07.25.2011 Dodd-Frank: Federal Reserve Publishes Final Rule Repealing Regulation Q

Section 627 of the Dodd-Frank Wall Street Reform and Consumer Protection Act repeals the prohibition against the payment of interest on demand deposits, effective July 21, 2011. 

On Monday, July 18, 2011, the Federal Reserve Board (the “Board”) issued a final rule repealing its Regulation Q, which prohibits the payment of interest on demand deposits for depository institutions that are members of the Federal Reserve System. The effective date of the rule is July 21, 2011. 

As reported in this publication earlier this month, the Federal Deposit Insurance Corporation issued a notice of final rulemaking on July 14, 2011, to repeal its regulation (12 CFR Part 329) that prohibits the payment of interest on demand deposits for state-chartered banks that are not members of the Federal Reserve System. 

In its notice of proposed rulemaking, the Board asked four specific questions regarding the impact of the repeal, which were also set forth in this publication of several months ago on the proposed rule. Most comments from those opposed to the proposed rule expressed concern about the impact of the repeal on community banks. These comments generally stated that the repeal would result in heightened competition for deposits, and that larger banks would be in a better position than community banks to offer higher rates in order to attract these deposits. 

The comments received by the Board from those supporting the repeal generally cited free-market reasons for their support. 

In addition to repealing Regulation Q, the final rule repeals the Board’s published interpretations of Regulation Q, and makes conforming changes to the Board’s Regulation D (Reserve Requirements of Depository Institutions) and Regulation DD (Truth In Savings).