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https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  DIDC March 29, 1982 - September 28, 1983  Collection: Paul A. Volcker Papers Call Number: MC279  Box 26  Preferred Citation: Depository Institutions Deregulation Committee, 1982 March 29-1983 September 28; Paul A. Volcker Papers, Box 26; Public Policy Papers, Department of Rare Books and Special Collections, Princeton University Library Find it online: http://findingaids.princeton.edu/collections/MC279/c173 and https://fraser.stlouisfed.org/archival/5297  The digitization ofthis collection was made possible by the Federal Reserve Bank of St. Louis. From the collections of the Seeley G. Mudd Manuscript Library, Princeton, NJ 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. They further agree to request permission of the Princeton University Library (and pay any fees, if applicable) if they plan to publish, broadcast, or otherwise disseminate this material. This includes all forms of electronic distribution.  Copyright The copyright law of the United States (Title 17, United States Code) governs the making of photocopies or other reproductions of copyrighted material. Under certain conditions specified in the law, libraries and archives are authorized to furnish a photocopy or other reproduction. One of these specified conditions is that the photocopy or other reproduction is not to be "used for any purpose other than private study, scholarship or research." If a user makes a request for, or later uses, a photocopy or other reproduction for purposes not permitted as fair use under the copyright law of the United States, that user may be liable for copyright infringement.  Policy on Digitized Collections Digitized collections are made accessible for research purposes. Princeton University has indicated what it knows about the copyrights and rights of privacy, publicity or trademark in its finding aids. However, due to the nature of archival collections, it is not always possible to identify this information. Princeton University is eager to hear from any rights owners, so that it may provide accurate information. When a rights issue needs to be addressed, upon request Princeton University will remove the material from public view while it reviews the claim. Inquiries about this material can be directed to: Seeley G. 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  1UNITED STATES LEAGUE of SAVINGS INSTITUTIONS  111 EAST WACKER DR./CHICUN.1514-C67: 13 112) 644-3100 ;  (3r7  WILLIAM B. O'CONNELL Prmdem  FEDER AL pr  "  VE  C".•1+-' c-  683. SEP 29 Flf 4: 13 September 28, 1983: i  pgiar,  Mr. Mark G. Bender Executive Secretary Depository Institutions Deregulation Committee Room 3025 Department of the Treasury 15th Street and Pennsylvania Avenue, N.W. Washington, D.C. 20220 Dear Mr. Bender: The United States League of Savings Institutions* wishes to comment briefly on the two items which the Depository Institutions Deregulation Committee has scheduled as agenda items for the Committee's September 30, 1983 meeting: (1) the elimination of the thrift institution differential on passbook accounts and on time deposits of 7 to 31 days in amounts under $2,500; and (2) the reduction of required deposit minimums on Super NOW Accounts, Money Market Deposit Accounts and ceiling-free time deposits of 7 to 31 days. * The U. S. League of Savings Institutions, formerly the U. S. League of Savings Associations, has a membership of 3,500 companies representing over 99% of the assets of the $730 billion savings and loan business. League membership includes all types of associations -- Federal and state-chartered, stock and mutual. Recently, many prominent savings banks have joined the League as members. The principal officers are: Leonard Shane, Chairman, Huntington Beach, California; Paul Prior, Vice Chairman, New Castle, Indiana; William O'Connell, President, Chicago, Illinois; Stuart Davis, Legislative Chairman, Beverly Hills, California; and Roy Green, Executive Vice President, Phil Gasteyer, Legislative Counsel, Jim Freeman, Senior Legislative Representative, Washington, D. C. League headquarters are at 111 East Wacker Dr., Chicago, Illinois 60601. The Washington Office is located at 1709 New York Avenue N. W., Washington, D. C. 20006. Telephone: (202) 637-8900.  THE AMERICAN HOME: THE SAFEGUARD OF AMERICAN LIBERTIES   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -2-  We are well aware, of course, that Section 426 of Public Law 97-320, the Cam -St Germain Depository Institutions Act of 1982, mandates that all interest rate differentials be eliminated by January 1, 1984.  Our member  institutions continue both their operational and investment planning with that date for ending the thrift differential in view, and will be prepared for this near-final rate deregulation step at that time. To take that step any sooner would cause a serious disruption in the rebuilding and recovery process in which our institutions have been engaged since enactment of Garn-St Germain and the moderation of market interest rates. We would ask that any action elininating the differential be effective no earlier than on January 1, 1984. We also oppose the reduction or elimination of the current $2,500 minimum deposit requirement effective for Super NOW Accounts, Money Market Deposit Accounts and ceiling-free time deposits of 7 to 31 days. Any downward changes in these minimum requirements would have the effect of disrupting the recovery of savings institutions at a time when the industry, on average, stands a chance of experiencing its first year of positive earnings since 1980. We estimate that if the minimum balance requirement were eliminated at this time, the shifts that would occur of low balance convenience deposits into higher rate accounts would cost the savings and loan business more than one-fourth of the expected total earnings of the business in 1983.  This  bottom line cost would amount to $420 million for the first 12 months after this change.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -3-  Further, our ability to continue as a reliable source of long-term housing finance would be eroded even beyond that which we experienced with the introduction of the Money Market Deposit Account itself.  Savings institution  managers are having difficulty managing what they describe as a maturity warp -- the uncertainty and the imbalance which derives from relying on essentially short-term deposits to make long-term mortgage loans.  At least the $2,500  minimum deposit requirement by limiting the conversion of low balance convenience deposits provides institutions with a small degree of manageability. We believe also that the DIDC should take into consideration the adverse potential impact of reducing or eliminating minimum deposit requirements on borrower interest rates. Mortgage interest rates, although down from the record highs of 1981-82, still remain at levels which effectively close the lending window on thousands of would-be homeowners. Today we see rates trending somewhat lower, and this is being welcomed within the long-depressed home construction industry. The slightest upward tick in rates sends shudders through that industry, and we fear that the contemplated minimum deposit requirement reduction or removal could have that impact. We would ask, then, that the DIDC not impede the recovery of our own savings institutions and that of the home construction industry by lowering or eliminating minimum deposit requirements at this time. Finally, it has been our observation that the rapid pace of deposit interest rate deregulation, changes in early withdrawal penalties, and the creation of new accounts have served to promote confusion in the marketplace   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -4-  among consumers. Effective on October 1, 1983 -- the very day after the DIDC's next scheduled meeting --  jor changes will become effective. These  changes have already required managers of savings institutions to conduct another round of informational programs to better educate depositors on the alternatives available to them. We believe confusion among depositors could be held to a minimum if the DIDC would provide sufficient breathing time between its actions. In summary, the U.S. League of Savings Institutions opposes the elimination of the thrift institution differential before January 1, 1984, and opposes the elimination or reduction of minimum deposit requirements at this time. Thank you for this opportunity to comment on the DIDC's agenda items. Should you have any questions, please feel free to contact me. Sincerely,  William B. O'Connell President WBO/js   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  ITTEE DEPOSITORY INSTITUTIONS DEREGULATION COMM Washington. D.C. 20220 COMPTROLLER OF THE CURRENCY FEDERAL RESERVE BOARD  FEDERAL DEPOSIT INSURANCE CORPORATION NATIONAL CREDIT UNION ADMINISTRATION  FEDERAL HOME LOAN BANK BOARD DEPARTMENT OF THE TREASURY  September 13, 1983  Memorandum For: From:  Subject:  DIDC Staff Mark Bend Executive Secretary September 30, 1983 DIDC Meeting  ember 30, 1983 The next DIDC Meeting will be held on Sept rtment of Commerce, at 10:00 a.m. in the Auditorium of the Depa ue, N.W. which is located at 14th and Constitution Aven which I would There are a few matters about this meeting like to bring to your attention. ers planning to First, a list of names of those staff memb cy. Those listed attend this meeting is needed from each agen at the Department will have access to the Secretary's entrance the meeting. All of Commerce just prior to the beginning of side of the Commerce others will enter through the 14th Street IMPORTANT: All Building and follow signs to the auditorium. Ms. Sharon Kindrock, to s name of list agencies should submit their r than Friday, Room 1060, Main Treasury Building, by no late to be made on need ges chan name September 23, 1983. If any change as soon the with rock these lists, please call Ms. Kind etary's entrance Secr the ring ente as possible (566-5152). Upon ers and Staff" Memb C "DID to s at Commerce, just follow the sign entrance to the stage. ents at the Second, at this meeting the seating arrangem of stage ram diag (see table and behind the table are limited Member and e itte Comm setup attached). We can accommodate each f members, staf r othe one of their staff members at the table. The table. the nd behi sit who normally sit at the table will have to s area ed gnat desi All additional DIDC staff members will sit in which will be posted (see diagram again). fing Speakers, There will be a seat at the table for Brie been done at past which will be used in the same manner as has should be seated meetings at Treasury. All Briefing Speakers seated at the behind the table, if he or she is not already table.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  - 2 d on stage are those The only people who will be allowe , lettering that say "DIDC Staff" wearing white badges with black . ple ignated peo special technicians and other des ediately following the There will be a Press Conference imm ference room directly behind 10:00 a.m. DIDC Meeting in the con the stage. Attachment MB/spk   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  uTlvas 3TIcind  (ssaoxv JJels  Dala  suosaad 00S :AlTova0 2uTleas a'Als-aaleau (UTIXOS OU   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  B-u -pEas ssaad saTelS  4aoeds uado) aoou  a2e2s Jo woad _  L.)  uanqlsvg *iv/  Aaivall  ur2au *umq3  ('xam slEas 91 sxoaddy) 2uTluaS JJElS  uosTITEM  *J1S BUM  uia  Staff will enter Back of Stage -- Members and through Conference Room and exit  Stairs ---  1 BOARD OF GOVERNORS OF THE  FEDERAL RESERVE SYSTEM WASHINGTON, O. C. 20551  August 11, 1983  TO:  Board of Governors  FROM:  Normand Bern  For Information Only  Attached are materials relating to the DIDC recommendation to remove the statutory prohibition against the payment of interest on demand deposits.  These materials include (1) Secretary Regan's letter  to Congress containing the DIDC recommendation, (2) a draft of the recommended legislation, and (3) a related staff memorandum.  Attachment   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  AVNi:11V1-13 S'P,1 JO 331110 (13A133E I I :11 11V S I 911V C861 "MAUD 3H1 JO U01\1141100 JO OVEN  DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE atAingtori. 1).C. 20220 COMPTROLLER OF THE CURRENCY FEDERAL RESERVE BOARD  FEDERAL DEPOSIT INSURANCE CORPORATION NATIONAL CREDIT UNION ADMINISTRATION  FEDERAL HOME LOAN BANK BOARD DEPARTMENT OF THE TREASURY  August 4, 1983  Dear Mr. Chairman: The Depository Institutions Deregulation Committee recently considered the question of whether and to what extent interestbearing transaction accounts should be made available by depository institutions to members of the public not eligible to hold NOW accounts. In connection with this discussion, the Committee considered whether (1) it should authorize a fully transactional money market deposit account (NMMDA"), and (2) there should continue to be a statutory prohibition against paying interest on demand deposits by Federally-insured depository institutions. While the Committee is of the view that it can authorize a fully transactional MMDA, others question the Committee's authority in light of the statutory prohibition against paying interest on demand deposits. In order to eliminate the potential for protracted litigation, the Committee determined to present the issue of paying interest on demand deposits to Congress. The Committee concluded that this statutory prohibition is no longer justified and recommends that depository institutions be permitted to pay interest on demand deposits. An extensive analysis of the issue of payment of interest on demand deposits was undertaken by the Committee's staff. A copy of this study is enclosed for your information. The study concludes that the arguments for prohibiting the payment of interest on demand deposits in the 1930s appear to have little validity today. In this regard, certain developments have weakened significantly the economic effect of the prohibition, such as (1) implicit interest payments on demand deposits through the provision of customer services either free or at fees below cost, (2) market development of close demand deposit substitutes that earn interest (e.g., money market mutual funds and sweep accounts), and (3) legislative and regulatory changes to permit explicit interest-bearing transaction accounts that are legally distinct from demand deposits. Since many transactions balances earn close to a market return either implicitly or explicitly, we believe that the cost implications for depository institutions of the removal of the prohibition against the payment of interest on demand deposits would be of manageable size and largely temporary. Although some depositors with active accounts might be disadvantaged, depositors on average would tend to benefit from permitting the payment of interest on demand deposits. On balance, it seems that interest bearing demand deposits would result in a more efficient allocation of the economy's resources.  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  s  - 2 -  st The removal of the prohibition of payment of intere paid rates on demand deposits without authority to limit s of prior to March 31, 1986, would diminish the effectivenes as $2,500 than the present ceiling on NOW accounts of less could tors deposi well as on passbook savings accounts since keep their savings balances in ceiling free demand deposits. st on Therefore, if the prohibition against payment of intere give to demand deposits is removed, the Congress may wish the DIDC authority to apply ceilings to demand deposits of less than $2,500 until March 31, 1986, at the same ceiling order to rates permitted for NOW accounts and ATS accounts in assure competitive equity for these accounts. ory The Committee is also of the view that the current statut requirement that it hold quarterly meetings should be removed. on The actions of the Committee to date, including the creati way long a gone have t, Accoun t of the Money Market Deposi for toward achieving the Committee's objective of providing st intere all of" ation elimin te "the orderly phaseout and ultima no be will there 1983, 1, rate ceilings. In fact, by October ceilings on all new or renewed time deposits with maturities of more than 31 days. The Committee believes that the remaining actions to without complete the deregulation process may be accomplished can tee Commit mandatory quarterly meetings; rather, the e schedule meetings as required by events. This would provid work. its the Committee additional flexibility in completing Therefore, the Committee requests Congress to repeal the requirement that it hold public meetings at least quarterly. A draft bill that would accomplish these objectives is enclosed. Sincerely,  714/ta L7/ T, -r/t Donald T. Regar/ Chairman The Honorable Jake Garn Chairman Committee on Banking, Housing and Urban Affairs United States Senate Washington, D.C. 20510  _eA;tL aLcu /4a,2,e eth  Enclosures   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  11\  A BILL To permit the payment of interest on demand deposits held by depository institutions. Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, Short Title SEC. 101.  This Act may be cited  as the "Demand  Deposit Deregulation Act". Payment of Interest on Demand Deposits SEC. 102(a).  The first  and  second  sentences of  section 19(1) of the Federal Reserve Act (12 U.S.C. 371a) are hereby repealed. (b).  The third sentence of section 19(i) of the  Federal Reserve Act is amended by striking out "Notwithstanding any other provision of this section, a" and inserting in lieu thereof "A". SEC. 103.  The first sentence of section 18(g)(1) of  the Federal Deposit Insurance Act (12 U.S.C. 1828(g)(1)) is hereby repealed. SEC. 104.  The second sentence of section 5(b)(1)(B)  of the Home Owners' Loan Act of 1933 (12 U.S.C. 1464(b)(1)(B)) is hereby repealed. SEC. 105.  Section 19(b) of the Federal Reserve Act  (12 U.S.C. 461(b)) is amended by striking the last sentence in subparagraph following:  (8)(A) and  inserting  "This subparagraph does  in  lieu  thereof  the  not apply to (1) any  category of deposits or accounts which are first authorized pursuant to Federal law in any State after April 1, 1980; nor (2) an amount equal to the amount by which current total demand deposits exceeds the amount of demand deposits held by the  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -2institution on a daily average basis during the 14-day period preceding the date of enactment of this Act, held by each depository institution located outside of Connecticut, Maine, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, and Vermont, except as permitted by order or regulation of the Board.". SEC. 106.  Section 204 of Public Law 96-221 (12 U.S.C.  3503) is amended by adding at the end thereof a new subsection (c) to read as follows: "(c)  The Deregulation Committee shall not later than  six months from the effective date of this Act establish rules permitting the payment of interest on demand deposits at the same  rates  that  are  permitted  for  accounts  subject  to  withdrawal by negotiable or transferable instrument for the purpose of making transfers to third parties authorized under section 2(a) of  Public  Law  93-100 (12  U.S.C.  1832(a)).  Interest may not be paid by a depository institution on any demand deposit until such rules are issued by the Deregulation Committee.". SEC. 107(a).  Section 207(b)(2) of Public Law 96-221  (12 U.S.C. 3506(b)(2)) is amended to read as follows:  first sentence of section 18(g) of  the  Federal  "The  Deposit  Insurance Act (12 U.S.C. 1828(g)) is amended by striking out "payment and" and by striking out ", including limitations on the rates of interest and dividends that may be paid":".   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  A  -3(b).  Section 207(b)(3) of Public Law 96-221  (12 U.S.C. 3506(b)(3)) is amended to read as follows:  "The  second, fourth and seventh sentences of section 18(g) of the Federal Deposit Insurance Act (12 U.S.C. 1828(g)) are hereby repealed;". SEC. 108.  The second sentence of section 203(b) of  the Depository Institutions Deregulation Act of 1980 (12 U.S.C. 3502(b)) is hereby repealed. SEC. 109.  This Act shall take effect 180 days from  the date of enactment, except that section 108 shall take effect on the date of enactment of this Act.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  . Section-by-Section Analysis  SEC. 101.  The title of the Act is the Demand Deposit  Deregulation Act. SEC. 102.  This section repeals the prohibition in the  Federal Reserve Act against payment of interest on demand deposits by member banks. SEC. 103.  This section repeals the provision in the  Federal Deposit Insurance  Act  prohibiting  the  payment  of  interest on demand deposits held by insured nonmember banks and insured branches of foreign banks. SEC. 104.  This section repeals the provision in the  Home Owners Loan Act prohibiting a federal savings and loan association or federal savings bank from paying interest on demand deposits. SEC.  105.  This  section  amends  the  transitional  provisions for the phase-in of reserve requirements. reserve  requirements  were  instituted  for  all  When  depository  institutions, a transitional period of eight years was adopted to allow nonmember institutions to build up gradually to the required reserve level.  (Member banks were given a shorter  transitional period to adjust their reserves downward to the new level.) reasons:  This transitional provision was adopted for two  (1)  to  avoid  an  undue  burden  on  nonmember  institutions putting up reserves for the first time; and (2) to prevent disruption in the conduct of monetary policy through a sudden decrease in the amount of reserve balances held.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  NOW  -2-. accounts were first authorized for all depository institutions (except those in New England, New York, and New Jersey where been  they had  authorized  previously) effective  implementation of the new reserve requirements.  after  the  These accounts  were exempted from the phase-in of reserve requirements because it would not be burdensome to depository institutions to hold full reserves against them since they were newly authorized accounts.  However,  when  interest  on  demand  deposits  is  permissible, nonmember depository institutions may attempt to avoid  the  full  reserve  requirement  on  NOW  accounts  by  converting the accounts to demand deposits which are subject to the phase-in.  Section 105 reduces the potential for avoidance  of reserve requirements by requiring a nonmember depository institution to continue to hold full reserves against the amount by which an institution's total demand deposits exceeds the base of total demand deposits during a period immediately prior to the enactment of this bill.  Nonmember depository  institutions in New England, New York and New Jersey however would  continue  to receive  the  full  phase-in  of  requirements on NOW accounts and demand deposits. Reserve  is  given  authority  to  make  exceptions  reserve The Federal to  this  requirement. SEC. 106.  This  section  authorizes  the  DIDC  to  establish rules concerning the payment of interest on demand deposits.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Such rules shall authorize interest to be paid on  -.3-demand deposits under the same rate limitations as for NOW accounts.  Therefore  the  Committee  would  be  required  to  establish the same rate ceiling on demand deposits of under $2,500 as is established for NOW accounts of under $2,500. These regulations shall be implemented  not later than six  months from the effective date of the Act (one year from day of enactment). SEC. 107.  This section makes technical conforming  changes to the Depository Institutions Deregulation Act of 1980. SEC. 108.  This provision removes the requirement that  the DIDC meet in public at least quarterly. SEC. 109.  This section delays the effective date of  the Act to allow depository institutions an opportunity to prepare for the operational changes made by the Act.  The  effective date for removing the requirement that the DIDC meet quarterly is effective immediately.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE Washington. 1).C. 20220 COMPTROLLER OF THE CURRENCY FEDERAL RESERVE BOARD  FEDERAL DEPOSIT INSURANCE CORPORATION NATIONAL CREDIT UNION ADMINISTRATION  FEDERAL HOME LOAN BANK BOARD DEPARTMENT OF THE TREASURY  June 14, 1983  TO:  Depository Institutions Deregulation Committee  FROM:  DIDC Staffl  I.  SUBJECT:  The Payment of Interest on Demand Deposits  Introduction At its meeting of March 1, the Committee asked the staff to prepare  an analysis of the issues raised by the payment of interest on demand deposits. The Committee, of course, does not have the authority to take direct action with regard to the statutory prohibition of the payment of interest on demand deposits.  However, its views on the current prohibition could be communicated  to the Congress, in which authority rests.  The Committee's decision with  regard to authorizing MMDAs with unlimited transactions capabilities for businesses could be delayed pending congressional consideration of, or be made independent of, the broader issues of interest on demand deposits. This memorandum analyzes the implications of paying interest on demand deposits.2  It is intended to serve as a companion to the accompanying  staff memorandum "Money Market Deposit Accounts with Unlimited Transfers for  1.  This memorandum was prepared mainly by staff of the Board of Governors of the Federal Reserve System (D. Lindsey, R. Avery, E. Boutilier, F. Furlong, P. Lloyd-Davies, B. Opper and P. Pilecki.)  2.  These issues were previously examined in "The Impact of the Payment of Interest on Demand Deposits," a study of the staff of the Board of Governors of the Federal Reserve System (S.H. Axilrod, J.D. Paulus, E.C. Ettin, D.E. Lindsey and T.D. Simpson), January 1977.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -2-  Those Not Eligible to Maintain NOW Accounts," dated June 14, 1983.  The anal-  for ysis of the impact on depository earnings of a fully transactional MMDA businesses contained in the earlier. version of that memorandum, dated Februthe present ary 26, 1983, has been revised so as to facilitate comparison with on memorandum's analysis of the earnings impact of removing restrictions demand deposit interest.  The summary section of the present memorandum, pp. 2  memoranda through 5, contains a direct comparison of the conclusions in the two onal regarding earnings impacts of interest on demand deposits versus a transacti MMDA for businesses. Other sections of the present memorandum discuss the historical backto ground of the prohibition of interest on demand deposits, existing returns the public on transactions balances, the impact on depositors of explicit ve interest on demand deposits, monetary policy considerations, and legislati implications related to removing the prohibition of interest on demand deposits.  II.  Summary (1) The justifications underlying the prohibitions of interest on  on demand deposits enacted in 1933 and 1935 were that the payment of interest banker's balances gave rise to a substantial movement of funds from rural the areas to money center banks and that interest rate competition weakened soundness of banks.  Some researchers have suggested that these arguments had  little validity at the time and it seems clear they have less validity today. (2) The economic effects of the prohibition have been eroded by of (a) the payment of implicit interest on demand deposits through provision services priced below cost; (b) the emergence through the workings of market as federal forces of instruments closely substitutable for demand deposits, such funds and repurchase Agreements, traded in nationwide markets, and money market   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -3-  mutual funds; and (c) the authorization through legislative and regulatory action of deposits with transactions characteristics bearing explicit interest that are legally distinct from demand deposits, such as NOW accounts and MMDAs. (3) Although the implicit interest rate now paid to many demand depositors may approximate the level of the explicit rate they would earn if the prohibition were eliminated, the rate paid to certain depositors, including some households and medium and small businesses, seems to be lower than they might receive with explicit interest on demand deposits.  To be sure, tax con-  siderations would serve to diminish the benefits to households since explicit interest is taxable while services charges are not tax deductible.  Some house-  holds with small, active accounts could experience a fall in their overall after-tax return on transactions accounts in a regime of explicit interest and higher fees.  On the other hand, household and business depositors on average  would tend to gain by receiving explicit interest rather than subsidized services of equivalent cost to institutions, since customers tend to overuse subsidized services and hence value them below their marginal cost of production.  In general, the inducement for "unbundling" of charges for services  combined with explicit interest presumably would contribute to a more efficient allocation of the economy's resources.  Moreover, depositors themselves  would have less incentive to expend resources to minimize their holdings of transactions balances if additional dollars put in these accounts earned explicit interest. (4) The impact of interest on demand deposits on the earnings of depository institutions is expected to be minor in the long run.  Indeed,  eliminating interest rate restrictions on household transactions deposits would have little bearing on institutions' long-run profits, since the ceilings   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -4-  on regular NOW and ATS accounts already are scheduled to be removed by March 31, 1986.  In the case of business demand deposits, competitive pressures over  time likely would move most implicit rates near competitive levels, even in the absence of explicit interest on business demand deposits. (5) In the short run, though, the payment of explicit interest on demand deposits could temporarily lower earnings of commercial banks.  In the  first year or so, pre-tax profits may be reduced in an estimated range of $1 to $2 billion or 5 to 10 percent, assuming the continuation of current levels of market interest rates.  This earnings reduction would be composed of a 1 to  2-1/2 percent decline related to interest-bearing household transactions deposits plus a 4 to 7-1/2 percent fall related to interest-bearing business demand deposits.  The latter range for business demand deposits is identical to the  estimated first-year earnings impact of authorizing a fully transactional MMDA for businesses, since the two accounts are functionally equivalent.  Although  the industry-wide impact of interest on demand deposits would appear manageable, certain individual institutions might be especially vulnerable to earnings pressures during the transition period;. however, these same institutions also would face earnings pressures in the long run in any event. (6) For the smallest commercial banks (assets of less than $100 million) and the largest commercial banks (assets of $1 billion or more) the estimated first-year earnings impacts of paying interest on demand deposits are virtually the same--ranging from 4-1/2 to 9 percent of 1982 pre-tax profits. Although large commercial banks tend to rely much more heavily on business demand deposits, smaller banks generally deal more with medium- and small-size businesses whose shifting of funds to interest-bearing demand deposits will have the greatest potential for increasing costs.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Medium-size commercial banks  •  -5first-year likely to experience the largest ($100 million to $1 billion) are pre-tax 2 to 13 percent of their 1982 earnings reduction--estimated at 6-1/ overall to have not only a relatively high income. These institutions tend ral involve sits (which, as noted, will in gene reliance on business demand depo a relatively r ownership categories) but also a larger cost impact than othe anies held by medium- and small-size comp high share of their demand deposits likely to contribute most to enlarged (which will be the type of deposit deposit cost). ving the restrictions on the pay(7) For thrift institutions, remo noticeable deposits is not likely to have a ment of interest on transactions ortion of e institutions have a smaller prop impact on their cost of funds. Thes very few nces than commercial banks and have their deposits in NOW account bala prohiceilings on all NOW accounts and the demand deposits. Eliminating both ease could lead to some transitional incr bition of interest on demand deposits icit present the combined implicit and expl in their costs. However, since at ting a competitive rate, totally deregula yield on NOWs is evidently close to   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  thrift earnings even in the first NOWs would have only a minor impact on year. utory prohibition against the (8) The process of removing the stat Howwould not be unduly complicated. payment of interest on demand deposits ent of interest on demand deposits ever, removal of the prohibition of paym g statutory provision is needed regardin raises the issue of whether a specific . under the Monetary Control Act of 1980 the phase-in of reserve requirements  -6Historical Background  III.  Section 19(i) of the Federal Reserve Act, which provides in part that "No  member  bank  shall, directly or indirectly, by any  device  whatsoever, pay any interest on any deposit which is payable on demand," was added by the Banking Act of 1933.  This prohibition against interest  payments on demand deposits was extended to insured nonmember banks and mutual savings banks by the Banking Act of 1935.1  Federally chartered  savings and loan associations were not authorized to accept demand deposits until passage of the Garn-St Germain Depository Institutions Act of 1982, which permits such associations (as well as federal savings banks) to accept demand accounts of individuals and organizations that have a business, corporate,  commercial,  or  agricultural  loan  relationship  association as authorized by its charter or by law.  with  the  At the same time this  authority was granted to federally chartered savings and loans and federal savings banks, the Congress extended to them the prohibition against interest on demand deposits. Banks began to pay interest on selected accounts during the early part of the nineteenth century.  By the mid-1800s, large banks in New York  City had attracted a considerable volume of bankers' balances--that deposits of other commercial banks--and were paying interest on those  1.  The authority of mutual savings banks to offer demand deposits is governed by state law. Most states which charter mutual savings banks have authorized them to offer demand deposits. Nevertheless, while the state regulates the authority to offer demand deposits, it is federal law which prohibits mutual savings banks from paying interest on those accounts.   https://fraser.stlouisfed.org " Federal Reserve Bank of St. Louis  •-  -7-  deposits.  Banking Act of 1933, the In the century before the passage of the  frequently criticized payment of interest on deposits was regulators, and legislative bodies.  by bankers,  Before the Federal Reserve System was  y directed toward interest payments on established, such criticism was usuall es were thought to have played in bankers' balances and the role these balanc 1 ed between 1857 and 1907. occurr that s crise ng banki ic period the  -  bankers' balances also The concern over interest payments on d. continued .during the 1913 to 1933 perio  With the threat of banking panics  t of the Federal Reserve System, seemingly eliminated by the establishmen bankers' balances were put by money attention turned to the uses to which 2 center banks.  attracted funds from It was argued that interest payments  purpose of financing speculative rural areas to money centers for the investments in the securities market.  1.  2.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Further, it was commonly alleged  liquid repository of funds for many Bankers' balances served as a highly experience strong seasonal to d tende smaller rural banks which related to spring planting and fall fluctuations in deposits and loans their deposits at large banks harvesting. These banks would rely upon . During periods of normal to meet local customers' demand for funds culty in adjusting to economic activity, large banks had little diffi er, when conditions Howev es. seasonal contractions in bankers' balanc to liquidate loans cult it diffi tightened, the money center banks found cs of interest criti to ing Accord or other assets on short notice. of large banks to lity inabi ing result payments on bankers' balances, the periods caused severe meet their obligations to small banks during such sible for banking stress on financial markets and was mainly respon had not been paid on panics. These critics contended that if interest their funds locally bankers' balances, smaller banks would have invested and the crises would have been averted. or Glass). See 77 Cong. Rec. 3729 (1933) (Remarks of Senat  •  -8funds were being diverted from productive that such speculatively Invested 1 uses in rural areas. Act of 1933 is relatively The legislative history of the Banking atmosphere without formal hearings. sparse; it was enacted in a crisis the issue of interest on demand Concern at that time did not center on such as establishing federal deposit deposits, but rather on other issues, insurance.  the 1933 Act and from However, from the limited discussion of  extending the prohibition to insured legislative history of the 1935 Act e for the provision prohibiting nonmember banks, some reasons appear to emerg interest payments on demand deposits.  First, the popular view was advanced  on bankers' balances encouraged in 1933 that the payment of interest rural areas to money center banks able to ' substantial movement of funds from credit availability to rural pay higher interest rates, thus limiting 2 areas.  After the experience with  the prohibition in 1933, Congress  interest on demand deposits could further realized that the prohibition of 3 y better enabling banks to meet reduce bank costs significantly, thereb raging them to participate in the deposit insurance assessments, and encou federal deposit insurance program.  Senator Carter Glass observed that, "If  necessity of bidding for demand banks are relieved of the competitive have money to meet this deposits on interest, they will not only  1.  4165, 4166 (1933) (Remarks of See 77 Cong. Rec., Pt. 4, pp. 3729, Senator Glass).  2.  2 on page 7. See Senator Glass' comments cited in note  3.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  of the Currency to the American Address by J.F.T. O'Connor, Comptroller on September 7, 1933, printed Bankers' Association at Chicago, Illinois, House Committee on Banking and in Hearings on H. R. 5357 before the Currency, 74th Cong., 1st Sess. 173 (1935)•  •  .....a.  •  -91 left Over." assessment . . . but they will have almost an equal amount interest on demand Some congressmen also believed that the payment of customers who had deposits led to excessive competition between banks for their funds on demand large deposits causing these large depositors to shift g the stability of more frequently than might be expected and thus weakenin 2 the banks. time An objective look at these reasons after the passage of reveals some flaws in the reasoning.  The argument that payment of interest  rural areas did on bankers' balances drained substantial loanable funds from ably more than not consider that local loans generally earned consider ion. bankers' balances over most of the period prior to the prohibit  Thus,  not the sole the interest that could be earned on such balances was incentive for holding them.  Among the possible reasons overlooked by those  a convenient arguing for the prohibition were: (1) bankers' balances were swings form in which smaller banks could hold liquid funds against seasonal balances in deposits and loan demand; (2) country banks generally maintained with  correspondent  banks  to  facilitate  check  clearing  and  other  ve transactions; and (3) bankers' balances served as a highly attracti short-term asset for the purpose of diversifying the portfolios of rural banks and stabilizing the expected return on their assets.  1.  77 Cong. Rec. 4168 (1933).  2.  Hearings on S. 1715 and H. R. 7617 before the Subcommittee of the Senate Committee on Banking and Currency, 74th Cong., 1st Sess. 492 (1935) (statement of Benjamin M. Anderson, Jr., Economist, Chase National Bank of New York.)   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -10The bankers' balance argument appears even less applicable to issues  connected  with  interest  on  circumstances than it was in 1933.  demand  deposits  under  current  Rural areas are no longer dependent  largely upon rural bank deposits for loanable funds, and rural banks have several channels available for placing interest-bearing highly liquid funds in nonlocal institutions.  One example is the federal funds market, in which  a depository institution may make overnight loans of its excess funds to another institution that needs such funds. The other principal argument for the prohibition of interest on demand deposits concerned bank safety and stability.  At least two studies  have examined the question of whether interest rate competition for bank deposits heightened the instability of the banking system in the early 1 thirties.  Neither found  evidence that rate  competition  for  demand  deposits led to bank failures. In summary, more recent analysis indicates that, in retrospect, prohibiting the payment of interest on demand deposits in 1933 lacked strong justification.  Moreover, the arguments for the prohibition at the time it  was enacted seem to have little validity today. There have  been several studies done on behalf of the U. S.  Government since passage of the 1933 Act regarding payment of interest on  1.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  George J. Bentson, "Interest Payments on Demand Deposits and Bank Investment Behavior," Journal of Political Economy, October, 1964, and Albert H. Cox, Jr., Regulation of Interest on Bank Deposits (Michigan Business Studies, Vol. XVII, #4, 1966.)  •  •  1 demand deposits.  Every report issued as a result of these studies prior  the to the 1977 study by Federal Reserve staff has recommended retaining prohibition against the payment of interest on demand deposits, although the FINE Report in 1975 recommended eventually phasing it out over time.  As  recently as October 1982, the prohibition was ratified when savings and loan associations were authorized to accept demand deposits by the Garn-St Germain Act in connection with an expansion of asset powers provided by Title III of that Act to enable thrifts to diversify their investments. Section 312 states that "a(n) association may not pay interest on a demand account." history.  There is no discussion of this prohibition in the legislative It would appear that the Congress may not have intended the  provision as a reaffirmation that interest on demand deposits should be prohibited as a policy matter.  1.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Money and Credit and Their Influence on Jobs, Prices and Growth, the Report of the Commission on Money and Credit, (1961); U. S. Committee on Financial Institutions, Report to the President of the United States (Heller Committee) (1963); Report of the President's Commission on Financial Structure and Regulation (Hunt Commission) (1971); the "discussion principles" of Financial Institutions and the Nation's Economy (FINE), a report issued by the House Committee on Banking and Currency (1975); "The Impact of the Payment of Interest on Demand . cit. . Deposits," 1977, 22  tt  4 •  -12-  IV.  Existing Returns on Transactions Balances Despite the legal prohibition against payment of interest on demand  effect deposits, several developments have weakened significantly the economic of the prohibition.  These developments may be classified as: (1) the implicit  to payment of interest on demand balances through the provision of services ts • customers at prices below costs; (2) the spontaneous emergence of arrangemen and that provide close substitutes for demand deposits, such as sweep accounts that money market mutual funds, and (3) the legislative and regulatory changes permited explicit interest-bearing transactions accounts legally distinct from demand deposits but, in some cases, functionally equivalent. Implicit Interest on Demand Deposits The most common services provided to demand deposit holders below cost relate to transactions activity such as processing and collecting checks or electronic items deposited to accounts, debiting accounts for checks drawn on them, providing cash withdrawals and preparing periodic statements of account activity.  The subsidy to account holders involved in providing these services  at a price below cost constitutes one form of implicit interest on account balances.  Indications of the magnitude of this subsidy from the standpoint of  bank costs can be gleaned from data collected in the Federal Reserve System's Functional Cost Analysis (FCA) program, which is designed to measure the costs and revenues associated with various commercial bank functions.1 The average implicit subsidy given personal demand depositors through 1981 the provision of subsidized transactions services at reporting banks in  1.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  In 1981, 614 banks participated in the program. They do not however, constitute a random sample; only 58 of the respondents had deposits over 8200 million, and some of the survey questions were answered only by a subset of banks.  4  —13—  (the latest available data) is shown in Table 1.  On average, bank expenses to  charges by service personal checking accounts exceeded income from customer deposits) and by about $45 per year at small banks (less than $50 million in about $73 at medium—size banks ($50 to ::,200 million in deposits))  By dividing  transactions subsidy this implicit interest by the average account balance, the percent at medium is estimated to be about 4-1/2 percent at small banks and 7 banks.2 Table 2 shows the implicit transactions subsidy paid to business depositors in 1981, based on a comparable estimation procedure.  The average  rate rate is about 2 percent, which is significantly lower than the estimated 2 and for personal depositors; although annual expenses per account are between 3 times expenses per personal account, the average business account balance reported in the FCA data is 5 to 10 times the size of the average personal •  account.  However, these estimated implicit rates only capture the return to demand depositors who make no use of subsidized bank services other than those directly associated with account maintenance shown in line 2.  While this may  be true of many individual depositors, it is not the case for most business account holders, who also receive implicit payments in other forms.  First, bal—  ances may be used to compensate for credit services such as loan commitments or takedowns.  Recent evidence suggests that balance requirements on loan  1.  Not enough large banks ($200 million or over in deposits) provided data broken down by personal and business accounts to permit reliable estimates.  2.  This, of course, represents the cost of the the value of the subsidy to the depositor. VI below, the latter value will be somewhat be induced by the artificially low price to him by less than the cost to the bank.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  subsidy to the bank rather than As discussed further in Section lower, since the depositor will use some services that benefit  A  4  -14-  Table 1  Implicit Interest Cost of Non-Interest Bearing Personal Checking Accounts, per Account, by Size of Bank, 1981  Banks with Deposits of up to $50 million •  $50-$200 million  $1,019  $1,055  (2) Expenses  $88  $105  (3) Income from charges  $43  $32  (4) Net cost (implicit interest payment) [2 - 3]  $45  $73  4.44%  6.932  (1) Average balance  (5) Implicit interest rate [4  1.  Account maintenance cost, plus all expenses associated with deposits and check clearing.  Source:   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  1]  Functional Cost Analysis - 1981 Average Banks  -15-  Table 2  Implicit Interest Cost of Commercial Checking Accounts, per Account, by Size of Bank, 1981  Banks with Deposits of up to $50 million (1) Average balance (2) Expensesl (3) Income from charges (4) Ner cost (implicit interest payment) [2 - 3] (5) Implicit interest rate [4   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  1.  1]  $50-$200 million  $5,288  $9,868  $145  $242  $29  $39  $117  $203  2.21%  2.06%  Account maintenance cost, plus all expenses associated with deposits and check clearing.  Source:  Functional Cost Analysis - 1981 Average Banks  commitments, for example, have been set around 5 percent of the unused line.1 If the customer chooses not to pay by holding balances, a typical annual fee is 3/8 percent of the unused line.  Thus, the implicit rate of return on such a 5)  balance held to pay for a loan commitment is 100 x (3/8 addition to the return from other subsidized services.  7.5 percent, in  In recent years, how-  ever, the trend has been away from balances and toward fees for credit services. Second, additional compensating balances may be held to pay for other operating services such as wire transfers, processing credit card drafts, payroll preparation, securities safekeeping, transfer agent activities, lock boxes, cash concentration accounts, and zero balance accounts.2  In general, large  corporations are far more likely to use these services than small businesses or individuals.  As a result, demand deposit balances of large corporations  are more likely to be fully utilized in formally compensating the bank for a variety of subsidized operational services as well as for loan services than are the accounts of small businesses or individuals. The remaining types of subsidized services involve less formal arrangements.  Banks may provide convenience through a branch network; they also may  give advice regarding general financial planning, tax counseling, mergers, and local or national economic conditions.  While compensating balances may not  1.  See Appendix A to the November 30, 1982 DIDC staff memorandum, "Transactional Money Market Deposit Account." The data discussed there refer to conditions last summer before the sharp decline in interest rates, and the balance requirement has probably since risen.  2.  See the accompanying June 14, 1983 DIDC staff memorandum, "Money Market Deposit Accounts with Unlimited Transfers for Those Not Eligible to Maintain NOW Accounts" for a description of how balance requirements are determined. The implicit return on such compensating balances, at least for large corporate customers, generally is set to provide a market-determined rate of return to business depositors, less the cost of reserve requirements to the bank.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -17-  captured by FCA be formally required for these services and their costs not data, providing the services nevertheless is costly and in effect represents payment of implicit interest. Rough estimates of average overall implicit rates now earned by Section V. households and businesses on transactions deposits are presented in The Emergence of Close Substitutes for Demand Deposits In recent decades, numerous market innovations, in some cases stimulated by high market interest rates that accompanied historically high rates proof inflation, have afforded payment of explicit interest on balances that vide many of the same functions as demand deposits.  The following list provides  . several examples, but is not a complete description of such innovations   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  (1)  The federal funds market provides a convenient outlet for eligible lenders (depository institutions, U.S. government agencies, securities dealers and certain others) to place very shortterm (mostly overnight) funds at a market rate to borrowing banks, principally large money center banks. As this market developed over time, it effectively replaced the market for interest-bearing bankers' balances that existed before 1933.  (ii) Repurchase agreements also offer a large sized, very liquid asset to lenders ineligible for the federal funds market, especially corporations and state and local governments. (iii) Money market mutual funds are investment companies registered with the S.E.C. under the Investment Company Act of 1940. They invest exclusively in money market instruments and provide checking privileges subject to restrictions (usually with a minimum check size). Many have been established by brokerage houses and are used primarily by individuals. Others cater principally to institutional investors such as pension funds. (iv) Sweep accounts allow a hank at the end of each day to transfer out of a demand deposit account balances above a pre-arranged dollar limit either into money market instruments or into a money market mutual  As • • -  "•-• •••  46 , ••••i••• -• t...1.1.  I  i• ••11.6%.,  ii.i.,••••4‘..Ad• •...Jo.  . —18— d automafund share. Funds also may be transferre nts when payme cover to tically back to the account Thus, . level et pre-s a the balance falls below le, while the account serves as transactions vehic . funds us surpl on d earne is a market return ns Accounts Legislated Interest-Bearing Transactio d above have emerged from While the demand deposit substitutes liste both explicit interest and transactions market forces, other accounts providing legislation or regulation. Below is a services have been introduced through ts; Table 3 provides data on their summary of the most important developmen growth since 1980. chusetts com(i) In 1974, the Congress permitted Massa accounts. NOW offer to mercial banks and thrifts l savings mutua by ed offer These accounts had been issue to rity autho The er. hanks two years earli nd Engla New other to ded exten NOW accounts was Jersey New to 1978, in York New to 1976, states in of 1980. end in 1979 and to the entire nation at the accounts, gs savin Legally, the accounts are treated as ceilrate a to ct and explicit interest paid is subje at nts accou these hold ing. Depositors eligible to and units al nment gover s, present include individual s may be nonprofit corporations. Check-like draft the gives which ce, balan nt written on the accou d deman a of tages advan mic econo account all the cit expli of tage advan ional addit the deposit, with nt, accou interest. *A similar account, the share draft 1974. was authorized at credit unions in tutions Act of (ii) The Cam -St Germain Depository Insti commercial banks rize autho 1982 directed the DIDC to t deposit account marke money the and thrifts to issue and competitive to alent equiv be (MMDA), intended to has a minimum nt accou This . funds with money market ct to no average monthly balance of S2,500, is subje thorized preau interest rate ceiling, and permits six three only or automatic transfers a month, of which itors.1 depos all may be by check. It is available to  1.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Instruments," See Frederick T. Furlong, "New Deposit Bulletin, May 1983.  Federal Reserve  -19—  Table 3  *Balances in Accounts with Transactions Capabilities at Depository Institutions' (monthly average, not seasonally adjusted)  December 1980 $ Billions  % of Total  April 1983 $ Billions  7 of Total  369  93  330  42  Regular NOW, ATS and share draft accounts  27  7  91  11  Money market deposit accounts  n.a.  n.a.  341  43  Super NOW accounts  n.a.  n.a.  29  4  396  100  791  100  Gross demand deposits2  Total  n.a.—not applicable. 1.  Commercial banks, savings and loan associations, mutual savings banks and credit unions.  7.  Excludes demand deposits due to commercialbanks, certified checks and officer's checks.  Source: Federal Reserve System Report of Deposits, used for reserve requirement purposes.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -  • •  -20-  utions (iii) The DIDC also authorized depository instit 1983. y Januar in ing beginn NOWs, Super issue to with ts These are fully transactional NOW accoun no with and average monthly balances over $2,500 to le eligib tors interest rate ceilings. Deposi hold regular NOW accounts also may hold Super NOWs. Thus, eligible depositors prepared to invest $2,500 or more already have access to a it transactions account with unconstrained explic interest. es all (iv) The Monetary Control Act of 1980 requir time all on restrictions on interest rates paid 11, March by ated and savings accounts to be elimin consets; accoun NOW r 1986. This includes regula quently, by 1986, individuals and others eligible to hold NOW accounts will have a fully transace tional account without a regulated minimium balanc conthe r neithe fter, Therea g. ceilin or interest tinued prohibition of interest on demand deposits nor any other regulation will represent a legal impediment to banks wishing to pay explicit inter, est on individuals' transactions balances. Indeed share on ctions in 1982, all interest rate restri draft accounts at credit unions were eliminated, cso share draft depositors already have a transa regula or ory statut a r neithe tions account with crestri rate st intere any nor e balanc m tory minimu tions.  V.  Depository Earnings Estimates of Impact of Demand Deposit Interest on about $330 As of April 1983, gross demand deposits amounted to  account balances totaled over billion, while regular NOW, ATS and share draft S90 billion, and Super NOWs nearly $30 billion.  Virtually all demand deposits  ble deposits were held at commerand three-fourths of interest-bearing checka cial banks.  in general, The relative importance of transactions deposits  of funds for commercial banks and demand deposits in particular, as a source and thrift institutions is depicted in Table 4.  For commercial banks, trans-  ic assets as of December 1982, actions deposits averaged 21.4 percent of domest   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  —21—  Table 4 Reliance on Transactions Deposits and Demand Deposits By Type of Institution  Transactions deposits' as percent of domestic assets Commercial banks? Savings and loan associations3 Mutual savings4 banks  Demand deposits' as percent of domestic assets  21.4  17.0  1.4  0.1  2.5 .  1.0  1.  The commercial bank figures for demand deposits exclude demand deposits due to commercial banks, certified checks, and officers checks. The figures for demand deposits for savings and loans and mutual savings banks consist of demand deposits subject to transfer by draft.  2.  Based on Call Report data for December 1'482.  3.  Based on Call Report data for June 1982.  4. Based on Call Report data for Federally insured mutual savings banks   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  for December 1982.  114.1••••  ea,  •  •  -22-  compared to an average of 1.4 percent for savings and loans at mid-year and 2.5 percent for mutual savings banks at year end. To help assess whether demand deposits have represented a relatively cheap source of funding, a statistical study of their influence on profitability across commercial banks was conducted for each of the years 1978 through 1982. Rank profitability, measured as an institution's ratio of before tax-profits to assets, was related to several variables including its ratio of demand deposits to assets.  The results indicate that for the years 1978 through 1981,  an institution's reliance on demand deposits had a statistically significant positive impact on profitability.  Moreover, the impact appears to have been  greater in the years when market interest rates were higher.  In contrast, with  the sharp drop in interest rates that occurred in the last half of 1982, the estimates for that year do not reveal a statistically significant relation between profitability and reliance on demand deposits.  This suggests that  last year demand deposits in general were not a significantly more attractive means of funding than other sources.  Put another way, given interest rate  levels prevailing in 1982 on average, institutions likely would not have been willing to pay much more in explicit interest for demand deposits than they already were paying on average implicitly. The impact that eliminating the prohibition of interest on demand deposits can be expected to have on earnings of depository institutions is addressed in the remainder of this section.  The analysis assumes that the  ceiling rate on regular NOW (and ATS) accounts also would be eliminated at the same time, since restraining the competitive position of institutions whose transactions balances are concentrated primarily in NOW accounts, such as thrift institutions, would not seem warranted.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  The discussion focuses  -23-  principally on commercial banks where transitory earnings pressures would be more likely to develop given their relatively heavy reliance on transactions deposits for funding. (Effects on thrift earnings are discussed beginning on p. 45.) In order to obtain quantitative estimates of earnings impacts for the first year or so after interest on demand deposits is authorized, this section will first examine in detail the three main factors that will determine how converting to such a regime initially would alter earnings. The first factor is how much higher than otherwise the combined explicit and implicit rates paid on affected deposits would be, as measured by costs incurred by commercial banks.  The residual implicit rate represents the  cost of services still provided less the revenue obtained through (presumably increased) service charges—per dollar of affected deposits.  While an increase  in the sum of these average explicit and implicit rates would be more pronounced at levels of market interest rates comparable to those prevailing in recent years, the above evidence suggests that given the sharp drop in market rates in the second half of 1982, implicit rates now paid on a significant portion of demand deposits may not be much different from the overall rates institutions would pay at current market rates if explicit interest were allowed.  Never-  theless, the average overall yield on certain demand deposits could rise, particularly for deposits of medium- and small-size businesses.  This effect could  be heightened during an initial transition period if institutions--especially thrifts--viewed the authorization of explicit interest on all demand deposits as an opportunity to increase market shares by offering still higher introductory interest returns, as was the case with MMDAs.  In addition, explicit  rates could tend to foster more competition since depositors could more easily compare offering rates among institutions.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -24Second, earnings could be put under further, albeit largely transitory, pressure to the degree that depository institutions have to absorb some of the fixed costs associated with resources currently used to provide the services comprising implicit interest.  Although institutions could recoup  same of these costs by charging more for services, the quantity of such services demanded would tend to fall. Thus, institutions could not recoup that portion of existing fixed costs associated with unneeded facilities that cannot be quickly dismantled or other resources that cannot be readily converted to alternative uses.  This absorbed cost associated with discontinued services  can be expressed as a percent of the volume of affected deposits.  This figure--  unrecouped fixed costs of idle resources per dollar of affected deposits--can be added to the increased average rate paid on affected deposits to derive the total cost impact per dollar of affetted deposits. The third factor is the amount of affected deposits--that is, the volume of funds that would move into accounts offering a deregulated explicit rate.  Presumably, institutions would continue to offer conventional demand  deposits, if not regular NOWs, along side the new transactions accounts bearing a deregulated explicit rate.  By passing the initiative to switch accounts on  to depositors, institutions would avoid the full adverse cost impact of converting all demand deposits at once to explicit interest-bearing form.  This third  factor then boils down to the size of the shifts into the new accounts authorized by the legislative change, and whether the source of funds is existing demand deposits, other deposits or market instruments. The probable magnitude of these three factors will be examined sequentially for household demand deposits, regular NOW and ATS accounts, and business demand deposits.  It should, of course, be emphasized that these estimates--which  the will be presented as ranges--are not as precise as might be presumed from   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -25-  detailed estimates presented below.  They should be interpreted as rough  estimates of likely impacts on the assumption of a continuation of today's levels of market interest rates. Transitional Net Cost Impact for Household Demand Deposits Increase in Average Rate Paid on Affected Deposits.  Evidence from --  available Functional Cost Analysis data lends support to the presumption that the implicit return on the bulk of household demand deposits is not significantly below the explicit rate institutions would be willing to pay.  The pre-  vious section noted that in 1981 the implicit return on household demand deposits at a sample of commercial banks with assets of $50 to $200 million was about 7 percent.  Although data beyond 1981 are not yet available, implicit  rates paid likely have followed historical patterns in  howing little short-run  responsiveness to movements in market interest rates, in part owing to the large fixed cost component in implicit remuneration.  Thus, this FCA data may well be  suggestive of average implicit rates prevailing today.  By comparison, the aver-  age explicit yield on Super NOWs at commercial banks was only 7.2 percent as of the end of April of this year.' Taking into account the depositories' return to intermediation and the likelihood that any shortfall of service charges below operating expenses largely reflected incomplete transitional adjustments, a 7 percent overall rate may well approximate the competitive rate of return on transactions balances at today's level of market interest rates.  To be sure,  the FCA data indicate that the implicit return on household demand deposits at a sample of the smallest banks was below 7 percent in 1981.  1.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  But it is unlikely  In the last week of April, the coupon-equivalent yield on three-month Treasury bills was 8.4 percent. If Treasury bills had represented the investment outlet for funds acquired by Super NOWs, then the marginal reserve requirement cost to an institution bearing the full 12 percent required reserve ratio on transaction accounts would have amounted to about 1 percentage point.  -26that any significant volume of household demand deposits is paid implicitly much less than 1 to 2 percentage points below what would be earned in long-run equilibrium if explicit interest were allowed and market rates were around current levels--even considering the possibility that explicit rates would tend to foster more competition since depositors could more readily compare offering rates among institutions. In an attempt to capture or protect market shares, commercial banks as well as other depositories initially might raise overall average yields on these balances above long-run equilibrium levels relative to market interest rates.  It seems unlikely, however, that commercial banks or thrift institu-  tions would have much additional incentive to compete for household deposits. Explicit market interest rates already are paid on ceiling-free Super NOWs and MMDAs.  The pricing of Super NOWs since their introduction .suggests that insti-  tutions have not been inclined to bid aggressively for those accounts.  Thus,  lifting the prohibition of interest on household demand deposits seems unlikely to touch off a "bidding war" among institutions. These considerations underpin the high and low estimates of 1 and 2 percentage points for the net increase in overall rates paid on average on those household balances transferring to interest-bearing demand deposits. These estimates, shown in line 1 of Table 5, cover the transition period of a year or so following the effective date of the regulatory change. Fixed costs absorbed.  Commercial banks could face further downward  earnings pressures by having to absorb some of the fixed costs associated with the provision of services that now constitute implicit interest payments.  The  adverse impact on earnings would be tempered as institutions receive revenue from separately pricing services that the public is willing to continue to purchase and as institutions abandon those services that can not be provided on a   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -27-  Table 5 Estimated Transitional Effect on Commercial Banks' Before-Tax Earnings of Removing Interest Rate Prohibition on Household Demand Deposits  (1) Increase in ratel (%  100)  Low Estimate  High Estimate  .01  .02  .006  .015  $5  $5  $.08  $.18  plus (2) Fixed cost absorbed  (% +100)  times (3) Household demand deposits affected ($ billions) equals (4) Increase in net costs ($ billions)  1. The sum of the average explicit rate and the decline in the average implicit rate. Source:   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Federal Reserve staff estimates.  -28coat-effective basis.  Since the pro:egg of scaling back their operating facili-  ties could take some time, a portion of existing fixed costs would initially be absorbed by commercial banks in an environment of explicit interest.  In the  first year this absorbed fixed cost is assumed to equal one-tenth to three-tenths of the implicit interest currently earned on those household demand deposits converting to interest-bearing accounts.  With implicit returns on shifted  deposits between 6 and 5 percent--as assumed in the low and high cost estimates, respectively, in line 1--then the absorbed cost to commercial banks would be between .6 and 1.5 percent of the shifted deposits--as shown in line 2 of Table 5. The volume of affected deposits.  The volume of transfers to demand  deposits earning explicit interest is likely to be relatively small.  House-  holds maintaining demand deposits currently could earn an explicit return if they wished by opening a regular NOW or Super NOW account. ing to NOWs already has occurred.  Considerable shift-  In 1981--the first year of nationwide NOW  accounts--the estimated volume of demand deposits shifted to NOWs represented about 40 percent of the amount of household demand deposits outstanding at the beginning of the year.1  After the early months of that year and subsequently,  though, shifts to NOWs from demand deposits abated substantially until the advent of Super NOWs early this year when substantial shifting resumed for several months before tapering off again.  While inertia may explain why some households  have not switched, other depositors likely have determined that the combination of noninterest-bearing accounts and "free" services is more advantageous.  After  all, explicit interest would be subject to income taxes while the fees for services could not be deducted from income.  For certain demand depositors--particularly  depositors with active accounts but with small average balances--the after-tax  1.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  The actual level of household demand deposits fell by much less than twofifths, since shifts to NOWs were offset by flows of new funds to these demand deposits.  -29-  return could well be higher with a noninterest-bearing demand deposit account having no or low service charges rather than with an interest-bearing NOW account subject to higher service Charges. Even so, publicity surrounding the authorisation of interest on demand deposits and advertising of newly offered household accounts would induce some further shifting out of noninterest earning household demand deposits.  The  most likely accounts to shift would be larger, inactive accounts with low implicit returns.' Since these shifts would increase the fraction of remaining regular demand deposits represented by smaller, active accounts--which are less profitable--depositories may take the opportunity to impose higher service charges on these old accounts as well. deposit shifts.  This reaction would induce still further  If all interest rate restrictions were lifted, a reasonable  assumption may be that at most something on the order of 5 percent of the estimated $90 billion level of household demand deposits outstanding would shift to interest-bearing demand deposits (over and above the amount that would have shifted in any event to Super NOW accounts).  This $5 billion is shown on  line 3 of Table 5; inflows from other sources to interest-bearing household demand deposits are assumed to be negligible given that the shifting to Super NOWs from non-M1 sources has evidently about run its course already. Increased net cost.  Estimates of the increased net cost to commer-  cial banks during the first year or so of explicit interest on household demand deposits is derived in line 4 of Table 5 by multiplying the sum of estimates of the higher rate and the fixed cost absorbed per dollar of affected deposits by this estimate of affected deposits.  The resulting figure ranges from $80  to $180 million for the first year.  1.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Recent survey data indicate that about one-fourth of the current $90 billion in household demand deposits are in accounts over $2,500.  -30Transitional Net Cost Impact for NOW and ATS Accounts Increase in average rate paid on affected deposits.  Functional Cost  Analysis data indicate that regular NOW holders receive both an explicit and implicit rate on their balances. close to 2 percentage points.  The implicit portion of the yield appears  Combined with the 5-1/4 percent explicit rate  generally paid at present, the overall return seems to represent a fully competitive rate of remuneration, considering the cost of reserve requirements. Thus, line 1 of Table 6 assumes no increase in the sum of explicit and implicit rates paid on regular NOW and ATS balances would occur on average if the rate ceiling were removed, that is, the decline in the implicit rate is offset by the increase in the explicit rate. Fixed costs absorbed.  To the extent commercial banks raise explicit  rates, they will attempt to recoup the cost of current services through added fees.  However, NOW and ATS account depositors might not be willing to purchase  the same level of services once new charges are levied even if a fully competitive explicit interest rate were paid on account balances, although the relative cutback might be somewhat less than for household holders of demand deposits. It seems reasonable to assume, as in line 2 of Table 6, that commercial banks during the first year would absorb average fixed costs between one-tenth and two-tenths of the 2 percent implicit interest cost, which amounts- to -an annual expense to these commercial banks of .2 to .4 percent of regular NOW and ATS balances affected. The volume of affected deposits.  Lifting the ceiling on regular NOW  and ATS accounts could affect a large volume of deposits at commercial banks. Line 3 of Table 6 gives the estimate that some $70 billion of such accounts may be affected in the first year, representing virtually all the funds held in such accounts at commercial banks.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  —31—  Table 6 Estimated Transitional Effect on Commercial Banks' Before—Tax Earnings of Removing Interest Rate Restrictions on Regular NOW and ATS Accounts  Low Estimate  High Estimate  .002  .004  (1) Increase in ratel (% + 100) plus (2) Fixed cost absorbed  (% + 100)  times (3) Regular NOW and ATS accounts affected ($ billions) equals (4) Increase in net costs ($ billions)  1. The sum of the increase in the average explicit rate and the decrease in the average implicit rate. *--negligible Source:   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Federal Reserve staff estimates.  Increased net cost.  The absorption of fixed costs on regular NOW  and ATS accounts is estimated to depress earnings of commercial banks by between $140 and $280 million in the first year.  It should be emphasized again  that the elimination of interest rate restrictions on regular NOW and ATS accounts is due to occur by March 31, 1986 in any case, giving rise to earnings pressures at that time.  In anticipation, institutions could try to reduce  that future impact by making operational adjustments in the interim.  Transitional Net Cost Impact for Business Demand Deposits at Commercial Banks Increase in average rate paid on affected deposits.  Some medium- and  small-size firms apparently are not now being compensated fully for their demand deposit holdings.  These businesses are less likely than large firms to make  extensive use Of credit and operational services that usually make up the implicit interest payments involved in compensating balance agreements.  Despite their  relatively low utilization of these services, these businesses probably receive at current market rates implicit returns that are only 1 to 2 percentage points below what would otherwise be paid for those funds after complete adjustment to explicit interest on demand deposits.1 To be sure, allowing explicit interest on business demand deposits would provide commercial banks with a new instrument.  These institutions could  be inclined to offer attractive rates for a short period of time to capture market  1.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Judging from information provided recently by Federal Reserve Bank staff, perhaps a quarter of the demand deposits of small firms, on average, are held beyond amounts required as compensation for credit and operational services. Assuming a 7 percent implicit return on the other three-quarters of the balances implies a weighted average return of 5-1/4 percent. Further assuming a 7 percent overall return on all demand balances for these firms after explicit interest is introduced implies an increase in the average overall return for small firms of 1-3/4 percent, which is consistent with the text's assumption of a 1 to 2 percent increase for those small- and medium-size firms that are not now receiving a competitive rate and that switch to an interest-bearing demand deposit.  -33share.  However, even in the case of business demand deposits, using high  offering rates for this purpose might not be a particularly productive strategy. Large business depositors apparently already earn close to a competitive rate on demand deposits (after adjusting for reserve requirements).  Medium- and small-  size business depositors would find it costly to switch from one depository institution currently providing transaction and other services to another institution.  Thus, to attract these customers, a competing commercial bank might  have to offer a substantial premium for more than just a short period of time.1 All things considered, a reasonable assumption seems to be that the average explicit rate on demand deposits opened by those sma117 and medium-size firms that currently are not paid full compensation would be only 1 to 2 percentage points higher than these firms receive now. experience no change in returns.  Large firms are assumed to  Also assuming that those medium- and small-size  businesses that could experience an increase in returns account for one-half of business funds shifted gives an average increase in yields on all 'converted business demand deposits of 1/2 to 1 percent (line 1 of Table 7).2  1.  Upward pressure on rates could occur if thrift institutions also received expanded powers to offer business demand deposits. But at present most thrifts probably are not in a position to provide the array of services usually demanded or required by corporate customers. Hence, thrift competition would be unlikely to raise costs to commercial banks appreciably.  2.  This assumption is based in part on Federal Trade Commission data on the cash and demand deposit holdings of businesses in 1982. Those data indicate that, among manufacturing firms, companies with assets of less than $100 million accounted for 60 percent of the cash and demand deposit holdings. The results from a survey of financial companies (not including depository institutions) and nonfinancial companies conducted by a private research firm suggest that the fraction of business demand deposits held by medium- and small-size firms could he somewhat greater than 60 percent. Some medium- and small-size firms, however, already are fully compensated for demand balances and would not experience an increase in the rate paid by a commercial bank for the funds. Thus, if all firms were equally likely to shift to an interest-bearing demand account, the balances with a potential for gaining a higher return would be less than 60 percent--perhaps around 50 percent.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  -34-  Table 7 Estimated Transitional Effect on Commercial Banks' Before-Tax Earnings of Removing Interest Rate Prohibition on Business Demand Deposits  (1) Increase in rate' (% + 100)  Low Estimate  High Estimate  .005  .01  .003  .006  $90  $90  $.72  $1.44  plus (2) Fixed cost absorbed  (% + 100)  times (3) Business demand deposits affected ($ billions) equals (4) Increase in net costs ($ billions)  1. The sum of the average explicit rate and the decrease in the average implicit rate. Source:  Federal Reserve staff estimates.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -35Fixed costs absorbed.  Some large business depositors may wish to cut  back on cash management services once they can obtain an explicit rate on their demand deposits, even though this rate would reflect the continued cost of reserve requirements.  Some smaller business customers, too, might curtail  their use of bank services once pricing schedules were instituted.  However,  banks likely will be able to scale down more quickly facilities related to the provision of business services than those related to household services.  If  the cost absorbed by commercial banks were one-twentieth to one-tenth of the current average implicit yield (assumed to be between 6-1/2 and 6 percent in the low and high cost estimates, respectively, in line 1) on business funds that would shift, earnings would be reduced by a further .3 to .6 percent of business demand deposits earning explicit interest.  This estimate is shown in  line 2 of Table 7. The volume of affected deposits.  There is little basis for judging  "whet volume of business demand deposits initially would be shifted to interestbearing checking accounts.  In the long run, businesses conceivably might shift  most of their transactions balances to interest-bearing demand accounts, since they would not be impeded by tax considerations from paying explicit fees for services rather than receiving them as implicit returns to balances held. However, some time probably would elapse before existing compensating balance arrangements unwind.  If, during the first year, one-half of the demand  deposits of businesses were to shift, about $90 billion would be involved (line 3 of Table 7).  The unwinding of compensating balance arrangements could  induce firms to place some funds transferred out of existing business demand deposits in instruments other than interest-bearing demand deposits.  This  outflow from transactions balances is assumed to be just offset, but no more than offset, by funds transferred out of other sources into interest-bearing   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  business demand deposits.  The differential reflecting the cost of transaction  reserve requirements between rates on demand deposits versus alternative deposit and non-deposit investment outlets may well discourage substantial inflows of investment-type funds to interest-bearing business demand deposits. Increased net cost.  These component estimates imply that authorizing  interest on business demand deposits alone would raise annual bank costs in the first year by between $720 million and nearly $1.5 billion (line 4 of Table 7).  This range of earnings impacts is identical to the estimate in the accom-  panying memorandum for the first-year cost impacts for commercial banks of allowing businesses a fully transactional MMDA.1  And, as would be expected  since depository institutions cannot now offer an interest-bearing transactions account to businesses, removing the prohibition of interest for business demand deposits is estimated to have a significantly larger cost impact than for household accounts—as may be seen by comparing the first 3 lines of Table 8. Overall Earnings Impact for All Transactions Accounts at Commercial Banks The estimates for the combined first-year earnings impact for affected household and business transactions deposits range from about $1 to $2 billion at annual rates (Table 8).2  1.  This range represents between 5 and 10 percent of  See the accompanying June 14, 1983 DIDC staff memorandum, "Money Market Deposit Accounts with Unlimited Transfers for Those Not Eligible to Maintain NOW Accounts".  due 2. The earnings impact of authorizing interest payments on demand deposits implicit existing since , be negligible to estimated is banks to commercial returns associated with clearing and other services are doubtless near a competitive rate of return, and since the transaction reserve requirement will dissuade lenders of federal funds from switching to interbank demand deposits. Similarly, little cost impact is likely to be associated with interest on the relatively small amount of balances held in state and local demand deposits, since the extent of conversion of these funds to interest earning demand deposits will probably be minor in light of the current eligibility of municipalities for NOWs and Super NOWs.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -.37-  Table 8 Estimated Transitional Effect on Commercial Banks' Before-Tax Earnings of Removing Interest Rate Restrictions on All Transactions Deposits ($ billions)  Low Estimate  High Estimate  .08  .18  .14  .28  .72  1.44  Increase in net costs for: (1) Household demand deposits affected plus (2) Regular NOW and ATS accounts affected plus (3) Business demand deposits affected  •  equals ' (4) Total increase in net costs  .94  1.90  4.9%  9.9%  Memo: (5) Total increase in net costs as percent of 1982 before-tax earnings  Source:   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Federal Reserve staff estimates in Tables 5 - 7.  -38-  1982 before-tax income for commercial banks.1 are subject to considerable uncertainty.  These estimates, of course,  If depository institutions were to  s in an attempt to increase substantially interest rates on transactions deposit could be higher than those secure larger market shares, the transitional costs shown in Table 8.  On the other hind, to the extent that the combination of  depository institutions explicit interest and higher yields attract new funds to pressures would be that could be invested at a positive spread, earnings eased somewhat.2 and ATS It is worth reemphasizing that the ceilings on regular NOW event. accounts are scheduled to be removed by March 31, 1986 in any  Depository  million out of institutions hence will bear earnings pressures of $140 to $280 take advantage of the $1 to $2 billion overall impact at that time unless they in advance. the longer interval to position themselves for this change  Thus,  NOW and ATS the portion of the total earnings impact attributed to regular ultimately will accounts really represents potential costs that depositories s is authorized. confront regardless of whether or not interest on demand deposit s Also worth pointing out is that estimates of the overall earning of present levels impact of interest on demand deposits assumes the continuation of market interest rates.  Earnings impacts would be enlarged by higher market  rates but reduced by further rate declines.  1. 2.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  $19.2 billion. Pre-tax profits for all insured commercial banks in 1982 were transfer from As noted, only a small volume of funds can be expected to interest-bearing to s deposit lar Eurodol market instruments or large CDs and requirements reserve tion transac the of business demand deposits in light ive. As also attract less ely relativ yields deposit that would make demand household zed authori newly into s balance -type savings of noted, transfers lds househo tive demand deposits may be limited since most interest-sensi may have already opened a Super NOW.  —39—  Differential Impacts by Bank Size The preceding estimates of impacts on costs and earnings apply to the banking system as a whole.  However, effects on particular institutions or  groups of institutions may vary widely depending upon the type of market and customer served, with some institutions less able to withstand transition costs than others.  In particular, those institutions with relatively large amounts  of devosits that are likely to switch to interest-bearing accounts (such as small- and medium-size business accounts) would tend to experience relatively greater reductions in earnings. Reliance on transactions deposits varies considerably among commercial banks.  However, the existing differences apparently are not strongly  related to asset size.  As shown in the top panel of Table 9, the relative reli-  ance on transaction deposits among the different size groups has been reasonably similar, except for the largest banks.  The higher ratios for medium and smaller  institutions in 1982 appear primarily to reflect their holdings of NOW and ATS accounts.  The proportions of demand deposits to domestic assets, shown in the  bottom panel of Table 9, reveal less of a systematic difference between large and small institutions. While reliance on total demand deposits is similar among size categories of commercial banks, considerable differences exist in the ownership of those deposits at large and small banks.  As Table 10 shows, smaller commercial  banks tend to rely relatively more on household demand deposits, while larger •  commercial banks have more business demand deposits.  To the extent the lifting  of interest rate restrictions on transactions deposits would have a greater impact on the cost of business deposits, earnings pressures might be expected to be Ie.:3s at smaller banks than at larger banks.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  On the other hand, the business  -40—  Table 9 Commercial Bank Reliance on Transactions Depositsi (percent) Commercial banks by asset class (dollars)  December 1980  December 1981  December 1982  Ratio. of transactions deposits to domestic assets Under $25 million  26.3  25.8  • 24.8  $25 million to $100 million  26.4  25.9  24.6  22.3  25.8  24.1  23.1  22.4  19.2  .$100 million to $1 billion $1 billion and over  algiiiiiiiMMIMMIMIMMIWWWWWIIIMMMIIIIVEMMIMiiMMIBMWMILWMMIUMMEM=MIMMIliMilt===================iflati  Ratio of demand deposits to domestic assets Under $25 million  25.5  20.1  17.7  $25 million to $100 million  25.0  20.1  17.7  $100 million to $1 billion  20.4  21.0  18.4  $1 billion and over  21.7  19.7  16.1  1. Excludes demand deposits due to commercial banks, certified checks and officer's checks. Source:   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Call Reports  •   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -41—  Table 10 Distribution of Business and Household Demand Deposits by Size of Commercial Bank December 1982 (percent)  Commercial banks by asset class (dollars)  Ratio to domestic assets Household Business demand deposits demand deposits  Less than $25 million  5.4  9.0  $25 million to $100 million  8.6  7.0  $100 million to $1 billion  10.6  5.2  $1 billion or more  10.6.  3.5  Source:  Federal Reserve staff estimates based on the Survey of Ownership of Demand Deposit Accounts of Individuals, Partnerships, and Corporations and the Call Report, both for December 1982.  -42-  demand deposits held at small commercial banks are more likely to be those of medium- and small-size firms.  Shifts from noninterest-bearing demand deposits  of these smaller businesses to interest-bearing demand deposits have the greatest potential for raising the cost of funds for commercial banks.  Taking  explicit account of these offsetting considerations, estimates in Table 11 show little difference between the smallest and largest commercial banks in cost increases relative to 1982 pre-tax profits arising from eliminating interest rate restrictions on transactions balances.  The estimates in the table suggest  that the commercial banks most affected by allowing interest on demand deposits would be medium-size banks (assets of $100 million to $1 billion).  While these  medium size banks have the sane relative reliance on business demand deposits as larger banks, they also have a larger fraction of these deposits held by smalland medium-size firms that potentially is subject to greater cost increases. Disaggregating the estimated cost increases by size of bank does reveal the potential for a differential impact from allowing interest on demand deposits. However, the estimates in Table 11 still mask the degree to which individual institutions would experience difficulties during a transition period.  The most  vulnerable institutions would appear to be those that have both a high proportion of deposits in rate-constrained transactions accounts and low earnings. Table 12 shows the number of commercial banks by size class that had in 1982 both a high ratio of demand deposits to assets—either the highest quartile or decile of demand deposits to total assets--and low earnings--either those institutions in the lowest quartile or decile of before-tax income to domestic assets. Depending on which criterion is applied, the number of vulnerable institutions ranges from 171 to 817 out of about 14,000 commercial banks.  The vast majority  of the institutions that could face the most difficulty are smaller banks   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -43-  Table 11 . Estimated Transitional Impact on Commercial Banks' Before-Tax Earnings of Removing Interest Rate Restrictions on Transactions Deposits  Commercial banks by asset class (dollars)  Low Estimate  High Estimate  Net cost increase in $ millions 46  95  $25 million to 100 million  167  338  $100 million to $1 billion  266  536  $1 billion or more  461  928  Total  940  1,897  Less than $25 million  --- Net cost increase as a percent of 1982 profits before taxes ---  Less than $25 million  4.4  9.1  $25 million to 100 million  4.4  8.8  $100 million to $1 billion  6.4  12.9  $1 billion or more  4.6  9.2  Total  4.9  9.9  Source:   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Federal Reserve staff estimates.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  4111.  Table 12 Humber of Vulnerable Banks Balances 'Low Earnings and High Transactions Insured Commercial Banks 1982 Total Domestic Assets (Millions of Dollars) 1,000- Over 100- 2505,000 1,000 5,000 250 10-25 25-50 50-100  Size: 5-10  0-5 Those banks within lowest quartile of ratio of earnings to domestic assets and --  Total  • •  Highest quartile of ratio of demand deposits to domestic assets  32  243  156  94  89  59  68  37  16  10  4  1,410 4,230  3,719  104  32  8  817  2  0  171  185  41  14,124  Those banks within lowest decile of ratio of earnings to domestic assets and -- Highest decile of ratio of demand deposits to domestic assets ...... number of banks MEMO: Total -.MEMO:  8 326  26 --  • 2.394  512  1,307  Ratios  Ratio of earnings to domestic assets -- Lowest quartile -- Lowest decile -- Median  .0080 .0068 .0060 .0056 .0043 .0028 .0028 .0030 .0111 .0098 .0086 .0078  .0068 .0074 .0081 .0067 -.0036 -.0011 .0016 .0038 .0114 .0116 .0117 .0132  .  Ratio of demand deposits to domestic assets -- Highest quartile -- Highest decile -- Median Source:  0071 .0021 .0111  .0041 .0029 .0056  .3070 .5092 .2166  .2262 .2183 .2934 .2774 .1756 .1681  1_ 19M2. Call Reports, June and December, ----  .2261 .2288 .283:5 .2523 .1877 ' .174:3  .2248 .2331 .2523 .2645 .2768 .2839 .2959 .2984 .1736 .1858 .2119 .2264  .2177 .2754 .1669 1  1  1  1  1  1  6. • yip  -45-  (assets of less than $100 million).  As shown in the memorandum items, demand  deposits at subcategories of these smaller banks ranged from about one-fifth to more than one-half of domestic assets at the end of 1982, while earnings ranged from .8 percent of assets to losses of more than .36 percent of assets. Impact On Thrift Institutions Removal of restrictions on the payment of interest on transactions deposits per se is not likely to have a noticeable impact on the cost of funds at thrift institutions.  Savings and loans and mutual savings banks currently  have relatively few NOW accounts and very few demand deposits.  Table 13 shows  that this limited reliance of savings and loans on transactions deposits is uniform across size categories.  In contrast, some difference is apparent in  the ratios of transactions deposits to assets for mutual savings banks.  As of  December 1982, for the smallest mutual savings banks transactions deposits were equivalent to 5.6 percent of assets,' compared with 2.2 percent at the larger institutions (top panel of Table 14).  The differences reflect primarily  the relatively large holdings of NOW accounts as opposed to noninterest-bearing demand deposits at smaller savings banks.  As the bottom panel of Table 14  shows, the ratios of demand deposits to assets as of December 1982 were not much different across size groups. The demand deposits held at thrifts for the most part are household deposits, which already could earn explicit interest if shifted to a regular NOW or Super NOW account.  However, if thrift institutions were to raise rates  on transactions accounts in an attempt to gain market share or in response to competion, earnings would tend to be adversely affected, although if any new fund inflows could be invested at a positive spread, this depressing effect would tend to he offset.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  In this regard, though, as argued earlier, depository  -46--  Table 13 Savings and Loan Association Reliance on Transactions Deposits' (percent) Savings and loans by asset class (dollars)  December 1980  June 1982  December 1981  Ratio of transactions deposits to domestic assets .2  1.1  1.4  .2  1.1  1.4  $100 million to Si billion  .2  1.3  1.6  Si billion and over  .2  1.2  1.3  Under $25 million $25 million  to $100  million  IRMIIMMIUMW=====  MOMIIMMIIIMMIUMMIUMM111============1111=======================iMMUISMORMIMILIMOMMINV  Ratio of demand deposits to domestic assets Under $25 million $25 million to $100 million $100 million to $1 billion $1 billion and over -  Less than .05 percent. 1.  Demand deposits consist of demand deposits subject to transfer by draft.  Source:   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Call Reports  S  —47—  Table 14 Mutual Saving Bank Reliance on Transactions Depositsl (percent) Mutual savings banks by asset class (dollars)  December 1980  December 1981  December 1982  Ratio of transactions deposits to domestic assets Under $25 million  2.3  3.9  •5.6  S25 million to $100 million  4.2  3.6  4.3  $100 million to $1 billion  1.9  2.5  2.8  $1 billion and over  1.4  1.7  2.2 111171  1 11==============MWMUMMIli====i1111=====MMMIMMMUMMIM==============.1 . , 111 ==i1OMMIEVIMMISMIMMIMM=  Ratio of demand deposits to domestic assets Under $25 million  0.5  1.2  2.0  525 million to $100 million  1.0  1.0  1.2  $100 million to Si billion  0.9  1.1  1.1  $1 billion and over  0.8  0.7  1.0  1.  Federally insured mutual savings banks. deposits subject to transfer by draft.  Source:   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Call Reports  Demand deposits consist of demand  •  -48-  institutions would seem to have little added incentive to compete aggressively for household deposits.' Elimination of the ceiling on all NOWs by itself could lead to some transitional increase in costs for thrift institutions.  As apparently is the  case for commercial banks, thrift institutions likely compensate regular NOW depositors through a combination of explicit and implicit interest payments. If fully explicit yields were paid on all NOWs, thrifts may have to absorb some of the fixed cost incurred in supplying services used to pay implicit returns. Given the limited importance of NOWs as a source of funding at savings and loans and mutual savings banks, such costs may be no more than $50 to $100 million.  However, with the still generally weak earnings at thrifts, the  marginal impact on some institutions could be more significant.  This could be  particularly true of the very small mutual savings banks that apparently rely relatively heavily on transactions deposits. Longer-run Earnings Impacts Eliminating interest rate restrictions on household transactions deposits would have little hearing on the long-run profits of depository institutions, since the ceiling on NOW and ATS accounts already is scheduled to be removed by March 31, 14486, and the associated costs will have to he faced in time in any event.  Moreover, given time, households that would initially shift  into interest-hearing demand deposits also would probably move into an unconstrained NOW account anyway.  In addition, fixed costs incurred by discontinuing  services associated with both household and business depositors would disappear  1.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  If authorization to pay interest on demand deposits were coupled with expanded powers for savings and loans to offer transactions accounts to businesses, they may be willing to bid more aggressively for business funds than for household demand deposits, since internal shifting would be minimal. However, success in this effort, as noted earlier, may be limited.  -.49-  in the long run as the scaling back of facilities and the retraining of personnel is completed. In the case of business demand deposits, the impact on profits in the long run largely depends on whether explicit interest arrangements would permanently foster more competition and less price discrimination than those Involving implicit interest, since any initial period of "loss leader pricing" would surely be short-lived judging by the experience with MMDAs.  The evidence  for large corporations suggests that even with implicit interest these depositors currently are paid close to a competitive rate. In addition, it appears that medium- and small-size businesses are becoming more active cash managers.  It  seems likely that, even without explicit interest on business demand deposits, competitive pressures over time would move implicit rates on most business demand deposits closer to competitive rates.  Thus, in the long run, profits of  depository institutions may not be much different with or without explicit interest on demand deposits.  Of course, to the extent that implicit yields on  certain business demand deposits would take some time to move to their long-run equilibrium relative to market rates, depository institutions may he able to earn some economic rent in the interim. While long-run profits may not be much different, explicit interest on demand deposits could eliminate the "dead-weight" losses associated with circumventing the current restrictions.  For example, paying interest on transac-  tions balances through sweep arrangements involving RPs is more costly than directly crediting an interest-bearing transactions account.  In addition, by  charging separately for services, depository institutions would not supply services that depositors valued less than the marginal cost of producing the services.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Along the same lines, depository institutions would be less inclined to  -  -50-  use extensive branching networks that in part have been used to offer an implicit return through the convenience of branch locations.  VI. Impact on Depositors of Explicit Interest on Demand Deposits Impact on Household Depositors Households currently can hold Super NOW accounts which are not subject to deposit rate constraints.  The only present limitation on these accounts  is the $2,500 minimum balance requirement, which in effect will be removed by March 31, 1986, when the ceiling rate on all NOW accounts is scheduled to be eliminated.  Since the Super NOW is operationally equivalent to a market-rate  demand deposit, the major impact on consumers of deregulating demand deposits essentially would be to accelerate by three years the deadline for removing the minimum balance requirement.  Should the Congress remove all restrictions  on the payment of interest on demand deposits, it would seem appropriate, as noted earlier, for the DIDC simultaneously to remove all restrictions on the payment of interest on NOW and ATS accounts.  On the other hand, the Congress  could allow interest on demand deposits but authorize the DIDC to set the same ceiling rate on these deposits as for regular NOWs and/or the same minimum balance as for Super NOWs until March 31, 1986.  With this option the Committee  could either lift ceilings on all transactions deposit accounts or perhaps subject demand deposits to the same rate or minimum balance limitations that apply to NOWs.  In the case in which all restrictions on transactions accounts  were eliminated, this Change—by moving up in time the opportunity to earn a market rate--would directly affect only those households eligible for NOW accounts but with account balances below the Super NOW minimum, although other households may also be induced to switch to a transactions account with an unconstrained rate.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -51Quantifying the overall net gains accruing to such depositors after restrictions on interest on transactions deposits are lifted is difficult. Estimates in the last section suggest that in the first year, at least, certain households would receive explicit plus residual implicit payments on demand deposits that are  $50 to  . 02 times $5 billion) in excess $100 million (.01 or .  of the cost of providing their present implicit returns. These estimates, however, represent only a component of the pre-tax gains to households from explicit interest, since depositors on average not only will benefit from the increase in average rates paid, but also will obtain further welfare gains as well.  No depositor now receiving subsidized services  necessarily places a value on those services as high as their cost of production) Therefore, depositors can be made still better off by receiving explicit interest-of course, valued dollar-for-dollar by depositors--instead of "undervalued" services having equivalent costs of production.  The added annual gains arising  from this effect would be at least equal to the fixed costs absorbed by commercial banks in the first year on both demand deposits and NOWs affected--or an estimated range of $170 to $355 million.2  1.  The provision of services at a price below cost encourages depositors to overuse them, so that the value obtained will be less than the cost to the institution on the margin. This is likely to be the case particularly for transactions services in individual accounts, where the depositor has no incentive to economize on the writing of checks. Similarly, services such as expensive premises, branching networks and fast teller services may be valued by depositors at less than their production cost.  2.  As an illustration drawn from the high cost estimates in Table 5, the total explicit interest to be paid on the $5 billion of shifted household demand deposits (assuming no residual implicit interest) would be $350 million (.07 x $5 billion). Offsetting this gain would be the added fees that households will have to pay for services plus the value of services foregone. If households purchased at full cost the same services they were previously paid as implicit interest, it would then cost them an additional $250 million (.05 x $5 billion). Some of these purchases would be discontinued, however, since their value to depositors will be less than their (continued on p. 52)   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis •  In combination, then, the annual before-tax  -52-  value of these two effects benefitting households is at least as large as the overall pre-tax cost to commercial banks of explicit interest on household deposits in the first year--in an estimated range of $220 to $455 million. The influence of taxes, however, works to diminish the gains to household depositors, since explicit interest is taxable and service charges are not tax deductible. Not all depositors are likely to be equally affected.  Some households  with small balances in demand deposits but with sizable account activity now are earning a greater than competitive return, in effect being subsidized by depositors with large balances but inactive accounts.  If a regime of explicit  interest payments induced higher service charges even on noninterest-bearing   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  (continued from p. 51) newly established price. Households might be willing to pay only, say, $100 million more than now in charges for those services that they would continue to demand when fully priced. Of the other $150 million cost of .services that would be discontinued, banks in the first year will only be able to reduce the variable costs aosociated with producing them, amounting to, say, $75 million. Another $75 million (.015 x $5 billion) of fixed costs associated with discontinued services would be absorbed by banks in the first year. Of course, in the first year banks would have been willing to continue to offer the discontinued services previously costing $150 million ($75 million in variable costs plus $75 million in fixed costs) if households had been willing to cover the $75 million in variable costs of producing them. Assuming that, in the first year or so, banks price these services to cover only variable costs, the fact that households are assumed unwilling to continue to use these services when prices reflect variable costs reveals that they would value these discontinued services by less than $75 million. The net pre-tax gain to households in the first year, then, is the explicit interest received, $350 million, minus the added service Charges paid, $100 million, minus the value to households of the discontinued services, which is at most $75 million. This means the total net gain to households in the first year is at least $175 million or $75 million in excess of the increase in rates paid on demand deposits--with the $75 million representing the high estimate of fixed costs absorbed in discontinuing services related to household demand deposits. Even the $175 million overall gain represents an underestimate of first-year pre-tax welfare gains to households in the high cost case. Households will experience a further gain by in effect giving up services with variable costs to banks of $75 million that households value by less than $75 million in exchange for $75 million in explicit interest that is valued in full.  -53-  demand deposits, a possibility mentioned earlier, certain households would be adversely affected, particularly after taxes, unless they are able to curtail their account activity. Impact on Business Depositors Because a transactions account at depository institutions without a regulated interest ceiling is not now available to business, the potential impact of allowing interest on demand deposits could be larger for businesses than individuals.  On the other hand, businesses, particularly large ones,  also are much more likely currently to be using credit and operational bank services, and receiving those services in lieu of explicit deposit interest. In addition, large businesses are more likely to have both the size and financial sophistication to take advantage of cash management techniques to minimize their transactions balances.  Thus, large businesses apparently already are  receiving a highly competitive return on their demand deposits. Available evidence, previously discussed, suggests that some smalland medium-sized firms could gain more than large firms from explicit interest on demand deposits.  Estimates in Section V suggest that small- and medium-  sized firms initially may obtain annual interest payments in an unregulated rate environment some $450 to $900 million in excess of the present cost to banks of providing them implicit returns.  In contrast to households, the pecuniary -  payments and service charges would not in general involve any diminished gains owing to tax considerations.  As with households, the advent of explicit pricing  will generate further welfare gains for all business depositors as explicit interest replaces subsidized services that businesses undervalue  such as cash  management services for large businesses (especially in a regime of explicit interest) and teller time, financial advice and branch services for smaller   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  .11  Ire  r . •  -54-  businesses.  These additional annual gains would at least equal the fixed costs  absorbed in the first year by institutions discontinuing business services--an estimated $270 to $540 million per year.  Again, the overall annual gain to  business depositors before taxes is at least as large as the first-year pre-tax cost to depository institutions for business accounts--$720 to $1,440 million.  VII. Monetary Policy Considerations Monetary policy issues raised by permitting interest on demand deposits are essentially the sane as those associated with a fully transactional MMDA for businesses, which are examined in the accompanying DIDC staff memorandum dated June 14, 1983.  In summary, introducing explicit interest on demand  deposits may temporarily induce additional uncertainty regarding the interpretation of movements in the monetary aggregates, particularly the M1 measure of transaction balances.  However, uncertainties recently have been consider-  able in any case, in view of the authorization of nationwide NOWs, of the Super NOW and of the MMDA, and any added uncertainties associated with explicit interest on demand deposits -can be expected to diminish over time. In addition, future problems of measuring and interpreting movements in transactions balances would be mitigated by the resultant lessened incentive to develop new transactions-type instruments outside the depository system. It should be noted, though, that explicit interest on demand deposits likely will induce a somewhat faster response in rates paid on Ml-type deposits to a change in market interest rates.  This effect may reduce further the sensi-  tivity of M1 demand to movements in market rates, leading to additional complications for the conduct of monetary policy.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  IN\ -•••  -56-  would result in lower reserve requirements for such institutions without substantively changing the type of account that is offered.  TO avoid  disruptions in the conduct of monetary policy, the Monetary Control Act could be amended so that the phase-in would not apply to interest-bearing demand deposits held by depositors eligible for NOW accounts in the 42 states in which NOW accounts are subject to the full 12 percent reserve requirement on transaction accounts.  An alternative method for reducing the  incentive for depository institutions in these states to shift NOW account customers to interest bearing demand deposits--but without the difficulty of identifying the eligibility of deposit holders for NOW accounts--would be to apply the full transaction account reserve requirement to demand deposits in excess of the volume of demand deposits held by an institution at the time 1 of enactment. Under the Garn-St Germain Depository Institutions Act of 1982, federally insured savings and loan associations are permitted to offer demand accounts to persons or organizations that have a business, corporate, commercial, or agricultural loan relationship with the association (12 U.S.C.  1.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  1464(b)(1)(A); 96 Stat. 1496).  In addition, an association may  Suppose a depository institution in one of the 42 states that do not phase in the reserve requirements on NOW accounts had at the time of enactment $200 of demand deposits on which the reserve requirement was being phased in and $100 of NOW accounts subject to the full transaction account reserve requirement. After enactment all demand deposit growth over and above the $200 would be subject to full reserve requirements, including shifts from NOW accounts into interest-bearing demand deposits.  -57-  accept demand accounts from a  commercial, corporate,  business, or  agricultural entity for the sole purpose of effectuating paymen ts thereto by a  nonbusiness customer (12 U.S.C.  1464(b)(1)(B)).  The  issue  of  interest-bearing demand deposits seems independent of the provisi on of the Garn-St Germain Act, which was intended to provide S&Ls with only limited commercial checking account authority.  Thus, this memorandum does not  address the issue as to whether these limitations should remain in place. It should be noted that maintaining these limitations would require that NOW account eligibility not be changed. Removing the prohibition against payment of interest on demand deposits suggests that the current interest rate ceiling s on NOW and ATS accounts should also be removed at the same tine or that the DIDC be given authority to apply interest ceilings to demand deposit s until March 31, 1986.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  BOARD OF GOVERNORS Or THE  FEDERAL RESERVE SYSTEM  Office Correspondence To  Chairman Volcker  From  Messrs. Ettin and Schwartz  Date November 10, 1982 Subject: Background for meeting with Secretary Regan on DIDC-Garn Account  For your background preparatory to your meeting with Secretary Regan, attached are: 1)  An "issue" list containing areas of agreement and outstanding major and minor issues.  2)  Checklist of decisions to be made at Monday's DIDC meeting.  3)  A very abbreviated summary of comments, focusing on views expressed by trade groups.  4)  A note on the preliminary staff views of the effect of the new account on internal deposit shifting and earnings in 1983.  The memorandum to be the basis for the D1DC meeting at 8 a.m. on Monday, November 15, is not yet available, but will be in your car when you return from Texas.  Attachments   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  ISSUE LIST  I.  There is general agreement that the account must --  have no minimum maturity (although there could be a reservation of notice) have no interest rate ceiling  --  have a minimum denomination no greater than $5,000  --  allow three preauthorized or automatic transfers and three other third party payments (e.g., drafts) per month  --  be made available to all customers  --  be federally insured be effective no later than December 14  II.  Major undecided issues 1.  Should there be a minimum initial and maintenance denomination lower than $5,000 (e.g., $2,500 or no regulatory minimum) FHLB and NCUA reportedly support no regulatory minimum issue is simplicity and deregulation vs. risks of additional capital erosion from costly internal deposit shifts  viebfr  2.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Number of transfers:  If no drafts were written in a particular  month, should six preauthorized or automatic transfers be permitted that month, or if the drafts were not written, should the number of preauthorized or automatic transfers be limited to three per month?  In either case no more than three drafts per  month would be permitted. Congressional intent.  Either interpretation would satisfy  -2-  3.  Regulations to limit evasions -  no loophole accounts same charge on overdrafts on this or linked accounts as on overdrafts on other unrelated accounts no automatic or preauthorized payments from this account to cover amount owed on multiple transaction credit facilities (e.g., credit cards).  4.  Regulation to avoid elimination of remaining deposit ceilings: Cannot guarantee rate for longer than, say, seven days.  III.  Selected minor undecided issues ,I.  If there is a regulatory maintenance balance (a)  Over how long a period should it be calculated, e.g., a month  (b)  What occurs when balance falls below it, e.g., cut rate to NOW account rate.  2.  Reservation of notice:  3.  Should there be a minimum size for drafts or other transactions?   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  e.g., seven days.  "q11.  80 I  -DRAFTCHECKLIST OF DECISIONS TO BE MADE BY THE DIDC TO IMPLEMENT SECTION 327 OF THE DEPOSITORY INSTITUTIONS ACT OF 1982  I.  FEATURES STRONGLY RECOMMENDED BY STAFF ON THE BASIS OF STATUTE AND/OR LEGISLATIVE HISTORY o o o o  II.  No minimum maturity on the account No limitation on the rate of interest payable on account balances which meet any minimum maintenance balance the committee may adopt No restriction on account eligibility Account effective not later than December 14, 1982  OTHER CHARACTERISTICS Minimum Denomination 1.  2.  The minimum initial denomination should be: o  $5,000;  O  $2,500;  •  $1,000;  O  Other; or  o  Left to the discretion of the institution  The minimum subsequent or maintenance balance should be: o • o  3.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Other; or Left to the discretion of the institution.  To determine compliance with the minimum maintenance balance requirement, if any, the institution may use the average balance over: o  One day;  o  One month (as defined in item 15); or  • 4.  Same as initial;  Other  If the balance in the account falls below the required minimum maintenance balance, if any: o  A ceiling rate equal to the institution's NOW account rate should be imposed for the entire month (as defined in item 15)  4.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -2o  A ceiling rate equal to the institution's NOW account rate should be imposed for the remainder of the month (as defined in item 15);  •  Other  Transactions 5.  b.  7.  8.  Authorization and interpretation of transactions which the Act provides will not subject the account to transaction account reserves: •  Three preauthorized or automatic transfers only and three third party checks only are permitted per month; or  •  Six transfer per month are permitted, no more than three of which can be effectuated by draft.  Additional transactions: •  Limit transactions to these authorized in item 5, but consider allowing expanded transaction features at the next Committee meeting;  o  Allow depository institutions to offer the account with no limit on transactions (including drafts). (This would subject the account to transaction account reserve requirements under the Federal Reserve Board's current Regulation D).  Drafts drawn on the account must have a minimum denomination of: O  $500;  o  Other; or  •  Left to the discretion of the institution.  Preauthorized or automatic transfers must have a minimum denomination of: O  $500;  •  Other; or  •  Left to the discretion of the institution.  _3Maturity 9.  Reservation Notice Requirement: o  • 10.  Other  An institution is effective rate of the interest rate at least as often o  One day;  o  Seven days;  • o 11.  Institutions must reserve the right to require at least seven days' notice prior to withdrawal (any reservation notice that is invoked would apply to all depositors); or  required to reserve the right to change the return on the account at its discretion (including or method of calculation of the interest rate) as every:  Month (the "month" defined in item 15); or No restrictions on guarantee of rate.  Institutions may not offer the account with a contracted maturity greater than o  No contracted maturity will be allowed;  o  1 day;  O  7 days;  o  One month (the "month" as defined in item 15); or  o  Let the institution determine the maturity of the account.  Miscellaneous 12.  13.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Loans: O  Prohibit loans to meet minimum denomination and maintenance balance; or  o  Do not prohibit loans in connection with this deposit account  Overdrafts: o  The rate of interest and other charges imposed on an overdraft credit arrangement offered in connection with this account must be not less than those imposed on overdrafts for customers that do not possess this account; or  o  No prohibition on overdraft arrangements.  -414.  15.  16.  Credit card tie-ins: o  Prohibit automatic or preauthorized debits from the new account to pay the balances owed on credit cards or similar multiple transaction credits; or  o  Do not prohibit such tie-ins.  Definition of "month": o  Calendar month or statement cycle of at least four weeks; or  o  Calendar month only.  Date used to monitor compliance with draft limitations should be: o  Date on draft;  o  Date of payment;  • 17.  18.  19.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  20.  Either of the above.  Procedures to ensure compliance with withdrawal limit: o  DIDC regulations should require that institutions must either prevent withdrawals in excess of three automatic or preauthorized and three checks per month, or adopt procedures to monitor accounts on an ex post basis and contact customers that have a greater number of such withdrawals.  •  Other  Restrictions on the size and frequency of withdrawals by mail, telephone (via check to the depositor), messenger, or in person: o  No restrictions on such withdrawals; or  o  Other restrictions  Additional deposits: o  No regulatory restrictions on additional deposits and permit sweeps from other accounts; or  o  Other  Effective Date: o  December 14, 1982 (60 days from date of enactment); or  o  Other  November 10, 1982  TO:  Chairman Volcker  FROM:  Normand Bernar /V  SUBJECT:  Tabulations of Trade Association and Other Comments on new Money Market Deposit Account  The DIDC Federal Register notice (copy attached) suggested that the have Garn-St Germain Depository Institutions Act and its legislative history t the mandated the following six features as the minimum necessary to implemen Act.!! 1.  no minimum maturity  2.  no interest rate ceiling  3.  initial minimum denomination no greater than $5,000  4.  not subject to transaction reserve requirements if limited to three preauthorized or automatic transfers and three other third-party payments (including drafts) per month  5.  available to all depositors  6.  insured by the FDIC or FSLIC The comments of the major trade associations (and of the Thrift  Institutions Advisory Council) are summarized in the tables that follow. There are two sets of these tables, based on two separate classifications, i.e., by topic and by trade association.  Also attached is a table summarizing  the more than 1,200 comments received from the public. agree Several of the trade associations commented explicitly that they the However, with the above listing of the minimum requirements of the Act. the that argues Investment Company Institute (in a 50-page letter of comment) the ", ced-rate maximum rate payable on the account must be "a market-referen institutions. The absence of which could lead to predatory pricing by large that the new account ICI and the American Council of Life Insurance also argue are discussed in is not automatically required to be insured. (These issues the forthcoming staff memo to the DIDC.) Attachments 1. Tabulations 2. DIDC request for public comment. 3. Copies of trade association letters.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  ‘N1  -1Trade Association Comments on New Money Market Account  American Bankers Association  Reserve City Bankers  Independent Bankers Association  General comments  Allow maximum flexibility to institutions.  Allow maximum flexibility to institutions.  Leave most of details to institutions.  Minimum initial denomination  No higher than $5,000, with phaseout schedule.  No higher than $2,500.  $5,000  Maintenance balance  Same as minimum initial balance.  Leave up to institution (if any is set, should be below initial).  Same as minimum initial balance.  Maximum rate when account is below maintenance  NOW account rate.  NOW account rate if any limit is set.  NOW account rate.  Minimum denomination for drafts  NO restrictions.  No restrictions.  No restrictions.  Require institutions . to reserve right of notice of withdrawal  Require 7-day reservation clause.  Loans to meet initial minimum  No restrictions.  No restrictions.  Prohibit.  Additional deposits and sweeps from other accounts  NO restrictions.  No restrictions.  No restrictions.  Time limit of interest rate guarantee  No restrictions.  No restrictions.  No restrictions.  Maximum maturity  No restrictions  No restrictions  NO restrictions.  Enforcement of limitation on monthly withdrawals  Ex post review.  Ex post review.  Definition of "month"  Calendar month or statement cycle.  Statement month (calendar or other).  Restrictions on overdraft credit associated with account  No restrictions.  No restrictions.  Prohibit overdrafts.  Limitations on withdrawals  No limits on inperson, over-thecounter, , messenger, mail, or ATM withdrawals.  Unlimited withdrawals by mail, telephone, messenger, or in person.  Let individual institution set own rules on in-person withdrawals.  Implementation of account  As soon as possible and no later than December 14.  NO later than December 14.  Other comments  Recommend optional account with unlimited thirdparty transfers (subject to transaction reserves).  Recommend optional account with unlimited thirdparty transfers (subject to transaction reserves).  Features   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Require 7-day reservation clause.  -2-  Trade Association Comments on New Money Market Account  Consumer Bankers Association  Conference of State Bank Supervisors  Thrift Institutions Advisory Council  General comments  Allow maximum flexibility to institutions.  Allow maximum flexibility to institutions.  Allow maximum flexibility to institutions.  Minimum initial denomination  Prefer none; otherwise urge phase down schedule or removal date.  Prefer none; otherwise no higher than $2,500.  Divided views. $2,500 (S&Ls) and $5,000 (MSBs).  Maintenance balance  No restrictions (if any maintenance to be set, suggest $2,500).  Same as initial minimum.  Maximum rate when account is below maintenance  No restrictions.  5 percent.  Minimum denomination for drafts  No restrictions.  No restrictions.  Require institutions to reserve right of notice of withdrawal  Allow but do not require.  Do not require.  Loans to meet initial minimum  No restrictions.  Prohibit.  Additional deposits and sweeps from other accounts  No restrictions (also allow sweeps to other accounts).  Time limit of interest rate guarantee  No restrictions.  Maximum maturity  No restrictions.  Enforcement of limitation on monthly withdrawals  Ex post review.  Definition of "month"  Calendar or statement cycle of at least 4 weeks.  Restrictions on overdraft credit associated with account  No restrictions.  Limitations on withdrawals  Unlimited withdrawals by mail, telephone, messenger, or in person.  Unlimited withdrawals by mail, messenger, or in person or by telephone and ATMs if permitted by Regulation D.  Implementation of account  Allow 30 days.  December 14.  Features  Other comments   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  • No restrictions (also allow sweeps to other accounts). No restrictions but monitor for possible abuses.  Prefer daily rate; 7-day maximum acceptable. 7 days.  Calendar or statement month.  Recommend optional account with unlimited third-party transfers (subject to transaction reserves). Also, urge no premiums.  -3Market Account Trade Association Comments on New Money  Features  U.S. League  National Savings and Loan League  NAMSB Minimize danger of major shifts from passbook accounts.  General comments  Avoid restrictions that might limit appeal; critical that new account not be used to circumvent other ceilings.  Minimum initial denomination  No higher than $5,000 or lower than $2,500.  $5,000  $5,000  Maintenance balance  Same as minimum initial balance.  $5,000  $5,000  Maximum rate when account is below maintenance  5% for days below minimum.  Thrift passbook rate.  Minimum denomination for drafts  No restrictions.  No restrictions.  Require institutions to reserve right of notice of withdrawal  Do not require.  Do not require.  Do not require.  Loans to meet initial minmimum  Prohibit.  No restrictions.  Prohibit.  Additional deposits and sweeps from other accounts  No restrictions.  No restrictions.  No restrictions.  Time limit of interest rate guarantee  7 days maximum.  No restrictions.  7 days maximum.  Self-policing to be monitored by regulatory agencies.  Give broadest latitude to institutions.  Give maximum flexibility to institutions.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  NOW account rate.  Maximum maturity Enforcement of limitation on monthly withdrawals Definition of "month"  Calendar months.  Restrictions on overdraft credit associated with account  Discourage such overdrafts by not allowing preferential rate.  No restrictions.  Limitations on withdrawals  Allow broadest latitude possible. Should not require any penalties.  No restrictions on payments to depositor, including via ATM's.  Include in-person withdrawals in limit of 3 preauthorized or automatic transfers.  Implementation of account  December 14 or 30 days after regs published.  December 14.  Numerous MSBs feel 30 days insufficient lead time.  Other comments  No restrictions on account maintenance, transaction, or other fees; no restrictions on compounding; no premiums allowed.  Recommend optional account with unlimited thirdparty transfers (subject to transaction reserves).  Eliminate 4-week moving average on 6-month MMC's.  Trade Association Comments on New Money Market Account  Minimum Initial Denomination  Maintenance Balance  Maximum Rate When Account Below Maintenance  Minimum Denomination for Drafts  American Bankers Association  No higher than $5,000.  Same.  NOW account rate.  No restrictions.  Reserve City Bankers  No higher than $2,500.  Leave up to institution.  NOW account rate.  No restrictions.  Independent Bankers Association  $5,000.  Same.  NOW account rate.  No restrictions.  Consumer Bankers Association  Prefer none, other— wise urge phasedown schedule.  No restrictions.  No restrictions.  No restrictions.  Conference of State Bank Supervisors  Prefer none, but no higher than $2,500.  