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	<title> - PROPOSALS TO PERMIT PAYMENT OF INTEREST ON BUSINESS CHECKING ACCOUNTS AND STERILE RESERVES MAINTAINED AT FEDERAL RESERVE BANKS</title>
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	[House Hearing, 107 Congress]
	[From the U.S. Government Publishing Office]



	PROPOSALS TO PERMIT PAYMENT OF
	INTEREST ON BUSINESS CHECKING ACCOUNTS
	AND STERILE RESERVES MAINTAINED AT
	FEDERAL RESERVE BANKS

	=======================================================================

	HEARING

	BEFORE THE

	SUBCOMMITTEE ON
	FINANCIAL INSTITUTIONS AND CONSUMER CREDIT

	OF THE

	COMMITTEE ON FINANCIAL SERVICES

	U.S. HOUSE OF REPRESENTATIVES

	ONE HUNDRED SEVENTH CONGRESS

	FIRST SESSION

	__________

	MARCH 13, 2001

	__________

	Printed for the use of the Committee on Financial Services

	Serial No. 107-4



	U.S. GOVERNMENT PRINTING OFFICE
	71-148 WASHINGTON : 2001


	_______________________________________________________________________
	For sale by the Superintendent of Documents, U.S. Government Printing
	Office
	Internet: bookstore.gpo.gov Phone: (202) 512-1800 Fax: (202) 512-2550
	Mail: Stop SSOP, Washington DC 20402-0001


	HOUSE COMMITTEE ON FINANCIAL SERVICES

	MICHAEL G. OXLEY, Ohio, Chairman

	JAMES A. LEACH, Iowa JOHN J. LaFALCE, New York
	MARGE ROUKEMA, New Jersey, Vice BARNEY FRANK, Massachusetts
	Chair PAUL E. KANJORSKI, Pennsylvania
	DOUG BEREUTER, Nebraska MAXINE WATERS, California
	RICHARD H. BAKER, Louisiana CAROLYN B. MALONEY, New York
	SPENCER BACHUS, Alabama LUIS V. GUTIERREZ, Illinois
	MICHAEL N. CASTLE, Delaware NYDIA M. VELAZQUEZ, New York
	PETER T. KING, New York MELVIN L. WATT, North Carolina
	EDWARD R. ROYCE, California GARY L. ACKERMAN, New York
	FRANK D. LUCAS, Oklahoma KEN BENTSEN, Texas
	ROBERT W. NEY, Ohio JAMES H. MALONEY, Connecticut
	BOB BARR, Georgia DARLENE HOOLEY, Oregon
	SUE W. KELLY, New York JULIA CARSON, Indiana
	RON PAUL, Texas BRAD SHERMAN, California
	PAUL E. GILLMOR, Ohio MAX SANDLIN, Texas
	CHRISTOPHER COX, California GREGORY W. MEEKS, New York
	DAVE WELDON, Florida BARBARA LEE, California
	JIM RYUN, Kansas FRANK MASCARA, Pennsylvania
	BOB RILEY, Alabama JAY INSLEE, Washington
	STEVEN C. LaTOURETTE, Ohio JANICE D. SCHAKOWSKY, Illinois
	DONALD A. MANZULLO, Illinois DENNIS MOORE, Kansas
	WALTER B. JONES, North Carolina CHARLES A. GONZALEZ, Texas
	DOUG OSE, California STEPHANIE TUBBS JONES, Ohio
	JUDY BIGGERT, Illinois MICHAEL E. CAPUANO, Massachusetts
	MARK GREEN, Wisconsin HAROLD E. FORD Jr., Tennessee
	PATRICK J. TOOMEY, Pennsylvania RUBEN HINOJOSA, Texas
	CHRISTOPHER SHAYS, Connecticut KEN LUCAS, Kentucky
	JOHN B. SHADEGG, Arizona RONNIE SHOWS, Mississippi
	VITO FOSSELLA, New York JOSEPH CROWLEY, New York
	GARY G. MILLER, California WILLIAM LACY CLAY, Missouri
	ERIC CANTOR, Virginia STEVE ISRAEL, New York
	FELIX J. GRUCCI, Jr., New York MIKE ROSS, Arizona
	MELISSA A. HART, Pennsylvania
	SHELLEY MOORE CAPITO, West Virginia BERNARD SANDERS, Vermont
	MIKE FERGUSON, New Jersey
	MIKE ROGERS, Michigan
	PATRICK J. TIBERI, Ohio

	Terry Haines, Chief Counsel and Staff Director
	Subcommittee on Financial Institutions and Consumer Credit

	SPENCER BACHUS, Alabama, Chairman

	DAVE WELDON, Florida, Vice Chairman MAXINE WATERS, California
	MARGE ROUKEMA, New Jersey CAROLYN B. MALONEY, New York
	DOUG BEREUTER, Nebraska MELVIN L. WATT, North Carolina
	RICHARD H. BAKER, Louisiana GARY L. ACKERMAN, New York
	MICHAEL N. CASTLE, Delaware KEN BENTSEN, Texas
	EDWARD R. ROYCE, California BRAD SHERMAN, California
	FRANK D. LUCAS, Oklahoma MAX SANDLIN, Texas
	BOB BARR, Georgia GREGORY W. MEEKS, New York
	SUE W. KELLY, New York LUIS V. GUTIERREZ, Illinois
	PAUL E. GILLMOR, Ohio FRANK MASCARA, Pennsylvania
	JIM RYUN, Kansas DENNIS MOORE, Kansas
	BOB RILEY, Alabama CHARLES A. GONZALEZ, Texas
	STEVEN C. LaTOURETTE, Ohio PAUL E. KANJORSKI, Pennsylvania
	DONALD A. MANZULLO, Illinois JAMES H. MALONEY, Connecticut
	WALTER B. JONES, North Carolina DARLENE HOOLEY, Oregon
	JUDY BIGGERT, Illinois JULIA CARSON, Indiana
	PATRICK J. TOOMEY, Pennsylvania BARBARA LEE, California
	ERIC CANTOR, Virginia HAROLD E. FORD, Jr., Tennessee
	FELIX J. GRUCCI, Jr, New York RUBEN HINOJOSA, Texas
	MELISSA A. HART, Pennsylvania KEN LUCAS, Kentucky
	SHELLEY MOORE CAPITO, West Virginia RONNIE SHOWS, Mississippi
	MIKE FERGUSON, New Jersey JOSEPH CROWLEY, New York
	MIKE ROGERS, Michigan
	PATRICK J. TIBERI, Ohio


	C O N T E N T S

	----------
	Page
	Hearing held on:
	March 13, 2001............................................... 1
	Appendix:
	March 13, 2001............................................... 41

	WITNESSES
	Tuesday, March 13, 2001

	Bochnowski, David A., Chairman and Chief Executive Officer,
	Peoples Bank, SB, Munster, IN, Chairman, America's Community
	Bankers........................................................ 26
	Gulledge, Robert I., Chairman, President and Chief Executive
	Officer,
	Citizens Bank, Inc., Robertsdale, AL, on behalf of the
	Independent Community Bankers of America....................... 29
	Hammond, Donald V., Acting Under Secretary for Domestic Finance,
	Department of the Treasury..................................... 8
	Jennings, Thomas P., Senior Vice President and General Counsel,
	First
	Virginia Banks, Inc., on behalf of The Financial Services
	Roundtable..................................................... 28
	Meyer, Hon. Laurence H., Member, Board of Governors, Federal
	Reserve System................................................. 7
	Smith, James E., Chairman and Chief Executive Officer, Citizens
	Union State Bank and Trust, Clinton, MI, President-elect,
	American Bankers Association................................... 25

	APPENDIX

	Prepared statements:
	Bachus, Hon. Spencer......................................... 42
	Kelly, Hon. Sue.............................................. 44
	Bochnowski, David A.......................................... 69
	Gulledge, Robert I........................................... 80
	Hammond, Donald V............................................ 56
	Jennings, Thomas P........................................... 75
	Meyer, Hon. Laurence H....................................... 45
	Smith, James E............................................... 60

	Additional Material Submitted for the Record

	Association for Financial Professionals, prepared statement...... 85
	Independent Community Bankers, prepared statement................ 92
	National Federation of Independent Business, prepared statement.. 130
	U.S. Chamber of Commerce, prepared statement..................... 133


	PROPOSALS TO PERMIT PAYMENT OF
	INTEREST ON BUSINESS CHECKING
	ACCOUNTS AND STERILE RESERVES
	MAINTAINED AT FEDERAL RESERVE BANKS

