[Federal Register Volume 76, Number 135 (Thursday, July 14, 2011)]
[Rules and Regulations]
[Pages 41392-41395]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-17686]


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FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Parts 329 and 330

RIN 3064-AD78


Interest on Deposits; Deposit Insurance Coverage

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Final rule.

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SUMMARY: The FDIC is issuing a final rule amending its regulations to 
reflect section 627 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (the DFA),\1\ repealing the prohibition against the 
payment of interest on demand deposit accounts effective July 21, 2011.
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    \1\ Public Law 111-203, 124 Stat. 1376.

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DATES: The final rule is effective July 21, 2011.

FOR FURTHER INFORMATION CONTACT: Martin Becker, Senior Consumer Affairs 
Specialist, Division of Consumer and Depositor Protection, (703) 254-
2233, Mark Mellon, Counsel, Legal Division, (202) 898-3884, Federal 
Deposit Insurance Corporation, 550 17th Street, NW., Washington, DC 
20429.

SUPPLEMENTARY INFORMATION:

I. Background

    Section 627 of the DFA repealed the statutory prohibition against 
the payment of interest on demand deposits, effective one year from the 
date of the DFA's enactment, July 21, 2011. Section 343 of the DFA 
amended section 11(a)(1) of the Federal Deposit Insurance Act, 12 
U.S.C. 1821(a)(1), to provide full insurance coverage for depository 
institution noninterest-bearing transaction accounts from December 31, 
2010, through December 31, 2012.
    In light of the prospective repeal of the demand deposit interest 
prohibition, the FDIC proposed to rescind 12 CFR part 329, the 
regulation which implements that prohibition with respect to state-
chartered, nonmember (SNM) banks to be effective on the same date as 
the statutory repeal, July 21, 2011. 76 FR 21265 (Apr. 15, 2011) (NPR). 
At the same time, however, a regulatory definition of the term 
``interest'' would still be useful in interpreting the requirements of 
section 343 of the DFA providing temporary, unlimited deposit insurance 
coverage for noninterest-bearing transaction accounts. For this reason, 
in the NPR the FDIC also proposed to transfer the definition of 
``interest'' found at 12 CFR 329.1(c) to Part 330, specifically the 
definitions section at 12 CFR 330.1. The FDIC also specifically 
solicited comment on whether other parts of Part 329 could also prove 
useful and therefore should be moved into Part 330 as well. In 
addition, the FDIC sought comment on every other aspect of the proposed 
rule.\2\
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    \2\ In counterpart to this rulemaking, the Board of Governors of 
the Federal Reserve System (the Federal Reserve) have issued a 
notice of proposed rulemaking to repeal 12 CFR Part 217, Prohibition 
Against Payment of Interest on Demand Deposits (Regulation Q). See 
76 Federal Register 20892 (Apr. 14, 2011). Regulation Q implements 
the prohibition against the payment of interest on demand deposits 
with respect to member banks.
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II. Comment Summary and Discussion

    The FDIC received eight comments on the NPR. Three were from 
community banks, one was from a large depository institution, two were 
from depository institution trade groups, one from a financial 
consulting firm, and one was from a legal representative for a money 
market fund.
    The chief points were:
    1. The FDIC should stop or delay repeal of the prohibition (four 
commenters);
    2. Community banks will be harmed by repeal of the prohibition 
(four commenters);
    3. The FDIC should add the Part 329 section concerning premiums to 
Part 330 (three commenters); and
    4. The FDIC should adopt or incorporate all Federal Reserve 
interpretations and advisory opinions

[[Page 41393]]

pertaining to Regulation Q (two commenters).

Repeal or Delay Prohibition

    Commenters opposed to immediate implementation of the repeal of the 
prohibition made several arguments. All four commenters stated that 
repeal would result in increased deposit volatility as depository 
institutions competed for an increased share of business deposits by 
offering continually higher rates of interest. Three of the four 
contended this would severely affect community banks. One commenter 
called for delay until the safety and soundness consequences of repeal 
are understood, arguing that the FDIC and the Federal Reserve have the 
authority to issue a statement of policy that would prevent interest 
payments on deposits. Another commenter recommended a phase-in with 
immediate implementation of the repeal followed by a twelve- to 
eighteen-month grandfather for Federal Reserve interpretations and 
advisory opinions concerning Regulation Q. Another commenter stated 
that efforts to repeal the prohibition should either cease or be 
delayed until its impact is understood.
    In response to these comments, the FDIC notes that, as previously 
observed, pursuant to section 627 of the DFA, as of July 21, 2011, the 
prohibition against the payment of interest on demand deposits will be 
repealed by operation of statute, as a matter of law.