U.S. League  No higher than $5,000. No lower than $2,500.  Same.  5 percent.  No restrictions.  National Savings and Loan League  $5,000  Same.  Thrift passbook rate.  No restrictions.  NAMSB  $5,000  Same.  NOW account rate.  Thrift Institutions Advisory Council  $2,500  Same.  5 percent   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  No restrictions.  Require Institutions to Reserve Right of Notice of Withdrawal American Bankers Association  Require 7-day reservation clause.  Reserve City Bankers  Loans to Meet Initial Minimum  Additional deposits and Sweeps from Other Accounts  Time limits on Interest Rate Guarantee  No restrictions.  No restrictions.  No restrictions.  No restrictions.  No restrictions.  No restrictions.  Independent Bankers Association  Require 7-day reservation clause.  Prohibit.  No restrictions.  No restrictions.  Consumer Bankers Association  Do not require.  No restrictions.  No restrictions.*  No restrictions.  No restrictions, but monitor for abuses.  Conference of State Bank Supervisors  U.S. League  Do not require.  Prohibit.  No restrictions.  7 days maximum.  National Savings and Loan League  Do not require.  No restrictions.  No restrictions.  No restrictions.  NAMSB  Do not require  Prohibit.  No restrictions.  7 days maximum.  Thrift Institutions Advisory Council  Do not require  Prohibit  No restrictions.*  Prefer daily rate; 7-day maximum acceptable.  * Also allow sweeps to other accounts.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Enforcement of Limitation on Monthly Withdrawals  Restrictions on Overdraft Credit Associated with Account  American Bankers Association  Ex post review.  No restrictions.  Reserve City Bankers  Ex post review.  No restrictions.  No limits on inperson, mail, telephone, or messenger.  Prohibit overdrafts.  Institutions should set own rules on in-person.  Ex post review.  No restrictions.  No limits on in-person, mail, telephone, or messenger.  U.S. League  Self-policing.  Discourage by not allowing preferential rate.  Allow broadest latitude possible.  National Savings and Loan League  Broadest latitude to institutions.  No restrictions.  No limits on payments to depositors, including ATMs.  NAMSB  Broadest latitude to institutions.  Independent Bankers Association  Consumer Bankers Association  Limitations on Withdrawals  Other Comments (See also Note below)**  No limits on inperson, mail, mes. N '-senger, or ATMS.  Recommend optional account with unlimited third-party transfers (subject to transaction account reserve requirements). Same as above.  Conference of State Bank Supervisors  Thrift Institutions Advisory Council  **Note:  Same as above.  Include in-person in 3 per month limit. No limits on inSame as above. person, mail, or messenger or by telephone/ ATMs/RSUs as per Reg D.  U.S. League and TIAC recommend no premiums; U.S. League recommends no restrictions on fees for transactions, etc.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -7-  Summary of Public Comments (other than trade associations)  General comments Total of 1,227 comments received through November 3, with over 90 percent from depository institutions. New account overwhelmingly viewed as welcome opportunity to compete on level playing field, but concern expressed that DIDC might limit its attractiveness through excessive regulation. Minimum initial denomination No general consensus. Nearly 65 percent recommended a minimum of $3,000 or less, including 24 percent who favored no restrictions. At the other extreme, 40 percent of commercial banks and 44 percent of NSBs (but only 22 per— cent of S&Ls) urged a minimum of $5,000 (or more), commonly citing concern about the cost impact of internal shifts of funds into the new account. Maintenance balance Typically citing operational simplicity, over 60 percent of respondents recommend the same minimum and maintenance balances; about 25 percent favored letting institutions set their maintenance balances and the remainder favored a maintenance balance lower than the initial balance. Maximum rate when account is below maintenance About 65 percent of respondents felt a reduced rate should be required on balances below maintenance level, with the NOW rate, the institution's pass— book rate, or a zero rate all mentioned as appropriate. Those advocating insti— tutional discretion on this penalty rate noted that MMFs do not pay a lower rate on small balances. Minimum denomination for drafts About 56 percent of commercial banks, 54 percent of S&Ls, and 42 percent of MSBs preferred to leave the choice to the institution, with many noting that operationally a minimum draft size would be difficult to police. Those recom— mending a mandated minimum most frequently suggested $500. Require institutions to reserve right to notice of withdrawal Many of the 60 percent who opposed a requirement that they reserve the right to require 7—day's notice of withdrawal evidently misunderstood the request for comment as asking whether they favored a mandatory 7—day notice prior to any withdrawals. The 40 percent who approved seemed to understand that they would only be reserving the right to require 7 days' notice which could provide a buffer against extraordinary developments but which probably would never be invoked.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -8-  Loans to meet initial minimum Close to 3/4 of thrifts recommended that such loans not be permitted, while a slight majority of commercial banks favored allowing them. Prohibition was viewed as necessary to enforce meaningful minimum initial and maintenance balances. Comments in favor cited the absence of similar restrictions on MMFs. Additional deposits and sweeps from other accounts More than 86 percent of all respondents favored no restrictions on additional deposits and over 70 percent favored permitting sweeps, with commercial banks registering the lowest majority (65 percent). Time limit of interest rate guarantee Nearly 2/3 of commercial bank respondents and over 1/2 of S&Ls favored no limitation, while a majority of MSBs preferred some limit. Those in favor of a limit noted that its absence would effectively deregulate accounts that are presently subject to a rate ceiling. The most frequent specification for a limit was 7 days or less (43 percent) or over 7 days and less than 30 days (38 percent). Maximum maturity Over 90 percent of respondents favored none. Enforcement of limitation on monthly withdrawals Most respondents favored either ex post monitoring by the institution (62 percent) or allowing the institution to decide how to enforce compliance (25 percent). Only 13 percent favored strict enforcement via dishonoring checks. Considerable concern was expressed regarding operational difficulties in monitoring compliance. Nearly 70 percent indicated a preference for using date of payment rather than draft date as the basis for control. Definition of "month" Over 70 percent of respondents indicated a preference for using the statement cycle or institutional discretion, with the balance favoring use of the calendar month. Restrictions on overdraft credit associated with an account Citing maximum flexibility and competitive equity with MMMFs, 62 percent of respondents opposed any restrictions on overdraft credit arrangements.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -9-  Limitations on withdrawals Nearly 3/4 of respondents favored unlimited withdrawals by mail, telephone, messenger, or in—person. Many letters also expressed disagreement with the staff position which proposed regarding telephone transfers as pre— authorized transfers if made to third parties or to another deposit account of the same depositor. Implementation date About 1/2 of respondents indicated that 30 days was adequate lead time to implement the new account, with some conditioning their affirmative reply on the simplicity of the account. Those answering in the negative cited such operational problems as restrictions on the number of drafts and minimum balances, with smaller institutions especially concerned about such problems. Other comments Many respondents suggested that the DIDC consider an account that provides unlimited checking and is reservable as a transaction account.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE Washington, D.C. 20220  PRESS RELEASE  October 18, 1982  Money Market Deposit Account In the attached Federal Register notice the Depository Institutions Deregulation Committee (DIDC) announces a 15 day public comment period on the new money market deposit account. The Garn-St Germain Depository Institutions Act of 1982 directs the DIDC to authorize a new Federally insured account to be offered by commercial banks, savings and loan associations and mutual savings banks that is directly competitive with money market mutual funds.  f  The Garn-St Germain Act requires that this account: (1) have no limitation on the maximum rate of interest payable; (2) be in effect no later than 60 days from enactment of the GarnSt Germain Act; (3) not be subject to transaction account reserve requirements (as defined by the Board of Governors of the Federal Reserve System, as of August 1, 1982) even though no minimum maturity is required, and even though up to three preauthorized or automatic transfers plus three third-party transfers are permitted per month; and (4) be "directly equivalent to and competitive with money market mutual funds registered with the Securities and Exchange Commission under the Investment Company Act of 1940." The Committee is requesting comments on features not specifically set forth in the Garn-St Germain Act; e.g., minimum initial denomination, maintenance balance, denomination of withdrawals, whether institutions should be required to reserve the right to require seven days' notice of withdrawal, and whether loans should be permitted to meet the minimum denomination requirement.  Attachment  COMPTROLLER OF THE CURRENCY Digitized forFEDERAL FRASER RESERVE BOARD https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  FEDERAL DEPOSIT INSURANCE CORPORATION NATIONAL CREDIT UNION ADMINISTRATION  FEDERAL HOME LOAN BANK BOARD DEPARTMENT OF THE TREASURY  DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE 12 CFR Part 1204 [Docket No. D-0026]  Money Market Deposit Account  AGENCY:  Depository Institutions Deregulation Committee.  ACTION:  Proposed rulemaking.  SUMMARY:  The Depository Institutions Deregulation Committee  ("Committee") is required by the Garn-St Germain Depository Institutions Act of 1982 ("Garn-St Germain Act") to authorize a new insured deposit account, available to all depositors, to compete with money market mutual funds.  The Garn-St Germain Act  requires that this account: (1) have no limitation on the maximum rate of interest payable; (2) be in effect no later than 60 days from enactment of the Garn-St Germain Act; (3) not be subject to transaction account reserve requirements (as defined by the Board of Governors of the Federal Reserve System, as of August 1, 1982) even though no minimum maturity is required, and even though up to three preauthorized or automatic transfers plus three third-party transfers are permitted per month; and (4) be "directly equivalent to and competitive with money market mutual funds registered with the Securities and Exchange Commission under the Investment Company Act of 1940." No minimum denomination was set forth in the Garn-St Germain Act, although the Conference Report suggested it be no more than $5000.  The Committee is  requesting comments on features not specifically set forth in   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  - 2 the Garn-St Germain Act;  2.12.,  minimum initial denomination,  maintenance balance, denomination of withdrawals, whether institutions should be required to reserve the right to require seven days' notice of withdrawal, and whether loans should be permitted to meet the minimum denomination requirement. DATE:  Comments must be received by (15 days from the date of  publication). ADDRESS:  Interested parties are invited to submit written data,  views, or arguments concerning the proposed rules to Gordon Eastburn, Acting Executive Secretary, Depository Institutions Deregulation Committee, Room 1058, Department of the Treasury, 15th Street and Pennsylvania Avenue, N.W., Washington, D.C. 20220. All material submitted should include the Docket Number D-0026 and will be available for  inspection  and copying upon request, except  as provided in § 1202.5 of the Committee's Rules Regarding Availability of Information (12 CFR § 1202.5). FOR FURTHER INFORMATION CONTACT:  Alan Priest, Attorney, Office of  the Comptroller of the Currency (202/447-1880); Joseph DiNuzzo, Attorney, Federal Deposit Insurance Corporation (202/389-4147); Rebecca Laird, Senior Associate General Counsel, Federal Home Loan Bank Board (202/377-6446); Paul S. Pilecki, Senior Attorney, Board of Governors of the Federal Reserve System (202/452-3281); or Elaine Boutilier, Attorney-Adviser, Treasury Department (202/566-8737). LIST OF SUBJECTS IN 12 CFR Part 1204: SUPPLEMENTARY INFORMATION:  Banks, banking.  The Depository Institutions Deregula-  tion Act of 1980 (Title II of P.L. 96-221; 12 U.S.C. §§ 3501 et seq.) ("DIDA") was enacted to provide for the orderly phaseout  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  - 3 and ultimate elimination of the limitations on the maximum rates of interest and dividends that may be paid on deposit accounts by depository institutions as rapidly as economic conditions warrant.  Under DIDA, the Committee is authorized to phase out  interest rate ceilings by any one of a number of methods including the creation of new account categories not subject to interest rate limitations or with interest rate ceilings set at market rates of interest. Section 327 of the Garn-St Germain Act specifically requires the Committee to authorize a new insured deposit account, which "shall be directly equivalent to and competitive with money market funds." The Garn-St Germain Act prohibits any limitation on the maximum rate of interest payable on the new account.  The  Garn-St Germain Act also states that the account shall not be subject to reserve requirements on transaction accounts even though no minimum maturity is required and even though up to three preauthorized or automatic transfers and three tkansfers to third parties are permitted. The Committee has solicited public comment on short-term deposits previously.  After the June 25, 1981 meeting, the  Committee requested comments on the desirability of authorizing a new deposit instrument with characteristics similar to money market mutual funds, although the Committee did not put forth a specific proposal at that time. 1981).  46 Fed. Reg. 36712 (July 15,  After the September 22, 1981 meeting, the Committee  requested comments'on three specific proposals for short-term time deposits.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  46 Fed. Reg. 50804 (October 15, 1981).  - 4 One of the short-term accounts proposed in the October 15, 1981 notice was a $5000-minimum denomination NOW account, which is similar in concept to the account set forth in the Garn-St Germain Act.  Consequently, the Committee has received comments  on an instrument that possesses essentially all of the features / of the congressionally-mandated account. Certain features are mandated by the Garn-St Germain Act and cannot be changed. However, some features were left by Congress to the Committee's discretion.  Accordingly, comment is requested only on features  not specified in the Act.  Public comment is being requested in  view of the interest expressed by competitors of depository institutions for an opportunity to comment on the features the Committee may designate. The new account proposed by the Committee would have the following features as required by the Garn-St Germain Act and its legislative history:  (1) no minimum maturity; (2) no interest rate  ceiling; (3) an initial minimum denomination no greater than $5000; (4) allow up to three preauthorized or automatic transfers and three other third-party payments (including drafts) per month without being subject to transaction account reserve requirements; (5) available to all depositors; and (6) insured by the FDIC or FSLIC.  The  Committee is considering whether or not to impose a minimum initial denomination and/or maintenance balance of less than $5000 and requests comments on this feature.  In connection with the  minimum balance, the Committee may impose an interest rate limitation (such as the NOW-account rate) on accounts which fall below the minimum maintenance balance, and prohibit loans to meet the   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  - 5 minimum initial denomination.  The account will permit limited  withdrawals to be made, and certain requirements are being considered by the Committee in regard to these withdrawals, e.9. (1) a minimum denomination on drafts; (2) unlimited withdrawals by the depositor by mail, telephone, messenger or in person, except that telephone transfers to third parties or another deposit account of the depositor would be regarded as preauthorized transfers; (3) require an institution to monitor on an ex post basis to determine compliance with the withdrawal limitations; and (4) require an institution to reserve the right to requir e seven days' notice prior to withdrawal.  Although the maximum  rate of interest paid on the account may not be limited, the Committee is concerned that institutions will circumvent the requirements on other time deposits by guaranteeing a rate of interest for a substantial time period, therefore the Committee is considering a limitation on the time period for which an instit ution may guarantee an interest rate.  The Committee also may  restrict overdraft credit arrangements offered in connection with this new account. The Committee requests comments on the new account as proposed above, and particularly requests comments on the following issues: (a)  What should be the minimum initial denomination? (The Conference Report suggests that it be no more than $5000, and interest has been expressed in a $2500 minimum denomination.)  (b)   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Should the maintenance balance differ from the initial denomination?  If so, what should it be?  - 6 What would be the possible consequences of having no maintenance balance?  Would it be operationally  easier to have the maintenance balance the same as the minimum initial denomination? (c)  Should an institution be required to pay a lower rate of interest, such as the NOW-account rate, for accounts which fall below the maintenance balance?  (d)  Should a minimum denomination be set for drafts? If so, should it be $100, $500, or some other amount?  1(e)  Should depository institutions be required to reserve the right to require seven days' (or some  9  s   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  other time span) notice prior to withdrawal? (f)  Should loans be permitted to meet the minimum initial denomination?  (g)  Should any restrictions be placed on additional deposits?  Should sweeps from other accounts be  permitted? (h)  Should the time period for which an institution can guarantee an interest rate be limited? If so, what should it be?  Or should the account  have a maximum maturity? (i)  How should the limitation on the number of withdrawals per month be enforced?  For example, should  the institution be required to monitor accounLs on an ex post basis to determine compliance?  How should  "month" be defined for purposes of this limitation? Should the date of payment by the institution or the  - 7 date written on the draft control for purposes of compliance with the three drafts per month limitation? (j)  Should any restrictions be placed on overdraft credit arrangements offered in connection with this account?  (k)  Should unlimited withdrawals by mail, telephone, messenger, or in person be permitted to the depositor? (The staff believes that telephone transfers should be regarded as preauthorized transfers if the transfer is to a third person or to another deposit account of the same depositor.)  (1)  Is thirty days (or some shorter or longer period) adequate lead time for depository institutions to implement operational changes for this account?  The issues set forth above are not intended to limit the area of comment.  The Committee requests comments on those  questions and on any other aspect of the account which the public wishes to address, particularly with respect to characteristics that would make this account "directly equivalent to and competitive with" money market funds. The Committee has considered the potential effect on small entities of the proposal to establish a new ciPposit instrument, as required by the Regulatory Flexibility Act (5 U.S.C. § 603 et seq.).  In this regard, the Committee's action, in and of itself,  would not impose any new reporting or recordkeeping requirements. Consistent with the Committee's statutory mandate to eliminate deposit interest rate ceilings, this proposal would enable all   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  - 8 depository institutions to compete more effectively in the marketplace for short-term funds.  Depositors generally should benefit  from the Committee's proposal, since the new instrument would provide them with another investment alternative that pays a market rate of return.  If low-yielding deposits shift into  the new account, depository institutions might experience increased costs as a result of this action.  However, their competitive  position vis-a-vis nondepository competitors would be enhanced by their ability to offer a competitive short-term instrument at market rates.  The new funds attracted by the new instrument  (or the retention of deposits that might otherwise have left the institution) could be invested at a positive spread and would therefore at least partially offset the higher costs associated with the shifting of low-yielding accounts. The Committee is asking for comments for a 15-day period. This short comment period is made necessary by the fact that the Garn-St Germain Act requires the new account to be available within 60 days of enactment.  Because the Committee desires to give  the depository institutions adequate time to prepare and market the account, time for comment must be limited to allow time for compilation and consideration of the comments, a Committee vote on the features and publication of the final rule.  Therefore,  comments on this account should be submitted promptly.  By Order of the Committee, October 15, 1982.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Gordon Eastburn Acting Executive Secretary  BOARD OF GOVERNORS OF THE  FEDERAL. RESERVE SYSTEM  Office Correspondence To From  Date  Mr. Edward C. Ettin  November 10, 1982  The New Money Market Deposit Account: A Preliminary Analysis of Potential Shifting and Earnings Effects  Subject:  Michael Moran and Edward F. McKelvey  Summary At your request, the staff has prepared several tables to help gauge the potential effects of the new account to be authorized by the DIDC at its meeting next Monday, November 15.  Attention is focused on shifts of deposits  from passbook savings accounts, since these represent the most costly transfers of funds, and on the amounts of new funds from outside the depository institutions that would be needed to offset the negative impact of passbook shifts on the earnings of these institutions.  Shifts of funds from other  accounts would have relatively small effects on earnings and thus are not considered in the analysis that follows. In brief, the results indicate that even at current reduced level of interest rates all depository institutions could lose about $2 to $2-1/4 billion in annualized earnings (before taxes) if as much as 50 percent of the balances above $5,000 were to shift into the new account; this loss would be about evenly divided between thrift institutions and commercial banks (see table 4, page 9, second line of middle panel).  The staff analysis also  suggests that, under the same interest rate and shifting assumptions, additional pre-tax cost to depository institutions of setting the minimum denomination at $2,500 would be on the order of $3/4 billion (table 5, page 10). These estimates are, of course, highly sensitive to both the assumed level of interest rates and the proportion assumed to shift out of passbook accounts, as illustrated in tables 4 and 5.  They also depend to a lesser  extent on the interest margin that institutions can earn on new funds, assumed   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -2-  in the analysis to be 150 basis points.  The remainder of this memorandum  reviews the basis for these very rough estimates.  Discussion As shown in table 1, surveys conducted earlier this year indicate that substantial proportions of savings balances at banks and thrifts alike are in accounts with balances over $5,000--the highest minimum denomination being contemplated by the DIDC for the new account.  These proportions range  from a low of 60 percent at commercial banks to as much as 72 percent at mutual savings banks.  In addition, about $50 billion, or roughly one-sixth  of all passbook balances, are held in accounts between $2,500 and $5,000; as a fraction of total assets this figure is about 2 percent. Table 2 presents "break-even" flows of funds that institutions would have to attract, under a variety of assumptions regarding interest rates on the new account, in order to offset the cost increase associated with each dollar shifting into the new account from passbook deposits; entries in the table should thus be read as amounts of new inflows, in dollars, per dollar shifted.  Underlying these calculations is an assumption that new  funds can be invested profitably at a spread of 150 basis points.'  As the  table indicates, if institutions were to pay 8 percent on the new account--a rather low figure--commercial banks would need $1.83 in new inflows per dollar shifting from passbooks in order to neutralize the loss in earnings; thrifts would need slightly less--$1.67--because of the 25 basis point differential  1. While institutions can undoubtedly "earn" more than this by using the new funds to pay down high-cost advances or to acquire relatively high-yielding mortgages, they also will probably invest a significant amount of funds in liquid assets at virtually no gain. On balance we believe that 150 basis points is a reasonable average.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -3-  currently permitted on passbook accounts.  The table also illustrates how  quickly the break-even ratio rises with increases in the assumed rate on the new account; for example, at 10 percent the corresponding figures are $3.17 and $3.00. In table 3, the results of these calculations are converted into aggregate inflows that the institutions would have to attract in order to break even under the assumption that 50 percent of the "eligible" passbook deposits were to shift; for this purpose "eligible" passbooks have been defined as those over $5,000 or, in the lower panel, $2,500.1  It is clear  that, under the assumptions underlying table 3, substantial new inflows would be required if the institutions were to break even on the new account.  For  example, if they paid 9 percent on a $5,000 account, depository institutions would have to get $226 billion in new funds to offset the cost effects of losing half their larger passbook balances to the new account; with a $2,500 minimum on the new account this figure would be about 27 percent larger. The figures in table 3 can be adjusted relatively easily for changes in the assumed percentage of shifts out of eligible passbooks.  If 25 percent  is thought to be an appropriate figure, for example, each entry should simply be divided by 2; in the illustration above the required new money would be $113 billion.  For a 75 percent shifting assumption each figure should be  multiplied by 1.5, producing a result of $339 billion in the case illustrated.  1. It should be noted that this definition of "eligible" passbooks understates the actual amount that is at risk, quite possibly by a significant margin, in as much as individuals can combine resources from several different assets to meet whatever minimum requirement is imposed. This type of activity, though probably significant, is impossible to quantify and hence has been excluded from the analysis. In our view, the least unsatisfactory way to account for the possibility of such pooling is to assume that a relatively large proportion, like 50 percent, of "eligible" accounts shifts.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -4-  All of the figures shown in table 3 are much larger than the new inflows that the staff anticipates the new account will generate in the first year of its existence.  While projections of this sort are admittedly  quite crude and subject to substantial error, the staff's current thinking is that total small time and savings growth will be boosted by about $50 billion (net of internal transfers to the new account) in the first 6 months after the account is introduced; by the end of 1983 this figure might rise a bit further to about $60 billion.' Taking $60 billion as a best guess of the first year's new money flow, it would appear that earnings for all depository institutions (before taxes) would be about $2 to $2-1/4 billion lower than they otherwise would have been, using the 50 percent shifting, 9 percent interest rate scenario and assuming that the new account has a minimum denomination of $5,000 (see middle panel of table 4, second line).  Of this amount, commercial banks would  stand to lose about $1 billion or a bit more, while S&Ls and MSBs would each sustain industry-wide losses in the $1/2 billion range.  In proportion to  total assets, MSBs would experience the largest setback, reflecting a greater presence of passbooks with high balances in their deposit account structure. 0 1. In arriving at this estimate,!the staff has assumed that money market funds will be the primary source of transfers from outside the institutions. Indeed, many money fund investors--for example, institutional investors, cash management account holders, and the larger shareholders of general purpose and broker/dealer funds (with accounts over $100,000)--will not find the new account attractive, while inertia and preference for the money funds will limit the degree of shifting by other money fund clients. Flows from outside sources other than money funds--Treasury securities, corporate bonds, equities, and the like--probably would be quite mall. Of course, many of the transfers that do take place in the first six months will represent portfolio reallocations; hence somewhat less will flow in during the next six months.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -5-  A rough adjustment for the effects of setting the minimum denomination at $2,500 would be to increase the aggregate estimated loss by about $3/4 billion, about two-thirds of which would be sustained by commercial banks (see table 5, middle panel, second line).  When compared to the increase in  "eligible" deposits, this additional loss seems large.  The reason for this  is that a reduction in the minimum denomination from $5,000 to $2,500 is not likely to draw much additional new money to the depository institutions; average balances at money funds are already well above $10,000, even for household accounts, and not much is below $5,000.  The main effect of the  lower minimum is therefore to encourage more internal shifting and consequently to increase interest costs. Finally, tables 6 and 7 give some evidence about the number and size of those institutions most vulnerable to the cost effects of passbook transfers.  In table 6 insured savings and loans associations are arrayed by  their capital adequacy as measured by the net worth ratio (rows) and by the proportion of total deposits held in the form of savings accounts (columns); table 7 presents similar data for mutual savings banks.  Institutions that  are in the most precarious position are those in the upper right-hand portion of each table; these are the institutions whose capital has already been depleted and which have a relatively large potential loss to sustain from passbook shifts.  As the tables indicate, S&Ls are in somewhat better shape,  relatively speaking, than MSBs.  Few institutions will face immediate problems,  but many will probably be affected seriously, especially MSBs.  As shown in  the last row of table 7, 225 MSBs, with nearly half the industry's assets, have more than 30 percent of their deposits in passbook accounts.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -6-  Table 1 SIZE DISTRIBUTION OF PASSBOOK SAVINGS DEPOSITS AT COMMERCIAL BANKS AND THRIFT INSTITUTIONS  Size category  1/ 2/ 3/ Commercial banks-- Savings and loans-- Mutual savings banks-- Total Percent of Total Passbook Savings  --  less than 2,500  21.3  19.0  14.7  2,500 to 5,000  18.8  16.2  13.3  greater than 5,000  59.8  64.8  72.0  Passbook Savings in Billions of Dollars4/  less than 2,500  $33.7  $17.1  $6.9  57.7  2,500 to 5,000  29.8  14.6  6.2  50.6  greater than 5,000  94.6  58.5  33.7  186.8  158.1  90.2  46.8  295.1  Total  Percent of Total Assets less than 2,500  1.9  2.5  4.0  2.2  2,500 to 5,000  1.7  2.1  3.6  2.0  greater than 5,000  5.5  8.6  19.5  7.2  9.2  13.2  27.1  11.4  Total  1. 2. 3. 4.  Based on a survey conducted by the American Bankers Association in February 1982. Based on a survey conducted by the U.S. League of Savings Associations in Jaunary 1982. Based on a survey conducted by the National Association of Mutual Savings Banks in February 1982. The dollar volume of savings deposits in each size category was derived by applying the percentages from the top portion of the table to the passbook savings balances in September 1982.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -7-  Table 2 BREAK-EVEN RATIO: NEW DEPOSITS TO SHIFTED PASSBOOK SAVINGS DEPOSITS REQUIRED FOR DEPOSITORY INSTITUTIONS TO BREAK EVEN!' ON THE NEW MONEY MARKET DEPOSIT ACCOUNT Commercial bank break-even ratio  Thrift Institution break-even ratio  8.0%  1.83  1.67  9.0  2.50  2.33  10.0  3.17  3.00  12.0  4.50  4.33  Interest rate on the New Account  1. The break-even ratios assume that new funds attracted can be reinvested at a 150 basis point spread. The rate currently paid on commercial bank passbook savings is 5.25 percent and the thrift rate is 5.5 percent.  -8Table 3 DOLLAR VOLUME OF NEW FUNDS REQUIRED TO BREAK EVEN IF 50 PERCENT OF ELIGIBLE PASSBOOK SAVINGS DEPOSITS SHIFTY Interest rate on the New Account  Commercial Banks  Savings and Loans  Mutual Savings Banks  Total  $5,000 minimum denomination-------------8.0  86.6  48.8  28.1  163.5  9.0  118.3  68.2  39.3  225.8  10.0  149.9  87.8  50.6  288.3  12.0  212.9  126.6  73.0  412.5  $2,500 minimum denomination 8.0  113.8  61.0  33.3  208.1  9.0  155.5  85.2  46.5  287.2  10.0  197.2  109.7  59.9  366.8  12.0  279.9  158.3  86.4  524.6  1. The data presented in the table assumes that 50 percent of the eligible passbook savings deposits (i.e. those with balances higher than the minimum denomination on the new account) will shift. The data can be adjusted easily to show the effects of alternative assumptions. For example, if only 25 percent of eligible passbook deposits shift, the above data should be divided by 2; if 75 percent of the eligible passbook deposits are assumed to shift, the above data should be multiplied by 1.5.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -9Table 4 ESTIMATED REDUCTION IN 1983 PRE-TAX EARNINGS UNDER ALTERNATIVE SHIFTING AND INTEREST RATE ASSUMPTIONS1/ Shifting and Interest Rate Assumption  Commercial Banks  Savings and Loans  Mutual Savings Banks  Total  Billions of Dollars 25 percent shifting 8 9 10 12  percent percent percent percent  0.1 0.3 0.5 0.9  0.1 0.2 0.3 0.6  0.1 0.2 0.2 0.4  0.3 0.7 1.1 1.9  0.7 1.1 1.5 2.3  0.4 0.6 0.9 1.4  0.3 0.4 0.6 0.9  1.3 2.1 2.9 4.5  1.2 1.8 2.4 3.6  0.7 1.1 1.5 2.2  0.5 0.7 0.9 1.3  2.4 3.6 4.7 7.1  50 percent shifting 8 9 10 12  percent percent percent percent  75 percent shifting 8 9 10 12  percent percent percent percent  1. All calculations are based on an account with a $5,000 minimum denomination; interest rates refer to those paid on the new account, which are assumed to be reflective of market conditions. NOTE:   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Detail may not add to totals because of rounding.  -10Table 5 ESTIMATED INCREASE IN 1983 PRE-TAX LOSSES ASSUMING A $2,500 MINIMUM DENOMINATION Shifting and Interest Rate Assumption  Commercial Banks  Savings and Loans  Mutual Savings Banks  Total  Billions of Dollars 25 percent shifting 8 9 10 12  percent percent percent percent  0.2 0.2 0.3 0.4  0.1 0.1 0.1 0.2  * * 0.1 0.1  0.3 0.3 0.5 0.7  0.3 0.5 0.6 0.9  0.2 0.2 0.3 0.4  0.1 0.1 0.1 0.2  0.6 0.8 1.0 1.5  0.5 0.7 0.9 1.3  0.2 0.3 0.4 0.6  0.1 0.1 0.2 0.3  0.8 1.1 1.5 2.2  50 percent shifting 8 9 10 12  percent percent percent percent  75 percent shifting 8 9 10 12  percent percent percent percent  * - less than $50 million.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -11Table 6 NUMBER OF FSLIC-INSURED S&Ls AND TOTAL ASSETS BY NET WORTH RATIO AND SAVINGS DEPOSITS TO TOTAL DEPOSIT RATIO1 / (June 1982)  Net Worth Ratio  Ratio of Savings Deposits to Total Deposits less greater than 10% 10 to 20 20 to 30 than 30%  Total  less than 0.0  22 0.9  34 7.8  14 2.1  6 1.7  76 12.5  0.0 to 1.0  54 3.9  43 9.7  25 11.2  12 1.2  134 26.0  1.0 to 2.0  95 9.9  138 42.8  46 17.4  13 1.5  292 71.6  2.0 to 3.0  129 18.7  270 95.6  95 27.1  27 3.5  521 144.9  3.0 to 4.0  117 12.6  346 123.3  114 27.7  23 3.8  600 167.4  4.0 to 5.0  107 11.5  303 83.3  102 15.7  39 4.2  551 114.7  198 9.0  609 82.4  342 34.5  188 12.5  1,337 138.5  722 66.4  1,743 445.0  738 135.8  308 28.3  3,511 675.5  greater than 5.0  Total  1. The first entry in each cell is the number of FSLIC-insured S&Ls and the second entry is the total assets for that group of institutions.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -12-Table 7 NUMBER OF FDIC-INSURED MUTUAL SAVINGS BANKS AND TOTAL ASSETS DISTRIBUTED BY NET WORTH RATIO AND SAVINGS DEPOSITS TO TOTAL DEPOSIT RATIO!' (June 1982)  Net Worth Ratio  Ratio of Savings Deposits to Total Deposits less greater than 10% 10 to 20 20 to 30 30 to 40 than 40%  Total  3 5.7  5 6.0  8 11.7  9 8.5  3 3.7  1  14 12.5  11 11.9  14 4.5  1 0.2  26 16.7  23 37.9  23 12.9  4 1.6  52 52.7  17 7.4  35 11.8  7 1.0  59 20.2  1.0 to 2.02/  2.0 to 3.0  1 0.2  ar•  3.0 to 4.0  4.0 to 5.0  2 0.4  5.0 to 6.0  greater than 6.0  Total  1 0.3  1 0.5  32 12.8  99 22.6  33 7.1  166 43.3  1 0.3  4 1.0  95 84.2  179 61.4  46 10.0  325 157.0  *--less than 50 million. 1. The first entry in each cell is the number of FDIC-insured MSBs and the second entry is the total assets for that group of institutions. 2. There are no FDIC-insured MSB$ with a net worth ratio below 1.0 percent.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  ITTEE DEPOSITORY INSTITUTIONS DEREGULATION COMM Washington. D.C. 20220 COMPTROLLER OF THE CURRENCY FEDERAL RESERVE BOARD  FEDERAL DEPOSIT INSURANCE CORPORATION NATIONAL CREDIT UNION ADMINISTRATION  FEDERAL HOME LOAN BANK BOARD DEPARTMENT OF THE TREASURY  APPENDIX B  ions Deregulation Committee MEMORANDUM TO: Depository Institut Peter J. Wallison General Counsel  FROM: SUBJECT:  e a Legal Authority of the DIDC to Authoriz ion sact Tran d mite Deposit Account with Unli Capability  the Committee At its meeting on November 15, 1982, r accounts which, among authorized depository institutions to offe ceilings, limited transaction other things, have no interest rate gories of customers. In features, and are available to all cate indicated that at its next taking this action, the Committee a new account without meeting it would consider authorizing sactions permitted to the limitations as to the number of tran depositor. e's authority to This memorandum addresses the Committe gories of depositors. It establish such an account for all cate ided the Committee with the is my conclusion that Congress prov authority to establish such an account. DISCUSSION Depository Institutions Section 327 of the Garn-St Germain Act") requires the Committee to Act of 1982 ("Garn-St Germain would be "directly authorize a new deposit account that " money market mutual funds, equivalent to and competitive with gn an account that meets this leaving it to the Committee to desi   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -2-  standard.  The language of Section 327 of the Act and its legis-  lative history make clear that Congress considered certain characteristics to be essential for a truly competitive account -- no interest rate ceiling, a minimum initial denomination that does not exceed $5000, at least limited transaction features, and availability to all customers -- but Congress did not restrict the DIDC's authority to add other characteristics that would make the account "directly equivalent to and competitive with" money market mutual funds. Thus, as was the case when the Committee voted to adopt a limited transaction account at its last meeting, the features of any account created by the DIDC under the mandate of Section 327 are ultimately defined by the DIDC's judgment as to what characteristics are necessary or appropriate to assure that depository institutions may compete effectively with money market mutual funds for the saver's dollar. The new account authorized by the Committee at its last meeting included the following principal features:  no interest  rate ceilings, a minimum initial deposit requirement of not less than $2500, up to six transfers from the account (no more than three of which can be by check), and availability to all customers. The issue to be considered by the Committee at this meeting is whether to authorize an additional account, with the same or similar features, which would have no limitation on the number of transactions that might be effected in the account.  In my view,  the Committee is authorized to Create such an account if, in its   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  _3_  judgment, an unlimited transaction feature would make such an account "directly equivalent to and competitive with" money market mutual funds. The legislative history of Section 327 shows that Congress considered transaction features to be important for any truly competitive account, but was concerned that the reserve requirements ordinarily associated with transaction accounts would place depository institutions at a cost disadvantage in relation to money market funds.  Thus, in suggesting to the DIDC  what characteristics of money market funds make them strong competitors of depository institutions, the Senate Banking Committee noted: The bank regulatory agencies must take into account in the design of the new instrument the fact that the most competitive features of the money market mutual funds are their low minimum balances, their high liquidity in terms of withdrawals and their third party drafts, and the absence of reserve requirements on such funds (which gives them a cost advantage). S. Rep. No. 97-536, 97th con. 2d Sess. 19 (1982). To deal with the problem of reserve requirements, Congress simply provided an exemption from such requirements for accounts which do not permit more than six transfers, only three of which may be by check.  But in so doing,  Congress did not restrict the authority of the DIDC to create an account which, although subject to reserve requirements, would be competitive with money market mutual funds because it permitted more than six transactions. In this connection, the DIDC might determine in its discretion that 12 transfers would attract a substantial   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -4number of customers who currently maintain accounts in money nt market funds, or that unlimited accessibility to the accou by check -- a feature available to many money market fund shareholders -- is appropriate to attract customers who value this liquidity feature more highly than the rate of interest paid on the account. If it draws these conclusions, or others which reflect to its judgment as to the relevant characteristics necessary with" make an acount "directly equivalent to and competitive money market mutual funds, the Committee is authorized to create an account with unlimited transaction capabilities. There is no requirement in the Garn-St Germain Act or elsewhere that the new account with unlimited transaction capabilities be made available to less than all categories of customers.  Although Section 706 of the Act did not  of extend eligibility for NOW accounts to'business customers depository institutions, this is not a significant indicator of Congressional intent with regard to the new account. First, the legislative history of Section 327 makes quite mers clear that availability of the new account to all custo e was, in Congress' view, essential for a truly competitiv account.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  As stated by the Senate Banking Committee:  -5It is the direction of this Committee that DIDC create a new deposit account for use by l regulated depository institutions (banks, mutua ns) iatio savings banks, savings and loan assoc which: (1) shall be available to all types of depository institutions customers... id.*  statement To read section 706 as a limitation on this  unambiguous would be to allow an inference to overcome an ess that declaration of intention 'by the Committee of Congr on 327. was principally responsible for drafting Secti Act Second, and perhaps more important, at the time the the DIDC would was passed, Congress could not know whether nt available to determine that an unlimited transaction accou de depository all customers was appropriate in order to provi  theme in * Universal availability was a consistent nt, as accou new the of stics cteri describing the chara of the floor the on quy collo wing demonstrated by the follo House: w-up [Mr. Stanton] Now, if I may, Mr. Chairman, follo to ble eligi those rning with one additional question conce are We DIDC. the by open this new account to be created erships, aware that anyone--private individuals, partn , and so on c corporations, business organizations, publi units There nt. accou -- are eligible to open a money market fund own a can who to as are no limitations or restraints imposed again would I man, MMMF account. In light of this, Mr. Chair DIDC, the that presume that it is the intent of the conferees tly is to be direc in authorizing this new account which market mutual funds money with e titiv compe equivalent to and restrictions, should recognize that there are not to be any eligible to limitations, or prohibitions imposed as to who is hold this new account. Mr. St Germain: Once again, the gentlemen is t that the precisely right. It is the conferees clear inten eligible is who to as s DIDC is not to impose any limitation y Ed. (Dail 8436 H. Rec. Cong. to open this new account. 128 Oct. 1, 1981).   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  -6institutions with an account "directly equivalent to and competitive with" money market mutual funds.  If the DIDC  were to determine that this characteristic is not appropriate for a competitive account, then a NOW account would continue to be an attractive alternative for those who are eligible to use it and place a high value on its unlimited transaction features.  On the other hand, if the DIDC were to decide that  unlimited transaction features would significantly increase the competitiveness of a new account created under the mandate of Section 327, it is authorized by Congress to add that feature to the new account.  Under these circumstances, the  NOW account would lose its viability, but there is nothing in the Act or. its legislative history to suggest that the supersession of the NOW account by a new competitive account created under Section 327 of the Act was not fully consistent with Congressional intent. Accordingly, in my opinion the DIDC is free to authorize an account under Section 327 of the Garn-St Germain Act which is available to all customers and permits unlimited transactions by depositors.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  eL  ethr  -AIt  reed-M-1  jitled te ii: Itt hVil  tax  6tAllitaPelill4"4-tierltatt4e:7:"  1PL 41 AlAdell tvi  t  /12  :tud  VAkallt  .aft€  ,1  ?  t  17.4eimLv U- (:/u).41A  AP.241-6 (S,4 d-cis9,6 ukraelk 00_  14 4.1'4-  fourtt  L), LgjvigtrwLe INAluimi (311 'wad, kz4t4  v1/41  GwAtti,,ertkuult  ;Tiys  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  ,  4g.2-07,  Il, INAA-u4144ty,,(1444'r4c,drIA.  'Aq$  414  vtre cAutef  Wed  i I 1.:)  . ,AaLtai If-t-ettutA o'-eze,(14  ,Z, 3,1/(11Aa4Wc -  y wectv krA4A,(0/-Nului -4,tef, *claettaki ' 91,042; 4-7 " 5:(1 741-1/0  italt ieedzbL6/(-1(cte-G,   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  de;ligeee itteia41c'i bit-bi  41.4.0,-t Az, ad,  New Short-Term Account  1.  May be offered on either Time Open or' Certificate basis.  2.  Term - 7 day fixed maturity with one day grace period for withdrawals. Automatic renewal permitted. Interest rate set weekly. Depository institutions are also permitted to offer the account on a 7 day notice basis.  Sa 3. tsu;4A $20)°°D fra.t  Eligibility - same as for savings account (including $150,000 maximum account size for corporations for Reg D and Q purposes).  kA, itaz  jAvi•-lv  Minimum Denomination - $20,000 initial and maintenance.  5'  6.  Additional Deposits - amounts deposited between maturity dates are initialized at next maturity date (maximum 13 day hold in fixed maturity mode). Withdrawal and Early Withdrawal Penalty -  withdrawal at maturity of amounts above the minimum denomination without affecting the rate paid on the remaining funds.  -  withdrawal at maturity of amounts that bring the remaining balance below the minimum sets the rate on the remaining funds to the savings account rate.  -  minimum early withdrawal penalty of loss ofA interest 4iiiml0A0a on higher of $20,000 or amount withdrawn (and avif remaillj_ng balance und passbook rate on remairilin 1:70 t CAtit 1044 ; falls below minimum). "A  -  non-negotiable.  en-e.  " tAA.TU.4141.4.44,Ant,  ide.eA:r  7.  Permitted Means of Withdrawal - include in person, by mail, by telephone instruction, by standing order.  8.  Impermissible Means of Withdrawal - include by check and by automatic transfer triggered by balance in this or another account. (Additional deposits to the account triggered by balance in this or another account are also prohibited.)  411 " ,24 44  Loans to meet the minimum denomination and loans secured by the account are prohibited. There is the additional requirement that the overdraft rate on transaction accounts to which the balances in the proposed account are transferred at maturity may not be lower than the rate on such overdrafts for depositors that do not hold the proposed account.  S  er,/9.4.12.  SAAA4J2  se4~-ti  ttui •   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  2  418)-1'10.  Reserve Requirements - same as for time deposits.  11, 54 "" ' C 464^ '1144 g  catajg ; ko cuitl  r 12.  Premiums should be prohibited or limited to two per depositor per year (in contrast to the currept two per account per year). oi elteA4 , / -gekt Ma. 4?... CeZay.  13.  Effective Date of September 1, 1982.  &tome.  e  Rate Ceiling of 50 basis points below the rate on the 91-day b.p." `714-e-IA:r ct certificate (this implies a thrift differential) or 50 below 90-day bill rate (this implies no differential). • et-L.2%4XThe 50 b.p. is partially offset ,by the difference between 444/11. quarterly compounding on the 91-day account and weekly, daily, or continuous compounding on the proposed account. The account would no longer be subject to a rate ceiling as of April 1, 1983.  /  Ce  ewted 544.4,ei  et/  /a AA  91  %   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  1F4.J /204 Aft., .  (4  Proposed Short-Term Account  II.  Rate:  ° No ceiling or a ceiling with a differential in favor of thrifts (see attachment).  Denomination:  ° Minimum daily balance of $20,000. If the average balance falls below the required minimum, the rate is reduced to the passbook rate.  III.  Maturity:  O Range of 7 to 31 days. o The form can be either an enforced notice or a specific term. The length of the grace period before automatic rollover is one business day.  IV.  Provisions Regarding Additional Deposits:   https://fraser.stlouisfed.org fr Federal Reserve Bank of St. Louis  O  New deposits permitted at any time but must be held in the account for the full notice or maturity period. No sweeps into this new account from another account triggered by the level of the balance in any M4s1.  I  _  V.  Notice and Withdrawal Provisions:  2  -  0 No withdrawal by third-party draft drawn directly on this new account. o No sweeps from this account to another account automatically triggered by the level of the balance in any account. o The permissible means of delivering notice are: telephone or other telecommunication, mail or messenger, in person, and standing order. O The permissible forms of payment are: check or cash to depositor, cash, draft or electronic transfer by institution to third parties, and transfer to any other account held by depositor.  VI.  Minimum Early Withdrawal Penalty:  VII.  Miscellaneous Restrictions: ° Prohibit loans to depositors to meet required balance.  o Loss of interest that has been earned on the amount withdrawn back to the previous notice or maturity date, but no less than the amount that would have been earned for one-half the period.  o Prohibit the use of this account as collateral for a loan. o The overdraft rate on transaction accounts to which the balances in the new account are transferred may not be lower than the rate on such overdrafts for depositors that do not hold the proposed account.  VIII. Negotiability:  ° Non-negotiable.  IX.  Eligibility:  ° No restrictions.  X.  Effective Date:  ° September 1, 1982.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  w ,  ATTACHMENT (for an account with an indexed ceiling and a differential)  I.a) Interest Rate Ceiling and Differential:  o 91-day Treasury Bill rate, auction average, bank discount basis for thrift institutions and 25 basis points less for commercial banks. .  Ceiling rate and differential eliminated on May 1, 1983 and suspended whenever the 91-day Treasury bill rate has been 9% or below for four consecutive Treasury bill auctions.  o Differential applies to all types of accounts, including IRA/Keogh and governmental unit deposits.  o Adjustment of the rate permitted at the discretion of the institution, but not less frequently than the maximum maturity or notice authorized for the account.  I.b) Compounding:  ° Permitted without restriction.  I.c) Premiums:  ° Limited to two per account holder per year.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE wasitingtori. I).C. 20220 COMPTROLLER OF THE CURRENCY FEDERAL RESERVE BOARD   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  FEDERAL DEPOSIT INSURANCE CORPORATION NATIONAL CREDIT UNION ADMINISTRATION  FEDERAL HOME LOAN BANK BOARD DEPARTMENT OF THE TREASURY  AGENDA  DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE  June 29, 1982 3:30 p.m. Cash Room Open Meeting  1.  Consideration of Alternative Short-Term Deposit Accounts.  2.  Consideration of Rules for Establishment of Interest Rates on Accounts Not Subject to Interest Rate LimitatiOns.\  MONEY MAriET ACCOUNT  Minimum Balance:  $20,000 as of 9/1/82 Reductions in minimum balance shall he accoplished on a phased-in schedule after enactment of legislation containing the provisions of Title I of S.1720. Subsequent to the enactrent of such legislation the minimum balance shall be $15,000 as of 90 days after. enactrent, 10,000 as of 120 days after enactrent, and 5,000 as of 150 days after enactment.  Maturity:  None  Interest Rate:  Daily interest may be paid lased on the interest rate of the most recent 91-day Treasury bill auction and may be compounded daily for thrift institutions. The interest rate allowable for ccurrercial banks shall be the 91-day Treasury bill rate less 25 basis points with daily compounding allowed. The differential Shall be removed one year subsequent to the enactment of legislation containing the provisions of Title I of S.1720.  Maintenance of Balance:  No interest Shall he paid on the account if it below the minimum specified level. •sr  drops  •iso  Transfers:  A maximum of three drafts or pre-authorized transfers per month. Dollar limitations to be specified by inindividual associations.  Withdrawal Penalty:  None  Reserve Requirement:  None (3% for nonpersonal)  Additional Deposits:  No limit  Eligibility:  All depositors  Effective Date:  9/1/82  Other:  NO loopholes, NO premiums   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  FD.T. C  6/29/82 MONEY MARKET ACCOUNT  Minimum Balance:  $20,000 $15,000 $10,000 $ 5,000 0 $  as as as as as  of of of of of  10/1/82 1/1/83 4/1/83 7/1/83 10/1/83  Reductions in minimum balance after 10/1/82 subject to delay or rescission depending on experience with deposit flows and actions by Congress to deregulate thrift asset powers Maturity:  None (14-day reservation notice as with present passbook accounts)  Interest Rate:  No ceiling (interest at passbook rate if balance drops below minimum)  Withdrawals:  No limit except no sweeps and only three third-party drafts per month (mandatory $25 charge per item for each draft beyond three). Telephone transfers, etc., permissible  Withdrawal Penalty:  None  Reserve Requirement:  None (3% for nonpersonal)  Additional Deposits:  No limit  Eligibility:  All depositors  Effective Date:  10/1/82  Other:  No loans to meet initial or maintenance balances   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Agenda Item 2 -- Establishment of Interest Rates on Accounts Not Subject to Ceilings --In response to inquiries from depository institutions, the Committee is requested to determine the manner in which interest rates may be established or adjusted on deposit categories exempt from rate ceilings, i.e. the 3-1/2 year or 18 month IRA deposit. --Under existing rules of the agencres, the deposit contract must state explicitly the specified rate or procedure for determining the rate to be paid. --Depository institutions indicate that the current rule reduces their flexibility in adjusting rates on outstanding deposits not subject to rate ceilings. For example, they wish to retain the discretion to pay a bonus from time to time on outstanding balances or adjust the rate to meet competition. --The memorandum proposes three options for the Committee's consideration:   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  --Give institutions complete discretion in setting interest rates payable on such accounts. This option provides the maximum degree of discretion to institutions and would be most consistent with deregulation. This option was favored previously by Pratt, Isaac and Callahan. --Require institutions to specify in the deposit contract a minimum rate or the means of determining the rate, beyond which discretionary bonuses would be permitted. This option enables consumers to determine with certainty the minimum amount of interest they will receive and provide the depository institution with discretion to meet competition. --Require institutions to specify in the deposit contract a minimum rate or the means of determining the rate, beyond which no discretionary bonuses would be permitted. In addition, any variable rate must be based on a predetermined schedule or on an index over which the institution has no control or discretion. This option is most consistent with assuring that depositors will not be mislead into believing that the depositor will receive a bonus when the institution does not intend to pay one. It also assures that institutions will not be "forced" by depositors to pay higher rates on outstanding balances.  2  L not subject Please Indicate Your Vote -- For deposit categories tutions: insti to Federal interest rate limitations, depository  /-7  1.  /7  2.  /7  3.  May retain complete discretion in establishing the icted interest rate and amount payable and are not restr t enden indep for d to using only rate indexes establishe 21 ol. contr their business purposes or indexes not under t payMust establish a minimum interest rate or amoun a in bonus a able but may reserve the right to pay n's tutio insti itory manner determined solely in the depos discretion. interest Must specify in the deposit contract a specific est inter g rate or a verifiable standard for determinin est inter rates or bonus amounts. In addition, the on rate on a variable rate time deposit must be based which a predetermined schedule or on an index over ol or the depository institution does not have contr discretion.  DIDC Member Signature Attachment:  1/  Staff Memorandum  terms such Under state laws governing contracts, material be stated to have would as the rate of interest generally en the betwe act contr and agreed upon in order to create a n. tutio depositor and the depository insti   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  tk (ralote  C  ei44ke.c-LaX  cre2  3-.II  l•  L.4 Ls  MU:4 CUs  1/6..r  s1 / 4.04. g  itss 47.3  k  44.1.  ito  AtA 44401_1._  Ikht  c‘i  1114te  91 igama.)  Oa  'Mtn'46  1  Sa-vr.y,:r  "thev& /14of  4 ttr-gir /014 -  1f'_f2  ac-t  C& 4C.z gt/ 1 4  StZs  44,  Ms ies  31  :o_1(1_  U 7  112_  r -11;it,itea  12.8  tti4 91-ti ace+   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  13.667  .14,10 13.011 -a ces. i3. 26/  1.7  3.8  A-3 Chart 1 SPREADS BETWEEN YIELDS ON MMMFs AND A HYPOTHETICAL SHORT-TERM DEPOSIT' , Percent 8 MMTIF Rate less Deposit Rate (Weekly data) 6  4  2  2  4 Percent 4 MMMF Rate less Deposit Rate (Quarterly average data)  —3  OEMS  2  • 1  OMEN  1  2  1/  1982 1981 1980 1979 Deposit rate is the fully effective yield corresponding to a ceiling equal to the 91-day Treasury bill rate, auction average discount basis.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  PROPOSED INVESTMENT ACCOUNT  Minimum Initial Deposit  $25,000  Minimum Balance Maintained  $15,000  Maturity  7-31 day notice and/or maturity 1-day grace period  Interest Rate  No Ceiling (or) Ceiling: 91 day T-bill for thrifts Differential: -25 basis points for banks  Withdrawals  No limit on dollar size No withdrawals by draft  Withdrawal Penalty  Loss of interest earned  Reserve Requirement  None (3% for nonpersonal)  Additional Deposits  No limit  Eligibility  All depositors  Other  No loopholes  DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE Washington, D.C. 20220  . PRESS RELEASE  October 18, 1982  Money Market Deposit Account In the attached Federal Register notice the Depository Institutions Deregulation Committee (DIDC) announces a 15 day public comment period on the new money market deposit account. The Garn-St Germain Depository Institutions Act of 1982 directs the DIDC to authorize a new Federally insured account to be offered by commercial banks, savings and loan associations and mutual savings banks that is directly competitive with money market mutual funds.  f  The Garn-St Germain Act requires that this account: (1) have no limitation on the maximum rate of interest payable; (2) be in effect no later than 60 days from enactment of the GarnSt Germain Act; (3) not be subject to transaction account reserve requirements (as defined by the Board of Governors of the Federal Reserve System, as of August 1, 1982) even though no minimum maturity is required, and even though up to three preauthorized or automatic transfers plus three third-party transfers are permitted per month; and (4) be "directly equivalent to and competitive with money market mutual funds registered with the Securities and Exchange Commission under the Investment Company Act of 1940." The Committee is requesting comments on features not specifically set forth in the Garn-St Germain Act; e.g., minimum initial denomination, maintenance balance, denomination of withdrawals, whether institutions should be required to reserve the right to require seven days' notice of withdrawal, and whether loans should be permitted to meet the minimum denomination requirement.  Attachment  COMPTROLLER OF THE CURRENCY Digitized for FEDERAL FRASER RESERVE BOARD https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  FEDERAL DEPOSIT INSURANCE CORPORATION NATIONAL CREDIT UNION ADMINISTRATION  FEDERAL HOME LOAN BANK BOARD DEPARTMENT OF THE TREASURY  DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE  12 CFR Part 1204 [Docket No. D-0026]  Money Market Deposit Account  AGENCY:  Depository Institutions Deregulation Committee.  ACTION:  Proposed rulemaking.  SUMMARY:  The Depository Institutions Deregulation Committee  ("Committee") is required by the Garn-St Germain Depository Institutions Act of 1982 ("Garn-St Germain Act") to authorize a new insured deposit account, available to all depositors, to compete with money market mutual funds.  The Garn-St Germain Act  requires that this account: (1) have no limitation on the maximum rate of interest payable; (2) be in effect no later than 60 days from enactment of the Garn-St Germain Act; (3) not be subject to transaction account reserve requirements (as defined by the Board of Governors of the Federal Reserve System, as of August 1, 1982) even though no minimum maturity is required, and even though up to three preauthorized or automatic transfers plus three third-party transfers are permitted per month; and (4) be "directly equivalent to and competitive with money market mutual funds registered with the Securities and Exchange Commission under the Investment Company Act of 1940." No minimum denomination was set forth in the Garn-St Germain Act, although the Conference Report suggested it be no more than $5000.  The Committee is  requesting comments on features not specifically set forth in   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  - 2 the Garn-St Germain Act; e.g., minimum initial denomination, maintenance balance, denomination of withdrawals, whether institutions should be required to reserve the right to require seven days' notice of withdrawal, and whether loans should be permitted to meet the minimum denomination requirement. DATE:  Comments must be received by (15 days from the date of  publication). ADDRESS:  Interested parties are invited to submit written data,  views, or arguments concerning the proposed rules to Gordon Eastburn, Acting Executive Secretary, Depository Institutions Deregulation Committee, Room 1058, Department of the Treasury, 15th Street and Pennsylvania Avenue, N.W., Washington, D.C. 20220. All material submitted should include the Docket Number D-0026 and will be available for as provided in  inspection  and copying upon request, except  1202.5 of the Committee's Rules Regarding Availa-  bility of Information (12 CFR  1202.5).  FOR FURTHER INFORMATION CONTACT:  Alan Priest, Attorney, Office of  the Comptroller of the Currency (202/447-1880); Joseph DiNuzzo, Attorney, Federal Deposit Insurance Corporation (202/389-4147); Rebecca Laird, Senior Associate General Counsel, Federal Home Loan Bank Board (202/377-6446); Paul S. Pilecki, Senior Attorney, Board of Governors of the Federal Reserve System (202/452-3281); or Elaine Boutilier, Attorney-Adviser, Treasury Department (202/566-8737). LIST OF SUBJECTS IN 12 CFR Part 1204: SUPPLEMENTARY INFORMATION:  Banks, banking.  The Depository Institutions Deregula-  tion Act of 1980 (Title II of P.L. 96-221; 12 U.S.C. §§ 3501 et seq.) ("DIDA") was enacted to provide for the orderly phaseout  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  - 3 and ultimate elimination of the limitations on the maximum rates of interest and dividends that may be paid on deposit accounts by depository institutions as rapidly as economic conditions warrant.  