Puzzling Definition of “Time Deposit”


Reg. D Definition of “Time Deposit”

Regulation D (12 CFR 204) promulgated by the Federal Reserve Board (FRB) imposes reserve requirements on certain bank deposits. Generally, “transaction accounts” are subject to reserve requirements, but “time deposits” and “savings deposits” are not. The current definition of the term “Time Deposit”, however, can be confusing if not read in light of the historical context. Currently, Reg. D defines a “Time Deposit” as:

Time Deposit means:

(i) A deposit that the depositor does not have a right and is not permitted to make withdrawals from within six days after the date of deposit unless the deposit is subject to an early withdrawal penalty […];

(ii) A savings deposit;

(iii) […]

(iv) […]

37 CFR 204.2(c)(1).

Based on the above definition, therefore, “Savings Deposits” are a type of “Time Deposits”. But why?

If one reads the definition of “Savings Deposit” in the regulation, a “Savings Deposit” does not require a minimum term or impose an early withdrawal penalty. It is thus substantially different from the type of “Time Deposits” defined in the first sub-part of the “Time Deposit” definition.

Moreover, in practice, “Savings Deposits” are generally understood as a different type of deposit accounts from “Time Deposits”. For example, in the Federal Reserve Form, FR 2900 (Report of Transaction Accounts, Other Deposits, and Vault Cash), with which financial institutions report their deposit liabilities for reserve reporting purposes, “Time Deposits” and “Savings Deposits” are listed as two separate categories, apart from “Transaction Accounts” and “Vault Cash”. Additionally, the Reg. D section of the FRB Consumer Compliance Handbook also lists “Time Deposits” and “Savings Deposits” as two separate and distinct categories.

Under Reg. D, both “Time Deposits” and “Savings Deposits” are explicitly exempted from the reserve requirements. Therefore, it is not necessary to define “Savings Deposits” as a type of “Time Deposits” to achieve the goals of the regulation. — It is a puzzling definition, until one looks up the history of the regulation.


As first written in 1980, Reg. D defined a “Time Deposit” as one that “does not have a right to withdraw” for 14 days after deposit. Notably, the definition at the time did not explicitly impose an early withdrawal penalty. Such a definition, therefore, was broad enough to include certain “Savings Deposits”, for which the bank reserved rights to require an early withdrawal notice. Therefore, it was logical for the 1980 version of Reg. D to define “Time Deposits” to include those “Savings Deposits” that were not considered “Transaction Accounts”. Specifically, the definition was written as follows:

Time Deposit means:

(i) A deposit that the depositor does not have a right to withdrawals for a period of 14 days or more after the date of deposit. “Time deposit” includes funds:

(A) […];

(B) […];

(C) […];

(D) […];

(E) That constitute a “savings deposit” which is not regarded as a “transaction account.”

(ii) […].

45 Fed. Reg. 56018, 56020 (August 22, 1980).

By comparing the 1980 and current definitions, it becomes clear that after the definition of “Time Deposits” was amended, particularly by adding the early withdrawal penalty, “Savings Deposits” no longer belonged in the conventional type of “Time Deposits” and were removed from the explicit list. For unknown reasons, however, the FRB decided to keep it as a separate category under “Time Deposits”, thus creating the present confusions.

To clarify, FRB should amend Reg. D to remove the “Savings Deposit” from the definition of a “Time Deposit”.

Syndicated Loan Participant Due Diligence

Insufficient Due Diligence

The syndicated loan markets have expanded steadily in recent years, reaching a record of more than $2.5T in US total issuance in 2017, surpassing the previous record of $2.14T set in 2013. (https://www.reuters.com/article/us-uslending-records/u-s-syndicated-lending-topples-records-in-2017-idUSKBN1ED2NO.) As the markets expand, more and more lenders, particularly smaller banks or non-bank institutions, are able to diversify exposures with reduced efforts, by delegating some of the works required for originating loans to the lead agent banks.

In this process, however, due diligence by participating lenders, and hence their risk assessments, may suffer. In some instances, it may be appropriate to assign lower risks to syndicated loans, particularly larger ones extended to large public corporations, and adjust the due diligence accordingly. In some other cases, nonetheless, due diligence may not be sufficient, because there is insufficient public information about the borrower, and the lender does not have sufficient manpower or resources to conduct adequate due diligence, resulting in misjudgments of the risks involved.

Additionally, a participating bank may trust that the lead agent bank will conduct the syndication competently and disclose all relevant information in good faith, or risk damaging its reputation. If this trust is misplaced, however, the participating bank may find it difficult to obtain appropriate legal recourses.

Arm’s Length Dealing

First of all, most syndicated loan agreements explicitly provide that the lead agent bank is not a fiduciary for the participating lender, and that the participating lender has conducted its own credit analysis based on appropriate information, not relying on the lead agent bank. (Eg, “The LSTA’s Complete Credit Agreement Guide”, by Bellucci & McCluskey, 2016; JPMorgan Chase v. Luxor Capital, Supreme Court of NY, NY County, 2010.) Moreover, in NY, syndicated loan dealings generally are considered arm’s length transactions between the lenders, and the lead agent bank does not owe a fiduciary duty to the participating banks.

For example, in Banque Arabe et Internationale E’Investissement v. Maryland National Bank (US Court of Appeals, 2nd Cir. 1995), Maryland National Bank originated a $35m loan for conversion of rental buildings to coops or condos, and sold $10m of the loan to Banque. The borrower eventually defaulted, because the NY regulators delayed in approving any of the conversions, and Banque sued Maryland National Bank for failing to disclose the delays in regulatory approval. The Court held that “[i]n the case of arm’s length negotiations or transactions between sophisticated financial institutions, no extra-contractual duty of disclosure exits. […] This same principle applies to loan participation agreements, in which there is deemed to be no fiduciary relationship unless expressly and unequivocally created by contract.”

That being said, all parties to the loan syndicate, including the lead agent bank, are bound by the covenant of good faith and fair dealing. Also, if the lead agent bank possesses “superior knowledge” of matters not readily available to the other parties, or if it needs to complete or clarify partial or ambiguous statement previously made, the lead agent bank may have duty to disclose the information. Otherwise, the lead agent bank may be subject to claims of fraud. (Eg, Banque Arabe et Internationale E’Investissement v. Maryland National Bank.) The parties can also negotiate for specific disclosures by the lead agent bank and incorporate them into the agreement. These remedies, however, may not be generally available and need to be decided on a case-by-case basis.

Best Practice

Addressing multibank lending transactions, OCC has advised participating banks to conduct independent credit analysis, to require the borrower to make full credit information available, and to require the lead agent bank (or the selling bank) to provide available information on the borrower, among others. (OCC Banking Circular 181 (Rev.), “Purchases of Loans in Whole or in Part-Participations”, August 2, 1984.) Sufficient due diligence is always the best policy, be it a syndicated or participant loan.