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What can I expect to see on my analyis statements due to changes in financial regulations and the repeal of "reg Q?

Tim Williams's Profile

Do you think banks will redefine ECR or will that be replaced by an interest credit?


Topic Expert
Dan Gill
Title: Director, Corporate Systems
Company: The Weiland Financial Group
(Director, Corporate Systems, The Weiland Financial Group) |

Of all of the things that are affecting our account analysis statements today (interest on reserves, FDIC fees, changes in consumer bank fees, etc.) The upcoming repeal of Reg. Q promises to have the biggest impact.

Reg. Q is the result of depression era financial controls that did not allow corporate bank accounts to receive "hard" interest. It was because of this rule and the fact that it lead to corporations finding other places to keep their idle balances that we have many of the cash management options and services that we have today. Sweep accounts, controlled disbursements, ZBAs and the earnings credit we receive on account analysis are all the result of this ruling.

Recently, the Dodd-Frank act has made it possible for the repeal of Reg. Q. It should be eliminated as early as July of 2011, and most likely the first account analysis statements we will see affected by it will be the August 2011 statements. The results of this will go far beyond massive changes to our account analysis statements, it could completely change the way we manage cash on a daily basis. Imagine if the rates on balances left in our corporate bank accounts were competetive and we could just leave excess balances sitting in those accounts getting a reasonable return. How much could that change our daily positioning of cash?

We will see most of the impact of the repeal of Reg Q on our account analysis statements, and there are several possible ways that banks might implement the change. Some might even offer us options on how we would like hard interest to be applied to our accounts. We have identified more than 20 variables that must be evaluated by the corporate treasurer to determine the best bank fee structure for their particular situation. Even though we won't see the changes for nearly a year, we need to be modeling all of the possible scenarios today.

There are a number of options that banks may put in place to handle the repeal of Reg Q.
Option 1 - "Hard" Interest Only
Some banks may simply do away with earnings credit on account analysis and switch to the payment of hard interest on all balances. The customer pays all analysis fees with no balance offset and enjoys a return on their balances. This option probably ends up being the most expensive for the bank and may have tax consequences for the customer, but it could make good sense for some.

Option 2 - Earnings Credit Only
Some banks may not pay hard interest at all, and continue with the earnings credit rate, exactly as it is today. With the right earnings credit rate structure, this model may be appealing to banks and certain customers with regulatory or compensating balance requirements. This may be the only option for some banks initially as they begin to realize the technology investment they will have to make in order to pay interest on account analysis.

Option 3 - Hybrid Approach
This model is the most complex mathematically, but offers the best alternative for most banks and corporates. In the hybrid approach, the bank would pay earnings credit on the account balances up to the level needed to offset all of the service charges. Then, hard interest would be paid on all balances in excess.

There are many variables involved in evaluating which model would work best for your particular company. Your preference may even change as short term rates change. I believe that corporate treasury would be well served to evaluate these changes in great detail today, so that we can provide guidance to our banking partners on how best to implement these changes on our accounts.

Susan Larkin
Title: Deposit Services
Company: Valley Bank
(Deposit Services, Valley Bank) |

What are the 20 variables mentioned in the 9/22/10 post regarding the repeal of Reg Q?


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