From the September 2010 issue of Treasury & Risk magazine

Reg Q Wipeout

Treasurers who thought the ambitious Dodd-Frank financial reform bill would not disrupt routine cash management operations are getting a wake-up call. While over-the-counter derivatives rules and rating agency regulation attracted the most attention from treasury pros in the run-up to the bill's passage, they're now discovering that the repeal of Regulation Q could change how they deal with overnight account balances. And alterations in the coverage for bank accounts provided by the Federal Deposit Insurance Corp. could mean new banking fees and changes in how account analysis statements are handled.

Now that Reg Q is completely defunct, banks are free to pay interest on corporate checking account balances for the first time since the Depression. Just how much that will affect where cash managers keep corporate funds remains to be seen.

The elimination of Reg Q could create more differences among banks and introduce new forms of competition that could reshape the marketplace. Banks now have a new tool to compete for corporate business, notes Eric Lansky, president of USA Mutuals in Dallas, Texas, which packages bank depository products for corporate investors.

"Banks will use the interest they pay on business checking accounts to compete for commercial clients," Lansky says. "This will be good for businesses, particularly small businesses. It will be bad for banks not able to pay competitive rates." And it will be bad for money funds, he adds.

But others note that banks may have limited interest in paying interest. If banks are pinched for liquidity, they could pay more on checking account balances to attract funds, but in normal times they will not want to see large balances accumulate in interest-paying demand deposit accounts and will not pay high interest rates to attract them, Graves suggests.

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