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FEDERAL RESERVE BANK OF ATLANTA
1EALTH CARE
S&Ls
OCTOBER 1984
Slowdown in Growth
Hesitant Banking
CREDIT UNIONS
INTEREST
Seeking a New Role
Demand Deposits and Reg Q
President
Robert P. Forrestal
Sr. Vice President and
Director of Research
Sheila L Tschinkel
Vice President and
Associate Director of Research
B. Frank King
Financial Institutions and Payments
D a v i d D. W h i t e h e a d , R e s e a r c h O f f i c e r
L a r r y D. W a l l
Robert E
Goudreau
National E c o n o m i c s
Robert E Keleher, Research Officer
M a r y S- R o s e n b a u m
J o s e p h A W h i t t , Jr.
Regional E c o n o m i c s
G e n e D. S u l l i v a n , R e s e a r c h O f f i c e r
Charlie Carter
W i l l i a m J. K a h l e y
B o b b i e H. M c C r a c k i n
J o e l R. P a r k e r
Database M a n a g e m e n t
P a m e l a V. W h i g h a m
Visiting Scholars
G e o r g e J. B e n s t o n
U n i v e r s i t y of R o c h e s t e r
G e r a l d P. D w y e r
Emory University
R o b e r t A. E i s e n b e i s
U n i v e r s i t y of N o r t h C a r o l i n a
John Hekman
U n i v e r s i t y of N o r t h C a r o l i n a
P a u l M. H o r v i t z
U n i v e r s i t y of H o u s t o n
Peter Merrill
Peter Merrill Associates
I
B
II
11
E3
>| j
MÊÊÊtt
g
C o m m u n i c a t i o n s Officer
Donald E
Bedwell
Public Information Director
D u a n e Kline
Publications Coordinator
•
Cynthia Walsh-Kloss
Graphics
E d d i e W . L e e . Jr.
C h e r y l D- B e r r y
The E c o n o m i c R e v i e w s e e k s to inform the public
about Federal Reserve policies a n d the e c o n o m i c
environment and. in particular, to narrow the gap
b e t w e e n specialists a n d c o n c e r n e d laymen. Views
expressed in the E c o n o m i c Review aren t necessarily
those of this Bank or the Federal Reserve System.
Material may be reprinted or abstracted if the Review
and author are credited Please provide the B a n k s
Research Department with a copy ol any publication
containing reprinted material. Free subscriptions a n d
additional c o p i e s are available from the information
Center. Federal Reserve Bank of Atlanta. P.O. Box
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E c o n o m i c I n s i g h t a tree newsletter on e c o n o m i c
trends published by the Atlanta Fed twice a month.
ISSN 0 7 3 2 - 1 8 1 3
V O L U M E LXIX N O . 9
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58
Dynamics of Growth and Change
in the Health-Care Industry
Vigorous growth in the health-care industry seems
likely to slacken soon. What will this mean for the
Southeast's work force, and for its increasing elderly
population?
S&L Use of New Powers:
A Comparative Study of State- and
Federal-Chartered Associations
The plight of S&Ls prompted Congress to expand
their powers in the early 1980s, and some states
had acted even earlier. Why have thrifts made such
meager use of these new powers?
What Distinguishes Larger and
More Efficient Credit Unions?..
Among Georgia's biggest credit unions, what do
the most efficient do differently than the less efficient
institutions? An Atlanta Fed study examines the states
largest credit unions to find out.
Interest on Deposits and the
Survival of Chartered
Depository Institutions
Do Federal controls on deposit interest rates safeguard the banking system or invite abuses? The
alternatives are reviewed in this study.
Statistical Summary
m
I
•t]
Dynamics of Growth and Change
in the Health-Care Industry
Bobbie H. McCrackin
The aging population, availability of funds for training and capital
expansion, and the prevalence of health insurance have stimulated
health-care industry growth in recent decades. But recent costcutting changes point to slower expansion in the future.
Health care has been an important g r o w t h industry in recent
d e c a d e s , p a r t i c u l a r l y in t h e
Southeast. T h e region's j o b exThe author is a member
of the
Fed's Research
Department
4
Atlanta
pansion in medical care has
o u t p a c e d t h a t of most other
local industries as w e l l as t h e
national rate of health care emp l o y m e n t growth. From 1971
t o 1 9 8 1 j o b s in health-related
industries more than d o u b l e d
in the region and grew 80 percent nationwide. Hospitals and
medical a n d dental labs multiplied almost t w i c e as quickly in
t h e Southeast as in t h e nation.
