Rep. Jack Metcalf introduced legislation Thursday that would let banks earn interest on reserves held at the Federal Reserve and pay interest on business checking accounts in two and a half years.

House Banking Committee Chairman Jim Leach and Rep. Paul E. Kanjorski, D-Pa., are the co-sponsors.

Under the proposal, banks and thrifts could pay interest on business checking accounts starting Oct. 1, 2001. In the interim, the legislation would expand the number of withdrawals that commercial customers could make from money market deposit accounts to 24 per month. The current limit on these so-called sweep accounts is six transactions a month.

"Our smaller banks and businesses are being hurt by an old regulation that has benefited only those who can afford complicated and expensive banking processes meant to work around the current system," Rep. Metcalf, R-Wash., said in a statement. "The sophisticated methods used by larger financial institutions to circumvent current regulations concerns me."

Bankers and industry groups hold mixed opinions on the merits of paying interest to business customers. "This continues to be a divisive issue," said Ronald K. Ence, a lobbyist for the Independent Community Bankers of America. "Bankers on both sides feel very strongly about it."

Supporters include America's Community Bankers, the National Federal of Independent Business, and the U.S. Chamber of Commerce.

"The current system forces community banks to use third-party providers outside of the banking system to provide their customers with a return on their idle funds" and is very costly, said Cornelius D. Mahoney, president and chief executive of Woronoco Savings Bank in Westfield, Mass. "This bill will change that, allowing community banks to better compete by providing a much-needed service to their small-business customers."

But some banking organizations-ranging from First Union Corp. to small institutions-oppose it, because it could interfere with their current sweep account business or cost them too much.

The American Bankers Association has supported a longer transition period, and the ICBA favors only the expansion of sweep accounts.

Regarding payment of interest on reserves, the Treasury Department opposes it as too costly, but the Fed supports it. Financial institutions could earn $95 million to $115 million annually through 2007 under the proposal, according to a Congressional Budget Office estimate.

Rep. Marge Roukema, chairwoman of House Banking's financial institutions subcommittee, is expected to incorporate a similar plan into a regulatory relief bill this year.

The Senate Banking Committee in February approved similar provisions as part of a regulatory relief bill and is trying to get the full Senate to schedule a vote soon, the committee spokeswoman said. Or it could be attached to the broader financial reform legislation. The Senate Banking bill would pay interest on business checking accounts starting Jan. 1, 2001.

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