Prohibition Against Payment of Interest on Demand Deposits, 42015-42020 [2011-17886]
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Federal Register / Vol. 76, No. 137 / Monday, July 18, 2011 / Rules and Regulations
CATTLE AND CALVES 1—Continued
State/unit
1,000 head
Directors
Total ...................................................................................................................................................................
550
....................
35. Mid-Atlantic ................................................................................................................................................................
Maryland ...................................................................................................................................................................
West Virginia ............................................................................................................................................................
....................
192
400
1
....................
....................
Total ...................................................................................................................................................................
592
....................
36. Southeast ...................................................................................................................................................................
Alabama ....................................................................................................................................................................
Georgia .....................................................................................................................................................................
South Carolina ..........................................................................................................................................................
....................
1,253
1,100
385
3
....................
....................
....................
Total ...................................................................................................................................................................
2,738
....................
37. Southwest ..................................................................................................................................................................
California ...................................................................................................................................................................
Nevada .....................................................................................................................................................................
....................
5,283
450
6
....................
....................
Total ...................................................................................................................................................................
5,733
....................
38. Importer 2 ...................................................................................................................................................................
6,887
7
1 2008,
2 2007,
*
2009, and 2010 average of January 1 cattle inventory data.
2008, and 2009 average of annual import data.
*
*
*
Dodd-Frank Act’s repeal of Section
19(i). The final rule also repeals the
Board’s published interpretation of
Regulation Q and removes references to
Regulation Q found in the Board’s other
regulations, interpretations, and
commentary.
*
Dated: July 12, 2011.
Rayne Pegg,
Administrator, Agricultural Marketing
Service.
[FR Doc. 2011–17885 Filed 7–15–11; 8:45 am]
BILLING CODE P
DATES:
Effective Date: July 21, 2011.
as it may deem necessary to effectuate
the purposes of this section and prevent
evasions thereof. * * *’’ The Board
promulgated Regulation Q on August
29, 1933 to implement Section 19(i) of
the Act. Section 627 of the Dodd-Frank
Act repeals Section 19(i) of the Act in
its entirety, effective July 21, 2011.
FOR FURTHER INFORMATION CONTACT:
12 CFR Parts 204, 217, and 230
Regulations D, Q, and DD
[Docket No. R–1413]
RIN 7100–AD 72
Prohibition Against Payment of
Interest on Demand Deposits
The Board is publishing a
final rule repealing Regulation Q,
Prohibition Against Payment of Interest
on Demand Deposits, effective July 21,
2011. Regulation Q was promulgated to
implement the statutory prohibition
against payment of interest on demand
deposits by institutions that are member
banks of the Federal Reserve System set
forth in Section 19(i) of the Federal
Reserve Act (‘‘Act’’). Section 627 of the
Dodd-Frank Wall Street Reform and
Consumer Protection Act (‘‘Dodd-Frank
Act’’) repeals Section 19(i) of the
Federal Reserve Act effective July 21,
2011. The final rule implements the
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On April 14, 2011, the Board
published in the Federal Register a
request for comment on its proposal to
repeal Regulation Q effective July 21,
2011 (76 FR 20892, Apr. 14, 2011). In
its request for comment, the Board also
sought comment on all aspects of the
proposal, and also sought comment on
four specific issues related to the
proposal:
1. Does the repeal of Regulation Q
have significant implications for the
balance sheets and income of depository
institutions? What are the anticipated
effects on bank profits, on the allocation
of deposit liabilities among product
offerings, and on the rates offered and
fees assessed on demand deposits,
sweep accounts, and compensating
balance arrangements?
2. Does the repeal of Regulation Q
have any implications for short-term
funding markets such as the overnight
federal funds market and Eurodollar
markets, or for institutions such as
institution-only money market mutual
funds that are active investors in shortterm funding markets?
3. Is the repeal of Regulation Q likely
to result in strong demand for interestbearing demand deposits?
I. Prohibition Against Payment of
Interest on Demand Deposits
Board of Governors of the
Federal Reserve System (Board)
ACTION: Final rule.
AGENCY:
SUMMARY:
II. Request for Public Comment
Sophia H. Allison, Senior Counsel (202/
452–3565), Legal Division, or Joshua S.
Louria, Financial Analyst (202/263–
4885), Division of Monetary Affairs; for
users of Telecommunications Device for
the Deaf (TDD) only, contact (202/263–
4869); Board of Governors of the Federal
Reserve System, 20th and C Streets,
NW., Washington, DC 20551.
SUPPLEMENTARY INFORMATION:
FEDERAL RESERVE SYSTEM
Section 19(i) of the Federal Reserve
Act (‘‘Act’’) (12 U.S.C. 371a) generally
provides that no member bank ‘‘shall,
directly or indirectly, by any device
whatsoever, pay any interest on any
deposit which is payable on demand.
* * *’’ Section 19(i) was added to the
Act by Section 11 of the Banking Act of
1933 (48 Stat. 162, 181). Section 324 of
the Banking Act of 1935 (49 Stat. 684,
714) amended Section 19(a) of the Act
to authorize the Board, ‘‘for the
purposes of this section, to define the
terms ‘demand deposits’, ‘gross demand
deposits,’ ‘deposits payable on demand’
[and] to determine what shall be
deemed to be a payment of interest, and
to prescribe such rules and regulations
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4. Does the repeal of Regulation Q
have any implications for competitive
burden on smaller depository
institutions?
The comment period closed on May
16, 2011.
III. Public Comments
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a. Summary
The Board received a total of 62
comments on the proposed rule. Of
these, 45 comments were received from
40 banks,1 6 comments were received
from trade associations, 4 comments
were received from other types of
entities, and 7 comments were received
from individuals. Of the comments
received on the proposed rule, 6
comments were in favor of the proposed
rule, 54 comments were opposed to the
proposed rule, and 2 comments neither
supported nor opposed the proposed
rule but commented on other aspects of
the proposal. A number of commenters
specifically addressed one or more of
the four specific questions the Board
asked in the proposed rule separately
from their general comments on the
proposed rule.
b. Comments in Favor of the Proposed
Rule
One financial group expressed
support for the proposed rule, stating
that the commenter looked forward to a
fair and competitive market that is no
longer manipulated through regulation
by lobbyists for money market funds
and large banks. Another commenter, an
individual, opined that the proposal
‘‘repeals an arbitrary and basically nonfunctioning rule’’ and would ‘‘allow
more transparency and competition in
this arena’’ that ‘‘will force banks to
innovate and to lower costs.’’ This
commenter asserted that the repeal
would ‘‘lead to more simplicity in
deposit offerings and to less rationale
for current workarounds’’ such as NOW
accounts.
A trade association commented that
the repeal could result in a more stable
source of capital for banks and provide
financial professionals with another
competitive investment alternative. This
commenter also opined that taxes on
interest paid would increase revenues
for the U.S. Treasury, and asserted that
‘‘there inherently will be new economic
dynamics that must be considered when
negotiating fees and rates.’’ This
commenter further asserted that this
would ‘‘force financial professionals
and corporate treasurers to consider
how to effectively rebalance their
deposit portfolios in light of the new
1 More than one person from the same institution
submitted comments in some cases.
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products and rates structures,’’ and that
they would have ‘‘another option in
terms of liquidity.’’ This commenter
expected demand for interest-bearing
demand deposits to increase after the
repeal.
One bank commented in support of
the proposal because ‘‘price controls
should not be the subject of government
regulation.’’ This commenter suggested
that the repeal would enable the bank to
compete for corporate demand deposits
without having to sweep them into
other off-balance-sheet investments.
Another bank commented favorably on
the repeal, arguing that Regulation Q
‘‘has been pretty much hollowed out
and therefore rendered irrelevant
through the years.’’
c. Comments Opposed to the Proposed
Rule
Most of the comments received
opposed the repeal of Regulation Q.
