[Federal Register Volume 76, Number 137 (Monday, July 18, 2011)]
[Rules and Regulations]
[Pages 42015-42020]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-17886]


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FEDERAL RESERVE SYSTEM

12 CFR Parts 204, 217, and 230

Regulations D, Q, and DD

[Docket No. R-1413]
RIN 7100-AD 72


Prohibition Against Payment of Interest on Demand Deposits

AGENCY: Board of Governors of the Federal Reserve System (Board)

ACTION: Final rule.

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SUMMARY: The Board is publishing a final rule repealing Regulation Q, 
Prohibition Against Payment of Interest on Demand Deposits, effective 
July 21, 2011. Regulation Q was promulgated to implement 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 final rule implements the Dodd-Frank Act's 
repeal of Section 19(i). The final rule also repeals the Board's 
published interpretation of Regulation Q and removes references to 
Regulation Q found in the Board's other regulations, interpretations, 
and commentary.

DATES: Effective Date: July 21, 2011.

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. Section 627 of 
the Dodd-Frank Act repeals Section 19(i) of the Act in its entirety, 
effective July 21, 2011.

II. Request for Public Comment

    On April 14, 2011, the Board published in the Federal Register a 
request for comment on its proposal to repeal Regulation Q effective 
July 21, 2011 (76 FR 20892, Apr. 14, 2011). In its request for comment, 
the Board also sought comment on all aspects of the proposal, and also 
sought comment on four specific issues related to the proposal:
    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?

[[Page 42016]]

    4. Does the repeal of Regulation Q have any implications for 
competitive burden on smaller depository institutions?
    The comment period closed on May 16, 2011.

III. Public Comments

a. Summary

    The Board received a total of 62 comments on the proposed rule. Of 
these, 45 comments were received from 40 banks,\1\ 6 comments were 
received from trade associations, 4 comments were received from other 
types of entities, and 7 comments were received from individuals. Of 
the comments received on the proposed rule, 6 comments were in favor of 
the proposed rule, 54 comments were opposed to the proposed rule, and 2 
comments neither supported nor opposed the proposed rule but commented 
on other aspects of the proposal. A number of commenters specifically 
addressed one or more of the four specific questions the Board asked in 
the proposed rule separately from their general comments on the 
proposed rule.
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    \1\ More than one person from the same institution submitted 
comments in some cases.
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b. Comments in Favor of the Proposed Rule

    One financial group expressed support for the proposed rule, 
stating that the commenter looked forward to a fair and competitive 
market that is no longer manipulated through regulation by lobbyists 
for money market funds and large banks. Another commenter, an 
individual, opined that the proposal ``repeals an arbitrary and 
basically non-functioning rule'' and would ``allow more transparency 
and competition in this arena'' that ``will force banks to innovate and 
to lower costs.'' This commenter asserted that the repeal would ``lead 
to more simplicity in deposit offerings and to less rationale for 
current workarounds'' such as NOW accounts.
    A trade association commented that the repeal could result in a 
more stable source of capital for banks and provide financial 
professionals with another competitive investment alternative. This 
commenter also opined that taxes on interest paid would increase 
revenues for the U.S. Treasury, and asserted that ``there inherently 
will be new economic dynamics that must be considered when negotiating 
fees and rates.'' This commenter further asserted that this would 
``force financial professionals and corporate treasurers to consider 
how to effectively rebalance their deposit portfolios in light of the 
new products and rates structures,'' and that they would have ``another 
option in terms of liquidity.'' This commenter expected demand for 
interest-bearing demand deposits to increase after the repeal.
    One bank commented in support of the proposal because ``price 
controls should not be the subject of government regulation.'' This 
commenter suggested that the repeal would enable the bank to compete 
for corporate demand deposits without having to sweep them into other 
off-balance-sheet investments. Another bank commented favorably on the 
repeal, arguing that Regulation Q ``has been pretty much hollowed out 
and therefore rendered irrelevant through the years.''