Despite this rapid growth t h e
industry still commands a smaller
portion of t h e labor force in t h e
Southeast t h a n its 7.4 percent
share n a t i o n w i d e . Southeasterners spend less per capita for
health care, b u t some of this
cost differential is probably due
t o t h e region's lower cost of
living The per capita availability
of health professionals, such as
dentists, doctors, and
nurses, is lower in the
Southeast, and its
ifM*
other
health
resources,
such as
nursing
homes,
have approached but
not yet reached
national
standards
of availability. 1
This disparity is surprising since t h e region's
share of e l d e r l y r e s i d e n t s is
higher than t h e nation's and
t h e d i f f e r e n c e in this share is
e x p e c t e d t o increase. Despite
generally lagging health-care resources, t h e Southeast has proportionately m o r e hospital facilities.
The health-care industry's
g r o w t h during t h e 1970s and
early 1980s entailed spiraling
m e d i c a l cost increases, b u t
several changes are taking place
that augur better cost control.
M o s t of t h e s e changes w i l l
heighten consumers' and suppliers' sensitivity t o price increases. For instance, higher deductibles and c o p a y m e n t s for
many medical services should
help d a m p e n - d e m a n d . Enroll-
O C T O B E R 1984, E C O N O M I C
REVIEW
m e n t in health maintenance organizations, which
has e x p a n d e d m o r e rapidly in t h e Southeast
than in t h e nation over t h e last decade, s h o u l d
enhance m e m b e r doctors' a n d patients' price
consciousness since patients prepay fees annually rather t h a n on a fee-for-service basis.
Likewise, the institution of Medicare reimbursem e n t according t o illness or injury rather than
cost of treatment should foster price consciousness a m o n g hospital administrators. The growth
of t h e for-profit sector, particularly in hospital
administration, should increase c o m p e t i t i o n
a n d lower prices in this industry segment, t h e
largest source of health-care j o b s a n d inflation.
The proliferation of for-profit health-care establishments is significant for the Southeast
w h e r e o n e - f i f t h of all hospital beds are in
i n v e s t o r - o w n e d hospitals, c o m p a r e d w i t h less
than o n e - t e n t h nationally. A fast-growing population a n d more flexible regulatory climate for
health care have swelled t h e industry's forprofit segment in t h e Southeast relative t o
other regions.
If successful, these d e v e l o p m e n t s p o r t e n d
more efficient allocation of resources and higher
p r o d u c t i v i t y b u t also slower j o b g r o w t h and
possibly a less equitable geographic distribution
of health m a n p o w e r and services. Hospitals in
t h e Southeast may be affected since t h e region
has m o r e beds per capita and lower o c c u p a n c y
rates than in t h e nation. However, t h e for-profit
s e c t o r s strong base a n d rising d e m a n d , attrib u t a b l e b o t h t o migration and t o t h e region's
d i s p r o p o r t i o n a t e share of elderly, should mitigate t h e effects of these changes o n healthcare j o b s in t h e Southeast.
Purpose of Study
In an effort t o understand future e c o n o m i c
trends in t h e Southeast, t h e Federal Reserve
Bank of Atlanta has c o n d u c t e d ongoing research
into g r o w t h industries w i t h a significant base in
this region. The service sector has been an
i m p o r t a n t source of e m p l o y m e n t g r o w t h a n d
stability in many parts of t h e Sixth Federal
Reserve District d u r i n g t h e past d e c a d e and is
likely t o c o n t i n u e t o grow. The health-care
industry is an i m p o r t a n t c o m p o n e n t of t h e
service sector. Its size, measured in j o b s or
share of Gross National Product, rivals that of
many basic industries in t h e manufacturing
sector.
FEDERAL RESERVE B A N K O F A T L A N T A
The medical-care industry exemplifies t h e
strengths of t h e service sector, particularly in
terms of j o b creation and resistance t o cyclical
fluctuations. It also reflects a chief weakness of
service-based e m p l o y m e n t , namely, relatively
poor p r o d u c t i v i t y a n d lower wages. D e s p i t e
t h e lower level of wages, health-care costs
have been rising rapidly. Chiefly because of
these cost increases, changes are taking place
in the industry that may presage d i f f e r e n t
patterns of future growth. W h i l e regulation t o
control costs is increasing, t h e health-care industry appears t o be e x p e r i e n c i n g a revival of
c o m p e t i t i o n m u c h like that o c c u r r i n g in t h e
transportation and financial services industries.
The purpose of this article is t o identify t h e dynamics of recent g r o w t h in t h e health-care industry in order t o evaluate t h e i m p a c t of current
changes a n d f u t u r e trends. The first section describes the increasing share of resources, especially
labor, allocated in recent decades t o t h e industry
in t h e Southeast a n d t h e nation. The u n d e r l y i n g
causes of these trends are e x a m i n e d next by
c o m p a r i n g t h e industry's f u n c t i o n i n g w i t h the
market n o r m of e c o n o m i c theory. Finally, t h e
o u t l o o k for t h e health-care industry, particularly
in the Southeast, is evaluated.
