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FEDERAL RESERVE BANK
OF NEW YORK
[
Circular No. 9272
April 6, 1982
”1
DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE
Establishment of Two New Time Deposit Instruments
To All Depository Institutions, and Others Concerned,
in the Second Federal Reserve District:
The Depository Institutions Deregulation Committee (DIDC) has amended its rules to establish
two new categories of time deposits, effective May 1, 1982.
The first is a 3-16 year deposit with no interest rate ceiling. The minimum maturity of this new
category will be reduced annually until March 31, 1986 when the maturity will be the minimum
maturity for time deposits (currently 14 days).
The second is a short-term instrument intended to enable depository institutions to compete
more effectively with short-term market instruments. It will have a fixed ceiling rate based upon the
91-day Treasury bill rate.
Printed on the following pages is the text of tht Federal Register notices (Docket nos. D-0022
and D-0023) issued by the DIDC announcing these actions. Questions regarding these matters may
be directed to our Consumer Affairs and Bank Regulations Department (Tel. No. 212-791-5914)
A nthony M . S olom on,
President.
DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE
(12 CFR Part 1204)
[DOCKET NO. D-0022]
Time Deposits of Less Than $100,000 with
Original Maturities of 3-1/2 Years or More
AGENCY:
Depository Institutions Deregulation Committee
ACTION:
Final Rule
SUMMARY:
The Depository Institutions Deregulation Committee
("Committee'') has established a new deposit category with a min
imum original maturity of 3-1/2 years and no interest rate ceiling.
Under a schedule established by the Committee, the maturity of the
new instrument will be reduced annually by one year until March 31,
1986, at which time it will have the minimum maturity for time
deposits (currently 14 days).
The schedule will also reduce the
minimum and maximum maturities of the small saver certificate (SSC),
but other existing categories of time deposits will not be changed
by the plan.
EFFECTIVE DATE: May 1, 1982.
FOR FURTHER INFORMATION CONTACT:
F. Douglas Birdzell, Counsel, or
Joseph DiNuzzo, Attorney, Federal Deposit Insurance Corporation
(202) 389-4147; Paul S. Pilecki, Senior Attorney, Board of Governors
of the Federal Reserve System (202)452-3281; Elaine Boutilier,
Attorney-Advisor, Department of the Treasury (202) 566-8737; Rebecca
Laird, Senior Associate General Counsel, Federal Home Loan Bank Board
(202) 377-6446; or Mark Leemon, Attorney, Office of the Comptroller
of the Currency (202) 447-1880.
SUPPLEMENTARY INFORMATION:
On October 6, 1981, the Committee
requested public comments on two related proposals to help accomp
lish the Committee's statutorily-required objective of an orderly
phaseout of deposit interest rate ceilings giving due regard to
the safety and soundness of depository institutions (see 46 Federal
Register 49137).
The Committee requested comment on whether to
establish a new time deposit account category that would have the
following principal characteristics: (1) an initial minimum origi
nal maturity of 3-1/2 years or more; (2) no interest rate limitation;
(3) a minimum denomination of $250; (4) an early withdrawal penalty
equal to 9 months' simple interest; and optional features that would
allow additions to the account during the first year without increas
ing the maturity and would permit the instrument to be negotiable.
The proposal also would have established two new deposit categories
in 1984 and 1985.
The Committee also requested comments on a sched
ule that would reduce each year the minimum maturity of this new
deposit category by one year.
2
In response to its request, the Committee received 580 letters
from the public on the new deregulation plan and the proposed new
account.
Of the 121 savings and loan associations and 27 mutual
savings banks responding, about 79 percent indicated they did not
want a deregulation schedule that included a ceilingless deposit
instrument.
Accordingly, most of them did not respond to the spe
cific questions regarding the characteristics of the proposed
new instrument.
Of the 375 commercial banks that responded, over 80 percent
favored a scheduled phaseout but disagreed over the characteristics
of the proposed new instrument.
