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For release on delivery
10:00 a.m. EDT
June 4, 1986
Statement by
Manuel H. Johnson
Member, Board of Governors of the Federal Reserve System
Before the
Subcommittee on Financial Institutions Supervision,
Regulation and Insurance
of the
Committee on Banking, Finance and Urban Affairs
United States House of Representatives
June 4, 1986
I appreciate
the opportunity
to appear
before
the
Subcommittee today on behalf of the Federal Reserve Board to
discuss
H.R.
3567,
the
Depository
Improvement Act and H.R.
Institutions
Examination
2282, the Truth in Savings Act.
I
will begin by offering the Board's evaluation of H.R. 3567 and
then turn to H.R. 2282.
posed
The Board's responses to the questions
in Chairman St Germain's letter of May 27,
1986,
are
appended to this testimony.
The purpose of the proposed legislation is to improve
the quality of depository institutions supervision by assuring
that
the
federal
compensation
personnel,
programs
supervisory
and benefits
agencies
to attract
provide
and
retain
by improving the efficiency of
and by providing
supervisory
agencies.
for
the
adequate
competent
examiner
certification
We are in agreement
with
training
of
state
the
basic
objectives of the proposed legislation, and have taken steps to
achieve many of them.
We do have reservations concerning the
arrangements the bill would establish to accomplish certain of
the objectives, however, and I will discuss them as I proceed.
With respect to the major provisions of the bill that
would
exempt
the
supervisory
agencies
from
federal
civil
service laws and the federal budgetary process, we would point
out that the Federal
Reserve
is already
exempt
from
these
constraints under specific provisions of the Federal Reserve
Act.
Accordingly, the Board believes that the Federal Reserve
should be excluded from this portion of the bill.
At the same
-
2
-
time, the Board supports the legislation insofar as it applies
to
the
other
supervisory
agencies.
The
legislation
will
provide them with the flexibility necessary to establish their
own employee
compensation programs
and budgets
and
thereby
enable them to maintain a qualified examination and supervisory
staff.
The
Examination
proposed
Council
legislation
to conduct
would
regional
also
require
the
studies of private
sector pay scales and employee benefits for jobs comparable to
those
of federal
examiners.
The Council
would
report
the
results of these studies to the federal regulatory agencies,
which would be required to take them into account in setting
pay scales for their personnel.
Under existing practice,
the Federal Reserve Banks,
which employ substantially all of the System's examiners,
set
their salary levels commensurate with those being offered by
banks and other financial institutions in their local areas.
In determining what the local salary levels are,
the Federal
Reserve Banks conduct surveys that are essentially the same as
envisioned
for
the Council.
The
Federal Reserve
would
be
prepared to share with the Council the information that the
Reserve Banks gather.
out,
is that,
while
Our survey experience, we would point
the
federal
pay
scale
is below going
compensation levels in certain sections of the country,
significantly above local levels in other sections.
it is
-
3-
As important as the issue of examiner compensation is,
it cannot be considered without regard for the continuing need
to
control
costs
government-wide
and
to
achieve
budgetary
savings consistent with the Gramm-Rudman-Hollings legislation.
Although
the
Federal
Reserve
System
is
not
covered
by
Gramm-Rudman, Chairman Volcker has stated the Federal Reserve
System's intention to comply voluntarily with
that legislation.
revised
to
meet
Gramm-Rudman
Accordingly,
the
for
4.3
other
reductions
were
made
by
commitment
to budgetary
the Board's
percent
government
restraint,
1986 budget
reduction
agencies
the Reserve
mandated
and
Banks.
the
the spirit of
by
comparable
Despite
Federal
was
this
Reserve
is
increasing the number of its on-site examinations and hiring
additional examiners to help conduct them.
These measures are,
in our opinion, necessary to meet growing supervisory concerns
regarding banks and bank holding companies that are under the
Federal
Reserve's
regulatory
authority.
Because
of
these
concerns with supervision, we support the bill's objective to
provide the other supervisory agencies with adequate budgetary
flexibility to meet increased requirements for bank supervision.
It is, of course, particularly difficult to strengthen
our supervisory function at a time when our overall budget is
being reduced.
