F E D E R A L R E S E R V E B A N KO F N E W Y O R K

r Circular No. 8 1 0 2 n L April 27, 1977 J

AMENDMENT TO REGULATION Q

New Time Deposit Category

For IRA and Keogh Plan Accounts

T o A l l M e m b e r B a n k s , a n d O th e r s C o n ce rn ed , in th e S e c o n d F e d e r a l R e s e r v e D i s t r i c t :

Following is the text of a statement issued April 7 by the Board of Governors of the Federal Reserve System:

The Board of Governors of the Federal Reserve System announced today that it is establishing a new category of time deposit accounts to benefit individuals saving for their retirement.

The Board’s action amended Regulation Q (Interest on Deposits) to create a category of deposits under which member banks could pay maximum interest rates for consumer-type time deposits to savers in Individual Retirement Accounts1 and Keogh Plan1 2 retirement accounts.

The main features of the new class of retirement savings deposits are:— It will become effective after 90 days (July 6, 1977).— Member banks may pay interest on IRA and Keogh plan time deposits at a rate of interest equal to the

highest rate permissible under Regulation Q, for time deposits of any maturity or denomination under $100,000, by a Federally insured commercial bank, mutual savings bank or savings and loan association. This is presently 7.75 per cent.

— No minimum denomination would be required for this class of deposit.—A maturity of three years or more would be required.— However, as with other types of IRA or Keogh accounts, withdrawals may be made before maturity with­

out penalty for early withdrawal if the depositor reaches the age of 59^ , or is disabled.— Member banks may modify existing IRA or Keogh plan agreements to permit retirement savers to take

advantage of this new rule.

Retirement savers may elect to use other types of time deposits for their IRA or Keogh plan funds, such as ordinary savings accounts or time deposits with maturities of less than three years. In such cases, the accounts will be subject to the existing ceiling rates of interest prescribed by Regulation Q.

In taking its action the Board noted a Congressional report indicating that about half of all employees in pri­vate employment are not covered by retirement plans.

The Board estimated that for retirement savers contributing the maximum yearly amount under a Keogh plan at a member bank for 30 years, the higher interest allowable under the new category could increase retire­ment savings by up to $50,000 and that the increase for participants under IRAs could be up to $10,000. At present. Regulation Q permits thrift institutions to pay a quarter of one per cent more interest on such deposits than commercial banks may pay.

“Such a penalty for choosing deposits at a particular type of institution is clearly inconsistent with the object­ives of maximizing the total amount of earnings on retirement savings that the Congress sought to encourage through establishment of IRA and Keogh programs” the Board’s announcement said.

The Board’s announcement noted that issues relating to the creation of a new deposit category for IRA or Keogh funds have been the subject of substantial public comment over the course of nearly two years.

In June 1975 the Board requested public comment on a number of questions relating to IRAs, including the questions whether the existing schedule of interest rate ceilings that can be paid on IRA deposits should be increased and whether member banks should be permitted to pay interest on IRA deposits at rates equal to those that may be paid by savings and loan associations and mutual savings banks. In July 1976, the Board announced that it was of the view that IRA participants should be permitted to obtain the highest rate of interest permis­sible on their retirement savings regardless of where the funds are maintained. It was anticipated that further

1 The Employee Retirement Income Security Act of 1974 (ER ISA ) oermits individual* nnt uposit in Individual Retirement Accounts (IRAs) for retirement purposes, tax-deferred contributions up to V s w T y ^ o? IS t ' cent of gross income, whichever is less. p u a year, or 15 per

2 Keogh (H.R. 10) plan accounts were authorized under the Self-Employed Individuals Tax Retirement Art nf U K ? n , acurrently permits a self-employed person to deposit in a Keogh plan account tax-deferred contributions up to $7 500 a ye^r' oTcent of gross income, whichever is less. p a year, or 15 per

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action by the Board to permit member banks to offer IRAs on a fully competitive basis would be appropriate in early 1977. “Accordingly,” the Board said, “the public has had ample opportunity to comment on the issues rele­vant to the Board’s action establishing a special category of deposit for IRAs and Keoghs.”

By adopting a final rule at this time, the Board said, public uncertainty about IRA and Keogh accounts will be removed and retirement savers may begin immediately to plan their retirement programs. The 90-day deferral of the effective date gives member banks time to make operational and other changes and will give them opportunity to compete for IRA and Keogh deposits on an equal basis.

The Board’s announcement pointed out that preferred tax treatment.was given to IRAs to encourage sav­ings for retirement, and not to extend a competitive advantage for a particular class of financial institution.

