[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
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71-148 WASHINGTON : 2001
_______________________________________________________________________
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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
March 13, 2001
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