Harm to Community Banks

    As noted previously, several commenters contended repeal would 
result in heightened competition for deposits. They reasoned that large 
banks will offer high rates of interest and lure away business 
depositors previously content to do business with community banks based 
on personal services (relationship deposits). Community banks would 
then be pressured to offer higher rates of interests in order to stay 
competitive, further cutting already thin marginal rates of return. 
Increased deposits might also mean added pressure for depository 
institutions to loan these new funds out, possibly leading to unsafe 
and unsound lending and further weakening depository institutions' 
fiscal health.
    As potential responses to these anticipated negative consequences, 
one commenter recommended that the FDIC take a number of steps: (a) The 
FDIC should consider issuing a statement of policy to warn depository 
institutions about the need for interest rate risk management; (b) 
interest rate risk should be quantified and an increased capital charge 
should be imposed on depository institutions with heightened risk due 
to repeal of the statutory prohibition; (c) stress tests should be 
performed on depository institutions before they are allowed to pay 
interest on business checking accounts; (d) call reports should be 
modified to provide for the reporting of interest rate risk; and (e) 
reserve requirements should be increased to reduce competition for 
deposits.
    Another commenter recommended that the FDIC hold roundtables prior 
to the July 21, 2011, repeal date, urged the FDIC and the Federal 
Reserve to work together to clarify issues in connection with the 
repeal, and requested that the FDIC provide more time for compliance by 
depository institutions. This commenter noted that while the FDIC has 
no authority to delay or to phase in the statutory repeal, efforts 
still need to be made to provide depository institutions with clarity. 
The commenter noted the need to revise call reports and thrift 
financial reports to indicate interest-bearing demand deposit accounts. 
It also noted the need for clarity with respect to so-called ``hybrid 
products,'' deposit accounts that both pay interest and offer earnings 
credits.
    A third commenter urged that the Financial Stability Oversight 
Council (the FSOC) should address the systemic threat which the 
upcoming repeal poses to the ``U.S. banking and financial system and 
the economy as a whole.'' \3\
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    \3\ Created by section 111 of the DFA, the FSOC is charged with 
identifying threats to the financial stability of the U.S., 
promoting market discipline, and responding to emerging risks to the 
stability of the U.S. financial system.
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    After carefully considering these comments, the FDIC has concluded 
that the commenters raise valid concerns about potential risks arising 
from the repeal of the prohibition against paying interest on demand 
deposits. Based on currently available information, however, there are 
also potential benefits which may balance out or outweigh those risks. 
While it is true that depository institutions may incur added expense 
by offering interest payments to accounts where it was previously 
unavailable (such as business checking), they may also save funds by no 
longer having to waive expenses on such accounts (e.g., courier 
service), as an inducement to retain accountholders. Moreover, many 
institutions offer products to business customers that serve as a 
substitute for paying interest on demand deposit accounts. The most 
notable example is a repo sweep account in which funds are swept 
overnight from a demand deposit account to a repo account and swept 
back to the demand deposit account the next morning. The institution 
pays interest on the funds while they are in the repo account. Thus, 
for some institutions the repeal of the prohibition against paying 
interest on demand deposits will result in the replacement of indirect 
payments of interest on demand deposits with explicit, direct interest-
bearing demand deposit accounts.
    Repeal of the prohibition might directly benefit community banks by 
allowing them to attract more potentially stable deposits which could 
reduce their need for higher-cost, more volatile funding. This could 
lower community banks' funding costs and also allow them to plan 
business growth more dependably and rigorously. Interest rates are 
currently at a historic low. This should provide depository 
institutions with an adjustment period. If the cost of funds should 
increase, depository institutions should have time to make the 
necessary adjustments to protect profits and manage interest rate risk 
through measures such as changes to fee structures and rates to balance 
out increased interest expense. With regard to interest rate risk and 
potential liquidity issues, the FDIC and the other federal banking 
agencies have already provided depository institutions with detailed 
guidance which those institutions are expected to follow.

Add Part 329 Section on Premiums to Part 330

    Three commenters stated that the Part 329 section pertaining to 
premiums should be added to Part 330 along with the definition of 
``interest.'' Section 329.103 describes the circumstances under which a 
depository institution's provision of a premium to a depositor will not 
be considered a payment of interest. It is substantially identical to 
section 217.101 in Regulation Q. Commenters contended that retaining 
this section along with the definition of interest might prove useful 
in determining whether an account qualifies for unlimited insurance 
coverage as a noninterest-bearing transaction account.
    In response to these comments, the FDIC agrees that there would be 
utility in importing section 329.103 into Part 330. The FDIC will 
therefore import section 329.103 into Part 330 as an interpretive rule, 
to be designated as section 330.101. This step is also consistent with 
the FDIC's decision, as explained in more detail below, to look to 
Regulation Q and Federal Reserve interpretations of that rule when 
construing section 343.