c. Comments Opposed to the Proposed Rule

    Most of the comments received opposed the repeal of Regulation Q. 
Several commenters indicated that they believe that the repeal would 
have ``devastating'' effects on smaller and community banks. Commenters 
also indicated that they expect many detrimental effects for 
institutions from the repeal, including increased cost of funding, the 
addition of increased interest rate risk to institution balance sheets, 
increased expenses, decreased net interest margins, decreased earnings, 
decreased profits, and the ``potential to place many banks in a 
liability sensitive position.'' Commenters also expected detrimental 
effects for institutions' customers, including decreased credit 
availability, increased costs of credit, and increased fees and costs 
of services. A number of commenters argued that the repeal comes at a 
time when the banking industry in general, and the community banking 
industry in particular, is already stressed and facing challenges to 
continued viability and profitability, as well as increased regulatory 
burden, particularly with new interchange fee regulations. Some 
commenters contended that there is currently little demand for loans, 
and that without loan demand the increased cost of funds represented by 
paying interest on demand deposits would result in decreased income. 
One commenter argued that the payment of interest on balances 
maintained in accounts at Federal Reserve Banks is not sufficient to 
offset the cost of paying interest on demand deposits.
    A number of commenters asserted that the interest-free demand 
deposit base is the primary franchise builder for community banks and 
the largest source of fixed-rate funding. One commenter argued that 
such deposits ``are the lifeblood of community banks'' who lend this 
money back into the local market at competitive rates to promote local 
lending for housing, consumer lending and small business lending. 
Commenters argued that smaller institutions, as they lose their demand 
deposit base, would have to access other short-term funding sources, 
which would increase costs in those markets. Commenters also argued 
that the repeal would increase the concentration of financial assets in 
the banking sector as funds move out of investments such as money 
market mutual funds into interest-bearing demand deposits, making 
nonbank money markets less liquid, less robust, less efficient, and 
more expensive. One commenter further argued that the outflow of funds 
from money market mutual funds into interest-bearing demand deposits 
would damage the commercial paper market, since money market mutual 
funds are major purchasers of commercial paper. Another commenter 
argued that the repeal would harm the market for municipal bonds, 
because community banks would be no longer able to buy fixed-rate bank-
qualified municipal bonds.
    Several commenters stated that they expect larger and ``too big to 
fail'' banks, which they believe already have a competitive advantage, 
to draw commercial demand depositors away from smaller and community 
banks with expensive marketing programs and offers of higher interest 
rates with which smaller institutions cannot compete. Some commenters 
asserted that these customers, once drawn away to larger banks, will 
suffer decreases in service levels compared to what they received from 
smaller banks because the business model of smaller banks focuses on 
relationships and service levels. One commenter asserted that the 
repeal of Regulation Q would not enable smaller and community banks to 
compete with larger institutions because, according to the commenter, 
community banks mostly compete with one another and not with larger 
institutions. Other commenters asserted that troubled banks would be 
likely to try to ``buy'' demand deposits by offering unsustainably high 
interest rates, placing the banking system at risk for more bank 
failures and increasing costs to the FDIC's bank insurance fund. One 
commenter argued that large banks that are funded with off-balance-
sheet sources in order to avoid FDIC insurance premiums would see the 
repeal as a way to ``buy'' domestic deposits, ``robbing'' local 
communities of needed capital.
    Some commenters asserted that the movement of funds from non-
interest-

[[Page 42017]]

