I. INTRODUCTION
Regulation D (Reserve Requirements of Depository Institutions – Classifications of Deposits) applies to all federally insured state chartered banks and national banks (12 C.F.R. Section 204.1).
Regulation D established the reserve requirements for both state and national banks and classifies deposits into two general categories: (a) time deposits (0% reserves) and (b) transaction accounts (3% or greater reserves). A bank must utilize the definitions contained in Regulation D to be able to specify the deposit products it offers and place them in the proper category for reserve requirement calculations.
A. Time Deposits
A “time deposit” is one which the depositor has no right nor is permitted to make withdrawals from within six days after the date of deposit unless the deposit is subject to and assessed an early withdrawal penalty of at least seven days’ simple interest on amounts withdrawn the first six days after the deposit. A time deposit from which partial early withdrawals are allowed must impose withdrawal penalties of at least seven days’ simple interest on amounts withdrawn within six days after each partial withdrawal. If such additional withdrawal penalties are not imposed, then the account is no longer a time deposit (but may be a savings deposit if it meets the requirements of the definition) and becomes a transaction account.
Again, any account or deposit that falls within the nonpersonal time deposit definition may be subject to reserve requirements.
The “time deposit” definition includes deposits payable on a specified date (not less than seven days after the date of deposit) and deposits payable at the end of a specified time period (not less than seven days after the date of deposit). Deposit accounts in which a bank requires a written notice given by the depositor not less than seven days prior to withdrawal are also defined as time deposits. “Club accounts” (non-savings, special accounts; i.e.,“Christmas club” or “vacation club”) deposited pursuant to written contracts providing that no withdrawal shall be made unless a certain number of periodic deposits have been made during a period of not less than three months are also classed as “time deposits.”
All “savings deposits” are included in the time deposit category. The term “savings deposit” means a deposit/account in which the depositor is not required by the deposit contract (but may at any time be required by the bank) to give written notice of an intended withdrawal not less than seven days before withdrawal is made (and not payable on a specified date or at the end of a specified time period).
The term “savings deposit” also includes an account wherein the depositor is limited to no more than six transfers and withdrawals, or a combination of such transfers and withdrawals, per month or statement cycle (or similar period) of at least four weeks, to another account of the depositor at the same bank or to a third party by means of a preauthorized or automatic transfer, or telephonic agreement, order or instruction, or by check, draft, debit card or similar order. (NOTE: As of July 2, 2009, Regulation D was amended to eliminate the previous restriction of three transfers or withdraws per month from a savings deposit account by check, draft, debit card, or similar order payable to third parties).
While banks are not required to change their practices to allow six, rather than three withdrawals and transfers from savings deposit accounts, if they retain the limitation of three transfers or withdrawals per month and charge fees for additional transactions that are now permitted, they may not inform customers that such limitations or fees are required by federal law or regulation. The banks adopting these changes are required to update their Truth-In-Savings (Regulation DD) disclosures of excess transaction fees, and their deposit account agreement disclosing limitations on Regulation D transactions should be updated accordingly.
1. Nonpersonal Time Deposits
The term “nonpersonal time deposit” means a time deposit, including a MMDA or any other savings deposit, where the entire beneficial interest is held by a depositor which is not a “natural person.” A “natural person” is an individual or a sole proprietorship, but not a corporation owned by an individual, partnership or other association. The term also includes time deposits which are transferable (unless issued to a natural person prior to October 1, 1980). A time deposit is considered transferable unless it contains a specific statement that it is not transferable on the certificate, instrument, passbook, statement or other form representing the account. Exceptions to the term are KEOGH (H.R. 10) plans, IRAs, or unfunded deferred-compensation plans (Subtitle D of the Revenue Act of 1978), but the entire beneficial interest must be held by natural persons.
2. Time Deposits and Early Withdrawals
For monetary policy purposes, early withdrawal penalties are distinguishing features between transaction accounts and time deposits and the various maturities on time deposits. According to Regulation D, a deposit with a minimum maturity of seven or more days from which withdrawals are allowed within the first six days of a deposit will be a time deposit only by meeting other criteria for a time deposit and is subject to a minimum early withdrawal penalty equal to seven days simple interest on the amount withdrawn.
Deposits not meeting the “time” or “savings” deposits definition are considered transaction accounts and subject to reserve requirements.
The balance of a time deposit after partial early withdrawal is still considered a time deposit if later early withdrawals are subject to the seven day penalty for withdrawals made within six days of the last partial withdrawal.
B. Exceptions to/Waiver of Penalty
A time deposit or a portion thereof, may be paid before maturity without imposing the early withdrawal penalties specified by this part:
1. Where the time deposit is maintained in an individual retirement account and is paid within seven days after establishment of the individual retirement account, or where it is maintained in a Keogh plan; if the depositor forfeits an amount at least equal to the simple interest earned on the amount withdrawn;
2. Where the depository institution pays all or a portion of a time deposit representing funds contributed to an individual retirement account or a Keogh plan when the individual for whose benefit the account is maintained attains age 59 1/2 or is disabled or thereafter;
3. Where the depository institution pays that portion of a time deposit on which federal deposit insurance has been lost as the result of the merger of two or more federally insured banks in which the depositor previously maintained separate time deposits, for a period of one year from the date of the merger;
4. Upon the death of any owner of the time deposit funds;
5. When the owner of the time deposit is determined to be legally incompetent by a court or other administrative body of competent jurisdiction; or
6. Where a time deposit is withdrawn within 10 days after a specified maturity date even though the deposit contract provided for automatic renewal at the maturity date.
