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Federal Reserve Bank of St. Louis
DIDC
March 29, 1982 - September 28, 1983
Collection: Paul A. Volcker Papers
Call Number: MC279
Box 26
Preferred Citation: Depository Institutions Deregulation Committee, 1982 March 29-1983
September 28; Paul A. Volcker Papers, Box 26; Public Policy Papers, Department of Rare Books
and Special Collections, Princeton University Library
Find it online: http://findingaids.princeton.edu/collections/MC279/c173 and
https://fraser.stlouisfed.org/archival/5297
The digitization ofthis collection was made possible by the Federal Reserve Bank of
St. Louis.
From the collections of the Seeley G. Mudd Manuscript Library, Princeton, NJ
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Federal Reserve Bank of St. Louis
1UNITED STATES LEAGUE of SAVINGS INSTITUTIONS
111 EAST WACKER DR./CHICUN.1514-C67:
13
112) 644-3100
;
(3r7
WILLIAM B. O'CONNELL
Prmdem
FEDER AL pr
"
VE
C".•1+-' c-
683. SEP 29 Flf 4: 13
September 28, 1983:
i
pgiar,
Mr. Mark G. Bender
Executive Secretary
Depository Institutions Deregulation Committee
Room 3025
Department of the Treasury
15th Street and Pennsylvania Avenue, N.W.
Washington, D.C. 20220
Dear Mr. Bender:
The United States League of Savings Institutions* wishes to comment
briefly on the two items which the Depository Institutions Deregulation
Committee has scheduled as agenda items for the Committee's September 30, 1983
meeting: (1) the elimination of the thrift institution differential on
passbook accounts and on time deposits of 7 to 31 days in amounts under
$2,500; and (2) the reduction of required deposit minimums on Super NOW
Accounts, Money Market Deposit Accounts and ceiling-free time deposits of 7 to
31 days.
*
The U. S. League of Savings Institutions, formerly the U. S. League of
Savings Associations, has a membership of 3,500 companies representing over
99% of the assets of the $730 billion savings and loan business. League
membership includes all types of associations -- Federal and state-chartered,
stock and mutual. Recently, many prominent savings banks have joined the
League as members. The principal officers are: Leonard Shane, Chairman,
Huntington Beach, California; Paul Prior, Vice Chairman, New Castle, Indiana;
William O'Connell, President, Chicago, Illinois; Stuart Davis, Legislative
Chairman, Beverly Hills, California; and Roy Green, Executive Vice President,
Phil Gasteyer, Legislative Counsel, Jim Freeman, Senior Legislative
Representative, Washington, D. C. League headquarters are at 111 East Wacker
Dr., Chicago, Illinois 60601. The Washington Office is located at 1709 New
York Avenue N. W., Washington, D. C. 20006. Telephone: (202) 637-8900.
THE AMERICAN HOME: THE SAFEGUARD OF AMERICAN LIBERTIES
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Federal Reserve Bank of St. Louis
-2-
We are well aware, of course, that Section 426 of Public Law 97-320, the
Cam -St Germain Depository Institutions Act of 1982, mandates that all
interest rate differentials be eliminated by January 1, 1984.
Our member
institutions continue both their operational and investment planning with that
date for ending the thrift differential in view, and will be prepared for this
near-final rate deregulation step at that time. To take that step any sooner
would cause a serious disruption in the rebuilding and recovery process in
which our institutions have been engaged since enactment of Garn-St Germain
and the moderation of market interest rates. We would ask that any action
elininating the differential be effective no earlier than on January 1, 1984.
We also oppose the reduction or elimination of the current $2,500 minimum
deposit requirement effective for Super NOW Accounts, Money Market Deposit
Accounts and ceiling-free time deposits of 7 to 31 days. Any downward changes
in these minimum requirements would have the effect of disrupting the recovery
of savings institutions at a time when the industry, on average, stands a
chance of experiencing its first year of positive earnings since 1980.
We estimate that if the minimum balance requirement were eliminated at
this time, the shifts that would occur of low balance convenience deposits
into higher rate accounts would cost the savings and loan business more than
one-fourth of the expected total earnings of the business in 1983.
This
bottom line cost would amount to $420 million for the first 12 months after
this change.
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Federal Reserve Bank of St. Louis
-3-
Further, our ability to continue as a reliable source of long-term housing
finance would be eroded even beyond that which we experienced with the
introduction of the Money Market Deposit Account itself.
Savings institution
managers are having difficulty managing what they describe as a maturity warp
-- the uncertainty and the imbalance which derives from relying on essentially
short-term deposits to make long-term mortgage loans.
At least the $2,500
minimum deposit requirement by limiting the conversion of low balance
convenience deposits provides institutions with a small degree of
manageability. We believe also that the DIDC should take into consideration
the adverse potential impact of reducing or eliminating minimum deposit
requirements on borrower interest rates. Mortgage interest rates, although
down from the record highs of 1981-82, still remain at levels which
effectively close the lending window on thousands of would-be homeowners.
Today we see rates trending somewhat lower, and this is being welcomed within
the long-depressed home construction industry. The slightest upward tick in
rates sends shudders through that industry, and we fear that the contemplated
minimum deposit requirement reduction or removal could have that impact.
We would ask, then, that the DIDC not impede the recovery of our own
savings institutions and that of the home construction industry by lowering or
eliminating minimum deposit requirements at this time.
Finally, it has been our observation that the rapid pace of deposit
interest rate deregulation, changes in early withdrawal penalties, and the
creation of new accounts have served to promote confusion in the marketplace
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Federal Reserve Bank of St. Louis
-4-
among consumers. Effective on October 1, 1983 -- the very day after the
DIDC's next scheduled meeting --
jor changes will become effective. These
changes have already required managers of savings institutions to conduct
another round of informational programs to better educate depositors on the
alternatives available to them. We believe confusion among depositors could
be held to a minimum if the DIDC would provide sufficient breathing time
between its actions.
In summary, the U.S. League of Savings Institutions opposes the
elimination of the thrift institution differential before January 1, 1984, and
opposes the elimination or reduction of minimum deposit requirements at this
time.
Thank you for this opportunity to comment on the DIDC's agenda items.
Should you have any questions, please feel free to contact me.
Sincerely,
William B. O'Connell
President
WBO/js
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Federal Reserve Bank of St. Louis
ITTEE
DEPOSITORY INSTITUTIONS DEREGULATION COMM
Washington. D.C. 20220
COMPTROLLER OF THE CURRENCY
FEDERAL RESERVE BOARD
FEDERAL DEPOSIT INSURANCE CORPORATION
NATIONAL CREDIT UNION ADMINISTRATION
FEDERAL HOME LOAN BANK BOARD
DEPARTMENT OF THE TREASURY
September 13, 1983
Memorandum For:
From:
Subject:
DIDC Staff
Mark Bend
Executive Secretary
September 30, 1983 DIDC Meeting
ember 30, 1983
The next DIDC Meeting will be held on Sept
rtment of Commerce,
at 10:00 a.m. in the Auditorium of the Depa
ue, N.W.
which is located at 14th and Constitution Aven
which I would
There are a few matters about this meeting
like to bring to your attention.
ers planning to
First, a list of names of those staff memb
cy. Those listed
attend this meeting is needed from each agen
at the Department
will have access to the Secretary's entrance
the meeting. All
of Commerce just prior to the beginning of
side of the Commerce
others will enter through the 14th Street
IMPORTANT: All
Building and follow signs to the auditorium.
Ms. Sharon Kindrock,
to
s
name
of
list
agencies should submit their
r than Friday,
Room 1060, Main Treasury Building, by no late
to be made on
need
ges
chan
name
September 23, 1983. If any
change as soon
the
with
rock
these lists, please call Ms. Kind
etary's entrance
Secr
the
ring
ente
as possible (566-5152). Upon
ers and Staff"
Memb
C
"DID
to
s
at Commerce, just follow the sign
entrance to the stage.
ents at the
Second, at this meeting the seating arrangem
of stage
ram
diag
(see
table and behind the table are limited
Member and
e
itte
Comm
setup attached). We can accommodate each
f members,
staf
r
othe
one of their staff members at the table. The
table.
the
nd
behi
sit
who normally sit at the table will have to
s
area
ed
gnat
desi
All additional DIDC staff members will sit in
which will be posted (see diagram again).
fing Speakers,
There will be a seat at the table for Brie
been done at past
which will be used in the same manner as has
should be seated
meetings at Treasury. All Briefing Speakers
seated at the
behind the table, if he or she is not already
table.
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Federal Reserve Bank of St. Louis
- 2 d on stage are those
The only people who will be allowe
,
lettering that say "DIDC Staff"
wearing white badges with black
.
ple
ignated peo
special technicians and other des
ediately following the
There will be a Press Conference imm
ference room directly behind
10:00 a.m. DIDC Meeting in the con
the stage.
Attachment
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
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Staff will enter
Back of Stage -- Members and
through Conference Room
and exit
Stairs ---
1
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON, O. C. 20551
August 11, 1983
TO:
Board of Governors
FROM:
Normand Bern
For Information Only
Attached are materials relating to the DIDC recommendation to
remove the statutory prohibition against the payment of interest on
demand deposits.
These materials include (1) Secretary Regan's letter
to Congress containing the DIDC recommendation, (2) a draft of the recommended legislation, and (3) a related staff memorandum.
Attachment
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Federal Reserve Bank of St. Louis
AVNi:11V1-13 S'P,1 JO 331110
(13A133E
I I :11 11V S I 911V C861
"MAUD
3H1 JO
U01\1141100 JO OVEN
DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE
atAingtori. 1).C. 20220
COMPTROLLER OF THE CURRENCY
FEDERAL RESERVE BOARD
FEDERAL DEPOSIT INSURANCE CORPORATION
NATIONAL CREDIT UNION ADMINISTRATION
FEDERAL HOME LOAN BANK BOARD
DEPARTMENT OF THE TREASURY
August 4, 1983
Dear Mr. Chairman:
The Depository Institutions Deregulation Committee recently
considered the question of whether and to what extent interestbearing transaction accounts should be made available by
depository institutions to members of the public not eligible
to hold NOW accounts. In connection with this discussion, the
Committee considered whether (1) it should authorize a fully
transactional money market deposit account (NMMDA"), and (2)
there should continue to be a statutory prohibition against
paying interest on demand deposits by Federally-insured
depository institutions. While the Committee is of the view
that it can authorize a fully transactional MMDA, others
question the Committee's authority in light of the statutory
prohibition against paying interest on demand deposits. In
order to eliminate the potential for protracted litigation,
the Committee determined to present the issue of paying
interest on demand deposits to Congress.
The Committee concluded that this statutory prohibition
is no longer justified and recommends that depository institutions be permitted to pay interest on demand deposits. An
extensive analysis of the issue of payment of interest on
demand deposits was undertaken by the Committee's staff. A
copy of this study is enclosed for your information. The
study concludes that the arguments for prohibiting the payment
of interest on demand deposits in the 1930s appear to have
little validity today. In this regard, certain developments
have weakened significantly the economic effect of the
prohibition, such as (1) implicit interest payments on demand
deposits through the provision of customer services either
free or at fees below cost, (2) market development of close
demand deposit substitutes that earn interest (e.g., money
market mutual funds and sweep accounts), and (3) legislative
and regulatory changes to permit explicit interest-bearing
transaction accounts that are legally distinct from demand
deposits.
Since many transactions balances earn close to a market
return either implicitly or explicitly, we believe that the
cost implications for depository institutions of the removal
of the prohibition against the payment of interest on demand
deposits would be of manageable size and largely temporary.
Although some depositors with active accounts might be
disadvantaged, depositors on average would tend to benefit
from permitting the payment of interest on demand deposits.
On balance, it seems that interest bearing demand deposits
would result in a more efficient allocation of the economy's
resources.
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Federal Reserve Bank of St. Louis
s
- 2 -
st
The removal of the prohibition of payment of intere
paid
rates
on demand deposits without authority to limit
s of
prior to March 31, 1986, would diminish the effectivenes
as
$2,500
than
the present ceiling on NOW accounts of less
could
tors
deposi
well as on passbook savings accounts since
keep their savings balances in ceiling free demand deposits.
st on
Therefore, if the prohibition against payment of intere
give
to
demand deposits is removed, the Congress may wish
the DIDC authority to apply ceilings to demand deposits of
less than $2,500 until March 31, 1986, at the same ceiling
order to
rates permitted for NOW accounts and ATS accounts in
assure competitive equity for these accounts.
ory
The Committee is also of the view that the current statut
requirement that it hold quarterly meetings should be removed.
on
The actions of the Committee to date, including the creati
way
long
a
gone
have
t,
Accoun
t
of the Money Market Deposi
for
toward achieving the Committee's objective of providing
st
intere
all
of"
ation
elimin
te
"the orderly phaseout and ultima
no
be
will
there
1983,
1,
rate ceilings. In fact, by October
ceilings on all new or renewed time deposits with maturities
of more than 31 days.
The Committee believes that the remaining actions to
without
complete the deregulation process may be accomplished
can
tee
Commit
mandatory quarterly meetings; rather, the
e
schedule meetings as required by events. This would provid
work.
its
the Committee additional flexibility in completing
Therefore, the Committee requests Congress to repeal the
requirement that it hold public meetings at least quarterly.
A draft bill that would accomplish these objectives is
enclosed.
Sincerely,
714/ta L7/
T,
-r/t
Donald T. Regar/
Chairman
The Honorable
Jake Garn
Chairman
Committee on Banking, Housing
and Urban Affairs
United States Senate
Washington, D.C. 20510
_eA;tL
aLcu
/4a,2,e eth
Enclosures
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Federal Reserve Bank of St. Louis
11\
A BILL
To permit the payment of interest on demand deposits
held by depository institutions.
Be it enacted by the Senate and House of Representatives
of the United States of America in Congress assembled,
Short Title
SEC. 101.
This Act may be cited
as the "Demand
Deposit Deregulation Act".
Payment of Interest on Demand Deposits
SEC. 102(a).
The first
and
second
sentences of
section 19(1) of the Federal Reserve Act (12 U.S.C. 371a) are
hereby repealed.
(b).
The third sentence of section 19(i) of the
Federal Reserve Act is amended by striking out "Notwithstanding
any other provision of this section, a" and inserting in lieu
thereof "A".
SEC. 103.
The first sentence of section 18(g)(1) of
the Federal Deposit Insurance Act (12 U.S.C. 1828(g)(1)) is
hereby repealed.
SEC. 104.
The second sentence of section 5(b)(1)(B)
of the Home Owners' Loan Act of 1933 (12 U.S.C. 1464(b)(1)(B))
is hereby repealed.
SEC. 105.
Section 19(b) of the Federal Reserve Act
(12 U.S.C. 461(b)) is amended by striking the last sentence in
subparagraph
following:
(8)(A) and
inserting
"This subparagraph does
in
lieu
thereof
the
not apply to (1) any
category of deposits or accounts which are first authorized
pursuant to Federal law in any State after April 1, 1980; nor
(2) an amount equal to the amount by which current total demand
deposits exceeds the amount of demand deposits held by the
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Federal Reserve Bank of St. Louis
-2institution on a daily average basis during the 14-day period
preceding the date of enactment of this Act, held by each
depository institution located outside of Connecticut, Maine,
Massachusetts, New Hampshire, New Jersey, New York, Rhode
Island, and Vermont, except as permitted by order or regulation
of the Board.".
SEC. 106.
Section 204 of Public Law 96-221 (12 U.S.C.
3503) is amended by adding at the end thereof a new subsection
(c) to read as follows:
"(c)
The Deregulation Committee shall not later than
six months from the effective date of this Act establish rules
permitting the payment of interest on demand deposits at the
same
rates
that
are
permitted
for
accounts
subject
to
withdrawal by negotiable or transferable instrument for the
purpose of making transfers to third parties authorized under
section 2(a) of
Public
Law
93-100 (12
U.S.C.
1832(a)).
Interest may not be paid by a depository institution on any
demand deposit until such rules are issued by the Deregulation
Committee.".
SEC. 107(a).
Section 207(b)(2) of Public Law 96-221
(12 U.S.C. 3506(b)(2)) is amended to read as follows:
first sentence of section 18(g) of
the
Federal
"The
Deposit
Insurance Act (12 U.S.C. 1828(g)) is amended by striking out
"payment and" and by striking out ", including limitations on
the rates of interest and dividends that may be paid":".
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Federal Reserve Bank of St. Louis
A
-3(b).
Section 207(b)(3) of Public Law 96-221
(12 U.S.C. 3506(b)(3)) is amended to read as follows:
"The
second, fourth and seventh sentences of section 18(g) of the
Federal Deposit Insurance Act (12 U.S.C. 1828(g)) are hereby
repealed;".
SEC. 108.
The second sentence of section 203(b) of
the Depository Institutions Deregulation Act of 1980 (12 U.S.C.
3502(b)) is hereby repealed.
SEC. 109.
This Act shall take effect 180 days from
the date of enactment, except that section 108 shall take
effect on the date of enactment of this Act.
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Federal Reserve Bank of St. Louis
. Section-by-Section Analysis
SEC. 101.
The title of the Act is the Demand Deposit
Deregulation Act.
SEC. 102.
This section repeals the prohibition in the
Federal Reserve Act against payment of interest on demand
deposits by member banks.
SEC. 103.
This section repeals the provision in the
Federal Deposit Insurance
Act
prohibiting
the
payment
of
interest on demand deposits held by insured nonmember banks and
insured branches of foreign banks.
SEC. 104.
This section repeals the provision in the
Home Owners Loan Act prohibiting a federal savings and loan
association or federal savings bank from paying interest on
demand deposits.
SEC.
105.
This
section
amends
the
transitional
provisions for the phase-in of reserve requirements.
reserve
requirements
were
instituted
for
all
When
depository
institutions, a transitional period of eight years was adopted
to allow nonmember institutions to build up gradually to the
required reserve level.
(Member banks were given a shorter
transitional period to adjust their reserves downward to the
new level.)
reasons:
This transitional provision was adopted for two
(1)
to
avoid
an
undue
burden
on
nonmember
institutions putting up reserves for the first time; and (2) to
prevent disruption in the conduct of monetary policy through a
sudden decrease in the amount of reserve balances held.
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Federal Reserve Bank of St. Louis
NOW
-2-.
accounts were first authorized for all depository institutions
(except those in New England, New York, and New Jersey where
been
they had
authorized
previously) effective
implementation of the new reserve requirements.
after
the
These accounts
were exempted from the phase-in of reserve requirements because
it would not be burdensome to depository institutions to hold
full reserves against them since they were newly authorized
accounts.
However,
when
interest
on
demand
deposits
is
permissible, nonmember depository institutions may attempt to
avoid
the
full
reserve
requirement
on
NOW
accounts
by
converting the accounts to demand deposits which are subject to
the phase-in.
Section 105 reduces the potential for avoidance
of reserve requirements by requiring a nonmember depository
institution to continue to hold full reserves against the
amount by which an institution's total demand deposits exceeds
the base of total demand deposits during a period immediately
prior to the enactment of this bill.
Nonmember depository
institutions in New England, New York and New Jersey however
would
continue
to receive
the
full
phase-in
of
requirements on NOW accounts and demand deposits.
Reserve
is
given
authority
to
make
exceptions
reserve
The Federal
to
this
requirement.
SEC. 106.
This
section
authorizes
the
DIDC
to
establish rules concerning the payment of interest on demand
deposits.
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Federal Reserve Bank of St. Louis
Such rules shall authorize interest to be paid on
-.3-demand deposits under the same rate limitations as for NOW
accounts.
Therefore
the
Committee
would
be
required
to
establish the same rate ceiling on demand deposits of under
$2,500 as is established for NOW accounts of under $2,500.
These regulations shall be implemented
not later than six
months from the effective date of the Act (one year from day of
enactment).
SEC. 107.
This section makes technical conforming
changes to the Depository Institutions Deregulation Act of 1980.
SEC. 108.
This provision removes the requirement that
the DIDC meet in public at least quarterly.
SEC. 109.
This section delays the effective date of
the Act to allow depository institutions an opportunity to
prepare for the operational changes made by the Act.
The
effective date for removing the requirement that the DIDC meet
quarterly is effective immediately.
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Federal Reserve Bank of St. Louis
DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE
Washington. 1).C. 20220
COMPTROLLER OF THE CURRENCY
FEDERAL RESERVE BOARD
FEDERAL DEPOSIT INSURANCE CORPORATION
NATIONAL CREDIT UNION ADMINISTRATION
FEDERAL HOME LOAN BANK BOARD
DEPARTMENT OF THE TREASURY
June 14, 1983
TO:
Depository Institutions
Deregulation Committee
FROM:
DIDC Staffl
I.
SUBJECT:
The Payment of Interest on
Demand Deposits
Introduction
At its meeting of March 1, the Committee asked the staff to prepare
an analysis of the issues raised by the payment of interest on demand deposits.
The Committee, of course, does not have the authority to take direct action
with regard to the statutory prohibition of the payment of interest on demand
deposits.
However, its views on the current prohibition could be communicated
to the Congress, in which authority rests.
The Committee's decision with
regard to authorizing MMDAs with unlimited transactions capabilities for
businesses could be delayed pending congressional consideration of, or be made
independent of, the broader issues of interest on demand deposits.
This memorandum analyzes the implications of paying interest on
demand deposits.2
It is intended to serve as a companion to the accompanying
staff memorandum "Money Market Deposit Accounts with Unlimited Transfers for
1.
This memorandum was prepared mainly by staff of the Board of Governors of
the Federal Reserve System (D. Lindsey, R. Avery, E. Boutilier, F. Furlong,
P. Lloyd-Davies, B. Opper and P. Pilecki.)
2.
These issues were previously examined in "The Impact of the Payment of
Interest on Demand Deposits," a study of the staff of the Board of Governors
of the Federal Reserve System (S.H. Axilrod, J.D. Paulus, E.C. Ettin, D.E.
Lindsey and T.D. Simpson), January 1977.
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Federal Reserve Bank of St. Louis
-2-
Those Not Eligible to Maintain NOW Accounts," dated June 14, 1983.
The anal-
for
ysis of the impact on depository earnings of a fully transactional MMDA
businesses contained in the earlier. version of that memorandum, dated Februthe present
ary 26, 1983, has been revised so as to facilitate comparison with
on
memorandum's analysis of the earnings impact of removing restrictions
demand deposit interest.
The summary section of the present memorandum, pp. 2
memoranda
through 5, contains a direct comparison of the conclusions in the two
onal
regarding earnings impacts of interest on demand deposits versus a transacti
MMDA for businesses.
Other sections of the present memorandum discuss the historical backto
ground of the prohibition of interest on demand deposits, existing returns
the public on transactions balances, the impact on depositors of explicit
ve
interest on demand deposits, monetary policy considerations, and legislati
implications related to removing the prohibition of interest on demand deposits.
II.
Summary
(1) The justifications underlying the prohibitions of interest on
on
demand deposits enacted in 1933 and 1935 were that the payment of interest
banker's balances gave rise to a substantial movement of funds from rural
the
areas to money center banks and that interest rate competition weakened
soundness of banks.
Some researchers have suggested that these arguments had
little validity at the time and it seems clear they have less validity today.
(2) The economic effects of the prohibition have been eroded by
of
(a) the payment of implicit interest on demand deposits through provision
services priced below cost; (b) the emergence through the workings of market
as federal
forces of instruments closely substitutable for demand deposits, such
funds and repurchase Agreements, traded in nationwide markets, and money market
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Federal Reserve Bank of St. Louis
-3-
mutual funds; and (c) the authorization through legislative and regulatory
action of deposits with transactions characteristics bearing explicit interest
that are legally distinct from demand deposits, such as NOW accounts and MMDAs.
(3) Although the implicit interest rate now paid to many demand
depositors may approximate the level of the explicit rate they would earn if
the prohibition were eliminated, the rate paid to certain depositors, including
some households and medium and small businesses, seems to be lower than they
might receive with explicit interest on demand deposits.
To be sure, tax con-
siderations would serve to diminish the benefits to households since explicit
interest is taxable while services charges are not tax deductible.
Some house-
holds with small, active accounts could experience a fall in their overall
after-tax return on transactions accounts in a regime of explicit interest and
higher fees.
On the other hand, household and business depositors on average
would tend to gain by receiving explicit interest rather than subsidized
services of equivalent cost to institutions, since customers tend to overuse
subsidized services and hence value them below their marginal cost of production.
In general, the inducement for "unbundling" of charges for services
combined with explicit interest presumably would contribute to a more efficient
allocation of the economy's resources.
Moreover, depositors themselves
would have less incentive to expend resources to minimize their holdings of
transactions balances if additional dollars put in these accounts earned
explicit interest.
(4) The impact of interest on demand deposits on the earnings of
depository institutions is expected to be minor in the long run.
Indeed,
eliminating interest rate restrictions on household transactions deposits
would have little bearing on institutions' long-run profits, since the ceilings
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Federal Reserve Bank of St. Louis
-4-
on regular NOW and ATS accounts already are scheduled to be removed by March 31,
1986.
In the case of business demand deposits, competitive pressures over
time likely would move most implicit rates near competitive levels, even in
the absence of explicit interest on business demand deposits.
(5) In the short run, though, the payment of explicit interest on
demand deposits could temporarily lower earnings of commercial banks.
In the
first year or so, pre-tax profits may be reduced in an estimated range of $1 to
$2 billion or 5 to 10 percent, assuming the continuation of current levels of
market interest rates.
This earnings reduction would be composed of a 1 to
2-1/2 percent decline related to interest-bearing household transactions deposits plus a 4 to 7-1/2 percent fall related to interest-bearing business demand
deposits.
The latter range for business demand deposits is identical to the
estimated first-year earnings impact of authorizing a fully transactional MMDA
for businesses, since the two accounts are functionally equivalent.
Although
the industry-wide impact of interest on demand deposits would appear manageable,
certain individual institutions might be especially vulnerable to earnings
pressures during the transition period;. however, these same institutions also
would face earnings pressures in the long run in any event.
(6) For the smallest commercial banks (assets of less than $100
million) and the largest commercial banks (assets of $1 billion or more) the
estimated first-year earnings impacts of paying interest on demand deposits
are virtually the same--ranging from 4-1/2 to 9 percent of 1982 pre-tax profits.
Although large commercial banks tend to rely much more heavily on business
demand deposits, smaller banks generally deal more with medium- and small-size
businesses whose shifting of funds to interest-bearing demand deposits will
have the greatest potential for increasing costs.
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Federal Reserve Bank of St. Louis
Medium-size commercial banks
•
-5first-year
likely to experience the largest
($100 million to $1 billion) are
pre-tax
2 to 13 percent of their 1982
earnings reduction--estimated at 6-1/
overall
to have not only a relatively high
income. These institutions tend
ral involve
sits (which, as noted, will in gene
reliance on business demand depo
a relatively
r ownership categories) but also
a larger cost impact than othe
anies
held by medium- and small-size comp
high share of their demand deposits
likely to contribute most to enlarged
(which will be the type of deposit
deposit cost).
ving the restrictions on the pay(7) For thrift institutions, remo
noticeable
deposits is not likely to have a
ment of interest on transactions
ortion of
e institutions have a smaller prop
impact on their cost of funds. Thes
very few
nces than commercial banks and have
their deposits in NOW account bala
prohiceilings on all NOW accounts and the
demand deposits. Eliminating both
ease
could lead to some transitional incr
bition of interest on demand deposits
icit
present the combined implicit and expl
in their costs. However, since at
ting
a competitive rate, totally deregula
yield on NOWs is evidently close to
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Federal Reserve Bank of St. Louis
thrift earnings even in the first
NOWs would have only a minor impact on
year.
utory prohibition against the
(8) The process of removing the stat
Howwould not be unduly complicated.
payment of interest on demand deposits
ent of interest on demand deposits
ever, removal of the prohibition of paym
g
statutory provision is needed regardin
raises the issue of whether a specific
.
under the Monetary Control Act of 1980
the phase-in of reserve requirements
-6Historical Background
III.
Section 19(i) of the Federal Reserve Act, which provides in part
that "No
member
bank
shall, directly or indirectly, by any
device
whatsoever, pay any interest on any deposit which is payable on demand," was
added by the Banking Act of 1933.
This prohibition against interest
payments on demand deposits was extended to insured nonmember banks and
mutual savings banks by the Banking Act of 1935.1
Federally chartered
savings and loan associations were not authorized to accept demand deposits
until passage of the Garn-St Germain Depository Institutions Act of 1982,
which permits such associations (as well as federal savings banks) to accept
demand accounts of individuals and organizations that have a business,
corporate,
commercial,
or
agricultural
loan
relationship
association as authorized by its charter or by law.
with
the
At the same time this
authority was granted to federally chartered savings and loans and federal
savings banks, the Congress extended to them the prohibition against
interest on demand deposits.
Banks began to pay interest on selected accounts during the early
part of the nineteenth century.
By the mid-1800s, large banks in New York
City had attracted a considerable volume of bankers' balances--that
deposits of other commercial banks--and were paying interest on those
1.
The authority of mutual savings banks to offer demand deposits is
governed by state law. Most states which charter mutual savings banks
have authorized them to offer demand deposits. Nevertheless, while the
state regulates the authority to offer demand deposits, it is federal
law which prohibits mutual savings banks from paying interest on those
accounts.
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"
Federal Reserve Bank of St. Louis
•-
-7-
deposits.
Banking Act of 1933, the
In the century before the passage of the
frequently criticized
payment of interest on deposits was
regulators, and legislative bodies.
by bankers,
Before the Federal Reserve System was
y directed toward interest payments on
established, such criticism was usuall
es were thought to have played in
bankers' balances and the role these balanc
1
ed between 1857 and 1907.
occurr
that
s
crise
ng
banki
ic
period
the
-
bankers' balances also
The concern over interest payments on
d.
continued .during the 1913 to 1933 perio
With the threat of banking panics
t of the Federal Reserve System,
seemingly eliminated by the establishmen
bankers' balances were put by money
attention turned to the uses to which
2
center banks.
attracted funds from
It was argued that interest payments
purpose of financing speculative
rural areas to money centers for the
investments in the securities market.
1.
2.
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Federal Reserve Bank of St. Louis
Further, it was commonly alleged
liquid repository of funds for many
Bankers' balances served as a highly
experience strong seasonal
to
d
tende
smaller rural banks which
related to spring planting and fall
fluctuations in deposits and loans
their deposits at large banks harvesting. These banks would rely upon
. During periods of normal
to meet local customers' demand for funds
culty in adjusting to
economic activity, large banks had little diffi
er, when conditions
Howev
es.
seasonal contractions in bankers' balanc
to liquidate loans
cult
it
diffi
tightened, the money center banks found
cs of interest
criti
to
ing
Accord
or other assets on short notice.
of large banks to
lity
inabi
ing
result
payments on bankers' balances, the
periods caused severe
meet their obligations to small banks during such
sible for banking
stress on financial markets and was mainly respon
had not been paid on
panics. These critics contended that if interest
their funds locally
bankers' balances, smaller banks would have invested
and the crises would have been averted.
or Glass).
See 77 Cong. Rec. 3729 (1933) (Remarks of Senat
•
-8funds were being diverted from productive
that such speculatively Invested
1
uses in rural areas.
Act of 1933 is relatively
The legislative history of the Banking
atmosphere without formal hearings.
sparse; it was enacted in a crisis
the issue of interest on demand
Concern at that time did not center on
such as establishing federal deposit
deposits, but rather on other issues,
insurance.
the 1933 Act and from
However, from the limited discussion of
extending the prohibition to insured
legislative history of the 1935 Act
e for the provision prohibiting
nonmember banks, some reasons appear to emerg
interest payments on demand deposits.
First, the popular view was advanced
on bankers' balances encouraged
in 1933 that the payment of interest
rural areas to money center banks able to
' substantial movement of funds from
credit availability to rural
pay higher interest rates, thus limiting
2
areas.
After the experience with
the prohibition in 1933, Congress
interest on demand deposits could
further realized that the prohibition of
3
y better enabling banks to meet
reduce bank costs significantly, thereb
raging them to participate in the
deposit insurance assessments, and encou
federal deposit insurance program.
Senator Carter Glass observed that, "If
necessity of bidding for demand
banks are relieved of the competitive
have money to meet this
deposits on interest, they will not only
1.
4165, 4166 (1933) (Remarks of
See 77 Cong. Rec., Pt. 4, pp. 3729,
Senator Glass).
2.
2 on page 7.
See Senator Glass' comments cited in note
3.
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Federal Reserve Bank of St. Louis
of the Currency to the American
Address by J.F.T. O'Connor, Comptroller
on September 7, 1933, printed
Bankers' Association at Chicago, Illinois,
House Committee on Banking and
in Hearings on H. R. 5357 before the
Currency, 74th Cong., 1st Sess. 173 (1935)•
•
.....a.
•
-91
left Over."
assessment . . . but they will have almost an equal amount
interest on demand
Some congressmen also believed that the payment of
customers who had
deposits led to excessive competition between banks for
their funds on demand
large deposits causing these large depositors to shift
g the stability of
more frequently than might be expected and thus weakenin
2
the banks.
time
An objective look at these reasons after the passage of
reveals some flaws in the reasoning.
The argument that payment of interest
rural areas did
on bankers' balances drained substantial loanable funds from
ably more than
not consider that local loans generally earned consider
ion.
bankers' balances over most of the period prior to the prohibit
Thus,
not the sole
the interest that could be earned on such balances was
incentive for holding them.
Among the possible reasons overlooked by those
a convenient
arguing for the prohibition were: (1) bankers' balances were
swings
form in which smaller banks could hold liquid funds against seasonal
balances
in deposits and loan demand; (2) country banks generally maintained
with
correspondent
banks
to
facilitate
check
clearing
and
other
ve
transactions; and (3) bankers' balances served as a highly attracti
short-term asset for the purpose of diversifying the portfolios of rural
banks and stabilizing the expected return on their assets.
1.
77 Cong. Rec. 4168 (1933).
2.
Hearings on S. 1715 and H. R. 7617 before the Subcommittee of the Senate
Committee on Banking and Currency, 74th Cong., 1st Sess. 492 (1935)
(statement of Benjamin M. Anderson, Jr., Economist, Chase National Bank
of New York.)
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Federal Reserve Bank of St. Louis
-10The bankers' balance argument appears even less applicable to
issues
connected
with
interest
on
circumstances than it was in 1933.
demand
deposits
under
current
Rural areas are no longer dependent
largely upon rural bank deposits for loanable funds, and rural banks have
several channels available for placing interest-bearing highly liquid funds
in nonlocal institutions.
One example is the federal funds market, in which
a depository institution may make overnight loans of its excess funds to
another institution that needs such funds.
The other principal argument for the prohibition of interest on
demand deposits concerned bank safety and stability.
At least two studies
have examined the question of whether interest rate competition for bank
deposits heightened the instability of the banking system in the early
1
thirties.
Neither found
evidence that rate
competition
for
demand
deposits led to bank failures.
In summary, more recent analysis indicates that, in retrospect,
prohibiting the payment of interest on demand deposits in 1933 lacked strong
justification.
Moreover, the arguments for the prohibition at the time it
was enacted seem to have little validity today.
There have
been several studies done on behalf of the U. S.
Government since passage of the 1933 Act regarding payment of interest on
1.
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Federal Reserve Bank of St. Louis
George J. Bentson, "Interest Payments on Demand Deposits and Bank
Investment Behavior," Journal of Political Economy, October, 1964, and
Albert H. Cox, Jr., Regulation of Interest on Bank Deposits (Michigan
Business Studies, Vol. XVII, #4, 1966.)
•
•
1
demand deposits.
Every report issued as a result of these studies prior
the
to the 1977 study by Federal Reserve staff has recommended retaining
prohibition against the payment of interest on demand deposits, although the
FINE Report in 1975 recommended eventually phasing it out over time.
As
recently as October 1982, the prohibition was ratified when savings and loan
associations were authorized to accept demand deposits by the Garn-St
Germain Act in connection with an expansion of asset powers provided by
Title III of that Act to enable thrifts to diversify their investments.
Section 312 states that "a(n) association may not pay interest on a demand
account."
history.
There is no discussion of this prohibition in the legislative
It would appear that the Congress may not have intended the
provision as a reaffirmation that interest on demand deposits should be
prohibited as a policy matter.
1.
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Federal Reserve Bank of St. Louis
Money and Credit and Their Influence on Jobs, Prices and Growth, the
Report of the Commission on Money and Credit, (1961); U. S. Committee on
Financial Institutions, Report to the President of the United States
(Heller Committee) (1963); Report of the President's Commission on
Financial Structure and Regulation (Hunt Commission) (1971); the
"discussion principles" of Financial Institutions and the Nation's
Economy (FINE), a report issued by the House Committee on Banking and
Currency (1975); "The Impact of the Payment of Interest on Demand
. cit.
.
Deposits," 1977, 22
tt
4 •
-12-
IV.
Existing Returns on Transactions Balances
Despite the legal prohibition against payment of interest on demand
effect
deposits, several developments have weakened significantly the economic
of the prohibition.
These developments may be classified as: (1) the implicit
to
payment of interest on demand balances through the provision of services
ts •
customers at prices below costs; (2) the spontaneous emergence of arrangemen
and
that provide close substitutes for demand deposits, such as sweep accounts
that
money market mutual funds, and (3) the legislative and regulatory changes
permited explicit interest-bearing transactions accounts legally distinct from
demand deposits but, in some cases, functionally equivalent.
Implicit Interest on Demand Deposits
The most common services provided to demand deposit holders below cost
relate to transactions activity such as processing and collecting checks or
electronic items deposited to accounts, debiting accounts for checks drawn on
them, providing cash withdrawals and preparing periodic statements of account
activity.
The subsidy to account holders involved in providing these services
at a price below cost constitutes one form of implicit interest on account
balances.
Indications of the magnitude of this subsidy from the standpoint of
bank costs can be gleaned from data collected in the Federal Reserve System's
Functional Cost Analysis (FCA) program, which is designed to measure the costs
and revenues associated with various commercial bank functions.1
The average implicit subsidy given personal demand depositors through
1981
the provision of subsidized transactions services at reporting banks in
1.
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Federal Reserve Bank of St. Louis
In 1981, 614 banks participated in the program. They do not however, constitute a random sample; only 58 of the respondents had deposits over 8200
million, and some of the survey questions were answered only by a subset of
banks.
4
—13—
(the latest available data) is shown in Table 1.
On average, bank expenses to
charges by
service personal checking accounts exceeded income from customer
deposits) and by
about $45 per year at small banks (less than $50 million in
about $73 at medium—size banks ($50 to ::,200 million in deposits))
By dividing
transactions subsidy
this implicit interest by the average account balance, the
percent at medium
is estimated to be about 4-1/2 percent at small banks and 7
banks.2
Table 2 shows the implicit transactions subsidy paid to business
depositors in 1981, based on a comparable estimation procedure.
The average
rate
rate is about 2 percent, which is significantly lower than the estimated
2 and
for personal depositors; although annual expenses per account are between
3 times expenses per personal account, the average business account balance
reported in the FCA data is 5 to 10 times the size of the average personal
•
account.
However, these estimated implicit rates only capture the return to
demand depositors who make no use of subsidized bank services other than those
directly associated with account maintenance shown in line 2.
While this may
be true of many individual depositors, it is not the case for most business
account holders, who also receive implicit payments in other forms.
First, bal—
ances may be used to compensate for credit services such as loan commitments
or takedowns.
Recent evidence suggests that balance requirements on loan
1.
Not enough large banks ($200 million or over in deposits) provided data
broken down by personal and business accounts to permit reliable estimates.
2.
This, of course, represents the cost of the
the value of the subsidy to the depositor.
VI below, the latter value will be somewhat
be induced by the artificially low price to
him by less than the cost to the bank.
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Federal Reserve Bank of St. Louis
subsidy to the bank rather than
As discussed further in Section
lower, since the depositor will
use some services that benefit
A
4
-14-
Table 1
Implicit Interest Cost of Non-Interest Bearing Personal Checking Accounts,
per Account, by Size of Bank, 1981
Banks with Deposits of
up to $50 million
•
$50-$200 million
$1,019
$1,055
(2) Expenses
$88
$105
(3) Income from charges
$43
$32
(4) Net cost (implicit interest payment) [2 - 3]
$45
$73
4.44%
6.932
(1) Average balance
(5) Implicit interest rate [4
1.
Account maintenance cost, plus all expenses associated with deposits
and check clearing.
Source:
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Federal Reserve Bank of St. Louis
1]
Functional Cost Analysis - 1981 Average Banks
-15-
Table 2
Implicit Interest Cost of Commercial Checking Accounts,
per Account, by Size of Bank, 1981
Banks with Deposits of
up to $50 million
(1) Average balance
(2) Expensesl
(3) Income from charges
(4) Ner cost (implicit interest payment) [2 - 3]
(5) Implicit interest rate [4
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Federal Reserve Bank of St. Louis
1.
1]
$50-$200 million
$5,288
$9,868
$145
$242
$29
$39
$117
$203
2.21%
2.06%
Account maintenance cost, plus all expenses associated with deposits
and check clearing.
Source:
Functional Cost Analysis - 1981 Average Banks
commitments, for example, have been set around 5 percent of the unused line.1
If the customer chooses not to pay by holding balances, a typical annual fee
is 3/8 percent of the unused line.
Thus, the implicit rate of return on such a
5)
balance held to pay for a loan commitment is 100 x (3/8
addition to the return from other subsidized services.
7.5 percent, in
In recent years, how-
ever, the trend has been away from balances and toward fees for credit services.
Second, additional compensating balances may be held to pay for other
operating services such as wire transfers, processing credit card drafts, payroll preparation, securities safekeeping, transfer agent activities, lock boxes,
cash concentration accounts, and zero balance accounts.2
In general, large
corporations are far more likely to use these services than small businesses
or individuals.
As a result, demand deposit balances of large corporations
are more likely to be fully utilized in formally compensating the bank for a
variety of subsidized operational services as well as for loan services than
are the accounts of small businesses or individuals.
The remaining types of subsidized services involve less formal arrangements.
Banks may provide convenience through a branch network; they also may
give advice regarding general financial planning, tax counseling, mergers, and
local or national economic conditions.
While compensating balances may not
1.
See Appendix A to the November 30, 1982 DIDC staff memorandum, "Transactional Money Market Deposit Account." The data discussed there refer to
conditions last summer before the sharp decline in interest rates, and
the balance requirement has probably since risen.
2.
See the accompanying June 14, 1983 DIDC staff memorandum, "Money Market
Deposit Accounts with Unlimited Transfers for Those Not Eligible to Maintain NOW Accounts" for a description of how balance requirements are
determined. The implicit return on such compensating balances, at least
for large corporate customers, generally is set to provide a market-determined rate of return to business depositors, less the cost of reserve
requirements to the bank.
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Federal Reserve Bank of St. Louis
-17-
captured by FCA
be formally required for these services and their costs not
data, providing the services nevertheless is costly and in effect represents
payment of implicit interest.
Rough estimates of average overall implicit rates now earned by
Section V.
households and businesses on transactions deposits are presented in
The Emergence of Close Substitutes for Demand Deposits
In recent decades, numerous market innovations, in some cases stimulated by high market interest rates that accompanied historically high rates
proof inflation, have afforded payment of explicit interest on balances that
vide many of the same functions as demand deposits.
The following list provides
.
several examples, but is not a complete description of such innovations
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Federal Reserve Bank of St. Louis
(1)
The federal funds market provides a convenient
outlet for eligible lenders (depository institutions, U.S. government agencies, securities
dealers and certain others) to place very shortterm (mostly overnight) funds at a market rate
to borrowing banks, principally large money
center banks. As this market developed over
time, it effectively replaced the market for
interest-bearing bankers' balances that existed
before 1933.
(ii) Repurchase agreements also offer a large sized,
very liquid asset to lenders ineligible for
the federal funds market, especially corporations and state and local governments.
(iii) Money market mutual funds are investment companies
registered with the S.E.C. under the Investment
Company Act of 1940. They invest exclusively in
money market instruments and provide checking privileges subject to restrictions (usually with a
minimum check size). Many have been established by
brokerage houses and are used primarily by individuals. Others cater principally to institutional
investors such as pension funds.
(iv) Sweep accounts allow a hank at the end of each day
to transfer out of a demand deposit account balances
above a pre-arranged dollar limit either into money
market instruments or into a money market mutual
As • •
-
"•-• •••
46
,
••••i••• -• t...1.1.
I
i• ••11.6%.,
ii.i.,••••4‘..Ad• •...Jo.
. —18—
d automafund share. Funds also may be transferre
nts when
payme
cover
to
tically back to the account
Thus,
.
level
et
pre-s
a
the balance falls below
le, while
the account serves as transactions vehic
.
funds
us
surpl
on
d
earne
is
a market return
ns Accounts
Legislated Interest-Bearing Transactio
d above have emerged from
While the demand deposit substitutes liste
both explicit interest and transactions
market forces, other accounts providing
legislation or regulation. Below is a
services have been introduced through
ts; Table 3 provides data on their
summary of the most important developmen
growth since 1980.
chusetts com(i) In 1974, the Congress permitted Massa
accounts.
NOW
offer
to
mercial banks and thrifts
l savings
mutua
by
ed
offer
These accounts had been
issue
to
rity
autho
The
er.
hanks two years earli
nd
Engla
New
other
to
ded
exten
NOW accounts was
Jersey
New
to
1978,
in
York
New
to
1976,
states in
of 1980.
end
in 1979 and to the entire nation at the
accounts,
gs
savin
Legally, the accounts are treated as
ceilrate
a
to
ct
and explicit interest paid is subje
at
nts
accou
these
hold
ing. Depositors eligible to
and
units
al
nment
gover
s,
present include individual
s may be
nonprofit corporations. Check-like draft
the
gives
which
ce,
balan
nt
written on the accou
d
deman
a
of
tages
advan
mic
econo
account all the
cit
expli
of
tage
advan
ional
addit
the
deposit, with
nt,
accou
interest. *A similar account, the share draft
1974.
was authorized at credit unions in
tutions Act of
(ii) The Cam -St Germain Depository Insti
commercial banks
rize
autho
1982 directed the DIDC to
t deposit account
marke
money
the
and thrifts to issue
and competitive
to
alent
equiv
be
(MMDA), intended to
has a minimum
nt
accou
This
.
funds
with money market
ct to no
average monthly balance of S2,500, is subje
thorized
preau
interest rate ceiling, and permits six
three
only
or automatic transfers a month, of which
itors.1
depos
all
may be by check. It is available to
1.
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Federal Reserve Bank of St. Louis
Instruments,"
See Frederick T. Furlong, "New Deposit
Bulletin, May 1983.
Federal Reserve
-19—
Table 3
*Balances in Accounts with Transactions
Capabilities at Depository Institutions'
(monthly average, not seasonally adjusted)
December 1980
$ Billions
% of Total
April 1983
$ Billions
7 of Total
369
93
330
42
Regular NOW, ATS and
share draft accounts
27
7
91
11
Money market deposit
accounts
n.a.
n.a.
341
43
Super NOW accounts
n.a.
n.a.
29
4
396
100
791
100
Gross demand deposits2
Total
n.a.—not applicable.
1.
Commercial banks, savings and loan associations, mutual savings banks
and credit unions.
7.
Excludes demand deposits due to commercialbanks, certified checks and
officer's checks.
Source: Federal Reserve System Report of Deposits, used for reserve requirement
purposes.
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Federal Reserve Bank of St. Louis
-
• •
-20-
utions
(iii) The DIDC also authorized depository instit
1983.
y
Januar
in
ing
beginn
NOWs,
Super
issue
to
with
ts
These are fully transactional NOW accoun
no
with
and
average monthly balances over $2,500
to
le
eligib
tors
interest rate ceilings. Deposi
hold regular NOW accounts also may hold Super
NOWs. Thus, eligible depositors prepared to
invest $2,500 or more already have access to a
it
transactions account with unconstrained explic
interest.
es all
(iv) The Monetary Control Act of 1980 requir
time
all
on
restrictions on interest rates paid
11,
March
by
ated
and savings accounts to be elimin
consets;
accoun
NOW
r
1986. This includes regula
quently, by 1986, individuals and others eligible
to hold NOW accounts will have a fully transace
tional account without a regulated minimium balanc
conthe
r
neithe
fter,
Therea
g.
ceilin
or interest
tinued prohibition of interest on demand deposits
nor any other regulation will represent a legal
impediment to banks wishing to pay explicit inter,
est on individuals' transactions balances. Indeed
share
on
ctions
in 1982, all interest rate restri
draft accounts at credit unions were eliminated,
cso share draft depositors already have a transa
regula
or
ory
statut
a
r
neithe
tions account with
crestri
rate
st
intere
any
nor
e
balanc
m
tory minimu
tions.
V.
Depository Earnings
Estimates of Impact of Demand Deposit Interest on
about $330
As of April 1983, gross demand deposits amounted to
account balances totaled over
billion, while regular NOW, ATS and share draft
S90 billion, and Super NOWs nearly $30 billion.
Virtually all demand deposits
ble deposits were held at commerand three-fourths of interest-bearing checka
cial banks.
in general,
The relative importance of transactions deposits
of funds for commercial banks
and demand deposits in particular, as a source
and thrift institutions is depicted in Table 4.
For commercial banks, trans-
ic assets as of December 1982,
actions deposits averaged 21.4 percent of domest
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Federal Reserve Bank of St. Louis
•
—21—
Table 4
Reliance on Transactions Deposits and Demand Deposits
By Type of Institution
Transactions deposits'
as percent
of domestic assets
Commercial banks?
Savings and loan
associations3
Mutual savings4
banks
Demand deposits'
as percent
of domestic assets
21.4
17.0
1.4
0.1
2.5 .
1.0
1.
The commercial bank figures for demand deposits exclude demand deposits
due to commercial banks, certified checks, and officers checks. The
figures for demand deposits for savings and loans and mutual savings
banks consist of demand deposits subject to transfer by draft.
2.
Based on Call Report data for December 1'482.
3.
Based on Call Report data for June 1982.
4. Based on Call Report data for Federally insured mutual savings banks
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Federal Reserve Bank of St. Louis
for December 1982.
114.1••••
ea,
•
•
-22-
compared to an average of 1.4 percent for savings and loans at mid-year and
2.5 percent for mutual savings banks at year end.
To help assess whether demand deposits have represented a relatively
cheap source of funding, a statistical study of their influence on profitability
across commercial banks was conducted for each of the years 1978 through 1982.
Rank profitability, measured as an institution's ratio of before tax-profits
to assets, was related to several variables including its ratio of demand
deposits to assets.
The results indicate that for the years 1978 through 1981,
an institution's reliance on demand deposits had a statistically significant
positive impact on profitability.
Moreover, the impact appears to have been
greater in the years when market interest rates were higher.
In contrast, with
the sharp drop in interest rates that occurred in the last half of 1982, the
estimates for that year do not reveal a statistically significant relation
between profitability and reliance on demand deposits.
This suggests that
last year demand deposits in general were not a significantly more attractive
means of funding than other sources.
Put another way, given interest rate
levels prevailing in 1982 on average, institutions likely would not have been
willing to pay much more in explicit interest for demand deposits than they
already were paying on average implicitly.
The impact that eliminating the prohibition of interest on demand
deposits can be expected to have on earnings of depository institutions is
addressed in the remainder of this section.
The analysis assumes that the
ceiling rate on regular NOW (and ATS) accounts also would be eliminated at the
same time, since restraining the competitive position of institutions whose
transactions balances are concentrated primarily in NOW accounts, such as
thrift institutions, would not seem warranted.
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Federal Reserve Bank of St. Louis
The discussion focuses
-23-
principally on commercial banks where transitory earnings pressures would be
more likely to develop given their relatively heavy reliance on transactions
deposits for funding. (Effects on thrift earnings are discussed beginning on
p. 45.) In order to obtain quantitative estimates of earnings impacts for the
first year or so after interest on demand deposits is authorized, this section
will first examine in detail the three main factors that will determine how
converting to such a regime initially would alter earnings.
The first factor is how much higher than otherwise the combined
explicit and implicit rates paid on affected deposits would be, as measured by
costs incurred by commercial banks.
The residual implicit rate represents the
cost of services still provided less the revenue obtained through (presumably
increased) service charges—per dollar of affected deposits.
While an increase
in the sum of these average explicit and implicit rates would be more pronounced
at levels of market interest rates comparable to those prevailing in recent
years, the above evidence suggests that given the sharp drop in market rates in
the second half of 1982, implicit rates now paid on a significant portion of
demand deposits may not be much different from the overall rates institutions
would pay at current market rates if explicit interest were allowed.
Never-
theless, the average overall yield on certain demand deposits could rise, particularly for deposits of medium- and small-size businesses.
This effect could
be heightened during an initial transition period if institutions--especially
thrifts--viewed the authorization of explicit interest on all demand deposits
as an opportunity to increase market shares by offering still higher introductory interest returns, as was the case with MMDAs.
In addition, explicit
rates could tend to foster more competition since depositors could more
easily compare offering rates among institutions.
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Federal Reserve Bank of St. Louis
-24Second, earnings could be put under further, albeit largely transitory, pressure to the degree that depository institutions have to absorb some
of the fixed costs associated with resources currently used to provide the
services comprising implicit interest.
Although institutions could recoup
same of these costs by charging more for services, the quantity of such services
demanded would tend to fall. Thus, institutions could not recoup that portion
of existing fixed costs associated with unneeded facilities that cannot be
quickly dismantled or other resources that cannot be readily converted to
alternative uses.
This absorbed cost associated with discontinued services
can be expressed as a percent of the volume of affected deposits.
This figure--
unrecouped fixed costs of idle resources per dollar of affected deposits--can
be added to the increased average rate paid on affected deposits to derive the
total cost impact per dollar of affetted deposits.
The third factor is the amount of affected deposits--that is, the
volume of funds that would move into accounts offering a deregulated explicit
rate.
Presumably, institutions would continue to offer conventional demand
deposits, if not regular NOWs, along side the new transactions accounts bearing
a deregulated explicit rate.
By passing the initiative to switch accounts on
to depositors, institutions would avoid the full adverse cost impact of converting all demand deposits at once to explicit interest-bearing form.
This third
factor then boils down to the size of the shifts into the new accounts authorized by the legislative change, and whether the source of funds is existing
demand deposits, other deposits or market instruments.
The probable magnitude of these three factors will be examined sequentially for household demand deposits, regular NOW and ATS accounts, and business
demand deposits.
It should, of course, be emphasized that these estimates--which
the
will be presented as ranges--are not as precise as might be presumed from
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Federal Reserve Bank of St. Louis
-25-
detailed estimates presented below.
They should be interpreted as rough
estimates of likely impacts on the assumption of a continuation of today's
levels of market interest rates.
Transitional Net Cost Impact for Household Demand Deposits
Increase in Average Rate Paid on Affected Deposits.
Evidence from --
available Functional Cost Analysis data lends support to the presumption that
the implicit return on the bulk of household demand deposits is not significantly below the explicit rate institutions would be willing to pay.
The pre-
vious section noted that in 1981 the implicit return on household demand deposits at a sample of commercial banks with assets of $50 to $200 million was
about 7 percent.
Although data beyond 1981 are not yet available, implicit
rates paid likely have followed historical patterns in
howing little short-run
responsiveness to movements in market interest rates, in part owing to the large
fixed cost component in implicit remuneration.
Thus, this FCA data may well be
suggestive of average implicit rates prevailing today.
By comparison, the aver-
age explicit yield on Super NOWs at commercial banks was only 7.2 percent as of
the end of April of this year.' Taking into account the depositories' return to
intermediation and the likelihood that any shortfall of service charges below
operating expenses largely reflected incomplete transitional adjustments, a 7
percent overall rate may well approximate the competitive rate of return on
transactions balances at today's level of market interest rates.
To be sure,
the FCA data indicate that the implicit return on household demand deposits at
a sample of the smallest banks was below 7 percent in 1981.
1.
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Federal Reserve Bank of St. Louis
But it is unlikely
In the last week of April, the coupon-equivalent yield on three-month Treasury bills was 8.4 percent. If Treasury bills had represented the investment outlet for funds acquired by Super NOWs, then the marginal reserve
requirement cost to an institution bearing the full 12 percent required
reserve ratio on transaction accounts would have amounted to about 1 percentage point.
-26that any significant volume of household demand deposits is paid implicitly
much less than 1 to 2 percentage points below what would be earned in long-run
equilibrium if explicit interest were allowed and market rates were around
current levels--even considering the possibility that explicit rates would
tend to foster more competition since depositors could more readily compare
offering rates among institutions.
In an attempt to capture or protect market shares, commercial banks
as well as other depositories initially might raise overall average yields on
these balances above long-run equilibrium levels relative to market interest
rates.
It seems unlikely, however, that commercial banks or thrift institu-
tions would have much additional incentive to compete for household deposits.
Explicit market interest rates already are paid on ceiling-free Super NOWs and
MMDAs.
The pricing of Super NOWs since their introduction .suggests that insti-
tutions have not been inclined to bid aggressively for those accounts.
Thus,
lifting the prohibition of interest on household demand deposits seems unlikely
to touch off a "bidding war" among institutions.
These considerations underpin the high and low estimates of 1 and 2
percentage points for the net increase in overall rates paid on average on
those household balances transferring to interest-bearing demand deposits.
These estimates, shown in line 1 of Table 5, cover the transition period of
a year or so following the effective date of the regulatory change.
Fixed costs absorbed.
Commercial banks could face further downward
earnings pressures by having to absorb some of the fixed costs associated with
the provision of services that now constitute implicit interest payments.
The
adverse impact on earnings would be tempered as institutions receive revenue
from separately pricing services that the public is willing to continue to purchase and as institutions abandon those services that can not be provided on a
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Federal Reserve Bank of St. Louis
-27-
Table 5
Estimated Transitional Effect on Commercial Banks'
Before-Tax Earnings of Removing Interest Rate Prohibition
on Household Demand Deposits
(1) Increase in ratel (%
100)
Low Estimate
High Estimate
.01
.02
.006
.015
$5
$5
$.08
$.18
plus
(2) Fixed cost absorbed
(% +100)
times
(3) Household demand deposits affected
($ billions)
equals
(4) Increase in net costs ($ billions)
1. The sum of the average explicit rate and the decline in the average implicit
rate.
Source:
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Federal Reserve Bank of St. Louis
Federal Reserve staff estimates.
-28coat-effective basis.
Since the pro:egg of scaling back their operating facili-
ties could take some time, a portion of existing fixed costs would initially be
absorbed by commercial banks in an environment of explicit interest.
In the
first year this absorbed fixed cost is assumed to equal one-tenth to three-tenths
of the implicit interest currently earned on those household demand deposits
converting to interest-bearing accounts.
With implicit returns on shifted
deposits between 6 and 5 percent--as assumed in the low and high cost estimates,
respectively, in line 1--then the absorbed cost to commercial banks would be between .6 and 1.5 percent of the shifted deposits--as shown in line 2 of Table 5.
The volume of affected deposits.
The volume of transfers to demand
deposits earning explicit interest is likely to be relatively small.
House-
holds maintaining demand deposits currently could earn an explicit return if
they wished by opening a regular NOW or Super NOW account.
ing to NOWs already has occurred.
