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Federal market share factors, including of thrift price can be attributed the relative institutions differences thrifts, price differences NOW accounts at differences The efforts presence used to were inversely banks in the one-to-one in the market The percentage deposits importance These related battle to generally the success relationship did in Lexington, not smallest percentage A second has been thrift offer factor NOW Both accounts that with balance amount, charge pay balance falls that and no service below the depositor service banks interest banks selected and the is assessed may include thrifts of if a is maintained. a monthly transaction operating in the SMSAs form a basis for price com- parisons.9 monthly Pricing service elements charges, fees, and the minimum avoid any charges. among institutions, can per balance While prices include transaction required often pected, among thrifts generally the markets, where they pricing pricing advantages. maintained the most attractive with competing Price differentials were less favorable in the other SMSAs. In fact, had slightly lower the service charges than the local savings and loans, but they set low minimum-balance requirements of banks the reason of checking NOW accounts. NOW checking accounts, the checking their amounts have of these in- would by banks. earn Since interest, incentive unless outweighs earning advantage. that maintained pricing a financial accounts individuals for not to NOW accounts their Banks operating of balances. share these among banks automatic volumes, the overall teller protection.10 5.5 percentage Summary Growth of NOW tions have utilized authority to accounts. the balance'S January large and portion from transaction of these acquired interest-bearing Over was 75 percent generated of this funds checking accounts. 40 institu- recently these February in the depository their offer transaction NOW accounts as most and during year, and a appeared other Banks of have Much factors obviously to NOW balances because of the of banks bank-market importance ferences in the battle in NOW account such and automatic to affect and thrifts as non-price in generating no hard data variation in the rela- institutions, between competition at banks, and the among institutions. cap- 10. The Cincinnati savings and loan associations, along with other institutions, provide automatic teller machines on a joint basis. Competition tions when commercial authorized Paul R. Watro is an economist with the Federal Reserve Bank of Cleveland. The research assistance of Peggy Petricig is appreciated. The views stated herein are those of the author and not necessarily those of the Federal Reserve Bank of Cleveland or of the Board of Governors of the Federal Reserve System. drawal tory (NOW) accounts and banking ceivably BULK RATE U.S. Postage Paid Cleveland,OH Reserve Bank of Cleveland Department P.O. Box 6387 Cleveland,OH 44101 Permit No. 385 count) lessen an count years.2 at banks and thrifts Reserve District of its share (or Through some schemes, impact banks of the conof the transaction aggressive of NOW accounts ac- market- banks can of NOW ac- three burgh). and the market showed substantial in the growth to pricing and institutions ac- examines balances, transaction balances Federal 1980.3 December of banks analyzed (Cleveland, and thrift in six SMSAsCincinnati, and one each in Pennsylvania West Virginia along balances, in the Fourth since are in Ohio Toledo) tucky have been available for several depository institutions transaction ac- in other NOW account even may gain in the New England states, where that at banks and thrifts. of NOW account changes of thrifts of minimum- Commentary a Much of the variation extent Economic with of NOWs has been attributed the requirements the growth share of banks and thrifts in balance of whole in the state bankpolicies and the stringency accounts share NOW accounts and banks, Differences the relative impor- institutions orqanizations.l as accounts. the pricing nonprofit market. differences of thrift ing structure, transaction the competitive Growth tance NOW share reflected for and pricing additional Deposi- offered in market compete payments indeed, loan order of with- now industry market. and tually This will lose some ing efforts counts; savings nationwide. can interest-bearing institu- 1, 1981, savings banks were to offer negotiable households ------------------~~~~ Research banks, institutions The depository since January and mutual third-party Federal among has intensified associations, to types by Paul R. Watro dif- between and NOW accounts The Battle for NOWs (Wheeling). and (Pitts- and Ken- (Lexington). Growth Growth of NOWs in the Fourth (40) has been rapid District depository (see table institutions District 1). Fourth accumulated $3.3 billion in NOW balances as of July 1981, representi ng al most 15 percent of thei r total transaction deposits (NOW, demand, auto- had 1. Banks and savings and loan associations are permitted to offer NOW accounts to nonprofit organizations that are granted tax exemptions by the Internal Revenue Service and to public institutions, such as state universities or city hospitals. varied efforts overdraft the relative share pricing for NOWs, and teller machines, NOW pricing disparities areas. presumably has of reduced in gaining to differences of thrift banks and thrifts, checking ~£QDomicCommentary bank share fell only by ex- have thrift varied among the SMSAs examined. can be attributed tive than 1981 the bank 10,1981 August points. success balances has been rapid, inflows significantly; Simul- reduction among the market services, While of net declined gain generally the six SMSAs. Marketing be expected ness. also of competition auxil iary tection banks deposits this type NOW the largest percentage influence share savings and loan NOW balances, prices January the smallest price differences in their some with higher Since in SMSAs the greatest Non-price charging of the interest- to register demand to the pricing had a tendency perienced to as substitutes held do relative that accounts accounts individuals accounts Assuming perceive has been despite institutions. for the success in gaining NOW business price either 87.5 percent tured The of important provide thrifts. institutions competitive largest or overdraft originate to avoid their charges. Another machines were the and Pittsburgh, compared banks Among thrifts in Cleveland terms taneously, 9. Average prices were calculated from the prices charged by the three or four largest banks and thrifts during the first five months of this year. When the pricing terms of one of the three largest institutions were not comparable, the prices of the fourth largest institution were used. were the most as the three than thrift where they estab- for example, most successful As ex- gained a larger