Banks have a secret following July’s repeal of Regulation Q. Most now offer the interest-bearing corporate accounts the rule prohibited, but you have to ask to find that out.
When rates rise, however, companies can expect aggressive competition for their short-term investment dollars that likely will include fewer money-market funds and sweep accounts.
A recent survey by Calabasas, Calif.-based Informa Research Services found that 70% of banks currently offer interest-bearing checking accounts to corporate customers. At the high end, 86% of banks with between $20 billion and $50 billion in assets offer the accounts, while 60% of community banks with $1 billion or less in assets have taken the plunge.
Meanwhile, 82% of the 52 banks responding to the survey, including 10 institutions with $100 billion or more in assets and five with $1 billion or less, say they are taking a defensive market posture. In other words, the accounts are available, but only if clients ask for them.
With today’s rates so low, however, corporate finance executives see little benefit in moving funds to interest-bearing accounts paying only a few basis points more, and sometimes less, than the earnings credit rates (ECRs) they receive on current accounts. ECRs are not interest but credits that companies can use to pay for bank services, one way banks got around Reg Q.
In addition, the Federal Deposit Insurance Corp. fully insures non-interest-bearing accounts through the end of 2012, making those accounts preferable from a risk management standpoint; after 2012, all accounts will be insured up to $250,000.
Nevertheless, a few banks are using their post-Reg Q accounts to capture new business. Lake City Bank, with $2.8 billion in assets, has rolled out a Business Rewards account that pays interest of 2% on balances up to $25,000.
Kevin Deardorff, executive vice president of the Warsaw, Ind., bank with 48 branches, says the bank expects interest-bearing corporate accounts to become widely used, especially as rates rise.
“We wanted a product that is well developed and we’re actively selling so we can capture more market share,” Deardorff says. The bank charges a $10 monthly service fee to avoid cannibalizing demand for its existing zero-interest accounts, and clients must make at least 10 debit transactions monthly and receive statements electronically.
So far there’s little demand for the account, says Deardorff, but marketing has been low-key, in part to reserve a new weapon for Lake City bankers’ arsenal when they call on prospective clients.
One of the big banks seeking to capitalize on Reg Q’s repeal is Capital One. For accounts with balances between $10,000 and $100,000, it’s offering a year-long promotional rate of 1%; for balances between $100,000 and $500,000, the rate drops to 0.5%; and after a year the account shifts to the market rate. Capital One executives were unavailable by press time.
Jim Graves, senior vice president for liquidity management at KeyBank, says demand for its interest-bearing corporate accounts has so far mostly come from small businesses with balances under $250,000.
The bank now offers one interest-bearing account to small businesses and a separate version to commercial clients, and it plans to offer those customers hybrid versions—accounts that provide an ECR to pay for fees and interest on excess balances—in February.
Graves says he expects clients to start paying attention when rates rise to 1%, and predicts that 3% will be a turning point that generates competitive offerings. “The higher rate tends to indicate a more robust and healthy economy—and the number of alternatives becomes much more appetizing,” Graves says.
Market funds and sweep accounts, however, may no longer be such important parts of the competitive mix. Graves notes that many companies currently operate non-interest-bearing accounts alongside sweep and or money market accounts. “Unless those accounts find some way to differentiate themselves through the rate structure or some other factor, there’s really not a whole lot of reason to keep two accounts,” he says.
And given the flexibility banks have to provide teaser rates and other tantalizing banking services to win over customers, they appear bound for heavy competition.
It’s ironic. Regulation Q was enacted in response to the 1929 stock crash to encourage businesses to hold their short-term investments outside of banks so that companies would not pull their funds out in a bank run. It has been repealed in response to another financial crisis. “We’re turning 180 degrees,” says Anthony Carfang, a partner at Treasury Strategies.
For an earlier look at how banks and corporations will respond to the repeal of Reg Q, see Reg Q Wipeout.