A survey conducted by the Board indicated that as of December 31, 1976 commercial banks had obtained only 35 per cent of the IRA market, while accounting for 47 per cent of the total household time and savings deposit market [see table p r in te d b e lo w ] .

The Board’s action was taken at this time because of a number of other reasons that it found compelling, including:

— There is still a large number of people eligible to establish IRA or Keogh accounts who have not done so, due partly, the Board believes, to lack of advertising of such accounts by commercial banks due to their noncompetitive position.

— Making retirement savings accounts of equal value at all depositories early in the year may avoid substan­tially diminishing the number of people who start retirement savings this year.

— Banks and other financial institutions offering IRA and Keogh Plan accounts will require a substantial amount of lead time to develop marketing plans that can be put into effect sufficiently in advance of year- end to be useful.

By previous action the Board has made IRA and Keogh plan deposits subject to the same rules under Reg­ulation Q.

IN DIV ID UAL RETIREM ENT ACCOUNTS AND KEOGH ACCOUNTS AT FEDERALLY INSURED DEPOSITORY INSTITUTIO NS

March 31 and December 31, 1976

Per Cent Distribution of Total House­hold Holdings

of TimeAmount Per Cent and Savings($ Mils.) Distribution Deposits as of

Mar. 31 Dec. 31 Mar. 31 Dec. 31 Dec. 3 1 ,19761(Individual Retirement Accounts)

Commercial Banks 469 1,067 34 35 47Mutual Savings Banks 244 504 18 16 15Savings and Loan

Associations 672 1,480* 48 49 p 38Total 1,385 3,051 100 IOOp 100

(Keogh Accounts)Commercial Banks 150 n.a. 15 n.a. 47Mutual Savings Banks 322 n.a. 33 n.a. 15Savings and Loan

Associations 512 n.a. 52 n.a. 38Total 984 n.a. 100 n.a. 100

i Flow-of-Funds estimates. p Preliminary, n a. Not available.N O TE : Data for March 31 are based on universe reports. Data for December 31 are estimates from a sample survey of commer­

cial and mutual savings banks and partial reports from a universe survey of savings and loan associations.

Printed on the following pages is an excerpt from the F edera l R e g is te r of April 19, 1977, con­taining the text of an explanatory notice issued by the Board of Governors regarding the amendment to Regulation Q. In addition, enclosed is a copy of the amendment, which is effective July 6, 1977. Questions thereon may be directed to our Consumer Affairs Division (Tel. No. 212-791-5919).

Additional copies of the enclosure are available upon request.

P a u l A . V o l c k e r ,

President.2

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Title 12— Banks and Banking

' c h a p t e r II— FED ER A L RESERVE SYSTEMSUBCHAPTER A— BOARD OF GOVERNORS OF

THE FEDERAL RESERVE SYSTEM[Reg. Q; Docket No. R-0017]

PAR T 217— IN TE R E S T O N D EP O SITS

Individual Retirement Accounts and Keogh (H .R . 10) Plans

A G E N C Y : B o a r d o f G o v e r n o r s o f th e F e d e r a l R e se r v e S y s te m .

A C T IO N : F in a l ru le .

S U M M A R Y : T h is r u le e s ta b lis h e s a n e w c a te g o r y o f t im e d e p o s it fo r IR A a n d K e o g h fu n d s d e p o s ite d w ith m em b er b a n k s . T h e r u le p e r m its m e m b e r b a n k s to p a y in te r e s t o n fu n d s w ith a m a tu r ity o f th r e e y e a r s o r lo n g e r d e p o s ite d p u r ­s u a n t to IR A a n d K e o g h P la n s e s ta b ­l ish e d w ith t h e b a n k a t a r a te o f u p to 7.75 p e r c e n t .

T h is a c t io n is in te n d e d to e n c o u r a g e d e p o s ito r s to e s ta b lish IR A a n d K e o g h P la n s .

E F F E C T IV E D A T E : J u ly 6, 1977.

F O R F U R T H E R IN F O R M A T IO N C O N ­T A C T :

A lle n L . R a ik e n , A s s is ta n t G e n e r a l C o u n se l, L e g a l D iv is io n , B o a r d o f G o v ­e r n o r s o f th e F e d e r a l R e se r v e S y s te m , W a sh in g to n , D C 20551 (2 0 2 -4 5 2 -3 6 2 5 ) .

