After two years of sidestepping reserve requirements on checking accounts, First Union Corp. is taking the high road - sort of.
In August, the Federal Reserve Board voted to prevent the North Carolina company from continuing a practice that it had used to evade the 10% reserve requirement on checking accounts. The bank was sweeping funds nightly into time deposits, which are not subject to reserves.
The Fed ban takes effect Oct. 27.
Competitive Edge
First Union has been using the loophole to gain an advantage over competitors. It pays customers interest on 100% of their checking account balances, while NationsBank Corp., Wachovia Corp., and SunTrust Banks Inc. pay interest on only 90%.
The rival banks have justified their policy by saying that the Fed doesn't pay interest on the 10% of deposits they have to post in reserves. But Congress has banned that technique as well, as part of last year's Truth in Savings Act.
Rivals Will Wait
The law, which requires interest to be paid on 100% of checking balances, takes effect March 19.
First Union's rivals apparently will hold to their 90% rule for the next five months.
"It will be business as usual until then," said Walter McDowell, executive vice president of Wachovia Bank of North Carolina.
But in an effort to woo new customers and avoid antagonizing old ones, First Union says it will pay interest on all deposits.
Window of Opportunity
"It is certainly a competitive advantage for us to be able to offer customers interest on 100% of their balances," said Jeep Bryant, a bank spokesman.
He estimated that First Union is forfeiting about $560,000, or 30 basis points of interest on its $4.5 billion of checking deposits, by not temporarily shifting to the 90% practice.
