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F E D E R A L R E S E R V E B A N K O F D A LL A S

DALLAS, TEXAS

75222
Circular No. 80-110
June 5, 1980

TITLE 12 - CHAPTER XII - INTEREST ON DEPOSITS
Major Changes in 2 1/2 Year Time Deposits,
Six-Month Money Market C ertificates, and Early
Withdrawal Rules; Extension o f Comment Period On Premiums

TO ALL MEMBER BANKS AND
OTHERS CONCERNED IN THE
ELEVENTH FEDERAL RESERVE DISTRICT:
The Depository Institutions Deregulation C om m ittee has announced several
important changes in the rules regarding the rate o f interest to be paid on deposits at
federally insured depository institutions. The changes are summarized as follows:
1.

2 1/2 Year Small Saver C ertificate - E ffective June 2, 1980, the C om m ittee has
established ceiling rates that are generally 50 basis points higher than the current
rate. Savings and loans have retained their one-quarter percent differential for
these deposits.
The Deregulation C om m ittee has adopted a nominal ceiling of 9.25% for com m ercial
banks and 9.50% for thrift institutions to go along with the recently established caps
of 11.75% and 12.00% respectively. These caps remain unchanged. Between the
nominal ceiling and the cap rate thrift institutions may pay the treasury 2 1/2 year
rate (rather than the old rate of 50 basis points under the treasury rate) and
com m ercial banks may pay 25 basis points (rather than 75) less than the treasury
rate.
The new 2 1/2 year or more ceiling rates will be set every two weeks rather than
monthly. For the period from June 2 through June 11, the maximum ceiling rate
of 9.25% is authorized for com m ercial banks, although individual banks may choose
to offer the deposits at a rate lower than that.
From Thursday, June 12 to
Wednesday, June 25 a different ceiling rate will be available to be established
Monday, June 9, 1980, by averaging the 2 1/2 year yield on U. S. Treasury securities
for the five preceeding business days ending on Monday. Institutions may continue
to compound the rate paid on 2 1/2 year deposits.
R ate information will be
available from the treasury wire, correspondent banks, and the Federal Reserve
Bank at Ext. 6177 on the Tuesday prior to the e ffe c tiv e date of Thursday.

2. Six-Month Money Market C ertificate - E ffectiv e June 5, 1980, the C om m ittee has
established a new ceiling rate which is at least 25 basis points above the rate
established for six-month treasury bills (auction average on a discount basis). The
rules also establish a minimum ceiling rate o f 7.75% for all institutions regardless
o f the treasury bill rate. An institution may pay less than the ceiling rate if it
wishes to do so on all tim e deposits. When the treasury bill rate is 8.75% or higher
or 7.25% or lower, thrift institutions lose their one-quarter percent differential.

Banks and others are encouraged to use the following incoming W ATS numbers in contacting this Bank:
1-800-442-7140 (intrastate) and 1-800-527-9200 (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 -

Commercial
Bank Ceiling

Thrift Ceiling

Differential

8.75 and above

Bill rate + 25
basis points

Bill rate + 25
basis points

0

8.50
but less than
8.75

Bill rate + 25
basis points

7.50
but less than
8.50

Bill rate + 25
basis points

7.25 but less
than 7.50

7.75

Below 7.25

7.75

Bill Rate

9.00

Bill rate + 50
basis points

0 to 25 basis
points
25 basis points

Bill rate + 5025 basis points
basis points
to 0
7.75

0

Interest may not be compounded during the term s of these deposits.
The Deregulation Committee has created an exception to this rule during the 6
month period from May 29 through November 30, 1980. During this time period,
commercial banks may renew maturing 6-month certificates with the same
depositor at a rate of interest equal to the ceiling rate of interest payable on money
market certificates by thrift institutions. The rule applies only to renewals for the
same depositor and not for new customers.
3. Penalty for Early Withdrawals - A new rule for early withdrawal applicable to all
federally insured depository institutions will cover all time deposits entered into,
renewed or extended on or after June 2, 1980.
Under this rule, depository
institutions are required to impose a minimum penalty of an amount equal to three
months of interest on the funds withdrawn if the time deposit has an original
maturity of one year or less and six months of interest on the funds withdrawn
where the time deposit has an original m aturity of more than one year, regardless
of the length of time the funds have remained on deposit. The minimum required
penalty is to be calculated on the basis of the nominal (simple interest) rate of
interest being paid on the time deposit.
For deposits with a depository institution for less than 3 months and 6 months
respectively, the penalty will require a reduction in the principal amount used to
purchase the time deposit. Time deposits entered into before June 2, 1980, will
continue to be subject to the rules of the agencies adopted effective July 1, 1979.
Banks are advised to counsel new depositors with respect to the provisions of the
new rule.
4. Comment Period on Prohibition of Premiums - The comment period on this and
other related proposals has been extended by the Deregulation Committee to July
16, 1980
Enclosed are copies of a press release and Federal Register notice which
should be kept by member banks in the Regulation Q Section of their Regulations
Binders.

