withdrawal. The Board replied that it would not be permissible for the bank to pay the check and continue to classify the account as a "savings deposit".

The amendments in question require that withdrawals may be made "only through payment to the depositor himself but not to any other person whether or not acting for the depositor". Although the footnotes to the amendments state that "Payment may be made to the depositor over the counter, through the mails or otherwise", in the situation presented by the inquiry payment would not be made "to the depositor", but rather to a third party. The footnotes merely explain that the depositor would not necessarily have to go to the bank in person to make a withdrawal. For example, it would be permissible for the bank to make payment to the depositor by mailing him a check, or it would be permissible for the depositor to send a messenger to the bank and for the bank to deliver to the messenger a check payable to the depositor.

Whether the particular deposit agreement is one with respect to which the bank merely reserves the right to require 30 days' advance written notice of withdrawal or is one which specifically requires 30 days' advance written notice of withdrawal, payment in the manner contemplated by the inquiry would not be in conformity with the amendments in question.

[20 F. R. 4207, June 16, 1955]

§ 204.106

"Differential" or "dealer reserve" accounts as deposits against which reserves are required.

(a) The Board has recently received several inquiries as to whether certain differential or reserve accounts set up for instalment paper are deposits against which reserves are required. The Board has previously stated four conclusions for determining whether so-called "dealer reserve" or "differential" accounts are deposits against which reserves are required:

(1) If the purchase price of the paper is credited to the dealer's account, the resulting credit obviously is a deposit against which reserves must be maintained.

(2) The uncollected difference between the purchase price and the face amount of the paper is in practical effect a potential margin of security and

does not constitute a deposit against which reserves must be maintained.

(3) Where, however, an instalment payment has been received and a portion of such payment (say 90 percent) has been credited against the purchase price and the remainder (say 10 percent) has not been credited against the purchase price, the 90 percent of the payment which has been applied against the purchase price does not constitute a deposit balance, but the remaining 10 percent of the payment does constitute a deposit unless and until it is paid over to the dealer or applied against his indebtedness.

(4) Whenever the payments received on any paper purchased aggregate an amount in excess of the purchase price plus interest or discount, any such excess which is not paid over to the dealer or credited against his indebtedness likewise constitutes a deposit against which reserves must be maintained.

(b) There apparently is doubt among some member banks as to the situations in which these various conclusions are applicable. In the interests of clarification, the Board wishes to point out and differentiate typical circumstances in which each of the above conclusions would be controlling.

(c) Conclusion No. 1 would be controlling in a situation where the borrower is credited with the full face amount or outstanding balance of the paper but a certain percentage thereof is designated as a reserve account and cannot be withdrawn by the dealer. In such a case the entire amount credited to the dealer's account, including the percentage of the purchase price withheld, constitutes a deposit against which reserves are required. The fact that no repayments on the paper have been received and held in the account is not material in determining whether the account is a deposit. The determining factor is that the reserve is created out of the proceeds of the full purchase price of the paper.

(d) By contrast, the differential account under Conclusion No. 2 is created from the uncollected difference between the purchase price of the paper and the face amount or outstanding balance thereof. In this case, the differential account would merely be a memorandum of this "uncollected difference" and con

stitute a potential margin of safety for the purchaser of the paper. Under these circumstances, the differential account would not constitute a deposit against which reserves are required.

(e) Conclusion No. 3 applies to those situations where collections are received in a differential account. Obviously, any portion of such collections which is credited against the purchase price does not constitute a deposit. However, any portion of such collections which is carried in the differential account and is not applied against the purchase price or otherwise paid over to the dealer, constitutes a deposit against which reserves are required. In some instances, the entire amount of the collections when received is held in the differential account for a period of time. Periodically, a portion of the collections is offset against the purchase price. Until the collections are either paid over to the customer or applied against his indebtedness, they constitute deposits against which reserves are required.

