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r,\,0,4,4   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Pi cc0 tik ,-;rs- c Q. -.....;  Collection: Paul A. Volcker Papers Call Number: MC279  Box 8  Preferred Citation: NOW Accounts [Folder 2], 1973-1976; Paul A. Volcker Papers, Box 8; Public Policy Papers, Department of Rare Books and Special Collections, Princeton University Library Find it online: http://findingaids.princeton.edu/collections/MC279/c134 and https://fraser.sdouisfed.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 These documents can only be used for educational and research purposes ("fair use") as per United States copyright law. By accessing this file, all users agree that their use falls within fair use as defined by the copyright law of the United States. 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Mudd Manuscript Library 65 Olden Street Princeton, NJ 08540 609-258-6345 609-258-3385 (fax) muddgprinceton.edu   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  MIN\  •  IJ 0 LL)  / 1 2/7y _ eAe, u'ui  ri ri"r I  ;  r""w"---  1  111  I  HEWS RELEASE FEDERAL RESERVE BANK OF BOSTON Boston, Mass. 02106 617-426-7100 Contact Alford S. Peckham, Ext.364 (Night Phone 617-369-4559)  For Release:  (R869)  TUESDAY, MARCH 26, 1974 PLEASE OBSERVE RELEASE DATE  BOSTON, Mar. 00 -- The Federal Reserve Bank of Boston reported today that 141 banks and thrift institutions in Massachusetts and New Hampshire offer NOW accounts to their customers as of the end of February, an increase of 15 institutions over the end of January. All but one of these 15 institutions are located in Massachusetts. All institutions combined held $150 million of NOW deposits in 116, 000 accounts as of February 28. The Boston Reserve Bank, acting as agent for Federal and State regulatory authorities in the collection of NOW statistics, issues these and other data relating to NOW accounts on a monthly basis. The February survey showed the following additional characteristics of NOW accounts. The average balance in a NOW account was $1,298, while the average number of drafts written in February was 7 per account. However, the most active accounts were in mutual savings banks in New Hampshire,   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  (more)  .  44  -2-  R869  where the average balance was $594 and the average number of drafts was 11.5 per account. In total, 602,000 NOW drafts were written in February on the 116, 000 NOW accounts. Most institutions were paying the 5 percent maximum on NOW accounts and calculating interest from day of deposit to day of withdrawal. A few institutions were offering 4 percent or less. In total, 44 of the 141 offering institutions in the two states imposed no service charge on NOW drafts. Twenty-six imposed a 10-cent per draft charge and 64 imposed a 15-cent service charge.  Seven institutions used a combination of no service charge  for a specified number of drafts plus a 10- or 15-cent charge for all drafts over the specified number each month. Summary tables of the February survey are attached. Additional tabular data are available upon request from the Research Department of the Federal Reserve Bank of Boston.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  (30)  (March 22, 1974)  TABLE 1 NUMBER OF INSTITUTIONS OFFERING NOWS AND NOW BALANCES AS OF  FEBRUARY 28, 1974  ( DOLLAR AMOUNTS IN THOUSANDS OF DOLLARS )  I I I I I I  I 1 I I I I  NUMBER OF INSTITUTIONS  TOTAL  I I TRANSACTIONS DURING MONTH NOW I I I BALANCES I AMOUNT I I I OF I PREVIOUS I I DEPOSIT I ALL WITH— I OFFERING I MONTH I INTEREST I INFLOWS I DRAWALS I I CREDITED I NOWS I I  I I I SERVICE I CHARGES I I  I I NOW I I I BALANCES I I CURRENT I MONTH I I I I •=.11="...•  I MASSACHUSETTS I  COMMERCIAL BANKS MEMBERS NON—MEMBERS  92 61  5 7  1,511 763  0 3  794 1,549  245 518  0 0  2,060 1,797  I  MUTUAL SAVINGS BANKS  167  89  134,797  566  49,011  45,878  43  138,453  I  SAVINGS & LOAN ASSOCIATIONS AND COOPERATIVES FSLIC INSURED — MEMBERS FHLB *STATE INSURED — MEMBERS FHLB *STATE INSURED — NON MEMBERS FHLB  35 0 144  6 0 15  470 0 399  2 0 2  1,362 0 958  519 0 329  0 0 0  1,315 0 1,030  TOTAL  499  122  137,940  573  53,674  47,489  43  144.655  COMMERCIAL BANKS MEMBERS NON—MEMBERS  76 0 0  3 0 0  282 0 0  2 0 0  269 0 0  72 0 0  0 0 0  481 0 0  I **MUTUAL SAVINGS BANKS  52  16  4,946  16  4,897  4,548  0  5,311  I I I I I I I I I 1 I I I I I 1 1 I 1 I I  I 1 1 1  I  MASSACHUSETTS  I NEW HAMPSHIRE I  I I  I  SAVINGS & LOAN ASSOCIATIONS AND COOPERATIVES **FSLIC INSURED — MEMBERS FHLB STATE INSURED — MEMBERS FHLB STATE INSURED — NON MEMBERS FHLB TOTAL  NEW HAMPSHIRE  I TOTAL MASSACHUSETTS AND NEW HAMPSHIRE  o  o  o  o  0  0 0  0 0  0 0  0 0  5,228  18  5.166  4,620  0  5,792  143,168  591  58,840  52,109  43  150,447  0 o  o o  o o  o o  0  0  0  128  19  627  141  PREPARED BY STATISTICAL SECTION, RESEARCH DEPARTMENT, FEDERAL RESERVE BANK OF BOSTON *These institutions were combined to insure confidentiality. **These institutions were combined to insure confidentiality.  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  I I I I I I I I  TABLE 2 NUMBER OF NOW ACCOUNTS AT OFFERING INSTITUTIONS AS OF  I NUMBER OF I NOW ACCOUNTS I PREVIOUS MONTH 411•0 dm.  NNW  •••••••••  FEBRUARY 28+ 1974  I NEW ACCOUNTS OPENED DURING MONTH I I I BY EXISTING I BY NEW I CUSTOMERS (1)I CUSTOMERS  NUMBER OF ACCOUNTS CLOSED DURING MONTH 011141.  •••••=1.1.  NUMBER OF NOW ACCOUNTS CURRENT MONTH ••••••••=•••••  I MASSACHUSETTS I  COMMERCIAL BANKS MEMBERS NON—MEMBERS  I  MUTUAL SAVINGS BANKS  I  I I  SAVINGS Fs LOAN ASSOCIATIONS AND COOPERATIVES FSLIC INSURED — MEMBERS FHLB *STATE INSURED — MEMBERS FHLB *STATE INSURED — NON MEMBERS FHLB  I  TOTAL  MASSACHUSETTS  656 603  80 329  281 276  9 9  1,008 1.199  95,678  4,061  3,715  1,753  101,701  833 0 434  429 0 380  535 228  3  1,792 0 1,039  98,204  5,279  5,035  1,779  106,739  I NEW HAMPSHIRE I  COMMERCIAL BANKS MEMBERS NON—MEMBERS  I **MUTUAL SAVINGS BANKS I I  SAVINGS I. LOAN ASSOCIATIONS AND COOPERATIVES **FSLIC INSURED — MEMBERS FHLB STATE INSURED — MEMBERS FHLB STATE INSURED — NON MEMBERS FHLB  I  TOTAL  NEW HAMPSHIRE  I TOTAL MASSACHUSETTS AND NEW HAMPSHIRE  155  37  53  8,456  443  120  244  85  8,934  0 0 0  0 0 0  8+611  480  173  86  9,178  106,815  5,759  5,208  1,865  115,917  0 0 0  MO mi.. 41.0.1••••00.  (I) EXISTING CUSTOMERS ARE DEFINED AS THOSE HAVING AN ACCOUNT AT THE INSTITUTION AT THE TIME THE NOW ACCOUNT WAS OPENED. PREPARED BY STATISTICAL SECTION, RESEARCH DEPARTMENT, FEDERAL RESERVE BANK OF BOSTON *These institutions were combined to insure confidentiality. **Thee institutions were combined to insure confidentiality.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  =MIND ••••••11.  TABLE 3 B NOW ACCOUNT ACTIVITY DURING THE MONTH OF FEBRUARY, 1974  •••••••••••=1. 4.11•••••••••  I I I I  I I I I gm.  •••••••  •••••••• ear •••••••••••=•••••••••  NO DRAFTS  I TOTAL MASSACHUSETTS AND NEW HAMPSHIRE  I  1-9  DRAFTS  I 10-20 DRAFTS!  (3)  I I I I  AVERAGE BALANCE PER ACCOUNT  84.5 30.2  12.9 53.0  2.4 14.6  0.2 2.3  1,008 1,199  27.2  55.7  13.8  3.2  101,701  I I I I 29043.65 I 1,498.75 I I 19361.37 I  1  23.4 0 41.3  63.4 0 47.3  12.2 0 9.4  0.9 0 2.0  1,792 0 1,039  733.82 0 991.34  27.9  55.3  13.6  3.2  106,739  1.355.22  34.8 0 0  60.3 0 0  4.9 0 0  0.0 0 0  14.5  39.1  27.2  19.2  8,934  594.47  0 0.0 0.0  0 0.0 0.0  0 0.0 0.0  0 0.0 0.0  0 0 0  0 0.00 0.00  15.0  39.7  26.6  18.7  9,178  631.07  26.9  54.1  14.7  4.4  115,917  STATISTICAL SECTION, RESEARCH DEPARTMENT, FEDERAL RESERVE BANK OF BOSTON  *These institutions were combined to insure confidentiality. **These institutions were combined to insure confidentiality.  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Note:  I I I I I j I I I I  19297.89 I  (3) PERCENTAGES MAY NOT TOTAL EXACTLY 100 PERCENT DUE TO ROUNDING.  By  I I I j 1 I I I I I I  T 1,971.31 0 ' I 0 I  244 0 0  ••••••••••  PREPARED  I I I I  ••••••WENOM  4m•E•wom  4111.1MNIN.M10  I I MASSACHUSETTS I I COMMERCIAL BANKS I MEMBERS I NON-MEMBERS I I MUTUAL SAVINGS BANKS I I SAVINGS & LOAN ASSOCIATIONS AND I COOPERATIVES I FSLIC INSURED - MEMBERS FHLB I *STATE INSURED - MEMBERS FHLB I *STATE INSURED - NON MEMBERS FHLB I TOTAL I MASSACHUSETTS I I I NEW HAMPSHIRE I I COMMERCIAL BANKS MEMBERS I I NON-MEMBERS I I **MUTUAL SAVINGS BANKS I I SAVINGS & LOAN ASSOCIATIONS AND I COOPERATIVES I **FSLIC INSURED - MEMBERS FHLB I STATE INSURED - MEMBERS FHLB I STATE INSURED - NON MEMBERS FHLB I NEW HAMPSHIRE I TOTAL  I NUMBER OF I NOW ACCOUNTS CURRENT I MONTH > 20 DRAFTS I  PERCENTAGE OF NOW ACCOUNTS WITH ACTIVITY DURING MONTH OF:  Activity data shown above is not completely end-of-month activity because of varying account cycles.  .M . / 0 mni.M.  MO   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  *  F. '  BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEtv.  Date To From  February 27, 1974 -  A/c Robert L. Cardon  Aat.  Attached i; a copy of the first monthly report on activity in NOW accounts in Massachusetts and New Hampshire, which is being released today by the Federal Reserve Bank of Boston.  A  The Federal Reserve - repoited today that 126 of the 627 banks and thrift- institutions fñ Massachusetts and New—Hatapdhire offered _ NOW accounts _ _ to their customers as of the end of January.  These institutions held $143-  million of NOW deposits in 107,000 accounts as of that date. These and other data relating to NOW accounts are collected monthly by the Federal Reserve Bank of Boston which acts as agent for Federal and State regulatory authorities in the collection of NOW stati stics. Future reports of NOW account activity will be issued by the Boston Reserve Bank on a monthly basis. Negotiable orders of withdrawal (NOWs) -- which function as checks -- have been issued by mutual savings banks in Massa chusetts and New Hampshire since mid-1972.  Congress adopted legislation last year that  permits all depository institutions in those two states to allow their customers to write negotiable orders of withdrawal against interestbearing savings accounts.  Federal regulations governing the issuance of  NOWs by federally insured institutions went into effect last January 1 and 4  placed a ceiling rate of 5 per cent interest on NOW depos its. The first month's survey of NOW accounts showed that 100 mutual savings banks accounted for most of the NOW deposits and the number of accounts. In January, 14 commercial banks and 12 savings and loan assoc iations and cooperative banks in the two states began offering NOWs , and by monthend had 2,655 accounts, with balances aggregating $3.4 milli on.  Of the  NOW accounts opened at these institutions, 889 were opened by new customers.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  - 2 The survey showed the following additional char acteristics of NOW accounts during January: -  The- average balance in a NOW account was $1,341 - at the end of  the month. -- The average number of NOW drafts written in January at all institutions was 7.3 per account.  However, Table III on account activity  shows that the most Q.ictive accounts were in mutu al savings banks in New Hampshire where 25 per cent of the accounts gene rated more than 20 transfers during January and only 15 per cent of the accounts were inactive. Twelve of the 15 mutual savings banks in New Hamp shire offering NOW accounts imposed no service charge on NOW drafts.  -- In total, 590,000 NOW drafts were written in January on the 107,000 NOW accounts. Most institutions were paying the 5 per cent maxi mum on NOW accounts and calculating interest from day of deposit to day of withdrawal. A few institutions in New Hampshire were offe ring 4 per cent or less. In total, 41 of the 126 offering institutions in the two states imposed no service charges on NOW drafts.  Twenty-two imposed a 10-cent per draft  service charge and 63 imposed a 15-cent service charge. Summary tables of the first month's survey are attached.  Ad-  ditional tabular data are available upon request from the Research Department of the Federal Reserve Bank of Boston.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  0%,  # 2/21/74  1PM'?  TAHLE 1 NUMRER OF INSTITUTIONS OFFERING NOWS AND NOW bALANCES AS OF ( DOLLAR AmOUNTS IN  I I I I I  0..,r0Aurn Hy STATIcTICAL S='CTIr)',• f) ,-;F000-uti  tflfIIJfIii1ibJL11 ARS)  NUmB ER OF TU INSTITIONS  TOTAL  r 1 I I mASSACHUSETTS I I COmFRCIAL RANKs I mfmBERS I NON-MEmBERSI 1 mUTUAL SAVINGS RANKS I I SAVINGS & LflAN ASSOCIATIONS AND I COOPERATIVES FsLIC ImsUPEO - mFmREQS FHLR 1 I STATE INSIPFD - mrmRERS FHLR STATENON MFmRERS FHLR* .1 I I TOTAL MASSACHUSETTS I I I NEw HAmPSHT0F I I COmmEpCIAL RANKS I MEmRER S I NON-MEmBERS** I I mUTISAL SAVINGS RANKS*** I 1 sAvINGs & LoAN ASSOCIATIONS ANU I COOPERATIV 1 FSLIC PiSlic-4F1 - mrmPEPs FHLR I STATE INSDPEO - mEHREPS FHIR I STATE INSOPF0 - NON mEmHFRs FH14 I I NPW HAmpsHipE TOTAL I 1 TOTAL HASSACH!ISFTTS ANO NFw HAPPsHiqr 1 I  JANuARY, 1974  92 61  I I TRANSACTIONS DURING mONTH NOW I 1 I HALANCES I AMnONT I I OF I I PREVIOUS I 1 DEPOSIT I ALL WITHI OFFERING I MONTH I INTEREST I INFLOWS I DRAWALS I NOwS I CREDITED I 1 I  0 5•5 0 6 1  I I I SERVICE I CHARGES I I  1,625 89 1  119 129  0 0  1,95 7(113 1  I I I I I 1  1  134,84: !  167  85  138,028  604  57,028  9 59,72  1,036  35 28 116  4 0 7  0 0 0  0 0 0  53P 0 449  68 0 64  0 0 0  0 385'  S.  107  138,028  610  60,531  60,172  1,036  137,61  I  50 26  0 3  34  16  0 0 5,226  0 0  0 438  21  5,381 •  0 156 5,681  0 0 0  I I I I I I  I I : 2) I 28. I 4,947 I  T I  r  18 0 0  0 0 0  0 0 0  0 0 0  0 0 0  0 0 0  0 0 0  0 0 0  I2H  19  5,226  21  5,819  • 5,837  0  5,229  627  126  1 43,24  631  66,350  6600 ,9  1,036  143,190  FF!)F-PAL ..41:(+0VF_  HL4K. oF BOSTON  *Includes one state insured member of FHLB. **Includes one member commercial bank. ***Includes one savings and loan association. The above adjustments were made to insure the confidentiality of individual inntitution data.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  I I I NO., I I BALANCES I I CURRENT I I MONTH I 1 I  I I I I I I I I I  TAHLE 2 NUmREd OF NO41 ACCOUNTS AT OFFERING INSTITUTIONS AS OF  NN4HER OF I.N014 ACCOUNTS I PREVIOUS MONTH  JANUARY, 1974  I NEW ACCOUNTS OPENED DURING MONTH I I BY NEW I HY EXISTING I CUSTOMERS (1)I CUSTOMERS I  NUMBER OF ACCOUNTS CLOSED DURING MONTH  NUvBER OF NOW ACCoufiTS CURRENT MONTH  I MASSACHUSETTS I  COMMERCIAL RANKS mcmHERs NON—mEmBERS  I  mUTOAL SAVINGS RANKs  I  SAVIN6S  I  LOAN ASSOCIATIONS AND COOPERATIVES FSLIC INsuPF0 — mFmREPR F7ALR STATE INSUPED — uFmRERs FHLR STATE TuSuPEO — NON , MrMHERS FHLH*  TOTAL  MASSACHUSETTS  89,036  0 0 0 89.036  534 343  1?5 ??2  3 2  66 603  4,660  3.360  1,379  95,677  300 0 164  3 0 5  833 0 407  4,171  1,392  98.176  536 0 248 6,361  I NEW HAmPSHIPE I  COmmFACIAL RANKS  mp- mERs NoN—mEm,w2s**  I  MUTUAL 5/WINGS RANKR irk* RAVINGS is. LOAN ASSOCIATIONS AND COORFRATIVEs ERLIC TNsui4F0 — mE4PF0s FHLH STATE INSuPFD — mFmHERs FHL8 STATE Nslipfn — NON PEAREPS EHLR  I  TOTAL  NEW HAmRSHIRE  I TOTAL mAssAcHuSETTs ANT) NF4 HAm0SHTQF  0  0 78  0 77  -7;948  489  98  0 0 0  0 0 0  0 0 0  7,948  567  175  79  8.611  96,984  6,924  4.346  1,471  106,787  155 8,456  79  INSTITUTION AT THE TIME THE NOW ACCOUNT WAS OPENED. (1) 1vIST1M5 CUCT1P.T.P5 APF DEF1Mt-4) AS THOSE HAVING AN ACCOUNT AT THE en,FPA41) BY sTATYsTIOAl SFCTIOu. orcFAlecH 01-)APImENT, EFOEPAL PESFRVE HANK OF BOSTON ***Includes one savings and loan association. *Includes one state insured member of FHLB. **Includes one member commercial bank. The above adjustments were made to insure the confidentiality of individual institution data.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  TABLE 3 1 NOW ACCOUNT ACTIVITY DURING THE MONTH OF JANUARY, 1974  NUMBER OF NOW ACCOUNTS WITH ACTIVITY DURING MONTH OF: JANUARY. 1974 1  NO DRAFTS  I  1-9  DRAFTS  I 10-20 DRAFTS'  > 20 DRAFTS I  TOTAL NUMBER OF NOW DRAFTS  AVERAGE I NUMBER OF I I I NCW DRAFTS I I PER ACCOWAT(2)I  mASSACHUSETTS COmmrRCIAL RANKS mFmHERs NON—mEMRERS MUTUAL SAVINGS RANKS  322 330  321 259  13 12  0 2  2.273 979  6.4 3.5  I  24.079  54.051  13.923  3.624  493.703  6.8  I  543 0 195  272 0 194  0 18  0 0 0  1.435 0 669  0.0 3.1  I I  25.469  55,097  13,984  3.626  499.059  6.8  0 93  0 62  0 0  0 0  0 257  0A 4.1  I  1,265  2,888  2,187  2,116  91,244  12.6  I  0 0 0  0  0 0 0  0 0 0  0 0  0.0 0.0 0.0  SAVINGS A. LOAN ASSOCIATIONS AND COOPERATIVES FSLIC INSuRFD — mFm9ERS FHLR STATE INSuRED — mEmPERS FHLH STATE INSURED — NON'MEmBERS FHLB* TOTAL  mASSACHUIETTS  NEW HtimPcHNE  COm“FRCIAL RANKS mFmi4ERs NON—mEmBERS** MUTUAL SAVINGS RANKS*** SAVINGS c LOAN ASSOCIATIONS AND COOPERATIVES EcLIC INSURED — MEmPFRS FHLR STATE imsimEn — mFmRERs FHLB STATE INSHRED — NON MEmREPS FH1R TOTAL  NW HAmnSHIRF  TOTAL mASSACHDSETtS AND NE41 HPSHTRE  1.38  2,950  2.187  2.116  91.501  12.h  289827  98.047  16.171  5.742  590.560  7.3  (?) AVFRAGF EYCLUOES THOCc. ACCoUNTc 4HICH HAD NO ACTIVITY DUPING THE MONTH. rl -,F.'D BY STATIcTICed  svcri;.  wcsFAqCH DEPAJ)TmENT. FEDERAL RESEPVE BANK OF BOSTON  Note: Activity data shown above is not completely end-of-nonth data because of varying account cycles.  *Includes one state insured member of FHLB. **Includes one member commercial bank. ***Includes one savings and loan association. The above adjustments were made to insure the confidentiality of individual institution data.  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  I  TA4LE 4 A RATES PAID ON NOW ACCOUNTS AS OF  JANUARY, 1974  ( DOLLAP AMOUNTS IN THOUSANDS OF DOLLARS)  1  I  I  I  I I  I I  I  I  3.0%  1  ovER 3.09' ANn  1  I  LESS THAN 4.0cg  I  I NO OF INST  I I  DOLLAR AMOUNT  I I  I I  4.0%  I NO OF INST  I I  DOLLAR AMOUNT  I I  OVER 4.03 AND LESS THAN 4.50*  I NO OF INST  I 1  DOLLAR AMOUNT  I I  I NO OF INST  I . I mASSACHUSETTS I I CON04FRCIAL RANKS  I I I I  MFmHERS NoN-meoREPS. MUTUAL SAVINGS JRANKS  1 I 1  1 I I I 1 1  TOTAL  MASSACHUSETTS  I I I I I  I  I I 1  mEr.04ERS NON-mEvRERS**  mOTuAL SAVINGS clANKco** SAVINGS X. LOAN AsSOCIATIONS AND COOPFRATIVEs FsLIC TNSUPED — Mrv.PErs FHLR STATE TNsilprn - mFmREPS FHLH STATE INSIIPEO - NON MEABEPS FHLR  I MEW HAmoSHIPE TOTAL I I TOTAL MASSACHUSETTS AND NEW HAMPSHIRE I I  I I  I 01  0 0  0 0  0 0  o  0  o  0  0  0  0  o  0 t I  0  0  0  o  o  0 1 1 I  0 0 (1 0  0 o 0  0 0 0  0 0 n  o 0 0  0 o 0  0 o 0  o o 0  o  0  n  o  o  o  o  1 1 1 I I 1 I I I I  .  I  o  0  0  0  n  0  1  0  44  6  1,160  0  0  0  0  o  0  0  8  2,685  0  0 T I 0 I I  I 0 1 o 1 o 1 1  0 1  I  o o o  o o o  o o 0  n 0 n  o o o  o 0 o  o o o  h  1.160  1  44  8  2,685  0  b  1,160  0 I I  1  44  8  2,685  o  o 1 I I  naFpAoEn Hy STATISTICAL SFCTIOm. RFSFARCH OrPaRTMENT , FEDERAL RESERVE BANK OF ROSTON *Includes one state insured member of FHLB. **Includes one member commercial bank. ***Includes one savings and loan association. The above adjustments were made to insure the confidentiality of individual institution data.  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  DOLLAR AMOUNT  0 0  I I NEW HAuPSHIPE I COm'AFRCIAL RANKS I I I  I I  I I I  SAVINGS & LOAN ASSOCIATIONS AND COOPERATIVES FSLIC INSoRFO — mEmHEQs FHLH STATE INSuPED — mFkHEPS F.11.R STATE INsuPFII - NON MEMBERS FHLA*  I I  *a'  TABLE 4 H RATES PAID ON NO  ACCOUNTS  JANUARY, 1974  AS OF  ( DOLLAR AMOUNTS IN THOUSANDS OF DOLLARS)  I I 1 I 1.  I I I I I  I I vASSACHUSETTS I COvmENCIAL RANKS I mrAHERS I I NON-mEvRERS,  No OF ImSI  I I I I I 1  v0 TuAL SAVINGS RANKS SAVINGS A. LOAN ASSOCIATIONS AND COODERATIVES Fc.LIC INsuPF0 - kiEmPERs FHL4 STATE ThislIPFD - mEmPEPs FHL8 i STATE INSHPEO - NON MEMBERS FHLH*. TOTAL  mASsACHI,SETTS  DOLLAR AMOUNT  No OF INST  I I  DOLLAR AMOUNT  1  SAVINGS R. LOAN ASSOCIATIONS AND CO0PFRATIVEs FSLIC INSII-eED - MEvREPc FHiH STATE INSIIO PE - mFPRE0S FHLR STATE INSURED - NCN ME1RE0S FHA  I I I NEW HAMRSHIQF TOTAL 1 I TO L vASSACHUSFTTS AN AN')T NE.4 HAKiPSHI PE  ;  I I  5.0,0. NO OF INSTS  I 1  DOLLAR AMOUNT  I I I I I  WEIGHTED AVERAGE PATE (3)  o n  0  5 6  19 7V3  5.000 5.000  0  o  0  0  89  134.832  5.000  0  I 1 I 1 I I I I I I I  I 1 I  I 0 0 0  0 0 0  0 0 0  0  0  0  0 0 0  4 0 7 107  470 0 385  5.000 .000 5.000  137,961  9.000  I I I I 1 I  I I 0 0  0 0  0 0  0 0  0 2  0 238  .C10 4.765  I I I I I  0  0  0  0  2  1,102  3.988  I  I 1 I I  I I 1 I I  0 0  1 1 I NEW HAMPSHIRE I COm,0ERCIAL RANKS I I wFmHfp4S 1 NoN-mEmHERS" I MUTUAL SAVINGS RANKcii.** I  I I  OvtR 4.51. AND LESS THAN 5.03  U 0  I  I I I  I I 1 I I  4.503  1 1  0 0 0  0 0 0  0 0 0  0 0 0  0 0 0  0 0 0  0  0  0  0  4  1.340  4.030  o  0  0  0  111  1399301  4.964  .000 0 0:: -  I I I I I I I I I I  1  ( (3)  YEIGHTFD BY r)OLLAP AMOUNT  or-IFpAaED 4y STATISTICAL SECTION. -)prc;F_Akc.4 ovIDAPTmENT. FEDERAL REsEPvE HANK OF BOSTON *Includes one state insured member of FHLB. **Includes one member commercial bank. ***Includes one savings and loan association. The above adjustments were made to insure the confidentiality of individual institution data.  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  TABLE 4C CHARGES PER DRAFT FOR NOW ACCOUNTS-AVERAGE BALANCE PER ACCOUNT January 31, 1974  Number of Institutions Charge per Draft 10 15  Average Balance per Account  Total  Free Drafts  Commercial Banks  11  3  1  7  $1,806.19  Mutual Savings Banks  85  22  17  46  $1,409.24  Savings & Loans and Cooperative Banks  11  4  3  4  $689.51  Total Massachusetts  107  29  21  57  $1,405.24  3  $1,819.35  Massachusetts:  New Hampshire:  Commercial Banks  3  Mutual Savings Banks*  16  12  1  3  $585.03  Total New Hampshire  19  12  1  6  $607.25  126  41  22  63  $1,340.89  Total Massachusetts and New Hampshire:  * Includes one Savings & Loan Association.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Prepared by: Statistical Section Research Department Federal Reserve Bank of Boston  4ik TAHLF 5 METHOD OF INTFPEST RATE CALCULATION As OF  JANIJAPy, 1974  ( NumRFR OF INSTITUTIONS )  1 INTEREST CALCULATED ON: I MIN DAY OF DEP DAY OF DEP I AvG OLy TO DIv DT RAL To WITH HAL I  I I I I I I mAsSACHuSETTS I COmmEpCIAL PANKs I mFmREms I NON-mEkAPEPS 1  i 1  muTuAL SAVINGS PANKs  FREQUENCY OF COMPOUNDING  CONT  o  0 0  0  61  17  6  1  0  0  o  0  0  82  3  0 0 0  3 0 6  n 0 0  0  2  o  o  0  5  1 1  TOTAL  s  1  98  3  0  68  0 0  o  o  o  o  1  2  0  0  o o  15  0  0  12  I  munIAL SAVINGS RANKS ***  I SAVINGS F. LOAN ASSOCIATIONS AND 1 COOPERATIVES I I EsLIC INSUPEO — MEWIER; FHLB STATE INsuf4F0 — mEmHEPs FHLR I STATE INSuRFD — NON mEAHFRS FHL4 I I NFw HAM0SHIQF TOTAL I 1 I TOTAL 4ASsACHIJSETTS ANO NE ,o "AMPSHIRF  I I I I I I I I I  I 1 I 1 I I 1 I  o o 1  1 o 1  0 0  o  I 1  20  12  7  0  o  o  0  0  3  o o  I 1 I I I I I  o  1  2  2  0  0  10 0  I  1  0  2  5  0  0  17  7  0  I I I  0  80  22  3  6  I I 1  2  115  1  o o  12  0  1  0  0  17  0 0  0  o  o  0 0 0  0  0 0 0  0 0  0 0 0  1 I I  o  0 0 0  0 0 0  0 0 0  1  I  1 I PRFPAPEO BY STATISTICAL SFCTI , M, WPSEARCH DwPAPTMENT, FFOEPAL RESFPVE HANK OF BOSTON  *Includes one state insured member of FHLB. **Includes one member commercial bank. ***Includes one savings and loan association. The above adjustments were made to insure the confidentiality of individual institution data.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  OTHER  2 2  0  1 0 1  T A  OTERLy  3 2  4 3  I I 1 1  1 I I NEw HAmPSHIPE I COmmrPCIAL RANKS I MFMNERc I NoN—mEmHEPS** I  MONTHLY  0 2  0 1  SAVINGS k LOAN ASSOCIATIONc AND CODPEPATIvEs FcLIC TNsuPFD — mEmpEqs FHLR STATE INstiqE0 — mFm4EPs FHLH STATE INSURED — NON MEMHERS FHLR* mAccACHuSETTS  DAILY  0 0  1 2  1 I  I I OTHER I I  I I  •  TARLF 6 SIZE DISTRIBUTION BY NUMBER OF INSTITUTIONS As OF  JANuARy, 1974  ( RASED ON TOTAL ASSETS )  I I I I I mAsSACHuSETTS I commcpCIAL RANKS I mEFRS I I NON-mEmpFPS I moTuAL SAVINGS -RANKS I I I SAVINGS & LoAN ASSOCIATIONS AND I COoPFPATTvEs I FSLIC I9suPF0 - mEm9Fps FHLR I STATE INsUQED - mEmRFRS FHLR I STATE INSUPFD - NO mEmBEPS FHLR* I I TOTAL mAcsACHuSETTS I I I NEW HAmPSHIRE I I COm'AFPCIAL RANKS I mEv.AERS 1 NOKI-mEmAFRs** I I MUTUAL SAVINGS RANKS Irk* I I SAVINGS & LOAN ASSOCIATIONS AND 1 COOPERATIvES I FSLIC INsUwED - mEmk, wds FHL8 STATE P1SUuED - MF0.0 FR5 FHL8 I I STATE IsISUQED - NON kiEmHERS FHLR I TOTAt I NE.4 HAmPsHIRF I IToTAL mASSACHUSETTS AND NEW HAmPSHIPF I I  pqFPAPED By STATISTICAt_ SFCTION.  < 100m  ALL INSTIToTIONS I I I I00-900m I  > 500m  I I I  INSTITUTIONS OFFEPING NOwS I I < 100m 100-500m I I > 500m  73 55  14 6  9 0  4 4  0 2  1 0  120  43  4  44  37  4  27 28 142  P 0 2  . 0 0 0  2 0 6  2 0 2  0 0 0  417  73  9  59  43  5  48 25  2 1  0 0  0 3  0 0  0 0  31  3  0  14  2  0  17 0 0  1 0 0  0 0 0  0 0 0  0 U 0  0 0 0  121  7  n  17  2  0  53P  80  (3  76  45  5  FSEARCH orPARTMENT. FEDERAL REsEqvE 8ANK OF BOSTON  *Includes one state insured member of FHLB. **Includes one member commercial bank. ***Includes one savings and loan association. The above adjustments were made to insure the confidentiality of individual institution data.  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  I I I I I I I I I I I I I I I I I I 1 I I I I I A  1 I I I I I I I I I I I I I  TABLE 7 SOUPCE OF mEw ACcOuNTs AND ACTIVITY OF POLITICAL SUBDIVISIONS As OF  JANuARY. 1974  I DEPOSITS TO NEw I NOw ACCOuNTs FROm: (4) I I DEm DEPOSITS I TImE k SAV  I I I I 1 I mASSACHuSETTS I I .COm.AEPCIAL BANKs I mEtABEPS NOm—mEmBERs I I muTUAL SAVINGS BANKS I I I SAVINGS k LOAN AsSOCIATIONS ANO I CoOPFPATIVES ‘ I FSLIC risuPEo — mEm ,AEPS FHLB sTtTE INsuPED — mEm'-iERS FHLR I I SItTE NSOPED — NON mENHERs FriLH* I TOTAL I mAssACHUSETTS I I I NI7w HAmDSHIPE 1 I COmkAERCIAL kANKs mEm9EPS I NON—NEMPERs** I I I MUTUAL SAVINr;S RANKS*** I I SAVINGS k LOAN ASSOCIATIoNS ANL) I C000EPATIVF5 1 FsLic ImsuPEn — MEmP,FPS FHLP I STATE INsupEn — mFvFRs FHL4 I STATE INSUPED mE4RERS EHLR 1 1 rnTAL Nrw HAmPSHIRE I I ToTAL NAASSACHUsETTs AND NEw HAmPsHIRE I 1  I mEmO: BALANCES OwNED 8Y I STATE AND LOCAL I GOvERNmENTS I  I MEm0: NumBEP OF ACCOuNTS OwNE0 BY STATF A),D I LOCAL GOvEPNmENTS I I  36 179  4 74  0 0  0 0  0  1.604  0  0  12S 0 79  0 0 0  0 0 0  1.886  0  0  0 0 0 215  I I I I I I I I 1 I I I I 1 I I I  r .  I I I I I  0 73  0 52  0 0  0 0  0  27  0  0  I I I  0  0  0  0  I  r  1 o  o  o  o  1  0  0  0  0  I  73  79  0  0  288  • 1.965  0  0  1  (4) THESE APE TPANSEFos TO NEW NoW ACCOUNTS OPENED DuRING THE MoNTH FROm THE INsTITUTIONS OWN DEmAND DEPOSITS OR TPJE AND SAVINGc oEPosITc. 04E-04ED Hy sTATIsTICAL 5PC -rink', PFcARcH orPARTMENT, FEDERAL RESEPVE HANK OF HOSTON  *Includes one state insured member of FHLB. **Includes one member commercial bank. ***Includes one savings and loan association. The above adjustments were made to insure the confidentiality of individual institution data.  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  I I I I  I I I I I  TABLE 8 OUTSTANDING NEGOTIABLE ORDERS OF WITHDRAWAL (NOWs) (in thousands of dollars)  PERIOD  1.9 '2 Sept.  TOTAL OF ALL OFFERING INSTITUTIONS  COMMERCIAL BANKS MEMBER  TOTAL  NON-MEMBER  ..  -  MASS.  MUTUAL SAVINGS BANKS  N.H.  MASS.  -N.H."  SAVINGS & LOAN ASSOCIATIONS  MASS.  N.H.  Oct. Nov. Dec. 19 '3 Jan. Feb. Mar. Apr. May June July Aug. Sept.  11,094 22,386 34,823 45,272 60,726 73,451 86,118 94,606 102,045 108,381 113,418 117,005 120,223  11,094 22,386 34,823 45,272 60,726 73,451 86,118 94,606 102,045 108,381 113,418 117,005 120,223  Oct. Nov. Dec. 19 '4 Jan.  11,094 22,386 34,363 44,522 59,661 71,975 84,162 92,341 99,633 105,688 110,486 113,852 116,259  130,361 136,872 143,254 143,190  --460 750 1,065 1,476 1,956 2,265 2,412 2,693 2,932 3,153 3,964  130,361 136,872 143,254 139,779  125,873 131,795 138,028 134,832  4,488 5,077 5,226 4,947  2,556  1,511  •• 1.•  763  282  MASSACHUSETTS  040  TOTAL  Prepared by:  TOTAL  855  • S&Ls  470  Statistical Section, Research Department, Federal Reserve Bank of Boston *Includes one state insured member of FHLB. **Includes one member commercial bank. ***Includes one savings and loan association. The above adjustments were made to insure the confidentiality of individual institution data.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  • ••••••11. ••••11••  0  N.H. COOPS  385  --  TABLE 9 NUMBER OF INSTITUTIONS OFFERING NEGOTIABLE ORDERS OF WITHDRAWAL (NOWs)  PERIOD  TOTAL OF ALL OFFERING INSTITUTIONS  1972 Sept. Oct. Nov. Dec.  23 35 52 59  1973 Jan. Feb. Mar. Apr. May June July Aug. Sent. Oct. Nov. Dec.  63 67 69 69 69 69 70 72 74 80 86 90  1974 Jan.  126  Prepared by:  MUTUAL SAVINGS BANKS  COMMERCIAL BANKS NON-MEMBER  MEMBER  TOTAL  TOTAL MASS,  N.H.  MASS.  5  --  6  MASSACHUSETTS TOTAL  N.H.:"  .  14  MASS.  •• N.H.  SAVINGS & LOAN ASSOCIATIONS  3  23 35 52 59  23 35 46 50  --6 9  63 67 69 69 69 69 70 72 74 80 86 90  53 55 57 57 57 57 58 60 61 66 71 75  10 12 12 12 12 12 12 12 13 14 15 15  101  85  16  6 S&Ls I  '  11  4  Statistical Section, Research Department, Federal Reserve Bank of Boston  *Includes one state insured member of FHLB. **Includes one member commercial bank. ***Includes one savings and loan association. The above adjustments were made to insure the confidentiality of individual institution. data.  • ••••••••• ^   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  4.111-11  N.H. COOPS  7  --  BOARD OF GOVERNORS OF THE  FEDERAL RESERVE SYSTEM WASHINGTON. O. C. 20551  GEORGE W. MITCHELL VICE CHAIRMAN  March 19, 1974  Mr. Stuart W. Hamilton,. Jr. Executive Vice President New Hampshire Bankers Assocation 15 Pleasant Street Concord, New Hampshire 03301 Dear Mr. Hamilton: I am responding, on behalf of the Board of Governors, to the Petition filed by the New Hampshire Bankers Association requesting that the Board amend section 217.5(3) of Regulation Q to remove the 150 item limitation on the number of negotiable orders of withdrawal (NOWS) that a member bank may accept during any calendar year on any deposit subject to such orders. As you know, the system established by the Board to monitor NOW activity in Massachusetts and New Hampshire has been in place for approximately two months. Because of this brief collection period the Board has not obtained sufficient data on which to base a decision regarding the 150 item limitation. Moreover, data available do not indicate that modification or removal of the item limitation is warranted at this time. As the monitoring system is refined, as additional institutions offer NOW accounts, and as customers become more familiar with the NOW account, the Board expects to be able to make more searching assessments of the use and effect of NOW accounts on financial institutions in Massachusetts and New Hampshire. As the Board has indicated previously with regard to the NOW experiment, it will continue to monitor the experiment and will not hesitate to recommend and consider additional regulatory action, including the action recommended in the Petition, should data indica te that such action is warranted.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Sincerely yours,  (Signed) George W. Mitchell George W. Mitchell  •  3 /416 March 12, 1974  To: From:  Board of Governors Legal Division ( A. Raiken)  Subject: Petition by New Hampshire Bankers Association to remove 150 item limit on NOW accounts  Banking Sectioh (E. Ettin)  ACTION REQUESTED:  Approval of draft letter (Attachment A) denying the  relief requested by petitioners (Attachment B). SUMMARY STATEMENT: on January 1, 1974.  The Board's regulations on NOW accounts became effective The Boston Reserve Bank has begun its monthly collection  of data on NOW accounts in Massachusetts and New Hampshire and the Board 1/ has recently received the Reserve Bank's report for January. The Staff believes that data available do not as yet indicate the necessity for removing the 150 item limitation at this time and that more data are necessary in order to make such a determination.  It should be noted that  the data collection system does not provide information on the number of drafts drawn on any particular NOW account.  Indications that the 150  item limitation is constraining will have to be read from data over time on the total number of NOW accounts that are very active. The draft response restates the Board's previously expressed intention to continue to monitor the NOW experiment and to consider additional regulatory action should data indicate that such action is warranted.  lj Memorandum  of February 29, 1974 to the Board from Banking Section regarding NOW account data.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  p.  ATTACHMENT A  Mr. Stuart W. Hamilton, Jr. Executive Vice President New Hampshire Bankers Association 15 Pleasant Street Concord, New Hampshire 03301 Dear Mr. Hamilton: I am responding, on behalf of the Board of Governors, to the Peititon filed by the New Lampshire Bankers Association requesting that the Board amend section 217.5(3) of Regulation Q to remove the 150 item limitation on the number of negotiable orders of withdrawal (NOWS) that a member bank may accept during any calender year on any deposit subject to such orders.  The Petition requests this action for the following  asserted reasons: 1.  Difficulty and expense in supervisory agency enforcement  2.  Lack of customer control over number of NOWS presented  3.  Failure to impose a penalty for exceeding 150 limit  4.  Studies indicate an average regular checking account customer writes between 9 to 13 items per month  5.  Application of item limit to member banks only is discriminatory  6.  Existing interest rate differential is aggravated by item limitation  All of the issues raised in the Petition were considered by the Board prior to adoption of NOW regulations.  The Board has stated  that its regulations are predicated on the belief that the basic purpose of the NOW experiment is to make money transfers a feature of savings   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  - 2accounts.  The primary, but not exclusive beneficiaries of this policy  are intended to be those who do not have checking accounts but keep their funds in a savings account in a commercial bank, a mutual savings bank, a savings and loan association or other thrift institution.  Although  the manner in which NOWS generally have developed in New Hampshire (no service charge with reduced interest payments) encourages their use in a manner similar to checking accounts, the Board does not believe that NOW accounts should be made so available and attractive as to result in the wholesale conversion of demand deposits into such accounts.  To  discourage this result the Board imposed the item limit on the use of NOW transfers.  The limit of 150 transfers per year consequently is viewed  appropriate at the outset of the experiment to serve that segment of the public that the Board expects will derive the primary benefit from the NOW account. With regard to the policing and enforcement difficulties foreseen by petitioners as inherent in the application of an item limitation, the Board believes that the monitoring system currently in place and the normal examination process will provide the basis for effective application of this requirement.  Moreover, as with other Board regulations, and  especially during the period of the NOW experiment authorized by Congress, the Board expects that the vast majority of member banks will make every effort to adhere to the item limitation.  Depositors should be informed  of the limitation at the opening of NOW accounts and banks offering NOW accounts should indicate that items in excess of the 150 limit will be returned unpaid.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  - 3 The Board's review of the NOW account data compiled by the Federal Reserve Bank of Boston for the month of January indicates that of 50 member banks in New Hampshire, only one is currently offering NOWS. These data also indicate that only 2 of 26 nonmember commercial banks and 15 of 34 mutuals, and 1 of 18 S & L's are offering such accounts. With regard to the 3 commercial banks (1 member and 2 nonmember), data relating to the average number of NOW drafts written on these accounts in New Hampshire during January (4.1 per account) was far below the approximately 12 per month average possible under the Board's item limitation. Indeed, no commercial bank NOW account in New Hampshire had more than 9 drafts drawn on it in January. Because the Board's monitoring system has been in operation for approximately two months, the Board does not regard the data thus far obtained as conclusive as to any NOW account feature.  however, data  available do not indicate that modification or removal of the item limitation is warranted at this time.  As the monitoring system is refined, as additional  institutions offer NOW accounts, and as customers become more familiar with the NOW account, the Board expects to be able to make increasingly more accurate assessments of the use and effect of NOW accounts on financial institutions in Massachusetts and New Hampshire. As the Board has indicated previously with regard to the NOW experiment, it will continue to monitor the experiment and will not hesitate to recommend and consider additional regulatory action, including the action recommended in the Petition, should data indicate that such action   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  - 4 is warranted.  The Board wiil appreciate your Association providing any  data and additional information that you believe will be useful in assessing the progress of the NOW experiment.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Sincerely yours,  George W. Mitchell  411  II/  ATTACHMENT B  February 19, 1974 Board of Governors of The Federal Reserve System 21st and Constitution Avenue, N.W. Washington, D.C. 20551 Petition for Relief With Respect to Amendments to Regulation Q Issued by the Board of Governors of the Federal Reserve System on December 7, 1973 Governing Payment of Interest on Deposits--Under Which Customers of Member Banks in Massachusetts and New Hampshire May Write Negotiable Orders of Withdrawal (NOWs) Against Interest-Bearing Savings Accounts. the Board of The New Hampshire Bankers Association respectfully petitions Q, Sec. 217.5 (3), Governors of the Federal Reserve System to amend Regulation more than 150 which contains a requirement that "no member bank may accept any deposit subject negotiable orders of withdrawal during any calendar year on to such orders." 150 negotiable The Association respectfully requests that this limitation of ns: orders per calendar year be eliminated for the following reaso   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  1.  The restriction cannot possibly be policed by the Comptroller of the Currency or by Federal Reserve Examiners, without voluminous additional records which will further add to cost.  2.  The consumer-customer can control the number of Orders he writes in a calendar year, but he cannot control the number which may be presented to his bank for payment in a twelvemonth period.  3.  thus 150 The Board has imposed no penalties for exceeding item limit, nor has it told member banks what they must do if that limit is exceeded by a depositor.  4.  The Functional Cost Analysis conducted by the twelve Federal Reserve Banks indicates the average number of checks written  •  by individuals range from 9 per month to 13 per month, depending on whether we look at "Special Checking Accounts" or "Personal Checking Accounts".  This indicates some customers must draw fewer  than 9 checks and some must draw more than 14 checks per month. The limitation of 150 orders per year, then, automatically means that Member Banks will serve those who draw fewer than 12 Orders per month and those who maintain the smaller balances. 5.  No similar restrictions have been imposed upon Non-Member Trust Companies, Mutual Savings Banks; Savings and Loan Associations, and Cooperative Banks.  In New Hampshire only the State's  49 National Banks and one Trust Company that are members of the Federal Reserve System, are so limited.  This restriction cannot  fail to affect the data of the NOW account experiment in Massachusetts and New Hampshire. 6.  In New Hampshire 20 National Banks share common quarters with 20 Savings Banks.  The inequity placed upon the National Bank in  the form of a limit on the number of negotiable orders of withdrawal, can only aggravate the additional inequity of the Regulation Q interest rate advantages held by the savings banks.  In cities and  towns where the banks share a common facility, the depositor need only cross the lobby to avoid an item limitation. The Association sincerely hopes the Board of Governors of the Federal Reserve System will take action at the earliest possible time to remove the unfair and impractical requirement that no member bank may accept more than 150 negotiable orders of withdrawal during any calendar year on any deposit subject to such orders.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Respectfully submitted  New Hampshire Bankers Association  *op.  • BOARD OF GOVERNORS OF THE  1 • •  FEDERAL RESERVE SYSTEM  Office Correspondence To  Board of Governors  From  Banking Section (Paul Boltz)  Date  Subject:  February 29, 1974  NOW Account data  This memorandum is for information only. The Boston Federal Reserve Bank has begun the monthly collection of data on NOW accounts in Massachusetts and New Hampshire, and the attached tables are the first report. High points of the January report are:   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  only 14 commercial banks (CB's) and 12 S&L's began offering NOW's in January, or about one bank and S&L for every sixteen such institutions (Table 1). of a total of $143 million in NOW accounts at the end of January,$2.6 million were at CB's and less than $1 million were at S&L's (Table 1). •••  about 70 per cent of NOW accounts at CB's and 63 per cent of NOW accounts at S&L's were opened by existing customers (Table 2). Existing customers at CB's initially opened their NOW accounts mainly by shifting funds from demand deposit (Table 7). over half the NOW accounts at commercial banks had no activity in January; only 2 per cent of them had 10 or more drafts during the month. NOW accounts at MSB's were much more active, particularly in New Hampshire where about 50 per cent of their NOW accounts had 10 or more drafts during the month and 25 per cent had more than 20 drafts (Table 3). New Hampshire MSB's generally had no service charges and paid less interest on their NOW accounts (4 per cent or less) than other institutions, making NOW accounts at New Hampshire MSB's the most like checking accounts (Tables 4A, 4B, 4C). almost all other institutions besides New Hampshire MSB's were paying the maximum 5 per cent, and most were levying service charges (Tables 4A, 4B, 4C). The large majority of institutions were paying interest from day of deposit to day of withdrawal (Table 5). About onehalf of the institutions offering NOW's were charging 15 cents per NOW draft, less than one-fifth were charging 10 cents per draft, and one-third were offering free drafts. Most of the free drafts were offered by MSB's (Table 4C).  *NS-  TO:   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Board of Governors  .10I, IMO  - 2 -  the average NOV balance was $1,340, with commercial banks having the largest average balance by a substantial margin in both states (Table 40). January 1974 was the first time MSB's showed a decline in their NOW balance totals since they began offering such accounts in 1972 (Table 8). Whatever the cause of the weakening, it does not reflect CB and S&L competition since total NOW balance at all institutions also declined slightly (Table 8) and the number of NOW accounts continued to increase rapidly at MSB's (Table 2)  • FED•  ••  ERAL RESERVE BANK OF BOSTON  MEMORANDUM To: From:  Mr. Eisenmenger  & - ,s-  DM* January 22, 1974  Subject  NOW Accounts  Mrs. Chamberlain  The following have been added to our lists of financial institutions offering NOW accounts since the January 15 memo.  Commercial Banks First National Bank, Northampton, Massachusetts, 5 percent; 15c per draft. Merrimack Valley National Bank, Andover, Massachusetts, 5 percent; no service charge. Naumkeag Trust Company, Salem, Massachusetts, 5 pevent; 10c per draft.  Savings Banks Fall River Savings Bank, Fall River, Massachusetts, 5 percent; 15c per draft. Union Savings Bank, Fall River, Massachusetts, 5 percent; 15c per draft. Malden Savings Bank, Malden, Massachusetts, 5 percent; 15c per draft. Framingham Savings Bank, Framingham, Massachusetts, 5 percent; no, service charge.  Table 1 shows the number of institutions in Massachusetts and New Hampshire presently offering NOW accounts. This table has been compiled from various sources, primarily industry trade associations, and may not represent a complete , - ount. Institutions which have indicated that they will offer NOW accounts soon" are Waltham Savings Bank, Newton Cooperative Bank, Pittsfield Cooperative Bank, Citizens Savings Bank of Fall River, Pentucket Five Cents Savings Bank in Haverhill, Framingham Cooperative Bank, and Hingham Institution for Savings.  233 (2-73 15M)   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  •  Table 1  Number of Institutions Offering NOW Accounts*  Savings Banks  S & L's and Cooperative Banks  Commercial Banks  Mass.  N.H.  Mass.  12/31/73  75  15  0  0  0  01/08/74  75  15  6  1  01/15/74  78  15  9  01/22/74  82  15  9  *Note:  N.H.  Mass.  N.H.  Total Mass.  N.H.  0  75  15  4  2  85  18  1  7  2  94  18  1  10  2  101  18  This table has been compiled primarily from information obtained from indust ry trade associations and is not necessarily a complete count of all institutions offering NOW accounts.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  DEC 2 8 1973  The ftemeable James M. Uanley House of Reoreesatatives Weshington, D. C. 20515 Deer Hr. Hanley: In Chairmee Surma' abeam*, I am writing in response to your hive Letter of December le regarding the ION aecennt reiadatione been issued by the 111001:d of Governor*, the federal Deposit Insurance Corporation, and the Pederai Mee Left peek Voogd.  We share your basic concern thnt there not occItr in dassechusetts and Mow Hampshire otametions prejudicial to the longrun interests of ommammers or of diapealtory institutions, anti we . Intend to do our beet to see that such situations do not develor, ?rlor to the adoption of the Mal regulations, mtich are de to become effective oa January 1, the agmecies deliberated at considerable length in an effort to arrive ea similar rules. Unfortunately, as you note, complete agreement wee not reached. Singe than, the Board has considered the setter of the differing regulations and their potential --*Insequences. it is our judament that there Is no regulatory aittion the lioard can take at this time which would be eAmetructtve. This is not to *an besseeer, that we will be inactive. Ths Agencies have jointly established a surveillance system dMe.sned to monitor both NOW account activity end the promotional Snorts of the depository institutions in the two State*. The monitoring system will 1-1rovide haportant information mhdch can be wed to guide further discussion& among the species.  It is, of course, Ilossible that events soon after January I mill cause tie to reconsider our position, and if circa.OtOaCeS warrant we are prepared to initiate discussion* promptly   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  The Honorable Jam** M. Henley Peso Two  looking toward additional regulatory action. At the moment, thousb, further rule-making by the Board **mme The Board will pay particular stbOalties to any problem* stOmMims from the ability of S &Ms in Messachusetts and New Moupohire to make 104 attcounts available to State and local Wm41011MMate. We shall not hesitate to make our views 10101,ft should it spoor them steps need to be taken to neutralise Soy competitive odomotoso whiah may arise from the existence of this authority. We appreciate havtnt your views, nueI hops the foregoing dieeoesion has Wen helpfiA to you. Sincerely yours, (Signed) Georsy3 W. Mitchell George W. Mitchell  JSR:vcd #782 12/28/73 bcc:  Mrs. Nallardi (#2542)  •  •  TO:  Mr. Cardon (for reply)  cc:  Governor Mitchell r. Rippey   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  S M. HANLEY  "fir  DISTRICT, NEW YOPK  WASHINGTON  •  COMMITTEES:  POST OFFICE AND CIVIL SERVICE  OFFICE:  109 CANNON BUILDING CODE 202: 225-3701  Cortgre of tbe Meet'atato 1(171 n7.- r ,  thick of tiepreknitiin  SYRACUSE OFFICE: 370 FEDERAL BUILDING 13202 CODE 315: 473-5G57  :,-,Eltafsbington, Ae. 20515  CHAIRMAN: SUBCOMMITTEE ON POSTAL SERVICE  BANKING AND CURRENCY suBcommirmEs, BANK SUPERVISION AND INSURANCE SMALL BUSINESS URBAN MASS TRANSPORTATION  December 18, 1973  ...^1 .1  7  •  C •  Mr. Arthur F. Burns, Chairman The Federal Reserve Board Federal Reserve Building Washington, D. C. 20551  lef  Dear '!/.. Chairman;  •   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Your agencyagency issued regulations last week governing the use of NOW accounts in Massachusetts and New Hampshire. Because of the nature of these regulations, I feel compelled to comment on them at this time. As a Member of the House Committee which dealt with this legislation, as well as the Conference Committee which resolved the differences between the House and Senate bills, I have a strong interest in seeing that congressional intent is carried out. When tentative regulations were issued by the agencies in mid-September, I was pleased to note that steps were being taken to regulate the use of these accounts from the outset. Specifically, usage was limited primarily to natural persons, a uniform interest rate ceiling below the commercial bank passbook rate was instituted, and the number of drafts which could be issued in any month was prescribed. I was distressed to note that the final regulations did not achieve these goals. It is clear that Congress directed the agencies to achieve uniformity in regulations; however, this result was not attained. The Federal Reserve regulations limiting the number of NOW items was in keeping with congressional intent; however, the other agencies did not follow suit. Moreover, the ability of savings and loans to issue NOW accounts to governmental instrumentalities could create severe competitive imbalances between competing financial institutions in the two states. I feel strongly that your agency and the other agencies must reconsider these regulations in light of congressional intent. The severe inequities which will be created by these regulations must he avnidcd at all costs.  //  • •  Mr. Arthur F. Burns, Chairman December 18, 1973  Page 2  I hone you will take steps to resolve these problems as quickly as possible'. In addition, I hope ycu will keep me informed as to what actions are being taken in this regard. Your personal attention to these comments will be greatly apprecia ted. I hope to hear from you at your earliest convenience. With best wishes, I remain Sincerely yours,  JMH:asl  •   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  James M. Hanley Member of Congress  .• ... .• of COv444,  BOARD OF GOVERNORS OFTHE  FEDERAL RESERVE SYSTEM '0 • •  • • (n• • 4f,  WASHINGTON, 0. C. 20551  • RAL Rf-St*••   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  GEORGE W. MITCHELL VICE CHAIRMAN  December 27, 1973  Mr. Frank S. Jackson, President Massachusetts Bankers Association 125 High Street Boston, Massachusetts 02110 Dear Mr. Jackson: The Board has received and considered your petition for a reconsideration of its NOW account regulations. It does not believe that any unilateral action it can take at this time would be constructive. The statutory instructions to the Interagency Coordinating Committee are to consult before acting, and in this case, as in others, the Board has followed this instruction carefully and precisely. In that context, the Board has endeavored, in its negotiation, to reach agreement with the other agencies. In the case of the NOW account regulations, complete agreement was not possible. The agencies have jointly instituted a surveillance system to monitor NOW account activity and promotional steps taken by Massachusetts and New Hampshire institutions with respect to this type of account. Until the monitoring system now in place indicates how the competitive situation is developing, the Board believes that efforts to change the existing regulations would not be fruitful. It is, of course, possible that promotional announcements on or about January I will be a cause for immediate reconsideration; but at this time there appears to be no change in the facts and no basis for new interpretations of them by the agencies. The Board will be particular17 sensitive to any problems raised by the ability of savings and loan associations to make NOW accounts available to State and local   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  BOARD. GOVERNORS  Mr. Frank S. Jackson  OF THE  FEDERAL  RESERV  -2-  -YSTEM  December 27, 1973  governments. In response to a recent letter from Mr. Edward R. Tufts, I have addressed this issue. Copies of this correspondence are enclosed. Let me, in closing, assure you of the Board's concern that there not occur in Massachusetts and New Hampshire situations that will be prejudicial to the long-run interests of consumers or depository institutions. Sincerely yours,  4.101Qt  Enclosures 2  ell  BOARD OF GOVERNORS or THE 4  FEDERAL RESERVE SYSTEM  Ulace Coyre3pondence To  Board of Governors  From  David C. Melnicoff  Date  -C -T  December 26, 1973  Petition of Massachusetts Bankers Association for Reconsideratic of NOW Accounts  Subject:  ACTION REQUESTED • Deferral of active consideration of the substance of the petition.  DISCUSSION The petition submitted by the Massachusetts Bankers Association dated December 20, asks that the Board, the FDIC, and the FULBB defer the effective date of the NOW account regulations pending action on the substance of the petition. The Massachusetts Bankers ask that the FDIC and FULBB adopt the Board's rules. Fag this the Bankers ask that the Federal Reserve adopt the FELBB rules the 150 item limitation be eliminated and that coilimercial banks be permitted to extend the privilege of NOW account ownership to state and municipal governments. It is  not feasible to obtain agreement of the other regulatory prior to January 1. Moreover, there is little danger that any great damage can be done within the first few days of January. The Board might, however, wish to note the petition for the record and indicate to the Massachusetts Bankers that it will take appropriate action promptly should the situation warrant. I   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Attached hereto is a letter from Governor Mitchell to the President of the Massachusetts Bankers Association dealing with this matter. Attachment  7  •  /A   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  December 26, 1973  Dear Mr. Tufts: Thank you for your letter of December 11 concerning the regulations issued by the Board of Governors and other agencies with respect to the use of NOW accounts in Massachusetts nnd New Uampshire. The basic situation has not chpnged yOu since the promulgation of the new rules except that, note, certain thrift institutions have shown"particular interest in extending LOW account facilities to State and local governInents. The passage of a bill by the Uouse of Representatives, which permits 100 per cent insurance on State and municipal deposits, will undoubtedly heighten this interest. The repilations issued by the Board reflected our concerns as well as our hopes for the NOW account experiment. We shall monitor the situation very closely and we shall not hesitate to make our views known whenever it appears appropriate or to consider such steps as available to us to neutralize competitive disadvantages. Sincerely yours, (S;p2d) CatrE,3V.ilitchel! George W. Mitchell  Mr. Edward R. Tufts Executive Vice ?resident Massachusetts Bankers Association, Inc. 125 High Street Boston, Massachusetts 02110  DCM:GWM:cbd  Massachusetts Bankers Association, Inc. 125 HIGH STREET. BOSTON. MASS.  02110  •  (617)  542-1837. 1838. 1839  COARD  •  ,• ^^  FEflIPA  ,•,  1973 EC 14 F:1  33  December 11, 1973  ,  43?57.6.-  The Honorable Dr. Arthur Burns Chairman Federal Reserve Board Washington, D.C.  •  • 14?-1,/  My dear Dr. Burns:  This Association is in receipt of the Regulations promidgated by the Federal Reserve Board relative to the use of N.O.W. Accounts. We commend the Board for its consideration of the item limitations and, while we do not agree with the number, certainly it is a step in the right direction as far as we are concerned. • We were hopeful that more emphasis would have been placed on mandatory service charges. This, however, may come about in time. We are deeply disturbed at the differences in the Regulations as promulgated by each agency, and would urge that the Federal Reserve Board in its capacity as a member of the Inter—Agency Committee, exercise all due judgment to reconsideration by the F.D.I.C. and have it adopt the same item limitations as the Federal Reserve Regulations, thereby eliminating the discrimination against member banks. We would, also, urge the Board to exercise due consideration with the Federal Home Loan Bank Board to clarify the Section relative to 'who may have a N.O.W. Account' to eliminate the interpretation permitting State, and Municipal Govern— ments from participating in this type of Account. With the bill pending before Congress relative to 100% insurance requirements on State, and Municipal Funds, this becomes a natural for thrifts and s&I's to now advertise 100% insurance, to the detriment of the commercial banking industry.  Edward R. Tufts Executive Vice President •••••  ERTIhfk  L  ANK S. JACKSON, Pre.sident  sident. Union Market National  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Bank, Watertown  WILSON BRUNEL,Second Vice President President, Third National B,ink of Harnp Ltn County, Springfield  EDWARD R. TUFTS Executive Vice President  **;DEGOIri*. .0 • <I0 4• •*0N'• +WC • co 9 0 44 /41‘\  FEDERAL press  RESERVE  reiease  ••••-•  4  For Immediate Release  December 7, 1973  The Board of Governors of the Federal Reserve System today issued an amendment to its Regulation Q  0-overniner 0 payment of interest on deposits 0  unI.r which customers of member banks in Massachusetts and New Hampshire may write negotiable orders of withdrawal (NOWs) against interest-bearing savings accounts. The amendment, effective January 1, 1974, was adopted pursuant to new legislation permitting all depository institutions in the two states to allow customers to write NOWs -- which function as checks -- on savings accounts.  The customary type of check may be written only against non-  interest-paying demand deposits. The new rules for the use of NOWs by savings depositors in Federal Reserve member banks in Massachusetts and New Hampshire are: ilaximum interest payable on NOW accounts is 5 per cent. -- NOW accounts may be owned only by natural persons (or fiduciary accounts for individuals) and non-profit associations eligible to maintain savings accounts. To avoid unfair competition for deposits with institutions in neighboring states, advertising and solicitation of NOW account deposits should be directed toward residents of Massachusetts and New Hampshire. In this connection, member banks are requested to offer NOW accounts only to permanent or temporary residents of Massachusetts and New Hampshire, persons who work in those states, and current customers. Zr  The number of negotiable orders of withdrawal that may be processed against an individual DOW account may not exceed 150 per year.  The Board's rules governing the use of NOWs in the two states were formulated following careful consideration of the history of the  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Zr  2  4in  legislation and of all comment received on a tentative statement of proposed policies issued by the Board on September 14.  The Board also con-  sulted with the other federal regulatory agencies through the Inter-Agency Coordinating Committee.  The Federal Deposit Insurance Corporation and the  Federal Home Loan Bank Board are also issuing regulations covering institutions under their jurisdiction in Nassachusetts and New Hampshire. The new rules do not require the imposition of service charges by member banks on NOW transactions.  But the Board suggested that each in-  dividual bank charge a fee for transactions if its earnings from NOW accounts do not fully cover the cost of establishing and servicing such accounts. NOW drafts will continue to be cleared, for all depository institutions, by the Federal reserve Bank of Boston through member banks. In cooperation with the other regulatory agencies, the Board -through the Federal Reserve Bank of Boston -- is establishing a system for monitoring, on a monthly basis, the use and activity in NOW accounts.  The  purpose is to generate timely information on public use and acceptance of such accounts and to uncover any institutional weaknesses that may arise from excessive promotional schemes and activities. The Board has written the chairmen and ranking minority members of the committees and subcommittees that considered the recent NOW account legislation, to inform them of the reasons underlying the Board's action. Following are excerpts from those letters:   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  The Board has predicated its actions on the belief that the basic purpose of the NOW account experiment is to make money transfers a feature of savings accounts owned by individuals. The primary, but not exclusive, beneficiaries of this policy would be those who do not have checking accounts but keep their funds in a savings account  •   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -3 in a commercial bank, a mutual savings bank, a savings and loan association or other thrift institution. The Board does not believe that NOW accounts should be made so available and attractive as to result in the wholesale conversion of demand deposits into such accounts. In formulating its rules, the Board has given close attention to comment it received on its tentative proposals published September 14, just before the new legislation went into effect. The Board has considered the views of the other federal regulatory agencies concerned, and of the banking officials in the two states in which Congress authorized the experiment in making check-like withdrawals from interest-bearing deposits. The Board has also sought to be guided by the legislative history of PL 93-100 permitting NOW transfers from savings accounts. This legislative history indicates that the NOW account experiment was meant by Congress to be confined to Massachusetts and New Hampshire. Consequently, the Board is requesting member banks in Massachusetts and New Hampshire to limit the ownership of NOW accounts to permanent or temporary residents of those states, to persons who work in the two states and to current customers. Similarly, the Board has limited direct solicitation of NOW account deposits by member banks to the two states concerned. The legislative history also implies that eligible holders should be limited to natural persons. Savings accounts at commercial banks are limited to individuals, to fiduciary accounts for the benefit of individuals, and to certain non-profit associations. The Board has concluded that confining the use of NOW accounts at member banks to those who have savings accounts at those banks carries out the intent of Congress. The Board does not believe that Congress intended for corporations and state and local governments to have access to NOW accounts, and it sees no present reason for permitting such access. The Board believes that all depository institutions offering this service should be permitted to pay the same rates of interest on the deposits supporting.NOW accounts. In its publication of September 14 soliciting comment on tentative proposals for the use of NOW accounts, the Board implied concern over the possibility that NOW accounts might be offered as a   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  - 4 loss leader for attracting deposits. In the interest of maintaining sound banking, institutions in these two states should avoid predatory competition implicit in loss leader promotion. The Board suggests that fees should be charged where the costs of maintaining and servicing NOW accounts, including the interest paid to the holder of the account, are not fully covered by the bank's earnings on the deposits supporting the account. One reason for this concern is the fact that savings accounts at all the depository institutions in Massachusetts and New Hampshire are small on the average -less than $250 -- and that the large majority of all savings accounts in the two states is under $1,000. Thus, a bank's opportunities for earnings on such accounts are limited. When one keeps in mind the interest paid to holders of such accounts, the costs of setting up accounts and the servicing of transactions, it is clear that unless fees are charged for NOW transfers many, if not most, such accounts would be operated at a loss to the institution offering them. This would tend to undermine the viability of the experiment by undermining the earning capacity and ultimately the soundness of institutions caught in a competitive bind. The Board is reluctant to deal with this possibility by fixing the money equivalent of the costs of handling a funds transfer in a NOW account, since this will vary from institution to institution or customer to customer, or even from transaction to transaction. The best solution, therefore, appears to be for an individual bank to charge fees in the light of its own knowledge of the relation of its costs to its earnings on NOW accounts. The NOW account may become the vehicle for wholesale conversion of checking accounts to NOW accounts unless some limitation is imposed upon the use of NOW transfers. The Board has therefore set a twelve month limit of 150 such transfers per account. The NOW account should be of particular benefit to that segment of the public that does not maintain checking accounts, and, therefore, does not make large numbers of payments in some form other than currency. The limit of 150 transfers per year, consequently, seems appropriate at the outset to serve that segment of the public that the Board expects will derive the primary benefit from the NOW account.  A copy of the Board's order in this matter is attached. - 0 -  tiTLE 12--BANKS AND  BANKING  CHAPTER II--FEDERAL RESERVE SYSTEM [REG. Q] PART 217--INTEREST ON DEPOSITS Negotiable Orders of Withdrawal  On September 14, 1973, the Board of Governors invited public comment on a Statement of Proposed Policies to regulate the use of interest-bearing accounts from which a depositor is allowed to make transfers of funds by negotiable orders of withdrawal (NOWs).  Section 2(a) of  P.L. 93-100 permits NOWs to be made only in the States of Massachusetts and New Hampshire.  After consideration of all comments received and after  consulting with the Federal Deposit Insurance Corporation, the Federal Home Loan Bank Board and the Comptroller of the Currency, the Board has amended its Regulation Q so as to prescribe rules governing the use of NOWs within Massachusetts and New Hampshire.  Pursuant to P.L. 93-100  and the Board's authority under section 19 of the Federal Reserve Act to prescribe rules governing the payment of interest on deposits, the amendment treats deposits on which NOWs may be drawn as savings deposits and thereby limits use of NOWs to individuals and certain non-profit organizations. The maximum rate of interest that may be paid on NOW accounts is 5 per cent, the maximum rate currently prescribed for savings deposits in member banks. The amendment limits the number of NOWs that may be accepted by a member bank from a customer to 150 per year.