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FEDERAL RESERVE BANK
O F N EW YORK
Circular No. 8 5 8 5 T
June 13, 1979
J
[
REGULATION Q
— Comment Invited on Proposals to Subject Certain Repurchase Agreements to Interest Rate Ceilings
and Liberalize the Early W ithdrawal Penalty in Event of Depositor’s Death
—Amendments Providing for Higher Returns for Small Savers
— Interpretation Allowing the Pooling of Deposits Under Certain Conditions
To A ll Member Banks, and Others Concerned,
in the Second Federal Reserve District:
In our Circular No. 8583, dated May 31, 1979, we issued a joint statement by the three Fed
eral banking supevisory agencies announcing a series of regulatory changes designed to help small
savers obtain a higher return on their deposits. In this connection, enclosed are copies of the
amendments to Regulation Q, “Interest on Deposits,” of the Board of Governors of the Federal
Reserve System, and of the revised Supplement to that Regulation, both effective July 1, 1979. Also
enclosed is a copy of a related interpretation of the Board’s Regulation Q permitting the pooling
of funds by depositors in order to reach a minimum denomination requirement for the payment of
higher rates of interest, and a copy of an erratum sheet (unrelated to the Board’s current action)
correcting an earlier error in the Regulation Q pamphlet.
Printed below is the text of two proposals by the Board of Governors to further amend its
Regulation Q in order to (1) subject member bank repurchase agreements of less than $100,000
to the interest rate ceilings of Regulation Q, and (2) require member banks to redeem a time de
posit prior to maturity without penalty upon the death of the depositor, if requested to do by an
authorized representative. Comments on these proposals should be submitted by July 2, and may
be sent to our Consumer Affairs and Bank Regulations Department.
•
P aul A. V olcker ,
P r e s id e n t.
FEDERAL RESERVE SYSTEM
[12 CFR Part 217]
INTERESTS ON DEPOSITS
[Reg. Q; Docket Nos. R-0228; R-0229]
FEDERAL RESERV E SYSTEM
[12C F R Part 217]
I Docket No. R-0229]
Interest on Deposits; Deposits as
Including Certain Promissory Notes
and Other Obligations
a g e n c y : Board of Governors of the
Federal Reserve System.
a c t io n : Proposed rulemaking.
The Board has proposed
amending its regulations to subject
member bank repurchase agreements of
summary:
less than $100,000 to the interest rate
ceilings of Regulation Q. Such
repurchase agreements arise from a
transfer of direct obligations of, or
obligations that are fully guaranteed as
to principal and interest by the United
States or any agency thereof that the
bank is obligated to repurchase.
DATE: Comments must be received by
July 2,1979.
FOR FURTHER INFORMATION CONTACT:
Gilbert T. Schwartz, Assistant General
Counsel (202/452-3623), or Paul S.
Pilecki, Attorney (202/452-3281) Legal
Division, Board of Governors of the
Federal Reserve System, Washington,
D.C. 20551.
SUPPLEMENTARY INFORMATION: Section
217.1(f)(2) of Regulation Q and
§ 204.1(f)(2) of Regulation D presently
exempt from the definition of deposits
any obligations that “evidence an
indebtedness arising from a transfer of
direct obligations of, or obligations that
are fully guaranteed as to principal and
interest by the United States or any
agency thereof that the bank is obligated
to repurchase.” Consequently, these
obligations are not subject to the
Regulation Q interest rate ceilings or to
reserve requirements. This general
(O V ER )
exemption was established in 1969 in
order to facilitate a strong Government
and agency securities market, to provide
banks a means of temporarily financing
their portfolio positions and to provide a
service to customers who desire to
invest temporarily idle funds in
Government and agency securities in
amounts and maturities less than those
readily available in the market. The
repurchase agreement exemption was
not intended to provide member banks
with a device for avoiding interest rate
ceilings.
The Board is aware of recent actions
by banks to offer small denomination
repurchase agreements ("RPs”) of
Government and agency securities at
rates in excess of that which would be
available for time deposits of
comparable terms. The Board views the
sale of small denomination repurchase
agreements of Government and agency
securities not subject to interest rate
limitations as potentially harmful to the
orderly administration of currently
prescribed deposit rate ceilings and to
the competitive balance existing
between thrifts and commercial banks.
In this regard, the issuance of small
denomination RPs appears to be
primarily a substitute for small
denomination time deposits.
Consequently, the Board has proposed
to narrow the current exemption from
deposit treatment under Regulation Q by
including within the definition of
deposits member bank obligations
arising from a transfer of direct
obligations of, or obligations that are
fully guaranteed as to principal or
interest by the United States or any
agency thereof that the bank is obligated
to repurchase. Public comment is
requested on the extent to which the
application of interest rate ceiling to
repurchase agreements issued in
amounts of less than $100,000 would
affect the practice of providing bank
customers a vehicle for investing
temporarily idle funds. This proposal
would not affect the current exemption
for interbank transactions involving
repurchase agreements of less than
$100,000.