Several commenters indicated that they
believe that the repeal would have
‘‘devastating’’ effects on smaller and
community banks. Commenters also
indicated that they expect many
detrimental effects for institutions from
the repeal, including increased cost of
funding, the addition of increased
interest rate risk to institution balance
sheets, increased expenses, decreased
net interest margins, decreased earnings,
decreased profits, and the ‘‘potential to
place many banks in a liability sensitive
position.’’ Commenters also expected
detrimental effects for institutions’
customers, including decreased credit
availability, increased costs of credit,
and increased fees and costs of services.
A number of commenters argued that
the repeal comes at a time when the
banking industry in general, and the
community banking industry in
particular, is already stressed and facing
challenges to continued viability and
profitability, as well as increased
regulatory burden, particularly with
new interchange fee regulations. Some
commenters contended that there is
currently little demand for loans, and
that without loan demand the increased
cost of funds represented by paying
interest on demand deposits would
result in decreased income. One
commenter argued that the payment of
interest on balances maintained in
accounts at Federal Reserve Banks is not
sufficient to offset the cost of paying
interest on demand deposits.
A number of commenters asserted
that the interest-free demand deposit
base is the primary franchise builder for
community banks and the largest source
of fixed-rate funding. One commenter
argued that such deposits ‘‘are the
lifeblood of community banks’’ who
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lend this money back into the local
market at competitive rates to promote
local lending for housing, consumer
lending and small business lending.
Commenters argued that smaller
institutions, as they lose their demand
deposit base, would have to access other
short-term funding sources, which
would increase costs in those markets.
Commenters also argued that the repeal
would increase the concentration of
financial assets in the banking sector as
funds move out of investments such as
money market mutual funds into
interest-bearing demand deposits,
making nonbank money markets less
liquid, less robust, less efficient, and
more expensive. One commenter further
argued that the outflow of funds from
money market mutual funds into
interest-bearing demand deposits would
damage the commercial paper market,
since money market mutual funds are
major purchasers of commercial paper.
Another commenter argued that the
repeal would harm the market for
municipal bonds, because community
banks would be no longer able to buy
fixed-rate bank-qualified municipal
bonds.
Several commenters stated that they
expect larger and ‘‘too big to fail’’ banks,
which they believe already have a
competitive advantage, to draw
commercial demand depositors away
from smaller and community banks
with expensive marketing programs and
offers of higher interest rates with which
smaller institutions cannot compete.
Some commenters asserted that these
customers, once drawn away to larger
banks, will suffer decreases in service
levels compared to what they received
from smaller banks because the business
model of smaller banks focuses on
relationships and service levels. One
commenter asserted that the repeal of
Regulation Q would not enable smaller
and community banks to compete with
larger institutions because, according to
the commenter, community banks
mostly compete with one another and
not with larger institutions. Other
commenters asserted that troubled
banks would be likely to try to ‘‘buy’’
demand deposits by offering
unsustainably high interest rates,
placing the banking system at risk for
more bank failures and increasing costs
to the FDIC’s bank insurance fund. One
commenter argued that large banks that
are funded with off-balance-sheet
sources in order to avoid FDIC
insurance premiums would see the
repeal as a way to ‘‘buy’’ domestic
deposits, ‘‘robbing’’ local communities
of needed capital.
Some commenters asserted that the
movement of funds from non-interest-
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bearing demand deposits into interestbearing demand deposits would take
such deposits outside of the unlimited
FDIC insurance coverage currently
available for non-interest-bearing
transaction accounts. One commenter
argued that the unlimited insurance for
such accounts created moral hazard by
reducing depositor incentives to
monitor institutions and by encouraging
institutions to engage in riskier behavior
secure in the knowledge that their
demand depositors will not move. This
commenter argued that the repeal of
Regulation Q will increase these risks
because depositors could move freely
from interest-bearing to non-interestbearing demand deposits in times of
stress, thereby creating effective
unlimited insurance on all demand
deposits.
Several commenters argued that the
effects of the repeal may be less visible
in a low interest rate environment but
would be more pronounced as interest
rates begin to rise. Some commenters
argued that the repeal would threaten
the viability of many institutions in a
rising rate environment. Another
commenter argued that the effect would
be magnified by the combination of
rising interest rates and the expiration of
the FDIC’s program of unlimited
insurance for non-interest-bearing
transaction accounts in 2012.
Some comments opposed to the
repeal asserted that the provision that
became Section 627 of the Dodd-Frank
Act was inserted into the bill late in the
process, and was not debated or heard
in the House or Senate Committees. A
few commenters questioned the stated
rationale for interest on demand
deposits as benefitting small businesses.
These commenters asserted that a
typical small business maintains on
average about $10,000 in a demand
deposit, which even at a two percent
interest rate would still earn the small
business only $200 in one year. One of
these commenters asserted that banks
would have to increase fees to make up
for the increased cost associated with
paying interest on demand deposits,
eroding the $200-per-year figure to
approximately $100 per year. This
commenter argued that $100 or $200 per
year was not sufficient to permit such
businesses to grow or create jobs.
Several commenters argued that the
Board should not repeal Regulation Q,
or should delay the effective date of the
repeal until studies of the impact of the
repeal, including safety and soundness
effects, could be conducted and
considered. Some commenters
suggested that the Board advocate before
the Congress for a repeal of Section 627
of the Dodd-Frank Act (the provision
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that repeals the statutory prohibition
against payment of interest on demand
deposits), and some contended that the
Board simply should retain or reinstate
Regulation Q. One commenter, noting
that the Board would no longer have
statutory authority to retain Regulation
Q after July 21, 2011, asserted that the
Board nevertheless has the authority to
issue a policy statement prohibiting the
payment of interest on demand deposits
until the banking agencies studied the
safety and soundness implications of
the repeal and determined that it was
safe and sound to permit payment of
such interest. Another commenter
argued that the repeal of Regulation Q
would create systemic risk and that the
Board should use its systemic risk
authority under the Dodd-Frank Act to
prevent the repeal from taking effect.
Another commenter suggested a twostage process, repealing the regulation
in the first phase, and then starting a
second phase of twelve to eighteen
months within which the existing
interpretations of Regulation Q would
remain in effect to give the FDIC the
opportunity to consider whether to
adopt some or all of them.
A few commenters argued that,
instead of repealing Regulation Q, the
Board should amend Regulation D to
provide for a non-reservable interestbearing ‘‘money market deposit
account’’ that would allow up to
twenty-four preauthorized or automatic
transfers per month. Commenters also
asserted that funds moving into interestbearing demand deposits from nonreservable deposits such as time
deposits, or from other non-deposit
sources would be subject to a reserve
requirement of up to ten percent, which
they stated would reduce the
availability of such funds for lending or
other investment.
d. Comments Addressing Four Specific
Questions Raised in the Proposed Rule
1. Does the repeal of Regulation Q have
significant implications for the balance
sheets and income of depository
institutions? What are the anticipated
effects on bank profits, on the allocation
of deposit liabilities among product
offerings, and on the rates offered and
fees assessed on demand deposits,
sweep accounts, and compensating
balance arrangements?
A financial group commented that the
‘‘playing field will be leveled between
big banks and community banks’’ and
that the proposed rule would ‘‘provide
an opportunity to pursue large balance
commercial clients that in the past
would not consider a smaller
institution.’’ This group commented that
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the cost of funds ‘‘will be considerably
less than consumer core deposits,’’ and
that ‘‘in spite of the cannibalization of
some current deposits’’ the net effect
would be beneficial. This commenter
also asserted that ‘‘we will no longer
have to pay vendors for sweeps’’ and
that customers would be able to choose
between receiving earnings credits and
direct payments of interest. This
commenter further asserted that there
would be no impact on that institution’s
fees but that the repeal would enable
smaller institutions to compete with
larger institutions for ‘‘large balance
clients’’ because previously ‘‘large
balance clients’’ always had sufficient
earnings credits to offset fees and the
large institutions holding those balances
were able to use in-house sweeps
programs. Smaller institutions,
according to this commenter, were not
able to price competitively for such
programs because of the vendor costs for
sweeps programs, ‘‘the ‘Too Big To Fail’
concept’’ and the fact that earnings
credits are not valuable beyond what
can be used to pay for fees.
