[Federal Register Volume 63, Number 33 (Thursday, February 19, 1998)]
[Rules and Regulations]
[Pages 8341-8342]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-4142]



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 Rules and Regulations
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  Federal Register / Vol. 63, No. 33 / Thursday, February 19, 1998 / 
Rules and Regulations  

[[Page 8341]]


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FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 329

RIN 3064-AC13


Interest on Deposits

AGENCY: Federal Deposit Insurance Corporation.

ACTION: Final rule.

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SUMMARY: The Federal Deposit Insurance Corporation (FDIC) is amending 
its regulation entitled ``Interest on 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 in insured nonmember banks and in insured branches of foreign 
banks. The interest on deposits regulation implements this prohibition. 
The amendment provides as an exception to the prohibition, the payment 
of interest or other remuneration on any deposit which, if held by a 
member bank, would be allowable under 12 U.S.C. 371a and 461, or by 
regulation of the Board of Governors of the Federal Reserve System 
(FRB). This amendment is in accordance with the FDIC's review of its 
regulations under section 303 of the Riegle Community Development and 
Regulatory Improvement Act of 1994.

EFFECTIVE DATE: April 1, 1998.

FOR FURTHER INFORMATION CONTACT: Marc Goldstrom, Counsel, Regulation 
and Legislation Section, Legal Division, (202-898-8807); or 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. Section 11 of the 
Banking Act of 1933 (12 U.S.C. 371a) prohibits member banks from paying 
interest on demand deposits and is implemented by Regulation Q, (12 CFR 
part 217) of the FRB.
    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)). 
Generally, member banks, state nonmember banks and insured branches of 
foreign banks are subject to the same prohibition and exceptions to 
such prohibition, albeit under different statutes and regulations.
    From time to time the FRB issues or authorizes a new exception to 
the prohibition applicable to member banks, and the FDIC later issues 
or authorizes a similar exception affecting state nonmember banks and 
insured branches of foreign banks. In situations when the FRB issued or 
authorized an exception to the prohibition, but the FDIC had yet to 
act, state nonmember banks and insured branches of foreign banks faced 
a possible competitive disadvantage with respect to member banks.
    In order to eliminate the potential for any such competitive 
disadvantage in the future and in light of the FDIC's statutory mandate 
to make such exceptions to this prohibition as are prescribed with 
respect to demand deposits in member banks, the FDIC published a notice 
of proposed rulemaking in the Federal Register on October 16, 1997 (62 
FR 53769). The proposed amendment would allow for the payment of 
interest or other remuneration on any deposit which, if held by a 
member bank, would be allowable under 12 U.S.C. 371a and 461, or by 
regulation of the FRB. The effect of the amendment is that state 
nonmember banks and insured branches of foreign banks would become 
subject to the same exceptions to the prohibition that member banks are 
subject to, regardless of whether the FDIC had issued or authorized the 
specific exception.
    The FDIC received a total of 19 comments on the proposal. Comments 
were received from eleven banks, one bank holding company, one 
individual, and six trade associations. Twelve commenters expressed 
support for the proposal and two expressed disagreements. However, one 
of those disagreeing with the proposal appeared to have misunderstood 
its effects. That commenter seemed to believe that the proposed rule 
would eliminate the prohibition entirely.
    The other commenter expressing disapproval claimed that it would be 
detrimental to smaller independent banks and their customers, without 
explaining why he believed this to be the case. For the reasons stated 
in the notice of proposed rulemaking, the FDIC has decided to issue a 
final rule that is the same as the proposed rule.
    Of the comments received, seven believed that the prohibition 
should be removed altogether. The FDIC may not at this time consider 
such action because section 18(g) of the FDI Act requires the FDIC to 
impose the prohibition by regulation. Thus, until such time as Congress 
repeals or amends section 18(g) of the FDI Act, the prohibition against 
paying interest on demand deposits must be maintained.
    One regional trade association asked the FDIC to support the 
American Bankers Association (ABA) initiatives to develop new money 
market deposit accounts for commercial entities. The ABA recently asked 
the FRB to amend its regulations to create a money market deposit 
account (MMDA) that would allow up to twenty-four transactions a month 
for commercial entities not eligible for NOW accounts. The FRB 
declined, claiming that an MMDA that provided for twenty-four 
transactions instead of the current limit of six transactions would 
effectively circumvent the statutory prohibition against the payment of 
interest on demand deposits.
    The regional trade association has now asked the FDIC to authorize 
an MMDA that allows twenty-four transactions per month and to encourage 
the FRB to do the same. The regional trade association argues that such 
an MMDA is necessary because banks are at a competitive disadvantage 
with brokerage firms and credit unions,

[[Page 8342]]

which are able to offer their business customers interest-bearing 
accounts with unlimited checking.
    The FDIC is aware that the prohibition on the payment of interest 
on demand deposits puts banks at a competitive disadvantage and may 
encourage an otherwise unnecessary use of resources to avoid the 
prohibition. Nonetheless, the FDIC agrees with the FRB that authorizing 
such an MMDA would effectively circumvent the statutory prohibition. 
The FDIC also believes that the most appropriate way to address this 
issue is through a statutory change. Accordingly, organizations 
interested in pursuing this matter may wish to urge Congress to remove 
the prohibition.

Final Rule

    The FDIC is adopting its proposed rule without change.

Regulatory Flexibility Act

    The Board hereby certifies that the final rule will not have a 
significant economic impact on a substantial number of small entities 
within the meaning of the Regulatory Flexibility Act (5 U.S.C. 601 et 
seq.). The effect of this rule is that state nonmember banks and 
insured branches of foreign banks will become subject to the same 
exceptions to the prohibition that member banks are subject to, 
regardless of whether the FDIC has issued or authorized the specific 
exception.

Paperwork Reduction Act

    The final rule will not constitute a ``collection of information'' 
within the meaning of section 3502(3) of the Paperwork Reduction Act of 
1995 (44 U.S.C. 3501 et seq.). Consequently, no material has been 
submitted to the Office of Management and Budget for review.

Small Business Regulatory Enforcement Fairness Act

    The Small Business Regulatory Enforcement Fairness Act of 1996 
(SBREFA) (Pub. L. 104-121) provides generally for agencies to report 
rules to Congress and for Congress to review rules. The reporting 
requirement is triggered when agencies issue a final rule as defined by 
the Administrative Procedure Act (APA) at 5 U.S.C. 551. Because the 
FDIC is issuing a final rule as defined by the APA, the FDIC will file 
the reports required by SBREFA.
    The Office of Management and Budget (OMB) has determined that this 
final revision to part 329 does not constitute a ``major rule'' as 
defined by SBREFA.

List of Subjects in 12 CFR Part 329

    Banks, banking, interest rates.

    For the reasons set forth in the preamble, the Board of Directors 
of the FDIC hereby amends part 329 of title 12 of the Code of Federal 
Register as follows:

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. Section 329.3 is added to read as follows:


Sec. 329.3  Exception to prohibition on payment of interest.

    Section 329.2 shall not apply to the payment of interest or other 
remuneration on any deposit which, if held by a member bank, would be 
allowable under 12 U.S.C. 371a and 461, or by regulation of the Board 
of Governors of the Federal Reserve System.

    By order of the Board of Directors.

    Dated at Washington, D.C., this 10th day of February, 1998.

Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 98-4142 Filed 2-18-98: 8:45 am]
BILLING CODE 6714-01-P