Goodbye Reg Q, hello interest



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Thanks to one of the latest changes in banking regulations, business banking customers can now earn interest on their checking accounts. The Dodd-Frank Wall Street Reform Act, which became law in July 2010, included numerous changes to the financial services industry, including repeal of Regulation Q.Originally enacted in 1933, Regulation Q prohibited financial institutions from paying interest on commercial demand deposit accounts. Fast-forward to July 21, 2011, and demand deposits can now earn interest income. This means that businesses no longer need to "sweep" the balances of noninterest-bearing checking accounts to savings accounts at the end of each day in order to earn interest.Over the years, financial institutions implemented account analysis to provide earnings credits based upon the average collected balance for commercial checking accounts. Customers could then use the credits to offset transaction expenses with their commercial accounts. Commercial customers who maintained large balances in their accounts would most often have an excess of these earnings credits that were then zeroed-out at the end of each month if they were not used; others applied the credits to fees to offset their expenses.The elimination of Reg Q provides businesses with a choice -- either earn interest on their commercial accounts or utilize the traditional earnings credit product. It is important for businesses to consider that if they opt to convert their noninterest-bearing transaction accounts to interest-bearing accounts, the account will no longer be eligible for unlimited deposit insurance coverage. Currently, all funds in a noninterest-bearing transaction account are insured in full by the Federal Deposit Insurance Corp. through Dec. 31, 2013. This temporary unlimited coverage is in addition to, and separate from, the coverage of at least $250,000 available to depositors under the FDIC's general deposit insurance rules.Another toolThe change to business operating accounts will allow your operating accounts to earn interest on 90 percent of the balance in the account. This means your team can choose to leave cash in a business operating account without needing to think about sweeps or cash management.Fred Pierce, President of Metal Works, a Londonderry-based specialty sheet metal fabricating company, began putting these cash balances to work in September as part of a pilot program launched by Hampshire First. Prior to having this option, Metal Works transferred excess funds to money market accounts that required active management to ensure that the checking account maintained appropriate operating cash levels as funds were paid out."Given the competitive nature of our business, we need to pay attention to any expense savings or revenue enhancement we can find," said Pierce "This is simply another tool to help us maximize our cash assets."James Dunphy is president and CEO of Manchester-based Hampshire First Bank.

 

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