WASHINGTON — It looks like a long shot, but small banks are not giving up their quest to bring back rules that they say have helped keep business deposits in local communities.
The Dodd-Frank Act repealed a Great Depression-era ban that prevented banks from paying interest on business checking accounts.
The repeal had the support of small businesses that were frustrated by their inability to earn a return from their checking accounts, large banks that saw a new opportunity to fund their businesses, and free-market economists who saw the 1930s rule as misguided government intervention.
"Should Congress force depositors to subsidize borrowers? Obviously not," Alex Pollock, an economist at the American Enterprise Institute, testified Thursday during a hearing of the House financial institutions subcommittee. "Should Congress promote competition in banking to the benefit of customers? Obviously yes."
There appears to be little enthusiasm in Congress for reviving the long-standing measure, which officially ended last year, especially given that the House voted overwhelmingly to repeal it numerous times even prior to 2010.
But small bankers again made their pitch at Thursday's hearing. Cliff McCauley, senior executive vice president of Frost Bank, a San Antonio-based bank with $19 billion in assets, suggested that small businesses that support the new rules are taking a short-sighted view.
McCauley said that zero-interest business checking has allowed community banks to make affordable fixed-rate loans to small businesses and home buyers in their local communities.
Business deposits are now poised to move to large banks such as Capital One, which pays interest on business checking accounts in order to fund its credit card lending, he said.
"They can pay a higher interest rate on deposits because of the high interest rates on their credit cards," said McCauley, who appeared on behalf of the Independent Bankers Association of Texas. "It is my opinion that the too-big-to-fail institutions will utilize this new tool to attract deposits in the future."
The Independent Community Bankers of America, which submitted written testimony, also supports reviving the ban on interest for business checking accounts. The ban was part of a rule known as Regulation Q, which is now completely dismantled.
"Ultimately, repeal of Regulation Q could cause community banks to lose market share to larger banks who can afford to pay more interest on deposits and lead to further consolidation of the financial industry, creating greater systemic risk," the community banking trade group testified. "Stable, reliable funding strengthens banks and helps them to serve local economies.
The subcommittee also received written testimony from Capital One Financial Corp., which introduced an interest-bearing business checking account as soon as the new rules took effect last July.
"We believe that the majority of checking accounts in the marketplace prior to the repeal forced a large segment of small businesses into products that either provided little value relative to their deposit levels or failed to deliver on the simplicity and ease desired," the company testified.
Although the new rules have been in effect for eight months, their impact in the marketplace has been minimal so far, witnesses said. That's because interest rates are so low that businesses have not seen much reason to move their money.
But McCauley warned that will change, to the detriment of community banks that will either have to pay competitive interest rates and pass the higher costs on to borrowers, or watch their business depositors flee to larger institutions.
"There is so much excess liquidity in the system that most banks are awash with deposits, and couple that with the artificially low rate environment that the Fed has put us in, there really isn't any competition for deposits," he said in an interview following the hearing.
"If you fast-forward, when deposits become scarce and rates get high, then the competition goes up for them. And that's where it really becomes problematic, especially for the community banks."
The community bankers' plea drew a largely noncommittal response from lawmakers of both parties, who are usually quite receptive to their entreaties.
Rep. Shelley Moore Capito, a West Virginia Republican who chairs the financial institutions subcommittee, suggested that even before the 2011 repeal, banks were able to evade the ban on interest payments.
"In some cases banks effectively paid interest to businesses by offering them sweep arrangements in which business deposits were transferred from business checking accounts, invested into commercial paper, or repurchase agreements, or mutual funds at the end of each day and then transferred back the next day," Capito said.
McCauley, the Texas banker, acknowledged that some banks got around the regulation, but he said they generally did so with the accounts of larger businesses.
"Large banks have historically used that for larger customers," he said. "A small customer in a larger bank did not utilize a sweep account."
The Independent Community Bankers of America and the Texas bankers group are calling on Congress not only to bring back the old rule on business checking accounts, but also to add a new law that aims to address the concerns of small businesses.
The bill, sponsored by Republican Rep. Randy Neugebauer, would allow businesses to make up to 30 transfers each month from their savings accounts, which can earn interest, to their checking accounts. Today only six such transfers are allowed each month.