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  In addition, consistent  -2-  with the Congressional intention that the use of NOWs be confined to the States of Massachusetts and New Hampshire, the Board has amended the advertising provisions of Regulation Q to restrict the advertisement, announcement and solicitation of NOWs by member banks to media directed toward residents of Massachusetts and New Hampshire.  The Board's  intention in imposing these advertising limitations is to confine the use of NOWs to persons residing or employed in those two states and to current customers of member banks in those states. The effective date of these amendments was deferred for less than the 30-day period referred to in Title 5, United States Code, section 553(d), because the Board found that the public interest compelled it to make the action effective no later than the date adopted.  See § 262.2(e)  of the Board's Rules of Procedure (12 CFR 262.2(e)). Effective January 1, 1974, the Board's Regulation Q (12 CFR 217) is amended in the following respects: 1.  § 217.1 is amended by adding a new subparagraph (3) to para-  graph (e) of that section to read as follows: § 217.1  Definitions.  (e)  Savings Deposits.  (3)  In those states where banks are permitted to offer deposits  subject to negotiable orders of withdrawal, such deposits may be maintained   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  only by individuals and organizations permitted to maintain savings deposits under subparagraph (1) of this paragraph. 2.  § 217.5 is amended by amending paragraph (c) of that section  to read as follows: § 217.5  Withdrawal of Savings Deposits.  (c)  Manner of payment of savings deposits.  (1)  Subject to the provisions of subparagraphs (2) and (3) of  this paragraph, *  (3)  The provisions of this paragraph do not apply to de-  posits subject to negotiable orders of withdrawal authorized by Federal law to be issued in the states of Massachusetts and New Hampshire which shall be subject to the limitation that no member bank may accept more than 150 negotiable orders of withdrawal during any calendar year on any deposit subject to such orders. (4)  Where a savings deposit is evidenced by a passbook, every  withdrawal made upon presentation of the passbook shall be entered in the passbook at the time of withdrawal, and every other withdrawal for such a deposit shall be entered in the passbook as soon as practicable after withdrawal is made. 3. follows:   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  § 217.6 is amended by adding a new paragraph (i) to read as  -4 , r  217.6  Advertising of interest  (i)  on deposits.  Negotiable Orders of Withdrawal.  In addition to compliance  with the other paragraphs of this section, member banks offering accounts subject to negotiable orders of withdrawal, to the extent practicable, shall limit every advertisement, announcement or solicitation made in any newspaper, magazine, radio, television or other media to such facilities directed toward residents of New Hampshire and Massachusetts.  All other  advertisements, announcements and solicitations of such accounts, including direct mailing, circulars, and notices, whether written or oral, to the extent practicable, shall be directed only to persons residing or employed in New Hampshire and Massachusetts and to persons who are customers of member banks in those states on the effective date of this amendment. 4.  § 217.7 is amended by amending paragraph (c) to read as  follows: § 217.7  Maximum rates of interest payable by member banks on time and  savings deposits.  (c)  Savings deposits.  No member bank shall pay interest at  a rate in excess of 5 per cent on any savings deposit including savings deposits that are subject to negotiable orders of withdrawal, the issuance of which is authorized by Federal law. By Order of the Board of Governors, effective January 1, 1974.  (Signed)  Chester B. Feldberg Chester B. Feldberg Secretary of the Board  [SEAL]   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  MR. RIPPEY AGENDA (DATE) NM/ FOR INFORMATION PRIOR TO CONSIDERATION AT A BOARD MEETING  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  10 Str.  BOARD OF GOVERNORS OF THE  FEDERAL RESERVE SYSTEM  Office Correspondence To  Board of Governors  From  Division of Research and Statistics (Messrs. Ettin and Krabill), Legal Division (Mr. Raiken), and Division of Federal Reserve Bank Operations (Mr. Kudlinski)   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Date  November 16, 1973  Analysis and Staff Recommendations on Regulatory Action on NOW Accounts in Massachusetts and New Hampshire  Subject:  On September 14, 1973, following enactment of enabling legislation, the Board published for comment its proposed rules for the regulation of Negotiable Orders of Withdrawal (NOW's) for member commercial banks (CB's) in Massachusetts and New Hampshire. The FDIC and FHLBB published for comment similar rules Srnoeb CB's, all mutual savings banks (MSB's), and savings and loan associations (S&L's). summary of comments has  The comment period has ended and a  already been sent to the Board.  This memorandum provides a general analysis of the cSi ents and possible regulatory actions that the Board may wish to consider prior to  tsSscussons with the Inter-Agency  Coordinating Committee.  The legal opinions presented in this  memorandum should be considered preliminary.  If further legal  research suggests different conclusions from those contained herein, they will be communicated to the Board from the Legal Division. Review of comments and dicussions with staff of the FHLBB and the FDIC suggest that there are conflicts between two regulatory philosophies in regard to the NOW issue.  1/  "Summary Comments on the Board's Statement of Proposed Policies with Respect to NOW Accounts," November 13, 1973.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Board of Governors  - 2  At one extreme is the proposal for minimal regulation, with the agencies essentially setting only an interest rate ceiling and ownership limitations.  This approach has been endorsed by the  thrift institutions, the FHLBB, and at least the staff of the FDIC; it is also the position of several members of the Congress, particularly Senators Brooke and McIntyre.  The proponents of this view  suggest that only by a relatively unfettered market test can the NOW experiment ordered by Congress truly take place.  If, accord-  ing to this argument, difficulties develop--particularly involving solvency and profitability of either individual institutions or classes of institutions--more restrictive regulations can then be adopted. At the other extreme is a regulatory philosophy calling for maximum safeguards initially, with the agencies placing item limitations and mandatory service changes on NOW account transfers. The objective of this approach is to minimize at the outset any risk of financial structure distortions or institutional difficulties. Proponents argue that regulations could be made less restrictive over time if no problems, in fact, develop.  This philosophical  approach is inherent in the proposed rules published for comment by the Board, the FDIC, and the FHLBB, although there were no specific indications contained in the proposed rules that the regulations might be relaxed at some future date.  CB's prefer   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  - 3  Board of Governors  imposition of initial safeguards, but have not indicated support for their eventual relaxation.  Opponents argue that the "prior  safeguard" approach will "artificially structure" NOW accounts and thus will not produce a true experiment as legislated by the Congress. Board staff  along with the staff of the FDIC and FHLBB,  has a preference for the minimal regulatory philosophy, but believes that if such an approach is promulgated by the three Federal supervisory agencies, institutions should be put on notice that the experiment is being closely monitored and that additional regulations may be imposed should disruptions in financial flows or abuses become evident.  The staff has developed the basis for  such a monitoring system, which has been endorsed by all interested agencies, to be administered by the Boston Federal Reserve Bank. This monitoring system is described more fully in the attached memorandum from the Boston Bank to the Board. It should be noted that if the Board adopts the more severe regulatory posture, such an approach would probably be opposed by the other agencies, criticized by certain members of the Congress, and possibly challenged in the courts by the savings banks in the two states. In framing its recommendations, Board staff was guided not only by its preference for the minimal regulatory philosophy but also by the following principles and assumptions:   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Board of Governors  1.  - 4  The impact of regulation should be as equal as possible among institutions.  2.  Public benefit and the desirability of interinstitutional competition should be tempered by the need to maintain the solvency and profitability of financial institutions during a period of change.  3.  Congressional intent was to provide for a meaningful experiment.  4.  The regulations should be clearly consistent with statutory limitations on the authority of the Board, the FDIC, and the FHLBB.  As will be noted below, on certain issues it is not possible to satisfy all of these objectives. Section I below summarizes the staff's recommendations. Section II sets forth the analysis leading to these recommendations on issues contained in the Board's proposed rules announced September 14. Section III presents the analysis underlying recommendations regarding issues not addressed in the Board's proposed rules. I.  SUMMARY OF STAFF RECOMMENDATIONS  1.  NOW accounts should be defined as savings accounts for all institutions, applying commercial bank definitions. This means that ownership would   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Board of Governors  - 5  be limited to natural persons, certain nonprofit institutions, and trustees and fiS uciaries. 2.  NOW accounts should be limited to residents .j.chusetts and New Hampshire a_aatal__ af .jials depo sitors at institutions in the two states, and persons working in either of the two states.  3.  Interest rate ceilings for NOW accounts should I' identical for all depository institutions, and set at  4.  -I' cent.  No regulatory limitation should be placed on the method of calculating interest, rate ceillings should not distinguish between accounts of different sizes, and minimum balance requirements should not be imposed.  5.  There should not be mandatory service charges or item limitations on NOW accounts.  As an  alternative, the agencies could authorize two alternative types of NOW accounts: a)  a low rate account with no item limitation S r mandatory service charge; and  b)  a higher rate account with a mandatory service charge on each item.  Board of Governors   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  6.  - 6 -  Full clearance facilities should not be made available to thrift institutions.  However,  each NOW-issuing thrift institution should be assigned a unique routing symbol in order that its NOW drafts may be cleared through the Federal Reserve System without carrying the name of a correspondent commercial bank.  Two  possible approaches for the interface between thrift insitutions and the Federal Reserve clearing system are discussed in this memorandum. 7.  All depository institutions offering NOW's should be subject to the same restrictions regarding advertising.  The rules regarding  advertising of interest rates on time and savings deposits should be made applicable to NOW accounts, and the words "demand deposits" and "payable on demand" should be banned in all advertising of NOW accounts. 8.  Depository institutions should be allowed to. offer overdraft privileges in combination with NOW accounts, so long as such overdrafts do not involve automatic transfers from other accounts.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Board of Governors  II.  - 7  STAFF ANALYSIS OF THE BOARD'S PROPOSED RULES  Definition of account The agencies have proposed that NOW accounts be defined as a form of savings deposit account (under commercial bank I-finitions) and, as such, ownership would be limited to individuals, certain nonprofit institutions, and fiduciaries and trustees.  Such a definition would force MSB's in Massachusetts  and New Hampshire to cease offering NOW's to governmental bodies and corporations. CB's strongly oppose NOW accounts for governmental bodies and coporations.  The comments received from MSB's were  generally silent on this issue, even though State law now permits them to offer savings accounts to such holders.  Thus, particularly  since the amounts involved are small, it seems likely that MSB's would not actively resist such a restriction.  Discussion with  representatives of these institutions, on their recent visit to theBoard, supports this view. However, CB's want to limit NOW's to individuals and nonprofit institutions, i.e., excluding not only ail governmental entities and corporate accounts, but also accounts of fiduciaries and trustees.  Their position appears to the staff to be an attempt  to maintain the fiduciary market as a captive of commercial banking,to force trustees and fiduciaries to hold their transactions balances only in the form of demand deposits.  Trustees  Board of Governors  - 8  and fiduciaries for individuals now may hold savings accounts at CB's and such accounts are apparently currently held in significant volume in NOW form at MSB's.  Obviously, MSB's want to maintain  the right to offer NOW's to fiduciaries and trustees. The legislative history of the bill authorizing NOW's in Massachusetts and New Hampshire suggests that NOW's be limited to individuals at all offering institutions.  However, classification  of NOW's as savings accounts, which would permit NOW's to be held by certain nonprofit institutions, with the legislative history.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  does not appear inconsistent  Inclusion of trustees and fiduciaries  for individuals in the group permitted to hold NOW's would also be consistent with current interpretations for permissible holding of savings accounts at CB's. The staff recommends that the Board define NOW's as savings accounts, which may be held by natural persons, certain nonprofit institutions, and trustees and fiduciaries.  Board staff  has been informed by the staff of the FDIC and the FHLBB that their agencies would concur in this defintion.  It should be noted that  the Board could, if it wished, limit NOW accounts to individuals only, or to individuals and certain nonprofit institutions, while still classifying NOWs as savings accounts. Geographical limitation on holders The Board has proposed that NOW account ownership be limited solely to residents of Massachusetts and New Hampshire, except that NOW accounts could be offered by institutions to all their existing customers.  Board of Governors  - 9  Staff of other agencies and comments received assert that imposition of such a limitation would be both unconstitutional and impossible to enforce.  For example, Congressman St. Germain  argues that such a limitation so discriminates against out-of-state residents as to be an "apparent violation" of Article 4, Section 2 2/ of the constitution.—  Aside from the constitutional issue, the  staff sees some difficulty in enforcing meaningful residency restrictions. The geographical limitation stated in the statute authorizing NOW's in Massachusetss and New Hampshire simply refers to the offering institutions in the two states, but it seems imI licit that the intent of Congress was also to limit ownershi of NOW's generally to the two-state area.. The staff of the FHLBB ••••••10.  and FDIC have concluded that the experiment authorized by the Congress can be effectuated by a regulation limng the advertising of NOW's to media primarily serving the two states. It should be noted that such a regulation would not I  rohibit institutions from accepting NOW deposits from nonresidents.  While the staff understands that some institutions are voluntarily limiting their NOW customers to the local market area, the FDIC FHLBB suggestion could cause competitive difficulties for institutions  2/   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Senators Brooke and McIntyre find no difficulty with this aspect of the Board's proposed rule.  Board of Governors  - 10 -  located near the Massachusetts and New Hampshire boundaries in Connecticut, New York, Vermont, Maine, and Rhode Island.  Under  this approach, such institutions would likely lose some funds to their NOW-offering competitors in the two states. The staff feels that the competitive inequity for institutions in contiguous states implicit in a regulation relying on advertising limitations is inconsistent with the experiment required by the Congress. Moreover, the staff is of the judgment that a residency restriction for the purpose of supervising the VIIIYVIEVI••••••••••••*,••  , Eueriment authorized by Congress could be sustained in the courts. 11 • 0 . 111= . 1 11 ... 111411110•••••••••••••••••••14•40.  Thus, even though there are likely to be administrative problems, the staff recommends that the Board limit NOW accounts to residents and present depositors, and would also make nonresidents who are employed in the two states eligible for NOW accounts. Interest rate ceilin  interest rate calculation  number of items  and service charges These four items are so closely related that it seems desirable to consider them together.  Moreover, in the staff's  view, these issues are the most basic to the NOW "experiment." There are several issues to be considered.  First,  the positions taken by CB's and thrift institutions reflects their self-interest.  CB's,with their demand deposit powers, want  to restrict the NOW because it weakens their competitive position.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Board of Governors  - 11 -  Thus they urge severe limitations on their issuance, including low rate ceilings, restrictive methods of interest calculation, item limitations, and mandatory service charges.  Thrift institutions,  S n the other hand, conceiving of NOW's as a vehicle for widening their deposit markets, argue for minimum restrictions. Second, NOW's have a significant potential impact on I rofits of financial institutions. will  If CB's do offer NOW's their costs  rise, which may or may not be covered by additional service  charges.  If CB's IS not offer NOW's, they will lose funds to MSB's  and S&L's. The most vulnerable CB's are the generally small institutions with a large proportion of deposits in consumer demand S.lances, especially in small denominations, and  nU.ssoo  savings accounts; they are most likely to experience shifts from demand and passbook accounts to NOW balances. Unfortunately, the staff has been unable to quantify the degree of potential impact on individual institutions.  The direction  of effect is clear, however, and the impact on profits of some institutions could be substantial.  Indeed, when CB's begin to  offer NOW's, it is possible that in the short-run free market forces would cause reductions ofservice charges, perhaps to zero, affecting the profits of all offering institutions.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  hS wever  In the long-run,  the staff_ expects that market forces will require the  imposition of service charges or the reduction in offering rates on NOW's.  Board of Governors  - 12 -  Finally, there are legal issues.  MSB's and Senators  Brooke and McIntyre../ have taken the position that the enabling Congressional legislation permits the FDIC to establish maximum interest rates on NOW accounts at state-insured MSB's in Massachusetts and New Hampshire, but does not permit the FDIC to impose on such institutions any item limitations, service charges, minimum balance requirements, or restrictions on the method of interest calculation. The necessity of competitive equality, a required ingredient of any "experiment," suggests that if this is the case it would be difficult for the Board, the FHLBB, and the FDIC to exercise their authority to impose such limitations on Federally insured institutions.  However, staff of the FDIC  has expressed the preliminary judgment that their agency in fact has the power to impose such restrictions on State-insured MSB's. The issues discussed above are an integral part of the Board's proposed rules,which suggested three alternatives that were under consideration. A.  1.  4-1/2 per cent ceiling.  2.  Payment of interest on minimum (or average) balance.  3/   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  The two Senators requested ". . . that the Committee be supplied with a copy of any proposed regulations at least two weeks prior to their implementation."   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  - 13 -  Board of Governors  3.  No mandatory service charges on the first 10 items.  4.  Required service charges, amount not inIicated, on any items inexcess of 10 per month. per cent ceiling, but if interest is to be paid: a)  the number of items per month cannot exceed 15, and  b)  the minimum (or average daily) balance must exceed $400.  2.  No mandatory service charges on item transfers, but no interest can be paid if there is an excess of 15 items per month. a modcation of (B), a lower rate ceiling (unspeced) on the first $400 in the account and a higher rate ceiling (4-1/2 per cent) on the balance above $400.  2.  Required per-item service charges, amount nSt indicated, on items in excess of 15 per month.  Board of Governors  - 14 -  Interest Rate Ceilings.  Most MSB's were opposed to all  of the rate limitation proposals by the Board.  They felt that the  rate ceilings now authorized for savings accounts at all institutions should be carried over to NOW accounts; this would imply not only a higher rate ceiling than the Board proposed, but extension of the present one-quarter point rate differential on savings accounts between CB's and thrift institutions to NOW accounts (5 per cent for CB's and 5-1/4 per cent for thrift institutions). CB's, on the other hand, generally felt the NOW ceiling should be identical for all institutions and lower than their own passbook rate ceiling.  The 4-1/2 per cent ceiling was generally acceptable  to the CB's. If the Board believes that uniform regulatory limitations among all offering institutions are desirable, then the rate ceiling for CB's and thrift institutions should be the same.  It can  also be argued that, with NOW's, thrift institutions are in a position to offer CB-type services and thus there is less reason to permit a rate advantage with respect to NOW accounts.  Thus,  the staff of the Board, the FDIC, and the FHLBB recommend that rate ceilings on NOW's should be the same for all institutions.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Some members of Congress and MSB's have argued that the proposed 4-1/2 per cent rate ceiling is too low.  However, if the  Board wants NOW rate parity among institutions, setting the ceiling as high as 5 per cent would cause informed consumers to shift  - 15 -  Board of Governors  from CB passbook accounts to NOW's.  To do so would provide the  consumer the same return and also provide the ability to draw the Board would -14ama authoriz  negotiable drafts.  Iwo  the anomaly of two accounts with the same rate ceilings   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  one of  which has transfer privileges. Thus, the staff recommends that the NOW rate ceiling be set at 4-1/2 per cent. Method of rate calculation.  There are many ways by  which a depository institution could calculate the interest return of NOW's, given an interest rate ceiling.  The regulatory  agencies heretofore have not generally imposed rules regarding the method of calculation, other than requiring full disclosure to the public.  The Board's proposed rules on NOW's, however,  have indicated that it was considering, among other alternatives, limiting payment of interest to minimum balances or imposing a split rate ceiling, with different ceilings applying to different amS unts in the same account. The effect of such limitations on interest rate calculations is to reduce the attractiveness of NOW's as a vehicle for transferring funds.  As such, the use of NOW's--particularly  by holders of small balances--could be effectively limited.  I  - 16 -  Board of Governors  As might be expected, MSB's were opposed to such restriction; while CB's were generally favorably disposed.-11/  Some comments  noted that limitations on the method of calculation of interest were anti-consumer; were difficult to market, administer, compute, and understand; were arbitrary; and were discriminatory against small depositors.  More generally, such limitations, it was  asserted, would so alter the character of NOW's so as to destroy their attractiveness to all but the large balance depositors. In sum, restrictions on the method of calculation of interest could be highly effective in limiting shifts of funds from CB's to MSB's and S&L's.  However, the effect of such con-  straints falls disproportionately on the smaller depositors and would, therefore, subject the Board to criticism.  As a result,  the staff recommends that the final rules adopted by the Board remain silent on the method of interest rate calculation and that there be no difference in rate ceilings by size of account. Item Limitations and Service Charges.  The three  alternative rules ccntained in the Board's proposals all require that for items above a specified number the issuing institution must impose service charges.  Many MSB's, which now impose  service charges, oppose mandatory service charges as an intrusion  4/ However, even the CB's recommended that institutions be given some option in their interest rate calculations since small noncomputerized institutions might have some difficulty in calculating interest in a way different than their existing method.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  S.  Board of Governors  - 17 -  into management policies.  However, these institutions appeared  ailLiag—ta—accept the concept   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  f mandatory service char es if  item limitations were eliminated. Board's rules acceptable.  CB's generally found that  Several CB's proposed alternative  item limitations (5, 10, or 15), and expressed a desire for mandatory service charges on all items.  The staffs of the  FDIC and FHLBB oppose required service charges and item limitations. Consistent with its preference for initial promulgation of minimal regulation, the staff recommends that the Board's final rules contain no restriction on the number of items and no required service charges.  However, the staff would also recommend that  the Board clearly indicate to all interested parties that the agencies will be monitoring developments and that abuses or distortions could lead to adoption of mandatory service charges and/or item limitations. Should the Board decide to impose service charges and/ or item limitations at the outset, it may wish to consider permitting the issuing institutions some options.  Currently, New  Hampshire MSB's offer a lower interest rate account (3 per cent) with no service charge or item limitation, while in Massachusetts the MSB's generally offer a higher rate account (5-1/4 per cent) with no item limitation but a 15 cent per item charge.. 1/ 5/  Consistent  At least two MSB's in Massachusetts are now offering 5-1/4 per cent NOW's with no service charges or item limitation. We are informed that these two institutions needed cash badly and opted to attract funds in this way, believing that regulations would shortly force them to reimpose service charges.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Board of Governors  -18-  with these differences, the Board could adopt a regulation permitting institutions the option to offer one or both of the following: Now Account A-- 1) rate ceiling of 3 per cent 2) no item limitation 3) no mandatory service charges Now Account B  1) rate ceiling of 4-1/2 per cent 2) no item limitation 3) mandatory service charge on each item  The trade associations for MSB's in both states have suggested similar alternatives, except that the rate ceiling on NOW Account B under their proposal would be the same for each institution as its own ceiling on passbook accounts. Option A would permit an account closer to a demand balance and would leave to long-run market forces what service charge the issuing institution would adopt.  Option B would permit an account  closer to a savings account, and limit both the active use of the account and the profit impact on the issuing institutions by requiring service charges.  By providing options, the issuing institutions  would have greater freedom to select a marketing strategy, and thus a fuller experiment on the use of the NOW account is allowed for.  Neither of these options would, however, be as beneficial  tS the public as are the Massachusetts NOW's currently.  And conse-  quently, neither would be acceptable to those members of Congress who feel that Congress wanted essentially no limitations on NOW accSunts.  Board of Governors   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -19-  If the Board finds the two-account approach undesirable, but wants to impose mandatory service charges and/or item limitations on NOW accounts, there are several issues that should be cS nsidered. A mandatory service charge on all items would indirectly limit account activity, would directly diminish the profit impact of NOW's on financial institutions, and was resisted least by the MSB's.  However, if the Board adopts this approach, it would be  intruding into an area that has traditionally been considered a management function. An item limitation would directly limit activity in each NOW account, but could be easily evaded through multiple accounts would be dcult to enforce, and the regulation would have to allSw for delays between the writing of a check and presentment for payment.  In addition, such a limitation would not directly  cushiS n the profit impact of NOW's on issuing institutions. A combination of a mandatory service charge on all items and an item limitation would directly limit both the profit squeeze and account activity, but would be regarded by some as over-regulation.  The approach proposed in the Board's September 14  release, an item limitation above which an unspeced service charge must be levied on each item, was misunderstood by many as   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -20-  Board of Governors  effectively prohibiting service charges up to the item limit. And, it is conceivable that such a regulation would, in fact, make it competitively difficult for any institution to impose service charges on the base number of items. If the Board elects to impose a limiting restriction, the staff prefers a required service charge rather than 4D_Item limitation.  Such an approach would directly minimize any profit squeeze  on financial institutions, which could potentially be a significant problem in the short run; is simple enough to be easily understood; and would be relatively easy to enforce. Federal Reserve Check Collection System. The issue that elicited the most voluminous and vehement criticism from commercial banks and Federal Reserve Banks concerned the Board's proposed rule regarding "full use" of the Federal Reserve check collection system.  The proposed rule would allow  NOW -issuing thrift institutions that agree to keep 3 per cent of their NOW account balances on deposit in a clearing account at the Federal Reserve Bank full use of the Federal Reserve check collection system.  This proposal reflected the Board's desire to link what,  in effect, ar p v of nonmember  untary reserve requirements on NOW account deposits  stitutions to "full use" of the Federal Reserve  check collection system. Objections to this proposal may be summarized as follows: 1.  The proposed rule is unfair to nonmember commercial banks since this alternative is not available to them.  Board of Governors   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -21-  That is, a nonmember commercial bank cannot deposit inter-zone checks directly with the Federal Reserve, and cannot, under present policies, hold a clearing balance at a Federal Reserve Bank. 2.  Thrift institutions would receive the bulk of the benefits of membership without paying anything like the full cost (i.e., putting up reserves on all their deposits).  Many  member banks emphasized that the Board's proposed rule was not in keeping with Governor Mitchell's testimony on NOW's emphasizing the importance of equity among institutions with regard to reserve requirements, uniformity of taxation, and equality of regulatory supervision. 3.  Commercial banks stated that access to clearing facilities by thrift institutions should be adopted only as part of a Hunt Commission package.  4.  From a legal point of view, there is some question regarding the authority of the Federal Reserve to offer clearance facilities to S&L's.  MSB's  have traditionally been regarded as "nonmember   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Board of Governors  -22-  banks" and, since they may join the Federal Reserve System if they wish, it is believed that they could be authorized to clear through the Fed if this regulation were adopted; however, there is more doubt as to the Board's present authority to offer its clearing facilities to S&L's. 5.  Commercial banks may lose correspondent balances of thrift institutions, a factor which would affect profitability of these banks and, consequently, aggravate the membership problem.  6.  On any given day the clearings chargeable to a NOW issuing institution's 3 per cent clearing account could exceed the dollar amount of that account, which would result in an administrative problem of resolving an overdraft at the Federal Reserve Bank.  7.  The Bank Commissioners in the two states believe that reserve requirements on nonmember institutions should be left to the states.  8.  Federal Reserve Banks noted that the proposed rule would substantially increase F.R. check collection costs.  NOW drafts are presently processed as "payable through" items, i.e., the holder of a NOW draft--such as a Federal Reserve Bank--  Board of Governors  -23-  presents it to a specified commercial bank for payment.  The names  of both the MSB and the paying commercial bank now appear on the face of the item.  The Boston FRB argues that, since NOW drafts  of nonmember commercial banks will be presented directly to those banks for payment by the Boston FRB, the Congressional legislation authorizing_MHIs and the uniform commercial code imply that the FRB must also offer direct presentment of NOW drafts-to S&L' —  and  442,  "Direct presentment" would mean that the NUJ drafts  of thrift institutions would no longer have to be presented to a CB for payment, although the thrift institutions would pay the Boston FRB through a member bank.  Such direct presentment to thrift  institutions implies the assignment of unique ABA transit numbers to these institutions. The Board staff concurs with the Boston FRB that steps should be taken to permit thrift institutions to eliminate the name of a CB from the face of its NOW drafts.  And the Board staff, like  the Boston FRB, agrees that thrift institutions should not be permitted to deposit cash items directly with the FRB for collection  6/ The Richmond FRB Branch in Baltimore since 1969 has made direct presentment of checks to issuing MSB's. 7/ The Boston FRB estimates its cost as $160,000 for such direct presentment. This estimate is crude and costs could be as low as $80,000 or as high as $240,000.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  3Lr  o fie#8  •  4. Board of Governors  -24-  (although they can continue to deposit such items through member correspondent banks).  But, the Board staff is unable to make a  unanimous recommendation on the presentment for payment by , Federal Reserve offices of NOW items drawn on thrift institutions. The Division of Resear  h  lan  losffosed by the Boston Federal Reserve Bank--viz, direct presentment of NOW drafts to thrift institutions, with payment of cash letters by thrift institutions through member correspondents.  The Research  and Statistics Division feels that this approach will place all NOW-offering institutions on an equal footing, treating nonmember CB's and thrift institutions in the two states in identical fashion with respect to NOW drafts presentments.  Thrift institutions,  however, would still have to deposit cash items for collection through a member bank correspondent. The Division of Federal Reserve Bank Operations believes that the least expensive, least disruptive, and easiest 2E2221.1. 1 ._ to implement present NOW items 2722E1 12S121I112114101EtatEve drawn on thrift institutions to correspondent member banks for -•,  payment, but that thrift institutions be assigned ABA transit numbers to be printed directly on the NOW drafts.  The transit  •  number would mean that the thrift institution need not place the name of its paying correspondent commercial bank on the NOW draft. While thrift institutions may object to these proposals because nonmember commercial banks do receive direct presentment,_ ---_---------   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Board of Governors  -25-  at least this approach eliminates the name of the paying CB from the face of the NOW draft. change corre  III  -  Indeed, thrift institutions could easily  ts without reprinting NOW drafts  transit number sta s the same.  since the ABA  This approach also is less costly  since it involves a small one-time expense for the Federal Reserve to modify its check sorting program, does not increase transportation expenses, and may permit the consolidation of FR sorts to large correspondents.  The maximum flexibility inherent in the  assignment of unique numbers affords the System the capability to modify regulations as a result of the experiment with minimum cost to the System, CB's, MSB's, and S&L's.  The concept also allows  an experimental environment with minimum disruption to the existing check collection system. The legal staff of the Boston FRB argues that the approach •••umme......••••••••••••••mar • ,  recommended by the Division of Federal Reserve Bank Operations is unacceptable.  As noted earlier they argue that Congressional action )  on NOW's and the uniform commercial code require  direct presentment  Sf NOW items to thrift institutions if the Federal Reserve providu_ Iirect presentment of NOW items to nonmember CB's; the latter is required  accordin  o the Boston Bank  b  Regulation J.  At this writing, these legal issues have not been clared. The System Steering Committee on Improving the Payments Mechanism is considering the matter of thrift institution access  C .   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -26-  Board of Governors  to and participation in the Federal Reserve payments mechanism services including automated clearing houses, point-of-sale, and wire transfer.  In view of the precedent-setting implications  of thrift institution access to Federal Reserve services, it is ••••ar•mamsamM••••ImVnMm..ili•nr  recommended that any action on the proposed rules that would result 4.01101111M1•11......  in access to the Federal Reserve check collection system beyond direct presentment await the recommendations of the System Steering Committee.  The next meeting of the Steering Committee is planned  for December 19 in Washington. III.  RECOMMENDATIONS ON ISSUES NOT IN THE BOARD's PROPOSED RULES  The comments received by the Board raised several important issues not covered by the Board's proposed rules announced on September 14, 1973.  This section discusses two of these issues  deemed significant enough for the Board's attention. Advertising The Board's proposed rules were silent on the issue of advertising restrictions.  The Massachusetts Bankers Association  argued that advertising regulation for NOW accounts should ban words such as "demand deposits" and "checks" in reference to NOW accounts, stipulate item limitations (if any), and forbid advertising of compound rates.  No comments received indicated a need to  advertise to the public the fact that all issuers of NOW's could require 30 days notice prior to the payment of a NOW draft.  416,   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Board of Governors  -27-  The staff is of the opinion that a NOW draft is the functiS nal equivalent of a check on a demand deposit--with the exception of the possible 30-day notice--and is identical in appearance.  Thus, the staff sees no reason to restrict the use  of the word "check."  However, the 30-day notice element suggests  that the words "demand deposit" be banned and possibly that the Board may wish to consider imposing a rule that NOW drafts indicate on their face that payment could be delayed 30 days.  Since no restriction is placed on the advertisement  of compound rates on time and savings deposits (although there are rules pertaining to clarity of presentation to the public), the staff sees no reason to adopt a different rule for advertisement of NOW rates from those on other interest-bearing deposits, but urges that the rules adopted by the agencies be uniform. Thus, the staff recommends in advertisements regarding Nab's: 1.  That the words "demand deposit" or "payable on demand" be banned; and  2.  That advertised interest rates be subject to the same rules as is now the case for interest bearing deposits at all Federally-insured institutiSns.  Overdrafts. At least one MNISB in Massachusetts is offering an overdraft privilege on its NOW accounts.  The Massachusetts Bankers  46, Board of Governors  -28-  Association has argued that such overdrafts should be banned because they undermine the thrift character of the NOW account. Present Board rules permit overdrafts on demand accounts if such overdrafts are loans but prohibit automatic transfers from interest-bearing accounts to demand balances to cover overdrafts. Permitting overdrafts on NOW's, if there is no automatic transfer from other deposit accounts, simply facilitates the consumer lending function of the institution.  If automatic transfers from other  accounts to NOW's were permitted,the NOW depositor could earn a higher return on passbook balances that the depositor could view essentially as part of  sIW balance.  The staff feels that the public benefit of the convenience of overdrafts on NOW's cannot be ignored--particularly as part of an experiment.  MSB's can now make consumer loans and hence  have the legal authority to permit overdrafts on NOW's. Federally chartered  sS  However,  which there are only 53 in the two  states, accounting for less than 1 per cent of total deposits of all institutions in Massachusetts and New Hampshire) cannot make cS nsumer loans and hence would not be able to make overdrafts. The staff of the FHLBB feels it likely that its Board would not oppose overdraft arrangements for MSB's and On balance, the staff recommends that overdrafts on NOW's be permitted, provided that there are no automatic transfers from any other deposit account.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  1111111/  Attachment A TO:  Board of Governors  FROM:  Boston Federal Reserve Bank (Messers Eisenmenger and White)  SUBJECT:  NOW Monitoring System  As you know, on August 16, 1973, the Congress authorized all depository institutions (except credit unions) in the states of Massachusetts and New Hampshire to offer interest-bearing deposits withdrawals by negotiable orders (NOW's). This legislation left it up to the Board of Governors, the Federal Deposit Insurance Corporation and the Federal Home Loan Bank Board to adopt a coordinated set of regulations for NOW accounts in Massachusetts and New Hampshire.  Proposed regulations were released by  the agencies on September 14, with comments due by November 1.  When  final regulations are adopted, all depository institutions (except credit unions) in the two states will be able to offer NOW's. It will be very important for the system to obtain data on these accounts for two reason: 1)  Movements from demand deposits to NOW's will affect M 1  and movements from time and savings deposits at commercial banks to NOW's at thrift institutions will affect M2.  Thus, for the Board and the  FOMC to interpret movements in these key aggregates, data must be available on shifts to, and growth in, NOW account balances. 2)  The Congress considers the authorization of NOW accounts  in the two states as an experiment.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  As such, the Federal agencies must  *4. -A2-  monitor developments in order to report to the Congress. Since 1972, the Massachusetts Mutual Savings Central Fund and the New Hampshire Savings Bank Trade Association have collected NOW acount data.  We have approached these groups, the Federal Home  Loan Bank of Boston, the  Boston Office of the Federal Deposit In-  surance Corporation, and the Massachusetts Cooperative Central Fund to suggest that the Federal Reserve Bank of Boston be the central collecting agency for NOW data. posal.  All of these groups have agreed with this pro-  In addition, we have been informed by the respective local  offices that Chairman  Wille (FDIC) and Chairman Bomar (FHLBB) have  agreed to the proposal. Under the plan, we will collect data at the end of each month from all institutions offering NOW s. We will process the data, provide aggregates by type of institution and by state to all interested parties and also provide micro data to the agencies responsible for specific types of institutions.  Intial contacts will be made by the respective  agencies involved, but data will be submitted directly to this Bank. Until final regulations are adopted, it is impossible to design a specc form.  However, we expect the form will cover the  following:   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  1)  Balances in NOW accounts at the end of the month.  2)  Number of NOW accounts at the end of the month.  3)  Source of NOW accounts (new accounts, transfers from demand balances, transfers from time and savings accounts)  -A3-  4)  Number of items cleared during the month.  5)  Rate paid on NOW balances  6) Service charge per item (if any). It is also impossible to determine the number of respondents since it is not yet clear how many institutions will offer NOW accounts. The maximum number of reporters will be: Type of Institution  Massachusetts  New Hampshire  Total  Member Commercial Banks  92  50  142  Nonmember Commercial Banks  56  28  84  167  30  197  35  23  58  Cooperative Banks  144  0  144  Total  494  131  625  Mutual Savings Banks Savings and Loan Associations  Presently, 76 Mutual Savings Banks (62 in Massachusetts and 14 in New Hampshire) are offering NOW's. We have been informed that Budget Bureau approval is necessary. It is our understanding that the Board staff has approached OMB to obtain approval in principle.  As soon as final regulations are adopted,  we will prepare a report form with instructions and forward tS the appropriate parties.  tSr comments  Hopefully, we can begin collecting data at  the end of the first full month after the regulations are final.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  ,  MR. RIPPEY  FOR INFORMATION PRIOR TO CONSIDERATION AT A BOARD MEETING  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  BOARD OF GOVERNORS OF THE  FEDERAL RESERVE SYSTEM  Office Correspondence To  Board of Governors  From  David C. Melnicoff  Date  November 13, 1973  Subject:  Summary Comments on the Board's Statement of Proposed Policies with Respect to NOW Accounts  ,  The attached memorandum summarizes comments received to date on proposed NOW Account regulations.  A staff memorandum presenting  alternative courses of action and a recommendation is in process of preparation and will be available early next week.  In all likelihood  the members of the Coordinating Committee will want to consider definitive regulations before the end of November. NOW Account regulations have been tentatively scheduled for Board discussion on November 15.  Additional discussion, prior to  Coordinating Committee conversations, will probably be scheduled shortly thereafter.  Attachment   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  TO: FROM:   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  DATE:  Board of Governors  SUBJECT: Summary of Comments on the Board's Statement of Proposed Policies with Respect to NOW Accounts.  Legal Division (A 0 L. Raiken) Divn of Research and Statistics (D. Krabill, J. Decker)  ACTION REQUESTED:  None.  November 12, 1973  This memo is a summary of the comments  received in response to Board publication of proposals relating to Negotiable Orders of Withdrawal (Nails), dated September 14, 1973 (Attachment).  This surrmiary has been prepared to assist the Board in  its consideration of regulations on NOWs as authorized in Massachusetts and New Hampshire by P.L. Confluents Received:  93-100.  Approximately 170 confluents have been received on  the subject proposals as of November 8, 1973. from four groups:  (1)  Comments were received  Commercial banks and bankers associations in  Massachusetts and New Hampshire (19 coufluents); (2)  Thrift institutions  and their associations in Massachusetts and New Hampshire (27 comments); (3)  Cormnercial banks located outside of Massachusetts and New  Hampshire (99 comments); and (4)  other interested groups and persons  including national associations, Federal Reserve banks, state supervisory authorities, and United States Congressmen and Senators (24 1/ comments).  111 INDEx  To Comments: MASSACHUSETTS AND NEW HAMPSHIRE COMMERCIAL BANKS I MASSACHUSETTS AND NEW HAMPSHIRE THRIFT INSTITUTIONS. II III COMMERCIAL BANKS OUTSIDE MASSACHUSETTS AND NEW HAMPSHIRE NATIONAL ASSOCIATIONS IV FEDERAL RESERVE BANKS V STATE SUPERVISORY AUTHORITIES VI VII U.S. CONGRESSMEN AND SENATORS  Page: 2 6 10 14 17 21 22  •   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Jr  -2-  I.  COMMERCIAL BANKS AND ASSOCIATIONS IN MASSACHUSETTS AND NEW HAMPSHIRE General Statement The Massachusetts Bankers Association (MBA), the New Hampshire  Bankers Association (NHBA), and bankers in those two states stress the need for uniformity in whatever regulations may be adopted.  The MBA  and several banks discussed the potential impact on bank profits and loan rates, and the need to limit the profit impact of NOW's.  Several  banks commented that NOW accounts will further aggrevate the competitive imbalance in favor of thrift institutions and believe that NOW accounts should be accompanied by reforms such as those recommended by the Hunt Commission.  The MBA and almost all the banks oppose  the  proposal to grant thrifts direct access to the System's collection facilities on the establishment of a 3 percent clearing balance. A.  Nature of NOW Account--Depositor Eligibility--The MBA and some  Massachusetts banks favor the Board's proposal to limit NOW's to natural persons and certain nonprofit organizations.  The NHBA and  other banks in the two states recommend limiting NOWs to natural persons.  No banks recommend allowing trustee and fiduciary deposits,  and the MBA and some banks recommend that the regulation disqualify 2/ them explicitly. Those banks which commented oppose any grand fathering of existing NOW accounts for depositors not otherwise eligible under the regulations.  2/ One letter received from a trust custodian urged inclusion of fiduiciary accounts in the group authorized to maintain NOW accounts.  •   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Commercial Banks and Associations in Massachusetts and New Hampshire (Con't.)  -3-  Two banks recommend broadening the authority of banks to accept savings accounts as part of the regulation on NOWs.  One bank  recommends allowing corporate savings accounts in banks and elimination of the differential in interest ceilings.  Another bank  recommends allowing corporate savings accounts up to $50,000 or $100,000. B.  Residence Requirement--The MBA and those banks which commented  on this proposal would not limit NOWs to residents of the two states. The MBA and one bank would permit NOWs for persons living outside Massachusetts and New Hampshire who work in the two states. banks oppose any geographic restrictions.  Two other  One bank favors the limi-  tation of advertising to the two state area as an alternative to geographic restrictions. C.  Basis for Computation of Interest --Both the MBA and NHBA  favor a minimum balance requirement.  The NHBA would not allow  interest to be paid below that minimum, while the MBA favors the split rate proposal.  Most Massachusetts and New Hampshire commercial  banks generally favor some form of the limitation on the manner in which interest would be apid on NOW accounts, and propose limitations similar to those proposed by the Board (minimum balance or average balance, required minimum balance, or split interest).  Two banks  oppose regulation in this area, the Merchants National Bank of  •   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Commercial Banks and Associations in Massachusetts and New Hampshire (Con't.)  -4  Manchester, New Hampshire, stating that such restrictions are "objectionable both from an administrative and a marketing standpoint." Imposition of mandatory item charges and item limitations were viewed by some banks as effective alternatives to the minimum or average balance proposals. D,  Item Limitation and Service Charge Proposals--The NHBA favors  mandatory service charges on all NOW instruments,  The MBA considers  restrictions in this area to be highly important and recommends an item limitation of 10 items per month, a mandatory service charge equal to 15 cents for the first ten items, and a penalty charge of 75 3/ cents for items in excess of 10.— Banks in the two states generally favor either a fixed item limitation, a mandatory service charge, or both.  The Shawmut Association supports a mandatory service charge on  all items, stating that "the history of free checking in the Massachusetts market confirms the fact that totally free checking will be offered inunediately up to the limit possible," and that such mandatory charges would inhibit "misleading promotion as free checking.1!  One bank, however, the Manchester Bank, opposes the Board's  proposals in this area and those regarding the computation of interest  3/ The MBA has considered the Board's legal authority to impose conditions on the use of NOW accounts and has concluded that in view of "the broad inherent authority contained in earlier acts [and the] absence of any clear legislative intent in the 1973 Act, the Agencies have ample authority to apply such conditions to the use of NOW accounts as they see fit; and to structure them accordingly,  •   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Commercial Banks and Associations in Massachusetts and New Hampshire (Con't.)  -5  as anti-consumer, complicated, and leading "the FDIC and FRS into the establishing of pricing of bank services which would be a dangerous and unwarranted precedent:1 Interest Rate Ceiling--The MBA, NHBA, and the commercial banks  E.  in Massachusetts and New Hampshire strongly urge that interest ceilings be equal on NOW accounts for all institutions.  The MBA finds  the 41 / 2 percent rate "prudent" only if it is assured that an absolute item limitation will be imposed and an adequate service charge will be fixed.  The majority of the banks colunte nting favor the  percent  I roposal, although rates proposed range from 3 to 5 percent. Fu  Full Thrift Access to System Collection Facilities--This  P roposal was vigorously opposed by virtually all commercial banks and the MBA.  The MBA feels that reserve requirements on NOW accounts  should be suspended for member banks and that thrifts should not be allowed direct use of the collection system.  The NHBA believes that  if thrift institutions are to clear NOW drafts through the Boston Reserve Bank, they must maintain sufficiently large clearing balances to reimburse the system for the cost. Board's proposal.  Only one bank supported the  The bases for objections to this proposal by other  banks are as follow: (1)  Direct access is not a prerequisite for operation of NOW accounts. Therefore it is unnecessary to set a significant national precedent without resolving other related questions.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Commercial Banks and Associations in Massachusetts and New Hampshire (Con't.)  G.  -6-  (2)  The MBA states that if direct clearing is provided as proposed, "one of the most valuable privileges of membership--the clearing privilege-will be given away to nonmember institutions that do not have to meet tAe burdens of membership."  (3)  The proposed 3 percent clearing balance results in preferential treatment for thrifts, and discriminates against members, who must hold reserves, and nonmember banks, who would not be offered the same opportunity.  Miscellaneous Comments (1)  Automatic transfers--The Shawmut Association recommends  easing of bank regulations to allow for automatic transfers from savings to checking accounts.  The MBA opposes tying NOW accounts to  other product lines or services with respect to both automatic overdrafts and the automatic transfer of funds between accounts. (2)  Advertising--The MBA recommends adoption of forceful  advertising and promotional regulations to insure accurate representation of the thrift purpose of NOWs.  IL  THRIFT INSTITUTIONS IN MASSACHUSETTS AND NEW HAMPSHIRE General Statement The Savings Bank Association of Massachusetts (SRAM) and the  New Hampshire Association of Savings Banks (NHASB), in a joint statement, oppose  the proposed restrictions on NOWs as contrary to the  intent of Congress in creating the two state experiment.  They state  that the proposed regulations would cause the slow death of NOWs, and   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Thrift Institutions in Massachusetts and New Hampshire (Con't.) -7-  would transform them into a type of account that would more nearly compete with commercial bank checking accounts.  Further, they see the  proposals as confusing, overly restrictive, and discriminatory against small depositors and the elderly.  They reject the arguments that NOWs  have a major impact on bank profits and cause disruptive shifts from regular checking accounts.  Thus, the joint statement recommends that  the NOW experiment be continued under minimum restrictions, and that regulations provide financial institutions the option to offer NOWs under one or both of the following sets of restrictions:  (1) regular  savings passbook rates with present differentials and a mandatory service charge to offset costs (approximately 15 cents per NOW draft); and(2) a lower interest rate with no mandatory service charge. The Massachusetts Co-operative Bank League (MCBL) and thrift institutions in the two states agree  in general with the thrust of  the joint statement of the SBAM and NHASB, but not always with the specific proposals,  About half the thrift institutions endorse  the  SBAM/NHASB proposal for two different types of NOWs, while the other half express the opinion that the regulations should not alter the nature of NOWs, which have been attractive to depositors. A,  Nature of NOW Account--Depositor Eligibility--The definition  of NOW accounts as a form of savings deposit is considered correct by Massachusetts and New Hampshire thrift institutions.  However, SBAM  points out that the state definition of a savings account includes corporations and governments, while that of the FRS and FDIC does   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Thrift Institutions in Massachusetts and New Hampshire (Con't.) -8-  not.  While resistance to the exclusion of government and corporate  accounts was minor, the SBAM, NHASB, MCBL, and most thrifts strongly requested that fiduciaries and trustees not be excluded from holding NOW accounts. B.  Residence Requirement--Almost unanimously, the thrift  institutions and their associations opposed the proposed restriction of NOWs to residents.  The SBAM, NHASB, and MCBL propose allowing  NOWs for customers within the market area of Massachusetts or New Hampshire financial institutions, and for individuals who work in the two states.  The MCBL and some thrift institutions recommend limiting  NOW advertising to media located within the two states as a method to limit out of state shifts of funds into NOWs.  Others oppose any  residence requirement or limitation on advertising as artificial, discriminatory, and difficult to administer. C.  Basis for Computation of Interest--Thrift institutions and  their associations object strongly to the proposals relating to required minimum (or average) balance or a split interest rate.  These  limitations are seen as unwarranted protection for commercial banks, discriminatory against small depositors, and beyond the intent of Congress.  The Charlestown Savings Bank of Boston states that "to  attempt to limit the balance upon which interest will be paid. . will make it administratively cumbersome and thoroughly confuse the depositor, many of whom are aged or unsophisticated in banking practices."  SBAM asserts that although the agencies have clear cut   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Thrift Institutions in Massachusetts and New Hampshire (Con't.) -9-  authority to regulate the payment of interest and advertising, it is questionable how far this authority extends to what traditionally are operating procedures and management decisions of individual institutions based on individualized cost factors. D.  Item Limitation and Service Charge Proposals --Comments on  mandatory service charges varied, but all those commenting objected to an item limitation imposed by regulation.  The SBAM, NHASB, and MCBL  would support a mandatory service charge if accompanied by interest ceilings at the same level as for present savings accounts, but want that charge to be closely tied to the cost of servicing accounts. Several thrift institutions support mandatory service charges of 15 cents per item, while others oppose mandatory service charges as an infringement on management.  The Home Savings Bank of Boston, one of  two Massachusetts institutions offering NOWs at 5  percent and no  service charge, opposes such restrictions as "not a proper subject matter of regulation." The Worcester County Institution for Savings favors a mandatory charge for all NOW drafts, and states that "it is quite probable that with your new regulations we will all have to offer free checks and probably all have a losing service from a point of view of profit." E.  Interest Rate Ceiling--The SBAM/NHASB proposal for two types  of NOW accounts would provide for NOWs at (1) savings ceilings with mandatory service charges and/or (2) lower ceilings with no mandatory charges, thus extending the interest differential on savings accounts   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Thrift Institutions in Massachusetts -10and New Hampshire (Con't.)  to NOW accounts.  Thirft institutions in Massachusetts strongly  urge no reduction of the -5 1, percent interest rate currently paid on NOWs by thrift institutions, asserting that depositors in Massachusetts regard these accounts as savings accounts and that on average no more than five NOW drafts are written each month. F.  Full Access to System Collection Faces--This aspect of  the Board's proposal brought only a few comments from thrift institutions.  All those responding found this proposal favorable, including  the Home Savings Bank, which stated that "We are pleased to learn [that] the Federal Reserve Bank of Boston will begin accepting such clearing accounts pursuant to section 13 of the Federal Reserve Act." SBAM also favors this proposal, stating: Although it is difficult to predict just how many savings banks will find it advantageous to use this method of clearance, clearly it presents an alternative procedure which is optional and thus could only serve to improve the procedures of thrift institutions, The proposed regulation is desirable. We endorse the spirit with which the Federal Reserve Board has offered to make their facilities available to thrift institutions.  III.  COMMERCIAL WiNKS OUTSIDE MASSACHUSETTS AND NEW HAMPSHIRE General Statement The great majority of the approximately 100 comments raised  objections to the Board's proposal to grant thrift institutions full access to the System's clearing facilities in exchange for maintaining a clearing account equal to 3 percent of NOW balances.  In addition,  many couanercial bankers 5555se NOWs as interest paying demand deposits   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Commercial Banks Outside Massachusetts and New Hampshire (Con t -11-  and feel that payment of interest on NOWs will adversely affect bank profits •and will ultimately result in adverse effects on consumers through increased Ao  Nature of  •the  •loan  costs.  NOW Account--Depositor Eligibility--Most bankers  who commented feel that NOWs should be limited only to natural I-  rsons. B.  Residence Requirement--Most bankers who commented IS not favor of NOWs beyond Massachusetts and New Hampshire.  Only one  I•  banker, Mr. James English of Connecticut Bank and Trust, commented on the competitive inequity faced by bankers in states bordering Massachusetts and New Hampshire, stating: Connecticut has a long common border with Massachusetts and, in the Greater Springfield area, for example, many Connecticut residents live and/or work in close proximity to Massachusetts banking •offices. A number of small banks are located in this part of Connecticut and could be adversely affected to a significant degree by a run-off • of deposits to Massachusetts banks. Furthermore, to the extent that the experiment can be limited to the residents •of a single state, the more clearcut the results will be. C.  Basis for Computation of Interest--Ivlost comments from this  • group favor imposition of limitations to differentiate NOWs from ordinary savings deposits.  •favored •a  The concept of a minimum or average  • monthly balance is generally viewed with favor, requirement of $400 is also  A minimum balance  by some commercial bankers.  Others feel that interest calculations on  split rate basis would be  difficult to enforce or even program on a computer.  In addition, the   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Commercial Banks Outside Massachusetts and New Hampshire (Con't.) -12-  proposd restrictions are seen as anti-consumer, easily misunderstood, and difficult to market. In sharp contrast to the majority, Union Bank, Los Angeles, states its disapproval of imposed constraints on NOW's, especially 'tahen specific permissive legislation has opened up to competition an area of potentially broader bank services."  Union Bank questions  "why should the Board conceive its duty as restraining member bank exercise of this new competitive freedom  and sees the Board's  proposals as "petty intrusions into the realm of decisions properly made by the financial institutions itself." D.  Item Limitation and Service Charges--Most banks agree that  service charges should be imposed, but are divided as to whether these charges should be established by Federal agencies or the banks. Some banks are opposed to agency-set charges generally, but in recogon of the character of the NOW experiment some regulatory structuring of the experiment.  