[Congressional Record Volume 145, Number 19 (Wednesday, February 3, 1999)]
[Senate]
[Pages S1162-S1163]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. HAGEL (for himself and Mr. Reed):
  S. 349. 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 1999

  Mr. HAGEL. Mr. President, I rise today to introduce the Small 
Business Banking Act of 1999. I am again joined in the effort by my 
distinguished colleague Senator Reed of Rhode Island, who is the 
principal cosponsor of this important legislation.
  We originally introduced this legislation during the last Congress. 
This legislation was incorporated into a more comprehensive financial 
regulatory relief bill that was unanimously reported out of the Senate 
Committee on Banking, Housing, and Urban Affairs. We fully expect it 
will be enacted into law during this Congress.
  Passage of this bill will remove one of the last vestiges of an 
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 extremely important for anyone trying to 
maximize profits to be able to invest funds wisely for maximum 
efficiencies. Let me quote from a December, 1997 letter I received from 
a constituent, Mary Jo Bousek. Mary Jo owns a commercial property 
company. She writes:

       ``I was very pleased to see that you sponsored a bill to 
     allow banks to pay interest on checking accounts for 
     partnerships and corporations. When we changed our rental 
     properties from a sole proprietorship to a Limited Liability 
     Company, we suddenly began losing about $1500 a year in 
     interest on our bank account. This seems totally unreasonable 
     and unfair.''

  Mary Jo is right. It is unfair.
  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. This places these firms at 
an advantage over community banks that can't offer their corporate 
customers interest on their checking accounts.
  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 financial 
community. The Small Business Banking Act of 1999 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, the National Federation

[[Page S1163]]

of Independent Businesses, the U.S. Chamber of Commerce, and the 
American Farm Bureau Federation. This bill has the support of many of 
the banks, thrifts, and small businesses in my home state of Nebraska. 
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 banking 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 1999, 
legislation that eliminates a Depression-era federal law prohibiting 
banks from paying interest on commercial checking accounts. Last year, 
I cosponsored a similar bill with Senator Hagel that was incorporated 
into a financial institutions regulatory relief bill which passed the 
Banking Committee.
  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 in 1933, it 
was the popular view that payment of interest on deposits created an 
incentive for rural banks to shift excess deposits to urban money 
center banks which 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, 
many banks have developed complex mechanisms called sweep accounts to 
circumvent the interest rate prohibition. Because of the costs 
associated with developing sweep accounts, large banks have become the 
primary offerors of these accounts. As a result, many smaller banks are 
at a competitive disadvantage with larger banks which can offer their 
commercial depositors interest-bearing accounts. Most importantly, 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 the administrative 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.
  Mr. President, as we move into a new millennium, I think it 
appropriate that we eliminate this vestige of the early twentieth 
century that is no longer useful and is indeed burdensome.
                                 ______