House Banking Committee Chairman Jim Leach is preparing legislation that would let banks circumvent the ban on interest-bearing corporate checking accounts.
The Iowa Republican said he plans to introduce a bill that would let corporate customers cover checks by withdrawing funds from money market deposit accounts each business day.
If withdrawals were allowed so frequently, banks could use a two-step process to pay interest on business checking accounts. At the end of each day, the bank would simply move the funds needed to cover a customer's checks from its money market account.
The industry needs "expanded flexibility to compete for accounts that are leaking out of the banking system," Rep. Leach said in a speech Wednesday to the American Bankers Association's government relations council.
Bankers have long complained about losing corporate customers to brokerage firms, which are allowed to offer interest-bearing money market accounts with unlimited checking. Similar accounts at banks are restricted to six withdrawals a month. Rep. Leach's bill would permit 24 withdrawals a month.
"Our money market limitations are too restrictive," said James P. Ghiglieri Jr., president of Citizens National Bank in Toluca, Ill. "Rep. Leach's plan would help our relationships with commercial customers."
The Iowa Republican's proposal is almost identical with an industry plan proposed to the Federal Reserve Board in July. While agreeing the ban on interest-bearing corporate checking should be lifted, Fed Chairman Alan Greenspan rejected the request on grounds that Congress should decide.
Rep. Leach's plan is an alternative to legislation that would let banks directly pay interest on corporate checking accounts. That bill, introduced by Rep. Jack Metcalf, R-Wash., has split the banking industry.
While many bankers want to offer interest-bearing checking to their business customers, others say they could not afford the expense.
"A lot of bankers would much prefer to see a middle-of-the-road approach along lines Rep. Leach is proposing," said Ronald K. Ence, lobbyist for the Independent Bankers Association of America.
The American Bankers Association's board of directors endorsed Rep. Leach's idea last Thursday.
The plan would eliminate the need for massive "sweep" programs, which large banks have used to keep corporate customers. Under these arrangements, banks transfer excess corporate cash from noninterest-bearing checking accounts to overnight repurchase agreements or money market mutual funds. Sweep programs are expensive to operate, and many small banks cannot afford them.