Considerable shift-
In 1981--the first year of nationwide NOW
accounts--the estimated volume of demand deposits shifted to NOWs represented
about 40 percent of the amount of household demand deposits outstanding at the
beginning of the year.1
After the early months of that year and subsequently,
though, shifts to NOWs from demand deposits abated substantially until the advent
of Super NOWs early this year when substantial shifting resumed for several
months before tapering off again.
While inertia may explain why some households
have not switched, other depositors likely have determined that the combination
of noninterest-bearing accounts and "free" services is more advantageous.
After
all, explicit interest would be subject to income taxes while the fees for services
could not be deducted from income.
For certain demand depositors--particularly
depositors with active accounts but with small average balances--the after-tax
1.
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Federal Reserve Bank of St. Louis
The actual level of household demand deposits fell by much less than twofifths, since shifts to NOWs were offset by flows of new funds to these
demand deposits.
-29-
return could well be higher with a noninterest-bearing demand deposit account
having no or low service charges rather than with an interest-bearing NOW
account subject to higher service Charges.
Even so, publicity surrounding the authorisation of interest on demand
deposits and advertising of newly offered household accounts would induce some
further shifting out of noninterest earning household demand deposits.
The
most likely accounts to shift would be larger, inactive accounts with low
implicit returns.' Since these shifts would increase the fraction of remaining regular demand deposits represented by smaller, active accounts--which are
less profitable--depositories may take the opportunity to impose higher service
charges on these old accounts as well.
deposit shifts.
This reaction would induce still further
If all interest rate restrictions were lifted, a reasonable
assumption may be that at most something on the order of 5 percent of the
estimated $90 billion level of household demand deposits outstanding would
shift to interest-bearing demand deposits (over and above the amount that would
have shifted in any event to Super NOW accounts).
This $5 billion is shown on
line 3 of Table 5; inflows from other sources to interest-bearing household
demand deposits are assumed to be negligible given that the shifting to Super
NOWs from non-M1 sources has evidently about run its course already.
Increased net cost.
Estimates of the increased net cost to commer-
cial banks during the first year or so of explicit interest on household demand
deposits is derived in line 4 of Table 5 by multiplying the sum of estimates
of the higher rate and the fixed cost absorbed per dollar of affected deposits
by this estimate of affected deposits.
The resulting figure ranges from $80
to $180 million for the first year.
1.
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Federal Reserve Bank of St. Louis
Recent survey data indicate that about one-fourth of the current $90 billion in household demand deposits are in accounts over $2,500.
-30Transitional Net Cost Impact for NOW and ATS Accounts
Increase in average rate paid on affected deposits.
Functional Cost
Analysis data indicate that regular NOW holders receive both an explicit and
implicit rate on their balances.
close to 2 percentage points.
The implicit portion of the yield appears
Combined with the 5-1/4 percent explicit rate
generally paid at present, the overall return seems to represent a fully competitive rate of remuneration, considering the cost of reserve requirements.
Thus, line 1 of Table 6 assumes no increase in the sum of explicit and implicit rates paid on regular NOW and ATS balances would occur on average if the
rate ceiling were removed, that is, the decline in the implicit rate is offset
by the increase in the explicit rate.
Fixed costs absorbed.
To the extent commercial banks raise explicit
rates, they will attempt to recoup the cost of current services through added
fees.
However, NOW and ATS account depositors might not be willing to purchase
the same level of services once new charges are levied even if a fully competitive explicit interest rate were paid on account balances, although the relative
cutback might be somewhat less than for household holders of demand deposits.
It seems reasonable to assume, as in line 2 of Table 6, that commercial banks
during the first year would absorb average fixed costs between one-tenth and
two-tenths of the 2 percent implicit interest cost, which amounts- to -an annual
expense to these commercial banks of .2 to .4 percent of regular NOW and ATS
balances affected.
The volume of affected deposits.
Lifting the ceiling on regular NOW
and ATS accounts could affect a large volume of deposits at commercial banks.
Line 3 of Table 6 gives the estimate that some $70 billion of such accounts may
be affected in the first year, representing virtually all the funds held in
such accounts at commercial banks.
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Federal Reserve Bank of St. Louis
—31—
Table 6
Estimated Transitional Effect on Commercial Banks'
Before—Tax Earnings of Removing Interest Rate Restrictions
on Regular NOW and ATS Accounts
Low Estimate
High Estimate
.002
.004
(1) Increase in ratel (% + 100)
plus
(2) Fixed cost absorbed
(% + 100)
times
(3) Regular NOW and ATS accounts
affected ($ billions)
equals
(4) Increase in net costs ($ billions)
1. The sum of the increase in the average explicit rate and the decrease in the
average implicit rate.
*--negligible
Source:
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Federal Reserve Bank of St. Louis
Federal Reserve staff estimates.
Increased net cost.
The absorption of fixed costs on regular NOW
and ATS accounts is estimated to depress earnings of commercial banks by between $140 and $280 million in the first year.
It should be emphasized again
that the elimination of interest rate restrictions on regular NOW and ATS
accounts is due to occur by March 31, 1986 in any case, giving rise to earnings
pressures at that time.
In anticipation, institutions could try to reduce
that future impact by making operational adjustments in the interim.
Transitional Net Cost Impact for Business Demand Deposits at Commercial Banks
Increase in average rate paid on affected deposits.
Some medium- and
small-size firms apparently are not now being compensated fully for their demand
deposit holdings.
These businesses are less likely than large firms to make
extensive use Of credit and operational services that usually make up the implicit interest payments involved in compensating balance agreements.
Despite their
relatively low utilization of these services, these businesses probably receive
at current market rates implicit returns that are only 1 to 2 percentage points
below what would otherwise be paid for those funds after complete adjustment
to explicit interest on demand deposits.1
To be sure, allowing explicit interest on business demand deposits
would provide commercial banks with a new instrument.
These institutions could
be inclined to offer attractive rates for a short period of time to capture market
1.
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Federal Reserve Bank of St. Louis
Judging from information provided recently by Federal Reserve Bank staff,
perhaps a quarter of the demand deposits of small firms, on average, are
held beyond amounts required as compensation for credit and operational
services. Assuming a 7 percent implicit return on the other three-quarters
of the balances implies a weighted average return of 5-1/4 percent. Further
assuming a 7 percent overall return on all demand balances for these firms
after explicit interest is introduced implies an increase in the average
overall return for small firms of 1-3/4 percent, which is consistent with
the text's assumption of a 1 to 2 percent increase for those small- and
medium-size firms that are not now receiving a competitive rate and that
switch to an interest-bearing demand deposit.
-33share.
However, even in the case of business demand deposits, using high
offering rates for this purpose might not be a particularly productive strategy.
Large business depositors apparently already earn close to a competitive rate on
demand deposits (after adjusting for reserve requirements).
Medium- and small-
size business depositors would find it costly to switch from one depository
institution currently providing transaction and other services to another institution.
Thus, to attract these customers, a competing commercial bank might
have to offer a substantial premium for more than just a short period of time.1
All things considered, a reasonable assumption seems to be that the
average explicit rate on demand deposits opened by those sma117 and medium-size
firms that currently are not paid full compensation would be only 1 to 2 percentage points higher than these firms receive now.
experience no change in returns.
Large firms are assumed to
Also assuming that those medium- and small-size
businesses that could experience an increase in returns account for one-half of
business funds shifted gives an average increase in yields on all 'converted
business demand deposits of 1/2 to 1 percent (line 1 of Table 7).2
1.
Upward pressure on rates could occur if thrift institutions also received
expanded powers to offer business demand deposits. But at present most
thrifts probably are not in a position to provide the array of services
usually demanded or required by corporate customers. Hence, thrift competition would be unlikely to raise costs to commercial banks appreciably.
2.
This assumption is based in part on Federal Trade Commission data on the
cash and demand deposit holdings of businesses in 1982. Those data indicate that, among manufacturing firms, companies with assets of less than
$100 million accounted for 60 percent of the cash and demand deposit holdings. The results from a survey of financial companies (not including
depository institutions) and nonfinancial companies conducted by a private
research firm suggest that the fraction of business demand deposits held
by medium- and small-size firms could he somewhat greater than 60 percent.
Some medium- and small-size firms, however, already are fully compensated
for demand balances and would not experience an increase in the rate paid
by a commercial bank for the funds. Thus, if all firms were equally likely
to shift to an interest-bearing demand account, the balances with a potential for gaining a higher return would be less than 60 percent--perhaps
around 50 percent.
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Federal Reserve Bank of St. Louis
•
-34-
Table 7
Estimated Transitional Effect on Commercial Banks'
Before-Tax Earnings of Removing Interest Rate Prohibition
on Business Demand Deposits
(1) Increase in rate' (% + 100)
Low Estimate
High Estimate
.005
.01
.003
.006
$90
$90
$.72
$1.44
plus
(2) Fixed cost absorbed
(% + 100)
times
(3) Business demand deposits affected
($ billions)
equals
(4) Increase in net costs ($ billions)
1. The sum of the average explicit rate and the decrease in the average implicit
rate.
Source:
Federal Reserve staff estimates.
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Federal Reserve Bank of St. Louis
-35Fixed costs absorbed.
Some large business depositors may wish to cut
back on cash management services once they can obtain an explicit rate on their
demand deposits, even though this rate would reflect the continued cost of
reserve requirements.
Some smaller business customers, too, might curtail
their use of bank services once pricing schedules were instituted.
However,
banks likely will be able to scale down more quickly facilities related to the
provision of business services than those related to household services.
If
the cost absorbed by commercial banks were one-twentieth to one-tenth of the
current average implicit yield (assumed to be between 6-1/2 and 6 percent in
the low and high cost estimates, respectively, in line 1) on business funds
that would shift, earnings would be reduced by a further .3 to .6 percent of
business demand deposits earning explicit interest.
This estimate is shown in
line 2 of Table 7.
The volume of affected deposits.
There is little basis for judging
"whet volume of business demand deposits initially would be shifted to interestbearing checking accounts.
In the long run, businesses conceivably might shift
most of their transactions balances to interest-bearing demand accounts, since
they would not be impeded by tax considerations from paying explicit fees for
services rather than receiving them as implicit returns to balances held.
However, some time probably would elapse before existing compensating balance
arrangements unwind.
If, during the first year, one-half of the demand
deposits of businesses were to shift, about $90 billion would be involved
(line 3 of Table 7).
The unwinding of compensating balance arrangements could
induce firms to place some funds transferred out of existing business demand
deposits in instruments other than interest-bearing demand deposits.
This
outflow from transactions balances is assumed to be just offset, but no more
than offset, by funds transferred out of other sources into interest-bearing
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Federal Reserve Bank of St. Louis
business demand deposits.
The differential reflecting the cost of transaction
reserve requirements between rates on demand deposits versus alternative deposit
and non-deposit investment outlets may well discourage substantial inflows of
investment-type funds to interest-bearing business demand deposits.
Increased net cost.
These component estimates imply that authorizing
interest on business demand deposits alone would raise annual bank costs in the
first year by between $720 million and nearly $1.5 billion (line 4 of Table
7).
This range of earnings impacts is identical to the estimate in the accom-
panying memorandum for the first-year cost impacts for commercial banks of
allowing businesses a fully transactional MMDA.1
And, as would be expected
since depository institutions cannot now offer an interest-bearing transactions
account to businesses, removing the prohibition of interest for business demand
deposits is estimated to have a significantly larger cost impact than for
household accounts—as may be seen by comparing the first 3 lines of Table 8.
Overall Earnings Impact for All Transactions Accounts at Commercial Banks
The estimates for the combined first-year earnings impact for affected
household and business transactions deposits range from about $1 to $2 billion
at annual rates (Table 8).2
1.
This range represents between 5 and 10 percent of
See the accompanying June 14, 1983 DIDC staff memorandum, "Money Market
Deposit Accounts with Unlimited Transfers for Those Not Eligible to Maintain
NOW Accounts".
due
2. The earnings impact of authorizing interest payments on demand deposits
implicit
existing
since
,
be
negligible
to
estimated
is
banks
to commercial
returns associated with clearing and other services are doubtless near a
competitive rate of return, and since the transaction reserve requirement
will dissuade lenders of federal funds from switching to interbank demand
deposits. Similarly, little cost impact is likely to be associated with
interest on the relatively small amount of balances held in state and local
demand deposits, since the extent of conversion of these funds to interest
earning demand deposits will probably be minor in light of the current eligibility of municipalities for NOWs and Super NOWs.
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Federal Reserve Bank of St. Louis
-.37-
Table 8
Estimated Transitional Effect on Commercial Banks'
Before-Tax Earnings of Removing Interest Rate Restrictions
on All Transactions Deposits
($ billions)
Low Estimate
High Estimate
.08
.18
.14
.28
.72
1.44
Increase in net costs for:
(1) Household demand deposits affected
plus
(2) Regular NOW and ATS accounts affected
plus
(3) Business demand deposits affected
•
equals '
(4) Total increase in net costs
.94
1.90
4.9%
9.9%
Memo:
(5) Total increase in net costs as
percent of 1982 before-tax earnings
Source:
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Federal Reserve Bank of St. Louis
Federal Reserve staff estimates in Tables 5 - 7.
-38-
1982 before-tax income for commercial banks.1
are subject to considerable uncertainty.
These estimates, of course,
If depository institutions were to
s in an attempt to
increase substantially interest rates on transactions deposit
could be higher than those
secure larger market shares, the transitional costs
shown in Table 8.
On the other hind, to the extent that the combination of
depository institutions
explicit interest and higher yields attract new funds to
pressures would be
that could be invested at a positive spread, earnings
eased somewhat.2
and ATS
It is worth reemphasizing that the ceilings on regular NOW
event.
accounts are scheduled to be removed by March 31, 1986 in any
Depository
million out of
institutions hence will bear earnings pressures of $140 to $280
take advantage of
the $1 to $2 billion overall impact at that time unless they
in advance.
the longer interval to position themselves for this change
Thus,
NOW and ATS
the portion of the total earnings impact attributed to regular
ultimately will
accounts really represents potential costs that depositories
s is authorized.
confront regardless of whether or not interest on demand deposit
s
Also worth pointing out is that estimates of the overall earning
of present levels
impact of interest on demand deposits assumes the continuation
of market interest rates.
Earnings impacts would be enlarged by higher market
rates but reduced by further rate declines.
1.
2.
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Federal Reserve Bank of St. Louis
$19.2 billion.
Pre-tax profits for all insured commercial banks in 1982 were
transfer from
As noted, only a small volume of funds can be expected to
interest-bearing
to
s
deposit
lar
Eurodol
market instruments or large CDs and
requirements
reserve
tion
transac
the
of
business demand deposits in light
ive. As also
attract
less
ely
relativ
yields
deposit
that would make demand
household
zed
authori
newly
into
s
balance
-type
savings
of
noted, transfers
lds
househo
tive
demand deposits may be limited since most interest-sensi
may have already opened a Super NOW.
—39—
Differential Impacts by Bank Size
The preceding estimates of impacts on costs and earnings apply to
the banking system as a whole.
However, effects on particular institutions or
groups of institutions may vary widely depending upon the type of market and
customer served, with some institutions less able to withstand transition costs
than others.
In particular, those institutions with relatively large amounts
of devosits that are likely to switch to interest-bearing accounts (such as
small- and medium-size business accounts) would tend to experience relatively
greater reductions in earnings.
Reliance on transactions deposits varies considerably among commercial banks.
However, the existing differences apparently are not strongly
related to asset size.
As shown in the top panel of Table 9, the relative reli-
ance on transaction deposits among the different size groups has been reasonably
similar, except for the largest banks.
The higher ratios for medium and smaller
institutions in 1982 appear primarily to reflect their holdings of NOW and ATS
accounts.
The proportions of demand deposits to domestic assets, shown in the
bottom panel of Table 9, reveal less of a systematic difference between large
and small institutions.
While reliance on total demand deposits is similar among size categories of commercial banks, considerable differences exist in the ownership of
those deposits at large and small banks.
As Table 10 shows, smaller commercial
banks tend to rely relatively more on household demand deposits, while larger
•
commercial banks have more business demand deposits.
To the extent the lifting
of interest rate restrictions on transactions deposits would have a greater
impact on the cost of business deposits, earnings pressures might be expected to
be Ie.:3s at smaller banks than at larger banks.
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Federal Reserve Bank of St. Louis
On the other hand, the business
-40—
Table 9
Commercial Bank Reliance
on Transactions Depositsi
(percent)
Commercial
banks by
asset class
(dollars)
December 1980
December 1981
December 1982
Ratio. of transactions deposits to domestic assets
Under $25 million
26.3
25.8
• 24.8
$25 million to $100 million
26.4
25.9
24.6
22.3
25.8
24.1
23.1
22.4
19.2
.$100 million to $1 billion
$1 billion and over
algiiiiiiiMMIMMIMIMMIWWWWWIIIMMMIIIIVEMMIMiiMMIBMWMILWMMIUMMEM=MIMMIliMilt===================iflati
Ratio of demand deposits to domestic assets
Under $25 million
25.5
20.1
17.7
$25 million to $100 million
25.0
20.1
17.7
$100 million to $1 billion
20.4
21.0
18.4
$1 billion and over
21.7
19.7
16.1
1. Excludes demand deposits due to commercial banks, certified checks and officer's
checks.
Source:
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Call Reports
•
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
-41—
Table 10
Distribution of Business and Household Demand Deposits
by Size of Commercial Bank
December 1982
(percent)
Commercial
banks by
asset class
(dollars)
Ratio
to domestic assets
Household
Business
demand deposits
demand deposits
Less than $25 million
5.4
9.0
$25 million to $100 million
8.6
7.0
$100 million to $1 billion
10.6
5.2
$1 billion or more
10.6.
3.5
Source:
Federal Reserve staff estimates based on the
Survey of Ownership of Demand Deposit Accounts
of Individuals, Partnerships, and Corporations
and the Call Report, both for December 1982.
-42-
demand deposits held at small commercial banks are more likely to be those of
medium- and small-size firms.
Shifts from noninterest-bearing demand deposits
of these smaller businesses to interest-bearing demand deposits have the greatest potential for raising the cost of funds for commercial banks.
Taking
explicit account of these offsetting considerations, estimates in Table 11 show
little difference between the smallest and largest commercial banks in cost
increases relative to 1982 pre-tax profits arising from eliminating interest
rate restrictions on transactions balances.
The estimates in the table suggest
that the commercial banks most affected by allowing interest on demand deposits
would be medium-size banks (assets of $100 million to $1 billion).
While these
medium size banks have the sane relative reliance on business demand deposits
as larger banks, they also have a larger fraction of these deposits held by smalland medium-size firms that potentially is subject to greater cost increases.
Disaggregating the estimated cost increases by size of bank does reveal
the potential for a differential impact from allowing interest on demand deposits.
However, the estimates in Table 11 still mask the degree to which individual
institutions would experience difficulties during a transition period.
The most
vulnerable institutions would appear to be those that have both a high proportion of deposits in rate-constrained transactions accounts and low earnings.
Table 12 shows the number of commercial banks by size class that had in 1982
both a high ratio of demand deposits to assets—either the highest quartile or
decile of demand deposits to total assets--and low earnings--either those institutions in the lowest quartile or decile of before-tax income to domestic assets.
Depending on which criterion is applied, the number of vulnerable institutions
ranges from 171 to 817 out of about 14,000 commercial banks.
The vast majority
of the institutions that could face the most difficulty are smaller banks
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Federal Reserve Bank of St. Louis
-43-
Table 11
.
Estimated Transitional Impact on
Commercial Banks' Before-Tax Earnings of Removing Interest
Rate Restrictions on Transactions Deposits
Commercial banks
by asset class
(dollars)
Low Estimate
High Estimate
Net cost increase in $ millions
46
95
$25 million to 100 million
167
338
$100 million to $1 billion
266
536
$1 billion or more
461
928
Total
940
1,897
Less than $25 million
--- Net cost increase as a percent of 1982 profits before taxes ---
Less than $25 million
4.4
9.1
$25 million to 100 million
4.4
8.8
$100 million to $1 billion
6.4
12.9
$1 billion or more
4.6
9.2
Total
4.9
9.9
Source:
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Federal Reserve Bank of St. Louis
Federal Reserve staff estimates.
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Federal Reserve Bank of St. Louis
4111.
Table 12
Humber of Vulnerable Banks
Balances
'Low Earnings and High Transactions
Insured Commercial Banks
1982
Total Domestic Assets (Millions of Dollars)
1,000- Over
100- 2505,000
1,000 5,000
250
10-25 25-50 50-100
Size:
5-10
0-5
Those banks within lowest
quartile of ratio of
earnings to domestic
assets and
--
Total
•
•
Highest quartile of
ratio of demand
deposits to domestic
assets
32
243
156
94
89
59
68
37
16
10
4
1,410 4,230
3,719
104
32
8
817
2
0
171
185
41
14,124
Those banks within lowest
decile of ratio of earnings
to domestic assets and
-- Highest decile of
ratio of demand
deposits to domestic
assets
......
number of banks
MEMO: Total
-.MEMO:
8
326
26
--
•
2.394
512
1,307
Ratios
Ratio of earnings to domestic
assets
-- Lowest quartile
-- Lowest decile
-- Median
.0080 .0068 .0060 .0056
.0043 .0028 .0028 .0030
.0111 .0098 .0086 .0078
.0068 .0074 .0081
.0067
-.0036 -.0011 .0016 .0038
.0114 .0116 .0117
.0132
.
Ratio of demand deposits to
domestic assets
-- Highest quartile
-- Highest decile
-- Median
Source:
0071
.0021
.0111
.0041
.0029
.0056
.3070
.5092
.2166
.2262 .2183
.2934 .2774
.1756 .1681
1_
19M2.
Call Reports, June and December, ----
.2261
.2288
.283:5
.2523
.1877 ' .174:3
.2248 .2331 .2523 .2645
.2768 .2839 .2959 .2984
.1736 .1858 .2119 .2264
.2177
.2754
.1669
1
1
1
1
1
1
6. • yip
-45-
(assets of less than $100 million).
As shown in the memorandum items, demand
deposits at subcategories of these smaller banks ranged from about one-fifth to
more than one-half of domestic assets at the end of 1982, while earnings ranged
from .8 percent of assets to losses of more than .36 percent of assets.
Impact On Thrift Institutions
Removal of restrictions on the payment of interest on transactions
deposits per se is not likely to have a noticeable impact on the cost of funds
at thrift institutions.
Savings and loans and mutual savings banks currently
have relatively few NOW accounts and very few demand deposits.
Table 13 shows
that this limited reliance of savings and loans on transactions deposits is
uniform across size categories.
In contrast, some difference is apparent in
the ratios of transactions deposits to assets for mutual savings banks.
As of
December 1982, for the smallest mutual savings banks transactions deposits
were equivalent to 5.6 percent of assets,' compared with 2.2 percent at the
larger institutions (top panel of Table 14).
The differences reflect primarily
the relatively large holdings of NOW accounts as opposed to noninterest-bearing
demand deposits at smaller savings banks.
As the bottom panel of Table 14
shows, the ratios of demand deposits to assets as of December 1982 were not
much different across size groups.
The demand deposits held at thrifts for the most part are household
deposits, which already could earn explicit interest if shifted to a regular
NOW or Super NOW account.
However, if thrift institutions were to raise rates
on transactions accounts in an attempt to gain market share or in response to
competion, earnings would tend to be adversely affected, although if any new
fund inflows could be invested at a positive spread, this depressing effect
would tend to he offset.
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Federal Reserve Bank of St. Louis
In this regard, though, as argued earlier, depository
-46--
Table 13
Savings and Loan Association Reliance
on Transactions Deposits'
(percent)
Savings and
loans by
asset class
(dollars)
December 1980
June 1982
December 1981
Ratio of transactions deposits to domestic assets
.2
1.1
1.4
.2
1.1
1.4
$100 million to Si billion
.2
1.3
1.6
Si billion and over
.2
1.2
1.3
Under $25 million
$25 million
to $100
million
IRMIIMMIUMW=====
MOMIIMMIIIMMIUMMIUMM111============1111=======================iMMUISMORMIMILIMOMMINV
Ratio of demand deposits to domestic assets
Under $25 million
$25 million to $100 million
$100 million to $1 billion
$1 billion and over -
Less than .05 percent.
1.
Demand deposits consist of demand deposits subject to transfer by draft.
Source:
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Call Reports
S
—47—
Table 14
Mutual Saving Bank Reliance
on Transactions Depositsl
(percent)
Mutual savings
banks by
asset class
(dollars)
December 1980
December 1981
December 1982
Ratio of transactions deposits to domestic assets
Under $25 million
2.3
3.9
•5.6
S25 million to $100 million
4.2
3.6
4.3
$100 million to $1 billion
1.9
2.5
2.8
$1 billion and over
1.4
1.7
2.2
111171
1 11==============MWMUMMIli====i1111=====MMMIMMMUMMIM==============.1
.
,
111
==i1OMMIEVIMMISMIMMIMM=
Ratio of demand deposits to domestic assets
Under $25 million
0.5
1.2
2.0
525 million to $100 million
1.0
1.0
1.2
$100 million to Si billion
0.9
1.1
1.1
$1 billion and over
0.8
0.7
1.0
1.
Federally insured mutual savings banks.
deposits subject to transfer by draft.
Source:
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Call Reports
Demand deposits consist of demand
•
-48-
institutions would seem to have little added incentive to compete aggressively
for household deposits.'
Elimination of the ceiling on all NOWs by itself could lead to some
transitional increase in costs for thrift institutions.
As apparently is the
case for commercial banks, thrift institutions likely compensate regular NOW
depositors through a combination of explicit and implicit interest payments.
If fully explicit yields were paid on all NOWs, thrifts may have to absorb some
of the fixed cost incurred in supplying services used to pay implicit returns.
Given the limited importance of NOWs as a source of funding at savings and
loans and mutual savings banks, such costs may be no more than $50 to $100
million.
However, with the still generally weak earnings at thrifts, the
marginal impact on some institutions could be more significant.
This could be
particularly true of the very small mutual savings banks that apparently rely
relatively heavily on transactions deposits.
Longer-run Earnings Impacts
Eliminating interest rate restrictions on household transactions
deposits would have little hearing on the long-run profits of depository institutions, since the ceiling on NOW and ATS accounts already is scheduled to be
removed by March 31, 14486, and the associated costs will have to he faced in
time in any event.
Moreover, given time, households that would initially shift
into interest-hearing demand deposits also would probably move into an unconstrained NOW account anyway.
In addition, fixed costs incurred by discontinuing
services associated with both household and business depositors would disappear
1.
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Federal Reserve Bank of St. Louis
If authorization to pay interest on demand deposits were coupled with
expanded powers for savings and loans to offer transactions accounts to
businesses, they may be willing to bid more aggressively for business funds
than for household demand deposits, since internal shifting would be minimal. However, success in this effort, as noted earlier, may be limited.
-.49-
in the long run as the scaling back of facilities and the retraining of personnel
is completed.
In the case of business demand deposits, the impact on profits in
the long run largely depends on whether explicit interest arrangements would
permanently foster more competition and less price discrimination than those
Involving implicit interest, since any initial period of "loss leader pricing"
would surely be short-lived judging by the experience with MMDAs.
The evidence
for large corporations suggests that even with implicit interest these depositors
currently are paid close to a competitive rate. In addition, it appears that
medium- and small-size businesses are becoming more active cash managers.
It
seems likely that, even without explicit interest on business demand deposits,
competitive pressures over time would move implicit rates on most business
demand deposits closer to competitive rates.
Thus, in the long run, profits of
depository institutions may not be much different with or without explicit
interest on demand deposits.
Of course, to the extent that implicit yields on
certain business demand deposits would take some time to move to their long-run
equilibrium relative to market rates, depository institutions may he able to
earn some economic rent in the interim.
While long-run profits may not be much different, explicit interest
on demand deposits could eliminate the "dead-weight" losses associated with circumventing the current restrictions.
For example, paying interest on transac-
tions balances through sweep arrangements involving RPs is more costly than
directly crediting an interest-bearing transactions account.
In addition, by
charging separately for services, depository institutions would not supply services that depositors valued less than the marginal cost of producing the services.
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Federal Reserve Bank of St. Louis
Along the same lines, depository institutions would be less inclined to
-
-50-
use extensive branching networks that in part have been used to offer an
implicit return through the convenience of branch locations.
VI. Impact on Depositors of Explicit Interest on Demand Deposits
Impact on Household Depositors
Households currently can hold Super NOW accounts which are not subject
to deposit rate constraints.
The only present limitation on these accounts
is the $2,500 minimum balance requirement, which in effect will be removed by
March 31, 1986, when the ceiling rate on all NOW accounts is scheduled to be
eliminated.
Since the Super NOW is operationally equivalent to a market-rate
demand deposit, the major impact on consumers of deregulating demand deposits
essentially would be to accelerate by three years the deadline for removing
the minimum balance requirement.
Should the Congress remove all restrictions
on the payment of interest on demand deposits, it would seem appropriate, as
noted earlier, for the DIDC simultaneously to remove all restrictions on the
payment of interest on NOW and ATS accounts.
On the other hand, the Congress
could allow interest on demand deposits but authorize the DIDC to set the same
ceiling rate on these deposits as for regular NOWs and/or the same minimum
balance as for Super NOWs until March 31, 1986.
With this option the Committee
could either lift ceilings on all transactions deposit accounts or perhaps
subject demand deposits to the same rate or minimum balance limitations that
apply to NOWs.
In the case in which all restrictions on transactions accounts
were eliminated, this Change—by moving up in time the opportunity to earn a
market rate--would directly affect only those households eligible for NOW
accounts but with account balances below the Super NOW minimum, although other
households may also be induced to switch to a transactions account with an
unconstrained rate.
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Federal Reserve Bank of St. Louis
-51Quantifying the overall net gains accruing to such depositors after
restrictions on interest on transactions deposits are lifted is difficult.
Estimates in the last section suggest that in the first year, at least, certain
households would receive explicit plus residual implicit payments on demand
deposits that are
$50 to
. 02 times $5 billion) in excess
$100 million (.01 or .
of the cost of providing their present implicit returns.
These estimates, however, represent only a component of the pre-tax
gains to households from explicit interest, since depositors on average not
only will benefit from the increase in average rates paid, but also will obtain
further welfare gains as well.
No depositor now receiving subsidized services
necessarily places a value on those services as high as their cost of production)
Therefore, depositors can be made still better off by receiving explicit interest-of course, valued dollar-for-dollar by depositors--instead of "undervalued"
services having equivalent costs of production.
The added annual gains arising
from this effect would be at least equal to the fixed costs absorbed by commercial
banks in the first year on both demand deposits and NOWs affected--or an estimated
range of $170 to $355 million.2
1.
The provision of services at a price below cost encourages depositors to
overuse them, so that the value obtained will be less than the cost to the
institution on the margin. This is likely to be the case particularly for
transactions services in individual accounts, where the depositor has no
incentive to economize on the writing of checks. Similarly, services such
as expensive premises, branching networks and fast teller services may be
valued by depositors at less than their production cost.
2.
As an illustration drawn from the high cost estimates in Table 5, the total
explicit interest to be paid on the $5 billion of shifted household demand
deposits (assuming no residual implicit interest) would be $350 million
(.07 x $5 billion). Offsetting this gain would be the added fees that
households will have to pay for services plus the value of services foregone. If households purchased at full cost the same services they were
previously paid as implicit interest, it would then cost them an additional
$250 million (.05 x $5 billion). Some of these purchases would be discontinued, however, since their value to depositors will be less than their
(continued on p. 52)
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Federal Reserve Bank of St. Louis
•
In combination, then, the annual before-tax
-52-
value of these two effects benefitting households is at least as large as the
overall pre-tax cost to commercial banks of explicit interest on household
deposits in the first year--in an estimated range of $220 to $455 million.
The influence of taxes, however, works to diminish the gains to household
depositors, since explicit interest is taxable and service charges are not tax
deductible.
Not all depositors are likely to be equally affected.
Some households
with small balances in demand deposits but with sizable account activity now
are earning a greater than competitive return, in effect being subsidized by
depositors with large balances but inactive accounts.
If a regime of explicit
interest payments induced higher service charges even on noninterest-bearing
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Federal Reserve Bank of St. Louis
(continued from p. 51)
newly established price. Households might be willing to pay only, say,
$100 million more than now in charges for those services that they would
continue to demand when fully priced. Of the other $150 million cost of
.services that would be discontinued, banks in the first year will only be
able to reduce the variable costs aosociated with producing them, amounting
to, say, $75 million. Another $75 million (.015 x $5 billion) of fixed
costs associated with discontinued services would be absorbed by banks in
the first year. Of course, in the first year banks would have been willing
to continue to offer the discontinued services previously costing $150
million ($75 million in variable costs plus $75 million in fixed costs) if
households had been willing to cover the $75 million in variable costs of
producing them. Assuming that, in the first year or so, banks price these
services to cover only variable costs, the fact that households are assumed
unwilling to continue to use these services when prices reflect variable
costs reveals that they would value these discontinued services by less
than $75 million. The net pre-tax gain to households in the first year,
then, is the explicit interest received, $350 million, minus the added
service Charges paid, $100 million, minus the value to households of the
discontinued services, which is at most $75 million. This means the total
net gain to households in the first year is at least $175 million or $75
million in excess of the increase in rates paid on demand deposits--with
the $75 million representing the high estimate of fixed costs absorbed in
discontinuing services related to household demand deposits. Even the
$175 million overall gain represents an underestimate of first-year pre-tax
welfare gains to households in the high cost case. Households will experience a further gain by in effect giving up services with variable costs
to banks of $75 million that households value by less than $75 million in
exchange for $75 million in explicit interest that is valued in full.
-53-
demand deposits, a possibility mentioned earlier, certain households would be
adversely affected, particularly after taxes, unless they are able to curtail
their account activity.
Impact on Business Depositors
Because a transactions account at depository institutions without a regulated interest ceiling is not now available to business, the potential
impact of allowing interest on demand deposits could be larger for businesses
than individuals.
On the other hand, businesses, particularly large ones,
also are much more likely currently to be using credit and operational bank
services, and receiving those services in lieu of explicit deposit interest.
In addition, large businesses are more likely to have both the size and financial sophistication to take advantage of cash management techniques to minimize
their transactions balances.
Thus, large businesses apparently already are
receiving a highly competitive return on their demand deposits.
Available evidence, previously discussed, suggests that some smalland medium-sized firms could gain more than large firms from explicit interest
on demand deposits.
Estimates in Section V suggest that small- and medium-
sized firms initially may obtain annual interest payments in an unregulated
rate environment some $450 to $900 million in excess of the present cost to banks
of providing them implicit returns.
In contrast to households, the pecuniary -
payments and service charges would not in general involve any diminished gains
owing to tax considerations.
As with households, the advent of explicit pricing
will generate further welfare gains for all business depositors as explicit
interest replaces subsidized services that businesses undervalue
such as cash
management services for large businesses (especially in a regime of explicit
interest) and teller time, financial advice and branch services for smaller
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Federal Reserve Bank of St. Louis
.11
Ire
r . •
-54-
businesses.
These additional annual gains would at least equal the fixed costs
absorbed in the first year by institutions discontinuing business services--an
estimated $270 to $540 million per year.
Again, the overall annual gain to
business depositors before taxes is at least as large as the first-year
pre-tax cost to depository institutions for business accounts--$720 to $1,440
million.
VII. Monetary Policy Considerations
Monetary policy issues raised by permitting interest on demand deposits are essentially the sane as those associated with a fully transactional MMDA
for businesses, which are examined in the accompanying DIDC staff memorandum
dated June 14, 1983.
In summary, introducing explicit interest on demand
deposits may temporarily induce additional uncertainty regarding the interpretation of movements in the monetary aggregates, particularly the M1 measure
of transaction balances.
However, uncertainties recently have been consider-
able in any case, in view of the authorization of nationwide NOWs, of the
Super NOW and of the MMDA, and any added uncertainties associated with
explicit interest on demand deposits -can be expected to diminish over time.
In addition, future problems of measuring and interpreting movements in
transactions balances would be mitigated by the resultant lessened incentive
to develop new transactions-type instruments outside the depository system.
It should be noted, though, that explicit interest on demand deposits likely
will induce a somewhat faster response in rates paid on Ml-type deposits to
a change in market interest rates.
This effect may reduce further the sensi-
tivity of M1 demand to movements in market rates, leading to additional
complications for the conduct of monetary policy.
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Federal Reserve Bank of St. Louis
•
IN\
-•••
-56-
would result in lower reserve requirements for such institutions without
substantively changing the type of account that is offered.
TO avoid
disruptions in the conduct of monetary policy, the Monetary Control Act
could be amended so that the phase-in would not apply to interest-bearing
demand deposits held by depositors eligible for NOW accounts in the 42
states in which NOW accounts are subject to the full 12 percent reserve
requirement on transaction accounts.
An alternative method for reducing the
incentive for depository institutions in these states to shift NOW account
customers to interest bearing demand deposits--but without the difficulty of
identifying the eligibility of deposit holders for NOW accounts--would be to
apply the full transaction account reserve requirement to demand deposits in
excess of the volume of demand deposits held by an institution at the time
1
of enactment.
Under the Garn-St Germain Depository Institutions Act of 1982,
federally insured savings and loan associations are permitted to offer
demand accounts to persons or organizations that have a business, corporate,
commercial, or agricultural loan relationship with the association (12
U.S.C.
1.
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Federal Reserve Bank of St. Louis
1464(b)(1)(A); 96 Stat. 1496).
In addition, an association may
Suppose a depository institution in one of the 42 states that do not
phase in the reserve requirements on NOW accounts had at the time of
enactment $200 of demand deposits on which the reserve requirement was
being phased in and $100 of NOW accounts subject to the full transaction
account reserve requirement. After enactment all demand deposit growth
over and above the $200 would be subject to full reserve requirements,
including shifts from NOW accounts into interest-bearing demand deposits.
-57-
accept demand accounts from a
commercial, corporate,
business, or
agricultural entity for the sole purpose of effectuating paymen
ts thereto by
a
nonbusiness customer (12 U.S.C.
1464(b)(1)(B)).
The
issue
of
interest-bearing demand deposits seems independent of the provisi
on of the
Garn-St Germain Act, which was intended to provide S&Ls with
only limited
commercial checking account authority.
Thus, this memorandum does not
address the issue as to whether these limitations should remain
in place.
It should be noted that maintaining these limitations
would require that NOW
account eligibility not be changed.
Removing the prohibition against payment of interest
on demand
deposits suggests that the current interest rate ceiling
s on NOW and ATS
accounts should also be removed at the same tine or that
the DIDC be given
authority to apply interest ceilings to demand deposit
s until March 31, 1986.
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Federal Reserve Bank of St. Louis
BOARD OF GOVERNORS
Or THE
FEDERAL RESERVE SYSTEM
Office Correspondence
To
Chairman Volcker
From
Messrs. Ettin and Schwartz
Date November 10, 1982
Subject: Background for meeting with
Secretary Regan on DIDC-Garn
Account
For your background preparatory to your meeting with Secretary
Regan, attached are:
1)
An "issue" list containing areas of agreement and
outstanding major and minor issues.
2)
Checklist of decisions to be made at Monday's DIDC
meeting.
3)
A very abbreviated summary of comments, focusing on
views expressed by trade groups.
4)
A note on the preliminary staff views of the effect
of the new account on internal deposit shifting and
earnings in 1983.
The memorandum to be the basis for the D1DC meeting at 8 a.m.
on Monday, November 15, is not yet available, but will be in your car
when you return from Texas.
Attachments
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Federal Reserve Bank of St. Louis
ISSUE LIST
I.
There is general agreement that the account must
--
have no minimum maturity (although there could be a reservation
of notice)
have no interest rate ceiling
--
have a minimum denomination no greater than $5,000
--
allow three preauthorized or automatic transfers and three
other third party payments (e.g., drafts) per month
--
be made available to all customers
--
be federally insured
be effective no later than December 14
II.
Major undecided issues
1.
Should there be a minimum initial and maintenance denomination
lower than $5,000 (e.g., $2,500 or no regulatory minimum)
FHLB and NCUA reportedly support no regulatory minimum
issue is simplicity and deregulation vs. risks of additional
capital erosion from costly internal deposit shifts
viebfr
2.
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Federal Reserve Bank of St. Louis
Number of transfers:
If no drafts were written in a particular
month, should six preauthorized or automatic transfers be permitted that month, or if the drafts were not written, should the
number of preauthorized or automatic transfers be limited to
three per month?
In either case no more than three drafts per
month would be permitted.
Congressional intent.
Either interpretation would satisfy
-2-
3.
Regulations to limit evasions
-
no loophole accounts
same charge on overdrafts on this or linked accounts as
on overdrafts on other unrelated accounts
no automatic or preauthorized payments from this account
to cover amount owed on multiple transaction credit
facilities (e.g., credit cards).
4.
Regulation to avoid elimination of remaining deposit ceilings:
Cannot guarantee rate for longer than, say, seven days.
III.
Selected minor undecided issues
,I.
If there is a regulatory maintenance balance
(a)
Over how long a period should it be calculated, e.g., a month
(b)
What occurs when balance falls below it, e.g., cut rate to
NOW account rate.
2.
Reservation of notice:
3.
Should there be a minimum size for drafts or other transactions?
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Federal Reserve Bank of St. Louis
e.g., seven days.
"q11.
80
I
-DRAFTCHECKLIST OF DECISIONS TO BE MADE BY THE DIDC TO
IMPLEMENT SECTION 327 OF THE DEPOSITORY INSTITUTIONS ACT OF 1982
I.
FEATURES STRONGLY RECOMMENDED BY STAFF ON THE BASIS OF STATUTE
AND/OR LEGISLATIVE HISTORY
o
o
o
o
II.
No minimum maturity on the account
No limitation on the rate of interest payable on account balances
which meet any minimum maintenance balance the committee may adopt
No restriction on account eligibility
Account effective not later than December 14, 1982
OTHER CHARACTERISTICS
Minimum Denomination
1.
2.
The minimum initial denomination should be:
o
$5,000;
O
$2,500;
•
$1,000;
O
Other; or
o
Left to the discretion of the institution
The minimum subsequent or maintenance balance should be:
o
•
o
3.
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Federal Reserve Bank of St. Louis
Other; or
Left to the discretion of the institution.
To determine compliance with the minimum maintenance balance
requirement, if any, the institution may use the average balance over:
o
One day;
o
One month (as defined in item 15); or
•
4.
Same as initial;
Other
If the balance in the account falls below the required minimum
maintenance balance, if any:
o
A ceiling rate equal to the institution's NOW account rate
should be imposed for the entire month (as defined in item 15)
4.
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Federal Reserve Bank of St. Louis
-2o
A ceiling rate equal to the institution's NOW account rate
should be imposed for the remainder of the month (as defined
in item 15);
•
Other
Transactions
5.
b.
7.
8.
Authorization and interpretation of transactions which the Act
provides will not subject the account to transaction account
reserves:
•
Three preauthorized or automatic transfers only and three
third party checks only are permitted per month; or
•
Six transfer per month are permitted, no more than three of
which can be effectuated by draft.
Additional transactions:
•
Limit transactions to these authorized in item 5, but consider
allowing expanded transaction features at the next Committee
meeting;
o
Allow depository institutions to offer the account with no
limit on transactions (including drafts). (This would subject
the account to transaction account reserve requirements under
the Federal Reserve Board's current Regulation D).
Drafts drawn on the account must have a minimum denomination of:
O
$500;
o
Other; or
•
Left to the discretion of the institution.
Preauthorized or automatic transfers must have a minimum denomination
of:
O
$500;
•
Other; or
•
Left to the discretion of the institution.
_3Maturity
9.
Reservation Notice Requirement:
o
•
10.
Other
An institution is
effective rate of
the interest rate
at least as often
o
One day;
o
Seven days;
•
o
11.
Institutions must reserve the right to require at least seven
days' notice prior to withdrawal (any reservation notice that
is invoked would apply to all depositors); or
required to reserve the right to change the
return on the account at its discretion (including
or method of calculation of the interest rate)
as every:
Month (the "month" defined in item 15); or
No restrictions on guarantee of rate.
Institutions may not offer the account with a contracted maturity
greater than
o
No contracted maturity will be allowed;
o
1 day;
O
7 days;
o
One month (the "month" as defined in item 15); or
o
Let the institution determine the maturity of the account.
Miscellaneous
12.
13.
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Federal Reserve Bank of St. Louis
Loans:
O
Prohibit loans to meet minimum denomination and maintenance
balance; or
o
Do not prohibit loans in connection with this deposit account
Overdrafts:
o
The rate of interest and other charges imposed on an overdraft
credit arrangement offered in connection with this account must
be not less than those imposed on overdrafts for customers that
do not possess this account; or
o
No prohibition on overdraft arrangements.
-414.
15.
16.
Credit card tie-ins:
o
Prohibit automatic or preauthorized debits from the new account
to pay the balances owed on credit cards or similar multiple
transaction credits; or
o
Do not prohibit such tie-ins.
Definition of "month":
o
Calendar month or statement cycle of at least four weeks; or
o
Calendar month only.
Date used to monitor compliance with draft limitations should be:
o
Date on draft;
o
Date of payment;
•
17.
18.
19.
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Federal Reserve Bank of St. Louis
20.
Either of the above.
Procedures to ensure compliance with withdrawal limit:
o
DIDC regulations should require that institutions must either
prevent withdrawals in excess of three automatic or
preauthorized and three checks per month, or adopt procedures to
monitor accounts on an ex post basis and contact customers that
have a greater number of such withdrawals.
•
Other
Restrictions on the size and frequency of withdrawals by mail,
telephone (via check to the depositor), messenger, or in person:
o
No restrictions on such withdrawals; or
o
Other restrictions
Additional deposits:
o
No regulatory restrictions on additional deposits and permit
sweeps from other accounts; or
o
Other
Effective Date:
o
December 14, 1982 (60 days from date of enactment); or
o
Other
November 10, 1982
TO:
Chairman Volcker
FROM:
Normand Bernar
/V
SUBJECT:
Tabulations of Trade
Association and Other
Comments on new Money
Market Deposit Account
The DIDC Federal Register notice (copy attached) suggested that the
have
Garn-St Germain Depository Institutions Act and its legislative history
t the
mandated the following six features as the minimum necessary to implemen
Act.!!
1.
no minimum maturity
2.
no interest rate ceiling
3.
initial minimum denomination no greater than $5,000
4.
not subject to transaction reserve requirements if
limited to three preauthorized or automatic transfers
and three other third-party payments (including drafts)
per month
5.
available to all depositors
6.
insured by the FDIC or FSLIC
The comments of the major trade associations (and of the Thrift
Institutions Advisory Council) are summarized in the tables that follow.
There are two sets of these tables, based on two separate classifications,
i.e., by topic and by trade association.
Also attached is a table summarizing
the more than 1,200 comments received from the public.
agree
Several of the trade associations commented explicitly that they
the
However,
with the above listing of the minimum requirements of the Act.
the
that
argues
Investment Company Institute (in a 50-page letter of comment)
the
",
ced-rate
maximum rate payable on the account must be "a market-referen
institutions. The
absence of which could lead to predatory pricing by large
that the new account
ICI and the American Council of Life Insurance also argue
are discussed in
is not automatically required to be insured. (These issues
the forthcoming staff memo to the DIDC.)
Attachments
1. Tabulations
2. DIDC request for public comment.
3. Copies of trade association letters.
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Federal Reserve Bank of St. Louis
‘N1
-1Trade Association Comments on New Money Market Account
American Bankers
Association
Reserve City
Bankers
Independent Bankers
Association
General comments
Allow maximum
flexibility to
institutions.
Allow maximum
flexibility to
institutions.
Leave most of details
to institutions.
Minimum initial
denomination
No higher than
$5,000, with phaseout schedule.
No higher than
$2,500.
$5,000
Maintenance balance
Same as minimum
initial balance.
Leave up to
institution (if
any is set, should
be below initial).
Same as minimum
initial balance.
Maximum rate when
account is below
maintenance
NOW account rate.
NOW account rate
if any limit is
set.
NOW account rate.
Minimum denomination
for drafts
NO restrictions.
No restrictions.
No restrictions.
Require institutions
. to reserve right
of notice of withdrawal
Require 7-day
reservation
clause.
Loans to meet initial
minimum
No restrictions.
No restrictions.
Prohibit.
Additional deposits and
sweeps from other
accounts
NO restrictions.
No restrictions.
No restrictions.
Time limit of interest
rate guarantee
No restrictions.
No restrictions.
No restrictions.
Maximum maturity
No restrictions
No restrictions
NO restrictions.
Enforcement of
limitation on
monthly withdrawals
Ex post review.
Ex post review.
Definition of
"month"
Calendar month or
statement cycle.
Statement month
(calendar or other).
Restrictions on
overdraft credit
associated with
account
No restrictions.
No restrictions.
Prohibit overdrafts.
Limitations on
withdrawals
No limits on inperson, over-thecounter,
, messenger,
mail, or ATM
withdrawals.
Unlimited withdrawals by mail,
telephone, messenger, or in
person.
Let individual
institution set own
rules on in-person
withdrawals.
Implementation of
account
As soon as possible
and no later than
December 14.
NO later than
December 14.
Other comments
Recommend optional
account with
unlimited thirdparty transfers
(subject to transaction reserves).
Recommend optional
account with
unlimited thirdparty transfers
(subject to transaction reserves).
Features
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Federal Reserve Bank of St. Louis
Require 7-day
reservation
clause.
-2-
Trade Association Comments on New Money Market Account
Consumer Bankers
Association
Conference of State
Bank Supervisors
Thrift Institutions
Advisory Council
General comments
Allow maximum
flexibility to
institutions.
Allow maximum
flexibility to
institutions.
Allow maximum
flexibility to
institutions.
Minimum initial
denomination
Prefer none;
otherwise urge
phase down schedule
or removal date.
Prefer none;
otherwise no higher
than $2,500.
Divided views.
$2,500 (S&Ls) and
$5,000 (MSBs).
Maintenance balance
No restrictions (if
any maintenance to
be set, suggest
$2,500).
Same as initial
minimum.
Maximum rate when
account is below
maintenance
No restrictions.
5 percent.
Minimum denomination
for drafts
No restrictions.
No restrictions.
Require institutions
to reserve right of
notice of withdrawal
Allow but do not
require.
Do not require.
Loans to meet initial
minimum
No restrictions.
Prohibit.
Additional deposits and
sweeps from other
accounts
No restrictions
(also allow sweeps
to other accounts).
Time limit of interest
rate guarantee
No restrictions.
Maximum maturity
No restrictions.
Enforcement of
limitation on
monthly withdrawals
Ex post review.
Definition of
"month"
Calendar or statement
cycle of at least
4 weeks.
Restrictions on
overdraft credit
associated with
account
No restrictions.
Limitations on
withdrawals
Unlimited withdrawals by mail,
telephone, messenger,
or in person.
Unlimited withdrawals
by mail, messenger,
or in person or by
telephone and ATMs
if permitted by
Regulation D.
Implementation of
account
Allow 30 days.
December 14.
Features
Other comments
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Federal Reserve Bank of St. Louis
• No restrictions
(also allow sweeps
to other accounts).
No restrictions
but monitor for
possible abuses.
Prefer daily rate;
7-day maximum
acceptable.
7 days.
Calendar or statement
month.
Recommend optional
account with unlimited
third-party transfers
(subject to transaction reserves).
Also, urge no premiums.
-3Market Account
Trade Association Comments on New Money
Features
U.S. League
National Savings
and Loan League
NAMSB
Minimize danger of
major shifts from
passbook accounts.
General comments
Avoid restrictions
that might limit
appeal; critical
that new account
not be used to
circumvent other
ceilings.
Minimum initial
denomination
No higher than $5,000
or lower than $2,500.
$5,000
$5,000
Maintenance balance
Same as minimum
initial balance.
$5,000
$5,000
Maximum rate when
account is below
maintenance
5% for days below
minimum.
Thrift passbook
rate.
Minimum denomination
for drafts
No restrictions.
No restrictions.
Require institutions
to reserve right
of notice of withdrawal
Do not require.
Do not require.
Do not require.
Loans to meet initial
minmimum
Prohibit.
No restrictions.
Prohibit.
Additional deposits and
sweeps from other
accounts
No restrictions.
No restrictions.
No restrictions.
Time limit of interest
rate guarantee
7 days maximum.
No restrictions.
7 days maximum.
Self-policing to be
monitored by regulatory agencies.
Give broadest
latitude to
institutions.
Give maximum
flexibility to
institutions.
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Federal Reserve Bank of St. Louis
NOW account rate.
Maximum maturity
Enforcement of
limitation on
monthly withdrawals
Definition of
"month"
Calendar months.
Restrictions on
overdraft credit
associated with
account
Discourage such
overdrafts by not
allowing preferential rate.
No restrictions.
Limitations on
withdrawals
Allow broadest
latitude possible.
Should not require
any penalties.
No restrictions on
payments to depositor, including via
ATM's.
Include in-person
withdrawals in
limit of 3 preauthorized or
automatic transfers.
Implementation of
account
December 14 or 30
days after regs
published.
December 14.
Numerous MSBs feel
30 days insufficient
lead time.
Other comments
No restrictions on
account maintenance,
transaction, or
other fees; no
restrictions on
compounding; no
premiums allowed.
Recommend optional
account with
unlimited thirdparty transfers
(subject to transaction reserves).
Eliminate 4-week
moving average on
6-month MMC's.
Trade Association Comments on New Money Market Account
Minimum Initial
Denomination
Maintenance
Balance
Maximum Rate
When Account
Below Maintenance
Minimum Denomination
for Drafts
American Bankers
Association
No higher than
$5,000.
Same.
NOW account rate.
No restrictions.
Reserve City
Bankers
No higher than
$2,500.
Leave up to
institution.
NOW account rate.
No restrictions.
Independent Bankers
Association
$5,000.
Same.
NOW account rate.
No restrictions.
Consumer Bankers
Association
Prefer none, other—
wise urge phasedown
schedule.
No restrictions.
No restrictions.
No restrictions.
Conference of State
Bank Supervisors
Prefer none, but no
higher than $2,500.
U.S. League
No higher than $5,000.
No lower than $2,500.
Same.
5 percent.
No restrictions.
National Savings
and Loan League
$5,000
Same.
Thrift passbook rate.
No restrictions.
NAMSB
$5,000
Same.
NOW account rate.
Thrift Institutions
Advisory Council
$2,500
Same.
5 percent
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Federal Reserve Bank of St. Louis
No restrictions.
Require Institutions
to Reserve Right of
Notice of Withdrawal
American Bankers
Association
Require 7-day reservation clause.
Reserve City
Bankers
Loans to Meet
Initial Minimum
Additional deposits
and Sweeps from
Other Accounts
Time limits on
Interest Rate
Guarantee
No restrictions.
No restrictions.
No restrictions.
No restrictions.
No restrictions.
No restrictions.
Independent Bankers
Association
Require 7-day reservation clause.
Prohibit.
No restrictions.
No restrictions.
Consumer Bankers
Association
Do not require.
No restrictions.
No restrictions.*
No restrictions.
No restrictions,
but monitor for
abuses.
Conference of State
Bank Supervisors
U.S. League
Do not require.
Prohibit.
No restrictions.
7 days maximum.
National Savings
and Loan League
Do not require.
No restrictions.
No restrictions.
No restrictions.
NAMSB
Do not require
Prohibit.
No restrictions.
7 days maximum.
Thrift Institutions
Advisory Council
Do not require
Prohibit
No restrictions.*
Prefer daily rate;
7-day maximum
acceptable.
* Also allow sweeps to other accounts.
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Federal Reserve Bank of St. Louis
Enforcement of
Limitation on
Monthly Withdrawals
Restrictions on
Overdraft Credit
Associated with
Account
American Bankers
Association
Ex post review.
No restrictions.
Reserve City
Bankers
Ex post review.
No restrictions.
No limits on inperson, mail, telephone, or messenger.
Prohibit overdrafts.
Institutions should
set own rules on
in-person.
Ex post review.
No restrictions.
No limits on in-person,
mail, telephone, or
messenger.
U.S. League
Self-policing.
Discourage by not
allowing preferential
rate.
Allow broadest
latitude possible.
National Savings
and Loan League
Broadest latitude
to institutions.
No restrictions.
No limits on
payments to
depositors,
including ATMs.
NAMSB
Broadest latitude
to institutions.
Independent Bankers
Association
Consumer Bankers
Association
Limitations
on Withdrawals
Other Comments
(See also Note below)**
No limits on inperson, mail, mes. N
'-senger, or ATMS.
Recommend optional
account with unlimited
third-party transfers
(subject to transaction
account reserve requirements).
Same as above.
Conference of State
Bank Supervisors
Thrift Institutions
Advisory Council
**Note:
Same as above.
Include in-person in
3 per month limit.
No limits on inSame as above.
person, mail, or messenger or by telephone/
ATMs/RSUs as per Reg D.
U.S. League and TIAC recommend no premiums; U.S. League recommends no restrictions on fees for transactions, etc.
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Federal Reserve Bank of St. Louis
-7-
Summary of Public Comments
(other than trade associations)
General comments
Total of 1,227 comments received through November 3, with over 90
percent from depository institutions. New account overwhelmingly viewed as
welcome opportunity to compete on level playing field, but concern expressed
that DIDC might limit its attractiveness through excessive regulation.
Minimum initial denomination
No general consensus. Nearly 65 percent recommended a minimum of
$3,000 or less, including 24 percent who favored no restrictions. At the other
extreme, 40 percent of commercial banks and 44 percent of NSBs (but only 22 per—
cent of S&Ls) urged a minimum of $5,000 (or more), commonly citing concern about
the cost impact of internal shifts of funds into the new account.
Maintenance balance
Typically citing operational simplicity, over 60 percent of respondents
recommend the same minimum and maintenance balances; about 25 percent favored
letting institutions set their maintenance balances and the remainder favored a
maintenance balance lower than the initial balance.
Maximum rate when account
is below maintenance
About 65 percent of respondents felt a reduced rate should be required
on balances below maintenance level, with the NOW rate, the institution's pass—
book rate, or a zero rate all mentioned as appropriate. Those advocating insti—
tutional discretion on this penalty rate noted that MMFs do not pay a lower rate
on small balances.
Minimum denomination for drafts
About 56 percent of commercial banks, 54 percent of S&Ls, and 42 percent
of MSBs preferred to leave the choice to the institution, with many noting that
operationally a minimum draft size would be difficult to police. Those recom—
mending a mandated minimum most frequently suggested $500.
Require institutions to reserve
right to notice of withdrawal
Many of the 60 percent who opposed a requirement that they reserve the
right to require 7—day's notice of withdrawal evidently misunderstood the request
for comment as asking whether they favored a mandatory 7—day notice prior to any
withdrawals. The 40 percent who approved seemed to understand that they would
only be reserving the right to require 7 days' notice which could provide a buffer
against extraordinary developments but which probably would never be invoked.
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Federal Reserve Bank of St. Louis
-8-
Loans to meet initial minimum
Close to 3/4 of thrifts recommended that such loans not be permitted,
while a slight majority of commercial banks favored allowing them. Prohibition
was viewed as necessary to enforce meaningful minimum initial and maintenance
balances. Comments in favor cited the absence of similar restrictions on MMFs.
