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FEDERAL RESERVE BANK

OF NEW YORK

REGULATION Q

Comment Invited on Proposals Relating to New Types of Savings Deposits

[Circular No. 8551

April 4, 1979 ]

To A l l Me mb er Ba n ks , a n d O the r s Con ce r n e d , 

in the Se con d Fe d e r a l Re se r v e D i s t r i c t :

 The Boar d of Governor s of t he Federal Reser ve Syst em, t he Feder al Home Loan

Bank Board, and t he Federal Deposi t I nsurance Corporat i on have i ssued t he f ol l owi ng

 j oi nt announcement :

A ser i es of measur es desi gned t o hel p i ndi vi dual s obt ai n a hi gher

r at e of r et ur n on t hei r savi ngs was proposed t oday [ Apr i l 3] f or publ i ccomment by t he Feder al r egul at or s of f i nanci al i nst i t ut i ons.

Comment was r equest ed by May U on poss i bl e act i ons t hat coul d bet aken on i ndi vi dual pr oposal s or i n combi nat i on. The r egul ator s emphasi zedt hat t he f ol l owi ng pr oposal s are open t o change bn such speci f i cs as

matur i t y, r at e, penal t y or other t erms on t he basi s of publ i c commentr ecei ved:

1. Cr eat i on of a f i ve- year cer t i f i cat e of deposi t wi t h a maxi mumr ate of i nt er est based on but bel ow t he rat e on U. S. Treasur y secur i t i es

of si mi l ar mat ur i t y.

2. I nt r oduct i on of a bonus savi ngs account t hat woul d pay an

ext r a 1/ 2 per cent on t he mi ni mumbal ance hel d i n t he account over a

12- mont h per i od.

3. Cr eat i on of a r i si ng- r at e cer t i f i cat e f eat ur i ng hi gher

l i qui di t y and an i nt er est r at e cei l i ng t hat i ncreases dur i ng t he t er m oft he cert i f i cat e.

1+. El i mi nati on of al l mi ni mum deposi t r equi r ement s on cert i f i cates

of l ess t han four year s ( r equi r ed cur r ent l y onl y at savi ngs and l oan

associ at i ons) and r educi ng t he mi ni mum amount t o $500 f or other cer t i f i cate

account s, except f or t he $10, 000 mi ni mum r equi r ed f or s i x- mont h (26 - week)money market cert i f i cat es.

 These act i ons wer e proposed j oi nt l y by t he Federal Home Loan Bank

Boar d f or f eder al l y i nsur ed savi ngs and l oan associ at i ons, t he Feder al

Reserve Boar d f or al l nat i onal and St ate member banks , and by t he Feder alDeposi t I nsurance Corporat i on f or f ederal l y i nsur ed nonmember banks andsavi ngs banks.

 Today' s proposal s are consi st ent wi t h an announcement made by t he agenci eson Mar ch 8, when new r ul es wer £ i ssued f or t he si x- mont h money marketcer t i f i cat e. At t hat t i me, t he agenci es sai d t hey were revi ewi ng t he t er mson other t ypes of deposi t s "wi t h a vi ew t oward pr ovi di ng i mpr oved savi ngs

oppor t uni t i es f or t he smal l saver . "

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Fi ve- year CDs

I n seeki ng publ i c comment on t he proposal , f or a f i ve- year CD, t he agenci es

suggest ed a cei l i ng rate f or commerci al banks t hat woul d be 1 1/ U percent agepoi nt s bel ow an aver age f i ve- year r at e based on U. S. Treasury secur i t i es.

 The cei l i ng f or t hr i f t i nst i t ut i ons woul d be 1 percent age poi nt bel ow t he

same Treasur y r ate.

Cei l i ngs f or newl y i ssued CDs woul d change once each mont h. Begi nni ngt he f i r st Thur sday of ever y mont h, t he cei l i ng r at e f or new i nst r ument si ssued t hat mont h woul d be based on t he aver age f i ve- year r ate f or t he

precedi ng cal endar week as determi ned by t he Treasury. Under t hi s f or mul a,

t he nomi nal cei l i ngs f or Apr i l 1979 woul d be 7.95 per cent f or commerci albanks and 8.20 per cent f or t hr i f t i nst i t ut i ons. The cor r espondi ng ef f ecti ve

yi el ds, i ncl udi ng cont i nuous compoundi ng, woul d be 8.39 percent f or banks

and 8. 67 per cent f or t hr i f t s.

 The penal t y f or pr emat ur e wi t hdrawal on t hi s i nst r ument woul d be

f or f ei t ur e of si x mont hs* i nt er est .

