Goodbye, Regulation Q

REGION – While some bankers are being pro-active, others are taking a "wait-and-see" approach to a recent change in federal banking regulations that will allow them to offer interest-bearing checking accounts to business owners.

Regulation Q is part of the Glass-Steagall Banking Act of 1933 and was enacted as part of a Congressional response to the lack of local lending during the Great Depression.

Reg Q, as it is known, gave the Federal Reserve the right to cap the interest rate that banks could pay depositors. So the Fed immediately capped the interest rate paid on business checking accounts at 0 percent. This encouraged local banks to lend money within their communities, rather than placing it on deposit in larger financial centers at potentially higher returns.

Though interest wasn't paid to business depositors, many banks continued to attract customers by offering an "earnings credit" on business checking accounts, which offset service charges based on a depositor's balance.

As of July 21, another federal regulation – the Dodd-Frank Act – will allow interest on business checking accounts and banks are expected to rethink the products they offer business owners.

Traverse City State Bank is being pro-active by creating a new business checking account that is interest bearing. These accounts will earn interest at market rates, according to Nancy Haller, the bank's senior vice president and compliance officer.

"We have begun discussions with commercial customers to customize a product that balances the unlimited benefits of FDIC insurance with interest income opportunities, service charges and earnings credits," she says. "We are designing products that will be flexible and beneficial to our business customers.

"Banks were previously not allowed to pay interest on business checking accounts, but now the playing field has been leveled for business and individuals. Businesses can now enjoy interest income on their checking account balances, similarly to how individual account holders have in the past."

TCSB's individual account owners are not impacted in any way with the regulatory changes, she adds.

Haller says it's also important to note that new deposit products could have ramifications to a business depositor's FDIC insurance coverage. Under current regulations, FDIC insurance coverage is limited to $250,000 on interest bearing accounts. Non-interest bearing checking accounts will continue to have unlimited FDIC insurance coverage through Dec. 31, 2012.

The change will present a whole new opportunity for regional banks to introduce new products and assess their product mix, according to Norm Plumstead, first vice president at Honor Bank.

"We view it as an opportunity, particularly for community banks," he says. "One reason, is that we've always tried to keep our products easy [for customers] to understand. Being allowed to offer hard interest allows a straight-forward, easy-to-understand product."

Plumstead notes that Honor Bank is working to develop new types of accounts and should be unveiling them by the end of the year.

"I think small business owners will have to consider two things," he says. "First are the tax consequences. They will have to pay taxes on hard interest accounts. Second is that once the customer switches accounts they are disqualified from unlimited FDIC coverage. That could be a factor for some."

"I think a lot of banks are going to wait and see what's happening with rates and what competitors do," says Doug Zernow of Northwestern Bank. "That's what I'm hearing within the industry."

Officials at the local Chase Banks referred questions to a corporate spokeswoman who said Chase declined to comment on Reg. Q. BN

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