Additional deposits and
sweeps from other accounts
More than 86 percent of all respondents favored no restrictions on
additional deposits and over 70 percent favored permitting sweeps, with commercial banks registering the lowest majority (65 percent).
Time limit of interest
rate guarantee
Nearly 2/3 of commercial bank respondents and over 1/2 of S&Ls favored
no limitation, while a majority of MSBs preferred some limit. Those in favor of
a limit noted that its absence would effectively deregulate accounts that are
presently subject to a rate ceiling. The most frequent specification for a
limit was 7 days or less (43 percent) or over 7 days and less than 30 days
(38 percent).
Maximum maturity
Over 90 percent of respondents favored none.
Enforcement of limitation on
monthly withdrawals
Most respondents favored either ex post monitoring by the institution
(62 percent) or allowing the institution to decide how to enforce compliance
(25 percent). Only 13 percent favored strict enforcement via dishonoring checks.
Considerable concern was expressed regarding operational difficulties in monitoring compliance. Nearly 70 percent indicated a preference for using date of
payment rather than draft date as the basis for control.
Definition of "month"
Over 70 percent of respondents indicated a preference for using the
statement cycle or institutional discretion, with the balance favoring use of
the calendar month.
Restrictions on overdraft credit
associated with an account
Citing maximum flexibility and competitive equity with MMMFs, 62 percent
of respondents opposed any restrictions on overdraft credit arrangements.
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Federal Reserve Bank of St. Louis
-9-
Limitations on withdrawals
Nearly 3/4 of respondents favored unlimited withdrawals by mail,
telephone, messenger, or in—person. Many letters also expressed disagreement
with the staff position which proposed regarding telephone transfers as pre—
authorized transfers if made to third parties or to another deposit account
of the same depositor.
Implementation date
About 1/2 of respondents indicated that 30 days was adequate lead time
to implement the new account, with some conditioning their affirmative reply
on the simplicity of the account. Those answering in the negative cited such
operational problems as restrictions on the number of drafts and minimum balances,
with smaller institutions especially concerned about such problems.
Other comments
Many respondents suggested that the DIDC consider an account that
provides unlimited checking and is reservable as a transaction account.
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Federal Reserve Bank of St. Louis
DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE
Washington, D.C. 20220
PRESS RELEASE
October 18, 1982
Money Market Deposit Account
In the attached Federal Register notice the Depository
Institutions Deregulation Committee (DIDC) announces a 15 day
public comment period on the new money market deposit account.
The Garn-St Germain Depository Institutions Act of 1982
directs the DIDC to authorize a new Federally insured account to
be offered by commercial banks, savings and loan associations
and mutual savings banks that is directly competitive with money
market mutual funds.
f
The Garn-St Germain Act requires that this account: (1) have
no limitation on the maximum rate of interest payable; (2) be
in effect no later than 60 days from enactment of the GarnSt Germain Act; (3) not be subject to transaction account reserve
requirements (as defined by the Board of Governors of the Federal
Reserve System, as of August 1, 1982) even though no minimum
maturity is required, and even though up to three preauthorized
or automatic transfers plus three third-party transfers are
permitted per month; and (4) be "directly equivalent to and competitive with money market mutual funds registered with the
Securities and Exchange Commission under the Investment Company
Act of 1940."
The Committee is requesting comments on features not
specifically set forth in the Garn-St Germain Act; e.g., minimum
initial denomination, maintenance balance, denomination of withdrawals, whether institutions should be required to reserve the
right to require seven days' notice of withdrawal, and whether
loans should be permitted to meet the minimum denomination
requirement.
Attachment
COMPTROLLER OF THE CURRENCY
Digitized forFEDERAL
FRASER RESERVE BOARD
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Federal Reserve Bank of St. Louis
FEDERAL DEPOSIT INSURANCE CORPORATION
NATIONAL CREDIT UNION ADMINISTRATION
FEDERAL HOME LOAN BANK BOARD
DEPARTMENT OF THE TREASURY
DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE
12 CFR Part 1204
[Docket No. D-0026]
Money Market Deposit Account
AGENCY:
Depository Institutions Deregulation Committee.
ACTION:
Proposed rulemaking.
SUMMARY:
The Depository Institutions Deregulation Committee
("Committee") is required by the Garn-St Germain Depository
Institutions Act of 1982 ("Garn-St Germain Act") to authorize a
new insured deposit account, available to all depositors, to
compete with money market mutual funds.
The Garn-St Germain Act
requires that this account: (1) have no limitation on the maximum
rate of interest payable; (2) be in effect no later than 60
days from enactment of the Garn-St Germain Act; (3) not be
subject to transaction account reserve requirements (as defined
by the Board of Governors of the Federal Reserve System, as of
August 1, 1982) even though no minimum maturity is required, and
even though up to three preauthorized or automatic transfers
plus three third-party transfers are permitted per month; and
(4) be "directly equivalent to and competitive with money market
mutual funds registered with the Securities and Exchange Commission
under the Investment Company Act of 1940." No minimum denomination
was set forth in the Garn-St Germain Act, although the Conference
Report suggested it be no more than $5000.
The Committee is
requesting comments on features not specifically set forth in
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Federal Reserve Bank of St. Louis
- 2 the Garn-St Germain Act;
2.12.,
minimum initial denomination,
maintenance balance, denomination of withdrawals, whether
institutions should be required to reserve the right to require
seven days' notice of withdrawal, and whether loans should be
permitted to meet the minimum denomination requirement.
DATE:
Comments must be received by (15 days from the date of
publication).
ADDRESS:
Interested parties are invited to submit written data,
views, or arguments concerning the proposed rules to Gordon
Eastburn, Acting Executive Secretary, Depository Institutions
Deregulation Committee, Room 1058, Department of the Treasury,
15th Street and Pennsylvania Avenue, N.W., Washington, D.C. 20220.
All material submitted should include the Docket Number D-0026 and
will be available for
inspection
and copying upon request, except
as provided in § 1202.5 of the Committee's Rules Regarding Availability of Information (12 CFR § 1202.5).
FOR FURTHER INFORMATION CONTACT:
Alan Priest, Attorney, Office of
the Comptroller of the Currency (202/447-1880); Joseph DiNuzzo,
Attorney, Federal Deposit Insurance Corporation (202/389-4147);
Rebecca Laird, Senior Associate General Counsel, Federal Home
Loan Bank Board (202/377-6446); Paul S. Pilecki, Senior Attorney,
Board of Governors of the Federal Reserve System (202/452-3281);
or Elaine Boutilier, Attorney-Adviser, Treasury Department
(202/566-8737).
LIST OF SUBJECTS IN 12 CFR Part 1204:
SUPPLEMENTARY INFORMATION:
Banks, banking.
The Depository Institutions Deregula-
tion Act of 1980 (Title II of P.L. 96-221; 12 U.S.C. §§ 3501 et
seq.) ("DIDA") was enacted to provide for the orderly phaseout
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Federal Reserve Bank of St. Louis
- 3 and ultimate elimination of the limitations on the maximum rates
of interest and dividends that may be paid on deposit accounts
by depository institutions as rapidly as economic conditions
warrant.
Under DIDA, the Committee is authorized to phase out
interest rate ceilings by any one of a number of methods including the creation of new account categories not subject to interest
rate limitations or with interest rate ceilings set at market
rates of interest.
Section 327 of the Garn-St Germain Act specifically requires
the Committee to authorize a new insured deposit account, which
"shall be directly equivalent to and competitive with money
market funds." The Garn-St Germain Act prohibits any limitation
on the maximum rate of interest payable on the new account.
The
Garn-St Germain Act also states that the account shall not be
subject to reserve requirements on transaction accounts even though
no minimum maturity is required and even though up to three
preauthorized or automatic transfers and three tkansfers to
third parties are permitted.
The Committee has solicited public comment on short-term
deposits previously.
After the June 25, 1981 meeting, the
Committee requested comments on the desirability of authorizing
a new deposit instrument with characteristics similar to money
market mutual funds, although the Committee did not put forth a
specific proposal at that time.
1981).
46 Fed. Reg. 36712 (July 15,
After the September 22, 1981 meeting, the Committee
requested comments'on three specific proposals for short-term
time deposits.
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Federal Reserve Bank of St. Louis
46 Fed. Reg. 50804 (October 15, 1981).
- 4 One of the short-term accounts proposed in the October 15,
1981 notice was a $5000-minimum denomination NOW account, which
is similar in concept to the account set forth in the Garn-St
Germain Act.
Consequently, the Committee has received comments
on an instrument that possesses essentially all of the features
/
of the congressionally-mandated account. Certain features are
mandated by the Garn-St Germain Act and cannot be changed.
However, some features were left by Congress to the Committee's
discretion.
Accordingly, comment is requested only on features
not specified in the Act.
Public comment is being requested in
view of the interest expressed by competitors of depository
institutions for an opportunity to comment on the features the
Committee may designate.
The new account proposed by the Committee would have the
following features as required by the Garn-St Germain Act and its
legislative history:
(1) no minimum maturity; (2) no interest rate
ceiling; (3) an initial minimum denomination no greater than $5000;
(4) allow up to three preauthorized or automatic transfers and three
other third-party payments (including drafts) per month without being subject to transaction account reserve requirements; (5) available to all depositors; and (6) insured by the FDIC or FSLIC.
The
Committee is considering whether or not to impose a minimum initial denomination and/or maintenance balance of less than $5000
and requests comments on this feature.
In connection with the
minimum balance, the Committee may impose an interest rate limitation (such as the NOW-account rate) on accounts which fall below
the minimum maintenance balance, and prohibit loans to meet the
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Federal Reserve Bank of St. Louis
- 5 minimum initial denomination.
The account will permit limited
withdrawals to be made, and certain requirements are being considered by the Committee in regard to these withdrawals, e.9.
(1) a minimum denomination on drafts; (2) unlimited withdrawals
by the depositor by mail, telephone, messenger or in person,
except that telephone transfers to third parties or another deposit account of the depositor would be regarded as preauthorized
transfers; (3) require an institution to monitor on an ex post
basis to determine compliance with the withdrawal limitations;
and (4) require an institution to reserve the right to requir
e
seven days' notice prior to withdrawal.
Although the maximum
rate of interest paid on the account may not be limited, the
Committee is concerned that institutions will circumvent the requirements on other time deposits by guaranteeing a rate of interest for a substantial time period, therefore the Committee is
considering a limitation on the time period for which an instit
ution may guarantee an interest rate.
The Committee also may
restrict overdraft credit arrangements offered in connection
with this new account.
The Committee requests comments on the new account as proposed above, and particularly requests comments on the following
issues:
(a)
What should be the minimum initial denomination?
(The Conference Report suggests that it be no more
than $5000, and interest has been expressed in a
$2500 minimum denomination.)
(b)
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Federal Reserve Bank of St. Louis
Should the maintenance balance differ from the
initial denomination?
If so, what should it be?
- 6 What would be the possible consequences of having
no maintenance balance?
Would it be operationally
easier to have the maintenance balance the same as
the minimum initial denomination?
(c)
Should an institution be required to pay a lower
rate of interest, such as the NOW-account rate, for
accounts which fall below the maintenance balance?
(d)
Should a minimum denomination be set for drafts?
If so, should it be $100, $500, or some other
amount?
1(e)
Should depository institutions be required to
reserve the right to require seven days' (or some
9
s
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Federal Reserve Bank of St. Louis
other time span) notice prior to withdrawal?
(f)
Should loans be permitted to meet the minimum
initial denomination?
(g)
Should any restrictions be placed on additional
deposits?
Should sweeps from other accounts be
permitted?
(h)
Should the time period for which an institution can guarantee an interest rate be limited?
If so, what should it be?
Or should the account
have a maximum maturity?
(i)
How should the limitation on the number of withdrawals per month be enforced?
For example, should
the institution be required to monitor accounLs on an
ex post basis to determine compliance?
How should
"month" be defined for purposes of this limitation?
Should the date of payment by the institution or the
- 7 date written on the draft control for purposes of compliance with the three drafts per month limitation?
(j)
Should any restrictions be placed on overdraft
credit arrangements offered in connection with
this account?
(k)
Should unlimited withdrawals by mail, telephone, messenger, or in person be permitted to the depositor?
(The staff believes that telephone transfers should
be regarded as preauthorized transfers if the transfer
is to a third person or to another deposit account of
the same depositor.)
(1)
Is thirty days (or some shorter or longer period)
adequate lead time for depository institutions to
implement operational changes for this account?
The issues set forth above are not intended to limit the
area of comment.
The Committee requests comments on those
questions and on any other aspect of the account which the public
wishes to address, particularly with respect to characteristics
that would make this account "directly equivalent to and competitive with" money market funds.
The Committee has considered the potential effect on small
entities of the proposal to establish a new ciPposit instrument,
as required by the Regulatory Flexibility Act (5 U.S.C. § 603 et
seq.).
In this regard, the Committee's action, in and of itself,
would not impose any new reporting or recordkeeping requirements.
Consistent with the Committee's statutory mandate to eliminate
deposit interest rate ceilings, this proposal would enable all
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Federal Reserve Bank of St. Louis
- 8 depository institutions to compete more effectively in the marketplace for short-term funds.
Depositors generally should benefit
from the Committee's proposal, since the new instrument would
provide them with another investment alternative that pays a
market rate of return.
If low-yielding deposits shift into
the new account, depository institutions might experience increased
costs as a result of this action.
However, their competitive
position vis-a-vis nondepository competitors would be enhanced
by their ability to offer a competitive short-term instrument
at market rates.
The new funds attracted by the new instrument
(or the retention of deposits that might otherwise have left the
institution) could be invested at a positive spread and would
therefore at least partially offset the higher costs associated
with the shifting of low-yielding accounts.
The Committee is asking for comments for a 15-day period.
This short comment period is made necessary by the fact that the
Garn-St Germain Act requires the new account to be available within 60 days of enactment.
Because the Committee desires to give
the depository institutions adequate time to prepare and market
the account, time for comment must be limited to allow time for
compilation and consideration of the comments, a Committee vote
on the features and publication of the final rule.
Therefore,
comments on this account should be submitted promptly.
By Order of the Committee, October 15, 1982.
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Federal Reserve Bank of St. Louis
Gordon Eastburn
Acting Executive Secretary
BOARD OF GOVERNORS
OF THE
FEDERAL. RESERVE SYSTEM
Office Correspondence
To
From
Date
Mr. Edward C. Ettin
November 10, 1982
The New Money Market Deposit
Account: A Preliminary Analysis of
Potential Shifting and Earnings Effects
Subject:
Michael Moran and Edward F. McKelvey
Summary
At your request, the staff has prepared several tables to help gauge
the potential effects of the new account to be authorized by the DIDC at its
meeting next Monday, November 15.
Attention is focused on shifts of deposits
from passbook savings accounts, since these represent the most costly transfers of funds, and on the amounts of new funds from outside the depository
institutions that would be needed to offset the negative impact of passbook
shifts on the earnings of these institutions.
Shifts of funds from other
accounts would have relatively small effects on earnings and thus are not
considered in the analysis that follows.
In brief, the results indicate that even at current reduced level
of interest rates all depository institutions could lose about $2 to $2-1/4
billion in annualized earnings (before taxes) if as much as 50 percent of
the balances above $5,000 were to shift into the new account; this loss would
be about evenly divided between thrift institutions and commercial banks
(see table 4, page 9, second line of middle panel).
The staff analysis also
suggests that, under the same interest rate and shifting assumptions, additional pre-tax cost to depository institutions of setting the minimum denomination at $2,500 would be on the order of $3/4 billion (table 5, page 10).
These estimates are, of course, highly sensitive to both the assumed
level of interest rates and the proportion assumed to shift out of passbook
accounts, as illustrated in tables 4 and 5.
They also depend to a lesser
extent on the interest margin that institutions can earn on new funds, assumed
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Federal Reserve Bank of St. Louis
-2-
in the analysis to be 150 basis points.
The remainder of this memorandum
reviews the basis for these very rough estimates.
Discussion
As shown in table 1, surveys conducted earlier this year indicate
that substantial proportions of savings balances at banks and thrifts alike
are in accounts with balances over $5,000--the highest minimum denomination
being contemplated by the DIDC for the new account.
These proportions range
from a low of 60 percent at commercial banks to as much as 72 percent at
mutual savings banks.
In addition, about $50 billion, or roughly one-sixth
of all passbook balances, are held in accounts between $2,500 and $5,000; as
a fraction of total assets this figure is about 2 percent.
Table 2 presents "break-even" flows of funds that institutions
would have to attract, under a variety of assumptions regarding interest rates
on the new account, in order to offset the cost increase associated with
each dollar shifting into the new account from passbook deposits; entries in
the table should thus be read as amounts of new inflows, in dollars, per
dollar shifted.
Underlying these calculations is an assumption that new
funds can be invested profitably at a spread of 150 basis points.'
As the
table indicates, if institutions were to pay 8 percent on the new account--a
rather low figure--commercial banks would need $1.83 in new inflows per dollar
shifting from passbooks in order to neutralize the loss in earnings; thrifts
would need slightly less--$1.67--because of the 25 basis point differential
1. While institutions can undoubtedly "earn" more than this by using the new
funds to pay down high-cost advances or to acquire relatively high-yielding
mortgages, they also will probably invest a significant amount of funds in
liquid assets at virtually no gain. On balance we believe that 150 basis
points is a reasonable average.
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Federal Reserve Bank of St. Louis
-3-
currently permitted on passbook accounts.
The table also illustrates how
quickly the break-even ratio rises with increases in the assumed rate on the
new account; for example, at 10 percent the corresponding figures are $3.17
and $3.00.
In table 3, the results of these calculations are converted into
aggregate inflows that the institutions would have to attract in order to
break even under the assumption that 50 percent of the "eligible" passbook
deposits were to shift; for this purpose "eligible" passbooks have been
defined as those over $5,000 or, in the lower panel, $2,500.1
It is clear
that, under the assumptions underlying table 3, substantial new inflows would
be required if the institutions were to break even on the new account.
For
example, if they paid 9 percent on a $5,000 account, depository institutions
would have to get $226 billion in new funds to offset the cost effects of
losing half their larger passbook balances to the new account; with a $2,500
minimum on the new account this figure would be about 27 percent larger.
The figures in table 3 can be adjusted relatively easily for changes
in the assumed percentage of shifts out of eligible passbooks.
If 25 percent
is thought to be an appropriate figure, for example, each entry should simply
be divided by 2; in the illustration above the required new money would be
$113 billion.
For a 75 percent shifting assumption each figure should be
multiplied by 1.5, producing a result of $339 billion in the case illustrated.
1. It should be noted that this definition of "eligible" passbooks understates
the actual amount that is at risk, quite possibly by a significant margin, in
as much as individuals can combine resources from several different assets to
meet whatever minimum requirement is imposed. This type of activity, though
probably significant, is impossible to quantify and hence has been excluded
from the analysis. In our view, the least unsatisfactory way to account for
the possibility of such pooling is to assume that a relatively large proportion, like 50 percent, of "eligible" accounts shifts.
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Federal Reserve Bank of St. Louis
-4-
All of the figures shown in table 3 are much larger than the new
inflows that the staff anticipates the new account will generate in the
first year of its existence.
While projections of this sort are admittedly
quite crude and subject to substantial error, the staff's current thinking is
that total small time and savings growth will be boosted by about $50 billion
(net of internal transfers to the new account) in the first 6 months after
the account is introduced; by the end of 1983 this figure might rise a bit
further to about $60 billion.'
Taking $60 billion as a best guess of the first year's new money
flow, it would appear that earnings for all depository institutions (before
taxes) would be about $2 to $2-1/4 billion lower than they otherwise would
have been, using the 50 percent shifting, 9 percent interest rate scenario
and assuming that the new account has a minimum denomination of $5,000 (see
middle panel of table 4, second line).
Of this amount, commercial banks would
stand to lose about $1 billion or a bit more, while S&Ls and MSBs would each
sustain industry-wide losses in the $1/2 billion range.
In proportion to
total assets, MSBs would experience the largest setback, reflecting a greater
presence of passbooks with high balances in their deposit account structure.
0
1. In arriving at this estimate,!the staff has assumed that money market
funds will be the primary source of transfers from outside the institutions.
Indeed, many money fund investors--for example, institutional investors, cash
management account holders, and the larger shareholders of general purpose
and broker/dealer funds (with accounts over $100,000)--will not find the new
account attractive, while inertia and preference for the money funds will
limit the degree of shifting by other money fund clients. Flows from outside
sources other than money funds--Treasury securities, corporate bonds, equities, and the like--probably would be quite mall. Of course, many of the
transfers that do take place in the first six months will represent portfolio
reallocations; hence somewhat less will flow in during the next six months.
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Federal Reserve Bank of St. Louis
-5-
A rough adjustment for the effects of setting the minimum denomination at $2,500 would be to increase the aggregate estimated loss by about $3/4
billion, about two-thirds of which would be sustained by commercial banks
(see table 5, middle panel, second line).
When compared to the increase in
"eligible" deposits, this additional loss seems large.
The reason for this
is that a reduction in the minimum denomination from $5,000 to $2,500 is
not likely to draw much additional new money to the depository institutions;
average balances at money funds are already well above $10,000, even for
household accounts, and not much is below $5,000.
The main effect of the
lower minimum is therefore to encourage more internal shifting and consequently
to increase interest costs.
Finally, tables 6 and 7 give some evidence about the number and
size of those institutions most vulnerable to the cost effects of passbook
transfers.
In table 6 insured savings and loans associations are arrayed by
their capital adequacy as measured by the net worth ratio (rows) and by the
proportion of total deposits held in the form of savings accounts (columns);
table 7 presents similar data for mutual savings banks.
Institutions that
are in the most precarious position are those in the upper right-hand portion
of each table; these are the institutions whose capital has already been
depleted and which have a relatively large potential loss to sustain from
passbook shifts.
As the tables indicate, S&Ls are in somewhat better shape,
relatively speaking, than MSBs.
Few institutions will face immediate problems,
but many will probably be affected seriously, especially MSBs.
As shown in
the last row of table 7, 225 MSBs, with nearly half the industry's assets,
have more than 30 percent of their deposits in passbook accounts.
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Federal Reserve Bank of St. Louis
-6-
Table 1
SIZE DISTRIBUTION OF PASSBOOK SAVINGS DEPOSITS
AT COMMERCIAL BANKS AND THRIFT INSTITUTIONS
Size category
1/
2/
3/
Commercial banks-- Savings and loans-- Mutual savings banks-- Total
Percent of Total Passbook Savings
--
less than 2,500
21.3
19.0
14.7
2,500 to 5,000
18.8
16.2
13.3
greater than 5,000
59.8
64.8
72.0
Passbook Savings in Billions of Dollars4/
less than 2,500
$33.7
$17.1
$6.9
57.7
2,500 to 5,000
29.8
14.6
6.2
50.6
greater than 5,000
94.6
58.5
33.7
186.8
158.1
90.2
46.8
295.1
Total
Percent of Total Assets
less than 2,500
1.9
2.5
4.0
2.2
2,500 to 5,000
1.7
2.1
3.6
2.0
greater than 5,000
5.5
8.6
19.5
7.2
9.2
13.2
27.1
11.4
Total
1.
2.
3.
4.
Based on a survey conducted by the American Bankers Association in February 1982.
Based on a survey conducted by the U.S. League of Savings Associations in Jaunary
1982.
Based on a survey conducted by the National Association of Mutual Savings Banks in
February 1982.
The dollar volume of savings deposits in each size category was derived by applying
the percentages from the top portion of the table to the passbook savings balances
in September 1982.
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
-7-
Table 2
BREAK-EVEN RATIO:
NEW DEPOSITS TO SHIFTED PASSBOOK SAVINGS DEPOSITS
REQUIRED FOR DEPOSITORY INSTITUTIONS TO BREAK EVEN!'
ON THE NEW MONEY MARKET DEPOSIT ACCOUNT
Commercial bank
break-even
ratio
Thrift Institution
break-even
ratio
8.0%
1.83
1.67
9.0
2.50
2.33
10.0
3.17
3.00
12.0
4.50
4.33
Interest rate
on the
New Account
1. The break-even ratios assume that new funds attracted can be
reinvested at a 150 basis point spread. The rate currently paid
on commercial bank passbook savings is 5.25 percent and the
thrift rate is 5.5 percent.
-8Table 3
DOLLAR VOLUME OF NEW FUNDS REQUIRED
TO BREAK EVEN IF 50 PERCENT OF ELIGIBLE
PASSBOOK SAVINGS DEPOSITS SHIFTY
Interest rate
on the
New Account
Commercial
Banks
Savings
and Loans
Mutual
Savings Banks
Total
$5,000 minimum denomination-------------8.0
86.6
48.8
28.1
163.5
9.0
118.3
68.2
39.3
225.8
10.0
149.9
87.8
50.6
288.3
12.0
212.9
126.6
73.0
412.5
$2,500 minimum denomination 8.0
113.8
61.0
33.3
208.1
9.0
155.5
85.2
46.5
287.2
10.0
197.2
109.7
59.9
366.8
12.0
279.9
158.3
86.4
524.6
1. The data presented in the table assumes that 50 percent of the eligible
passbook savings deposits (i.e. those with balances higher than the minimum
denomination on the new account) will shift. The data can be adjusted easily
to show the effects of alternative assumptions. For example, if only 25 percent of eligible passbook deposits shift, the above data should be divided
by 2; if 75 percent of the eligible passbook deposits are assumed to shift,
the above data should be multiplied by 1.5.
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Federal Reserve Bank of St. Louis
-9Table 4
ESTIMATED REDUCTION IN 1983 PRE-TAX EARNINGS UNDER
ALTERNATIVE SHIFTING AND INTEREST RATE ASSUMPTIONS1/
Shifting and
Interest Rate
Assumption
Commercial
Banks
Savings
and Loans
Mutual
Savings Banks
Total
Billions of Dollars
25 percent shifting
8
9
10
12
percent
percent
percent
percent
0.1
0.3
0.5
0.9
0.1
0.2
0.3
0.6
0.1
0.2
0.2
0.4
0.3
0.7
1.1
1.9
0.7
1.1
1.5
2.3
0.4
0.6
0.9
1.4
0.3
0.4
0.6
0.9
1.3
2.1
2.9
4.5
1.2
1.8
2.4
3.6
0.7
1.1
1.5
2.2
0.5
0.7
0.9
1.3
2.4
3.6
4.7
7.1
50 percent shifting
8
9
10
12
percent
percent
percent
percent
75 percent shifting
8
9
10
12
percent
percent
percent
percent
1. All calculations are based on an account with a $5,000 minimum denomination; interest rates refer to those paid on the new account, which are assumed
to be reflective of market conditions.
NOTE:
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Federal Reserve Bank of St. Louis
Detail may not add to totals because of rounding.
-10Table 5
ESTIMATED INCREASE IN 1983 PRE-TAX LOSSES
ASSUMING A $2,500 MINIMUM DENOMINATION
Shifting and
Interest Rate
Assumption
Commercial
Banks
Savings
and Loans
Mutual
Savings Banks
Total
Billions of Dollars
25 percent shifting
8
9
10
12
percent
percent
percent
percent
0.2
0.2
0.3
0.4
0.1
0.1
0.1
0.2
*
*
0.1
0.1
0.3
0.3
0.5
0.7
0.3
0.5
0.6
0.9
0.2
0.2
0.3
0.4
0.1
0.1
0.1
0.2
0.6
0.8
1.0
1.5
0.5
0.7
0.9
1.3
0.2
0.3
0.4
0.6
0.1
0.1
0.2
0.3
0.8
1.1
1.5
2.2
50 percent shifting
8
9
10
12
percent
percent
percent
percent
75 percent shifting
8
9
10
12
percent
percent
percent
percent
* - less than $50 million.
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Federal Reserve Bank of St. Louis
-11Table 6
NUMBER OF FSLIC-INSURED S&Ls AND TOTAL ASSETS
BY NET WORTH RATIO AND SAVINGS DEPOSITS
TO TOTAL DEPOSIT RATIO1 /
(June 1982)
Net Worth
Ratio
Ratio of Savings Deposits to Total Deposits
less
greater
than 10%
10 to 20
20 to 30
than 30%
Total
less than 0.0
22
0.9
34
7.8
14
2.1
6
1.7
76
12.5
0.0 to 1.0
54
3.9
43
9.7
25
11.2
12
1.2
134
26.0
1.0 to 2.0
95
9.9
138
42.8
46
17.4
13
1.5
292
71.6
2.0 to 3.0
129
18.7
270
95.6
95
27.1
27
3.5
521
144.9
3.0 to 4.0
117
12.6
346
123.3
114
27.7
23
3.8
600
167.4
4.0 to 5.0
107
11.5
303
83.3
102
15.7
39
4.2
551
114.7
198
9.0
609
82.4
342
34.5
188
12.5
1,337
138.5
722
66.4
1,743
445.0
738
135.8
308
28.3
3,511
675.5
greater
than 5.0
Total
1. The first entry in each cell is the number of FSLIC-insured S&Ls and the
second entry is the total assets for that group of institutions.
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Federal Reserve Bank of St. Louis
-12-Table 7
NUMBER OF FDIC-INSURED MUTUAL SAVINGS BANKS
AND TOTAL ASSETS DISTRIBUTED BY NET WORTH RATIO
AND SAVINGS DEPOSITS TO TOTAL DEPOSIT RATIO!'
(June 1982)
Net Worth
Ratio
Ratio of Savings Deposits to Total Deposits
less
greater
than 10%
10 to 20
20 to 30
30 to 40
than 40%
Total
3
5.7
5
6.0
8
11.7
9
8.5
3
3.7
1
14
12.5
11
11.9
14
4.5
1
0.2
26
16.7
23
37.9
23
12.9
4
1.6
52
52.7
17
7.4
35
11.8
7
1.0
59
20.2
1.0 to 2.02/
2.0 to 3.0
1
0.2
ar•
3.0 to 4.0
4.0 to 5.0
2
0.4
5.0 to 6.0
greater
than 6.0
Total
1
0.3
1
0.5
32
12.8
99
22.6
33
7.1
166
43.3
1
0.3
4
1.0
95
84.2
179
61.4
46
10.0
325
157.0
*--less than 50 million.
1. The first entry in each cell is the number of FDIC-insured MSBs and the
second entry is the total assets for that group of institutions.
2. There are no FDIC-insured MSB$ with a net worth ratio below 1.0 percent.
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Federal Reserve Bank of St. Louis
ITTEE
DEPOSITORY INSTITUTIONS DEREGULATION COMM
Washington. D.C. 20220
COMPTROLLER OF THE CURRENCY
FEDERAL RESERVE BOARD
FEDERAL DEPOSIT INSURANCE CORPORATION
NATIONAL CREDIT UNION ADMINISTRATION
FEDERAL HOME LOAN BANK BOARD
DEPARTMENT OF THE TREASURY
APPENDIX B
ions Deregulation Committee
MEMORANDUM TO: Depository Institut
Peter J. Wallison
General Counsel
FROM:
SUBJECT:
e a
Legal Authority of the DIDC to Authoriz
ion
sact
Tran
d
mite
Deposit Account with Unli
Capability
the Committee
At its meeting on November 15, 1982,
r accounts which, among
authorized depository institutions to offe
ceilings, limited transaction
other things, have no interest rate
gories of customers. In
features, and are available to all cate
indicated that at its next
taking this action, the Committee
a new account without
meeting it would consider authorizing
sactions permitted to the
limitations as to the number of tran
depositor.
e's authority to
This memorandum addresses the Committe
gories of depositors. It
establish such an account for all cate
ided the Committee with the
is my conclusion that Congress prov
authority to establish such an account.
DISCUSSION
Depository Institutions
Section 327 of the Garn-St Germain
Act") requires the Committee to
Act of 1982 ("Garn-St Germain
would be "directly
authorize a new deposit account that
" money market mutual funds,
equivalent to and competitive with
gn an account that meets this
leaving it to the Committee to desi
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Federal Reserve Bank of St. Louis
-2-
standard.
The language of Section 327 of the Act and its legis-
lative history make clear that Congress considered certain
characteristics to be essential for a truly competitive account
-- no interest rate ceiling, a minimum initial denomination that
does not exceed $5000, at least limited transaction features, and
availability to all customers -- but Congress did not restrict
the DIDC's authority to add other characteristics that would make
the account "directly equivalent to and competitive with" money
market mutual funds.
Thus, as was the case when the Committee voted to adopt a
limited transaction account at its last meeting, the features of
any account created by the DIDC under the mandate of Section 327
are ultimately defined by the DIDC's judgment as to what
characteristics are necessary or appropriate to assure that
depository institutions may compete effectively with money market
mutual funds for the saver's dollar.
The new account authorized by the Committee at its last
meeting included the following principal features:
no interest
rate ceilings, a minimum initial deposit requirement of not less
than $2500, up to six transfers from the account (no more than
three of which can be by check), and availability to all
customers.
The issue to be considered by the Committee at this meeting
is whether to authorize an additional account, with the same or
similar features, which would have no limitation on the number of
transactions that might be effected in the account.
In my view,
the Committee is authorized to Create such an account if, in its
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Federal Reserve Bank of St. Louis
_3_
judgment, an unlimited transaction feature would make such an
account "directly equivalent to and competitive with" money
market mutual funds.
The legislative history of Section 327 shows that Congress
considered transaction features to be important for any truly
competitive account, but was concerned that the reserve
requirements ordinarily associated with transaction accounts
would place depository institutions at a cost disadvantage in
relation to money market funds.
Thus, in suggesting to the DIDC
what characteristics of money market funds make them strong
competitors of depository institutions, the Senate Banking
Committee noted:
The bank regulatory agencies must take into
account in the design of the new instrument the fact
that the most competitive features of the money market
mutual funds are their low minimum balances, their high
liquidity in terms of withdrawals and their third party
drafts, and the absence of reserve requirements on such
funds (which gives them a cost advantage).
S. Rep. No. 97-536, 97th con. 2d Sess. 19 (1982).
To deal with the problem of reserve requirements,
Congress simply provided an exemption from such requirements
for accounts which do not permit more than six transfers,
only three of which may be by check.
But in so doing,
Congress did not restrict the authority of the DIDC to
create an account which, although subject to reserve
requirements, would be competitive with money market mutual
funds because it permitted more than six transactions.
In this connection, the DIDC might determine in its
discretion that 12 transfers would attract a substantial
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Federal Reserve Bank of St. Louis
-4number of customers who currently maintain accounts in money
nt
market funds, or that unlimited accessibility to the accou
by check -- a feature available to many money market fund
shareholders -- is appropriate to attract customers who
value this liquidity feature more highly than the rate of
interest paid on the account.
If it draws these conclusions, or others which reflect
to
its judgment as to the relevant characteristics necessary
with"
make an acount "directly equivalent to and competitive
money market mutual funds, the Committee is authorized to
create an account with unlimited transaction capabilities.
There is no requirement in the Garn-St Germain Act or
elsewhere that the new account with unlimited transaction
capabilities be made available to less than all categories
of customers.
Although Section 706 of the Act did not
of
extend eligibility for NOW accounts to'business customers
depository institutions, this is not a significant indicator
of Congressional intent with regard to the new account.
First, the legislative history of Section 327 makes quite
mers
clear that availability of the new account to all custo
e
was, in Congress' view, essential for a truly competitiv
account.
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Federal Reserve Bank of St. Louis
As stated by the Senate Banking Committee:
-5It is the direction of this Committee that
DIDC create a new deposit account for use by
l
regulated depository institutions (banks, mutua
ns)
iatio
savings banks, savings and loan assoc
which: (1) shall be available to all types of
depository institutions customers...
id.*
statement
To read section 706 as a limitation on this
unambiguous
would be to allow an inference to overcome an
ess that
declaration of intention 'by the Committee of Congr
on 327.
was principally responsible for drafting Secti
Act
Second, and perhaps more important, at the time the
the DIDC would
was passed, Congress could not know whether
nt available to
determine that an unlimited transaction accou
de depository
all customers was appropriate in order to provi
theme in
* Universal availability was a consistent
nt, as
accou
new
the
of
stics
cteri
describing the chara
of the
floor
the
on
quy
collo
wing
demonstrated by the follo
House:
w-up
[Mr. Stanton] Now, if I may, Mr. Chairman, follo
to
ble
eligi
those
rning
with one additional question conce
are
We
DIDC.
the
by
open this new account to be created
erships,
aware that anyone--private individuals, partn
, and so on
c
corporations, business organizations, publi units
There
nt.
accou
-- are eligible to open a money market fund
own a
can
who
to
as
are no limitations or restraints imposed
again
would
I
man,
MMMF account. In light of this, Mr. Chair
DIDC,
the
that
presume that it is the intent of the conferees
tly
is to be direc
in authorizing this new account which
market mutual funds
money
with
e
titiv
compe
equivalent to and
restrictions,
should recognize that there are not to be any
eligible to
limitations, or prohibitions imposed as to who is
hold this new account.
Mr. St Germain: Once again, the gentlemen is
t that the
precisely right. It is the conferees clear inten
eligible
is
who
to
as
s
DIDC is not to impose any limitation
y Ed.
(Dail
8436
H.
Rec.
Cong.
to open this new account. 128
Oct. 1, 1981).
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Federal Reserve Bank of St. Louis
•
-6institutions with an account "directly equivalent to and
competitive with" money market mutual funds.
If the DIDC
were to determine that this characteristic is not appropriate
for a competitive account, then a NOW account would continue
to be an attractive alternative for those who are eligible to
use it and place a high value on its unlimited transaction
features.
On the other hand, if the DIDC were to decide that
unlimited transaction features would significantly increase
the competitiveness of a new account created under the mandate of Section 327, it is authorized by Congress to add that
feature to the new account.
Under these circumstances, the
NOW account would lose its viability, but there is nothing in
the Act or. its legislative history to suggest that the supersession of the NOW account by a new competitive account
created under Section 327 of the Act was not fully consistent
with Congressional intent.
Accordingly, in my opinion the DIDC is free to authorize
an account under Section 327 of the Garn-St Germain Act which
is available to all customers and permits unlimited transactions by depositors.
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Federal Reserve Bank of St. Louis
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de;ligeee itteia41c'i bit-bi
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New Short-Term Account
1.
May be offered on either Time Open or' Certificate basis.
2.
Term - 7 day fixed maturity with one day grace period for
withdrawals. Automatic renewal permitted. Interest rate
set weekly. Depository institutions are also permitted to
offer the account on a 7 day notice basis.
Sa
3.
tsu;4A $20)°°D
fra.t
Eligibility - same as for savings account (including $150,000
maximum account size for corporations for Reg D and Q purposes).
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jAvi•-lv
Minimum Denomination - $20,000 initial and maintenance.
5'
6.
Additional Deposits - amounts deposited between maturity
dates are initialized at next maturity date (maximum 13
day hold in fixed maturity mode).
Withdrawal and Early Withdrawal Penalty -
withdrawal at maturity of amounts above the minimum
denomination without affecting the rate paid on the
remaining funds.
-
withdrawal at maturity of amounts that bring the
remaining balance below the minimum sets the rate
on the remaining funds to the savings account rate.
-
minimum early withdrawal penalty of loss ofA interest
4iiiml0A0a on higher of $20,000 or amount withdrawn (and
avif remaillj_ng balance
und
passbook rate on remairilin
1:70 t CAtit
1044
;
falls below minimum). "A
-
non-negotiable.
en-e.
"
tAA.TU.4141.4.44,Ant,
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7.
Permitted Means of Withdrawal - include in person, by mail,
by telephone instruction, by standing order.
8.
Impermissible Means of Withdrawal - include by check and by
automatic transfer triggered by balance in this or another
account. (Additional deposits to the account triggered by
balance in this or another account are also prohibited.)
411
"
,24
44
Loans to meet the minimum denomination and loans secured
by the account are prohibited. There is the additional
requirement that the overdraft rate on transaction accounts
to which the balances in the proposed account are transferred at maturity may not be lower than the rate on such
overdrafts for depositors that do not hold the proposed
account.
S
er,/9.4.12.
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Federal Reserve Bank of St. Louis
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Reserve Requirements - same as for time deposits.
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12.
Premiums should be prohibited or limited to two per depositor
per year (in contrast to the currept two per account per
year). oi elteA4
, / -gekt Ma. 4?... CeZay.
13.
Effective Date of September 1, 1982.
&tome.
e
Rate Ceiling of 50 basis points below the rate on the 91-day
b.p."
`714-e-IA:r ct
certificate (this implies a thrift differential) or 50
below 90-day bill rate (this implies no differential).
• et-L.2%4XThe 50 b.p. is partially offset ,by the difference between
444/11.
quarterly compounding on the 91-day account and weekly,
daily, or continuous compounding on the proposed account.
The account would no longer be subject to a rate ceiling
as of April 1, 1983.
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Federal Reserve Bank of St. Louis
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/204 Aft., .
(4
Proposed Short-Term Account
II.
Rate:
° No ceiling or a ceiling with
a differential in favor of
thrifts (see attachment).
Denomination:
° Minimum daily balance of $20,000.
If the average balance falls
below the required minimum, the
rate is reduced to the passbook
rate.
III.
Maturity:
O Range of 7 to 31 days.
o The form can be either an enforced
notice or a specific term.
The length of the grace period
before automatic rollover is one
business day.
IV.
Provisions Regarding
Additional Deposits:
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fr
Federal Reserve Bank of St. Louis
O
New deposits permitted at any time
but must be held in the account
for the full notice or maturity
period.
No sweeps into this new account
from another account triggered by
the level of the balance in any
M4s1.
I
_
V.
Notice and Withdrawal
Provisions:
2
-
0 No withdrawal by third-party draft
drawn directly on this new account.
o No sweeps from this account to
another account automatically
triggered by the level of the
balance in any account.
o The permissible means of delivering
notice are: telephone or other
telecommunication, mail or messenger,
in person, and standing order.
O The permissible forms of payment are:
check or cash to depositor, cash, draft
or electronic transfer by institution
to third parties, and transfer to any
other account held by depositor.
VI.
Minimum Early Withdrawal
Penalty:
VII.
Miscellaneous Restrictions: ° Prohibit loans to depositors to meet
required balance.
o Loss of interest that has been earned
on the amount withdrawn back to the
previous notice or maturity date, but
no less than the amount that would have
been earned for one-half the period.
o Prohibit the use of this account as
collateral for a loan.
o The overdraft rate on transaction
accounts to which the balances
in the new account are transferred
may not be lower than the rate
on such overdrafts for depositors
that do not hold the proposed
account.
VIII. Negotiability:
° Non-negotiable.
IX.
Eligibility:
° No restrictions.
X.
Effective Date:
° September 1, 1982.
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Federal Reserve Bank of St. Louis
w
,
ATTACHMENT
(for an account with an indexed ceiling
and a differential)
I.a) Interest Rate
Ceiling and
Differential:
o 91-day Treasury Bill rate, auction average,
bank discount basis for thrift institutions
and 25 basis points less for commercial
banks.
.
Ceiling rate and differential eliminated
on May 1, 1983 and suspended whenever the
91-day Treasury bill rate has been 9% or
below for four consecutive Treasury bill
auctions.
o Differential applies to all types of accounts,
including IRA/Keogh and governmental unit
deposits.
o Adjustment of the rate permitted at the
discretion of the institution, but not
less frequently than the maximum maturity
or notice authorized for the account.
I.b) Compounding:
° Permitted without restriction.
I.c) Premiums:
° Limited to two per account holder per year.
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Federal Reserve Bank of St. Louis
DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE
wasitingtori. I).C. 20220
COMPTROLLER OF THE CURRENCY
FEDERAL RESERVE BOARD
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
FEDERAL DEPOSIT INSURANCE CORPORATION
NATIONAL CREDIT UNION ADMINISTRATION
FEDERAL HOME LOAN BANK BOARD
DEPARTMENT OF THE TREASURY
AGENDA
DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE
June 29, 1982
3:30 p.m.
Cash Room
Open Meeting
1.
Consideration of Alternative Short-Term Deposit Accounts.
2.
Consideration of Rules for Establishment of Interest
Rates on Accounts Not Subject to Interest Rate LimitatiOns.\
MONEY MAriET ACCOUNT
Minimum Balance:
$20,000 as of 9/1/82
Reductions in minimum balance shall he accoplished on
a phased-in schedule after enactment of legislation
containing the provisions of Title I of S.1720. Subsequent to the enactrent of such legislation the minimum balance shall be $15,000 as of 90 days after. enactrent, 10,000 as of 120 days after enactrent, and 5,000
as of 150 days after enactment.
Maturity:
None
Interest Rate:
Daily interest may be paid lased on the interest rate
of the most recent 91-day Treasury bill auction and
may be compounded daily for thrift institutions. The
interest rate allowable for ccurrercial banks shall be
the 91-day Treasury bill rate less 25 basis points
with daily compounding allowed. The differential Shall
be removed one year subsequent to the
enactment of
legislation containing the provisions of Title I of
S.1720.
Maintenance of Balance:
No interest Shall he paid on the account if it
below the minimum specified level.
•sr
drops
•iso
Transfers:
A maximum of three drafts or pre-authorized transfers
per month. Dollar limitations to be specified by inindividual associations.
Withdrawal Penalty:
None
Reserve Requirement:
None (3% for nonpersonal)
Additional Deposits:
No limit
Eligibility:
All depositors
Effective Date:
9/1/82
Other:
NO loopholes, NO premiums
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Federal Reserve Bank of St. Louis
FD.T. C
6/29/82
MONEY MARKET ACCOUNT
Minimum Balance:
$20,000
$15,000
$10,000
$ 5,000
0
$
as
as
as
as
as
of
of
of
of
of
10/1/82
1/1/83
4/1/83
7/1/83
10/1/83
Reductions in minimum balance after
10/1/82 subject to delay or rescission
depending on experience with deposit
flows and actions by Congress to
deregulate thrift asset powers
Maturity:
None (14-day reservation notice as with
present passbook accounts)
Interest Rate:
No ceiling (interest at passbook rate
if balance drops below minimum)
Withdrawals:
No limit except no sweeps and only
three third-party drafts per month
(mandatory $25 charge per item for
each draft beyond three). Telephone
transfers, etc., permissible
Withdrawal Penalty:
None
Reserve Requirement:
None (3% for nonpersonal)
Additional Deposits:
No limit
Eligibility:
All depositors
Effective Date:
10/1/82
Other:
No loans to meet initial or maintenance
balances
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Federal Reserve Bank of St. Louis
Agenda Item 2 -- Establishment of Interest Rates on Accounts Not Subject
to Ceilings
--In response to inquiries from depository institutions, the
Committee is requested to determine the manner in which interest
rates may be established or adjusted on deposit categories
exempt from rate ceilings, i.e. the 3-1/2 year or 18 month
IRA deposit.
--Under existing rules of the agencres, the deposit contract
must state explicitly the specified rate or procedure for
determining the rate to be paid.
--Depository institutions indicate that the current rule reduces
their flexibility in adjusting rates on outstanding deposits
not subject to rate ceilings. For example, they wish to retain
the discretion to pay a bonus from time to time on outstanding
balances or adjust the rate to meet competition.
--The memorandum proposes three options for the Committee's
consideration:
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Federal Reserve Bank of St. Louis
--Give institutions complete discretion in setting interest
rates payable on such accounts. This option provides
the maximum degree of discretion to institutions and
would be most consistent with deregulation. This option
was favored previously by Pratt, Isaac and Callahan.
--Require institutions to specify in the deposit contract
a minimum rate or the means of determining the rate,
beyond which discretionary bonuses would be permitted.
This option enables consumers to determine with certainty
the minimum amount of interest they will receive and
provide the depository institution with discretion to
meet competition.
--Require institutions to specify in the deposit contract
a minimum rate or the means of determining the rate,
beyond which no discretionary bonuses would be permitted.
In addition, any variable rate must be based on a predetermined
schedule or on an index over which the institution has
no control or discretion. This option is most consistent
with assuring that depositors will not be mislead into
believing that the depositor will receive a bonus when
the institution does not intend to pay one. It also
assures that institutions will not be "forced" by depositors
to pay higher rates on outstanding balances.
2
L
not subject
Please Indicate Your Vote -- For deposit categories
tutions:
insti
to Federal interest rate limitations, depository
/-7
1.
/7
2.
/7
3.
May retain complete discretion in establishing the
icted
interest rate and amount payable and are not restr
t
enden
indep
for
d
to using only rate indexes establishe
21
ol.
contr
their
business purposes or indexes not under
t payMust establish a minimum interest rate or amoun
a
in
bonus
a
able but may reserve the right to pay
n's
tutio
insti
itory
manner determined solely in the depos
discretion.
interest
Must specify in the deposit contract a specific
est
inter
g
rate or a verifiable standard for determinin
est
inter
rates or bonus amounts. In addition, the
on
rate on a variable rate time deposit must be based
which
a predetermined schedule or on an index over
ol or
the depository institution does not have contr
discretion.
DIDC Member Signature
Attachment:
1/
Staff Memorandum
terms such
Under state laws governing contracts, material
be stated
to
have
would
as the rate of interest generally
en the
betwe
act
contr
and agreed upon in order to create a
n.
tutio
depositor and the depository insti
https://fraser.stlouisfed.org
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Chart 1
SPREADS BETWEEN YIELDS ON MMMFs
AND A HYPOTHETICAL SHORT-TERM DEPOSIT'
,
Percent
8
MMTIF Rate less Deposit Rate
(Weekly data)
6
4
2
2
4
Percent
4
MMMF Rate less Deposit
Rate (Quarterly average
data)
—3
OEMS
2
• 1
OMEN
1
2
1/
1982
1981
1980
1979
Deposit rate is the fully effective yield corresponding to a ceiling equal
to the 91-day Treasury bill rate, auction average discount basis.
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
PROPOSED INVESTMENT ACCOUNT
Minimum Initial Deposit
$25,000
Minimum Balance Maintained
$15,000
Maturity
7-31 day notice and/or maturity
1-day grace period
Interest Rate
No Ceiling
(or)
Ceiling: 91 day T-bill for
thrifts
Differential: -25 basis
points for banks
Withdrawals
No limit on dollar size
No withdrawals by draft
Withdrawal Penalty
Loss of interest earned
Reserve Requirement
None (3% for nonpersonal)
Additional Deposits
No limit
Eligibility
All depositors
Other
No loopholes
DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE
Washington, D.C. 20220
. PRESS RELEASE
October 18, 1982
Money Market Deposit Account
In the attached Federal Register notice the Depository
Institutions Deregulation Committee (DIDC) announces a 15 day
public comment period on the new money market deposit account.
The Garn-St Germain Depository Institutions Act of 1982
directs the DIDC to authorize a new Federally insured account to
be offered by commercial banks, savings and loan associations
and mutual savings banks that is directly competitive with money
market mutual funds.
f
The Garn-St Germain Act requires that this account: (1) have
no limitation on the maximum rate of interest payable; (2) be
in effect no later than 60 days from enactment of the GarnSt Germain Act; (3) not be subject to transaction account reserve
requirements (as defined by the Board of Governors of the Federal
Reserve System, as of August 1, 1982) even though no minimum
maturity is required, and even though up to three preauthorized
or automatic transfers plus three third-party transfers are
permitted per month; and (4) be "directly equivalent to and competitive with money market mutual funds registered with the
Securities and Exchange Commission under the Investment Company
Act of 1940."
The Committee is requesting comments on features not
specifically set forth in the Garn-St Germain Act; e.g., minimum
initial denomination, maintenance balance, denomination of withdrawals, whether institutions should be required to reserve the
right to require seven days' notice of withdrawal, and whether
loans should be permitted to meet the minimum denomination
requirement.
Attachment
COMPTROLLER OF THE CURRENCY
Digitized for FEDERAL
FRASER RESERVE BOARD
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Federal Reserve Bank of St. Louis
FEDERAL DEPOSIT INSURANCE CORPORATION
NATIONAL CREDIT UNION ADMINISTRATION
FEDERAL HOME LOAN BANK BOARD
DEPARTMENT OF THE TREASURY
DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE
12 CFR Part 1204
[Docket No. D-0026]
Money Market Deposit Account
AGENCY:
Depository Institutions Deregulation Committee.
ACTION:
Proposed rulemaking.
SUMMARY:
The Depository Institutions Deregulation Committee
("Committee") is required by the Garn-St Germain Depository
Institutions Act of 1982 ("Garn-St Germain Act") to authorize a
new insured deposit account, available to all depositors, to
compete with money market mutual funds.
The Garn-St Germain Act
requires that this account: (1) have no limitation on the maximum
rate of interest payable; (2) be in effect no later than 60
days from enactment of the Garn-St Germain Act; (3) not be
subject to transaction account reserve requirements (as defined
by the Board of Governors of the Federal Reserve System, as of
August 1, 1982) even though no minimum maturity is required, and
even though up to three preauthorized or automatic transfers
plus three third-party transfers are permitted per month; and
(4) be "directly equivalent to and competitive with money market
mutual funds registered with the Securities and Exchange Commission
under the Investment Company Act of 1940." No minimum denomination
was set forth in the Garn-St Germain Act, although the Conference
Report suggested it be no more than $5000.
The Committee is
requesting comments on features not specifically set forth in
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Federal Reserve Bank of St. Louis
- 2 the Garn-St Germain Act; e.g., minimum initial denomination,
maintenance balance, denomination of withdrawals, whether
institutions should be required to reserve the right to require
seven days' notice of withdrawal, and whether loans should be
permitted to meet the minimum denomination requirement.
DATE:
Comments must be received by (15 days from the date of
publication).
ADDRESS:
Interested parties are invited to submit written data,
views, or arguments concerning the proposed rules to Gordon
Eastburn, Acting Executive Secretary, Depository Institutions
Deregulation Committee, Room 1058, Department of the Treasury,
15th Street and Pennsylvania Avenue, N.W., Washington, D.C. 20220.
All material submitted should include the Docket Number D-0026 and
will be available for
as provided in
inspection
and copying upon request, except
1202.5 of the Committee's Rules Regarding Availa-
bility of Information (12 CFR
1202.5).
FOR FURTHER INFORMATION CONTACT:
Alan Priest, Attorney, Office of
the Comptroller of the Currency (202/447-1880); Joseph DiNuzzo,
Attorney, Federal Deposit Insurance Corporation (202/389-4147);
Rebecca Laird, Senior Associate General Counsel, Federal Home
Loan Bank Board (202/377-6446); Paul S. Pilecki, Senior Attorney,
Board of Governors of the Federal Reserve System (202/452-3281);
or Elaine Boutilier, Attorney-Adviser, Treasury Department
(202/566-8737).
LIST OF SUBJECTS IN 12 CFR Part 1204:
SUPPLEMENTARY INFORMATION:
Banks, banking.
The Depository Institutions Deregula-
tion Act of 1980 (Title II of P.L. 96-221; 12 U.S.C. §§ 3501 et
seq.) ("DIDA") was enacted to provide for the orderly phaseout
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Federal Reserve Bank of St. Louis
- 3 and ultimate elimination of the limitations on the maximum rates
of interest and dividends that may be paid on deposit accounts
by depository institutions as rapidly as economic conditions
warrant.
Under DIDA, the Committee is authorized to phase out
interest rate ceilings by any one of a number of methods including the creation of new account categories not subject to interest
rate limitations or with interest rate ceilings set at market
rates of interest.
Section 327 of the Garn-St Germain Act specifically requires
the Committee to authorize a new insured deposit account, which
"shall be directly equivalent to and competitive with money
market funds." The Garn-St Germain Act prohibits any limitation
on the maximum rate of interest payable on the new account.
The
Garn-St Germain Act also states that the account shall not be
subject to reserve requirements on transaction accounts even though
no minimum maturity is required and even though up to three
preauthorized or automatic transfers and three transfers to
third parties are permitted.
The Committee has solicited public comment on short-term
deposits previously.
After the June 25, 1981 meeting, the
Committee requested comments on the desirability of authorizing
a new deposit instrument with characteristics similar to money
market mutual funds, although the Committee did not put forth a
specific proposal at that time.
1981).
46 Fed. Reg. 36712 (July 15,
After the September 22, 1981 meeting, the Committee
requested comments'on three specific proposals for short-term
time deposits.
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Federal Reserve Bank of St. Louis
46 Fed. Reg. 50804 (October 15, 1981).
- 4 One of the short-term accounts proposed in the October 15,
1981 notice was a $5000-minimum denomination NOW account, which
is similar in concept to the account set forth in the Garn-St
Germain Act.
Consequently, the Committee has Teceived comments
on an instrument that possesses essentially all of the features
of the congressionally-mandated account.
Certain features are
mandated by the Garn-St Germain Act and cannot be changed.
However, some features were left by Congress to the Committee's
discretion.
Accordingly, comment is requested only on features
not specified in the Act.
Public comment is being requested in
view of the interest expressed by competitors of depository
institutions for an opportunity to comment on the features the
Committee may designate.
The new account proposed by the Committee would have the
following features as required by the Garn-St Germain Act and its
legislative history:
(1) no minimum maturity; (2) no interest rate
ceiling; (3) an initial minimum denomination no greater than $5000;
(4) allow up to three preauthorized or automatic transfers and three
other third-party payments (including drafts) per month without being subject to transaction account reserve requirements; (5) available to all depositors; and (6) insured by the FDIC or FSLIC.
The
Committee is considering whether or not to impose a minimum initial denomination and/or maintenance balance of less than $5000
and requests comments on this feature.
In connection with the
minimum balance, the Committee may impose an interest rate limitation (such as the NOW-account rate) on accounts which fall below
the minimum maintenance balance, and prohibit loans to meet the
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Federal Reserve Bank of St. Louis
- 5 minimum initial denomination.
The account will permit limited
withdrawals to be made, and certain requirements are being considered by the Committee in regard to these withdrawals, e.g.
(1) a minimum denomination on drafts; (2) unlimited withdrawals
by the depositor by mail, telephone, messenger or in person,
except that telephone transfers to third parties or another deposit account of the depositor would be regarded as preauthorized
transfers; (3) require an institution to monitor on an ex post
basis to determine compliance with the withdrawal limitations;
and (4) require an institution to reserve the right to require
seven days' notice prior to withdrawal.
Although the maximum
rate of interest paid on the account may not be limited, the
Committee is concerned that institutions will circumvent the requirements on other time deposits by guaranteeing a rate of interest for a substantial time period, therefore the Committee is
considering a limitation on the time period for which an institution may guarantee an interest rate.
The Committee also may
restrict overdraft credit arrangements offered in connection
with this new account.
The Committee requests comments on the new account as proposed above, and particularly requests comments on the following
issues:
(a)
What should be the minimum initial denomination?
(The Conference Report suggests that it be no more
than $5000, and interest has been expressed in a
$2500 minimum denomination.)
(b)
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Federal Reserve Bank of St. Louis
Should the maintenance balance differ from the
initial denomination?
If so, what should it be?
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Federal Reserve Bank of St. Louis
- 6 What would be the possible consequences of having
no maintenance balance?
Would it be operationally
easier to have the maintenance balance the same as
the minimum initial denomination?
(c)
Should an institution be required to pay a lower
rate of interest, such as the NOW-account rate, for
accounts which fall below the maintenance balance?
