Without going into too much unnecessary background on why this question has come up, can anyone out there explain a few things regarding Regulation D to me.
Here is an overview:
What is Regulation D? It is a Federal Regulation which limits the number of transfers, withdrawals and third party payments that can be made on or from a regular share (savings) account. Transactions performed electronically or with the use or aid of an electronic device are subject to limitation. Electronic transactions are limited to 6 per month from a regular share (savings) account. These include telephone, automated clearinghouse (ACH), fax, data transmission, home banking, bill paying, automatic transfers, or any other arrangement by the credit union to pay a third party from the member’s account. (Transactions made in person at a Credit Union office are not subject to the limitations.)
This was taken from a FAQ at some credit union’s site, which is presumably the reason for the specific references to credit unions.
What I don’t understand is: why the big deal? Why there a regulation that prevents me from paying my bills via online banking from my savings account, as opposed to my checking (I realize it doesn’t fully prevent me, but my bank has threatened to turn my savings account into a non-interest bearing one if I continue to exceed the transaction limit imposed by D.)
The Federal Reserve System, which issued Regulation D, wishes to maintain a distinction between bank accounts which are used as proxies for cash (that is, checking accounts), and accounts which are used to accumulate wealth (savings accounts). The latter are subject to less volatility and less frequent withdrawals. The two types of accounts are regulated differently in terms of reserve requirements, as befits the different purposes for which they are used.
In the absence of federal regulation, it’s possible that your bank would impose a similar restriction anyway. The rationale for paying higher interest on a savings account is that it will tend to accumulate larger balances and incur fewer transaction costs.
Thanks for the explanation, Freddy. I understand the rationale, I guess, but still it seems a bit odd of a distinction to make nowadays, considering how many banks treat savings accounts as overdraft protection for checking accounts, and that more and more people seem to be moving “savings” monies into mutual funds and such.
I would like to point out that many if not all financial institutions would be HIGHLY annoyed with you if you were to invoke your savings account as overdraft protection more than a couple of times a month.
The thinking in the industry would be that you are the kind of customer that cannot handle money, and would wind up skipping state and leaving them with a large negative balance.
Not that you, of course, are that kind of person. Nor that bankers are even correct in this belief.
I agree though, that savings accounts LOOK like they are becoming marginalized. I would not use one, except for the fact that my credit union offers me a 1.5% on my “Share” (really savings) account.