A trade association commented that
the anticipated effects of the repeal on
bank profits, allocation of deposit
liabilities, and rates offered is closely
tied to the bank’s local market and
interest rate environment. Specifically,
this association commented that in
small markets with little competition for
deposits, banks may elect neither to pay
interest nor to offer earnings credits
following the repeal. This commenter
asserted that many banks in markets
with high competition for deposits
believed that the cost difference
between paying direct interest or
offering an interest substitute would not
be significant in a low interest rate
environment. This commenter asserted
that, in a high interest rate environment,
banks will be under increased pressure
to offer interest which would result in
higher costs of funds and decreased net
interest margins. This commenter also
asserted that ‘‘the banking industry’s
best defense against interest rates
spiraling to exceptionally high and
unsustainable levels are more account
options, including interest, earnings
credits, premiums, bonuses, and hybrid
accounts.’’ This commenter further
asserted that the effect of the repeal on
correspondent banks should be
negligible.
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2. Does the repeal of Regulation Q have
any implications for short-term funding
markets such as the overnight federal
funds market and Eurodollar markets, or
for institutions such as institution-only
money market mutual funds that are
active investors in short-term funding
markets?
A financial group commented that
‘‘[a]ny changes would be limited’’ and
would have no long-term effects on such
markets. This group commented that
off-balance-sheet sweeps would be
moved back on balance sheet and that
‘‘deposits for the first time will actually
have market competition which will be
good for the company, good for the
bank, consumers, and overall good for
the market.’’ This commenter also
asserted that ‘‘[t]he only complainers
will be those that monopolize the
business today due to regulation, but
they will adjust [by] either paying more
or [downsizing].’’
A bank commented that the demand
for short-term funding markets will
likely increase, which will increase cost
of accessing those markets which will
increase bank borrowing costs and have
a negative impact on profitability.
3. Is the repeal of Regulation Q likely to
result in strong demand for interestbearing demand deposits?
A financial group commented that the
repeal of Regulation Q is likely to result
in strong demand for interest-bearing
demand deposits and that ‘‘this is very
good for the bank and the business
clients’’ and that they expect to see
‘‘significant growth in this product
category in number of accounts and
balances.’’
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4. Does the repeal of Regulation Q have
any implications for competitive burden
on smaller depository institutions?
Many of the comments described
above discussed the implications of the
repeal of Regulation Q for competitive
burden on smaller depository
institutions. A financial group
commented that the repeal of Regulation
Q would not have any implications ‘‘to
any significant degree’’ for competitive
burden on smaller depository
institutions and that the repeal
‘‘provides the best opportunity we have
seen in decades to pursue business
clients.’’ This commenter asserted that
only the smaller institutions that would
be negatively affected by the repeal ‘‘are
those very small institutions in noncompetitive markets which have
benefitted having no large banks
compete for funds.’’ A bank contended
that the repeal of Regulation Q will add
to the profitability challenges of smaller
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institutions that have a better track
record of serving the communities in
which they operate than larger
institutions do.
A trade association commented that
the repeal would increase competition
for typically high-balance business
accounts and that costs of funds would
increase as such accounts become more
difficult to attract and more expensive
to retain. This commenter asserted that
troubled financial institutions needing
liquidity or deposits will aggressively
market exceptionally high interest rates
which may place community banks at a
disadvantage. This commenter also
asserted that the repeal would improve
parity between FDIC-insured
institutions and credit unions in a high
interest rate environment because credit
unions ‘‘pay interest on business
checking and are moving aggressively
into the small business-banking niche.’’
The commenter further asserted that the
repeal ‘‘may assist banks of all sizes and
charter types to attract funds previously
placed outside of the traditional banking
system’’ and that this ‘‘reintermediation
of corporate money will be more
noticeable when interest rates increase.’’
e. Responses to the Public Comments
Many of the comments opposed to the
repeal of Regulation Q suggested
implicitly or explicitly that the Board
should not repeal Regulation Q or
should delay the repeal of Regulation Q.
As stated in the Board’s Notice of
Proposed Rulemaking, however, the
Board will no longer have the authority
to retain Regulation Q after July 21,
2011. Accordingly, the Board does not
have the discretion to retain the
regulation, nor does the Board have the
authority to postpone the effective date
of the repeal beyond July 21, 2011.
While the Board may use its safety and
soundness authority to regulate interest
paid by the smaller group of statechartered member banks (but not all
member banks, as under Regulation Q),
the implementation of Section 627 of
the Dodd-Frank Act does not appear to
present issues of systemic risk or safety
and soundness. In particular, the ability
to pay interest on demand deposits
should enhance clarity in the market for
transaction accounts and potentially
eliminate many of the complicated
procedures implemented by depository
institutions to pay implicit interest on
demand deposits. Interest-bearing
demand deposits could attract funds
from other areas of the financial system
and increase the funding possibilities of
the banking sector. Additionally, the
repeal of Regulation Q will become
effective during a period of
exceptionally low interest rates. In such
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an environment, all short-term money
market rates are near zero, suggesting
that even for those institutions that
chose to pay interest on demand
deposits, the rate paid will likely also be
close to zero. Near-zero money market
rates will likely continue for an
extended period, so depository
institutions and their customers should
be able to adjust in a gradual and
orderly manner to the new environment.
Similarly, it would be contrary to the
purpose of Regulation D to define
‘‘savings deposit’’ to include an account
from which up to 24 convenient
transfers or withdrawals per month are
permitted, as some commenters
requested. The Board is required by
Section 19(b) of the Act to impose
reserve requirements on transaction
accounts. Section 19(b)(1)(C) of the Act
defines ‘‘transaction account’’ as a
deposit or account on which the
depositor is permitted ‘‘to make
withdrawals by negotiable or
transferrable instrument, payment
orders of withdrawal, telephone
transfers, or other similar items for the
purpose of making payments or
transfers to third persons or others.’’ 2
Section 19 was intended to distinguish
transaction accounts, which are
reservable, from savings deposits, which
are not reservable. Allowing 24
convenient transfers per month would
allow such transfers every business day
of the month, and allow a savings
deposit to function in a manner
indistinguishable from a transaction
account.
IV. Final Regulatory Flexibility
Analysis
In accordance with Section 3(a) of the
Regulatory Flexibility Act, 5 U.S.C. 601
et seq. (RFA), the Board is conducting
this final regulatory flexibility analysis
incorporating comments received
during the public comment period. An
initial regulatory flexibility analysis was
included in the Board’s notice of
proposed rulemaking in accordance
with Section 3(a) of the RFA. In its
notice of proposed rulemaking, the
Board requested comments on all
aspects of the proposal, and specifically
requested comment on whether the
repeal of Regulation Q pursuant to
Section 627 of the Dodd-Frank Act
would have any implications for
competitive burden on smaller
depository institutions.
1. Statement of the need for and the
objectives of the final rule. The Board is
repealing Regulation Q, which
implements the statutory prohibition set
forth in Section 19(i) of the Act,
2 12
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effective July 21, 2011. The repeal
implements Section 627 of the DoddFrank Act, which repeals Section 19(i)
of the Act effective July 21, 2011.
Accordingly, the repeal of Regulation Q
effective July 21, 2011, is mandatory.
2. Summary of significant issues
raised by public comments in response
to the Board’s IRFA, the Board’s
assessment of such issues, and a
statement of any changes made as a
result of such comments. As noted in
the SUPPLEMENTARY INFORMATION, a
majority of commenters asserted that the
final rule would have numerous
deleterious effects on small member
banks. As also noted in the
SUPPLEMENTARY INFORMATION, however,
the legal authority pursuant to which
the Board promulgated Regulation Q
will cease to exist on July 21, 2011.
