Regulation Q ( 12 CFRbr>217
is a

Federal Reserve The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States of America. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a ...

regulation which sets out

capital requirements A capital requirement (also known as regulatory capital, capital adequacy or capital base) is the amount of capital a bank or other financial institution has to have as required by its financial regulator. This is usually expressed as a capital ad ...

for banks in the United States. Updated as required. The version of Regulation Q current was enacted in 2013. From 1933 until 2011, an earlier version of Regulation Q imposed various restrictions on the payment of interest on deposit accounts. During that entire period, it prohibited

bank A bank is a financial institution that accepts deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital markets. Because ...

s from paying

interest In finance and economics, interest is payment from a borrower or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (that is, the amount borrowed), at a particular rate. It is distinct ...

demand deposit Demand deposits or checkbook money are funds held in demand accounts in commercial banks. These account balances are usually considered money and form the greater part of the narrowly defined money supply of a country. Simply put, these are depo ...

s. From 1933 until 1986 it also imposed maximum rates of interest on various other types of bank deposits, such as

savings account A savings account is a bank account at a retail bank. Common features include a limited number of withdrawals, a lack of cheque and linked debit card facilities, limited transfer options and the inability to be overdrawn. Traditionally, transac ...

s and NOW accounts. That version of Regulation Q no longer exists; all its remaining aspects, such as the type of entities that may own or maintain interest-bearing NOW accounts, were incorporated into Regulation D.

History

As a result of Section 11 of the Banking Act of 1933, Regulation Q was promulgated by the

Federal Reserve Board The Board of Governors of the Federal Reserve System, commonly known as the Federal Reserve Board, is the main governing body of the Federal Reserve System. It is charged with overseeing the Federal Reserve Banks and with helping implement the mon ...

on August 29, 1933. In addition to prohibiting the payment of interest on demand deposits (a prohibition that the act also wrote into the Federal Reserve Act (12 U.S.C.371a) as Section 19(i)), it was also used to impose interest rate ceilings on various other types of bank deposits, including savings and time deposits.Federal Register 76, no. 72, Thursday, April 14, 2011, section on

Federal Reserve System The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States of America. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a ...

br>
/ref> The motivation for the deposit interest restrictions was the perception that the bank failures of the early 1930s, during the first part of the

Great Depression The Great Depression (19291939) was an economic shock that impacted most countries across the world. It was a period of economic depression that became evident after a major fall in stock prices in the United States. The economic contagio ...

, had been caused in part by excessive bank competition for deposit funds, driving down the margin between lending rates and borrowing rates and encouraging overly speculative investment behavior on the part of large banks. As interest rates in general rose during the 1950s, banks felt increasing incentive to work around the interest ceilings by competing on the basis of convenience features such as multiple branch banks and on the basis of pecuniary features such as loan interest rate discounts that were tied directly to deposit account balances.Mitchell, Douglas W., ''Interest-Bearing Checking Accounts and Macro Policy'',

Ph.D. A Doctor of Philosophy (PhD, Ph.D., or DPhil; Latin: or ') is the most common degree at the highest academic level awarded following a course of study. PhDs are awarded for programs across the whole breadth of academic fields. Because it is ...

dissertation,

Princeton University Princeton University is a private university, private research university in Princeton, New Jersey. Founded in 1746 in Elizabeth, New Jersey, Elizabeth as the College of New Jersey, Princeton is the List of Colonial Colleges, fourth-oldest ins ...

, 1978: pp. 3–4. A more direct challenge was the creation of NOW accounts, which were structured to effectively be the equivalent of interest-bearing demand deposits but to technically avoid being demand deposits. Congress legalized these for Massachusetts and New Hampshire in 1974, the rest of New England in 1976, and nationwide on December 31, 1980.Gilbert, Alton. "Requiem for Regulation Q: What It Did and Why It Passed Away",

Federal Reserve Bank of St. Louis The Federal Reserve Bank of St. Louis is one of 12 regional Reserve Banks that, along with the Board of Governors in Washington, D.C., make up the United States' central bank. Missouri is the only state to have two main Federal Reserve Banks (Ka ...

br>
/ref> The imposed cap on savings deposit interest rates also encouraged the emergence of alternatives to banks, including

money market fund A money market fund (also called a money market mutual fund) is an open-ended mutual fund that invests in short-term debt securities such as US Treasury bills and commercial paper. Money market funds are managed with the goal of maintaining a hi ...

s. As a result of these challenges to interest rate ceilings, Congress permitted the creation of new types of flexible-interest bank accounts, including

money market account A money market account (MMA) or money market deposit account (MMDA) is a deposit account that pays interest based on current interest rates in the money markets. The interest rates paid are generally higher than those of savings accounts and tra ...

s as of December 14, 1982. Regulation Q ceilings for

savings accounts A savings account is a bank account at a retail bank. Common features include a limited number of withdrawals, a lack of cheque and linked debit card facilities, limited transfer options and the inability to be overdrawn. Traditionally, trans ...

and all other types of accounts except for demand deposits were phased out during the period 1981–1986 by the

Depository Institutions Deregulation and Monetary Control Act The Depository Institutions Deregulation and Monetary Control Act of 1980 (, ) (often abbreviated DIDMCA or MCA) is a United States federal financial statute passed in 1980 and signed by President Jimmy Carter on March 31. It gave the Federal Res ...

of 1980; as of March 31, 1986, all interest rate ceilings had been eliminated except for the ban on demand deposit interest, which was then the only remaining substantive component of Regulation Q. The Regulation Q prohibition of interest-bearing demand deposit accounts was effectively repealed by the

Dodd–Frank Wall Street Reform and Consumer Protection Act The Dodd–Frank Wall Street Reform and Consumer Protection Act, commonly referred to as Dodd–Frank, is a United States federal law that was enacted on July 21, 2010. The law overhauled financial regulation in the aftermath of the Great Recessi ...

of 2010 (Pub. L. 111-203 §627). Beginning July 21, 2011, financial institutions have been allowed, but not required, to offer interest-bearing demand deposits.

References

{{Bank regulation in the United States Bank regulation in the United States