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FED ER AL RESERVE BANK O F NEW YORK ["Circular No. 6 1 7 6 ~ l L June 6, 1968 J Interpretation of Regulation Q by Board of Governors To All Member Banlcs, and Others Concerned, in the Second Federal Reserve District: The following statement was issued yesterday by the Board of Governors of the Federal Reserve System: The Board of Governors of the Federal Reserve System, in an interpretation of i s Regulation Q, said t today that a member bank may pay interest on a multiple maturity time deposit at the maximum allowable rate — presently 5 per cent — only i the deposit i payable at intervals of at least 90 days. f s The interpretation was issued for clarification purposes following receipt of inquiries on the conditions under which banks may pay the maximum 5 per cent rate on time deposits having more than one maturity date. Printed below is the text of the interpretation. It will be published shortly in the Federal Register and Federal Reserve Bulletin but is being sent to you now so that you may have prompt notice of its content. A lfred H ayes , President. Payment of Interest of 5 % Per Annum on Multiple Maturity Time Deposits From time to time the Board of Governors receives inquiries relating to the payment of interest of 5 per cent per annum on “multiple maturity time deposits” as defined in section 217.1 (g) of Regulation Q. In view of the variety of deposit contracts that have eome into use in recent years, the Board considers i t advisable to clarify, for banks and their depositors, certain limitations on the authority of a member bank to pay 5 per cent interest on funds deposited with i. t The underlying principle i that a member bank may s pay interest on a multiple maturity time deposit at the rate of 5 per cent only i the deposit i payable f s at intervals of at least 90 days. 90-day certificate of deposit. — One major category of multiple maturity time deposits i certificates of s deposit that (1 ) mature on a series of specified dates or ( ) are automatically renewed at maturity without 2 any action by the depositor. Certificates that mature at specified dates that are 90 days apart and cer t f c t s that mature 90 days after the date of issuance iiae and are automatically renewable for successive 90-day periods until the depositor withdraws his funds con stitute multiple maturity time deposits in certificate form with the shortest intervals between payment dates that are permissible i interest thereon i to be f s paid at a rate of 5 per cent. 90-day notice account.— Another major category of multiple maturity time deposits i deposits that are s payable only after written notice of withdrawal. Such deposits may be in the form of a passbook or other wise. Funds may be added to the account either at specified times or whenever the depositor wishes, depending on the terms of the contract. A member bank may pay interest at the rate of 5 per cent on funds in such an account, on two con ditions. The f r t i that the funds must not be is s withdrawable within 90 days of the date they are deposited. The second i that funds must not be s withdrawable l s than 90 days after the date of es written notice of intention to withdraw. In other words, a member bank may pay 5 per cent only on deposits that are payable solely at intervals of at least 90 days. If a depositor gives 90 days’ notice of intention to withdraw and then decides that he will not need the funds at the specified date, he may cancel his notice, either explicitly, or impliedly by a new 90-dav notice. He may not, however, retain his right to withdraw at the expiration of the f r t notice while giving a simul is taneous or subsequent notice, unless the latter expires at a date at least 90 days after the expiration of the frt is. 90-day notice account coupled with provision for automatic renewal.— Recently, a few banks have offered a 5 per cent multiple maturity time deposit contract that authorizes withdrawal by the depositor on more than one basis. For example, the contract mav pro\ide that funds received on or before •Jan uary 1 may be withdrawn March 31 and, with respect to funds not withdrawn on that date, the deposit will be automatically renewed until June 30, and so forth The contract also provides that funds may be with drawn on 90 days’ notice in writing. In such event, to be consistent with the principle that the depositor ma\ not have access to a 5 per cent multiple maturity teposit at intervals of l ss than 90 days such a con e ( over ) tract should inform the depositor that, when notice i given with respect to a l or a portion of the funds s l 011 deposit, such notice automatically cancels any other provision for withdrawal that i inconsistent s with said principle. Consequently, i the depositor gives notice on March f 1 of his intention to withdraw $1,000 from his account on June 1 the contract should make clear that this , automatically cancels his right to withdraw such amount on March 31, since such amount would other wise be payable at intervals of l s than 90 days. es Also, his right under the specified maturity (or automatic-rcnewal maturity) provision to withdraw such amount on June 30 should be suspended, for the same reason. The latter right might be reinstated by the depositor revoking before April 1 his notice of inten tion to withdraw, since that would be at least 90 days before the specified June 30 maturity. However, the right to withdraw on March 31 could not be reinstated. If i could, the depositor would be in a position to t acquire access to the amount involved at intervals of l s than 90 days. es As in a “straight” 90-dav notice account, the depos itor may supersede his notice of intention to withdraw by a subsequent 90-dav notice. Again, such notice would have the e f c of canceling any other right to fet withdraw that i inconsistent with the 90-dav interval s principle. Withdrawal “ grace period . There i one excep ”— s tion to the rule that a member bank may not pay 5 per cent interest on multiple maturity deposits that are payable at intervals of l s than 90 days. A bank es may permit a depositor to withdraw his funds within ten days after a specified maturity, even i there i f s a provision for automatic renewal for 90 days i not f withdrawn at said maturity. If he does s , no interest o may be paid for the period from the maturity date to the date of withdrawal, for during that time the deposit i a “demand deposit,” on which payment of s interest i prohibited by law. If he does not so with s draw, the deposit remains a time deposit, with a term running from the maturity date until a subsequent specified date or for a specified number of days.1 1 A single maturity time deposit also may be renewed by action of the depositor within ten days after maturity. In such event, as in the ease of the multiple maturity time deposit, a member bank may pay interest on the deposit between the maturity date and renewal thereof at the applicable maximum rate. “ Em ergency” withdrawal. In accordance with sec — tion 217.4(d) of Regulation Q. a bank may pay a time deposit before maturity where that i “necessary s to prevent great hardship to the depositor,” but in that case the depositor forfeits accrued and unpaid (uncredited) interest. Occasions for such withdrawals are exceptional. Unless the depositor i confronted s with an actual emergency, a bank may not permit withdrawal of funds before maturity of the deposit or termination of the specified period of notice. If the depositor simply has a need for funds, the bank may extend credit to him on the security of his time deposit, but the rate of interest on such loan must be at least 2 per cent per annum in excess of the rate of interest paid on the time deposit. Advertising time deposits . Some recent advertise — ments by member banks might be interpreted as offer ing withdrawal privileges from a 5 per cent multiple maturity time deposit at intervals of l s than 90 days. es In December 1966, the Board was joined by the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the Federal Home Loan Bank Board in a statement of principles directed against misleading advertising practices in the s l c oii tation of deposits. The third principle states that “i an advertised rate i payable only on investments f s or deposits that meet fixed time or amount require ments, such requirements should be stated.” An advertisement by a member bank that permits the reader to infer that the bank will pay interest at the rate of 5 per cent on funds that may be withdrawn at intervals of less than 90 days i inconsistent with s that principle and i regarded by the Board as mis s leading. The Board heretofore has refrained, in the defini tion of “time deposit” i Regulation Q, from prescrib n ing permissible designations for such deposits, and has not objected to banks offering time deposit con tracts that are called “savings certificates” or “saving bonds.” However, use of such designations without explanation might have a misleading tendency, be cause of the public’ impression that “savings” in a s bank will be paid at any time. Consequently, the greater the possibility that the name given to an account may mislead, the more imperative i the s bank’ obligation to direct the depositor’ attention to s s the withdrawal restrictions that govern the particular account offered.
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