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April 4, 1 980
Historic Legislation
The Depository Institutions Deregulation and
Monetary Control Act of 1 980, which was
signed into law this week by the President,
is an historic piece of financial legislation.
Over time, it should help accomplish three
major goals;
* Promoting greater competition in the
financial markets, primarily by phasing out
deposit interest-rate ceilings and by broadening the asset and payment powers of banks
and thrift institutions;
* Supporting equity and improving monetary
control, by extending reserve requirements
to all depository institutions with transactions
accounts and non-personal time
deposits; and
* Solving the problem of declining Federal
Reserve membership, by reducing the cost
of reserve requirements for member banks.
A major feature of the new legislation is its
increased reliance on market forces to determine future levels of deposit interest rates.
The entire process may require six years to
complete, but in the meantime, the Federal
regulatory agencies have the authority to
initiate a gradual phase-out of rate ceilings.
Also, during the transition period, thrift
institutions may retain their present
1/4-percentage point rate differential on
many time and savings deposits, in relation
to commercial-bank rates.
Phasing-out
ceilings
The new policy reflects the inability of rate
ceilings, in an era of inflation and high interest rates, to prevent outflows of funds (disintermediation) from depository institutions.
This phenomenon had occurred despite partial rate decontrol, as evidenced by the
removal of ceilings on "jumbo" ($1 00,000
and over) time certificates a decade ago, and
by the effective removal of ceilings on large
($1 0,000 and over) money-market certificates almost two years ago. Moreover, the
effective removal of rate ceilings on large
time deposits has carried a political handi-
cap, because such deposits recently have
been paying almost three times as much
interest as the passbook savings held by
millions of small savers.
Still, Congress has ordained a slow phaseout of rate ceilings because of the difficulties
created for depository institutionsprincipally thrift institutions-by a mismatch
between the rates they currently pay on shortterm sources of funds and the rates they earn
on long-term mortgages. Perhaps one-half
of the $475 billion in mortgages held by
savings-and-Ioan associations carry yields
of 7Y2-percent or less-while only about
one-fifteenth of S&L mortgage loans carry
yields approximating those on the moneymarket certificates which now account for
more than one-third of all S&L deposits.
Recognizing this problem, Congress in the
new law mandated a study of the subject
by the financial regulatory agencies, the
and the Department of Housing and
Urban Development.
Improvingthe assetmix
Going further, Congress took several steps to
improve the asset mix of thrift institutions. It
authorized S&L's to issue and extend credit
on credit cards, to exercise trust powers, and
to invest up to 20 percent of assets in consumer loans and in various types of corporate
debt. Also, it authorized mutual savings
banks to offer checking accounts to business
customers and to place as much as 5 percent
of their assets in commercial loans to institutions located in the same market area.
Again, the new legislation eased limitations
on lending rates at depository institutions.
Congress increased the interest-rate ceiling
on credit-union loans from 12 to 15 percent,
and authorized the Credit Union National
Administration to impose further short-term
increases when required by money-market
conditions. Moreover, Congress pre-empted
state usury ceilings on mortgage loans and
in this
nor
01
the Board of
do net
Bank of San
cd the h-:del;:t!
of all depository institutions subject to
Federal Reserve reserve requirements.
"Transaction" accounts include bank
demand deposits, interest-bearing N OW's,
share drafts, ATS accounts, and phone transfers and other accounts subject to transfer
to third parties.
on business and agricultural loans over
$25,000-and on the latter, permitted
an interest rate of not more than 5 percent
above the Federal Reserve's discount rate,
including surcharge. The pre-emption would
be permanent for mortgage loans and wou Id
cover a three-year period for commercial
loans, but in both cases could be overridden
by state legislative action.
Imposing reserverequirements
On transaction accounts, the reserve requirement after a phase-in period will be 3 percent on the first $25 million and, initially,
12 percent on larger amounts. (The $25-million base will be indexed at 80 percent, i.e.,
increased at a rate equal to 80 percent of the
annual growth: rate of aggregate transaction
accounts at all depository institutions.) On
non-personal time deposits, the initial reserve
requirement will be 3 percent. The Federal·
Reserve wi II have the power to change reserve requirements within a range of 8 to
1 4 percent for transaction accounts, and
within a range of 0 to 9 percent for nonpersonal time deposits. Under certain conditions, the Fed can impose a supplementary
reserve up to 4 percent on transaction
accounts, which will earn interest at the average yield earned by the Fed's portfolio of
securities during the preceding quarter. Also,
under certain emergency conditions, the Fed
will have standby authority to impose reserve
requirements outside the normal limits, or
to impose requirements on any liability.
Broadeningpaymentspowers
Congress also broadened depositoryinstitution payments powers, by legalizing
certain innovations which had been developed by the industry in recent years, but
which had been ruled illegal by a Federal
court last year. (This gave a certain urgency to
passageof the legislation, because interim
authorit)dor these activities was scheduled·
to expire on March 31.) Commercial-bank
automatic-transfer (from savings) accounts,
credit-union share drafts, and thrift-institution
remote service units may operate henceforth
without legal restriction. N OW accounts
(negotiable orders of withdrawal) for indi
viduals and non-profit organizations will
receive permanent authorization nationwide
next December 31, broadening the foothold
which they now hold in New England, New
York and New Jersey.
While broadening thrift-institution powers,
Congress also recognized that they had
already begun to offer deposits similar
to commercial-bank deposits-and thus
decided that they should conform to similar
ground rules, for both equity and monetary-·
control purposes. Hence, it made transaction
accounts and non-personal time accounts
For most depository institutions which aren't
Federal Reserve members, the reserve provisions will be phased-in over an eight-year
period, starting six months from now. (However, N OW accounts will be subject to full
reserve requirements after next December 31.)
