Mr. Chairman and Members of the Committee, my name is Neil Mahoney. I am Chairman and
Chief Executive Officer of Woronoco Savings Bank, a mutual institution in Westfield,
Massachusetts. Woronoco Savings Bank was established 126 years ago and now has $340
million in assets.
I am also Chairman of America's Community Bankers. ACB is the national trade association for 2,000 savings and community financial institutions and related business firms. The industry has more than $1 trillion in assets, 253,000 employees and 14,500 offices. ACB members have diverse business strategies based on consumer financial services, housing finance and community development.
I welcome the opportunity to speak with you today on sections 101 and 102 of S. 1405, the "Financial Regulatory Relief and Economic Efficiency Act of 1997," introduced by Senators Richard Shelby and Connie Mack. These provisions will eliminate outdated, anachronistic restrictions still in place today, such as:
ACB has made its strong support of eliminating the prohibition on paying interest on business checking accounts, and requiring the Federal Reserve Board to pay interest on sterile reserves, one of its priority issues for 1998.
In ACB's view, prohibiting the payment of interest on business checking accounts is long outdated, unnecessary and anticompetitive. Restrictions on these types of accounts make community banks less competitive in their ability to serve the financial needs of many business customers. Small businesses would benefit if banks could offer them both commercial loans and interest on checking accounts. In addition, institutions would benefit by not having to spend time and effort simply trying to get around the existing prohibition. There is no need for limitations that prevent depository institutions from providing the most efficient, effective cash management services for their customers now and into the 21st century. This prohibition is the last vestige of the Regulation Q system of rate controls and should be dropped, just as the rest of those prohibitions were almost two decades ago. This is an issue whose time has come. Indeed, it is long overdue. In this era of increased competition from securities firms and nonbanks, we should attempt to broaden services to customers.
Sections 101 and 102 of the Shelby-Mack bill provide freedom of choice in the marketplace for the consumer and financial institution nothing is mandated. The bill removes regulatory restrictions, but does not require institutions to offer particular accounts. However, we would expect many institutions to market new accounts, and small business customers will more likely stay at institutions that serve them more efficiently.
As a Massachusetts savings banker, I note that it was another state-chartered savings bank in Massachusetts the Consumers Savings Bank of Worcester, MA -- that pioneered the consumer NOW account in the 1970s. Obviously, this concept should also be extended to business customers.
To remain competitive, more and more banks and savings institutions, especially smaller community banks, are looking for ways to meet the cash management needs of their business customers. Cash management services help businesses make the best use of their cash on hand before they need it to pay bills. While many companies used to let their cash sit idle in demand checking accounts, giving depository institutions interest-free sources of cash, they have become much more sophisticated about limiting checking account balances and investing the surplus. Business customers want to earn interest on idle checking funds. Sweep accounts, designed to move noninterest-bearing demand checking accounts into investment vehicles and then back again as needed to pay bills, have been receiving a great deal of attention in this regard.
Bring up the subject of sweep accounts in a room with five bankers and you're sure to get at least 10 different opinions about what sweeps accounts are, how they work, why they don't work and how unfair the regulatory system is to banks. Confusion, frustration and anger are the direct results of a convoluted regulatory system governing sweep account arrangements. They are not suited to our increasingly fast-paced, electronic banking system.
In most sweep account arrangements, the customer and the depository institution agree how much money should be kept in the demand account. The institution calculates balances nightly and compares them to this target. When the balance exceeds the target amount, the institution invests the excess. If the deposit balance drops below the target, the bank liquidates enough of the sweep account investment holding to bring the deposit balance back up to the target. Institutions also frequently combine a credit line with their accounts to cover the business in the event that the combined investments and demand account funds are not enough to cover the outflows from checking accounts.
Merrill Lynch and other nondepository institutions have been part of this trend for a long time and have offered sweep accounts to move money from noninterest-bearing demand accounts to investment vehicles, such as mutual funds, and then back again to the demand accounts as needed, with much lower minimum balances than required by large commercial banks and without the restrictive regulations imposed on banks and savings institutions.
As addressed in more detail later in my testimony, bank regulations limit sweeps from a savings account to six times each month. Because Merrill Lynch and other non-depositories don't fall under banking regulations, they can provide unlimited sweeps from their investment accounts. The Merrill Lynch program, for example, offers accounts for small and large businesses alike. Small businesses can invest excess funds in a money fund, where the minimum balance is only $2,000. The account also includes a credit line and a 15-cents-per-check charge. The accounts for larger customers have a $20,000 minimum, plus a choice of several investment and credit options.
