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F E D E R A L R E S E R V E B A NK
OF NEW YO RK
[
Circular No. 9177
October 30, 1981
"1
DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE
Recent Rulings Regarding Interest Rate Ceilings
To All Commercial Banks, Mutual Savings Banks,
and Savings and Loan Associations in the Second
Federal Reserve District, and Others Concerned:
Following is the text of a statement issued October 26 by the Depository Institutions Deregulation
Committee:
Passbook Savings Increase Postponed. The Depository Institutions Deregulation Committee (DIDC) voted on
Monday, October 19, 1981 to postpone indefinitely the one-half of one percentage point increase in the nontransac
tion savings rate ceiling that was scheduled to become effective on November 1, 1981. Accordingly, the maximum
rates payable on passbook and statement savings accounts will remain at 5.50 percent for thrift institutions and at
5.25 percent for commercial banks. Although the Committee will consider this issue again at its December meeting,
no decision has been made on whether further action will be taken at that time.
IRAlKeogh. A final rule creating a new IRA/Keogh account category also was issued today by the DIDC. The
new account has a minimum maturity of 1Vi years and no regulated interest rate ceiling. This means that depository
institutions may provide instruments with fixed or floating interest rates. Additional deposits during the term of the
account will not require extending its maturity. In addition, any depository institution may waive its mandatory early
withdrawal penalties for transfers within the same institution- from existing IRA/Keogh deposits to the new
IRA/Keogh account category.
The new IRA/Keogh account category becomes effective on December 1, 1981, but it does not change the
current eligibility requirements or contribution limits for IRAs or Keoghs contained in the Internal Revenue Code.
The extended eligibility changes enacted by the Economic Recovery Tax Act of 1981 do not become effective until
January 1, 1982. Any questions concerning the income tax treatment of an IRA/Keogh account or the fiduciary
responsibilities connected with these accounts should be directed to the Internal Revenue Service (202-566-4576).
MMC/SSC Ceiling Rates. The DIDC issued final rules concerning the maximum interest rates payable on
26-week money market certificates (MMCs) and the 2% to 4 year small savers certificates (SSCs). These final rules
reaffirm the DIDC rules that were adopted on May 28, 1980 and subsequently were amended to remove the interest
rate caps and to change the dates that the MMC and SSC rates become effective. Pursuant to a Federal District Court
order, these amended rules were published for public comment. Having remained in force during the comment
period, the current rules were adopted in final form at the September 22, 1981 DIDC meeting without change.
MMC Ceiling - Optional Four Auction Average. In a separate action, the DIDC also adopted rules at its
September 22 meeting that would permit the use of a four-week average of 26-week U.S. Treasury bills in
calculating the maximum interest rates payable on MMCs issued by thrift institutions and commercial banks.
Current rules limit the MMC maximum rate to the Treasury bill discount rate plus one-quarter of one percentage
point. The new rules would set the current ceiling rate at the higher of (a) the most recent auction discount rate plus
25 basis points, or (b) an average of the discount rates for the four auctions immediately prior to the date of the
deposit, plus 25 basis points. The Committee believes that the alternative methods of calculating the maximum rate
will enable banks and thrift institutions to be more competitive with money market mutual funds throughout an
(OVER)
interest rate cycle, and especially during a declining rate environment when money market funds traditionally have
been able to pay more than the money market certificates. This new rule becomes effective on Sunday, November 1,
1981.
For further information about MMC or SSC rates please call 202-566-3734. Questions about the DIDC rules
should be directed to the appropriate depository institution regulatory agency.
Enclosed — for member banks in this District — are official notices from the DIDC containing its final
rules. They will be published in thq Federal Register, and copies will be furnished upon request directed to our
Circulars Division.
Questions on these matters may be directed to our Consumer Affairs and Bank Regulations Department
(Tel. No. 212-791-5914). In addition, interest rate ceilings for MMCs and SSCs are available on a telephone
tape recorded message (Tel. No. 212-791-6800).
A n th o n y M. S o l o m o n ,
President.
DIDC RULINGS
1. Postponement of passbook ceiling rate increase
2. Establishment of new IRA/Keogh time deposit category
3. Adoption of MMC and SSC ceiling rates
4. Permission for optional method for calculating MMC maximum rate
[Enc. Cir. No. 9177]
DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE
12 CFR P a rt 1204
[Docket No. D-0021]
A djustm ent o f I n te r e s t R ates on S avings A ccounts
AGENCY:
D ep o sito ry I n s titu t io n s D e re g u la tio n Com m ittee.
ACTION:
Postponem ent o f E ffe c tiv e D ate o f F in a l R ule.
SUMMARY: The D ep o sito ry I n s titu tio n s D e re g u la tio n Committee ("th e Committee)
h as postponed in d e f in ite ly th e e f f e c tiv e d a te o f a f in a l ru le th a t would have
in c re a se d by 50 b a s is p o in ts th e c e ilin g r a te o f i n te r e s t p ay ab le on
n o n tra n s a c tio n sav in g s d e p o s its on November 1 , 1981. A cco rd in g ly , d e p o sito ry
i n s t i t u t i o n s w ill c o n tin u e to be s u b je c t to e x is tin g r u le s : com m ercial banks
a re p e rm itte d to pay i n te r e s t on sav in g s d e p o s its a t a r a te o f 5 -1 /4 p e rc e n t,
and sa v in g s and lo an a s s o c ia tio n s and m utual sav in g s banks a re p e rm itte d to pay
5 -1 /2 p e rc e n t on such a c c o u n ts. None o f th e o th e r r u le s o f th e Committee are
a ffe c te d by t h is a c tio n .
EFFECTIVE DATE: O ctober 19, 1981.
FOR FURTHER INFORMATION CONTACT: A llan S c n o tt, A tto rn ey -A d v iso r, or E lain e
B o u tilie r , A tto rn ey -A d v iso r, D epartm ent o f th e T reasu ry (202) 566-6798 or
566-8737; D aniel L. Rhoads, A tto rn e y , Board o f G overnors o f th e F ed eral
R eserve System (2C2) 452-3711; Rebecca H. L a ird , S enior A sso c ia te G eneral
C ounsel, F ed eral Home Loan Bank Board (202) 377-6446; David A n se ll, A tto rn ey ,
O ffic e o f th e C om ptroller o f th e C urrency (202) 447-1880; R andall J . M ille r,
A cting D ire c to r, O ffic e o f P o lic y A n a ly sis, N atio n al C re d it Union A d m in istra tio n
(202) 357-1090; and F. D ouglas B ir d z e ll, C ounsel, or Kathy A. Johnson, A tto rn ey ,
F ed eral D ep o sit In su ran ce C o rp o ratio n (202) 389-4324 or 389-4384.