	----------


	TUESDAY, MARCH 13, 2001

	U.S. House of Representatives,
	Subcommittee on Financial Institutions
	and Consumer Credit,
	Committee on Financial Services,
	Washington, DC.
	The subcommittee met, pursuant to call, at 2:10 p.m., in
	room 2128, Rayburn House Office Building, Hon. Spencer Bachus,
	[chairman of the subcommittee], presiding.
	Present: Chairman Bachus; Representatives Weldon, Bereuter,
	Lucas of Oklahoma, Kelly, Manzullo, Biggert, Toomey, Cantor,
	Hart, Capito, Ferguson, Rogers, Tiberi, Waters, Watt, Bentsen,
	Carson and Shows.
	Chairman Bachus. The hearing of the Subcommittee on
	Financial Institutions and Consumer Credit will come to order.
	Without objection, all Members' opening statements will be made
	a part of the record.
	I now am going to recognize myself for an opening
	statement, and then the subcommittee Chairs and Ranking Members
	will make opening statements, which will be limited to five
	minutes, and the other Members will be recognized for three
	minutes for opening statements.
	Today the subcommittee convenes to consider two separate
	but related proposals. One, repealing the current ban on the
	payment of interest on business checking accounts; and, two,
	permitting interest to be paid on funds that banks and other
	depository institutions are required by law to maintain at the
	Federal Reserve banks. The eyes of most Americans may glaze
	over at the mention of these two issues, yet both are of
	critical importance as the subcommittee seeks to continue the
	work of modernizing our financial system, which we began last
	year with the enactment of Gramm-Leach-Bliley.
	Like many of the provisions repealed by Gramm-Leach-Bliley,
	the ban on paying interest on business checking accounts is a
	Depression-era prohibition. Many think it has long since
	outlived its usefulness, and I myself have that opinion. When
	originally enacted in 1933, the ban was designed to protect
	small rural banks from having to compete for deposits with
	larger institutions based upon what they could offer customers
	as far as a higher interest rate. That was valid at one time.
	This policy justification is simply no longer relevant in a
	competitive environment where banks must compete not merely
	against each other, but against a host of non-bank financial
	firms offering a wide range of interest-bearing products.
	The prohibition on paying interest to business checking
	customers is one of the many factors contributing to a
	liquidity crunch for our Nation's small community banks. Faced
	in many cases with declining deposits coupled with strong
	demand for loans in their communities, small banks are caught
	in a vise, and are increasingly forced to seek funding from the
	Federal Home Loan Banking System and other alternative sources.
	Unable to earn interest on their checking account balances,
	small businesses in areas served by community banks have a
	powerful bottom-line incentive to take their business
	elsewhere. Not surprisingly, many choose to do exactly that,
	opening cash management accounts at brokerage firms or parking
	their assets in other interest-bearing vehicles outside the
	banking system.
	Repealing the ban on interest on business checking accounts
	will allow banks to compete for such deposits on a more level
	playing field and promote the development of bank products and
	services geared toward a corporate clientele that is ill-served
	by the current prohibition.
	The second issue we will address today is somewhat the flip
	side of the first issue. Under current law, depository
	institutions are required to hold deposits at the Federal
	Reserve banks against transaction accounts maintained by the
	institution's customers. No interest is paid on these reserves.
	Banks have argued, persuasively in my view, that if the law is
	changed to permit interest to be paid on business checking
	accounts, a corresponding change should be made to authorize
	payment of interest on reserves that banks are required, by
	law, to maintain at the Federal Reserve banks.
	In addition, as we will hear in a moment from Federal
	Reserve Governor Meyer, I would anticipate that he will testify
	that failure to act in this area not only disadvantages banks,
	but it may at some point begin to have adverse consequences on
	the Fed's ability to conduct its monetary policy.
	Last year, the House passed legislation that would have
	repealed the prohibition on interest payments on business
	checking accounts, but the bill died in the Senate. Similarly,
	this subcommittee favorably reported legislation to authorize
	the Federal Reserve to pay interest on statutorily required
	reserves, but the full House never took up the bill. Two
	respected Members of this subcommittee, Mrs. Kelly and Mr.
	Toomey, have taken the lead this year in reintroducing these
	important proposals. I look forward to working with them and
	with Chairman Oxley to make sure that this Congress succeeds
	where past efforts have failed.
	[The prepared statement of Hon. Spencer Bachus can be found
	on page 42 in the appendix.]
	Before recognizing Ms. Waters for an opening statement, let
	me welcome all Members to the hearing and extend a special
	welcome to Bob Gulledge, who is President of the Citizens Bank
	in my home State of Alabama, who last week was elected
	President of the Independent Community Bankers of America. I
	congratulate Bob on the appointment. We know you will serve
	Alabama well.
	Let me recognize Ms. Waters for any opening statement she
	would like to make.
	Ms. Waters. Thank you very much, Mr. Chairman. I think you
	framed the issue quite well in your opening comments, and I do
	believe, because we have heard these issues before in this
	subcommittee that there probably is a consensus in this
	subcommittee of support for both issues.
	I am interested in two aspects of these issues that have
	not been discussed in any thorough way. One is how much does it
	cost? Is this going to be a cost to the Treasury; if so, how
	much and how is it calculated? And then I think we got into
	discussion once before on how will the customers benefit from
	the interest that banks would receive if, in fact, we would
	repeal existing law. I am going to be looking for comments and
	raising questions in those two areas and would be very
	appreciative for explanations that would help me to resolve
	some of the questions that I have in these two areas. And I
	would also like to know from the Feds how it helps them with
	monetary policy to be able to pay interest on what is, I guess,
	known as the sterile accounts.
	So with that, Mr. Chairman, I will yield back the balance
	of my time.
	Chairman Bachus. Thank you, Ms. Waters.
	At this time, Mr. Toomey, do you wish to make an opening
	statement?
	Mr. Toomey. Thank you, Mr. Chairman, and I would like to
	commend you for having this hearing so promptly and moving on
	this legislation. As you pointed out, last year we had a huge
	success when we passed the Gramm-Leach-Bliley Act, repealed
	archaic Depression-era banking laws, and here we are able to
	address a further step forward in repealing what many of us
	believe is an out-of-date portion of that Banking Act of 1933,
	the prohibition on paying interest on business checking
	accounts.
	It is just about time that we allowed regulation to catch
	up with the marketplace. The reality is that financial
	institutions with the wherewithal have maneuvered their way
	around this prohibition quite legally and appropriately, but it
	is a cumbersome process. They offer repos, implied in the form
	of services to customers, credits against bank charges. In
	fact, a quick search on the Internet, and we discovered
	numerous listings for banks offering, quote, ``interest on
	business checking,'' unquote.
	Unfortunately, of course, some banks cannot afford to
	purchase the software and the technology and the systems needed
	to circumvent these rules, and in any case it is very
	inefficient for banks to have to waste time and resources in
	inventing ways to get around unnecessary and inappropriate
	regulation.
	So now it is well past time to repeal this ban and allow
	banks to develop products and services that will serve their
	customers, not the Government; allow businesses both large and
	small to have wider array of choices with their cash; allow
	small banks more tools to help them increase their core
	deposits, and frankly everyone will benefit from a repeal from
	unnecessary level of regulation.
	Early today I introduced the Business Checking Freedom Act
	which does repeal the prohibition on paying interest on
	business checking with a one year phase-in period. I would like
	to thank the other sponsors of the legislation, Mr. Kanjorski,
	Mrs. Roukema, Mrs. Hooley, Mr. Ney, Mr. Gonzalez, and Mrs.
	Capito. I took forward to the testimony of the witness. Thank
	you, Mr. Chairman.
	Chairman Bachus. Ms. Carson.
	Ms. Carson. Thank you very much, Mr. Chairman, for moving
	expeditiously on this issue concerning interest of the business
	demand deposits and permit payments of interest on sterile
	reserves. I could only replicate what has already been said
	very eloquently, so let me suggest then that I would use my
	limited time to say that we are honored today to have Mr. David
	Bochnowski from Munster, Indiana, the fine State of Indiana.
	For more than two decades, Congress has considered legislation
	that could repeal the ban on payment of interest or business
	demand deposits, and now we are here today to hopefully move
	forward in addressing an archaic rule. It is my firm belief
	that with people such as David Bochnowski present here today,
	that we will be able to take further steps toward resolving the
	issue.
	Most of you, no doubt, know that Mr. Bochnowski currently
	serves as Chairman of the America's Community Bankers, and has
	served as its director since 1994. Yet this position represents
	only one chapter of a life dedicated to public service. This
	gentleman from my State began his career as a special assistant
	to my good friend, who was our senator at that time, Senator
	Birch Bayh. Mr. Bochnowski later served as a law clerk for the
	U.S. district court in Indiana's southern district. He served
	as a trustee for Munster Community Hospital, as a commissioner
	for the Chicago Gary Airport Authority, and also served his
	country with valor in Vietnam. So it is a pleasure, Mr.
	Chairman, and Members of this subcommittee, to introduce to you
	my friend, Mr. Bochnowski here, who is scheduled for the second
	panel, the discussion. I yield back.
	Chairman Bachus. Thank you, Ms. Carson.
	Ms. Kelly, do you wish to make an opening statement?
	Mrs. Kelly. Thank you, Mr. Chairman. This afternoon, as I
	was walking over here, I heard the signs of spring. I heard the
	birds coming back and I noticed the buds emerging on the trees,
	and now I see Governor Meyer here before our subcommittee to
	talk about interest on business checking accounts, and sterile
	reserves, and that is an additional true signal that spring is
	here, don't you think?
	So Governor Meyer, we welcome you and thank you very much
	for coming back to talk with us about this. I want to quickly
	thank Chairman Bachus and Ranking Member Waters for agreeing to
	hold this hearing today. These issues are very important and
	they relate to another growing issue that we would hold
	hearings on in this Congress, and that is the ability of
	community banks to attract sufficient deposits to ensure safe
	and sound operation of the banks.
	The question I would like to explore with the witnesses
	today is how will the repeal of the prohibition of paying
	interest on corporate demand deposits affect the bottom line of
	the banks? I have introduced H.R. 974, the Small Business
	Interest Checking Account Act of 2001, and a Senate companion
	has been introduced today by Senator Chuck Schumer. This
	legislation contains three parts: first, it gives banks the
	authority to increase their sweep activities from the current
	six times a month to 24; second, it authorizes the Federal
	Reserve to pay interest on reserves; and third, it gives the
	Federal Reserve greater flexibility in setting reserve
	requirements. In crafting this legislation, I have consulted
	with the Federal Reserve, the Treasury Department, and the
	groups before us today to ensure that this legislation will be
	acceptable by all. In addition, Congressmen Toomey and
	Kanjorski have introduced legislation to repeal the current
	prohibition on business checking accounts.
	As has occurred in the past year, we anticipate these
	initiatives to be merged when we mark up the legislation, and
	in the course of the length of the transition period, these are
	going to be the biggest issues. So I look forward to discussing
	these issues with the distinguished witnesses that we have
	today, that have taken their time to join us. And I yield back
	the balance of my time.
	[The prepared statement of Hon. Sue W. Kelly can be found
	on page 44 in the appendix.]
	Chairman Bachus. Thank you, Mrs. Kelly.
	Mr. Cantor. I will be sure to say to all Members, please
	speak in the mike. That wasn't intended for you, Mr. Cantor.
	Mr. Cantor. I am sure I need no help. Thank you. I have no
	formal opening statement. I would like to extend my personal
	welcome to the panel witnesses, especially to Mr. Thomas P.
	Jennings, the Senior Vice President and General Counsel of
	First Virginia Bank from my home State, whose bank has a strong
	presence in the 7th District of Virginia in Richmond. Welcome,
	Mr. Jennings.
	Chairman Bachus. Thank you. Do we have anybody here from
	Missouri? Maybe we could recognize him next.
	Mrs. Hart from Pennsylvania.
	Ms. Hart. Thank you, Mr. Chairman. I also don't have any
	formal opening statement. I am pleased for the opportunity to
	be here at the hearing today and hear from such a distinguished
	panel on the issue. As a freshman, I am not as experienced as
	some of the others on some of the issues nationally when it
	comes to banking and financial services. However, I was very
	much involved on a State level as a State Senator, and I will
	be very much interested to see the private sector panel discuss
	these issues and answer some of the questions we have.
	My main concern is basically how little, and normally how
	little can Government become involved in the decisions made by
	financial institutions without causing them harm. Because my
	angle is basically that if we can regulate less, I would prefer
	to do it. However some questions have been raised to me from
	some of those involved on different ends of banking and
	different types of banking and the communities I represent
	about whether or not this is a good idea, and if it is a good
	idea at this time, I will be interested in hearing.
	So for any of the--especially panel two that is here, I
	will be very interested in hearing your response to those
	questions. And just general questions of interest I think to
	the Members of the subcommittee. Mr. Chairman I am honored
	obviously to be a part of this subcommittee and pleased to be
	here, and also not to discount panel one, but I will also be
	interesting in hearing really directly the amount of control
	they believe that they need to have when it comes to banks,
	especially making decisions about interest. Thanks, Mr.
	Chairman.
	Chairman Bachus. Mr. Bentsen.
	Mr. Bentsen. Thank you, Mr. Chairman. I would thank you for
	holding this hearing. I hoped we would have disposed of this
	issue in the last Congress, but we didn't, and I would hope we
	can dispose of it in this Congress rather quickly. It seems, at
	least on this side of the street, we are generally in
	agreement, so I hope we are able to move quickly on this. I
	yield back the balance of my time.
	Chairman Bachus. Thank you, Mr. Bentsen.
	Chairman Oxley, you are recognized at this time.
	Mr. Oxley. My opening statement is making its way up to the
	podium as I speak, and so I would defer to other Members with
	an opening statement until such time as it may arrive, and I
	think you would rather have that than me making it up on the
	fly.
	Chairman Bachus. And we earlier said, without objection, we
	would make those statements part of the record without the
	spoken word.
	Mr. Oxley. That would be a brilliant idea, and I would
	agree with that and ask unanimous consent that we do the same.
	Chairman Bachus. So moved. Thank you, Mr. Chairman.
	Mr. Watt.
	Mr. Watt. Thank you, Mr. Chairman. I will be brief. I have
	expressed my opinions about this in the last term of Congress,
	and have been a long supporter of not having money sitting
	around doing nothing, either in checking accounts or sterile
	reserves or otherwise. And I hope we are going to do something
	in addition to having hearings on it this time, and actually
	move some bill that will accomplish those objectives. Thank
	you.
	Chairman Bachus. Thank you, Mr. Watt. Are there other
	Members of the subcommittee who would like to make opening
	statements? If not, Chairman Oxley.
	Mr. Oxley. Mr. Chairman, I think your initial idea was good
	that the statement be made part of the record. I just want to
	commend you on holding this hearing. This is a very important
	issue. And I appreciate the participation of the Members,
	particularly the Members who have been through this issue
	before, the gentleman from North Carolina, Mr. Watt, yourself
	and others, Mrs. Kelly, and we look forward to the testimony
	from the witnesses and hopefully a strong bipartisan support
	for this legislation. I yield back.
	Chairman Bachus. I thank you, Mr. Chairman. We did mention,
	as you referred to, that Mrs. Kelly and Mr. Toomey had actually
	sponsored the legislation last year and Mr. Watt, I recognize
	your role. At this time we will recognize the first panel made
	up of Governor Laurence Meyer, Federal Reserve Board Governor
	of the Federal Reserve System, who has been before this
	subcommittee four years in a row to testify about this subject.
	So we would expect a pretty smooth statement, I would think.
	And then, Acting Under Secretary of Domestic Finance for the
	Department of the Treasury, Donald Hammond. Secretary Hammond,
	we welcome you and Governor Meyer. And Governor Meyer, if you
	would like to lead off.

	STATEMENT OF HON. LAURENCE H. MEYER, MEMBER, BOARD OF
	GOVERNORS, FEDERAL RESERVE SYSTEM

	Mr. Meyer. Thank you. Mr. Chairman, Representative Waters,
	and Members of the subcommittee. The Federal Reserve Board
	continues to strongly support legislative proposals to
	authorize payment of interest on demand deposits and interests
	on balances held by depository institutions at Reserve Banks.
	As we have previously testified, unnecessary restrictions on
	the payment on interest on demand deposits and balances held by
	Reserve Banks distort market prices and lead to economically
	wasteful efforts to circumvent these restrictions.
	Authorization of interest on balances at Reserve Banks would
	also help to ensure the continued effectiveness of current
	procedures for implementing monetary policy.
	The Board also supports obtaining an increased flexibility
	in setting reserve requirements, which would allow it to
	consider reducing the regulatory burden on depositories to the
	extent consistent with the effective implementation of monetary
	policy. As you know, the Federal Open Market Committee
	formulates monetary policy by setting a target for the
	overnight Federal Funds rate, the interest rate on loans
	between depository institutions of balances held at their
	accounts at Reserve Banks.
	As we have previously testified, the issue of potential
	volatility in the Funds rate has arisen in recent years because
	of substantial declines in required reserve balances owing to
	the implementation of automated sweep programs from reservable
	checking accounts to savings accounts that are not subject to
	reserve requirements. Nevertheless, despite a much lower level
	of required reserve balances, no trend increase in volatility
	has been observed to date. In part, this stability reflects the
	increasingly important role of contractual clearing balances.
	These clearing balances are the amounts that depositories
	contract to hold in their accounts at the Federal Reserve in
	addition to funds that will meet reserve requirements.
	Contractual clearing balances earn implicit interest in the
	form of credits that may offset charges for Federal Reserve
	services, such as check clearing.
	To prevent the sum of required reserves and contractual
	clearing balances from falling even lower, the Federal Reserve
	has sought authorization to pay interest on required reserve
	balances and to pay explicit interest on contractual clearing
	balances. Such interest payments could help maintain the level
	of these balances and forestall any potential increase in the
	volatility of interest rates. Authorization of increased
	flexibility in setting reserve requirements would also be
	desirable as it would allow the Federal Reserve to consider
	exploring the possibility of reducing reserve requirements
	below the minimum levels currently allowed by law. Such
	reductions would further remove incentives for wasteful reserve
	avoidance practices.
	To ensure the continued effective implementation of
	monetary policy with lower reserve requirements, however, we
	would need authority to pay interest on contractual clearing
	balances. Indeed, while the best outcome would be an
	authorization to pay interest on any balances held at the
	Federal Reserve, if the budget costs of interest on required
	reserve balances continues to inhibit its passage we would
	support a separate authorization of interest on contractual
	clearing balances which would have essentially no budgetary
	cost.
	Another legislative proposal that would improve the
	efficiency of our financial sector is elimination of the
	prohibition of interest on demand deposits. This prohibition
	distorts the pricing of transaction deposits and associated
	bank services. Some small businesses receive no interest on
	their deposits. In competing for the liquid assets of other
	businesses, banks set up complicated procedures to pay implicit
	interest on compensating balance accounts. Banks also spend
	resources and charge fees for sweeping the excess demand
	deposits of larger businesses into money market investments on
	a nightly basis. Such expenses would be unnecessary if interest
	were allowed to be paid on both demand deposits and reserve
	balances that must be held against them.
	In summary, the Federal Reserve Board strongly supports
	legislative proposals to authorize the payment of interest on
	demand deposits and on balances held by depository institutions
	at Reserve Banks, as well as increased flexibility in the
	setting of reserve requirements. We believe these steps would
	improve the efficiency of our financial sector and better
	ensure the efficient conduct of monetary policy in the future.
	Thank you.
	[The prepared statement of Hon. Laurence H. Meyer can be
	found on page 45 in the appendix.]
	Chairman Bachus. Thank you.
	Mr. Hammond. Let me say to both witnesses that without
	objection, your written statements will be made a part of the
	record.

