Mr. Chairman, thank you for calling today's hearing to discuss provisions of S. 1405, the Financial Regulatory Relief and Economic Efficiency Act of 1997.

I would like to commend the authors of the bill, Senators Shelby and Mack, for including provisions in S. 1405 to eliminate a prohibition on the payment of interest on business checking accounts. 1, along with Senator Hagel have introduced legislation, S. 1249, the Small Business Banking Act, to eliminate this prohibition.

Enacted as a part of the Glass-Steagall Act in the early 1930s, the prohibition on interest on commercial deposits has far outlived its usefulness. At the time of enactment, it was the popular view that payment of interest on deposits created an incentive for rural banks to shift deposits of excess funds to urban money center banks that made loans that fueled speculation. Moreover, it was believed that such transfers created liquidity crises in rural communities. However, a number of changes in the banking system since enactment of the prohibition have called into question its usefulness.

First, with the passage of the Depository Institutions Deregulatory and Monetary Control Act of 1980, Congress allowed financial institutions to offer interest-bearing accounts to individuals - a change which has not adversely affected safety and soundness.

Second, a number of banks have developed complex mechanisms called sweep accounts to circumvent the interest rate prohibition. Because of the costs associated with developing sweep accounts, however, large banks have become the primary offerors of these accounts. As a result, many smaller banks are at a competitive disadvantage with larger banks that can offer their commercial depositors interest-bearing accounts.

Most importantly, the vast majority of small businesses cannot afford to utilize sweep accounts because the cost of opening these accounts is relatively high and most small businesses do not have a large enough deposit base to justify these costs.

In light of these developments, it has become clear that the prohibition on interest-bearing commercial accounts is nothing more than a relic of the Depression-era that has effectively disadvantaged small businesses and small banks, and led large banks to dedicate significant resources to circumventing the prohibition. I am, therefore, pleased that Senators Shelby and Mack have included provisions to repeal the prohibition in S. 1405.

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