Banks have a secret following July's repeal of Regulation Q.Most now offer the interest-bearing corporate accounts the ruleprohibited, but you have to ask to find that out.

When rates rise, however, companies can expect aggressivecompetition for their short-term investment dollars that likelywill include fewer money-market funds and sweep accounts.

A recent survey by Calabasas, Calif.-based Informa ResearchServices found that 70% of banks currently offer interest-bearingchecking accounts to corporate customers. At the high end, 86% ofbanks with between $20 billion and $50 billion in assets offer theaccounts, while 60% of community banks with $1 billion or less inassets have taken the plunge.

Meanwhile, 82% of the 52 banks responding to the survey,including 10 institutions with $100 billion or more in assets andfive with $1 billion or less, say they are taking a defensivemarket posture. In other words, the accounts are available, butonly if clients ask for them.

With today's rates so low, however, corporate finance executivessee little benefit in moving funds to interest-bearing accountspaying only a few basis points more, and sometimes less, than theearnings credit rates (ECRs) they receive on current accounts. ECRsare not interest but credits that companies can use to pay for bankservices, one way banks got around Reg Q.

In addition, the Federal Deposit Insurance Corp. fully insuresnon-interest-bearing accounts through the end of 2012, making thoseaccounts 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 tocapture 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 expectsinterest-bearing corporate accounts to become widely used,especially as rates rise.

“We wanted a product that is well developed and we're activelyselling so we can capture more market share,” Deardorff says. Thebank charges a $10 monthly service fee to avoid cannibalizingdemand for its existing zero-interest accounts, and clients mustmake at least 10 debit transactions monthly and receive statementselectronically.

So far there's little demand for the account, says Deardorff,but marketing has been low-key, in part to reserve a new weapon forLake City bankers' arsenal when they call on prospectiveclients.

One of the big banks seeking to capitalize on Reg Q's repeal isCapital One. For accounts with balances between $10,000 and$100,000, it's offering a year-long promotional rate of 1%; forbalances between $100,000 and $500,000, the rate drops to 0.5%; andafter a year the account shifts to the market rate. Capital Oneexecutives were unavailable by press time.

Jim Graves, senior vice president for liquidity management atKeyBank, says demand for its interest-bearing corporate accountshas so far mostly come from small businesses with balances under$250,000.

The bank now offers one interest-bearing account to smallbusinesses and a separate version to commercial clients, and itplans to offer those customers hybrid versions—accounts thatprovide an ECR to pay for fees and interest on excess balances—inFebruary.

Graves says he expects clients to start paying attention whenrates rise to 1%, and predicts that 3% will be a turning point thatgenerates competitive offerings. “The higher rate tends to indicatea more robust and healthy economy—and the number of alternativesbecomes much more appetizing,” Graves says.

Market funds and sweep accounts, however, may no longer be suchimportant parts of the competitive mix. Graves notes that manycompanies currently operate non-interest-bearing accounts alongsidesweep and or money market accounts. “Unless those accounts findsome way to differentiate themselves through the rate structure orsome other factor, there's really not a whole lot of reason to keeptwo accounts,” he says.

And given the flexibility banks have to provide teaser rates andother tantalizing banking services to win over customers, theyappear bound for heavy competition.

It's ironic. Regulation Q was enacted in response to the 1929stock crash to encourage businesses to hold their short-terminvestments outside of banks so that companies would not pull theirfunds out in a bank run. It has been repealed in response toanother financial crisis. “We're turning 180 degrees,” says AnthonyCarfang, a partner at Treasury Strategies.

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