At a congressional hearing Tuesday, bankers and regulators repeated their support for legislation that would let banks pay interest on business checking accounts and earn interest on reserves required by the central bank.
"Unnecessary restrictions on the payment of interest on demand deposits and reserve balances distort market prices and lead to economically wasteful efforts to circumvent them," Federal Reserve Board Governor Laurence H. Meyer testified.
Banks are sweeping customer funds into money market deposits and other accounts that are exempt from the requirements. Mr. Meyer predicted the level of reserves will be cut roughly in half, to $4.5 billion, by yearend.
If the legislation fails, the central bank may find it difficult to implement monetary policy this year, he warned.
Without the right to pay interest on business checking accounts, Cornelius D. Mahoney, president and chief executive officer of Woronoco Savings Bank in Westfield, Mass., said, small banks will lose these customers to nonbanks.
Sen. Richard Shelby, R-Ala., who is sponsoring the legislation, released letters of endorsement from Comptroller of the Currency Eugene A. Ludwig, acting Federal Deposit Insurance Corp. Chairman Andrew C. Hove Jr., and Office of Thrift Supervision Director Ellen S. Seidman.
Both provisions are part of a larger bill that would roll back more than 40 banking regulations.