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FEDER AL RESERVE BANK
O F N E W YORK
I" Circular No. 9 0 7 6 1
L
May 19, 1981
J
AMENDMENTS TO REGULATION D AND Q
Coverage Extended to C ertain Deposits at Foreign Offices
To A ll Depository Institutions, and Others Concerned,
in the Second Federal Reserve D istrict:
The Board of Governors of the Federal Reserve System has
amended its Regulation D, “Reserve Requirements of Depository In
stitutions,” and Regulation Q, “Interest on Deposits,” to subject de
posits of less than $100,000 maintained at foreign offices to both regu
lations. The amendments became effective May 14, 1981,
The Board indicated that it acted “to avoid the undermining of
interest rate ceilings and the adverse effects on the flow of funds among
depository institutions and on monetary policy that would result from
recent offerings of foreign deposit accounts.”
Enclosed is the text of the amendments. Questions thereon may
be directed to our Accounting Department (Tel. No. 212-791-5249 or
5250).
A
nthony
M.
Solom on,
President.
TITLE 12 —
CHAPTER II —
SUBCHAPTER A —
BANKS AND BANKING
FEDERAL RESERVE SYSTEM
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
[Regulations D and Q]
[Docket No. R-0358]
PART 204 —
RESERVE REQUIREMENTS OF DEPOSITORY INSTITUTIONS
PART 217 —
INTEREST ON DEPOSITS
Deposits Payable Outside the United States
AGENCY:
Board of Governors of the Federal Reserve System.
ACTION:
Final rules.
SUMMARY: The Board of Governors of the Federal Reserve System has amended
its Regulation D — Reserve Requirements of Depository Institutions
(12 CFR Part 204) and Regulation Q — Interest on Deposits (12 CFR Part 217)
to subject deposits in denominations of less than $100,000 maintained
at foreign branches to interest rate ceilings and reserve requirements.
This action is taken in light of recent offerings that have significant
potential adverse implications for the viability of the existing interest
rate ceiling structure, the flow of funds among depository institutions,
and the conduct of monetary policy.
EFFECTIVE DATE:
May 14, 1981.
FOR FURTHER INFORMATION CONTACT: Gilbert T. Schwartz, Associate General
Counsel (202/452-3625) or Paul S. Pilecki, Senior Attorney (202/4523281), Legal Division, Board of Governors of the Federal Reserve System,
Washington, D.C. 20551.
SUPPLEMENTARY INFORMATION:
In recent days the Board has become aware
of a deposit arrangement involving the use of foreign offices of depository
institutions that can be used by such instiuttions to evade the reserve
requirements of Regulation D (12 CFR Part 204) and the interest rate
ceilings of Regulation Q (12 CFR Part 217).
If allowed to proliferate,
the arrangement would erode the effectiveness of reserve requirements
and interest rate limitations on deposits.
In order to preserve the
effectiveness of Federal reserve requirements and interest rate ceilings,
the Board has determined that it is essential to subject such arrangements
to Regulations D and Q, effective immediately if the deposits are in
denominations of less than $100,000. Under the account arrangement,
the institution establishes accounts in denominations of less than $100,000
through its U.S. offices on behalf of its foreign office. Customers
may direct the institution to transfer funds to the institution's foreign
office for deposit in an account at the foreign office or direct the
[Enc. Cir. No. 9076]
-2 foreign office to transfer funds from the foreign office account to
the customer's checking account at a U.S. office of the institution.
Transfers may be effectuated by telephone or by other instruction.
The account agreement provides that amounts on deposit in the foreign
office account are payable only at the foreign office.
Hie Board has determined that funds deposited in the foreign
office account arrangement described above and other arrangements involving
the receipt of deposits at foreign offices that would otherwise likely
be maintained in the United States should be subjected to deposit interest
rate limitations under Regulation Q — Interest on Deposits (12 CFR
Part 217) and to reserve requirements under Regulation D — Reserve
Requirements of Depository Institutions (12 CFR Part 204) if they are
in denominations of less than $100,000.
In this connection, the Board
has amended Regulations D and Q to provide that deposits will be regarded
as payable outside the United States if the depositor has a right to
demand payment only outside the United States and only if the deposit
is in denominations of $100,000 or more.
The Board believes that arrangements of the type described
above serve no purpose other than as devices to evade Regulations D
and Q. The account does not facilitate the conduct of the foreign office's
or the customer's foreign business, and the depositor has no interest
in maintaining funds in a foreign office other than as a device to obtain
a rate of interest in excess of Regulation Q ceilings.
The Board regards
the foreign office involvement in such transactions as being limited
to serving as an accounting convenience.
Under section 19 of the Federal Reserve Act, a deposit that
is payable only outside the United States is not subject to basic reserve
requirements (12 U.S.C. § 461(b)(6)), interest rate limitations (12
U.S.C. § 371b) or to the prohibition against payment of interest on
demand deposits (12 U.S.C. § 371a). The purpose of this exemption is
to enable foreign branches of U.S. banks to compete on a more nearly
equal basis with foreign banks.—
The Board believes that foreign office
accounts in denominations of less than $100,000 do not serve to further
the competitive position of the foreign office vis a vis foreign banks
and, thus, such accounts are not entitled to the exemptions in section 19.