All comments on this proposal should
be submitted in writing to the Secretary,
Board of Governors of the Federal
Reserve System, Washington, D.C.
20551, to be received by July 2,1979. All
material submitted should include the
Docket Number R-0229. Such material
will be made available for inspection
and copying upon request except as
provided in § 261.6(a) of the Board’s
Rules Regarding Availability of
Information.
Pursuant to its authority under section
19 (a), (i) and (j) of the Federal Reserve
Act (12 U.S.C. 461, 371a and 371b) the
Board proposes to amend Regulation Q
(12 CFR Part 217) as follows:
§ 217.1
*
*
Definitions.
*
*
*
(f) Deposits as including certain
promissory notes and other obligations.
For the purposes of this part, the term
“deposits" also includes any member
bank’s liability on any promissory note,
acknowledgment of advance, due bill, ox
similar obligation (written or oral) that
is issued or undertaken by a member
bank principally as a means of obtaining
funds to be used in its banking business,
except any such obligation that:
* * * * *
Counsel (202/452-3623) or Anthony F.
Cole, Senior Attorney (202/452-3711),
Legal Division, Board of Governors of
the Federal Reserve System,
Washington, D.C. 20551.
SUPPLEMENTARY INFORMATION:
Regulation Q currently provides that
upon the death of any owner of time
deposit funds, a member bank, if it so
chooses, may pay all or a portion of
such time deposit funds before maturity
without imposing the normally required
early withdrawal interest forfeiture
penalty (§ 217.4(d)). The Board proposes
to amend this provision to require a
member bank to pay a time deposit prior
to maturity without penalty upon the
death of any owner when requested to
(2)
Is issued in denominations of
do so by the owner’s representative or
$100,000 or more .on or after July 1,1979, by any other owner. The Board believes
and evidences an indebtedness arising
that the proposed amendment will more
from a transfer of direct obligations of,
fully effectuate the intent of this
or obligations that are fully guaranteed
exception to the early withdrawal
as to principal and interest by the
penalty rule, which is to facilitate the
United States or any agency thereof that administration of estates as well as ease
the bank is obligated to repurchase;
the financial burdens occasioned by the
death of a depositor. Public comment is
By order of the Board of Governors of the
requested on whether the proposed
Federal Reserve System, May 30,1979.
amendment, if adopted, should apply to
Theodore E. Allison,
all time deposits or only to those time
Secretary of the Board.
deposits issued after the implementation
[FR Doc. 79-17489 Filed 5-5-79; 8:45 ami
date.
BILLING CODE 8210-01-M
All comments and information on this
proposal should be submitted in writing
[12 CFR Part 217]
to the Secretary, Board of Governors of
[Docket No. R-0228]
the Federal Reserve System,
Washington, D.C. 20551, to be received
Payment of Time Deposits Before
by July 2,1979. All material submitted
Maturity
should include the Docket Number R0228. Such material will be made
a g e n c y : Board of Governors of the
available for inspection and copying
Federal Reserve System.
upon request except as provided in
a c t io n : Proposed rule.*
section 261.6(a) of the Board's Rules
Regarding Availability of Information
S u m m a r y : The Board of Governors of
(12
CFR 261.6(a)).
the Federal Reserve System purposes to
Pursuant to its authority under section
amend Regulation Q concerning the
19(j) of the Federal Reserve Act (12
payment of time deposits before
maturity in the event of the death of any U.S.C. § 371b), the Board proposes to
amend Regulation Q (12 CFR 217.4) as
owner of the time deposit funds. Under
the Board’s current regulation, a member follows:
§ 217.4 Payment o f time deposits before
bank, upon the death of any owner of a
maturity.
time deposit, is permitted to pay such
* * * * *
time deposit before maturity without
(d ) P e n a lty f o r e a r l y w ith d r a w a ls .
imposition of the normally required
• * * A time deposit may be paid
early withdrawal interest forfeiture
before maturity without a forfeiture of
penalty. Under the proposed
interest as prescribed by this paragraph
amendment, a member bank would be
in the following circumstances:
required to pay a time deposit prior to
(1) Where a member bank pays all or
maturity without penalty upon the death a portion of a time deposit upon the
of any owner when requested to do so
death of any owner of the time deposit
by the owner’s representative or by any funds. Provided, however, a member
other owner.
bank is required to pay a time deposit
DATES: Comments must be received by
prior to maturity without penalty upon
July 2,1979.
the death of any owner of the funds
when requested to do so by the owner's
ADDRESS: Theodore E. Allison,
representative or other owners:11* * * *
Secretary, Board of Governors of the
* * * * *
Federal Reserve System, Washington.
