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https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  DIDC 1981 July 21, 1981 - December 16, 1981  Collection: Paul A. Volcker Papers Call Number: MC279  Box 26  Preferred Citation: Depository Institutions Deregulation Committee, 1981 July 21-December 16; Paul A. Volcker Papers, Box 26; Public Policy Papers, Department of Rare Books and Special Collections, Princeton University Library Find it online: http://findingaids.princeton.edu/collections/MC279/c171 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) mudd@princeton.edu   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  CC:  President Ronald Reagan  CC:  Mr. William Pratt Federal Home Loan Bank Board  CC:  Mr. William O'Connell United States Savings and Loan League  CC:  Dr. Gerald "Jerry" Smith Louisiana Savings and Loan League Mr. Paul Volcker Federal Reserve Board  CC:  Mr. Jake Garn Committee on Banking, Housing and Urban Affairs  CC:  Honorable Russell Long U. S. Senator  CC:  Honorable J. Bennett Johnston U. S. Senator  CC:  Honorable Gillis Long U. S. Representative  CC:  Honorable W. J. "Billy" Tauzin U. S. Representative   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE Wzishington. I).C. '20220 COMPTROLLER OF THE CURRENCY FEDERAL RESERVE BOARD  FEDERAL HOME LOAN BANK BOARD DEPARTMENT OF THE TREASURY  FEDERAL DEPOSIT INSURANCE CORPORATION NATIONAL CREDIT UNION ADMINISTRATION  December 16, 1981  . Dear Mr. Trotter: Thank you for your second letter of November 23 about the I am sorry that we disagree situation of the thrift industry. about the needs of the industry and about the task that the Depository Institutions Deregulation Committee must perform. I regret that we do not have enough staff to answer letters in detail, but please rest assured that your views will continue to be given careful consideration. Sincerely,  .9-SvPriken 6,21Livro Gordon Eastburn Policy Director  Mr. John W. Trotter Iberia Savings and Loan Association Post Office Box 1000 70560 New Iberia, Louisiana   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  tri ,  • trOa '11  NW ,Lst  &é.70ArtItl  ,Or (.  1/114°4A  cot  • 6  NATIONAL ASSOCIATION OF MUTUAL SAVINGS BANKS Actions to be Considered by the DIDC at its December 16 Meetin g and NAMSB Positons DIDC Proposals Passbook Rate Increase The October 26 release of the Depository Instit Committee stated that..."a utions Deregulation lthough the Committee wil l consider this issue again at its December meeting, no decision has been made on whether fur action will be taken at ther that time." New Short Term Deposit Instruments The DIDC has requested comments on three possib le proposals for discussion at its December meetin g: 1. A $5,000 minimum den omination transaction acc ount with no interest ceiling. If balanc es fall below $5,000, the 5-1/4 per cent NOW account ceiling would app ly. 2. A $10,000 minimum den omination account with an initial maturity of 91 days and 14-day notice period thereafter, and an int tied to the 13-week Treasu erest rate ceiling ry bill discount rate. 3. A $25,000 minimum denomi nation account with no int erest rate ceiling, a minimum 1-day notice requirement, and no add itions or withdrawals. 3-1/2 Year "Wild Card" and Der egulation Schedule As part of new deregu lation schedule, the propos al would introduce a no-ceiling account with a min imum maturity of 3-1/2 years effective February 1, 1982. Progressively shorter-term "wild card" acc oun ts would be introduced in subsequent years until Februa ry 1, 1986, when all time acc free of rate ceilings. ounts would be Various nonrate features are also proposed for the 3-1/2 year "wild cards," includ ing a $250 minimum, negoti ability, revised premature withdrawal penalt ies, and other features. NAMSB Positions Overall Position on DIDC The DIDC is engaged in head-long deposit deregulation wit hout sufficient regard for the safety and soundness of the thrift industry. It is moving too fast at the wrong tim e -- at a time when thrift institutions are badly battered by the forces of rapid inflation and high int erest rates. As a result of the DIDC's actions, deposit deregulation is proceeding far more rapidly than asset deregulation at thrift institutions . The DIDC's   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  imbalanced and precipitous approach is, we believe, inconsistent with the intent of the Congress as reflected in the 1980 Deregulation Act. Prompt Congressional action is needed to restrain and restructure the DIDC. The need for such action is not lessened by the recent decline in interst rate levels. In an inflationary environment, wide fluctuations are to be expected and no one can say for sure when and how rapidly interst rates will resume their upward course. In any event, the temporary relief resulting from a relaxation of interest rate pressures -- as well as the benefits of the All Savers Certificate Program created by the Congress -will be more than offset by premature deregulatory actions if the DIDC is left unchecked. Specifically, we urge as a first step the adoption of a Congressional Resolution (S. J. Res. 129) directing the DIDC to defer further action increaing the cost of funds of depository institutions until the end of 1982, and to establish a deregulation framework conducive to che long-term viability of all depository institutions. We further urge that legislation be enacted to restructure the DIDC and ensure that it acts in a manner consistent with the safety and soundness of thrift institutions and in conformity with the intent of the Congress as set forth in the 1980 Deregulation Act. Such legislation would achieve the following objectives: 1. Restate the DIDC's legislative mandate to provide greater emphasis on assuring safety and soundness of depository institutions. 2. Restructure the DIDC by restricting its membership to the CLairmen of the FDIC, the FHLBB and Federal Reserve. These are the agencies di.cectly responsible for assuring the safety and soundness of institutions subject to DIDC regulation -- through the deposit insurance function and role as the lender of last resort. 3. Require unanimous agreement among the DIDC members in any deregulation action. 4. Require immediate restoration of the MMC differential for thrift institutions at all levels of interest rates. Such a program would directly address the major problems created by the DIDC's policies. It would provide needed safeguards against precipitous deposit deregulatin in the present climate. At the same time, it would provide the foundation for a strengthened thrift industry which can compete on even terms in deregulated markets in the future. Passbook Rate Increase An increase in the passbook rate ceiling would greatly increase deposit interest costs at thrift institutions, while having no appreciable effect on deposit flows. From the standpoint of the "small saver," an increase would be meaningless in view of the availability of numerous higherrate investment alternatives. Currently, passbook savings accounts total $50 billion or 30 per cent of total savings bank deposits.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  The dangers of raising the passbook rate ceiling were clearly stated  by Federal Reserve Board Chairman Volcker at the September 22 meeting when the DIDC initially voted in favor of a 50 basis point rise: "...In this case I do think our injunction to have due regard for the safety and soundness of the depository institutions is relevant and important. In this case all the analyses that I have suggest that there would be a very substantial earnings cost to the thrift institutions and to the commercial banks, for that matter...The impact on earnings in this case seems so severe in a situation in which the safety and soundness of these institutions would be jeopardized that I am forced to arrive at the conclusion that we ought to keep this on the agenda continuously, but not act today..." At least partial recognition of the dangers of a passbook rate increase was reflected in the October 19 reversal by the DIDC of the 50 basis point increase. In this regard, the DIDC stated that "...The Committee has determined that the likely benefits to depositors now appear to be outweighed by the probable adverse effects (in terms of increased costs) to the depository institutions" New Short-Term Instruments NAMSB is strongly opposed to proposals for new stiort-term deposit instruments. Such deposit instruments would be directly and closely competitive with passbook savings accounts. Their introduction would greatly accelerate shifts from lower-rate passbook savings deposits and thereby produce massive increases in deposit interest costs. To the extent that funds are attracted from other accounts, the maturity structure of savings bank deposits would be further shortened, and the "borrow-short, lend-long" imbalance would be further aggravated. At the same time, thrift institutions would probably lose funds to commercial banks, especially if the new accounts were offered on a "wild card" basis with no ceiling rates. Because of their large low-yield mortgage portfolios, thrift institutions simply cannot generate the earnings necessary to pay market rates on short-term deposit instruments in the current climate. Commercial banks would obviously be in a better position to compete for such deposits due to their shorter-term asset portfolios andd greater earnings flexibility. Thus, commercial banks would be the main beneficiaries of the proposal, while thrift institution earnings psoitions would be dealt another devastating blow. Because of large-scale shifts from passbook savings, the introduction of new short-term deposits would have effects broadly similar to an increase in passbook cengs. All of the arguments which favored reversal of the passbook rate decision apply with equal force to the proposed introduction of new short-term instruments. While strongly opposing the introduction of new short-term deposits under current conditions, NAMSB has recognized the need for flexibility in the short-term area. As we have repeatedly indicated to the DIDC, the preferable means is through broader use of nondeposit liability instruments -- such as consumer repurchasse agreements, participation cercates and mortgage-backed securities. Increased use of nondeposit liability instruments would provide savings banks with greater flexibility since individual institutions could vary rates, maturities and other terms in line  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  with local market conditions and the needs of the institutions. Deposit accounts, by contrast, are typically offered uniformly by all institutions in a given market area, regardless of the circumstances of the individual institution. As for the specific DIDC proposals, the $10,000, 91-day Treasurybill related account is merely an extension of the present 6-month CD. Similarly, the $25,000-minimum "wild card" represents little more than the current "jumbo" CD with a minimum denomination reduced from $100,000. It is doubtful that either of these instruments would enable thrift institutions to compete with money market funds (one of the objectives stated by the DIDC), even apart from their harmful earnings impact. The $5,000-minimum, no-ceiling,transaction account would stimulate particularly large-scale shifts from passbook savings. About 50 per cent of total passbook deposits at savings banks is held in balances of $10,000 or more. Furthermore, depending on the shape of the yield curve and the state of competition, rates paid on these transaction accounts could well be above those on all other types of savings and time accounts. This would be anomalous from the standpoint of depository institutions, as well as from the standpoint of monetary policy. With respect to the latter, Federal Reserve spokesmen have urged in the past that a rate spread be maintained between transaction accounts and savings accounts for monetary polfcy purposes. If the "super NOW account" were adopted, however, yields on transaction accounts might periodically be higher, and far higher, than those on all other types of accounts. 3-1/2 Year "Wild Card" and Deregulation Schedule There is nothing "new" about the 3-1/2 year "wild card" proposal. It is clearly designed to circumvent the statutory protection for the thrift istitution differential and the July 31 court decision voiding the earlier DIDC action which would have authorized 4-year "wild cards" effective August 1. That decision required the DIDC to abide by the statutory provision that a differential between thrift institutions and commercial banks on any category of account existing on December 10, 1975 cannot be reduced or eliminated without Congressional approval. By shifting from a 4-year to a 3-1/2 year maturity and adding incidental deposit provisions, the DIDC is attempting to create a "new" account. Apart from legal considerations, the current proposal is wholly undesirable on economic grounds and detrimental to the soundness of the thrift industry. Like its predecessors, the 3-1/2 year "wild card" proposal would enormously aggravate the already serious earnings problems of thrift institutions. Nor is there any reason to suppose that deposit flows of thrift institutions would benefit. Commercial banks would clearly have the advantage in the rate war likely to result from the elimination of ceilings on such accounts. The "wild card" proposal is particularly untimely in view of the other actions taken by the DIDC. Specifically, elimination of the 12 per cent "cap" on 30-month certificates provides market rates for savers in the intermediate-area, while avoiding the risk of a rate war among depository institutions. In view of this action, no further deregulation in the intermediate-term area is unwarranted at this time.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  TREASURY NEWS  Department of the Treasury • Washington, D.C.• Telephone 566-2041 FOR IMMEDIATE RELEASE Tuesday, December 15, 1981  CONTACT:  Robert Don Levine (202)566-2041  SECRETARY REGAN RECOMMENDS DELAY IN DIDC PROPOSALS  Secretary of the Treasury Donald T. Regan announced today that he will recommend, as Chairman of the Depository Institutions Deregulation Committee, that the Committee postpone consideration of three deregulation initiatives scheduled for consideration at its meeting Wednesday, December 16. Secretary Regan said that several key members of Congress have requested that the DIDC take no action with Congress adjournec: or about to adjourn. He said that in response to these 7equests, he will recommend that the DIDC postpone action OT all its present agenda items. This should give members of Congress and others more time to become familiar with the important items on the agenda.  The agenda items include consideration of: the plan for deregulation of interest rate ceilings on time deposits, short-term deposit instrument proposals, and the interest rate ceiling for savings deposits.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  ## #  U.S. HOUSE OF REPRESENTATIVES COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS MEMORANDUM 12/14/81  Chairman Volcker: In order to keep you informed at the same time as the Chairman of the DIDC, I am attaching a copy of a letter signed by 13 Members of the Committee to Secretary Regan as Chairman of the DIDC.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  incerely,  F rnand J. St )ermain, Chairman  A ALAND J. ST GERMAIN, R.I., CHAIRMAN P. HENRY S. REUSS, WIS. HENRY B. GONZALEZ, TEX. JOSEPH G. MINISH, NJ. FRANK ANNUNZIO, ILL PARREN J. MITCHELL MD. WALTER E.. FAUNTROY, D.C. STEPHEN L. NEAL, N.C. JERRY M. PATTERSON, CALIF. JAMES J. BLANCHARD, MICH. CARROLL HUBBARD. JR., KY. JOHN J. LAFALCE, N.Y. DAVID W. EVANS, IND. NORMAN E. D'AMOURS, N.H. STANLEY N. LUNDINE, MARY ROSE °AKAR. OHIO JIM MATTOX, TEX. BRUCE F. VENTO, MINN. DOUG BARNARD. JR., GA. ROBERT GARCIA. N.Y. MIKE LOWRY, WASH. CHARLES E. SCHUMER, N.Y. BARNEY FRANK. MASS. BILL. PATMAN. TEX. WILLIAM J. COYNE PA. STENY 14. HOVER, MD.  N.Y.  U.S. HOUSE OF REPRESENTATIVES COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS NINETY-SEVENTH CONGRESS 2129 RAYBURN HOUSE OFFICE BUILDING  WASHINGTON, D.C. 20515  December 11, 1981  J. WILLIAM STANTON. OHIO CHALMERS P. WYLIE, OHIO STEWART B. MCKINNEY, CONN. GEORGE HANSEN, IDAHO JIM LEACH, IOWA THOMAS B. EVANS, JR., DEL RON PAUL, TEX. ED BETHUNE, ARK. NORMAN D. SHUMWAY, CALIF. STAN PARRIS, VA. ED WEBER. OHIO BILL MCCOLLUM, FLA. GREGORY W. CARMAN, N.Y. GEORGE C. WORTLEY, N.Y. MARGE ROUKEMA, NJ. BILL LOWERY, CALIF. JAMES K. COYNE, PA. DOUGLAS K. BEREUTER, NEBR. DAVID DREIER, CALIF. 225..47.47  Honorable Donald T. Regan Chairman, Depository Institutions Deregulation Committee 15and Pennsylvania Avenue, NW Washington, D.C. 20220 Dear Mr. Chairman: We understand the Depository Institutions Dereglilation Committee will meet on Wednesday, December 16, 1981, to consider, among other things, several matters including the issuance of several new accounts and possibly consideration of an increase in the passbook ceiling rate offered by depository institutions. Public Law 96-221 creating the DIDC states in part, "...The Deregulation Committee shall work toward providing all depositors with a market rate of return on their savings with due regard for the safety and soundness of depository institutions." Given the unfortunate plight of the thrift industry at this time, the undersigned feel it would not be propitious economically to issue new accounts at this time. Positive action on the items on your agenda for December 16, 1981, could substantially increase the cost of funds to financial institutions and to their borrowing customers.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Sincerely,  me Amor  MIK 6.,  Page Two December 11, 1981 Honorable Donald T. Regan   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE Washington, D.C. 20220  November 20, 1981  PRESS RELEASE ,  Press Contact:  Robert Don Levine 202/566-2041  DIDC Announces Decisions on new IRA/Keogh Account  The Depository Institutions Deregulation Committee announced today that it has voted to retain the new IRA/Keogh It has a account that it adopted at its September 22 meeting. rate interest regulated no minimum maturity of 1-1/2 years and not to decided has In addition, however, the Committee ceiling. of transfer the for permit waiver of early withdrawal penalties instrudeposit existing IRA/Keogh accounts to the new IRA/Keogh ment. In taking this action, the Committee indicated that certain member agencies will carefully monitor the rates offered on IRA/ These regulatory agencies are particularly concerned Keogh accounts. that competition for IRA/Keogh accounts not endanger the safety and soundness of individual depository institutions and will take appropriate actions if necessary. These decisions were made through a written ballot vote of the Committee in response to a request by Federal Home Loan Bank Board Chairman Richard T. Pratt that the Committee place a ceiling, indexed Mr. Pratt to the yield on Treasury securities, on the new account. withdrawal early the requiring to consider DIDC the also had requested account the new to institution the within transfers penalties for from existing IRA/Keogh accounts prior to their maturity. The DIDC vote reaffirms that the new IRA/Keogh account category will have (1) a maturity of 1-1/2 years or more, (2) no interest rate restrictions, (3) no federally required minimum denomination, (4) the normal early withdrawal penalty of six months interest, and (5) at the option of the institutions, additions may be permitted without extending the original maturity of the deposit. Although elimination of the penalty free conversion option may deny some current IRA/Keogh account holders a higher return on funds previously invested until those deposits mature, this action will not inhibit the main objectives of the new IRA/Keogh account -- namely, that of encouraging savings and allowing depository institutions to compete more effectively for the new retirement savings forthcoming January 1, 1982.  COMPTROLLER OF THE CURRENCY FEDERAL RESERVE BOARD   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  FEDERAL DEPOSIT INSURANCE CORPORATION NATIONAL CREDIT UNION ADMINISTRATION  FEDERAL HOME LOAN BANK BOARD DEPARTMENT OF THE TREASURN  •  4k  DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE Washington. D.C. 20220 FEDERAL HOME LOAN BANK BOARD DEPARTMENT OF THE TREASURY  FEDERAL DEPOSIT INSURANCE CORPORATION NATIONAL CREDIT UNION ADMINISTRATION  COMPTROLLER OF THE CURRENCY FEDERAL RESERVE BOARD  November 19, 1981  TO  : Depository Institutions Deregulation Committee  FROM  : Steven L. Skancke Executive Secretary  SUBJECT: IRA/Keogh Accounts  / 2At the September 22 meeting, the Committee elected to authorize a 11 ceilingless  year  permission  to  IRA/Keogh  waive  Also,  deposit.  penalties  for  premature  / 2-year deposits. IRA/Keogh accounts to the new 11 discusses  two  proposed  revisions  for  which  institutions transfers  were  from  given  existing  The attached staff memo your  notational  vote  is  requested. 1.  It is proposed that the permission for waiver of early withdrawal penalties for conversions of existing IRA/Keogh Accounts to the new / 1 2-year account be rescinded.  cia.P OeilurL--  Approve the proposed action Do not approve  2.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  / 2-year account be eliminated It is proposed that the ceilingless 11 / 2-year account with a ceiling indexed at 50 and replaced by a 11 / 2-year Treasury basis points (plus compounding) over the 11 Compounding will be permitted and constant maturity yield. institutions may offer fixed-rate or floating rate certificates within the confines of that ceiling. Approve the proposed action  Ate  Do not approve  DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE ashington. D.C. 20220 FEDERAL HOME LOAN BANK BOARD DEPARTMENT OF THE TREASURY  FEDERAL DEPOSIT INSURANCE CORPORATION NATIONAL CREDIT UNION ADMINISTRATION  COMPTROLLER OF THE CURRENCY FEDERAL RESERVE BOARD  November 19, 1981  TO  : Depository Institutions Deregulation Committee  FROM  : DIDC Staff  SUBJECT: IRA/Keogh Accounts  ACTION REQUESTED The  Committee  amendment of  is  actions  requested taken at  to  the  consider September  two 22  proposals  meeting.  for  the  These  two  1) rescind the authority given to institutions to waive the  proposals are:  normally mandatory early withdrawal penalties for conversions of existing IRA/Keogh  deposits  to  the  new  2-year and / 11  over ceilingless IRA/Keogh  2/ deposit at the same institution ; and 2) revoke the authority for the 11 year and over ceilingless account scheduled for implementation on December 2-year and over account with a / 1; replace that ceilingless account with a 11 2-year Treasury constant / ceiling indexed at 50 basis points over the 11 maturity yield (plus compounding) for both thrifts and commercial banks. The  rate  on  a  given certificate could  be fixed  for  the life of the  certificate or institutions could offer floating rate certificates, but periodic rate adjustments could not raise the yield above the then existing  This memorandum was prepared primarily by the Federal Home Loan Bank Board staff (Mr. Hartzog).   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -2-  rate ceiling for newly issued certificates; the ceiling would change biweekly along with SSC  Periodic additions would be  yields.  permitted  six months interest  without extending the maturity of the account. The  early withdrawal penalty adopted for the ceilingless IRA/Keogh deposit would apply along with the current penalty exemption for savers 591 / 2 years this staff analysis requests a  or older. The cover memo accompanying notational vote on these proposals.  BACKGROUND At  the  September  22  the  meeting,  Committee  be  unrestricted  what  to  as  yields  may  be  paid  new  Institutions  ceilingless deposit for qualified IRA and Keogh accounts. would  a  authorized  to  the  saver.  Additions to these accounts could be made without extending the maturity of the deposit; early withdrawals would be subject to the loss of six-months simple interest that is applicable to all deposits with a maturity of greater than one year. However, the standard certificates  bearing  a  floating  rate.  penalty was modified for  Additionally,  the  Committee  authorized institutions to waive, at their discretion, early withdrawal penalties where the holder of an existing IRA or Keogh deposit elects to convert that deposit prior to its maturity to a new 1%-year IRA/Keogh deposit at the same institution. There were a variety of considerations involved in the creation of the new deposit. IRAs  and  First, the Congress has granted universal eligibility for  thus  substantially. competitiveness   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  potential  the The of  new  flow  of  ceilingless  depository  IRA  deposits  account  institutions  vis  has  expanded  would  enhance  a  open  vis  the  market  -3-  Second, depository institutions, both thrifts  investment alternatives. and commercial banks, had  requested  regulatory  changes to accommodate  savers who wished to make periodic additions to their IRA rather than a lump sum contribution each year. Third, some members of the Committee felt that a deregulated IRA, because of limited aggregate volume of IRA funds, would provide a useful experiment in deregulation and would facilitate institution adjustment to product pricing without government guidelines.  DISCUSSION Indexed  IRA/Keogh Deposit. Subsequent to the Committee's actions,  there has been growing concern among some depository institutions as to the - impact of these actions on institutions profitability, particularly thrift profitability.  These concerns focus primarily around the potential for  "price wars", or market-share pricing, if selected depository institutions seek to enlarge their market share by offering above-market yields. argued  that these high  profitability  not  only  It is  yields, while benefitting savers, would damage because  of  possible  negative  lending  spreads  endured on new deposits in order to capture that larger market share, but also the internal transfer of existing low-cost IRA/Keogh deposits to the 2-year IRA/Keogh deposits, if early withdrawal penalties / new higher yield 11 are waived.  Furthermore, loss of IRA/Keogh market share may erode an  institution's customer base for other financial services. Institutions expressing those concerns point to the recent experience of institutions offering extremely high yields on repurchase agreements intended to attract All Savers Certificate deposits. institutions indicate   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Those concerned  that the same type of market-share pricing will  -4-  / 2-year deposit and that thrift institutions, because of recur with the new 11 their poor profitability, will be precluded from competing effectively for those deposits. The staff believes that while there may be potential for market-share pricing, the recent experience with repos and ASCs is not indicative of such behavior.  The yields on ASCs are substantially below market yields  from the perspective of the institutions; competitive pressures, in the absence of restrictive regulations, will quite likely lead to direct or indirect price competition to raise those yields towards market levels.  In  the cases reviewed by the staff, the combined costs of high-yield repos (25 to 50% for one month) and below-market ASCs did not exceed market yields-defined as the one-year Treasury yield. Additionally, the pricing behavior of institutions during the 1973 wild card (4-year certificate) experiment and the period in 1981 preceding the  scheduled  4-year ceilingless  account offers evidence  possibility of market-share pricing. share  pricing  except  in  isolated  against  the  Neither episode resulted in marketinstances.  However, such evidence,  / 2-year though somewhat indicative, may be of limited applicability to the 11 IRA/Keogh deposit because of the significantly longer maturities of these two four-year deposits, the 5%-of-deposit limitation on wild-card issuance in 1973, and the fact that 1981 pricing patterns are observable only for the period before the scheduled introduction of that ceilingless account. There is no definitive empirical evidence pricing will occur. which  institutions  conclusive.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  However, were  that such market-share  because the limited periods of time during  exempt  from  ceilings,  this  evidence  is  not  The possibility of market-share pricing does exist; market-  -5-  share pricing is not uncommon in non-financial consumer markets.  One  proposal for countering this potential phenomenon is to impose a rate / 2-year ceiling which is indexed at 50 basis points over the Treasury 11 constant maturity  yield.  Because  effective ceilings on  the proposed  account would significantly exceed Treasury effective yields (by about 100 basis points at current interest rate levels), depository institutions would have flexibility to compete with open market investments on a price basis. Although this indexed IRA/Keogh account would have the advantage of eliminating  the  institutions,  it  potential does  ceilingless account.  have  for  market-share  several  pricing  disadvantages  among  depository  when compared  to  a*  First, institutions would lose flexibility in terms  of designing accounts to meet the needs of their customers and competing effectively with nondepository institutions. would  be able  Nondepository institutions  to offer a wide variety of alternative plans to  their  customers. Second, given that there is no mechanism built into this deposit whereby the institution can pay a premium for longer-term deposits, this / 2-year new indexed IRA/Keogh account would likely be offered only as a 11 account when the yield curve is positively sloped.  Therefore, in order to  attract long-term IRA/Keogh deposits, those funds would have to be placed in an SSC (additions without maturity extensions are not permitted) or the 1 2-year ceilingless account, if adopted. proposed 3/  On the other hand, when  the yield curve is negatively sloped, institutions could pay higher yields than on accounts indexed to longer term Treasury yields.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -6-  Third, it is not clear that this indexed IRA/Keogh account would be less expensive than a ceilingless alternative.  It may be the case that a  majority of depository institutions will treat the ceiling on this account as a floor and will continually pay the maximum rate permissible.  It is  2-year constant maturity Treasury yield plus 50 basis / possible that the 11 points may exceed, over the long run, rates that depository institutions would otherwise have paid on a ceilingless account.  Arguing against this  possibility is the recent behavior of a significant proportion (25-40%) of depository  institutions  paying  less  than  the ceiling on Small Savers  Certificates. Fourth, a  ceilingless  account, as originally  IRA/Keogh  intended,  would provide additional evidence on the pricing behavior of institutions in  the  absence  of rate  ceilings.  Such  evidence  would  be useful in  2-year ceilingless deposit proposed 1 assessing the likely effects of the 3/ for implementation on February 1, 1982. Penalty-Free IRA/Keogh Conversions.  A second proposal is revoke the  authority of institutions to waive early withdrawal penalties if the saver elects to prematurely transfer an existing IRA/Keogh deposit to the new ceilingless account at the same institution.  This proposal may be adopted  either in conjunction with the proposed indexed account, or separately. Allowing conversions of existing IRA/Keogh accounts into a newlycreated  IRA/Keogh  account  would  be  beneficial  in  two  ways.  First,  conversion would allow depositors to boost the return on their IRA/Keogh funds.  Money which is currently housed in the three-year and over special  IRA/Keogh time deposit (earning eight percent), Small Saver Certificates (many of which are earning 12 percent or less), and other lower yielding   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -7-  institution, into an time deposits could shift, at the discretion of the account which would likely pay more than 12 percent.1  Second, institutions  ual IRA/Keogh would be able to consolidate the accounts of each individ depositor into their  house  certificates.  one time certificate. retirement  in  funds  Currently a  some IRA/Keogh depositors  multitude  of  different  time  Consolidation of these certificates may serve to benefit  both depository institutions and their customers. effects on However, widespread conversions have significant adverse institution  Over  costs.  55%  of  IRA/Keogh  deposits  depository  at  this category institutions currently yield 8% or less; thrifts have 61% in while commercial banks have 44%.  If these accounts were converted without  costs would rise penalty to new IRA/Keogh deposits yielding 11%, deposits by $160 million commercial banks.  at S&Ls, $57  million  at  MSBs, and  at  million  If a 13% IRA/Keogh deposit yield is assumed, those cost  4'5-1/43  MSBs, and $192 impacts would be $256 million at S&Ls, $90 million at those existing million at commercial banks. These cost impacts assume that 2 years. / IRA/Keogh deposits would mature evenly over the next 11 will deny Whereas elimination of the penalty-free conversion option funds which were some current IRA/Keogh account holders a market return on objectives to be previously invested, such action will not inhibit the main account--namely, accomplished by the introduction of the new IRA/Keoghthat  of  compete  encouraging effectively  savings for  the  and new  allowing  depository  retirement  savings  institutions  to  will  be  which  forthcoming after the first of the new year.  1Current rates for U. S. is 12.0% percent.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  2 / Treasury securities with a maturity of 11  years  -8-  However, the new 11 / 2 year deposit may help to offset the cost of penalty-free conversions.  If it is assumed that institutions can reinvest  new funds at a 200 basis point spread, all depository institutions would fig have to attract -$r21 billion of new money to break-even with IRA/Keogh deposits yielding 11% and $.31 billion to break even with IRA/Keogh deposits yielding 13%. In contrast, the staff projects that total new IRA funds attracted by depository institutions will be $8 to 11 billion.  These  calculations assume that historical IRA participation rates, measured in a 1977 survey, are indicative of future participation rates.  However, more  aggressive marketing by institutions as well as the ability to offer the / 2-year deposit may increase new 11  the participation rate and make  the  attraction of break-even flows more likely. The Committee may amend its final rule by adopting either or both of the two proposals without additional public comment and without a delayed effective date.  The Committee does not need to seek public comment on  these two proposals because it has already requested comment on indexing the IRA/Keogh account and on conversions from existing IRA/Keogh accounts.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  1  AMERICAN BANKERS ASSOCIATION  1120 Connecticut Avenue. N.W. Washington. D.C. 20036  EXECUTIVE DIRECTOR GOVERNMENT RELATIONS Gerald M.Lowrie 202/467-4097  November 18, 1981  Mr. Steven L. Skancke Executive Secretary Depository Institutions Deregulation Committee Department of the Treasury 15th Street and Pennsylvania Ave., N.W. Washington, D.C. 20220  Re:  Docket Nos. D-0022 D-0023  Dear vr. Skancke: In response to the notices of proposed rulemaking published in the October 6 and October 15, 1981 Federal Registers, the American Bankers Associaton is submitting these comments on the Depository Institutions Deregulation Committee's proposed schedule for phasing out interest rate ceilings on time deposits under $100,000 and on its proposed short-term time deposit instruments. Our Association is comprised of more than 13,200 full service banks, over 92% of the nation's banking community. At the outset, however, our Association wishes to reaffirm its support, in the strongest terms, for the deregulation of individual retirement accounts and Keogh accounts scheduled for December 1. Our Banking Leadership Conference has carefully reviewed the actions over recent months of the Depository Institutions Deregulation Committee. Without this action, banks and savings and loan associations would be hobbled in their attempts to compete with insurance companies, brokerage firms, and other uninsured financial institutions for this expanding market. We cannot stress enough the need for the Deregulation Committee to maintain its commitment to the process of deregulation and to the significant first step that removal of interest rate ceilings on IRAs and Keogh Accounts represents. Our Banking Leadership Conference has strongly reaffirmed its convictions that interest rate deregulation of IRAs and Keoghs as approved by the Committee is essential at this time.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •w  AMERICAN BANKERS AcSOCIATION  CONTINU1NIG OUR LETTER OF  G02590 H-18-81 SHEET NO.  2  We have also reviewed the proposal by the Ca-nittee to establish new short-term deposit instruments. Our Association has been on record since May of this year as endorsing the need for more lie,uid deposit instruments to compete with money market mutual funds. While the Deregulation Committee has failed to act on this request, money market funds have been growing at the rate of almost S3 billion per week. We oripally supported the creation of the new 30- and 91-day instruments indexed to comparable Treasury bill rates with a minimum denomination no greater than $5,000. A strong consensus of the members of our BeYikng Leadership Conference, however, now believes that these instruments, while helpful and vast improvements over what is presently available, are still not sufficient to the continually changing competitive needs of depaitory institutions. They believe that the proposed interest-bearing tranction account with a $5,000 minimum deposit would best allow them to compete with money market mutual funds. Effective competition requires that this account have no ceiling rate of interest when the minimum balance is maintained (and the rate ceiling in effect on WV accounts below the minInum) and that a method be provided, whether through limiting the number of transactions or otherwise, so that the account could he offered free of reserve requirements. This new instrument would have the virtues of being operationally simple, understandable to both bankers and their customers, and competitive with most offerings of money market mutual funds. Should the Deregulation Committee feel itself unable to approve this account, our Association would reaffirm its support, as a minimum response, for the creation of new 30- and 91-day instruments with minimum denominations no greater than $5,000 and ceiling rates indexed to rates on Treasury instruoents of comparable maturity. The Leadership Conference also supports the proposed 1-day notice, $25,000 minimum denomination certificate of deposit with no interest rate ceiling. Many bankers feel that this instrument will provide for bank customers an account comparable to existing repurchase agreements without the paperwork burden and investment constraints incumbent on repos. By providing competitive tools to counter the instruments that may be offered by other financial intermediaries, banks and thrift institutions will be better able to attract and retain deposit dollars. And because these instruments will be available in somewhat higher denominations than average passbook deposits, they will not accelerate the runoff of passbook money into higher yielding accounts. Of course, we would oppose any Interest rate differential being attached to any new instrument created. The imposition of a differential would be a slap in the face to those thousands of commercial banks whose commitment to housing finance has matched or exceeded that of the savings and loan industry. We also might recognize that there has been some concern that the proposed short-term, market-rate deposits could drain funds from savings and   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  AMERICAN BANKERS ASSOCIATION  CONTINUING OUR LETTiR Of  G02596 11-18-81 SHEET NO.  3 low-cmst time deposits, thus increasing the average cost of funds at depository institutions. No douht, some depositors will shift their funds from low-cost deposits into these proposed higher yielding deposits. However, in the ahsence of a competitive, short-term deposit instrument, these depositors are likely to withdraw their funds to purchase sone non-deposit instrument paying a market interest rate. The depository institution affected would then be required to borrow or sell large CD's at an interest rate above the rate on the proposed certificates. Thus, we teliew? these proposed deposits will result in an improved outlook for earnings at depository institutions. Opponents of these proposed deposits point to the decline in earnings at thrift institutions since the introduction of the 6-month money market -:ertifirate in support of their position. However, we believe that the decline in earrings would have been ruch greater without the 6-month money market nertifirate. There would have been a huge shift of funds from depository institutions to money market alternatives that would have had to he replacerl with borrowings or large CD's at rates higher than the money market certificate. It should he clear by now that depository institutions cannot hP protected from high interest rates by interest rate ceilings. To delay authorization of a short-term, narket-rate deposit will only lead to a further shift of funds from depocitory institutions where they are used to serve tbe local community to non-depository institutions that are subject to almost none of thP regilatory constraints designed to protect the safety and sounlness of our financial system. ror a varicty of reasons, some depositors are very slow to respond to the higher irterest rates that can be earned by shifting funds out of savings anr1 low-cost time deposits. In fact, the residue of funds left in such instruments are probably less interest-sensitive than those funds that have alre,ady shifted. mhe proposed short-term, market-rate instrument would require the depositor to take some explicit action to shift funds from savings and low-cost time deposits. Thus, depositor inertia will ensure that funds that are unlikely to be shifted to a money market alternative are also less likely to be transferred to the proposed new deposit. We also believe that a short-term, market-rate instrument is more important for the thrift institutions than for commercial banks, in spite of the industry'c short-sighted views on this issue. Because the interest rate differential has concentrated more interest-sensitive consumer deposits in the thrift institutions, they are subject to a greater threat of loss of funds to non-depository institutions paying market rates. They also have more to gain from offering a competitive, short-term instrument. This can be observed in the marketplace. The retail repurchase agreement is the shortest instrument offered by depository institutions at a market rate. While the evidence is fragmentary, thrift institutions appear to have entered this market more quickly and aggressively than commercial banks. As of the end of September 1981, it is estimated that thrifts had $9.5 billion of retail repurchase agreements outstanding while commercial banks had only $4.7 billion.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  AMERICAN BANKERS ASSOCIATION  CONTINUING OUR LETTER OF  CO2596 11-18-81 SHEET NO.  4  The Committee also requested comment on several specific aspects concerning short-term instruments: a)  Minimum denomination needs to be balanced against other characteristics of any short-term instrument ultimately created. As we have described desirable cleposit products ahwe, a $5,000 minimum would seem appropriate fr-A- the transaction-type account proposed whereas a $25,000 minimun se, ns more appropriate for the one-day notice account proposed.  h)  Our ssociation's strong preference is for ceilingless accounts. The additilnal flexi'Dility gained by ceiling elimination provides depo7itory institutions opportunities to target their deposit products not available with any type of ceilinged account. In addition, we believe it very important to note that the lack of an interest rate ceiling may actually result in lower deposit costs to depositories than the iple.5:inj of ceilings on new short-term instruments to a market interest rate. This is so because, for many years, savings and loan associations and some hanks have treated all interest rate ceilings as effectively established rates, and have consistently priced their deposit products at those rates. By forcing such institutions to choose the rates at which they will price their accounts, interest rate costs may be less than with manipulated rates.  c)  Clearly, any thrift-connercial hank interest rate differential would be insulting to those commercial banks whose support for the residential mortgage Parket has grown steadily in recent years. It would also be discriminatory against bank deposit customers, and would represent failure on the part of the Deregulation Committee to recognize the fact that the competition for depositors' funds is coning increasingly from money market mutual funds and other non-regulated financial intermediaries upon whom no interest rate ceilings can be imposed.  d)  It is our Association's view that, to the the maximum extent feasible, Institutions should be left free to design their own deposit products. We believe that any short-term maturity that permits banks and specialized thrift institutions to avoid reserves on their individual depositors' accounts will be acceptable.  e)  Again, we believe that institutions should be given the maximum feasible independence to determine the type of transaction account they wish to offer. Institutions should be free to hold transaction account-level required reserves if they offer accounts upon which third-party payment items may freely be drawn, or avoid reserves by limiting the transactional features of any account they decide to offer. We think it most important that DIDC provide to banks and specialized thrift institutions the ability to avoid reserve requirements on these short-term deposit accounts in order that they may be directly competitive with money market mutual funds, none of whose accounts are reservable.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  AMERICAN BANKERS ASSOCIATION  CONTINUING OUR LETTER Of  00  9G  11-18-81 SHEET NO.  5  f)  It is our Association's view that, whereas any transaction-type account created may need to be limited to individuals or not-for-profit organizations, because of the continuing prohibition on the payment of interest on demand deposits and the statutory limitations of the Consumer Checking Account Equity Act of 1980, Title III of P.L. 96-221, any further limitation on eligiblity would simply lead to additional fund diversion to non-bank financial intermediaries who suffer no such limitations.  g)  We have described above the $5,000 minimum, ceilingless transaction account that would be our preference as well as the one-day notice account with a $25,000 minimum. We would support 30-day and 91-day, $5,000 CD's if the $5,000 transaction account is not adopted.  h)  Our Association strongly believes that competitive, short-term instruments are absolutely vital at this time if insured depositories are to have any method of preserving their market share in the face of increasing competition from non-Federally insured financial interme'iaries. Over $175 billion in money market fund investments will remain beyond the competitive reach of banks and savings and loans so long as these institutions have no effective short-term instruments with which to attract these deposits. As we have detailed above, these new instruments will not have a significant adverse effect on depository earnings because passbook or lower-earning time deposits may not be expected to flow into these accounts in large volume. In addition, the long-run earnings impact of more competitive short-term instruments will be highly favorable because the greater ability to attract and retain short-term deposits these instruments will provide should enhance the opportunities for asset diversification and more positive spread over time.  i)  Our Association would oppose any changes in the 6-month money market certificate of deposit at the present time. So many institutions have found so high a percentage of their liabilities moving into 6-month CD's that the potential costs of tampering with this form of deposit could he enormous. In addition, the many hours of advertising time and tremendous educational expense banks have incurred in teaching their customers about this product would recur if any significant changes were made in the money market certificate's features.  In summary, of the three short-term deposit instruments proposed by the Deregulation Committee, the American Bankers Association would most strongly support the $5,000 minimum, no ceiling rate of interest transaction-type account. We must stress the need for DIDC to provide those banks that so desire the opportunity to avoid transaction-account reserve requirements on such instruments by limiting the transaction features of the account. And we would note that, if the Committee cannot agree to authorize this account, we would reaffirm our continued support for new 30-day and 91-day certificates of deposit with $5,000 minimum denominations and ceiling rates   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  AMERICAN BANKERS ASSOCIATION  CONTINUING OUR LETTER OF  11-18-81 SHEET NO.  6  of interest indexed to comparable Treasury instruments. We believe that the Deregulation Committee should also authorize its proposed one-day notice, $25,000 minimum certificate of deposit with no regulated ceiling rate of interest. Our Association's views on the long-term deregulation schedule proposed by the Committee have also been expressed in previous communications. With more than one and a half years having elapsed since passage of legislation requiring deposit ceiling deregulation, the Deregulation Committee should proceed as quickly as possible to establish a firm schedule for deregulation. Although we favor a schedule that begins with deregulating accounts with maturities of no more than three years, we strongly support the schedule proposed by the Committee as far preferable to the existing uncertain deregulation environment. The proposed schedule will provide depository institutions with the ability to plan for ultimately ceilingless deposit accounts. By beginning with longer-term deposits, it will also permit managers to better control asset-liability risk and to attract longer-tern deposits most appropriate for longer-term lending. We therefore support the loncer-term deregulation schedule as proposed.  