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Over time, lawmakers began to see how banks were getting around the regulation. As such, they slowly began to approve other banking products to exceed the previous interest rate ceilings imposed earlier with the one exception being a ban on interest-bearing demand deposits.
In hindsight, Regulation Q has served as an example of how Federal laws can result in financial repression by forcefully attempting to manipulate money flows in the economy. Many analysts contend that it resulted in savers earning less than the rate of inflation and negatively affected growth in the economy.
The creation of money market mutual funds as a side effect of Regulation Q was a benefit for investors. Now, without the limitations that resulted in the regulation’s creation in the first place, many investors wonder what kind of impact it will have on their portfolios.
The group that should see the largest change is small businesses. Previously, they needed to hold multiple accounts and engage in cumbersome and oftentimes pricey transfers between accounts in order to maximize efficiency. With checking accounts now able to offer interest, though, the need to hold numerous accounts can be greatly reduced, freeing up more money. More money equals more growth and greater opportunities.
One thing investors and small businesses should keep in mind is that interest-bearing demand deposits don’t get the protection of the FDIC. That means an insolvent bank would spell disaster for account holders who hold money in these types of accounts. Going forward, it seems likely that more account options will be available for consumers and businesses alike but the standard model of diversifying assets across multiple account types will stay in place.
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