By order of the Board of Governors. May
D.C. 20551. All material submitted
30.1979.
should include the Docket Number RTheodore E. Allison,
0228.
Secretary o f the Board.
FOR FURTHER INFORMATION CONTACT:
Gilbert T. Schwartz, Assistant General
|FRDoc 79-17481Filed 6-5-79: 8:45am)
BILLING CODE 6210-01-M
P R IN T E D IN NEW YORK, FROM FEDERAL REGISTER, VOL. 44, NO. 110
Board of Governors of the Federal Reserve System
SUPPLEMENT TO REGULATION Q
Effective July 1, 1979
SECTION 217.7—MAXIMUM RATES OF INTEREST PAYABLE
BY MEMBER BANKS ON TIME AND SAVINGS DEPOSITS
Pursuant to section 19 of the Federal Reserve
Act and § 217.3 hereof, the Board of Governors
of the Federal Reserve System hereby pre
scribes the following maximum rates1 of inter
est per annum payable by member banks of the
Federal Reserve System on time and savings
deposits:
(a) Time deposits of $100,000 or more.
There is no maximum rate of interest presently
prescribed on any time deposit of $ 100,000 or
more.
(b) Fixed ceiling time deposits of less than
$100,000. Except as provided in paragraphs
(a), (d), (e), (f), and (g), no member bank
shall pay interest on any time deposit at a rate
in excess of the applicable rate under the follow
ing schedule:
Maturity
Maximum percent
30 days or more but less
5
than 90 days
90 days or more but less
than 1 year
5/a
1 year or more but less
6
than 30 months
30 months or more but
less than 4 years
4 years or more but
less than 6 years
7'A
6 years or more but
less than 8 years
7/a
8 years or more
?yA
(c)
Savings deposits. No member bank shall
pay interest at a rate in excess of M/\ percent on
any savings deposit. Provided, however, that no
member bank shall pay interest at a rate in
excess of 5 percent on any savings deposit that
is subject to negotiable orders of withdrawal,
the issuance of which is authorized by Federal
law.
1 The limitations on rates of interest payable by mem
ber banks of the Federal Reserve System on time and
savings deposits, as prescribed herein, are not applicable
to any deposit which is payable only at an office of a
member bank located outside the States of the United
States and the District of Columbia.
2
The ceiling rate on this category is the highest
fixed ceiling rate that may be paid on time deposits
under $100,000 by any Federally insured commercial
bank, mutual savings bank, or savings and loan associ
ation.
(d) Governmental unit time deposits of less
than $100,000. Except as provided in para
graphs (a), (f), and (g), no member bank shall
pay interest on any time deposit which consists
of funds deposited to the credit of, or in which
the entire beneficial interest is held by, the
United States, any State of the United States,
or any county, municipality or political subdi
vision thereof, the District of Columbia, the
Commonwealth of Puerto Rico, the Virgin
Islands, American Samoa, Guam, or political
subdivision thereof, at a rate in excess of 8
percent.2
(e) Individual Retirement Account and
Keogh (H.R. 10) Plan deposits of less than
$100,000. Except as provided in paragraphs (a)
and (g), a member bank may pay interest on
any time deposit with a maturity of three years
or more that consists of funds deposited to the
credit of, or in which the entire beneficial inter
est is held by, an individual pursuant to an Indi
vidual Retirement Account agreement or Keogh
(H.R. 10) Plan established pursuant to 26
U.S.C. (I.R.C. 1954) §§ 408, 401, at a rate not
in excess of 8 percent.2
For this Regulation to be complete, retain :
1) Regulation Q pamphlet, effective December 6, 1978.
2) Amendments effective March 15, 1979 and July 1, 1979.
3) Erratum sheet, dated March 1979.
4) This slip sheet.
[Enc. Cir. No. 8585]
PRINTED IN NEW YORK
(OVER)
(f) 26-week money market time deposits of
less than $100,000. Except as provided in para
graph (a), a member bank 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 rate established (auction average
on a discount basis) for United States Treasury
bills with maturities of 26 weeks issued on or
immediately prior to the date of deposit. Round
ing such rate to the next higher rate is not
permitted. A member bank may not compound
interest during the term of this deposit. A mem
ber bank may offer this category of time deposit
to all depositors.
(g)
Time deposits of less than $100,000
with maturities of four years or more. Except
as provided in paragraphs (a) and (b), a mem
ber bank may pay interest on any nonnegotiable
time deposit with a maturity of four years or.
more that is issued on or after the first day of
every month at a rate not to exceed one and
one-quarter percent below the average 4-year
yield for United States Treasury securities as
determined and announced by the United States
Department of the Treasury three business days
prior to the first day of such month. The average 4-year yield will be rounded by the United
States Department of the Treasury to the
nearest 5 basis points. A member bank may
offer this category of time deposit to all de
positors.