bearing demand deposits into interest-bearing demand deposits would 
take such deposits outside of the unlimited FDIC insurance coverage 
currently available for non-interest-bearing transaction accounts. One 
commenter argued that the unlimited insurance for such accounts created 
moral hazard by reducing depositor incentives to monitor institutions 
and by encouraging institutions to engage in riskier behavior secure in 
the knowledge that their demand depositors will not move. This 
commenter argued that the repeal of Regulation Q will increase these 
risks because depositors could move freely from interest-bearing to 
non-interest-bearing demand deposits in times of stress, thereby 
creating effective unlimited insurance on all demand deposits.
    Several commenters argued that the effects of the repeal may be 
less visible in a low interest rate environment but would be more 
pronounced as interest rates begin to rise. Some commenters argued that 
the repeal would threaten the viability of many institutions in a 
rising rate environment. Another commenter argued that the effect would 
be magnified by the combination of rising interest rates and the 
expiration of the FDIC's program of unlimited insurance for non-
interest-bearing transaction accounts in 2012.
    Some comments opposed to the repeal asserted that the provision 
that became Section 627 of the Dodd-Frank Act was inserted into the 
bill late in the process, and was not debated or heard in the House or 
Senate Committees. A few commenters questioned the stated rationale for 
interest on demand deposits as benefitting small businesses. These 
commenters asserted that a typical small business maintains on average 
about $10,000 in a demand deposit, which even at a two percent interest 
rate would still earn the small business only $200 in one year. One of 
these commenters asserted that banks would have to increase fees to 
make up for the increased cost associated with paying interest on 
demand deposits, eroding the $200-per-year figure to approximately $100 
per year. This commenter argued that $100 or $200 per year was not 
sufficient to permit such businesses to grow or create jobs.
    Several commenters argued that the Board should not repeal 
Regulation Q, or should delay the effective date of the repeal until 
studies of the impact of the repeal, including safety and soundness 
effects, could be conducted and considered. Some commenters suggested 
that the Board advocate before the Congress for a repeal of Section 627 
of the Dodd-Frank Act (the provision that repeals the statutory 
prohibition against payment of interest on demand deposits), and some 
contended that the Board simply should retain or reinstate Regulation 
Q. One commenter, noting that the Board would no longer have statutory 
authority to retain Regulation Q after July 21, 2011, asserted that the 
Board nevertheless has the authority to issue a policy statement 
prohibiting the payment of interest on demand deposits until the 
banking agencies studied the safety and soundness implications of the 
repeal and determined that it was safe and sound to permit payment of 
such interest. Another commenter argued that the repeal of Regulation Q 
would create systemic risk and that the Board should use its systemic 
risk authority under the Dodd-Frank Act to prevent the repeal from 
taking effect. Another commenter suggested a two-stage process, 
repealing the regulation in the first phase, and then starting a second 
phase of twelve to eighteen months within which the existing 
interpretations of Regulation Q would remain in effect to give the FDIC 
the opportunity to consider whether to adopt some or all of them.
    A few commenters argued that, instead of repealing Regulation Q, 
the Board should amend Regulation D to provide for a non-reservable 
interest-bearing ``money market deposit account'' that would allow up 
to twenty-four preauthorized or automatic transfers per month. 
Commenters also asserted that funds moving into interest-bearing demand 
deposits from non-reservable deposits such as time deposits, or from 
other non-deposit sources would be subject to a reserve requirement of 
up to ten percent, which they stated would reduce the availability of 
such funds for lending or other investment.

d. Comments Addressing Four Specific Questions Raised in the Proposed 
Rule

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?
    A financial group commented that the ``playing field will be 
leveled between big banks and community banks'' and that the proposed 
rule would ``provide an opportunity to pursue large balance commercial 
clients that in the past would not consider a smaller institution.'' 
This group commented that the cost of funds ``will be considerably less 
than consumer core deposits,'' and that ``in spite of the 
cannibalization of some current deposits'' the net effect would be 
beneficial. This commenter also asserted that ``we will no longer have 
to pay vendors for sweeps'' and that customers would be able to choose 
between receiving earnings credits and direct payments of interest. 
This commenter further asserted that there would be no impact on that 
institution's fees but that the repeal would enable smaller 
institutions to compete with larger institutions for ``large balance 
clients'' because previously ``large balance clients'' always had 
sufficient earnings credits to offset fees and the large institutions 
holding those balances were able to use in-house sweeps programs. 
Smaller institutions, according to this commenter, were not able to 
price competitively for such programs because of the vendor costs for 
sweeps programs, ``the `Too Big To Fail' concept'' and the fact that 
earnings credits are not valuable beyond what can be used to pay for 
fees.
    A trade association commented that the anticipated effects of the 
repeal on bank profits, allocation of deposit liabilities, and rates 
offered is closely tied to the bank's local market and interest rate 
environment. Specifically, this association commented that in small 
markets with little competition for deposits, banks may elect neither 
to pay interest nor to offer earnings credits following the repeal. 
This commenter asserted that many banks in markets with high 
competition for deposits believed that the cost difference between 
paying direct interest or offering an interest substitute would not be 
significant in a low interest rate environment. This commenter asserted 
that, in a high interest rate environment, banks will be under 
increased pressure to offer interest which would result in higher costs 
of funds and decreased net interest margins. This commenter also 
asserted that ``the banking industry's best defense against interest 
rates spiraling to exceptionally high and unsustainable levels are more 
account options, including interest, earnings credits, premiums, 
bonuses, and hybrid accounts.'' This commenter further asserted that 
the effect of the repeal on correspondent banks should be negligible.

