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T H E SE C RETAR Y O F T H E T R E A S U R Y WASHINGTON 20220 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. t 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 - 2 - 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 inadvertently.to . 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 extension. . . • 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. Sincerely, W. M ichael Blumenthal The Honorable William P roxm ire United States Senate Washington, D. C. 20510