U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

75–076 PDF 2012

UNDERSTANDING THE EFFECTS OF THE 

REPEAL OF REGULATION Q ON FINANCIAL 

INSTITUTIONS AND SMALL BUSINESSES 

HEARING 

BEFORE THE

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS 

AND CONSUMER CREDIT 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

SECOND SESSION 

MARCH 1, 2012 

Printed for the use of the Committee on Financial Services 

Serial No. 112–104 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

SPENCER BACHUS, Alabama, Chairman 

JEB HENSARLING, Texas, Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

NAN A. S. HAYWORTH, New York 

JAMES B. RENACCI, Ohio 

ROBERT HURT, Virginia 

ROBERT J. DOLD, Illinois 

DAVID SCHWEIKERT, Arizona 

MICHAEL G. GRIMM, New York 

FRANCISCO ‘‘QUICO’’ CANSECO, Texas 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

BARNEY FRANK, Massachusetts, Ranking 

Member 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

JAMES H. CLINGER, Staff Director and Chief Counsel 

(III) 

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND CONSUMER CREDIT

SHELLEY MOORE CAPITO, West Virginia, Chairman 

JAMES B. RENACCI, Ohio, Vice Chairman 

EDWARD R. ROYCE, California 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, North Carolina 

JEB HENSARLING, Texas 

PATRICK T. MCHENRY, North Carolina 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

FRANCISCO ‘‘QUICO’’ CANSECO, Texas 

MICHAEL G. GRIMM, New York 

STEPHEN LEE FINCHER, Tennessee 

CAROLYN B. MALONEY, New York, 

Ranking Member 

LUIS V. GUTIERREZ, Illinois 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

RUBE ́ N HINOJOSA, Texas 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

NYDIA M. VELA ́ ZQUEZ, New York 

GREGORY W. MEEKS, New York 

STEPHEN F. LYNCH, Massachusetts 

JOHN C. CARNEY, JR., Delaware 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

March 1, 2012 ................................................................................................... 1 

Appendix: 

March 1, 2012 ................................................................................................... 21 

WITNESSES 

THURSDAY, MARCH 1, 2012 

McCauley, Cliff, Senior Executive Vice President, Frost Bank, on behalf of 

the Independent Bankers Association of Texas ................................................. 3 

Pollock, Alex J., Resident Fellow, American Enterprise Institute ...................... 5 

APPENDIX 

Prepared statements: 

Maloney, Hon. Carolyn: ................................................................................... 22 

McCauley, Cliff ................................................................................................. 24 

Pollock, Alex J. ................................................................................................. 29 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Maloney, Hon. Carolyn: 

Written statement of John Durrant, Managing Vice President, Small 

Business Banking, Capital One Financial Corporation ............................. 33 

Renacci, Hon. James: 

‘‘The Hamilton Financial Index: A semi-annual report on the state of 

our financial services industry,’’ dated February 2012 .............................. 35 

Written statement of the Independent Community Bankers of America .... 86 

(1) 

UNDERSTANDING THE EFFECTS OF THE 

REPEAL OF REGULATION Q ON FINANCIAL 

INSTITUTIONS AND SMALL BUSINESSES 

Thursday, March 1, 2012 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS

AND CONSUMER CREDIT, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 9:34 a.m., in room 

2128, Rayburn House Office Building, Hon. Shelley Moore Capito 

[chairwoman of the subcommittee] presiding. 

Members present: Representatives Capito, Renacci, Luetkemeyer, 

Canseco; Maloney, Hinojosa, and Scott. 

Also present: Representative Green. 

Chairwoman CAPITO. We will go ahead and get started. Mrs. 

Maloney is busy elsewhere, but she said to go ahead and get started. 

Would the witnesses to take their seats? 

I want to thank everybody for coming today, and the hearing will 

come to order. We are scheduled to have a vote between 10:15 and 

10:30, so we will see what happens. 

I am going to give my opening statement. 

In the wake of the stock market crash and the financial crisis 

leading up to the Great Depression, many steps were taken to enhance regulation of the financial sector. One such item was the 

Federal Reserve prohibition on banks paying interest on demand 

deposit accounts, commonly referred to as Regulation Q or Reg Q. 

In the years leading up to the crash, there was an increasing 

trend of financial institutions competing with each other by offering higher interest rates on demand deposit accounts. 

In 1933, Federal regulators responded by promulgating Reg Q, 

which prohibited the payment of interest on demand deposits. That 

is a little history lesson there for me and for you. 

Since then, banks have utilized tactics to avoid the effects of Reg 

Q. In some cases, banks effectively paid interest to businesses by 

offering them sweep arrangements in which business deposits were 

transferred from business checking accounts, invested into commercial paper or repurchase agreements or mutual funds at the end of 

each day, and then transferred back the next day. 

The Dodd-Frank Act included the repeal of Section 19(i) of the 

Federal Reserve Act in its entirety, thereby striking the statutory 

authority under which the Federal Reserve issued Reg Q. Since 

2 

July 21, 2001, banks have been able to pay interest on business 

checking accounts on a voluntary basis. 

The repeal of Reg Q has been debated in the House of Representatives over the last decade. In fact, the House voted almost unanimously several times to move legislation that would have included 

a repeal of Reg Q. 

That said, we are in a much different environment coming out 

of the financial crisis, and our witnesses will provide important insight into the effect the repeal of Reg Q is having on financial institutions and small businesses. 

Since Mrs. Maloney is not here for the purpose of giving an opening statement, I would like to recognize Mr. Canseco for 2 minutes. 

Mr. CANSECO. Thank you, Madam Chairwoman. And I thank you 

and welcome our witnesses here today. 

Mr. McCauley, it is always good to have someone from San Antonio here as a witness. So thank you for being here today on this 

panel. 

And thank you, Mr. Pollock, for coming. 

Today, we examine the impact of banks now being allowed to pay 

interest on demand deposit accounts, the last vestige of a law that 

Congress passed during the Great Depression. 

While the repeal of this last vestige of Reg Q has, by and large, 

been supported by industry participants for years, there is now 

concern amongst a number of community banks that Reg Q’s repeal 

could leave them at a further disadvantage versus their larger 

counterparts. 

I believe it is important today to hear the merits of both sides 

of this argument. While we, as Congress, should take measures 

that responsibly lift the burdens off of community banks, we must 

also make sure that we foster a competitive marketplace that takes 

into account the capabilities of banks of every size, as well as small 

businesses. 

Again, I thank Mr. McCauley and Mr. Pollock for being here 

today, and I look forward to our discussion on Reg Q. I yield back. 

Chairwoman CAPITO. Thank you. 

Mr. Scott, would you like to make an opening statement or—Mr. 

Renacci, do you wish to make an opening statement? No? 

