Banks in July will start paying interest in business transaction accounts. Should treasurers make any changes?
With the repeal of Regulation Q effective next month, financial institutions will be allowed to pay interest on business transaction accounts for the first time since 1933.
There are certainly long-term implications for both corporate treasurers and banks: that’s because liquidity management strategies and sweep account structures will have to be rethought and eventually replaced with more streamlined solutions. Nonetheless, in the short-term there has been an industry hesitation to embrace any changes. As one treasurer explained after a recent meeting with a key cash management bank, the subject of the repeal and subsequent interest earnings on the company’s corporate accounts was a side conversation at best. Definitely not on top of the agenda.
This shouldn’t come as a surprise. Both corporate treasuries and commercial banks are taking a “wait & see” approach with the new regulation, which goes into effect July 21, 2011. Due in part to the 1933 banking reform legislation which produced the Glass-Steagall Act, cash managers and their banking partners have worked diligently to create account structures and processes that can consolidate cash and earn interest income on excess balances, thereby circumventing the restriction on paying interest on corporate bank accounts.
Within larger corporate organizations this account architecture can be quite intricate, with sweep and cash pooling solutions often structured around legal and tax requirements, as well as restricted and segregated funds. This infrastructure, and the daily cash procedures and processes they support, are not easily revamped and any permanent changes to it will certainly take much forethought and planning within a treasury operation. Additionally, as treasurers start to consider new liquidity strategies and compare banks, they must devote additional internal resources to the decision-making and possibly engage an RFP process. In the current low-rate environment, the costs of applying these resources could outweigh the foreseen benefits.
Going soft.
Of course, some investment decisions do not require a large-scale overhaul of an organization’s bank account infrastructure. For instance, some corporates have already decided to stay with the earnings credit, a soft credit calculated on average monthly cash balances and applied to offset corporate bank fees. While the interest rate applied is typically below the overnight funds rates treasury can otherwise earn, and is generally lower than deposit rates, this conservative option makes sense from a process standpoint, minimizing transactions between accounts and requiring low maintenance. Considering today’s low interest rates, these soft credits are certainly a viable option for many treasuries versus an interest paying demand account.
Conservative treasurers may also opt for non-interest earning accounts because they are fully FDIC insured with no maximum amount. If most of a corporate’s excess cash is swept and invested in a money market or an overseas account, then for some corporate treasurers this repeal may be a non-event. However, others practitioners think the repeal will have important significance as to how they manage cash deposits in the future.
Just how much an of an impact the Dodd-Frank Reform Act’s Repeal of Reg Q has on corporate treasuries, and particularly cash managers looking to protect cash assets while earning a reasonable return for the corporation, remains to be seen. Things won’t change overnight, and while both banks and corporates understand that the infrastructure implications are more long-term in nature, the more immediate ramifications to bank product offerings, fees, and cash management strategy is not clear to all participants, many of whom disagree on the repeal’s impact.