Negotiable order of withdrawal account
While a negotiable order of withdrawal is essentially identical to a check drawn on a demand deposit account, US banking regulations define the terms "demand deposit account" and "negotiable order of withdrawal account" separately. And until July 2011, Regulation Q stated that a demand deposit could not pay interest. NOW accounts were structured to comply with Regulation Q.
NOW accounts are considered checkable deposits, and are counted in the Fed's M1 definition of the money supply, as well as in the broader definitions. Like all bank deposits, they are liabilities from the bank's perspective.
The Banking Act of 1933 specified that no member bank "shall, directly or indirectly, by any device whatsoever, pay any interest on any deposit which is payable on demand", and on August 29, 1933, this restriction was incorporated into the Federal Reserve Board's new Regulation Q. The reason for the prohibition was that, in a period of bank turmoil in the early years of the Great Depression, interest payments on demand deposits, especially by large New York banks, were viewed as "excessive competition" in the banking sector, supposedly leading to diminished profit margins and hence bank failures, the latter both because of the diminished profit margins themselves and because of resultant excessive stock market speculation by the New York banks.:pp.3–4
At first the general level of interest rates was low, and so the ban on demand deposit interest prevented only what would have been small interest payments, and there was no significant attempt at avoiding the ban. But starting in the 1950s, interest rates became higher and banks began to feel greater incentive to get around the ban. Non-pecuniary avoidance efforts included increased offering of convenience features such as large numbers of branch offices and giveaways of consumer goods to new customers. Pecuniary avoidance of the ban, known as implicit interest, included preferred loan rates (often tied explicitly to the customer's demand deposit balances) and below-cost service charges for services such as check-clearing.:p.4
The NOW account was developed as a more explicit challenge to the ban on interest payments by Ronald Haselton, then President and CEO of the Consumer Savings Bank in Worcester, MA, leading to Congress permitting NOW accounts in Massachusetts and New Hampshire starting in January 1974, and in all of New England starting in March 1976. At the outset there was a 5% interest rate ceiling on NOW accounts, and it was binding: all New England institutions offering them paid the full allowable 5% rate.:p. 4
With no obvious adverse effects of NOW accounts in New England, Congress allowed them nationwide at all depository institutions beginning December 31, 1980. Beginning on March 31, 1986, as part of a general deregulation of interest rates, there was no longer an interest ceiling on NOW accounts, though interest was still prohibited on demand deposits. Finally, on July 21, 2011 the ban on demand deposit interest (the only substantive remaining component of Regulation Q) was eliminated, thereby removing the only distinction between the two types of accounts.
- Mishkin, Frederic S. (2007). The Economics of Money, Banking, and Financial Markets (Alternate Edition). Boston: Addison Wesley. p. 220. ISBN 0-321-42177-9.
- "Federal Register Volume 76, Number 72 (Thursday, April 14, 2011)". Federal Register. 76 (72). April 14, 2011. See section on Federal Reserve System
- Mitchell, Douglas W., Interest-Bearing Checking Accounts and Macro Policy, Ph.D. dissertation, Princeton University, 1978.
- "BUSINESS PEOPLE; Haselton Brothers' Role In Banking Innovations". The New York Times. 4 January 1983. Retrieved 2012-05-17.
- Gilbert, Alton (February 1986). "Requiem for Regulation Q: What It Did and Why It Passed Away" (PDF). Federal Reserve Bank of St. Louis: 31.
- Basch, Donald, "The diffusion of NOW accounts in Massachusetts", New England Economic Review, November/December 1976, pp. 20–30.
- Campbell, George, "Success with NOW accounts", Federal Home Loan Bank Board Journal, September 1976, pp. 2–8.
- Gibson, Katherine, "The early history and initial impact of NOW accounts", New England Economic Review, January/February 1975, pp. 17–26.
- Kimball, Ralph, "Recent developments in the NOW account experiment in New England", New England Economic Review, November/December 1976, pp. 3–19.
- Paulus, John, "Effects of 'NOW' accounts on costs and earnings of commercial banks in 1974-75", Staff Economic Study #88, Board of Governors of the Federal Reserve System, 1976.
- Simmons, Richard, "NOW accounts and other services: Another perspective", Federal Home Loan Bank Board Journal, September 1976, pp. 9–10.