SUPPLEMENTARY INFORMATION: At i t s m eeting on Septem ber 22, 1981, th e Committee
a f in a l ru le to in c re a se by 50 b a s is p o in ts th e maximum in te r e s t r a te s
p ay ab le on n o n tra n sa c tio n sav in g s d e p o s its 1 / to be e f f e c tiv e November 1, 1981
adopted
1/
The f in a l ru le d e fin e d tr a n s a c tio n sa v in g s acco u n ts as th o se sav in g s
acco u n ts s u b je c t to tra n s a c tio n account re se rv e req u irem en ts under the
F ed eral R e se rv e 's R eg u latio n D (12 CFR 2 0 4 .2 (e )). Such acco u n ts in c lu d e :
a l l n e g o tia b le o rd e r o f w ithdraw al acco u n ts (NCWs); a l l c r e d it union sn are
d r a f t acco u n ts (CUSDs); a l l sa v in g s acco u n ts s u b je c t to au to m atic tr a n s f e r s
(ATS); sav in g s acco u n ts th a t p erm it more than tn re e tr a n s f e r s per month
tnrough telep h o n e tr a n s f e r s (ITS) or p re -a u tn o riz e d n o n n eg o tiao le tr a n s f e r s
(PNTS); and a l l sa v in g s acco u n ts tn a t p erm it payment to th ir d p a r tie s ov
means o f an autom ated t e l l e r m achine (ATM), remove s e rv ic e u n it (RSU), or
o th e r e le c tr o n ic d e v ic e . N o n tra n sa e tio n sav in g s acco u n ts would then oe
d e fin e d as a l l sav in g s acco u n ts w ith tn e e x cep tio n o f th o se m entioned
aoove. I t should oe noted th a t th e N a tio n al C re d it Union A d m in istra tio n
Board nas s o le a u th o rity to s e t in te r e s t r a te c e ilin g s on d e p o s its a t
F e d e ra lly c h a rte re d c r e d it u n io n s.
http://fraser.stlouisfed.org/
i
Federal Reserve Bank of St. Louis
DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE
12 CFR P a rt 1204
[Docket No. D-0024]
New IRA/Keogh Time D eposits
AGENCY: D ep o sito ry I n s titu tio n s D ereg u latio n Committee.
ACTION: F in a l r u le .
SUMMARY: The D ep o sito ry I n s titu tio n s D ereg u latio n Committee (th e "Com m ittee") has
adopted a f in a l ru le which e s ta b lis h e s a new IRA/Keogh time d e p o sit c a te g o ry . The
new d e p o sit categ o ry has a minimum m a tu rity of 1-1/2 y ears and no re g u la te d in te r e s t
r a te c e ilin g . Accounts e s ta b lis h e d under the new categ o ry may be s tru c tu re d to
perm it a d d itio n s at any tim e w ith o u t ex ten d in g the m a tu rity of the funds in the
a c c o u n t. In a d d itio n , the Committee has determ ined th a t d e p o sito ry in s t i t u t i o n s , a t
th e ir d is c r e tio n , may waive th e m andatory e a rly w ithdraw al p en alty governing time
d e p o sit acco u n ts fo r tr a n s f e r s w ith in the same in s t i t u t i o n from any IRA/Keogh time
d e p o s it in e x iste n c e on or p rio r to December 1, 1981 to the new IRA/Keogh d e p o sit
ca tego ry .
EFFECTIVE DATE: December 1, 1981
FOR FURTHER INFORMATION CONTACT: F. Douglas B ird z e ll, C ounsel, F ed eral D eposit
In su ran ce C o rp o ratio n (202 /3 8 9 -4 3 2 4 ), Paul S. P ile c k i, S enior A tto rn ey , Board of
G overnors of the F ed eral Reserve System (202/452-3231), A llan S c h o tt, A tto rn ey A d v iso r, T reasu ry Departm ent (2 0 2/566-6798), Rebecca L a ird , S enior A sso ciate G eneral
C ounsel, F e d e ra l Home Loan Bank Board (2 0 2/377-6466), Mark Leemon, A tto rn ey , O ffice
of the C o m p tro ller of the C urrency (202/447-1880) o r R andall J . M ille r, A cting
D ire c to r, O ffice of P o lic y A n a ly sis, N atio n al C re d it Union A d m in istratio n (202/3571090). For IRA/Keogh tax in fo rm a tio n : In te rn a l Revenue S erv ice (202/566-4576).
SUPPLEMENTARY INFORMATION: At i t s December 12, 1980 m eeting the Committee req u ested
comments on fiv e p ro p o sals concerning IRA/Keogh acco u n ts. The f i r s t p ro p o sal was to
reduce the m a tu rity on the s p e c ia l IRA/Keogh time d e p o sit from th ree years to one.
The second and th ir d p ro p o sals were to e s ta b lis h o n e-y ear IRA/Keogh n o tice acco u n ts.
The fo u rth p ro p o sal p re se n te d s e v e ra l o p tio n s fo r in c re a s in g , re v is in g , or
e lim in a tin g IRA/Keogh in te r e s t ra te c e ilin g s . The f i f t h p ro p o sal was to e s ta b lis h an
IRA/Keogh time d e p o sit w ith a minimum re q u ire d m a tu rity or n o tic e p erio d of 14 davs
and no re g u la te d c e ilin g r a te .
In seek in g comments on th ese p ro p o sa ls, the Committee c ite d th ree b a sic
o b je c tiv e s . The f i r s t o b je c tiv e was to reduce the co m p le x itie s a s s o c ia te d w ith the
a d m in is tra tio n of IRA/Keogh accounts under c u rre n t agency re g u la tio n s , e s p e c ia lly
w ith reg ard to a d d itio n a l d e p o sits to the a c c o u n ts. The second was to h elp f u l f i l l
the C o n g ressio n al in te n t of the Employee R etirem ent Income S e c u rity Act of 1974
(ERISA) to encourage q u a lifie d in d iv id u a ls to save fo r th e ir re tire m e n t. The th ird
o b je c tiv e was to proceed w ith the C om m ittee's mandate to provide fo r the o rd e rlv
1
- 2 -
(see 46 F ed eral R e g iste r 50782 (O ctober 15, 1 9 8 1 )). T h is a c tio n was taken a f te r
p u b lic n o tic e and c o n s id e ra tio n o f p u b lic comments su b m itted in resp o n se to th e
n o tic e . The Committee D elieved th a t t h i s a c tio n would h e lp stem th e o u tflo w o f
funds from such acco u n ts and fu rth e r th e in te n t o f th e D ep o sito ry I n s t i t u t i o n s
D ereg u latio n Act o f 1980 (12 U .S.C . S 3501 e t . s e q .) to p ro v id e in c re a se d r a te s
o f re tu rn to sa v e rs.
On th e D asis o f p re lim in a ry in fo rm a tio n s in c e i t s l a s t m eetin g , th e
Committee has determ ined th a t th e lik e ly b e n e f its to d e p o s ito rs now appear to be
outw eighed Dy th e p ro b ab le ad v erse e f f e c ts (in term s o f in c re a se d c o s ts ) to tn e
d e p o sito ry i n s t i t u t i o n s . A cco rd in g ly , on O ctober 19, 1981, th e Committee voted
to postpone in d e f in ite ly th e e f f e c tiv e d a te o f i t s f in a l ru le th a t would nave
in c re a se d th e c e ilin g r a te s on n o n tra n sa e tio n sav in g s a c c o u n ts. A lthougn tn e
Committee w ill d is c u s s t h is is s u e ag ain a t i t s Decemoer m eetin g , no d e c is io n nas
oeen made on w netner fu rth e r a c tio n w ill be tak en a t th a t tim e.
The e x is tin g i n te r e s t r a te c e ilin g s on d e p o s its w ill c o n tin u e to ap p ly to
F e d e ra lly in su red d e p o s ito ry i n s t i t u t i o n s . Under th e se r u le s , com m ercial banks
may pay up to 5 -1 /4 p e rc e n t on a l l sa v in g s acco u n ts (Doth tr a n s a c tio n and
n o n tra n sa c tio n acco u n ts) and t h r i f t s may pay up to 5 -1 /2 p e rc e n t on a l l suen
ac c o u n ts. The i n te r e s t r a te c e ilin g fo r NOW acco u n ts a t a l l i n s t i t u t i o n s a ls o
w ill rem ain a t 5 -1 /4 p e rc e n t. No o th e r a c tio n s tak en by th e Committee a t tn e
September 22 m eeting a re a ffe c te d by th e postponem ent o f th e sa v in g s c e ilin g
r a te r u le .
