As One Regulation Dismantles Another: Wall Street Reform To Allow Interest On Business Checking Accounts

As of Friday, June 25, 2010 the U.S. House and Senate financial reform conferees approved what is now known as the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Act, considered the largest overhaul of our country’s financial system since the reforms that came out of the Great Depression, is sure to have a wide-ranging impact on our banking system and economy as a whole.

The House and Senate are expected to vote on the compromise version of the bill this week, where it is expected to pass, and President Obama has signaled a desire to sign the bill into law before the July 4th holiday.

With its depth and reach, combined with a host of new regulations yet to be written, the full effect of the Act will likely not be known for some time. However, both banks and small businesses may see immediate benefit from one provision once it takes effect—the removal of the prohibition on paying interest on business checking accounts.

This prohibition has been a part of American banking law since the Great Depression. Originally designed as a measure to protect small rural banks from the competition of larger financial institutions, it is somewhat ironic that the repeal occurred out of our current economic crisis. But the repeal comes as no surprise as the benefits of the ban have been debated for decades and many within the banking industry have long fought for its removal.

Section 627, which contains the repeal, is less than one of the over 2000 pages making up the Act. While it took only a small portion to repeal over 70 years of regulation, the potential impact is large.

It is true that banks will face higher costs as they pay interest on these accounts, but the interest payments in turn will allow them to compete with the other financial institutions small businesses have long been turning to in order to get around the dated prohibition. Banks who take advantage of the repeal will argue that they offer a safer place to keep funds and will be able to better serve their small business partners. Indeed it is the small businesses who stand to benefit the most from the repeal. Since its inception, people have found numerous ways to get around the prohibition, and it became the impetus for money market funds and other alternatives to traditional banking. Now, banks are back in the fray. Banks are now a reinvigorated competitor for small business funds, and this competition can only benefit American small business.

If passed as expected, the repeal will go into effect one year after the enactment of the Act, giving banks ample time to design rate structures and fees to compete for small business funds and to market themselves for this new venture.

Posted by: Kyle Melloan

Categories: Bankruptcy & Banking Law, Dodd-Frank Act