Fed Rebuffs ABA on NOW Accounts for Business

The Federal Reserve Board has rejected the banking industry's request for interest-bearing business checking accounts similar to those offered by securities firms.

The American Bankers Association had sought to sidestep the ban of interest-bearing corporate checking accounts by having the Fed relax withdrawal restrictions on money market deposit accounts. Banks then would have linked these interest-bearing accounts to traditional corporate checking accounts, creating de facto business NOW accounts.

"We believe the approach you recommend is not the most appropriate way to address this issue," Fed Chairman Alan Greenspan wrote in a July 10 letter that the ABA received Wednesday. "Instead of taking regulatory action that would circumvent the law, we believe a statutory change would be more appropriate."

Mr. Greenspan, however, agreed that the ban on interest-bearing corporate checking accounts hurts banks and should be lifted.

"We recognize that the prohibition puts depository institutions at a competitive disadvantage and fosters a wasteful use of resources to circumvent it," he said. "Obtaining the ability to pay interest on demand deposits would assist depository institutions in providing cash management services to commercial entities to the mutual benefit of the institutions and their customers."

Industry officials criticized the Fed's decision as unfair.

"We have competitors that offer very simple products that pay interest, but we don't have anything that works as easily," said Donald R. Mengedoth, president and chief executive of Community First Bancshares, Fargo, N.D. "This decision keeps us at a competitive disadvantage."

Bankers will ask the Fed to reconsider.

"This is something the ABA feels very strongly can be corrected by the Fed without the long, drawn-out procedure of making statutory changes," said Alice M. Dittman, vice chairman of the ABA's community bankers council and chairman of Cornhusker Bank, Lincoln, Neb.

The ABA's proposal would have permitted corporate customers to make up to 24 withdrawals per month from money market deposit accounts, which pay interest. At the end of each business day, the bank would transfer out enough funds to cover checks drawn on the noninterest-bearing corporate checking account.

Bankers have complained for several years that Merrill Lynch & Co. and other brokerage firms are luring away corporate deposits by offering interest-bearing money market accounts with unlimited checking.

The ABA's proposal would have eliminated the need for massive sweeps programs, which banks have used to keep corporate customers. Banks transfer excess corporate cash from noninterest bearing checking accounts to overnight repurchase agreements or money market mutual funds. These programs are expensive to operate and often are not available to small- business customers.

James D. McLaughlin, the ABA's director of regulatory and trust affairs, said his group has received hundreds of letters from banks supporting the proposal.

"This was an initiative that came from our community banks because they were losing deposits to mutual funds and credit unions because the businesses could earn interest from those other entities," he said.

The ABA's government relations council will decide at its Sept. 9 meeting whether the association should lobby for a legislative fix, he added.

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