What Is Regulation Q?
Regulation Q is a Federal Reserve Board (FRB) rule that sets "minimum capital requirements and capital adequacy standards for board regulated institutions" in the United States. Regulation Q was updated in 2013 in the aftermath of the 2007–2008 financial crisis and continues to go through changes.
Key Takeaways
- The original rule was created in 1933, in accordance with the Glass-Steagall Act, with the goal of prohibiting banks from paying interest on deposits in checking accounts.
- Regulation Q eventually led to the emergence of money market funds as a workaround to the prohibition of paying interest.
- The Fed later updated Regulation Q, implementing rules to ensure banks maintain sufficient capital to continue lending, despite losses or any downturns in the economy.
Understanding Regulation Q
The original rule was created in 1933, in accordance with the Glass-Steagall Act, with the goal of prohibiting banks from paying interest on deposits in checking accounts. It also enacted ceilings on the interest rates that could be paid in other types of accounts.
The purpose of these measures was to limit speculative behavior by banks competing for customer deposits as it led to banks seeking risky means of profit to be able to pay the interest on these deposits. This was later commonly regarded as a means of financial repression.
Regulation Q eventually led to the emergence of money market funds as a workaround to the prohibition of paying interest.
Repealing Regulation Q
In 2011, Regulation Q was repealed by the Dodd-Frank Wall Street Reform and Consumer Protection Act, allowing banks that are members of the Federal Reserve System (FRS) to pay interest on demand deposits. This action was taken to increase a bank's capital reserves and, subsequently, mitigate any credit illiquidity—one of the causes of the 2007–2008 credit crisis.
Response to the repeal was mixed. Detractors claimed it would result in increased competition for customer deposits and that larger banks would be in a better position to offer higher interest rates, thereby hurting smaller community banks. They also cited increased costs of funding and higher expenses.
Supporters, on the other hand, argued that the repeal would result in more innovative products, greater transparency, and a stable source of capital.
Current Regulation Q Requirements
In 2013, the Federal Reserve (Fed) issued an updated Regulation Q, designed to ensure banks maintain sufficient capital to be able to continue lending, regardless of losses or any downturns in the economy.
Certain institutions are exempt from having to meet the capital requirements, including bank holding companies with less than $100 billion in total consolidated assets.
These rules included a minimum ratio of common equity Tier 1 capital to risk-weighted assets of 4.5%, and a common equity Tier 1 capital conservation buffer to risk-weighted assets of 2.5%, as well as a supplementary leverage ratio of 3% for large banks that are internationally active, which takes into consideration off-balance sheet exposure.
In 2020, the Fed then adopted a final rule to determine a company's capital buffer requirement, opting to use the results of a supervisory stress test, rather than the static 2.5% of risk-weighted assets component.
FAQs
What Is Regulation Q? Regulation Q is a Federal Reserve Board (FRB) rule that sets "minimum capital requirements and capital adequacy standards for board regulated institutions" in the United States. Regulation Q was updated in 2013 in the aftermath of the 2007–2008 financial crisis and continues to go through changes.
What is the history of Regulation Q? ›
History. As a result of Section 11 of the Banking Act of 1933, Regulation Q was promulgated by the Federal Reserve Board on August 29, 1933. In addition to prohibiting the payment of interest on demand deposits (a prohibition that the act also wrote into the Federal Reserve Act (12 U.S.C.
Is reg q still in effect? ›
The Federal Reserve Board on Thursday announced the approval of a final rule to repeal its Regulation Q, which prohibits the payment of interest on demand deposits by institutions that are member banks of the Federal Reserve System.
What is the repeal of Regulation Q? ›
The repeal of Regulation Q implements the repeal of Section 19(i) of the Federal Reserve Act, effective July 21, 2011, pursuant to Section 627 of the Dodd-Frank Act. The repeal relieves a restriction by repealing the prohibition against payment of interest on demand deposits by member banks.
What are the 3 types of regulation? ›
Three main approaches to regulation are “command and control,” performance-based, and management-based. Each approach has strengths and weaknesses.
What does regulation O stand for? ›
Regulation O prohibits a member bank from extending credit to an insider that is not made on substantially the same terms as, or is made without following credit underwriting procedures that are at least as stringent as, comparable transactions with persons that are non-insiders and not employees of the bank.
Is Regulation D gone? ›
Regulation D is no longer in effect, but many banks are still enforcing the rule. Review your savings account disclosure to find out what happens if you make more than six withdrawals a month. And if needed, switch to a better savings account that doesn't charge fees.
What is the Reg Q ceiling? ›
Regulation Q- type interest rate ceilings on transactions accounts, passbook savings accounts, and small time deposits prevent banks from paying a competitive rate of inter- est when market rates exceed the ceiling rates. When this occurs, the behavior of banks, depositors, and borrowers changes.
Is regulation AA still in effect? ›
The Dodd-Frank Wall Street Reform and Consumer Protection Act ended the Federal Reserve Board's power to make rules regarding deceptive or unfair banking practices, and thus Regulation AA was repealed with the passage of the Dodd-Frank Act.
What happens when a regulation is repealed? ›
Once deleted, the repealed statute no longer has the force of law. All repeals of parts of the US Code are, therefore, express repeals. Implied repeal occurs where two statutes are mutually inconsistent. The effect is that the later statute repeals the earlier statute pro tanto (in so far as it is inconsistent).
A final rule, in the context of administrative rulemaking, is a federal administrative regulation that advanced through the proposed rule and public comment stages of the rulemaking process and is published in the Federal Register with a scheduled effective date.
What was Regulation Q Banking Act of 1933? ›
In addition, the act introduced what later became known as Regulation Q, which mandated that interest could not be paid on checking accounts and gave the Federal Reserve authority to establish ceilings on the interest that could be paid on other kinds of deposits.
What is meant by Regulation Q in the euro currency market? ›
Regulation Q. Federal Reserve Board regulation imposing caps on the rates that banks may pay on savings and time deposits. Currently time deposits with a denomination of $100,000 or more are exempt from Reg Q. Jun 6, 2024. Market: After-Hours.
What is the Regulation Q ceiling? ›
Regulation Q- type interest rate ceilings on transactions accounts, passbook savings accounts, and small time deposits prevent banks from paying a competitive rate of inter- est when market rates exceed the ceiling rates. When this occurs, the behavior of banks, depositors, and borrowers changes.
What does regulation mean in medical terms? ›
Regulation refers to laws or bylaws defining the conditions for health professionals' minimum educational requirements, entry to practice, title protection, scope-of-practice and other measures, such as the regulation of continuing professional development.
What does level of regulation mean? ›
Introduction. There are three primary levels of regulation: registration, statutory certification, and licensure. These three levels vary in terms of legal restrictiveness and protections; each of the levels may be the best choice for a specific type of situation.