Health-Care Industry Growth
Growth Rate. From 1971 t o 1981 t h e n u m b e r
of health-care j o b s in t h e nation rose 80 percent,
m o r e than d o u b l e t h e rise in n o n f a r m e m p l o y ment. Of t h e 10 types of health-care establishments, chiropractors' offices, a m i n o r area, grew
fastest over t h e d e c a d e (see Table 1). Allied
health services (optometrists, health practitioners,
outpatient services, and related establishments)
increased at t h e second fastest rate. 2
The g r o w t h rate was m o r e rapid in t h e Southeast (see Chart 1). Medical-care j o b s grew by
124 percent over the decade. In t h e Southeast,
allied health services grew at t h e fastest pace,
surpassing chiropractors' offices. Regional growth
in hospitals as w e l l as medical and d e n t a l labs
surpassed t h e national rate.
Volume Gains. From 1971 t o 1981 t h e healthcare industry a d d e d 2.5 m i l l i o n j o b s t o t h e
national economy. Almost 90 percent of the new
health jobs w e r e p r o v i d e d by hospitals, nursing
care facilities, allied health services, and physicians'
offices. Hospitals a c c o u n t e d for t h e largest share
of that gain, while nursing-care facilities produced
t h e second largest v o l u m e increase.
5
I
Table 1. Health-Care Employment, United States a n d S o u t h e a s t 1971 and 1981
United States
Dtal Health
Physician Offices
Dental Offices
Osteopath Offices
Chiropractor Offices
Hospitals
Medical & Dental Labs
Allied Health Services
Nursing-Care Facilities
Drugs
Supplies & Instruments
New Jobs
1971-81
Percent
Increase
2,468,629
383,161
197,539
12,048
18,407
979,823
45,748
265,219
563,281
45,001
61,241
80.4
96.1
114.8
93.1
257.3
53.7
81.0
210.0
119.9
35.7
78.8
Southeast
Percent Share
1971
1981
100.0
13.0
5.6
0.4
0.2
59.5
1.8
4.1
15.3
0.2
0.1
100.0
14.1
6.7
0.5
0.5
50.7
1.9
7.1
18.7
0.2
0.2
New Jobs
1971-81
Percent
Increase
330,440
59,054
23,737
1,011
2,176
145,607
7,277
33,629
57,052
6,351 a
a
4,604
124.2
114.7
131.8
105.3
275.1
108.4
143.6
296.4
130.0
96.7
73.0
| F^rcentj3h§re_
1971 1981
100.0
19.4
6.8
0.4
0.3
50.5
1.9
4.3
16.5
0.1
0.1
100.0
18.5
7.0
0.3
0.5
46.9
2.1
7.5
16.9
0.1
0.1
a
A l a b a m a a n d Mississippi are not included because data are unavailable for 1971.
Source: Calculated by Federal Reserve Bank ot Atlanta from data in U.S. Department of Commerce, Bureau of the Census, County Business
Southeastern States a n d U.S. 1971 a n d 1981
M u c h of t h e g r o w t h in t h e physicians' category
comes f r o m doctors' increased t e n d e n c y t o incorporate; previously, most doctors w e r e selfe m p l o y e d and categorized separately. The growth
in hospital and nursing h o m e e m p l o y m e n t has
b e e n f u e l e d by sociological or d e m o g r a p h i c
changes, such as t h e increasing p r o p o r t i o n of t h e
p o p u l a t i o n age 65 and over. A recent study
estimated t h a t the elderly, w h o c o m p r i s e onet e n t h of the population, account for m o r e t h a n
o n e - t h i r d of hospital-care days, one-fifth of surgical procedures, almost one-third of total personal
health-care expenditures, a n d o n e - f o u r t h of hospital discharges. The biggest share of expenses is
attributable t o those near death: o n e - t h i r d of
Medicare expenses are incurred by t h e 6 percent
of M e d i c a r e recipients in their final year of life. 3
A n o t h e r researcher estimated a p p r o x i m a t e l y 1
percent of GNP is n o w spent o n elderly persons
in their last year. 4 In addition, as a larger percentage of w o m e n enter t h e w o r k force p e o p l e
must increasingly satisfy their n e e d for l o w or
intermediate-level medical care by purchasing
t h e services of nursing homes. M o r e o v e r , t h e
increased m o b i l i t y of workers and retirees separates older generations from younger family
members. These trends t o w a r d higher mobility
and greater female labor force participation reinforce the d e m a n d spurred by the relative increase
in n u m b e r s of t h e elderly, w h o are t h e most likely
t o use nursing-care facilities.
