The Anticipated Effects of Depository Institutions Paying Interest on Checking Accounts

^Pr^ep^ar^{ed f}^o^r^M^e^m^b^ers^an^d^Com^mⁱ^t^t^ees^of^C^ong^r^e^ss

Since the 1930s, depository institutions have been prohibited by federal statute from paying
interest on checking account balances. The main rationale was to promote bank safety and
soundness. Unpredictable movements of deposits among banking institutions in response to
interest rate competition were thought to make some banks vulnerable to failure. Another, but
related, reason was that big money center banks were able to pay higher interest rates for deposits
than smaller banks, and thus could bid deposits away from smaller country banks to make more
speculative loans, such as for buying shares in the stock market. It was believed that the bidding
away of deposits had the effect of misallocating financial resources away from productive to
speculative uses.
To get around the prohibition, banks established inefficient implicit interest payment mechanisms
to compete for deposits. These implicit mechanisms ranged from free or discounted banking
services to gifts. Regulatory changes, over time, have also reduced the effectiveness of the
prohibition. For example, the establishment of negotiable orders of withdrawal (NOW) accounts
and automatic transfers between savings and checking accounts (called “sweeps”) in effect allow
depositors to earn interest on their checking balances.
On January 4, 2007, the Business Checking Fairness Act of 2007 (H.R. 41) was introduced in ^th
110 Congress by Representative Nydia Velazquez. This bill would repeal the prohibition on
depository institutions paying interest on any checking accounts and require bank regulators to
conduct surveys of bank fees and services, including automated teller machines (ATMs) and
credit card transactions. H.R. 41 was referred to the House Committee on Financial Services.
Should the prohibition on paying interest be rescinded, it would be expected to improve the
efficiency of financial markets, even though paying interest would raise the costs of providing
checking account services for some depository institutions. Institutions that would have higher
costs are those currently paying little or no implicit or explicit interest on checking accounts.
Those institutions already paying some implicit interest on checking accounts may experience a
reduction in cost because these implicit interest rate mechanisms are inefficient and tend to
misallocate financial resources. Most analysts believe that the transparency of explicit interest
rate payments would lead to better decision making on the part of depository institutions and their
depositors.
A repeal of the prohibition on paying interest could also have a beneficial effect on the conduct of
monetary policy by the Federal Reserve. A long-term relative decline in demand deposits has
been accompanied by a decline in reserve balances at the Fed. To the extent that paying interest
on demand deposits increased reserve balances, the Fed would have more funds to invest in
government securities, to the ultimate benefit of the Treasury.
This report will be updated as legislative developments warrant.

Introduc tion ..................................................................................................................................... 1
Origin of the Prohibition.................................................................................................................1
Effects of The Prohibition...............................................................................................................1
Inefficient Implicit Pricing........................................................................................................1
The Adoption of NOW Accounts..............................................................................................2
Sweeping Business Checking Accounts....................................................................................3
The Legislative Response................................................................................................................3
What Could Be Expected If the Prohibition Were Repealed?.........................................................4
The Impact on Depository Institutions......................................................................................4
A Relative Decline in Demand Deposits Reduces the Impact of Repeal............................5
The Impact on Businesses.........................................................................................................6
The Impact on Consumer Checking Accounts..........................................................................6
The Impact on Monetary Policy................................................................................................7
Table 1. Demand Deposits Compared to Total Deposits at Commercial Banks and
Savings Banks..............................................................................................................................5
Author Contact Information............................................................................................................7

Since the 1930s, depository institutions have been prohibited by federal statute from paying
interest on “checking account” or demand deposit balances. Depository institutions are banks,
savings associations, and credit unions. To get around the prohibition, depositories have over the
years established a number of implicit interest arrangements. On January 4, 2007, the Business ^th
Checking Fairness Act of 2007 (H.R. 41) was introduced in the 110 Congress by Representative
Nydia Velazquez. This bill would repeal the prohibition on depository institutions paying interest
on any checking accounts and require bank regulators to conduct surveys of bank fees and
services, including automated teller machines (ATMs) and credit card transactions. H.R. 41 was
referred to the House Committee on Financial Services. Similar legislation was considered in
previous Congresses. This report examines the rationale for the prohibition, describes the effects
it has had including the development and regulatory approval of measures to mitigate those
effects, and concludes with an analysis of the anticipated effects of repealing the prohibition on
depository institutions, on their customers, and on the conduct of monetary policy.

