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NEW YORK (
TheStreet) -- Smaller regional and community banks are hoping to take advantage of the repeal a nearly 80-year ban on interest rates on business checking accounts that could allow them to grow their deposit base.
Till now, small businesses have had to turn to money market funds and high-interest CDs to get interest. Banks have tried to compensate small businesses by offering "earnings credits" based on deposit amounts and account activity to offset some of the checking account charges.
But now banks have the option to pay hard interest on those deposits and small players see it as an opportunity to steal some business from larger competitors that will find it difficult to make the change.
"If you are a large, mature bank, the last thing you want to do is re-price your deposits," argues Geoffery Greenwade, president and CEO of Houston, Texas-based Green Bank, which is taking the lead in its market to offer interest rates on checking accounts. "For a bank like ours which has grown from $230 million in assets to $1 billion in five years, we can put that money to work. If I can take some business away from
Chase(JPM - Get Report) or
Bank of America(BAC - Get Report), I can then lend that money."
The little known change took place July 21st as part of the implementation of the Dodd-Frank Act and removed the business checking interest ban. The provision was originally intended to curb speculative lending, but regulators appear to have concluded that curtailing banks' ability to attract core deposits does not prevent them from making risky investments.
So far, Greenwade says his competitors are taking a "wait-and-see attitude", but he expects that they will soon follow his lead. "This is a much better way to attract core deposits. I would much rather get $20 million in an interest-bearing checking account than $20 million in high-interest yielding CDs."
Some industry observers expect banks would likely hike lending rates to help pay for the higher cost of deposits. Green Bank expects to make most of its money from volumes rather than spreads. "Deposits are the fuel and loans are the engine. The more deposits I attract, the more I can lend," said Greenwade.
--Written by Shanthi Bharatwaj in New York
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