WASHINGTON - Because 1996 is a leap year, federal regulators are proposing to allow banks to use 365 or 366 as the base for calculating interest.

While moving to 366 days would save banks money, Truth-in-Savings compliance software used by some banks may not be equipped to give banks that option.

The Federal Reserve issued a proposal last week that would permit banks to calculate interest using 366 days only if the account is open as of Feb. 29.

But since most computer systems are not designed to use two sets of numbers in the same year, the conditions set by the Fed are causing headaches.

The public has until Feb. 2 to comment on the plan.

The Fed proposal states that under Truth-in-Savings rules that took effect in 1993, banks may divide by 366 days when determining interest, instead of 365 days, as long as the account will accrue interest on Feb. 29.

Still, a Federal Reserve official said "banks are always free to use 365."

The proposal put out last week was necessary because the Fed's Truth-in- Savings commentary was unclear on this point, according to Nessa Feddis, senior federal counsel with the American Bankers Association.

Banks, she said, were unsure whether they had to use 365 days, 366 days, or both in calculating interest on savings accounts in leap years.

Even with the new proposal, Ms. Feddis said bankers who want to use 366 days may not have time to make the necessary technical changes by yearend. Most software systems are not equipped to use two different calculation methods, she said.

"It could be very difficult to distinguish between accounts depending on when they open or close," Ms. Feddis added. "This could cause some problems."

Jennifer McCollough, president of Compliance Services Group Inc., Maple Grove, Minn., said many of her clients don't think the money saved by the change is worth the bother.

"During training sessions, most of the bankers say that they'll stay with 365 days to avoid all the hassle," she said. "Whether or not that will actually happen, I don't know. But if I were a banker, that's what I'd be doing."

However, a source at Integra Bank, Pittsburgh, said the $15 billion- asset bank could save up to $800,000 in interest by using 366, instead of 365. The reason is simple math: dividing an account total by the larger number gives a smaller result, meaning less interest is paid out.

Ms. Feddis said the cost to each customer would be just a few cents. But, she said, tallying each individual's small loss would translate into big savings for banks.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.