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FEDERAL RESERVE BANK
OF NEW YORK
Circular No. 9 5 4 5
August 30, 1983
D EPO SITO R Y IN ST IT U T IO N S D E R E G U L A T IO N COM M ITTEE
R em oval of Interest Rate C eilings on T im e D eposits
To All Member Banks, and Others Concerned,
in the Second Federal Reserve District:
As indicated in our Circular No. 9524, dated July 11, 1983, the Depository
Institutions Deregulation Committee (DIDC) has acted to remove most of the remaining
Regulation Q interest rate ceilings on time accounts, effective October 1, 1983. Printed
on the reverse side is the text of the summary portion of the notice submitted by the
DIDC to the Federal Register.
Enclosed—for member banks in this District—is the complete text of the DIDC’s
notice, which has been published in the Federal Register of August 24, 1983; it will be
furnished to others upon request directed to the Circulars Division of this Bank (Tel. No.
212-791-5216).
Questions regarding this matter may be directed to our Regulations Division (Tel.
No. 212-791-5914).
A nthony M. S olomon,
President.
(Over)
DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE
[12 C . F . R .
PART 1 2 0 4 ]
D oc k e t No.
R emo va l o f
0031
I n t e r e s t R a t e C e i l i n g s on Ti me D e p o s i t s
AGENCY:
D epository I n s t i t u t i o n s
ACTION:
F in a l Rule.
D e r e g u la t io n Committee.
SUMMARY:
E f f e c t i v e O c tob e r 1, 1 9 8 3 , the D e p o s i t o r y
I n s t i t u t i o n s D e r e g u l a t i o n Committee ("C om m ittee") has:
( 1 ) e l i m i n a t e d a l l i n t e r e s t r a t e c e i l i n g s ( a ) on a l l
time d e p o s i t s w i t h o r i g i n a l m a t u r i t i e s or r e q u i r e d n o t i c e
p e r i o d s o f more t ha n 31 d a y s , and ( b ) on t i m e d e p o s i t s o f
$ 2 , 5 0 0 o r more w i t h o r i g i n a l m a t u r i t i e s o r r e q u i r e d n o t i c e
p e r i o d s o f s e v e n to 31 d a y s ;
( 2 ) e l i m i n a t e d o t h e r r e g u l a t i o n s on t i m e d e p o s i t s
e x c e p t f o r : ( a ) t h e minimum e a r l y w i t h d r a w a l p e n a l t i e s ; ( b )
a minimum d e n o m i n a t i o n o f $ 2 , 5 0 0 f o r c e i l i n g - f r e e t i m e
d e p o s i t s w i t h o r i g i n a l m a t u r i t i e s or r e q u i r e d n o t i c e p e r i o d s
o f s e v e n t o 31 d a y s ; ( c ) t h e c u r r e n t c e i l i n g on t i m e
d e p o s i t s o f l e s s than $ 2 ,5 0 0 w i t h o r i g i n a l m a t u r i t i e s or
r e q u i r e d n o t i c e p e r i o d s o f s e v e n t o 31 d a y s ; and ( d ) t h e
r u l e s o f the a g e n c i e s r e q u i r i n g a one p e r c e n t a g e p o i n t
d i f f e r e n t i a l b e t w e e n a l o a n r a t e and t h e r a t e on a t i m e
d e p o s i t s e c u r i n g a l o a n ; and
( 3 ) e s t a b l i s h e d t h e f o l l o w i n g new minimum e a r l y
w ithdrawal p e n a l t i e s :
(a) f o r tim e d e p o s i t s w i t h o r i g i n a l
m a t u r i t i e s o r r e q u i r e d n o t i c e p e r i o d s o f 32 d a y s t o o n e
y e a r , l o s s o f o n e m o n t h ' s s i m p l e i n t e r e s t ; and ( b ) f o r t i m e
d e p o s i t s w i t h o r i g i n a l m a t u r i t i e s or r e q u i r e d n o t i c e p e r i o d s
o f more t h a n o n e y e a r , l o s s o f t h r e e m o n t h s ' s i m p l e
interest.
(The c u r r e n t p e n a l t y f o r t h e s e v e n t o 31 d a y
a c c o u n t s e t f o r t h a t 12 C . F . R . 1 2 0 4 . 1 2 1 r e m a i n s u n c h a n g e d
and a p p l i e s t o a l l t i m e d e p o s i t s . w i t h o r i g i n a l m a t u r i t i e s o r
r e q u i r e d n o t i c e p e r i o d s o f s e v e n t o 31 d a y s ) .
The new r e g u l a t i o n s a p p l y o n l y t o a c c o u n t s o p e n e d ,
r e n e w e d or e x t e n d e d on o r a f t e r O c t o b e r 1 , 1 9 8 3 .
These
r e g u l a t i o n s do n o t a f f e c t any a c c o u n t s t h a t h a v e n o t
matured p r i o r to t h a t d a t e .
The C o m m i t t e e ' s a c t i o n s w e r e
t a k e n to p r o v i d e d e p o s i t o r y i n s t i t u t i o n s w i t h more
f l e x i b i l i t y i n ma na g i ng t h e i r a s s e t - l i a b i l i t y s t r u c t u r e s .
EFFECTIVE DATE:
October 1, 1983.
C e r ta in conforming
ame ndme nt s to t h e C o m m i t t e e ' s r u l e s w i l l b e e f f e c t i v e
January 1, 1984.
FOR FURTHER INFORMATION CONTACT:
Paul S. P i l e c k i , S e n i o r
C o u n s e l , Bo a r d o f G o v e r n o r s o f t h e F e d e r a l R e s e r v e S y s t e m
( 2 0 2 / 4 5 2 - 3 2 8 1 ) ; Alan P r i e s t , A t t o r n e y , O f f i c e o f t h e
C o m p t r o l l e r o f the C u r r e n c y ( 2 0 2 / 4 4 7 - 1 8 8 0 ) ; J u l e s B e r n a r d ,
Senior A t t o r n e y
F. D o u g l a s B i r d z e l l , C o u n s e l , F e d e r a l
Deposit Insurar i Corporation ( 2 0 2 / 3 8 9 - 4 1 4 7 ) ; R o b e r t H.