-3-

Questions concerning the actions taken should be directed to the Consumer
Affairs Section of the Bank Supervision and Regulations Department, Ext. 6171.
Sincerely yours,
Robert H. Boykin
First Vice President
Enclosures

DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE PRESS RELEASE
COMPTROLLER OF THE CURRENCY FEDERAL DEPOSIT INSURANCE CORPORATION FEDERAL HOME LOAN BANK BOARD
FEDERAL RESERVE BOARD____________ NATIONAL CREDIT UNION ADMINISTRATION____________ TREASURY DEPARTMENT

For Inmediate release

May 29, 1980

The Depository Institutions Deregulation Committee today announced
a number of inter-related actions for adjusting interest rate ceilings as
a step toward giving the public a market return on savings.
The Committee!/said that these actions are aimed, within this
context, at helping depository institutions compete for deposits more
effectively, to enhance the ability of small banks to serve the agricultural
and small business needs of their communities, to help thrift institutions
increase liquidity and to permit banks and savings institutions to better serve
the nation's needs for financing homebuilding and home ownership.
The Committee's actions affect the six-month floating ceiling
Money Market Certificate (MMC), the 2 1/2 year and longer floating ceiling
Small Savers Certificate (SSC), and the penalty for early withdrawal of funds
from time deposits.
1.

These actions are:

Money Market Certificate:

The new rule consists of these provisions:

?/

--All institutions may pay at least 25 basis points above the
6-month Treasury bill rate (weekly auction average).
--All institutions may pay the same ceiling rate when the Treasury
bill rate is 8 3/4 percent or higher.

■i/ Members of the Committee are the Secretary of the Treasury, and the
chairmen of the Federal Reserve Board, Federal Deposit Insurance Corporation,
Federal Home Loan Bank Board and the National Credit Union Administration
Board. The Comptroller of the Currency is a nonvoting member of the
Committee.
2 /

— ' See footnote, bottom page 2, for previous MMC terms.

.

-2--The ceiling rate will drop no lower than 7 3/4 percent, thus

establishing a minimum ceiling which will permit all institutions to operate
in a free market when

the 6-month bill rate is less than 7 1/4 percent.

--A differential favoring thrift institutions will be part of the
ceiling structure when the 6-month bill rate is between 7 1/4 percent and
8 3/4 percent.
When the bill rate is 8.75 percent or more, both thrift institutions
and commercial banks may pay 25 basis points over the bill rate, and when the
bill rate is 7.26 percent or more, up to 8.74 percent, a differential of as
much as 25 basis points may exist between rates that commercial banks and
thrift institutions may pay.

This is described in the table below.

A minimum ceiling rate of 7 3/4 percent has been established.

That is,

should the Treasury 6-month bill rate fall to, say 7 percent, the minimum
ceiling would still be 7 3/4 percent, for both commercial banks and thrift
institutions.

As always, banks or thrift institutions may pay less than the

ceiling if they wish.
During the next six months, commercial banks may renew maturing
MMCs with the same depositor at an MMC rate equal to the ceiling rate for
thrift institutions.

This applies only to renewals by the same depositor.

The ceiling rates will continue to be established by the result of
the weekly Treasury auction of six-month bills and will continue to be effective
on the Thursday following the Monday auction.

The new ceiling rules are

effective for MMCs issued beginning June 5.
The Money Market Certificate was established in June 1978. It is issued
weekly by financial institutions in minimum denominations of $10,000 and
matures in 26 weeks. Its yield varies according to the yield of the sixmonth Treasury bill. Prior to the Committee's action the MMC ceiling was
the same as the bill rate for commercial banks at all yields and for thrift
institutions at bill rates of 9.01 or more. When the bill was between 8.75
and 9.00 percent, thrift institutions could pay 9.00 percent and when the
bill rate was 8.74 percent or less thrift institutions could pay 1/4 of 1
percent above the bill rate.

-3 The following table illustrates the ceiling rate schedules for
MMCs:
Commercial Bank Ceiling

Bill Rate

Thrift Ceiling

Differential

8.75 and above

bill rate + 25

bcis is
bill rate + 25 points 0

8.50 to 8.75

bill rate + 25 bp

9.00

0 to 25 basis
points

7.50 to 8.50

bill rate + 25 bp

bill rate + 50 bp

25

7.25 to 7.50

7.75

bill rate + 50 bp

25 bp to 0

below 7.25

7.75

7.75

0

2.

