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federal reserve

Bank

DALLAS, TEXAS

of

Dallas

75222

Circular No. 80-213
Novem ber 6, 1980

TITLE 12 - PART 217 - INTEREST ON DEPOSITS
Fixed Rate Obligations Issued by Bank Holding Companies

TO ALL MEMBER BANKS,
BANK HOLDING COMPANIES
AND OTHERS CONCERNED IN THE
ELEVENTH FEDERAL RESERVE DISTRICT:
The Board of Governors of the Federal Reserve System has issued an
interpretation, e ffe c tiv e October 17, 1980, providing that fixed rate obligations
issued by bank holding companies with a stated maturity of five years or more
and with respect to which no more than 5 percent of the original principal
amount of the issue may be redeemed in any one year, with a limitation of
$25,000 per investor per year, are not subject to Regulation Q interest rate
limitations.
Printed on the following pages is a copy of the Board's material
submitted for publication in the Federal R egister.
These pages more fully
explain the Board's action. Any questions concerning the interpretation should
be directed to the Consumer Affairs Section of our Bank Supervision and
Regulations Department, Ext. 6171.
Sincerely yours,
Robert H. Boykin
First Vice President

Banks and others are encouraged to use the following incoming WATS 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)

TITLE 12— BANKS AND BANKING

CHAPTER II— FEDERAL RESERVE SYSTEM
SUBCHAPTER A— BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
[Regulation Q, Docket No. R-0329]
Part 217— Interest on Deposits

AGENCY:

Board of Governors of the Federal Reserve System.

ACTION:

Final interpretation.

SUMMARY: This interpretation provides that Regulation Q interest rate
limitations do not apply to fixed rate obligations issued by bank holding
companies with a stated maturity of five years or more and with respect
to which no more than 5 per cent of the original principal amount of
the issue may be redeemed in any one year, with a limitation of $25/000
per investor per year.
EFFECTIVE DATE:

October 17, 1980.

FOR FURTHER INFORMATION CONTACT: Gilbert T. Schwartz, Assistant General
Counsel (202/452-3623), or Anthony F. Cole, Senior Attorney (202/452­
3612), Legal Division, Board of Governors of the Federal Reserve System,
Washington, D.C. 20551.
SUPPLEMENTARY INFORMATION:
to read as follows:
§ 217.156

12 CFR 217 is amended by adding a new section 217.156

Application of Regulation Q to fixed rate obligations issued
by the parent bank holding company of a member bank.

(a) The Board has received a request for an interpretation
that sections 217.1(h) and 217.7(h) of Regulation Q (12 CFR §§ 217.1(h)
and 217.7(h)) do not apply to small denomination fixed rate obligations
with limited redemption features issued by bank holding companies.
The obligations in question generally have a stated maturity of from
10 to 25 years, but are redeemable at the option of the holder subject
to limitations as to the amount that any holder may redeem in any year
(usually $25,000) and as to the aggregate amount that may be redeemed
in any year (usually 5 per cent of the original principal amount of
the issue).
(b) Sections 217.1(h) and 217.7(h) were adopted by the Board
effective March 14, 1980, and apply Regulation Q interest rate ceilings
to certain obligations issued by a member bank's parent bank holding
company. Section 217.1(h) specifically provides that the "deposits"
of a member bank includes an obligation that is: (1 ) issued in a denomination

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of less than $100,000; (2) required to be registered with the SEC; (3)
issued or guaranteed in whole or in part by
the member bank's
parent
which is a bank holding company (regardless
of the use of theproceeds);
and (4) issued with an original maturity or
redemption period of four
years or less. Section 217.7(h) specifies the ceiling rates of interest
payable on such obligations.
Sections 217.1(h) and 217.7(h) were adopted in view of the
Board's concern of the potential adverse impact the widespread issuance
by bank nolding companies of principally floating rate notes with a
redemption feature aimed at the retail market was likely to have on
deposit flows among depository institutions. The Board's concern was
based on its belief that such obligations, which typically are issued
at rates substantially in excess of Regulation Q ceiling rates payable
on time deposits of comparable maturity, were competitive with consumer
deposits issued by depository institutions.
(c) The Board believes that the obligations in question are
distinguished from those that were the subject of the Board's principal
concerns in two ways. First, they carry a fixed rate of interest; second,
the amount that may be redeemed in any year is limited to 5 per cent.
The Board regards this limited redemption feature as having an effect
similar to a sinking fund which ensures that repayments are not concentrated,
while at the same time preserving the long-term nature of the obligation.
In view of these considerations, the Board does not believe that such
obligations would be a major source of competition for deposits issued
by depository institutions.
(d) Accordingly, the Board has determined that obligations
issued by a member bank's parent which is a bank
holding company will
not be regarded as having a redemption period of
four years or less
under section 217.1(h) and, thus, will not be subject to the interest
rate limitations specified in section 217.7(h), if they have the following
characteristics:
(1 ) the obligations possess a fixed rate of interest
that does not change during the life of the obligation; (2 ) no more
than 5 per cent of the original principal amount of the issue may be
redeemed at the option of the holders in any one
year; (3) no more than
$25,000 per holder may be redeemed in any one year; and (4) the obligations
possess a minimum stated maturity of five years or more. The five year
minimum maturity requirement (i.e., 25 per cent higher than the current
more than four year requirement) offsets the possible 25 per cent maximum
reduction ( 5 per cent per year for five -years) in the amount outstanding
after five years and is regarded as necessary to preserve the objective
of the four year minimum maturity requirement in section 217.1(h).
The Board also believes that in order to ensure that potential purchasers
are aware of the limited nature of the redemption feature, those limitations
should be prominently disclosed in any materials or solicitations concerning
such obligations.

-3-

The Board has issued this interpretation based upon its statutory
authority under section 19 of the Federal Reserve Act, 12 U.S.C. § 461.
By order of the Board of Governors, October 23, 1980.

(Signed)

Theodore E. Allison
Theodore E. Allison
Secretary of the Board

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