The quandary is that if community banks don't offer sweep arrangements or some alternative service, their business customers are likely to leave for the options provided by nondepository institutions, a point on which any bankers and industry experts agree. And Merrill Lynch is not the only nonbank competition. American Express is making a major play in the media for its integrated small business service package. Businesses are also able to deposit idle funds into share draft accounts at some credit unions that offer interest and unlimited checking privileges.
The problem is that sweep accounts are expensive and can be very labor intensive, especially for smaller institutions. Though there are software programs that handle sweeps automatically, these programs are typically too expensive for smaller community banks and savings institutions.
Federal prohibitions against a bank or savings institution paying interest directly or indirectly on demand checking accounts or allowing for-profit businesses to own NOW accounts (checking accounts that pay interest) have fueled the creation of more and more convoluted mechanisms to get around the outdated, limiting and unnecessary legal barriers.
There are essentially three sweep options available to banks and savings institutions:
Larger banks and savings institutions (those with $750 million or more in assets) with ample commercial accounts and sweep transactions tend to use the third option and connect with a third-party provider offering sweep options that the bank or savings institution cannot offer alone. Because, in this instance, the bank or savings institution is not paying the interest (it is paid by the third party), there is no technical violation of federal law. However, the downside of this approach leading customers of a bank or savings institution to a competitor only exacerbates the incongruity of disparate regulatory treatment when depositories and nondepositories perform functionally similar, if not identical, activities. Also, third-party sweep/cash management arrangements do not work for small and medium-sized banks and savings institutions. The volume of sweeps and the size of deposit balances mitigate against such arrangements being profitable in the context of small volume sweeps and small deposit balances. It is difficult for these institutions to team up with a "name" fund into which the swept dollars would be invested because the balances simply aren't big enough. This system creates de facto discrimination against smaller institutions and, consequently, smaller businesses.
Smaller banks and savings institutions ($250 million and less in assets), which make up approximately two-thirds of ACB's membership, are left with only one labor-intensive, burdensome and inefficient option the repurchase agreement. However, that option generates a heavy paperwork load. Overnight repos require a number of steps including the requirements to obtain repurchase agreements in writing and to make certain disclosures to the customer in the written repurchase agreement, including the fact that funds held pursuant to a repurchase agreement are not insured. Many small banks cannot afford the expense of paperwork associated with these accounts.
After considering all the mechanisms now in place to transfer funds from a demand deposit to an interest-bearing account or investment vehicle in order to generate earnings, it is obvious that it would be much easier if banks and savings and institutions could simply pay interest on the demand account in the first place. Continued restrictions on these accounts make community banks less competitive in attempting to service the financial needs of small businesses and local communities. Many small businesses, operating on shoestring budgets, do not draw the attention of larger depository institutions and are effectively denied access to a product or service that proportionately is just as important to them as for large businesses. This disparity is solely the result of an artificial and, by today's standards, questionable public policy embedded in law.
Woronoco Savings Bank is located in a town where the business community is populated primarily by small businesses, i.e., the classic "Mom and Pop" store and small service and light manufacturing firms. Many of the larger banks offer cash management accounts, but many of the small businesses don't have high enough balances to qualify. Businesses both large and small should have the same opportunity to earn a few extra dollars from their checking accounts.
Federal law prohibiting a bank or savings institution from paying interest directly or indirectly on business checking accounts is the last vestige of an obsolete deposit rate control structure. The prohibition was enacted in the 1930s to serve purposes that were probably misguided then and are not valid today. According to legislative history, the provision was enacted because it was believed that bank failures were being caused as large banks attracted small banks' deposits by paying interest on their bank deposits. Accordingly, this reduced community lending and exposed the small banks to higher risks of failure.
No serious economic analysis now attributes the crisis of the banking system (and overall economy) in the 1930s to paying market rates on deposits. Misguided fiscal, monetary, and trade policies were the culprits. Continuing the misguided Regulation Q response merely continues the well-meant, but harmful, treatment of those days.
Admittedly, elimination of the prohibition is not a totally unmixed blessing. Some existing customers who may have been willing to settle for a non-interest-bearing account may now press for explicit interest. However, the experience with consumer accounts is instructive, and few banks would advocate a return to the old Regulation Q prohibition on interest on consumer demand/NOW accounts. Interest payments on consumer accounts was in fact a response to what would otherwise have been a much more serious erosion of market share to mutual funds and other non-bank financial companies.
