As mandated by the Dodd-Frank Act, on July 21 Reg Q, which has prohibited banks from paying interest on business checking accounts since the 1930s, will disappear. But thanks to low interest rates and unlimited deposit insurance available on non-interest-bearing accounts until 2012, banks expect don’t expect a huge dash for interest-bearing accounts.
Citi plans to offer interest-bearing accounts to business customers, and expects no more than1% to 2% of corporate and institutional balances to shift to interest-bearing demand deposit accounts, says Michael Berkowitz, head of North American liquidity, investments and information services at Citi Global Transaction Services.
“There are already so many investment options out there that enable a client to get a return on their balances,” Berkowitz says.
Many companies are already compensated for the balances they hold in business checking accounts with an earnings credit rate (ECR) that they use to offset treasury management fees. Companies can also use sweep accounts that move excess funds into a separate account where they’re invested.
Bank of America will also create a new product to take advantage of the end of Reg Q, but “it will likely not offer an aggressive rate” given the cost to the bank to create the instrument, says Dub Newman, head of global treasury sales at Bank of America Merrill Lynch. Newman questions whether companies will have much interest in shifting to a new banking product “based on a not tremendous amount of difference in returns.”
When U.S. rates begin to rise, companies might have more interest in accounts that pay interest, he says, although rates aren’t expected to head higher until late next year. “But right now, we’re not feeling demand on the upper end.”
Newman also cites the unlimited FDIC insurance that is available through the end of 2012 on all accounts that don’t pay interest. “To the degree that a client is focused on that, particularly in a low-rate environment where they’re not seeing a lot of return regardless of the instrument they’re in, that extra safety of FDIC [coverage] has a value to it,” he says.
Smaller companies might be more interested in interest-bearing checking accounts than large companies, which use more bank services whose costs can be offset with ECRs, Newman says.
Once Reg Q ends, analysts expect bank offerings to include accounts that offer an earnings credit rate; accounts that pay interest; and hybrid accounts that offer both an ECR and, once the company’s fees are covered, hard interest.
Berkowitz says Citi’s hybrid offering will involve two accounts, with the excess funds in the ECR account swept to an account that pays interest. Providing both ECR and interest in a single account is less beneficial for customers, he says. “If you pay interest at all on an account, you lose the full FDIC insurance. By maintaining two accounts, you maintain full FDIC insurance on the non-interest bearing portion.”
According to a survey of 364 companies conducted by the Association for Financial Professionals, 50% have no plan to increase their balances at their U.S. relationship banks given the change in Reg Q, while 29% say they’re looking into it, and 16% say they plan to do so, “if only on a limited basis.”
Thomas Hunt, director of treasury services at AFP, notes that companies haven’t had much information on which to base their decisions because there’s been little information about how banks plan to respond to the end of Reg Q. “Banks haven’t been tipping their hand as to what the offerings will be,” Hunt says.
Dan Gill, director of corporate products at Weiland Financial Group, a division of Open Solutions, says corporate demand for interest-bearing accounts depends partly on the company’s industry. For example, insurers, which are required to keep a certain amount of liquid funds, might be more inclined to move to an interest-bearing account than a manufacturing company that sweeps excess funds to an investment account, he says.
And for big companies, the possibility of earning interest on checking accounts is just one of many factors they will consider when choosing their banks, Gill says. But he predicts that large corporates “are going to stay where they are until rates are significantly higher.”
Gill adds that the rates on business checking accounts aren’t likely to be that attractive. “Corporate checking balances are [banks’] least desirable balances, because they can go away at any time, so banks are not going to try to entice them,” he says.
For an earlier look at how banks and corporations will respond to the repeal of Reg Q, see Reg Q Wipeout.