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October 21, 1983
As The DustSettles
The introduction of money market deposit
accounts ( MM D As) last December was the
single most important step in the deregulation of deposit rates at commercial banks
and thrifts. Money market deposit accounts
dramatically altered both consumers' holdings of savings deposits at banks and thrifts
and institutions' competitive strategies for
attracting these deposit balances.
The volume of funds moving to the new
account was overwhelming as M M D As attracted $367 billion by the middle of this
year. The dramatic inflows greatly affected
the market shares of depository institutions.
In the Twelfth Federal Reserve District,
which includes Alaska, Arizona, California,
Hawaii, Idaho, Nevada, Oregon, Utah, and
Washington, the surge in M M D A balances
was particularly pronounced. District banks
and thrifts attracted nearly $90 billion with
the new instrument, about a quarter of the
national total and well above the region's
eighteen percent share of the national
domestic deposit market.
An open field
Introduction of M M D As on December 14
widened the scope for active competition
between depository institutions and money
market funds. The various indexed-ceiling
accounts and longer-term ceiling-free accounts authorized over the past five years,
such as the indexed 6-month money market
certificate, had allowed banks and thrifts to
offer fairly "competitive" rates on deposits.
But the M M D A marked the first unimpeded
opportunity for banks, savings and loans and
mutual savings banks to compete with nondeposit instruments. Perhaps even more
important, the new account gave banks and
thrifts the opportunity to compete with each
other for consumer and businessdeposits on
the basis of "price," I.e., deposit rates, rather
than engaging in non-price competition
such as offering free or subsidized services,
promotions, and convenient locations.
With the advent of the M M D A, many of this
region's banks and thrifts jumped at the
chance to improve their share of the region's
$250 billion or more in retail savings-type
deposits. By initially offering M M D A rates
that were well above prevailing money market rates (some institutions were paying up
to three percentage points or more above
money market fund yields), these institutions sought to attract funds away from
money market funds and other banks and
thrifts. Other institutions quickly followed
suit in order to remain competitive and to
protect their share of retail savings balances.
Such balances consist, in addition to M M D A
deposits, of passbook savings deposits, and
small-denomination (less than $100,000)
time certificates of deposit.
Depositshifts
In the first months, active biddingfor'M M D A
balances not only attracted funds from nondeposit sources, but also caused tremendous shifting of deposits among banks and
thrifts. By mid-year, when M M D A balances
had stabilized, they had grown to a staggering 15.9 percent of the total domestic
deposits of U.S. banks, and 1 7.3 percent
of nationwide thrift deposits. Moreover,
close to two-thirds of the M M D A balances
came from other accounts at depository
institutions.
In the Twelfth District, which typically has a
higher ratio of personal deposits to total
deposits, the new accounts reached a
whopping 21.8 percent of bank deposits and
25.4 percent of thrift deposits by mid-year.
In comparison, savings deposits, which traditionally have been a major source of
below-market-rate core deposits, now
account for lessthan 10 percent of total
domestic deposits at both banks and savings
and loans in the West, as compared to 13
percent at banks and 17 percent at 5 & Ls
before the introduction of the M M D A.
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Adjustment period
M M D A pricing strategies, developed amid
considerable uncertainty, played a crucial
role in directing deposit flows and in altering
market shares. Banks and thrifts faced major
uncertainties about both the initial and
long-run interest rate sensitivity of M M D A
balances and the likely volume of M M D A
deposits that would be generated.
during the first few weeks, major California
banks offered rates about 25 basis points
above their thrift competition. When combi ned with liberal cash bonuses to new
depositors and heavy media and promotional campaigns, the aggressive strategy
paid off for the banking industry: it captured over 60 percent of the District's
M M D A balances by the end of January.
Institutions also faced a number of trade-offs
in competing for M M D A deposits. Higher
introductory rates would attract a larger
share of the market, particu larly if M M D As
proved to be highly sensitive to interest rates
in the beginning. However, higher rates
would also raise interest expenses and cou Id
reduce near-term profits by inducing depositors to shift funds out of lower cost passbook
and certificate accounts. Moreover, institutions faced the risk that rate-sensitive funds
flowing into M M D As in response to premium rates might readily flow out once the
institutions stopped paying such rates.
Another element of banks' strategy dealt
with reducing their vulnerability to market
share losses that might be caused by subsequent "rate wars." Banks attempted to lock
their funds in by linking them to other products, such as automated teller machines,
credit cards, or consumer lines of credit.
This strategy has apparently been successful
as banks have suffered only a slight loss in
market shares since late January despite
higher rates paid by S&Ls.
Gains
Measures of industry market sharesfor
M M D As and for total retail savingsdeposits
(savings, small time, and personal MM DAs)
attest to the success of the banks' early
campaign and their ability to hold on to most
of their gains in subsequent months. At midyear, when M M D A growth had leveled off,
District banks sti II held a 56 percent share
of the M M D A market, and over $50 billion
in M M D As (nearly $40 billion in personal
accounts and the remainder in non-personal
accounts held by corporations, partnerships, governments and nonprofit organizations). With the traditional advantage of
a full line of business services, banks captured an overwhelming 86.5 percent of nonpersonal M M D As. At mid-year, western
banks held a 51 .4 percent share of the large
market for personal M M D A balances; this
brought District banks' share of total retail
savings-type deposits up from 42 percent in
November of 1982 to 45 percent by midyear (see Chart 2).
