INTRODUCTION
This article is intended to provide a ready reference on both federal and state laws and regulations addressing the subject of interest on deposits, classification of deposits, and reserve requirements. The main text is organized according to the following topics:
Historical Overview of the Deregulation Process
FDIC Regulations
Federal Reserve Board Regulation D
Brokered Deposit Regulation
Nebraska State Department of Banking and Finance
INTEREST ON DEPOSITS AND RESERVE REQUIREMENTS:
HISTORICAL OVERVIEW OF DEREGULATION PROCESS
In the early 1930s, federal legislation was enacted, as a response to the banking panics, placing limits on interest rates, on time and savings deposits and to prohibit interest paid on demand deposits. The intent of Congress was to limit interest rate competition between banks in an effort to raise bank profitability and to reduce risk. Interest rate limitations were applied to insured thrifts in 1966, but at a higher level than applied to commercial banks. By the 1970s, many indicators had come to reveal that such interest rate controls were more of a hindrance to banks and their customers and were no longer accomplishing the original intent. Until 1980, interest rate limits were set by the Federal Reserve Board for member banks in Regulation Q, whereas the FDIC placed such ceilings on the institutions it supervised.
The deregulation process began with the passage of the Monetary Control Act of 1980 which provided for a six year phasing-out of interest ceiling regulations. The new law also created the Depository Institution’s Deregulation Committee (DIDC). First, the DIDC created several new accounts whose rates were linked to U.S. Treasury rates. Then, in 1982, the DIDC deregulated interest ceilings on long-term time deposits.
In 1982, passage of the Garn-St Germain Depository Institutions Act provided that the DIDC establish an account which would be directly competitive with money market mutual funds. Effective December 14, 1982, the money market deposit account (MMDA) came into being, subject to a minimum balance of $2,500. The Garn-St Germain Act also directed the elimination of interest rate differentials between banks and thrifts by January 1, 1984. Super NOW accounts were authorized by the DIDC, effective January 5, 1983. These new accounts were limited to individuals, nonprofit organizations and were subject initially to a $2,500 minimum balance. Both MMDAs and Super NOWs were free from interest rate ceilings.
On all remaining time and savings deposits (other than those with a balance of less than $2,500 and less than a 31 day maturity) interest rate limits were removed by the DIDC effective October 1, 1983. The DIDC then lowered the $2,500 minimum balance to $1,000 (January 1, 1985) and later eliminated the $1,000 minimum balance requirement (January 1, 1986).
The final phase-out of interest rate regulation occurred on March 31, 1986. On that date, the interest rate ceiling on passbook and ATS (automatic transfer from savings) accounts was eliminated. Only the statutory restriction on demand deposit interest payments remained. The DIDC and its authority also ceased to exist, according to law, on March 31, 1986. Depository institutions would be subject only to those regulations promulgated by their respective regulators.
Effective July 21, 2012, the prohibition against payment of interest on demand deposits was repealed pursuant to Section 627 of the Dodd-Frank Act.