Repeal of Regulation Q

Thursday, August 25, 2011 at 12:14PM
Banking Spectrum in Compliance

On July 14, 2011, the Fed repealed the Regulation Q prohibition on paying interest on demand deposit accounts, effective July 21, 2011.  Institutions that elect to pay interest on demand deposit accounts will not be able to offer such customers unlimited deposit insurance.  This may be more attractive to business customers who tend to keep larger checking or operating account balances.

With the advent of interest bearing checking accounts, this may herald the demise of retail repo or sweep accounts.  In these accounts funds from a demand deposit account are swept at the end of the day into a repo account either at the bank or through a third party brokerage service.  There the funds are able to earn interest until they are swept back into the demand deposit account the next morning.  Thus, for some institutions the repeal of the prohibition on paying interest on demand epposit accounts will result in the replacement of indirect interest payments on demand deposit accounts (the retail repo or sweep account structure) with explicit direct interest bearing demand deposit accounts.  This may depend on that rate banks are willing to offer on such accounts.

New York State Banking Board General Regulation Part 20, which largely mirrors Regulation Q, is likewise repealed.

The definition of interest under FDIC regulation section 321.1(c) has been moved to Part 330 (deposit insurance coverage), specifically the definition section at 330.1.

FDIC regulation section 329.103, which addresses the rules for the payment of premiums has also been moved to section 330.101.

Section 330.101 also now includes that section of former Regulation Q that allows a bank to pay a premium on a demand deposit account without it being deemed interest as long as the payment on the funds is not tied to the balance in the account and the duration of the account balance.  The origins of this rule came about years ago to enable institution to pay bonus or extra cash payments to ATM customers on a random basis when they performed certain ATM transactions.

Article originally appeared on Banking Spectrum (https://www.bankingspectrum.com/).