The Federal Reserve Board has issued for public comment a proposed rule that would repeal the Board’s Regulation Q pursuant to Section 627 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Section 19(i) of the Federal Reserve Act (FRA) prohibits the payment of interest on demand deposits by member banks of the Federal Reserve System, and Reg. Q has implemented that provision since its enactment in 1933. Section 627 of Dodd-Frank has repealed Section 19(i) effective July 21, 2011. Accordingly, the Board believes Reg. Q will no longer serve a useful purpose.

The Board’s request for comment reflects some concern, however, that eliminating Reg. Q will affect smaller institutions more than larger ones. Allowing, but not requiring, banks to pay interest on demand deposit accounts (DDAs) will entail additional costs, which institutions will have to absorb or pass on as higher fees and charges. As a practical matter, competitive forces are likely to compel smaller banks to pay interest on DDAs.

Comments are due within 30 days after publication of the proposal in the Federal Register.

Dodd-Frank also effects corresponding repeals of Section 5(b)(1)(B) of the Home Owners’ Loan Act (for federally chartered thrift institutions) and Section 18(g) (for state nonmember banks).

Although Board authority under FRA Section 19(a) “to determine what shall be deemed to be a payment of interest” has not been repealed, the Board takes the position that the purpose of that authority was to enforce the Section 19(i) prohibition and that, with the repeal of Section 19(i) on July 21, 2011, there is no reason to retain any such definition of “interest.” Acknowledging that there may be other laws or regulations that incorporate Reg. Q or its definition of “interest” by reference, the Board believes that those responsible for implementing or enforcing such laws and regulations can either incorporate the desired language verbatim (rather than by cross-reference) after July 21, 2011, or delete the cross-reference.