Mr. Luetkemeyer? No? 

We are having a dearth of opening statements, so back to you 

again, Mr. Scott. 

Mr. SCOTT. Oh. 

Chairwoman CAPITO. I am sorry to rush you. Take your time. 

Mr. SCOTT. No problem. This is a very, very important hearing. 

And I certainly want to thank you, Madam Chairwoman, for holding this hearing to get the impact of the repeal of Regulation Q. 

As we know, Dodd-Frank rescinded Regulation Q, which had prohibited banks from paying interest on business checking accounts. 

And after its repeal, member banks and Federal savings associations could pay interest on demand deposit accounts, but they are 

not required to do so. 

Some supporters of Regulation Q’s repeal have stated that small 

banks have been put at a competitive disadvantage due to their inability to cut fees in contrast with larger banks. And supporters for 

the repeal also include some small businesses that claim that they 

3 

could not earn interest on their fee deposits, nor could they negotiate fee reductions. 

So repeal of Regulation Q brings with it significant changes to 

the calculation of the account analysis for banks. In response to the 

passage of Dodd-Frank and Regulation Q’s repeal, banks have several options in choosing to respond. One option is paying hard interest on the entire average account balance and thereby eliminating the soft interest credit. Another option is to proceed with 

paying a soft earnings credit on that portion of the average balance 

required to offset service charges, then paying hard interest on excess balances. 

And of course, banks could opt for no change and pay no interest 

at all. I would be interested during this hearing to discover both 

the benefits and the risks of each of these options and what effect 

each of these options would have on the affected institutions as 

well as on the economy in general. 

Thank you, Madam Chairwoman. I look forward to the witnesses. 

Chairwoman CAPITO. Thank you. 

I think that will conclude our opening statements. So I would 

like to take the opportunity to introduce the panel of witnesses for 

the purpose of making a 5-minute presentation, and then we will 

begin questioning. 

First, we have Mr. Cliff McCauley, senior executive vice president of the Frost Bank of Texas. 

Hold on just a second here. I see Mrs. Maloney is here. 

Without objection— 

Mrs. MALONEY. My apologies. 

Chairwoman CAPITO. No problem. 

Mrs. MALONEY. I thought it was at 10:00. Like Pavlov’s dog, 

whatever the usual time is, is when I show up. 

Okay. Thanks. 

Chairwoman CAPITO. I was just recognizing Mr. McCauley. He is 

going to make his statement. Welcome. 

STATEMENT OF CLIFF MCCAULEY, SENIOR EXECUTIVE VICE 

PRESIDENT, FROST BANK, ON BEHALF OF THE INDEPENDENT BANKERS ASSOCIATION OF TEXAS 

Mr. MCCAULEY. Chairwoman Capito, Ranking Member Maloney, 

and members of the subcommittee, my name is Cliff McCauley. I 

am senior executive vice president of Frost Bank, headquartered in 

San Antonio, Texas. 

For the last 20 years, my primary area of responsibility has been 

leading our correspondent banking line of business. I appreciate 

the opportunity to testify on behalf of the community banking industry about the potentially devastating effects of the repeal of 

Regulation Q. 

In my role of working with community banks for over 30 years, 

I have become very familiar with the balance sheet structure and 

business model that has developed over the decades as they serve 

their communities and customers. 

One very important part of this basic structure is the relationship that exists between banker and small-business owner. This 

model is built on relationship, service, close knowledge of the busiVerDate Nov 24 2008 18:21 Aug 03, 2012 Jkt 075076 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 K:\DOCS\75076.TXT TERRIE
4 

ness, and credit support. This has been possible because of the 

longstanding effects of Regulation Q and is the foundation of the 

banker-business relationship. 

The demand deposit account, or DDA, is the primary transaction 

account and repository for working capital of virtually every small 

business. It has been argued that for too long banks have denied 

paying interest on DDAs and that it would only be fair for small 

businesses to earn that interest on their daily balances. 

There are many ways to measure value, and certainly investment dollars should be paid an expected return. But as mentioned 

previously, DDA transaction accounts are not investment accounts. 

They are working capital accounts with significant movement of 

funds to meet the needs of the business. 

With the other account type restrictions of Reg Q being lifted 

many years ago, savings or investment funds have had the ability 

to earn a return and that process is very mature. The business 

DDA also has a value on a return, not just on interest dollars 

earned. It helps to support the relationship to cover service costs 

and to provide credit support for that business in a way that is 

meaningful. 

Without these balances to support the relationship, businesses 

will be faced with higher service fees and increased borrowing 

costs. 

These business DDA volumes also provide the pool of fixed-rate 

deposits that are so critical for the community bank model. 

These business DDA deposits that are competed for based on 

service and relationship support are the vital source of funds that 

community banks use to make fixed-rate loans and purchase fixedrate securities. These fixed-rate loans allow small businesses to 

enter into new ventures with borrowing cost certainty and thus create the new jobs that are so critical to our communities and our 

national economy. 

Community banks are also the largest purchasers of local municipal and public entity debt issues that are so critical to the progress 

of our rural and less populated communities. 

If a community bank no longer has a stable fixed-rate source of 

deposits to use to purchase fixed-rate local bonds without incurring 

unreasonable interest rate risk, it will require local entities to pay 

a higher interest rate to attract purchasers, further hurting their 

already strained budgets. 

If the repeal of Reg Q is allowed to stand, and business DDA accounts succumb to the enticements of the highest bidder, the negative effects to community banks and small business are clear. 

So who will be the beneficiary? It is my opinion that the too-bigto-fail institutions will utilize this new tool to attract deposits in 

the future since FDIC insurance premiums are now calculated on 

total assets rather than domestic deposits. 

With their incentive to fund their balance sheets with wholesale 

funding now gone, paying interest on business checking will be an 

option to replace those dollars with a more stable source of funding. 

If this does happen, it is unlikely that those funds will remain 

in the community for local purposes and small businesses will find 

themselves on their own in times of unforeseen need. 

5 

There is another side effect to the repeal that must be considered 

and that is the Transaction Account Guarantee program, or TAG, 

that gives unlimited FDIC coverage to non-interest-bearing balances. The irony of the repeal of Reg Q is that once interest is paid 

on these balances, the guarantee reverts to the $250,000 limit, 

which is not adequate for many businesses’ primary transaction account. 

With the unquestionable support of the Federal Government of 

these too-big-to-fail institutions, the community bank is at a significant disadvantage. I have heard many times that the desire is to 

eliminate too-big-to-fail, but actions such as the repeal of Reg Q 

play right into the vantage of those institutions. 

For those businesses that from time to time do have investable 

funds, there is a better way to meet their needs and keep the funds 

in the local community banks without the repeal of Reg Q. Amending Regulation D to increase the number of allowable transactions 

in a money market account to not more than 30 per month would 

allow those banks and businesses desirous of an interest paying 

and earning relationship to do so without destroying the foundation 

of most community banking franchises. 

