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Bill Could Create Money Fund Competitor

The Business Checking Modernization Act, a bill in Congress that would repeal a law prohibiting banks from paying interest on business checking accounts, could create a new major competitor for money market funds.

The bill provides for a three-year phase-in period. Until now, banks could pay interest on demand deposits for individuals but not for companies. The proposed bill will change this, making it possible for banks to directly compete with money market funds for companies' short-term assets.

Under the bill, banks would be allowed, for the first three years, to sweep money from a savings account into a regular, no-interest, business checking account, up to 24 times a month, allowing one transfer each business day. Most savings accounts now are only allowed six sweep transfers a month.

The bill could pose a challenge for money market funds but it is unclear how widespread the effect would be, said John Collins, a spokesperson for the Investment Company Institute.

"Because banks do not pay interest on business checking accounts, there is an incentive for the corporations to have their cash automatically swept into money market funds over night so that they can get the interest and then to transfer these funds as needed to business checking accounts," he said.

Limitations of banks' interest-paying accounts have helped money market funds prosper. Some bank accounts, for example, have minimum investing periods while others require account holders to notify the bank before they withdraw money. This will change, however, if the proposed bill becomes law.

The new interest-bearing checking accounts will offer several benefits over money market funds. For example, up to $100,000 of the assets in the account will be FDIC-insured. Also, the accounts will not be structured as investment companies so they will not have to pay for a board of directors and meet other regulatory requirements.

Many banks have already gotten around the existing ban by offering "sweep" accounts, in which money is swept from interest-bearing accounts to non-interest business checking as needed. However, some banks do not have the service of sweeping into a money market fund, said Collins.

The impact of the legislation may also be limited because many banks already have mutual funds, Collins said. To encourage customers to sweep money into interest-bearing accounts would create a conflict of interest with banks' mutual funds.