[Federal Register Volume 76, Number 72 (Thursday, April 14, 2011)]
[Proposed Rules]
[Pages 20892-20894]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-9002]


 ========================================================================
 Proposed Rules
                                                 Federal Register
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 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
 
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 

  Federal Register / Vol. 76, No. 72 / Thursday, April 14, 2011 / 
Proposed Rules  

[[Page 20892]]



FEDERAL RESERVE SYSTEM

12 CFR Parts 204, 217, and 230

[Regulations D, Q, and DD; Docket No. R-1413]
RIN No. 7100-AD72


Prohibition Against Payment of Interest on Demand Deposits

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Notice of proposed rulemaking; request for public comment.

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SUMMARY: The Board is requesting public comment on proposed amendments 
that would repeal Regulation Q, Prohibition Against Payment of Interest 
on Demand Deposits, effective July 21, 2011. Regulation Q implements 
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 proposed amendments 
implement the Dodd-Frank Act's repeal of Section 19(i). The proposed 
amendments would also repeal the Board's published interpretation of 
Regulation Q. The proposed amendments also remove references to 
Regulation Q found in the Board's other regulations, interpretations, 
and commentary.

DATES: Comments must be submitted by May 16, 2011.

ADDRESSES: You may submit comments, identified by Docket No. R-1413 and 
RIN No. 7100-AD60, by any of the following methods:
    Agency Web site: http://www.federalreserve.gov. Follow the 
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
    Federal eRulemaking Portal: http://www.regulations.gov. Follow the 
instructions for submitting comments.
    E-mail: [email protected]. Include the docket number 
in the subject line of the message.
    Fax: (202) 452-3819 or (202) 452-3102.
    Mail: Jennifer J. Johnson, Secretary, Board of Governors of the 
Federal Reserve System, 20th Street and Constitution Avenue, NW., 
Washington, DC 20551.
    All public comments are available from the Board's Web site at 
http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as 
submitted, unless modified for technical reasons. Accordingly, your 
comments will not be edited to remove any identifying or contact 
information.
    Public comments may also be viewed electronically or in paper in 
Room MP-500 of the Board's Martin Building (20th and C Streets, NW.) 
between 9 a.m. and 5 p.m. on weekdays.

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. In the past, Regulation Q also contained 
provisions implementing then-current statutory provisions regulating 
the rates of interest payable on various types of interest-bearing 
deposits. The Depository Institutions Deregulation Act of 1982 phased 
out these statutory interest rate limitations effective in March 1986. 
After that time, Regulation Q consisted primarily or exclusively of 
provisions related to implementing Section 19(i)'s prohibition of the 
payment of interest on demand deposits by member banks.
    Section 627 of the Dodd-Frank Act repeals Section 19(i) of the Act 
in its entirety, effective one year from the date of enactment. 
Accordingly, the Board will no longer have statutory authority to 
promulgate Regulation Q effective July 21, 2011. The Board therefore 
proposes to repeal Regulation Q, effective July 21, 2011. For the same 
reason, the Board proposes to repeal its published interpretation of 
Regulation Q currently set forth at 12 CFR 217.101 (Premiums on 
deposits). The Board is proposing a conforming technical amendment to 
section 204.10 of Regulation D, 12 CFR part 204, to eliminate 
references to Regulation Q. The Board is also proposing conforming 
technical amendments to the official staff commentary to Regulation DD, 
12 CFR part 230. Specifically, comments 230.2(n)-1 and 230.7(a)(1)-5 
would be revised to eliminate references to the definition of 
``interest'' in Regulation Q.
    The Dodd-Frank Act did not repeal the Board's authority under 
Section 19(a) of the Act to ``determine what shall be deemed to be a 
payment of interest.'' The Board believes, however, that the primary 
reason for this authority was to enforce Section 19(i)'s prohibition of 
the payment of interest on demand deposits. Accordingly, the Board 
believes that there will be no reason to retain the definition of 
``interest'' in Regulation Q following the repeal of Section 19(i). The 
Board recognizes that there may be other laws or regulations that 
currently refer to Regulation Q or that incorporate the definition of 
``interest'' currently set forth in Section 217.2(d) of Regulation Q. 
The Board believes, however, that such other laws and regulations can 
substantively incorporate the Regulation Q definition

[[Page 20893]]

of ``interest'' at any time if necessary, or can delete references to 
Regulation Q that will be obsolete after July 21, 2011. Accordingly, 
the Board does not propose retaining the definition of ``interest'' 
currently set forth in Regulation Q.
    The Board seeks comments on all aspects of the proposal. In 
addition, the Board specifically seeks comments on the following:
    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?
    4. Does the repeal of Regulation Q have any implications for 
competitive burden on smaller depository institutions?

II. Form of Comment Letters

    Comment letters should refer to Docket No. R-1413 and RIN No. 7100-
AD70 and, when possible, should use a standard typeface with a font 
size of 10 or 12; this will enable the Board to convert text submitted 
in paper form to machine-readable form through electronic scanning, and 
will facilitate automated retrieval of comments for review. Comments 
may be mailed electronically to [email protected].

III. Initial Regulatory Flexibility Analysis

    In accordance with Section 3(a) of the Regulatory Flexibility Act, 
5 U.S.C. 601 et seq. (RFA), the Board has reviewed the proposed 
amendments to Regulation Q. A final regulatory flexibility analysis 
will be conducted after consideration of comments received during the 
public comment period.
    1. Statement of the objectives of the proposal. The Board is 
proposing to repeal Regulation Q, which implements the statutory 
prohibition set forth in Section 19(i) of the Act, effective July 21, 
2011. The proposed repeal implements Section 627 of the Dodd-Frank Act, 
which repeals Section 19(i) of the Act effective July 21, 2011.
    2. Small entities affected by the proposal. The proposal would 
affect all member banks of the Federal Reserve System, regardless of 
size, that hold demand deposits. The proposal would permit, but not 
require, member banks to pay interest on demand deposits maintained at 
those institutions. As such, the Board expects that the proposal would 
have a positive impact on such entities because it would eliminate an 
obsolete regulatory provision and because member banks are not 
obligated to offer interest-bearing demand deposits following the 
repeal of Regulation Q. The Board is requesting comment on whether the 
repeal of Regulation Q has any implications for competitive burden on 
smaller member banks.
    3. Other federal rules. The Board believes that no federal rules 
duplicate, overlap, or conflict with the proposed amendments to 
Regulation Q.
    4. Significant alternatives to the proposed revisions. The Board 
welcomes comment on any significant alternatives that would minimize 
the impact of the proposal on small entities.

IV. Paperwork Reduction Act Analysis

    In accordance with the Paperwork Reduction Act (PRA) of 1995 (44 
U.S.C. 3506; 5 CFR Part 1320 Appendix A.1), the Board reviewed the 
proposed rule under the authority delegated to the Board by the Office 
of Management and Budget (OMB). The proposed rule contains no 
requirements subject to the PRA.

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 proposing to amend 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 Sec.  204.10--Payment of interest on balances, 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 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)

    3. Part 217 is removed and reserved.

PART 230--TRUTH IN SAVINGS (REGULATION DD)

Supplement I to Part 230--Official Staff Interpretations

    4. The authority citation for part 230 continues to read as 
follows:

    Authority:  12 U.S.C. 4301 et seq.

    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, 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, acting through the

[[Page 20894]]

Secretary under delegated authority, April 8, 2011.
Jennifer J. Johnson,
Secretary of the Board.

[FR Doc. 2011-9002 Filed 4-13-11; 8:45 am]
BILLING CODE 6210-01-P