Under DIDA, the Committee is authorized to phase out  interest rate ceilings by any one of a number of methods including the creation of new account categories not subject to interest rate limitations or with interest rate ceilings set at market rates of interest. Section 327 of the Garn-St Germain Act specifically requires the Committee to authorize a new insured deposit account, which "shall be directly equivalent to and competitive with money market funds." The Garn-St Germain Act prohibits any limitation on the maximum rate of interest payable on the new account.  The  Garn-St Germain Act also states that the account shall not be subject to reserve requirements on transaction accounts even though no minimum maturity is required and even though up to three preauthorized or automatic transfers and three transfers to third parties are permitted. The Committee has solicited public comment on short-term deposits previously.  After the June 25, 1981 meeting, the  Committee requested comments on the desirability of authorizing a new deposit instrument with characteristics similar to money market mutual funds, although the Committee did not put forth a specific proposal at that time. 1981).  46 Fed. Reg. 36712 (July 15,  After the September 22, 1981 meeting, the Committee  requested comments'on three specific proposals for short-term time deposits.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  46 Fed. Reg. 50804 (October 15, 1981).  - 4 One of the short-term accounts proposed in the October 15, 1981 notice was a $5000-minimum denomination NOW account, which is similar in concept to the account set forth in the Garn-St Germain Act.  Consequently, the Committee has Teceived comments  on an instrument that possesses essentially all of the features of the congressionally-mandated account.  Certain features are  mandated by the Garn-St Germain Act and cannot be changed. However, some features were left by Congress to the Committee's discretion.  Accordingly, comment is requested only on features  not specified in the Act.  Public comment is being requested in  view of the interest expressed by competitors of depository institutions for an opportunity to comment on the features the Committee may designate. The new account proposed by the Committee would have the following features as required by the Garn-St Germain Act and its legislative history:  (1) no minimum maturity; (2) no interest rate  ceiling; (3) an initial minimum denomination no greater than $5000; (4) allow up to three preauthorized or automatic transfers and three other third-party payments (including drafts) per month without being subject to transaction account reserve requirements; (5) available to all depositors; and (6) insured by the FDIC or FSLIC.  The  Committee is considering whether or not to impose a minimum initial denomination and/or maintenance balance of less than $5000 and requests comments on this feature.  In connection with the  minimum balance, the Committee may impose an interest rate limitation (such as the NOW-account rate) on accounts which fall below the minimum maintenance balance, and prohibit loans to meet the   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  - 5 minimum initial denomination.  The account will permit limited  withdrawals to be made, and certain requirements are being considered by the Committee in regard to these withdrawals, e.g. (1) a minimum denomination on drafts; (2) unlimited withdrawals by the depositor by mail, telephone, messenger or in person, except that telephone transfers to third parties or another deposit account of the depositor would be regarded as preauthorized transfers; (3) require an institution to monitor on an ex post basis to determine compliance with the withdrawal limitations; and (4) require an institution to reserve the right to require seven days' notice prior to withdrawal.  Although the maximum  rate of interest paid on the account may not be limited, the Committee is concerned that institutions will circumvent the requirements on other time deposits by guaranteeing a rate of interest for a substantial time period, therefore the Committee is considering a limitation on the time period for which an institution may guarantee an interest rate.  The Committee also may  restrict overdraft credit arrangements offered in connection with this new account. The Committee requests comments on the new account as proposed above, and particularly requests comments on the following issues: (a)  What should be the minimum initial denomination? (The Conference Report suggests that it be no more than $5000, and interest has been expressed in a $2500 minimum denomination.)  (b)   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Should the maintenance balance differ from the initial denomination?  If so, what should it be?   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  - 6 What would be the possible consequences of having no maintenance balance?  Would it be operationally  easier to have the maintenance balance the same as the minimum initial denomination? (c)  Should an institution be required to pay a lower rate of interest, such as the NOW-account rate, for accounts which fall below the maintenance balance?  (d)  Should a minimum denomination be set for drafts? If so, should it be $100, $500, or some other amount?  (e)  Should depository institutions be required to reserve the right to require seven days' (or some other time span) notice prior to withdrawal?  (f)  Should loans be permitted to meet the minimum initial denomination?  (g)  Should any restrictions be placed on additional deposits?  Should sweeps from other accounts be  permitted? (h)  Should the time period for which an institution can guarantee an interest rate be limited? If so, what should it be?  Or should the account  have a maximum maturity? (i)  How should the limitation on the number of withdrawals per month be enforced?  For example, should  the institution be required to monitor accounLs on an ex post basis to determine compliance?  How should  "month" be defined for purposes of this limitation? Should the date of payment by the institution or the  date written on the draft control for purposes of compliance with the three drafts per month limitation? (j)  Should any restrictions be placed on overdraft credit arrangements offered in connection with this account?  (k)  Should unlimited withdrawals by mail, telephone, messenger, or in person be permitted to the depositor? (The staff believes that telephone transfers should be regarded as preauthorized transfers if the transfer is to a third person or to another deposit account of the same depositor.)  (1)  Is thirty days (or some shorter or longer period) adequate lead time for depository institutions to implement operational changes for this account?  The issues set forth above are not intended to limit the area of comment.  The Committee requests comments on those  questions and on any other aspect of the account which the public wishes to address, particularly with respect to characterist ics that would make this account "directly equivalent to and compet itive with" money market funds. The Committee has considered the potential effect on small entities of the proposal to establish a new  osit instrument,  as required by the Regulatory Flexibility Act (5 U.S.C. § 603 et seq.).  In this regard, the Committee's action, in and of itself ,  would not impose any new reporting or recordkeeping requirements . Consistent with the Committee's statutory mandate to elimin ate deposit interest rate ceilings, this proposal would enable all   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  depository institutions to compete more effectively in the marketplace for short-term funds.  Depositors generally should benefit  from the Committee's proposal, since the new instrument would provide them with another investment alternative that pays a market rate of return.  If low-yielding deposits shift into  the new account, depository institutions might experience increased costs as a result of this action.  However, their competitive  position vis-a-vis nondepository competitors would be enhanced by their ability to offer a competitive short-term instrument at market rates.  The new funds attracted by the new instrument  (or the retention of deposits that might otherwise have left the institution) could be invested at a positive spread and would therefore at least partially offset the higher costs associated with the shifting of low-yielding accounts. The Committee is asking for comments for a 15-day period. This short comment period is made necessary by the fact that the Garn-St Germain Act requires the new account to be available within 60 days of enactment.  Because the Committee desires to give  the depository institutions adequate time to prepare and market the account, time for comment must be limited to allow time for compilation and consideration of the comments, a Committee vote on the features and publication of the final rule.  Therefore,  comments on this account should be submitted promptly. , By Order of the Committee, October 15, 1982.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  F Gordon Eastburn Acting Executive Secretary  do —  410  DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE COMPTROLLER OF THE CURRENCY FEDERAL RESERVE BOARD  U.S. TREASURY DEPARTMENT  NATIONAL CREDIT UNION ADMINISTRATION  DATE:  TO:  FEDERAL HOME LOAN BANK BOARD  FEDERAL DEPOSIT INSURANCE CORPORATION  Depository Institutions Deregulation Committee  SUBJECT:  June 18, 1982  Design of Short-Term Deposit Instrument  FROM:  DIDC Staff*  At its March 22 meeting, the Committee adopted a long-run strategy for deregulating deposit rate ceilings.  At the same time, the Committee  expressed its continuing concern about the ability of depository institutions to compete with money market mutual funds (MMMFs) and, particularly, about the weakness of deposit flows to thrift institutions.  In view of this con-  cern, the Committee adopted the 91-day, $7,500 minimum time deposit with a 25 basis point differential for thrifts.  The Committee also directed the staff  to continue efforts to design a shorter-term instrument to enhance the ability of depository institutions to compete with MMMFs.  This memorandum reviews  the basic issues involved in designing such an instrument, including monetary policy considerations, and then discusses in more detail the possible features that the Committee may wish to consider.1  I.  The Fundamental Issues Since June 1981, when the Committee first solicited public comment  on this matter, total assets of MMMFs have grown from $127 billion to $203  This memorandum was prepared primarily by the staff of the Federal Reserve * Board (Messrs. Ettin, Schwartz, McKelvey, and Ms. Glassman). 1/ These issues have been discussed in greater detail in previous staff memoranda; see particularly, "Short-Term Instrument Proposals," March 15, 1982.  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  4 •  -2-  household investors). billion (roughly three-fifths of which is held by  During  savings deposits increased the same period, total small-denomination time and ts, however, declined from from $1,171 billion to $1,242 billion; savings deposi $365 billion to $347 billion.  In order to maintain their customer base, many  a market rate of interest on banks and thrifts are attempting to pay depositors , but unless they are short-term funds through a variety of sweep arrangements tory institutions will conable to offer a short-term instrument directly deposi arrangements will continue to tinue to lose savings deposits to MMMFs, and sweep proliferate. term instrument The Committee's efforts to design a competitive short. may be hampered by the consideration of two issues  One of these is that a new  ts, thereby raising instishort-term account will draw funds from savings accoun tutions' costs.  t market rates As indicated previously to the Committee, at curren  short-term market rate account each dollar shifted from a savings account to a of external funds in order to would require the institutions to attract $3 to $4 break even.' e staff, is the The second issue, of concern to the Federal Reserv ry policy. effect that any new instrument would have on moneta  The Federal  between transaction and Reserve regards the maintenance of a distinction monetary policy. other accounts as essential to its conduct of  If the new  features, it would further blur account were to blend transactions and savings difficult to define and control the distinctions among accounts, making it more new account were subject to the money supply; this would be true even if the  analysis and related issues can be 1/ An extensive discussion of break-even "Short-Term Instrument Proposals," found in the previously cited staff memorandum, March 15, 1982, pp. 14-19.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -3-  transaction account reserve requirements.  On the other hand, regardless of  , the conduct any restrictions which the Committee may impose on this account nondepository instituof monetary policy will continue to be complicated as tions and savings tions provide savers with instruments that combine transac features.  ent Currently, under the Board's Regulation D, any deposit instrum  or any account with a maturity or required notice period of less than 14 days, subject to transaction that can be used ordinarily to pay third parties, is account reserve requirements.'  The Board's statutory authority would permit  time account, so it to shorten the 14-day maturity break to accommodate a new would make the long as that account had limited transaction features; this account eligible for time deposit reserve requirements.2  The Committee is  instrument which can therefore faced with the difficult task of designing an MMMF shares, effectively compete with other market rate instruments, such as the extent practicable, but which minimizes savings deposit outflows and, to rations. takes into account the Federal Reserve's monetary policy conside  tion reserve 1/ In particular, the Federal Reserve Board now imposes transac period of notice d require or y requirements on (1) any account with a maturit demand all drawn-be can less than 14 days, (2) any account on which a draft auto(3) s," deposit le checkab deposits, NOWs, share drafts, and similar "other monthly three than more which matic transfer accounts, and (4) any account on Reserve has preauthorized or telephone transfers can be made. The Federal to MMMFs that ments also asked Congress for authority to extend reserve require s. serve as the functional equivalent of transactions account sferable time 2/ Under the Monetary Control Act, savings deposits and nontran deposits time rable transfe deposits held by persons are not reservable, while a reserve to subject and time deposits held by other than natural persons are on ment require reserve requirement of zero to 9 percent; the Board's current zero a Board adopted such time deposits generally is 3 percent. Even if the would still be banks member , account new any on ment require percent reserve on the aggregate of subject to a small (and declining) reserve requirement n period of reserve their time and savings deposits during the phase-dow requirements under the Monetary Control Act.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -4-  II.  Design of the Instrument that a The balance of this memorandum discusses the characteristics  t the above consideranew short-term instrument might have, taking into accoun tions.  ty, and interest The key variables are the minimum denomination, maturi  for the Committee's considrate; a number of other features are also presented eration.  tions placed In addition, the Committee should be aware that limita  monetary policy will also on the new instrument to reduce costs and facilitate result in operational complexities for institutions.  Attachment A summarizes  the decision variables for the new instrument. Minimum Initial Deposit.  A large minimum balance requirement would  savings accounts, but would minimize the potential for internal shifting from make the new instrument less competitive as well.'  The staff believes that  $10,000 to $25,000 would be an initial minimum denomination on the order of shifts. likely to prevent a large amount of internal deposit  In determining  also wish to keep in mind: the minimum initial deposit, the Committee may the minimum deposit requirement (1) the possibility of future adjustments in shifts, and (2) the desirability as information develops about internal deposit accounts to MMMFs and retail of reducing pressure on institutions to offer sweep based on smaller denominations. repurchase agreements, many of which have been  are in accounts with high 1/ A substantial proportion of savings deposits 75 percent of savings that ted balances. In December 1981, the FDIC indica 41 percent were in excess and $5,000 account balances at MSBs were in excess of 1982 survey conducted by ry Februa a of $15,000. These results were similar to 1980, the FHLBB August In Banks. s the National Association of Mutual Saving ts at S&Ls accoun s saving r regula indicated that 70 percent of the funds in t were over percen 45 and $5,000 of were in accounts with balances in excess in March ation s Associ an Banker Americ $10,000. A small sample survey by the s deposit saving of t 60 percen about 1982 indicated that at commercial banks 0. $10,00 of excess in were t percen balances were in excess of $5,000 and 38 es balanc NOW total of ths three-four The latter survey also indicated that almost 0. $10,00 of excess in were were in excess of $5,000 and almost half   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -5-  ce. :Minimum Subsequent or Maintenance Balan  To accommodate occasional  der establishing a minimum mainwithdrawals, the Committee may wish to consi deposit requirement. tenance balance lower than the initial  MMMFs typically  below the initial balance requirement. permit shareholders to maintain balances ument, however, would be tantamount to A similar provision for the new instr t for those depositors in a position to reducing the initial balance requiremen anging assets. meet it by borrowing or temporarily rearr  Moreover, considera-  um balance requirements for other tions of simplicity and consistency with minim e balance on the new instrument be deposit accounts suggest that the maintenanc the same as the initial minimum. have reduced the balance in In order to determine if withdrawals minimum, the Committee must specify the the proposed account below the required maintained. The Committee could require period over which the minimum is to be as an average over some interval (e.g., a that the minimum balance be maintained accounts failing to meet this requireweek) or that it be met at all times. For stipulate that they be closed or, ment, however defined, the Committee could ning balance not exceed the applicalternatively, that the rate paid on the remai tutions would, of course, be free to impose able savings deposit ceiling. Insti more restrictive provisions. Maturity.  place a high To the extent that savings account holders  new account to have a fixed maturity value on liquidity, requiring the proposed ing it were short, might limit internal shift or required notice period, even if from savings accounts.  might be The resultant illiquidity compared to MMMFs  ance of the deposit instrument. offset by the convenience and insur  Moreover,  ates that the shorter the maturity the greater the Federal Reserve staff indic Therefore, the Committee staff suggests two are its monetary policy concerns.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -6(2) in order to provide flexibility to options: -(1) a 7-day instrument, or een of an instrument with any maturity betw issuing institutions, authorization 90 days.1 7 and 31 days, or perhaps between 7 and itutions could be permitted Whatever the maturity selected, the inst (1) a time deposit open account (which to offer the account in two versions: al rced notice requirement before withdraw has no specific maturity) with an enfo , the a time deposit with specific maturity equal to the period selected, or (2) e rolled over (after perhaps a 1-day grac balance of which would be automatically ruct otherwise. period) if the depositor did not inst  Discussions with deposi-  of opinion regarding the operational tory institutions suggest a wide range unt; some can handle such an account difficulties of a short-term notice acco do so only at great inconvenience. with little difficulty, while others can greater flexibility to individual instiAuthorizing both versions would permit tutions. Rate.  of and against imposition There are several arguments in favor  of a rate ceiling on any new deposit.  The major arguments for a ceilingless  account are: (1)  of the account; a ceiling might limit the competitiveness  (2)  all deposit rate one objective of the DIDC is to remove ceilings by 1986;  (3)  institutions do not the available evidence suggests that price irrationally;  opposed to a minimum maturity) is nescessary 1/ A specific or maximum maturity (as to or deregulate all ceilings for deposits equal if the Committee does not wish to gua dere ed tion. In March, the Committee adopt above the proposed minimum denomina sits depo which would effectively be superseded for lation schedule based on maturity mum the new account unless a specific or maxi above the minimum denomination on maturity were adopted.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -7-  a as compared to an account with a market-indexed ceiling, l interna ate ceilingless account will not further exacerb shifts from savings accounts, since the savings account ceiling is so far below the market rate;  (4)  there is evidence that, in the market for competitive shortrate term instruments, virtually all issuers pay the ceiling less pay and if there were no ceiling some institutions might and rate; and some more than what would have been the ceiling  (5)  pay, institutions need the flexibility in the rates they can regain to especially in the early months of the new instrument, depositors lost to MMMFs and other instruments.  (6)  are: The major arguments for imposing an indexed ceiling s may because of MMMFs, the competition for short-term deposit experience be so intense as to make irrelevant the historical y that irrational pricing has not occurred in other maturit categories;  (1)  (2)  of the operating losses of thrifts may necessitate restraint rate competition in the short run; and  (3)  a ceiling would be necessary if the Committee intends to establish a rate differential between banks and thrifts.  rate ceiling, the ceiling should If the Committee chooses to impose an interest account competitive. move fairly closely with market rates to make the  There  would need to address, including are several other issues that the Committee rate), the relationship of the the choice of a base rate (e.g., 91-day bill the ceiling would change, ceiling to the base rate, the frequency with which and compounding provisions.  These matters are discussed more fully in the  appendix. Rate Differential.  In deciding whether to impose a rate ceiling and  thrifts, the Committee may wish whether to establish a rate differential for 91-day account at the March 22 meeting to review its objectives in adopting the to prepare additional short-term deposit and its purpose in directing Lhe staff proposals.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  to As noted earlier, the Committee adopted the 91-day account  -8institutions vis-a-vis MMNFs, and enhance the competitive posture of depository deposit flows which were espeit imposed a rate differential to enhance thrift cially weak compared to commercial banks.  Thrift deposit flows have improved  account with a differential, subsequent to the May 1 introduction of the 91-day responsible for that improvealthough the extent to which the 91-day account is ment cannot be determined. a position to meet It should be noted that, for those depositors in proposed account may be equally the minimum denomination balance requirement, the ts than is the 91-day account, or more attractive to consumers in most respec the Committee. depending on the other specific features chosen by  If so, the  have gone to the 91-day new account may attract funds that otherwise would action in establishing a account, and the intended effects of the Committee's considerably. differential on the 91-day account may be diminished  If a differ-  er whether it will apply to ential is imposed, the Committee should also consid IRA/Keogh and public unit deposits. Additional Deposits.  Flexibility to accept additional deposits to  itive with MMMFs, but would the proposed new account would make it more compet additional funds remain on deposit raise the problem of how to assure that the for the prescribed maturity or notice period.  With regard to fixed-maturity  either to permit additional term deposits, the simplest approaches would be additional deposits at any deposits only at the time of renewal or to allow time.  tee could permit such With respect to additional deposits, the Commit  maturity date or, alternatively, funds to be withdrawn at the next scheduled establish procedures assuring that could require the issuing institutions to account for at least the prescribed each additional deposit remains in the   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -9-  maturity period.1  ly appropriate for This latter approach might be particular  es for specific withdrawals introduces notice accounts, where the timing of notic additional complexities.2  Reserve For monetary policy reasons, the Federal  permit additional deposits to the staff recommends that the Committee not triggered automatically by the level proposed new account if such deposits are account. of balances maintained in this or any other Withdrawals.  bition on the The staff recommends no regulatory prohi  proposed new account, provided that size or number of withdrawals from the the minimum maturity or notice period. the funds to be withdrawn have satisfied n has received notification, withdrawals For notice accounts, once the institutio r of calendar days has passed. Insticould occur only after the specified numbe minimum notice, which could be given tutions would have to require at least the mail or messenger, in person (over-theby telephone or other telecommunication, ing order. counter or through an ATM), or by stand  For term accounts, withdrawals  fixed maturity accounts include, but 1/ Examples of acceptable procedures for are not limited to, the following: the maturity of the original deposit. (1) Each deposit would re-initialize t-in-first-out" accounting to (2) Each deposit would be subject to "firs ained for the term of the assure that each additional deposit was maint (3)  account. set up an "accounting cycle" equal An institution would be permitted to nt. New deposits received accou ed to the original term of the offer be regarded as maturing at after the accounting cycle had begun would cycle. In effect, each deposit the end of the next complete accounting following cycle. would be on "hold" until the end of the  for notice accounts include, but are not 2/ Examples of acceptable procedures limited to, the following: l any notice to withdraw that had (1) Any additional deposit would cance ication called for a longer already been received, unless that notif d. e remaining interval than the minimum notic perio deposit would be each e that assur to nting accou -out" (2) "First-in-first d. maintained for at least the minimum notice perio cycle equal to the notice interval. (3) Establishment of an accounting of an accounting cycle, notice For funds received after the beginning or after the beginning of the of withdrawal could be given only at tunity to give notice on next accounting cycle. In effect, the oppor red until the beginning of the any particular deposit would be defer next accounting cycle.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -10-  could be made by any of the same methods.  Any funds not withdrawn by the end  of the grace period would automatically roll over. l Reserve staff In view of its monetary policy concerns, the Federa new short-term account believes that the Committee should not authorize any payments. that can be used in connection with third-party  Thus, even though  of a new instrument relative such an approach would limit the attractiveness that the Committee prohibit both to MMMFs, the Federal Reserve staff suggests ly on the account and third-party negotiable drafts that can be drawn direct ers by changes in balances of the automatic triggering of deposits and transf this or any other account.  r, The Federal Reserve staff would not object, howeve  deposits, transfers, or payto allowing the depositor to initiate unlimited ctions, so long as such ments by telephonic notification or standing instru maturity or notice period protransactions were in compliance with minimum visions. Early Withdrawal Penalty.  In view of the short maturity or notice  prohibit early withdrawals under on the proposed account, the Committee could any circumstances. penalties.  withdrawal This approach would eliminate the need for early  early withdrawals, it If the Committee chose instead to authorize  ies: might establish either of the following penalt  (1) loss of earned interest  the standard penalty (loss of interest (as adopted on the 91-day account) or (2) ty, which could require invasion that would have been earned if held to maturi of principal).1  more restrictive penalty Once again, institutions could adopt a  or prohibit early withdrawals altogether.  relatively small for a partial withdrawal 1/ Either of these penalties could be interest would be forfeited would be small since the number of days for which account. owing to the short-term nature of the   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -11-  Miscellaneous Restrictions.  The staff recommends that the Committee  itors that are designed to help consider whetherto prohibit loans to depos ces. depositors meet initial or maintenance balan  If such loans were permitted  requirements. they would undercut the purpose of these  A second issue relates  be permissible on NOW or demand to overdraft privileges, which would still transferable. deposits to which the new account is  In order to prevent devices  or notice requirements, however, designed to circumvent the minimum maturity ring that the rate charged on such the Committee may wish to consider requi charged for depositors that do overdrafts be substantially equal to the rate not hold the proposed account. Eligibility.  ns be The staff recommends that depository institutio  nt to all depositors. permitted to offer the proposed new accou Effective Date.  ns In order to provide sufficient time for institutio  ign systems, the staff recommends that to plan marketing strategies and redes be September 1, 1982, about two months the effective date of any new instrument decision. after announcement of the Committee's  The staff believes that further  necessary because the terms of the public comment on this instrument is not sive public comment period preproposed deposit were the subject of an exten Committee's decision as to the viously conducted by the Committee, and the deposit would be within the scope of specific characteristics of the proposed public comments received to date. the Committee's previous proposals and   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -12-  Attachment A SUMMARY OF DECISION VARIABLES FOR A PROPOSED SHORT-TERM DEPOSIT ACCOUNT  I.  Rate 1.  No ceiling.  2.  of thrifts (see Indexed ceiling with no differential in favor Attachment B if this option is selected).  3.  thrifts (see Indexed ceiling with a differential in favor of Attachments B and C if this option is selected).  II.  Denomination 1.  Initial minimum balance.  2.  Maintenance minimum balance.  3.  calculated. Period over which maintenance balance is to be  4.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  a.  I day.  b.  1 week.  c.  1 month.  d.  the account. Period equal to maturity (or notice period) of  e.  Institutions' choice of above.  m. Action to be taken if balance falls below minimu a.  ceiling or to zero) Rate reduced (e.g., to applicable passbook minimum maintenance until new deposits bring balance up to the balance.  b.  e must be paid to Account must be closed and remaining balanc t of the depositor; depositor or transferred to another accoun ed to re-open account. initial minimum balance would be requir  -13-  III.  Maturity 1.  e range (e.g., 7 to 31 Specific (e.g., only 7 days) or a permissibl days or 7 to 90 days). enforced notice, specific term, or both.  2.  Form:  3.  period (e.g., 1 business For term accounts, the length of the grace day) before automatic rollover.  IV.  Provisions Regarding Additional Deposits 1.  For fixed-maturity accounts. a.  (or by the end of New deposits permitted only at maturity the grace period).  b.  alizing the maturity. New deposits permitted without re-initi  c.  to the above, that Any procedure, including but not limited the account for at assures that each new deposit remains in least the prescribed maturity period.  2.  For notice accounts:  any procedure that assures that additions  the notice period. to the account are maintained for at least 3.  V.  er account. Sweeps into the proposed account from anoth a.  Permitted.  b.  Prohibited.  Notice and Withdrawal Provisions 1.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Possible restrictions. a.  it for required Amount withdrawn must have remained on depos d measured from time maturity or notice period (notice perio institution receives notification).  b.  drawn directly on the No withdrawal by third-party draft proposed account.  -14-  red by the No sweeps to another account automatically trigge  c;  t or any level of the balance maintained in the new accoun other account. 2.  3.  Permissible means of delivering notice. a.  Telephone or other telecommunication.  b.  Mail or messenger.  c.  In person (including ATM).  d.  Standing order.  Permissible forms of payment. a.  Check or cash to depositor.  b.  to third Cash, draft, or electronic transfer by institution parties.  c. VI.  Transfer to any other account held by the depositor.  Early Withdrawal Penalty 1.  Early withdrawal prohibited.  2.  of: Early withdrawal permitted but with penalty a.  Loss of earned interest.  b.  if funds withLoss of interest that could have been earned period), redrawn had been held to maturity (or for notice quiring invasion of principal.  VII.  Possible Miscellaneous Restrictions 1.  l or maintenance balances. Prohibit loans to depositors to meet initia  2.  deposit accounts to Require that overdraft rate on NOW or demand   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  transferable not be which the balances in the new account are afts for depossubstantially lower than the rate on such overdr t. itors that do not hold the proposed accoun  -15-  3.  ility. Prohibit transferability and/or negotiab  4.  that use the account as Prohibit loans to the account holder minimum loan rate would collateral. (Under existing regulation, on the deposit.) be 1 percent over the rate being paid  VIII.  Eligibility of Depositors 1.  No restrictions.  2.  unts (i.e., individuals and Limited to those eligible for NOW acco certain nonprofit organizations).  3. IX.  Limited to individuals only.  Effective Date   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -16-  Attachment B G SUMMARY OF DECISION VARIABLES IF AN INDEXED CEILIN MENT IS IMPOSED ON THE PROPOSED SHORT-TERM INSTRU  I. II.  III. IV.  average, discount basis). Base Rate (e.g., the 91-day bill rate auction Relationship of the Ceiling Rate to the Base Rate A.  Spread from base rate.  B.  4-week averaging option, as on MMC.  Frequency of Changes in Ceiling Rate to Ceiling Changes Adjustment of Rates Payable on Existing Accounts A.  ceiling or maintain Allow institutions either to adjust to the new opened or rolled the rate established at the time the account was over.  B.  ng accounts fixed Require institutions to keep the rates on existi until they roll over.  C.  on existing accounts Require institutions to reduce the rates paid s or the notice if the ceiling falls before the account mature period has expired.  V.  Compounding A.  Permit without restriction.  B.  account or length of enLimit compounding period to maturity of forced notice period.  VI.  Miscellaneous Issues A.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  or current holders of the May institutions offer RPs to future offered to other customers? new deposit at a rate in excess of that  -17-  B.  ing rule May premiums be offered on the account--if so, exist period, or (i.e., two per account per year), at each rollover no more than, say, four times a year?  C.  account? May fees be paid to third party brokers for this   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -18—  Attachment C SUMMARY OF ADDITIONAL DECISION VARIABLES IF A DIFFERENTIAL IS IMPOSED ON THE CEILING RATE FOR THE PROPOSED NEW SHORT—TERM INSTRUMENT  I.  points more than Size of Differential (e.g., thrifts can pay 25 basis commercial banks).  II.  III.  Duration of Differential A.  Permanent.  B.  Temporary, e.g., one year.  eliminated Conditions Under Which Differential is Eliminated (e.g., weeks and when base rate is below 9 percent for four consecutive utive weeks). reimposed when base rate exceeds 9 percent for 4 consec  IV.  ts Applicability of Differential to Special Types of Deposi A.  IRA/Keogh deposits.  B.  Governmental unit deposits.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  ,  APPENDIX ISSUES RELATING TO DETERMINATION OF A CEILING RATE  If the Committee imposed an indexed ceiling--with or without a differential--it would have to address several additional issues. include:  These  the choice of a base rate, the relationship of the ceiling to the  base rate, compounding provisions, the frequency with which the ceiling rate changes, and whether rates payable on existing account balances may be adjusted when the ceiling changes. The staff would recommend using the 91-day bill rate (auction average, discount basis) as the base rate, with or without any 4-week averaging adjustment such as occurs on the MMC.  The ceiling rate could then be set above,  equal to, or somewhat below the base rate. A major consideration in establishing a ceiling is the relationship between the ceiling and yields on MMMFs and other open market instruments. The insurance and convenience aspects of a deposit instrument are valued by many individuals, suggesting that a ceiling somewhat below these alternative yields would still enable the new account to attract funds.  For illustrative  purposes, Chart 1 displays the historical rate spread--measured on both a weekly and quarterly average basis--that would have prevailed since 1979 between the average MMMY yield and the rate on a short-term account if the ceiling had been equal to the 91-day bill rate (quoted on a discount basis).  Even though  management fees are deducted, the average MMMF yield tends to be higher because most of the assets held by these funds are private securities yielding higher rates of return.  The chart indicates that even with daily compounding a deposit  rate ceiling equal to the bill rate would have allowed MMMFs to pay, on average, over 50 basis points more than the depository institutions.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -  A-2  notes that it would be From a practical point of view, the staff effectively on an instrument with extremely difficult to prohibit compounding a short maturity.  ly must pay out On a fixed-term account, institutions legal  ce in the account is rolled or credit interest at maturity, even if the balan over automatically. flexibility.  hat more On a notice account, the Committee has somew  and compounding of It could, for example, limit the crediting  interest to periods of one quarter or more.  If the Committee authorized both  iction on compounding for notice notice and fixed-term accounts, any restr als between the two; it is likely, accounts would result in yield differenti around any such restriction that however, that institutions would invent ways are difficult to anticipate.  g is Since the primary concern about compoundin  suggests that the Committee address its effect on the cost of funds, the staff relationship between the ceiling and this issue in its consideration of the the rate base.  at Treasury bill In this regard, Table 1 illustrates that  add between 37 and 77 basis points to rates of 12 percent, compounding would ency of the compounding. the nominal ceiling depending on the frequ ceiling rate involves the One mechanical issue with respect to a paid on existing account balances rules that would govern adjustments of rates ng. to changes in the interest rate ceili  The Committee could, for example,  r to change to the new ceiling or to allow institutions the discretion eithe the account was opened or rolled maintain the rate established at the time require that institutions maintain over. Alternatively, the Committee could account was opened or rolled over. In the rate established at the time the d, of an interval equal to the notice perio any event, at maturity or at the end change the rate on an existing account the institution would be required to rate then in force for new deposits. balance if it exceeded the ceiling   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  ft #  -  A- 3 Chart 1 SPREADS BETWEEN YIELDS ON MMMFs AND A HYPOTHETICAL SHORT-TERM DEPOSIT  li Percent #11#111/  , Imolm. •,  8  MMNF Rate less Deposit Rate (Weekly data) 6 8......•  4  I  .•1=0  er\ANIVIlv  vAA I  \ ,  + _  ...... 2  4 Percent — 4  , ...MM.  MMMT Rate less Deposit Rate (Quarterly average data)  3  anaml  2  friM#  — 1 ,..mMID  + 0 _  _. 1 IIIMMII  2 MMIMMI, 1  ,MID  1 1/  -  1  I  3  1982 1981 1980 1979 equal ceiling a to ding correspon yield effective fully the is Deposit rate basis. discount average auction rate, bill Treasury to the 91-day   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  A-4 Table 1 EFFECTIVE YIELDS CORRESPONDING TO A 12 PERCENT NOMINAL CEILING FOR VARIOUS COMPOUNDING PERIODS--365/360 BASIS  Type of Compounding  Effective Rate  Increased Yield Due to Compounding  Percent of the Continuously Compounded Increase  ---- percent per annum ---100  1)  Continuous  12.938  .771  2)  Daily  12.935  .768  99+  3)  Weekly  12.922  .755  98  4)  Quarterly (91 day)  12.734  .567  74  5)  Semi-annual (182 days)  12.538  .371  48  6)  No compounding!'  12.167  1/  The fact that the effective rate is about 17 basis points higher than the nominal rate even with no compounding is due to the artificial year.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  0  1  FEDERAL DEPOSIT INSURANCE CORPORATION, Washington.D.C. 20429 OFFICE OF THE CHAIRMAN  June 15,Q.9824-Z -11 C—.  07 c ) >  7.0  rr  =c)c)  rn  cr) rri  M C.)  The Honorable George Bush President of the Senate United States Senate Washington, D.C. 20510  >  az  ....1.  .•  I am hereby transmitting our report on the economic viability of depository institutions as required by Section 206 of the Depository Institutions Deregulation and Monetary Control Act of 1980.  ncerely,  William M. I a c Chairman  Enclosure  CC: • All DIDC Members   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Honorable Paul Volcker Chairman, Federal Reserve Board  rr  ri (.1)  •Fi.  VI  =  N.  Sir:  C ")  1982 REPORT TO CONGRESS ON THE ECONOMIC VIABILITY OF DEPOSITORY INSTITUTIONS (AS REQUIRED BY SECTION 206 OF THE DEPOSITORY INSTITUTIONS DEREGULATION AND MONETARY CONTROL ACT OF 1980)  By William M. Isaac, Chairman Federal Deposit Insurance Corporation  Introduction  Section 206 of the Depository Institutions Deregulation and Monetary Control Act of 1980 (P.L. 96-221) mandates that each member of the Depository Institutions Deregulation Committee (DIDC) separately report to Congress annually on issues relating to the economic viability of depository institutions.  This report contains our comments and recommendations on various  issues which the DIDC faces in its efforts to eliminate deposit interest rate ceilings at depository institutions. The task facing the DIDC is made difficult by important but frequently conflicting objectives.  In our deliberations we must not lose sight of the  benefits from deposit rate deregulation.  Interest rate ceilings force many  depositors to earn a below-market return on their investments and these rate restrictions have placed all depository institutions at a competitive disadvantage in the financial services industry.  At the same time, however, we  must give due consideration to the earnings position of many thrift institutions.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -2Let me turn to the specific issues which we were asked to address in Section 206 of P.L. 96-221.  After discussing these issues, I will outline a  comprehensive deregulation program which we feel deals with the fundamental problems facing the banking and thrift industries.  The Appendix contains a  summary of recent DIDC policy actions.  An Assessment of Whether the Removal of Any Differential Between the Rates Payable on Deposits and Accounts by Banks and Those Payable by Thrift Institutions Will Adversely Affect the Housing Finance Market or the Viability of the Thrift Industry  Relative Importance of the Differential The instruments offered by depository institutions which carry a rate differential in favor of thrift institutions are shown in table 1.  Overall,  the importance of deposits subject to a differential at thrift institutions has been steadily declining (see table 2).  We would expect this decline to  continue as those deposits subject to a differential shift into alternative higher-yielding instruments or leave thrift institutions altogether. Fixed-ceiling time and savings deposits.  Fixed-ceiling time deposits have  been declining in importance for the past several years and the low rate ceilings on these deposits, relative to market rates, will insure that these deposits will continue to diminish in importance in the future. deposits declined steadily in importance over most of 1981.  Passbook  Although factors  such as sharp declines in market interest rates and end-of-the-quarter interest crediting have resulted in slight increases in passbook balances, this general outflow trend will likely continue. Small Savers Certificates (SSCs).  SSCs have increased substantially in  importance at thrift institutions since the 12% interest rate "cap" was removed on August 1, 1981.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Allowing institutions to pay a market rate on this  -3Table 1.  Maximum interest rates payable on time and savings deposits at federally-insured depository institutions.  Account Type  Commercial Banks  S&Ls and MSBs  Savings Deposits Negotiable Order of Withdrawal (NOW) Accounts  5.25%  5.50%  5.25  5.25  Fixed-Ceiling Time Deposits by Maturity: 14 to 89 days 90 days to 1 year 1 to 2-1/2 years 2-1/2 to 4 years 4 to 6 years 6 to 8 years 8 years and over  5.25 5.75 6.00 6.50 7.25 7.50 7.75  n.a.a 6.00 6.50 6.75 7.50 7.75 8.00  Variable-Ceiling Time Deposits by Maturity: 91-day time deposit  6-month Money Market Certificate . . 12-month All Savers Certificate 30-month to 3-1/2 year Small Savers Certificate  Ceiling-Free Time Deposits by Maturity: 18-month or more individual retirement accounts and Keogh (H.R. 10) plans 3-1/2-year time deposits Time deposits with denominations of $100,000 or more  ..  91-day Treasury bill 91-day bill rate minus 25 basis rate points 6-month Treasury bill rate plus 25 basis pointsb 70% of 12-month Treasury bill rate 2-1/2 year Treasury security rate minus 25 basis points  2-1/2 year Treasury security rate  Not Limited Not Limited  Not Limited Not Limited  Not Limited  Not Limited  a n.a. signifies account categories generally not available at S&Ls and MSBs. bA rate differential in favor of thrifts is imposed when the 6-month bill rate drops below 9 percent.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  _14_  Table 2.  Relative Proportion of deposits at FSLIC-insured S&Ls and all MSBs which are subject to a differential.a  Percent of Total Deposit Balances  Time Period  (a) Passbook Savings Deposits S&Ls MSBs  1981 January February March April May June July August September October November December  19.9 19.5 19.9 19.6 19.0 19.1 18.8 18.1 18.1 17.4 17.4 17.8  1982 January February March  17.6 17.3 17.4  (b) 30-month Small Saver Certificates S&Ls MSBs  (c) Fixed-Ceiling Time Deposits S&Ls MSBs  34.3  10.6  8.6  33.7 33.5  10.8  8.9  33.5 33.0 32.4 32.5 31.6 31.0 30.4 30.2 30.4  11.2 11.7 11.6 11.9 12.1 13.3 15.1 17.0 18.0 18.7  9.1 9.5 9.6 9.6  9.8  17.6  10.8 12.0 12.9 13.6 14.1  30.4 30.1 30.0  19.6 20.2 21.0  14.9 15.3 15.8  22.6 21.6 21.1 20.3 19.3 18.9  Total Deposits Subject to a Differential (a + b + c) S&Ls MSBs  53.1 51.9 52.2 51.6  64.7 63.6 62.9 62.9  16.4 15.8 14.0 13.6 12.9  21.8 21.0 20.3 19.9 19.5 19.2 18.5 17.7 16.8 16.1 15.3 14.8  49.9 49.9 48.5 47.8 49.0 48.4 49.0 49.4  62.1 61.2 60.8 60.1 59.8 59.4 59.1 59.3  11.9 11.1 10.7  14.1 13.8 13.3  49.1 48.6 49.1  59.4 59.2 59.1  Source: The Federal Home Loan Bank Board, the Federal Reserve Board, and the National Association of Mutual Savings Banks. aAs yet, no data are available on the new 91-day instrument.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -5instrument has dramatically increased its attractiveness.  At present many  consumers find it advantageous to "lock in" the relatively high yields which are currently available on this instrument.  It is not likely, however, that  the SSC will continue to grow as rapidly as it has since August 1981.  To some  extent, the SSC will be replaced by the new 3-1/2 year, ceiling-free deposit instrument which was introduced on May 1, 1982. 91-day time deposit.  This instrument was introduced on May 1, 1982.  It  has a temporary differential in favor of thrift institutions and an interest rate ceiling, for thrifts, equal to the 91-day Treasury bill rate (auction average on a discount basis).  The differential is slated to be permanently  removed on May 1, 1983, or temporarily removed in the event the 91-day Treasury bill rate remains less than or equal to auctions.  9% for four consecutive bill  The success of this instrument will depend heavily upon the level  of the 91-day bill rate relative to the rates paid on both the MMC and money market mutual fund shares, its closest competitors.  Current Plans for the Removal of the Differential The SSC, which currently has a differential, will be gradually replaced by a new ceiling-free deposit instrument.  Effective May 1, 1982 the SSC maturity  range was reduced to 2-1/2 years to less than 3-1/2 years (the old range was from 2-1/2 years to less than 4 years).  Also on May 1 a ceiling-free time  deposit with a minimum maturity of 3-1/2 years became effective.  On April 1,  1983, the SSC maturity range will be reduced to 1-1/2 years to less than 2-1/2 years and the minimum maturity on the new ceiling-free instrument will be reduced to 2-1/2 years.  Finally, on April 1, 1983, the SSC will be effectively  superseded as the minimum maturity on the ceiling-free instrument is reduced to 1-1/2 years and the minimum maturity on the SSC is not correspondingly reduced.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  4  -6The rate differential on the new 91-day instrument was imposed as a temporary measure to aid thrift deposit flows.  As mentioned previously, the  differential on this instrument is slated to be removed on May 1, 1983.  While  this differential is in effect, however, we expect that it will result in improved flows to thrift institutions.  Although it is not possible to esti-  mate its precise impact, FDIC staff analysis indicates that a 25 basis point differential in favor of thrift institutions does have an effect upon where consumers choose to deposit their funds.  Unfortunately, it is likely that  many of the benefits thrifts get from the differential will come at the expense of commercial banks.  Hardest hit will be the smaller banking insti-  tutions which provide a significant portion of mortgage and agriculture credit to rural areas. Currently, there are no plans for the removal of the differential on 1 accounts which were in existence on December 10, 1975.  However, one result  of the deregulation schedule which was passed by the D1DC at its March 22, 1982, meeting is that all fixed-ceiling time deposits in existence on December 10, 1975, will be gradually replaced by the new ceiling-free time deposit which was introduced on May 1, 1982. At this time, we do not see any immediate reason why the differential on passbook savings deposits should be removed.  Such action would only serve to  encourage a shifting of low-cost funds from thrifts to commercial banks. This would exacerbate thrift earnings problems while providing only limited benefits to the banks.  Low rate ceilings have greatly diminished passbook  1Section 102 of P.L. 94-200 requires that the differential on all accounts in existence on December 10, 1975, may not be removed without the approval of both houses of Congress.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -7accounts as an investment vehicle and, at current rate ceiling levels, passbook balances cannot be viewed as a viable source for mortgage lending. Over the long run, the thrift differential cannot be considered as desirable for either the thrift industry or the housing market.  The existence  of a differential necessarily implies the imposition of some interest rate ceiling on deposits at both thrifts and commercial banks; however, experience has shown that the long-run viability of the thrift industry will depend upon its ability to compete with alternative market investments for funds.  Even  allowing rate ceilings to float with market rates does not permit depository institutions to compete effectively with alternative investments over all phases of the interest rate cycle.  Additionally, rate ceilings drastically  limit an institution's ability to construct deposit contracts which it feels will best suit its own customers.  Recommendations for Measures Which Would Encourage Savings, Provide for the Equitable Treatment of Small Savers, and Ensure a Steady and Adequate Flow of Funds to Thrift Institutions and the Housing Market  To Encourage Savings  Lately there has been much concern over the low U.S. household saving rate, both in absolute terms and relative to other industrialized countries. Table 3 provides information on the household saving rate from 1970 to the present.  Although various cultural and structural differences make saving  comparisons between different countries somewhat difficult to interpret, the saving rate in this country has remained relatively low for several years. While reducing inflation and achieving sustained growth in the economy are most important for improving the savings outlook, some tax incentives in the Economic Recovery Tax Act of 1981 should encourage saving.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -8-  Table 3.  The National Income and Product Account (NIPA) saving rate, 1970 through the first quarter of 1982 (quarterly data are seasonally adjusted).  Time Period 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980-1 -II -III -IV 1981-I -II -III -IV 1982-1  Saving Rate 8.0 8.1 6.5 8.6 8.5 8.6 6.9 5.7 5.2 5.3 4.9 6.2 6.1 5.1 4.6 5.4 5.2 6.1 5.5  Source: U.S. Department of Commerce, Bureau of Economic Analysis, National Income and Product Accounts of the United States, Table 2.1.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -9The expansion in Individual Retirement Account (IRA) and Keogh Account eligibility on January 1, 1982, provides savers with a powerful tax incentive to save for retirement.  These funds tend to be a stable, long-term source of  funds for depository institutions.  In order both to aid these institutions in  capturing their "fair share" of these new funds and to encourage saving, the DIDC has allowed all depository institutions to offer a ceiling-free, IRA/Keogh time deposit with a minimum maturity of 1-1/2 years.  Between  December 1, 1981, when this account was first authorized, and March 31, 1982, this deposit account has attracted an estimated $7.2 billion. All Savers Certificates--which provide a federally-insured, tax-free investment--have grown in volume to $51 billion (as of April 30, 1982).  Some of  this money represents new saving which would otherwise not have occurred.  In  addition, the scheduled reduction in income tax rates should encourage people to save by increasing their disposable income. Last, but also of great importance, is the continued removal of deposit interest rate ceilings.  To date, depository institutions are able to offer  ceiling-free time deposits with maturities of 3-1/2 years and over and on certain IRA/Keogh deposits.  We feel that the continued removal of deposit  rate ceilings should go a long way toward encouraging saving by those who are reluctant to seek investment vehicles outside federally-insured depository institutions.  To Provide for the Equitable Treatment of Small Savers  During 1981 and the first quarter of 1982, the DIDC undertook several substantial actions designed specifically to aid the small saver and, at the same time, to improve fund flows into depository institutions.  On August 1, 1981,  the Committee removed the 12.00/11.75% "cap" on the Small Savers Certificate.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -10This action resulted in a substantial increase in the rate ceiling applicable to this instrument (see table 4).  This is significant for the small saver  because the SSC has no federally-regulated minimum denomination.  As a con-  sequence, many institutions offer the SSC in minimum denominations of as low as $100. The Committee has also adopted a 3-1/2 year minimum-maturity time deposit which has no interest rate ceiling.  The minimum maturity on this instrument  will decrease by one year on April 1, 1983, 1984, and 1985. „  On March 31,  1986, the minimum maturity will drop to that for time deposits in existence at that time.  Thus, by 1986, complete time deposit rate deregulation will be  accomplished.  In order that small savers are not excluded from purchasing  this new certificate, the DIDC has not imposed a mandatory minimum denomination requirement and, furthermore, depository institutions must offer this instrument in a $500 denomination. Alternatives to deposit accounts do exist for many savers (for example, money market mutual funds offer an account which earns a market rate, provides instant liquidity and some funds require minimum denominations of as low as $1,000).  However, federal insurance and convenience requirements do limit  some savers to accounts at depository institutions.  This is evidenced by the  fact that a substantial portion of passbook savings deposits are in accounts with relatively high balances.  For example, an estimated 24% of passbook  savings deposits at MSBs are in accounts with denominations of $25,000 or more.  Certainly alternatives for these savers exist.  However, for reasons  other than rates of return on their savings, they choose to remain at a depository institution.  Therefore, the only way to generally provide complete  equity to savers would be through further deposit rate deregulation.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -11-  Table 4.  Average SSC Rate Ceilings in Effect for Thrift Institutions, January 1981 through May 1982.  Time Period  Average Thrift SSC Rate Ceiline  1981 January February March April May June July Augustb September October November December  12.00 12.00 12.00 12.00 12.00 12.00 12.00 15.78 16.50 15.79 14.10 13.02  1982 January February March April May  14.24 14.77 14.23 14.30 13.89  aThe rate ceilings listed are on a simple annual basis, compounding is permitted. Commercial banks are restricted to paying a maximum of 25 basis points less than the thrift rate.  b The 12.00 percent "cap" on SSC rates was removed on August 1, 1981.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -12-  To Ensure a Steady and Adequate Flow of Funds to Thrift Institutions and the Housing Market  Deposit Flows Deposit flows at both S&Ls and MSBs deteriorated during 1981 relative to the 1980 performance.  As shown in table 5, S&Ls experienced a $25.4 billion  net deposit outflow during 1981 (excluding interest credited) while registering a net inflow of only $10.7 billion in 1980.  Relatively speaking, the  MSB experience has been somewhat worse, with net outflows of $13.8 billion in 1981 and $4.9 billion in 1980.  Although in absolute terms MSB outflows have  been smaller than those at S&Ls, the net outflows as a percentage of total deposits has been greater at mutual savings banks. To a large extent, this deterioration of deposit flows can be directly linked to the inability of thrifts to compete--due to deposit rate controls--with alternative market investments.  The consistently higher market  interest rates during 1981 relative to 1980, in conjunction with increased consumer awareness of alternative investment opportunities, has resulted in a large degree of disintermediation (see table 5).  For example, money market  mutual funds increased by $107 billion during 1981 compared to a $29 billion increase during 1980.  It is likely that deposit flow problems will continue  as long as deposit interest rate restrictions remain binding and market interest rates remain at their relatively high levels. The All Savers Certificate (ASC) has, so far, had only a slight impact upon thrift deposit flows.  This certificate attracted a substantial amount of  new money when it was first introduced in October 1981.  During that month,  S&Ls attracted $16.5 billion and MSBs $4.0 billion into ASC deposits.  Since  that time, however, ASC growth has been much slower, with average monthly   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -13Table 5.  Deposit flows at federally-insured savings and loan associations and at all mutual savings banks, January 1980 through April 1982.  S&L Deposit Flows ($ Millions)  Time Period 1980 January February March April May June July August September October November December Totals for 1980 1981 January February March April May June July August September October November December Totals for 1981 1982 January February March Aprila  Excluding Interest Credited  Including Interest Credited  MSB Deposit Flows ($ Millions) Excluding Interest Credited  Including Interest Credited  1,167 1,079 -696 -817 1,785 -169 961 1,285 6 2,550 1,461 2,055 10,668  2,035 1,823 4,345 321 3,004 5,210 2,355 2,481 5,518 3,827 2,476 7,563 40,956  -1,436 -543 -679 -1,024 242 -176 246 1 -460 -169 -227 -639 -4,863  -928 -79 930 -449 861 1,716 843 610 1,377 403 312 1,255 6,851  599 879 -2,137 -4,638 -70 -5,759 -5,538 -3,290 -3,799 1,601 -1,530 -1,723 -25,404  2,060 2,276 3,694 -2,857 1,696 317 -3,491 -1,343 2,172 3,688 481 4,717 13,411  -979 -385 -757 -2,025 -676 -1,387 -1,935 -1,542 -1,679 -65 -1,060 -1,283 -13,774  -365 296 1,224 -1,234 148 542 -1,133 -672 319 789 -188 849 574  -138 761 -1,284 -5,209  1,959 1,909 5,228 -2,547  -1,064 -233 -868 -1,800  -225 603 1,124 -800  Source: Federal Home Loan Bank Board and the National Association of Mutual Savings Banks. aPreliminary.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -14increases of only $1.1 billion at S&Ls and $0.33 billion at MSBs.  As of April  1982, ASC balances at S&Ls stood at $23.1 billion (4.4% of total deposits) and $6.0 billion at MSBs (4.0% of total deposits).  Flows of Funds to Thrift Institutions and the Housing Market Improved flows of funds into thrift institutions depend upon their ability to pay a market rate to their depositors.  Unfortunately, the heavy reliance  upon standard fixed-rate mortgages have left thrifts holding a large percentage of below-market-rate assets.  This impedes their ability to pay  market rates to depositors and still remain profitable.  The long-run solution  is to enable the thrifts to offer assets whose yields are more closely linked to current market rates. The Depository Institutions Deregulation and Monetary Control Act of 1980 ("the Act") has provided greater leeway for thrift institutions to acquire short-term assets.  The Act allows federally-chartered S&Ls and MSBs to invest  up to 20 percent of their assets in secured and unsecured consumer loans and other corporate securities.  In addition, federal MSBs are authorized to make  commercial, corporate, and business loans of up to five percent of total assets.  While this liberalization of asset powers will allow thrifts a  greater amount of diversity in their portfolios, we do not feel the Act has gone far enough. Providing the DIDC with a mandate to deregulate the liability side of the balance sheet at thrift institutions, yet not allowing for a mechanism whereby the asset portfolios are deregulated will result in a structural imbalance. Depository institutions are entering a new age which will be marked by a significant amount of deregulation and, hence, increased competition.  Shortly,  thrifts will no longer be offered the protection of deposit rate ceilings.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -15By the same token, high interest rates, technological innovations, and increased consumer sophistication have resulted in many financial innovations. Nondepository institutions have accelerated their efforts to compete for deposits, thus, further blurring the distinction between depository institutions and their close competitors.  In this emerging competitive environ-  ment, it is important that thrift institutions have the greatest amount of flexibility to compete with other financial institutions. It should be noted that certain tax incentives exist which have encouraged thrifts to emphasize home mortgage lending.  Even though these income-tax  provisions are currently of no use to the thrifts which are losing money and, therefore, not paying federal income taxes, such limitations will become binding in the future when thrift earnings improve.  In this circumstance  thrifts will be discouraged from fully implementing any new asset powers. Although thrift institutions are major contributors to housing finance, the overall performance of the housing market is also influenced by other factors.  In pursuing monetary and fiscal policy goals, the federal government  has, at times, caused competition for scarce funds in the credit markets to intensify.  During these periods, mortgage and housing activity contracts much  more sharply than activity in most other sectors of the economy.  On the other  hand, mortgage purchases by federally-sponsored credit agencies have aided housing activity, particularly during periods of tight money and high interest rates. To conclude, an adequate flow of funds to the housing market does not depend upon forcing thrifts to be residential mortgage specialists.  If pro-  viding thrifts with expanded asset powers reduces the thrift presence in the housing market, we believe that much of this slack will be taken up by other   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -16lenders.  In a stable financial environment, a greater demand for housing  finance will exist and financial intermediaries will supply the necessary funds at market rates.  Findings Concerning Disintermediation of Savings Deposits from Insured Banks and Insured Thrift Institutions to Uninsured Money Market Innovators Paying Market Rates to Savers  The growth of money market mutual funds (MMFs) has contrib uted substantially to the disintermediation of savings deposits from insured banks and thrift institutions.  It is impossible to precisely determine how much of this  dollar inflow has been due to the interest rate restrictions imposed upon depository institutions.  