	STATEMENT OF DONALD V. HAMMOND, ACTING UNDER SECRETARY FOR
	DOMESTIC FINANCE, DEPARTMENT OF THE TREASURY

	Mr. Hammond. Thank you, Mr. Chairman, Chairman Bachus,
	Representative Waters, Members of the subcommittee. I
	appreciate this opportunity to appear before you this
	afternoon. I appreciate this opportunity to present the
	Treasury Department's views on repealing prohibitions on the
	payment of interest on business checking accounts, and on
	permitting the payment of interest on reserve balances that
	depository institutions maintain at the Federal Reserve. The
	Treasury Department supports permitting banks and thrifts to
	pay interest on business deposits. While sympathetic to many of
	the arguments in favor of permitting the Federal Reserve to pay
	interest on reserve account balances, we are not prepared to
	endorse this proposal at this time.
	The Treasury Department has consistently supported
	provisions repealing the prohibition on paying interest on
	demand deposits. Repeal of this prohibition would eliminate a
	needless Government control on the price that banks must pay
	for business deposits consistent with the earlier elimination
	of Regulation Q rate ceilings on other deposits. The result
	should be more efficient resource allocation. Most proposals
	that would have allowed banks and thrifts to pay interest on
	demand deposits would have delayed repeal of the current
	prohibition for a number of years and provided for transitional
	mechanisms. The Treasury Department continues to prefer a
	relatively quick repeal on the prohibition on paying interest
	on demand deposits obviating the need for special transitional
	arrangements.
	The Federal Reserve Act requires depository institutions to
	maintain reserves against certain of their deposit liabilities.
	Institutions typically meet these reserve requirements through
	vault cash, and a portion of their reserve balances at a
	Federal Reserve bank known as required reserve balances.
	Depository institutions may voluntarily hold reserve balances
	above the amount necessary to meet the requirements which are
	called excess reserves. Required reserve balances and excess
	reserves held at the Federal Reserve do not earn interest,
	hence they are referred to as stale reserves. Since the
	beginning of 1990s, required reserve balances at the Federal
	Reserve banks have declined by 83 percent. Three factors may be
	primarily responsible for the decline: one, regulatory actions
	taken by the Federal Reserve in the early 1990s reducing
	reserve requirements; banks' growing use of new products and
	technology, such as retail sweep accounts to minimize required
	reserves; and growth in the use of vault cash to meet reserve
	requirements as increased ATM usage has increased the need for
	such cash. The proportion of reserve requirements met by vault
	cash has risen from 44 percent in December of 1989 to 85
	percent in January of this year.
	The three principal grounds for paying interest on reserve
	balances are to: one, promote economic efficiency; two,
	facilitate monetary policy; and three, lower cost to the
	banking industry.
	Permitting the payment of interest on reserve balances
	might lead to greater economic efficiency. Banks have expended
	considerable resources to avoid holding non-interest-bearing
	required reserve balances. If banks earned interest on these
	reserve balances, they would be less likely to expand the use
	of sweeps and might unwind some existing sweep programs.
	As you heard from the Federal Reserve, the decline in
	required reserve balances could lead to greater short-term
	interest rate volatility, although such volatility is not a
	serious problem at present. For various reasons, the demand for
	balances to meet reserve requirements is more stable than the
	demand for balances to clear transactions through the Federal
	Reserve Fedwire system. Thus, the smaller the required reserve
	balances, the greater the role that less predictable daily
	clearing needs of banks would have in determining the demand
	for reserves. This may make it more difficult for the Federal
	Reserve to supply the amount of reserves consistent with its
	Federal funds rate target.
	Banks have long contended that the cost of reserve
	requirements, forgone earnings, put them at a competitive
	disadvantage relative to non-bank competitors that are not
	subject to reserve requirements. Yet the foregone earnings that
	depository institutions currently incur through reserve
	requirements must be viewed in their context to the overall
	relationship to the Federal Government, including benefits
	derived from Federal deposit insurance and access to the
	Federal Reserve payment system and discount window.
	The Office of Management and Budget, a congressional budget
	office, have, in the past, estimated that paying interest on
	required reserve balances would cost approximately $600 million
	to $700 million over a five-year period. Both the OMB and the
	CBO estimate take into account the effect on tax revenues from
	depository institutions that receive interest. Some proposals
	have provided for an offset to the budget cost by transferring
	a part of the Federal Reserve surplus to the Treasury. It is
	true that in some previous years, budget accounting rules have
	permitted the transfer of Federal Reserve surplus funds to the
	Treasury to count as receipts that would offset the cost of
	other programs. Yet over time, transfers of the surplus do not
	result in budget savings.
	In sum, Congress should act to repeal prohibitions on
	paying interest on business checking accounts at banks and
	thrifts. This would eliminate unnecessary restrictions on this
	institution's ability to serve their commercial customers.
	Proponents of paying interest on reserve balances maintained at
	the Federal Reserve have put forth a number of reasons in their
	favor.
	As a general matter we are sympathetic to many of the
	arguments put forth by those proponents, particularly with
	respect to monetary policy. At the same time, however, we are
	also mindful of the budgetary costs associated with this
	proposal which would be significant. The President's budget
	does not include the use of taxpayer resources for this
	purpose. At this time, then, the Administration is not prepared
	to endorse that proposal. I appreciate the opportunity to
	appear before you and I am happy to respond to any questions
	you may have.
	[The prepared statement of Donald V. Hammond can be found
	on page 56 in the appendix.]
	Chairman Bachus. Thank you.
	I appreciate the testimony, summary of the testimony from
	the first panel, and at this time we will permit Members five
	minutes to ask you any questions they may have. And I am going
	to go ahead and read down the order that we are going to do
	this in the order that the Members arrived. I am going to go
	from Majority, we will alternate, but on the Majority side, Mr.
	Cantor, Mr. Toomey, Mrs. Biggert, Ms. Hart, Mr. Lucas, Ms.
	Kelly, Mr. Rogers, Mr. Bereuter, Mr. Ferguson, Mr. Tiberi, Mrs.
	Capito, Mr. Manzullo and Mr. Weldon.
	On the Minority side, Ms. Waters, Ms. Carson, Mr. Bentsen,
	Mr. Watt, Mr. Shows. If I note that a Member is no longer at
	the hearing, I will just simply go to the next Member down, and
	at this time I will recognize Mr. Cantor for questioning.
	Mr. Cantor. Thank you, Mr. Chairman.
	I would like to direct this question to Mr. Hammond, and
	really ask you, I think, a question of fairness and the fact
	that if we are going to lift the ban on the interest on
	business checking, why is it that banks couldn't receive
	interest on their sterile reserve deposit? And to me, there is
	this question of the cost of funds versus getting return on the
	funds deposited. How do you answer that, leaving aside sort of
	the budgetary concern of the Administration?
	Mr. Hammond. I think from a standard of balance and equity,
	the match of payment of reserves on the liabilities side
	combined with the payment of interest on business checking
	gives the opportunity for balance within the system, and I
	think with that regard, the two proposals make sense looking at
	them together. As I said in my testimony, we are quite
	supportive of a lot of arguments related to the cost or to the
	proposal for paying interest on reference. I think the final
	component is that there is a cost to be important by the
	general taxpayer, related to the fact at that time, Federal
	Reserve system returns its earnings to the Treasury on an
	annual basis. As a result, the payment of interest on reserves
	does, in fact, create a cost to the general funds.
	Mr. Hammond. Leaving aside that provision, I think that the
	proposal to pay interest on the reserves is one that we support
	from the standpoint of the other provisions. But obviously, the
	cost is a significant issue.
	Mr. Cantor. Thank you, Mr. Chairman. I yield back the
	balance of my time.
	Chairman Bachus. Ms. Waters.
	Ms. Waters. Thank you, Mr. Chairman.
	As I indicated in my opening remarks, I wanted to know more
	about the cost to the public, and while I don't want to get you
	all embroiled in the discussion about the $1.6 trillion tax cut
	that we are discussing here, the fact of the matter is some of
	us are very concerned about how we pay for it. If you are
	suggesting that paying interest on the sterile reserves could
	cost us $600 to $700 million over a five-year period of time,
	could you calculate that out over a ten-year period of time? We
	are dealing with a tax cut over a ten-year period of time and
	we are looking at, well basically, you know, how are we going
	to do this? So what does this calculate out to? It is double
	more this amount, or it is more than this amount over a ten-
	year period of time?
	Mr. Hammond. I am not aware of any estimates that extend
	beyond the five year horizon that both OMB and the
	Congressional Budget Office have independently performed. I
	suspect that what you would see is a fairly even balance unless
	you saw things such as growth in, for example, clearing
	balances which, if allowed to pay interest on those, the
	Federal Reserve System may very well find that there is a
	reduced cost from the overall proposal.
	Ms. Waters. Also, I would like to ask you, as I am going to
	ask Mr. Meyer if I have time, what--if there is additional
	earnings in the flow of income on the payment of interest from
	the Feds to the banks, how can consumers benefit from this? Did
	we discuss this before, what the banks do with this additional
	revenue and whether or not it would lower interest rates? What
	can it do for the average consumer?
	Mr. Hammond. I think any opportunity to improve the
	profitability of financial institutions certainly has to have
	indirect benefits for consumers, because obviously, the
	increased earning capacity of the financial institution should
	lead to reduced fees in certain areas in their business. How
	those reductions in fees would flow through on an average basis
	I think would vary from institution to institution.
	Ms. Waters. Should we support this repeal of law that would
	allow for the payment of interest on these accounts in the
	Federal Reserve accounts, the sterile accounts? Should we
	encourage, in some way in the legislation, the banks to reduce
	fees or to show how their customers are benefiting from this
	new revenue?
	Mr. Meyer.
	Mr. Meyer. I would not particularly encourage that. I would
	leave it to the competitive financial system we have that would
	induce banks to pass along the benefits of interest on reserves
	in a variety of ways, and I wouldn't want to instruct them
	precisely on how to do that. I think the most likely outcome
	would be somewhat higher interest rates on the transaction
	deposits that are no longer backed by the sterile reserves. It
	could be that banks might charge somewhat lower interest rates
	on some loans or they might charge somewhat lower fees for some
	services. There are a whole variety of ways that they could
	adjust, but I wouldn't want to micromanage that and tell them
	this is the way you ought to adjust. It is up to bank
	management, it is up to the competitive forces in the markets,
	to determine precisely what those adjustments are.
	Ms. Waters. If you had to make the argument to the taxpayer
	who would be told that it would be a cost to the taxpayer to
	pay interest on these accounts, how could you tell the taxpayer
	that they were going to benefit, if we are not going to
	encourage in some way, some broad way, how could you tell the
	taxpayers that yes, you got support, the bank is getting a new
	source of revenue; no, you are not going to mandate in any way
	that the customers benefit from that; but yes, it is going to
	cost them money for this to happen, how do you reconcile that
	way?
	Mr. Meyer. Well, three ways. First of all, that it would
	reduce the necessity of banks engaging in wasteful spending to
	get around these restrictions. Setting up a sweep account has
	no social benefits at all. It is just to avoid a restriction.
	So that is a total benefit to society that that money isn't
	wasted. Second, I would tell them that they should look forward
	to, and could reasonably anticipate, that they will get either
	higher interest rates or face lower loan rates, because that
	will be an outcome of this--a natural outcome of this due to
	our competitive system. And third, I would tell them that they
	can look forward to continued effective monetary policy,
	because this will also maintain the effectiveness of our
	current operating procedures.
	Ms. Waters. Thank you. I believe my time is up.
	Chairman Bachus. Thank you.
	Mr. Toomey.
	Mr. Toomey. Thank you, Mr. Chairman.
	Actually, perhaps if both of you gentlemen could address
	this briefly. You know it is true we are working on a, in my
	view, unfortunately modest tax relief package of $1.6 trillion
	dollar. Some of us would like to see considerably larger. It is
	all focused on individual tax relief, as you gentlemen very
	well know. But when it comes to corporate taxes, it is not the
	failure to pay interest on stellar reserves in a way, a hidden
	or implicit tax on a category of assets rather on the
	profitability of a firm, in other words it is a cost imposed by
	Government that bears no relationship to the profitability of
	the firm, like most of our methods of tax incorporations, but
	rather deals with a category of assets, and isn't that, in many
	ways, an inefficient way to tax corporations?
	Mr. Meyer. Well, it is, it is often referred to as an
	implicit tax, and I think it is a particularly inefficient tax
	because it generates these totally wasteful expenditures, and
	so I quite agree.
	Mr. Hammond. I would certainly agree that it is a cost that
	is unrelated to other activities of the business. It is also a
	cost that, as Governor Meyer pointed out, can be managed
	through incurring other costs to avoid that type of
	relationship. That would seem to be, all things being equal,
	not the most effective way of going about collecting that type
	of revenue.
	Mr. Toomey. So if you had to prioritize the kinds of taxes
	as a general matter, that if we were looking at ways to relieve
	the tax burden on the corporate sector of our economy, for
	instance, would this be a kind of tax that might deserve a
	priority, because it has additional negative consequences that
	go with it above and beyond those negative consequences that
	are associated with any kind of tax?
	Mr. Hammond. I think, speaking from my experience, and keep
	in mind I am not certainly an expert on taxation by any means.
	I think any time you try to prioritize various costs against
	each other, you have to see the complete list. All I could tell
	you is that it does appear to be a very inefficient way of
	generating revenue. Where that would rank in a listing of
	priorities of various other types of business expenses or
	business taxes, I don't know.
	Mr. Toomey. Moving on for a moment to interest on business
	checking accounts, could either of you maybe develop a little
	bit your thoughts on the nature of and the costs associated
	with the ways that banks have had to find ways around this
	decades-old prohibition?
	Mr. Meyer. Well, there are several ways. One of them is
	setting up very complicated procedures to pay implicit interest
	through compensating balances. These are fairly complex
	arrangements. You have to keep track of a lot of different
	services that are being provided to the businesses to
	compensate them for the failure to pay interest on the demand
	deposits. That is a very inefficient way relative to simply
	paying interest on demand deposits.
	A second way is setting up sweep accounts where balances
	are taken out of the demand deposit accounts and swept into
	either open market instruments or into savings accounts that
	pay interest. Now, that can be done, but there is a fixed cost
	of setting up these arrangements. That can be quite large, and
	there is a maintenance cost every year of implementing those.
	So these are very costly procedures that would be totally
	unnecessary if we allowed the payment of interest on demand
	deposits.
	Mr. Hammond. I would agree with that analysis.
	Mr. Toomey. OK. My last question, if time still permits, is
	your--each of your thoughts on a phase-in period. What is the
	appropriate period of time the phase-in a repeal of this
	prohibition? There has been suggestion that it be immediate and
	some have suggested several years. I am just curious to have