Small Saver Certificate!/

With the object of giving small savers using this low-initial-deposit
certificate more for their money, the Committee revised its terms as follows:
--Minimum ceiling rates of 9.25 percent for commercial banks and 9.50
percent for thrifts were established.

That is, even when the rate for Treasury

issues with a maturity of 2 1/2 years falls below rates at which these ceilings
would be activiated, thrift institutions and commercial banks would not be
forced to pay less than the minimum ceiling rates.
wish to do so.

They could pay less if they

These "floor" rates would be effective at the current Treasury

2 1/2 year rate and hence, beginning June 2, commercial banks may pay 9 1/4
percent and thrifts may pay 9 1/2 percent.
--The scale of interest that can be paid for the SSC was generally
increased by 50 basis points.

Between the minimum and the cap rates(see below),

thrift institutions may pay the Treasury 2 1/2 year rate (rather than half a
point under the Treasury rate) and commercial banks may pay 25 basis points
(rather than 75) less than the Treasury rate.

The Small Saver Certificate was established in 1979 and is issued by thrift
institutions and commercial banks in maturities of 30 months or more. Prior
to the Committee's action the ceiling rate for the SSC was the rate for
Treasury issues with a maturity of 2 1/2 years, less 3/4 of one percent for
commercial banks and 1/2 of one percent for thrift institutions. There is no
minimum denomination — issuers may sell the SSC in whatever amounts they
wish. This feature has made it attractive to savers with only small amounts
to deposit.

.

- 4-

— the SSC ceiling rates will be set bi-weekly rather than montnly.
--The existing ’cap" on the interest rates that may be paid on
’
the SSC -- 12 percent for thrift institutions and 11 3/4 percent for commercial
banks -- was continued unchanged.

That is, even if the rate on Treasury issues

of 2 1/2 years maturity rises beyond the point at which these ceilings would
be activated, financial institutions could not pay more on the SSC than these
"cap" rates.
--Institutions may continue to compound the rate paid.
The SSC ceiling rates will be announced on Monday and be effective
the following Thursday.

The new rules will be effective for SSC issued

beginning June 2.
3.

Penalty for early withdrawal of funds from time deposits

The penalty for withdrawal of funds from a time deposit before its
maturity will be an amount equal to three months simple, nominal interest when
the original maturity is one year or less and six months simple, nominal interest
when the original maturity is longer.

In the past, the minimum required penalty

did not exceed interest accrued or already paid.

Under the new rule, the penalty

may require a reduction in the principal sum of the account.

For example:

If

a depositor withdraws funds from a one year deposit after one month, the penalty
would be an amount equal to three months interest even though that much interest
had not yet been earned, and a reduction in principal would be necessary. The penalty
is in terms of interest on the amount withdrawn. This rule is effective June 2.
Extension of time for comment on a proposal regarding premiums or gifts for deposits
In a separate action the Depository Institutions Deregulation
Committee extended the period for comment from June 16 to July 16 on its proposal
to prohibit premiums or gifts offered by depository institutions upon the opening
of a new account or an addition to an existing account.
The proposal was made originally on May 7 and on May 13 the Committee
,
announced that it had extended the time for comment from June 9 to June 16.
-

0

-

TITLE 12— BANKS AND BANKING
CHAPTER XII— DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE
[Docket No. D-0007]
PART 1204-INTEREST ON DEPOSITS

AGENCY:

Depository Institutions Deregulation Committee.

ACTION:

Final rule.

SUMMARY: The Depository Institutions Deregulation Committee ("the Committee")
has adopted a final rule concerning the penalty for early withdrawals
of time deposit funds. The rule provides for a minimum required penalty
of a forfeiture of an amount equal to three months of interest/ at the
nominal contract rate/ on the funds withdrawn where the time deposit
has an original maturity of one year or less and six months of interest,
at the nominal contract rate, on the funds withdrawn where the time
deposit has an original maturity of more than one year, regardless of
the length of time the funds have remained on deposit. The rule applies
to all commercial banks, mutual savings banks, and savings and loan
associations subject to the authorities conferred by section 19(j) of
the Federal Reserve Act, section 18(g) of the Federal Deposit Insurance
Act and section 5B(a) of the Federal Home Loan Bank Act.
EFFECTIVE DATE:

June 2, 1980.

