The requirement that banks hold 12% of their demand deposits with the Federal Reserve in accounts that bear no interest has hurt earnings potential, as have skyrocketing deposit insurance premiums.

Hard-pressed banks are questioning the logic of absorbing such costs.

Many have begun to pay interest only on "investable" account balances - the deposit balance minus the reserve.

And some banks have also begun to pass along a portion of their deposit insurance costs.

A Growing Trend

"There is a trend toward reserve adjusting," said Gail Lieberman, editor of the newsletter Bank Rate Monitor, published in North Palm Beach, Fla. "Some institutions have also added an additional 4% reserve, actually stating it is for [Federal Deposit Insurance Corp.] insurance."

The concept of reserve adjusting is by no means new in banking. In commercial banking, large corporate customers for decades have been "compensated" on the basis of investable balances.

Because banks are prohibited from paying interest on the demand deposits of corporate customers, banks have used deposit balances to offset charges for bank services.

In fact, banks have developed an elaborate system of "account analysis" for corporate accounts. For example, ledger balances minus the 12% reserve and any float are assigned an imputed interest rate, usually based on the Treasury bill rate. The bank then compares the value of the deposits it holds with the value of the services used by the corporation to determine whether compensation has been fair.

Fee for Deposit Insurance

Corporate customers have also seen an explicit fee in their account analyses for FDIC insurance.

"Originally, there may have been five or 10 banks that had a separate line item in the account analysis that said 'FDIC charge,'" said Jack Meckler, president of Phoenix-Hecht, cash management consulting and research firm based in a Research Triangle Park, N.C. But "as the rate began to escalate and became a bigger part of the bank's expenses, more and more banks began to put it in their account analysis."

Two or three years ago "only 60% of banks were doing this," Mr. Meckler said, citing his firm's pricing survey.

Now up to 80% of banks are breaking out charges for FDIC coverage, he said.

In consumer banking, however, the use of reserve-adjusted balances to determine the interest paid on accounts is a relatively new concept. It began in southern states a few years ago and has now spread to other parts of the country.

Negative Publicity

Several banks using reserve-adjusted balances also withhold a percentage of customers' deposits from earning interest, explicitly stating that it is to cover the cost of FDIC insurance.

Unlike the experience in commercial banking, the use of investable balances with consumer deposits has generated a great deal of negative media attention.

Some fo the reasoning appears justified. While banks use an imputed interest rate to offset service charges for corporate customers, individuals get a real rate of interest on their deposits. Yet most banks using reserve adjustments are advertising as if they paid on 100% of a customer's deposits.

Further, while most banks disclose to customers the net rate on their total deposits when asked, some have tried to evade the issue, which only provokes customer distrust.

Banks must recognize that their customer's primary motive for holding a part of their balances in interest-bearing demand deposits is not to earn the highest rate of interest.

"A lot of the research we do says that people are willing to give up yield for security," said Mr. Meckler of Phoenix-Hecht. "One interesting thing that we've found out recently was that it's not just security - it's the prospect of continued security."

Therefore, it is much more important for a bank to enhance a customer's faith in the institution than to offer the highest rate.

Undoubtedly, banks must find ways to offset the costs of reserve requirements and FDIC premiums. But any hint of deceptive practices is likely to create an outcy for legislation when banking reform is already a highly sensitive topic.

For example, Rep. Esteban Torres, D-Calif., has drafted a "truth in savings" bill that is likely to be debated in Congress this fall. If it were passed as currently written, it would require that banks pay the stated interest rate on 100% of a customer's deposit.

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