There is still time to fix the problematic effects of this repeal 

while interest rates are at historic lows by reinstating Reg Q and 

passing Chairman Neugebauer’s H.R. 2251 that accomplishes the 

amendment to Regulation D previously mentioned. 

I appreciate the opportunity to be here today, and I will be happy 

to answer any questions. 

[The prepared statement of Mr. McCauley can be found on page 

24 of the appendix.] 

Chairwoman CAPITO. Thank you. 

Our next panelist is Mr. Alex J. Pollock, resident fellow, American Enterprise Institute. 

Welcome. 

STATEMENT OF ALEX J. POLLOCK, RESIDENT FELLOW, 

AMERICAN ENTERPRISE INSTITUTE 

Mr. POLLOCK. Thank you, Madam Chairwoman, Ranking Member Maloney, and members of the subcommittee. 

While I am not from San Antonio, Congressman, I am from 

banking. I have lots of friends in the business from many decades. 

In the past, during the 1970s, when I criticized the theory and 

effects of Regulation Q to one of those friends, these effects being 

to transfer huge amounts of money from small savers and from 

small businesses to banking profits, this friend who was a bank 

lobbyist memorably told me: ‘‘You have to understand, Alex, that 

Regulation Q is so embedded in the American banking system that 

it is permanent!’’ 

This was a poor prediction, of course, as it turned out, although 

it took until 2011 to be completely falsified. 

Because under Regulation Q banks were prevented by the government from paying interest on business demand deposits for so 

long, cumbersome methods were developed to compensate for this 

regulatory rigidity, as the chairwoman pointed out in her opening 

remarks. The Regulation Q effect on business demand deposits was 

also to encourage complex, implicit pricing arrangements, instead 

6 

of clear, explicit pricing. This made things more difficult for small 

companies, which didn’t and don’t have internal bureaucracies. 

As a small-business witness testified to the Senate Banking 

Committee, for example: ‘‘When I started my first business, I can 

recall vividly my astonishment at being told a business could not 

earn interest on its checking account. Later, as the business prospered, my banker suggested a sweep account. Boy, was it a paperwork nightmare.’’ 

This witness rightly asked why the government should force this 

complication on small business. Why indeed? It shouldn’t. 

Last year’s repeal of the final remaining vestige of Regulation Q’s 

1930s thinking, as the chairwoman pointed out, at long last completed a pro-competitive process, which began with the Monetary 

Control Act of 1980. This final repeal was and is a good idea. We 

can easily see this by asking and answering half a dozen simple 

questions to clarify the economics of the matter. 

If we want to have a competitive market economy, should Congress engage in price-fixing to benefit banks? Obviously not. 

Should Congress prevent depositors from getting interest income 

that banks would be willing to pay? Obviously not. 

Is it the business of Congress to try to prop up banking profits, 

for any kind of bank? Obviously not. 

Should Congress force depositors to subsidize borrowers? Obviously not. 

Does Congress know the right price for a business checking account? Obviously not. Only the competitive market can determine 

this, and it might determine multiple varieties of answers to that. 

Should Congress promote competition in banking to the benefit 

of customers? Obviously, yes. That could hardly be more clear. 

Moreover, the whole history of Regulation Q, as discussed in my 

written testimony, displays the folly of such regulatory schemes. 

Customers are better served by encouraging competition than by 

suppressing it. This is especially true for smaller customers who 

lack negotiating power and are price-takers in the market, not 

price-makers. 

To address quickly the specific questions asked by the committee: 

‘‘Has competition for business checking accounts increased?’’ To 

some extent, but because the Federal Reserve, as we all know, is 

manipulating short-term interest rates to approximately zero, I 

wouldn’t expect to see major results at this point. We will see more 

when interest rates rise, as they inevitably will. But since we are 

in a time of zero interest rates, it is in fact a good time to do this 

transition—it makes it easier. 

The subcommittee asks, ‘‘Are you concerned with unintended 

consequences?’’ No. 

‘‘Will small businesses benefit?’’ Yes. Regulation Q certainly 

caused subsidies to be extracted from small business depositors 

and transferred to banking revenues. This should be removed. 

‘‘How about the Federal Reserve’s statement that this will get 

greater clarity in pricing?’’ I do believe that explicit pricing is clearer and better than implicit pricing. 

In conclusion, Madam Chairwoman, about 35 years after my 

bank lobbyist friend told me it was impossible, we have finally arrived to the truly post-Regulation Q world, and this is a good thing. 

7 

Thank you again for the opportunity to be here. 

[The prepared statement of Mr. Pollock can be found on page 29 

of the appendix.] 

Chairwoman CAPITO. Thank you. I want to thank you both. 

I am going to put a general question out, and then I would like 

to hear both of your responses. 

I guess I would like an assessment, if you have an assessment 

now, of how many institutions are actually offering interest on demand. I think Mr. Pollock addressed the fact that it is probably 

very low because of interest rates in general. 

Mr. McCauley, you talked about the relationship between the repeal of Reg Q and the TAG program with the FDIC and what kind 

of relationship there is and might be because the TAG program is 

set to expire, I believe, at the end of this year. 

Do we really have a complete picture, because of the low interest 

rates and maybe the TAG program as well, what the landscape will 

really be under the repeal of Reg Q? 

So, Mr. McCauley, if you could kind of generally respond to those 

questions? 

Mr. MCCAULEY. Sure. I think you are exactly right. Right now, 

there is very little movement because rates are at artificial lows 

and the entire banking system is awash in liquidity. So there is 

very little competition for deposits right now. 

We will not see the effects of the repeal of Reg Q until monetary 

policy changes the excess reserves that are in the system and we 

start seeing an increase in interest rates. 

At that point down the road is when it is going to become very 

critical and it is going to really—the effects of it are going to be 

seen within the banking community. 

The TAG program is—the irony is that it is only for non-interestbearing balances. And when you pay one basis point of interest on 

there, the TAG goes away. 

Chairwoman CAPITO. Right. 

Mr. MCCAULEY. It was put in place to help the community banks 

compete with the too-big-to-fail institutions with the implicit guarantee of the Federal Government. 

Chairwoman CAPITO. Do you have any idea of how many institutions are currently choosing to pay interest on— 

Mr. MCCAULEY. There are very few. Some of the large national 

institutions that have huge advertising budgets and are in need of 

deposits to fund credit card portfolios have made some moves in 

this regard. 

And that further, by being able to do that, they have the possibility of disintermediating the funds from community banks. In today’s world of electronic banking, you can bank anywhere. And so 

once those funds to chase interest earned on those demand deposit 

balances leave the community bank, then they are not going to be 

used in that local community. 