FOR FURTHER INFORMATION CONTACT: John Hall, Attorney, Federal Hone
Loan Bank Board (202/377-6466), Debra Chong, Attorney, Office of the
Comptroller of the Currency (202/447-1632) , F. Douglas Birdzell, Senior
Attorney, Federal Deposit Insurance Corporation (202/389-4324), Anthony
F. Cole, Senior Attorney, Federal Reserve Board (202/452-3612), or Allan
Schott, Attorney-Advisor, Treasury Department (202/566-6798).
SUPPLEMENTARY INFORMATION: Under regulations of the Federal Reserve,
the Federal Deposit Insurance Corporation and the Federal Heme Loan
Bank Board, adopted effective July 1, 1979, a depositor is required
to forfeit at least three months of interest on funds withdrawn prior
to maturity from a time deposit with an original maturity of one year
or less and six months of interest on funds withdrawn prior to maturity
frcm a time deposit with an original maturity of more than one year.
Where the funds withdrawn have remained on deposit for less than three
months or six months, respectively, the depositor is required to forfeit
all interest earned on the funds withdrawn. No reduction of principal
is required, however, unless interest has already been paid to the depositor.

-2 -

The present penalty rule has not served as an adequate deterrent
to premature withdrawals of time deposit funds in the early weeks or
months of deposit contracts, particularly when market rates are increasing.
In this regard, uncertainty regarding the possible withdrawal of funds
before the agreed upon maturity could be disruptive to a depository
institution's loan and investment programs. The rule adopted by the
Committee modifies the current penalty rules of the agencies to require
a forfeiture of an amount equal to three months of interest on the funds
withdrawn where the time deposit has an original maturity of one year
or less and six months of interest on the funds withdrawn where the
time deposit has an original maturity of more than one year, regardless
of the length of time the funds have remained on deposit.
The rule also provides that the minimum required penalty is
to be calculated on the basis of the nominal (simple interest) rate
of interest being paid on the time deposit. Under the current regulatory
interpretations of the agencies, where interest is being paid on a compounded
basis, the amount of interest forfeited must be calculated on a compounded
basis. Calculating the penalty on the basis of the nominal rate of
interest is more beneficial to consumers, will simplify the calculation
and administration of the early withdrawal penalty, and will facilitate
disclosure of penalty amounts to customers. Examples of the application
of the modified penalty rule follow.
Example 1
A $5,000 time deposit with a maturity of one year and earning
interest at a rate of 6 per cent compounded continuously (using 365/360)
is withdrawn two months (sixty days) after the date of deposit. Regardless
of the method of compounding, accruing, or crediting of interest, the
penalty is $75.00, an amount equal to three months of interest at the
nominal contract rate on the funds withdrawn ($5,000 X .06/4 ■ $75.00).
Imposition of the penalty in this case requires a reduction of $24.75
in the principal amount requested to be withdrawn since the funds have
earned only $50.25 (6 per cent compounded continuously on $5,000 for
two months) (the penalty amount under the former penalty rule) at the
time of withdrawal. If the deposit were withdrawn six months (182 days)
after the date of deposit, the penalty also is $75.00. However, in
this case, no reduction in principal is necessary unless the interest
earned has been paid out or withdrawn from the account. The depositor's
balance at the time of withdrawal, including accrued interest, would
have been a maximum of $5,153.99 (including 6 per cent interest compounded
continuously for six months) and at the time of withdrawal the depositor
would receive from the institution $5,078.99 ($5,153.99 less $75.00).
If the depositor had already received all of his earned interest from
the institution prior to the early withdrawal, the depositor would receive
$4,925.00 at the time of the withdrawal.

-3 -

Example 2
A $5,000 time deposit with a maturity of four years earning
interest at a rate of 7-1/4 per cent compounded continuously (using
365/360) is withdrawn three months (90 days) after the date of deposit.
Regardless of the method of compounding, accruing, or crediting of interest,
the penalty is $181.25, an amount equal to six months interest at the
nominal contract rate on the funds withdrawn ($5,000 X .0725/2 = $181.25).
Imposition of the penalty in this case requires a reduction of $89.80
in the principal amount requested to be withdrawn since the funds have
earned only $91.45 (7-1/4 per cent compounded continuously on $5,000
for three months) (the penalty amount under the former penalty rule)
at the time of withdrawal.
If the deposit were withdrawn three years
after the date of deposit, the penalty also is $181.25. However, in
this case, no reduction in principal is necessary unless the interest
earned has been paid out or withdrawn from the account. The depositor's
balance at the time of withdrawal, including accrued interest, would
have been a maximum of $6,233.63 (including 7-1/4 per cent interest
compounded continuously for three years) and at the time of withdrawal
the depositor would receive from the institution $6,052.38 (6,233.63
less $181.25). If the depositor had already received all of his earned
interest from the institution prior to the early withdrawal, the depositor
would receive $4,818.75 at the time of the withdrawal.
The new rule will apply to all time deposits entered into,
or renewed or extended, on or after June 2, 1980. Time deposits entered
into before June 2, 1980, will continue to be subject to the rules of
the agencies adopted effective July 1, 1979. Depository institutions,
however, with the depositor's consent, may calculate the minimum penalty
required to be imposed on withdrawals from pre-existing time deposits
on the basis of the nominal simple rate of interest paid on such deposits.
The new rule does not affect other provisions of the agencies' early
withdrawal penalty rules, such as the exceptions to application of the
penalty in the event of the death or incompetence of a depositor.
This action was taken by the Committee in view of the increased
number of early withdrawals of time deposits that have occurred and
the adverse effects of such withdrawals on the costs of depository institutions
and on their ability effectively to manage their liabilities.
In view
of these considerations and to facilitate the orderly administration
of currently prescribed deposit interest rate regulations, the Committee
finds that application of the notice and public participation provisions
of 5 U.S.C. § 553 to this action would be contrary to the public interest
and that good cause exists for making this action effective in less
than 30 days.

