Both the Federal Reserve Board and the Federal Deposit Insurance Corporation published final rules repealing regulations that prohibited payment of interest on demand deposits, effective July 21, 2011. The Federal Reserve Board’s Regulation Q was repealed on July 12, 2011. The FDIC’s Part 329 was repealed on July 6, 2011. The regulations had been in place since 1933. The repeals were required by Section 627 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (‘‘Dodd-Frank Act’’).
The repeals raise numerous questions, such as:
- Does the repeal of Regulation Q/Part 329 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?
- Is the repeal of Regulation Q/Part 329 likely to result in strong demand for interest-bearing demand deposits?
- Does the repeal of Regulation Q/Part 329 have any implications for competitive burden on smaller depository institutions?
How Should Your Bank Respond?
Banks have a number of options in fashioning their response to passage of the bill. You can:
- Pay hard interest on the entire average account balance in which case you will eliminate the soft interest credit and charge hard dollars for services rendered.
- Pay a soft earnings credit on that portion of the average balance required to offset service charges and then pay hard interest on any excess balances.
- Maintain the status quo and pay no hard interest at all.
Your response will be based on demand from your customers and the response of in-market competitors. Will you be a leader or a follower?