WASHINGTON-It looks like a long shot, but small banks are not giving up their quest to bring back rules that they say have helped keep business deposits in local communities.
The Dodd-Frank Act repealed a Great Depression-era ban that prevented banks from paying interest on business checking accounts.
The repeal had the support of small businesses that were frustrated by their inability to earn a return from their checking accounts, large banks that saw a new opportunity to fund their businesses, and free-market economists who saw the 1930s rule as misguided government intervention, reported American Banker, an affiliate of Credit Union Journal.
"Should Congress force depositors to subsidize borrowers? Obviously not," Alex Pollock, an economist at the American Enterprise Institute, testified during a hearing of the House financial institutions subcommittee. "Should Congress promote competition in banking to the benefit of customers? Obviously yes."
There appears to be little enthusiasm in Congress for reviving the long-standing measure, which officially ended last year, especially given that the House voted overwhelmingly to repeal it numerous times even prior to 2010.
But small bankers again made their pitch at the hearing. Cliff McCauley, SVP of Frost Bank, San Antonio, suggested that small businesses that support the new rules are taking a short-sighted view.
McCauley said that zero-interest business checking has allowed community banks to make affordable fixed-rate loans to small businesses and home buyers in their local communities.
Biz Deposits On The Move
Business deposits are now poised to move to large banks such as Capital One, which pays interest on business checking accounts in order to fund its credit card lending, he said.
"They can pay a higher interest rate on deposits because of the high interest rates on their credit cards," said McCauley, who appeared on behalf of the Independent Bankers Association of Texas. "It is my opinion that the too-big-to-fail institutions will utilize this new tool to attract deposits in the future."
The Independent Community Bankers of America, which submitted written testimony, also supports reviving the ban on interest for business checking accounts. The ban was part of a rule known as Regulation Q, which is now completely dismantled.
"Ultimately, repeal of Regulation Q could cause community banks to lose market share to larger banks who can afford to pay more interest on deposits and lead to further consolidation of the financial industry, creating greater systemic risk," the community banking trade group testified. "Stable, reliable funding strengthens banks and helps them to serve local economies."