L n te d ia te postponem ent o f th e e f f e c tiv e d a te o f th e n o n tra n s a c tio n sav in g s
account c e ilin g r a te ru le is n e c e ssa ry to a ssu re th a t d e p o s ito ry i n s t i t u t i o n s
w ill nave t h i s in fo rm a tio n in a tim e ly m anner. The Committee fin d s fo r good
cause th a t th e n o tic e and p u b lic p ro ced u re p ro v is io n s o f 5 U .S.C . S553 w ith
reg ard to th is a c tio n a re im p ra c tic a b le and c o n tra ry to th e p u b lic i n te r e s t and
tn a t tn e d e fe rre d e f f e c tiv e d a te p ro v is io n o f 5 U .S.C . S553 would be
in c o n s is te n t w itn th is a c tio n . In view o f th e C om m ittee's fin d in g s , s e c tio n s
603 and 604 o f th e R eg u lato ry F le x ib ility Act (5 U .S.C . SS 603 and 604) a re not
a p p lic a b le . F u rth erm o re, because o f th e n a tu re o f t h i s a c tio n , th e Committee
fin d s th a t good cause e x is ts under s e c tio n 1201.6(e) o f th e C om m ittee's
re g u la tio n s for making th is a c tio n e f f e c tiv e le s s than 30 days from tn e d a te o f
p u o lic a tio n in th e F ed eral R e g is te r.
P u rsu an t to i t s a u th o rity under s e c tio n 203(a) o f th e D ep o sito ry
I n s titu tio n s D ereg u latio n Act o f 1980 ( T itle I I o f P .L . 96-221; 12 U .S.C .
5 3 5 0 2 (a )), th e Committee hereoy p o stp o n es tn e e f f e c tiv e d a te o f s e c tio n 117 o f
i t r u le s , 12 C .F.R . S1204.117, u n til fu rth e r n o tic e .
3y o rd er o f tn e Com m ittee, O ctober 23, 1981.
S teven L. Skancke
E xecutive S e c re ta ry
phaseout and u ltim a te e lim in a tio n of d e p o sit c e ilin g s . In th is re g a rd , the Committee
viewed IRA/Keogh accounts as a p p ro p ria te v e h ic le s fo r d e re g u la tio n because of th e ir
s t a b i l i t y and because they accounted fo r a sm all p ro p o rtio n ( le s s than 3%) of to ta l
tim e and sav in g s d e p o s its .
Summary o f Public Comments
_
A to ta l o f 366 comments were receiv ed re p re s e n tin g 153 com m ercial banks, 138
sav in g s and loan a s s o c ia tio n s , 26 m utual sav in g s banks, 15 c r e d it u n io n s, 15 trad e
a s s o c ia tio n s , 2 governm ent re g u la to rs , 7 F ed eral Reserve Banks, and 10 o th e r groups
or in d iv id u a ls .
The re sp o n d e n ts' views, on the C om m ittee's p ro p o sa ls to reduce the m a tu rity on
th e s p e c ia l IRA/Keogh account from th re e y ears to one were evenly d iv id ed w ith in a ll
c la s s e s of i n s t i t u t i o n s ex cep t fo r m utual sav in g s banks which were g e n e ra lly
opposed. The 124 resp o n d en ts fa v o rin g th is o p tio n g e n e ra lly c ite d i t s g re a te r
f l e x i b i l i t y and i t s c o m p a tib ility w ith the ERISA p ro v isio n fo r a r o llo v e r of
IRA/Keogh accounts once p e r year w ith no ta x p e n a lty . The 135 respondents opposed to
th is o p tio n in d ic a te d th a t i t would tend to in c re a se d e p o sit v o l a t i l i t y and in c re a se
a d m in is tra tiv e c o m p le x itie s.
Most respondents addressed the two notice account proposals together. All types
of depository institutions expressed similar views on these options. Considering the
comments on the two options together, a majority of connenters opposed one-year
notice accounts. However, many commenters, whether supporting or opposing notice
accounts, expressed the view that it would be desirable to permit additions to
IRA/Keogh accounts without extending the maturity of the account.
With re sp e c t to th e p ro p o sa ls to in c re a s e , re v is e , or e lim in a te the c e ilin g
ra te s governing IRA/Keogh a c c o u n ts, about t h r e e - f if th s of the 333 respondents
ex p ressed a p re fe re n c e fo r f lo a tin g ra te c e ilin g s indexed to U.S. T reasury s e c u ritv
y ie ld s . However, th ere was a d iv e r s ity of opin io n as to which T reasury s e c u rity
v ie ld would be an a p p ro p ria te in d ex , and a t what frequency (w eekly, m onthly,
q u a r te r ly , e t c .) th is c e ilin g ra te should change. There was a lso su p p o rt,
p a r tic u la r ly among com m ercial banks and c r e d it u n io n s, fo r e lim in a tio n of a ll
in t e r e s t ra te c e ilin g s on re tire m e n t a c c o u n ts. On the o th e r hand, le s s than onete n th of th o se responding p re fe rre d a h ig h e r fix ed c e ilin g r a te .
A m a jo rity of the respondents opposed a c e ilin g - f r e e , minimum 14-dav IRA/Keogh
a c c o u n t. Those fav o rin g the o p tio n s tre s s e d i t s f l e x i b i l i t y and the a b i l i t y i t would
provide d e p o sito ry in s titu tio n s to compete e f f e c tiv e ly a g a in st no n d ep o sito ry
i n s t i t u t i o n s . O thers noted th a t i t would provide v a lu a b le ex p erien ce in o p e ra tin g in
a d e re g u la te d environm ent. The resp o n d en ts th a t were opposed c ite d in creased d ep o sit
v o l a t i l i t y and h ig h e r d e p o sit c o sts as th e ir prim ary co n cern s. Many a lso q u estio n ed
th e lo g ic of a u th o riz in g an account w ith a 14-day minimum m a tu rity to accum ulate
t r a d i t i o n a l l y lo n g -term funds.
2
Su b seq u en t DIDC A ction
At i t s June 25, 1981 m eetin g , th e Committee c o n sid e re d th e fiv e p ro p o sa ls and
s e v e ra l a n c illa r y is s u e s which had been issu e d fo r comment. However, the Committee
e le c te d to d e fe r a c tio n on th e se is s u e s pending a n tic ip a te d C o n g ressio n al re v is io n s
to th e law g o v ern in g IRA/Keogh a c c o u n ts.
On A ugust 13, 1981, the P re s id e n t sig n ed th e Economic Recovery Tax Act of 1981
w hich amended th e laws g o v ern in g IRA/Keogh a c c o u n ts. In g e n e ra l, th e se amendments
expand the e l i g i b i l i t y of IRA acco u n ts to in d iv id u a ls a lre a d y covered by some
form of em ployer sponsored re tire m e n t p lan and in c re a s e the a llo w a b le annual
c o n tr ib u tio n lim its fo r bo th IRA and Keogh a c c o u n ts . I t is e stim a te d th a t
th e se re v is io n s w ill in c re a s e th e number o f ta x p a y e rs e l i g i b l e fo r IRAs and
Keogh p la n s by ab o u t 48 m illio n .