[[Page 42018]]

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?
    A financial group commented that ``[a]ny changes would be limited'' 
and would have no long-term effects on such markets. This group 
commented that off-balance-sheet sweeps would be moved back on balance 
sheet and that ``deposits for the first time will actually have market 
competition which will be good for the company, good for the bank, 
consumers, and overall good for the market.'' This commenter also 
asserted that ``[t]he only complainers will be those that monopolize 
the business today due to regulation, but they will adjust [by] either 
paying more or [downsizing].''
    A bank commented that the demand for short-term funding markets 
will likely increase, which will increase cost of accessing those 
markets which will increase bank borrowing costs and have a negative 
impact on profitability.
3. Is the repeal of Regulation Q likely to result in strong demand for 
interest-bearing demand deposits?
    A financial group commented that the repeal of Regulation Q is 
likely to result in strong demand for interest-bearing demand deposits 
and that ``this is very good for the bank and the business clients'' 
and that they expect to see ``significant growth in this product 
category in number of accounts and balances.''
4. Does the repeal of Regulation Q have any implications for 
competitive burden on smaller depository institutions?
    Many of the comments described above discussed the implications of 
the repeal of Regulation Q for competitive burden on smaller depository 
institutions. A financial group commented that the repeal of Regulation 
Q would not have any implications ``to any significant degree'' for 
competitive burden on smaller depository institutions and that the 
repeal ``provides the best opportunity we have seen in decades to 
pursue business clients.'' This commenter asserted that only the 
smaller institutions that would be negatively affected by the repeal 
``are those very small institutions in non-competitive markets which 
have benefitted having no large banks compete for funds.'' A bank 
contended that the repeal of Regulation Q will add to the profitability 
challenges of smaller institutions that have a better track record of 
serving the communities in which they operate than larger institutions 
do.
    A trade association commented that the repeal would increase 
competition for typically high-balance business accounts and that costs 
of funds would increase as such accounts become more difficult to 
attract and more expensive to retain. This commenter asserted that 
troubled financial institutions needing liquidity or deposits will 
aggressively market exceptionally high interest rates which may place 
community banks at a disadvantage. This commenter also asserted that 
the repeal would improve parity between FDIC-insured institutions and 
credit unions in a high interest rate environment because credit unions 
``pay interest on business checking and are moving aggressively into 
the small business-banking niche.'' The commenter further asserted that 
the repeal ``may assist banks of all sizes and charter types to attract 
funds previously placed outside of the traditional banking system'' and 
that this ``reintermediation of corporate money will be more noticeable 
when interest rates increase.''