The 9 regulatory agencies and
Federal Reserve Banks and most of the 28 commercial bank trade
associations wrote in support of the proposed plan while the 10
thrift trade associations expressed opposition.
Ten individ
uals and non-depository institutions offered comments and half of
them were opposed to the plan.
Those opposed to the proposals questioned the authority of
the Committee to introduce a deregulation schedule at this time
that authorizes new ceilingless instruments.
They argued that
such action is contrary to the Congressional mandate that the
Committee phase out interest rate ceilings only if economic con
ditions warrant and only after due regard for the safety and sound
ness of depository institutions.
Those favoring the proposals expressed the view that a schedule
will provide institutions with an opportunity to plan for the legis
lated goal of ceilingless deposit accounts.
By beginning with
long-term accounts, they argued it will permit financial institu
tions to better control their asset-liability risk and to attract
longer-term deposits that are most appropriate for longer-term
lending.
After considering all of the comments, the Committee has estab
lished a new deposit category to become effective on May 1, 1982.
The new category will have the following characteristics:
(1) no
interest rate ceiling, (2) a minimum original maturity of 3-1/2 years,
(3) no minimum denomination but the account must be made available
in a $500 denomination, (4) permits additions to an account during
the first year without extending its maturity (optional), and (5)
permits the instrument to be negotiable (optional). 1/ The existing
penalty for early withdrawal will apply to the new instrument.
The
1/
The Federal Home Loan Bank Board adopted on March 24, 1982 a
regulation permitting institutions insured by the Federal
Savings and Loan Insurance Corporation to offer certificates
of deposit in negotiable form.
Prior to this action which
will take effect April 25, 1982 savings and loan associations
were not generally permitted to offer negotiable certificates
except for large denomination ($100,000) certificates.
3
maturity of the new instrument will be reduced annually by one year,
and the new deposit category will be used in conjunction with a
schedule designed to phaseout interest rate ceilings on time deposits.
In addition, the minimum maturity of the SSC will be adjusted downward
by the schedule to complement the new deposit category.
The schedule
adopted by the Committee is as follows:
Step 1 (May 1, 1982)
1.
2.
The new 3-1/2 year or longer, ceiling
less deposit category becomes effective.
The maturity for SSCs is adjusted to 2-1/2
years to less than 3-1/2 years.
Step 2 (April 1, 1983)
1.
The minimum maturity on the ceilingless
deposit category is reduced to 2-1/2
years.
2.
The maturity on the SSC is reduced to
1-1/2 years to less than 2-1/2 years,
and the rate is tied to the average
yield for 1-1/2 year Treasury securi
ties with the 25 basis point differen
tial retained.
S t e p '3 (April 1, 1984)
1.
The minimum maturity for the ceilingless
deposit category is reduced to 1-1/2 years.
Step 4 (April 1, 1985)
1.
The minimum maturity for the ceilingless
deposit category is reduced to 6 months.
Step 5 (March 31, 1986)
1.
The minimum maturity for the ceilingless
deposit category is reduced to the minimum
maturity for time deposits in effect on
that date.
The new rules apply only to new time deposits issued on or
after each of the relevant dates? the rates payable on existing
time and savings deposits are unaffected by the new rules.
Moreover, ceiling rates for new time deposits with maturities
other than those specified in the phaseout schedule on each of
the relevant implementation dates will remain unchanged unless
specifically acted upon in the future by the Committee.
In taking this action, the Committee concluded that the plan
is necessary to provide additional returns to savers and to provide
4
depository institutions and their customers with a specific sched
ule so that institutions may better plan their asset and liability
strategies in anticipation of an environment without deposit inter
est rate ceilings. Nonetheless, the Committee will monitor the
schedule at least annually, taking into account economic conditions
and with due regard for the safety and soundness of depository
institutions.
The Committee asked for public comment on two other new account
categories that would be established as part of the deregulation
schedule.
These accounts, like the SSC, would be indexed to Treas
ury securities but would have no thrift differential and would have
a reduced minimum and maximum maturity. 2/ However, since these new
accounts would not become effective until April 1984 and April
1985, the Committee determined that it should consider the necessity
of such accounts at that time instead of authorizing them now.
