Even If Reserves Earned Interest, Bankers Tell Fed, Sweep Accounts

Most banks would continue to offer sweep accounts even if the Federal Reserve Board paid interest on reserves, according to a government survey released after the markets closed Friday.

The Fed's annual senior financial officer survey finds that only three of the 44 large banks contacted would be "very likely" to eliminate sweep programs; 24 banks said they were unlikely to dismantle these programs.

Also, 30 banks said they would continue to minimize required reserves because they could earn more investing these funds than by keeping them in interest-bearing accounts at the Fed. Only five banks said they would abandon efforts to minimize reserves.

Several bills are pending in Congress that would authorize the Fed to pay interest on reserves. Some also would let banks pay interest on corporate checking accounts.

If banks could pay interest on corporate checking, most said they would peg the price to rates paid for short-term deposits. One-quarter of the banks, however, said they were considering a tiered pricing structure in which companies with high checking account balances would get higher interest rates.

The banks said they swept an average of $2.3 billion a day from non- interest-bearing checking accounts to interest-bearing money market mutual funds, repurchase agreements, and similar instruments. Those transfers would fall by one-third if interest were paid on corporate checking, the banks said.

Banks also expressed support for a so-called Lombard credit facility, similar to that used by European central banks. Under this system, the Fed would create a second discount window, which would extend credit at roughly 200 basis points above the discount rate set by the Federal Open Market Committee.

Unlike the requirements for discount window loans, banks would not have to explain the need for such credits, submit copies of their balance sheets to the Fed, or pursue private funding sources first. Several researchers have suggested that creating a Lombard credit facility would make the fed funds market less volatile.

Thirty-one banks said they would be "quite willing" to use a Lombard credit facility whenever shortages in the fed funds market caused rates to rise significantly above the Fed's target rate.

Only five banks said they were worried that the Fed would view such borrowing negatively, and eight said they feared the market would punish them for using the Lombard facility.

Most of the banks said they had reduced funds deposited at the Fed. More than half said this made it tougher to manage their reserve accounts. Two- thirds of the banks said they need to buy fed funds regularly to meet reserve requirements; 11% said they regularly sell fed funds.

The 44 banks, which hold about 40% of the industry's assets, were surveyed in May.

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