Ledig, Attorney Federal Home Loan Bank B o a r d
( 2 0 2 / 3 7 7 - 7 0 5 7 ) ; o r B e t t y A. W h e l c h e l , A t t o r n e y - A d v i s e r ,
Treasury Department ( 2 0 2 / 5 6 6 - 8 7 3 7 ) .
DEPOSITORY
INSTITUTIONS DEREGULATION COMMITTEE
[12 C .F.R.
P A R T 1204]
D o c k e t No.
0031
R e m o v a l of I n t e r e s t Rate C e i l i n g s on T i m e D e p o s i t s
AGENCY:
ACTION:
D e p o s i t o r y I n s t i t u t i o n s D e r e g u l a t i o n Commit t e e .
Fin a l Rule.
*
SUMMARY:
E f f e c t i v e O c t o b e r 1, 1983, the D e p o s i t o r y
I n s t i t u t i o n s D e r e g u l a t i o n C o m m i t t e e ("Com m i t t e e ") has:
(1) e l i m i n a t e d all i n t e r e s t rate c e i l i n g s (a) on all
time d e p o s i t s w i t h o r i g i n a l m a t u r i t i e s or r e q u i r e d n otice
p e r i o d s of m o r e than 31 days, and (b) on time d e p o s i t s of
$2,500 or m o r e w i t h o r i g i n a l m a t u r i t i e s or r e q u i r e d notice
p e r i o d s of seven to 31 days;
(2) e l i m i n a t e d other r e g u l a t i o n s on time d e p o s i t s
e x c e p t fo_r: (a) the m i n i m u m ear l y w i t h d r a w a l pe n a l t i e s ? (b)
a m i n i m u m d e n o m i n a t i o n of $2,500 for c e i l i n g - f r e e time
d e p o s i t s w i t h o r i g i n a l m a t u r i t i e s or r e q u i r e d no t i c e p e r i o d s
of seven to 31 days; (c) the c u r r e n t ceiling on time
d e p o s i t s of less than $2,500 w i t h o r i g i n a l m a t u r i t i e s or
r e q u i r e d n o t i c e p e r i o d s of seven to 31 days? and (d) the
rules of the a g e n c i e s requiring a one p e r c e n t a g e p o i n t
d i f f e r e n t i a l b e t w e e n a loan rate and the rate on a time
d e p o s i t securing a loan? and
(3) e s t a b l i s h e d the f o l lowing new m i n i m u m e a r l y
withdrawal penalties:
(a) for time d e p o s i t s w i t h orig i n a l
m a t u r i t i e s or r e q u i r e d n o t i c e p e r i o d s of 32 d a y s to one
year, loss of one m o n t h ’s simple interest? and (b) for time
d e p o s i t s w i t h o r i g i n a l m a t u r i t i e s or r e q u i r e d n o t i c e p e r i o d s
[Enc. Cir. No. 9545]
2
of m o r e than one year, loss of three m o n ths' s imple
interest.
(The c u r r e n t p e n a l t y for the sev e n to 31 day
a c c o u n t set forth at 12 C. F . R . 1 2 0 4 . 1 2 1 r e m a i n s u n c h a n g e d
and a p p l i e s to all time d e p o s i t s w i t h o r i g i n a l m a t u r i t i e s or
r e q u i r e d n o t i c e p e r i o d s of seven to 31 days).
T h e new r e g u l a t i o n s a p p l y o nly to a c c o u n t s opened,
r e n e w e d or e x t e n d e d on or after O c t o b e r 1, 1983.
These
r e g u l a t i o n s do n o t a f f e c t any a c c o u n t s that h ave n o t
m a t u r e d p r i o r to that date.
The C o m m i t t e e ' s a c t i o n s w e r e
taken to p r o v i d e d e p o s i t o r y i n s t i t u t i o n s w i t h m o r e
f l e x i b i l i t y in m a n a g i n g their a s s e t - l i a b i l i t y s t r u c t u r e s .
E F F E C T I V E DATE:
O c t o b e r 1, 1983.
Certain conforming
a m e n d m e n t s to the C o m m i t t e e ' s rules w i l l be e f f e c t i v e
J a n u a r y 1, 1984.
FOR F U R T H E R I N F O R M A T I O N C O N T A C T :
P aul S. P i l e c k i , S e n i o r
C o u n s e l , B o a r d of G o v e r n o r s of the F e d e r a l R e s e r v e S y s t e m
( 2 0 2 / 4 5 2 — 3281 )? A l a n Priest, A t t o r n e y , O f f i c e of the
C o m p t r o l l e r of the C u r r e n c y ( 2 0 2 / 4 4 7 - 1 8 80 ) ; J u l e s B e r n a r d ,
S e n i o r A t t o r n e y , F. D o u g l a s B i r d z e l l , C o u n s e l , F e d e r a l
D e p o s i t I n s u r a n c e C o r p o r a t i o n ( 2 0 2 / 3 8 9 - 4 1 47 ) ; R o b e r t H.
L edig, A t t o r n e y , F e d e r a l H o m e L o a n B a n k B o a r d
( 2 0 2 / 3 7 7 - 7 0 57 ) ; or B e t t y A. W h e l c h e l , A t t o r n e y - A d v i s e r ,
T r e a s u r y D e p a r t m e n t ( 2 0 2 / 5 6 6 - 8 7 37 ) .
L i s t of S u b j e c t s
in 12 C F R P a r t 1204:
Banks,
bank i n g .
SUPPLEMENTARY INFORMATION;
The D e p o s i t o r y I n s t i t u t i o n s
D e r e g u l a t i o n A c t of 1980 (Title II of P.L. No. 96-221,
12 U.S.C. 3501 , e t . s e q . ) ("DIDA") wa s e n a c t e d to p r o v i d e
for the o r d e r l y p h a s e o u t , and the u l t i m a t e e l i m i n a t i o n of,
c e i l i n g s on the m a x i m u m rates of i n t e r e s t and d i v i d e n d s that
may be p a i d on d e p o s i t accounts.
Under the DIDA, the
C o m m i t t e e is a u t h o r i z e d to p h a s e ou t i n t e r e s t rate c e i l i n g s
by one or m o r e of the m e t h o d s s p e c i f i e d in the Act,
including the c o m p l e t e e l i m i n a t i o n of c e i l i n g s a p p l i c a b l e to
p a r t i c u l a r c a t e g o r i e s of accounts.