(d)
Should a minimum denomination be set for drafts?
If so, should it be $100, $500, or some other
amount?
(e)
Should depository institutions be required to
reserve the right to require seven days' (or some
other time span) notice prior to withdrawal?
(f)
Should loans be permitted to meet the minimum
initial denomination?
(g)
Should any restrictions be placed on additional
deposits?
Should sweeps from other accounts be
permitted?
(h)
Should the time period for which an institution can guarantee an interest rate be limited?
If so, what should it be?
Or should the account
have a maximum maturity?
(i)
How should the limitation on the number of withdrawals per month be enforced?
For example, should
the institution be required to monitor accounLs on an
ex post basis to determine compliance?
How should
"month" be defined for purposes of this limitation?
Should the date of payment by the institution or the
date written on the draft control for purposes of compliance with the three drafts per month limitation?
(j)
Should any restrictions be placed on overdraft
credit arrangements offered in connection with
this account?
(k)
Should unlimited withdrawals by mail, telephone, messenger, or in person be permitted to the depositor?
(The staff believes that telephone transfers should
be regarded as preauthorized transfers if the transfer
is to a third person or to another deposit account of
the same depositor.)
(1)
Is thirty days (or some shorter or longer period)
adequate lead time for depository institutions to
implement operational changes for this account?
The issues set forth above are not intended to limit the
area of comment.
The Committee requests comments on those
questions and on any other aspect of the account which the
public
wishes to address, particularly with respect to characterist
ics
that would make this account "directly equivalent to and compet
itive with" money market funds.
The Committee has considered the potential effect on small
entities of the proposal to establish a new
osit instrument,
as required by the Regulatory Flexibility Act (5 U.S.C.
§ 603 et
seq.).
In this regard, the Committee's action, in and of itself
,
would not impose any new reporting or recordkeeping requirements
.
Consistent with the Committee's statutory mandate to elimin
ate
deposit interest rate ceilings, this proposal would enable
all
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depository institutions to compete more effectively in the marketplace for short-term funds.
Depositors generally should benefit
from the Committee's proposal, since the new instrument would
provide them with another investment alternative that pays a
market rate of return.
If low-yielding deposits shift into
the new account, depository institutions might experience increased
costs as a result of this action.
However, their competitive
position vis-a-vis nondepository competitors would be enhanced
by their ability to offer a competitive short-term instrument
at market rates.
The new funds attracted by the new instrument
(or the retention of deposits that might otherwise have left the
institution) could be invested at a positive spread and would
therefore at least partially offset the higher costs associated
with the shifting of low-yielding accounts.
The Committee is asking for comments for a 15-day period.
This short comment period is made necessary by the fact that the
Garn-St Germain Act requires the new account to be available within 60 days of enactment.
Because the Committee desires to give
the depository institutions adequate time to prepare and market
the account, time for comment must be limited to allow time for
compilation and consideration of the comments, a Committee vote
on the features and publication of the final rule.
Therefore,
comments on this account should be submitted promptly.
, By Order of the Committee, October 15, 1982.
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Federal Reserve Bank of St. Louis
F
Gordon Eastburn
Acting Executive Secretary
do —
410
DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE
COMPTROLLER OF THE CURRENCY
FEDERAL RESERVE BOARD
U.S. TREASURY DEPARTMENT
NATIONAL CREDIT UNION ADMINISTRATION
DATE:
TO:
FEDERAL HOME LOAN BANK BOARD
FEDERAL DEPOSIT INSURANCE CORPORATION
Depository Institutions
Deregulation Committee
SUBJECT:
June 18, 1982
Design of Short-Term
Deposit Instrument
FROM:
DIDC Staff*
At its March 22 meeting, the Committee adopted a long-run strategy
for deregulating deposit rate ceilings.
At the same time, the Committee
expressed its continuing concern about the ability of depository institutions
to compete with money market mutual funds (MMMFs) and, particularly, about
the weakness of deposit flows to thrift institutions.
In view of this con-
cern, the Committee adopted the 91-day, $7,500 minimum time deposit with a 25
basis point differential for thrifts.
The Committee also directed the staff
to continue efforts to design a shorter-term instrument to enhance the ability
of depository institutions to compete with MMMFs.
This memorandum reviews
the basic issues involved in designing such an instrument, including monetary
policy considerations, and then discusses in more detail the possible features
that the Committee may wish to consider.1
I.
The Fundamental Issues
Since June 1981, when the Committee first solicited public comment
on this matter, total assets of MMMFs have grown from $127 billion to $203
This memorandum was prepared primarily by the staff of the Federal Reserve
*
Board (Messrs. Ettin, Schwartz, McKelvey, and Ms. Glassman).
1/ These issues have been discussed in greater detail in previous staff memoranda; see particularly, "Short-Term Instrument Proposals," March 15, 1982.
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Federal Reserve Bank of St. Louis
4
•
-2-
household investors).
billion (roughly three-fifths of which is held by
During
savings deposits increased
the same period, total small-denomination time and
ts, however, declined from
from $1,171 billion to $1,242 billion; savings deposi
$365 billion to $347 billion.
In order to maintain their customer base, many
a market rate of interest on
banks and thrifts are attempting to pay depositors
, but unless they are
short-term funds through a variety of sweep arrangements
tory institutions will conable to offer a short-term instrument directly deposi
arrangements will continue to
tinue to lose savings deposits to MMMFs, and sweep
proliferate.
term instrument
The Committee's efforts to design a competitive short.
may be hampered by the consideration of two issues
One of these is that a new
ts, thereby raising instishort-term account will draw funds from savings accoun
tutions' costs.
t market rates
As indicated previously to the Committee, at curren
short-term market rate account
each dollar shifted from a savings account to a
of external funds in order to
would require the institutions to attract $3 to $4
break even.'
e staff, is the
The second issue, of concern to the Federal Reserv
ry policy.
effect that any new instrument would have on moneta
The Federal
between transaction and
Reserve regards the maintenance of a distinction
monetary policy.
other accounts as essential to its conduct of
If the new
features, it would further blur
account were to blend transactions and savings
difficult to define and control
the distinctions among accounts, making it more
new account were subject to
the money supply; this would be true even if the
analysis and related issues can be
1/ An extensive discussion of break-even
"Short-Term Instrument Proposals,"
found in the previously cited staff memorandum,
March 15, 1982, pp. 14-19.
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Federal Reserve Bank of St. Louis
-3-
transaction account reserve requirements.
On the other hand, regardless of
, the conduct
any restrictions which the Committee may impose on this account
nondepository instituof monetary policy will continue to be complicated as
tions and savings
tions provide savers with instruments that combine transac
features.
ent
Currently, under the Board's Regulation D, any deposit instrum
or any account
with a maturity or required notice period of less than 14 days,
subject to transaction
that can be used ordinarily to pay third parties, is
account reserve requirements.'
The Board's statutory authority would permit
time account, so
it to shorten the 14-day maturity break to accommodate a new
would make the
long as that account had limited transaction features; this
account eligible for time deposit reserve requirements.2
The Committee is
instrument which can
therefore faced with the difficult task of designing an
MMMF shares,
effectively compete with other market rate instruments, such as
the extent practicable,
but which minimizes savings deposit outflows and, to
rations.
takes into account the Federal Reserve's monetary policy conside
tion reserve
1/ In particular, the Federal Reserve Board now imposes transac
period of
notice
d
require
or
y
requirements on (1) any account with a maturit
demand
all
drawn-be
can
less than 14 days, (2) any account on which a draft
auto(3)
s,"
deposit
le
checkab
deposits, NOWs, share drafts, and similar "other
monthly
three
than
more
which
matic transfer accounts, and (4) any account on
Reserve has
preauthorized or telephone transfers can be made. The Federal
to MMMFs that
ments
also asked Congress for authority to extend reserve require
s.
serve as the functional equivalent of transactions account
sferable time
2/ Under the Monetary Control Act, savings deposits and nontran
deposits
time
rable
transfe
deposits held by persons are not reservable, while
a
reserve
to
subject
and time deposits held by other than natural persons are
on
ment
require
reserve
requirement of zero to 9 percent; the Board's current
zero
a
Board adopted
such time deposits generally is 3 percent. Even if the
would still be
banks
member
,
account
new
any
on
ment
require
percent reserve
on the aggregate of
subject to a small (and declining) reserve requirement
n period of reserve
their time and savings deposits during the phase-dow
requirements under the Monetary Control Act.
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Federal Reserve Bank of St. Louis
-4-
II.
Design of the Instrument
that a
The balance of this memorandum discusses the characteristics
t the above consideranew short-term instrument might have, taking into accoun
tions.
ty, and interest
The key variables are the minimum denomination, maturi
for the Committee's considrate; a number of other features are also presented
eration.
tions placed
In addition, the Committee should be aware that limita
monetary policy will also
on the new instrument to reduce costs and facilitate
result in operational complexities for institutions.
Attachment A summarizes
the decision variables for the new instrument.
Minimum Initial Deposit.
A large minimum balance requirement would
savings accounts, but would
minimize the potential for internal shifting from
make the new instrument less competitive as well.'
The staff believes that
$10,000 to $25,000 would be
an initial minimum denomination on the order of
shifts.
likely to prevent a large amount of internal deposit
In determining
also wish to keep in mind:
the minimum initial deposit, the Committee may
the minimum deposit requirement
(1) the possibility of future adjustments in
shifts, and (2) the desirability
as information develops about internal deposit
accounts to MMMFs and retail
of reducing pressure on institutions to offer sweep
based on smaller denominations.
repurchase agreements, many of which have been
are in accounts with high
1/ A substantial proportion of savings deposits
75 percent of savings
that
ted
balances. In December 1981, the FDIC indica
41 percent were in excess
and
$5,000
account balances at MSBs were in excess of
1982 survey conducted by
ry
Februa
a
of $15,000. These results were similar to
1980, the FHLBB
August
In
Banks.
s
the National Association of Mutual Saving
ts at S&Ls
accoun
s
saving
r
regula
indicated that 70 percent of the funds in
t were over
percen
45
and
$5,000
of
were in accounts with balances in excess
in March
ation
s
Associ
an
Banker
Americ
$10,000. A small sample survey by the
s
deposit
saving
of
t
60
percen
about
1982 indicated that at commercial banks
0.
$10,00
of
excess
in
were
t
percen
balances were in excess of $5,000 and 38
es
balanc
NOW
total
of
ths
three-four
The latter survey also indicated that almost
0.
$10,00
of
excess
in
were
were in excess of $5,000 and almost half
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Federal Reserve Bank of St. Louis
-5-
ce.
:Minimum Subsequent or Maintenance Balan
To accommodate occasional
der establishing a minimum mainwithdrawals, the Committee may wish to consi
deposit requirement.
tenance balance lower than the initial
MMMFs typically
below the initial balance requirement.
permit shareholders to maintain balances
ument, however, would be tantamount to
A similar provision for the new instr
t for those depositors in a position to
reducing the initial balance requiremen
anging assets.
meet it by borrowing or temporarily rearr
Moreover, considera-
um balance requirements for other
tions of simplicity and consistency with minim
e balance on the new instrument be
deposit accounts suggest that the maintenanc
the same as the initial minimum.
have reduced the balance in
In order to determine if withdrawals
minimum, the Committee must specify the
the proposed account below the required
maintained. The Committee could require
period over which the minimum is to be
as an average over some interval (e.g., a
that the minimum balance be maintained
accounts failing to meet this requireweek) or that it be met at all times. For
stipulate that they be closed or,
ment, however defined, the Committee could
ning balance not exceed the applicalternatively, that the rate paid on the remai
tutions would, of course, be free to impose
able savings deposit ceiling. Insti
more restrictive provisions.
Maturity.
place a high
To the extent that savings account holders
new account to have a fixed maturity
value on liquidity, requiring the proposed
ing
it were short, might limit internal shift
or required notice period, even if
from savings accounts.
might be
The resultant illiquidity compared to MMMFs
ance of the deposit instrument.
offset by the convenience and insur
Moreover,
ates that the shorter the maturity the greater
the Federal Reserve staff indic
Therefore, the Committee staff suggests two
are its monetary policy concerns.
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Federal Reserve Bank of St. Louis
-6(2) in order to provide flexibility to
options: -(1) a 7-day instrument, or
een
of an instrument with any maturity betw
issuing institutions, authorization
90 days.1
7 and 31 days, or perhaps between 7 and
itutions could be permitted
Whatever the maturity selected, the inst
(1) a time deposit open account (which
to offer the account in two versions:
al
rced notice requirement before withdraw
has no specific maturity) with an enfo
, the
a time deposit with specific maturity
equal to the period selected, or (2)
e
rolled over (after perhaps a 1-day grac
balance of which would be automatically
ruct otherwise.
period) if the depositor did not inst
Discussions with deposi-
of opinion regarding the operational
tory institutions suggest a wide range
unt; some can handle such an account
difficulties of a short-term notice acco
do so only at great inconvenience.
with little difficulty, while others can
greater flexibility to individual instiAuthorizing both versions would permit
tutions.
Rate.
of and against imposition
There are several arguments in favor
of a rate ceiling on any new deposit.
The major arguments for a ceilingless
account are:
(1)
of the account;
a ceiling might limit the competitiveness
(2)
all deposit rate
one objective of the DIDC is to remove
ceilings by 1986;
(3)
institutions do not
the available evidence suggests that
price irrationally;
opposed to a minimum maturity) is nescessary
1/ A specific or maximum maturity (as
to or
deregulate all ceilings for deposits equal
if the Committee does not wish to
gua
dere
ed
tion. In March, the Committee adopt
above the proposed minimum denomina
sits
depo
which would effectively be superseded for
lation schedule based on maturity
mum
the new account unless a specific or maxi
above the minimum denomination on
maturity were adopted.
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Federal Reserve Bank of St. Louis
-7-
a
as compared to an account with a market-indexed ceiling,
l
interna
ate
ceilingless account will not further exacerb
shifts from savings accounts, since the savings account
ceiling is so far below the market rate;
(4)
there is evidence that, in the market for competitive shortrate
term instruments, virtually all issuers pay the ceiling
less
pay
and if there were no ceiling some institutions might
and
rate;
and some more than what would have been the ceiling
(5)
pay,
institutions need the flexibility in the rates they can
regain
to
especially in the early months of the new instrument,
depositors lost to MMMFs and other instruments.
(6)
are:
The major arguments for imposing an indexed ceiling
s may
because of MMMFs, the competition for short-term deposit
experience
be so intense as to make irrelevant the historical
y
that irrational pricing has not occurred in other maturit
categories;
(1)
(2)
of
the operating losses of thrifts may necessitate restraint
rate competition in the short run; and
(3)
a ceiling would be necessary if the Committee intends to
establish a rate differential between banks and thrifts.
rate ceiling, the ceiling should
If the Committee chooses to impose an interest
account competitive.
move fairly closely with market rates to make the
There
would need to address, including
are several other issues that the Committee
rate), the relationship of the
the choice of a base rate (e.g., 91-day bill
the ceiling would change,
ceiling to the base rate, the frequency with which
and compounding provisions.
These matters are discussed more fully in the
appendix.
Rate Differential.
In deciding whether to impose a rate ceiling and
thrifts, the Committee may wish
whether to establish a rate differential for
91-day account at the March 22 meeting
to review its objectives in adopting the
to prepare additional short-term deposit
and its purpose in directing Lhe staff
proposals.
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Federal Reserve Bank of St. Louis
to
As noted earlier, the Committee adopted the 91-day account
-8institutions vis-a-vis MMNFs, and
enhance the competitive posture of depository
deposit flows which were espeit imposed a rate differential to enhance thrift
cially weak compared to commercial banks.
Thrift deposit flows have improved
account with a differential,
subsequent to the May 1 introduction of the 91-day
responsible for that improvealthough the extent to which the 91-day account is
ment cannot be determined.
a position to meet
It should be noted that, for those depositors in
proposed account may be equally
the minimum denomination balance requirement, the
ts than is the 91-day account,
or more attractive to consumers in most respec
the Committee.
depending on the other specific features chosen by
If so, the
have gone to the 91-day
new account may attract funds that otherwise would
action in establishing a
account, and the intended effects of the Committee's
considerably.
differential on the 91-day account may be diminished
If a differ-
er whether it will apply to
ential is imposed, the Committee should also consid
IRA/Keogh and public unit deposits.
Additional Deposits.
Flexibility to accept additional deposits to
itive with MMMFs, but would
the proposed new account would make it more compet
additional funds remain on deposit
raise the problem of how to assure that the
for the prescribed maturity or notice period.
With regard to fixed-maturity
either to permit additional
term deposits, the simplest approaches would be
additional deposits at any
deposits only at the time of renewal or to allow
time.
tee could permit such
With respect to additional deposits, the Commit
maturity date or, alternatively,
funds to be withdrawn at the next scheduled
establish procedures assuring that
could require the issuing institutions to
account for at least the prescribed
each additional deposit remains in the
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-9-
maturity period.1
ly appropriate for
This latter approach might be particular
es for specific withdrawals introduces
notice accounts, where the timing of notic
additional complexities.2
Reserve
For monetary policy reasons, the Federal
permit additional deposits to the
staff recommends that the Committee not
triggered automatically by the level
proposed new account if such deposits are
account.
of balances maintained in this or any other
Withdrawals.
bition on the
The staff recommends no regulatory prohi
proposed new account, provided that
size or number of withdrawals from the
the minimum maturity or notice period.
the funds to be withdrawn have satisfied
n has received notification, withdrawals
For notice accounts, once the institutio
r of calendar days has passed. Insticould occur only after the specified numbe
minimum notice, which could be given
tutions would have to require at least the
mail or messenger, in person (over-theby telephone or other telecommunication,
ing order.
counter or through an ATM), or by stand
For term accounts, withdrawals
fixed maturity accounts include, but
1/ Examples of acceptable procedures for
are not limited to, the following:
the maturity of the original deposit.
(1) Each deposit would re-initialize
t-in-first-out" accounting to
(2) Each deposit would be subject to "firs
ained for the term of the
assure that each additional deposit was maint
(3)
account.
set up an "accounting cycle" equal
An institution would be permitted to
nt. New deposits received
accou
ed
to the original term of the offer
be regarded as maturing at
after the accounting cycle had begun would
cycle. In effect, each deposit
the end of the next complete accounting
following cycle.
would be on "hold" until the end of the
for notice accounts include, but are not
2/ Examples of acceptable procedures
limited to, the following:
l any notice to withdraw that had
(1) Any additional deposit would cance
ication called for a longer
already been received, unless that notif
d.
e
remaining interval than the minimum notic perio
deposit would be
each
e
that
assur
to
nting
accou
-out"
(2) "First-in-first
d.
maintained for at least the minimum notice perio
cycle equal to the notice interval.
(3) Establishment of an accounting
of an accounting cycle, notice
For funds received after the beginning
or after the beginning of the
of withdrawal could be given only at
tunity to give notice on
next accounting cycle. In effect, the oppor
red until the beginning of the
any particular deposit would be defer
next accounting cycle.
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Federal Reserve Bank of St. Louis
-10-
could be made by any of the same methods.
Any funds not withdrawn by the end
of the grace period would automatically roll over.
l Reserve staff
In view of its monetary policy concerns, the Federa
new short-term account
believes that the Committee should not authorize any
payments.
that can be used in connection with third-party
Thus, even though
of a new instrument relative
such an approach would limit the attractiveness
that the Committee prohibit both
to MMMFs, the Federal Reserve staff suggests
ly on the account and
third-party negotiable drafts that can be drawn direct
ers by changes in balances of
the automatic triggering of deposits and transf
this or any other account.
r,
The Federal Reserve staff would not object, howeve
deposits, transfers, or payto allowing the depositor to initiate unlimited
ctions, so long as such
ments by telephonic notification or standing instru
maturity or notice period protransactions were in compliance with minimum
visions.
Early Withdrawal Penalty.
In view of the short maturity or notice
prohibit early withdrawals under
on the proposed account, the Committee could
any circumstances.
penalties.
withdrawal
This approach would eliminate the need for early
early withdrawals, it
If the Committee chose instead to authorize
ies:
might establish either of the following penalt
(1) loss of earned interest
the standard penalty (loss of interest
(as adopted on the 91-day account) or (2)
ty, which could require invasion
that would have been earned if held to maturi
of principal).1
more restrictive penalty
Once again, institutions could adopt a
or prohibit early withdrawals altogether.
relatively small for a partial withdrawal
1/ Either of these penalties could be
interest would be forfeited would be small
since the number of days for which
account.
owing to the short-term nature of the
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Federal Reserve Bank of St. Louis
-11-
Miscellaneous Restrictions.
The staff recommends that the Committee
itors that are designed to help
consider whetherto prohibit loans to depos
ces.
depositors meet initial or maintenance balan
If such loans were permitted
requirements.
they would undercut the purpose of these
A second issue relates
be permissible on NOW or demand
to overdraft privileges, which would still
transferable.
deposits to which the new account is
In order to prevent devices
or notice requirements, however,
designed to circumvent the minimum maturity
ring that the rate charged on such
the Committee may wish to consider requi
charged for depositors that do
overdrafts be substantially equal to the rate
not hold the proposed account.
Eligibility.
ns be
The staff recommends that depository institutio
nt to all depositors.
permitted to offer the proposed new accou
Effective Date.
ns
In order to provide sufficient time for institutio
ign systems, the staff recommends that
to plan marketing strategies and redes
be September 1, 1982, about two months
the effective date of any new instrument
decision.
after announcement of the Committee's
The staff believes that further
necessary because the terms of the
public comment on this instrument is not
sive public comment period preproposed deposit were the subject of an exten
Committee's decision as to the
viously conducted by the Committee, and the
deposit would be within the scope of
specific characteristics of the proposed
public comments received to date.
the Committee's previous proposals and
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Federal Reserve Bank of St. Louis
-12-
Attachment A
SUMMARY OF DECISION VARIABLES FOR A
PROPOSED SHORT-TERM DEPOSIT ACCOUNT
I.
Rate
1.
No ceiling.
2.
of thrifts (see
Indexed ceiling with no differential in favor
Attachment B if this option is selected).
3.
thrifts (see
Indexed ceiling with a differential in favor of
Attachments B and C if this option is selected).
II.
Denomination
1.
Initial minimum balance.
2.
Maintenance minimum balance.
3.
calculated.
Period over which maintenance balance is to be
4.
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Federal Reserve Bank of St. Louis
a.
I day.
b.
1 week.
c.
1 month.
d.
the account.
Period equal to maturity (or notice period) of
e.
Institutions' choice of above.
m.
Action to be taken if balance falls below minimu
a.
ceiling or to zero)
Rate reduced (e.g., to applicable passbook
minimum maintenance
until new deposits bring balance up to the
balance.
b.
e must be paid to
Account must be closed and remaining balanc
t of the depositor;
depositor or transferred to another accoun
ed to re-open account.
initial minimum balance would be requir
-13-
III.
Maturity
1.
e range (e.g., 7 to 31
Specific (e.g., only 7 days) or a permissibl
days or 7 to 90 days).
enforced notice, specific term, or both.
2.
Form:
3.
period (e.g., 1 business
For term accounts, the length of the grace
day) before automatic rollover.
IV.
Provisions Regarding Additional Deposits
1.
For fixed-maturity accounts.
a.
(or by the end of
New deposits permitted only at maturity
the grace period).
b.
alizing the maturity.
New deposits permitted without re-initi
c.
to the above, that
Any procedure, including but not limited
the account for at
assures that each new deposit remains in
least the prescribed maturity period.
2.
For notice accounts:
any procedure that assures that additions
the notice period.
to the account are maintained for at least
3.
V.
er account.
Sweeps into the proposed account from anoth
a.
Permitted.
b.
Prohibited.
Notice and Withdrawal Provisions
1.
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Federal Reserve Bank of St. Louis
Possible restrictions.
a.
it for required
Amount withdrawn must have remained on depos
d measured from time
maturity or notice period (notice perio
institution receives notification).
b.
drawn directly on the
No withdrawal by third-party draft
proposed account.
-14-
red by the
No sweeps to another account automatically trigge
c;
t or any
level of the balance maintained in the new accoun
other account.
2.
3.
Permissible means of delivering notice.
a.
Telephone or other telecommunication.
b.
Mail or messenger.
c.
In person (including ATM).
d.
Standing order.
Permissible forms of payment.
a.
Check or cash to depositor.
b.
to third
Cash, draft, or electronic transfer by institution
parties.
c.
VI.
Transfer to any other account held by the depositor.
Early Withdrawal Penalty
1.
Early withdrawal prohibited.
2.
of:
Early withdrawal permitted but with penalty
a.
Loss of earned interest.
b.
if funds withLoss of interest that could have been earned
period), redrawn had been held to maturity (or for notice
quiring invasion of principal.
VII.
Possible Miscellaneous Restrictions
1.
l or maintenance balances.
Prohibit loans to depositors to meet initia
2.
deposit accounts to
Require that overdraft rate on NOW or demand
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Federal Reserve Bank of St. Louis
transferable not be
which the balances in the new account are
afts for depossubstantially lower than the rate on such overdr
t.
itors that do not hold the proposed accoun
-15-
3.
ility.
Prohibit transferability and/or negotiab
4.
that use the account as
Prohibit loans to the account holder
minimum loan rate would
collateral. (Under existing regulation,
on the deposit.)
be 1 percent over the rate being paid
VIII.
Eligibility of Depositors
1.
No restrictions.
2.
unts (i.e., individuals and
Limited to those eligible for NOW acco
certain nonprofit organizations).
3.
IX.
Limited to individuals only.
Effective Date
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Federal Reserve Bank of St. Louis
-16-
Attachment B
G
SUMMARY OF DECISION VARIABLES IF AN INDEXED CEILIN
MENT
IS IMPOSED ON THE PROPOSED SHORT-TERM INSTRU
I.
II.
III.
IV.
average, discount basis).
Base Rate (e.g., the 91-day bill rate auction
Relationship of the Ceiling Rate to the Base Rate
A.
Spread from base rate.
B.
4-week averaging option, as on MMC.
Frequency of Changes in Ceiling Rate
to Ceiling Changes
Adjustment of Rates Payable on Existing Accounts
A.
ceiling or maintain
Allow institutions either to adjust to the new
opened or rolled
the rate established at the time the account was
over.
B.
ng accounts fixed
Require institutions to keep the rates on existi
until they roll over.
C.
on existing accounts
Require institutions to reduce the rates paid
s or the notice
if the ceiling falls before the account mature
period has expired.
V.
Compounding
A.
Permit without restriction.
B.
account or length of enLimit compounding period to maturity of
forced notice period.
VI.
Miscellaneous Issues
A.
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Federal Reserve Bank of St. Louis
or current holders of the
May institutions offer RPs to future
offered to other customers?
new deposit at a rate in excess of that
-17-
B.
ing rule
May premiums be offered on the account--if so, exist
period, or
(i.e., two per account per year), at each rollover
no more than, say, four times a year?
C.
account?
May fees be paid to third party brokers for this
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Federal Reserve Bank of St. Louis
-18—
Attachment C
SUMMARY OF ADDITIONAL DECISION VARIABLES IF A
DIFFERENTIAL IS IMPOSED ON THE CEILING RATE FOR
THE PROPOSED NEW SHORT—TERM INSTRUMENT
I.
points more than
Size of Differential (e.g., thrifts can pay 25 basis
commercial banks).
II.
III.
Duration of Differential
A.
Permanent.
B.
Temporary, e.g., one year.
eliminated
Conditions Under Which Differential is Eliminated (e.g.,
weeks and
when base rate is below 9 percent for four consecutive
utive weeks).
reimposed when base rate exceeds 9 percent for 4 consec
IV.
ts
Applicability of Differential to Special Types of Deposi
A.
IRA/Keogh deposits.
B.
Governmental unit deposits.
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Federal Reserve Bank of St. Louis
,
APPENDIX
ISSUES RELATING TO DETERMINATION OF A CEILING RATE
If the Committee imposed an indexed ceiling--with or without a
differential--it would have to address several additional issues.
include:
These
the choice of a base rate, the relationship of the ceiling to the
base rate, compounding provisions, the frequency with which the ceiling rate
changes, and whether rates payable on existing account balances may be adjusted
when the ceiling changes.
The staff would recommend using the 91-day bill rate (auction average,
discount basis) as the base rate, with or without any 4-week averaging adjustment such as occurs on the MMC.
The ceiling rate could then be set above,
equal to, or somewhat below the base rate.
A major consideration in establishing a ceiling is the relationship
between the ceiling and yields on MMMFs and other open market instruments.
The insurance and convenience aspects of a deposit instrument are valued by
many individuals, suggesting that a ceiling somewhat below these alternative
yields would still enable the new account to attract funds.
For illustrative
purposes, Chart 1 displays the historical rate spread--measured on both a weekly
and quarterly average basis--that would have prevailed since 1979 between the
average MMMY yield and the rate on a short-term account if the ceiling had
been equal to the 91-day bill rate (quoted on a discount basis).
Even though
management fees are deducted, the average MMMF yield tends to be higher because
most of the assets held by these funds are private securities yielding higher
rates of return.
The chart indicates that even with daily compounding a deposit
rate ceiling equal to the bill rate would have allowed MMMFs to pay, on average,
over 50 basis points more than the depository institutions.
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Federal Reserve Bank of St. Louis
-
A-2
notes that it would be
From a practical point of view, the staff
effectively on an instrument with
extremely difficult to prohibit compounding
a short maturity.
ly must pay out
On a fixed-term account, institutions legal
ce in the account is rolled
or credit interest at maturity, even if the balan
over automatically.
flexibility.
hat more
On a notice account, the Committee has somew
and compounding of
It could, for example, limit the crediting
interest to periods of one quarter or more.
If the Committee authorized both
iction on compounding for notice
notice and fixed-term accounts, any restr
als between the two; it is likely,
accounts would result in yield differenti
around any such restriction that
however, that institutions would invent ways
are difficult to anticipate.
g is
Since the primary concern about compoundin
suggests that the Committee address
its effect on the cost of funds, the staff
relationship between the ceiling and
this issue in its consideration of the
the rate base.
at Treasury bill
In this regard, Table 1 illustrates that
add between 37 and 77 basis points to
rates of 12 percent, compounding would
ency of the compounding.
the nominal ceiling depending on the frequ
ceiling rate involves the
One mechanical issue with respect to a
paid on existing account balances
rules that would govern adjustments of rates
ng.
to changes in the interest rate ceili
The Committee could, for example,
r to change to the new ceiling or to
allow institutions the discretion eithe
the account was opened or rolled
maintain the rate established at the time
require that institutions maintain
over. Alternatively, the Committee could
account was opened or rolled over. In
the rate established at the time the
d,
of an interval equal to the notice perio
any event, at maturity or at the end
change the rate on an existing account
the institution would be required to
rate then in force for new deposits.
balance if it exceeded the ceiling
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Federal Reserve Bank of St. Louis
ft
#
-
A- 3
Chart 1
SPREADS BETWEEN YIELDS ON MMMFs
AND A HYPOTHETICAL SHORT-TERM DEPOSIT
li
Percent
#11#111/
, Imolm.
•,
8
MMNF Rate less Deposit Rate
(Weekly data)
6
8......•
4
I
.•1=0
er\ANIVIlv
vAA
I
\
,
+
_
...... 2
4
Percent
— 4
,
...MM.
MMMT Rate less Deposit
Rate (Quarterly average
data)
3
anaml
2
friM#
— 1
,..mMID
+
0
_
_. 1
IIIMMII
2
MMIMMI,
1
,MID
1
1/
-
1
I
3
1982
1981
1980
1979
equal
ceiling
a
to
ding
correspon
yield
effective
fully
the
is
Deposit rate
basis.
discount
average
auction
rate,
bill
Treasury
to the 91-day
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Federal Reserve Bank of St. Louis
A-4
Table 1
EFFECTIVE YIELDS CORRESPONDING TO A 12 PERCENT NOMINAL CEILING
FOR VARIOUS COMPOUNDING PERIODS--365/360 BASIS
Type of
Compounding
Effective
Rate
Increased
Yield Due to
Compounding
Percent of the
Continuously
Compounded Increase
---- percent per annum ---100
1)
Continuous
12.938
.771
2)
Daily
12.935
.768
99+
3)
Weekly
12.922
.755
98
4)
Quarterly (91 day)
12.734
.567
74
5)
Semi-annual (182 days)
12.538
.371
48
6)
No compounding!'
12.167
1/
The fact that the effective rate is about 17 basis points higher than the
nominal rate even with no compounding is due to the artificial year.
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Federal Reserve Bank of St. Louis
0
1
FEDERAL DEPOSIT INSURANCE CORPORATION, Washington.D.C. 20429
OFFICE OF THE CHAIRMAN
June 15,Q.9824-Z
-11
C—.
07
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7.0
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M
C.)
The Honorable George Bush
President of the Senate
United States Senate
Washington, D.C. 20510
>
az
....1.
.•
I am hereby transmitting our report on the economic viability of
depository institutions as required by Section 206 of the Depository
Institutions Deregulation and Monetary Control Act of 1980.
ncerely,
William M. I a c
Chairman
Enclosure
CC: • All DIDC Members
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Federal Reserve Bank of St. Louis
Honorable Paul Volcker
Chairman, Federal Reserve Board
rr
ri
(.1)
•Fi.
VI
=
N.
Sir:
C
")
1982 REPORT TO CONGRESS ON THE ECONOMIC VIABILITY OF DEPOSITORY INSTITUTIONS
(AS REQUIRED BY SECTION 206 OF THE DEPOSITORY INSTITUTIONS DEREGULATION AND
MONETARY CONTROL ACT OF 1980)
By
William M. Isaac, Chairman
Federal Deposit Insurance Corporation
Introduction
Section 206 of the Depository Institutions Deregulation and Monetary
Control Act of 1980 (P.L. 96-221) mandates that each member of the Depository
Institutions Deregulation Committee (DIDC) separately report to Congress
annually on issues relating to the economic viability of depository institutions.
This report contains our comments and recommendations on various
issues which the DIDC faces in its efforts to eliminate deposit interest rate
ceilings at depository institutions.
The task facing the DIDC is made difficult by important but frequently
conflicting objectives.
In our deliberations we must not lose sight of the
benefits from deposit rate deregulation.
Interest rate ceilings force many
depositors to earn a below-market return on their investments and these rate
restrictions have placed all depository institutions at a competitive disadvantage in the financial services industry.
At the same time, however, we
must give due consideration to the earnings position of many thrift institutions.
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Federal Reserve Bank of St. Louis
-2Let me turn to the specific issues which we were asked to address in
Section 206 of P.L. 96-221.
After discussing these issues, I will outline a
comprehensive deregulation program which we feel deals with the fundamental
problems facing the banking and thrift industries.
The Appendix contains a
summary of recent DIDC policy actions.
An Assessment of Whether the Removal of Any Differential Between the Rates
Payable on Deposits and Accounts by Banks and Those Payable by Thrift
Institutions Will Adversely Affect the Housing Finance Market or the
Viability of the Thrift Industry
Relative Importance of the Differential
The instruments offered by depository institutions which carry a rate
differential in favor of thrift institutions are shown in table 1.
Overall,
the importance of deposits subject to a differential at thrift institutions
has been steadily declining (see table 2).
We would expect this decline to
continue as those deposits subject to a differential shift into alternative
higher-yielding instruments or leave thrift institutions altogether.
Fixed-ceiling time and savings deposits.
Fixed-ceiling time deposits have
been declining in importance for the past several years and the low rate ceilings on these deposits, relative to market rates, will insure that these
deposits will continue to diminish in importance in the future.
deposits declined steadily in importance over most of 1981.
Passbook
Although factors
such as sharp declines in market interest rates and end-of-the-quarter
interest crediting have resulted in slight increases in passbook balances,
this general outflow trend will likely continue.
Small Savers Certificates (SSCs).
SSCs have increased substantially in
importance at thrift institutions since the 12% interest rate "cap" was removed on August 1, 1981.
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Federal Reserve Bank of St. Louis
Allowing institutions to pay a market rate on this
-3Table 1.
Maximum interest rates payable on time and savings deposits at
federally-insured depository institutions.
Account Type
Commercial
Banks
S&Ls and
MSBs
Savings Deposits
Negotiable Order of Withdrawal
(NOW) Accounts
5.25%
5.50%
5.25
5.25
Fixed-Ceiling Time Deposits
by Maturity:
14 to 89 days
90 days to 1 year
1 to 2-1/2 years
2-1/2 to 4 years
4 to 6 years
6 to 8 years
8 years and over
5.25
5.75
6.00
6.50
7.25
7.50
7.75
n.a.a
6.00
6.50
6.75
7.50
7.75
8.00
Variable-Ceiling Time Deposits
by Maturity:
91-day time deposit
6-month Money Market Certificate . .
12-month All Savers Certificate
30-month to 3-1/2 year Small
Savers Certificate
Ceiling-Free Time Deposits by
Maturity:
18-month or more individual
retirement accounts and Keogh
(H.R. 10) plans
3-1/2-year time deposits
Time deposits with denominations
of $100,000 or more
..
91-day Treasury bill
91-day bill
rate minus 25 basis
rate
points
6-month Treasury bill rate plus 25
basis pointsb
70% of 12-month Treasury bill rate
2-1/2 year Treasury
security rate minus
25 basis points
2-1/2 year
Treasury
security rate
Not Limited
Not Limited
Not Limited
Not Limited
Not Limited
Not Limited
a n.a. signifies account categories generally not available at S&Ls and
MSBs.
bA rate differential in favor of thrifts is imposed when the 6-month bill
rate drops below 9 percent.
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Federal Reserve Bank of St. Louis
_14_
Table 2.
Relative Proportion of deposits at FSLIC-insured S&Ls and all
MSBs which are subject to a differential.a
Percent of Total Deposit Balances
Time Period
(a)
Passbook
Savings
Deposits
S&Ls
MSBs
1981
January
February
March
April
May
June
July
August
September
October
November
December
19.9
19.5
19.9
19.6
19.0
19.1
18.8
18.1
18.1
17.4
17.4
17.8
1982
January
February
March
17.6
17.3
17.4
(b)
30-month
Small Saver
Certificates
S&Ls
MSBs
(c)
Fixed-Ceiling
Time
Deposits
S&Ls
MSBs
34.3
10.6
8.6
33.7
33.5
10.8
8.9
33.5
33.0
32.4
32.5
31.6
31.0
30.4
30.2
30.4
11.2
11.7
11.6
11.9
12.1
13.3
15.1
17.0
18.0
18.7
9.1
9.5
9.6
9.6
9.8
17.6
10.8
12.0
12.9
13.6
14.1
30.4
30.1
30.0
19.6
20.2
21.0
14.9
15.3
15.8
22.6
21.6
21.1
20.3
19.3
18.9
Total Deposits Subject
to a Differential
(a + b + c)
S&Ls
MSBs
53.1
51.9
52.2
51.6
64.7
63.6
62.9
62.9
16.4
15.8
14.0
13.6
12.9
21.8
21.0
20.3
19.9
19.5
19.2
18.5
17.7
16.8
16.1
15.3
14.8
49.9
49.9
48.5
47.8
49.0
48.4
49.0
49.4
62.1
61.2
60.8
60.1
59.8
59.4
59.1
59.3
11.9
11.1
10.7
14.1
13.8
13.3
49.1
48.6
49.1
59.4
59.2
59.1
Source: The Federal Home Loan Bank Board, the Federal Reserve Board, and the
National Association of Mutual Savings Banks.
aAs yet, no data are available on the new 91-day instrument.
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Federal Reserve Bank of St. Louis
-5instrument has dramatically increased its attractiveness.
At present many
consumers find it advantageous to "lock in" the relatively high yields which
are currently available on this instrument.
It is not likely, however, that
the SSC will continue to grow as rapidly as it has since August 1981.
To some
extent, the SSC will be replaced by the new 3-1/2 year, ceiling-free deposit
instrument which was introduced on May 1, 1982.
91-day time deposit.
This instrument was introduced on May 1, 1982.
It
has a temporary differential in favor of thrift institutions and an interest
rate ceiling, for thrifts, equal to the 91-day Treasury bill rate (auction
average on a discount basis).
The differential is slated to be permanently
removed on May 1, 1983, or temporarily removed in the event the 91-day
Treasury bill rate remains less than or equal to
auctions.
9% for four consecutive bill
The success of this instrument will depend heavily upon the level
of the 91-day bill rate relative to the rates paid on both the MMC and money
market mutual fund shares, its closest competitors.
Current Plans for the Removal of the Differential
The SSC, which currently has a differential, will be gradually replaced by
a new ceiling-free deposit instrument.
Effective May 1, 1982 the SSC maturity
range was reduced to 2-1/2 years to less than 3-1/2 years (the old range was
from 2-1/2 years to less than 4 years).
Also on May 1 a ceiling-free time
deposit with a minimum maturity of 3-1/2 years became effective.
On April 1,
1983, the SSC maturity range will be reduced to 1-1/2 years to less than 2-1/2
years and the minimum maturity on the new ceiling-free instrument will be reduced to 2-1/2 years.
Finally, on April 1, 1983, the SSC will be effectively
superseded as the minimum maturity on the ceiling-free instrument is reduced
to 1-1/2 years and the minimum maturity on the SSC is not correspondingly
reduced.
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Federal Reserve Bank of St. Louis
•
4
-6The rate differential on the new 91-day instrument was imposed as a temporary measure to aid thrift deposit flows.
As mentioned previously, the
differential on this instrument is slated to be removed on May 1, 1983.
While
this differential is in effect, however, we expect that it will result in
improved flows to thrift institutions.
Although it is not possible to esti-
mate its precise impact, FDIC staff analysis indicates that a 25 basis point
differential in favor of thrift institutions does have an effect upon where
consumers choose to deposit their funds.
Unfortunately, it is likely that
many of the benefits thrifts get from the differential will come at the expense of commercial banks.
Hardest hit will be the smaller banking insti-
tutions which provide a significant portion of mortgage and agriculture credit
to rural areas.
Currently, there are no plans for the removal of the differential on
1
accounts which were in existence on December 10, 1975.
However, one result
of the deregulation schedule which was passed by the D1DC at its March 22,
1982, meeting is that all fixed-ceiling time deposits in existence on
December 10, 1975, will be gradually replaced by the new ceiling-free time
deposit which was introduced on May 1, 1982.
At this time, we do not see any immediate reason why the differential on
passbook savings deposits should be removed.
Such action would only serve to
encourage a shifting of low-cost funds from thrifts to commercial banks.
This would exacerbate thrift earnings problems while providing only limited
benefits to the banks.
Low rate ceilings have greatly diminished passbook
1Section 102 of P.L. 94-200 requires that the differential on all
accounts in existence on December 10, 1975, may not be removed without the
approval of both houses of Congress.
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Federal Reserve Bank of St. Louis
-7accounts as an investment vehicle and, at current rate ceiling levels, passbook balances cannot be viewed as a viable source for mortgage lending.
Over the long run, the thrift differential cannot be considered as desirable for either the thrift industry or the housing market.
The existence
of a differential necessarily implies the imposition of some interest rate
ceiling on deposits at both thrifts and commercial banks; however, experience
has shown that the long-run viability of the thrift industry will depend upon
its ability to compete with alternative market investments for funds.
Even
allowing rate ceilings to float with market rates does not permit depository
institutions to compete effectively with alternative investments over all
phases of the interest rate cycle.
Additionally, rate ceilings drastically
limit an institution's ability to construct deposit contracts which it feels
will best suit its own customers.
Recommendations for Measures Which Would Encourage Savings, Provide for
the Equitable Treatment of Small Savers, and Ensure a Steady and Adequate
Flow of Funds to Thrift Institutions and the Housing Market
To Encourage Savings
Lately there has been much concern over the low U.S. household saving
rate, both in absolute terms and relative to other industrialized countries.
Table 3 provides information on the household saving rate from 1970 to the
present.
Although various cultural and structural differences make saving
comparisons between different countries somewhat difficult to interpret, the
saving rate in this country has remained relatively low for several years.
While reducing inflation and achieving sustained growth in the economy are
most important for improving the savings outlook, some tax incentives in the
Economic Recovery Tax Act of 1981 should encourage saving.
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Federal Reserve Bank of St. Louis
-8-
Table 3.
The National Income and Product Account (NIPA) saving rate, 1970
through the first quarter of 1982 (quarterly data are seasonally
adjusted).
Time Period
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980-1
-II
-III
-IV
1981-I
-II
-III
-IV
1982-1
Saving Rate
8.0
8.1
6.5
8.6
8.5
8.6
6.9
5.7
5.2
5.3
4.9
6.2
6.1
5.1
4.6
5.4
5.2
6.1
5.5
Source: U.S. Department of Commerce, Bureau of Economic Analysis, National
Income and Product Accounts of the United States, Table 2.1.
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Federal Reserve Bank of St. Louis
-9The expansion in Individual Retirement Account (IRA) and Keogh Account
eligibility on January 1, 1982, provides savers with a powerful tax incentive
to save for retirement.
These funds tend to be a stable, long-term source of
funds for depository institutions.
In order both to aid these institutions in
capturing their "fair share" of these new funds and to encourage saving, the
DIDC has allowed all depository institutions to offer a ceiling-free,
IRA/Keogh time deposit with a minimum maturity of 1-1/2 years.
Between
December 1, 1981, when this account was first authorized, and March 31, 1982,
this deposit account has attracted an estimated $7.2 billion.
All Savers Certificates--which provide a federally-insured, tax-free investment--have grown in volume to $51 billion (as of April 30, 1982).
Some of
this money represents new saving which would otherwise not have occurred.
In
addition, the scheduled reduction in income tax rates should encourage people
to save by increasing their disposable income.
Last, but also of great importance, is the continued removal of deposit
interest rate ceilings.
To date, depository institutions are able to offer
ceiling-free time deposits with maturities of 3-1/2 years and over and on
certain IRA/Keogh deposits.
We feel that the continued removal of deposit
rate ceilings should go a long way toward encouraging saving by those who are
reluctant to seek investment vehicles outside federally-insured depository
institutions.
To Provide for the Equitable Treatment of Small Savers
During 1981 and the first quarter of 1982, the DIDC undertook several substantial actions designed specifically to aid the small saver and, at the same
time, to improve fund flows into depository institutions.
On August 1, 1981,
the Committee removed the 12.00/11.75% "cap" on the Small Savers Certificate.
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Federal Reserve Bank of St. Louis
-10This action resulted in a substantial increase in the rate ceiling applicable
to this instrument (see table 4).
This is significant for the small saver
because the SSC has no federally-regulated minimum denomination.
As a con-
sequence, many institutions offer the SSC in minimum denominations of as low
as $100.
The Committee has also adopted a 3-1/2 year minimum-maturity time deposit
which has no interest rate ceiling.
The minimum maturity on this instrument
will decrease by one year on April 1, 1983, 1984, and 1985.
„
On March 31,
1986, the minimum maturity will drop to that for time deposits in existence at
that time.
Thus, by 1986, complete time deposit rate deregulation will be
accomplished.
In order that small savers are not excluded from purchasing
this new certificate, the DIDC has not imposed a mandatory minimum denomination requirement and, furthermore, depository institutions must offer this
instrument in a $500 denomination.
Alternatives to deposit accounts do exist for many savers (for example,
money market mutual funds offer an account which earns a market rate, provides
instant liquidity and some funds require minimum denominations of as low as
$1,000).
However, federal insurance and convenience requirements do limit
some savers to accounts at depository institutions.
This is evidenced by the
fact that a substantial portion of passbook savings deposits are in accounts
with relatively high balances.
For example, an estimated 24% of passbook
savings deposits at MSBs are in accounts with denominations of $25,000 or
more.
Certainly alternatives for these savers exist.
However, for reasons
other than rates of return on their savings, they choose to remain at a depository institution.
Therefore, the only way to generally provide complete
equity to savers would be through further deposit rate deregulation.
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Federal Reserve Bank of St. Louis
-11-
Table 4.
Average SSC Rate Ceilings in Effect for Thrift Institutions,
January 1981 through May 1982.
Time Period
Average Thrift
SSC Rate Ceiline
1981
January
February
March
April
May
June
July
Augustb
September
October
November
December
12.00
12.00
12.00
12.00
12.00
12.00
12.00
15.78
16.50
15.79
14.10
13.02
1982
January
February
March
April
May
14.24
14.77
14.23
14.30
13.89
aThe rate ceilings listed are on a simple annual basis, compounding is
permitted. Commercial banks are restricted to paying a maximum of 25 basis
points less than the thrift rate.
b The 12.00 percent "cap" on SSC rates was removed on August 1, 1981.
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Federal Reserve Bank of St. Louis
-12-
To Ensure a Steady and Adequate Flow of Funds to Thrift Institutions and
the Housing Market
Deposit Flows
Deposit flows at both S&Ls and MSBs deteriorated during 1981 relative to
the 1980 performance.
As shown in table 5, S&Ls experienced a $25.4 billion
net deposit outflow during 1981 (excluding interest credited) while registering a net inflow of only $10.7 billion in 1980.
Relatively speaking, the
MSB experience has been somewhat worse, with net outflows of $13.8 billion in
1981 and $4.9 billion in 1980.
Although in absolute terms MSB outflows have
been smaller than those at S&Ls, the net outflows as a percentage of total
deposits has been greater at mutual savings banks.
To a large extent, this deterioration of deposit flows can be directly
linked to the inability of thrifts to compete--due to deposit rate controls--with alternative market investments.
The consistently higher market
interest rates during 1981 relative to 1980, in conjunction with increased
consumer awareness of alternative investment opportunities, has resulted in a
large degree of disintermediation (see table 5).
For example, money market
mutual funds increased by $107 billion during 1981 compared to a $29 billion
increase during 1980.
It is likely that deposit flow problems will continue
as long as deposit interest rate restrictions remain binding and market
interest rates remain at their relatively high levels.
The All Savers Certificate (ASC) has, so far, had only a slight impact
upon thrift deposit flows.
This certificate attracted a substantial amount of
new money when it was first introduced in October 1981.
During that month,
S&Ls attracted $16.5 billion and MSBs $4.0 billion into ASC deposits.
Since
that time, however, ASC growth has been much slower, with average monthly
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Federal Reserve Bank of St. Louis
-13Table 5.
Deposit flows at federally-insured savings and loan associations and
at all mutual savings banks, January 1980 through April 1982.
S&L Deposit Flows
($ Millions)
Time Period
1980
January
February
March
April
May
June
July
August
September
October
November
December
Totals for 1980
1981
January
February
March
April
May
June
July
August
September
October
November
December
Totals for 1981
1982
January
February
March
Aprila
Excluding
Interest
Credited
Including
Interest
Credited
MSB Deposit Flows
($ Millions)
Excluding
Interest
Credited
Including
Interest
Credited
1,167
1,079
-696
-817
1,785
-169
961
1,285
6
2,550
1,461
2,055
10,668
2,035
1,823
4,345
321
3,004
5,210
2,355
2,481
5,518
3,827
2,476
7,563
40,956
-1,436
-543
-679
-1,024
242
-176
246
1
-460
-169
-227
-639
-4,863
-928
-79
930
-449
861
1,716
843
610
1,377
403
312
1,255
6,851
599
879
-2,137
-4,638
-70
-5,759
-5,538
-3,290
-3,799
1,601
-1,530
-1,723
-25,404
2,060
2,276
3,694
-2,857
1,696
317
-3,491
-1,343
2,172
3,688
481
4,717
13,411
-979
-385
-757
-2,025
-676
-1,387
-1,935
-1,542
-1,679
-65
-1,060
-1,283
-13,774
-365
296
1,224
-1,234
148
542
-1,133
-672
319
789
-188
849
574
-138
761
-1,284
-5,209
1,959
1,909
5,228
-2,547
-1,064
-233
-868
-1,800
-225
603
1,124
-800
Source: Federal Home Loan Bank Board and the National Association of
Mutual Savings Banks.
aPreliminary.
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Federal Reserve Bank of St. Louis
-14increases of only $1.1 billion at S&Ls and $0.33 billion at MSBs.
As of April
1982, ASC balances at S&Ls stood at $23.1 billion (4.4% of total deposits) and
$6.0 billion at MSBs (4.0% of total deposits).
Flows of Funds to Thrift Institutions and the Housing Market
Improved flows of funds into thrift institutions depend upon their ability
to pay a market rate to their depositors.
Unfortunately, the heavy reliance
upon standard fixed-rate mortgages have left thrifts holding a large
percentage of below-market-rate assets.
This impedes their ability to pay
market rates to depositors and still remain profitable.
The long-run solution
is to enable the thrifts to offer assets whose yields are more closely linked
to current market rates.
The Depository Institutions Deregulation and Monetary Control Act of 1980
("the Act") has provided greater leeway for thrift institutions to acquire
short-term assets.
The Act allows federally-chartered S&Ls and MSBs to invest
up to 20 percent of their assets in secured and unsecured consumer loans and
other corporate securities.
In addition, federal MSBs are authorized to make
commercial, corporate, and business loans of up to five percent of total
assets.
While this liberalization of asset powers will allow thrifts a
greater amount of diversity in their portfolios, we do not feel the Act has
gone far enough.
Providing the DIDC with a mandate to deregulate the liability side of the
balance sheet at thrift institutions, yet not allowing for a mechanism whereby
the asset portfolios are deregulated will result in a structural imbalance.
Depository institutions are entering a new age which will be marked by a significant amount of deregulation and, hence, increased competition.
Shortly,
thrifts will no longer be offered the protection of deposit rate ceilings.
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Federal Reserve Bank of St. Louis
-15By the same token, high interest rates, technological innovations, and increased consumer sophistication have resulted in many financial innovations.
Nondepository institutions have accelerated their efforts to compete for
deposits, thus, further blurring the distinction between depository institutions and their close competitors.
In this emerging competitive environ-
ment, it is important that thrift institutions have the greatest amount of
flexibility to compete with other financial institutions.
It should be noted that certain tax incentives exist which have encouraged
thrifts to emphasize home mortgage lending.
Even though these income-tax
provisions are currently of no use to the thrifts which are losing money and,
therefore, not paying federal income taxes, such limitations will become
binding in the future when thrift earnings improve.
In this circumstance
thrifts will be discouraged from fully implementing any new asset powers.
Although thrift institutions are major contributors to housing finance,
the overall performance of the housing market is also influenced by other
factors.
In pursuing monetary and fiscal policy goals, the federal government
has, at times, caused competition for scarce funds in the credit markets to
intensify.
During these periods, mortgage and housing activity contracts much
more sharply than activity in most other sectors of the economy.
On the other
hand, mortgage purchases by federally-sponsored credit agencies have aided
housing activity, particularly during periods of tight money and high interest
rates.
To conclude, an adequate flow of funds to the housing market does not
depend upon forcing thrifts to be residential mortgage specialists.
If pro-
viding thrifts with expanded asset powers reduces the thrift presence in the
housing market, we believe that much of this slack will be taken up by other
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Federal Reserve Bank of St. Louis
-16lenders.
In a stable financial environment, a greater demand for housing
finance will exist and financial intermediaries will
supply the necessary
funds at market rates.
Findings Concerning Disintermediation of Savings Deposits
from Insured
Banks and Insured Thrift Institutions to Uninsured Money
Market Innovators
Paying Market Rates to Savers
The growth of money market mutual funds (MMFs) has contrib
uted substantially to the disintermediation of savings deposits from insured
banks and
thrift institutions.
It is impossible to precisely determine how much of this
dollar inflow has been due to the interest rate restrictions
imposed upon
depository institutions.
However, it is likely that this volume has been sig-
nificant since depository institutions currently have no
viable short-term
instrument with which to compete with MMFs.
Table 6 shows the net monthly MMF inflows (sales minus redempt
ions) for
non-institutional-only funds.2
Net MMF inflows were much stronger in 1981
($87 billion) than during 1980 ($25 billion).
In large part, this was due to
the relatively higher interest rates during 1981.
MMFs will likely continue to be a principal competitor
facing depository
institutions throughout 1982.
New and existing MMFs are attempting to cater
to a broader spectrum of customers.
For example, Sears, in conjunction with
its subsidiary Dean Witter Reynolds, is offering a money fund which
is
2 Institutional-only funds are excluded from the analysis because
their
high minimum denominations (typically $100,000 or over) preclude investm
ent by
the typical individual saver.
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Federal Reserve Bank of St. Louis
-17-
Table 6.
Net monthly inflows (sales minus redemptions) into noninstitutional-only money market mutual funds, January 1980
through April 1982.
Time Period
Source:
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Federal Reserve Bank of St. Louis
Monthly Inflows
($ Billions)
1980
January
February
March
April
May
June
July
August
September
October
November
December
6.94
5.62
0.61
-0.79
4.88
2.05
2.56
3.72
-0.13
1.15
-0.32
-1.09
1980 Total = 25.20
1981
January
February
March
April
May
June
July
August
September
October
November
December
8.64
8.81
11.36
7.10
1.08
7.16
10.93
8.53
7.71
6.34
8.18
1.57
1981 Total = 87.41
1982
January
February
March
April
5.88
-0.56
5.16
-0.63
Donoghue's Money Fund Report of Holliston, MA
01746.
-18designed to attract the relatively small saver.3
Also contributing to MMF
growth are the increasingly popular tie-in arrangements between MMFs and
depository institutions.
These so-called "sweep" accounts provide a link
between a MMF and a demand or NOW account whereby excess balances from the
transaction account are automatically swept into the MMF on a daily basis.
Currently such services are offered by several hundred commercial banks, but
plans now exist which may expand this number to several thousand.
Finally, electronic funds transfer innovations will continue to increase
the accessibility of MMF accounts.
A reduction in the cost and time for
transfers in and out of MMFs should enhance the liquidity of money funds and,
as a result, increase their popularity.
As we have seen in the past, if de-
pository institutions are constrained as to the services which they can offer,
these missing services will simply be provided by alternative institutions.
The DIDC is considering a short-term deposit instrument to enable
institutions to better compete with money market mutual funds (MMFs) and, at
the same time, limit the adverse earnings implications which would arise from
internal shifts from low-yielding passbook deposits.
Although the majority of
passbook accounts have relatively low balances (the average passbook balance
at thrift institutions is estimated at $2,500), there exist many very high
balance accounts.
Tables 7 and 8 list estimates of the size distribution of
passbook balances at MSBs and S&Ls; respectively.
3The Sears fund requires an initial investment of only $1,000 and additions can be made in increments of only $50. By MMF standards, these requirements are minimal. In addition, if current plans materialize, Sears MMF
account holders will be able to access their accounts via any Sears retail
outlet.
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Federal Reserve Bank of St. Louis
-19-
Table 7.
Estimated size distribution of passbook savings deposits at mutual
savings banks.
Passbook Deposit
Size Category
Percent of Total
Passbook Balances
Under $5,000
$5,000 - $14,999
$15,000 - $24,999
$25,000 and Over
25%
34
17
24
Source: December 4, 1981 telephone survey conducted by the Federal
Deposit Insurance Corporation.
Table 8.
Estimated size distribution of passbook savings deposits at savings
and loan associations.
Source:
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Federal Reserve Bank of St. Louis
Passbook Deposit
Size Category
Percent of Total
Passbook Balances
Under $2,500
$2,500 - $4,999
$5,000 - $7,499
$7,500 - $9,999
$10,000 and Over
16%
15
13
9
46
August 1980 Federal Home Loan Bank Board Survey.