Of necessity, we have expanded the supervisory
function by less than we had planned and,
to meet the added
expenses of the expansion that has been accomplished, have had
-
to make cuts
Congress
4
-
in other areas of our
were
to provide
the other
budget.
Thus,
agencies
with
compensation and budgetary authority,
we would
from
salary
this action
in setting
our own
if the
Jjlexible
take guidance
and
budgetary
policies.
The proposed legislation would also provide
development of a proposal
examiner
would
to consolidate all
training programs under
require
that
the
federal
for
agency
the Examination Council and
Council
study
the
feasibility
of
establishing a graduate education program for examiners.
understand
it,
the Council
har- the- concept
of
under
authority,
a program.
from offering
such
respect to consolidating all other examiner
As I
a graduate
education program under study ano1 is not,
restricted
the
its current
training
With
in the
Council, we believe that in addition to the present schools the
Council conducts
for all the agencies,
serious consideration
should be given to having the Council assume responsibility for
conducting certain "core" courses for examiners.
short,
however,
of having the Council
responsibilities
activities
and
for
the agencies.
responsibilities
assume all educational
Each
that
agency
require
training for its examiners —
for example,
holding
and
company
examinations.
the
inspections
Thus,
flexibility
Edge
it is essential
to offer
special training needs.
their
own
We would stop
has
unique
specialized
in the area of bank
Act
corporation
that the agencies
courses
to meet
retain
their
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5
-
The proposed legislation would also direct the Council
to establish
standards
for
judging
the
adequacy
of
state
supervisory agencies and to conduct reviews of individual state
supervisory departments
to determine whether
should rely on their examinations.
federal agencies
It seems more appropriate
to have the federal supervisory agencies
ultimately charged
with the responsibility for ensuring the safety and soundness
of state
institutions assigned the requisite
for certifying the states.
portion
of
establish
the
the
proposed
necessary
legal authority
Thus, the Board cannot support this
legislation
because
interrelationship of
it
does
authority
not
and
responsibility.
I would point out that the federal agencies that have
statutory
supervisory
responsibility
over
state-chartered
institutions already have in place programs to coordinate their
supervisory
Reserve,
efforts
with
state
authorities.
The
Federal
for example, has voluntary arrangements with several
qualified states to conduct alternate examinations on an annual
or
more
frequent
basis.
Furthermore,
we
have
recently
undertaken to expand its use of examination reports prepared by
state examiners.
I might add that the Federal Reserve System has also
taken steps to help supplement the training programs for state
examiners.
The Board has authorized scholarship funds for the
Education Foundation of State Bank Supervisors and
instructed
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6
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the Reserve Banks to provide financial assistance directly to
state
bank
examiners
who
attend
Federal
Reserve
training
schools.
In summary, we support the main thrust of the bill to
provide,
where
flexibility —
needed,
adequate
compensation
and
budgetary
authority the Federal Reserve already has — to
assure a continued high priority for adequate supervision of
the nation's
benefits
depository
to be gained
institutions.
We also
see
certain
from further coordinating the examiner
training programs of the agencies.
We do not, however, believe
it is appropriate to vest in the Council responsibility
for
certifying the acceptability of a state's examination reports
for use by the federal supervisory agencies.
I would now like to direct the balance of my comments
to the provisions of H.R. 2282.
H.R. 2282 would
address
deposit
account
advertising
and disclosures by establishing uniform requirements applicable
to
all
depository
advertisements
institutions.
regarding
interest
The
rates
bill
calls
to state
an
for
annual
percentage yield and an annual rate of simple interest as well
as other
factors.
With
respect
to disclosures,
depository
institutions would be required to provide schedules of fees and
charges for all existing accounts and prior to any changes in
the
schedules.
Rule
writing
authority
to
implement
these
-
requirements
for all
7
-
institutions
is given
to the Board of
Governors of the Federal Reserve System.