From an economic perspective, a truly dynamic analysis of the viability and benefit of dropping the interest prohibition would reveal that most small and medium-sized institutions would benefit from the shake-up and potential reshuffling of small business account relationships that would occur, in the same way that the NOW account offered banks the ability to compete and capture consumer accounts. The banking industry as a whole will gain through the elimination of confusion over and violations of these regulations. Granted, some larger depositories may have an "investment" in sweep technology that may "lose value" under the change in a static or relative sense. However, if the sweep alternative offers a true economic benefit other than as a regulatory end-run, the service will remain viable.
Some institutions that have already invested in sweep account technology and are benefiting from this arrangement are, quite rationally, opposed to this change in law. These same banks have circulated misleading cost estimates for an interest-bearing checking account product using a 4.5% CD rate that really reflects only what a large commercial bank might offer its largest accounts. The real rate may be in the 2% range, depending on the market and types of accounts offered.
Other analyses being circulated by some of the larger banks arguing that an interest-on-business checking product will have dire consequences for the banking industry, but these come from the same institutions that have profited handsomely from the fee income derived from sweep arrangements. An interest-on-business checking account product would undoubtedly enable community banks to better compete with larger institutions for this market. Community banks also might want to offer interest on small-business deposits as low as $2,500 to strengthen their customer relationships and prevent losses from defections to larger banks as customers grow.
Most sweep accounts pay interest based on money market rates, and this will not likely change with an interest-on-business checking account product. Therefore, the suggestion that profitability will suffer is debatable. Currently, many banks offer the choice of personal NOW accounts with or without interest. They can do the same on business accounts. Eliminating the prohibition would not require banks to pay interest on all business deposits.
Currently, many banks operate a hybrid type of the sweep, with fees added to cover bank costs. With an interest-bearing checking account product, a business could earn interest on an average balance, after the reserve requirement, minus the required balance to cover service charges.
Currently, some banks also use a tiered interest rate for their sweep accounts. The same could be done with an interest-bearing checking account product.
Currently, some banks use earnings credits to offset service charges with a business checking account. With an interest-on-business-checking product, banks still could use earnings credits to offset service charges. The sweep account would net nothing more for some businesses than they would earn through a interest-bearing business checking account product. The big difference is that institutions would not have to use sweep mechanisms to transfer funds in and out of the bank, as well as in and out of the account. This would reduce costs for everyone.
The economic analysis of some of the larger institutions supporting the existing prohibition does not deserve serious consideration. This is one-sided advocacy, not analysis. Its basic logic would argue for a rollback of interest paying consumer accounts too. How can that be serious policy for the 21st century? Maybe every dollar in an account would be more "profitable" for the banking system, but there would not be many dollars! More importantly, customers would not be well-served. Why should we force customers out of the banking system, as this prohibition does?
ACB respectfully suggests that the appropriate context, for comparative purposes, is the experience which has been gained over the last 25 years with interest-bearing transaction accounts in the form of NOW accounts for banks and savings institutions. It was a savings bank which first introduced the NOW account in Massachusetts in June 1972. A strenuous effort was necessary to keep NOW accounts from being prohibited by federal law at that time, but gradually this pro-consumer service moved beyond Massachusetts to the rest of New England, and then to New York and New Jersey. Predecessor organizations to ACB supported successful efforts to take the NOW account nationwide in 1980. They also, in 1983, supported the elimination of the prohibition on interest on business checking.
The experience with NOW accounts provides the best evidence for evaluating the results that would flow from enactment of interest on business checking, and by every objective analysis, NOW accounts have been an overwhelming success in terms of consumer acceptance, flow of funds to depository institutions, and increased efficiencies in the financial markets. It is interesting to note that many of the arguments being put forward in opposition to repealing the prohibition on the payment of interest-on-demand deposits are quite similar to the arguments advanced in the early days of NOW accounts. NOW accounts would be too expensive, we were told, too volatile, too disruptive of existing competitive relationships, and would only serve to raise borrowing costs. A quarter century of experience with interest-bearing transaction accounts has shown these fears to be unfounded.
With respect to the argument that repealing the prohibition would be too expensive for depository institutions to manage, it should be noted that similar claims greeted the introduction of the money market deposit account twenty years ago. Though rate deregulation could have been handled a lot better, eventually everyone benefited both banks and customers. With regard to the volatility argument, NOW accounts have proven to be a very stable source of deposits that has helped, in turn, to reduce borrowing costs.
