Banking Law

Banks and bank accounts are regulated by both state and federal statutory law. Bank accounts may be established by national and state chartered banks and savings associations. All are regulated by the law under which they were established.

Until the early 1980s, the federal government regulated and controlled interest rates on bank accounts. A ceiling existed on interest rates for savings accounts. Interest payments on demand-deposit accounts generally were prohibited. Banks were prohibited from offering money-market accounts. The Depository Institutions Deregulation Act of 1980 eliminated the interest-rate controls on savings accounts. The restrictions on checking and money-market accounts were lifted nationwide by this act and the Garn-St Germain Depository Institutions Act.

The operation of checking accounts is governed by state law and supplemented by federal law. Article 4 of the Uniform Commercial Code, which has been adopted at least in part in every state, defines the rights between parties regarding bank deposits and collections. Part 1 of the article contains general provisions and definitions. Part 2 governs the actions of the first bank to accept the check (depository bank) and other banks that handle the check but are not responsible for its final payment (collecting banks). Part 3 governs the actions of the bank responsible for the payment of the check (payor bank). Part 4 governs the relationship between a payor bank and its customers. Part 5 governs documentary drafts. These are checks or other types of drafts that will be honored only if certain papers are first presented to the payor of the draft.

If a check passes through the Federal Reserve System (as the majority do), Regulation J of the Federal Reserve comes into effect. Regulation CC governs extensively the availability of funds in a depositor's account and the process involving checks dishonored because of non-payment. The Expedited Funds Availability Act limits the time a depository bank can delay before making the amount of a deposited check available for withdrawal.

Checks are negotiable instruments. As such, sections of Article 3 of the Uniform Commercial Code govern the relationship between parties who receive and transfer checks. Also bearing on banking activities are Articles 4A, 5 and 8 of the Uniform Commercial Code (which deal with funds transfers, letters of credit and securities).

The banking crisis of the 1930s led to the development of federal insurance for deposits administered by the Federal Deposit Insurance Corporation. Funding for the program comes from premiums paid by member institutions. The bank accounts of individuals at institutions that are insured are protected for up to an aggregated total of $100,000.

Certificates of deposit (CDs) may be negotiable instruments and subject to Article 3 of the Uniform Commercial Code.

Title 12 of the Code of Federal Regulations, which is divided into chapters, provides federal agency regulations that concern banks and banking.

Last updated: Sept. 29, 2008

The content on this page was developed in partnership with the Legal Information Institute, Cornell Law School.