CURRENCY Committee on Banking and Financial Services
James A. Leach, Chairman
For Immediate Release:	Contact: David Runkel or
Wednesday, March 29, 2000	Brookly McLaughlin (202) 226-0471

Before the Committee today is H.R. 4067, the Business Checking Modernization Act. It is the latest iteration of legislation which has been discussed for a number of years and which our colleague, Jack Metcalf, has worked for diligently during his entire tenure on this Committee.

There are few precepts more symbolically restraining to market forces than a legal bar to banks paying interest to a particular customer base, in this case businesses. While historically banks have liked this restraint, it is increasingly self-evident that when market mechanisms are intruded upon by government intervention, the market is stilted and customers move to other financial intermediaries. It is time Congress gets out of the protectionism business that, as in so many circumstances, is proving to be blatantly counter-productive.

This restraint on ability to pay interest is one of many reasons that in a little more than three decades, the share of the saved dollar held in federally-insured institutions dropped from approximately two/thirds to about one/fourth. Today banks, particularly small ones, are finding it increasingly difficult to develop and maintain a reliable deposit base. This proposed change in law, while potentially increasing the cost of money for some accounts at banks, will at least maintain these accounts in communities and potentially reduce the need for buying higher-priced money from outside a community base.

The Managers’ Amendment that will be before the Committee will allow banks to offer daily sweeps of business accounts, effective immediately upon passage. Three years after passage, the prohibition on the payment of interest on demand deposits would be totally lifted.

The legislation, with the Managers’ Amendment, has strong support within the small business community and is endorsed by the American Bankers Association and America’s Community Bankers.

The Managers’ Amendment makes the following three revisions to H.R. 4067:

• It amends the Federal Reserve Act, the Home Owners Loan Act, and the Federal Deposit Insurance Act to permit national and state banks and federal and state thrifts to immediately on date of enactment offer customers the ability to have a daily sweep -- 24 transfers a month -- from an interest bearing account into their checking account. This option provides banks with some additional flexibility to serve business customers during the transition period before the prohibition on paying interest on demand deposits is removed. These provisions would no longer be necessary when the repeal of the prohibition on paying interest on demand deposits is effective and would therefore be repealed at the same time. It permits the Federal Reserve to authorize more than 24 transfers a month. The purpose of this amendment is to allow some flexibility in light of the increased number of transactions taking place internationally. The Federal Reserve could determine that the interest-bearing account from which funds would be transferred to the checking account is subject to the reserve requirements.

• It provides a significantly longer transition period of 3 years from the date of enactment rather than one year before the repeal of the prohibition on the payment of interest on demand deposits is effective.

• The Federal Reserve Act requires banks to hold 3% in reserves against the first $ 25 million the bank has in transactions accounts and between 8% and 14% against the amount above that threshold as determined by the Fed.. Today, the $25 million threshold level has been adjusted for inflation to $44.3 million and the ratio on the amount above that threshold level is 10%. The amendment eliminates the minimum statutory ratios of 3% and 8% for reserves leaving the Federal Reserve with the ability to not require reserves. The Federal Reserve Act specifically provides that reserves are to maintained solely for the purpose of implementing monetary policy.

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