House Passes Repeal of Business Interest Checking Prohibition

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House Passes Repeal of Business Interest Checking Prohibition

On April 3, 2001, the U.S. House of Representatives passes H.R. 974, known as the Small Business Interest Checking Act of 2001. It repeals the prohibition on paying interest on business checking accounts, effective two years following enactment. Upon enactment, it permits business customers to transfer funds from interest-bearing accounts to business checking accounts at least 24 times a month. It also permits the Federal Reserve to pay banks and savings institutions interest on the reserves they keep with the Fed.

It is anticipated that the Senate will take up similar legislation in the near future. The enactment of this legislation is likely this year.

For bank directors, it is time to ask your management team what this legislation is going to cost their bank of the next few years. Although interest will be paid on reserves, this interest will not be sufficient to fully offset the amount of interest that will need to be paid on business checking accounts. Some banks are reporting to us that they expect a loss of more than 20% of their current income once the legislation is fully effective.

If there is a shortfall on income, what are the sources of income to make up for the shortfall? This will require an effort by the Board and management to evaluate carefully its current business and how it can be enhanced so that additional income can be produced. Now is the time to consider the broad powers that banks have to enter a variety of profitable banking and financial businesses alone or in concert with other financial institutions and joint ventures and third party providers. To read Mr. Baris's article on Gramm-Leach-Bliley, click here.

Keith Dalrymple, President of AABD, recently spoke before the Legislative Conference of the Pennsylvania Association of Community Bankers on how community banks should address the issues presented by the repeal on the prohibition on payment of interest on business checking accounts. To read Mr. Dalrymple's speech, click here.