the o bjectives of m a x im iz in g the total amount of e a rn in g s on re tire m e n t s av ings that the C ongress sought to e n co u ra g e th ro u g h e s tab lis h m en t of IRA and Keogh p ro g ra m s" the B o a rd 's announcem ent s a id . T h e B o a rd 's announcem ent noted that issues r e la tin g to th e creation o f a new dep osit c ateg o ry fo r IRA o r Keogh funds have been the subject of sub stan tial p u b lic comment o v e r the cou rse of n e a r ly two y e a r s . In June 1975 the Board re quested p u b lic comment on a n u m b e r of questions re la tin g to IR A s , in c lu d in g the questions w h e th e r the e x i s t ing schedule of in te re s t ra te c e ilin g s that can be paid on IRA deposits should be in creased and w h e th e r m em ber b a n ks should be p e rm itte d to pay in te re s t on IRA deposits at rates equal to those that may be paid b y s av in g s and loan associations and mutual s av in g s b a n k s . In J u ly 1976, the Board announced th a t it was of the v iew that IRA p a rtic ip a n ts should be p e rm itte d to obtain the h ig h e s t rate of in te re s t p e rm is s ib le on t h e i r re tir e m e n t s av ings re g a rd le s s of w h e r e the funds a r e m a in ta in e d . It was a n tic ip a te d that f u r t h e r action b y the B oard to p e r m it m em ber banks to o ffer IRAs on a f u l l y co m p etitive basis w o uld be a p p r o p r ia t e in e a r ly 1977. " A c c o r d in g ly , " the Board s a id , "th e p u b lic has had am ple o p p o r tu n it y to comment on the issues r e le v a n t to the B o a rd 's action e s ta b lis h ing a special c ateg o ry of deposit fo r IRAs and K e o g h s ." By adopting a final r u le at this tim e , the Board s a id , p u b lic u n c e r ta in ty about IRA and Keogh accounts w i l l be rem oved and r e t i r e ment s a v e rs may b e g in im m ed iately to p la n t h e i r re tire m e n t p ro g ra m s . T h e 9 0 -d a y d e fe r r a l of the e ffective date g iv e s m ember b a nks tim e to make o p eratio nal and o th e r changes and w i l l g iv e them o p p o rtu n ity to compete fo r IR A and Keogh deposits on an equal b a s is . T h e B o a rd 's announcem ent pointed out that p r e f e r r e d tax tre atm en t was g iv e n to IRAs to e n co u ra g e s av ing s for r e tir e m e n t, and not to e x tend a c om petitive ad va n ta g e fo r a p a r t i c u l a r class of fin a n c ia l in s titu tion . A s u r v e y conducted by the Board in d ica te d th a t as of D ecem ber 31, 1976, com m ercial banks had obtained o n ly 35 p e rc e n t of the IRA m a rk e t, w h ile a ccounting for 47 p e rc e n t o f the total household tim e and savings dep osit m a rk e t (see enclosed ta b le ) . T h e B oard's action was ta k en at th is time because of a n u m b e r of o th e r reasons that it found c o m p e llin g , in c lu d in g : — T h e r e is s till a la r g e n u m b e r o f people e lig ib le to e stab lis h IRA o r Keogh accounts w ho ha ve not done so, due p a r t l y , the Board b e lie v e s , to lack of a d v e r tis in g o f such accounts b y com m ercial b a nks d u e to t h e i r non com petitive p o s itio n . I ^V I - a - — M a k in g re tire m e n t s av in g s accounts of equal v a lu e at a ll depo sitories e a r l y in the y e a r may avoid s u b s ta n tia lly d im in is h in g the n u m b e r of people who s ta rt re tire m e n t s av ings this y e a r . — Banks and o th e r fin a n c ia l in s titu tio n s o ffe r in g IR A and Keogh plan accounts w ill r e q u i r e a sub stan tial amount of lead tim e to d e ve lo p m a rk e tin g p lans that can be p u t into effect s u ffic ie n tly in a d va n c e of y e a r - e n d to be u s e f u l . By p re v io u s action the Board has made IRA and Keogh p la n deposits s u bject to the same ru les u n d e r R e g ulation Q . For the convenience of m em ber banks and oth ers th a t m a in tain R e g u la tions B in d e r s , we ha ve updated th e s up plem e nt to R eg ulation Q . M em ber banks and o thers should file the s u p p lem e n t, w h ic h is p r in t e d on the enclosed s lip s hee t, in t h e ir b i n d e r s . A n y questions c o n ce rn in g the updated s upplem ent should be d ir e c te d to R ic h a r d B . West or Eugene C o y , J r . , of our R egulations D e p a rtm e n t, E x t. 6171. A d d itio n a l copies of the updated su pplem ent w ill be fu r n is h e d upon r e quest to the S e c r e ta r y 's O ffice of this B a n k , E x t. 6267. S in c e r e ly y o u r s , R o b e rt H . B o y k in F ir s t V ic e P re s id e n t E