C. Transaction Accounts
The “transaction account” category includes demand deposits; negotiable orders of withdrawal (NOW) accounts; and automatic transfer (ATS) accounts. The term includes all non-savings deposits and all non-time deposits or deposit accounts which replenish depleted demand deposit accounts.
“Demand deposits” include:
For NOW account eligibility, see the separate article following this one.
For banks that elect not to suspend enforcement of the six-transfer limit on accounts classified as "savings deposits," the following apply:
1. Common Compliance Questions
a. What is the Difference Between a “Savings Account” and a “MMDA?” As of April 24, 1991 the Fed amended Regulation D to eliminate the separate “savings account” and “MMDA” categories and replaced the old categories with a new definitional category called “savings deposit.”
b. What Transactions are Included/Excluded in the “Six Transactions Per Month” Limit?
Transactions Included
The following lists the transactions included in the limitation:
Transactions Excluded
c. How Should a Bank Handle Excess Transfers? For reserve requirement purposes, an account is not considered a “savings deposit” if it has more than six preauthorized, automatic, or telephonic transfers per month. If there are excess transfers, the account is not a “savings deposit,” and different reserve requirements apply.
When it comes to excess transfers, Reg D is clear as to how a bank must handle the problem. If the customer makes more than six preauthorized transfers per month, the bank should warn the customer, and if the excess transfers continue, the bank must reclassify the “savings deposit” as a transaction account. If the bank does not reclassify the account and continues to permit excess transfers, the account will automatically (by Reg D definition) become a transaction account under the following rules:
D Elimination of Transfer Limits on Savings Deposits
The Federal Reserve Board (FRB) has issued an interim final rule to simplify reserve requirements by eliminating transfer limits on savings deposits. The FRB has revised the “savings deposit" definition under FRB Regulation D (Reserve Requirements of Depository Institutions) by eliminating the limit on customers’ transfers from their savings deposit accounts from a maximum of six transfers per month. The rule became effective on April 24, 2020.
The amendments are intended to allow depository institution customers more convenient access to their funds and to simplify account administration for depository institutions. Prior to this interim final rule, Regulation D limited the number of certain convenient kinds of transfers or withdrawals that an account holder may make from a “savings deposit" to not more than six per month (six transfer limit). “Convenient" transfers or withdrawals for this purpose include preauthorized or automatic transfers (such as overdraft protection transfers or arranging to have bill payments deducted directly from the depositor’s savings account) telephonic transfers (made by the depositor telephoning or sending a fax or online instruction to the bank and instructing the transfer to be made), and transfers by check, debit card, or similar orders payable to third parties. The interim final rule includes deletion of the provisions in the “savings deposit" definition that require depository institutions either to prevent transfers and withdrawals in excess of the limit or to monitor savings deposits ex post for violation of the limit.
The interim final rule allows depository institutions immediately to suspend enforcement of the six transfer limit and to allow their customers to make an unlimited number of convenient transfers and withdrawals from their savings deposits. The interim final rule permits, but does not require, depository institutions to suspend enforcement of the six transfer limit. The interim final rule also does not require any changes to the deposit reporting practices of depository institutions.
E. Interim Final Rule - FAQs
Concurrently with the adoption of the interim final rule, the FRB has issued FAQs on its existing “savings deposit frequently asked questions" webpage which may be found at https://www.federalreserve.gov/supervisionreg/savings-deposits-frequently-asked-questions.htm.
F. Interest on Required and Excess Reserves
1. Introduction
The Federal Reserve Board (FRB) adopted a final rule, effective July 2, 2009, directing Federal Reserve Banks to pay interest on balances held at Reserve Banks to satisfy reserve requirements and on balances held in excess of required reserve balances and clearing balances. The action taken by the FRB is pursuant to provisions of the Emergency Economic Stabilization Act of 2008 that accelerated the effective date of the authority for the Federal Reserve Banks to pay earnings on balances maintained at the Reserve Banks by or on behalf of depositary institutions, which was originally scheduled to go into effect on October 1, 2011, under the provisions of the Financial Services Regulatory Relief Act of 2006.
2. Interest on Reserves
Interest will be paid on average required reserve balances and average excess balances maintained over a reserve maintenance period. The interest rate for both required reserve balances and excess balances has been established at one quarter percent. The Federal Reserve Board has also reserved authority to revise from time to time the rates for payment of interest on balances at Reserve Banks, to retain flexibility to make adjustments to the rates of interest in response to evolving market conditions.
3. Treatment of Correspondent Balances Under the final rule, the Reserve Banks will pay interest on required reserve balances maintained by or on behalf of an eligible institution, even if the pass-through correspondent for the eligible institution is itself not an eligible institution. In the case of a pass-through correspondent that is not an eligible institution, the required reserve balances held in the correspondent’s account will be solely those held to meet its correspondent’s reserve requirements. When the pass-through correspondent is an eligible institution, the required reserve balances in the correspondent’s account may include those balances held by the correspondent to meet its own reserve requirement, if any, as well as those held to meet its correspondent’s reserve requirements.
Under the final rule, any excess balance in the account of a correspondent that is not an eligible institution will be attributable to the correspondent, and no earnings will be paid on the excess balance in that account. A pass-through correspondent may, but is not required, to pass back to its correspondent interest paid on balances held on behalf of that correspondent.