The C o m m i t t e e had a d o p t e d a d e r e g u l a t i o n s c h e d u l e (12
C.F.R. 1204.119) that p r o v i d e s for the g r a d u a l r e m oval of
i n t e r e s t rate c e i l i n g s b e g i n n i n g w i t h l onger term a c c o unts.
Under this plan, there are no c e i l i n g s on time d e p o s i t s w i t h
o r i g i n a l m a t u r i t i e s of 2-1/2 y e a r s or m o r e issued on or
after A p r i l 1, 1983.
C e i l i n g s w ere s c h e d u l e d to be r e m oved
on a c c o u n t s w i t h m a t u r i t i e s or r e q u i r e d n o t i c e p e r i o d s of
1-1/2 y e a r s or m o r e on A p r i l 1, 1984; of 6 m o n t h s or m o r e on
A p r i l 1, 1985; and of 14 days or m o r e on M a r c h 31, 1986.
3
S u b s e q u e n t events, h owever, have b r o u g h t into q u e s t i o n
the need to c o n t i n u e the d e r e g u l a t i o n p r o c e s s in a c c o r d a n c e
w i t h the C o m m i t t e e ' s d e r e g u l a t i o n schedule.
In the G a r n - S t
G e r m a i n D e p o s i t o r y I n s t i t u t i o n s A c t of 1982 (Pub. L. 97-320),
C o n g r e s s p r o v i d e d for b o t h (1) the e l i m i n a t i o n of the i n t e r e s t
rate d i f f e r e n t i a l s for all c a t e g o r i e s of insured a c c o u n t s on
or b e f o r e J a n u a r y 1, 1984, and (2) the e s t a b l i s h m e n t of the
c e i l i n g - f r e e m o n e y m a r k e t d e p o s i t a c c o u n t (" M M D A ") no later
than D e c e m b e r 14, 1982.
G i v e n these s t a t u t o r y m a n d a t e s for
the a c c e l e r a t e d e l i m i n a t i o n of the d i f f e r e n t i a l and the
e s t a b l i s h m e n t of the MMDA, the C o m m i t t e e b e g a n to q u e s t i o n
w h e t h e r c e i l i n g s on time d e p o s i t s are still neces s a r y .
Also,
the a u t h o r i z a t i o n of the MMDA, and later the c e i l i n g - f r e e NOW
account, c r e a t e d an a n o m a l o u s s i t u a t i o n w h e r e c e i l i n g s had
b e e n e l i m i n a t e d on h i g h l y liquid s h o r t - t e r m a c c o u n t s and on
l o n g e r - t e r m c e r t i f i c a t e s of d e posit, b u t not on the
i n t e r m e d i a t e accounts.
Depository institutions consequently
b e g a n to find it d i f f i c u l t to b a l a n c e p r o p e r l y their
a s s e t - l i a b i l i t y structures.
The C o m m i t t e e , g i v e n the c i r c u m s t a n c e s , d e c i d e d at its
D e c e m b e r 6, 1982 meeting to seek p u b l i c c o m m e n t on eliminating
the remaining c e i l i n g s and on several m e t h o d s for a c celerating
the d e r e g u l a t i o n of time d e p o sits.
It r e c e i v e d a p p r o x i m a t e l y
365 c o m m e n t s on those p r o p o s a l s .
O v e r half of the c o m m e n t e r s
e x p r e s s e d the v i e w that further d e r e g u l a t i o n should be
p o s t p o n e d b e c a u s e m o r e time was n eeded for d e p o s i t o r y
i n s t i t u t i o n s to a b sorb the c h a n g e s that w e r e taking place as a
r e s u l t of the M MDA and the c e i l i n g - f r e e N O W account.
M a n y of
the r e s p o n d e n t s c o m m e n t e d that the C o m m i t t e e should abide by
the s c h e d u l e that was p u t in p l a c e in A p r i l 1982.
The m o s t
typical res p o n s e was that the C o m m i t t e e was issuing too m a n y
new r e g u l a t i o n s too fast, and that it was hard for the
ind u s t r y to keep up w i t h all the DIDC changes, e s p e c i a l l y when
there wa s short lead time to p r e p a r e for the changes.
C o m m e n t e r s p o i n t e d o u t that it took time to teach e m p l o y e e s
a b o u t the a c c o u n t s so they could e x p l a i n the new rules to the
c u s t o m e r s , as well as m a k e n e c e s s a r y data p r o c e s s i n g changes.
O ver 40 p e r c e n t of the c o m m e n t e r s , however, indicated
s u p p o r t for some form of a c c e l e r a t e d d e r e g u l a t i o n .
These
c o m m e n t e r s p o i n t e d out that d e p o s i t o r s did n o t have the
o p p o r t u n i t y to i n v e s t in c o m p e t i t i v e , insured a c c o u n t s with
m a t u r i t i e s b e t w e e n six and 30 months.
In a d d ition, these
c o m m e n t e r s i n d i c a t e d that d e r e g u l a t i o n of all a c c o u n t s would
a l l o w d e p o s i t o r y i n s t i t u t i o n s to p r i c e their d e p o s i t s in a way
that w o u l d a t t r a c t funds in the m a t u r i t y c a t e g o r i e s that best
m a t c h the m a t u r i t i e s of their loans and i n vestments.
4
A t its M a r c h 1, 1983 m e e t i n g , the C o m m i t t e e v o t e d to
table d i s c u s s i o n of this issue and all the o t h e r a g e n d a items
u n t i l the J u n e m e e t i n g .
In part, that d e c i s i o n r e f l e c t e d the
f a c t that the then p r e v a i l i n g d e r e g u l a t i o n s c h e d u l e c a l l e d for
the m i n i m u m m a t u r i t y of the l o n g - t e r m , c e i l i n g - f r e e a c c o u n t to
be r e d u c e d on A p r i l 1, 1983, from 3-1/2 y e a r s to 2-1/2 y e a r s
and the m i n i m u m m a t u r i t y on the inde x e d small s a v e r s
c e r t i f i c a t e to be r e d u c e d f r o m 30 m o n t h s to 18 m o n ths.
A l t h o u g h i n s t i t u t i o n s had k n o w n of these c h a n g e s for over a
y e a r and had time to p l a n for them, the c h a n g e s w e r e
s i g n i f i c a n t and the C o m m i t t e e b e l i e v e d that i n s t i t u t i o n s
sh o u l d be g i v e n a d d i t i o n a l time to a d j u s t to them b e f o r e
f u r t h e r c h a n g e s w e r e made.
