Regulation Q

Regulation Q is a Federal Reserve Board rule that prohibited banks from being able to pay interest on deposits within checking accounts. Regulation Q was enacted in accordance with the Glass-Steagall Act of 1933 to limit loan sharking and other unseemly actions. In addition, it motivated consumers to release funds from these accounts and put them into money market funds.

In 2010 the Dodd-Frank Act, for all intents and purposes, repealed Regulation Q and allowed for banks to offer interest on checking accounts for it business banking customers. This move was made, in part, to increase banking reserves to militate against credit illiquidity that was experienced in the initial days of the 2008-2009 credit crisis. Regulators continued to adjust and modify the interim final rules through 2015 to include exemptions for small savings and loan holding companies from the minimum capital requirements mandated in Dodd-Frank.

Public comments filed during the proposed repeal of Regulation Q included support from a financial group that anticipated a more competitive market would result from the change. The comments also included an opinion that lobbyists who served money market funds and large banks had influenced the market through regulations. The repeal of Regulation Q was expected to end such activity.

An individual commenter described the repeal as an opportunity for greater transparency and competition by removing a nonfunctioning rule. Further, there was an expectation that banks would be compelled to innovate and lower rates in response to the repeal.

A trade association commented that it believed the repeal would lead to a more stable source of capital for banks. The repeal of Regulation Q could also provide financial professionals with access to a new competitive investment alternative. Taxes on interest paid could also increase the flow of revenue to the U.S. Treasury.

Many opponents to the repeal of Regulation Q commented that the elimination of the rule would be detrimental to small and community banks. Concerns cited in the public comments included an expectation of increased interest rate risk for institutions, increased costs of funding, higher expenses, and diminished earnings, profits, and net interest margins. Opponents to the repeal also pointed to a potential decrease in credit availability along with an increased cost of credit as issues expected to surface with the change.

The timing of the repeal also drew concern from opponents to the change. They cited in the comments that the community banking industry was under stress at the time and faced challenges to its viability and profitability. Opponents also pointed to the potential for new interchange fee regulations with the repeal of Regulation Q that could create an increased regulatory burden for community banks.