are willing to see  Thomas Storrs, on  I- half of North Carolina National Bank, questions the legal and economic basis for Federally imposed restrictions on services rendered depositors or charges levied on depositors.  He states:  Either proposed method of constraint would, in my opinion, be a substantial invasion of management's role in the making of business decisions and would be a most unfortunate reversal of the Board's recent actions to disentangle itself from pricing decisions on time deposits...Such constraints would, however, clearly limit the validity of the results of the experiment.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Commercial Banks Outside Massachusetts and New Hampshire (Con't.) -13-  E.  Interest Rate Ceiling--Most banks in this group agree that a  rate of interest less than the rate on savings deposits would be appropriate.  Rates mentioned are generally somewhat lower than the  proposed 41 / 2 percent. F.  Full Access to System Collection Facilities--This proposal met  strong opposition from almost all banks which commented.  Most of the  objections are based on present inequalities in interest ceilings, reserve requirements, taxation, branching laws, and other supervisory provisions. This proposal is felt to run counter to the spirit of the Hunt Commission recommendation of a comprehensive reform of financial institutions,as opposed to piecemeal changes.  Some banks recommend  postponing the question of thrift clearing privileges until after study of the administration's proposals to implement Hunt Commission legislation,  Bankers generally feel that the three percent clearing  account is too low on entry price and that entry on those terms would be inequitable vis a vis member banks.  Several banks questioned the  value of continued System membership in the face of the proposed concessions being made to thrift institutions. G.  Miscellaneous Comments—Man-facturers Bank of Detroit and the  First National Bank of Denver raised questions concerning the legal identity of a NOW draft and the clearing procedures that would be applicable to the collection of NOW drafts.  Since the paying  institution must reserve the right to delay payment through the   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Coininercial Banks Outside Massachusetts %jIi New Hampshire (Con'to) -14-  requirement of advance notice, Manufacturers questions whether NOWs can be payable at a definite time and suggests that the existing commercial code provisions or a similarly standardized body of law or regulations be made applicable to NOWs.  First National of Denver asks:  "When are funds considered good when the drawee institution reserves the right to 30-day notice?"  In addition, the bank inquires about the  methods of presentation, return, and dishonor.  IV.  NATIONAL ASSOCIATIONS A.  American Bankers Association--The ABA opposes the concept of  NOW accounts, but given the existing legislation generally agrees with the basic principles of the Board's proposals.  However, it urges that  any regulations adopted emphasize (1) the experimental character of the NOW program and (2) the basic thrift character of NOWs.  The ABA  supports the following positions: --NOWs must be limited to natural persons residing in Massachusetts and New Hampshire; --NOWs must be treated as a form of savings deposit; --Rates of interest must be uniform and set lower than ordinary bank savings deposits; --Limitations in method of interest calculation, mandatory service charges, and item limitations such as those proposed by the bankers associations in Massachusetts and New Hampshire should be applied equally to all insAtutions; and --Federal Reserve Check Collection system should not be made available to thrift institutions on a direct basis.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  National Associations (Con't.)  -15-  The ABA finds the Board's check collection proposal to be inequitable, costly to the Federal Reserve System, and unnecessary in view of existing clearing arrangements.  The ABA favors uniform  reserve requirements on NOW accounts as a condition to direct thrift access to the System's clearing facilities.  The ABA also urges that  the 30-day notice requirement be fully disclosed on NOW items. Although favoring added constraints to discourage abuses in NOW 4/ account competition, the ABA cautions that the limits should not be so restrictive as to prevent institutions from effectively carrying out the Congressionally authorized NOW experiment. B.  Independent Bankers Association--The IBA objects to the NOW  proposals since "they would not provide for profitable handling of NOW accounts" by banks, and finds that the regulations IS not limit the use of NOWs as checking accounts to the extent intended by Congress.  The IBA states that legislative history mandates that NOWs  be low activity, low interest, minimum balance accounts restricted to family use.  The IBA recommends increasing the minimum monthly balance  requirement to $550, reducing the item limitation to 5, and reducing the interest ceiling below the proposed 41 / 2 percent. C.  Consumers Union--CU opposes the proposed NOW regulations and  urges the Board "to scrap these proposed regulations in their entirety and to substitute therefor a simple provision authorizing continued  4/ The ABA memorandum concludes that the Board does have the legal authority to impose limitations on the use of NOWs and on the payment of interest on NOW accounts.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  National Associations (Con't.)  -16-  'withdrawals' from 'depository institutions' on NOW accounts 'in the States of Massachusetts and New Hampshire' as provided for in Section 2(a) of Public Law 93-100."  CU finds all of the Board's  proposals to be contrary to the intent of Congress that NOWs be allowed to continue in the two states, and contends that imposition of the Board's proposals will result in virtual elimination of NOW accounts.  CU's position on NOW accounts was stated in the June 1973  issue of Consumer Reports in an article titled "Why Not Pay Interest on Checking Accounts." D.  Conference of State Bank Supervisors--CSBS finds that the  Board's offer to clear NOWs_directly in exchange for maintenance of 37 clearing balances "may be interpreted as an indirect effort to achieve reserve-setting authority over these institutions.  CSBS believes  that any such an extension of the Fed's authority would be detrimental to the dual banking system."  In addition, the CSBS finds that  "serious legal problems" exist with the proposal for direct clearance of NOW drafts, contending that the Board has neither authority to clear items for, nor authority to set reserves applicable to nonmember thrifts. E.  National Association of Mutual Savings Banks--The views of the  NAMSB are fully in accord with the views of the Savings Banks Association of Massachusetts and the New Hampshire Savings Banks Association.  The NAMSB finds the Board's proposals "excessive" and as  nullifying the intent of Congress, but does endorse the proposed regulation regarding the clearing of NOW drafts.  IP  •   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  National Associations (Con't.)  F.  -17-  United States Savings and Loan League--The USSLL,letter  received before publication of the proposed regulations, stated that the interest rate ceiling should be set at the passbook rate with no item limitation or minimum balance requirement.  However, the USSLL  stated support for a per item service charge (without stating whether it should be mandatory), commensurate with the cost of providing services, as a step toward a more rational allocation of resources and toward making innovations in the payments mechanism, such as electronic transfers, profitable to consumers. G.  Bankers Associations from Indiana and Kansas--These associ-  ations objected to the Board's proposal  thrifts direct  access to the System's clearing facilit  basis of the  existing inequity in reserve requiremenn, and regulatory supervision.  V.  III.  FEDERAL RESERVE BANKS CCMMENTS Comments were received from nine Federal Reserve Banks.  Seven out of the eight which commented on the proposal for full use of the Federal Reserve check collection system by thrift institutions objected. A.  Boston--The Boston Reserve Bank proposes that thrift institu-  tions be assigned routing symbols and have the right of direct I resentment, but not be allowed direct access to the clearing system in the form of direct depository privileges or clearing balances.  The  I- st estimate of the cost of this proposal is $160,000 in 1974, which could easily vary by 50 percent."   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Federal Reserve Bank Comments (Con't.)  -18-  Boston's recommendations on other as  of ted  regulations, as stated in Mr. Morris's Augu Iiilette Melnicoff, are as follows: --NOWs available to individuals andofit  ions only;  --interest ceilings equal for all institutions at the highest rate possible, preferably 5 percent; --no item limitation or mandatory service charge; and --reserve requirements of 3 percent, the lowest possible level. B.  New York--The New York Reserve Bank states that the NOW  experiment should be subject to a minimum of regulation to allow the full impact of NOWs on competition between counnercial banks and thrift institutiS ns to be evaluated in as free an environment as possible. The New York bank favors the Board's proposal for access to System clearing faces provided the 3 percent clearing balances are maintained with Boston Reserve I.  New York also favors limitation of  NOW accounts initially to individual residents and nonprofit organizations in Massachusetts and New Hampshire (and present NOW customers) but hopes that NOWs may eventually be made available to all types of depositors, especially small businesses.  The New York Bank believes  that pricing policies should be determined by the market place and Sisagrees with the proposals to establish service charges and impose minimum balances, stating that unsound policies could be handled thrS ugh the regular examination process.  Although not objecting to  the proposed 41 / 2 percent interst ceiling, New York sees no compelling justification for setting the rate below the current passbook ceiling.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Federal Reserve Bank Comments (Con't.)  -19-  New York also believes NOWs should be classified as a new type of time deposit due to  tsIrd characteristics, and that NOW and savings  deposits should be reported separately. C.  Philadelyhia--The Philadelphia Reserve Bank favors avoidance  of unnecessary restrictions on NOWs and urges that the Board only establish the maximum rate of interest that can be paid on the minimum or average balance.  Regulatory restrictions on activity and  item charges are viewed as a threat to the benefits to consumers of a competitive financial system.  The Bank agrees that NOWs should I-  •• to residents of Massachusetts and New Hampshire, but did not comment on the proposal for clearing NOW drafts at the Boston Reserve Bank. D.  Cleveland--The Cleveland Reserve Bank recommends minimizng the  restrictions to allow the full competitive impact of NOWs to be  elt.  Cleveland proposes no mandatory service charge or interest rate differential on NOWs.  Cleveland also recommends that thrifts be  limited in their participation in System collection facilities to presentment through member banks, and that if use of the collection system is granted, the reserve requirement should be somewhere between the requirement on savings deposits and that on demand deposits.  The  Cleveland Bank estimates a cost of about $500,000 per year if thrift institutions in District IV are granted full use of the System's collection facilities.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Federal Reserve Bank Comments (Con't.)  E.  -20-  Richmond--The Richmond Bank approves of the "savings account"  tratement of NOWs and favors limiting NOWs to natural persons who reside in the two states.  Richmond's desire to limit NOWs to natural  persons is based on the argument that national nonprofit organizations would have an incentive to switch their funds into Boston banks from out of state banks.  Richmond opposes mandatory service charges or item  restrictions, recommending instead a graduated interest ceg of 2 to 4 percent based on the minimum balance maintained.  The Richmond Bank  opposes the proposal to allow full use of the System's clearing facilities, and instead proposes treating thrift institutions at RCPC's in the same manner as nonmember banks.  The bank urges low reserve  requirements for NOWs of member banks, but points out the possibility that the proposed 3 percent could create a bad precedent since NOW accounts are in many ways more similar to demand deposits than savings accSunts. F.  Atlanta--The Atlanta Bank agrees with the Board's NOW account  policies with the exception of the proposal regarding the clearing of NOW drafts of thrift institutions.  Atlanta proposes that thrift institu-  tions should be able to deposit only through a correspondent commercial bank, and that they should not be assigned routing symbols. G.  Chicago--The Chicago Reserve Bank favors an interest rate  ceg "not in competition with savings accounts...to control a flow of funds among or within financial institutions,"  Chicago believes  that the proposal regarding the use of System collection facilities favors thrift institutions over nonmember banks and is objectionable S n the basis that it should only accompany comprehensive reform.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Federal Reserve Bank Comments (Con't.)  -21-  Chicago opposes imposition of mandatory service charges as infringement on a bank management function and, while recognizing that the issue of NOW reserve requirements is complex, is concerned that the Board may be setting an undesirable precedent. Louis--The St. Louis Reserve Bank opposes the Board's S roposal for full access to collection facilities.  St. Louis states  that the questions of uniform reserve requirements and tax treatment fS r all financial institutions should be considered by Congress before thrift institutions are given full access to Federal Reserve facilities. I.  Dallas--The Dallas Bank recoinmends that clearing accounts not  be permitted for nonmember banks or thrift institutions and states that such authorization "would further dilute attractiveness of membership for small a-,d medium-sized banks."  Dallas favors a 41 / 2  percent interest ceiling tied to a $400 minimum balance, but opposes mandatory service charges as a regulation that "would be difficult to enforce and would possibly generate misunderstanding and ill feeling."  VI.  STATE SUPERVISORY AUTHORITIES Comments have been received from both the Massachusetts and  New Hampshire bank supervisors. A.  New Hampshire Bank Comudssioner--James W. Nelson, New  Hampshire Bank Commissioner, questions whether a supervisory agency should dictate the number of free items before a service charge is made 5n NOWs 0  He asserts that such policies belong to the banks to   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  State Supervisory Authority Comments (Con't.)  determine.  -22-  The Commissioner states that since the NOW experiment may  affect the course of the nation's financial structure, it is important that State as well as Federal responsibilities be considered. Mr. Nelson recognizes the responsibility of states to establish reserve requirements for State institutions and requests that the Board do the same.  He states that if NOW account transactions expand,  mutual savings banks will have a 10 percent reserve requirement on NOWs in the same form as the 12 percent reserve that State-chartered nonmember conilercial banks now carry against demand deposits. B.  Conmdssioner of Banks, Commonwealth of Massachusetts --Mrs.  Koplow limited her comments to the Board's offer of direct thrift access to the System's collection system, stating that it "is subject to interpretation as being a rear guard action in a situation where legislative mandate does not allow the frontal approach of imposing reserves."  The Commissioner is opposed to the proposal as "disruptive  to the dual banking system and as an intrusion on the functions of the Commonwealth of Massachusetts regulatory authority."  VII.  CONGRESSIONAL COMMENTS Senators Brooke and McIntyre submitted a joint letter on the  Board's NOW proposals.  Congressmen St. Germain (R.I.) and Studds  (Mass) also commented on the Board's proposals. The letter received from Senators Brooke and McIntyre stated that the Conference Committee's intention was to limit NOW accounts "solely to individual persons."  They support the Board's   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Congressional Comments (Con't.)  -23-  proposal to limit NOWs to residents of the two states involved. However, they urge that the interest ceiling be 5 percent for all institutions, since that rate is better for the consumer.  They take  strong exception to the rest of the proposed regulations (mandatory service charge, item limitation, minimum balance requirement, and method of computing interest) as contrary to the intent expressed by Congress in its desire for a regional experiment. Congressman St. Germain stated, in reacting to the Board's proposed restrictions, that "the range of alternatives proposed is consistent with congressional intent that full regulatory control be exercised."  Rep. St. Germain objects, however, to the proposal to  limit offering NOWs to depositors residing in Massachusetts and New Hampshire.  Such a limitation is alleged to violate Article 4, Section  2 of the United States Constitution (Privileges and Immunities Clause). In addition Rep. St. Germain notes that difficulties raised in attempting to define resident appear "insurmountable" and urges that the attempted limitations be abandoned. A letter received from Congressman Gerry E. Studds (Mass.) expressed strong disapproval of the proposed regulations as contrary to the intent of Congress for a regional experiment and contrary to the best interest of the consumer.  a  * **IS  FEDERAL  RESERVE  2  press  release  •tRALRE5 ••  • • ••  For immediate release  September 14, 1973  published The Board of Governors of the Federal Reserve System today the use of for comment a tentative statement of proposed policies to regulate husetts and Negotiable Orders of Withdrawal (NOWs) by member banks in Massac New Hampshire.  The statement also proposes a plan for Federal Reserve  clearance of NOWs for thrift institutions. er 1. The Board will receive comment on the proposal through Novemb of The Board's statement of proposed policies follows passage of NOWs in legislation, to go into effect September 15, permitting the use the two states. -Negotiable orders of withdrawal -- which function as a check are presently being issued by mutual savings banks in Massachusetts and New Hampshire.  The new law permits all depository institutions in those  awal states to allow their customers to write negotiable orders of withdr against interest-bearing savings accounts.  The customary type of check is  written against non-interest bearing demand deposits. Use of NOWs by member banks is subject to the Board's authority to prescribe regulations governing the payment of interest on deposits. The Board recommended, pending adoption of final rules for NOW accounts, that member banks abstain from offering NOW accounts, since present proposals are tentative and subject to change in the light of comment received.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  - 2 The Board said that it is considering the following possible regulatory policies with respect to NOW accounts at member banks: -- A NOW account is regarded as a form of savings account.  It is  consequently available only to individuals and to certain non-profit organizations. The Board regards the offering of NOW accounts as a regional experiment, and accordingly proposes to limit these accounts to residents of Massachusetts and New Hampshire (except that a bank could offer NOW accounts to any of its present customers). -- The Board further believes some constraints on the use of NOW accounts are needed to avoid an excessive initial conversion from family checking accounts to NOW accounts in Massachusetts and New Hampshire.  Such  an eventuality would be consistent with the public interest only if brought about in an orderly and carefully planned manner. Therefore, the Board proposes, for the present: 1.  To permit the payment of interest only on the minimum (or average) balance in such accounts, and  2.  To require that the bank impose a service charge on all NOWs written by the depositor in excess of 10 items per month.  This would  not preclude service charges on the first 10 items. As alternative means of constraint, the Board is considering requiring, if interest is to be paid: 1.  That the number of NOWs a depositor writes not exceed 15 per month, and   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  0  - 3 2.  That there be a minimum, or average daily balance of $400 in a NOW account.  This alternative, the Board said, might be further conditioned, to provide that higher interest could be paid on unused balances in the NOW account over $400 than on the first $400, and to require a service charge on items in excess of 15 per month. At the same time, the Board believes NOW accounts should be differentiated from ordinary savings accounts, and for this reason proposes that interest paid on unused portions of NOW accounts be less than the ceng rate for ordinary savings accounts (which is 5 per cent).  The Board is giving preliminary  consideration to a ceg of 4.5 per cent for unused funds in NOW accounts. The Board also proposed that the thrift institutions offering NOW accounts be permitted to make full use of the Federal Reserve check collection system to clear NOWs.  This would be conditioned upon a requirement that non-  member thrift institutions wishing to use Federal Reserve facilities to clear NOWs maintain a clearing account with the Federal Reserve.  The Board suggested  that such accounts -- to comply with the law regarding nonmember clearing accounts -- be a balance held with the Federal Reserve Bank of Boston equal to 3 per cent of total NOW accounts in the thrift institution.  This would be  equal to the reserve requirement on member bank savings deposits (including NOW accounts).  It is not intended to affect present clearing arrangements for  nonmember commercial banks. Comment should be sent to the Secretary of the Board, Washington, D. C. 20551, not later than November 1, 1973.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  A copy of the Board's statement is attached. - 0 -  •   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  FEDERAL RESERVE SYSTEM [12 CFR 217j Statement of Proposed Policies with Respect to NOW Accounts in Massachusetts and New Hampshire  On September 15, 1973, a new Federal law becomes effective with applicability to interest-bearing accounts from which the depositor is allowed to make transfers of funds by negotiable orders of withAt the present time, such accounts are offered only  drawal (NOWs).  by mutual savings banks in Massachusetts and New Hampshire. Section 2(a) of P.L. 93-100 provides that "No depository institutiS n shall allow the owner of a deposit or account on which interest or dividends are paid to make withdrawals by negotiable or transferable instrument for the purpose of making transfers to third parties, except that such withdrawals may be made in the States of Massachusetts and New Hampshire."  The Board regards this language  as affirmatively authorizing, so far as Federal law is concerned, NOW accounts in the two States for all depository institutions, including S ember banks.  This authorization, however, is subject to the Board's  broad authority under section 19(j) of the Federal Reserve Act to prescribe regulations governing the payment of interest on deposits in member banks. The Board proposes to treat the NOW account as a form of savings deposit.  This would mean that (1) such accounts may be offerred  S nly to individuals and certain non-profit organizations, and (2) withdrawals from such accounts are subject to the right of the bank to  ii  -2require the depositor to give at least 30 days notice of any intended withdrawal, although this right need not be exercised. The Board believes some limitation is needed so as to assure that the offering of NOW accounts remains a regional, rather than a national, experiment.  Accoringly, the Board proposes to limit these  accounts to residents of Massachusetts and New Hampshire (except that a bank could offer NOW accounts to any of  tsIree  customers).  This  is consistent with the statutory focus on "the owner of a deposit or account on which interest or dividends arP paid." The Board further believes that some constraints on the use nSrder to differentiate NOW accounts from  of such accounts are needed ordinary demand deposits. -xcessive  Without some constraints, one can exI-  al conversion from family checking accounts to NOW  accounts in the two States.  Such an eventuality Would be consisent  with the public interest only if brought about in an orI•refully planned manner.  Therefore, the Board proposes for the present  to permit the payment of interest on the minimum (or average) balance in such accounts, subject to the requirement that the bank impose a peritem service charge on all items written by the depositor in excess of a 10 items-per-month limit.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  (Such a requirement would not preclude  service charges on the first 10 items.)  As an alternative, it is  considering requiring, if interest is to be paid, (1) that the number of negotiable orders of withdrawals that a depositor writes per month not exceed 15 items, and (2) that there be a minimum (or average daily) I.lance of $400 in the account.  (This alternative might be further  a   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -3-  the first $400 conditioned to provide a lower interest rate ceiling on m service in the account than on the remainder, and to call for some per-ite charge for items in excess of 15 per month.) At the same time, the Board believes that NOW accounts should its. be differentiated in some fashion from ordinary savings depos  For  payable on that reason, it proposes to set the maximum rate of interest gs deposits; it such deposits at a level below that for ordinary savin of 4-1/2 per is preliminarily giving consideration to a maximum rate cent for NOW accounts.  •  thrift The Federal Reserve System also proposes to permit all use of the Federal institutions offering NOW accounts to make full items--so long as Reserve collection system in order to clear these in this manner maintains any nonmember thrift institution clearing items Bank of Boston. a clearing account with the Federal Reserve  "Full use"  ng items directly to of the collection system would include sendi ving items drawn on the the Federal Reserve for collection and recei institution directly from the Federal Reserve.  Under section 13 of the  account must be of a size Federal Reserve Act, the'nonmember clearing sufficient to offset the items in transit.  The dollar amount of the  ion of the total dollar items in transit would generally be a funct tution. amount of the NOW accounts in the insti  Accordingly, the Board  ing NOWs for a nonmember proposes to require, as a condition to clear per cent of the total NOW thrift institution, a clearing balance of 3 accounts of the institution.  t This requirement is not intended to affec  -4--  In this  present clearing arrangements for nonmember commercial banks.  connection, it should be noted that the reserve requirement for a member bank's savings deposits (including NOW accounts) is presently 3 per cent. Interested persons are invited to submit relevant data, views, or arguments with respect to the Board's proposed policies.  Any such  material should be submitted in writing to the Secretary, Board of Governors of the Federal Reserve System, Washington, D. C. 20551, to be received not later than November 1, 1973.  Such material will be  made available for inspection and copying upon request, except as provided in § 261.6(a) of the Board's Rules Regarding Availability of Information. Pending the Board's adoption of final rules for NOW accounts, it is recommended that member banks abstain from offering NOW accounts. Offering NOW accounts, in the present uncertain environment, would be unwise, since the proposed policies outlined above are tentative and subject to change before final adoption in light of the public comments received. By order of the Board of Governors, September 14, 1973. (Signed) Theodore E. Allison Theodore E. Allison Assistant Secretary of the Board  [SEAL]   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  S.  eeh-y.tGOVERNMENT RELATIONS  THE AMERICAN BANKERS ASSOCIATION  1120 CONNECTICUT AVENUE,N.W,WASHINGTON,D.C. 20036 EXECUTIVE DIRECTOR CHARLES R. McNEILL 202/ 467-4097  November 1, 1973 Mr. Chester B. Feldberg Secretary Board of Governors of the Federal Reserve Board 21st and Constitution Ave., N. W. 20551 Washington, D. C. Dear Mr. Feldberg: In accordance with the notice issued by the Board of Governors of the Federal Reserve System on September 14, 1973, The American Bankers Association is submitting its views on the Board's "tentative statement of proposed policies" to regulate the use of Negotiable Orders of Withdrawal(NOWs) by member banks in Massachusetts and New Hampshire, as well as the Board's proposed plan for access to the Federal Reserve clearance system for thrift institutions. Prior to commenting on the provisions of the Board's statement of proposed policies, we would like to review for the Board,the basic position of The American Bankers Association with respect to NOW accounts and the underlying reasons for this position. As the Board of Governors knows, during the past year our Association expressed strong support in both Houses of Congress for legislation which would have prohibited depository institutions throughout the country from allowing the owner of a deposit or account on which interest or dividends were paid to make withdrawals by negotiable or transferable orders for the purpose of making transfers to third parties.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  The basis for our position was, and continues to be, that the NOW account concept is contrary to one of the long-standing principles the Federal government has imposed upon the banking industry, namely the prohibition of interest on checking accounts. For all practical purposes, NOW accounts are checking accounts and are often referred to as such by both the regulatory agencies as well as financial institutions and their customers. We are also convinced that the NOW account concept represents a significant change in the structure of financial institution powers and one that should not have been permitted to take place on a piece-meal basis. In our testimony before the Congressional Committees that considered NOW account legislation, we stated our belief that major changes in the powers or responsibilities of financial institutions should be made only after careful assessment  •  THE AMERICAN CANKERS AB3OCIATION WASHINGTON,D.C.  CONTINUING OUR LETTER OF  November 1, 1973 SHEET No.2  of all the implications, which affect monetary policy, equality among types of financial institutions, stability of the financial institutions, stability of the financial system, depositor protection and the flow of funds to housing. In this same vein, we note with considerable interest, and fully agree with, Vice Chairman George W. Mitchell's testimony on behalf of the Board of Governors on the NOW account issue before the Subcommittee on Financial Institutions of the Senate Committee on Banking, Housing, and Urban Affairs wherein he stated that "The public interest and simple fairness suggest that any changes be accompanied by the imposition of competitive equity in interest rate ceilings, reserve requirements, and tax treatment." Unfortunately, these arguments for the need for complete parity among financial institutions were unheeded by the Congress, and the NOW account legislation -Public Law 93-100 -- contains no provision calling for any such across-the-board equalities between such institutions. Nevertheless, we recognize that as a result of the passage of Public Law 93-100 -- which expressly prohibited NOW accounts in 48 States while allowing such accounts for all depository in3titutions in Massachusetts and New Hampshire -- it is now incumbent upon the Fe leral Reserve Board, the Federal Deposit Insurance Corporation, and the Fede -al Home Loan Bank Board to adopt regulations relating to the utilization of NOW accounts offered by member banks, insured nonmember banks, mutual savings banks, and Federally insured savings and loan associations in those two States. Accordingly, The American Bankers Association generally agrees with the basic principles of the Board's proposed policies applicable to NOW accounts, as announced on September 14. At the same time however, we believe it is imperative for this Board, as well as the Federal Deposit Insurance Corporation and the Federal Home Loan Bank Board to preface any regulations promulgated to regulate NOW accounts with a clear statement that the Federal banking agencies realize full well that such accounts are strictly experimental in nature, and that the basic purpose of Congress in permitting NOW accounts to exist in Massachusetts and New Hampshire was to permit the agencies to conduct an experiment in those two States. We also urge the Board to express their intent that the regulations applicable to NOW accounts are subject to change and in no way are designed as prototype regulations to be utilized for the future spread of this type of account to other States.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  1  THE AMERICAN BANKERS ASSOCIATION WASHINGTON,D.C.  CONTINUING OUR LETTER OF  November 1, 1973 SHEET NO  Our Association is also convinced that each of the Federal banking agencies has a responsibility in promulgating NOW account regulations to delineate with clarity that the underlying objective behind the NOW account experiment is to make savings accounts more useful to consumers and is in no way intended to result in the wholesale conversion of bank checking accounts to NOW accounts. Although we realize that the agencies have indicated in their proposals that the NOW account is a form of savings deposit, we would urge that additional emphasis be added so as to assure the "thrift" character of NOW accounts as distinguished from bank checking accounts. Furthermore, in view of the "experimental" nature of the NOW account concept and in keeping with the basic objectives underlying the management of any true experiment, we strongly urge, and in fact believe it mandatory, that the Federal banking agencies closely monitor the development and growth of NOW accounts in Massachusetts and New Hampshire. Such a monitoring procedure could be established by requiring the financial institutions in those two States to provide NOW account information on a frequent and regular basis to the appropriate agency. In turn, this would enable the agencies to become immediately aware of any adverse effects of NOW accounts on competing financial institutions, and to initiate timely corrective action. We also believe that the information gathered by this monitoring procedure should be publicly disclosed on a monthly or at least quarterly basis to enable the Congress and other interested parties to analyze and evaluate the NOW account experiment. We would further suggest that the agencies clearly indicate at the outset that the regulations are not designed or intended to be final and absolute, but rather, that they should be viewed only as the agencies' initial approach to regulating the use of NOW accounts. In this connection, we suggest that the agencies stand ready to make further amendments or refinements of their regulations that they deem necessary to carry out the NOW experiment as it evolves. Turning from the basic premises our Association believes must preface the agencies' NOW account regulations, we now wish to comment on the specific policies proposed by the Board as a means of regulating NOW accounts. While we realize that there are any number of variations which the agencies could incorporate in such regulations, there are several characteristics which we believe must be encompassed. First, NOW account: regulations must be clearly limited to Massachusetts and New Hampshire. Second, NOW accounts must be treated as a form of savings deposit. Third, rates of interest paid on NOW account balances must be uniform between competing institutions. Fourth, any constraints, limitations or conditions imposed on NOW accounts must apply equally to all financial institutions offering such accounts. Fifth, the Federal Reserve check collection system should not be made available to thrift institutions on a direct basis as a by-product of this experiment.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  3  THE AMERICAN BANKERS ASSOCIATION WASHINGTON,O.C.  CONTINUING OUR LETTER OF  November 1, 1973 SHEET No 4  Our Association recognizes that neither Public Law 93-1_00 nor the accompanying legislative history specifically addresses itself to the scope of the Federal banking agencies' authority over NOW accounts. Nevertheless, we believe it is clear from the statements offered in both the Senate and House that an "experiment" was authorized and that the Congress intended to permit the agencies to regulate NOW accounts in any manner they deem reasonable in order to carry out the periment". As Chairman Patman stated: "By prohibiting NOW accounts at this time in 48 States, the 'experiment'should be confined to the two States where they now exist permitting regulatory supervision and meaningful evaluation for our future deliberations." Furthermore, in view of the broad powers granted to the Federal Reserve Board in section 19 of the Federal Reserve Act, the Federal Deposit Insurance Corporation in section 18(g) of the Federal Deposit Insurance Act, and the Federal Home Loan Bank Board in section 5(b) of the Federal Home Loan Bank Act, we are convinced that the agencies possess the necessary statutory powers to define a NOW account, apply reasonable restrictions, limitations or conditions on its use, and to structure it accordingly.  NOW Accounts 1VIust Be Treated as Savings Deposits For reasons previously outlined, our Association believes that nSrder not to contravene the statutory prohibition against the payment of interest on demand deposits, the agencies must define the NOW account as a "savings deposit" rather than a "time deposit" or "demand deposit". We believe such a definition is imperative to guard against the transformation of regular savings deposits into demand deposits. Therefore, we endorse the Board's proposal to treat the NOW account as a form of savings deposit. However, the existing definon of "savings deposit", to the extent that it includes "non-profit corporations" in addition to individuals, is, in our opinion, broader than both the Board's recommendation as well as Congressional intent. As the Board will recall, its recommendation to Congress was that "all financial institutions should be authorized to offer money transfer services on savings accounts that bear interest, and that are used primarily for household purposes... ." Accordingly, we would urge that Board to define a NOW account as a savings account available only to natural persons in Massachusetts and New IIampshire and for household and family purposes only. In addition, if savings accounts are to continue to be subject to 30 clays notice, in the interest of full disclosure, this fact should be c--rly indicated on the face of the withdrawal instrument.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  • THE AMERICAN BANKERS ASSOCIATION WASHINGTON,D.C.  CONTINUING OUR LETTER OF  November 1, 1973 SHEET No 5  Geographic Restrictions on NOW Accounts As previously indicated, our Association basically opposes the NOW account concept because it involves de facto payment of interest on demand accounts. And, consistent with this belief, we will continue to oppose any further spread of NOW accounts to the other 48 States, pending a Congressional review of these basic issues. At the same time however, we also realize that in keeping with the express intent of Congress in passing Public Law 93-100, the Federal banking agencies are now compelled to insure that NOWs are contained within those two States, and that the "experiment" does, in fact, remain regional rather than become national in scope. Accordingly, The American Bankers Association endorses the Board's stated intention to restrict these accounts to residents of Massachusetts and New Hampshire during the course of this experiment.  Uniform Rates of Interest on NOW Accounts With respect to interest rates paid on NOW accounts, we believe that uniform ceilings must be established on such accounts and applied to all financial institutions offering NOW accounts whether they operate under Federal or State charter. Therefore, our Association endorses the Board's recommendation to the Congress that "family accounts in all financial instituticSns should be subject to identical interest rate ceilings set by appropriate Federal regulatory authority". Similarly, we agree with the Board that the interest rate paid on NOW accounts should be differentiated from that paid on ordinary savings deposits, and we urge the Board to set the maximum uniform rate of interest payable on NOW accounts at a level below that for ordinary savings deposits in banks.  Imposition of Other Constraints, Limitations or Conditions on NOW Accounts The Board's release of September 14 also indicates a belief, and we agree, that some additional constraints or limitations on the use of NOW accounts are needed in order to differentiate such accounts from ordinary demand deposits. We believe that the need for such limitations is clearly evidenced by the recent innovation of "Super NOWs" and "Total NOWs" by thrift institutions. More specifically, the Board stated that it is considering such limitations as a minimum balance, number of items, and service charges. Under normal circumstances, The American Bankers Association would oppose the imposition of such limitations now being considered by the Board in favor   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  THE AMERICAN BANKERS ASSOCIATION WASHINGTON,D.C.  CONTINUING OUR LETTER OF  November 1, 1973 SHEET NO  6  of free and open competition among financial institutions with respect to this type of service or activity. Under the existing circumstances however, and in view of the experimental nature of NOW accounts in Massachusetts and New Hamshire, we cal understand the Board's desire to preclude any substantial shifts in the deposits of financial institutions by the inclusion of certain control devices in the NOW account regulations. From an overall policy standpoint, however, we would assume that any such limitations should not be so restrictive as to prevent financial institutions from effectively carrying out the Congressionally intended NOW account experiment. To this extent, and although we realize that regulatory limitations often become the competitive standard, we believe that the general types of proposed restrictions outlined by the Board appear to be reasonable and would not, in our opinion, thwart or preclude the NOW account experiment from being a viable financial service. As far as the specifics of any of the proposed limitations, our Association believes it best to defer to the combined judgment of the bankers in the two affected States, and to the regulatory agencies in devising and imposing reasonable and workable limitations on the use of NOW accounts. Again, as with the rate of interest on NOWs, our major concern is that no matter what type of limitations or restrictions are incorporated in the final regulation, they should be applied uniformly to NOW accounts offered by all financial institutions involved in the experiment.  Federal Reserve Check Collection Proposal Prior to commenting specifically on the Board's proposed clearing policy which would permit thrift institutions full use of the Federal Reserve check collection system, our Association believes it would be beneficial to outline the existing NOW account clearing procedure in Massachusetts and New Hampshire. At the present time, NOW items of thrift institutions are cleared as drafts payable through the banking system. This "pass-through" system has proved to be effective and at the same time provides an economical clearing approach for NOW account holders. If the Board's proposal permitting thrift institutions full use of its check collection system were adopted, it would substantially and dramatically alter the existing clearing system for NOW accounts.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Over and above this consideration however, there are several other substantive reasons why our Association is strongly opposed to this aspect of the Board's proposal. These may be summarized as follows: First, our Association does not believe that Congress intended the limited NOW account experiment to predetermine in any way the outcome of what we view as a major national issue related to changes  THE AMERICAN BANKERS ASSOCIATION WASHINGTON,O.C.  CONTINUING OUR LETTER OF  November 1,  1973  SHEET NO7  in the powers of financial institutions. To the extent that the Board's proposal would permit thrift institutions direct entry into our nation's funds transfer system without imposing other elements necessary to achieve equality between competitive institutions, we view this proposal as contrary to the general intent of the Congress. Second, continuation of the NOW account experiment does not, in our opinion, require a change in existing clearing arrangements, and there is nothing in the legislative history of Public Law 93-100 suggesting the need for the Board to test a new clearing approach. In fact, in an experimental enviornment, we believe it essential to test separately those elements that will clearly provide a basis for evaluating the results of the experiment. Consequently, we are convinced that by permitting direct access to the check clearance system, the Board would be providing a new service unwarranted by the legislation, not required for public or competitive reasons and unnecessary for conducting the NOW account experiment. Third, this proposal, which would result in thrift institutions depositing with the Federal Reserve all checks received while merely keeping a 3% balance against NOW accounts, would be discriminatory and unfair to member banks who cannot obtain check collection services on an equivalent basis. Thus, one of the major benefits of Federal Reserve membership would be 'granted to thrift institutions in a most inequitable manner. Similarly, although they have limited depository privileges in Regional Check Processing Centers, nonmember banks would also be discriminated against, as they would not be permitted the same total depository privilege. Fourth, in the opinion of our Association, it is also possible that the check payment system's efficiency could be adversely affected by adoption of this proposal. Due to the likely increase in the Federal Reserve Bank of Boston's processing time requirements, the Federal Reserve Bank of Boston might eventually find it necessary to establish earlier cutoff hours, thereby harming bank customers on a nationwide basis. Fifth, adoption of the Board's proposed clearing approach could result in substantial increases in the Federal Reserve's operating costs. Such cost increases would stem from thrift institutions depositing their checks directly with the Federal Reserve Bank of Boston, as well as the processing and transportation costs caused by direct presentment of NOW items to thrift institutions. Direct presentment could increase the number of disi ribution points from 235 to 640. While we realize the Board must be aware of the increased cost aspects of the proposal,   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  • TO-IE AMERICAN BANKERS AS3OCIATION WASHINGTON,D.C.  CONTINUING OUR LETTER OF  November 1, 1973 SHEET NO. 8  nevertheless, we believe it a significant factor and one that should be given very careful Board consideration. Furthermore, there is little likelihood that increased Federal Reserve costs would be offset by reduced costs in the private sector. Our Association also has serious concerns over several other implications of the Board's proposal to change the clearing system. These relate to the kind of instrument a NOW item would be, its collection, fund availability, use of routing numbers, dishonorment, certification, and applicability of the Uniform Commercial Code. To summarize, in view of these complex legal, regulatory and operating issues, we believe it would be unwise and unwarranted to change the form of the NOW instrument or its clearing approach. Finally, The American Bankers Association firmly believes that all financial institutions should be required to maintain reserves on total NOW account balances on an equal basis, and we are aware that the Federal Reserve Board lacks statutory power to impose such requirements on nonmember banks. Therefore, while we applaud the Board's efforts to obtain a degree of reserve uniformity on NOW accounts offered by thrift institutions, through the clearing account mechanism, we strongly oppose the proposal to establish partial reserve equity by permitting thrift institutions offering such accounts to make full use of the Federal Reserve check collection system. In addition, we are unable to find any evidence in the legislative history surrounding Public Law 93-100 that would support the Federal Reserve Board's attempt to attract reserve requirements from thrift institutions .in this fashion. As apossible alternative approach for achieving reserve equity on NOW accounts, we urge the Federal Reserve Board, the Federal Deposit Insurance Corporation and the Federal Home Loan Bank Board to consult and work with the State regulatory agencies having jurisdiction over thrift institutions in the States of Massachusetts anI New Ha-npshire in a coordinated effort to achieve reserve equity on NOW balances held by all institutions under their jurisdiction in these States. Recognizing that the corollary of equality in funds transfer privileges is equality in responsibties, we deem it imperative that, to the extent there are reserves on NOW accounts, there be comparabty in reserve requirements on NOW accounts between all competing financial institutions offering such accounts. We believe that this approach is in the public interest and is also consistent with our firm belief that both the level and form of required reserves for State chartered institutions should be determined by the respective State authorities in keeping with the principle of duality in regulating our nation's depository institutions.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  CONTINUING OUR LETTER OF  THE AMERICAN BANKERS ASSOCIATION WASHINGTON,O.C.  November 1, 1973 SHEET NO. 9  We appreciate this opportunity to comment and would welcome an opportunity to discuss our position further with representatives of the Board for the purpose of furnishing additional information concerning our views, if this might prove helpful to the Board.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Sincerely,  Charles R. McNeill Executive Director Government Relations  JOHN SPAR.KMAN. FLA.. 1"_'!-!AIRMA1 WILIJAM PFtOXPAIRE, MJIRRISON /. WILLIAMS, JR., N.J. THOMAS J. MC INTYRE, N.H. ALAN CRANSTON, CALIF. /LOLA! F. STEVENSoN III, ILL. J. Er NNETT JOHNSTON, JR., LA. WILL iko,M D. HATHAWAY. MAINE JOSH R. BIDEN, JR., OEL.  • 'ZICnifeb Zfafez Zenct!c  JOHN TOWER, TEX. WALLACE F. PENN AH EDWARD W. PROO SS. BOB PACKWOOn, 0 BILL OPOCK, TENN. ROBERT TAFT, JR., OHIO LOWELL P. WEICKER, JR., CONN.  BOARD KcoyERNoRs FECEp. ,1 -",  COMMITTEE ON BANKING. HOUSING AND URBAN A FAIRS, L. I DUDLEY L. O'NEAL, JR. STAPP DIRECTOR AND GENERAL. COUNSEL  WASHINGTON. D.C. 20510  October 18, 1973 Dr. Arthur F. Burns, Chairman Federal Reserve Board Washington, D. C. Dear Mr. Chairman:  „3  -  p  1: 5,0  PFCFIVED OFFICE CI: ChAiRtiAN  -s-s---4,bliwommb= Op  This letter is in response to your agency's invitation to submit comments on rules you have proposed on the regulation and operation of NOW accounts in the States of Massachusetts and New Hampshire. In order to make our comments clear and precise, we have chosen to refer to each proposed rule as delineated in the FDIC news release announ cing this proposed action. 1. "Limit NOW accounts to those eligible for a 'savings deposit' under current FDIC regulations (thereby excluding business corporations, among others)." During the Senate's consideration of the NOW account issue, it was decided at Committee level to take no action to limit NOW accounts in the various States. The Committee was concerned, howEver, about the competitive impact that NOW accounts would have on various inItitutions, and, in Committee Report 93-149 accompanying the bill, S. 1798, the Committee took the position that it "is convinced that such accavnts should only be offered and limited solely to individual persons.' 2. "Further limit the offering of NOW accouats to depositors residing in Massachusetts and New Hampshire." This particular issue did not arise in either House of Congre ss until the Senate -House conference. During the conference, consideratio n was given to limiting NOW accounts to either residents of the States in which such accounts were offered, and, also, possibly tm those individuals not residing in the State but who worked there or alr&ady had an account with the institution. There was concern expressed durtng the confer ence as to the competitive impact of allowing only certain States to offer NOW accounts and not limiting in some way the eligibility of indivi duals to have such accounts. Competitive inequities could easily develop, assuming the attractiveness of NOW accounts to the consumer, and, therefore, such a restriction seemed reasonable under the circumstances.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  ,    Dr. Arthur F. Burns October 18, 1973  Page 2  3. "Establish 4/ 3 4 percent per annum as the maximum rate of interest that could be paid on a NOW account." During the Senate's entire consideration of NOW accounts, there was concern expressed over interest rates to be paid. For this reas on, the Columittee included in the bill clear authority to the Fede ral Deposit Insurance Corporation to establish maximum interest rate leve ls on NOW accounts. It was the expressed desire of the Couanittee, however, that the interest rate level be high enough for the consumer to receive a fair return on his savings. It is, therefore, urged that in setting maximum interest rate limits on NOW accounts that your agency provide for the highest poss ible interest rate and yet one that will provide equality to all institutions offering NOW accounts. In view of the fact that thrift institut ions are now given a of 1% advantage over commercial banks, it would appear reas onable to set a maximum limit at the parity level among the various inst itutional groups. While all depository institutions are allowed unde r present authority to pay a maximum of 4/ 3 4% on normal passbook savings accounts, this is also true at the 57 level. Therefore, it would appe ar that an interest rate maximum of 5% would_seem reasonable rather than the as proposed. MNE11.11MMMI .  4. "Suggest a number of alternatives, the primary purpose of which would be to distinguish the NOW account from a dema nd deposit." This proposed rule is the one that gives us the greatest concern. The legislative history clearly shows that in extendin g NOW account authority to the States of New Hampshire and Massachusetts that Congress considered this of an experimental nature and clearly intended that any limitations made on such accounts be minimal. While there was a considerable difference of opinion and position taken by the SepAte and the House on how to handle the NOW account issue, the legislatdive history is clear that once the conferees reached agreement on the legislation by allowing Massachusetts and New Hamp shire to continue to offer this service that regulations on the activities of such accounts should be held to a minimum. Only by taking this approach can limited experience of NOW accounts in Numerous proposed restrictions on the during the conference, and these were  https://fraser.stlouisfed.org a Federal Reserve Bank of St. Louis  Congress have the benefit the two States allowed to activity of such accounts uniformly re'ected b the  of the offer them. were offered Senate  a  Dr. Arthur F. Burns October 18, 1973  Page 3  6 conferees. Of particular concern is the possibility that your agency through the promulgation of rules on NOW accounts will place restrictions on these accounts that were considered and rejected by Congress. A brief summary of the action of the Senate clearly shows an intent to minimize restrictive limitations with regard to the activity of NOW accounts. The Senate Committee in considering the issue took no action other than providing the FDIC with clear authority over interest rate controls paid on such accounts. At Committee level an amendment was offered and rejected by a vote of 14 to 2 which would have provided that NOW accounts could have continued for only one year in the States of Massachusetts and New Hampshire. On the Senate floor an amendment was offered and accepted by a vote of 43 to 33 which would have limited NOW accounts to New Hampshire and Massachusetts until such time as flexible Regulation Q authority was not extended by Congress. The amendment provided that at that time NOW accounts could then be offered on a national basis. At no point during the Senate's debate on NOW accounts was any consideration given to limiting the activity of such accounts other than granting the FDIC interest rate authority. During the conference, numerous proposals were made by the House conferees to limit the activity of NOW accounts in New Hampshire and Massachusetts and all of these proposals were rejected. Throughout the entire legislative history there is only one mention made with regard to limitatiQns on the activipies of.NOW a.ccounts,„ and this 71777177 by a House member who was not a member of either the House Banking and Currency Committee or the conference committee. The legislative history on the Senate side is very clear on this point. During the Senate debate on the conference report on August 3, 1973, Senator M4intyre stated on page S 15810: 0 "The bill agreed upon by the conferees provides the Federal Deposit It3urance Corporation with specific interest rate authority over all mutual savings banks. The language does not place any further specific restrictions on NOW accounts. However, the Senate Banking Committee's committee report clearly indicated that the Federal regulatory agencies should closely monitor such accounts to assure that competitive inequities do not develop and to move _ swiftly to take corrective action if warranted." /Emphasis added/ Again, on the same page, Senator Brooke stated:   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  • Dr. Arthur F. Burns October 18, 1973  Page 4  "Therefore, Mr. President, in order to insure the complete development of the NOW account experiment intended by the conferees, I wish to point out that while section 3 of the bill does extend Federal rate control authority over uninsured mutual savings banks in Massachusetts thereby assuring uniform Federal regulato ry authority over these accounts, it is not the intention that these agencies should take steps to prematurely limit them in these States. This authority is created to provide a safeguard against dama ging disintermediation caused directly by these accounts. A poss ibility that seems greatly diminished by the fact that the conf erees have contemplated that these accounts should not be limited simp ly to mutual savings banks in these two States. Time and again, the Conferees on H.R. 6370 debated the merits of the many prop osals before it to require either the establishment of a definite expiration date for the NOW account experiment in our two States or qualify these accounts in some other manner. Each time such a 1Lni tation was voted down. And accordingly, none is mentioned at any point in the conference report. The intent of the conferees with respect to the,imposition of restrictions on NOW accounts in thes e States is clear -- there should be none. In my judgment, it would be highly desirable for NOW accounts to be offered on a fully competitive basis by all banking institutions with no particular restrictions for the coming several months. Only if this experiment is permitted to continue on a free and fully competit ive basis will the evidence the Congress hopes to obtain be availabl e." /Emphasis added/ The action of Congress is clear that the purpose of allo wing Ne .Hampshire and Massachusetts to continue to offe r the NOW account was to provide an experiment to dQtermine whether th11 .1sai2g_khoaa.kg.luanded.. nationwide. Among the various alternatives, two of your agency's proposed limitations are not only unjustified but are of auea tionable legality mandatory service charges and the payment of interest on the minimum balance in the account during any interest crediting peri od. These two proposals are not only unfair to the consumer, but they represen t unwarranted encroachment by your agency into the operation of a NOW acco unt. Nothing could be more damaging to a NOW account customer than a Fede ral regulation limiting his interest rate to a minimum balance. This is grossly unfair, and it is difficult to comprehend how your agency could even suggest such a proposal. The same is true with regard to mand atory service charges. Both of these proposed rules are directed not at comp etition among the various competing financial institutions but are directed solely against the consumer. The imposition of service charges should be a competit ive decision made by the offering institution and not by any Federal regulation. We   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Dr. Arthur F. Burns October 18, 1973  Page 5  strongly suggest that neither of these two proposals be included in any NOW account regulations issued by your agency. Certainly, some reasonable regulation is comlatible with the experimental nature of these accounts to safeguart the account holder and assure that unreasonable competition does not develop because of the limited nature of those who can offer NOW accounts at this time. Restrictive measures on the activity of an indivitbal NOW account is, in our opinion, unnecessary and such restrictions should be placed on those accounts only after sufficient experience warranty such action. The experimental nature of these accounts coyld be seriously affected by over-regulation. In view of the fact that your proposed regulations could not only have a serious impact on the operation of NOW accounts but also would administratively alter what we believe to be obvious legislative intent, we, therefore, request that the Committee be supplied with a copy... of...au . proposed regulations at least two wc thg....prior to their implementation.. . Sincerely, ( I 0 4 40 eon44,444 i..".114."113 4:4"t: • .„ A, 1- 04-  Edward W. Brooke,   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  Thomas J. McIntyre, U.:S.S. /  •A '  •• *of Gov;•. . .*• 0  FEDERAL  g  press  RESERVE  release  For immediate release  September 14, 1973  The Board of Governors of the Federal Reserve System today published for comment a tentative statement of proposed policies to regulate the use of Negotiable Orders of Withdrawal (NOWs) by member banks in Massachusetts and New Hampshire.  The statement also proposes a plan for Federal Reserve  clearance of NOWs for thrift institutions. The Board will receive comment on the proposal through November 1. The Board's statement of proposed policies follows passage of legislation, to go into effect September 15, permitting the use of NOWs in the two states. Negotiable orders of withdrawal -- which function as a check -are presently being issued by mutual savings banks in Massachusetts and New Hampshire.  The new law permits all depository institutions in those  states to allow their customers to write negotiable orders of withdrawal against interest-bearing savings accounts.  The customary type of check is  written against non-interest bearing demand deposits. Use of NOWs by member banks is subject to the Board's authority to prescribe regulations governing the payment of interest on deposits. The Board recommended, pending adoption of final rules for NUN accounts, that member banks abstain from offering NOW accounts, since present proposals are tentative and subject to change in the light of comment received.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  - 2 The Board said that it is considering the following possible regulatory policies with respect to NOW accounts at member banks: -- A NOW account is regarded as a form of savings account.  It is  consequently available only to individuals and to certain non-profit organizations. •••••••  The Board regards the offering of NOW accounts as a regional  experiment, and accordingly proposes to limit these accounts to resiI•f Massachusetts and New Hampshire (except that a bank could offer NOW accounts to any of its present customers). -- The Board further believes some constraints on the use of NOW accounts are needed to avoid an excessive  al conversion from family  checking accounts to NOW accounts in Massachusetts and New Hampshire.  Such  an eventuality would be consistent with the public interest only if brought about in an orderly and carefully planned manner. Therefore, the Board proposes, for the present: 1.  To permit the payment of interest only on the minimum (or average) balance in such accounts, anS  2.  To require that the bank impose a service charge on all NOWs written by the depositor in excess of 10 items per month.  This would  nS t preclude service charges on the first 10 items. As alternative means of constraint, the Board is considering requiring, if interest is to be paid:   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  1.  That the number of NOWs a depositor writes not exceed 15 per month, and  3 _ 2.  That there be a minimum, or average daily balance of $400 in a NOW account.  This alternative, the Board said, might be further conditioned, to provide that higher interest could be paid on unused balances in the NOW account over $400 than on the first $400, and to require a service charge on items in excess of 15 per month. At the same time, the Board believes NOW accounts should be differentiated from ordinary savings accounts, and for this reason proposes that interest paid on unused portions of NOW accounts be less than the ceiling rate for ordinary savings accounts (which is 5 per cent).  The Board is giving preliminary  consideration to a ceiling of 4.5 per cent for unused funds in NOW accounts. The Board also proposed that the thrift institutions offering NOW accounts be permitted to make full use of the Federal Reserve check collection system to clear NOWs.  This would be conditioned upon a requirement that non-  member thrift institutions wishing to use Federal Reserve facilities to clear NOWs maintain a clearing account with the Federal Reserve.  