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FEDERAL RESERVE BANK
OF NEW YORK
[
Circular No. 9381 ~l
October 13, 1982
TEMPORARY AMENDMENT TO REGULATION D
Reserve Requirements on Certain Time Deposits Linked to Lines of Credit
To All Depository Institutions in the Second
Federal Reserve District, and Others Concerned:
Following is the text of a statement issued October 7, 1982 by the Board of Governors of the Federal Reserve
System:
The Federal Reserve Board today made time deposits linked to a line of credit on which checks or similar third party
transfers can be drawn subject to the reserve requirements of transaction accounts.
The Board made the rule — a temporary amendment to Regulation D, Reserve Requirements of Depository
Institutions — effective immediately, but requested comment on the technical aspects of the rule pending adoption on a
permanent basis.
The Board asked for comment by December 3, 1982.
The ruling affects a growing number of arrangements being offered by depository institutions whereby depositors
maintaining time deposits are able to obtain a loan — secured by the time deposit — by means of writing a check or similar
draft provided by the institution as part of the arrangements establishing the time deposit. The Board regards such
arrangements as circumventing the reserve requirements of Regulation D and the regulations of the Depository Institutions
Deregulation Committee.
Reserve requirements for transaction and time deposits are spelled out in the attached notice of the Board’s actions. In
general, transaction accounts are subject to a reserve requirement of 12 percent, and those time deposits held by other than
individuals are subject to a 3 percent reserve requirement.
Enclosed is a copy of the text of the amendment to Regulation D, effective October 5, 1982, which includes an
explanation of the Board’s action and request for comment.
Comments on the amendment, which is being adopted on a temporary basis by the Board in order to allow for a
comment period on the technical aspects of the ruling, should be submitted by December 3,1982, and may be sent to
our Consumer Affairs and Bank Regulations Department. Questions regarding the amendment may also be directed
to that Department (Tel. No. 212-791-5914).
A
nthony
M.
So l o m o n ,
P resident.
Board of Governors of the Federal Reserve System
RESERVE REQUIREMENTS OF DEPOSITORY INSTITUTIONS
AMENDMENT TO REGULATION D
(effective O c to b er 5 , 1 982)
TRANSACTION ACCOUNTS
AGENCY:
Board of Governors of the Federal Reserve System.
ACTION:
Temporary rule; request for public comment.
SUMMARY: The Board of Governors is adopting a temporary amendment to
Regulation D— Reserve Requirements of Depository Institutions (12 CFR
Part 204) to define as transaction accounts, time deposits issued in
connection with an agreement that permits the depositor to obtain credit,
directly or indirectly, through the drawing of a check, draft or similar
device on the issuing institution that can be used for the purpose of
making payments or transfers to third persons or others. Accordingly,
these deposits are subject to transaction account reserve requirements.
The Board also requests public comment on the technical aspects of this
rule prior to its permanent adoption. The Board also determined that
in making a loan to a depositor upon the security of his or her time
deposit, a member bank must charge 1 per cent above the annual effective
rate being paid on the time deposit.
EFFECTIVE DATE:
1982.
October 5, 1982.
Comments must be received by December 3,
ADDRESS: Comments, which should refer to Docket No. R-0424, should
be addressed to William W. Wiles, Secretary, Board of Governors of the
Federal Reserve System, 20th Street and Constitution Avenue, N.W., Washington,
D.C. 20551, or should be delivered to room B-2223 between 8:45 a.m.
and 5:15 p.ra. Comments may be inspected in room B-1122 between 8:45
a.m. and 5:15 p.m. except as provided in section 261.6(a) of the Board's
Rules Regarding Availability of Information (12 CFR 261.6(a)).
FOR FURTHER INFORMATION CONTACT:' Gilbert T. Schwartz, Associate General
Counsel (202/452-3625), Paul S. Pilecki, Senior Attorney (202/452-3281),
or Beverly A. Belcamino, Legal Assistant (202/452-3623), Legal Division,
Board of Governors of the Federal Reserve System, Washington, D. C.
20551.