We should also note our preference for elimination of deposit rate ceilings or longer maturity instruments over establishing indexed ceiling rates on those maturities for the following reasons: 1.  The complete elimination of rate ceilings allows individual depository institutions to make their own pricing decisions rather than following government guidelines. Such freedom is essential to generate true competition for the consumer savings dollar. True competition is impossible under any government imposed price-fixing scheme -- floating or fixed.  2.  Elimination of deposit rate ceilings allows individual banks reacting to the market rather than the product designers in the regulatory agencies to shape ideal depository instruments. We believe this is important to the long run efficiency of financial institutions. Individual financial institutions, not the regulatory agencies, know what kinds of instruments will be most useful in their own markets.  3.  Eliminating ceilings beginning with longer maturity liabilities will help institutions with long term assets better match their assets and liabilities and thus avoid mistakes that are today costing these Institutions so dearly. Any institution that wishes to make medium and long term loans can do so with much less interest rate risk by using a 3 1/2-year maturity instrument than by using a 6-month instrument.  4.  Eliminating deposit interest rate ceilings also eliminates once and forever the discriminatory practice of imposing an interest rate differential between different types of depository institutions.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  AMERICAN BANKERS ASSOCIATION  CONTINUING OUR LETTER Of  11-18-81 SHUTNa  7  Imposing such a differential on a market rate instrument is an unjustifiable anticompetitive precedent because it would prevent competition between different types of depository institutions. A differential makes absolutely no sense. Commercial banks and other types of financial institutions are important sources of funds for housing finance. The importance of these non-thrift institutions will become even greater as the thrift institutions take advantage of the broader range of asset powers acquired last year. 5.  Elimination of the ceilings also facilitates long run planning. It allows depository institutions to plan long range marketing programs without the uncertainty of when they will be able to offer a market rate instrument. This in turn allows better financial planning.  Advocates of market oriented interest rate ceilings are concerned about the posc:ibility of ruinous competition in the absence of such ceilings. It is alleged that many banks failed during the 1930's as a result of paying an excessive rate of interest on time and savings deposits. Detailed studies of that period fail to find any connection between banks paying high rates of interest on time and savings deposits and bank failures. (See Footnote 1) Moreover, since the imposition of deposit interest rate ceilings, we have had at least two tests of depository institutions behavior in the effective absence of such ceilings. In neither instance is there any evidence of ruinous competition occurring. The first such test covered much of the period between 1933 and the mid 1950's. During that period, deposit interest rate ceilings generally were not binding. Yet there is no evidence that hanks paid excessive interest rates. The second such test occurred in July of 1973 when regulatory agencies authorized depository institutions to offer certificates with maturities of 4 years or more in denominations of at least $1,000 without any rate ceilings. The experiment was short lived; in October of the same year, Congress required the regulatory agencies to reimpose rate ceilings on these deposits. This period is frequently cited as an example of the chaos that would result if deposit rate ceilings were removed. It is said that banks  1)  See, for example, Albert Cox, Regulation of Interest Rates on Bank Deposits, Michigan Business Studies, Vol. XVII, No.4, and George Benston, "Interest Payments on Demand Deposits and Bank Investment Behavior, Journal of Political Economy, October 1964.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  AMERICAN BANKERS ASSOCIATION  CONTINUING OUR LETTER Of  C0259G 11-18-81 8 SHEET NO.  paid inordinate rates for these deposits and thus attracted a large volume of funds from thrift institutions. The available data provide absolutely no support for this interpretation. (See Footnote 2) Banks paid rates comparable to those paid by the thrifts. In spite of the ability to offer these deposits without ceilings, the evidence suggests that both banks and thrifts lost funds to non-depository alternatives that were paying market rates -- in this case, Treasury bills, as evidenced by the dramatic increase in the volume of non-competitive bids. As with the money market certificates, these CD's without rate ceilings probably resulted in a lower volume of funds being siphoned from the depository institutions than would have occurred in their absence. Thus, our Association is strongly supportive of the Committee's proposed 3 1/2-year, deregulated deposit instrument, and its scheduled longer-term deregulation program. It is our view that this instrument and the accompanying schedule complies in all respects with the Depository Institutions Deregulation Act of 1980 (Title II of P.L. 96-221) and, indeed, that Committee failure to adopt an effective deregulation schedule would be in violation of that Act's mandate to "provide for the orderly phase-out and the ultimate elimination of the limitations on the maximum rates of interest ..." at depository institutions. In additional response to the specific questions raised by the Committee on this proposal, we believe: 1) That the 3 1/2-year or more minimum maturity is an appropriate point at which to begin a deregulation schedule, and that that maturity should be reduced by one year every year. We believe it crucial that the Committee select a deregulation schedule, announce it, and then stick to it. 2) We would be supportive of allowing additional deposits to each account during the first year of its maturity, but would strongly object to any such feature being mandatory. A requirement that depositories allow additional deposits during the first year of an account would be directly contrary to the concept of deregulation. 3) We believe the appropriate minimum denomination should be $150 rather than $250 but recognize the necessity for a minimum higher than $100 in order to distinguish these accounts from fixed-rate time deposits at savings and loan associations that enjoy the interest rate differential and, until two years ago, required $100 minimum deposits.  2)  See, for example, Ed Kane, "Getting Along without Regulation Q: Testing the Standard View of Deposit Rate Competition During the "Wildcard' Experience." Journal of Finance, June 1978.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  AMERICAN BANKERS ASSOCIATION  CONTINUING OUR LITTER OF  G02596 11-18-81 SHEET NO.  9  4) The most appropriate early withdrawal penalty, we believe, would be 3 months loss of interest for each remaining year of an instrument's maturity, but we have no strong objection to the Commttee's proposed nine-month penalty. Our Association is strongly supportive of the elimination of the interest rate differential on indexed accounts provided for by the Committee in 19. We are, nevetheless, disappointed, that this most rational step will not be taken for more than two years, particularly in light of the growing importance of commercial banks in the residential housing market designed to be protected by the differential. The American Bankers Association strongly urges the Depository Institutions Deregulation Committee to get on with the business of deregulating. The Committee should provide all depositories the flexibility to determine, to the maximum extent feasible, the appropriate liability risk for their competitive environment, and should ensure that a full range of long- and short-term instruments are available for that purpose. We appreciate the opportunity the Committee has offered to comment on these proposals. cincerely,  7). neralrl M. Lowrie   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  THE CONSUMER BANKERS ASSOCIATION  002646  November 16, 1981  Steven L. Skancke Executive Secretary Depository Institutions Deregulation Committee Room 1054 Department of the Treasury 15th Street and Pennsylvania Avenue, N.W. Washington, D. C. 20220 Re:  Docket No. D-0023--Short-Term Time Deposit Instruments  Dear Mr. Skancke: The Consumer Bankers Association, which represents the retail banking departments of over 400 commercial banks who hold over 80% of the total domestic deposits held by such institutions, appreciates the opportunity to comment on the Committee's proposals for the creation of a new short-term deposit instrument. The Association has actively promoted the creation of an instrument by which depository institutions would be able to effectively compete with the non-regulated providers of consumer financial services, as witnessed by our petition to the DIDC dated August 27, 1981. We commend the Committee for proposing such an instrument. The Association strongly supports adoption of a new short-term deposit instrument--the first option presented for comment by the DIDC--as a viable means to compete with the nonregulated entities, of which money market funds alone have captu-:ed over $170 billion in consumer deposits within the last cwo years. In our letter we address general comments sought by the Committee, as well as answer the specific questions posed on the proposed $5,000 minimum denomination transaction account with no interest rate ceiling. In reply to the Committee's request for general comments on various aspects of a new short-term instrument, we offer the following responses: (a) The minimum denomination on the new short-term instrument should be $5,000. This amount would be competitive with money market funds. A denomination lower than $5,000 could pose a danger to core deposits. However, if ample evidence is presented that a higher denomination would be more attractive, competitive, and not result in shifting of core deposits, a $10,000 minimum denomination would be acceptable.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  1300 N 1711-1 STREET  ARLINGTON, VA 22209  703/276-1750  002646 Steven L. Skancke November 16, 1981  Page Two  (b) The new instrument should have no required ceiling or index. Financial institutions should be given the opportunity to freely compete with non-regulated entities, and the flexibility to set the rate, decide if a floating rate is to be offered, and if so, what type of index such a floating rate should be tied to. (c) As previously stated, The Consumer Bankers Association does not support a required index rate. In addition, in the event the Committee adopts an instrument for which the rate is indexed, no differential should be established. If in fact the purpose of creating such an instrument is to allow a "more level playing field" for both commercial banks and thrifts to compete with non-regulated providers of consumer financial services, instituting a differential would only result in another competitive disadvantage for commercial banks. Furthermore, establishing such a differential would be contrary to the DIDC's goal of deregulation. (d) The new short-term instrument should not have either a required minimum maturity or a notice requirement. Placing such restrictions on the instrument would make it far less attractive in competing with money market funds. (e) Third-party transfers should be permitted for the new short-term instrument. The number of transfers should be determined by the individual depository institution. If the institution decides to permit more than three transfers per month, the account, of course, would be subject to Regulation D reserve requirements. However, reserves should not be subject to any phase-in or phase-out requirements, and should be the same for everyone. (f) Eligibility for such a short-term instrument should be limited to those depositors eligible to maintain NOW accounts under 12 C.F.R. §217.157. (g) The preferred combination of the above features would produce an instrument as outlined by the Committee in the first option presented for comment and would have the following characteristics:   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  o o o o o o o o  minimum denomination of $5,000 no required interest rate ceiling or index no required maturity no notice requirement transactional capabilities no differential eligibility based on NOW account eligibility Federal Deposit insurance  Ali  Steven L. Skancke November 16, 1981  002646 Page Three  (h) Introduction of an instrument to compete with money market mutual funds is not only desirable, but essential at this time. The substantial competitive imbalance which now exists between depository and nondepository institutions is well known to members of the DIDC. Perhaps the most dramatic illustration of this inequity has been the development of the money market mutual funds by major investment banking companies. As the overall level of interest rates rose during the past four years, the consumer began to demand a market rate of return on his deposits, which, for the most part, government regulations prohibit depository institutions from offering. The result was predictable; in just two years, total assets of money market mutual funds have grown to $170 billion. The competitive disadvantage may be addressed at least in part by the creation of a new short-term deposit instrument. Adoption of such an instrument would give depository institutions significant new flexibility to attract and retain consumer deposits, while allowing consumers to enjoy a market rate of return on their deposits. In addition, unlike the money market mutual funds, the instrument would be insured. (i) Lowering the minimum denomination of money market certificates would not be preferable to establishing a new short-term instrument. A new type of MMC would still be too restrictive to effectively compete with money market funds by retaining the following characteristics: -  required maturity indexed ceiling rate no transactional capabilities notice requirement.  The Association urges adoption of a new short-term instrument as described in the Committee's first proposal. With respect to the specific questions, we offer the following comments: (a) This option would allow retail-oriented commercial banks as well as thrift institutions to effectively compete with money market mutual funds. Although arguments have been raised that a large shifting of funds from checking and savings accounts to this higher yielding instrument will occur, hence increasing costs to depository institutions, we believe the impact of this shift and cost increase will be minimal compared to the new deposits such an instrument will attract and retain. The competitive position created by such an instrument for depository institutions vis-a-vis nondepository competitors would be enhanced by their ability to offer a competitive short-term instrument at market rates. The new funds generated by the new instrument,   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Steven L. Skancke November 16, 1981  002646 Page Four  as well as those funds retained by depository institutions that might otherwise have flowed to nondepository competitors, will offset the higher costs that such an instrument might generate, since those funds could be invested at a positive spread. (b) The $500 minimum withdrawal requirement is acceptable and competitive with money market mutual funds. (c) As previously discussed, The Consumer Bankers Association strongly opposes any required interest rate ceiling or index. Individual financial institutions should be granted the discretion to price the instrument. (d) As previously stated, individual depository institutions should have the flexibility to decide if more than three transfers per month will be allowed thus making the account reservable. Opponents of this new instrument have argued that it would be a costly and unstable source of funds. However, two points refute these arguments. First, since a market rate will be paid on the instrument, depositors will not be inclined to move funds, and thus they will be stable. Second, the funds will be less expensive than those funds obtained by selling large CDs to money market mutual funds. Only large metropolitan banks can obtain funds in this fashion. Most small to medium institutions are not in the position to effectively market jumbo CDs. Opponents of establishing a new short-term instrument have also argued that the DIDC is mandated to deregulate only to the extent that "economic conditions warrant." We submit that the recent growth of money market mutual funds, consisting of deposits for which depository institutions are currently unable to compete, presents a severe threat to all regulated financial institutions and warrants immediate deregulation. In response to the argument that any new short-term instrument will only cause further customer confusion, we would point out that money market mutual funds currently offer the consumer numerous investment opportunities; the variety of those products obviously is not so confusing as to discourage the massive outflow of funds from depository institutions. Finally, those expressing total opposition to any form of new short-term instrument claim that such an instrument would further erode core deposits. We would point out that many of these opponents were willing to accept such a risk through advocating the creation of the All Savers Certificate. While the ASC has resulted in some shifting of core deposits, funds. it has, nonetheless, attracted a substantial amount of new   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  002646 Steven L. Skancke November 16, 1981  Page Five  In comparing option 1 with the second option presented by the Committee, it is apparent that a 91-day, $10,000 time deposit would provide depository institutions with a minimal ability, to compete with money market funds based on the high minimum deposit, the interest rate ceiling, the notice requirement and the lack of a transaction account feature. Similarly, the third proposal, in spite of its market rate of return feature and limited notice requirement, would not attract a significant proportion of money market deposits based on a far too restrictive minimum deposit amount of $25,000. In sum, if depository institutions are ever going to compete with the unregulated entities, we will only be successful if we are permitted to offer similar products. Therefore, The Consumer Bankers Association urges the Committee to adopt an instrument reflecting the characteristics contained in option 1.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Thank you for your consideration.  Sincerely,  DAia- 0.174,6ta_ove) Drew V. Tidwell General Counsel   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  National Savings and Loan League  1101 Fifteenth Street NW Washington, DC 20005 202 331-0270 Cable: NATLISA Harding deC. Williams General Counsel  November 16, 1981  Mr. Steven L. Skancke, Executive Secretary Depository Institutions Deregulation Committee Room 1054 Department of the Treasury 15th and Pennsylvania Avenue, N. W. Washington, D. C. 20220 RE:  Docket No. D-0023  Dear Mr. Skancke: We are writing to present the comments of the National Savings and Loan League on the proposal on the above docket relating to short-term time deposits. There has been, as you know, a great deal of diversity within the savings and loan industry on the questions of whether any short-term time deposits should be authorized at this time and, if so, what form they should take. The National League Board of Directors at its meeting on October 14, 1981, adopted a resolution favoring in principle the power of savings and loan associations to offer an instrument which would be competitive with money market funds. However, final recommendation on a specific instrument was deferred pending a review of economic data on the course of interest rates and the effect of these instruments on earnings. An examination of recent economic data shows that in the period between the time this proposal was adopted and this week, short-term rates have decreased dramatically. In addition, there are indications that within the shortterm maturity range the trend is toward the establishment of a positive slope, i.e., that rates are beginning to bear a direct relationship to the length of maturities.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  003571 Mr. Steven L. Skancke November 16, 1981 Page 2 Between September 28 and November 18, for example, 6-month Treasury bill yields on a discounted basis have dropped over 400 basis points from 14.76% to 10.62%. Two-year Treasury notes on an average yield basis have dropped over 300 basis points since October 21 from 15.56% to 12.22%. These facts, plus the easing of the premium surcharge on the discount rate by the Federal Reserve Board, indicate to us that our existing accounts may shortly be in a much more favorable position to compete effectively for the consumer's savings dollar than we have been in the high rate environment. This easing of short-term rates could be used as an argument to postpone action on a new certificate. On the other hand, these favorable conditions can be viewed as an opportune time for the implementation, at lower costs, of an instrument which can effectively compete with money market funds, both for new deposits and retention of existing deposits. The $5,000 account, with certain variations, appears to be the option most favored by our membership. Several also prefer the $10,000 account. We see no inconsistency in permitting both types, but are concerned with the third option, the $25,000 account, since it would, in effect, lower the "jumbo" CD minimum to that amount. As we have consistently maintained both before Congress and in communications with this Committee, we believe that the range of accounts subject to no rate restraints (as opposed to indexing to market) should not be increased during the rate decontrol transition period, which Congress established, to enable thrift institutions to take full advantage of the deregulation of their asset structure. If the Committee does decide to approve new categories of short-term time deposits, we would support their being structured to bear as close a resemblance as possible to money market fund accounts within the exceptions outlined agove. The characteristics would include: -- fixed or floating rates at the option of the association indexed to market   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  003.571 Mr. Steven L. Skancke November 16, 1981 Page 3  optional transaction availability (associations which wished to avoid monetary reserves could prevent these accounts from being reservable by limiting check writing and other third-party payment access to 3 or fewer per month) -- liberalized post-deposit minimum balances no limits on eligibility a twenty-five basis point differential in favor of thrift institutions -  no minimum maturity on a $5,000 account.  We believe that this instrument or instruments would enable our associations to not only retain existing and obtain new funds, as noted, but would also result in many cases of a reverse flow of funds from money market funds back into financial institutions. We are well aware of the trade offs involved between higher costs of funds and increased liquidity, but believe that this kind of instrument will offer an effective means to compete for funds in today's economic climate. We appreciate the opportunity to comment on this proposed regulation. Since  ly  Harding eC. Williams Genera Counsel  HW:ajh  UNITED STATES LEAGUE of SAVINGS ASSOCIATIONS 8 111 EAST WACKER DR./CHICAGO, ILLINOIS 60601 / TEL. (312) 644-3100  0032i0  November 16, 1981  , .parS  Mr. Steven L. Skancke Executive Secretary Depository Institutions Deregulation Room 1054 Committee Department of the Treasury 15th Street and Pennsylvania Ave., N.W. Washington, D.C. 20220 Re:  Docket No. p-0023  Dear Mr. Skancke: On behalf of the U.S. League of Savings Associations* I am writing to comment on the DIDC's proposals for a new short-term deposit instrument. During the past year, the nation's thrift institutions have experienced unprecedented losses.  In our opinion, the  negative impact of very high interest rates has been greatly exacerbated by the unbalanced and ill-timed nature of the deregulation process.  *The U.S. League of Savings Associations has a membership of 4,400 savings and loan associations representing over 997 of the assets of the $650 billion savings and loan business. League membership includes all types of associations--Federal and state-chartered, stock and mutual. The principal officers are: Roy Green, Chairman, Jacksonville, FL; Leonard Shane, Vice Chairman, Huntington Beach, CA; Stuart Davis, Legislative Chairman, Beverly Hills, CA; William O'Connell, President, Chicago, IL; Arthur Edgeworth, Director, Washington Operations; Glen Troop, Legislative Director, Washington; and Phil Gasteyer, Associate Director, Washington Operations. League Headquarters are at 111 East Wacker Drive, Chicago, IL 60601. The Washington Office is located at 1709 New York Avenue, N.W., Washington, D.C. 20006, (202) 637-8900.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  THE AMERICAN HOME THE SAFEGUARD OF AMERICAN LIBERTIES  -2-  003210  Now that interest rates are declining, there is a good chance that the nation's thrift sector can get back on its feet by the end of 1982.  In order to achieve this objective,  however, thrifts must have a respite from the deregulation process.  If such a moratorium is not adopted by the DIDC, we  believe that it will further complicate and postpone our recovery and will also put the DIDC in the position of operating in direct contradiction to its Congressional directive to act with "due regard for the safety and soundness" of thrift institutions. In this regard, we urge the DIDC to postpone indefinitely any action on the proposed new short-term deposit instrument. The $25,000 Jumbo CD One proposal by the DIDC is to create a new short-term account having a $25,000 minimum and no interest rate ceiling. In effect, this proposal would lower the current jumbo CD minimum from $100,000 to $25,000. At present, we estimate that the average MMC account balance is close to $20,000. multiple accounts.  Many of our savers also have  Thus, there iS a very high probability that  if this new account is authorized, many savers will simply combine accounts to qualify. Currently, thrifts are paying anywhere from 100 to 200 basis points as a jumbo CD premium over commercial banks. Jumbo CD rates can exceed MMC rates by amounts ranging from 17 to 47 or more.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -3-  003210  If only 507 of our current MMC balances switch to new "jumbos" at a rate spread of only 17, the cost to the savings and loan business will be roughly $750 million over the next If all our MMC balances switched at a 47 rate spread,  12 months.  the cost to the business would be roughly $6 billion. Of course, jumbo CDs tend to have much shorter maturities than even that of the 6-month MMC.  Thus, major savings shifts into  these new lower minimum "jumbos" would greatly increase thrift institution interest rate risk.  Another rate surge would have  an even more devastating effect should this new account be authorized. The $5,000 Transaction Account Another proposal before the DIDC would create a $5,000 minimum transaction account with no interest rate ceiling.  Such  an account ,-ould effectively eliminate all interest rate ceilings on savings balances of $5,000 or more. Massive savings shifts could be anticipated if this proposal were adopted.  The costs associated with the $25,000  jumbo CD proposal would be far exceeded by this account as a high percentage of passbook funds could also shift.  These  transfers would occur virtually overnight. If only $50 billion of our current passbook balances shifted into this new account at an added interest rate spread of 57, the added cost to the savings and loan business would be $2.5 billion over the next 12 months.  If the interest rate  roll-up is close to 107, the cost could double to $5 billion. These costs would be in addition to the $750 million to $6 billion in added costs associations might incur from MMC shifts.  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  N , -4-  003210 The 91-Day MMC A third proposal by the DIDC would create a $10,000 minimum 91-day account with a 14-day required notice for withdrawal thereafter, and a floating interest rate tied to the 13-week T-bill discount rate. This proposed account would be the least costly of the three proposals.  This account, however, would also significantly  increase association interest rate risk thus exacerbating the impact of any future interest rate surge on the business.  As  proposed, this new account could also become an operational nightmare. At some later point, when thrift sector conditions permit, we would support a much simpler new short-term account. One possibility would be a new 91-day account tied to the T-bill rate having both a $10,000 minimum and a 3-month loss of interest as a penalty for early withdrawal. Such an account would be a logical extension of the 6-month MMC.  It would be easily understood by savers and easily  marketed by financial institutions. The analysis of the three new proposed accounts concentrates on the cost involved in switching money from existing accounts.  The new instruments will undoubtedly also attract  new deposits but nowhere near enough to offset the costs arising from the inter-account switches.  Suppose, for instance, the  proposed instruments were phenomenally successful and lured all the $170 billion in money market funds back to depository institutions with thrifts attracting 407 of that total, or $68 billion.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Even if this money could be arbitraged at a  • -5-  003210  generous 27 spread, the addition to the bottom line would only be $1.4 billion.  Even this unrealistically optimistic estimate  of the benefits from the introduction of the new accounts would be inadeauate to offset the added costs which would be produced by internal upgrading from passbooks and other low yielding accounts to the higher rate instruments.  Even under the most  optimistic scenario, the cost-benefit ratio would be extremely adverse. Needed Respite Currently, Congress is discussing legislation to help federal regulators deal with failing thrifts.  Even after the  recent interest rate declines, the problems in the thrift sector will take time to heal.  Balance must be restored to the  deregulation process. Accelerating the deregulation process at this time will only cause additional problems.  The ultimate losers in such cases  are the FDIC, FSLIC and the general public. We feel that the DIDC must declare a deregulation moratorium or a "time-out" until thrifts can recover from the ravages of high interest and precipitous deregulation.  In  this regard, we strongly urge you to defer all action concerning new short-term accounts indefinitely. We are grateful for the opportunity to express these views.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Sincerely, •  4.  William B. O'Connel President  0ec* NATIONAL ASSOCIATION OF MUTUAL SAVINGS BANKS 200 PARK AVENUE  NEW YORK, N.Y. 10166 TELEPHONE  212-973-5432  NAMSB  Cable Address: Savings, New York  November 12, 1981  Mr. Steven L. Skancke Executive Secretary Depository Institutions Deregulation Committee Room 1054 Department of the Treasury 15th and Pennsylvania Avenue, N.W. Washington, D. C. 20220 Re:  Docket No. D-0023 -Proposed Short-Term Deposit Instruments  Dear Mr. Skancke: On October 14, the Depository Institutions Deregulation Committee requested comments on the desirability of authorizing a new short-term deposit instrument. The stated purpose was to permit depository institutions to compete more effectively for short-term deposits, particularly with money market funds. Specifically the DIDC requested comments on three possible shortterm deposit instruments: 1. A $5,000 minimum denomination transaction account with no interest rate ceiling; 2. A $10,000-minimum account with a 91-day maturity and a 14-day notice requirement thereafter and a rate tied to the 13-week Treasury bill auction rate; and 3. A $25,000-minimum account with no interest rate ceiling and a minimum one-day notice requirement. Overall NAMSE Position Since its establishment, the DIDC has pursued a dangerous course of imbalanced deposit deregulation without sufficient concern for the viability of thrift institutions. Deregulation on the deposit side has proceeded far more rapidly than on the asset side of the thrift institution balance sheet.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  1  Mr. Steven L. Skancke  - 2  November 12, 1981  (102501  health of the thrift As a result, the DIDC's policies have weakened the e contained in industry and clearly conflicted with the Congressional mandat deposit ly" "order the 1980 Deregulation Act, that the DIDC provide for tory deposi of deregulation "with due regard for the safety and soundness institutions." of all of We continue to urge that the DIDC postpone implementation current until lation deregu its September 22 actions and defer further deposit the until and e, adverse conditions affecting thrift institutions improv powers these institutions Congress adopts legislation providing the broadened weakened condition of the need to be competitively viable. Given the current for the DIDC to follow thrift industry, this is the only responsible course l deposit insurance under current circumstances. At a time when the federa d thrifts, it is trouble agencies are actively seeking merger partners for only magnify the could inconceivable that the DIDC would adopt proposals that problem. ments, With respect to proposals for new short-term deposit instru the to ns icatio commun NAMSB has strongly opposed such action in previous be would ents instrum DIDC. We have pointed out that new short-term deposit ucIntrod ts. accoun s directly and closely competitive with passbook saving from lower-rate passshifts rate accele y greatl would ts tion of such accoun increases in deposit book savings deposits and thereby produce massive ed from other accounts, interest costs. To the extent that funds are attract be further shortened, the maturity structure of savings bank deposits would further aggravated. and the "borrow-short, lend-long" imbalance would be ly lose funds to At the same time, thrift institutions would probab offered on a "wild commercial banks, especially if the new accounts were large low-yield mortgage card" basis with no ceiling rates. Because of their te the earnings necessary portfolios, thrift institutions simply cannot genera ments in the current climate. to pay market rates on short-term deposit instru on to compete for such Commercial banks would obviously be in a better positi and greater earnings deposits due to their shorter-term asset portfolios beneficiaries of the main the be would flexibility. Thus, commercial banks be dealt another would ons positi gs earnin ution proposal, while thrift instit devastating blou. erm deposit We continue to oppose the introduction of new short-t ill-timed in larly particu are als propos instruments at this time. The DIDC's The DIDC has already authorized view of its other actions and proposals of ceilius on 3 112 year ation elimin • IRA/Keogh "wild cards" and roDosed ts in future years. Both accoun accounts and on progressively shorter-term institutions. thrift at will result in enormous cost increases depository instituIn the short-term area, the DIDC has permitted rates in combill ry Treasu of tions the option of using a 4-week average specific purpose the for done was puting ceiling rates on 6-month MMCs. This with money ively effect more e of enabling depository institutions to compet rates. st market funds during periods of declining intere   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  002501 Mr. Steven L. Skancke  - 3 -  November 12, 19881  Furthermore, the DIDC recently reversed its position on the 50 basis benefits to point passbook rate increase on the ground "...that the likely (in effects adverse e probabl the depositors now appear to be outweighed by the of All tions." institu terms of increased costs) to the depository n apply with arguments that favored reversal of the passbook rate decisio instrudeposit erm short-t equal force to the proposed introduction of new ceilings k rate passboo in e increas ments. Such action would be similar to an to savings k passboo from because it would stimulate large-scale shifts higher-rate accounts. s While strongly opposing the introduction of new short-term deposit in lity flexibi for need the zed under current conditions, NAMSB has recogni the DIDC, the the short-term area. As we have repeatedly indicated to ty instruments liabili sit preferable means is through broader use of nondepo cates and certifi -- such as consumer repurchase agreements, participation ty instruliabili sit mortgage-backed securities. Increased use of nondepo individual since lity ments would prcvide savings banks with greater flexibi with local line in terms institutions could vary rates, maturities and other s, by account Deposit market cone:tions and the needs of the institutions. given a in tions contrast, are typically offered uniformly by all institu institution. market area, regardless of the circumstances of the individual Specific Proposals for New Short-Term Deposit Instruments c As noted earlier, the DIDC requested comments on three specifi a (2) ; proposals: (1) a $5,000-minimum, no-ceiling transaction account -minimum $10,000-minimum, market-linked 91-day account; and (3) a $25,000 d to be "wild card." In varying degree, each of the proposals is designe each runs the risk of competitive with money market funds. At the same time, accounts. stimulating large-scale shifts from existing lower-rate re a This is, of course, the dilemma. There is no way to structu market funds, without short-term deposit that will be competitive with money institutions. There thrift of costs t interes also greatly increasing deposit tilting the compewithout account an such re structu is, similarly, no way to r position stronge far a in are which banks ial titive balance toward commerc climate. current the in rates erm short-t high pay than thrift institutions to As for the three specific proposals, each is an extension of an in existing type of account. It is doubtful that they would be useful DIDC. the realizing the objectives stated by For example, the $25,000-minimum "wild card" represents little more from $100,000. than the current "jumbo" CD with a minimum denomination reduced funds market money with tive be competi Such an account would probably not require wal withdra of notice one-day The because of the $25,000 minimum. nature, in erm short-t ly ment assures that the instrument would be extreme ce at thrift thereby further aggravating the asset-liability maturity imbalan institutions.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  +I •  Mr. Steven L. Skancke  - 4  November 12, 1981  Similarly, the proposed 91-day Treasury bill-related, $10,000 account it an obvious offspring of the 6-month money market certificate. It is doubtful that this account would perform any function other than to stimulate greater shifts from passbook savings than have already occurred as a result of 6-month MMCs. The $5,000-minimum, no-ceiling, transaction account would also stimulate large-scale shifts from passbook savings. As proposed, this account would be subject to no ceiling rate if the balance is above $5,000 and to the 5-1/4 per cent NOW ceiling if the balance falls below $5,000. About 50 per cent of total passbook savings at savings banks is held in balances of $10,000 or more. It is clear that many passbook savings account holders would have strong incentives to transfer funds to the new "super NOW account." It should also be noted that, depending on the shape of the yield the state of competition, rates paid on $5,000-minimum transaction and curve accounts could well be above rates on all other types of savings and time accounts. This would be anomalous from the standpoint of depository institutions, as well as from the standpoint of monetary policy. With respect to the latter, Federal Reserve spokesmen have urged in the past that a rate spread be maintained between transaction accounts and savings accounts for monetary policy purposes. If the "super NOW account" were adopted, however, yields on transaction accounts might actually be higher, and far higher, than those on all other types of accounts. In short, all of the proposed neu short-term accounts would have adverse effects on savings banks. It could hardly be otherwise, given the earnings problems of thrift institutions and the other deregulation actions already taken by DIDC. We have considered this issue many times. Nothing has happened to change our view that no new short-term deposit instruments should be adopted at this time and that the preferable means is the increased use of nondeposit liabilities.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Sincerely yours,  Robert R. Masterton Chairman  Saul E. Klaman President   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  4 • National Savings and Loan League  r)(1  liur../JeJks 1101 Fifteenth Street NW Washington, D.C. 20005 202 331-0270 Cable: NATLISA Kathleen Ellis Topelius Associate General Counsel  November 6, 1981 RE:  Docket No. D-0022  Mr. Steven L. Skancke, Executive Secretary Depository Institutions Deregulation Committee Room 1054 Department of the Treasury 15th and Pennsylvania Avenue, N. W. Washington, D. C. 20220 Dear Mr. Skancke: ly applauds the Committee's ininancial instituended to enhance h a market rate of e ud wot, we thr3 1/ py r ce past, e e plore d uctioa2pw-n eoladaf a n ew  With full awareness of the earnings problems engulfing thrift institutions, the Committee courageously voted to reverse its September 22, 1981, decision to increase by 50 basis points the maximum interest rates payable on nontransaction savings deposits. We have requested the Committee to exhibit that same courage in reversing its September 22, 1981, decision to create a"wild card" IRA/Keogh account. As consistently stated in National League comments to themost recently in our letter regarding the new IRA/Keogh account -- the thrift industry cannot at this time survive the predatory pricing surely engendered by the creation of "wild card" Cmmittee to move foraccounts. We, therefore, urge ward with its plan to create a new 3 1/2-year account; we S to exhibit some due regard for the Cmmittee implore survival of the thrift industry by indexing that new 3 year account to market rates. -S  -  Sin erely Kathleen E. Topelius Associate General Counsel  r,xi A.  NATIONAL ASSOCIATION OF MUTUAL SAVINGS BANKS 200 PARK AVENUE  NEW YORK, N.Y. 10017 TELEPHONE 212-973-5432  NAMSB 1920  November 6, 1981  Cable Address: Savings, New York  Mr. Steven L. Skancke Executive Secretary Depository Institutions Deregulation Committee Room 1054 Department of the Treasury 15th Street and Pennsylvania Avenue, N.W. Washington, D. C. 20220 Re: Docket No. D-0022 -- Time Deposits with Original Maturities of 3-1/2 Years or More Dear Mr. Skancke: This letter is in response to the proposal of the Depository Institutions Deregulation Committee to establish a "new" category of time deposit with a minimum maturity of 3-1/2 years and no interest rate ceiling. The proposal would also eliminate rate ceilings on progressively shorter maturities in future years until ceilings are eliminated on all time deposits effective February 1, 1986. NAMSB has repeatedly opposed previous proposals to introduce "wild card" accounts under current conditions. We continue to oppose, in the strongest possible terms, the elimination of rate ceilings on any category of deposit and the establishment of a rigid deregulation schedule at this time. on Such action would fly in the face of the requirement in the 1980 Deregulati ceilings Act that the DIDC provide for the "orderly" phase-out of deposit rate ns." institutio depository of soundness and safety the "with due regard for be would it ns, institutio thrift of Given the current weakened condition or to category deposit any on ceilings eliminate irresponsible for the DIDC to outright oppose We years. future adopt a fixed deregulation schedule for taken by elimination of interest rate ceilings, including the action already the DIDC with respect to IRA/Keogh accounts. 3-1/2 year "wild In our judgment, there is nothing "new" about the 31 court July card" proposal. It is clearly designed to circumvent the "wild 4-year decision voiding the DIDC action which would have authorized by the abide cards" effective August 1. That decision required the DIDC to and ns statutory provision that a differential between thrift institutio   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  r- p OU  •dr  Jp-Sir 0014O6 Mr. Steven L. Skancke November 6, 1981 Page 2  commercial banks on any category of account existing on December 10, 1975 remains to cannot be reduced or eliminated without Congressional approval. It the and be seen whether the shift from a 4-year to a 3-1/2 year maturity addition of incidental deposit provisions would be held to constitute a "new" account and satisfy the requirements of the July 31 court decision. Apart from legal considerations, the current proposal is wholly thrift undesirable on economic grounds and detrimental to the soundness of the would proposal card" industry. Like its predecessors, the 3-1/2 year "wild instienormously aggravate the already serious earnings problems of thrift thrift of flows deposit that suppose tutions. Nor is there any reason to the advantage institutions would benefit. Commercial banks would clearly have on such ceilings of n eliminatio in the rate war likely to result from the earnings greater and structure asset accounts. Because of their short-term ns in institutio thrift outcompete easily flexibility, commercial banks could ns institutio thrift e, consequenc a As the current high interest rate climate. while costs interest would experience massive increases in their deposit losing funds to commercial banks at the same time. All of this would repeat the experience of the misguided 1973 "wild card" experiment which amply demonstrated the dangers of premature deposit deregulation. Because of these adverse effects, the proposed 3-1/2 year "wild card" All accounts would offset, or more than offset the expected benefits of the actions aising Savers program. This is especially true in view of the cost-r already taken by the DIDC, such as the IRA/Keogh "wild cards." The Congress adopted the All Savers program, in part, to strengthen deposit flows and DIDC earnings positions of thrift institutions. Through its impact, the providing in Congress the of objective proposal would effectively subvert the for All Savers Certificates. The 3-1/2 year "wild card" proposal would clearly aggravate the funds to severe recession in the housing industry. By encouraging shifts of further would commercial banks and weakening thrift institutions, the proposal cut back the already reduced supply of mortgage funds. The "wild card" proposal is particularly untimely in view of the other actions taken by the DIDC. Specifically, elimination of the 12 per cent "cap" on 30-month certificates provides market rates for savers in the intermediate-term area, while avoiding the risk of a rate war among depository institutions. In view of this action, no further deregulation in the intermediate-term area is necessary at this time. of Thus, the 3-1/2 year "wild card" proposal is yet another example safety the for concern precipitous deregulation by the DIDC, with insufficient established, dereguand soundness of thrift institutions. Since the DIDC was the asset lation has proceeded far more rapidly on the deposit side than on side of the thrift institution ledger. We urge the DIDC to defer the implementation of this proposal, as well as other deregulation actions, until current adverse conditions affecting thrift institutions improve, and until these instituthe Congress adopts legislation providing the broadened powers tions need to be competitively viable.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  I.  001756 Mr. Steven L. Skancke November 6, 1981 Page 3  This would be consistent with the basic intent of the Congress in adopting the 1980 Deregulation Act. That Act promised a balanced approach: gradual deposit decontrol over a period of six years, together with expanded, though still limited, asset and liability powers for thrift institutions. Experience since the Deregulation Act was enacted amply demonstrates that thrift institutions need much broader powers, as well as time to implement them, to operate in a deregulated deposit environment. That experience also demonstrates that thrift institutions cannot absorb further deposit deregulation until their earnings positions are strengthened in an improved financial market climate. The DIDC has also posed specific questions regarding the terms of the "new" 3-1/2 year accounts: maturity; provision for additional deposits during the first year without maturity extension; minimum denomination; early withdrawal penalties; negotiability; availability on a discount basis; and other features. It seems evident that these specific terms are not primarily designed to structure an account for competitive or other business purposes. Rather, these terms apparently represent an attempt to distinguish the proposed 3-1/2 year accounts from deposit categories existing on December 10, 1975 and thereby circumvent the July 31 court decision which struck down the DIDC's earlier 4-year "wild card" proposal. Under these circumstances, and given our total opposition to the basic thrust of the "wild card" concept, it is difficult for us to comment in meaningful terms on the specific details of the proposed "new" account.