-4 -

Pursuant to its authority under Title II of Public Law 96­
221, 94 Stat. 142 (12 U.S.C. 3501 et seq.), to prescribe rules governing
the payment of interest and dividends on deposits of federally insured
commercial banks, savings and loan associations and mutual savings banks,
effective June 2, 1980, the Committee adopts a final rule as follows:
PART 1204— INTEREST ON DEPOSITS
§ 1204.103— Penalty for Early Withdrawals
Where a time deposit with an original maturity of one year
or less, or any portion thereof, is paid before maturity, a depositor
shall forfeit an amount at least equal to three months of interest earned,
or that could have been earned, on the amount withdrawn at the nominal
(simple interest) rate being paid on the deposit, regardless of the
length of time the funds withdrawn have remained on deposit. Where
a time deposit with an original maturity of more than one year, or any
portion thereof, is paid before maturity, a depositor shall forfeit
an amount at least equal to six months of interest earned, or that could
have been earned, on the amount withdrawn at the nominal (simple interest)
rate being paid on the deposit, regardless of the length of time the
funds withdrawn have remained on deposit.
By order of the Committee, May 28, 1980.

(Signed) Normand R. V. Bernard
Normand R. V. Bernard
Executive Secretary of the Committee

TITLE 12— BANKS AND BANKING
CHAPTER XII— DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE
[Docket No. D—0008]
PART 1204— INTEREST ON DEPOSITS

AGENCY:

Depository Institutions Deregulation Committee.

ACTION:

Final rules.

SUMMARY: The Depository Institutions Deregulation Committee ("Committee")
has adopted final rules concerning the ceiling rates of interest payable
on the 26-week money market certificate (MMC) and on the 2-1/2 year
and longer small saver certificate (SSC). Under the rules adopted,
the ceiling rate of interest payable on the MMC by all institutions
(commercial banks, mutual savings banks, and savings and loan associations)
will be at least one quarter of one per cent above the rate established
for six-month United States Treasury bills and in no event will the
celling rate drop below 7-3/4 per cent.
In addition, during the period
May 29 through November 30, 1980, commercial banks may renew maturing
MMCs with the same depositor at a rate of interest equal to the ceiling
rate of interest payable on MMCs by mutual savings banks and savings
and loan associations.
The ceiling rate of interest payable by all
institutions on the SSC has been increased by one-half of one per cent
and in no event will the ceiling rate drop below 9.25 per cent for commercial
banks and 9.50 per cent for mutual savings banks and savings and loan
associations. These actions will provide consumers with a higher rate
of return on their savings and will improve the competitive position
of depository institutions. The actions also will enhance the ability
of small banks to serve the agricultured, and small business needs of
their communities, help thrift institutions to increase liquidity, and
permit banks and savings institutions to better serve the nation's needs
for financing home building and home ownership. The rules apply to
all commercial banks, mutual savings banks, and savings and loan associations
subject to the authorities conferred by section 1 9 (j) of the Federal
Reserve Act, section 18(g) of the Federal Deposit Insurance Act, and
section 5B(a) of the Federal Heme Loan Bank Act.
EFFECTIVE DATE: The new ceiling rules for MMCs are effective for MMCs
issued beginning on June 5, 1980. The provision permitting commercial
banks to renew maturing MMCs at the thrift ceiling rate is effective
May 29, 1980.
iSie new ceiling rules for SSCs are effective for SSCs
issued beginning on June 2, 1980.

