Negotiable order of withdrawal account

In the United States, a negotiable order of withdrawal account (NOW account) is an interest-paying deposit account on which an unlimited number of checks may be written.

A negotiable order of withdrawal is essentially identical to a check drawn on a demand deposit account, but US banking regulations define the terms "demand deposit account" and "negotiable order of withdrawal account" separately. Until July 2011, Regulation Q stated that a demand deposit could not pay interest. NOW accounts were structured to comply with Regulation Q.

NOW accounts are considered checkable deposits, and are counted in the Federal Reserve Board's M1 definition of the money supply, as well as in the broader definitions. Like all other bank deposits, they are liabilities from the bank's perspective.

History

The Banking Act of 1933 specified that no member bank "shall, directly or indirectly, by any device whatsoever, pay any interest on any deposit which is payable on demand", and on August 29, 1933, this restriction was incorporated into the Federal Reserve Board's new Regulation Q. The reason for the prohibition was that in a period of bank turmoil in the early years of the Great Depression, interest payments on demand deposits, especially by large New York banks, were viewed as "excessive competition" in the banking sector and supposedly led to diminished profit margins and hence bank failures, the latter because of both the diminished profit margins themselves and the resultant excessive stock market speculation by the New York banks.

At first, the general level of interest rates was low, and since the ban on demand deposit interest prevented only what would have been small interest payments, there was no significant attempt at avoiding the ban. In the 1950s, however, interest rates increased and so banks began to feel greater incentive to get around the ban. Non-pecuniary avoidance efforts included increased offering of convenience features such as large numbers of branch offices and giveaways of consumer goods to new customers. Pecuniary avoidance of the ban, known as implicit interest, included preferred loan rates (often explicitly tied to the customer's demand deposit balances) and below-cost service charges for services such as check-clearing.