(f) Conclusion No. 4 also applies to those situations where collections are received on installment or similar paper. It is emphasized in this conclusion that all payments received on paper in excess of the purchase price plus interest, discount, and the like, which are not applied against the borrower's indebtedness or otherwise paid over to him, are deposits against which reserves are required. This would be true regardless of how this excess is held by the bank, whether in a differential account or otherwise.

[25 F.R. 1818, Mar, 2, 1960]

§ 204.107 Withheld taxes as deposits for reserve purposes.

(a) In a ruling published in the 1942 Federal Reserve Bulletin, page 532, the Board stated that deductions of Social Security taxes by a bank from salaries of its employees should be treated as "Other liabilities" in condition reports and not as deposits for reserve purposes. (b) In a ruling published in the 1944 Bulletin, page 670, the Board applied the same principle with respect to (1) State income taxes withheld from salaries of a bank's own employees who reside outside the State, and (2) Federal income

taxes withheld from payments made by a bank as disbursing agent for dividends, bond interest, etc., where withholding at source is required under the Internal Revenue Act.

(c) On the other hand, the Federal Deposit Insurance Corporation has always regarded moneys withheld for these purposes as deposits that should be included in the assessment base for deposit insurance. Its position was upheld in two cases decided by Federal Courts under the Federal Deposit Insurance Act prior to its amendment in 1960 and the regulations of the FDIC in force at the time. In 1955 the United States District Court for the Southern District of New York decided that withheld income and Social Security taxes, and taxes on dividends and interest on securities, payable by the bank as agent for the issuing corporations, should be included as deposits in the assessment base (FDIC v. Irving Trust Co., 137 Fed. Supp. 145, 154). In 1957 the United States Court of Appeals for the Seventh Circuit held that money withheld by the bank for payment of Federal income taxes on its employees' salaries and for payment of employees' share of Federal Social Security taxes were deposits and should be included in the assessment base (FDIC v. Cont. Ill. N. Bk., 245 F. 2d 567, 576).

(d) When the Federal Deposit Insurance Act was amended on July 14, 1960, the definition of the term "deposit" in 12 U.S.C. 1813 (1) was expanded to include specifically "withheld taxes." Since one of the primary purposes of the 1960 amendment was to eliminate differences in the definition of deposits for purposes of (1) reports of condition submitted to the three Federal supervisory agencies, (2) reserve requirements, and (3) Federal deposit insurance assessments, and in view of the court decisions referred to above, the Board has decided that the two rulings published in the Federal Reserve Bulletin for 1942 and 1944, referred to above, should be regarded as superseded and that withheld taxes, including withheld income taxes and Social Security taxes of a bank's own employees, should be classified hereafter as deposits in condition reports and in computing required reserves.

[26 F.R. 8169, Aug. 31, 1961]

§ 204.108 Savings accounts by corporations operated for profit prohibited. For text of this interpretation, see § 217.135 of this subchapter.

[29 F.R. 398, Jan. 16, 1964]

§ 204.109

Private bank a “bank” under section 19, paragraph 11, of the Act. (a) In connection with the matters covered in §§ 210.102 and 215.105 of this subchapter (Reg. J and Reg. O), the Board was asked whether, in computing its required reserves under section 19, paragraph 11, of the Federal Reserve Act (12 U.S.C. 465), a member bank may deduct any balance due from a private bank of the kind involved in those paragraphs. The statute provides that:

In estimating the reserve balances required by this Act, member banks may deduct from the amount of their gross demand deposits the amounts of balances due from other banks (except Federal reserve banks and foreign banks) and cash items in process of collection payable immediately upon presentation in the United States, within the meaning of these terms as defined by the Board of Governors of the Federal Reserve System.

(b) The Board regards this question as governed by its views in §§ 210.102 and 215.105 of this subchapter. Accordingly, as the term "other banks" in the statute includes such private banks, balances due therefrom may be deducted in accordance with the provisions of section 19, paragraph 11, of the Act.