Accordingly, the Board does not have
the discretion to retain the regulation
beyond July 21, 2011, nor does the
Board have the authority to postpone
the effective date of the repeal beyond
that date. As further noted in the
SUPPLEMENTARY INFORMATION, the Board
does not believe that the final rule
presents issues of systemic risk or safety
and soundness sufficient to warrant
action by the Board on those bases.
Accordingly, the Board made no
changes in the final rule as a result of
the analysis of the public comments.
3. Description of and estimate of
small entities affected by the final rule.
The final rule will affect all national
banks and all state-chartered member
banks. Those institutions may choose
after July 21, 2011 to pay interest on
demand deposits that they hold for their
customers. A financial institution is
generally considered ‘‘small’’ if it has
assets of $175 million or less.3 There are
currently approximately 2,956 member
banks (national banks and statechartered member banks) that have
assets of $175 million or less. These
institutions are not required to offer
demand deposits to their customers or
to pay interest on those deposits. The
Board expects the final rule to have a
positive impact on all such entities
because it eliminates an obsolete
regulatory provision and because it
provides member banks with the option
of offering interest-bearing demand
deposits following the repeal of
Regulation Q.
4. Projected reporting, recordkeeping,
and other compliance requirements.
The Board believes that the final rule
will not have any impact on reporting,
3 U.S. Small Business Administration, Table of
Small Business Size Standards Matched to North
American Industry Classification System Codes,
available at https://www.sba.gov/sites/default/files/
Size_Standards_Table.pdf.
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recordkeeping, and other compliance
requirements for member banks.
5. Steps taken to minimize the
economic impact on small entities;
significant alternatives. No significant
alternatives to the final rule were
suggested that could be accomplished
without Congressional action. Although
some commenters suggested that the
Board issue a policy statement delaying
the implementation of the statutory
repeal, the Board does not believe that
it has the authority to extend the
statutory effective date through a policy
statement that would contravert the
clear Congressional intent to repeal the
prohibition against the payment of
interest on demand deposits effective
July 21, 2011.
V. Paperwork Reduction Act Analysis
In accordance with the Paperwork
Reduction Act (PRA) of 1995 (44 U.S.C.
3506; 5 CFR 1320 Appendix A.1), the
Board reviewed the final rule under the
authority delegated to the Board by the
Office of Management and Budget
(OMB). No collections of information
pursuant to the PRA are contained in
the final rule; however, there will be
clarifications to the instructions of
several regulatory reporting
requirements. The Board estimates that
the clarifications would have a
negligible effect on the burden estimates
for the existing regulatory reporting
information collections.
VI. Administrative Procedure Act
The Administrative Procedure Act
(‘‘APA’’) generally requires federal
agencies to publish a final rule at least
30 days before the effective date thereof.
5 U.S.C. 553. The APA also provides
exceptions under which an agency may
publish a final rule with an effective
date that is less than 30 days from the
date of publication of the final rule.
Specifically, the APA provides a
substantive rule may be published on a
date that is less than 30 days before its
effective date where the rule ‘‘grants or
recognizes an exemption or relieves a
restriction,’’ or where the agency finds
good cause that is published in the final
rule. 5 U.S.C. 553(d)(2)–(3).
The repeal of Regulation Q
implements the repeal of Section 19(i)
of the Federal Reserve Act, effective July
21, 2011, pursuant to Section 627 of the
Dodd-Frank Act. The repeal relieves a
restriction by repealing the prohibition
against payment of interest on demand
deposits by member banks. As such, the
final rule is exempt under Section
553(d)(2) of the APA from the
requirement of publication not less than
30 days before the effective date. The
Board also finds good cause under
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42019
Section 553(d)(3) of the APA for
publication of the final rule on a date
that is less than 30 days before the
effective date. Publication of the final
rule in this time frame will not impose
a burden on anyone, since all persons
subject to Regulation Q have been on
notice since passage of the Dodd-Frank
Act nearly a year ago that Regulation Q
would be repealed effective July 21,
2011. In addition, the Board’s request
for comment published in the Federal
Register on April 14 provided
additional notice, over three months
prior to the effective date, that the rule
would be repealed. The Board does not
have the legal authority to extend the
effective date beyond July 21, 2011,
because the law pursuant to which the
Board promulgated the rule will cease to
exist on that date. Accordingly, the
Board finds good cause for not delaying
the effective date of the final rule.
List of Subjects
12 CFR Part 204
Banks, Banking, Reporting and
recordkeeping requirements.
12 CFR Part 217
Banks, Banking, Reporting and
recordkeeping requirements.
12 CFR Part 230
Advertising, Banks, Banking,
Consumer protection, Reporting and
recordkeeping requirements, Truth in
savings.
For the reasons set forth in the
preamble, under the authority of section
627 of Public Law 111–203, 124 Stat.
1376 (July 21, 2010), the Board is
amending 12 CFR parts 204, 217, and
230 to read as follows:
PART 204—RESERVE
REQUIREMENTS OF DEPOSITORY
INSTITUTIONS
1. The authority citation for part 204
is amended to read as follows:
■
Authority: 12 U.S.C. 248(a), 248(c), 461,
601, 611, and 3105.
2. In § 204.10, paragraph (c) is revised
to read as follows:
■
§ 204.10
Payment of interest on balances.
*
*
*
*
*
(c) Pass-through balances. A passthrough correspondent that is an eligible
institution may pass back to its
respondent interest paid on balances
held on behalf of that respondent. In the
case of balances held by a pass-through
correspondent that is not an eligible
institution, a Reserve Bank shall pay
interest only on the required reserve
balances held on behalf of one or more
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respondents, and the correspondent
shall pass back to its respondents
interest paid on balances in the
correspondent’s account.
*
*
*
*
*
DEPARTMENT OF TRANSPORTATION
Federal Aviation Administration
14 CFR Part 33
PART 217—PROHIBITION AGAINST
PAYMENT OF INTEREST ON DEMAND
DEPOSITS (REGULATION Q)—
[REMOVED AND RESERVED]
■
3. Part 217 is removed and reserved.
PART 230—TRUTH IN SAVINGS
(REGULATION DD)
[Docket No. FAA–2010–0398; Amendment
No. 33–31]
RIN 2120–AJ62
for practices, methods, and procedures
the Administrator finds necessary for
safety in air commerce, including
minimum safety standards for aircraft
engines. This final rule is within the
scope of that authority because it
updates existing regulations for rotor
overspeed for aircraft turbine engines.
Background
Airworthiness Standards; Rotor
Overspeed Requirements
AGENCY: Federal Aviation
Administration (FAA), DOT.
ACTION: Final rule.
Part 33 of Title 14, Code of Federal
Regulations, prescribes airworthiness
standards for original and amended type
certificates for aircraft engines. The
European Aviation Safety Agency
(EASA) Certification Specification—
Engines (CS–E) prescribes
corresponding airworthiness standards
to certify aircraft engines in Europe.
While part 33 and the CS–E are similar,
they differ in several respects. These
differences may result in added costs,
delays, and time required for
certification. This rule will harmonize
applicable U.S. and EASA standards
and clarify existing overspeed
requirements for aircraft turbine engine
rotor parts.
5. Maturity of time accounts. Institutions
are not required to pay interest after time
accounts mature. Examples include:
This rule will amend the
aircraft turbine engine rotor overspeed
type certification standards. This action
establishes uniform rotor overspeed
design and test requirements for aircraft
engines and turbochargers certificated
by the FAA and the European Aviation
Safety Agency (EASA). The rule also
establishes uniform standards for the
design and testing of engine rotor parts
in the United States and in Europe,
eliminating the need to comply with
two differing sets of requirements.
DATES: This amendment becomes
effective September 16, 2011.
