Republican lawmakers vowed Wednesday to push for the Federal Reserve Board to pay interest on required reserves.
Senate Banking Committee Chairman Alfonse M. D'Amato, R.-N.Y., said his committee will hold hearings in September on the issue, and Rep. Jack Metcalf, R-Wash., pledged to introduce legislation late next week to lift the restrictions.
"The American people expect an efficient financial system," Sen. D'Amato said. "We must remember, when banks aren't paid interest on these deposits, it's really bank customers who are potentially losing money."
Fed Chairman Alan Greenspan, who was testifying before Senate Banking on the health of the economy, said he strongly supports paying interest on reserves.
In a July 14 letter released at the hearing, Mr. Greenspan said the ban on interest amounts to a "reserve tax" that banks spends considerable money to avoid.
Roger L. Fitzsimonds, chairman and chief executive at Milwaukee-based Firstar Corp., applauded the legislative efforts.
"Bankers have always felt they should be paid," he said. "We're leaving a lot of money on deposit and getting no return."
Because the Fed cannot pay interest on reserves, many banks are trying to sweep funds from traditional savings and checking accounts, which are subject to reserves, into money market accounts, which are exempt.
Robert Strand, a senior economist at the American Bankers Association, said fewer banks would feel pressure to offer sweep accounts if the restrictions were lifted.
Since 1994, required reserve balances have decreased by $19 billion as a result of sweep accounts, Mr. Greenspan said. He predicted that these reserves would fall to $4 billion, from $9 billion today, if the trend is not reversed.
"Required reserves balances possibly could be reduced to a point that would complicate the implementation of monetary policy," he said.
Reserve balances would climb by roughly $19 billion if the Fed paid interest, he predicted. Banks would earn a rate"very close" to the federal funds rate.
Paying interest would cost the central bank about $300 million a year, Fed officials said.
Mr. Greenspan also reiterated his support for allowing banks to pay interest on business checking account, saying it would increase bank deposits and further stem the decline in reserve balances.
This was Mr. Greenspan's second appearance before lawmakers this week. Toward the end of a hearing Tuesday before a House banking subcommittee, Mr. Greenspan rejected suggestions that the Fed should exit the check processing business. "I think we add materially to the overall payment system of the United States," he said.
Also, he disputed a claim by Rep. Carolyn B. Maloney, D-N.Y., that the Fed fails to recover the cost of providing clearing services. "We have had a significant profit, which in effect has been turned over to Treasury," he said. "My recollection is it's something like $1 billion."