-2 -

FOR FURTHER INFORMATION CONTACT: John Hall, Attorney, Federal Home
Loan Bank Board (202/377-6466), Debra Chong, Attorney, Office of the
Comptroller of the Currency (202/447-1632), F. Douglas Birdzell, Senior
Attorney, Federal Deposit Insurance Corporation (202/389-4324), Anthony
F. Cole, Senior Attorney, Federal Reserve Board (202/452-3612), or Allan
Schott, Attorney-Advisor, Treasury Department (202/566-6798).
SUPPLEMENTARY INFORMATION: Effective June 1, 1978, the Federal Reserve,
the Federal Deposit Insurance Corporation ("FDIC") and the Federal Home
Loan Bank Board ("FHLBB”) promulgated regulations authorizing Federally
insured commercial banks, mutual savings banks, and savings and loan
associations to offer MMCs (nonnegotiable time deposits of $10,000 or
more with maturities of 26 weeks) at a maximum rate of interest tied
to the discount yield (auction average) on the most recently issued
six-month United States Treasury bills. Under regulations of the agencies,
the maximum rate of interest payable by commercial banks on MMCs is
the Treasury bill discount rate. The maximum rate of interest payable
by mutual savings banks and savings and loan associations on MMCs is
one-quarter of one per cent above the Treasury bill discount rate when
that rate is less than 8-3/4 per cent, 9 per cent when the Treasury
bill discount rate is between 8-3/4 per cent and 9 per cent, and the
Treasury bill discount rate when that rate is above 9 per cent. Thus,
when the Treasury bill discount rate is 9 per cent or higher, all institutions
may pay interest on the MMC at the same ceiling rate. However, when
the Treasury bill discount rate is between 8-3/4 per cent and 9 per
cent, mutual savings banks and savings and loan associations may pay
interest on MMCs at a ceiling rate of up to 25 basis points more than
the rate payable by commercial banks, and when the discount rate is
less than 8-3/4 per cent, thrift institutions may pay 25 basis points
more than the rate payable by commercial banks.
The rule adopted by the Committee establishes a new MMC ceiling
rate for all institutions that is at least 25 basis points above the
rate established (auction average on a discount basis) for six-month
Treasury bills issued on or immediately prior to the date of deposit.
The rule also establishes a minimum ceiling rate of 7-3/4 per cent which
all institutions will be authorized to pay regardless of the Treasury
bill rate. Of course, an institution may pay less than the ceiling
rate if it wishes to do so. When the Treasury bill rate is 8-3/4 per
cent or higher, both commercial banks and thrift institutions may pay
interest at a ceiling rate of 25 basis points above the bill rate.
A differential of up to 25 basis points on the ceiling rate payable
by commercial banks and thrift institutions has been retained where
the Treasury bill rate is more than 7-1/4 per cent, but less than 8-3/4
per cent. The new ceiling rates of interest payable are described in
the table below. The new rule affects only the establishment of the

-3 -

ceiling cate payable on the MMC and the other provisions of the agencies'
regulations, including the prohibition against compounding of interest
on MMCs, are not affected by this rule. As in the past, the ceiling
rates will continue to be established by the result of the weekly Treasury
auction of six-month bills and will continue to be effective on the
Thursday following the auction. The new ceiling rules will be effective
for MMCs issued beginning on Thursday, June 5.
In view of the fact that commercial banks that are relatively
large lenders in the mortgage and agricultural credit markets and which,
especially in the agricultural credit market, tend to be quite small,
have relied particularly heavily on MMCs, the Committee also has decided
to permit commercial banks, during the next six months (May 29 through
November 30, 1980) to renew maturing MMCs with the same depositor at
a rate of interest equal to the ceiling rate of interest payable on
MMCs by thrift institutions.
The following table illustrates the new ceiling rate schedule
for MMCs:

Commercial
Bank Ceiling

Thrift Ceiling

8.75 and above

Bill rate + 25
basis points

Bill cate + 25
basis points

8.50
but less than
8.75

Bill rate + 25
basis points

7.50
but less than
8.50

Bill rate + 25
basis points

Bill Rate

7.25 but less
than 7.50

0 to 25 basis
points

Bill rate + 50
basis points

7.75

25 basis points

Bill rate + 50
basis points

7.75

Below 7.25

9.00

Differential

25 basis points
to 0

7.75

SSCs
Effective January 1, 1980, the Federal Reserve, FDIC and FHLBB
promulgated regulations authorizing Federally insured commercial banks,
mutual savings banks and savings and loan associations to offer SSCs
(nonnegotiable time deposits with maturities of 2-1/2 years or more)

