Capital Briefs: Greenspan Backs Bill to Pay Interest on Reserves

Federal Reserve Board Chairman Alan Greenspan has endorsed a bill that would let banks pay interest on corporate checking accounts and receive interest on holdings kept at the reserve banks.

"The Federal Reserve strongly supports this legislation," Mr. Greenspan wrote in a Sept. 26 letter to Rep. Jack Metcalf. "It would eliminate a significant distortion in the financial markets that places small businesses at a particular disadvantage. Moreover, it would assist us in our implementation of monetary policy."

The House Banking Committee is expected to hold hearings in late January on the bill, which was introduced in July by Rep. Metcalf, R-Wash.

Mr. Greenspan said the ban on paying interest on corporate checking accounts "serves no purpose and imposes unnecessary costs on both businesses and depository institutions."

He also said paying interest on reserves would stop the precipitous decline in these balances, which have fallen to less than $10 billion, a 50% drop over three years. Low levels of reserves make it difficult for the Fed to keep short-term rates stable.