At i t s June m eetin g , the Committee a ls o review ed the p u b lic comments and
concluded th a t the a re a s o f concern could be narrow ed to two: (1 ) p ro v id in g
i n s t i t u t i o n s w ith the a b i l i t y to a c c e p t a d d itio n s w ith o u t ex ten d in g th e m a tu rity of
IRA/Keogh acco u n ts and (2 ) a llo w in g fo r v a ria b le r a te s on such acco u n ts in o rd e r to
p ro v id e d e p o s ito rs w ith a m arket re tu rn on funds in v e s te d .
In l i g h t of the p u b lic comments on i t s p ro p o s a ls , the Com m ittee, on Septem ber
22, 1981, approved a f in a l ru le e s ta b lis h in g a new tim e d e p o s it ca te g o ry a v a ila b le
o n ly to IRA/Keogh account h o ld e rs . T his new ru le is e f f e c tiv e on December 1, 1981.
The new IRA/Keogh c a te g o ry p ro v id es fo r a minimum m a tu rity of 1-1 /2 y e a rs and no
re g u la te d in t e r e s t r a te c e ilin g . The new account may a c c e p t a d d itio n a l d e p o s its a t
any tim e w ith o u t ex ten d in g the m a tu rity of any o r a l l o f th e funds in th e a c c o u n t.
The Committee a ls o ru le d th a t m andatory e a rly w ith d raw al p e n a ltie s may be w aived fo r
t r a n s f e r s w ith in th e same i n s t i t u t i o n from any IRA/Keogh account in e x is te n c e on or
p rio r to December 1, 1981 to th e new IRA/Keogh account c a te g o ry . D ep o sito ry
i n s t i t u t i o n s are g iv en th e d is c r e tio n to p erm it such p e n a lty - f r e e tr a n s f e r s . D uring
i t s d e lib e r a tio n s , th e Committee s ta te d th a t the e x is tin g e a r ly w ith d raw al p e n a lty
p ro v is io n s go v ern in g c e r t i f i c a t e s w ith m a tu r itie s g r e a te r than one y ear would apply
to the new IRA/Keogh d e p o s it c a te g o ry . In a d d itio n , th e e x is tin g , p e rm issiv e DIDC
exceptions to th e e a rly w ith d raw al p e n a lty fo r IRA/Keogh d e p o s ito rs who a re 5 9 -1 /2
o r o ld e r , o r d is a b le d , ap p ly to th e new d e p o s it c a te g o ry .
The minimum e a rly w ith d raw al p e n a lty fo r a f lo a tin g r a te tim e d e p o s it (th e
i n t e r e s t r a te fo r which v a rie s d u rin g th e term of th e d e p o s it) w ith a m a tu rity of
more th an one y ear is an amount equal to s ix m onths' sim p le i n t e r e s t . I f a
d e p o s ito ry i n s t i t u t i o n t i e s th e i n t e r e s t r a te on i t s new IRA/Keogh account
to an index th a t is beyond i t s c o n tro l ( e . g . , T reasu ry s e c u r ity r a t e , com
m e rc ia l paper r a t e , F ed eral funds r a te , F ed eral R eserve d isc o u n t r a t e , e tc .)
fo r th e en t ir e term of th e d e p o s it, th e i n s t i t u t i o n may b ase th e sim ple in t e r e s t
r a t e , f n r purposes o f c a lc u la tin g th e minimum e a rlv w ith d raw al p e n a lty , on th e
r a te in e f f e c t on the d a te th e acco u n t is opened o r on xne d a te o r w ith d ra w a l, o r
on an av erag e o f th e r a te s in e f f e c t d u rin g th e term o f th e d e p o s it, as d e sc rib e d
below . At th e tim e th e acco u n t is opened, how ever, th e i n s t i t u t i o n must sp e c ify
w hether i t w ill use th e i n i t i a l i n t e r e s t r a te , th e r a te on th e d a te o f w ith d raw al
o r th e av erag e r a t e . For exam ple, i f th e r a te on th e account is s e t a t th e
tw e n ty -s ix week T reasu ry b i l l d isc o u n t r a te p lu s 100 b a s is p o in ts and i t changes
w eekly w ith th e most re c e n t a u c tio n r e s u l t s , th e e a rly w ith d raw al p e n a lty ra te
co u ld be th e d isc o u n t r a te (p lu s 100 b a s is p o in ts ) in e f f e c t on th e d a te th e
acco u n t was opened o r th e d a te o f th e w ith d ra w a l, o r an av erag e o f a l l th e r a te s in
e f f e c t d u rin g th e term of th e d e p o s it, bu t w hichever i s used must be s p e c ifie d in
th e deposit agreem ent.
3
If th e d e p o sito ry i n s t i t u t i o n chooses not to t i e th e in t e r e s t r a te on i t s
new IRA/Keogh account to an in d ex , b u t in s te a d chooses to s e t th e p re c is e way in
which th e r a te v a rie s over th e term of th e d e p o s it, o r i f i t changes th e re
la tio n s h ip o f th e IRA/Keogh r a te to th e index ( e . g , , th e com m ercial paper ra te
minus 50 b a s is p o in ts fo r th e f i r s t s ix months of th e in stru m en t and the com m ercial
paper r a te a t minus 100 b a s is p o in ts t h e r e a f te r ) , th en th e e a rly w ithdraw al p e n a lty
must be computed u sin g an average of th e sim ple in te r e s t r a te s on th e d e p o sit du rin g
th e tim e p erio d th a t th e d e p o sit was o u ts ta n d in g . If the i n te r e s t ra c e is
e s ta b lis h e d a t re g u la r in te r v a ls and rem ains in e f f e c t f^ r re g u la r p e rio d s ( e . g .,
th e r a te is e s ta b lis h e d once a month and rem ains in e f f e c t fo r one m onth), the
average sim ple in te r e s t ra te would be th e sum of th e r a te s e s ta b lis h e d a t each
in te r v a l w h ile th e funds were on d e p o s it, d iv id ed by th e number of p erio d s
th e funds were on d e p o s it. Each p a r tia l p erio d w ill be co n sid ered a f u l l
p erio d fo r th e purpose o f th is c a lc u la tio n . For exam ple, i f a 1 -1 /2 y ear tim e
d e p o sit w ith an i n te r e s t r a te th a t v a rie s m onthly was e s ta b lis h e d on December 15,
1981, and w ithdraw n on F ebruary 7, 1982, th e average sim ple in te r e s t r a te would
be th e sum of th e December, Jan u ary , and F ebruary r a te s , d iv id ed by th re e .
I f the le n g th o f the p e rio d s fo r which r a te s are e f f e c tiv e v a r ie s , the average
sim ple in te r e s t ra te would be a rriv e d a t by d iv id in g the amount of time a d e p o s it was
o u tsta n d in g in to eq u al p erio d s and then adding th e ra te s th a t were in e f f e c t d u rin g
those p e rio d s and d iv id in g by the number of p e rio d s . The p erio d used should be the
s h o rte s t p erio d for which a ra te was in e f f e c t. For exam ple, a tim e d e p o sit m ight
have the fo llo w in g r a te s in e f f e c t fo r th e fo llo w in g p e rio d s a t the tim e a d e p o s ito r
wished to w ithdraw h is /h e r fu n d s.
s ix m onths............................15%
1-1/2 y e a r s ..........................16%
2 y e a rs ...................................14%
The t o t a l amount of time th e d e p o s it was o u tsta n d in g was 3 y ears (6 months + 1-1/2
y ears + 1 y e a r). T his 3 year p erio d would then be d iv id ed in to 6 p e rio d s of 6 months
each. Then the ra te s in e f f e c t fo r each p erio d would be:
1 st s ix month p e rio d ..................................15%
2nd s ix month p e rio d .................................. 16%
3rd six month p e rio d ..................................16%
4 th s ix month p e rio d .................................16%
5th six month p e rio d .................................. 14%
6th six month p e rio d .................
