Regulation Q – Definition

Cite this article as:"Regulation Q – Definition," in The Business Professor, updated December 11, 2018, last accessed June 3, 2020, https://thebusinessprofessor.com/lesson/regulation-q-explained/.

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Regulation Q Definition

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 The prohibition was lifted in 2011 after it was repealed.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.

A Little More on What is Regulation Q

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Regulation Q was repealed by the Dodd-Frank Wall Street Reform and Consumer Protection Act that allowed banks to offer interest to its customers holding checking accounts.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The regulation was finally repealed following the 2008-09 credit crisis in the U.S as the authority considered this regulation be a tool contributing towards financial repression.

References for Regulation Q

Academic Research on Regulation Q

  • ·       Requiem for regulation q: What it did and why it passed away, Gilbert, R. A. (1986). Review68. According to R. Alton Gilbert, he studied the effect of Regulation Q over the last 53 years that it has been in effect. And he postulated that the Regulation Q policy did not achieve its primary result. This research claimed that the policy was then modified in the year 1996 and became disruptive to the operation of depository institutions as deposits were lost which brought about the rise in the market interest rate which rose above the ceiling rate. In response to this situation, most thrift institution increases their share of the time deposit to avoid an erosion of their share of the total saving and time deposits.
  • ·       The administration of Regulation Q, Ruebling, C. E. (1970). Federal Reserve Bank of St. Louis Review1, 29-40. This research analyses explains the administration of the regulation Q as regards leasing and other important policy making in the economy.
  • ·      Regulation Q and the behavior of savings and small time deposits at commercial banks and the thrift institutions, Cook, T. Q. (1978). According to this paper, the behavior of the saving deposit and the mall time deposit at most commercial banks, savings and loan associations and in mutual savings banks were explained and were seen as a matter of widespread interest for different important reason.
  • ·       Regulation Q and the commercial loan market in the 1960s, Friedman, B. M. (1975). Journal of Money, Credit and Banking7(3), 277-296. This paper explains the Regulation Q policy and the correlation between this rule and the commercial loan market in the 1960s.
  • ·       GETTING ALONG WITHOUT REGULATION Q: TESTING THE STANDARD VIEW OF DEPOSIT‐RATE COMPETITION DURING THE “WILD‐CARD EXPERIENCE”, Swan, C., & Kane, E. J. (1978). The Journal of Finance33(3), 921-932. This paper explains the process of getting along without the Regulation Q by examining the standard view of Deposit-rate competition during the “Wild Card Experience”.
  • ·       A case study of Federal Reserve policymaking: Regulation Q in 1966, Mayer, T. (1982). Journal of Monetary Economics10(2), 259-271. According to this paper, evaluation of the Federal Reserve’s efficiency was carried out. It was done by looking into the binding of the Regulation Q ceiling of the 1996. This paper also records the factor that attests the relevancy of the economic theory. The sources adopted by this paper are the confidential Minutes of the Board of Governors and internal memos. Some likely reasons were also propounded, these reasons indicate that the Fed’s analyses was seriously lacking.
  • ·       Mortgage Rates and Regulation Q: Note, Mayer, T., & Nathan, H. (1983). Journal of Money, Credit and Banking15(1), 107-115. This research thesis explains mainly the Mortgage Rates and the Regulation Q and explains the various aspects to which it operates in the leasing and mortgage sector.
  • ·       Deposit interest rate ceilings as credit supply shifters: Bank level evidence on the effects of Regulation Q, Koch, C. (2015). Journal of Banking & Finance61, 316-326. According to this research analyses, the effect of deposit rate ceiling etched in the Regulation Q on commercial banks’ credit growth was also explained using a historical bank level set starting from the year 1959. Also, the interaction between the monetary policies according to this paper also suggests that the policy impact on the bank level credit growth as non-linear and significantly larger inasmuch as the rate ceilings are in place. This paper explains the deposit interest rates ceilings and then defines it as an important feature of the United State regulatory regime until mid-1980s.
  • ·       The Effects of Removing Regulation Q–A Theoretical Analysis, Winningham, S. (1980). Economic Review, Federal Reserve Bank of Kansas City, 3-17. This paper explains the effects of Removing Regulation Q according to Theoretical analysis. This process was well explained in this research thesis and a more suitable model was adopted.
  • ·       Bank failures in the US: A note on regulation Q, Ostrosky, A. L. (1997). International Advances in Economic Research3(2), 176-180. This paper provided solution to the problem of bank failures in the United States which has increased rapidly since 1981. This situation was explained using certain factors such as the cost of transferring fund to banks, and the Tax Reform Act of 1986. Under the Regulation Q, its elimination has been proposed as a possible contributing cause of the failure of the bank’s problem. The main aim of this paper is to give a formal, initial and an empirical investigation into whether or not the Regulation Q did influence the bank failure rate in the United States.
  • ·       Regulation Q and Consumer Protection: Legal and Economic Guidelines, Holmberg, S. (1975). Banking LJ92, 1073. According to this paper, the Regulation Q and consumer protection was explained according to the legal and economic guidelines.
  • ·       Regulation Q: The Money Markets and Housing-I, Meltzer, A. H. (1970). Housing and Monetary Policy (Boston: Federal Reserve Bank of Boston, 1970), 41-51. This research thesis explains the correlation between the money market and the housing-I and their correlation with the Regulation Q rule in an economy.

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