S U P P L E M E N T A R Y IN F O R M A T IO N : T h e B o a r d o f G o v e r n o r s h a s a m e n d e d R e g u la t io n Q ( I n te r e s t o n D e p o s it s ) (12 C F R P a r t 2 17) to e s ta b lish a n e w c a t e ­g o r y o f t im e d e p o s it fo r In d iv id u a l R e ­t ir e m e n t A c c o u n ts ( IR A s) a n d K e o g h (H .R . 10) P la n s e s ta b lish e d a t m e m b e r b a n k s . T h e B o a r d ’s a c t io n w ill b e c o m e e f fe c t iv e in 90 d a y s in o rd er to p r o v id e su ff ic ie n t t im e fo r m em b er b a n k s to m a k e n e c e s sa r y a d ju s tm e n ts to th e ir o p e r a t in g p r o c e d u r e s a n d m a r k e tin g m a te r ia ls to im p le m e n t th e r e g u la to r y c h a n g e .

T h e n e w d e p o s it c la s s if ic a t io n e n a b le s m e m b e r b a n k s to p a y in te r e s t o n IR A a n d K e o g h t im e d e p o s its a t a r a te o f in te r e s t n o t in e x c e s s o f t h e h ig h e s t o f a n y o f th e p e r m iss ib le r a te s t h a t c a n be p a id o n a n y t im e d e p o s it u n d e r $100,000 b y a n y F e d e r a lly in su r e d c o m m e r c ia l b a n k , m u tu a l s a v in g s b a n k , or s a v in g s a n d lo a n a s s o c ia t io n . T h e h ig h e s t p e r ­m is s ib le r a te is c u r r e n t ly 7.75 p e r c e n t p e r a n n u m . N o m in im u m d e n o m in a t io n w o u ld b e r e q u ir e d fo r IR A a n d K e o g h t im e d e p o s its . T h e n e w d e p o s it c la s s i f i ­c a t io n fo r IR A s a n d K e o g h s w ill r eq u ire a m a tu r ity o f th r e e y e a r s o r m o r e . T h e th r e e y e a r m in im u m m a tu r ity r e q u ir e ­m e n t w a s a d o p te d b e c a u se ta x p r o v is io n s p e r m it a n IR A p a r t ic ip a n t to r o llo v e r h is o r h e r IR A c o n tr ib u t io n s fr o m o n e in s t i tu t io n to a n o th e r w ith o u t in c u r r in g a ta x p e n a lty o n c e in th r e e y e a r s . W h ile t h is n e w c a te g o r y o f a c c o u n t is a v a ila b le o n ly fo r IR A a n d K e o g h d e p o s its , in d i ­v id u a ls m a y s t i l l e le c t to u se o th e r e x i s t ­in g c a te g o r ie s o f d e p o s its , su c h a s sa v in g s a c c o u n ts a n d t im e d e p o s its w ith m a tu r i­t ie s o f le s s th a n th r e e y e a r s fo r IR A a n d K e o g h fu n d s . W h e n o th e r ty p e s o f a c ­c o u n ts a r e u sed , h o w e v e r , s u c h d e p o s its

w o u ld b e s u b je c t to th e e x is t in g c e il in g r a te s o f in te r e s t p r e sc r ib e d b y R e g u la ­t io n Q fo r s u c h c a te g o r ie s .

T h e B o a r d ’s a c t io n is ta k e n in v ie w o f C o n g r e s s ’ e n a c tm e n t o f t h e E m p lo y m e n t R e t ir e m e n t In c o m e S e c u r ity A c t o f 1974 (P u b . L. 9 3 -4 0 6 ) ( “E R I S A ” ) , w h ic h p r o ­v id es , in p a r t , fo r t h e e s ta b l is h m e n t o f IR A s b y in d iv id u a ls n o t c o v e r e d b y e m ­p lo y e r p e n s io n p la n s a n d fo r in c r e a s e d c o n tr ib u t io n s to K e o g h P la n s b y s e l f - e m p lo y e d p e r so n s . In a d o p t in g E R IS A , C o n g r e ss p ro v id ed t a x in c e n t iv e s to e n ­c o u r a g e q u a lifie d in d iv id u a ls t o sa v e fo r th e ir r e t ir e m e n t th r o u g h th e e s ta b l is h ­m e n t o f p e r so n a l r e t ir e m e n t s a v in g s p r o ­g ra m s. T h e C o n g r e ss h a s in d ic a te d t h a t a p p r o x im a te ly o n e - h a l f o f a ll e m p lo y e e s in p r iv a te e m p lo y m e n t a r e n o t c o v e r e d b y r e t ir e m e n t p la n s (H . R p t. N o . 9 3 -8 0 7 ) . A c c o r d in g ly , th e B o a r d b e lie v e s t h a t i t is in t h e p u b lic in te r e s t to a c c o m m o d a te th e C o n g r e s s io n a l o b je c t iv e b y e n a b lin g a n IR A o r K e o g h P la n p a r t ic ip a n t to o b ta in th e h ig h e s t p o ss ib le r e tu r n o n h is o r h e r r e t ir e m e n t s a v in g s r e g a r d le s s o f t h e ty p e o f d e p o s ito r y in s t i tu t io n in w h ic h th e d e p o s ito r m a in ta in s h is or h e r fu n d s . T h e B o a r d ’s a c t io n is ta k e n a f te r e x te n s iv e c o n s id e r a t io n o f s u b s ta n t ia l p u b lic c o m m e n t r e c e iv e d o n th e is s u e o f e n a b lin g m e m b e r b a n k s to o ffer IR A a n d K e o g h d e p o s it p r o g r a m s o n a fu l ly c o m ­p e t it iv e b a s is w ith o th e r f in a n c ia l in s t i ­tu t io n s ( se e 40 F R 28644 , 57663 , 41 F R 31576 , 5 0 2 4 2 ) .