-20It is likely that any short-term deposit will attract some funds from
existing passbook accounts, the net effect of which could be an increase in
costs to depository institutions.
A comparatively high minimum denomination
feature would limit this internal shifting.
At the same time, a minimum
denomination in the $15,000 to $25,000 range would still allow institutions to
compete effectively with MMFs.
As can be seen in table 9, a substantial
proportion of MMF money held by households are in accounts with balances in
excess of $25,000.
As a final note, should the Committee adopt this instrument, it intends to
periodically re-examine the minimum denomination feature with a eye toward its
reduction.
With experience, the DIDC will be better able to judge the amount
of passbook shifting which comes with various minimum denominations.
Recommendations for Such Legislative and Administrative Actions as the
Member Involved Considers Necessary to Maintain the Economic Viability of
Depository Institutions
A number of measures can be taken to minimize disruptions to our financial
system and to insure that the current problems we are facing do not recur in
the future.
First, is enactment of the Regulator's Bill to give the federal insuring
agencies greater flexibility in dealing with the immediate problems facing
thrift institutions.
Second, is the federal override of state usury ceilings and prohibitions
of due-on-sale clauses.
Although some preemptions of state usury ceilings are
contained in the Depository Institutions Deregulation and Monetary Control Act
of 1980, major qualifications to these provisions add an additional element of
uncertainty to the portfolio management problems facing depository institutions, especially in an unstable interest rate environment.
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Federal Reserve Bank of St. Louis
Prohibitions of
-21-
Table 9.
Estimated size distribution of money market mutual fund accounts
held by households.
MMF Account
Size Category
Under $5,000
$5,000 - $9,999
$10,000 - $19,999
$20,000 - $29,999
$30,000 and Over
Source:
Institute.
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Federal Reserve Bank of St. Louis
Percent of Total
Household Balances
5%
11
19
9
56
March 11, 1981 survey conducted by the Investment Company
-22due-on-sale clauses are particularly detrimental to thrift earnings because
they slow the rate of turnover of their low-yielding mortgage portfolios.
Mutual savings banks currently have over 75 percent of their mortgages in
assets yielding less than 10 percent.
Finally, new asset powers for thrifts, such as those contained in S.1720
should be enacted.
The financial difficulties facing some thrifts may pre-
clude their immediate utilization of these powers.
However, it is important
that thrifts have broader portfolio flexibility, know their portfolio options,
and plan for the future.
This will allow them to make the most efficient use
of the new funds which they will obtain as the deregulation process continues,
and will also allow them to become viable competitors in the financial marketplace of the future.
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Federal Reserve Bank of St. Louis
-23-
Appendix:
DIDC Policy Actions, January 1981 Through May 1982
Notation Vote--February 16, 1981
The Committee adopted a temporary amendment to its rule on the use of
premiums which prohibited an institution from soliciting the opening of
multiple accounts in order to provide more than one premium at a time.
In
addition, the Committee solicited public comment on whether this rule should
be made permanent.
(This rule was made permanent in March 1982).
Committee Meeting--March 26, 1981
1.
Adopted a final rule, effective April 7, 1981, which moves the effec-
tive implementation date on ceiling rate changes on the MMC and SSC from
Thursday to Tuesday.
2.
Request for public comment on phasing out interest rate ceilings by
maturity and on a proposal to remove the "caps" on the SSC.
Committee Meeting--June 25, 1981
1.
Final rule, effective August 1, 1981, whereby the Committee adopted a
schedule to phase out interest ceilings by maturity beginning with deposits
with a maturity of four years or more.
Along with this action, the Committee
reduced the maturity range of the SSC from 2-1/2 years and over to 2-1/2 years
to less than 4 years.
The U.S. District Court for the District of Columbia
subsequently declared invalid the above phase out action on the ground that it
eliminated the differential on an account in existence on December 10, 1975.
This court action, however, did not affect the SSC maturity reduction.
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Federal Reserve Bank of St. Louis
-242.
Final rule, effective August 1, 1981, which removed the "caps"
on the
SSC.
3.
Request for public comment on a proposal to increase savings deposit
rate ceilings.
4.
Request for public comment on a proposal to allow the MMC rate ceiling
to be based upon a moving average of past and present 26-week Treasury bill
rates.
Additionally, the Committee requested comment on the creation of a new
short-term time deposit.
Notation Vote--September 3, 1981
The Committee adopted regulations authorizing depository institutions
to
issue All Savers Certificates.
This action became effective on October 1,
1981.
Committee Meeting--September 22, 1981
1.
Adopted a final rule which would allow depository institutions, begin-
ning December 1, 1981, to offer a new ceiling-free IRA/Keogh time
deposit with
a minimum maturity of 1-1/2 years.
In addition, the Committee granted insti-
tutions permission for the waiver of early withdrawal penalties
for conversions of existing IRA/Keogh accounts into this new account.
(This latter
action was subsequently rescinded by the Committee.)
2.
Adopted a final rule, effective November 1, 1981, which would increase
passbook savings deposit rate ceilings by 50 basis points.
This action was
subsequently postponed by the Committee.
3.
Adopted a final rule, effective November 1, 1981, which would
permit
the MMC rate ceiling to be based upon a 4-week moving average of past and current 6-month Treasury bill auction rates.
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Federal Reserve Bank of St. Louis
-254.
Final rule to readopt the MMC and SSC ceiling rate changes which were
originally adopted on May 28, 1980.
This action was in response to a U.S.
District Court ruling that indicated the DIDC had the authority to make the
rate ceiling changes, but required that the Committee first solicit public
comment on such changes.
(Comment was requested by the Committee on August
13, 1981.)
5.
Request for public comment on various proposed short-term deposit
instruments.
6.
Request for public comment on a new deregulation schedule which would
phase out deposit rate ceilings by maturity beginning with the introduction of
a new 3-1/2 year and over maturity deposit which would have no regulated rate
ceiling.
Notation Vote--October 20, 1981
The Committee voted to postpone the 50 basis point increase in passbook
savings deposit rate ceilings.
Notation Vote--November 19, 1981
The Committee acted to rescind permission for waiver of early withdrawal
penalties for conversion of existing IRA/Keogh accounts into the new
1-1/2-year account.
Committee Meeting--December 16, 1981
During this meeting the Committee voted to defer consideration of the
pending agenda items to the March 22, 1982 meeting.
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Federal Reserve Bank of St. Louis
a)
These items were:
consideration of a plan to deregulate interest rate limitations
on time deposits,
-26b)
consideration of short-term deposit instrument proposals; and
c)
consideration of the interest rate ceiling for savings deposits.
Committee Meeting--March 22, 1981
1.
The Committee adopted a final rule authorizing depository institutions
to offer--effective May 1, 1982--a $7,500 minimum denomination time deposit
with a 91-day maturity.
This instrument has a rate ceiling equal to the
91-day Treasury bill rate (auction average on a discount basis) for thrift
institutions and 25 basis points less for commercial banks.
This rate differ-
ential will be removed on May 1, 1983 and will be suspended any time the
91-day Treasury bill rate is
9% or below for four consecutive rate auctions.
It is reinstate during the one-year period if the rate should rise above
and it is not suspended again until it falls to
9%
9% or below for another four
auction period.
2.
Final rule adopting a schedule to deregulate interest rate ceilings on
time deposits by authorizing a new time deposit instrument.
This instrument
has no federally imposed interest rate ceiling and has an initial minimum
maturity of 3-1/2 years that will be reduced by one year on April 1, 1983,
1984, and 1985.
On March 31, 1986, the minimum maturity will be reduced to
that for all time deposits in existence on that date.
This instrument has no
federally required minimum denomination, however, institutions that do
select
to offer this time deposit are required to offer a $500 denomination. This
latter restriction is designed to prohibit institutions from setting a
minimum
denomination so high as to exclude the small saver.
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DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE
COMPTROLLER OF THE CURRENCY
FEDERAL DEPOSIT INSURANCE CORPORATION
FEDERAL RESERVE BOARD
NATIONAL CREDIT UNION ADMINISTRATION
DATE:
TO:
Depository Institutions
Deregulation Committee
FROM:
SUBJECT:
FEDERAL HOME LOAN BANK BOARD
U.S. TREASURY DEPARTMENT
June 15, 1982
Short-term Deposit Proposals
DIDC Staff*
At its March 22 meeting, the Committee adopted a long-run strategy
for deregulating deposit rate ceilings.
At the same time, the Committee
expressed its continuing concern about the ability of depository institutions
to compete with money market mutual funds (MMMFs) and, particularly, about
the weakness of deposit flows to thrift institutions.
In view of this con-
cern, the Committee adopted the 91-day, $7,500 minimum time deposit with a 25
basis point differential for thrifts.
The Committee also directed the staff
to continue efforts to design a shorter-term instrument to enhance the ability
of depository institutions to compete with MMMFs.
This memorandum reviews
the basic issues involved in designing such an instrument, including monetary
policy considerations, and then discusses in more detail the possible features
that the Committee may wish to consider. 1
I.
The Fundamental Issues
Since June 1981, when the Committee first solicited public comment
on this matter, total assets of MMMFs have grown from $127 billion to $203
This memorandum was prepared primarily by the staff of the Federal Reserve
Board (Messrs. Ettin, Schwartz, McKelvey, and Ms. Glassman).
1/ These issues have been discussed in greater detail in previous staff memoranda; see particularly, "Short-term Instrument Proposals," March 15, 1982.
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billion (roughly three-fifths of which is held by household investors).
During
the same period, savings deposits at depository institutions declined from
$367 billion to $350 billion and total small-denomination deposits (including
savings accounts) increased from $1,172 billion to $1,244 billion.
In order
to maintain their customer base, many banks and thrifts are attempting to pay
depositors a market rate of interest on short-term funds through a variety of
sweep arrangements.
Unless they are able to offer a short-term instrument
directly, however, depository institutions will continue to lose savings
deposits to MMMFs, and sweep arrangements will continue to proliferate.
The design of a new short-term instrument involves the consideration
of two fundamental issues that limit the potential competitiveness of the
instrument.
One concern is that a new short-term account will draw funds from
savings accounts, thereby raising institutions' costs.
As indicated previously
to the Committee, at current market rates each dollar shifted from a savings
account to a short-term market rate account would require the institutions to
attract $3 to $4 of external funds in order to break even.'
The second issue, of concern to the Federal Reserve staff, is the
effect that any new instrument would have on monetary policy.
The Federal
Reserve regards the maintenance of a distinction between transaction and
other accounts as essential to its conduct of monetary policy.
If the new
account were to blend transactions and savings features, it would further blur
the distinctions among accounts, making it more difficult to define and control
the money supply; this would be true even if the new account were subject to
1. An extensive discussion of break-even analysis and related issues can be
found in the previously cited staff memorandum, "Short-Term Instrument Proposals," March 15, 1982, pp. 14-19.
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transaction account reserve requirements.
On the other hand, regardless of
any restrictions which the Committee may impose on this account, the conduct
of monetary policy will continue to be complicated as nondepository institutions provide savers with instruments that combine transactions and savings
features.
Currently, under the Board's Regulation D, any deposit instrument
with a maturity or required notice period of less than 14 days, or any account
that can be used ordinarily to pay third parties, is subject to transaction
account reserve requirements.1
The Board's statutory authority would permit
it to shorten the 14-day maturity break to accommodate a new time account, so
long as that account had limited transaction features; this would make the
account eligible for time deposit reserve requirements.2
The Committee is
therefore faced with the difficult task of designing an instrument which can
effectively compete with other market rate instruments, such as MMMF shares,
but which minimizes savings deposit outflows and, to the extent practicable,
takes into account the Federal Reserve's monetary policy considerations.
1/ In particular, the Federal Reserve Board now imposes transaction reserve
requirements on (1) any account with a maturity or required notice period of
less than 14 days, (2) any account on which a draft can be drawn--all demand
deposits, NOWs, share drafts, and similar "other checkable deposits," (3) automatic transfer accounts, and (4) any account on which more than three monthly
preauthorized or telephone transfers can be made. The Federal Reserve has
also asked Congress for authority to extend reserve requirements to MMMFs that
serve as the functional equivalent of transactions accounts.
2/ Under the Monetary Control Act, savings deposits and nontransferable time
deposits held by persons are not reservable, while transferable time deposits
and time deposits held by other than natural persons are subject to a reserve
requirement of zero to 9 percent; the Board's current reserve requirement on
such time deposits generally is 3 percent. Even if the Board adopted a zero
percent reserve requirement on any new account, member banks would still be
subject to a small (and declining) reserve requirement on the aggregate of
their time and savings deposits during the phase-down period of reserve
requirements under the Monetary Control Act.
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II.
Design of the Instrument
The balance of this memorandum discusses the characteristics that a
new short-term instrument might have, taking into account the above considerations.
The key variables are the minimum denomination, maturity, and interest
rate; a number of other features are also presented for the Committee's consideration.
In addition, the Committee should be aware that limitations placed
on the new instrument to reduce costs and facilitate monetary policy will also
result in operational complexities for institutions.
Attachment A summarizes
the decision variables for the new instrument.
Minimum Initial Deposit.
A large minimum balance requirement would
minimize the potential for internal shifting from savings accounts, but would
make the new instrument less competitive as well.'
The staff believes that
an initial minimum denomination on the order of $10,000 to $25,000 would be
likely to prevent a large amount of internal deposit shifts.
In determining
the minimum initial deposit, the Committee may also wish to keep in mind:
(1) the possibility of future adjustments in the minimum deposit requirement
as information develops about internal deposit shifts, and (2) the desirability
of reducing pressure on institutions to offer sweep accounts to MMMFs and retail
repurchase agreements, many of which have been based on smaller denominations.
1/ A substantial proportion of savings deposits are in accounts with high
balances. In December 1981, the FDIC indicated that 75 percent of savings
account balances at MSBs were in excess of $5,000 and 41 percent were in excess
of $15,000. These results were similar to a February 1982 survey conducted by
the National Association of Mutual Savings Banks. In August 1980, the FHLBB
indicated that 70 percent of the funds in regular savings accounts at S&Ls
were in accounts with balances in excess of $5,000 and 45 percent were over
$10,000. A small sample survey by the American Bankers Association in March
1982 indicated that at commercial banks about 60 percent of savings deposit
balances were in excess of $5,000 and 38 percent were in excess of $10,000.
The latter survey also indicated that almost three-fourths of total NOW balances
were in excess of $5,000 and almost half were in excess of $10,000.
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Minimum Subsequent or Maintenance Balance.
To accommodate occasional
withdrawals, the Committee may wish to consider establishing a minimum maintenance balance lower than the initial deposit requirement.
MMMFs typically
permit shareholders to maintain balances below the initial balance requirement.
A similar provision for the new instrument, however, would be tantamount to
reducing the initial balance requirement for those depositors in a position to
meet it by borrowing or temporarily rearranging assets.
Moreover, considera-
tions of simplicity and consistency with minimum balance requirements for other
deposit accounts suggest that the maintenance balance on the new instrument be
the same as the initial minimum.
In order to determine if withdrawals have reduced the balance in
the proposed account below the required minimum, the Committee must first
specify the period over which the minimum is to be maintained.
The Committee
could require that the minimum balance be maintained as an average over some
interval (e.g., a week) or that it be met at all times.
For accounts failing
to meet this requirement, however defined, the Committee could stipulate that
they be closed or, alternatively, that the rate paid on the remaining balance
not exceed the applicable savings deposit ceiling.
Institutions would, of
course, be free to impose more restrictive provisions.
Maturity.
To the extent that savings account holders place a high
value on liquidity, requiring the proposed new account to have a fixed maturity
or required notice period, even if it were short, might limit internal shifting
from savings accounts.
The resultant illiquidity compared to MMMFs might be
offset by the convenience and insurance of the deposit instrument.
Moreover,
the Federal Reserve staff indicates that the shorter the maturity the greater
are its monetary policy concerns.
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Federal Reserve Bank of St. Louis
Therefore, the Committee staff suggests two
%
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options:
(1) a 7-day instrument, or (2) in order to provide flexibility to
issuing institutions, authorization of an instrument with any maturity between
7 and 31 days, or perhaps between 7 and 90 days.'
Whatever the maturity selected, the institutions could be permitted
to offer the account in two versions:
(1) a time deposit open account (which
has no specific maturity) with an enforced notice requirement before withdrawal
equal to the period selected, or (2) a time deposit with specific maturity, the
balance of which would be automatically rolled over (after perhaps a 1-day grace
period) if the depositor did not instruct otherwise.
Discussions with deposi-
tory institutions suggest a wide range of opinion regarding the operational
difficulties of a short-term notice account; some can handle such an account
with little difficulty, while others can do so only at great inconvenience.
Authorizing both versions would permit greater flexibility to individual institutions.
Rate.
There are several arguments in favor of and against imposition
of a rate ceiling on any new deposit.
The major arguments for a ceilingless
account are:
(1)
a ceiling might limit the competitiveness of the account;
(2)
the objective of the DIDC is to deregulate;
(3)
the available evidence suggests that institutions do not
price irrationally;
1/ A specific or maximum maturity (as opposed to a minimum maturity) is necessary if the Committee does not wish to deregulate all ceilings for deposits
equal to or above the proposed minimum denomination. In March, the Committee
adopted a deregulation schedule based on maturity which would effectively
be superseded for deposits above the minimum denomination on the new account
unless a specific or maximum maturity were adopted.
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(4)
as compared to an account with a market-indexed ceiling, a
ceilingless account will not further exacerbate internal
shifts from savings accounts, since the savings account
ceiling is so far below the market rate;
(5)
there is evidence that, in the market for competitive shortterm instruments, virtually all issuers pay the ceiling rate
and if there were no ceiling some institutions might pay less
and some more than what would have been the ceiling rate; and
(6)
institutions need the flexibility in the rates they can pay,
especially in the early months of the new instrument, to regain
depositors lost to MMMFs and other instruments.
The major arguments for imposing an indexed ceiling are:
(1)
because of MMMFs, the competition for short-term deposits may
be so intense as to make irrelevant the historical experience
that irrational pricing has not occurred in other maturity
categories;
(2)
the operating losses of thrifts may necessitate restraint of
rate competition in the short run; and
(3)
a ceiling would be necessary if the Committee intends to
establish a rate differential between banks and thrifts.
If the Committee chooses to impose an interest rate ceiling, the ceiling should
move fairly closely with market rates to make the account competitive.
There
are several other issues that the Committee would need to address, including
the choice of a base rate (e.g., 91-day bill rate), the relationship of the
ceiling to the base rate, the frequency with which the ceiling would change,
and compounding provisions.
These matters are discussed more fully in the
appendix.
Rate Differential.
In deciding whether to impose a rate ceiling and
whether to establish a rate differential for thrifts, the Committee may wish
to review its objectives in adopting the 91-day account at the March 22 meeting
and its purpose in directing the staff to prepare additional short-term deposit
proposals.
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Federal Reserve Bank of St. Louis
As noted earlier, the Committee adopted the 91-day account to
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enhance the competitive posture of depository institutions vis-a-vis MMMFs, and
it imposed a rate differential to enhance thrift deposit flows which were especially weak compared to commercial banks.
Thrift deposit flows have improved
subsequent to the May 1 introduction of the 91-day account with a differential,
although the extent to which the 91-day account is responsible for that improvement cannot be determined.
It should be noted that for those depositors in a position to meet
the minimum denomination balance requirement the proposed account may be equally
or more attractive to consumers in most respects than are the 91-day deposits,
depending on the other specific features chosen by the Committee.
If so, the
new account may at! _ict funds that otherwise would have gone to the 91-day
account, and the intended effects of the Committee's action in establishing a
differential on the 91-day account may be diminished considerably.
If a differ-
ential is imposed, the Committee should also consider whether it will apply to
IRA/Keogh and public unit deposits.
Additional Deposits.
Flexibility to accept additional deposits to
the proposed new account would make it more competitive with MMMFs, but would
raise the problem of how to assure that the additional funds remain on deposit
for the prescribed maturity or notice period.
With regard to fixed-maturity
term deposits, the simplest approaches would be either to permit additional
deposits only at the time of renewal or to allow additional deposits at any
time.
With respect to additional deposits, the Committee could permit such
funds to be withdrawn at the next scheduled maturity date or, alternatively,
could require the issuing institutions to establish procedures assuring that
each additional deposit remains in the account for at least the prescribed
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Federal Reserve Bank of St. Louis
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maturity period.1
This latter approach might be particularly appropriate for
notice accounts, where the timing of notices for specific withdrawals introduces
additional complexities.2
For monetary policy reasons, the Federal Reserve
staff recommends that the Committee not permit additional deposits to the
proposed new account if such deposits are triggered automatically by the level
of balances maintained in this or any other account.
Withdrawals.
The staff recommends no regulatory prohibition on the
size or nueier of withdrawals from the proposed new account, provided that
the funds to be withdrawn have satisfied the minimum maturity or notice period.
For notice accounts, once the institution has received notification, withdrawals
could occur only after the specified number of calendar days has passed.
Insti-
tutions would have to require at least the minimum notice, which could be given
by telephone or other telecommunication, mail or messenger, in person (over-thecounter or through an ATM), or by standing order.
For term accounts, withdrawals
1/ Examples of acceptable procedures for fixed maturity accounts include, but
are not limited to, the following:
(1) Each deposit would re-initialize the maturity of the original deposit.
(2) Each deposit would be subject to "first-in-first-out" accounting to
assure that each additional deposit was maintained for the term of the
account.
(3) An institution would be permitted to set up an "accounting cycle" equal
to the original term of the offered account. New deposits received
after the accounting cycle had begun would be regarded as maturing at
the end of the next complete accounting cycle. In effect, each deposit
would be on "hold" until the end of the following cycle.
2/ Examples of acceptable procedures for notice accounts include, but are not
limited to, the following:
(1) Any additional deposit would cancel any notice to withdraw that had
already been received, unless that notification called for a longer
remaining interval than the minimum notice period.
(2) "First-in-first-out" accounting to assure that each deposit would be
maintained for at least the minimum notice period.
(3) Establishment of an accounting cycle equal to the notice interval.
For funds received after the beginning of an accounting cycle, notice
of withdrawal could be given only at or after the beginning of the
next accounting cycle. In effect, the opportunity to give notice on
any particular deposit would be deferred until the beginning of the
next accounting cycle.
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could be made by any of the same methods.
Any funds not withdrawn by the end
of the grace period would automatically roll over.
In view of its monetary policy concerns, the Federal Reserve staff
believes that the Committee should not authorize any new short-term account
that can be used in connection with third-party payments.
Thus, even though
such an approach would limit the attractiveness of a new instrument relative
to MMMFs, the Federal Reserve staff suggests that the Committee prohibit both
third-party negotiable drafts that can be drawn directly on the account and
the automatic triggering of deposits and transfers by changes in balances of
this or any other account.
The Federal Reserve staff would not object, however,
to allowing the depositor to initiate unlimited deposits, transfers, or payments by telephonic notification or standing instructions, so long as such
transactions were in compliance with minimum maturity or notice period provisions.
Early Withdrawal Penalty.
In view of the short maturity or notice
on the proposed account, the Committee could prohibit early withdrawals under
any circumstances.
penalties.
This approach would eliminate the need for early withdrawal
If the Committee chose instead to authorize early withdrawals, it
might establish either of the following penalties:
(1) loss of earned interest
(as adopted on the 91-day account) or (2) the standard penalty (loss of interest
that would have been earned if held to maturity, which could require invasion
of principal).1
Once again, institutions could adopt a more restrictive penalty
or prohibit early withdrawals altogether.
1/ Either of these penalties could be relatively small for a partial withdrawal
since the number of days for which interest would be forfeited would be small
owing to the short-term nature of the account.
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Miscellaneous Restrictions.
The staff recommends that the Committee
consider whether to prohibit loans to depositors that are designed to help
depositors meet initial or maintenance balances.
If such loans were permitted
they would undercut the purpose of these requirements.
A second issue relates
to overdraft privileges, which would still be permissible on NOW or demand
deposits to which the new account is transferable.
In order to prevent devices
designed to circumvent the minimum maturity or notice requirements, however,
the Committee may wish to consider requiring that the rate charged on such
overdrafts be substantially equal to the rate charged for depositors that do
not hold the proposed account.
Eligibility.
The staff recommends that depository institutions be
permitted to offer the proposed new account to all depositors.
Effective Date.
In order to provide sufficient time for institutions
to plan marketing strategies and redesign systems, the staff recommends that
the effective date of any new instrument be September 1, 1982, about two months
after announcement of the Committee's decision.
The staff believes that further
public comment on this instrument is not necessary because the terms of the
proposed deposit were the subject of an extensive public comment period pre—
viously conducted by the Committee, and the Committee's decision as to the
specific characteristics of the proposed deposit would be within the scope of
the Committee's previous proposals and public comments received to date.
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Attachment A
SUMMARY OF DECISION VARIABLES FOR A
PROPOSED SHORT-TERM DEPOSIT
I.
Rate
1.
No ceiling.
2.
Indexed ceiling with no differential in favor of thrifts (see
Attachment B if this option is selected).
3.
Indexed ceiling with a differential in favor of thrifts (see
Attachments B and C if this option is selected).
II.
Denomination
1.
Initial minimum balance.
2.
Maintenance minimum balance.
3.
Period over which maintenance balance is to be calculated.
•
I day.
•
1 week.
•
1 month.
• Period equal to maturity (or notice period) of the account.
• Institutions' choice of above.
4.
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Federal Reserve Bank of St. Louis
Action to be taken if balance falls below minimum.
j.
Rate reduced (e.g., to applicable passbook ceiling or to zero)
until:
•
new deposits bring balance up to the minimum maintenance
balance.
•
new deposits bring balance up to the initial minimum balance.
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•
Account must be closed and remaining balance must be paid to
depositor or transferred to another account of the depositor;
initial minimum balance would be required to re-open account.
• Must institutions notify the depositor on the first day the
balance in the account falls below the minimum.
III.
Maturity
9
Specific (e.g., only 7 days) or a permissible range (e.g., 7 to / 0
1.
days).
enforced notice, specific term, or both.
2.
Form:
3.
For term accounts, the length of the grace period (e.g., 1 business
day) before automatic rollover.
IV.
Provisions Regarding Additional Deposits
For fixed-maturity accounts.
1.
•
New deposits permitted only at maturity (or by the end of
the grace period).
• New deposits permitted without re-initializing the maturity.
•.•
Any procedure, including but not limited to the above, that
assures each new deposit remains in the account for at least
the prescribed maturity period.
2.
For notice accounts.
•
Any procedure that assures that additions to the account are
maintained for at least the notice period.
3.
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Federal Reserve Bank of St. Louis
Sweeps into the proposed account from another account.
• Permitted.
• Prohibited.
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V.
Notice and Withdrawal Provisions
Possible restrictions.
1.
• Amount withdrawn must have remained on deposit for required
maturity or notice period (notice period measured from time
institution receives notification).
• No withdrawal by third-party draft drawn directly on the
proposed account.
•
No sweeps to another account automatically triggered by the
level of the balance maintained in the new account or any
other account.
Permissible
2.
means41
• Telephone or other telecommunication.
• Mail or messenger.
• In person (including ATM).
•
3.
Standing order.
Permissible forms.
• Check or cash to depositor.
•
Cash, draft, or electronic transfer by institution to third
parties.
• Transfer to depositor's checking or NOW account.
VI.
Early Withdrawal Penalty
1.
Early withdrawal prohibited.
2.
Early withdrawal permitted but with penalty of:
- • Loss of earned interest.
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Federal Reserve Bank of St. Louis
• Loss of interest that could have been earned if funds withdrawn had been held to maturity (or for notice period), requiring invasion of principal.
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VII.
Possible Miscellaneous Restrictions
1.
Prohibit loans to depositors to meet initial or maintenance balances.
2.
Require that overdraft rate on NOW or demand deposit accounts to
which the balances in the new account are transferable not be
substantially lower that the rate on such overdrafts for depositors that do not hold the proposed account.
3.
Prohibit transferability and/or negotiability.
4.
Prohibit loans to the accountholder that use the account as
collateral.
(Under existing regulation, minimum loan rate would
be 1 percent over the rate being paid on the deposit.)
VIII.
Eligibility of Depositors
1.
No restrictions.
2.
Limited to those eligible for NOW accounts (i.e., individuals and
certain nonprofit organizations).
3.
IX.
Limited to individuals only.
Effective Date
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Attachment B
SUMMARY OF DECISION VARIABLES IF AN INDEXED CEILING
WITHOUT A DIFFERENTIAL IS IMPOSED ON THE PROPOSED
SHORT-TERM INSTRUMENT
I.
II.
III.
IV.
Base Rate (e.g., the 91-day bill rate auction average, discount basis).
Relationship of the Ceiling Rate to the Base Rate
•
Spread from base rate.
•
4-week averaging option, as on MMC.
Frequency of Changes in Ceiling Rate
Adjustment of Rates Payable on Existing Accounts to Ceiling Changes
•
Allow institutions either to adjust to the new ceiling or maintain
the rate established at the time the account was opened or rolled
over.
•
Require institutions to keep the rates on existing accounts fixed
until they roll over.
•
Require institutions to reduce the rates paid on existing accounts
if the ceiling falls before the account matures or the notice
period has expired.
V.
Compounding
•
Permit without restriction.
•
Limit compounding period to maturity of account or length of enforced notice period.
VI.
Miscellaneous Issues
•
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May institutions offer RPs to future or current holders of the
new deposit at a rate in excess of that offered to other customers?
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•
May premiums be offered on the account--if so, existing rule
(i.e., two per account per year), at each roll over period, or
no more than, say, four times a year?
•
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May fees be paid to third party brokers for this account?
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Attachment C
SUMMARY OF ADDITIONAL DECISION VARIABLES IF A
DIFFERENTIAL IS IMPOSED ON THE CEILING RATE FOR
THE PROPOSED NEW SHORT-TERM INSTRUMENT
I.
Size of Differential (e.g., thrifts can pay 25 basis points more than
commercial banks).
II.
III.
Duration of Differential
•
Permanent.
•
Temporary, e.g., one year.
Conditions Under Which Differential is Eliminated (e.g., eliminated
when base rate is below 9 percent for four consecutive weeks and
reimposed when base rate exceeds 9 percent).
IV.
Applicability of Differential to Special Types of Deposits
•
IRA/Keogh deposits.
•
Governmental unit deposits.
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APPENDIX
ISSUES RELATING TO DETERMINATION OF A CEILING RATE
If the Committee imposed an indexed ceiling--with or without a
differential--it would have to address several additional issues.
include:
These
the choice of a base rate, the relationship of the ceiling to the
base rate, compounding provisions, the frequency with which the ceiling rate
changes, and whether rates payable on existing account balances may be adjusted
when the ceiling changes.
The staff would recommend using the 91-day bill rate (auction average,
discount basis) as the base rate, with or without any 4-week averaging adjustment such as occurs on the MMC.
The ceiling rate could then be set above,
equal to, or somewhat below the base rate.
A major consideration in establishing a ceiling is the relationship
between the ceiling and yields on MMMFs and other open market instruments.
The insurance and convenience aspects of a deposit instrument are valued by
many individuals, suggesting that a ceiling somewhat below these alternative
yields would still enable the new account to attract funds.
For illustrative
purposes, Chart 1 displays the historical rate spread--measured on both a weekly
and quarterly average basis--that would have prevailed since 1979 between the
average MMMF yield and the rate on a short-term account if the ceiling had
been equal to the 91-day bill rate (quoted on a discount basis).
Even though
management fees are deducted, the average MMMF yield tends to be higher because
most of the assets held by these funds are private securities yielding higher
rates of return.
The chart indicates that even with daily compounding a deposit
rate ceiling equal to the bill rate would have allowed MMMFs to pay, on average,
over 50 basis points more than the depository institutions.
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A-2
From a practical point of view, the staff notes that it would be
extremely difficult to prohibit compounding effectively on an instrument with
a short maturity.
On a fixed-term account, institutions legally must pay out
or credit interest at maturity, even if the balance in the account is rolled
over automatically.
flexibility.
On a notice account, the Committee has somewhat more
It could, for example, limit the crediting and compounding of
interest to periods of one quarter or more.
If the Committee authorized both
notice and fixed-term accounts, any restriction on compounding for notice
accounts would result in yield differentials between the two; it is likely,
however, that institutions would invent ways around any such restriction that
are difficult to anticipate.
Since the primary concern about compounding is
its effect on the cost of funds, the staff suggests that the Committee address
this issue in its consideration of the relationship between the ceiling and
the rate base.
In this regard, Table 1 illustrates that at Treasury bill
rates of 12 percent, compounding would add between 37 and 77 basis points to
the nominal ceiling depending on the frequency of the compounding.
One mechanical issue with respect to a ceiling rate involves the
rules that would govern adjustments of rates paid on existing account balances
to changes in the interest rate ceiling.
The Committee could, for example,
allow institutions the discretion either to change to the new ceiling or to
maintain the rate established at the time the account was opened or rolled
over.
Alternatively, the Committee could require that institutions maintain
the rate established at the time the account was opened or rolled over.
In
any event, at maturity or at the end of an interval equal to the notice period,
the institution would be required to change the rate on an existing account
balance if it exceeded the ceiling rate then in force for new deposits.
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Federal Reserve Bank of St. Louis
A-3
Chart 1
SPREADS BETWEEN YIELDS ON MMMFs
1/
AND A HYPOTHETICAL SHORT-TERM DEPOSIT
Percent
MMMY Rate less Deposit Rate
(Weekly data)
6
4
2
...... 2
4
Percent
— 4
MMMT Rate less Deposit
Rate (Quarterly average
-- data)
—3
2
1
0
Im•••••
2
•11Mall•
.m•
1
1/
1981
1982
1980
1979
Deposit rate is the fully effective yield corresponding to a ceiling equal
to the 91-day Treasury bill rate, auction average discount basis.
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Federal Reserve Bank of St. Louis
A-4
Table 1
EFFECTIVE YIELDS CORRESPONDING TO A 12 PERCENT NOMINAL CEILING
FOR VARIOUS COMPOUNDING PERIODS--365/360 BASIS
Type of
Compounding
Effective
Rate
Increased
Yield Due to
Compounding
Percent of the
Continuously
Compounded Increase
---- percent per annum ---100
1)
Continuous
12.938
.771
2)
Daily
12.935
.768
99+
3)
Weekly
12.922
.755
98
4)
Quarterly (91 day)
12.734
.567
74
5)
Semi-annual (182 days)
12.538
.371
48
6)
No compoundingli
12.167
1/
The fact that the effective rate is about 17 basis points higher than the
nominal rate even with no compounding is due to the artificial year.
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Federal Reserve Bank of St. Louis
0
•
•111
Raft
11111111110631/111111\
MINIMMA
WORLD SAVINGS
June 10, 1982
The Honorable Richard T. Pratt, Chairman
Federal Home Loan Bank Board
1700 "G" Street, N.W.
Washington, D.C. 20552
Dear Dick:
We understand that the Depository Institutions Deregulation Committee ("Committee")
will consider action at its meeting on June 29 on a seven-day market rate account
with a relatively high minimum denomination. It is our opinion that the account
which has been proposed for comment has several serious pitfalls. The purpose of
this letter is to strongly urge the Committee to consider instead the adoption of
a new form of short-term deposit which we believe will be successful because it
possesses all of the attributes necessary to be competitive with Money Market
Mutual Funds (MMMF) and other short-term investments while avoiding certain
dangers and shortcomings of the seven-day account being considered.
Background
It should be clear now to almost everybody that the thrift industry is in dire
straits. Operating losses are substantial and net worth erosion has become
critical. In addition to the earnings and net worth problems, there has been a
continuing loss of savings to competitive instruments offered by unregulated,
non-depository institutions. The steady movement of consumer deposits out of
thrift institutions has serious overtones and perhaps even greater, and more
immediate, consequences than those presented by the industry's shrinking capital.
Although a magnificent job has been done in maintaining public confidence to date,
there is growing evidence that a breach of that public confidence is taking place.
A New Account Similar to a Money Market Mutual Fund is Needed
It is absolutely essential that the Committee now authorize an account which is
certain to be successful. Accordingly, we believe that this new form of deposit
must possess the attributes of a product in which the public has already demonstrated an intense interest, namely, the Money Market Mutual Fund. In addition,
it is imperative that the account be simple and easy to market.
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Federal Reserve Bank of St. Louis
20TH STREET AND BROADWAY, OAKLAND CA._ PORNIA 94612 (415) 645-9414
MEMBER OF GOLDEN WEST FINA'.2IAL CORPORATION
The Honorable Richard T. Pratt
June 10, 1982
Page Two
Objectives of a New Account
If properly designed, we believe that a new form of short-term deposit should
enable commercial banks and thrift institutions to successfully compete with
MMMFs for the first time. Moreover, such an account should be able to stop the
continuing outflow of consumer savings from depository institutions in general,
and from thrift companies in particular, without an excessive transfer of funds
from lower rate passbook accounts. In our opinion, the objectives of such an
account should strike an appropriate balance between the need to resolve the
growing cash flow needs of thrift institutions on the one hand, and the concerns
over the industry's earnings and net worth problems on the other hand.
Suggested Characteristics of a Competitive Deposit
Based on the lessons learned by the remendous success of MMMFs and the experience
we have gained from marketing a highly effective consumer repurchase agreement
("repo") program, we believe that a short-term account should possess the following
characteristics in order to meet the needs and objectives discussed above:
Interest Rate: The weekly average rate paid by the nation's leading
MMMFs taken from Donohue's Money Funds Report or, preferably, as determined by the Federal Reserve Board. The interest rate should be fixed
for a seven-day period.
Differential: Thrift institutions must be authorized to pay 1/4% more
than the rate proposed above.
Term: Thirty (30) days, renewable automatically for successive like
periods. No maturity notification should be required.
Minimum Opening Balance: We recommend a $2,000 minimum opening balance.
However, if the Committee chooses a larger minimum, we strongly urge a
minimum balance of no more than $5,000.
Minimum Maintenance Balance:
$2,000.
Withdrawals: Permitted without notice in amounts of at least $500 up to
three times per month. Withdrawals may be made by check. Withdrawals
of less than $500 would be subject to a $10 processing fee.
Deposits: Permitted in amounts of $500 or more.
vv.0_45\,,t
The account proposed above offers features which are highly competitive with MMMFs
and other short-term instruments in a package that is easy to understand and easy
to market. In our view, this deposit will satisfy the public's demand for high
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Federal Reserve Bank of St. Louis
•
The Honorable Richard T. Pratt
June 10, 1982
Page Three
yield, short maturity and reasonable access and thus will be very successful in
halting the erosion of consumer deposits from depository institutions and in
attracting new savings. At the same time, we believe that transfers of passbook
savings into this new account will not be excessive or inordinately expensive
given the cash flow benefits to be realized.
Our experience in working with financial institution lobby groups, interested
legislators and industry regulators indicates that it is likely that there will
be diverse opinions regarding the appropriateness of the account proposed above.
Because several of these divergent views can be anticipated, we would like to
take this opportunity to discuss the two major issues expected to be raised.
First, some commercial baners may argue that the interest rate on the proposed
account should be deregulazed completely rather than be limited to an index and
that there should not be a differential even for an interim period. Those who
raise these objections are either ignorant of the current condition of thrift
institutions or seek to ta.e advantage of the plight of that industry. We submit that to totally deregu - ate any new short-term account would give the comparatively healthy commercial :anking industry an insuperable advantage over the
severely weakened thrift irstitutions, thereby further abbreviating the business
life expectancy of many sa.ings and loans and savings banks.
We believe that the key obectives of public policy for the Committee at this
time should be to enable dePository institutions in general to become competitive
with unregulated intermediaries and to remedy the increasingly severe liquidity
problems facing thrift com:anies. We submit that the proposed account accomplishes
these objectives by giving commercial banks the long-sought opportunity to compete
with MMMFs on an equal fooYng. At the same time, thrift institutions will be
pruviLied the means to bols7ar their cash flows and, it is to be hoped, win some
positive publicity by virt_e of a return to healthy savings gains. Finally, we
believe that the highly co-2etitive market rate of the account proposed makes
full deregulation unnecessa-y at this time and thus forestalls until a more
appropriate time an action .hich could have disastrous results for thrifts if
taken now.
Second, it is expected tha: some thrift company executives will argue that funds
generated by the new form c: market-rate deposit we have proposed will be too
costly in view of the large operating losses and declining capital of the industry.
In addition, although a %ter large percentage of the liabilities of thrift institutions are already at or a:proaching market rates, objections will still be
expressed by those who fear that transfers from passbook accounts to the new
deposit form will be partic_larly expensive.
Admittedly, the diminishini net worth positions of thrift institutions are cause
for extreme concern. Howe\er, less obvious and even more dangerous, in our
opinion, are the growing 1 - :Jidity problems of the thrift industry stemming from
its inability to effective-. compete for consumer savings. Indeed, it is not
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Federal Reserve Bank of St. Louis
The Honorable Richard T. Pratt
June 10, 1982
Page Four
inconceivable that continuing consumer deposit losses could trigger a cash flow
crisis. Thus, we believe that the benefits which will be provided to the industry
at a most critical time through enhanced cash flow and liquidity far outweigh the
cost of the competitive product.
We would also like to say a few words about concerns over the transfers from
passbook accounts. These accountholders can be divided into two categories:
those who will not transfer and those who will. The first group, a large core
of stable passbook deposits, have not been tempted by market rates (which have
been available at financial institutions since June of 1978) and are not likely to
move now simply because of the advent of the proposed account. The second group
uses the passbook as a parking lot for funds. As long as thrift institutions
do not have a competitive product, these depositors are prime candidates for disintermediation into MMMFs or any other attractive, high-yielding instrument.
This passbook customer will satisfy his needs. When his current financial instrument does not meet his requirement for yield and liquidity, he goes elsewhere.
We believe that it is somewhat naive to expect the saver to continue indefinitely
to be content with a 5 1/4 - 5 1/2% return when he is being bombarded with
profitable alternatives. The gap in the savings and loan product line (the
absence of a high-yielding, liquid account) created a vacuum that spawned a
$200 billion MMMF industry. Currently, in a desperate attempt to fill this gap
and to retain customers, several depository institutions have actually linked
up with MMMFs and created an account which will facilitate the movement of savings
funds into MMMFs through a sweep arrangement. To summarize, there is a large
portion of passbook savings that is immobile. The balance of these accounts is
unstable and highly susceptible to the best offer. Experience has demonstrated
that it is patently shortsighted (and, at this junction, dangerous) to expect to
retain savings with yields that are well below market in a market rate world.
Under the present circumstances, we believe the most judicious course of action
must include an attempt to retain "group two" of our passbook funds by offering
an account with an attractive rate, rather than face the high likelihood of losing
these funds entirely.
Conclusion
In the past four years since the adoption of the popular six-month money market
account, regulators have been unable to design a successful short-term account.
One major reason for this failure has been the effort to create a deposit which
will not lure funds from passbook accounts, either through the use of long minimum
terms or high minimum balances. The result of all of this effort has been the
creation of a sizeable number of relatively noncompetitive products. It is now
exceedingly critical that the Committee focus instead on the products being
offered in the financial marketplace, in general, and specifically those offered
by MMMFs, and adopt a form of deposit which will enable commercial banks and
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Federal Reserve Bank of St. Louis
The Honorable Richard T. Pratt
June 10, 1982
Page Five
thrift institutions to once again aggressively compete for consumer funds without being at a disadvantage to other unregulated intermediaries. We believe that
we have described the characteristics of such an account in this letter and we
urge the Committee to favorably consider our recommendation.
Sincerely,
Herbert M. Sandler
Chairman of the Board
and Chief Executive Officer
HMS:jy
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
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thatKlifloss has already discussed this
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of the other DIDC members will vote for
Option I.
Attachment
DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE
asiiington. 1).C. 20220
COMPTROLLER OF THE CURRENCY
FEDERAL RESERVE BOARD
FEDERAL DEPOSIT INSURANCE CORPORATION
NATIONAL CREDIT UNION ADMINISTRATION
FEDERAL HOME LOAN BANK BOARD
DEPARTMENT OF THE TREASURY
JUN 08 1982
MEMORANDUM TO:
FROM:
Distribution
Steve Skancketj4
Attached for presentation to your respective DIDC
member is the final notation ballot on the Establishment
of Interest Rates on Accounts not Subject to Interest
Rate Limitations.
Please return this ballot to me as soon as your
member has voted. If you expect a delay, please let
me know.
DISTRIBUTION:
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Federal Reserve Bank of St. Louis
COPIES:
Eastburn
Silverberg
Chamberlain
Bernard L/
Miller
Arnold
Schott
DiNuzzo
Laird
Schwartz
Leemon
Fenner
DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE
Washington. D.C. 20220
COMPTROLLER OF THE CURRENCY
FEDERAL RESERVE BOARD
FEDERAL DEPOSIT INSURANCE CORPORATION
NATIONAL CREDIT UNION ADMINISTRATION
FEDERAL HOME LOAN BANK BOARD
DEPARTMENT OF THE TREASURY
June 7, 1982
TO.
FROM:
Depository Institutions
Deregulation Committee
Steven L. SkanckeZa
Executive Secretary
SUBJECT
Request for Notation
Vote on Establishment
of Interest Rates on
Accounts Not Subject
to Interest Rate
Limitations
Your notation vote is requested to determine whether the
Committee's actions to create new deposit accounts without
Federal interest rate limitations (1) should allow depository
institutions complete discretion in setting interest rates payable on such accounts, (2) should require in the deposit contract the specification of a minimum rate or the means for determining the rate, beyond which discretionary bonuses would be
permitted, or (3) should require in the deposit contract the
establishment in advance of a specific rate or a specific means
by Which to determine the rate, beyond which no bonuses would
be permitted.
Current DIDC member agency rules 1/, adopted under authority since transferred to the DIDC, require that time deposits
issued by depository institutions specify at the time the deposit
agreement is entered into, the rate of interest paid, and if
such rate is variable, that it be indexed to an independently
verifiable standard. Interpretations of these rules would
seem to prohibit depository institutions from paying a bonus
subject solely to their own discretion or paying interest at a
rate subject solely to their control. In addition, FDIC rules
would require imposing an early withdrawal penalty for payment
of a discretionary bonus.
The Committee has been asked to review these agency interpretations and determine whether they should continue to apply.
(DIDC action will not affect current agency advertising or disclosure regulations nor will it prevent agencies from issuing
such further regulations they deem necessary to assure consumer
protection.) A DIDC staff memorandum providing additional
background is attached.
1/
National Credit Union Administration rules are not involved.
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Federal Reserve Bank of St. Louis
2
not subject
Please Indicate Your Vote -- For deposit categories
tutions:
insti
itory
depos
s,
ation
to Federal interest rate limit
/17 1.
May retain complete discretion in establishing the
cted
interest rate and amount payable and are not restri
t
enden
indep
for
ished
establ
es
to using only rate index
1/
ol.
contr
their
under
not
es
business purposes or index
/7
payMust establish a minimum interest rate or amount
a
in
bonus
a
pay
to
right
able but may reserve the
tution's
manner determined solely in the depository insti
discretion.
2.
[73.
interest
Must specify in the deposit contract a specific
est
inter
g
minin
deter
for
rd
rate or a verifiable standa
est
inter
the
on,
additi
In
rates or bonus amounts.
on
rate on a variable rate time deposit must be based
which
over
index
an
on
a predetermined schedule or
or
the depository institution does not have control
discretion.
DIDC Member Signature
Attachment:
1/
Staff Memorandum
terms such
Under state laws governing contracts, material
stated
as the rate of interest generally would have to be
the
en
betwe
and agreed upon in order to create a contract
depositor and the depository institution.
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Federal Reserve Bank of St. Louis
DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE
Wa,liingtor).1).C. 20220
COMPTROLLEROFTHECURRENCY
FEDERAL RESERVE BOARD
TO:
FROM:
FEDERAL DEPOSIT INSURANCE CORPORATION
NATIONAL CREDIT UNION ADMINISTRATION
Depository Institutions
Deregulation Cbmrittee
DIDC Staff *
ACTION REQUESiED:
SUBJECT:
FEDERAL HOME LOAN BANK BOARD
DEPARTMENT OF THE TREASURY
Establidhment of Interest
Rates on Accounts Not
Subject to Interest Rate
Limitations
The Committee is asked to determine the extent of discre-
for
tion that depository institutions may have in establishing interest rates
deposit categories that are not subject to Federal interest rate limitations.
BACKGROUND:
At its September 22, 1981 and March 22, 1982 meetings, the DIDC
authorized new deposit account categories not subject to Federal interest
rate limitations.
Inquiries from depository institutions have raised ques-
tions concerning the permissible methods of establishing interest rates on
sudh accounts.
Some of the individual agencies, in interpreting their cur-
rent regulations, have indicated that deposit contracts must state explicitly
either the specified rate to be paid on the deposit or the method for determining the rate.
This is to enable the depositor to verify that he or she is
receiving the correct amount of interest.
Also, sore agency rules provide
that any discretionary increase in the rate of interest paid on a time deposit
constitutes an early withdrawal.
Several institutions (see, for example, the attached petition of the
Philadelphia Savings Fund Society) have asked whether it is permissible to
establish a rate on deregulated accounts Whereby the deposit contract would
state the minimum rate paid on the time deposit, but also would provide that
the institution retains the right to pay a higher interest rate or bonus
solely at its discretion.
Any such higher rate or bonus could depend on one
or more variables, such as the rate offered by competitors or the earnings
* This memorandum was prepared primarily by the staff of the Federal Reserve
Board and the Treasury Department.
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Federal Reserve Bank of St. Louis
2
of the institution and, under some of the proposals
would be at the sole
discretion of the depository institutions.
DISCUSSION:
The staff believes that this issue is significant for all existing
and future deposits not subject to an interest rate ceiling, including the new
IRA/Keogh 1-1/2-year and the 3-1/2-year minimum maturity account categories.
The range of options available to the Committee includes (1) allowing depository
institutions to retain complete discretion in establishing rates and amounts
of interest to be paid on account categories not subject to interest rate
limitations; (2) requiring a stated minimum rate or amount of interest but permitting discretionary bonuses to be paid in addition; and (3) reaffirming
existing DIDC member agency (not NCUA) rules and interpretations.
Adopting the first option would permit depository institutions to base their
interest rate on any index or schedule they deem appropriate for the account.
Thus, current FHLBB and Federal Reserve rules requiring that the index be outside
the control of the institution, or the FDIC rule limiting the choice of an index
to one established for an independent business purpose, no longer would apply.
As a result, an institution and a depositor, for example, would be able to agree
on a rate of interest that varies with the institution's cost of funds or profitability and where the relationship between the index and the rate of interest
paid would be subject to the discretion of the institution.
Such a grant of
discretion, however, would not override state laws and general principles of
contract law, nor would it override advertising and other consumer protection
requirements now present in DIDC member agency rules and interpretations.
Option two would require depository institutions to specify a minimum rate
of interest, or a method for determining that rate of interest.
In addition to
this minimum an institution would retain discretion to pay a bonus for whatever
purpose it would deem appropriate.
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Federal Reserve Bank of St. Louis
A, variable rate would continue to be governed
3
permissible indexes upon which
by FDIC, FHLBB and Federal Reserve restrictions on
the rate could be based.
e rules and interpreIn option three, current FDIC, FHLBB and Federal Reserv
the selection of appropriate
tations on setting and changing interest rates, and
indexes, are maintained.
This option would prohibit the establishment of a time
any part of the amount or
denosit where an institution retains discretion over
bonus or to pay an unspecified
rate to be paid, including the discretion to pay a
amount above a minimum.
Institutions wculd have to inform the holder of a time
of interest or, if a
deposit at the time an account is opened of the rate
be used in computing and
variable rate account, the specific method that will
paying interest on the account../
ine the balance between
In resolving this issue, the Committee must determ
ts that may accrue to both
(1) consumer protection and (2) preserving the benefi
ility in developing dedepositors and institutions by allowing greater flexib
posit contracts.
t depository
Discretionary rate and bonus arrangements may permi
increase their deposit
institutions to be more competitive and, as a result,
flows.
than they would
Consumers may benefit from higher interest payments
otherwise receive.
utions
On the other hand, there is potential that some instit
receive an unspecified
may mislead consumers into believing that they will
have little or no intention
rate of interest or a bonus on a time deposit but
of paying the bonus.
or
In addition they may decide to provide higher rates
bonuses to some depositors, but not others.
ers from the allure of
1/ These rules were established to protect consum
guaranteed or the
not
are
rates
higher rates of return when the higher
able. Under their
verifi
not
is
rates
r
method of determining these highe
t contracts for
deposi
time
its
in
provisions, an institution may provide
st if it speciof
intere
rate
the
in
the payment of a bonus or an increase
paid or the
be
will
bonus
the
which
fies the verifiable conditions under
provision that
a
e
includ
could
ution
rate increased. For example, an instit
ution's ratio
instit
the
t
if
accoun
an
a bonus of one percent will be paid on
tablished
pre-es
a
s
for a year exceed
of net income to average total assets
amount, such as 1.50%.
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Federal Reserve Bank of St. Louis
4
ning ceiling-free accounts
If the Committee determines that its rules gover
over the rate or amounts of intermean that institutions may retain discretion
supersede existing agency rate-setest to be paid on such accounts, this would
rules. This would seem to be
ting rules, but not advertising or disclosure
and March 1982 deregulation of
consistent with the Committee's September 1981
categories.
deposit interest rates on certain account
As a practical matter,
institutions establish at least
market constraints would likely require that
itors would likely learn of
a minimum rate to attract depositors, and depos
.
institutions that do not deal in good faith
The regulatory agencies would be
osure guidelines with regard to
free to issue additional advertising and discl
mers against misleading practices.
rate and bonus arrangements to protect consu
ictions governing the establishIf the Committee believes that current restr
es are needed to complement adverment of interest rates or payments of bonus
ction of depositors, then the curtising and disclosure rules in assuring prote
tions can be reaffirmed by the DIDC,
rent agency rate regulations and interpreta
fy in the deposit contract the method
and institutions will be required to speci
of establishing any interest paid.
Choose option two which reAs an alternative, the Committee may wish to
method of determining a rate be
quires that a minimum rate or a verifiable
institutions be given discretion to
established in a deposit contract but that
pay bonuses above that rate.
Attachment:
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Federal Reserve Bank of St. Louis
Philadelphia Savings
Fund Society Petition
006363
PUS
THE PHILADELPHIA SAVING FUND SOCIETY •THE NATION'S FIRST MUTUAL SAVINGS BANK
IA. Todd Cooke
Chairman
February 19, 1982
Mr. Steven L. Skancke
Executive Secretary
Depository Institutions
Deregulation Committee
Department of the Treasury
15th Street & Pennsylvania Avenue, NW
Washington, DC 20220
Dear Mr. Skancke:
The Philadelphia Saving Fund Society (PSFS) requests that the Depository
Institutions Deregulation Committee (DIDC) issue a ruling whereby DIDC
Regulations supercede FDIC Rules and Regulations to permit maximum rate
flexibility for the new IRA/Keogh accounts. Specifically, PSFS requests that
Section 329.4(e)(1) of the FDIC Rules and Regulations be superceded. This
section has the effect of limiting the ability of financial institutions to
provide market interest rates for IRA/Keogh accounts and defeats the DIDC's
Intention to deregulate the interest rate ceiling for these accounts. Thus,
It prohibits financial institutions from aggressively competing with
non -financial institutions for retirement deposits.
PSFS submits the attached petition for DIDC review and action. Implementation
of PSFS' recommendation will ultimately benefit customers in that competition
and not regulation will determine the interest rate paid on these deposits.
Thank you for your consideration.
Sincerely,
1212 MARKET STREET • PHILADELPHIA, PA 19107
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Federal Reserve Bank of St. Louis
(215) 636-6100
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Federal Reserve Bank of St. Louis
00C3G3
PSFS' PETITION TO AMEND FDIC
REGULATIONS FOR IRA/KEOGH ACCOUNTS
006363
Background
s to
ted comments on proposed change
ues
req
C
DID
the
0,
198
18,
On December
of and
flexibility in administration
r
ate
gre
ow
all
to
ns
tio
ula
existing reg
uested on
Comment was specifically req
ts.
osi
dep
ogh
/Ke
IRA
for
competition
a ceiling
account should be indexed to
ogh
/Ke
IRA
ed
pos
pro
the
whether or nbt
elected
e 25, 1981 meeting, the DIDC
Jun
its
At
ed.
lat
egu
der
y
rate or totall
ative
ts pending the outcome of legisl
oun
acc
ogh
/Ke
IRA
the
on
ion
to defer act
by Congress.
revisions being considered
1981 by
signed into law on August 13,
1,
198
of
Act
Tax
ry
ove
Rec
The Economic
by providing for
sting IRA/Keogh legislation
President Reagan, amended exi
's. It
eligibility requirements for IRA
the
ing
and
exp
and
s
ion
but
higher contri
sidering.
issues which the DIDC was con
did not address the earlier
idered
1981 meeting, the DIDC recons
22,
ber
tem
Sep
its
at
r,
yea
Later in the
for IRA/Keogh
a new time deposit category
these proposals and approved
hteen
) a minimum maturity of eig
(1
for
ed
vid
pro
t
oun
acc
new
acounts. The
deposits
ceiling, and (3) additional
e
rat
st
ere
int
ted
ula
reg
months, (2) no
will be permitted.
without extending the maturity
The Issue
ress the issue of a
staff did not adequately add
PSFS believes that the DIDC
regulations
lings when it wrote the final
deregulated interest rate cei
te that
C guidelines specifically sta
FDI
t.
oun
acc
ogh
/Ke
IRA
concerning the new
/Keogh account, the
establishes a variable rate IRA
on
uti
tit
ins
ial
anc
fin
If a
the terms and
to the indicator as noted in
al
equ
be
t
mus
e
rat
st
intere
xibility to pay
This does not provide any fle
t.
oun
acc
the
of
s
ion
condit
tor as a
in fact, it fixes the indica
,
and
tor
ica
ind
the
n
higher tha
e ceiling.
"regulated" interest rat
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Federal Reserve Bank of St. Louis
00G3G3
The Law
Section 1204.118(a) of the DIDC Regulations provides for the new IRA/Keogh
account and reads:
(a) A commercial bank, mutual savings bank or savings and loan
association may pay interest at any rate as agreed to by the
depositor on any time deposit with a maturity of one and one-half
years or more, that consists of funds deposited to the credit of, or
in which the entire beneficial interest is held by, an individual
pursuant to an Individual Retirement Account agreement or Keogh
(H.R. 10) Plan established pursuant to 26 U.S.C. (I.R.C. 1954) 219,
401, 408 ano related provisions.
Section 329.4(e) of the FDIC Rules and Regulations state:
(e) Applicatic-
T4
---?lty to changes in interest rates or
maturities.-(1) Increases in interest rates on existing time
deposits.
orner
on any tir-:
.nere is an increase in the rate of interest paid
the deposit will be treated as having been
withdrawn by the depositor, prior to maturity, on the date on which
the deposit begir,s to earn interest at the higher rate.