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Sincerely yours,  4. Robert R. Masterton Chairman  Saul B. Klaman President  J  (/UNITED STATES LEAGUE of SAVINGS ASSOCIATIONS  001757  8 111 EAST WACKER DR / CHICAGO, ILLINOIS 60601 /TEL. (312) 644-3100  November 6, 1981  Mr. Steven L. Skancke Executive Secretary Depository Institutions Deregulation Committee Room 1054 Department of the Treasury 15th Street and Pennsylvania Ave. N.W. Washington, D.C. 20220 Re:  Docket No. D-0022  Dear Mr. Skancke: On behalf of the United States League of Savings Associations*, I am writing to comment on the DIDC's proposals to establish a new "wild card" category of time deposits for all account maturities of 3 1/2-years or more and to reduce this minimum 3 1/2-year maturity in future years. Over the past year, interest rates have been at or near record levels. During this period the nation's thrift institutions have suffered unprecedented earnings pressures. Record losses have been experienced and will continue for the remainder of this year.  *The U. S. League of Savings Associations has a membership of 4,400 savings and loan associations representing over 99% of the assets of the $625 billion savings and loan business. League membership includes all types of associations -- Federal and state-chartered, stock and mutual. The principal officers and staff are: Rollin Barnard, President, Denver, CO; Roy Green, Vice President, Jacksonville, FL; William O'Connell, Executive Vice President, Chicago, IL; Arthur Edgeworth, Director -Washington Operations. League headquarters are at 111 East Wacker Drive, Chicago, IL 60601. The Washington Office is located at 1709 New York Avenue, N.W., Washington, D.C. 20006, Telephone: (202) 637-8900.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  THE AMERICAN HOME THE SAFEGUARD OF AMERICAN LIBERTIES   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Gi The Congress has directed tha t the timing of the financia deregulation process be con ditioned with "due regard for the safety and soundness" of thr ift institutions. The problems currently facing thrifts hav e been caused by unbalanced and inappropriate deregulation in the face of record intere st rat( and general economic instabili ty. We believe that any action : the DIDC which will accelerat e the deregulation process at tn) time are not only unwarranted but dangerous. In this regard, we urge the DIDC to: 1.  Immediately reverse by notati onal vote the new "wild c IRA/Keogh rules stemming fro m its September 22, 1981 actions; and  2.  Postpone indefinitely any act ion on the proposed "wild card" of 3 1/2-year or more maturity and the related schedule for reducing the min imum maturity on this new deposit category.  The New IRA Rules The United States League of Savings Associations applauds t recent decision of the DIDC reversing the passbook rate increas adopted at its September 22, 1981 meeting. The added cos t of t 1/2 of one percent increase would have been not only unp roducti but also severely damaging to the already hard-pressed thr ift sector. In our opinion, the IRA/Keogh "wild card" rules promise to I even more costly to the nat ion's thrifts. Our analysis indicatE that for the savings and loa n business the penalty-free conversi of existing IRA/Keogh accoun ts to 18-month "wild card" accounts will cost between $222 mil lion and $1.03 billion over the next 1 months, depending on the pro portion of existing accounts which shift to the new rate. In addition, a significant amo unt of existing savings dol lar is likely to switch to the new "wild card" account -attracted . both the uncontrolled rate and the tax advantage of the switch. very conservative estimate would place the amount of such accoun switches by newly-eligible IRA/Keogh savers at a total at least large as the entire $12 bil lion now on deposit in existi ng IRA/Keogh accounts. The new eligibility base and "wi ld card" features of this new accoun t category are likely to cos t the savings and loan business bet ween $444 million and $1.03 billion over the next year. Looked at another way, the new IRA/Keogh rules are likely to offset a large portion of the cost-reduction benefits exp ected fo savings and loan associati ons from the All Savers Certif icate program during the next 12 months.  sector At some later point, when general economic and thrift approach ctive constru more a conditions warrant, we would suggest suggested to the IRA/Keogh account issue along the lines already ent). to the DIDC by the U.S. League (see attachm ors We would also remind the Committee that IRA/Keogh deposit ents instrum savings -related already have a wide choice of market Tnus to choose from in funding their retirement savings plans. in compete to rules existing institutions are well equipped under the expanding IRA/Keogh marketplace. The Proposed Deregulation Schedule Analogous computations show that the proposed deregulation schedule involving "wild card" accounts with maturities in excess on of 3 1/2-years would also have a seriously-adverse effect uncapped the association earnings. Recent experience with which 2 1/2-year certificate (SSC) clearly shows the speed with the Because costs can be run up by untimely deregulation. to 3 1/2-year"wild card" will have a maturity somewhat similar ly certain that of the SSC, rates set on the new account will will exceed the already high 2 1/2-year rate. Accordingly, costs increase with the introduction of this account. The dominance of this new "wild card" account category over the SSC will present another problem to associations over and • of above the obvious cost impact. This problem is a consequence ed convert the absence of the housing differential on any account to "wild card" status., The effect of this loss on the market share of thrift institutions can be anticipated from the experience with the six-month Money Market Certificate since March 1979. The two-thirds/one-third split in favor of thrift institutions for new money going into the MMCs prior to the elimination of the differential almost exactly reversed itself once the differential disappeared. Associations can therefore expect to lose about 101, SSC -- but of the funds _which _would_iazobab_14._..have..f_ioty_o_intp_ card" "wild r 1/2-yea 3 the into now d diverte which will be accounts at commercial banks. If the Committee proceeds with the 3 1/2-year proposal on February 1, associations will pay a higher rate for fewer dollars. Normally, the effect of any change in account status can be analyzed in terms of its impact on the marginal cost of funds to the institution. In this instance the impact is so adverse that the marginal cost cannot even be mathematically defined, since, instead of attracting new, though perhaps expensive, dollars this change will actually reduce savings flows to associations.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  0  This, in turn, could contribute further to the financial deterioration of thrifts which are already severely weakened. progressive removal of rate ceilings on accounts will cause interest rates on such accounts to increase as financial institutions enter into a rate-war environment.  The  The United States League of Savings Associations strongly urges that the DIDC suspend the deregulation process until economic conditions and the earnings pressures being experienced by the thrift sector show signs of significant improvement. The U.S. League appreciates the opportunity to present these views. Sincerely,  William B. O'Connell Executive Vice President Enclosure   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  t...--'  1-esTel  First Vice P'ec.cten•  Second Vice Pres,de7.1  '4\ C. BEN":ETT, Cnie Executive Otlicer tur...r State Ban,  ROBERT L. McCORM:CK JR.. PrestdenVCE0  JAMES O HERR:NGTON. Board Charmar,  ARCH G MA:NOUS JR.. Presiden  Stiliwate! Nat:ona: Bank and Trust Company  Comka!er Nationa. Bank  St:lwa!;" Cii,',>nor-i,-, 7z,")74  Co.N,ate, kansAs 67:`:  CM7ers union Nationa ban', & Trust Corripe-, lexinprr Keroucwy 4:15S7  t.';'...'7-  Svon Cirolina 2.9:;74  Treasv.7'  WASHINGTON OFFICE  adepende,n1 BANKERS ASSOCIATION OF AMERICA 1t52c.-. MASSACHUSE71S MILNUE N.Vv. - SWTE 202. WASHING7ON D.C.'. 20036 202/332-89E..  November 6, 1981  Mr. Steven L. Skancke Executive Secretary Depository Institutions Deregulation Committee Department of the Treasury 15th St. & Pennsylvania Ave.,N.W. - Rm. 1054 Washington, D. C. 20220 Re:  Deregulation of Time Deposits of 3-1/2 Year Maturity (Docket No. D-0022); Short-Term Time Deposit Instruments (Docket No. D-0023)  Dear Mr. Skancke: The Independent Bankers Association of America, which represents over 7300 smaller banks, is pleased to respond to your request for comments on the Depository Institutions Deregulation Committee's proposed rules to create two new types of time deposit: a deregulation plan beginning with deposits of 3-1/2 year maturity, and a short-term instrument: Deregulation of Time Deposits of 3-1/2 Year Maturity We support the proposal to establish a deregulation schedule beginning with certificates of 3-1/2 year maturity if a uniform ceiling rate is imposed which is indexed to corresponding money market indicators. Section 204(a) of the Depository Institutions Deregulation and Monetary Control Act specifically directs that "the Deregulation Committee shall not increase such limitations above market rates during the six-year period beginning on   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  00170  'ge-MiftE-  IOW  001705 2  the date of enactment of this title." (emphasis added) By proposing that no interest rate limitations should apply to 3-1/2 year deposits, the Committee not only acts in direct contradiction to this legislative language, but opens the door to predatory rate wars which are clearly unhealthy for financial institutions and the public in general. The 1973 experiment with "wild card" competition was a notable disaster and was abandoned by regulators following Congressional intervention after only a four-month interval. The recent scramble to tie up All Savers funds in repurchase agreements paying up to 40% interest demonstrates that some depository institutions are still prepared to engage in suicidal "wild card" competition despite troubled financial conditions. With the imposition of uniform market-level ceilings, the 3-1/2 year deregulation plan could be mutually attractive to both financial institutions and consumers. In fact, with market rate ceilings added, the deregulation plan could begin with a shorter term deposit such as 2-1/2 or 3 years and be even more competititve and attractive in today's market. (In our letter of May 8, 1981, commenting on the Committee's 4-year deregulation plan, we suggested that the plan begin with 2-1/2 year small savers certificates.) The realities of today's interest rate climate have discouraged depositors from investing in long-term instruments, and any attempt to deregulate by maturity will be merely a meaningless gesture if the required maturity period is drawn too long. We believe that a deregulation plan with interest rate ceilings indexed to market indicators beginning with deposits of 2-1/2 to 3-1/2 years maturity is a reasonable middle-ground approach by which the deregulation process can go forward in the "orderly" fashion intended by the Congress. In response to the Committee's questions regarding specific aspects of the proposed deregulation plan:   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  1.  Allowing additional deposits during the first year of the account without extending the maturity would be an operational nightmare for many smaller banks without access to extensive computer services. It is not a feature which will make the account particularly more attractive to depositors, and is likely to cause confusion and ill will because of the arbitrary cut-off date of one year.  1111111..  001705 -3  2. The minimum denomination should be $500, which is a standard minimum at most institutions. The proposed minimum of $250 is simply low for institutions to profitably handle a new, complex deposit category. 3. The early withdrawal penalty should remain at the current forfeiture of six months' interest. A nine month penalty for this single deposit category would be confusing to the public, and would require institutions to prepare penalty notices especially for this one account. 4. In order for the new account to be as attractive as possible, the rules for its issuance should be kept simple and easy to promote. The proposal regarding discounted negotiability is inconsistent with the need to streamline the rules to encourage greater public acceptance. Short-Term Time Deposit Instruments In the face of the continued reluctance by Congress and other authorities to impose bank-like restrictions on money market mutual funds and others who are competing with banklike services, we believe that a new instrument is necessary for banks and thrifts to compete more effectively for shortterm funds. Of the three alternative accounts proposed by the Committee, Proposal 2--a $10,000 minimum denomination time deposit with an initial maturity of 91 days and a 14-day notice period thereafter, and an interest rate ceiling tied to the 13-week Treasury bill discount rate-is clearly the outstanding option. This account provides for a more stable source of funds than the other options, and allows the institution to offer a fixed rate which eases some of the operational problems. Following the initial 91-day maturity, withdrawals could be permitted in $500 minimum amounts so long as the minimum denomination is maintained in the account. The eligibility for this account should be limited to individuals. A rate differential for thrifts is totally inappropriate; it would simply give thrifts an unwarranted competitive leg-up over banks, which has no bearing on the root problem of deposit outflows to money market mutual funds.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  001705 -4  The other two proposed accounts are irreparably flawed in our view, and should not be adopted by the Committee. Proposal 1 includes a ceilingless interest rate, and the concerns about "wild card" competition are greatly intensified if the "wild card" account is a short-term deposit. Proposal 3's minimum denomination of $25,000 is too high to be attractive to the smaller savers who will still be forced to turn to the mutual funds for a competitive short-term investment. Proposal 2 is the sensible middle course--responsive to the needs of financial institutions and consumers, without creating radical problems in cost or operations. We appreciate your consideration of our comments. Sincerely,  W. C. Bennett President  WCB:ks   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  THE CONSUMER BANKERS ASSOCIATION  1594  November 3, 1982  Mr. Steven L. Skancke Executive Secretary Depository Institutions Deregulation Committee Room 1054 Department of the Treasury 15th Street & Pennsylvania Avenue, N.W. Washington, D.C. 20220 Docket 0-0022 Dear Mr. Skancke: The Consumer Bankers Association (CBA) is a national trade association, which represents the retail banking departments of over 400 request commercial banks. We are pleased to respond to the Committee's and one three new for public comment on the following: 1) the proposed each would that half year deposit category; 2) the proposed schedule year reduce the minimum maturity of this new deposit category by one es to be year; and 3) the creation of two additional new deposit categori effective in 1984 and 1985. the CBA commends the Committee on its general thrust to facilitate deregulation of depository institutions. However, we would further more emphasize the compelling need for the Committee to authorize a competitive instrument in order to allow depository institutions to compete effectively with money market funds and other non-regulated providers of financial services. In our comment letter on Docket #0-0023, we will discuss this issue fully. 2 year deposit category, we would add 1 In supporting the new 3/ certain caveats on the following specific aspects of the proposal. 1. Additional deposits during first year. We do not believe it first would be desirable to allow additions to such accounts during the year or any term thereafter unless an extension of the maturity is also required. 2. Minimum denomination. Since the proposed denomination is quite Law, we are of the opinion that the amount of the minimum denomination should be determined by the offering institution. Such an approach would be in keeping with the spirit of deregulation. 3. Early withdrawal penalty. We support the current six month's severe forfeiture of interest for early withdrawals and feel that a more overly an in result would months, nine penalty, such as the proposed restrictive account.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  1300 N. 171•14 STREET  ARLINGTON, VA 22209  703/276-1750  ,  4. Negotiability/Discounting. Again, we believe that these features should be optional to the offering institution. Each institution can individually best decide if it wants to become subject to reserve requirements as the result of a transferability feature. Prohibiting this feature would be akin to regulation. By denying financial institutions this feature the Committee would place additional restrictions in the marketplace. Allowing a negotiability option will permit institutions to compete on an additional basis and further stimulate competition and deregulation. CBA supports the proposed schedule for deregulating the new deposit category. Finally, we support the concept of introducing additional new account categories in 1984 and 1985 that would have characteristics 1 2 year category. similar to the proposed 3/ We appreciate this opportunity to present our views to the Committee, and will be happy to answer any questions raised in our comments.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Sincerely,  aLe" L 7/6bi% Drew V. Tidwell General Counsel  2  /it)  FTe5ident VV C BENNETT. Chiel Executive °nicer Arthur State Bank Union. Smith Carolina 29379  First Vice PrPs,dent  BO3ERT i McCORMiCK JR . PleSidrnt/CE0 Notone Brink :%nd Trust Compaq 5!it'woh”. Okia!kkiki 74.'4  Stikva!(•  Treasurer  Second Vice President JAMES D HERICNGTON. Beard Chairman CnThs.,i!e• Na;sor.oi B.rw C,oittv• lir KarbSdS 6702Y  ARCH G MAINOUS JR., President Citizens Union National liar* & Tiust Company Lekington, Kentucky 40586  TJ 11111111."  WASHINGTON OFFICE  003932  adependent BANKERS ASSOCIATION OF AMERICA 1625 MASSACHUSETTS AVENUE N.W - SUITE 202, WASHING1ON, D.C. 2003E 202/332-8980  October 29, 1981  Honorable William M. Isaac Chairman Federal Deposit Insurance Corporation 550 - 17th Street, N.W. Washington, D. C. 20429 Dear Mr. Chairman: In the wake of last week's decision by the DIDC to postpone the 50-basis-point increase in passbook savings rates and published reports that the Committee may be reconsidering implementation of all of the actions approved at its September 22 meeting, we felt this is an appropriate time to clarify IBAA's view towards the deregulation of interest rates and point out the aspects of the DIDC's actions which are most objectionable to the 7400 small cormunity banks which are our members. We hope that by identifying our concerns and advocating a reasonable middle-ground approach, the stalemate might be broken and the deregulation process can go forward without the drastic shifts in policy and rulings which are so unsettling for financial institutions and which defeat the legislated goal that the phase-out process be "orderly". First of all, we support the action to postpone the increase in the passbook savings rate. We believe that the 50-basis-point hike was an inadequately considered compromise which would substantially increase costs for banks and thrifts, while doing little to stem the outflow from passbook accounts. This does not mean that we favor continuation of the static rate schedules prevalent in the past, but it does mean that we believe   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  003932 - 2 -  the timetable established by the Deregulation Act should not be accelerated in a time when financial institutions, particularly thrifts, are facing serious earnings difficulties. The Deregulation Act represents a hard-fought battle to balance the interests of the financial industry and establish a deregulation framework conducive to the long-term viability of all depository institutions. The Committee invites industry protest when it abandons the guidelines suggested in the Act and issues proposals such as the 500-basis-point increase in the savings rate. The Committee also departs from Congressional directives in the Act when it acts to completely eliminate all limitations on interest rate ceilings for IRA/Keogh accounts or time deposits of 3-1/2 year maturity. Section 204(a) of the Act specifically directs that "the Deregulation Committee shall not increase such limitations above market rates during the six-year period beginning on the date of enactment of this title." (emphasis added) By moving rates into "wild card" competition, the Committee not only acts in direct contradiction to this legislative language, but opens the door to predatory rate wars which are clearly unhealthy for financial institutions and the public in general. The 1973 experiment with "wild cards" was a notable disaster and was abandoned by regulators following Congressional intervention after only a four-month interval. One observer at the time wrote: "The tentative experiment with Q was a dismal failure. As predicted, the wild card ran wild: rates soared, disintermediation popped up, mortgage money disappeared, and the home building industry wobbled dangerously and threatened to topple." ("Experimenting With Q," United States Investor, October 22, 1973.) The recent scramble to tie up All Savers funds in repurchase agreements paying up to 40% interest demonstrates that some depository institutions are still prepared to play interest rate roulette despite troubled financial conditions.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  OM:  C03932  -3  It is often said that those who do not remember history are condemned to repeat it. In this case, bankers remember all too well the financial convulsions caused by the 1973 wild card fiasco. We find it almost incomprehensible that regulators charged with preserving the safety and soundness of depository institutions would choose to ignore the specific directive that interest ceilings remain at market rates for the six-year deregulatory period, and instead take action to repeat the wild card nightmare. We will soon be providing our comments on the proposals pending before the Committee to provide a short-term competitive instrument and to deregulate deposits of 3-1/2 years maturity. The specifics of each proposal concern us, of course, but our paramount interest is that ceiling rates for all categories of accounts be indexed to appropriate money market indicators. We believe it is vitally important for the Committee to also reconsider its IRA/Keogh action in order to impose uniform rate indexes. We do not intend to quibble over regulatory details best left to the Committee's discretion or act in ways which would block all forward movement towards deregulation. We must oppose, however, actions by the Committee which unreasonably accelerate the deregulation process or remove all indexation to market rates in disregard of the expressed intent of Congress. The Committee's attempts to speed deregulation have resulted in no deregulation at all. We suggest that if the Committee returns to the general framework envisioned in the Act--that is, a progressive phase-out to market rate levels--rather than rocking the industry with proposals which are premature or overly ambitious, the Committee will find that the nation's small banks are ready to proceed with a reasonable deregulation process. Sincerely,  W. C. Bennett President WCB:ks   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  NATIONAL ASSOCIATION OF MUTUAL S  200 PARK AVE NEw YORK NY 10017  4-01805752g0 10/17/81 ICS IPmmTZZ CSP wSHB 2033270871 MGM TDmT sTAmFORO CT 118 10-17 01u8P EST  1034 DONALD T REGAN, SECRETARY OF TREASURY TREASURY DEPT wASHINGToN Dc 20220  1  CONGRATULATIONS ON YOUR ACTION TO DELAY INCREASE IN PASSBOOK CEILING RATE SCHEDULED TO GO INTO EFFECT NOVEMBER 1, THIS INCREASE wOULD HAVE HAD SERIOUSLY HARMFUL IMPACT ON NATIONS THRIFT INDUSTRY AS WILL OTHER SEPTEMBER 22 DIDC ACTIONS. THEREFORE URGE YOU TO TAKE SIMILAR AOla TO DELAY CREATION OF CEILING-FREE 1-1/2 YEAR IRA/KEOGH ACCOUNT EFFECTIVE DECEMBER 1 ANDLTO INT-RODUcEPROPU_ED_NIEW-36D1/2 yEAR - "wILD _CARDfl, RAPID DEREGULATION ON DEPOSITS SIDE MUST STOP UNTIL ADVERSE FINANCIAL CLIMATE IMPROVES AND CONGRESS ACTS TO DEREGULATE ASSET SIDE OF THRIFT LEDGER. ROBERT mASTERTON CHAIRMAN AND SAUL B KLAMAN PRESIDENT NATIONAL ASSOCIATION MUTUAL SAVINGS BANK 200 PARK AVE NE w YORK NY 10017  P  1 3:5 1 EST MGMCOmP   https://fraser.stlouisfed.org TO REPLY BY MAILGRAM, SEE REVERSE SIDE FOR WESTERN UNION'S TOLL - FREE PHONE NUMBERS Federal Reserve Bank of St. Louis  .10  NATIONAL ASSOCIATION OF MUTUAL SAVINGS BANKS 200 PARK AVENUE  NEW YORK, N.Y. 10166 TELEPHONE 212-973-5432  SAUL B. KLAMAN  NAPASB  Cable Address: Savings, New York  Mr. Gordon Eastburn Acting Executive Secretary Depository Institutions Deregulation Comml Department of the Treasury, Room 1054 15th and Pennsylvania Avenue, N.W. Washington, D.C. 20220  PRESIDENT  September 21, 1981  DIDC/8i:818ACTION:SKANCKE DUE:10/9/81  Dear Mr. Eastburn: pondence submitted by This letter follows up on the previous corres t on items to be considered NAMSB in response to the request for public commen the September 22 meeting at the upcoming DIDC meeting. The agenda for new long-term deregulation specifically includes a proposal to create "a schedule with new deposit categories." result of the court We assume that this item was added as a direct Gesell voiding DIDC decision handed down on July 31 by Judge Gerhard ized a four-year "wild author have would which 15 Regulation Section 1204.1 on required the DIDC card" certificate beginning August 1, 1981. That decisi interest rate differential on any to abide by the statutory requirement for an 1975. category of account in existence as of December 10, of any deposit NAMSB remains strongly opposed to the creation pal reason is the princi The g. ceilin instrument without an interest rate pressures which cost other and gs earnin s obvious one relating to the seriou tering now, and will savings banks and savings and loan associations are encoun rate war with A . future eable forese ately continue to face in the immedi stronger far a in are basis rywide an indust commercial banks, which on a lopsided be y clearl would , utions competitive position than thrift instit affair. the risk that with From a public policy standpoint, there is also de with the startup coinci to ms progra ing many banks planning aggressive market r 1, there would be considerable of the All Savers Certificate on Octobe go forward at this time with confusion among the public if the DIDC were to , the cost impact of a "wild Indeed ment. another "new" type of deposit instru All Savers Certificate the of t benefi card" account could well outweigh the st cost pressures on intere e reliev program that Congress adopted in part to thrift institutions.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Mr. Gordon Eastburn  -2-  September 21, 1981  Current interest rate ceilings applicable to the Small Saver Certificate provide institutions with sufficient flexibility to structure their liabilities within an adequate range of interest rates. If the DIDC were to extend the maximum maturity of this certificate to "2-1/2 years or more" rather than the current "less than four years," then institutions would have flexibility in the maturity range as well. We strongly suggest this course of action as preferable to the "wild card" approach to long-term deregulation. In addition to the aforementioned economic and policy arguments, there remain significant legal questions as to whether DIDC can create a "new" deposit instrument without a differential simply by changing the maturity limit contained in the now invalid Section 1204.115 to 3-1/2 years or some other figure. This results from the simple fact that 3-1/2 years falls within the maturity range of the "2-1/2 years or more" certificate that was in existence as of December 10, 1975. In short, we respectfully suggest that for the DIDC to specify a maturity of 3-1/2 years on the presumption it would result in a "new" certificate will most likely lead to only another lawsuit and further disruption of the financial markets.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  We thank you for the opportunity to submit these additional views. Sincerely,  Sio,,J  ki„.  Saul B. Klaman President  or TI F CONSUMF HANKERS 1\SSC)CIA1 ION  August 27, 1981  DIDC/81-606 DUE:9/11/81 ACTION:EASTBURN Gordon Eastburn Acting Executive Secretary and Acting Policy Director Depository Institutions Deregulation Committee Department of the Treasury 15th Street and Pennsylvania Avenue, N.W. Room 3025 Washington, D. C. 20220 RE:  cc:John Feichter  Petition for the Creation of A New Deposit Instrument  Dear Mr. Eastburn: The Consumer Bankers Association (CBA) is a national trade association which represents the retail banking departments of more than 400 commerical banks. Members of the CBA hold over 80% of the total domestic deposits held by all commercial banks. On behalf of its member banks, the CBA hereby respectfully requests the Policy Director of the Depository Institutions Deregulation Committee (DIDC) to include on the agenda for the next DIDC meeting, currently scheduled for September 22, 1981, consideration of the establishment of a new deposit instrument as more fully described below. Need for New Deposit Instrument The substantial competitive imbalance which now exists between depository and nondepository institutions is well known to the members of DIDC. This competitive disparity has increased precipitously within the past year. Perhaps the most dramatic illustration of this inequity has been the development of the money market mutual funds by major   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  1725 K STREET, N.W.  WASHINGTON,D. C. 20006  202:46b-6004  Gordon Eastburn  -2-  August 27, 1981  investment banking companies. As the overall level of interest rates rose during the past four years, the public began to demand a market rate of return on its deposits. For the most part, however, government regulations prohibit depository institutions from providing this rate of return. The result was predictable. The nonregulated entities in the market place responded to the demand by creating money market mutual funds, which provided substantially the same check writing privileges as demand deposit accounts offered by banks, together with a market rate of return on funds retained on deposit. With aggregate assets of less than $5 billion in 1977, the nation's money market mutual funds have grown to over $145 billion in deposits in the past four years. The money market funds of one investment company alone -- Merrill Lynch at $29.5 billion -- exceed the domestic deposits of all but the two largest U.S. commercial banks. Needless to say, the growth of money market mutual funds has resulted in increasing deposit outflows from both thrift institutions and commercial banks. This competitive imbalance may be addressed at least in part by the creation of a new deposit instrument which will give consumers an alternative to money market mutual funds. Proposed New Deposit Account The CBA requests that the DIDC exercise its statutory authority under sections 203 and 204 of the Depository Institutions Deregulations and Monetary Control Act of 1980, to create a new account category which would not be subject to any interest rate ceilings. This new account would clearly be designated as an investment account, but would have a restricted transactional capability which would fit within the existing regulatory framework and would approximate in a limited manner the liquidity offered by money market mutual funds. More specifically, we recommend, as set forth in the attachment, that the DIDC authorize all covered financial institutions to offer to individual depositors a new investment account with a minimum initial deposit of $5,000 and a minimum balance requirement of $5,000. Should the balance r in an investment account drop below $5,000 during any calenda month or other applicable 30 day period, the remaining balance ould be subject to the interest rate ceilings applicat a to regular savings accounts or share accounts, as   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Gordon Eastburn  -3-  August 27, 1981  appropriate, for that month or period. In addition, the investment account would be available only to depositors eligible to maintain NOW accounts under Regulation Q. Such accounts would not be available to partnerships or other business organizations. We further recommend that, to underscore the investment nature of the accounts, depositors not be permitted to write checks or drafts to third parties against these new investment accounts. Nevertheless, a certain level of liquidity should be provided through transfers to a transaction account at the same financial institution. This transaction account would be either a demand deposit or NOW account (at the option of the offering financial institution), accessible by checks or other negotiable drafts. This related transaction account would be subject to the existing restrictions of Regulation Q and to the reserve requirements of Regulation D, as well as to other constraints which an individual institution may wish to impose, such as service charges or minimum balance requirements. For the benefit of those thrift institutions or credit unions which do not offer transaction accounts, the receipient of such transfers could be simply a passbook or statement savings account or a share account. The implementing regulations also should provide a further measure of flexibility by permitting a limited number of direct withdrawals by a depositor who does not have a transaction or savings account at the same financial institution. In order to provide depository institutions with the flexibility to design their own investment account programs to compete more effectively with money market mutual funds, we recommend that the DIDC not impose new restrictions on the number of transfers permitted from any such investment accounts. Rather, we recommend that financial institutions be governed by the existing provisions of Regulation D in designing such accounts. In this manner, financial institutions will be encouraged to limit transfers (by account agreement and practice) to no more than three in any thirty day period. If a financial institution elects to permit more frequent transfers, the investment accounts would constitute transaction accounts subject to the existing reserve requirements for such accounts. Finally, we recommend that the DIDC not establish a minimum dollar amount on transfers from such investment accounts. Such minimum dollar limitations will occur naturally   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  L  61;  Gordon Eastburn  -4-  August 27, 1981  as a result of restrictions imposed by financial institutions on the number of transfers in any statement cycle, as well as by the desire of depositors to maximize their interest income. If the DIDC determines that a minimum transfer amount is a necessary element of any such program, we recommend that the minimum transfer amount be as low as possible, and in no event higher than $500 per transfer. In this regard it is important to note that few if any money market mutual funds mandate minimum transaction amounts greater than $500 and many funds have a transactional limit of $250. Classifying the New Accounts The DIDC must also address the categorization of such investment accounts within the framework of existing Regulation Q. Under the existing regulation, such an account must be one of three types of deposits: demand, time, or savings. However, none of these existing categories completely reflects the characteristics of the proposed investment account. Classifying such accounts as demand deposits precludes the payment of interest, while the classification as time deposits raises questions regarding the maintenance of individual deposits for a required maturity period. Characterizing it as a savings deposit without additional qualification could result in lifting the interest ceilings on all savings deposits. In order to eliminate these problems, the CBA recommends that the investment account be classified as a special savings account. Like a NOW account which is a special savings deposit, the investment account funds would be available on call, but with the depository institution reserving the right to require 14 days' notice prior to withdrawal. Benefits Adoption of this new deposit account category by the DIDC would give depository institutions significant new flexibility to attract and retain consumer deposits. It would also allow consumers to enjoy a market return on their savings, while permitting consumers restrictive access to funds via the related transaction account. In addition, the availability of such accounts would enable depository institutions to adjust to operating in a market rate environment since interest rate ceilings would still be imposed on other types of traditional time and savings deposits.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  PROPOSED NEW INVESTMENT ACCOUNT  Minimum Initial Deposit  $5,000  Minimum Balance Requirement  $5,000  Interest Rate Ceiling - $5,000 and above  none  - Below $5,000  regular passbook rate  Limitation on number of Deposits  none  Limitations on Withdrawals  none  - But Reserve Requirement if more than 3 per month. - No Third Party Transfers  Minimum Transfer/Withdrawal Amount  none  Eligible Customers  Same as NOW account  Deposit Insurance  yes   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Gordon Eastburn  -5-  August 27, 1981  In providing a more liquid deposit vehicle at market rates of interest, banks and other depository institutions also would be able, through market experimentation, to determine the effects of convenient locations, the availability of a wide range of financial services and deposit insurance on the level of interest rates that consumer depositors would consider comparable (using a total return criterion) with money market mutual fund alternatives. Finally, the creation of such a new deposit category would not present any of the issues which caused the district court for the District of Columbia to order the DIDC to rescind a portion of its recently promulgated interest rate phase-out regulations. United States League of Savings (D.D.C. July 31, 1981). F. Supp Association v. DIDC, The investment account that we propose would clearly constitute a new instrument for purposes of that decision and the Deregulation Act. For all of the reasons set forth above, the CBA respectfully requests the DIDC to consider at its September 22 meeting and to expeditiously approve the creation of such a new investment account. Respectfully submitte  /&? Drew V. Tidwell General Counsel CC:   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Steven L. Skancke   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  National Savings and Loan League 1101 Fifteenth Street NW Washington. DC 20005 202 331-0270 Cable: NATLISA Jonathan Lindley Executive Vice President  August 20, 1981  Mr. Gordon Eastburn Acting Executive Secretary Depository Institutions Deregulation Committee Room 1054 Department of the Treasury 15th Street and Pennsylvania Avenue, N. W. 20220 Washington, D. C.  -7,)I u .9IJLiri u • =74 (--j  Dear Mr. Eastburn: RE:  Docket No. D-0020  The National Savings and Loan League appreciates the opportunity to comment on the DIDC's proposed amendments to regulations governing money market certificate accounts (MMCs) and on the proposed creation of a new short-term time deposit account having characteristics similar to many money market mutual funds (MMMFs). Our views on the issues raised by the DIDC's proposals are included below under appropriate subheadings. MMC:  Eight-week Moving Average  The Committee's first proposal would permit depository institutions to offer MMCs with a fixed interest rate ceiling indexed to the higher of (1) the rate for 26-week Treasury bills or (2) a moving average of that rate computed on the basis of auctions held during the preceding eight weeks. The National League believes the Committee's proposal will enable depository institutions to more effectively compete with MMMFs throughout the interest rate cycle and we, therefore, generally support implementation of the proposed regulatory revisions. We believe, however, that the following changes to the proposal are warranted: First, the eight-week time period proposed should to five or six weeks. Because most MMMF inshortened be have an average maturity of less than 35 days, vestments   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Mr. Gordon Eastburn August 20, 1981 Page 2 an eight-week average may force depository institutions to pay a yield greater than that being offered by the funds during periods of declining interest rates. A sixweek average should be more than sufficient to assure that depository institutions are permitted to offer a yield fully competitive with MMMFs. Second, as drafted, the proposal would mandate that depository institutions pay the higher of the 26week Treasury bill rate or the eight-week moving average. We can think of no valid reason for the DIDC to dictate regulations mandating payment of the higher rate resulting of from two permissible yield computations. The language choice the final regulation should clearly indicate that the average moving the and rate bill ry between the 26-week Treasu institory deposi each of ative prerog is left solely to the tution's management. MMC:  Variable Rate  The Committee's second proposal would permit st depository institutions to offer MMCs on which the intere term. t deposi k 26-wee the rate would vary weekly during We oppose implementation of the proposed regulation for the sole reason that operationally a variable rate MMC would be an administrative burden. If we had some evidence that the increase in data processing costs would be offset by inflow of funds into variable rate MMCs, we might want to reconsider our position. What we have, however, is a substantial, very definite increase in operational costs s. weighted against an entirely speculative increase in inflow do we gs, earnin Given the already severe pressure on thrifts' le variab a to not believe that the risks inherent in the switch rate MMC are warranted. Creation of a New Short-term Time Deposit Because of the importance of the issue, the National Committee's League polled its members for their response to the teristics charac proposal to authorize an insured account having genering similar to those of a money market fund. The follow ed: alizations can be drawn from poll responses receiv 1)  We believe that the current high interest rate environment has converted that segment of the public formerly characterized as "savers" into "small investors" who are both interest-rate sensitive and willing to explore alternative investment opportunities.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Mr. Gordon Eastburn August 20, 1981 Page 3 2)  We agree with the principle that savings and loan institutions, in the future, must be willing to pay market rates of interest in the consumer savings market if our associations wish to continue to attract retail savings. Given the process of deregulation of financial institutions and the growing competition from non-regulated financial intermediaries, savings and loan associations will have to offer a variety of savings plans that are fully market competitive in terms of rate of return, liquidity, safety and convenience.  3)  However, the current interest rate environment, coupled with consumer interest-rate sensitivity, has produced a catastrophic decrease in earnings for thrift institutions who, with justification, fear immediate implementation of an account that is competitive only at extremely high rates and that virtually guarantees the demise of passbook and perhaps longer-term savings accounts.  4)  On balance, then, while the majority of our members generally support, in principle, the creation of new accounts fully competitive with those offered by "non-regulated" competitors, we would strongly urge the Committee to defer consideration and implementation of the proposed "money market" account until the Administration's economic recovery program and the Federal Reserve's monetary policy have coalesced to produce a more predictable and less inflationary economic environment.  We are grateful for the opportunity to participate in the rulemaking process and we hope that the DIDC will carefully consider our comments before taking any final action to implement the Committee's proposals. Sincerely 0.4w1-14z-Itive  Jonathan Lindley Executive Vice Presiden  0  November 6, 1981  TO:  Chairman Volcker  FROM:  Normand Bernard  SUBJECT:  Chronology of Significant DIDC Actions  chronology At Ed Ettin's request, I have prepared the attached ctive on the recent of significant DIDC actions which provides perspe industry officials criticism of House Banking Committee members and thrift lation. who have decried what they see as unduly rapid deregu  Actions  are marked with an involving an increase (or removal) of a rate ceiling asterisk in the attached chronology.  Some Comments created The only removal of a ceiling to date involves the newly 1. IRA/Keogh instrument which will go into effect on December  Adoption of  September 22 meeting the deregulatory schedule put out for comment at the one of the proposals (beginning with 3-1/2 year and over maturities) and/or , represent major for a new short-term deposit instrument would, of course deregulatory action.  The only significant upward rate adjustments in ceil-  ls) have been the liftings to date (as opposed to actual or proposed remova eby, permitting ing of the "cap" on small saver certificates (SSCs)--ther the previous 11-3/4 the rate on SSCs to move up with Treasury yields beyong the May 1980 increases of percent (banks) and 12 percent (thrift) caps--and in comparison with pre25 basis points on MMCs and 50 basis points on SSCs DIDC rules. s, the With regard to the differential between banks and thrift involves the new rules only action that has reduced the thrift advantage on MMCs that were adopted in May 1980.  This relatively minor action has  ential (compared to the to date reduced or eliminated the thrift differ   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  ••••.-  -2-  old rule) in only 11 weeks--all during the late spring/early summer of 1980. Apart from the differential issue, thrifts have objected to any rule changes that may increase their interest costs.  In summary those  changes have included: 1.  Elimination of ceiling on new IRA/Keogh instrument.  2.  Increases of 25 basis points and 50 basis points on ceilings for MMCs and SSCs, respectively (in comparison with old rules).  3.  Removal of "cap" on SSCs.  4.  Four-week averaging option on MMCs which will keep the MMC rate higher than under the old rule when 6-month bill rates are declining (effective for first time this week). New DIDC rules that tend to reduce deposit interest costs are  the early withdrawal penalty (with invasion of principal feature) and immediate (i.e., day after announcement) implementation of new MMC and SSC ceilings.  Attachments   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  ATTACHMENT A  CHRONOLOGY OF SIGNIFICANT DIDC ACTIONS  DATE May 26, 1980  ACTION Change in rules for Money Market Certificates (MMCs) *1. Rates raised 25 basis points (compared to previous rule). 2. Differential in favor of thrifts restricted to when 6 month Treasury bill rate is between 7-1/2 and 8-3/4 percent. 3. Minimum ceiling of 7-3/4 percent for all depository institutions. 4. Temporary (6 month) authorization for banks to pay higher thrift rate (when applicable) on rollovers. Change in rules for Small Saver Certificates *1. Rates raised 50 basis points (compared to previous rule). 2. Minimum ceiling of 9-1/4 percent for banks and 9-1/2 percent for thrifts. 3. New rates set bi-weekly rather than monthly. NOTE: Differential of 25 basis points in favor of thrifts retained throughout schedule. Change in Early Withdrawal Penalty Rule Invasion of principal permitted for first time (3 months' interest penalty for deposits of 1 year or less; 6 months' penalty for deposits over 1 year).  September 9, 1980  March 26, 1981  September 3, 1981   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 0  1. Ceiling rate payable on NOW accounts set at 5-1/4 percent for all depository institutions. ATS rate remains at 5-1/4 percent for all institutions and at 5-1/4 percent for banks/5-1/2 percent for thrifts on TTS, PNTS, and RSU-ATM accounts. 2. New rules on premiums and finders fees issued. *1. Caps on 2-1/2 year SSC removed to allow ceiling to fluctuate with 2-1/2 year Treasury yield at all levels; 25 basis points differential in favor of thrifts retained. *2. New deregulatory schedule adopted to phase out rate ceilings, beginning with maturities of 4 years and over on August 1, 1981. Schedule prevented from going into effect by Court action on the ground that it eliminated the differential on an account in existence on December 10, 1975. All Savers certificate rules issued in conformance with new law.  •  -2-  DATE September 22, 1981   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  ACTION *1. New IRA/Keogh instrument created with 1-1/2 year maturity and no interest rate or minimum denomination restrictions, effective December 1, 1981. *2. Passbook rates for banks and thrifts raised 1/2 percentage point; action rescinded October 19, 1981. 3. New rule permitting use of four-week average of past auction rates on 6-month Treasury bills in calculating maximum rate payable on MMCs. PROPOSALS 4. Request for comments on new short-term deposit instrument, with specific reference to three possible instruments. 5. Request for comments on a new deregulation schedule, starting with new 3-1/2 year deposit category with no interest rate ceiling.  ATTACHMENT B CHAIRMAN FERNAND J. Sr GERMAIN. R.1, HENRY S. REUSS, WIS. HENRY B. GONZALEZ, TEX. JOSEPH G. MINISH, NJ. FRANK ANNUNZIO. ILL. PAR REN J. MITCHELL MD. WALTER E. FAUNTROY. D.C. STEPHEN L NEAL N.C. . JERRY M. PATTERSON. CALIF JAMES .1. BLANCHARD. MICH. CARROLL. HUBBARD. JR, KY.  