Moreover, depository institutions
w e r e in the p r o c e s s of a d j u s t i n g to the r e c e n t l y a u t h o r i z e d
M M D A and the c e i l i n g - f r e e N C W account.
A t i t s . J u n e 30, 1983 m e e t i n g , the C o m m i t t e e d e t e r m i n e d
that d e p o s i t o r y i n s t i t u t i o n s had had s u f f i c i e n t time to a d j u s t
to p a s t c h a n g e s in a c c o u n t s t r u c t u r e s and to p r e p a r e for the
c o m p l e t e e l i m i n a t i o n of all c e i l i n g s on a c c o u n t s .
Therefore,
it d e c i d e d , e f f e c t i v e O c t o b e r 1, 1983, to e l i m i n a t e v i r t u a l l y
all i n t e r e s t rate c e i l i n g s and other r e g u l a t i o n s g o v e r n i n g
time d e p o s i t s e x c e p t for (1) r e q u i r e d e a r l y w i t h d r a w a l
p e n a l t i e s ; (2) the $2,500 m i n i m u m d e n o m i n a t i o n on the
c e i l i n g - f r e e , seven to 31- day account? and (3) the r u les of
the a g e n c i e s requiring a one p e r c e n t a g e p o i n t d i f f e r e n t i a l
b e t w e e n a loan rate and the rate on a time d e p o s i t securing a
loan.
Thus, r e g u l a t i o n s such as those r e q u i r i n g that time
d e p o s i t s of 1-1/2 y e a r s or m o r e be m a d e a v a i l a b l e in
d e n o m i n a t i o n s of $500 or more, or those r e s t r i c t i n g the
n e g o t i a b i l i t y of the seven to 31 day a c c o u n t , have b een
e l i m i n a t e d w ith r e s p e c t to a c c o u n t s e s t a b l i s h e d on or after
O c t o b e r 1, 1983.
T h e new i n t e r e s t rate ceiling s t r u c t u r e will
be as follows:
5
I n t e r e s t Rate Ce i l i n g
Structure
E f f e c t i v e O c t o b e r 1, 1983
I n t e r e s t Rate Ce i l i n g
Account
Required
Minimum Deposit
Commercial
Banks
S a v i n g s & L oan
A s s o c i a t i o n s and
Savinqs Banks
NOW Accounts
0 - $ 2 ,499
5-1/4%
5-1/4%
Ceiling-free
NOW A c c o u n t s
$2,500
None
None
Passbook Savings
None
5-1/4%
5-1/2%
MMDA
$2,500
None
None
T i m e d e p o s i t s of
7-31 days V
$ 0 - $ 2 ,499
5-1/4%
5-1/2%
T i m e d e p o s i t s of
7-31 days
$2,500
None
None
All time d e p o s i t s
of m o r e than 31 d ays
None
None
None
V
The a g e n c i e s a d vise that d e p o s i t o r y i n s t i t u t i o n s ma y cont i n u e
to issue to g o v e r n m e n t a l u n i t s time d e p o s i t s of less than $2500
with m a t u r i t i e s or requ i r e d n o t i c e p e r i o d s of seven to 31 days,
s u b j e c t to the c u r r e n t ceiling of e i g h t p e r c e n t in e f f e c t for
such d e p o sits.
6
S i n c e a m i n i m u m d e n o m i n a t i o n of $2,-500 w ill still be
r e q u i r e d on c e i l i n g - f r e e , seven to 3 1 - d j y a c c o u n t s , all
r e g u l a t i o n s d e s i g n e d to u p h o l d that r e q u i r e m e n t w i l l r e m a i n in
e f f e c t w i t h r e s p e c t to seven to 3 1 - d a y accounts.
Consequently,
the r e s t r i c t i o n s on loans, a d d i t i o n a l d e p o s i t s , and a u t o m a t i c
tra n s f e r s to other a c c o u n t s set forth in S e c t i o n 1 2 0 4 . 1 2 1 ( b ) ,
(d), and (e) will still a p p l y to such accounts.
In a d d i tion,
since i n t e r e s t c e i l i n g s re m a i n in e f f e c t for N O W a c c o u n t s and
p a s s b o o k a c c o u n t s of less than $2,500, r e s t r i c t i o n s c o n c e r n i n g
w i t h d r a w a l s from seven to 3 1 - d a y time d e p o s i t s in S e c t i o n
1 2 0 4 . 1 2 1 ( f ) will re m a i n in effect.
S i m i l a r l y , since c e i l i n g s w i l l r e m a i n in e f f e c t w i t h r e s p e c t
to time d e p o s i t s of less than $2,500 w i t h o r i g i n a l m a t u r i t i e s or
r e q u i r e d n o t i c e p e r i o d s of seven to 31 days, all r e g u l a t i o n s
d e s i g n e d to e n f o r c e c e i l i n g s shall re m a i n in e f f e c t w i t h r e s p e c t
to such a c c ounts.
C o n s e q u e n t l y , r u les p e r t a i n i n g to p r e m i u m s ,
finders' fees, p r e p a y m e n t of interest, and p a y m e n t of i n t e r e s t in
m e r c h a n d i s e w ill still a p p l y to those seven to 3 1 - d a y a c c o u n t s of
less than $2,500.
The C o m m i t t e e also e s t a b l i s h e d the f o l l o w i n g new m i n i m u m
e a r l y w i t h d r a w a l p e n a l t i e s ; (1) for a c c o u n t s w i t h o r i g i n a l
m a t u r i t i e s or r e q u i r e d n o t i c e p e r i o d s of 32 d a y s to one year,
loss of one m o n t h ' s s imple interest;
and (2) for a c c o u n t s w i t h
o r i g i n a l m a t u r i t i e s or r e q u i r e d n o t i c e p e r i o d s of m o r e than one
year, loss of three months' s imple interest.
It later c l a r i f i e d
its ac t i o n w i t h r e s p e c t to the seven' to 3 1 - d a y a c c o u n t by a
n o t a t i o n vote, retaining the e x isting p e n a l t y and applying it to
all time d e p o s i t s of seven to 31 days.
