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F ederal Reserve bank of DALLAS, TEXAS Dallas 75222 Circular No. 73-319 December 12, 1973 To All Member Banks and Others Concerned in the Eleventh Federal Reserve District: The Board of Governors of invited public comment as part of a the feasibility and desirability of used in the computation of interest the Federal Reserve System has "Truth and Savings" study on specifying the methods to be on consumer savings accounts. This legislation would require financial institutions to disclose the "annual percentage rate" and other terms that- apply to their savings plans. Interested persons should submit relevant data, views, or arguments to the Secretary, Board of Governors of the Federal Reserve System, Washington, D. C. 20551? to be received by January 31? 197^-. Attached is a copy of the press release and Board’s order relating to this matter. Yours very truly, P. E. Coldwell, President Attachments This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) k FEDERAL ^ press RESERV release Rfc^. •' * F o r im m e d ia te r e l e a s e D ecem ber 3 , 1973 The B o ard o f G o v e rn o rs o f t h e F e d e r a l R e s e rv e S y stem to d a y i n v i t e d p u b l i c comment a s p a r t o f a s tu d y i t i s u n d e r t a k in g i n c o n n e c tio n w i t h C o n g r e s s io n a l r e v ie w o f th e s o - c a l l e d " T r u th i n S a v in g s " b i l l . T h is l e g i s l a t i o n w ould r e q u i r e f i n a n c i a l i n s t i t u t i o n s to d i s c l o s e t h e " a n n u a l p e r c e n ta g e r a t e " an d o t h e r te rm s t h a t a p p ly to t h e i r s a v in g s p l a n s . The s u b c o m m itte e o f t h e S e n a te C o m m ittee on B a n k in g , H o u sin g and U rban A f f a i r s t h a t i s c o n s i d e r i n g t h e l e g i s l a t i o n a s k e d t h e B o a rd t o s tu d y t h e " f e a s i b i l i t y an d d e s i r a b i l i t y o f r e q u i r i n g u n ifo r m m eth o d s o f i n t e r e s t r a t e c o m p u ta tio n on s a v in g s a c c o u n t s ." I n t h i s c o n n e c t i o n , t h e B o ard r e q u e s t e d p u b l i c comment on t h e f o llo w in g q u e s t i o n s : 1. I f a s i n g l e m ethod o f i n t e r e s t r a t e c o m p u ta tio n w e re r e q u i r e d on s a v in g s a c c o u n t s , w h at w o u ld b e t h e a d v a n ta g e s an d d i s a d v a n t a g e s - - i n c l u d i n g c o m p e t it i v e e f f e c t s - - t o c o n su m e rs and t o fin a n c ia l in s titu tio n s ? 2. A ssum ing t h a t a s i n g l e m ethod w e re r e q u i r e d , w h ic h m ethod i s t h e m ost a p p r o p r i a t e ? P le a s e in d ic a te p r e f e r e n c e s and t h e r e a s o n s f o r y o u r p r e f e r e n c e w i t h r e s p e c t t o f r e q u e n c y o f com pounding and c r e d i t i n g , m ethod o f c a l c u l a t i n g t h e b a la n c e on w h ic h i n t e r e s t i s c o m p u te d , s u c h a s low b a l a n c e , L IFO , FIFO o r d a y - o f - d e p o s i t t o d a y - o f - w i t h d r a w a l , an d o t h e r te r m s . 