Requiem for Regulation Q: What It Did and Why It Passed Away

Abstract

March 1986 marked the end of the phase-out of interest rate ceilings on time and savings deposits, otherwise known as Regulation Q. Throughout its 53-year history, Regulation Q policy did not achieve its intended objectives. The original objectives in the 1930s were to induce relatively small banks to reduce their balances due from other banks and to increase profits of the banking system by limiting banks' interest expense. The Regulation Q policy adopted in 1966 failed to achieve the objectives of constraining interest rate increases and promoting a stable supply of mortgage credit. The policy also altered the allocation of wealth in the economy, causing those with relatively small savings to forego billions of dollars in interest income. Congress acted in 1980 to institute a process of phasing out Regulation Q. As a result, the share of small-denomination time and savings deposits fell at thrift institutions as it rose at commercial banks. Thrifts have responded by increasing their share of large-denomination time deposits.