Dear Representatives Toomey and Kanjorski:

The Association for Financial Professionals (AFP) strongly supports the "Business Checking Freedom Act of 2003" (H.R. 859), and applauds your introduction of this legislation. Your bill eliminates an archaic banking law that has hampered the ability of America's businesses, and particularly smaller businesses, to make effective use of funds on deposit in banks.  This outdated banking law (implemented by Federal Reserve Board Regulation Q) prohibits banks from paying interest on business checking accounts, which makes commercial banks less competitive in serving the financial needs of many of their business customers.

The inability of depository institutions to pay interest on business checking accounts hurts all sectors of the economy, especially small businesses.  Responding to this prohibition, some banks developed convoluted arrangements to sweep sterile checking account funds on a daily basis to money market deposit accounts or other earnings instruments.  These "sweep" systems are cumbersome and costly for smaller banks and savings institutions to operate.  The complexity and expense of these systems impede the ability of smaller depository institutions to compete for business checking accounts.  Consequently, small businesses are unable to take advantage of the benefits of efficient use of funds often available to larger and more sophisticated businesses.  However, even large businesses which are able to employ balances profitably would welcome the flexibility and simplicity in funds management that would follow the elimination of Regulation Q.

Some have argued that implementation of systems and procedures to provide for business checking interest would be a difficult and costly process, requiring several years for the transition.  Since banks are in the business of calculating interest, and in fact compute earnings credit for business accounts now, we believe that the transition would be relatively easy, and require no more than 90 days.  Also, the legislation does not mandate but allows the option of paying interest — let those banks that choose to pay interest move swiftly to meet market needs. 

Promptly ending the prohibition against the payment of interest on business checking accounts will not stop cash management tools like sweeps.  However, the end of Regulation Q will eliminate the artificial environment that created the sweeps market in the first place.  Products should not owe their existence to government protection through price regulation (i.e., no interest on business checking accounts).  Rather, they need to demonstrate their worth in a free market as another option a customer may choose.  We believe that a simple straightforward and timely repeal of Regulation Q is the best solution for all market participants. 

We thank you for your leadership in the effort to eliminate anti-competitive and obsolete regulatory devices like Regulation Q.

Sincerely,