Congress amended federal banking law in the mid-1930s to prohibit banks from paying interest ¹
on checking account balances. Checking accounts, a term used interchangeably in this report
with demand deposits, are distinguished from time deposits or savings deposits by being
immediately available to the depositor without restrictions on or penalty for early withdrawal.
Congress imposed the restriction because of concerns about the destabilizing effects on the
banking system of deposit competition among banks. Unpredictable movements of deposits
between banking institutions in response to interest rate competition, it was thought, could
potentially cause some banks to fail. Another, but related, reason was that big money center banks
were able to pay higher interest rates for deposits than smaller banks, and could thus bid deposits
away from smaller country banks. It was believed that this would encourage more speculative
loans, such as for buying shares in the stock market. Thus, the bidding away of deposits from
small banks to large ones could have the effect of misallocating financial resources away from
productive to speculative uses.

From the outset, many analysts believed that the prohibition on paying interest on checking
accounts would distort the price of deposits and related bank services. The interest rate ceiling of
zero would not prevent banks from competing for checking deposits. Bank profits depend on
attracting deposits in order to acquire income-earning assets, such as commercial loans and
mortgages. To compete for deposits, banks and other depository institutions began to pay

¹^T^h^{e Ban}^kⁱⁿ^g^A^c^{t o}^f¹⁹³³^actu^a^ll^y^p^l^aced^ceilin^g^s^oⁿ^th^{e i}ⁿ^tere^{st t}^h^{at b}^aⁿ^k^{s co}^u^l^d^p^a^y^oⁿ^dⁱ^f^f^e^ren^t^kⁱⁿ^d^s^o^f^d^e^p^o^sits.
^Ch^eckⁱⁿ^g^d^e^p^o^s^its^h^a^v^e^{a ceilin}^g^o^f^zero^,^w^h^ich^{is eff}^ecti^v^el^y^{a p}^r^o^hⁱ^bⁱ^tⁱ^oⁿ^o^f^p^a^yⁱⁿ^gⁱⁿ^{terest o}ⁿ^th^es^{e acc}^ounts^.

“implicit interest rates” (i.e., services or other considerations) in lieu of formal interest payments.²
For business deposits, the implicit interest payments took the form of bundling banking products
and services and offering them to business customers at a discount as compensation for
maintaining their checking deposits with a bank. Items in these bundles included discounted
interest rates on loans, and negotiated minimum balances that must be maintained to receive
certain banking services free or at significant discounts.
Similar offers were made to non-business depositors. For personal checking accounts, the implicit
interest payments took the form of giving some customers free checking accounts and/or other
discounted banking services such as discounted interest rates on loans. In the 1970s, it was not
uncommon for banks to give away toaster ovens and other gadgets as inducements to depositors.
These implicit interest rate mechanisms, however, are inefficient because they tended to
misallocate financial resources. Without an explicit price, the supply of these services and the
demand for them are unlikely to reach equilibrium. Depository institutions often developed
servicing capacities that turned out either to over supply or under supply the needs of their
customers. If the services are under supplied, customers are likely to seek those services
elsewhere. If the services are over supplied, the depository institutions have lost profits by
supplying unneeded services. In either case, financial resources are not deployed optimally. The
prohibition on paying interest for demand deposits creates a lack of price transparency in
garnering deposits, which leads to inappropriate decision making on the part of business
customers as well as the depository institutions.
The high rates of inflation in the 1970s increased the need for depository institutions to compete
aggressively for deposits. Depository institutions found themselves with an increasing mismatch
between the interest they earned on assets and interest paid to acquire new assets and deposits.
Money market accounts offered by non-banking institutions provided strong competition. The
interest rate payment prohibition frustrated depository institutions’ competition for deposits. In
response to these pressures, banks began to seek ways to offer customers the opportunity to earn
interest on funds that could be used to transfer money to third parties, but which also evaded the
restrictions applying to demand deposits. In 1972
^Aⁿ^u^m^b^{er of}^s^t^a^t^e-^c^h^artered^m^u^tu^a^l^s^a^vⁱ^ngs^ban^k^sⁱⁿ^Ne^w^Eng^l^an^{d beg}^aⁿ^off^e^riⁿ^g^acco^uⁿ^t^s
^t^h^at^w^e^re^t^echnⁱ^cal^l^yⁿ^o^t^de^m^aⁿ^d^deposⁱ^t^s^{, bu}^t^u^pon^w^hⁱ^c^hⁿ^e^g^o^tⁱ^a^bl^{e orders}^of^wⁱ^t^h^dra^w^al
^(NOW^{) cou}^l^{d be}^u^s^{ed to tran}^s^f^{er fun}^d^s^to^th^{ird parties}^.^T^h^es^{e NOW}^accouⁿ^t^s^w^e^{re n}^o^t
^s^u^bj^{ect to th}^{e proh}^{ibition of}ⁱⁿ^teres^t^pa^y^m^ents^{.... C}^o^m^m^e^rcia^{l ban}^k^sⁱⁿ^Ne^w^Eⁿ^g^l^an^d^w^e^re³
^permⁱ^t^t^e^{d t}^o^of^f^e^{r N}^O^W^accoun^t^sⁱⁿ^{order t}^o^com^p^et^e.
The NOW account innovation spread to other parts of the country and, by 1980, Congress
enacted the Depository Institutions Deregulation and Monetary Control Act of 1980 (P.L. 96-

