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August 8, 1 980
Deregu lati on
Public Law 96-221 -the Depository Institutions Deregu lation and Monetary Control
Act-has been on the books for only four
months' time, but it is already living up to its
billing as the most far-reaching piece offinanciallegislation ofthe past generation. Controversy has developed around several sections
of the legislation. However, most of the arguments to date have centered around Title II
( Depository Institutions Deregulation), which
established mechanisms for phasing-out deposit interest-rate ceilings within a six-year
period.
In moving toward deregulation, Congress
asserted that statutory limitations on savings
interest rates actually discouraged savings,
created inequities for depositors, and hindered depository institutions in competing for
funds-and also failed to achieve their intended purpose of providing an even flow of
funds for home financing. Congress thus set
up a Deregulation Committee to achieve its
mandate, with a membership consisting of
the Secretary of the Treasury and the
Chairmen of the Federal Reserve Board of
Governors, the Federal Deposit Insurance
Corporation, the Federal Home Loan Bank
Board and the National Credit Union Administration, along with the (non-voting) Comptroller of the Currency.
Congress specifically instructed the Committee to provide savers with a market rate of
return by increasing all rate ceilings "as soon
as feasible," with "due regard for the safety
and soundness of depository institutions."
The Committee's powers are limited in several ways. During the phase-out period, it
can't eliminate the quarter-percentage-point
differential which thrift institutions can pay
over commercial-bank rates on passbook
savings and other categories of time and savings accounts authorized as of December
1 975. (Thus, that restriction does not apply to
the money-market and small-saver certificates developed during the past several
years.) Again, the legislation does not even
address the most formidable rate ceilingthe outright prohibition of interest payments
on demanddeposits. But on balance, Congress clearly intended to eliminate rate ceilings on time deposits after a six-year period.
Critical decisions'
The Deregulation Committee's initial actions
this spring were welcomed by most bankers
and household savers, but generally criticized by thrift institutions and home builders.
One committee proposal, not yet implemented, would prohibit depository institutions from offering premiums or gifts
("freebies") to depositors opening new accounts or adding to existing ones. Critics have
argued that this proposal would involve
more, rather than less, regulation, and that it
would deprive institutions of a useful marketing tool. Defenders of this move, on the other
hand, have argued that it wou Id be consistent
with the planned phase-out of ceilings on the
payment of expl icit interest, and with the gen- eral movement toward the use of explicit
prices rather than implicit prices (with premiums) for financial services.
In another action designed to help depository
institutions compete more effectively for deposits, the committee moved to liberalize rate
ceilings on the popular money-market and
small-saver certificates. (The rate on M M C's
is tied to the six-month Treasury-bill auction
yield, while the rate on small-saver certificates is tied to the thirty-month Treasury-note
yield.) Among other rulings, the committee
narrowed the range in which thrifts may pay
the full quarter-percent differential to the
7.5-8.5 percent spectrum of bill rates, and
allowed commercial banks a one-time "rollover" bonus on maturing M M C's at the
thrifts' ceiling rate. Thrift institutions argued
strongly againstthese rulings; in fact, the
League of Savings Associations filed suit to
void the committee's actions, partly on the
grounds that only one ofthe committee mem-
u.s.
bers "has a primary statutory duty to provide
for sound and economical home financing."
priority treatment. A related issue is the viability of the thrifts and their ability to operate
in an environment without rate ceilings. In
the new legislation, Congress required each
member of the Deregulation Committee to
prepare an annual report specifically addressing these questions. Each report is to
include recommendations designed to assure
a steady flow of funds into the housing sector,
and to assessthe impactof uninsured moneymarket innovators (such as money-market
mutual funds) in reducing the flows of funds
into insured banks and thrift institutions.
Much of the controversy centers around the
thrift institutions' fear that their loss of the
quarter-point differential on rate ceilings
would reduce the flow offunds into mortgage
finance-including
perhaps a $1 7-billion
loss this year because of the banks' ability to
offer the rollover bonus on maturing M M C's.
But the banks respond that they too would
channel new flows of funds into housing; in
the San"Francisco Reserve District, for example, weekly reporting banks hold a larger
proportion of their loan portfolios in realestate than in business loans ($47 billionvs.
$33 billion).
The deregulation game plan, as laid out in
the basic legislation, contains several mechanisms for helping thrifts adjust to the
new environment, including provisions for
substantially broadening their third-party
payment and lending authority. To the same
end, the legislation authorizes a Federal override of state usury ceilings on mortgage rates,
although states could forestall that move by
imposing new ceilings within four years of
passage of the act. Meanwh i Ie, over consumer-group opposition, the Federal Home
Loan Bank Board has authorized member institutions to offer renegotiable mortgages, resembling the Canadian-type "rollover"
mortgage-reflecting Chairman Jay Janis'
view that "thrifts cannot pay savers a market
rate of return" unless they can obtain a market rate of return on their loans.
