Last Thursday, Treasury Strategies issued a "Client Advisory" entitled, "Interest on Business Checking Moves Closer to Passage in U.S.." The release says, "A provision was approved by the U.S. House and Senate financial reform conferees yesterday, which allows banks to pay interest on business demand deposit accounts for the first time since the Great Depression."
It explains, "Treasury Strategies has been following Regulation Q for several years. Its most recent incarnation is Rep. Scott Murphy's Business Checking Fairness Act which was appended to the Wall Street Reform & Consumer Protection Act of 2009. This is an interesting contradiction. A proposed solution to the current crisis is to allow interest on business checking, whereas a regulatory outcome of the Great Depression was to prohibit such interest."
Treasury Strategies synopsis says, "Commercial Banks will face higher cost of funds as they begin paying interest. However, they will be better able to compete for deposits through interest payments and FDIC guarantees under TAG. Higher cost of funds and deposit insurance premiums will probably be recouped through higher fees on transaction services. The challenge for banks is to carefully calibrate rate structures and transaction fees such that they attract a customer mix that optimizes their return on capital."
They add, "Fund Companies will face increased rate competition from the banking sector. Their challenge will be to convince customers that the resulting higher banking service charges will offset interest paid. They will need to position their funds as either yield-enhanced or safer than bank deposits -- a task made tougher by recent changes to rule 2a-7 and FDIC insurance. However, fund companies can point out to regulators that if customers exit funds and move into the banking system, 'too big to fail' banks will become even larger."
Finally, the release says, "Corporate Treasurers will need to sort through several changes that will result from the RegQ repeal. In the short run, they will experience a volatile market, characterized by new products, new rate structures and new fees, as well as promotional pricing. Credit worthiness of the institution becomes a larger issue. It's likely that companies will need to evaluate new and tiered rate structures, earnings credits, transaction fees, deposit insurance pass-thoroughs, short-term investments, and sweep accounts. These changes will impact companies differently depending on their balance levels, transaction volume, liquidity needs and financial situation."