For this Regulation to be complete, retain:
1) Regulation D, pamphlet, amended effective December 31, 1981.
2) Amendments effective April 28, April 29, and September 1, 1982.
3) This slip sheet.
[Enc. Cir. No. 9381]
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SUPPLEMENTARY INFORMATION: The Monetary Control Act of 1980 ("MCA")
(Title I of P.L. 96-221; 94 Stat. 132) defines "transaction account"
as a deposit or account on which the depositor or account holder is
permitted to make payments or transfers to third persons or others (12
U.S.C. § 461(b)(1)(C)). The Board is empowered to determine that deposits
or accounts are transaction accounts for reserve requirement purposes
if such accounts may be used to provide funds directly or indirectly
for the purpose of making payments or transfers to third persons or
others (12 U.S.C. § 461(b)).
The Board's Regulation D currently defines
"transaction account" as "a deposit or account on which the depositor
or account holder is permitted to make withdrawals by negotiable or
transferable instrument, payment orders of withdrawal, telephone transfers,
or other similar device for the purpose of making payments or transfers
to third persons or others."
(12 CFR § 204.2(e)).
Several depository institutions have recently begun issuing
complex time deposit arrangements involving a line of credit that may
be accessed by checks drawn on the issuing institution that are payable
to third parties. These arrangements have the effect of allowing depositors
to earn market rates of interest on funds that may be used for third
party payments. The Board believes that these circuitous arrangements
both circumvent transaction account reserve requirements under Regulation D
since they convert longer term time deposits into deposits that properly
should be regarded as transaction accounts, and evade the intent of
the interest rate limitations established by the Depository Institutions
Deregulation Committee ("DIDC") as part of the phaseout of interest
rate ceilings mandated by the Depository Institutions Deregulation Act
of 1980 ("DIDA") (Title II of P.L. 96-221; 94 Stat. 132). The Board
believes that it is inappropriate for depository institutions to attempt
to circumvent Regulation D requirements with arrangements such as those
described. Fairness to all depository institutions and orderly administration
of the interest rate ceiling phaseout require the Board to take this
regulatory action. Consequently, in order to carry out the purposes
of the MCA and DIDA and to maintain the distinction between transaction
accounts and time deposits, the Board has determined to regard the arrangements
described above as transaction accounts and subject them to Regulation D
reserve requirements. Currently, all time deposits, as defined in section 204.2(c
of Regulation D (12 CFR § 204.2(c)(1)) are subject to no basic reserve
requirements if they are personal time deposits, to a 3 per cent reserve
requirement if they are nonpersonal time deposits with a maturity of
less than 3-1/2 years, and to a zero per cent reserve requirement if
they are nonpersonal time deposits with a maturity of 3-1/2 years or
more.
In this connection, the Board notes that the legislation that
was recently passed by Congress requiring the DIDC to authorize depository
institutions to offer an account that is directly competitive with money
market mutual funds should assist banks and thrifts in achieving their
objectives in a manner consistent with applicable law and regulation.
Transaction account reserve requirements will be applicable
to time deposits issued in connection with an arrangement that permits
the depositor to obtain credit by check, draft, nonnegotiable order
or instruction or similar device that is used to make payments or transfers
to third persons or others, or to a deposit account of the depositor.
The Board has also determined that it is appropriate to grandfather
the balances in depository institutions for those time deposits subject
to arrangements established before October 5, 1982.
However, if the
deposit maintained in connection with the line of credit is extended,
or matures and is renewed, the funds will become subject to transaction
account reserve requirements. This amendment does not effect the ability
of a depositor to use his or her time deposit as collateral for a loan
transaction that does not involve the use of a credit line on which
checks or similar instruments may be drawn.
The Board is requesting comment until December 3, 1982, on
whether any additional arrangements should be covered by this amendment
and whether any arrangements should be eliminated from the scope of
the amendment before it is adopted in final form.
Some of these arrangements are structured using a loan secured
by a time deposit.
Section 217.4(f) of Regulation Q (12 CFR § 217.4(f))
provides that a member bank may make a loan to a depositor upon the
security of his time deposit as long as the interest rate on the loan
is at least one per cent above the rate being paid on the time deposit.
