Federal Reserve Board Chairman Alan Greenspan has sharply criticized an industry proposal to circumvent a ban on interest- bearing corporate checking accounts.
Writing to several lawmakers, Mr. Greenspan said permitting up to 24 withdrawals per month-four times more than currently allowed-from money market deposit accounts would make it tougher for the Fed to conduct monetary policy because more banks would create retail sweeps programs.
In a sweeps program, a bank automatically transfers funds from non- interest-bearing accounts with reserve requirements to interest-bearing accounts without reserve requirements. The proliferation of sweeps accounts has caused reserve balances to fall to $10 billion in November 1997, a decrease of $14 billion from December 1994.
This decline has raised alarms at the Fed because the central bank manipulates short-term rates by controlling the market for overnight loans of excess reserves. As the level of reserves falls, it becomes increasingly difficult to keep these rates stable.
"The board has been concerned about the potential effects of this erosion on the way the Federal Reserve is conducting monetary policy," Mr. Greenspan said in the letter dated Friday. "This problem would be exacerbated by the adoption of this proposal. Accordingly, the board opposes this proposal."
Instead, Mr. Greenspan reiterated his call for Congress to eliminate the ban on corporate checking accounts.
"The board supports the elimination of unnecessary or anticompetitive regulatory requirements," Mr. Greenspan said. "A 24-transaction account might aid banks in meeting competition, but the board believes that a more straightforward and more economically efficient way to address this issue would be simply to repeal the prohibition against the payment of interest on demand deposits."
Banking trade groups are split on the issue. The American Bankers Association made the 24-transaction proposal last year, arguing that the Fed could adopt the change without legislative approval. The Fed rejected the request, saying it lacked the power to change the rule.
James McLaughlin, the ABA's director of regulatory and trust affairs, said legislation is not politically viable because many banks do not want to pay interest on corporate checking.
"What he is saying is cleaner from an economist's view," Mr. McLaughlin said. "But the key issue is what is acceptable to the banking industry."
America's Community Bankers, however, supports a bill sponsored by Rep. Jack Metcalf, R-Wash., which would drop the ban on interest-bearing corporate checking accounts and require the Fed to pay interest on reserves.
"The Federal Reserve Board letter is further reaffirmation of what America's Community Bankers has been saying all along: Eliminating the prohibition on paying interest on business checking accounts and permitting the Fed to pay interest on sterile reserves is good public policy," said Robert R. Davis, ACB's director of government relations.