Federal Reserve members can expect reductions in reserve requirements, as noted
below, and these will be phased-in over a
four-year period.
Shifting the burden
Roughly 17,000 institutions will be subject to
reserve requirements, including about 5,400
member banks, 9,000 nonmember banks,
and initially, about 3,400 S&L's and mutual
2
savings banks. Somewhat over two-fifths
of all these institutions, as well as a number
of large credit unions, will have to hold
balances at Federal Reserve Banks, over and
above the portion of their reserve requirements met by hold i ngs of vau It cash -wh i ch
means that vault cash alone will satisfy
reserve requirements at the other institutions.
Based on December 1 979 data, required reserves held at the Fed (when fully phased-in)
wou Id amou nt to about $1 3 V2bi II ion for
member banks and about $3 billion for
other institutions.
ber banks. Moreover, in administering the
discount window, Reserve Banks will take
into consideration the special needs of savings and other depository institutions.
Another far-reaching change will be the
implementation, no later than 18 months
from now, of pricing schedules for most
Federal Reserve services. These would
encompass the provision of currency and
coin, check clearing, wire transfers,
automated clearinghouse services, securities
safekeeping, float (checks in process of collection), and "any new service which the
Federal Reserve provides." These services
shall be made available to non-member
depository institutions at the same prices
available to member banks. The fees would
cover all directand indirect costs actually.
incurred in providing services, including the
taxes and return on capital that would have
been incurred by a private firm providing
similar services-but with due regard to
competitive factors and the provision of an
adequate level of services nationwide.
Member banks will benefit considerably from
the new reserve structure, which will result in
a 43-percent reduction in their aggregate
reserves, and a 58-percent reduction in reserves at the
This"action carrie not
minute too soon, however, because the Federal Reserve has been subject to heavy attrition recently, reflecting financial innovation,
shifting competitive patterns, and strong in!Iationary pressures with their related high
Interest rates. Thus, many banks have found it
progressively more costly and more difficult
to justify continuation of membership, since
they (unlike their non-member competitors)
cou Id not earn interest on thei r reserves. In
late 1979 and early 1 980,69 banks dropped
their membership, and about 670 other banks
reportedly were considering withdrawalaltogether, more than 11 percent of the System's membership. If all had actually withdrawn, deposits of banks holding reserves
with the System wou Id have fallen to
64 percent of total banking-system deposits
-compared with a 73-percent share held
three years ago.
a
The new law covers a great deal more, including a Congressional mandate to simplify
the mass of regulations stemming from earlier
Congressional legislation. But Congress'
main purpose has been to reduce competitive
barriers and to institute a "more level playing
field" in the American financial system,
while broadening and strengthening the Federal Reserve's monetary-control procedures.
In these respects, it is truly the most farreaching piece of financial legislation of the
past generation.
Verle Johnston
Accessand pricing rules
Nonmember institutions, being subject to
reserve requirements for the first time, in
return will receive access to certain Federal
Reserve services, including access to the
Fed's discount window. Any depository institution with transactions or non-personal time
deposits will be entitled to the same discount
and borrowing privileges now open to mem3
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RANKINGDATA-TWELfTH FEDERAL
RESERVE
DISTRICT
(Dollar amounts in millions)
Selected
Assets nd liabilities
a
largeCommercial
8anks
Loans(gross,adjusted)and investments*
Loans(gross,adjusted)- total#
Commercial and industrial
Realestate
Loansto individuals
Securitiesloans
U.s. Treasurysecurities*
Other securities*
Demand deposits - total#
Demand deposits- adjusted
Savingsdeposits - total'
Time deposits - total#
Individuals, part. & corp.
(LargenegotiableCD's)
Weekly
Averages
of DailyFigures
Member8ankReserve
Position
Excess
Reserves+ )/Deficiency (-)
(
Borrowings
Net free reserves(+ )/Net borrowed(- )
Amount
Outstanding
3/19/80
138,540
116,414
33,798
45,202
24,506
1,340
6,725
'15,401
43,475
30,698
27,321
61,080
52,462
21,601
Weekended
3/19/80
20
263
243
Change
from
3/12/80
72
49
+ 159
+ 220
+ 10
+ 50
11
12
519
-1,31 7
290
+ 708
+ 706
+ 187
Changefrom
year ago
Dollar
Percent
+ 12.9
15,882
16,192
+ 16.2
4,442
+ 15.1
8,943
+ 24.7
3,488
+ 16.6
- 12.0
183
- 13.5
1,047
737
+ 5.0
+
+ 11.4
+ 4,445
+ 1,872 + 6.5
8.4
2,509
+ 10,671 + 21.2
+ 11,629 + 28.5
+ 3,660 + 20.4
Weekended
Comparable
year-agopericid
3/12/80
-
+
+
+
+
+
11
182
171
44
34
78
Federal
Funds**
.* Excludestrading account securities.
# Includes items not shown separately.
** The revised series on, Federal Funds and RepurchaseAgreement Borrowings (FR2415) is available on
requestfrom the Statisticaland Data ServicesDepartmentof the FederalReserve
Bankof SanFrancisco.
Editorial
comments beaddressed theeditor(William8urke)or to theauthor.... Free
may
to
copies this
of
andotherFederal
Reserve
publications beobtained calling writing'the
can
by
or
Public
Information
Section,
Federal
Reserve
8ankof SanFrancisco, Box7702,San
P.O.
Francisco
94120.Phone
(415)544-2184.
4I'ill'@car
@FedFRASER