[[Page 41394]]

Retention of Federal Reserve Regulation Q Staff Opinions and 
Interpretive Letters

    Two commenters called for retention of Federal Reserve staff 
opinions and interpretive letters concerning Regulation Q. They stated 
that these materials would continue to be useful in determining whether 
depository institutions may continue to rely on practices established 
pursuant to these documents (one example given was third party payment 
programs). One commenter recommended that, as of July 21, 2011, the 
materials be retained for a period of eighteen months or more.
    As noted previously, section 217.101 of Regulation Q is 
substantially identical to section 329.103. Moreover, the FDIC, along 
with other federal banking agencies, has regularly interpreted issues 
arising from the prohibition against the payment of interest on demand 
deposits in the same manner as the Federal Reserve. In light of this 
agency consistency and the continued potential instrumental value of 
agency interpretations regarding this issue, the FDIC will continue to 
rely upon Regulation Q and Federal Reserve interpretations of that 
regulation for purposes of implementing temporary, unlimited deposit 
insurance coverage pursuant to section 343 of the DFA.

III. Final Rule

    For the reasons set forth in the preceding section, the FDIC is 
issuing the final rule.

IV. Regulatory Analysis and Procedure

A. Effective Date

    Absent a showing of ``good cause,'' the Administrative Procedure 
Act (5 U.S.C. 553(d)(3)) requires a 30-day delayed effective date 
before a final rule may become effective. The FDIC finds good cause for 
waiving this requirement because the final rule simply conforms the 
FDIC's regulations to reflect the statutory repeal of the prohibition 
against the payment of interest on demand deposit accounts. As 
discussed, that statutory repeal becomes effective July 21, 2011. 
Delaying the effective date of the final rule for thirty days would 
result in a gap between the effective date of the statutory repeal and 
the effective date of the amendments to the FDIC's regulations 
reflecting that statutory repeal. Also, the FDIC deems it unnecessary 
to provide a delayed effective date for the final rule because there 
are no actions SNM banks must take to implement the final rule; as 
noted, the final rule simply conforms the FDIC's regulations to reflect 
a statutory change.
    The Riegle Community Development and Regulatory Improvement Act 
provides that any new regulations or amendments to regulations 
prescribed by a Federal banking agency that impose additional 
reporting, disclosures, or other new requirements on insured depository 
institutions shall take effect on the first day of a calendar quarter 
which begins on or after the date on which the regulations are 
published in final form, unless the agency determines, for good cause 
published with the rule, that the rule should become effective before 
such time.\4\ The final rule does not impose any additional reporting, 
disclosures, or other new requirements on insured depository 
institutions.
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    \4\ 12 U.S.C. 4802.
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    The final rule is therefore effective upon July 21, 2011, the date 
when the statutory prohibition against the payment of interest on 
demand deposits will be repealed under section 627 of the DFA.

B. Paperwork Reduction Act

    No collections of information pursuant to the Paperwork Reduction 
Act (44 U.S.C. Ch. 3501 et seq.) are contained in the final rule.

 C. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) requires that each federal 
agency either certify that a proposed rule would not, if adopted in 
final form, have a significant economic impact on a substantial number 
of small entities or prepare an initial regulatory flexibility analysis 
of the rule and publish the analysis for comment. For purposes of the 
RFA analysis or certification, financial institutions with total assets 
of $175 million or less are considered to be ``small entities.'' The 
FDIC hereby certifies pursuant to 5 U.S.C. 605(b) that the final rule 
will not have a significant economic impact on a substantial number of 
small entities. This is because the FDIC already applies the Part 329 
definition of ``interest'' and the interpretive rule on premiums for 
purposes of determining whether an account qualifies for full deposit 
insurance coverage as a noninterest-bearing transaction account. The 
FDIC is only transferring the definition from Part 329 to Part 330 
because the former regulation will become moot on July 21, 2011, 
pursuant to section 627 of the DFA and its repeal of the statutory ban 
on the payment of interest on demand deposits. There will therefore be 
no significant economic impact on a substantial number of small 
entities as a result of this change.

D. Small Business Regulatory Enforcement Fairness Act

    The Office of Management and Budget (OMB) has determined that the 
final rule is not a ``major rule'' within the meaning of the relevant 
sections of the Small Business Regulatory Enforcement Act of 1996 
(SBREFA) (5 U.S.C. 801, et seq.).
    As required by SBREFA, the FDIC will file the appropriate reports 
with Congress and the General Accounting Office so that the final rule 
may be reviewed.