TIVES U.S. HOUSE OF REPRESENTA AND URBAN AFFAIRS COMMITTEE ON BANKING, FINANCE NINETY-SEVEIYTH CONGRESS CE BUILDING 2129 RAYBURN Housc OFFI  JOHN .1. LAFALCE, N.Y. GLADYS NOON SPELLMAN. MD. DAVID W. EVANS, IND. NORMAN E. DAMOURS. N.H. STANLEY N. LUNDINE N.Y. MARY ROSE OAKAR, OHIO  WASHINGTON, R.C. 20515  JIM MATTOX, TEX. BRUCE F. VENT°. MINN. DOUG BARNARD, JR.. GA. ROBERT GARCIA, N.Y. MIKE LOWRY, WASH. CHARLES E. SCHUMER. N.Y.  October 27, 1981  J. WILLIAM STANTON, OHIO CHALMERS P. WYLIE. OHIO STEWART B. MCKINNEY, CONN. GEORGE HANSEN. IDAHO HENRY J. HYDE, ILL. JIM LEACH. IOWA THOMAS B EVANS, JR., DELRON PAUL TEX. ED BETH LINE. ARK. NORMAN D. SHUMWAY, CALIF. JON HINSON, MISS. STAN PAR RIB. VA. ED WEBER. OHIO BILL MCCOLLUM. FLA. GREGORY W. CARMAN. N.Y. GEORGE C. WORTLEY. N.Y. MARGE ROUKEMA, NJ. BILL LOWERY. CALIF. JAMES K. COYNE. PA. 2.25-4247  BARNEY FRANK. MASS. BILL PATMAN. TEX. WILLIAM J. COYNE. PA.  7 '  -  Honorable Donald T. Regan titutions Chairman, Depository Ins tee Deregulation Commit , N.W. 15 and Pennsylvania Avenue 20 Washington, D.C. 202 Dear Mr. Regan: thereof, , or a subcommittee The House Banking Committee review in the near future to plans to conduct hearings viability s of the DIDC on the the effects of the action and upon consumers. of depository institutions C postpone ongly urge that the DID In light of this we str in final those regulations issued the effective dates for actions which to defer any other form on September 22, and of funds to increasing the cost would have the effect of \ il unt er sum con without benefiting the financial institutions an adequate g Committee has had kin Ban the as e tim h suc \ s. ion act C DID iew rev opportunity to Sincerely,  Frank Annunzio  cc: Members https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  of the DIDC  g. 4  Page Two October 27, 1981 n Honorable D,:.)11d T. Rega  ed. r  ueet401,400r,,t? P  •.  -  , Henry  Carroll Hubbard  Dave Evans /  . Mike Lowry/  Walter E. Fall. L oy  r  Steny HOle /LIAA  t  Jim Mattox , -e Neal  t -  -.1144-  -rry0I. Patterson orman--E  D'Amours  Bill McColli2r ‘ r•°- / f2.m es  J.  , -  _2/..2-  _../f 1-1f)el  lianchard  a  Mary Rose Dakar / Robert Garcia Ed Bethune  Stan L  dine ./  _ Stan Parris  Hyde 4Akk''' rAVVVAV)• 9 y Norman D. Shumwa Tom Evans   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -Pace Three October 27, 1981 T. Recan Honorable Donald  John J  La  ice  . Carman  Gr  anse Barney Frank  L4  II 4  Marge R  Georg  Wortley  pougiBereut r  BrrceF. Vento  r Charles E. Schume   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  William J. Coyne  J. WILLIAM STANTON, OHIO CHALMERS P. WYLIE. OHIO STEWART B. McKINNEY. CONN. GEORGE HANSEN, IDAHO HENRY J. HYDE, ILL  FERNAND J. ST GERMAIN, R.I., CHAIRMAN HENRY S. REUSS, WIS. HENRY B. GONZALEZ, TEX. JOSEPH G. MINISH, NJ. FRANK ANNUNZIO, ILL. PARREN J. MITCHELL MD. WALTER E. FAUNTROY, D.C. STEPHEN L. NEAL, N.C. JERRY M. PATTERSON, CALIF. JAMES J. BLANCHARD, MICH. CARROLL HUBBARD, JR., KY. JOHN J. LAFALCE, N.Y. GLADYS NOON SPELLMAN, MD. DAVID W. EVANS, IND. NORMAN E. D'AMOURS, N.H. STANLEY N. LUNDINE, N.Y.  U.S. HOUSE OF REPRESENTATIVES  JIM LEACH, IOWA THOMAS B. EVANS, JR., DEL.  COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS  RON PAUL TEX. ED BETHUNE, ARK. NORMAN D. SHUMWAY, CALIF.  NINETY-SEVENTH CONGRESS 2129 RAYBURN HOUSE OFFICE BUILDING  WASHINGTON, D.C. 20515  JON HINSON. MISS. STAN PARRIS, VA. ED WEBER, OHIO BILL McCOLLUM, FLA. GREGORY W. CARMAN. N.Y. GEORGE C. WORTLEY, N.Y.  MARY ROSE OAKAR, OHIO  MARGE ROUKEMA, NJ.  JIM MATTOX, TEX. BRUCE F. VENTO, MINN. DOUG BARNARD, JR., GA.  BILL LOWERY, CALIF. JAMES K. COYNE, PA.  October 27, 1981  225.4247  ROBERT GARCIA, N.Y. MIKE LOWRY. WASH. CHARLES E. SCHUM.ER, N.Y. BARNEY FRANK. MASS. BILL PATMAN. TEX. WILLIAM J. COYNE,PA.  17.)  Honorable Donald T. Regan Chairman, Depository Institutions Deregulation Committee 15 and Pennsylvania Avenue, N.W. Washington, D.C. 20220 Dear Mr. Regan: The House Banking Committee, or a subcommittee thereof, plans to conduct hearings in the near future to review the effects of the actions of the DIDC on the viability of depository institutions and upon consumers.  In light of this we strongly urge that the DIDC postpone the effective dates for those regulations issued in final form on September 22, and to defer any other actions which would have the effect of increasing the cost of funds to financial institutions without benefiting the consumer untill such time as the Banking Committee has had an adequate opportunity to review DIDC actions. Sincerely,  Frank Annunzio  cc:  Members of the DIDC   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Page Two October 27, 1981 Honorable Donald T. Regan   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Dave Evans  Jh'alter E. Fau  "` • • Page Three October 27, 1981 Honorable Donald T. Regan  Gr  y W. Carman  612 11..€ William J. Coyne  Doug./Beteut r  / /6•(.Xe Bruce F. Vento Cl/C4 Charles E. Schumer   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  DEPOSITORY INSTITUTIONS DEREGULATION  COMMITTEE  Washington, D.C. 20220  October 8, 1981  PRESS RELEASE  ified Investment Requirement All Savers Certificates -- Qual Questions and Answers s about the treatment and Additional questions and answer ired of depository institutions timing of qualified financing requ are attached. They cover the issuing All Savers Certificates following issues: 1.  of qualified net October-December 1981 investment savings and ASC proceeds.  2.  investment. Carry-over of excess qualified  3.  assets. Sales of qualified investment  4.  base in determining Alternatives to using an asset requirement. satisfaction of the investment  act: For further information please cont 202-447-1880 Mr. David Ansell Currency Office of the Comptroller of the Mr. F. Douglas Birdzell oration Federal Deposit Insurance Corp Ms. Rebecca Laird Federal Home Loan Bank Board Mr. Daniel Rhoades Federal Reseve Board Mr. Robert Fenner ration National Credit Union Administ Ms. Elaine Boutilier Mr. Allan Schott Department of the Treasury Mr. Robert Levine DIDC Press Officer ion ASC and other rate informat  Attachment:  202-389-4261  202-377-6446  202-452-3711  202-357-1030  202-566-8737 202-566-6798  202-566-5158  202-566-3734  Questions and Answers   COMPTROLLER OF THE CURRENCY https://fraser.stlouisfed.org orcrovr RrIAPn Federal Reserve Bank of St. Louis  CORPORATION FEDERAL DEPOSIT INSURANCE ISTRATION ADMIN UNION T CREDI NATIONAL  BOARD FEDERAL HOME LOAN BANK SURY DEPARTMENT OF THE TREA  Qualified Investment Requirement Questions and Answers  1.  Q.  A.  2.  Q.  A.  during the period of October May loans and investments made that qualify under 1, 1981 through December 31, 1981 (3) be used to meet the Internal Revenue Code § 128(d) test for the quarter qualified residential financing ending March 31, 1982? ified investments must be Yes. The DIDC states that qual ter. The statute states in made by the close of the quar stments must be made during one place that qualified inve d another place that qualifie the succeeding quarter and in ter. the close of the quar investments must be made as of y, the legislative history In light of this inconsistenc erence Report states that has been reviewed. The Conf by the end of the quarter the requirement is to be met generally indicates an and the legislative history e housing loans. intent of Congress to stimulat good reason to require a Since there appears to be no ts that Congress considered delay in making the investmen tation of the statute, desirable, the staff's interpre is that investments may as embodied in the DIDC rule, of 1981 to meet the be made during the fourth quarter ncing requirement by the end qualified residential fina of the first quarter of 1982. extends qualified residential If a depository institution in 1982 in an amount in exfinancing during one quarter ired to be extended during cess of the minimum amount requ itution to continue offering that quarter to enable the inst ter? ied forward to the next quar ASCs, may the excess be carr t investments must be made by Yes. The DIDC rule states tha ess qualified investment in the close of the quarter. An exc to the subsequent quarter; one quarter may be carried over mentation of the investment however, there must be clear docu Further, no loan used to used to qualify for each quarter. again to qualify in a qualify in one quarter may be used subsequent quarter. answer represents a change in The staff is aware that this in the September In response to the same question position. onse was that excess loans could 21st Q & A release, the resp in reconsideration, particularly not be carried over. Upon on, the staff has agreed to light of the preceding questi change this response.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  2  3.  Q.  A.  4.  Q.  A.  tution that Do the sales of loans originated by the insti ly housing, -fami multi or esingl on are secured by liens residential d insure or nteed guara , loans home improvement on loans, ructi const l entia resid , loans loans, mobile home nations origi new by t offse be to have or agricultural loans t of amoun the g minin deter in s or purchases of such asset under cing finan l entia resid an institution's qualified Internal Revenue Code § 128 (d)(3)? (B), Sales of assets described in Section 128 (d)(3)(A), No. loan The up. made be to have not (C), (D), (E) and (H) do day or at is counted when made and it may be sold the next residential fied quali of t amoun any time without reducing the of the 8 and 7 pp. at ial mater financing. The explanatory 1204.116 § ation regul DIDC and ent DIDC Federal Register docum fying quali of sales only that mean (c)(3)(B) should be read to made be must ns actio trans t marke assets purchased in secondary up. the DIDC Does the explanatory material on pp. 7 and 8 of ficate Certi s Saver All ining Federal Register document conta st again s asset ied qualif of rules require the use of a base ied qualif of t amoun site which to measure whether the requi residential financing has been met? method of No. The example was provided to illustrate one requirement. cing finan l calculating the qualified residentia ad it inste base; a use An institution would not need to by t remen requi might demonstrate that it had met the purchase and ents docum ng keeping copies of dated loan closi investment of t amoun agreements indicating that the requisite tutions insti Thus, er. had been met by the close of the quart the in d trate illus may choose whether to use a base as requisite example or to meet the test by demonstrating the amount of qualified investment.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE FEDERAL DEPOSIT INSURANCE CORPORATION  COMPTROLLER OF THE CURRENCY  FEDERAL HOME LOAN BANK BOARD U.S. TREASURY DEPARTMENT  NATIONAL CREDIT UNION ADMINISTRATION  FEDERAL RESERVE BOARD  October 1, 1981  TO:  FROM:   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  SUBJECT:  Chairman Volcker  Various DIDC votes  Edward C. Ettine  14\ The results of various DIDC votes are: 1)  There will be public comment solicited in time for discussion at the December meeting on further increases in passbook ceilings as well as increases in the ceilings on transactions savings and fixed-rate time accounts.  (Only Chairman Pratt  joined your opposition.) 2)  Penalty-free transfers to the new IRA/Keogh accounts will be permitted only from other IRA/Keogh accounts.  (Secretary  Regan and Chairman Connell opposing; they wanted penalty free transfers from any account.) 3) Brokerage of ASCs will be permitted. opposition.)  (Only Isaac joined your  DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE COMPTROLLER OF THE CURRENCY FEDERAL RESERVE BOARD  FEDERAL DEPOSIT INSURANCE CORPORATION  FEDERAL HOME LOAN BANK BOARD  NATIONAL CREDIT UNION ADMINISTRATION  U.S. TREASURY DEPARTMENT  September 17, 1981  TO:  Board of Governors  FROM:  Normand Bernard / /it '  SUBJECT:  DIDC Meeting on September 22  Attached for your information are the agenda and four of the five memoranda prepared for the next meeting of the DIDC to be held on Tuesday, September 22, in the "Cash Room" at Main Treasury (3:30 p.m.). We expect to circulate the final memorandum on Friday.  These memoranda  are Confidential until the time of the meeting on Tuesday.  Attachments   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  ITTEE DEPOSITORY INSTITUTIONS DEREGULATION COMM Ua,hington. D.C. 20220 COMPTROLLER OF THE CURRENCY FEDERAL RESERVE BOARD  FEDERAL DEPOSIT INSURANCE CORPORATION ON NATIONAL CREDIT UNION ADMINISTRATI  FEDERAL HOME LOAN BANK BOARD DEPARTMENT OF THE TREASURY  NOTICE GOVERNMENT IN THE SUNSHINE MEETING Time and Date:  3:30 p.m., September 22, 1981 Cash Room, Department of the Treasury (Use Pennsylvania Avenue Entrance) et Pennsylvania Avenue between 15th Stre ue Aven e utiv Exec East and Washington, D.C. 20220  Place:  Status:  Open  Matters to be Considered: 1.  2.  3.  rate ceilings on Reconsideration of final rule on interest l Savers Certimoney market certificates (MMCs) and Smal ficates (SSCs). ceiling for Consideration of raising the interest rate savings deposits. t-term deposit Consideration of creation of a- new shor method of the ge chan instrument and proposals to et certifimark y mone calculating the ceiling rate on cates (MMCs).  4.  a-deregulated Reconsideration of proposals to create IRA/Keogh Account.  5.  a new long-term Consideration of proposal to create -it categories. deregulation schedule with new depos  NOTE:  fpenefit\of those This meeting will be recorded for the availabli for unable to attend. Cassettes will be Department of the listening in the DIDC offices at the for $5.00 per Treasury, and copies may be purchased writing to: cassette by calling (202) 566-5152 or by Committee Depository Institutions Deregulation Department of the Treasury, Room 1054 MT 20220 Wa'shington, D.C.  DIDC and the September 22 For further information about the . 3734 566meeting, please call (202) e SeCretary of the Committee Gordon Eastburn, Acting Ekecutiv   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  r  DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE ,MPTROLLER OF THE CURRENCY  FEDERAL HOME LOAN BANK BOARD  FEDERAL DEPOSIT INSURANCE CORPORATION  U.S. TREASURY DEPARTMENT  NATIONAL CREDIT UNION ADMINISTRATION  FEDERAL RESERVE BOARD  September 16, 1981 TO:  Depository Institutions Deregulation Committee  FROM:  DIDC Staff*  SUBJECT:  Reconsideration of MMC and SSC Ceiling Rates  Action Requested The Committee has been ordered by the U.S. District Court for the District of Columbia to reconsider the interest rate ceiling schedules for 26-week money market certificates (MMCs) and 2-1/2 to 4-year small savers certificates (SSCs) that were established at the May 28, 1980 meeting. The court ruled on June 30, 1981 that the Committee had the authority to alter the interest rate ceilings on these deposits, but had to solicit public comment on the ceiling rate changes and to reconsider the changes in order to be in compliance with the Administrative Procedure Act.  Responses to the  Committee's request for public comment have been received and the Committee is required to review its decision by September 22, 1981.  After reviewing  the public comments, and in light of market developments since May 1980, the staff does not feel there is sufficient reason to alter the MMC and SSC ceiling rate schedules and recommends that the schedules adopted on May 28, 1980 remain in effect, as amended.  * This memorandum was prepared by the staff of the Federal Reserve Board (Messrs. Moran and Winer).   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -2-  Background The DIDC approved three major adjustments to the ceiling rate schedules for MMCs and SSCs at its May 28, 1980 meeting.  First, the Committee  raised the MMC ceiling rates by 25 basis points and the SSC ceiling rates by 50 basis points.  .  Second, the range of Treasury bill rates over which thrift  institutions have a differential on MMCs was narrowed from all bill rates below 9.0 percent to bill rates between 7.25 and 8.75 percent.  Finally, the  Committee established "minimum ceilings" for both MMCs and SSCs.'  (The MMC  ceiling schedules before and after the May 1980 change are presented in table 1; the comparable SSC schedules are presented in table 2.)  As dis-  cussed more fully below, the Committee's actions were prompted by the rapidly declining interest rates in the Spring of 1980 and the dislocations in credit flows that could have occurred in the absence of the ceiling rate adjustments. On June 16, 1980, less than one month after the Committee adopted the ceiling rate changes, the United States League of Savings Associations ("U.S. League") brought suit against the Committee in federal district court to enjoin the Committee's enforcement of the ceiling rate changes and to have them declared null and void.  The U.S. League argued:  (1) that the  Committee exceeded its statutory authority by issuing rules that partially eliminated the thrift institution differential and by issuing the rules before thrift institutions could adjust to their new asset powers; (2) that the Committee violated the Deregulation Act by establishing above-market minimum ceiling rates for MMCs and SSCs and by not giving due regard to the  1/ The Committee also allowed commercial banks to temporarily reissue maturing MMCs at the thrift rate for a 6-month period ending November 1980. However, this was not an issue in the court order.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -3-  TABLE 1 CEILING RATE SCHEDULES FOR 6-MONTH MONEY MARKET CERTIFICATES 6-month bill rate  Commercial bank ceiling  Thrift ceiling  Differential  -- Prior to the DIDC's May 28, 1980 meeting -9.00 and above  bill rate  bill rate  8.75 to 9.00  bill rate  9.00  Below 8.75  bill rate  0 0 to .25  bill rate + .25  .25  -- Following the DIDC's May 28, 1980 meeting -8.75 and above  bill rate + .25  8.50 to 8.75  bill rate + .25  7.50 to 8.50  bill rate + .25  7.25 to 7.50  7.75  Below 7.25  7.75   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  bill rate + .25 9.00 bill rate + .5 bill rate + .5 7.75  0 0 to .25 .25 .25 to 0 0  -4-  TABLE 2 CEILING RATE SCHEDULES FOR 2-1/2 YEAR SMALL SAVER CERTIFICATES 2-1/2 year Treasury yield  Commercial bank ceiling  Thrift ceiling  Differential  Prior to the DIDC's May 28, 1980 meeting -12.50 and above Below 12.50  11.75  12.00  .25  Treasury -.75  Treasury -.5  .25  -- Following the DIDC's May 28, 1980 meeting -12.00 and above!/ 9.50 to 12.00 Below 9.50 1/  11.75  12.00  .25  Treasury -.25  Treasury  .25  9.25  9.50  .25  At the June 25, 1981 meeting the Committee removed the 12.0 percent and 11.75 percent caps on the small savers certificates. Under the schedule now in effect, thrifts pay the Treasury rate at all interest rate levels above 9.50 percent, and commercial banks pay 25 basis points below the Treasury rate.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -5-  safety, soundness, and competitive equality of thrift institutions in issuing its rules; (3) that Title II of the Deregulation Act, which created the Committee, was unconstitutional; and (4) that the Committee violated the Administrative Procedure Act by not providing notice and opportunity for public comment prior to adopting the rules. The district court found in favor of the Committee and against the U.S. League with respect to the first three of these arguments, thus upholding e the broad scope of the Committee's authority and confirming the substantiv legality and constitutionality of its actions.  However, the court found  that the Committee violated the Administrative Procedure Act by failing to provide notice and opportunity for public comment on the ceiling rate changes. Therefore, the court ordered the Committee to: (1) issue notice and provide an opportunity for public comment on the rules; and (2) reconsider the changes in light of the comments received.  It is important to note, however, that  although it ordered the Committee to seek public comment on the ceiling rate schedules, the court did not invalidate or suspend the current ceilings. Instead, the court observed that invalidation of the rules could cause disruption in the financial community, and ordered that the rules remain in full force and effect pending reconsideration.  Subsequently, the court  directed the Committee to reconsider the May 28, 1980 rules on or before September 22, 1981.  Discussion On August 13, 1981, the Committee solicited public comment on the May 1980 ceiling rate changes and received 14 responses:  10 from commercial  banks and two each from savings and loan associations and trade associations (table 3).   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Three respondents (all commercial banks) fully supported the  -6-  Table 3 SUMMARY OF COMMENTS ON THE MAY 1980 CEILING RATE CHANGES  -  Commercial banks  Fully support the changes 3  Requested some adjustment in the ceiling rate schedules 7  Savings and loans  2  Trade associa-.ions 1/  2  1/  The trade associations responding to the Committee's request for commen: were the U.S. League of Savings Associations and the New Jersey Savings League.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -7-  Committee's action while the other 11 respondents favored some type of adjustment in the ceiling rate schedules.  Among the commercial banks favoring a  rate adjustment, six requested that the thrift differential be eliminated and one requested that the minimum ceilings on MMCs and SSCs be eliminated.  In  addition, one of the responding commercial banks requested that the SSC rate be computed on a weekly basis and another argued strongly for a more competitive short-term deposit.  The two savings and loan associations and the two  trade associations commenting on the ceiling rate schedules requested that the Committee restore the thrift differential on MMCs at all interest rate levels and remove the minimum ceilings on both MMCs and SSCs.  In addition,  the U.S. League of Savings Associations requested that the 12 percent cap on SSCs at thrifts and the 11-3/4 percent cap at commercial banks be reinstated. The May 1980 adjustments to the ceiling rate schedules were a reaction to the rapidly declining interest rates over the period preceding the meeting.  The Committee's action to increase the ceiling rates on MMCs and  SSCs was taken to improve the competitive position of depository institutions relative to market instruments, primarily money market mutual funds (MMMFs). As typically occurs during a period of declining rates, MMMFs enjoyed an interest rate advantage over other instruments since the existing assets in a MMMF's portfolio allows it to quote a higher yield than that available on alternative investments.  In addition, because Treasury rates tend to decline  more rapidly than other market rates, the returns on MMCs and SSCs were further depressed relative to those quoted by MMMFs.  Savings and small time  deposit growth at commercial banks and thrifts was very weak during this period, while at the same time MMMFs were experiencing unprecedented inflows (table 4).   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Some expedited adjustment in the ceiling rates on MMCs and SSCs  -8-  TABLE 4 SAVINGS AND SMALL TIME DEPOSIT GROWTH AND MMMF INFLOWS (Percent, annual rate, month average basis) Commercial Banks  All Thrifts CUs MSBs S&Ls (Seasonally adjusted)  All Institutions  1/ MMMFs(NSA)  1980-Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec.  10.2 5.8 9.8 12.2 8.0 9.0 12.2 10.9 7.3 7.2 20.5 3.5  2.5 9.2 1.3 0.6 7.7 8.5 6.8 8.4 9.0 5.0 8.7 9.7  -2.1 -2.7 -2.2 -0.6 5.7 8.2 9.9 9.8 8.7 4.4 2.8 3.1  -0.4 -0.8 3.3 0.8 8.2 17.5 30.1 28.2 13.2 12.3 9.2 5.0  1.3 0.8 0.7 0.4 7.3 9.2 9.5 10.4 9.3 5.5 7.4 7.9  4.9 3.0 4.6 5.6 7.6 8.9 10.7 10.5 8.4 6.2 13.0 6.0  155.4 197.9 92.1 4.12/ 67.7 107.9 66.7 32.9 1.7 9.2 8.9 -16.5  1981-Jan. Feb. Mar. Apr. May June July Aug.  5.3 2.0 6.7 2.5 4.5 6.1 5.6 11.0  1.7 1.5 0.8 -4.4 1.6 -1.1 -7.3 -2.5  0.2 0.4 1.0 -2.2 -0.1 2.1 -1.8 -0.7  1.0 3.4 8.0 4.7 2.5 -2.3 -6.2 -2.2  1.2 1.4 1.6 -3.2 1.4 -0.5 -6.2 -2.2  2.9 1.6 3.7 -0.7 2.6 2.2 -1.1 3.5  72.3 166.3 170.7 135.9 53.6 50.4 107.1 99.2  5.5  -1.2  -0.1  1.1  -0.8  1.8  145.6  Memo: First eight months of 1981 1/ 27  Excludes "institution-only" money market mutual funds. Money market mutual fund growth was artificailly depressed in this month by the Federal Reserve's Special Credit Restraint Program, which subjected MMMFS to a "Special Deposit Requirement."   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -9-  position seemed necessary in these circumstances to enhance the competitive of depository institutions. Although current interest rates differ markedly from those that banks and prevailed in late May, the competitive position of commercial when thrifts relative to MMMFs is still very similar to that which existed the Committee increased the ceiling rates.  Money market funds have had a  distinct yield advantage over MMCs in recent weeks--averaging 120 basis and points in July and August--and both MMC inflows and total small time savings deposit growth has been very weak (table 4).  If the Committee were  1980, to revert to the lower level of ceiling rates in effect prior to May and thrifts the attractiveness of small time deposits at commercial banks of small would be reduced significantly and would further slow the growth time deposits. tial The Treasury bill rate range over which thrifts have a differen mall commercial on MMCs was narrowed in order to prevent deposit attrition at banks.  Given the declining rate environment that existed at the time, the  a subCommittee fa ed the prospect that a differential would reemerge for stantial period.  If this were to occur, small commercial banks, which had  have become increasingly dependent upon MMCs as a source of funds, could thrift faced substantial deposit attrition as MMC balances were shifted to institutions, resulting in pressure on their ability to extend credit.  Thus,  higher loan the ultimate impact of a sustained differential could have been t rates and reduced credit availability to customers who are highly dependen on small commercial banks, such as mortgage borrowers, agriculture, and small businesses.  The Committee did not alter the existing 25 basis point  differential on 30-month SSCs.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  These longer-term deposits were considered  'M\  -10-  more consistent with the longer-term nature of thrift institutions' portfolios and more likely to provide a more solid base and incentive for mortgage lending. These arguments favoring a limited differential continue to be rele--, vant in the present situation.  Small commercial banks continue to be highly  dependent on MMCs as a source of funds (see table 5), and the reemergence of a differential for a sustained period would likely result in deposit attrition and reduced credit availability to the customers of small commercial banks. Staff analysis suggests that the offsetting benefit to thrift institutions might not be substantial.'  At its June 25 meeting, the DIDC recently consid-  ered a proposal to temporarily reinstate the MMC differential at all interest rate levels, but the modest benefits of such an action for thrifts, combined with the potential adverse impace on many smaller commercial banks, led a majority of the Committee to vote against the proposal. In the final rate adjustment made on May 28, 1980, the Committee adopted "minimum ceilings" for both MMCs and SSCs.  The minimum ceiling on  MMCs was set at 7.75 percent; the SSC minimum ceiling was 9.5 percent for thrift institutions and 9.25 percent for commercial banks (see table 1 and 2).2 In establishing these minimums, the Committee anticipated that if the 6-month Treasury bill rate or the 2-1/2 year constant maturity yield continued to fall, the minimum ceilings would allow depository institutions to attract a substantial volume of funds at a time when their earnings pressures were  1/ See the analysis presented in the DIDC Staff memorandum "Proposal to Reinstate the MMC Rate Differential," June 23, 1981. 2/ The MMC minimum ceiling was in effect for a three week period in late June and early July, 1980. The SSC minimum ceiling was in effect for a ten week period beginning in June and ending in August, 1980.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -11-  Table 5 MMC DISTRIBUTION AT FEDERALLY INSURED COMMERCIAL BANKS JUNE 1981 Percent of Banks MMC/Asset Ratios (Percent) --  All  1/ Small-  1/ Medium-  1/ Large--  Memo: Mortgag.p, Agricultural Banks 2/ Banks 2/  0 to 10  8.2  6.8  13.9  52.8  3.5  4.6  10 to 20  23.9  21.0  44.8  42.1  7.3  24.8  20 to 30  43.8  45.2  37.0  5.1  41.3  52.8  30 to 40  21.3  23.7  4.1  41.1  16.1  40 to 50  2.6  3.0  0.1  6.3  1.5  over 50  0.2  0.3  0.1  0.5  0.2  100.0  100.0  100.0  100.0  100.0  100.0  Memo: Avg. MMC/Total Asset Ratio (Percent)  23.6  24.5  18.1  9.6  29.0  23.5  Outstanding MMCs (Billions of dollars)  213.6  86.6  61.8  65.2  25.9  55.8  1/ 2/  Small banks have less than $100 million in assets, medium size banks have S100 million to $1 billion in assets, and large banks have Si billion or more in assets. Agricultural banks have one-fourth or more of their total loans in farm loans. Mortgage banks have one-fourth or more of their assets in mortgages.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -12-  easing.  The establishment of such a ceiling would not preclude an institu-  tion from offering lower rates.  Although current MMC and SSC rates are sub-  stantially higher than the minimum ceilings, the above arguments would be germane_if these rates were to fall to lower levels. •y  Thus, the Committee  may wish to retain the minimum ceilings. On the other hand, the retention of the minimum ceilings may induce institutions to pay higher yields on deposits and thereby adversely affect institution profitability.  This result would occur if institutions treat the  minimum ceilings as "floors" on deposit yields.  However, this adverse effect  on institution profitability would occur only when interest rates have dropped substantially below current levels and thrift profitability is correspondingly higher.  Recommendation In light of the arguments favoring the current ceiling rate schedules and the limited interest in this issue suggested by the paucity of comments, the staff recommends that the Committee retain the ceiling rate schedules for MMCs and SSCs that were adopted on May 28, 1980.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE COMPTROLLER OF THE CURRENCY FEDERAL RESERVE BOARD  FEDERAL DEPOSIT INSURANCE CORPORATION NATIONAL CREDIT UNION ADMINISTRATION  FEDERAL HOME LOAN BANK BOARD U.S. TREASURY DEPARTMENT  September 16, 1981 TO:  Depository Institutions Deregulation Committee  FROM:  DIDC Staff*  SUBJECT:  Increasing Savings Deposit Rate Ceilings  ACTION REQUESTED: The Committee is asked to vote on whether or not to increase savings deposit rate ceilings.  Section 205(a) of the Depository Institutions Deregulation Act of  1980 (the "Act") (12 U.S.C. § 3504(a)) requires the Committee to vote by no later than September 30, 1981 on whether to raise the rates on passbook and similar accounts by at least one-quarter of one percentage point) ] Furthermore, given the interdependence between savings deposits and interest-bearing transaction accounts , the Committee may wish to consider a change in the rate ceilings on this latter category of accounts..  BACKGROUND: The Committee has considered action to increase savings deposit rate ceilings on several occasions in the past.  At its September 9, 1980 meeting, the DIDC voted  to set interest rate ceilings on all NOW and ATS accounts at 5 1/4% to be effective  This memorandum was prepared primarily by James Marino of the Federal Deposit Insurance Corporation staff.  1/  In addition, the Act requires the Committee to vote by no later than March 31, 1983; 1984; 1985; and 1986 on whether to increase the limitations on the maximum rates applicable to all categories of deposits and accounts by at least one-half of one percentage point.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -2-  on December 31, 1980.  One option under consideration at that time was a 25 basis  point increase in non-transaction savings deposit rate ceilings in order to create a differential between transaction and non-transaction savings accounts at commercial banks.--"  Due to cost implications from such a move, the Committee declined to  increase savings deposit rate ceilings but announced that it would be its policy to establish a transaction/non-transaction savings account differential as soon as it became feasible to increase rate ceilings on non-transaction savings accounts. Such action was considered again at the Committee's December 12, 1980 and March 26, 1981 meetings.  However, no action was taken at these meetings.  Given the September 30 deadline to consider an increase in savings deposit rate ceilings, the Committee decided at its June 25, 1981 meeting to seek public comment to guide it in its deliberations (46 Fed. Reg. 36864).  One proposal sug-  gested at the meeting was a plan to increase the rate ceilings on savings deposits by five percentage points to 10.25/10.50% for commercial banks and thrifts, respectively.  In addition, the Committee specifically asked for comments on the following  questions.  2/  1.  Should the interest rates payable on passbook savings accounts be increased and, if so, to what level?  2.  Should the rates on ATS (Automated Transfer Service) and NOW (Negotiable Order of Withdrawal) accounts also be adjusted?  In the Committee's previous discussions, transaction savings accounts were defined as those savings accounts subject to transaction account reserve requirements under the Federal Reserve's Regulation D. Such accounts include: all negotiable order of withdrawal accounts (NOWs); all credit union share draft accounts (CUSDs); all savings accounts subject to automatic transfers (ATS); savings accounts that permit more than three transfers per month through telephone transfers (TTS) or pre-authorized non-negotiable transfers (PNTS); and all savings accounts that permit payments to third parties by means of an automated teller machine (ATM), remote service unit (RSU), or other electronic device. Non-transaction savings accounts would then be defined as all savinaccounts with the exception of those mentioned above. It should be noted t the NCUA Board has sole authority to set interest rate ceilings on deposits Federally chartered credit unions.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -3-  3.  What would be the impact of rate adjustments, such as a five percentage point or lesser increase, with regard to the earnings of and cost to depository institutions? Responses should address long run, as well as immediate effects on depository institutions.  4.  Any other comments or observations on this matter that would provide guidance to the Committee.  DISCUSSION: Savings Deposit Rate Ceilings The Committee received 4,571 comments from various depository institutions, trade associations, federal agencies, business groups, associations of retired people, and individuals. ' A detailed summary of comments is contained in Appendix A of this memorandum (page 15).  The largest proportion of respondents  favored a 5 percentage point increase in the savings deposit rate ceiling with the bulk of this support coming from retirees and associations of retired people. Among depository institutions, however, support for such a proposal was slim. Indeed, 94% of the thrift institutions favored no savings deposit rate change. Although 53% of commercial banks favored some rate increase, support for a 5 percentage point or some other substantial change was relatively small. The retirees and the associations of retired people were unanimous in their support for a 5 percentage point rate hike.  They noted that the 5.25/5.50% rate  ceilings are unrealistically low in today's environment where open market rates are often three times as high. against.  As a result of this, they felt discriminated  Furthermore, they stressed that the current ceilings are not high  enough to allow them to keep pace with inflation. favored this proposal noted it would:  Those commercial banks which  (1) enable them to compete more favor-  ably with money market funds, (2) reduce their reliance upon MMCs and large CDs,  Commentors universally responded as though this were a proposal to increase the savings deposit rate ceiling by 500 basis points.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  (3) improve their long-run profit prospects, and (4) reduce their reliance on retail repurchase agreements which are relatively onerous to handle. Those commercial banks (CBs) and bank trade associations favoring an intermediate (1/4 to 3 1/4 percentage points) increase in the savings deposit ceiling agreed with the above mentioned arguments but felt that a one-time 500 basis point change would be too drastic and hence preferred a more gradual phaseout. Those opposing any rate ceiling increase (generally thrift institutions, thrift trade associations, retail businesses, law firms, and thrift institution employees) cited cost consequences as their primary objection.  This group felt  that any savings deposit rate ceiling adjustment would be inappropriate at this time since it would substantially increase costs without significantly improving deposit flows. In considering the issue of raising the rate ceilings on savings deposits, the DIDC must give due regard to the safety and soundness of depository institutions.  The net cost or benefit of a plan to increase substantially savings  deposit rate ceilings will depend heavily upon the difference between savings deposit flows which will occur without any change in rate ceilings and the flows that would materialize if savings deposit rates are increased.  It is difficult  to determine what would happen as historical data provide little insight.  In  addition, commentors provided no information on specific flows which may result from such changes.  However, public responses, particularly those from thrifts,  indicated that the impact on deposit flows would not be sufficie nt to offset the increased interest expense. Assuming that all institutions can invest new money at 20%,Ai Table 1 shows both the gross cost of a 500 basis point increase in savings deposit rate ceilings  Al  This may be an unrealistically high rate for thrift institutions.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Table 1.  Summary of Analysis of 10.25/10.50% Savings Deposit Rate Ceiling  Institution Type  Gross Cost Of Rate Ceiling Change  Breakeven Flows  Savings and Loan Assoc.  4.68*  49  Mutual Savings Banks  2.39  25  Commercial Banks  8.04  87  15.11  161  TOTAL  *All numbers in this table are in billions of dollars.  Table 2.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Summary of Analysis of 6.25/6.50% Savings Deposit Rate Ceilings  Institution Type  Gross Cost Of Rate Ceiling Change  Breakeven Flows  Savings and Loan Assoc.  0.94*  10  Mutual Savings Banks  0.48  5  Commercial Banks  1.61  17  TOTAL  3.03  32  *All numbers in this table are in billions of dollars.  -0-  and the breakeven flows (that is, inflows plus reduced outflows which would result from the rate ceiling increase) which must materialize in order to make such a rate ceiling change feasible (see Appendix B for a detailed derivation of these numbers).  The breakeven flows which must materialize in order to make the ceiling  increase a viable proposition seem too large to warrant such action.  Figure 1  shows savings deposit balances at different institutions from January 1979 through August 1981.  Since January of this year, savings balances have been decreasing  at an annual rate of $18.5, $7.5, and $28.3 billion at S&Ls, MSBs, and CBs; respectively.  If one assumes outflows of such magnitude (totaling $54.3 billion)  will continue over the next year in the absence of a 500 basis point increase in savings deposit rate ceilings, inflows of at least $107 billion (161-54) would have to occur over the next 12 months in order to make such a rate increase a breakeven proposition.  This would imply that savings balances at depository  institutions must increase by at least 35 percent.  The staff believes that such  expected flows are unlikely. Table 2 shows comparable numbers for a 100 basis point increase in savings deposit rate ceilings. institutions.  Breakeven flows sum to $32 billion for all depository  The staff suggests that such a small rate ceiling change would  not significantly impact deposit flows. This analysis assumes a time horizon of only one year.  It is recognized  that a substantial increase in the savings deposit rate ceiling may be profitable for a large group of depository institutions if one considers a much longer time frame; however, due to the present earnings difficulties of some institutions, the staff believes that projections based on longer pay-back periods should be avoided at this time. Several thrift institutions have indicated that if the savings deposit rate   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Figure 1.  -7Savings Deposits at Depository Institutions.  Commercial Banks  ($ billion:  -  - 210 - 200  .MII  -  - 190  ...  - 180 - 170 an,  - 160  1  1  Savings and Loan Associations  -  - 130  - 120  - 110  -  - 100 4  1 Mutual Savings Banks - 70  - 65  - 60  - 55  1979  1980  1981  Note: Seasonally adjusted monthly average for January 1980 through August 1981. Source:  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Federal Reserve Board.  is increased by more than a nominal amount, problems may result due to its effect on the early withdrawal penalty for the time deposits accepted prior to July 1, 1979. This penalty requires that the interest rate on the amount withdrawn be converted to the savings deposit rate, and in addition three months interest at that rate must be forfeited.  As the savings deposit rate increases, this penalty decreases.  Indeed, if 10.25/10.50% rate ceilings were adopted, some depositors holding fixed rate time deposits could actually receive an early-withdrawal "premium" by terminating their deposits rather than leaving them in the institution until maturity. Thus, if the passbook rate is increased by more than a nominal amount, the language of the pre-July 1, 1979 early withdrawal penalty must be changed in order to prevent a substantial change in the actual penalty. ' NOW/ATS Rate Ceilings Of those responding to the NOW/ATS rate ceiling question, the majority of responding thrift institutions (97%), commercial banks (58%), and federal agencies (67%) favored no change in NOW/ATS rate ceilings.  5/  6/  All depository institution trade  12 C.F.R. 5 217.4(d) and 329.4(d) and 526.7. The penalty prescribed in 12 C.F.R. g 1204.103 may be applied in lieu of this penalty at the discretion of the depository institution with the depositor's consent. (See, preamble to 12 C.F.R. Part 1204, as published at 45 Fed. Reg. 37801). This could easily be done by changing the penalty to read that "where a time deposit, opened prior to July 1, 1979, or any amount thereof, is paid before maturity, an institution may pay interest on the amount withdrawn at a rate not to exceed that prescribed for a savings deposit at that institution on [the date before the effective date of the new savings deposit rate ceiling], and the depositor shall forfeit three months of interest payable at such rate." The staff believes that under 5 U.S.C. § 553(b)(B), a notice and public comment period would not be required for the changes in the pre-July 1, 1979 penalty, . described above, since notice and comment would be impracticable and contrary to the public interest. Leaving the language of the pre-July 1, 1979 penalty as it is would result in an inadvertent and possibly dramatic effect on depository institutions holding fixed rate time deposits subject to that penalty. It is obvious that such a drastic change in the early withdrawal penalty wa not contemplated by the increase in the passbook rate, since there was ver little comment received on the issue. The change in the language of the penalty actually leaves the effect of the early withdrawal penalty status quo.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  - J-  associations were opposed to such a move.  Negative responses were mainly due to  the fact that most institutions desired no change in the savings deposit rate ceiling, or if such a change was suggested it was only to create a savings/NOW differential.  Several institutions felt that NOW/ATS accounts were already  earning a market return (if one considers service charges) and, therefore, no ceiling increase should be implemented at this time.  Those suggesting an in-  crease in the NOW/ATS rate ceiling seemed to think these rates should be closely aligned or identical with the savings deposit rate.  Indeed, of the CBs which  specified some particular NOW rate ceiling, 73% suggested that same rate as for savings deposits. Some CBs, bank trade associations and federal agencies indicated that some savings/NOW account differential is necessary to create a distinction between interest-bearing transaction and non-transaction savings accounts.  This would  be desirable for monetary policy considerations and, in addition, it would encourage NOW account users at CBs to channel excess balances into savings accounts which have no reserve requirements.2./  The gross annual cost to CBs from  a 25 basis point increase in the savings deposit rate would be approximately $400 million.  7/  For each NOW account dollar shifted into a savings deposit the  The reserve requirements for transaction accounts at all depository institutions are 3 percent of the first $25 million and 12 percent on the amount over $25 million. Transaction accounts include demand deposits, NOW accounts, ATS accounts, and any other savings accounts from which more than three transfers per month can be made by telephone or pre-authorized transfer. Savings deposits owned solely by natural persons are not subject to reserve requirements, however, those awned by other than natural persons are classified as nonpersonal time deposits and are subject to a 3 percent reserve requirement. NOW accounts are subject to the full transaction account reserve requirements without the benefit of a phase-in. Reserve requirements on other accounts at nonmember depository institutions are subject to a phase-in incrementally at the rate of 1/8 of required reserves per year. Currently nonmember depository institutions are subject to required reserves on such accounts at 1/4 of the fully phased in reserve ratios.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -10-  CB will be able to invest an additional 12 cents (assuming 12% reserve require13../ ments).  If one assumes banks can invest new money at 20%, the earnings contri-  bution would be equivalent to 240 basis points per dollar shifted (12 x 20).  On  this basis, there would have to be at least a $17 billion ($400 million/.024) shift in funds from NOW into non-transaction savings accounts at CBs in order to make such a rate increase profitable for CBs.  Given that there are only approxi-  mately $55 billion in NOW accounts at CBs, such a shift appears unlikely.  In  addition, the corresponding 25 basis point rate increase at thrift institutions would cost them over $350 million with only marginal benefits accruing to them.  -"  On the other hand, the Committee should consider the benefits such action would have in aiding the interpretation in the movements of monetary aggregates. The  10/  11/ definitions of the money supply become blurred as some true and M2  savings balances are actually recorded in the Ml-B definition.  These inaccuracies  For member commercial banks the reserve requirements on personal savings deposits are being phased down to zero over 4 years. Currently the reserve requirement rate member bank savings deposits is 1-7/8 percent and, hence, the reserve saving:L for a one dollar shift from transaction to non-transaction savings deposits is 10-1/8 cents. 9/  10  11/  Given that a 25 basis point differential already exists between NOW/ATS and other savings deposits at thrifts, an increase in the non-transaction savings deposit rate ceiling would not be likely to result in substantial shifting between such accounts. However, such action would create a differential between non-transaction savings deposits and TTS, PNTS, RSU, and ATM transaction savings accounts which may provide some benefit to thrifts. Ml-B generally includes (1) demand deposits at commercial and mutual savings banks, (2) currency outstanding, (3) travelers checks of nonbank issuers, (4) NOW and ATS accounts at banks and thrift institutions, and (5) credit union share draft accounts. M2 includes Ml-B plus savings and small-denomination time deposits at all depository institutions, overnight repurchase agreements at CBs, overnight Eurodollars held by U.S. residents, and money market mutual fund shares.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  may prevent an adequate interpretation of Ml-B and M2 and, therefore, make the implementation of monetary policy more difficult.  OPTIONS: The Committee may wish to consider the following options (See Table 3 for a summary of these suggested options): 1.  Take no action at this time but maintain the position that the Committee will initiate a transaction/non-transaction savings account differential at the earliest feasible time. This option would not:  (1) increase the return to savers using savings  accounts, (2) improve fund flows to institutions, or (3) create a transaction savings account differential.  However, such a move would avoid  any negative short-run earnings impact on depository institutions at this time. 2.  Substantially increase the savings deposit rate ceilings by 100 (option 2a) to 500 (option 2h) basis points.  Such action would more closely align  the savings deposit rate ceilings with market interest rates and, as a result, increase the return to the holders of such accounts.  This pro-  posal would most likely have a negative impact on short-run earnings at virtually all depository institutions since increased flows of deposits will probably be insufficient to compensate, at least in the near term, for increased costs.  Under this proposal the rate ceilings on trans-  action savings accounts may be increased or allowed to remain at their   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  TABLE 3.  Structures of Interest Rate Ceilings on Transaction Savings Account, Non-Transaction Savings Accounts, and Fixed-Ceiling Time Deposits at Federally Insured S&Ls, MSBs and CBs.  