However, it is likely that this volume has been sig-  nificant since depository institutions currently have no viable short-term instrument with which to compete with MMFs. Table 6 shows the net monthly MMF inflows (sales minus redempt ions) for non-institutional-only funds.2  Net MMF inflows were much stronger in 1981  ($87 billion) than during 1980 ($25 billion).  In large part, this was due to  the relatively higher interest rates during 1981. MMFs will likely continue to be a principal competitor facing depository institutions throughout 1982.  New and existing MMFs are attempting to cater  to a broader spectrum of customers.  For example, Sears, in conjunction with  its subsidiary Dean Witter Reynolds, is offering a money fund which is  2 Institutional-only funds are excluded from the analysis because their high minimum denominations (typically $100,000 or over) preclude investm ent by the typical individual saver.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -17-  Table 6.  Net monthly inflows (sales minus redemptions) into noninstitutional-only money market mutual funds, January 1980 through April 1982.  Time Period  Source:   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Monthly Inflows ($ Billions)  1980 January February March April May June July August September October November December  6.94 5.62 0.61 -0.79 4.88 2.05 2.56 3.72 -0.13 1.15 -0.32 -1.09  1980 Total = 25.20  1981 January February March April May June July August September October November December  8.64 8.81 11.36 7.10 1.08 7.16 10.93 8.53 7.71 6.34 8.18 1.57  1981 Total = 87.41  1982 January February March April  5.88 -0.56 5.16 -0.63  Donoghue's Money Fund Report of Holliston, MA  01746.  -18designed to attract the relatively small saver.3  Also contributing to MMF  growth are the increasingly popular tie-in arrangements between MMFs and depository institutions.  These so-called "sweep" accounts provide a link  between a MMF and a demand or NOW account whereby excess balances from the transaction account are automatically swept into the MMF on a daily basis. Currently such services are offered by several hundred commercial banks, but plans now exist which may expand this number to several thousand. Finally, electronic funds transfer innovations will continue to increase the accessibility of MMF accounts.  A reduction in the cost and time for  transfers in and out of MMFs should enhance the liquidity of money funds and, as a result, increase their popularity.  As we have seen in the past, if de-  pository institutions are constrained as to the services which they can offer, these missing services will simply be provided by alternative institutions. The DIDC is considering a short-term deposit instrument to enable institutions to better compete with money market mutual funds (MMFs) and, at the same time, limit the adverse earnings implications which would arise from internal shifts from low-yielding passbook deposits.  Although the majority of  passbook accounts have relatively low balances (the average passbook balance at thrift institutions is estimated at $2,500), there exist many very high balance accounts.  Tables 7 and 8 list estimates of the size distribution of  passbook balances at MSBs and S&Ls; respectively.  3The Sears fund requires an initial investment of only $1,000 and additions can be made in increments of only $50. By MMF standards, these requirements are minimal. In addition, if current plans materialize, Sears MMF account holders will be able to access their accounts via any Sears retail outlet.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -19-  Table 7.  Estimated size distribution of passbook savings deposits at mutual savings banks.  Passbook Deposit Size Category  Percent of Total Passbook Balances  Under $5,000 $5,000 - $14,999 $15,000 - $24,999 $25,000 and Over  25% 34 17 24  Source: December 4, 1981 telephone survey conducted by the Federal Deposit Insurance Corporation.  Table 8.  Estimated size distribution of passbook savings deposits at savings and loan associations.  Source:   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Passbook Deposit Size Category  Percent of Total Passbook Balances  Under $2,500 $2,500 - $4,999 $5,000 - $7,499 $7,500 - $9,999 $10,000 and Over  16% 15 13 9 46  August 1980 Federal Home Loan Bank Board Survey.  -20It is likely that any short-term deposit will attract some funds from existing passbook accounts, the net effect of which could be an increase in costs to depository institutions.  A comparatively high minimum denomination  feature would limit this internal shifting.  At the same time, a minimum  denomination in the $15,000 to $25,000 range would still allow institutions to compete effectively with MMFs.  As can be seen in table 9, a substantial  proportion of MMF money held by households are in accounts with balances in excess of $25,000. As a final note, should the Committee adopt this instrument, it intends to periodically re-examine the minimum denomination feature with a eye toward its reduction.  With experience, the DIDC will be better able to judge the amount  of passbook shifting which comes with various minimum denominations.  Recommendations for Such Legislative and Administrative Actions as the Member Involved Considers Necessary to Maintain the Economic Viability of Depository Institutions  A number of measures can be taken to minimize disruptions to our financial system and to insure that the current problems we are facing do not recur in the future. First, is enactment of the Regulator's Bill to give the federal insuring agencies greater flexibility in dealing with the immediate problems facing thrift institutions. Second, is the federal override of state usury ceilings and prohibitions of due-on-sale clauses.  Although some preemptions of state usury ceilings are  contained in the Depository Institutions Deregulation and Monetary Control Act of 1980, major qualifications to these provisions add an additional element of uncertainty to the portfolio management problems facing depository institutions, especially in an unstable interest rate environment.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Prohibitions of  -21-  Table 9.  Estimated size distribution of money market mutual fund accounts held by households.  MMF Account Size Category Under $5,000 $5,000 - $9,999 $10,000 - $19,999 $20,000 - $29,999 $30,000 and Over  Source: Institute.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Percent of Total Household Balances 5% 11 19 9 56  March 11, 1981 survey conducted by the Investment Company  -22due-on-sale clauses are particularly detrimental to thrift earnings because they slow the rate of turnover of their low-yielding mortgage portfolios. Mutual savings banks currently have over 75 percent of their mortgages in assets yielding less than 10 percent. Finally, new asset powers for thrifts, such as those contained in S.1720 should be enacted.  The financial difficulties facing some thrifts may pre-  clude their immediate utilization of these powers.  However, it is important  that thrifts have broader portfolio flexibility, know their portfolio options, and plan for the future.  This will allow them to make the most efficient use  of the new funds which they will obtain as the deregulation process continues, and will also allow them to become viable competitors in the financial marketplace of the future.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -23-  Appendix: DIDC Policy Actions, January 1981 Through May 1982  Notation Vote--February 16, 1981 The Committee adopted a temporary amendment to its rule on the use of premiums which prohibited an institution from soliciting the opening of multiple accounts in order to provide more than one premium at a time.  In  addition, the Committee solicited public comment on whether this rule should be made permanent.  (This rule was made permanent in March 1982).  Committee Meeting--March 26, 1981 1.  Adopted a final rule, effective April 7, 1981, which moves the effec-  tive implementation date on ceiling rate changes on the MMC and SSC from Thursday to Tuesday. 2.  Request for public comment on phasing out interest rate ceilings by  maturity and on a proposal to remove the "caps" on the SSC.  Committee Meeting--June 25, 1981 1.  Final rule, effective August 1, 1981, whereby the Committee adopted a  schedule to phase out interest ceilings by maturity beginning with deposits with a maturity of four years or more.  Along with this action, the Committee  reduced the maturity range of the SSC from 2-1/2 years and over to 2-1/2 years to less than 4 years.  The U.S. District Court for the District of Columbia  subsequently declared invalid the above phase out action on the ground that it eliminated the differential on an account in existence on December 10, 1975. This court action, however, did not affect the SSC maturity reduction.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -242.  Final rule, effective August 1, 1981, which removed the "caps" on the  SSC.  3.  Request for public comment on a proposal to increase savings deposit  rate ceilings. 4.  Request for public comment on a proposal to allow the MMC rate ceiling  to be based upon a moving average of past and present 26-week Treasury bill rates.  Additionally, the Committee requested comment on the creation of a new  short-term time deposit.  Notation Vote--September 3, 1981 The Committee adopted regulations authorizing depository institutions to issue All Savers Certificates.  This action became effective on October 1,  1981.  Committee Meeting--September 22, 1981 1.  Adopted a final rule which would allow depository institutions, begin-  ning December 1, 1981, to offer a new ceiling-free IRA/Keogh time deposit with a minimum maturity of 1-1/2 years.  In addition, the Committee granted insti-  tutions permission for the waiver of early withdrawal penalties for conversions of existing IRA/Keogh accounts into this new account.  (This latter  action was subsequently rescinded by the Committee.) 2.  Adopted a final rule, effective November 1, 1981, which would increase  passbook savings deposit rate ceilings by 50 basis points.  This action was  subsequently postponed by the Committee.  3.  Adopted a final rule, effective November 1, 1981, which would permit  the MMC rate ceiling to be based upon a 4-week moving average of past and current 6-month Treasury bill auction rates.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -254.  Final rule to readopt the MMC and SSC ceiling rate changes which were  originally adopted on May 28, 1980.  This action was in response to a U.S.  District Court ruling that indicated the DIDC had the authority to make the rate ceiling changes, but required that the Committee first solicit public comment on such changes.  (Comment was requested by the Committee on August  13, 1981.) 5.  Request for public comment on various proposed short-term deposit  instruments. 6.  Request for public comment on a new deregulation schedule which would  phase out deposit rate ceilings by maturity beginning with the introduction of a new 3-1/2 year and over maturity deposit which would have no regulated rate ceiling.  Notation Vote--October 20, 1981 The Committee voted to postpone the 50 basis point increase in passbook savings deposit rate ceilings.  Notation Vote--November 19, 1981 The Committee acted to rescind permission for waiver of early withdrawal penalties for conversion of existing IRA/Keogh accounts into the new 1-1/2-year account.  Committee Meeting--December 16, 1981 During this meeting the Committee voted to defer consideration of the pending agenda items to the March 22, 1982 meeting.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  a)  These items were:  consideration of a plan to deregulate interest rate limitations on time deposits,  -26b)  consideration of short-term deposit instrument proposals; and  c)  consideration of the interest rate ceiling for savings deposits.  Committee Meeting--March 22, 1981 1.  The Committee adopted a final rule authorizing depository institutions  to offer--effective May 1, 1982--a $7,500 minimum denomination time deposit with a 91-day maturity.  This instrument has a rate ceiling equal to the  91-day Treasury bill rate (auction average on a discount basis) for thrift institutions and 25 basis points less for commercial banks.  This rate differ-  ential will be removed on May 1, 1983 and will be suspended any time the 91-day Treasury bill rate is  9% or below for four consecutive rate auctions.  It is reinstate during the one-year period if the rate should rise above and it is not suspended again until it falls to  9%  9% or below for another four  auction period. 2.  Final rule adopting a schedule to deregulate interest rate ceilings on  time deposits by authorizing a new time deposit instrument.  This instrument  has no federally imposed interest rate ceiling and has an initial minimum maturity of 3-1/2 years that will be reduced by one year on April 1, 1983, 1984, and 1985.  On March 31, 1986, the minimum maturity will be reduced to  that for all time deposits in existence on that date.  This instrument has no  federally required minimum denomination, however, institutions that do select to offer this time deposit are required to offer a $500 denomination. This latter restriction is designed to prohibit institutions from setting a minimum denomination so high as to exclude the small saver.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE COMPTROLLER OF THE CURRENCY  FEDERAL DEPOSIT INSURANCE CORPORATION  FEDERAL RESERVE BOARD  NATIONAL CREDIT UNION ADMINISTRATION  DATE:  TO:  Depository Institutions Deregulation Committee  FROM:  SUBJECT:  FEDERAL HOME LOAN BANK BOARD U.S. TREASURY DEPARTMENT  June 15, 1982  Short-term Deposit Proposals  DIDC Staff*  At its March 22 meeting, the Committee adopted a long-run strategy for deregulating deposit rate ceilings.  At the same time, the Committee  expressed its continuing concern about the ability of depository institutions to compete with money market mutual funds (MMMFs) and, particularly, about the weakness of deposit flows to thrift institutions.  In view of this con-  cern, the Committee adopted the 91-day, $7,500 minimum time deposit with a 25 basis point differential for thrifts.  The Committee also directed the staff  to continue efforts to design a shorter-term instrument to enhance the ability of depository institutions to compete with MMMFs.  This memorandum reviews  the basic issues involved in designing such an instrument, including monetary policy considerations, and then discusses in more detail the possible features that the Committee may wish to consider. 1  I.  The Fundamental Issues Since June 1981, when the Committee first solicited public comment  on this matter, total assets of MMMFs have grown from $127 billion to $203  This memorandum was prepared primarily by the staff of the Federal Reserve Board (Messrs. Ettin, Schwartz, McKelvey, and Ms. Glassman). 1/ These issues have been discussed in greater detail in previous staff memoranda; see particularly, "Short-term Instrument Proposals," March 15, 1982.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -2-  billion (roughly three-fifths of which is held by household investors).  During  the same period, savings deposits at depository institutions declined from $367 billion to $350 billion and total small-denomination deposits (including savings accounts) increased from $1,172 billion to $1,244 billion.  In order  to maintain their customer base, many banks and thrifts are attempting to pay depositors a market rate of interest on short-term funds through a variety of sweep arrangements.  Unless they are able to offer a short-term instrument  directly, however, depository institutions will continue to lose savings deposits to MMMFs, and sweep arrangements will continue to proliferate. The design of a new short-term instrument involves the consideration of two fundamental issues that limit the potential competitiveness of the instrument.  One concern is that a new short-term account will draw funds from  savings accounts, thereby raising institutions' costs.  As indicated previously  to the Committee, at current market rates each dollar shifted from a savings account to a short-term market rate account would require the institutions to attract $3 to $4 of external funds in order to break even.' The second issue, of concern to the Federal Reserve staff, is the effect that any new instrument would have on monetary policy.  The Federal  Reserve regards the maintenance of a distinction between transaction and other accounts as essential to its conduct of monetary policy.  If the new  account were to blend transactions and savings features, it would further blur the distinctions among accounts, making it more difficult to define and control the money supply; this would be true even if the new account were subject to  1. An extensive discussion of break-even analysis and related issues can be found in the previously cited staff memorandum, "Short-Term Instrument Proposals," March 15, 1982, pp. 14-19.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -3-  transaction account reserve requirements.  On the other hand, regardless of  any restrictions which the Committee may impose on this account, the conduct of monetary policy will continue to be complicated as nondepository institutions provide savers with instruments that combine transactions and savings features.  Currently, under the Board's Regulation D, any deposit instrument  with a maturity or required notice period of less than 14 days, or any account that can be used ordinarily to pay third parties, is subject to transaction account reserve requirements.1  The Board's statutory authority would permit  it to shorten the 14-day maturity break to accommodate a new time account, so long as that account had limited transaction features; this would make the account eligible for time deposit reserve requirements.2  The Committee is  therefore faced with the difficult task of designing an instrument which can effectively compete with other market rate instruments, such as MMMF shares, but which minimizes savings deposit outflows and, to the extent practicable, takes into account the Federal Reserve's monetary policy considerations.  1/ In particular, the Federal Reserve Board now imposes transaction reserve requirements on (1) any account with a maturity or required notice period of less than 14 days, (2) any account on which a draft can be drawn--all demand deposits, NOWs, share drafts, and similar "other checkable deposits," (3) automatic transfer accounts, and (4) any account on which more than three monthly preauthorized or telephone transfers can be made. The Federal Reserve has also asked Congress for authority to extend reserve requirements to MMMFs that serve as the functional equivalent of transactions accounts. 2/ Under the Monetary Control Act, savings deposits and nontransferable time deposits held by persons are not reservable, while transferable time deposits and time deposits held by other than natural persons are subject to a reserve requirement of zero to 9 percent; the Board's current reserve requirement on such time deposits generally is 3 percent. Even if the Board adopted a zero percent reserve requirement on any new account, member banks would still be subject to a small (and declining) reserve requirement on the aggregate of their time and savings deposits during the phase-down period of reserve requirements under the Monetary Control Act.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -4-  II.  Design of the Instrument The balance of this memorandum discusses the characteristics that a  new short-term instrument might have, taking into account the above considerations.  The key variables are the minimum denomination, maturity, and interest  rate; a number of other features are also presented for the Committee's consideration.  In addition, the Committee should be aware that limitations placed  on the new instrument to reduce costs and facilitate monetary policy will also result in operational complexities for institutions.  Attachment A summarizes  the decision variables for the new instrument. Minimum Initial Deposit.  A large minimum balance requirement would  minimize the potential for internal shifting from savings accounts, but would make the new instrument less competitive as well.'  The staff believes that  an initial minimum denomination on the order of $10,000 to $25,000 would be likely to prevent a large amount of internal deposit shifts.  In determining  the minimum initial deposit, the Committee may also wish to keep in mind: (1) the possibility of future adjustments in the minimum deposit requirement as information develops about internal deposit shifts, and (2) the desirability of reducing pressure on institutions to offer sweep accounts to MMMFs and retail repurchase agreements, many of which have been based on smaller denominations.  1/ A substantial proportion of savings deposits are in accounts with high balances. In December 1981, the FDIC indicated that 75 percent of savings account balances at MSBs were in excess of $5,000 and 41 percent were in excess of $15,000. These results were similar to a February 1982 survey conducted by the National Association of Mutual Savings Banks. In August 1980, the FHLBB indicated that 70 percent of the funds in regular savings accounts at S&Ls were in accounts with balances in excess of $5,000 and 45 percent were over $10,000. A small sample survey by the American Bankers Association in March 1982 indicated that at commercial banks about 60 percent of savings deposit balances were in excess of $5,000 and 38 percent were in excess of $10,000. The latter survey also indicated that almost three-fourths of total NOW balances were in excess of $5,000 and almost half were in excess of $10,000.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -5-  Minimum Subsequent or Maintenance Balance.  To accommodate occasional  withdrawals, the Committee may wish to consider establishing a minimum maintenance balance lower than the initial deposit requirement.  MMMFs typically  permit shareholders to maintain balances below the initial balance requirement. A similar provision for the new instrument, however, would be tantamount to reducing the initial balance requirement for those depositors in a position to meet it by borrowing or temporarily rearranging assets.  Moreover, considera-  tions of simplicity and consistency with minimum balance requirements for other deposit accounts suggest that the maintenance balance on the new instrument be the same as the initial minimum. In order to determine if withdrawals have reduced the balance in the proposed account below the required minimum, the Committee must first specify the period over which the minimum is to be maintained.  The Committee  could require that the minimum balance be maintained as an average over some interval (e.g., a week) or that it be met at all times.  For accounts failing  to meet this requirement, however defined, the Committee could stipulate that they be closed or, alternatively, that the rate paid on the remaining balance not exceed the applicable savings deposit ceiling.  Institutions would, of  course, be free to impose more restrictive provisions. Maturity.  To the extent that savings account holders place a high  value on liquidity, requiring the proposed new account to have a fixed maturity or required notice period, even if it were short, might limit internal shifting from savings accounts.  The resultant illiquidity compared to MMMFs might be  offset by the convenience and insurance of the deposit instrument.  Moreover,  the Federal Reserve staff indicates that the shorter the maturity the greater are its monetary policy concerns.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Therefore, the Committee staff suggests two  %  -6-  options:  (1) a 7-day instrument, or (2) in order to provide flexibility to  issuing institutions, authorization of an instrument with any maturity between 7 and 31 days, or perhaps between 7 and 90 days.' Whatever the maturity selected, the institutions could be permitted to offer the account in two versions:  (1) a time deposit open account (which  has no specific maturity) with an enforced notice requirement before withdrawal equal to the period selected, or (2) a time deposit with specific maturity, the balance of which would be automatically rolled over (after perhaps a 1-day grace period) if the depositor did not instruct otherwise.  Discussions with deposi-  tory institutions suggest a wide range of opinion regarding the operational difficulties of a short-term notice account; some can handle such an account with little difficulty, while others can do so only at great inconvenience. Authorizing both versions would permit greater flexibility to individual institutions. Rate.  There are several arguments in favor of and against imposition  of a rate ceiling on any new deposit.  The major arguments for a ceilingless  account are: (1)  a ceiling might limit the competitiveness of the account;  (2)  the objective of the DIDC is to deregulate;  (3)  the available evidence suggests that institutions do not price irrationally;  1/ A specific or maximum maturity (as opposed to a minimum maturity) is necessary if the Committee does not wish to deregulate all ceilings for deposits equal to or above the proposed minimum denomination. In March, the Committee adopted a deregulation schedule based on maturity which would effectively be superseded for deposits above the minimum denomination on the new account unless a specific or maximum maturity were adopted.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -7-  (4)  as compared to an account with a market-indexed ceiling, a ceilingless account will not further exacerbate internal shifts from savings accounts, since the savings account ceiling is so far below the market rate;  (5)  there is evidence that, in the market for competitive shortterm instruments, virtually all issuers pay the ceiling rate and if there were no ceiling some institutions might pay less and some more than what would have been the ceiling rate; and  (6)  institutions need the flexibility in the rates they can pay, especially in the early months of the new instrument, to regain depositors lost to MMMFs and other instruments.  The major arguments for imposing an indexed ceiling are: (1)  because of MMMFs, the competition for short-term deposits may be so intense as to make irrelevant the historical experience that irrational pricing has not occurred in other maturity categories;  (2)  the operating losses of thrifts may necessitate restraint of rate competition in the short run; and  (3)  a ceiling would be necessary if the Committee intends to establish a rate differential between banks and thrifts.  If the Committee chooses to impose an interest rate ceiling, the ceiling should move fairly closely with market rates to make the account competitive.  There  are several other issues that the Committee would need to address, including the choice of a base rate (e.g., 91-day bill rate), the relationship of the ceiling to the base rate, the frequency with which the ceiling would change, and compounding provisions.  These matters are discussed more fully in the  appendix. Rate Differential.  In deciding whether to impose a rate ceiling and  whether to establish a rate differential for thrifts, the Committee may wish to review its objectives in adopting the 91-day account at the March 22 meeting and its purpose in directing the staff to prepare additional short-term deposit proposals.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  As noted earlier, the Committee adopted the 91-day account to  -8-  enhance the competitive posture of depository institutions vis-a-vis MMMFs, and it imposed a rate differential to enhance thrift deposit flows which were especially weak compared to commercial banks.  Thrift deposit flows have improved  subsequent to the May 1 introduction of the 91-day account with a differential, although the extent to which the 91-day account is responsible for that improvement cannot be determined. It should be noted that for those depositors in a position to meet the minimum denomination balance requirement the proposed account may be equally or more attractive to consumers in most respects than are the 91-day deposits, depending on the other specific features chosen by the Committee.  If so, the  new account may at! _ict funds that otherwise would have gone to the 91-day account, and the intended effects of the Committee's action in establishing a differential on the 91-day account may be diminished considerably.  If a differ-  ential is imposed, the Committee should also consider whether it will apply to IRA/Keogh and public unit deposits. Additional Deposits.  Flexibility to accept additional deposits to  the proposed new account would make it more competitive with MMMFs, but would raise the problem of how to assure that the additional funds remain on deposit for the prescribed maturity or notice period.  With regard to fixed-maturity  term deposits, the simplest approaches would be either to permit additional deposits only at the time of renewal or to allow additional deposits at any time.  With respect to additional deposits, the Committee could permit such  funds to be withdrawn at the next scheduled maturity date or, alternatively, could require the issuing institutions to establish procedures assuring that each additional deposit remains in the account for at least the prescribed   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -9-  maturity period.1  This latter approach might be particularly appropriate for  notice accounts, where the timing of notices for specific withdrawals introduces additional complexities.2  For monetary policy reasons, the Federal Reserve  staff recommends that the Committee not permit additional deposits to the proposed new account if such deposits are triggered automatically by the level of balances maintained in this or any other account. Withdrawals.  The staff recommends no regulatory prohibition on the  size or nueier of withdrawals from the proposed new account, provided that the funds to be withdrawn have satisfied the minimum maturity or notice period. For notice accounts, once the institution has received notification, withdrawals could occur only after the specified number of calendar days has passed.  Insti-  tutions would have to require at least the minimum notice, which could be given by telephone or other telecommunication, mail or messenger, in person (over-thecounter or through an ATM), or by standing order.  For term accounts, withdrawals  1/ Examples of acceptable procedures for fixed maturity accounts include, but are not limited to, the following: (1) Each deposit would re-initialize the maturity of the original deposit. (2) Each deposit would be subject to "first-in-first-out" accounting to assure that each additional deposit was maintained for the term of the account. (3) An institution would be permitted to set up an "accounting cycle" equal to the original term of the offered account. New deposits received after the accounting cycle had begun would be regarded as maturing at the end of the next complete accounting cycle. In effect, each deposit would be on "hold" until the end of the following cycle. 2/ Examples of acceptable procedures for notice accounts include, but are not limited to, the following: (1) Any additional deposit would cancel any notice to withdraw that had already been received, unless that notification called for a longer remaining interval than the minimum notice period. (2) "First-in-first-out" accounting to assure that each deposit would be maintained for at least the minimum notice period. (3) Establishment of an accounting cycle equal to the notice interval. For funds received after the beginning of an accounting cycle, notice of withdrawal could be given only at or after the beginning of the next accounting cycle. In effect, the opportunity to give notice on any particular deposit would be deferred until the beginning of the next accounting cycle.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -10-  could be made by any of the same methods.  Any funds not withdrawn by the end  of the grace period would automatically roll over. In view of its monetary policy concerns, the Federal Reserve staff believes that the Committee should not authorize any new short-term account that can be used in connection with third-party payments.  Thus, even though  such an approach would limit the attractiveness of a new instrument relative to MMMFs, the Federal Reserve staff suggests that the Committee prohibit both third-party negotiable drafts that can be drawn directly on the account and the automatic triggering of deposits and transfers by changes in balances of this or any other account.  The Federal Reserve staff would not object, however,  to allowing the depositor to initiate unlimited deposits, transfers, or payments by telephonic notification or standing instructions, so long as such transactions were in compliance with minimum maturity or notice period provisions. Early Withdrawal Penalty.  In view of the short maturity or notice  on the proposed account, the Committee could prohibit early withdrawals under any circumstances. penalties.  This approach would eliminate the need for early withdrawal  If the Committee chose instead to authorize early withdrawals, it  might establish either of the following penalties:  (1) loss of earned interest  (as adopted on the 91-day account) or (2) the standard penalty (loss of interest that would have been earned if held to maturity, which could require invasion of principal).1  Once again, institutions could adopt a more restrictive penalty  or prohibit early withdrawals altogether.  1/ Either of these penalties could be relatively small for a partial withdrawal since the number of days for which interest would be forfeited would be small owing to the short-term nature of the account.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -11—  Miscellaneous Restrictions.  The staff recommends that the Committee  consider whether to prohibit loans to depositors that are designed to help depositors meet initial or maintenance balances.  If such loans were permitted  they would undercut the purpose of these requirements.  A second issue relates  to overdraft privileges, which would still be permissible on NOW or demand deposits to which the new account is transferable.  In order to prevent devices  designed to circumvent the minimum maturity or notice requirements, however, the Committee may wish to consider requiring that the rate charged on such overdrafts be substantially equal to the rate charged for depositors that do not hold the proposed account. Eligibility.  The staff recommends that depository institutions be  permitted to offer the proposed new account to all depositors. Effective Date.  In order to provide sufficient time for institutions  to plan marketing strategies and redesign systems, the staff recommends that the effective date of any new instrument be September 1, 1982, about two months after announcement of the Committee's decision.  The staff believes that further  public comment on this instrument is not necessary because the terms of the proposed deposit were the subject of an extensive public comment period pre— viously conducted by the Committee, and the Committee's decision as to the specific characteristics of the proposed deposit would be within the scope of the Committee's previous proposals and public comments received to date.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -12-  Attachment A SUMMARY OF DECISION VARIABLES FOR A PROPOSED SHORT-TERM DEPOSIT  I.  Rate 1.  No ceiling.  2.  Indexed ceiling with no differential in favor of thrifts (see Attachment B if this option is selected).  3.  Indexed ceiling with a differential in favor of thrifts (see Attachments B and C if this option is selected).  II.  Denomination 1.  Initial minimum balance.  2.  Maintenance minimum balance.  3.  Period over which maintenance balance is to be calculated. •  I day.  •  1 week.  •  1 month.  • Period equal to maturity (or notice period) of the account. • Institutions' choice of above. 4.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Action to be taken if balance falls below minimum.  j.  Rate reduced (e.g., to applicable passbook ceiling or to zero) until: •  new deposits bring balance up to the minimum maintenance balance.  •  new deposits bring balance up to the initial minimum balance.  -13-  •  Account must be closed and remaining balance must be paid to depositor or transferred to another account of the depositor; initial minimum balance would be required to re-open account.  • Must institutions notify the depositor on the first day the balance in the account falls below the minimum. III.  Maturity  9  Specific (e.g., only 7 days) or a permissible range (e.g., 7 to / 0  1.  days). enforced notice, specific term, or both.  2.  Form:  3.  For term accounts, the length of the grace period (e.g., 1 business day) before automatic rollover.  IV.  Provisions Regarding Additional Deposits For fixed-maturity accounts.  1.  •  New deposits permitted only at maturity (or by the end of the grace period).  • New deposits permitted without re-initializing the maturity. •.•  Any procedure, including but not limited to the above, that assures each new deposit remains in the account for at least the prescribed maturity period.  2.  For notice accounts. •  Any procedure that assures that additions to the account are maintained for at least the notice period.  3.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Sweeps into the proposed account from another account. • Permitted. • Prohibited.  -14-  V.  Notice and Withdrawal Provisions Possible restrictions.  1.  • Amount withdrawn must have remained on deposit for required maturity or notice period (notice period measured from time institution receives notification). • No withdrawal by third-party draft drawn directly on the proposed account. •  No sweeps to another account automatically triggered by the level of the balance maintained in the new account or any other account.  Permissible  2.  means41 • Telephone or other telecommunication. • Mail or messenger. • In person (including ATM). • 3.  Standing order.  Permissible forms. • Check or cash to depositor. •  Cash, draft, or electronic transfer by institution to third parties.  • Transfer to depositor's checking or NOW account. VI.  Early Withdrawal Penalty 1.  Early withdrawal prohibited.  2.  Early withdrawal permitted but with penalty of: - • Loss of earned interest.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  • Loss of interest that could have been earned if funds withdrawn had been held to maturity (or for notice period), requiring invasion of principal.  -15-  VII.  Possible Miscellaneous Restrictions 1.  Prohibit loans to depositors to meet initial or maintenance balances.  2.  Require that overdraft rate on NOW or demand deposit accounts to which the balances in the new account are transferable not be substantially lower that the rate on such overdrafts for depositors that do not hold the proposed account.  3.  Prohibit transferability and/or negotiability.  4.  Prohibit loans to the accountholder that use the account as collateral.  (Under existing regulation, minimum loan rate would  be 1 percent over the rate being paid on the deposit.) VIII.  Eligibility of Depositors 1.  No restrictions.  2.  Limited to those eligible for NOW accounts (i.e., individuals and certain nonprofit organizations).  3. IX.  Limited to individuals only.  Effective Date   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -16-  Attachment B SUMMARY OF DECISION VARIABLES IF AN INDEXED CEILING WITHOUT A DIFFERENTIAL IS IMPOSED ON THE PROPOSED SHORT-TERM INSTRUMENT  I. II.  III. IV.  Base Rate (e.g., the 91-day bill rate auction average, discount basis). Relationship of the Ceiling Rate to the Base Rate •  Spread from base rate.  •  4-week averaging option, as on MMC.  Frequency of Changes in Ceiling Rate Adjustment of Rates Payable on Existing Accounts to Ceiling Changes •  Allow institutions either to adjust to the new ceiling or maintain the rate established at the time the account was opened or rolled over.  •  Require institutions to keep the rates on existing accounts fixed until they roll over.  •  Require institutions to reduce the rates paid on existing accounts if the ceiling falls before the account matures or the notice period has expired.  V.  Compounding •  Permit without restriction.  •  Limit compounding period to maturity of account or length of enforced notice period.  VI.  Miscellaneous Issues •   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  May institutions offer RPs to future or current holders of the new deposit at a rate in excess of that offered to other customers?  -17-  •  May premiums be offered on the account--if so, existing rule (i.e., two per account per year), at each roll over period, or no more than, say, four times a year?  •   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  May fees be paid to third party brokers for this account?  -18-  Attachment C SUMMARY OF ADDITIONAL DECISION VARIABLES IF A DIFFERENTIAL IS IMPOSED ON THE CEILING RATE FOR THE PROPOSED NEW SHORT-TERM INSTRUMENT  I.  Size of Differential (e.g., thrifts can pay 25 basis points more than commercial banks).  II.  III.  Duration of Differential •  Permanent.  •  Temporary, e.g., one year.  Conditions Under Which Differential is Eliminated (e.g., eliminated when base rate is below 9 percent for four consecutive weeks and reimposed when base rate exceeds 9 percent).  IV.  Applicability of Differential to Special Types of Deposits •  IRA/Keogh deposits.  •  Governmental unit deposits.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  APPENDIX ISSUES RELATING TO DETERMINATION OF A CEILING RATE  If the Committee imposed an indexed ceiling--with or without a differential--it would have to address several additional issues. include:  These  the choice of a base rate, the relationship of the ceiling to the  base rate, compounding provisions, the frequency with which the ceiling rate changes, and whether rates payable on existing account balances may be adjusted when the ceiling changes. The staff would recommend using the 91-day bill rate (auction average, discount basis) as the base rate, with or without any 4-week averaging adjustment such as occurs on the MMC.  The ceiling rate could then be set above,  equal to, or somewhat below the base rate. A major consideration in establishing a ceiling is the relationship between the ceiling and yields on MMMFs and other open market instruments. The insurance and convenience aspects of a deposit instrument are valued by many individuals, suggesting that a ceiling somewhat below these alternative yields would still enable the new account to attract funds.  For illustrative  purposes, Chart 1 displays the historical rate spread--measured on both a weekly and quarterly average basis--that would have prevailed since 1979 between the average MMMF yield and the rate on a short-term account if the ceiling had been equal to the 91-day bill rate (quoted on a discount basis).  Even though  management fees are deducted, the average MMMF yield tends to be higher because most of the assets held by these funds are private securities yielding higher rates of return.  The chart indicates that even with daily compounding a deposit  rate ceiling equal to the bill rate would have allowed MMMFs to pay, on average, over 50 basis points more than the depository institutions.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -  A-2  From a practical point of view, the staff notes that it would be extremely difficult to prohibit compounding effectively on an instrument with a short maturity.  On a fixed-term account, institutions legally must pay out  or credit interest at maturity, even if the balance in the account is rolled over automatically. flexibility.  On a notice account, the Committee has somewhat more  It could, for example, limit the crediting and compounding of  interest to periods of one quarter or more.  If the Committee authorized both  notice and fixed-term accounts, any restriction on compounding for notice accounts would result in yield differentials between the two; it is likely, however, that institutions would invent ways around any such restriction that are difficult to anticipate.  Since the primary concern about compounding is  its effect on the cost of funds, the staff suggests that the Committee address this issue in its consideration of the relationship between the ceiling and the rate base.  In this regard, Table 1 illustrates that at Treasury bill  rates of 12 percent, compounding would add between 37 and 77 basis points to the nominal ceiling depending on the frequency of the compounding. One mechanical issue with respect to a ceiling rate involves the rules that would govern adjustments of rates paid on existing account balances to changes in the interest rate ceiling.  The Committee could, for example,  allow institutions the discretion either to change to the new ceiling or to maintain the rate established at the time the account was opened or rolled over.  Alternatively, the Committee could require that institutions maintain  the rate established at the time the account was opened or rolled over.  In  any event, at maturity or at the end of an interval equal to the notice period, the institution would be required to change the rate on an existing account balance if it exceeded the ceiling rate then in force for new deposits.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  A-3 Chart 1 SPREADS BETWEEN YIELDS ON MMMFs 1/ AND A HYPOTHETICAL SHORT-TERM DEPOSIT Percent  MMMY Rate less Deposit Rate (Weekly data) 6  4  2  ...... 2  4 Percent — 4 MMMT Rate less Deposit Rate (Quarterly average -- data)  —3  2  1  0  Im•••••  2 •11Mall• .m•  1 1/  1981 1982 1980 1979 Deposit rate is the fully effective yield corresponding to a ceiling equal to the 91-day Treasury bill rate, auction average discount basis.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  A-4 Table 1 EFFECTIVE YIELDS CORRESPONDING TO A 12 PERCENT NOMINAL CEILING FOR VARIOUS COMPOUNDING PERIODS--365/360 BASIS  Type of Compounding  Effective Rate  Increased Yield Due to Compounding  Percent of the Continuously Compounded Increase  ---- percent per annum ---100  1)  Continuous  12.938  .771  2)  Daily  12.935  .768  99+  3)  Weekly  12.922  .755  98  4)  Quarterly (91 day)  12.734  .567  74  5)  Semi-annual (182 days)  12.538  .371  48  6)  No compoundingli  12.167  1/  The fact that the effective rate is about 17 basis points higher than the nominal rate even with no compounding is due to the artificial year.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  0  •  •111 Raft 11111111110631/111111\ MINIMMA  WORLD SAVINGS June 10, 1982  The Honorable Richard T. Pratt, Chairman Federal Home Loan Bank Board 1700 "G" Street, N.W. Washington, D.C. 20552 Dear Dick: We understand that the Depository Institutions Deregulation Committee ("Committee") will consider action at its meeting on June 29 on a seven-day market rate account with a relatively high minimum denomination. It is our opinion that the account which has been proposed for comment has several serious pitfalls. The purpose of this letter is to strongly urge the Committee to consider instead the adoption of a new form of short-term deposit which we believe will be successful because it possesses all of the attributes necessary to be competitive with Money Market Mutual Funds (MMMF) and other short-term investments while avoiding certain dangers and shortcomings of the seven-day account being considered. Background It should be clear now to almost everybody that the thrift industry is in dire straits. Operating losses are substantial and net worth erosion has become critical. In addition to the earnings and net worth problems, there has been a continuing loss of savings to competitive instruments offered by unregulated, non-depository institutions. The steady movement of consumer deposits out of thrift institutions has serious overtones and perhaps even greater, and more immediate, consequences than those presented by the industry's shrinking capital. Although a magnificent job has been done in maintaining public confidence to date, there is growing evidence that a breach of that public confidence is taking place. A New Account Similar to a Money Market Mutual Fund is Needed It is absolutely essential that the Committee now authorize an account which is certain to be successful. Accordingly, we believe that this new form of deposit must possess the attributes of a product in which the public has already demonstrated an intense interest, namely, the Money Market Mutual Fund. In addition, it is imperative that the account be simple and easy to market.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  20TH STREET AND BROADWAY, OAKLAND CA._ PORNIA 94612 (415) 645-9414 MEMBER OF GOLDEN WEST FINA'.2IAL CORPORATION  The Honorable Richard T. Pratt June 10, 1982 Page Two  Objectives of a New Account If properly designed, we believe that a new form of short-term deposit should enable commercial banks and thrift institutions to successfully compete with MMMFs for the first time. Moreover, such an account should be able to stop the continuing outflow of consumer savings from depository institutions in general, and from thrift companies in particular, without an excessive transfer of funds from lower rate passbook accounts. In our opinion, the objectives of such an account should strike an appropriate balance between the need to resolve the growing cash flow needs of thrift institutions on the one hand, and the concerns over the industry's earnings and net worth problems on the other hand. Suggested Characteristics of a Competitive Deposit Based on the lessons learned by the remendous success of MMMFs and the experience we have gained from marketing a highly effective consumer repurchase agreement ("repo") program, we believe that a short-term account should possess the following characteristics in order to meet the needs and objectives discussed above: Interest Rate: The weekly average rate paid by the nation's leading MMMFs taken from Donohue's Money Funds Report or, preferably, as determined by the Federal Reserve Board. The interest rate should be fixed for a seven-day period. Differential: Thrift institutions must be authorized to pay 1/4% more than the rate proposed above. Term: Thirty (30) days, renewable automatically for successive like periods. No maturity notification should be required. Minimum Opening Balance: We recommend a $2,000 minimum opening balance. However, if the Committee chooses a larger minimum, we strongly urge a minimum balance of no more than $5,000. Minimum Maintenance Balance:  $2,000.  Withdrawals: Permitted without notice in amounts of at least $500 up to three times per month. Withdrawals may be made by check. Withdrawals of less than $500 would be subject to a $10 processing fee. Deposits: Permitted in amounts of $500 or more. vv.0_45\,,t The account proposed above offers features which are highly competitive with MMMFs and other short-term instruments in a package that is easy to understand and easy to market. In our view, this deposit will satisfy the public's demand for high   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  The Honorable Richard T. Pratt June 10, 1982 Page Three  yield, short maturity and reasonable access and thus will be very successful in halting the erosion of consumer deposits from depository institutions and in attracting new savings. At the same time, we believe that transfers of passbook savings into this new account will not be excessive or inordinately expensive given the cash flow benefits to be realized. Our experience in working with financial institution lobby groups, interested legislators and industry regulators indicates that it is likely that there will be diverse opinions regarding the appropriateness of the account proposed above. Because several of these divergent views can be anticipated, we would like to take this opportunity to discuss the two major issues expected to be raised. First, some commercial baners may argue that the interest rate on the proposed account should be deregulazed completely rather than be limited to an index and that there should not be a differential even for an interim period. Those who raise these objections are either ignorant of the current condition of thrift institutions or seek to ta.e advantage of the plight of that industry. We submit that to totally deregu - ate any new short-term account would give the comparatively healthy commercial :anking industry an insuperable advantage over the severely weakened thrift irstitutions, thereby further abbreviating the business life expectancy of many sa.ings and loans and savings banks. We believe that the key obectives of public policy for the Committee at this time should be to enable dePository institutions in general to become competitive with unregulated intermediaries and to remedy the increasingly severe liquidity problems facing thrift com:anies. We submit that the proposed account accomplishes these objectives by giving commercial banks the long-sought opportunity to compete with MMMFs on an equal fooYng. At the same time, thrift institutions will be pruviLied the means to bols7ar their cash flows and, it is to be hoped, win some positive publicity by virt_e of a return to healthy savings gains. Finally, we believe that the highly co-2etitive market rate of the account proposed makes full deregulation unnecessa-y at this time and thus forestalls until a more appropriate time an action .hich could have disastrous results for thrifts if taken now. Second, it is expected tha: some thrift company executives will argue that funds generated by the new form c: market-rate deposit we have proposed will be too costly in view of the large operating losses and declining capital of the industry. In addition, although a %ter large percentage of the liabilities of thrift institutions are already at or a:proaching market rates, objections will still be expressed by those who fear that transfers from passbook accounts to the new deposit form will be partic_larly expensive. Admittedly, the diminishini net worth positions of thrift institutions are cause for extreme concern. Howe\er, less obvious and even more dangerous, in our opinion, are the growing 1 - :Jidity problems of the thrift industry stemming from its inability to effective-. compete for consumer savings. Indeed, it is not   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  The Honorable Richard T. Pratt June 10, 1982 Page Four  inconceivable that continuing consumer deposit losses could trigger a cash flow crisis. Thus, we believe that the benefits which will be provided to the industry at a most critical time through enhanced cash flow and liquidity far outweigh the cost of the competitive product. We would also like to say a few words about concerns over the transfers from passbook accounts. These accountholders can be divided into two categories: those who will not transfer and those who will. The first group, a large core of stable passbook deposits, have not been tempted by market rates (which have been available at financial institutions since June of 1978) and are not likely to move now simply because of the advent of the proposed account. The second group uses the passbook as a parking lot for funds. As long as thrift institutions do not have a competitive product, these depositors are prime candidates for disintermediation into MMMFs or any other attractive, high-yielding instrument. This passbook customer will satisfy his needs. When his current financial instrument does not meet his requirement for yield and liquidity, he goes elsewhere. We believe that it is somewhat naive to expect the saver to continue indefinitely to be content with a 5 1/4 - 5 1/2% return when he is being bombarded with profitable alternatives. The gap in the savings and loan product line (the absence of a high-yielding, liquid account) created a vacuum that spawned a $200 billion MMMF industry. Currently, in a desperate attempt to fill this gap and to retain customers, several depository institutions have actually linked up with MMMFs and created an account which will facilitate the movement of savings funds into MMMFs through a sweep arrangement. To summarize, there is a large portion of passbook savings that is immobile. The balance of these accounts is unstable and highly susceptible to the best offer. Experience has demonstrated that it is patently shortsighted (and, at this junction, dangerous) to expect to retain savings with yields that are well below market in a market rate world. Under the present circumstances, we believe the most judicious course of action must include an attempt to retain "group two" of our passbook funds by offering an account with an attractive rate, rather than face the high likelihood of losing these funds entirely. Conclusion In the past four years since the adoption of the popular six-month money market account, regulators have been unable to design a successful short-term account. One major reason for this failure has been the effort to create a deposit which will not lure funds from passbook accounts, either through the use of long minimum terms or high minimum balances. The result of all of this effort has been the creation of a sizeable number of relatively noncompetitive products. It is now exceedingly critical that the Committee focus instead on the products being offered in the financial marketplace, in general, and specifically those offered by MMMFs, and adopt a form of deposit which will enable commercial banks and   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  The Honorable Richard T. Pratt June 10, 1982 Page Five  thrift institutions to once again aggressively compete for consumer funds without being at a disadvantage to other unregulated intermediaries. We believe that we have described the characteristics of such an account in this letter and we urge the Committee to favorably consider our recommendation. Sincerely,  Herbert M. Sandler Chairman of the Board and Chief Executive Officer HMS:jy   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  .....  ,,,... •  ty ..i. 4.4frial"? %- -•1: ; 41. 4- wgaz c14-taf 1- it "AKA44 : al a mitts :: ' - IlY toot set  ,EDV  ili To:  SP14ft  OARD F GOVERN°, OF THE ESE 't le: EM  V .cke a 1 haierman  FrogifgRAMNARD  DaVitqp2  Cfst  44  it &4444d tut 614.11  " CIPbAC ** 417 #41A7,  • . •  ;4046 444 i0:  it:  7 4441441044W 466 4244. 4 / and ithwie. Inerst I st. re vote ppn .1:I  0  thatKlifloss has already discussed this memo with you.  Gil Schwartz is a principal  author of the accompanying memo.  j th  I understand that most, and possibly all, of the other DIDC members will vote for Option I.  Attachment  DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE asiiington. 1).C. 20220 COMPTROLLER OF THE CURRENCY FEDERAL RESERVE BOARD  FEDERAL DEPOSIT INSURANCE CORPORATION NATIONAL CREDIT UNION ADMINISTRATION  FEDERAL HOME LOAN BANK BOARD DEPARTMENT OF THE TREASURY  JUN 08 1982 MEMORANDUM TO: FROM:  Distribution Steve Skancketj4  Attached for presentation to your respective DIDC member is the final notation ballot on the Establishment of Interest Rates on Accounts not Subject to Interest Rate Limitations. Please return this ballot to me as soon as your member has voted. If you expect a delay, please let me know.  DISTRIBUTION:   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  COPIES:  Eastburn Silverberg Chamberlain  Bernard L/ Miller  Arnold Schott DiNuzzo Laird  Schwartz Leemon Fenner  DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE Washington. D.C. 20220 COMPTROLLER OF THE CURRENCY FEDERAL RESERVE BOARD  FEDERAL DEPOSIT INSURANCE CORPORATION NATIONAL CREDIT UNION ADMINISTRATION  FEDERAL HOME LOAN BANK BOARD DEPARTMENT OF THE TREASURY  June 7, 1982  TO.  FROM:  Depository Institutions Deregulation Committee Steven L. SkanckeZa Executive Secretary  SUBJECT  Request for Notation Vote on Establishment of Interest Rates on Accounts Not Subject to Interest Rate Limitations  Your notation vote is requested to determine whether the Committee's actions to create new deposit accounts without Federal interest rate limitations (1) should allow depository institutions complete discretion in setting interest rates payable on such accounts, (2) should require in the deposit contract the specification of a minimum rate or the means for determining the rate, beyond which discretionary bonuses would be permitted, or (3) should require in the deposit contract the establishment in advance of a specific rate or a specific means by Which to determine the rate, beyond which no bonuses would be permitted. Current DIDC member agency rules 1/, adopted under authority since transferred to the DIDC, require that time deposits issued by depository institutions specify at the time the deposit agreement is entered into, the rate of interest paid, and if such rate is variable, that it be indexed to an independently verifiable standard. Interpretations of these rules would seem to prohibit depository institutions from paying a bonus subject solely to their own discretion or paying interest at a rate subject solely to their control. In addition, FDIC rules would require imposing an early withdrawal penalty for payment of a discretionary bonus. The Committee has been asked to review these agency interpretations and determine whether they should continue to apply. (DIDC action will not affect current agency advertising or disclosure regulations nor will it prevent agencies from issuing such further regulations they deem necessary to assure consumer protection.) A DIDC staff memorandum providing additional background is attached.  1/  National Credit Union Administration rules are not involved.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  2  not subject Please Indicate Your Vote -- For deposit categories tutions: insti itory depos s, ation to Federal interest rate limit  /17 1.  May retain complete discretion in establishing the cted interest rate and amount payable and are not restri t enden indep for ished establ es to using only rate index 1/ ol. contr their under not es business purposes or index  /7  payMust establish a minimum interest rate or amount a in bonus a pay to right able but may reserve the tution's manner determined solely in the depository insti discretion.  2.  [73.  interest Must specify in the deposit contract a specific est inter g minin deter for rd rate or a verifiable standa est inter the on, additi In rates or bonus amounts. on rate on a variable rate time deposit must be based which over index an on a predetermined schedule or or the depository institution does not have control discretion.  DIDC Member Signature Attachment:  1/  Staff Memorandum  terms such Under state laws governing contracts, material stated as the rate of interest generally would have to be the en betwe and agreed upon in order to create a contract depositor and the depository institution.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE Wa,liingtor).1).C. 20220 COMPTROLLEROFTHECURRENCY FEDERAL RESERVE BOARD  TO:  FROM:  FEDERAL DEPOSIT INSURANCE CORPORATION NATIONAL CREDIT UNION ADMINISTRATION  Depository Institutions Deregulation Cbmrittee DIDC Staff *  ACTION REQUESiED:  SUBJECT:  FEDERAL HOME LOAN BANK BOARD DEPARTMENT OF THE TREASURY  Establidhment of Interest Rates on Accounts Not Subject to Interest Rate Limitations  The Committee is asked to determine the extent of discre-  for tion that depository institutions may have in establishing interest rates deposit categories that are not subject to Federal interest rate limitations.  BACKGROUND:  At its September 22, 1981 and March 22, 1982 meetings, the DIDC  authorized new deposit account categories not subject to Federal interest rate limitations.  Inquiries from depository institutions have raised ques-  tions concerning the permissible methods of establishing interest rates on sudh accounts.  Some of the individual agencies, in interpreting their cur-  rent regulations, have indicated that deposit contracts must state explicitly either the specified rate to be paid on the deposit or the method for determining the rate.  This is to enable the depositor to verify that he or she is  receiving the correct amount of interest.  Also, sore agency rules provide  that any discretionary increase in the rate of interest paid on a time deposit constitutes an early withdrawal. Several institutions (see, for example, the attached petition of the Philadelphia Savings Fund Society) have asked whether it is permissible to establish a rate on deregulated accounts Whereby the deposit contract would state the minimum rate paid on the time deposit, but also would provide that the institution retains the right to pay a higher interest rate or bonus solely at its discretion.  Any such higher rate or bonus could depend on one  or more variables, such as the rate offered by competitors or the earnings  * This memorandum was prepared primarily by the staff of the Federal Reserve Board and the Treasury Department.  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  2  of the institution and, under some of the proposals  would be at the sole  discretion of the depository institutions.  DISCUSSION:  The staff believes that this issue is significant for all existing  and future deposits not subject to an interest rate ceiling, including the new IRA/Keogh 1-1/2-year and the 3-1/2-year minimum maturity account categories. The range of options available to the Committee includes (1) allowing depository institutions to retain complete discretion in establishing rates and amounts of interest to be paid on account categories not subject to interest rate limitations; (2) requiring a stated minimum rate or amount of interest but permitting discretionary bonuses to be paid in addition; and (3) reaffirming existing DIDC member agency (not NCUA) rules and interpretations. Adopting the first option would permit depository institutions to base their interest rate on any index or schedule they deem appropriate for the account. Thus, current FHLBB and Federal Reserve rules requiring that the index be outside the control of the institution, or the FDIC rule limiting the choice of an index to one established for an independent business purpose, no longer would apply. As a result, an institution and a depositor, for example, would be able to agree on a rate of interest that varies with the institution's cost of funds or profitability and where the relationship between the index and the rate of interest paid would be subject to the discretion of the institution.  Such a grant of  discretion, however, would not override state laws and general principles of contract law, nor would it override advertising and other consumer protection requirements now present in DIDC member agency rules and interpretations. Option two would require depository institutions to specify a minimum rate of interest, or a method for determining that rate of interest.  In addition to  this minimum an institution would retain discretion to pay a bonus for whatever purpose it would deem appropriate.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  A, variable rate would continue to be governed  3 permissible indexes upon which by FDIC, FHLBB and Federal Reserve restrictions on the rate could be based. e rules and interpreIn option three, current FDIC, FHLBB and Federal Reserv the selection of appropriate tations on setting and changing interest rates, and indexes, are maintained.  This option would prohibit the establishment of a time  any part of the amount or denosit where an institution retains discretion over bonus or to pay an unspecified rate to be paid, including the discretion to pay a amount above a minimum.  