Thursday, July 21, 2011

Prohibition on Paying Interest on Demand Deposit Accounts Ends Today

The ban on banks paying interest on business checking accounts ended today.

Section 627 of the Dodd-Frank Act repealed the prohibition on banks paying interest on demand deposit accounts, which became effective one year after the enactment of the legislation.

When interest rates were higher, I regularly heard from bankers about credit unions paying interest on business checking accounts, as credit unions were never subject to this prohibition.

Banks now have the option of paying interest on demand deposit accounts.

This measure should help community banks compete with credit unions for business customers, especially once rates begin to rise.
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4 comments:

  1. AnonymousJuly 21, 2011 at 10:58 AM

    This was not a competitive disadvantage for banks, it was an engine of massive profits.

    ReplyDelete
  2. ZacharyJuly 25, 2011 at 12:09 PM

    I noticed that almost every single comment letter from the community bankers was opposed to the repeal of Reg Q. This regulation ensured a steady supply of "free" deposits for the bank. In a rising rate environment, this is really going to hurt the community banks as they will have the choice of losing business customers to the MegaBanks or cutting even further into their tight interest margins to be able to complete.

    If virtually all of the community bank comments were opposed to the repeal of Reg Q, how can you cite this as a source of historical competitive advantage for credit unions? Why is this good news for community banks? Your logic seems questionable...

    ReplyDelete
  3. Keith LeggettJuly 25, 2011 at 12:22 PM

    Zachary:

    It will mean expenses for community banks will increase. This is why they are opposed to the repeal.

    However, if community banks cannot pay interest on demand deposits while their competition can, ultimately community banks will lose the relationship.

    ReplyDelete
  4. ZacharyJuly 27, 2011 at 6:07 PM

    I'm sure you are well aware of the fact that the banking lobbies were pushing for the implementation of Reg Q 30 years ago when interest rates were high. Banks wanted to have the business deposits, but did not want to have the expense associated with paying all of that interest out (rates were very high throughout the 80's), so you pushed for the prohibition on paying interest. Credit unions simply insisted they should be able to retain the option of paying dividends to their small business members even though the law would allow banks to weasel out of this obligation.

    Now you turn around and cite the provision your lobby pushed for as a source of competitive disadvantage. Seems a bit bipolar to me. It's what you all asked for! Then again, this might be a case of ABA induced amnesia.

    Community banks are upset because the real winners are going to be the MegaBanks, not community based institutions. MegaBanks will be in a better position to draw away profitable business accounts from everyone else and leave the scraps for community banks and credit unions to fight over.

    Its sad that the ABA really just represents the needs of Chase, BofA, Wells, and Citi.

    ReplyDelete

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