6
Patterns.
Relative Growth. The share of nonfarm employm e n t derived f r o m health care rose nationally
from 5.5 percent in 1971 t o 7.4 percent in 1981.
In t h e Southeast, t h e industry's share increased
from 4.3 t o 6.4 percent. A l t h o u g h t h e medical
industry's proportion of nonagricultural employm e n t in t h e Southeast r e m a i n e d b e l o w that of
t h e nation, a pattern of convergence is evident.
This relatively m o r e rapid g r o w t h in healthrelated j o b s is a t t r i b u t a b l e partly to t h e region's
above-average population growth, resulting from
i n - m i g r a t i o n . In a d d i t i o n , f e d e r a l p o l i c i e s h a v e
been i m p l e m e n t e d t o equalize t h e d i s t r i b u t i o n
of health professionals, especially in rural and
poorer areas. Even so, t h e Southeast still lags
b e h i n d t h e nation in its per capita availability of
primary-care professionals.
Hospitals, doctors' offices, and nursing facilities
account for over 80 percent of health-care jobs,
b o t h nationally and in t h e Southeast. Despite t h e
rapid growth rate of chiropractic and allied health
service jobs, together t h e y c o n s t i t u t e d less t h a n
o n e - t e n t h of t h e nation's a n d t h e Southeast's
health-care j o b s in 1981. Hospitals retain t h e
largest share of such jobs, b u t this p r o p o r t i o n
d e c l i n e d f r o m 59 percent in 1971 t o 51 percent
in 1981. This decrease is d u e primarily t o t h e
nation's declining birth rate a n d a faster growth
rate in o u t p a t i e n t visits relative to inpatient
visits. 5
O C T O B E R 1984, E C O N O M I C
REVIEW
Chart 1 . Growth Rate of Health-Care
Employment by Industry Segment
1971-1981
Percent
Change
350 •
Chart 2. Growth Rate of Health-Care
Employment by Occupation
1970-1980
Percent Change
300 •
250
200
-
150 -
100 -
Source: Calculated by Federal Reserve Bank of Atlanta from data in U S
Department of Commerce, Bureau of the Census, County Business
Patterns, Southeastern States and U.S., 1971 a n d 1981
The next largest c o m p o n e n t of t h e n a t i o n w i d e
health industry is nursing a n d personal-care facilities. Nursing homes' share rose nationally but d i d
not increase appreciably in the Southeast, w h e r e
they rank third b e h i n d physicians' offices in
terms of e m p l o y m e n t share. This pattern holds
even in Florida, w h i c h is surprising since t h e
percentage of elderly in Florida's p o p u l a t i o n is
m u c h higher than t h e national proportion. Alt h o u g h e m p l o y m e n t in southeastern physicians'
offices, t h e other large c o m p o n e n t , rose in absolute terms, g r o w t h of this industry segment
was o u t d i s t a n c e d by other categories of health
care a n d its share of industry j o b s changed o n l y
slightly.
Growth of Health Occupations
The figures presented above a n d in Table 1
describe changes in t h e health-care industry
according to the type of establishment—hospitals,
doctors' offices, nursing homes—in which workers
are e m p l o y e d . They d o n o t distinguish b e t w e e n
occupations such as doctors, nurses, therapists,
clerical workers, or service personnel in any of
these establishments. To understand the industry,
however, it is i m p o r t a n t t o identify changes in
occupations as well. There are five major categories
of health occupations: managerial, health diagnosing (physicians and dentists), health assessing
FEDERAL RESERVE B A N K O F A T L A N T A
Sources: C o m p u t e d by Federal Reserve Bank of Atlanta from data in U.S.
Department of Commerce, Bureau of the Census, 1980 Census
ot Population. Table 2 1 7 (southeastern states, a n d Table 2 7 6
(U.S.), forthcoming.
and treating (nurses, pharmacists, and therapists),
health technicians (laboratory workers and licensed
practical nurses, or LPNs), a n d health services
(nurses aides a n d other service personnel). 0
Growth Rate. An e x a m i n a t i o n of changes in t h e
o c c u p a t i o n a l structure of t h e health industry
indicates that managerial and technical/professional occupations increased most rapidly (see
Chart 2). Health service j o b s a n d physicians a n d
dentists increased at a rate b e l o w t h e industry
norm. From 1 9 7 0 to 1980, o c c u p a t i o n s in t h e
industry grew even m o r e rapidly in t h e Southeast
than in the nation. Increases in the technical/professional category w e r e p r o m p t e d largely by a rise
in technical requirements as n e w services, such
as intensive care units, b e c a m e widespread. The
next most rapidly g r o w i n g major category was
health assessing a n d treating occupations. An
i m p o r t a n t catalyst of g r o w t h in this category was
the Nurse Training Act, w h i c h f r o m 1964 to 1975
provided substantial financial support for nurse
training. U.S. f u n d i n g for rehabilitation m e d i c i n e
raised t h e n u m b e r of therapists sharply. W i t h i n
this major category, therapist occupations in t h e
Southeast m o r e than tripled, t h e fastest g r o w t h
of any of t h e narrower j o b categories. Even the
slowest growing health occupations, such as
physicians, dentists, a n d nurses aides, e x p a n d e d
at a faster pace than total e m p l o y e d persons,
measured by occupation.