2 - 3. W hat a r e t h e a d v a n ta g e s an d d i s a d v a n t a g e s - i n c l u d i n g c o s t and c o m p e t it i v e c o n s i d e r a t i o n s - o f p e r m i t t i n g tw o o r m ore m eth o d s o f c o m p u ta tio n r a t h e r th a n a s i n g l e m eth o d ? D u rin g h e a r i n g s c o n d u c te d e a r l i e r t h i s y e a r by t h e S e n a te S u b c o m m itte e , c o n c e r n was e x p r e s s e d t h a t t h e w id e v a r i e t y o f m eth o d s u s e d i n c o m p u tin g i n t e r e s t m akes i t im p o s s ib le t o d e v i s e a s i n g l e a n n u a l r a t e t h a t w o u ld p r o v id e a n a c c u r a t e b a s i s f o r c o m p a rin g y i e l d s on d i f f e r e n t s a v in g s p l a n s . V a r i a b l e s s u c h a s t h e b a la n c e u s e d i n t h e c o m p u ta tio n o f i n t e r e s t , g r a c e p e r i o d s , s e r v i c e c h a r g e s and r e q u ir e m e n ts f o r minimum b a la n c e s c a n h a v e a s u b s t a n t i a l e f f e c t on t h e y i e l d r e c e i v e d by a d e p o s ito r. F o r e x a m p le , t h e sam e h y p o t h e t i c a l s a v in g s a c c o u n t c o u ld y i e l d i n t e r e s t r a n g i n g fro m a b o u t $30 t o $75 o v e r a s ix - m o n th p e r i o d u s in g t h e sam e a n n u a l r a t e b u t v a r y i n g t h e o t h e r e le m e n ts i n t h e c a lc u la tio n . P u b l i c consnent on t h e s e m a t t e r s s h o u ld be fo rw a rd e d t o t h e S e c r e t a r y o f t h e B o ard i n W a s h in g to n . A c o p y o f t h e B o a r d 's o r d e r i n t h i s m a t t e r i s a t t a c h e d . -0 - FEDERAL RESERVE SYSTEM " T r u th i n S a v in g s " A s u b c o m m itte e o f t h e S e n a te C om m ittee on B a n k in g , H o u sin g an d U rb an A f f a i r s i n J u n e h e l d h e a r i n g s on p ro p o s e d " T r u th i n S a v in g s " l e g i s l a t i o n (S . 1 0 5 2 ). The l e g i s l a t i o n w o u ld r e q u i r e f i n a n c i a l i n s t i t u t i o n s t o d i s c l o s e t h e " a n n u a l p e r c e n t a g e r a t e " and o t h e r te r m s a p p l i c a b l e t o t h e i r s a v in g s p l a n s . The te s tim o n y r e c e i v e d a t t h e h e a r i n g g e n e r a l l y s u p p o r te d t h e c o n c e p t o f f u l l and u n ifo r m d i s c l o s u r e a s a m eans o f a s s i s t i n g c o n su m e rs t o u n d e r s ta n d t h e i r a c c o u n ts b e t t e r and t o e n a b le them t o sh o p among c o m p e tin g p la n s . H ow ever, c o n c e r n w as e x p r e s s e d t h a t t h e m u l t i p l i c i t y o f m eth o d s o f c o m p u tin g i n t e r e s t , w h ic h may h a v e a s i g n i f i c a n t e f f e c t u p o n t h e a c t u a l d o l l a r s e a r n e d d e p e n d in g up o n a c t i v i t y p a t t e r n s , m akes i t i m p o s s ib l e t o d e v i s e a s i n g l e a n n u a l r a t e t h a t w o u ld p r o v i d e a n a c c u r a t e b a s i s f o r c o m p a rin g d i f f e r e n t s a v in g s a c c o u n t p l a n s . A lth o u g h t h e a n n u a l r a t e may r e f l e c t d i f f e r e n c e s i n com pounding p e rio d s ( c o n t i n u o u s , d a i l y , m o n th ly , e t c . ) , by t h e b a la n c e s t o w h ic h t h e r a t e i s a p p l i e d f irs t-in -firs t-o u t, i t w o u ld n o t b e a f f e c t e d ( e . g . » low b a l a n c e , l a s t - i n - f i r s t - o u t , d a y -o f - d e p o s it to d a y -o f- w i t h d r a w a l ) , g r a c e p e r i o d s f o r d e p o s i t s and w i t h d r a w a l s , r e q u i r e m en