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FEDERAL RESERVE BANK OF N EW YORK Circular No. 8 7 0 9 ~l December 19, 1979 -1 CHANGES IN REGULATION Q Including New 2/4-Year Time Deposit Tied to Yields on Treasury Securities T o A ll M e m b e r B a n k s , a n d O t h e r s C o n c e r n e d , in t h e S e c o n d F e d e r a l R e s e r v e D is t r ic t: C h a n ges in R eg u la tion Q , “ In terest on D e p o s its ,” h ave b e e n a d o p te d , effe ctiv e January 1, 1980, b y the B oa rd o f G ov ern ors o f the F ed era l R eserve System in con su ltation w ith the oth er F ed era l financial re g u la tory a gen cies. F o llo w in g is the text o f a join t statem ent a n n o u n cin g the action s b y these a gen cies: A series of regulatory moves designed to help the small saver — including a new 2V2 year certificate tied to the yield on Treasury securities — was announced jointly today by the Federal Home Loan Bank Board, the Federal Deposit Insurance Corporation, the Federal Reserve Board and the National Credit Union Administration. The changes, which will go into effect January 1, will also increase the ability of federally insured depository institutions to compete for funds with market instruments which are not subject to interest rate ceilings. Today’s announcement represents a further adjustment of interest rate ceilings that began earlier this year. When announcing small-saver actions effective last July 1, the agencies said they planned to consult near the end of the year to determine whether further changes in ceilings would be appropriate. The new measures are as follows: 1. Replace the existing 4-year floating-rate time deposit with a new floating rate certificate with a maturity of 214 years or more tied to the yield on Treasury securities maturing in 2*4 years. For thrift institutions (savings and loan associations and mutual savings banks), the ceiling rate will be 50 basis points below the 2*4 year Treasury rate, while for banks the ceiling rate will be 75 basis points below the Treasury rate. Federal credit unions may offer the same variable ceiling rate as thrifts on share certificates of 90 days or more. There are no minimum deposit requirements and compounding of interest will be permitted. The ceiling will be established monthly for new deposits based on the rate announced by the Treasury three business days before the beginning of each month. Recently, the yield on Treasury securities that mature in 2*4 years has averaged approximately 11.20 percent. Thus, the comparable ceiling for thrift institutions, were the new certificate available, would be 10.70 percent and for banks, 10.45 percent. After compounding, the effective yield on this instrument would be 11.46 percent and 11.18 percent for thrifts and banks respectively. The ceiling rate that is established monthly will apply to all new deposits issued throughout the month. The ceiling on outstanding deposits of this type will not change during the life of the deposit. The new certificate replaces the 4-year variable rate deposit that was established effective last July 1. All fixed rate ceilings remain in effect, however. 2. Increase by 14 of a percentage point the ceiling on deposits maturing in 90 days to 1 year. The new nominal ceiling for commercial banks is 534 percent while thrifts may pay up to 6 percent. 3. Permit banks to pay the same rate as thrifts when IRA/Keogh and governmental unit funds are deposited in the new 214-year or more certificates. Banks also may pay the same as thrifts on IRA/Keogh and governmental unit deposits of $10,000 or more placed in 26-week money market certificates regardless of the level of the Treasury bill rate. However, the thrifts’ differential on such certificates when the Treasury bill rate is below 9 percent continues to apply for other depositors of 26-week money market certificates. The new actions were taken by the individual agencies after consultations required by law. The agencies also indicated that they plan to monitor future deposit flows among depository institutions on a continuing basis. P rin ted on the fo llo w in g p a ges is the text o f the B o a rd ’s official n o tice exp la in in g the ch an ges in R e g u la tion Q . In a d d ition , e n clo se d is a c o p y o f th e S u p p lem en t to R eg u la tion Q , e ffe ctiv e January 1, 1980, w h ic h reflects these ch an ges. Q u estion s on this m atter m a y b e d ire cte d to our R egu lation s D ivision (T e l. N o. 212-791 5 9 1 4 ). T ho m as M. T im l e n , First V ic e President. INTEREST ON DEPOSITS (Reg. Q ; Docket No. R-0267) Maximum Rates of Interest Payable the other