Answer by John Burnett:
Tell them it is a regulation designed to allow the Fed to determine how much of a bank's deposits must be maintained in the form of reserves. It's a tool of monetary policy.
If your deposit account types allow customers to do whatever the regulation allows, you have to deal with complicated restrictions.
One less than perfect, but fairly simple way to explain these restrictions is to use the "seat of your pants" rule. If the customer has to get off the "seat of his/her pants" to do the transaction (go to an ATM or branch of the bank), the transaction is probably not subject to the transfer limits. If, however, the customer can do the transfer from his/her telephone, PC, fax machine, Internet Café, (get the idea?), it will probably be subject to either the 3 or the 6/month limit.
Of course, this all depends on whether you're dealing with a savings/MMDA account. If it's a checking or NOW account, the customer can transfer at will.
Answer by David Dickinson:
I like to approach this from a Reserve Requirement stand point. Tell them this oversimplified example to give them a little Banking 101 lesson:
"Banks make money by lending our deposit customer's money back out. But we can't lend it all out as we have to have some money on hand to meet the needs of these deposit customers. Reg D provides guidance on how much we need to keep on hand. We complete a report (FR 2900) that groups our accounts into 3 buckets time accounts, savings & MMDA's and transactional accounts.
The more liquid an account is, the more reserve requirements we have to keep. Time accounts are very illiquid and we don't expect customers to cash them in before maturity. If they do, we may impose a penalty. Savings accounts are limited to 6 covered debits per month making them more liquid then time accounts but not as liquid as transactional accounts. Transactional accounts don't have any limits (at least by law) so they have the highest reserve requirements.
If we put an account in the savings/MMDA bucket, we must be sure that it acts like a savings account. We have to monitor the debits allowed in this account to ensure that it meets this definition. If it exceeds these limits on "more than an occasional basis" we may to reclassify the account as a transactional account.
First published on BankersOnline.com 6/17/02