-4 -

at a maximum rate of interest tied to the average 2-1/2 year yield for
United States Treasury securities as determined monthly by the United
States Treasury. For thrift institutions (mutual savings banks and
savings and loan associations), the ceiling rate of interest on SSCs
is currently 50 basis points below the 2-1/2 year Treasury rate or 12
per cent, whichever is lower. The ceiling rate for oommercial banks
is the lower of 75 basis points below the 2-1/2 year Treasury rate or
11-3/4 per cent.
The rule adopted by the Committee establishes new SSC ceiling
rates for all institutions that generally are 50 basis points higher
than the current ceiling rates. The rule also establishes minimum ceiling
rates of 9-1/4 per cent for commercial banks and 9-1/2 per cent for
thrift institutions, regardless of the average 2-1/2 year Treasury rate.
Under the new rule, the ceiling rate for thrift institutions will be
the higher of the average 2-1/2 year yield for Treasury securities,
or 9-1/2 per cent. The ceiling rate for commercial banks will be the
higher of the average 2-1/2 year yield for Treasury securities less
25 basis points, or 9-1/4 per cent. Of course, an institution may pay
less than the ceiling rate if it chooses to do so. The cap of 12 per
cent (for thrift institutions) and 11-3/4 per cent (for commercial banks)
imposed on the SSC ceiling rate by the agencies effective February 27,
1980, will be retained.
In no event, may a thrift institution or a
commercial bank pay interest on an SCC at a rate in excess of 12 per
cent and 11-3/4 per cent, respectively. As in the past, institutions
will be permitted to compound interest on SSCs.
Under the current regulations of the agencies, the ceiling
rate on the SSC is established monthly for new deposits based on the
rate announced by the Treasury three business days before the beginning
of each month. This rate is the average 2-1/2 year yield for United
States Treasury securities for the five business days preceding the
last three business days of the month. Under the new rule, the ceiling
rate will be established bi-weekly. The average 2-1/2 year yield on
United States Treasury securities will be announced by Treasury on Monday
(based on the average 2-1/2 year yield for the five business days ending
on Monday) and the ceiling rates based on that rate will be effective
for a two week period beginning on the following Thursday.
If Monday
is a holiday, the yield will be based on the five business days ending
the preceding Friday and the ceiling rate will still be effective on
the next Thursday. Although the ceiling rate will be determined bi­
weekly, as in the past, the ceiling rate applicable to outstanding deposits
will not change during the life of the deposit.

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The new ceiling rules will be effective for SSCs issued beginning
on Monday June 2, 1980.
Since the average 2-1/2 yield on Treasury securities,
as announced by Treasury on Wednesday, May 28, is 9.05 per cent, the
ceiling rate effective June 2 will be 9-1/2 per cent for thrift institutions
and 9-1/4 per cent for commercial banks. This ceiling rate will remain
in effect for SSCs issued through Wednesday June 11. Thereafter, the
new ceiling rate will be established bi-weekly each Monday (June 9,
June 23, July 7, etc.) and will be effective the following Thursday
(June 12, June 26, July 10, etc.). The new rule affects only the establishment
of the ceiling rates payable on the SSC and other provisions of the
agencies' regulations are not affected by this rule.
These actions were taken by the Committee in order to enable
depository institutions to provide depositors with a higher rate of
return and to improve the competitive position of depository institutions.
In order to facilitate the accomplishment of these objectives as soon
as possible, the Committee finds that application of the notice and
public participation provisions of 5 U.S.C. § 553 to these actions would
be contrary to the public interest and that good cause exists for making
these actions effective in less than 30 days.
Pursuant to its authority under Title II of Public Law 96­
221, 94 Stat. 142 (12 U.S.C. 3501 et seq.), to prescribe rules governing
the payment of interest and dividends on deposits of federally insured
commercial banks, savings and loan associations, and mutual savings
banks, the Committee amends Part 1204 (Interest on Deposits) by adding
sections 104, 105 and 106 as follow:
1.

Effective June 5, 1980:

§ 1204.104--26-Week Money Market Time Deposits of Less than $100,000.
Commercial banks, mutual savings banks, and savings and loan
associations may pay interest on any nonnegotiable time deposit of $10,000
or more, with a maturity of 26 weeks, at a rate not to exceed the rates
set forth below. Rounding any rate to the next higher rate is not permitted
and interest may not be compounded during the term of this deposit.

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Rate established (auction average
on a discount basis) for P.S. Treasury
bills with maturities of 26 weeks
issued on or immediately prior to the
date of deposit ("Bill Rate")

Maximum per cent

Ccmmercial Banks
7.75

7.50 per cent or below

Bill Rate plus onequarter of one per cent

Above 7.50 per cent

Mutual Savings Banks and Savings
and Loan Associations
7.25 per cent or below
Above 7.25 per cent, but below
8.50 per cent

7.75
Bill Rate plus onehalf of one per cent

8.50 per cent, but below 8.75
per cent
8.75 per cent or above

2.