S in c e IR A a n d K e o g h t im e d e p o s it a c ­c o u n ts a r e e x p e c te d to b e in e x is te n c e fo r lo n g p e r io d s o f t im e a s fu n d s fo r r e ­t ir e m e n t a r e g r a d u a lly b u ilt up , t h e d e ­p o s it a lt e r n a t iv e s p r e s e n tly a v a ila b le a t c o m m e r c ia l b a n k s a n d th r i f t s c a n c r e a te a d iffe r e n c e in to ta l in te r e s t a c c u m u la te d o f a s m u c h a s $10 ,000 fo r IR A p la n s a n d $50,000 fo r K e o g h a c c o u n ts (a s s u m ­in g a 30 y e a r in v e s tm e n t p e r io d a n d th e m a x im u m p e r m iss ib le a n n u a l d e p o s it o f $1,500 fo r IR A a n d $7 ,500 fo r K e o g h d e ­p o s i t s ) . S u c h a p e n a lty fo r c h o o s in g d e ­p o s its a t a p a r t ic u la r ty p e o f in s t i tu t io n is c le a r ly in c o n s is te n t w ith th e o b je c ­t iv e s o f m a x im iz in g th e to ta l a m o u n t o f e a r n in g s o n r e t ir e m e n t s a v in g s t h a t th e C o n g r e ss so u g h t to e n c o u r a g e th r o u g h e s ta b l is h m e n t o f th e IR A a n d K e o g h p ro g ra m s. S o m e r e t ir e m e n t sa v e r s m a y n o t e v e n b e a w a r e o f th e c u r r e n t ly h ig h e r r a te s a v a ila b le a t th r i f t s or m a y n o t h a v e e a s y a c c e s s to su c h in s t i tu t io n s . T h e B o a r d b e lie v e s t h a t c r e a t io n o f a n e w c a te g o r y o f t im e d e p o s it is a p p r o p r ia te in o rd er to r e f le c t th e s p e c ia l c h a r a c te r is ­t ic s a n d b e n e f its p ro v id ed to r e t ir e m e n t sa v e r s u n d e r th e E R IS A le g is la t io n .

In a d o p t in g t h is a m e n d m e n t , th e B o a r d h a s c o n s id e r e d th e a p p lic a b il ity o f P u b . L. 9 4 -2 0 0 . U n d e r t h a t la w , a n in ­t e r e s t r a te d if fe r e n t ia l fo r a n y c a te g o r y o f d e p o s it t h a t w a s in e f fe c t o n D e c e m b e r 10, 1975, m a y n o t be e l im in a te d w ith o u t o b ta in in g a p p r o v a l o f C o n g r e ss . T h e p r o ­v is io n s o f F ub . L. 9 4 -2 0 0 d o n o t a p p ly , h o w e v e r , to c a te g o r ie s o f d e p o s it e s ta b ­l ish e d a f te r D e c e m b e r 10, 1975. S in c e th e B o a r d ’s a c t io n e s ta b l is h e s a n e n t ir e ly n e w d e p o s it c a te g o r y fo r IR A a n d K e o g h sa v e r s , w h ic h d iffe r s in s ig n if ic a n t a s ­

p e c t s fr o m a n y c a te g o r ie s t h a t e x is te d o n D e c e m b e r 10, 1975, th e p r o v is io n s o f P u b . L. 9 4 -2 0 0 a r e n o t a p p lic a b le . C o n ­se q u e n t ly , th e B o a r d ’s a c t io n in e s ta b ­l is h in g th is n e w c a te g o r y o f d e p o s it fo r IR A a n d K e o g h p a r t ic ip a n ts w ill b eco m e e f fe c t iv e in 90 d a y s (J u ly 6, 1 9 7 7 ) .