Board of Governors of the Federal Reserve System
INTEREST ON DEPOSITS
IN TER PRETA TIO N OF REGULATION Q
Pooling of Funds to Obtain Higher Interest Rates
contrary to the spirit of Regulation Q.
This interpretation replaces these prior
FEDERAL RESERVE SYSTEM
Board rulings that had been issued in
the form of letter opinions in 1968 and
12CFR Part 217
1970.
(b) The Board has determined that
(Reg. Q, Docket No. R-0227]
member banks accepting and paying
Interest on Deposits; Pooling of Funds higher rates of interest on pooled
deposits from depositors who
To Obtain Higher Interest Rates
themselves have pooled their funds
a g e n c y : Board of Governors of the
whether or not the bank knows or has
Federal Reserve System.
reason to know that such funds have
been pooled would not be violating
a c t io n : Final interpretation.
Regulation Q. However, member banks
are not permitted to solicit, advise or
s u m m a r y : This interpretation provides
encourage depositors to pool funds for
that under Regulation Q member banks
the purpose of paying higher interest
may accept funds pooled by depositors
but may not solicit pooled funds through rates. In addition, member banks are not
permitted to solicit deposits from
advertisement, announcement or other
customers on the basis that the funds
notice where the purpose of such
will
be pooled by the bank for the
pooling is to pay higher rates of interest
purpose of paying higher interest rates.
on deposits.
The Board believes that participation by
e f f e c t iv e DATE: Immediately.
member banks in encouraging or
establishing pooling arrangements
FOR FURTHER INFORMATION CONTACT:
constitutes a device to avoid interest
Gilbert T. Schwartz, Assistant General
rate limitations. The Board further
Counsel (202/452-3623), or Paul S.
believes that adopting this new policy
Pilecki, Attorney (202/452-3281), Legal
will facilitate the administration of
Div ision, Board of Governors of the
Regulation Q interest rate ceilings.
Federal Reserve System, Washington.
(c) The Board would regard any
D.C. 20551.
advertisement, announcement or
SUPPLEMENTARY INFORMATION: 12 CFR
solicitation by a member bank
Part 217 is amended by adding a new
indicating that it will accept pooled
§ 217.155 to read as follows:
funds or that funds can be pooled to
§217.155 Pooling of funds to obtain
obtain higher rates as a violation of
higher interest rates.
Regulation Q. For example, printed and
(a)
The Board of Governors has
broadcast advertisements stating that
reviewed its previous rulings concerning depositors can achieve higher interest
acceptance of pooled funds by member
rates by pooling their funds with others
banks. Under these rulings, the Board
and depositing them in the bank would
had expressed the view that a member
be inappropriate. In addition, in
bank that paid a higher rate on a deposit responding to inquiries from depositors
that it knew or had reason to know
concerning available deposit
resulted from funds aggregated (pooled) instruments and rates, member banks
principally for the purpose of obtaining
are not permitted to suggest the practice
a higher rate of interest would be acting of pooling as a means of meeting
minimum denomination requirements.
Similarly, any advertisement,
announcement or solicitation, written or
oral, by a member bank discussing a
policy, practice, program, or procedure
for accepting pooled deposits would not
be permitted. If, for example, two
depositors come into a member bank on
their own with checks of $5,000 each
seeking to purchase jointly one $10,000
minimum denomination money market
time deposit, the bank is permitted to
accept such funds in the form of a
money market time deposit and to pay
the ceiling rate on such deposits.
However, a member bank could not
arrange to introduce, directly or
indirectly, separate depositors that are
seeking to pool their funds.
(d)
This interpretation is not intended
to affect other well-established practices
which involve pooling of funds such as
money market mutual funds, trust
department aggregation of temporarily
idle balances of bona fide fiduciary
accounts, or combination of funds held
in escrow by a person acting in a
fiduciary or custodial capacilty. In
addition, member banks are expected to
report interest earned by depositors on
pooled funds in accordance with the
regulations of the Internal Revenue
Service.
The Board has issued this
interpretation based upon its statuory
authority under section 19 of the Federal
Reserve Act, 12 U.S.C. 461, 371a and
371b.
By order of the Board of Governors of the
Federal Reserve System, May 30,1979.
Theodore E. Allison,
Secretary of the Board.