e. Responses to the Public Comments

    Many of the comments opposed to the repeal of Regulation Q 
suggested implicitly or explicitly that the Board should not repeal 
Regulation Q or should delay the repeal of Regulation Q. As stated in 
the Board's Notice of Proposed Rulemaking, however, the Board will no 
longer have the authority to retain Regulation Q after July 21, 2011. 
Accordingly, the Board does not have the discretion to retain the 
regulation, nor does the Board have the authority to postpone the 
effective date of the repeal beyond July 21, 2011. While the Board may 
use its safety and soundness authority to regulate interest paid by the 
smaller group of state-chartered member banks (but not all member 
banks, as under Regulation Q), the implementation of Section 627 of the 
Dodd-Frank Act does not appear to present issues of systemic risk or 
safety and soundness. In particular, the ability to pay interest on 
demand deposits should enhance clarity in the market for transaction 
accounts and potentially eliminate many of the complicated procedures 
implemented by depository institutions to pay implicit interest on 
demand deposits. Interest-bearing demand deposits could attract funds 
from other areas of the financial system and increase the funding 
possibilities of the banking sector. Additionally, the repeal of 
Regulation Q will become effective during a period of exceptionally low 
interest rates. In such an environment, all short-term money market 
rates are near zero, suggesting that even for those institutions that 
chose to pay interest on demand deposits, the rate paid will likely 
also be close to zero. Near-zero money market rates will likely 
continue for an extended period, so depository institutions and their 
customers should be able to adjust in a gradual and orderly manner to 
the new environment.
    Similarly, it would be contrary to the purpose of Regulation D to 
define ``savings deposit'' to include an account from which up to 24 
convenient transfers or withdrawals per month are permitted, as some 
commenters requested. The Board is required by Section 19(b) of the Act 
to impose reserve requirements on transaction accounts. Section 
19(b)(1)(C) of the Act defines ``transaction account'' as a deposit or 
account on which the depositor is permitted ``to make withdrawals by 
negotiable or transferrable instrument, payment orders of withdrawal, 
telephone transfers, or other similar items for the purpose of making 
payments or transfers to third persons or others.'' \2\ Section 19 was 
intended to distinguish transaction accounts, which are reservable, 
from savings deposits, which are not reservable. Allowing 24 convenient 
transfers per month would allow such transfers every business day of 
the month, and allow a savings deposit to function in a manner 
indistinguishable from a transaction account.
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    \2\ 12 U.S.C. 461(b)(1)(C).
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IV. Final Regulatory Flexibility Analysis

    In accordance with Section 3(a) of the Regulatory Flexibility Act, 
5 U.S.C. 601 et seq. (RFA), the Board is conducting this final 
regulatory flexibility analysis incorporating comments received during 
the public comment period. An initial regulatory flexibility analysis 
was included in the Board's notice of proposed rulemaking in accordance 
with Section 3(a) of the RFA. In its notice of proposed rulemaking, the 
Board requested comments on all aspects of the proposal, and 
specifically requested comment on whether the repeal of Regulation Q 
pursuant to Section 627 of the Dodd-Frank Act would have any 
implications for competitive burden on smaller depository institutions.
    1. Statement of the need for and the objectives of the final rule. 
The Board is repealing Regulation Q, which implements the statutory 
prohibition set forth in Section 19(i) of the Act,

[[Page 42019]]

effective July 21, 2011. The repeal implements Section 627 of the Dodd-
Frank Act, which repeals Section 19(i) of the Act effective July 21, 
2011. Accordingly, the repeal of Regulation Q effective July 21, 2011, 
is mandatory.
    2. Summary of significant issues raised by public comments in 
response to the Board's IRFA, the Board's assessment of such issues, 
and a statement of any changes made as a result of such comments. As 
noted in the SUPPLEMENTARY INFORMATION, a majority of commenters 
asserted that the final rule would have numerous deleterious effects on 
small member banks. As also noted in the Supplementary Information, 
however, the legal authority pursuant to which the Board promulgated 
Regulation Q will cease to exist on July 21, 2011. Accordingly, the 
Board does not have the discretion to retain the regulation beyond July 
21, 2011, nor does the Board have the authority to postpone the 
effective date of the repeal beyond that date. As further noted in the 
SUPPLEMENTARY INFORMATION, the Board does not believe that the final 
rule presents issues of systemic risk or safety and soundness 
sufficient to warrant action by the Board on those bases. Accordingly, 
the Board made no changes in the final rule as a result of the analysis 
of the public comments.
    3. Description of and estimate of small entities affected by the 
final rule. The final rule will affect all national banks and all 
state-chartered member banks. Those institutions may choose after July 
21, 2011 to pay interest on demand deposits that they hold for their 
customers. A financial institution is generally considered ``small'' if 
it has assets of $175 million or less.\3\ There are currently 
approximately 2,956 member banks (national banks and state-chartered 
member banks) that have assets of $175 million or less. These 
institutions are not required to offer demand deposits to their 
customers or to pay interest on those deposits. The Board expects the 
final rule to have a positive impact on all such entities because it 
eliminates an obsolete regulatory provision and because it provides 
member banks with the option of offering interest-bearing demand 
deposits following the repeal of Regulation Q.
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    \3\ U.S. Small Business Administration, Table of Small Business 
Size Standards Matched to North American Industry Classification 
System Codes, available at http://www.sba.gov/sites/default/files/Size_Standards_Table.pdf.
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    4. Projected reporting, recordkeeping, and other compliance 
requirements. The Board believes that the final rule will not have any 
impact on reporting, recordkeeping, and other compliance requirements 
for member banks.
    5. Steps taken to minimize the economic impact on small entities; 
significant alternatives. No significant alternatives to the final rule 
were suggested that could be accomplished without Congressional action. 
Although some commenters suggested that the Board issue a policy 
statement delaying the implementation of the statutory repeal, the 
Board does not believe that it has the authority to extend the 
statutory effective date through a policy statement that would 
contravert the clear Congressional intent to repeal the prohibition 
against the payment of interest on demand deposits effective July 21, 
2011.