share of NOWs in those markets vary 8. While it is recognized that these factors may be interdependent, they are treated as independent variables in the analysis. the services apparently associations to the average pricing terms pncmq auxiliary and Cleveland SMSAs. switch or four had lower these more banks were found to Cincinnati banks and thrifts widely fluence stipulated fees. The average prices of the three largest and thrifts charges typically offer efforts, varied Lexington share of banks for each type of marketing terms, the price gap between at thrifts had the are assumed banks, a of NOW market policies or average If the While thrifts banks. occur. thrifts affecting the pricing 5.25 percent, in the given SMSA. of offices and deposits. institutions. minimum where the going prices institution of for NOWs, although Banks gained the largest percentage balances was in the measures to reflect lished the greatest of of- held by thrifts their SMSAs. such services.8 on the success of gener- measure selected non- institutions, of thrifts NOW accounts. fices and total and and auxiliary of the largest banks and thrifts banks of checking banks, among had some influence ating importance of NOWs between and as marketing many in the SMSA market, and price to Reserve Bank of Cleveland and pro- would Address correction requested as shown from mailing list o Correct o Remove success of NOW busi- are available on Please send mailing label to the Research Department, Federal Reserve Bank of Cleveland, P.O. Box 6387, Cleveland, OH 44101. 2. See Ralph C. Kimball, "Variations in the New England NOW Account Experiment," New England Economic Review, Federal Reserve Bank of Boston, November/December 1980, pp. 23-39. 3. The term thrifts incl udes savings and loan associations and mutual savings banks. Credit unions are excluded because they offer share drafts rather than NOW accounts. The Fourth Federal Reserve District includes all of Ohio, the eastern part of Kentucky, the western part of Pennsylvania, and a small portion of West Virginia. Pennsylvania is the only state in the Fourth District where mutual savings banks operate. Table 2 NOW and Transaction Balances and Market Sharea Table 1 NOW Growth and Other Deposit Changesa Millions of dollars Deposit type NOW Demand Automatic transfer Telephone and pre-authorized Total transaction Savings Time __ 1_9_8_0 December January 20,060 1,139 c 996 20,953 765 2,152 17,648 588 736 819 645 2,585 17,702 561 686 3,014 18,221 581 3,013 17,340 561 690 630 3,176 17,311 546 615 December July 3,314 17 ,730 540 589 July change 3,313 -2,330 - 599 -230 22,019 23,350 21,033 21,506 22,506 21,544 21,648 22,173 154 26,350 63,570 26,245 66,046 24,448 24,717 67,721 24,717 67,721 24,256 68,270 23,846 29,825 23,697 69,443 -2,643 5,873 67,084 a. Deposits include those of banks, savings and loan associations, and mutual savings banks in the Fourth District. Figures are weekly averages based on daily figures for the first full reporting week (Thursday to Wednesday) in each month. Figures are slightly understated, because smaller institutions do not report on a daily basis. SOURCE: Report of Transaction Accounts, Other Deposits, and Vault Cash, Federal Reserve System. matic transfer, and telephone and pre-authorized accountsl.f Such rapid growth can be attributed to the widespread offering of NOW accounts by most banks and savings and loan associations and their aggressive marketing efforts. Over 75 percent of the NOW' account growth occurred during January and February of this year. While NOW balances are still increasing, the pace has slowed substantially since the beginning of the year. In fact, NOW account balances failed to grow between April and. May at 40 institutions. Despite the large buildup of NOW account balances, total transaction balances at 4D depository institutions registered only a $154-million net increase. Apparently many depositors switched funds from other accounts to open NOW accounts. The depository institutions experienced declines in demand deposits ($2,330 million). auto4. Figures represent weekly averages based on daily figures for the first full reporting week (Thursday to Wednesday) in each month. These data are derived from the reserve-accounting report submitted to the Federal Reserve Bank of Cleveland. Figures are slightly understated, because smaller institutions do not report on a daily basis and all credit unions are excluded. 1981 1980 --------------19-8-1--------~----~--~Decemberto February March April May June matic transfer savings ($599 million), and telephone and pre-authorized transfers ($230 mill ion). These institutions also reported a $2,653-million net outflow of savings deposits since December 1980. While some of the savings deposits were transferred to NOW accounts, a large portion of these funds probably were shifted to higheryielding certificates of deposit and moneymarket funds.5 Market Share Banks had a natural advantage in introducing NOW accounts because of their near monopoly of the checking account market. In fact, some banks automatically converted eligible checking accounts into NOW accounts. Attempting to compete against this advantage, thrift institutions generally began offering NOWs at lower charges and balance requirements than banks. Wl:1ile such pricing encourages lower-balance depositors to open NOW accounts at thrift institutions, it would seem unlikely to in- 5. Time deposits increased by $5,9 billion at 4D banks and thrift institutions, and money-market· funds rose from $76.6 billion to $129.7 billion between December 1980 and July 1981. NOW balances, $ mil Banks Thrifts January February Cincinnati March April May June July 926 70 1,956 196 2,326 259 2,688 326 2,676 337 2,802 2,900 374 414 o 93.0 7.0 90.9 9.1 90,0 10,0 89.2 10.8 88.8 11.2 88.2 11.8 87,5 12,5 21,654 365 22,955 395 20,567 486 20,984 550 21,876 20,915 20,989 21,487 630 629 659 686 98.3 1.7 98.3 1.7 97.8 2.2 97.4 97.2 2.8 97,1 2,9 97,0 3.0 96,9 3,1 o Market share, percentb Banks Thrifts Total transaction balances, $ mil Banks Thrifts Table 3 Market Share and Thrift Competition in Selected SMSAs 100 Market share, percentb Banks Thrifts 2.6 a. Figures are weekly averages based on daily figures for the first full reporting week (Thursday to Wednesday) in each month. Thrifts include savings and loan associations and mutual savings banks, Total transaction balances include demand deposits, automatic transfer savings, telephone and pre-authorized transfers, and NOW deposits, Figures are slightly understated, because smaller institutions do not report on a daily basis, b. Market share balances of NOW accounts are estimates based on the proportion of total deposits at offices within the SMSA. SOURCE: Report of Transaction Accounts, Other Deposits, and Vault Cash, Federal Reserve System. duce higher-balance customers to switch to another institution if they already were receiving