Regulation Q - Explained
What is Regulation Q?
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What is Regulation Q?
Regulation Q is a Federal Reserve Board Regulation imposing restrictions on the payment of interest on checking accounts. The rule was adopted in 1933 and prohibits banks from paying interest to its customers holding checking accounts. The prohibition was lifted in 2011 after it was repealed. It also imposed caps on the interest rates a bank may pay on various other types of deposits until the rule was changed in 1986.
How Does Regulation Q Work?
The aim of passing this regulation was to motivate the customers to release funds from their checking accounts and invest them in money market funds. Regulation Q was repealed by the Dodd-Frank Wall Street Reform and Consumer Protection Act that allowed banks to offer interest to its customers holding checking accounts. The step was primarily taken to mitigate credit illiquidity and increase the banking reserves. In July 2011, the banks were allowed to offer interest-bearing demand deposits. The rule was adjusted and modified until 2015. It exempted the small savings and loan holding companies from the requirement of maintaining minimum capital as mandated by the Dodd-Frank Act. There has been a long debate around Regulation Q as some believed it was necessary to repeal the regulation in order to create a more transparent and competitive market. They also expected the banks to lower their rate and introduce innovative policies in response to the repeal. It was also argued that the repeal would lead to a more stable source of capital for banks and increase the revenue flow to the U.S. Treasury. The opponents to the repeal were of the view that removing the regulation would affect the small and community banks adversely. They argued the repeal would create an increased regulatory burden for these banks. They also expressed their concern about the potential decrease in credit availability along with an increased cost of credit. The regulation was finally repealed following the 2008-09 credit crisis in the U.S as the authority considered this regulation be a tool contributing towards financial repression.