221). This law deregulated interest rates paid on savings deposits, but not checking accounts.

Even though the zero-interest ceiling on demand deposits remained, depository institutions
everywhere were now allowed to offer interest-bearing checking accounts as NOW accounts.

²^Cre^d^it^uni^{ons, w}^h^ic^{h a}^r^e^de^posit^oryⁱⁿ^stituti^ons^but^re^la^tiv^e^l^y^s^m^a^{ll o}ⁿ^e^s^{, w}^e^re^a^b^le^{to pa}^y^“^d^iv^ide^nds,”
^indis^tⁱⁿ^g^u^is^ha^ble^f^r^om^inte^r^e^s^t^{, on the}ⁱ^r^c^h^e^c^k^ing^a^c^c^ount^ba^la^nc^e^s^.
³^{See CRS Rep}^o^r^{t 9}⁸^-4⁷⁴^,^Pay^m^eⁿ^{t of I}ⁿ^te^r^e^s^t^on^D^e^m^aⁿ^d^D^e^pos^its^:^{An Ec}^on^om^ic^An^aly^s^is^{, by}^G^.^T^h^om^a^s^W^oodw^a^r^d.

Another mechanism designed to circumvent the zero-interest rate ceiling was the innovation of
regularly “sweeping” the balances in demand or transaction accounts. Sweeps are arrangements
between depository institutions and business customers that allow the institutions to sweep the
businesses’ checking account balances out of those accounts each evening and put them into
interest earning accounts. The next day the balances are transferred back into the businesses’
checking accounts to meet the businesses’ daily transactions. Sweeps, thus, give the businesses
the advantage of gaining interest on their transaction balances when they are not in immediate
use. Because of the high cost to depository institutions of setting up and operating sweep
accounts, they are established almost exclusively for business accounts. “Sweep accounts”
existed in practice before 1994 when the Federal Reserve officially allowed depository
institutions to sweep checking deposits.
Sweep accounts are more beneficial to larger depository institutions than to small ones. Large
institutions are required to keep reserves on their checking accounts. Smaller institutions often are
not. These required reserves earn no interest and consequently are costly to large depository
institutions which could invest these reserves if they weren’t required. The benefit to sweep
accounts is that even though checks are drawn on them, no reserves are required to be set aside
for these accounts. Thus, institutions escape the cost of maintaining non-interest-earning required ⁴
reserves. Furthermore, larger banks are able to attract more deposits by offering higher interest
rates than smaller institutions because large banks are able to make arrangements with securities
dealers to offer rates based on the much higher rates of returns available on short-term non-bank
investments.
The major disadvantage to sweep accounts for some banks is their cost. According to testimony
of America’s Community Bankers,
^T^h^{e pr}^oblem^is^t^h^{at s}^w^{eep accou}ⁿ^t^s^{are ex}^pen^sⁱ^v^{e an}^{d can}^{be v}^e^r^y^l^a^b^o^rⁱⁿ^t^eⁿ^s^iv^e^,^e^s^p^e^cⁱ^a^l^ly
^f^o^r^s^m^a^llerⁱⁿ^stit^u^tioⁿ^s^{. T}^h^o^u^g^h^th^er^{e ar}^{e so}^f^t^w^a^r^e^p^r^o^g^r^a^m^s^t^h^at^h^aⁿ^d^{le s}^w^eep^s
^au^to^m^a^tⁱ^call^y^{, t}^h^es^{e prog}^ra^m^s^{are ty}^picall^y^t^{oo ex}^pen^sⁱ^v^{e f}^o^{r sm}^al^l^e^{r com}^m^uni^t^y^baⁿ^k^s^an^d⁵
^sa^viⁿ^g^{s i}ⁿ^stⁱ^t^utⁱ^o^{ns t}^o^a^c^q^ui^r^e^aⁿ^d^o^p^e^r^a^t^e^.