no-charge NOW accounts at a bank.6 In view of these factors, it is not surprising that banks have competed effectively for NOW balances (see table 2). By Feb,\uary 1981, banks gained 91 percent of NOW balances in the 4D. A large portion of these funds probably originated from deposits that were switched from other accounts. Other types of bank deposits-demand, automatic transfer, telephone and preauthorized, and savings-declined over this two-month period. Since January 1981, however, thrift institutions have consistently gained an increasingly larger share of the net inflows of NOW accounts. After gaining only 7 percent in January, thrifts increased their share of 6. Lower service charges might make it profitable for high-balance depositors to change institutions, particularly if they prefer to economize on their transaction balances. monthly inflows of NOW balances, reaching a high of 29 percent in July. Although the volume of NOW growth has decreased greatly, thrifts have improved their overall share of NOW balances outstanding by 5.5 percentage points since January, reaching 12.5 percent in July. Because of the growth in NOW accounts, thrifts increased their share of total transaction balances from 1.7 percent in December 1980 to 3.1 percent in July 1981. This was accomplished by a $414-million increase in NOW balances, offset by a $93-million decline in other transaction balances, for a net gain of $321 million. In contrast, banks experienced a net reduction of $167 million in transaction balances. Market Area Another way to gauge the relative success of banks and thrifts in attracting NOW accounts is to examine competition in individual market areas. Indeed, the geo- Cleveland Lexington Pittsburgha Toledo Wheeling Market share of NOW balances (May 1981), %b Banks Thrifts 87.2 12.8 79.3 20.6 99.0 1.0 86.7 13.3 94.3 5.7 93.1 6.9 Offices operated by thrifts, % Deposits held by thrifts, % 46.9 48.1 38.3 43.6 16.0 16.2 35.0 28.6 25.7 38.9 20.0 27.7 1,000 383 617 1,417 933 500 433 1,833 500 1,333 833 508 325 667 567 100 5.53 4.67 0.86 7.35 4.42 2.93 4.33 4.50 -0.17 4.67 3.33 1.34 3.83 3.75 0.08 4.67 4.17 0.50 367 1.78 950 2.77 633 1.83 1,000 2.84 400 1.66 400 2.67 15 13 18 10 20 18 Minimum balance to avoid fees, $c Banks Thrifts Difference Monthly service charge, $c Banks Thrifts Difference Average price difference between NOW and checking accounts Minimum balance to avoid fees, $ Monthly service charge, $ Reduction in demand deposits (December to May),% 350 1,067 a. Although all of the largest depository institutions in the selected SMSAs offered NOW accounts, two of the Pittsburgh banks did not offer them to individuals. These banks, however, continued to provide automatic transfer savings accounts for individuals over the period examined. b. Market-share balances of NOW accounts are estimates based on the proportion of total deposits at offices within the SMSA. c. Prices are averages calculated from prices charged by the three or four largest banks in each of the SMSAs during the first five months of 1981. Minimum-balance requirements refer to those maintained in NOW accounts only; in Pittsburgh, however, savings and NOW balances are collectively applied to the requirement. All NOW and checking accounts refer to the least-cost minimum-balance type, assuming monthly transaction of three deposits and fifteen checks. An average service charge is used for institutions offering sliding-scale charges. SOURCES: Report of Transaction Accounts, Other Deposits, and Vault Cash, Federal Reserve System; Summary of Deposit Data, Federal Deposit Insurance Corporation; and an informal telephone survey. graphical area in which depository institutions compete varies according to the type of product or service provided. Institutions compete for large construction loans in regional and national markets, whereas competition for such services as individual savings, checking, and NOW accounts generally is confined to smaller regional or local areas. NOW account balances of banks and thrifts were analyzed in six of the largest standard metropolitan statistical areas (SMSAs) in the 4D. NOW balances captured by banks differed widely among these SMSAs. After five months, the bank-market share of NOWs varied between 79.3 percent in Cleveland to 99.0 percent in Lexington (see table 3).1 These variations in the bank7. The share of NOWs held by banks and thrift institutions is estimated, because data are reported by institution rather than by office. Several large institutions operate offices in more than one SMSA. Estimates are based on the proportion of total deposits held by offices within a given SMSA. Table 2 NOW and Transaction Balances and Market Sharea Table 1 NOW Growth and Other Deposit Changesa Millions of dollars Deposit type NOW Demand Automatic transfer Telephone and pre-authorized Total transaction Savings Time __ 1_9_8_0 December January 20,060 1,139 c 996 20,953 765 2,152 17,648 588 736 819 645 2,585 17,702 561 686 3,014 18,221 581 3,013 17,340 561 690 630 3,176 17,311 546 615 December July 3,314 17 ,730 540 589 July change 3,313 -2,330 - 599 -230 22,019 23,350 21,033 21,506 22,506 21,544 21,648 22,173 154 26,350 63,570 26,245 66,046 24,448 24,717 67,721 24,717 67,721 24,256 68,270 23,846 29,825 23,697 69,443 -2,643 5,873 67,084 a. Deposits include those of banks, savings and loan associations, and mutual savings banks in the Fourth District. Figures are weekly averages based on daily figures for the first full reporting week (Thursday to Wednesday) in each month. Figures are slightly understated, because smaller institutions do not report on a daily basis. SOURCE: Report of Transaction Accounts, Other Deposits, and Vault Cash, Federal Reserve System. matic transfer, and telephone and pre-authorized accountsl.f Such rapid growth can be attributed to the widespread offering of NOW accounts by most banks and savings and loan associations and their aggressive marketing efforts. Over 75 percent of the NOW' account growth occurred during January and February of this year. While NOW balances are still increasing, the pace has slowed substantially since the beginning of the year. In fact, NOW account balances failed to grow between April and. May at 40 institutions. Despite the large buildup of NOW account balances, total transaction balances at 4D depository institutions registered only a $154-million net increase. Apparently many depositors switched funds from other accounts to open NOW accounts. The depository institutions experienced declines in demand deposits ($2,330 million). auto4. Figures represent weekly averages based on daily figures for the first full reporting week (Thursday to Wednesday) in each month. These data are derived from the reserve-accounting report submitted to the Federal Reserve Bank of Cleveland. Figures are slightly understated, because smaller institutions do not report on a daily basis and all credit unions are excluded. 