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M e se a u re k D e p a r t m e n t

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)

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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
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

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 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,

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

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(Dollar amounts in millions)__________________________________________________
Change from
Selected Assets and Liabilities
year ago @
Large Commercial Banks
Loans (gross, adjusted) and investments*
+ 17,653
+ 16.52
Loans (gross, adjusted) — total#
+ 16,494
+ 19.41
Commercial and industrial
+ 3,704
+ 14.12
Real estate
+ 7,639
+ 26.78
Loans to individuals
Securities loans
U.S. Treasury securities*
+ 3.66
Other securities*
+ 6.35
Demand deposits — total#
+ 11,043
+ 33.65
Demand deposits — adjusted
+ 2,197
+ 7.37
Savings deposits — total
- 320
- 1.53
Time deposits — total#
+ 7,836
- 448
+ 18.86
Individuals, part. & corp.
+ 7,906
- 465
+ 24.55
(Large negotiable CD's)
+ 2,593
- 498
+ 17.92
Weekly Averages
Week ended
Week ended
of Daily Figures
year-ago period
Member Bank Reserve Position
Excess Reserves (+(/Deficiency (-)
Net free reserves (+)/Net borrowed/- )
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)