14%
To a r r iv e a t th e average sim ple in te r e s t r a te , th e r a te in e f f e c t d u rin g each p erio d
would be added to g e th e r — 1 5 + 1 6 + 1 6 + 1 6 + 1 4 + 1 4 - 9 1 . The r e s u ltin g sum would
then be d iv id ed by th e number of p e rio d s — 91 ^ 6 — to y ie ld an av erag e sim ole
in te r e s t r a te of 15.17%.
In the case of lump-sum payments of cash th a t would be reg ard ed
as in te r e s t under 12 C .F.R . 1204.108, such payments must be tak en in to account in
com puting the p e n a lty r a te . Any lump-sum payment m ust be p ro ra te d over th e l i f e of
the d e p o s it. The p o rtio n th a t is a ttr ib u te d to the tim e p erio d d u rin g which the
d e p o sit was o u tsta n d in g must be regarded as in te r e s t fo r purposes of com puting the
p e n alty r a te . The p o rtio n a ttr ib u ta b le to th e rem aining l i f e of the d e p o s it is
reg ard ed as unearned in te r e s t and must be deducted from the p r in c ip a l amount of the
d e p o sit and re tu rn e d to th e member bank. (N ote: In d iv id u a ls and i n s t i t u t i o n s should
c o n su lt the In te rn a l Revenue S erv ice co n cern in g p erm issab le tra n s a c tio n s in v o lv in g
IRA/Keogh accounts.)
4
to r exam ple, assume th a t cash o f $100 th a t would be reg ard ed
as in t e r e s t were giv en to a d e p o s ito r a t the opening of a $1,000, 4 -y ear v a ria b le
r a te tim e d e p o s it, th a t the e n tir e amount is w ithdraw n a f t e r one y e a r, and th a t the
average of the ra te s paid on the d e p o s it d u rin g the time i t was o u tsta n d in g was 12
p e rc e n t. The lump-sum of $100 would be regarded by th e DIDC as a payment of in te r e s t
and must be tak en in to account in com puting th e p e n a lty r a te . Since th e d e p o sit was
o u ts ta n d in g fo r o n e -fo u rth of i t s expected l i f e , a co rresp o n d in g amount of th e lump-sum
must be tak en in to account in com puting th e p e n a lty r a t e . Thus, 2.5 p ercen t (25 divided
by 1,000) must be added to th e average of th e r a te s p aid d u rin g the tim e the d e p o sit
was o u tsta n d in g (12 p e rc e n t) to ach iev e a p e n a lty r a te o f 14.5 p e rc e n t. The rem aining
th r e e - f o u r th s o f th e lump-sum payment ($75) would be regarded as unearned
i n te r e s t and would be re tu rn e d to th e member bank. Thus th e amount th a t th e
custom er would re tu rn would be $147.50.
The new ru le p ro v id es g r e a te r f l e x i b i l i t y in d e sig n in g IRA/Keogh acco u n ts. Under
the new r u le , d e p o sito ry i n s t itu tio n s w ill be p e rm itte d to a ccep t a d d itio n s to a
1-1 /2 y ear or more IRA/Keogh account governed by w hatever in t e r e s t ra te s tru c tu re __
fix e d o r f lo a tin g — they would choose, provided th a t th e method o f v ary in g the
in t e r e s t r a te is a d e q u ately d is c lo s e d in th e c o n tr a c t. The Committee b e lie v e s
th is could le a d to more a tt r a c t i v e o v e ra ll r a te s and o th e r term s on re tire m e n t
acco u n ts and thus encourage th e ir u se.
The new ru le does n o t a l t e r the income tax tre a tm e n t of IRA/Keogh accounts or
the fid u c ia ry r e s p o n s ib ilitie s of IRA/Keogh f id u c ia r ie s under T itle I of ERISA.
The Committee co n sid ered the im pact of i t s f in a l ru lin g on sm all e n t i t i e s , as
re q u ire d by the R eg u lato ry F le x ib ility Act (5 U .S.C. 601 e t s e q . ) . In th is re g a rd ,
th e C om m ittee's a c tio n does not impose any new re g u la to ry burden, o r impose any new
re p o rtin g or reco rd k eep in g re q u ire m e n ts. R ath er, th is a c tio n e lim in a te s re g u la to ry
r e s t r i c t i o n s on the maximum in te r e s t ra te payable on IRA/Keogh a c c o u n ts. Small
e n t i t i e s th a t are d e p o sito ry in s titu tio n s could have in c re a se d o p e ra tin g expenses as
a r e s u lt of th is a c tio n , because i t is lik e ly they w ill be paying h ig h er in te r e s t
r a te s on IRA/Keogh d e n o s its ; how ever, th e ir c o m p etitiv e p o s itio n v is - a - v is
n o n d ep o sito ry i n s t itu tio n co m p etito rs should be enhanced by th e ir a b i l i t y to o ffe r
h ig h e r ra te s on IRA/Keogh d e p o s its . F urtherm ore, th is a c tio n reduces an
a d m in is tra tiv e burden which has been a s s o c ia te d w ith IRA/Keogh d e p o sits by p e rm ittin g
p e rio d ic a d d itio n s to the acco u n ts w ith o u t a m a tu rity e x te n sio n .
For th e reasons s e t out in the pream ble, P a rt 1204, C hapter XII of T itle 12 Code
of F ed eral R e g u la tio n s, is amended as s e t fo rth below .
1. The a u th o rity c ita tio n fo r P a rt 1204 read s as fo llo w s: AUTHORITY: Secs.
203, 204, and 205, T itle I I , Pub. L. 96-221, 94 S ta t. 142 and 143 (12 U .S.C.
3502, 3503, and 3504).
2.
In P a rt 1204, a new se c tio n 1204.118 is added to read as fo llo w s:
S ectio n 1204.118 In d iv id u a l R etirem ent Accounts and Keogh (H. R. 10) Plan
D eposits of le s s than $100,000.
(a) A com m ercial bank, m utual sav in g s bank or sav in g s and loan
a s s o c ia tio n may pay in te r e s t a t any r a te as agreed to by th e d e p o s ito r on
any tim e d e p o sit w ith a m a tu rity of one and o n e -h a lf y e a rs o r m ore, th a t
c o n s is ts of funds d e p o site d to th e c r e d it o f, or in which th e e n tir e bene
f i c i a l in te r e s t is held by, an in d iv id u a l p u rsu an t to an In d iv id u a l
R etirem ent Account agreem ent o r Keogh (H.R. 10) Plan e s ta b lis h e d p u rsu an t to
26 U .S.C. (I.R .C . 1954) §§ 219, 401, 404, 408 and re la te d p ro v is io n s . An
i n s t i t u t i o n may perm it a d d itio n a l d e p o s its to be made to such a tim e d e p o sit
a t anv tim e p rio r to i t s m a tu rity w ith o u t ex ten d in g th e m a tu rity of all or a
p o rtio n o f the e n tir e balan ce in th e acco u n t.
5
(b ) The e a rly w ithdraw al p e n alty re q u ire d to be imposed fo r the
prem ature w ithdraw al of tim e d e p o sits may be waived a t the d is c re tio n of the
i n s t i t u t i o n when funds a re tra n s fe rre d w ith in th e same i n s t i t u t i o n from an
In d iv id u a l R etirem ent Account o r Keogh P lan Account whici»
e n te re d in to
p rio r to December 1, 1981 to a tim e d e p o sit d e sc rib e d in P aragraph ( a) .