E. The Treasury and General Government Appropriations Act, 1999--
Assessment of Federal Regulations and Policies on Families

    The FDIC has determined that the final rule will not affect family 
well-being within the meaning of section 654 of the Treasury and 
General Government Appropriations Act, enacted as part of the Omnibus 
Consolidated and Emergency Supplemental Appropriations Act of 1999 
(Pub. L. 105-277, 112 Stat. 2681).

F. Plain Language

    Section 722 of the Gramm-Leach-Bliley Act, Public Law 106-102, 113 
Stat. 1338, 1471 (Nov. 12, 1999), requires the federal banking agencies 
to use plain language in all proposed and final rules published after 
January 1, 2000. No commenter suggested that the NPR was materially 
unclear, and the FDIC believes that the final rule is substantively 
similar to the NPR.

List of Subjects

12 CFR Part 329

    Banks, Banking, Interest rates.

12 CFR Part 330

    Bank deposit insurance, Banks, Banking, Reporting and recordkeeping 
requirements, Savings and loan associations, Trusts and trustees.

    For the reasons set forth in the preamble, under the authority of 
section 627 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act, the FDIC amends chapter III of title 12 of the Code of 
Federal Regulations as follows:

PART 329--INTEREST ON DEPOSITS

0
1. Part 329 is removed and reserved.

PART 330--DEPOSIT INSURANCE COVERAGE

0
2. The authority citation for part 330 continues to read as follows: 12 
U.S.C. 1813(l), 1813(m), 1817(i), 1818(q), 1819(Tenth), 1820(f), 
1821(a), 1822(c).

[[Page 41395]]


0
3. In Sec.  330.1, paragraphs (k) through (r) of Sec.  330.1 are 
redesignated as paragraphs (l) through (s) respectively and new 
paragraph (k) is added to read as follows:


Sec.  330.1  Definitions.

* * * * *
    (k) Interest, with respect to a deposit, means any payment to or 
for the account of any depositor as compensation for the use of funds 
constituting a deposit. A bank's absorption of expenses incident to 
providing a normal banking function or its forbearance from charging a 
fee in connection with such a service is not considered a payment of 
interest.
* * * * *

0
4. In Sec.  330.6, in the first sentence of paragraph (b) remove 
``Sec.  330.1(m)'' and add in its place ``Sec.  330.1(n)''.

0
5. In Sec.  330.9, in the first sentence of paragraph (c)(1) remove 
``Sec.  330.1(k)'' and add in its place ``Sec.  330.1(l)''.

0
6. In Sec.  330.12:
0
a. In the first sentence of paragraph (a) remove ``Sec.  330.1(p)'' and 
add in its place ``Sec.  330.1(q)''.
0
b. In the first sentence of paragraph (b)(1) remove ``Sec.  330.1(o)'' 
and add in its place ``Sec.  330.1(p)''.

0
7. In Sec.  330.13, in the first sentence of paragraph (a) remove 
``Sec.  330.1(l)'' and add in its place ``Sec.  330.1(m)''. In the last 
sentence of paragraph (a) remove ``Sec.  330.1(q)'' and add in its 
place ``Sec.  330.1(r)''.

0
8. In Sec.  330.16, in the first sentence of paragraph (a) remove 
``Sec.  330.1(r)'' and add in its place ``Sec.  330.1(s)''.

0
9. New Sec.  330.101 is added to read as follows:


Sec.  330.101   Premiums.

    This interpretive rule describes certain payments that are not 
deemed to be ``interest'' as defined in Sec.  330.1(k).
    (a) Premiums, whether in the form of merchandise, credit, or cash, 
given by a bank to the holder of a deposit will not be regarded as 
``interest'' as defined in Sec.  330.1(k) if:
    (1) The premium is given to the depositor only at the time of the 
opening of a new account or an addition to an existing account;
    (2) No more than two premiums per deposit are given in any twelve-
month interval; and
    (3) The value of the premium (in the case of merchandise, the total 
cost to the bank, including shipping, warehousing, packaging, and 
handling costs) does not exceed $10 for a deposit of less than $5,000 
or $20 for a deposit of $5,000 or more.
    (b) The costs of premiums may not be averaged.
    (c) A bank may not solicit funds for deposit on the basis that the 
bank will divide the funds into several accounts for the purpose of 
enabling the bank to pay the depositor more than two premiums within a 
twelve-month interval on the solicited funds.
    (d) The bank must retain sufficient information for examiners to 
determine that the requirements of this section have been satisfied.
    (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, DC, this 6th day of July 2011.

Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 2011-17686 Filed 7-13-11; 8:45 am]
BILLING CODE 6714-01-P