Negotiable Order of Withdrawal (NOW) Accounts: History, Innovations and Modern Alternatives
BP
Summary:
A negotiable order of withdrawal (NOW) account, commonly known as a NOW account, served as an interest-earning demand deposit account allowing customers to draft against deposited funds. Predominantly utilized before the Dodd-Frank Act, its historical significance lies in providing an interest-bearing alternative for liquid funds. This extensive article delves into the evolution, advantages, and eventual obsolescence of NOW accounts, offering a comprehensive understanding of their historical context and relevance in modern banking practices.
Introduction to negotiable order of withdrawal (NOW) account
A negotiable order of withdrawal (NOW) account, colloquially referred to as NOW account, is a distinctive interest-earning demand deposit account that empowers account holders to draft against deposited funds. Widely recognized before the Dodd-Frank Act reshaped financial regulations in 2010, the NOW account played a crucial role in the landscape of interest-bearing options for liquid funds.
Evolution of negotiable order of withdrawal (NOW) accounts
Originating in the 1970s, NOW accounts took shape under the leadership of Ronald Haselton, former President and CEO of Consumer Savings Bank. Initially confined to Massachusetts and New Hampshire, these accounts challenged the prohibition on interest payments on deposit accounts. The pivotal year of 1980 witnessed nationwide accessibility, marking a significant milestone in their evolution.
In 1986, the removal of the 5% interest rate ceiling spurred the introduction of Super NOW accounts, distinguished by higher interest rates. The progression continued until the Dodd-Frank Act in 2010, a legislative move that eliminated Regulation Q, providing banks with greater flexibility to offer interest-paying checking accounts.
Regulation changes: Dodd-Frank act and repeal of regulation Q
The Dodd-Frank Act represented a pivotal juncture for NOW accounts. Pre-Dodd-Frank, Regulation Q prevented banks from offering interest on demand deposit or checking accounts. NOW accounts, designed as an alternative with a temporary holding period, faced obsolescence when the Dodd-Frank Act repealed Regulation Q, enabling banks to pay interest on demand deposits.
NOW accounts vs. demand deposit accounts
In the contemporary banking landscape, NOW accounts have become relics of the past. Distinguished from demand deposit checking accounts by a potential seven-day holding period, NOW accounts required customers to plan for advance notices. While not universally enforced, this holding period, along with measurable interest rates, characterized NOW accounts.
Frequently asked questions
Why were NOW accounts popular before the Dodd-Frank act?
Before the Dodd-Frank Act, NOW accounts were sought after for providing a means to earn interest on liquid funds, addressing the regulatory gap created by Regulation Q.
How did NOW accounts evolve after the 1986 removal of the 5% interest rate ceiling?
Post the removal of the interest rate ceiling in 1986, Super NOW accounts emerged, offering even more competitive interest rates compared to regular NOW accounts.
What led to the decline of NOW accounts in the modern banking landscape?
The decline of NOW accounts can be attributed to the Dodd-Frank Act’s repeal of Regulation Q, which allowed mainstream banks to offer interest on demand deposits, nullifying the unique advantages of NOW accounts.
Key takeaways
- Negotiable Order of Withdrawal (NOW) accounts were popular interest-earning demand deposit accounts before the Dodd-Frank Act.
- They served as an interest-bearing option for liquid funds, evolving into Super NOW accounts with competitive interest rates.
- The Dodd-Frank Act’s repeal of Regulation Q transformed the landscape, enabling mainstream banks to offer interest on demand deposits.
- NOW accounts, with their historical significance, became a less relevant choice in modern banking practices.
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