FOR FURTHER INFORMATION CONTACT: For
technical questions concerning this final
rule, contact Tim Mouzakis, Engine and
Propeller Directorate Standards Staff,
ANE–111, Engine and Propeller
Directorate, Federal Aviation
Administration, 12 New England
Executive Park, Burlington,
Massachusetts 01803–5299; telephone
(781) 238–7114; fax (781) 238–7199; email timoleon.mouzakis@.faa.gov. For
legal questions concerning this final
rule contact Vincent Bennett, ANE–7,
Office of Regional Counsel, Federal
Aviation Administration, 12 New
England Executive Park, Burlington,
Massachusetts 01803–5299; telephone
(781) 238–7044; fax (781) 238–7055; email vincent.bennett@faa.gov.
SUPPLEMENTARY INFORMATION:
*
Authority for This Rulemaking
Summary of the Final Rule
The FAA’s authority to issue rules
regarding aviation safety is found in
Title 49 of the United States Code.
Subtitle I, Section 106 describes the
authority of the FAA Administrator.
Subtitle VII, Aviation Programs,
describes in more detail the scope of the
agency’s authority.
We are issuing this rulemaking under
the authority described in Subtitle VII,
Part A, Subpart III, Section 44701,
‘‘General requirements.’’ Under that
section, the FAA is charged with
promoting safe flight of civil aircraft in
air commerce by prescribing regulations
There are minor differences between
the proposal and this final rule. Sections
33.27(c) and (g) were changed in
response to comments and our review of
the proposal. This rule harmonizes rotor
overspeed requirements found in part
33 with EASA CS–E 840, Rotor
Integrity.
4. The authority citation for part 230
continues to read as follows:
■
Authority: 12 U.S.C. 4301 et seq.
Supplement I to Part 230—Official Staff
Interpretations
5. In Supplement I to Part 230:
A. Under Section 230.2—Definitions,
paragraph (n) Interest, is revised.
■ B. Under Section 230.7—Payment of
interest, subsection (a)(1) Permissible
methods, the introductory text of
paragraph (5) is revised.
The revisions read as follows:
■
■
Supplement I to Part 230—Official Staff
Interpretations
*
*
*
Section 230.2
*
*
*
*
*
Definitions.
*
*
(n) Interest
1. Relation to bonuses. Bonuses are not
interest for purposes of this regulation.
*
*
*
Section 230.7
*
*
Payment of interest.
(a)(1) Permissible methods
*
*
*
*
*
*
*
*
*
By order of the Board of Governors of the
Federal Reserve System, July 12, 2011.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 2011–17886 Filed 7–15–11; 8:45 am]
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SUMMARY:
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Summary of the NPRM
The FAA published a notice of
proposed rulemaking (NPRM) on April
26, 2010 (75 FR 21523). The proposed
changes establish a uniform certification
basis for aircraft turbine engine rotor
parts between the FAA and EASA. The
proposal discussed requiring that rotor
parts be designed with a safety margin
large enough that the parts have an
overspeed capability that exceeds the
engine’s certified operating conditions,
including overspeed conditions which
can occur in the event of a failure of
another engine component and/or
system malfunction. For failures that
may result in an overspeed, the proposal
limited rotor growth to that which
would not lead to a hazardous condition
as defined in § 33.75. The comment
period for the NPRM closed on July 26,
2010.
Summary of Comments
The FAA received comments from
Rolls-Royce, General Electric Aviation,
Turbomeca, Pratt and Whitney, and
General Aviation Manufacturers
Association (GAMA). The commenters
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]]>Agencies
[Federal Register Volume 76, Number 137 (Monday, July 18, 2011)]
[Rules and Regulations]
[Pages 42015-42020]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-17886]
=======================================================================
-----------------------------------------------------------------------
FEDERAL RESERVE SYSTEM
12 CFR Parts 204, 217, and 230
Regulations D, Q, and DD
[Docket No. R-1413]
RIN 7100-AD 72
Prohibition Against Payment of Interest on Demand Deposits
AGENCY: Board of Governors of the Federal Reserve System (Board)
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: The Board is publishing a final rule repealing Regulation Q,
Prohibition Against Payment of Interest on Demand Deposits, effective
July 21, 2011. Regulation Q was promulgated to implement the statutory
prohibition against payment of interest on demand deposits by
institutions that are member banks of the Federal Reserve System set
forth in Section 19(i) of the Federal Reserve Act (``Act''). Section
627 of the Dodd-Frank Wall Street Reform and Consumer Protection Act
(``Dodd-Frank Act'') repeals Section 19(i) of the Federal Reserve Act
effective July 21, 2011. The final rule implements the Dodd-Frank Act's
repeal of Section 19(i). The final rule also repeals the Board's
published interpretation of Regulation Q and removes references to
Regulation Q found in the Board's other regulations, interpretations,
and commentary.
DATES: Effective Date: July 21, 2011.
FOR FURTHER INFORMATION CONTACT: Sophia H. Allison, Senior Counsel
(202/452-3565), Legal Division, or Joshua S. Louria, Financial Analyst
(202/263-4885), Division of Monetary Affairs; for users of
Telecommunications Device for the Deaf (TDD) only, contact (202/263-
4869); Board of Governors of the Federal Reserve System, 20th and C
Streets, NW., Washington, DC 20551.
SUPPLEMENTARY INFORMATION:
I. Prohibition Against Payment of Interest on Demand Deposits
Section 19(i) of the Federal Reserve Act (``Act'') (12 U.S.C. 371a)
generally provides that no member bank ``shall, directly or indirectly,
by any device whatsoever, pay any interest on any deposit which is
payable on demand. * * *'' Section 19(i) was added to the Act by
Section 11 of the Banking Act of 1933 (48 Stat. 162, 181). Section 324
of the Banking Act of 1935 (49 Stat. 684, 714) amended Section 19(a) of
the Act to authorize the Board, ``for the purposes of this section, to
define the terms `demand deposits', `gross demand deposits,' `deposits
payable on demand' [and] to determine what shall be deemed to be a
payment of interest, and to prescribe such rules and regulations as it
may deem necessary to effectuate the purposes of this section and
prevent evasions thereof. * * *'' The Board promulgated Regulation Q on
August 29, 1933 to implement Section 19(i) of the Act. Section 627 of
the Dodd-Frank Act repeals Section 19(i) of the Act in its entirety,
effective July 21, 2011.
II. Request for Public Comment
On April 14, 2011, the Board published in the Federal Register a
request for comment on its proposal to repeal Regulation Q effective
July 21, 2011 (76 FR 20892, Apr. 14, 2011). In its request for comment,
the Board also sought comment on all aspects of the proposal, and also
sought comment on four specific issues related to the proposal:
1. Does the repeal of Regulation Q have significant implications
for the balance sheets and income of depository institutions? What are
the anticipated effects on bank profits, on the allocation of deposit
liabilities among product offerings, and on the rates offered and fees
assessed on demand deposits, sweep accounts, and compensating balance
arrangements?
2. Does the repeal of Regulation Q have any implications for short-
term funding markets such as the overnight federal funds market and
Eurodollar markets, or for institutions such as institution-only money
market mutual funds that are active investors in short-term funding
markets?
3. Is the repeal of Regulation Q likely to result in strong demand
for interest-bearing demand deposits?
[[Page 42016]]
4. Does the repeal of Regulation Q have any implications for
competitive burden on smaller depository institutions?
The comment period closed on May 16, 2011.
III. Public Comments
a. Summary
The Board received a total of 62 comments on the proposed rule. Of
these, 45 comments were received from 40 banks,\1\ 6 comments were
received from trade associations, 4 comments were received from other
types of entities, and 7 comments were received from individuals. Of
the comments received on the proposed rule, 6 comments were in favor of
the proposed rule, 54 comments were opposed to the proposed rule, and 2
comments neither supported nor opposed the proposed rule but commented
on other aspects of the proposal. A number of commenters specifically
addressed one or more of the four specific questions the Board asked in
the proposed rule separately from their general comments on the
proposed rule.