On January 4, 2007, H.R. 41 was introduced in the 110^th Congress and referred to the House
Committee on Financial Services. So far, the committee has taken no action on the bill and no ^th
similar bill has been introduced in the Senate. In the 109 Congress, on May 26, 2005, the House
Financial Services Committee passed the Business Checking Freedom Act of 2005, but the bill
was not taken up by the Senate. The Business Checking Fairness Act of 2007 would do the
following:

⁴^C^R^S^R^e^por^{t R}^L³⁰⁸⁷⁴^,^Pr^o^pos^al^s^{to All}^o^w^Fe^de^r^a^{l Re}^s^e^r^v^e^Bank^s^{to P}^a^{y In}^t^e^rest^on^R^e^{serve B}^a^l^{ances: T}^h^{e Issu}^es
^Be^hin^d^the^Le^gis^l^atioⁿ^,^by^Wa^lte^r^W^.^Euba^nk^s^.
⁵^{U.S. C}^ong^re^{ss, House}^Com^m^itte^e^{on Ba}^nkⁱⁿ^g^a^nd^Fina^nc^ia^l^Se^rv^ic^e^s^{, Subc}^om^m^itte^e^{on Fi}^na^nc^ia^{l I}ⁿ^stitutⁱ^oⁿ^{s a}ⁿ^d
^C^ons^um^e^r^C^r^e^d^it,^H^.^R.¹⁵⁸⁵^—D^e^pos^it^or^y^Iⁿ^s^tit^uti^ons^Re^g^u^l^a^tor^y^S^t^r^e^am^linin^{g Ac}^t^of¹⁹⁹⁹^,^he^a^rⁱⁿ^g^s^{, 1}⁰⁶^th^Co^ng^{., 1}^st
^s^e^s^s^{., May}^12,¹⁹⁹⁹⁽^W^a^s^h^ing^t^oⁿ^:^G^P^0,¹⁹⁹⁹⁾^,^p.²^09.

• Amend federal law to authorize interest-bearing or dividend-bearing transaction
accounts. It would permit up to 24 transfers per month to another account of the
owner in the same institution.
• Authorize the payment of interest on reserves by a Federal Reserve bank at least
quarterly on balances maintained there on behalf of a depository institution.
• Amend the Federal Reserve Act to require the Board to survey biennially and
report biennially to Congress on bank fees and certain services.
• Amend the Financial Institution Reform, Recovery, and enforcement Act of
1989, and the Riegle-Neal Interstate Banking and Branching Efficiency Act of

1994, to repeal certain reporting requirements.

In short, H.R. 41 would repeal the prohibition on payment of interest on demand deposits
effective at the end of a two-year period beginning on the date of enactment of the act. In the
interim, to enable depository institutions and businesses to ease into a market environment where
interest is paid on checking accounts, the provisions would provide statutory authority for
sweeps. This would have the effect of giving statutory weight to the 1994 Federal Reserve
regulation that allowed depository institutions to make sweeps. Sweeps are also referred to as
transfers, and would be allowed as many as 24 times per month.
The Congressional Budget Office (CBO) has not yet done a cost estimate for H.R. 41. However,
CBO completed an estimate for the Business Checking Freedom Act of 2005, H.R. 1224, in the ^th
109 Congress. CBO estimated that H.R. 1224 would not have any net effect on annual federal
revenues over the 2006-2009 period, but would decrease revenues after 2009. That revenue loss ⁶
would total approximately $1.8 billion over the 2010-2015 period.