	the benefit of your thoughts on this.
	Mr. Hammond. I think following up on your last question,
	Treasury feels that the shorter the transition period, the
	better. In fact, even no transition period would be
	appropriate. From the standpoint that the longer that you have
	of a transition or special arrangements for transition
	processing, you create some of the same costs and
	inefficiencies that the sweep programs and other comparable
	programs have today.
	Mr. Meyer. Well, I would agree. I think our preference
	would be for either no transition or a very short transition.
	Otherwise, what we are doing is maintaining the competitive
	advantage of some players in the market, the larger banks that
	have sweep programs already relative to the smaller banks that
	don't, providing differential access to the larger firms that
	can take advantage of compensating balances on sweep accounts
	relative to the small businesses that can't. We have said,
	however, in the interest of achieving a consensus and a
	compromise, if there was a short transition period, we
	certainly wouldn't object to that.
	Mr. Toomey. Thank you both.
	Mr. Chairman, I yield the balance of my time.
	Chairman Bachus. Mr. Toomey, again, we want to thank you
	for your diligence on this legislation that we passed a few
	years ago.
	At this time I will recognize Ms. Carson.
	Ms. Carson. Yes. Thank you, Mr. Chairman.
	I want to try to be quick with this. We passed legislation
	that allows automatic electronic transfers of a lot of Federal
	checks, like Social Security checks, civil service retirement,
	and so forth, which obviously arrive at your institutions the
	last day of the month prior to the time they are due, first day
	of the month. They don't collect until the third of the month,
	and so forth. The banks are obviously, at that particular time,
	drawing a lot of interest on that deposit for those couple of
	days, and so forth, that they happen. Who do you pay that
	interest to? The money's sent there by the--pardon me, not you,
	but how is that interest money paid once it is received by the
	financial institution? Because it was orchestrated by the
	Federal Reserve, you know what I am saying? I am glad you do,
	because I can't figure out what I am saying.
	Mr. Meyer. Well, there is a period after which it must be
	credited to the account of the person who is receiving that
	deposit, and from then on the interest goes to the deposit
	owner.
	Ms. Carson. Right. But during those 3 or 4 days that the
	bank has the money, that the customer can't draw from, the
	money's there but the customer can't draw from it.
	Mr. Hammond. Actually, in the normal course with electronic
	payments, we make the cash available the same day that it is
	available to the consumer, to the financial institution. What
	frequently happens is that the financial institution gets
	advice of the payment in advance of the availability of the
	funds, but, for example, for a Social Security payment, where
	it would be available on the third of the month, which would be
	the date that the check would normally arrive, if they are
	getting an electronic payment, they immediately have available
	funds in their account on the third of the month for that type
	of payment.
	Ms. Carson. I want to ask you, I know this has nothing to
	do with this legislation on interest being on checking
	accounts, but I did want to say, and you sort of touched upon
	it, one of the principal arguments for two- or three-day delay
	on interest-bearing checking accounts, it is banks who
	currently offer sweep accounts and other alternatives to
	interest-bearing checking accounts, will need time to unwind
	their current arrangements with their business customers?
	Now, I know you have been sort of talking about that. But
	with a long transition period with the 24 transactions per
	month MMDA, that is the money market deposit account, financial
	institution also incur cost at establishing 24-hour transaction
	MMDAs. Then at the end of the transaction period, those
	arrangements would have to be unwound. Doesn't a long
	transition period needlessly increase the cost and burdens for
	both financial institutions and their business customers?
	Mr. Meyer. I would agree. I believe it does.
	Mr. Hammond. I would say that a transition period doesn't
	offer any benefits to the customers or to those institutions
	who today don't have other types of institutional arrangements.
	So I don't see any justification for an extended transition
	period.
	Ms. Carson. But is your belief that if this bill becomes
	law then you don't have to, you won't have the concern about
	the transition periods and----
	Mr. Meyer. No, I think that banks could manage that process
	very effectively. I don't think it is, by any means, a
	necessity to have a transition period, but it is one of the
	balancing forces out there. There certainly are going to be
	banks that say they have entered into relationships with
	customers that build in these sweep accounts. These sweep
	arrangements have a certain period over which they hold. The
	banks would prefer a transition period that would allow them to
	get the benefit of these arrangements. But on the other hand,
	during that period, these will be all the other banks that
	don't have the opportunity to have sweep accounts and all the
	small businesses that won't have opportunity to have interest-
	bearing accounts. So we have to balance those two forces.
	Ms. Carson. Yeah, I favored the legislation, so don't--you
	know, misread my inquiry.
	Mr. Chairman, I would yield back.
	Chairman Bachus. Thank you, Ms. Carson.
	Mrs. Biggert.
	Mrs. Biggert. Thank you, Mr. Chairman.
	Mr. Hammond, one of the witnesses that we will hear from
	later today in his written testimony has said that implementing
	interest rates on the business checking accounts could, in
	fact, hurt small banks disproportionately, because they will be
	forced to raise additional deposits to offset the costs of
	moving money from interest-free deposits to interest-bearing
	accounts, but we are also--that this will help community banks
	retain commercial checking accounts. Do you believe that small
	banks could be hurt by allowing interest to be paid on interest
	checking accounts? It will help them to retain large business
	accounts and keep those large business accounts from jumping
	over to other financial service industries?
	Mr. Hammond. I think the ability for banks to pay interest
	on business checking accounts gives small financial
	institutions, in particular, an increased competitive advantage
	that they don't otherwise have today. They don't have the
	capability of offering some of the more complicated or more
	costly sweep relationships, nor do they have the ability to
	compete effectively against, for example, securities firms.
	So I think over the long term, this provision would allow
	small banks to retain existing checking and deposits and put
	them on a more equal footing to be able to obtain additional
	deposits going forward.
	Mrs. Biggert. But will this still force them to raise, they
	will have the raise their deposit level?
	Mr. Hammond. I think obviously there will be an increase in
	cost as they phase this from however they approach the payment
	of interest on business checking accounts, but the offset to
	that is that today, for business customers who want interest on
	their checking deposits, they have gone somewhere else if they
	can't find that service at the small bank. So as a reality,
	they may, in fact, find they are able to lure small businesses
	back into their fold in that environment.
	Mrs. Biggert. Mr. Meyer, would you agree with that?
	Mr. Meyer. Yes, I also think the main beneficiary would be
	smaller banks and that, in addition, while they would pay
	interest on these deposits, deposits are still a relatively low
	cost source of funds to community banks, and they need the
	opportunity to compete effectively for them with non-banks.
	Mrs. Biggert. So you wouldn't see them losing the business
	accounts to other financial services?
	Mr. Meyer. No. To the contrary. Now I think one should
	understand that there are banks who have customers that are
	relatively insensitive to interest rates and are now getting
	zero on their balances. I can understand that some banks would
	like to have a situation where that could continue. I am not
	sure that that is in the public interest, so I would support
	the legislation.
	Mrs. Biggert. Thank you.
	Thank you, Mr. Chairman. I yield back.
	Chairman Bachus. Thank you, Mrs. Biggert.
	At this time, Mr. Bentsen.
	Mr. Bentsen. Thank you, Mr. Chairman.
	Governor, as I said at the outset, I had thought we had
	done this already and we had on our side of the Capitol, and so
	hopefully we can do it now. And I look at the panel that is
	coming after this and I didn't get through all the testimony,
	but I am still looking for somebody who is opposed to this, but
	I guess I also want to say I agree with you on the transition
	period. I don't see any reason why sweep accounts that have
	been structured for banks to pay interest to their customers
	can't be unwound. These are all short term sweep accounts
	anyway, so they can remain liquid, and I would hope that if
	there is a problem, that somebody will present that to the
	subcommittee so we can look at it. But it seems to me that
	there is sufficient time to make a transition for this. In
	addition, it would seem to me that there would become a very
	apparent marketplace in the future for providers of sweep
	accounts to smaller banks who aren't going to want to do this
	on their own, that this will be a service that they will buy.
	So I don't see where anybody's ox gets gored in this process.
	Let me ask you about your discussion in your testimony,
	though, regarding reserve requirements. You talk about maybe
	this providing you with an opportunity with the Fed, the
	opportunity if Congress is willing to, I guess, reduce the band
	between the 8 and 14 percent to a lower percent, but you also
	say currently, the Fed is, I think, a 10 percent reserve
	requirement level, so you are not at the low end anyway. Some
	of my colleagues have proposed a complete repeal of the reserve
	requirement.
	In your testimony, you sort of hint at that, but I am not
	sure if you go as far. So my first question would be, are you
	arguing that we ought to repeal the reserve requirement, or are
	you arguing that we ought to just give you greater flexibility
	so the Fed can explore other means with which to implement
	monetary policy?
	And secondary to that, given the possibility that we might
	actually pay down all of the Federal debt, publicly held debt,
	and of course, it is not a done deal yet, but it is an outside
	possibility, I realize the Fed has undertaken a study of other
	types of securities with which to conduct open market
	activities. In the event that there is not a sufficient
	replacement for the Fed to conduct open market activities to
	the tune that you do currently, would it be wise to eliminate
	reserve requirements altogether as a tool of monetary policy,
	or is it so antiquated that it really doesn't do any good?
	Mr. Meyer. In the past, we have been concerned that the
	total of required reserves and contractual clearing balances
	would fall to such a low level that it would impede the
	effective operation of monetary policy.
	Now, in fact, as it has fallen, we haven't seen an
	increased volatility in the Federal Funds rate. Now we have the
	prospect that if we pay interest on required reserves and we
	pay interest on contractual clearing balances, these deposits
	will grow, although we don't really need them higher. So if
	they grow, it would provide us with an opportunity to lower the
	required reserve ratio. So one of the benefits here is we might
	be able to have the same level of deposits with the same
	effectiveness of monetary policy, and lower required ratios at
	the same time.
	Whether that would be possible would depend on the
	experience once we implemented interest on required reserves
	and interest on contractual clearing balances, seeing how much
	they would grow, and then we would have to very gradually see
	to what extent we might be able to lower reserve requirements.
	Mr. Bentsen. If I might interject before my time is up, I
	think I know where you are heading in saying that instead of
	having a mandatory reserve requirement you could, in effect,
	buy the reserves that you need to conduct monetary policy, and
	I appreciate that, but is there an opportunity where an
	imbalance in the economy and an imbalance in interest rates
	might otherwise cause banks to put their funds elsewhere than
	at the rate that the Fed is paying, or would the Fed be paying
	market rates so there wouldn't be any spread between the public
	market and the Fed market?
	Mr. Meyer. I think we would be paying the rate where we
	could control the total level of the required and contractual
	balances to achieve the stable and predictable level that is
	necessary for monetary policy.
	Mr. Bentsen. But then puts that in the possibility of an
	interest rate trap itself?
	Mr. Meyer. No, I don't believe that would be a problem at
	all.
	Mr. Bentsen. Thank you, Mr. Chairman.
	Chairman Bachus. Thank you, Mr. Bentsen.
	Ms. Hart.
	Ms. Hart. Thank you, Mr. Chairman.
	I have one question, and actually either of you might be
	able to shed some light on it. Some concern, a lot of concern
	has been raised by some of the larger institutions in the
	communities I represent regarding problems that could be caused
	to some of the small community banks as a result that if they
	are permitted to offer interest on their business checking that
	even though it isn't required, they will all feel a need to do
	it and may basically lead us into some other kind of banking
	disaster. I would just like to have either one or both of you
	shed any light on whether there is any merit to that at all?
	Mr. Meyer. I want to make sure I got your question
	correctly. I believe you said that larger banks are worried
	that this will cause a problem for smaller banks. Is that what
	you said?
	Ms. Hart. Larger banks and those who have other kinds of
	investment instruments, yes.
	Mr. Meyer. It is very kind of the larger banks to worry
	about the smaller banks. I think we all appreciate that. I
	think maybe we should hear from smaller bankers who you will
	hear from on the next panel, and I think they will tell you
	that they are probably better off looking after their own
	interest than the larger banks. It may be the case that larger
	banks want to preserve their competitive advantage from sweeps.
	Ms. Hart. I certainly understand that, but my question to
	you was because I, unfortunately, like a lot of us, lived
	through the Resolution Trust Corporations' activities and saw a
	lot of strange things happen in the banking industry in what,
	the late 1980s, I guess, and----
	Mr. Meyer. We have had a lot of experience with banks
	paying interest on transaction balances, NOW accounts, that has
	proved very successful. It has been a benefit for banks and for
	consumers. I think the main point here is that giving small
	banks the opportunity to pay interest on demand deposit is
	going to make them more competitive in the market for
	relatively inexpensive funding and strengthen their financial
	conditions and competitiveness in the financial system.
	Ms. Hart. So you see it all around as a benefit to the
	complete market, it is not going to weaken any player in the
	market necessarily.
	Mr. Meyer. No. I think it does level the playing field.
	That does mean that some banks that had competitive advantages
	might find the current circumstance better, but you have to
	weigh that against that the benefits of leveling the playing
	field.
	Ms. Hart. Absolutely.
	Mr. Hammond.
	Mr. Hammond. It is really hard to add to that. I think I
	agree completely with Governor Meyer. Today what you have is a
	competitive imbalance to some extent between small banks and
	some of the larger banks with more sophisticated product
	offerings. This does, in fact, bring things more into an
	equitable balance situation. Obviously, that means that someone
	has to give something up in order for someone else to be on a
	more equal footing.
	Ms. Hart. Well, the other issue is, I think, there are
	almost not in the same market at this point, and by doing this,
	we place all of the financial institutions in the same market.
	Do you see any danger caused, because really the different
	tiers of the market really will become one in a lot of ways?
	Mr. Meyer. No. Small banks compete with larger banks and
	they compete with non-banks, and we are just giving them a
	better opportunity to be a more effective competitor in that
	marketplace.
	Ms. Hart. I was just playing devil's advocate, by the way.
	Thanks very much.
	Thank you, Mr. Chairman.
	Chairman Bachus. Thank you, Ms. Hart.
	Mr. Watt.
	Mr. Watt. Thank you, Mr. Chairman.
	I was going to start off by fussing at you all for why we
	were limiting this to business accounts, and then I realized
	that you did it for individuals, or we did it for individuals
	before I came to Congress. I think I had forgotten about that,
	because I never have enough money in my account to qualify for
	any interest, but it does raise an interesting question, which
	is whether either the Fed or the Department of the Treasury or
	any of the other regulators are keeping any statistical
	information about how effective NOW accounts have been, and the