This
is in keeping with the public comments, which indicated that most
depository institutions would prefer fewer rather than more new
accounts.
In its proposed rulemaking, the Committee requested comments
on a number of features, including a minimum denomination of $250,
a 9-month early withdrawal penalty, and allowing additional deposits
during the first year of an account without extending its maturity.
The public comrtients on a minimum denomination of $250 were mixed.
Some respondents commented that no minimum denomination should be
required, thereby allowing the institution to set whatever it
believed was appropriate.
However, most respondents indicated that
$250 was acceptable.
The Committee concluded that the institutions
should be allowed the maximum flexibility possible to set a minimum
denomination on the new category of time deposit without disadvant
aging the small saver, and, therefore, adopted the provision cur
rently used with the All Savers Certificate:
no minimum denomi
nation is mandated, but the account must be made available in $500
denominations.
This leaves the institutions free to accept deposits
of any amount, as long as a $500 account is also available.
In commenting on the feature of additional deposits during the
first year, most respondents indicated that it would be feasible
only if an institution offered it in conjunction with a floating
rate instrument.
Many opposed this feature as too complicated and
confusing to the depositor.
The Committee has authorized additional
deposits during the first year as an optional feature of the new
2/ The account proposed to be established in 1984 would have a
maturity of 6 months to 1-1/2 years and could be offered at a rate
not to exceed the 26-week U.S. Treasury rate (auction average on a
discount basis). The account proposed to be established in 1985
would have a maturity of 14-days to six months and could be offered
at a rate not to exceed the 13 week U.S. Treasury bill rate (auction
average on a discount basis).
5
deposit category.
Under this feature (which an institution is not
required to offer) the institution may accept additional deposits
at any time during the first year of the account without extending
the maturity of the account.
The deposit contract shall specify
the method to be used for determining the rate of interest to be
paid on additions to an account during that first year.
The comments received on the proposed 9-month early withdrawal
penalty primarily opposed the proposal as adding confusion and making
the account less attractive to depositors.
Furthermore, they noted
that an early withdrawal penalty longer than 6 months can be required
by an institution under the existing regulation.
The Committee has
determined that the existing early withdrawal penalty of a forfeiture
at least 6 months' interest on the amount withdrawn will apply to
the new account.
It should be noted, however, that under the sched
ule, the minimum maturity of the new account will be less than one
year effective April 1, 1985.
At that time the early withdrawal
penalty would be that which applies to accounts of less than one
year, i.e. 3 months' interest.
The minimum early withdrawal penalty for a floating rate time
deposit (for which the interest rate varies during the term of the
deposit) with a maturity of more than one year is an amount equal
to six months' simple interest.
If a depository institution ties
the interest rate on its new account to an index that is beyond
its control (e.g., Treasury security rate, commercial paper rate,
Federal funds rate, Federal Reserve discount rate) for the entire
term of the deposit, the institution may base the simple interest
rate, for purposes of calculating the minimum early withdrawal
penalty, on the rate in effect on the date the account is opened,
or on the date of withdrawal, or on an average of the rates in
effect during the term of the deposit.
The institution must
specify, however, whether it will use the initial interest rate,
the rate on the date of withdrawal, or the average rate.
For
example, if the rate on the account is set at the twenty-six week
Treasury bill discount rate plus 100 basis points and it changes
weekly with the most recent auction results, the early withdrawal
penalty rate could be the discount rate (plus 100 basis points) in
effect on the date the account was opened, or the date of the
withdrawal, or an average of all the rates in effect during the
term of the deposit? but the method to be used must be specified
in the deposit agreement.
If the depository institution chooses not to tie the interest
rate on its new account to an index, but instead chooses to set the
precise way in which the rate varies over the term of the deposit,
or if it changes the relationship of the rate to the index (e.g.#
the commercial paper rate minus 50 basis points for the first six
months of the instrument and the commercial paper rate at minus
100 basis points thereafter), then the early withdrawal penalty
must be computed using an average of the simple interest rates on
the deposit during the time period that the deposit was outstanding.