T h i s p e n a l t y p r o v i d e s for
the f o r f e i t u r e of the g r e a t e r of (1) all i n t e r e s t e a r n e d on the
a m o u n t w i t h d r a w n from the m o s t r e c e n t of the date of d e p o s i t ,
d a t e of m a t u r i t y , or d a t e on w h i c h n o t i c e wa s g i v e n , or (2) all
i n t e r e s t that could have b e e n e a rned on the a m o u n t w i t h d r a w n
during a p e r i o d equal to o n e - h a l f the m a t u r i t y p e r i o d or the
r e q u i r e d n o t i c e period.
D e p o s i t o r y i n s t i t u t i o n s are to invade the p r i n c i p a l of the
account, if n e c e s s a r y , to impose the e a r l y w i t h d r a w a l penalty.
To c a l c u l a t e the i n t e r e s t rate to be u sed in a s s e s s i n g the
p e n a l t y on floating rate or v a r i a b l e rate time d e p o s i t s ,
d e p o s i t o r y i n s t i t u t i o n s should c o n tinue, aft e r O c t o b e r 1, 1983,
to use the p r o c e d u r e s a l r e a d y e s t a b l i s h e d for such c a l c u l a t i o n s ,
w h i c h are d e s c r i b e d in A p p e n d i x A.
The new m i n i m u m e a r l y w i t h d r a w a l p e n a l t y w i l l a p p l y to all
time d e p o s i t c o n t r a c t s e n t e r e d into, renewed, or e x t e n d e d on or
7
after O c t o b e r 1, 1983.
A n y time d e p o s i t issued b e f o r e O c t o b e r 1,
1983, that is not rene w e d or e x t e n d e d on or after that date, will
be s u b j e c t to the ear l y w i t h d r a w a l p e n a l t y in e f f e c t at the time
that the a c c o u n t w a s issued, renewed, or e x t e nded, w h i c h e v e r is
later.
Since e a r l y w i t h d r a w a l p e n a l t i e s c o n t i n u e to a p ply to time
d e p osits, all r e g u l a t i o n s d e s i g n e d to e n f o r c e the p e n a l t i e s
rem a i n in effect.
C o n s e q u e n t l y , any a m e n d m e n t of a time d e p o s i t
that r e s u l t s in a r e d u c t i o n in the m a t u r i t y of a d e p o s i t will
c o n t i n u e to c o n s t i t u t e the p a y m e n t of a time d e p o s i t pri o r to
m a t u r i t y , requiring the i m p o s i t i o n of the e a r l y w i t h d r a w a l
penalty.
Also, c e r t a i n g r a c e p e r i o d s during w h i c h an
a u t o m a t i c a l l y r e n e w e d time d e p o s i t ma y be paid w i t h o u t the
i m p o s i t i o n of the p e n a l t y still will be p e r m i t t e d .
Finally, all
d i s c l o s u r e and a d v e r t i s i n g rules c o n c e r n i n g e a r l y w i t h d r a w a l
p e n a l t i e s w ill rem a i n in effect.
The new m i n i m u m ear l y w i t h d r a w a l p e n a l t y will be m o r e severe
than existing p e n a l t i e s under l i m i t e d c i r c u m s t a n c e s .
For
example, the c u r r e n t m i n i m u m ear l y w i t h d r a w a l p e n a l t y for 91-day,
$2,500 time d e p o s i t s is equal only to all i n t e r e s t earned on the
amount withdrawn.
The new m i n i m u m e a r l y w i t h d r a w a l p e n a l t y on
those 9 1 - d a y i n s t r u m e n t s that are r e n e w e d or e x t e n d e d on or after
O c t o b e r 1, 1983, will be m o r e severe during the fir s t 31 days of
the accounts, since the new m i n i m u m p e n a l t y
on the 91-day
a c c o u n t is the loss of at lea s t one m o n t h ' s simple interest.
All a c c o u n t s that w e r e issued w i t h fixed m a t u r i t i e s prior
to O c t o b e r 1, 1983, that are r e n ewed or e x t e n d e d on or after that
date, w ill be s u b j e c t to, and m u s t be m o d i f i e d to reflect, the
new early w i t h d r a w a l p e n a l t i e s .
W i t h regard, however, to
a c c o u n t s that are s u b j e c t only to r e q u i r e d no t i c e b e f o r e
w i t h d r a w a l and which, b e c a u s e of their n o t i c e feature, m a y not
a c t u a l l y be r e n ewed or e x t e n d e d on or after O c t o b e r 1, 1983,
d e p o s i t o r y i n s t i t u t i o n s m a y e l e c t e i t h e r - (1) to c o n t i n u e to apply
the e a r l y w i t h d r a w a l p e n a l t y e s t a b l i s h e d by the r e g u l a t i o n s
a p p l i c a b l e to the a c c o u n t p r i o r to O c t o b e r 1, 1983; or (2) to
m o d i f y the a c c o u n t s to i n c o r p o r a t e the new m i n i m u m early
withdrawal penalties.
B o t h the e a r l y w i t h d r a w a l p e n a l t i e s for time d e p o s i t s and
the $2,500 m i n i m u m d e n o m i n a t i o n on the c e i l i n g - f r e e , seven to 31da y a c c o u n t w e r e reta i n e d to p r e v e n t an a c c e l e r a t e d o u t f l o w from
p a s s b o o k s a v i n g s accounts.
In ad d i t i o n , the e a r l y w i t h d r a w a l
p e n a l t y was b e l i e v e d to be d e s i r a b l e to p r o t e c t d e p o s i t o r y
i n s t i t u t i o n s that in v e s t in l o n g - t e r m a s s e t s on the planning
p r e s u m p t i o n that the d e p o s i t s w ill be m a i n t a i n e d unt i l maturity.
8
The new r e g u l a t i o n s e f f e c t i v e l y w i l l e l i m i n a t e all
r e g u l a t o r y d i s t i n c t i o n s , other than the e a r l y w i t h d r a w a l
p e n a l t i e s , among those a c c o u n t s e s t a b l i s h e d or r e n e w e d on or
after O c t o b e r 1, 1983, that e i t h e r (1) have o r i g i n a l
m a t u r i t i e s of m o r e than 31 days, or (2) are of $2,500 or m o r e
and have o r i g i n a l m a t u r i t i e s of 31 d a y s or less.