7
Table 2. Health Occupations, United States and Southeast, 1970 and 1980
United States
Absolute
Difference
1970-80
Managers, Medical & Health
Health Diagnosing
Physicians
Dentists
Health Assessing & Treating
Registered Nurses
Pharmacists
Therapists
Health Technicians
Clinical Labs
LPNs
Health Services
Nurses Aides
Total Health
Southeast
Percent Percent Share
Increase
1970 1980
51,349
193,129
135,615
29,879
711,310
516,091
28,900
113,757
433,004
114,559
163,778
583,185
378,148
89.9
42.9
45.9
31.5
72.3
68.8
25.2
148.8
81.2
92.5
62.7
51.0
41.2
3,452,704
59.5
Absolute
Difference
1970-80
Percent I Percent Share
Increase
1970 1980
1.2
7.0
4.7
1.3
18.3
13.7
1.6
2.1
10.4
2.6
4.6
18.7
14.0
7,327
31,039
21,487
5,319
95,527
65,687
7,417
14,464
72,717
16,423
32,057
89,267
65,136
148.3
74.5
78.1
61.0
96.3
88.8
57.3
226.3
120.1
116.4
107.2
73.5
65.7
0.8
6.9
4.6
1.5
16.5
12.3
2.2
1.1
10.1
2.3
5.0
20.2
16.5
1.1
6.5
4.4
1.2
17.3
12.4
1.8
1.9
11.9
2.7
5.5
18.7
14.6
100.0 100.0
523,867
87.2
100.0
100.0
1.0
7.8
5.1
1.6
17.0
12.9
2.0
1.3
9.2
2.1
4.5
19.7
15.8
Source: C o m p u t e d by Federal Reserve Bank of Atlanta from data in U.S. Department of Commerce, Bureau of the Census, J 980 Census of
Population,Table
2 1 7 (Southeastern States) a n d Table 2 7 6 (U.S.). forthcoming.
Absolute Gains. Of t h e half-million n e w health
j o b s in t h e Southeast from 1 9 7 0 to 1980, health
assessing occupations, particularly nurses and
therapists, e x p e r i e n c e d t h e largest absolute increase (see Table 2).7 V o l u m e gains in health
services w e r e nearly as large. Health technicians
c o n t r i b u t e d t h e t h i r d largest n u m b e r of jobs. The
Southeast a d d e d fewer doctors a n d health managers over t h e decade. National trends f o l l o w e d
t h e same pattern, w i t h nursing j o b s e x p a n d i n g
t h e most a n d managerial j o b s t h e least.
Relative Growth. Little restructuring of t h e
occupational composition of health care occurred
over the decade. Despite its comparatively slow
g r o w t h rate, t h e major occupational category
remains health services, of w h i c h nurses aides
constitute the largest component Health services'
share of medical occupations fell slightly. The
second largest category, health assessing a n d
treating occupations, increased its share of j o b s
in the Southeast only slightly. The relative decline
of nurses aides and t h e increase of LPNs, the
largest c o m p o n e n t of health technicians, reflects
an upgrading of credentials required. In spite of
t h e rapid g r o w t h rate of health management
8
occupations, this category's share c o m p r i s e d
only 1 percent of all health occupations in 1980.
Distribution of Health Resources
Distribution of Health-Care Personnel. Notw i t h s t a n d i n g t h e rapid growth of health-related
j o b s in t h e Southeast over t h e last decade, most
states in this region remain b e l o w t h e U.S.
