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FED ER AL RESERVE BANK OF NEW YORK r Circular N o . 4 9 2 2 1 L A u g u st 8 , 1 9 6 0 J Absorption of Exchange Charges As Payment of Interest on Deposits To All Member Banks of the Second Federal Reserve District: On August 4,1960, the Board of Governors of the Federal Reserve System issued the following interpretation relative to absorption of exchange charges as payment of interest on deposits: The B o a rd has had occasion to con sid er whether certain p ra ctices in v o lv in g the a b sorp tion o f exchange charges con stitute the p aym en t b y a F ed era l R eserve m em ber ban k o f interest on dem and deposits in v iola tion o f R egu la tion Q, P a y m en t o f Interest on D eposits, an d S ection 19 o f the F e d era l R eserve A ct. O ne question was w hether such absorp tion w o u ld con stitute the p aym en t o f interest on dem and deposits w hen the am ounts absorbed b y a m em ber bank are claim ed to be less than the cost o f collectin g them fro m depositors. A n o th e r question was whether a m em ber bank w ou ld be p a y in g interest on dem and deposits i f it m aintain ed balances w ith another bank o r banks in retu rn fo r w hich such oth er bank o r banks d ire ctly or in d ire ctly w ou ld absorb fo r it exchange charges m ade b y the draw ee banks. U p on a ca re fu l review o f the su b ject, the B oard has co n clu d ed that both these practices should be deem ed to be the p a ym en t o f interest on dem and deposits in v iola tion o f R egu la tion Q an d S ection 19 o f the F e d era l R eserve A c t. In oth er w ord s, the p aym en t o f interest in cludes a n y d irect or in d ire ct p a ym en t or absorption o f exch ange charges b y a n y device w hatsoever, regardless o f w hether such p aym en t or absorption is m ade d ire ctly b y a mem ber bank o r in d ire ctly th rou gh an y oth er bank fo r a m em ber ban k or a dep ositor o f such m em ber bank. T his p rin cip le w ill be a p p lied h erea fter b y exam iners fo r the F ed era l R eserve B anks in their exam inations o f State m em ber banks an d the C om p troller o f the C urren cy has advised that it w ill be a p p lie d b y n ation al bank exam iners in their exam inations o f n ational banks. In rea ch in g this con clu sion the B o a rd has ca r e fu lly reexam ined earlier interpretations on the su bject, an d this in terp reta tion supersedes all such earlier interpretations, in clu d in g those p u blish ed in the 1944 F e d e ra l R eserve B ulletin, p . 339, an d 1945 F e d era l R eserve B ulletin, p . 564. The interpretation will in due course be published in the Federal Register and in the Federal Reserve Bulletin. A l f r e d H a y e s , President.