1981 1980 --------------19-8-1--------~----~--~Decemberto February March April May June matic transfer savings ($599 million), and telephone and pre-authorized transfers ($230 mill ion). These institutions also reported a $2,653-million net outflow of savings deposits since December 1980. While some of the savings deposits were transferred to NOW accounts, a large portion of these funds probably were shifted to higheryielding certificates of deposit and moneymarket funds.5 Market Share Banks had a natural advantage in introducing NOW accounts because of their near monopoly of the checking account market. In fact, some banks automatically converted eligible checking accounts into NOW accounts. Attempting to compete against this advantage, thrift institutions generally began offering NOWs at lower charges and balance requirements than banks. Wl:1ile such pricing encourages lower-balance depositors to open NOW accounts at thrift institutions, it would seem unlikely to in- 5. Time deposits increased by $5,9 billion at 4D banks and thrift institutions, and money-market· funds rose from $76.6 billion to $129.7 billion between December 1980 and July 1981. NOW balances, $ mil Banks Thrifts January February Cincinnati March April May June July 926 70 1,956 196 2,326 259 2,688 326 2,676 337 2,802 2,900 374 414 o 93.0 7.0 90.9 9.1 90,0 10,0 89.2 10.8 88.8 11.2 88.2 11.8 87,5 12,5 21,654 365 22,955 395 20,567 486 20,984 550 21,876 20,915 20,989 21,487 630 629 659 686 98.3 1.7 98.3 1.7 97.8 2.2 97.4 97.2 2.8 97,1 2,9 97,0 3.0 96,9 3,1 o Market share, percentb Banks Thrifts Total transaction balances, $ mil Banks Thrifts Table 3 Market Share and Thrift Competition in Selected SMSAs 100 Market share, percentb Banks Thrifts 2.6 a. Figures are weekly averages based on daily figures for the first full reporting week (Thursday to Wednesday) in each month. Thrifts include savings and loan associations and mutual savings banks, Total transaction balances include demand deposits, automatic transfer savings, telephone and pre-authorized transfers, and NOW deposits, Figures are slightly understated, because smaller institutions do not report on a daily basis, b. Market share balances of NOW accounts are estimates based on the proportion of total deposits at offices within the SMSA. SOURCE: Report of Transaction Accounts, Other Deposits, and Vault Cash, Federal Reserve System. duce higher-balance customers to switch to another institution if they already were receiving no-charge NOW accounts at a bank.6 In view of these factors, it is not surprising that banks have competed effectively for NOW balances (see table 2). By Feb,\uary 1981, banks gained 91 percent of NOW balances in the 4D. A large portion of these funds probably originated from deposits that were switched from other accounts. Other types of bank deposits-demand, automatic transfer, telephone and preauthorized, and savings-declined over this two-month period. Since January 1981, however, thrift institutions have consistently gained an increasingly larger share of the net inflows of NOW accounts. After gaining only 7 percent in January, thrifts increased their share of 6. Lower service charges might make it profitable for high-balance depositors to change institutions, particularly if they prefer to economize on their transaction balances. monthly inflows of NOW balances, reaching a high of 29 percent in July. Although the volume of NOW growth has decreased greatly, thrifts have improved their overall share of NOW balances outstanding by 5.5 percentage points since January, reaching 12.5 percent in July. Because of the growth in NOW accounts, thrifts increased their share of total transaction balances from 1.7 percent in December 1980 to 3.1 percent in July 1981. This was accomplished by a $414-million increase in NOW balances, offset by a $93-million decline in other transaction balances, for a net gain of $321 million. In contrast, banks experienced a net reduction of $167 million in transaction balances. Market Area Another way to gauge the relative success of banks and thrifts in attracting NOW accounts is to examine competition in individual market areas. Indeed, the geo- Cleveland Lexington Pittsburgha Toledo Wheeling Market share of NOW balances (May 1981), %b Banks Thrifts 87.2 12.8 79.3 20.6 99.0 1.0 86.7 13.3 94.3 5.7 93.1 6.9 Offices operated by thrifts, % Deposits held by thrifts, % 46.9 48.1 38.3 43.6 16.0 16.2 35.0 28.6 25.7 38.9 20.0 27.7 1,000 383 617 1,417 933 500 433 1,833 500 1,333 833 508 325 667 567 100 5.53 4.67 0.86 7.35 4.42 2.93 4.33 4.50 -0.17 4.67 3.33 1.34 3.83 3.75 0.08 4.67 4.17 0.50 367 1.78 950 2.77 633 1.83 1,000 2.84 400 1.66 400 2.67 15 13 18 10 20 18 Minimum balance to avoid fees, $c Banks Thrifts Difference Monthly service charge, $c Banks Thrifts Difference Average price difference between NOW and checking accounts Minimum balance to avoid fees, $ Monthly service charge, $ Reduction in demand deposits (December to May),% 350 1,067 a. Although all of the largest depository institutions in the selected SMSAs offered NOW accounts, two of the Pittsburgh banks did not offer them to individuals. These banks, however, continued to provide automatic transfer savings accounts for individuals over the period examined. b. Market-share balances of NOW accounts are estimates based on the proportion of total deposits at offices within the SMSA. c. Prices are averages calculated from prices charged by the three or four largest banks in each of the SMSAs during the first five months of 1981. Minimum-balance requirements refer to those maintained in NOW accounts only; in Pittsburgh, however, savings and NOW balances are collectively applied to the requirement. All NOW and checking accounts refer to the least-cost minimum-balance type, assuming monthly transaction of three deposits and fifteen checks. An average service charge is used for institutions offering sliding-scale charges. SOURCES: Report of Transaction Accounts, Other Deposits, and Vault Cash, Federal Reserve System; Summary of Deposit Data, Federal Deposit Insurance Corporation; and an informal telephone survey. graphical area in which depository institutions compete varies according to the type of product or service provided. Institutions compete for large construction loans in regional and national markets, whereas competition for such services as individual savings, checking, and NOW accounts generally is confined to smaller regional or local areas. NOW account balances of banks and thrifts were analyzed in six of the largest standard metropolitan statistical areas (SMSAs) in the 4D. NOW balances captured by banks differed widely among these SMSAs. After five months, the bank-market share of NOWs varied between 79.3 percent in Cleveland to 99.0 percent in Lexington (see table 3).1 These variations in the bank7. The share of NOWs held by banks and thrift institutions