A Comprehensive Guide to Regulation Q and Its Repeal

Regulation Q was a set of rules established by the Federal Reserve in 1933 to regulate interest rates paid by banks on certain types of deposits.

These rules were designed to prevent banks from competing with each other to attract deposits, which was seen as a way to prevent bank runs and maintain financial stability.

Regulation Q prohibited banks from paying interest on demand deposits, such as checking accounts, but allowed them to pay interest on time deposits, such as savings accounts and certificates of deposit.

Banks were also limited in the amount of interest they could pay on time deposits, with the maximum rate set by the Federal Reserve.

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Regulation Q was promulgated by the Federal Reserve Board on August 29, 1933, as a result of Section 11 of the Banking Act of 1933.

Regulation Q imposed interest rate ceilings on various types of bank deposits, including savings and time deposits. This was done to prevent excessive bank competition for deposit funds, which was seen as a contributor to the bank failures of the early 1930s.

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The Regulation Q prohibition of interest-bearing demand deposit accounts was effectively repealed by the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010. This repeal allowed financial institutions to offer interest-bearing demand deposits, but it's not required.

Regulation Q ceilings for savings accounts and other types of accounts were phased out between 1981 and 1986. This was done through the Depository Institutions Deregulation and Monetary Control Act of 1980.

The creation of NOW accounts in 1974 was a direct challenge to Regulation Q's interest ceilings. Congress legalized these accounts in Massachusetts and New Hampshire, then expanded to the rest of New England in 1976 and nationwide in 1980.

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Regulation Q was aimed at motivating customers to release funds from their checking accounts and invest in money market funds.

The regulation was repealed by the Dodd-Frank Wall Street Reform and Consumer Protection Act, which allowed banks to offer interest to customers holding checking accounts.

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In July 2011, banks were allowed to offer interest-bearing demand deposits, marking a significant change from previous regulations.

The rule was adjusted and modified until 2015, exempting small savings and loan holding companies from maintaining minimum capital as mandated by the Dodd-Frank Act.

The repeal of Regulation Q was considered a tool contributing towards financial repression, particularly after the 2008-09 credit crisis in the U.S.

The opponents of the repeal argued that it would affect small and community banks adversely, creating an increased regulatory burden and potentially decreasing credit availability.

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Regulation Q had a significant impact on the US banking system, particularly during the Great Depression. It was a federal regulation that prohibited banks from paying interest on deposits, effectively limiting their ability to compete with other financial institutions.

This led to a decrease in the number of bank failures, as banks were less likely to take on risky investments to attract deposits. By limiting their ability to pay interest, banks were forced to focus on more conservative investments.

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The lack of competition in the banking industry also led to a reduction in the number of banks, as smaller banks were unable to compete with larger banks that had more resources. This consolidation of the banking industry made it more difficult for consumers to access banking services.

Regulation Q was repealed in 2011, but its effects on the banking industry can still be seen today. The regulation's legacy can be seen in the current banking landscape, where banks are still subject to strict regulations and capital requirements.

The repeal of Regulation Q in 2011 had significant consequences for the banking industry. Regulation Q was repealed by the Dodd-Frank Wall Street Reform and Consumer Protection Act, allowing banks to pay interest on demand deposits.

Banks that are members of the Federal Reserve System (FRS) were directly affected by this change, as they were now able to increase their capital reserves. This was seen as a way to mitigate credit illiquidity, one of the causes of the 2007-2008 credit crisis.

The response to the repeal was mixed, with some arguing that it would result in increased competition for customer deposits and hurt smaller community banks.

Regulation Q was first introduced in 1933 as part of the Banking Act, with the Federal Reserve Board promulgating it on August 29, 1933.

The motivation behind Regulation Q was to prevent bank failures by reducing competition for deposit funds, which was seen as a major contributor to the bank failures of the early 1930s.

The initial version of Regulation Q prohibited the payment of interest on demand deposits and imposed interest rate ceilings on other types of bank deposits, including savings and time deposits.

Banks felt increasing pressure to work around the interest ceilings by offering convenience features and loan interest rate discounts tied to deposit account balances.

The creation of NOW accounts in 1974 and 1980 allowed banks to offer interest-bearing accounts that technically avoided being demand deposits.

Regulation Q's imposed cap on savings deposit interest rates led to the emergence of alternatives to banks, including money market funds.

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The Depository Institutions Deregulation and Monetary Control Act of 1980 phased out Regulation Q ceilings for savings accounts and other types of accounts, except for demand deposits, between 1981 and 1986.

The Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 effectively repealed the Regulation Q prohibition on interest-bearing demand deposit accounts, allowing financial institutions to offer interest-bearing demand deposits starting in 2011.

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Regulation Q was repealed in 2011 by the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The repeal allowed banks that are members of the Federal Reserve System to pay interest on demand deposits.

This action aimed to increase a bank's capital reserves and mitigate credit illiquidity, one of the causes of the 2007-2008 credit crisis.

Detractors of the repeal claimed it would result in increased competition for customer deposits and hurt smaller community banks.

Larger banks would be in a better position to offer higher interest rates, increasing costs of funding and expenses.

Supporters argued that the repeal would lead to more innovative products, greater transparency, and a stable source of capital.

You can find additional guidance and interpretations for Regulation Q on the Board's website, available here.

The Board recognizes that directly issued credit-linked-note transactions can transfer credit risk to investors, similar to synthetic securitizations that qualify under the capital rule.

Staff of the Board of Governors has developed FAQs to assist entities in complying with the Board's Regulation Q, but these FAQs have not been approved by the Board of Governors.

You can submit questions regarding these FAQs, or requests for modification, rescission, or waiver, through the Board's Contact Us form.

A Board-regulated institution may request a reservation of authority under the capital rule for directly issued credit-linked notes to assign a different risk-weighted-asset amount to the reference exposures.

The Board's response to the request will be communicated in writing to the firm, describing the action taken and any limitations or conditions related to the action.

You cannot rely on these FAQs or on written action issued to any other firm as the basis for the capital treatment of any transaction.

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