Thus, the
C o m m i t t e e ' s a c t i o n s i m p l i f i e s the c u r r e n t a c c o u n t s t r u c t u r e
and is i n t e n d e d to g i v e d e p o s i t o r y i n s t i t u t i o n s the f l e x i
b i l i t y to m a n a g e their l i a b i l i t i e s in such a w a y as to a t t r a c t
d e p o s i t s in m a t u r i t i e s that m a t c h their a s s e t m a t u r i t i e s .
In
this context, it s hould be noted that the r e g u l a t i o n s e s
tablish the m i n i m u m e a r l y w i t h d r a w a l p e n a l t i e s and r e q u i r e
m e n t s a p p l i c a b l e to a c c o unts.
Depository
i n s t i t u t i o n s may
e s t a b l i s h stri c t e r e a r l y w i t h d r a w a l p e n a l t i e s , if they so
desire.
S i m i l a r l y , d e p o s i t o r y i n s t i t u t i o n s m a y l i m i t the
i n t e r e s t they p a y on b o t h c e i l i n g - f r e e a c c o u n t s and a c c o u n t s
s u b j e c t to ceilings, sc long as the rate of i n t e r e s t p a i d in
the latter case is less than the rate e s t a b l i s h e d by
regulation.
Th e r e g u l a t i o n s g o v e r n i n g time d e p o s i t s issued
b e f o r e O c t o b e r 1, 1983, p a s s b o o k s a v i n g s a c c o u n t s , m o n e y
m a r k e t d e p o s i t ac c o u n t s , and N O W a c c o u n t s are no t a f f e c t e d by
the C o m m i t t e e ' s action.
The C o m m i t t e e , as is r e q u i r e d by the R e g u l a t o r y
F l e x i b i l i t y A c t (5 U.S.C. 603, et s e q . ), c o n s i d e r e d the
p o t e n t i a l e f f e c t on small e n t i t i e s of r e moving i n t e r e s t rate
c e i l i n g s and r e g u l a t i o n s on time d e p o s i t s w i t h o r i g i n a l
m a t u r i t i e s or r e q u i r e d n o t i c e p e r i o d s of m o r e than 31 d a y s and
time d e p o s i t s of $2,500 or m o r e w i t h o r i g i n a l m a t u r i t i e s or
r e q u i r e d n otice p e r i o d s of 31 d a y s or less.
The C o m m i t t e e ' s
ac t i o n in this regard w i l l not impose any new reporting or
r e c o r d - k e e p i n g r e q u i r e m e n t s.
Small e n t i t i e s w h i c h are
d e p o s i t o r s should b e n e f i t g e n e r a l l y from the C o m m i t t e e ' s
pro p o s a l , since they will have a w i d e r s e l e c t i o n of
i n s t r u m e n t s that w i l l pay a m a r k e t rate of return.
Small
e n t i t i e s whi c h are d e p o s i t o r y i n s t i t u t i o n s also should b e n e f i t
g e n e r a l l y from the C o m m i t t e e ' s p r o p o s a l , since they will be
bet t e r able to p r o p e r l y b a l a n c e their a s s e t - l i a b i l i t y
s tructures.
If, h o wever, l o w - y i e l d i n g d e p o s i t s s h i f t into the
c e i l i n g - f r e e a c c o u n t s as a r e s u l t of the C o m m i t t e e ' s action,
small e n t i t i e s w h i c h are d e p o s i t o r y i n s t i t u t i o n s may
e x p e r i e n c e i n c r e a s e d costs.
The staff study, h o wever,
c o n c l u d e d that any s h i f t of l o w - y i e l d i n g d e p o s i t s into the
c e i l i n g - f r e e a c c o u n t s due to the C o m m i t t e e ' s a c t i o n is li k e l y
to be m inimal, m o s t such t r a n s f e r s having taken p l a c e upon the
a u t h o r i z a t i o n of the m o n e y m a r k e t d e p o s i t a c c o u n t and the
c e i l i n g - f r e e N O W account.
Th e C o m m i t t e e f u r t h e r imposed a
$2,500 m i n i m u m on c e i l i n g - f r e e a c c o u n t s w i t h o r i g i n a l
9
m a t u r i t i e s or r e q u i r e d n otice p e r i o d s of less than 31 d ays to
d i s c o u r a g e s udden shifts from l o w - y i e l d i n g s h o r t - t e r m d e p o s i t s
to c e i l i n g - f r e e accounts.
P u r s u a n t to its a u t h o r i t y u n der T i t l e II of P u b l i c Law
96-221 (94 Stat. 142; 12 U.S.C. Sec. 3501, et s e q . ) to
p r e s c r i b e rules g o v e r n i n g the p a y m e n t of i n t e r e s t and
d i v i d e n d s on d e p o s i t s and a c c o u n t s of f e d e r a l l y insured
c o m m e r c i a l banks, s a v i n g s and loan a s s o c i a t i o n s , and s a v i n g s
banks, the C o m m i t t e e a m e n d s P a r t 1204 —
I n t e r e s t on Dep o s i t s ,
as follows:
1.
E f f e c t i v e O c t o b e r 1, 1983, by adding
1 2 04.123 to read as follows:
a new s e c t i o n
S E C T I O N 1 2 0 4 . 1 2 3 - P a y m e n t of I n t e r e s t on T ime
D e p o s i t s I ssued On or A f t e r O c t o b e r 1, 1983.
(a)
N o t w i t h s t a n d i n g any other p r o v i s i o n of P a r t
1204, a c o m m e r c i a l bank, s a v i n g s bank or s a v i n g s and loan
a s s o c i a t i o n may pay i n t e r e s t at any rate ag r e e d to by the
d e p o s i t o r on any time d e p o s i t issued, renewed, or e x t e n d e d on
or after O c t o b e r 1, 1983, that e ither (1) is in an a m o u n t of
$2,500 or more, or (2) has an o r i g i n a l m a t u r i t y or required
notice p e r i o d p r i o r to w i t h d r a w a l of m o r e than 31 days.
(b)
An i n s t i t u t i o n m a y p e r m i t a d d i t i o n a l d e p o s i t s
to be made to any time d e p o s i t issued p u r s u a n t to this
s e c t i o n at any time pri o r to its m a t u r i t y w i t h o u t extending
the m a t u r i t y of all or a p o r t i o n of the e n t i r e b a l a n c e in
the account.
2.