Federal financial regulatory agencies, the Board has amended Regulation Q (12 CFR 217) to: (1) create a new time deposit category with a maturity of 2 V2 years or more and with a maximum ceiling rate of interest based on the average 2Vfe year yield on Treasury securities; (2) increase the ceiling rate of interest payable on time deposits with maturities of 90 days or more but less than one year from 5XA per cent to 5% per cent; and (3) permit member banks to pay interest on IRA/Keogh and governmental unit funds at the same rate permitted mutual savings banks and savings and loan associations when such funds are invested in 26-week $10,000 money market time deposits or the new 2 V2 year time deposit. The Board believes that these amendments, in coniunction with those adopted by the other Federal financial regulatory agencies, will enable savers to obtain hieher rates of return on their savings and will increase the flow of funds to the nation’s depository institutions, as well as encourage individuals to save for their retirement. AGENCY: Board of Governors of the Federal Re serve System. ACTION: Final Rule. SUMMARY: The Board of Governors of the Federal Reserve System has adopted three amendments to Regulation Q. The first amendment creates a new time deposit category with a maturity of 2 Vz years or more. Member banks are authorized to pay interest on this new nonnegotiable time deposit at a ceiling rate of three quarters of one per cent below the average 2 Vz year yield for United States Treasury securities as determined monthly by the United States Treasury. No minimum denomination is required for this new deposit category. As part of this action, the Board is eliminating the four-year or more time deposit with a ceiling rate tied to the average yield on four-year United States Treasury securities which member banks were authorized to offer effective July 1, 1979. The second amendment increases the ceiling rate of interest payable by member banks on time deposits with maturities of 90 days or more but less than one year, from 5XA per cent to 5 3A per cent. The third amendment permits members to pay interest on In dividual Retirement Account/Keogh (H.R. 10) Plan and governmental unit funds at the same rate per mitted mutual savings banks and savings and loan associations when such funds are invested in 26-week $10,000 money market time deposits or the new 2 V2 year time deposit. These actions are being taken to provide additional returns to savers. E FFE C T IV E DATE: I. 2 V2 year fixed rate, variable ceiling time deposit Beginning January 1, 1980, member banks will be permitted to offer a nonnegotiable time deposit with a maturity of 2 V2 years or more at a ceiling rate tied to the average 2 V2 year yield on United States Treas ury securities. The ceiling rate in effect during a particular month will apply to all newly issued time deposits of this category even if a member bank issues the new time deposit with maturities in excess of 2V2 years. The ceiling rate for new deposits will be determined monthly, but the ceiling rate applicable to outstanding deposits will not change during the life of the deposit. Although no minimum denomi nation 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 2V2 , 4, 6 and 8 years or more at ceiling rates of 6 V2 , 7Vi, 7 ^ and 7% per cent, respectively, are not affected by this action and will remain in effect. As part of this action the Board is eliminating, effective January 1, 1980, the 4-year or more time deposit with a ceiling rate tied to the average yield on 4-vear United States Treasury securities. Member banks were authorized to offer this deposit effective July 1, 1979 (12 CFR 217.7 ( g ) ). However, outstanding deposits of this category are not affected by this action. Beginning the first day of every month, a member bank will be permitted to pay interest on new de posits with maturities of 2Ah years or more at a ceiling rate of three quarters of one per cent (75 basis points) below the average 2% year yield for U.S. Treasury securities as announced by the Treasury. This ceiling rate will remain in effect for all instruments issued January 1, 1980. FOR FURTHER INFORMATION CONTACT: Gil bert T. Schwartz, Assistant General Counsel (202/4523625) or Anthony F. Cole, Senior Attorney (202/4523612), Legal Division, Board of Governors of the Federal Reserve System, Washington, D.C. 20551. SUPPLEMENTARY INFORMATION: On May 30, 1979, the Board of Governors adopted amendments to Regulation Q designed to help small savers obtain a higher return on their deposits (44 FR 32646). These amendments included raising the savings deposit ceiling rate