Risk & Compliance

Any Interest in Interest?

Banks are taking a wait-and-see approach before offering companies interest on their checking accounts, which the Dodd-Frank Act now permits.
Sarah JohnsonJuly 21, 2011

Among the many regulations of the Dodd-Frank Act is a rare gift for companies that becomes effective today: the ability of banks to pay interest on business checking accounts. Previously, banks were prohibited from offering interest on these accounts under a decades-old rule called Regulation Q. That rule’s repeal went into effect on the one-year anniversary of Dodd-Frank’s enactment.

Still, don’t expect a barrage of marketing campaigns from banks begging for your deposits. Many banks have not yet said how they will react to the change. As a result, half of the finance executives responding to a May survey by the Association for Financial Professionals said they have no intention of increasing their balances with the banks they partner with because of the Regulation Q change (or because of another Dodd-Frank offering that went into effect last year: continued unlimited insurance from the Federal Deposit Insurance Corporation on non-interest-bearing accounts).

The change presents another item for treasurers to keep in mind when they consider the possibilities for where to park their companies’ cash. The same AFP survey found that companies allocate 42% of their short-term investments in bank deposits (followed most closely by diversified money-market mutual funds at 19%). “If treasurers are doing a bank scorecard to see the products and services their bank partners provide, it’s another metric to measure against,” says Tom Hunt, director of treasury services for AFP.

Meanwhile, banks have a new tool for winning new corporate customers. “The smaller and more midsize banks are probably going to use it as a strategic marketing positioning to try and garner deposits, obviously, but also to get their foot into a new banking relationship,” says Hunt.

Green Bank, a community bank based in Texas, is testing out its new ability immediately. Its offer of a new business checking account with interest, starting today, will help the bank acquire new customers, predicts Geoffrey Greenwade, president and CEO of Green Bank. “It will really resonate with businesses that have lower activity but that keep moderate or high balances,” he says.

For now, even if they can find a bank that will pay interest on business checking accounts, treasurers may decide to stick with the status quo. What they’re making now from checking accounts through earnings credits (soft dollars used to offset banking fees) is currently higher than money market fund rates, Hunt says. And checking-account rates “are going to be a little bit lower than what you would earn if you just put money away in a money market fund,” he says. Moreover, checking accounts that provide hard dollars in interest will not have unlimited FDIC protection.