Banks, especially the major institutions,
gambled that rate-sensitivity would show up
only during the transition period as savers
shifted funds from non-deposit instruments
and less liquid Or lower yielding accounts.
They believed that during the adjustment
period, balances would be rate-sensitive as
depositors shopped for the "best" deal.
However, once funds had been shifted,
account holders would be less likely, given
the time and effort involved, to move funds
around to take advantage of differentials
of only a few basis points that could be
reversed at any time. Thus, the banking
industry leaders generally bid aggressively
during the first few weeks following authorization of the new account, while savings
and loans, weakened by several years of
poor or negative earnings, generally followed a less aggressive strategy.
In the early weeks after the introduction of
M M D As, when rate premia were at their
highest, most S&Ls in the West did not
rnatch bank rates (see Chart 1). In fact,
Consequently, the savings and loan industry's market share of total retai I savingstype deposits dropped slightly from 51
2
The last point is important because the
competition for retail savings-type instruments has heated up again in recent weeks.
The recent upturn.in interest rates together
with the October 1 deregulation of certificates portends another period of increasing
competition among M M D As, other deposit
certificates, and especially, money market
funds.
percent to just under 50 percent, despite
the addition of over $37 billion in M M D As.
S&Lsgained only a 46.2 percent share of the
personal M M D A market. The Twelfth District's other thrifts-mutual savings banks
and credit unions-also suffered losses in
their market share of retail savings-type
deposits. To regain their market share, thrifts
have raised offering rates, but to little effect
as market shares have changed little since
February. For example, California S&Ls generally have been offering rates ranging from
25 to 75 basis points above prevailing bank
rates, but they have had only slight success
in regaining the market share they had earlier lost to banks.
In principle, a wide enough yield differential
in favor of money market mutual funds
could attract a significant portion of the
flows that have been moving into M M D As.
In the extreme, it cou Id even cause some
erosion of existing M M D A balances. How·
ever, banks and thrifts are not likely to letthe
differential grow large enough to adversely
affect their funding strategieswithout adjusting their M M D A rates. Moreover, the inability of the thrift industry in the West to
recapture its market share (from banks) with
the use of differentials evenlarger than the
present differential between money market
mutual fund rates and M M D As suggests that
neither of these outcomes is likely.
It's not over yet
The California data indicate that the higher
rates currently being paid by thrifts are not
large enough to recapture the market share
they lost. However, taken together, banks
and thrifts have been successful in holding
on to their existing M M D A balances despite
small yield advantages favoring non-depository institutions, most notably money
market mutual fund shares.
Gary C. Zimmerman
Chart 1
CALIFORNIA MMDA RATE DIFFERENTIALS
Basis Points
Chart 2
CALIFORNIA NET PERSONAL MMOA INFLOWS
75
$ Billions.
50
,
15
25
01 - - - - - , 1 - - - - - - - - - - - F
M
Thrifts
10
"" Thrifts minus banks
D
1982
Banks
A
5
o
M
1983
o
1982
3
F
M
A
1983
M
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BANKINGDATA-TWELFTHFEDERAL
RESERVE
DISTRICT
(Dollar amounts in millions)
SelectedAssetsand liabilities
LargeCommercialBanks
loans'(gross,adjusted)and investments*
loans (gross,adjusted)- total#
Commercial and industrial
Realestate
loans to individuals
Securitiesloans
U.s. Treasurysecurities"
Other securities*
Demanddeposits- totaJ#
Demanddeposits- adjusted
Savingsdeposits- totaH
Time deposits- total#
Individuals;part.& corp_
(Large negotiable CD's)
WeeklyAverages
of Dailv Figures
MemberBankReserve
Position
ExcessReserves
(+ l/Deficiency(-)
Borrowings
Net freereserves(+ l/Net borrowed{-)
Amount
Outstanding
Change
from
10/5/83
161.828
141,770
43,041
57,097
24,770
2,745
7,478
12,578
44,173
29,861
66,896
66,512
61,035
16,980
9/28/83
85
112
- 17
- 17
45
83
62
88
4,480
1,192
1,369
- 599
- 446
- 365
Weekended
10/5/83
112
72
40
Change from
year ago
Dollar
Percent
-
-
-
Weekended
9/28/83
107
103
4
2,127
1,593
3,114
185
1,294
162
981
1,516
3,199
1,181
34,652
35,181
30,572
22,209
-
-
-
1.3
1.1
6.7
0.3
5.5
6.3
15.1
10.8
7.8
4.1
107.5
34.6
33.4
56.7
Comparable
vear-aQOneriod
108
3
105
* Excludestradingaccountsecurities.
# Includesitemsnot shownseparately.
t Includes Money Market Deposit Accounts; Super-N OW accounts, and N OW accounts.
Editorialcommentsmaybeaddressedto theeditor (GregoryTong)or to theauthor.••. Freecopiesof
this and other federal Reservepublicationscanbeobtainedby callingor writing the PublicInforma-
tion Section,FederalReserveBankof SanFrancisco,P.O.Box7702,SanFrancisco94120.Phone(415)
974-2246.
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@FedFRASER