Option I (current)  Account Type Non-Transaction Savings  Option 2a  Commercial Banks  S&Ls and MSBs  Commercial Banks  5.25  5.50  6.25  S&Ls and MSBs 6.50  Option 2b Commercial Banks 10.25  Option 3  S&Ls and MSBs 10.50  Commercial Banks  S&Ls and MSBs  5.50  5.75  -1  Transaction Savings: TTS/PNTS/RSU/ATM  5.25  5.50  5.25 - 6.00  5.50 - 6.00  5.25 - 10.00  5.25 - 10.00  5.25  5.50  NOW!AL'S  5.25  5.25  5.25 - 6.00  5.25 - 6.00  5.25 - 10.00  5.25 - 10.00  5.25  5.25  14 to 89 days  5.25  n.a.a  6.25  n.a.  10.25  n.a.  5.50  n.a.  90 days to 1 year  5.75  6.00  6.75  7.00  10.75  11.00  6.00  6.25  1 to 21 / 2 years  6.00  6.50  7.00  7.50  11.00  11.50  6.25  6.75  21j to 4 years  6.50  6.75  7.50  7.75  11.50  11.75  6.75  7.00  4 to 6 years  7.25  7.50  8.25  8.50  12.25  12.50  7.50  7.75  Time Deposits by Maturity:  6 to 8 years  7.50  7.75  8.50  8.75  12.50  12.75  7.75  8.00  8 years and over  7.75  8.00  8.75  9.00  12.75  13.00  8.00  8.25  Note:  The interest rate ceiling on CUSDs and regular share accounts at credit unions is 7 percent. n.a. signifies account categories generally not available at S&Ls and a/ MSBs.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  12/  present 1evels.  In addition, in order to maintain the structure of  ceiling rates, the Committee may wish to consider like increases in the rate ceilings on existing fixed-ceiling time deposits for the benefit of institutions which are still using such accounts. 3.  Increase non-transaction savings deposit rate ceilings by 25 basis points in order to create a transaction/non-transaction savings account differential.  Under this option transaction savings account rate ceilings would  remain unchanged.  This proposal would do little to provide equity to the  savers who depend upon savings accounts and would likely do nothing toward improving fund flows at depository institutions.  This option would, how-  ever, aid in the interpretation of movements in monetary aggregates and, in addition, may have a beneficial impact on some depository institutions via encouraging a shift in funds from reservable NOW accounts into non-  In increasing rates on transaction savings accounts, the Committee may wish to institute a transaction/non-transaction savings account differential and/or equalize transaction savings account rate ceilings among CBs, MSBs, and S&Ls. With respect to this latter point, a legal issue arises with regard to whether the existing interest rate differential between commercial banks and S&Ls/MSBs can be eliminated on TTS, PNTS, and RSU-ATM accounts. Briefly, according to Public Law 94-200, unless TTS, PNTS, and RSU-ATM accounts can be regarded as comprising a new deposit category not subject to the differential, the differential on such accounts must be maintained because they existed on December 10, 1975. On the other hand, the differential on TTS, PNTS and RSU-ATM accounts could be eliminated if the DIDC interprets the Depository Institutions Deregulation Act and its legislative history as expressing the Congressional view that 94-200 should not apply to interest-bearing transaction accounts but that all institutions should be able to offer such accounts on the same terms and conditions. Because no rate ceiling differential banks and thrifts ever existed for NOW/ATS accounts, the law allows for a uniform rate ceiling on such accounts. A more detailed discussion of this issue appears on pages 10-13 of the September 3, 1980 DIDC staff memorandum entitled "Deposit Rate Ceilings on Interest-Bearing Household Transaction Accounts." In addition, the staff has interpreted Title XVI Section 1602(c) of the Financial Institutions Regulatory and Interest Rate Control Act of 1978 to mean that rate ceilings on ATS accounts must be the same at CBs and S&Ls.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  reservable savings deposits.  As with option 2, the Committee may wish to make  corresponding adjustments to the ceiling on existing fixed-ceiling time deposits.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  1 4  APPENDIX A:  SUMMARY OF COMMENTS  The Committee received 4,571 responses to its request for comments regarding a change in the savings deposit rate ceiling:  493 from commercial banks and bank  holding companies, 1,374 from thrift institutions, 23 from trade associations, nine from federal agencies, 55 from businesses, 170 from individual chapters of various associations of retired people, and 2,447 from individuals.  A numerical  breakdown of the results of these comments is presented in Table 4.  The largest  proportion of respondents favored a five percentage point increase in the savings deposit rate ceilings with the heaviest support coming from retirees and various chapters of associations of retired people.  The overwhelming majority (97 per-  cent) of depository institutions opposed such a proposal although there was considerable support among CBs for some savings deposit rate ceiling increase. Commercial Banks and CB Trade Associations Four hundred ninety-three CBs and bank holding companies and four CB trade associations responded to the Committee's request for comment. The bulk of CBs (89 percent) were opposed to a savings deposit rate ceiling increase of as much as 500 basis points although a majority (53 percent) appeared to favor some sort of rate ceiling increase.  -'  Almost all (99 percent) CBs  responding to the earnings question indicated that a five percentage point increase in the savings deposit rate ceiling would have a strongly negative impact  13/ — From reading the comments it was difficult to determine whether many institutions were actually in favor of a specific rate increase or whether they suggested such an increase to simply appease the DIDC whom they felt was intent upon a five percentage point increase. The staff suggests that the listed number of institutions apparently favoring a rate ceiling increase may be an overestimate of the quantity which actually favor such a change.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  TABLE 4. Summary of Comments on DIDC'Proposal to Increase Savings and NOW/ATS Account Rate Ceilings  Percentage Point Increase in Savings Deposit Rate Ceiling Group Commercial Banks Thrifts b  Number of Respondents  0.50  0.75  1 - 2.5  2.75 - 3.25 5.0  Othera  Yes  No  Long Run  Reduce Outflows  Increase Inflows  Pos.  Neg.  Pos.  Neg.  Yes  Yes  No  No  493  230  44  33  12  51  8  40  15  60  126  176  2  229  10  46  22  1,288  17  17  3  24  1  3  4  17  19  619  1  1,161  5  360  5  118  26  374  4  1  2  0  0  1  0  0  0  0  0  3  0  4  1  0  0  0  0  2  19  19  0  0  0  0  0  0  0  0  0  16  0  19  0  0  0  5  0  9  9  1  1  0  1  3  0  2  1  0  2  4  0  8  0  0  2  1  2  2  55  39  1  1  0  0  1  10  1  2  3  15  0  14  0  8  0  6  0  6  Thrift Trade Associationsc Federal Agenciesd Nondepository Businesses  TOTAL  0.25  Short Run  1,374  Commercial Bank Trade Assoc's.  Association of Retired Peoplee individualsf  0.0  No Ceiling  Increase in NOW/ATS Rate Ceiling  Impact on Fund Flows at Depository Institutions  Earnings Impact on Depository Institutions  53 i 12  74  170  0  0  0  0  0  0  170  0  0  0  0  0  0  0  0  0  0  0  0  2,447  481  0  0  0  2  0  1,964  0  0  1  139  0  k78  0  34  1  6  0  9  4,571  2,059  65  51  16  81  10  2,189  21  79  151  972  3  1,713  16  448  30  189  40  476  a/ This category consists of the respondents that did not specify a rate increase but primarily suggested a "minimal" increase or some gradual phase-in. b, This category includes savings and loan associations, mutual savings banks and one creidt union. C/ Included in this category is a response from both the National Association of Realtors and the Ohio Deposit Guarantee Fund. d/ This category consists of responses from eight Federal Reserve District Banks and the Madison Regional Office of the FDIC. e/ Primarily local chapters of both the American Association of Retired Persons and the National Retired Teachers Association. f/ Primarily retirees and employees of thrift institutions.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -17-  upon profitability and many institutions noted that such a change would increase interest expenses sufficiently to wipe out all net earnings.  For this reason,  many institutions suggested a gradual phaseout of the savings deposit rate ceiling.  This would give them a chance to adjust and, in addition, any schedule  which may be set up by the DIDC would give them the opportunity to plan for the future.  Those CBs favoring large rate ceiling increases generally noted:  (1) a  desire to pay savers a higher return, (2) an increased ability to compete with nondeposit alternatives, (3) a reduced reliance upon MMCs and large CDs, (4) an improvement in long-run earnings prospects, and (5) a reduction in reliance upon retail repurchase agreements. CBs overwhelmingly felt this proposal would have negative short-run earnings implications.  Many suggested that loan rates would certainly increase as a  result, thus decreasing some benefits which may occur to the savings deposit holder.  A surprising number of CBs expressed concern over the impact of this  proposal upon the thrift industry.  These banks were worried about widespread  failures among thrifts. Although 29 percent of the banks responding to the fund flows issue indicated the proposal would reduce savings deposit outflows, 86 percent noted it would not significantly result in deposit inflows.  Most CBs questioned the  notion that such a savings deposit rate increase would result in flows from the higher yielding MMCs and SSCs (that is, as long as market rates remained relatively high). In addition to the above comments, several banks indicated that state usury ceilings would prohibit them from passing along the costs of a 10.25 percent savings deposit rate.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  For example, the Hardwich Bank and Trust Company stated  -18-  that: Georgia usury laws place a limit of approximately 11 percent on consumer loans so we would not be able to pass this rate increase on to our customers. Out bank is primarily a consumer bank so we are not able to benefit from the high "prime" rates like the money center banks. Those CBs desiring an increase in the NOW/ATS rate ceiling (42 percent) generally felt these ceilings and the savings deposit rate ceilings should either be closely aligned or identical.  Of these, 40 percent suggested the same rate  ceiling change as that implemented for savings accounts, 15 percent desired some small differential, and 46 percent did not specify the rate increase.  The  majority of this latter category simply desired a gradual increase in both savings deposit and NOW/ATS rate ceilings. Although the DIDC has no control over this issue, many banks took this opportunity to express their displeasure over the CB/thrift savings deposit differential.  It was their opinion that banks and thrifts are essentially iden-  tical in the eyes of the public and that any rate differential amounts to an unfair advantage for thrifts. The CB trade associations were unanimously opposed to a five percentage point increase in the savings deposit rate ceiling, but were generally in favor of some increase (two suggested 1/4 percent) which would distinguish savings deposits from NOW/ATS accounts.  The American Banker., Association stated that any  increase greater than 1/4 of a percentage point would "have an adverse affect on bank earnings without any significant commensurate increase in bank's ability to gather new savings."  The Illinois Bankers Association suggested a two percentage  point increase in the savings deposit rate ceiling to better allow CBs to compete with their less regulated competitors.  They also indicated that a five percen-  tage point increase may have a beneficial long-run impact upon earnings. However, the Independent Bankers Association commented that the benefit from such an   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -19-  increase would be speculative at best and that such a risky gesture would not be prudent at this time. The Consumer Bankers Association is opposed to any rate ceiling increase at this time; however, they noted that if any rate increase is decided upon, it should be only to distinguish NOW/ATS accounts from savings deposits.  Thrift Institutions and Thrift Trade Associations  1  The Committee received 1,374 responses from thrift institutions (1,314 from savings and loan associations, 59 from mutual savings banks, and one from a credit union) and 17 responses from various thrift institution trade associations. The overwhelming proportion of thrifts (94 percent) and thrift trade associations (100 percent) were strongly opposed to any rate change and, in particular, found a 500 basis point increase in savings deposit rate ceilings unthinkable.  They  noted such a move would have a devastating impact upon earnings and would greatly accelerate the deterioration in the net worth position of many institutions.  The  Michigan Savings and Loan League suggested that: The proposed passbook increase would cost the savings and loan business $5 billion per year, resulting in an increase of 50 to 100 percent in tax loss carryback claims on the Treasury by savings associations. The National Association of Mutual Savings Banks was characteristic in its comments when it noted that: While a "large" increase in passbook rate ceilings would have devastating effects, a "small" increase would merely add to already mounting deposit interest costs without stimulating any new money or shifts from market-linked deposits. Nor would an increase be justified on the grounds of benefiting the "small saver." The "small saver" already has numerous higher-rate alternatives, and the range of options has expanded further as a result of recent DIDC actions. Congressional adoption of the All Saver Certificate program with low minimum denominations has provided an additional important investment alternative.  --' Included with the thrift institution trade associations is a response from both the National Association of Realtors and the Ohio Deposit Guarantee Fund.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -20-  In addition, the California Savings and Loan League stated: The bulk of our passbook savings are fairly stable and are not sensitive to interest rates. Those savers who desire higher yields have already moved to the instruments currently available — instruments that pay rates in excess of ten percent. The thrifts complained they should be given an opportunity to rearrange their asset portfolio before a significant amount of liability deregulation continues.  They generally felt the DIDC would be violating Congressional intent  by not having sufficient regard for the viability of depository institutions and by not deregulating in a gradual manner.  Many thrifts indicated a five percent-  age point increase in the savings deposit rate ceiling would result in a significant increase in mortgage rates which would negatively impact the already weak housing industry and result in additional inflationary pressures.  Furthermore,  several thrifts suggested there would be a problem with the early withdrawal penalty on fixed-ceiling CDs issued before July 1, 1979 if the savings deposit rate ceiling is significantly increased (see the text accompanying notes 5 and 6 for details). Given that thrifts were generally opposed to any increase in the savings deposit rate ceiling, they were also opposed to any increase in the NOW/ATS rate ceiling (97 percent opposed). to such a move.  Thrift trade associations were unanimously opposed  Of the thrifts which desired an increase in NOW/ATS rate ceil-  ings, 30 percent suggested that the NOW/ATS rate ceiling should be the same as the savings deposit rate ceiling, 35 percent requested a differential ranging from 25 to 200 basis points, 18 percent wanted the NOW ceiling to be greater than the savings deposit ceiling, and 18 percent did not specify any ceiling.  Federal Agencies This category consists of responses from eight Federal Reserve District Banks and the Madison Regional Office of the FDIC.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  This group expressed concern  -21-  that the passbook saver was not getting a fair return on his/her money in addition to the fact that a higher savings deposit rate is necessary in order to 15 / retain and/or attract additional funds. ---  Because of this philosophy, the  respondents in this group generally suggested substantial rate ceiling increases. There was, however, an expression of concern over the earnings implications of such moves. The Federal Reserve Bank of Minneapolis argued against any large abrupt increase in the savings rate noting that: Many institutions would have difficulty adjusting to such a sudden increase. There is considerable evidence that deposit ceilings have induced depository institutions to invest in other forms of competition, such as branching and providing off-site electronic facilities, that cannot be reversed overnight. Until other adjustments could be made, a 500 basis point increase in the rate paid on passbook accounts could cost depository institutions in excess of $18 billion on an annualized basis. Further, I do not believe that an increase in the ceilings, even of this magnitude would enable depository institutions to attract significant volumes of new deposits. At best, it would stem the transfer of deposits to higher interest accounts and the outflow of funds to other competitors. This effect would be unlikely to offset the cost of higher rates in the near term. In addition, this District Bank expressed the concern that with ceilings of ten and one-half percent institutions may be slow to lower savings deposit rates below the ceilings if market rates fall.  This, it was felt, is due to the fact  that institutions have paid the ceiling rate on this account for such a long time. The Federal agencies were generally opposed to any increase in NOW/ATS rates. However, Federal Reserve Banks stressed the importance of a savings/NOW account rate differential citing the importance to monetary policy.  15/ — However, the Federal Reserve Bank of San Francisco maintains that even a five percentage point increase in the savings deposit rate ceiling would not be sufficient to attract a significant amount of funds from sophisticated savers.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -22-  Nondepository Businesses •Fifty-five nondepository businesses responded to the Committee request for public comments. law firms. increase.  This group consists primarily of small retail businesses and  These groups were generally opposed (71 percent) to any rate The retail businesses were concerned about increased borrowing costs  associated with a sizeable increase in the savings deposit rate ceiling.  The  law firms, many of which represent depository institutions, stressed the negative impact of such a proposal upon the earnings of the thrift and banking industry.  Associations of Retired People and Individuals The Committee received 170 comment letters from various local chapters of both the American Association of Retired Persons (AARP) and the National Retired Teachers Association (NRTA) as well as 2,447 letters from individuals.  This  latter group consisted primarily of retirees and thrift institution employees. The Association of Retired People and the letters from retirees commented only on the proposed five percentage point increase in the savings deposit rate. This group was unanimously in favor of such a rate ceiling change.  They noted  that 5.25/5.50 percent was a remarkably low rate of interest to be paid on any account in the current interest rate environment.  This low rate has not been  sufficient to keep pace with inflation and, as a consequence, these savers have been experiencing a negative real return on their funds.  The retirees generally  felt that a passbook-type savings investment was the only viable means of investing their funds and as a consequence, these savers felt discriminated against. Many respondents in this group suggested that a 10.25/10.50 percent savings deposit rate would be extremely helpful to their finances.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -  The thrift institution employees were strongly opposed to any rate ceiling change at this time.  They cited adverse earnings consequences and a general  fear over the welfare of their employing institutions.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  APPENDIX B:  COST ANALYSIS OF SAVINGS DEPOSIT RATE CEILING INCREASES  This appendix provides a detailed description of how the results listed in Tables 1 and 2 of the text were obtained. The additional costs to institutions of a substantial savings deposit rate increase would result from the extra interest expense of maintaining both the quantity of net savings funds that would have been retained without the rate increase [C1] plus any net new funds that would have been attracted from outside the institution at the present savings rate ceiling [C2]. The potential benefits of the rate change would be obtained by interest savings or profits generated from funds which are:  (1) retained in savings  accounts because of the rate change [B1]; (2) attracted from outside the institution which would not otherwise have entered [B2]; (3) attracted from other higher-yielding deposits at the institution [B3]; and (4) attracted from the outside that would otherwise have gone into another more expensive deposit but, instead, were deposited into a savings account [B4]. For the purpose of this analysis, a 500 basis point increase in the savings deposit rate ceiling will be assumed. In all likelihood the quantity of funds involved in B3 and B4 will be fairly small given the substantial gaps which will still exist between both the MMC and SSC and the 10.25/10.50 percent savings deposit rate ceiling. This gap relative to current rates would be in the range of five to six percentage points.  Furthermore, commentors generally agreed that such a savings  deposit rate ceiling increase would not be helpful in terms of attracting funds from existing market-linked certificates at the institution. Furthermore, one could argue that the quantity of net new funds which   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  6  would be attracted from outside the institution that would have been attracted at the present savings rate ceiling [C2] would be small.  The current 5.25/5.50  percent ceilings make the account unattractive to the investor who is interested in yield considerations. For major consideration, then, one must weigh the cost (Cl x .05)1_61/ against the benefits generated by both the retention of savings deposits [B1] and the new funds which may be attracted from outside the institution [B2].  The quantity Cl  is known for each type of depository institution; however, the quantities Bl and B2 are unknown and would be difficult to estimate.  For the purpose of this anal-  ysis, one can calculate the value of (Bl + B2) which would be necessary for a five percentage point increase in the savings deposit rate ceiling to have a "breakeven" effect on earnings. Table 1 shows the breakeven values of (B1 + B2) for the different type of depository institutions assuming that all institutions can invest new money at 20 percent.JS  In addition, Table 1 lists the values of (Cl x .05) assuming a  500 basis point increase in savings deposit rate ceilings. Table 2 lists comparable numbers assuming a 100 basis point increase in savings deposit rate ceilings.  The numbers in this table were derived in a like  fashion under the same assumptions.  16/ _ The quantity Cl is $93.6, $47.7 and $160.7 billion for savings and loan associations, mutual savings banks and commercial banks, respectively. The increase in the savings deposit rate ceilings = .05 = .105 - .055. 17/ Breakeven flows equal (Cl x .05)/(.20 - .105) for thrift institutions and (Cl x .05)/(.20 - .1025) for commercial banks.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE Vsa,itingtoti. D.C. :102:20 COMPTROLLER OF THE CURRENCY FEDERAL RESERVE BOARD  FEDERAL DEPOSIT INSURANCE CORPORATION NATIONAL CREDIT UNION ADMINISTRATION  FEDERAL HOME LOAN BANK BOARD DEPARTMENT OF THE TREASURY  September 16, 1981  TO:  Depository Institutions Deregulation Committee  FROM:  RE:  Proposals to change the method of calculating the ceiling rate on MMCs and consideration of creation of a new short-term deposit instrument.  DIDC Staff*  ACTION REQUESTED The Committee is asked to consider three issues which were published for public comment following its meeting of June 25, 1981.  The first is  a proposal to permit the interest rate ceiling on money market certificates of deposit (MMCs) to be determined by the higher of 1) the current average auction rate on 26-week Treasury bills, or 2) an 8-week moving average of past auction rates on 26-week Treasury bills.  The  second is a proposal to permit depository institutions to vary on a weekly basis the rate of interest paid on MMCs.  The third issue  concerns creating a new short-term deposit instrument that would enable  *This memorandum was prepared primarily by Christopher James and Susan Krause of the Office of the Comptroller of the Currency, and Michael Moran of the Federal Reserve Board Staff.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -2—  banks to compete more effectively with money market mutual funds (MMFs).  A summary of public comments is attached.  These three  are consistent with the Congressional objective, established proposals: by the Depository Institutions Deregulation Act of 1980, to assure the ability of regulated depository institutions to compete with non—depository entities.  BACKGROUND During the past year the Committee has received several proposals to permit depository institutions to issue a short—term deposit instrument with characteristics similar to those of MMF shares.  The impetus behind  these proposals has been the inability of commercial banks and thrift institutions, given the present rules governing deposit instruments and the recent interest rate levels, to compete effectively in the market for small denomination or short—term funds.  The result has been the  sluggish growth of deposits at depository institutions, especially thrifts, and the contemporaneous rapid growth in money market mutual funds. For example, non—institutional MMFs have grown steadily since January of this year with assets increasing $73.5 billion (not seasonally adjusted), to approximately $123 billion.  These funds offer  investors a liquid, short—term, variable—rate investment with low minimum investment requirements (generally between $1000 and $5000). comparison, small—denomination time and savings deposits at all depository institutions increased only $14.0 billion (seasonally adjusted) during the same period.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  In  -3-  The use by depository institutions of nondeposit instruments to attract and to retain funds has also increased.  For example,  institutions have increased their use of small-denomination retail repurchase agreements (RPs).  Since 1979, RPs in denominations of less  than $100,000 with maturities of less than 90 days have been exempted from deposit rate ceilings and therefore provide institutions with a means of competing with MMFs.  However, many depository institutions  find that RPs are not completely adequate.  These institutions have  indicated that because RPs necessitate holding underlying government or agency securities, they do not provide a major new source of loan funding. If present deposit regulations were to remain unchanged and if interest rates remain at their present levels, it is anticipated that MMFs will continue to grow and savings and time deposit growth at commercial banks and thrift institutions will continue to be slow.  The  weak deposit growth at thrifts in conjunction with their present earnings problems makes consideration of the earnings impact of any new . instrument particularly important'  1 In evaluating the earnings impact of a new deposit instrument consideration must be given to the fact that the current earnings problem exists in part because savings and fixed-ceiling time deposits are shifting out of institutions and into market instruments. This has forced depository institutions to replace some of these funds with higher cost non-regulated borrowing sources or the liquidation of assets.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -4-  Despite the fact that MMF shares and other nondeposit instruments have made substantial competitive inroads, a new short-term deposit instrumen_t_has not been authorized in part because such an instrument might exacerbate the earnings problems of thrift institutions and of many small commercial banks.  A key concern is that a new short-term  deposit instrument, while enhancing the competitive position of depository institutions, would not generate a sufficient increase in deposits to offset the detrimental earnings impact associated with the transfer of deposits from existing low-cost accounts into the new deposit instrument. The detrimental earnings effect of a new deposit instrument will depend upon the extent to which funds shift from existing low-rate time and savings deposits.  The amount of shifting will, in turn, depend upon  the minimum denomination, maturity, yield and withdrawal features of the new instrument.  The lower the minimum denomination and/or the shorter  the maturity, the greater will be the opportunity for shifting out of existing low-rate deposits.  In evaluating the earnings impact of  introducing a new deposit instrument, the additional cost associated with the shifting of deposits must be weighed against the contribution to earnings that the additional funds attracted by the new instrument will have.  The greater the shifting of existing deposits, the larger  the influx of new funds required for the institution to break even.  For  example, if a new instrument was introduced yielding a market return, and assuming the proceeds could be reinvested at 200 basis-point spread,   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -5-  depository institutions would have to attract, as new deposits, 4 to 6 times the volume of funds shifted from passbook accounts to break even 2 on this account in the first year. Because of the present earnings situation, it may be necessary to balance the objective of obtaining competitive equality between depository and non-depository institutions against the adverse earnings effect of introducing a new deposit instrument.  Attention has therefore  focused on proposals which would provide depository institutions with a more competitive instrument while minimizing any negative earnings effect. Several alternativ.e approaches designed to meet these conflicting objectives have been suggested.  One approach would be to modify  existing deposit instruments by adding features similar to those offered by MMFs (included in this group are proposals to reduce the minimum denomination  f the MMC, change the interest rate ceiling determination  method of the MMC, make the MMC a floating-rate deposit account with weekly rate fluc:uations, or, raise the basic savings account rate).  A  second approach would be to authorize a new more competitive short-term deposit account (such as a 91-day $5,000 MMC-type account, or a $25,000 minimum-denomination notice account). At its June 25, 1981 meeting, the Committee decided to seek public comment on two proposals regarding the modification of the interest rate ceiling on the existing MMC.  Under the Committee's first proposal,  depository institutions would be permitted to offer MMCs with a fixed  2 This estimate does not include, however, the earnings implications of a continued outflow of funds associated with not introducing a new instrument.  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -6-  interest rate ceiling indexed to the higher of 1) the rate for 26-week . U.S. Treasury bills established and announced under the existing procedure, or 2) a moving average of the rates established for 26-week U.S. Treasury bills at the auctions held during the eight weeks immediately prior to the date of deposit.  Depository institutions could  then determine which of the rates would apply as the ceiling rate for new MMC deposits. The second proposal would allow depository institutions to change the rate paid on an MMC each week (e.g., a "floating-rate MMC").  Under  current regulations the ceiling rate is determined by the most recently _ announced discount rate for 26-week U.S. Treasury bills and remains fixed during the term of the deposit.  Under the proposed floating-rate  MMC, the ceiling rate would be indexed to the rate on 26-week bills and would be allowed to vary weekly with the bill rate. The Committee also reviewed staff memorandum which outlined the possible attributes and likely effects of authorizing a new short-term 3 instrument.  The Committee decided to solicit public comment on the  concept of creating a new short-term deposit instrument, with specific emphasis on the appropriate method of determining the interest rate ceiling, minimum denomination requirements for initial deposits, rules concerning additions and withdrawals, and maturity. At the June 25 meeting the Committee also adopted a long-run deregulation strategy which begins deregulation with long-term deposits _ re. of 4 years or n -,  The long-run deregulation strategy was designed to  3 See the DIDC staff memorandum, "More Competitive Short-Term Deposits," June 5, 1981.  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -7-  provide all depositors, and particularly small savers, with a market rate of return on their deposits. short-ter  The proposal concerning a new  instrument and- the modification of the MMC rate are being  considered within the context of providing depository institutions with a means of competing with MMFs, consistent with the long-term deregulation schedule.  To the extent that the modification or  deregulation of existing long-term deposit instruments, such as the Small Savers Certificate, enhances the ability of depository institutions to compete with non-depository institutions, the need for a new short-term instrument or the modification of the MMC may be lessened. DISCUSSION Moving-Average MMC Rate The Committee received 553 comments on its proposal for a moving-average MMC rate.  Of these, 365 opposed the new method of  calculating the MMC ceiling and 188 favored the proposed change.  Among  the 452 depository institutions responding to the Committee's request for comment, 295 preferred the current method of calculating the ceiling and 157 favored the proposed change.  A detailed discussion of the  comments is provided in an attachment. The primary rationale for this proposal is to permit commercial banks and thrift institutions to be more competitive with non-depository institutions during periods of declining interest rates.  Specifically,  MMFs have grown most rapidly relative to the MMC during periods of declining interest rates.  In a declining rate environment, the existing  assets in an MMF's portfolio allows it to advertise a yield that is frequently more attractive than current MMC rates (see Table 1).   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  With  i  -8-  Table 1 AVERAGE YIELDS AND VOLUME OF MMCS AND MMFS  ,  -.......,  Yield at Comm'l  Total  MMF  MMF  Yield  Year  Month  Total MMC1  1979  Jan. Feb. Mar. Apr. May June July Aug. Sep. Oct. Nov. Dec.  $107.7 119.8 135.7 151.7 163.9 170.1 179.9 194.1 205.9 - -.236.8 257.3 265.8  9.48% 9.37 9.44 9.30 9.60 8.90 9.47 9.50 10.11 12.65 12.04 11.85  $13.4 15.6 18.0 20.3 23.2 25.9 30.0 32.5 34.9 38.8 42.0 45.2  9.81% 9.51 9.65 9.62 9.56 9.51 8.91 9.41 10.87 12.33 13.53 12.90  1980  Jan. Feb. Mar. Apr. May June July Aug. Sep. Oct. Nov. Dec.  $291.1 307.3 342.6 377.0 369.5 361.7 351.0 348.2 351.0 357.4 379.8 411.2  11.89% 13.01 15.07 11.89 7.75 7.75 8.53 10.50 11.07 12.53 14.28 14.28  $53.1 60.3 60.5 60.7 70.0 76.2 80.6 80.7 78.2 77.4 77.0 75.8  12.87% 12.97 15.02 16.25 11.88 9.77 8.39 8.21 9.35 10.79 12.40 15.97  1981  Jan. Feb. Mar. Apr. May June July  $430.0 441.5 447.3 450.9 463.9 468.3 480.1  14.37% 13.86 12.52 14.29 15.93 13.87 14.64  $80.7 92.4 105.6 117.1 118.1 122.8 139.3  17.23% 16.17 15.05 13.85 15.70 17.20 17.25  Banks  i 1  Total includes commercial banks, S&Ls, and MSBs  SOURCE:  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Investment Company Institute.  NI\  -9-  the alternative method of calculating the MMC ceiling, depository institutions could base the current MMC rate on an average of past Treasury bill auction rates, and thus offer yields which during periods of declining rates would be more competitive with MMFs.  In an  environment of rising rates, depository institutions generally have a yield advantage since they are offering current market rates while existing MMF assets lock the funds into lower yields for a short period of time.  Since commercial banks and thrifts would have the option of  tying MMC rates to the current Treasury bill auction, they would retain this yield advantage during periods of rising rates.  As indicated in  Chart 1, this revised calculation method would have allowed depository institutions to offer rates competitive with MMFs throughout past interest rate cycles." In addition, since the proposal is simply a modification of an existing instrument, the incremental shifting of funds from low-cost savings deposits might be minimal, therefore helping to minimize any negative impact on earnings. A number of respondents favored the general idea behind the proposal, but suggested that the Committee use a 4-week moving average of past auction rates rather than an 8-week average.  These respondents  argued that the 4-week average would approximate the maturity of an MMF portfolio more closely and would result in lower interest costs if 4 Treasury rates were to decline for an extended period.  The staff has  4 Throughout 1981 the average maturity on MMF portfolios has been about 30 days. However, if interest rates were to begin declining, MMFs could easily lengthen the average maturity on their portfolios. For example, during the spring of 1980 when the general level of interest rates declined quite rapidly, the average maturity on MMF portfolios increased from 30 days to 50 days.  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -10Chart 1 A COMPARISON OF ALTERNATIVE MMC RATES AND THE MMF RATE  Percent 18  16 1 1 1 1  /  14 i—MMF yield 12 1 I • 1 1  Thrift effe tive MMC rat  10  OMNI.  Comm  1  1  1  1  1  1  1  1 1  1  1  1  1  1  1  1  1  1  1  1  8  6  18  1 /  1  Adjusted thrift effective MMC rate 1/  16  •  ' 14 —1 t...MMF yield  40.  —I' 12  Nommin  10  8  1  1  1  1  1  1  1  [lilt  1  1  1  1  1  1  III  JFMAMJJASONDJFMAMJJ 1/  Adjusted by tying the MMC rate to the higher of (1) the 26-week Treasury bill rate at the most recent auction or (2) an 8-week moving average of 26-week Treasury bill auction rates.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  6  -11-  irwestigated moving averages of several durations in order to determine the effect of alternative methods of computing the MMC ceiling rates. summary  c;"T  the results is presented in Table 2.  A  In general, moving  averages of longer duration will produce larger spreads over the MMF rate (Table 2, item 6), but would also result in higher interest costs for depository institutions (Table 2, item 5). In terms of the impact on the interest cost to depository institutions, the 4-week moving-average method may be preferable to the 8-week moving-average method.  The 4-week method would have resulted in  only a slight negative average interest rate spread over the money market funds during tlie 1980-81 period, but would have increased the costs of MMCs, on average, by only 26 basis points.  The 8-week method  would have increased MMC costs by 45 basis points. The primary argument of the respondents opposed to the new method of calculating MMC ceilings was that it would increase the interest costs of depository institutions and exacerbate the earnings pressure at many thrifts.  These respondents maintained that since the MMC would remain  less liquid than MMFs, the proposal would do little to attract new funds, and thus would only increase the cost of deposits.  Although the  new method of calculating ceilings would add, on average, 26 to 45 basis points to the cost of MMCs, the staff believes that the competitive position of depository institutions would be improved significantly. During periods of declining rates the spread between the advertised yield on money market fund shares and the rate on MMCs would be narrowed from levels as high as 300 to 400 basis points to significantly lower   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -12-  Table 2 SELECTED SUMMARY OF RESULTS FROM ALTERNATIVE METHODS OF CALCULATING THE 26 WEEK MMC CEILING RATE' (January 1980 through August 1981)  Actual MMC rate2 1.  2.  3.  4.  5.  6.  4-week MMC rate  6-week MMC rate  8-week MMC rate  10-week MMC rate  Average MMC rate  13.34  13.60  13.71  13.79  13.84  Highest MMC rate  17.00  17.00  17.00  17.00  17.00  Lowest MMC rate  8.01  8.01  8.37  8.70  8.70  Standard deviation of rates  2.59  2.54  2.46  2.37  2.28  0.26  0.37  0.45  0.50  -0.04  0.07  0.15  0.20  Average spread over actual MMC rate Average spread over MMF rate  -0.30  1  The first column relates to the actual ceiling rates on 26-week MMCs. The remaining columns relate to hypothetical MMC rates that were calculated by tying the ceiling to the higher of the current Treasury bill auction rate or a moving average of past auction rates.  2  The effective MMC rate at thrift institutions.  SOURCE:   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Federal Reserve Board Staff.  -13-  ranges (Chart 1).  To the extent that commercial banks and thrifts were  able to attract additional funds during periods of declining rates (including the retention of MMCs that otherwise would have left the institutions), they could reinvest the incremental flows at positive interest rate spreads (or borrow less at high market rates) and at least partially offset the higher cost associated with the new MMC rate ceilings. The staff estimates that for 1980 and the first half of 1981, the proposal would have increased deposit costs slightly more than the earnings associated with the incremental deposit flow.  For example,  staff estimates indicate that the 4-week moving-average method would have lowered the net-income-to-average-asset ratio at thrift institutions by 3 to 6 basis points in 1980.  The 8-week moving average  method would have reduced this ratio by 6 to 10 basis points.  In the  first half of 1981 the 4 week moving-average method would have resulted in an annual decline in the ratio of net income to total assets of 6 to 10 basis points while the 8-week method of calculating the average 5 would have resulted in an 8 to 12 basis point decline.  5 In developing these earnings estimates, the staff first calculated the incremental cost associated with the existing stock of MMCs rolling over at the higher rates generated by the moving average method of calculation. The staff then calculated the revenue increase that would be generated by reinvesting incremental MMC inflows into 26-week negotiable certificates of deposit. The assumed incremental MMC inflows in the staff's calculations ranged from no new inflows to a substantial increase in MMCs.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -14-  Several respondents opposed to the proposal also indicated that the new method of calculating the MMC ceiling would generate customer confusion and operational problems.  However, if the new ceiling rates  could be announced promptly, it would seem that these problems could be held to a minimum. Floating-Rate MMC The Committee received 471 comment letters on its proposal to authorize depository institutions to offer a floating-rate MMC. Three-fourths of the respondents were against the proposal.  Eighty  percent of the savings and loan associations and mutual savings banks and 70% of the commercial banks that commented were against the proposal.  Most individuals and trade groups responding to the proposal  were also against the floating-rate feature.  More details on the  public comments received can be found in an attachment. The proposed floating-rate MMC represents an attempt to enable commercial banks and thrifts to compete more effectively with MMFs. Under present rules, the rate of interest paid on an MMC may not be increased during the 26-week period; a depositor can obtain a rate increase only by incurring an early withdrawal penalty and purchasing a new 26-week MMC.  Under the proposal, depository institutions would  have the option of offering an MMC with the interest rate adjusted weekly and indexed to the most recently announced rate for 26-week U.S. Treasury bills.  Thus a depositor could obtain a return that reflected  market changes. A floating-rate MMC would offer additional flexibility to depository institutions and the resulting potential marketing benefits of the instrument may help institutions attract additional funds.  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Such  -15-  an instrument might be particularly attractive to depositors during a period when interest rates are expected to rise.  However, it is not  clear that the floating-rate MMC provides substantive competitive advantages over MMFs.  The redemption of MMF shares would still remain  more convenient and less costly than the MMC.  Further, the minimum  investment requirements would continue to be lower at most MMFs.  Also,  although the new MMC would be attractive during periods when interest rates are expected to rise, it would not be attractive to investors during periods when interest rates are expected to decline.  Yet it is  during periods of declining interest rates, as discussed earlier, that institutions have thseIreatest need for an instrument which is competitive with the MMF. In addition to the limited competitive advantages of the floating-rate MMC, there may be operational problems with it.  Many  depository institutions commented that the weekly recalculations of the rates on their MMCs would be burdensome.  Furthermore, some depository  institutions indicated that the marketing advantages associated with the yield feature of a floating-rate MMC would be moderated by the difficulty in explaining the complexities of the new instrument to depositors. Short-Term Instrument The Committee received 440 comment letters on its request for comment on the creation of a new short-term deposit instrument designed to compete with MMFs.  About half, 52%, of the respondents were against  the creation of a new deposit instrument.  Sixty-six percent of the  banks endorsed the new instrument and 62% of the S&Ls were against it. The comments are summarized in an attachment.  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -16-  formal The creation of a short-term market-rate account was not a of proposal, but rather a request for comments on the possibility s authorizing a new short-term time deposit having characteristic similar to some MMF shares.  To that end, the relevant variables for  ent are the Committee to consider in structuring a short-term instrum transaction yield, minimum denomination, liquidity (maturity), and characteristics.  The optimal design of a short-term instrument will  combine these features in such a way as to provide substantive ing a minimum competition with MMF shares while at the same time attract of funds from existing low-yield savings accounts. Yield.  In order- fb compete with nondeposit investments, the return  on the new short-term instrument must reflect market rates.  Obviously  holders a yield approximating a market rate will be quite attractive to s of time and savings accounts subject to deposit rate ceiling substantially below market rates. ed so The rate of return of the deposit instrument could be structur as to lessen any negative earnings effect.  For example, the ceiling  rate could be set slightly below the appropriate market rate. option would be to prohibit the compounding of interest.  Another  The  ent from depositors may feel that the ease of acquiring such an instrum insurance local depository institutions and the advantages of deposit short-term would offset the marginal reduction in yield of the new instrument.  To the extent that this is true, however, convenience and  instrument deposit insurance would bring in even more deposits if the paid a competitive market rate.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -17-  Minimum Denomination.  If the new instrument is to match MMF shares  in attractiveness, it should have a minimum denomination in the $1,000-$5000 range.  However, such a low minimum denomination on a  short-term instrument would make it accessible to many holders of low-yield savings accounts who cannot afford a $10,000-minimum 26-week MMC, or for whom $10,000 represents too large an amount to commit for 6 months.  Available evidence suggests that a substantial volume of  savings deposits are held in accounts with relatively large balances, that is, over $5,000 (see Table 3 on the following page).  Such  depositors may find a short-term deposit instrument at a market rate very attractive,  resulting in  a shift from passbook accounts.  Such  shifting could be discouraged by setting a very high minimum denomination such as $25,000.  A $25,000 instrument which offered other  appealing features such as high liquidity and a high yield might enable depository institutions to attract deposits from small businesses and from individuals with large balances. Liquidity.  To match effectively the liquidity of an MMF share, a  new instrument would need to have a very short term-to-maturity.  The  disadvantage of such a short-term instrument is that it would approximate the liquidity of a passbook savings account, thus increasing the institution's exposure to shifting.  An account with a  longer maturity, such as 91 days, might discourage the shifting of savings account funds since it would not provide the same liquidity. Such an account, however, might draw funds away from the 26-week MMC. Another approach to matching the liquidity of MMF shares would be to have a stated maturity such as 91 days, but permit limited withdrawals without penalty, with or without a notice requirement.  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -18-  Table 3 DEPOSIT STRUCTURE AT FSLIC-INSURED SAVINGS AND LOAN ASSOCIATIONS (Billions of dollars, August 1980) _ Volume of Funds Earning Passbook Rate or Less Less than $2,500 $2,500 to $4,999 $5,000 to $7,499 $7,500 to $9,999 $10,000 or more TOTAL  SOURCE: 1981.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Volume of Volume of All Non-MMC Non-MMC Accounts Time-Deposits  18.6 17.1 15.3 10.9 53.7  14.2 15.5 27.0 18.9 131.2  32.8 32.6 42.3 29.8 184.9  115.6  206.8  322.5  DIDC Staff Memorandum, "More Competitive Short-Term Deposits," June 5,  -19-  Transactions Characteristics.  Another feature of most MMFs is the  ability of a depositor to perform third party transfers.  