The Board suggested  that such accounts -- to comply with the law regarding nonmember clearing accounts -- be a balance held with the Federal Reserve Bank of Boston equal to 3 per cent of total NOW accounts in the thrift institution.  This would be  equal to the reserve requirement on member bank savings deposits (including NOW accounts).  It is not intended to affect present clearing arrangements for  nonmember commercial banks. Comment should be sent to the Secretary of the Board, Washington, D. C. 20551, not later than November 1, 1973.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  A copy of the Board's statement is attached. - 0 -   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  FEDERAL RESERVE SYSTEM [12 CFR 217] Statement of Proposed Policies with Respect to NOW Accounts in Massachusetts and New Hampshire  On September 15, 1973, a new Federal law becomes effective with applicabty to interest-bearing accounts from which the depositor is allowed to make transfers of funds by negotiable orders of withdrawal (NOWs).  At the present time, such accounts are offered only  by mutual savings banks in Massachusetts and New Hampshire. Section 2(a) of P.L. 93-100 provides that "No depository institutiIn shall allow the owner of a deposit or account on which interest or dividends are paid to make withdrawals by negotiable or transferable instrument for the purpose of making transfers to third S.rties, except that such withdrawals may be made in the States of Massachusetts and New Hampshire."  The Board regards this language  as affirmatively authorizing, so far as Federal law is concerned, NOW accounts in the two States for all depository institutions, including I ember banks.  This authorization, however, is subject to the Board's  broad authority under section 19(j) of the Federal Reserve Act to prescribe regulations governing the payment of interest on deposits in member banks. The Board proposes to treat the NOW account as a form of savings deposit.  This would mean that (1) such accounts may be offerred  only to individuals and certain non-profit organizations, and (2) withdrawals from such accounts are subject to the right of the bank to  -2require the depositor to give at least 30 days notice of any intended withdrawal, although this right need not be exercised. The Board believes some limitation is needed so as to assure that the offering of NOW accounts remains a regional, rather than a national, experiment.  Accoringly, the Board proposes to limit these  accounts to residents of Massachusetts and New Hampshire (except that a bank could offer NOW accounts to any of its present customers).  This  is consistent with the statutory focus on "the owner of a deposit or account on which interest or dividends are paid." The Board further believes that some constraints on the use of such accounts are needed in order to differentiate NOW accounts from ordinary demand deposits. excessive  Without some constraints, one can expect an  al conversion from family checking accounts to NOW  accounts in the two States.  Such an eventuality Would be consisent  with the public interest only if brought about in an orI•refully planned manner.  Therefore, the Board proposes for the present  to permit the payment of interest on the minimum (or average) balance in such accounts, subject to the requirement that the bank impose a peritem service charge on all items written by the depositor in excess of a 10 items-per-month limit.  (Such a requirement would not precluI-  -rvice charges on the first 10 items.)  As an alternative, it is  considering requiring, if interest is to be paid, (1) that the number of negotiable orders of withdrawals that a depositor writes per month not exceed 15 items, and (2) that there be a minimum (or average daily) S.lance 5f $455 in the account.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  (This alternative might be further  -3-  conditioned to provide a lower interest rate ceiling on the first $400   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  in the account than on the remainder, and to call for some per-item service charge for items in excess of 15 per month.) At the same time, the Board believes that NOW accounts should be differentiated in some fashion from ordinary savings deposits.  For  that reason, it proposes to set the maximum rate of interest payable on such deposits at a level below that for ordinary savings deposits; it is preliminarily giving consideration to a maximum rate of 4-1/2 per cent for NOW accounts. The Federal Reserve System also proposes to permit all thrift institutions offering NOW accounts to make full use of the Federal Reserve collection system in order to clear these items--so long as any nonmember thrift institution clearing items in this manner maintains a clearing account with the Federal Reserve Bank of Boston.  "Full use"  of the collection system would include sending items directly to the Federal Reserve for collection and receiving items drawn on the institution directly from the Federal Reserve.  Under section 13 of the  Federal Reserve Act, the nonmember clearing account must be of a size sufficient to offset the items in transit.  The dollar amount of the  items in transit would generally be a function of the total dollar amount of the NOW accounts in the institution.  Accordingly, the Board  proposes to require, as a condition to clearing NOWs for a nonmember thrift institution, a clearing balance of 3 per cent of the total NOW accounts of the institution.  This requirement is not intended to affect  •  -4-  present clearing arrangements for nonmember commercial banks.  In this  connection; it should be noted that the reserve requirement for a member bank's savings deposits (including NOW accounts) is presently 3 per cent. Interested persons are invited to submit relevant data, views, or arguments with respect to the Board's proposed policies.  Any such  material should be submitted in writing to the Secretary, Board of Governors of the Federal Reserve System, Washington, D. C. 20551, to be received not later than November 1, 1973.  Such material will be  made available for inspection and copying upon request, except as provided in § 261.6(a) of the Board's Rules Regarding Availability of Information. Pending the Board's adoption of final rules for NOW accounts, it is recommended that member banks abstain from offering NOW accounts. Offering NOW accounts, in the present uncertain environment, would be unwise, since the proposed policies outlined above are tentative and subject to change before final adoption in light of the public comments received. By order of the Board of Governors, September 14, 1973. (Signed) Theodore E. Allison Theodore E. Allison Assistant Secretary of the Board  [SEAL]   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  May 31, 1973  MEMORANDUM To:  Board of Governors  From:  John Rippey  The Conference Committee meeting on the Senate and House bills extending flexible interest rate ceg authority and regulating NOW accounts failed to complete its work today. The flexible Regulation Q authority will expire at midnight tonight.  The Conference set June 11 as the next meeting date.  Mr. Patman reportedly announced after the Conference that the Reg. 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RIP-PEY   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  • For Information Only  •  BOARD OF GOVERNORS OF THE  FEDERAL RESERVE SYSTEM  Office Correspondence  Date March 28, 1973  To  Board of Governors  Subject: Impact of NOW accounts on  From  Brenton C. Leavitt  commercial banks in Massachusetts  For information only On March 23, 1973, Messrs. Murphy, Blair, Harrison, Gray, and Grabill, senior officers of five different Massachusetts commercial banks, met with representatives of the Board's staff.  The bankers represented  relatively large banks with the largest being State Street Bank and Trust Conpany, resources about $1.5 billion.  These bankers contended that by  offering NOW accounts, the savings banks were imposing exceedingly difficult and unfair competitive pressures on them.  They all said they  favored NOW accounts and were asking for only competitive equality on rates.  To this end they suggested that Regulation Q might be amended to  permit commercial banks in Massachusetts to pay the same rate that savings banks are paying on savings deposits and to offer NOW accounts. 01111•••   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  They asked how they might present their request to the Board and were told to address a letter to Tynan Smith.  We told them that such  letter should contain facts about what was happening as a result of competitive inequaes and their views on what may happen.  It was also  suggested they address themselves to such questions as the impact of their suggested change on savings and loan associations, and impact on interstate flS ws, particularly on flows with states bordering on Massachusetts. When they left, they said we could expect a submission to the Board requesting consideration of such action.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  March 23, 1973  IIIMOSANDUM To:  Governor Mitchell  /lac  John Rippey  Attached is your corrected transcript. I'd suggest having Krabill go over page 143--comparing the figures there with the revised table. The revised table will be returned with the transcript for inclusion in the printed hearing at the end of your prepared statement.  Attachment   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  March 23, 1973  MEMORANDUM To:  Tynan Smith  From:  John Rippey  Acting at the following draft Banks the letter of Don Barnes and John Attachment  Bob Holland's suggestion, I have prepared to be used in transmitting to the Reserve March 21 to Representative St Germain. Ferrell have reviewed the letter.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  DRAFT LETTER TO PRESIDENTS OF ALL FEDERAL RESERVE BANKS  am sending you a copy of a letter which the Board has sent to Chairman St Germain of the House Subcommittee on Bank Supervision and Insurance in response to Mr. St Germain's recent inquiry regarding the participation of savings and loan associations in automated clearing house arrangements.  In preparing a  reply, the Board developed a policy which it believes ought to apply to the operation of clearing houses in which the Federal Reserve maintains a prevenee. The Board believes this policy, as well as the other considerations discussed in the letter, reflects important public considerations, and I therefore request that you distribute a copy of the letter to each bank in your district which is a direct participant in a clearing house arrangement.  To complete  our files on this matter, I should like to receive copies of the letters you send the banks in transmitting the Boald's letter. Many thanks for your assistance in this matter--and for your comments made in conjunction with the preparation of the letter. Sincerely yours,  Tynan Smith Secretary Enclosure   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  March 22, 1973  Mr. Joe H. Davis Executive Vice President First National Bank Box 84 Memphis, Tennessee 38101 Dear Mr. Davis: As I promised, here is a copy of Governor on. Mitchell's testimony on the "NOW" account phenomen I'd be most interested in your reactions to it. Sincerely yours,  John S. Rippey Special Assistant to the Board Enclosure bcc:  Mt. Domm Waage Association of Registered Bank Holding Companies 730 - 15th Street, N. W. 20005 Washington, D. C.  •   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  For release on delivery  Statement by  George W. Mitchell  Member, Board of Governors of the Federal Reserve System  before the  Subcommittee on Financial Institutions  of the  Coimnittee on Banking, Housing and Urban Affairs  United States Senate  March 21, 1973   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  I appreciate this opportunity to present the views of the Board of Governors on S. 1008. The Board welcomes Chairman McIntyre's call for a constructive dialogue on the issues addressed by this legislation: namely, extension of the authority to regulate interest rate cegs on deposits and the development of negotiable orders of withdrawal ("NOW's") for use by savings account customers as currently offered by mutual savings banks in Massachusetts and New Hampshire.  In particular, the appearance of NOW accounts  as a competitive mutation somewhere between traditional demand deposits and savings deposits compels a reconsideration of the roles of thrift and banking institutions in the payments mechanism today and in the future. First, let me couilllent on section 1 of S. 1008, which would extend for one year, through May 31, 1974, the authority granted in 1966 for flexible and coordinated regulation of rates payable on time and savings deposits.  The Board continues to  recommend that this authority be made permanent.  This is not to  say that interest rate ceilings on time and savings deposits should be forever in place.  In making the authority permanent, Congress  would, of course, enable the regulatory agencies to adjust or suspend the ceilings when conditions warrant. NOW Accounts With respect to NOW accounts, let me say at the outset that the present situation, from the standpoint of the financial   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  • -2-  institutions that compete with mutual savings banks in New Hampshire and Massachusetts, is an intolerable one.  The Board shares the  concern of those who feel that the developments in New England have occurred without the needed guidance from Congress to insure competitive equity. If they are left to develop without proper consideration of their competitive impact, the adverse effects of NOW accounts on other institutions could become extremely serious.  Should this  subcommittee, and the Congress as a whole, find NOW accounts to be a worthwhile initiative, then ways must be found for an orderly phasing-in of similar powers for all financial institutions along with their assumption of comparable regulatory constraints. The Board believes the program I shall outline below meets the need for competitive equity while still recognizing the desirability of improvements in the banking and money services offered to the American family.  Corporations, governments, businesses,  foreign institutions, and nonprofit entities find it more feasible than individuals to keep surplus funds continuously invested. By and large, most families are dependent on the range of services and yields which depository institutions are willing and able to offer them.  The Board's program would provide more leeway for  competitive forces to enrich and extend the services of depository institutions.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -3-  At the same time, however, the public interest and simple fairness suggest that any such changes be accompanied by the imposition of competitive  equity in interest rate ceilings,  reserve requirements, and tax treatment.  The adoption of the  legislative proposals I shall outline could go a long way toward the establishment  of a firm base for continued evolution of a  banking and financial system geared to the needs of the economy. Legislative Recolimlendations The Board suggests a three-part legislative program: (1) All financial institutions should be authorized to offer money transfer services on savings accounts that bear interest, and that are used primarily for household purposes.  These accounts ("family accounts") would  be subject to regulation by the appropriate Federal regulatory authorities and to the conditions set forth in (2) and (3) below. (2) "Family accounts" in all financial institutions should be subject to identical interest rate ceilings set by the appropriate Federal regulatory authorities.  This  requirement applies to all financial institutions, whether they operate under Federal or State charter. (3)  All institutions offering "family accounts" should be required to maintain identical reserves against these accounts with the Federal Reserve System, in accordance with regulations to be established by the Board.  Limited  access to the Federal Reserve's discount window might be provided institutions maintaining such reserves.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -4-  The first recommendation extends to cohmtercial banks, savings and loan associations, savings banks, and certain other depository institutions the right to offer their customers what are in effect checking services on savings accounts, as this power may be circumscribed by their respective regulatory authoes.  Checking or transfer privileges for interest-  bearing accounts should be limited, in the first instance, to accounts owned by individuals.  Savings and loan associations  at present have limited money transfer powers, but have exercised them very little.  Other institutions generally have not acquired  this power, though there are some exceptions established by State law. Under the second recommendation, the Federal regulatory agencies would establish competitive equality among various types of institutions with respect to the new category of "family accounts."  A permissible interest rate ceiling for such accounts  might lie somewhere between the rate currently allowed on passbook savings accounts and the zero level accorded demand deposits.  The  flexibility with regard to interest rate ceilings would allow for an orderly phasing-in of "family accounts" in institutions choosing to offer them. The regulatory agencies should be given sufficient latitude to distinguish accounts affording instant liquidity in   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -5  the form of money transfer facilities from other savings  and  time deposits for the purpose of establishing interest rate ceilings.  Regular savings accounts, at higher interest ceilings  but without checking or transfer privileges, would continue to I- available to individuals and others who now may hold such accounts under existing regulations. The third recommendation, relating to reserve requirements, reflects a position the Board has held for some time, namely that there be universal applicability of reserve requirements established by the Federal Reserve to institutions offering money transfer services. In S.  this recommendation arises out of the need for  competitive equity--having all institutions that share the same money transfer Functions also sharing the economic burden embodied in the reserve requirements set forth by Congress in the Federal Reserve Act. Beyond this, however, the monetary control exercised through reserve requirements should impinge on all institutions particiS.ting in the nation's monetary processes and mechanisms. To require the maintenance of nonearning reserve assets by only one class of institutions--cammercial banks that are members S f the Federal Reserve System--is not only unfair competitively, and, therefore, likely to be less beneficial to the public, but   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  • -6  it alsS makes reserve requirements less useful as an instrument of Federal Reserve policy.  As the institutional source of the  money supply broadens--and it will if savings institutions continue to move in the direction indicated by the NOW account-the reserve base should also broaden, so that monetary policy actiS ns can be smoothly transmitted through the entire financial system.  As it applies to nfamily accountsthis argument would  require that member and nonmember commercial banks, as well as thrift institutions, should have identical reserve requirements. Transition to New Structure If the Congress accepts this principle with respect to "family accounts  the Board would want somewhat greater flexibility  in the range of reserve requirements which can, by statute, be imposed on various types of deposit liabes.  The statutory  range on time deposits, now from 3 percent to 10 percent, might well be extended downward, for instance, so that consideration could be given to reducing to minimal levels reserve requirements on the smaller personal time and savings accounts of the types now held by banks and thrift institutions.  The new "family accounts"  might bear a reserve reqamment somewhere between the present statutory minimum requirement on savings accounts--3 percent--and that on demand accounts--7 percent.  Commercial banks and thrift  institutiS ns would add to their reserve accounts with the Federal Reserve at this rate as their "family account" business grew.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -7-  The transition to this new structure would require care and time to work out any monetary policy effects and to prevent any unfavorable effects on particular institutions; but, with cooperation on the part of the Federal regulatory authorities, it could probably be accomplished without great difficulty. The Board looks forward to the extension of transfer powers to thrift institutions, therefore, only if there is a corresponding assumption of costs and public responsibilities by those institutions.  The development of the NOW account and  similar instruments makes it clear that the need for Congress to deal with the question is urgent, even though implementation of any changes Congress authorizes will necessarily be gradual. Three General Principles The Board's legislative recommendations have been developed while keeping in mind the Federal Reserve's present responsibilities in operating a clearing system for the handling of checks.  The Federal Reserve regards its role in expediting  and accommodating money transfers as highly important. The Board believes, first, that so far as public participation and support are concerned, there should be a single, integrated nationwide mechanism for efficient transfer of funds. The existing system, using checks and drafts, and functioning through commercial banks and the Federal Reserve Banks, is   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  • -8-  substantially of that character.  In this connection, the Federal  Reserve's Steering Committee on Improving the Payments Mechanism issued a statement in December elaborating on this and other points and I am attaching a copy of it for your use. Second, even allowing for the existence of private clearing arrangements, the Board believes that the public system using check or electronic transfers of funds from one institution to another should be such as to insure that the conditions of entry into a general clearing arrangement are fair, and that equitable treatment is assured for institutions with similar powers and responsibilities. Third, the costs of the transfer system and the benefits of participating in it should be equitably distributed among all of the institutions involved, and among their depositors. As implied in the foregoing, the Board believes in comparable treatment for institutions having like powers, but the existing situation fails to meet this standard.  Some institutions,  namely, banks which are not members of the Federal Reserve System, have a competitive advantage.  Although in most States the nominal  reserve percentage for banks is comparable to that imposed on member banks, the reserves required by the States may be carried in the form of what are effectively earning assets: and correspondent balances.  Government obligations  Reserves maintained with the Federal  9•   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Reserve, on the other hand, are generally nonearning assets. Although nonmember banks do not keep reserves with the Federal Reserve, nevertheless they are accorded certain Federal Reserve check clearing services deemed essential to the public's need for prompt money payment.  If, in the future, extensive checking  account powers are developed for savings institutions, the extension of the benefits of the payments mechanism, whether conventional or electronic, to such institutions, without their assuming a fair share of the costs, would exacerbate existing inequitites. Background for the Evolving Payments System Describing some of the background behind the principles enumerated above can help indicate how NOW accounts are related to larger developments in the payments system.  For some years,  concern has been growing that the volume of checks being handled is reaching the point where our present check collection and clearance systems will soon be inadequate.  Last year, for example,  individuals and institutions in this country wrote somewhat over 25 billion checks.  Those checks were drawn on 94 million accounts  with balances aggregating $192 billion.  Seventy-nine percent of these  accounts had balances of less than $1,000--the average was $253; nearly all of these accounts were "family" or personal.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -10-  To process nearly 500 million items weekly, about 30 percent of which flows directly through Federal Reserve facilities, we have stepped up check processing activities, revised procedures, and installed new electronic processing and wire transfer equipment.  Yet we anticipate that in five years, money transfers will  increase about 1-1/2 times from the levels in 1972.  Obviously,  we must move, and should move quickly, to a system placing much greater reliance on the electronic transfer of funds. Up to now, the bulk of the expenditures for research and development in the payments area has been borne either by the Federal Reserve or by conunercial banks. tangible results.  This activity has had  In the sumiaer of 1970, the Federal Reserve  System opened a new electronic communications center, equipped with special-purpose message switching units capable of highspeed transmission, to provide for anticipated increases in funds transfer and other types of electronic messages. Individual banks are experimenting with electronic payments systems using terminals in retail stores that can be activated by plastic cards.  On a more comprehensive basis, the  Federal Reserve has cooperated with banks in Georgia and California in drawing up plans for payments systems which will minimize paper and emphasize electronics.  More recently, the thrift  -11-  industry has begun to consider the implications of electronics payments.  The mutual savings bank industry last July incorporated  MINTS (Mutual Institutions National Transfer System) as an affiliate of their association. There appears to be no question that this attention to the future shape of the payments system, shared by the Federal Reserve, is both necessary and timely.  The more innovative think-  ing that is applied to the problems involving the payments system, the better the ultimate solutions will be. At present there are 163 million savings accounts at financial institutions with balances totaling $310 billion.  About 52  per cent of those accounts are at commercial banks; 20 at savings and loan associations, 13 per cent at mutual savings banks and 15 per cent at credit unions.  About 71 per cent of these accounts  have balances of less than $1,000, and they average about $189 per account.  The bulk of the money in savings deposits, about 74 per  cent, is found in those accounts with balances between $1,000 to $20,000.  The institutional shares in savings accounts, measured by  dollars rather than number of accounts, are:  commercial banks, 39 per  cent; savings and loan associations, 32 per cent; mutual savings banks, 22 per cent; and credit unions, 7 per cent.  (See table attached.)  Today, large corporate customers monitor their demand balances with great skill, keeping them just at the levels required   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -12-  to cover credit availability and the costs of money transfer services they receive.  Any additional funds they have are  invested in such assets as Treasury bills, commercial paper, and bank negotiable certificates of deposit.  Individuals, too, have  moved some of their funds from demand deposit balances into interest-bearing accounts.  They may want to reduce further the  proportion of their funds kept in demand balances. Thus, by offering the convenience of NOW accounts, some mutual savings bankers have gained an early start in a possible evolution of the payments system that is logical and probably feasible.  They have opened an avenue of exploration  as to what type of deposit account ought to be available to consumers in coming years, regardless of present practices. By building on past experience, it would be both prudent and responsive to afford household savings accounts greater flexibility through granting the regulatory agencies authority to approve money transfer arrangements as technology evolves. The proposals set forth above are consistent with this view.  Attachments.  DEPOSIT ACCOUNTS IN FINANCIAL INSTITUTIONS JUNE 30, 1972 Demand Deposits1 at Commercial Banks2/  Savings Accounts (Excluding Time Certificates of Deposit) Commercial Banks2/  Credit Unions5/  suls3/  Total  Number of Accounts (Millions) Size of Account less than $1,000 $1,000 - $20,000 $20,000-$100,000 over $100,000 Total  63.7 20.2 .5  20.4 4.7  *  94.2  84.4  31.9  21.9  25.1  163.3  Amounts (Billions) Size of Account less than $1,000 $1,000 - $20,000 $20,000-$100,000 over $100,000 Total  62.8 36.9 73.0  230.0 50.1 7.7  191.7  68.9  Average Size of Account Accounts less than $1,000 Accounts $1,000 $20,000  $ 253  3443  $ 208  4212  5967  5967  1  3338  Totals may not add due to rounding. * - less than .05. 1/ Demand deposits of individuals, partnerships, and corporations. 2/ FDIC Summary of Accounts and Deposits in All Commercial Banks-June 30, 1972. Number of regular accounts (exclusive of special accounts) and dollar amounts for size categories partially estimated from mutual savings bank data. Total dollar amount in insured regular accounts from FHLBB; total dollar amount in uninsured regular accounts estimated by Federal Reserve staff. 4/ FDIC Summary of Accounts and Deposits in All Mutual Savings Banks-June 30, 1972. Breakdowns by account size estimated, based on 12/31/71 NCUA figures.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  • Evolution of the Payments Mechanism The following statement was prepared by the Federal Reserve System Steering Committee on Improving the Payments Mechanism to inform the Nation's bankers and the public of the general direction of payments mechanism development as currently envisioned by the Committee. The essential features of the payments system that is evolving in response to electronic technology are reasonably clear. These features are not likely to change drastically unless a new technology develops. Private and public roles in this system probably will be very similar to those in being today with financial institutions interfacing with the public and the Federal Reserve maintaining the interface among financial institutions. The Federal Reserve has indicated its intent to accommodate visible evolution in the payments mechanism by continuously improving and updating its facilities to handle a growing volume of funds transfers along the channels of likely development. Thus, the regional processing centers and expanded clearinghouse arrangements now being established by the Federal Reserve System in some 40 trade centers for handling checks may become the nuclei of interconnected regional communications networks for handling wire transfers of funds and financial data. The System's role in facilitating the development of automated clearing facilities and the linkage of such facilities to provide a nationwide network for automated crediting systems or preauthorized debiting systems may pioneer a similar role in the experimental point-of-sale terminals. Such terminals, now linked to a single bank's computer and energized by a unique credit-card authorization system, with appropriate standards and interlinkage, may potentially provide merchants and consumers with a convenient means of consummating transactions at the point of sale over a broad range of merchants and financial institutions and over  large geographic areas. These transactions encompass use of an electronic communications network to transfer payments originating (a) at a point of sale,(b) with a wage, salary, or other income payment, or (c) with an authorization to charge a depositor's account. This network would serve all accounts from which, or to which, payments are made. CHANGES IN PROSPECT The Nation's payments mechanism can be expected to evolve in the direction of a system where credit to the payee's account is made at the same time the payor's account is charged. Increasingly, these transfers will be made over a computer-directed communications network. As electronic transfers become technologically and economically superior, checks would be largely displaced. The use of the credit card, or a similar means of activating electronic payments transfers, should expand greatly. Much of today's paper-oriented operation would be displaced by electronic terminals at the point of sale for making direct funds transfers, with the related accounting being done by computers. Significant reductions in the volume of transactions made through the use of paper currency may also take place—by the use of point-of-sale terminals and through other electronic techniques. The electronic funds transfer system is expected to evolve in a modular fashion through the development and interlinkage of a comprehensive series of computer-directed communications networks. At the local level, the system would include commercial banks and possibly other depositary institutions linked to point-of-sale terminals in retail establishments, to computers in businesses, and possibly to terminal devices in homes. Through these financial institutions, connection would be made to regional. national, and international networks, enabling the movement of funds nearly everywhere in the world.  REPRINTED FROM FEDERAL RESERVE BULLETIN FOR DECEMBER 1972  1010  FEDERAL RESERVE BULLETIN  E  DECEMBER 1972  OBJECTIVES The payments system as it evolves will need to be aimed at providing the public with a convenient, economical, and secure means of moving funds. In comparison to the present check and other funds transfer systems, the new payments system should: • be more efficient, as electronic data processing and communications technologies replace labor-intensive processing procedures. • provide a more secure method of payment, less subject to theft, loss, forgery, and alteration of payments data, and a method of tracing all transactions. • assure a more equitable balance of the debit and credit effect on participants. • accommodate both debit and credit transfers.  storage, and retrieval of associated information: and that provides better integration of business electronic data processing capabilities with the payments mechanism. Financial institutions need a more efficient system of transferring funds—one that is less labor intensive—a system that will enable them to offer customers a wider variety of services, including informational services based on the improved data generated by the payments system. Government needs are similar to those of business, but with the additional special need for greater security against theft of checks issued to the public.  The system would continue to: • provide for the continuation of competition among financial institutions. • involve public participation and surveillance over private institutions' money role. • be capable of providing timely and detailed data on money flows, trade volumes, and other payments-related information for use in monetary policy and other relevant applications.  ROLE OF THE FEDERAL RESERVE SYSTEM It is anticipated that the Federal Reserve will install and manage a nationwide communications network through which interregional settlements between financial institutions will be made. A number of other networks may exist. In part. these will be local and regional funds transfer networks in which Federal Reserve involvement may be minimal. The total of transfers internal to banking institutions may expand if demand deposit market shares become more concentrated. Thrift institutions may set up their own networks. Credit-card clearing networks may become more widespread. The level of Federal Reserve involvement in different regional or local networks for transfer of funds will vary depending on the banking structure. The Federal Reserve should expect to monitor the regional and local networks to assure that a satisfactory degree of security is being maintained and that the capability for interfacing with the national network is obtained. Since the payments mechanism will evolve continuously, the Federal Reserve should expect to continue its participation in this evolutionary process in order to assure the desired development and coordination of the payments system, to insure the continued competition among providers of financial services, and to protect the public interest.  FEDERAL RESERVE INVOLVEMENT The Federal Reserve Act directs the Federal Reserve System to provide an efficient payments mechanism for the public. The policy statement of the Board of Governors on June 18, 1971, called for "basic changes in the Nation's system for handling money payments [as] essentially transitional steps toward replacing the use of checks with electronic transfer of funds." In further development of the payments mechanism, the convenience and needs of the participants should continue to be the primary considerations. These needs may be summarized as follows: Consumers need an economical means of payment that is acceptable anywhere; is less subject to theft than cash; is less subject to loss, forgery, and alteration than checks; facilitates the keeping of necessary personal records; and enables them convenient access to a wide range of services from financial institutions. Businesses need a system that reduces the time, costs, and risks in making and receiving payments; that facilitates the transmitting,   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  • EVOLUTION OF THE PAYMENTS MECHANISM  ROLE OF FINANCIAL INSTITUTIONS It is anticipated that private financial institutions will continue to play the predominant role in local and regional communications networks through which intraregional payments will flow. The number of private facilities engaged in processing payments transactions may decline as branching systems and holding companies centralize their accounting operations, or as correspondent banks expand their accounting services, or as smaller institutions use specialized service bureaus or band together to perform demand deposit and other accounting services. Nearly all financial institutions will be linked together through local, regional, or national communications networks by means of compatible input and output devices. Customers with larger volumes of transactions will interface into their banks' equipment. Competitive marketing of collection and payments services may become less localized. Through the use of advanced equipment, more and better services will be available to customers. ROLE OF BUSINESS The evolution of the payments system will enable business and governmental units to utilize electronic data processing equipment more fully and streamline their payments procedures. It will be possible to submit payments data to and receive payments data from financial institutions in electronically transferable form. Businesses can now use computer-oriented input to initiate payment from their own deposit accounts or, through preauthorization agreements, initiate payment from the deposit accounts of customers. They will be able to send to their customers machine-readable invoices that, when forwarded to the issuing companies or the customers' banks. will be transformed into electronic payment messages. Larger business and governmental depositors will establish computer-to-computer connections with the financial institutions that hold their accounts. This option will permit greater competition for accounts because distances will have a diminishing cost impact. Instantaneous funds transfers will significantly simplify corporate funds management.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  • 1011  Float will largely disappear and will not be a significant factor to consider in determining investable funds. Corporate treasurers will be able to obtain more timely information from financial institutions on the status of corporate balances, and the timing of certain classes of funds' receipts and disbursements will become more predictable. Informational services provided by financial institutions will enable small- and medium-sized businesses to manage investment of funds in a manner previously practicable only in large businesses. ROLE OF THE INDIVIDUAL It is anticipated that, due to rising costs and delays and given a more convenient, cheaper alternative, most individuals will minimize their writing of checks. Salaries, wages, pensions, dividends, and other income items will predominantly be credited directly into individuals' accounts and, through preauthorization, recurring payments will be deducted automatically from accounts. In addition, a consumer will be able to pay some bills simply by signing a machine-readable invoice and forwarding it to the issuing company or the financial institution holding the consumer's account. Other payments will be made through point-of-sale terminals, with either the individual's demand deposit account or possibly an interest-bearing deferred-payment account being debited. The consumer will be able to complete financial transactions through the use of a card or similar identifying device, and this procedure will be accomplished through automated teller units conveniently located in shopping centers, in other places handling numerous consumer sales, and in the home. FUTURE STEPS As the electronic payments system continues to develop, some areas that may need continuing attention by the Federal Reserve System are as follows: • public reaction and changes in public attitudes toward payments system improvements. • impact of payments system improvements on the public's use of coin and currency.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  1012  FEDERAL RESERVE BULLETIN :2 DECEMBER 1972  • bank cards and their re!ationship to the payments mechanism; the competitive impact of bank cards with respect to retail cledit cards. • international electronic funds transfer developments. • impact of payments system developments on Federal Reserve System operations and policy. • technological developments in data handling and transmission. • development of the standards necessary for effi-  dent transmittal and interchange of payments information. • legal considerations surrounding actions designed to improve the payments system. The Federal Reserve System will need for some time to continue to devote significant resources to the development of the Nation's payments mechanism. fl  •  • 1 4 1973  The Honorable Fernand 3. St Germain, Chairman Subcommittee on Bank Supervision and Insurance Committee on Banking and Currency House of Representatives Washington, D. C. 20515 Dear Mt. Chairman: I am responding to your recent telephoned request to appear on March 15 before your subcommittee to present the views of the Board of Governors on H.R. 4070, H.R. 4988, and H.R. 4719, legislation pending before your subcommittee.  •   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  As you know, conferences concerning the international monetary situation are being held in Paris, and Chairman Burns and Governor Daane are in attendance at these meetings. Consequently, it has not been possible up to now for the full Board Co consider the important issues raised by the bills before your subcommittee. It is our e:tpectation that the full Board will be able to consider the bills early nest week. Until then, I feel it would be inappropriate for ma to appear before your subcommittee since it would not be possible for me to convey the Board's views. I will, of course, be in touch with you as soon as the Board has taken action, and I trust this will be in time for our views to be of assistance to you and the other members of the subcommittee. Sincerely yours, /4.5 George W. Mitchell :rj 3/13/73  L .  C JE-D'Y   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  tvo 6,3 (t  Mir* 7, 1973 1411101ZANDU14 To:  'Dm O'Connell John Ferrell Don Barnes John Rippey  The Board will be presenting testimony on 1006 and on H.O,. 4070 beginning March 15.  Please  take a look at the attached bills and let me know if you and any technical difficulties with them.  Attachments JSR:rj  JOHN SPARKMAN, ALA., CHAI RMAN WILLIAM PROXMIRE. WIS. HARRISON A. WILLIAMS, JR..  JOHN TOWER, TEX. N.J. WALLACE F. 8ENNET1, U. H THOMAS J. MC INTYRE, N.H. EDWARD W. BROOKE. MASS . ALAN CRANSTON. CALIF. BOB PACKWOOD, OREG. ADLAI E. STEVENSON III. ILL. BILL BROCK, TENN. J. BENNETT JOHNSTON. JR.. LA. ROBERT TAFT, JR., OHIO WILLIAM D. HATHAWAY, MAIN E LOWELL P. WEICKER, JR., CONN. JOSEPH R. BIDEN, JR., DEL. DUDLEY L. O'NEAL, JR. STAFF DIRECTOR AND GENE RAL COUNSEL  Z.0010 13.. CIIP°° s•),S SI-V‘  'ZICTrifeb Zevaig com M IT1 EE ON BANKING, HOJIIVI•q(•11:1 RBAN AFFAIRS WASH1NGTOV$ SIO.C. 20510 n  nCCO\ICLA bBtAt\IA  March 5, \U 'L. The Honorable Arthur F. Bur ns Chairman Federal Reserve System Washington, D. C. 20551 Dear Mr. Chairman:  The Subcommittee on Financ ial Institutions has scheduled hearings from March 20 to March 22 on a bil l providing for a one year con tinuation of flexible Regulation Q author ity and to amend several Fed eral laws to make it clear that all federally regulated financial instituti ons could offer negotiable order of withdr awal accounts to depositors. In connection with these hearings, you are invited to appear as a witness on March 21 before the Subcommittee. The hearin gs will start at 10:00 a.m. and will be held in Room 5302, New Senate Off ice Building. Rules of the Committee req uire you to file a written sta tement twentyfour hours in advance of your appearance. For Commit tee and news media purposes, it is requested tha t you supply seventy-five cop ies of your written statement. Be assure d that your statement will not be released to the news media until your appearance before the Commit tee. Copies of your statement should be delivered to Mrs. Othella C. Pompier, Room 5300, New Senate Office Building, by noon on March 20. Rules of the Committee lim it oral presentations to bri ef summaries of the statement not to exc eed fifteen minutes durati on. Your written statement will be printed in full in the record of hea rings. • Your cooperation with the Committee Rules is appreciat ed, and I am enclosing for your informati on a copy of the bill, S. 1008.  1'  ,7Sin 1/  •-  •  •  4  ,  t  Triomas J. McInty/U.S:S. Chairman Subcommittee on Financia Institutions Enclosure   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  A   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  f  •  ,;  !  . • ilttli  ;  4'  93D CONGRESS 1sT SESSION  ,  IN THE SENATE OF THE UNITED STATES FErauAlly 26, 1073 Mr.McINTyllE introduced the following, bill; which was read twice and referred to the Committee on Banking, Housing and Urb an Affairs  t  :  :  t t •  A BELL  To extend certain laws relating to the payment of interest on time and savings deposits and to make clear that Federal banking statutes do not prohibit depository institut ions from offering negotiable order of withdrawal services in con nection with certain interest-bearing deposits. Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled, 3 That section 7 of the Act of Septem ber 21, 19(6 (Public 4 Law 89-597), is amended by stri king out "1973" and in-  5 sorting in lieu thereof "1974". 6  SEC. 2. Section 19 (i) of the Federal Iteserve Act (12 U.S.C. 371a) is amended by adding; at the end ther eof the following new sentence: ",Nothing in this paragraph shall be II  2 1  construed. as prohibiting payment of interest on a deposit  2 with respect to which the bank may require the depositor 3 to give notice of an intended withdrawal not less than thirty 4  days before the withdrawal is made; even though in practice •  5 such notice is not required and the depositor is allowed to 6  make withdrawals by negotiable instrument for the purpose  7 of making payments to third persons or otherwise." 8  SEC. 3. Section 18(g) of the Federal Deposit Insurance Act (12 U.S.C. 1828(g)) is amended by adding at  ,a  10 the end thereof the following new sentence: "Nothing in 11 this subsection shall be construed as prohibiting payment of 12 interest on a deposit with respect to which the bank may 13 require the depositor to give notice of an intended with14_ drawal not less than thirty days before the withdrawal is  15 made, even though in practice such notice is not required 16. And the depositor is allowed to make withdrawals- by nego17 tiable instrument for the purpose of making payments to 18 third persons or otherwise." A  19  • Sm. 4. Paragraph (13) of section 107 of the. Federal  •  20 Credit Union Act (12 U.S.C. 1757) is amended to read as 4   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  21 follows: 22  "(13) in accordance with rules and regulations pre-  23  scribed by the A dministrator, (A.) to sell to members  24  negotiable cheeks (including travelers checks) and  25  money orders, and 'to cash checks and money orders for  3 1  members, for a fee which does not exceed the direct and  2  indirect costs incident to providing such service and (B)  3  to allow its members to make withdrawals from their  4  share accounts by negotiable instrument for the purpose  5  of making payments to third persons or otherwise; and".  6  SEc. 5. The last sentence of section 5(b)(1) of the  7 Home Owners' Loan Act of 1933 (12 U.S.C. 1464) is 8 amended to read as follows: "An association may allow 9 holders of savings accounts to make withdrawals from such _ 1  accounts by negotiable instrument for the purpose of making  11 payments:to third persons or_ otherwise as long as the : association retains the _right to require the advance notice 4.43 referred to in the third sentence of this paragraph." _ -_: . ,. .s. _-. - :   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  1.  •   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  93o CONGRESS 1ST SESSION  S. 1008  A BELL — . To extend certain laws relating to the payment of interest on. time and savings deposits and to make clear that Federal banking statutes do not prohibit depository institutions from offering negotiable order of withdrawal services in connection with certain interestbearing deposits.  040  ••  • SO  • -in •110.  ▪  .0▪ 0  •••• ••••  ▪  sow  • •••  ▪  ..•••••••  ".••  .1 •0  By Mr. ArCINTYRE  •ea kir ••• .•••  ••• •-  0, •••  ••••  •••••  20,1973 Read - twice and referred to the Committe e on. Banking, Housing and Urban Affairs FEBRUARY  •  46,1•  •••.•  ,  • ,  1.1•• ••••  T.-  p •  •  • ••••  • • •  0. •  0 00. 10.  00  ••  011.  1.  •  1.10 • •  -00  .  .••.. .•  N ........  • •••••  ••••••.• ......  .•  11. 1.101  • .00'  .......  •••  •.  . I  , ••• ova  ••  •0  :....  \ •••  • 1  an -. . 1  ."...  V  • .11  0... ......  411 • ....... . •  ••••  110 1. •••••••  .1  411,  ....  •  7*..."  ...  ••••  •••-• •  ...p a.  ••  ....... 0.0.  r.....  S••••  .... ••••• *ay  0.1.  S1......  • .0•  1.110.••  .....  ••••• ••••  1  .  •....  •••  01 11100  ..i  ....  ....  ........,  V/  ......  •••••  ...I.  1.•••••.  • .•  • •• ft• 0 00  1  •••••  r,--  1001  1,10•0  as  •••••  00  as00  ••••••••  •  awn  ;00  -  ...WI  .......... ,•0•••  • .......  • •  •  ...  •••••  ‘.. •••• 111a.  1...-• 0 ,  S.1/  bra..  • ...... •••  .... •  .  .....  ...•  ...VW.  X  :—.  ••••• •••  I.* VP" •••  1.10  •  .  • INV  ,•  .4. •  . 001  ; C  •0•••• .  I•..  •  ow  011  ...0.0.1.  ....  1.•••••  •••00  ••••••  ••••  .00  •••••  0 ... • ...•  •••••••  'a.  1.01-..  ..... •  ••:.  1,.. .•; '  .01  ..  '...-  "------71E71"--171*P•17,7777r;r77.77 ‘!..'!1'17% .4bra•  •  •• •  :••  • 4.3.. *  •••  11.••••••*r•TrIL•1• 01••  .  •  1— 7  93D CONGRESS 1ST SESSION  S61008  IN THE SENATE OF THE UNITED STATES FEBRUARY 26, 1973 Mr. MchrryBE introduced the following bill which was read twice and referred to the Committee on Banking, Housing and Urban Affairs  A BILL To extend certain laws relating to the payment of interest on time and savings deposits and to make clear that Federal banking statutes do not prohibit depository institutions from offering negotiable order of withdrawal services in connection with certain interest-bearing deposits. Be it enacted by the Senate and House of 1?epresenta2 tives of the United States of America in Congress assembled, 3 That section 7 of the Act of September 21, 1966 (Public 4 Law 89-597), is amended by striking out "1973" and in5 serting in lieu thereof "1974".  6  SEC. 2. Section 19(i) of the Federal Reserve Act (12  7 U.S.C. 371a) is amended by adding at the end thereof the   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  following new sentence: "Nothing in this paragraph shall be II   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  2 1 construed as prohibiting payment of interest on a deposit 2 with respect to which the bank may require the depositor 3 to give notice of an intended withdrawal not less than thirty 4 days before the withdrawal is made, even though in practice 5 such notice is not required and the depositor is allowed to 6 make withdrawals by negotiable instrument for the purpose 7 of making payments to third persons or otherwise." 8  SEC. 3. Section 18(g) of the Federal Deposit Insur-  9 ance Act (12 U.S.C. 1828(g)) is amended by adding at 10 the end thereof the following new sentence: "Nothing in 11 this subsection shall be construed as prohibiting payment of 12 interest on a deposit with respect to which the bank may 13 require the depositor to give notice of an intended with14 drawal not less than thirty days before the withdrawal is 15 made, even though in practice such notice is not required 16 and the depositor is allowed to make withdrawals by nego17 tiable instrument for the purpose of making payments to 18 third persons or otherwise." 19  SEC. 4. Paragraph (13) of section 107 of the Federal  20 Credit Union Act (12 U.S.C. 1757) is amended to read as 21 follows: 22  "(13) in accordance with rules and regulations pre-  23  scribed by the Administrator, (A) to sell to members  24  negotiable checks (including travelers checks) and  25  money orders, and to cash checks and money orders for  "9••••••••  3 1  members, for a fee which does not exceed the direct and  2  indirect costs incident to providing such service and (B) to allow its members toP. make withdrawals from their  4  share accounts by negotiable instrument for the purpose  5  of making payments to third persons or otherwise; and". Stc. 5. The last sentence of section 5(b)(1) of the  7 Home Owners' Loan Act of 1933 (12 U.S.C. 1464) is 8 amended to read as „follows; "An association may allow 9 holders of savings accounts to make withdrawals from such  10 accounts by negotiable instrument for the purpose of making 11  payments to third persons or:. otherwise as long as the  12 association retains the right to require the advance notice  ii referred to in the third sentence of this paragraph."   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  93o CONGRESS 1ST SESSION  S. 1008  A BILL To extend.eertaiu laws relating to the payment of interest ort,time'and savings deposits and to make..clear that Federal banking statutes do not prohibit depository institutions from offering negotiable order of withdrawal services:in connection with certain interestbearing deposits. By Mr:. MCINTYRE FEBRUARY 26,1973 Read twice and referred to. the Committee on Banking, Housing and Urban Affairs  30 93D CONGRESS /st Session  SENATE  {  REPORT No. 93-149  STRUCTURE AND REGULATION OF FINANCIAL INSTITUTIONS  REPORT OF THE  COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS UNITED STATES SENATE TO ACCOMPANY  TOGETHER WITH  ADDITIONAL VIEWS  MAY 14, 1973.—Ordered to be printed  83-010   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  U.S. GOVERNMENT PRINTING OFFICE 'WASHINGTON : 1973  COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS JOHN SPARKMAN, Alabama, Chairman WILLIAM PROXMIRE, Wisconsin HARRISON A. WILLIAMS, JR., New Jersey THOMAS J. McINTYRE, New Hampshire ALAN CRANSTON, California ADLAI E. STEVENSON III, Illinois J. BENNETT JOHNSTON, JR., Louisiana WILLIAM D. HATHAWAY, Maine JOSEPH R. BIDEN, JR., Delaware   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  JOHN TOWER, Texas WALLACE F. BENNETT, Utah EDWARD W. BROOKE, Massachusetts BOB PACKWOOD, Oregon BILL BROCK, Tennessee ROBERT TAFT, JR., Ohio LOWELL P. WEICKER, JR., Connecticut  DUDLEY L. O'NEAL, Jr., Staff Director and General Counsel MICHAEL E. BURNS, Minority Counsel (II)  CONTENTS Extension of authority for the flexible regulation of interest rates or dividends payable by financial institutions Conversion of mutual savings and loan associations into stock organizations Authority for Federal savings and loan associations and national banks to invest in State housing corporations Premium payments by insured savings and loan associations to the Federal Savings and Loan Insurance Association State taxation of federally insured financial institutions Cordon Rule Additional views of Messrs. Bennett and Brock Additional views of Mr. Brooke   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Page  1 3 5 5 6 9 10 12  Calendar No. 141 93D CONGRESS 1st Session  t J  SENATE  REPORT No. 93-149  STRUCTURE AND REGULATION OF FINANCIAL INSTITUTIONS  MAY 14, 1973.—Ordered to be printed  Mr. SPARKMAN,from the Committee on Banking, Housing and Urban Affairs, submitted the following  REPORT together with ADDITIONAL VIEWS [To accompany S. 1798]  Extension of Flexible Interest Rate Authority and the Issue of NOW Accounts  4  Section 1. The Subcommittee on Financial Institutions held hearings on March 20-22,1973 on three bills: S. 1008, S. 1256, and S. 1257. All three of these bills contained sections providing for the extension of the authority of the Board of Governors of the Federal Reserve System, the Board of Directors of the Federal Deposit Insurance Corporation, and the Federal Home Loan Bank Board to regulate in a flexible manner the interest rates or dividends payable by insured banks on time and savings deposits and by members of the Federal Home Loan Bank system on deposits, shares, or withdrawable accounts. Flexible rate control legislation was first enacted by Congress in September 1966. On five different occasions Congress has extended this authority for varying and consecutive periods of time and unless further extended this authority will expire on May 31,1973. The original basis for enacting flexible rate control authority was a finding by Congress that interest rate competition was putting an enormous upward pressure on savings rates paid by thrift institutions beyond their ability to pay such rates. Through this rate control authority the Federal agencies have established interest rate differen-   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  (1)  2 tials between commercial banks and competing thrift institutions. Committee in examining this question resolved that a one year The sion of this authority was in the public interest at this time. extenThe Committee's reason for a simple one year extension of flexibl interest rate authority was based primarily on the fact that it is an-e ticipated that in the near future the President will submit to Congress legislative proposals based upon the findings of the President's Commission on Financial Structure and Regulation. In the report submitted to the President, numerous structural changes were recommended for competing financial institutions that would justify an orderly phase out of flexible interest rate authority based on differentials between thrift institutions and commercial banks. The Committee found, however, that at this time an extension of flexible interest rate authority, Regulation Q, was necessary to insure a continuing supply of savings funds for the mortgage market. During the Committee's examination of the extension of interest rate control legislation, testimony was received on a new banking service presently being offered to customers of mutual savings banks in Massachusetts and New FIampshire. In the past few months, mutual savings banks in these two States have been offering a type of account commonly referred as a"NOW account" by which a depositor may remove funds from a savings account through the use of a negotiable order of withdrawal. NOW accounts first originated early in August of 1970 in Massachusetts. As of March 1, 1973, 56 out of the 167 Statechartered savings banks in Massachusetts were offering NOW accounts, and, as of that date, the funds in those accounts represented three-fourths of 1 percent of total mutual savings deposits in Massachusetts with balances of slightly more than $1,900 per account. As of March 1, 1973, 11 out of the 30 State-chartered mutual.savings banks in New Hampshire were also offering NOW accounts with deposits representing one-seventh of 1 percent of total savings deposits in all New Hampshire savings banks, and the average balance in those accounts was $550. At the present time, NOW accounts are being offered only by Statechartered mutual savings banks in Massachusetts and New Hampshire, and there are approximately 45,000 people having such accounts. The existence of this new service has raised questions concerning the competitive balance between competing financial institutions. During the Committee's consideration of this subject, testimony was received primarily from commercial banks and savings and loan associations indicating concern that if NOW accounts were allowed to continue that serious competitive disruptions and inequities would occur,. Testimony received from the Federal Deposit Insurance Corporation. the Department of the Treasury,the Federal Reserve Board,and the Federal Home Loan Bank Board indicated, however, that at this time there was not sufficient evidence of dismtermediation to warrant the prohibition of NOW accounts at this time. The Committee in considering the question of NOW accounts had two bills before it, one of which,S.1256,contained a section which provided for the prohibition of NOW accounts. Another bill considered by the Committee, S. 1008, provided for the extension of NOW account authority to all competing financial institutions. During the Full Committee executive session, an amendment was offered and rejected   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  3 by a vote of 14 to 2 which would have provided that NOW accounts would be allowed to continue for only one year in the two States presently having this type of account, namely, Massachusetts and New Hampshire. The Committee did take into consideration, however,the question of competitive distortions within the financial community because of the existence of these accounts and included in the bill a section giving the Federal Deposit Insurance Corporation the authority over the rate of interest paid on NOW accounts. While this action does not limit the continuation and possible expansion of NOW accounts,it does provide the FDIC with clear authority to cover all Federally-insured and noninsured banks throughout the country that presently offer such servjc or are commenced by other financial institutions in the future. The Cnmittee is particularly concerned with the competitive position that small commercial banks must face in competing with Statechartered mutual savings banks offering such service where permitted by State law, regulation, or judicial decision. The Committee, therefore, instructs the FDIC to monitor closely the effect that NOW accounts have on competition among the various financial institutions and to move swiftly to take corrective action if warranted. The Committee in taking such action recognized the potential benefit that an individual customer could receive by way of payment of interest on an account by which funds can also be withdrawn through the use of negotiable orders of withdrawal. Thernmittee is also cognizant that the potential for competitive inequities could develop if such accounts became widespread in use without clear regulatory standards and criteria. At the present time, the legality of NOW accounts is determined by the laws, banking regulations, and judicial decisions of the individual States. The localized nature of NOW accounts convinced the Committee that at the present time the issue is one primarily of State rather than Federal jurisdiction. The Committee concluded that in view of the fact that these accounts presently exist in only two States that a case for Federal intervention is not justified. The Committee, however, is convinced that such accounts should only be offered and limited solely to individual persons. The Committee also intends to examine the entire question of the extension of this type of account to all competing financial institutions during its consideration of the President's legislative proposals resulting from the Commission on Financial Structure and Regulation. Conversion of Mutual Savings and Loan Associations into Stock Associations Section 2 of the bill would amend section 402 of title IV of the National Housing Act by adding a new subsection (j) thereto. New subsection (j) would prohibit the Federal Home Loan Bank Board and the Federal Savings and Loan Insurance Corporation until December 31, 1974 from approving conversions from the mutual to stock form by savings and loan associations the accounts of which are insured. or would become insured, by the Corporation. By administrative action the Federal Home Loan Bank Board has maintained a   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  4 moratorium on such conversions since December 5, 1963. In general, the effect of new subsection (j) would be to impose a morat orium by statute. The first sentence of the new subsection is intended to the responsibility of the Board and the Corporation; to descristate be the scope and coverage of the subsection; and to provide for the tempo prohibition of the exercise of such responsibility with respect rary covered. institutions. The subsection would cover a mutual to the stock conversion in which either the converting or converted institto ution is insured by the FSLIC; in which the converting institution taneously applies for FSLIC insurance; or in which the convesimulis to occur by way of merger or holding company acquisition.rsion The exception clause in the first sentence is intended to insure that appro priate exceptions can be made in supervisory cases. The secon d sen-. tence is intended to grant necessary rulemaking, defini tional and enforcement authority. New subsection (j) contains the phrase "including approval of any application for such conversion pending on the date of enact this subsection". This phrase is intended to insure that the ment of section is equally applicable to all associations and to insurenew subthe purpose of the subsection is not defeated by the filing of applithat catio prior to its enactment. At the present time there is pending befor ns e the Federal Home Loan Bank Board a conversion application by an association in Salt Lake City, Utah. In October 1972 the association initiated litigation against the Board contesting the validity of the administrative moratorium which the Board has maintained since-becember 5, 1963. On November 24, 1972 the Board and the association entered into a Letter Agreement with respect to a stay of the.litigation and certain other matters concerning the application. It is not the Committee's intention that the terms of new subsection (j) should prejudice any rights given to the association under such agreement or that the terms of the subsection should vacate the related order of the United States District Court for the District of Utah entered on November 28, 1972. On April 19, 1971 the Federal Home Loan Bank Board submitted legislation authorizing Federal stock associations either by de novo chartering or by conversion from existing mutual associations. Following hearings on the legislation in October 1971 the Committee concluded that the procedure for effecting conversions needed to be spelled out in greater detail in the legislation. The Board has been working on revised legislation, but has not yet submitted such legislation. The legislation is expected from the Board within the next few months and the Committee hopes that it will be submitted promptly. • Along with the preparation of this legislation, the Board has been actively preparing regulations implementing the existing provisions of law relating to conversions and has been moving toward the termination of its administrative moratorium. Under existing.law,a mutual to stock conversion can occur only if the resulting association is chartered under state law. Thus, if the Board's moratorium is terminated and if a large number of associations choose to convert, the Federal system would be diminished and it would be difficult to deny federal associations the right to convert.to federal stock associations. The Committee believes it desirable to impose a temporary moratorium in   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  5 order to protect the Federal system and to prevent any.