Bonus savi ngs account s

Under t hi s pr oposal , a l ump- sumbonus coul d be pai d on t he mi ni mum i n

a savi ngs account mai nt ai ned by an i ndi vi dual or qual i f i ed nonpr of i t organi

zat i on duri ng a 12- mont h peri od.

 Thi s bonus woul d be i n addi t i on t o t he maxi mum r ates on savi ngsaccounts of 5 per cent f or commerci al banks and 5 l A per cent f or savi ngs

banks and savi ngs and l oan associ at i ons.

Ri s i ng- r at e cert i f i cat es

 The mat ur i t y f or t he proposed r i si ng- r at e cer t i f i cat e woul d be 8 years

and t he i nt er est r at e cei l i ng woul d r i se i n accor dance wi t h t he f ol l owi ng

schedul e:

MAXI MUM RATES PAYABLE

Per i od Commer ci al Banks S&Ls and MSBs

0-1 year 6 6 1/U

Over 1 - 2 1 / 2 years 6 1/2 6 3 A

Over 2 1/ 2 - U years 7 7 1/U

Over U - 5 years 7 1/2 7 3/U

Over 5 - 8 years 8 8 1/ U

I nt er est at t he above r at es woul d be pai d onl y for the per i od i ndi cat ed

 The 6 percent r at e f or commer ci al banks, f or exampl e, woul d be pai d duri ng

t he f i r st year of t he cer t i f i cat e; t he cei l i ng r at e woul d r i se t o 6 1/ 2

per cent onl y f or t he per i od f r om 1 year t o 2 1/ 2 years, and sc on. Compoundi ng

wi l l be al l owed on t hese account s.

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 The penal t y f or ear l y wi t hdr awal dur i ng t he f i r st year woul d be f or f ei t ur e

of t hr ee mont hs' i nt er est . No penal t y woul d be r equi r ed af t er that . Addi t i ons

t o the account coul d be made onl y dur i ng t he f i r st year .

Mi ni mum denomi nat i on

Present l y, t her e i s a $1, 000 mi ni mum r equi r ed f or cer t ai n cat egor i esof t i me deposi t s. The agenci es proposed r educi ng t hi s mi ni mumt o $500

al t hough i nst i t ut i ons woul d be f r ee t o est abl i sh a hi gher mi ni mum i f t hey

desi r ed.

 The r egul at or s not ed t hat cost st udi es i ndi cat e t hat t he f our pr oposed

measur es may have a gr eat er f i nanci al i mpact on t hr i f t s, due t o t hei r asset

st r uct ur e, t han commerci al banks. The pr oposal s, by af f ecti ng deposi t f l ows

and t he cost of deposi t f unds, may i mpact somewhat on mor t gage rates.

Wi t h r egard t o Feder al credi t uni ons, t he Nat i onal Cr edi t Uni on

Admi ni st r at i on i s not mandati ng speci f i c mat ur i t i es—whi ch may r ange f r om

90 days on out — f or i t s shar e cer t i f i cat e account s ( si mi l ar t o CDs) . However ,i n or der t o mai nt ai n consi st ency among f i nanci al i nst i t ut i ons, t he maxi mum

r at es payabl e on such cert i f i cates woul d be set 1/ U percent above t he cei l i ng

r at es speci f i ed f or commerc i al banks.

I n t r ansmi t t i ng t he st atement t o t he Reserve Banks, t he Boar d of Governors

al so noted:

 These pr oposed act i ons woul d not change t he cei l i ng r at es cur r ent l y

i n ef f ect f or out st andi ng deposi t s. Al so, t he cei l i ng r at e t hat may be pai d

on I RA and Keogh account s and on government t i me deposi t s woul d remai n at

8 per cent r egar dl ess of t he cei l i ngs est abl i shed f or f i ve- year CDs or

ei ght - year r i si ng r at e cert i f i cat es.

 The onl y changes pr oposed i n t he penal t y f or ear l y wi t hdr awal are ont he f i ve- year CD and t he r i si ng- r at e cer t i f i cat e. The penal t y on al l ot her

cer t i f i cates woul d r emai n unchanged— namel y, t he l oss of t hr ee mont hs i nt erest

and r educt i on of r emai ni ng i nt erest t o t he passbook r ate on t he amount of

f unds wi t hdr awn. However, publ i c comment i s sought on whet her t he pr oposed

si x- mont h penal t y on t he f i ve- year cer t i f i cat e shoul d appl y t o al l ot her CDs.

 The t ext of t he pr oposal s wi l l be mai l ed t o al l member banks i n t hi s Di st r i ct

when avai l abl e. I t wi l l al so be publ i shed i n t he Feder al Regi st er .

Comments on t he pr oposal s shoul d be submi t t ed by May U and may be sent t o

our Consumer Af f ai r s and Bank Regul at i ons Depart ment .

Pa u l  A. Vo l c k er .

 President.