by one-quarter of one per cent to 5A /4 per cent, creation of a new four-year or more time deposit whose ceiling rate is tied to the rate paid on four-year U.S. securities, elimination of’ minimum denomination requirements (except for the $10,000 minimum required for the 26-week money market certificate), and reduction of the penalties for early withdrawal of time deposit funds. In announcing these actions, the Board stated that consideration would be given toward the end of this year to deter mine whether further adjustments in interest rate ceilings would be appropriate. After consultation with 2 IRA/Keogh (H.R. 10) Plan and governmental unit time deposits during the month until the first day of the next month vviien a new ceiling rate will go into effect for in struments issued on or after that date. Member banks are permitted to compound and compute in terest on this deposit in accordance with any of the methods authorized by section 217.3 of Regulation Q. The average 2 ¥2 year yield on U.S. Treasury securities will be announced three business days prior to the effective date (the first day of the month) and will represent an average of the 2 V2 year yields for the previous five business days. Member banks will be permitted to pay interest on time deposits of this category which consist of funds deposited to the credit of, or in which the entire beneficial interest is held by, a governmental unit or an individual pursuant to an IRA agreement or Keogh (H.R. 10) Plan, at a ceiling rate equal to the ceiling rate pavable on the same category of deposit by any Federally insured savings and loan association or mutual savings bank. The Board believes that this action creating a shorter term time deposit instrument with a ceiling rate tied to market rates of interest will increase the amount of savings maintained by depositors. 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. II. III. The Board amended Regulation Q, effective July 6, 1977, to create a new category of IRA/Keogh Plan time deposit with a maturity of three years or more and no minimum denomination. Member banks are authorized to pay interest on such time deposits at a ceiling rate of 8 per cent, which 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 association. The Board’s action was taken to accommodate the Congressional objective expressed in the Employee Retirement Income Security Act of 1974 (Pub. L. 93406) of encouraging individuals to save for their retirement by enabling an IRA or Keogh Plan partici pant to obtain the highest possible return on retire ment savings regardless of the type of depository institution selected by the depositor. While this special category of deposit is available only for IRA and Keogh depositors, IRA and Keogh funds may be deposited in any form of deposit account, including the 26-week $10,000 money market certificate, so long as the Regulation Q minimum maturity and minimum denomination requirements are satisfied. However, where an individual elects to deposit IRA and Keogh funds in a 26-week money market certificate, thrift institutions have a rate ad vantage over commercial banks in view of the exis tence of the differential in the ceiling rates payable on such accounts by thrifts and commercial banks when the Treasury bill rate is below 9 per cent. The Board regards the maintenance of this differential with respect to IRA or Keogh funds as inconsistent with the objectives of maximizing the total amount of earnings on retirement savings that Congress sought to encourage through establishment of IRA and Keogh programs. Since preferred tax and interest rate treat ment was given to IRA/Keogh plants to encourage savings for retirement, and not to extend a competitive advantage for a particular class of financial institution, the Board has amended Regulation Q (12 CFR § 217.7 (f )) to permit member banks to pay interest on new 26-week $10,000 money market certificates which consist of IRA or Keogh funds at a ceiling rate equal to the ceiling rate payable on the 26-week money market certificate by any Federally insured savings and loan association or mutual savings bank regardless of the level of the Treasury bill rate. How ever, the terms of existing IRA/Keogh time deposits may not be modified until such deposits mature. ( As discussed above, similar action is being taken with respect to the new 2V2 year certificate.) The Board amended Regulation Q, effective Novem ber 27, 1974, to create a new category of time de posit for funds of public units. Pursuant to section 217.7 ( d ), member banks are authorized to 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, a governmental