“Whether 'tis nobler in the mind to suffer the slings and arrows of outrageous regulation,
Or to take arms against a sea of troubles, and by opposing end them?”

Oddly enough when I think Dodd-Frank, this Shakespearean passage pops into my mind, slightly altered of course! In this soliloquy, Hamlet struggles with his internal conflict of whether or not he will be able to overcome the recent events which have depressed him so greatly…

While a lot of financial institutions are perilously navigating the new regulatory waters with great dread, there is one change that may have a positive impact on your institution. The rescission of Regulation Q, which since 1933 has restricted the payment of interest on demand deposit accounts, became effective on July 21, 2011! Oddly enough, it was originally enacted shortly after the great depression to encourage Banks to lend …strange how history repeats itself. In 2011, the government is hoping that the rescission of Regulation Q will attract capital which the Banks can then lend out.

So, what is the right choice for your financial institution? The decision will depend on your strategic plan and goals, as well as the financial position of your institution. Here are some thoughts for consideration:

• How will your customers benefit from this? Are you already offering cost saving mechanisms like earned interest credits or other cash management vehicles such as sweep accounts to help them manage cash?
• Is there competition in your market place for commercial accounts? Do you even want to compete for commercial accounts? Competitive pressure to offer this could cut into already tight earnings which have been made even tighter by the increased regulatory burden. How will you deal with this increased expense -- by increasing the costs of other products and services which may discourage other customers? How will this affect your loan pricing decisions?
• If the decision is made to offer interest on demand deposits for business customers, there will be other costs involved related to systems, staffing, training, etc., which must be added into the equation.
• How will you retain the new business customers that you attract? Will you need to change the product mix or offer more innovative products to keep up with the competition? Are you prepared to do that with little or no additional costs?
• Will your business customers prefer full FDIC coverage on balances in checking accounts that pay no interest, or FDIC insurance coverage on balances up to $250,000 in interest-bearing accounts?
• How will this impact your capital levels and liquidity management practices, particularly in a rising rate environment?

Remember, there is no requirement to pay interest on demand deposit accounts. Your decision to offer this product should be carefully thought out in relation to your strategic plan. But if you do make the decision to offer this product, please keep these in mind:

• There are several account disclosure requirements before implementation. For existing accounts, in accordance with your original account agreement, a change in account terms which describes the contractual obligations of the parties will be needed. The agreement for new business interest-bearing demand deposit accounts established on or after July 21, 2011 must be revised to describe the contractual obligations of the parties.
• Customer notification of the change in FDIC insurance protection is needed, alerting those customers to the fact that interest payments will remove the current unlimited deposit insurance and that they will now be subject to the $250,000 coverage limit.

Author: Janet Golonka, MBA, CRCM, CRP, Director for ICS in the Western Pennsylvania region.