If the interest rate is established at regular intervals and remains
in effect for regular periods (e.g., the rate is established once
6
a month and remains in effect for one month), the average simple
interest rate would be the sum of the rates established at each
interval while the funds were on deposit, divided by the number of
periods the funds were on deposit.
Each partial period will be
considered a full period for the purpose of this calculation.
For
example, if a 2-1/2 year time deposit with an interest rate that
varies monthly was established on May 15, 1983, and withdrawn on
July 7, 1983, the average simple interest rate would be the sum of
the May, June, and July rates, divided by three.
If the length of the periods for which rates are effective
varies, the average simple interest rate would be calculated by
dividing the amount of time a deposit was outstanding into equal
periods and then adding the rates that were in effect during
those periods and dividing by the number of periods.
The period
used should be the shortest period for which a rate was in effect.
For example, a time deposit might have the following rates in
effect for the following periods at the time a depositor wished
to withdraw the funds:
six months................15%
1-1/2 years...............16%
1 year.................... 14%
The total amount of time the deposit was outstanding was 3 years
(6 months + 1-1/2 years + 1 year).
This 3-year period would then
be divided into 6 periods of 6 months each.
Then the rates in
effect for each period would be:
1st
2nd
3rd
4th
5th
6th
six
six
six
six
six
six
month period............... 15%
month period............... 16%
month period............... 16%
month period............ ...16%
month period............... 14%
month period............... 14%
To calculate the average simple interest rate, the rate in effect
during each period would be added together — 15 + 16 + 16 + 16
+ 14 + 14 * 91.
The resulting sum would then be divided by the
number of periods — 91 divided by 6 — to yield an average
simple interest rate of 15.17%.
In the case of lump-sum payments of cash that would be regarded
as interest (see e.g., 12 C.F.R. 1204.109 and 12 C.F.R. 1204.111),
such payments must be taken into account in computing the penalty
rate.
Any lump-sum payment must be prorated over the life of the
deposit.
The portion that is attributed to the time period during
which the deposit was outstanding must be regarded as interest
for purposes of computing the penalty rate.
The portion attribut
able to the remaining life of the deposit is regarded as unearned
interest and must be deducted from the principal amount of the
deposit and returned to the institution.
7
For example, assume that cash of $100 that would be regarded
as interest were given to a depositor at the opening of a $1,000,
4-year variable rate time deposit, that the entire amount is with
drawn after one year, and that the average of the rates paid on
the deposit during the time it was outstanding was 12 percent.
The
lump-sum of $100 would be regarded by the Committee as a payment of
interest and must be taken into account in computing the penalty
rate.
Because the deposit was outstanding for one-fourth of its
expected life, a corresponding amount of the lump-sum must be taken
into account in computing the penalty rate.
Thus, 2.5 percent (25
divided by 1,000) must be added to the average of the rates paid
during the time the deposit was outstanding (12 percent) to achieve
a penalty rate of 14.5 percent.
The remaining three-fourths of
the lump-sum payment ($75) would be regarded as unearned interest
and would be returned to the institution.
Thus, the amount that
the customer would return would be $147.50.
The new rule provides greater flexibility in designing accounts
Depository institutions will be permitted to accept additions in
the first year to a new account governed by whatever interest rate
structure — fixed or floating — they would choose, provided that
the method of varying the interest rate is adequately disclosed in
the deposit contract.
The Committee also considered the proposal to phaseout interest
rate ceilings in terms of its impact on small entities, as required
by the Regulatory Flexibility Act (5 U.S.C. §§ 601, et seq.). In
this regard, the Committee's action does not impose any new regula
tory burden, or increase any existing or add any new reporting or
record keeping requirements.
Instead, this action eliminates regu
latory restrictions on the maximum interest rate payable for certain
time deposits on May 1, 1982.
