The Federal Reserve Board announced today that it has amended Regulation D (Reg D) to permit banks and credit unions to allow their customers to make more than six payments or withdrawals per month from their savings and money market accounts. This was done in part to give customers easier access to their funds during the COVID-19 pandemic. It is one of the many actions the Fed has taken in the last two months to combat the economic effects of the pandemic.
The first thing to note about this Reg D change is that it does not require institutions to suspend their excessive transaction policies. It’s up to the bank or credit union. Some bank policies include fees when customers exceed six payments or withdrawals per month. Some banks also have policies that give them the right to close savings accounts if customers regularly exceed this limit. Before you choose to exceed this limit, make sure to check with your bank or credit union. If they haven’t suspended enforcement of this limit, be sure to let them know that they can no longer blame federal regulations on their policy.
Another thing to note is that this rule change may just be temporary. I am still trying to get clarification. The Fed’s press release and FAQs are not clear on this question. At first I thought that “interim final rule” in the press release title implied a temporary change, but after researching the definition of this, that does not seem to be the case. One would think that the Fed’s FAQs would specifically address this question, but it does not. Also, the press release and the FAQs state in several instances that institutions may “suspend enforcement of the six transfer limit.” The definition of “suspend” implies a temporary condition. However, if this rule change is temporary, one would think that the Fed would include an end date. If this rule change is temporary, it seems likely that it should last through 2020 at the very least. I’ll update this post once I receive clarification.
Update 7/27/20: The Fed has updated its FAQs with an answer to the question about if this rule change is temporary or permanent. The answer suggests it's permanent, but there is a possibility of changes based on feedback and future conditions. Below is an excerpt to the Fed's answer:
The Committee’s choice of a monetary policy framework is not a short-term choice. The Board does not have plans to re-impose transfer limits but may make adjustments to the definition of savings accounts in response to comments received on the Board’s interim final rule and, in the future, if conditions warrant.
Below is a copy of the press release from the Federal Reserve Board so you can interpret it for yourself.
Federal Reserve Board announces interim final rule to delete the six-per-month limit on convenient transfers from the "savings deposit" definition in Regulation D
The Federal Reserve Board on Friday announced an interim final rule to amend Regulation D (Reserve Requirements of Depository Institutions) to delete the six-per-month limit on convenient transfers from the "savings deposit" definition. The interim final rule allows depository institutions immediately to suspend enforcement of the six transfer limit and to allow their customers to make an unlimited number of convenient transfers and withdrawals from their savings deposits at a time when financial events associated with the coronavirus pandemic have made such access more urgent.
The regulatory limit in Regulation D was the basis for distinguishing between reservable "transaction accounts" and non-reservable "savings deposits." The Board's recent action reducing all reserve requirement ratios to zero has rendered this regulatory distinction unnecessary.
Concurrently, the Federal Reserve is making temporary revisions to the FR 2900 series, FR Y-9, and FR 2886b reports to reflect the amendments to Regulation D.
The Fed’s FAQs page is available here.
In addition to making it easier for depositors to access their funds during the COVID-19 pandemic, the Fed provided another reason for this change. In March the Fed eliminated reserve requirements on all transaction accounts. This was another way for the Fed to support more lending by banks and credit unions. The elimination of the reserve requirement made the transaction limit distinction between checking accounts and savings accounts unnecessary.
For details on the old transaction limits of Regulation D, please refer to this DA article on Regulation D and how it affects depositors. The last change in transaction limits of Regulation D was after the 2008 Financial Crisis. In May 2009, the Fed announced changes to Regulation D to permit institutions to allow customers to write up to six checks per month from money market accounts instead of just three. Previous to this change, withdrawals or payments by check were treated differently than electronic withdrawals or payments.
Ways This Reg D Change Will Impact Savers
Depositors must first wait on their banks and credit unions to remove the six-per-month limit on their savings and money market accounts before depositors can benefit from this Reg D change.
Once the bank or credit union makes the changes, it may allow savers to earn more interest. Currently, depositors have to maintain adequate checking account balances to cover all of their regular payments. To avoid overdrafts, many depositors keep a sizable balance in their checking accounts. Free overdraft transfer policies (like those from Ally Bank) has made it easier to maintain a smaller checking account balance, but depositors still had to avoid excessive overdrafts since they count toward the excessive transaction limit. If banks and credit unions now eliminate the excessive transaction limit, savers can use their money market or savings accounts to make regular payments without worrying about the number of transactions. Also, if the institution offers free overdraft transfers, depositors can maintain only a small amount in their checking accounts. This will allow the vast majority of their funds to reside in the savings or money market accounts which typically earn much higher interest rates than the checking account.
A possible negative impact from this Reg D change is that it could put more downward pressure on savings account rates, especially at online banks that offer both low-interest checking accounts and high-interest savings accounts. This assumes that many depositors will react to this policy change and reduce their balances they maintain in their low-interest checking accounts and increase their balances in their high-interest savings accounts.
Waiting on the Banks and Credit Unions
The higher interest cost to banks may be a reason that banks won’t be in a rush to change their excessive transaction policies. It will be interesting to see how fast banks and credit unions react. Ally Bank already has suspended their excessive transaction fees due to the COVID-19 pandemic. However, as I described in my review of Ally’s COVID-19 relief package, Ally was still discouraging customers from making unlimited withdrawals from their savings and money market accounts. I’ve asked Ally if they plan to make changes based on today’s Reg D change. I’ll be sure to provide an update once I hear from them. If your bank or credit union announces a policy change, please let us know in the comments.