written by Blair Groves

When Dodd-Frank passed three years ago, a banking regulation from 1933, that many considered antiquated and counterproductive, was wiped off the books. The repeal of Reg Q, which prohibited banks from paying interest on commercial demand deposit accounts, has been met mostly with a big yawn by both community banks and small businesses.

With interest rates hovering near zero and inflation not an issue, it has essentially been a non-event. However, with the inevitable and eventual rise in interest rates, this is certain to change. Small business deposits comprise up to half of the demand deposit base for many community banks.

With loan demand starting to pick up again, and more deposits moving out of banks and back into the stock market from the “flight to safety” phenomenon that occurred during the crisis, future funding pressures should be at the forefront of banker’s minds. Making this even more important, regulators have stated they are going to limit bank’s reliance on non-core funding sources that they have traditionally turned to during liquidity shortfalls.

These facts will make it more tempting to begin paying interest on business deposits, but be sure your institution has a pre-determined strategy. One possible strategy is to pay interest only on balances above a certain amount. This will reward your biggest depositors and help preserve these relationships. Also, keep an eye on what your competitors are doing and watch for signs of deposit attrition when rates begin to rise. Be prepared to act swiftly if competitive pressures require it.

Contact us if you have any questions about how to determine your strategy 417-881-0145.