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FED ER A L R E SE R V E BANK OF NEW YORK Circular No. 3 2 1 5 1 May 16, 1947 J PAYMENT OF INTEREST ON TIME AND SAVINGS DEPOSITS To All Member BanTcs in the Second Federal Reserve District: This circular contains information regarding the maximum rates of interest which member banks in the Second Federal Reserve District may lawfully pay on time and savings deposits. Statutory provisions 1. Section 19 of the Federal Reserve Act (hereinafter referred to as the “ Act” ) pro vides generally, among other things, that no member bank shall pay any interest on any deposit payable on demand, and that the Board of Governors of the Federal Reserve System shall, by regulation, limit the rate of interest which may be paid by member banks on time and savings deposits1; and authorizes the Board of Governors to define certain terms used in the Act, to determine what shall be deemed a payment of interest, and to prescribe rules and regulations to effectuate the purposes of the section. Regulation Q 2. Under authority of the provisions of Section 19 of the Act, the Board of Governors of the Federal Reserve System has issued Regulation Q, entitled “ Payment of Interest on Deposits” . Reference is made to the Regulation for the definitions of terms used in the Act and for details as to the prohibition against the payment of interest on deposits payable on demand and the limitations upon the payment of interest on time and savings deposits. A copy of this Regulation together with a copy of the most recent Supplement thereto has been furnished to each member bank in this District. Supplement to Regulation Q 3. The latest Supplement to Regulation Q, effective January 1, 1936, prescribes the maximum rates of interest which member banks may pay on time and savings deposits.1 In the event of any change in these rates, we will promptly notify our member banks of the change. Member banks limited to maximum rate for State banks 4. Section 24 of the Act provides that the rate of interest on time and savings deposits which a national banking association may pay shall not exceed the maximum rate authorized by law to be paid upon such deposits by State banks or trust companies organized under the laws of the State in which such association is located. i The foregoing provisions are not applicable to any deposit which is payable only at an office of a member bank located outside of the States of the United States and the District of Columbia. 5. Section 3(c) of Regulation Q provides that the maximum rate of interest paid by a member bank on a time or savings deposit may not exceed either the applicable maximum rate prescribed in the Supplement to Regulation Q, or the applicable maximum rate authorized by law to be paid upon such deposit by State banks or trust companies organized under the laws of the State in which such member bank is located, whichever may be less. Banks located in the State of New York 6. The Banking Board of the State of New York adopted its General Regulation No. 3, as revised, on November 8, 1943, continuing in effect the provisions of the regulation con tained in its Resolution No. 200 adopted on June 21, 1935, prescribing 2% per annum, compounded quarterly, as the maximum rate of interest, accruing after October 1, 1935, which banks and trust companies organized under the laws of the State of New York might pay on time or thrift deposits.1 An extract from the Banking Board’s General Regulation No. 3 appears on page 3 of this circular. 7. The Board of Governors of the Federal Reserve System has heretofore stated its view that the rate of interest, accruing after October 1, 1935 and during the period for which the regulation contained in Resolution No. 200 of the Banking Board is legally in effect, which a national bank or other member bank located in the State of New York may lawfully pay on time or savings deposits may not exceed the rate of 2% per annum prescribed in such regula tion of the Banking Board. However, attention is called to the fact that under the currently effective Supplement to Regulation Q, member banks are prohibited from paying interest at a rate in excess of 1% per annum on time deposits2 (except Postal Savings deposits) having maturities of less than 90 days or payable upon written notice of less than 90 days. Banks located in the State of New Jersey 8. The provisions of App. A:7-8 to A:7-15 of the Revised Statutes of NewTJersey, grant ing certain emergency powrers to the Commissioner of Banking and Insurance, become inopera tive after May 16, 1947; and, accordingly, orders issued thereunder, prescribing a maximum rate of interest which banks and trust companies organized under the laws of the State of New Jersey might pay on time and savings deposits, will be of no effect after that date. Howx ever, attention is called to the fact that the maximum rate of interest paid by a member bank on a time or savings deposit may not exceed the applicable maximum rate prescribed in the currently