On July 14, 2011, the Board of Governors of the Federal Reserve System (the “Federal Reserve”) and the Federal Deposit Insurance Corporation (“FDIC”) each separately issued a final rule (collectively, the “Final Rules”) implementing the repeal of the statutory prohibition on the payment of interest on demand deposits, as mandated by section 627 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The Final Rules will take effect on July 21, 2011, the one-year anniversary of the passage of the Dodd-Frank Act.
Section 19(i) of the Federal Reserve Act (the “FRA”) generally provides that no bank which is a member of the Federal Reserve System “shall, directly or indirectly, by any device whatsoever, pay any interest on any deposit which is payable on demand…” On August 29, 1933, the Federal Reserve promulgated Regulation Q in order to implement Section 19(i)3 of the FRA. Section 627 of the Dodd-Frank Act repeals section 19(i) of the FRA in its entirety and the final rule now issued by the Federal Reserve repeals Regulation Q and any references to Regulation Q found in the Federal Reserve’s other regulations, interpretations, and commentary, each effective beginning on July 21, 2011.
The FDIC issued a complimentary final rule which rescinds the regulations which implements the interest prohibition of section 19(i) of the FRA with respect to state-chartered, nonmember banks, codified at 12 CFR 329.2. The FDIC’s final rule will also become effective beginning on July 21, 2011. The FDIC’s final rule goes on to also apply the statutory definition of “interest” found at 12 CFR 329.1(c), which is part of the rules dealing with the payment of interest on deposits, to the definitions section of 12 CFR 330, which are the rules dealing with deposit insurance coverage. The rules regarding deposit insurance coverage were also separately affected by the Dodd-Frank Act, which implemented a temporary period of unlimited deposit insurance coverage through the FDIC for noninterest-bearing transaction accounts through December 31, 2012. As a result of the temporary unlimited deposit insurance provided by the Dodd-Frank Act, the rationale for the transfer of the definition of “interest” provided for in the FDIC’s final rule is that “a regulatory definition of the term ‘interest’ would still be useful in interpreting the requirements of section 343 of the [Dodd-Frank Act] providing temporary, unlimited deposit insurance coverage for noninterest-bearing transaction accounts.” The definition of “interest” applicable to the rules regarding deposit insurance will be, effective July 21, 2011, as follows:
“The term ‘interest’ 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.”
The Working Group will continue to monitor any developments with the Federal Reserve and FDIC and provide timely coverage at Weil’s Financial Regulatory Reform Center. If you are interested in discussing the Final Rules please call or email Working Group members Heath Tarbert (202-682-7177) (email@example.com) or Alex Radetsky (212-310-8905) (firstname.lastname@example.org).