Permitting depository institutions to pay interest on demand deposits would be likely to change
the competitive environment. It would give depository institutions additional flexibility in pricing
services related to deposits. In the current environment, non-depository institutions, such as
money market and mutual funds, brokerage houses, and other financial services providers are
able to offer businesses interest-paying transaction accounts with ATM access and other services.
Depository institutions, on the other hand, are explicitly prohibited from doing so. The new
competitive environment resulting from repealing the prohibition of paying interest on checking
accounts would have an impact on depository institutions, businesses, consumers, monetary
policy, and the U.S. Treasury.
Repealing the prohibition could cause depository institutions to dismantle inefficient implicit
price mechanisms which could increase the profitability of providing checking account services.

⁶^U^.^{S. C}^ong^r^e^s^sⁱ^ona^{l B}^udg^e^t^O^f^fⁱ^ce^,^{Cost Estim}^ate^H.^R^.¹²²⁴^,^B^u^si^{ness Ch}^eckiⁿ^g^F^r^eed^o^m^A^c^t^o^f²⁰⁰⁵^{, Ma}^y^10,²⁰^05,
^p.1.^htt^p^://w^w^w^.c^bo.g^o^v^/^s^how^doc^.c^fm^?ⁱ^nde^x⁼^6353&^s^e^queⁿ^ce=0^&fro^m⁼⁶^.

Most depository institutions are already paying some form of interest on their deposits. For these
institutions, there could be some reduction in costs by being able to offer an explicit interest rate
on demand deposits. Institutions with implicit interest rates that exceed the interest rate after
repeal could experience significant savings that could have an impact on their profitability.
Smaller depository institutions may also augment their bottom line by being able to compete
more easily in attracting demand deposits without investing in expensive, complicated implicit-
interest-paying mechanisms.
Not all depository institutions, however, would benefit from repeal of the prohibition on paying
interest on demand deposits, since costs would rise for some. Most analysts expect costs to
increase for depositories with the largest amount of demand deposits on which they are not now
paying any interest—explicitly or implicitly. These depository institutions would face pressures to
begin paying interest in order to keep their depositors after repeal. Consequently, they would be
expected to experience a decline in profits in providing demand deposit services.
In the 1970s checking deposits declined to little more than 50% of all deposits in commercial
banks. Table 1 shows that demand deposits at commercial banks have continued to decline,
falling from 21% in 1984 to about 10% as of December 2004. This means that demand deposits ⁷
are not a growing part of depository institutions’ business in relation to time deposits. The trend
also means that depositories are already paying interest on most of their deposits, and repealing
the prohibition would have less impact on profits than in the 1970s. Furthermore, even though
Table 1 shows a huge change in demand deposits at savings banks (due mainly to the growth of
savings banks doing more commercial lending), demand deposits are still a small portion of
savings banks’ total deposits. In December 2006, 95.6% of savings banks deposits are time
deposits on which they pay explicit interest. In short, even though some depositories are expected
to benefit and others are expected to experience losses, the declining trend in demand deposits
will reduce the significance of both impacts on depository institutions.
Table 1. Demand Deposits Compared to Total Deposits at Commercial Banks and
Savings Banks
^{($ in mill}^ions)
^Dates^{Commercial Banks}^{Savings Banks}
^Total^Demand^{As a %}^Total^Demand^{As a %}
^Deposits^Deposits^{of Total}^Deposits^Deposits^Deposits^{of Total}^Deposits
^{Dec. 31,}^6,73^1,36²^516,³⁵^{6 7.7}^1,09^3,73⁷^48,4^{05 4.4}
²⁰⁰⁶
^{Dec. 31,}^1,96^2,82^{7 414,}¹³⁶^21.1^944,⁷³³^1,85⁶^0.2
¹⁹⁸⁴
^Source:^{Federal Deposit Ins}^uran^{ce Corporation.}

⁷^T^h^{e t}^e^r^m^{s t}ⁱ^m^e^d^e^p^o^sⁱ^t^s^and^saviⁿ^g^{s d}^e^p^o^sⁱ^t^s^are^u^s^edⁱⁿ^t^e^rch^aⁿ^g^eab^l^y^b^ecau^{se h}ⁱ^st^o^rⁱ^cal^l^y^al^l^sa^viⁿ^g^{s d}^e^p^o^sⁱ^t^s^h^a^d
^s^p^e^cⁱ^fⁱ^e^d^m^a^turitie^s^.^T^houg^{h pa}^s^s^book^s^a^vⁱ^ng^s^a^c^c^ounts^a^r^e^a^v^a^ila^ble^up^on^de^m^a^{nd, ba}^nk^s^c^o^u^l^{d le}^g^a^lly^de^lay
^pa^y^m^eⁿ^{ts f}^o^{r up to}^six^m^onths.^P^e^na^ltie^{s f}^o^{r e}^a^r^l^y^w^ithdra^w^a^l^{s a}^r^e^a^not^he^{r disti}ⁿ^g^u^ishⁱ^ng^f^e^a^t^ure^a^m^ong^tim^e^de^posits.

