What is Regulation D?

Every single savings account in the United States is limited to six "convenient" withdrawals a month by what is colloquailly referred to as Federal Reserve Regulation D.

12 Code of Federal Regulations §204.2(d)(2) defines a savings account and requires this limit.

(2) The term “savings deposit” also means: A deposit or account, such as an account commonly known as a passbook savings account, a statement savings account, or as a money market deposit account (MMDA), that otherwise meets the requirements of §204.2(d)(1) and from which, under the terms of the deposit contract or by practice of the depository institution, the depositor is permitted or authorized to make no more than six transfers and withdrawals, or a combination of such transfers and withdrawals, per calendar month or statement cycle (or similar period) of at least four weeks, to another account (including a transaction account) of the depositor at the same institution or to a third party by means of a preauthorized or automatic transfer, or telephonic (including data transmission) agreement, order or instruction, or by check, draft, debit card, or similar order made by the depositor and payable to third parties. A preauthorized transfer includes any arrangement by the depository institution to pay a third party from the account of a depositor upon written or oral instruction (including an order received through an automated clearing house (ACH)) or any arrangement by a depository institution to pay a third party from the account of the depositor at a predetermined time or on a fixed schedule. Such an account is not a transaction account by virtue of an arrangement that permits transfers for the purpose of repaying loans and associated expenses at the same depository institution (as originator or servicer) or that permits transfers of funds from this account to another account of the same depositor at the same institution or permits withdrawals (payments directly to the depositor) from the account when such transfers or withdrawals are made by mail, messenger, automated teller machine, or in person or when such withdrawals are made by telephone (via check mailed to the depositor) regardless of the number of such transfers or withdrawals.4

[Emphasis added]

If we examine this quote more closely, we see that this limitation of six withdrawals per month/statement cycle is applied to those that fall into the following categories

  • preauthorized or automatic transfer
    • This includes
      • any arrangement by the depository institution to pay a third party from the account of a depositor upon written or oral instruction (including an order received through an automated clearing house (ACH))
      • any arrangement by a depository institution to pay a third party from the account of the depositor at a predetermined time or on a fixed schedule.
  • telephonic (including data transmission) agreement
  • order or instruction
  • check
  • draft
  • debit card
  • similar order made by the depositor and payable to third parties

This regulation does not limit "inconvenient" transactions that fall into the following categories

  • in person
  • at an ATM
  • by mail

What Happens If You Exceed The Limit?

In practice the consequences for violating this limit do vary somewhat. Some banks may only issue a warning for the first offense, while others may assess a fee. But for repeated offenses, all banks will either close your account or convert it to a checking account.

Why Does This Limitation Exist?

Banks literally create money out of thin air. The money is not created in the sense that the US government prints more money at will, but by just claiming two or more people have stake to the same money.

This is best explained by example. Suppose Ross opens an account at the Central Perk Bank and deposits $100. Rachel decides she wants a loan and gets a $40 loan from Central Perk Bank. So even though Central Perk Bank now only has $60 in deposits, when Ross checks his balance, Central Perk Bank tells Ross he still has $100 in deposits. So in total, Ross and Rachel have $140, even though this micro economy only started with $100. The $40 that the bank loaned to Rachel just appeared out of thin air.

All of this works so long as Ross doesn't want more than $60 of his deposits back. In economic terms, multiple people wanting most or all of their deposits back is known as a bank run. To guard against bank runs, the government created the Federal Deposit Insurance Corporation (FDIC), which insures deposits up to $250k, even if there were a bank run.

The Federal Reserve requires that banks keep a certain portion of all customers' deposits on hand (in practice, it's held at the Federal Reserve itself). The percentage required is known as the reserve requirement. This not only reduces the potential loss of money from bank runs, but also prevents the bank from loaning out too much money and becoming overextended.

The Federal Reserve has a higher reserve requirement for checking accounts than savings accounts. Savings accounts are meant to be less liquid, which reduces the risk of a bank running out of money from a possible bank run. Hence, in exchange for allowing banks to hold less money in reserve for savings account deposits as opposed to checking account deposits, the Federal Reserve enforces a six withdrawal limit.