In earlier debates, critics of Regulation Q ultimately prevailed with the argument that the government should not be in the business of subsidizing borrowers at the expense of small savers, and precisely the same principle applies to repealing the prohibition on the payment of interest on demand deposits. Small businesses should have a convenient way to earn interest on their excess working balances.
Anecdotal evidence across-the-board tells of efforts to serve small local markets being hampered
by an inability to fully serve business clients. Smaller institutions are hit the hardest because
establishing and maintaining a program to get around the regulation can be cost prohibitive. A
growing number of institutions have gone on record calling for an interest-on business checking
Borel Bank & Trust Company, San Mateo, California
"Daily, the banking industry is transferring billions of dollars to brokerage firms or mutual fund money market accounts under 'cash management' programs. . . . Not only does this reduce the amount of deposits available to lend to business and individuals to stimulate the economy (and enhance bank earnings and strengthen our industry), but it also makes monetary policy harder to enforce as few funds remain in the banking industry."
Bank of Eastern Idaho, Idaho Falls, Idaho
"Small community banks are seeing deposit dollars leave their institutions by the millions. These dollars are not headed for other banks, they are headed for non-FDIC insured institutions that pay interest on their deposits. It is not a matter of expense, this bank can pay the local depositor or purchase 'other funds.' The expense will be approximately the same. However, the product that the customer is after is not provided by the bank and its ongoing reputation and credibility is being impaired. Please lift the prohibition and allow interest to be paid on demand deposits."
Oconee State Bank, Watkinsville, Georgia
"We are a community bank with assets of $115 million that has to compete with the 'Nationbanks' of the country. We feel that we should have the flexibility to pay interest on commercial demand deposits. Many banks have found ways around this prohibition."
United Bank of Union, Union, Missouri
"Banks in the United States continue to be shackled with finding methods to circumvent the last vestiges of Regulation Q. Methods used vary from daily transfers in-house of funds from money market account to sweep and corporate repo accounts. Isn't it time to simply remove the limitation on paying interest on corporate accounts thus eliminating many useless hours of paperwork and time in making the other methods work? . . . What better time than now to remove the limitations, a strong reserve fund, no bank closures in the last calendar year and a strong economy. Let the market flow and eliminate this useless restriction."
Royal Bank of Pennsylvania, Narbeth, Pennsylvania
"We have a hard time competing against mutual funds particularly in the area of businesses wanting to earn interest on their accounts. It would be nice if we had an account that we could use other than sweeping money into a mutual fund, to allow businesses with substantial deposits to earn interest. If this can be developed it would be most helpful to keep us competitive."
Ridgefield Bank, Ridgefield, Connecticut
"The current regulation is both ineffective and unfair to banks and their customers. . . . [T]he prohibition against paying interest on demand deposits is frequently circumvented by cash management and sweep arrangements that merely move money on paper from demand accounts to investment accounts on a daily basis. Technology allows this to be done easily, but it is expensive for small banks, and many smaller depositors do not benefit from this service. The current prohibition simply no longer meets the realities of the world nor does it allow banks to fairly compete with non-bank competitors. While the prohibition may have been wisely intended, it is no longer wise."
Bank of Murfreesboro, Murfreesboro, Tennessee
" I would like to make my support known for the proposal to lift the prohibition on paying interest on commercial bank account deposits. . . . Please hurry with your lifting of this prohibition."
The Bank of Tampa, Tampa, Florida
"With all of the mechanisms now in place to transfer funds from a regular deposit account to another type of account or investment simply to generate interest income, how much easier it would be if we could simply pay interest on a principal operating account. . . . "I am serving on the Board of Directors of the Community Bankers of Florida; and at a recent board meeting, the overwhelming majority of the board members voted in favor of the right to pay interest on demand deposits."
Southern National Bank of Texas, Sugar Land, Texas
"Our bank is being hampered by the Federal Reserve Board's Regulation Q, which prohibits the payment of interest on commercial demand deposit accounts. Just in the last three months of 1997, our bank lost several millions of dollars of existing deposits and loans to investment banks like Merrill Lynch and Paine Webber. This law is restricting community banks from competing in the financial services arena.
"Small businesses have a right to earn interest on their money and national and state banks should have a right to offer them this service. Instead, small businesses are opting to move their accounts to large brokerage houses that are permitted to offer interest bearing demand deposit accounts. When it comes down to lending money, these big banks will not even consider offering these small businesses a revolving line of credit or a loan for purposes of working capital."
