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Interest on Business Checking

House Approves Business Checking Bill

April 2, 2003

The House of Representatives today approved H.R. 758, the Business Checking Freedom Act, [pdf] by voice vote.

The legislation, sponsored by Oversight and Investigations Chairwoman Sue Kelly (NY) and Rep. Pat Toomey (PA), would remove the prohibition on banks from paying interest on business checking accounts and would allow the Federal Reserve to pay interest on so-called "sterile"reserves.

"The time for this Depression-era prohibition to go is long overdue,"Toomey said. "It is well past time for businesses, especially small businesses, to earn interest on their checking account balances and for banks to serve their customers, not outdated government regulations.”

Small business owners are disadvantaged by the current prohibition on business checking because they tend to bank at smaller institutions. If they choose to bank at larger institutions, their smaller deposits typically mean they won't qualify for complicated mechanisms such as "sweep accounts."Larger banks offer these products, which circumvent the ban on interest-bearing checking accounts, to larger business depositors. Smaller institutions are often unable to offer such products.

On the issue of interest on reserves, the Federal Reserve requires banks, thrifts, and credit unions to maintain cash reserves to cover potential withdrawals and to help the Fed manage the nation's monetary supply. No interest is paid to depository institutions on these funds; therefore, they are referred to as "sterile."The payment of interest on banking reserves would provide incentives for financial institutions to increase their reserve balances voluntarily. In recent years, these balances have been dropping, holding potential consequences for the Fed's ability to conduct monetary policy.

"Individual consumers pay interest when they take out a car loan, home loan, or student loan. And yet, the government wants its loans for free -- it requires loans of reserves and doesn't pay a penny of interest. Our government has always taken this privilege with other people's money, but the free ride should end,"Oxley said.

Source: House Financial Services Committee



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