Chairwoman CAPITO. Mr. Pollock, do you have a response to my 

questions? How many? And have we really seen the full effect and 

will we see it going forward in relationship to the TAG program? 

Mr. POLLOCK. As I said in my testimony, Madam Chairwoman, 

we wouldn’t expect to see a big effect now. This actually is a good 

time, as I said, to do the transition, so people can get ready. 

8 

As far as TAG goes, Mr. McCauley rightly said that there are a 

lot of things you are, as a customer, evaluating when deciding who 

to do any kind of business with, including banking business. You 

might like the local knowledge of a local bank. You might like the 

relationship. You are going to weigh that against the way it prices 

its deposits, the way it prices its credit. 

You might include the fact that if I just forego interest, I can get 

an unlimited government guarantee on my money. You will put 

that into your decision. 

What we ought to be doing always, in my opinion, in public policy is letting that competitive market work out those various tradeoffs because there is no way for anybody to sit in the central place 

and say this is how it should work. It is why we have a competitive 

market: to figure out the right answer. 

Chairwoman CAPITO. In terms of, you mentioned the electronic 

banking, and certainly that is the way things are done now, will 

continue to be done in such a rapid-fire manner. And I think that 

is a good thing, because it really does move to the ease of customer 

satisfaction and it creates more of a national or international banking scenario when you can move your funds around rather quickly. 

Do you think that—so you are envisioning, Mr. McCauley, a situation where the money is just going to be chasing the highest rate 

without the relationships that are born in a community bank. Is 

that essentially— 

Mr. MCCAULEY. Yes, my experience in working with community 

banks for a long, long time is that the rate sensitivity of their customers is one of the highest things that they worry about. Customers will move for 5 basis points, 10 basis points, not really looking at the long-term ramifications of that. 

That is fine with investment dollars because you are going to put 

those into a term investment and you are going to try to maximize 

your return. 

When you start taking the transaction account so you have a 

community banker and a small business there, and they are enticed to move that money to the highest bidder, and say it is a 

credit card bank from out of territory that wants to fund a credit 

card portfolio, they can obviously pay a higher interest rate than 

the community banker can because of the returns on our credit 

card portfolio. 

Once those funds leave that community bank to be deployed by 

that other bank, and those deposits are made electronically, they 

come out of that community in which they were originally deposited, that small-business owner then loses the support. 

I hear many, many times from community bankers that this 

foundation of the relationship with the DDA is the reason that they 

stand behind their customers, because they support the balance 

sheet of the local community bank. 

Chairwoman CAPITO. My time has expired here so— 

Mr. MCCAULEY. Okay. 

Chairwoman CAPITO. —I don’t want to violate my own rules 

here. 

Mrs. Maloney is recognized for 5 minutes for questioning. 

Mrs. MALONEY. Thank you. And I thank both panelists. And, 

Madam Chairwoman, thank you. 

9 

First, I request unanimous consent to place into the record testimony from John Durrant, managing vice president of small business banking at Capital One Financial Corporation. 

Chairwoman CAPITO. Without objection, it is so ordered. 

Mrs. MALONEY. Capital One introduced clear interest banking 

checking. And this is the first bank, as I understand it, to market 

a business checking account that will offer high interest checking 

rates for the first 12 months and a market competitive rate thereafter. So thank you for accepting it. 

And I would first like to respond to your testimony, Mr. 

McCauley. You characterized this action with Regulation Q as sort 

of a last minute, 11th hour action. But legislation has been pending, as Mr. Pollock mentioned, for many, many years. Since 1979, 

I found legislation calling for the repeal of Reg Q, possibly even before that. 

And several times, literally several times, it has been debated on 

the Floor of Congress and passed by a wide margin on the Floor 

of Congress. And the longer I stay here, the more I really respect 

anything that can get a majority vote on the Floor of Congress, 

much less a wide margin. 

I recall, along with many of my colleagues, having sat through 

numerous, numerous, numerous hearings, one chaired by your 

predecessor, Sue Kelly, who was Chair of this committee at one 

point, on this legislation of which she was the lead sponsor. 

So clearly, this is not a new, undebated issue. It was offered on 

the Floor of Congress when Dodd-Frank was being debated. But I 

just wanted to clarify that it wasn’t an 11th hour amendment. It 

had passed this body numerous times, passed out of this committee 

numerous times. 

I would like to ask you about the sweeps process and if you could 

elaborate on it. As Mr. Pollock mentioned and others mentioned, 

there have been numerous attempts to try to go around Regulation 

Q prohibition since it was enacted in Glass-Steagall, one of which 

is the sweeps, the automatic transfer of one’s savings accounts to 

one checking accounts. And many financial institutions have benefited from this practice, offering the service to their customers and 

collecting fees. 

So I would like to know, has your bank taken advantage of these 

sweep activities and those like them? What are the fees for the 

sweep activities? How prevalent are they in your bank? Is it prevalent throughout the system? 

If you could comment on the sweeps, the automatic transfer, and 

what the fees are and exactly how it works? Is it automatic? Do 

they opt into it—exactly how it works and have you been benefited 

from this and what the fees are? 

Mr. MCCAULEY. Sweep accounts have been around for a long 

time, as already previously stated. Sweep accounts are mainly 

available to larger corporate entities, more sophisticated depositors 

that have larger amounts to sweep. There is a cost to that, the fees 

associated with it on a daily basis. It can either be a hard dollar 

figure, or it can actually be a spread of a few basis points. 

Mrs. MALONEY. But how much is it usually, like $100, $35? What 

is the usual average sweep fee? 

Mr. MCCAULEY. As far as hard dollars on a monthly basis? 

10 

Mrs. MALONEY. Yes. 

Mr. MCCAULEY. It varies from institution to institution. I would 

say it would be less than $100 per month from the standpoint of 

a hard dollar fee if you looked at an average. 

However, those sweep accounts have not been really available to 

smaller businesses, to smaller entities and to smaller financial institutions. That is the main concern, that they have never been 

able to do that, they didn’t have the sophisticated systems to be 

able to do that, nor did they have the size of customers that would 

benefit from that. 

And that is why we suggest the amendment of Regulation D to 

allow on-balance-sheet sweeps, if you will, to keep that money in 

the community bank. 

Mrs. MALONEY. Okay. My time is almost up. I would like to ask 

Mr. Pollock, the main concern that I hear from my constituents, 

the small-business owners, is that they are forced to dedicate time 

and energy to transferring funds from one account to another to 

earn interest, and they say that they could better use this time 

serving clients and helping them grow their businesses. 

How will this help them grow and create jobs, the number one 

concern before Congress, this elimination of Reg Q? And why do 

you think it has taken so long for this to happen, and why did they 

put it in there in the first place? I know you are a historian, too. 