---------------------------------------------------------------------------
\1\ More than one person from the same institution submitted
comments in some cases.
---------------------------------------------------------------------------
b. Comments in Favor of the Proposed Rule
One financial group expressed support for the proposed rule,
stating that the commenter looked forward to a fair and competitive
market that is no longer manipulated through regulation by lobbyists
for money market funds and large banks. Another commenter, an
individual, opined that the proposal ``repeals an arbitrary and
basically non-functioning rule'' and would ``allow more transparency
and competition in this arena'' that ``will force banks to innovate and
to lower costs.'' This commenter asserted that the repeal would ``lead
to more simplicity in deposit offerings and to less rationale for
current workarounds'' such as NOW accounts.
A trade association commented that the repeal could result in a
more stable source of capital for banks and provide financial
professionals with another competitive investment alternative. This
commenter also opined that taxes on interest paid would increase
revenues for the U.S. Treasury, and asserted that ``there inherently
will be new economic dynamics that must be considered when negotiating
fees and rates.'' This commenter further asserted that this would
``force financial professionals and corporate treasurers to consider
how to effectively rebalance their deposit portfolios in light of the
new products and rates structures,'' and that they would have ``another
option in terms of liquidity.'' This commenter expected demand for
interest-bearing demand deposits to increase after the repeal.
One bank commented in support of the proposal because ``price
controls should not be the subject of government regulation.'' This
commenter suggested that the repeal would enable the bank to compete
for corporate demand deposits without having to sweep them into other
off-balance-sheet investments. Another bank commented favorably on the
repeal, arguing that Regulation Q ``has been pretty much hollowed out
and therefore rendered irrelevant through the years.''
c. Comments Opposed to the Proposed Rule
Most of the comments received opposed the repeal of Regulation Q.
Several commenters indicated that they believe that the repeal would
have ``devastating'' effects on smaller and community banks. Commenters
also indicated that they expect many detrimental effects for
institutions from the repeal, including increased cost of funding, the
addition of increased interest rate risk to institution balance sheets,
increased expenses, decreased net interest margins, decreased earnings,
decreased profits, and the ``potential to place many banks in a
liability sensitive position.'' Commenters also expected detrimental
effects for institutions' customers, including decreased credit
availability, increased costs of credit, and increased fees and costs
of services. A number of commenters argued that the repeal comes at a
time when the banking industry in general, and the community banking
industry in particular, is already stressed and facing challenges to
continued viability and profitability, as well as increased regulatory
burden, particularly with new interchange fee regulations. Some
commenters contended that there is currently little demand for loans,
and that without loan demand the increased cost of funds represented by
paying interest on demand deposits would result in decreased income.
One commenter argued that the payment of interest on balances
maintained in accounts at Federal Reserve Banks is not sufficient to
offset the cost of paying interest on demand deposits.
A number of commenters asserted that the interest-free demand
deposit base is the primary franchise builder for community banks and
the largest source of fixed-rate funding. One commenter argued that
such deposits ``are the lifeblood of community banks'' who lend this
money back into the local market at competitive rates to promote local
lending for housing, consumer lending and small business lending.
Commenters argued that smaller institutions, as they lose their demand
deposit base, would have to access other short-term funding sources,
which would increase costs in those markets. Commenters also argued
that the repeal would increase the concentration of financial assets in
the banking sector as funds move out of investments such as money
market mutual funds into interest-bearing demand deposits, making
nonbank money markets less liquid, less robust, less efficient, and
more expensive. One commenter further argued that the outflow of funds
from money market mutual funds into interest-bearing demand deposits
would damage the commercial paper market, since money market mutual
funds are major purchasers of commercial paper. Another commenter
argued that the repeal would harm the market for municipal bonds,
because community banks would be no longer able to buy fixed-rate bank-
qualified municipal bonds.
Several commenters stated that they expect larger and ``too big to
fail'' banks, which they believe already have a competitive advantage,
to draw commercial demand depositors away from smaller and community
banks with expensive marketing programs and offers of higher interest
rates with which smaller institutions cannot compete. Some commenters
asserted that these customers, once drawn away to larger banks, will
suffer decreases in service levels compared to what they received from
smaller banks because the business model of smaller banks focuses on
relationships and service levels. One commenter asserted that the
repeal of Regulation Q would not enable smaller and community banks to
compete with larger institutions because, according to the commenter,
community banks mostly compete with one another and not with larger
institutions. Other commenters asserted that troubled banks would be
likely to try to ``buy'' demand deposits by offering unsustainably high
interest rates, placing the banking system at risk for more bank
failures and increasing costs to the FDIC's bank insurance fund. One
commenter argued that large banks that are funded with off-balance-
sheet sources in order to avoid FDIC insurance premiums would see the
repeal as a way to ``buy'' domestic deposits, ``robbing'' local
communities of needed capital.
Some commenters asserted that the movement of funds from non-
interest-
[[Page 42017]]
bearing demand deposits into interest-bearing demand deposits would
take such deposits outside of the unlimited FDIC insurance coverage
currently available for non-interest-bearing transaction accounts. One
commenter argued that the unlimited insurance for such accounts created
moral hazard by reducing depositor incentives to monitor institutions
and by encouraging institutions to engage in riskier behavior secure in
the knowledge that their demand depositors will not move. This
commenter argued that the repeal of Regulation Q will increase these
risks because depositors could move freely from interest-bearing to
non-interest-bearing demand deposits in times of stress, thereby
creating effective unlimited insurance on all demand deposits.
Several commenters argued that the effects of the repeal may be
less visible in a low interest rate environment but would be more
pronounced as interest rates begin to rise. Some commenters argued that
the repeal would threaten the viability of many institutions in a
rising rate environment. Another commenter argued that the effect would
be magnified by the combination of rising interest rates and the
expiration of the FDIC's program of unlimited insurance for non-
interest-bearing transaction accounts in 2012.
Some comments opposed to the repeal asserted that the provision
that became Section 627 of the Dodd-Frank Act was inserted into the
bill late in the process, and was not debated or heard in the House or
Senate Committees. A few commenters questioned the stated rationale for
interest on demand deposits as benefitting small businesses. These
commenters asserted that a typical small business maintains on average
about $10,000 in a demand deposit, which even at a two percent interest
rate would still earn the small business only $200 in one year. One of
these commenters asserted that banks would have to increase fees to
make up for the increased cost associated with paying interest on
demand deposits, eroding the $200-per-year figure to approximately $100
per year. This commenter argued that $100 or $200 per year was not
sufficient to permit such businesses to grow or create jobs.
Several commenters argued that the Board should not repeal
Regulation Q, or should delay the effective date of the repeal until
studies of the impact of the repeal, including safety and soundness
effects, could be conducted and considered. Some commenters suggested
that the Board advocate before the Congress for a repeal of Section 627
of the Dodd-Frank Act (the provision that repeals the statutory
prohibition against payment of interest on demand deposits), and some
contended that the Board simply should retain or reinstate Regulation
Q. One commenter, noting that the Board would no longer have statutory
authority to retain Regulation Q after July 21, 2011, asserted that the
Board nevertheless has the authority to issue a policy statement
prohibiting the payment of interest on demand deposits until the
banking agencies studied the safety and soundness implications of the
repeal and determined that it was safe and sound to permit payment of
such interest. Another commenter argued that the repeal of Regulation Q
would create systemic risk and that the Board should use its systemic
risk authority under the Dodd-Frank Act to prevent the repeal from
taking effect. Another commenter suggested a two-stage process,
repealing the regulation in the first phase, and then starting a second
phase of twelve to eighteen months within which the existing
interpretations of Regulation Q would remain in effect to give the FDIC
the opportunity to consider whether to adopt some or all of them.
A few commenters argued that, instead of repealing Regulation Q,
the Board should amend Regulation D to provide for a non-reservable
interest-bearing ``money market deposit account'' that would allow up
to twenty-four preauthorized or automatic transfers per month.
