Friday, June 24, 2011


The bank reform bill that's received a lot of press the past year -- the Dodd-Frank Wall Street Reform and Consumer Protection Act -- is approaching its one year anniversary, July 21.  On that date, several provisions take effect, including Section 627, which allows banks to pay interest on business checking accounts.

"Sounds like a winner," says Virginia.  "It seems as though banks would be delighted.  A little deregulation for a change."

Uh-hum.  So why did the Independent Community Bankers of America (trade association for smaller, local banks) send a letter to Federal Reserve Board Chairman Bernanke urging the Fed not to implement the deregulation? Because it fears the big banks will get all the business and the little banks won't be able to compete on price (interest rate).  It fears the change will result in "bidding wars for business deposits among banks" and "expose banks to potential liquidity problems." It says money may move from money market funds, which already pay interest, to the megabanks, further increase the concentration of bank assets, and exacerbate the too-big-to-fail problem.  Welcome to a reprise of "Wall Street" meets "Main Street."

"Let me get this straight," says Virginia. "So the little banks are upset because the big banks may get the free cookie?"

Well, there ain't no such thing as a free cookie.  Someone has to pay.  There are two sides to this cookie -- the interest on deposit side, and the interest on loan side.  As the trade association argues, banks will have to pay more for their funds and businesses (as well as consumers) will have to pay more to borrow those funds.

"So is it right?" says Virginia.

Is it right?  That's a good question.  Is what right?  Is it right for retailers who have cash on hand not to earn interest on their deposits?  Is it right for Wal-Mart-sized banks to predatorily price little banks out of business?  And is it right for people pushing for deregulation to change direction depending on the issue?

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