The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
';;"
December 5,1980
TheTimeis
ow
On December 31, all commercial banks,
savings-and-Ioan associations and mutual
savings banks will be able to offer interestbearing checking accounts. These accounts,
called N OW (Negotiable Order of Withd raw aI) accou nts, cou Id change the natu re of
banking in this country and affectthe conduct
of monetary policy. With the advent of nationwide N OW accounts, commercial banks
and credit unions will no longer be the only
depository institutions capable of offering
interest -beari ng checki ng-type accou nts
nationwide. Henceforth, S&L's and mutuals
will take the opportunity to compete headto-head with banks as one-stop family financial centers.
Aggressive thrift-institution promotion campaigns will intensify the competition for
household accounts. (Regulatory authorities
have set the ceiling interest rate on N OW
accou nts at 5 % percent, but competition for
N OW funds will increasingly center around
terms for services.) Many consumers, who
until recently have been denied the opportunity to earn explicit interest on their checking accounts, will find N OW accounts very
attractive. As a result, N OW balances are
likely to grow rapidly.
Rapid growth in N OW balances will heighten the uncertainty affecting the conduct of
monetary policy. In February 1981, the Federal Reserve will set the growth-rate ranges
for several measures of the money supply for
that calendar year. N OW-account growth
will affect growth in each of these monetary
aggregates differently. Thus, in order to
choose appropriate target ranges, the Fed
must predict how fast N OW balances will
grow.and which financial assetswill be
converted to N OWs. N OW accounts thus
wi II produce benefits for many households,
but initially will create difficulties for the Fed
in its task of selecting long-run target ranges
for money-supply growth.
Birth of NOWs
N OW accounts made their debut in June
1972 when Consurners Savings, a Massachusetts mutual-savings bank, began allowing
withdrawals from savings accounts by a
check-like negotiable order of withdrawal.
By early fall, other mutual savings banks in
Massachusetts and New Hampshire had followed Consumers' lead. Effective January
1974, Congress authorized all banks and
thrift institutions in Massachusetts and New
Hampshire to offer N OW accounts. Then, in
1976, Congress further broadened N OW
authority to include depository institutions in
Connecticut, Maine, Rhode Island and
Vermont. N OW accounts proved to be extremely popular in these six states,growing to
a level of $2 billion by December 1976 (see
chart). New York and New Jersey institutions
began to offer N OWs in 1978 and 1980,
respectively.
After several efforts to legalize N OW ac- _
counts nationwide, Congress finally granted
N OW authority (or similar authority) to all
depository institutions with the enactment of
the Depository Institutions Deregulation and
Monetary Control Act in March, 1980. The
ceiling interest rate for N OWs, which will be
available to individuals, households and
nonprofit organizations, was set at 5% percent for all institutions. This is the same figure
as the passbook-savings rate at commercial
banks and 1/4 percent less than the passbook
rate at thrift institutions.
Stiff competition
Although depository institutions cannot accept N OW deposits ur:til the end of the year,
competition for N OW dollars is already
beginning to heat up. A sizable number of
banks and savings-and-Ioan associations,
particularly in the West, have begun to promote N OWs aggressively. Some S&Ls are
trying to build a N OW customer base by
offering preauthorized-transfer and telephone bill-paying accounts that will auto-
Savings-and-Ioan associations, on the other
hand, are generally eager to see their N O W
balances grow, because they view N OW
accounts as a means of increasing their market share relative to banks. Some S&L executives reason that N O W funds are more likel.y
to come from bank demand-deposit accounts
than from their own passbook-savings accounts. They are attracted to this new source
of funds. in spite of processing costs and
reserve requirements, because it is less
expensive than borrowing from Federal
Home Loan Banks or paying 12 to 14 percent
for funds in the money and capital markets.
matically be converted to N O W accounts on
January 1. But some banks, in their marketing
efforts, are trying to get a headstart on the
thrift competition by stressing the similarity of
their currently-available ATS (Automatic
Transfer from Savings) accounts to N O W
accounts.