By o rd er of the Com m ittee, O ctober 23 t 1981.
E xecutive S e c re ta ry
DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE
12 C .F .R . P a rt 1204
[Docket No. D-0008]
I n te r e s t R ate C e ilin g s on Money M arket C e r tif ic a te s (MMCs)
and Sm all Savers C e r tif ic a te s (SSCs)
AGENCY: D ep o sito ry I n s titu t io n s D e re g u la tio n Com m ittee.
ACTION: R e te n tio n of c e r ta in ru le s adopted on May 28, 1980.
SUMMARY: P u rsu an t to a re c e n tly issu e d F ed eral D is tr ic t C ourt o rd e r,—
^
the D ep o sito ry I n s titu tio n s D e re g u la tio n Committee ("Com m ittee") has
re c o n sid e re d c e r ta in f in a l ru le s i t adopted on May 28, 1980. These
r u le s concern the c e ilin g ra te s of in te r e s t payable on the 26-week money
m arket c e r t i f i c a t e (MMC) and on the 2-1/2 y ear to 4 year sm all sav ers
c e r t i f i c a t e (SSC). Upon re c o n s id e ra tio n , th e Committee has decided
to r e ta in the c e ilin g r a te s e s ta b lis h e d in i t s May 28, 1980 r u le s , as
su b se q u e n tly amended. Under the ru le s adopted, th e c e ilin g r a te of
i n te r e s t payable on the MMC by a l l fe d e ra lly in su re d com m ercial banks,
m utual savings banks, and sav in g s and loan a s s o c ia tio n s was a t le a s t
one q u a rte r of one per cen t above the r a te e s ta b lis h e d fo r 26-week U nited
S ta te s T reasu ry b i l l s and in no event would the c e ilin g r a te drop below
7-3 /4 per c e n t. The c e ilin g r a te of in te r e s t payable by a l l in s titu tio n s
on the SSC was in c re a se d by o n e -h a lf of one per cen t and in no event
would the c e ilin g r a te drop below 9.25 per cen t fo r com m ercial banks
and 9.50 per oent fo r m utual savings banks and sav in g s and loan a s s o c ia tio n s .
Upon re c o n s id e ra tio n , th e Committee has decided to r e ta in the c e ilin g
r a te s e s ta b lis h e d in i t s May 28, 1980 r u le s .
EFFECTIVE DATE: Septem ber 22, 1981.
FOR FURTHER INFORMATION CONTACT: For reco rd ed in fo rm atio n reg ard in g
c u rre n t in te r e s t ra te c e ilin g s on MMCs, SSCs, and A ll S avers C e r tif ic a te s
(ASCs), p le a se c a ll 202/566-3734. For o th er in fo rm a tio n , p le a se c o n ta c t:
A llan S c h o tt, A tto rn ey -A d v iso r, D epartm ent of the T reasu ry (202/5666798); Anthony S. W iner, A tto rn ey , Board of G overnors of the F ed eral
R eserve System (202/452-2418); Rebecca H. L aird , Senior A sso c ia te G eneral
C ounsel, F ed eral Heme Loan Bank Board (202/377-6446); H olly M alloy,
A tto rn e y , O ffice of the C om ptroller of the C urrency (202/447-1880);
or F. Douglas B ir d z e ll, C ounsel, F ed eral D eposit In su ran ce C o rp o ratio n
(202/389-4324).
1 / U.S. League o f Sav. A ss'n s v. DIDC, C iv. A ction No. 80-1486
(D.D.C. June 30, 1981).
-2-
SUPPLEMEMTARY INFORMATION: On June 30, 1981, th e U nited S ta te s D i s t r i c t
C ourt for the D i s t r i c t of Columbia o rd ered the Committee to re c o n sid e r
c e r ta in ru le s i t adopted on May 28, 1980, and to provide n o tic e and
o p p o rtu n ity fo r p u b lic comment concerning the r u le s . The Committee
had not p u b lish e d the ru le s fo r p u b lic comment p rio r to th e ir a d o p tio n ,
and the C ourt determ ined th a t the Committee was re q u ire d to provide
n o tic e and o p p o rtu n ity fo r p u b lic comment in t h is p a r tic u la r c a se .
A cco rd in g ly , th e Committee s o lic ite d p u b lic comment on th e se r u le i on
A ugust 13, 1981 (46 F ed eral R e g iste r 40892). Upon c o n sid e rin g a l l
comments receiv ed and the economic b a s is fo r the May 28, 1980 r u le s ,
th e Committee has decided th a t the c e ilin g r a te s of i n te r e s t issu e d
on th a t d ate fo r MMCs and SSCs should be re ta in e d .
One o f the ru le s adopted by th e Committee e s ta b lis h e d a new
MMC c e ilin g r a te fo r a l l in s titu tio n s th a t was a t le a s t 25 b a s is p o in ts
above the r a te e s ta b lis h e d (a u c tio n average on a d isc o u n t b a sis) for
26-week T reasu ry b i l l s issu e d on or im m ediately p rio r to the d ate of
d e p o s it. The ru le a ls o e s ta b lis h e d a minimum c e ilin g r a te of 7-3 /4
per cen t which a l l in s titu tio n s were a u th o riz e d to pay re g a rd le s s of
the T reasu ry b i l l r a te . The ru le provided th a t when the T reasu ry b i l l
r a te is 8-3/4 per cen t or h ig h e r, both com m ercial banks and t h r i f t
in s titu tio n s could pay i n t e r e s t a t a c e ilin g r a te of 25 b a s is p o in ts
above the b i l l r a te . A d i f f e r e n t i a l of up to 25 b a s is p o in ts on the
c e ilin g r a te payable by com m ercial banks and t h r i f t in s ti t u t i o n s was
re ta in e d only where the T reasu ry b i l l r a te was more than 7-1/4 per c e n t,
but le s s than 8-3/4 per o e n t.
The o th e r ru le adopted by the Committee e s ta b lis h e d new SSC
c e ilin g r a te s fo r a l l in s titu tio n s th a t g e n e ra lly were 50 b a s is p o in ts
hig h er than the p rev io u s c e ilin g r a te s . The ru le s a ls o e s ta b lis h e d
minimum c e ilin g r a te s of 9-1 /4 p er cen t fo r com m ercial banks and 9-1/2
per cen t fo r t h r i f t i n s t i t u t i o n s , re g a rd le s s of the average 2-1/2 year
T reasu ry r a te .
The Committee has determ ined th a t many of the c o n s id e ra tio n s
re g a rd in g the co m p etitiv e p o s itio n of d e p o sito ry in s ti t u t i o n s th a t were
in stru m e n ta l in i t s d e c isio n to issu e the May 1980 ru le s are a ls o of
s ig n if ic a n t concern in the c u rre n t co m p etitiv e environm ent. The C om m ittee's
May 1980 a c tio n to in c re a se the c e ilin g r a te s on MMCs and SSCs was taken
to improve the c o m p etitiv e p o s itio n of d e p o sito ry in s t i t u t i o n s r e la tiv e
to m arket in stru m e n ts, p rim a rily money m arket m utual funds (MMMFs).
If the Committee were to re v e rt to the low er le v e l of c e ilin g r a te s
in e f f e c t p rio r to May 1980, the a ttr a c tiv e n e s s of sm all tim e d e p o sits
a t com m ercial banks and t h r i f t s could be reduced s ig n if ic a n tly .
