Earlier this week, The Federal Reserve Board "requested comment on a proposed rule to repeal the Board's Regulation Q, which prohibits the payment of interest on demand deposits by institutions that are member banks of the Federal Reserve System." A press release explains, "The proposed rule would implement Section 627 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which repeals Section 19(i) of the Federal Reserve Act in its entirety effective July 21, 2011. The repeal of that section of the Federal Reserve Act on that date eliminates the statutory authority under which the Board established Regulation Q."
The release explains, "The proposed rule would also repeal the Board's published interpretation of Regulation Q and would remove references to Regulation Q found in the Board's other regulations, interpretations, and commentary. The Board is seeking comment on whether the repeal of Regulation Q is expected to have implications for balance sheets and income of depository institutions, short-term funding markets such as overnight federal funds market, the demand for interest-bearing demand deposits, and competitive burden on smaller depository institutions. Comments on the proposal must be submitted within 30 days from the date of publication in the Federal Register, which is expected shortly."
The full "Prohibition Against Payment of Interest on Demand Deposits - Notice of proposed rulemaking; request for public comment's Summary" explains, "The Board is requesting public comment on proposed amendments that would repeal Regulation Q, Prohibition Against Payment of Interest on Demand Deposits, effective July 21, 2011. Regulation Q implements the statutory prohibition against payment of interest on demand deposits by institutions that are member banks of the Federal Reserve System set forth in Section 19(i) of the Federal Reserve Act. Section 627 of the Dodd-Frank Wall Street Reform and Consumer Protection Act repeals Section 19(i) of the Federal Reserve Act effective July 21, 2011. The proposed amendments implement the Dodd-Frank Act's repeal of Section 19(i). The proposed amendments would also repeal the Board's published interpretation of Regulation Q. The proposed amendments also remove references to Regulation Q found in the Board's other regulations, interpretations, and commentary, including Section 204.10 of Regulation D (Reserve Requirements of Depository Institutions) and paragraph (n) of Supplement I to Regulation DD (Truth in Savings)."
The proposed rule continues, "The Board promulgated Regulation Q on August 29, 1933 to implement Section 19(i) of the Act. In the past, Regulation Q also contained provisions implementing then-current statutory provisions regulating the rates of interest payable on various types of interest-bearing deposits. The Depository Institutions Deregulation Act of 1982 phased out these statutory interest rate limitations effective in March 1986. After that time, Regulation Q consisted primarily or exclusively of provisions related to implementing Section 19(i)'s prohibition of the payment of interest on demand deposits by member banks."
It says, "Section 627 of the Dodd-Frank Act repeals Section 19(i) of the Act in its entirety, effective one year from the date of enactment. Accordingly, the Board will no longer have statutory authority to promulgate Regulation Q effective July 21, 2011. The Board therefore proposes to repeal Regulation Q, effective July 21, 2011. For the same reason, the Board proposes to repeal its published interpretation of Regulation Q currently set forth at 12 CFR 217.101 (Premiums on deposits)."
The rule adds, "The Dodd-Frank Act did not repeal the Board's authority under Section 19(a) of the Act to 'determine what shall be deemed to be a payment of interest.' The Board believes, however, that the primary reason for this authority was to enforce Section 19(i)'s prohibition of the payment of interest on demand deposits. Accordingly, the Board believes that there will be no reason to retain the definition of 'interest' in Regulation Q following the repeal of Section 19(i). The Board recognizes that there may be other laws or regulations that currently refer to regulation Q or that incorporate the definition of 'interest' currently set forth in Section 217.2(d) of Regulation Q. The Board believes, however, that such other laws and regulations can substantively incorporate the Regulation Q definition of 'interest' at any time if necessary, or can delete references to Regulation Q that will be obsolete after July 21, 2011. Accordingly, the Board does not propose retaining the definition of 'interest' currently set forth in Regulation Q."
The Fed concludes, "The Board seeks comments on all aspects of the proposal. In addition, the Board specifically seeks comments on the following: 1. Does the repeal of Regulation Q have significant implications for the balance sheets and income of depository institutions? What are the anticipated effects on bank profits, on the allocation of deposit liabilities among product offerings, and on the rates offered and fees assessed on demand deposits, sweep accounts, and compensating balance arrangements? 2. Does the repeal of Regulation Q have any implications for short-term funding markets such as the overnight federal funds market and Eurodollar markets, or for institutions such as institution-only money market mutual funds that are active investors in short-term funding markets? 3. Is the repeal of Regulation Q likely to result in strong demand for interest-bearing demand deposits? 4. Does the repeal of Regulation Q have any implications for competitive burden on smaller depository institutions?"
Comments should be "identified by Docket No. R-1413 and RIN No. 7100-AD60 and sent via e-mail to regs.comments@federalreserve.gov. Finally, note that Crane's Money Fund Symposium will host a session on "Corporate Sweeps, Reg Q & Banking Regs on Friday, June 24 in Philadelphia featuring Jeff Avers, Group V.P. of SunTrust and Tony Carfang, Principal of Treasury Strategies.