-irreversible precedent from being established so that the Congress will have a free hand in considering the Board's revised legislation. Authority for Federal Savings and Loan Associations and National Banks to Invest in State Housing Corporations  a  Section 3 of the bill would authorize Federal savings and loan associations and national banks to invest in state housing corporations incorporated in the State in which the savings and loan association or bank is located. Such State housing corporations would be established for the limited purpose of providing housing and incidental services, particularly for families of low and moderate income. The investment by a savings and loan association would be limited to a savings and loan association whose general reserves, surplus, and undivided profits aggregate a sum in excess of 5 percent of its withdrawable accounts; and,other than loans or loan commitments,it could not exceed one-fourth of 1 percentum of the assets of the savings and loan association. The investment by a national bank would be limited to shares of stock and loans and loan commitments not exceeding in the aggregate 5 percent of its capital stock actually paid in and unimpaired, plus 5 percent of its unimpaired surplus fund. The bill woi drerniire4hat the appronriate Federal remilatory body ov r the rnancial institution would re(rulate in ve.stroents in Stfitp brnicing corporations au horized by this erovision, also that each such State housing corporation would make available such information as may be needeby the supervisory body to insure that the investments are made in accordance with this section of the bill. The Committee would like to encourage the Nation's financial institutions to invest more actively in low- and moderate-income housing and, noting the development of State housing agencies in recent years sees in this provision the opportunity for more extensive between State housing agencies and financial institutions. cooperation' Premium Payments to the Federal Savings and Loan Insurance Corporation Section 4 of the bill would amend Section 404 of the National Housing Act to establish a new procedure for payment by insured savings and loan associations of premiums into the reserve fund of the Federal Savings and Loan Insurance Corporation. Basically, the amendment would eliminate the prepayment of additional premiums and restructure the regular insurance premium payment system to eliminate wide fluctuations in the flow of premiums into the reserve fund and to provide for a more orderly payment system at a level more appropriate to the projected needs of the Insurance Corporation. The existing language of section 404 establishes a regular annual insurance premium of 1/12 of one percent of the total amount of all savings accounts of the insured members of each insured institution and, under certain specified circumstances an additional premium—in the nature of a prepayment of the regular pre-   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  S. Rept. 149,93 1-2  6 mium—in an amount equal to two percent of each insured institution's annual savings deposit increase. Whether the additional premium prepayment is to be paid in a given year depends on the ratio of insurance reserves of the Insurance Corporation to the total amount of all savings accounts in all insured institutions. This statutory plan produces widely varying cash flows from insured institutions to the FSLIC—from zero over a period of years to very substantial sums in other years. After a two percent ratio of insurance reserves to savings in insured institutions was achieved in 1969, cash flow from the additional premium was cut off. By the end of 1972 this ratio slipped below 1 3/5 percent. This means that additional premium payments will have to resume as of May 1, 1973 and upon billing by the Corporation for those institutions having premium years beginning after such date. Unless the section is amended, an extremely large cash flow into the FSLIC's insurance reserves will result. These funds are not required by the Corporation and would simply divert funds that would otherwise finance housing. The irregular cash flows which result from the present premium structure are detrimental to the orderly administration of home mortgage credit and the affairs of the Corporation. The amendment to section 404 would eliminate the prepayment of additional premiums and restructure the premium payment system by giving the Federal Home Loan Bank Board discretion to adjust the level of cash payments to the Corporation within a range of 30 to 270 percent of the regular annual premiums with the remainder to be transferred from the Secondary Reserve of accumulated premium prepay-. ments. A goal of the amendment is the orderly phasing out of the Secondary Reserve. Under the amendment, if at any December 31 the FSLIC's reserve ratio is less than 1.25 percent, full cash payment of the regular premium would be begun and continued until the year-end ratio again reaches 1.25 percent. The proposed amendment is based on the judgment of the Corporation that the present law's goal of a reserve ratio in the 1.60 to 2.00 percent range is not justified. Relative to the size of its reserve funds, the FSLIC's losses over a span of 38 years have been nominal, and the projected reserves forthcoming as a result of this amendment will be adequate to discharge its financial responsibilities and maintain the public's confidence. Study of "Doing Business" Tax by States on Financial Institutions Section 5 of the bill would direct the Advisory COmmission on Intergovernmental Relations to make a study of all pertinent matters relating to the application of State "doing business" taxes on out-of-State depositories—commercial banks,. mutual savings banks, and savings and loan associations. The Commission is directed to report to the Congress its suggestions and recommendation for legislation by December 31, 1974. The amendment would impose a moratorium until December 31$ 1975, on taxation on interstate transactions during which States could impose, with one additional tax,the restricted list of taxes which a State could have imposed on any insured depository not having its principal office within such State. These permitted taxes were contained in the so-called "temporary amendment"(applicable to national   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  P.7  banks) found in Public Law 91-156. This temporary amendment expired December 31, 1972. The additional tax pertains to payroll taxes based on persons employed in such jurisdiction. Public Law 91-156 authorized a State to impose on a national bank located within it, in addition to other taxes previously authorized by Section 5219 of the Revised Statutes, virtually any other tax except a tax on intangible personal property. It authorized a State to impose on a national bank not located within it a few taxes on tangible property located within the State or on certain transactions taking place in the State. This "temporary" amendment was to last until January 1, 1972 (later extended to January 1, 1973), at which time the "permanent" amendment would take effect. The "permanent" amendment provided that for tax purposes, national banks must be treated the same as State-chartered banks. Recognizing that these amendments enacted in 1969 raised many problems, Public Law 91-156 instructed the Federal Reserve Board to conduct a study of the subject of State taxation of banks. The Board completed its study in April,1971. Congress by Public Law 91-213 directed the Board to provide additional material regarding intangible personal property tax. This additional study was submitted to the Congress on June 12,1972. In its study the Federal Reserve Board made three principal recommendations:(1) intangibles (including coins and currency) owned by all depositories should be exempt from taxation ; (2) limitations should be placed on the imposition of "doing business" and similar taxes on out-of-State depositories until arrangements could be made for a coordinated system of interstate taxation; and (3) measures should be taken to prevent discrimination. During the last session of Congress the Committee held hearings on S. 3652 which would have carried out most of the recommendations of the Federal Reserve Board. This bill was tabled by the Committee. On February 28, 1973, the Committee held hearings on a similar bill, S. 297. A provision similar to this amendment was a part of both S.3652 and S.297. Taxation of the transactions of out-of-State depositories raises a number of difficult legal questions as well as operating and administrative problems. If an individual State decides to impose a "doing business" tax and other neighboring States do not,this will tend to cause lendable funds to dry up in the taxing State. There is also the danger in multi-State tax situations of a tax base exceeding 100%. But even where this limit is not exceeded, serious problems may result when two or more States claiming jurisdiction to tax use different rules and require different kinds of reports and records. The Committee believes that the Advisory Commission on Intergovernmental Relations is eminently qualified to assume this task since the Commission members include Federal Executive and Legislative Branch representatives, State legislators and State and local executives. The Task Force on Government Operations of the National Legislative Conference has expressed its support for this proposal in the following letter dated April 16,1973, from its Chairman, the Honorable Ralph Turlington.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Mb.  8 NATIONAL LEGISLATIVE CONFERENCE) Washington,D.0., April16,1973.  Hon.JOHN SPARKMAN, Chairman Senate Committee on Banking, Housing and Urban Affairs, Senate Office Building, Washington, D.0. DEAR SENATOR SPARKMAN: On March 31st the Government Operations Task Force of the National Legislative Conference entertained a discussion of S. 297, a bill to regulate state taxation of federally insured financial institutions. The Conference is already on record in opposition to the major assumptions of that legislation, namely, that federally insured institutions need protection from unfair tax discrimination by the States and that these same institutions should enjoy an exemption from a state tax on intangibles—a tax privilege allowed no other profit making business. One further objective of the bill is to render an exemption to these institutions from the payment of either a state income or franchise tax in a State, other than the State where its principal office is located, even though these same institutions are doing business, or earning income,in those States. While we oppose such favored treatment, we do feel that some ground rules dealing with apportionment of taxable financial institutions income between States is certainly worthy of development. In this regard, the Government Operations Task Force of the National Legislative Conference feels that a brief moratorium on the interstate taxation of federally insured depositories is in order, during which time a fair and equitable apportionment formula can be agreed upon. Because of the representation of the States on the Advisory Commission on Intergovernmental Relations, we feel that ACIR would be the proper institution to develop recommendations concerning equitable state taxation of out-of-state commercial banks, mutual savings banks and savings and loan associations and other matters relating to the question of multi-states taxation. Our Committee believes that if Congress so desires to request the Advisory Commission to perform the study, a suitable appropriation along with the request would be in order. Thank you very much for your attention. Sincerely, Representative RALPH TURLINGTON Chairman,Government0perations Task Force. The Banking, Housing and Urban Affairs Committee recognizes that the Finance Committee may also have an interest in the issue of the interstate taxation of financial institutions, since that Committee has for some time now been examining the issue of the interstate taxation of business corporations in general. Nothing in this section of the bill should be interpreted as an attempt to circumvent whatever jurisdiction the Finance Committee may feel that it also has in this matter. Indeed, the Banking, Housina and Urban Affairs Committee b may assert its jurisdiction in recognizes that the Finance Committee desires. so it In time any light of this and in an effort to this matter apprise more fully the members of the Finance Committee of developments in this area, the Committee recommends that the report authorized by this section be referred to both this Committee and the Finance Committee.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  1 .7  9 Cordon Rule In the opinion of the committee, it is necessary to dispense with the requirements of subsection 4 of rule XXIX of the Standing; Rules of the Senate in order to expedite the business of the Senate in connection with this report.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Additional Views of Messrs. Bennett and Brock Insofar as S. 1798 is concerned with the control of interest rates paid to depositors in commercial banks, mutual savings banks, cooperative banks, and savings and loan associations—and this is one of the principal purposes of S. 1798—the bill is deficient in one major respect. The bill fails to confine to the States of Massachusetts and New Hampshire a practice under which mutual savings banks in those States are offering the public an interest return on checking accounts to the competitive disadvantage of commercial banks,cooperative banks,and savings and loan associations. The record of hearings by the Committee is replete with evidence that State laws in Massachusetts and New Hampshire are permitting mutual savings banks in those States to pay interest on checking accounts—a practice which is prohibited by Federal or State law to &her competitive financial intermediaries in Massachusetts and New Hampshire. This practice was characterized by Federal Reserve Board Governor Mitchell—speaking for the Board— as "intolerable". Governor Mitchell stated that:"The Board shares the concern of those who feel that the developments in New England have occurred without the needed guidance from Congress to insure competitive equality." We agree with this statement by the Federal Reserve Board and feel that this practice should be limited until the Congress can examine the competitive situation, and the more basic question of whether, or the extent to which,existing law and regulation should be modified to permit the payment of interest on checking accounts. This practice has been outlawed since the passage of the Glass-Steagall Act in 1933— following the undesirable consequences of such :payment of interest during the years leading to the great financial crisis of the early 1930's. Although the Federal Reserve Board recommended that Congress consider legislation to permit all financial intermediaries to offer interest payments on a type of checking account characterized as a "family account", the Board stated clearly that the granting of such powers should be accompanied by the imposition of comparable responsibilities and regulatory responsibilities upon the competing institutions. The Committee has not yet considered fully these recommendations of the Board. By failing to confine the NOW account practice to the two States of New Hampshire and Massachusetts, the Committee left the door open for the practice to spread to other States. There are indications that similar moves may be made by mutual savings banks in Pennsylvania. New York, Connecticut, Vermont, and other States where mutual savings banks are chartered under State law. The spreading of what Governor Mitchell called an "intolerable" competitive situation should be stopped until the Congress can examine fully all the questions involved in granting comparable powers and imposing comparable responsibilities and burdens upon competing financial intermediaries. (10)   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  11 It is our feeling that the Committee should have confined the NOW account practice temporarily to existing conditions in Massachusetts and New Hampshire.If the Senate fails to confine this practice to those two States,then it is imperative that the Senate and the Congress move expeditiously to consider the implementation of the recommendations made to the President by his Commission on Financial Structure and Regulation as a means of restoring the competitive balance between depository institutions. WALLACE F. BENNETT. BILL BROCK.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Additional Views of Mr. Brooke Considerable discussion has taken place in recent weeks, both in the Senate and House of Representatives,concerning the growth of"NOW accounts" and continuance of the so-called "Massachusetts Exception to Regulation Q." Inasmuch as both of these issues vitally affect financial institutions in Massachusetts, as well as Commonwealth consumers, I have given considerable attention to these matters prior to reaching a conclusion as to how they should be addressed by Congress. One must begin by discussing the Massachusetts exception to Regulation Q which was enacted into law by Congress in 1969, at a time when severe credit problems confronted financial institutions in Massachusetts. Specifically, Federal deposit rate control authority was to have been extended to non-Federally insured thrift institutions in Massachusetts pursuant to a two-step process. Prior to July 31, 1970, Federal financial regulatory agencies could prevent interest rates paid by non-insured institutions from exceeding 5.5 percent. Thereafter, full Federal rate control authority was to have gone into effect unless the Commonwealth enacted "comparable" rate control authority and the Commonwealth's Commissioner of Banks issued regulations in the exercise of that authority. Comparable authority was enacted by the General Court of Massachusetts in 1970, and the Commissioner of Banks subsequently issued regulations, thereby removing the threat that Regulation Q would apply to non-Federally insured thrift institutions in Massachusetts. Several bills which have been proposed recently in Congress would remove the Massachusetts exception and thereby extend plenary Federal rate control authority to the Commonwealth. The Senate Banking Committee rejected such proposals and, I believe, it was wise in doing so at this time. Even though I supported retention of the Massachusetts exception and resolution of these issues by Massachusetts' Commissioner of Banks, I am mindful of the fact that the situation today differs from the circumstances existing in 1969 when the original legislation was enacted. Specifically, the credit crisis which prompted this legislative exception and which threatened substantial disintermediation if Federal rate controls had been extended to Massachusetts at that time has since passed and is considered unlikely to recur in a similar form in the near future. Mutual savings banks currently enjoy some competitive advantages over their Federally chartered or insured competitors (e.g., the authority to sell life insurance, mutual funds,to invest in common stocks for their own account, and to offer corporate savings accounts), which have contributed to the substantial growth experienced by mutual savings banks in recent years. At no time have I supported competitive   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  (12)  13 inequities between financial institutions in Massachusetts. On the contrary, I have earnestly sought to have the Commonwealth's competitive balance maintained at the state level wherever possible. It is my hope, therefore, that comparable rates or other appropriate adjustments will be applied in the Commonwealth in the near future. Absent such action, there is reason to believe that Washington will once again turn its attention to Massachusetts and that pressures for plenary Federal regulation will mount. I am hopeful that this situation does not arise and that steps will be taken to minimize the competitive inequities existing among financial institutions in Massachusetts. For the foregoing reason, I believe that the position taken by this committee is preferable to a complete repeal of the Massachusetts exception at this time. It is also important to place the NOW account controversy in perspective • otherwise, one does not truly appreciate the intensity of the debate between financial institutions in the Commonwealth. The Massachusetts exception to Regulation Q has been administered in such a way as to enable the mutual savings bank industry which consists of the dominant financial institutions in that state to grow at a much faster rate vis-a-vis their competitors. Even though the Commissioner of Banks initially denied the use of negotiable orders of withdrawal with respect to savings deposits held in mutual savings banks,the Supreme Judicial Court of Massachusetts decided otherwise and thereby gave birth to the present controversy. One can certainly understand the concern expressed by commercial banks and savings and loans over possible harmful effects created by NOW account growth. At present, these accounts represent a small percentage of bank deposits statewide; however, if the Federal Reserve Bank of Boston is correct, NOW accounts will grow to approximately $1 billion by October of this year. Such growth,if unrestrained, could produce substantial harmful effects on competing financial institutions. I am mindful of the position taken by the Federal Reserve Board in recent testimony before this Committee to the effect that the NOW account situation in Massachusetts and New Hampshire, from the standpoint of the financial institutions that compete with mutual savings banks in those states, "is an intolerable one." The Federal Reserve Board went on to state that these developments "have occurred without the needed guidance from Congress to insure competitive equity." Accordingly, this Committee adopted an amendment which would partially repeal the Massachusetts exception discussed above and thereby confer overall regulatory authority upon the FDIC as to NOW accounts. The Commissioner of Banks would retain full jurisdiction over savings accounts which are not subject to withdrawal in favor of any person other than the depositor or his legal representative. Thus, the Committee has taken responsible action to assure that NOW account growth does not go unchecked by Federal regulatory agencies. While I would have preferred action at the state level on the NOW account issue, as well as the rate control matter generally,I am satisfied that present circumstances justify these actions.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  S. Rept. 149,93 1  8  14 It has been my belief that NOW accounts represent a positive consumer innovation which provides added convenience to savings account users. I do not believe, however, that the limited withdrawal privileges afforded to NOW account users are the equivalent of demand deposit privileges which have been sought by the mutual savings banks in the Massachusetts' legislature recently. Such additional privileges should only be granted in the context of overall consideration of recommendations promulgated by the "Hunt Commission" concerning the role of financial institutions in our economy generally, or in some similar context. In my view, the NOW account represents a vehicle for enabling the elderly and others to withdraw funds from their savings accounts without having to bring their passbooks to the depository institutions in question. This convenience aspect of the NOW account is laudatory however, it must not be turned into a wedge by which mutual savings banks obtain demand deposits contrary to current law. It is important to note that the subject of demand deposit privileges for mutual savings banks has not been at issue during recent Congressional deliberations. It must be dealt with at another time and in another context. In conclusion, it is my hope that the limited Federal intrusion into the realm of state-chartered and state-insured financial institutions will not mark the beginning of the end of state regulatory powers, as we know them in Massachusetts. Only by achieving effective state regulation will such a threat be averted. EDWARD W. BROOKE. 0   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  .•11.111m..m.  Calendar No. 141 93D CONGRESS 1ST SESSION  S. 1798 [Report No. 93-149  IN THE SENATE OF THE UNITED STATES MAY 14, 1973 Mr. SPARKMAN, from the Committee on Banking, Housing and Urban Affairs, reported the following bill; which was read twice and ordered to be placed on the calendar  A BILL To extend for one year the authority for more flexible regulation of maximum rates of interest or dividends payable by financial institutions, to amend certain laws relating to federally insured financial institutions. 1  Be it enacted by the Senate and House of Representa-  2 tives of the United States of America in Congress assembled, 3 EXTENSION OF AUTHORITY FOR THE FLEXIBLE REGITLA-  4  TION OF INTEREST RATES OR DIVIDENDS PAYABLE BY  5  FINANCIAL INSTITUTIONS  6  SECTION 1. (a) Section 7 of the Act of September 21,  7 1966 (Public Law 89-597; 80 Stat. 823), as amended, is 8 further amended by striking out "1973" and inserting in 9 lieu thereof "1974".   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  2 1  (b) Section 18(g) of the Federal Deposit Insurance  2 Act (12 U.S.C. 1828(g)) is amended by striking out the 3 period at the end of the tenth sentence and inserting in lieu 4 thereof the following: ": Provided, That the authority eon5 ferred by this subsection shall apply to deposits held by any 6 noninsured bank in any account with respect to which such 7 bank permits withdrawals, by means of negotiable or non8 negotiable orders or otherwise, in favor of any person other  9 than the depositor or his legal representative." 10 CONVERSION OF MUTUAL SAVINGS AND LOAN ASSOCIATIONS 11 12  INTO STOCK ORGANIZATIONS SEC. 2. Section 402 of the National Housing Act (12  13 U.S.C. 1725) is amended by adding at the end thereof the 14 following new subsection: 15  "(j) Until December 21, 1974, the Corporation shall  16 not approve, under regulations adopted pursuant to this title  17 or section 5 of the Home Owners' Loan Act of 1933, by 18 order or otherwise, a conversion from the mutual to the 19 stock form of organization involving or to involve an insured  20 institution, including approval of any application for such 21 conversion pending on the date of enactment of this subsec22 don, except that this sentence shall not be deemed to limit 23 now or hereafter the authority of the Corporation to approve 24 conversions in supervisory cases. The Corporation may by 25 rule, regulation, or otherwise and under such civil penalties  3 1 (which shall be cumulative to any other remedies) as it may 2 prescribe, take whatever action it deems necessary or appro3 priate to implement or enforce this subsection." 4 AUTHORITY FOR FEDERAL SAVINGS AND LOAN INSTITU5  TIONS AND NATIONAL BANKS TO INVEST IN STATE  6  HOUSING CORPORATIONS  7  SEC. 3. (a) The Congress finds that Federal savings  8 and loan associations and national banks should have the 9 authority to assist in financing the organization and operation 10 of any State housing corporation established under the laws 11 of the State in which the corporation will carry on its opera12 tions. It is the purpose of this section to provide a means 13 whereby private financial institutions can assist in providing 14 housing, particularly for families of low- or moderate-income, 15 by purchasing stock of and investing in loans to any such 16 State housing corporation situated in the particular State in 17 which the Federal savings and loan association or national 18 bank involved is located. 19  (b) Section 5(c) of the Home Owners' Loan Act of  90 1933 (12 U.S.C. 1464(c)) is amended by adding at the 21 end thereof the following new paragraph: 4   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  22  "Subject to regulation by the Board but without regaid  23 to any other provisions of this subsection, any such ass-  24 ciation whose general reserves, surplus, and undivided profits 25 aggregate a sum in excess of 5 per centum of its with-   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  4 1 drawable accounts is authorized to invest in, to lend to, or to commit itself to lend to any State housing corporation 3 incorporated in the State in which the home office of such 4 association is situated, in the same manner and to the same 5 extent as the statutes of such State authorize a savings and 6 loan association organized under the laws of such State to 7 invest in, to lend to, or commit itself to lend to such State 8 housing corporation, but loans and loan commitments under 9 this sentence shall be subject to appropriate limitations 10 prescribed by the Board, and no association may make any 11 investment, other than loans and loan commitments, under 12 this sentence if its aggregate outstanding direct investment 13 under this sentence, determined as prescribed by the Board, 14 would thereupon exceed one-fourth of 1 per centum of its 15  assets."  16  (c) Paragraph seventh of section 5136 of the Revised  17  Statutes (12 U.S.C. 24) is amended by adding at the end  18 thereof the following: "Notwithstanding any other provi19 sion of this paragraph, the association may purchase for its 20 own account shares of stock issued by any State housing  91 corporation incorporated in the State in which the associa22 tion is located and may make investments in loans and corn-  23 mitments for loans to any such corporation: Provided, That 24  in no event shall the total amount of such stock held for its  25 own account and such investments in loans and commit-  5 1 ments made by the association exceed at any time 5 per 2 centum of its capital stock actually paid in and unimpaired  plus 5 per centum of its unimpaired surplus fund." 4  (d)(1) The Federal Savings and Loan Insurance Corporation with respect to insured institutions, the Board  6 of Governors of the Federal Reserve System with res sect 7 to State member insured banks, and the Federal Deposit •  8 Insurance Corporation with respect to State nonmember in9 sured banks .shall by aur9priate ruleL ler or  10 otherwise regulate investment in State housing corporations. 11  (2) A State housing corporation in which financial in-  12 stitutions invest under the authority of this section shall 13 make available to the appropriate Federal supervisory 14 agency referred to in paragraph (1) such information as_.. 15  may be necessary to insure that investments are properly....  16  made in accordance with this section.  17  (e) For the purposes of this section and any Act  18 amended by this section19  (1) The term "insured institution" has the same  20  meaning as in section 401(a) of the National Housing  21  Act.  22  (2) The terms "State member insured. banks" and  23  "State nonmember insured banks" have the same mean-  24  ing as when used in the Federal Deposit Inuirmee  25   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  (3) The term. ".State housing corporation' means   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  6 1  a corporation established by a State for the limited pur-  2  pose of providing housing and incidental services, par-  3  ticularly for families of low or moderate income.  4  (4) The term "State" means any State, the Dis-  5  trict of Columbia, Guam, the Commonwealth of Puerto  6  Rico, and the Virgin Islands.  7 PRE 11 It'.1i PAYMENTS BY INSURED SAVINGS AND LOAN 8  ASSOCIATIONS TO THE FEDERAL SAVINGS AND LOAN  9  INSURANCE CORPORATION  10  SEC. 4. The text of section 404 of the National Housing  11 Act (12 U.S.C. 1727) is amended to read as follows: 12  "SEC. 404. (a) (1) The Corporation shall establish a  13 primary reserve which shall be the general reserve of the 14 Corporation and a secondary reserve to which shall be 15 credited the amounts of the prepayments made by insured 16 institutions pursuant to former provisions of subsection (d) 17 and the credits made pursuant to the first sentence of sub18 section (e). 19  "(2) The Corporation may accomplish the purposes and  20 provisions of this section by rules, regulations, orders, or 21 otherwise as it may consider necessary or appropriate. 22  "(b)(1) Each institution whose application for insur-  23 ance is approved by the Corporation shall pay to the Cor-  24 poration, in such manner as it shall prescribe, a premium for 25 such insurance equal to one-twelfth of 1 per eentum of the  •  7 1 total amount of all accounts of the insured members of such 2 institution. Such premium shall be paid at the time the certif3 icate is issued by the Corporation under section 403, and 4 thereafter annually, except that under regulations prescribed 5 by the Corporation such premium may be paid semiannually.  6  (2) If, at the close of any December 31, the primary  7 reserve equals or exceeds 2 per centum of the total amount 8 of all accounts of insured members of all insured institutions 9 as of such close, no premium under paragraph (1) of this  10 subsection shall be payable by any insured institution with 11 respect to its premium year beginning during the year corn12 mencing on May 1 next succeeding such December 31, 13 except that the foregoing provisions of this sentence shall 14 not be applicable to any insured institution with respect to 15 any of the twenty premium years beginning with the pre-, 16 mium year commencing with the date on which such certif17 icate is issued. 18  "(c) The Corporation is further authorized to assess  19 against each insured institution additional premiums for 20 insurance until the amount of such premiums equals the 21 amount of all losses and expenses of the Corporation; except 22 that the total amount so assessed in any one year against 23 any such institution shall not exceed one-eighth of 1 per 24 centum of the total amount of the accounts of its insured 25 members.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  8 1  "(d)(1) The Corporation shall not, on or after the date  ..., of enactment of this sentence, accept or receive further pay3 ments in the nature of prepayments of future premiums as 4  was formerly required by this subsection (including any such payments which have accrued or are payable under  6 such former provisions). When no insured institution has  7 any pro rata share of the secondary reserve, other than any 8 such share immediately payable to it, the Corporation may 9 take such steps as it may deem appropriate to close out and 10 discontinue the secondary reserve. II  "(2) The Corporation may provide for the adjustment  12 of payments made under former provisions of this subsec-  13 tion or made or to be made under subsections (b) and (c) 14 of this section in cases of merger or consolidation, transfer 15  of bulk assets or assumption of liabilities, and similar transac-  16 tions, as defined by the Corporation for the purposes of 17 18  this paragraph. "(e) The Corporation shall credit to the secondary  19 reserve, as of the close of each calendar year a return on the 20 outstanding balances of the secondary reserve, during such 21  calendar year, as determined by the Corporation, at a rate  22  equal to the average annual rate of return to the Corpora-  23 tion during the year ending at the close of November 30 of 21 such calendar year, as determined by the Corporation, 25  on the investments held by the Corporation in obligations   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  9 1  of, or guaranteed as to principal and interest by, the United  2 States. Except as provided in subsections (f) and (g), the 3 secondary reserve shall be available to the Corporation only 4 for losses of the Corporation and shall be so available only to 5 such extent as other accounts of the Corporation which are 6  available therefor are insufficient for such losses. No right,  7 title, or interest of any institution in or with respect to its 8  pro rata share of the secondary reserve shall be assignable  9 or transferable whether by operation of law or otherwise,  10 except to such extent as the Corporation may provide for 11 transfer of such pro rata share in cases of merger or con12 solidation, transfer of bulk assets or assumption of liabilities, 13 and similar transactions, as defined by the Corporation for 14 15  purposes of this sentence. "(f) If (i) the status of an insured institution as an  16 insured institution is terminated pursuant to any provision of 17 section 407 or the insurance of accounts of an insured insti-  18 tution is otherwise terminated, (ii) a conservator, receiver, 19 or other legal custodian is appointed for an insured institu20 tion under the circumstances and for the purpose set forth 21 in subdivision (d) of section 401, or (iii) the Corporation 22 makes a determination that for the purposes of this sub-  90 section an insured institution has gone into liquidation, the 24 Corporation shall pay in cash to such institution its pro 25  rata share of the secondary reserve, in accordance with such S.1798   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  10 1 terms and conditions as the Corporation may prescribe, or, 2 at the option of the Corporation, the Corporation may apply 3 the whole or any part of the amount which would other4 wise be paid in cash toward the payment of any indebtedness 5 or obligation, whether matured or not, of such institution to 6 the Corporation, then existing or arising before such pay7 ment in cash: Provided, That such payment or such appli8 cation need not be made to the extent that the provisions 9 of the exception in the last sentence of subsection (e) are  10 applicable. 11  (g) If, at the close of December 31 in any year after  12 1971, the aggregate of the primary reserve and the second13 ary reserve equals or exceeds 1+ per centum of the total 14 amount of all accounts of insured members of all insured in15 stitutions but the primary reserve does not equal or exceed 16 2 per centum of such base, each insured share of the second17 ary reserve shall, during the year beginning with May 1 next 18 succeeding such close, be used, to the extent available, to 19 discharge such institution's obligation for its premium under 20 subsection (b) for the premium year beginning in such year, 21 but only to the extent of such percentage, to be the same for 22 all insured institutions and to be not less than 30 nor more 23 than 70 per centum of such premium, as the Corporation may 24 determine; and the use of such pro rata shares as provided 25 in this sentence shall continue unless and until the next sen-   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  11 1 ttence or the last sentence of this subsection shall become 2 operative. If, at the close of any December 31 occurring be3 fore the last sentence of this subsection shall become opera4 tive, the aggregate of the primary reserve and the secondary 5 reserve is not at least equal to 1-1- per centum of the total 6 amount of all accounts of insured members of all insured 7 institutions, the use of any insured institution's pro rata share 8 of the secondary reserve under the first sentence of this sub-  9 section shall terminate with respect to its premium under 10 subsection (b) for the premium year beginning during the 11 calendar year commencing on May 1 next succeeding such 12 December 31, and such termination shall continue unless and 13 until the first sentence of this subsection shall become opera14 tive. If, at the close of any December 31, the primary 15 reserve equals or exceeds such 2 per centum, the Corporation 16 shall, at such time (which shall be the same for all insured 17 institutions and shall not be later than May 1 next succeeding 18 such close) and in such manner as the Corporation shall 19 determine, pay in cash to each insured institution its pro 20 rata share of the secondary reserve. 21  "  (1) Each insured institution shall make such  22 deposits in the Corporation as may from time to time 23 be required by call of the Federal Home Loan Bank Board. 24 Any such call shall be calculated by applying a specified 25  percentage, which shall be the same for all insured in-   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  12 1 stitutions, to the total amount of all withdrawable or re2 :purchasable shares, investment certificates, and deposits 3 in each insured institution. No such call shall be made 4 unless such Board determines that the total amount of such  call, plus the outstanding deposits previously made pur6 suant to such calls, does not exceed 1 per centum of the 7 total amount of all withdrawable or repurchasable shares, 8 investment certificates, and deposits in all insured institu9 tions. For the purposes of this subsection, the total amounts  10 hereinabove referred to shall be determined or estimated 11 by such Board or in such manner as it may prescribe. 12  "(2) The Corporation shall credit as of the close of  13 each calendar year, to each deposit outstanding at such 14 close, a return on the outstanding balance, as determined 15 by the Corporation, of such deposit during such calendar 16  year, at a rate equal to the average annual rate of return,  17 as determined by the Corporation, to the Corporation dur-  118  the year ending at the close of November 30 of such  19 calendar year, on the investments held by the Corporation 20 in obligations of, or guaranteed as to principal and interest 21 29  by, the United States. "(3) The Corporation in its discretion may at any time  23 repay all such deposits or repay pro rata a portion of each 24 of such deposits, in such manner and under such procedure  _o as the Corporation may prescribe. Any procedure for such   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  13 1 pro rata repayment may provide for total repayment of 2 any deposit, if total repayment of any and all deposits of 3 equal or smaller amount is likewise provided for. 4  "(4) The provisions of subsection (f) of this section  5 and of the last sentence of subsection (e) of this section shall 6 be applicable to deposits under this subsection, and for the pur7 poses of this subsection the references in such subsection (f) 8 and such last sentence to the prepayments and the pro rata 9 shares therein mentioned shall be deemed instead to be ref-  10 erences respectively to the deposits under this subsection and 11 the pro rata shares of the holders thereof, and the reference in• 12 such subsection (f) to that subsection shall be deemed in13 stead to be a reference to this subsection."  14 STATE TAXATION OF FEDERALLY INSURED FINANCIAL 15 16 17 18  INSTITUTIONS SEC. 5. (a) This section may be cited as the "State Taxation of Depositories Act". ())) Recognizing that the several States should be al-  19 lowed the greatest degree of autonomy in formulating their 20 tax policies, the Congress finds that the national goals of 21 fostering an efficient banking system and the free flow of 22 commerce among the States will be furthered by clarifying 23 the principles governing State taxation of interstate transac21 tions of banks and other -depositories. Application of taxes 25  measured by income or receipts, or other `filoi0 business'   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  14 1 taxes, in States other than the States in which depositories 2 have their principal offices should be deferred until such time 3 as uniform and equitable methods are developed for deter-  4 mining jurisdiction to tax and for dividing the tax base among 5 States. 6  (c) The legislature of a State may impose, and lnay  7 authorize any political subdivision thereof to impose, the fol-  8 lowing taxes and only such taxes on any insured depository 9 not having its principal office within such State:  10  (1) sales taxes and use taxes complementary thereto  11  upon purchases, sales, and use within such jurisdiction;  12  (2) taxes on real property or on the occupancy of  13  real property located within such jurisdiction;  14  (3) taxes (including documentary stamp taxes) on  15  the execution, delivery, or recordation of documents with-  16  in such jurisdiction;  17  '(4) taxes on tangible personal property (not in-  18  eluding cash or currency) located within such jurisdic-  19  tion;  20  (5) license, registration, transfer, excise, or other  21  fees or taxes imposed on the ownership, use, or transfer  22  of tangible personal property located within such juris-  23  diction; and  24 25  (6) payroll taxes based on persons employed in  such jurisdiction.  4.  15 1  (d) For the purpose of this section-  2  (1) The term "insured depository" means any bank  3  the deposits of which are insured under the Federal De-  4  posit Insurance Act, any institution the accounts of which  5  are insured by the Federal Savings and Loan Insurance  6  Corporation, and any thrift and home financing institu-  7  tion which is a member of a Federal home loan bank.  8  (2) The term "State" means any of the several  9  States of the -United States, the District of Columbia, the  10  Commonwealth of Puerto Rico, the Virgin Islands,  11  Guam, and American Samoa.  12  (e) (1) The Advisory Commission on Intergovern-  13 mental Relations shall make a study of all pertinent matters 14 relating to the application of State "doing business" taxes on 15  out-of-State commercial banks, mutual savings banks, and  16 savings and loan associations. Such study shall include rec17 ommendations for legislation which will provide equitable 18 State taxation of out-of-State commercial banks, mutual say19 ings banks, and savings and loan associations. Such rec20 ommendations shall include, but shall not be limited to, the 21 matter of the proper allocation, apportionment, or other 22 division of tax bases and such other matters relating to the 23 question of multistate taxation of commercial banks, mutual 24 savings banks, and savings and loan associations as the Corn25 mission shall determine to be pertinent. In conducting the   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  16 1 study, the Commission shall consult with the Secretary of the 2  Treasury, the Federal Reserve Board, the Federal Deposit  3 Insurance Corporation, the Federal Home Loan Bank Board, 4 appropriate State banking and taxing authorities, and others 5 as needed. 6  (2) The Commission shall make a report to the Con-  7 gress of the results of its study and recommendations not later •  8 than December 31, 1974. 9  (3) There are authorized to be appropriated to the  10  Commission such sums as may be necessary to carry out  11 the provisions of this subsection. 12  (f) (1) The provisions of this section shall take effect  13 on the date of enactment of this Act. 14 is  (2) The provisions of this section shall terminate December 31, 1975.  •   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Calendar No. 141 93o CONGRESS 1ST SESSION  S. 1798  [Report No. 93-149]  A BILL To extend for one year the authority for more flexible regulation of maximum rates of interest or dividends payable by financial institutions, to amend certain laws relating to federally insured financial institutions. By Mr. SPARKMAN MAY 14, 1973 Read twice and ordered to be placed on the calendar   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  93D CONGRESS 1ST SESSION  H .R.6226  IN THE HOUSE OF REPRESENTATIVES MARCH 28,19'T3 Mr. DRINAN introduced the following bill; which was referred to the Committee on Banking and Currency  A BILL To extend certain laws relating to the payment of interest on time and savings deposits to make clear that Federal banking statutes do not prohibit depository institutions from offering negotiable order of withdrawal services in connection with certain interest-bearing deposits. 1  Be it enacted by the Senate and House of Representa-  2 tives of the United States of America in Congress assembled, 3 That section 7 of the Act of September 21, 1966 (Public 4 Law 89-597), is amended by striking out "1973" and in5 serting in lieu thereof "1974". 6  SEC. 2. Section 19(i) of the Federal Reserve Act (12 U.S.C. 371a) is amended by adding at the end thereof the following new sentence: "Nothing in this paragraph shall be I-0   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  2 1  construed as prohibiting payment of interest on a deposit  2  with respect to which the bank may require the depositor to give notice of an intended withdrawal not less than thirty  4  days before the withdrawal is made, even though in practice  5 such notice is not required and the depositor is allowed to 6  make withdrawals by negotiable instrument for the purpose  7 of making payments to third persons or otherwise." 8  SEC. 3. Section 18(g) of the Federal Deposit Insur-  9 ance Act (12 U.S.C. 1828(g)) is amended by adding at 10 the end thereof the following new sentence: "Nothing in 11 this subsection shall be construed as prohibiting payment of 12 interest on a deposit with respect to which the bank may 13 require the depositor to give notice of an intended with14 drawal not less than thirty days before the withdrawal is 15 made, even though in practice such notice is not required 16 and the depositor is allowed to make withdrawals by nego17 tiable instrument for the purpose of making payments to 18 third persons or otherwise." 19  SEC. 4. Paragraph (13) of section 107 of the Federal  20 Credit Union Act (12 U.S.C. 1757) is amended to read as 21 follows: 22  "(13) in accordance with rules and regulations pre-  23  scribed by the Administrator, (A) to sell to members  24  negotiable checks (including travelers checks) and  25  money orders, and to cash checks and money orders for  3 1  members, for a fee which does not exceed the direct and  2  indirect costs incident to providing such service and (B)  3  to allow its members to make withdrawals from their  4  share accounts by negotiable instrument for the purpose  5  of making payments to third persons or otherwise; and".  6  SE0. 5. The last sentence of section 5(b)(1) of the  7 Home Owners' Loan Act of 1933 (12 U.S.C. 1464) is 8 amended to read as follows; "An association may allow 9 holders of savings accounts to make withdrawals from such  10 accounts by negotiable instrument for the purpose of making 11  payments to third persons or otherwise as long as the  12 association retains the right to require the advance notice  L; referred to in the third sentence of this paragraph."   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  I  93D CONGRESS 1ST SESSION  H H. R. 6226  A BILL To extend certain laws relating to the payment of interest on time and savings deposits and to make clear that Federal banking statutes do not prohibit depository institutions from offering negotiable order of withdrawal services in connection with certain interestbearing deposits. By Mr.DRINAN MARCH 28, 1973 Referred to the Committee on Banking and Currency  93D CONGRESS t HOUSE OF REPRESENTATIVES 1st Session  REPORT No. 93-418  FLEXIBLE INTEREST RATES  JULY 31, 1973.—Ordered to be printed  Mr. PATMANI from the committee of conference, submitted the following  CONFERENCE REPORT [To accompany H.R. 6370]  The committee of conference on the disagreeing votes of the two Houses on the amendment of the Senate to the bill (H.R. 6370) to extend certain laws relating to the payment of interest on time and savings deposits. to prohibit depository institutions from permitting negotiable orders of withdrawal to be made with respect to any deposit or account on which any interest or dividend is paid,to authorize Federal savings and loan associations and national banks to own stock in and invest in loans to certain State housing corporations, and for other purposes, having met, after full and free conference, have agreed to recommend and do recommend to their respective Houses as follows: That the House recede from its disagreement to the amendment of the Senate and agree to the same with an amendment as follows: In lieu of the matter proposed to be inserted by the Senate amendment insert the following: EXTENSION OF AUTHORITY FOR THE FLEXIBLE REGULATION OF INTEREST RATES ON DEPOSITS AND SHARE ACCOUNTS IN FINANCIAL INSTITUTIONS SECTION 1. Section 7 of the Act of September 21. 1966 (Public La9v 89-597). is amended by striking out "August 1, 1973" and inserting in lieu thereof"December 31,1974". PROHIBITION ON CERTAIN ACTIVITIES BY DEPOSITORY INSTITUTIONS SEC. 2. (a) No depository institution shall allow the owner of a deposit or account on which interest or dividends are paid to make withdrawals by negotiable or transferable instruments for the purpose of making transfers to third parties,except that such withdrawals may be made in the States of Massachusetts and New Hampshire. (b) For purposes of this section, the term "depository institution" means99-006   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  rts.• .  •  -4 - # •••  2 (1) any insured bank as defined in section 3of the Federal Deposit Insurance Act; (2) any State bank as defined in section 3of the Federal Deposit Insurance Act; (3) any mutual savings bank as defined in section 3 of the Federal Deposit Insurance Act; (4) any savings bank as defined in section 3 of the Federal DepositInsurance Act; (5) any insured institution as defined in section 401 of the National Housing Act; and (6) any building and loan association or savings and loan association organized and operated according to the laws of the State in which, it is chartered or organized; and, for purposes of this paragraph,the term "State" means any State of the United States, the District of Columbia, any territory of the United States, Puerto Rico, Guam, American Samoa, or the Virgin Islands. (c) Any depository institution which violates this section shall be fined $1,000 for each violation. EXTENSION OF AUTHORITY OF FEDERAL DEPOSIT INSURANCE CORPORATION OVER INTEREST RATES PAID ON DEPOSITS BY NONINSURED TAXES SEC. 3. Section 18(g) of the Federal Deposit Insurance Act (12 LI.5.0.1828(g)) is amended by— (1) inserting in the second sentence thereof "or dividends" ims mediately after "the payment and advertisement of interest": and (2) striking out in the tenth sentence thereof "(1)", and by further striking out in such sentence ", and (2) there does not exist under the laws of such State abank supervisory agency with authority comparable to that conferred by this subsection,including specifically the authority to regulate the rates of interest and dividends paid by such noninsured banks on time and savings deposits, or if such agency exists it has not issued regulations in the exercise of that authority". CONVERSION OF MUTUAL SAVINGS AND LOAN ASSOCIATIONS INTO STOCK ORGANIZATIONS SEC. 4. Section 402 of the National Housing Act (12 U.S.C.1725) is amended by adding at the end thereof the following new subsection .• "(j) (I) Except as provided in paragraph (2),until June 30,1974, the Corporation shall not approve,under regulations adopted pursuant to this title or section 5 of the Home Owners' Loan Act of 1933, by order or otherwise, a conversion from the mutual to the stock form of organization involving or to involve an insured institution, including approval of any application for such conversion pending on the date of enactment of this subsection, except that this sentence shall not be deemed to limit now or hereafter the authority of the Corporation to approve conversions in supervisory cases. The Corporation may by rule, regulation, or otherwise and under such civil penalties (which shall be cumulative to any other remedies) as it may prescribe take whatever action it deems necessary .or appropriate to implement or en/orce this subsection. "(2) After December 31, 1973, the Corporation may approve any study application filed prior to May 22, 1973, pursuant to regulations   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  H. Rept. 93-418  3 in effect and adopted pursuant to this title or section 5 of the Home Owners'Loan Act of 1933." AUTHORITY FOR FEDERAL SAVINGS AND LOAN INSTITUTIONS AND NATIONAL BANKS TO INVEST IN STATE HOUSING CORPORATIONS SEC. 5. (a) The Congress finds that Federal savings and loan associations and national banks should have the authority to assist in financing the organization and operation of any State housing corporation established under the laws of the State in which the corporation will carry on its operations. It is the purpose of this section to provide a means whereby private financial institutions can assist in providing housing, particularly for families of low or m,oderate income, by 2),,rcha,'ng ,,,tork of and investing in loans to any such State housing corporation situated in the particular State in which the Federal savings and loan association or national bank involved is located. (b) Section 5(c) of the Home Owners'Loan Act of 1933 (12 U.S.C. 1464(c)) is amended by adding at the end thereof the following new paragraph: "Subject to regulation by the Board but without regard to any other provisions of this subsection, any such association whose general reserves, surplus, and undivided profits aggregate a sum in excess of 5 per centum of its withdrawable accounts is authorized to invest in, to lend to, or to commit itself to lend to any State housing corporation incorporated in the State in which the home office of such association is situated, in the same manner and to the same extent as the statutes of such Stute authorize a savings and loan association organized under the laws of such State to invest in, to lend to, or commit itself to lend to such State housing corporation, but loans and loan commitments under this sentence shall be subject to appropriate limitations prescribed by the Board, and no association may make ony investment, other than loans and loan commitments, under this sentence if its aggregate outstanding direct investment under this sentence, determined as prescribed by the Board, would thereupon exceed one-fourth of 1 per centum of its assets." (c) Paragraph seventh of section 5136 of the Revised Statutes (12 F.S.C. 24) is amended by adding at the end thereof the following: "Notwithstanding any other provision of this paragraph, the association may purchase for its own account shares of stock issued by any State housing corporation incorporated in the State in which the association is located and may make investments in loans and commitments for loans to any such corporation: Provided, That in no event shall the total amount of such stock held for its own account and such in eestments in loans and commitments made by the association exceed ot any time 5 per centum, of its capital stock actually paid in and unimpaired plus 5 per centum of its unimpaired surplus fund." (d)(1) The Federal Savings and Loan Insurance Corporation with respect to insured institutions, the Board of Governors of the Federal Reserve System with respect to State member insured banks, and the Federal Deposit Insurance Corporation with respect to State nonmember insured banks shall by appropriate rule, regulation, order, or otherwise regulate investment in State housing corporations. (2) A State housing corporation in which financial institutions invest under the authority of this section shall make available to the   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  H. Rept. 93-418  appropriate Federal supervisory agency referred to in paragraph (1) such information as may be necessary to insure that investments are properly made in accordance with this section. (e) For the purposes of this section and any Act amended by this section— (1) The term "insured institution" has the same meaning as in section 401(a) of the National Housing Act. (2) The terms "State member insured banks" and "State nonmember insured banks" have the same meaning as when used in the Federal Deposit Insurance Act. (3) The term "State housing corporation" means a corporation established by a State for the limited purpose of providing housing and incidental services, particularly for families of low or moderate income. (4) The term "State" means any State, the District of Columbia, Guam, the Commonwealth of Puerto Rico, and the Virgin Islands. PREMIUM PAYMENTS BY INSURED SAVINGS AND LOAN ASSOCIATIONS To THE FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION SEC. 6. The text of section 404 of the National Housing Act (12 U.S.C. 1727) is amended to read as follows: "Sec.404.(a)(1) The Corporation shall establish a primary reserve which shall be the general reserve of the Corporation and a secondary reserve to which shall be credited the amounts of the prepayments made by insured institutions pursuant to former provision-9 of subsection (d) and the credits made pursuant to the first sentence of subsection (e). "(2) The Corporation may accomplish the purposes and provisions •of this section by rules, regulations, orders, or otherwise as it may consider necessary or appropriate. "(b)(1) Each institution whose application for insurance is approved by the Corporation shall pay to the Corporation,in such manner as it shall prescribe, a premium for such insurance equal to ~twelfth of 1 per centum of the total amount of all accounts of the insured members of such institution. Such premium shall be paid at the time the certificate is issued by the Corporation under section 403, and thereafter annually, except that under regulations prescribed by the Corporation such premium may be paid semiannually. "(2) If,at the close of any December 31, the primary reserve equals or exceeds 2 per centrum of the total amount of all accounts of insured members of all insured institutions as of such close, no premium under paragraph (1) of this subsection shall be payable by any insured institution with respect to its premium year beginning during the year com,m,eneing on May I next succeeding such December 31, except that the foregoing provisions of this sentence shall not be applicable to any insured institution with respect to any of the twenty premium years beginning with the premium year commencing with the date on which such certificate is issued. "(c) The Corporation is further authorized to assess against each insured institution additional premiums for insurance until the amount of such premiums equals the amount of all losses and expenses of the Corporation; except that the total amount so assessed in any one year   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  H. Rept. 93-418  MM\  5 against any such institution shall not exceed one-eighth of 1 per centum of the total amount of the accounts of its insured members. "(d)(1) The Corporation shall not, on or after the date of enactment of this sentence, accept or receive further payments in the nature of prepayments of future premiums as was formerly required by this subsection (including any such payments which have accrued or are payable under such former provisions). When no insured institution has any pro rata share of the secondary reserve, other than any such share immediately payable to it, the Corporation may take such steps as it may deem appropriate to close out and discontinue the secondary reserve. "(2) The Corporation may provide for the adjustment of payments made under former provisions of this subsection or made or to be made under subsections (b) and (c) of this section incases of merger or consolidation, transfer of bulk assets or assumption of liabilities, and similar transactions, as defined by the Corporation for the purposes of this paragraph. "(e) The Corporation shall credit to the secondary reserve, as of the close of each calendar year a return on the outstanding balances of the secondary reserve, during such calendar year, as determined by the Corporation, at a rate equal to the average annual rate of return to the Corporation during the year ending at the close of November 30 of such calendar year, as determined by the Corporation, on the investments held by the Corporation in obligations of, or guaranteed as to principal and interest by, the United States. Except as provided in subsections (f) and (g), the secondary reserve shall be available to the Corporation only for losses of the Corporation and shall be so available only to such extent as other accounts of the Corporation which are available therefor are insufficient for such losses. No right, title, or interest of any institution in or with respect to its pro rata sitare of the secondary reserve shall be assignable or transferable whether by operation of law or otherwise, except to such extent as the Corporation may provide for transfer of such pro rata share in cases of merger or consolidation, transfer of bulk assets or assumption of liabilities, and similar transactions, as defined by the Corporation for purposes of this sentence. "(f) If (i) the status of an insured institution as an insured institution is terminated pursuant to any provision of section 407 or the insurance of accounts of an insured institution is otherwise terminated, (ii) a conservator, receiver, or other legal custodian is appointed for an insured institution under the circumstances and for the purpose set forth in subsection (d) of section 401, or (iii) the Corporation makes a determination that for the purposes of this subsection an insured institution has gone into liquidation, the Corporation shall pay in cash to such institution its pro rata share of the secondary reserve, in accordance with such terms and conditions as the Corporation may prescribe, or, at the option of the Corporation, the Corporation may apply the whole or any part of the amount which would otherwise be paid in cash toward the payment of any indebtedness or obligation, whether matured or not, of such institution to the Corporation. then existing or arising before such payment in cash: Provided, That such payment or such application need not be made to the extent that the   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  H. Rept. 93-418  6 provisions of the exception in the last sentence of subsection (e) are applicable. "(g) If, at the close of December 31 in any year after 1971, the aggregate of the primary reserve and the secondary reserve equals or 4 per centum of the total amount of all accounts of insured exceeds 11/ members of all insured institutions but the primary reserve does not equal or exceed 2 per centum of such base, each insured institution's pro rata share of the secondary reserve shall, during the year beginning with May 1 next succeeding such close, be used, to the extent available, to discharge such institution's obligation for its premium under subsection (b) for the prelmium year beginning in such year, but only to the extent of such percentage, to be the same for all insured institutions and to be not less than 30 nor more than 70 per centurn of such premium,as the Corporation may determine; and the use of such pro rata shares as provided in this sentence shall continue 'unless and until the next sentence or the last sentence of this subsection shall become operative. If, at the close of any December 31 occurring before the last sentence of this subsection shall become operative, the aggregate of the primary reserve and the secondary reserve is not at least equal to 11/4 per centum of the total amount of all accounts of insured members of all insured institutions, the use of any insured institution's pro rata share of the secondary reserve ?finder the first sentence of this subsection shall terminate with respect to its premium under subsection (b) for the premium year beginning during the calendar year commencing on May 1 next succeeding such December 31, and such termination shall continue 'unless and until the first sentence of this subsection shall become operative. If, at the close of any December 31, the primary reserve equals or exceeds such 2 per centum, the Corporation shall, at such time (which shall be the same for all insured institutions and shall not be later than May 1 next succeeding such close) and in such manner the Corporation shall determine, pay in cash to each insured institm".