Small entities that are depositors
generally should benefit from the Committee's action because they
will be able to earn higher rates of interest on their time deposits
Small entities that are depository institutions could have increased
operating expenses as a result of this action, because it is likely
that they will be paying higher interest rates on certain time
deposits; on the other hand, their competitive position vis-a-vis
nondepository institution competitors should be enhanced by their
ability to offer higher rates on time deposits, thereby attracting
new funds that can be reinvested profitably.
By law, the Committee is required to work towards the ultimate
elimination of interest rate ceilings on time deposits.
The Com
mittee considered several alternatives to accomplish this objective;
an analysis of these alternatives is available from the Executive
Secretary of the Committee.
In the Committee's view, the plan that
was adopted provides the greatest flexibility for all depository
institutions during the phaseout period, without having a dispropor
tionately adverse impact on any particular size of depository insti
tution.
Pursuant to its authority under Title II of the Depository
Institutions Deregulation and Monetary Control Act of 1980, 94 Stat.
a
142 (12 U.S.C. § 3501 et se g .), to prescribe rules governing the
payment of interest and dividends on deposits of Federally insured
commercial banks, savings and loan associations, and mutual savings
banks, the Committee amends Part 1204 — Interest on Deposits (12
CFR Part 1204) as follows:
1.
Effective May 1, 1982, Section 106 is amended by adding a
new paragraph (c) to read as follows:
§ 1204.106 —
Time Deposits of Less Than $100,000 With Maturities
of 2-1/2 Years to 4 Y e a r s .
*
*
*
(c)(1)
Effective May 1, 1982, this section is amended by
striking the term "2-1/2 years to less than 4 years" wherever it
appears and inserting in its place "2-1/2 years to less than 3-1/2
years".
(2)
Effective April 1, 1983, this section is amended
by striking the term "2-1/2 years to less than 3-1/2 years"
wherever it appears and inserting in its place "1-1/2 years to
less than 2-1/2 years", and by striking the term "average 2-1/2
year yield" wherever it appears and inserting in its place "aver
age 1-1/2 year yield".
2.
Effective May 1, 1982, a new section 119 is added that
would read as follows:
§ 1204.119 *-- Time Deposits of Less Than $100,000 with Original
Maturities of 3-1/2 Years or More.
(a) A commercial bank, mutual savings bank, or savings and
loan association may pay interest at any rate as agreed to by the
depositor on any time deposit with an original maturity of 3-1/2
years or more that has no minimum denomination but is made available
in a denomination of $500.
(b) Any time deposit with an original maturity of 1-1/2 years
or more issued pursuant to this section may provide by contract that
additional deposits may be made to the account for a period of one
year from the date that it is established without extending the
original maturity date of the account.
Deposits made to the account
more than one year after the date that it is established shall extend
the maturity of the entire account for a period of time at least
equal to the original term of the account.
(c) Any time deposit offered pursuant to this section may
be issued in a negotiable or nonnegotiable form.
(d) Effective April 1, 1983, this section is amended by
striking the term "3-1/2 years" wherever it appears and insert
ing in its place the term "2-1/2 years".
9
(e)
Effective April 1, 1984, this section is amended by
striking the term "2-1/2 years" wherever it appears and inserting
in its place "1-1/2 years".
(f)
Effective April 1, 1985, this section is amended by
striking the term "1-1/2 years" wherever it appears in paragraph
(a) and inserting in its place "6 months".
(g)
Effective March 31, 1986, this section is amended by
striking the term "with an original maturity of 6 months or more"
wherever it appears.
By order of the Committee, March 26, 1982.
Steven L. Skancke
Executive Secretary
DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE
(12 CFR Part 1204)
[DOCKET NO. D-0023]
91-Day Time Deposits of Less Than $100,000
AGENCY:
Depository Institutions Deregulation Committee.
ACTION:
Final rule.
SUMMARY: The Depository Institutions Deregulation Committee ("Committee")
has established a new category of time deposit that will enable depository
institutions to compete more effectively with short-term market instruments.