[FR Doc. 79-17490 Filed #-5-79: 8:45 am)
BILUNG CODE 6210-01-M
PR IN T E D IN NEW YORK, FROM FEDERAL REGISTER, VOL. 44, NO. 110
[Enc. Cir. No. 8585]
Board of Governors of the Federal Reserve System
INTEREST ON DEPOSITS
AM ENDM ENTS TO REGULATION Q
(effective July 1, 1979)
Early Withdrawal Penalty and Maximum Rates of Interest
EFFECTIVE DATE:
July 1, 1979.
substantial number of respondents
favored
totally eliminating the minimum
FEDERAL RESERVE SYSTEM
denomination requirements for all
Gilbert T. Schwartz, Assistant General
Counsel (202/452-3623) or Anthony F.
certificates of deposit, other than the 2612 CFR Part 217
Cole, Senior Attorney (202/452-3711),
week money market certificate. A
Legal Division, Board of Governors of
detailed summary of comments received
[Regulation Q; Docket No. R-0215]
the Federal Reserve System,
is available upon request from the
Interest on Deposits; Early Withdrawal
Washington, D.C. 20551.
Board's Office of Public Affairs,
Penalty and Maximum Rates of
telephone (202) 452-3215.
SUPPLEMENTARY INFORMATION: In
Interest
After consideration of the comments
response to notice published in the
Federal Register (44 FR 21023), the Board received, the Board has determined not
AGENCY: Board of Governors of the
to adopt the proposals to create an 8has received and reviewed over 900
Federal Reserve System.
year rising rate time deposit and to
comments
on
its
proposals
to
provide
a c t io n : Final rule.*
1
authorize the payment of an interest
additional returns to savers. A majority
bonus on savings funds. The Board,
of those responding generally favored
s u m m a r y : On April 3,1979, the Board of
however,
has determined to amend
action
to
provide
savers
with
higher
Governors of the Federal Reserve
Regulation Q (12 CFR 217) to: (1) create
rates of return but opposed certain
System invited public comment of
a new time depoist category with a
operational aspects of the proposals as
proposals to amend Regulation Q to
maturity of 4 years or more and with a
unnecessarily complex, costly to
provide additional returns to savers (44
maximum ceiling rate of interest based
administer and difficult for member
FR 21023).
on the average 4-year yield on Treasury
banks and depositors to understand.
The period for receipt of public
With reference to the specific proposals, securities; (2) eliminate the $1,000
comment on the proposed amendments
minimum denomination requirements
a majority of respondents commenting
expired on May 5,1979. After
favored adoption of the proposed 5-year currently imposed on certain time
consideration of the comments
deposits; (3) modify the penalty required
time deposit. The proposed six-month
submitted and the views expressed
to be imposed upon the withdrawal of
interest forfeiture penalty for early
therein, the Board has determined to
funds from time deposits prior to
withdrawals and application of such a
take the following actions:
penalty to all time deposits also were
maturity; and (4) increase the ceiling
(1) Creation of a new time deposit
favored by a majority of respondents. A rate of interest payable on savings
category with a maturity of 4 years or
substantial number of respondents
deposits to five and one-quarter percent.
more and no required minimum
commented that a maturity shorter than
The Board believes that these
denomination.
amendments will enable individuals to
(2) Elimination of the $1,000 minimum five years for the proposed instrument
was preferable. A majority of
obtain higher rates of return on their
denomination requirements currently
respondents commenting opposed
savings without adversely affecting the
imposed on certain time deposits by
adoption of the proposed 8-year rising
viability of the nation’s financial system.
Regulation Q. (The $10,000 minimum
rate time deposit and the bpnus savings
A discussion of the amendments
denomination requirement on the 26proposal. The respondents generally
adopted follows.
week money market time deposit,
commented that these two proposals
however, is retained.)
I. Four-year fixed rate, variable ceiling
would create costly operational
(3) Modification of the interest
time deposit
problems and would be confusing to
forfeiture penalty required to be
customers.
Reduction
of
the
minimum
Beginning
July 1,1979, member banks
imposed when funds are withdrawn
denomination requirements currently
will be permitted to offer a
from time deposits prior to maturity.
nonnegotiable time deposit with a
(4) Increase the ceiling rate of interest imposed on certain time deposits under
payable on savings deposits by member Regulation Q (12 CFR 217.7) from $1,000 maturity of 4 years or more at a ceiling
rate tied to the average 4-year yield on
banks from five percent to five and one- to $500 was favored by a majority of
respondents commenting. In addition, a
United States Treasury securities. The
quarter percent.
FOR FURTHER INFORMATION CONTACT:
For this Regulation to be complete, retain :
1) Regulation Q pamphlet, effective December 6, 1978.
2) Supplement effective July 1, 1979.
3) Amendment effective March 15, 1979.
4) Erratum sheet, dated March 1979.
5) This slip sheet.
