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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 7.75 Below 7.25 7.75 9.00 Differential 0 to 25 basis points Bill rate + 50 basis points 25 basis points Bill rate + 50 basis points 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. -5 - 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. -6 - 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 I * * 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] 1 -