The new deposit category has the following principal characteristics:
(1)
a minimum denomination of $7,500; (2) a maturity of exactly 91
days; (3) a fixed ceiling rate of interest based on the most recent
rate established and announced for U.S. Treasury bills with maturities
of 91 days (auction average on a discount basis); and (4) compounding
of interest is not permitted. The Committee also established a temporary
25 basis point differential in.favor of thrift institutions for one
year and a separate minimum early withdrawal penalty for this deposit
category. The temporary differential will also not apply when the Treasury
bill rate is 9 per cent or less for four consecutive auctions.
EFFECTIVE DATE:
May 1, 1982.
FOR FURTHER INFORMATION CONTACT: Rebecca Laird, Senior Associate General
Counsel, Federal Home Loan Bank Board (202/377-6446), Mark Leemon, Attorney,
Office of the Comptroller of the Currency (202/447-1880), F. Douglas
Birdzell, Counsel, or Joseph A. DiNuzzo, Attorney, Federal Deposit Insurance
Corporation (202/389-4147), Daniel L. Rhoads, Attorney, Board of Governors
of the Federal Reserve System (202/452-3711), or Elaine Boutilier, AttorneyAdvisor, Department of the Treasury (202/566-8737).
SUPPLEMENTARY INFORMATION: The Depository Institutions Deregulation
Act of 1980 (Title II of P.L. 96-221; 12 U.S.C. §§ 3501 et seg.) ("Act")
was enacted to provide for the orderly phaseout and ultimate elimination
of the limitations on the maximum rates of interest and dividends that
may be paid on deposit accounts by depository institutions as rapidly
as economic conditions warrant and with due regard for the safety and
soundness of depository institutions. Under the Act, the Committee
is authorized to phase out interest rate ceilings by any one of a number
of methods, including the creation of new account categories either
not subject to interest rate limitations or with interest rate ceilings
set at market rates of interest.
-2 -
At its June 25, 1981 meeting, the Committee considered the
issue of short-term time deposit instruments and decided to request
public comment on the desirability of authorizing a new deposit instrument
having characteristics similar to money market mutual funds (MMFs).
46 Fed. Reg. 36712 (July 15, 1981). The Committee did not put forth
a specific proposal at that time. Over 400 comments were received by
the Committee on this issue.
(An analysis of the comments is contained
in the DIDC staff paper "Proposals to Change the Method of Calculating
the Ceiling Rate of MMCs and Consideration of Creation of a New ShortTerm Deposit Instrument", September 16, 1981, which is available upon
request from the Executive Secretary of the Committee.) Approximately
half of the respondents favored creation of a new short-term instrument
and about half were opposed. Those opposing the authorization of a
new short-term instrument, generally thrift institutions, argued that
the higher costs associated with a new deposit instrument and the potential
shifts from savings accounts would add to their current earnings problems.
At its September 22, 1981 meeting, the Committee decided to
solicit additional public coiranent (46 Fed. Reg. 50804, October 15, 1981)
on several specific deposit proposals as well as the general features
of short-term instruments. The three specific proposals were:
(1)
a ceilingless, $5,000 minimum denomination account with a transactions
feature; (2) a time deposit with an initial maturity of 91 days, and
a 14-day notice period thereafter, with a ceiling rate tied to the 13week Treasury bill rate; and (3) a ceilingless $25,000 minimum denomination
1-day notice account. Comment was requested on several specific account
characteristics as well.
The Committee received 844 responses on the three proposals
published for comment and considered these comments at its March 22,
1982, meeting. The comments are summarized in the memorandum to the
Committee dated December 10, 1981, entitled "Short-Term Investment Proposals."
About 58 per cent of all respondents commenting favored a more competitive
short-term instrument. The proposal was favored by a majority of commercial
banks and was opposed by a majority of the thrift institutions commenting.
Many of the respondents, including thrift institutions opposed to any
new short-term instrument, stated that competition for short-term funds
is no longer limited to competition among depository institutions but
now also includes competition with MMFs. Some respondents argued that
regulation of MMFs would be preferable to authorizing a new short-term
instrument.