PR IN TE D IN NEW YORK. FROM FEDERAL REGISTER, VOL. 44, NO. I l l
[Enc. Cir. No. 8585]
ceiling rate will be the same even if a
member bank issues the new time
deposit with maturities in excess of four
years. Although no minimum
denomination will be required, member
banks are free to establish a minimum
denomination requirement for this new
category of deposit. The existing fixed
ceiling time deposits with maturities of
4, 0 and 8 years at ceiling rates of 7'A,
7 'A and 8 per cent, respectively, are not
affected by this action and will remain
in effect.
The ceiling rate on the new deposit
category will be established each month
for new deposits received during that
month at one and one-quarter per cent
below the average 4-year yield for
United States Treasury securities as
determined by the U.S. Treasury
Department. Beginning the first day of
every month, a member bank will be
permitted to pay interest at a ceiling rate
of one and one-quarter per cent below
the average 4-year yield as announced
by the Treasury. This ceiling rate will
remain in effect for all instruments
issued during the month until the first
day of the next month when a new
ceiling rate will go into effect for
instruments issued on or after that date.
The ceiling rate of interest established
at the time of issue of any time deposit
in this category will not change during
the period the deposit is outstanding.
Member banks are permitted to
compound and compute interest on this
deposit in accordance with any of the
methods authorized by section 217.3 of
Regulation Q. The average 4-year yield
will be announced three business days
prior to the effective date (the first day
of the month) and will represent an
average of the 4-year yields for the
previous, five business days. As
explained more fully hereinafter, the
minimum penalty required to be
imposed upon the withdrawal of funds
from this category of time deposit is a
forfeiture of six months interest at the
rate being paid on the deposit.
With respect to this new deposit
category, member banks should
maintain data such as rates paid and
amounts issued in a manner that
facilitates reporting to the Board.I.
II. Elimination of minimum
denomination requirements
Effective July 1,1979, the Board has
amended Regulation Q to eliminate the
$1,000 minimum denomination
requirements currently imposed on time
deposits with maturities of 4 years or
more in order to earn interest at a
ceiling rate of 7 Vi per cent or more (12
CFR 217.7(b)(2). (3), and (4)). Although
no minimum denomination will be
required on such deposits, member
banks will be free to impose such
requirements. However, the $10,000
minimum denomination required on 26week money market time deposits by
section 217.7(f) of Regulation Q (12 CFR
217.7(f)) will remain in effect. The Board
believes that this action will broaden
the availability of time deposit
categories to all depositors and enable
small savers to obtain higher yields on
their funds.
III. Penalty for early withdrawals
Regulation Q currently provides that
where a member bank agrees to pay a
time deposit prior to maturity, the bank
must impose an early withdrawal
penalty on the funds withdrawn (12 CFR
217.4(d)). The current minimum required
penalty is a reduction in the rate of
interest paid on the funds withdrawn to
a rate not to exceed the rate currently
prescribed for a savings deposit (5 per
cent) plus a forfeiture of three months
interest at such rate. Under the current
structure, the amount of the early
withdrawal penalty increases
significantly the longer the deposit is
maintained. In order to reduce the
severity of this penalty, the Board has
amended section 217.4(d) of Regulation
Q (12 CFR 217.4(d)) to create a new
early withdrawal penalty.
Effective July 1,1979, the minimum
required early withdrawal penalty on
time deposits with original maturities of
one year or less is a forfeiture of three
months interest on the amount
withdrawn at the rate being paid on the
deposit. If the amount withdrawn has
been on deposit for less than three
months, however, all interest is
forfeited. The minimum required early
withdrawal penalty on time deposits
with original maturities of more than
one year is a forfeiture of six months
interest on the amount withdrawn at the
rate being paid on the deposit. If the
amount withdrawn has been on deposit
for less than six months, however, all
interest is forfeited. No reduction of
interest to the savings rate will be
required. This penalty will apply to all
time deposit contracts entered into on or
after July 1,1979, and to all existing time
deposit contracts that are extended or
reviewed on or after July 1,1979. The
new penalty is a minimum required
penalty only and a member bank is free
to specify in its deposit contract a more
severe premature withdrawal penalty as
long as such penalty is disclosed to the
depositor. Time deposits entered into
before July 1,1979, and not extended or
renewed on or after such date, will
continue to be subject to the Board's
current penalty rule which requires a
reduction of the rate of interest paid on
the funds withdrawn before maturity to
2
the savings rate, less three months
interest at that rate.