An exception is granted to this regulation in Section 329.4(e) (3) of the FDIC
Rules and Regulations which reads:
(3) Exceptions.
The provisions of this paragraph (e) do not apply to an
increase in the rate of interest paid on a time deposit where such
increase is explicitly authorized by the terms of the original
deposit contract and may not be granted or withheld at the
opposition of the bank.
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Federal Reserve Bank of St. Louis
-Nok
-3..
006363
tation of this regulation is not
PSFS believes that the FDIC's interpre
when they authorized the new
consistent with the intentions of the DIDC
IRA/Keogh account.
PSFS' Variable Rate IRA/Keoqh Account
its Variable Rate IRA/Keogh account is
PSFS has been advised by the FDIC that
FDIC has cited PSFS' method of
in violation of FDIC Regulations. The
tent with FDIC Regulations. PSFS'
determining the interest rate to be inconsis
Rate IRA/Keogh account include the
Terms and Conditions for the Variable
rate paid.
following statement regarding the interest
be payable at a variable
"During the initial term, interest will
a weekly basis. The
annual rate which is subject to change on
each variation in the
Interest Rate will vary in conjuncton with
ntly issued six-month
auction average discount rate for most rece
Treasury Department
U.S. Treasury Bills as announced by the U.S.
Bill Auction. On the
following each weekly six-month U.S. Treasury
rest Rate will be
first business day after each Auction, the Inte
the period it is in
redetermined and reset so as to produce, for
90% of the
effect, a Percentage Yield at least equal to
then-current Auction Rate."
least equal to 90%" does not conform
The FDIC contends that the statement "at
329.4(e)(3) of its Rules and
with the exception granted in Section
is not readily ascertainable by the
Regulations. The rate of interest paid
customer.
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Federal Reserve Bank of St. Louis
- 4-
00C363
interest rate does conform
PSFS believes that its method of determining the
to the DIDC Regulations, which
with FDIC Rules and Regulations, in addition
authorize the account for the following reasons:
for the new account so that
The DIDC authorized no interest rate restrictions
iations could actively
banks, mutual savings banks and saving and loan assoc
mers' deposits. Money Market
compete with non-financial institutions for custo
external or internal
Funds, for example, do not index their rate to any
g their rates. It was
indicator. They have complete latitude in determinin
flexibility to financial
the DIDC's intent, we believe, to provide equal
were designed to
institutions. Accordingly, PSFS' Terms and Conditions
y establishment of its
provide this flexibility and latitude in the weekl
mers that would be based on
rate. It guaranteed an interest rate to its custo
compete aggressively with
prevailing market conditions. This allows PSFS to
its, rather than lose them to
non-financial institutions for customers' depos
ictions.
non -financial institutions because of rate restr
mer be able to determine the
The DIDC also expressed concern that the custo
ed. PSFS clearly states in
indicator to which the interest rate would be index
minimum rate would be, as
its terms and conditions what the guaranteed
previously quoted, on page 3.
onth auction rate is and know
Customers can readily determine what the six-m
earned for the period. When PSFS
the minimum amount of interest that will be
minimum, it is because market
elects to pay a rate higher than the guaranteed
nue to attract new deposits. The
conditions require it if PSFS wishes to conti
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Federal Reserve Bank of St. Louis
..,
006363
— 5 —
payment of a higher rate of interest to the customer certainly cannot be
-
considered as a disservice to the customer.
In addition, PSFS makes its rates
available through branch signage, special rate "hotlines", advertising in
newspapers and an insert mailed with each quarterly statement showing the
interest rates for each period.
It is important for the DIDC to provide financial institutions with maximum
flexibility in the competition for IRA/Keogh deposits. These deposits
represent long-term, stable funds for financial institutions.
If other
restrictions are placed on these accounts, such as the interest rate
restrictions identified in the FDIC guidelines, PSFS believes financial
institutions will be at a major competitive disadvantage.
PSFS Recommendation
PSFS has supported the DIDC in its efforts to deregulate and improve the
administration of IRA/Keogh account.
PSFS recommends that the DIDC issue a
ruling whereby DIDC regulations supercede existing FDIC Regulations to provide
for a truly deregulated IRA/Keogh account.
If this petition is accepted, financial institutions would be able to compete
on a truly equal basis with non-financial institutions for customers'
desposits.
Competition will benefit potential customers by encouraging the
payment of a market return on funds invested.
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Federal Reserve Bank of St. Louis
?
BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM
Date: 6/9/82
To:
Chairman Volcker
From: NORMAND BERNARD
Notation vote request.
I understand
that Neal Soss has already discussed this
memo with you.
Gil Schwartz is a principal
author of the accompanying memo.
I understand that most, and possibly all,
of the other DIDC members will vote for
Option I.
Attachment
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Federal Reserve Bank of St. Louis
DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE
washinl.zton. D.C. 20220
COMPTROLLER OF THE CURRENCY
FEDERAL RESERVE BOARD
FEDERAL DEPOSIT INSURANCE CORPORATION
NATIONAL CREDIT UNION ADMINISTRATION
FEDERAL HOME LOAN BANK BOARD
DEPARTMENT OF THE TREASURY
June 7, 1982
TO.
FROM:
Depository Institutions
Deregulation Committee
Steven L. Skancke,en8
Executive Secretary
SUBJECT
Request for Notation
Vote on Establishment
of Interest Rates on
Accounts Not Subject
to Interest Rate
Limitations
Your notation vote is requested to determine whether the
Committee's actions to create new deposit accounts without
Federal interest rate limitations (1) should allow depository
institutions complete discretion in setting interest rates payable on such accounts, (2) should require in the deposit contract the specification of a minimum rate or the means for determining the rate, beyond which discretionary bonuses would be
permitted, or (3) should require in the deposit contract the
establishment in advance of a specific rate or a specific means
by Which to determine the rate, beyond which no bonuses would
be permitted.
Current DIDC member agency rules 1/, adopted under authority since transferred to the DIDC, require that time deposits
issued by depository institutions specify at the time the deposit
agreement is entered into, the rate of interest paid, and if
such rate is variable, that it be indexed to an independently
verifiable standard.
Interpretations of these rules would
seem to prohibit depository institutions from paying a bonus
subject solely to their own discretion or paying interest at a
In addition, FDIC rules
rate subject solely to their control.
would require imposing an early withdrawal penalty for payment
of a discretionary bonus.
The Committee has been asked to review these agency interpretations and determine whether they should continue to apply.
(DIDC action will not affect current agency advertising or disclosure regulations nor will it prevent agencies from issuing
such further regulations they deem necessary to assure consumer
protection.) A DIDC staff memorandum providing additional
background is attached.
1/
National Credit Union Administration rules are not involved.
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Federal Reserve Bank of St. Louis
2
subject
Please Indicate Your Vote -- For deposit categories not
ions:
institut
ry
to Federal interest rate limitations, deposito
/-7
1.
May retain complete discretion in establishing the
interest rate and amount payable and are not restricted
to using only rate indexes established for independent
business purposes or indexes not under their control. 1/
/-7
2.
Must establish a minimum interest rate or amount payable but may reserve the right to pay a bonus in a
manner determined solely in the depository institution's
discretion.
[73.
Must specify in the deposit contract a specific interest
rate or a verifiable standard for determining interest
rates or bonus amounts. In addition, the interest
rate on a variable rate time deposit must be based on
a predetermined schedule or on an index over which
the depository institution does not have control or
discretion.
DIDC Member Signature
Attachment:
1/
Staff Memorandum
Under state laws governing contracts, material terms such
as the rate of interest generally would have to be stated
and agreed upon in order to create a contract between the
depositor and the depository institution.
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Federal Reserve Bank of St. Louis
DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE
Wa4lingt(mAW. 20220
COMPTROLLER OF THE CURRENCY
FEDERAL RESERVE BOARD
TO:
FROM:
FEDERAL DEPOSIT INSURANCE CORPORATION
NATIONAL CREDIT UNION ADMINISTRATION
Depository Institutions
Deregulation Committee
DIDC Staff *
ACTION REQUESTED:
SUBJECT:
FEDERAL HOME LOAN BANK BOARD
DEPARTMENT OF THE TREASURY
Establishment of Interest
Rates on Accounts Not
Subject to Interest Rate
Limitations
The Committee is asked to determine the extent of discre-
tion that depository institutions may have in establishing interest rates for
deposit categories that are not subject to Federal interest rate limitations.
BACKGROUND:
At its September 22, 1981 and March 22, 1982 meetings, the DIDC
authorized new deposit account categories not subject to Federal interest
rate limitations.
Inquiries from depository institutions have raised ques-
tions concerning the permissible methods of establishing interest rates on
such accounts.
Some of the individual agencies, in interpreting their cur-
rent regulations, have indicated that deposit contracts must state explicitly
either the specified rate to be paid on the deposit or the method for determining the rate.
This is to enable the depositor to verify that he or she is
receiving the correct amount of interest.
Also, some agency rules provide
that any discretionary increase in the rate of interest paid on a time deposit
constitutes an early withdrawal.
Several institutions (see, for example, the attached petition of the
Philadelphia Savings Fund Society) have asked whether it is permissible to
establish a rate on deregulated accounts whereby the deposit contract would
state the minimum rate paid on the time deposit, but also would provide that
the institution retains the right to pay a higher interest rate or bonus
solely at its discretion.
Any such higher rate or bonus could depend on one
or more variables, such as the rate offered by competitors or the earnings
* This memorandum was prepared primarily by the staff of the Federal Reserve
Board and the Treasury Department.
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Federal Reserve Bank of St. Louis
- 2-
of the institution and, under some of the proposals
would be at the sole
discretion of the depository institutions.
DISCUSSION:
The staff believes that this issue is significant for all existing
and future deposits not subject to an interest rate ceiling, including the new
IRA/Keogh 1-1/2-year and the 3-1/2-year minimum maturity account categories.
The range of options available to the Committee includes (1) allowing depository
institutions to retain complete discretion in establishing rates and amounts
of interest to be paid on account categories not subject to interest rate
limitations; (2) requiring a stated minimum rate or amount of interest but permitting discretionary bonuses to be paid in addition; and (3) reaffirming
existing DIDC member agency (not NCUA) rules and interpretations.
Adopting the first option would permit depository institutions to base their
interest rate on any index or schedule they deem appropriate for the account.
Thus, current FHLBB and Federal Reserve rules requiring that the index be outside
the control of the institution, or the FDIC rule limiting the choice of an index
to one established for an independent business purpose, no longer would apply.
As a result, an institution and a depositor, for example, would be able to agree
on a rate of interest that varies with the institution's cost of funds or profitability and where the relationship between the index and the rate of interest
paid would be subject to the discretion of the institution.
Such a grant of
discretion, however, would not override state laws and general principles of
contract law, nor would it override advertising and other consumer protection
requirements now present in DIDC member agency rules and interpretations.
Option two would require depository institutions to specify a minimum rate
of interest, or a method for determining that rate of interest.
In addition to
this minimum an institution would retain discretion to pay a bonus for whatever
purpose it would deem appropriate.
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Federal Reserve Bank of St. Louis
A variable rate would continue to be governed
a
3
ible indexes upon which
by FUIC, FHLBB and Federal Reserve restrictions on permiss
the rate could be based.
rules and interpreIn option three, current FDIC, FHLBB and Federal Reserve
on of appropriate
tations on setting and changing interest rates, and the selecti
inthxes, are maintained.
This option would prohibit the establishment of a time
of the amount or
deposit where an institution retains discretion over any part
pay an unspecified
rate to be paid, including the discretion to pay a bonus or to
amount above a minimum.
Institutions would have to inform the holder of a time
t or, if a
deposit at the time an account is opened of the rate of interes
computing and
variable rate account, the specific method that will be used in
paying interest on the account.1/
between
In resolving this issue, the Committee must determine the balance
accrue to both
(I) consumer protection and (2) preserving the benefits that may
ing dedepositors and institutions by allowing greater flexibility in develop
posit contracts.
Discretionary rate and bonus arrangements may permit depository
institutions to be more competitive and, as a result, increase their deposit
flows.
would
Consumers may benefit from higher interest payments than they
otherwise receive.
On the other hand, there is potential that some institutions
fied
may mislead consumers into believing that they will receive an unspeci
on
rate of interest or a bonus on a time deposit but have little or no intenti
of paying the bonus.
In addition they may decide to provide higher rates or
bonuses to some depositors, but not others.
1/ These rules were established to protect consumers from the allure of
higher rates of return when the higher rates are not guaranteed or the
their
method of determining these higher rates is not verifiable. Under
for
ts
contrac
provisions, an institution may provide in its time deposit
speciit
if
t
of
interes
the payment of a bonus or an increase in the rate
fies the verifiable conditions under which the bonus will be paid or the
that
rate increased. For example, an institution could include a provision
ratio
tion's
a bonus of one percent will be paid on an account if the institu
ished
a pre-establ
of net income to average total assets for a year exceeds
1.50%.
as
such
amount,
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Federal Reserve Bank of St. Louis
4
ceiling-free accounts
If the Committee determines that its rules governing
rate or amounts of intermean that institutions may retain discretion over the
existing agency rate-setest to be paid on such accounts, this would supersede
ting rules, but not advertising or disclosure rules.
This would seem to be
March 1982 deregulation of
coAsistent with the Committee's September 1981 and
deposit interest rates on certain account categories.
As a practical matter,
establish at least
market constraints would likely require that institutions
likely learn of
a minimum rate to attract depositors, and depositors would
institutions that do not deal in good faith.
The regulatory agencies would be
ines with regard to
free to issue additional advertising and disclosure guidel
t misleading practices.
rate and bonus arrangements to protect consumers agains
ing the establishIf the Committee believes that current restrictions govern
to complement adverment of interest rates or payments of bonuses are needed
depositors, then the curtising and disclosure rules in assuring protection of
be reaffirmed by the DIDC,
rent agency rate regulations and interpretations can
deposit contract the method
and institutions will be required to specify in the
of establishing any interest paid.
two whidh reAs an alternative, the Committee may wish to choose option
determining a rate be
quires that a minimum rate or a verifiable method of
be given discretion to
established in a deposit contract but that institutions
pay bonuses above that rate.
Attachment:
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Federal Reserve Bank of St. Louis
Philadelphia Savings
Fund Society Petition
006363
PUS
THE PHILADELPHIA SAVING FUND SOCIETY • THE NATION'S FIRST MUTUAL SAVINGS BANK
M. Todd Cooke
Chairman
February 19, 1982
Mr. Steven L. Skancke
Executive Secretary
Depository Institutions
Deregulation Committee
Department of the Treasury
15th Street & Pennsylvania Avenue, NW
20220
Washington, DC
Dear Mr. Skancke:
The Philadelphia Saving Fund Society (PSFS) requests that the Depository
Institutions Deregulation Committee (DIDC) issue a ruling whereby DIDC
Regulations supercede FDIC Rules and Regulations to permit maximum rate
flexibility for the new IRA/Keogh accounts. Specifically, PSFS requests that
Section 329.4(e)(1) of the FDIC Rules and Regulations be superceded. This
section has the effect of limiting the ability of financial institutions to
provide market interest rates for IRA/Keogh accounts and defeats the DIDC's
intention to deregulate the interest rate ceiling for these accounts. Thus,
it prohibits financial institutions from aggressively competing with
non -financial institutions for retirement deposits.
PSFS submits the attached petition for DIDC review and action. Implementation
of PSFS' recommendation will ultimately benefit customers in that competition
and not regulation will determine the interest rate paid on these deposits.
Thank you for your consideration.
Sincerely,
1212 MARKET STREET • PHILADELPHIA, PA 19107
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Federal Reserve Bank of St. Louis
(215) 636-6100
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Federal Reserve Bank of St. Louis
00G3G3
PSFS' PETITION TO AMEND FDIC
REGULATIONS FOR IRA/KEOGH ACCOUNTS
006363
Background
ed changes to
C requested comments on propos
DID
the
0,
198
18,
er
emb
Dec
On
ation of and
greater flexibility in administr
existing regulations to allow
requested on
osits. Comment was specifically
dep
ogh
/Ke
IRA
for
on
iti
pet
com
d to a ceiling
IRA/Keogh account should be indexe
ed
pos
pro
the
not
or
r
the
whe
the DIDC elected
At its June 25, 1981 meeting,
ed.
lat
egu
der
y
all
tot
or
e
raL
come of legislative
/Keogh accounts pending the out
IRA
the
on
ion
act
er
def
to
Congress.
revisions being considered by
ust 13, 1981 by
of 1981, signed into law on Aug
Act
Tax
ry
ove
Rec
ic
nom
Eco
The
viding for
ng IRA/Keogh legislation by pro
President Reagan, amended existi
nts for IRA's. It
anding the eligibility requireme
exp
and
s
ion
but
tri
con
her
hig
ng.
ues which the DIDC was consideri
did not address the earlier iss
C reconsidered
tember 22, 1981 meeting, the DID
Sep
its
at
r,
yea
the
in
er
Lat
IRA/Keogh
a new time deposit category for
ed
rov
app
and
als
pos
pro
se
the
ty of eighteen
vided for (1) a minimum maturi
pro
t
oun
acc
new
The
s.
unt
aco
onal deposits
st rate ceiling, and (3) additi
ere
int
ted
ula
reg
no
(2)
,
ths
mon
l be permitted.
without extending the maturity wil
The Issue
issue of a
did not adequately address the
ff
sta
C
DID
the
t
tha
es
iev
bel
PSFS
ns
when it wrote the final regulatio
deregulated interest rate ceilings
that
FDIC guidelines specifically state
t.
oun
acc
ogh
/Ke
IRA
new
the
g
concernin
t, the
a variable rate IRA/Keogh accoun
es
ish
abl
est
on
uti
tit
ins
ial
anc
If a fin
ms and
the indicator as noted in the ter
interest rate must be equal to
ty to pay
s does not provide any flexibili
conditions of the account. Thi
tor as a
and, in fact, it fixes the indica
higher than the indicator
ceiling.
"regulated" interest rate
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Federal Reserve Bank of St. Louis
-2
00G303
The Law
Section 1204.118(a) of the DIDC Regulations provides for the new IRA/Keogh
account and reads:
(a) A commercial bank, mutual savings bank or savings and loan
association may pay interest at any rate as agreed to by the
depositor on any time deposit with a maturity of one and one-half
years or more, that consists of funds deposited to the credit of, or
in which the entire beneficial interest is held by, an individual
pursuant to an Individual Retirement Account agreement or Keogh
(H.R. 10) Plan established pursuant to 26 U.S.C. (I.R.C. 1954) 219,
401, 408 ano reiated provisions.
Section 329.4(e) of the FDIC Rules and Regulations state:
7 - -?lty to changes in interest rates or
(e) Applicatic-
maturities.-(1) Increases in interest rates on existing time
deposits.
hnert Lnere is an increase in the rate of interest paid
on any ti -:
the deposit will be treated as having been
withdrawn by the depositor, prior to maturity, on the date on which
the deposit begins to earn interest at the higher rate.
An exception is granted to this regulation in Section 329.4(e) (3) of the FDIC
Rules and Regulations which reads:
(3) Exceptions.
The provisions of this paragraph (e) do not apply to an
increase in the rate of interest paid on a time deposit where such
increase is explicitly authorized by the terms of the original
deposit contract and may not be granted or withheld at the
opposition of the bank.
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Federal Reserve Bank of St. Louis
1
- 3-
006363
of this regulation is not
PSFS believes that the FDIC's interpretation
when they authorized the new
consistent with the intentions of the DIDC
IRA/Keogh account.
PSFS' Variable Rate IRA/Keogh Account
Variable Rate IRA/Keogh account is
PSFS has been advised by the FDIC that its
cited PSFS' method of
in violation of FDIC Regulations. The FDIC has
with FDIC Regulations. PSFS'
determining the interest rate to be inconsistent
IRA/Keogh account include the
Terms and Conditions for the Variable Rate
paid.
following statement regarding the interest rate
le at a variable
"During the initial term, interest will be payab
basis. The
annual rate which is subject to change on a weekly
tion in the
Interest Rate will vary in conjuncton with each varia
d six-month
auction average discount rate for most recently issue
ury Department
U.S. Treasury Bills as announced by the U.S. Treas
Auction.
following each weekly six-month U.S. Treasury Bill
On the
Rate will be
first business day after each Auction, the Interest
period it is in
redetermined and reset so as to produce, for the
of the
effect, a Percentage Yield at least equal to 90%
then-current Auction Rate."
to 90%" does not conform
The FDIC contends that the statement "at least equal
) of its Rules and
with the exception granted in Section 329.4(e)(3
ascertainable by the
Regulations. The rate of interest paid is not readily
customer.
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Federal Reserve Bank of St. Louis
yfr
- 4-
00G363
rate does conform
PSFS believes that its method of determining the interest
Regulations, which
with FDIC Rules and Regulations, in addition to the DIDC
authorize the account for the following reasons:
new account so that
The DIDC authorized no interest rate restrictions for the
could actively
banks, mutual savings banks and saving and loan associations
ts. Money Market
compete with non -financial institutions for customers' deposi
or internal
Funds, for example, do not index their rate to any external
rates. It was
indicator. They have complete latitude in determining their
to financial
the DIDC's intent, we believe, to provide equal flexibility
designed to
institutions. Accordingly, PSFS' Terms and Conditions were
ishment of its
provide this flexibility and latitude in the weekly establ
would be based on
rate. It guaranteed an interest rate to its customers that
prevailing market conditions.
This allows PSFS to compete aggressively with
than lose them to
non-financial institutions for customers' deposits, rather
non -financial institutions because of rate restrictions.
to determine the
The DIDC also expressed concern that the customer be able
PSFS clearly states in
indicator to which the interest rate would be indexed.
be, as
its terms and conditions what the guaranteed minimum rate would
previously quoted, on page 3.
n rate is and know
Customers can readily determine what the six-month auctio
for the period. When PSFS
the minimum amount of interest that will be earned
m, it is because market
elects to pay a rate higher than the guaranteed minimu
t new deposits. The
conditions require it if PSFS wishes to continue to attrac
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
6
•
006363
-5-
payment of a higher rate of interest to the customer certainly cannot be
considered as a disservice to the customer.
In addition, PSFS makes its rates
available through branch signage, special rate "hotlines", advertising in
newspapers and an insert mailed with each quarterly statement showing the
interest rates for each period.
It is important for the DIDC to provide financial institutions with maximum
flexibility in the competition for IRA/Keogh deposits. These deposits
represent long-term, stable funds for financial institutions.
If other
restrictions are placed on these accounts, such as the interest rate
restrictions identified in the FDIC guidelines, PSFS believes financial
institutions will be at a major competitive disadvantage.
PSFS Recommendation
PSFS has supported the DIDC in its efforts to deregulate and improve the
administration of IRA/Keogh account.
PSFS recommends that the DIDC issue a
ruling whereby DIDC regulations supercede existing FDIC Regulations to provide
for a truly deregulated IRA/Keogh account.
If this petition is accepted, financial institutions would be able to compete
on a truly equal basis with non-financial institutions for customers'
ipmmi
desposits.
Competition will benefit potential customers by encouraging the
payment of a market return on funds invested.
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Federal Reserve Bank of St. Louis
TO:
U.S. League Executive Committee
RE:
Recommendations of Deregulation Policy Committee to DIDC
The U.S. League Committee on Deregulation Policy met in
Washington on June 15 to discuss the U.S. League position in
- regard to any new short-term account to be authorized by the DIDC
at its upcoming meeting on June 29, 1982.
The recommendations are
as follows:
1.
Any U.S. League support for a new account is contingent upon
savings associations obtaining significant new asset powers as
presently pending before the Senate.
No such account should
be declared effective by the DIDC unless and until legislation
is enacted providing such powers.
2.
Bearing in mind the asset powers contingency, the Committee
recommends:
a.
Minimum balance of $10,000.
b.
Minimum maintenance belance of $10,000.
c.
If the account balance falls below the minimum balance,
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Federal Reserve Bank of St. Louis
the rate on the account falls to 0%.
•
Page -2d.
Provisions for a notice arrangement for withdrawals or a
term as in a certificate are unacceptable because of the
extreme operational and administrative problems created
for associations and customers, computer problems,
difficulty of enforcement, etc.
In lieu thereof, the
Committee recommends a time deposit, open account
approach under which funds must be on deposit for a
minimum of 7 days before they are eligible for
withdrawal.
This approach also eliminates the issue of a
withdrawal penalty in that funds cannot be withdrawn
prematurely.
e.
The account should be structured so that it is not
reservable, i.e., it would not be transactionable, no
automatic transfers, no more than 3 pre-authorized
transfers per month, etc.
f.
The rate on the account should be indexed to the 91-day
T-Bill rate (discount basis).
The rate would change the
day following each weekly auction.
No averaging of rates such as is presently authorized for
six-month MMC's.
h.
A thrift institution differential would be provided with
banks paying 25 basis points less than the, T-Bill rate.
i.
Deposits and withdrawals could be made in any amount as
determined by the institution.
k.
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Federal Reserve Bank of St. Louis
Compounding is permitted.
P..!sq1M
N1CCORMICK JR.. PreSidentrCE0
Stiliter Nittionai
12ritiwirer. C.,ii.inom,1 74074
. P ..ROBERT
First Vice President
JAMES D. HERRiNGTON. Board Chairman
Coldwater National Bank
Co:dwater, Kansas 67029
Secono Vice President
TiedSurer
PAUL H BRINGGOLD. President
JAMES R. TAYLOR, President/CM
McKeesport National Bank
First National Bank
Cannon Falis, Minnesota 55009
McKeesport Pennspania 15%32
,
l
i;clependent
WASHINGTON
OFFICE
BANKERS ASSOCIATION OF AMERICA
1625 MASSACHUSETTS AVENUE N.W. - SUITE 202, WASHIN
GTON, D.C. 20036 202/332-8980
April 14, 1982
Honorable Donald T. Regan
Chairman
Depository Institutions Deregulation Comm
ittee
Department of the Treasury
15th & Pennsylvania Ave., N.W. - Rm. 3330
Washington, D. C. 20220
Dear Mr. Secretary:
The IBAA was very disappointed by the DIDC
's failure
to approve a short-term competitive deposit
product for
banks at its March 22 meeting. We strongly
urge that
the DIDC immediately review this matter look
ing towards
the prompt authorization of such a product.
Continued
inaction by the DIDC will result in addi
tional billions
of dollars being drained out of the comm
unities we serve
by money market mutual funds, including
the new "sweep"
accounts established at banks in conjunct
ion with money
market mutual funds.
As you know, we have not in the past
endorsed a
specific competitive deposit product.
In this letter
we urge that the Committee consider a
specific product
having the following characteristics:
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Federal Reserve Bank of St. Louis
1.
An account with no limitation on the freq
uency
or amount of deposits.
2.
A minimum initial deposit and balance
requirement
of $10,000. We believe that a $10,000
minimum is
needed to protect existing passbook savi
ngs accounts
although many of our members would favo
r a lower
ceiling.
-2
itted
ers would not be perm
Third party transf
by the
ed
rn
ve
ers would be go
and internal transf
depositor
a
at
th
accounts so
s
ng
vi
sa
as
s
le
cover
same ru
unt to automatically
co
ac
e
th
e
us
t
no
could
nd account.
n on a related dema
aw
dr
ts
af
dr
or
checks
e a specific
sfers would requir
Such internal tran
n.
customer instructio
mits the number
on D effectively li
for with4. Since Regulati
minimum dollar amount
stitutions
of withdrawals, a
in
ny
blished. Ma
ta
es
be
t
no
ed
ne
withdrawals
drawals
nimum accounts for
mi
h
is
bl
ta
es
to
e the
will wish
order to differentiat
in
s
er
sf
an
tr
al
or intern
ok accounts.
account from passbo
surance
the same deposit in
ve
ha
ld
ou
sh
t
un
ing a
5. The acco
that consumers seek
as other deposits so
in an
s
rn can deposit fund
financial
market rate of retu
ed
is
rv
rally supe
de
fe
a
at
t
un
co
ac
insured
institution.
t not have an
ve that the accoun
cognizes
6. It is imperati
ential. The IBAA re
interest rate differ
ilings
ce
out interest rate
that an account with
ly
ng
lish this increasi
members
is a method to accomp
AA
IB
ver, thousands of
important end. Howe
d to
xe
de
product that is in
still would prefer a
carded
ld
wi
tes rather than a
competitive market ra
product.
pport for the
ve also expressed su
ha
s
er
mb
me
r
ou
of
Many
March 22 meeting.
airman Isaac at the
Ch
IC
FD
by
d
re
fe
of
t with a
proposal
ish a $25,000 accoun
bl
ta
es
d
ul
wo
al
os
op
pr
e prompt
The Isaac
We strongly encourag
t.
en
em
ir
qu
re
ce
ti
no
this letter
withdrawal
count described in
ac
w
ne
e
th
t
op
ad
to
DIDC action
c.
ted by Chairman Isaa
and the proposal sugges
Si erely,
3.
A
4
/
/ ber
Ro
(
President
NUM
4111111111A
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Federal Reserve Bank of St. Louis
cc:
r
Fed Chairman Paul Volcke
aac
FDIC Chairman William Is
att
FHLBB Chairman Richard Pr
an
NCUA Chairman Edgar Callah
r
Comptroller C. Todd Conove
7
cCormic' Jr.
President
First Vice President
Second Vice President
Treasurer
-ROBER1 LkvicCORMICK JR., President/CEO
..Still‘Nater National Bank and Trust Comcany
St:ilwater. Oklahoma 74074
•
JAMES D. HERRINGTON, Board Chairman
PAUL H. BRINGGOLD, President
JAMES R. TAYLOR, President/CEO
Coldwater National Bank
Coldwater, Kansas 67029
First National Bank
Cannon Falls, Minnesota 55009
McKeesport National Bank
McKeesport, Pennsylvania 15132
WASHINGTON
OFFICE
ndefleildent
BANKERS ASSOCIATION OF AMERICA
1625 MASSACHUSETTS AVENUE N.W. - SUITE 202, WASHINGTON, D.C. 20036 202/332-8980
June 2, 1982
Mr. Louis H. Nevins
Senior Vice President
National Association of
Mutual Savings Banks
1709 New York Avenue, N.W.
Washington, D. C. 20006
Dear Lew:
The IBAA had its annual convention in mid-March.
One of the major issues before the IBAA at that time
was the question of whether we should join the ABA
in supporting a ceilingless $5,000 super NOW account
or whether we should maintain our traditional position
that all new depository institution products be indexed
to appropriate market rates. The latter was the position
of the IBAA on IRA/Keogh accounts.
Our policy bodies agreed that the IBAA should support
a "new short-term transaction product" without an interest
rate differential. Our policy bodies did favor the $5,000
to $7,500 minimum. We also moved off the position that
the new short-term transaction account should be indexed
to appropriate market rates without fully embracing the
wildcard concept since thousands of our member banks still
favored indexation.
A telegram setting forth our position was sent from
convention
to all members of DIDC, and we copied the
the
key members of the House and Senate Banking Committees.
A copy of the letter and the attached cable which we sent
to Chairman Garn is attached.
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Federal Reserve Bank of St. Louis
16'
2
After the March 22 meeting and after we had received
the attached letter from Chairman Volcker, the new competitive
transaction account product that we sought no longer appeared
to be in the cards.
Looking towards forging a compromise which might be
acceptable to the members of the DIDC, we began working
with Chase and the consumer bankers behind their $10,000
investment account idea. Our support of this gencral
concept was the last letter we wrote to the DIDC.
Such an investment account would be a step in the
right direction but clearly would not allow depository
institutions to compete effectively with money market
mutual funds in our marketplace.
Sincerely,
Kenneth A. Guenther
Executive Director
Enclosures
cc: Mr. Arthur Edgeworth
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Federal Reserve Bank of St. Louis
An:
June 4, 1982
COMPROMISE SHORT-TERM DEPOSIT INSTRUMENT
"INVESTMENT ACCOUNT"
Depository institutions need a new deposit account to
compete with the money market mutual funds. It needs three
characteristics:
1.
It must be truly competitive.
2.
It must not disrupt monetary policy.
3.
It must not drain funds from existing low-cost
deposits.
In order to be competitive, the deposit must be accessible,
and it must pay a rate comparable to that of the money market
funds. However, a transaction account would be required to bear
reserves of 12%, which would reduce its yield significantly
below that of the non-reserved money market funds.
Therefore, the Depository Institutions Deregulation
Committee should authorize a new account called an investment
account, that would be a special class of savings account
(as is the NOW account) with no interest rate ceiling, no
reserve requirements, and no third party transfer capability.
The principal characteristics of such an investment
account:
1.
No Interest Rate Ceiling.
The financial institution should be permitted to
pay a rate appropriate for its local market as
determined by the institution (either fixed, fixed
periodically, or floating). This will permit
the institution to vary the rate as conditions
demand, rather than being "locked-in", unless
the institution elects to fix the rate.
2.
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Federal Reserve Bank of St. Louis
No Third Party Transfers.
The account is not a transaction account, but
an investment account. Therefore, all third
party transfers would be prohibited. Withdrawals could be made upon customer instruction
in cash, by telephone transfer, ATM, or internal
transfer to another account. Withdrawals would
be limited to three per month.
AP.
-2-
3.
Deposits.
After the investment account is opened, there
should be no limitation on the frequency or
size of deposits.
4.
Minimum Initial Deposit and Balance.
A $10,000 initial balance will enable financial
institutions to protect their best customers,
and to compete for 83% of the balances in
money market funds.
5.
No Minimum Withdrawal.
Institutions may wish to establish minimum
withdrawal amounts, but the limitation of
three withdrawals per month discourages
withdrawals.
6.
Eligibility.
Eligibility should be restricted to those
eligible for NOW accounts.
7.
Deposit Insurance.
The same deposit insurance rules that apply
to other accounts should apply to the
investment account.
There is no need for reserves on this account, since it has no
transaction capability and ownership of the account is limited
to individuals and non-profit organizations. Commercial firms
cannot use the account. The limited withdrawal rule hampers
use of the account for cash management purposes. Since it
has no transaction capability, it will not interfere with
monetary policy. In fact, to the extent that the new account
discourages further movement of the deposits of financial
institutions to the money market funds, it will assist in the
control of the money supply.
Since it will pay a market rate and the funds will be available
when needed, the account will be competitive with the money
market funds. The investment account will encourage deposit
stability because the market rate of return will discourage
interest rate shopping and depositors will not be faced with
periodic reinvestment decisions as is the case with maturing
certificates of deposit.
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Federal Reserve Bank of St. Louis
-3Since it is a new class of deposit, institutions can price the
service charges and fees at will to further discourage the
movement of funds. The institutions will be free to impose
other terms and conditions as they see fit.
It is important to the well-being of the thrift institutions
to discourage the transfer of passbook deposits into this
new account. Therefore, the new account should be differentiated
from passbook accounts by these features:
1.
Its name, an "Investment Account".
2.
By prohibiting use of a passbook as an access
device.
3.
By limiting monthly withdrawals to three.
4.
By allowing only withdrawals or internal
transfers, on customer instruction.
5.
By requiring a $10,000 minimum deposit.
6.
By allowing automatic deposits, but not
automatic withdrawals.
7.
By allowing fixed or floating interest rates
set by the market.
8.
Whatever fees and service charges the offering
institutions choose to impose.
ADVANTAGES:
1.
No maturity date, thus avoiding periodic investment decisions by depositors and the risk
of losing the deposit at those times.
2.
No reserve requirements, since it is a
personal savings account.
3.
No index, so rates can find their own level,
which may be below rates paid in the national
money market.
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Federal Reserve Bank of St. Louis
-4-
4.
Rates may be either fixed or variable, and
may be changed at the discretion of the
institution. Deposits are not "locked in"
at a high rate for a long time.
5.
Funds would have the same day availability,
as do passbooks, but not through a third
party transfer. While not fully competitive
with money market fund liquidity, it is
sufficient.
6.
The account is operationally simple.
7.
It encourages saving and discourages
withdrawals.
8.
Money market funds have 83% of their balances
in accounts of $10,000 or more, and depository
institutions could compete for that money.
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Federal Reserve Bank of St. Louis
TD)
t,
J
DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE
COMPTROLLER OF THE CURRENCY
FEDERAL DEPOSIT INSURANCE CORPORATION
DATE:
Depository Institutions
Deregulation Committee
FROM:
U.S. TREASURY DEPARTMENT
NATIONAL CREDIT UNION ADMINISTRATION
FEDERAL RESERVE BOARD
TO:
FEDERAL HOME LOAN BANK BOARD
SUBJECT:
April 13, 1982
Short-term Deposit Proposals
DIDC Staff
At its March 22 meeting, the Committee authorized a new certificate
with a 91-day maturity, a $7,500 minimum denomination, a ceiling rate tied to the
91-day bill auction average, and a temporary 25 basis point differential in favor
of thrift institutions.
At that meeting, however, the Committee instructed
the staff to prepare for Committee consideration additional proposals for a
shorter-term deposit that would provide depository institutions with a more
competitive vehicle vis-a-vis money market mutual funds (11HMFs) and other
market instruments.
As discussed more fully in previous staff memoranda,
the funda-
mental problem before the Committee is to design a deposit that will minimize potential high-cost internal shifts from savings accounts while simultaneously maximizing the competitive appeal of the new instrument and
1/
minimizing operational difficulties for issuing institutions.— In balancing
these parameters, the staff felt that four variables were particularly
important:
This memorandum was prepared primarily by Edward C. Ettin of the staff
of the Federal Reserve Board.
1/ See particularly, "Short-term Instrument Proposals," March 15, 1982.
*
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Federal Reserve Bank of St. Louis
2
Minimum Denomination.
The larger the minimum balance
requirements, the less potential for internal shifting
from savings accounts, but the less competitive the new
1/
instrument. — A high minimum denomination would also
tend to limit shifts from 6-month MMCs; although such
shifts would not have a significant impact on immediate costs,
they would make the cost structure of depository institutions more sensitive to changes in interest rates.
Simi-
larly, a high minimum denomination would differentiate any
new instrument from the $7,500, 91-day certifi
cate adopted
at the last DIDC meeting.
2.
Liquidity.
There is a presumption that savings account
holders place extreme emphasis on liquidity.
Requiring
the proposed new account to have a short fixed maturity or
permitting withdrawal only after a notice period might therefore serve to limit internal shifting from savings accounts.
The resultant reduced liquidity relative to MMMFs might be
offset by the convenience and insurance of the deposit instrument.
1/
A substantial proportion of savings deposits are in high balance accounts.
In December 1981, the FDIC indicated that 75 percent of MSB savings account
balances were in excess of $5,000 and 41 percent in excess of $15,000.
These results were similar to a February 1982 survey of the National Association of Mutual Savings Banks. In August 1980, the FHLBB indicated that
70 percent of S&L regular savings were in accounts with balances in excess
of $5,000 and 45 percent in excess of $10,000. A small sample survey by
the American Bankers Association in March 1982 indicated that at commerc
ial
banks about 60 percent of savings deposit balances were in excess of
$5,000
and 38 percent in excess of $10,000. The latter survey also indicated
that
almost three-fourths of total NOW balances were in excess of $5,000 and
almost half in excess of $10,000.
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Federal Reserve Bank of St. Louis
-3
3,
Rate.
Whiel the convenience and insurance associated with
deposits suggests that depository institutions need not
offer the same yield as MMMFs in order to attract sizable
deposit flows, offering rates cannot deviate significantly
from market yields if the instrument is to be competitive.
While a competitive instrument could be achieved with an
indexed ceiling, a ceiling free account would provide more
flexibility to issuing institutions.
4.
Operational feasibility and convenience.
Limited staff
discussion with depository institutions has suggested the
importance of providing operational flexibility to permit
offering institutions to integrate a new instrument into
their internal systems and particular marketing strategies
The Committee may, therefore, wish to balance potential
characteristics of the proposed new instrument designed to
limit internal shifts against such problems for depository
institutions.
In designing a short-term instrument, the staff has attempted to
take account of the conflicts inherent in the Committee's objectives as
reflected in these four key variables.
The balance of this memorandum
discusses the detailed characteristics of the staff's proposal and presents
certain options for the Committee's consideration.
Monetary Policy.
Before reviewing each characteristic, it is
relevant to summarize the reserve requirement issues associated with the
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Federal Reserve Bank of St. Louis
-4 creation of a new deposit instrument and the associated monetary policy
considerations.
The Federal Reserve Board, under the Monetary Control Act,
has the exclusive authority for determining the applicability of Federal
reserve requirements to current and future deposit instruments.
Under
the Board's current Regulation D, any deposit instrument with a maturity
or required notice period of less than 14 days is subject to transaction
account reserve requirements.
In addition, any account upon which a check or
draft can be drawn and any account that can be used as a normal practice to
pay third parties are also regarded as transaction accounts)'The Federal
Reserve staff has indicated that its Board could, however, regard any new
account with a shorter maturity as a time deposit, particularly if it had
limited withdrawal features, and could establish a zero percent reserve requirement on this category of time deposit.—
The more the new instrument has
characteristics that facilitate third-party payments the greater is the likelihood
that the Federal Reserve would regard the account as a transaction account in
order to carry out its responsibilities for controlling the monetary aggregates--especially the transaction aggregate Ml.
However, the Federal Reserve
staff advises that any account that permits third party payments as a normal
1/
2/
The Federal Reserve Board now imposes transaction reserve requirements
on (1) any account with a maturity or required notice period of less than 14
days, (2) any account on which a draft can be drawn--all demand deposits,
NOWs, share drafts, and similar "other checkable deposits," (3) automatic transfer accounts, and (4) any account on which more than three
monthly preauthorized or telephone transfers can be made. The Federal
Reserve has also asked Congress for authority to extend reserve requirements to MMMFs.
Under the Monetary Control Act, savings deposits and non-negotiable time
deposits held by persons are not reservable, while negotiable time deposits
and time deposits held by other than natural persons are subject to a
reserve requirement of zero to 9 percent; thP Board's current reserve
requirement on such time deposits generally is 3 percent. Even if the Board
adopted a zero percent reserve requirement on any new account, memner
banks would still be subject to a small (and declining) reserve requirement on the aggregate of their time and savings deposits during the phasedown period of reserve requirements under the Monetary Control Act.
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Federal Reserve Bank of St. Louis
practice, even if reservable as a transaction account, would complicate the
conduct of monetary policy.
More generally, the Federal Reserve staff believes that, in order
for the Federal Reserve to interpret movements in the monetary aggregates,
it is important to minimize the degree of blurring between transaction
and non-transaction deposits.
A new deposit instrument that combines high
yield with extremely short maturity, and particularly one that permits or
facilitates third party payments, would increase the difficulty of interpreting the degree to which such an instrument is being used for transaction
purposes relative to serving as an investment vehicle.
In view of the mone-
tary policy concerns, the Federal Reserve staff believes that the Committee
should prohibit outright an account that can be used to facilitate thirdparty payments.
Thus, even though it would limit its attractiveness
relative to MMMFs, the Federal Reserve staff suggests that the new instrument have a maturity (or notice) of no less than seven days, that thirdparty negotiable drafts drawn directly on the account be prohibited, and
that automatic or preauthorized withdrawal notifications from the new
account to a transactions account also be prohibited.
Unlimited telephone
notifications by the depositor, however, would be permitted.
Minimum Initial Deposit.
The staff recommends that the Committee
adopt a relatively high initial minimum denomination--between $10,000 and
$25,000--in order to reduce internal deposit shifts.
In determining the
minimum initial deposit, the Committee may also wish to keep in mind
(1) the possibility of future reductions in the minimum deposit requirement
as information develops about internal deposit shifts, (2) the desirability
of reducing pressure on institutions to offer sweep accounts to MMMFs and retail
RPs, many of which have been based on smaller denominations, and (3) its
judgment about the size of any maintenance minimum after the initial deposit.
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Federal Reserve Bank of St. Louis
Minimum Subsequent or Maintenance Balance.
On the presv7iption
that depositors will wish to add to and draw on the balance in the new
instrument after the account is opened, the Committee may wish to consid
ef
requiring a minimum maintenance balance different from the initial
deposit
minimum.
suggest
Simplicity and consistency with other minimum balance requirement.
,
that the maintenance balance be the same as the initial minimu
m.
Flexibility in the use of the account suggests that the mainte
nance balance
might be on the order of $5,000 less than the minimum initial balance, but such
an
approach may be tantamount to reducing the initial balance requir
ement if
depositors can temporarily adjust their asset holdings to meet
the initial
balance requirement.
In any event, the Committee will have to determine two other
issues with regard to the maintenance balance:
the balance falls below the regulatory minimum.
options:
(a) the passbook rate or
(1) the rate to be paid if
The staff suggests two
(b) closure of the account (and con-
version to a passbook or transaction account) if the balanc
e falls below
the minimum maintenance balance for a specified period.
the first option.
(2)
The staff recommends
The interval over which the minimum maintenance
balance is to be calculated.
The staff recommends that institutions be
permitted the option of determining the maintenance
balance as the average
for any interval from one day to one month.
Maturity,.
As previously noted, the shorter the maturity of the
new instrument the more competitive it would be with MMMFs, the
larger is
the potential for internal deposit shifts from passbook accounts,
and, at least
below seven days, the more the Federal Reserve staff indicates it will
be
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Federal Reserve Bank of St. Louis
- 7 a potential problem for monetary policy.
options:
The Committee staff suggests two
1/
(1) a 5-day instrument or (2) a 7-day instrument. —
Whatever the maturity selected, the staff recommends that insti-
tutions be permitted to offer the account in either or both of two versions:
(1) a time deposit open account (which has no specific maturity), with an
enforced notice requirement before withdrawal equal to the period selected
or (2) a time deposit with specific maturity, the balance of which would be
automatically rolled over (after a 1-day grace period) if the depositor did
not give the institution other instructions.
Staff discussions with a few
depository institutions suggest that some can handle a notice account
operationally, others can do so at great inconvenience, and still others
would find it extremely difficult operationally.
Rate.
issue of rate.
rate ceiling.
There is a difference of opinion among the staff on the
A majority of staff recommends that there be no regulatory
This group argues:
a ceiling might inhibit the competitive
nature of the account; the objective of the DIDC is to deregulate, the
available evidence suggests that institutions do not price irrationally;
a ceilingless feature, as opposed to a market-indexed ceiling, will not
exacerbate internal shifts from savings accounts, since the savings account
ceiling is so far below the market rate; there is evidence that, in the
market for competitive short-term instruments, virtually all issuers pay
the ceiling rate and if there were no ceiling, some institutions might pay
less and some more than what would have been the ceiling rate; and insti-
1/
A specific or maximum maturity (as opposed to a minimum maturity) is
necessary in order to avoid in effect deregulating all ceilings for
deposits equal to or above the proposed minimum denomination. The
Committee in March adopted a deregulation schedule based on maturity,
which would otherwise be superseded for deposits above the minimum
size unless a specific or maximum maturity is adopted.
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Federal Reserve Bank of St. Louis
8
tutions need the flexibility, especially in the early months of the new
instrument, to use rate to regain depositors lost to =Fs and other
instruments.
Others among the staff believe
have an indexed ceiling.
that the new instrument should
Institutions could be permitted to choose either
varying the rate on outstanding deposits in line with the weekly index
or maintaining a fixed rate based on the index in the initial week of the
term account.
Staff supporting a ceiling on the new account argue that
the Committee has already adopted a deregulation plan based on maturity;
the insurance and convenience of deposits imply that institutions can
offer less than MMMFs and still attract funds; and the operating losses of
thrifts imply the need to restrain rate competition in the short-run.
Indeed,
the FHLBB staff argues the need for at least a temporary differential on
this account to avoid inconsistency with the Committee's March decision
with regard to the 91-day deposit and in order to facilitate improvement
in thrift deposit inflows relative to those of banks.
Most of the DIDC
staff do agree that, in contrast to the 91-day account, the attractiveness of the proposed instrument would increase bank deposit inflows even if
there were a thrift differential.
If there were an indexed ceiling imposed--with or without a
differential--the Committee would have to choose a base rate and a mechanical
indexing method.
The staff would recommend that the 91-day bill rate (auction
average, discount basis, no 4-week averaging option) as the base rate and
that the ceiling rate be equal to the base rate.
The upper panel of Chart 1
shows the weekly spread by which MMMF yields would have exceeded the rate
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Federal Reserve Bank of St. Louis
- 9 CHART 1
INTEREST RATE SPREADS BETWEEN MMMYs
AND A SHORT-TERM DEPOSIT EQUAL TO THE 91-DAY
TREASURY BILL RATE (Discount Basis)
Percent
—
8
MMMF rate less Deposit Rate
(weekly aata)
6
4
SWIM
No
Compounding
2
0
1
4
I Compounded
Daily
i I
1 1—
Fl
2
4
Percent
gonimm•
4
MMMF rate less Deposit Rate
(quarterly average data)
IMMO
1
2
/
1
No
1
Compounding-4 /
1
1
WNW,
3
11
0
aft.ann ft..
emu.eft.eft.
ema
eft..
Compounded
Daily
IMMIND
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Federal Reserve Bank of St. Louis
Fl
1979
1980
1981
1982
- 10 on such a deposit since 1979, with and without compounding; the lower panel
shows the same spread on a quarterly average basis.
With daily compounding
(the dashed line), over the entire period the deposit rate would have on
average exceeded the MMMIF yield by over 30 basis points; in about two-thirds
of the weeks since 1979 the deposit rate (daily compounding) would have
exceeded MIIMF yields.
The staff notes that it would be technically difficult effectively
to prohibit compounding on the proposed instrument, even with a ceiling.
First, for a fixed-term account (even if automatically rolled over) institutions legally must pay out or credit interest at maturity.
Second, if
the Committee authorized both fixed-term and notice accounts and prohibited
the crediting of interest on the latter any more frequently than, say quarterly,
the effective yields on the two similar accounts would be different.
Additionally.
as shown in the last two columns of Table 1 (which shows effective yields on
instruments with a 13 percent nominal yield) the difference in effective yield
between quarterly and continuous compounding is relatively small.
At current
rates, compounding adds 45 to 90 basis points to effective yields.
Should the Committee choose to impose a ceiling and a
differential, the staff would recommend that thrifts be permitted to pay
the bill rate and commercial banks 25 basis points less.
We would further
recommend that the same procedure be adopted as on the new 91-day
deposit
instrument, viz., the differential would disappear after one year, and,
during that year, for any interval after the auction average on the 91-day
bill rate falls below 9 percent for four consecutive auctions.
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Federal Reserve Bank of St. Louis
Effective Yields on a 13.0 Percent Certificate
for Various Compounding Periods--365/360 Basis
Type of
Compounding
Effective
Rate
Increased
Yield Due to
Compounding
Percent of the
Continuously
Compound
Increase
1)
Continuous
14.088
.907
2)
Daily
14.085
.904
99+
3)
Weekly
14.070
.889
98
4)
Quarterly (91 days)
13.847
.666
73
5)
Semi-annual (182 days)
13.616
.435
48
6)
1/
No within — period
compounding
13.181
1/
100
The fact that the effective rate is about 18 basis points higher than the
nominal rate even with no within period compounding is due to the artificial
year.
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Federal Reserve Bank of St. Louis
- 12 -
Finally, as noted earlier, regardless of whether the account is
subject to ceilings or not, the staff recommends that a ceiling rate equal to
the applicable passbook rate be imposed whenever the balance on the account
falls below the minimum maintenance requirement.
Additional Deposits.
The staff recommends that the new account
be structured so that institutions can accept additional deposits without
a quantitative regulatory limit.
If the Committee adopts such a proposal--
which would add to the flexibility of the account--it will have to provide
for rules regarding the effect of additional deposits on the maturity of
the account.
For notice accounts, the staff suggests that institutions be
free to use any or all of the following methods:
1)
"First-in-first-out" accounting controls to assure that each
deposit is maintained for at least the minimum notice period;
2)
Establishment of an accounting cycle equal to the notice
interval.
For funds received after the beginning of the
accounting cycle notice of withdrawal could be given only
at or after the beginning of the next accounting cycle.
In effect, each deposit would be on "hold" until the beginning
of the next accounting cycle.
3)
Any other procedure that assures additions to the account
are maintained for at least the notice period.
For term (specific maturity) accounts, the problem of additional
deposits becomes somewhat more complicated.
With some minor exceptions,
existing agency regulations require that additional deposits re-initialize
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Federal Reserve Bank of St. Louis
- 13 -
the maturity of the entire balance of the account.
The staff recommends
that the Committee permit institutions to use any or all of the
following
methods for accepting additional deposits to the proposed term
account:
1)
Each deposit re-initializes the maturity of the original
deposit.
2)
Each deposit is subject to "first-in-first-out" accounting
to assure that each additional deposit is maintained for
the term of the account.
3)
An institution is permitted to set up an "accounting cycle"
equal to the original term of the offered account.
New
deposits received after the accounting cycle has begun will
be regarded as maturing at the end of the next accounting
cycles
In effect, each deposit will be on "hold" until
the end of the next accounting cycle.
4.
Any other procedure that assures all additions to the
account are maintained for at least the term of the account.
Withdrawals.
The staff recommends no regulatory prohibition
on the size or number of withdrawals from the proposed new account.
For notice accounts, withdrawals could occur only after the
specified number of calendar days (discussed under maturity above) after
the time the depository institutions receive
notification.
Notice would
not be optional to the institution but must actually be given by the
depositor, and would be permitted by telephone or other telecommunication,
mail or messenger, or in-person (over-the-counter or through an ATM).
For term accounts, withdrawals could occur only at maturity (or
before the end of the grace period).
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Federal Reserve Bank of St. Louis
Notification of intent to withdraw
- 14 -
could occur any time before the end of the grace period by the same
procedure as for a notice account.
If no notification were received by
the end of the grace period, the deposit would automatically roll over.
Federal Reserve staff note that automatic and/or preauthorized
notification for withdrawal would facilitate the use of the account for
transaction purposes, raising monetary policy concerns; they urge prohibition of such arrangements and indicate that the Federal Reserve Board
might impose transaction reserve requirements on accounts with such withdrawal features.
The Federal Reserve staff recommends that the Committee
require that all notifications require specific action by the depositor
and automatic, preauthorized, standing and similar withdrawal or transfer
notifications be prohibited.
Withdrawals from any version of the new account could only be
by (1) check or cash to the depositor or by the institution's draft to a
third party and (2) by transfer to the depositor's checking or NOW account.
No withdrawals by third-party draft drawn directly on the account would be
permitted.
Early Withdrawal Penalty.
A majority of the staff recommend
that, since the maturity or notice on the proposed account is so short,
no early withdrawals be permitted under any circumstances.
would eliminate the need for early withdrawal penalties.
This approach
If the Committee
chose to permit early withdrawals, it might authorize one of the following early withdrawal penalties:
(1) loss of earned interest (as adopted on
the 91-day account) or (2) the standard penalty (loss of 3-months interest,
which could require invasion of capital).
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Federal Reserve Bank of St. Louis
Of course, if early withdrawal
- 15 -
is permitted any institution could adopt a more restrictive early withdrawal
penalty or prohibit such withdrawals if it chose to do so.
Eligibility.
The staff is unanimous in its recommendation that
the proposed new account have no regulatory limitation on eligibility for
all depositors.
Miscellaneous Restrictions.
The staff recommends a regulatory
prohibition on loans to depositors designed to meet initial or maintenance
balances.
Overdraft privileges would still be permissible on NOW or demand
deposits to which the new account is transferable, but staff recommends
regulations that require that the rates charged on such overdrafts should
not be substantially lower than the rates charged on such overdrafts for
depositors that do not hold the proposed account.
To assure that withdrawal before maturity or notice is not facilitated, or the early withdrawal penalty (if any) is avoided, the Federal
Reserve staff recommends either that no loans be permitted using the
account as collateral or that such loans have a minimum loan rate equal
to the rate being earned on the deposit plus the institution's lending
rate to other customers using Government securities or other similar high
quality collateral.
In addition, to further minimize the use of this
account for transactions purposes, the Federal Reserve staff recommends
that the new instrument be issued only in non-negotiable form.
Effective Date.
In order to provide a sufficient interval for
institutions to plan marketing strategies and design systems, the staff
recommends that the effective date of any new instrument be 60 days after
announcement of the Committee's decision.
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Federal Reserve Bank of St. Louis
The staff believes that further
- 16 -
public comment on this instrument is not necessary because the terms of
the proposed deposit were the subject of an extensive public comment
period previously conducted by the Committee and the Committee's decision
as to the specific characteristics of the proposed deposit would be within
the scope of the comments received to date.
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Federal Reserve Bank of St. Louis
A
BALLOT FOR SHORT-TERM DEPOSIT PROPOStS
I.
MEM.:
I am in favor of authorizing a new short-term deposit instrument at
this time.
Yes
No
(If you vote no you may still wish to complete the rest of the ballot
in order to affect the design of the instrument in the event that a
majority favors authorization.)
II.
MINIMUM DENOMINATION
1.
The minimum initial denomination should be (check one)
$25,000
Other
(Please specify amount)
2.
The minimum subsequent or maintenance balance should be (check one)
Same as initial minimum
$5,000 less than initial
minimum
Other
(Please specify amount)
3.
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Federal Reserve Bank of St. Louis
For purposes of calculating the subsequent or maintenance balance,
the institution may use average daily balances over (check one).
One day
The same as my answer to
III-1 below
Any period not to exceed
a calender month
Other
(Please specify amount)
&sm.
-2
III.
MATURITY
1.
The maturity of the new instrument should be (check one)
5-days
7-days
Other
(Please specify)
2.
The instrument must be in the form of (check one)
Time deposit open account with notice
period equal to my vote in III-1
Specific maturity equal to my vote in
III-1 (with a 1-day grace period)
Institutions may have their choice of
either or both of the above
IV.
RATE
1.
Institutions should be authorized to pay (check one)
Any rate they wish (no ceiling)
An indexed ceiling rate with no
differential in favor of thrifts
1/
An indexed ceiling rate with a
1/
differential in favor of thrifts —
2.
If the balance in the account falls below the minimum specified
in my vote on 11-2 (check one)
A ceiling rate no higher than the
applicable savings account ceiling
should be imposed
The account must be closed
(See next page)
1/
If an indexed ceiling is adopted (either with or without a
differential)
the Committee will be asked to determine other issues listed in
the
Appendix to this ballot.
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•
Federal Reserve Bank of St. Louis
3
The institution may select either
or both of the above
Other
(Please specify)
V.
ADDITIONAL DEPOSITS
1.
There should be no dollar limit or frequency limit on additional
deposits (check one)
Agree
"
2.
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Federal Reserve Bank of St. Louis
Limitations should be imposed
as follows
(Please specify)
For notice accounts, if additional deposits are authorized, the
institution (check one)
Must adopt first-in-first-out
accounting procedures to assure
that each additional deposit is
maintained for the minimum notice
period
An institution is permitted to set
up an accounting cycle equal to the
notice interval. For funds received
after the accounting cycle has begun,
notice of withdrawal could be given
only at or after the beginning of the
next accounting cycle
Any procedure that assures that
additional deposits are maintained
for at least the notice period.
The institution is permitted to use
any or all of the above
Other
(Please specify)
4
3.