Major issues
The response to arguments such as these
may well influencethe pace atwhich deposit
interest-rate ceilings are phased out, or
perhaps decide whether they will ever be
completely eliminated. One major question
centers on the role of housi ng in the economy
and the extent to which it should be afforded
In recent weeks, the Bank Board has proposed several specific steps that would
broaden thrift-institution powers under the
new law-and in the process, assistfirst-time
home buyers. The regu lations wou Id raise the
basic S8lL home loan from 80 percent of
value to 90 percent, raise the maximum
home loan from $75,000 to $200,000, and
extend the maximum term from 30 to 40
years. In addition, theywould permit S&L's to
allocate as much as 20 percent of their assets
to consumer loans, and would permitthem to
2
measurable, rather than through a welter of
differential portfolio and price constraints
that are riddled with subsidies and taxes of
uncertain incidence, and which tend to
"warp" financial institutions and credit
markets.
broaden their sources of funds by borrowing
up to 50 percent of total assets-including,
within that overall constraint, the elimination
of previous limits on borrowings through
commercial paper, mortgage-backed bonds,
reverse repurchase agreements, and commercial-bank loans. The Bank Board also has
authorized S&L's to issue credit cards and to
offer interest-bearing check-type accounts
(N OW accounts) beginning in 1981.
Beyond that, there is the basic question of
where housing and home finance stand
among the nation's lengthy list of priorities.
Most analysts would concede that the fight
against inflation requires a higher level of
saving and investment, and an attendant increase in badly lagging productivity. Also,
they would agree that eliminating deposit
rate ceilings a priori should increase the flow
of savings into depository institutions, but
they might disagree about where those savings should go. Housing clearly ranks very
high on the list of the nation's social needs,
but it adds nothing directly to the nation's
industrial capacity, which is so necessary for
making the nation more productive.
Other solutions
Many observers would contend, however,
that the best cure for the problems of housing
would be to wring inflation out of the economy. As Federal Reserve Chairman Volcker
recently told the National Association of Mutual Savings Banks, a close relationship exists
between Switzerland's 4Y2-5 percent mortgage money and that country's low rates of
money growth and inflation. In any case,
wringing inflation out of the economy could
defuse much of the opposition to compensatory devices such as the renegotiable mortgage, and conceivably obviate the need for
them.
Verle johnston
Housing also would benefit from the implementation of the recommendations of many
study groups over the years-especially the
Hunt Commission of 1971. That commission
argued for the phase-out of deposit interest-rate ceilings, and also advanced other
proposals which may be worthy of consideration-including the possible use of tax credits for investors in residential mortgages, and
a system of mortgage interest-rate insurance
to reimburse lenders when market rates rise
by a certain amount above yields on existing
portfolios." But the commission also had
strong views about the proper approach to
take if "a properly functioning intermediary
system left housing goals unmet." In that
event, it said, home buyers and renters shou Id
be subsidized directly through the Federal
budget, where costs and benefits are clearly
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BANKING DATA-TWELfTH fEDERALRESERVE
DISTRICT
(Dollar amountsin millions)
SelectedAssetsand liabilities
large CommercialBanks
Loans(gross,adjusted)and investments*
Loans(gross,adjusted)- total#
Commercialand industrial
Realestate
Loansto individuals
Securitiesloans
U.S.Treasurysecurities*
Othersecurities*
Demanddeposits- total#
Demanddeposits- adjusted
Savingsdeposits- total
Time deposits- total#
Individuals,part.& corp.
(LargenegotiableCD's)
WeeklyAverages
of Daily Figures
MemberBankReservePosition
ExcessReserves
(+ )/Deficiency(- )
Borrowings
Net freereserves(+)/Net borrowed(- )
.. I?pl?i\aN• o41?PI
PUOZ!J\1'0 1?>lsPIV
Amount
Outstanding
Change
from
7/23/80
7/16/80
136,931
115,261
33,244
46,803
23,548
985
6,290
15,380
42,371
31,027
28,870
61,745
53,463
22,285
9
33
40
137
36
12
16
8
-1,790
i921
151
211
201
169
Changefrom
yearago
Dollar
Percent
-
-
-
Weekended
Weekended
7/23/80
7/16/80
50
30
80
65
47
112
-
7,524
8,453
1,842
7,664
1,003
851
1,246
317
382
185
1,816
10,869
11,253
4,364
I-
f-
f-
5.8
7.9
5.9
19.6
4.4
46.4
16.5
2.1
0.9
0.6
5.9
21.4
26.7
24.4
Comparable
year-agoperiod
-
27
232
205
* Excludestradingaccountsecurities.
# Includesitemsnot shownseparately.
Editorialcommentsmaybe addressed
to theeditor (WilliamBurlce)or to the author.... free copiesof this
andother federalReserve
publicationscanbeobtainedbycallingor writingthe PublicInformationSection,
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