	extent of individual deposits that are actually drawing
	interest on or having interest paid on them. Do you all have
	any information about that?
	Mr. Meyer. Yes. There are $240 billion of what we call NOW
	accounts, interest-bearing transaction accounts held by
	households.
	Mr. Watt. What percentage of total deposit is that of
	individuals?
	Mr. Meyer. That is relative to demand deposits, some of
	which are held by households also, but most of which are held
	by businesses, that are about $315 billion.
	Mr. Watt. So it is working pretty well then is your
	assessment?
	Mr. Meyer. Absolutely.
	Mr. Watt. OK.
	Mr. Hammond, I am wondering, since this is a new Treasury
	Department, this turnover, whether there is any likelihood that
	you all are going to reevaluate your position on the reserve,
	on the payment of interest, because it seems to me, I guess I
	am kind of like Mr. Toomey. It seems inconsistent with the
	philosophy that this is the Government's money rather than the
	individual banks, or even the depositor's money, and that
	somehow the Government is entitled to this money in this budget
	equation. I understand that we could use it and we could spend
	it, but it just--your argument seems just completely
	inconsistent with the arguments that I have heard in support of
	returning tax moneys to people. And the President's question,
	in his address to the joint session where he asked who the
	surplus belongs to, my response to that by the way, is, it
	doesn't belong to anybody until it materializes. But if you
	follow what he was saying, it doesn't belong to the Government,
	it belongs to the depositor or the taxpayer, or so the bottom
	line is, it is likely that you all are going to reevaluate your
	position that you have testified about today, or you don't see
	that happening?
	Mr. Hammond. I think what is likely is that more, as more
	appointees come into the Treasury Department, people will look
	at legislation that is going through the process and make
	independent judgments at that point in time, and I think
	additionally, what we have to keep in mind with regard to the
	cost, if you will remember back, what I said is that we are
	concerned about where it falls into the priorities of the
	Administration today, vis-a-vis the surplus.
	Mr. Watt. If you put somebody else's money in the
	priorities sometimes.
	Mr. Hammond. Obviously the decisions and the positions that
	people have to take depend on, to the extent that this were an
	expenditure of $700 million over five years, then another
	expenditure of $700 million over five years would have to be
	removed from the budget, all things being equal. I think it is
	that tradeoff and that debate which is likely to continue
	throughout the budget process. So I think it is very likely
	that new appointees also come in and look at the issue and look
	at the pros and cons and go forward from there.
	Mr. Watt. So I guess your, the bottom line of what you are
	saying is if we move this bill, they are more likely to look at
	it quickly and may reevaluate what you are saying.
	Mr. Hammond. They will certainly have the opportunity to be
	focused on that as they come on board, yes.
	Mr. Watt. OK. While they are in the process of doing that,
	would you also deliver them a message that I would like for
	them to take a look at, our Mr. Lucas' bill, H.R. 557, which
	seems to me to fit kind of in the same category of things where
	we could refund some of the BIF and SAIF overcapitalized
	accounts. So if they are reviewing, can you deliver a message
	to them that we would like for them to take a look at that one
	too.
	Mr. Hammond. I think deposit insurance reform will be
	certainly a very important issue to be debated going on this
	year, and I suspect they will be quite focused on that and
	other components of this.
	Mr. Watt. Thank you, Mr. Chairman.
	Chairman Bachus. Thank you, Mr. Watt.
	Mrs. Kelly.
	Mrs. Kelly. Thank you, Mr. Chairman.
	Governor Meyer, I welcome you again. I think you probably
	are familiar with a conversation that I had with Chairman
	Greenspan when he was here on February 28th. I just want to
	reestablish for the record a couple of the points that were
	made in that conversation. As I understood him to say, the Fed
	wants these bills to be merged, and he wants them to go forward
	as one bill; is that correct?
	Mr. Meyer. The main objective is to get both parts passed.
	Whether they pass as one bill or two bills is of no consequence
	to us, but we would be delighted to have it in one bill.
	Mrs. Kelly. Well, for efficiency sake, it is probably a
	good thing for them to come through together. The second thing
	is that the Fed supports my language that allows for the
	payment of interest on the reserves held at the Federal Reserve
	Bank, and the language that gives the Fed greater flexibility
	in setting the reserve requirements; is that correct?
	Mr. Meyer. That is correct, and just to make it clear, that
	bill, it is my understanding, is written so that it allows the
	payment of interest on all three kinds of deposits, that is,
	required reserves, contractual clearing balances, and excess
	reserves. So it has that flexibility and it gives us a lot of
	options.
	Mrs. Kelly. Yeah, that is exactly the way we viewed it.
	Mr. Hammond, you indicated in your testimony that the
	Treasury Department is reviewing the policy of paying the
	interest on reserves held at the Federal Reserve banks. I would
	kind of like to get a commitment that the Treasury and the Fed
	will work together with our staffs so that we can do this all
	properly, efficiently and as cleanly as possible while we can
	address any concerns that the Treasury may have, and I just
	wanted to say that for the record, and get your agreement that
	that is the case.
	Mr. Hammond. We would be delighted, as we always are, to
	work closely with you and the Federal Reserve on these
	provisions. I would include that certainly to the extent that
	we look at budget costs, however, that we also have to include
	in those deliberations the Office of Management and Budget, as
	they are the Administration's chief keeper of the budget
	priorities.
	Mrs. Kelly. I am hopeful we will be able to resolve that
	issue though.
	Mr. Chairman, that is all I am going to say in the interest
	of speeding this up. I am going to yield back the balance of my
	time.
	Chairman Bachus. Thank you, Mrs. Kelly.
	Mr. Rogers.
	Mr. Rogers. Thank you, Mr. Chairman.
	I was just trying to determine here from some CBO
	estimates, and your calculations of that $600 to $700 million
	to your budget, that was a static calculation of costs, kind of
	in a parochial view. Have you looked, or has anyone looked at
	the increased revenue that would be received by the
	accumulation of assets by those individual businesses from
	interest earned, which they previously do not enjoy?
	Mr. Hammond. I am not sure if I understand your question
	correctly.
	Mr. Rogers. Well, the Federal Treasury will gain more money
	on the taxes paid by corporations on the increase of interest
	of which they don't enjoy now on those accounts; is that
	correct?
	Mr. Hammond. Let me just back up and make sure I understand
	the question correctly. If I understand what you are asking, is
	the benefit that the business community will obtain from the
	payment of interest on reserves factored into the calculation
	of the net costs to the Government, and the answer to that is
	no, it is not. What the CBO and OMB projections are based on is
	an assumption on what it will be from a budget standpoint to
	Federal revenues and expenditures. So obviously, to the extent
	the overall economy benefits from moving some of that money out
	of the Federal coffers into the commercial banking system, that
	is another consideration.
	Mr. Rogers. I am not sure we are on the same sheet of
	music.
	Mr. Hammond. OK.
	Mr. Rogers. Just from what Congressman Toomey talked about,
	the administrative costs are obviously going to be less with
	the passage of this bill. Higher reserves that may net is going
	to be some increase to the Fed. But also, the Federal Treasury
	will gain in corporate taxation from gains in interest that
	small businesses don't currently pay, because they don't
	accumulate that asset. Am I correct?
	Mr. Hammond. You are correct.
	Mr. Rogers. I have not seen anywhere in the calculations
	that I can find, so $600 to $700 million doesn't seem very
	real--it is a very static number.
	Mr. Hammond. My understanding is those effects are actually
	factored into both the OMB and CBO calculations. We can verify
	that.
	Mr. Meyer. They use a 25 percent assumed tax rate, and that
	is explicitly in their calculation.
	Mr. Rogers. That is a little different than what I am
	reading here from CBO. So maybe we can get all on the same
	sheet of music, and somehow some way maybe afterward, we can
	get--as a matter of fact, their last line, if I can quote from
	this, Mr. Chairman, if you will--``It is overall profits in
	Federal revenue, therefore it would not be affected.''
	Mr. Meyer. Are you talking about interest on reserves or
	interest on demand deposits? Interest on demand deposits would
	be a transfer from banks to businesses with no effect on tax
	revenue.
	Mr. Rogers. Isn't that a static calculation? I am doing
	this for my own edification here. I am not trying to be
	confrontational.
	Mr. Meyer. It is very difficult to make an estimate of what
	the broader impacts of this would be on overall economic
	activity. What you are looking for is dynamic scoring, asking
	what other changes might occur in the economy and how that
	might generate additional income and tax revenue. That is a
	very difficult task to undertake. CBO did not make that
	calculation, and is not routinely made when estimating the cost
	of various programs.
	Mr. Rogers. I understand that. I guess my conclusion, or we
	will go back and do some of these as well, is if you can
	calculate the loss based on money for interest held in those
	accounts, you can also tabulate increased interest that
	previously was not taxed, and will be taxed just on those very
	simple calculations. We will play around with the numbers. I
	will be happy to talk with you.
	Mr. Hammond. We will be happy to work with you.
	Mr. Rogers. I think that $600 to $700 million is way
	overstated when you talk about total revenue generated. There
	is an old saying that money is neither created or destroyed. I
	have a feeling taxation falls in the same category here and we
	will find the way to get that money somehow.
	Thank you, Mr. Chairman. I would yield back.
	Chairman Bachus. Thank you. I will like to have the record
	reflect there is only a teddy bear remaining on the Minority
	side. And if it has no questions, we will go to Mr. Tiberi.
	Mr. Tiberi. I have no questions, Mr. Chairman.
	Chairman Bachus. Thank you.
	Mrs. Capito, no questions.
	Dr. Weldon.
	Dr. Weldon. I just have one quick question.
	Governor, you mentioned a lot of the machinations banks go
	through to keep their level of sterile deposits small with the
	Federal Reserve. You mentioned sweep accounts as one of them.
	What are some of the other things that they do?
	Mr. Meyer. Well, that is the major way that they reduce
	their required reserves. They take the deposits that are in the
	accounts that are reservable, and they find ways to transfer
	them into nonreservable accounts, preserving nevertheless the
	transactions' capability of the deposit holders, and that is
	what sweep accounts are all about. This is the major mechanism.
	Dr. Weldon. OK. I don't think I have any other questions.
	Thank you, Mr. Chairman. Thank you for your testimony.
	Chairman Bachus. Thank you.
	Governor Meyer and Secretary Hammond, if we were to offer a
	bill that required interest payments on required reserves and
	not on clearing balances or excess reserves, what would your
	reaction to that be?
	Mr. Meyer. Disappointment. We understand that there is an
	issue about paying interest on required reserves. There is
	budgetary cost, and you have a decision that has to be made
	about how to finance that or what to offset it with. But in the
	case of contractual clearing balances, that is really a switch
	from implicit to explicit interest. There is no budgetary cost,
	and I can't see any reason why you wouldn't do that. With
	respect to interest on excess reserves, it is something we
	don't really contemplate using today, and that would only be in
	our tool kit. Should we be in a position where we would want to
	change the way we implement monetary policy, it would be useful
	to have. But it is something for the future, not something we
	would plan to implement over any near term.
	Chairman Bachus. Thank you.
	Mr. Hammond. Yeah, I think what you would be doing is miss
	ing a large number of the benefits that could be obtained from
	paying interest on a broader universe of reserves.
	Mr. Meyer. Could I make one other point? We have suggested
	here that if we don't get interest on required reserves, we
	would be very anxious, nevertheless, to have a bill that gave
	us the opportunity to have interest on contractual clearing
	balances. That would help. And if we had both together, it
	might be possible over time to lower reserve requirements by
	having more funds flow into contractual clearing balances with
	explicit interest. It might allow us the opportunity to lower
	the actual required reserve ratio. So there is a real
	advantage, it seems to me, in a bill that has both interest on
	required reserves and interest on contractual clearing balance.
	And I would certainly hope you would support that.
	Chairman Bachus. I might ask both the first and second
	panel and the memberships they represent to look at the Kelly
	legislation, and you might suggest any changes in that as a
	result of that question.
	We have heard questions, and I think Ms. Hart was the one
	Member who asked some questions about maybe this is not in the
	best interest of the small banks, and I think maybe she
	recognized that there are small banks who oppose this, and I
	think we will probably, from the second panel, hear that some
	of their membership is divided, and at the same time in the
	past few years, organizations representing some of these same
	banks have asked the Congress to allow them to pay interest on
	business accounts.
	Having said that, there is a tangible cost to the banks of
	having to pay interest which they can pretty easily calculate,
	I would think. On the other hand, it is rather intangible on
	how much, how many deposits they are losing from not being able
	to offer that. Do you know of any estimates as to the costs
	thereof? We know that the deposit base on the smaller banks
	which don't offer sweep accounts, that base has been eroding
	somewhat, but do you have any thoughts on that?
	Mr. Meyer. No, I don't have any numbers to share with you,
	but it is certainly true that when community bankers come in
	and talk about their issues, funding issues are at the very
	top, and their ability to compete for what they call core
	deposits. These transaction accounts are very important to
	them, and of course, paying interest on demand deposits is one
	way for permitting them to be more competitive for those
	deposits.
	Mr. Hammond. We are not aware of any estimates as well as
	to how you would, what the effect would be or what the deposit
	loss would be, or has been, to small financial institutions.
	Chairman Bachus. Thank you.
	Do any other Members have a follow-up question? Oh, Mr.
	Weldon have you, you have been--all right.
	At this time, we will dismiss the first panel. I will say
	that the Chair notes that some Members may have additional
	questions for this panel which they may wish to submit in
	writing, and without objection the hearing record will remain
	open for 30 days for Members to submit written questions to
	these witnesses and to place those responses in the record.
	At this time the first panel is discharged and I would like
	the members of the second panel to be seated, and thank you for
	your testimony.
	I would like to introduce the second panel at this time.
	From my left to right, Mr. James E. Smith is Chairman and Chief
	Executive Officer of Citizens Union State Bank and Trust in
	Clinton, Missouri, and President-elect of the American Bankers
	Association. We appreciate your testimony, Mr. Smith.
	Mr. David Bochnowski is Chairman and Chief Executive
	Officer of Peoples Bank of Munster, Indiana; Chairman of
	America's Community Bankers, and we appreciate your testimony
	and note, we also thank you for your service in Vietnam.
	And Mr. Thomas Jennings is Senior Vice President and
	General Counsel for First Virginia Banks on behalf of the
	Financial Services Roundtable based in Falls Church, Virginia.
	Mr. Jennings. Yes, sir.
	Chairman Bachus. And Mr. Robert Gulledge, President and
	Chief Executive Officer of Citizens Bank of Robertsdale,
	Alabama, who is here representing as Chairman of the
	Independent Community Bankers of America. And if any of you
	have never been to Baldwin County, Alabama, it is your loss.
	Mr. Gulledge, a beautiful, beautiful county.
	At this time, without objection, your written statements
	will also be made a part of the record. You will be recognized
	for five minutes to summarize your testimony, and we will start
	with you, Mr. Smith, and Mr. Bochnowski, I have allowed you an
	additional minute because you have extensive submitted
	testimony.
	Mr. Bochnowski. Thank you, Mr. Chairman.