Mr. POLLOCK. Thank you, Congresswoman. 

Of course, your small-business customers are right. They are engaging in this bureaucracy and trying to move things back and 

forth only because Congress put in this prohibition, which was then 

mirrored in the Federal Reserve’s regulation. Congress caused this 

complication and expense to happen. 

If you go back to 1933, in the banking act of that year, you will 

find that among the things Congress was trying to do with what 

became Regulation Q was to prop up banking profits by giving 

banks what seemed like free—or interest-free at least—money. 

There was a lot of cartel-like thinking in the 1930s, which was 

displayed in a lot of the New Deal regulation. The regulators were 

viewed as a sort of cartel manager, as the Federal Reserve was in 

this case, to preside over a deposit product cartel where we fix the 

prices by regulationin order to try to prop up baking profits. This 

is not a good reason, I think we can say. 

Mr. RENACCI [presiding]. Thank you. 

I am now going to recognize myself for 5 minutes. 

First off, I want to say that I am concerned about community 

banks being able to meet the requirements of many of the regulations of Dodd-Frank and being able to compete. But on this issue, 

I am trying to get a handle on it, and the way I have spelled it 

out is pre-repeal, small community banks did not pay interest. And 

large banks already sidestepped the issue by having sweep accounts. 

Post-repeal, small community banks are not paying interest because interest rates are too low. And large banks are still 

sidestepping the issue by having sweep accounts. 

So in essence, I think I heard, Mr. McCauley, in your testimony 

that nothing has really changed at this point till liquidity gets back 

into market. 

11 

But I question, even after the repeal, if pre-repeal, the large 

banks were already doing this, then post-repeal, aren’t the small 

community banks really just going to be competing with themselves, between themselves, as the first institution maybe starts to 

put an interest on that account, and then the small community 

bank down the street has to do it? 

I realize it is a cost. I was a small-business owner for 28 years. 

But I also believe in competition. So I am trying to just sort 

through that. And maybe you can tell me your thoughts on that. 

Mr. MCCAULEY. Historically, community banks have competed 

with each other, but it has been based on a level playing field of 

a zero interest rate for transaction accounts. They had to compete 

on the basis of service, relationship, knowledge of the business, and 

credit support. So there is no pure form of competition in that. 

When you get into a bidding war, it is an auction. It is going to 

the highest bidder. 

As was already previously mentioned, the number one player so 

far has been Capital One, it is on the record, and they are doing 

that to fund a displaced credit portfolio that is not part of the local 

community. 

So it is not only the competition within the community—sure, 

there is going to be competition between community banks—but 

now, with the outside competition coming in and being able to pay 

a much higher rate than any community bank could. 

The other part of it is that the downside of that is it is going to 

result in higher borrowing cost. Everybody focusing on just the interest earned, that is one side of it. But when you take a bank and 

you make their entire balance sheet floating rate as far as their liabilities—the deposits—it is going to be very problematic for them 

to make fixed-rate loans. They are not going to be able to do it. 

And so without those fixed-rate loans and that borrowing cost 

certainty, it is going to have a major impact on the small-business 

borrower who, many times, is also the small-business depositor. 

And so, there is another side to this with the borrowing cost and 

also investment in supporting local communities and their bond 

issues. Community banks, excuse me. 

Mr. RENACCI. I was going to say, ultimately, I do understand 

that and I agree. The loser in this will always be—and it is sad 

to say—the consumer because as costs go up, as you increase your 

interest, you are going to have to charge a higher cost in the banking system to pay a loan. So I do understand that. That is why it 

is interesting to hear this. 

But ultimately, I am still trying to go back to the small banks 

versus the large banks because I think you made that statement 

earlier. Do you believe, based on the system pre-repeal, that there 

is a real difference since the large banks are already using sweep 

accounts? 

Mr. MCCAULEY. The large banks have historically used it for 

larger customers. They didn’t necessarily use that with small—it 

really has to do with the volume of funds that the customer has. 

A small customer in a larger bank did not utilize a sweep account. 

Mr. RENACCI. Mr. Pollock, your thoughts on this? 

12 

Mr. POLLOCK. Congressman, I am with you on competition. The 

winners from competition are consumers and customers of all 

kinds. That is always true. 

When we talk about money trying to be channeled in one place 

or another by regulation, we typically end up with inefficiencies 

and consumers losing. If the people in small towns, let us say, 

choose to put their money in a demand deposit with a credit card 

bank, at the same time those people are using the credit cards of 

that bank and spending the money in the local stores. 

If we sit back, as I said before, from the center and try to say, 

we are going to design a set of rules to make all these flows work 

out the way we want, we will make them work much worse than 

a competitive market will. 

Mr. RENACCI. Thank you. I am running out of time. So I will recognize Mr. Hinojosa for 5 minutes. 

Mr. HINOJOSA. Thank you, Congressman Renacci. 

I want to acknowledge Chairwoman Capito and Ranking Member 

Carolyn Maloney. I commend them for holding today’s congressional hearing on the effects of Regulation Q. 

I believe the repeal of Regulation Q has the potential to have a 

damaging effect on our community banks, which in turn may hurt 

the small businesses, some of our local school districts, and other 

entities that overwhelmingly rely on community banks for smallbusiness loans. 

I appreciate the concerns of my colleagues that Regulation Q represents an intrusion into the banking practices. I would counter, 

however, that we also should listen to the small banks that fear 

the effects of this repeal. 

They are the banks serving rural America and other underserved 

areas which larger banks deem unprofitable. They are the banks 

making the loans to small businesses. They are the banks with relationships forged in those communities. 

I would ask my colleagues on both sides of the aisle to listen to 

and consider the concerns expressed today. 

My question for Mr. McCauley is, in my district in deep south 

Texas, community banks and credit unions are very important to 

the small businesses and to the families who have taken advantage 

of the low fixed mortgage rates that community banks are able to 

provide. Variable-rate mortgages were one component of the 

subprime crisis and encouraging fixed-rate mortgages, especially in 

underserved areas, as I mentioned. 

It is important to protect the future health of the housing market. I would like to hear your prediction, sir, for how the repeal of 

Reg Q will affect the ability of community banks to provide fixedrate loans to home buyers, and also tell me how this might affect 

the operations of community banks in those underserved areas in 

general. 

Mr. MCCAULEY. Thank you, Congressman. 

Yes, I am very familiar with your district and the community 

banks. I work with very many of them in your district. 

Mr. HINOJOSA. We are pleased to have your chain of banks in 

deep south Texas. You all do a wonderful job. 

Mr. MCCAULEY. Great. Thank you. 

