[Congressional Record Volume 143, Number 136 (Friday, October 3, 1997)]
[Senate]
[Pages S10319-S10320]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. HAGEL (for himself and Mr. Reed):
  S. 1249. A bill to allow depository institutions to offer negotiable 
order of withdrawal accounts to all businesses, to repeal the 
prohibition on the payment of interest on demand deposits, and for 
other purposes; to the Committee on Banking, Housing, and Urban 
Affairs.


                 the small business banking act of 1997

  Mr. HAGEL. Mr. President, I rise today to introduce the Small 
Business Banking Act of 1997. I'm joined in this effort by my 
distinguished colleague Senator Reed of Rhode Island, who is the 
principal cosponsor of this important legislation.

  Passage of this bill will remove one of the last vestiges of the 
obsolete interest rate control system. Abolishing the statutory 
requirement that prohibits incorporated businesses from owning interest 
bearing checking accounts will provide America's small business owners, 
farmers, and farm cooperatives with a funds management tool that is 
long overdue.
  Passage of this bill will ensure America's entrepreneurs can compete 
effectively with larger businesses. My experience as a businessman has 
shown me, firsthand, that it's extemely important for anyone trying to 
maximize profits to be able to invest funds wisely for maximum 
efficiencies.
  During President Ronald Reagan's first term, one of his early actions 
was to abolish many provisions of the antiquated interest rate control 
system the banking system was required to use. With this change to the 
laws, Americans were finally able to earn interest on their checking 
accounts deposited in banks. Unfortunately, one aspect of the old 
system left untouched by the change in law was not allowing America's 
businesses to share in the good fortune.
  Complicating matters is the growing impact of nonbanking institutions 
that offer deposit-like money accounts to individuals and corporations 
alike. Large brokerage firms have long offered interest on deposit 
accounts they maintain for their customers.
  While I support business innovation, I don't believe it's fair when 
any business gains a competitive edge over another due to government 
interference through overregulation. This is exactly the case we have 
with banking laws that stifle bankers, especially America's small 
community bankers, and give an edge to another segment of the

[[Page S10320]]

financial community. The Small Business Banking Act of 1997 seeks to 
correct this imbalance and allow community banks to compete fairly with 
brokerage firms.
  I'm pleased to say our bill has the strong support of America's 
Community Bankers and the American Farm Bureau Federation. In my home 
State of Nebraska, this bill has the support of the Nebraska Bankers 
Association and the Independent Bankers Association. These important 
organizations represent a crosscurrent of the type of support Senator 
Reed and I have for our bill. Senator Reed and I also have the support 
of the Federal regulators. In their 1996 Joint Report, ``Streamlining 
of Regulatory Requirements'', the Board of Governors of the Federal 
Reserve System, the Federal Deposit Insurance Corporation, the Office 
of the Comptroller of the Currency, and the Office of Thrift 
Supervision, stated they believe the statutory prohibition against 
payment of interest on business checking accounts no longer serves a 
public purpose. I heartily agree.
  Mr. President, this is a straightforward bill that will do away with 
an unnecessary regulation that burdens American business. I urge my 
colleagues to support it.
  Mr. REED. Mr. President, I am pleased to join my colleague Senator 
Hagel in introducing the Small Business Banking Act of 1997, 
legislation that eliminates a Depression-era Federal law prohibiting 
banks from paying interest on commercial checking accounts. This 
legislation represents an important victory for small business and the 
banking industry because it eliminates a costly and burdensome Federal 
prohibition that has outlived its usefulness.
  The prohibition against the payment of interest on commercial 
accounts was originally part of a broad prohibition on the payment of 
interest on any deposit account. At the time of enactment, it was the 
popular view that payment of interest on deposits created an incentive 
for rural banks to shift deposits of excess funds to urban money center 
banks that made loans that fueled speculation. Moreover, it was 
believed that such transfers created liquidity crises in rural 
communities. However, a number of changes in the banking system since 
enactment of the prohibition have called into question its usefulness.
  First, with the passage of the Depository Institutions Deregulatory 
and Monetary Control Act of 1980, Congress allowed financial 
institutions to offer interest-bearing accounts to individuals--a 
change which has not adversely affected safety and soundness. Second, a 
number of banks have developed complex mechanisms called sweep accounts 
to circumvent the interest rate prohibition. Because of the costs 
associated with developing sweep accounts, however, large banks have 
become the primary offerors of these accounts. As a result, many 
smaller banks are at a competitive disadvantage with larger banks that 
can offer their commercial depositors interest-bearing accounts. Most 
important, the vast majority of small businesses cannot afford to 
utilize sweep accounts because the cost of opening these accounts is 
relatively high and most small businesses do not have a large enough 
deposit base to justify these costs.
  In light of these developments, it has become clear that the 
prohibition on interest-bearing commercial accounts is nothing more 
than a relic of the Depression era that has effectively disadvantaged 
small businesses and small banks, and led large banks to dedicate 
significant resources to circumventing the prohibition. I am, 
therefore, pleased to cosponsor this legislation that will eliminate 
this prohibition and level the playing field for small banks and small 
business.
                                 ______