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Kohn states Fed's support of the Business Checking Freedom Act.

This spring, Federal Reserve Governor Donald Kohn delivered testimony before the U.S. House of Representatives Subcommittee on Financial Institutions and Consumer Credit of the Committee on Financial Services. Kohn commented on the proposed Business Checking Freedom Act of 2003.

Kohn stated that the Board supports the act, which would eliminate the prohibition of interest on demand deposits, authorize the Federal Reserve to pay interest on balances held by depository institutions at Reserve Banks, and provide the Board with increased flexibility in setting reserve requirements. The act would also repeal the current ban prohibiting depository institutions from paying interest on corporate checking accounts.

According to Kohn, the act would expand the options available for conducting monetary policy. Also, the act's increased flexibility in setting reserve requirements would allow the Federal Reserve to reduce the regulatory burden on depository institutions.

The authorization to pay interest on excess reserve balances could be a useful addition to monetary policy, Kohn emphasized. An interest rate on excess reserves would act as a floor on overnight interbank lending rates; a depository institution would not likely lend balances to another institution at a lower interest rate than it could earn by keeping the excess funds in its account at the Federal Reserve.

The efficiency of the financial sector would be improved by eliminating the prohibition of interest on demand deposits, as provided for in the act.
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Publication:Financial Update
Date:Apr 1, 2003
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