[Federal Register Volume 62, Number 146 (Wednesday, July 30, 1997)]
[Rules and Regulations]
[Pages 40731-40732]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-20018]


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FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 329

RIN 3064-AC09


Prohibition Against Payment of Interest on Demand Deposits

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Interpretive rule.

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SUMMARY: The FDIC has amended an interpretive rule to provide an 
additional exception to the limitations on premiums that may be given 
in connection with demand deposits. Section 18(g) of the Federal 
Deposit Insurance Act (FDI Act) requires that the FDIC by regulation 
prohibit the payment of interest or dividends on demand deposits. 12 
CFR part 329 implements this prohibition. As an exception to the 
prohibition, an interpretive rule permits premiums of 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. The interpretive rule also limits the 
timing of such premiums to the opening of a new account or an addition 
to an existing account.
    The FDIC has amended the interpretive rule to provide an additional 
exception that permits premiums which are unrelated to the balance in a 
demand deposit account and the duration of the account balance. 
Therefore, insured nonmember banks and insured branches of foreign 
banks are now permitted to give premiums on demand deposits, without 
limitation as to the amount of the premium, provided that the premiums 
are not related to, or dependent upon, the balance in the account and 
the duration of the account balance. This amendment maintains 
substantial parity with Regulation Q, 12 CFR Part 217, as recently 
amended by the Board of Governors of the Federal Reserve System (FRB).

DATES: Effective July 30, 1997.

FOR FURTHER INFORMATION CONTACT: Marc Goldstrom, Counsel, Regulation 
and Legislation Section, Legal Division, (202-898-8807); Louise 
Kotoshirodo, Review Examiner, Division of Compliance and Consumer 
Affairs, (202-942-3599).

SUPPLEMENTARY INFORMATION:

Background

    Section 18(g) of the FDI Act provides that the Board of Directors 
of the FDIC shall by regulation prohibit the payment of interest or 
dividends on demand deposits in insured nonmember banks and in insured 
branches of foreign banks. (12 U.S.C. 1828(g)). Accordingly, the FDIC 
promulgated regulations prohibiting the payment of interest or 
dividends on demand deposits at 12 CFR part 329. The Board of Governors 
of the Federal Reserve System (FRB) has a corresponding prohibition for 
member banks at 12 CFR part 217 (Regulation Q). As an exception to the 
prohibition, the FDIC issued an interpretive rule that generally 
permits (1) premiums only at the time of the opening of a new account 
or an addition to, or renewal of, an existing account; (2) no more than 
two premiums per deposit in any twelve-month interval; and (3) that the 
value of the premiums does not exceed $10 for deposits of less than 
$5000 and $20 for deposits of $5000 or more. (12 CFR 329.103). The FRB 
has a corresponding exception for member banks at 12 CFR 217.101.
    Section 18(g) of the FDI Act also provides that the FDIC shall make 
such exceptions to this prohibition as are prescribed with respect to 
demand deposits in member banks by section 19 of the Federal Reserve 
Act, as amended, or by regulation of the FRB. (12 U.S.C. 1828(g)). The 
FRB has recently amended its interpretation to establish an additional 
exception with respect to member banks. The amendment permits member 
banks to give premiums on demand deposits, without regard to the amount 
of the premium, provided that the premiums are not related to, or 
dependent upon, the balance in an account and the duration of the 
account balance. (12 CFR 217.101(b)). The FDIC is now amending its 
interpretive rule to provide a similar exception for state nonmember 
banks and insured branches of foreign banks.
    Premium limitations were first adopted by the FDIC and the FRB in 
1970. These premium limitations originally applied to all types of 
deposits and were established in part to prevent evasion of interest 
rate ceilings at a time when interest rates were regulated. The 
Depository Institutions Deregulation and Monetary Control Act of 1980 
deregulated interest rates on time and savings deposits (including NOW 
accounts). In 1980, the Depository Institutions Deregulation Committee 
adopted these premium limitations with respect to time and savings 
deposits 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. The premium limitations, 
therefore, have only applied to demand deposit accounts.
    Because the preexisting exception is restricted to the opening of, 
addition to, or renewal of, a deposit account, it has constrained the 
ability of depository institutions to offer incentives to use their 
products, including the use of new services such as ATM or debit cards. 
In the past, the exception has prevented a bank from offering 
incentives to existing demand deposit customers who signed up for an 
ATM card because the incentives did not coincide with the opening of, 
addition to, or renewal of, an account. For the same reason the 
exception has prevented another bank from offering incentives to 
encourage deposit customers to use an ATM card more than three times 
per month. Premiums from the use of a debit card, which reduces the 
amount on deposit, would also constitute interest on the deposit under 
the preexisting exception, since they are also not paid upon the

[[Page 40732]]

opening of, addition to, or renewal of, an account.
    The FDIC 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, such a premium generally should not be viewed 
as interest. From an economic point of view, such premiums do not 
appear to constitute interest on the account, since interest is 
generally a payment to, or for the account of, a depositor as 
compensation for the use of the depositor's funds. (12 CFR 329.1(c)).
    As an additional matter, since interest rates on time deposits were 
deregulated, there is no longer any need to provide that premiums that 
are paid at the time of renewal are permissible. This revision removes 
the reference to renewal in the preexisting exception.
    In light of all the foregoing, the FDIC is amending its 
interpretive rule effective on date of publication in the Federal 
Register to except from the prohibition of the payment of interest on 
demand deposits, 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 5 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.
    Under 5 U.S.C. 553(d), a 30-day period between publication date and 
effective date is not required for interpretative rules. Accordingly, 
this interpretive rule is effective on date of publication in the 
Federal Register.

Paperwork Reduction Act

    No collections of information pursuant to the Paperwork Reduction 
Act are contained in the rule.

List of Subjects in 12 CFR Part 329

    Banks, banking, Interest rates.

    For the reasons set forth in the preamble, the FDIC amends 12 CFR 
part 329 as set forth below:

PART 329--INTEREST ON DEPOSITS

    1. The authority citation for part 329 continues to read as 
follows:

    Authority: 12 U.S.C. 1819, 1828(g) and 1832(a).

    2. In Sec. 329.103, paragraph (a)(1) is amended by removing ``, or 
renewal of,'', and a new paragraph (e) is added after paragraph (d) to 
read as follows:
* * * * *


Sec. 329.103  Premiums.

* * * * *
    (e) 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 Directors.

    Dated at Washington, D.C. this 23rd day of July, 1997.

Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 97-20018 Filed 7-29-97; 8:45 am]
BILLING CODE 6714-01-P