Since
1969,
the
Board
has
had
regulations on advertising in Regulation Q.
year,
the Board proposed
clarify,
and
This proposal
simplify
("APY")
a series of amendments
its current
advertising
to update,
requirements.
service charges
in
At the same time the Board directed its staff
the need
for action
on disclosure
account information to bank customers.
of
and complete
when
is
their
accounts
and
detailed
The Board also supports
providing bank customers with clear
they open
issues
such as requiring an annual percentage
and a statement concerning
advertisements.
to explore
In January of this
addresses many of the same advertising
covered by H.R. 2282,
yield
comprehensive
planning
information
a
Policy
Statement encouraging disclosures by member banks.
In considering this Policy Statement,
the Board
has
taken into account that the level of information provided to
bank customers has been high.
Over the past two years,
only
approximately 4 percent of the total complaints received by the
Board on member banks pertained to advertising and disclosure
issues similar
to these contained
in the bill.
Moreover,
January 1986 Survey of Consumer Attitudes conducted
for
a
the
Board by the University of Michigan indicated that 94 percent
of current deposit account owners felt that they had received
the information that they needed to know about the terms and
-
conditions
of
their
8
-
accounts.
Eighty-two
percent
of
the
families who opened a checking account and 73 percent of those
opening a savings account in the past two years reported they
had received a written explanation of the terms and conditions
of their
new account.
Although
the survey did not provide
information on the nature of the disclosures made
form,
in written
it did indicate that a significant majority of consumers
are receiving what they believe to be adequate disclosures on
their accounts in written or oral form.
While H.R. 2282 would have the advantage of extending
uniform
advertising
and
depository institutions,
thrift
disclosure
to
all
including member and nonmember banks,
institutions and credit
flexibility.
requirements
unions,
it may unduly
limit
In particular, by attempting to establish uniform
requirements applicable to all accounts,
H.R.
2282 does not
allow sufficient latitude to tailor advertising and disclosure
requirements
to
individual
account
characteristics
individual customers' use of accounts.
and
For example, H.R. 2282
requires advertisements regarding the rate of interest payable
on an account to state the annual percentage yield
the annual rate of simple interest.
("APY") and
Similarly in its January
proposal, the Board included three alternatives for advertising
interest on deposits:
simple interest,
or an APY,
or both.
While the Board's Consumer Advisory Council supports requiring
both the APY and the simple interest rate,
public commenters
-
were divided as to which
9
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alternative
Given this difference of opinion,
was most
appropriate.
flexibility may be required
in determining if the same requirements should apply to all.
Other
regulatory
advertising
provisions
flexibility
in
requirements.
of
H.R. 2282
may
establishing
also
clear
hamper
and
It may be unnecessary
simple
to require
advertisements containing annual percentage yields to refer to
the method of compounding or to require advertisements to state
the
method
concerning
elements
of
paying
account
interest.
charges
characteristic
of
Similarly,
required
the
by H.R. 2282
transaction
penalties,
and
might
be
refers
accounts,
transaction fees, and elements of time deposits,
withdrawal
statement
simplified
such
to
as
such as early
to
avoid
confusing bank customers as to the charges applicable to their
account.
With respect to disclosures,
H.R. 2282 could be read
to require depository institutions to provide customers with
schedules of fees and charges applicable to all accounts and
services and a description
schedules when account
of all changes
terms are changed,
in the previous
even
through such
schedules may not be applicable to the customer's account.
order
to avoid confusion,
limited
to changes
disclosure
in information
requirements
relevant
deposit relationship with the institution.
should
In
be
to a customer's
10
-
Allow me,
at
Board
this
position.
The
disclosure
by depository
-
point,
supports
to
clear
reiterate
advertising
institutions
and
our
basic
and
full
has proposed
for
comment amendments to update and clarify its advertising rules
and
is working
toward a Policy Statement
disclosures by member banks.
that will
address
As both of these efforts would be
limited to member banks, the Board is consulting with the other
regulatory
agencies
in
an
effort
to
obtain
a
uniform
application of these concepts to all depository institutions.
While we are not seeking legislation,
if Congress believes that
legislation
uniformity
agencies,
is
the
necessary
Board
to
believes
achieve
that
the
legislation
provide a more flexible statutory mandate.
the
Board
benefits
to
structure
as new
rules
that
types of deposits
among
would
evolve
the
should
This would permit
enhance
while
customer
minimizing
customer confusion and the burden on depository institutions.
