The Honorable John J. LaFalce
2310 Rayburn House Office Building
Washington, DC 20515-3229

Dear Congressman LaFalce:

The Association for Financial Professionals (AFP) strongly urges that the House Banking Committee approve the "Business Checking Modernization Act" (H.R. 4067) recently introduced by Rep. Metcalf (R-WA) and Chairman Jim Leach (R-IA). This bill would eliminate 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 This outdated banking law prohibits banks from paying interest on business checking accounts. Restrictions on these types of accounts also make commercial banks less competitive in serving the financial needs of many business customers.

AFP represents nearly 15,000 financial professionals who on behalf of over 5,000 corporations and other organizations are significant users of the nation's financial system. Our members have responsibility for banking relationships, investments, pension management, credit, payments and cash management. They have an active interest in the proposed changes to Regulation Q, contained in H.R. 4067.

The inability of depository institutions to pay interest on business accounts hurts all sectors of the economy but especially small businesses. Some banks have 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. This impedes the ability of smaller depository institutions to compete for business checking accounts and for small businesses to obtain the benefits of efficient use of funds often available to larger and more sophisticated businesses. However, even large businesses which have developed means to employ balances profitably would welcome the flexibility and simplicity in funds management which would follow the elimination of Regulation Q.

Sweep accounts remove funds from demand deposit accounts which must be backed by reserves held at the Federal Reserve. "Sweeps" are not subject to reserve requirements which, according to the Federal Reserve, constitute an important factor in measuring the money supply and controlling monetary policy.

Federal regulators support legislative changes in this area. 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 that they believed that the 1933 statutory prohibition against payment of interest on business checking accounts "no longer serves a public purpose."

AFP appreciates your sponsorship of H.R. 4067. This modernization of outdated practices will enable banks to pay interest on checking accounts, reducing reliance on artificial devices like "sweep" accounts used to earn interest on sterile deposits. We encourage you to expedite approval of H.R. 4067, as another demonstration of your desire to modernize banking practices.

Sincerely,

cc:
Minority Members
Committee on Banking and Financial Services