-3-
The T reasu ry b i l l ra te range over which t h r i f t s have a d i f
f e r e n t i a l on KMCs was narrow ed in May 1980, fo r the purpose of p rev en tin g
d e p o s it a t t r i t i o n a t sm all com m ercial banks. Given the d e c lin in g r a te
environm ent th a t e x is te d a t the tim e, th e Committee faced the p ro sp ect
th a t a d i f f e r e n t i a l would reem erge fo r a s u b s ta n tia l p e rio d . I f th is
were to o c c u r, sm all com m ercial banks, which had become in c re a s in g ly
dependent upon MMCs as a source of fu n d s, co u ld have faced s u b s ta n tia l
d e p o s it a t t r i t i o n and subsequent p re ssu re on th e ir a b i l i t y to extend
c r e d i t . Thus, the u ltim a te im pact of a s u sta in e d d if f e r e n tia l could
have been higher loan r a te s and reduced c r e d it a v a ila b ility to m ortgage
b o rro w ers, a g r ic u ltu r e , and sm all b u s in e s s e s , the custom ers h ig h ly
dependent on sm all com m ercial banks. The Committee b e lie v e s th a t the
reem ergence of a d if f e r e n t i a l for a s u s ta in e d p erio d could r e s u l t in
d e p o s it a t t r i t i o n and reduced c r e d it a v a ila b ility to the custom ers of
sm all com m ercial banks, and th a t the sm all co rresp o n d in g b e n e fit to
t h r i f t in s ti t u t i o n s may n o t be s u f f ic ie n t to outw eigh the d etrim en t
to sm all com m ercial banks.
The Committee re c e iv e d 14 resp o n ses to i t s re q u e st fo r p u b lic
comment on t h i s is s u e : 10 from com m ercial banks and two each from
sav in g s and loan a s s o c ia tio n s and tra d e a s s o c ia tio n s . Three respondents
( a ll com m ercial banks) f u lly su p p o rted the C om m ittee's a c tio n w hile
th e o th e r 11 resp o n d en ts fav o red some type o f adjustm ent in th e c e ilin g
r a te sc h e d u le s. Among the com m ercial banks fa v o rin g a r a te ad ju stm en t,
s ix re q u e ste d th a t the t h r i f t d if f e r e n tia l be e lim in a te d and one req u ested
th a t the minimum c e ilin g s on MMCs and SSCs be e lim in a te d . The two
sav in g s and loan a s s o c ia tio n s and the two tra d e a s s o c ia tio n s commenting
on the c e ilin g r a te sch ed u les req u ested th a t the Committee re s to re the
t h r i f t d i f f e r e n tia l on MMCs a t a l l in te r e s t ra te le v e ls and remove the
minimum c e ilin g s on both MMCs and SSCs. In a d d itio n , one tra d e a s s o c ia tio n
re q u e ste d th a t the 12 per cen t cap on SSCs a t t h r i f t s and the 11-3/4
p er cen t cap a t com m ercial banks be r e in s ta te d .
In lig h t of the co n tin u ed im portance of the co m p etitiv e con
s id e ra tio n s on which the May 28, 1980 ru le s were grounded, the Committee
has decided to r e ta in the MMC and SSC in te r e s t ra te c e ilin g s issu ed
on th a t d a te . Since th e C om m ittee's a c tio n does not i n s t i t u t e a change
in the c u rre n t e f f e c t of the ru le s in v o lv ed , d e f e r r a l of the e ffe c tiv e
d a te p u rsu an t to 5 U .S.C . § 553(d) i s not n e c e ssa ry . F urtherm ore,
because of the p u b lic n a tu re o f the m eeting where th e ru le was adopted,
th e p re ss re le a s e issu e d fo llo w in g th a t m eetin g , and p u b lic a tio n in
th e m edia of the C om m ittee's a c tio n , ad eq u ate n o tic e of the a c tio n has
been given to the p u b lic . A cco rd in g ly , th e Committee fin d s th a t good
cause e x is ts under S e c tio n 1201.6 of the DIDC's re g u la tio n s for making
th e e f f e c tiv e d ate le s s than 30 days from d ate of p u b lic a tio n in the
F e d e ra l R e g is te r.
-4 -
P u rsu an t to i t s a u th o rity under T i t l e I I of P u b lic Law 96221, 94 S ta t. 142 (12 U .S.C . § 3501 e t . s e q .) , to p re s c rib e ru le s governing
the payment of in te r e s t and d iv id en d s on d e p o sits of f e d e r a lly in su re d
com m ercial banks, sav in g s and loan a s s o c ia tio n s , and m utual savings
banks, e f f e c tiv e Septem ber 22, 1981, th e Committee confirm s the con
tin u e d a p p lic a tio n of se c tio n s 104 and 106 o f P a rt 1204— I n t e r e s t on
D ep o sits (12 C .F .R . S§ 1204.104, 1204.106) so as to r e f l e c t the SSC
and MMC c e ilin g r a te s issu e d on May 28, 1980, and as su b seq u en tly .amended.
By o rd er of the Com m ittee,
E xecutive S e c re ta ry
DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE
12 CFR P a rt 1204
[Docket No. D-0021]
C e ilin g R ates for 26-Week Money M arket C e r tif ic a te s
AGENCY: D ep o sito ry I n s titu tio n s D ereg u latio n Com m ittee.
ACTION:
Amendment
of
F in a l R ule.
SUMMARY: The D ep o sito ry I n s titu tio n s D ereg u latio n Committee ("Com m ittee")
has amended i t s ru le r e la tin g to the e sta b lish m e n t o f in te r e s t ra te
c e ilin g s for $10,000 minimum denom ination 26-week money m arket c e r t i
f ic a te s ("MMCs") (12 CFR 1204.104). Under the amended r u le , the in te r e s t
r a te c e ilin g s on MMCs w ill be indexed to the h ig h er o f (a) th e ra te
fo r 26-week U.S. T reasu ry b i l l s e s ta b lis h e d im m ediately p rio r to the
d a te o f d e p o sit or (b) th e average o f the r a te s for 26-week T reasu ry
b i l l s for the four weeks im m ediately p rio r to the d ate o f d e p o s it.
EFFECTIVE DATE: November 1, 1981.
FOR FURTHER INFORMATION CONTACT: For recorded in fo rm atio n reg ard in g
c u rre n t in te r e s t ra te c e ilin g s on MMCs, Sm all Saver C e r tif ic a te s ("SSC s"),
and A ll Saver C e r tif ic a te s ("ASCs"), p le a se c a ll (202/566-3734). For
o th e r in fo rm a tio n , p le a se c a l l : A llan S c h o tt, A tto rn ey -A d v iso r, T reasury
D epartm ent (202/566-6798); John H arry Jo rg en so n , Senior A tto rn ey , Board
o f G overnors o f the F ed eral Reserve System (202/452-3778); F. Douglas
B ir d z e ll, C ounsel, F ed eral D eposit Insurance C o rp o ratio n (202/389-4324);
Rebecca L aird , Senior A sso ciate G eneral C ounsel, F ed eral Home Loan Bank
Board (202/377-6446); or David A n se ll, A tto rn ey , O ffice o f the Comp
t r o l l e r o f the C urrency (202/447-1880).
SUPPLEMENTARY INFORMATION: Under the re g u la tio n s o f the Committee in
e f f e c t p rio r to th is amendment, th e maximum in te r e s t ra te th a t could
be p aid on MMCs by F e d e ra lly in su red d e p o sito ry i n s titu tio n s was indexed
to the ra te (a u c tio n average on a d isc o u n t b a sis) for 26-week U.S.