Responses to Questions Posed in May 27, 1986
Letter of Chairman St Germain
1.
In your view, are the employees of your agency public
sector or private sector employees? Are the examiners in
your agency public sector or private sector employees?
The Federal Reserve Board is best characterized as an
independent agency of
employees
are
public
the United
sector
States,
employees.
and
as
While
such
the
its
Federal
Reserve Banks, which employ substantially all of the System's
examiners, are organized in corporate form and their shares are
held by members banks,
United
States
and
they act as
their
officers
instrumentalities of the
and
employees,
in
this
capacity, carry out specific public functions under statutory
author ity.
2.
What specific salary and benefit provisions in present law
are lacking in order to retain examiners in your agency?
Is it possible to keep financial institutions regulatory
agency personnel subject to civil service pay scales,
generally, but to provide certain limited exemptions where
needed?
As I have noted above, Federal Reserve examiners are
employed by the Federal Reserve Banks and thus are not subject
to federal civil service laws.
However, by policy we have kept
the salaries of our Federal Reserve Board personnel consistent
with
federal pay scales.
The same policy has also had some
effects on the scale of compensation offered
Banks.
Thus,
at the Reserve
should the Congress provide more
compensation
flexibility to the other agencies than they now possess under
laws governing
the Federal civil
service and
the budgetary
-
process,
the
System
would
2
view
-
this
action
as
providing
guidance for its own policies.
3.
The Gramm-Rudman legislation only applies to the
regulatory agencies when a sequestration order takes
effect.
Every effort is being made by the Congress to
meet the FY 1987 budget deficit target of $144 billion.
In the present situation, there is unlikely to be a
sequestration order until October of 1987.
In light of these circumstances, where is the immediate
necessity for taking examiners out from under Gramm-Rudman
until other factors develop that may require such measures?
While
it is true that the agencies only come
Gramm-Rudman as sequestration takes place,
under
the agencies cannot
ignore the potential for sequestration in setting their hiring
and budget policies.
The Federal Reserve too must be sensitive
to these possibilities,
since it is now voluntarily complying
with the spirit of the Gramm-Rudman law.
Thus,
in light of the
need to strengthen the supervision of depository institutions,
additional
compensation
and
budgetary
flexibility,
where
needed, would promote a more effective set of employment and
budget practices.
4.
Will raising the pay levels of federal examiners cause
state regulators to lose many of their examiners?
Certain states may already have lost some examiners to
federal agencies because the current federal civil service pay
scale substantially exceeds the pay levels for examiners in a
number of states.
The broader
problem
facing
these states,
-
however,
is
competitive
Moreover,
3
-
that
their
compensation
with
those
offered
if
compensated
employees
in
(adequate,
in
some
from
levels
the
states
the
are
also
private
are
not
standpoint
sector or at other levels of government),
sector.
adequately
of
retention in the face of higher wages offered
not
employee
in the private
this should not be
permitted to interfere with the efforts of any federal agency
to attract and retain qualified personnel.
5.
Is there a problem with turnover rates at your agency with
personnel other than examiners?
If so, please explain
fully.
While the Federal Reserve Banks are able to establish
salary levels
to meet
the competition,
we are
experiencing
increasing difficulties in retaining examiners, particularly in
certain areas of the country.
We are also losing some key
Reserve Bank people to the private sector in other functions of
the bank.
In recent years,
retaining
experienced
the Board has also had a problem
personnel.
encountered difficulties
In
in retaining
financial analysts and secretaries.
particular,
attorneys,
we
have
economists,
Many experienced employees
in these job families are leaving the Board because they were
offered
substantially higher
salaries and because
they were
unwilling to invest their future here when the prospects
salary growth are severely restricted.
for
-
6.
4
-
What would be your alternative to the approach taken
the latest version of the Carper/Lundine bill?
