A provision was approved by the U.S. House and Senate financial reform conferees last week, which allows banks to pay interest on business demand deposit accounts for the first time since the Great Depression.
Below is our short synopsis of the issues.
Commercial Banks will face higher cost of funds as they begin paying interest. However, they will be better able to compete for deposits through interest payments and FDIC guarantees under TAG. Higher cost of funds and deposit insurance premiums will
probably be recouped through higher fees on transaction services.
The challenge for banks is to carefully calibrate rate structures and transaction fees such that they attract a customer mix that optimizes their return on capital.
Fund Companies will face increased rate competition from the banking sector. Their challenge will be to convince customers that the resulting higher banking service charges will offset interest paid. They will need to position their funds as either
yield-enhanced or safer than bank deposits – a task made tougher by recent changes to rule 2a-7 and FDIC insurance.
However, fund companies can point out to regulators that if customers exit funds and move into the banking system, “too big to fail” banks will become even larger.
Corporate Treasurers will need to sort through several changes that will result from the RegQ repeal. In the short run, they will experience a volatile market, characterized by new products, new rate structures and new fees, as well as promotional
pricing. Credit worthiness of the institution becomes a larger issue. It’s likely that companies will need to evaluate new and tiered rate structures, earnings credits, transaction fees, deposit insurance pass-thoroughs, short-term investments, and sweep accounts.
These changes will impact companies differently depending on their balance levels, transaction volume, liquidity needs and financial situation.
The outcome of these changes will impact everyone in the financial services industry. We'd be interested in hearing your thoughts on the topic.