Regional Banks Press Fed To Retain Sweep Accounts

WASHINGTON -- A number of large regional banking companies have voiced strong opposition to a Federal Reserve Board plan to curb sweep accounts, saying it could drive billions of dollars in corporate deposits out of the banking system.

In comment letters filed with the Fed, the banks said the accounts help them compete for corporate clients against the likes of American Express and Merrill Lynch & Co.

They denied that the product is intended to evade reserve requirements, as the Fed has claimed.

Under the sweep arrangements, banks transfer billions of dollars in idle balances from checking and NOW accounts into time deposits at the end of the day, allowing their customers to earn interest.

But shifting the deposits at night, when reserves are calculated, also enables banks to keep less in their noninterest-bearing reserve accounts at the Fed. Banks are required to maintain reserves equal to 12% of transaction accounts.

First Union Corp. of Charlotte, N.C., cut its required reserves last year by $350 million when it set up a sweep program. That program -- though it was developed in consultation with the Fed -- prompted the crackdown proposal in April.

Fluctuating Aftermath

Fed governors feared that reserve balances were eroding to the point that they were losing their grip on an important tool of monetary policy.

When the Fed eliminated reserve requirements on nonpersonal time deposits in January, wild fluctuations resulted in the federal funds market for several weeks. The Fed staff interpreted that as a sign that reserves had dipped about as low as they could safely go. They are concerned that banks could use sweep arrangements to reduce their reserve balances to zero.

The Fed received 70 letters on the proposal and other technical amendments to its reserve requirement rules. Comments on sweep accounts ran about three-to-one against the Fed proposal.

One predominant theme was that the Fed's proposal is ill-timed, given widespread concern about poor earnings performance and the weak competitive posture of commercial banks.

Not surprisingly, First Union is one of the most vocal critics on the proposed limits. The plan "would significantly increase bank costs, reduce bank competitiveness, and discourage bank innovation designed to benefit customers -- all without any specific or definable benefits," wrote Edward E. Crutchfield Jr., First Union's chairman and chief executive.

"Banks will either lose these deposits to nonbank competitors, or they will increase or implement the use of alternative investments such as repurchase agreements" - known as repos - wrote Robert S. McCoy Jr., president of South Carolina National Corp.

Pros and Cons of Repos

By sweeping funds into repos, banks can satisfy their customers, said Roman J. Gerber, executive vice president of Banc One Corp., Columbus, Ohio, which offers just such an arrangement to its corporate customers.

But the repo sweeps have a serious disadvantage: Because the deposits are used to purchase securities, they "do not result in loanable funds," Mr. Gerber noted.

He urged the Fed to authorize banks to offer accounts that pay interest and permit unlimited transactions for corporate customers. These accounts would be subject to transaction-account reserves.

Call for Fed Interest

One commenter said the proposal could backfire. If banks cannot offer competitive products, the reserve base may actually shrink as depositors move their funds to institutions not subject to reserves, said James W. Otto, chief financial officer of Ameritrust Co., Cleveland.

There were also renewed calls for the Fed to pay interest on reserves.

Among other regional banks that weighed in against the plan were CoreStates Financial Corp., Philadelphia; First Interstate Bancorp, Los Angeles; First City Bancorporation of Texas, Houston. Some others, including PNC Corp., Pittsburgh, and First Bank System, Minneapolis, endorsed the Fed's goal of reining in abuses, but said the proposal appeared too broad.

BankAmerica Corp., San Francisco, and Barnett Banks Inc. of Jacksonville, Fla., both expressed support for the proposal but didn't go into detail.

The Fed is expected to take final action on the proposal within two months.

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