Two recent articles indicate that next week's repeal of Regulation Q's ban on interest for business checking accounts shouldn't have a big impact on the money markets, at least for now. On Tuesday, Treasury & Risk magazine wrote, "Response Tepid as Reg Q Repeal Nears: Low rates to tamp demand for interest-bearing accounts for now, saying, "As mandated by the Dodd-Frank Act, on July 21 Reg Q, which has prohibited banks from paying interest on business checking accounts since the 1930s, will disappear. But thanks to low interest rates and unlimited deposit insurance available on non-interest-bearing accounts until 2012, banks expect don't expect a huge dash for interest-bearing accounts."
The article comments, "Citi plans to offer interest-bearing accounts to business customers, and expects no more than 1% to 2% of corporate and institutional balances to shift to interest-bearing demand deposit accounts, says Michael Berkowitz, head of North American liquidity, investments and information services at Citi Global Transaction Services." Berkowitz tells T&R, "There are already so many investment options out there that enable a client to get a return on their balances."
It explains, "Many companies are already compensated for the balances they hold in business checking accounts with an earnings credit rate (ECR) that they use to offset treasury management fees. Companies can also use sweep accounts that move excess funds into a separate account where they're invested. Bank of America will also create a new product to take advantage of the end of Reg Q, but "it will likely not offer an aggressive rate" given the cost to the bank to create the instrument, says Dub Newman, head of global treasury sales at Bank of America Merrill Lynch."
The Treasury & Risk piece adds, "Newman also cites the unlimited FDIC insurance that is available through the end of 2012 on all accounts that don't pay interest." "To the degree that a client is focused on that, particularly in a low-rate environment where they're not seeing a lot of return regardless of the instrument they're in, that extra safety of FDIC [coverage] has a value to it," he tells the magazine.
Also, The Wall Street Journal's new "CFO Report" featured a piece Wednesday entitled, "Companies Show Little Interest in Interest. It says, "U.S. companies have billions in their checking accounts, but most will forego the chance to earn interest on those balances in order to keep government guarantees on their money in place. Companies can start earning interest on new accounts banks are rolling out with the July 21 expiry of Regulation Q, a Depression-era ban on interest-bearing corporate checking accounts. But with that opportunity comes risk most companies apparently aren't willing to bear: giving up a blanket guarantee on their money from the Federal Deposit Insurance Corporation. Low interest rates makes the trade off particularly unappealing."
CFO Journal says, "Phil Lindow, head of liquidity in JP Morgan's treasury and securities services group, said he didn't expect many companies to leap at the chance to get into interest bearing accounts, given general economic uncertainty. The decision to leave money on the table highlights how risk averse U.S. companies remain years after the worst of the financial crisis -- and well into a period of record profitability. The new checking account options also bring attention to a little known corner of the corporate cash management world. In lieu of the interest they were banned from paying under Regulation Q, over the years banks have developed so-called earnings credit rate accounts. These pay credits based on the size of deposits that can be used to reduce the transaction fees that banks normally charge for basic services such as wire transfers or check processing."
The blog adds, "Such accounts currently offer corporations anywhere between 0.20% and 0.65% in credits based on the size of their deposits, depending on the account and the institution. [AMC Theatre's Terry] Crawford said that he's seen rates between 0.30% and 0.65% at the banks he deals with. While low, the rates are still much higher than the 0.03% yield of three-month Treasuries, or the 0.13% company would earn by investing in three-month commercial paper. Making the accounts more attractive: the FDIC offers a 100% guarantee on all deposits in non-interest bearing accounts. The guarantee was first offered under the agency's temporary liquidity guarantee program in November 2008 to protect banks who were worried that companies would begin pulling money out of their accounts. First slated to expire at the beginning of 2010, protection was extended by the Dodd-Frank financial system reform act to Dec. 31, 2012."
Finally, the article says, "Companies had about $543 billion in ECR checking accounts as of October 2010, according to consulting firm Treasury Strategies Inc. The accounts are an important source of core deposits for the banks, which also see them as a way to strengthen relationships with businesses. Being at the center of companies' cash management efforts allows banks the chance to provide more lucrative services, including M&A and capital markets advice."
