Legal Definitions - Regulation Q

Regulation Q was a regulation established by the Federal Reserve Board that primarily governed commercial banks in the United States. Its main functions were:

• Setting maximum interest rates that banks could pay on certain types of savings accounts.
• Regulating how banks advertised these interest rates to the public.

This regulation was a direct outcome of the Banking Act of 1933. While many of its provisions, particularly those related to interest rate ceilings, have since been repealed or phased out, it played a significant role in shaping the banking industry for decades.

Example 1: Interest Rate Ceilings

Imagine in the 1970s, two commercial banks, "First City Bank" and "Community Savings," both wanted to attract more customers for their standard savings accounts. Even if First City Bank had a very profitable year and wanted to offer 6% interest to attract new deposits, Regulation Q would have capped the maximum interest rate they could legally offer, perhaps at 5.25%. Community Savings would be subject to the exact same ceiling.

This example illustrates how Regulation Q imposed a uniform upper limit on the interest rates banks could pay on savings, preventing them from competing aggressively solely on the basis of higher interest rates.

Example 2: Advertising Restrictions

Consider a commercial bank, "National Trust," in the 1960s, planning a marketing campaign for its new "High-Yield Savings" account. Regulation Q would have dictated specific rules about how National Trust could describe the interest earned on this account in its advertisements, brochures, and promotional materials. For instance, it might have required that the annual percentage yield (APY) be prominently displayed, or prohibited misleading statements about how frequently interest was compounded, even if the bank preferred to use more enticing but less precise language.

This demonstrates how Regulation Q extended beyond just setting rates, also controlling the transparency and accuracy of how banks communicated those rates to potential depositors, ensuring consumers received clear and standardized information.