V. Paperwork Reduction Act Analysis

    In accordance with the Paperwork Reduction Act (PRA) of 1995 (44 
U.S.C. 3506; 5 CFR 1320 Appendix A.1), the Board reviewed the final 
rule under the authority delegated to the Board by the Office of 
Management and Budget (OMB). No collections of information pursuant to 
the PRA are contained in the final rule; however, there will be 
clarifications to the instructions of several regulatory reporting 
requirements. The Board estimates that the clarifications would have a 
negligible effect on the burden estimates for the existing regulatory 
reporting information collections.

VI. Administrative Procedure Act

    The Administrative Procedure Act (``APA'') generally requires 
federal agencies to publish a final rule at least 30 days before the 
effective date thereof. 5 U.S.C. 553. The APA also provides exceptions 
under which an agency may publish a final rule with an effective date 
that is less than 30 days from the date of publication of the final 
rule. Specifically, the APA provides a substantive rule may be 
published on a date that is less than 30 days before its effective date 
where the rule ``grants or recognizes an exemption or relieves a 
restriction,'' or where the agency finds good cause that is published 
in the final rule. 5 U.S.C. 553(d)(2)-(3).
    The repeal of Regulation Q implements the repeal of Section 19(i) 
of the Federal Reserve Act, effective July 21, 2011, pursuant to 
Section 627 of the Dodd-Frank Act. The repeal relieves a restriction by 
repealing the prohibition against payment of interest on demand 
deposits by member banks. As such, the final rule is exempt under 
Section 553(d)(2) of the APA from the requirement of publication not 
less than 30 days before the effective date. The Board also finds good 
cause under Section 553(d)(3) of the APA for publication of the final 
rule on a date that is less than 30 days before the effective date. 
Publication of the final rule in this time frame will not impose a 
burden on anyone, since all persons subject to Regulation Q have been 
on notice since passage of the Dodd-Frank Act nearly a year ago that 
Regulation Q would be repealed effective July 21, 2011. In addition, 
the Board's request for comment published in the Federal Register on 
April 14 provided additional notice, over three months prior to the 
effective date, that the rule would be repealed. The Board does not 
have the legal authority to extend the effective date beyond July 21, 
2011, because the law pursuant to which the Board promulgated the rule 
will cease to exist on that date. Accordingly, the Board finds good 
cause for not delaying the effective date of the final rule.

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 amending 12 CFR parts 204, 217, and 230 to read as follows:

PART 204--RESERVE REQUIREMENTS OF DEPOSITORY INSTITUTIONS

0
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.


0
2. In Sec.  204.10, 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

[[Page 42020]]

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)--[REMOVED AND RESERVED]

0
3. Part 217 is removed and reserved.

PART 230--TRUTH IN SAVINGS (REGULATION DD)

0
4. The authority citation for part 230 continues to read as follows:

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

Supplement I to Part 230--Official Staff Interpretations

0
5. In Supplement I to Part 230:
0
A. Under Section 230.2--Definitions, paragraph (n) Interest, is 
revised.
0
B. Under Section 230.7--Payment of interest, subsection (a)(1) 
Permissible methods, the introductory text of 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, July 12, 2011.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 2011-17886 Filed 7-15-11; 8:45 am]
BILLING CODE 6210-01-P