average a n d m e d i a n in availability of health-care
providers. 8 As s h o w n in Table 3, t h e n u m b e r of
nonfederally e m p l o y e d doctors a n d dentists,
relative t o population, was b e l o w the U.S. mean
in every southeastern state except Florida in
1981. In rank as well, t h e supply of physicians
remained b e l o w t h e U.S. median in every southeastern state except Florida Similarly, the number
of registered nurses relative t o p o p u l a t i o n was
well b e l o w national norms in t h e same five
southeastern states—Alabama, Georgia, Louisiana,
Mississippi, and Tennessee. Except for Floridians,
southeasterners rely more heavily on licensed
practical nurses than on registered nurses. Southeasterners also seem t o d e p e n d more on pharmacists for health care than o n physicians: every
OCTOBER 1984, E C O N O M I C
REVIEW
Table 3. Proportional Availability of Health-Care Resources,
Southeastern States and United States
United States
Alabama
Florida
Georgia
Louisiana
Mississippi
Tennessee
3
Nonfederal
Physicians 3
(1979)
Dentists 3
(1980)
Nurses 3
(1976)
2.01
1.29
2.31
1.53
1.60
1.13
1.66
.55
.37
.48
.41
.43
.33
.50
3.80
2.23
3.53
2.63
2.45
2.26
2.33
LPNs 3
(1976)
Community
Hospital
Beds 3
(1981)
Nursing
Home Beds'
(1980)
1.91
2.34
1.56
2.21
1.99
2.03
2.86
4.4
5.2
4.8
4.5
4.6
5.5
5.3
58
48
22
61
57
44
43
P e r 1,000 population.
Beds in nursing h o m e s with 2 5 or more b e d s per 1,000 residents 6 5 a n d over.
Source: Data on nurses, L P N s from U.S. Department of Health, Education, a n d Welfare, Health Resources Administration, Survey of Health
Manpower
( D e c e m b e r 1974), pp. 1 2 2 , 1 7 8 ; data on doctors ( M D s and DOs) a n d dentists from U. S Department of Health & H u m a n Services, Health
Resources Administration, Third Report to the President and Congress on the Status of Health Professions Personnel: The United States
(January 1982), pp. IV-99, VI-24; hospital a n d nursing h o m e data from Department of Health & H u m a n Services, National Center for Health
Statistics Health, United States (December 1983). pp. 167-68, 1 74-75.
southeastern state except Florida has m o r e pharmacists per capita than in t h e nation.
W i t h i n t h e Southeast, as in the nation, t h e
distribution of health jobs is s k e w e d t o w a r d
urban rather than rural areas (see Table 4).
Birmingham, Tampa, Augusta, Shreveport, Jackson,
Nashville, a n d M e m p h i s have t h e largest proportional representation of health-care j o b s in
their respective states. 9 U n l i k e goods, services
cannot be stored; they are c o n s u m e d u p o n
purchase. Nurses and doctors, like bootblacks
and taxi drivers, usually must be present for an
e c o n o m i c transaction t o take place. In addition,
many medical services are highly capital intensive.
In order to use expensive medical e q u i p m e n t
efficiently, it is necessary to have a threshold
p o p u l a t i o n base likely t o need such facilities. O n
average, southeastern cities' share of health-care
j o b s is 12 percent m o r e than their share of
nonfarm e m p l o y m e n t . 1 0
Other Health Resources. The rapid g r o w t h of
t h e health industry in the Southeast is also
e v i d e n c e d by an increase in hospital beds. From
1972 t o 1982 the n u m b e r of hospitals in t h e
region increased 13 percent, a n d beds rose 41
percent; n a t i o n w i d e there w e r e 1 percent m o r e
hospitals a n d 1 5 percent m o r e beds over the
decade. Of course, the region's population growth
FEDERAL RESERVE B A N K O F A T L A N T A
spurred m u c h of this expansion, b u t o n a proportional basis every southeastern state s h o w e d
similar i m p r o v e m e n t . For example, f r o m 1 9 7 0 to
1981 the n u m b e r of hospital beds p e r - 1 , 0 0 0
residents grew f r o m 4.3 t o 4.4 in t h e nation b u t
from 4.3 to 5.2 in Alabama. The 1974 National
Health Planning a n d Resources D e v e l o p m e n t
Act required that "certificates of need" be obtained
from local planning agencies before expansion
or construction of n e w hospitals c o u l d be undertaken. Yet even after t h e act began t o reverse t h e
g r o w t h of hospital beds nationally, southeastern
states c o n t i n u e d to e x p a n d o n a p r o p o r t i o n a l
basis, or d e c l i n e d less sharply than t h e national
rate. The n u m b e r of short-term hospital beds per
1,000 residents is higher in the Southeast than in
t h e nation (see Table 3). Nursing-care facilities
s h o w a s o m e w h a t d i f f e r e n t pattern, w i t h g r o w t h
in h o m e s and beds close to t h e national rate of 9
percent f r o m 1976 to 1980. Nursing h o m e beds
per 1,000 residents age 65 and over remain
b e l o w t h e U.S. norm, a n d no clear pattern of
convergence is evident. However, Florida's ext r e m e l y low index partly reflects discrepancies in
classification. M a n y of t h e state's resort communities have patient-care facilities for their
residents, b u t these are not classified as nursing
homes.