-)n its pro rata share of the secondary reserve. "(h)(1) Each insured institution shall make such deposits in the Corporation as may from time to time be required by call of the Federal Home Loan Bank Board. Any such call shall be calculated by applying a specified percentage, which shall be the same for all insured institutions, to the total amount of all withdrwal or repurchasable shares,investment certificates, and deposits in each insured institution. No such call shall be made unless such Board determines that the total amount of such call, plus the outstanding deposits previously made pursuant to such calls, does not exceed 1 per eentwm,of the total amount of all withdrawable or repurchasable shares, investment certificates, and deposits in all insured institutions. For the purposes of this subsection, the total amounts hereinabove referred to shall be determ,ineel or estimated by such Board or in such manner as it may prescribe. "(2) The Corporation shall credit as of the close of each calendar year, to each deposit outstanding at such close, a return on the outstanding balance as determined hv the Corvoration, of such deposit during such calendar year, at a rate equal to the (1,.erage annual rate of return, as determined by the Corporation, to the Corporation during the year ending at the close of November 30 of such calendar war, on the investments held by the Corporation in obligations of, or guaranteed as to principal and interest by, the United States.  1   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  H. Rept. 93-418  7 "(3) The Corporation in its discretion may at any time repay all such deposits, or repay pro rata a portion of each of such deposits, in such manner and under such procedure as the Corporation may prescribe. Any procedure for such pro rata repayment may provide for total repayment of any deposit, if total repayment of any and all deposits of equal or smaller amount is likewise provided for. (4) The provisions of subsection (f) of this section and of the last sentence of subsection (e) of this section shall be applicable to deposits under this subsection, and for the purposes of this subsection the references in such subsection (f) and such last sentence to the prepayments and the pro rata shares therein mentioned shall be deemed instead to be references respectively to the deposits under this subsection and the pro rata shares of the holders thereof, and the reference in such subsection (f) to that subsection shall be deemed instead to be a reference to this subsection." STATE TAXATION OF FEDERALLY INSURED FINANCIAL INSTITUTIONS' SEC. 7. (a) This section may be cited as the "State Taxation of Depositories Act". (b) The Congress finds that the national goals of fostering an efficient banking system and the free flow of commerce among the States will be furthered by clarifying the principles governing State taxation of interstate transactions of banks and other depositories. Application of taxes measured by income or receipts, or other "doing business" taxes, in States other than the States in which depositories have their principal offices should be deferred until such time as uniform and equitable methods are developed for determining jurisdiction to tax and for dividing the tax base among States. (c) With respect to any taxable year or other taxable period beginning on or after the date of enactment of this section and before January 1,1976, no State or political subdivision thereof may impose any tax measured by income or receipts or any other "doing business" tax on any insured depository not having its principal office within such State. (d)For the purpose of this section— (1) The term "insured depository" means any bank the deposits of which are insured under the Federal Deposit Insurance Act, any institution the accounts of which are insured by the Federal Savings and Loan Insurance Corporation, or any thrift and home financing institution which is a member of a Federal home loan bank. (2) The term "State" means any of the several States of the United States, the District of Columbia, the Commonwealth of Puerto Rico, the Virgin Islands, Guam, and American Samoa. (c)(1) The Advisory Commission on Intergovernmental Relations shall make a study of all pertinent matters relating to the application of State "doing business" taxes on out-of-State commercial banks, mutual savings banks, and savings and loan associations. Such study shall include recommendations for legislation which will provide equitable State taxation of out-of-State commercial banks, mutual savings banks, and savings and loan associations. Such recommendations shall include, but shall not be limited to, the matter of the proper allocation, apportionment,or other division of tax bases and such other   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  H. Rept. 93-413  8 te taxation of commercial matters'relating to the question of multista and loan associations as banks, mutual savings banks, and savings inent. In conducting the the Commission shall determine to be pert Secretary of the Treasstudy, th,e Commission shall consult with the l Deposit Insurance Corury, the Federal Reserve Board, the Federa rd, appropriate State poration, the Federal Home Loan BankasBoa needed. banking and taxing authorities,and others rt to the Congress of the (2) The Commission shall make a repo later than December 31, results of its study and recommendations not 1974. ted to the Commission (3) There are authorized to be appropria the provisions of this such sums as may be necessary to carry out subsection. l take effect on the thirtieth SEc. 8. The provisions of this Act shal the amendments made day after the date of its enactment, except that of enactment of th,iit by sections 1 and 5 shall take effect on the date Act. And the Senate agree to the same. WRIGHT PATMAN, FERNAND J. ST GERMAIN, FRANK ANNUNZIO, W.A.BARRETT, JIM HANLEY, FRANK J. BRASCO, WILLIAM R.COTTER, JOHN JOSEPH MOAKLEY, THOMAS L.ASHLEY, WILLIAM B.WIDNALL, JOHN H.ROUSSELOT, ALBERT W.JOHNSON, J. WILLIAM STANTON, GARRY BROWN, Managers on the Part of the House. JOHN SPARKMAN, WILLIAM PROXMIRE, HARRISON WILLIAMS, THOMAS J. MCINTYRE, JOHN TOWER, WALLACE F.BENNETT, EDWARD W.BROOKE, Managers on the Part of the Senate.   https://fraser.stlouisfed.org MN Federal Reserve Bank of St. Louis  H. Rept. 93-418  1MM\  JOINT EXPLANATORY STATEMENT OF THE COMMITTEE OF CONFERENCE The managers on the part of the House and the Senate at the conference on the disagreeing votes of the two Houses on the amendment of the Senate to the bill (H.R. 6370) to extend certain laws relating to the payment of interest on time and savings deposits, to prohibit depository institutions from permitting negotiable orders of withdrawal to be made with respect to any deposit or account on which any interest or dividend is paid, to authorize Federal savings and loan associations and national banks to own stock in and invest in loans to certain State housing corporations, and for other purposes, submit the following joint statement to the House and the Senate in explanation of the effect of the action agreed upon by the managers and recommended in the accompanying conference report: The House bill extended until September 30, 1975, the authority of various Federal financial regulatory agencies to establish flexible ceilings that may be paid by most banks on time and savings deposits, and y most building and loan, savings and loan, and homestead associations and cooperative banks on deposits, shares, and withdrawable accounts. The Senate amendment extended the same authority until June 1, 1974. The conferees accepted the compromise date of December 31, 1974. The House bill prohibited depository institutions from allowing the owner of a deposit, or account on which interest or dividends is paid to make withdrawals by negotiable or transferable instruments for the purpose of making transfers to third parties. The Senate amendments differed from the House bill in that it did not prohibit such withdrawals with respect to depository institutions in Massachusetts and New Hampshire. The Senate amendment also differed in that its prohibition on such withdrawals with respect to depository institutions in 48 States and its exception with respect to Massachusetts and New Hampshire expired on the same date as is prescribed in Section 7 of the Act of September 21, 1966. The conferees accepted a compromise which prohibits such withdrawals in depository institutions in 48 States, making an exception for such withdrawals in depository institutions in Massachusetts and New Hampshire. The compromise also deletes credit unions from the definition of "depository institution". The House bill extended the authority of the Federal Deposit Insurance Corporation over interest rates paid by non-insured banks, except to non-insured banks in any State where total deposits of noninsured financial institutions in such State are less than 20% of total deposits of all financial institutions in such State. The Senate amendment extended the authority of the Federal Deposit Insurance Corpo-   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  (9)  H. Rept. 93-418  10 ration over interest rates paid by non-insured banks to NOW accounts in such banks. The conferees accepted the House provision. The House bill extended the authority of the Federal Home Loan Bank Board in the same manner as it extended the authority of the Federal Deposit Insurance Corporation. The Senate amendment con• tained no comparable provision. The conferees receded to the Senate position. The House bill amended section 5(c) of the Home Owners' Loan Act and paragraph seven of section 5136 of the Revised Statutes in order to permit national banks and certain savings and loan associations chartered by the Federal Home Loan Bank Board to invest in, lend to, and to commit themselves to lend to State housing corporations incorporated in the State in which the head office of the association is located. The investments of any such association may not exceed 1/ 4 of 1 percent of its assets, and its loans and loan commitments may not exceed 1 percent of the total outstanding loans which it makes or purchases. The Senate amendment differed from the House bill in that it: (1) had no ceiling on the amount of loans and loan commitments that any such association may make to State housing corporations other than whatever ceiling the Federal Home Loan Bank Board may, by rule, prescribe; (2) placed the same aggregate limitation on investments which any such association may make to State housing corporations, as does the House bill, except that in the Senate amendment the Federal Home Loan Bank Board may, by rule, set a smaller aggregate limitation; (3) directed the Federal Savings and Loan Insurance Corporation, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation to regulate investment in State housing corporations: and (4) defined the terms "insured institution", "State member insured banks", "State nonmember insured banks",_ "State housing corporation", and "State". The House receded to the Senate provision. The Senate amendment amended section 402 of title IV of the National Housing Act to direct the Federal Savings and Loan Insurance Corporation not to approve until December 31, 1973, conversions from the mutual to stock form by savings and loan associations the accounts of which are insured or would become insured by the Corporation. The House bill contained no comparable provision. The House conferees accepted the Senate provision with an amendment. Under the provision adopted by the conferees, the Corporation is directed not to grant approval to applications for conversion from the mutual to stock form until June 30, 1974; with the exception that study applications filed with the Corporation before Senate passage of S. 1798 on May 22, 1973, may be considered on the merits after   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  H. Rept. 93-418  .MMEek  11 December 31, 1973, in accordance with regulations then in effect and adopted pursuant to title IV of the National Housing Act or Section 5 of the Home Owners'Loan Act of 1933. The Senate amendment amended section 404 of title IV of the National Housing Act to establish a new procedure for payment by insured savings and loan associations of premiums into the reserve fund of the Federal Savings and Loan Insurance Corporation. The House bill had no comparable provision. The conferees accepted the Senate provision. The Senate amendment directed the Advisory Commission on Intergovernmental Relations to make a study with respect to the application by the States of "doing business" taxes on out-of-State commercial banks, mutual savings banks, and savings and loan associations.and to report the results of such study together with its recommendations to Congress not later than December 31, 1974. The Senate amendment also contained a list of specific types of taxes which the States and political subdivisions thereof may impose on insured depositories .on or after the date of enactment of the section of the amendment containing such provision and before January 1,1976. Such list did not include taxes measured by income or receipts or other "doing business" taxes. The Senate amendment defined insured depositories to mean banks i - nsured by the Federal Deposit Insurance Corporation, institutions insured by the Federal Savings and Loan Insurance Corporation, and thrift and home financing institutions which are members of any Fedora] home loan bank. The House bill had no comparable provision. • Tile conferees adopted a version which does not alter the study in any way, which eliminates the list of permissible State taxes and in lieu thereof explicitly states that no State or political subdivision thereof may impose any tax measured by income or receipts or any other "doing business" tax on any insured depository not having its principal .office within such.State, and which alters the effective date provision so that the prohibition on State taxation discussed above is with respect to any taxable year or period beginning on or after the date of enactment of this section of the conference substitute and before January 1, 1976. The effective date was altered so that the prohibition would not affect a State or political subdivision thereof in the middle of a taxable year or period. The House bill and the amendments made by it took effect 30 days -after enactment, except the Regulation Q extension amendment and the State Housing Corporation amendment took effect on enactment. The Senate amendment contained no comparable provision, and,therefore, it took effect on enactment. The Senate receded to the House provision.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  H. Rept. 93-418   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  12 WRIGHT PATMAN, FERNAND J. ST GERMAIN, FRANK A NNUNZIO, W. A. BARRETT, JIM HANLEY, FRANK J. BRASCO, WILLIAM R. COTTER, JOHN JOSEPH MOAKLEY, THOMAS L. ASHLEY, WILLIAM B. WIDNALL, JOHN H. ROITSSELOT, ALBERT W. JOHNSON, J. WILLIAM STANTON, GARRY BROWN, Managers on the Part of the House. JOHN SPARKMAN, WILLIAM PROXMIRE, HARRISON WILLIAMS, THOMAS J. MCINTYRE, JOHN TOWER WALLACE F.' BENNETT, EDWARD W. BROOKE, Managers on the Part of the Senate. 0  H. Rept. 93-418  30 (.c-cs"' REPORT 93D CONGRESS t HOUSE OF REPRESENTATIVES J 1 No. 93-140 /St Session f  EXTENDING CERTAIN LAWS RELATING TO PAYMENT OF INTEREST ON TIME AND SAVINGS DEPOSITS, TO AUTHORIZE CERTAIN FINANCIAL INSTITUTIONS TO INVEST IN STATE HOUSING CORPORATIONS, AND FOR OTHER PURPOSES  APRIL 16, 1073.—Committed to the Committee of the Whole House on the State of the Union and ordered to be printed  Mr. PATMANI from the Committee on Banking and Currency, submitted the following  REPORT [To accompany H.R. 6370]  The Committee on Banking and Currency, to whom was referred the bill (H.R. 6370) to extend certain laws relating to the payment of interest on time and savings deposits, to prohibit depository institutions from permitting negotiable orders of withdrawal to be made with respect to any deposit or account on which any interest or dividend is paid, to authorize Federal savings and loan associations and national banks to own stock in and invest in loans to certain State housing corporations, and for other purposes, having considered the same, report favorably thereon with amendments and recommend that the bill as amended do pass. AMENDMENTS The amendments are as follows: Page 2, strike out line 7 and all that follows thereafter through page 3, line 14. Page 3,line 18, strike out "3" and insert in lieu thereof "2". Page 4, line 12, strike out "4" and insert in lieu thereof "3". Page 4, line 25, strike out "5" and insert in lieu thereof "4". Page 5, line 5, strike out "Act" and insert in lieu thereof "section". Page 6, immediately after line 20, insert the following new section heading: "Effective Date". Page 6, line 21, strike out "6" and insert in lieu thereof "5". Page 6,line 23, strike out"5" and insert in lieu thereof "4". 83-006   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  ,  2 Amend the title so as to read:"A bill to extend certain laws relating to the payment of interest on time and savings deposits, to authorize Federal savings and loan associations and national banks to own stock in and invest in loans to certain State housing corporations, and for other purposes." GENERAL STATEMENT CONCERNING TEMPORARY RATE CONTROL AUTHORITY In 1966, with the enactment of PL 89-597, the Congress provided authority to the various Federal financial regulatory agencies to establish flexible ceilings on rates paid by financial institutions on time and savings deposits. The most recent extension was provided by PL 92-15, continuing present authority until June 1, 1973. Your Committee has concluded that once again temporary rate control authority must be continued if stability in the volume of funds available for home mortgage financing is to be maintained and the soundness and solvency of financial institutions is to be ensured by the prevention of costly rate wars between banks and thrift institutions. In a period of continued tight money and high interest rates, your Committee has no alternative but to recommend that controls continue to be administered with a sufficient differential to ensure an adequate flow of funds into the mortgage market. After extended hearings and consultation with affected industry groups and the regulatory agencies, your Committee has determined that all are in agreement with the need for a further extension. The use of this authority does contribute significantly to a moderation in the excessive competition for consumer savings and does facilitate a steady flow,of funds into thrift institutions. In view of the continued uncertainty as to conditions in the financial market and the anticipated submission by the Administration of its long awaited recommendations providing for a comprehensive review of our existing financial institutions, your Committee believes a further extension is clearly in the public interest. Section 1 of the bill would extend existing authority for a twentyeight month period to permit adequate time for the orderly consideration of comprehensive, coordinated financial institution recommendations without the necessity of interrupting these deliberations for rate control legislation. Should a permanent structure and regulatory process be recommended to deal with existing discrimination while ensuring competitive equality, the time period can be shortened at the time of adoption of reform legislation. ADDITIONAL REGULATORY RATE CONTROL AUTHORITY Section 2 (Federal Deposit Insurance Corporation) and section 3 (Federal Home Loan Bank Board) will enable these agencies to regulate the rate of interest paid by nonmember savings and loan associations, cooperative banks and by banks in Massachusetts the accounts of which are not insured by the Federal Deposit Insurance Corporation. This approach was approved after the Committee, by a vote of 19 to 17, deleted from the original bill a prohibition against NOW accounts.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  :3 The NOW account is an interest-bearing savings account which is subject to withdrawal by negotiable or transferable order, presently being offered under State law by savings banks in both Massachusetts and New Hampshire. Although testimony was heard from all interested parties within the financial community, and substantial differences of opinion with regard to the effects of NOW accounts on the competitive balance in the industry were expressed, the committee decided against instituting a statutory ban on these accounts. Instead, with sections 2 and 3 of the bill as amended, the committee has assured that there is Federal regulatory control over all institutions that could offer NOW accounts. Thus, should any indication of a disruptive, competitive imbalance become evident in the future, there will be fully adequate Federal regulatory authority to deal with the problem in the absence of action at the State level. EMERGENCE OF STATE HOUSING CORPORATIONS In an effort to encourage and support newly emerging Statechartered housing corporations your Committee, by its adoption of section 4 of the bill, authorizes' Federal savings and loan associations and national banks to invest in, or make loans or loan commitments to, such corporations. All Federal regulatory agencies expressed their support for the flexibility provided by section 4. The Committee is always anxious to explore opportunities to provide housing funds for the development of low to moderate income housing and believes that this authority will in the future be of assistance to those States who have indicated a willingness and an ability to perform a more significant role in meeting the housing needs of their citizens. It is believed that the limitations on investment provided by section 4 will protect the safety and security of the financial structure of those institutions while providing for an additional and timely source for  home mortgage financing. SECTION-BY-SECTION EXPLANATION OF THE COMMITTEE BILL Section 1. Expansion of authority for the flexible regulation of interest rates on deposits and share accounts in financial institutions This section extends until September 30, 1975, the authority for the flexible regulation of interest rates on deposits and share accounts in financial institutions. Section 2. Extension of authority of Federal Deposit Insurance Corporation over interest rates paid on deposits by noninsured banks This section amends section 18(g) of the Federal Deposit Insurance Act in order to extend the authority of the Federal Deposit Insurance Corporation to cover interest rates paid on deposits by certain nonfederally-insured banks. The effect of this provision would be to bring non-federally-insured institutions under the Federal interest rate limitation where their aggregate time and savings deposits in a given State exceed 20 percent of the total time and savings deposits of all financial institutions in that State. At this time, Massachusetts is the only State which would be affected by this provision.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  4 The theory behind the provision is that, as a matter of Federal policy, interest rate limitations cannot be effective in any State in which over 20 percent of the deposits held in that State are outside the scope of the limitation, even though they may be subject to a similar authority at the State level. Section 3. Extension of authority of Federal Home Loan Bank Board over rates of interest and dividends paid on deposits, shares, and withdrawable accounts by nonmember savings and loan associations and cooperative banks This section amends section 5B(a) of the Federal Home Loan Bank Act in order to extend the authority of the Federal Home Loan Bank Board to cover rates of interest and dividends paid on deposits, shares, and withdrawable accounts by nonmember building and loan, savings and loan, and homestead associations, and cooperative banks, in the same manner that section 2 extends the Federal Deposit Insurance Corporation's authority. Similarly, this provision relieves the restriction on the Home Loan Bank Board's authority only in Massachusetts. Section 4. Federal savings and loan associations and national banks This section amends section 5(c) of the Home Owners' Loan Act of 1933 to allow any Federal savings and loan association, in certain situations, to invest in, lend to, or commit itself to lend to any State housing corporation incorporated in the State in which the head office of the association is situated. This section also amends the seventh paragraph of section 5136 of the Revised Statutes to allow any national banking association, in certain situations, to purchase for its own account shares of stock issued by any State housing corporation incorporated in the State in which the association is located and to make investments in loans and commitments for loans to any such corporation. Section 5. Effective date This section provides that the provisions of this Act and the amendments made by it shall take effect on the thirtieth day after the date of its enactment, except that amendments made by sections 1 and 4 shall take effect on enactment. COST OF CARRYING OUT THE BILL AND COMMITTEE VOTE In compliance with clause 7 of rule XIII of the Rules of the House of Representatives, the following statement is made relative to the cost incurred in carrying out this bill. The Committee believes that existing agencies and staff therein are adequate to carry out the objectives of this legislation. In compliance with clause 27 of rule XI of the Rules of the House of Representatives, the following statement is made relative to the record vote of the motion to report a bill. A total of 34 votes was cast for reporting, none were cast against reporting and a total of 2 abstained. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED In compliance with clause 3 of rule XIII of the Rules of the House of Representatives, changes in existing law made by the bill, as re-   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  5 ported, are shown as follows (existing law proposed to be omitted is enclosed in black brackets, new matter is printed in italics, existing law in which no change is proposed is shown in roman): SECTION 7 OF THE ACT OF SEPTEMBER 21, 1966 SEC. 7. Effective [June 1, 1973] September 30, 1975: (1) So much of section 19(j) of the Federal Reserve Act (12 U.S.C. 371(b)) as precedes the third sentence thereof is amended to read as it would without the amendment made by section 2(c) of this Act. (2) The second and third sentences of section 18(g) of the Federal Deposit Insurance Act (12 U.S.C. 1828(g)) are amended to read as they would without the amendment made by section 3 of this Act. (3) The last three sentences of section 18(g) of the Federal Deposit Insurance Act (12 U.S.C. 1828(g)) are repealed. (4) Section 5B of the Federal Home Loan Bank Act (12 U.S.C. 1425b) is repealed.  SECTION  18(g)  OF THE FEDERAL DEPOSIT INSURANCE ACT  (g) The Board of Directors shall by regulation prohibit the payment of interest or dividends on demand deposits in insured nonmember banks and for such purpose it may define the term "demand deposits" but such exceptions from this prohibition shall be made as are now or may hereafter be prescribed with respect to deposits payable on demand in member banks by section 19 of the Federal Reserve Act, as amended, or by regulation of the Board of Governors of the Federal Reserve System. The Board of Directors may from time to time, after consulting with the Board of Governors of the Federal Reserve System and the Federal Home Loan Bank Board, prescribe rules governing the payment and advertisement of interest or dividends on deposits, including limitations on the rates of interest or dividends that may be paid by insured nonmember banks (including insured mutual savings banks) on time and savings deposits. The Board of Directors may prescribe different rate limitations for different classes of deposits, for deposits of different amounts or with different maturities or subject to different conditions regarding withdrawal or repayment, according to the nature or location of insured nonmember banks or their depositors, or according to such other reasonable bases as the Board of Directors may deem desirable in the public interest. The Board of Directors is authorized for the purposes of this subsection to define the terms "time deposits" and "savings deposits", to determine what shall be deemed a payment of interest, and to prescribe such regulations as it may deem necessary to effectuate the purposes of this subsection and to prevent evasions thereof. Such regulations shall prohibit any insured nonmember bank from paying any time deposit before its maturity except upon such conditions and in accordance with such rules and regulations as may be prescribed by   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  6 the Board of Directors, and from waiving any requirement of notice before payment of any savings deposit except as to all savings deposits having the same requirement. The provisions of this subsection and of regulations issued thereunder shall also apply, in the discretion of the Board of Directors, to obligations other than deposits that are undertaken by insured nonmember banks or their affiliates for the purpose of obtaining funds to be used in the banking business. As used in this subsection, the term "affiliate" has the same meaning as when used in section 2(b) of the Banking Act of 1933, as amended (12 U.S.C. 221a(b)), except that the term "member bank", as used in such section 2(b), shall be deemed to refer to an insured nonmember bank. For each violation of any provision of this subsection or any lawful provision of such regulations relating to the payment of interest or dividends on deposits or to withdrawal of deposits, the offending bank shall be subject to a penalty of not more than $100, which the Corporation may recover for its use. During the period commencing on October 15, 1962, and ending on October 15, 1968, the provisions of this subsection shall not apply to the rate of interest which may be paid by insured nonmember banks on time deposits of foreign governments, monetary and financial authorities of foreign governments when acting as such, or international financial institutions of which the United States is a member. The authority conferred by this subsection shall also apply to noninsured banks in any State if [(1)] the total amount of time and savings deposits held in all such banks in the State, plus the total amount of deposits, shares, and withdrawable accounts held in all building and loan, savings and loan, and homestead associations (including cooperative banks) in the State which are not members of a Federal home loan bank, is more than 20 per centum of the total amount of such deposits, shares, and withdrawable accounts held in all banks, and building and loan, savings and loan, and homestead associations (including cooperative banks) in the State [, and (2) there does not exist under the laws of such State a bank supervisory agency with authority comparable to that conferred by this subsection, including specifically the authority to regulate the rates of interest and dividends paid by such noninsured banks on time and savings deposits, or if such agency exists it has not issued regulations in the exercise of that authority]. Such authority shall only be exercised by the Board of Directors with respect to such noninsured banks prior to July 31, 1970, to limit the rates of interest or dividends which such banks may pay on time and savings deposits to maximum rates not lower than 532 per centum per annum. Whenever it shall appear to the Board of Directors that any noninsured bank or any affiliate thereof is engaged or has engaged or is about to engage in any acts or practices which constitute or will constitute a violation of the provisions of this subsection or of any regulations thereunder, the Board of Directors may, in its discretion, bring an action in the United States district court for the judicial district in which the principal office of the noninsured bank or affiliate thereof is located to enjoin such acts or practices, to enforce compliance with this subsection or any regulations thereunder, or for a combmation of the foregoing, and such courts shall have jurisdiction of such actions, and, upon a proper showing, an injunction, restraining order, or other appropriate order may be granted without bond.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  7 SECTION  5B(a)  OF THE FEDERAL HOME LOAN BANK ACT  SEC. 5B. (a) The Board may from time to time, after consulting with the Board of Governors of the Federal Reserve System and the Board of Directors of the Federal Deposit Insurance Corporation, prescribe rules governing the payment and advertisement of interest or dividends on deposits, shares, or withdrawable accounts, including limitations on the rates of interest or dividends on deposits, shares or withdrawable accounts that may be paid by members, other than those the deposits of which are insured in accordance with the provisions of the Federal Deposit Insurance Act, by institutions which are insured institutions as defined in section 401(a) of the National Housing Act, and by nonmember building and loan,savings and loan, and homestead associations, and cooperative banks. The Board may prescribe different rate limitations for different classes of deposits, shares, or withdrawable accounts, for deposits, shares, or withdrawable accounts of different amounts or with different maturities or subject to different conditions regarding withdrawal or repayment, according to the nature or location of such members, institutions, or nonmembers or their depositors, shareholders or withdrawable account holders, or according to such other reasonable bases as the Board may deem desirable in the public interest. The authority conferred by this subsection shall apply to nonmember building and loan, savings and loan, and homestead associations, and cooperative banks in any State if [(1)] the total amount of deposits, shares, and withdrawable accounts held in all such nonmember associations and banks in the State, plus the total amount of time and savings deposits held in all banks in the State which are not insured by the Federal Deposit Insurance Corporation, is more than 20 per centum of the total amount of such deposits, shares, and withdrawable accounts held in all banks, and building and loan, savings and loan, and homestead associations (including cooperative banks) in the State [, and (2) there does not exist under the laws of such State a bank supervisory agency with authority comparable to that conferred by the first two sentences of this subsection, including specifically the authority to regulate the rates of interest and dividends paid by any such association or bank on deposits, shares, or withdrawable accounts, or if such agency exists it has not issued regulations in the exercise of that authority]. Such authority shall only be exercised by the Board with respect to such nonmember associations and banks prior to July 31, 1970, to limit the rates of interest or dividends which such associations or banks may pay on deposits, shares, or withdrawable accounts to maximum rates not lower than 5iA per centum per annum. SECTION  5(C)  OF THE HOME OWNER'S LOAN ACT OF 1933  (c) Such associations shall lend their funds only on the security of their savings accounts or on the security of first liens upon real property within one hundred miles of their home office or within the State in which such home office is located which constitute first liens upon homes, combinations of homes and business property, other dwelling units, or combinations of dwelling units, including homes, and business property involving only minor or incidental business   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  8 use (all of which may be defined by the Board): Provided, That not more than $45,000 for each single-family dwelling, and not more than such amount per room as the Board may determine by regulation within the limits allowable (at the time of the loan) in section 207(c) (3) of the National Housing Act for any other dwelling unit covered by such lien, shall be loaned on the security of any such lien, and the Board shall by regulation limit to not more than 20 per centum of the assets of the association the aggregate amount or amounts of the investments which may be made by an association under the foregoing provisions of this sentence on the security of property which comprises or includes more than four dwelling units or does not constitute homes or combinations of homes and business property; except that not exceeding 20 per centum of the assets of such association may be loaned on the security of first liens upon improved real estate without regard to the foregoing limitations, and additional sums not exceeding 20 per centum of the assets of an association may be used without regard to such area restriction for the making or purchase of participating interests in first hens on real property of the type described in this sentence in the matter preceding this proviso: And providedfurther, That any portion of the assets of such associations may be invested in obligations of, or fully guaranteed as to principal and interest by, the United States, or in the stock or bonds of a Federal Home Loan Bank, or in obligations, participations, or other instruments of or issued by, or fully guaranteed as to principal and interest by, the Federal National Mortgage Association or the Government National Mortgage Association or any other agency of the United States, or the stock of the Federal National Mortgage Association; or in time deposits, certificates, or accounts of any bank the deposits of which are insured by the Federal Deposit Insurance Corporation; or in general obligations of any State or of any political.subdivision thereof or in obligations or other instruments or securities of the Student Loan Marketing Association; and as used in this section the term "State" shall include the District of Columbia, the Commonwealth of Puerto Rico, and the possessions of the United States: And provided further, That any such association which is converted from a State-chartered institution may continue to make loans in the territory in which it made loans while operating under State charter. In addition to the loans and investments otherwise authorized, such associations may purchase, subject to all the provisions of this paragraph except the area restriction, loans secured by first liens on improved real estate which are insured under the provisions of the National Housing Act, as amended, or insured as provided in the Servicemen's Readjustment Act of 1944, as amended, or chapter 37 of title 38, United States Code. Structures or parts thereof designed or used as fraternity or sorority houses which include sleeping accommodations for students of a college or university, or designed or used principally for the provision of living accommodations for persons who are students, employees, or members of the staff of a college, university, or hospital, shall be considered, subject to such regulations as the Board may prescribe, "other dwelling units" for the purposes of this subsection. Without regard to any other provision of this subsection except the area requirement, any such association is authorized to invest a sum not in excess of 20 per centum of the assets of such association in loans   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  9 insured under title I of the National Housing Act, in home improvement loans insured under title II of the National Housing Act, in unsecured loans insured or guaranteed under the provisions of the Servicemen's Readjustment Act of 1944, as amended, or chapter 37 of title 38 of the United States Code, and in other loans for property alteration, repair, or improvement, including the construction of new structures related to residential use of the property: Provided, That no such loan, unless so insured or guaranteed, shall be made in excess of $5,000. Participating interests in loans secured by mortgages which have the benefit of insurance or guaranty (or a commitment therefor) under the National Housing Act, the Servicemen's Readjustment Act of 1944, or chapter 37 of title 38, United States Code, shall not be taken into account in determining the amount of loans which an association may make within any of the percentage limitations contained in the first proviso of this subsection. Without regard to any other provision of this subsection, but subject to such prohibitions, limitations, and conditions as the Board may by regulation prescribe, any such association may make and invest in— (A) any loan not exceeding $5,000 made for the repair, equipping, alteration, or improvement of any real property, or (B) any loan made for the purpose of mobile home financing. Without regard to any other provision of this subsection, any such association is authorized to invest in loans, obligations, and advances of credit (all of which are hereinafter referred to as "loans") made for the payment of expenses of college, university, or vocational education, but no association shall make any investment in loans under this paragraph if the principal amount of its investment in .such loans, exclusive of any investment which is or which at the time of its making was otherwise authorized, would thereupon exceed 5 per centum of its assets. Without regard to any other provision of this subsection except the area restriction, any such association whose general reserves, surplus, and undivided profits aggregate a sum in excess of 5 per centum of its withdrawable accounts is authorized to invest an amount not exceeding at any one time 5 per centum of such withdrawable accounts in loans to finance the acquisition and development of land for primarily residential usage, subject to such rules and regulations as the Board may prescribe. Without regard to any other provision of this subsection except the area restriction and the dollar amount limitation, any such association may invest an amount not exceeding at any one time 5 per centum of its assets in nonamortized loans which are made on the security of first liens upon homes or combinations of homes and business property and which (1) are repayable within a period of eighteen months, (2) provide that interest payments be made at least semiannually, and (3) do not exceed 80 per centum of the appraised value of the property involved. For the purposes of this paragraph the term "first liens" includes the assignment of the whole of the beneficial interest in a trust having a corporate trustee whereunder real estate held in the trust can be subjected to the satisfaction of the obligation or obligations secured with the same priority as a first mortgage, a first deed of trust, or a first trust deed in the jurisdiction where the real estate is located.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  MI\  10 Without regard to any other provision of this subsection except the area restriction, any such association is authorized to invest an amount not exceeding at any one time 5 per centum of its assets in amortized loans or participating interests therein which are secured by first liens upon improved real estate used to provide housing facilities for the aging, subject to the following qualifications: (1) each such loan shall be repayable within a period of 30 years; (2) no such loan shall exceed 90 per centum of the appraised value of the improved real estate given as security therefor; and (3) each such loan— (A) shall be made upon and secured by real estate which is improved by housing accommodations, individual or multiple, designed for the purpose of providing accommodations for occupancy by aging persons, or of providing rest homes or nursing homes, so constructed or altered as to be suitable primarily for the occupancy of persons over fifty-five years of age and limited principally to the occupancy of such persons; and (B) shall be made for the implementation of the purpose described in clause (A) Without regard to any other provision of this subsection, any such association is authorized to invest not more than 5 per centum of its assets in, or in interests in, real property located within urban renewal areas as defined in subsection (a) of section 110 of the Housing Act of 1949 and obligations secured by first liens on real property so located, but no investment shall be made by an association under this sentence in real property or any interest therein if the aggregate investment of the association under this sentence in real property and interests therein, determined as prescribed by the Board, would thereupon exceed 2 per centum of the assets of the association. Without regard to any other provision of this subsection, any such association whose general reserves, surplus, and undivided profits aggregate a sum in excess of 5 per centum of its withdrawable accounts is authorized to invest in, to lend to, or to commit itself to lend to any business development credit corporation incorporated in the State in which the head office of such association is situated, in the same manner and to the same extent as the statutes of such State authorize a savings and loan association organized under the laws of said State to invest in, to lend to, or to commit itself to lend to such business development credit corporation, but the aggregate amount of such investments, loans, and commitments of any such association outstanding at any time shall not exceed one-half of 1 per centum of the total outstanding loans made by such association, or $250,000, whichever is the lesser. For the purpose of this section the terms "real property" and "real estate" shall include a leasehold or subleasehold estate in real property under a lease or sublease the term of which does not expire, or which is renewable automatically or at the option of the holder (or at the option of the association) so as not to expire, for at least ten years beyond the maturity of the debt. Any such association is authorized to invest in the capital stock, obligations, or other securities of any corporation organized under the   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  0  11 laws of the State, District, Commonwealth, territory, or possession in which the home office of the association is located, if the entire capital stock of such corporation is available for purchase only by savings and loan associations of that State, District, Commonwealth, territory, or possession and by Federal savings and loan associations having their home offices therein, but no association may make any investment under this sentence if its aggregate outstanding investment under this sentence, determined as prescribed by the Board, would thereupon exceed 1 per centum of its assets. Without regard to any other provision of this subsection, any such association may, to such extent as the Federal Home Loan Bank Board may by regulation permit, (1) invest in loans, and interest in loans, secured by mortgages as to which the association has the benefit of insurance under title X of the National Housing Act, now or hereafter in effect, or of a commitment or agreement for such insurance, or (2) acquire and hold investments in housing project loans, or interests therein, having the benefit of any guaranty under section 221 of the Foreign Assistance Act of 1961, as now or hereafter in effect, or loans, or interests therein, having the benefit of any guaranty under section 224 of such Act, or any commitment or agreement with respect to such loans, or interests therein, made pursuant to either of such sections: This authority extends to the acquisition, holding, and disposition of loans, or interests therein, having the benefit of any guaranty under section 221 or 222 of the Foreign Assistance Act of 1961, as amended by section 105 of the Foreign Assistance Act of 1969 or as hereafter amended or extended, or of any commitment or agreement for any such guaranty. Investments under clause (1) of this .paragraph shall not be included in any percentage of assets or other percentage referred to in this subsection. Investments under clause (2) of this paragraph shall not exceed, in the case of any association, 1 per centum of the assets of such association. Without regard to any other provision of this subsection, an association may invest in loans or obligations, or interests therein, as to which the association has the benefit of any guaranty under title IV of the Housing and Urban Development Act of 1968 or under part B of the Urban Growth and New Community Development Act of 1970, as now or hereafter in effect, or of a commitment or agreement therefor, and such investments shall not be included in any percentage of assets or other percentage referred to in this subsection. Notwithstanding any other provision of this subsection, an association may invest in loans or obligations, or interests therein, as to which the association has the benefit of insurance under section 240 of the National Housing Act, or of a commitment or agreement therefor, and such investments shall not be included in any percentage of assets or other percentage referred to in this subsection. Any such association may invest in loans, or interests in loans, to financial institutions with respect to which the United States or any agency or instrumentality thereof has any function of examination or supervision, or to any broker or dealer registered with the Securities and Exchange Commission, secured by loans, obligations, or investments in which if has any statutory authority to invest directly. No building and loan association incorporated under the laws of the District of Columbia or organized in such District or doing business in such District shall establish any branch or move its principal office or any branch without the prior written approval of the Federal   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  12 Home Loan Bank Board, and no other building and loan association shall establish any branch in such District or move its principal office or any branch in such District without such approval. As used in the sentence next preceding, "branch" means any office, place of business, or facility, other than the principal office as defined by the Board, of a building and loan association at which accounts are opened or payments thereon are received or withdrawals therefrom are paid, or any other office, place of business, or facility of a building and loan association defined by the Board as a branch within the meaning of such sentence, and as used in such sentence and in this sentence "building and loan association" means any incorporated or unincorporated building, building or loan, building and loan, savings and loan, or homestead association or cooperative bank. Any such association may invest in any investment which, at the time of the making of the investment, is an asset eligible for inclusion toward the satisfaction of any liquidity requirement imposed on the association pursuant to section 5A of the Federal Home Loan Bank Act, but only to the extent that the investment is permitted to be so included under regulations issued by the Board pursuant to that section, or is otherwise authorized. Any such association is authorized to act as trustee of any trust created or organized in the United States and forming part of a stock bonus, pension, or profit-sharing plan which qualifies or qualified for specific tax treatment under section 401(d) of the Internal Revenue Code of 1954, if the funds of such trust are invested only in savings accounts or deposits in such association or in obligations or securities issued by such association. All funds held in such fiduciary capacity by any such association may be commingled for appropriate purposes of investment, but individual records shall be kept by the fiduciary for each participant and shall show in proper detail all transactions engaged in under the authority of this paragraph. Any such association may issue and sell securities which are guaranteed pursuant to section 306(g) of the National Housing Act. Without regard to any other provision of this subsection, any such association is authorized to invest m shares of stock issued by a corporation authorized to be created pursuant to title IX of the Housing and Urban Development Act of 1968, and is authorized to invest in any partnership,limited partnership, or joint venture formed pursuant to section 907(a) or 907(c) of that Act: Without regard to any other provisions of this subsection, any such association whose general reserves, surplus and undivided profits aggregate a sum in excess of5 per centum of its withdrawable accounts is authorized to invest in, to lend to, or to commit itself to.lend to any State housing corporation incorporated in the State in which the head office of such association is situated, in the same manner and to the same extent as the statutes of such State authorize a savings and loan association organized under the laws of such State to invest in, to lend to, or commit itself to lend to such State housing corporation, but the aggregate amount of such investments, other than loans and loan commitments, of any such association outstanding at any time shall not exceed one-fourth of 1 per centum of the total assets of such association, and uninsured loans and commitments of any such association outstanding at any time shall not exceed I per centum of the total outstanding loans made or purchased by such association.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  I.  13 PARAGRAPH SEVENTH OF SECTION 5136 OF THE REVISED STATUTES OF THE UNITED STATES Seventh. To exercise by its board of directors or duly authorized officers or agents, subject to law, all such incidental powers as shall be necessary to carry on the business of banking; by discounting and negotiating promissory notes, drafts,.bills of exchange, and other evidences of debt; by receiving deposits; by buying and selling exchange, coin, and bullion; by loaning money on personal security; and by obtaining, issuing, and circulating notes according to the provisions of this chapter. The business of dealing in securities and stock by the association shall be limited to purchasing and selling such securities and stock without recourse, solely upon the order, and for the account of, customers, and in no case for its own account, and the association shall not underwrite any issue of securities or stock: Provided, That the association may purchase for its own account investment securities under such limitations and restrictions as the Comptroller of the Currency may by regulation prescribe. In no event shall the total amount of the investment securities of any one obligor or maker, held by the association for its own account, exceed at any time 10 per centum of its capital stock actually paid in and unimpaired and 10 per centum of its unimpaired surplus fund, except that this limitation shall not require any association to dispose of any securities lawfully held by it on August 23, 1935. As used in this section the term "investment securities" shall mean marketable obligations, evidencing indebtedness of any person, copartnership, association, or corporation in the form of bonds, notes and/or debentures commonly known as investment securities under such further definition of the term "investment securities" as may by regulation be prescribed by the Comptroller of the Currency. Except as hereinafter provided or otherwise permitted by law, nothing herein contained shall authorize the purchase by the association for its own account of any shares of stock of any corporation. The limitations and restrictions herein contained as to dealing in, underwriting and purchasing for its own account, investment securities shall not apply to obligations of the United States, or general obligations of any State or of any political subdivision thereof, or obligations of the Washington Metropolitan Area Transit Authority which are guaranteed by the Secretary of Transportation under section 9 of the National Capital Transportation Act of 1969, or obligations issued under authority of the Federal Farm Loan Act, as amended, or issued by the thirteen banks for cooperatives or any of them or the Federal Home Loan Banks, or obligations which are insured by the Secretary of Housing and Urban Development under title XI of the National Housing Act or obligations which are insured by the Secretary of Housing and Urban Development (hereafter in this sentence referred to as the "Secretary") pursuant to section 1712 of this title, if the debentures to be issued in payment of such insured obligations are guaranteed as to principal and interest by the United States, or obligations, participations, or other instruments of or issued by the Federal National Mortgage Association or the Government National Mortgage Association, or obligations of the Environmental Financing Authority or obligations or other instruments or securities of the Student Loan Marketing Association, or such obligations of any local public agency (as defined in section 1460(h) of Title 42)   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  14 as are secured by an agreement between the local public agency and the Secretary in which the local public agency agrees to borrow from said Secretary, and said Secretary agrees to lend to said local public agency, monies in an aggregate amount which (together with any other monies irrevocably committed to the payment of interest on such obligations) will suffice to pay, when due, the interest on and all installments (including the final installment) of the principal of such obligations, which monies under the terms of said agreement are required to be used for such payments, or such obligations of a public housing agency (as defined in the United States Housing Act of 1937, as amended) as are secured either (1) by an agreement between the public housing agency and the Secretary in which the public housing agency agrees to borrow from the Secretary, and the Secretary agrees to lend to the public housing agency, prior to the. maturity of such obligations (which obligations shall have a maturity of not more than eighteen months), monies in an amount which (together with any other monies irrevocably committed to the payment of interest on such obligations) will suffice to pay the principal of such obligations with interest to maturity thereon, which monies under the terms of said agreement are required to be used for the purpose of paying the principal of and the interest on such obligations at their maturity, or (2) by a pledge of annual contributions under an annual contributions contract between such public housing agency and the Secretary if such contract shall contain the covenant by the Secretary which is authorized by section 1421a(b) of Title'42, and if the maximum sum and the maximum period specified in such contract pursuant to section 1421a(b) of Title 42 shall not be less than the annual amount and the period for payment which are requisite to provide for the payment when due of all installments of principal and interest on such obligations: Provided, That.in carrying on the business commonly known as the safe-deposit business the association shall not invest in the capital stock of a corporation organized under the law of any State to conduct a safe-deposit business in an amount in excess of 15 per centum of the capital stock of the association actually paid in and unimpaired and 15 per centum of its unimpaired surplus. The limitations and restrictions herein contained as to dealing in and underwriting investment securities shall not apply to obligations issued by the International Bank for Reconstruction and Development, the Inter-American Development Bank or the Asian Development Bank, or obligations issued by any State or political subdivision or any agency of a State or political subdivision for housing, university, or dormitory purposes, which are at the time eligible for purchase by a national bank for its own account, nor to bonds, notes and other obligations issued by the Tennessee Valley Authority or by the United States Postal Service: Provided, That no association shall hold obligations, issued by any of said organizations as a result of underwriting, dealing, or purchasing for its own account (and for this purpose obligations as to which it is under commitment shall be deemed to be held by it) in a total amount exceeding at any one time 10 per centum of its capital stock actually paid in and unimpaired and 10 per centum of its unimpaired surplus fund. Notwithstanding any other provision in this paragraph, the association may purchase for its own account shares of stock issued by a corporation authorized to be created pursuant to sections 3931 to 3940 of Title 42, and may make investments in a partnership, limited   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  15 partnership, or joint venture formed pursuant to section 3937(a) or 3937(c) of Title 42. Notwithstanding any other provision of this paragraph, the association may purchase for its own account shares of stock issued by any State housing corporation incorporated in the State in which the association is located and may make investments in loans and commitments for loans to any such corporation: Provided, That in no event shall the total amount of such stock held for its own account and such investments in loans and commitments made by the association exceed at any time 5 per centum of its capital stock actually paid in and unimpaired plus 5 per centum of its unimpaired surplus fund. 0  a   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Union Calendar No.59 93D CONGRESS 1ST SESSION  H. R.6370 [Report No. 93-140]  IN THE HOUSE OF REPRESENTATIVES MARCH 29,1973 Mr. ST GERMAIN introduced the following bill; which was referred to the Committee on Banking and Currency APRIL 16,1973 Reported with amendments, committed to the Committee of the Whole House on the State of the Union, and ordered to be printed [Omit the part struck through and insert the part printed in italic]  A BILL To extend certain laws relating to the payment of interest on time and savings deposits, to prohibit depository institutions from permitting negotiable orders of withdrawal to be made with respect to any deposit or account on which any interest or dividend is paid, to authorize Federal savings and loan associations and national banks to own stock in and invest in loans to certain State housing corporations, and for other purposes. 1  Be it enacted by the Senate and House of Representa-  2 tives of the United States of America in Congress assembled,   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  2 1 EXTENSION OF AUTHORITY FOR THE FLEXIBLE REGULATION 2  OF INTEREST RATES ON DEPOSITS AND SHARE AC-  3  COUNTS IN FINANCIAL INSTITUTIONS  4  SECTION 1. Section 7 of the Act of September 21, 1966  5 (Public Law 89-597), is amended by striking out "June 1, 6 1973" and inserting in lieu thereof "September 30, 1975". 7  PROHIBITION ON CERTAIN ACTIVITIES B INSTITUTIONS  8 9  DEPosniouY  SEE: -2-7 (a) No depository iftstittitioft shall allow the  10 owner of ft deposit Of freeonfit on which interest Of 4ii4dends 11 is pftitl o make withdrawals by negotiable  Of  transferable  12 instfuniefits for the pftfpose of making transfers to thiffz1 13 parties. 14  (4) Fof purposes of this section the ter-in "depository  15 institution' means 16 17 18 19 20 21 22 23 24  25  (1) any insured bank as defined in section 3 of the  Federal Deposit Insurance ik-etl(2) any State kink as defined in seetion 3 of the Federal Deposit Instirance tk-et-;(3) any mutual savings batik as defined in section 3of the Federal Deposit Ifisafanee (1) any savings hank as defined in section g of the Federal Deposit Instiftinee Act; (5) any insured institution as defined in section 401 of the National housing Aet   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  3 1  -EC+ any building and loan association or savings and  2  loan association organized and operated according to the  3  laws of the State in which it is chartered Of ofginctizefil  4  and for purposes of this paragraph, the terni "Statell  5  inetnis any State of the United States, the District of  6liftithia, any territory of the United States Puerto 7  It-ice, Guam, American Samoa, Of the Alirgin Islands;  8  Federal credit union as defined in section  9  101 of the Federal Credit Union A* Of  4-8* any State credit union as defined in section 101  10 11  of the Federal Credit 17T-Ii401± Aet.7  12  (c) Any depository institution which i4olates this see  13 doll shall be fined S1,000 for each 4c4tiktion-; 14 EXTENSION OF AUTHORITY OF FEDERAL DEPOSIT INSUR15  ANCE CORPORATION OVER INTEREST RATES PAID ON  16  DEPOSITS BY NONINSURED BANKS  17  SEC. al. 2. Section 18(g) of the Federal Deposit Insur-  18 ance Act (12 U.S.C. 1828(g)) is amended by 19  (1) inserting in the second sentence thereof 4‘or  20  dividends" immediately after "the payment and adver-  21  tisement of interest"; and  22  (2) striking out in the tenth sentence thereof  23  "(1)", and by further striking out in such sentence  24 25  , and (2) there does not exist under the laws of such  CC  State a bank supervisory agency with authority com-   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  4 1  parable to that conferred by this subsection, including  2  specifically the authority to regulate the rates of interest  3  and dividends paid by such noninsured banks on time  4  and savings deposits, or if such agency exists it has not  5  issued regulations in the exercise of that authority".  