However, these arrangements may provide for interest on the loan to
be charged at 1 per cent over the annual simple rate being paid on the
deposit when the effective rate on the deposit is higher due to the
effects of compounding. For example, a 12 per cent annual simple rate
being paid on a deposit yields an annual effective rate of 12.935 per
cent with daily compounding on a 365/360 basis.
In order to preserve
the effectiveness of § 217.4 of Regulation Q, the Board has determined
that the interest rate charged on a loan secured by a time deposit must
be at least 1 per cent above the effective rate paid on the time deposit,
taking into account the effects of compounding. The Board has been
advised that a similar position has been adopted by the Federal Deposit
Insurance Corporation and the Federal Home Loan Bank Board.
The impact of this proposal on small entities has been considered
in accordance with section 604 of the Regulatory Flexibility Act (5
U.S.C. § 604; Pub. L. 96-354). The Board has deferred deposit reporting
and reserve requirements for small nonmeraber banks and thrift institutions
in view of pending legislation that would give small depository institutions
a permanent exemption from reserve requirements. Finally, no new recordkeeping
or reporting requirements will be imposed as a result of the proposal.
To aid in
persons are invited
All material should
of Governors of the
consideration of this matter by the Board, interested
to submit relevant data, views, comment or argument.
be submitted in writing to the Secretary, Board
Federal Reserve System, Washington, D. C. 20551
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to be received by December 3, 1982. All material submitted should include
the Docket No. R-0424.
Such material will be made available for inspection
and copying upon request except as provided in section 261.6(a) of the
Board's Rules Regarding Availability of Information (12 CFR 261.6(a)).
List of Subjects in 12 CFR Part 204
Banks, banking; Currency; Federal Reserve System; Penalties;
Reporting requirements.
Pursuant to its authority under section 19(b) of the Federal
Reserve Act (12 U.S.C. § 461(b)), effective October 5, 1982 the Board
amends Regulation D (12 CFR Part 204) by revising paragraph (e) of section 204.2
to read as follows:
SECTION 204.2— DEFINITIONS
*
(e)
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*
*
*
*
*
*
(4) deposits or accounts in which payments may be made
to third parties by means of an automated teller machine, remote service
unit or other electronic device;
(5) deposits or accounts in which payments may be made
to third parties by means of a debit card;
(6) deposits or accounts under the terms of which, or
which by practice of the depository institution, the depositor is permitted
or authorized to make more than three withdrawals per month for purposes
of transferring funds to another account or for making a payment to
a third party by means of preauthorized or telephone agreement, order
or instruction. An account that permits or authorizes more than three
such withdrawals in a calendar month, or statement cycle (or similar
period) of at least four weeks, is a "transaction account" whether or
not more than three such withdrawals actually are made during such period.
A "preauthorized transfer" includes any arrangement by the depository
institution to pay a third party from the account of a depositor upon
written or oral instruction (including an order received through an
automated clearing house (ACH)), or any arrangement by a depository
institution to pay a third party from the account of the depositor at
a predetermined time or on a fixed schedule. An account is not a "transaction
account" by virtue of an arrangement that permits withdrawals for the
purpose of repaying loans and associated expenses at the same depository
institution (as originator or servicer); and
(7)
deposits or accounts maintained in connection w
an arrangement that permits the depositor to obtain credit directly
or indirectly through the drawing of a negotiable or nonnegotiable check,
draft, order or instruction or other similar device (including telephone
or electronic order or instruction) on the issuing institution that
can be used for the purpose of making payments or transfers to third
persons or others, or to a deposit account of the depositor.
Deposits
that were established before October 5, 1982, subject to arrangements
will not be regarded as transaction accounts until the deposit issued
in connection with the line of credit is extended, or matures and is
renewed.
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By order of the Board of Governors, October 6, 1982.
(sig n e d )
W i l l i a m W. W i l e s
William W. Wiles
Secretary of the Board
[SEAL]
@FedFRASER