Regulation Q
What Is Regulation Q?
Regulation Q is a Federal Reserve Board (FRB) rule that sets "least capital requirements and capital adequacy standards for board regulated institutions" in the United States. Regulation Q was refreshed in 2013 in the outcome of the 2007-2008 financial crisis and keeps on going through changes.
Figuring out Regulation Q
The original rule was made in 1933, as per the Glass-Steagall Act, determined to forbid banks from paying interest on deposits in checking accounts. It likewise enacted roofs on the interest rates that could be paid in different types of accounts.
The purpose of these measures was to limit speculative behavior by banks going after customer deposits as it prompted banks seeking risky means of profit to have the option to pay the interest on these deposits. This was later commonly viewed for of financial repression.
Regulation Q in the end prompted the rise of money market funds as a workaround to the restriction of paying interest.
Canceling Regulation Q
In 2011, Regulation Q was canceled by the [Dodd-Frank Wall Street Reform and Consumer Protection Act](/dodd-frank-financial-administrative reform-bill), permitting banks that are individuals from the Federal Reserve System (FRS) to pay interest on demand deposits. This action was taken to increase a bank's capital reserves and, thusly, relieve any credit illiquidity — one of the reasons for the 2007-2008 credit crisis.
Reaction to the cancelation was mixed. Detractors guaranteed it would bring about increased competition for customer deposits and that larger banks would be in a better position to offer higher interest rates, in this way harming more modest community banks. They additionally refered to increased costs of funding and higher expenses.
Allies, then again, contended that the nullification would bring about additional inventive products, greater transparency, and a stable source of capital.
Current Regulation Q Requirements
In 2013, the Federal Reserve (Fed) issued a refreshed Regulation Q, intended to guarantee banks keep up with adequate capital to have the option to keep lending, paying little mind to losses or any slumps in the economy.
Certain institutions are exempt from being required to meet the capital requirements, incorporating bank holding companies with under $100 billion altogether consolidated assets.
These rules incorporated a base ratio of common equity Tier 1 capital to risk-weighted assets of 4.5%, and a common equity Tier 1 capital preservation buffer to risk-weighted assets of 2.5%, as well as a valuable leverage ratio of 3% for large banks that are globally active, which thinks about off-balance sheet exposure.
In 2020, the Fed then adopted a last rule to decide an organization's capital buffer requirement, selecting to utilize the consequences of a supervisory stress test, as opposed to the static 2.5% of risk-weighted assets part.
Features
- The Fed later refreshed Regulation Q, executing rules to guarantee banks keep up with adequate capital to loan, notwithstanding losses or any slumps in the economy.
- The original rule was made in 1933, as per the Glass-Steagall Act, determined to restrict banks from paying interest on deposits in checking accounts.
- Regulation Q at last prompted the rise of money market funds as a workaround to the forbiddance of paying interest.