U n d e r t h e B o a r d ’s e x is t in g R e g u la t io n Q, w ith d r a w a l o f fu n d s m a d e p r io r to th e m a tu r ity a r e s u b je c t t o a p e n a lty fo r e a r ly w ith d r a w a l (12 C F R 2 1 7 .4 ( d ) ) . H o w ev er , fu n d s h e ld p u r su a n t to IR A o r K e o g h a g r e e m e n ts e n te r e d in to b y th e d e p o s ito r a n d th e b a n k m a y be w it h ­d r a w n fro m t im e d e p o s its p r io r to m a ­tu r ity w ith o u t p e n a lty w h e n th e d e p o s i­to r a t ta in s a g e 5 9 V2 o r is d isa b le d , in a c ­c o r d a n c e w ith t h e e x c e p t io n s p r e v io u s ly a d o p te d by th e B o a r d (40 F R 57663 a n d 41 F R 5 0 2 4 2 ) . T h e s e p r o v is io n s a lso w ill b e a p p lic a b le to th e n e w IR A a n d K e o g h t im e d e p o s it c a te g o r ie s .

I n o rd er to p e r m it e x is t in g r e t ir e m e n t sa v e r s to o b ta in th e m o s t a d v a n ta g e o u s IR A a n d K e o g h p ro g ra m s, m e m b e r b a n k s m a y m o d ify th e te r m s o f e x is t in g IR A a n d K e o g h p la n s e n te r e d in to p r io r to t h e e f fe c t iv e d a te o f t h is a m e n d m e n t w ith o u t im p o s it io n o f a n e a r ly w it h ­d r a w a l o r in te r e s t c o n v e r s io n p e n a lty o th e r w ise req u ired u n d e r th e B o a r d ’s r e g u la t io n s .

I s su e s r e la t in g to th e c r e a t io n o f a n e w d e p o s it c a te g o r y fo r IR A a n d K e o g h fu n d s h a v e b e e n th e s u b je c t o f s u b s ta n ­t ia l p u b lic c o m m e n t p r e se n te d to th e B o a r d o n se v e r a l o c c a s io n s . O n J u n e 27, 1975, th e B o a r d , in c o n ju n c t io n w ith th e o th e r F e d e r a l f in a n c ia l r e g u la to r y a g e n ­c ie s , r e q u e s te d p u b lic c o m m e n t o n s e v ­e r a l is su e s p e r ta in in g to t h e o ffe r in g o f IR A p r o g r a m s u n d e r t h e B o a r d ’s R e g u ­la t io n Q (40 F R 2 8 6 4 4 ) . P u b lic c o m ­m e n t w a s s o lic it e d o n a n u m b e r o f IR A is su e s in c lu d in g w h e th e r th e e x is t in g sc h e d u le o f c e i l in g in te r e s t r a te s t h a t c a n be p a id o n IR A d e p o s its sh o u ld be in c r e a s e d a n d w h e th e r m e m b e r b a n k s sh o u ld b e p e r m itte d to p a y in te r e s t o n IR A d e p o s its a t r a te s th a t a r e e q u a l to th o s e t h a t m a y b e p a id by s a v in g s a n d lo a n a s s o c ia t io n s a n d m u tu a l sa v in g s b a n k s.

O v er 325 p u b lic c o m m e n ts w e r e r e ­c e iv e d by t h e B o a r d o n t h e IR A issu e s p r e se n te d . T w o h u n d r e d e le v e n r e s p o n d ­e n t s in d ic a te d t h e v iew t h a t th e R e g u la ­t io n Q p e n a lty fo r e a r ly w ith d r a w a l u n ­n e c e s s a r ily in te r fe r e s w ith t h e d is tr ib u ­t io n o f r e t ir e m e n t sa v in g s a n d fa v o r e d r e m o v a l o f t h e R e g u la t io n Q p e n a lty r e ­s t r ic t io n s w h e n r e t ir e m e n t fu n d s a r e d is tr ib u te d t o a n in d iv id u a l w h o r e t ir e s or b e c o m e s d isa b le d . O n ly 29 p e r so n s o p ­p o se d e lim in a t io n o f t h e p e n a lty . T w o h u n d r e d f o r ty - n in e r e s p o n d e n ts s ta te d th e b e lie f t h a t c o m m e r c ia l b a n k s sh o u ld b e p e r m itte d to p a y in te r e s t o n IR A s a t r a te s e q u a l to th o s e p a id by th r i f t in s t i ­tu t io n s . S ix t y - e ig h t r e s p o n d e n ts o p ­p o se d su c h a c t io n . In a d d it io n , o n e h u n d r e d s e v e n ty - o n e r e s p o n d e n ts f a v ­o red t h e c r e a t io n o f a n e w c a te g o r y o f t im e d e p o s it fo r IR A s w h ile fo r ty r e ­sp o n d e n ts o p p o se d th e a c t io n . F if t y -o n e r e s p o n d e n ts fa v o r e d a n in c r e a s e in th e e x is t in g c e i l in g o n in te r e s t r a te s p e r -

