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M e se a u re k D e p a r t m e n t irw May 4,1979 What Price Saving? April turned out to be a fickle month for household savers. At mid month, the Federal Reserve and other financial-regulatory agencies released a set of proposals designed to help individuals obtain a higher rate of return on their savings. But shortly thereafter, a Federal appeals court in Washington ruled against the legality of certain practices which, in effect, permit individual savers to earn interest on their trans action accounts. checking accounts, as well as market rates on their time and savings ac counts. Those who had enough money and/or sophistication could invest in Treasury bills, moneymarket funds or other vehicles. Others were limited in what they could obtain, and this situation led groups such as the Gray Panthers (the senior citizens' lobby), to push Congress and the regulatory agen cies to remove interest-rate ceilings for small savers. These conflicting developments reflect the difficulties created for consumers by two pieces of legisla tion — one in 1933 which limited the payment of interest on commercialbank deposits, and another in 1966 which extended the concept of in terest-rate ceilings to thrift institu tions as well as banks. By limiting “destructive" competition for funds, Congress acted in the first case to support the stability of the banking industry, and in the second case to support the stability of the thrift industry (and by extension, the housing industry). Over time, how ever, these motherhood issues have conflicted with the equally valid issue of equity for the small saver. Conflicting decisions Responding to these pressures, the regulatory agencies last month issued a set of proposals that would provide for a higher rate of return on household savings. The propos als would create 1) a five-year cer tificate of deposit with a maximum interest rate based on (but below) the rate on U.S. Treasury securities of similar maturity; 2) a bonus sav ings account that would pay an extra !6 percent on the minimum balance held in the account over a twelve-month period; and 3) an eight-year certificate featuring an interest-rate ceiling that would increase over that period. Of course, commercial banks have long paid implicit interest in the form of subsidized (or free) check and deposit transactions, conveni ent locations and other consumer services. But with the sharp rise in market rates over the past decade and a half, consumers have tried to obtain explicit interest on their In addition, the proposals would eliminate all minimum-deposit requirements on savings-and-loan certificates of less than four years' maturity, and would reduce the minimum amount to $500 for all other certificates except the 26week money-market certificates (MMC's). The minimum would (continued on page 2) >(g&\y<slh ]D)< idem! Eamk ©i S a a Fffc f ¥ ( Opinions expressed in this newsletter do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco, nor of the Board of Governors of the Federal Reserve System. remain at $10,000 for the MMC's, whose high rates (tied to the Trea sury-bill rate) have attracted more than $130 billion in funds since their inception in mid-1978. Also, ceiling rates now in effect on outstanding deposits would remain unchanged. In the U.S. Court of Appeals deci sion, the panel said that recent experiments in automatic transfer (ATS) accounts and various thriftinstitution innovations were con trary to Federal statutes. Because of favorable regulatory rulings, banks now offer automatic fund transfers between savings and checking ac counts, savings-and-loan associa tions operate remote-service units in shopping centers and other loca tions, and credit unions permit their customers to write check-like share drafts on their savings ac counts. As a result, the panel said, "three separate and distinct types of financial institutions" created by Congress to serve separate needs now are offering "virtually identical services to the public, all without the benefit of Congressional consideration and statutory enactment." But the court recognized that an immediate shut-down of these ser vices would "necessarily have a deleterious impact on the financial community as a whole" — not to mention individual savers. Thus it delayed the effect of its order until January 1,1980, thereby inviting Congress (or the Supreme Court) to step in and solve the problem. Why rate ceilings? Federal Reserve Governor J. Charles Partee, in recent Congress ional testimony, argued that the2 2 problem of rate ceilings reflected the efforts by legislators and regu lators to balance several of con flicting goals — equity for the small saver, adequacy of mortgage credit flows, and the financial strength and viability of depositary institu tions. He noted that thrift institu tions specifically are faced with constraints on the kinds of assets they hold, and thus remain unable to pay market-oriented rates of return on all deposit liabilities during high interest-rate periods. The regulatory agencies, from 1966 on, thus intended to give savings-and-loan associations and mutual savings banks a pre mium or differential to help offset their competitive disadvantage in relation to commercial banks, and to help assure an adequate supply of mortgage credit. That disadvan tage resulted, in part, from the thrifts' inability to offer a full range of deposit and lending services to their customers, who were pre dominantly in the consumer sec tor. The argument for the differen tial, however, lost much of its force as the thrifts began to assume bank-type lending and deposit powers, especially when thrifts in Northeastern states began to issue check-like NOW accounts. Regulatory