E f f e c t i v e O c t o b e r 1, 1983, by d e s i g n a t i n g sect i o n
1204 . 1 0 3 as p a r a g r a p h (a), by adding a new s e n t e n c e at the
b e g i n n i n g thereof, and by adding new p a r a g r a p h s (b), (c),
and (d) to read as follows:
SECTION 1204.103 —
(a)
o nly
P e n a l t y for E a r l y W i t h d r a w a l s
The f o l l owing m i n i m u m ear l y w i t h d r a w a l p e n a l t i e s apply
to time d e p o s i t c o n t r a c t s e n t e r e d into, renewed, or
10
e x t e n d e d b e t w e e n J u n e 2, 1980, and S e p t e m b e r 30, 1983,
and that have not b e e n r e n e w e d or e x t e n d e d on or after
O c t o b e L 1, 1983.
★
★
★
*
(b)
The fol l o w i n g m i n i m u m e a r l y w i t h d r a w a l p e n a l t i e s shall
a p p l y to time d e p o s i t c o n t r a c t s e n t e r e d into, r e n e w e d or
e x t e n d e d on or after O c t o b e r 1, 1983:
(1)
W h e r e a time d e p o s i t w i t h an o r i g i n a l m a t u r i t y
or r e q u i r e d n o t i c e p e r i o d of seven to 31 days, or any
p o r t i o n thereof, is p aid b e f o r e m a t u r i t y , a d e p o s i t o r shall
f o r f e i t an a m o u n t equal to the g r e a t e r of (i) all i n t e r e s t
e a r n e d on the a m o u n t w i t h d r a w n from the m o s t r e c e n t of the
d a t e of d e p o s i t , d ate of m a t u r i t y , or d a t e on w h i c h n o tice
wa s g i v e n , or (ii) all i n t e r e s t that could have b e e n ea r n e d
on the a m o u n t w i t h d r a w n during a p e r i o d equal to o n e - h a l f
the m a t u r i t y p e r i o d or the r e q u i r e d n o t i c e period.
(2)
W h e r e a time d e p o s i t w i t h an o r i g i n a l m a t u r i t y
or r e q u i r e d n o t i c e p e r i o d of 32 d a y s to one year, or any
p o r t i o n thereof, is p a i d b e f o r e m a t u r i t y , a d e p o s i t o r shall
f o r f e i t an a m o u n t at l e a s t equal to one m o n t h ' s i n t e r e s t
earned, or that could have b e e n earned, on the a m o u n t
w i t h d r a w n at the n o m i n a l (simple) i n t e r e s t rate being p aid
on the d e p o s i t , r e g a r d l e s s of the l e n g t h of time the funds
w i t h d r a w n have r e m a i n e d on d e posit.
(3)
W h e r e a time d e p o s i t w i t h an o r i g i n a l m a t u r i t y
or r e q u i r e d n o t i c e p e r i o d of m o r e than one year, or any
p o r t i o n thereof, is p aid b e f o r e m a t u r i t y , the d e p o s i t o r
shall f o r f e i t an a m o u n t at l e a s t equal to three months'
i n t e r e s t earned, or that could have b e e n earned, on the
a m o u n t w i t h d r a w n at the n o m i n a l (simple) i n t e r e s t rate being
p a i d on the depo s i t , r e g a r d l e s s of the l e n g t h of time the
f u nds w i t h d r a w n have r e m a i n e d on deposit.
(c) N o t w i t h s t a n d i n g p a r a g r a p h (a), w h e r e a time d e p o s i t of
$2,500 to less than $ 1 0 0,000, w i t h an o r i g i n a l m a t u r i t y of
91 days, that has b e e n issued, r e n e w e d or e x t e n d e d b e f o r e
O c t o b e r 1, 1983, but not rene w e d or e x t e n d e d on or after
that date, is p a i d b e f o r e m a t u r i t y , a d e p o s i t o r shall
f o r f e i t an a m o u n t equal to at l e a s t all i n t e r e s t e a r n e d on
the a m o u n t w i t h d r a w n .
(d) N o t w i t h s t a n d i n g p a r a g r a p h (a), w h e r e a n o n n e g o t i a b l e
time d e p o s i t of $2,500 or more, w i t h an o r i g i n a l m a t u r i t y or
11
r e q u i r e d n otice p e r i o d of seven to 31 days, that has been
issued renewed or e x t e n d e d b e f o r e O c t o b e r 1, 1983, b u t not
rene w e d or e x t e n d e d on or after that date, is p a i d bef o r e
m a t u r i t y , the d e p o s i t o r shall f o r f e i t an a m o u n t equal to at
l e a s t the g r e a t e r of —
(i) all i n t e r e s t e arned on the a m o u n t w i t h d r a w n
from the m o s t r e c e n t of the d a t e of dep o s i t , d a t e of
mat u r i t y , or d a t e on w h i c h n o t i c e w a s g i v e n , or
(ii) all i n t e r e s t that could have b e e n earned on
the a m o u n t w i t h d r a w n during a p e r i o d equal to o n e - h a l f the
m a t u r i t y p e r i o d or req u i r e d n o t i c e period.
3.
E f f e c t i v e O c t o b e r 1, 1983,
as follows:
"seven
Section 1204.121
(a) by d e s i g n a t i n g the name of
to 3 1 - d a y time deposits"?
paragraph
(b) by deleting
(a) thereof?
the word
(c) by revising p a r a g r a p h
is amended
the s e c t i o n
"nonnegotiable"
(c)
to be
from
to read as follows:
"(c) S e c t i o n 102 of this p a r t shall not apply to
time d e p o s i t s issued under this section.
W h e r e all or any
p a r t of a time d e p o s i t issued under this s e c t i o n is
w i t h d r a w n w i t h i n one b u s i n e s s day after the m a t u r i t y date of
the d e p o s i t or the date of e x p i r a t i o n of n o t i c e of
w i t h d r a w a l , no ear l y w i t h d r a w a l p e n a l t y is r e q u i r e d to be
a p p l i e d on the a m o u n t w i t h d r a w n . "
4.
E f f e c t i v e O c t o b e r 1, 1983, the following s e c t i o n s of
P a r t 1204 are repealed:
1204.104, 1204.105, 1204.106,
1204.112, 1204.114, 1204.116, 1204.118, 1204.119, and
1204.120.
5.