Commenters also asserted that funds moving into interest-bearing demand
deposits from non-reservable deposits such as time deposits, or from
other non-deposit sources would be subject to a reserve requirement of
up to ten percent, which they stated would reduce the availability of
such funds for lending or other investment.
d. Comments Addressing Four Specific Questions Raised in the Proposed
Rule
1. Does the repeal of Regulation Q have significant implications for
the balance sheets and income of depository institutions? What are the
anticipated effects on bank profits, on the allocation of deposit
liabilities among product offerings, and on the rates offered and fees
assessed on demand deposits, sweep accounts, and compensating balance
arrangements?
A financial group commented that the ``playing field will be
leveled between big banks and community banks'' and that the proposed
rule would ``provide an opportunity to pursue large balance commercial
clients that in the past would not consider a smaller institution.''
This group commented that the cost of funds ``will be considerably less
than consumer core deposits,'' and that ``in spite of the
cannibalization of some current deposits'' the net effect would be
beneficial. This commenter also asserted that ``we will no longer have
to pay vendors for sweeps'' and that customers would be able to choose
between receiving earnings credits and direct payments of interest.
This commenter further asserted that there would be no impact on that
institution's fees but that the repeal would enable smaller
institutions to compete with larger institutions for ``large balance
clients'' because previously ``large balance clients'' always had
sufficient earnings credits to offset fees and the large institutions
holding those balances were able to use in-house sweeps programs.
Smaller institutions, according to this commenter, were not able to
price competitively for such programs because of the vendor costs for
sweeps programs, ``the `Too Big To Fail' concept'' and the fact that
earnings credits are not valuable beyond what can be used to pay for
fees.
A trade association commented that the anticipated effects of the
repeal on bank profits, allocation of deposit liabilities, and rates
offered is closely tied to the bank's local market and interest rate
environment. Specifically, this association commented that in small
markets with little competition for deposits, banks may elect neither
to pay interest nor to offer earnings credits following the repeal.
This commenter asserted that many banks in markets with high
competition for deposits believed that the cost difference between
paying direct interest or offering an interest substitute would not be
significant in a low interest rate environment. This commenter asserted
that, in a high interest rate environment, banks will be under
increased pressure to offer interest which would result in higher costs
of funds and decreased net interest margins. This commenter also
asserted that ``the banking industry's best defense against interest
rates spiraling to exceptionally high and unsustainable levels are more
account options, including interest, earnings credits, premiums,
bonuses, and hybrid accounts.'' This commenter further asserted that
the effect of the repeal on correspondent banks should be negligible.
[[Page 42018]]
2. Does the repeal of Regulation Q have any implications for short-term
funding markets such as the overnight federal funds market and
Eurodollar markets, or for institutions such as institution-only money
market mutual funds that are active investors in short-term funding
markets?
A financial group commented that ``[a]ny changes would be limited''
and would have no long-term effects on such markets. This group
commented that off-balance-sheet sweeps would be moved back on balance
sheet and that ``deposits for the first time will actually have market
competition which will be good for the company, good for the bank,
consumers, and overall good for the market.'' This commenter also
asserted that ``[t]he only complainers will be those that monopolize
the business today due to regulation, but they will adjust [by] either
paying more or [downsizing].''
A bank commented that the demand for short-term funding markets
will likely increase, which will increase cost of accessing those
markets which will increase bank borrowing costs and have a negative
impact on profitability.
3. Is the repeal of Regulation Q likely to result in strong demand for
interest-bearing demand deposits?
A financial group commented that the repeal of Regulation Q is
likely to result in strong demand for interest-bearing demand deposits
and that ``this is very good for the bank and the business clients''
and that they expect to see ``significant growth in this product
category in number of accounts and balances.''
4. Does the repeal of Regulation Q have any implications for
competitive burden on smaller depository institutions?
Many of the comments described above discussed the implications of
the repeal of Regulation Q for competitive burden on smaller depository
institutions. A financial group commented that the repeal of Regulation
Q would not have any implications ``to any significant degree'' for
competitive burden on smaller depository institutions and that the
repeal ``provides the best opportunity we have seen in decades to
pursue business clients.'' This commenter asserted that only the
smaller institutions that would be negatively affected by the repeal
``are those very small institutions in non-competitive markets which
have benefitted having no large banks compete for funds.'' A bank
contended that the repeal of Regulation Q will add to the profitability
challenges of smaller institutions that have a better track record of
serving the communities in which they operate than larger institutions
do.
A trade association commented that the repeal would increase
competition for typically high-balance business accounts and that costs
of funds would increase as such accounts become more difficult to
attract and more expensive to retain. This commenter asserted that
troubled financial institutions needing liquidity or deposits will
aggressively market exceptionally high interest rates which may place
community banks at a disadvantage. This commenter also asserted that
the repeal would improve parity between FDIC-insured institutions and
credit unions in a high interest rate environment because credit unions
``pay interest on business checking and are moving aggressively into
the small business-banking niche.'' The commenter further asserted that
the repeal ``may assist banks of all sizes and charter types to attract
funds previously placed outside of the traditional banking system'' and
that this ``reintermediation of corporate money will be more noticeable
when interest rates increase.''
e. Responses to the Public Comments
Many of the comments opposed to the repeal of Regulation Q
suggested implicitly or explicitly that the Board should not repeal
Regulation Q or should delay the repeal of Regulation Q. As stated in
the Board's Notice of Proposed Rulemaking, however, the Board will no
longer have the authority to retain Regulation Q after July 21, 2011.
Accordingly, the Board does not have the discretion to retain the
regulation, nor does the Board have the authority to postpone the
effective date of the repeal beyond July 21, 2011. While the Board may
use its safety and soundness authority to regulate interest paid by the
smaller group of state-chartered member banks (but not all member
banks, as under Regulation Q), the implementation of Section 627 of the
Dodd-Frank Act does not appear to present issues of systemic risk or
safety and soundness. In particular, the ability to pay interest on
demand deposits should enhance clarity in the market for transaction
accounts and potentially eliminate many of the complicated procedures
implemented by depository institutions to pay implicit interest on
demand deposits. Interest-bearing demand deposits could attract funds
from other areas of the financial system and increase the funding
possibilities of the banking sector. Additionally, the repeal of
Regulation Q will become effective during a period of exceptionally low
interest rates. In such an environment, all short-term money market
rates are near zero, suggesting that even for those institutions that
chose to pay interest on demand deposits, the rate paid will likely
also be close to zero. Near-zero money market rates will likely
continue for an extended period, so depository institutions and their
customers should be able to adjust in a gradual and orderly manner to
the new environment.
Similarly, it would be contrary to the purpose of Regulation D to
define ``savings deposit'' to include an account from which up to 24
convenient transfers or withdrawals per month are permitted, as some
commenters requested. The Board is required by Section 19(b) of the Act
to impose reserve requirements on transaction accounts. Section
19(b)(1)(C) of the Act defines ``transaction account'' as a deposit or
account on which the depositor is permitted ``to make withdrawals by
negotiable or transferrable instrument, payment orders of withdrawal,
telephone transfers, or other similar items for the purpose of making
payments or transfers to third persons or others.'' \2\ Section 19 was
intended to distinguish transaction accounts, which are reservable,
from savings deposits, which are not reservable. Allowing 24 convenient
transfers per month would allow such transfers every business day of
the month, and allow a savings deposit to function in a manner
indistinguishable from a transaction account.
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\2\ 12 U.S.C. 461(b)(1)(C).
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IV. Final Regulatory Flexibility Analysis
In accordance with Section 3(a) of the Regulatory Flexibility Act,
5 U.S.C. 601 et seq. (RFA), the Board is conducting this final
regulatory flexibility analysis incorporating comments received during
the public comment period. An initial regulatory flexibility analysis
was included in the Board's notice of proposed rulemaking in accordance
with Section 3(a) of the RFA. In its notice of proposed rulemaking, the
Board requested comments on all aspects of the proposal, and
specifically requested comment on whether the repeal of Regulation Q
pursuant to Section 627 of the Dodd-Frank Act would have any
implications for competitive burden on smaller depository institutions.