ceilings have changed over the years, either through increased ceiling rates on existing account categories, or through the introduction of new deposit instru ments — primarily the latter. The introduction of successively long er-term certificates dramatically changed the maturity structure of thrift-institution deposit liabilities. When rate ceilings went into effect in 1966, 85 to 90 percent of thrift deposits were in passbook form, but by mid-1978, that proportion had declined substantially; in fact, only 30 percent of all small-denom ination savings were in maturities of less than four years. This ma turity lengthening can help to stabilize the thrifts' balance sheets, in view of the fact that they hold predominantly long-term assets. Also, substantial earlywithdrawal penalties help to ensure the stability of these longer-term deposits in subse quent periods of rising rates, blunting potential disintermedi ation, or shifts of funds from the thrifts to money-market vehicles. Nonetheless, the same set of prob lems prevailing in 1966 still limits the options available to the regula tors to increase rates of return paid to small savers. Thrift-institution earnings again are being squeezed by their effort to compete for funds in a period of high interest rates. Even though the average return on thrifts' mortgage portfolios is more than 2 1/2 percentage points higher than in 1966, inflationinduced increases in market rates have amounted to over 3!/2 per centage points in short-term markets and about 4 percentage points in intermediate-term mar kets over the same period. And with small savers' increased awareness of alternative market instruments, the potential threat of disintermediation is even greater today than before. Towards solutions Partee argued that when inflation ary pressures moderate, and mar ket interests rates decline, thrifts will be in a much better position to compete. "Over the longer run, 3 however, any depositary institu tion that specializes in fixed-rate mortgages is likely to remain vul nerable to the pressures of disin termediation, which include the risks of illiquidity, insolvency and possible forced merger." In his view, Congress should authorize nationwide variable-rate mort gages, with appropriate consumer safeguards, so that thrift and other instutions could build up asset portfolios providing earnings more flexibly attuned to market developments. Again, Congress should consider exempting Feder ally insured depositary institu tions from state usury ceilings on residential mortgage rates, especi ally considering that usury ceil ings today are below free-market mortgage yields in 14 states. Going beyond Partee's recom mendations, the situation might seem to call for continued move ment in the direction of "unbund ling" — that is, the explicit pricing of each charge and each service by depositary institutions at market prices. Corporations and govern mental units, through sophisticat ed cash-management practices, have moved in this direction for some time, willingly paying market rates for services in exchange for receiving market rates of return on all balances they hold. Household savers, on grounds of equity, are now demanding the same treat ment— that is, the effective repeal of the long-standing restrictions on deposit-interest payments. Otherwise, they seem to say that they too will shift their funds out of depositary institutions and into market instruments. William Burke uo}SuiqsH/v\ • qejfi • uogejo • epeAatsj • oqepi ne/v\eH • eiujoj!!^ • euozuy • e>|SP|V qi|P3 'O DSpUPJ-l UPS ZSL ON UWlHd a iv d 3DViSOd s n n v w SSV13 JLSMJ BANKING DATA—TWELFTH FEDERAL RESERVE DISTRICT (Dollar amounts in millions)__________________________________________________ Amount Change Change from Selected Assets and Liabilities Outstanding from year ago @ Large Commercial Banks 4/18/79 4/11/79 Dollar Percent Loans (gross, adjusted) and investments* 124,512 + 17,653 752 + 16.52 Loans (gross, adjusted) — total# 101,487 + 16,494 457 + 19.41 Commercial and industrial + 3,704 29,945 72 + 14.12 Real estate 147 + 7,639 36,159 + 26.78 Loans to individuals NA 21,025 142 NA Securities loans 1,593 NA 22 NA U.S. Treasury securities* 8,024 + 32 283 + 3.66 Other securities* + 15,001 263 8% + 6.35 Demand deposits — total# + 11,043 43,865 182 + 33.65 Demand deposits — adjusted 32,027 + 2,197 123 + 7.37 Savings deposits — total 29,811 462 - 320 - 1.53 Time deposits — total# + 7,836 49,393 - 448 + 18.86 Individuals, part. & corp. + 7,906 40,105 - 465 + 24.55 (Large negotiable CD's) 17,064 + 2,593 - 498 + 17.92 Weekly Averages Week ended Week ended Comparable of Daily Figures 4/18/79 4/11/79 year-ago period Member Bank Reserve Position Excess Reserves (+(/Deficiency (-) 11 49 72 Borrowings 11 46 11 Net free reserves (+)/Net borrowed/- ) 57 38 61 Federal Funds — Seven Large Banks Net interbank transactions + 2,441 + 2,701 + 2,268 [Purchases (+)/Sales (-)] Net, U.S. Securities dealer transactions + 737 + 126 + 819 [Loans (+(/Borrowings (-)] * Excludes trading account securities. # Includes items not shown separately. @ Historical data are not strictly comparable due to changes in the reporting panel; however, adjustments have been applied to 1978 data to remove as much as possible the effects of the changes in coverage. In addition, for some items, historical data are not available due to definitional changes. Editorial comments may be addressed to the editor (William Burke) or to the author____ Free copies of this and other Federal Reserve publications can be obtained by calling or writing the Public Information Section, Federal Reserve Bank of San Francisco, P.O. Box 7702, San Francisco 94120. Phone (415) 544-2184.
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