FEDERAL REGISTER, V O L 4 2 , NO. 75— TUESDAY, APRIL 19, 1977

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m itte d to b e p a id o n IR A d e p o s it s b y m e m b e r b a n k s . F o r ty - fo u r c o m m e n ts o p p o se d s u c h a c t io n .

I n o r d e r to e n c o u r a g e t h e e s ta b l is h ­m e n t o f IR A s a n d in r e s p o n s e t o th e v ie w s e x p r e s se d b y th e p u b lic , t h e B o a r d a m e n d e d it s R e g u la t io n Q in D e c e m b e r 1975 to p e r m it a b a n k to p a y a t im e d e p o s it p r io r to m a tu r ity in a c c o r d a n c e w ith t h e p a y o u t te r m s o f th e IR A a g r e e ­m e n t w ith o u t im p o s in g t h e R e g u la t io n Q in te r e s t p e n a lty w h e n t h e IR A p a r t ic i ­p a n t a t ta in s a g e 59 V2 or b e c o m e s d is ­a b le d . I n a d d it io n , t h e $1 ,000 m in im u m d e n o m in a t io n r e q u ir e m e n t fo r lo n g e r te r m t im e d e p o s its w a s w a iv e d fo r IR A fu n d s (4 0 F R 5 7 6 6 3 ) . S im ila r a c t io n w a s ta k e n b y t h e F e d e r a l D e p o s it In s u r a n c e C o r p o r a tio n a n d t h e F e d e r a l H o m e L o a n B a n k B o a r d . T h e B o a r d in d ic a te d th a t t h e a c t io n ta k e n a t t h a t t im e a p p lie d s o le ly to fu n d s d e p o s ite d p u r su a n t to IR A p la n s a n d n o to K e o g h P la n s a n d t h a t th e B o a r d w a s s tu d y in g fu r th e r th e d iffe r e n c e s in t h e s ta tu to r y p r o v is io n s r e ­la t in g t o t h e a d m in is tr a t io n a n d o p e r a ­t io n o f K e o g h s in o r d e r to d e te r m in e w h e th e r t h e a m e n d m e n ts a d o p te d fo r IR A s sh o u ld b e m a d e a p p lic a b le to K e o g h s . I t w a s a ls o in d ic a te d t h a t t h e B o a r d w a s c o n t in u in g to e x a m in e t h e q u e s t io n o f w h e th e r m e m b e r b a n k s sh o u ld b e p e r m it te d to p a y in te r e s t o n IR A d e p o s it s a t r a te s t h a t a r e e q u a l to th o s e t h a t m a y b e p a id b y s a v in g s a n d lo a n a s s o c ia t io n s a n d m u tu a l sa v in g s b a n k s .

I n J u ly 1976 t h e B o a r d a n n o u n c e d t h a t i t w a s o f th e v ie w t h a t IR A p a r t ic ip a n ts sh o u ld b e p e r m itte d to o b ta in t h e h ig h e s t r a te o f in te r e s t p e r m is s ib le o n th e ir r e ­t ir e m e n t s a v in g s r e g a r d le s s o f w h e r e th e ir fu n d s a r e m a in ta in e d ( 4 1 F R 3 1 5 7 6 ) . T h e B o a r d s ta t e d t h a t c o n t in u a ­t io n o f t h is in e q u ity w a s in c o n s is te n t w ith t h e o b je c t iv e o f p r o v id in g IR A d e p o s ito r s w ith a m e a n s o f o b ta in in g th e h ig h e s t e a r n in g s p o ss ib le o n r e t ir e m e n t sa v in g s . T h e B o a r d ’s a n n o u n c e m e n t a lso d isc u s se d t h e f in d in g s o f a su r v e y o f IR A fu n d s c o n d u c te d by th e B o a r d in c o n ­ju n c t io n w ith t h e F D IC a n d F e d e r a l

