Interest on Business Checking

STATUS
On May 24, the House of Representatives passed the Business Checking Freedom Act of 2005 (H.R. 1224). The bill would repeal the decades-old prohibition on the payment of interest on demand deposits imposed by the Fed’s Regulation Q in 1933. Similar business checking provisions were included in a regulatory relief bill that passed the House last year. The House bill allows Industrial Loan Companies (ILC) to offer NOW accounts to its business customers, which is an expansion of current ILC authority. On July 29, Senator Hagel (R-NE) introduced “Interest on Business Checking Act of 2005” (S. 1586). The controversy over the expansion of ILC authority has held up passage of the legislation in the Senate. Earlier this year, Wal-Mart submitted an application with the Utah Department of Financial Institutions and the FDIC to operate an ILC. Several groups, including some banking organizations and labor unions are opposing Wal-Mart’s application.

BACKGROUND
Originally enacted in 1933, this outdated banking law (implemented by Federal Reserve Board Regulation Q) prohibits banks from paying interest on business checking accounts, which makes commercial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. This has hampered the ability of America’s businesses, and particularly smaller businesses, to make effective use of funds on deposit in banks. Prohibitions on paying interest on personal accounts ended years ago.

AFP's ACTIONS
AFP supports the elimination of Regulation Q. Its elimination would enable interest payments to businesses, and simplify cash management for larger companies.

On April 26, AFP sent letters to the House Financial Services Committee urging passage of the Business Checking Freedom Act of 2005. AFP supports the elimination of Regulation Q because it would enable interest payments to businesses, and simplify cash management for larger companies. The AFP Government Relations Committee’s Financial Markets Task Force also expressed its support during a March meeting with Senator Crapo’s staff.

As part of a coalition, which includes America’s Community Banks (ACB), National Federation of Independent Businesses (NFIB) and the U.S. Chamber of Commerce, AFP has communicated its support of repealing Regulation Q to Congress. Specifically, AFP has written support letters to House Financial Service Committee members, the entire House of Representatives, and continues to meet with key congressional staff.