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F ederal Reserve Bank o f Dallas


Circular No. 72-107
June 5, 1972

To All Member Banks and Others Concerned
in the Eleventh Federal Reserve District:
You may recall that on June 10, 1971? I wrote you a brief letter
cautioning that the use of individual officers as nominees in bidding for
public funds could be a violation of Regulation Q. In addition to the
individual bid procedure, it has become evident that some banks are bidding
for public funds in a manner which, in effect, reflects payment for demand
deposits. After careful study, the Board of Governors has issued a letter
regarding one bank in the Eleventh District clearly pointing to the
tions of both the spirit and the letter of Regulation Q by such procedures.
The relevant section of the Board’s letter are reproduced below.
After reviewing the facts of the case, the Board is of the
view that [Name of Bank] should be considered, for the purposes
of Regulation Q, to have been a party to the bid between the
officer of the bank and the public body. Among the circum­
stances leading to this conclusion are the facts that the bank
recommended the officer to the public body in connection with
the bid; the bank has pledged its own securities as collateral
for the public funds to fulfill the obligation of the bank
officer as Treasurer to secure the funds; all or substantially
all of the funds have been channelled to the bank; and the
interest paid on the funds by the bank is calculated so as to
meet the interest payments promised by the bank officer to the
public body.
The Board has previously ruled that, where a member bank
pays a customer who maintains a demand deposit in a prescribed
amount a higher rate of interest on a time deposit than is
paid to customers who do not maintain demand deposits, the
incremental interest is actually paid as "compensation" for
the use of funds constituting the demand deposit and involves
a violation of the prohibition against paying Interest on a
demand deposit.
The Board believes that the arrangement involving this
bank gives rise to a payment of interest on a demand deposit.
The amount of interest paid by the bank on the time deposits
is calculated so as to yield a certain rate of return on all

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Circular No. 72-107




June 5? 1972

funds on deposit, both time and demand. An indication that
interest is actually being paid on a demand deposit in this
situation is that the rate of interest on the time deposits
may be computed only after the amount of interest to be paid
on all the funds is determined and varies with the amount of
the demand deposit.
It also appears that the arrangement entered into by the
bank may involve an agreement or understanding (whether or
not in writing) that time deposits of the type on which the
interest rate ceiling has been suspended will be "rolled over".
The Board regards such an agreement or understanding as a
violation of the spirit of the interpretation the Board issued
at the time it suspended the interest rate ceiling on a 30-89day single maturity time deposits of at least $100,000. [See
Published Interpretations, I 3370(b).] Of course, if there is
an underlying instrument or contract or any informal understand­
ing or agreement providing for automatic renewal of the deposits
at maturity, the deposits would fall within the definition of
"multiple maturity time deposit" [§ 217.1(g) of Regulation Q]
and the maximum rate that may be paid on such a deposit would
It is hoped that all banks will carefully avoid such procedures
in future public fund bidding and will take immediate steps to bring any
present contracts into conformity with Regulation Q .

Very truly yours,
P. E. Coldwell,