Research Scan: Sweep Account ThreatTo Policy Discounted

Central bankers will be able to conduct monetary policy even if banks use sweep accounts to drastically reduce required reserve balances, according to two economists.

Federal Reserve Bank of Kansas City economists Gordon H. Sellon Jr. and Stuart E. Weiner write that the central bank has two options to prevent wild fluctuations in short-term interest rates caused by lower reserves.

Interest could be paid on reserve balances. This would require congressional ap-proval but would give bankers an incentive to leave excess funds with the Fed.

The Fed also could establish a second discount window that would offer banks overnight loans at a rate slightly higher than normal market prices. This would reduce interest rate volatility because the price for overnight loans would never exceed the Fed's price.

The authors note that Germany uses a similar system to prevent rate spikes.

For a copy of "Monetary Policy Without Reserve Requirements: Case Studies and Options for the United States," call 816-881-2683.

Even full interstate branching will not eliminate the banking industry's susceptibility to regional economic downturns, according to two Federal Reserve Bank of St. Louis economists.

Michele Clark Neely and David C. Wheelock write that supporters of interstate branching have argued that it would stabilize bank earnings by allowing institutions to diversify.

But the researchers write that banks have been able to diversify for years by creating holding company subsidiaries. Yet a majority of banking companies have limited their growth to a single region. "With the 1997 reduction of barriers to branching, we expect the U.S. banking system as a whole to become less dependent on, but not entirely independent of, idiosyncrasies in local bank markets," they conclude.

For a copy of "Why Does Bank Performance Vary Across States?" call 314- 444-8444.

A new study explores the pros and cons of taxing federal credit unions. James M. Bickley, a public finance specialist at the Congressional Research Service, writes that banks complain that credit unions use their $900 million tax subsidy to unfairly nab business. But he said credit unions argue that taxation would destroy the character of these cooperatives.

For a copy of "Should Credit Unions Be Taxed?" call 202-707-5700.

Banks will do a poor job serving residents of Indian reservations unless the industry conducts extensive consumer education programs, according to a working group study by the Office of the Comptroller of the Currency.

The agency surveyed 11 banks that either serve Native Americans or are located near reservations to learn which outreach programs work and why.

They find Native Americans often have an outdated view of the types of services banks offer. They recommend holding seminars and homebuying classes to change this. Other factors that discourage Native Americans from using banks include lack of access to branches and ATMs, and incomplete or poor credit histories.

Banks often fail to serve Native Americans because they lack the ability to collateralize loans on the reservation or believe the paperwork burden is too extensive, the agency finds.

For a copy of "Providing Financial Services to Native Americans in Indian Country," call 202-874-4940.

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