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Isum Fm m eisc© July 13,1973 Federal authorities increased rate ceilings on consumer deposits last week, thus enabling the regulated financial institutions to bid more effectively against market securities for the funds of individual savers. These actions were taken to help individuals earn higher returns on their deposits, but also to help the institutions guard against the repeti tion of 1966- or '69- style heavy savings outflows. The Federal Reserve Board of Gov ernors, in amending Regulation Q, permitted member banks to raise from 41/2 to 5 percent the maximum rate payable on passbook savings, and the Federal Home Loan Bank Board meanwhile allowed a smaller increase, from 5 to 51/4 percent, on maximum passbook rates payable by federally-supervised savings-andloan associations. These authorities raised rate ceilings by varying amounts— by one-half percentage point or more— on various types of certificate accounts, depending on maturity and minimum amount of deposit. In fact, ceilings were lifted completely for deposits maturing in four years or more with a minimum denomination of $1 ,000. Some banks and S&L's immediately hiked their rates to the new ceil ings, but others appeared reluctant to follow suit— not suprisingly, in view of the substantial costs in volved in such a move. These costs can be especially large in the case of passbook savings, since all ex isting passbook accounts benefit from a rate boost, whereas existing http://iraser.stlouisfed.org/ Federal Reserve Bank of St. Louis certificate accounts do not. Banks alone could be faced with an addi tional interest cost of $607 million annually if rates were boosted onehalf percentage point for the entire $121 billion held in passbook ac counts. Less reliance on Q The latest policy actions, when viewed with other policy measures of the past several months, suggest that the monetary authorities are relying much more heavily on gen eral rather than specific weapons in their current fight against inflation. In other words, they are utilizing open-market operations, discountrate increases and reserve-require ment changes almost exclusively, with much less reliance on Regula tion Q interest-rate ceilings as a means of curbing the over-rapid credit expansion. This can be de duced not only from last week's action, but even more from the mid-May decision to suspend rate ceilings entirely on large negotiable CD's with maturities of 90 days or more. (Ceilings on short-term CD's were suspended in 1970.) In 1966 and 1969, by way of con trast, the maintenance of low Reg-Q ceilings drained funds out of the institutions and into money-market instruments—the dreaded process of disintermediation. (Several econ omists once offered a prize for the coining of a better word, but unfor tunately there were no takers.) As Reg Q merely diverted funds from controlled institutions to uncon trolled markets, it tended to disrupt (continued on page 2) the financial system without in creasing the total restrictiveness of monetary policy. Some disintermediation has already occurred this year; net savings in flows into the S&L's during the January-May period were 26 percent below the year-ago pace, and the situation has worsened as the year has progressed. The recent policy measures, however, suggest that this situation could improve, with considerably less reliance on Regu lation Q as an instrument of policy in the future. Disintermediation On several different occasions since the mid-1960's, deposit-rate ceilings have fallen below market interest rates, so that depositors have re ceived a lower return on their funds than they would have obtained through direct investment of their funds in the money market. Disin termediation thus occurred, as funds that ordinarily would have been channeled to depository insti tutions were instead withdrawn (or withheld) because of the availability of higher-yielding direct invest ments. The result in both 1966 and 1969 was a severe loss of deposits, which limited the institutions' ability to serve their customers' needs. The liquidity squeeze was most evident at the large banks, which suffered from exceptionally heavy deposit withdrawals as their customers— especially their large depositors— became increasingly conscious of the higher returns available else where. Moreover, as thrift institu tions became increasingly unable to attract funds, the private mortgage market shrank, necessitating direct Federal intervention on a massive scale to support the mortgage market. Ceilings and savings Ceilings first came into use under the Banking Act of 1933. This legisla tion was designed to reduce in terest-rate competition among banks, since it was felt that such competition tended to increase bank costs and to encourage the purchase of risky high-yield assets. When Federal ceilings were applied to S&L's in 1966, the objectives were somewhat different—first, to hold down deposit rates and insulate depository institutions from the money-market forces that might drain funds from them, and sec ondly, to prevent the shift of funds among