As mandated by the Dodd-Frank Act, on July 21 Reg Q, which hasprohibited banks from paying interest on business checking accountssince the 1930s, will disappear. But thanks to low interest ratesand unlimited deposit insurance available on non-interest-bearingaccounts until 2012, banks expect don't expect a huge dash forinterest-bearing accounts.

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Citi plans to offer interest-bearing accounts to businesscustomers, and expects no more than1% to 2% of corporate andinstitutional balances to shift to interest-bearing demand depositaccounts, says Michael Berkowitz, head of North American liquidity,investments and information services at Citi Global TransactionServices.

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“There are already so many investment options out there thatenable a client to get a return on their balances,” Berkowitzsays.

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Many companies are already compensated for the balances theyhold in business checking accounts with an earnings credit rate(ECR) that they use to offset treasury management fees. Companiescan also use sweep accounts that move excess funds into a separateaccount where they're invested.

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Bank of America will also create a new product to take advantageof the end of Reg Q, but “it will likely not offer an aggressiverate” given the cost to the bank to create the instrument, says DubNewman, head of global treasury sales at Bank of America MerrillLynch. Newman questions whether companies will have muchinterest in shifting to a new banking product “based on a nottremendous amount of difference in returns.”

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When U.S. rates begin to rise, companies might have moreinterest in accounts that pay interest, he says, although ratesaren't expected to head higher until late next year. “But rightnow, we're not feeling demand on the upper end.”

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Newman also cites the unlimited FDIC insurance that is availablethrough the end of 2012 on all accounts that don't pay interest.“To the degree that a client is focused on that, particularly in alow-rate environment where they're not seeing a lot of returnregardless of the instrument they're in, that extra safety of FDIC[coverage] has a value to it,” he says.

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Smaller companies might be more interested in interest-bearingchecking accounts than large companies, which use more bankservices whose costs can be offset with ECRs, Newman says.

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Once Reg Q ends, analysts expect bank offerings to includeaccounts that offer an earnings credit rate; accounts that payinterest; and hybrid accounts that offer both an ECR and, once thecompany's fees are covered, hard interest.

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Berkowitz says Citi's hybrid offering will involve two accounts,with the excess funds in the ECR account swept to an account thatpays interest. Providing both ECR and interest in a single accountis less beneficial for customers, he says. “If you pay interest atall on an account, you lose the full FDIC insurance. By maintainingtwo accounts, you maintain full FDIC insurance on the non-interestbearing portion.”

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According to a survey of 364 companies conducted by theAssociation for Financial Professionals, 50% have no plan toincrease their balances at their U.S. relationship banks given thechange in Reg Q, while 29% say they're looking into it, and 16% saythey plan to do so, “if only on a limited basis.”

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Thomas Hunt, director of treasury services at AFP, notes thatcompanies haven't had much information on which to base theirdecisions because there's been little information about how banksplan to respond to the end of Reg Q. “Banks haven't been tippingtheir hand as to what the offerings will be,” Hunt says.

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Dan Gill, director of corporate products at Weiland FinancialGroup, a division of Open Solutions, says corporate demand forinterest-bearing accounts depends partly on the company's industry.For example, insurers, which are required to keep a certain amountof liquid funds, might be more inclined to move to aninterest-bearing account than a manufacturing company that sweepsexcess funds to an investment account, he says.

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And for big companies, the possibility of earning interest onchecking accounts is just one of many factors they will considerwhen choosing their banks, Gill says. But he predicts that largecorporates “are going to stay where they are until rates aresignificantly higher.”

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Gill adds that the rates on business checking accounts aren'tlikely to be that attractive. “Corporate checking balances are[banks'] least desirable balances, because they can go away at anytime, so banks are not going to try to entice them,” he says.

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For an earlier look at how banks and corporations willrespond to the repeal of Reg Q, see Reg QWipeout.

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Susan Kelly

Susan Kelly is a business journalist who has written for Treasury & Risk, FierceCFO, Global Finance, Financial Week, Bridge News and The Bond Buyer.