effective Supplement to Regulation Q. Effect of this circular on previous circular 9. This circular supersedes our Circular No. 3105, dated June 28, 1946, entitled “ Pay ment of Interest on Time and Savings Deposits” . Additional copies of this circular may be obtained upon request. A llan S pro u l, President. i Since the use of the words “ saving” and “ savings” is restricted by statute in the State of New York, the term “ thrift deposit” is used to describe deposits conforming to the definition of the term “ savings deposit” contained in Regulation Q. * As defined in section 1 of Regulation Q, ‘ ‘ time deposits ’ ’ means ‘ *time certificates of deposit ’ ’ and ‘ *time deposits, open account” . Extract from General Regulation No. 3 of the Banking Board of the State of New York November 8, 1943 GENERAL REGULATION No. 3 W H E R E A S , pursuant to subdivision 1 of Section 14 of the Banking Law, the Banking Board is authorized to make, alter and amend rules and regulations to effectuate the policy declared in Section 10 of said Banking Law and pursuant to subdivision 1 (h) of said Section 14, the Banking Board is authorized to prescribe the interest or dividend rate which may be paid by any banking organization and to prohibit the payment of inter est or dividends by any banking organization; Deposits and Shares— Payment of Interest and Dividends NOW, T H E R E F O R E , B E IT R E SO LV ED THAT 1. No bank or trust company and no private banker, investment company, or New York agency of any foreign banking corporation shall directly or indirectly, by any device whatsoever, pay after December 31, 1934, any interest on any deposit or similar credit balance which is pay able on demand; provided that nothing herein contained shall be construed as prohibiting the payment of interest in accordance with the terms of any certificate of deposit or other contract entered into in good faith on or before December 10, 1934, and which was in force on that d ate; but no such certificate of deposit or other contract shall be renewed or extended unless it shall be modified to conform to this regulation and every bank and trust company and every private banker and New York agency of any foreign banking corporation shall take such action as may be neces sary to conform to this regulation as soon as consistent with its contractual obligation; provided, however, that this regulation shall not apply to any deposit made by a mutual savings bank nor to any deposit of public funds made by or on behalf of any state, county, school district or other sub division or municipality so long as the regulations of the Federal Reserve Board permit the payment of interest on such deposits by member insti tutions. Demand deposits within the meaning of this regulation shall comprise all deposits payable within thirty days and all funds held by investment companies in connection with the exercise of the power con ferred in subdivision 1 (a) of Section 508 of the Banking Law which are payable within thirty days. The Superintendent is authorized to construe this regulation in such a manner as to require the persons and corporations to which it applies to conform to the requirements imposed upon banks which are members of the Federal Reserve System with respect to the non-payment of interest on demand deposits. Demand Deposits 2. No bank, trust company or private banker shall pay interest accru ing after October 1, 1935, on any time or thrift deposit or any part thereof at a rate in excess of two per cent per annum compounded quarterly; pro vided, however, that a bank, trust company or private banker may pay interest in accordance with the terms of any certificate of deposit or other contract which was lawfully entered into in good faith prior to June 26, 1935, and in force on that date and which may not legally be terminated or modified by such bank, trust company or private banker at its or his option; but no such certificate of deposit or other contract shall be renewed or extended unless it be modified to conform with the provisions of this regulation and all such certificates of deposit or other contracts shall be terminated or modified to conform with this regulation at the earliest pos sible date in accordance with the terms thereof. This regulation shall not prevent the compounding of interest at other than quarterly intervals, provided the aggregate amount of interest so compounded shall not ex ceed the aggregate amount of interest at two per cent per annum com pounded quarterly. Time and Thrift Deposits 3. No existing regulation of the Banking Board forbidding the pay ment of interest on any deposit or similar credit balance which is payable on demand, or prescribing a maximum rate of interest payable by banks, trust companies, and private bankers upon time and th rift deposits, shall apply to any deposit with any such bank, trust company, or banker which is payable only at an office thereof located outside of the State of New York. Time and T hrift Deposits in Out-of-State Offices