Institutions wculd have to inform the holder of a time  of interest or, if a deposit at the time an account is opened of the rate be used in computing and variable rate account, the specific method that will paying interest on the account../ ine the balance between In resolving this issue, the Committee must determ ts that may accrue to both (1) consumer protection and (2) preserving the benefi ility in developing dedepositors and institutions by allowing greater flexib posit contracts.  t depository Discretionary rate and bonus arrangements may permi  increase their deposit institutions to be more competitive and, as a result, flows.  than they would Consumers may benefit from higher interest payments  otherwise receive.  utions On the other hand, there is potential that some instit  receive an unspecified may mislead consumers into believing that they will have little or no intention rate of interest or a bonus on a time deposit but of paying the bonus.  or In addition they may decide to provide higher rates  bonuses to some depositors, but not others. ers from the allure of 1/ These rules were established to protect consum guaranteed or the not are rates higher rates of return when the higher able. Under their verifi not is rates r method of determining these highe t contracts for deposi time its in provisions, an institution may provide st if it speciof intere rate the in the payment of a bonus or an increase paid or the be will bonus the which fies the verifiable conditions under provision that a e includ could ution rate increased. For example, an instit ution's ratio instit the t if accoun an a bonus of one percent will be paid on tablished pre-es a s for a year exceed of net income to average total assets amount, such as 1.50%.  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  4  ning ceiling-free accounts If the Committee determines that its rules gover over the rate or amounts of intermean that institutions may retain discretion supersede existing agency rate-setest to be paid on such accounts, this would rules. This would seem to be ting rules, but not advertising or disclosure and March 1982 deregulation of consistent with the Committee's September 1981 categories. deposit interest rates on certain account  As a practical matter,  institutions establish at least market constraints would likely require that itors would likely learn of a minimum rate to attract depositors, and depos . institutions that do not deal in good faith  The regulatory agencies would be  osure guidelines with regard to free to issue additional advertising and discl mers against misleading practices. rate and bonus arrangements to protect consu ictions governing the establishIf the Committee believes that current restr es are needed to complement adverment of interest rates or payments of bonus ction of depositors, then the curtising and disclosure rules in assuring prote tions can be reaffirmed by the DIDC, rent agency rate regulations and interpreta fy in the deposit contract the method and institutions will be required to speci of establishing any interest paid. Choose option two which reAs an alternative, the Committee may wish to method of determining a rate be quires that a minimum rate or a verifiable institutions be given discretion to established in a deposit contract but that pay bonuses above that rate.  Attachment:   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Philadelphia Savings Fund Society Petition  006363  PUS THE PHILADELPHIA SAVING FUND SOCIETY •THE NATION'S FIRST MUTUAL SAVINGS BANK  IA. Todd Cooke Chairman  February 19, 1982  Mr. Steven L. Skancke Executive Secretary Depository Institutions Deregulation Committee Department of the Treasury 15th Street & Pennsylvania Avenue, NW Washington, DC 20220 Dear Mr. Skancke: The Philadelphia Saving Fund Society (PSFS) requests that the Depository Institutions Deregulation Committee (DIDC) issue a ruling whereby DIDC Regulations supercede FDIC Rules and Regulations to permit maximum rate flexibility for the new IRA/Keogh accounts. Specifically, PSFS requests that Section 329.4(e)(1) of the FDIC Rules and Regulations be superceded. This section has the effect of limiting the ability of financial institutions to provide market interest rates for IRA/Keogh accounts and defeats the DIDC's Intention to deregulate the interest rate ceiling for these accounts. Thus, It prohibits financial institutions from aggressively competing with non -financial institutions for retirement deposits. PSFS submits the attached petition for DIDC review and action. Implementation of PSFS' recommendation will ultimately benefit customers in that competition and not regulation will determine the interest rate paid on these deposits. Thank you for your consideration. Sincerely,   1212 MARKET STREET • PHILADELPHIA, PA 19107 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  (215) 636-6100   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  00C3G3  PSFS' PETITION TO AMEND FDIC REGULATIONS FOR IRA/KEOGH ACCOUNTS  006363 Background s to ted comments on proposed change ues req C DID the 0, 198 18, On December of and flexibility in administration r ate gre ow all to ns tio ula existing reg uested on Comment was specifically req ts. osi dep ogh /Ke IRA for competition a ceiling account should be indexed to ogh /Ke IRA ed pos pro the whether or nbt elected e 25, 1981 meeting, the DIDC Jun its At ed. lat egu der y rate or totall ative ts pending the outcome of legisl oun acc ogh /Ke IRA the on ion to defer act by Congress. revisions being considered 1981 by signed into law on August 13, 1, 198 of Act Tax ry ove Rec The Economic by providing for sting IRA/Keogh legislation President Reagan, amended exi 's. It eligibility requirements for IRA the ing and exp and s ion but higher contri sidering. issues which the DIDC was con did not address the earlier idered 1981 meeting, the DIDC recons 22, ber tem Sep its at r, yea Later in the for IRA/Keogh a new time deposit category these proposals and approved hteen ) a minimum maturity of eig (1 for ed vid pro t oun acc new acounts. The deposits ceiling, and (3) additional e rat st ere int ted ula reg months, (2) no will be permitted. without extending the maturity  The Issue  ress the issue of a staff did not adequately add PSFS believes that the DIDC regulations lings when it wrote the final deregulated interest rate cei te that C guidelines specifically sta FDI t. oun acc ogh /Ke IRA concerning the new /Keogh account, the establishes a variable rate IRA on uti tit ins ial anc fin If a the terms and to the indicator as noted in al equ be t mus e rat st intere xibility to pay This does not provide any fle t. oun acc the of s ion condit tor as a in fact, it fixes the indica , and tor ica ind the n higher tha e ceiling. "regulated" interest rat   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  00G3G3 The Law Section 1204.118(a) of the DIDC Regulations provides for the new IRA/Keogh account and reads: (a) A commercial bank, mutual savings bank or savings and loan association may pay interest at any rate as agreed to by the depositor on any time deposit with a maturity of one and one-half years or more, that consists of funds deposited to the credit of, or in which the entire beneficial interest is held by, an individual pursuant to an Individual Retirement Account agreement or Keogh (H.R. 10) Plan established pursuant to 26 U.S.C. (I.R.C. 1954) 219, 401, 408 ano related provisions. Section 329.4(e) of the FDIC Rules and Regulations state: (e) Applicatic-  T4  ---?lty to changes in interest rates or  maturities.-(1) Increases in interest rates on existing time deposits.  orner  on any tir-:  .nere is an increase in the rate of interest paid the deposit will be treated as having been  withdrawn by the depositor, prior to maturity, on the date on which the deposit begir,s to earn interest at the higher rate. An exception is granted to this regulation in Section 329.4(e) (3) of the FDIC Rules and Regulations which reads: (3) Exceptions.  The provisions of this paragraph (e) do not apply to an  increase in the rate of interest paid on a time deposit where such increase is explicitly authorized by the terms of the original deposit contract and may not be granted or withheld at the opposition of the bank.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -Nok  -3..  006363  tation of this regulation is not PSFS believes that the FDIC's interpre when they authorized the new consistent with the intentions of the DIDC IRA/Keogh account.  PSFS' Variable Rate IRA/Keoqh Account its Variable Rate IRA/Keogh account is PSFS has been advised by the FDIC that FDIC has cited PSFS' method of in violation of FDIC Regulations. The tent with FDIC Regulations. PSFS' determining the interest rate to be inconsis Rate IRA/Keogh account include the Terms and Conditions for the Variable rate paid. following statement regarding the interest be payable at a variable "During the initial term, interest will a weekly basis. The annual rate which is subject to change on each variation in the Interest Rate will vary in conjuncton with ntly issued six-month auction average discount rate for most rece Treasury Department U.S. Treasury Bills as announced by the U.S. Bill Auction. On the following each weekly six-month U.S. Treasury rest Rate will be first business day after each Auction, the Inte the period it is in redetermined and reset so as to produce, for 90% of the effect, a Percentage Yield at least equal to then-current Auction Rate."  least equal to 90%" does not conform The FDIC contends that the statement "at 329.4(e)(3) of its Rules and with the exception granted in Section is not readily ascertainable by the Regulations. The rate of interest paid customer.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  - 4-  00C363  interest rate does conform PSFS believes that its method of determining the to the DIDC Regulations, which with FDIC Rules and Regulations, in addition authorize the account for the following reasons:  for the new account so that The DIDC authorized no interest rate restrictions iations could actively banks, mutual savings banks and saving and loan assoc mers' deposits. Money Market compete with non-financial institutions for custo external or internal Funds, for example, do not index their rate to any g their rates. It was indicator. They have complete latitude in determinin flexibility to financial the DIDC's intent, we believe, to provide equal were designed to institutions. Accordingly, PSFS' Terms and Conditions y establishment of its provide this flexibility and latitude in the weekl mers that would be based on rate. It guaranteed an interest rate to its custo compete aggressively with prevailing market conditions. This allows PSFS to its, rather than lose them to non-financial institutions for customers' depos ictions. non -financial institutions because of rate restr  mer be able to determine the The DIDC also expressed concern that the custo ed. PSFS clearly states in indicator to which the interest rate would be index minimum rate would be, as its terms and conditions what the guaranteed previously quoted, on page 3.  onth auction rate is and know Customers can readily determine what the six-m earned for the period. When PSFS the minimum amount of interest that will be minimum, it is because market elects to pay a rate higher than the guaranteed nue to attract new deposits. The conditions require it if PSFS wishes to conti   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  ..,  006363 — 5 —  payment of a higher rate of interest to the customer certainly cannot be -  considered as a disservice to the customer.  In addition, PSFS makes its rates  available through branch signage, special rate "hotlines", advertising in newspapers and an insert mailed with each quarterly statement showing the interest rates for each period.  It is important for the DIDC to provide financial institutions with maximum flexibility in the competition for IRA/Keogh deposits. These deposits represent long-term, stable funds for financial institutions.  If other  restrictions are placed on these accounts, such as the interest rate restrictions identified in the FDIC guidelines, PSFS believes financial institutions will be at a major competitive disadvantage.  PSFS Recommendation PSFS has supported the DIDC in its efforts to deregulate and improve the administration of IRA/Keogh account.  PSFS recommends that the DIDC issue a  ruling whereby DIDC regulations supercede existing FDIC Regulations to provide for a truly deregulated IRA/Keogh account.  If this petition is accepted, financial institutions would be able to compete on a truly equal basis with non-financial institutions for customers' desposits.  Competition will benefit potential customers by encouraging the  payment of a market return on funds invested.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  ?  BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Date: 6/9/82 To:  Chairman Volcker  From: NORMAND BERNARD  Notation vote request.  I understand  that Neal Soss has already discussed this memo with you.  Gil Schwartz is a principal  author of the accompanying memo. I understand that most, and possibly all, of the other DIDC members will vote for Option I.  Attachment   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE washinl.zton. D.C. 20220 COMPTROLLER OF THE CURRENCY FEDERAL RESERVE BOARD  FEDERAL DEPOSIT INSURANCE CORPORATION NATIONAL CREDIT UNION ADMINISTRATION  FEDERAL HOME LOAN BANK BOARD DEPARTMENT OF THE TREASURY  June 7, 1982  TO.  FROM:  Depository Institutions Deregulation Committee Steven L. Skancke,en8 Executive Secretary  SUBJECT  Request for Notation Vote on Establishment of Interest Rates on Accounts Not Subject to Interest Rate Limitations  Your notation vote is requested to determine whether the Committee's actions to create new deposit accounts without Federal interest rate limitations (1) should allow depository institutions complete discretion in setting interest rates payable on such accounts, (2) should require in the deposit contract the specification of a minimum rate or the means for determining the rate, beyond which discretionary bonuses would be permitted, or (3) should require in the deposit contract the establishment in advance of a specific rate or a specific means by Which to determine the rate, beyond which no bonuses would be permitted. Current DIDC member agency rules 1/, adopted under authority since transferred to the DIDC, require that time deposits issued by depository institutions specify at the time the deposit agreement is entered into, the rate of interest paid, and if such rate is variable, that it be indexed to an independently verifiable standard. Interpretations of these rules would seem to prohibit depository institutions from paying a bonus subject solely to their own discretion or paying interest at a In addition, FDIC rules rate subject solely to their control. would require imposing an early withdrawal penalty for payment of a discretionary bonus. The Committee has been asked to review these agency interpretations and determine whether they should continue to apply. (DIDC action will not affect current agency advertising or disclosure regulations nor will it prevent agencies from issuing such further regulations they deem necessary to assure consumer protection.) A DIDC staff memorandum providing additional background is attached.  1/  National Credit Union Administration rules are not involved.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  2  subject Please Indicate Your Vote -- For deposit categories not ions: institut ry to Federal interest rate limitations, deposito  /-7  1.  May retain complete discretion in establishing the interest rate and amount payable and are not restricted to using only rate indexes established for independent business purposes or indexes not under their control. 1/  /-7  2.  Must establish a minimum interest rate or amount payable but may reserve the right to pay a bonus in a manner determined solely in the depository institution's discretion.  [73.  Must specify in the deposit contract a specific interest rate or a verifiable standard for determining interest rates or bonus amounts. In addition, the interest rate on a variable rate time deposit must be based on a predetermined schedule or on an index over which the depository institution does not have control or discretion.  DIDC Member Signature Attachment:  1/  Staff Memorandum  Under state laws governing contracts, material terms such as the rate of interest generally would have to be stated and agreed upon in order to create a contract between the depositor and the depository institution.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE Wa4lingt(mAW. 20220 COMPTROLLER OF THE CURRENCY FEDERAL RESERVE BOARD  TO:  FROM:  FEDERAL DEPOSIT INSURANCE CORPORATION NATIONAL CREDIT UNION ADMINISTRATION  Depository Institutions Deregulation Committee DIDC Staff *  ACTION REQUESTED:  SUBJECT:  FEDERAL HOME LOAN BANK BOARD DEPARTMENT OF THE TREASURY  Establishment of Interest Rates on Accounts Not Subject to Interest Rate Limitations  The Committee is asked to determine the extent of discre-  tion that depository institutions may have in establishing interest rates for deposit categories that are not subject to Federal interest rate limitations.  BACKGROUND:  At its September 22, 1981 and March 22, 1982 meetings, the DIDC  authorized new deposit account categories not subject to Federal interest rate limitations.  Inquiries from depository institutions have raised ques-  tions concerning the permissible methods of establishing interest rates on such accounts.  Some of the individual agencies, in interpreting their cur-  rent regulations, have indicated that deposit contracts must state explicitly either the specified rate to be paid on the deposit or the method for determining the rate.  This is to enable the depositor to verify that he or she is  receiving the correct amount of interest.  Also, some agency rules provide  that any discretionary increase in the rate of interest paid on a time deposit constitutes an early withdrawal. Several institutions (see, for example, the attached petition of the Philadelphia Savings Fund Society) have asked whether it is permissible to establish a rate on deregulated accounts whereby the deposit contract would state the minimum rate paid on the time deposit, but also would provide that the institution retains the right to pay a higher interest rate or bonus solely at its discretion.  Any such higher rate or bonus could depend on one  or more variables, such as the rate offered by competitors or the earnings  * This memorandum was prepared primarily by the staff of the Federal Reserve Board and the Treasury Department.  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  - 2-  of the institution and, under some of the proposals  would be at the sole  discretion of the depository institutions.  DISCUSSION:  The staff believes that this issue is significant for all existing  and future deposits not subject to an interest rate ceiling, including the new IRA/Keogh 1-1/2-year and the 3-1/2-year minimum maturity account categories. The range of options available to the Committee includes (1) allowing depository institutions to retain complete discretion in establishing rates and amounts of interest to be paid on account categories not subject to interest rate limitations; (2) requiring a stated minimum rate or amount of interest but permitting discretionary bonuses to be paid in addition; and (3) reaffirming existing DIDC member agency (not NCUA) rules and interpretations. Adopting the first option would permit depository institutions to base their interest rate on any index or schedule they deem appropriate for the account. Thus, current FHLBB and Federal Reserve rules requiring that the index be outside the control of the institution, or the FDIC rule limiting the choice of an index to one established for an independent business purpose, no longer would apply. As a result, an institution and a depositor, for example, would be able to agree on a rate of interest that varies with the institution's cost of funds or profitability and where the relationship between the index and the rate of interest paid would be subject to the discretion of the institution.  Such a grant of  discretion, however, would not override state laws and general principles of contract law, nor would it override advertising and other consumer protection requirements now present in DIDC member agency rules and interpretations. Option two would require depository institutions to specify a minimum rate of interest, or a method for determining that rate of interest.  In addition to  this minimum an institution would retain discretion to pay a bonus for whatever purpose it would deem appropriate.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  A variable rate would continue to be governed  a  3  ible indexes upon which by FUIC, FHLBB and Federal Reserve restrictions on permiss the rate could be based. rules and interpreIn option three, current FDIC, FHLBB and Federal Reserve on of appropriate tations on setting and changing interest rates, and the selecti inthxes, are maintained.  This option would prohibit the establishment of a time  of the amount or deposit where an institution retains discretion over any part pay an unspecified rate to be paid, including the discretion to pay a bonus or to amount above a minimum.  Institutions would have to inform the holder of a time  t or, if a deposit at the time an account is opened of the rate of interes computing and variable rate account, the specific method that will be used in paying interest on the account.1/ between In resolving this issue, the Committee must determine the balance accrue to both (I) consumer protection and (2) preserving the benefits that may ing dedepositors and institutions by allowing greater flexibility in develop posit contracts.  Discretionary rate and bonus arrangements may permit depository  institutions to be more competitive and, as a result, increase their deposit flows.  would Consumers may benefit from higher interest payments than they  otherwise receive.  On the other hand, there is potential that some institutions  fied may mislead consumers into believing that they will receive an unspeci on rate of interest or a bonus on a time deposit but have little or no intenti of paying the bonus.  In addition they may decide to provide higher rates or  bonuses to some depositors, but not others. 1/ These rules were established to protect consumers from the allure of higher rates of return when the higher rates are not guaranteed or the their method of determining these higher rates is not verifiable. Under for ts contrac provisions, an institution may provide in its time deposit speciit if t of interes the payment of a bonus or an increase in the rate fies the verifiable conditions under which the bonus will be paid or the that rate increased. For example, an institution could include a provision ratio tion's a bonus of one percent will be paid on an account if the institu ished a pre-establ of net income to average total assets for a year exceeds 1.50%. as such amount,  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  4  ceiling-free accounts If the Committee determines that its rules governing rate or amounts of intermean that institutions may retain discretion over the existing agency rate-setest to be paid on such accounts, this would supersede ting rules, but not advertising or disclosure rules.  This would seem to be  March 1982 deregulation of coAsistent with the Committee's September 1981 and deposit interest rates on certain account categories.  As a practical matter,  establish at least market constraints would likely require that institutions likely learn of a minimum rate to attract depositors, and depositors would institutions that do not deal in good faith.  The regulatory agencies would be  ines with regard to free to issue additional advertising and disclosure guidel t misleading practices. rate and bonus arrangements to protect consumers agains ing the establishIf the Committee believes that current restrictions govern to complement adverment of interest rates or payments of bonuses are needed depositors, then the curtising and disclosure rules in assuring protection of be reaffirmed by the DIDC, rent agency rate regulations and interpretations can deposit contract the method and institutions will be required to specify in the of establishing any interest paid. two whidh reAs an alternative, the Committee may wish to choose option determining a rate be quires that a minimum rate or a verifiable method of be given discretion to established in a deposit contract but that institutions pay bonuses above that rate.  Attachment:   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Philadelphia Savings Fund Society Petition  006363  PUS THE PHILADELPHIA SAVING FUND SOCIETY • THE NATION'S FIRST MUTUAL SAVINGS BANK  M. Todd Cooke Chairman  February 19, 1982  Mr. Steven L. Skancke Executive Secretary Depository Institutions Deregulation Committee Department of the Treasury 15th Street & Pennsylvania Avenue, NW 20220 Washington, DC Dear Mr. Skancke: The Philadelphia Saving Fund Society (PSFS) requests that the Depository Institutions Deregulation Committee (DIDC) issue a ruling whereby DIDC Regulations supercede FDIC Rules and Regulations to permit maximum rate flexibility for the new IRA/Keogh accounts. Specifically, PSFS requests that Section 329.4(e)(1) of the FDIC Rules and Regulations be superceded. This section has the effect of limiting the ability of financial institutions to provide market interest rates for IRA/Keogh accounts and defeats the DIDC's intention to deregulate the interest rate ceiling for these accounts. Thus, it prohibits financial institutions from aggressively competing with non -financial institutions for retirement deposits. PSFS submits the attached petition for DIDC review and action. Implementation of PSFS' recommendation will ultimately benefit customers in that competition and not regulation will determine the interest rate paid on these deposits. Thank you for your consideration. Sincerely,   1212 MARKET STREET • PHILADELPHIA, PA 19107 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  (215) 636-6100   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  00G3G3  PSFS' PETITION TO AMEND FDIC REGULATIONS FOR IRA/KEOGH ACCOUNTS  006363 Background ed changes to C requested comments on propos DID the 0, 198 18, er emb Dec On ation of and greater flexibility in administr existing regulations to allow requested on osits. Comment was specifically dep ogh /Ke IRA for on iti pet com d to a ceiling IRA/Keogh account should be indexe ed pos pro the not or r the whe the DIDC elected At its June 25, 1981 meeting, ed. lat egu der y all tot or e raL come of legislative /Keogh accounts pending the out IRA the on ion act er def to Congress. revisions being considered by ust 13, 1981 by of 1981, signed into law on Aug Act Tax ry ove Rec ic nom Eco The viding for ng IRA/Keogh legislation by pro President Reagan, amended existi nts for IRA's. It anding the eligibility requireme exp and s ion but tri con her hig ng. ues which the DIDC was consideri did not address the earlier iss C reconsidered tember 22, 1981 meeting, the DID Sep its at r, yea the in er Lat IRA/Keogh a new time deposit category for ed rov app and als pos pro se the ty of eighteen vided for (1) a minimum maturi pro t oun acc new The s. unt aco onal deposits st rate ceiling, and (3) additi ere int ted ula reg no (2) , ths mon l be permitted. without extending the maturity wil  The Issue issue of a did not adequately address the ff sta C DID the t tha es iev bel PSFS ns when it wrote the final regulatio deregulated interest rate ceilings that FDIC guidelines specifically state t. oun acc ogh /Ke IRA new the g concernin t, the a variable rate IRA/Keogh accoun es ish abl est on uti tit ins ial anc If a fin ms and the indicator as noted in the ter interest rate must be equal to ty to pay s does not provide any flexibili conditions of the account. Thi tor as a and, in fact, it fixes the indica higher than the indicator ceiling. "regulated" interest rate  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -2  00G303  The Law Section 1204.118(a) of the DIDC Regulations provides for the new IRA/Keogh account and reads: (a) A commercial bank, mutual savings bank or savings and loan association may pay interest at any rate as agreed to by the depositor on any time deposit with a maturity of one and one-half years or more, that consists of funds deposited to the credit of, or in which the entire beneficial interest is held by, an individual pursuant to an Individual Retirement Account agreement or Keogh (H.R. 10) Plan established pursuant to 26 U.S.C. (I.R.C. 1954) 219, 401, 408 ano reiated provisions. Section 329.4(e) of the FDIC Rules and Regulations state: 7 - -?lty to changes in interest rates or  (e) Applicatic-  maturities.-(1) Increases in interest rates on existing time deposits.  hnert Lnere is an increase in the rate of interest paid  on any ti -:  the deposit will be treated as having been  withdrawn by the depositor, prior to maturity, on the date on which the deposit begins to earn interest at the higher rate. An exception is granted to this regulation in Section 329.4(e) (3) of the FDIC Rules and Regulations which reads: (3) Exceptions.  The provisions of this paragraph (e) do not apply to an  increase in the rate of interest paid on a time deposit where such increase is explicitly authorized by the terms of the original deposit contract and may not be granted or withheld at the opposition of the bank.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  1  - 3-  006363  of this regulation is not PSFS believes that the FDIC's interpretation when they authorized the new consistent with the intentions of the DIDC IRA/Keogh account.  PSFS' Variable Rate IRA/Keogh Account Variable Rate IRA/Keogh account is PSFS has been advised by the FDIC that its cited PSFS' method of in violation of FDIC Regulations. The FDIC has with FDIC Regulations. PSFS' determining the interest rate to be inconsistent IRA/Keogh account include the Terms and Conditions for the Variable Rate paid. following statement regarding the interest rate le at a variable "During the initial term, interest will be payab basis. The annual rate which is subject to change on a weekly tion in the Interest Rate will vary in conjuncton with each varia d six-month auction average discount rate for most recently issue ury Department U.S. Treasury Bills as announced by the U.S. Treas Auction. following each weekly six-month U.S. Treasury Bill  On the  Rate will be first business day after each Auction, the Interest period it is in redetermined and reset so as to produce, for the of the effect, a Percentage Yield at least equal to 90% then-current Auction Rate."  to 90%" does not conform The FDIC contends that the statement "at least equal ) of its Rules and with the exception granted in Section 329.4(e)(3 ascertainable by the Regulations. The rate of interest paid is not readily customer.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  yfr  - 4-  00G363  rate does conform PSFS believes that its method of determining the interest Regulations, which with FDIC Rules and Regulations, in addition to the DIDC authorize the account for the following reasons:  new account so that The DIDC authorized no interest rate restrictions for the could actively banks, mutual savings banks and saving and loan associations ts. Money Market compete with non -financial institutions for customers' deposi or internal Funds, for example, do not index their rate to any external rates. It was indicator. They have complete latitude in determining their to financial the DIDC's intent, we believe, to provide equal flexibility designed to institutions. Accordingly, PSFS' Terms and Conditions were ishment of its provide this flexibility and latitude in the weekly establ would be based on rate. It guaranteed an interest rate to its customers that prevailing market conditions.  This allows PSFS to compete aggressively with  than lose them to non-financial institutions for customers' deposits, rather non -financial institutions because of rate restrictions.  to determine the The DIDC also expressed concern that the customer be able PSFS clearly states in indicator to which the interest rate would be indexed. be, as its terms and conditions what the guaranteed minimum rate would previously quoted, on page 3.  n rate is and know Customers can readily determine what the six-month auctio for the period. When PSFS the minimum amount of interest that will be earned m, it is because market elects to pay a rate higher than the guaranteed minimu t new deposits. The conditions require it if PSFS wishes to continue to attrac   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  6  •  006363 -5-  payment of a higher rate of interest to the customer certainly cannot be considered as a disservice to the customer.  In addition, PSFS makes its rates  available through branch signage, special rate "hotlines", advertising in newspapers and an insert mailed with each quarterly statement showing the interest rates for each period.  It is important for the DIDC to provide financial institutions with maximum flexibility in the competition for IRA/Keogh deposits. These deposits represent long-term, stable funds for financial institutions.  If other  restrictions are placed on these accounts, such as the interest rate restrictions identified in the FDIC guidelines, PSFS believes financial institutions will be at a major competitive disadvantage.  PSFS Recommendation PSFS has supported the DIDC in its efforts to deregulate and improve the administration of IRA/Keogh account.  PSFS recommends that the DIDC issue a  ruling whereby DIDC regulations supercede existing FDIC Regulations to provide for a truly deregulated IRA/Keogh account.  If this petition is accepted, financial institutions would be able to compete on a truly equal basis with non-financial institutions for customers' ipmmi  desposits.  Competition will benefit potential customers by encouraging the  payment of a market return on funds invested.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  TO:  U.S. League Executive Committee  RE:  Recommendations of Deregulation Policy Committee to DIDC  The U.S. League Committee on Deregulation Policy met in Washington on June 15 to discuss the U.S. League position in - regard to any new short-term account to be authorized by the DIDC at its upcoming meeting on June 29, 1982.  The recommendations are  as follows:  1.  Any U.S. League support for a new account is contingent upon savings associations obtaining significant new asset powers as presently pending before the Senate.  No such account should  be declared effective by the DIDC unless and until legislation is enacted providing such powers.  2.  Bearing in mind the asset powers contingency, the Committee recommends:  a.  Minimum balance of $10,000.  b.  Minimum maintenance belance of $10,000.  c.  If the account balance falls below the minimum balance,   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  the rate on the account falls to 0%.  •  Page -2d.  Provisions for a notice arrangement for withdrawals or a term as in a certificate are unacceptable because of the extreme operational and administrative problems created for associations and customers, computer problems, difficulty of enforcement, etc.  In lieu thereof, the  Committee recommends a time deposit, open account approach under which funds must be on deposit for a minimum of 7 days before they are eligible for withdrawal.  This approach also eliminates the issue of a  withdrawal penalty in that funds cannot be withdrawn prematurely. e.  The account should be structured so that it is not reservable, i.e., it would not be transactionable, no automatic transfers, no more than 3 pre-authorized transfers per month, etc.  f.  The rate on the account should be indexed to the 91-day T-Bill rate (discount basis).  The rate would change the  day following each weekly auction. No averaging of rates such as is presently authorized for six-month MMC's. h.  A thrift institution differential would be provided with banks paying 25 basis points less than the, T-Bill rate.  i.  Deposits and withdrawals could be made in any amount as determined by the institution.  k.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Compounding is permitted.  P..!sq1M  N1CCORMICK JR.. PreSidentrCE0 Stiliter Nittionai 12ritiwirer. C.,ii.inom,1 74074  . P ..ROBERT  First Vice President JAMES D. HERRiNGTON. Board Chairman Coldwater National Bank Co:dwater, Kansas 67029  Secono Vice President  TiedSurer  PAUL H BRINGGOLD. President  JAMES R. TAYLOR, President/CM McKeesport National Bank  First National Bank Cannon Falis, Minnesota 55009  McKeesport Pennspania 15%32  ,  l  i;clependent  WASHINGTON OFFICE  BANKERS ASSOCIATION OF AMERICA  1625 MASSACHUSETTS AVENUE N.W. - SUITE 202, WASHIN GTON, D.C. 20036 202/332-8980  April 14, 1982  Honorable Donald T. Regan Chairman Depository Institutions Deregulation Comm ittee Department of the Treasury 15th & Pennsylvania Ave., N.W. - Rm. 3330 Washington, D. C. 20220 Dear Mr. Secretary: The IBAA was very disappointed by the DIDC 's failure to approve a short-term competitive deposit product for banks at its March 22 meeting. We strongly urge that the DIDC immediately review this matter look ing towards the prompt authorization of such a product. Continued inaction by the DIDC will result in addi tional billions of dollars being drained out of the comm unities we serve by money market mutual funds, including the new "sweep" accounts established at banks in conjunct ion with money market mutual funds. As you know, we have not in the past endorsed a specific competitive deposit product. In this letter we urge that the Committee consider a specific product having the following characteristics:   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  1.  An account with no limitation on the freq uency or amount of deposits.  2.  A minimum initial deposit and balance requirement of $10,000. We believe that a $10,000 minimum is needed to protect existing passbook savi ngs accounts although many of our members would favo r a lower ceiling.  -2  itted ers would not be perm Third party transf by the ed rn ve ers would be go and internal transf depositor a at th accounts so s ng vi sa as s le cover same ru unt to automatically co ac e th e us t no could nd account. n on a related dema aw dr ts af dr or checks e a specific sfers would requir Such internal tran n. customer instructio mits the number on D effectively li for with4. Since Regulati minimum dollar amount stitutions of withdrawals, a in ny blished. Ma ta es be t no ed ne withdrawals drawals nimum accounts for mi h is bl ta es to e the will wish order to differentiat in s er sf an tr al or intern ok accounts. account from passbo surance the same deposit in ve ha ld ou sh t un ing a 5. The acco that consumers seek as other deposits so in an s rn can deposit fund financial market rate of retu ed is rv rally supe de fe a at t un co ac insured institution. t not have an ve that the accoun cognizes 6. It is imperati ential. The IBAA re interest rate differ ilings ce out interest rate that an account with ly ng lish this increasi members is a method to accomp AA IB ver, thousands of important end. Howe d to xe de product that is in still would prefer a carded ld wi tes rather than a competitive market ra product. pport for the ve also expressed su ha s er mb me r ou of Many March 22 meeting. airman Isaac at the Ch IC FD by d re fe of t with a proposal ish a $25,000 accoun bl ta es d ul wo al os op pr e prompt The Isaac We strongly encourag t. en em ir qu re ce ti no this letter withdrawal count described in ac w ne e th t op ad to DIDC action c. ted by Chairman Isaa and the proposal sugges Si erely, 3.  A  4 / / ber Ro (  President  NUM  4111111111A  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  cc:  r Fed Chairman Paul Volcke aac FDIC Chairman William Is att FHLBB Chairman Richard Pr an NCUA Chairman Edgar Callah r Comptroller C. Todd Conove  7 cCormic' Jr.  President  First Vice President  Second Vice President  Treasurer  -ROBER1 LkvicCORMICK JR., President/CEO ..Still‘Nater National Bank and Trust Comcany St:ilwater. Oklahoma 74074 •  JAMES D. HERRINGTON, Board Chairman  PAUL H. BRINGGOLD, President  JAMES R. TAYLOR, President/CEO  Coldwater National Bank Coldwater, Kansas 67029  First National Bank Cannon Falls, Minnesota 55009  McKeesport National Bank McKeesport, Pennsylvania 15132  WASHINGTON OFFICE  ndefleildent BANKERS ASSOCIATION OF AMERICA  1625 MASSACHUSETTS AVENUE N.W. - SUITE 202, WASHINGTON, D.C. 20036 202/332-8980  June 2, 1982  Mr. Louis H. Nevins Senior Vice President National Association of Mutual Savings Banks 1709 New York Avenue, N.W. Washington, D. C. 20006 Dear Lew: The IBAA had its annual convention in mid-March. One of the major issues before the IBAA at that time was the question of whether we should join the ABA in supporting a ceilingless $5,000 super NOW account or whether we should maintain our traditional position that all new depository institution products be indexed to appropriate market rates. The latter was the position of the IBAA on IRA/Keogh accounts. Our policy bodies agreed that the IBAA should support a "new short-term transaction product" without an interest rate differential. Our policy bodies did favor the $5,000 to $7,500 minimum. We also moved off the position that the new short-term transaction account should be indexed to appropriate market rates without fully embracing the wildcard concept since thousands of our member banks still favored indexation. A telegram setting forth our position was sent from convention to all members of DIDC, and we copied the the key members of the House and Senate Banking Committees. A copy of the letter and the attached cable which we sent to Chairman Garn is attached.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  16'  2  After the March 22 meeting and after we had received the attached letter from Chairman Volcker, the new competitive transaction account product that we sought no longer appeared to be in the cards. Looking towards forging a compromise which might be acceptable to the members of the DIDC, we began working with Chase and the consumer bankers behind their $10,000 investment account idea. Our support of this gencral concept was the last letter we wrote to the DIDC. Such an investment account would be a step in the right direction but clearly would not allow depository institutions to compete effectively with money market mutual funds in our marketplace. Sincerely,  Kenneth A. Guenther Executive Director  Enclosures cc: Mr. Arthur Edgeworth   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  An:  June 4, 1982 COMPROMISE SHORT-TERM DEPOSIT INSTRUMENT "INVESTMENT ACCOUNT" Depository institutions need a new deposit account to compete with the money market mutual funds. It needs three characteristics: 1.  It must be truly competitive.  2.  It must not disrupt monetary policy.  3.  It must not drain funds from existing low-cost deposits.  In order to be competitive, the deposit must be accessible, and it must pay a rate comparable to that of the money market funds. However, a transaction account would be required to bear reserves of 12%, which would reduce its yield significantly below that of the non-reserved money market funds. Therefore, the Depository Institutions Deregulation Committee should authorize a new account called an investment account, that would be a special class of savings account (as is the NOW account) with no interest rate ceiling, no reserve requirements, and no third party transfer capability. The principal characteristics of such an investment account: 1.  No Interest Rate Ceiling. The financial institution should be permitted to pay a rate appropriate for its local market as determined by the institution (either fixed, fixed periodically, or floating). This will permit the institution to vary the rate as conditions demand, rather than being "locked-in", unless the institution elects to fix the rate.  2.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  No Third Party Transfers. The account is not a transaction account, but an investment account. Therefore, all third party transfers would be prohibited. Withdrawals could be made upon customer instruction in cash, by telephone transfer, ATM, or internal transfer to another account. Withdrawals would be limited to three per month.  AP.  -2-  3.  Deposits. After the investment account is opened, there should be no limitation on the frequency or size of deposits.  4.  Minimum Initial Deposit and Balance. A $10,000 initial balance will enable financial institutions to protect their best customers, and to compete for 83% of the balances in money market funds.  5.  No Minimum Withdrawal. Institutions may wish to establish minimum withdrawal amounts, but the limitation of three withdrawals per month discourages withdrawals.  6.  Eligibility. Eligibility should be restricted to those eligible for NOW accounts.  7.  Deposit Insurance. The same deposit insurance rules that apply to other accounts should apply to the investment account.  There is no need for reserves on this account, since it has no transaction capability and ownership of the account is limited to individuals and non-profit organizations. Commercial firms cannot use the account. The limited withdrawal rule hampers use of the account for cash management purposes. Since it has no transaction capability, it will not interfere with monetary policy. In fact, to the extent that the new account discourages further movement of the deposits of financial institutions to the money market funds, it will assist in the control of the money supply. Since it will pay a market rate and the funds will be available when needed, the account will be competitive with the money market funds. The investment account will encourage deposit stability because the market rate of return will discourage interest rate shopping and depositors will not be faced with periodic reinvestment decisions as is the case with maturing certificates of deposit.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -3Since it is a new class of deposit, institutions can price the service charges and fees at will to further discourage the movement of funds. The institutions will be free to impose other terms and conditions as they see fit. It is important to the well-being of the thrift institutions to discourage the transfer of passbook deposits into this new account. Therefore, the new account should be differentiated from passbook accounts by these features: 1.  Its name, an "Investment Account".  2.  By prohibiting use of a passbook as an access device.  3.  By limiting monthly withdrawals to three.  4.  By allowing only withdrawals or internal transfers, on customer instruction.  5.  By requiring a $10,000 minimum deposit.  6.  By allowing automatic deposits, but not automatic withdrawals.  7.  By allowing fixed or floating interest rates set by the market.  8.  Whatever fees and service charges the offering institutions choose to impose.  ADVANTAGES: 1.  No maturity date, thus avoiding periodic investment decisions by depositors and the risk of losing the deposit at those times.  2.  No reserve requirements, since it is a personal savings account.  3.  No index, so rates can find their own level, which may be below rates paid in the national money market.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -4-  4.  Rates may be either fixed or variable, and may be changed at the discretion of the institution. Deposits are not "locked in" at a high rate for a long time.  5.  Funds would have the same day availability, as do passbooks, but not through a third party transfer. While not fully competitive with money market fund liquidity, it is sufficient.  6.  The account is operationally simple.  7.  It encourages saving and discourages withdrawals.  8.  Money market funds have 83% of their balances in accounts of $10,000 or more, and depository institutions could compete for that money.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  TD)  t,  J  DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE COMPTROLLER OF THE CURRENCY  FEDERAL DEPOSIT INSURANCE CORPORATION  DATE:  Depository Institutions Deregulation Committee  FROM:  U.S. TREASURY DEPARTMENT  NATIONAL CREDIT UNION ADMINISTRATION  FEDERAL RESERVE BOARD  TO:  FEDERAL HOME LOAN BANK BOARD  SUBJECT:  April 13, 1982  Short-term Deposit Proposals  DIDC Staff  At its March 22 meeting, the Committee authorized a new certificate with a 91-day maturity, a $7,500 minimum denomination, a ceiling rate tied to the 91-day bill auction average, and a temporary 25 basis point differential in favor of thrift institutions.  At that meeting, however, the Committee instructed  the staff to prepare for Committee consideration additional proposals for a shorter-term deposit that would provide depository institutions with a more competitive vehicle vis-a-vis money market mutual funds (11HMFs) and other market instruments. As discussed more fully in previous staff memoranda,  the funda-  mental problem before the Committee is to design a deposit that will minimize potential high-cost internal shifts from savings accounts while simultaneously maximizing the competitive appeal of the new instrument and 1/ minimizing operational difficulties for issuing institutions.— In balancing these parameters, the staff felt that four variables were particularly important:  This memorandum was prepared primarily by Edward C. Ettin of the staff of the Federal Reserve Board. 1/ See particularly, "Short-term Instrument Proposals," March 15, 1982.  *   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  2  Minimum Denomination.  The larger the minimum balance  requirements, the less potential for internal shifting from savings accounts, but the less competitive the new 1/ instrument. — A high minimum denomination would also tend to limit shifts from 6-month MMCs; although such shifts would not have a significant impact on immediate costs, they would make the cost structure of depository institutions more sensitive to changes in interest rates.  Simi-  larly, a high minimum denomination would differentiate any new instrument from the $7,500, 91-day certifi cate adopted at the last DIDC meeting. 2.  Liquidity.  There is a presumption that savings account  holders place extreme emphasis on liquidity.  Requiring  the proposed new account to have a short fixed maturity or permitting withdrawal only after a notice period might therefore serve to limit internal shifting from savings accounts. The resultant reduced liquidity relative to MMMFs might be offset by the convenience and insurance of the deposit instrument.  1/  A substantial proportion of savings deposits are in high balance accounts. In December 1981, the FDIC indicated that 75 percent of MSB savings account balances were in excess of $5,000 and 41 percent in excess of $15,000. These results were similar to a February 1982 survey of the National Association of Mutual Savings Banks. In August 1980, the FHLBB indicated that 70 percent of S&L regular savings were in accounts with balances in excess of $5,000 and 45 percent in excess of $10,000. A small sample survey by the American Bankers Association in March 1982 indicated that at commerc ial banks about 60 percent of savings deposit balances were in excess of $5,000 and 38 percent in excess of $10,000. The latter survey also indicated that almost three-fourths of total NOW balances were in excess of $5,000 and almost half in excess of $10,000.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -3  3,  Rate.  Whiel the convenience and insurance associated with  deposits suggests that depository institutions need not offer the same yield as MMMFs in order to attract sizable deposit flows, offering rates cannot deviate significantly from market yields if the instrument is to be competitive. While a competitive instrument could be achieved with an indexed ceiling, a ceiling free account would provide more flexibility to issuing institutions. 4.  Operational feasibility and convenience.  Limited staff  discussion with depository institutions has suggested the importance of providing operational flexibility to permit offering institutions to integrate a new instrument into their internal systems and particular marketing strategies The Committee may, therefore, wish to balance potential characteristics of the proposed new instrument designed to limit internal shifts against such problems for depository institutions. In designing a short-term instrument, the staff has attempted to take account of the conflicts inherent in the Committee's objectives as reflected in these four key variables.  The balance of this memorandum  discusses the detailed characteristics of the staff's proposal and presents certain options for the Committee's consideration. Monetary Policy.  Before reviewing each characteristic, it is  relevant to summarize the reserve requirement issues associated with the   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -4 creation of a new deposit instrument and the associated monetary policy considerations.  The Federal Reserve Board, under the Monetary Control Act,  has the exclusive authority for determining the applicability of Federal reserve requirements to current and future deposit instruments.  Under  the Board's current Regulation D, any deposit instrument with a maturity or required notice period of less than 14 days is subject to transaction account reserve requirements.  In addition, any account upon which a check or  draft can be drawn and any account that can be used as a normal practice to pay third parties are also regarded as transaction accounts)'The Federal Reserve staff has indicated that its Board could, however, regard any new account with a shorter maturity as a time deposit, particularly if it had limited withdrawal features, and could establish a zero percent reserve requirement on this category of time deposit.—  The more the new instrument has  characteristics that facilitate third-party payments the greater is the likelihood that the Federal Reserve would regard the account as a transaction account in order to carry out its responsibilities for controlling the monetary aggregates--especially the transaction aggregate Ml.  However, the Federal Reserve  staff advises that any account that permits third party payments as a normal 1/  2/  The Federal Reserve Board now imposes transaction reserve requirements on (1) any account with a maturity or required notice period of less than 14 days, (2) any account on which a draft can be drawn--all demand deposits, NOWs, share drafts, and similar "other checkable deposits," (3) automatic transfer accounts, and (4) any account on which more than three monthly preauthorized or telephone transfers can be made. The Federal Reserve has also asked Congress for authority to extend reserve requirements to MMMFs. Under the Monetary Control Act, savings deposits and non-negotiable time deposits held by persons are not reservable, while negotiable time deposits and time deposits held by other than natural persons are subject to a reserve requirement of zero to 9 percent; thP Board's current reserve requirement on such time deposits generally is 3 percent. Even if the Board adopted a zero percent reserve requirement on any new account, memner banks would still be subject to a small (and declining) reserve requirement on the aggregate of their time and savings deposits during the phasedown period of reserve requirements under the Monetary Control Act.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  practice, even if reservable as a transaction account, would complicate the conduct of monetary policy. More generally, the Federal Reserve staff believes that, in order for the Federal Reserve to interpret movements in the monetary aggregates, it is important to minimize the degree of blurring between transaction and non-transaction deposits.  A new deposit instrument that combines high  yield with extremely short maturity, and particularly one that permits or facilitates third party payments, would increase the difficulty of interpreting the degree to which such an instrument is being used for transaction purposes relative to serving as an investment vehicle.  In view of the mone-  tary policy concerns, the Federal Reserve staff believes that the Committee should prohibit outright an account that can be used to facilitate thirdparty payments.  Thus, even though it would limit its attractiveness  relative to MMMFs, the Federal Reserve staff suggests that the new instrument have a maturity (or notice) of no less than seven days, that thirdparty negotiable drafts drawn directly on the account be prohibited, and that automatic or preauthorized withdrawal notifications from the new account to a transactions account also be prohibited.  Unlimited telephone  notifications by the depositor, however, would be permitted. Minimum Initial Deposit.  The staff recommends that the Committee  adopt a relatively high initial minimum denomination--between $10,000 and $25,000--in order to reduce internal deposit shifts.  In determining the  minimum initial deposit, the Committee may also wish to keep in mind (1) the possibility of future reductions in the minimum deposit requirement as information develops about internal deposit shifts, (2) the desirability of reducing pressure on institutions to offer sweep accounts to MMMFs and retail RPs, many of which have been based on smaller denominations, and (3) its judgment about the size of any maintenance minimum after the initial deposit.  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Minimum Subsequent or Maintenance Balance.  On the presv7iption  that depositors will wish to add to and draw on the balance in the new instrument after the account is opened, the Committee may wish to consid ef requiring a minimum maintenance balance different from the initial deposit minimum. suggest  Simplicity and consistency with other minimum balance requirement. , that the maintenance balance be the same as the initial minimu m.  Flexibility in the use of the account suggests that the mainte nance balance might be on the order of $5,000 less than the minimum initial balance, but such an approach may be tantamount to reducing the initial balance requir ement if depositors can temporarily adjust their asset holdings to meet the initial balance requirement. In any event, the Committee will have to determine two other issues with regard to the maintenance balance: the balance falls below the regulatory minimum. options:  (a) the passbook rate or  (1) the rate to be paid if The staff suggests two  (b) closure of the account (and con-  version to a passbook or transaction account) if the balanc e falls below the minimum maintenance balance for a specified period. the first option.  (2)  The staff recommends  The interval over which the minimum maintenance  balance is to be calculated.  The staff recommends that institutions be  permitted the option of determining the maintenance balance as the average for any interval from one day to one month. Maturity,.  As previously noted, the shorter the maturity of the  new instrument the more competitive it would be with MMMFs, the larger is the potential for internal deposit shifts from passbook accounts, and, at least below seven days, the more the Federal Reserve staff indicates it will be   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  - 7 a potential problem for monetary policy. options:  The Committee staff suggests two  1/ (1) a 5-day instrument or (2) a 7-day instrument. — Whatever the maturity selected, the staff recommends that insti-  tutions be permitted to offer the account in either or both of two versions: (1) a time deposit open account (which has no specific maturity), with an enforced notice requirement before withdrawal equal to the period selected or (2) a time deposit with specific maturity, the balance of which would be automatically rolled over (after a 1-day grace period) if the depositor did not give the institution other instructions.  Staff discussions with a few  depository institutions suggest that some can handle a notice account operationally, others can do so at great inconvenience, and still others would find it extremely difficult operationally. Rate. issue of rate. rate ceiling.  There is a difference of opinion among the staff on the A majority of staff recommends that there be no regulatory  This group argues:  a ceiling might inhibit the competitive  nature of the account; the objective of the DIDC is to deregulate, the available evidence suggests that institutions do not price irrationally; a ceilingless feature, as opposed to a market-indexed ceiling, will not exacerbate internal shifts from savings accounts, since the savings account ceiling is so far below the market rate; there is evidence that, in the market for competitive short-term instruments, virtually all issuers pay the ceiling rate and if there were no ceiling, some institutions might pay less and some more than what would have been the ceiling rate; and insti-  1/  A specific or maximum maturity (as opposed to a minimum maturity) is necessary in order to avoid in effect deregulating all ceilings for deposits equal to or above the proposed minimum denomination. The Committee in March adopted a deregulation schedule based on maturity, which would otherwise be superseded for deposits above the minimum size unless a specific or maximum maturity is adopted.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  8  tutions need the flexibility, especially in the early months of the new instrument, to use rate to regain depositors lost to =Fs and other instruments. Others among the staff believe have an indexed ceiling.  that the new instrument should  Institutions could be permitted to choose either  varying the rate on outstanding deposits in line with the weekly index or maintaining a fixed rate based on the index in the initial week of the term account.  Staff supporting a ceiling on the new account argue that  the Committee has already adopted a deregulation plan based on maturity; the insurance and convenience of deposits imply that institutions can offer less than MMMFs and still attract funds; and the operating losses of thrifts imply the need to restrain rate competition in the short-run.  Indeed,  the FHLBB staff argues the need for at least a temporary differential on this account to avoid inconsistency with the Committee's March decision with regard to the 91-day deposit and in order to facilitate improvement in thrift deposit inflows relative to those of banks.  Most of the DIDC  staff do agree that, in contrast to the 91-day account, the attractiveness of the proposed instrument would increase bank deposit inflows even if there were a thrift differential. If there were an indexed ceiling imposed--with or without a differential--the Committee would have to choose a base rate and a mechanical indexing method.  The staff would recommend that the 91-day bill rate (auction  average, discount basis, no 4-week averaging option) as the base rate and that the ceiling rate be equal to the base rate.  The upper panel of Chart 1  shows the weekly spread by which MMMF yields would have exceeded the rate   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  - 9 CHART 1 INTEREST RATE SPREADS BETWEEN MMMYs AND A SHORT-TERM DEPOSIT EQUAL TO THE 91-DAY TREASURY BILL RATE (Discount Basis) Percent —  8  MMMF rate less Deposit Rate (weekly aata) 6  4  SWIM  No Compounding 2  0 1 4 I Compounded Daily i I  1 1—  Fl  2  4  Percent gonimm•  4  MMMF rate less Deposit Rate (quarterly average data) IMMO 1  2  / 1 No 1 Compounding-4 / 1 1  WNW,  3  11  0 aft.ann ft.. emu.eft.eft. ema  eft..  Compounded Daily  IMMIND   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Fl 1979  1980  1981  1982  - 10 on such a deposit since 1979, with and without compounding; the lower panel shows the same spread on a quarterly average basis.  With daily compounding  (the dashed line), over the entire period the deposit rate would have on average exceeded the MMMIF yield by over 30 basis points; in about two-thirds of the weeks since 1979 the deposit rate (daily compounding) would have exceeded MIIMF yields. The staff notes that it would be technically difficult effectively to prohibit compounding on the proposed instrument, even with a ceiling. First, for a fixed-term account (even if automatically rolled over) institutions legally must pay out or credit interest at maturity.  Second, if  the Committee authorized both fixed-term and notice accounts and prohibited the crediting of interest on the latter any more frequently than, say quarterly, the effective yields on the two similar accounts would be different.  Additionally.  as shown in the last two columns of Table 1 (which shows effective yields on instruments with a 13 percent nominal yield) the difference in effective yield between quarterly and continuous compounding is relatively small.  At current  rates, compounding adds 45 to 90 basis points to effective yields. Should the Committee choose to impose a ceiling and a differential, the staff would recommend that thrifts be permitted to pay the bill rate and commercial banks 25 basis points less.  We would further  recommend that the same procedure be adopted as on the new 91-day deposit instrument, viz., the differential would disappear after one year, and, during that year, for any interval after the auction average on the 91-day bill rate falls below 9 percent for four consecutive auctions.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Effective Yields on a 13.0 Percent Certificate for Various Compounding Periods--365/360 Basis  Type of Compounding  Effective Rate  Increased Yield Due to Compounding  Percent of the Continuously Compound Increase  1)  Continuous  14.088  .907  2)  Daily  14.085  .904  99+  3)  Weekly  14.070  .889  98  4)  Quarterly (91 days)  13.847  .666  73  5)  Semi-annual (182 days)  13.616  .435  48  6)  1/ No within — period compounding  13.181  1/  100  The fact that the effective rate is about 18 basis points higher than the nominal rate even with no within period compounding is due to the artificial year.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  - 12 -  Finally, as noted earlier, regardless of whether the account is subject to ceilings or not, the staff recommends that a ceiling rate equal to the applicable passbook rate be imposed whenever the balance on the account falls below the minimum maintenance requirement. Additional Deposits.  The staff recommends that the new account  be structured so that institutions can accept additional deposits without a quantitative regulatory limit.  If the Committee adopts such a proposal--  which would add to the flexibility of the account--it will have to provide for rules regarding the effect of additional deposits on the maturity of the account. For notice accounts, the staff suggests that institutions be free to use any or all of the following methods: 1)  "First-in-first-out" accounting controls to assure that each deposit is maintained for at least the minimum notice period;  2)  Establishment of an accounting cycle equal to the notice interval.  For funds received after the beginning of the  accounting cycle notice of withdrawal could be given only at or after the beginning of the next accounting cycle. In effect, each deposit would be on "hold" until the beginning of the next accounting cycle. 3)  Any other procedure that assures additions to the account are maintained for at least the notice period.  For term (specific maturity) accounts, the problem of additional deposits becomes somewhat more complicated.  