is estimated, because data are reported by institution rather than by office. Several large institutions operate offices in more than one SMSA. Estimates are based on the proportion of total deposits held by offices within a given SMSA. Table 2 NOW and Transaction Balances and Market Sharea Table 1 NOW Growth and Other Deposit Changesa Millions of dollars Deposit type NOW Demand Automatic transfer Telephone and pre-authorized Total transaction Savings Time __ 1_9_8_0 December January 20,060 1,139 c 996 20,953 765 2,152 17,648 588 736 819 645 2,585 17,702 561 686 3,014 18,221 581 3,013 17,340 561 690 630 3,176 17,311 546 615 December July 3,314 17 ,730 540 589 July change 3,313 -2,330 - 599 -230 22,019 23,350 21,033 21,506 22,506 21,544 21,648 22,173 154 26,350 63,570 26,245 66,046 24,448 24,717 67,721 24,717 67,721 24,256 68,270 23,846 29,825 23,697 69,443 -2,643 5,873 67,084 a. Deposits include those of banks, savings and loan associations, and mutual savings banks in the Fourth District. Figures are weekly averages based on daily figures for the first full reporting week (Thursday to Wednesday) in each month. Figures are slightly understated, because smaller institutions do not report on a daily basis. SOURCE: Report of Transaction Accounts, Other Deposits, and Vault Cash, Federal Reserve System. matic transfer, and telephone and pre-authorized accountsl.f Such rapid growth can be attributed to the widespread offering of NOW accounts by most banks and savings and loan associations and their aggressive marketing efforts. Over 75 percent of the NOW' account growth occurred during January and February of this year. While NOW balances are still increasing, the pace has slowed substantially since the beginning of the year. In fact, NOW account balances failed to grow between April and. May at 40 institutions. Despite the large buildup of NOW account balances, total transaction balances at 4D depository institutions registered only a $154-million net increase. Apparently many depositors switched funds from other accounts to open NOW accounts. The depository institutions experienced declines in demand deposits ($2,330 million). auto4. Figures represent weekly averages based on daily figures for the first full reporting week (Thursday to Wednesday) in each month. These data are derived from the reserve-accounting report submitted to the Federal Reserve Bank of Cleveland. Figures are slightly understated, because smaller institutions do not report on a daily basis and all credit unions are excluded. 1981 1980 --------------19-8-1--------~----~--~Decemberto February March April May June matic transfer savings ($599 million), and telephone and pre-authorized transfers ($230 mill ion). These institutions also reported a $2,653-million net outflow of savings deposits since December 1980. While some of the savings deposits were transferred to NOW accounts, a large portion of these funds probably were shifted to higheryielding certificates of deposit and moneymarket funds.5 Market Share Banks had a natural advantage in introducing NOW accounts because of their near monopoly of the checking account market. In fact, some banks automatically converted eligible checking accounts into NOW accounts. Attempting to compete against this advantage, thrift institutions generally began offering NOWs at lower charges and balance requirements than banks. Wl:1ile such pricing encourages lower-balance depositors to open NOW accounts at thrift institutions, it would seem unlikely to in- 5. Time deposits increased by $5,9 billion at 4D banks and thrift institutions, and money-market· funds rose from $76.6 billion to $129.7 billion between December 1980 and July 1981. NOW balances, $ mil Banks Thrifts January February Cincinnati March April May June July 926 70 1,956 196 2,326 259 2,688 326 2,676 337 2,802 2,900 374 414 o 93.0 7.0 90.9 9.1 90,0 10,0 89.2 10.8 88.8 11.2 88.2 11.8 87,5 12,5 21,654 365 22,955 395 20,567 486 20,984 550 21,876 20,915 20,989 21,487 630 629 659 686 98.3 1.7 98.3 1.7 97.8 2.2 97.4 97.2 2.8 97,1 2,9 97,0 3.0 96,9 3,1 o Market share, percentb Banks Thrifts Total transaction balances, $ mil Banks Thrifts Table 3 Market Share and Thrift Competition in Selected SMSAs 100 Market share, percentb Banks Thrifts 2.6 a. Figures are weekly averages based on daily figures for the first full reporting week (Thursday to Wednesday) in each month. Thrifts include savings and loan associations and mutual savings banks, Total transaction balances include demand deposits, automatic transfer savings, telephone and pre-authorized transfers, and NOW deposits, Figures are slightly understated, because smaller institutions do not report on a daily basis, b. Market share balances of NOW accounts are estimates based on the proportion of total deposits at offices within the SMSA. SOURCE: Report of Transaction Accounts, Other Deposits, and Vault Cash, Federal Reserve System. duce higher-balance customers to switch to another institution if they already were receiving no-charge NOW accounts at a bank.6 In view of these factors, it is not surprising that banks have competed effectively for NOW balances (see table 2). By Feb,\uary 1981, banks gained 91 percent of NOW balances in the 4D. A large portion of these funds probably originated from deposits that were switched from other accounts. Other types of bank deposits-demand, automatic transfer, telephone and preauthorized, and savings-declined over this two-month period. Since January 1981, however, thrift institutions have consistently gained an increasingly larger share of the net inflows of NOW accounts. After gaining only 7 percent in January, thrifts increased their share of 6. Lower service charges might make it profitable for high-balance depositors to change institutions, particularly if they prefer to economize on their transaction balances. monthly inflows of NOW balances, reaching a high of 29 percent in July. Although the volume of NOW growth has decreased greatly, thrifts have improved their overall share of NOW balances outstanding by 5.5 percentage points since January, reaching 12.5 percent in July. Because of the growth in NOW accounts, thrifts increased their share of total transaction balances from 1.7 percent in December 1980 to 3.1 percent in July 1981. This was accomplished by a $414-million increase in NOW balances, offset by a $93-million decline in other transaction balances, for a net gain of $321 million. In contrast, banks experienced a net reduction of $167 million in transaction balances. Market Area Another way to gauge the relative success of banks and thrifts in attracting NOW accounts is to examine competition in individual market areas. Indeed, the geo- Cleveland Lexington Pittsburgha Toledo Wheeling Market share of NOW balances (May 1981), %b Banks Thrifts 87.2 12.8 79.3 20.6 99.0 1.0 86.7 13.3 94.3 5.7 93.1 6.9 Offices operated by thrifts, % Deposits held by