People's Bank, Holyoke, Massachusetts
"Community bankers recognize we are all at risk. We have to pay interest on excess funds that traditionally have been parked in non-interest-bearing accounts." [American Banker, August 11, 1997]
Cornhusker Bank, Lincoln, Nebraska
"With our continued declining market share, it's inevitable. I just think it's right. Why should we encourage our customers to invest their money somewhere else?" [American Banker, November 14, 1997]
"Each bank should decide for itself and its own analysis of what the costs would be. 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." [American Banker, December 11, 1997]
First National Bank of White Sulpher Springs, Montana
"Nothing says the bank would have to do it. But in this whole era of deregulation shouldn't we attempt to broaden services to customers?" [American Banker, August 11, 1997]
North Carolina Bankers Association
A survey conducted by the North Carolina Bankers Association on whether to allow financial institutions to offer interest bearing negotiable order of withdrawal accounts to business customers found overwhelming support for the proposal. Respondents noted that the ability to offer business NOW accounts would enable community financial institutions to more effectively compete and would diminish the need for sweep accounts and repurchase agreements.
Not only small banks are advocating this change. Wells Fargo, the major West Coast money center operation, has strongly advocated the change:
"Currently, the only legal restriction on paying interest on demand deposits covers corporate funds. . . This last interest-rate restriction is as old fashioned as the ones that have rightfully been eliminated. It too should be terminated, so that the market can best serve the needs of large and small companies without the necessity of constructing elaborate alternatives to the simple and direct payment of interest on all demand deposits." [Getting the Balance Right: Wells Fargo's View on Bank Fees and Customer Service, January 1998]
Shadow Financial Regulatory Committee
"Sweep accounts are an inefficient way of paying interest on business demand deposits. The prohibition of interest payments on demand deposits is a remnant of the Banking Act of 1933 that has outlived any supposed usefulness, and should be repealed. Paying interest on demand deposits is both more efficient and safer for the banking system than encouraging banks' use of sweep accounts." [Statement No. 143, December 1997]
If institutions like Woronoco could offer an interest payment option, we would give those customers without enough money to qualify a greater opportunity to get more value for their deposits. Obviously, not every bank supports this change. One reason for opposing the elimination of this prohibition is the edge that a past investment in high tech sweep systems and software may give an individual institution. But that edge comes at the expense of the banking system as a whole and, just as importantly, at the expense of the system's customer base.
No bank has a legitimately vested interest in a statutory or regulatory structure that does not serve a valid public purpose. If the sweep structure offers a real economic benefit rather than simply being an end-run not available to all, sweeps will still survive after lifting the ban. Indeed, we would expect those arrangements to survive for the large businesses with ultra-sophisticated cash management needs. Only their artificial, growth will be pruned by open competition.
Several studies have been done on behalf of the federal government regarding the payment of interest on business checking accounts. The conclusions have been consistent for decades.
In 1975, the House Banking Subcommittee on Financial Institutions and the Nation's Economy (FINE) Discussion Principles suggested that "the prohibition against paying interest on demand deposits would be removed" over time.
In 1979, President Carter's Inter-Agency Task Force on Regulation Q recommended that interest-bearing transaction accounts be authorized for all federally-insured depository institutions.
In 1983, the report of the Depository Institutions Deregulation Committee (DIDC) asked Congress to remove the statutory prohibition on the payment of interest on demand deposits. The Committee concluded that this statutory prohibition is no longer justified and recommended that depository institutions be permitted to pay interest on demand deposits. Extensive analysis of the issue of the payment of interest on demand deposits undertaken by the Committee staff found:
"[T]he arguments for prohibiting the payment of interest on demand deposits in the 1930s appear to have little validity today. In this regard, certain developments have weakened significantly the economic effect of the prohibition, such as (1) implicit interest payments on demand deposits through the provision of customer services either free or at fees below cost, (2) market development of close demand deposit substitutes that earn interest (e.g., money market mutual funds and sweep accounts), and (3) legislative and regulatory changes to permit explicit interest bearing transaction accounts that are legally distinct from demand deposits.