	STATEMENT OF JAMES E. SMITH, CHAIRMAN AND CHIEF EXECUTIVE
	OFFICER, CITIZENS UNION STATE BANK AND TRUST, CLINTON, MI;
	PRESIDENT-ELECT OF THE AMERICAN BANKERS ASSOCIATION

	Mr. Smith. Mr. Chairman, I would like to thank you for
	holding this important hearing. I would also like to
	acknowledge the continuing leadership of Representative Kelly
	on these issues, including sponsoring legislation to provide
	for 24 transaction sweep accounts, Federal Reserve flexibility
	on setting reserve requirements, and payment of interest on
	sterile reserves. We applaud her efforts and those of many
	Members of the subcommittee who helped move similar legislation
	through the House last year.
	We strongly support the legislative initiative underway in
	Congress that would authorize a new 24-hour transaction deposit
	account and allow the Federal Reserve to pay interest on bank
	reserve balances. I will briefly touch on each of these
	important issues.
	The banking industry has wrestled with the issue of paying
	interest on demand deposits for more than a decade. So far
	there is no consensus. However, there is broad industry support
	for creating a new account that will allow 24 transfers per
	month between a checking account and an interest-bearing
	account, that is one transfer for each business day. This is
	the concept contained in Representative Kelly's bill, H.R. 974,
	which we support. This new account will help banks meet the
	needs of their large and small business customers and better
	compete with non-bank firms, such as investment companies,
	security companies and credit unions that offer interest-
	bearing business accounts. Some bills introduced over the last
	few years go beyond ABA's current position in that they will
	eliminate the prohibition on paying interest on demand
	deposits. If Congress does decide to take such action, it is
	critical that an adequate transition period be provided. Banks
	often provide a bundle of services to compensate for the
	prohibition on paying interest such as transaction services,
	lending and lines of credit, and other ancillary services. A
	transition would allow time to unwind these arrangements and to
	price explicitly these services or reset any previously agreed-
	upon terms.
	My second point relates to interest on reserves held at the
	Fed. ABA supports authorizing the Fed to pay interest on
	sterile reserves. The opportunity cost of holding non-interest-
	bearing reserves at the Fed has been significant over the
	years. Conservatively, we estimate the cost at $400 million
	this year. However, the cost to our communities are many
	multiples of this due to the additional foregone lending
	opportunities that would certainly arise. The high cost of
	sterile reserves naturally creates an incentive for banks to
	minimize this burden. The introduction of sweep accounts was
	one avenue to lower these costs. As a consequence, since late
	1993, reserve balances at the Federal Reserve bank have dropped
	from almost $30 billion to $6\1/2\ billion today. Simply put,
	required reserves held at Federal Reserve banks will continue
	to decline unless market interest rates are paid on these
	funds.
	Paying interest on reserves could help the Federal Reserve
	conduct monetary policy since it will allow the Fed to maintain
	reserves at whatever level it thought appropriate to achieve
	its goals. In addition, paying interest on reserves will
	facilitate the development of transaction deposit products and
	level the playing field between banks and other financial
	institutions.
	Finally, let me address the budget issue that surrounds
	this bill. Some argue that paying interest would have a
	negative budget impact, but the ABA believes that without the
	payment of interest, reserves will vanish and so will the
	Federal revenues received. However, if interest is paid, the
	declining reserve will be stemmed and Federal revenues will
	increase from what they would have been. Simply put, the
	payment of interest will yield a budgetary gain over time.
	And in conclusion, the ABA strongly supports legislation
	that would authorize a new 24 transaction deposit account, and
	allow the Federal Reserve to pay interest on bank reserve
	balances.
	Thank you, Mr. Chairman, for this opportunity to appear
	before your subcommittee today.
	[The prepared statement of James E. Smith can be found on
	page 60 in the appendix.]
	Chairman Bachus. Thank you.
	Mr. Bochnowski.

	STATEMENT OF DAVID A. BOCHNOWSKI, CHAIRMAN AND CHIEF EXECUTIVE
	OFFICER, PEOPLES BANK OF MUNSTER, IN; CHAIRMAN, AMERICA'S
	COMMUNITY BANKERS

	Mr. Bochnowski. Thank you, Mr. Chairman. My name is David
	Bochnowski, and I am Chairman and Chief Executive Officer of
	Peoples Bank in Munster, Indiana. I am testifying today in my
	capacity as Chairman of America's Community Bankers on behalf
	of ACB. Thank you for this opportunity to testify on this issue
	of critical importance to community banks in small- and medium-
	sized businesses across America.
	ACB strongly supports allowing banks the option of paying
	interest on business checking accounts as reflected in the
	legislation introduced today by Representatives Toomey and
	Kanjorski. We also strongly support authorizing the Federal
	Reserve to pay interest on sterile reserves, in fact, these
	issues were first brought to the attention of Congress by ACB
	in 1994, and they continue to be a top priority of ours.
	The ban on interest-bearing checking accounts is the last
	statutory vestige of Regulation Q, a Depression-era law that,
	in the words of Federal bank regulators, no longer serves a
	public purpose. Instead, this prohibition has resulted in an
	anti-competitive business environment that has allowed a
	limited number of financial conglomerates to corner the market
	for cash management services that continues to block off an
	entire area of potential deposits for community banks to lend
	to our neighbors and to our communities, and it prevents many
	small businesses from earning interest on their checking
	accounts.
	The obvious solution to these problems is for Congress to
	pass legislation allowing banks the option of paying interest
	on business checking accounts, and in fact, just last year, the
	House passed such legislation not once, but twice. Both bills
	were passed with the support of ACB and the National Federation
	of Independent Business, the United States Chamber of Commerce,
	and a host of other organizations. During a speech before ACB
	last December, Chairman Greenspan singled out the detrimental
	effects of this prohibition saying, and I quote: ``This is of
	particular concern to community bankers, of course, given that
	larger banks are offering interest to their customers through
	sweep accounts. Bending legislation, modernizing the law would
	potentially help bolster deposit growth and open opportunities
	for other profitable customer relationships without the
	unproductive and costly circumvention of the existing
	statute.''
	We are pleased Governor Meyer has echoed those remarks
	earlier in his testimony today. Given this broad coalition of
	support for repealing the ban, you may ask why this prohibition
	still stands. Historically, much of the opposition has been
	generated by a few large financial firms and banks. Unlike most
	community banks, these institutions can conduct sweep
	arrangements efficiently because they have the financial
	resources to do so.
	As the head of a $400 million community bank, I can tell
	you firsthand that for most of us, sweep arrangements are a
	costly and cumbersome product. We offer them because we don't
	have the option of paying interest on business checking
	accounts. And for many smaller community banks sweeps are not
	an option. The minimum investment for these types of
	arrangements is well beyond the reach of most small- and
	medium-sized businesses.
	Mr. Chairman, we understand that large banks and Wall
	Street financial firms have invested significant resources in
	offering sweep account services to their customers. We do not
	begrudge the benefits they have reaped from their efforts, nor
	do we oppose their continuing to conduct business in this
	manner. But we do not believe it is asking too much to ask
	Congress to allow community banks, many of us who are strapped
	for deposits, to compete in the marketplace for cash management
	services.
	And what about small business customers that larger
	financial institutions do not serve? Doesn't it make sense for
	Congress to give them the option of earning a market rate of
	return on their deposits?
	We think the time has come to lift this artificial
	prohibition and keep more money on Main Street and off Wall
	Street. We are also well aware that some of our community
	banking brethren do not see eye to eye with us on this issue.
	Let me say to them that we do not support legislation that will
	require banks to pay interest on business checking accounts. We
	simply want the option for them to do so.
	Mr. Chairman, I would like to also express ACB's support
	for legislation authorizing the Federal Reserve Board to pay
	interest on sterile reserves held at Federal Reserve Banks. On
	behalf of ACB I would like to commend Representative Kelly for
	her ongoing efforts on this issue.
	Finally, there is the critical point of timing with respect
	to this issue. Because a delay would only postpone the benefits
	of this much needed change, it is our strong preference that
	legislation giving banks the option to pay interest on business
	checking accounts do so immediately upon enactment. We do
	recognize that some institutions are seeking an extensive
	transition period. While we appreciate the efforts made by
	Representatives Toomey and Kanjorski to accommodate these
	concerns, we strongly believe a phase-in period is unnecessary
	and undesirable.
	ACB strongly endorses the Toomey-Kanjorski bill as an
	important step in allowing banks to offer interest-bearing
	checking accounts. We commend House Financial Services
	Committee Chairman Oxley for putting this issue on the fast
	track, and we commend you, Chairman Bachus, for holding today's
	hearing. Thank you again for the opportunity to testify before
	the subcommittee, and I look forward to any questions you might
	have.
	[The prepared statement of David A. Bochnowski can be found
	on page 69 in the appendix.]
	Chairman Bachus. That was a 5-minute statement.
	Mr. Bochnowski. Thank you, Mr. Chairman.
	Chairman Bachus. Mr. Jennings.

	STATEMENT OF THOMAS P. JENNINGS, SENIOR VICE PRESIDENT AND
	GENERAL COUNSEL, FIRST VIRGINIA BANKS ON BEHALF OF THE
	FINANCIAL SERVICES ROUNDTABLE

	Mr. Jennings. Thank you, Mr. Chairman. I am the General
	Counsel of First Virginia Banks, Inc., in Falls Church,
	Virginia. I am pleased to have the opportunity today to speak
	on behalf of the Financial Services Roundtable. First Virginia
	is the oldest bank holding company in Virginia, with roots
	beginning in 1949. The Financial Services Roundtable represents
	100 of the largest integrated financial services companies
	providing banking, insurance and investment products and
	services to American consumers. Roundtable member companies
	account directly for $17 trillion in managed assets and $6.6
	trillion in assets and provide jobs for 1.6 million employees.
	Chairman Bachus, thank you for holding this hearing today
	and for inviting the Roundtable to participate. The Roundtable
	also extends thanks to Congresswoman Sue Kelly for introducing
	H.R. 974, which will be the focus of my testimony.
	The Roundtable strongly supports this bill and it would
	help to remove the hidden tax imposed on banks by allowing the
	payment of interest on banks' required reserves.
	The Roundtable strongly believes that any bill that allows
	institutions to pay interest on commercial checking accounts,
	such as the bill introduced by Congressman Pat Toomey, must be
	coupled with provisions allowing the Federal Reserve Board to
	pay interest on required reserves. The reason for this is
	simple. If institutions are to begin paying interest on
	commercial checking accounts, they will be forced to undertake
	significant changes in operating systems and, more importantly,
	they will be pressured to revisit their pricing for numerous
	account relationships.
	Non-interest bearing, or sterile reserves held at the
	Federal Reserve, amount to a hidden tax on banks. This
	nonproductive use of deposits runs counter to the interests of
	all of our key constituencies, including our bank's management,
	shareholders and, more importantly, our customers and our
	communities. Reserve requirements make banks less likely to
	develop new and innovative deposit products since the cost of
	these products are artificially high.
	Let me explain how the bill which will permit the payment
	of interest on business checking will affect First Virginia.
	Currently our family of banks meets all of its reserve
	requirements through vault cash, the money we keep in branches
	and at other facilities, and through required balances held at
	the Federal Reserve. First Virginia has a program in place to
	aggressively manage the cash we hold and where we hold it in
	order to ensure that our customers receive cash when they need
	it. Because banks our size must hold 10 cents in reserve for
	every additional dollar held in checking accounts, allowing the
	payment of interest on business checking accounts would
	increase the amounts held in those accounts, thus substantially
	increasing our reserve requirements. The corresponding increase
	and required reserves may force us to hold excess cash over and
	above the amount we need to pay our customers. If First
	Virginia were to carry this money without receiving interest on
	it or without being able to put it to productive use, it could
	increase the hidden cost paid by our institution. If the
	Federal Reserve were to pay First Virginia and other banks
	interest on the reserves kept with them, the cost of holding
	these excess reserves would at least be partially offset.
	I would also like to point out a possible unintended
	consequence if a policy change results in banks holding
	additional non-interest-bearing reserves. Because an increase
	in these reserves would make it more expensive to banks to
	offer checking accounts, many consumers might choose to place
	their money in accounts outside the banking system. The end
	result might be that the Federal Reserve would hold even fewer
	reserves, because banks would be holding fewer deposits.
	In the past, Congress has linked the issue of paying
	interest on required reserves with paying interest on
	commercial checking. In 1998, the House Banking Committee
	included both provisions as part of its broader regulatory
	relief package, as championed by Congresswoman Roukema. That
	bill, H.R. 4364, passed the House by voice vote.
	As the subcommittee has already heard, strong monetary
	policy arguments exist for allowing the Federal Reserve to pay
	interest on required reserves.
	Mr. Chairman, in conclusion, the Roundtable appreciates the
	opportunity to provide our comments and supports this important
	legislation that would remove the hidden tax on banks and urges
	Congress to follow its historical practice of combining payment
	of interest on reserves legislation with interest on commercial
	checking legislation. Thank you again for the opportunity, and
	I would be pleased to answer any questions.
	[The prepared statement of Thomas P. Jennings can be found
	on page 75 in the appendix.]
	Chairman Bachus. Thank you, Mr. Jennings.
	Mr. Gulledge.