IV. Ceiling Rate on Savings Deposits
Regulation Q currently provides that
no member bank shall pay interest on
any savings deposit at a rate in excess
of 5 per cent (12 CFR 217.7(c)). Effective
July 1,1979, the Board has amended
Regulation Q to increase the ceiling rate
of interest payable on savings deposits
by member banks, except savings
deposits that are subject to negotiable
orders of withdrawal, from 5 per cent to
5Vi per cent. This action is being taken
in lieu of the proposal to authorize
member banks to pay an interest bonus
on savings funds held by individuals or
certain nonprofit organizations and will
provide higher returns to savers. The
ceiling rate of interest payable by
member banks on savings deposits
subject to negotiabje orders of
withdrawal will remain at 5 per cent.
Pursuant to its authority under section
19(j) of the Federal Reserve Act (12
U.S.C. § 371b) to prescribe rules
governing the payment of interest on
deposits, effective July 1,1979, the Board
amends Regulation Q (12 CFR §§ 217.4,
217.6, and 217.7) as follows:
(1) Amend § 217.4 (d) and (e) to read
as follows:
§ 217.4 Payment of the time deposits
before maturity.
*
* * * *
(d)
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 at least three
months of interest on the amount
withdrawn at the rate being paid on the
deposit. If the amount withdrawn has
remained on deposit for less than three
months, all interest shall be forfeited.
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 at least six
months interest on the amount
withdrawn at the rate being paid on the
deposit. If the amount has remained on
deposit for less than six months, all
interest shall be forfeited." Where
“ The provision* of thi* paragraph apply to all
time deposit contracts entered into on or after July
1,1979, and to all existing time deposit contracts
that are extended or renewed (whether by
automatic renewal or otherwise) on or after such
date. All contracts not subject to the provisions of
this paragraph shall be subject to the restrictions of
f 217.4(d) in effect prior to July 1,1979. which
provided that where a time deposit, or any portion
thereof, is paid before maturity, a member bank
may pay interest on the amount withdrawn at a rate
not to exceed that prescribed in $ 217.7 for a savings
deposit and the depositor shall forfeit three months
of interest payable at such rate. If. however, the
amount withdrawn has remained on deposit for
three months or less, all interest shall be forfeited.
necessary to comply with the
requirements of this paragraph, any
interest already paid to or for the
account of the depositor shall be
deducted from the amount requested to
be withdrawn. Any amendment of a
time deposit contract that results in an
increase in the rate of interest paid or in
a reduction in the maturity of the
deposit constitutes a payment of the
time deposit before maturity. A time
deposit may be paid before maturity
without a forfeiture of interest as
prescribed by this paragraph in the
following circumstances: * * *
(e)
Disclosure of early withdrawal
penalty. At the time a depositor enters
into a time deposit contract with a
member bank, the bank shall provide a
written statement of the effect of the
penalty prescribed in paragraph (d) of
this section, which shall (1) state clearly
that the customer has contracted to keep
his funds on deposit for the stated
maturity and (2) describe fully and
clearly how such penalty provisions
apply to time deposits in such bank, in
the event the bank, notwithstanding the
contract provisions, permits payment
before maturity. Such statements shall
be expressly called to the attention of
the customer.
*
'*“ *
*
*
3
(2) Amend § 217.6(e) to read as
follows:
$ 217.6 Advertising of interest on
deposits.
*
*
*
*
*
(e)
Penalty for early withdrawals.
Any advertisement, announcement, or
solicitation relating to interest paid by a
member bank on time deposits shall
include clear and conspicuous notice
that the bank is prohibited from
allowing payment of a time deposit
before maturity unless substantial
interest is forfeited. Such notice may
state that,
“Substantial interest penalty is
required for early withdrawal.”
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
INTEREST ON DEPOSITS
ERRATUM: REGULATION Q
Collection to pamphlet amended effective December 6, 1978
The Regulation Q pamphlet amended effective
December 6, 1978 contains an error. The follow
ing passage appeared incorrectly in the text of
§ 217.4(d):
A member bank may not be paid before
maturity. This provision does not prevent a
member bank from arranging the sale or pur
chase of such a certificate on behalf of the
holder or prospective purchaser of a certifi
cate issued under that subpart.
The first sentence should not have appeared and
the second had appeared previously. This passage
has been deleted so that § 217.4(d) reads correctly
as set forth below:
SECTION 217.4 - PAYMENT OF TIME
DEPOSITS BEFORE MATURITY
(a) Time deposits payable on a specified date.
No member bank shall pay any time deposit,
which is payable on a specified date, before such
specified date, except as provided in paragraph (d)
of this section.
(b) Time deposits payable after a specified
period. No member bank shall pay any time
deposit, which is payable at the expiration of a
certain specified period, before such specified
period has expired, except as provided in para
graph (d) of this section.
(c) Time deposits payable after a specified
notice. No member bank shall pay any time
deposit, with respect to which notice is required
to be given a certain specified period before any
withdrawal is made, until such required notice
has been given and the specified period thereafter
has expired, except as provided in paragraph (d)
of this section.