Moreover, Congress has expressed its will that rate ceilings on deposits
of less than $100,000 should continue in effect until April 1, 1986,
unless eliminated sooner by the Depository Institutions Deregulation
Committee.—
Proliferation of arrangements such as those described
above could abrogate the effectiveness of the interest rate ceiling
structure, thereby presenting potential adverse implications for the
flow of funds among depository institutions and provide an unfair competitive
advantage to U.S. banks with foreign offices relative to depository
1/ See 35 FR 2768 (February 10, 1970) and Senate Report No. 1260, 73d
Conqress, 2d Session, June 6, 1934 (pp. 4, 6).
y
Section 202 of the Depository Instituions Deregulation Act of 1980
(Pub. L. 96-221).
-3 institutions that do not maintain foreign branches. These arrangements
also could have an adverse impact on the conduct of monetary policy.
Consequently, the Board believes that if an institution subject to Regulations D
and/or Q desires to accept deposits of less than $100,000 at a foreign
office, such deposits must comply with all provisions of Regulations D
and/or Q.
In considering this matter, the Board noted that the purpose
of foreign branches of U.S. banks is to conduct a foreign and international
business and not to function as a substitute for domestic banking facilities.
However, the Board is concerned with the ability of U.S. depository
institutions to compete with nondepository institutions and recognizes
that additional instruments may be needed in order to foster additional
competition.
The Board notes that the Depository Institutions Deregulation
Committee may consider the possibility of creating new deposit instruments
that would enhance the competitive position of depository institutions
at its next meeting in connection with its consideration of the Committee's
proposal to deregulate rate ceilings on deposits.
The Board believes that adoption of these amendments effective
immediately is necessary in order to assure the effectiveness of reserve
requirements and interest rate ceilings.
Consequently, the Board, for
good cause, finds that the notice and public procedure provisions of
5 U.S.C. § 553(b) with regard to this action are impracticable and contrary
to the public interest, and that deferral of the effective date pursuant
to 5 U.S.C. § 553(d) would be inconsistent with the effective enforcement
of Regulations D and Q.
In view of the Board's finding that the amendments should
be adopted immediately, notice of proposed rulemaking is not required
by 5 U.S.C. § 553. Accordingly, sections 603 and 604 of the Regulatory
Flexibility Act (5 U.S.C. §§ 603 and 604) are not applicable. However,
the Board notes that its action will bolster the ability of small depository
institutions, which do not have foreign branches, to compete for deposits
with large institutions with foreign branches.
Effective May 14, 1981, pursuant to the Board's authority
under § 19(a) of the Federal Reserve Act (12 U.S.C. § 461(a)) to define
the terms used in that section and to prescribe such regulations as
the Board may deem necessary to effectuate the purposes of § 19 and
to prevent evasions thereof, the Board amends Regulations D (12 CFR
Part 204) and Q (12 CFR Part 217) as follows:
1. Section 204.2 of Regulation D (12 CFR Part 204) is amended
by adding a new paragraph (t) as follows:
SECTION 204.2 —
DEFINITIONS
For purposes of this Part, the following definitions apply
unless otherwise specified:
*
*
*
*
*
- 4(t)
"Any deposit that is payable only at an office located
outside the United States" means (1) a deposit of a United States residentthat is in a denomination of $100,000 or more, and as to which the depositor
is entitled, under the agreement with the institution, to demand payment
only outside the United States or (2) a deposit of a person who is not
a United States resident— as to which the depositor is entitled, under
the agreement with the institution, to demand payment only outside the
United States.
1/ A deposit of a foreign branch, office, subsidiary, affiliate or other
foreign establishment ("foreign affiliate") controlled by one or more
domestic corporations is not regarded as a deposit of a United States
resident if the funds serve a purpose in connection with its foreign
or international business or that of other foreign affiliates of the
controlling domestic corporation(s).
2. Section 217.1 of Regulation Q (12 CFR Part 217) is amended
by adding a new paragraph (k) as follows:
SECTION 217.1 —
DEFINITIONS
For purposes of this Part, the following definitions apply
unless otherwise specified:
*
*
*
*
*
(k)
"Any deposit that is payable only at an office located
outside of the States of the United States and the District of Columbia"
means (1) a deposit of a U.S. resident—^- (as defined in 12 CFR § 204.2(s))
that is in a denomination of $100,000 or more, and as to which the depositor
is entitled under the agreement with the institution, to demand payment
only outside the States of the United States or the District of golumbia
or (2) a deposit of a person who is not a United States resident— /
as to which the depositor is entitled under the agreement with the institution
to demand payment, only outside the States of the United States or the
District of Columbia.
8a/ A deposit of a foreign branch, office, subsidiary, affiliate or
other foreign establishment ("foreign affiliate") controlled by one
or more domestic corporations is not regarded as a deposit of a United
States resident if the funds serve a purpose in connection with its
foreign or international business or that of other foreign affiliates
of the controlling domestic corporation(s).
By order of the Board of Governors, May 14, 1981.
(Signed)
Theodore E. Allison
Theodore E. Allison
Secretary of the Board
[SEAL]
@FedFRASER