intermediaries by main taining a differential between bank and thrift-institution rates. The Reg-Q ceiling on commercialbank passbook savings was set at 21/2 percent in 1936, and thereafter raised at infrequent intervals—to 3 percent in 1957, to 31/2 percent in 1962, and to 4 percent in 1964. The passbook rate was then left un changed until the January-1970 hike to 41/2 percent, but in the meantime, C=3 rate ceilings were raised several times on the various types of certifi cate accounts that go under the heading of consumer-type time deposits. The higher rates paid on certificates attracted an increasingly larger share of savings funds into this category over the years. However, with the sharp rise in market rates during the tight-money periods, financial-institution rates fell far behind. Between 1968 and 1969, for instance, the average rate paid on commercial-bank savings accounts rose from 4.48 to 4.87 percent, and the average for S&L accounts rose from 4.71 to 4.81 percent— but over the same period, the 90-day Treasury bill rate jumped from 5.34 to 6.68 percent, and fin ally reached almost 8 percent at the early-1970 peak. During 1969, on the average, Treasury bills thus offered savers almost two percentage points higher return than they were likely to obtain from deposit accounts. The margin narrowed considerably as monetary conditions eased, but it has since widened again. In mid1973, Treasury bills once again paid close to 8 percent, far above the new ceilings on savings accounts. Consequently, major fluctuations in savings accounts have occurred in response to rapid changes in money rates. The net increase in house hold savings dropped from $27.0 to $19.4 billion between 1965 and 1966, and more dramatically, from $29.0' to $4.6 billion between 1968 and Digitized for F R A S E R 1969. Despite the easing of rate ceilings in 1973, this year should witness a substantial decline from 1972's unprecedented savings in flow of $77.5 billion. Phasing out Q? The usefulness of interest-rate ceil ings has been heavily debated during past inflationary periods, but the discussion has been given greater focus in recent years by the Commission on Financial Structure and Regulation—the Hunt Commis sion. (The Commission submitted its report in December 1971, and the Administration has since been mulling over its recommendations.) One of its major proposals was for the elimination of interest-rate ceil ings, largely because of the danger of disintermediation. The Commission argued, however, for a gradual phasing-out of such ceilings on consumer deposits. The group reasoned that many banks and thrift institutions are locked into substantial long-term invest ments at relatively low returns, so that they are sensitive to the in terest-rate risks of a fully deregu lated market. The latest policy mea sures apparently support this reasoning, since rate ceilings on all but the longest-maturity consumer deposits have only been increased —and not suspended completely. William Burke m o C=3 uoiSuiq seM • qe*n • uo S o j o • epeA8N • oqepi • BjUJO|i|e3 • e u o zu y • B>jse|v hbm bh © *|!|C3 'ODSJ3UBJJ UBS s s p r o y i ZSL ON llWH3d ° aivd aovisod #sn p ® iU ® 8 ® ^ jJ 1IVW SSV1D ISdlJ w BANKING DATA—TWELFTH FEDERAL RESERVE DISTRICT Loans adjusted and investments * Loans adjusted— total* Com m ercial and industrial Real estate Consum er instalment U.S. Treasury securities Other securities Deposits (less cash items)— total* Demand deposits adjusted U.S. Governm ent deposits Time deposits— total* Savings O ther time I.P.C. State and political subdivisions (Large negotiable CD 's) Weekly Averages of Daily Figures Member Bank Reserve Position Excess reserves Borrowings Net free (+ ) / Net borrowed ( - ) Federal Funds— Seven Large Banks Interbank Federal funds transactions Net pu rchases (+ ) / Net sales ( - ) Transactions: U.S. securities dealers Net loans (+ ) / Net borrowings ( - ) Am ount O utstanding 6 / 27 / 73 Change from 6 / 20 / 73 73,424 56,185 20,119 16,460 8,354 5,775 11,464 71,044 21,083 878 47,864 18,040 20,311 6,825 9,744 + + + + + + + + + + + + + + Change from year ago Dollar Percent 509 318 6 88 43 124 67 327 64 58 213 75 166 57 179 W eek ended 6 / 27 / 73 + 9,898 + 10,181 + 3,278 + 2,787 + 1,343 549 266 + + 8,790 + 1,898 76 + 7,005 159 + 4,917 + 1,368 + 4,560 W eek ended 6 / 20 / 73 m jp B JI® p ® jr (Dollar amounts in millions) Selected Assets and Liabilities Large Commercial Banks ra n sg + + + + + + + + + + + + 15.58 22.13 19.46 20.38 19.16 8.68 2.38 14.12 9.89 6.74 17.14 0.87 31.94 25.07 87.96 Com parable year-ago period - 26 5 21 86 186 -1 0 0 20 235 -2 5 5 + + 808 + 509 -1 ,347 + 168 + 608 - 189 *lncludes items not shown separately. O pinions 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. Inform ation on this and other publications can be obtained by callin g or w riting the Digitized for nistrative Services Departm ent. Federal Reserve Bank of San Francisco, P.O . Box 7702, http://fraser.stloUafedEorgjfcisco, Califo rn ia 94120. Phone (415) 397-1137. Federal Reserve Bank of St. Louis
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