While the respondents opposing a new short-term instrument
generally declined to comment on the specific proposals, those respondents
who did comment preferred a ceilingless, $5,000 minimum denomination
deposit with a transaction feature. This proposal was perceived as
being the most effective of those proposed for meeting MMF competition.
Those opposing the proposal argued that it would cause an increase in
the cost of funds, primarily in shifts from passbook and NOW accounts
into the new instrument. Commercial banks opposed the establishment
of a differential in favor of thrift institutions while thrift institutions
were in favor of such a differential.
-3 -
The second proposal, the $10,000 minimum denomination time
deposit with a minimum initial maturity of 91 days and a 14-day notice
period thereafter, was the least popular among those favoring a new
instrument. About 50 comments favored the adoption of this proposal.
The comments were divided on the 14-day notice feature, and proponents
were generally satisfied with its other characteristics. Opponents
criticized its similarity to 26-week money market certificates and its
likely inability to attract new funds, particularly funds held by MMFs.
The third proposal, a ceilingless $25,000 minimum denomination
account with a 1-day notice requirement and no transaction feature,
was the second-most popular of the three proposals. Proponents stated
that the category would allow them to compete for deposits of corporations
and individuals, while opponents felt that it would only benefit larger,
highly liquid institutions.
One of the more popular of several alternative short-term
instruments suggested in response to the Committee's proposal was a
91-day or 30-day instrument with a minimum denomination of $5,000, no
transactions feature, and a rate tied to a comparable Treasury bill
yield. About 100 respondents favored this suggested category.
At its December 16, 1981, meeting, the Committee postponed
consideration of its proposals until its March 22, 1982 meeting. Since
the December 16, 1981 meeting, the Committee has received over 2,500
letters (over 90 per cent of which were from commercial banks) urging
active pursuit of deregulation.
The impetus behind the Committee's consideration of a short
term instrument has been the continued strong growth of MMFs while growth
of small time and savings deposits at commercial banks and at thrift
institutions has been weak. MMFs, though uninsured, offer an investment
which includes the characteristics of a market return, liquidity, a
transaction feature, no early withdrawal penalty, and can be obtained
in denominations as low as $1,000. Short-term Treasury and U.S. agency
securities also provide competition to depository institutions in that
they offer a market return, tax advantages, liquidity, safety, and can
be obtained in minimum denominations of $5,000 to $10,000.
In order to assist depository institutions in competing with
non-depository institutions that offer alternative short-term instruments,
the Committee has determined to authorize a new deposit instrument that
will enable depository institutions to attract new funds, will help
stem deposit outflows and will enhance the ability of institutions to
retain valuable customer relationships.
After consideration of the comments received, the Committee
has determined to authorize, effective May 1, 1982, a new category of
short-term time deposit as follows:
-4 -
— minimum denomination of $7,500
— 91-day maturity
— a fixed ceiling rate for savings and loan associations and
mutual savings banks equal to the 91-day Treasury bill rate
(auction average on a discount basis) at the most recent auction.
The ceiling rate for commercial banks will be 25 basis points
less than the thrift ceiling rate. The rate will become effective
the day following the auction.
— no compounding of interest is permitted
— may be offered in either negotiable or nonegotiable form
— the 25 basis points differential in favor of thrift institutions
is authorized until May 1, 1983. In addition, the differential
will not apply whenever the 13-week Treasury bill rate is
at or below 9 per cent for the four most recent consecutive
auctions. When the differential is not in effect, commercial
banks may pay the thrift ceiling rate.
— a separate minimum early withdrawal penalty of forfeiture
only of all interest earned, and
— the account is available to all depositors.
United States Treasury bills maturing in 91 days are auctioned
weekly by the Treasury Department, normally on Monday. The 91-day United
States Treasury bill rate will be announced by Treasury and is published
widely in many newspapers throughout the country. The ceiling rate
payable for new deposits, as determined by the most recent auction,
will be effective on the day following the auction.