E f f e c t i v e J a n u a r y 1, 1984, p a r a g r a p h s
s e c t i o n 1 2 0 4 . 1 0 3 are repealed.
By Ord e r of
(c) and
(d) of
the C o m m i t t e e , A u g u u t 18,
__
f/AJn C-.
Mark G. Beader
Executive Secretary
1983.
12
APPENDIX A
C a l c u l a t i n g the E a r l y W i t h d r a w a l P e n a l t y
for F l oating R ate T i m e D e p o s i t s
If an i n t e r e s t rate on a time d e p o s i t is tied to an
index that is b e y o n d the d e p o s i t o r y i n s t i t u t i o n ' s c o n trol
(e , g .. T r e a s u r y s e c u r i t y rate, c o m m e r c i a l pap e r rate,
F e d e r a l fun d s rate, F e d e r a l R e s e r v e d i s c o u n t rate) for the
e n t i r e term of the d e posit, the i n s t i t u t i o n m a y base the
simple i n t e r e s t rate, for p u r p o s e s of c a l c u l a t i n g the
m i n i m u m e a r l y w i t h d r a w a l p e n a l t y , on the rate in e f f e c t on
the d ate the a c c o u n t w a s opened, or on the date of
w i t h d r a w a l , or on an a v e r a g e of the r a tes in e f f e c t during
the term of the deposit.
The i n s t i t u t i o n m u s t specify,
however, w h e t h e r it w i l l use the initial i n t e r e s t rate, the
rate on the d ate of w i t h d r a w a l , or the a v e r a g e rate.
If the
i n t e r e s t rate on a time d e p o s i t is not tied to an index, bu t
instead varies' in a p r e c i s e wa y over the term of the
d e posit, or the r e l a t i o n s h i p of the rate c h a n g e s in regard
to the index (e . g ., the c o m m e r c i a l pap e r rate m i n u s 50 b a sis
p o i n t s for the f i r s t six m o n t h s of the i n s t r u m e n t and the
c o m m e r c i a l p a p e r rate m i n u s 100 b a s i s p o i n t s thereafter),
then the d e p o s i t o r y i n s t i t u t i o n m u s t c o m p u t e the m i n i m u m
e a r l y w i t h d r a w a l p e n a l t y using the a v e r a g e of the simple
i n t e r e s t rates on the d e p o s i t during the time p e r i o d that
the d e p o s i t was o u t s t a n d i n g .
If the i n t e r e s t rate is e s t a b l i s h e d at regular
i n t e r v a l s and r e m a i n s in e f f e c t for regular p e r i o d s (e . g .,
the rate is e s t a b l i s h e d once a m o n t h and re m a i n s in e f f e c t
for one m o n th), the d e p o s i t o r y i n s t i t u t i o n m u s t c a l c u l a t e
the a v e r a g e simple i n t e r e s t rate by taking the sum of the
r a tes e s t a b l i s h e d at each int e r v a l w h i l e the funds w e r e on
d e posit, d i v i d e d by the n umber of p e r i o d s the f u nds w e r e on
deposit.
E a c h p a r t i a l p e r i o d w ill be c o n s i d e r e d a full
p e r i o d for the p u r p o s e of this c a l c u l a t i o n .
If the l ength of the p e r i o d s for w h i c h rates are
e f f e c t i v e v a r ies, the d e p o s i t o r y i n s t i t u t i o n m u s t c a l c u l a t e
the a v e r a g e s imple i n t e r e s t rate by div i d i n g the a m o u n t of
time a d e p o s i t w a s o u t s t a n d i n g into equal p e r i o d s and then
adding the rates that w e r e in e f f e c t during those p e r i o d s
and divi d i n g by the n umber of per i o d s .
The p e r i o d used
13
should be the s h o r t e s t p e r i o d for w h i c h a rate w a s in
effect.
For e x ample, a time d e p o s i t m i g h t have the
f o l l o w i n g rates in e f f e c t for the fol l o w i n g p e r i o d s at the
time a d e p o s i t o r w i s h e d to w i t h d r a w the funds:
6 months
(percent)
1-1/2 y e a r s
1 year
............................................ 15
(percent)
(percent)
......................................... 16
............................................... 14
The total a m o u n t of time the d e p o s i t wa s o u t s t a n d i n g was 3
y e a r s (6 m o n t h s + 1-1/2 y e a r s + 1 year).
T h i s 3-year p e r i o d
w o u l d then be d i v i d e d into 6 p e r i o d s of 6 m o n t h s each.
Then
the rates in e f f e c t for each p e r i o d w o u l d be:
1st six
m o n t h p e r i o d (percent)
...............................15
2nd six
m o n t h p e r i o d (percent)
...............................16
3rd six
m o n t h p e r i o d (percent)
............................... 16
4th six
m o n t h p e r i o d (percent)
............................... 16
5th six
m o n t h p e r i o d (percent)
............................... 14
6th s i x ' m o n t h p e r i o d
(percent)
............................. 14
To c a l c u l a t e the a v e r a g e simple i n t e r e s t rate, the rate in
e f f e c t during each p e r i o d w o u l d be add e d to g e t h e r - 15 + 16 + 16 + 16 + 14 + 14 = 91
The resulting sum w o u l d then be d i v i d e d by the number of
periods—
91 d i v i d e d by 6-- to y i e l d an a v e r a g e simple
i n t e r e s t rate of 15.17 percent.
L u m p sum p a y m e n t s of cash that w o u l d be r e garded as
i n t e r e s t (see 12 C F R 1 2 0 4 . 1 0 9 and 12 C F R 1 2 0 4 . 1 1 1 ) , m u s t be
taken into a c c o u n t in computing the p e n a l t y rate. A n y
l u m p - s u m p a y m e n t m u s t be p r o r a t e d over the life of the
deposit.
The p o r t i o n that is a t t r i b u t e d to the time p e r i o d
during w h i c h the d e p o s i t wa s o u t s t a n d i n g m u s t be reg a r d e d as
i n t e r e s t for p u r p o s e s of computing the p e n a l t y rate.
The
p o r t i o n a t t r i b u t a b l e to the remaining life of the d e p o s i t is
r e g a r d e d as u n e a r n e d i n t e r e s t and m u s t be d e d u c t e d from the
p r i n c i p a l a m o u n t of the d e p o s i t and r e t u r n e d to the
ins ti tu t i o n .
@FedFRASER