SOHO Advocacy -- Congress Moves To Repeal Ban On Business Interest Checking Accounts

Congress Moves To Repeal Ban On Business Interest Checking Accounts
By Peter Feltman, CCH Washington Staff Writer

Small businesses are getting closer to having access to interest checking from banks, following action by a House committee.

The House Banking Committee on March 29, 2000, approved the Business Checking Modernization Act (HR 4067), which would overturn Depression-era restrictions on the payment of interest on checking accounts for businesses. This legislation is supported by many small business groups and by numerous banks, but was held up when regulators requested that Congress wait until the Y2K crisis passed before acting.

Businesses under current law cannot have interest checking, and they are not allowed to open NOW (Negotiable Order of Withdrawal) accounts, which are the primary means for consumers to receive interest and checking together.

Banks have gotten around the restrictions through the use of sweep accounts, where the bank, usually through the use of computers, sweeps money from an interest-earning account, such as a savings or money market account, into a checking account as needed. While this procedure effectively gives businesses interest checking, it is cumbersome, and not economical for some smaller banks as well as for smaller accounts. Small business groups have complained that some banks are only willing to offer sweeps for large accounts.

H.R. 4067 would create a three-year phase-in period. At first, federally insured banks and thrifts could set up sweep accounts with up to 24 sweeps a month (potentially one for each business day), and more if the Federal Reserve approves. Three years after enactment of the bill, the repeal on the restrictions on interest and checking would be lifted.

The bill also gives the Federal Reserve the power to decide what sorts of reserves are necessary. The reserve question helped with the bill's passage, since the Federal Reserve has noted that sweep accounts have lowered reserves. Reserves, which are used by the Fed for monetary policy, are lower for savings accounts than for checking (also called demand) accounts, and with sweeps allowing more money in savings than in checking, reserves have fallen.

Banks have also lost business as non-banks, with cheaper costs since they lack FDIC-insurance, have offered products that are essentially the same as checks. Furthermore, regulators also worry that sweep accounts can deprive the FDIC of the best assets in the case of a bank failure, by sweeping valuable assets into overnight repurchase agreements, and thus out of the FDIC's reach.

The Independent Community Bankers, America's Community Bankers, the U.S. Chamber of Commerce, and the National Federation of Independent Business also support repealing the prohibition on interest checking, which was originally enacted during the Depression to prevent potentially ruinous interest rate competition among banking institutions.

In February of 1999, the Senate Banking Committee approved a similar measure, but it has yet to reach the full Senate for a vote.

CCH Business Owner's Toolkit www.toolkit.cch.com offers a comprehensive portfolio of practical information, tips and software tools for small businesses.

To keep up-to-date regarding all the tax law changes affecting your taxes and your business, be sure to pick up a copy of CCH Business Owner's Toolkit Tax Guide 2000. This easy-to-use tax reference--and accompanying FREE offer for online tax return preparation and filing--is available at major booksellers.

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