thrifts, % 46.9 48.1 38.3 43.6 16.0 16.2 35.0 28.6 25.7 38.9 20.0 27.7 1,000 383 617 1,417 933 500 433 1,833 500 1,333 833 508 325 667 567 100 5.53 4.67 0.86 7.35 4.42 2.93 4.33 4.50 -0.17 4.67 3.33 1.34 3.83 3.75 0.08 4.67 4.17 0.50 367 1.78 950 2.77 633 1.83 1,000 2.84 400 1.66 400 2.67 15 13 18 10 20 18 Minimum balance to avoid fees, $c Banks Thrifts Difference Monthly service charge, $c Banks Thrifts Difference Average price difference between NOW and checking accounts Minimum balance to avoid fees, $ Monthly service charge, $ Reduction in demand deposits (December to May),% 350 1,067 a. Although all of the largest depository institutions in the selected SMSAs offered NOW accounts, two of the Pittsburgh banks did not offer them to individuals. These banks, however, continued to provide automatic transfer savings accounts for individuals over the period examined. b. Market-share balances of NOW accounts are estimates based on the proportion of total deposits at offices within the SMSA. c. Prices are averages calculated from prices charged by the three or four largest banks in each of the SMSAs during the first five months of 1981. Minimum-balance requirements refer to those maintained in NOW accounts only; in Pittsburgh, however, savings and NOW balances are collectively applied to the requirement. All NOW and checking accounts refer to the least-cost minimum-balance type, assuming monthly transaction of three deposits and fifteen checks. An average service charge is used for institutions offering sliding-scale charges. SOURCES: Report of Transaction Accounts, Other Deposits, and Vault Cash, Federal Reserve System; Summary of Deposit Data, Federal Deposit Insurance Corporation; and an informal telephone survey. graphical area in which depository institutions compete varies according to the type of product or service provided. Institutions compete for large construction loans in regional and national markets, whereas competition for such services as individual savings, checking, and NOW accounts generally is confined to smaller regional or local areas. NOW account balances of banks and thrifts were analyzed in six of the largest standard metropolitan statistical areas (SMSAs) in the 4D. NOW balances captured by banks differed widely among these SMSAs. After five months, the bank-market share of NOWs varied between 79.3 percent in Cleveland to 99.0 percent in Lexington (see table 3).1 These variations in the bank7. The share of NOWs held by banks and thrift institutions is estimated, because data are reported by institution rather than by office. Several large institutions operate offices in more than one SMSA. Estimates are based on the proportion of total deposits held by offices within a given SMSA. Federal market share factors, including of thrift price can be attributed the relative institutions differences thrifts, price differences NOW accounts at differences The efforts presence used to were inversely banks in the one-to-one in the market The percentage deposits importance These related battle to generally the success relationship did in Lexington, not smallest percentage A second has been thrift offer factor NOW Both accounts that with balance amount, charge pay balance falls that and no service below the depositor service banks interest banks selected and the is assessed may include thrifts of if a is maintained. a monthly transaction operating in the SMSAs form a basis for price com- parisons.9 monthly Pricing service elements charges, fees, and the minimum avoid any charges. among institutions, can per balance While prices include transaction required often pected, among thrifts generally the markets, where they pricing pricing advantages. maintained the most attractive with competing Price differentials were less favorable in the other SMSAs. In fact, had slightly lower the service charges than the local savings and loans, but they set low minimum-balance requirements of banks the reason of checking NOW accounts. NOW checking accounts, the checking their amounts have of these in- would by banks. earn Since interest, incentive unless outweighs earning advantage. that maintained pricing a financial accounts individuals for not to NOW accounts their Banks operating of balances. share these among banks automatic volumes, the overall teller protection.10 5.5 percentage Summary Growth of NOW tions have utilized authority to accounts. the balance'S January large and portion from transaction of these acquired interest-bearing Over was 75 percent generated of this funds checking accounts. 40 institu- recently these February in the depository their offer transaction NOW accounts as most and during year, and a appeared other Banks of have Much factors obviously to NOW balances because of the of banks bank-market importance ferences in the battle in NOW account such and automatic to affect and thrifts as non-price in generating no hard data variation in the rela- institutions, between competition at banks, and the among institutions. cap- 10. The Cincinnati savings and loan associations, along with other institutions, provide automatic teller machines on a joint basis. Competition tions when commercial authorized Paul R. Watro is an economist with the Federal Reserve Bank of Cleveland. The research assistance of Peggy Petricig is appreciated. The views stated herein are those of the author and not necessarily those of the Federal Reserve Bank of Cleveland or of the Board of Governors of the Federal Reserve System. drawal tory (NOW) accounts and banking ceivably BULK RATE U.S. Postage Paid Cleveland,OH Reserve Bank of Cleveland Department P.O. Box 6387 Cleveland,OH 44101 Permit No. 385 count) lessen an count years.2 at banks and thrifts Reserve District of its share (or Through some schemes, impact banks of the conof the transaction aggressive of NOW accounts ac- market- banks can of NOW ac- three burgh). and the market showed substantial in the growth to pricing and institutions ac- examines balances, transaction balances Federal 1980.3 December of banks analyzed (Cleveland, and thrift in six SMSAsCincinnati, and one each in Pennsylvania West Virginia along balances, in the Fourth since are in Ohio Toledo) tucky have been available for several depository institutions transaction ac- in other NOW account even may gain in the New England states, where that at banks and thrifts. of NOW account changes of thrifts of minimum- Commentary a Much of the variation extent Economic with of NOWs has been attributed the requirements the growth share of banks and thrifts in balance of whole in the state bankpolicies and the stringency accounts share NOW accounts and banks, Differences the relative impor- institutions orqanizations.l as accounts. the pricing nonprofit market. differences of thrift ing structure, transaction the competitive Growth tance NOW share reflected for and pricing additional Deposi- offered in market