[Federal Register Volume 62, Number 94 (Thursday, May 15, 1997)]
[Rules and Regulations]
[Pages 26736-26737]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-12706]


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FEDERAL RESERVE SYSTEM

12 CFR Part 217

[Regulation Q; Docket No. R-0971]


Prohibition Against Payment of Interest on Demand Deposits

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Interpretation.

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SUMMARY: The Board has amended an interpretation to provide an 
exception to the current limitations on premiums given on demand 
deposit accounts. Section 11 of the Banking Act of 1933 prohibits the 
payment of interest on demand deposits, and Regulation Q implements 
this prohibition. As an exception to this rule, an interpretation 
permits premiums up to $10 for deposits of less than $5000 and up to 
$20 for deposits of $5000 or more not more than twice per year 
(Interpretation). The Interpretation also limits the timing of such 
premiums to the opening of a new account or an addition to an existing 
account.
    The Board has amended the Interpretation to provide an additional 
exception that permits premiums given without regard to the balance in 
a demand deposit account and the duration of the account balance, since 
from an economic point of view such premiums do not constitute interest 
on the account. Accordingly, depository institutions are permitted to 
give such premiums, without regard to the amount

[[Page 26737]]

of the premium, provided that the premiums are not related to or 
dependent on the balance in the account and the duration of the account 
balance, without violating Regulation Q.

EFFECTIVE DATE: May 15, 1997.

FOR FURTHER INFORMATION CONTACT: Rick Heyke, Staff Attorney, Legal 
Division, Board of Governors of the Federal Reserve System (202/452-
3688). For the hearing impaired only, Telecommunications Device for the 
Deaf (TDD), Diane Jenkins (202/452-3544).

SUPPLEMENTARY INFORMATION:

Background

    Section 11 of the Banking Act of 1933 prohibits the payment of 
interest on demand deposits (12 U.S.C. 371a). Regulation Q implements 
this prohibition (12 CFR 217.3). As an exception to this rule, the 
Interpretation permits premiums up to $10 for deposits of less than 
$5000 and up to $20 for deposits of $5000 or more not more than twice 
per year (12 CFR 217.101). The Interpretation limits the timing of the 
premiums to the opening of a new account or an addition to an existing 
account. The Board has revised the Interpretation to permit in addition 
premiums, without regard to the amount of the premium, provided that 
the premiums are not related to or dependent on the balance in an 
account and the duration of the account balance.
    The premium limitations in Regulation Q originally applied to all 
types of deposits and were established in part to prevent evasion of 
interest rate ceilings at the retail level prior to the deregulation of 
interest rates on time and savings deposits (including NOW accounts) 
pursuant to the Depository Institutions Deregulation and Monetary 
Control Act of 1980. The premium limitations were agreed upon by the 
Depository Institutions Deregulation Committee (``DIDC'') and supported 
by all the depository institution regulators in an effort to preserve a 
relatively level playing field during the period of deposit interest 
rate deregulation, which ended in 1986. Since then, banks have been 
permitted to offer premiums on interest bearing accounts, including 
NOW, time, and savings accounts, without regard to the premium 
limitations, and the limitations have only applied to demand deposit 
accounts.
    Because the existing exemption is restricted to the opening of or 
an addition to 1 a deposit account, it has constrained the 
ability of depository institutions to offer incentives to use their 
products, including encouraging the use of new services such as ATM or 
debit cards. On June 23, 1981, the Executive Secretary of the DIDC 
advised one bank that wanted to offer promotions to deposit customers 
who signed up for an ATM card and another bank that wanted to offer 
promotions to deposit customers who used an ATM card more than three 
times per month, that the promotions would constitute impermissible 
premiums because they would not coincide with opening or adding to an 
account. In effect, the Interpretation, coupled with these rulings, 
holds that premiums from use of a debit card, which reduces the amount 
on deposit, constitute interest on the deposit.
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    \1\ Premiums are also permitted on renewing a deposit, but this 
has been moot since time deposits were deregulated, and is 
eliminated in the revision.
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    The Board believes that in cases where a premium is not related to 
or dependent on the balance in a demand deposit account and the 
duration of that balance, the premium generally should not be viewed as 
interest.
    In light of all the foregoing, the Board is amending its 
Interpretation effective on date of publication in the Federal Register 
to except from the Regulation's restriction any premiums that are not 
related to the balance in an account and the duration of the account 
balance.

Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601-612) requires an 
agency to publish a regulatory flexibility analysis for any final rule 
for which the agency was required to publish a general notice of 
proposed rulemaking. Under 12 U.S.C. 553(b), a general notice of 
proposed rulemaking is not required for interpretative rules. 
Accordingly, no regulatory flexibility analysis is required in this 
case.
    The amendment of the Interpretation will reduce the regulatory 
burden imposed by the Board's Regulation Q on all depository 
institutions, large and small. Therefore, the Board believes that the 
amendment will not have a significant adverse economic impact on a 
substantial number of small entities.
    Under 12 U.S.C. 553(d), a 30 day period between publication date 
and effective date is not required for interpretative rules. 
Accordingly, this interpretation is effective on date of publication in 
the Federal Register.

Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act notice of 1995 (44 
U.S.C. Ch. 3506; 5 CFR Part 1320, Appendix A.1), the Board has reviewed 
the rule under authority delegated to the Board by the Office of 
Management and Budget. No collections of information pursuant to the 
Paperwork Reduction Act are contained in the rule.

List of Subjects in 12 CFR Part 217

    Banks, Banking, Federal Reserve System.

Authority and Issuance

    For the reasons set forth in the preamble, the Board amends part 
217 of chapter II of title 12 as set forth below:

PART 217--PROHIBITION AGAINST THE PAYMENT OF INTEREST ON DEMAND 
DEPOSITS (REGULATION Q)

    1. The authority citation for part 217 continues to read as 
follows:

    Authority: 12 U.S.C. 248, 371a, 461, 505, 1818, and 3105.


Sec. 217.101  [Amended]

    2. In Sec. 217.101, paragraph (a)(1) is amended by removing ``,or 
renewal of,'', and a new paragraph (b) is added after paragraph (a) 
concluding text to read as follows:


Sec. 217.101  Premiums on deposits.

* * * * *
    (b) Notwithstanding paragraph (a) of this section, any premium that 
is not, directly or indirectly, related to or dependent on the balance 
in a demand deposit account and the duration of the account balance 
shall not be considered the payment of interest on a demand deposit 
account and shall not be subject to the limitations in paragraph (a) of 
this section.

    By order of the Board of Governors of the Federal Reserve 
System, May 9, 1997.
William W. Wiles,
Secretary of the Board.
[FR Doc. 97-12706 Filed 5-14-97; 8:45 am]
BILLING CODE 6210-01-P