H o m e L o a n B a n k B o a r d . A m o n g th e d a ta o b ta in e d fr o m a ll F e d e r a lly in su r e d c o m ­m e r c ia l b a n k s , sa v in g s a n d lo a n s , a n d m u tu a l sa v in g s b a n k s, w e r e s ta t is t ic s o n t h e a m o u n t a n d d is tr ib u tio n o f IR A fu n d s , d is tr ib u tio n o f IR A fu n d s a c c o r d ­in g t o s iz e o f in s t i tu t io n , a n d m a tu r ity c la s s if ic a t io n s o f IR A fu n d s a t c o m m e r ­c ia l b a n k s a n d m u tu a l sa v in g s b a n k s. T h e r e s u lts o f th is su r v e y in d ic a te t h a t a s o f M a r c h 31, 1976, t h r i f t in s t i tu t io n s p o sse sse d r e la t iv e ly m o r e IR A fu n d s th a n c o m m e r c ia l b a n k s . T h e B o a r d s ta t e d t h a t fu r th e r m o n ito r in g fo r s e v e r a l m o n th s w o u ld b e n e c e s sa r y in o rd er t o d e te r m in e w h e th e r m e m b e r b a n k s a r e a t a c o m p e t i­t iv e d is a d v a n ta g e in c o m p e t in g fo r IR A fu n d s a n d t h a t i f t h e p r e s e n t tr e n d in th e c o m p e t it iv e s tr u c tu r e fo r IR A fu n d s c o n t in u e d , t h e B o a r d w o u ld th e n c o n ­s id e r ta k in g a p p r o p r ia te s te p s to r e s to r e c o m p e t it iv e b a la n c e b e tw e e n c o m m e r ­c ia l b a n k s a n d t h r i f t in s t i tu t io n s in th e o ffe r in g o f IR A s. I t w a s a n t ic ip a te d th a t fu r th e r a c t io n b y t h e B o a r d t o p e r m it m e m b e r b a n k s to o ffer IR A s o n a fu l ly c o m p e tit iv e b a s is w o u ld b e a p p r o p r ia te in e a r ly 1977. A s e c o n d su r v e y c o n ­d u c te d in e a r ly 1977 in d ic a te d t h a t a s o f D e c e m b e r 31, 1976, c o m m e r c ia l b a n k s c o n t in u e d to h a v e a su b s ta n t ia l ly sm a lle r s h a r e o f th e IR A m a r k e t .1

In N o v em b er 1976, th e B o a r d a m e n d e d R e g u la t io n Q to e x te n d th e a m e n d m e n ts a d o p te d in D e c e m b e r 1975 fo r e a r ly w ith d r a w a l o f IR A fu n d s to fu n d s d e p o s ­ite d to m e m b e r b a n k s p u r su a n t to K e o g h p la n s e n te r e d in to b y th e d e p o s ito r w ith th e b a n k . T h is a c t io n w a s ta k e n in r e ­sp o n se to p u b lic c o m m e n ts r e q u e s tin g su c h a c t io n a n d b e c a u se t h e B o a r d d e ­te r m in e d t h a t th e n u m e r o u s o p e r a t io n a l s im ila r it ie s b e tw e e n K e o g h s a n d IR A s w a r r a n te d s im ila r tr e a tm e n t w ith r eg a rd

1 As of th a t date, comm ercial banks held 35 percen t of IRA funds and 47 percent of to ta l household tim e and savings depqsits. Savings and loans associations, however, ac­counted for 49 percen t of IRA funds and 38 percen t of to ta l household tim e and savings deposits.

to w ith d r a w a ls a t r e t ir e m e n t a n d w a iv er o f t h e m in im u m d e n o m in a t io n r e q u ir e - ' m e n t (41 F R 5 0 2 4 2 ) .