compete payments indeed, loan order of with- now industry market. and tually This will lose some ing efforts counts; savings nationwide. can interest-bearing institu- 1, 1981, savings banks were to offer negotiable households ------------------~~~~ Research banks, institutions The depository since January and mutual third-party Federal among has intensified associations, to types by Paul R. Watro dif- between and NOW accounts The Battle for NOWs (Wheeling). and (Pitts- and Ken- (Lexington). Growth Growth of NOWs in the Fourth (40) has been rapid District depository (see table institutions District 1). Fourth accumulated $3.3 billion in NOW balances as of July 1981, representi ng al most 15 percent of thei r total transaction deposits (NOW, demand, auto- had 1. Banks and savings and loan associations are permitted to offer NOW accounts to nonprofit organizations that are granted tax exemptions by the Internal Revenue Service and to public institutions, such as state universities or city hospitals. varied efforts overdraft the relative share pricing for NOWs, and teller machines, NOW pricing disparities areas. presumably has of reduced in gaining to differences of thrift banks and thrifts, checking ~£QDomicCommentary bank share fell only by ex- have thrift varied among the SMSAs examined. can be attributed tive than 1981 the bank 10,1981 August points. success balances has been rapid, inflows significantly; Simul- reduction among the market services, While of net declined gain generally the six SMSAs. Marketing be expected ness. also of competition auxil iary tection banks deposits this type NOW the largest percentage influence share savings and loan NOW balances, prices January the smallest price differences in their some with higher Since in SMSAs the greatest Non-price charging of the interest- to register demand to the pricing had a tendency perienced to as substitutes held do relative that accounts accounts individuals accounts Assuming perceive has been despite institutions. for the success in gaining NOW business price either 87.5 percent tured The of important provide thrifts. institutions competitive largest or overdraft originate to avoid their charges. Another machines were the and Pittsburgh, compared banks Among thrifts in Cleveland terms taneously, 9. Average prices were calculated from the prices charged by the three or four largest banks and thrifts during the first five months of this year. When the pricing terms of one of the three largest institutions were not comparable, the prices of the fourth largest institution were used. were the most as the three than thrift where they estab- for example, most successful As ex- gained a larger share of NOWs in those markets vary 8. While it is recognized that these factors may be interdependent, they are treated as independent variables in the analysis. the services apparently associations to the average pricing terms pncmq auxiliary and Cleveland SMSAs. switch or four had lower these more banks were found to Cincinnati banks and thrifts widely fluence stipulated fees. The average prices of the three largest and thrifts charges typically offer efforts, varied Lexington share of banks for each type of marketing terms, the price gap between at thrifts had the are assumed banks, a of NOW market policies or average If the While thrifts banks. occur. thrifts affecting the pricing 5.25 percent, in the given SMSA. of offices and deposits. institutions. minimum where the going prices institution of for NOWs, although Banks gained the largest percentage balances was in the measures to reflect lished the greatest of of- held by thrifts their SMSAs. such services.8 on the success of gener- measure selected non- institutions, of thrifts NOW accounts. fices and total and and auxiliary of the largest banks and thrifts banks of checking banks, among had some influence ating importance of NOWs between and as marketing many in the SMSA market, and price to Reserve Bank of Cleveland and pro- would Address correction requested as shown from mailing list o Correct o Remove success of NOW busi- are available on Please send mailing label to the Research Department, Federal Reserve Bank of Cleveland, P.O. Box 6387, Cleveland, OH 44101. 2. See Ralph C. Kimball, "Variations in the New England NOW Account Experiment," New England Economic Review, Federal Reserve Bank of Boston, November/December 1980, pp. 23-39. 3. The term thrifts incl udes savings and loan associations and mutual savings banks. Credit unions are excluded because they offer share drafts rather than NOW accounts. The Fourth Federal Reserve District includes all of Ohio, the eastern part of Kentucky, the western part of Pennsylvania, and a small portion of West Virginia. Pennsylvania is the only state in the Fourth District where mutual savings banks operate. Federal market share factors, including of thrift price can be attributed the relative institutions differences thrifts, price differences NOW accounts at differences The efforts presence used to were inversely banks in the one-to-one in the market The percentage deposits importance These related battle to generally the success relationship did in Lexington, not smallest percentage A second has been thrift offer factor NOW Both accounts that with balance amount, charge pay balance falls that and no service below the depositor service banks interest banks selected and the is assessed may include thrifts of if a is maintained. a monthly transaction operating in the SMSAs form a basis for price com- parisons.9 monthly Pricing service elements charges, fees, and the minimum avoid any charges. among institutions, can per balance While prices include transaction required often pected, among thrifts generally the markets, where they pricing pricing advantages. maintained the most attractive with competing Price differentials were less favorable in the other SMSAs. In fact, had slightly lower the service charges than the local savings and loans, but they set low minimum-balance requirements of banks the reason of checking NOW accounts. NOW checking accounts, the checking their amounts have of these in- would by banks. earn Since interest, incentive unless outweighs earning advantage. that maintained pricing a financial accounts individuals for not to NOW accounts their Banks operating of balances. share these among banks automatic volumes, the overall teller protection.10 5.5 percentage Summary Growth of NOW tions have utilized authority to accounts. the balance'S January large and portion from transaction of these acquired interest-bearing Over was 75 percent generated of this funds checking accounts. 