The growing intensity of the competition
among depository institutions is most evident
in the pricing field, with a wide range of
minimum balances and service charges
quoted. Minimum balances necessary to
avoid service charges on N OW accounts
range from zero in a few cases to $2,000 or
more. Some institutions do not require
minimum N O W balances, but require substantial balances in other accounts. For the
N OW account balances orother qualifying
account balances that fall below the requ ired
minimum, monthly maintenance charges
range from $2 to $7, while transactions fees
range from zero to 15 cents per check.
The most important reason for S&L pricing
behavior, however, may be their recognition
of the opportunities available from competing head-to-head with banks for household funds. The ability to offer checking
accounts, S&Ls contend, is the key to their
ability to retain their share of passbook savings, since the convenience of one-stop
banking is a key factor in household decisions about where to put their funds. Despite
their ability to offer Y4-percent more than
banks on savings-deposit-interest, the thrifts'
share of passbook savings has declined steadily from 65 percent in 1966 to 53 percent in
September 1980, although their share of
small time deposits has moved in the opposite direction. Thus, because of a desire to
acquire new funds and regain their share of
savings funds, savings-and-Ioan associations
are pricing their N OW accounts lower than
banks' N O W accounts. This pricing strategy
means that S&Ls are likely to gain a large
number of accounts, but that the average
balance in those accounts may well be lower
than in bank-held N OWs.
Terms thus vary widely, but as a group,
savings-and-Ioan associations are pricing
their N OW accounts more liberally than
commercial banks. Many of the major California banks, for example, have announced
that the minimum N O W balance necessary
to avoid service charges will be $1,500 to
$2,000, while some of the larger California
S&Ls will require only $500 to $1,000. The
reason for this disparity in terms is a difference in the way the different institutions view
N OW accounts. Many banks do not view
N OWsas a means of expanding their deposit
bases, but as a means of protecting their present deposits. After all, bankers are not eager
to see all of their regular zero-interest demand-deposit.accounts switch to N OWs. By
offering a wide variety of services in addition
to N OW accounts (such as convenientlylocated branch offices, automated-teller
machines, etc.), banks may be able to retain a
high proportion of their deposits in spite of
less liberal terms. Since banks will incur
higher costs by offering these services with
their N OWs, many are prepared to let their
less profitable, lower-balance accounts
switch to S&Ls.
Pricing strategies
Bankers are concerned that S&Ls and mutuals
are adopting an overly aggressive price strategy, either because the thrifts lack experience in pricing checking-type accounts, or
because the thrifts are deliberately sacrificing
short-run profits to gain market share. (Of
course, underpricing makes sense from the
thrifts' perspective only if the deposits they
lure away from banks do not switch back
2
!liMillions
2000
Growth of NOWs in New England States
1500
1000
500
1973
1974
1975
1976
grow, but whether N OW growth will come
primarily at the expense of growth in checking accounts or growth in savings deposits.
Shifts from traditional checking acounts to
N OWs will cause M-1 A, which includes
commercial-bank checking accounts, to
grow more slowly than in the past. However,
shifts from savings and other accounts to
N OWs will cause the M-1 B aggregate, which
includes M-OiA and other checkable deposits
(pri mari Iy ATSand N OW), to grow faster than
in the past without changingthe rate of.
growth in M-1 A.
once prices are raised to cover costs.) If these
institutions are underpricing their N OW
accounts, banks may be forced to do the
same, so that aggregate financial-institution
profits will decline.
The evidence from the New England experience is somewhat mixed. By 1976, most
savings banks in Massachusetts and New
Hampshire offered free N OW accounts paying the maximum (5 percent) interest rate.
Commercial banks, on the other hand, offered N OWs paying 5 percent but required a
minimum balance to avoid service charges.
Despite the desire to catch up with the savings banks, commercial banks generally did
not succumb to the pressure to offer free
N OWs. Somewhat surprisingly, then, commercial banks' share of N OW balances in
Massachusetts and New Hampshire grew
throughout this period, reaching 57 percent
by December 1976.