Some analysts believe paying interest on checking deposits would increase demand deposits
relative to time deposits. If the prohibition were repealed, checking deposits would pay interest
and would be more liquid than most time deposits. However, there are forces at work against such
a reversal of the declining trend in demand deposits. According to the Federal Deposit Insurance
Corporation’s statistics, as of December 31, 2006, there were 7,402 commercial banks in the
United States. The top 88 banks held 74% of total deposits. As mentioned above, large banks are
required to keep reserves against demand deposits, which earn no interest. Since no reserves are
mandated on time deposits, the incentive is to increase time deposits relative to demand deposits.
Paying interest on an already costly liability is contrary to profit-maximizing behavior. As a
result, the impact of repeal would likely fall short of leveling the playing field between demand
deposits and time deposits.
Repealing the prohibition on paying interest on checking accounts would be likely to have a
greater impact on small businesses than larger firms. To remain competitive, depository
institutions have been offering larger business customers cash management services, which make
best use of their cash on hand before they pay their bills. The bigger companies no longer let their
cash sit idly in checking accounts, giving depository institutions interest free loans until it is used
to pay bills. Large business customers have been demanding and receiving interest on their
checking account balances, mostly through complicated implicit interest mechanisms, such as
sweeps. In contrast, many smaller business customers have been unable to earn interest on their
deposits for the main reason that small business customers’ balances are too small to make it
worthwhile for depository institutions to pay them implicit interest.
Small businesses are at a disadvantage even when they are offered some implicit interest.
According to testimony of the National Federation of Independent Business,
^{We f}^o^uⁿ^d^t^h^at^t^h^{e sw}^{eep acc}^ouⁿ^t^resu^l^t^e^{d i}ⁿ^{a f}^l^{ood of}^{paper f}^r^om^t^h^{e bank}^:^eac^h^da^y^a
^r^ecoⁿ^c^iliatioⁿ^state^m^eⁿ^{t letti}ⁿ^g^u^s^kⁿ^o^w^h^o^w^th^e^m^oⁿ^e^y^h^a^d^b^een^sh^if^ted^ar^o^uⁿ^d^{. An}^d
^becau^s^e^t^h^is^is^don^e^vⁱ^{a t}^h^e^{mail, th}^{ere i}^s^al^w^a^y^s^{a t}^w^o^-^to-t^h^r^{ee da}^y^dela^yⁱⁿⁱⁿ^f^o^r^m^atioⁿ
^fl^o^w^so^w^e^ne^ve^r^ha^ve^aⁿ^a^c^c^ur^a^t^e^,^up^-t^o^-^t^h^e^miⁿ^u^t^e^vi^e^w^o^f^t^h^e^fl^o^w^o^f^fu^nd^s^a^m^oⁿ^g^o^u^r⁸
^ban^kⁱⁿ^g^acco^uⁿ^t^s^{.... S}^w^{eep accou}ⁿ^t^s^{are a book}^k^eepin^gⁿⁱ^g^h^t^m^{are f}^o^{r a sm}^{all bus}ⁱⁿ^e^s^s^.
While sweep accounts and other implicit payments to garner demand deposits have become more
customer friendly than in 1998, small businesses are likely to gain more than large ones if explicit
interest payment were allowed.
Repealing the prohibition on paying interest on all checking accounts would have an impact on
personal checking accounts, particularly on NOW accounts and money market deposit accounts
(MMDAs). The repeal would effectively eliminate the special status of NOW accounts, or
alternatively, checking accounts would be the same as NOW accounts, earning competitive
interest rates.

