Rep. Henry Reus, (D-Wis.), chairman of the House Banking Committee, is ready to introduce legislation to permit the Federal Reserve to pay interest to member banks.
Reuss' proposal would be much less costly than a plan proposed earlier by the Fed.
The central bank wants to pay interest on deposits member banks are now required to keep in non-earning accounts. The central bank is concerned because it is losing members to state banking regulation. Most state regulators permit banks to keep their so-called required reserves in income earning assets as Treasury securities.
There has been a long-running dispute between the Fed and the House and Senate Banking Committees over whether the central bank could go ahead on its own and pay interest without congressional approval. The Fed finally bowed to Reuss and Senate Banking Committee chairman William Proxmire (D-Wis.) and submitted legislation which Reuss introduced at the central bank's request.
But Reuss said the Fed plan - which also encompasses reducing the amount of required reserves as well as charging banks for services the Fed now renders for free - would cost $405 million in interest payouts in the first year while Reuss' would cost only $90 million.
Reuss said his plan would reduce total reserve requirements by $5 billion - about the same amount as the Fed's plan. This would free up more money that banks could lend instead of keeping it on account with the central bank.
Reuss would also limit the amount of interest the Fed could pay on required deposits to the amount of income the Fed receives from banks for services it now performs free, such as clearing checks.
In a statement released over the weekend, the Wisconsin Democrat said that the Federal Reserve Board's proposal is "a high price to pay for helping the Federal Reserve system retain members."
Reuss said a majority of the members of the House Banking Committee have endorsed his plan in principle.
The central bank, including chairman G. William Miller, does not favor the Reuss approach because the bank thinks that if the amount of interest that can be paid is limited to the income the Fed would earn from services it now provides free, the exodus of banks from the Fed system would not be stemmed.
Reuss, in his statement, said that the $5 billion reduction of reserve requirements will be enough incentive to keep banks from leaving the Fed system and "would make membership in the Federal Reserve more attractive to all banks."