9
I
Table 4 . Concentration Ratios of Health Employment
in Selected Southeastern SMSAs, 3 1970
and 1 9 8 0
1970
1980
Alabama SMSAs
Birmingham
1.10
1.15
1.21
1.39
Florida SMSAs
Miami
Tampa
Ft. Lauderdale
Jacksonville
West Palm Beach
Orlando
1.00
1.03
1.13
0.93
0.85
0.94
0.95
1.04
1.07
1.21
1.09
0.90
1.04
0.85
Georgia SMSAs
Atlanta
Augusta
1.21
1.14
1.71
1.11
0.99
2.16
Louisiana S M S A s
New Orleans
Baton Rouge
Shreveport
1.10
1.11
0.95
1.20
1.14
1.18
0.93
1.31
Mississippi SMSAs
Jackson
1.59
1.59
1.35
1.44
T e n n e s s e e SMSAs
Memphis
Nashville
Chattanooga
Knoxville
1.20
1.23
1.32
0.93
1.19
1.18
1.23
1.25
1.04
1.18
Southeastern SMSAs
1.12
1.12
a
D o e s not include health administrators b e c a u s e category is small a n d
comparable figures are not available.
Source: C o m p u t e d by Federal Reserve Bank of Atlanta from data in U S.
Department of Commerce, Bureau of the Census, 1970 and 1980
Census ol Population, General Social and Economic
Characteristics
(various states), Table 121 (1980) a n d Table 171 (1970).
Industry Earnings, Costs, and Expenditures
Earnings. A l t h o u g h health care has b e e n an
i m p o r t a n t source of n e w jobs, t h e industry's
p e r f o r m a n c e w h e n measured by earnings is less
impressive. The share of n o n f a r m earnings attributable t o the industry was 6.1 percent in 1981,
whereas its share of nonfarm jobs was 7.4 percent
In t h e Southeast, t h e industry's c o n t r i b u t i o n t o
nonfarm earnings was closer t o but still less than
10
its share of jobs. M e d i a n earnings r e m a i n e d
b e l o w all-industry norms: earnings of full-time
workers in t h e health-care industry increased t o
only 81 percent of general levels by 1978.
Earnings of nursing-home workers w e r e only 57
percent of t h e m e d i a n by 1978. Overall earnings
are even lower because health-care e m p l o y e e s
are more likely t o w o r k part-time than workers in
other industries. O n e - f i f t h of health-care employees w o r k part-time, whereas in general o n l y
o n e in seven e m p l o y e e s does so. Lower earnings
and hours are related also to t h e industry's large
female composition. W o m e n comprise 75 percent of t h e industry c o m p a r e d w i t h 4 2 p e r c e n t o f
t h e w o r k force. 1 1
Costs. Rapid health-care industry g r o w t h has
b e e n a c c o m p a n i e d by a rate of cost increases in
excess of t h e Consumer Price Index (CPI). Except
during periods of rapid inflation i n d u c e d by war
or exogenous shocks, such as energy crises,
medical care costs historically have outpaced the
CPI. Although a dramatic reduction in the inflation
rate has o c c u r r e d over t h e past f e w years, this
i m p r o v e m e n t had little effect o n medical costs.
Price increases slowed f r o m an 8.9 percent
g r o w t h rate in t h e period D e c e m b e r 1 9 8 0 t o
D e c e m b e r 1981 t o 3.9 percent in t h e f o l l o w i n g
1 2 - m o n t h period, whereas medical inflation
slowed f r o m 12.5 t o 11.0 percent. M e d i c a l cost
increases slowed s o m e w h a t subsequently. In
April 1 9 8 4 medical costs w e r e 6 percent ahead
of April 1983, w h i l e prices in general w e r e 4.5
percent higher. However, this modest deceleration
means t h a t t h e rate of price increases in t h e
health-care industry is even faster n o w relative t o
t h e CPI than it was during t h e peak period of
general inflation.
Hospitals have been the major source of medical
inflation in recent years. From D e c e m b e r 1977
t o D e c e m b e r 1983 hospital r o o m costs rose 106
percent w h i l e medical costs overall rose 75
p e r c e n t Physicians' services increased slightly
m o r e slowly than medical costs in general over
this period, and prescription drugs slightly faster.