D u r in g t h e c o u r se o f th is r u le m a k in g p r o c e e d in g in it ia t e d in J u n e 1975, th e B o a r d h a s re c e iv e d n u m e r o u s c o m m e n ts o n t h e q u e st io n o f p e r m it t in g m em b er b a n k s to o ffer IR A a n d K e o g h p ro g ra m s o n a fu l ly c o m p e tit iv e b a s is w ith o th e r d e p o s ito r y in s t i tu t io n s . T h e B o a r d h a s c a r e fu lly r e v ie w e d th e s e c o m m e n ts a n d h a s c o n s id e r e d th e r e su lts o f s tu d ie s i t h a s c o n d u c te d a n d o th e r in fo r m a t io n su b m itte d c o n c e r n in g th e e s ta b l is h m e n t o f IR A s a n d K e o g h s a t f in a n c ia l in s t itu t io n s . A c c o r d in g ly , th e p u b lic h a s h a d a m p le o p p o r tu n ity to c o m m e n t o n th e issu e s r e le v a n t to th e B o a r d ’s a c t io n e s ta b l is h in g a sp e c ia l c a te g o r y o f d e p o s it fo r IR A s a n d K e o g h s . B y a d o p tin g a f in a l r u le im m e d ia te ly , th e B o a r d ’s a c t io n w ill r em o v e th e p u b lic u n c e r ta in ty t h a t e x is t s c o n c e r n ­in g t h e c h a r a c te r is t ic s o f a n ew IR A a n d K e o g h s . B y a d o p tin g a f in a l r u le im ­m e d ia te ly , t h e B o a r d ’s a c t io n w ill r em o v e th e p u b lic u n c e r ta in ty t h a t e x is ts c o n ­c e r n in g th e c h a r a c te r is t ic s o f a n e w IR A a n d K e o g h d e p o s it c a te g o r y a n d w ill e n ­a b le r e t ir e m e n t sa v e r s to b e g in im m e ­d ia te ly t o p la n th e ir r e t ir e m e n t p r o ­g r a m s. T h e e f fe c t iv e d a te o f th e a m e n d ­m e n t h a s b e e n d e fe r r e d fo r 90 d a y s u n til J u ly 6, 1977, t o p ro v id e m e m b e r b a n k s w ith su f f ic ie n t o p p o r tu n ity to m a k e o p ­e r a t io n a l c h a n g e s a n d p r o m o tio n a l p la n s t h a t w ill b e n e c e s sa r y in o rd er to in c o r ­p o r a te t h e n e w a m e n d m e n ts in to th e ir IR A a n d K e o g h o ffe r in g s . T h e 90 d a y d e la y w ill e n su r e t h a t a ll m e m b e r b a n k s w ill h a v e t h e o p p o r tu n ity to c o m p e te fo r IR A a n d K e o g h d e p o s its o n a n e q u a l b a s is a n d w ill p r o v id e a n o r d e r ly t r a n s i ­t io n p e r io d d u r in g w h ic h a d ju s tm e n ts to e x is t in g p la n s c a n b e m a d e . B a se d o n th e s e c o n s id e r a t io n s , th e B o a r d fo r g o o d c a u se f in d s t h a t fu r th e r o p p o r tu n ity fo r p u b lic c o m m e n t r e g a r d in g th is a m e n d ­m e n t is u n n e c e s s a r y a n d w o u ld b e c o n ­tr a r y to t h e p u b lic in te r e s t .

4Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board of Governors of the Federal Reserve System

INTEREST ON DEPOSITS

AMENDMENT TO REGULATION Q

Effective July 6, 1977, Section 217.7 is amended to read as follows:SECTION 217.7— MAXIMUM RATES OF

INTEREST PAYABLE BY MEMBER BANKS ON TIME AND SAVINGS

DEPOSITS

* * *

(b) Time deposits of less than $100,000.

(1) Except as provided in paragraphs (a),(d ), and (e) and subparts 2 and 3 of this para­graph, no member bank shall pay interest on any time deposit at a rate in excess of the applicable rate under the following schedule:

♦ * *

(e) Individual retirement account and Keogh (H.R. 10) plan deposits of less than $ 100,000.

Except as provided in paragraph (a ), a member bank may pay interest on any time deposit with a maturity of three years or more that consists of funds deposited to the credit of, or in which the entire beneficial interest is held by, an individual pursuant to an Indi­vidual Retirement Account agreement or Keogh (H.R. 10) Plan established pursuant to 26 U.S.C. (I.R.C. 1954) §§ 408, 401, at a rate not in excess of the highest of any of the per­missible rates that can be paid on time deposits under $100,000 by any Federally insured com­mercial bank, mutual savings bank, or savings and loan association.3

3 The highest permissible rate is currently 7.75 per­cent per annum (12 CFR 329.7 and 12 CFR 526.5).

For this Regulation to be complete, retain:1) Regulation Q pamphlet, effective December 4, 1975.2) Amendments effective March 1, 1976, July 26, 1976, November 8, 1976, and

March 24, 1977.3) Supplement effective December 4, 1975.4) This slip sheet.

P RI N TE D I N N E W YORK

[Enc. Cir. No. 8102]

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