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FEB 2 3 1977

D ear Senator Proxm ire:
Thank you for your letter of Febru ary 17, 1977, requesting
the views of this Department on S. 217, a bill to extend the authority
for the flexible regulation of interest ra te s on deposits and accounts
in depository institutions, and for other p urposes. This bill deals
with se v e ra l important m easu res relative to the comprehensive issu e
of financial refo rm which the new T re asu ry sta ff has not had time to
review . It is against this background of a need for additional time
to review p o licies in this area that the following comments are made.
Title I would extend for three months, until June 1, 1977,
the presen t operating authority of the F ed eral R eserve Board, the
Fed eral D eposit Insurance Corporation, and the Federal Home Loan
Bank Board to impose interest rate ceilings on deposits. We suppoi't
this extension of Regulation Q. Three months should provide sufficient
time for this new a d m i n i s t r a t i o n to
< -^ isions on the difficult
i ssu e s involved in comprehensive financial re fo r m and reassess^th e
need for continuing Regulation O a u t h o rity i n Us present form. Any
ex t e n s i o n, which is of p irmgoy <ormr may impose a hardship on
financial institutions whose competitive relation ships are beings
r apidly altered by innovation ap^ rp»gnio+i->yy change now proceeding
at the state level.
Title II extends to three additional sta te s — New York, New
Je r se y , and Pennsylvania -- the authority of com m ercial banks and
thrift institutions to offer NOW accounts. We recommend that this
title be deleted so that the new Adm inistration can thoroughly
analyze data gathered from the NOW account experiment in New
England and review the study recently completed by the F ed eral
R eserve Board staff analyzing the problem s involved in allowing
in terest on demand deposits. Extending NOW account authority
region by region not only prejudges this issu e but also c a r rie s the
r isk of distorting flows of funds and competitive relationships between
institutions located in particular sta te s.

Title III would rein state, until November 1, 1978, the authority
of F ed eral R eserv e Banks to purchase U. S. obligations directly from
the T re asu ry . As you know, we have already transm itted a draft




bill extending this "d irect purchase authority'for a longer period -preferably, five y ears - - i n order to lim it the r isk that this essen tial
"backstop" to T re a su ry 's cash operations be sllowed .
lap se again in the future. \Ve therefore would have no objection to
the reinstatem ent of this authority although we would p refer a longer
. .
• T itle IV would broaden the range of se rv ic e s credit unions
can provide their cu sto m ers. We note that later this year C ongress'
will consider separate legislation on credit union m odernization
which incorporates the provisions of Title IV. While these new
pow ers, such a s perm ission to offer long-term m ortgages and
revolving lin es of credit may have considerable m erit, we believe
C on gress should ad d ress the entire question of new credit union
powers in the context of comprehensive financial institutions ri form.

W. M ichael Blumenthal
The Honorable
William P roxm ire
United States Senate
Washington, D. C. 20510

Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102