(d) Penalty for early withdrawals. Where a
time deposit, or any portion thereof, is paid be
fore maturity, a member bank may pay interest
on the amount withdrawn at a rate not to exceed
that currently prescribed in §217.7 for a savings
deposit: Provided, That the depositor shall forfeit
three months of interest payable at such rate If,
however, the amount withdrawn has remained on
deposit for three months or less, all interest shall
be forfeited. Where necessary to comply with the
requirements of this paragraph, any interest al
ready paid to or for the account of the depositor
shall be deducted from the amount requested to
be withdrawn." Any amendment of a time de
posit contract that results in an increase in the
rate of interest paid or in a reduction in the
maturity of the deposit constitutes a payment of
the time deposit before maturity. Provided fur
ther, That Investment Certificates issued in
negotiable form by a member bank pursuant to
subpart 3 of § 217.7(b) may not be paid before
maturity. This provision does not prevent a mem
ber bank from arranging the sale or purchase of
such a certificate on behalf of the holder or
prospective purchaser of a certificate issued under
that subpart. A member bank may not, however,
repurchase such certificates for its own account.
Provided further, That a time deposit may be paid
before maturity without a reduction or forfeiture
of interest as prescribed by this paragraph in the
following circumstances:
"T h e provisions o f this paragraph apply to all time
deposit contracts entered into after July 5, 1973, and to
all existing time deposit contracts that are extended or re
newed (whether by automatic renewal or otherwise) after
such date, and to all time deposit contracts that are
amended after such date so as to increase the rate of
interest paid. All contracts not subject to the provisions
of this paragraph shall be subject to the restrictions of
§ 217.4(d) in effect prior to July 5, 1973, which permitted
payment o f a time deposit before maturity only in an
emergency where necessary to prevent great hardship to
the depositor, and which required the forfeiture o f
accrued and unpaid interest for a period of not less than
3 months on the amount withdrawn if an amount equal to
the amount withdrawn had been on deposit for 3 months
or longer, and the forfeiture of all accrued and unpaid
interest on the amount withdrawn if an amount equal to
the amount withdrawn had been on deposit less than 3
months.
MARCH 1979
(1) Where a member bank pays all or a portion
of a time deposit upon the death of any owner of
the time deposit funds;1"
(2) Where a member bank pays all or a portion
of a time deposit representing funds contributed
to an Individual Retirement Account or a Keogh
(H.R. 10) plan established pursuant to 26 U.S.C.
(I.R.C. 1954) § § 408, 401 when the individual
for whose benefit the account is maintained
attains the age 59Vi or is disabled (as defined in 26
U.S.C. (I.R.C. 1954) § 72 (m)(7) or thereafter; or
(3) Where a member bank pays that portion of
a time deposit on which Federal deposit insurance
has been lost as the result of the merger of two
or more Federally insured banks in which the
depositor previously maintained separate time de
posits for a period of one year from the date of
the merger.
Under a time deposit agreement where subsequent
deposits reset the maturity of the entire account,
each deposit maintained in the account for at least
a period equal to the original maturity of the de
posit may be regarded as having matured indi
vidually and been redeposited at intervals equal to
' “ For the purposes o f this provision, an “ow ner” of
time deposit funds is any individual who at the time of
his or her death has full legal and beneficial title to all or
a portion of such funds, or, at the time of his or her death,
has beneficial title to all or a portion of such funds and
full power of disposition and alienation with respect
thereto.
such period. When a time deposit is payable only
after notice, for funds on deposit for at least the
notice period, the penalty for early withdrawal
shall be imposed for at least the notice period.
(e) Disclosure of early withdrawal penalty. At
the time a depositor enters into a time deposit
contract with a member bank, the bank shall pro
vide a written statement of the effect of the
penalty prescribed in paragrapgh (d) of this sec
tion, which shall (1) state clearly that the cus
tomer has contracted to keep his funds on deposit
for the stated maturity, and (2) describe fully
and clearly how such penalty provisions apply to
time deposits in such bank, in the event the bank,
notwithstanding the contract provisions, permits
payment before maturity. Such statements shall be
expressly called to the attention of the customer.
Written statements made with respect to negoti
able Investment Certificates issued by a member
bank pursuant to subpart 3 of § 217.7(b) shall
state clearly that no payment before maturity will
be permitted under any circumstances. Such state
ments shall be expressly called to the attention of
the customer. In addition, every negotiable Invest
ment Certificate shall state conspicuously on its
face that, “This time deposit cannot be paid prior
to maturity.”
(f) Loans upon security of time deposits. A
member bank may make a loan to the depositor
upon the security of his time deposit provided
that the rate of interest on such loan shall be not
less than 1 per cent per annum in excess of the
rate of interest on the time deposit.
@FedFRASER