(c) These views of the Board supersede the interpretation referring to private banks published at 1935 Federal Reserve Bulletin 108 and any other interpretations to the extent that they conflict with these views, and to that extent such interpretations are hereby revoked. [29 F.R. 2447, Feb. 14, 1964]

§ 204.111

Reserves against funds received by member banks in connec tion with instalment loans.

(a) The Board of Governors has been asked to re-examine its 1928 ruling that member banks must maintain reserves, in accordance with Federal Reserve Regulation D (this Part 204), against hypothecated "deposits" created by payments on instalment loans.

(b) It appears that in some States the books of commercial banks show as "deposits" the funds that are paid by a borrower on an instalment loan, until the loan is paid in full. The amounts received are not immediately used to reduce the unpaid balance due on the note, but are held by the bank until the sum of the payments equals the entire amount of principal and interest. It is understood that under the terms of the agreement between the banks and their customers the funds so received are assigned to the bank and cannot be reached by the borrower or his creditors.

(c) In 1928, the Board first ruled that member banks must maintain reserves against such hypothecated deposits. An interpretation to that effect was published in 1931 (1931 Fed. Res. Bulletin 538), and the Board has continued to adhere to that position.

(d) The Board has reconsidered its earlier rulings and has decided that where the agreement between the bank and borrower is such that instalment payments on loans are irrevocably assigned to the bank and cannot be reached by the borrower or his creditors, such payments are not “deposits” regardless of the terms used in relevant State statutes or in the bank's books and records and, therefore, are not subject to the reserve requirements of this part.

(e) The Board's earlier rulings on this subject are superseded to the extent that they conflict with the conclusion expressed herein.

[31 F.R. 8060, June 8, 1966]

§ 205.1

Statutory requirements.

Section 14 of the Federal Reserve Act reads in part as follows:1

Every Federal Reserve bank shall have power

(b) To buy and sell, at home or abroad, bonds and notes of the United States, and bills, notes, revenue bonds, and warrants with a maturity from date of purchase of not exceeding six months, issued in anticipation of the collection of taxes or in anticipation of the receipt of assured revenues by any State, county, district, political subdivision, or municipality in the continental United States, including irrigation, drainage and reclamation districts, such purchases to be made in accordance with rules and regulations prescribed by the Federal Reserve Board.

Within the meaning of this part:

(a) The term "warrant" shall be construed to mean "bills, notes, revenue bond, and warrants with a maturity from date of purchase of not exceeding six months."

(b) The term "municipality" shall be construed to mean "State, county, district, political subdivision, or municipality in the States of the United States and the District of Columbia, including irrigation, drainage, and reclamation districts."

(c) The term "net funded indebtedness" shall be construed to mean the legal gross indebtedness of the municipality (including the amount of any school district or other bonds which depend for their redemption upon taxes levied upon property within the municipality) less the aggregate of the following items:

(1) The amount of outstanding bonds or other debt obligations made payable from current revenues;

(2) The amount of outstanding bonds issued for the purpose of providing the inhabitants of a municipality with public utilities, such as waterworks, docks, electric plants, transportation facilities, etc.: Provided, That evidence is submitted showing that the income from such utilities is sufficient for maintenance, for payment of interest on such bonds, and for the accumulation of a sinking fund sufficient for their redemption at maturity;

(3) The amount of outstanding improvement bonds, issued under laws which provide for the levying of special assessments against abutting property in amounts sufficient to insure the payment of interest on the bonds and the redemption thereof at maturity: Provided, That such bonds are direct obligations of the municipality and included in the gross indebtedness of the municipality; and

(4) The total of all sinking funds accumulated for the redemption of the gross indebtedness of the municipality, except sinking funds applicable to bonds, described in subparagraphs (1), (2), and (3) of this paragraph.