As indicated in my testimony,
the Board supports the
main thrust of the bill with regard to providing
federal
supervisory
agencies
in
appropriate
compensate their examiners competitively.
the other
authority
to
ANALYSIS OF H.R. 2282
Prepared by the Staff of
The Board of Governors of the Federal Reserve System
H.R. 2282 would provide for a single regulatory agency
to
promulgate
regulations
on
the
advertising
of
interest-bearing deposits and on the disclosure of terms and
conditions
applicable
to
offered
depository
institutions.
by
deposits
and
services
The
bill
routinely
as
written
presents a number of significant issues.
Section
number of
3.
factors
Section 3 requires
the statement of
in "each advertisement,
announcement,
a
or
solicitation made by any depository institution regarding the
rate of
interest
which
is payable
on
any account."
The
legislation appears to require the same mandated statements in
all media —
newspaper, billboards, radio and television.
The
staff believes that such a requirement may inhibit advertising
in various media such as radio and television where the time
constraints inherent in short advertising spots may limit the
information that can be provided.
The bill should provide the
flexibility to tailor rules to different media.
This issue was
raised in the Board's January proposals to amend Regulation Q
advertising rules and flexibility was supported by the majority
of commenters who addressed this issue.
°
3(a)
—
This
section
interest-bearing
advertisements
appears
deposit
for demand
to
apply
accounts.
deposit
only
to
Consequently,
accounts
may
not
be
2
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covered.
-
Some advertisements
may be misleading.
for demand deposit accounts
For example, an advertisement for "free
checking" may be misleading when there is a minimum balance
requirement to avoid service charges.
of
the disclosure
appears
to
provisions
encompass
Further, the scope
in section 4 of
demand
deposit
the
bill
accounts.
Consideration should therefore be given to also including
demand deposit accounts within section 3.
3(a)(1) —
This provision would require the statement of an
annual percentage yield
interest
("APY")
is compounded.
reference
to
the
If
and the method by which
the APY
compounding
method
is
required,
can
be
the
deleted.
Compounding methods are reflected in the calculation of the
APY.
3(a)(3)
—
Advertisements would be required to state the
frequency
with
•depositor.
which
interest
Inclusion of
advertisements
and
is
this
usually
would
be
payable
information may
of
little
to
a
"clutter"
importance
to
depositors when viewing advertisements.
3(a)(4)
—
Minimum balance requirements would be required
to be stated.
It is unclear whether the "minimum balance"
required to be stated
account,
avoid
the
is that balance needed to open an
imposition
charges, or earn interest.
that member
banks
state
of
penalties
or
service
The Board currently requires
in advertisements
any minimum
balance required to earn the advertised rate of interest.
-
3(a)(6)
—
3
-
This provision mandates language to be used in
advertisements concerning the presence of early withdrawal
penalties
and
statement
is too restrictive
would
service
charges.
confuse consumers.
The
staff believes
and overbroad
the
in scope and
Early withdrawal
penalties
are
solely a function of time deposits and do not apply to
transaction
accounts.
On
the
other
hand,
transaction
accounts are subject to service charges which generally are
not assessed against time deposits.
The mandated statement
would
these
cause
confusion
by
blurring
distinctions.
Staff believes that a more generic statement such as "this
account is subject to service charges" or
"service charges
on this account may reduce your yield" are more appropriate
in an advertising context.
Of the 66 commenters addressing
this issue in the Board’s January proposals,
use of a statement such as the
55 supported
first one quoted
above,
although several of these commenters expressed the opinion
that the statement was not strong enough or sufficiently
detailed.
Current
Board
regulations require a statement
concerning the early withdrawal penalty.
3(a)(7)
—
This section would permit
advertisements
for
accounts with maturities of less than one year to exclude
APYs.
If APYs are
included,
then a specified
concerning the yield would be required.
this
section
be
deleted
structure appropriate
and
flexibility
regulatory
statement
Staff recommends
provided
requirements.
to
Exclusion
4
-
of
an APY
consumers'
for
-
shorter-term
time
deposits
would
ability to compare deposits of various
limit
types.
Further, the statement appears to be overly long and could
be simplified.
0
3(c) -- This provision requires that written summaries of
the
information
request.
required
by
section 3 be
provided
on
Staff believes this issue is more appropriately
addressed under section 4.
Section 4 .
This
section
establishes
detailed
disclosure requirements as well as procedures for maintaining
and disseminating the required information.