40 institu- recently these February in the depository their offer transaction NOW accounts as most and during year, and a appeared other Banks of have Much factors obviously to NOW balances because of the of banks bank-market importance ferences in the battle in NOW account such and automatic to affect and thrifts as non-price in generating no hard data variation in the rela- institutions, between competition at banks, and the among institutions. cap- 10. The Cincinnati savings and loan associations, along with other institutions, provide automatic teller machines on a joint basis. Competition tions when commercial authorized Paul R. Watro is an economist with the Federal Reserve Bank of Cleveland. The research assistance of Peggy Petricig is appreciated. The views stated herein are those of the author and not necessarily those of the Federal Reserve Bank of Cleveland or of the Board of Governors of the Federal Reserve System. drawal tory (NOW) accounts and banking ceivably BULK RATE U.S. Postage Paid Cleveland,OH Reserve Bank of Cleveland Department P.O. Box 6387 Cleveland,OH 44101 Permit No. 385 count) lessen an count years.2 at banks and thrifts Reserve District of its share (or Through some schemes, impact banks of the conof the transaction aggressive of NOW accounts ac- market- banks can of NOW ac- three burgh). and the market showed substantial in the growth to pricing and institutions ac- examines balances, transaction balances Federal 1980.3 December of banks analyzed (Cleveland, and thrift in six SMSAsCincinnati, and one each in Pennsylvania West Virginia along balances, in the Fourth since are in Ohio Toledo) tucky have been available for several depository institutions transaction ac- in other NOW account even may gain in the New England states, where that at banks and thrifts. of NOW account changes of thrifts of minimum- Commentary a Much of the variation extent Economic with of NOWs has been attributed the requirements the growth share of banks and thrifts in balance of whole in the state bankpolicies and the stringency accounts share NOW accounts and banks, Differences the relative impor- institutions orqanizations.l as accounts. the pricing nonprofit market. differences of thrift ing structure, transaction the competitive Growth tance NOW share reflected for and pricing additional Deposi- offered in market compete payments indeed, loan order of with- now industry market. and tually This will lose some ing efforts counts; savings nationwide. can interest-bearing institu- 1, 1981, savings banks were to offer negotiable households ------------------~~~~ Research banks, institutions The depository since January and mutual third-party Federal among has intensified associations, to types by Paul R. Watro dif- between and NOW accounts The Battle for NOWs (Wheeling). and (Pitts- and Ken- (Lexington). Growth Growth of NOWs in the Fourth (40) has been rapid District depository (see table institutions District 1). Fourth accumulated $3.3 billion in NOW balances as of July 1981, representi ng al most 15 percent of thei r total transaction deposits (NOW, demand, auto- had 1. Banks and savings and loan associations are permitted to offer NOW accounts to nonprofit organizations that are granted tax exemptions by the Internal Revenue Service and to public institutions, such as state universities or city hospitals. varied efforts overdraft the relative share pricing for NOWs, and teller machines, NOW pricing disparities areas. presumably has of reduced in gaining to differences of thrift banks and thrifts, checking ~£QDomicCommentary bank share fell only by ex- have thrift varied among the SMSAs examined. can be attributed tive than 1981 the bank 10,1981 August points. success balances has been rapid, inflows significantly; Simul- reduction among the market services, While of net declined gain generally the six SMSAs. Marketing be expected ness. also of competition auxil iary tection banks deposits this type NOW the largest percentage influence share savings and loan NOW balances, prices January the smallest price differences in their some with higher Since in SMSAs the greatest Non-price charging of the interest- to register demand to the pricing had a tendency perienced to as substitutes held do relative that accounts accounts individuals accounts Assuming perceive has been despite institutions. for the success in gaining NOW business price either 87.5 percent tured The of important provide thrifts. institutions competitive largest or overdraft originate to avoid their charges. Another machines were the and Pittsburgh, compared banks Among thrifts in Cleveland terms taneously, 9. Average prices were calculated from the prices charged by the three or four largest banks and thrifts during the first five months of this year. When the pricing terms of one of the three largest institutions were not comparable, the prices of the fourth largest institution were used. were the most as the three than thrift where they estab- for example, most successful As ex- gained a larger share of NOWs in those markets vary 8. While it is recognized that these factors may be interdependent, they are treated as independent variables in the analysis. the services apparently associations to the average pricing terms pncmq auxiliary and Cleveland SMSAs. switch or four had lower these more banks were found to Cincinnati banks and thrifts widely fluence stipulated fees. The average prices of the three largest and thrifts charges typically offer efforts, varied Lexington share of banks for each type of marketing terms, the price gap between at thrifts had the are assumed banks, a of NOW market policies or average If the While thrifts banks. occur. thrifts affecting the pricing 5.25 percent, in the given SMSA. of offices and deposits. institutions. minimum where the going prices institution of for NOWs, although Banks gained the largest percentage balances was in the measures to reflect lished the greatest of of- held by thrifts their SMSAs. such services.8 on the success of gener- measure selected non- institutions, of thrifts NOW accounts. fices and total and and auxiliary of the largest banks and thrifts banks of checking banks, among had some influence ating importance of NOWs between and as marketing many in the SMSA market, and price to Reserve Bank of Cleveland and pro- would Address correction requested as shown from mailing list o Correct o Remove success of NOW busi- are available on Please send mailing label to the Research Department, Federal Reserve Bank of Cleveland, P.O. Box 6387, Cleveland, OH 44101. 2. See Ralph C. Kimball, "Variations in the New England NOW Account Experiment," New England Economic Review, Federal Reserve Bank of Boston, November/December 1980, pp. 23-39. 3. The term thrifts incl udes savings and loan associations and mutual savings banks. Credit unions are excluded because they offer share drafts rather than NOW accounts. The Fourth Federal Reserve District includes all of Ohio, the eastern part of Kentucky, the western part of Pennsylvania, and a small portion of West Virginia. Pennsylvania is the only state in the Fourth District where mutual savings banks operate.