For term accounts, if additional deposits are authorized (check
one)
Each deposit re-initializes the maturity
of the original deposit
Each deposit is subject to first-infirst-out accounting to assure that
each additional deposit is maintained
for the term of the account
An institution is permitted to set up
an accounting cycle equal to the
original term of the offered account.
New deposits received after the
accounting cycle has begun will be
regarded as maturing at the end of
the next accounting cycle
Any procedure that assures that
additional deposits are maintained
for the maturity period
The institution is permitted to use
any or all of the above
VI.
WITHDRAWALS
1.
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Federal Reserve Bank of St. Louis
No drafts may be drawn on the account, notification for withdrawals
may not be automatic and/or preauthorized, notice or maturity
requirements must be met, and there should be no limitations on
dollar size or number of withdrawals (check one).
Agree
Disagree
If disagree, there should be
limitations as follows
(Please specify)
-5
VII.
EARLY WITHDRAWAL PENALTY
1.
Early withdrawal penalties (check one)
There is no early withdrawal penalty
and the deposit should be withdrawable only after notice or at maturity
Early withdrawal permitted at the
cost of
Earned interest
Standard penalty of 3-months
interest (with invasion of
principal required if necessary)
Other
(Please specify)
VIII.
ELIGIBILITY
1.
Deposit may be offered to all depositors without limit (check one)
Agree
Disagree
IX.
MISCELLANEOUS
1.
Institutions may not make loans to depositors for the purpose of
meeting or maintaining minimum balance requirements (check one)
Agree
Disagree
2.
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Federal Reserve Bank of St. Louis
The rate charged on overdrafts on NOW or demand deposits may not
be substantially lower for holders of the proposed account than for
other depositors (check one)
Agree
Disagree
3.
With regard to loans using the account as collateral
(check one)
Subject to the standard minimum loan
rate of 1 percent over the deposit
rate 1/
The minimum loan rate will be the
deposit rate plus the loan rate
to other customers using high
quality collateral
No loans may be made using the account
as collateral
4.
The account may only be offered in non-negotiab
le form (check
one)
Agree
Disagree
5.
Effective date will be 60 days after announcement
Agree
Disagree
I propose an effective date of
X.
COMMENTS
[Signature]
1/
This option would likely to give rise to transaction account reserv
e
likely offer transfers to checkthe notice or maturity neriod
requirements since institutions would
https://fraser.stlouisfed.org ing or NOW accounts before the end of
Federal Reserve Bank of St. Louis
i4
APPENDIX
If the Committee adopts an indexed ceiling it will be asked on
a subsequent ballot to make decisions with regard to:
•
the base rate (e.g., the 91-day bill auction average)
•
a 4-week averaging option
•
the relationship of the ceiling rate to the base rate
•
fixed ceiling vs. variable ceiling
•
compounding
•
tied RPs
•
premiums.
In addition, if the Committee decides that there should be a ceiling
differential in favor of thrifts, it will be asked on a subsequent ballot
to make decisions with regard to:
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Federal Reserve Bank of St. Louis
•
the size of the differential
permanent or temporary
•
if temporary, conditions under which it goes into
effect and is eliminated
applicability of differential to IRA/Keogh deposits
and deposits of governmental units.
NEW DEPOSIT INFLOWS REQUIRED
TO BREAKEVEN ON HIGH
YIELDING OVERNIGHT ACCOUNT
ASSUME
1)
New instrument costs 7-1/2 percentage points above savings account ceiling
(13 percent rate on new instrument)
2)
New money attracted can be invested at 2 percentage point spread
NEW DEPOSIT INFLOWS NEEDED TO BREAKEVEN
AT VARIOUS PROPORTIONS OF SHIFTS
IN SAVING DEPOSITS TO NEW ACCOUNT
(Billions of Dollars)
Proportion of Savings
Deposits That Would
Otherwise Have Been
Retained That Shift
to New Account
in 1982
S&Ls
MSBs
CBs
Total
10 Percent
31.9
16.1
58.5
106.5
20 Percent
63.8
32.3
117.0
213.0
30 Percent
95.6
48.4
175.5
319.5
40 Percent
127.5
64.5
234.0
426.0
50 Percent
159.4
80.6
292.5
532.5
$156
$284
,
,
Memo: Average Savings
Balances Otherwise
Retained in 1982
(Billions of Dollars)
$43
$85
,
Percent of Deposit
Memo: Non-Institutional
Money Fund Balances
as of Feb. 24, 1982
(Billions of Dollars)
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Federal Reserve Bank of St. Louis
277
167
,
137
$155.1
4
10"i
ASSISTING TROUBLED THRIFTS
Federal Reserve Board staff projects before tax losses in 1982 of $6 to
/
2 to $2 billion for MSBs.
$7 billion for S&Ls and $11
2,
Projection implies:
a)
250 S&Ls, with assets of $50 billion, will have negative net
worth in 1982.
b) Another 350 S&Ls, with assets of $70 billion, will have positive
capital ratios of less than 1 percent of as3ets in 1982.
c)
Twelve large MSBs, with assets of $20 to $25 billion, will have
capital ratios below 2 percent in 1982--the point at which
assistance is required for MSBs.
If interest rates remain above 12 percent in 1983
3.
1)
300 to 500 S&Ls (assets of $65 to $115 billion) will have
negative capital in 1983.
2)
Seven to 10 large MSBs (assets of $7 to $12 billion) will
need assistance in 1983.
Largest problem at FSLIC (more institutions with more assets in
trouble).
a)
b)
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Federal Reserve Bank of St. Louis
FSLIC resources in 1982:
1)
$1-1/4 to $1-1/2 billion of income from premiums and
portfolio.
2)
Fund has $5-1/4 billion of assets at market value ($7 billion
at book value).
To husband resources, FSLIC in 1982 plans
1)
Let some institutions with negative net worth continue to
operate.
2) Assist mergers of worst cases with heavy reliance on
indemnifying future income on acquired assets and minimal
up front payment.
3) "Paper" capital infusions where necessary.
•
IP •
- 2
c)
FSLIC outlays are netted against income in the budget. Under
normal circumstances, such outlays are negative. For fiscal
1982, the budget calls for FSLIC positive outlays of $38 million;
in 1983 negative $150 million.
d)
In calendar 1982, FSLIC could constrain its outlays as implied
by budget.
e)
4.
1)
Assist in merger only of 150-200 worst cases.
2)
Modest up front payments to acquirers in exchange for income
indemnifications, desirable locations, and current earnings
benefit of purchase accounting. 1/
If interest rates remain high in 1983, FSLIC will need assistance
1)
Number of institutions needing help will rise and number of
merger partners will decline.
2)
Larger up front payments needed.
3)
Indemnification payments from 1981-82 mergers could exceed
$1 billion.
FDIC has far fewer problems
a)
FDIC resources:
1)
$2 billion of income from portfolio and premiums
2)
$11 billion fund at market ($12.2 billion at book
value).
b)
Resources sufficient to handle MSB mergers.
c)
However, may find it difficult to obtain merger partner for
large MSBs in New York City and hence may have to use capital
infusion.
5.
If problem is worse than projected, or for contingency planning,
could consider two options: supplementing FSLIC resources or capital
infusion.
1/
"Purchase accounting" has been used in all recent S&L mergers. Under
this approach, the acquired institution's assets are marked to market
and the difference between the premium paid, if any, and the net worth
of the acquired institution (usually negative) is capitalized as "goodwill" by the acquiring institution. Goodwill is amortized over a longer
period than the discount on the acquired mortgage portfolio. The annual
net difference is added to income each year. Of course, there is no
immediate increase in capital from this approach.
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Federal Reserve Bank of St. Louis
-3
6.
Supplementing FSLIC resources
a)
Four sources of funding
1)
Congressional appropriations, which will be reflected in
the unified budget at the time of the FSLIC outlay and in
budget authority at time of the appropriation.
2
Increases in the FSLIC Treasury "tap", which is now $750
million as compared to $3 billion for the FDIC. Increasing the tap would be reflected in increased borrowing
authority at the time of the Congressional legislation
and in the unified budget only if and when any funds taken
down are spent by the FSLIC.
3)
Market borrowing by the FHL Banks which would be relent to
the FSLIC. The borrowing would not be captured in any
budget but any expenditure by the FSLIC would be in the
unified budget at the time of the outlay. Increased security
issuance by the FHL Banks for this purpose could affect the
risk premiums required by the market for FHL Bank securities.
Legislation may be required to permit the FSLIC to borrow from
the FHL Banks.
4) FSLIC borrowing from the Federal Reserve. The borrowing would
not be captured directly in any budget, but the securities
markets would have to absorb Treasury securities that the
Federal Reserve would otherwise acquire; the expenditure of
the FSLIC would be in the unified budget only at the time of
the outlay. Legislation may be reqVired to permit the FSLIC
to borrow from the Federal Reserve.—J There are obvious precential problems with central bank assistance, making it more
difficult to deny similar treatment to future socially and/or
politically necessitous sectors. Unless drawdowns are extremely
large over short periods of time, there are no monetary control
problems since open market operations could neutralize the reserve effects of such loans.
b)
7.
Capital infusion plans repayable out of future income of assisted
thrifts.
a)
1/
Problem with approach: merger assistance provides no repayable
debt to the FSLIC; FSLIC annual income ($1-1/2 billion) permits
limited debt service capacity and any repayment slows future
growth of fund relative to deposits.
Costs in 1982 in order to maintain 2 percent capital ratios
The Federal Reserve loan could be made under Section 13(3) or 13(13)
of the Federal Reserve Act. The Board's Regulation A requires five
Board members to find that "unusual and exigent" circumstances exist.
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Federal Reserve Bank of St. Louis
4
b)
1)
S&Ls:
$1-3/4 to $3 billion (800 to 1,000 S&Ls).
2)
MSBs:
$150 million (8 large MSBs).
Costs in 1983 to maintain 2 percent ratios if interest rates
stay above 12 percent.
1)
S&Ls:
$4 billion (1,400 to 1,700 S&Ls).
2)
MSBs:
$500 million (15 large MEBs).
c) Program could exist simulataneously with merging weakest thrifts.
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Federal Reserve Bank of St. Louis
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
To
From
April 8, 1982
Date
Chairman Volcker
Additional Comments from
Depository Institutions on a
Short-term Deposit Instrument
Subject:
Edward C. Ettin
Harry Albright, Dime Savings Bank of New York.
Harry feels that a
high denomination, short maturity (or notice account) will not do particularly
well and is not a solution to money fund competition.
sort of sweep arrangement is required.
He argues that some
Dime's ideal account would be a
$15,000 initial minimum ($5,000 maintenance) tied to a $2,500 NOW with sweeps
in and out of the NOW when the balance falls below or goes above $2,500; the
account should be ceilingless.
His second best account would limit sweeps
to three times a month (the first, tenth, and thirtieth of the month).
His
third best account would be to make the account a 7-day maturity account,
but with automatic sweeps in and out of NOWs at maturity.
I indicated that anything with a weep into a NOW would essentially
be a transaction account and would not only probably be reservable as such
but would cause the Fed considerable difficulties in setting money targets,
interpreting movements in the aggregates, and controlling Ml.
While he
indicated that he understood my concerns, he suggested that the genie was
already out of the bottle with money funds and depository institution-money
fund sweep arrangements.
Dime is planning next month to introduce an RP
sweep into and out of its NOW accounts.
It already offers "checking" account
draws on MMCs and SSCs by permitting customers to write checks covered by
loans secured by MMC and SSC balances at 1 percent over the deposit rate;
Dime has $170 million of such accounts with 10 to 20 percent of the balances
in such form actively used as credit lines.
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Federal Reserve Bank of St. Louis
_
2
Dime has 21 percent of its deposits in passbook form and is not
concerned about internal shifts; Harry feels that his savings accounts will
erode anyway and his proposed account will not significantly accelerate the
rate of erosion.
He agrees that the MSB industry has a higher savings ratio
than Dime, that only a handful of MSBs would agree with Dime's proposal, and
that the NAMSB would severely criticize DIDC action similar to his suggestion.
Harry keptreturning to the view that the Fed must stop depository
institution
sweeps with money funds and that the genie was out of the bottle.
Mary Grigsby, Houston First American Savings Association.
Mary
called back to modify her 30-60-90-day term account proposal, suggesting that
the DIDC ought to authorize institutions to offer 8 to 89 days time deposits
at variable or fixed indexed ceiling rates.
Such accounts, preferably with
a thrift differential, could be used to replace retail RPs; S&Ls are running
short of collateral.
Jack Kalchbrenner, Shawmut Corporation.
notice accounts would be difficult.
His operating staff feels
A short-term account would probably
shift more from MMCs and the new 91-day account than from savings deposits
at his bank.
(He feels he will get a 10 percent savings deposit shift.)
Asset and liability management would be made more difficult--especially until
experience was gained; it would be especially difficult profitably to lay
off the funds without taking a maturity mismatch risk.
In order to stop
sweep pressures, he feels a $10,000 minimum initial and $5,000 minimum
maintenance balance is needed.
cc:
Soss
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Federal Reserve Bank of St. Louis
DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE
COMPTROLLER OF THE CURRENCY
FEDERAL DEPOSIT INSURANCE CORPORATION
FEDERAL HOME LOAN BANK BOARD
NATIONAL CREDIT UNION ADMINISTRATION
FEDERAL RESERVE BOARD
U.S. TREASURY DEPARTMENT
April 8, 1982
TO:
Chairman Volcker
FROM:
Edward C. Ettini
t/
The attached was sent to DIDC staff.
You might be interested
in the size of the ballot if there is a notation vote.
I have also marked
in the memo those specific places where I refer to Federal Reserve monetary
policy concerns (see pp. 3, 5, 6, 7, 8, 13, 14 and 15 and on the ballot
pp. 6 and 7).
Attachment.
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Federal Reserve Bank of St. Louis
DEPOSITORY INSTITUTIONS DEREGULATION COMMI1 IhE
COMPTROLLER OF THE CURRENCY
FEDERAL DEPOSIT INSURANCE CORPORATION
FEDERAL RESERVE BOARD
FEDERAL HOME LOAN BANK BOARD
NATIONAL CREDIT UNION ADMINISTRATION
U.S. TREASURY DEPARTMENT
DATE:
TO:
SUBJECT:
Depository Institutions
Deregulation Committee
FROM:
April 8, 1982
Short-term Deposit Proposals
DIDC Staff
At its March 22 meeting, the Committee authorized a new certificate
with a 91-day maturity, a $7,500 minimum denomination, a ceiling rate tied to the
91-day bill auction average, and a temporar/25 basis point differential in favor
of thrift institutions.
At that meeti
the staff to prepare for Committee
shorter-term deposit that wou
competitive vehicle vis-a
on
the Committee instructed
datn aâditional proposals for a
ory institutions with a more
ke(t mutual funds (MMMFs) and other
market instruments.
As discussed more
in previous staff memoranda,
funda-
mental problem before the Committee is to design a deposit that will minimize potential high-cost internal shifts from savings accounts while simultaneously maximizing the competitive appeal of the new instrument and
minimizing operational difficulties for issuing institutions.
In balancing
these parameters, the staff felt that four variables were particularly
important:
This memorandum was prepared primarily by Edward C. Ettin of the staff
of the Federal Reserve Board.
1/ See particularly, "Short-term Instrument Proposals," March 15, 1982.
*
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1.
Minimum Denomination.
The larger the minimum balance
requirements, the less potential for internal shifting
from savings accounts, but the less competitive the new
1/
instrument. — A high minimum denomination would also
tend to limit shifts from 6-month MMCs; although such
shifts would not have a significant impact on immediate costs,
they would make the cost structure of depository institutions more sensitive to changes/ &n irit.prest rates.
larly, a high minimum deriqmi
N8h,w
new instrument from, the-.$7,5Q, 3
,
2.
Simi-
ld differentiate any
onth certificate adopted
at the last DIDC/meetin.c.
N
Liquidity. Theie\i
mption that savings account
holders place extreme
asis on liquidity.
Requiring
the proposed new account to have a short fixed maturity or
permitting withdrawal only after a notice period might therefore serve to limit internal shifting from savings accounts.
The resultant reduced liquidity relative to MMMFs might be
offset by the convenience and insurance of the deposit instrument.
1/
A substantial proportion of savings deposits are in high balance accounts.
In December 1981, the FDIC indicated that 75 percent of MSB savings account
balances were in excess of $5,000 and 41 percent in excess of $15,000.
These results were similar to a February 1982 survey of the National Association of Mutual Savings Banks. In August 1980, the FHLBB indicated that
70 percent of S&L regular savings were in accounts with balances in excess
of $5,000 and 45 percent in excess of $10,000. A small sample survey by
the American Bankers Association in March 1982 indicated that at commercial
banks about 60 percent of savings deposit balances were in excess of $5,000
and 38 percent in excess of $10,000. The latter survey also indicated that
almost three-fourths of total NOW balances were in excess of $5,000 and
almost half in excess of $10,000.
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4
3
3.
Rate.
The staff assumed that the ability to offer a market
rate is necessary.
However, there is some difference of
opinion among the staff as to whether the account should be
ceilingless or--should the Committee adopt a ceiling--how
close that ceiling need be to MMNF yields to be competitive.
4.
Operational feasibility and convenience.
Limited staff
discussion with depository institutions IN-Ns
importance of providing operational fl
uggested the
ibilley to permit
offering institutions to integratea neAnstrument into
their internal systems and pair marketing strategies.
to balance potential
The Committee may,
'\4s
characteristics of the
ed new instrument designed
to limit internal shifts against such problems for depository
institutions.
In designing a short-term instrument, the staff has attempted to
take account of the conflicts inherent in the Committee's objectives as
reflected in these four key variables.
proposal are summarized in Table 1.
The major characteristics of our
The balance of this memorandum discusses
the detailed characteristics of the staff's proposal and presents certain
options for the Committee's consideration.
Monetary Policy.
is relevant to summarize the
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Before reviewing each characteristic, it
reserve requirement issues associated with the
- 4 TABLE 1
SUMMARY OF THE PROPOSED ACCOUNTS'
MAJOR CHARACTERISTICS 1/
Minimum Initial Deposit:
Between $10,000 and $25,000
Minimum Subsequent Deposit:
Options
• Same as minimum initial deposit, or
• $5,000 less than minimum initial deposit
Maturity:
Options
•
•
•
•
5 days
7 days
14 days
Institutions' choice within 5- to 31-day range
Options for any of the alloy\
received
• Notice account (frotN.ie notification
by institution
y grace period, automatic
• Fixed maturity
rollover) ;
r or both
• Institutions\ oice to offer eithe
Rate:
Options
.
s
• Cetai
ceiling
• NeVe to 91-day bill rate (variable
of
n
optio
e •issfble) with
o No differential
o Temporary thrift differential of 25 basis
points
option of
If account balance falls below minimum,
• Rate falls to savings passbook rate
• Account must be closed
Compounding permitted
Additional Deposits:
Withdrawals:
No quantitative minimum
No quantitative minimum
Enforced notice or at maturity
or third party
Withdrawal may be paid only to depositor
nt
accou
it
depos
or transfer to NOW or demand
account
sed
propo
No withdrawals by draft directly on
Early Withdrawal Penalty:
Options
Eligibility:
All depositors
1/
only at maturity
• None since withdrawal permitted
or after notice
• Loss of earned interest
uding invasion of
• Loss of 3-months interest (incl
account balance)
table.
s are discussed in text and omitted from
Important technical and policy issue
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Federal Reserve Bank of St. Louis
- 5 creation of a new deposit instrument and the associated monetary policy
considerations.
The Federal Reserve Board, under the Monetary Control Act,
has the exclusive authority for determining the applicability of Federal
reserve requirements to current and future deposit instruments.
Under
the Board's current Regulation D, any deposit instrument with a maturity
or required notice period of less than 14 days is subject to transaction
account reserve requirements.
In addition, any account upon which a check or
draft can be drawn and any account that can be used as a normal practice to
1/
pay third parties are also regarded as trrsac
accounts.
The Federal
*Ns
4(
Reserve staff has indicated that its
at&culd, however, regard any new
account with a shorter maturity as astim
\
limited withdrawal features, and Could ment on this category of time'de
characteristics that facilita
it, particularly if it had
\v
lish a zero percent reserve requireThe more the new instrument has
-party payments the greater is the
Federal Reserve's need to regard the account as a transaction account in
order to carry out its responsibilities for controlling the monetary aggregates--especially the transaction aggregate Ml.
However, the Federal Reserve
staff advises that any account that permits third party payments as a normal
1/
2/
The Federal Reserve Board now imposes transaction reserve requirements
on (1) any account with a maturity or notice of less than 14 days,
(2) any deposit account on which a draft can be drawn--all demand deposits,
NOWs, share drafts, and similar "other checkable deposits," (3) automatic transfer accounts, and (4) any account on which more than three
monthly preauthorized or telephone transfers can be made. The Federal
Reserve has also asked Congress for authority to extend reserve requirements to MMMFs.
Under the Monetary Control Act, savings deposits and non-negotiable time
deposits held by persons are not reservable, while negotiable time deposits
and time deposits held by other than natural persons are subject to a
reserve requirement of zero to 9 percent; the Board's current reserve
requirement on such time deposits is 3 percent. Even if the Board
adopted a zero percent reserve requirement on any new account, member
banks would still be subject to a small (and declining) reserve requirement on the aggregate of their savings, personal and non-negotiable
time deposit during the current phase-down of reserve requirements under
the Monetary Control Act.
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Federal Reserve Bank of St. Louis
- 6 ld complicate the
e as a transaction account, wou
practice, even if reservabl
conduct of monetary policy.
in order
Reserve staff believes that,
More generally, the Federal
etary aggregates,
interpret movements in the mon
to
e
erv
Res
l
era
Fed
the
for
n transaction
the degree of blurring betwee
it is important to minimize
es high
deposit instrument that combin
new
A
ts.
osi
dep
ion
act
ans
and non-tr
that permits or
maturity, and particularly one
yield with extremely short
ficulty of interments, would increase the dif
facilitates third party pay
used for transaction
such an instrument is being
preting.the degree to which
In view of the moneg as an investment vehicle.
purposes relative to servin
s that the Committee
Federal Reserve staff belieire
tary policy concerns, the
that facilitate
account with characteristics
should prohibit outright an
even though it would
third-party payments: Thus,
for
t
oun
acc
the
of
use
the
erve staff
ve to MMMFs, the Federal Res
ati
rel
ss
ene
tiv
rac
att
its
limit
of no less
have a maturity (or notice)
t
men
tru
ins
new
the
t
tha
suggests
ectly on the
negotiable drafts drawn dir
rty
-pa
rd
thi
t
tha
s,
day
en
than sev
nsfers from
omatic or preauthorized tra
aut
t
tha
and
d,
ite
hib
pro
account be
hibited. Unlimited
ctions account also be pro
the new account to a transa
ld be permitted.
the depositor, however, wou
telephone notifications by
the Committee
The staff recommends that
Minimum Initial Deposit.
etween $10,000 and
tial minimum denomination--b
ini
h
hig
y
vel
ati
rel
a
adopt
determining the
internal deposit shifts. In
uce
red
to
er
ord
in
0-$25,00
in mind
tee may also wish to keep
mit
Com
the
t,
osi
dep
l
tia
minimum ini
osit requirement
uctions in the minimum dep
red
ure
fut
of
ty
ili
sib
(1) the pos
the desirability
ernal deposit shifts, (2)
int
ut
abo
ps
elo
dev
on
as informati
MMMFs and retail
to offer sweep accounts to
ons
uti
tit
ins
on
re
ssu
of reducing pre
ominations, and (3) its
been based on smaller den
RPs, many of which have
m after the initial deposit.
of any maintenance minimu
e
siz
the
ut
abo
nt
gme
jud
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Federal Reserve Bank of St. Louis
Minimum Subsequent or Maintenance Balance.
On the presumption
that depositors will wish to add to and draw on the balanc
e in the new
instrument after the account is opened, the Committee may
wish to consider
requiring a minimum maintenance balance different from the
initial deposit
minimum.
suggest
Simplicity and consistency with other minimum balance
requirements
that the maintenance balance be the same as the initial
minimum.
Flexibility in the use of the account suggests that the
maintenance balance
might be on the order of $5,000 less than the minimum initial balanc
e,,but such an
approach may be tantamount to reducing the initial balance requir
ement if
depositors can temporarily adjust their asset holdings to meet the
initial
balance requirement.
..„/
\
In any event, the c mmitt04. w
ka47 \t,?;,- determine two other
•
issues with regard to the maintertanabalpnph
(1) the rate to be paid if
the balance falls below the ..ii.edlatoy, iñimum.
options:
The staff suggests two
\)\\/'
(a) the passbook rate-R, v(b,) closure of the account (and con-
version to a passbook or transaction account) if the balance
falls below
the minimum maintenance balance for a specified period.
the first option.
(2)
The staff recommends
The interval over which the minimum maintenance
balance is to be calculated.
The staff recommends that institutions be
permitted the option of determining the maintenance balance as the averag
e
for any interval from one day to one month.
Maturity.
As previously noted, the shorter the maturity of the
new instrument the more competitive it would be with MIINFs, the larger is
the potential for internal deposit shifts from passbook accounts, and, at
least below seven days, the more the Federal Reserve staff indicates will be
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Federal Reserve Bank of St. Louis
the potential problem for monetary policy.
The Committee staff suggests four
options: (1) a 5-day instrument, (2) a 7-day instrument, (3) a 14-day instrument, or (4) authorization of institutions to offer maturities in the range
of 5 to 31 days.
Whatever the maturity selected, the staff recommends that institutions be permitted to offer the account in either or both of two versions:
(1) a time deposit open account (which has no specific maturity) with an
enforced notice requirement before withdrawal equal to the maturity (or
maturity range) selected or (2) a time depit\it
specific maturity, the
\Z," ove
balance of which would be automaticall,,rolle
after a 1-day grace
,
period) if the depositor did not givetki
Staff discussions with a f.ea-loilepoi o
Rate.
rate.
stitutions suggest that some can
others can do so at great inconvenience,
handle a notice account ot)
and still others would find
ution other instructions.
tremely difficult operationally.
There is a difference of opinion among the staff on the issue of
A majority of staff recommends that there be no regulatory rate ceiling.
This group argues that the objective of the DIDC is to deregulate; the available evidence suggests that institutions do not price irrationally; the
lack of a regulated rate ceiling, as opposed to a market indexed ceiling,
will not exacerbate internal shifts from savings accounts, since the issue
of liquidity is a more important factor than rate in inducing shifts; there
is evidence that, in the market for competitive short-term instruments,
virtually all issuers pay the ceiling rate and if there were no ceiling,
some institutions might pay less and some more than what would have been
the ceiling rate; and institutions need the flexibility, especially in the
early months of the new instrument, to use rate to regain depositors lost
to MMMFs and other market instruments.
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Federal Reserve Bank of St. Louis
9
Others among the staff believe
have an indexed ceiling.
that the new instrument should
Institutions could be permitted to choose either
varying the rate on outstanding deposits in line with the weekly index
or maintaining a fixed rate based on the index in the initial week of the
term account.
Staff supporting a ceiling on the new account argue that
the Committee has already adopted a deregulation plan based on maturity;
the insurance and convenience of deposits imply that institutions can
offer less than MMMFs and still attractOin
/ <1
and the operating losses of
i(on in the short-run.
thrifts imply the need to restrain,ra'tepeti
,
<
Indeed, the FHLBB staff argues th,iteq'ois
„t
/1"
this account to avoid incon$isfy4.
temporary differential on
t e Committee's March decision
with regard to the 9l-.d,eotri&jIn order to facilitate improvement
to those of banks.
in thrift deposit inflows
staff do agree that, in contra
ness of th
Most of the DIDC
to the 91-day account, the attractive-
proposed instrument would increase bank deposit flows even if
there were a thrift differential.
If there were an indexed ceiling imposed--with or without a
differential--the Committee would have to choose a base rate and a mechanical
indexing method.
The staff would recommend the 91-day bill rate (auction
average, discount basis, no-4-week averaging option) as the base rate and
that the ceiling rate be equal to the base rate.
The upper panel of Chart 1
shows the weekly spread by which MMMF yields would have exceeded the rate
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CHART 1
INTEREST RATE SPREADS BETWEEN MMMFs
AND A SHORT-TERM DEPOSIT EQUAL TO THE 91-DAY
TREASURY BILL RATE (Discount Basis)
Percent
—.8
,Inimmme
MMMF rate less Deposit Rate
(weekly data)
6
IMMO.
4
ft
No
Compounding
2
Compounde
Daily
1
%
1d
I
1 r-d
ki
2
4
Percent
—
MMMF rate less Deposit Rate
(quarterly average data)
No
Compounding-)
,
41•11
1
1
1
1
1
1
,IM=M11
alio snow lam
mum swab
SO.IN.
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Federal Reserve Bank of St. Louis
3
2
1
.•.\\
/a\
an.= 4..
4
/
0
./
Compounded
Daily
OMMIN
1
2
3
1
1979
1980
1981
1982
on such a deposit since 1979, wit
h and without compounding;
the lower panel
shows the same spread on a quarte
rly average basis. With
daily compounding
(the dashed line), over the ent
ire period the deposit rat
e would have on
average exceeded the MM1TF yield
by over 30 basis points;
in about two-thirds
of the weeks since 1979 the deposi
t rate (daily compounding)
would have
exceeded NIINF yields.
The staff notes that it would be
technically difficult effect
ively
to prohibit compounding on the
proposed instrument, even
with a ceiling.
,
First, for a fixed-term accoun
t (even i a'toma'1ly rolled
over) institutions legally must pay out
or cri,tNiir&st at -maturit
y. Second, if
the Committee authorized bot
h, fikOfer6 an 'dotice accoun
ts and prohibited
„
the crediting of intere t$51\t
fN',
"
\any more frequently than,
say quarterly,
the effective yields on th
ar accounts would be differ
ent. Additionally,
as shown in the last two col
u s of Table 2 (which shows
effective yields on
instruments with a 13 percen
t nominal yield) the differenc
e in effective yield
between quarterly and contin
uous compounding is relativel
y small. At current
rates, compounding adds 45
to 90 basis points to effect
ive yields.
Should the Committee choose
to impose a ceiling and
a temporary
differential, the staff would
recommend that thrifts be
permitted to pay
the bill rate and commer
cial banks 25 basis points
less. We would further
recommend that the sam pro
e
cedure be adopted as on
the new 91-day deposit
instrument, viz.,the differ
ential would disappear aft
er one year, and,
during that year, for any
interval after the auction ave
rage on the 91-day
bill rate falls below
9 percent for four consecutive
auctions.
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Federal Reserve Bank of St. Louis
- 12 Table 2
Effective Yields on a 13.0 percent Certificate
for Various Compounding Periods--365/360 Basis
Type of
Compounding
Formula
1 (.13) 365
360
-1
14.085
.904
99+
7 (.13)) 365
7
360
14.070
.889
98
91 (.13) 365
91
360
4.
13.847
.666
73
1 +, 182(.13)) 365
(
182-1=
360
r =
13.616
.435
48
365(.13))
360
-1
r = (1 +
6
13.181
(1
Weekly
Quarterly (91 days) r
)
Semi-Annual
(182 days)
1/
No within
period compounding
1/
100
.907
r
Daily
365 (.13)
360
-1
14.088
r = e
Continuous
0
Effective
Rate
Percent of the
Increased
Continuously
Yield
Compound
Due to
Increase
Compounding,
(1
=
0
The fact that the effective rate is about 18 basis points higher than the nominal
rate even with no within period compounding is due to the artificial year.
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Federal Reserve Bank of St. Louis
- 13 -
Finally, as noted earlier, regardless of whether the account is
subject to ceilings or not, the staff recommends that a ceiling rate equal
to the applicable passbook rate
be imposed whenever the balance on the
account falls below the minimum maintenance requirement.
Additional Deposits.
The staff recommends that the new account
be structured so that institutions can accept additional deposits without
quantitative regulatory limit once the account is opened.
If the Committee
adopts such a proposal--which would add to the flexibility of the account-certain problems regarding the account's maturity are raised.
V '"‘
For notice accounts, there are two
don, :
Z'' \\\\
1) requiring that instituti'
7
\
s adopt firs
, . .
accounting control(W\a'asar ''t
)\\\
for at least th
2)
'1\
u
imposing no reg
additional deposit
n-first-out"
ach deposit is maintained
Lçè period, or
itation on the holding period for
While individual institutions may not
allow it, this option would permit institutions to
accept additions to the new account for holding periods as
short as overnight.
The Federal Reserve staff indicates that its Board is likely to be concerned
about the monetary policy implications of the second approach and would urge that
the Committee prohibit such additions; the Federal Reserve would be likely
to impose transaction account reserve requirements to such deposits which
might be held for very short periods.
For term (specific maturity) accounts, the problem of additional
deposits becomes somewhat more complicated.
Under existing agency regula-
tions, additional deposits re-initialize the maturity of the account to the
original maturity at the time of the additional deposit.
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Federal Reserve Bank of St. Louis
The staff
- 14 recommends that the Committee permit institutions to use any or all of the
following methods for accepting additional deposits to the proposed term
account:
1)
Each deposit re-initializes the maturity of the original
deposit.
2)
Each deposit is subject to "first-in-first-out" accounting
to assure that each additional deposit is maintained for
the term of the account.
3)
An institution is permitted to set up an "accounting cycle"
equal to the original term of the offered account.
New
deposits received after the accounting cycle has begun
will be regarded as matur.ini•at th.eerkas
accounting cycle.
\
I4-"-e-ffOctv,' 660
interest-bearing esto
the next
s t will be held in
an be added at the
beginning of a new regu1p.z maturity term.
A fourth option might be:
4)
No regulatory limitation to the holding period for additional
deposits.
The Federal Reserve staff opposes the fourth option for the same monetary
policy reasons as noted above and indicates the likelihood that the Federal
Reserve Board might impose transaction account reserve requirements on
such deposits which might be held for very short periods.
Withdrawals.
The staff recommends no regulatory prohibition
on the size or number of withdrawals from the proposed new account.
For notice accounts, withdrawals could occur only after the
specified number of calendar days (discussed under maturity above) after
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Federal Reserve Bank of St. Louis
- 15 the time the depository institutions receives notification.
Notice
would not be optional to the institution but must actually be given by
the depositor, and would be permitted by telephone or other telecommunication, mail or messenger, or in person (over-the-counter or through an ATM).
For term accounts,N.ithdrawals could occur only at maturity (or
before the end of the grace period).
Notification of intent to with-
draw could occur any time before the end of the grace period by the same
procedure as for a notice account.
If no notification were received by
//
the end of the grace period, the deposit wou \.346(Nrn ically roll over.
,
Some DIDC staff urge that notifiatiolcif r
notice or term account be permitted
basis.
Federal Reserve staff
facilitate the use of the ac
a
<7:
2istic
e
f.
monetary policy concerns; it urg
t&mati
drawal from
and/or preauthorized
issive regulation would
ction purposes, raising
ibition of such arrangements and
indicates that the Federal Reserve bard might impose transaction reserve
requirements on accounts with such withdrawal procedures.
The Federal
Reserve staff recommends that the Committee require that all notifications
require specific action by the depositor and automatic, preauthorized,
standing and similar withdrawal notifications be prohibited.
Withdrawals from any version of the new account could only be
by (1) check or cash to the depositor or by the institutions to a third
party and (2) by transfer to the depositors' checking or NOW account.
No withdrawals by third party draft drawn directly on the account would
be permitted.
Early Withdrawal Penalty.
A majority of the staff recommend
that, since the maturity or notice on the proposed account is so short,
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Federal Reserve Bank of St. Louis
- 16 no early withdrawals be permitted under any circumstances.
This
approach would eliminate the need for early withdrawal penalties.
If
the committee chose to permit early withdrawals, it might authorize the
following early withdrawal penalties:
(1) loss of earned
interest (as
adopted on the 91-day account) or (2) the standard penalty (loss of 3-months
interest, which would require invasion of capital).
withdrawal is permitted
Of course, if early
any institution could adopt a more restrictive
early withdrawal penalty or prohibit such withdrawals if it chose to do
so.
e:
The staff is unanim&4, n its4ecommendation that
•
\t..
tion on eligibility for
the proposed new account have no regulatorr,li
v
Eligibility.
e
•
all depositors.
Miscellaneous Resirictton§
prohibition on loans to deposit
balances.
e staff recommends a regulatory
igned to meet initial or maintenance
Overdraft privileges would still be permissible on NOW or demand
deposits to which the new account is transferable, but staff recommends
regulations that require that the rates charged on such overdrafts must
equal the rates charged on such overdrafts for depositors that do not
hold the proposed account.
To assure that withdrawal before maturity or notice is not facilitated, or the early withdrawal penalty (if any) is avoided, the staff
recommends that no loans be permitted using the account as collateral at
interest rates less than the rate being earned on the deposit plus the
institutions' lending rate to other customers using Government securities
or other similar high quality collateral.
For similar reasons, the staff
recommends that the new instrument be issued only in non-negotiable form.
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Federal Reserve Bank of St. Louis
- 17 Because of the money market nature of the proposed instrument,
the Committee may also wish to consider prohibiting the offering of RPs
to account holders of the proposed new instrument (or those planning
to open such accounts) at a rate in excess of that offered to any other
customer.
The Committee may wish to do this particularly if the account
is subject to a rate ceiling so as to assure that such a ceiling is not
pierced.
It may also wish to do so forJess account to avoid
the payment of above market rates
in order to attract
customers before the effective date
'
Finally, if the accountjs—su le5Ft to ceilings, the Committee
N\
may wish to prohibit the
iums since the existing premium
rule--2 per year per account
instrument.
t lend itself to a short-term
If the account is ceilingless, the staff recommends no
prohibition since premiums are part of the interest received.
Effective Date.
In order to provide a sufficient interval for
Institutions to plan marketing strategies and design systems, the staff
recommends that the effective date of any new instrument be 60 days after
announcement of the Committee's decision.
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Federal Reserve Bank of St. Louis
BALLOT FOR SHORT-TERM DEPOSIT PROPOSALS
I.
I am in favor of authorizing a new short-term deposit instrument at
this time.
Yes
No
(If you vote no you may still wish to complete the rest of the ballot
in order to affect the design of the instrument in the event that
a majority favors authorization)
II.
MINIMUM DENOMINATION
1:
The minimum initial denominaiqri\sh
'(pileck one)
$25,000
$20,000
$15,000
$10,000
Other
(Please specify)
2.
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Federal Reserve Bank of St. Louis
The minimum subsequent or maintenance balance should be (check one)
$25,000
$20,000
$15,000
$10,000
$5,000
Other
(Please specify)
2
III.
MATURITY
1.
than one
The maturity of the new instrument should be (more
category can be authorized)
5-days
7-days
14-days
Institutions may offer any maturity they wish in the
5- to 31-day range
Other
(Please specify)
2.
The instrument must be in .thekoT
check one)
\
.
Time deposiF-411p,ep. ',qectxu
notice period equal to
my vote
Specific matu
ual to my vote in III-1
Institutions may have their choice of either or both
of the above
3.
For term accounts (i.e., specific maturity), there should be a
grace period of
No grace period
1 day
2 days
Other
(Please specify)
IV.
RATE
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Federal Reserve Bank of St. Louis
1.
one)
Institutions should be authorized to pay (check
Any rate they wish (no ceiling)
An indexed ceiling rate
-3
(Even if you vote for a ceilingless account, you may wish to
complete questions IV-2 through IV-7 to affect the design of
the instrument in the event that a majority favors an indexed
ceiling).
2.
If there is a ceiling, the base rate should be (check one)
The 91-day bill auction average (discount basis)
Other
(Please specify)
3.
'Itav
If there is ceiling, thrifts should
,
•'• N
there is a subsidiary question) A2
^N/
(
No
. differential (if yes,
Yes
If there is a
basis points less than thrifts.
pay
4.
erential, commercial banks may
(check one)
If there is a ceiling, the highest ceiling rate should
Equal the base rate indicated in my vote on IV-2
Be above the base rate by
basis points
Be below the base rate by
basis points
Other
(Please specify)
5.
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Federal Reserve Bank of St. Louis
be free to
In determining the ceiling, the institution should
(check one)
Use the higher of the latest base rate or a 4-week
average
There should be no 4-week averaging option
-4
6.
should
If there is a thrift differential, the differential
be
Permanent (as long as there is a ceiling)
Temporary
If temporary, the differential should disappear
At the end of one year
Other
(Please specify)
Within this interval, it should disappear if
The base rate is below 9 percent for four
consecutive weeks
\
/
\ • "
• c,„ ,
Other
--N laise-s e
\
\
And wit*Qe
The baserat
e
should reappear if
s at or above 9 percent for
one week
The base rate is at or above 9 percent for
four consecutive weeks
Other
(Please specify)
7.
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Federal Reserve Bank of St. Louis
If there is a ceiling (choose one)
would apply to the
The ceiling rate in the initial week
entire term of the account
of varying the
The institutions would have the option
changrate on outstanding deposits in line with the
ing base rate
-58.
Should there be regulatory restrictions on compounding (check
one)
Yes, compounding should be prohibited
No, an institution should be free to compound any way
it wishes
9.
Regardless of the ceiling, if the balance in the account falls
below the minimum specified in my vote on 11-2 (check one)
A ceiling rate equal to the institutions' savings
account ceiling should be imposed —, \
\\
The account must be closed
Other
(Please specify)
10.
For purposes of calcuLattng
institution may use ave
minimum balances the
alances over (check one)
One day
One week
Two weeks
One month
Any interval not to exceed one month
Other
11.
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Federal Reserve Bank of St. Louis
If there is a differential, commercial banks should be permitted
to pay the thrift ceiling rate to IRA/Keogh account depositors
and governmental units
Agree
Disagree
-6 ADDITIONAL DEPOSITS
V.
1.
There should be no dollar limit or frequency limit on additional
deposits (check one)
Agree
Limitations should be imposed as follows
2.
(Please specify)
the
authorized,
For notice accounts, if additional deposits are
institution (check one)
Must adopt first-in-first-out accounting controls to
assume that each additional"'
osit is maintained
\
for the minimum notice' TerixRd
No
d on the holding period
limitation should be
,
for additional depos
as overni
ich could then be as short
)\\
Other
(Please sp cify)
3.
For term accounts, if additional deposits are authorized (check
one)
Each deposit re-initializes the maturity of the original
deposit
Each deposit is subject to first-in-first-out accounting
to assure that each additional deposit is maintained
for the term of the account
An institutions is permitted to set up an accounting
cycle equal to the original term of the offered account.
New deposits received after the accounting cycle has
1/
Likely to give rise to transaction
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Federal Reserve Bank of St. Louis
account reserve requirements.
-7
the end of the
begun will be regarded as maturing at
next accounting cycle
any or all of the
The institution is permitted to use
above
holding period for
No limitation should be imposed on the
additional depos
(which could then be as short as
overnight)
VI.
WITHDRAWALS
1.
ck one
Limitations on withdrawals (Qhe
\ \-\
\
dollar size or number
There should be nq/iimitsa,ti s on
\ N;,
maturity requirements
ot,ce
then
provided thf
are met
tions as follows
There sh
(Please specify)
.
2.
Notifications for wit
awal from notice or term accounts
(check one)
d
May be automatic and/or preauthorize
1/
uthorized
May not be automatic and/or prea
3.
account (check one)
Withdrawals by draft drawn on the
Would be permitted
Would not be permitted
VII.
EARLY WITHDRAWAL PENALTY
1.
ck one)
Early withdrawal penalties (che
sit should be withdrawable
There should be none; the depo
only after notice or at maturity
1/
ion account reserve requirements.
Likely to give rise to transact
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Federal Reserve Bank of St. Louis
-8
cost of
Early withdrawal permitted at the
Earned interest
rest (with invasion
Standard penalty of 3-months inte
of principal permitted)
Other
(Please specify)
VIII. ELIGIBILITY
1.
)
Deposit may be offered (check one
To all depositors withottli
C\ \‘N
'
on
y
iit
gpi
NOW account eli
Individuals only
\ CNN
Other
(P1
IX. MISCELLANEOUS
1.
of
s to depositors for the purpose
Institutions may not make loan
one)
m balance requirements (check
meeting or maintaining minimu
Agree
Disagree
2.
not
ts on NOW or demand deposits may
The rate charged on overdraf
sitors
new account than for other depo
be lower for holders of the
(check one)
Agree
Disagree
3.
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Federal Reserve Bank of St. Louis
the
collateral may not be lower than
Loans using the account as
s using
the loan rate to other customer
yield on the account plus
ateral (check one)
similar high quality coll
Agree
Disagree
9 _
4.
The account may only be offered in non-negotiable form (check one)
Agree
Disagree
5.
RPs may not be offered to holders of the new account (or those
planning to open such account) at a rate higher than those
offered to other customers (check one)
Agree
Agree only if account subject to rate ceilings
Disagree
. 6.
Premiums may not be offered to account holder (check one)
Agree
Agree only if account subject to rate ceilings
Disagree
7.
Effective date will be 60 days after announcement
Agree
Disagree
I propose an effective date of
X.
COMMENTS
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Federal Reserve Bank of St. Louis
(Signature)
I
,
•
BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM
DATE
April 1, 1982
Chairman Volcker
TO:
FROM: EDWARD C. ETTIN
1
/
The attached has been circulated
among the DIDC staff.
cc:
Soss
Bradfield
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Federal Reserve Bank of St. Louis
DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE
FEDERAL HOME LOAN BANK BOARD
U.S TREASURY DEPARTMENT
FEDERAL DEPOSIT INSURANCE CORPORATION
NATIONAL CREDIT UNION ADMINISTRATION
COMPTROLLER OF THE CURRENCY
FEDERAL RESERVE BOARD
DRAFT
TO:
DATE:
Depository Institutions
Deregulation Committee
FROM:
DIDC Staff *
SUBJECT:
March 31, 1982
Short-term Deposit Proposals
$7,500
At its March 22 meeting, the Committee adopted a new 91-day
bill auction
minimum, certificate with a ceiling rate tied to the 91-day
favor of thrift
average, and with a temporary 25 basis point differential in
institutions.
At that meeting, however, the Committee instructed the staff
for a shorter-term
to prepare for Committee consideration additional proposals
competitive
deposit that would provide depository institutions with a more
market instruvehicle vis-a-vis money market mutual funds (MMMFs) and other
ments.
As discussed more fully in previous staff memoranda, -'the fundaminimize
mental problem before the Committee is to design a deposit that will
simultaneously
potential high-cost internal shifts from savings accounts while
minimizing opermaximizing the competitive appeal of the new instrument and
ational difficulties for issuing institutions.
In balancing these parameters,
the staff focused on four variables:
1.
*
1/
Minimum Denomination.
The larger the minimum balance
of the staff
This memorandum was prepared primarily by Edward C. Ettin
of the Federal Reserve Board.
15, 1982.
See particularly, "Short-term Instrument Proposals," March
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Federal Reserve Bank of St. Louis
•••=ni&
2
requirements, the less potential for internal shifting
1/
and less competitive the new instrument. —
2.
Liquidity.
There is a presumption that savings account
holders place extreme emphasis on instant liquidity.
Withdrawal from the proposed new account only after a
notice period, and/or a short fixed maturity, and/or
some combination of the two might therefore serve to
limit internal shifting.
The resultant reduced liquidity
relative to IIMMI's might be offset by the convenience and
insurance of the deposit instrument.
3.
Rate.
The staff assumed that the ability to offer a market
rate is necessary, but that rate need not necessarily be as
high as NIINF yields because of
convenience and deposit
insurance.
4.
Operational feasibility.
Limited staff discussion with
depository institutions suggests that a notice period is
generally feasible, but complicated.
Some institutions
were concerned about potential back-office problems and
consumer understanding of notice limitations.
Balancing these variables and the Committee's objectives, the
staff has designed three alternative instruments for Committee considera-
1/
A substantial proportion of savings balances are in high balance
accounts. In December 1981, the FDIC indicates that 75 percent of MSB
savings accounts were in excess of $5,000 and 41 percent in excess of
$15,000. In August 1980, the FHLBB indicates that 70 percent of S&L
regular savings were in accounts with balances in excess of $5,000 and
45 percent in excess of $10,000. A small sample survey by the American
Bankers Association in March 1982 indicated that at commercial banks
about 60 percent of savings deposit balances were in excess of $5,000
and 38 percent in excess of $10,000. The latter survey also indicated
that almost three fourths of total NOW balances were in excess of
$5,000 and almost half in excess of $10,000.
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Federal Reserve Bank of St. Louis
nation
tion, each of which have variants on the size of the minimum denomi
and rate.
ing
The three options are summarized in the table on the follow
ments to this
page and each is described in considerable detail in the attach
memorandum.
d
The details of the three proposals, of course, can be revise
by the Committee.
In evaluating the three alternatives, the following observations
might be useful to the Committee:
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Federal Reserve Bank of St. Louis
1)
Both alternatives A and B have options on the minimum denomination.
Should a relatively high minimum be selected--in order to limit
the potential shifts from savings accounts--the Committee could
consider indicating that it monitors the shift experience with
the higher minimum denomination to determine the appropriateness
of reducing the minimum denomination.
2) In evaluating the minimum denomination of alternatives
er the relative
A and B, the Committee may wish to consid
ity may have in
importance that a notice or a short-matur
reducing internal deposit shifts.
If it is felt that these
, the lower
limitations will significantly reduce shifts
minimum denomination may be appropriate.
a ceiling rate is appropriate
3) If the Committee believes that
notes that such a
for alternatives A and/or B, the staff
order to attract
ceiling need not equal a market rate in
ience of deposits.
funds, given the insurance and conven
which the nominal ceiling
Any judgment on the degree to
rate might be affected
should be indexed below a market
compounding.
by the decision on permissible
It would
- 4 SUMMARY OF PROPOSED ACCOUNTS' MAJOR CHARACTERISTICS
Feature
Alt. A
Alt. B
Alt. C
Maturity
7-day notice
7- or 14-day fixed
Dual accounts; 30or 90-day fixed
plus 7-day notice
or 7-day fixed.
Minimum Initial Deposit
$10,000 or $25,000
$10,000 or $25,000
$10,000 in 30- or
90-day account.
Minimum Subsequent
Balance
$10,000 or $25,000
$10,000 or $25,000
Additional Deposits
No limit
No limit
No limit but each
deposit goes first
into 30- or 90-day
account.
Withdrawals
No limit on dollar
size. 7-days prior
notice required.
Withdrawal paid to
depositor or third
party, or transfer
to NOW or demand
deposit. No withdrawals by negotiable instrument.
Only at maturity.
No limit on dollar
size withdrawals
paid to depositor
or third party, or
transfer to NOW or
demand deposit.
No withdrawal by
negotiable instrument.
At the end of 30- or
90-days from first
account. And funds not
withdrawn from first
account at maturity
shift to 7-day notice
or 7-day fixed
maturity account,
from which withdrawals are the same
as under alternatives A or B.
Early Withdrawal Penalty
None since no
withdrawal permitted without
7-day notice.
None since no
withdrawals permitted until
maturity.
Earned interest on
30- or 90-day
account. Same as
alternatives A or
B for 7-day account.
Interest Rate
Related to 91-day
bill rate or no
ceiling. Savings
rate if balance
below minimum.
Differential
possible if there
is a ceiling.
Related to 91-day
bill rate or no
ceiling. Savings
rate if balance
below minimum.
Differential
possible if there
is a ceiling.
Related to 91-day
bill rate. 30- or
90-day account
fixed or floating.
Differential possible.
Savings rate if
balance falls below
$10,000 in the sum
of both accounts.
Eligibility
All depositors.
All depositors.
All depositors.
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Federal Reserve Bank of St. Louis
$10,000 in the sum
of both accounts.
5
technically be difficult to effectively prohibit compounding on a
1
45
very short-term instrummt. /- As shown in Table 2, compounding adds
to 90 basis points to effective yields at current market rates.
4) As a technical matter, the staff notes that (a) a thrift
differential will contribute to relatively more rapid
deposit flows at thrifts, and (b) a competitive new instruute to
ment--even with a thrift differential--should contrib
greater deposit growth at commercial banks as well.
5)
s
Some institutions have indicated potential operating problem
with the alternative A notice account approach.
The fixed
maturity approach of alternative B would eliminate these
operating difficulties but would add potential complexities
for handling additional deposits.
However, these could be
minimized by permitting institutions their options as to
procedures for accepting new deposits.
Indeed, if the
instrument,
Committee is inclined to authorize a very short-term
A and
it might wish to consider authorizing both alternatives
or both
B--permitting institutions to choose to offer either
a notice or fixed maturity account.
Under this approach the
staff would suggest the same minimum denomination and rate
for both accounts.
1/
ically rolled over)
First, for a fixed -term account (even if automat
t at maturity.
interes
credit
or
out
institutions legally must pay
s (since they
account
notice
on
case
the
be
not
Second, while this would
fixed -term and
have no maturity), if the Committee authorized both
t on the latter
interes
of
ng
the
crediti
ted
notice accounts and prohibi
yields on the
ve
effecti
the
ly,
any more frequently than, say, quarter
in the last
shown
as
nt.
Third,
differe
two similar accounts would be
ents
instrum
on
yields
ve
two columns of Table 2 (which shows effecti
yield
ve
effecti
in
nce
with a 13 percent nominal yield) the differe
relatively small.
between quarterly and continuous compounding is
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Federal Reserve Bank of St. Louis
- 6 Table 2
Effective Yields on a 13.0 percent Certificate
for Various Compounding Periods--365/360 Basis
Type of
Compounding
1)
2)
Continuous
Daily
Effective
Rate
Increased
Yield
Due to
Compounding
14.088
.907
14.085
.904
99+
-1
14.070
.889
98
91 .13 )365
360
91
-1
13.847
.666
73
182 .13) 365
360
182
-1
13.616
.435
48
Formula
r=e
365 (.13)
360
r = (1
.4_
-1
_l_Lia) 365
360
-1
Percent of the
Continuously
Compound
Increase
100
—Z.....(.1-2)) 365
360
7
3)
4)
5)
6)
Weekly
Quarterly (91 days) r
Semi-Annual
(182 days)
1/
No within —
period compounding
1/
r = (1
365 .13
360
)-1
13.181
0
The fact that the effective rate is about 18 basis points higher than
the nominal
rate even with no within period compounding is due to the artificial
year.
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
7
6)
Monetary policy considerations--particularly the need to
separate transaction and investment balances--argue against
both a shorter notice account than 7 days and the ability
of deposit holders to draw negotiable drafts directly on
any of the proposed new instruments.
The Federal Reserve
Board has the authority to regard any of the three proposals
as time deposits for reserve requirement purposes and subject them to a zero percent reserve requirement.
7)
The alternative C approach would be the most effective for
limiting internal shifts, but also the least attractive
competitively.
Its operational mechanism appears complex
but the staff believes it is workable.
8) The more limited potential for shifting under alternative C
implies that a smaller denomination than alternatives A or
B could be adopted.
However, it also probably requires a
higher ceiling rate than the two alternatives to make up for
its more limited initial liquidity.
9)
In order to prevent evasions by depository institutions the
staff suggests that any new account prohibit loans to account
holders to meet minimum balance requirements as well as tied
RPs at a rate not available to all depositors.
Alternative A
7-day Notice Account
$10,000; Option 2:
$25,000
Minimum Initial Deposit:
Option 1:
Minimum Subsequent Balance:
Same (institution has option of determining minimum balance as average for week
or average for month).
Additional Deposits:
No regulatory limitation.
Maturity:
No specified maturity--time, open account;
funds can be withdrawn only after 7-days
notice.
Withdrawals:
No regulatory limitation on size of withdrawals.
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Federal Reserve Bank of St. Louis
Withdrawals only after seven calendar days
of the time the depository institution
receives notification.
Notice must actually be given before withdrawal (not optional to institution). No
standing, periodic, automatic, preauthorized, repetitive, or prearranged notifications
permitted.
Notification for withdrawals possible by:
a) Telephone or other telecommunication.
b) Mail or messenger.
c) In person (over the counter or
through an ATM).
Withdrawals can be by:
a)
Check or cash to depositor or to
third party (if the depositor does
not pick-up funds after giving
7-day notice, the funds may not be
automatically redeposited to the
proposed account).
b)
Transfer to checking or NOW account.
No withdrawals by negotiable draft.
"First-in-first-out" requirement applied to
account balance for notification-withdrawals.
-A2-
Early Withdrawal Penalty:
None (no withdrawals permitted in any
circumstances without 7-day prior notice).
Interest Rate:
Option 1: Ceiling rate related to auction
average of 91-day bill rate (discount basis),
effective the day after the auction. (No
4-week averaging option.)
Ceiling rates
would change weekly. Option 2: No ceiling.
Under either option, rate falls to savings
rate whenever balance in the account falls
below minimum balance.
Under option 1 if there is a differential,
commercial banks can pay 25 basis points
less than thrifts; differential disappears
one calendar year after effective date of
the instrument and, within that year, for
any interval after auction average on the
91-day bill falls below 9 percent for four
consecutive auctions.
Compounding of interest permitted. No
regulatory requirement as to whether interest
is to be calculated on minimum or average
balance.
Eligibility:
Available to all depositors.
Reserve Requiremen s:
Under the Federal Reserve's current Regulation D, the instrument would be subject
to transaction account reserve requirements
since the notice period is less than 14 days.
The Federal Reserve Board could regard the
account as a time deposit on the basis of
the 7-day notice requirement and limited
withdrawal features; if it did so, it could
also establish zero percent reserve requiement on this category of time deposits.
Other Restrictions:
1)
1/
Institution may not lend funds to
depositor to meet minimum initial or
maintenance balance or make any loan
using the account as collateral.
(Overdraft privileges permissible on
NOW or demand balances to which the new
The Board could also apply a reserve requirement to these accounts held
by other than natural persons (currently 3 percent). In any event, member
banks would still be subject to a small reserve requirement on time deposits
during the current phase-down of reserve requirements under the Monetary
Control Act.
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Federal Reserve Bank of St. Louis
-A3-
account is transferable; rate charged
on such overdrafts must equal rate
charged on overdrafts for those that do
not hold the proposed account).
Effective Date:
1/
2)
The account could only be issued in nonnegotiable form. If
3)
Institution may not offer RPs to account
holders (or those planning to open such
an account) at a rate in excess of that
offered to any other customer.
June 1 (Tuesday), with any ceiling based on
auction May 28 (Friday). (May 31 is a
holiday.)
The agencies could separately reduce the minimum maturity on large
denomination time deposits from 14- to 7-days, permitting the issuance
of large negotiable CDs with maturities of 7 days. Such an account
would be separate from the proposed new account. Federal Reserve Board
action to define 7-day CDs as time deposits would also be required to
obtain time deposit reserve requirements.
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Federal Reserve Bank of St. Louis
1
Alternative B
7- or 14-day Fixed Maturity Time Account
Minimum Initial Deposit:
Option 1:
Minimum Subsequent Balance:
Same (institution has option of determiniming minimum balance as average for week
or average for month).
Additional Deposits:
No regulatory limit on the size of additional
deposits.
$10,000.
Option 2:
$25,000
Institutions are permitted to use any or all
of following for additional deposits:
a) Each deposit re-initializes the
maturity of the original deposit.
b)
"First-in-first-out" accounting
to assure each addition is on
deposit for 7- or 14-days.
c)
Accounting cycle established for
(or 14) day intervals. New deposits
received at any time during the
7-day interval will be regarded
as maturing at the end of the next
accounting cycle.