The rate payable on these deposits may not exceed the ceiling
rate in effect on the date of deposit. If such deposits are renewed,
automatically or otherwise, the maximum rate that may be paid may not
exceed the 91-day Treasury bill rate in effect at the time of renewal
of the deposits. Unlike the money market certificate, averaging of
the four most recent auction rates will not be permitted. Premiums,
however, will be permitted in accordance with the Committee's rules.
The temporary 25 basis point ceiling rate differential in
favor of thrift institutions will expire on May 1, 1983. In addition,
the temporary differential will not apply if the 91-day Treasury bill
discount rate (auction average) is at or below 9 per cent for the four
most recent auctions of 91-day Treasury bills held immediately prior
to the date of deposit. When the differential is not in effect, commercial
banks will be permitted to pay the ceiling rate authorized for thrift
institutions.
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The Committee recognizes that the new deposit category will
not be fully competitive with instruments offered by non-depository
institutions. Therefore, the Committee has also directed its staff
to consider additional short-term deposit categories to enable depository
institutions to compete more effectively with non-depository institutions.
The staff was requested to present its recommendations to the Committee
within 30 days.
The Committee considered the potential effect on small entities
of this new category when it established the instrument, as required
by the Regulatory Flexibility Act (5 U.S.C. § 603 et seq.). In this
regard, the Committee's action would not impose any new reporting or
recordkeeping requirements. Small entities which are depositors generally
should benefit from the Committee's proposal, since the new instrument
would provide them a market rate of return. If low-yielding deposits
shift into the new account, small entities which are depository institutions
might have increased costs as a result of this action. However, their
competitive position vis-a-vis nondepository competitors should be enhanced
by their ability to offer a competitive short-term instrument at market
rates. The new funds attracted by the new instrument (or the retention
of deposits that might otherwise have left the institution) could be
invested at a positive spread and would therefore at least partially
offset the higher costs associated with the shifting ot low-yielding
accounts.
Pursuant to its authority under Title II of Public Law 96221, 94 Stat. 142 (12 U.S.C. § 3501 et seq.), to prescribe rules governing
the payment of interest and dividends on deposits of federally insured
commercial banks, savings and loan associations, and mutual savings
banks, effective May 1, 1982, the Committee amends Part 1204 (Interest
on Deposits) by adding section 120 as follows:
§ 1204.120 - 91-Day Time Deposits of Less than $100,000.
(a) Commercial banks, mutual savings banks, and savings and
loan associations may pay interest on any negotiable or nonnegotiable
time deposit of $7,500 or more, with a maturity of 91 days, at a rate
not to exceed the ceiling rates set forth below. Rounding any rate
upward is not permitted, and interest may not be compounded during the
term of this deposit.
(b)
(1) The ceiling rate of interest payable by mutual savings
banks and savings and loan associations shall be the rate established
and announced (auction average on a discount basis) for U.S. Treasury
bills with maturities of 91 days at the auction held immediately prior
to the date of deposit ("Bill Rate"). Except as provided in subparagraphs (2)
and (3) below, the ceiling rate of interest payable by commercial banks
shall be the Bill Rate minus one-quarter of one percentage point (25
basis points).
(2)
If the Bill Rate is 9 per cent or below at the four
most recent auctions of U.S. Treasury bills with maturities of 91 days
held immediately prior to the date of deposit, the ceiling rate of interest
payable by commercial banks shall be the Bill Rate.
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(3)
Effective May 1, 1983, the ceiling rate of interest
payable by commercial banks on this category of deposit for deposits
issued or renewed on or after that date shall be the Bill Rate.
(c)
Section 103 of this Part shall not apply to time deposits
issued under this section. Where all or any part of a time deposit
issued under this section is paid before maturity, a depositor shall
forfeit an amount equal to at least all interest earned on the amount
withdrawn.
By order of the Committee, April 1, 1982.
Steven L. Skancke
Executive Secretary
@FedFRASER