What Is Regulation Q and Why Was It Repealed?
Understand the historic banking rule that shaped deposit interest for decades and how its repeal created today's competitive account landscape.
Regulation Q was a federal rule established under the Banking Act of 1933, emerging from the financial turmoil of the Great Depression. Lawmakers at the time believed that intense competition among banks for customer deposits had contributed to the crisis. The thinking was that if banks offered excessively high interest rates to attract funds, they would be forced to seek riskier loans and investments to cover those expenses. By imposing restrictions on the interest banks could pay, the government aimed to remove this incentive for speculative behavior and ensure a more stable banking environment.
Core Prohibitions of Regulation Q
The primary function of Regulation Q was its prohibition on the payment of interest on demand deposits, which are standard checking accounts used for day-to-day transactions. Under the rule, any funds in an account that could be withdrawn at any time without notice were ineligible to earn interest. This ban was written into the Federal Reserve Act and applied to all member banks of the Federal Reserve System, shaping the structure of banking products for decades.
A second major function was granting the Federal Reserve the authority to set interest rate ceilings on time deposits and savings accounts. A time deposit, such as a Certificate of Deposit (CD), holds money for a fixed term, while a savings account is designed for accumulating funds. The regulation allowed these accounts to earn interest up to a maximum rate set by the Federal Reserve, which could be adjusted based on economic conditions. This was intended to prevent “rate wars” where banks might offer unsustainably high yields, and this aspect of the regulation was phased out by 1986.
The Repeal of Regulation Q
The end of Regulation Q’s core prohibition came with the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010. This legislation was enacted in response to the 2007-2008 financial crisis and overhauled the U.S. financial regulatory framework. Section 627 of the Dodd-Frank Act mandated the repeal of the part of the Federal Reserve Act that forbade paying interest on demand deposits.
By the 21st century, many economists and policymakers viewed Regulation Q as an outdated and anti-competitive measure. The prohibition was seen as unfairly penalizing businesses that needed to hold large sums of cash in checking accounts for operational purposes, preventing them from earning any return on that capital. The repeal was intended to increase efficiency and fairness in the banking sector by allowing market forces to determine rates.
The Federal Reserve Board issued its final rule to repeal Regulation Q, making the change effective on July 21, 2011. As of this date, financial institutions were legally permitted, though not required, to offer interest on business and personal checking accounts. This change ended a rule that had been in place for nearly 80 years, allowing banks to better manage their liquidity and provide a return on operating funds for customers.
The Modern Banking Environment
The repeal of Regulation Q altered the banking landscape, particularly for business clients. Before the repeal, corporate treasurers often used complex cash management strategies, such as “sweep” accounts that automatically moved funds from non-interest-bearing checking accounts into overnight investments to generate a yield. These programs could be costly and administratively burdensome.
With the ability to offer interest-bearing checking accounts after 2011, banks could provide a much simpler solution. This change allowed businesses to earn interest directly on their operating cash without the need for elaborate sweep programs. The shift especially provided small and medium-sized enterprises, which often lack access to sophisticated treasury tools, a new opportunity to generate income from their working capital.
The impact also extended to consumer banking by fostering a more competitive environment. With the final barrier to interest-based competition removed, banks began to more aggressively market high-yield checking and savings accounts. These products often feature higher interest rates than traditional accounts and are designed to attract and retain customer deposits in a deregulated market. This increased competition gives consumers more freedom to choose accounts that best fit their financial goals.
Remaining Regulatory Framework
While the repeal of Regulation Q removed key restrictions, it did not leave deposit accounts unregulated. Other federal rules continue to govern how banks manage these funds, with Federal Reserve Regulation D being a prominent example. This regulation provides the framework for reserve requirements, which is the amount of funds banks must hold in reserve rather than lend out. However, the Federal Reserve reduced the reserve requirement to zero percent in 2020.
Regulation D also defines different types of deposit accounts for regulatory purposes. Historically, it was the source of the rule that limited certain transfers and withdrawals from savings and money market accounts to six per month. This limitation was intended to maintain the legal distinction between a transactional checking account and a non-transactional savings deposit. The six-per-month limit was suspended in 2020 to give depositors easier access to their funds.