nclosures INDIVIDUAL RETIREMENT ACCOUNTS AND KEOGH ACCOUNTS AT FEDERALLY INSURED DEPOSITORY INSTITUTIONS March 31 and December 31, 1976 Amount ($ Mils.) Mar. 31 Dec. 31 Per Cent Distribution Mar. 31 Dec. 31 Per Cent Distribution of Total House hold Holdings of Time and Savings Deposits as of Dec. 31, 1976 U (Individual Retirement Accounts) Commercial Banks Mutual Savings Banks Savings and Loan Associations Total 469 244 1,067 504 34 18 35 16 47 15 672 1,480 p/ 48 49 £/ 38 100 100 £/ 100 1,385 3,051 (Keogh Account s) Commercial Banks Mutual Savings Bank Savings and Loan Associations Total 150 322 n.a. n.a. 15 33 n.a. n.a. 47 15 512 n.a. 52 n.a. 38 984 n.a. 100 n.a. 100 1/ Flov-of-Funds estimates. £/ Preliminary n.a. - Not available. NOTE: Data for March 31 are based on universe reports. Data for December 31 are estimates from a sample survey of commercial and mutual savings banks and partial reports from a universe survey of savings and loan associations. BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM SUPPLEMENT TO REGULATION Q Effective July 6,1977 S EC T IO N 217.7 — M A X IM U M R A T E S O F IN T E R E S T P A Y A B L E BY M E M B E R BANKS O N T IM E A N D S A V IN G S D EPOSITS P ursuant to the provisions o f section 19 of the Federal Reserve A ct and §217.3 hereof, the Board of G overnors of the Federal Reserve Sys tem hereby prescribes the following maximum rates1 of interest p er annum payable by m ember banks o f the Federal Reserve System on time and savings deposits: (c) Savings deposits. N o mem ber bank shall pay interest at a rate in excess of 5 percent on any savings deposit including savings deposits that are subject to negotiable orders of withdrawal, the issuance of which is authorized by F ederal law. (a) Time deposits of $100,000 or more. There is no maxim um rate of interest presently prescribed on any time deposit of $100,000 or more. (1) Except as provided in paragraph (a), no mem ber bank shall pay interest on any time de posit 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 U nited States, or any county, municipality, or political subdivision thereof, the District o f C o lumbia, the Com m onw ealth of Puerto Rico, the Virgin Islands, A merican Samoa, G uam , o r polit ical subdivision thereof, at a rate in excess of the highest of any of the permissible rates th at can be paid on time deposits under $100,000 by any Federally insured commercial bank, mutual sav ings bank, o r savings and loan institution.3 (b) Time deposits of less than $100,000. (1) Except as provided in paragraphs (a), (d), and (e), and subparts (2) and (3) of this paragraph, no m em ber bank shall pay interest on any time de posit at a rate in excess o f the applicable rate under the following schedule: M aturity 30 days or more but less than 90 days M a xim u m percent 5 90 days or more but less than 1 year 5V4 1 year or more but less th a n 30 months 6 30 months or more 6 V2 (2) M em ber banks may pay interest on any time deposit of $1,000 o r more, with a maturity of four years or more, at a rate not to exceed 714 percent.2 (3) Investment Certificates — M em ber banks may pay interest on any time deposit of $ 1,000 or more, with a maturity of six years or more, at a rate n o t to exceed IV 2 percent.2 (d) Governm ental unit tim e deposits of less than $ 100,000. (e) Individual retirem ent account and Keogh (H.R. 10) plan deposits of less than $100,000. Except as provided in paragraph (a), a mem ber bank may pay interest on any time deposit with a maturity of three years or more th a t consists of funds deposited to the credit of, or in w hich the entire beneficial interest is held by, an individual pursuant to an Individual R etirem ent A ccount agreement or Keogh (H.R. 10) plan established pursuant to 26 U.S.C. (I.R.C. 1954) sections 408, 401, at a rate n o t in excess of the highest of any of the permissible rates th a t can be paid on time deposits u n d er $100,000 by any Federally insured commercial bank, m utual savings bank, o r savings and loan association.3 1 The limitations o n rates o f interest payable by member banks o f 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 o f a member bank located outside the States o f the United States and the District of Columbia. 2 The $1,000 m inimum denomination requirement does not apply to time deposits representing funds con tributed to an Individual Retirement A ccount or K eogh (H .R. 10) plan established pursuant to 26 U.S.C. (I.R.C. 1954) §§408, 401. 3 The highest permissible rate is currently 7.75 perce nt per annum (12 CFR 329.7 and 12 C F R 526.5).