T reasu ry b i l l s e s ta b lis h e d im m ediately p rio r to the d ate o f the d e p o sit
( " B ill r a te " ) . Such b i l l s norm ally are au ctio n ed on Monday, and the
in t e r e s t ra te c e ilin g based on the B ill ra te was e f f e c tiv e the follow ing
day (12 CFR 1204.104). This c e ilin g ra te is e f f e c tiv e through the end
o f the day on which 26-week U.S. T reasu ry b i l l s are next a u c tio n e d .
Under the C om m ittee's amended r u le , d e p o sito ry in s titu tio n s
have the o p tio n o f o ffe rin g MMCs w ith a fix ed in te r e s t ra te c e ilin g
indexed to the higher o f e ith e r (1) th e r a te for 26-week U.S. T reasu ry
b i l l s e s ta b lis h e d and announced under the e x is tin g procedure (" s in g le
b i l l ra te " ) or (2) a moving average o f the ra te e s ta b lis h e d fo r 26-week
U.S. T reasu ry b i l l s a t the a u c tio n s h eld du rin g the four weeks im m ediately
p rio r to the d ate o f d e p o s it (average B ill r a t e ) . The average B ill
r a te for the four week p erio d w ill be determ ined weekly by av erag in g
th e B ill ra te s for the p a st four weeks (in c lu d in g the c u rre n t s in g le
B ill r a t e ) . D ep o sito ry i n s titu tio n s w ill not have to c a lc u la te the
average B ill ra te sin ce i t w ill be announced sim u ltan eo u sly w ith th e
c u rre n t B ill ra te for 26-week U.S. T reasu ry b i l l s . The c e ilin g on MMCs
w ill be the hig h er o f th ese two r a te s .
On Ju ly 9, 1981, the Committee issu ed fo r p u b lic comment
proposed ru le s th a t would p erm it d e p o sito ry i n s t itu tio n s to o ffe r MMCs
w ith a fix ed in te r e s t ra te c e ilin g indexed to the h ig h er o f (1) th e
r a te for 26-week U .S. T reasu ry b i l l s e s ta b lis h e d and announced under
the e x is tin g procedure or (2) a moving average o f the ra te e s ta b lis h e d
fo r 26-week U.S. T reasu ry b i l l s a t the a u c tio n s h eld during the e ig h t
weeks im m ediately p rio r to the d ate o f d e p o s it. The Committee s p e c i
f i c a l l y req u ested oomment on the p erio d o f tim e on which to base the
average (46 FR 36712 (1 9 8 1 )). The Committee receiv ed 553 comments from
d e p o sito ry i n s t i t u t i o n s , in d iv id u a ls , tra d e a s s o c ia tio n s , and nondeposi
to ry p a r tie s on th is p ro p o sa l. Comments in o p p o sitio n g e n e ra lly c r i t i
cized the eight-w eek p erio d as being too lo n g , and com m entators s ta tin g
a p re fe ren c e g e n e ra lly sug g ested a four week av erag e. Commentators
opposing the p ro p o sal in any form g e n e ra lly b e liev ed th a t the p ro p o sa l,
i f adopted, would in c re a se c o s ts w hile p ro v id in g only m arg in al b e n e fits
and would confuse consum ers by e s ta b lis h in g an a d d itio n a l ra te c e ilin g
to be m onitored. Many com m entators s ta te d th a t the p ro p o sa l, i f ad opted,
would a s s is t d e p o sito ry i n s titu tio n s in re ta in in g MMC d e p o s its in p e rio d s
o f d e c lin in g r a te s .
A fter c o n sid e rin g a l l th e comments, the Committee decided
a t i t s m eeting on September 22, 1981, to adopt the p ro p o sal bu t to use
a four-w eek average ra th e r than an eight-w eek av erag e. The Committee
b e lie v e s th a t the a lte r n a tiv e methods o f c a lc u la tin g MMC in te r e s t c e ilin g s
w ill en ab le banks and t h r i f t in s titu tio n s to be more c o m p e titiv e w ith
money m arket m utual funds ("MMMFs") thro u g h o u t an in te r e s t ra te c y c le .
The most ra p id p e rio d s o f fWMF grow th g e n e ra lly have o ccu rred in d e c lin in g
r a te environm ents when the e x is tin g a s s e ts in MMMF p o r tf o lio s allow
them to o ffe r y ie ld s th a t are fre q u e n tly more a t tr a c tiv e than contem
p o ra ry MC c e ilin g r a te s . With the a lte r n a tiv e m ethods o f c a lc u la tin g
th e MMC r a te c e ilin g , how ever, d e p o sito ry in s ti t u t i o n s w ill have the
o p tio n o f basing th e ir MMC r a te on an average o f p a s t T reasu ry b i l l
r a te s , and thus o ffe r y ie ld s more c o m p e titiv e w ith MMMFs du rin g p e rio d s
o f d e c lin in g r a te s . In an environm ent o f r is in g r a te s , d e p o sito ry
in s titu tio n s g e n e ra lly have an advantage sin c e they are o ffe rin g c u rre n t
m arket ra te s w hile e x is tin g MMMF a s s e ts lock them in to lower y ie ld s
fo r a sh o rt p erio d o f tim e. Since com m ercial banks and t h r i f t i n s t i
tu tio n s w ill have the o p tio n o f indexing MMC r a te c e ilin g s to the c u rre n t
T reasu ry b i l l r a te , they would r e ta in th is y ie ld advantage du rin g p e rio d s
o f ris in g r a te s . Since th is amendment is sim ply a m o d ific a tio n o f an
e x is tin g in stru m e n t, th e Committee ex p ects the s h if tin g o f d e p o s its
to be m inim al.
-3-
P u rsu an t to i t s a u th o rity under the D ep o sito ry I n s titu tio n s
D e re g u la tio n Act (12 U .S.C . S 3501, e t s e g . ) , the Committee amends
s e c tio n 1204.104 (26 Week Money M arket Time D eposits o f le s s than $100,000)
o f P a rt 1204— I n te r e s t on D ep o sits (12 CFR § 1204.104) to read as fo llo w s:
Commercial banks, m utual sav in g s banks, and sav in g s and loan
a s s o c ia tio n s may pay in te r e s t on any n o n n eg o tiab le tim e d e p o sit o f
$10,000 or more, w ith a m a tu rity o f 26 weeks a t a ra te not to exceed
th e h ig h er o f e ith e r (1) th e r a te s s e t fo rth below or (2) the average
o f the r a te s below for the four weeks im m ediately p rio r to the d ate
o f d e p o s it.
Rate e s ta b lis h e d and announced (a u c tio n
av e ra g e on a d isc o u n t b a sis) fo r U.S.
T reasu ry b i l l s w ith m a tu ritie s o f
26 weeks a t the a u ctio n held im m ediately
p rio r to the d a te o f d e p o sit ( " B ill R ate")
Maximum per cen t
Commercial Banks
7.50 per c e n t or below
Above 7.50 per c e n t
7.75
B ill Rate p lu s oneq u a rte r o f one per cen t
M utual Savings Banks and Savings
and Loan A sso c ia tio n s
7.25 per cen t or below
7.75
Above 7.25 per c e n t, but below
8.50 per cen t
8.50 per c e n t, but below 8.75
per cen t
B ill Rate p lu s oneh a lf o f one per cen t
9
8.75 per c e n t or above
B ill Rate p lu s oneq u a rte r o f one per cen t
By o rd er o f the Com m ittee,
a
Steven L. Skancke
E xecutive S e c re ta ry
i
* n
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