The battle over whether banks should be allowed to pay interest on corporate checking accounts is coming to a head.

Three bills to remove the ban are pending, and House Banking Committee Chairman James Leach promised last week to introduce a fourth when Congress returns in January.

"This is an issue that in the last couple of months has gained momentum," said Edward L. Yingling, chief lobbyist at the American Bankers Association. "It seems that there is a reasonable possibility that something will be enacted next year."

Banks seeking to increase core deposits to meet loan demand are pitted against those that already have substantial interest-free corporate checking deposits.

The conflict took center stage at last week's meeting of the ABA's government relations council, which sets the trade group's lobbying positions.

A coalition consisting mostly of large banks warned of dire consequences for community banks if Congress gives the industry permission to pay interest on corporate checking accounts, according to sources who attended the closed-door meeting.

Wachovia Corp. senior vice president Russ Stephenson, who was at the meeting, said in an interview that repealing the ban would hurt all banks' profitability and result in new fees on corporate customers.

"You need to go into this with your eyes open," he said. "I have a sense that this analysis has not been done."

But advocates said the government has no business dictating which customers earn interest and which may not.

"Each bank should decide for itself and do its own analysis of what the costs would be," said Alice M. Dittman, chairman of Cornhusker Bank in Lincoln, Neb., and head of ABA's community bankers council. "Some need this more than others. If you are short of funds for loans, then you are anxious to draw from whatever market you can."

"Nothing says the bank would have to do it," said Michael E. Grove, president and chief executive officer of First National Bank of White Sulphur Springs, Mont. "But in this whole era of deregulation shouldn't we attempt to broaden services to customers?"

Other than Mr. Stephenson, sources at the large banks that oppose paying interest on reserves would comment only if American Banker agreed to quote them anonymously.

"There is this belief that because we have sweep accounts we are opposing this," one official at a big bank said. "But the fact is that this is going to be a large cost to the industry and to us as a large bank."

Several lawmakers, including Rep. Jack Metcalf and Sen. Richard C. Shelby, seek to repeal the ban on interest-bearing corporate checking.

Rep. Leach's proposal would let customers make up to 24 withdrawals a month from interest-bearing money market deposit accounts. This effectively would repeal the ban because customers could write checks on their interest-free accounts and, at the end of each business day, their banks could transfer money from interest-bearing accounts to cover the debits.

The industry is split on which approach to back.

More than 80% of the members of ABA's government relations council endorsed the Leach bill while 85% of the ABA's community bankers council supported the outright ban in the Metcalf and Shelby bills. America's Community Bankers also supports repeal of the restriction.

The Independent Bankers Association of America recently decided to support Rep. Leach's proposal, and executive vice president Kenneth A. Guenther said the group will oppose legislation to abolish the ban on interest-bearing corporate checking.

In the middle are a number of the nation's largest banks-led by First Union Corp. and Wachovia Corp. -that oppose any change.

At the ABA government relations council meeting, 131 bankers debated a lobbying paper prepared by banks opposed to repealing the interest ban.

The discussion was led by Joel Naroff, First Union's chief economist. He declined to comment on the record.

The five-page lobbying paper attempts to refute arguments commonly made in favor of letting banks pay interest on corporate checking.

First, the paper questions whether banks will be able to attract enough new customers to defray the costs. In an attached spreadsheet analysis, the banks calculated that the level of corporate checking deposits would have to triple for an institution to break even.

"It will be impossible for small banks to recover their added expenses by improving their competitiveness," the banks said. "Instead, they will suffer a decline in their profitability, become more susceptible to a takeover, and the banking system will be more sensitive to economic shocks."

Next, big banks said depositories would have to restructure their balance sheets to keep interest rate risk from rising. This means banks would sell long-term mortgage-backed securities and buy short-term Treasury notes, which have lower yields. Total cost: $2 billion.

Third, the paper argued that paying interest will hurt both small banks and small businesses. The banks would have to recoup added interest expenses by raising fees to their business customers, which tend to be small.

"Small banks and small businesses will bear the largest portion of the higher interest expenses, while large banks will lose the least and large corporations could experience minimal impact on costs," according to the paper.

Despite these arguments, sources on Capitol Hill said they expect legislation to be enacted.

Erik Strom, legislative director to Rep. Metcalf, said the measure could be added on to a regulatory relief bill, tacked onto the financial modernization bill, or go as a stand-alone proposal.

"I'm feeling very good about this," Mr. Strom said. "We are going to move forward anything that has a chance to see the light of day."

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