	STATEMENT OF ROBERT I. GULLEDGE, PRESIDENT AND CHIEF EXECUTIVE
	OFFICER, CITIZENS BANK OF ROBERTSDALE, AL; CHAIRMAN,
	INDEPENDENT COMMUNITY BANKERS OF AMERICA

	Mr. Gulledge. Good afternoon, Chairman Bachus, Ranking
	Member Waters and Members of the subcommittee. My name is
	Robert I. Gulledge and I am Chairman, President and CEO of
	Citizens Bank, a community bank of $82 million in assets
	located in Robertsdale, Alabama. I also serve as Chairman of
	the Independent Community Bankers of America, on whose behalf I
	appear before you today.
	I want to thank you for giving me the opportunity to
	testify and I want to congratulate you, Chairman Bachus, on
	your elevation to the Chair of this important Financial
	Institutions Subcommittee of the Financial Services Committee.
	I will first address the issue of paying interest on
	business checking accounts. Mr. Chairman, as you know,
	repealing the ban on paying interest on business checking
	accounts has been hotly debated among community banks for many
	years. Community bankers continue to be sharply divided on this
	issue. Proponents of lifting the ban argue that it would
	increase economic efficiency, simplify business practices and
	help them keep their best business customers. Opponents argue
	that lifting the ban would squeeze their margins and impose a
	financial burden on them that could jeopardize their ability to
	compete for business customers in their markets.
	In my written testimony I describe the impact this proposal
	would have on two different banks, one in favor of lifting the
	ban and one opposed. The banker who opposes lifting the ban
	from a $721 million assets bank on the East Coast calculated
	that he would have to raise more than $21 million in additional
	deposits just to offset the interest costs if he were forced to
	pay interest on his business checking accounts. This cost, he
	said, would be prohibitive.
	The banker who supports lifting the ban from a $161 million
	asset bank in the Midwest feels that the current prohibition
	has been competitively damaging to his bank and to others. He
	argues that brokerage firms and other non-bank competitors have
	moved aggressively to compete with commercial banks for small
	business relationships, and without the tools to compete, banks
	and others could lose some of their best commercial accounts.
	Mr. Chairman, because bankers are split on this issue and
	the feelings run strong on both sides, the ICBA has advocated a
	compromise, that bankers on both sides tell us they can
	support. Under this compromise the number of allowable
	transactions from money market deposit accounts would be
	increased to 24 per month from the current legal limit of 6
	while keeping the permanent prohibition in place. This
	alternative was proposed in legislation introduced by
	Representative Kelly last year. It would allow banks to sweep
	funds between non-interest-bearing commercial checking accounts
	and interest-bearing money market deposit accounts on a daily
	basis. Thus, banks would not be forced to offer interest on
	commercial checking accounts but, rather, would have the option
	of paying interest on their commercial checking accounts by
	using sweep mechanisms.
	Mr. Chairman, this is the only alternative that we are
	aware of that has not raised objections from one side of the
	issue or the other side of the issue. We urge you and the
	subcommittee to give this proposal serious consideration, and
	we stand ready to work with you on this compromise. If you
	determine to go forward with removing the ban, may I suggest
	you allow an appropriate time to dismantle existing contractual
	arrangements of existing accounts with our customers.
	Let me now turn to the issue of allowing the Federal
	Reserve to pay interest on sterile reserves. We have no
	objection to this proposal, even though it is not an issue that
	would affect most small banks directly. Most small banks have
	transaction deposits in the lower tranche and are either not
	required to maintain reserves or can meet their reserve
	requirements with vault cash. In my written testimony I
	describe in greater detail the effect that this proposal would
	have on a typical ICBA community bank.
	Thank you for the opportunity to testify. I would be happy
	to answer questions you or the subcommittee may have. Thank you
	very much.
	[The prepared statement of Robert I. Gulledge can be found
	on page 80 in the appendix.]
	Chairman Bachus. Thank you, Mr. Gulledge.
	At this time we will recognize Mr. Cantor for 5 minutes.
	Mr. Cantor. Thank you, Mr. Chairman. And I guess any of
	panelists could probably answer my question. It is really for
	my own knowledge in trying to understand sort of the costs
	associated with the sweep accounts arrangements, and I hear
	some of you advocating a long transition period so you can
	unwind and get rid of the costs associated with them. Is there
	any other reason for these sweep arrangements other than to, if
	you will, get around the prohibition on interest checking for
	demand deposits for business?
	Mr. Bochnowski. Congressman, we introduced the sweep
	accounts this past August. We now have $10 million worth of
	deposits, if you want to call them that, that have been
	attracted to these accounts. Of that $10 million, only 6.5
	percent comes from inside the bank. We have existing
	arrangements with some of our customers; therefore, they are
	not eligible for these accounts. So while we do not have the
	option of doing what we would like to do with business
	checking, we have still figured out a way to do it, and it is
	costly. The requirements that we have to come back to our
	customers with, which is to, on a daily basis, monitor the
	level of these repurchase agreements of Government securities
	and to inform our customers daily of the value of those
	Government securities. So there is tremendous cost involved.
	So, from our point of view, we would rather go ahead and let
	this option run to all banks and let each bank on its own in
	the free market decide how it wants to offer those products to
	their customers.
	Mr. Smith. I want to give you an experience in my bank. A
	little over a year ago, we succumbed to the sweep accounts and
	started offering the sweep accounts. I would tell you that
	today we have picked up about 4 percent additional deposits if
	I was able to keep those deposits in the bank. Those are
	outside deposits. But I do have the third party provider that
	takes care of the sweep operation for me and I am under a
	contractual arrangement to continue with that for a period of
	time. So at my particular bank, I would need some time to
	unwind from that contractual relationship.
	Also, for a number of my commercial accounts it has been
	years building up, what we call bundled services, whether it is
	below market interest rates on loans or purchasing their checks
	or offering them other incentives because we cannot pay
	interest on their corporate account. That is going to take some
	time to go back and work with those accounts and work out those
	arrangements so we can make it an equitable situation both for
	the corporate customer and for the bank.
	Mr. Jennings. Not only are there costs involved in the
	sweeps, but we found that our business customers sometimes have
	a hard time keeping up with what is going on and the smaller
	business customers especially have had problems maintaining
	enough staff to look at what we are giving them in the way of
	what we have done for them. So there are not only costs to us,
	but costs to our customers if they are doing that.
	Mr. Gulledge. I do not have sweep accounts in my bank, and
	obviously if this legislation--if this ban is removed, this is
	a service that I will have to provide to be able to be
	competitive and to provide the service. I am a practicing
	banker and I am going to provide the services that are demanded
	of my customers. But there are also contractual arrangements
	out there dealing with loan customers, conditional loan
	approvals, compensating balances, there is a lot of other
	things that are out there that would have to be dealt with, and
	it is not something that I think can be made effective
	immediately without having serious effect on the operations and
	the performance of banks.
	Mr. Cantor. Mr. Chairman, I yield back the balance of my
	time. Thank you.
	Chairman Bachus. Thank you, Mr. Cantor.
	Mr. Bentsen.
	Mr. Bentsen. Thank you, Mr. Chairman.
	There is some disagreement it appears among the panel over
	the timing of how quickly sweep accounts or how quickly an
	interest on deposit should be allowed, whether there should be
	a one-year transition or a two or three-year transition period.
	And I guess, Mr. Smith, I just heard you--I kept getting paged,
	so I apologize I had to keep getting up--but I heard you say
	you have a contractual--in your own instance, you have
	contractual arrangements with a provider that requires you to
	work with them for a certain amount of time. I guess my
	question is do any of you all know what the average length of
	the sweep arrangement contracts are? It would seem to me that a
	lot of these are a year or less and would be fairly flexible to
	get out of. Maybe that is not the case.
	Second of all, Mr. Gulledge, I wonder with respect to your
	members in particular, I understand there are some members who
	would not, smaller banks where it would be cost prohibitive to
	establish perhaps your own system of setting up interest
	payments, whether you were going to hedge or what not. But
	there is a ready market already there offering money market
	demand accounts. The banks are using them as it is. Why
	wouldn't your banks want to use that at a nominal fee for the
	benefit of their customers?
	Mr. Gulledge. Well, in the written testimony I have given
	you the example, as I alluded to, of the two banks, one that
	was a $721 million bank that said he would have to develop a
	$21 million deposit growth to compensate for the cost and yet
	another at $161 says that he needs it to be more competitive.
	And I think what we are really saying here is that every
	community bank is going to have to look at their market, they
	are going to have to look at their competition, they are going
	to have to take a look at their customer base. There is a lot
	of work, and here again this is another reason, in my opinion,
	for giving a period of time in working out the proper
	arrangement so that every bank can look at it and make their
	own decisions as to what can be profitable.
	Mr. Smith. I don't know that there is any specific--I don't
	know the numbers--if there was any time that it would take, the
	average time to eliminate the sweep accounts, but please keep
	in mind it is not just the contractual relationships on the
	sweep accounts. Maybe I've quoted a loan at a below market rate
	because of the compensating balances and that might be a five-
	year loan. So I have already committed to a loan customer on
	one side of the ledger and then I want to at least try to
	average it out so I can come out on the other side of this
	issue. So perhaps I purchase their checks. Some of these checks
	are expensive, maybe $4-$5,000 for a two-year supply of checks.
	So what we are trying to do is balance this so we can make this
	transition period as smooth as possible for the banks to work
	into this. And it is voluntary, so in some of these
	arrangements you may want to continue the way you have been for
	a period of time until you can handle it.
	Mr. Bentsen. I don't completely understand what you are
	saying. Are you saying that in some of your arrangements that
	you have with your commercial clients that you have offset some
	of your cost or you have hedged some of the benefits you are
	providing with your customer with the rate you are getting
	through the sweep account? So it is not just a question of
	getting out of the sweep account, it is other costs that are
	factored into that as well?
	Mr. Smith. That is correct. It is a whole bundle of
	services that we have been trying to provide to our corporate
	customer in lieu of paying them interest on their checking
	accounts.
	Mr. Bochnowski. We all have these contractual arrangements,
	yet they don't have to hinder the small business side of this.
	I don't know that we should ask them to wait, especially since
	our experience has been that we do bring funds from outside the
	banking system into the banking system when we offer a product
	that is akin to this, the sweep accounts that we now have. The
	time that it would cost any of us to let our existing
	relationships run off: that is on our side, but there are many
	bankers who have not chosen to take the steps that we have. And
	we will ask them to wait until we can solve our problem in
	order for them to be able to offer this business checking
	option that we would like to have to their customers. And I
	think it is fair to say that we shouldn't ask the rest of the
	banking industry to wait while we catch up.
	Mr. Bentsen. Mr. Chairman, I sort of agree with that
	viewpoint, but I guess obviously you make an arrangement with
	your clients and you put together a package that is both
	beneficial to your client or obviously they would not be there,
	and beneficial to the bank and stockholders, because you are
	ultimately in the business of making money, which is a good
	thing. But I think that Mr. Bochnowski is somewhat correct
	that--I mean, we can't stop the clock if we are going to try to
	continue to deregulate the banking industry, which is the next
	step to do that.
	Mr. Smith. I would only say that this is voluntary so
	nobody has to wait. If they want to offer the 24 transfer, that
	is the same thing and so nobody has to wait. They can offer
	that product. And I may want to continue to offer my sweep
	products instead of offering the 24 transfer.
	Mr. Bentsen. But overall deregulation would be put off for
	two or three years on some of the bills that are being
	considered, and I think that is an issue that we have to think
	long and hard about.
	Thank you all.
	Thank you, Mr. Chairman.
	Chairman Bachus. Thank you, Mr. Bentsen.
	Mr. Toomey.
	Mr. Toomey. Thank you, Mr. Chairman.
	I would just like to follow up on the issue of the
	voluntary nature of this, because I spent many years as a small
	business owner and I have had accounts with banks and I have
	run into all of these arrangements, or at least a number of
	arrangements that have been alluded to, whereby I have had a
	loan where the interest rate charged to me on the loan was
	contingent on a certain balance that I would not earn interest
	on. It strikes me if you got such a loan on the books you could
	leave it exactly as it is, because this bill would not require
	paying interest on those deposits; it would simply provide the
	option.
	Similarly, I remember going through stacks of my bank
	statements that were very complicated and very lengthy to total
	up all of the little credits against service charges that I was
	being given, again in sort of compensation for the average
	balance that I have left. And again, it seems to me that is
	something that could continue. I don't know why anyone would,
	but you could continue it. So I guess from the point of view of
	the corporate borrower or your customer in that sense, I am
	wondering if I am missing anything. Are there other kinds of
	transactions where, absent a long phase-in, you would really
	have a contractual problem, or could you not continue with the
	current arrangement as a practical matter with respect to most
	of your customers? Maybe not with your correspondent banking
	relationship whereby you have the sweep accounts, but with
	relationship to the customers. Am I missing categories of
	transactions or something?
	Mr. Smith. I can only give you the experience of my bank.
	It is a rural bank in mid-Missouri and most of my arrangements
	with compensating balances are implied arrangements. They are
	not written arrangements. And basically it is discussions and
	knowing my customers for the past 27 years that I have dealt
	with them. I just need some time to work with them, educate
	them that we are unbundling, listing this service. We are going
	to be paying interest on their account if they so desire, but
	at the same time we will be doing some other things on the
	other side of the ledger that may be charges to them. I don't
	have necessarily very many contractual relationships that say