This may be  6 an important component of a competitive short-term instrument.  A  transaction feature could be authorized for a short-term instrument, making it appealing to both MMF investors and savings and NOW account holders.  However, if the account were used for transactions purposes  it might interfere with the formation and implementation of monetary policy by further blurring the distinction between savings and transactions balances and distorting movements in the monetary aggregates.  Thus the Committee may want to structure the instrument to  minimize its use for transactions purposes.  A fixed-term maturity  account with penalties for early withdrawal would eliminate the transactions potential.  Or, if withdrawal privileges are desired on  the account, such as a $500 minimum withdrawal feature, transactions activity could be discouraged by prohibiting access by draft and by limiting the number of telephone or preauthorized transfers per month. Of course, this would at the same time make investments in the many MMFs that offer transactions services relatively more attractive.  6 Investment Company Institute surveys have shown that the average number of checks written per MMF account is less than 3 per year. This figure probably understates somewhat the check-writing activity for non-institutional accounts as it includes institutional accounts which use primarily wire transfers. It also must be recognized that the potential for check-writing, whether actively used or not, may be quite important to the MMF investor.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -20-  OPTIONS The options discussed here concern the proposals before the Committee regarding more competitive short-term deposit instruments. The first two options discussed concern modification of the existing MMC, as proposed by the Committee subsequent to the June 25 meeting. The second set of options concerns the creation of a new short-term deposit instrument.  The two sets of options should not be interpreted  as mutually exclusive, although introduction of a new short-term instrument may obviate the need for modification of the MMC.  -. Options for Revising the MMC Rate (1)   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Moving-Average MMC Rate. Modify the method of calculating the MMC ceiling rate by tying the MMC ceiling to the higher of the current average auction rate or a moving average of past auction rates.  This action would improve the competitive  position of depository institutions, particularly in a declining rate environment, at the expense of an increase in the cost of MMCs.  If the Committee were to adopt this option,  the staff would recommend using a 4-week moving average rather than an 8-week moving average.  The shorter moving average  would improve the competitive position of depository institutions while being slightly less expensive than a longer moving average.  -21-  (2)  Floating-Rate MMC.  Permit the rate on a 26-week MMC to vary  weekly with the yield on 26-week Treasury bills.  A floating  Tate MMC would provide depository institutions with additional flexibility and possible marketing benefits in attracting funds.  In addition, modification of the MMC rate is unlikely  to produce shifting of funds out of existing savings and time deposits.  However, substantive benefits in terms of  attracting new deposits funds are likely to be limited under this option.  A variable-rate MMC would not substantially  improve the competitive position of depository institutions vis-a-vis NNE.  If the .Committee decides to authorize a modification to the MMC as discussed in option (1) or (2), public comment on either proposal is not required.  Options For a Short-Term Deposit Instrument A new short-term deposit instrument may attract funds out of other deposit instruments; the extent to which this shifting occurs and the competitiveness of the instrument with non-deposit instruments will depend upon the manner in which maturity, yield, minimum denomination and transactions features are combined.  At one extreme the creation of  an account with a market yield, no minimum denomination, a very short term-to-maturity and transactions capabilities, would provide depository institutions with an instrument which would match the features offered by MMFs.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  However, the creation of such an account  -22-  could result in substantial shifting of deposit funds from other Creation of an account with a high minimum  deposit accounts.  denomination or a long term-to-maturity would minimize shifting, but would be less effective in attracting new deposits. Given these considerations, the following instruments are intended to combine features in a manner which will minimize shifting while providing institutions with a competitive new instrument.  These  options reflect the public comments received by the Committee.  They  are not mutually exclusive and are presented for the purpose of discussion.  The Committee, of course, should not feel limited to these  choices.  (1)  A $25,000 minimum denomination, ceilingless 14-day notice account.  This proposal would permit depository institutions  to offer to large investors a deposit account similar to an MMF share.  The institution would be free to vary the interest  rate with market rates or offer a fixed-rate account.  A 14  day notice period at the option of the institution could be adopted, a provisio-1 similiar to the current withdrawal provitions on passbook accounts.  This type of account,  because of the large minimum denomination, would minimize shifting from passbook accounts.  As this would be a highly  liquid account, it might shorten the maturity of institutions' liability structures.  However, this would depend upon whether  this account was replacing other highly liquid funds or was, rather, attracting new funds.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -23-  A $5,000 minimum denomination 91-day certificate account with  (2)  -a rate ceiling tied to the 13-week Treasury bill discount rate.  The rate on the instrument could be fixed or allowed,  at the institution's option, to vary weekly with the Treasury bill rate. An instrument of this type would enable depository institutions to offer customers a deposit account which is more liquid than the 26-week MMC, and which is more accessible to small savers.  This new instrument may, however, attract  funds from bah savings and time deposits resulting in a higher cost of funds as well as possibly a shortening in maturity of institutions' liabilities.  This instrument would  be more attractive than the 26-week MMC in terms of both maturity and minimum denomination.  Because of this, if the  Committee were to authorize this instrument, it might also be appropriate to drop the minimum denomination on the 26-week MMC to $5,000.  (3)   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  A $5,000 minimum denomination 30-day account with an interest ceiling, either fixed or floating, tied to the 30-day Treasury bill discount rate.  The creation of a 30-day instrument, if  combined with the 91-day instrument outlined above, would provide a range of short-term instruments that would allow depository institutions to compete effectively with  -24-  alternative investment media.  It is not clear how much  additional shifting out of passbook savings accounts the 30-day account would create over and above that which would occur with the creation of the 91-day instrument of the same minimum denomination.  The shorter maturity, however, may make  the instrument more competitive with highly liquid MMF shares.  (4)   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  A minimum balance certificate account with the ability to make transfers to a transactions account.  There would be no  explicit minimum denomination on this account.  If the  account's bal-ance were greater than $5,000 the yield would be equal to the 91-day Treasury bill rate (or perhaps 25 basis points below the bill rate) and could be fixed or be allowed to change weekly following the Treasury's auction.  The  instrument's yield would fall to the passbook rate if the account's balance was less than $5,000.  Funds could be  withdrawn at any time, as well as automatically transferred to a separate transactions account.  Eligibility requirements for  this account would be identical to those for NOW accounts, that is, limited to individuals and nonprofit organizations. If a financial institution elects to permit more than three transfers per month, the instrument would constitute a transactions account subject to the existing reserve requirements for such accounts.  The low ($5,000) minimum  balance and liquidity features of this account would provide  -25-  depository institutions with an instrument which is competitive with the MMF share.  This account would, however,  likely result in substantial shifting out of passbook accounts and therefore significantly increase interest costs.  If the Committee decides to authorize a short-term instrument, such as one of the above, the staff recommends that a specific proposal be designed and public comment be requested.  There are two reasons for  releasing a more specific proposal at this time.  First, individuals  would be able to react to it in the context of knowing how the two proposals pertaining to the MMC ceiling were resolved, and thus would be able to better focus on the marginal costs and benefits of the short-term certificate proposal.  Second, the proposal would be more  specific than the previous one and would give respondents a chance to comment on all facets of a particular instrument.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Attachment*  PUBLIC COMMENTS  Moving-Average MMC Rate The Committee received 553 responses to its request for comment on a proposal to permit the ceiling rate of interest payable by depository institutions on 26-week money market certificates (MMCs) to be determined by the higher of (a) the rate for 26-week U.S. Treasury bills established immediately prior to the date of deposit or (b) the average of the rates for 26-week U.S. Treasury bills for the eight weeks immediately prior to the date of deposit.  Of the respondents, 188  favored the averaging approach although 51 respondents believed an 8-week period to be too long; 365 respondents opposed the proposal. Table 1, at the end of this Attachment, gives a breakdown of responses. Forty-five percent of the commercial banks and bank holding companies, 25% of the savings and loan associations, and 40% of the mutual savings banks responding favored the Committee's proposal.  These  institutions generally stated that the alternative method of determining  * This summary of comments was prepared primarily by Nancy Jones of the Office of the Comptroller of the Currency and Daniel Rhoads of the Federal Reserve Board Staff.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -2-  the applicable rate ceiling would enhance the competitive position of depository institutions vis-a-vis money market mutual funds (MMFs) during differing interest rate environments. Several S&Ls saw no real benefit to the proposal other than that it may allow them to better retain funds already on deposit.  In their  opinion, the ability of a depository institution to choose between a ceiling based on an average rate or a ceiling based on the present auction rate would enable institutions to have a slight competitive edge in periods of increasing interest rates because of their ability to offer an interest rate based on the most recent auction while MMFs could not do so. In periods of declining rates, an average rate would enable them to offer similar rates as MMFs.  However, 26 commercial banks and  11 S&Ls stated that the proposed 8-week averaging period was too long and suggested periods of 3-4 weeks since MMFs generally have portfolios with 3-4 week maturities.  Three MSBs suggested an averaging period of  4-6 weeks as being more indicative of market rates and therefore more appropriate than an 8-week period. Of the 14 trade associations responding to this proposal, 7 groups favored it and 7 groups opposed it.  The American Bankers Association  ("ABA") and the National Association of Mutual Savings Banks ("NAMSB") approved of the averaging concept on the basis that the added flexibility given to depository institutions would enable them to compete more effectively in periods when MMF yields lag behind market rates.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  The ABA noted that adequate resources should be allocated for  -3-  dissemil,ation of the average rate to allow institutions sufficient time to revi-&e and implement marketing campaigns.  The NAMSB noted that a  significant minority of its members opposed the proposal. The National Association of Realtors favored the proposal as enhancing the competitiveness of depository institutions during periods of declining rates.  They believe the shifting of deposits from  lower-cost accounts would be minimal since the proposal would only modify an existing account. The Natioaal Retired Teachers Association/American Association of Retired Penns suppt4rted the proposal but reiterated their position that MMC ceilings should be abolished as quickly as possible. The Ohio Savings & Loan League, Ohio Deposit Guarantee Fund, and Savings Association League of New York State supported the proposal as enhancing  he competitiveness of institutions vis-a-vis MMFs during  periods of declining rates.  The two Ohio respondents suggested that a  4-week afaging period would be more appropriate than the proposed 8-week ,Jeriod to more closely match the maturity period of MMF assets. Nine Federal Reserve Banks responded to the proposal and all were in favor.  The majority of these respondents stated that the proposal would  enhance the competitiveness of depository institutions vis-a-vis MMFs during periods of declining rates.  San Francisco, Minneapolis, and  Atlanta stated that in their opinion the proposal would have only a marginal effect on competition, with Atlanta and San Francisco stating that liquidity is of greater concern to investors than slight increases in interest rates.  Cleveland and Richmond stated that the proposal  would have the net effect of increasing the MMC rate ceiling, but  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -4-  Cleveland and Minneapolis believed that the adverse effect would be minimal.  Chicago preferred an 8-week averaging period while Cleveland  preferred a Lo-week period because of the similarity to the average maturity period for MMF assets. Of the responses from individuals associated with financial institutions, only 22% were in favor of the proposal.  Six of these  respondents suggested a shorter averaging period, generally 4-6 weeks. Twelve percent of other individuals responding favored the proposal as providing a better rate of return on deposits.  Two respondents believed  the averaging period to be too long. A majority or 55% of the commercial banks, 75% of the S&Ls, and 60% of the mutual savings banks responding were opposed to the proposal.  A  number of respondents based their opposition on the belief that the proposal would not enhance competition but would increase costs during periods of declining rates.  'also stated that Many of these respondents  the rate option would confuse customers and increase administrative costs.  Several banks stated that an average rate option would add to  the difficulty of asset-liability management by locking in above-market rates during periods of declining interest rates.  Many S&L respondents  noted that competitive pressures would force them to offer the higher rate and thus result in increased earnings pressures.  A number of  associations also commented that liquidity concerns were more important than slight increases in interest rates and that decreasing the minimum denomination requirements would improve their ability to compete. Half of the trade associations responding were against the proposal with those in opposition consisting of 6 thrift representatives and 1  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -5-  bank representative.  The Consumer Bankers Association stated that it  saw no need to average the rate since rates have not generally been a •Y deterrent with respect to MMCs. They prefer that the minimum denomination requirement be reduced from $10,000 to $3,000 to increase the attractiveness of MMCs. The Savings & Loan League of Connecticut stated that the averaging proposal would do nothing but add to the cost of the certificates which they believe would be disastrous to Connecticut associations.  The  Pennsylvania Savings League, Michigan Savings & Loan League, and the Federal Savings League of New England stated that the proposal would exacerbate increases in interest costs, thus increasing operating losses.  The New Jersey Savings League stated that the proposal would  add confusion to depositors and institutions and interfere with associations' attempts to establish new asset programs.  The Savings  Bank Association of New Jersey saw no merit in the proposal. Seventy-eight percent of the responses from individuals associated with financial institutions were opposed to the proposal.  The majority  of these responses were from respondents affiliated with thrift institutions.  In addition, 88% of the responses from other individuals  were opposed to the proposal.  Responses from both categories generally  based their opposition on the opinion that the proposal wauld increase costs to institutions and would confuse depositors as a result of the rate option. Floating-Rate MMC Three-fourths of the 471 respondents commenting on a floating-rate MMC were against the proposal with about 80% of the savings and loans  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -6-  and mutual savings banks and 70% of the commercial banks against it. Table 2, at the end of this Attachment, summarizes these responses. The primaty reason cited in opposition to the floating-rate MMC proposal was the expected operational difficulty of offering such an instrument.  The programming of the amount of interest paid, calculating  the early withdrawal penalties, and explaining the instrument to consumers were thought to be problematical if not infeasible.  The  proposal was often referred to by respondents as an "administrative nightmare".  Small banks, in particular, expressed their concern over  the costs involved in carrying out weekly rate changes.  A bank in favor  of the floating-rate proposal indicated that it would take 6 weeks and $12,000 to program its computer to accommodate a floating rate.  Many  institutions expressed their concern over the marketing of a floating-rate instrument which they believed would invariably cause customer confusion. Another frequently cited criticism of the floating-rate proposal was the expected difficulty that depository institutions would have matching a floating-rate MMC with an equally rate-sensitive asset.  These  respondents questioned whether their asset/liability structure could absorb the volatility of floating rates.  Several savings and loan  associations pointed out that a floating-rate MMC could increase funding cost volatility. Many of the respondents against the proposal were also of the opinion that customers prefer a deposit instrument where the rate is fixed throughout the term of the instrument and that in fact, a fixed rate is a marketing advantage.  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Other opponents expressed some doubt as  -7-  to whether the floating-rate feature would make MMCs more attractive than MMFs, especially if there were no change in the existing withdrawal penalties and, minimum balance requirements on MMCs. Those in favor of a floating-rate MMC felt that it would provide them with additional flexibility.  Many viewed this flexibility as  increasing their ability to compete with MMFs.  Other proponents,  however, felt that a floating-rate feature, in and of itself, would not substantially increase the attractiveness of the instrument unless additional changes were made to the MMC such as a revision of the early withdrawal penalty, and the removal of MMC rate ceilings.  Nevertheless,  these respondents favored the aspect of the proposal which would allow them to share interest rate risk with depositors and improve their interest rate sensitivity.  Several in this group believed that varying  rates would prevail in the future and therefore regarded the proposal as a step in that direction.  As one banker noted: "We believe this change  to be a logical and necessary move toward deregulation". Many of the respondents in favor of the proposal emphasized that allowing sufficient lead time, cited as anywhere from one month to one year, would be needed for depository institutions to prepare to offer such an instrument. A substantial number of the commercial banks and savings and loans, regardless of whether they favored the floating-rate MMC, stated that if the DIDC were to approve such an MMC, they would want to maintain the option of offering the fixed-rate MMC also.  These respondents pointed  out that while customers would be attracted to the floating-rate certificate in a rising rate environment, they would be less interested when rates are falling.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -8-  A few respondents questioned the appropriateness of using a 26-week rate as the index for an instrument whose rate varies weekly.  Some of  these ihdividuals felt that no index would be suitable and thus opposed the certificate; others endorsed the proposal but suggested a shorter-term rate for the index. Short-Term Instrument Fifty-two percent of the 440 respondents commenting were against the creation of a new short-term deposit instrument.  However, while 62% of  the S&Ls were against a new instrument, 66% of the banks were in favor of it.  Table 3 summarizes these responses.  It was clear from the responses that the short-term instrument described in the request for comments was often viewed as a proposal rather than an example.  Therefore, while many respondents endorsed a  13-week maturity and a rate tied to the discount rate on 13-week Treasury bills for the new instrument, it was clear that many thought that the maturity and rate were already specified.  Similarly, a  majority of these respondents endorsed authorization of withdrawals without penalty, after the initial maturity period and with a 7-day notice, as mentioned in the request for comment. Respondents who were against a new short-term instrument generally argued that a deposit with a 91-day maturity and a rate indexed to the 13-week Treasury bill discount rate would not attract a substantial amount of new deposits from MMFs.  These respondents stressed that an  instrument of this sort would not match the rates or liquidity of MMFs and therefore would only raise the cost of deposits to institutions as depositors in passbook accounts transferred their funds to the new   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -9-  instrument.  Many S&Ls stated that the higher costs associated with a  new deposit instrument would only add to their current earnings squeeze,  As one S&L noted, they "cannot afford any new instruments at  this time". Those in favor of the proposal generally expressed the belief that a new short-term deposit instrument would improve the competitive position of depository institutions vis-a-vis MMFs.  One banker stated: "I urge  your support for the creation of a deposit to combat this [the money market fund] problem.  The savers deserve to receive as high an interest  rate as possible for their funds and the financial institutions need to have the flexibility to compete for those funds". Of the respondents favoring a new instrument, many indicated that in order to ensure a competitive alternative to MMFs, depository institutions should be permitted to individually determine the features of the new short-term deposit.  These respondents feared that an  instrument designed by regulators may not be as competitive as is needed to compete effectively with MMFs. Other respondents, however, volunteered preferred characteristics for a standard instrument. diversity of opinion.  As might be expected, there was some  For example, respondents differed over the  appropriate denomination of the new instrument.  The most commonly cited  minimum denomination for the certificate was $5,000.  The second most  frequently mentioned minimum denominations were $1,000 and $2,500. Opinions on the appropriate minimum withdrawal amount varied from no minimum to $1,000, with the most commonly cited withdrawal amount being $500.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  A few respondents pointed out that an early withdrawal penalty  -10-  would make the instrument less liquid and therefore less competitive with MMFs.  Some respondents felt that a 30-day instrument indexed to  the 30-day T-bill discount rate would enable depository institutions to more closely approximate the liquidity offered by MMFs. Respondents both for and against a new short-term instrument frequently mentioned the substitutability of the retail repurchase agreement for the new instrument.  Opponents of a new instrument argued  that RPs currently accomplish the result intended for the new instrument -- that is, effective competition with MMFs. that a new instrument is unnecessary.  They argued, therefore,  Those favoring a new short-term  deposit, however, argued that they would prefer to offer a new instrument rather than an uninsured RP which is difficult for customers to comprehend and which does not create a major new source of funds for loans.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -11-  Table 1 Moving-Average MMC Rate Total # of Responses  Against  For  44.8%  112  203  91  55.2%  Banks  24.7  165  219  54  75.3  S&Ls  40.0  18  30  12  60.0  MSBs  12  22.2  42  77.8  54  Affiliated Individuals  12.5  21  24  3  87.5  Other Individuals  7  50.0  7  50.0  14  Trade Groups Regulators  9  100.0  0  TOTAL  188  34.0%  9  66.0%  365  8-Week period is too long  Banks S&Ls MSBs  26 11 3  553  8-week period is too short  2 0 0 0  Affiliated Individuals  6 2  0  Other Individuals  2  0  1  0  Trade Groups Regulators TOTAL   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  51  2  -12-  Table 2 Floating-Rate MMC Proposal  Total # of Responses-'  Against  For  Banks  59  29.9%  138  70.1%  197  S&Ls  45  20.9  170  79.1  215  MSBs  5  19.2  21  80.8  26  Individuals  0  16  100.0  16  Trade Groups  2  20.0  8  80.0  10  Regulators  5  71.4  2  28.6  7  TOTAL  116  0  24.6%  355  75.4%  471  Table 3 Short-Term Instrument Proposal  Banks  118  Total # of Responses  Against  For*  66.3%  60  33.7%  178  S&Ls  78  38.4  125  61.6  203  MSBs  8  30.8  18  69.2  26  Individuals  0  0  17  100.0  17  Trade Groups  3  30.0  7  70.0  10  Regulators  5  83.3  1  16.7  6  TOTAL  212  48.2%  228  51.8%  440  *Includes those respondents in favor of the short-term instrument described in the request for comments and those in favor of a new short-term instrument with features other than those described.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE 20220  a.inngton.  FEDERAL DEPOSIT INSURANCE CORPORATION NATIONAL CREDIT UNION ADMINISTRATION  COMPTROLLER OF THE CURRENCY FEDERAL RESERVE BOARD  FEDERAL HOME LOAN BANK BOARD DEPARTMENT OF THE TREASURY  • •••  September 14, 1981  MEMORANDUM TO:  SUBJECT:  Depository Institutions Deregulation Committee  FROM:  Deregulation of IRA/Keogh Accounts  DIDC Staff*  ACTION REQUESTED At the June 25, 1981 meeting, the Depository Institutions Deregulation Committee considered five proposals and several ancillary issues which had been issued for comment following its December 12, 1980 meeting, but elected to defer action on these issues pending anticipated Congressional revisions to the laws governing IRA/Keogh accounts.1/  On August 13, 1981, the President signed the Economic Recovery Tax Act of 1981 which amended the laws governing IRA/Keogh accounts.  In general, these amendments  expand the eligibility of IRA/Keogh accounts to individuals already covered by some form of employee-sponsored retirement plan and increase the allowable maximum contribution.  It is estimateu that these revisions will increase the number of  eligible taxpayers by around 40 million.  Now that changes in the IRA/Keogh  legislation are final, the Committee may wish to take action on the proposals  (*) This memorandum was prepared primarily by NCUA (Mr. Miller). (1/) See DIDC staff memorandum "Deregulation of IRA/Keogh Accounts," June 25, 1981.   https://fraser.stlouisfed.org ...Alit Federal Reserve Bank of St. Louis  3-•  1  ON.  -  addressed at the June, 1981 meeting.  BACKGROUND  In December, 1980, the Committee decided to solicit comments on modifications to the existing IRA/Keogh accounts.  The Committee's objectives were to reduce the  complexities associated with the administration of these accounts, to help fulfill the initial intent of the Employee Retirement Income Security Act of 1974 (ERISA) by encouraging retirement savings, and to proceed with the Congressional mandate to provide for the orderly phase-out of deposit rate ceilings.  At its June meeting, the  Committee reviewed these comments and while there was no clear consensus on the various issues, it was apparent from the public comments that the areas of concern could be narrowed to two, namely, providing institutions with the ability to accept periodic additions without extending the maturity of IRA/Keogh accounts and allowing for variable rate ceilings on such accounts in order to provide depositors with a market return on funds invested.2/  In addition, at the June meeting, the DIDC staff provided two options for Committee consideration.  Both options were structured to address the issues raised  in the public comments while satisfying all of the stated objectives of the Committee; moreover, they provided more flexibility than existed under the present IRA/Keogh regulations.  These options are restated below; however, they have been  modified slightly to incorporate the recent tax law revisions and the deposit account  (2/) These proposals and comments are summarized in the staff memorandum, "Summary of Comments on Proposals to Deregulate Retirement Accounts," June 25, 1981.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  2  action taken by the DIDC at its June meeting.  Option 1  Under the first option, an institution would be authorized to permit periodic additions to an existing account in the form of a 2-1/2 to 4 year small saver certificate without extending the maturity of the account, provided that the account was for IRA/Keogh purposes.3/ By allowing periodic additions, this option eliminates the need to extend the maturity of the deposit or to establish new accounts. However, during periods of rising interest rates depositors may nevertheless desire to establish new accounts rather than to add to a lower rate existing account, since the interest rate would be higher than on the initial account.  In order to reduce  this potential for a proliferation of accounts, this option would establish a floating ceiling rate for these accounts which would change at the beginning of each calendar quarter 4/ based on the higher of the 2-1/2 year Treasury security rate at the end of the previous quarter or the average of the 2-1/2 year Treasury rates  (3/) The agencies' regulations governing account additions are not now uniform and, with the exception of NCUA, complicate the use of time deposits (particularly those with variable ceilings), for periodic deposits to IRAs or Keoghs. Under Federal Reserve and FDIC rules, each addition to a time deposit is regarded either as having a separate and distinct maturity equal to the originally agreed upon maturity or as resetting the maturity of the entire account. Federal Reserve and FDIC regulations also require that the rate of interest paid on an addition to any existing time deposit not exceed the applicable ceiling rate on the date the additional deposit is made. This makes it impractical to use variable ceiling, fixed rate accounts to make routine additions to IRA/Keogh accounts. Under FHLBB rules, a fixed ceiling time deposit may be structured to provide for routine periodic additions. Each time an addition is made, however, the maturity of the entire account is reset for a period equal to the term of the original account. No additions to variable ceiling fixed rate accounts are permitted. Under NCUA rules, credit unions are authorized to accept periodic additions to certificate accounts without extending their maturity. (4/) E.g., last business day or average of last 5 business days.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  3  404.1.4?  •  during the previous quarter.  5/ Given the recent action by the Committee to remove  the "cap" on the SSC, this option would provide institutions with a viable lowdenomination time deposit which is linked to market rates (currently the SSC rate ceiling is 16.55%, however, institutions may compound this rate to yield 18.27%).  Although there is currently a regulated commercial bank-thrift differential on the small saver certificate, there are no regulated differentials on IRA/Keogh accounts and it is recommended that commercial banks be allowed to offer the thrift SSC ceiling on their IRA/Keogh deposits.  Option 2  Under the second option, the Committee would establish a new IRA/Keogh account with a minimum maturity of, say, one year with no interest rate ceiling.  This option  has all the advantages of option 1, and in addition, provides greater flexibility in the design of IRA/Keogh accounts.  Institutions would be permitted to offer and  accept periodic additions to a one year IRA/Keogh account governed by whatever interest rate structure -- fixed or floating -- they would choose, provided that the terms of the contract were adequately disclosed.  This could lead to more attractive  overall rates and other terms on retirement accounts and thus encourage their use.  (5/) If the Committee at some date chooses to authorize some longer term account indexed to market rates, this new account could be used for IRA/Keogh purposes. When used for these purposes, this account could accept periodic additions without extending the maturity, and the ceiling rate would change quarterly based on the higher of the indexed rate or the thrift 2-1/2 year to 4 year SSC rate. If the Committee should choose to establish a new totally deregulated account, then depository institutions could pay any rate -- fixed or floating -- provided it was adequately disclosed. Moreover, institutions would still be allowed to use traditional accounts for IRA/Keogh purposes, but at regulatory ceilings applicable to thrifts, no differential.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  4  In addition, the Committee could have the opportunity to observe depository institution pricing strategies with a totally ceiling-free small denomination instrument.  Option 2, however, does provide some potential for evasion of the ceiling rates on short term non-retirement accounts.  Treasury tax policy representatives have  advised that amounts contributed to an IRA or Keogh Account in a given tax year in excess of the tax deductible contribution limits may be withdrawn subject only to a 10% IRS penalty on any interest earned, provided the withdrawal is made prior to filing the return for the tax year in which the contributions are made. 6/ Therefore, under option 2, a taxpayer could (1) establish a legitimate 1 year IRA or Keogh account maturing on December 31, (2) make contributions to the account above the maximum tax deductible contribution limit, (3) earn interest at a ceiling free rate on such excess contributions during the tax year, and then (4) withdraw the excess funds on December 31 subject only to a 10% penalty on the earned interest.  Related Issues  The staff also has recommendations on some related issues on which the Committee requested comments.  The public comments on early withdrawal penalties favored the  maintenance of existing penalty provisions on IRA/Keogh accounts, and the staff supports this view.  On the qurstion of conversion from existing accounts, the  (6/) Withdrawals of excess contributions subsequent to filing for the tax year in which the contributions were made are subject to an IRS penalty of 10% of the amount withdrawn. Withdrawal at any time of deductible contributions is both subject to taxation at the time of withdrawal, whether or not the deduction was actually claimed, and subject to the 10% penalty:   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  5  comments indicated opposition by some institutions.  It is the view of the staff that  institutions should not be required to offer conversions, but should have the option to permit conversions without early withdrawal penalties if they wish to do so.  ,  Since public comment has already been received on the issues raised in past memoranda, the Committee could make any action effective without further comment. However, in order to permit time for institutions to develop marketing strategies and to adjust their computer systems, the staff recommends that any Committee action be effective with at least a two month lag.  In the case of the first option, the staff  recommends an effective date of January 5, 1982 -- the day nearest the beginning of the first quarter when the new SSC ceiling is established.  (  6  (  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  I,  CITIBAN(e Richard M. Kovacevich Senior Vice Pre,irjent  September 16, 1981  Mr. Gordon Eastburn Acting Executive Secretary Depository Institutions Deregulation Committee Treasury Building 15th & Pennsylvania Avenues, N.W. Washington, DC 20220 RE:  DIDC Regulations Governing All Savers Certificates  Dear Mr. Eastburn: On behalf of Citibank, I am writing to strongly urge DIDC to revise its Regulations governing All Savers Certificates with respect to two general topics: 1.  The unreasonably narrow method by which "qualified" residential loans are measured for compliance purposes; and  2.  The unfair rules by which consumers are permitted to convert six month savings certificates into the All Savers Certificate  In both of these areas we believe that the Regulations adopted by DIDC are against the interests of consumers, will be disruptive to the marketplace generally, and are not consistent with the intent behind the tax law authorizing the All Savers Certificate tax treatment. Further, we believe DIDC has full authority to amend the Regulations as we have proposed. Our discussion below supports the following recommendations 1. ul  K  •s:  .  Qualified loans should be cumulated with the benefit carrying over from quarter to quarter.  1.  Upon conversion from 6 month CD's to the All Savers Certificate, the balance (even if less than $10,000) should be able to earn the CD rate until maturity.  r:11--: 1-_---L,1  rca  Lo.  1.4.J Lk... -,  u....1.1.. L.L.J  ...,  ,x) LA ._  (1)  c„.7-1   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Qualified loans should be measured starting October 1, 1981, not January 1, 1982.  L; C._  •  411   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  September 16, 1981 Mr. Gordon Eastburn Page two  Measurement of "Qualified" Residential Loans. Under existing regulation, DIDC has set up a methodology for measuring qualified loans which is far too restrictive--both as to the starting date as of which qualified loans will be calculated and the method by which the measurement is forced into a quarter-by-quarter approach. Under these regulations, an institution does not start counting its qualified loans until January 1, 1982. Furthermore, the current regulations provide that should any institution in any quarter make qualified residential loans in excess of the amount it is required to make in order to satisfy the on-going eligibility test, it is not permitted to carry that excess forward and benefit from it the succeeding quarter. However, should the institution fail to qualify in any quarter, that failure is carried forward and must be made up. Thus, "bad news" is cumulative and carried forward but "good news" is not. We believe this is inequitable and disruptive. It is our belief that DIDC's narrow reading of its mandate forces an extremely burdensome test on all financial institutions because home mortgages and loans made in the context of residences experience extreme seasonality during any calendar period. Nor is there any connection between the flow of savings and increases and decreases in volume of mortgage lending. [See Attachment A] Historically, in fact, first mortgage lending, in particular, is highly seasonal and other types of mortgage lending follow much the same pattern. The flow of savings into financial institutions are influenced by quite disparate factors, such as relative rates in markets, rate of inflation, etc. A look at the last two years shows that it would (in many quarters) have been impossible for the S&L industry to'have satisfied the tests drawn by the DIDC going forward under All Saver (once one eliminates sales of mortgages) since the real rate of growth in their portfolios was much smaller than the origination of ffortgages would suggest. [See Attachment 13]  •••   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  September 16, 1981 Mr. Gordon Eastburn Page three  Furthermore, because of the fact that DIDC's test is measured only on a single day (the last day of each quarter) the current -regulation will have an extremely disruptive effect . on the secondary market as financial institutions across the country seek to manipulate the size of their loan portfolios either to build them up to the requisite amount or to sell off parts of a mortgage portfolio (subject to repurchase) in order not to squander any excess mortgage capacity. The frenetic buying and selling occasioned by this financial window dressing represents artificial movement with no real increase in mortgage availability. The fact that certain governmental certificates are included means that not only the mortgage market but the securities market will feel the brunt of this kind of manipulation--without any benefit going to the ultimate consumer or borrower. We find that neither test adopted follows the intent of the Congress in establishing the Economic Recovery Tax Act of 1981, particularly as described in the Conference Report. It seems to us that Congress only intended that the proceeds of the All Savers be directed into the mortgage business--at least up to the 75% test-not the more rigorous test created by the DIDC regulations. The statute and Conference Report taken together give the DIDC authority and direction which would easily encompass a far more flexible approach to the measurement of qualified loans. That is, the statutory language is explicit only in that qualified savings institutions are to "provide" residential property financing and the DIDC might well take the position that any loan which remains on the books is deemed to have been "provided" on an on-going basis. Thus, we would urge that the DIDC amend its regulations so that: A.  All new mortgages made after October I will count toward the measurement of qualified loans in the second and .succeeding quarters, on the grounds that  •   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  September 16, 1981 Mr. Gordon Eastburn Page four  such mortgages continue to be "provided" in those quarters as long as they remain on the books (an approach which is consistent with the philosophy that sales of mortgages do not reduce the obligation of an institution to come up with incremental loans). B.  Any qualified loans made after October I can be carried forward throughout the 15 month period to the extent that the volume exceeds the minimum needed. This second approach is consistent with the other side of the coin--i.e. the way in which deficiencies must be made up on a retroactive basis.  Conversion of 6 Month Certificates into The All Savers Under the existing regulatory interpretations, a consumer filing a single return who owns a $10,000 money market certificate will gain maximum tax benefit by opening an All Saver in an amount of nearly $8,000 on October 1, but faces several undesirable alternatives regarding the $2,000 remaining in his account--The $2,000 either can be: 1) withdrawn subject to penalty; 2) maintained in the account at the passbook rate; 3) put into the All Saver Certificate, at a less than market rate on taxable securities, or 4) converted to a longer term deposit. The problem confronting this particular consumer is deemed by us to be a "partial conversiGn" problem. In this era of deregulation we find it unconscionable that the DIDC would force these unpalatable alternatives onto the consumer. It is entirely consistent with the provisions of the Monetary Control Act of 1980 and the Economic Recovery Tax Act of 1981 to allow consumers to receive the full certificate rate on any remaining uncOnverted  4   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  c.ptc,mbPr 16, 1021 Mr. Gordon Eastburn Page five  amount, and we believe DIDC should adopt this position. Such a ruling encourages further savings on behalf of consumers, insofar as they are not penalized for past actions regarding their savings, and reinforces their notion that banks are a suitable place to maintain their savings and investment dollars. Finally, we submit that the past unduly harsh interpretation in this area should not be controlling in the present situation whereby all funds are maintained in the depository institution--that is, that the prior rulings were established when there were withdrawals from the institution and the minimum denomination requirements were no longer met. In this case there is no net outflow from the institution and the contractual obligations of the parties as to dollars on deposit are clearly being met. We submit that partial withdrawals cause financial institutions no operational or other problems that would cause DIDC to require an interest penalty to be passed on to the consumers in order to protect those depository institutions. In fact, the opposite situation is the case, and consumers need the protection that DIDC can afford. We cannot be sure of the number of the people affected, but there seem to be literally millions of people affected by a harsh ruling: o  •  At prevailing rates, a person filing singly with the IRS would only take maximum use of the tax exemption with a deposit of $7,930, causing an opportunity loss on $2,000 worth of interest for every holder of a $10,000 money market certificate; and A couple filing jointly need about $15,860 to maximize their benefit, and this couple owning two $10,000 CDs face a loss of $4,000 worth of interest.  •   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  September 16, 1981 Mr. Gordon Eastburn Page six  In order to encourage conversions and future residential construction, we believe that DIDC should recind the action of the other agencies immediately.  We strongly believe that DIDC can take such actions immediately and are, of course, able to provide you with additional data in articulation of our views at your convenience. Please feel free to call me should you have any further questions. Very truly yours, )?  •  INSURED SAVINGS & LOAN ASSGCIATIONS TOTAL MORTGAG,.; LOANS CLOSED NET DEPOSIT GAIN BY QUARTERS 1972-1981  1$(Billions  +$28  +$24  -t  N  ,i It\ I  +$20  ,,NT. ,\  ,., ,  i  Vi  I W I  \/  i  +$16  1  14  A  I \t•J  T'ci.  1  V‘  i  +$12  1  , fr 1*-7'  A '  t  /  Vert  I / \-  /A x l i  \ i -\  T t / .,..e."  i: ; . g'S.„,e7 Air  11 -t,I ‘ -t 1 t.  —1972-   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  —1973-  —1974-  —1975-  —1976-  — 1977  —1978  —1979  --1980  —1981-  •  ATTACHMENT A  •  INSURED SAVINGS & LOAN ASSOCIATIONS  RATIO (R) =   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  NET CHANGE IN MORTGAGE LOANS OUTSTANDING NET DEPOSIT GAIN IN PRECEDING QUARTER  Yr.  Qtr.  R (%)  1980  1 2 3 4  42.7% 25.3% 125.4% 105.1%  1981  1 2 3 4  30.8% 94.4%  ATTACHMENT B  •  AMERICAN BANKERS ASSOCIATION  "MD  1120 Connecticut Avenue. N.W. Washington. D.C. 20036  MEMORANDUM  September 14, 1981  MEMO TO THE DIDC STAFF  RE:  The treatment of qualified residential and agricultural financing provided by members of an affiliated group of corporations as financing provided by a bank which is a member of that group for purposes of section 128(d) of the Internal Revenue Code of 1954.  