Sherman: Repeal the Ban on Interest on Business Checking Accounts

The House of Representatives has approved a bill to repeal the ban on banks paying interest on business checking accounts, an issue I have championed as a member of the House Committee on Financial Services.

The Business Checking Freedom Act would allow banks to pay interest on business checking accounts.

The legislation would undo a Depression-era ban that is outdated in todays competitive financial marketplace, and puts a particular burden on small banks and small businesses.

The main rationale for the outdated Depression-era law was that unpredictable movements of deposits among banking institutions in response to interest rate competition may make some banks more vulnerable to failure.

Modern-day analysts have come to the conclusion that rescinding the prohibition on interest payments actually would improve the efficiency of financial markets. Moreover, the transparency of explicit interest rate payments would lead to better decision making on the part of banks and their depositors.

Changing the banking law also could have a beneficial effect on the conduct of monetary policy by the Federal Reserve. If paying interest on deposits increased reserve balances, as economists expect, then the Fed would have more funds to invest in government securities, to the ultimate benefit of the federal treasury.

Ending the ban also is a matter of fairness. Some large banks have avoided the ban by using so-called sweep accounts that transfer money between interest-bearing accounts and non-interest-bearing checking accounts. Such accounts often have significant minimum-balance requirements and entail extensive paperwork that make them unattractive for small businesses.

The House bill rescinding the ban on interest on business checking accounts passed more than a year ago. Unfortunately, despite the clear need of small businesses for this change, the Senate has refused to act on the legislation and time is running out in this session of Congress, which ends this December. Supporters of this measure should make their voices heard before the opportunity for small businesses slips away.

I hope that the Senate will finally approve this legislation before Congress concludes this term later this year. Should the Senate turns its back on small business, I will reintroduce this legislation after the next Congress convenes in January " but that means we would have to start the legislative process all over again.