1. Statement of the need for and the objectives of the final rule.
The Board is repealing Regulation Q, which implements the statutory
prohibition set forth in Section 19(i) of the Act,
[[Page 42019]]
effective July 21, 2011. The repeal implements Section 627 of the Dodd-
Frank Act, which repeals Section 19(i) of the Act effective July 21,
2011. Accordingly, the repeal of Regulation Q effective July 21, 2011,
is mandatory.
2. Summary of significant issues raised by public comments in
response to the Board's IRFA, the Board's assessment of such issues,
and a statement of any changes made as a result of such comments. As
noted in the SUPPLEMENTARY INFORMATION, a majority of commenters
asserted that the final rule would have numerous deleterious effects on
small member banks. As also noted in the Supplementary Information,
however, the legal authority pursuant to which the Board promulgated
Regulation Q will cease to exist on July 21, 2011. Accordingly, the
Board does not have the discretion to retain the regulation beyond July
21, 2011, nor does the Board have the authority to postpone the
effective date of the repeal beyond that date. As further noted in the
SUPPLEMENTARY INFORMATION, the Board does not believe that the final
rule presents issues of systemic risk or safety and soundness
sufficient to warrant action by the Board on those bases. Accordingly,
the Board made no changes in the final rule as a result of the analysis
of the public comments.
3. Description of and estimate of small entities affected by the
final rule. The final rule will affect all national banks and all
state-chartered member banks. Those institutions may choose after July
21, 2011 to pay interest on demand deposits that they hold for their
customers. A financial institution is generally considered ``small'' if
it has assets of $175 million or less.\3\ There are currently
approximately 2,956 member banks (national banks and state-chartered
member banks) that have assets of $175 million or less. These
institutions are not required to offer demand deposits to their
customers or to pay interest on those deposits. The Board expects the
final rule to have a positive impact on all such entities because it
eliminates an obsolete regulatory provision and because it provides
member banks with the option of offering interest-bearing demand
deposits following the repeal of Regulation Q.
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\3\ U.S. Small Business Administration, Table of Small Business
Size Standards Matched to North American Industry Classification
System Codes, available at https://www.sba.gov/sites/default/files/Size_Standards_Table.pdf.
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4. Projected reporting, recordkeeping, and other compliance
requirements. The Board believes that the final rule will not have any
impact on reporting, recordkeeping, and other compliance requirements
for member banks.
5. Steps taken to minimize the economic impact on small entities;
significant alternatives. No significant alternatives to the final rule
were suggested that could be accomplished without Congressional action.
Although some commenters suggested that the Board issue a policy
statement delaying the implementation of the statutory repeal, the
Board does not believe that it has the authority to extend the
statutory effective date through a policy statement that would
contravert the clear Congressional intent to repeal the prohibition
against the payment of interest on demand deposits effective July 21,
2011.
V. Paperwork Reduction Act Analysis
In accordance with the Paperwork Reduction Act (PRA) of 1995 (44
U.S.C. 3506; 5 CFR 1320 Appendix A.1), the Board reviewed the final
rule under the authority delegated to the Board by the Office of
Management and Budget (OMB). No collections of information pursuant to
the PRA are contained in the final rule; however, there will be
clarifications to the instructions of several regulatory reporting
requirements. The Board estimates that the clarifications would have a
negligible effect on the burden estimates for the existing regulatory
reporting information collections.
VI. Administrative Procedure Act
The Administrative Procedure Act (``APA'') generally requires
federal agencies to publish a final rule at least 30 days before the
effective date thereof. 5 U.S.C. 553. The APA also provides exceptions
under which an agency may publish a final rule with an effective date
that is less than 30 days from the date of publication of the final
rule. Specifically, the APA provides a substantive rule may be
published on a date that is less than 30 days before its effective date
where the rule ``grants or recognizes an exemption or relieves a
restriction,'' or where the agency finds good cause that is published
in the final rule. 5 U.S.C. 553(d)(2)-(3).
The repeal of Regulation Q implements the repeal of Section 19(i)
of the Federal Reserve Act, effective July 21, 2011, pursuant to
Section 627 of the Dodd-Frank Act. The repeal relieves a restriction by
repealing the prohibition against payment of interest on demand
deposits by member banks. As such, the final rule is exempt under
Section 553(d)(2) of the APA from the requirement of publication not
less than 30 days before the effective date. The Board also finds good
cause under Section 553(d)(3) of the APA for publication of the final
rule on a date that is less than 30 days before the effective date.
Publication of the final rule in this time frame will not impose a
burden on anyone, since all persons subject to Regulation Q have been
on notice since passage of the Dodd-Frank Act nearly a year ago that
Regulation Q would be repealed effective July 21, 2011. In addition,
the Board's request for comment published in the Federal Register on
April 14 provided additional notice, over three months prior to the
effective date, that the rule would be repealed. The Board does not
have the legal authority to extend the effective date beyond July 21,
2011, because the law pursuant to which the Board promulgated the rule
will cease to exist on that date. Accordingly, the Board finds good
cause for not delaying the effective date of the final rule.
List of Subjects
12 CFR Part 204
Banks, Banking, Reporting and recordkeeping requirements.
12 CFR Part 217
Banks, Banking, Reporting and recordkeeping requirements.
12 CFR Part 230
Advertising, Banks, Banking, Consumer protection, Reporting and
recordkeeping requirements, Truth in savings.
For the reasons set forth in the preamble, under the authority of
section 627 of Public Law 111-203, 124 Stat. 1376 (July 21, 2010), the
Board is amending 12 CFR parts 204, 217, and 230 to read as follows:
PART 204--RESERVE REQUIREMENTS OF DEPOSITORY INSTITUTIONS
0
1. The authority citation for part 204 is amended to read as follows:
Authority: 12 U.S.C. 248(a), 248(c), 461, 601, 611, and 3105.
0
2. In Sec. 204.10, paragraph (c) is revised to read as follows:
Sec. 204.10 Payment of interest on balances.
* * * * *
(c) Pass-through balances. A pass-through correspondent that is an
eligible institution may pass back to its respondent interest paid on
balances held on behalf of that respondent. In the case of balances
held by a pass-through correspondent that is not an eligible
institution, a Reserve Bank shall pay interest only on the required
reserve balances held on behalf of one or more
[[Page 42020]]
respondents, and the correspondent shall pass back to its respondents
interest paid on balances in the correspondent's account.
* * * * *
PART 217--PROHIBITION AGAINST PAYMENT OF INTEREST ON DEMAND
DEPOSITS (REGULATION Q)--[REMOVED AND RESERVED]
0
3. Part 217 is removed and reserved.
PART 230--TRUTH IN SAVINGS (REGULATION DD)
0
4. The authority citation for part 230 continues to read as follows:
Authority: 12 U.S.C. 4301 et seq.
Supplement I to Part 230--Official Staff Interpretations
0
5. In Supplement I to Part 230:
0
A. Under Section 230.2--Definitions, paragraph (n) Interest, is
revised.
0
B. Under Section 230.7--Payment of interest, subsection (a)(1)
Permissible methods, the introductory text of paragraph (5) is revised.
The revisions read as follows:
Supplement I to Part 230--Official Staff Interpretations
* * * * *
Section 230.2 Definitions.
* * * * *
(n) Interest
1. Relation to bonuses. Bonuses are not interest for purposes of
this regulation.
* * * * *
Section 230.7 Payment of interest.
(a)(1) Permissible methods
* * * * *
5. Maturity of time accounts. Institutions are not required to
pay interest after time accounts mature. Examples include:
* * * * *
By order of the Board of Governors of the Federal Reserve
System, July 12, 2011.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 2011-17886 Filed 7-15-11; 8:45 am]
BILLING CODE 6210-01-P
