WASHINGTON (CN) - The Board of Governors of the Federal Reserve System is asking for public comment on its proposal to repeal a rule that forbids member banks from paying interest on demand accounts held by businesses.
The rule, Regulation Q, was adopted under the Federal Reserve Act during the depression to encourage businesses to invest funds in productive assets rather than parking them in bank accounts to accrue interest.
By mandating repeal of Regulation Q, Congress hopes to encourage business to put less money into risky investments and deposit more into banks which have had falling deposits since 1993.
As a result of banks having lower deposits, fewer and fewer dollars are held by the Federal Reserve System. In 1993, the Federal Reserve held approximately $28 billion in reserves compared with about $6 billion in reserves today.
The Federal Reserve is interested in public comments about the potential impact of the repeal on the banking industry, specifically if allowing banks to offer interest on business accounts will create significant demand by business for interest bearing accounts.
Another area of concern to the Federal Reserve is the potential impact on the overnight federal funds market and other short term low risk investments where businesses currently place excess cash, if banks are able to offer similar returns and no risk.
The Federal Reserve will use the public input - which must be submitted to the Federal Reserve by May 16 of this year - to write regulations to ease the transition for banks. Under Dodd-Frank, Regulation Q must be repealed by July 21, 2011.
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