It has come to our attention that the Federal Reserve and the DIDC have informally taken the position that qualified residential and agricultural financing provided by members of an affiliated group of corporations which includes a bank will not be taken into account in determining whether that bank has met the requirements of section 128(d) of the Internal Revenue Code of 1954 to remain eligible to issue All Savers' Certificates. The ABA believes that such a position would be contrary to the express provisions of section 128, would be inconsistent with the legislative history of that section, and would frustrate the purposes for which the section was enacted. Statutory Provisions Involved Section 128 of the Internal Revenue Code of 1954 provides for the exclusion from gross income of interest earned on certain savings certificates. In order for the interest to be tax-exempt, the certificates must meet several requirements not at issue here and must be issued by a qualified savings institution. Code sec. 128(c)(1)(A). A commercial bank is a qualified savings institution. Code sec. 128(c)(2)(A)(i). A qualified savings institution (other than a credit union) will not be eligible to issue these certificates after March 31, 1982, unless it satisfies the requirements of section 128(d) with respect to the provision of qualified residential financing for the preceding calendar quarter. Code sec. 128 (d)(2). For the purpose of determining whether an institution that is a member of an affiliated group of corporations, as defined in section 1504 of the   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -2-  Code, for which a consolidated income tax return is filed has met the requirements of section 128(d) for a calendar quarter, all members of the affiliated group are to be treated as a single corporation. Code sec. 128(d)(6). Legislative History The present section 128 of the Internal Revenue Code of 1954 was added to the Code by section 301 of the Economic Recovery Tax Act of 1981. There was no provision in existing law to exclude from income for tax purposes interest earned on savings certificates, other than the partial exclusion for dividend and interest income provided by section 116 of the Code. The Economic Recovery Tax Act of 1981 was reported by the House Ways and Means Committee as H.R. 4242. Section 321 of H.R. 4242, as reported by the Committee, contained an almost identical amendment to the Code. With minor and technical differences, such as internal cross references, the provision of section 128(d) of the Code--as it would have been added by section 321 of H.R. 4242--is the same as present law, including a paragraph (6) which is identical to paragraph (6) of section 128(d) of the Code. The Committee Report on H.R. 4242 explains the purpose of paragraph (6) as follows: "The amount of qualified certificates, residential financing, and net new savings are to be determined on a net aggregate basis of all corporations (whether or not qualified depository institutions) which are affiliated corporations (within the meaning of sec. 1504), if a consolidated return is filed for any part of that calendar quarter." Report 97-201, p. 147. When H.R. 4242 was considered on the floor of the House on July 29, 1981, the text of the Committee's bill was replaced entirely by an amendment in the nature of a substitute. The Senate agreed to H.R. 4242 with its own amendment in the nature of a substitute. Both the House and Senate versions of H.R. 4242 contained the All Savers' Certificate provisions in substantially similar forms; neither version included the affiliated group rule. The rule was added back into section 128 by the conferees. The addition is explained in the joint explanatory statement as follows: "The conference agreement follows the House bill. In addition, the conferees agreed to three technical amendments. First, if a consolidated return is filed for any part of a calendar quarter in which savings certificates may be issued, the amount of qualified certificates, residential financing, and net new savings are to be determined on a net aggregate basis for all affiliated corporations." House Report No. 97-215, p. 244. Immediately before the conference, a copy of the enclosed letter from Lee E. Gunderson, President of the   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -3-  American Bankers Association, was hand delivered to each conferee. A copy of the enclosed memorandum, prepared by John F. Rolph, III, Vice President for Taxation Legislation, Citibank, was also hand delivered to the conferees. Discussion As explained in the letter and memorandum to the conferees, and as presented to the Ways and Means Committee by Mr. Conable at its evening meeting on July 21st, the purpose of the affiliated group rule was to make sure that a bank that issues All Savers' Certificates will get credit for qualified lending provided by a related corporation, whether as a subsidiary or simply as a member of the same group of corporations. Nothing in section 128 of the Code, and no interpretation of section 128 (d)(6), is intended to --or could--change well established rules applicable to lending between related corporations under the banking laws. It is explicitly stated in section 128(d)(6), that the affiliated group rule set forth there is to be applied soley for purposes of "this subsection", i.e., subsection (d) of section 128 of the Internal Revenue Code of 1954. The rule stated there is unambiguous. All members of the same affiliated group (as defined in section 1504) are to be treated as 1 corporation for the purpose of determining whether the qualified savings institution which is a member of the group meets the requirements set forth in paragraph (1) of the subsection. There is no distinction made between subsidiaries and other affiliated corporations, and there is no basis in the legislative history or in other similar provisions of the Internal Revenue Code for drawing such a distinction. Finally, subsection (c) of section 301 of the Economic Recovery Tax Act of 1981 directs the Secretary of the Treasury to study the effectiveness of the ASC interest exemption in generating additional savings. To the extent that this may be read as a statement of purpose for section 128, the disqualification of banks from issuing All Savers' Certificates because the qualified loans made by mortgage lending and agricultural credit affiliates cannot be counted will reduce the opportunity for that bank's depositors to generate additional savings through purchase of the certificates. Section 128(d)(6) of the Internal Revenue Code of 1954 should be applied according to its terms. The addition of a distinction between subsidiaries and affiliates is inconsistent with those terms, without support in the legislative history, and will frustrate the generation of additional savings through the All Savers' Certificate.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  " - V  -4-  Contact:   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Lloyd G. Ator, Jr. Tax Counsel 467-4202  DEPOSITORY INSTITUTIONS DEREGULATION COMMI1 1 hE PRESS RELEASF. COMFTRO..LER OF ME CURRENC`r :-.F7DERAL RESERVE BOARD  FEDERAL DEPOS77 INSURANCE CORPORATION tiA.TIONAI. CREDTT UNION AAT)O  FEDERAL HOME LOAN BANik BOARD TREASLTR DEPARTMEN'T  September 3, 1981  DIDC ADOPTS ALL SAVERS CERTIFICATE REGULATIONS  The Depository Institutions Deregulation Committee (DIDC) today adopted regulations authorizing depository institutions to issue one-year, tax exempt All Savers Certificates (ASCs). The DIDC, acting in accordance with the Economic Recovery Tax Act of 198, stipulated that the ASCs must: (1) have an annual investment yield equal to 70 percent of the average investment yield for 52-week U.S. Treasury bills; (2) be offered in denominations of $500, but can also be offered in any other denominations; (3) only be issued from October 1, 1981 through December 31, 1982; and (4)- have a maturity of one year. The ASCs will be subject to.existing rules for other types of deposits including rules regarding premiums, early withdrawals, and broker's or finder's fees. Depository institutions must give ASC buyers notice of the tax implications of interest earned. There is a lifetime exclusion from gross income for interest earned on ASCs of $1,000 ($2,000 in the case of a joint return). A depository institution's executive officer will have to certify that the institution has satisfied the qualified residential and agricultural financing provision required by the Tax Act. As stated above, the ASCs must have an average investment yield equal to 70 percent of the average investment yield of 52-week U.S. Treasury biils. Normally these are auctioned every four weeks on a Thursday. The average investment yield will be announced with the results of every 52-week bill auction. Seventy percent of this will become the offering yield for all ASCs issued starting Monday of the following week. That offering yield will remain unchanged until the week after the next auction of 52-week Treasury bills four weeks later.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -2  For example, the auction of 52-week U.S. Treasury bills on August 6, 1981 resulted in an average price of 85.296 per 100. The average investment yield on such 52-week bills would be 17.29 percent, 70 percent of which is 12.10 percent. An investor depositing $1,000 in an ASC subject to this yield requirement would receive $121.00 in interest upon maturity of the deposit. Withdrawals of earned interest on ASCs are permitted, but an individual who withdraws interest during the deposit term will receive a lower total amount of interest than if periodic interest earned were left on account and only withdrawn at ASC maturity. This is because the effect of compounding does not take place on any withdrawn interest amounts. Since ASCs cannot be offered until October 1, 1981, the first auction that will determine the yield on ASC will be the auction on September 3, 1981. Early Withdrawal: Under existing rules, which also hold for ASCs, the withdrawal of all or part of the principal of an ASC would result in a penalty equal to three months' interest (at the nominal rate) on the amount withdrawn. In addition, the Tax Act provides that an early withdrawal of any portion of the principal will eliminate the tax-exempt status of the ASC. Premiums: The value of premiums offered to increase the effective yield on ASCs (including shipping, warehousing, packaging and handling costs for merchandise) cannot exceed $10 for deposits of less than $5,000 or $20 for deposits of $5,000 or more.) Denominations: An institution is required to accept ASC deposits in multiples of $500 but may accept deposits in any other amount. It could accept a deposit for $247, for example, or $1,386.45 or any other amount. Commissioner of the IRS, Roscoe L. Egger, Jr., says IRS has reviewed pertinent portions of the DIDC final rules and finds them consistent with the applicable provisions of the Internal Revenue Code.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Contact:  Robert Don Levine -- 566-5158 Marlin Fitzwater -- 566-5252  TITLE 12--BANKS AND BANKING CHAPTER XII--DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE PART 1204--INTEREST ON DEPOSITS Qualified Tax-Exempt Savings Certificates  AGENCY:  Depository Institutions Deregulation Committee.  ACTION:  Final Rules.  SUMMARY: The Depository Institutions Deregulation Committee ("Committee") has established a new category of time deposit in order to permit depositors to take advantage of the Federal income tax benefits applicable to interest earned on qualified tax-exempt savings certificates, the so-called All-Savers Certificates ("ASCs"), and in order to help depository institutions reduce their costs of funds and increase their deposit flows. The Economic Recovery Tax Act of 1981 ("Tax Act"), with certain restrictions, authorizes a maximum lifetime exclusion of $1,000 ($2,000 in the case of a joint return) from gross income for interest earned on ASCs, which (1) are issued from October 1, 1981 through December 31, 1982, (2) have a maturity of one year, (3) are available in denominations of $500 and any other denomination determined by the depository institution and (4) have an annual investment yield equal to 70 percent of the average investment yield for the most recent auction of 52-week U.S. Treasury bills prior to the calendar week in which the ASCs are issued. The Committee also required that certain notice regarding the tax implications of ASCs be given to a depositor prior to the purchase of an ASC. EFFECTIVE DATE:  October 1, 1981  FOR FURTHER INFORMATION CONTACT: Rebecca Laird, Senior Associate General Counsel, Federal Home Loan Bank Board (202/377-6446), F. Douglas Birdzell or Joseph A. DiNuzzo, Counsels, Federal Deposit Insurance Corporation (202/389-4324 or 389-4237), Daniel Rhoads, Attorney, Board of Governors of the Federal Reserve System (202/452-3711), Allan Schott or Elaine Boutilier, Attorney-Advisors, Treasury Department (202/566-6798 or 566-8737), David Ansell, Attorney, Office of the Comptroller of the Currency (202/447-1880). SUPPLEMENTARY INFORMATION: Title III of the Tax Act, Public Law 97-34, 95 Stat. 172, (26 U.S.C. §128) provides that up to certain maximum dollar limitations and under certain restrictions, an individual's gross income (for Federal income tax purposes) does not include interest earned on qualified ASCs. In general, the Tax Act authorizes a lifetime exclusion from gross income of $1,000 for an individual return and $2,000 for a joint return,   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  2  and i.e., regardless of how much interest is earned on all ASCs, is ASCs on interest years taxable regardless of during which a earned, no more than a total of $1,000 ($2,000 in the case of taxable all for income joint return) can be excluded from gross years. However, interest earned on a particular ASC may not be l excluded from gross income, if (1) any portion of the principa portion any (2) or of that ASC is redeemed prior to its maturity, of that ASC is used as collateral or security for a loan. In order for interest to qualify for exclusion from gross income under the Tax Act, an ASC must meet several requirements. First, ASCs may be issued only during the period beginning on October 1, 1981, and ending on December 31, 1982. Second, the certificates must have a maturity period of one year. Third, the certificate must have an annual investment yield equal to 70 percent of the average annual investment yield on 52-week Treasury bills. Fourth, the issuing institution must provide that ASCs are available in denominations of $500. The Tax Act imposes limitations on the issuing institution with respect to the use of deposit funds derived from ASCs. Generally, for commercial banks, mutual savings banks and savings and loan associations, the Tax Act requires that at least 75 percent of the lesser of: (1) the proceeds from ASCs issued during a calendar quarter or (2) "qualified net savings", be used to provide "qualified residential financing" by the end of the subsequent calendar quarter. If an institution fails to meet the "qualified residential financing" requirement by the end of any calendar quarter, it may not issue additional ASCs until the requirement is satisfied. The term "qualified net savings" is the amount by which deposits into passbook savings accounts, 6-month money market certificates, 30-month small saver certificates, time deposits of less than $100,000, and ASCs exceed the amount withdrawn or redeemed from such accounts measured at the beginning and end of each calendar quarter. "Qualified residential financing" is any of the following:   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  (a) Any loan secured by a lien on a single-family or multifamily residence; (b) any secured or unsecured qualified home improvement loan; (c) any mortgage on a single-family or multifamily residence that is insured or guaranteed by the Federal, State or local government or any instrumentality thereof;  - 3 (d)  any loan to acquire a mobile home;  (e) any loan for the construction or rehabilitation of a single-family or multifamily residence; (f) any mortgage secured by single-family or multifamily residences purchased on the secondary market, but only to the extent such purchases exceed sales of such assets; (g) any security issued or guaranteed by the Federal National Mortgage Association, the Government National Mortgage Association, or the Federal Home Loan Mortgage Corporation, or any security issued by any other person if such security is secured by mortgages, but only to the extent such purchases exceed sales of such assets; and (h)  any loan for agricultural purposes.  The Tax Act defines single-family residence to include stock in a cooperative housing corporation, as defined in section 216 of the Internal Revenue Code, and 2, 3, and 4 family residences. The Tax Act does not, however, authorize depository institutions to offer ASCs; such determinations were left to the relevant regulatory agencies. In this regard, the Committee is empowered by its enabling statute, The Depository Institutions Deregulation Act (12 U.S.C. §3501 et seq), to prescribe rules governing "the establishment of classes of deposits or accounts", at all Federally insured commercial banks, mutual savings banks and savings and loan associations. In conformance with the provisions of the Tax Act, the Committee has authorized depository institutions to offer nonnegotiable ASCs with the following characteristics: (1)  A maturity of one year,  (2)  Available in denominations of $500, and  (3)  An annual investment yield equal to 70 percent of the average annual investment yield on 52-week U.S. Treasury bills auctioned immediately preceding the calendar week in which the ASC is issued.  The Tax Act provides that ASCs have a maturity of one year and there is no language in the legislative history or the statute to indicate any flexibility on this question. Accordingly, ASCs must have a maturity of exactly one year. It would be possible, however, for institutions, as part of their contract with depositors, to provide for the automatic renewal of ASCs, just as is permissible for any other time deposit.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  - 4 -  The Tax Act states that ASCs are to be "made available in denominations of $500." There is no language in the statute or its legislative history to indicate that ASCs are to be issued only in denominations of $500, or only in denominations of $500 or more. Thus, the Committee has concluded that depository institutions offering ASCs are required to make them available in denominations of $500, but are permitted to offer ASCs in any other denomination, including denominations of more or less than $500. However, a depository institution may establish its own maximum deposit amount above $500. Accordingly, an institution offering ASCs is required to accept ASC deposits for $500 and may issue them in multiples of $500, such as $1,000, $1,500 and so on, but is not required to accept ASC deposits in other amounts. A depository institution is not required to issue individual certificates for each $500.of a deposit. At the same time, an institution is permitted to accept ASC deposits in any other amount. For example, a depository institution could accept an ASC deposit in the amount of $247.00 or $1,386.45. With respect to the yield, ASCs must have an annual investment yield to maturity equal to 70 percent of the average investment yield of the most recently auctioned 52-week U.S. Treasury bills. The most recent auction is the one occurring immediately preceding the week in which the ASC is issued. Normally, 52-week U.S. Treasury bills are auctioned every four weeks, on a Thursday. The results of the auction are announced by the Treasury Department late in the day on the auction date. The average investment yield determined by that auction would be applicable for all ASCs issued beginning the next week, which would normally begin on a Monday. Beginning September 3, 1981, the Treasury Department will include the average annual investment yield to maturity for 52-week U.S. Treasury bills (rounded to the nearest one-hundredth of a percentage point) as part of the auction announcement. The annual investment yield should not be confused with the bank discount rate or the investment rate (equivalent couponissue yield), both of which are included in the Treasury Department's auction announcement. Unlike other time deposits regulated by the Committee, the yield on ASCs must be equal to 70 percent of the average annual investment yield on 52-week Treasury bills, rather than be the maximum permissible rate payable on such deposits. Thus, all depository institutions must provide the same yield to maturity on ASCs and there is no differential in favor of thrift institutions. Since the yield on ASCs must be equal to 70 percent of the yield on 52-week U.S. Treasury bills determined at a specific auction, ASCs are fixed-rate instruments. At their discretion Institutions may credit interest earned periodically during the term of an ASC deposit. Periodic crediting, however, would require that the nominal interest rate be decreased with increased periodicity of   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  4  - 5 The total amount of interest credited on ASCs compounding. of compoundat maturity will not vary with different methods the term during awn withdr is ing, provided that no interest dual indivi an but ted, of the deposit. Withdrawals are permit e receiv will term t who withdraws interest during the deposi st intere ic period a lower total amount of interest than if maturity, earned were left on account and only withdrawn at ASC any on place because the effect of compounding does not take withdrawn interest amounts. 6, The auction of 52-week U.S. Treasury bills on August The 1981, resulted in an average price of 85.296 per 100. be 17.29 annual investment yield on such 52-week bills would the be would t, percen 12.10 which, of percent, 70 percent to ed requir are utions instit that annual investment yield t subjec ASC an in $1,000 ting deposi pay on ASCs. An investor st intere in 0 $121.0 e receiv must to this yield requirement st upon maturity of the deposit if all principal and any intere the for t deposi on ined credited by compounding is mainta an entire one-year term of the certificate. If, however, to prior st intere aw institution permits a depositor to withdr time given any at to maturity, the amount of interest paid may only be that amount then credited to the depositor's account based on the periodicity of compounding employed. a Accordingly, institutions paying or crediting interest on $28.97 quarterly basis in the above illustration would pay of per quarter, which is an annualized nominal interest rate 11.59 percent. Such interest, if left in the account and end compounded quarterly, would accumulate to $121.00 at the y monthl rly, Simila icate. certif the of of the one-year term payments of interest would be $9.56 at a nominal rate of 11.48 percent. Different payments or crediting of interest would have to be adjusted accordingly. 1/ 1./ The formula used to derive the nominal interest rate at which interest can be paid and credited is as follows:  where:   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  c ) 100  d/365 -1  I =  (1 +  r =  100 x  c =  the annual investment yield required to be paid on the ASCs (in percent per annum);  d =  the average number of days in a compounding period (365 day year)  I =  the amount of interest that can be paid during a compounding period per dollar on balance in the account at the beginning of said period; and  365 X I  6 -  The Committee has also determined that all of its other le to rules relating to time and savings deposits are applicab prior to r deposito a to ASCs. For example, interest may be paid as prepaid not is maturity of the ASC, provided that interest and 01 §§1204.1 provided in the Committee's rules (12 C.F.R. 1204.111). In addition, the withdrawal of any portion of the ASC (although not the interest earned on the ASC) would result in imposition of an early withdrawal penalty equal to 3 months interest at the nominal interest rate on the amount withdrawn. (12 C.F.R. §1204.103). Furthermore, any brokers' or finders' fees paid in connection with an ASC must be included as part of the yield on the deposit (12 C.F.R. §1204.110). With respect to premiums, questions have been raised regarding the permissibility of offering premiums for ASC deposits because of a discussion which took place on the floor of the House of Representatives during consideration of the Tax Act (See Congressional Record, July 29, 1981, page _ H 5139). In that discussion, it was concluded that "substantial premiums or other inducements" should not be used to increase the yield on ASCs. The Committee previously determined that, within certain limitations, premiums given to attract deposits are considered promotional or advertising expenses rather than the payment of interest. For the same reason, the Committee has determined that premiums, under existing limitations, should not be viewed as increasing the yield on ASCs. Thus, premiums may be offered in connection with ASCs under the limitations of the Committee's existing rules (12 C.F.R. §1204.109). In order to avoid any misunderstandings regarding the tax consequences of the interest earned on a particular ASC, the Committee required depository institutions to provide customers with the following notice prior to the issuance of an ASC: "The Economic Recovery Tax Act of 1981 authorizes a maximum lifetime exclusion from gross income for Federal income tax purposes of $1,000 ($2,000 in the case of a joint return) for interest earned by  (Footnote 1/con't.) r =  the corresponding nominal rate of interest (365-day basis, in percent per annum).  For institutions using continuous compounding, the nominal interest rate would be defined as: r = 100 [in (1 + (c/100))], where "ln" signifies the natural logarithm of the expression that follows it.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  i  -  7 -  individuals on tax-exempt savings certificates. Regardless of how much interest is earned on this or any other tax-exempt savings certificate, including interest earned on such certificates from other institutions, and regardless of during which taxable years that interest is earned, no more than a total of $1,000 ($2,000 in the case of a joint return) can be excluded from federal gross income for all Furthermore, interest earned on a taxable years. specific certificate cannot be excluded from federal gross income if (1) that certificate is used as collateral for any loan, or (2) any part of the principal of that certificate is redeemed or disposed of prior to maturity. The notice is intended to indicate to depositors that they have ultimate responsibility for the tax consequences of an ASC.  ..  Several requests were submitted to the Committee asking that depositors with six-month money market certificates be permitted to convert their deposits to ASCs, without imposition of any early withdrawal penalty. Because the Federal Reserve Board, Federal Deposit Insurance Corporation and Federal Home Loan Bank Board under their respective individual authorities g have already addressed the circumstances under which existin ned determi has ee Committ deposits may be converted to ASCs, the the on act to ee that it is not necessary for the Committ requests. Also, in order to avoid any confusion or uncertainty with respect to certain terms which are used in the Tax Act, the Committee has made interpretations of such terms. First, the Committee has defined the term "qualified net savings" to include any interest or dividends credited to deposit accounts, since such interest is part of each customer's deposit funds. Second, the aggregate amount of "qualified residential financing" that a depository institution is to have invested at the end of a relevant quarter is to be determined net of repayments and paydowns of such assets over the relevant quarter, but sales of such assets may not be netted. Thus, an institution is not required to reinvest all of the previous quarter's mortgage loan payments of principal in addition to the requisite amount of the "qualified net savings" or ASCs For example, suppose that during for the previous quarter. quarter one, qualified net savings increased by $1,500,000-resulting in a requirement that qualified residential financing be increased in quarter two by $1,125,000 (75 percent of $1,500,000). Suppose also that the depository institution ended quarter one with $5,000,000 of qualified residential   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis I  Imil  - 8 of principal financing assets, during quarter two had repayments financing assets and complete payoffs of qualified residential sales of of $750,000 and qualified residential financing asset ng requirement $500,000. To meet its qualified residential financi would be required for quarter two of $1,125,000, the institution qualified resito have outstanding at the end of quarter two plus $1,125,000 ,000 ($5,000 000 $5,375, dential assets of at least d investment require the n to additio in minus $750,000). That is, quarter's last of percent 75 of ng in qualified residential financi up by make to have would tion qualified net savings, the institu tial residen ed qualifi of sales the end of the current quarter any make to have not would It financing assets during that quarter. residential up the current quarter's amortization of qualified If the latter s. financing from principal repayments and paydown in a ent investm had to be reinvested, qualified residential qualified 's quarter would exceed 75 percent of the previous quarter net savings. term Third, the Tax Act does not provide a definition of the "loan for agricultural purposes" and the legislative history does not provide guidance on the matter. In such circumstances, the Committee determined to establish a definition on the basis of analogous terms described in the instructions to the Call Report for Insured Commercial Banks. Accordingly, a "loan for finance agricultural purposes" is defined to include all "loans to A, le (Schedu " farmers to loans agricultural production and other A, le (Schedu d" farmlan by item 4) and "real estate loans secured finance housing item 1(b)). Finally, the exigencies of the business may make it extremely difficult for depository institutions actually to make investments in eligible loans within the quarter for which the qualified residential financing require months three ment is determined. Many mortgages close more than after the loan commitment is made and construction loan disbursements may be spread over several quarters. Since fulfillment of a commitment would achieve the desired residential financing, the Committee has determined that a firm commitment to make a loan that is described in the Tax Act as "qualified residential financing" will be treated as a qualified investment in the quarter the firm commitment is made. Under the Tax Act, failure to comply with the qualified residential financing requirement for any calendar quarter precludes an institution from issuing ASCs during the next quarter until the requirement is satisfied. The Committee has determined to enforce this requirement through a certification procedure. An executive officer of the depository institution is to certify that the institution has complied with the qualified residential financing requirement, as set out in the Tax Act. A specific certification form is not required, but it should include appropriate documentation, as determined by the depository institution. In addition, if institutions provide for automatic renewal of an ASC, depositors should be   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  - 9 the maturity notified in writing at least 15 days in advance of renew date in the event the depository institution cannot ntial the ASC because of its failure to satisfy the reside financing requirement. a Because immediate action is necessary to implement the by st intere 's nation the in program determined to be Congress, and because of limitations on the Committee's any discretionary authority, the Committee has not made §601 U.S.C. (5 Act ility findings under the Regulatory Flexib that finds tee Commit the et. seq.). For the same reason, deferred the prior notice opportunity for public comment and ary necess not are effective date provisions of 5 U.S.C. §553 not for in taking this action and that good cause exists ions complying with those provisions or the publication provis C.F.R. of section 1201.6 of the Committee's regulations (12 §1201.6). utions Pursuant to its authority under the Depository Instit , tee Deregulation Act (12 U.S.C. §3501 et. seq.), the Commit 1204) amends part 1204 -- Interest on Deposits (12 C.F.R. Part s: follow as read to by adding a new section 116, §1204.116---Tax-Exempt Savings Certificates. (a) A commercial bank, savings and loan association, or mutual savings bank may pay interest on a non-negotiable tax-exempt savings certificate ("ASC") provided that the time deposit has an original maturity of exactly one year, is available in denominations of $500 and any other denomination at the discretion of the depository institution, and has an annual investment yield to maturity equal to 70 percent of the average annual investment yield on the most recent auction of 52-week U.S. Treasury bills prior to the calendar week in which the ASC is 1/ issued._ 1/ When institutions credit interest more frequently than to reflect annually, the computation of interest must be adjusted ment yield to invest the effects of compounding so that the annual ically, Specif law. by the depositor remains at the rate stipulated which at rate st the formula used to derive the nominal intere interest can be credited is as follows:   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  I r  c ) d/365 -1 100 I ) x 16S ( x 100 = d  = (1 +  .MMInk  - 10 -  (b) A depository institution must provide each depositor the following notice, in a form that the depositor may retain at the time of opening a deposit under this subsection: The Economic Recovery Tax Act of 1981 authorizes a lifetime exclusion from gross income for federal income tax purposes of up to $1,000 ($2,000 in the case of a joint return) for interest earned on tax-exempt savings certificates. Regardless of how much interest is earned on this or any other tax-exempt savings certificate, including interest earned on such certificates from other institutions, and regardless of during which taxable years that interest is earned, no more than a total of $1,000 ($2,000 in the case of a joint return) can be excluded from federal gross income for all taxable years. Furthermore, interest earned on a specific certificate cannot be excluded from federal gross income if (A) that certificate is used as collateral for any loan, or (B) any part of the principal of that certificate is redeemed or disposed of prior to maturity.  (Footnote 1/con'td.) where:  = the annual investment yield required to be paid on the ASCs (in percent per annum); d = the average number of days in a compounding period (365 day year); the amount of interest earned during a (365 day year) = I compounding period per dollar in the account at the beginning of the period; and r = the corresponding nominal rate of interest (365day basis, in percent per annum). c  For institutions using continuous compounding, the nominal interest rate would be defined as: r = 100 [ln (1 + (c/100))], where "ln" signifies the natural logarithm of the expression that follows it.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  titution may not issue (c) (1) A depository ins under this section ASCs after March 31, 1982, r of the depository unless an executive office a form determined by .institution certifies, in institution has complied the institution, that the nt ntial financing" requireme with the "qualified reside The certification must set out in 26 U.S.C. §128. titution in its files and be maintained by the ins titution's primary must be available to the ins uest. The certification supervisory agency upon req supporting documentation, shall include appropriate tory institution. as determined by the deposi on issuing ASCs (2) A depository instituti must use at least during any calendar quarter 75 percent of the lesser of: issued during a (a) the proceeds from ASCs calendar quarter, or (b)  "qualified net savings",  ntial financing" by the to provide "qualified reside ar quarter and may not end of the subsequent calend the 75 percent requireissue additional ASCs until ment is satisfied. ng compliance (3) For purposes of determini al financing" with the "qualified residenti lies: requirement, the following app   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  savings" (A) the term "qualified net to deposit ed dit cre nds ide includes interest or div accounts; d residential (B) the amount of "qualifie repayment of of net d financing" is to be determine h assets suc of es sal principal and paydowns, but may not be netted; icultural (C) the term "any loan for agr ning as mea e sam purposes" is defined to have the Report the to ctions items described in the instru ks, Ban mercial of Condition of all Insured Com ance Agricultural Fin to ans "Lo 4 schedule A, item Farmers, and schedule Production and Other Loans to ns Secured by Farmland", A, item 1(b) "Real Estate Loa and ancing" (D) "qualified residential fin chase any assets includes a firm commitment to pur eligible for such investment.  - 12 ution provides for automatic (d) If a depository instit g s must be notified in writin renewal of an ASC, depositor in ance of the maturity of an ASC at least 15 days in adv titution cannot renew the the event the depository ins to satisfy the residential ASC because of its failure give such notice financing requirement. Failure to renewal of the ASC. shall not result in automatic (e)  1, 1983. This section expires January  tember 3, 1981. By Order of the Committee, Sep   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  e  c-ita,1c32r.) rn tbu Gordon Eas ive Secretary cut Acting Exe  BOARD OndVERIORS OF THE FEDERAL RESERVE SYSTEM  Date: September 1, 1981  To: Chairman Volcker From: EDWARD C. ETTIN  Please let me know if you'd like me to brief you on either of these memos. I should note that after our phone conversation today, NCUA staff called to indicate that subsequent to your chat with Connell yesterday, Mehle reached him at the airport to talk about the RP memo. Connell now feels that, despite his conversation with you, he " ... does not want to be out front and will oppose the on this issue.. proposal.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE Sis ash ington. 1).C. 20220 COMPTROLLER OF THE CURRENCY FEDERAL RESERVE BOARD  FEDERAL DEPOSIT INSURANCE CORPORATION NATIONAL CREDIT UNION ADMINISTRATION  FEDERAL HOME LOAN BANK BOARD DEPARTMENT OF THE TREASURY  September 1, 1981  TO:  Depository Institutions Deregulation Committee  FROM:  Gordon Eastburn, Acting Executive Secretary  SUBJECT:  Notation Vote to Authorize Depository Institutions to Offer All-Savers Certificates ("ASCs")  Your notation vote is requested as soon as possible on the staff recommendations authorizing depository institutions to offer ASCs as described in the Economic Recovery Tax Act of 1981. Several issues are raised by this new certificate and require action by the Committee. Each issue is addressed separately. A staff memorandum and draft Federal Register notice are attached. The Federal Register notice will be amended to reflect any changes due to the outcome of this notation vote.  A. The Tax Bill provides a tax exclusion for interest earned on a new category of deposit, the ASC, which is a one-year time deposit, offered by qualified depository institutions, available in denominations of $500, with a yield equal to 70 percent of the average annual investment yield on 52-week Treasury bills. 1.  Approve the new category of deposit.  2.  Do not approve.  B. The staff recommends that ASCs be made subject to the Committee's existing rules applicable to other types of deposits, including but not limited to: rules regarding premiums, early withdrawals, payment of interest during the term of the deposit and broker's or finder's fees. 1.  Approve recommended action.  2.  Do not approve.  C. The staff recommends requiring that depository instituinstitutions give depositors notice of the tax implications of interest earned on ASCs. 1.  Approve recommended action.  2.  Do not approve.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  i  8  t —2  -  D. The Committee has received requests to permit holders of existing time deposits to convert their deposits to ASCs without imposition of early withdrawal penalties. The regulatory agencies have existing rules addressing this general issue and are addressing the issue with respect to ASCs. The staff recommends that the Committee take no action. 1.  Approve recommended action.  2.  Do not approve; have Committee address this issue.  E. The staff recommends certification by an institution's executive officer that the institution has complied with qualified residential financing requirements, as set out in the Tax Act, accompanied by appropriate documentation. 1.  Approve recommended action.  2.  Do not approve.  Comments (if any):   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis I  DIDC Member's Signature  vii  DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE Vit aAtington. I).C. 20220 COMPTROLLER OF THE CURRENCY FEDERAL RESERVE BOARD  FEDERAL DEPOSIT INSURANCE CORPORATION NATIONAL CREDIT UNION ADMINISTRATION  FEDERAL HOME LOAN BANK BOARD DEPARTMENT OF THE TREASURY  August 31, 1981 TO:  Depository Institutions Deregulation Committee  FROM:  DIDC Staff*  SUBJECT:  Tax-Exempt Savings Certificates -- All-Savers Certificates  ACTION REQUESTED:  The Committee is requested to act by  notation vote on a number of questions regarding authorization for depository institutions to offer tax-exempt savings certificates, the so-called All-Savers Certificates ("ASCs"). The notation voting procedure is recommended in order that depository institutions may have as much preparation time as possible in advance of October 1, when ASCs may be offered under the recently-enacted tax legislation.  The next scheduled  meeting of the Committee is not until September 22, and the existing schedules of individual Committee members appear to preclude a meeting before then. Committee action is requested on the following: (1) approval for depository institutions to offer a new category of time deposit, the ASC, which is a one-year time deposit available in denominations of $500 with a yield equal to 70 percent of the average annual investment yield on 52-week Treasury bills; and 2) determinations on issues related to ASCs:  * This memorandum was prepared primarily by Allan Schott of the Treasury Department.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  t  -2  BACKGROUND:  -  (a)  whether to subject ASCs to the Committee's existing rules applicable to other types of time deposits,  (b)  whether to require depository institutions to give depositors notice of the tax implications of interest earned on ASCs,  (c)  whether to act on requests to permit holders of existing time deposits to convert their deposits to ASCs without imposition of early withdrawal penalties and, if so, which time deposits and under what circumstances, and  (d)  whether to provide the regulatory agencies with initial responsibilities for enforcing certain provisions of the statute authorizing tax exempt treatment for income earned on ASCs.  Title III of the Economic Recovery Tax Act of  1981, Public Law 97-34, 95 Stat. 172, (26 U.S.C. §128) ("Tax Act") provides a lifetime exclusion from an individual's gross income of $1,000 ($2,000 in the case of a joint return) for interest earned on ASCs.  The maximum amount that an  individual may exclude for all taxable years is $1,000 ($2,000 in the case of a joint return), regardless of how much interest is earned on all ASCs, and regardless of the taxable year during which the interest is earned. In order for interest earned on an ASC to qualify for the exclusion, the ASC must meet several requirements. 1/ First, such  An ASC must be issued by a "qualified depository Which is a bank defined in section 581 of the Internal Revenue Code (26 U.S.C. §581), a mutual savings bank, cooperative bank, domestic building and loan association, industrial loan association or bank, credit union, or any other savings or thrift institution chartered and supervised under Federal or state law, if the deposits or accounts  1/  Institution",   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  4 -  3  _  certificates may be issued only during the period beginning on October 1, 1981, and ending on December 31, 1982.  Interest paid  after December 31, 1982, with respect to ASCs properly issued before that date would be entitled to the exemption. the ASC must have a maturity period of one year.  Second,  Thus, all  of the interest excludable by virtue of Title III of the Tax Act would have to be earned before January 1,  .S  the issuing institution must provide that ASCs are available for any deposit in denominations of $500, subject to any limit on maximum deposits that the issuing institution may impose.  Fourth, the certificate must have a yield equal to  70 percent of the average investment yield on 52-week Treasury bills.  Whether a particular ASC meets this 70 percent require-  ment is determined by comparing the yield to maturity on the certificate (including the effect of any compounding of interest) to the yield to maturity on 52-week Treasury bills sold at the Treasury auction to have occurred in the calendar week immediately preceding the week the ASC is issued. The Tax Act also provides that none of the interest earned on a particular ASC may be excluded from an individual's gross income if (1) any portion of that ASC is redeemed or  (Footnote 1 Con't.) of the institution (other than an industrial loan association) are insured under Federal or state law or protected or guaranteed by state law. Because the deposits of all depository institutions under the jurisdiction of the Committee are Federally insured, such institutions are qualified depository institutions within the meaning of the Tax Act.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  4 _  4 -  disposed of prior to its maturity, or (2) any portion of that ASC is used as collateral or security for a loan.  The dis-  qualification for exclusion of interest earned on one ASC does not, however, disqualify interest earned on other ASCs held by the same depositor. Further, the Tax Act imposes limitations on the issuing institution with respect to the use of deposit funds derived from ASCs. unions,2/  Generally, for institutions other than credit the Tax Act requires that at least 75 percent of the  lesser of: (1) the proceeds from ASCs issued during a calendar quarter or (2) "qualified net savings" be used to provide "qualified residential financing" by the end of the subsequent calendar quarter.  If an institution fails to meet the "qualified  residential financing" requirement by the end of any calendar quarter, it may not issue additional ASCs until the requirement is satisfied. The term "qualified net savings" is the amount by which deposits into passbook savings accounts, 6-month money market certificates, 30-month small saver certificates, time deposits of less than $100,000, and ASCs exceed the amount  A special rule applies to credit unions. The amount of 2/ ASCs outstanding at the close of any quarter is limited to 100 percent of the credit union's savings, excluding accounts greater than $100,000 and share drafts, as of September 30, 1981, plus 10 percent of any new net savings as of the end of the quarter over the credit union's savings deposits as of September 30, 1981.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  5  withdrawn or redeemed from such accounts measured at the beginning and end of each calendar quarter. "Qualified residential financing" is any of the following: (a) Any loan secured by a lien on a single-family or multifamily residence; (b) any secured or unsecured qualified home improvement loan; (c) any mortgage on a single-family or multifamily residence that is insured or guaranteed by the Federal, State or local government or any instrumentality thereof; (d)  any loan to acquire a mobile home;  (e) any loan for the construction or rehabilitation of a single family or multifamily residence; (f) any mortgage secured by single-family or multifamily residences purchased in the secondary market, but only to the extent such purchases exceed sales of such assets; any security issued or guaranteed by the Federal National Mortgage Association, the Government National Mortgage Association, or the Federal Home Loan Mortgage Corporation, or any security issued by any other person if such security is secured by mortgages, but only to the extent such purchases exceed sales of such assets; and  (g)  (h)  any loan for agricultural purposes.  The Tax Act defines single-family residence to include stock in a cooperative housing corporation, as defined in section 216 of the Internal Revenue Code, and 2, 3, and 4 family residences. DISCUSSION OF ASC AUTHORIZATION:  The Tax Act itself does  not authorize depository institutions (or any other institution) to issue ASCs; the statute merely provides an exclusion from income for interest earned on time deposits with characteristics identical to those set out in the Tax Act.  The Congressional  intent that ASCs be made available is, however, clear.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Thus, it  6  -insured is necessary for the Committee to authorize Federally commercial banks, mutual savings banks, and savings and authorized loans to offer ASCs, if individuals are to receive the t tax benefits and if depository institutions are to benefi 3/ from reduced costs of funds and increased deposit flows. At the same time, there is little left to the discretion of t. the Committee with respect to the nature of the deposi The rate, maturity and denomination are set out in the Tax in Act; any deviation in these characteristics could result the interest from the ASC not qualifying for exclusion from an individual's gross income. Thus, the first question before the Committee is Whether following to authorize a new category of time deposit with the characteristics :4/ 1.  Maturity of exactly one year,  2.  Available in denominations of $500, and  3.  Yield to maturity equal to 70 percent of the average bills. annual investment yield on 52-week U.S. Treasury  The Tax Act provides that ASCs have a maturity of one y of the year and there is no language in the legislative histor statute to indicate any flexibility on this question.  Accordingly,  ty of an ASC authorized by the Committee is to have a maturi  -insured savings 3/ In order for other institutions, such as state credit unions a-nd loan associations, industrial loan companies and nt to offer ASCs, they must be authorized by their releva supervisory authority. r 1, 4/ Under the Tax Act, ASCs may be issued only from Octobe be would 1-981 through December 31, 1982. The regulation . period that for effective only   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  moN1  7  However, unless otherwise precluded by  exactly one year.  the Committee, it would be possible for institutions, as part of their contract with depositors, to provide for the automatic renewal of ASCs, just as is permissible for any other time deposit. The Tax Act also states that ASCs are to be "made available in denominations of $500".  This language raises the questions of:  (1) whether an individual certificate must be issued for each $500 of deposit of the same customer; (2) whether certificates can be issued only in $500 increments, i.e., $1,000, $1,500 and so on; and (3) whether certificates may be issued for any amount other than $500.  The Conference Report accompanying  the statute (H. Rept. 97-215 (1981)) states that ASCs are to be "available for any deposit of $500 or more, subject to any limit on maximum deposits".  There is no language in the  statute or its legislative history to indicate that ASCs are to be issued only in denominations of $500, or only in denominations of $500 or more.  Thus, the statute is best read as  requiring an institution to make ASCs available in denominations of $500, while permitting an institution to offer ASCs in any other denomination, including denominations of more or less than $500.  Under this approach, an institution would  be required to accept ASC deposits for $500, $1,000, $1,500 and so on, but would not be required to issue individual certificates for each $500 deposit.  At the same time, an  institution would be permitted to accept an ASC deposit in any other amount.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  For example, an institution could accept  8  an ASC deposit in the amount of $247.00 or $1,386.45.  