WASHINGTON - Rep. John J. LaFalce, D-N.Y., on Thursday introduced legislation that would encourage banks to offer low-cost checking accounts by paying them interest on mandatory reserves.

The House Banking Committee's ranking Democrat said that establishing these voluntary accounts would solve two policy questions: how to bring the 22% of low- and moderate-income households lacking bank accounts into the economic mainstream, and whether banks should earn interest on reserves they are required to hold at the Federal Reserve.

"I have been concerned that we are seeing the development of a dual financial services structure in this country - one for middle and upper-income individuals that involves traditional regulated and insured financial institutions," he said, and "a second for lower-income households that involves higher cost services from lesser regulated entities" such as check cashers and pawn shops.

The bill would guarantee eight free withdrawals and let regulators set initial deposit requirements, minimum balances, and a cap on monthly services charges. He predicted that banks could earn more than $600 million of interest payments over five years, more than offsetting the estimated $100 million cost of the accounts.

The American Bankers Association blasted the bill immediately. Payment of interest on reserves enjoys broad support and "should be considered on its own merits," said ABA chief lobbyist Edward L. Yingling. "That issue should not be held hostage to other issues. We have always opposed government-designed, low-cost checking accounts. They are simply unworkable."

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