Bill Rate plus onequarter of one per cent

Effective May 29, 1980:

§ 1204.105— 26-Week Money Market Time Deposits of Less Than $100,000.
Notwithstanding any other limitations, during the period May 29,
1980 through November 30, 1980, a commercial bank may renew maturing
26-week money market certificates with the same depositor at a rate
of interest equal to the ceiling rate of interest payable on such certificates
by mutual savings banks and savings and loan associations.

3.

E f f e c t i v e June 2, 1980:

§ 1204.106— Time Deposits of Less Than $100,000 With Maturities of
2-1/2 Years or More.
(a) Beginning on Thursday of every other week, a commercial
bank may pay interest on any nonnegotiable time deposit with a maturity
of 2-1/2 years or more at a rate not to exceed the higher of one-quarter
of one per cent below the average 2-1/2 year yield for United States
Treasury securities as determined and announced by the United States
Department of the Treasury immediately prior to such Thursday, or 9.25
per cent. The average 2-1/2 year yield will be rounded by the United
States Department of the Treasury to the nearest 5 basis points.
In
no
event shall the rate of interest paid exceed 11.75 per cent.
(b)Beginning on Thursday of every other week,
a mutual savings
bank or savings and loan association may pay interest on any nonnegotiable
time deposit with a maturity of 2-1/2 years or more at a rate not to
exceed the higher of the average 2-1/2 year yield for United States
Treasury securities as determined and announced by the United States
Department of the Treasury immediately prior to such Thursday, or 9.50
per cent. The average 2-1/2 year yield will be rounded by the United
States Department of the Treasury to the nearest 5 basis points.
In
no
event shall the rate of interest paid exceed 12.00 per cent.
By order of the Committee, May 28, 1980.

(Signed) Normand R. V. Bernard______

Normand R. V. Bernard
Executive Secretary of the Committee

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f

DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE
[12 CFR Part 1204]
(Docket No. D—0004)
Premiums, Finders Fees, and the Payment of Interest in Merchandise

AGENCY:

Depository Institutions Deregulation Committee.

ACTION:

Proposed rulemaking:

Extension of comment period.

SUMMARY: The Depository Institutions Deregulation Committee ("Committee")
has extended the period for receipt of public comment on its proposal
to adopt a rule concerning the offering of premiums or gifts by depository
institutions (Docket No. D-0004) to July 16, 1980.
DATES:

Comments must be received by July 16, 1980.

ADDRESS: Interested parties are invited to submit written data, views
or arguments regarding the proposed rules to Normand R. V. Bernard,
Executive Secretary, Depository Institutions Deregulation Committee,
Federal Reserve Building, 20th Street and Constitution Avenue, N.W.,
Washington, D.C. 20551. All material submitted should include the
Docket Number D-0004.
FOR FURTHER INFORMATION CONTACT: F. Douglas Birdzell, Senior Attorney,
Federal Deposit Insurance Corporation (202/389-4324), Daniel L. Rhoads,
Attorney, Board of Governors of the Federal Reserve System (202/452­
3711), Allan Schott, Attorney-Advisor, Treasury Department (202/566-6798),
John Hall, Attorney, Federal Home Loan Bank Board (202/377-6466), or
Debra Chong, Attorney, Office of the Comptroller of the Currency (202/447­
1632).
SUPPLEMENTARY INFORMATION: On May 6, 1980 (45 Fed. Reg. 32323, May 16,
1980), the Committee requested comment on a proposal to prohibit the offering
of premiums by depository institutions and to place limitations on the
use of finders fees by depository institutions. Under the proposed
rule, the giving to a depositor of a premium or gift (whether in the
form of cash or merchandise) by an institution associated directly with
the receipt of a deposit would be prohibited. In addition, finders
fees paid to third parties would be regarded as the payment of interest
to the depositor and would be required to be paid only in cash. The
Committee also is considering adoption of a proposed rule that would
require that all interest paid on a deposit be paid only in the form
of cash or a credit to a deposit account. Comment was requested on
the proposal by June 9, 1980. On May 13, 1980, the Committee extended

V

-2 the tine for receipt of coonMnts to June 16, 1980. In light of the
issues involved in this proposal and in order to facilitate public
participation in this matter, the Committee is extending the time for
receipt of written comments to July 16, 1980.
By order of the Committee, May 28, 1980.

(signed)

Normand R. V. Bernard

Normand R. V. Bernard
Executive Secretary of the Committee
[SEAL]

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