WASHINGTON - Federal Reserve Board Chairman Alan Greenspan on Wednesday said he would support legislation to let banks pay interest on business checking accounts and earn interest on mandatory reserves held at the Federal Reserve banks.

Mr. Greenspan made the remark during a question-and-answer session after his testimony to the House Financial Services Committee about the economy. Rep. Sue Kelly, R-N.Y., asked whether Mr. Greenspan favored legislation that she has introduced to authorize the Fed to pay interest on reserves and that has been combined with legislation to let banks pay interest on business checking.

"We believe that ideally those two issues should be joined and passed at the same time," Mr. Greenspan responded.

The House Financial Services subcommittee on financial institutions is expected to hold a hearing on the issue in two weeks.

Mr. Greenspan also urged passage of legislation that would give the Fed more leeway to reduce reserve requirements, though he said the board has no current plan to do so. "It certainly would have certain advantages to have a degree of flexibility should we need to at any particular point," he said.

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