The New England experience suggeststhat
roughly two-thirds of N OW balances come
from checking accounts, and that the remainder come from other financial assets,
primarily savings. N OW growth in 1981 may
well repeatthis general pattern, since the
minimum-balance pricing of N OWs encourages consumers to combine checking and
savings funds. Therefore, growth in N OW
balances is likely to depress M-1 A growth as
funds are shifted out of traditional checking
accounts, and to boost M-1 B growth as funds
are shifted out of savings and other interest- earning assets.
Despite this more conservative pricing strategy, N OW accounts may have been more
harmful to New England commercia! banks'
profitability, both in the short run and over the
longer run, than to mutual-savings banks'
profitability. Commercial banks in Massachusetts and New Hampshire were generally
much more profitable than their thrift competitors before the introduction of N OW
accounts, and N OW accounts thus may have
served to narrow the gap. This result is consistent with the thrifts' argument that the
ability to offer checking accounts makes it
possible for them to compete much more
effectively with commercial banks.
In light of the potential for substantial shifts of
funds following the introduction of nationwide N OW accounts, there will be less certainty than usual in the expectations of relative growth of the aggregates that the Federal
Reserve builds into its money-growth targets.
For this reason, the Fed has indicated that
caution is necessary in interpreting the initial
1981 targets. As Chairman Volckersaid in his
monetary-pol icy report to Congress last JuIy,
the Fed wi II seek reduced rates of monetary
growth over the long run, but the range for
M-l B, in particular, may have to accommodate a period of abnormal growth as the
public adjusts to N OW accounts.
Monitoring the M's
Aggressive promotion of N OW accounts will
cause N OW balances to grow very rapidly in
1981, creating difficulties for the Federal
Reserve in its task of setting growth-rate target
ranges for the monetC!ryaggregates. The Fed
must predict not only how fast N OWs will
Barbara Bennett
3
.LSl:Il=I
UOlflU!4SPM
<II
.. uo8aJO • ppPl\aN 04E'PI
!!E'MPH ., P!UJOj!!p:=>
" l?UOZ!
JV " l?>jSE'IV
<11
(G)
'1!12:>'O:>SPU2J:JU2S
. lSL 'ON IIW} Hd
GIVd
:J!)VIS Od 's'n
11VW SSV1:>IS!!I:I
\ill
\2?<d1
IiANKING DATA-TWELfTH FEDERAL
RESERVE
DISTRICT
(Dollaramountsin millions)
SelectedAssetsandliabilities
LargeCommercialBanks
Loans(gross,adjusted)andinvestments*
Loans(gross,adjusted)- total#
Commercialand industrial
Realestate
Loansto individuals
Securitiesloans
U.s. Treasurysecurities*
Othersecurities*
Demanddeposits- total#
Demanddeposits- adjusted
Savingsdeposits- total
Timedeposits- total#
Individuals,part.& corp.
(LargenegotiableCD's)
WeeklyAverages
of Daily Figures
MemberBankReserve
Position
ExcessReserves
(+ )/Deficiency(- )
Borrowings
Net freereserves
(+ )/Netborrowed(- )
Amount
Outstanding
11/19/80
143,420
121,348
35,780
49,477
23,668
1,268
6,641
15,431
45,253
32,350
29,339
67,886
58,873
26,462
Weekended
11/19/80
(n.a.)
245
(n.a.)
Change
Changefrom
yearago
from
Dollar
Percent
11/12/80
706
8,172
6.0
8.1
664
9,083
34
3,789
11.8
6,882
16.2
261
63
292
1.2
- 17.5
85
269
46
682
9.3
1.5
4
229
-1,878
550
1.2
-2,871
1,132
3.6
126
392
1.4
16.4
732
9,570
648
9,058
18.2
4,538
20.7
304
Comparable
Weekended
year-agoperiod
11/12/80
(n.a.)
96
(n.a.)
-
9
187
196
* Excludestradingaccountsecurities.
# Includesitemsnotshownseparately.
Editorialcommentsmaybeaddressed
to theeditor(WilliamBurke)or to the author.... Freecopiesof this
andotherFederalReserve
publications
canbeobtainedbycallingor writingthePublicInformationSection,
FederalReserve
Bankof Sanfrancisco,P.O.Box7702,SanFrancisco
94120.Phone(415)544-2184.
IS{[
<£I
@FedFRASER