unit at a ceiling rate of 8 per cent, which is the highest fixed ceiling rate that may be paid on time deposits under $100,000 Ceiling rate on 90-day time deposits Regulation Q currently provides that no member bank shall pay interest at a rate in excess of 5V2 per cent on a time deposit with a maturity of 90 days or more but less than one year (12 CFR § 217.7(b)). This ceiling rate has been equal to the ceiling rate in effect for savings deposits at thrift institutions since July 1, 1979. Prior to the July 1 savings rate increase, the member bank 90-day time deposit ceiling rate was one-quarter of one percent higher than the maximum rate payable on savings deposits at thrifts. Commercial banks historically have competed actively in the 90-day time deposit market and hold approximately 14 per cent of their small denomination time deposits in such accounts. In this regard, the agencies did not intend that their actions last July would affect the competitive balance between com mercial banks and thrifts. Accordingly, the Board has amended Regulation Q to increase the maximum rate of interest payable by member banks on time deposits with maturities of more than 90 days but less than one year to 5% per cent, one-quarter of one per cent above the ceiling rate of interest payable on savings deposits by thrift institutions. This action will restore the pre-existing competitive balance and will enable savers to obtain higher returns on their funds. The new ceiling rate may be paid only on certificates of deposit entered into or renewed on or after January 1, 1980. However, for purposes of administrative con venience, beginning January 1 member banks may pay interest on all funds in 90-day to one-year time de posits, open accounts, at a rate of 5% per cent. 3 by any Federally insured commercial bank, mutual savings bank or savings and loan association. This action was taken in light of the increase in 1974 in Federal deposit insurance to $100,000 on governmen tal unit time deposits. The increased insurance made thrift institutions more competitive with commercial banks. The Board’s action to permit member banks to pay interest on such funds at the same rates as thrifts, was intended to maintain the competitive balance among financial institutions, as well as to provide additional depository alternatives for govern mental units. While this special category of deposit is available only for governmental units, public funds may be deposited in any form of deposit account, including the 26-week $10,000 money market certificate, so long as the Regulation Q minimum maturity and minimum denomination requirements are satisfied. However, where a public unit elects to deposit funds in a 26-week $10,000 money market certificate, thrift institutions may have a rate advantage over com mercial banks in view of the existence of the differen tial when the Treasury bill rate is below 9 per cent. The Board regards maintenance of the differential with respect to public unit time deposit funds as in consistent with the objectives of maintaining competi tive equality and maximizing depository alternatives for governmental units. Accordingly, the Board also has amended Regulation Q (12 CFR § 217.7(f)) to permit member banks to pay interest on new 26-week $10,000 money market certificates which consist of public funds at a ceiling rate equal to the ceiling rate payable on the 26-w’eek money market certificate by any Federally insured savings and loan association or mutual savings bank. However, the terms of exist ing governmental unit time deposits may not be modified until such deposits mature. (As discussed above, similar action is being taken with respect to the new 2% year certificate.) The Board’s actions were taken at this time after consultation with the other Federal financial institu tion regulatory agencies. In order to provide increased returns to savers as rapidly as possible, the Board finds that application of the notice and public partici pation provisions of 5 U.S.C. § 553 to these actions would be contrary to the public interest and that good cause exists for making these amendments effective in less than thirty days. These amendments are adopted pursuant to the Board’s authority under section 19(j) of the Federal Reserve Act (12 U.S.C. § 371b) to prescribe limita tions on the rates of interest that may be paid by member banks on time and savings deposits. 