[Federal Register: February 19, 1998 (Volume 63, Number 33)]
[Rules and Regulations]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
Rules and Regulations
This section of the FEDERAL REGISTER contains regulatory documents
having general applicability and legal effect, most of which are keyed
to and codified in the Code of Federal Regulations, which is published
under 50 titles pursuant to 44 U.S.C. 1510.
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FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 329
Interest on Deposits
AGENCY: Federal Deposit Insurance Corporation.
ACTION: Final rule.
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
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
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,
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 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
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
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,
[FR Doc. 98-4142 Filed 2-18-98: Financial Institution Letters: 8:45 am]
BILLING CODE 6714-01-P