Also  a depository institution may establish its own maximum deposit amount above $500.  Presumably, this latter provision is to  provide institutions with some flexibility in their ASC deposit-taking, since they are subject to the Qualified residential financing requirement. With respect to the yield, ASCs must have a yield to maturity equal to 70 percent of the average annual investment yield of the most-recently auctioned 52-week U.S. Treasury bills.  The most recent auction is the one occuring immediately  preceding the week in which the ASC is issued.  Normally,  52-week U.S. Treasury bills are auctioned every four weeks, on a Thursday.  The results of the auction are announced by  the Treasury Department late in the day on the auction date. The average annual investment yield determined by that auction would be applicable for all ASCs issued beginning the next week, which would normally begin on a Monday.  Beginning  with the September 4, 1981 auction, the Treasury will include the average annual investment yield to maturity for 52-week U.S. Treasury bills (rounded to the nearest one-hundredth of a percentage point) as part of the auction announcement. Unlike other time deposits regulated by the Committee, the yield on ASCs must be equal to 70 percent of the average yield on 52-week Treasury bills, rather than be the maximum permissible rate payable on such deposits.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Thus, all depository  - 9 institutions must provide the same yield to maturity on ASCs, and there is no differential in favor of thrift institutions. Since the yield on ASCs must equal the yield on 52-week Treasury bills determined at a specific auction, ASCs are fixed-rate instruments. Institutions may pay or credit interest during the term of an ASC deposit.  Such payment or crediting, however, would require  that the nominal interest rate vary with the method of compounding.5/ The total amount of interest paid or credited on ASCs will not vary with different methods of compounding, provided that no interest is paid out or withdrawn during the term of the deposit.  For those  who withdraw interest during the deposit term, the total amount of interest paid would be lower because the effect of compounding does not occur, but the annual investment yield would remain  5/ When institutions pay or credit interest more frequently than annually, the computation of interest must be adjusted to reflect the effects of compounding so that the annual investment yield to the depositor remains at the rate stipulated by law. Specifically, the formula used to derive the nominal interest rate at which interest can be paid or credited is as follows: d/365 I = (1 + c ) 100  -1  r = 100 x (365) x I where:  c= the annual investment yield required to be paid on the ASCs (in percent per annum); d= the average number of days in a compounding period; I= the amount of interest that can be paid during a compounding period per dollar on balance in the account at the beginning of said period; and r= the corresponding nominal rate of interest (365-day basis, in percent per annum).  For institutions using continuous compounding, the nominal interest rate would be defined as: r= 100 [ in (1 + (c/100))]  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  - 10 -  unchanged.  For example, the auction of 52-week U.S. Treasury  bills on August 6, 1981, resulted in an average price of 85.296 per 100.  The annual investment yield on such 52-week bills  would be 17.29 percent 6/, 70 percent of Which, 12.10 percent, would be the annual investment yield that institutions are required to pay on ASCs. An investor depositing $1,000 in an ASC subject to this yield requirement would receive $121.00 in interest upon maturity of the deposit, if all principal and any interest credited by compounding were maintained on deposit for the entire one-year term of the certificate.  If, however, an institution chose to  permit interest to be paid to a depositor prior to maturity, the amount of interest and the nominal interest rate must be adjusted to account for whatever compounding of interest is implicit in the access of the depositor to the accumulated interest.  6/The annual investment yield is determined as follows: Annual Investment Yield to Maturity: Days in Year X 100 X [100.00 - Average Price] to Maturity Days Average Price Where: Average Price = Average price per 100 auction of 52 week T-bills Days in Year = Number of days in year beginning with issue date of bill (365 or 366) Days to Maturity = Number of days from issue date to maturity date (usually 364) Note: the annual investment yield on 52-week U.S. Treasury bills should not be confused with bank discount rate or the investment rate (equivalent coupon-issue yield), both of which are released as part of the Treasury Department's auction announcement. As an example, the August 6, 1981 auction resulted in an average rate paid on such bills of 14.542 percent on a bank discount basis, and 16.60 percent an investment rate equivalent coupon-issue yield basis.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Accordingly, institutions paying or crediting interest on a quarterly basis would, in the above illustration pay $28.97 per quarter, Which is an annualized nominal interest rate of 11.59 percent.  Such interest, if left in the account and  compounded quarterly, would accumulate to $121.00 at the end of the one-year term of the certificate.  Similarly, monthly  payments would be $9.56 at a nominal rate of 11.47 percent. Different payments or crediting of interest would have to be adjusted accordingly. DISCUSSION OF OTHER ISSUES:  Although the Tax Act imposes  limitations for ASCs, the Committee is also faced with several issues regarding implementation of ASC authority and enforcement of certain provisions of the Tax Act. ASCs and Existing Rules -  The first issue is Whether ASCs  should be subject to the Committee's rules that are applicable to other time deposits.7/ Several questions have been raised regarding What rules are to be applicable to ASCs.  The questions  relate to: payment of interest during the term of the deposit, brokers' or finders' fees, premiums given in connection with ASCs and early withdrawal penalties.  Nothing in the Tax Act  or its legislative history indicates an intent that the Committee should distinguish between ASCs and other categories of time deposits with respect to any of its existing rules.  Furthermore,  having one set of rules applicable to all categories of time  7/ Generally, all time deposits are subject to the same rules _ of the Committee. Early withdrawal penalties differ on the basis of maturity of deposit, although all deposits of the same maturity have the same penalty. There is also an exception for certain IRA/Keogh deposits that are withdrawn when the depositor reaches a certain age.  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  - 12 -  deposits would minimize administrative and interpretive problems associated with ASCs for depositors, depository institutions, the regulatory agencies and the Committee.  Accordingly, since  ASCs are time deposits, all of the Committee's other rules should apply to them.  For example, such action would permit  depository institutions to pay interest during the term of the deposit, but would prohibit the prepayment of interest.  In  addition, any brokers' or finders' fees paid in connection with an ASC would have to be included as part of the ASC yield under the Committee's rules. Premiums - With respect to premiums, questions have been raised regarding the permissibility of offering premiums for ASC deposits because of a discussion between Congressmen Rostenkowski and Martin which took place on the floor of the House of Representatives during consideration of the Tax Act (See Congressional Record, July 29, 1981, Page H 5139).  In  that discussion, it was concluded that "substantial premiums or other inducements" should not be used to increase the yield on ASCs.  When the Committee adopted its present rule regarding  premiums, it determined that, within certain limitations, premiums (whether in cash, credit or merchandise) given to attract deposits are considered promotional or advertising expenses rather than the payment of interest.  (Under the  , Committee rules, the value of the premium (including shipping handling, warehousing, packaging and handling costs for merchandise) for cannot exceed $10 for deposits of less than $5,000 or $20 deposits of $5,000 or more.)   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  On the basis of the same reasoning,  - 13 -  premiums, when given in connection with attracting ASCs under the limitations of the Committee's existing rules, should not be viewed as increasing the yield on ASCs. Early Withdrawal -  Furthermore, although the Tax Act  provides for the loss of tax benefits in the event of early withdrawal of part or all of the principal of an ASC, a penalty for such action is necessary to insure that ASCs remain true to their purpose of being one-year time deposits.  If no  early withdrawal penalty were imposed, the ASC would become nothing more than a passbook savings account with an interest rate that would be more than twice the current passbook rate. Under existing rules, the withdrawal of all or part of the principal of an ASC would result in a penalty equal to three months' interest (at the nominal rate) on the amount withdrawn. Notice to Depositors -  As discussed above, the Tax Act  places limitations on excluding interest earned on ASCs from a person's gross income.  As a result, part or all of the interest  earned on a particular ASC may not be excludable depending upon whether the depositor collateralizes a loan with the ASC, withdraws any part of principal prior to maturity or exceeds the lifetime maximum of $1,000 ($2,000 for a joint return) Notwithstanding the limitations on the tax benefits of ASCs, the availability of those tax benefits will be the primary feature used to attract ASC deposits.  In order to avoid any confusion,  it is recommended that depository institutions be required to give customers notice of the tax implications prior to the   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  - 14 -  institution issuing the ASC to the customer.  The following is  suggested: The Economic Recovery Tax Act of 1981 authorizes a lifetime exclusion from federal gross income of up to $1,000 ($2,000 in the case of a joint return) for interest earned on tax-exempt savings certificates. Regardless of how much interest is earned on this or any tax-exempt savings certificate, including interest earned on such certificates from other institutions, and regardless of during which taxable years that interest is earned, no more than a total of $1,000 ($2,000 in the case of a joint return) can be excluded from federal gross income for all taxable years. Furthermore, interest earned on this deposit cannot be excluded from federal gross income if (1) this deposit is used as collateral for any loan, or (2) any part of the principal of this deposit is redeemed or disposed of prior to maturity. Such a notice would indicate that the customer has ultimate responsibility for the tax treatment of interest earned on ASCs. Conversion of Existing Deposits to ASCs -  The Committee  has received several requests for it to authorize holders of six-month money market certificates ("MMCs") to convert their deposits to ASCs at the same institution without imposition of early withdrawal penalties. Existing rules of the FRB and the FDIC provide that the terms of a deposit contract may be changed, if the amendment results in a reduction of the interest rate of the deposit with the same or a longer maturity, or if the change results in an increase in the maturity of the deposit at the same or a lesser interest rate.  These rules would permit conversions  of all existing MMCs to ASCs without penalty.  The FHLBB has a  similar rule or interpretation under consideration and all three   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  - 15 -  agencies are going to address this issue presently under their respective authorities.  Thus, it is not necessary for  the Committee to act on the requests for conversion, since its action would be duplicative of that of the regulatory agencies. On the other hand, if the Committee wished, it could specifically address this issue and either permit the conversions of MMCS (or any other deposit); or the Committee could determine that a penalty should be imposed for any conversion of an existing time deposit to an ASC. Intrepretation and Enforcement of Residential Financing Requirement - As noted previously, the Tax Act provides that if the issuing institution does not satisfy the "qualified residential financing" requirement during any calendar quarter, it cannot issue ASCs during the subsequent quarter.  The pro-  vision raises obvious questions with regard to the interpretation of certain aspects and enforcement of the provision. The first question is whether "qualified net savings", 75 percent of Which is to be invested in qualified residential financing, includes interest credited to accounts.  It could  be argued that the term should include only the aggregate amount of net cash that customers add to their accounts during a calendar quarter.  On the other, interest earned on a deposit,  and credited to accounts increases the total amount of funds on deposit.  Since interest, once credited, is part of each  depositor's funds, the better view is to treat "qualified net savings" as including any interest credited to deposit accounts.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  - 16 -  Second, it is unclear whether "qualified residential financing" is intended to be determined on a gross flow or net flow basis.  For example, an institution that has $5 million  of mortgages outstanding at the end of a quarter may have $4.25 million outstanding at the end of the next quarter due to payments of principal and complete payoffs of such loans. If that same institution has a qualified residential financing requirement for the next quarter of $1 million, the question presented is whether the institution, in order to satisfy the requirement, must have $5.25 million of eligible assets or $6 million of such assets at the end of the relevant quarter. If the answer is determined on a gross flow basis, the institution would be required to have a total investment of $6 million in eligible assets.  This would necessitate that all of the previous  quarter's repayment of principal be reinvested in qualified financing plus all of that quarter's requisite "qualified net savings."  Such an interpretation could require an investment  in qualified residential financing of more than the institution's "qualified net savings." If, however, the answer is determined on a net flow basis, the institution would be required to have a total investment of $5.25 million in eligible assets.  This  approach would require that only the relevant quarter's "qualified net savings" must be invested in "qualified residential financing." Thus the net flow basis appears to be the more reasonable approach to satisfying the requirement. Third, there is no definition of a "loan for agricultural purposes" in the Tax Act and no guidance on the matter can be   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  found in the statute's legislative history.  In the absence of  a statutory definition, it is necessary to provide a definition. It is suggested that the definition be taken from the instructions for the call report for commercial banks, Which describe in detail "loans to finance agricultural production and other loans to farmers" and "real estate loans secured by farmland."  Such a  definition would appear to comply with the intent of the Tax Act and would resolve the question by providing a definition with which the depository institutions are already familiar. Further, neither the Tax Act nor its legislative history indicates whether a commitment to make a mortgage or purchase an eligible security quaes as eligible residential financing.  The exigencies of the housing finance business make it  dcult for an institution actually to make an investment in an eligible asset within one calendar quarter after its qualified residential financing requirement is determined.  For example,  mortgages often close more than three months after the loan commitment is made and construction loan disbursements may be spread over several quarters.  Since fulfillment of a commitment will  result in the desired financing, a firm commitment to invest in any of the assets described in the Tax Act as "quaed residential financing" should be considered as an eligible investment. Under the Tax Act, failure to comply with the quaed residential financing requirement precludes an institution frS m further issuing ASCs. include this limitation.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  The Committee's regulation should The enforcement aspects 5f the residential  - 18 -  financing requirement can be implemented by a simple certification procedure on the part of the institution's executive officer.  The certification should state that the institution has  complied with the qualified residential financing requirement, as set out in the Tax Act, and should include appropriate documentation, as determined by the institution.  Furthermore, an institution  not satisfying the residential financing requirement should be required to notify its customers specifically if the deposit contract provides for automatic renewal, so that the customer may make other arrangements. The attached draft Federal Register notice reflects the discussion contained in this memorandum.  If any different determinations are  made by the Committee, the notice will be amended to reflect those determinations.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  TITLE 12--BANKS AND BANKING CHAPTER XII--DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE PART 1204--INTEREST ON DEPOSITS Qualified Tax-Exempt Savings Certificates  AGENCY:  Depository Institutions Deregulation Committee.  ACTION:  Final Rules.  SUMMARY:  The Depository Institutions Deregulation Committee  ("Committee") has established a new category of time deposit in order to permit depositors to take advantage of the Federal income tax benefits applicable to interest earned on qualified tax-exempt savings certificates, the so-called All-Savers Certificates ("ASCs"), and in order to help depository institutions reduce their costs of funds and increase their deposit flows.  The Economic Recovery Tax Act of 1981 ("Tax Act"),  with certain restrictions, authorizes a maximum lifetime exclusion of $1,000 ($2,000 in the case of a joint return) from gross income for interest earned on ASCs, which (1) are issued from October 1, 1921 through December 31, 1982, (2) have a maturity of one year, (3) are available in denominations of $500 (and any denomination determined by the depository institution) and (4) have an annual investment yield equal to 70 percent of the average investment yield for 52-week U.S. Treasury bills auctioned immediately preceding the calendar week in which the ASCs are issued.  The Committee also required  that certain notice regarding the tax implications of ASCs be given to a depositor prior to the purchase of an ASC. EFFECTIVE DATE:  October 1, 1981  FOR FURTHER INFORMATION CONTACT:  Rebecca Laird, Senior  Associate General Counsel, Federal Home Loan Bank Board   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  - 2 (202/377-6446), F. Douglas Birdzell, Counsel, Federal Deposit Insurance Corporation (202/389-4324), Daniel Rhoads, Attorney, Board of Governors of the Federal Reserve System (202/452-3711), Allan Schott or Elaine Boutilier, Attorney-Advisors, Treasury Department (202/566-6798 or 566-8737), David Ansell, Attorney, Office of the Comptroller of the Currency (202/447-1880). SUPPLEMENTARY INFORMATION:  Title III of the Tax Act, Public  Law 97-34, 95 Stat. 172, (26 U.S.C. §128) provides that up to certain maximum dollar limitations and under certain restrictions • an individual's gross income (for Federal income tax purposes) does not include interest earned on qualified ASCs.  In general,  the Tax Act authorizes a lifetime exclusion from gross income of $1,000 for an individual return and $2,000 for a joint return, i.e., regardless of how much interest is earned on all ASCs, and regardless of during which taxable years interest on ASCs is earned, no more than a total of $1,000 ($2,000 in the case of a joint return) can be excluded from gross income for all taxable years.  However, interest earned on a particular ASC may not be  excluded from gross income, if (1) any portion of that ASC is redeemed prior to its maturity, or (2) any portion of that ASC is used as collateral or security for a loan. In order for interest to qualify for exclusion from gross ments. income under the Tax Act, an ASC must meet several require First, ASCs may be issued only during the period beginning on October 1, 1981, and ending on December 31, 1982. one Second, the certificates must have a maturity period of year.  Third, the certificate must have a yield equal to 70  percent of the average yield on 52-week Treasury bills.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -  3 -  Fourth, the issuing institution must provide that ASCs are available in denominations of $500. The Tax Act imposes limitations on the issuing institution with respect to the use of deposit funds derived from ASCs.  Generally, for commercial banks, mutual savings banks  and savings and loan associations, the Tax Act requires that at least 75 percent of the lesser of: (1) the proceeds from ASCs issued during a calendar quarter or (2) "qualified net savings", be used to provide "qualified residential financing" by the end of the subsequent calendar quarter.  If an  institution fails to meet the "qualified residential financing" requirement by the end of any calendar quarter, it may not issue additional ASCs until the requirement is satisfied. The term "qualified net savings" is the amount by which deposits into passbook savings accounts, 6-month money market certificates, 30-month small saver certificates, time deposits of less than $100,000, and ASCs exceed the amount withdrawn or redeemed from such accounts measured at the beginning and end of each calendar quarter. "Qualified residential financing" is any of the following:   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  (a) Any loan secured by a lien on a single-family or multifamily residence; (b) any secured or unsecured qualified home improvement loan; (c) any mortgage on a single-family or multifamily residence that is insured or guaranteed by the Federal, State or local government or any instrumentality thereof;  - 4 (d)  any loan to acquire a mobile home;  (e) any loan for the construction or rehabilitation of a single-family or multifamily residence; (f) any mortgage secured by single-family or multifamily residences purchased on the secondary market, but only to the extent such purchases exceed sales of such assets; (g) any security issued or guaranteed by the Federal National Mortgage Association, the Government National Mortgage Association, or the Federal Home Loan Mortgage Corporation, or any security issued by any other person if such security is secured by mortgages, but only to the extent such purchases exceed sales of such assets; and (h)  any loan for agricultural purposes.  The Tax Act defines single-family residence to include stock in a cooperative housing corporation, as defined in section 216 of the Internal Revenue Code, and 2, 3, and 4 family residences. The Tax Act does not, however, authorize depository insitutions to offer ASCs; such determinations were left to the relevant regulatory agencies.  In this regard, the Com-  mittee is empowered by its enabling statute, The Depository Institutions Deregulation Act (12 U.S.C. §3501 et seq), to prescribe rules governing "the establishment of classes of deposits or accounts", at all Federally insured commercial banks, mutual savings banks and savings and loan associations. In conformance with the provisions of the Tax Act, the Committee has authorized depository institutions to offer ASCs with the following characteristics: (1)  A maturity of one year,  (2)  Available in denominations of $500, and  (3)  A yield equal to 70 percent of the average annual investment yield on 52-week U.S. Treasury bills auctioned week immediately preceding the calendar week in which the ASC is issued.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  5  The Tax Act provides that ASCs have a maturity of one year and there is no language in the legislative history of the statute to indicate any flexibility on this question. ASCs must have a maturity of exactly one year.  Accordingly,  It would be possible,  however, for institutions, as part of their contract with depositors, to provide for the automatic renewal of ASCs, just as is permissible for any other time deposit. The Tax Act states that ASCs are to be "made available in denominations of $500." There is no language in the statute or its legislative history to indicate that ASCs are to be issued only in denominations of $500, or only in denominations of $500 or more.  Thus, the Committee has concluded that  depository institutions are required to make ASCs available in denominations of $500, but are permitted to offer ASCs in any other denomination, including denominations of more or less than $500.  Accordingly, an institution is required to  accept ASC deposits for $500, $1,000, $1,500 and so on, but is not required to accept ASC deposits in other amounts. Nor is a depository institution required to issue individual certificates for each $500 of a deposit.  At the same time,  an institution is permitted to accept an ASC deposit in any other amount.  For example, a depository institution could,  accept an ASC deposit in the amount of $247.00 or $1,386.45. Also a depository institution may establish its own maximum deposit amount above $500. With respect to the yield, ASCs must have a yield to maturity equal to 70 percent of the average investment yield of the most recently auctioned 52-week U.S. Treasury bills.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  6 y preThe most recent auction is the one occurring immediatel ceding the week in which the ASC is issued.  Normally, 52-week  , on a Thursday. U.S. Treasury bills are auctioned every four weeks ury DepartThe results of the auction are announced by the Treas ment late in the day on the auction date.  The average investment  for all yield determined by that auction would be applicable lly ASCs issued beginning the next week, which would norma begin on a Monday.  Beginning September 4, 1981, the Treasury  yield Department will include the average annual investment to the to maturity for 52-week U.S. Treasury bills (rounded of the auction nearest one-hundredth of a percentage point) as part announcement.  The annual investment yield should not be  rate confused with the bank discount rate or the investment included (equivalent coupon-issue yield), both of which are in the Treasury Department's auction announcement. ttee, Unlike other time deposits regulated by the Commi average the yield on ASCs must be equal to 70 percent of the the maximum yield on 52-week Treasury bills, rather than be permissible rate payable on such deposits.  Thus, all depository  on ASCs institutions must provide the same yield to maturity institutions. and there is no differential in favor of thrift the 52-week Since the yield on ASCs must equal the yield on auction, ASCs U.S. Treasury bills determined at a specific are fixed-rate instruments. term Institutions may pay or credit interest during the of an ASC deposit.  Such payment or crediting, however, would  with the method require that the nominal interest rate vary of compounding.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  ted The total amount of interest paid or credi  7 on ASCs will not vary with different methods of compounding, the provided that no interest is paid out or withdrawn during term of the deposit.  For those who withdraw interest during  be the deposit term, the total amount of interest paid would but lower because the effect of compounding does not occur, the annual investment yield would remain unchanged.  For  example, the auction of 52-week U.S. Treasury bills on August of 6, 1981, resulted in an average price paid for such bills 85.296 per 100.  The annual investment yield on such 52-week  bills would be 17.29 percent, 70 percent of which, or 12.10 that percent, would be the effective annual investment yield institutions are required to pay on ASCs. A depositor placing $1,000 in an ASC subject to this of yield requirement would receive $1,121.00 upon maturity by the deposit, if all principal and any interest credited ar compounding were maintained on deposit for the entire one-ye term of the certificate.  If, however, an institution permits  a depositor prior to withdraw interest prior to maturity, be the amount of interest and the nominal interest rate must st. adjusted to account for the effect of compounding of intere on a Accordingly, institutions paying or crediting interest quarterly basis in the above illustration would pay $28.97 per quarter, which is an annualized nominal rate of 11.59 percent.  Such interest, if left in the account and compounded  quarterly, would accumulate to $121.00 at the end of the one-year term of the certificate.  Similarly, monthly payments  percent. of interest would be $9.57 at a nominal rate of 11.48   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis (  8 would have to be Different payments or crediting compounding adjusted accordingly. 1/ of its other The Committee has also determined that all sits are applicable to rules relating to time and savings depo to a depositor prior ASCs. For example, interest may be paid rest is not prepaid to maturity of the ASC, provided that inte C.F.R. §§1204.101 as provided in the Committee's rules (12 and 1204.111).  In addition, the withdrawal of any portion  earned on the ASC) of the ASC (although not the interest drawal penalty would result in imposition of an early with nal interest rate on equal to 3 months interest at the nomi 3). the amount withdrawn. (12 C.F.R. §1204.10  Furthermore,  connection with an ASC any brokers' or finders' fees paid in the deposit (12 C.F.R. must be included as part of the yield on §1204.110).  more frequently than 1/ When institutions pay or credit interest be adjusted to reflect annually, the computation of interest must annual investment yield to the effects of compounding so that the ulated by law. Specifically, the depositor remains at the rate stip interest rate at which the formula used to derive the nominal follows: interest can be paid or credited is as .(1  c )  d/365 -1  100 r where:  = 100 x ( 365 )  x I  to be paid on = the annual investment yield required the ASCs (in percent annum); a compounding period; d = the average number of days in be paid during a I = the amount of interest that can balance in compounding period per dollar on the period; and the account at the beginning of said of interest (365r = the corresponding nominal rate day basis, in percent per annum). c  compounding, the nominal interest For institutions using continuous [in ( 1 + (c/100))). rate would be defined as: r = 100   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  a  - 9 With respect to premiums, questions have been raised regarding the permissibility of offering premiums for ASC deposits because of a discussion, which took place on the floor of the House of Representatives, during consideration of the Tax Act (See Congressional Record, July 29, 1981, page H 5139).  In that discussion, it was concluded that "substantial  premiums or other inducements" should not be used to increase the yield on ASCs.  The Committee previously determined that,  within certain limitations, premiums (whether in cash, credit or merchandise) given to attract deposits are considered promotional or advertising expenses rather than the payment of interest.  For the same reason, the Committee has determined  that premiums, under existing limitations should not be viewed as increasing the yield on ASCs.  Thus, premiums may be  offered in connection with ASCs under the limitations of the Committee's existing rules (12 C.F.R. §1204.109). In order to avoid any misunderstandings regarding the tax consequences of the interest earned on a particular ASC, the Committee required depository institutions to provide customers with the following notice prior to the issuance of an ASC: "The Economic Recovery Tax Act of 1981 authorizes a maximum lifetime exclusion from gross income of $1,000 ($2,000 in the case of a joint return) for interest earned on tax-exempt savings certificates. Regardless of how much interest is earned on this or any other tax-exempt savings certificate including interest earned on such certificates from other institutions, and regardless of during which taxable years that interest is earned, not more than a total of $1,000 ($2,000 in the case of a joint return) can be excluded from federal gross income for all taxable years. Furthermore, interest earned on this deposit   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  - 10 (1) cannot be excluded from federal gross income if or (2) loan, any for teral colla as this deposit is used med redee is it depos this of ipal any part of the princ ity. matur to or disposed of prior that they The notice is intended to indicate to depositors quences of an have ultimate responsibility for the tax conse ASC. asking Several requests were submitted to the Committee certificates be that depositors with six-month, money market without imposition permitted to convert their deposits to ASCs, of any early withdrawal penalty.  Because the Federal Reserve  and Federal Home Board, Federal Deposit Insurance Corporation ion of conversion Loan Bank Board are each addressing the quest individual of existing deposits under their respective it is not authorities, the Committee has determined that requests. necessary for the Committee to act on the tainty Also, in order to avoid any confusion or uncer in the Tax Act with respect to certain terms, which are used Committee has but which are not defined in that statute, the made interpretations of such terms.  First, the Committee has  include any defined the term "qualified net savings" to accounts, since interest or dividends credited to deposit deposit funds. such interest is part of each customer's residential Second, the aggregate amount of "qualified is to have invested financing" that a depository institution be determined on a net at the end of a relevant quarter is to flow basis.  reinvest Thus an institution is not required to  loan payments of principal all of the previous quarter's mortgage "qualified net in addition to the requisite amount of the   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  saving" or ASCs for the previous quarter.  Third, the Tax Act  does not provide a definition of the term "loan for agricultural purposes" and the legislative history does not provide guidance on the matter.  In such circumstances, the Committee determined  to establish a definition on the basis of analogous terms described in the instructions to the call report for commercial banks.  Accordingly, a "loan for agricultural purposes" is defined  to include all "loans to finance agricultural production and other loans to farmers" (Schedule A, item 4) and "real estate loans secured by farmland" (Schedule A, item 1(b)).  Finally,  the exigencies of the housing finance business may make it extremely difficult for depository institutions to actually make investments in eligible assets within one quarter after the qualified residential financing requirement is determined. Many mortgages close more than three months after the loan commitment is made and construction loan disbursements may be spread over several quarters.  Since fulfillment of a  commitment would achieve the desired residential financing, the Committee has determined that a firm commitment to invest in any of the assets described in the Tax Act as "qualified residential financing" satisfies that investment requirement. Under the Tax Act, failure to comply with the qualified residential financing requirement for any calendar quarter precludes an institution from issuing ASCs during the next quarter until the requirement is satified.  The Committee has  determined to enforce this requirement through a certification procedure.  An executive officer of the depository institution  is to certify that the institution has complied with the   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  - 12 set out in the qualified residential financing requirement, as Tax Act.  but A specific certification form is not required,  determined by it should include appropriate documentation, as the depository institution.  In addition, if institutions  should be provide for automatic renewal of an ASC, depositors ce of the maturity notified in writing at least 15 days in advan t renew date in the event the depository institution canno residential the ASC because of its failure to satisfy the financing requirement. ment a Because immediate action is necessary to imple est by the program determined to be in the nation's inter ttee's Congress, and because of limitations on the Commi not made any discretionary authority, the Committee has (5 U.S.C. §601 findings under the Regulatory Flexibility Act et. seq.).  For the same reason, the Committee finds that  nt and deferred the prior notice opportunity for public comme not necessary effective date provisions of 5 U.S.C. §553 are s for not in taking this action and that good cause exist n provisions complying with those provisions or the publicatio s (12 C.F.R. of section 1201.6 of the Committee's regulation §1201.6). Institutions Pursuant to its authority under the Depository , the Committee Deregulation Act (12 U.S.C. §3501 et. seq.) (12 C.F.R. Part 1204) amends part 1204 -- Interest on Deposits ws: by adding a new section 116, to read as follo §1204.116---Tax-Exempt Savings Certificates. (a) A commercial bank, savings and loan association, or mutual savings bank may pay interest on a tax-exempt savings   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  - 13 certificate ("ASC") provided that the time deposit has an original maturity of exactly one year, is available in denominations of $500, and has an annual investment yield to maturity equal to 70 percent of the average annual investment yield on 52-week U.S. Treasury bills set by auction, the auction to have occurred immediately preceding 1/ the calendar week in which deposit is issued. (b) A depository institution must provide each depositor the following notice, in a form that the depositor may retain at the time of opening a deposit under this subsection: The Economic Recovery Tax Act of 1981 authorizes a lifetime exclusion from federal gross income of up to $1,000 ($2,000 in the case of a joint return) for interest earned in tax-exempt savings certificates. Regardless of how much interest is earned on this or any other tax-exempt savings certificate including interest earned on such certificates from other institutions, and regardless of during which taxable years that interest is earned,  st rate at 1/ The formula used to derive the nominal intere s: as follow is ed credit which interest can be paid and  I =  (1 +  )  c  d/365 -1  100 365  where:  r =  100 x  c =  the annual investment yield required to be paid on the ASCs (in percent per annum);  d =  the average number of days in a compounding period;  100  I =  the amount of interest that can be paid during a compounding period per dollar on balance in the account at the beginning of said period; and  r =  the corresponding nominal rate of interest (365-day basis, in percent per annum).  nominal For institutions using continuous compounding, the (c/100))], + (1 interest rate would be defined as: r = 100 [in sion expres where "in" signifies the natural logarithm of the that follows.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis e  - 14  -  no more than a total of $1,000 ($2,000 in the case of a joint return) can be excluded from federal gross income for all taxable years. Furthermore, interest earned on this deposit cannot be excluded from federal gross income if (1) this deposit is used as collateral for any loan, or (2) any part of the principal of this deposit is redeemed or disposed of prior to maturity. (c) (1) A depository institution may not issue ASCs under this section unless an executive officer of the depository institution certifies, in a form determined by the institution, that the institution has complied with the "qualified residential financing" requirement set out in 26 U.S.C. §128. The certification should include appropriate supporting documentation, as determined by the depository institution. (2) For purposes of determining compliance with the "qualified residential financing" requirement the following applies: (a) the term "qualified net savings" includes interest on dividends credited to deposit accounts; (b) the amount of "qualified residential financing" is to be determined on a net flow basis; (c) the term "any loan for agricultural purposes" is defined to have the same meaning as items described in the instructions to the report of condition of all insured commercial banks, schedule A, itme 4 "Loans to Finance Agricultural Production and Other Loans to Farmers, and schedule A, item 1(b) "real estate loans secured by farmland," and (d) "qualfied residential financing" includes a firm commitment to purchase any assets eligible for such investment. (d) If a depository institution provides for automatic renewal of an ASC, depositors must be notified in writing at least 15 days in advance of the maturity of an ASC in the event the depository institution cannot renew the AS because of its failure to satisfy the residential financing requirement. (e) This section expires January 1, 1983. By Order of the Committee, [date], 1981   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Gordon Eastburn Acting Executive Secretary  AMERICAN RS DM B Alii t teION  1120 Connecticut Avenue,N.W. Washington,D.C. 20036  PRESIDENT Lee E.Gunderson President Bank of Osceola P. 0.Box188 Osceola,Wisconsin 54020  July 30, 1981  As a conferee on H.R. 4242, the Economic Recovery Tax Act ot 1981, you have the difficult task of helping to shape an equitable, and politically viable, compromise tax bill. In reaching that compromise, we would like to ask that you make every effort to retain the Bentsen amendment (No. 309) to the tax bill relating to the percentage limitation on loan loss reserves for banks. This amendment, which has a negligible revenue effect (estimated by the Joint Tax Committee at less than $80 million), will prevent tile percentage limitation from dropping i)elow the level presently used by bank regulators for testing the adequacy of loan loss reserves and reyaired by generally accepted accounting principles for financial reporting purposes. This is particularly important in light of current economic conditions when loan losses appear to be on their way to record highs. Personal bankruptcies, for example, increased in 1980 by more than 80 percent over 1979. The one-year provision, accepted and supported by the Administration, will provide an opportunity for the Congress, the Treasury, and the banking community to re-examine the policy judgments made in the Tax Reform Act of 1969 concerning tne adequacy of bank loan loss reserves in lignt of tnese changed economic circumstances. In connection with the All Savers Certificate provisions there are three items of a technical nature I wish to bring to your attention:   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  (1) It is important that the cooperative nousing language in the House version be retained. I understand that its absence from the Senate version resulted from oversight and was not by design. (2) Because many banks and savings and loans provide mortgage lending, agricultural credit, and otner  AMERIC.AN BANKERS ASSOCIATION  CONTINUING OUR LETTER OF  SHEET NO.  "qualified residential financing" through subsidiary corporations or through other corporate components of the holding company of which the bank is a member, it is important that all corporations which are members of the same affiliated group be treated ac a single corporation for purposes of the qualified financing test. In this way, home mortgages made by a savings and loan through its service corporation, home mortgages made by a bank through its mortgage lending subsidiary, and agricultural loans made through its agricultural credit corporation can be taken into account for purposes of the qualified financing test. (3) The treatment of foreign deposits is not clear under the language of either bill. The problem is that savings deposits in a foreign branch or subsidiary should not be taken into account in determining the level of qualified financing necessary for a bank to issue All Savers Certificates. These foreign deposits are not subject to United States deposit requirements and are generally not available for domestic lending. To include them in the savings base would discriminate against banks with foreign branches or subsidiaries. We urge you to seek retention of the bank loan loss reserve amendment and the inclusion of the three technical amendments to the All Savers provisions. Sincerely,  Lee E.Gunderson   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  .  .-  "ALL SAVER'S" TAX EXEMPT CD'S f July 30, 1981  REASONS FOR TREATING DEPOSITORY INSTITUTION MORTGAGE AND AGRICULTURAL LENDING AFFILIATES AS "QUALIFIED INSTITUTIONS"  In General Many large and medium size depository institutions conduct a substantial portion of their residential mortgage and agricultural lending through lending affiliates. Mortgage and agricultural lending affiliates are used by financial depositories for general business reasons. One of the principal business reasons is to obtain a broader market for offering these loan services to the public. These lending affiliates are not subject to certain geographic and other similar limitations which are imposed on depository institutions per se under Federal and State law. H.R. 4242, under Section 321(d)(6), expressly provides that "... all members of the same affiliated group (as defined in Section 1504) which file a consolidated return for the taxable year shall be treated as 1 corporation." The House Ways and Means Committee Report on H.R. 4242 at page 147 explains this provision as follows: The amount of qualified certificates, residential financing, and net new savings are to be determined on a net aggregate basis of all corporations (whether or not qualified depository institutions) which are affiliated corporations (within the meaning of sec. 1504), if a consolidated return is filed for any part of that calendar quarter. Recommendation This legislation should permit banks and other depositories to include mortgage and agricultural loans made by their affiliated lending corporations as "qualified residential financing" for the purpose of meeting the tests to issue tax exempt savings certificates. Without this affiliated group rule, many depository institutions, particularly medium size and larger depositories (which may be members of holding company groups),would be severely restricted in their ability to issue All Saver Certificates and thus to raise additional funds for mortgage lending which is the objective of this legislation.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -  ..  2  Suggested Amendment to H.R. 4260 On page 196, after line 17, insert the following amendment as new sec. 128(d)(6): "(6) CONSOLIDATED GROUPS.-For purposes of this subsection, all members of the same affiliated group (as defined in section 1504) which file a consolidated return for the taxable year shall be treated as a single corporation."  ...   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  JOHN F. ROLPH, EU July 30, 1981 Re:  All Savers--Conference Committee Action  Dear Lloyd: Please note the attached which have gone to Treasury, Hill staff, etc. Best regards,  BOARD OF GOVERNORS OF THE  FEDERAL RESERVE SYSTEM  Office Correspondence To  Chairman Volcker  From  Messrs. Bradfield and Mattingly  Date Subject:  July 211 1981  U.S. League of Savings  Assns. v. DIDC et al.  On July 20, 1981, the U.S. League of Savings Associations filed a lawsuit in U.S. District Court for the District of Columbia against DIDC and its members, seeking injunctive relief against DIDC's June 25, 1981, actions eliminating interest rate ceilings on time deposits in stages by August 1985. The League is now concerned with the first phase of the program, which eliminates the ceilings on time deposits of 4 years or more established after August 1, 1981. The League also contends that the removal of the 12 per cent cap on SSCs will significantly increase the cost of funds to thrifts and that the decision was made arbitrarily without benefit of adequate staff analysis on the impact an the viability of thrifts. The League claims that DIDC's action in removing interest ceilings an time deposits eleminates the differential on such rate violation of Public Law 94-200 (which precludes the elimiin accounts differential the on any category of deposits existing on nation of without the prior consent of the Congress). December 10, 1975, The League also contends that elimination of the ceilings violates section 203(a) of the Monetary Control Act, which generally prohibits DIDC from setting ceilings above "market rates" and that DIDC's action was not taken with "due regard for the safety and soundness of depository institutions." Finally, the League contends the June 25 action violated the Administrative Procedure Act in that the basis and reasons for the action are not set forth in the record and in that DIDC's action was arbitrary and capricious. Judge Gezell has called a meeting of counsel this afternoon regarding the League's request that the court issue a temporary injunction against the DIDC action. Under the Federal Rules of Civil Procedure, the court may issue such an injunction at any time and without providing DIDC an opportunity to file an answering brief. A temporary injunction is only valid for 10 days. However, the League has also moved for a preliminary injunction, which if granted is effective until the date of trial and final decision in the case. Trial and a final decision of the matter would take a minimum of 3-4 months. DIDC will have only a short period (probably 10 days) to respond to the League's motion for a preliminary injunction.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  to CO ert CD:7m  >  C—  r--  r' < . C) 3t1,:=7.3  (7)  ,
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