4 BO AR D OF GOVERNORS OF TH E FEDERAL RESERVE SYSTEM SUPPLEMENT TO REGULATION Q As am ended effective January 1 , 1 9 8 0 SECTION 217.7 — MAXIMUM RATES OF INTEREST PAYABLE BY MEMBER BANKS ON TIME AND SAVINGS DEPOSITS Pursuant to the provisions of Section 19 of the Federal Reserve Act and § 217.3 of this Part, the Board of Governors of the Federal Reserve System hereby prescribes the follow ing maximum rates 1 of interest per annum payable by member banks of the Federal Re serve System on time and savings deposits: (a) Time deposits of $100,000 or more. There is no maximum rate of interest present ly prescribed on any time deposit of $100,000 or more. (b ) Fixed ceiling time deposits of less than Except as provided in paragraphs (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 following schedule: $100,000. ( a ), Maturity Maximum per cent 30 days or more but less than 90 days 5V4 90 days or more but less than 1 year 5% 1 year or more but less than 2Vz years 6 2 V2 years or more but less than 4 years 6V2 4 years or more but less than 6 years 71/4 6 years or more but less than 8 years 7y2 8 years or more 734 (d ) Governmental unit time deposits of less 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 subdivision 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 per cent.2 than $100,000. (e) Individual Retirement Account and Keogh (H .R. 10) Plan deposits of less than Except as provided in paragraphs (a ) and (g), a member bank may pay inter est on any time deposit with a maturity of three years or more that consists of funds de posited to the credit of, or in which the entire beneficial interest is held by, an individual pursuant to an Individual Retirement Account agreement or Keogh (H.R. 10) Plan estab lished pursuant to 26 U.S.C. (I.R.C. 1954) §§ 408, 401, at a rate not in excess of 8 per cent.2 $100,000. (f) 26-week money market time deposits of 1 The limitation on rates of interest payable by member 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. [Enc. Cir. No. 8709] (c) Savings deposits. No member bank shall pay interest at a rate in excess of 514 per cent on any savings deposit. Provided, however, that no member bank shall pay in terest at a rate in excess of 5 per cent on any savings deposit that is subject to negotiable orders of withdrawal, the issuance of which is authorized by Federal law. Except as provided in par agraphs (a), (b) and (d), a member bank may pay interest on any nonnegotiable time less than $100,000. 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 asso ciation. PRINTED IN NEW YORK (OVER) 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 b asis) for United States Treasury bills with maturities of 26 weeks issued on or immedi ately prior to the date of deposit. Rounding such rate to the next higher rate is not per mitted. A member bank may not compound interest during the term of this deposit. A member bank may offer this category of time deposit to all depositors. However, a member bank may pay interest on any nonnegotiable time deposit of $10,000 or more with a matur ity of 26 weeks which consists of funds de posited to the credit of, or in which the entire beneficial interest is held by: (1 ) the United States, any State of the United States, or any county, municipality or political subdivision thereof, the District of Columbia, the Commonwealth of Puerto Rico, the Virgin Islands, American Samoa, Guam, or political subdivision thereof; or (2 ) 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 to exceed the ceiling rate pay able on the same category of deposit by any Federally insured savings and loan association or mutual savings bank. (g ) Time deposits of less than $100,000 with maturities of 2% years or more. Except as provided in paragraphs ( a ) , ( b ) , (d ) , and (e ), a member bank may pay interest on any nonnegotiable time deposit with a maturity of 2V2 years or more that is issued on or after the first day of each month at a rate not to exceed three quarters of one per cent below the aver age 2V2 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 2V2 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 depositors. However, a member bank may pay interest on any non negotiable time deposit with a maturity of 2V2 years or more which consists of funds de posited to the credit of, or in which the entire beneficial interest is held by: (1 ) the United States, any State of the United States, or any county, municipality or political subdivision thereof, the District of Columbia, the Commonwealth of Puerto Rico, the Virgin Islands, American Samoa, Guam, or political subdivision thereof; or (2 ) 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 to exceed the ceiling rate payable on the same category of deposit by any F ed erally insured savings and loan association or mutual savings bank.
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