With some minor exceptions,  existing agency regulations require that additional deposits re-initialize   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  - 13 -  the maturity of the entire balance of the account.  The staff recommends  that the Committee permit institutions to use any or all of the following methods for accepting additional deposits to the proposed term account: 1)  Each deposit re-initializes the maturity of the original deposit.  2)  Each deposit is subject to "first-in-first-out" accounting to assure that each additional deposit is maintained for the term of the account.  3)  An institution is permitted to set up an "accounting cycle" equal to the original term of the offered account.  New  deposits received after the accounting cycle has begun will be regarded as maturing at the end of the next accounting cycles  In effect, each deposit will be on "hold" until  the end of the next accounting cycle. 4.  Any other procedure that assures all additions to the account are maintained for at least the term of the account.  Withdrawals.  The staff recommends no regulatory prohibition  on the size or number of withdrawals from the proposed new account. For notice accounts, withdrawals could occur only after the specified number of calendar days (discussed under maturity above) after the time the depository institutions receive  notification.  Notice would  not be optional to the institution but must actually be given by the depositor, and would be permitted by telephone or other telecommunication, mail or messenger, or in-person (over-the-counter or through an ATM). For term accounts, withdrawals could occur only at maturity (or before the end of the grace period).   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Notification of intent to withdraw  - 14 -  could occur any time before the end of the grace period by the same procedure as for a notice account.  If no notification were received by  the end of the grace period, the deposit would automatically roll over. Federal Reserve staff note that automatic and/or preauthorized notification for withdrawal would facilitate the use of the account for transaction purposes, raising monetary policy concerns; they urge prohibition of such arrangements and indicate that the Federal Reserve Board might impose transaction reserve requirements on accounts with such withdrawal features.  The Federal Reserve staff recommends that the Committee  require that all notifications require specific action by the depositor and automatic, preauthorized, standing and similar withdrawal or transfer notifications be prohibited. Withdrawals from any version of the new account could only be by (1) check or cash to the depositor or by the institution's draft to a third party and (2) by transfer to the depositor's checking or NOW account. No withdrawals by third-party draft drawn directly on the account would be permitted. Early Withdrawal Penalty.  A majority of the staff recommend  that, since the maturity or notice on the proposed account is so short, no early withdrawals be permitted under any circumstances. would eliminate the need for early withdrawal penalties.  This approach  If the Committee  chose to permit early withdrawals, it might authorize one of the following early withdrawal penalties:  (1) loss of earned interest (as adopted on  the 91-day account) or (2) the standard penalty (loss of 3-months interest, which could require invasion of capital).   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Of course, if early withdrawal  - 15 -  is permitted any institution could adopt a more restrictive early withdrawal penalty or prohibit such withdrawals if it chose to do so. Eligibility.  The staff is unanimous in its recommendation that  the proposed new account have no regulatory limitation on eligibility for all depositors. Miscellaneous Restrictions.  The staff recommends a regulatory  prohibition on loans to depositors designed to meet initial or maintenance balances.  Overdraft privileges would still be permissible on NOW or demand  deposits to which the new account is transferable, but staff recommends regulations that require that the rates charged on such overdrafts should not be substantially lower than the rates charged on such overdrafts for depositors that do not hold the proposed account. To assure that withdrawal before maturity or notice is not facilitated, or the early withdrawal penalty (if any) is avoided, the Federal Reserve staff recommends either that no loans be permitted using the account as collateral or that such loans have a minimum loan rate equal to the rate being earned on the deposit plus the institution's lending rate to other customers using Government securities or other similar high quality collateral.  In addition, to further minimize the use of this  account for transactions purposes, the Federal Reserve staff recommends that the new instrument be issued only in non-negotiable form. Effective Date.  In order to provide a sufficient interval for  institutions to plan marketing strategies and design systems, the staff recommends that the effective date of any new instrument be 60 days after announcement of the Committee's decision.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  The staff believes that further  - 16 -  public comment on this instrument is not necessary because the terms of the proposed deposit were the subject of an extensive public comment period previously conducted by the Committee and the Committee's decision as to the specific characteristics of the proposed deposit would be within the scope of the comments received to date.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  A BALLOT FOR SHORT-TERM DEPOSIT PROPOStS  I.  MEM.:  I am in favor of authorizing a new short-term deposit instrument at this time. Yes No (If you vote no you may still wish to complete the rest of the ballot in order to affect the design of the instrument in the event that a majority favors authorization.)  II.  MINIMUM DENOMINATION 1.  The minimum initial denomination should be (check one) $25,000 Other (Please specify amount)  2.  The minimum subsequent or maintenance balance should be (check one) Same as initial minimum $5,000 less than initial minimum Other (Please specify amount)  3.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  For purposes of calculating the subsequent or maintenance balance, the institution may use average daily balances over (check one). One day The same as my answer to III-1 below Any period not to exceed a calender month Other (Please specify amount)  &sm.  -2  III.  MATURITY 1.  The maturity of the new instrument should be (check one) 5-days 7-days Other (Please specify)  2.  The instrument must be in the form of (check one) Time deposit open account with notice period equal to my vote in III-1 Specific maturity equal to my vote in III-1 (with a 1-day grace period) Institutions may have their choice of either or both of the above  IV.  RATE 1.  Institutions should be authorized to pay (check one) Any rate they wish (no ceiling) An indexed ceiling rate with no differential in favor of thrifts  1/  An indexed ceiling rate with a 1/ differential in favor of thrifts — 2.  If the balance in the account falls below the minimum specified in my vote on 11-2 (check one) A ceiling rate no higher than the applicable savings account ceiling should be imposed The account must be closed (See next page)  1/  If an indexed ceiling is adopted (either with or without a differential) the Committee will be asked to determine other issues listed in the Appendix to this ballot.   https://fraser.stlouisfed.org • Federal Reserve Bank of St. Louis  3  The institution may select either or both of the above Other (Please specify)  V.  ADDITIONAL DEPOSITS 1.  There should be no dollar limit or frequency limit on additional deposits (check one) Agree "  2.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Limitations should be imposed as follows (Please specify)  For notice accounts, if additional deposits are authorized, the institution (check one) Must adopt first-in-first-out accounting procedures to assure that each additional deposit is maintained for the minimum notice period An institution is permitted to set up an accounting cycle equal to the notice interval. For funds received after the accounting cycle has begun, notice of withdrawal could be given only at or after the beginning of the next accounting cycle Any procedure that assures that additional deposits are maintained for at least the notice period. The institution is permitted to use any or all of the above Other (Please specify)  4  3.  For term accounts, if additional deposits are authorized (check one) Each deposit re-initializes the maturity of the original deposit Each deposit is subject to first-infirst-out accounting to assure that each additional deposit is maintained for the term of the account An institution is permitted to set up an accounting cycle equal to the original term of the offered account. New deposits received after the accounting cycle has begun will be regarded as maturing at the end of the next accounting cycle Any procedure that assures that additional deposits are maintained for the maturity period The institution is permitted to use any or all of the above  VI.  WITHDRAWALS 1.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  No drafts may be drawn on the account, notification for withdrawals may not be automatic and/or preauthorized, notice or maturity requirements must be met, and there should be no limitations on dollar size or number of withdrawals (check one). Agree Disagree If disagree, there should be limitations as follows (Please specify)  -5  VII.  EARLY WITHDRAWAL PENALTY 1.  Early withdrawal penalties (check one) There is no early withdrawal penalty and the deposit should be withdrawable only after notice or at maturity Early withdrawal permitted at the cost of Earned interest Standard penalty of 3-months interest (with invasion of principal required if necessary) Other (Please specify)  VIII.  ELIGIBILITY 1.  Deposit may be offered to all depositors without limit (check one) Agree Disagree  IX.  MISCELLANEOUS 1.  Institutions may not make loans to depositors for the purpose of meeting or maintaining minimum balance requirements (check one) Agree Disagree  2.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  The rate charged on overdrafts on NOW or demand deposits may not be substantially lower for holders of the proposed account than for other depositors (check one) Agree Disagree  3.  With regard to loans using the account as collateral (check one) Subject to the standard minimum loan rate of 1 percent over the deposit rate 1/ The minimum loan rate will be the deposit rate plus the loan rate to other customers using high quality collateral No loans may be made using the account as collateral  4.  The account may only be offered in non-negotiab le form (check one) Agree Disagree  5.  Effective date will be 60 days after announcement Agree Disagree I propose an effective date of  X.  COMMENTS  [Signature] 1/  This option would likely to give rise to transaction account reserv e likely offer transfers to checkthe notice or maturity neriod  requirements since institutions would  https://fraser.stlouisfed.org ing or NOW accounts before the end of Federal Reserve Bank of St. Louis  i4  APPENDIX  If the Committee adopts an indexed ceiling it will be asked on a subsequent ballot to make decisions with regard to: •  the base rate (e.g., the 91-day bill auction average)  •  a 4-week averaging option  •  the relationship of the ceiling rate to the base rate  •  fixed ceiling vs. variable ceiling  •  compounding  •  tied RPs  •  premiums.  In addition, if the Committee decides that there should be a ceiling differential in favor of thrifts, it will be asked on a subsequent ballot to make decisions with regard to:   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  the size of the differential permanent or temporary •  if temporary, conditions under which it goes into effect and is eliminated  applicability of differential to IRA/Keogh deposits and deposits of governmental units.  NEW DEPOSIT INFLOWS REQUIRED TO BREAKEVEN ON HIGH YIELDING OVERNIGHT ACCOUNT ASSUME 1)  New instrument costs 7-1/2 percentage points above savings account ceiling (13 percent rate on new instrument)  2)  New money attracted can be invested at 2 percentage point spread NEW DEPOSIT INFLOWS NEEDED TO BREAKEVEN AT VARIOUS PROPORTIONS OF SHIFTS IN SAVING DEPOSITS TO NEW ACCOUNT (Billions of Dollars)  Proportion of Savings Deposits That Would Otherwise Have Been Retained That Shift to New Account in 1982  S&Ls  MSBs  CBs  Total  10 Percent  31.9  16.1  58.5  106.5  20 Percent  63.8  32.3  117.0  213.0  30 Percent  95.6  48.4  175.5  319.5  40 Percent  127.5  64.5  234.0  426.0  50 Percent  159.4  80.6  292.5  532.5  $156  $284  , , Memo: Average Savings Balances Otherwise Retained in 1982 (Billions of Dollars)  $43  $85 ,  Percent of Deposit  Memo: Non-Institutional Money Fund Balances as of Feb. 24, 1982 (Billions of Dollars)   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  277  167  ,  137  $155.1  4  10"i  ASSISTING TROUBLED THRIFTS  Federal Reserve Board staff projects before tax losses in 1982 of $6 to / 2 to $2 billion for MSBs. $7 billion for S&Ls and $11 2,  Projection implies: a)  250 S&Ls, with assets of $50 billion, will have negative net worth in 1982.  b) Another 350 S&Ls, with assets of $70 billion, will have positive capital ratios of less than 1 percent of as3ets in 1982. c)  Twelve large MSBs, with assets of $20 to $25 billion, will have capital ratios below 2 percent in 1982--the point at which assistance is required for MSBs. If interest rates remain above 12 percent in 1983  3.  1)  300 to 500 S&Ls (assets of $65 to $115 billion) will have negative capital in 1983.  2)  Seven to 10 large MSBs (assets of $7 to $12 billion) will need assistance in 1983.  Largest problem at FSLIC (more institutions with more assets in trouble). a)  b)   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  FSLIC resources in 1982: 1)  $1-1/4 to $1-1/2 billion of income from premiums and portfolio.  2)  Fund has $5-1/4 billion of assets at market value ($7 billion at book value).  To husband resources, FSLIC in 1982 plans 1)  Let some institutions with negative net worth continue to operate.  2) Assist mergers of worst cases with heavy reliance on indemnifying future income on acquired assets and minimal up front payment. 3) "Paper" capital infusions where necessary.  •  IP •  - 2  c)  FSLIC outlays are netted against income in the budget. Under normal circumstances, such outlays are negative. For fiscal 1982, the budget calls for FSLIC positive outlays of $38 million; in 1983 negative $150 million.  d)  In calendar 1982, FSLIC could constrain its outlays as implied by budget.  e)  4.  1)  Assist in merger only of 150-200 worst cases.  2)  Modest up front payments to acquirers in exchange for income indemnifications, desirable locations, and current earnings benefit of purchase accounting. 1/  If interest rates remain high in 1983, FSLIC will need assistance 1)  Number of institutions needing help will rise and number of merger partners will decline.  2)  Larger up front payments needed.  3)  Indemnification payments from 1981-82 mergers could exceed $1 billion.  FDIC has far fewer problems a)  FDIC resources: 1)  $2 billion of income from portfolio and premiums  2)  $11 billion fund at market ($12.2 billion at book  value).  b)  Resources sufficient to handle MSB mergers.  c)  However, may find it difficult to obtain merger partner for large MSBs in New York City and hence may have to use capital infusion.  5.  If problem is worse than projected, or for contingency planning, could consider two options: supplementing FSLIC resources or capital infusion.  1/  "Purchase accounting" has been used in all recent S&L mergers. Under this approach, the acquired institution's assets are marked to market and the difference between the premium paid, if any, and the net worth of the acquired institution (usually negative) is capitalized as "goodwill" by the acquiring institution. Goodwill is amortized over a longer period than the discount on the acquired mortgage portfolio. The annual net difference is added to income each year. Of course, there is no immediate increase in capital from this approach.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -3  6.  Supplementing FSLIC resources a)  Four sources of funding 1)  Congressional appropriations, which will be reflected in the unified budget at the time of the FSLIC outlay and in budget authority at time of the appropriation.  2  Increases in the FSLIC Treasury "tap", which is now $750 million as compared to $3 billion for the FDIC. Increasing the tap would be reflected in increased borrowing authority at the time of the Congressional legislation and in the unified budget only if and when any funds taken down are spent by the FSLIC.  3)  Market borrowing by the FHL Banks which would be relent to the FSLIC. The borrowing would not be captured in any budget but any expenditure by the FSLIC would be in the unified budget at the time of the outlay. Increased security issuance by the FHL Banks for this purpose could affect the risk premiums required by the market for FHL Bank securities. Legislation may be required to permit the FSLIC to borrow from the FHL Banks.  4) FSLIC borrowing from the Federal Reserve. The borrowing would not be captured directly in any budget, but the securities markets would have to absorb Treasury securities that the Federal Reserve would otherwise acquire; the expenditure of the FSLIC would be in the unified budget only at the time of the outlay. Legislation may be reqVired to permit the FSLIC to borrow from the Federal Reserve.—J There are obvious precential problems with central bank assistance, making it more difficult to deny similar treatment to future socially and/or politically necessitous sectors. Unless drawdowns are extremely large over short periods of time, there are no monetary control problems since open market operations could neutralize the reserve effects of such loans. b)  7.  Capital infusion plans repayable out of future income of assisted thrifts. a)  1/  Problem with approach: merger assistance provides no repayable debt to the FSLIC; FSLIC annual income ($1-1/2 billion) permits limited debt service capacity and any repayment slows future growth of fund relative to deposits.  Costs in 1982 in order to maintain 2 percent capital ratios  The Federal Reserve loan could be made under Section 13(3) or 13(13) of the Federal Reserve Act. The Board's Regulation A requires five Board members to find that "unusual and exigent" circumstances exist.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  4  b)  1)  S&Ls:  $1-3/4 to $3 billion (800 to 1,000 S&Ls).  2)  MSBs:  $150 million (8 large MSBs).  Costs in 1983 to maintain 2 percent ratios if interest rates stay above 12 percent. 1)  S&Ls:  $4 billion (1,400 to 1,700 S&Ls).  2)  MSBs:  $500 million (15 large MEBs).  c) Program could exist simulataneously with merging weakest thrifts.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  BOARD OF GOVERNORS OF THE  FEDERAL RESERVE SYSTEM  Office Correspondence To From  April 8, 1982  Date  Chairman Volcker  Additional Comments from Depository Institutions on a Short-term Deposit Instrument  Subject:  Edward C. Ettin  Harry Albright, Dime Savings Bank of New York.  Harry feels that a  high denomination, short maturity (or notice account) will not do particularly well and is not a solution to money fund competition. sort of sweep arrangement is required.  He argues that some  Dime's ideal account would be a  $15,000 initial minimum ($5,000 maintenance) tied to a $2,500 NOW with sweeps in and out of the NOW when the balance falls below or goes above $2,500; the account should be ceilingless.  His second best account would limit sweeps  to three times a month (the first, tenth, and thirtieth of the month).  His  third best account would be to make the account a 7-day maturity account, but with automatic sweeps in and out of NOWs at maturity. I indicated that anything with a weep into a NOW would essentially be a transaction account and would not only probably be reservable as such but would cause the Fed considerable difficulties in setting money targets, interpreting movements in the aggregates, and controlling Ml.  While he  indicated that he understood my concerns, he suggested that the genie was already out of the bottle with money funds and depository institution-money fund sweep arrangements.  Dime is planning next month to introduce an RP  sweep into and out of its NOW accounts.  It already offers "checking" account  draws on MMCs and SSCs by permitting customers to write checks covered by loans secured by MMC and SSC balances at 1 percent over the deposit rate; Dime has $170 million of such accounts with 10 to 20 percent of the balances in such form actively used as credit lines.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  _  2  Dime has 21 percent of its deposits in passbook form and is not concerned about internal shifts; Harry feels that his savings accounts will erode anyway and his proposed account will not significantly accelerate the rate of erosion.  He agrees that the MSB industry has a higher savings ratio  than Dime, that only a handful of MSBs would agree with Dime's proposal, and that the NAMSB would severely criticize DIDC action similar to his suggestion. Harry keptreturning to the view that the Fed must stop depository institution  sweeps with money funds and that the genie was out of the bottle.  Mary Grigsby, Houston First American Savings Association.  Mary  called back to modify her 30-60-90-day term account proposal, suggesting that the DIDC ought to authorize institutions to offer 8 to 89 days time deposits at variable or fixed indexed ceiling rates.  Such accounts, preferably with  a thrift differential, could be used to replace retail RPs; S&Ls are running short of collateral. Jack Kalchbrenner, Shawmut Corporation. notice accounts would be difficult.  His operating staff feels  A short-term account would probably  shift more from MMCs and the new 91-day account than from savings deposits at his bank.  (He feels he will get a 10 percent savings deposit shift.)  Asset and liability management would be made more difficult--especially until experience was gained; it would be especially difficult profitably to lay off the funds without taking a maturity mismatch risk.  In order to stop  sweep pressures, he feels a $10,000 minimum initial and $5,000 minimum maintenance balance is needed.  cc:  Soss   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE COMPTROLLER OF THE CURRENCY  FEDERAL DEPOSIT INSURANCE CORPORATION  FEDERAL HOME LOAN BANK BOARD  NATIONAL CREDIT UNION ADMINISTRATION  FEDERAL RESERVE BOARD  U.S. TREASURY DEPARTMENT  April 8, 1982  TO:  Chairman Volcker  FROM:  Edward C. Ettini t/  The attached was sent to DIDC staff.  You might be interested  in the size of the ballot if there is a notation vote.  I have also marked  in the memo those specific places where I refer to Federal Reserve monetary policy concerns (see pp. 3, 5, 6, 7, 8, 13, 14 and 15 and on the ballot pp. 6 and 7).  Attachment.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  DEPOSITORY INSTITUTIONS DEREGULATION COMMI1 IhE COMPTROLLER OF THE CURRENCY  FEDERAL DEPOSIT INSURANCE CORPORATION  FEDERAL RESERVE BOARD  FEDERAL HOME LOAN BANK BOARD  NATIONAL CREDIT UNION ADMINISTRATION  U.S. TREASURY DEPARTMENT  DATE:  TO:  SUBJECT:  Depository Institutions Deregulation Committee  FROM:  April 8, 1982  Short-term Deposit Proposals  DIDC Staff  At its March 22 meeting, the Committee authorized a new certificate with a 91-day maturity, a $7,500 minimum denomination, a ceiling rate tied to the 91-day bill auction average, and a temporar/25 basis point differential in favor of thrift institutions.  At that meeti  the staff to prepare for Committee shorter-term deposit that wou competitive vehicle vis-a  on  the Committee instructed datn aâditional proposals for a ory institutions with a more  ke(t mutual funds (MMMFs) and other  market instruments. As discussed more  in previous staff memoranda,  funda-  mental problem before the Committee is to design a deposit that will minimize potential high-cost internal shifts from savings accounts while simultaneously maximizing the competitive appeal of the new instrument and minimizing operational difficulties for issuing institutions.  In balancing  these parameters, the staff felt that four variables were particularly important:  This memorandum was prepared primarily by Edward C. Ettin of the staff of the Federal Reserve Board. 1/ See particularly, "Short-term Instrument Proposals," March 15, 1982.  *   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  1.  Minimum Denomination.  The larger the minimum balance  requirements, the less potential for internal shifting from savings accounts, but the less competitive the new 1/ instrument. — A high minimum denomination would also tend to limit shifts from 6-month MMCs; although such shifts would not have a significant impact on immediate costs, they would make the cost structure of depository institutions more sensitive to changes/ &n irit.prest rates. larly, a high minimum deriqmi  N8h,w  new instrument from, the-.$7,5Q, 3 ,  2.  Simi-  ld differentiate any  onth certificate adopted  at the last DIDC/meetin.c. N Liquidity. Theie\i mption that savings account holders place extreme  asis on liquidity.  Requiring  the proposed new account to have a short fixed maturity or permitting withdrawal only after a notice period might therefore serve to limit internal shifting from savings accounts. The resultant reduced liquidity relative to MMMFs might be offset by the convenience and insurance of the deposit instrument.  1/  A substantial proportion of savings deposits are in high balance accounts. In December 1981, the FDIC indicated that 75 percent of MSB savings account balances were in excess of $5,000 and 41 percent in excess of $15,000. These results were similar to a February 1982 survey of the National Association of Mutual Savings Banks. In August 1980, the FHLBB indicated that 70 percent of S&L regular savings were in accounts with balances in excess of $5,000 and 45 percent in excess of $10,000. A small sample survey by the American Bankers Association in March 1982 indicated that at commercial banks about 60 percent of savings deposit balances were in excess of $5,000 and 38 percent in excess of $10,000. The latter survey also indicated that almost three-fourths of total NOW balances were in excess of $5,000 and almost half in excess of $10,000.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  4  3  3.  Rate.  The staff assumed that the ability to offer a market  rate is necessary.  However, there is some difference of  opinion among the staff as to whether the account should be ceilingless or--should the Committee adopt a ceiling--how close that ceiling need be to MMNF yields to be competitive.  4.  Operational feasibility and convenience.  Limited staff  discussion with depository institutions IN-Ns importance of providing operational fl  uggested the  ibilley to permit  offering institutions to integratea neAnstrument into their internal systems and pair marketing strategies. to balance potential  The Committee may,  '\4s  characteristics of the  ed new instrument designed  to limit internal shifts against such problems for depository institutions. In designing a short-term instrument, the staff has attempted to take account of the conflicts inherent in the Committee's objectives as reflected in these four key variables. proposal are summarized in Table 1.  The major characteristics of our  The balance of this memorandum discusses  the detailed characteristics of the staff's proposal and presents certain options for the Committee's consideration. Monetary Policy. is relevant to summarize the   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Before reviewing each characteristic, it reserve requirement issues associated with the  - 4 TABLE 1 SUMMARY OF THE PROPOSED ACCOUNTS' MAJOR CHARACTERISTICS 1/ Minimum Initial Deposit:  Between $10,000 and $25,000  Minimum Subsequent Deposit:  Options • Same as minimum initial deposit, or • $5,000 less than minimum initial deposit  Maturity:  Options • • • •  5 days 7 days 14 days Institutions' choice within 5- to 31-day range  Options for any of the alloy\ received • Notice account (frotN.ie notification by institution y grace period, automatic • Fixed maturity rollover) ; r or both • Institutions\ oice to offer eithe Rate:  Options  .  s • Cetai ceiling • NeVe to 91-day bill rate (variable of n optio e •issfble) with o No differential o Temporary thrift differential of 25 basis points option of If account balance falls below minimum, • Rate falls to savings passbook rate • Account must be closed Compounding permitted Additional Deposits: Withdrawals:  No quantitative minimum No quantitative minimum Enforced notice or at maturity or third party Withdrawal may be paid only to depositor nt accou it depos or transfer to NOW or demand account sed propo No withdrawals by draft directly on  Early Withdrawal Penalty:  Options  Eligibility:  All depositors  1/  only at maturity • None since withdrawal permitted or after notice • Loss of earned interest uding invasion of • Loss of 3-months interest (incl account balance)  table. s are discussed in text and omitted from Important technical and policy issue   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  - 5 creation of a new deposit instrument and the associated monetary policy considerations.  The Federal Reserve Board, under the Monetary Control Act,  has the exclusive authority for determining the applicability of Federal reserve requirements to current and future deposit instruments.  Under  the Board's current Regulation D, any deposit instrument with a maturity or required notice period of less than 14 days is subject to transaction account reserve requirements.  In addition, any account upon which a check or  draft can be drawn and any account that can be used as a normal practice to  1/  pay third parties are also regarded as trrsac accounts. The Federal *Ns 4( Reserve staff has indicated that its at&culd, however, regard any new account with a shorter maturity as astim \ limited withdrawal features, and Could ment on this category of time'de characteristics that facilita  it, particularly if it had \v  lish a zero percent reserve requireThe more the new instrument has  -party payments the greater is the  Federal Reserve's need to regard the account as a transaction account in order to carry out its responsibilities for controlling the monetary aggregates--especially the transaction aggregate Ml.  However, the Federal Reserve  staff advises that any account that permits third party payments as a normal  1/  2/  The Federal Reserve Board now imposes transaction reserve requirements on (1) any account with a maturity or notice of less than 14 days, (2) any deposit account on which a draft can be drawn--all demand deposits, NOWs, share drafts, and similar "other checkable deposits," (3) automatic transfer accounts, and (4) any account on which more than three monthly preauthorized or telephone transfers can be made. The Federal Reserve has also asked Congress for authority to extend reserve requirements to MMMFs. Under the Monetary Control Act, savings deposits and non-negotiable time deposits held by persons are not reservable, while negotiable time deposits and time deposits held by other than natural persons are subject to a reserve requirement of zero to 9 percent; the Board's current reserve requirement on such time deposits is 3 percent. Even if the Board adopted a zero percent reserve requirement on any new account, member banks would still be subject to a small (and declining) reserve requirement on the aggregate of their savings, personal and non-negotiable time deposit during the current phase-down of reserve requirements under the Monetary Control Act.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  - 6 ld complicate the e as a transaction account, wou practice, even if reservabl conduct of monetary policy. in order Reserve staff believes that, More generally, the Federal etary aggregates, interpret movements in the mon to e erv Res l era Fed the for n transaction the degree of blurring betwee it is important to minimize es high deposit instrument that combin new A ts. osi dep ion act ans and non-tr that permits or maturity, and particularly one yield with extremely short ficulty of interments, would increase the dif facilitates third party pay used for transaction such an instrument is being preting.the degree to which In view of the moneg as an investment vehicle. purposes relative to servin s that the Committee Federal Reserve staff belieire tary policy concerns, the that facilitate account with characteristics should prohibit outright an even though it would third-party payments: Thus, for t oun acc the of use the erve staff ve to MMMFs, the Federal Res ati rel ss ene tiv rac att its limit of no less have a maturity (or notice) t men tru ins new the t tha suggests ectly on the negotiable drafts drawn dir rty -pa rd thi t tha s, day en than sev nsfers from omatic or preauthorized tra aut t tha and d, ite hib pro account be hibited. Unlimited ctions account also be pro the new account to a transa ld be permitted. the depositor, however, wou telephone notifications by the Committee The staff recommends that Minimum Initial Deposit. etween $10,000 and tial minimum denomination--b ini h hig y vel ati rel a adopt determining the internal deposit shifts. In uce red to er ord in 0-$25,00 in mind tee may also wish to keep mit Com the t, osi dep l tia minimum ini osit requirement uctions in the minimum dep red ure fut of ty ili sib (1) the pos the desirability ernal deposit shifts, (2) int ut abo ps elo dev on as informati MMMFs and retail to offer sweep accounts to ons uti tit ins on re ssu of reducing pre ominations, and (3) its been based on smaller den RPs, many of which have m after the initial deposit. of any maintenance minimu e siz the ut abo nt gme jud  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Minimum Subsequent or Maintenance Balance.  On the presumption  that depositors will wish to add to and draw on the balanc e in the new instrument after the account is opened, the Committee may wish to consider requiring a minimum maintenance balance different from the initial deposit minimum. suggest  Simplicity and consistency with other minimum balance requirements that the maintenance balance be the same as the initial minimum.  Flexibility in the use of the account suggests that the maintenance balance might be on the order of $5,000 less than the minimum initial balanc e,,but such an approach may be tantamount to reducing the initial balance requir ement if depositors can temporarily adjust their asset holdings to meet the initial balance requirement.  ..„/  \  In any event, the c mmitt04. w ka47 \t,?;,- determine two other • issues with regard to the maintertanabalpnph (1) the rate to be paid if the balance falls below the ..ii.edlatoy, iñimum. options:  The staff suggests two  \)\\/' (a) the passbook rate-R, v(b,) closure of the account (and con-  version to a passbook or transaction account) if the balance falls below the minimum maintenance balance for a specified period. the first option.  (2)  The staff recommends  The interval over which the minimum maintenance  balance is to be calculated.  The staff recommends that institutions be  permitted the option of determining the maintenance balance as the averag e for any interval from one day to one month. Maturity.  As previously noted, the shorter the maturity of the  new instrument the more competitive it would be with MIINFs, the larger is the potential for internal deposit shifts from passbook accounts, and, at least below seven days, the more the Federal Reserve staff indicates will be   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  the potential problem for monetary policy.  The Committee staff suggests four  options: (1) a 5-day instrument, (2) a 7-day instrument, (3) a 14-day instrument, or (4) authorization of institutions to offer maturities in the range of 5 to 31 days. Whatever the maturity selected, the staff recommends that institutions be permitted to offer the account in either or both of two versions: (1) a time deposit open account (which has no specific maturity) with an enforced notice requirement before withdrawal equal to the maturity (or maturity range) selected or (2) a time depit\it  specific maturity, the  \Z," ove balance of which would be automaticall,,rolle  after a 1-day grace  , period) if the depositor did not givetki Staff discussions with a f.ea-loilepoi o  Rate. rate.  stitutions suggest that some can others can do so at great inconvenience,  handle a notice account ot) and still others would find  ution other instructions.  tremely difficult operationally.  There is a difference of opinion among the staff on the issue of  A majority of staff recommends that there be no regulatory rate ceiling.  This group argues that the objective of the DIDC is to deregulate; the available evidence suggests that institutions do not price irrationally; the lack of a regulated rate ceiling, as opposed to a market indexed ceiling, will not exacerbate internal shifts from savings accounts, since the issue of liquidity is a more important factor than rate in inducing shifts; there is evidence that, in the market for competitive short-term instruments, virtually all issuers pay the ceiling rate and if there were no ceiling, some institutions might pay less and some more than what would have been the ceiling rate; and institutions need the flexibility, especially in the early months of the new instrument, to use rate to regain depositors lost to MMMFs and other market instruments.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  9 Others among the staff believe have an indexed ceiling.  that the new instrument should  Institutions could be permitted to choose either  varying the rate on outstanding deposits in line with the weekly index or maintaining a fixed rate based on the index in the initial week of the term account.  Staff supporting a ceiling on the new account argue that  the Committee has already adopted a deregulation plan based on maturity; the insurance and convenience of deposits imply that institutions can offer less than MMMFs and still attractOin / <1  and the operating losses of  i(on in the short-run. thrifts imply the need to restrain,ra'tepeti , < Indeed, the FHLBB staff argues th,iteq'ois „t /1" this account to avoid incon$isfy4.  temporary differential on t e Committee's March decision  with regard to the 9l-.d,eotri&jIn order to facilitate improvement to those of banks.  in thrift deposit inflows staff do agree that, in contra ness of th  Most of the DIDC  to the 91-day account, the attractive-  proposed instrument would increase bank deposit flows even if  there were a thrift differential. If there were an indexed ceiling imposed--with or without a differential--the Committee would have to choose a base rate and a mechanical indexing method.  The staff would recommend the 91-day bill rate (auction  average, discount basis, no-4-week averaging option) as the base rate and that the ceiling rate be equal to the base rate.  The upper panel of Chart 1  shows the weekly spread by which MMMF yields would have exceeded the rate   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  CHART 1 INTEREST RATE SPREADS BETWEEN MMMFs AND A SHORT-TERM DEPOSIT EQUAL TO THE 91-DAY TREASURY BILL RATE (Discount Basis) Percent —.8 ,Inimmme  MMMF rate less Deposit Rate (weekly data) 6  IMMO.  4  ft  No Compounding  2  Compounde Daily  1 % 1d I 1 r-d ki  2  4  Percent — MMMF rate less Deposit Rate (quarterly average data)  No Compounding-)  , 41•11  1 1 1 1 1 1  ,IM=M11  alio snow lam mum swab SO.IN.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  3  2  1  .•.\\  /a\ an.= 4..  4  /  0  ./  Compounded Daily  OMMIN  1  2  3  1 1979  1980  1981  1982  on such a deposit since 1979, wit h and without compounding; the lower panel shows the same spread on a quarte rly average basis. With daily compounding (the dashed line), over the ent ire period the deposit rat e would have on average exceeded the MM1TF yield by over 30 basis points; in about two-thirds of the weeks since 1979 the deposi t rate (daily compounding) would have exceeded NIINF yields. The staff notes that it would be technically difficult effect ively to prohibit compounding on the proposed instrument, even with a ceiling. , First, for a fixed-term accoun t (even i a'toma'1ly rolled over) institutions legally must pay out or cri,tNiir&st at -maturit y. Second, if the Committee authorized bot h, fikOfer6 an 'dotice accoun ts and prohibited „ the crediting of intere t$51\t fN', " \any more frequently than, say quarterly, the effective yields on th ar accounts would be differ ent. Additionally, as shown in the last two col u s of Table 2 (which shows effective yields on instruments with a 13 percen t nominal yield) the differenc e in effective yield between quarterly and contin uous compounding is relativel y small. At current rates, compounding adds 45 to 90 basis points to effect ive yields. Should the Committee choose to impose a ceiling and a temporary differential, the staff would recommend that thrifts be permitted to pay the bill rate and commer cial banks 25 basis points less. We would further recommend that the sam pro e cedure be adopted as on the new 91-day deposit instrument, viz.,the differ ential would disappear aft er one year, and, during that year, for any interval after the auction ave rage on the 91-day bill rate falls below 9 percent for four consecutive auctions.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  - 12 Table 2 Effective Yields on a 13.0 percent Certificate for Various Compounding Periods--365/360 Basis  Type of Compounding  Formula  1 (.13) 365 360 -1  14.085  .904  99+  7 (.13)) 365 7 360  14.070  .889  98  91 (.13) 365 91 360 4.  13.847  .666  73  1 +, 182(.13)) 365 ( 182-1= 360 r =  13.616  .435  48  365(.13)) 360 -1 r = (1 +  6  13.181  (1  Weekly  Quarterly (91 days) r  )  Semi-Annual (182 days)  1/  No within period compounding  1/  100  .907  r  Daily  365 (.13) 360 -1  14.088  r = e  Continuous  0  Effective Rate  Percent of the Increased Continuously Yield Compound Due to Increase Compounding,  (1  =  0  The fact that the effective rate is about 18 basis points higher than the nominal rate even with no within period compounding is due to the artificial year.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  - 13 -  Finally, as noted earlier, regardless of whether the account is subject to ceilings or not, the staff recommends that a ceiling rate equal to the applicable passbook rate  be imposed whenever the balance on the  account falls below the minimum maintenance requirement. Additional Deposits.  The staff recommends that the new account  be structured so that institutions can accept additional deposits without quantitative regulatory limit once the account is opened.  If the Committee  adopts such a proposal--which would add to the flexibility of the account-certain problems regarding the account's maturity are raised. V '"‘ For notice accounts, there are two don, : Z'' \\\\ 1) requiring that instituti' 7 \ s adopt firs , . . accounting control(W\a'asar ''t )\\\ for at least th 2)  '1\  u  imposing no reg additional deposit  n-first-out"  ach deposit is maintained  Lçè period, or itation on the holding period for  While individual institutions may not  allow it, this option would permit institutions to accept additions to the new account for holding periods as short as overnight. The Federal Reserve staff indicates that its Board is likely to be concerned about the monetary policy implications of the second approach and would urge that the Committee prohibit such additions; the Federal Reserve would be likely to impose transaction account reserve requirements to such deposits which might be held for very short periods. For term (specific maturity) accounts, the problem of additional deposits becomes somewhat more complicated.  Under existing agency regula-  tions, additional deposits re-initialize the maturity of the account to the original maturity at the time of the additional deposit.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  The staff  - 14 recommends that the Committee permit institutions to use any or all of the following methods for accepting additional deposits to the proposed term account: 1)  Each deposit re-initializes the maturity of the original deposit.  2)  Each deposit is subject to "first-in-first-out" accounting to assure that each additional deposit is maintained for the term of the account.  3)  An institution is permitted to set up an "accounting cycle" equal to the original term of the offered account.  New  deposits received after the accounting cycle has begun will be regarded as matur.ini•at th.eerkas accounting cycle.  \ I4-"-e-ffOctv,' 660  interest-bearing esto  the next  s t will be held in  an be added at the  beginning of a new regu1p.z maturity term. A fourth option might be: 4)  No regulatory limitation to the holding period for additional deposits.  The Federal Reserve staff opposes the fourth option for the same monetary policy reasons as noted above and indicates the likelihood that the Federal Reserve Board might impose transaction account reserve requirements on such deposits which might be held for very short periods. Withdrawals.  The staff recommends no regulatory prohibition  on the size or number of withdrawals from the proposed new account. For notice accounts, withdrawals could occur only after the specified number of calendar days (discussed under maturity above) after   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  - 15 the time the depository institutions receives notification.  Notice  would not be optional to the institution but must actually be given by the depositor, and would be permitted by telephone or other telecommunication, mail or messenger, or in person (over-the-counter or through an ATM). For term accounts,N.ithdrawals could occur only at maturity (or before the end of the grace period).  Notification of intent to with-  draw could occur any time before the end of the grace period by the same procedure as for a notice account.  If no notification were received by // the end of the grace period, the deposit wou \.346(Nrn ically roll over. , Some DIDC staff urge that notifiatiolcif r notice or term account be permitted basis.  Federal Reserve staff  facilitate the use of the ac  a  <7: 2istic e f.  monetary policy concerns; it urg  t&mati  drawal from and/or preauthorized  issive regulation would ction purposes, raising  ibition of such arrangements and  indicates that the Federal Reserve bard might impose transaction reserve requirements on accounts with such withdrawal procedures.  The Federal  Reserve staff recommends that the Committee require that all notifications require specific action by the depositor and automatic, preauthorized, standing and similar withdrawal notifications be prohibited. Withdrawals from any version of the new account could only be by (1) check or cash to the depositor or by the institutions to a third party and (2) by transfer to the depositors' checking or NOW account. No withdrawals by third party draft drawn directly on the account would be permitted. Early Withdrawal Penalty.  A majority of the staff recommend  that, since the maturity or notice on the proposed account is so short,   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  - 16 no early withdrawals be permitted under any circumstances.  This  approach would eliminate the need for early withdrawal penalties.  If  the committee chose to permit early withdrawals, it might authorize the following early withdrawal penalties:  (1) loss of earned  interest (as  adopted on the 91-day account) or (2) the standard penalty (loss of 3-months interest, which would require invasion of capital). withdrawal is permitted  Of course, if early  any institution could adopt a more restrictive  early withdrawal penalty or prohibit such withdrawals if it chose to do so.  e:  The staff is unanim&4, n its4ecommendation that • \t.. tion on eligibility for the proposed new account have no regulatorr,li v Eligibility.  e  •  all depositors. Miscellaneous Resirictton§ prohibition on loans to deposit balances.  e staff recommends a regulatory igned to meet initial or maintenance  Overdraft privileges would still be permissible on NOW or demand  deposits to which the new account is transferable, but staff recommends regulations that require that the rates charged on such overdrafts must equal the rates charged on such overdrafts for depositors that do not hold the proposed account. To assure that withdrawal before maturity or notice is not facilitated, or the early withdrawal penalty (if any) is avoided, the staff recommends that no loans be permitted using the account as collateral at interest rates less than the rate being earned on the deposit plus the institutions' lending rate to other customers using Government securities or other similar high quality collateral.  For similar reasons, the staff  recommends that the new instrument be issued only in non-negotiable form.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  - 17 Because of the money market nature of the proposed instrument, the Committee may also wish to consider prohibiting the offering of RPs to account holders of the proposed new instrument (or those planning to open such accounts) at a rate in excess of that offered to any other customer.  The Committee may wish to do this particularly if the account  is subject to a rate ceiling so as to assure that such a ceiling is not pierced.  It may also wish to do so forJess account to avoid  the payment of above market rates  in order to attract  customers before the effective date '  Finally, if the accountjs—su le5Ft to ceilings, the Committee N\ may wish to prohibit the  iums since the existing premium  rule--2 per year per account instrument.  t lend itself to a short-term  If the account is ceilingless, the staff recommends no  prohibition since premiums are part of the interest received. Effective Date.  In order to provide a sufficient interval for  Institutions to plan marketing strategies and design systems, the staff recommends that the effective date of any new instrument be 60 days after announcement of the Committee's decision.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  BALLOT FOR SHORT-TERM DEPOSIT PROPOSALS  I.  I am in favor of authorizing a new short-term deposit instrument at this time. Yes No (If you vote no you may still wish to complete the rest of the ballot in order to affect the design of the instrument in the event that a majority favors authorization)  II.  MINIMUM DENOMINATION 1:  The minimum initial denominaiqri\sh  '(pileck one)  $25,000 $20,000 $15,000 $10,000 Other (Please specify) 2.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  The minimum subsequent or maintenance balance should be (check one) $25,000 $20,000 $15,000 $10,000 $5,000 Other (Please specify)  2  III.  MATURITY 1.  than one The maturity of the new instrument should be (more category can be authorized) 5-days 7-days 14-days Institutions may offer any maturity they wish in the  5- to 31-day range Other (Please specify) 2.  The instrument must be in .thekoT  check one)  \ .  Time deposiF-411p,ep. ',qectxu  notice period equal to  my vote Specific matu  ual to my vote in III-1  Institutions may have their choice of either or both of the above 3.  For term accounts (i.e., specific maturity), there should be a grace period of No grace period 1 day 2 days Other (Please specify)  IV.  RATE   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  1.  one) Institutions should be authorized to pay (check Any rate they wish (no ceiling) An indexed ceiling rate  -3 (Even if you vote for a ceilingless account, you may wish to complete questions IV-2 through IV-7 to affect the design of the instrument in the event that a majority favors an indexed ceiling). 2.  If there is a ceiling, the base rate should be (check one) The 91-day bill auction average (discount basis) Other (Please specify)  3.  'Itav If there is ceiling, thrifts should , •'• N there is a subsidiary question) A2 ^N/ ( No  . differential (if yes,  Yes If there is a  basis points less than thrifts.  pay 4.  erential, commercial banks may  (check one) If there is a ceiling, the highest ceiling rate should Equal the base rate indicated in my vote on IV-2 Be above the base rate by  basis points  Be below the base rate by  basis points  Other (Please specify) 5.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  be free to In determining the ceiling, the institution should (check one) Use the higher of the latest base rate or a 4-week average There should be no 4-week averaging option  -4  6.  should If there is a thrift differential, the differential be Permanent (as long as there is a ceiling) Temporary If temporary, the differential should disappear At the end of one year Other (Please specify) Within this interval, it should disappear if The base rate is below 9 percent for four consecutive weeks \ / \ • " • c,„ , Other --N laise-s e \ \ And wit*Qe The baserat  e  should reappear if  s at or above 9 percent for  one week The base rate is at or above 9 percent for four consecutive weeks Other (Please specify) 7.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  If there is a ceiling (choose one) would apply to the The ceiling rate in the initial week entire term of the account of varying the The institutions would have the option changrate on outstanding deposits in line with the ing base rate  -58.  Should there be regulatory restrictions on compounding (check one) Yes, compounding should be prohibited No, an institution should be free to compound any way it wishes  9.  Regardless of the ceiling, if the balance in the account falls below the minimum specified in my vote on 11-2 (check one) A ceiling rate equal to the institutions' savings account ceiling should be imposed —, \ \\  The account must be closed Other (Please specify) 10.  For purposes of calcuLattng institution may use ave  minimum balances the alances over (check one)  One day One week Two weeks One month Any interval not to exceed one month Other 11.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  If there is a differential, commercial banks should be permitted to pay the thrift ceiling rate to IRA/Keogh account depositors and governmental units Agree Disagree  -6 ADDITIONAL DEPOSITS  V.  1.  There should be no dollar limit or frequency limit on additional deposits (check one) Agree Limitations should be imposed as follows  2.  (Please specify) the authorized, For notice accounts, if additional deposits are institution (check one) Must adopt first-in-first-out accounting controls to assume that each additional"'  osit is maintained  \ for the minimum notice' TerixRd No  d on the holding period  limitation should be , for additional depos as overni  ich could then be as short  )\\  Other (Please sp cify) 3.  For term accounts, if additional deposits are authorized (check one) Each deposit re-initializes the maturity of the original deposit Each deposit is subject to first-in-first-out accounting to assure that each additional deposit is maintained for the term of the account An institutions is permitted to set up an accounting cycle equal to the original term of the offered account. New deposits received after the accounting cycle has  1/  Likely to give rise to transaction   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  account reserve requirements.  -7 the end of the begun will be regarded as maturing at next accounting cycle any or all of the The institution is permitted to use above holding period for No limitation should be imposed on the additional depos  (which could then be as short as  overnight)  VI.  WITHDRAWALS 1.  ck one Limitations on withdrawals (Qhe \ \-\ \ dollar size or number There should be nq/iimitsa,ti s on \ N;, maturity requirements ot,ce then provided thf are met tions as follows  There sh  (Please specify)  . 2.  Notifications for wit  awal from notice or term accounts  (check one) d May be automatic and/or preauthorize  1/  uthorized May not be automatic and/or prea 3.  account (check one) Withdrawals by draft drawn on the Would be permitted Would not be permitted  VII.  EARLY WITHDRAWAL PENALTY 1.  ck one) Early withdrawal penalties (che sit should be withdrawable There should be none; the depo only after notice or at maturity  1/  ion account reserve requirements. Likely to give rise to transact   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -8 cost of Early withdrawal permitted at the Earned interest rest (with invasion Standard penalty of 3-months inte of principal permitted) Other (Please specify)  VIII. ELIGIBILITY 1.  ) Deposit may be offered (check one To all depositors withottli C\ \‘N ' on y iit gpi NOW account eli  Individuals only  \ CNN  Other (P1  IX. MISCELLANEOUS 1.  of s to depositors for the purpose Institutions may not make loan one) m balance requirements (check meeting or maintaining minimu Agree Disagree  2.  not ts on NOW or demand deposits may The rate charged on overdraf sitors new account than for other depo be lower for holders of the (check one) Agree Disagree  3.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  the collateral may not be lower than Loans using the account as s using the loan rate to other customer yield on the account plus ateral (check one) similar high quality coll Agree Disagree  9 _ 4.  The account may only be offered in non-negotiable form (check one) Agree Disagree  5.  RPs may not be offered to holders of the new account (or those planning to open such account) at a rate higher than those offered to other customers (check one) Agree Agree only if account subject to rate ceilings Disagree  . 6.  Premiums may not be offered to account holder (check one) Agree Agree only if account subject to rate ceilings Disagree  7.  Effective date will be 60 days after announcement Agree Disagree I propose an effective date of  X.  COMMENTS   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  (Signature)  I  ,  •  BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM DATE  April 1, 1982  Chairman Volcker  TO:  FROM: EDWARD C. ETTIN  1 /  The attached has been circulated among the DIDC staff.  cc:  Soss Bradfield   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE FEDERAL HOME LOAN BANK BOARD U.S TREASURY DEPARTMENT  FEDERAL DEPOSIT INSURANCE CORPORATION NATIONAL CREDIT UNION ADMINISTRATION  COMPTROLLER OF THE CURRENCY FEDERAL RESERVE BOARD  DRAFT TO:  DATE:  Depository Institutions Deregulation Committee  FROM:  DIDC Staff *  SUBJECT:  March 31, 1982  Short-term Deposit Proposals  $7,500 At its March 22 meeting, the Committee adopted a new 91-day bill auction minimum, certificate with a ceiling rate tied to the 91-day favor of thrift average, and with a temporary 25 basis point differential in institutions.  At that meeting, however, the Committee instructed the staff  for a shorter-term to prepare for Committee consideration additional proposals competitive deposit that would provide depository institutions with a more market instruvehicle vis-a-vis money market mutual funds (MMMFs) and other ments. As discussed more fully in previous staff memoranda, -'the fundaminimize mental problem before the Committee is to design a deposit that will simultaneously potential high-cost internal shifts from savings accounts while minimizing opermaximizing the competitive appeal of the new instrument and ational difficulties for issuing institutions.  In balancing these parameters,  the staff focused on four variables: 1.  * 1/  Minimum Denomination.  The larger the minimum balance  of the staff This memorandum was prepared primarily by Edward C. Ettin of the Federal Reserve Board. 15, 1982. See particularly, "Short-term Instrument Proposals," March   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •••=ni&  2  requirements, the less potential for internal shifting 1/ and less competitive the new instrument. — 2.  Liquidity.  There is a presumption that savings account  holders place extreme emphasis on instant liquidity. Withdrawal from the proposed new account only after a notice period, and/or a short fixed maturity, and/or some combination of the two might therefore serve to limit internal shifting.  The resultant reduced liquidity  relative to IIMMI's might be offset by the convenience and insurance of the deposit instrument. 3.  Rate.  The staff assumed that the ability to offer a market  rate is necessary, but that rate need not necessarily be as high as NIINF yields because of  convenience and deposit  insurance. 4.  Operational feasibility.  Limited staff discussion with  depository institutions suggests that a notice period is generally feasible, but complicated.  Some institutions  were concerned about potential back-office problems and consumer understanding of notice limitations. Balancing these variables and the Committee's objectives, the staff has designed three alternative instruments for Committee considera-  1/  A substantial proportion of savings balances are in high balance accounts. In December 1981, the FDIC indicates that 75 percent of MSB savings accounts were in excess of $5,000 and 41 percent in excess of $15,000. In August 1980, the FHLBB indicates that 70 percent of S&L regular savings were in accounts with balances in excess of $5,000 and 45 percent in excess of $10,000. A small sample survey by the American Bankers Association in March 1982 indicated that at commercial banks about 60 percent of savings deposit balances were in excess of $5,000 and 38 percent in excess of $10,000. The latter survey also indicated that almost three fourths of total NOW balances were in excess of $5,000 and almost half in excess of $10,000.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  nation tion, each of which have variants on the size of the minimum denomi and rate.  ing The three options are summarized in the table on the follow  ments to this page and each is described in considerable detail in the attach memorandum.  d The details of the three proposals, of course, can be revise  by the Committee. In evaluating the three alternatives, the following observations might be useful to the Committee:   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  1)  Both alternatives A and B have options on the minimum denomination. Should a relatively high minimum be selected--in order to limit the potential shifts from savings accounts--the Committee could consider indicating that it monitors the shift experience with the higher minimum denomination to determine the appropriateness of reducing the minimum denomination.  2) In evaluating the minimum denomination of alternatives er the relative A and B, the Committee may wish to consid ity may have in importance that a notice or a short-matur reducing internal deposit shifts.  If it is felt that these  , the lower limitations will significantly reduce shifts minimum denomination may be appropriate. a ceiling rate is appropriate 3) If the Committee believes that notes that such a for alternatives A and/or B, the staff order to attract ceiling need not equal a market rate in ience of deposits. funds, given the insurance and conven which the nominal ceiling Any judgment on the degree to rate might be affected should be indexed below a market compounding. by the decision on permissible  It would  - 4 SUMMARY OF PROPOSED ACCOUNTS' MAJOR CHARACTERISTICS Feature  Alt. A  Alt. B  Alt. C  Maturity  7-day notice  7- or 14-day fixed  Dual accounts; 30or 90-day fixed plus 7-day notice or 7-day fixed.  Minimum Initial Deposit  $10,000 or $25,000  $10,000 or $25,000  $10,000 in 30- or 90-day account.  Minimum Subsequent Balance  $10,000 or $25,000  $10,000 or $25,000  Additional Deposits  No limit  No limit  No limit but each deposit goes first into 30- or 90-day account.  Withdrawals  No limit on dollar size. 7-days prior notice required. Withdrawal paid to depositor or third party, or transfer to NOW or demand deposit. No withdrawals by negotiable instrument.  Only at maturity. No limit on dollar size withdrawals paid to depositor or third party, or transfer to NOW or demand deposit. No withdrawal by negotiable instrument.  At the end of 30- or 90-days from first account. And funds not withdrawn from first account at maturity shift to 7-day notice or 7-day fixed maturity account, from which withdrawals are the same as under alternatives A or B.  Early Withdrawal Penalty  None since no withdrawal permitted without 7-day notice.  None since no withdrawals permitted until maturity.  Earned interest on 30- or 90-day account. Same as alternatives A or B for 7-day account.  Interest Rate  Related to 91-day bill rate or no ceiling. Savings rate if balance below minimum. Differential possible if there is a ceiling.  Related to 91-day bill rate or no ceiling. Savings rate if balance below minimum. Differential possible if there is a ceiling.  Related to 91-day bill rate. 30- or 90-day account fixed or floating. Differential possible. Savings rate if balance falls below $10,000 in the sum of both accounts.  Eligibility  All depositors.  All depositors.  All depositors.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  $10,000 in the sum of both accounts.  5  technically be difficult to effectively prohibit compounding on a 1 45 very short-term instrummt. /- As shown in Table 2, compounding adds to 90 basis points to effective yields at current market rates. 4) As a technical matter, the staff notes that (a) a thrift differential will contribute to relatively more rapid deposit flows at thrifts, and (b) a competitive new instruute to ment--even with a thrift differential--should contrib greater deposit growth at commercial banks as well. 5)  s Some institutions have indicated potential operating problem with the alternative A notice account approach.  The fixed  maturity approach of alternative B would eliminate these operating difficulties but would add potential complexities for handling additional deposits.  However, these could be  minimized by permitting institutions their options as to procedures for accepting new deposits.  Indeed, if the  instrument, Committee is inclined to authorize a very short-term A and it might wish to consider authorizing both alternatives or both B--permitting institutions to choose to offer either a notice or fixed maturity account.  Under this approach the  staff would suggest the same minimum denomination and rate for both accounts.  1/  ically rolled over) First, for a fixed -term account (even if automat t at maturity. interes credit or out institutions legally must pay s (since they account notice on case the be not Second, while this would fixed -term and have no maturity), if the Committee authorized both t on the latter interes of ng the crediti ted notice accounts and prohibi yields on the ve effecti the ly, any more frequently than, say, quarter in the last shown as nt. Third, differe two similar accounts would be ents instrum on yields ve two columns of Table 2 (which shows effecti yield ve effecti in nce with a 13 percent nominal yield) the differe relatively small. between quarterly and continuous compounding is   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  - 6 Table 2 Effective Yields on a 13.0 percent Certificate for Various Compounding Periods--365/360 Basis  Type of Compounding  1)  2)  Continuous  Daily  Effective Rate  Increased Yield Due to Compounding  14.088  .907  14.085  .904  99+  -1  14.070  .889  98  91 .13 )365 360 91 -1  13.847  .666  73  182 .13) 365 360 182 -1  13.616  .435  48  Formula  r=e  365 (.13) 360  r = (1  .4_  -1  _l_Lia) 365 360 -1  Percent of the Continuously Compound Increase  100  —Z.....