"Since many transactions balances earn close to a market return either implicitly or explicitly, we believe that the cost implications for depository institutions of the removal of the prohibition against the payment of interest on demand deposits would be of manageable size and largely temporary. . . ." [DIDC, August 4, 1983]
Even back in 1983, the DIDC found the statutory prohibition on the payment of interest on demand deposits may resort to the payment of "implicit" interest through the providing of below-cost services to demand account holders. These services may range from those directly related to account maintenance (processing and collecting checks, debiting accounts for checks presented, and providing periodic account activity statements) to more elaborate business-oriented services (loan commitments, wire transfers, securities safekeeping, transfer agent activities, and advice on matters such as mergers, tax matters, economic conditions, and so on). Staff analysis done by the DIDC suggested the value of account maintenance services for commercial checking account holders to be about 2.2 percent at banks with deposits of up to $50 million and 2.1 percent at banks with deposits of $50 million to $200 million.
The report went on to note that since many transactions balances earn close to a market return either implicitly or explicitly, the cost implications for depository institutions of the removal of the prohibition would be of manageable size and largely temporary. Interest-bearing demand deposits would result in a more efficient allocation of the economy's resources, the report concluded. Depositors would be able to more accurately judge the particular benefits offered to them. In examining the types of subsidized services available to businesses and the types of services that businesses of various sizes utilize, DIDC staff concluded that many business firms received an implicit rate pretty much equivalent to what an explicit rate would be.
The economic benefits of allowing for the direct payment of interest on demand deposits will, in the longer run, more than compensate for any of the short term transitional costs involved.
More recently, in their 1996 Joint Report, Streamlining of Regulatory Requirements, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision stated they believed that the statutory prohibition against paying interest on demand deposits "no longer serves a public purpose."
Now is the time to act on at least a quarter century of sound policy recommendations.
ACB strongly supports authorizing the Federal Reserve to pay interest on reserves, and believes that such authorization is consistent with and must be linked to permission to pay interest on business checking accounts. The Federal Reserve today imposes an implicit tax on reserves that depository institutions hold at the Federal Reserve. This tax raises the cost and thus reduces the interest rate which depository institutions can afford to pay on deposits, making it difficult for depository institutions to compete with other institutions which offer deposit-like instruments that are not subject to reserve.
The tax also creates incentives to create sweep arrangements for demand deposits that are not subject to reserve requirements. In recent years, sweep arrangements have clouded interpretation of the monetary aggregates and complicated the execution of monetary policy. Paying interest on required reserve balances will increase the effectiveness of monetary policy and help make a bank's payment of interest on its business checking accounts more feasible. While the Fed's budget will initially be affected by these changes, in the long run it is reasonable to expect that the Fed would make this amount up in volume by bringing into reservable bank accounts billions of dollars now outside its control and in the hands of nondepository companies via sweep arrangements.
ACB would also like to strongly associate itself with the views expressed by Senate Banking Chairman D'Amato last July on this issue:
"The American people expect an efficient financial system. Eliminating outmoded fees, taxes and expenses imposed by the government improves efficiency and helps consumers at every level. We must remember, when banks aren't paid interest on these deposits, it's really bank customers who are potentially losing money." [Senate Banking hearing, July 23, 1997]
For the first time in 60 years, banks should be able to pay interest on business checking accounts. Simplicity would replace complexity by:
ACB strongly agrees with the views expressed by the Federal Reserve in its February 20 letters to Senators Shelby and Mack that the 24-transfer proposal is not a satisfactory solution. Furthermore, we see no reason not to immediately give banks all the competitive options they need to compete and may choose to use as they see fit. In addition, we are entirely unpersuaded that continued delay is in the interest of banks or their customers. Delay only postpones the benefit to be derived from a more rational financial system. Also, it would be hypocritical for any banking organization to suggest that they are in favor of more competitive banking but not in favor of eliminating this prohibition.
Whether a bank or savings institution is large or small, both in a relative sense are losing out to non-depositories when compelled to use sweep arrangements to serve the financial needs of their customers. The government should not dictate which customers may earn interest inside the bank and which may not. The real solution is to provide a legislative clean slate. It's time to leave the past behind. The rationale that gave birth to the prohibition no longer exists. Technological and financial innovation since the prohibition was enacted has served to facilitate avoidance of its effects. The prohibition imposes a burden, borne mostly by bank customers who must either hold non-earning checking deposits or absorb the dead weight costs of circumventing the prohibition with sweep accounts.
Let competition work its course on a level playing field to the benefit of the customer. Small businesses have a right to earn interest on their money, and banks and savings institutions should have a right to offer them this service. Eliminating the prohibition and authorizing the payment of interest on reserves at the Fed would represent a significant and long overdue step forward in modernizing the nation's banking structure.
Thank you for the opportunity to express our views.
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