Depository Institutions Deregulation and Monetary Control Act

The act responded to the financial turmoil of the late 1970s, when high inflation and market interest rates exceeded the ceilings set by Regulation Q, causing disintermediation—funds flowing out of thrift institutions into money market mutual funds.² The law aimed to enhance the competitiveness of depository institutions and strengthen monetary control by the Federal Reserve. It was part of a broader deregulatory trend, alongside the Garn–St. Germain Act of 1982, which further relaxed thrift regulations.

The act created the Depository Institutions Deregulation Committee to oversee the six-year phase-out of interest rate ceilings on deposit accounts, culminating in their elimination by 1986.³ It authorized NOW accounts nationwide, allowing consumers to earn interest on checking accounts. It also preempted state usury laws for certain loans, setting a federal ceiling of 12% for most consumer loans, though states could override this with a two-thirds vote. Additionally, it extended Federal Reserve reserve requirements to all depository institutions, including non-member banks and thrifts, and granted them equal access to the discount window and other Fed services.

The act contributed to the savings and loan crisis of the 1980s by allowing thrifts to offer higher interest rates, which encouraged riskier lending practices.⁴ The elimination of interest rate ceilings increased funding costs for thrifts, squeezing their profitability and leading to widespread failures. The act also altered the Federal Reserve's monetary policy toolkit, making reserve requirements more uniform and enhancing the Fed's control over the money supply. However, the phase-out of Regulation Q ultimately led to the end of the traditional passbook savings account era.

The act included a provision allowing the Federal Reserve to price its services competitively, which led to the development of the Fedwire funds transfer system as a revenue-generating service. It also required the Fed to pay interest on reserve balances, a feature that was not fully implemented until the Financial Services Regulatory Relief Act of 2006. The act's usury preemption was later challenged in court, but the Supreme Court upheld it in Marquette National Bank v. First of Omaha Service Corp. (1978), a case that predated the act but influenced its drafting. Additionally, the act allowed credit unions to offer share draft accounts, which function like checking accounts.

Regulation Q

Federal Reserve regulation that set maximum interest rates on deposit accounts, phased out by the 1980 act.

NOW account

Negotiable order of withdrawal account, an interest-bearing checking account authorized nationwide by the act.

Disintermediation

Withdrawal of funds from depository institutions to invest in higher-yielding instruments, often due to interest rate ceilings.