6 EXTENSION OF AUTHORITY OF FEDERAL HOME LOAN BANK 7  BOARD OVER RATES OF INTEREST AND DIVIDENDS PAID  8  ON DEPOSITS, SHARES, AND WITHDRAWABLE ACCOUNTS  9  BY NONMEMBER SAVINGS AND LOAN ASSOCIATIONS  10  AND COOPERATIVE BANKS  11  SEC. 47 3. The third sentence of section 5B(a) of the  12 Federal Home Loan Bank Act (12 U.S.C. 1425b (a)) is 13 amended by striking out "(1)", and by further striking 14 out ", and (2) there does not exist under the laws of such 15 State a bank supervisory agency with authority comparable 16 to that conferred by the first two sentences of this subsec17 tion, including specifically the authority to regulate the rates 18 of interest and dividends paid by any such association or bank 19 on deposits, shares, or withdrawable accounts, or if such 20 agency exists it has not issued regulations in the exercise 21 of that authority". 22  FEDERAL SAVINGS AND LOAN ASSOCIATIONS AND  23  NATIONAL BANKS  24  SEC. 5 4. (a) The Congress finds that Federal savings  25 and loan associations and national banks should have the 26 authority to assist in financing the organization and opera.  5  1 tion of any State housing corporation established under the 2 laws of the State in which the corporation will carry on its 3 operations. It is the purpose of this Act section to provide a 4 means whereby private financial institutions can assist in 5 providing housing, particularly for families of low or mod6 erate income, by purchasing stock of and investing in loans 7 to any such State housing corporation situated in the par8 ticular State in which the Federal savings and loan associa9 tion or national bank involved is located.  10  (b) Section 5(c) of the Home Owners' Loan Act of  11 1933 (12 U.S.C. 1464(c)) is amended by adding at the 12 end thereof the following new paragraph: 13  "Without regard to any other provisions of this sub-  14 section, any such association whose general reserves, surplus 15 and undivided profits aggregate a sum in excess of 5 per 16 centum of its withdrawable accounts is authorized to invest 17 in, to lend to, or to commit itself to lend to any State hous18 ing corporationi incorporated in the State in which the head 19 office of such association is situated, in the same manner 20 and to the same extent as the statutes of such State authorize 21 a savings and loan association organized under the laws of 22 such State to invest in, to lend to, or commit itself to lend 23 to such State housing corporation, but the aggregate amount 24 of such investments, other than loans and loan commitments, 25   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  of any such association outstanding at any time shall not   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  6 1 exceed one-fourth of 1 per centum of the total assets of such 2 association, and uninsured loans and commitments of any 3 such association outstanding at any time shall not exceed 4 1 per centum of the total outstanding loans made or pur-  5 chased by such association." 6  (c) Paragraph seven of section 5166 of the Revised  7 Statutes (12 U.S.C. 24) is amended by adding at the end  8 thereof the following: "Notwithstanding any other provi9 sion of this paragraph, the association may purchase for its  10 own account shares of stock issued by any State housing 11 corporation incorporated in the State in which the association 12 is located and may make investments in loans and commit13 ments for loans to any such corporation: Provided, That in 14 no event shall the total amount of such stock held for its own 15 account and such investments in loans and commitments made 16 by the association exceed at any time 5 per centum of its 17 capital stock actually paid in and unimpaired plus 5 per 18 centum of its unimpaired surplus fund." 19 20  EFFECTIVE DATE SEC. 67 5. The provisions of this Act shall take effect  21 on the thirtieth day after the date of its enactment, except 22 that the amendments made by sections 1 and 5 4 shall take 23 effect on the date of enactment of this Act.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  7 Amend the title so as to read: "A bill to extend certain laws relating to the payment of interest on time and savings deposits, to authorize Federal savings and loan associations and national banks to own stock in and invest in loans to certain State housing corporations, and for other purposes."   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Union Calendar No. 59 93D CONGRESS 1ST SESSION  H. Re 6370  [Report No. 93-140]  A BILL To extend certain laws relating to the payment of interest on time and savings deposits, to prohibit depository institutions from permitting negotiable orders of withdrawal to be made with respect to any deposit or account on which any interest or dividend is paid, to authorize Federal savings and loan associations and national banks to own stock in and invest in loans to certain State housing corporations, and for other purposes. By Mr. ST GERMAIN MARCH 29, 1973 Referred to the Committee on Banking and Currency APRIL 16, 1973 Reported with amendments, committed to the Committee of the Whole House on the State of the Union, and ordered to be printed  9:In CONGRESS 1ST SESSION  Ho  R.  6370  IN THE HOUSE OF REPRESENTATIVES MARCH 29,19M Mr. ST GERMAIN introduced the following bill ; which was referred to the Committee on Banking and Currency  A BILL To extend certain laws relating to the payment of interest on time and savings deposits, to prohibit depository institutions from permitting negotiable orders of withdrawal to be made with respect to any deposit or tcount on which any interest or dividend is paid, to authorize Federal savings and loan. associations and national banks to own stock in and invest in 4 housing corporations, and for other State certain to loans purposes. 1  Be it enacted by the Senate and. House of Represental-  2  tives of the United States of America in Congress assembled,   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  2 1_  EXTENSION OF AUTHORITY FOR THE FLEXIBLE REGULATION  2  OF INTEREST RATES ON DEPOSITS AND SHARE ACCOUNTS IN FINANCIAL INSTITUTIONS  4  SECTION 1. Section 7 of the Act of September 21, 1966  5  (Public Law 89-597), is amended by striking out "June 1,  6 1973" and inserting in lieu thereof "September 30, 1975". 7 PROHIBITION ON CERTAIN ACTIVITIES BY DEPOSITORY 8 9  INSTITUTIONS  SEC. 2. (a) No depository institution shall allow the  10 owner of a deposit or account on which interest or dividends 11 is paid to make withdrawals by negotiable or transferable 12 instruments for the purpose of making transfers to third 13 parties. 14  (b) For purposes of this section, the term "depository  15 institution" means16 17 18 19 20 21 22 23 24 25  (1) any insured bank as defined in section 3 of the  Federal Deposit Insurance Act; (2) any State bank as defined in section 3 of the Federal Deposit Insurance Act; (3) any mutual savings bank as defined in section 3 of the Federal Deposit Insurance Act; (4) any savings bank as defined in section 3 of  the Federal Deposit Insurance Act; (5) any insured institution as defined in section  401 of the National Housing Act;  in===   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  3 1  (6) any building and loan association or savings  2  and loan association organized and operated according  3  to the laws of the State in which it is chartered or  4  organized; and for purposes of this paragraph, the term  5  "State" means any State of the United States, the Dis-  6  trict of Columbia, any territory of the United States,  7  Puerto Rico, Guam, American Samoa, or the Virgin  8  Islands;  9  10 11  (7) any Federal credit union as defined in section 101 of the Federal Credit Union Act; or (8) any State credit union as defined in section  12  101 of the Federal Credit Union Act.  13  (c) Any depository institution which violates this see-  14  shall be fined $1,000 for each violation.  15 EXTENSION OF AUTHORITY OF FEDERAL DEPOSIT INSUR16  ANCE CORPORATION OVER INTEREST RATES PAID ON  17  DEPOSITS BY NONINSURED BANKS  18  SEC. 3. Section 18(g) of the Federal Deposit Insurance  19  Act (12 U.S.C. 1828(g)) is amended by  20  (1) inserting in the second sentence thereof "or  21  dividends" immediately after "the payment and adver-  22  tisement of interest"; and  23  (2) striking out in the tenth sentence thereof  24  "(1)", and by further striking out in such sentence  25  ", and (2) there does not exist under the laws of such   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  4  State a bank supervisory agency with authority corn2  parable to that conferred by this subsection, including  3  specifically the authority to regulate the rates of interest  4  and dividends paid by such noninsured banks on time  5  and savings deposits, or if such agency exists it has not  6  issued regulations in the exercise of that authority".  7 EXTENSION OF AUTHORITY OF FEDERAL HOME LOAN BANK 8  BOARD OVER RATES OF INTEREST AND DIVIDENDS PAID  9  ON DEPOSITS, SHARES, AND WITIIDIZAWABLE ACCOUNTS  10  BY NON1VIEAIBER SAVINGS AND LOAN ASSOCIATIONS  1/  AND COOPERATIVE BANKS  12  SEC. 4. The third sentence of section 5B(a) of the  13 Federal Home Loan Bank Act (12 U.S.C. 1425b (a)) is 14 amended by striking out "(1)", and by further striking 15 out ", and (2) there does not exist under the laws of such 16 State a bank supervisory agency with authority comparable 17 to that conferred by the first two sentences of this subsec18 tion, including specifically the authority to regulate the rates 19 of interest and dividends paid by any such association or bank  20 on deposits, shares, or withdrawable accoukts, or if such 21 agency exists it has not issued regulations in the exercise 22 of that authority". 23  FEDERAL SAVINGS AND LOAN ASSOCIATIONS AND  24  NATIONAL BANKS  25  SEC. 5. (a) The Congress finds that Federal savings   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  5 1 and loan associations and national banks should have the 2 authority to assist in financing the organization and opera3 tion of any State housing corporation established under the 4 laws of the State in which the corporation will carry on its 5 operations. It is the purpose of this Act to provide a means  6 whereby private financial institutions can assist in providing 7 housing, particularly for families of low or moderate income,  by purchasing stock of and investing in loans to any such 9 State housing corporation situated in the particular State in  10 which the Federal savings and loan association or national 11 bank involved is located. 12  (b) Section 5(c) of the Home Owners' Loan Act  13 of 1933 (12 U.S.C. 1464(c)) is amended by adding at 14 the end thereof the following new paragraph: 15  "Without regard to any other provisions of this sub-  16 section, any such association whose general reserves, surplus 17 and undivided profits aggregate a sum in excess of 5 per 18 centum, of its withdrawable accounts is authorized to invest  19 in, to lend to, or to commit itself to lend to any State hous20 ing corporation incorporated in the State in which the head 21  office of such association is situated, in the same manner  22 and to the same extent as the statutes of such State authorize 23 a savings and loan association organized under the laws of 24 such State to invest in, to lend to, or commit itself to lend 25 to such State housing corporation, but the aggregate amount   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  1 of such investments, other than loans and loan commitments, 2 of any such association outstanding at any time shall not 3 exceed one-fourth of 1 per centum of the total assets of such 4 association, and uninsured loans and. commitments of any 5 such association outstanding at any time shall not exceed 6 1 per centum of the total outstanding loans made or pur7 chased by such association."  (c) Paragraph seventh of section 5136 of the Revised 9 Statutes (12 U.S.C. 24) is amended by adding at the end  10 thereof the following: "Notwithstanding any other provision 11 of this paragraph, the association may purchase for its own 12 account shares of stock issued by any State housing corpo-  ration incorporated in the State in which the association 14 is located and may make investments in loans and corn15 mitments for loans to any such corporation: Provided, That 16 in no event shall the total amount of such stock held for its 17 own account and such investments in loans and commit18 ments made by the association exceed at any time 5 per 19 centum of its capital stock actually paid in and unimpaired 20 plus 5 per centum of its unimpaired surplus fund." 21  SEC. 6. The provisions of this Act shall take effect on  22 the thirtieth day after the date of its enactment, except that 23 the amendments made by sections 1 and 5 shall take effect 24 on the date of enactment of this Act.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  93o CONGRESS iST SESSION  H. R.6370  A BILL To extend certain laws relating to the payment of interect on time and savings deposits, to prohibit depository institutions from permitting negotiable orders of withdrawal to r be made with respect to any deposit or account on which any interest or dividend is paid, th authorize Federal savings and loan associations and national banks to own stock in and invest in loans to certain State housing corporations, and for other purposes. By Mr. ST GER1VIAIN MARCH 29, 1973 Referred to the Committee on Banking and Currency  •  TABLE 1 NUMBER OF INSTITUTIONS OFFERING NOWS AND NOW BALANCES AS OF  AUGUST 30, 1974  ( DOLLAR AMOUNTS IN THOUSANDS OF DOLLARS )  I I I I I I  I I I I I I I I I MASSACHUSETTS I COMMERCIAL BANKS I I MEMBERS NON-MEMBERS I I I MUTUAL SAVINGS BANKS I SAVINGS ih LOAN ASSOCIATIONS AND I I COOPERATIVES FSLIC INSURED - MEMBERS FHLB I STATE INSURED - MEMBERS FHLB I STATE INSURED - NON-MEMBERS FHLB I I TOTAL MASSACHUSETTS I I I I NEW HAMPSHIRE I COMMERCIAL BANKS I I I I MUTUAL SAVINGS BANKS I I SAVINGS i LOAN ASSOCIATIONS AND I I COOPERATIVES FSLIC INSURED - MEMBERS FHLB I I STATE INSURED - MEMBERS FHLB STATE INSURED - NON MEMBERS FHLB I I NEW HAMPSHIRE I TOTAL I I TOTAL MASSACHUSETTS AND NEW HAMPSHIRE I I  I TRANSACTIONS DURING MONTH I NOW I I I 1 BALANCES I AMOUNT I I OF PREVIOUS I DEPOSIT I ALL WITHI I I INTEREST I INFLOWS I DRAWALS I OFFERING I MONTH I CREDITED I I I NOWS I  NUMBER OF INSTITUTIONS  TOTAL  I I I NOW I I BALANCES I I CURRENT I I MONTH I I I  153 92 61  30 18 12  14,261 6,511 7,750  49 21 28  21,042 11,246 9,796  12,820 4,100 8,720  0 0 0  22,532 13,678 8,854  167  120  161,605  681  92,019  85,178  35  169,092  179 35 28 116  59 18 8 33  13,223 5,446 3,829 3,948  53 19 15 19  15,215 7,125 3,711 4,379  11,808 5,277 3,217 3,314  0 0 0 0  16,683 7,313 4,338 5,032  499  209  189,089  783  128,276  109,806  35  208,307  7A  10  3,744  11  3,041  2,410  0  4•3136  34  20  9,959  30  10,749  9,522  0  11,216  18 0 0  8 0 0  2,001 0 0  6 0 0  2,030 0 0  1,722 0 0  0 0 0  2,315 0 0  128  38  15,704  47  15,820  13,654  0  17,917  627  247  204,793  830  144,096  123,460  35  226,224  PREPARED BY STATISTICAL SECTION, RESEARCH DEPARTMENT, FEDERAL RESERVE BANK OF BOSTON   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  I I I SERVICE I CHARGES I I  I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I 1 I I I I I I  TABLE 2 NuMBLR OF NOW ACCOUNTS AT OFFERING INSTITUTIONS AS OF  AUGUST 30, 1974  NUMBER OF I I NEW ACCOUNTS OPENED DURING MONTH I I NOW ACCOUNTS I By NEW I I BY EXISTING I PHEvIOUS CUSTOMERS CUSTOMERS (1)I MONTH  NUMBER OF ACCOUNTS CLOSED DURING MONTH  NUMBER OF NOW ACCOUNTS CURRENT MONTH  I MASSACHUSETTS I  COMMERCIAL BANKS MEMBERS NON-MEMBERS  I  MUTUAL SAVINGS BANKS  I  SAVINGS 1. LOAN ASSOCIATIONS AND COOPERATIVES FSLIC INSURED - MEMBERS FHLB STATE INSURED - MEMBERS FHLB STATE INSURED - NON-MEMBERS FHLB  I  TOTAL MASSACHUSETTS  8,810 3,406 5,404  4,866 4,524 342  1,010 558 452  119 86 33  14,567 8,402 6,165  140,903  6,980  6,761  2,146  152,498  15,296 6,564 3,993 4,739  1,673 655 262 756  2,250 1,327 273 650  120 67 19 34  19,099 8,479 4,509 6,111  165,009  13,519  10,021  2,385  186,164  2,244  223  264  35  2,696  13,566  1,003  396  148  14,817  1,741 0 0  168 0 0  286 0 0  16  2,179 0 0  17,551  1,394  946  199  19,692  182,560  14,913  10,967  2,584  205,856  I NEW HAMPSHIRE I  COmmERC1AL BANKS  I  MUTUAL SAVINGS BANKS  I  SAVINGS & LOAN ASSOCIATIONS AND COOPERATIVES FSLIC INSURED - MEMBERS FHLB STATE INSURED - MEMBERS FHLB STATE INSURED - NON MEMBERS FHLB  I  TOTAL  NEW HAMPSHIRE  TOTAL MASSACHUSETTS AND NEW HAMPSHIRE  (1) EXISTING CUSTOMERS ARE DEFINED AS THOSE HAVING AN ACCOUNT AT THE INSTITUTION AT THE TIME THE NOW ACCOUNT WAS OPENED. PREPARED BY STATISTICAL SECTION, RESEARCH DEPARTMENT, FEDERAL RESERVE BANK OF BOSTON   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  TABLE 3 A NOW ACCOUNT ACTIVITY DURING THE MONTH OF AUGUST 30, 1974  •••.••  ••••.•  ••••••  NUMBER OF NOW ACCOUNTS WITH ACTIVITY DURING MONTH OF: AUGUST 30, 1974  I I dli.di•O  I  NO DRAFTS  I  1-9  DRAFTS  I 10-20 DRAFTS'  > 20 DRAFTS I  TOTAL NUMBER OF NOW DRAFTS  AVERAGE NUMBER OF I I I NOW DRAFTS I PER ACCOUNT(2)I •••••••  .  MASSACHUSETTS COMMERCIAL BANKS MEMBERS NON-MEMBERS MUTUAL SAVINGS BANKS SAVINGS & LOAN ASSOCIATIONS AND COOPERATIVES FSLIC INSURED - MEMBERS FHLB STATE INSURED - MEMBERS FHLB STATE INSURED - NON-MEMBERS FHLB TOTAL MASSACHUSETTS  5,191 3,628 1,563  5,606 2,139 3,467  2,299 1,457 842  19471 1,178 293  59,108 24,384 34,724  6.3 5.1 7.5  I  419313  77,333  25,462  8,390  869,446  7.8  I  4,188 2,073 793 19322  8,793 3,848 2,055 2,890  4,414 1,883 19144 1,387  1,704 675 517 512  1319228 53,463 34,220 43,545  8.8 8.3 9.2 9.0  I I I I  509692  91,732  32,175  11,565  19059,782  7.8  I  697  1,172  511  316  159140  7.5  I  2,373  5,953  3,721  2,770  139,344  11.1  499 0 0  19080 0 0  405 0 0  195 0 0  12,988 0 0  7.7 0.0 0.0  I I  3,569  8,205  4,637  3,281  167,472  10.3  I  54,261  99,937  36,812  14,846  19227,254  8.0  I  I  NEW HAMPSHIRE COMMERCIAL BANKS  MUTUAL SAVINGS BANKS SAVINGS I LOAN ASSOCIATIONS AND COOPERATIVES FSLIC INSURED - MEMBERS FHLB STATE INSURED - MEMBERS FHLB STATE INSURED - NON MEMBERS FHLB TOTAL  NEW HAMPSHIRE  TOTAL MASSACHUSETTS AND NEW HAMPSHIRE  ••••••II.  (2) AVERAGE EXCLUDES THOSE ACCOUNTS WHICH HAD NO ACTIVITY DURING THE MONTH. PREPARED BY STATISTICAL SECTION, RESEARCH DEPARTMENT, FEDERAL RESERVE BANK OF BOSTON   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  dift.11irameamolmomMo  •  TABLE 3 B NOW ACCOUNT ACTIVITY DURING THE MONTH OF AUGUST 30, 1974  ••••=1INM.  I I 1 I  I 1 I I I I MASSACHUSETTS I I COMMERCIAL BANKS I MEMBERS NON-MEMBERS I I I MUTUAL SAVINGS BANKS I I SAVINGS L LOAN ASSOCIATIONS AND I COOPERATIVES I FSLIC INSURED - MEMBERS FHL8 I STATE INSURED - MEMBERS FHL8 I STATE INSURED - NON-MEMBERS FHL8 I I TOTAL MASSACHUSETTS I I I NEW HAMPSHIRE I I COMMERCIAL BANKS I I I I MUTUAL SAVINGS BANKS I SAVINGS L LOAN ASSOCIATIONS AND I I COOPERATIVES I FSLIC INSURED - MEMBERS FHL8 I STATE INSURED - MEMBERS FHL8 I STATE INSURED - NON MEMBERS FHL8 I I NEW HAMPSHIRE TOTAL I TOTAL MASSACHUSETTS AND NEW HAMPSHIRE  NUMBER OF I I NOW ACCOUNTS CURRENT I MONTH > 20 DRAFTS I  PERCENTAGE OF NOW ACCOUNTS WITH ACTIVITY AUGUST 30, 1974 DURING MONTH OF: NO DRAFTS  I  1-9  DRAFTS  I 10-20 DRAFTSI  (3)  I I I I  35.6 43.2 25.4  38.5 25.5 56.2  15.8 17.3 13.7  10.1 14.0 4.8  14,567 8,402 6,165  1,546.78 1,627.95 1,436.17  27.1  50.7  16.7  5.5  152,498  1,108.81  21.9 24.4 17.6 21.6  46.0 45.4 45.6 47.3  23.1 22.2 25.4 22.7  8.9 8.0 11.5 8.4  19,099 8,479 4,509 6,111  873.50 862.48 962.08 823.43  27.2  49.3  17.3  6.2  186,164  1,118.94  25.9  43.5  19.0  11.7  2,696  1,626.85  16.0  40.2  25.1  18.7  14,817  756.97  22.9 0.0 0.0  49.6 0.0 0.0  18.6 0.0 0.0  8.9 0.0 0.0  2,179 0 0  1,062.41 0.00 0.00  18.1  41.7  23.5  16.7  19,692  909.86  26.4  48.5  17.9  7.2  205,856  PREPARED BY STATISTICAL SECTION, RESEARCH DEPARTMENT, FEDERAL RESERVE BANK OF BOSTON  I I I I I I I I I I I I I I I I I I I I I I 1 I I I I I I I I I I I 1 I I  1,098.94 I  ••••••11.11I•  (3) PERCENTAGES MAY NOT TOTAL EXACTLY 100 PERCENT DUE TO ROUNDING.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  AVERAGE BALANCE PER ACCOUNT  TABLE 4 A RATES PAID ON NOW ACCOUNTS AS OF  AUGUST 30, 1974  ( DOLLAR AMOUNTS IN THOUSANDS OF DOLLARS )  I I I I I  I I I I I  I I I I I  3.0% NO OF INST  I I  DOLLAR AMOUNT  OVER 3.0% AND LESS THAN 4.0% NO OF INST  I I  I I I I I  DOLLAR AMOUNT  I I I I I  4.0% NO OF INST  I I  DOLLAR AMOUNT  OVER 4.0% AND LESS THAN 4.50% NO OF INST  I I  DOLLAR AMOUNT  I I I I I  I MASSACHUSETTS I  I  I  COMMERCIAL BANKS MEMBERS NON—MEMBERS  o o o  o o o  o o o  o 0 o  1 o 1  230  SAVINGS & LOAN ASSOCIATIONS AND COOPERATIVES FSLIC INSURED — MEMBERS FHLB STATE INSURED — MEMBERS FHL8 STATE INSURED — NON—MEMBERS FHL8  o o o o  TOTAL MASSACHUSETTS  0  o o o o  o o o o  0 I 0 I 0 I  O  0 I  O  0 I 01o 0 I 0 I  230 0  MUTUAL SAVINGS BANKS  o  o o o o  O  1  230  0 I  I NEW HAMPSHIRE I  COMMERCIAL BANKS  0  0  0  0  2  424  o  0 I  I  MUTUAL SAVINGS BANKS  4  1,739  0  0  9  5,084  0  I  SAVINGS & LOAN ASSOCIATIONS AND COOPERATIVES FSLIC INSURED — MEMBERS FHL8 STATE INSURED — MEMBERS FHL8 STATE INSURED — NON MEMBERS FHL8  0 0 0  0 0 0  0 0 0  0 0 0  1 0 0  109 0 0  0 0 0  4  1,739  0  0  12  5,617  0  4  1,739  0  0  13  5,847  0  0 I I I I 0 I 0 I 0! I 0 I I 0 I I I  I  I  TOTAL  NEW HAMPSHIRE  I TOTAL MASSACHUSETTS AND NEW HAMPSHIRE  PREPARED BY STATISTICAL SECTION, RESEARCH DEPARTMENT, FEDERAL RESERVE BANK OF BOSTON   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  V  TABLE 4 B RATES PAID ON NOW ACCOUNTS AS OF  AUGUST 30, 1974  ( DOLLAR AMOUNTS IN THOUSANDS OF DOLLARS )  11•1.••104•M  I I I I I  I I I I I I I MASSACHUSETTS I COMMERCIAL BANKS I I MEMBERS NON—MEMBERS I I I MUTUAL SAVINGS BANKS I I SAVINGS L LOAN ASSOCIATIONS AND I COOPERATIVES I FSLIC INSURED -• MEMBERS FHLB MEMBERS FHLB I STATE INSURED I STATE INSURED ••• NON—MEMBERS FHLB I TOTAL MASSACHUSETTS I I I I NEW HAMPSHIRE I COMMERCIAL BANKS I I I I I MUTUAL SAVINGS BANKS I I SAVINGS L LOAN ASSOCIATIONS AND I COOPERATIVES I FSLIC INSURED — MEMBERS FHLB I STATE INSURED — MEMBERS FHLB I STATE INSURED — NON MEMBERS FHLB I I TOTAL NEW HAMPSHIRE I I TOTAL MASSACHUSETTS AND NEW HAMPSHIRE I I  I 1 I I I  4•50% NO OF INST  I I  DOLLAR AMOUNT  OVER 4.5% AND LESS THAN 5.0% NO OF INST  I I  DOLLAR AMOUNT  I 1 I I I  I I  DOLLAR AMOUNT  WEIGHTED AVERAGE RATE (4)  0 0 0  0 0 0  0 0 0  29 18 11  22,302 13,678 8,624  4.989 5.000 4.974  0  0  0  0  120  169,092  5.000  0 0 0 0  0 0 0 0  0 0 0 0  0 0 0 0  59 18 8 33  16,683 7,313 4,338 5,032  5.000 5.000 5.000 5.000  0  0  0  0  208  208,077  4.998  0  0  0  n  8  3,962  4.903  0  0  0  0  7  4,393  4.236  0 0 0  0 0 0  0 0 0  0 0 0  7 0 0  2,206 0 0  4.952 .000 .000  0  0  0  0  22  10,561  4.492  0  0  0  0  230  218,638  4.958  WEIGHTED BY DOLLAR AMOUNT  PREPARED BY STATISTICAL SECTION, RESEARCH DEPARTMENT, FEDERAL RESERVE BANK OF BOSTON   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  NO OF INSTS  I I I I I  4/•••••••  0 0 0  AM.= 11•••••=4100  (4)  5.0%  •••••/••  I I I I I I I I I I I I I I I I I I I I I I I I I I I 1 I I 1 I I I I I I I I I I I  •  TABLE 5 METHOD OF INTEREST RATE CALCULATION AS OF  AUGUST 30, 1974  ( NUMBER OF INSTITUTIONS )  I INTEREST CALCULATED ON: I -I AVG DLY MIN DAY OF DEP DAY OF DEP I BAL BAL TO WITH TO DIV DT  I I I I  I I OTHER I I  FREQUENCY OF COMPOUNDING -....... CONT  DAILY  MONTHLY  OTERLY  OTHER  I I I I  ••••=oomoraloNm••••••••••  I I MASSACHUSETTS I I COMMERCIAL BANKS I MEMBERS I NON-MEMBERS I I MUTUAL SAVINGS BANKS I I SAVINGS i. LOAN ASSOCIATIONS AND I COOPERATIVES I FSLIC INSURED - MEMBERS FHLB I STATE INSURED - MEMBERS FHLB I STATE INSURED - NON-MEMBERS FHLB I I TOTAL MASSACHUSETTS I I I NEW HAMPSHIRE I I COMMERCIAL BANKS I I I I MUTUAL SAVINGS BANKS I I SAVINGS i LOAN ASSOCIATIONS AND I COOPERATIVES I FSLIC INSURED - MEMBERS FHLB 1 STATE INSURED - MEMBERS FHLB I STATE INSURED - NON MEMBERS FHLB I I TOTAL NEW HAMPSHIRE I 1 TOTAL MASSACHUSETTS AND NEW HAMPSHIRE I I  5 3 2  1 0 1  21 12 9  0 0 0  3 3 0  7 4 3  6 2 4  11 8 3  6 4 2  0 0 0  1  1  116  1  1  79  23  16  2  0  3 1 0 2  0 0  55 16  0 0  1 1  o  8  o  o  0  31  0  0  32 8 4 20  8 6 I 1  8 I I 6  11 3 2 6  0 0 0 0  9  2  192  I  5  118  37  35  19  0  0  0  10  0  0  1  1  8  o  o  0  0  19  0  1  17  I  2  0  0  0 0 0  1 0 0  7 0 0  0 0 0  0 0 0  4 0 0  2 0 0  I 0 0  1 0 0  0 0 0  0  1  36  0  1  22  4  11  1  0  9  3  228  1  6  140  41  46  20  0  PREPARED BY STATISTICAL SECTION, RESEARCH DEPARTMENT, FEDERAL RESERVE BANK OF BOSTON   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  I I I I I I I I I I I I 1 I I I I I I I  I I I I I I I I I I I I I I I I I  TABLE 6 SIZE DISTRIBUTION BY NUMBER OF INSTITUTIONS AS OF  AUGUST 30, 1974  ( BASED ON TOTAL ASSETS )  I I I MASSACHUSETTS I I COMMERCIAL BANKS MEMBERS I NON-MEMBERS I I I MUTUAL SAVINGS BANKS I SAVINGS L LOAN ASSOCIATIONS AND I COOPERATIVES I FSLIC INSURED - MEMBERS FHL8 I STATE INSURED - MEMBERS FHL8 I I STATE INSURED - NON-MEMBERS FHL8 I I TOTAL MASSACHUSETTS I I I NEW HAMPSHIRE I I COMMERCIAL BANKS I I I I MUTUAL SAVINGS BANKS I I SAVINGS L LOAN ASSOCIATIONS AND COOPERATIVES I I FSLIC INSURED - MEMBERS FHL8 STATE INSURED - MEMBERS FHL8 I I STATE INSURED - NON MEMBERS FHL8 I NEW HAMPSHIRE I TOTAL I ITOTAL MASSACHUSETTS AND NEW HAMPSHIRE I I  < $50 M  ALL INSTITUTIONS -I S50-250 M I  I > $250 M  I  INSTITUTIONS OFFERING NOWS < $50 M  I  S50-250 M  > $250 M I  101 57 44  41 25 16  11 10 1  14 8 6  11 6 5  5 4 1  69  84  14  34  72  14  156 22 25 109  22 12 3 7  1 1 0 0  42 8 5 29  16 9 3 4  1 1 0 0  326  147  26  90  99  20  71  5  0  10  0  0  22  11  1  9  10  1  16 0 0  2 0 0  0 0 0  7 0 0  1 0 0  0 0 0  109  18  1  26  11  1  435  165  27  116  110  21  •••••••  PREPARED BY STATISTICAL SECTION, RESEARCH DEPARTMENT, FEDERAL RESERVE BANK OF BOSTON   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  I  ••••••••4mo.....  4M...m.••••••=.  1 I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I  TABLE 7 SOURCE OF NEW ACCOUNTS AND CHARGES PER DRAFT AS OF  AUGUST 30, 1974  DOLLAR AMOUNTS IN THOUSANDS OF DOLLARS )  .1.111MMI.11.411=POMMOM.MMI.10.21M4M4M11.11W  I  DEPOSITS TO NEW NOW ACCOUNTS FROM: (5)  I DEM DEPOSITS I  TIME E. SAV  CHARGES  PER  DRAFT  S.10  I  S.15  I I  FREE  I  I  I I MASSACHUSETTS I I COMMERCIAL BANKS I MEMBERS I NON-MEMBERS I I MUTUAL SAVINGS BANKS I I SAVINGS i LOAN ASSOCIATIONS AND I COOPERATIVES I FSLIC INSURED - MEMBERS FHL8 I STATE INSURED - MEMBERS FHLB I STATE INSURED - NON-MEMBERS FHLB I I TOTAL MASSACHUSETTS I I I NEW HAMPSHIRE I I COMMERCIAL BANKS I I I I MUTUAL SAVINGS BANKS I I SAVINGS I. LOAN ASSOCIATIONS AND I COOPERATIVES I FSLIC INSURED ... MEMBERS FHLB I STATE INSURED .... MEMBERS FHLB I STATE INSURED - NON MEMBERS FHLB I I TOTAL NEW HAMPSHIRE I 'TOTAL MASSACHUSETTS AND NEW HAMPSHIRE I I  OTHER (6) 4111.mr,  411M.M.Olb  120 33 87  5 3 2  3 2 1  17 12 5  5 1 4  0  2,126  51  23  37  9  0 0 0 0  308 99 37 172  28 7 4 17  12 7 1 4  13 2 2 9  6 2 1 3  283  2.554  84  38  67  20  230  C  3  0  6  1  0  79  15  0  0  5  0 0 0  46 0 0  3 0 0  1 0 0  4 0 0  0 0 0  230  130  21  1  10  6  513  2,684  105  39  77  26  (5) THESE ARE TRANSFERS TO NEW NOW ACCOUNTS OPENED DURING THE MONTH FROM THE INSTITUTIONS OWN DEMAND DEPOSITS OR TIME AND SAVINGS DEPOSITS. (6) "OTHER" INCLUDES INSTITUTIONS USING A COMBINATION OF FREE DRAFTS PLUS A CHARGE FOR EACH DRAFT OVER A SPECIFIED NUMBER. PREPARED BY STATISTICAL SECTION, RESEARCH DEPARTMENT. FEDERAL RESERVE BANK OF BOSTON  I  ••••••••  283 231 52  alw•••••••••••••=.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  41•••  I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I  Table 8 OUTSTANDING BALANCES - NEGOTIABLE ORDERS OF WITHDRAWAL (NOWs) (in thousands of dollars) TOTAL OF ALL OFFERING INSTITUTIONS  MONTH ENDED  11,094 22,386 34,823 45,272 60,726 73,451 86,118 94,606 102,045 108,381 113,418 117,005 120,223 130,361 136,872 143,254 143,190 150,447 165,157 174,682 180,637 191,229 204,646 226,224  1972 Sept. Oct. Nov. Dec. 1973 Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. 1974 Jan. Feb. Mar. Apr. May June July Aug.  T1-- _  _  •  1  -  en.  . •  TOTAL  2,556 4,338 6,588 9,689 11,052 13,771 17,919 26,918  •  •  el  COMMERCIAL BANKS MEMBER MASS. N.H.  1,511 2,060 2,882 3,638 3,891 4,587 6,511 13,678  ---------  .  -  MUTUAL SAVINGS BANKS NON-MEMBER N.H.* MASS.  763 1,797 3,034 4,820 5,405 6,569 7,664 8,854  282 481 672 1,231 1,756 2,615 3,744 4,386  TOTAL  MASS.  11,094 22,386 34,823 45,272 60,726 73,451 86,118 94,606 102,045 108,381 113,418 117,005 120,223 130,361 136,872 143,254 139,779 143,764 154,007 157,412 159,591 164,733 171,503 180,308  11,094 22,386 34,363 44,522 59,661 71,975 84,162 92,341 99,633 105,688 110,486 113,852 116,259 125,873 131,795 138,028 134,832 138,453 147,845 150,309 151,510 155,946 161,544 169,092  . s Ica ec ion, esearc epartment, e era eserve an o oston *Includes three member commercial banks. The above adjustments were made to insure the confidentiality of individual institution data.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  SAVINGS & LOAN ASSOCIATIONS MASSACHUSETTS S&Ls COOPS ..S.L  460 750 S. 1,476 1,956 2,265 2,412 2,693 2,932 3,153 3,964 4,488 5,077 5,226 4,947 5,311 6,162 7,103 8,081 8,787 9,959 11,216  855 2,345 4,562 7,581 9,994 12,725 15,224 18,998  470 1,315 2,340 3,374 4,045 4,843 5,446 7,313  1,030 1,985 3,539 4,806 6,246 7,777 9,370  _.. N.H. .  -237 668 1,143 1,636 2,001 2,315  Table 9 NUMBER OF INSTITUTIONS OFFERING NEGOTIABLE ORDERS OF WITHDRAWAL (NOWs)  MONTH ENDED 1972 Sept. Oct. Nov. Dec. 1973 Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. 1974 Jan. Feb. Mar. Apr. May June July Aug.  TOTAL OF ALL OFFERING INSTITUTIONS 23 35 52 59 63 67 69 69 69 69 70 72 74 80 86 90 126 141 171 188 204 227 238 247  TOTAL TOTAL  14 15 21 24 26 35 37 40  COMMERCIAL BANKS NON-MEMBER MEMBER MASS. N.H.* MASS. N.H.  5 5 8 9 9 14 15 18  1 1 3 3 4 7 8 8  6 7 8 10 11 12 12 12  2 2 2 2 2 2 2 2  MUTUAL SAVINGS BANKS TOTAL 23 35 52 59 63 67 69 69 69 69 70 72 74 80 86 90 100 104 114 121 126 133 137 140  MASS. 23 35 46 50 53 55 57 57 57 57 58 60 61 66 71 75 85 89 98 104 108 114 118 120  N.H. --6 9 10 12 12 12 12 12 12 12 13 14 15 15 15 15 16 17 18 19 19 20  SAVINGS & LOAN ASSOCIATIONS N.H. MASS. S&Ls TOTAL COOPS  4 6 9 12 12 15 17 18  12 22 36 43 52 59 64 67  ,  Prepared by: Statistical Section, Research Department, Federal Reserve Bank of Boston   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  7 15 23 27 35 38 39 41  1 1 4 4 5 6 8 8   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  --  STAFF ECONOMIC STUDIES EFFECTS OF "NOW" ACCOUNTS ON COSTS AND EARNINGS OF COMMERCIAL BANKS IN 1974-75  John D. Paulus  BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM  EFFECTS OF "NOW" ACCOUNTS ON COSTS AND EARNINGS OF COMMERCIAL BANKS IN 1974-75  John D. Paulus --Staff, Board of Governors  The research staffs of the Board of Governors of the Federal Reserve System and of the Federal Reserve Banks undertake studies that cover a wide range of economic and financial subjects. From time to time the results of studies that are of general interest to the economics profession and to others are summarized in the Federal Reserve Bulletin. The following paper, which was summarized in the Bulletin for September 1976, was prepared as a staff paper that was completed in the summer of 1976. The analyses and conclusions set forth are those of the author and do not necessarily indicate concurrence by other members of the research staffs, by the Board of Governors, or by the Federal Reserve Banks.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  SUMMARY In January 1974, following congressional legislation enacted the previous summer, all depositary institutions in the States of Massachusetts and New Hampshire began offering negotiable orders of withdrawal (NOW) from savings accounts to individuals, nonprofit organizations, and sole proprietorships. Because NOW accounts are very similar to interest-bearing checking accounts, the legislation essentially established a formal experiment in the two States in which limited demand deposit powers were extended to thrift institutions and in which the payment of interest on transactions balances was authorized for the first time since 1933. The principal subject of this study is the ongoing adjustment process of commercial banks, whose traditional monopolistic position in the issuance of demand deposits has been eroded by NOW accounts. Both aggregate and microeconomic data are used to study costs and earnings of banks in the two States. The study reviews shifts in market shares and develops rough estimates of the direct effect of NOW accounts on aggregate commercial bank costs and earnings. Moreover, the earnings of 40 banks either having low earnings in 1974, or having a high ratio of NOW accounts to total deposits, or experiencing a significant run-off of demand deposit balances--so-called marginal banks--are examined to determine whether banks that appear to be most vulnerable to NOW-related pressures are experiencing especially difficult problems of adjustment. Characteristics of the steady state--the period after which the industry has had ample time to adjust fully to NOW accounts--are considered, including implications for increased efficiency in the allocation of resources and the extent to which the public benefits, on balance, from the issuance of NOW accounts. The study finds that competitive pressures from thrift institutions offering NOW accounts reduced deposit market shares of commercial banks only modestly, reflecting mainly shifts of demand balances to thrift institutions. No evidence was found to indicate that banks had lost significant amounts of time and savings deposits to thrift institutions offering NOW accounts. These accounts are estimated to have reduced aggregate after-tax earnings of commercial banks in the two States by about 2-1/2 per cent in 1974 and by more than twice that amount in 1975. However, the impact of NOW accounts on earnings has been larger at marginal banks, especially those that aggressively or defensively have acquired a large volume of such accounts.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  CONTENTS  I.  II.  III.  IV.  V.  INTRODUCTION Regulation and Growth Purpose and Scope Summary and Conclusions  1  FLOWS OF FUNDS AND MARKET SHARES Source of NOW Funds Market Shares of Total Deposits  7  EFFECTS OF NOW ACCOUNTS ON AGGREGATE COMMERCIAL BANK COSTS, EARNINGS, AND PORTFOLIOS: 1974-1975 . Incremental Costs of NOWs Reductions in Earnings from Demand Deposit Outflows After Tax Reduction in Earnings ADJUSTMENT PROBLEMS OF INDIVIDUAL BANKS High Ratio Banks Runoff Banks Low Income Banks Summary of Marginal Bank Earnings Portfolio Adjustments by Marginal Banks THE LONG RUN ADJUSTMENT PROBLEM OF COMMERCIAL BANKS. . Characteristics of the Steady State Transition to the Steady State  . 15  24  . 36  APPENDIX A  42  APPENDIX B  47  This study essentially represents a joint effort of several members of the Federal Reserve System staff. First, Ralph Kimball of the Federal Reserve Bank of Boston deserves a special thanks. His assistance was invaluable on matters ranging from defining marginal bank groups to conducting bank interviews. At the Board, Edward Ettin, James Kichline, John Mingo, and Perry Quick made particularly valuable contributions and improvements to the final draft. Others who read an earlier draft and made valuable comments include David Lindsey, Raymond Lombra, and John Williams from the Board, and Paul Anderson, Robert White, and Mary Chamberlain from the Boston Fed. Jeff Susskind and Rebekah Wright assisted in gathering data and preparing tables, and Mary McLaughlin and Denise Lancaster typed- the final as well as earlier drafts. Despite the assistance of these people, the author alone is responsible for any remaining errors of judgment or analysis.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  I.  INTRODUCTION  In May 1972 the Massachusetts Supreme Court ruled that state law did not prohibit mutual savings banks from offering negotiable orders of withdrawal (NOW) from savings accounts.  Following this  ruling several state chartered mutual savings banks (MSBs) in Massachusetts began to issue NOW accounts, and, in September, a savings bank in New Hampshire began offering NOWs after determining that New Hampshire law was similar to that of Massachusetts.  Although these  rulings allowed state-regulated MSBs to participate in the NOW market, federally chartered or insured depository institutions could not-under federal regulations--offer NOWs.  The resultant controversy led  to congressional legislation--Public Law 93-100--signed on August 16, 1973, authorizing all depository institutions (except credit unions) in Massachusetts and New Hampshire to offer interest bearing deposits on which withdrawals by negotiable order could be made.  This legis-  lation thus established a formal experiment in the two states in which limited demand deposit powers were extended to thrifts and the payment of interest on  transactions balances was authorized for the first  time since 1933. Regulation and Growth Regulation of NOW accounts was divided between the Federal Reserve Board, the Federal Home Loan Bank Board, and the Federal Deposit Insurance Corporation.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  All institutions were authorized to begin offering  -2-  NOWs on January 1, 1974, but NOW accounts were to be issued exclusively to individuals, non-profit organizations and sole proprietorships. Partnerships, corporations, state and local governments, and financial institutions were prohibited from holding NOWs.  Because eligible  individuals and institutions held an estimated one-third of the $6 billion in demand deposits in Massachusetts and New Hampshire in 1974, this prohibition limited to about $2 billion the maximum level of conversions from commercial bank (CB) demand balances to NOW accounts; of course, NOWs could also attract funds from other financial assets, especially savings deposits. The three federal agencies imposed an interest rate ceiling of 5 per cent on NOW accounts offered by all institutions, the same as on savings deposits at CBs but one-fourth of a point less than thrifts are permitted to pay on savings deposits.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  At the end of 1975, 97 per  cent of all institutions offering NOWs were paying this 5 per cent ceiling rate of interest. Congress did not include in the law uniform reserve requirements against NOWs.  Because NOWs are technically savings accounts,  members of the Federal Reserve System must hold 3 per cent in required reserves against NOW balances, as compared to reserve requirements averaging about 10 per cent  on demand deposits.  Nonmember banks and  thrifts in Massachusetts and New Hampshire hold negligible reserves in non-interest bearing form against both demand deposits and NOW accounts.  -3-  The popularity of NOWs with consumers is evidenced by the rapid and steady growth of these accounts.  In the first two years of  the experiment, NOW balances grew at an average rate of 7-2/3 per cent per month, advancing from $143 million to $839 million.  As shown in  Figure 1, the monthly growth rates over this period have been quite stable, although during the last half of 1975 the rate of NOW growth declined somewhat, averaging just under 6 per cent per month.  FIGURE 1 NOW BALANCES ON RATIO SCALE ($ millions)  1000  500  200  100 1974  1975  Purpose and Scope NOW accounts have evolved into a very close substitute for personal checking accounts, thereby eroding CBs traditional monopoly   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -4position in the issuance of such  accounts.  With such erosion CBs  in Massachusetts and New Hampshire have lost the exclusive claim to offering "one-stop banking" to individuals who, for convenience, might be willing to maintain a time or savings account, even at relatively unfavorable interest rates, at an institution that provides checking services.  Moreover, the payment of interest on NOW accounts, many  of which represent direct conversions of zero-interest demand deposits, has raised the average costs to CBs of acquiring funds. These factors suggest that NOW accounts could affect the stability and the viability of commercial banking in Massachusetts and New Hampshire as CBs attempt to adjust to the new, more competitive environment.  This issue--the stability of commercial banking in  the two states during the adjusiment period--is the subject of the remainder of this study. to analyze  the  Both aggregate and micro data are used  ongoing adjustment of banks in the two states.  In Sections II and III, a broad view is taken of industry wide developments in banking in 1974 and 1975.  Shifts in market shares  are reviewed, and the hypothesis that the spread of one-stop banking to thrifts might cause CBs to lose significant amounts of demand related funds--especially small time and savings deposits--is examined. Rough estimates of the direct effect of NOW accounts on CB costs and earnings since January  1974 are also developed and discussed.  In Section IV the emphasis shifts to the adjustment problem of selected individual CBs.  In any industry, it is the  -5-  "marginal" firms--those firms with relatively high costs, or inadequate revenues--that determine the flexibility of the industry in adjusting to changes in the competitive and regulatory environment.  The effects  of NOW accounts on costs and earnings of 40 such marginal banks in the two states are therefore analyzed for 1974 and 1975.  Moreover, adjustments  in asset portfolios are considered to determine whether these banks have attempted to offset lower earnings by undertaking more risky investments. In Section V, characteristics of the steady state--the period after which the industry has had ample time to adjust fully to NOW accounts--are discussed, including implications for increased efficiency in the allocation of resources and the extent to which the public benefits, on balance, from the issuance of NOW accounts.  In addition,  future CB adjustment problems are considered as NOW balances continue to grow toward some equilibrium level. Summary and Conclusions Although NOWs represent a relatively expensive source of funds, banks began to compete aggressively for such deposits in 1975, despite low rates of return on money market instruments and weak demand for business loans.  As a result, NOW related flows of funds have had only amodest effect  on the CB share of total deposits in Massachusetts and New Hampshire.  By  the end of 1975, two full years after the NOW experiment began, households in the two states had converted an estimated $370 million in CB demand balances to NOW accounts at thrifts.  However, there is no evidence that  Significant flows of time and savings deposits have accompanied this demand outflow from CBs.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Thus, NOW induced shifts in deposit flows, confined  -6-  mainly to demand deposits, appear to have reduced the CB share of deposits in the two states--which total nearly $40 billion--by about one percentage point. The effects of NOWs on aggregate CB costs and earnings are limited by the relatively small size of the NOW market in the two states-demand balances eligible for conversion to NOW accounts, for example, represent less than 15 per cent of total deposits at CBs.  In 1974,  higher costs and deposit outflows associated with NOWs reduced aggregate CB after tax earnings an estimated 2-1/2 per cent.  Heightened consumer  awareness of NOWs by 1975 caused an acceleration in the growth of these deposits, resulting in substantial increases in bank costs of funds.  As  a result, the estimated earnings reduction attributable to NOWs in 1975 was more than twice that of 1974. It is argued in the final section that after all adjustments are complete--a process that may take several more years--CB costs of acquiring transactions balances could ultimately decline as a result of removing the restriction against the payment of interest on such funds. Given this expectation--which implies that both consumers and banks will be better off in the long run--and the accumulating evidence that NOWs have not reduced significantly either CB market shares or after tax earnings at the aggregate level, it would appear that the NOW experiment has been an almost unqualified success to date. However, an examination of the earnings of those banks that appear to be most vulnerable to competitive pressures from NOWs--the   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -7--  marginal" banks--revealed that the earnings performance of such banks deteriorated significantly in 1975 relative to that of other banks in the two states.  In the next few years the earnings prospects for many  marginal banks in Massachusetts and New Hampshire, which tend on average to be relatively small, may worsen as conversions and outflows of demand deposits continue.  Though NOWs may be only one of many contributing  factors, some weaker banks could eventually experience serious financial difficulties if NOW pressures on costs and revenues continue.  In the  event such difficulties should disrupt financial markets, the final verdict on NOWs may be less optimistic than the 1974-75 aggregate figures would suggest.  However, the likelihood of such disruptions is probably  small because the link between the disappearance or enforced merger of a limited number of weak banks, which is an uncertain event itself, and the stability of financial markets, is very difficult to establish.  II.  FLOWS OF FUNDS AND MARKET SHARES  The share of the NOW market held by CBs, shown in Table 1, has risen steadily since the beginning of the NOW experiment, reaching 43 per cent by the end of 1975.  MSBs held 46 per cent of all NOW  balances at that time, while savings and loan associations and cooperative banks (S&Ls and Coops) held the remaining 11 per cent.  During 1974,  CBs and MSBs each captured 41 per cent of net new NOW balances, with S&Ls and Coops attracting 18 per cent.  In contrast, in 1975 CBs acquired 56  per cent of the increase in NOWs, while MSBs and S&Ls and Coops received 33 and 11 per cent, respectively, of net new inflows.   Abb._ https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  TABLE 1 OUTSTANDING BALANCES AND SHARES - NEGOTIABLE ORDERS OF WITHDRAWAL (NOWs) (in thousands of dollars)  COMMERCIAL BANKS MONTH ENDED  TOTAL OF ALL OFFERING INSTITUTIONS  1972--Sept. Oct. Nov. Dec. 1973--Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. 1974--Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. 1975--Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec.  11.094 22,386 34,823 45,272 60,726 73,451 86,118 94,606 102,045 108,381 113,418 117,005 120,223 130,361 136,872 143,254 143,190 150,447 165,157 174,682 180,637 191,229 204,646 232,386 249,033 270,813 293,305 312,576 339,982 385,190 449,638 472,864 514,018 580,331 630,402 670,790 713,419 761,967 796,533 839,339   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  TOTAL  2,556 4,338 6,588 9,689 11,052 13,771 17,919 32,955 39.253 46,776 55,994 65,249 82,861 107,481 137,519 150.999 172,653 210,838 233,513 256,992 289,308 305,214 325,519 359,023  MASS.  2,274 3,857 5,916 8,458 9,296 11,156 14,175 28,450 33,597 40,245 48,563 56,989 73,517 96,647 124,706 136,165 155,318 185,923 201,607 217,936 235,029 254,821 271,691 302,112  N.H.  282 481 672 1,231 1,756 2,615 3,744 4,505 5,656 6,531 7,431 8,260 9,344 10,481 12,813 14,834 17,335 24,195 31.096 39,056 45,279 50,393 53,828 56,911  SHARE OF TOTAL NOWS  .02 .03 .04 .06 .06 .07 .09 .14 .16 .17 .19 .21 .24 .28 .31 .32 .34 .36 .37 .38 .39 .40 .41 .43  MUTUAL SAVINGS BANKS  TOTAL 11,094 22,386 34,823 45,272 60,726 73,451 86,118 94,606 102,045 108,381 113,418 117,005 120,223 130,361 132,872 143,254 139,779 143,764 154,007 157,412 159,591 164,733 171,503 180,335 187,721 197,758 206,764 213,661 220,725 236,580 262,797 268,571 283,322 304,633 327,417 337,684 351,612 368,271 378,792 386,560  MASS. 11,094 22,386 34,363 44,522 59,661 71,975 84,162 92,341 99,633 105,688 110,486 113,852 116,259 125,873 131,795 138,028 134,832 138,453 147,845 150,309 151,510 155,946 161,544 169.119 175,340 184,830 192,577 200,083 206,797 221,506 246,259 250,780 263,978 283,134 303,805 213,117 324,005 338,580 347,145 356,319  N.H.  460 750 1,065 1,476 1.956 2,265 2,412 2,693 2,932 3,153 3,964 4,488 5,077 5,226 4,947 5,311 6,162 7,103 8,081 8,787 9.959 11,216 12,381 12,928 14,187 13,578 13,928 15,074 16,538 17,791 19,344 21,499 23,612 25,567 27,607 29,691 31,647 30,241  SHARE OF TOTAL NOWS  SAVINGS & LOAN ASSOCIATIONS SHARE OF TOTAL NOWS N.H. MASS. TOTAL  CX)  .98 .96 .93 .90 .90 .86 .84 .78 .75 .73 .71 .68 .65 .61 .58 .57 .55 .53 .52 .50 .49 .48 .48 .46  855 2,345 4,562 7,581 9,994 12,725 15,224 19,096 22,059 26,279 30,547 33,666 36,396 41,482 49,322 53,294 58,043 64,860 69,472 76,114 81,499 88,482 92,222 93,756  855 2,345 4,325 6,913 8,351 11,089 13,223 16,781 19,314 23,316 26,689 29,747 32,369 37,215 43,980 47,185 51,388 57,315 61,554 67,519 72,407 78,785 81,863 84,168  237 668 1,143 1,636 2,001 2,315 2,745 2,968 3,858 3,919 4,027 4,267 5,342 6,109 6,655 7,545 7,918 8,595 9,092 9,697 10,359 9,598  .01 .02 .03 .04 .05 .07 .07 .08 .09 .10 .10 .11 .11 .11 .11 .11 .11 .11 .11 .11 .11 .12 .12 .11  -9-  The success of CBs in 1975 in attracting  or retaining NOW  funds can be attributed in part to the large increase in the number of offering institutions relative to that of MSBs.  In 1975, the number of  CBs offering NOW accounts increased from 64 to 134, while the number of 0  offering MSBs rose only from 157 to 175.  0  and Coops entered the NOW market in 1975, their ability to attract NOW  -4  Though a large number of S&Ls  balances has been limited by the relatively small size of these institutions in the two states. Source of NOW Funds Establishing the source of NOW funds--whether demand deposits, time and savings deposits, or other--is of considerable importance in examining NOW related market share developments and, as will be shown in Section III, in estimating the aggregate earnings impact of NOWs on CBs. One important type of evidence on this matter concerns the behavior of active NOW accounts and the proportion of NOW funds in active and inactive accounts.  Draft activity against active NOW accounts (i.e., those with at  least one draft drawn in a given month) has increased gradually during the experiment and averaged about 11 drafts per month in December 1975.  Since  the average number of checks written against personal checking accounts in New England in 1974 was about 14, this suggests that active NOW accounts are being used primarily as checking accounts. As a first approximation it thus seems reasonable to assume that funds in active NOW accounts were acquired largely from demand deposit balances.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  If, as seems plausible, inactive NOW funds originated  -10-  primarily in sources other than demand deposits--especially time and savings deposits--then total active NOW balances can serve as an estimate of the amount of NOW funds that were converted, or diverted, from demand deposits. Though there are no data on active and inactive balances, estimates can be obtained from data on the number of active and inactive NOW accounts in the two states.  In December 1975, there were 764,984  NOW accounts at banks and thrifts in Massachusetts and New Hampshire, 1/ of which 157,136--or 21 per cent--were inactive.  If the average  balance in these inactive accounts was equal to the average balance in savings accounts in CBs in New England, which is $1100, then inactive balances totaled some $170 million in December, or about 20 per cent of total NOW balances.  This leaves  $670 million, or about 80 per cent,  1/  Of course, the 157,136 inactive accounts include some that were active in earlier months; likewise, some of the accounts that were active in December were inactive in one or more previous months. However, it is believed that the number of drafts written against each account is relatively stable from month-tomonth, so that membership in the two classes of accounts--active and inactive--is also relatively stable. A necessary (though not sufficient) condition for stable membership in the two classes is that the percentage of inactive accounts must be relatively stable. This condition is satisfied adequately in the two states where the percentage of inactive accounts has fluctuated narrowly from month-to -month while declining from 26 per cent in mid-1974 to 20 per cent in December 1975.  2/  Passbook savings balances in thrifts average between $2000 and $3000 in Massachusetts and New Hampshire. However, those savings balances that were converted to NOWs can be expected to be much smaller than this average because of the one-fourth percentage point loss in earnings which becomes significant for large accounts. Moreover, many of the larger savings accounts at thrifts are held by businesses and are therefore ineligible for conversion to NOWs. Thus, the $1100 figure is applied to both thrifts and CBs.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -11--  in active balances.  This estimate of the proportion of NOW balances  attracted from demand deposits is similar to those offered by banking industry representatives in Massachusetts. In Table 2, estimated active and inactive balances are shown for CBs and thrifts in December 1975.  As shown in column 3, thrifts  held an estimated $370 million in active NOW balances in December. These funds, serving largely as checking balances, been obtained primarily from CB demand balances.  appear to have  Of the $110 million  in inactive accounts at thrifts, an undetermined part was no doubt obtained from CB time and savings deposits, with most of the remainder representing conversions from time and savings at thrifts.  This  TABLE 2 ESTIMATED ACTIVE AND INACTIVE NOW BALANCES ($ in millions) December 1975  Massachusetts and New Hampshire  Estimated Active Balances  CBs  359.0  61.4  297.6  MSBs  386.6  89.6  296.9  93.8  21.8  71.9  839.3  172.8  666.5  S&Ls & Coops TOTAL  3/  NOW Balances  Estimated Inactive Balances  Draft activity against active NOW accounts at thrifts averages about 101 / 2 in the two states, not significantly below the average at CBs.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -12-  suggests that approximately $400 million of NOW balances currently held by thrifts originated in CB deposits. Market Shares of Total Deposits The direct effect of NOW accounts on market shares in the two state area, where deposits at CBs and thrifts total nearly $40 billion, thus amounts to a one percentage point reduction in the 45 per cent share held by CBs.  Although this represents a relatively  modest reduction in the market share of CBs, the indirect effect of NOWs on such shares must also be considered before any judgment can be reached on whether major shifts are under way. This indirect effect involves the spread of convenient one stop banking to thrifts.  By permitting thrifts to issue what is  essentially a demand deposit, CBs could conceivably lose large amounts of time and, especially, savings deposits as demand deposit funds are diverted to thrifts.  Commercial bankers are particularly worried  about this possibility in view of the one-fourth percentage point advantage thrifts can offer on passbook savings. The evidence on this issue indicates that no such shift in deposits between institutions has occurred, as yet.  In the upper half  of Table 3 market shares of passbook savings excluding NOWs are shown for the last four Call Report dates, beginning in December 1973, just before the NOW experiment began. the passbook  As shown in the table, CBs' share of  savings market, in both Massachusetts and New Hampshire,  has actually grown during the NOW experiment.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  In Massachusetts the  -13-  TABLE 3 MARKET SHARES OF DEPOSITS HELD BY MAJOR DEPOSITORY INSTITUTIONS IN MASSACHUSETTS AND NEW HAMPSHIRE June 1970  June Dec June Dec 1972 1974 1973 1974 PASSBOOK SAVINGS EXCLUDING NOWs  June 1975  Massachusetts (dollars in millions)  13,605  13,815  12,906  13,680  12,882  13,695  Percentage held by CBs MSBs S&Ls  11.9 79.5 8.6  15.5 75.2 9.3  16.7 73.8 9.5  16.5 74.6 8.9  17.7 73.3 8.9  19.1 72.6 8.3  1,632  1,702  1,784  1,835  1,807  1,937  16.7 68.3 15.0  24.7 59.9 15.4  27.1 57.8 15.1  29.0 55.9 15.1  29.5 55.4 15.1  30.0 54.9 15.1  New Hampshire (dollars in millions) Percentage held by CBs MSBs S&Ls and coops  TOTAL DEPOSITS Massachusetts (dollars in millions)  21,886  26,856  30,771  31,302  31,819  32,273  Percentage held by CBs MSBs S&Ls  43.8 49.6 6.6  43.0 50.3 6.7  45.8 47.8 6.4  46.4 47.2 6.5  46.5 47.1 6.4  43.7 49.5 6.8  2,242  2,850  3,326  3,430  3,462  3,685  36.5 50.3 13.2  41.3 44.9 13.8  42.5 43.7 13.9  42.7 43.3 14.1  42.9 42.8 14.3  41.9 43.5 14.6  New Hampshire (dollars in millions) Percentage held by CBs MSBs S&Ls and coops  NOTE:  MSB and CB data are from Assets and Liabilities of Commercial and Mutual Sayings Banks (FDIC) with the exception of Massachusetts MSB data which were obtained from the NAMSB in New York. S&L data are from Monthly Financial Data (FSLIC).   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -14-  share of passbooks held by CBs increased from 16.7 to 19.1 per cent between December 1973 and June 1975, while New Hampshire CBs have increased their share of this market from 27.1 to 30.0 per cent during this period.  CBs have made significant gains in the passbook savings  market during the last twenty years, and this evidence suggests that NOW accounts have not significantly retarded this progress. Comparison of total market shares are of limited value, since large CBs, unlike thrifts, obtain a relatively large and variable part of their deposits from the issuance of large Certificates of Deposit. Data on total deposits are, nevertheless, presented in the bottom half of Table 3.  Although the CB share of total deposits declined from 46.4  nearly to 43.7 per cent between mid-1974 and mid-1975, this share remains a percentage point above its June 1972 level--recall that NOW accounts have been issued by MSBs in the two states since mid-1972.  In New Hamp-  shire, the market share of CBs has remained relatively stable over the   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  1974-75 period, as CBs in that state have successfully protected the gains made in market shares in the early seventies. On the basis of this evidence, it appears that, to date, no significant shifts have occurred in market shares beyond those arising directly from transfers of CB deposits into active NOW accounts at thrifts.  However, the possibility of such a shift, occurring on a  delayed basis, cannot be totally ruled out, particularly if consumers adjust slowly to changing conditions in financial markets.  -15-  III. EFFECTS OF NOW ACCOUNTS ON AGGREGATE COMMERCIAL BANK COSTS, EARNINGS, AND PORTFOLIOS: 1974-1975  In attempting to establish a permanent share of the NOW market, CBs in Massachusetts and New Hampshire have absorbed higher costs through the conversion of demand deposits to NOW accounts and have thus experienced a reduction in net earnings.  Moreover, CB  net earnings have been further reduced by the loss of relatively profitable demand deposit funds to thrifts offering NOWs.  Estimates  of the effect of NOWs on aggregate CB earnings must therefore include both the inhouse cost of converting noninterest bearing demand deposits to NOWs, as well as earnings reductions associated with NOW related outflows of demand deposits. In the remainder of this section rough estimates are produced which, it should be emphasized, are indicative only of basic magnitudes.  For reasons to be discussed later, these estimates are  Probably biased in the sense that the true depressing effect of NOWs on CB earnings is more likely to be smaller than the estimates, rather than larger.  Incremental Costs of NOWs In estimating the added costs to CBs of acquiring and retaining NOW funds, costs of converting time and savings deposits   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -16-  to NOWs are ignored, since such costs are likely to be small.  Thus,  incremental costs are calculated by multiplying estimated NOW balances at CBs which were converted from demand deposits by the difference between the average cost of NOW funds and that of demand deposit funds.  For this purpose, active NOW balances at CBs, as calculated  in Section II, will be used to estimate the level of conversions ' from demand deposits to NOWs. For nonmember banks the average cost of NOW funds is equal approximately to the sum of the interest payment, which averages  4/  In equating conversions of demand deposits to estimated active NOW balances, the consolidation of savings and demand deposit accounts into one active NOW account creates a minor problem, since treating the balance in the active NOW account as originating in a demand deposit causes an upward bias in the, estimated level of demand deposit conversions. Because average NOW balances at CBs aft significantly higher than at thrifts--$1600 at CBs to $900 at thrifts--it might appear that the effect of account consolidation on average NOW balances at CBs is large. However, this is somewhat misleading, since NOW accounts at CBs include conversions of so called D/B/A--"doing business as"--demand deposit accounts of sole proprietorships. These accounts typically carry very large balances ranging up to $50,000 and more. According to knowledgable observers, most of these D/B/A accounts have been converted to NOWs, thereby raising NOW average balances relative to those of demand deposits. For a few CBs whose D/B/A accounts were examined, average NOW balances after excluding D/B/A accounts were much smaller and more consistent with average demand deposit balances. Thus, the effect on average balances of consolidating savings and demand deposit accounts into one active NOW account may be quite small, and active NOW balances, as calculated in Section II, probably serve as a reasonably accurate, though slightly biased estimate of demand deposit conversions.  11411111.41, J132, 4 )  -17nearly 5 per cent, and the net cost of servicing NOW accounts.  This  latter cost consists mainly of expenditures on account maintenance (statement preparation, etc.) and costs associated, to a lesser extent, with clearing drafts and handling deposits to NOW accounts. For Federal Reserve members, the NOW cost is equal to this sum, less the earnings from funds released by the lower required reserve ratio on NOWs relative to demand deposits. The per dollar marginal cost of demand deposit funds is approximately equal to the net cost of servicing demand deposit accounts.  This service cost is similar to that of NOW accounts, though  probably slightly smaller because a higher proportion of CBs offer free checking than offer free NOWs.  If the service cost differential  is ignored because of its relative smallness, the incremental cost of s arr  NOW funds converted from demand deposits is equal to the rate of interest on NOWs minus, where applicable, the additional earnings from lower reserve requirements against NOWs. In calculating incremental costs, the interest rate on NOWs is set at 5 per cent and the 3 month Treasury bill rate is used to measure earnings from lower reserve requirements for member banks. These estimated costs are presented in Table 4 on a monthly basis   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  411   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -18-  beginning in January 1974.  For 1974, the estimated incremental cost  of NOWs totaled $830,000, while for 1975, this total is $9.3 million, reflecting the large growth in NOW balances at CBs this past year. In 1974, before tax CB earnings in Massachusetts and New Hampshire totaled $194 million, while in 1975 such earnings totaled $124 million; thus estimated incremental costs were about equal to one-half per cent of 1974 earnings, while 1975 incremental costs are estimated to be about 7% per cent of such earnings. incremental costs were equal  By 1975 year-end, moreover,  to about $14 million at an annual rate  ($1.182 million times 12), or about 11 per cent of 1975 earnings. As noted earlier, however, there are several reasons why these estimates probably overstate actual incremental costs. First, the small savings on service charges of NOWs relative to demand deposits are ignored and, second, active balances are used to estimate demand deposit conversions and this estimate is biased upward.  Also, the consolidation of savings and demand deposit  accounts into a single NOW account reduces CB's costs, since the maintenance cost of a NOW account is smaller than the sum of the costs of maintaining separate demand and savings deposit  accounts.  5/ Symbolically, the per dollar NOW cost for a Federal Reserve member bank can be expressed as: c =i +s - .07r n n n where i is the interest rate paid on NOWs, sn is the annual cost per dolYar of servicing a NOW account, r is rate of interest on some asset into which the funds derived from the lower NOW reserve difference requirements will be invested, and the constant .07 is the and between the average reserve requirement against demand deposits NOW accounts. If s is ignored on the grounds that NOW service cost costs are similar Oa those of demand deposits, the incremental of NOW funds is equal to in - .07 r for Federal Reserve members, and to i for nonmembers. These expressions are used in calculating estimates costs in Table 4.  -19TABLE 4 ESTIMATED INCREMENTAL COSTS TO CBs OF NOW ACCOUNTS (in thousands 0  1974-Jan  MIMBER BANKS Monthly Incremental IncreActive Cost mental Balances per Dollar Cost 1,215.5 .00371 4.5  NONMEMBER BANKS Monthly TOTAL Incremental IncreCB Active Cost mental Incremental Balances per Dollar Cost Cost 519.9 .00417 2.2 6.7  Feb  1,129.5  .00375  4.2  1,412.2  .00417  5.9  10.1  Mar  2,010.1  .00370  7.4  2,685.9  .00417  11.2  18.6  Apr  2,770.8  .00369  10.2  4,392.6  .00417  18.3  28.5  May  3,148.1  .00367  11.6  4,704.0  .00417  19.6  31.2  Jun  4,279.7  .00360  15.4  5,691.9  .00417  23.7  39.1  Jul  6,783.7  .00371  25.2  7,032.3  .00417  29.3  54.5  Aug  12,588.0  .00366  46.1  7,838.6  .00417  32.7  78.8  Sep  11,554.0  .00368  42.5  16.528.0  .00417  68.9  111.4  Oct  11,524.0  .00374  43.1  18,815.0  .00417  78.5  121.6  Nov  15,756.0  .00372  58.6  21,449.0  .00417  89.4  148.1  Dec  19,994.0  .00375  75.0  25,168.0  .00417  104.9  179.9 828.9  1975-Jan  31,248.0  .00379  118.4  29,175.0  .00417  121.7  240.1  Feb  46,098.0  .00384  177.0  34,810.0  .00417  145.2  322.2  Mar  62,754.0  .00384  241.0  45,720.0  .00417  190.7  431.6  Apr  70,121.0  .00383  268.6  51,462.0  .00417  214.6  483.2  May  80,021.0  .00386  308.9  60,001.0  .00417  250.2  559.1  Jun 103,083.0  .00386  397.9  68,747.0  .00417  286.7  684.6  Jul 118,220.0  .00381  450.4  75.699.0  .00417  315.7  766.1  Aug 127,962.0  .00379  485.0  83,326.0  .00417  347.5  832.5  Sep 140,017.0  .00379  530.7  92,286.0  .00417  384.8  915.5  Oct 153,315.0  .00381  584.1  99,918.0  .00417  416.7  1,000.8  Nov 163,813.0  .00385  630.7  107,302.0  .00417  447.4  1,078.1  Dec 183,221.0  .00385  705.4  114,385.0  .00417  477.0  1,182.4   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  9,325.0   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -20-  Reductions in Earnings from Demand Deposit Outflows The second way in which NOW accounts can reduce CB earnings is through the loss to thrifts of funds which would otherwise have provided positive net earnings for CBs.  As noted earlier, the major  identifiable loss of CB funds amounts to about $370 million in demand deposit balances through December 1975. In attempting to estimate earnings reductions at CBs attributable to NOW induced outflows of funds, active NOW balances at thrifts are used to approximate demand deposit outflows.  