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Short History of NOW and MMDA Accounts
John Burnett, BOL Guru
Guru Bios

Question:  I'm looking for someone who remembers when MMDAs and NOW Accounts were legalized for banks. Seems like MMDAs were first, the fall of some year, then NOW Accounts were authorized at 5.5% for commercial banks on January 5th of the next year. Was that 1980-1981? I'm trying to educate some younger bankers on Reg D and the history of reserves, NOW Accounts, etc.

Answer:  NOW accounts were introduced by the Consumers Savings Bank of Worcester, Massachusetts (long since merged, and merged, and merged -- it's now part of B of A), in the 1970s. Consumers thought it had found a loophole in Massachusetts law, and ultimately won a lawsuit brought against the bank by then Commissioner of Banks Frieda Koplow. The account's consumer heritage starts there, at a bank where business customers and checking accounts were still untested waters. The accounts spread to NH, and then through some FRB experiment, to all of New England. By the time 1980 and the Monetary Control Act had rolled around, Negotiable Order of Withdrawal (NOW) accounts had invaded NY and NJ.

The late 1970s and early 1980s were a time of extremely high inflation, and rates were off the charts. Banks were competing with the government for funds (disintermediation). The same law (Public Law 96-161, enacted 12-28-1979) that authorized NOW accounts in NJ also authorized banks in other states to offer ATS (Automatic Transfer from Savings) accounts. Although ATS accounts cannot be held by other than natural persons, they were seen as a compromise available to the states that could not have NOW accounts (yet).

The Depository Institutions Deregulation and Monetary Control Act of 1980 began the six-year process (ending March 31, 1986) of phasing out interest rate limits. Monetary Control Act (short name) section 303 also allowed nationwide spread of NOW accounts, with reserve requirements (effective date 3/31/1980). It also repealed the ATS language in PL 96-161, but replaced it with almost identical language making the offering of ATS accounts legal nationwide.

MMDAs were introduced in 1982, with the passage of the Garn-St Germain Act. Section 327 of that law amended section 204 of the Depository Institutions Deregulation and Monetary Control Act of 1980 to require the Deregulation Committee to issue regulations within 60 days (12/14/1982 was the effective date of those regulations) to authorize what became the MMDA. The act authorized "up to three preauthorized or automatic transfers and three transfers to third parties." Too bad the regulations couldn't be so straightforward!

First published on 10/09/06

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