WASHINGTON - In an extraordinary move, the Federal Reserve Board on Wednesday reversed its Jan. 4 decision to recalculate annual percentage yields under Truth-in-Savings.
In the face of staunch opposition by banking and consumer groups, the central bank said it will air the new formula as well as a previously proposed alternative for 60 days of public comment.
In the meantime, an interim rule will allow banks to disclose the simple interest rate as the annual percentage yield.
The Fed's 4-to-3 vote early this month was unusually combative, pitting Vice Chairman Alan S. Blinder and Governor Lawrence B. Lindsey, who supported the plan, against Chairman Alan Greenspan, who voted against it.
The board's vote to reconsider its decision was unanimous.
The new calculation treats accounts that pay interest periodically as if the interest had been left in the account and compounded.
Seven trade associations representing banks and thrifts asked the Fed to reconsider, arguing that the change would balloon compliance costs by $200 million without helping customers.
The groups also charged the central bank with violating the Administrative Procedures Act by adopting a final rule that differed significantly from the proposed rule.
Truth-in-Savings, or Regulation DD, took effect in June 1993. It requires banks to make certain disclosures to depositors. Bankers opposed the original APY formula because for multiyear CDs that do not compound interest payments, the APY is less than the stated interest rate.
After a couple of false starts, the Fed settled on a new calculation that treats accounts paying interest periodically as if the interest had been left in the account and compounded.
Banks contend that this formula benefits deposit brokers because it overstates the value of their CDs, which typically pay out interest rather than compound it.
But in a Jan. 13 letter to the Fed, the Securities Industry Association said banks do not have to retain interest.
Consumer groups, however, joined the debate on the banking industry side. In a Jan. 4 letter, the U.S. Public Interest Research Group and the Center for Study of Responsive Law recommended giving customers a disclosure explaining why an annual percentage yield can be different than the interest rate.