13 

The fixed rate at zero deposit base that community banks have, 

statistics will show that it is about 20 to 25 percent, and most community banks have a non-interest-bearing deposit base of about 20, 

25 percent. They have historically used this to make those fixedrate loans, many of those to home buyers in those rural areas 

where no mortgage company is going to make that loan. And you 

are very aware of that. It is very problematic. 

Without community banks making those fixed-rate home loans to 

those borrowers, it would be very difficult for them to get a mortgage and thus to purchase a home. 

With the inability to have with certainty, rate certainty, to know 

that you have this base of fixed-rate deposits at zero to margin off 

of or make a reasonable spread on and make those mortgage loans, 

the banks won’t be able to do it. 

They could utilize higher cost Federal Home Loan Bank borrowings to match fund off of that, but it will be a higher cost to 

the borrower because those funds do have a cost to them versus the 

base of DDA deposits that they have always had. 

So it is not only just the fixed-rate loans that they are able to 

make to the businesses, but also every community bank that I 

know does support their local community by making these mortgage loans and they are able to use fixed-rate funding because of 

that deposit base that they have with certainty. 

And without that, the cost of borrowing will go up or they will 

go to variable rate mortgages which can be quite problematic in a 

rising rate environment. 

And I think it is where we are right now. You are going to—the 

downside to community banking is, is to put them in a liabilitysensitive position with rising rates and the deposit side of their balance sheet increasing in rate. 

If they do have fixed-rate loans on the books, it is going to put 

them into a negative spread reminiscent of the S&L crisis. So they 

are going to be very cautious about making those. 

Mr. HINOJOSA. In your opening remarks, you said that it would 

be some time—and I don’t know exactly how long—before we really 

see what financial effect it would have on our community banks. 

Give me a timeline in your opinion of how long that would be? 

Mr. MCCAULEY. That is anybody’s guess. The Federal Reserve 

has put out that they are proposing to hold rates near zero through 

2014. But we know if inflation does return or unemployment does 

reduce at a rate, that the Federal Reserve will have to start moving to control those, and it could move some predictions, the rates 

will move up very fast to control. 

When that will be, I don’t know. But if you look at just when you 

return rates to anywhere, the Fed funds rate and a normal rate between 3 and 5 percent, which is very normal over time, it will be 

devastating as far as the marginability of the banks, not from a 

profit standpoint, but being able to provide those loans at a fixed 

cost to the borrower, fixed-rate loans whether it be mortgage or a 

small business. 

Mr. HINOJOSA. Thank you. My time has expired. I yield back. 

Mr. RENACCI. Thank you. 

Before I recognize Mr. Luetkemeyer, I would like to ask unanimous consent to insert 2 items into the record: a statement from 

14 

the Independent Community Bankers of America; and the Hamilton Financial Index. 

With that, I recognize Mr. Luetkemeyer for 5 minutes. 

Mr. LUETKEMEYER. Thank you, Mr. Chairman. 

I would just like to start out with a quick story. In our local 

bank, the local officer, loan officer one day was confronted by an 

elderly gentleman who had a large deposit, a lot of money in the 

bank, and he wanted to ask him for a higher interest rate on his 

deposits because he thought he had enough money in there that he 

deserved more interest on his deposits. 

And so the loan officer said, ‘‘I would love to give that to you, 

John, but your son, Robert has a loan with us on his car, a loan 

with us on his house, and a loan with us on his farm. And if you 

take the money out, we are not going to be able to loan him that 

money, number one. And number two, if we pay you more, we have 

to charge him more. Now, what do you want us to do?’’ 

And that, to me, is what is going on here, is that while Reg Q 

was there initially for a stated purpose, of which I am not sure— 

I would like to have a discussion with Mr. Pollock in 1 minute here 

about profits on it, but at some point the dollars that we are using 

to make loans to small businesses and individuals come from the 

deposits of the community generally. 

And the rates that are charged on those loans are reflective of 

what deposits are being paid so that there is a margin there. And 

if you pay more for deposits, you are going to charge more for the 

other services. That is the way it works. You have to maintain a 

margin on your interest rates as well as a profit margin to be able 

to keep your doors open. 

So I am not sure exactly why they think this is a good deal because I think we are taking from one group and giving to another. 

We are picking winners and losers here over who has checking balances with us and who has loans with us. And I am not sure we 

need to be in the middle of doing that. 

And so I guess a quick question for you, Mr. McCauley, is what 

percentage of your business deposits or what percentage of your deposits or business deposits versus personal deposits that you have 

in your bank? 

Mr. MCCAULEY. Within our organization, we are primarily a 

commercial bank and so it would be predominantly commercial deposits versus retail. 

Mr. LUETKEMEYER. Okay. Does your loan portfolio reflect the 

same amount of commercial loans versus personal loans then as 

well? 

Mr. MCCAULEY. Absolutely. 

Mr. LUETKEMEYER. So you have tied them together pretty well? 

Mr. MCCAULEY. Absolutely. And I think almost every banking 

franchise does. 

Mr. LUETKEMEYER. Right. So as a result, if you pay more for the 

deposits for your commercial deposits—or pay more for your commercial deposit—you are going to have to charge more for your 

commercial loans. Is that not right? It is pretty reflective. 

Mr. MCCAULEY. Right. It is a simple yes. 

15 

Mr. LUETKEMEYER. Okay. With regard to the transactional account guarantee, how impactful do you think it will be if we allow 

this thing to expire, to your bank in particular? 

Mr. MCCAULEY. I think it would be devastating to the community bank market. The implicit guarantee of too-big-to-fail has not 

been eliminated. And if you have any depositor who has any concerns, it is easy for the too-big-to-fail bank to say simply you don’t 

have to worry about insurance limits with us because we know the 

government is not going to let us fail. 

It will be devastating. It has leveled the playing field. We would 

like to say it is a level playing field, but we know it is not, and 

that the sovereign support credit given to the too-big-to-fail banks 

is very real. And customers are very, very educated about that. 

So, deposits will flow out of the community bank market to those 

too-big-to-fail institutions in excess of the $250,000 limit when and 

if it is allowed to expire. 

Mr. LUETKEMEYER. So as a result of that, do you feel that the 

dollars that are generated in a local community, that the local businesses are making, and then they would take those dollars out, and 

you would have less money to loan back to create more businesses 

and help more local folks? 

Mr. MCCAULEY. Absolutely. Most businesses require more than 

$250,000 to maintain the transaction of their business. 

Mr. LUETKEMEYER. Mr. Pollock, would you agree with that? 

Mr. POLLOCK. I am not sure what ‘‘that’’ is, Congressman. I am 

sorry. 

Mr. LUETKEMEYER. Mr. McCauley and I were discussing the 

transaction account guarantee and that if it expires at the end of 

the year, it is going to have a significant effect on especially small 

institutions as a result of the fact that the too-big-to-fail guys are 

able to point to that fact and the deposits will sort of gravitate that 

way. Do you feel that is accurate? 

