Introduction: Types of Deposit Accounts

This section will list and describe the distinctions federal banking laws and regulations make between different types of deposit accounts.

In order to understand and comply with these federal requirements and prohibitions, institutions need to be familiar with the definitions of the various types of accounts to which the rules relate.

Virtually all institutions offer a more complicated array of account types than we will study in this section. For example, Regulation D has only one definition of “savings deposit,” but most institutions offer two or three versions of savings deposits—a passbook or statement savings account and a “money-market deposit account” (MMDA) at the very least, and often several variations of each of these. There are a number of “nonlegal” reasons why financial institutions offer as many accounts as they do.

First, customers have different needs. Some need liquidity—i.e., the ability to withdraw their deposit “on demand,” at any time without notice. Others are not so concerned with liquidity and are willing to commit their deposit for a lengthy term. Some depositors are able to maintain a large balance and are therefore able to earn higher interest rates or reduced fees. Others can only maintain smaller balances and so do not earn those advantages. Institutions also offer different accounts depending on whether the customer wants checking privileges on the account and the amount of activity there will be on the account.

There are also historical reasons for the many different account types offered by depository institutions. Prior to 1980, the types of accounts offered and the interest rates paid by financial institutions were strictly regulated by the federal regulatory agencies. In the late 1970s, however, competition from high-interest money-market mutual funds began to pull large amounts of deposit money out of financial institutions. Money-market mutual funds were permitted to pay any rate of interest they wanted and, since they also offered checking privileges, were attractive alternatives to financial institution deposit accounts for people who wanted a high return on their money.

To stem the flow of funds out of financial institutions, Congress, in 1980, passed the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA). This Act established the Depository Institutions Deregulation Committee (the DIDC), made up of the heads of the various financial institution regulatory agencies. The DIDC was charged with gradually doing away with the limitations on deposit account interest rates and was given until April of 1986 to do so.

Over the course of its six-year existence, the DIDC authorized a variety of different accounts, such as the 91-day Certificate of Deposit (CD), the 7- to 31-day CD, the money-market deposit account (MMDA), and the SuperNOW account. Institutions could pay high rates of interest on these accounts but also had to impose certain restrictions on the accounts, such as high minimum balances or lengthy maturity periods. Institutions could also offer accounts with low minimum balances or short maturity periods, but could not pay interest on these accounts at rates above certain limits set by the DIDC.

By April of 1986, however, the distinctions between all these different accounts disappeared. DIDMCA had mandated that, by this time, all restrictions on interest rates, minimum balances, maturity periods, and so forth be eliminated. The only restriction that survived deregulation was the prohibition against paying interest on demand deposits, which, again, expires on July 21, 2011.

Although the regulatory structure was greatly simplified in April 1986, many institutions continued to offer accounts under the names established for them by the DIDC and with the old regulatory distinctions as to interest rates, minimum balances, and maturity periods. They did this either out of habit or because they liked the account structure they were left with in April of 1986 and did not want to disrupt their relationships with existing customers.

In any event, many institutions currently offer different types of accounts based on regulatory distinctions that no longer exist. There is nothing wrong with this, but knowing it might help you understand the reason behind some of the distinctions your own institution makes between types of accounts.

This section is concerned only with the categories of deposit established by the federal laws and regulations. You will need to explore on your own the variations offered by your own institution and the reasons for those variations.

We will first look at the categories and subcategories established by Regulation D for reserve requirement and reporting purposes. Next, we will look at what constitutes a “demand deposit” and what it means to say that institutions could not pay interest on demand deposits. Then we will look at Electronic Transfer Accounts. We will look at what sorts of depositors are eligible to hold a NOW account next. Finally, we explore “sweep” accounts and transfer restrictions on money-market deposit accounts.

We will not study Regulation CC, the funds availability regulation, in this section even though you should know what a “transaction account” is in order to understand the scope of Regulation CC. We deal in great depth with Regulation CC and the accounts to which it applies in other sections. We also refer you to our deposit insurance section for details on the distinctions those regulations make between time, savings, and demand deposits.