[Reg. E, effective July 10, 1923, as amended at 24 F.R. 7029, Aug. 29, 1959]

1 Section 14(b) of the Federal Reserve Act, as amended by 48 Stat. 348, 646, 49 Stat. 706, 56 Stat. 180; 12 U.S.C. 355, reads as follows: "Every Federal Reserve bank shall have power to buy and sell, at home or abroad, bonds and notes of the United States, bonds of the Federal Farm Mortgage Corporation having maturities from date of purchase of not exceeding 6 months, bonds issued under the provisions of subsection (c) of section 4 of the Home Owners' Loan Act of 1933, as amended, and having maturities from date of purchase of not exceeding 6 months, and bills, notes, revenue bonds, and warrants with a maturity from date of purchase of not exceeding 6 months issued in anticipation of the collection of taxes or in anticipation of the receipt of assured revenues by any State, county, district, political subdivision, or municipality in the continental United States, including irrigation, drainage, and reclamation districts, such purchases to be made in accordance with rules and regulations prescribed by the Board of Governors of the Federal Reserve System: Provided, That any bonds, notes, or other obligations which are direct obligations of the United States or which are fully guaranteed by the United States as to principal and interest may be bought and sold without regard to maturities but only in the open market."

$ 205.3 Class of warrants eligible for purchase.

Any Federal Reserve bank may purchase warrants issued by a municipality in anticipation of the collection of taxes or in anticipation of the receipt of assured revenues, provided:

(a) They are the general obligations of the entire municipality; it being intended to exclude as ineligible for purchase all such obligations as are payable from "local benefit" and "special assessment" taxes when the municipality at large is not directly or ultimately liable;

(b) They are issued in anticipation of taxes or revenues which are due and payable on or before the date of maturity of such warrants; but the Federal Reserve Board may waive this condition in spesific cases. For the purposes of this part taxes shall be considered as due and payable on the last day on which they may be paid without penalty;

(c) They are issued by a municipality: (1) Which has been in existence for a period of 10 years;

(2) Which for a period of 10 years previous to the purchase has not defaulted for longer than 15 days in the payment of any part of either principal or interest of any funded debt authorized to be contracted by it;

(3) Whose net funded indebtedness does not exceed 10 per centum of the valuation of its taxable property, to be ascertained by the last preceding valuation of property for the assessment of taxes.

§ 205.4

"Existence" and "nondefault”.

Warrants will be construed to comply with that part of § 205.3 (c) relative to term of existence and nondefault, under the following conditions:

(a) Warrants issued by or in behalf of any municipality which was, subsequent to the issuance of such warrants, consolidate with or merged into an existing political division which meets the requirements of these regulations, will be deemed to be the warrants of such political division: Provided, That such warrants were assumed by such political division under statutes and appropriate proceedings the effect of which is to make such warrants general obligations of such assuming political division and payable, either directly or ultimately, without limitation to a special fund from

the proceeds of taxes levied upon all the taxable real and personal property within its territorial limits.

(b) Warrants issued by or in behalf of any municipality which was, subsequent to the issuance of such warrants, wholly succeeded by a newly organized political division whose term of existence, added to that of such original political division or of any other political division so succeeded, is equal to a period of 10 years will be deemed to be warrants of such succeeding political division: Provided, That during such period none of such political divisions shall have defaulted for a period exceeding 15 days in the payment of any part of either principal or interest of any funded debt authorized to be contracted by it: And provided further, That such warrants were assumed by such new political division under statutes and appropriate proceedings the effect of which is to make such warrants general obligations of such assuming political division and payable, either directly or ultimately, without limitation to a special fund from the proceeds of taxes levied upon all the taxable real and personal property within its territorial limits.

(c) Warrants issued by or in behalf of any municipality which, prior to such issuance, became the successor of one or more, or was formed by the consolidation or merger of two or more, pre-existing political divisions, the term of existence of one or more of which, added to that of such succeeding or consolidated political division, is equal to a period of 10 years, will be deemed to be warrants of a political division which has been in existence for a period of 10 years: Provided, That during such period none of such original, succeeding, or consolidated political divisions shall have defaulted for a period exceeding 15 days in the payment of any part of either principal or interest of any funded debt authorized to be contracted by it.