Back in the 1930s, during the Great Depression, Congress decided one way to spur economic growth would be to prohibit banks from paying interest on demand deposit accounts (DDAs). The idea was to get companies to use their excess cash to build plants and purchase new equipment, and thereby create more jobs.
Fast forward to today, with the country again experiencing a rough economic period, and lawmakers have reversed course. Concerned about waning Federal Reserve capital levels — including the potential for dipping below reserve requirements and adversely affecting the payments system — the government has sought to increase bank deposits by repealing the interest prohibition, known as Regulation Q. The repeal, part of the Dodd-Frank financial reform law, went into effect in July.
To learn how repealing Reg Q might impact liquidity management alternatives and strategy, we interviewed Kevin Talley, Vice President and Treasury Management Product Manager at First Tennessee Bank.
Should financial managers re-evaluate their liquidity management alternatives now that banks can pay interest on business checking accounts?
Businesses should always be reassessing what their banks can offer them. But there is definitely an added reason to do so now with the repeal of Reg Q. Banks are working on some interesting new products and there may be some less expensive and more flexible liquidity management options emerging.
What new account options are on the horizon?
One new liquidity management option we're seeing in the industry is a checking plus interest account. It is similar to a NOW account but does not have some of the restrictions, such as eligibility requirements. NOW accounts were introduced in the 1980s as a way of allowing certain kinds of businesses, such as sole proprietorships, government entities and non-profits, to earn interest on checking accounts. The new checking plus interest accounts will be available to all businesses and eliminate NOW account restrictions on the number of allowable monthly withdrawals. First Tennessee introduced a checking plus interest account in August in conjunction with the Reg Q repeal. We call it the Business Interest Checking Account.
Are banks working on any other liquidity management alternatives in response to the Reg Q repeal?
Another emerging option is the hybrid account, which offers an earnings credit allowance as well as the potential for earning interest. If an accountholder maintains balances that exceed what's required to pay for monthly bank services, such as cash management fees, the bank can pay interest on the excess balances. In other words, if a company must maintain $800,000 in balances to pay for bank services through an earnings credit allowance, and the firm has $1 million on deposit in a hybrid account, the bank would pay interest on the excess $200,000 in that account.
What impact on liquidity management practices do you anticipate following the Reg Q repeal?
I believe NOW accounts will fade away, since all organizations will be able to receive the same interest benefits through the new checking plus interest accounts without the NOW's eligibility and withdrawal restrictions. Additionally, some companies will look at moving funds from overnight sweep accounts into checking plus interest accounts as a way of reducing fees.
Do you consider shifting non-interest bearing checking account balances into new interest-bearing checking accounts a "no brainer"?
Not at all. In today's economic environment, rates are extremely low, and we don't see that changing in the next 12 months. Many companies may want to simply maintain the status quo because the earnings credit allowance they are earning on their checking balances may be greater than the interest they could earn on an interest-bearing checking account.
Are there other factors to consider?
Taxes, for one. Earnings credit allowances are not taxable, but interest on checking balances is. Additionally, safety is a factor. If you invest in a business sweep account such as an overnight repurchase agreement account, you are 100% collateralized, as there are securities pledged against your invested funds. Similarly, deposits of any amount in a non-interest bearing DDA currently receive full FDIC insurance coverage. On the other hand, if you move from one of these accounts into one of the new interest-bearing checking accounts, you will only have FDIC insurance coverage up to $250,000.
Is there anything else you would like readers to know about how First Tennessee is responding to the Reg Q repeal?
Clients should be aware that while the new law allows banks to offer new interest-bearing checking account options for businesses, it does not require banks to do so. Our position at First Tennessee is that we expect some of our business clients will want to take advantage of the new law, so we are meeting that need with the new Business Interest Checking Account, and we are also developing a hybrid account alternative.
Contact your First Tennessee Treasury Management Sales Officer or Relationship Manager to learn more about the repeal of Reg Q or Business Interest Checking.