House Repeals Antiquated Banking Law to Benefit Small Businesses

April 9, 2002

The House of Representatives today approved H.R. 1009, the Business Checking Freedom Act, by voice vote. 

The legislation, sponsored by Financial Services Committee Member Rep. Patrick Toomey (PA), would abolish a Depression-era ban that prohibits financial institutions from offering interest on business checking accounts.

?In order for banks to remain competitive in today?s marketplace, they need to be able to offer a variety of products and services to attract deposits,? Toomey said. ?This legislation will help in permitting banks to pay interest to their business customers.?

Small businesses have disproportionately suffered under the ban because they are typically unable to take advantage of complex banking mechanisms used to skirt the ban.

Financial Services Committee Chairman Michael G. Oxley (OH) said, "Because of this quirk in current law,  America ?s small businesses are the only entities which currently have little choice but to allow their money to sit idly in banks. This legislation will allow those small businesses to put their money to work for them."

No longer applicable in today?s financial marketplace, the prohibition against banks offering interest on business checking accounts has existed since the Great Depression.  At the time, it was perceived that competition among banks for the limited amount of available capital was worsening the nation?s liquidity problem, so the ban on interest for business checking accounts was born.

Small business owners are disadvantaged because they tend to bank at smaller institutions. If they choose to bank at larger institutions, their smaller deposits typically mean they won?t qualify for complicated mechanisms such as "sweep accounts." Larger banks offer these products, which circumvent the ban on interest-bearing checking accounts, to larger business depositors.

The owner of a typical, five-employee small business loses about $3,000 per year because he is unable to earn interest on his business checking account. This amount could pay for three new computers or a one-year lease on a vehicle, items that would make a meaningful contribution to the small business owner?s success.

Repeal of the ban would be phased in over a two-year period following enactment of the legislation.

The bill would also authorize the payment of interest on deposits banks are required to hold with the Federal Reserve.  The current ban on interest payments is a disincentive for banks to maintain the reserves, which the Fed uses to conduct monetary policy.

Regarding the reserves issue, Oxley said, ?In the competitive financial marketplace, no one should have the free use of someone else?s money.  The government?s free ride should end.?

The Subcommittee on Financial Institutions and Consumer Credit approved the bill on March 21, 2001 and the full Committee on March 28, 2001.

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