Commercial banks are angling to offer a souped-up checking account for businesses, a product similar to those already in the arsenal of securities firms.
The American Bankers Association is pushing to relax withdrawal restrictions on money market deposit accounts. Banks would then link these interest-bearing products to traditional checking accounts, in effect circumventing a ban on corporate NOW accounts.
"Mutual funds can offer interest-bearing checking, brokerages can do it, even credit unions can do it," said Michael E. Grove, president and chief executive of First National Bank of White Sulphur Springs, Mont. "It is only banks that are at a competitive disadvantage."
On Wednesday, the ABA asked the Federal Reserve to authorize the revised money market accounts, which would be fully insured, pay competitive rates, and permit up to 24 withdrawals per month. That represents a four-fold increase in allowable withdrawals from current money market deposit accounts and would provide for at least one withdrawal per business day.
Companies would write checks on noninterest-bearing accounts and then the bank would transfer funds each night from the new money market deposit accounts to cover the balances. That would resemble the cash-management accounts that many securities firms now offer businesses.
"This is very important," said Donald R. Mengedoth, president and chief executive of Community First Bancshares, Fargo, N.D. "We are in a competitive environment where we see small businesses going to other providers who are not as restricted as we are in offering interest-bearing checking accounts."
Fed Governor Edward W. Kelley Jr. said the central bank may be receptive to the ABA proposal.
"Conceptually, I see no particular reason why there should be an artificially small number of transactions for this kind of account," said Mr. Kelley, who sits on the Fed's supervision and regulation committee. "But I have not examined all the issues and am not ready to take a firm position on it."
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 loss of corporate deposits has pushed up loan-to-deposit ratios at some rural banks, leaving bankers worried that they will not have enough deposits to meet loan demand.
"This proposal would enable banks to keep their small-business corporate customers and it would keep the funds in the community," said James D. McLauglin, the ABA's director of regulatory and trust affairs. "That means the money is available for lending as opposed to shipping it off to a Wall Street firm."
The new account could eliminate the need for massive sweeps programs that large banks have implemented to keep corporate customers. Under these programs, banks regularly transfer excess cash from corporate checking accounts and either invest them in overnight repurchase agreements or put them in money market mutual funds.
These sweeps programs are expensive to operate and present significant compliance challenges, the ABA said in its petition. Eliminating these sweeps would increase the safety and soundness of the banking system, the ABA said.
The Fed can create the account without new legislation, the trade group said. The Federal Reserve Act gives the agency the power to determine the maximum number of withdrawals permitted for money market deposit accounts, the group wrote. Also, the Garn-St. Germain Depository Institutions Act of 1982 requires the Fed to provide banks with a product that is competitive with money market mutual funds.
Not everyone is convinced the Fed will adopt the proposal.
Gil Schwartz, a partner at the Washington law firm Schwartz & Ballen, said he expects the Fed will defer to Capitol Hill. "I'd be quite surprised that it would do it without support from Congress," he said.
Still, the petition received support from other trade groups.
"This is consistent with modern money management techniques that allow you to make the most use of your resources," said Richard Whiting, general counsel to the Bankers Roundtable. "This just makes terrific sense."
"This sounds very intriguing," said Karen Thomas, director of regulatory affairs at the Independent Bankers Association of America. "We need to ask our members what they think about it."