ts f o r minimum b a la n c e s and end o f p e r i o d b a l a n c e s , s e r v i c e c h a r g e s f o r w ith d r a w a ls and o t h e r f a c t o r s . S e v e ra l o f th e s e v a r ia b le s have a s u b s t a n t i a l e f f e c t o n y i e l d , d e p e n d in g u p o n t h e p a t t e r n o f a c t i v i t y o f a n i n d i v i d u a l 's s a v in g s a c c o u n t transactions F o r e x a m p le , a s tu d y h a s show n t h a t a g iv e n s e t o f s a v in g s a c c o u n t t r a n s a c t i o n s o v e r a s i x m onth p e r i o d c o u ld r e s u l t i n i n t e r e s t p a y m e n ts r a n g i n g fro m a b o u t $ 3 0 t o o v e r $75 u s in g a s i x p e r c e n t a n n u a l r a t e i n e a c h c a s e b u t v a r y i n g t h e o t h e r e le m e n ts o f t h e c a l c u l a t i o n . As a r e s u l t o f t h e s e c o n c e r n s , th e B oard o f G o v e rn o rs o f t h e F e d e r a l R e s e rv e S y stem h a s b e e n r e q u e s t e d by m em bers o f t h e S e n a te C om m ittee t o s tu d y t h e " f e a s i b i l i t y and d e s i r a b i l i t y o f r e q u i r i n g u n ifo r m m eth o d s o f i n t e r e s t r a t e c o m p u ta tio n on s a v in g s a c c o u n t s . 1' A r e q u ir e m e n t f o r u n if o r m m eth o d s w o u ld make th e i n t e r e s t r a t e t h e o n ly v a r i a b l e , and w ould s i m p l i f y d i s c l o s u r e s r e q u i r e d u n d e r any p o s s i b l e T r u th i n S a v in g s l e g i s l a t i o n . n e c t i o n w ith t h a t s tu d y t h e B o ard d e s i r e s t o r e c e i v e p u b l i c comment on t h e f o llo w in g q u e s t i o n s : 1. I f a s i n g l e m eth od o f i n t e r e s t r a t e compu t a t i o n w e re r e q u i r e d on s a v in g s a c c o u n t s , w h a t w ould b e t h e a d v a n ta g e s and d i s a d v a n t a g e s — i n c l u d i n g c o m p e t it i v e e f f e c t s - - t o c o n su m e rs and to f i n a n c i a l i n s t i t u t i o n s ? 2 . A ssum ing t h a t a s i n g l e m ethod w e re r e q u i r e d , w h ic h m ethod i s t h e m ost a p p r o p r i a t e ? P l e a s e i n d i c a t e p r e f e r e n c e s and t h e r e a s o n s f o r y o u r p r e f e r e n c e w ith r e s p e c t t o f r e q u e n c y o f com pounding and c r e d i t i n g , m ethod o f c a l c u l a t i n g t h e b a la n c e on w h ic h i n t e r e s t i s c o m p u te d , s u c h a s low b a l a n c e , L IFO , FIFO o r d a y - o f - d e p o s i t t o d a y - o f - w i t h d r a w a l , and o t h e r te r m s . In con 3 . W hat a r e t h e a d v a n ta g e s and d i s a d v a n t a g e s — i n c l u d i n g c o s t and c o m p e t it i v e c o n s i d e r a t i o n s — o f p e r m i t t i n g tw o o r m ore m eth o d s o f c o m p u ta tio n r a t h e r th a n a s i n g l e m eth o d ? Comments o n an y o f t h e s e q u e s t i o n s and an y o t h e r r e l e v a n t com m ents o r o b s e r v a t i o n s s h o u ld b e f o rw a rd e d t o t h e S e c r e t a r y o f t h e B o a rd o f G o v e rn o rs o f t h e F e d e r a l R e s e rv e S y s te m , W a s h in g to n , D .C ., 2 0 5 5 1 , b y J a n u a r y 3 1 , 1 9 7 4 . B o ard o f G o v e rn o rs o f t h e F e d e r a l R e s e rv e S y ste m (Signed) Chester Feldberg C h e s te r F e ld b e r g S e c re ta ry [C2AL]
@FedFRASER