(.1-2)) 365 360 7 3)  4)  5)  6)  Weekly  Quarterly (91 days) r  Semi-Annual (182 days) 1/ No within — period compounding  1/  r = (1  365 .13 360 )-1  13.181  0  The fact that the effective rate is about 18 basis points higher than the nominal rate even with no within period compounding is due to the artificial year.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  7  6)  Monetary policy considerations--particularly the need to separate transaction and investment balances--argue against both a shorter notice account than 7 days and the ability of deposit holders to draw negotiable drafts directly on any of the proposed new instruments.  The Federal Reserve  Board has the authority to regard any of the three proposals as time deposits for reserve requirement purposes and subject them to a zero percent reserve requirement. 7)  The alternative C approach would be the most effective for limiting internal shifts, but also the least attractive competitively.  Its operational mechanism appears complex  but the staff believes it is workable. 8) The more limited potential for shifting under alternative C implies that a smaller denomination than alternatives A or B could be adopted.  However, it also probably requires a  higher ceiling rate than the two alternatives to make up for its more limited initial liquidity. 9)  In order to prevent evasions by depository institutions the staff suggests that any new account prohibit loans to account holders to meet minimum balance requirements as well as tied RPs at a rate not available to all depositors.  Alternative A 7-day Notice Account  $10,000; Option 2:  $25,000  Minimum Initial Deposit:  Option 1:  Minimum Subsequent Balance:  Same (institution has option of determining minimum balance as average for week or average for month).  Additional Deposits:  No regulatory limitation.  Maturity:  No specified maturity--time, open account; funds can be withdrawn only after 7-days notice.  Withdrawals:  No regulatory limitation on size of withdrawals.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Withdrawals only after seven calendar days of the time the depository institution receives notification. Notice must actually be given before withdrawal (not optional to institution). No standing, periodic, automatic, preauthorized, repetitive, or prearranged notifications permitted. Notification for withdrawals possible by: a) Telephone or other telecommunication. b) Mail or messenger. c) In person (over the counter or through an ATM). Withdrawals can be by: a)  Check or cash to depositor or to third party (if the depositor does not pick-up funds after giving 7-day notice, the funds may not be automatically redeposited to the proposed account).  b)  Transfer to checking or NOW account.  No withdrawals by negotiable draft. "First-in-first-out" requirement applied to account balance for notification-withdrawals.  -A2-  Early Withdrawal Penalty:  None (no withdrawals permitted in any circumstances without 7-day prior notice).  Interest Rate:  Option 1: Ceiling rate related to auction average of 91-day bill rate (discount basis), effective the day after the auction. (No 4-week averaging option.) Ceiling rates would change weekly. Option 2: No ceiling. Under either option, rate falls to savings rate whenever balance in the account falls below minimum balance. Under option 1 if there is a differential, commercial banks can pay 25 basis points less than thrifts; differential disappears one calendar year after effective date of the instrument and, within that year, for any interval after auction average on the 91-day bill falls below 9 percent for four consecutive auctions. Compounding of interest permitted. No regulatory requirement as to whether interest is to be calculated on minimum or average balance.  Eligibility:  Available to all depositors.  Reserve Requiremen s:  Under the Federal Reserve's current Regulation D, the instrument would be subject to transaction account reserve requirements since the notice period is less than 14 days. The Federal Reserve Board could regard the account as a time deposit on the basis of the 7-day notice requirement and limited withdrawal features; if it did so, it could also establish zero percent reserve requiement on this category of time deposits.  Other Restrictions:  1)  1/  Institution may not lend funds to depositor to meet minimum initial or maintenance balance or make any loan using the account as collateral. (Overdraft privileges permissible on NOW or demand balances to which the new  The Board could also apply a reserve requirement to these accounts held by other than natural persons (currently 3 percent). In any event, member banks would still be subject to a small reserve requirement on time deposits during the current phase-down of reserve requirements under the Monetary Control Act.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -A3-  account is transferable; rate charged on such overdrafts must equal rate charged on overdrafts for those that do not hold the proposed account).  Effective Date:  1/  2)  The account could only be issued in nonnegotiable form. If  3)  Institution may not offer RPs to account holders (or those planning to open such an account) at a rate in excess of that offered to any other customer.  June 1 (Tuesday), with any ceiling based on auction May 28 (Friday). (May 31 is a holiday.)  The agencies could separately reduce the minimum maturity on large denomination time deposits from 14- to 7-days, permitting the issuance of large negotiable CDs with maturities of 7 days. Such an account would be separate from the proposed new account. Federal Reserve Board action to define 7-day CDs as time deposits would also be required to obtain time deposit reserve requirements.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  1  Alternative B 7- or 14-day Fixed Maturity Time Account  Minimum Initial Deposit:  Option 1:  Minimum Subsequent Balance:  Same (institution has option of determiniming minimum balance as average for week or average for month).  Additional Deposits:  No regulatory limit on the size of additional deposits.  $10,000.  Option 2:  $25,000  Institutions are permitted to use any or all of following for additional deposits: a) Each deposit re-initializes the maturity of the original deposit. b)  "First-in-first-out" accounting to assure each addition is on deposit for 7- or 14-days.  c)  Accounting cycle established for (or 14) day intervals. New deposits received at any time during the 7-day interval will be regarded as maturing at the end of the next accounting cycle.  Maturity:  7 days with 1-day grace period or 14 days with 2-day grace period. If no instructions are received from depositor at or before maturity, deposit is automatically rolledover at the then prevailing rate.  Withdrawals:  No regulatory limit on size of withdrawals, but withdrawals can only occur at maturity (or before end of grace period).   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Notification for withdrawal by depositor can be given: a) At maturity (or before end of grace period). b) Prior to maturity, but no standing, periodic, automatic, preauthorized, repetitive, or prearranged notifications permitted.  -B2-  Notification for withdrawal possible by: a) Telephone or other telecommunication. b) Nail or messenger. c) In person (over the counter or through an ATM). Withdrawal can be by: a)  Check or cash to depositor or to third party (if the depositor does not pick-up funds after giving notice, the funds may be automatically redeposited to the proposed account).  b) Transfer to checking or NOW account. No withdrawal by negotiable draft. Early Withdrawal Penalty:  None since deposit must be held 7- or 14days in all circumstances.  Interest Rate:  Option 1: Ceiling rate related to auction average of 91-day bill rate (discount basis), effective the day after the auction. (No 4-week averaging option.) Option 2: No ceiling. Under option 1, 14-day deposit can be fixed rate, with ceiling related to bill rate in the initial week, or may vary the ceiling in line with weekly bill auction. 7-day deposit ceilings would change weekly. Under all options, if balance falls below minimum, the rate falls to the savings rate. Under option 1, if there is a differential, commercial banks can pay 25 basis points less than thrifts; differential disappears one calendar year after effective date of the instrument and, within that year, for any interval after auction average on the 91-day bill rate falls below 9 percent for four consecutive auctions.  Eligibility:   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Available to all depositors.  -B3-  Reserve Requirements:  Under the Federal Reserve's current Regulation D, no reserve requirement would be applicable to 14-day accounts held by natural persons but 3 percent would be applicable for non-personal accounts. The Board could reduce the latter requirement to zero percent. The 7-day account would currently be subject to transaction account reserve requirements, but the Board could define the account as a time deposit and apply a zero percent reserve to both personal and non -personal accounts or just to personal accounts. 1/  Other Restrictions:  1) Institution may not lend funds to depositor to meet minimum initial or maintenance balance or make any loan using the account as collateral. 2) The account could only be issued in non-negotiable form. 3) Institution may not offer RPs to account holders (or those planning to open such an account) at a rate in excess of that offered to any other customer.  Effective Date:  1/  June 1 (Tuesday), with any ceiling based on auction May 28 (Friday). (May 31 is a holiday.)  In both cases, member banks would still be subject to a small reserve requirement for personal accounts during the current phase-down of reserve requirement under the Monetary Control Act.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Alternative C Dual Account: 30-ddy or 90-day Fixed Maturity Plus 7-day Notice or 7-day Fixed Maturity Account Minimum Initial Deposit:  $10,000 in the 30-day or 90-day account.  Minimum Subsequent Balance:  $10,000 in the sum of two accounts--30- or 90-day fixed plus 7-day notice or 7-day fixed. (Institution has option of determining minimum balance as average for week or average for month.)  Maturity:  At 30- or 90-day maturity of first account (which could have a 5- or 7-day grace period), funds can be withdrawn. Balances not withdrawn are automatically transferred to one of two second accounts, at the depository institution's option (institution could offer either or both): a) A 7-day notice account, from which funds can be withdrawn only on 7-day's notice. b) A 7-day fixed maturity deposit (with 1 day grace period) that automatically rolls over funds that are not withdrawn by the end of the grace period.  Additional Deposits:  Withdrawals:   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  No regulatory minimum on the size of additional deposits, but all deposits must go first into the 30- or 90-day account. Institutions are permitted to use either or both of the following for permitting withdrawals at the end of 30- or 90-days or transfers to the second account. a) "First-in-first-out" accounting to assure each addition is on deposit for 30- or 90-days. b) Accounting cycle established in 30-day intervals. New deposits received,after say, the fifth day of the accounting cycle begin their regulatory maturity cycle at the beginning of the next accounting cycle (and hence must be held on deposit in the first account for more than 30- or 90-days). Under this approach, funds in the first account could be on deposit, say, as short as 25 days or as long as 55 days if fixed maturity was 30 days or 85 to 105 days if fixed maturity was 90-days.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -C2-  No regulatory limitation on size of withdrawals from either account, but withdrawals from the first account can only be at end of 30- or 90-days or at the end of the appropriate accounting cycle, and from the second account only after seven calendar days of the time the depository institution receives notification or at the end of a 7-day maturity. Notification for withdrawal by depositor from 30- or 90-day account (or 7 day fixed maturity account) can be given: a) At maturity (or before end of grace period). b) Prior to maturity, but no standby, periodic, automatic, preauthorized, repetitive, or prearranged notifications permitted. Notification for 7-day notice account variant must be received by the institution 7-days before withdrawal. No standing, periodic, automatic, preauthorized, or repetitive prearranged notifications permitted. Notification for withdrawals possible by: a) Telephone or other telecommunication. b) Mail or messenger. c) In person (over the counter or through an ATM). Withdrawals from first or second account can be by: a)  Check or cash to depositor or to third party (if the depositor does not pick-up funds at the appropriate time after giving notification, the funds may not be automatically redeposited to the proposed account).  b) Transfer to checking or NOW account. No withdrawal by negotiable draft.  -C3-  "First-in-first-out" requirement applied to 7-day notice account balance for notification-withdrawals. For 7-day fixed maturity variant institution could use one or both of the following: a) "First-in-first-out" accounting to assure each addition on deposit seven days. b) Accounting cycle established on 7day interval. New deposits received after the beginning of any interval begin their regulatory maturity cycle at the beginning of the next accounting cycle (and hence must be on deposit in excess of 7-days). Early Withdrawal Penalty:  All accured interest earned on first account; no withdrawals permitted in any circumstances from second account without 7-day prior notice or at maturity, with depositor given the indicated grace period on the latter account.  Interest Rate:  Option 1:   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  a)  For 30- or 90-day term account: Ceiling rate related to auction average of 91-day bill rate (discount basis), effective the day after the auction. (No 4-week averaging option.) Institutions may offer on fixed-rate basis with ceiling related to the auction average in the initial week of the deposit, or may vary the ceiling weekly in line with weekly bill auction.  b) For second account: Same ceiling rate as 30- or 90-days account established weekly. Option 2:  No ceiling.  Under option 1, if there is a differential, commercial banks can pay 25 basis points less than thrifts, differential disappears one calendar year after effective date of the instrument and, within that year, for any interval after auction average falls below 9 percent for four consecutive auctions.  -C4Under either option, rate falls to savings rate on both accounts when the sum of balances in the account fall below $10,000 as defined under "minim= subsequent balance." Compounding permitted on both accounts. Eligibility: Reserve Requirements:  Other Restrictions:  Available to all depositors. Under the Federal Reserve's current Regulation D, reserve requirements would not be applicable to the 30- or 90-days account held by persons, but the 7-day account would be subject to transaction account reserve requirements since the notice period is less than 14 days. The Federal Reserve Board could exempt the 7-day account from transaction reserve requirements on the basis of its maturity; if it did so, it could also establish zero percent reserve reqgirements on this category of time deposits. Af 1) Institution may not lend funds to depositor to meet minimum initial or maintenance balance or make any loan using the account as collateral. (Overdraft privileges permissible on NOW or demand balances to which the 7-day account is transferable; rate charged on such overdrafts must equal rate charged on overdrafts for those that do not hold the proposed account). be issued in 2) Both accounts could only 2/ non-negotiable form. — 3)  Effective Date:  1/  2/  Institution may not offer RPs to account holders (or those planning to open such an account) at a rate in excess of that offered to any other customer.  June 1 (Tuesday, with any ceiling based on auction May 28 (Friday). (May 31 is a holiday.)  small reserve requirements on time Member banks would still be subject to of reserve requirements under the deposits during the current phase-down also apply a reserve requirement to Monetary Control Act. The Board could (currently 3 percent). these accounts held by other than persons m maturity on large denomiminimu The agencies could separately reduce the ting the issuance of large permit nation time deposits from 14- to 7-days, an account would be separate Such negotiable CDs with maturities of 7 days. e l Reserv Board action to define 7from the proposed new account. Federa required to obtain time deposit day CDs as time deposits would also be reserve requirements.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  4  DRAFT  TO:  Depository Institutions Deregulation Committee  FROM:  DIDC Staff*  DATE:  SUBJECT:  March 29, 1982  Short-term Deposit Proposals  , Committee adopted a new 91-day At its March 22 meeting, the 91-day bill h a ceiling rate tied to the $7500 minimum, certificate wit ential in temporary 25 basis point differ auction average, and with a Committee At that meeting, however, the favor of thrift institutions. n additional e for Committee consideratio instructed the staff to prepar ository deposit that would provide dep proposals for a shorter-term -a-vis money market a more competitive vehicle vis institutions with market instruments. mutual funds (MNIMFs) and other the previous staff memoranda, -' As discussed more fully in a deposit that the Committee is to design fundamental problem before savings accounts h-cost internal shifts from will minimize potential hig of the new zing the competitive appeal while simultaneously maximi issuing instituoperational difficulties for instrument and minimizing on four variables: ameters, the staff focused tions. In balancing these par e The larger the minimum balanc 1. Minimum Denomination. ential for internal shifting requirements, the less pot t. the new instrumen' and the less competitive Ettin of the staff ed primarily by Edward C. This memorandum was prepar of the Federal Reserve Board. March 15, 1982. rm Instrument Proposals," -te ort "Sh , rly ula tic 1/ See par h balance savings balances are in hig of n tio por pro al nti sta A 2/ sub percent of MSB the FDIC indicates that 75 1, 198 er emb Dec In accounts. t in excess of ess of $5,000 and 41 percen exc in e wer ts oun acc savings t 70 percent of S&L 0, the FHLBB indicates tha $15,000. In August 198 excess of $5,000 and in ounts with balances acc in e wer s ing sav the American regular A small sample survey by 0. ,00 $10 of ess exc 45 percent in mercial banks 1982 indicated that at com ch Mar in on ati oci Ass Bankers in excess of $5,000 s deposit balances were about 60 percent of saving vey also indicated sur $10,000. The latter and 38 percent in excess of in excess of e wer of total NOW balances that almost three fourths in excess of $10,000. $5,000 and almost half  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -22.  Liquidity.  There is a presumption that savings account  holders place extreme emphasis on instant liquidity. Withdrawal from the proposed new account only after a notice period, and/or a short fixed maturity, and/or a limitation on the number of withdrawals might therefore serve to limit internal shifting.  The resultant reduced  liquidity relative to MMMFs might be offset by the convenience and insurance of the deposit instrument. 3.  Rate.  The staff assumed that the ability to offer a market  rate is necessary, but that rate need not necessarily be as high as MMMF yields because of the convenience and deposit insurance. 4.  Operational feasibility.  Limited staff discussion with  depository institutions suggests that a notice period is generally feasible, but complicated.  Some institutions  were concerned about potential back-office problems and consumer understanding of notice and withdrawal limitations. Balancing these variables and the Committee's objectives, the staff has designed four alternative instruments for Committee consideration.  These are summarized in the table on the following page and  each is described in more detail in the attachments to this memorandum. The details of the four proposals, of course, can be revised by the Committee and each proposal is self-explanatory.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -3ACTERISTICS SUMMARY OF PROPOSED ACCOUNTS' MAJOR CHAR Feature aturity  Minimum Initial deposit Minimum Subsequent Balance  Additional Deposits  Withdrawals  Alt. A  Alt. B  Alt. C  7-day notice  7-day notice  14-day fixed  $10,000  $25,000  $10,000  $5,000  $25,000  $10,000  No limit  No limit on dollar size. 7days prior notice required. Withdrawal paid to depositor or third party, or transfer to another account. No withdrawals by negotiable instru ment. Maximum of three withdrawals per month.  No limit  Same as Alt. A except no limit on number of withdrawals.  Alt. D Dual accounts: 30-day fixed plus 7-day notice $10,000 in 30-day account  $5,000 in the sum of both accounts.  No limit but re-initializes 14-day maturity.  No limit but each deposit goes first into 30-day account  Only at maturity.  None from 30-day account. At maturity of 30-day account, funds shift to 7-day notice account, from which withdrawals are the same as Alt. B.  Early Withdrawal Penalty  None since no withdrawal permitted without 7-day notice.  Same as Alt. A.  None since no withdrawals permitted until maturity.  Earned interest on 30-day account. Same as Alt. A for 7-day notice account.  Interest Rate  Equal to 91-day bill rate. Savings rate if balance below $5,000. Differential possible.  No ceiling or equal to 91day bill rate. Differential possible. Savings rate if balance falls below $25,000.  Equal to 91-day bill rate. Differential possible.  Equal to 91-day bill rate. 30-day account fixed or floating. Differential possible. Savings rate if balance falls below $5,000 in 7-day account.  Eligibility  All depositors  All depositors  All depositors.  All depositors.  held 14 days. deposits but each deposit must be * Alternatively, could accept new  https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -4owing observations In evaluating the four alternatives, the foll might be useful to the Committee:   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  1)  is reduced as one The potential for internal shifting but so is the competitive moves from alternative A to D, attraction of each instrument.  2)  B, the higher minimum In comparing alternatives A and its withdrawal balance of the latter suggests that -i.e. no limit on the features can be less restrictivesignificantly exacerbating number of withdrawals--without ts. the potential for internal shif  The higher minimum  suggests smaller risks in balance of alternative B also unt. authorizing a ceilingless acco 3)  ve instrument, would Alternative C, the least innovati problems for institutions, provide the least operational than alternatives A and but presents more difficulties B for deposit additions.  4)  be associated with the least Alternative D would probably but be the least competitive volume of internal shifting, y the most complex operationall of the four alternatives and  t to explain to the public. as well as the most difficul to ations--particularly the need 5) Monetary policy consider stment balances--argue against separate transactions and inve ity ount than 7 days and the abil both a shorter notice acc negotiable drafts directly on of deposit holders to draw rve instruments. The Federal Rese any of the proposed new s exempt any of the four proposal Board has the authority to d reserve requirements, and coul from transaction account als from held by other than individu also exempt such account . deposit reserve requirements the non-personal time  -5(Time deposits held by individuals are exempt from reserve requirements under the Monetary Control Act.)' — 6) In order to prevent evasions by depository institutions the staff suggests that any new account prohibit loans to account holders to meet minimum balance requirements as well as tied RPs at a rate not made available to all depositors.  1/  Member bank are subject to a small and declining reserve requirement on time deposits during the phase-down of reserve ratios under the Monetary Control Act. That ratio is currently 1.7 percent and is declining 0.4 percentage points semi-annually.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Alternative A Medium Balance 7-day Notice Account  Minimum Initial Deposit:  $10,000.  Minimum Subsequent Balance:  $5,000 (institution has option as to determining minimum balance as average for week or average for month).  Additional Deposits:  No regulatory limitation.  Maturity:  No specified maturity--time, open account; funds can be withdrawn only after 7-days notice.  Withdrawals:  Maximum of three per calendar month (or per statement cycled at least four weeks).   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  No regulatory limitation on size of withdrawals. Withdrawal only after seven calendar days of the time the depository institution received notification (three per month withdrawal based on date notification received; notification, even if withdrawal not subsequently made, counts toward maximum number of withdrawals). Withdrawals can be by: a)  Check or cash to depositor or to third party (if the depositor does not pick-up funds after giving 7-day notice, the funds may not be automatically redeposited to the proposed account).  b) Transfer to any other account. No withdrawals by negotiable draft. Notification for withdrawals possible by: a) Telephone or other telecommunication. b) Mail or messenger. c) In person (over the counter or through an ATM). No preauthorized notifications permitted. "First-in-first-out" requirement applied to account balance for notificationwithdrawals.  -A2-  Early Withdrawal Penalty:  None (no withdrawals permitted in any circumstances without 7-day prior notice and in excess of three per month).  Interest Rate:  Ceiling rate applicable to all balances equal to auction average of 91 -day bill rate (discount basis), effective the day after the auction. (No 4-week averaging option.) Rate falls to savings rate whenever balance in the account falls below $5,000 as defined above under "minimum subsequent balance." Compounding permitted (if not, interest credited only once per 7-day period). No regulatory requirement as to whether interest is to be calculated on minimum or average balance. Can only advertise weekly discount rate. If there is a differential, thrifts can pay bill rate and commercial banks 25 basis points less; differential disappears one calendar year after effective date of the instrument and, within that year, for any interval after auction average falls below 9 percent for four consecutive auctions.  Eligibility:  Available to all depositors.  Reserve Requirements:  Under the Federal Reserve's current Regulation D, the instrument would be subject to transaction account reserve requirements since the notice period is less than 14 days. The Federal Reserve Board could regard the account as a time deposit on the basis of the 7-day notice requirement and limited withdrawal features; if it did so, it could also establish zero percent reserve requirement on this category of time deposits. 11  Other Restrictions:  1) Institution may not lend funds to depositor to meet minimum initial or maintenance balance or make any loan using the account as collateral. (Overdraft privileges permissible on NOW or demand balances to which the new account  1/  Member banks would still be subject to small reserve requirements on time deposits during the current phase-down of reserve requirements under the Monetary Control Act. The Board could also apply a reserve requirement to these accounts held by other than natural persons (currently 3 percent).   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -A3-  is transferable; rate charged on such overdrafts must equal rate charged on overdrafts for those that do not hold the proposed account). 2)  The account could only be issued in non-negotiable form. 1/  3) Institution may not offer RPs to account holders (or those planning to open such an account) at a rate in excess of that offered to any other customer. Effective Date:  1/  June 1 (Tuesday), with ceiling based on auction May 28 (Friday). (May 31 is a holiday.)  The agencies could separately reduce the minimum maturity on large denomination time deposits from 14- to 7-days, permitting the issuance of large negotiable CDs with maturities of 7 days. Such an account would be separate from the proposed new account. Federal Reserve Board action to define 7-day CDs as time deposits would also be required to obtain time deposit reserve requirements.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Alternative B Large Balance 7-day Notice Account  Minimum Initial Deposit:  $25,000.  Minimum Subsequent Balance:  $25,000 (institution has option as to determining minimum balance as average for week or average for month).  Additional Deposits:  No regulatory limitation.  Maturity:  No specified maturity--time, open account; funds can be withdrawn only after 7-days notice.  Withdrawals:  No regulatory limitation on size of withdrawals. Withdrawal only after seven calendar days of the time the depository institution received notification. Withdrawals can be by: a)  Check or cash to depositor or to third party (if the depositor does not pick-up funds after giving 7-day notice, the funds may not be automatically redeposited to the proposed account).  b) Transfer to any other account. No withdrawals by negotiable draft. Notification for withdrawals possible by: a) Telephone or other telecommunication b) Mail or messenger. c) In person (over the counter or through an ATM). No preauthorized notifications permitted. "First-in-first-out" requirement applied to account balance for notificationwithdrawals. Early Withdrawal Penalty:   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  None (no withdrawal permitted in any circumstances without 7-day prior notice.)  -B2-  Interest Rate:  No ceiling. (If there is a ceiling it would be equal to auction average of 91-day bill rate (discount basis), effective the day after the auction, with no 4-week averaging option. If there is a differential, thrifts can pay bill rate and commercial banks 25 basis points less; differential disappears one calendar year after effective date of instrument and, within that year, for any interval after auction average falls below 9 percent for four consecutive auctions.) Rate falls to savings rate whenever balance in the account falls below $25,000 as defined above under "minimum subsequent balances." 1/ Compounding permitted (if not, interest credited only once per 7-day period). No regulatory requirement as to whether interest is to be calculated on minimum or average balance. Can only advertise non-compounded weekly rate.  Eligibility:  Available to all depositors.  Reserve Requirements:  Under the Federal Reserve's current Regulation D, the instrument would be subject to transaction account reserve requirements since the notice period is less than 14 days. The Federal Reserve Board could regard the account as a time deposit on the basis of the 7-day notice requirement and limited withdrawal features; if it did so, it could also establish zero percent reserve requirement on this category of time deposits. 2/  Other Restrictions:  1)  1/ 2/  Institution may not lend funds to depositor to meet minimum initial or maintenance balance or make any loan using the account as collateral. (Overdraft privileges permissible on NOW or demand balances to which the new account is transferable; rate charged on such overdrafts must equal rate charged on overdrafts for those that do not hold the proposed account).  Alternatively, could reduce ceiling 1 percentage point for each $1,000 maintenance balance below $25,000 until passbook ceiling is reached. Member banks would still be subject to small reserve requirements on time deposits during the current phase-down of reserve requirements under the Monetary Control Act. The Board could also apply a reserve requirement to these accounts held by other than natural persons (currently 3 percent).   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -B3-  Effective Date:  1/  2)  The account could only be issued in non-negotiable form. 1/  3)  Institution may not offer RPs to account holders (or those planning to open such an account) at a rate in excess of that offered to any other customer.  June 1 (Tuesday), with ceiling based on auction May 28 (Friday). (May 31 is a holiday.)  The agencies could separately reduce the minimum maturity on large denomination time deposits from 14- to 7-days, permitting the issuance of large negotiable CDs with maturities of 7 days. Such an account would be separate from the proposed new account. Federal Reserve Board action to define 7-day CDs as time deposits would also be required to obtain time deposit reserve requirements.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Alternative C Medium Balance 14-day Fixed Maturity Time Account  Minimum Initial Deposit:  $10,000.  Additional Deposits:  No regulatory limitation other than each additional deposit would re-initialize maturity to the original 14-days. (Alternatively, each new deposit must be held 14 days.)  Maturity:  14 days with 3-day grace period.  Withdrawals:  No withdrawals except at maturity without early withdrawal penalty.  Early Withdrawal Penalty:  None since deposit must be held 14 days in all circumstances.  Interest Rate:  Ceiling rate applicable to all balances equal to auction average of 91-day bill rate (discount basis), effective the day after the auction. (No 4-week averaging option.) Compounding permitted (if not, interest credited only once per 14-day period). Can only advertise weekly discount rate. If there is a differential, thrifts can pay bill rate and commercial banks 25 basis points less; differential disappears one calendar year after effective date of the instrument and, within that year, for any interval after auction average falls below 9 percent for four consecutive auctions.  Eligiblity:  Available to all depositors.  Reserve Requirements:  Under the Federal Reserve's current Regulation D, no reserve requirement would be applicable to accounts held by natural persons Ind 3 percent for non-personal accounts. ii The Board could eliminate the latter requirement.  1/  Member banks would still be subject to a small reserve requirement for personal accounts during the current phase-down of reserve requirement under the Monetary Control Act.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -C2Other Restrictions:  1) Institution may not lend funds to depositor to meet minimum initial or maintenance balance or make any loan using the account as collateral. 2)  The account could only be issued in non-negotiable form.  3) Institution may not offer RPs to account holders (or those planning to open such an account) at a rate in excess of that offered to any other customer. Effective Date:   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  June 1 (Tuesday), with ceiling based on auction May 28 (Friday). (Nay 31 is a holiday.)  Alternative D Dual Account:  30-day Fixed Maturity Plus 7-day Notice Account  Minimum Initial Deposit:  $10,000 in the 30-day account.  Minimum Subsequent Balance:  $5,000 in the sum of the two accounts (institution has option as to determining minimum balance as average for week or average for month).  Additional Deposits:  No regulatory minimum, but all additional deposits must be made to the 30-day account; after 30 days funds are shifted to the 7-day notice account on a "first-in-first-out" basis.  Withdrawals:  No withdrawals (without early withdrawal penalty) from 30-day account.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  No regulatory limitation on size of withdrawals from 7-day notice account, but withdrawals from that account can only be made after seven calendar days of the time the depository institutions receive notification. Withdrawals from 7-day notice account can be by: a)  Check or cash to depositor or to third party (if the depositor does not pick-up funds after giving 7-day notice, the funds may not be automatically redeposited to the proposed account).  b)  Transfer to any other account.  No withdrawals by negotiable draft. Notification for withdrawals from 7-day notice account possible by: a) Telephone or other telecommunication b) Mail or messenger. c) In person (over the counter or through an ATM). No preauthorized notifications permitted.  -D2-  "First-in-first-out" requirement applied to 7-day notice account balance for notification-withdrawals. Early Withdrawal Penalty:  All accrued interest earned on 30-day account; no withdrawals permitted in any circumstances on 7-day notice account without 7-day prior notice.  Interest Rate:  For 30-day term account: Ceiling rate applicable to all balances equal to auction average of 91-day bill rate (discount basis), effective the day after the auction. (No 4-week averaging option). Institutions may offer on fixed-rate basis with ceiling tied to auction average in the initial week of the deposit, or may vary the ceiling weekly in line with weekly bill auction. For 7-day notice account: Same ceiling rate as 30-day account established weekly. Rate falls to savings rate when balance in the 7-day notice account falls below $5,000 as defined under "minimum subsequent balance". Compounding permitted on both accounts. (If not, interest can only be credited at the end of 30-days in the first account for balances that have been held for 30 days, and at the end of 7-days on the second account). For the second account, no regulatory requirement as to whether interest is to be calculated on minimum or average balance. Can only advertise weekly discount rate. If there is a differential, thrifts can pay bill rate and commercial banks 25 basis points less; differential disappears one calendar year after effective date of the instrument and, within that year, for any interval after auction average falls below 9 percent for four consecutive auctions.  Eligibility:   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Available to all depositors.  -D3-  Reserve requirements:  Other restrictions:  t Under the Federal Reserve's curren would nts eme regulation D, reserve requir ount acc day not be applicable to the 30t oun acc ay 7-d held by persons, but the t oun acc on cti would be subject to transa ice not the ce reserve requirements sin Federal period is less than 14 days. The ay 7-d the mpt Reserve Board could exe erve res on cti notice account from transa urity mat its of is requirements on the bas it if es; tur and limited withdrawal fea zero did so, it could also establish this on percent reserve requirements category of time deposits. 1/ ds to 1) Institution may not lend fun tial ini m depositor to meet minimu e any mak or or maintenance balance lateral. col as loan using the account le on sib mis per (Overdraft privileges the ch whi to NOW or demand balances nstra is 7-day notice account ferable; rate charged on such rged overdrafts must equal rate cha not do t tha on overdrafts for those t). hold the proposed accoun issued 2) Both accounts could only be 2/ in non-negotiable form. RPs to account 3) Institution may not offer open such holders (or those planning to of that ess exc an account) at a rate in er. offered to any other custom  Effective Date:  g based on June 1 (Tuesday), with ceilin y 31 is a (Ma auction May 28 (Friday). holiday.)  requirements on time subject to small reserve be ll sti ld wou ks ban uirements under the 1/ Member phase-down of reserve req t ren cur the ing dur deposits erve requirement to Board could also apply a res The . Act l tro Con ry Moneta y 3 percent). er than persons (currentl these accounts held by oth urity on large mat m imu reduce the min y tel ara sep ld cou es nci ting the issuance 2/ The age m 14- to 7-days, permit fro ts osi dep e tim ion nat denomi h an account would maturities of 7 days. Suc h wit CDs e abl oti neg e Board action to of large new account. Federal Reserv ed pos pro the m fro te ara obtain time be sep would also be required to ts osi dep e tim as CDs define 7-day .  deposit reserve requirements https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  ABA CCNSENSUS STATEMENT AS SEEM= DC FOlt ALweicil  The American Bankers Association, through its Banking Leadership Conference, has carefully reviewed the actions over recent months of the Depository Institutions Deregulation Committee. We believe the Committee is to be strongly commended for taking action to substantially deregulate IRAs and Keogh Accounts at depository institutions beginning December 1. Without this action, banks and savings and loan associations would be hobbled in their attempts to compete with insurance companies, brokerage firms, and other uninsured financial intermediaries for this expanding market. We cannot stress enough the need for the Deregulation Committee to maintain its commitment to the process of deregulation and to the significant first step that removal of interest rate ceilings on IRAs and Keogh Accounts represents. Our Banking Leadership Conference has strongly reaffirmed that interest rate deregulation of IRAs and Keoghs as approved by the Committee is essential at this time. We have also reviewed the proposal by the Committee to establish new shortterm deposit instruments. Cur Association has been on record since May of this year as endorsing the needforamyre liquid deposit instruments to compete with money market mutual funds. While the Deregulation Conrnittee has failed to act on this request, money market funds have been growing at the rate of almost $3 billion per week. We originally supported the creation of the new 30- and 91-day instruments indexed to comparable Treasury bill rates with a minimum denomination no greater than $5,000. our Banking Leadership Conference, A strong consensus of the however, now believes that these instruments, while helpful and vast improvements over what is presently available, are still not sufficient to the continually changing competitive needs of depository institutions. They believe that the proposed interest-bearing transaction account with a $5,000 minimum deposit would best allow them to compete with money market mutual funds. Effective competition requires that this account have no ceiling rate of interest when the minimum balance is maintained (and the rate ceiling in effect on Naw accounts below the minimum) and that a method be provided, whether through limiting the number of transactions or otherwise, so that the account could be offered free of reserve requirements. This new instrument would have the virtues of being operationally simple, understandable to both bankers and their customers, and competitive with most offerings,of money market mutual funds. Should the Deregulation Committee feel itself unable to approve this account, our Association would reaffirm its support, as a minimum response, the creation of new 30- and 91- day instruments with minimum denominations no greater than $5,000 and ceiling rates indexed to rates on Treasury instruments of comparable maturity. The Leadership Conference also supports the proposed 1-day notice, $25,000 minimum denomination certificate of deposit with no interest rate ceiling. Many bankers feel that this instrument will provide for bank customers an account comparable to existing repurchase agreements without the paperwork burden and investment constraints incumbent on repos.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  CHART 1 INTEREST RATE ON NNF'S, MC'S AND TWO EXAMPLES OF PROPOSED INSTRUMENT' 20 .....41  ...0 .... ....' ".'  0% /  \  \  \ / %  15  \......"4",  i  \ ‘  %  ....  % A  ••••••  %  •% • is, % •  /‘ e/ ....1  eN,  •--  ..• ,  \ ,,  • %  . • . .  N  - ` 4----`4"-. -4% /'-a)---1";::::-7-1-1'  1  . . il ..•il  k  I  I  1  \  / m......•  % .......e ." . . , •.  .1/ . /P  I  .,,  . ''•  .•  //es  -1,  0  ...0#  •% • % % • • •  ; 1 1  •  R10  • / •0  I  •  • 4 •  —  ...1  %  ‘  %  \ It \. I  I „/  //  .4 1 ' .0 I  4.`.../  .'"1  5 ....1  sm.  •=w  ....  1979  1980  1981  OCT DEC AUG OCT DEC FEB APR JUN AUG OCT DEC FEB APR JUN AUG Money Market Funds 1979-1981 es  Money Market Certificat Balance Proposed Account 10,000 Average ce --Balan ge Proposed Account 5,000 Avera the money market over $2,500 earns interest equal to 1/ Proposed instrument assumes everything $2,500 earns the NOW account rate. certificate rate. Amounts up to  CHART 2 MARKET SHARE OF LARGE CD'S 100.00   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  agrill  ..........  80,00  ...  .  .... ....  ........  •  - . -  0..1  60,00  •••• ....  -  .  .. . ...  40.00  20j30  . -..  .... .............. . -  ..• ...........  i  41...  ....0  .....  ......  ••••••  r--..4  ....  .....•  ire  .....•  1.10  IMMII  Ob.  .--......,-, ••••  0  dom.  ... ....  ..- 0,•• ado  ....  ...•  oft.  ....  ..11••••••••• 111............ ......•  OP  .....  ...  6.......... ,  affia......-....•  ....../....  ..............•...........•  ..  ............., .  M  a.,•  1978  -19 1' —  1•80  1979  MAR JUN SEP DEC MAR JUN SEP DEC MAR JUN SEP DEC MAR JUN SEP DEC 1978-1981  COMERCIAL BANKS SAVINGS AHD LOANS - - - - - SAVIN3S ANKs — -  CHART 3 DOLLAR AMOUNT OF LARGE CD'S 2500  --  2000  ..  1 , 7...,i.....  1  I.  ,._,., .r...... /_.  4  .  •,-... r-  .  ,  0 1500   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  1000 00.1.  •••••  500  I  1  0_  ,1 ! t ' 7 1 1 1_ . I _ _i _ ... t, - - - 111 - - ri1  ' , i  -  1  ,i 1  4-  MOM  ••••  ,  , .1 ! - -r t _ __.1..._. =1+7 : . . 2=. 4 . . _. i ___ i _____ .._,_-_,.___  __ - - 4 - - - - 7 1978  1979  1980  1981  r  MAR JUN SEP DEC MAR JUN SEP DEC MAR JUN SEP DEC MAR JUN SEP DEC 1978-1981 COMMERCIAL BANK$ SAVINGS AND LOANS -- - - - MUTUAL SAVINGS BANKS  CHART 4 MARKET SHARES. SUN OF SIX MONTH MONEY NARKET, SMALL SAVER AND ALL SAVER CERTIFICATES 60.00  .\ \ -  41....  \ •- .1,.. %  I  .. ..  a..  ..... a...  ,.....  ......  ....  4, '4  ......  wow  .....  4...  ......  ....  *IMO  ••••••  I  ....•  0.M am.  Om. r....  I  I I I  40400  -.-...''''' . .. 1.-•••-•'''' ......'  .............._„.............................+t_  .....  ........-  o---..............---  ......  I  I  I  I  ,. .....-.1  I  I  I  N 20.00   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  ,  .4  .10  •••......  •-•.-...  .  I so  I  ........... . ,IM...........  ...  ............a 0.......,  I  0 1978  1980  1979  1981  -  MRFi JUN SEP DEC MRR JUN SEP DEC MAR JUN SEP DEC MAR JUN SEP DEC 1978-1981  COMERCIAL BANKS SAVINGS AND LOANS- - - - - SAVINGS BANKS -   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  CHART 5 DOLLAR AMOUNT. SUN OF MONEY MARKET. SMALL SAVERS AND ALL SAVERS CERTIFICATES 3000  .... /  '-7  e ,  e /  -  $  1 / • e  -  7  e  1 2000  o o  - -- /  ., ----7,--" -, .-  -  / / / / / / / /  e / i  -  .•  .. e  ..- e .--- .---  / /  -  --.. - .---.  / / / ... -----  .. ..---•  ----  ..-----*  _ 197/1  1979  198-0  1981  MAR JUN SEP DEC MAR JUN SEP DEC MAR JUN SEP DEC MAR JUN SEP DEC 1978 -1 981  COMMERCIAL BANKS SAVINGS AND LOANS - - - - - - - mutt. SAVIN3S BANKS— - — -  CHART 6 MARKET SHARES FIXED CEILING SMALL TIME DEPOSITS 60.00  app.  ••••  Noon  1111  ,  •••• OM.  ••••••  ima• •••••  40.00-  -  P  N 20.00   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  •  1978  1979  1981  1980  MAR JUN SEP DEC MAR JUN SEP DEC MAR JUN SEP DEC MAR JUN SEP DEC 1978-1981  COMERCIAL EMIS SAVINGS AND LOANS - - - -- - - MISRAL SAVIN3S BANKS- -  CHART 7 DOLLAR AMOUNT OF FIXED CEILING SMALL TIME DEPOSITS 25,00 ---  *ft. 4.,  am.  ....  .... -, •••• —4••• ••  2000  \ n.......  4.--"‹.—  % am.  \ ............--..-....--....,..........  1 0 15.00 0  %  am.  \ ••••••  Ar  " ...........  .... O..  ....b ...,  ‘.  11•...  \ OM. \  .....4  1000  N ..., .,.., N  -  ....„  ..I ..  _ -..  .... o.  0 500  ..  ft....  .... .......... .. .. . .... ...  ..-.1  —  1Q7R  1979  1981  1980  --  MRRJUNSEFECMAAJUNSEP CIEC MAR JUN SEP DEC MRR JUN SEP DEC 1978-1981 •   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  COMERCIAL BoiNCS SAVINGS AND LOANS — — — — — — — — — MUTUAL SAVIN3S BANKS  CHART 8 MARKET SHARE OF SAVINGS DEPOSITS  60,00  I  ..............,...---.....--..  •  -------  -.  ./..........,.. •-•••••--••-•..  •••...t  •••••••• -  40,00 ..m..  1,.............,  •••• "" '"'' ..-  ------.--  4...  Nib-  ,,,,..•  .....  •••••  •=••  •••••  .....,  .••••  •  N 20.00 ----- -   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -1  ...----  ..  0  •  ,  ',my.  --  .1  -  -  .------  -  -  -  I 19Th  1 979  1 9Rn  1 9R 1  MAR JUN SEP DEC MAR JUN SEP DEC MAR JUN SEP DEC MAR JUN SEP DEC 1978-1981  COMERCIAL BANKS  SAVINGS AND LOANS tiriliAL SAVIN3S BANKS — -  •••••••••  CHART 9 DOLLAR AMOUNT OF SAVINGS DEPOSITS 2500  .--  ...1  0.0W  ....i ....  2000  ....•  0..I  ...4  1 0 1500 0  .... 11...1 • .. ft..0  ...“.....  ....  ft..  0.11.  daft.  .00. ....  ft.. ....  IMMO  .0.. ... ft %  ...  ft..  ....  eft.  00.0  ... ...ft \ . de  .6.  ...,  Ift.  ... ...  .....  %.•  ...  '..  OW.4  1  1000  de'  1  .......,  ..'.  m.o.  gm.* ...•... .... a..  in...  .....4  am: .  do ..a........  .. .........  ,.....1  '''  . sam....... SS. ..ft....10........s'   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  4. ''s.......0 ..  0 500  ...  ....I  .  .0-.....•  0........ .••••  .0  —16—  — —7, — :  I  •ft.  MM.  ••..111  0 1978  1981  1980  1979  MEM JUN SEP DEC MAR JUN SEP DEC MAR JUN SEP DEC MAR JUN SEP DEC 1978-1981  COMCIERCIAL BANKS SAVINGS AM) LOANS - - - - MUTUAL SAVIN3S BANKS--  Table 1  COMMERCIAL BANE TIME & SAVINGS HELD BY INDIVIDUALS, PARTNERSHIPS, AND CORPORATIONS (millions) 1973 JAN 31  APR 30  JLY 31  OCT 31  121,453  122,936  123,627  123,876  46,693  46,633  43,281  39,184  1-215 years:  n/a  n/a  48,174  45,700  215-4 years:  n/a  n/a  9,267  10,919  over 4 years:  n/a  n/a  3,181  9,563  Savings: Time Deposits under 100,000 under 1 year:  SOURCE:  Federal Reserve Bulletin, April 1974.  SAVINGS ACTIVITY AT SAVINGS AND LOANS 1973  -  FEB  1,795  MAR  1,628  APR  724  MAY  1,763  JUN  890  JLY  291  AUG  - 1,186  SEP  340  OCT  835  NOV  1,166  DEC  406  SOURCE:   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Net New Savings Received (millions)  Federal Home Loan Bank Board Journal, April 1974.  Page 86.  Table 2  SELECTED DATA ON DEPOSITS PLACED IN 4-YEAR ACCCUNT S July 01, 1973 - October 31, 1973 Type of Institution COmmercial Banks Savings and Loans Mutual Savings Banks  TOTAL  SOURCE:  NOTE:  Deposits in 4-Year Accounts ($ billion) Per Cent of total 9.5  35  270.7  68.5  12.0  44  102.4  25.9  7.21  5.7  21  22.1  5.6  7.32  27.2  100  395.2  100.0  ,  7.20  E. Kane, "Getting Along Without Regulation Q," Journal of Finance, June, 1978, p.927.  For commercial banks and MUtual Savings Banks, average rates paid are estimated by weighing the highest interest rate in each interes t rate cell by the 4year accounts outstanding in that interest rate cell. For Savings and Loans, the weights used are total savings capital paying more than the regular rate.  * Figures from January 01, 1973   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  E8t3Jm3ted Average Rate Offered on 4year accounts (in % per annum)  Time Deposits * ($ billion) Per Cent of Total   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Table 3  TOTAL NONCOMPETITIVE BIDS ACCEPTED FOR 91-DAY AND 182-DAY TREASURY BILLS EACH MONTH IN 1973  Month January February March April May June July August September October November December  Source:  1135 1062 1578 1336 1611 1635 2195 2810 2299 1761 2376 1935  U.S. Treasury Department, Treasull Bulletin.  TABLE 4 Money Market Certificates by Size of Banks' December 1980  0-5 Percent of Assets Percent of Deposits  Source:  5-25  25-100  100-300  300-1B  1-56  greater than 5  Tota'  17.5%  21.87%  19.88%  15.96%  12.13%  9.49%  4.88%  11.6:  20.79%  24.51%  22.50%  18.64%  14.77%  12.83%  7.30%  15.02  Call Report Data  1 Banks acquired by mergers in 1981 have been aggregated with acquiring banks,   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  ATTACHMENT  I  BANKING'S CONTRIBUTION TO HOUSING FINANCE  4  The home mortgage market represents the largest private capital market In the U.S., with over $150 billion in home mortgages originated annually by all lenders. Only the debt requirements of the Federal government exceed the annual credit requirements for home mortgages. In order to raise the enormous capital required for mortgage lending, a complex network of lenders, government agencies, and investors has been developed to deliver mortgage loans to the millions of families and individuals buying a home each year. The two largest sources of mortgage credit funds are savings and loan associations (of which there are about 4,600 institutions) and full service banks (of which there are about 14,500 institutions). Other lenders are the mutual savings banks (500 institutions); mortgage bankers; and life insurance companies. In the past, thrift institutions have garnered most of the credit for financing residential housing. But direct mortgage credit is not the sole requirement for providing decent housing. Housing also depends on the existence of streets and sewers, utilities, construction companies and industry to produce housing materials; each of these elements is financed by banks. Residential Mortgage Loans Banks held $184.7 billion in residential mortgages at the end of the third quarter of 1981, ranking second only to the savings and loan industry in these loans. Moreover, full service banks originated $16.9 billion in residential mortgage loans during the first three quarters of 1981, close to 20% of the total. 1/ Residential Mortgage Loans Outstanding by Type of Lender Third Quarter 1981 (Billions of Dollars)  One-to Four Family  Lender  Savings & Loan Associations Full Service Banks Mortgage Pools or Trusts Mutual Savings Banks Federal & Related Agencies Life Insurance Companies All Others Total Source:  Pct. Of Total   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Pct. of Total  Total  Pct. of Total  433.1 171.6 132.4 65.6 65.7 17.9 124.1  42.9 17.0 13.1 6.5 6.5 1.8 12.3  38.3 13.1 9.4 17.4 14.8 19.9 27.4  27.3 9.3 6.7 12.4 10.5 14.2 19.5  471.4 184.7 141.8 83.0 80.5 37.8 151.5  41.0 16.1 12.3 7.2 7.0 3.3 13.2  1010.2  100.0%  140.3  100.0%  1150.5  100.0%  Federal Reserve Bulletin, December, 1981  1/ HUD News No.  MultiFamily  81-309, December 7, 1981  -2-  IL II.' 'Secondary Mortgage Market  become an increasingly vital segment of the The secondary mortgage market has support Banks contribute significantly to the total residential financing system. end of the ownership of their securities. As of of these secondary markets through red sponso n in debt securities of the three November 1981, banks held $14.8 billio issues debt of the total outstanding secondarymarketagencies. Banks hold over 20% al Mortgage Association. Nation Federal of the largest of the agencies, the market securities, banks also hold $14.2 In addition to these secondary mortgage s Home Loan Banks, and $.4 billion in Farmer billion in securities of the Federal Home federal total of $29.4 billion in obligations of Administration notes. Thus banks hold a government agencies involved in housing. Housing Related Securities Held by Banks November 1981 (Billions of Dollars) Secondary Mortgage Market Federal National Mortgage Association Government National Mortgage Association Federal Home Loan Mortgage Corporation Subtotal  1.1 14.8  .4  Farmers Home Administration  III.  .5  14.2  Other housing related Agencies Federal Home Loan Banks  Source:  13.2  Subtotal  14.6  Total  29.4  5 Treasury Bulletin, January 1982, TSO 4 &  Mobile Home Loans  have become Banks are the major source of credit for purchasing mobile homes which for 20.6% ted accoun homes Mobile . g market st housin the dominant factor in the law-co continue. sales strong and 1/ 1960 in U.S. the in of the new single family dwellings sold ble to availa widely is that g housin st of low-co Mobile homes are virtually the only kind banks had American families earning under $8,000 per year. As of October 3/, 1981 2/ total. the of 56.3% $10.3 billion in mobile home loans outstanding,  1/  Survey of Current Business, December, 1981  2/  Federal Reserve Bulletin, December, 1981   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  la%  -3IV.  Residential Construction Loans  ruction, an essential base Banks are a major supplier of funds for residential const held $18.4 billion in residenof housing finance. As of the third quarter of 1981, banks tial construction loans, over 46% of the total. of Lender Holdings of Residential Construction Loans by Type Third Quarter  1981  (Billions of Dollars)  Lender  Full Service Banks Savings & Loan Associations Federal Credit Agencies Mortgage Companies Mutual Savings Banks All Others TOTAL *Less than Source: V.  One-to-Four Family  MultiFamily  12.1 12.4 .0 .9 .6 *  6.3 2.4 2.4 .6 .7 1.2  18.4 14.8 2.4 1.5 1.3 1.2  26.0  13.6  39.6  Total  .05 HUD News No. 81-309, December 7, 1981  Loans for the Infrastructure of Housing  more than just the direct financing The total shelter needs of families require usable -needed are services to make a house of construction and final mortgages. Also and ts, stree , water y, as electricit for example, such private and municipal services ed relat and ng housi ate adequ to provide sewers. Considering all financing requirements recent data lending groups. Some of the most facilities, banks rank near the top of the available reveal that banks: t loans. Provide $8.3 billion in home improvemen  1/ .  industry indirectly through the loans Provide credit assistance to the housing age savings and loan associations, mortg they make to other housing lenders, such as an ing total s, trust estate investment bankers, life insurance companies, and real estimated $20.1 billion. 1/  1/  Federal Deposit Insurance Corporation,   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  June 30, 1981  • -4-  As of June 1981, banks held $145.4billion in municipal securities, nearly 50% of the total. 1/ An estimated $99.0 billion or 68.1% of total bank holdings was issued to finance residential support facilities - schools, roads, utilities and hospitals. This estimate is based on the percentage of 1981 proceeds from new long-term security issues of state and local government used for such purposes. Use of Proceeds of New Long-Term Security Issues of State and Local Governments 1981  Billions of Dollars  Pct. of Total  Public Housing, Hospitals and other Health Institutions  12.1  26.1  Utilities and Conservation Water, Sewer, Electric & Gas and Pollution Control  10.1  21.8  Education Elementary, Secondary, Colleges & Universities  4.6  9.9  Transportation Roads, Bridges, Ports & Airports  3.4  7.3  Parks and other Recreational Facilities  .7  1.5  Fire Stations, Police Stations and other Public Safety and Service Facilities  .7  1.5  Industrial Aid  7.5  16.2  Other Purposes  7.2  15.6  46.3  100.0  Use of Proceeds  TOTAL Source:  Municipal Market Developments, Public Securities Association, February, 1982  Note:  Components may not add to totals due to rounding.  1/  FDIC and Federal Reserve Board Flow of Fund Accounts   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  ._A  -5-  VI.  Measuring the Banking Industry's Contribution to Housing  Residential Mortgage Loans Mobile Home Loans Residential Construction Loans Federal Housing Agencies Obligations Home Improvement Loans Loans to Other Housing Lenders Municipal Securities Supporting Housing  $184.7 billion 10.3 18.4 29.4 8.3 20.1 99.0 370.2  The $370.2 billion commitment by the banking industry to housing is a rough estimate, but a conservative one. It does not cover an indeterminate amount of loans to contractors, building suppliers and other businesses engaged in housing construction, servicing, and supply. But by any standard of measurement, a $370.2 billion investment is a very significant commitment to the housing industry. This puts banks in a close second position to the savings and loan associations in the overall financing of the nation's housing needs.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  ATTACHMENT  2  BANKING'S CONTRIBUTION TO SMALL BUSINESS  Small businesses provide employment for more than one-half of the nation's work force, and produce almost one-half of the Gross National Product. More than nine out of every ten American businesses qualify as a small business, and the overwhelming majority of them obtain financing — seed capital, working capital, and funds for growth, diversification and expansion—from America's full service banks. Based upon data received from a representative nation-wide sample of approximately 600,000 firms in April 1980, banks were the major source of credit for small businesses ranging in size from less than $50,000 to $3,000,000 or more in gross sales. Of the firms included in this NFIB survey, 83 percent claimed banks as the source of their most recent loan. No more than 5 percent of the firms reported obtaining their most recent loan from any other single source. Similar information from a 1980 Greenwich Research Associates' Survey of "middle market" companies shows the importance of bank credit to the growth of larger firms. Companies with sales of $5-9 million accounted for 32 percent of all bank borrowings in the $5-110 million sales range during the previous 12 months. Companies in that sales range also expected the largest percentage increase in bank borrowings (13.2 percent) in the next 12 month period.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  1-40,  Small Business Finance  Source of Most Recent Small Business Loanl (April 1980)  Factor -------------*  83%  Bank  Private Person --- 5%  Co-op  1%  Government  1%  S & L  2%  Finance Co.  2%  Other  4%  Insurance Co. ---- 1%  1 non-borrowers and no answers excluded * less than 0.5% Source:  National Federation of Independent Business  Bank Borrowings and Projected Bank Borrowings by Company Size  Company Size (sales)  Actual 1980  Percent of Total  Expected 1981  Percent of Total  $20-110 million 10-19 million 5-9 million  $30.2 22.4 27.2  36% 27 32  $32.8 24.0 30.8  35% 26 33  Total Companies  $84.3  100%  $92.4  100%  Billions of Dollars* Note:  Borrowings projected to the total 63,354 middle market companies nationwide in 1980.  Source:  Greenwich Research Associates, 1981.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  ATTACHMENT  6 <,40  3  BANKING'S CONTRIBUTION TO AGRICULTURAL  FINANCE  Close to 90 percent of the nation's 14,500 full service banks have assets of less of than $100 million. Two-thirds of the nation's full service banks are in communities less than 25,000 people, and half of these banks are in towns with fewer than 5,000 residents. Based on the latest estimate, nearly 60 percent of these community banks listed agriculture as the single most important source of income for their community. According to a study published by the Department of Agriculture, farm sector debt, which increased from about $12 billion in the 1950's to over $150 billion in 1980, full could be about $600 billion by the end of the decade. At the beginning of 1980, the to only service banks held nearly $40 billion in direct farm debt, ranking second Farm Credit system among institutional holders of farm debt. Of that total, banks real supplied $31 billion in direct farm non-real estate credit and $8.6 billion in farm estate credit. Additionally, at the end of 1980, banks held $12.9 billion in securities issued by the Farmer's Home Administration and the various entities of the Farm Credit Administraas tion. Banks also supply a large but unknown volume of funds to agribusiness such also banks Finally, firms. agricultural equipment makers and agricultural processing of supply funds to finance rural agricultural communities. While a large portion ble banking's contribution to agricultural finance cannot be quantified, the quantifia contribution is $52.5 billion.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Agricultural Finance  Farm Debt Outstanding by Type of Lender January 1, 1980 Billions of Dollars  Lender Group Full Service Banks Farm Credit System Farmers Home Administration Life insurance Companies Individual ard Other Non-reporting Companies Total Source:  Pct. of Total  $39.6 48.6 15.5 12.2 36.9  25.9% 31.8 10.1 8.0 24.1  $152.8  100.0%  Economics, Statistics and Cooperative Service, USDA  Full Service  Bank Holdings of Farmers Home Administration and Farm Credit System Securities 3./ December 31, 1980 (Billions of Dollars)  Banks for Cooperatives Farm Credit Banks Federal Intermediate Credit Banks Federal Land Banks Farmers Home Administration Total Il- easurv Bulletin, February 1981, TS0 - 4 & 5 Source:  $0.4 7.7 1.1 3.1 0.6 $12.9  1/Also included in Government Finance (II-F) Total Quantifiable Bank Contributions to Agricultural Finance (Billions of Dollars) Direct non-real estate loans to farmers Direct real estate loans to farmers Bank Holdings of Securities Issued by Farmers Home Administration and Farm Credit System Total   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  31.0 8.6 12.9 $52.5  r ATTACHMENT  • ihis,  4  BANKING'S CONTRIBUTION TO CONSUMER FINANCE  In addition to making a significant contribution to household mortgage finance, full service banks supply the great bulk of other forms of consumer credit. This includes loans that are the basic support for the standard of living of the American family—automobile loans, mobile home loans, home improvement loans, and other general purpose loans. At the end of 1980, full service banks held $145.8 billion in consumer instalmen t credit, close to twice the amount held by any other type of financial institution and 46.5 percent of the total outstanding. Of that total, $61 billion was for indirect paper or direct loans to finance the purchase of automobiles or to refinance debts incurred for such a purpose—this represented over 52 percent of the amount held by all holders of that type of credit. Full service banks held $30 billion in revolving credit(50 percent of the total outstanding) and $10.4 billion in mobile home credit (60.1 percent of the total outstanding). Moreover, banks held over $33 billion in single-payment loans for household, family, and other personal expenditures. Including $44.4 billion of other instalment credit outstanding, the banking industry's contribution to non-mortgage consumer finance was $179 billion as of December 1980.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Consumer Finance (Non-Mortgage)  Consumer Instalment Credit by Holder December 1980 (Billions of Dollars)  Holder Full Service Banks Finance Companies Credit Unions Retailers* Savings and Loans Gasoline Companies Mutual Savings Banks  Amount Outstanding $145.8 76.8 44.0 29.4 9.9 4.7 2.8  Total  $313.4  *  Percentage of Total 46.5% 24.5 14.0 9.4 3.2 1.5 .9 100.0%  Includes auto dealers and excludes 30 - day charge credit held by travel and entertainment companies.  Source:  Federal Reserve Bulletin,  April, 1981  Banking's Contribution to Consumer Finance (Non-Mortgage) December 1980 (Billions of Dollars)  Type of Credit Auto Loans Revolving Credit Mobile Home Loans 1/ Other Instalment Credit Single-Payment Loans Total  Sources:  $179.0  FDIC and Federal Reserve Bulletin, April, 1981.  1/Also included in Housing Finance (II-A)   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Amount Outstanding $61.0 30.0 10.4 44.4 33.2
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