⁸^{U.S. C}^ong^re^{ss, Se}^na^te^Com^m^itte^e^{on Ba}^nkⁱⁿ^g^,^Housiⁿ^g^,^aⁿ^{d Urba}^{n A}^ffa^irs.^Fina^nc^ial^Re^gul^at^or^y^R^e^lie^{f an}^d
^Ec^onom^ic^Effic^ie^nc^y^Ac^{t of}¹⁹⁹⁸^,^rep^o^r^t^t^o^acco^m^p^an^y^S^.¹⁴⁰⁵^,¹⁰⁵^th^Cong^.,²^nd^s^e^s^s^{., S.R}^e^pt.¹^05-³⁴^{6, (}^W^a^s^hing^to^n:
^G^P^O,¹⁹⁹⁸⁾^,^p.²³^6.

It is less clear how MMDAs would be affected by the repeal. Money market deposit accounts
were introduced in 1982 to make banks competitive with security firms’ money market mutual
funds, which pay a higher interest rate than NOW accounts. They are liquid, but not as liquid as
checking accounts or NOW accounts. For example, an MMDA depositor must maintain a
minimum balance, and may make a maximum of six preauthorized transfers, of which no more
than three can be checks of $500 or more each. Even though MMDAs are “checkable” accounts,
the wording of the repeal legislation does not indicate how MMDAs would be affected. If
MMDAs continue to offer significantly higher interest than ordinary checking accounts,
depositors may continue to tolerate their lower liquidity.
The repeal of the prohibition could have an impact on the Federal Reserve (the Fed) and
monetary policy. To the extent that repeal would cause demand deposits at depository institutions
to increase—a reversal of the three decades of relative decline in demand deposits—there could
be benefits to the Fed. The decline in demand deposits was accompanied by a decline in required
reserve balances at the Fed. The Fed has argued that the continued negative trend could ⁹
potentially impair its ability to conduct monetary policy. As mentioned above, depository
institutions are required to maintain reserves against demand deposits. A growth in required
reserve balances at Federal Reserve Banks could enhance the Fed’s ability to conduct monetary
policy (increasing and decreasing the money supply and, thus, interest rates). These increased
reserve balances at the Fed would also provide the Federal Reserve with more funds that it would
invest in government securities. The overwhelming part of returns from these investments would
be remitted to the Treasury as government receipts. The Congressional Budget Office estimates ¹⁰
that these effects, however, would not be significant.
^Wa^l^t^e^{r W. Eu}^baⁿ^k^s
^Sp^{ecialist i}ⁿ^Fiⁿ^aⁿ^c^{ial Eco}ⁿ^o^m^ics
^w^e^u^b^ank^s^@^c^rs^.l^oc.g^o^v^{, 7-}⁷⁸⁴⁰

⁹^{U.S. C}^ong^re^{ss,. Ho}^use^Com^m^itte^e^{on Ba}^nkⁱⁿ^g^a^nd^Fina^nc^ia^l^Se^rv^ic^e^s^,^Bank^Re^s^e^r^v^e^s^M^ode^rⁿ^iz^atio^{n Ac}^t^{of 2}⁰⁰⁰^,
^h^earⁱⁿ^g,¹⁰⁶^th^Cong^.,²^nd^s^e^s^s^{., M}^a^y^{3, 20}⁰⁰^{, u}ⁿ^p^u^b^lis^he^d^,^Sta^t^e^m^{ent of}^L^a^ur^eⁿ^c^e^H^.^Me^y^e^r^,^Mem^b^er^{, B}^o^a^r^d^of
^G^o^v^e^r^nor^s^of^the^Fe^de^r^a^{l R}^e^s^e^r^v^{e Sy}^s^t^em^{. http://w}^w^w^.hous^e^.^g^o^v^.^/^b^aⁿ^kⁱ^ng^/53^00m^ey^.ht^m^.
¹⁰^{U.S. C}^ong^re^{ss, House}^Com^m^itte^e^{on F}ⁱ^na^nc^ia^l^Se^rv^ic^e^s^,^B^u^siⁿ^e^{ss Ch}^eckiⁿ^g^F^r^eed^o^m^A^c^t^o^f²⁰⁰⁵^,^R^e^por^t^t^o
^acco^m^p^an^y^H.^R.²¹¹⁴^,¹⁰⁹^th^C^ongr^ess,¹^nd^s^e^s^sⁱ^{on, H}^.^Re^pt^{. 1}^09-⁰⁸^{1 p.}¹⁸^.^htt^p^://w^w^w^.^c^ong^re^s^s^.^g^o^v^/^c^g^i-lis^/c^pque^ry^/
^R^?^c^p109^:FL^D^010:@¹⁽^h^r⁰⁸¹⁾^.