0
4(a) —
Under this provision, each depository institution
would be required to maintain a written schedule of "all
fees, charges, and terms and conditions which apply to each
type of
account and
service
depository institution."
routinely offered
Although
specified disclosure factors present no major
is concerned
that
broader
than intended.
provide
consumers
accounts.
require
inclusion
the
scope
information
as drafted,
of
of
issues,
section 4(a)
The purpose of this bill
adequate
However,
such
A list of charges to be included
in the schedule is also in the provision.
staff
by
all
concerning
section 4(a)
routinely
offered
the
the
is
is to
their
appears
to
services,
including those services involved in correspondent banking
relationships and large commercial accounts
schedule.
in a single
Even more retail oriented services may not be
-
5
-
appropriate for inclusion in a schedule when they are not
used
by
the
customer
receiving
the
schedules.
The
regulator charged with promulgating regulations under the
Act should be given sufficient flexibility to make these
distinctions, or,
amended
in the alternative,
to require
separate
the bill should be
schedules
with
information
limited to particular types of accounts in each schedule.
4(b)
—
This provision requires that the written schedule
be given to all depositors, each potential customer, and
any individual who requests
it.
Further, section 4(b) (2)
would require a new schedule with an explanation of changes
to be mailed to account holders not less than 30 days prior
to the effective date of
any change
in
the
schedule.
Written schedules of fees and prior notification of changes
in such fees are
important pieces of
information which
should be given affected depositors, however, the bill as
written may,
in fact, work to the ultimate detriment of
consumers.
As
embodied
in
the
case
of
in section 4(b)
section 4(a) , the
principles
can be retained by allowing for
separate schedules for each type of account.' For example,
depositors would receive a schedule of fees and terms and
conditions that is relevant to their relationship with the
bank.
with
A depositor that does not have a transaction account
a depository
institution
would
receive demand deposit disclosures.
consequently
not
ICE depositors decide
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6
-
to use a service or open an account other than one that
they have already received
information on, the depository
institution need only provide the necessary information at
that time.
only
Further,
those changes
provided to him.
targeted disclosure would mean
relevant
to the depositor
that
would
be
Consideration should also be given
to
requiring prior notification only of changes to an account
relationship that are adverse to a depositor.
Prior notice
of adverse changes would permit depositors to take whatever
steps
they
account,
deem
appropriate,
such
as
changing
their
before the effective date of the change.
We do
not believe that such a concern is warranted where changes
are favorable to a depositor, however.
a prior
notification
requirement
In such instances,
would
appear
to only
increase costs without any increased consumer benefit.
a potentially
• Right
analogous
to Financial
situation,
Privacy Act
coverage of the Act due,
Congress
to limit
amended
the
scope
(In
the
of
in part, to an estimate that the
cost of notifying all customers of their rights under the
Act would be approximately $922 million.)
Section
5.
This
section
authorizes
the
Board
to
promulgate regulations to effectuate the bill's provisions.
further requires that any regulations provide that APYs
calculated
on
the
basis
of
a 365-day
period.
The
It
are
staff
believes this latter provision is unnecessary because it would
not
improve a consumer's
shopping ability.
APYs calculated
-
7
-
through the use of uniform formulas, such as those contained in
the current Board proposal,
will
produce
the
same
rankings
among institutions using different compounding methods as would
APYs that have been "converted" to a 365-day basis.
°
5(b) (2) —
The grant of authority to make special rules for
particular kinds of accounts should be broader than merely
prescribing
uniform
rate
calculation
flexibility may also be needed
for
variable
variable.
rate
Thus,
for example,
includes a requirement
accounts
Special
in determining the proper
advertising and disclosure rules.
Board's current proposal
methods.
state
that
the
the
that ads
rate
is
Such a provision may also be needed under this
law and the Board
should have sufficient
flexibility to
adopt it.
°
The bill, as drafted,
between
state
the proposed
laws.
Since
does not address
disclosure
the
bill
the relationship
provisions
would
cover
and
existing
institutions
already subject to state disclosure laws, it should clarify
Congress' intention with regard to those laws.
@FedFRASER