	you have to keep a six figure balance in order to get this
	interest rate on your loan. It is more of an implied number,
	just from my knowledge and history of what this business has
	done in the past.
	Mr. Toomey. In your case, if you had one year for this
	change to take place, would that give you enough time?
	Mr. Smith. I still have a contractual relationship with a
	third party vendor out there that is going to go two years, so
	I've got to take care of him. So obviously we have got to meet
	my contractual relationship.
	Mr. Toomey. OK. I had another question for Mr. Bochnowski
	and I was wondering if you could share for us, I expect a lot
	of Members are not familiar with what a repo is and the
	mechanics and costly nature of trying to create this
	transaction as the way to circumvent this archaic rule. I was
	wondering if you could share with us how and why it is really a
	pain in the neck.
	Mr. Bochnowski. I appreciate that opportunity, Congressman.
	It is transparent to the customer, but on the bank side
	literally what we have to do is the customer's large deposit,
	instead of going into a checking account goes into a repurchase
	agreement; that is to say, they take a security interest in
	Treasury bills that we already own. And we are required by bank
	regulation when we do that--and since that is outside the
	depository relationship funds can sweep between their checking
	accounts and that account numerous times a day without
	violating any existing rule. But, because of the nature of the
	banking rules on this issue, we are required--first of all, we
	cannot pledge more than we have, so we have to monitor that
	security on a day-to-day basis, or those securities that are
	bundled on a day-to-day basis to be sure that we haven't
	exceeded regulatory requirements there. Second, because it is a
	repurchase agreement, again under requirement, we must tell the
	customer every day what the value of that security is. So we
	are forced to do a lot of bureaucratic transactions at a fairly
	substantial cost in order to reach a result to get around the
	law and to provide a transparent result to the customer.
	There is also a practical consideration here. At a bank our
	size, which is $400 million, we might have a securities
	portfolio on any given day of $40- to $50 million. Some of that
	is held for sale and some of that is our permanent portfolio.
	We can only attach this product to the permanent side of the
	portfolio. And so that we might be limited--there is a finite
	point at which we can no longer offer this service within our
	community because we run out of securities. If we have to wait
	for a year or two or three years, there again, I am going to
	say to my customers or people who have the potential to bring
	money back into the banking system, ``This is a great product,
	but could you wait ten or twelve months until I get back to
	you?'' I do not think that is necessarily good for our bank, I
	do not think it is good for our community, and I do not think
	it is good for our small business customers.
	Mr. Jennings. Technically that is a sale of securities by
	the financial institutions to the customer with an obligation
	or a commitment to repurchase those securities at a certain
	interest rate. And as my colleague over here said, there is
	only a limited number of securities that banks hold in their
	portfolios. So these are Federal Government securities and
	there is a limit to how much that is, so you can't offer that
	to anybody.
	Mr. Toomey. And they have to be marked to market daily and
	it strikes me as a rather cumbersome process as opposed to
	paying 4 or 5 percent interest.
	Mr. Smith. Correct.
	Mr. Toomey. Thank you. I yield back the balance of my time.
	Chairman Bachus. Thank you.
	Ms. Hart, do you have any questions?
	Ms. Hart. Thank you, Mr. Chairman.
	I did ask a question of the earlier panel that I don't
	think I need to ask again of this panel. Your testimony is all
	pretty clear. I think the one disagreement that I would like to
	get a little bit more of a handle on, or I guess some of you
	have been noncommittal, is the amount of time we ought to take,
	if any, to phase in the interest on business checking. The
	first panel clearly doesn't want any time to really be spent on
	a phase-in. I would just like each of you to comment on what
	you think would be the ideal amount of time for us to take
	until that is phased in, if it is phased in, or if we do it
	instantly.
	Mr. Smith. The bill that passed the House last year had a
	three-year phase-in and the American Bankers Association
	supported that bill, and that would be our position today.
	Mr. Bochnowski. America's Community Bankers would like to
	have it phased in immediately, because this is an option. We
	think that every bank could, at its own pace, decide when it
	wanted to phase it in and they could take that approach. I
	think the problem with the phase-in is you get the result, but
	you have a cumbersome process, because you have to go from
	money market accounts to the checking accounts. You have a
	double set of accounts you have to keep track of. You have a
	double set of regulations you have to watch. Why not just do
	it? If we are going to do it, let's do it.
	Mr. Jennings. Our members have incurred, a lot of them
	anyway, have incurred substantial costs in putting into place
	existing systems that they have. On the other hand, our members
	probably can afford to make the transition a lot easier than
	some of the other institutions could. So we did not take a
	position one way or the other on this, but we would not be
	opposed to whatever the subcommittee does up to a three-year
	phase-in.
	Mr. Gulledge. The differences that you are hearing between
	this panel and the other panel is that we are--for the most
	part, we are the practicing bankers and we are the ones that
	will be affected by the transition period, and I would say at
	that point as a minimum we need a three-year transition period.
	Mr. Hart. Thank you for that. So there isn't complete
	agreement, and that is OK.
	The other issue is the one that I had asked about earlier,
	was a question about pressure on the banks, and I think I want
	to direct this actually to community banks, because you are
	smaller to begin with, and the question that I had was is there
	any reservation in the back of your mind about the pressure
	that might be exerted upon your bank to compete in a market
	with a lot fewer resources and to offer interest even though it
	is not mandated by this law and even though your members or you
	may not feel that it is the wisest thing to do in order to stay
	even in business? Does that thought enter your mind or is that
	something you have heard from many of the members of the
	Association?
	Mr. Smith. I could respond. With my bank, personally, as I
	said, I started sweep accounts about a year ago and I have
	about $6.3 million in those sweep accounts and that is money
	that was going outside the community from local businesses and
	corporations. It was going outside the community. And I am glad
	I started it because I found some funding that I would like to
	get back into the community. If we do the 24 transfer
	legislation, then that will give me the opportunity to handle
	some of the liquidity problems in my community, my bank.
	Mr. Bochnowski. Congresswoman, I don't see that as an
	issue. I think we are under pressure right now to compete in
	our marketplace for all kinds of deposits and all kinds of
	products and services. I started in this Roundtable community
	of banks back in 1976 and I think the Federal Reserve
	statistics are that, at that point 90 percent of all deposits,
	all domestic deposits were at passbook or less in the United
	States of America. Times have changed. Clearly regulators also
	look at something called interest rate risk. They have to watch
	us very carefully at the behest of Congress on those kinds of
	issues. I think that the industry has proven that it can deal
	with these issues. And I think that we--Jim's company is
	currently offering this product. We are, too. I think we are
	doing it prudently. I don't think we are giving away the store
	at all.
	Mr. Jennings. The 24 sweep issue is--obviously our
	preference is to have interest on checking and interest on
	sterile reserves linked together. That is preferable. I can
	remember back to 1978 when the interest was allowed first to be
	paid on consumer checking accounts and it did not start out as
	interest on checking accounts. It started out as interest on
	savings accounts, which you could sweep into checking to pay
	the checks that came in, and only after a period of time did we
	go to NOW accounts and allowing interest on NOW accounts. In my
	own view, that is just people realize that is what the market
	is and that is the way things ought to be. So the 24 sweeps, I
	think if we went that route it is just temporary and eventually
	we would go to the market rule, which is paying interest on the
	funds that you have that belong to somebody else.
	Chairman Bachus. Thank you, Mr. Jennings.
	Mrs. Kelly.
	Ms. Hart.
	Ms. Hart. Mr. Chairman, I just realized that my time was
	up. Thank you.
	Chairman Bachus. Thank you.
	Mrs. Kelly.
	Mrs. Kelly. Thank you, Mr. Chairman.
	Mr. Smith, can you tell me the percent of accounts that are
	business checking accounts at your bank?
	Mr. Smith. Probably 35 percent business checking accounts,
	and I have some accounts classifieded as ag loans or ag
	accounts that would be approximately another 3 or 4 percent,
	because they are incorporated. So somewhere between 35 and 40
	percent.
	Mrs. Kelly. Thank you.
	Mr. Bochnowski, can you tell me what percent of accounts
	you have in your business checking accounts in your bank?
	Mr. Bochnowski. It fluctuates, but I would estimate it is
	20 to 25 percent.
	Mrs. Kelly. That is considerably less than Mr. Smith holds
	in his bank. So would I be wrong in assuming that you see the
	repeal of the prohibition of paying interest on business
	checking as a way that you can attract a greater number of
	business deposits in your bank?
	Mr. Bochnowski. I think that has something to do with it. I
	think there is also a little bit of history. While we are
	currently chartered as a State bank under Indiana law, we
	started as a thrift. Our company is 90 years old. We haven't
	been able to have business checking accounts for--except for
	the last probably decade--ten or fifteen years.
	Mrs. Kelly. Mr. Bochnowski, your testimony did not address
	the issue of giving the Fed greater flexibility in setting the
	reserve requirements. Do you have a position on my legislation
	there?
	Mr. Bochnowski. We are in favor of your legislation there.
	Mrs. Kelly. Thank you. Also in your testimony you said that
	sweep activities are a costly and cumbersome product. I find
	this a little bit confusing, because I have a copy of a report
	in my hand here, it is Service and Product Solutions for
	Community Banks, which it says on the masthead, ``Brought to
	you by America's Community Bankers.'' And on page six of this
	ACB publication it says--and I can read it or you can see it,
	and I have done my homework here, and underscored it: ``The
	banks utilizing sweeps are finding that they are strengthening
	existing customer relationships as well as benefiting from
	obtaining new bank clients. A bank sweep account in a focused
	marketing plan represents a serious advantage in expanding and
	acquiring new business relationships, which can be extended
	into other banking opportunities.''
	It just seems very interesting to me that you would give
	such different testimony from what the ACB writes in its own
	publication.
	Mr. Bochnowski. I don't disagree with what is said there.
	When I say they are costly, I mean it in this sense,
	Congresswoman. The threshold for our sweep accounts is $50,000.
	We cannot start our business customer until they get to that
	level. We would like to have it be much lower. We would like to
	see it at the $10- or $15,000 level, depending on their
	relationship with the bank in other ways, as has been alluded
	to in this testimony. But I think when I say they are costly,
	it is simply because they are, and that we cannot start the
	process of entering the customers into the sweep accounts until
	they can reach a certain deposit threshold level.
	Mrs. Kelly. Thank you very much. I yield back the balance
	of my time.
	Chairman Bachus. Thank you.
	Mr. Rogers.
	Mr. Rogers. Thank you, Mr. Chairman.
	Mr. Smith, you mentioned a point earlier that caught my
	attention. You said that--and maybe I misunderstood you--if we
	move the date up it would cause some liquidity problems for the
	bank. I assume that is because of the contractual relationship
	you have with your large corporate accounts. Can you help me
	understand that?
	Mr. Smith. No, I don't believe that is the way I intended
	that to sound. I think if we moved the date forward I think it
	will be difficult for the banks that are under contractual
	relationships to unhook from those relationships and unbundle
	those services quickly. And I think it will cost them some
	money on the bottom line in trying to meet that timeframe and
	move into the other timeframe. I didn't mean it from a
	liquidity standpoint, from a lending framework. I just meant
	that it would cost some of those banks some money on the bottom
	line in order to unbundling this program and starting a new
	program at the same time.
	Mr. Rogers. Can you give me an example of some kinds of
	activity you would want to unbundle and leave off the table in
	lieu of paying interest?
	Mr. Smith. For instance, I will go back, if we have
	purchased checks for this corporation, if we were going to pay
	interest on their checking account in the future we would not
	be interested in purchasing their checks and being out that
	expense. If we were going to tie it to compensating balancing,
	their loan rates--if we are going to tie that to compensating
	balances, then we won't be as interested in giving them such an
	advantageous program, if we are going to be paying them out on
	the other side of the ledger, because we have to balance the
	income and expense accordingly. So that is basically what I was
	driving at when I indicated we would have to unbundle some of
	these services and we would need time to get that accomplished
	as we move into this transition.
	Mr. Rogers. I appreciate that. I relayed a story earlier to
	Congresswoman Kelly that I was in a very rural, very small town
	in Michigan yesterday, having a meeting completely separate
	from this issue, and the local community bank closed its doors
	and walked down in total to that meeting to tell me to support
	this particular issue. I want to congratulate Congresswoman
	Kelly. If this can have that kind of a profound impact on a
	community that needs all the help it can get, I will be with
	it.
	With that, Mr. Chairman, I yield back the balance of my
	time.
	Chairman Bachus. Thank you.
	In addition to the witnesses that have testified before us
	today, the subcommittee has received written submissions from
	the United States Chamber of Commerce, the National Federation
	of Independent Business, the Association of Financial
	Professionals and the Community Bank Coalition, and their
	written submissions will become part of the record without
	objection.
	[The information can be found on page 85 in the appendix.]
	Chairman Bachus. And some Members may wish to submit to the
	panel, both the first and second panel, written questions, and
	with unanimous consent I am going to ask that the record be
	held open for 30 days to permit Members to submit those written
	questions to you and for you to respond back and allow them to
	introduce your responses into the record. So if they do make
	written requests of you, I hope that they will do so promptly
	and that you all will respond so that they may introduce those
	within 30 days. Obviously if they get them to you 3 weeks from
	today it may be tough.
	Mr. Jennings. I will be glad to answer any questions.
	Chairman Bachus. Thank you.
	With that, we thank you for your testimony. The second
	panel is discharged, and the hearing is adjourned. Thank you.
	Mr. Jennings. Thank you, Mr. Chairman.
	[Whereupon, at 4:28 p.m., the hearing was adjourned.]


	A P P E N D I X



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