Mr. POLLOCK. Thank you, Congressman. 

I do think there is in depositor behavior a looking to the bigger 

banks as safer. With respect to TAG, I do think there is an argument that if you are going to have the government guarantee the 

liabilities of banks, that such a deposit insurance system might 

have an unlimited amount for demand deposits, as opposed to investment accounts, as Mr. McCauley says. There is a reasonable 

argument to that. It all ought to be priced fairly. 

Mr. LUETKEMEYER. Are we not—do the banks pay insurance on 

these accounts? 

Mr. POLLOCK. Absolutely. 

Mr. LUETKEMEYER. So in other words, the larger accounts are already insured by the FDIC? 

Mr. POLLOCK. Yes. 

Mr. LUETKEMEYER. And you are paying insurance on that? 

Mr. POLLOCK. Yes, this is a totally bank-funded— 

Mr. LUETKEMEYER. Okay. 

Mr. POLLOCK. —insurance program. 

And it should be, and that insurance premium, Congressman, 

needs to be a fair price. The government learns over and over that 

underpricing government guarantees of private liabilities is a big 

16 

mistake, including in deposit insurance. We have learned that lesson. 

Mr. LUETKEMEYER. Thank you, Mr. Chairman. 

Mr. RENACCI. Thank you. 

We have votes in about 10 minutes, so if the Members would be 

amenable, what I will try and do is, we have two Members left. We 

will get the two Members in, and then close the hearing. 

So I recognize Mr. Scott for 5 minutes. 

Mr. SCOTT. Thank you very much. 

Mr. McCauley, Mr. Pollock, let me ask you, for those banks that 

are adjusting to this repeal of Reg Q, what would each of you recommend that they do to ensure that access to capital does not diminish while at the same time making sure that their operations 

are sound and stable? 

Mr. POLLOCK. Is that to me, Congressman? 

Mr. SCOTT. Yes, to each of you. I would like to get both of your 

responses. What are the recommendations to those that are adjusting so that they can stay viable? 

Mr. POLLOCK. Congressman, that is, in my view, a variation on 

asking about the relationship of depositors and lenders. As I said 

in my testimony, we should not be trying to force depositors to subsidize borrowers. That is a mistake. We shouldn’t force borrowers 

to subsidize depositors. That is why we want competitive markets, 

to establish prices among all of the actors in the markets. 

I don’t think we ought to be about, as a matter of public policy, 

guaranteeing that any particular competitor has funds at any particular price. I don’t think trying to fix the price of funding or of 

any product in any business by the government is a good idea. 

That takes away the amazing power of competitive markets, which 

is what we ought to want to have in banking, as well as everyplace 

else. 

Mr. SCOTT. Okay. Yes, sir? 

Mr. MCCAULEY. How does a bank respond? How do they stay viable? What could they do to prepare? That is going to really depend 

upon market forces. There is very little that a community bank can 

do if interest rates rise and there is a huge increase in the price 

of those deposits. They are going to have to be very reactionary. 

The market forces will drive that. 

I will say that the clarity issue question of the Fed and their 

comment that it will bring clarity as far as implicit interest versus 

explicit, that it is our understanding and learning from peer discussions and other software vendors and developers of systems that it 

is not going to get more simple. It is actually going to get more 

complex. 

Mr. SCOTT. Do you think that this repeal will cause a sharp decline in the profitability of banks? I represent a State that has gone 

through just a tremendous onslaught of bank closings and failures 

of banks. So I am very, very concerned about what we do up here 

to make sure we are not hurting these banks. 

Do you think the repeal of Reg Q will cause a sharp decline in 

the profitability of banks? 

Mr. MCCAULEY. In a rising rate environment for a bank that has 

a high percentage of their deposits and non-interest-bearing DDA 

that become interest-bearing, their interest expense is going to go 

17 

up very rapidly. And thus, yes, they are going to have to raise the 

cost of loans to maintain the same profitability. And if they can’t 

do that, profitability will be diminished. 

Mr. SCOTT. Do you think they should raise the cost of loans so 

that they can generate sufficient revenue to cover the increased 

cost of paying interest? 

Mr. MCCAULEY. Absolutely. 

Mr. SCOTT. All right. 

Let me ask you, do you think, do you anticipate the banks, particularly small community banks, will lose deposits due to the increased competition of interest rates? 

Mr. MCCAULEY. I believe that they will. I believe there will be 

a disintermediation to the larger institutions such as Capital One 

that has been previously mentioned that has obvious huge advertising budgets, and also an incentive to pay up for deposits to fund 

a very high price as far as interest rate credit card portfolio. 

For instance, they can pay a high interest rate for deposits because of the high interest rates on a credit card portfolio versus a 

community bank that is making loans within the community. 

Mr. SCOTT. Is there anything that could be done by the banks, 

by us, or by anyone to mitigate this damage? 

Mr. Pollock, I think you wanted to— 

Mr. POLLOCK. I would. Thank you, Congressman. 

I think what is not to be done is to have the Congress, as I said 

in my testimony, try to support the profitability of banks or of any 

business. If they are losing business, it is because they are not 

competitive. We have to let customers, consumers, small businesses, all businesses decide what is the most valuable package of 

price, service, relationship, and quality among the various competing banks. 

A big mistake, in my judgment, is for the Congress to say, we 

are going to pick one kind of competitor and try to make sure they 

are profitable. 

Mr. SCOTT. I will yield back so we can have enough time. My 

time has expired. 

Mr. RENACCI. Mr. Green, I know that you just stepped back in. 

We are going to go 5 and 5, but with you coming back, if you would 

like more than 1 minute, we will have to recess today or now and 

then come back after votes. 

Mr. GREEN. Mr. Chairman, I am honored to take whatever is 

available. 

[laughter] 

Mr. RENACCI. Mr. Canseco for 5 minutes. 

Mr. CANSECO. Thank you, Mr. Chairman. I appreciate the opportunity to ask these questions. 

Mr. Pollock, you bring some very interesting points in your testimony regarding Reg Q’s history and negative consequences that 

the policy has led to in the past, such as deposits leaving savings 

and loans in the 1960s when Reg Q was intended to keep them 

there. 

We can all agree that there are good regulations and bad regulations. But in your opinion, why specifically is a prohibition on paying interest a bad regulation? And how can it further lead to negative consequences? 

18 

Mr. POLLOCK. Congressman, in my judgment, among the worst 

kind of regulations are price regulations where the government 

tries to fix the price of any product or service. That is all that Reg 

Q was and would be if we had it back. It is a price-fixing regulation, which is a bad idea and always turns into creating distortions 

which are unfortunate over time. 

Mr. CANSECO. Thank you for that. 