Maturity:
7 days with 1-day grace period or 14 days
with 2-day grace period. If no instructions
are received from depositor at or before
maturity, deposit is automatically rolledover at the then prevailing rate.
Withdrawals:
No regulatory limit on size of withdrawals,
but withdrawals can only occur at maturity
(or before end of grace period).
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Federal Reserve Bank of St. Louis
Notification for withdrawal by depositor
can be given:
a) At maturity (or before end of grace
period).
b) Prior to maturity, but no standing,
periodic, automatic, preauthorized,
repetitive, or prearranged notifications
permitted.
-B2-
Notification for withdrawal possible by:
a) Telephone or other telecommunication.
b) Nail or messenger.
c) In person (over the counter or
through an ATM).
Withdrawal can be by:
a)
Check or cash to depositor or to
third party (if the depositor does
not pick-up funds after giving
notice, the funds may be automatically redeposited to the proposed
account).
b) Transfer to checking or NOW account.
No withdrawal by negotiable draft.
Early Withdrawal Penalty:
None since deposit must be held 7- or 14days in all circumstances.
Interest Rate:
Option 1: Ceiling rate related to auction
average of 91-day bill rate (discount basis),
effective the day after the auction. (No
4-week averaging option.) Option 2: No ceiling.
Under option 1, 14-day deposit can be fixed
rate, with ceiling related to bill rate in the
initial week, or may vary the ceiling in line
with weekly bill auction. 7-day deposit ceilings would change weekly.
Under all options, if balance falls below
minimum, the rate falls to the savings rate.
Under option 1, if there is a differential,
commercial banks can pay 25 basis points
less than thrifts; differential disappears
one calendar year after effective date of
the instrument and, within that year, for
any interval after auction average on the
91-day bill rate falls below 9 percent for
four consecutive auctions.
Eligibility:
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Federal Reserve Bank of St. Louis
Available to all depositors.
-B3-
Reserve Requirements:
Under the Federal Reserve's current Regulation D, no reserve requirement would be
applicable to 14-day accounts held by natural
persons but 3 percent would be applicable for
non-personal accounts. The Board could reduce
the latter requirement to zero percent. The
7-day account would currently be subject to
transaction account reserve requirements, but
the Board could define the account as a time
deposit and apply a zero percent reserve to
both personal and non -personal accounts or
just to personal accounts. 1/
Other Restrictions:
1) Institution may not lend funds to
depositor to meet minimum initial or
maintenance balance or make any loan
using the account as collateral.
2) The account could only be issued in
non-negotiable form.
3) Institution may not offer RPs to
account holders (or those planning
to open such an account) at a rate in
excess of that offered to any other
customer.
Effective Date:
1/
June 1 (Tuesday), with any ceiling based on
auction May 28 (Friday). (May 31 is a
holiday.)
In both cases, member banks would still be subject to a small reserve
requirement for personal accounts during the current phase-down of reserve
requirement under the Monetary Control Act.
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Federal Reserve Bank of St. Louis
Alternative C
Dual Account: 30-ddy or 90-day Fixed Maturity Plus 7-day
Notice or 7-day Fixed Maturity Account
Minimum Initial Deposit:
$10,000 in the 30-day or 90-day account.
Minimum Subsequent Balance:
$10,000 in the sum of two accounts--30- or
90-day fixed plus 7-day notice or 7-day
fixed. (Institution has option of determining minimum balance as average for week
or average for month.)
Maturity:
At 30- or 90-day maturity of first account
(which could have a 5- or 7-day grace period),
funds can be withdrawn. Balances not withdrawn are automatically transferred to one
of two second accounts, at the depository
institution's option (institution could
offer either or both):
a) A 7-day notice account, from which
funds can be withdrawn only on 7-day's
notice.
b) A 7-day fixed maturity deposit (with
1 day grace period) that automatically rolls over funds that are not
withdrawn by the end of the grace
period.
Additional Deposits:
Withdrawals:
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Federal Reserve Bank of St. Louis
No regulatory minimum on the size of additional
deposits, but all deposits must go first into
the 30- or 90-day account.
Institutions are permitted to use either or
both of the following for permitting withdrawals at the end of 30- or 90-days or
transfers to the second account.
a) "First-in-first-out" accounting
to assure each addition is on
deposit for 30- or 90-days.
b) Accounting cycle established in
30-day intervals. New deposits
received,after say, the fifth day
of the accounting cycle begin their
regulatory maturity cycle at the
beginning of the next accounting
cycle (and hence must be held on
deposit in the first account for
more than 30- or 90-days). Under
this approach, funds in the first
account could be on deposit, say,
as short as 25 days or as long as
55 days if fixed maturity was 30
days or 85 to 105 days if fixed
maturity was 90-days.
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Federal Reserve Bank of St. Louis
-C2-
No regulatory limitation on size of withdrawals from either account, but withdrawals
from the first account can only be at end of
30- or 90-days or at the end of the appropriate accounting cycle, and from the second
account only after seven calendar days of
the time the depository institution receives
notification or at the end of a 7-day maturity.
Notification for withdrawal by depositor
from 30- or 90-day account (or 7 day fixed
maturity account) can be given:
a) At maturity (or before end of grace
period).
b) Prior to maturity, but no standby,
periodic, automatic, preauthorized,
repetitive, or prearranged notifications permitted.
Notification for 7-day notice account variant
must be received by the institution 7-days
before withdrawal. No standing, periodic,
automatic, preauthorized, or repetitive prearranged notifications permitted.
Notification for withdrawals possible by:
a) Telephone or other telecommunication.
b) Mail or messenger.
c) In person (over the counter or
through an ATM).
Withdrawals from first or second account
can be by:
a)
Check or cash to depositor or to
third party (if the depositor does
not pick-up funds at the appropriate
time after giving notification, the
funds may not be automatically redeposited to the proposed account).
b) Transfer to checking or NOW account.
No withdrawal by negotiable draft.
-C3-
"First-in-first-out" requirement applied
to 7-day notice account balance for notification-withdrawals.
For 7-day fixed maturity variant institution
could use one or both of the following:
a) "First-in-first-out" accounting to
assure each addition on deposit
seven days.
b) Accounting cycle established on 7day interval. New deposits received
after the beginning of any interval
begin their regulatory maturity
cycle at the beginning of the next
accounting cycle (and hence must be
on deposit in excess of 7-days).
Early Withdrawal Penalty:
All accured interest earned on first
account; no withdrawals permitted in any
circumstances from second account without
7-day prior notice or at maturity, with
depositor given the indicated grace period
on the latter account.
Interest Rate:
Option 1:
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Federal Reserve Bank of St. Louis
a)
For 30- or 90-day term account:
Ceiling rate related to auction
average of 91-day bill rate (discount basis), effective the day
after the auction. (No 4-week averaging option.) Institutions may offer
on fixed-rate basis with ceiling
related to the auction average in the
initial week of the deposit, or may
vary the ceiling weekly in line
with weekly bill auction.
b) For second account: Same ceiling
rate as 30- or 90-days account
established weekly.
Option 2:
No ceiling.
Under option 1, if there is a differential,
commercial banks can pay 25 basis points
less than thrifts, differential disappears
one calendar year after effective date of
the instrument and, within that year, for
any interval after auction average falls
below 9 percent for four consecutive auctions.
-C4Under either option, rate falls to savings
rate on both accounts when the sum of
balances in the account fall below $10,000
as defined under "minim= subsequent
balance."
Compounding permitted on both accounts.
Eligibility:
Reserve Requirements:
Other Restrictions:
Available to all depositors.
Under the Federal Reserve's current Regulation D,
reserve requirements would not be applicable to
the 30- or 90-days account held by persons,
but the 7-day account would be subject to
transaction account reserve requirements
since the notice period is less than 14 days.
The Federal Reserve Board could exempt the
7-day account from transaction reserve
requirements on the basis of its maturity;
if it did so, it could also establish zero
percent reserve reqgirements on this category
of time deposits. Af
1) Institution may not lend funds to
depositor to meet minimum initial or
maintenance balance or make any loan
using the account as collateral.
(Overdraft privileges permissible on
NOW or demand balances to which the
7-day account is transferable; rate
charged on such overdrafts must equal
rate charged on overdrafts for those
that do not hold the proposed account).
be issued in
2) Both accounts could only
2/
non-negotiable form. —
3)
Effective Date:
1/
2/
Institution may not offer RPs to account
holders (or those planning to open such
an account) at a rate in excess of that
offered to any other customer.
June 1 (Tuesday, with any ceiling based on
auction May 28 (Friday). (May 31 is a
holiday.)
small reserve requirements on time
Member banks would still be subject to
of reserve requirements under the
deposits during the current phase-down
also apply a reserve requirement to
Monetary Control Act. The Board could
(currently 3 percent).
these accounts held by other than persons
m maturity on large denomiminimu
The agencies could separately reduce the
ting the issuance of large
permit
nation time deposits from 14- to 7-days,
an account would be separate
Such
negotiable CDs with maturities of 7 days.
e
l Reserv Board action to define 7from the proposed new account. Federa
required to obtain time deposit
day CDs as time deposits would also be
reserve requirements.
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Federal Reserve Bank of St. Louis
4
DRAFT
TO:
Depository Institutions
Deregulation Committee
FROM:
DIDC Staff*
DATE:
SUBJECT:
March 29, 1982
Short-term Deposit
Proposals
,
Committee adopted a new 91-day
At its March 22 meeting, the
91-day bill
h a ceiling rate tied to the
$7500 minimum, certificate wit
ential in
temporary 25 basis point differ
auction average, and with a
Committee
At that meeting, however, the
favor of thrift institutions.
n additional
e for Committee consideratio
instructed the staff to prepar
ository
deposit that would provide dep
proposals for a shorter-term
-a-vis money market
a more competitive vehicle vis
institutions with
market instruments.
mutual funds (MNIMFs) and other
the
previous staff memoranda, -'
As discussed more fully in
a deposit that
the Committee is to design
fundamental problem before
savings accounts
h-cost internal shifts from
will minimize potential hig
of the new
zing the competitive appeal
while simultaneously maximi
issuing instituoperational difficulties for
instrument and minimizing
on four variables:
ameters, the staff focused
tions. In balancing these par
e
The larger the minimum balanc
1. Minimum Denomination.
ential for internal shifting
requirements, the less pot
t.
the new instrumen'
and the less competitive
Ettin of the staff
ed primarily by Edward C.
This memorandum was prepar
of the Federal Reserve Board.
March 15, 1982.
rm Instrument Proposals,"
-te
ort
"Sh
,
rly
ula
tic
1/ See par
h balance
savings balances are in hig
of
n
tio
por
pro
al
nti
sta
A
2/
sub
percent of MSB
the FDIC indicates that 75
1,
198
er
emb
Dec
In
accounts.
t in excess of
ess of $5,000 and 41 percen
exc
in
e
wer
ts
oun
acc
savings
t 70 percent of S&L
0, the FHLBB indicates tha
$15,000. In August 198
excess of $5,000 and
in
ounts with balances
acc
in
e
wer
s
ing
sav
the American
regular
A small sample survey by
0.
,00
$10
of
ess
exc
45 percent in
mercial banks
1982 indicated that at com
ch
Mar
in
on
ati
oci
Ass
Bankers
in excess of $5,000
s deposit balances were
about 60 percent of saving
vey also indicated
sur
$10,000. The latter
and 38 percent in excess of
in excess of
e
wer
of total NOW balances
that almost three fourths
in excess of $10,000.
$5,000 and almost half
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Federal Reserve Bank of St. Louis
-22.
Liquidity.
There is a presumption that savings account
holders place extreme emphasis on instant liquidity.
Withdrawal from the proposed new account only after a
notice period, and/or a short fixed maturity, and/or a
limitation on the number of withdrawals might therefore
serve to limit internal shifting.
The resultant reduced
liquidity relative to MMMFs might be offset by the
convenience and insurance of the deposit instrument.
3.
Rate.
The staff assumed that the ability to offer a market
rate is necessary, but that rate need not necessarily be
as high as MMMF yields because of the convenience and
deposit insurance.
4.
Operational feasibility.
Limited staff discussion with
depository institutions suggests that a notice period is
generally feasible, but complicated.
Some institutions
were concerned about potential back-office problems and
consumer understanding of notice and withdrawal limitations.
Balancing these variables and the Committee's objectives, the
staff has designed four alternative instruments for Committee consideration.
These are summarized in the table on the following page and
each is described in more detail in the attachments to this memorandum.
The details of the four proposals, of course, can be revised by the
Committee and each proposal is self-explanatory.
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Federal Reserve Bank of St. Louis
-3ACTERISTICS
SUMMARY OF PROPOSED ACCOUNTS' MAJOR CHAR
Feature
aturity
Minimum Initial
deposit
Minimum Subsequent
Balance
Additional Deposits
Withdrawals
Alt. A
Alt. B
Alt. C
7-day notice
7-day notice
14-day fixed
$10,000
$25,000
$10,000
$5,000
$25,000
$10,000
No limit
No limit on
dollar size. 7days prior
notice required.
Withdrawal
paid to depositor or third
party, or transfer to another
account. No withdrawals by
negotiable instru
ment. Maximum of
three withdrawals
per month.
No limit
Same as Alt.
A except no
limit on number of withdrawals.
Alt. D
Dual accounts: 30-day
fixed plus 7-day
notice
$10,000 in 30-day
account
$5,000 in the sum of
both accounts.
No limit but
re-initializes
14-day maturity.
No limit but each
deposit goes first
into 30-day account
Only at maturity.
None from 30-day
account. At maturity
of 30-day account,
funds shift to 7-day
notice account, from
which withdrawals are
the same as Alt. B.
Early Withdrawal
Penalty
None since no
withdrawal permitted without
7-day notice.
Same as Alt.
A.
None since no
withdrawals permitted until
maturity.
Earned interest on
30-day account. Same
as Alt. A for 7-day
notice account.
Interest Rate
Equal to 91-day
bill rate.
Savings rate
if balance below $5,000.
Differential
possible.
No ceiling or
equal to 91day bill rate.
Differential
possible.
Savings rate
if balance
falls below
$25,000.
Equal to 91-day
bill rate.
Differential
possible.
Equal to 91-day bill
rate. 30-day account
fixed or floating.
Differential possible.
Savings rate if balance
falls below $5,000 in
7-day account.
Eligibility
All depositors
All depositors
All depositors.
All depositors.
held 14 days.
deposits but each deposit must be
* Alternatively, could accept new
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Federal Reserve Bank of St. Louis
-4owing observations
In evaluating the four alternatives, the foll
might be useful to the Committee:
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Federal Reserve Bank of St. Louis
1)
is reduced as one
The potential for internal shifting
but so is the competitive
moves from alternative A to D,
attraction of each instrument.
2)
B, the higher minimum
In comparing alternatives A and
its withdrawal
balance of the latter suggests that
-i.e. no limit on the
features can be less restrictivesignificantly exacerbating
number of withdrawals--without
ts.
the potential for internal shif
The higher minimum
suggests smaller risks in
balance of alternative B also
unt.
authorizing a ceilingless acco
3)
ve instrument, would
Alternative C, the least innovati
problems for institutions,
provide the least operational
than alternatives A and
but presents more difficulties
B for deposit additions.
4)
be associated with the least
Alternative D would probably
but be the least competitive
volume of internal shifting,
y
the most complex operationall
of the four alternatives and
t to explain to the public.
as well as the most difficul
to
ations--particularly the need
5) Monetary policy consider
stment balances--argue against
separate transactions and inve
ity
ount than 7 days and the abil
both a shorter notice acc
negotiable drafts directly on
of deposit holders to draw
rve
instruments. The Federal Rese
any of the proposed new
s
exempt any of the four proposal
Board has the authority to
d
reserve requirements, and coul
from transaction account
als from
held by other than individu
also exempt such account
.
deposit reserve requirements
the non-personal time
-5(Time deposits held by individuals are exempt from reserve
requirements under the Monetary Control Act.)'
—
6) In order to prevent evasions by depository institutions the
staff suggests that any new account prohibit loans to account
holders to meet minimum balance requirements as well as
tied RPs at a rate not made available to all depositors.
1/
Member bank are subject to a small and declining reserve requirement on
time deposits during the phase-down of reserve ratios under the Monetary
Control Act. That ratio is currently 1.7 percent and is declining 0.4
percentage points semi-annually.
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Federal Reserve Bank of St. Louis
Alternative A
Medium Balance 7-day Notice Account
Minimum Initial Deposit:
$10,000.
Minimum Subsequent Balance:
$5,000 (institution has option as to
determining minimum balance as average
for week or average for month).
Additional Deposits:
No regulatory limitation.
Maturity:
No specified maturity--time, open account;
funds can be withdrawn only after 7-days
notice.
Withdrawals:
Maximum of three per calendar month (or
per statement cycled at least four weeks).
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Federal Reserve Bank of St. Louis
No regulatory limitation on size of withdrawals.
Withdrawal only after seven calendar days
of the time the depository institution
received notification (three per month withdrawal based on date notification received;
notification, even if withdrawal not subsequently made, counts toward maximum number
of withdrawals).
Withdrawals can be by:
a)
Check or cash to depositor or to
third party (if the depositor does
not pick-up funds after giving 7-day
notice, the funds may not be automatically redeposited to the proposed
account).
b) Transfer to any other account.
No withdrawals by negotiable draft.
Notification for withdrawals possible by:
a) Telephone or other telecommunication.
b) Mail or messenger.
c) In person (over the counter or through
an ATM).
No preauthorized notifications permitted.
"First-in-first-out" requirement applied
to account balance for notificationwithdrawals.
-A2-
Early Withdrawal Penalty:
None (no withdrawals permitted in any
circumstances without 7-day prior notice
and in excess of three per month).
Interest Rate:
Ceiling rate applicable to all balances
equal to auction average of 91 -day bill
rate (discount basis), effective the day
after the auction. (No 4-week averaging
option.)
Rate falls to savings rate whenever balance
in the account falls below $5,000 as defined
above under "minimum subsequent balance."
Compounding permitted (if not, interest
credited only once per 7-day period).
No regulatory requirement as to whether
interest is to be calculated on minimum
or average balance.
Can only advertise weekly discount rate.
If there is a differential, thrifts can pay
bill rate and commercial banks 25 basis
points less; differential disappears one
calendar year after effective date of the
instrument and, within that year, for any
interval after auction average falls below
9 percent for four consecutive auctions.
Eligibility:
Available to all depositors.
Reserve Requirements:
Under the Federal Reserve's current Regulation D, the instrument would be subject
to transaction account reserve requirements
since the notice period is less than 14 days.
The Federal Reserve Board could regard the
account as a time deposit on the basis of
the 7-day notice requirement and limited
withdrawal features; if it did so, it could
also establish zero percent reserve requirement on this category of time deposits. 11
Other Restrictions:
1) Institution may not lend funds to
depositor to meet minimum initial or
maintenance balance or make any loan
using the account as collateral. (Overdraft privileges permissible on NOW or
demand balances to which the new account
1/
Member banks would still be subject to small reserve requirements on time
deposits during the current phase-down of reserve requirements under the
Monetary Control Act. The Board could also apply a reserve requirement to
these accounts held by other than natural persons (currently 3 percent).
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Federal Reserve Bank of St. Louis
-A3-
is transferable; rate charged on such
overdrafts must equal rate charged on
overdrafts for those that do not hold
the proposed account).
2)
The account could only be issued in
non-negotiable form. 1/
3) Institution may not offer RPs to account
holders (or those planning to open such
an account) at a rate in excess of that
offered to any other customer.
Effective Date:
1/
June 1 (Tuesday), with ceiling based on
auction May 28 (Friday). (May 31 is a
holiday.)
The agencies could separately reduce the minimum maturity on large
denomination time deposits from 14- to 7-days, permitting the issuance
of large negotiable CDs with maturities of 7 days. Such an account would
be separate from the proposed new account. Federal Reserve Board action
to define 7-day CDs as time deposits would also be required to obtain
time deposit reserve requirements.
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Federal Reserve Bank of St. Louis
Alternative B
Large Balance 7-day Notice Account
Minimum Initial Deposit:
$25,000.
Minimum Subsequent Balance:
$25,000 (institution has option as to
determining minimum balance as average
for week or average for month).
Additional Deposits:
No regulatory limitation.
Maturity:
No specified maturity--time, open account;
funds can be withdrawn only after 7-days
notice.
Withdrawals:
No regulatory limitation on size of withdrawals.
Withdrawal only after seven calendar days
of the time the depository institution
received notification.
Withdrawals can be by:
a)
Check or cash to depositor or to
third party (if the depositor does
not pick-up funds after giving
7-day notice, the funds may not be
automatically redeposited to the
proposed account).
b) Transfer to any other account.
No withdrawals by negotiable draft.
Notification for withdrawals possible by:
a) Telephone or other telecommunication
b) Mail or messenger.
c) In person (over the counter or
through an ATM).
No preauthorized notifications permitted.
"First-in-first-out" requirement applied
to account balance for notificationwithdrawals.
Early Withdrawal Penalty:
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Federal Reserve Bank of St. Louis
None (no withdrawal permitted in any
circumstances without 7-day prior notice.)
-B2-
Interest Rate:
No ceiling. (If there is a ceiling it
would be equal to auction average of 91-day
bill rate (discount basis), effective the
day after the auction, with no 4-week
averaging option. If there is a differential,
thrifts can pay bill rate and commercial banks
25 basis points less; differential disappears
one calendar year after effective date of
instrument and, within that year, for any
interval after auction average falls below
9 percent for four consecutive auctions.)
Rate falls to savings rate whenever balance
in the account falls below $25,000 as defined
above under "minimum subsequent balances." 1/
Compounding permitted (if not, interest
credited only once per 7-day period).
No regulatory requirement as to whether
interest is to be calculated on minimum
or average balance.
Can only advertise non-compounded weekly rate.
Eligibility:
Available to all depositors.
Reserve Requirements:
Under the Federal Reserve's current Regulation D, the instrument would be subject
to transaction account reserve requirements
since the notice period is less than 14 days.
The Federal Reserve Board could regard the
account as a time deposit on the basis of the
7-day notice requirement and limited withdrawal
features; if it did so, it could also establish
zero percent reserve requirement on this
category of time deposits. 2/
Other Restrictions:
1)
1/
2/
Institution may not lend funds to
depositor to meet minimum initial or
maintenance balance or make any loan
using the account as collateral.
(Overdraft privileges permissible on
NOW or demand balances to which the
new account is transferable; rate
charged on such overdrafts must equal
rate charged on overdrafts for those
that do not hold the proposed account).
Alternatively, could reduce ceiling 1 percentage point for each $1,000
maintenance balance below $25,000 until passbook ceiling is reached.
Member banks would still be subject to small reserve requirements on time
deposits during the current phase-down of reserve requirements under the
Monetary Control Act. The Board could also apply a reserve requirement to
these accounts held by other than natural persons (currently 3 percent).
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Federal Reserve Bank of St. Louis
-B3-
Effective Date:
1/
2)
The account could only be issued
in non-negotiable form. 1/
3)
Institution may not offer RPs to account
holders (or those planning to open such
an account) at a rate in excess of that
offered to any other customer.
June 1 (Tuesday), with ceiling based on
auction May 28 (Friday). (May 31 is a
holiday.)
The agencies could separately reduce the minimum maturity on large
denomination time deposits from 14- to 7-days, permitting the issuance
of large negotiable CDs with maturities of 7 days. Such an account
would be separate from the proposed new account. Federal Reserve Board
action to define 7-day CDs as time deposits would also be required to
obtain time deposit reserve requirements.
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Federal Reserve Bank of St. Louis
Alternative C
Medium Balance 14-day Fixed Maturity Time Account
Minimum Initial Deposit:
$10,000.
Additional Deposits:
No regulatory limitation other than each
additional deposit would re-initialize
maturity to the original 14-days. (Alternatively, each new deposit must be held
14 days.)
Maturity:
14 days with 3-day grace period.
Withdrawals:
No withdrawals except at maturity without
early withdrawal penalty.
Early Withdrawal Penalty:
None since deposit must be held 14 days
in all circumstances.
Interest Rate:
Ceiling rate applicable to all balances
equal to auction average of 91-day bill
rate (discount basis), effective the day
after the auction. (No 4-week averaging
option.)
Compounding permitted (if not, interest
credited only once per 14-day period).
Can only advertise weekly discount rate.
If there is a differential, thrifts can
pay bill rate and commercial banks 25 basis
points less; differential disappears one
calendar year after effective date of the
instrument and, within that year, for any
interval after auction average falls below
9 percent for four consecutive auctions.
Eligiblity:
Available to all depositors.
Reserve Requirements:
Under the Federal Reserve's current Regulation D,
no reserve requirement would be applicable to
accounts held by natural persons Ind 3 percent for non-personal accounts. ii The Board
could eliminate the latter requirement.
1/
Member banks would still be subject to a small reserve requirement for
personal accounts during the current phase-down of reserve requirement
under the Monetary Control Act.
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Federal Reserve Bank of St. Louis
-C2Other Restrictions:
1) Institution may not lend funds to
depositor to meet minimum initial or
maintenance balance or make any loan
using the account as collateral.
2)
The account could only be issued in
non-negotiable form.
3) Institution may not offer RPs to account
holders (or those planning to open such
an account) at a rate in excess of that
offered to any other customer.
Effective Date:
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Federal Reserve Bank of St. Louis
June 1 (Tuesday), with ceiling based on
auction May 28 (Friday). (Nay 31 is a
holiday.)
Alternative D
Dual Account:
30-day Fixed Maturity Plus 7-day Notice Account
Minimum Initial Deposit:
$10,000 in the 30-day account.
Minimum Subsequent Balance:
$5,000 in the sum of the two accounts
(institution has option as to determining
minimum balance as average for week or
average for month).
Additional Deposits:
No regulatory minimum, but all additional
deposits must be made to the 30-day account;
after 30 days funds are shifted to the 7-day
notice account on a "first-in-first-out"
basis.
Withdrawals:
No withdrawals (without early withdrawal
penalty) from 30-day account.
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Federal Reserve Bank of St. Louis
No regulatory limitation on size of withdrawals from 7-day notice account, but
withdrawals from that account can only be
made after seven calendar days of the
time the depository institutions receive
notification.
Withdrawals from 7-day notice account
can be by:
a)
Check or cash to depositor or to
third party (if the depositor does
not pick-up funds after giving
7-day notice, the funds may not be
automatically redeposited to the
proposed account).
b)
Transfer to any other account.
No withdrawals by negotiable draft.
Notification for withdrawals from 7-day
notice account possible by:
a) Telephone or other telecommunication
b) Mail or messenger.
c) In person (over the counter or
through an ATM).
No preauthorized notifications permitted.
-D2-
"First-in-first-out" requirement applied
to 7-day notice account balance for
notification-withdrawals.
Early Withdrawal Penalty:
All accrued interest earned on 30-day account;
no withdrawals permitted in any circumstances on 7-day notice account without
7-day prior notice.
Interest Rate:
For 30-day term account: Ceiling rate
applicable to all balances equal to auction
average of 91-day bill rate (discount
basis), effective the day after the auction.
(No 4-week averaging option). Institutions
may offer on fixed-rate basis with ceiling
tied to auction average in the initial week
of the deposit, or may vary the ceiling
weekly in line with weekly bill auction.
For 7-day notice account: Same ceiling
rate as 30-day account established weekly.
Rate falls to savings rate when balance
in the 7-day notice account falls below
$5,000 as defined under "minimum subsequent
balance".
Compounding permitted on both accounts.
(If not, interest can only be credited at
the end of 30-days in the first account for
balances that have been held for 30 days,
and at the end of 7-days on the second
account). For the second account, no
regulatory requirement as to whether
interest is to be calculated on minimum
or average balance.
Can only advertise weekly discount rate.
If there is a differential, thrifts can pay
bill rate and commercial banks 25 basis
points less; differential disappears one
calendar year after effective date of the
instrument and, within that year, for any
interval after auction average falls below
9 percent for four consecutive auctions.
Eligibility:
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Federal Reserve Bank of St. Louis
Available to all depositors.
-D3-
Reserve requirements:
Other restrictions:
t
Under the Federal Reserve's curren
would
nts
eme
regulation D, reserve requir
ount
acc
day
not be applicable to the 30t
oun
acc
ay
7-d
held by persons, but the
t
oun
acc
on
cti
would be subject to transa
ice
not
the
ce
reserve requirements sin
Federal
period is less than 14 days. The
ay
7-d
the
mpt
Reserve Board could exe
erve
res
on
cti
notice account from transa
urity
mat
its
of
is
requirements on the bas
it
if
es;
tur
and limited withdrawal fea
zero
did so, it could also establish
this
on
percent reserve requirements
category of time deposits. 1/
ds to
1) Institution may not lend fun
tial
ini
m
depositor to meet minimu
e any
mak
or
or maintenance balance
lateral.
col
as
loan using the account
le on
sib
mis
per
(Overdraft privileges
the
ch
whi
to
NOW or demand balances
nstra
is
7-day notice account
ferable; rate charged on such
rged
overdrafts must equal rate cha
not
do
t
tha
on overdrafts for those
t).
hold the proposed accoun
issued
2) Both accounts could only be
2/
in non-negotiable form.
RPs to account
3) Institution may not offer
open such
holders (or those planning to
of that
ess
exc
an account) at a rate in
er.
offered to any other custom
Effective Date:
g based on
June 1 (Tuesday), with ceilin
y 31 is a
(Ma
auction May 28 (Friday).
holiday.)
requirements on time
subject to small reserve
be
ll
sti
ld
wou
ks
ban
uirements under the
1/ Member
phase-down of reserve req
t
ren
cur
the
ing
dur
deposits
erve requirement to
Board could also apply a res
The
.
Act
l
tro
Con
ry
Moneta
y 3 percent).
er than persons (currentl
these accounts held by oth
urity on large
mat
m
imu
reduce the min
y
tel
ara
sep
ld
cou
es
nci
ting the issuance
2/ The age
m 14- to 7-days, permit
fro
ts
osi
dep
e
tim
ion
nat
denomi
h an account would
maturities of 7 days. Suc
h
wit
CDs
e
abl
oti
neg
e Board action to
of large
new account. Federal Reserv
ed
pos
pro
the
m
fro
te
ara
obtain time
be sep
would also be required to
ts
osi
dep
e
tim
as
CDs
define 7-day
.
deposit reserve requirements
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Federal Reserve Bank of St. Louis
ABA CCNSENSUS STATEMENT AS SEEM=
DC FOlt ALweicil
The American Bankers Association, through its Banking Leadership Conference,
has carefully reviewed the actions over recent months of the Depository Institutions
Deregulation Committee. We believe the Committee is to be strongly commended
for taking action to substantially deregulate IRAs and Keogh Accounts at
depository institutions beginning December 1. Without this action, banks and
savings and loan associations would be hobbled in their attempts to compete with
insurance companies, brokerage firms, and other uninsured financial intermediaries
for this expanding market.
We cannot stress enough the need for the Deregulation Committee to maintain
its commitment to the process of deregulation and to the significant first step
that removal of interest rate ceilings on IRAs and Keogh Accounts represents.
Our Banking Leadership Conference has strongly reaffirmed that interest rate
deregulation of IRAs and Keoghs as approved by the Committee is essential at this
time.
We have also reviewed the proposal by the Committee to establish new shortterm deposit instruments. Cur Association has been on record since May of this
year as endorsing the needforamyre liquid deposit instruments to compete with
money market mutual funds. While the Deregulation Conrnittee has failed to act on this
request, money market funds have been growing at the rate of almost $3 billion per
week. We originally supported the creation of the new 30- and 91-day instruments
indexed to comparable Treasury bill rates with a minimum denomination no greater
than $5,000.
our Banking Leadership Conference,
A strong consensus of the
however, now believes that these instruments, while helpful and vast improvements
over what is presently available, are still not sufficient to the continually
changing competitive needs of depository institutions. They believe that the
proposed interest-bearing transaction account with a $5,000 minimum deposit
would best allow them to compete with money market mutual funds. Effective
competition requires that this account have no ceiling rate of interest
when the minimum balance is maintained (and the rate ceiling in effect on
Naw accounts below the minimum) and that a method be provided, whether through
limiting the number of transactions or otherwise, so that the account could be
offered free of reserve requirements. This new instrument would have the
virtues of being operationally simple, understandable to both bankers and their
customers, and competitive with most offerings,of money market mutual funds.
Should the Deregulation Committee feel itself unable to approve this account,
our Association would reaffirm its support, as a minimum response, the creation
of new 30- and 91- day instruments with minimum denominations no greater
than $5,000 and ceiling rates indexed to rates on Treasury instruments of
comparable maturity.
The Leadership Conference also supports the proposed 1-day notice, $25,000
minimum denomination certificate of deposit with no interest rate ceiling. Many
bankers feel that this instrument will provide for bank customers an account
comparable to existing repurchase agreements without the paperwork burden and
investment constraints incumbent on repos.
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Federal Reserve Bank of St. Louis
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
CHART 1
INTEREST RATE ON NNF'S, MC'S AND TWO
EXAMPLES OF PROPOSED INSTRUMENT'
20
.....41
...0
.... ....' ".'
0%
/
\
\
\
/
%
15
\......"4",
i
\ ‘
%
....
%
A
••••••
%
•%
• is,
%
•
/‘
e/
....1
eN,
•--
..•
,
\
,,
•
%
.
•
.
.
N
- ` 4----`4"-.
-4%
/'-a)---1";::::-7-1-1'
1
.
. il
..•il
k
I
I
1
\
/
m......•
% .......e
." .
.
,
•.
.1/
.
/P
I
.,,
.
''•
.•
//es
-1,
0
...0#
•%
• %
%
•
•
•
;
1
1
•
R10
•
/ •0
I
•
•
4
•
—
...1
%
‘
%
\ It
\.
I
I „/
//
.4 1 '
.0
I
4.`.../
.'"1
5
....1
sm.
•=w
....
1979
1980
1981
OCT DEC
AUG OCT DEC FEB APR JUN AUG OCT DEC FEB APR JUN AUG
Money Market Funds
1979-1981
es
Money Market Certificat
Balance
Proposed Account 10,000 Average
ce --Balan
ge
Proposed Account 5,000 Avera
the money market
over $2,500 earns interest equal to
1/ Proposed instrument assumes everything
$2,500 earns the NOW account rate.
certificate rate. Amounts up to
CHART 2
MARKET SHARE OF LARGE CD'S
100.00
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
agrill
..........
80,00
...
.
.... ....
........
•
- . -
0..1
60,00
•••• ....
-
.
.. . ...
40.00
20j30
. -..
.... .............. .
-
..• ...........
i
41...
....0
.....
......
••••••
r--..4
....
.....•
ire
.....•
1.10
IMMII
Ob.
.--......,-,
••••
0
dom.
... ....
..- 0,••
ado
....
...•
oft.
....
..11•••••••••
111............
......•
OP
.....
...
6..........
,
affia......-....•
....../....
..............•...........•
..
............., .
M
a.,•
1978
-19 1' —
1•80
1979
MAR JUN SEP DEC MAR JUN SEP DEC MAR JUN SEP DEC MAR JUN SEP DEC
1978-1981
COMERCIAL BANKS
SAVINGS AHD LOANS - - - - - SAVIN3S ANKs — -
CHART 3
DOLLAR AMOUNT OF LARGE CD'S
2500
--
2000
..
1
,
7...,i.....
1
I.
,._,.,
.r...... /_.
4
.
•,-... r-
.
,
0 1500
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
1000
00.1.
•••••
500
I
1
0_
,1
!
t '
7
1
1
1_ .
I _ _i _ ... t, - - - 111 - - ri1
'
,
i
-
1
,i
1
4-
MOM
••••
,
,
.1
!
- -r
t
_ __.1..._.
=1+7
:
.
.
2=.
4
.
.
_.
i
___
i
_____
.._,_-_,.___
__ - - 4 - - - - 7
1978
1979
1980
1981
r
MAR JUN SEP DEC MAR JUN SEP DEC MAR JUN SEP DEC MAR JUN SEP DEC
1978-1981
COMMERCIAL BANK$
SAVINGS AND LOANS -- - - - MUTUAL SAVINGS BANKS
CHART 4
MARKET SHARES. SUN OF SIX MONTH MONEY NARKET,
SMALL SAVER AND ALL SAVER CERTIFICATES
60.00
.\
\
-
41....
\
•- .1,..
%
I
..
..
a..
.....
a...
,.....
......
....
4,
'4
......
wow
.....
4...
......
....
*IMO
••••••
I
....•
0.M
am.
Om.
r....
I
I
I
I
40400
-.-...'''''
.
.. 1.-•••-•''''
......'
.............._„.............................+t_
.....
........-
o---..............---
......
I
I
I
I
,.
.....-.1
I
I
I
N 20.00
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
,
.4
.10
•••......
•-•.-...
.
I
so
I
........... . ,IM...........
...
............a
0.......,
I
0
1978
1980
1979
1981
-
MRFi JUN SEP DEC MRR JUN SEP DEC MAR JUN SEP DEC MAR JUN SEP DEC
1978-1981
COMERCIAL BANKS
SAVINGS AND LOANS- - - - - SAVINGS BANKS
-
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
CHART 5
DOLLAR AMOUNT. SUN OF MONEY MARKET.
SMALL SAVERS AND ALL SAVERS CERTIFICATES
3000
....
/
'-7
e
,
e
/
-
$
1
/
•
e
-
7
e
1 2000
o
o
- -- /
., ----7,--"
-,
.-
-
/
/
/
/
/
/
/
/
e
/
i
-
.•
.. e
..- e
.--- .---
/
/
-
--..
- .---.
/
/
/
... -----
.. ..---•
----
..-----*
_
197/1
1979
198-0
1981
MAR JUN SEP DEC MAR JUN SEP DEC MAR JUN SEP DEC MAR JUN SEP DEC
1978 -1 981
COMMERCIAL BANKS
SAVINGS AND LOANS - - - - - - - mutt. SAVIN3S BANKS— - — -
CHART 6
MARKET SHARES
FIXED CEILING SMALL TIME DEPOSITS
60.00
app.
••••
Noon
1111
,
••••
OM.
••••••
ima•
•••••
40.00-
-
P
N 20.00
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
•
1978
1979
1981
1980
MAR JUN SEP DEC MAR JUN SEP DEC MAR JUN SEP DEC MAR JUN SEP DEC
1978-1981
COMERCIAL EMIS
SAVINGS AND LOANS - - - -- - - MISRAL SAVIN3S BANKS- -
CHART 7
DOLLAR AMOUNT OF FIXED CEILING
SMALL TIME DEPOSITS
25,00
---
*ft.
4.,
am.
....
....
-,
••••
—4•••
••
2000
\
n.......
4.--"‹.—
%
am.
\
............--..-....--....,..........
1
0
15.00
0
%
am.
\
••••••
Ar
"
...........
....
O..
....b
...,
‘.
11•...
\
OM.
\
.....4
1000
N ...,
.,..,
N
-
....„
..I
..
_
-..
....
o.
0 500
..
ft....
....
..........
..
..
.
....
...
..-.1
—
1Q7R
1979
1981
1980
--
MRRJUNSEFECMAAJUNSEP CIEC MAR JUN SEP DEC MRR JUN SEP DEC
1978-1981
•
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
COMERCIAL BoiNCS
SAVINGS AND LOANS — — — — — — —
— —
MUTUAL SAVIN3S BANKS
CHART 8
MARKET SHARE OF SAVINGS DEPOSITS
60,00
I
..............,...---.....--..
•
-------
-.
./..........,.. •-•••••--••-•..
•••...t
••••••••
-
40,00
..m..
1,.............,
•••• "" '"'' ..-
------.--
4...
Nib-
,,,,..•
.....
•••••
•=••
•••••
.....,
.••••
•
N 20.00 ----- -
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
-1
...----
..
0
•
,
',my.
--
.1
-
-
.------
-
-
-
I
19Th
1 979
1 9Rn
1 9R 1
MAR JUN SEP DEC MAR JUN SEP DEC MAR JUN SEP DEC MAR JUN SEP DEC
1978-1981
COMERCIAL BANKS
SAVINGS AND LOANS
tiriliAL SAVIN3S BANKS — -
•••••••••
CHART 9
DOLLAR AMOUNT OF SAVINGS DEPOSITS
2500
.--
...1
0.0W
....i
....
2000
....•
0..I
...4
1
0
1500
0
....
11...1
•
..
ft..0
...“.....
....
ft..
0.11.
daft.
.00.
....
ft..
....
IMMO
.0..
...
ft
%
...
ft..
....
eft.
00.0
...
...ft
\
.
de
.6.
...,
Ift.
...
...
.....
%.•
...
'..
OW.4
1
1000
de'
1
.......,
..'.
m.o.
gm.*
...•...
....
a..
in...
.....4
am:
.
do
..a........
..
.........
,.....1
'''
. sam.......
SS.
..ft....10........s'
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
4.
''s.......0
..
0 500
...
....I
.
.0-.....•
0........
.••••
.0
—16—
— —7,
—
:
I
•ft.
MM.
••..111
0
1978
1981
1980
1979
MEM JUN SEP DEC MAR JUN SEP DEC MAR JUN SEP DEC MAR JUN SEP DEC
1978-1981
COMCIERCIAL BANKS
SAVINGS AM) LOANS - - - - MUTUAL SAVIN3S BANKS--
Table 1
COMMERCIAL BANE TIME & SAVINGS HELD BY
INDIVIDUALS, PARTNERSHIPS, AND CORPORATIONS
(millions)
1973
JAN 31
APR 30
JLY 31
OCT 31
121,453
122,936
123,627
123,876
46,693
46,633
43,281
39,184
1-215 years:
n/a
n/a
48,174
45,700
215-4 years:
n/a
n/a
9,267
10,919
over 4 years:
n/a
n/a
3,181
9,563
Savings:
Time Deposits
under 100,000
under 1 year:
SOURCE:
Federal Reserve Bulletin, April 1974.
SAVINGS ACTIVITY AT SAVINGS AND LOANS
1973
-
FEB
1,795
MAR
1,628
APR
724
MAY
1,763
JUN
890
JLY
291
AUG
- 1,186
SEP
340
OCT
835
NOV
1,166
DEC
406
SOURCE:
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Net New Savings Received (millions)
Federal Home Loan Bank Board Journal, April 1974.
Page 86.
Table 2
SELECTED DATA ON DEPOSITS PLACED IN 4-YEAR ACCCUNT
S
July 01, 1973 - October 31, 1973
Type of
Institution
COmmercial
Banks
Savings and
Loans
Mutual Savings
Banks
TOTAL
SOURCE:
NOTE:
Deposits in 4-Year Accounts
($ billion)
Per Cent
of total
9.5
35
270.7
68.5
12.0
44
102.4
25.9
7.21
5.7
21
22.1
5.6
7.32
27.2
100
395.2
100.0
,
7.20
E. Kane, "Getting Along Without Regulation Q," Journal
of Finance,
June, 1978, p.927.
For commercial banks and MUtual Savings Banks,
average rates paid are estimated
by weighing the highest interest rate in each interes
t rate cell by the 4year accounts outstanding in that interest rate cell.
For Savings and Loans,
the weights used are total savings capital paying more
than the regular rate.
* Figures from January 01, 1973
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Federal Reserve Bank of St. Louis
E8t3Jm3ted Average
Rate Offered on 4year accounts
(in % per annum)
Time Deposits *
($ billion) Per Cent
of Total
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Federal Reserve Bank of St. Louis
Table 3
TOTAL NONCOMPETITIVE BIDS ACCEPTED
FOR 91-DAY AND 182-DAY TREASURY
BILLS EACH MONTH IN 1973
Month
January
February
March
April
May
June
July
August
September
October
November
December
Source:
1135
1062
1578
1336
1611
1635
2195
2810
2299
1761
2376
1935
U.S. Treasury Department,
Treasull Bulletin.
TABLE 4
Money Market Certificates
by Size of Banks'
December 1980
0-5
Percent of
Assets
Percent of
Deposits
Source:
5-25
25-100
100-300
300-1B
1-56
greater than 5
Tota'
17.5%
21.87%
19.88%
15.96%
12.13%
9.49%
4.88%
11.6:
20.79%
24.51%
22.50%
18.64%
14.77%
12.83%
7.30%
15.02
Call Report Data
1
Banks acquired by mergers in 1981 have been aggregated with acquiring banks,
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
ATTACHMENT
I
BANKING'S CONTRIBUTION TO HOUSING FINANCE
4
The home mortgage market represents the largest private capital market In the
U.S., with over $150 billion in home mortgages originated annually by all lenders.
Only the debt requirements of the Federal government exceed the annual credit requirements for home mortgages.
In order to raise the enormous capital required for mortgage lending, a complex
network of lenders, government agencies, and investors has been developed to deliver
mortgage loans to the millions of families and individuals buying a home each year.
The two largest sources of mortgage credit funds are savings and loan associations
(of which there are about 4,600 institutions) and full service banks (of which there
are about 14,500 institutions). Other lenders are the mutual savings banks (500
institutions); mortgage bankers; and life insurance companies.
In the past, thrift institutions have garnered most of the credit for financing
residential housing. But direct mortgage credit is not the sole requirement for providing decent housing. Housing also depends on the existence of streets and sewers,
utilities, construction companies and industry to produce housing materials; each of
these elements is financed by banks.
Residential Mortgage Loans
Banks held $184.7 billion in residential mortgages at the end of the third quarter of
1981, ranking second only to the savings and loan industry in these loans. Moreover,
full service banks originated $16.9 billion in residential mortgage loans during the
first three quarters of 1981, close to 20% of the total.
1/
Residential Mortgage Loans Outstanding by Type of Lender
Third Quarter 1981
(Billions of Dollars)
One-to Four
Family
Lender
Savings & Loan Associations
Full Service Banks
Mortgage Pools or Trusts
Mutual Savings Banks
Federal & Related Agencies
Life Insurance Companies
All Others
Total
Source:
Pct. Of
Total
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Pct. of
Total
Total
Pct. of
Total
433.1
171.6
132.4
65.6
65.7
17.9
124.1
42.9
17.0
13.1
6.5
6.5
1.8
12.3
38.3
13.1
9.4
17.4
14.8
19.9
27.4
27.3
9.3
6.7
12.4
10.5
14.2
19.5
471.4
184.7
141.8
83.0
80.5
37.8
151.5
41.0
16.1
12.3
7.2
7.0
3.3
13.2
1010.2
100.0%
140.3
100.0%
1150.5
100.0%
Federal Reserve Bulletin, December, 1981
1/
HUD News No.
MultiFamily
81-309, December 7, 1981
-2-
IL
II.' 'Secondary Mortgage Market
become an increasingly vital segment of the
The secondary mortgage market has
support
Banks contribute significantly to the
total residential financing system.
end of
the
ownership of their securities. As of
of these secondary markets through
red
sponso
n in debt securities of the three
November 1981, banks held $14.8 billio
issues
debt
of the total outstanding
secondarymarketagencies. Banks hold over 20%
al Mortgage Association.
Nation
Federal
of the largest of the agencies, the
market securities, banks also hold $14.2
In addition to these secondary mortgage
s Home
Loan Banks, and $.4 billion in Farmer
billion in securities of the Federal Home
federal
total of $29.4 billion in obligations of
Administration notes. Thus banks hold a
government agencies involved in housing.
Housing Related Securities Held by Banks
November 1981
(Billions of Dollars)
Secondary Mortgage Market
Federal National Mortgage Association
Government National Mortgage Association
Federal Home Loan Mortgage Corporation
Subtotal
1.1
14.8
.4
Farmers Home Administration
III.
.5
14.2
Other housing related Agencies
Federal Home Loan Banks
Source:
13.2
Subtotal
14.6
Total
29.4
5
Treasury Bulletin, January 1982, TSO 4 &
Mobile Home Loans
have become
Banks are the major source of credit for purchasing mobile homes which
for 20.6%
ted
accoun
homes
Mobile
.
g
market
st
housin
the dominant factor in the law-co
continue.
sales
strong
and
1/
1960
in
U.S.
the
in
of the new single family dwellings sold
ble to
availa
widely
is
that
g
housin
st
of
low-co
Mobile homes are virtually the only kind
banks had
American families earning under $8,000 per year. As of October 3/, 1981
2/
total.
the
of
56.3%
$10.3 billion in mobile home loans outstanding,
1/
Survey of Current Business, December, 1981
2/
Federal Reserve Bulletin, December, 1981
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Federal Reserve Bank of St. Louis
la%
-3IV.
Residential Construction Loans
ruction, an essential base
Banks are a major supplier of funds for residential const
held $18.4 billion in residenof housing finance. As of the third quarter of 1981, banks
tial construction loans, over 46% of the total.
of Lender
Holdings of Residential Construction Loans by Type
Third Quarter
1981
(Billions of Dollars)
Lender
Full Service Banks
Savings & Loan Associations
Federal Credit Agencies
Mortgage Companies
Mutual Savings Banks
All Others
TOTAL
*Less than
Source:
V.
One-to-Four
Family
MultiFamily
12.1
12.4
.0
.9
.6
*
6.3
2.4
2.4
.6
.7
1.2
18.4
14.8
2.4
1.5
1.3
1.2
26.0
13.6
39.6
Total
.05
HUD News No. 81-309, December 7, 1981
Loans for the Infrastructure of Housing
more than just the direct financing
The total shelter needs of families require
usable -needed are services to make a house
of construction and final mortgages. Also
and
ts,
stree
,
water
y,
as electricit
for example, such private and municipal services
ed
relat
and
ng
housi
ate
adequ
to provide
sewers. Considering all financing requirements
recent data
lending groups. Some of the most
facilities, banks rank near the top of the
available reveal that banks:
t loans.
Provide $8.3 billion in home improvemen
1/ .
industry indirectly through the loans
Provide credit assistance to the housing
age
savings and loan associations, mortg
they make to other housing lenders, such as
an
ing
total
s,
trust
estate investment
bankers, life insurance companies, and real
estimated $20.1 billion. 1/
1/
Federal Deposit Insurance Corporation,
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
June 30, 1981
•
-4-
As of June 1981, banks held $145.4billion in municipal securities, nearly 50% of
the total. 1/ An estimated $99.0 billion or 68.1% of total bank holdings was issued
to finance residential support facilities - schools, roads, utilities and hospitals.
This estimate is based on the percentage of 1981 proceeds from new long-term security
issues of state and local government used for such purposes.
Use of Proceeds of New Long-Term Security Issues
of
State and Local Governments
1981
Billions
of Dollars
Pct. of
Total
Public Housing, Hospitals and
other Health Institutions
12.1
26.1
Utilities and Conservation
Water, Sewer, Electric & Gas and Pollution Control
10.1
21.8
Education
Elementary, Secondary, Colleges & Universities
4.6
9.9
Transportation
Roads, Bridges, Ports & Airports
3.4
7.3
Parks and other Recreational Facilities
.7
1.5
Fire Stations, Police Stations and other
Public Safety and Service Facilities
.7
1.5
Industrial Aid
7.5
16.2
Other Purposes
7.2
15.6
46.3
100.0
Use of Proceeds
TOTAL
Source:
Municipal Market Developments, Public Securities Association,
February, 1982
Note:
Components may not add to totals due to rounding.
1/
FDIC and Federal Reserve Board Flow of Fund Accounts
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Federal Reserve Bank of St. Louis
._A
-5-
VI.
Measuring the Banking Industry's Contribution to Housing
Residential Mortgage Loans
Mobile Home Loans
Residential Construction Loans
Federal Housing Agencies Obligations
Home Improvement Loans
Loans to Other Housing Lenders
Municipal Securities Supporting Housing
$184.7 billion
10.3
18.4
29.4
8.3
20.1
99.0
370.2
The $370.2 billion commitment by the banking industry to housing is a rough
estimate, but a conservative one. It does not cover an indeterminate amount of loans
to contractors, building suppliers and other businesses engaged in housing construction,
servicing, and supply. But by any standard of measurement, a $370.2 billion investment
is a very significant commitment to the housing industry. This puts banks in a close
second position to the savings and loan associations in the overall financing of the
nation's housing needs.
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Federal Reserve Bank of St. Louis
ATTACHMENT
2
BANKING'S CONTRIBUTION TO SMALL BUSINESS
Small businesses provide employment for more than one-half of the nation's work
force, and produce almost one-half of the Gross National Product. More than nine out
of every ten American businesses qualify as a small business, and the overwhelming
majority of them obtain financing — seed capital, working capital, and funds for
growth, diversification and expansion—from America's full service banks.
Based upon data received from a representative nation-wide sample of approximately 600,000 firms in April 1980, banks were the major source of credit for small
businesses ranging in size from less than $50,000 to $3,000,000 or more in gross
sales. Of the firms included in this NFIB survey, 83 percent claimed banks as the
source of their most recent loan. No more than 5 percent of the firms reported
obtaining their most recent loan from any other single source.
Similar information from a 1980 Greenwich Research Associates' Survey of
"middle market" companies shows the importance of bank credit to the growth of
larger firms. Companies with sales of $5-9 million accounted for 32 percent of all bank
borrowings in the $5-110 million sales range during the previous 12 months. Companies in that sales range also expected the largest percentage increase in bank
borrowings (13.2 percent) in the next 12 month period.
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Federal Reserve Bank of St. Louis
1-40,
Small Business Finance
Source of Most Recent
Small Business Loanl
(April 1980)
Factor -------------*
83%
Bank
Private Person --- 5%
Co-op
1%
Government
1%
S & L
2%
Finance Co.
2%
Other
4%
Insurance Co. ---- 1%
1 non-borrowers and no answers excluded
* less than 0.5%
Source:
National Federation of Independent Business
Bank Borrowings and Projected Bank Borrowings by Company Size
Company Size (sales)
Actual
1980
Percent of
Total
Expected
1981
Percent of
Total
$20-110 million
10-19 million
5-9
million
$30.2
22.4
27.2
36%
27
32
$32.8
24.0
30.8
35%
26
33
Total Companies
$84.3
100%
$92.4
100%
Billions of Dollars*
Note:
Borrowings projected to the total 63,354 middle market companies nationwide in 1980.
Source:
Greenwich Research Associates, 1981.
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Federal Reserve Bank of St. Louis
ATTACHMENT
6
<,40
3
BANKING'S CONTRIBUTION TO AGRICULTURAL
FINANCE
Close to 90 percent of the nation's 14,500 full service banks have assets of less
of
than $100 million. Two-thirds of the nation's full service banks are in communities
less than 25,000 people, and half of these banks are in towns with fewer than 5,000
residents. Based on the latest estimate, nearly 60 percent of these community banks
listed agriculture as the single most important source of income for their community.
According to a study published by the Department of Agriculture, farm sector
debt, which increased from about $12 billion in the 1950's to over $150 billion in 1980,
full
could be about $600 billion by the end of the decade. At the beginning of 1980,
the
to
only
service banks held nearly $40 billion in direct farm debt, ranking second
Farm Credit system among institutional holders of farm debt. Of that total, banks
real
supplied $31 billion in direct farm non-real estate credit and $8.6 billion in farm
estate credit.
Additionally, at the end of 1980, banks held $12.9 billion in securities issued by the
Farmer's Home Administration and the various entities of the Farm Credit Administraas
tion. Banks also supply a large but unknown volume of funds to agribusiness such
also
banks
Finally,
firms.
agricultural equipment makers and agricultural processing
of
supply funds to finance rural agricultural communities. While a large portion
ble
banking's contribution to agricultural finance cannot be quantified, the quantifia
contribution is $52.5 billion.
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Federal Reserve Bank of St. Louis
Agricultural Finance
Farm Debt Outstanding by Type of Lender
January 1, 1980
Billions of
Dollars
Lender Group
Full Service Banks
Farm Credit System
Farmers Home Administration
Life insurance Companies
Individual ard Other Non-reporting
Companies
Total
Source:
Pct. of
Total
$39.6
48.6
15.5
12.2
36.9
25.9%
31.8
10.1
8.0
24.1
$152.8
100.0%
Economics, Statistics and Cooperative Service, USDA
Full Service
Bank Holdings of Farmers Home Administration
and Farm Credit System Securities 3./
December 31, 1980
(Billions of Dollars)
Banks for Cooperatives
Farm Credit Banks
Federal Intermediate Credit Banks
Federal Land Banks
Farmers Home Administration
Total
Il- easurv Bulletin, February 1981, TS0 - 4 & 5
Source:
$0.4
7.7
1.1
3.1
0.6
$12.9
1/Also included in Government Finance (II-F)
Total Quantifiable Bank Contributions to Agricultural Finance
(Billions of Dollars)
Direct non-real estate loans to farmers
Direct real estate loans to farmers
Bank Holdings of Securities Issued by Farmers
Home Administration and Farm Credit System
Total
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Federal Reserve Bank of St. Louis
31.0
8.6
12.9
$52.5
r
ATTACHMENT
• ihis,
4
BANKING'S CONTRIBUTION TO CONSUMER FINANCE
In addition to making a significant contribution to household mortgage finance,
full service banks supply the great bulk of other forms of consumer credit. This
includes loans that are the basic support for the standard of living of the American
family—automobile loans, mobile home loans, home improvement loans, and other
general purpose loans.
At the end of 1980, full service banks held $145.8 billion in consumer instalmen
t
credit, close to twice the amount held by any other type of financial institution and
46.5
percent of the total outstanding. Of that total, $61 billion was for indirect paper or direct
loans to finance the purchase of automobiles or to refinance debts incurred for such
a
purpose—this represented over 52 percent of the amount held by all holders of that
type of credit. Full service banks held $30 billion in revolving credit(50 percent of the
total outstanding) and $10.4 billion in mobile home credit (60.1 percent of the total
outstanding). Moreover, banks held over $33 billion in single-payment loans
for
household, family, and other personal expenditures. Including $44.4 billion of other
instalment credit outstanding, the banking industry's contribution to non-mortgage
consumer finance was $179 billion as of December 1980.
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Federal Reserve Bank of St. Louis
Consumer Finance
(Non-Mortgage)
Consumer Instalment Credit
by Holder
December 1980
(Billions of Dollars)
Holder
Full Service Banks
Finance Companies
Credit Unions
Retailers*
Savings and Loans
Gasoline Companies
Mutual Savings Banks
Amount
Outstanding
$145.8
76.8
44.0
29.4
9.9
4.7
2.8
Total
$313.4
*
Percentage
of Total
46.5%
24.5
14.0
9.4
3.2
1.5
.9
100.0%
Includes auto dealers and excludes 30 - day charge credit held by travel and
entertainment companies.
Source:
Federal Reserve Bulletin,
April, 1981
Banking's Contribution to Consumer Finance
(Non-Mortgage)
December 1980
(Billions of Dollars)
Type of Credit
Auto Loans
Revolving Credit
Mobile Home Loans 1/
Other Instalment Credit
Single-Payment Loans
Total
Sources:
$179.0
FDIC and Federal Reserve Bulletin, April, 1981.
1/Also included in Housing Finance (II-A)
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Federal Reserve Bank of St. Louis
Amount
Outstanding
$61.0
30.0
10.4
44.4
33.2
@FedFRASER