Savings deposit out-  flows, which are essentially unknown, are ignored because the earnings from such funds would have been small, especially in 1975 when market interest rates were low, relative to those of demand deposits. For nonmember banks, per dollar earnings on demand deposits are equal to the average yield on invested funds minus the net cost of acquiring such funds (in the case of demand deposits, the cost of servicing an average account).  For Federal Reserve member banks, net  earnings on demand deposit funds are equal to the average yield on invested funds multiplied by 0.9 (the proportion, on average, of each demand deposit dollar that can be invested after reserve requirements 2/ are met) minus the net cost of acquiring funds.  6/  7/  Of course, nonmember banks maintain small precautionary reserves against deposits. Since such reserves are negligible, they are ignored in all calculations Symbolically, net demand deposit earnings for member banks are expressed by rD(1 -rr) -sD = [r(1 -rr) -s1D, where r is the yield on invested funds, rr is the average reserve requirement against demand deposits, s is the service cost per dollar of demand balances, and D is the stock of demand deposits. This expression also holds for nonmember banks, of course, with rr = O.  -21-  Studies by Donald Hester and James Pierce indicate that a high proportion of demand deposit funds are invested in short-term market securities; thus the Treasury bill rate was used to measu re the yield on demand deposit funds lost to thrifts._§../  The average cost  of servicing a demand deposit account was, somewhat arbitraril y, set at 3 per cent of the average balance.  This rough estimate is based on  functional cost data from the Federal Reserve Bank of Bosto n.  These  data indicate the cost of servicing a checking account in New England averages between 3 and 4 per cent.  Since a substantial portion of CBs  in Massachusetts and New Hampshire offer free checking (implying only a small part of servicing costs are born by customers), 3 per cent was chosen as the average net cost of servicing such deposits.V Estimates of the earnings reduction attributable to NOW induced demand deposits outflows are presented in Table 5.  For each  month the estimated total outflow is shown for both member and nonmember banks.  These outflows are cumulative--that is, they include all funds  lost in previous months as well as those lost in the current month. For both member and nonmember banks, estimated outflows are multiplied by monthly per dollar earnings on demand deposit funds to obtain an 8/ 9/  See Hester, Donald and James L. Pierce, Bank Management and Portf olio Behavior, Yale University Press, 1975. This method of calculating demand deposit earnings implies the marginal return on demand balances exceeds the average return on all balances. Although for a hypothetical bank issuing only one type of deposit, the marginal return should be below the average retur n, such a relationship need not hold for any particular type of depos it for banks issuing more than one type of deposit.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -22TABLE 5 ESTIMATED LOST EARNINGS FROM DEMAND DEPOSIT OUTFLOWS (in thousands $)  1974-Jan Feb  CB EARN51( NONMEMBER BANKS MEMBER BANKS Red=of Monthly Cumulative Monthly Cumulative Lost Earnings Estimated Lost Earnings Estimated 07=s 7 Outflows Per Dollar Earnings Outflows Per Dollar Earnings .00396 17,735 312.4 94,209 .00332 327.2 60.8 .00338 17,959 266.4 .00279 95,314  Mar  103,085  .00349  359.7  19,456  .00415  80.8  440.6  Apr  105,906  .00367  388.9  20,026  .00436  87.3  476.1  May  107,994  .00382  412.8  20,478  .00453  92.7  505.5  Jun  111,187  .00361  401.3  21,121  .00429  90.6  491.8  Jul  116,941  .00331  387.5  22,264  .00396  88.2  475.7  Aug  122,692  .00406  497.9  23,404  .00479  112.0  609.9  Sep  127,487  .00377  480.9  24,368  .00447  108.9  589.8  Oct  135,191  .00293  396.5  25,838  .00354  91.4  487.9  Nov  143,460  .00319  457.5  27,469  .00382  104.9  562.4  Dec  151,598  .00288  437.2  28,949  .00348  100.8  538.1  1975-Jan  155,605  .00237  368.7  28,376  .00291  82.6  5 3 :16  Feb  170,420  .00169  287.5  31,075  .00215  Mar  195,432  .00166  324.0  35,646  .00212  9 : 5 6 676  4 416 99 35 3  Apr  206,168  .00177  365.0  37,647  .00225  84.5  449.5  May  219,731  .00149  326.6  40,128  .00193  77.4  404.0  Jun  236,247  .00139  329.5  43,193  .00183  78.9  408.4  Jul  252,305  .00212  535.6  46,079  .00264  121.5  657.1  Aug  257,973  .00235  605.5  47,222  .00289  136.3  741.8  Sep  276,384  .00229  632.2  50,622  .00282  142.7  774.9  Oct  293,152  .00206  604.1  53,729  .00257  137.9  742.1  Nov  303,838  .00160  b86.4  55,725  .00206  114.6  601.1  Dec  311,801  .00163  507.6  57,082  .00209  119.1  626.7 6,611.0  NOTE:   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Outflows from memb2r and nonmember CBs are assumed to be proportional tc market shares of demand deposits (averaged over each year) of these bank For example, if member CBs held 80 per cent of demand deposits in a givc year, then 80 per cent of active balances at thrifts for that year are assumed to have come from member banks and the remaining 20 per cent frc In nonmembers.  -23-  estimate of earnings lost each month.  ictior rom [lows  For 1974, these estimated earnings  reductions totaled $5.9 million, which is much larger than the 1974 estimate of incremental costs from Table 4.  This, of course, reflects the  2.7  7.2  fact that thrifts--especially MSBs--held a large percentage of active  ).6  NOWs in 1974.  The 1975 estimated earnings reduction from demand deposit  5.1 outflows, shown at the bottom of Table 5, totaled $6.6 million.191  5.5  L.8  After Tax Reduction in Earnings  i.7  1.9  Adding the estimates of incremental costs of conversion of demand deposits to NOWs at CBs to the reduced earnings from demand deposit  .9  outflows from CBs to thrifts yields a rough estimate of the total before  .4  tax reduction in earnings attributable to NOW accounts.  .1 .6  total is $6.7 million, while for 1975 the total is $15.9 million. To obtain an after tax reduction in earnings it is necessary  .3  .4  For 1974 this  to reduce these figures by the amount of the tax savings accruing from  .6  .5  .0  .4  lower CB earnings.  In 1974 more than 90 per cent of Massachusetts and  New Hampshire CBs had before tax earnings exceeding $25,000.  The mar-  ginal tax rate for these banks was therefore 48 per cent, while for the  .1  .8 9  remaining banks the marginal rate was either 25 or zero per cent, depending on whether earnings were positive or negative.  The weighted  1 1  10/  7 0  :0  IkS.  ren   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Concerning the robustness of these estimates to changes in the assumed average balance in inactive accounts, if instead of $1100 this average was twice as large--$2200--the earnings reduction from demand deposit outflows would have been about 30 per cent smaller. For example, assuming a $2200 average balance in inactive accounts at thrifts reduces estimated active balances from $370 million to $260 million in December 1975. Thus, earnings reductions from demand deposit outflows would be only 26/37, or about 70 per cent, of those shown in Table 5 for that month.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -24-  average of these marginal rates, with weights equal to the proportion of banks in each class, is equal to about 44 per cent.  Reducing the  estimated $6.7 million 1974 earnings reduction by this amount produces an after tax reduction in earnings of $3.8 million.  Since after tax  profits in Massachusetts and New Hampshire totaled $142 million in 1974, this represents a reduction in total after tax earnings of a little over 2% per cent. For 1975 the weighted average marginal tax rate for Massachusetts and New Hampshire banks was 40 per cent.  Reducing the $15.9  million 1975 before tax earnings reduction by this factor thus produces an after tax reduction of $9.5 million.  Total after tax earnings in  the two NOW states declined by $35 million to $107 million in 1975. NOWs thus appear to account for a little more than one-quarter of the earnings drop in the two states last year.  IV.  ADJUSTMENT PROBLEMS OF INDIVIDUAL BANKS  Analysis of aggregate data suggests that at worst, industrywide earnings in Massachusetts and New Hampshire may have been depressed by a few percentage points in 1974 and 1975 by the introduction of NOW accounts.  Consequently, the industry does not appear to be experiencing  particularly serious adjustment problems. often conceal important information.  However, aggregate data can  In particular, when an industry  is adjusting to a change in basic costs or revenues, certain segments of that industry--those so-called marginal firms--may suffer disproportionately high losses of earnings and capital.  The adjustment  -25-  experience of these firms can often reveal far more about the stability of the industry than aggregate data. The remainder of this section is therefore devoted to a study of costs, earnings, and portfolio adjustments of selected banks whose earnings and capital positions appear to be most vulnerable to NOW related changes in costs and revenues.  The banks selected for special  attention--40 of the 226 banks in the two states--belong to at least one of the following categories: (1) "high ratio" banks, defined as those banks having 10 per cent or more of total deposits in NOW accounts in June 1975, (2) "runoff" banks, defined as those banks not offering NOWs in mid-1975 and experiencing significant losses of demand deposits between January 1974 and June 1975, and (3) "low earnings" banks, defined as those banks offering NOWs in mid-1975 with 1974 before tax earnings to total deposit ratios in the lowest 20 percentile in the two states. These 40 banks tend to be relatively small--the median bank having only $17.5 million in deposits--and include only one very large bank. High Ratio Banks In June 1975, there were eight "high ratio" CBs--banks with more than 10 per cent of total deposits in NOW accounts.  Five of these  banks were either established banks with a history of aggressive management prior to the introduction of NOW accounts, or were new banks. In interviews conducted by the Federal Reserve Bank of Boston, it was found that the former group of banks tended to be aggressive in offering NOWs, often introducing them before their competitors and promoting them   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -26-  heavily through advertising.  In general, the management of these banks  viewed NOW accounts as a means of increasing their market shares by attracting new customers.  For these banks, the high proportion of NOWs  resulted from a deliberate,aggressive policy by the banks' management. The remaining three banks tended to be older banks which introduced NOW accounts as a defensive measure.  These banks, for one  reason or another, found themselves under severe competitive pressures and were forced to introduce NOWs to maintain their deposit base. Two of these banks have an abnormally high ratio of personal demand deposits to total deposits, and thus were particularly vulnerable to competition from thrifts offering NOWs. Table 6 displays the recent aggregate earnings pattern of six of the eight "high ratio" banks--those six that have been in operation since 1973.  The largest of the six banks had negative earnings in  the 1972-1973 base period, and positive but low earnings in 1974 and 1975.  On balance, the remaining five banks  in 1974, but suffered substantial earnings  increased their earnings declines in 1975 relative  to the 1972-1973 pre-NOW base period. Of the six banks in Table 6, three indicated that their high concentration of NOWs reflected a deliberate policy of attempting to increase market shares. defensively.  The remaining three banks were acting  It is difficult to judge for any of these banks the  relative importance of NOW costs in the 1975 overall reduction in high ratio bank earnings.  However, calculations similar to those  -27-  of Section III suggest that one large bank experienced an increase in NOW costs exceeding $600,000 in 1975, while two other banks lost at least 10 per cent of 1975 income due to higher NOW costs and outflows of demand deposit funds. It seems reasonable to surmise that the six high ratio banks-at least in the short run--probably suffered the largest earnings reductions from the NOW experiment.  The three banks that acted defensively  appear to have had little choice in the matter of whether to offer NOWs; tneir earnings problems could be severe and could well continue for some time.  The remaining three banks were also hard hit by higher NOW costs;  however, their aggressive strategies may prove successful in the longer run. TABLE 6 SUMMARY OF HIGH RATIO BANK EARNINGS  Average Size 1974 Assets (in $ Millions)  Average Ratio of NOWs to Deposits Dec 1975  1972-73 Average After Tax Earnings per Bank (in $ Thousands)  40.3  23.7  139  Per Cent Change from 1972-73 After Tax Earnings 1974 1975 42.0  -28.2  Runoff Banks In contrast to the "high ratio" banks that had a high ratio of NOWs to total deposits, 16 so-called "runoff" banks lost at least 10 per cent of their demand deposit base between January 1974 and June 1975 and did not offer NOW accounts over this period.  Of the  16 runoffs, all but three indicated in interviews that they believed   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -28-  demand deposit outflows were at least partly attributable to NOWs. However, four of the 13 banks that blamed NOWs for demand outflows also small. indicated that their demand deposit losses due to NOWs were very Most of the 16 runoff banks cited added costs as the reason for not introducing NOWs.  Some banks also indicated that they lacked  necessary computer facilities required to handle NOW accounts and one bank, which does not pay the ceiling interest rate on savings accounts, expressed concern that offering NOWs would cause added expenses by forcing the savings rate to the ceiling. Table 7 displays separately the average earnings of those nine banks that felt that NOWs had contributed to demand deposit runoffs and of the seven banks that believed that NOWs had contributed little if anything to runoffs.  The earnings records of the two groups of  runoff banks in 1975 are quite similar, with both groups of banks experiencing one to two per cent increases in 1972-1973 average earnings.  Over the two years, five banks in each category experienced  lower earnings relative to 1972-1973 in at least one year, with one bank in the latter category suffering lower earnings in both years. Again it is difficult to judge how much of the earnings impact of "runoff" banks was due to NOWs.  Generally, the earnings of these  banks held up better than those of "high ratio" banks that aggressively sought NOWs or defensively acquiesced in offering NOWs.  However, the  long run earnings potential of runoffs could still be less favorable than that of the high ratio banks.  -29-  TABLE 7 RUNOFF BANK EARNINGS 1972-73 Averae Per Cent Average Size Reduction After Tax 1974 in Demand Earnings Assets Deposits Per Bank ($ Mils) 12/73-12/75 ($000s)  Per Cent Change From 1972-73 After Tax Earnings 1975 1974  Attributed to NOWs  13.5  22.6  41.2  110.6  1.8  Not Attributed to NOWs  26.2  19.5  351.0  23.5  1.5  Total  19.0  20.9  176.8  34.9  1.5  Low Income Banks Low income banks are defined as those banks offering NOWs in June 1975 whose ratio of 1974 before tax earnings to total deposits falls in the lowest 20 percentile for the two states.  There were 18  banks in this category, with 13 in Massachusetts and five in New Hampshire.  These banks all had ratios of before tax earnings to  deposits below 0.7 per cent in 1974, a year in which the two-state average for all banks was about 1.2 per cent. As shown in Table 8, the low earnings banks suffered substantial reductions in earnings in both 1974 and 1975.  In 1974, 11 of the 18  low earners experienced a drop in earnings from 1972-1973, while in 1975 the earnings of 14 of these banks were lower than in 1972-1973.  However,  it cannot be concluded that NOWs were primarily responsible for this sharp decline in earnings for the low earners, because many of these banks, which were selected precisely because their 1974 earnings were   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -30-  low, suffered from relatively large loan losses in 1974 and 1975. Generally low 1975 earnings, moreover, appear to reflect a continuation NOWs. of 1974 earnings problems as well as increased pressures from  TABLE 8 LOW INCOME BANK EARNINGS  Hi Average Size 1974 Assets (in $ Millions)  Average Ratio of NOWs to Deposits Dec 1975  1972-73 Average After Tax Earnings per Bank (in $ Thousands)  141.8  2.5  657  Per Cent Change from 1972-73 After Tax Earnings 1975 1974 -26.7 -46.2*  -103.1  Ru  Lc Lc  -62.8*  * excludes earnings record of largest bank in "low income" group  ot  1.E Summary of Marginal Bank Earnings Table 9 compares the 1974-75 earnings of the 40 Massachusetts and New Hampshire marginal banks to those of the remaining 186 CBs in the two states, to CBs in the four other New England states, and to CBs in the balance of the nation.  From this table it is seen that in 1975  even banks in Massachusetts and New Hampshire not included in the marginal bank category generally performed more poorly than other New England banks.  Part of this poor earnings performance is attributable to NOWs,  since nearly all banks in the two states were affected adversely to varying degrees by NOW pressures in 1975.  However, as noted in Section III, NOWs  can account for only a small part--an estimated one-fourth--of the drop in after tax earnings in the two states last year.  Other factors, including  C]  -31-  TABLE 9 Weighted Average Changes in Earnings  Category  High Ratio Bonks  Per Cent Change in Earnings from 1972-73 1975 1974 42.0  -28.2  Run-off Banks Runoff attributed to NOWs Runoff not attributed to NOWs  34.9 110.6 23.5  1.5 1.8 1.5  Low Earnings Banks Low Earnings Banks - adjusted*  -26.7 -46.2  -103.1 -62.8  All Marginal Banks All Marginal Banks - adjusted*  -11.8 -10.3  -80.0 -37.8  9.2  -16.6  CB's in Other 4 New England States  16.7  9.8  CB's in 44 Other States  18.5  19.5  Other Banks 186 Other CB's in Massachusetts and New Hampshire  Excludes earnings record of largest bank in "low income" group  1   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -32-  large loan losses resulting from the depressed economies of the two states, presumably account for the remainder of the drop in earnings. It is clear from Table 9 that the earnings performance of the 40 marginal banks, particularly in 1975, was significantly worse than that of other banks, including the 186 Massachusetts and New Hampshire banks not included in the marginal bank category.  However,  it would be incorrect to attribute this poor earnings performance totally or even largely to NOWs.  According to reports of bank examiners,  the major problem for the low income banks has been excessive loan losses and inefficient management.  In no case was it concluded in  bank examination reports that NOWs were a principal contributor to the earnings problems of low earnings banks.  The examiners reports also  indicate that NOWs played a relatively minor role in the overall earnings reductions of "high ratio" and "runoff" banks.  Indeed, NOWs  were mentioned in only a few of the latest examination reports of the 40 marginal banks and in most cases, the examiner's comments were limited to factual observations on NOW growth. More generally, while earnings were clearly lower for the 40 banks selected for special analysis, it does not appear that NOWs have as yet had a significant adverse effect on the soundness of the Massachusetts and New Hampshire marginal banks.  However, NOW-related  problems could increase for some of these banks in the future, particularly those that, for reasons unrelated to NOWs, are presently experiencing earnings difficulties.  Reduced revenues from demand  demand deposit outflows or higher costs associated with conversions of  -33-  balances to NOWs could threaten the already weakened condition of these banks.  Indeed, although evidence suggests that NOWs per se  did not cause the problems of any of these 40 banks, the NOW experiment appears to have, in the short run at least, exacerbated more basic problems faced by several banks.  Such banks clearly present  the most difficult problem for the banking system in adjusting to financial innovations and regulatory changes.  Portfolio Adjustments by Marginal Banks CBs with earnings problems can attempt to offset higher NOW costs and lower earnings in two basic ways:  by lowering costs by  imposing relatively high service charges on NOW accounts, and by raising revenues in any number of ways.  As indicated briefly in Section III,  there is limited evidence, mostly of a  judgmental nature, that CB  service charges on NOW accounts are higher on average than those imposed on demand deposits; thus a part, probably small, of increased NOW costs are being recovered through higher service charges. CBs can attempt to increase revenues by raising loan rates. However, in Massachusetts and New Hampshire, where stiff competition exists from banks in neighboring states and from money market instruments--including commercial paper--such a strategy would likely be counterproductive.  CBs can also attempt to raise earnings by including  in their portfolios more risky, higher yielding assets. For example, a CB can usually increase revenues by selling short-telm,highly liquid   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -34-  assets such as Treasury bills, and using the proceeds to acquire nonprime business or real estate loans.  The problem with this strategy  is that the acquisition of more loans increases both the level of average earnings and the variation of these earnings.  Increased  variation in earnings, moreover, generally increases the probability of bank failure.  Thus, portfolio adjustments by CBs attempting to  maintain a target level of earnings are of considerable importance in examining the stability of commercial banking. Before reviewing empirical evidence on this matter, it should be  noted that, on theoretical grounds, costs and portfolio risk  io theory will, under some conditions, be directly related.' Portfol l as developed in the last 25 years, however, suggests that rationa wealth holders seek to balance benefits of higher rates of return against the disadvantages of additional risk when selecting an optimal portfolio of assets.  This behavior, though implying under  some conditions that somewhat more risk will be assumed when the return on bank capital declines, is generally incompatible with attempting to maintain a target level of earnings independent of portfolio risk whenever costs or revenues change.  This suggests  a willingness of  bank shareholders to accept somewhat lower earnings in the event of a temporary increase in costs; thus only modest increases in the riskiness of the bank portfolio may result.  11/  See Carl Gambs, "Interest Bearing Demand Deposits and Bank Portfolio Behavior", Southern Economic Journal, July 1975.  -35-  The hypothesis that the 40 marginal banks in Massachusetts and New Hampshire have increased portfolio risk in order to offset NOW related lower earnings can be examined by using the ratio of loans to total assets as a very rough measure of risk for each bank.  In the  left panel of Figure 2, ratios of loans to total assets are shown for each of the three classes of marginal banks.  Since early 1974 these  ratios have been gradually declining, and this would appear to contradict the "target rate of earnings" hypothesis of CB behavior. However, the economies of Massachusetts and New Hampshire were depressed during the 1974-75 period, and loan demand was generally weak. Therefore, a comparison of loan ratios of marginal banks relative to  FIGURE 2  70  70 High ratio Industry less marginal banks  GO  60  Low income  50  /  Marginal banks  ('J  50  Runoffs   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  40  40 1973  1975  1973  1975  -36-  all other Massachusetts and New Hampshire banks is shown in the right panel of Figure 2.  Because marginal banks experienced greater than  under average NOW related earnings losses, it might be conjectured that might the target rate of return hypothesis their loan to asset ratios decline less than that of the industry.  Instead, since late 1974 the  2, aggregate marginal bank ratio, as shown in the right panel of Figure has declined more than the industry ratio.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Based on this evidence, the  of their 40 marginal banks do not appear to have increased the riskiness of portfolios, as measured by the ratio of loans to assets, as a result the NOW experiment.  V.  THE LONG-RUN ADJUSTMENT PROBLEM OF COMMERCIAL BANKS Conversion of time and savings deposits to NOW accounts causes  negligible cost increases for CBs.  Thus, the problem banks face in the  long run is that of absorbing, or offsetting, higher costs associated funds to with conversions from demand deposits to NOWs, and the loss of thrifts.  Because CBs have become quite successful in retaining NOW  funds, and hence face escalating costs of acquiring funds  in the short  d run, the problem of absorbing such costs will be examine in some detail in the remainder of this section. Characteristics of the Steady State The Federal Reserve Board's Demand Deposit Ownership Survey indicates that one-third of all demand deposits are held by households; thus only about $2 billion of the $6 billion in demand balances in Massachusetts and New Hampshire could ultimately be converted to NOWs.  In Table 2 it  -37-  was shown that an estimated $670 million of demand deposits had been converted to NOWs as of December 1975.  Thus, approximately one-third  of all eligible transactions balances were at that time in NOW accounts. It would be grossly incorrect, however, to attempt to obtain an estimate of the effect of NOWs on CB profits in the steady state-that period after which NOW market shares have stabilized and CBs have made all desired adjustments--by multiplying the December 1975 estimated earnings reductions (Tables 4 and 5) by some number such as 3.  Such a  calculation would be misleading because it ignores potential adjustments that CBs can make in competing for NOW funds. Before the payment of interest on NOWs was permitted, CBs competed for transactions balances by offering suppliers of funds various nonpecuniary services, such as free checking, branch banking, longer hours of operation, and larger numbers of tellers to reduce waiting time.  At  the margin, however, the cost of providing such services generally exceeds the value attached to these services by customers.  It is a widely accepted  proposition, for example, that whenever the price of a service is set at zero, that service will be consumed by customers until the value to the customer of the last unit is zero.  However, there is a positive cost  associated with providing, or producing each service unit (e.g., the cost of clearing checks written against a "free" checking account is positive for each check).  Thus, the provision of such services is inefficient in  the sense that valuable resources are used up in producing services which, on the margin, have relatively low value.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -38-  interest By substituting pecuniary returns--the payment of nate the waste, or on NOWs--for nonpecuniary services, CBs can elimi ry services that inefficiencies, associated with providing nonpecunia  12!  have low marginal values relative to cost.  Indeed, by permitting  customers and banks can the payment of interest on NOW balances, both be expected to benefit.  This can be shown by supposing that banks  public and pay no interest initially offer free checking services to the on demand deposit balances.  The total return on demand funds derived  cashing services, while by customers is thus equal to the value of check   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  ces is equal to the cost the cost to the bank of acquiring demand balan accounts. of servicing their customers' free checking  If banks are  customers with demand allowed to make explicit interest payments to even if they are required funds on deposit, customers will be better off the interest rate is set to pay for check cashing services as long as high enough.  costs Moreover, bank costs can be lowered due to reduced  r "free" to customers-of servicing checking accounts--which are no longe if the interest rate is not set too high.  Indeed, it can be shown--see  for which both cusAppendix A--that there is a range of interest rates value of bank services tomers and banks are better off--i.e., the total higher, while bank costs to the customer, including interest earned, is of providing these services are lower.  12/  interest For the pre-1933 period, when CBs were permitted to pay payments on demand balances, banks with higher average interest interest. tended also to have lower average expenses other than nonThis presumably reflects the substitution of pecuniary for est on pecuniary services by banks offering higher rates of inter d Deposits deposits. See George Benston,"Interest Payments on Deman Economy, and Bank Investment Behavior," Journal of Political October, 1964.  -39-  One very important implication of this result--as shown in Appendix A--is that the cost to CBs of acquiring transactions balances can conceivably decline if banks are permitted to pay interest on such balances.  This paradoxical result arises from the fact that removing  a constraint on the way in which banks can compete for transactions balances allows CBs to select a more efficient (lower cost) strategy for attracting such funds. Transition to the Steady State As previously noted, banks began to compete aggressively for NOW funds in 1975.  As also noted, continuing competitive pressures may  make the transition to the steady state a long, and for many marginal banks, a difficult process.  However, after NOW growth begins to moderate  and NOW market shares of individual CBs and thrifts stabilize, the aggressive competition for NOW funds should gradually disappear.  This will prob-  ably occur through a reduction in the level of free nonpecuniary services.---' To establish that rational pricing of NOW balances will indeed occur at some future date, it is necessary to show that the pricing policy now in effect of offering relatively high rates of return (including both pecuniary and nonpecuniary returns) on a new liability such as a NOW account is neither surprising nor irrational, but represents a short-run strategy consistent with maximizing the sum of current plus discounted future earnings.  13/   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Indeed, it can be shown--see Appendix B--that when the  Early evidence on service charges on NOWs in Vermont, Rhode Island, Connecticut, and Maine, which began issuing such accounts in March 1976, indicates that depository institutions in those states are pricing NOWs more in accordance with long-run profit maximizing criteria. For example, while in Massachusetts and New Hampshire over half of all issuing institutions offer free NOWs, only about one-quarter of the issuing institutions in the remaining four New England states are similarly offering free NOWs.  -40-  future supply of funds arising from a new liability is related positively period before such to market shares established during the transition ze the value shares have completely stabilized, a bank seeking to maximi of stockholder's equity will temporarily  pay higher rates for these  . funds than is consistent with short-run profit maximization  As market  offered will shares begin to stabilize, moreover, the rate of return decline to the profit maximizing level.  This implies that current CB  istent behavior in competing aggressively for NOW funds is not incons the NOW market with stockholder objectives, and more important, as accounts will decline. "settles down", total rates of return offered on NOW The major type of nonpecuniary return offered by CBs which free drafts and free can be easily adjusted is free checking, including account maintenance.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  In table 10, estimates of NOW costs based on  are shown. Functional Cost Data from the Federal Reserve Bank of Boston  Table 10 NOW COSTS FOR A $1000 ACCOUNT Item Cost  Number of items per Month  Monthly Cost  Annual Cost  $.09  11  .99  11.88  Deposits made  .15  2  .30  3.60  Outside checks Handled  .04  4  .16  1.92  2.00  1  2.00  24.00  Total servicing cost per account  3.45  41.40  Interest cost, $1000.00 Account  4.17  40.00  $7.62  $91.40  Drafts  Account Maintenance (Statements, etc.)  Total cost per account  -41-  The total annual cost of servicing a NOW account with a $1000 average balance is about $90, of which nearly half ($41.40) is attributable to non-interest related costs.  If a 10 cent charge were imposed on drafts,  the cost of servicing an average NOW account would decline to about $80. Moreover, if account maintenance charges were introduced, this cost would drop further to about $55.  Since the cost of servicing a free checking  account averages about $40, CBs offering such accounts would thus experience, as the transition period proceeds, only moderate increases in costs Of acquiring transactions balances if customers are required to absorb draft and account maintenance charges. Other adjustments which take longer to make--such as reducing the number of branches, constructing less elaborate bank buildings, and the like--will be made later as competitive pressures force CBs to adopt more efficient strategies for acquiring deposits.  These adjust-  ments, as noted earlier, will lower CB costs and thereby provide a net gain to the economy through more efficient resource utilization.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -42-  APPENDIX A REMOVAL OF INTEREST RATE CONSTRAINTS, BANK COSTS OF ACQUIRING FUNDS, AND PORTFOLIO RISK*  Suppose that banks can initially offer only non pecuniary services--free checking, long hours, impressive buildings, etc.--in order to attract transactions deposits.  The demand for these services is given  by the curve DD in figure A-1, while the MC curve represents the marginal cost to the bank of providing such services.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Price  P  FIGURE A-1  o  A  Quantity 0  Q0  If the price of non pecuniary services is set at zero--as it is for all banks that offer free checking--the quantity demanded of such services will be 0Q . 1  The area under the DD curve--the area of triangle  ODQ --thus represents the total value of these services to the customer. 1  T  cost of providing this level of services, ignoring fixed costs, is equal to the area under the MC curve--the area of OAEQ1.  * It is assumed throughout this appendix that bank customers are relativel homo2enous and that the number of checks written is positively related to the average balance of each account.  1 -43-  From figure A-1 it is clear that the cost of providing services beyond 0Q0 exceeds the value attached to such services by customers.  If  permitted to pay interest on these funds, banks can eliminate this inefficiency, and still provide customers with the same or greater level of total--pecuniary plus nonpecuniary--services.  Moreover, the cost of  providing this level of services will be lower. For example, suppose banks charge customers Po for nonpecuniary services (e.g., check cashing and statement preparation).  The level of  such services "purchased" by customers will then drop to 0Q0, which yields a net return to customers equal to the area of the triancle PoDB (which is equal to the area under the demand curve between 0 and Q0 less the cost paid for services--equal to OP0BQ0).  Suppose further that the  interest rate is set at a level to yield customers a pecuniary return equal to the area of OP0CQ1.  The total return to customers is then equal  to the area under the demand curve between 0 and Ql plus the area of the triangle BCQ1.  The area of BCQ1 thus represents a net gain to customers.  The cost to the bank of providing this higher level of services is equal to the area under the marginal cost curve between 0 and Qo plus the area of the rectangle BCQ1Q0.  This is less than the area under MC between 0  and Q1--the original cost of nonpecuniary services--by the area of BEG. Thus, by paying this particular interest rate on funds, total returns to customers are increased, while bank costs have declined.  Moreover, any  interest payment greater than OP0BQ1 but less than OP0BEQ1 will similarly raise total returns to customers while lowering bank costs.    1 https://fraser.stlouisfed.org  Federal Reserve Bank of St. Louis  -44-  This result can be easily extended to show that the cost of funds will decline if banks are permitted to pay interest on deposits. In the northeast quadrant of figure A-2, let the curve CR describe the relationship between bank costs of providing services and the valuation of those services by customers.  Next, in the southeast quadrant, let  the curve S represent the customers' supply function of deposits.  This  curve has the usual property that as total returns offered by banks increase, the supply of funds rises.  C  C  figure A-2 Total, Cost  CR  Ds R o  Valuation of Services (Net Return)  Ds The cost of acquiring funds is depicted by the curve C in the northwest quadrant of figure A-2.  This curve is derived from the CR  and S curves by use of the 45 degree translation line in the southwest quadrant.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  For example, if bank costs are Co' the level of services  -45-  offered to customers will be R . According to the supply function S, o s customers will then supply Do in funds. Thus, deposits totaling D: are supplied when bank costs are Co, as indicated by the point a in the northwest quadrant. The payment of interest on deposits shifts the CR curve to the right to C R', since, as shown, a higher return to customers can be achieved by a given expenditure of bank funds. figure A-2  It is easily seen from  that this shift causes the C curve to shift downward to C'.  Thus, by removing the constraint against the payment of interest on transactions balances--and thereby permitting banks to adopt a more efficient strategy for attracting funds--the cost to banks of acquiring funds will decline. Finally, the lowering of the C curve has implications for the amount of portfolio risk a bank will undertake.  1/ It has been shown— in  the context of a mean-variance portfolio model2j that if bank owners 3/ have a quadratic utility function— the amount of portfolio risk a bank will undertake rises whenever the risk-return curve shifts downward, and declines when an upward shift occurs.  The lowering of the C curve  in the steady state would tend to raise the mean-variance curve.  1/ 2/  3/   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Thus,  See Carl Gambs, op. cit. The mean-variance portfolio model was developed by Harry Markowitz, Portfolio Selection, Efficient Diversification of Investments, New York: John Wiley & Sons, 1959 and James Tobin, "Liquidity Preference as Behavior Towards Risk", Review of Economic Studies, February 1958. For a comprehensive review of portfolio theory including recent developments, see Michael Jensen, "Capital Markets: Theory and Evidence", Bell Journal of Economics and Management Science, 1972. Quadratic, that is, in the mean and variance of the distribution of expected returns.  -46-  might be lowered as a result of in the long run, bank portfolio risk ctions balances. the payment of interest on transa  In the short run,  -variance curve is lowered, thus the C curve is raised and the mean increase. implying that portfolio risk might  However, as noted in  yet of such a change in the riskiSection IV, there is no evidence as s and New Hampshire. ness of bank assets in Massachusett   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -47-  APPENDIX B SHORT-RUN PROFIT MAXIMIZATION AS A SUB-OPTIMAL CRITERION WHEN THE LONG-RUN SUPPLY OF FUNDS DEPENDS CN MARKET SHARES ESTABLISHED DURING A TRANSITION PERIOE  Suppose a new bank liability is introduced and that the long run supply of funds to each bank depends positively on the market share established during a transition period.  Suppose further that the bank  wishes to maximinize the sum of current plus future disco unted profits. For a two-period world the formal problem is: maximinimize where  W =II + 1 t —  = (i - r ) D t t t II = (i - r ) D S s s  II s  profits during the transition period profits in the steady state  p is a discount rate i is the rate earned on investments during the transition period. t r  t  is the offering rate on the new liability (including both pecuniary and nonpecuniary services) during the transition period  i is the rate earned on investments in the steady state s r is the offering rate (also includes both pecuniary and nons pecuniary services) in the steady state (rs < s) The deposit supply functions are of the forms:   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  D  = D (r ) t t t  91) t >0 ar  t  D  S  = D (r 2 D ) S s t  DD s ar s  2  aD s  apt  (Supply function during transition)  >0  (Supply function in steady state)  -48-  Note that the supply of funds during the transition period depends positively on the offering rate, while the supply in the steady state, or long run, depends positively on the market share--D c--established during the transition period in addition to the offering rate. To maximinize W (wealth), we differentiate with respect to rt and r and set both expressions to zero: s 311  t 31. t  1 P  1  Differentiating  311s Dr t DR s Dr s  0  =0  H with respect to r yields t s (i — r ) 3D s s S  3D t > 0  be negative Because 311 /Dr is positive, the partial derivative DH t/Drtmust t s if the first order wealth maximinization conditions are to be satisfied (first equation above).  This implies that if the first period profit  function is concave with respect to r t, as is usually assumed, then the rate r  t  that maximizes wealth is greater than the first period profit  maximizing rate.  This is shown in figure B-1, where  rP and rw  are the transition period profit and wealth maximizing prices, respectively. Notice that r'--the rate offered by a bank maximizing wealth (or, equivalently, stockholders equity)--is higher than q; this follows from Dflt/Drt being negative.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -49-  Figure B-1  v  IL t i  rP t  w r t  r  t  Finally, the condition Dlls/Drs = 0 implies that in the steady state, after market shares have stabilized, rate setting will be based on traditional profit maximizing considerations.  I I   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  A  BILL  To extend certain laws relating to the payment of interest on time and savings deposits, to make clear that Federal statutes do not prohibit depositary institutions from paying interest on savings accounts subject to withdrawal by check, to apply reserve requirements to such accounts, and for other purposes. Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, Short Title Section 1.  This Act may be cited as the "Savings Account Act  of 1973." Extension of Authority to Establish Ceiling Rates Sec. 2. (a) Section 7 of the Act of September 21, 1966 (Public Law 89-597) is amended by striking out "June 1, 1973" and inserting "September 1, 1975". (b) Section 18(g) of the Federal Deposit Insurance Act (12 U.S. C. 1828(g)) is amended by--   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  (1) inserting in the second sentence thereof "or dividends" immediately after "the payment and advertisement of interest"; and (2) striking out in the tenth sentence thereof "(1)", and by further striking out in such sentence ", and (2) there does not  "lb  -2  exist under the laws of such State a bank supervisory agency with authority comparable to that conferred by this subsection, including specifically the authority to regulate the rates of interest and dividends paid by such noninsured banks on time and savings deposits, or if such agency exists it has not issued regulations in the exercise of that authority". Payment of Interest on Savings Accounts Subject to Withdrawal by Check Sec. 3. (a) Section 19(i) of the Federal Reserve Act (12 U.S. C. 371a) is amended by adding at the end thereof the following new sentence: "Nothing in. this paragraph shall be construed as prohibiting payment of interest on a deposit with respect to which the bank may require the depositor to give notice of an intended withdrawal not less than thirty days before the withdrawal is made, even though in practice such notice is not required and th  depositor is allowed to make transfers of  funds out of such accounts by negotiable instrument or otherwise." (b) Section 18(g) of the Federal Deposit Insurance Act (12 U.S. C. 1828(g)) is amended by adding at the end thereof the following new sentence: "Nothing in this subsection shall be construed as prohibiting payment of interest on a deposit with respect to which the bank may notice of an intended withdrawal not less than require the depositor to give/thirty days before the withdrawal is made, even though in practice such notice is not required and the depositor is allowed to make transfers of funds out of such accounts by negotiable instrument or. otherwise."   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -3  (c) Paragraph (13) of section 107 of the Federal Credit Union Act (12 U.S. C. 1757) is amended to read as follows: "(13) in accordance with rules and regulations prescribed by the Administrator, (A) to sell to members negotiable checks (including travelers checks) and money orders, and to cash checks and money orders for members, for a fee which does not exceed the direct and indirect costs incident to providing such service and (B) to allow its members to make transfers of funds out of such accounts by negotiable instrument or otherwise; and". (d) The last sentence of section 5(b)(1) of the Home Owners' Loan Act of 1933 (12 U.S. C. 1464) is amended to read as follows: "An association may allow holders of savings accounts to make transfers of funds out of such accounts by negotiable instrument or otherwise as long as the association retains the right to require the advance notice referred to in. the third sentence of this paragraph." Reserve Requirements on Savings Accounts Subject to Withdrawal by Check Sec. 4.  (a) Section 19 of the Federal Reserve Act is amended  by adding at the end thereof the following new subsection: "(k) (1) Every institution (other than an institution organized under the laws of a foreign country) that engages to any extent in the business   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -4-  of offering savings accounts out of which the depositor is allowed to make transfers of funds by negotiable instrument or otherwise shall maintain reserves against those accounts in such ratios, not less than 1 per centum nor more than 10 per centum, as the Board shall determine. "(2) Reserves held to meet the requirements of this subsection shall be in the form of-"(A) balances maintained by the institution in the Federal Reserve Bank of the Federal Reserve District in which its head office is located, and "(B) the currency and coin held by the institution, or such part thereof as the Board may prescribe. "(3) Every institution subject to this subsection shall make reports concerning its required reserves to the Board at such time and in such form as the Board may require. In the event that the Board determines that an institution has violated any provision of this subsection, in addition to the penalties that may be authorized by other provisions of law, such institution shall be subject to a penalty not exceeding $1, 000 per day for each day during which such violation continues. Such penalty may be assessed by the Board and, when so assessed, may be collected by an action brought in a United States district court by the Federal Reserve E3ank of the district in which the institution is located.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Whenever it  • 41  5-  shall appear to the Board that an institution has willfully violated the provisions of this subsection regarding required reserves or reports with respect thereto, the Board, after having warned the institution to discontinue such violations, may report such facts to the Federal Deposit Insurance Corporation, the Federal Savings and Loan Insurance Corporation, the Administrator of the National Credit Union Administration, or any State authority that insures the institution's deposits, which shall immediately commence proceedings to terminate the status of the institution as an insured institution." (b) Section I9(f) of the Federal Reserve Act (12 U.S. C. 464) is amended by striking out "a member bank" and inserting "an institution." (c) Section 13 of the Federal Reserve Act is amended by adding at the end thereof the following new paragraph: "Each Federal Reserve Bank may make advances to any nonmember institution in its district that is subject to the provisions of section 19(k) regarding reserves, in accordance with regulations to be prescribed by the Board." (d) This section shall take effect on the first Thursday of the third month which begins after the date on which this Act is enacted.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  FINANCIAL IMPACT OF NOW ACCOUNTS  Introduction: Since January 1974, all depository institutions in the states of New Hampshire and Massachssetts have had the power to offer negotiable orders of withdrawal (NOW's) from savings accounts. These accounts have grown greatly in number and dollar volume since their introduction. The following table supports the conclusion that recent growth has taken place largely in NOW Accounts at commercial banks in Massachusetts and New Hampshire.*  Number of Institutions Offering NOW Accounts in Mass. and N.H. Commercial Banks Savings Banks  June 1974  35 133  June 1975  June 1976  115 168  158 181  $210,800 304,600  $635,800 462,400  Yonthly NOW Accounts Balances in Mass. and N.H. (millions of dollars) Commercial Banks Savings Banks  $13,839 164,859  .  A recent paper authored by John Paulus and' published in the Federal Reserve's "Staff Economic Studies" series studies the growth of NO....; accounts in 1974 and 1975. It comes to the conclusion that "these accounts are estimated to have reduced aggregate after-tax earnings -of commercial banks in the two states by about 2Li percent in 1974 and by more than twice that amount in 1975." Moreover, the study concludes that certain "marginal banks"** have experienced an even larger negative impact on earnings. Based on fragmentary data thus far in 1976, there appears to have been a further deterioration in earnings. When one couples this earnings decline with a dramatic increase in NOW accounts at commercial i.iuks, this earnings downturn may be worsened.  *The source of this data is the Federal Reserve Bank of Boston. g*"Marginal banks" are defined in the Paulus Fptudv as belonging "to at least one of the following categories: (1) 'high ratio' banks, defined as those banks having 10 percent or more of total deposits in NOT: accounts in June 1975; (2) 'run-off' banks, defined a*s those banks not offerini, ::07:'s in mid-1975 and experiencing significant losses in demand deposits between January 1974 and June 1975; and (3) 'low earnings' banks, defined as those banks offering NOW's in mid.-1975, with 1974 before tax earnings to total deposit ratios in the lowest 20 percentile in the two states. The 40 banks (selected by these criteria) tend to be relatively small -- the median bank having only $17.5 million.!n deposits -- and Include only one very large bank."   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  The Foulus study at to examine what hapins to commercial bank earnings and 71arket share in the transitional phase and in the steady state. The steady • state is defined as that period after which market shares have stabilized and commercial banks have made the desired service charge and interest rate adjustments. The transition phase takes place from the time the laws -are changed until the steady state is reached. Under this definition, Massachusetts and New Hampshire are still in the transition phase, both because of the continuing expected future changes in .NOW share held by commercial banks and expected future changes in service charges and interest rates (which will be discussed later) It is appropriate to evaluate the Paulus study since it is the first of the studies which will provide guidance to policymakers on the future of NOW accounts. We will review it in the context of three questions. First, is the analysis sound? Second, what has been the actual effect on bank earnings? Third, does this have applicability to other states? • 1.  Is the Paulus analysis sound?  The basic point to be dealt with is that the available data are weak. As a result, the study is forced to make strong assumptions which in turn lead to imprecise conclusions regarding the direct effect of NOW accounts c,n commercial 'bank market share. Examples of several assumptions will serve to amplify this point. (1) "Inactive" NOW accounts are assumed to be acquired from time deposits. Data do not exist on "active" and "inactive" balances, so the number of these accounts was used instead. An "active" account was arbitrarily defined as an account with at least one draft per month written. In other words, the dividing line between checking and savings accounts is one draft per month: (2) "Active" NOW accounts were assumed to be checking accounts since the levels of activity were "similar." "Similar" here means the similarity between 11 drafts per month for Massachusetts -New Hampshire NOW accounts vs. 14 drafts per month for New England checking accounts, i.e., a 27.3 percent difference, and over different geographical areas: Since large NOW accounts may well be used as savings as well as checking accounts, this assumption may be invalid. (3) The rest ofthe banking and economic variables are assumed unchnne,inp. However, because NOW accounts amount to only one third of demand deposits, what happens to the other two thirds is relevant. Moreover, at a time of great economic upheaval, what is happening in the real sector is relevant -- that is, the 1973 energy embargo and subsequently the extraordinarly severe and long 1974-1975 national recession. These and a number of other assumptions of this type made in the study may not reflect the real world situation closely enough. A final point is on the anequacy of dealing with consumers' reaction to the availability of one-step banking now available at savings banks. Now both commercial banks and thrifts offer one-stop banking convenience, and thrifts have a one quarter point rate advantage on time deposits. The ultimate loss of deposits to commercial banks could be much larger than the im7u!iate loss. The author dismisses this by pointing out that com.ercial hlnk market share of pessbook savings has actually gro-,:n during the NOW experiment. lie is, hcwever, careful to point out that lags in consumer response to the logical advantage of thrifts could make this turnaround in the future. Economi theory c would predict such a turnaround. The value of consumers' time has prevented mass flights toward the one quarter percent rate differential in the past. But if one postulates that all institutions are now equivalent except for the one quarter percent differential, in the long run logic dictates deposit flow to thrift institutions. In addition since it is not now known how much transfer   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  it may well be that the thrift market share or passbook savings has been depressed by this process. The author Ignored 'i)is possibility. A more logic al proce2ss than the one the study presents is (a) conversion of commercial bank demand deposits to NOW accounts at commercial banks fairly quickly, and (b) sig• nificant transfer of commercial bank NOW's to thrift NOW's much more slowly to get convenient access to the one quarter point rate edge on regular time deposits. Thus, we conclude that the analysis is based on far too many assumptions -some of them quite heroic -- which are not realistic reflections of the real world. While the author is careful to point these out in his compl ete text, the published summaries fail to do so. What concerns us is that the summary conclusions do not attempt to deal with this somewhat unreal reflection of the world, and this study may lack enough touch with reality that it should probably not be used for drawing policy conclusions. Again, more empirical work needs to be done, but only after additional time series have been collected to provide sufficient data for proper statistica l analysis. Moreover, given the large numbers of strong assumptions which must be made, it would be far better to select those assumptions which bankers view as more or less accurate!" deqerihing the realities or tne situa tion, Pernaps a questionnaire snoulu ue sent to a iarge sample 01 oanIcs to solicit their opinions on alternative assumptions which best reflect reality. In addition, such questionnaires could ask bankers for hypotheses of how NOW accounts are affecting their business. And some of these hypot heses could be tested in future research. 2.  What has been the actual effect on bank earnings?  Another conclusion of the study that we believe needs furth er research is the conclusion that a 2.5 percent drop in 1974 bank earnings was attributable to NOW accounts and an 8.8 percent drop in 1975. We must expre ss concern that this 8.8 percent figure is never calculated in the text. A vague "more than twice that amount," i.e., more than twice 2.5 percent, is all that is stated. Perhaps this could lead to misinterpretation by policymake rs and those who are attempting to critically assess the financial implications of NOW accounts on the banking system. Furthermore, our own analysis suppo rts the conclusion that the effects have been much greater. This conclusion can be supported from both general and specific arguments. The general problem is illustrated in the following table: Income Before Income Taxes But After Net Securities Gains or Losses Insured Commercial Banks - As of l'oce7:1'er 11 Mass. 1969 1970 1971 1972 1973 1974 1975 Data Source:   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  N.H.  U.S.  177.7 15.0 6,492.3 189.8 + 6.8% 19.0 +26.7% 7,024.1 + 8.27. 163.8 -13.7 17.1 -10.0 6,926.3 - 1.4 169.9 + 3.7 18.3 + 7.0 7,343.4 + 6.0 184.2 + 8.4 18.8 + 2.7 8,679.4 +18.2 170.3 - 2.2 19.8 + 5.3 9,163.7 + 5.6 110.7 -35.0 14.4 -27.3 9,013.8 - 1.6 Assets and Liabilities: Commercial andnutty)]. Savings Kinks . L December 3lj 1975, Federal Deposit Insurance corroratio n.  •  Throughout the period 1969-1974 Massachusetts ,eid New Hampshire commercial banks' income before taxes varied more or less in line with the country as a whole. • Thiegenerally consistent pattern was radicall - broken in 1975. We believe that much of this greater negative variance must be attributed to the NOW account expansion in commercial banks which occurred during 1975. Fragmentary data collected thus far in 1976 support the continuation of this disturbing trend. Analysis of data should include analysis by size of bank. This is especially important because we hypothesize that small banks may experience significantly different effects than large ban17.s. In the specific case of our holding company (First National Boston Corporation), we have observed changes in our small bank subsidiaries. Over the past year, there has developed an abrupt downward trend in the earnings performance at all three institutions. We believe that this can be attributed wholly to the increased expense of serving the NOW accounts with no increase in interest income to offset . the greatly increased interest expense. We are, so to speak, losing both ways. Not only by the increased interest expense, but also by the 16(,c of service charge rn,renue which, in years past, approximated one third of annual earnings. .0alat we have described here within our own holding company has important real world implications for large and small institutions throughout the state. 3.  Does this have applicability to other states?  There are additional concerns about the broader long run economic effects on the Massachusetts and New Hampshire economies. We do not purport to he able to answer these queries at this point. The answers, of course, in part depend on whether NOW accounts become a nationwide phenomena or are restricted to the New England region. it is clear that what happens at commercial banks and thrift institutions will obviously have some spillover effects on the economy. If after-tax earnings are down, in the long run somebody is going to have a harder time getting a loan. Thus it is conceivable that NOW accounts could be inducing some additional credit rationing. If we decide that NOW accounts are .a ."good thing" for the Massachusetts - New Hampshire economies, does this imply that they would he a good thing for the U.S. economy as a whole? This is an even more complicated issue than the previous one. If we offer, across the board, a new and essentially risk free, payable-on -demand consumer asset yielding an 8 percent*** return to the economy, it is difficult to predict the household portfolio shift that will occur. These shifts will then affect the overall economy in many complicated ways. If something as pervasive in the economy as checking accounts is changed, many unexpected things may happen as endless numbers of adjustment processes work themselves out. Thus, for quite some time there may not be a stationary state. Further Research to be IThne There is a need ::: --en ,-...,c_ ....zeL-c:F: -:- 77 7:::eFizn cf 7:7- e NOW experiv-.2nt is a7preprialc. These co7.77n:s :-.n :.11, - -2 i:.1.s sl- u:: 1.:lve i7::::cated SC7e Important directions for new research. They are summariz ed in this section. ***Eight percent equals three percent transactions costs plus five percent interest.  Mr'  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  t a.  4" (l) Data Collection The NOW account instrument is still very much in an experime ntal stage. Although studies are being undertaken. on the financial and bank ing impact of NOW accounts, it must be kept in mind that the data collecti on period has not been long enough to reach substantive empirical conclusi ons. Thus, we strongly believe that much more data collection -especially by bank size and analysis are needed before a judgment Is made on the desirability of extending the New England NOW experiment to other area s of the country. (2)  Realistic Assumptions  Results from a questionnaire to bankers shou ld constitute an important input determining the assumptions regarding NOW acco unts. Realistic assumptions are not only important to insure a good quality study, but are critical to the policies which will be determined in part by the results of the studies.  (3) •a  111  Study of Effects on Savings Banks  Studies should include an analysis of the savi ngs bank industry as well as the commercial bank industry. Changes in both of these types of institutions will have a major effect on the type and pric e of services that the public will receive. Thus, data collection on savi ngs banks becomes an important element in the evaluation of the NOW acco unt experiment. (4)  The General Economic Context  Future studies should, in addition to focu sing on the specific. considerations of banks' costs and revenues, also describe the general economic context in which the "experiment" takes place. For example, the earnings drop in Massachusetts and New Hampshire banks must be explained. If the researcher believes that NOW accounts do not expl ain the variations, then another explanation should be put forth and test ed. This broader economic context .should also include an attempt to desc ribe the applicability of the results to other states. (5)  Long Term Economic Effects  - itithough this is a difficult area to rese arch, it is, nonetheless, important. Tt 4 s our hypothesis that a trend appears to he developing as a resu lt of NOW moLs .thar may..cauFe smal],commen:*7' .hanks to merge, .affiliate, or go out of liusinc3s becausu Of their inabilit y to add to capital. In our opinion, this would be an unfortunate resu lt of public policy on NOW accounts. If current NOW policies are left unc haned, the long-range result could be a decline in the number of cc---17.7tir.:-, com ercia: banks i bin he ills markets in New En ,;lan:'.. Tf kis s, indeed, the ddrect resul f the continuation of the 1:0W account expe riment in Massachusetts and New Hamp shire and its extention to the other New Engl and states, then consideration of the potential long run effects are critical to reasonable policy decisions.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  S.  General Comments • IWAtn one attempts to make n much mor e general analysis of NOW acc ounts, it is apparent that both the timing and the spatial location of the experi ment in NOW accounts were poorly chosen. First, the initial effects of the experiment coincided with a major cyclical dow nturn in the national economy, and NnW accounts were introduced in a region of the country where the spe cial problems of economic maturity are not fully understood.' The Paulus study fails to address these •critical issues. We conclude that the timing of this experiment is particularly damaging for many small commercial banks becaus e their source of funds is the consumer, not money markets. Thus, the cost of fun ds to these institutions is relatively con stant. At this time, when ear nings on funds are low due to low interest rates, these banks are already experiencing . an earnings squeeze. Apparently, the additional cost pressures from the NOW ,accounts worsened the cyclical swings in bank earnings. 1 iThe transition period is of par ticular interest to those who are faced with the task of formulating national bank policies. The relative impact on isavings banks and commercial banks during this period is an important area of study. During the transitio n period, NOW accounts provide a larger jolt Ito commercial banks .than to saving s banks, because savings banks experience a marginal decline in interest cos ts and an approximately 3 per cent increase lin transaction costs. Commercia l banks, on the other hand, experience a 5 percent increase in costs of handling these accounts. And small commercial 'banks may not have an offset of lowered required reserves. During the transition period, charges on other services will be adjusted; for example, NOW account service charges and loa n interest rates may be increa sed. :rn fact, our r.onversations. with han kers in MassnohaQotts and New linmnshire indicate. . t nac sev _ eralLh _ewes e lor alL s ering e pric,es are PeinE, consiaerecLipr implementation in the near ter m future.. This ultimate adjustment woL.iuipiex (and thus probab ly take longer to resolve) for commercial banks than for savings ban ks. For savings banks, it wil l involve an adjustment mainly to mortgage rates, but commercial banks' ass ets are more diverse and many possible dif ferent price adjustments to man y different assets may have to be tried bef ore the steady state is reache d.  I  1  '11  a/   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Prepared in the Economics Department The First National Bank of Boston December 30, 1976   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  itee z c/e  e  e , t2  xie 49ff-/z/xw/7 "`-°--4_.  •  te  er°1--er-x-  ti? g  rM/7
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