But, Mr. Pollock, do you think that a prohibition on interest on 

demand deposit accounts is price fixing? 

Mr. POLLOCK. Absolutely, I do, sir. 

Mr. CANSECO. And Mr. McCauley? 

Mr. MCCAULEY. No, it is absolutely put in place for a purpose. 

And I think that you look at the past 70 years of it being in place, 

how it has really helped support the community banking industry. 

It unequivocally leads to the ability to make those fixed-rate loans 

and purchase those fixed-rate securities to support those communities. 

Mr. CANSECO. Let me ask you specifically, could you, Mr. 

McCauley, explain how community banks specifically would become 

more liability-sensitive in the wake of Reg Q’s repeal? 

Mr. MCCAULEY. Sure. The liabilities of a bank are their deposits, 

what they owe back to their customers. And if your sensitivity is 

really related to rates moving one way or the other, if you are liability-sensitive, that means that as interest rates rise, your costs 

are going to go up; or as interest rates lower, your costs are going 

to go down as far as your deposit cost. There is nowhere for rates 

to go but up from where we are right now. 

It puts community banks in an incredibly difficult position. It can 

be purported that it is a great time to do it. I think it is a terrible 

time to do it because you put community banks in a very intensely 

liability-sensitive position that they have never had to deal with on 

asset-liability management. So their interest rate risk volatility becomes extreme. 

Mr. CANSECO. You mentioned in your testimony that demand deposits require a 10 percent reserve requirement at the Federal Reserve. Could you explain how that would hurt lending, especially 

by community banks, to the local areas that they serve? 

Mr. MCCAULEY. Transaction accounts require a 10 percent reserve at the Federal Reserve. Today, those monies that are in 

money market accounts or other non-transaction investment accounts do not have a reserve requirement. 

With the repeal of Reg Q, interest rates paid on demand deposit 

accounts that are transaction accounts to attract funding into that, 

those funds that did not have a reserve requirement will now have, 

which will take 10 percent of all of those deposits out of the system 

to be loaned and to support the local communities. 

Mr. CANSECO. So let us assume I am a small businessman who 

has a working relationship with a community bank and I keep my 

checking accounts there. What side should I be on here? Should I 

be in favor of Reg Q or against Reg Q? 

Mr. MCCAULEY. I think you should be in favor of Reg Q with the 

amendment of Reg D because we have a solution. There is a better 

way than repealing Reg Q. It is to reinstate Reg Q and amend Reg 

D. That way we can keep those funds on a balance sheet of a comVerDate Nov 24 2008 18:21 Aug 03, 2012 Jkt 075076 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 K:\DOCS\75076.TXT TERRIE
19 

munity bank without the machinations of a sweep or the expense 

of a sweep account. 

Mr. CANSECO. Mr. Luetkemeyer pointed out something very interesting, that if I am getting interest payments on my demand deposit account, it is also going to affect the loan rate that I am going 

to get on any loan that I have, whether it is a car loan or a business loan. Is that correct? 

Mr. MCCAULEY. That is correct. There is a direct relationship. 

Mr. CANSECO. Let me pursue some of that. I have 40 seconds left. 

But you touched upon something that I need to have elaborated 

here. 

I know from being in business in Texas and banking in Texas, 

many of our community banks go out there and bid on government 

accounts to attract those deposits in there. It is certainly not a 

lending relationship; it is a depository relationship with schools, 

city, county, etc. 

Tell me how that would affect you one way or the other with or 

without Reg Q. 

Mr. MCCAULEY. Most community banks do this as an accommodation to their local municipal governments to support them on 

their accounts. They have investment accounts they pay an interest 

on. If they are now going to get in a competitive environment and 

pay an interest rate on the demand accounts, it is going to further 

deteriorate their ability to do that, because it is not a profitable account for them. 

Mr. CANSECO. And one more question, if I may. So therefore, it 

is going to affect those consumers other than governmental depositors when they ask for loans from the institution. 

Mr. MCCAULEY. Absolutely, the cost will be higher. 

Mr. CANSECO. Thank you. 

Mr. RENACCI. Thank you. 

Mr. Green for 1 minute. 

Mr. GREEN. Thank you, Mr. Chairman. 

Let me speak quickly. Let me thank you, Mr. McCauley, for 

being here today. I claim a little bit of you in Houston, Texas. And 

community banks are especially important to us in the State of 

Texas, to have banks with the owner in the community. They know 

the people in the community. It means something to have community banks. 

With reference to competition, I support competition, but there 

are some concerns that I will have to raise. When the big box 

stores come in, they drive out the mom-and-pops. Community 

banks are the equivalent of mom-and-pops. If we don’t do something, we have to protect them to make sure that we have what 

we know to be a viable institution that helps communities. 

I would add only this as I close. With these community banks, 

we have an opportunity to make sure that small businesses can 

work with small banks so that they can continue to thrive. I will 

do what I can to be helpful. I have some thoughts, and perhaps I 

will get a chance to share them at a later time. 

Thank you very much, Mr. Chairman. 

Mr. RENACCI. Thank you, Mr. Green. 

The Chair notes that some Members may have additional questions for this panel, which they may wish to submit in writing. 

20 

Without objection, the hearing record will remain open for 30 days 

for Members to submit written questions to these witnesses and to 

place their responses in the record. 

This hearing is adjourned. 

[Whereupon, at 10:32 a.m., the hearing was adjourned.] 

(21) 

A P P E N D I X 

March 1, 2012 

22 


75076.001
23 


75076.002
24 


75076.003
25 


75076.004
26 


75076.005
27 


75076.006
28 


75076.007
29 


75076.008
30 


75076.009
31 


75076.010
32 


75076.011
33 


75076.012
34 


75076.013
35 


75076.014
36 


75076.015
37 


75076.016
38 


75076.017
39 


75076.018
40 


75076.019
41 


75076.020
42 


75076.021
43 


75076.022
44 


75076.023
45 


75076.024
46 


75076.025
47 


75076.026
48 


75076.027
49 


75076.028
50 


75076.029
51 


75076.030
52 


75076.031
53 


75076.032
54 


75076.033
55 


75076.034
56 


75076.035
57 


75076.036
58 


75076.037
59 


75076.038
60 


75076.039
61 


75076.040
62 


75076.041
63 


75076.042
64 


75076.043
65 


75076.044
66 


75076.045
67 


75076.046
68 


75076.047
69 


75076.048
70 


75076.049
71 


75076.050
72 


75076.051
73 


75076.052
74 


75076.053
75 


75076.054
76 


75076.055
77 


75076.056
78 


75076.057
79 


75076.058
80 


75076.059
81 


75076.060
82 


75076.061
83 


75076.062
84 


75076.063
85 


75076.064
86 


75076.065
87 


75076.066
88 


75076.067