Even the rate of hospital cost increases decelerated
recently, as of April 1 9 8 4 t h e 1 2 - m o n t h g r o w t h
rate of hospital r o o m costs was 8.6 percent. 1 2
Expenditures. Increasing aggregate health costs
are reflected in t h e industry's increasing share of
gross national p r o d u c t (GNP). In 1983 t h e outp u t of t h e industry a m o u n t e d t o 11 percent of
GNP, up f r o m 8 percent in 1973 a n d 6 percent in
1965. Hospitals a c c o u n t e d for almost half t h e
1983 figure. Over t h e last decade, t h e average
O C T O B E R 1984, E C O N O M I C
REVIEW
length of hospital stays d e c l i n e d as d i d t h e
n u m b e r of hospital beds per capita, b u t t h e
n u m b e r of tests d o u b l e d a n d t h e n u m b e r of
operations grew three times as fast as t h e population. 1 3
Regionally, health expenditures have remained
b e l o w national levels. W i t h t h e e x c e p t i o n of
Florida, w h o s e e x p e n d i t u r e s slightly e x c e e d t h e
norm, per capita personal health-care e x p e n d i tures in southeastern states range from 75 t o 91
percent of the national average. Alabama, Georgia,
Louisiana, a n d Mississippi ranked in t h e b o t t o m
third of e x p e n d i t u r e s by state. Nursing h o m e
e x p e n d i t u r e s are substantially lower, w i t h all six
southeastern states ranked in t h e b o t t o m t h i r d of
per capita expenditures. Florida and Tennessee
residents s p e n d less t h a n 60 percent of t h e U.S.
average, a n d t h e other states in t h e region s p e n d
a b o u t three-fourths of t h e U.S. norm. 1 4 However,
e x p e n d i t u r e s have been increasing m o r e rapidly
in t h e Southeast. In a d d i t i o n , prices t e n d t o be
lower in the region a n d so partly offset variations
in expenditures. Expenditures for hospital care
are closer t o t h e U.S. m e a n and median. O n e
reason for this disparity b e t w e e n hospital a n d
other types of medical e x p e n d i t u r e s might be
the relatively high u n e m p l o y m e n t rates in certain
areas of t h e Southeast. U n e m p l o y e d w h o lose
work-related insurance often seek care for routine
medical needs in an e m e r g e n c y room, w h e r e
chargesare substantially h i g h e r t h a n those levied
for t r e a t m e n t in a d o c t o r s office.
Why the Health-Care Industry Has Grown
The aging p o p u l a t i o n a n d federal measures t o
p r o m o t e training a n d capital expansion have
been stimulants t o g r o w t h in health care. The
factors d o not, however, a c c o u n t for patients'
ability t o afford increasingly expensive medical
care, labor force entrants' ability t o f i n d j o b s in
t h e industry, a n d the g r o w t h of t h e industry as a
whole. Economists w h o have e x a m i n e d health
care have developed several competing explanatory models: one focuses on demand characteristics
peculiar t o the industry and t w o others emphasize
the lack of normal competitive market mechanisms.
Induced Demand. A w i d e l y advanced explanation of health-care industry growth is grounded
in the c o n c e p t of price elasticity, w h e r e b y dem a n d for most goods is inversely related to their
price. The spread of third-party health-care payments, in t h e f o r m of insurance or welfare, has
r e d u c e d the price of medical care directly borne
FEDERAL RESERVE B A N K O F A T L A N T A
by consumers. Price elasticity w o u l d suggest this
drop in price should be accompanied by increased
d e m a n d for medical services.
Historically, doctors indirectly p r o v i d e d health
i n s u r a n c e by m e a n s of p r i c e d i s c r i m i n a t i o n ,
charging patients according t o their ability to pay.
In theory, everyone, i n c l u d i n g t h e poor, received
medical service. Health insurance began during
t h e Great Depression a n d was b o o s t e d in t h e
postwar p e r i o d because of t h e rising b u r d e n of
i n c o m e taxation on m i d d l e and lower i n c o m e
workers, t h e IRS e x e m p t i o n of insurance benefits
f r o m taxable income, and a S u p r e m e Court
ruling that e m p l o y e e fringe benefits c o u l d be
i n c l u d e d in collective bargaining. 1 5 By 1970, over
90 percent of factory a n d office workers in
m e t r o p o l i t a n areas w e r e p r o t e c t e d w i t h some
hospital and surgical coverage. Coverage of medical costs, particularly doctors' fees, increased
sharply in recent years, f r o m a r o u n d 60 percent
in 1 9 6 0 t o over 90 percent by 1976. 1 6 Thirdparty coverage was b r o a d e n e d substantially in
t h e m i d - 1 9 6 0 s w i t h t h e e n a c t m e n t of M e d i c a r e
and M e d i c a i d legislation, which extended medical
insurance to t h e elderly a n d indigent. These
programs w e r e i m p l e m e n t e d to achieve greater
equity in t h e d i s t r i b u t i o n of health services.
Critics argue that this broad expansion of thirdparty payments stimulates d e m a n d in t w o respects. A t any given price, consumers d e m a n d
m o r e medical care than t h e y w o u l d o t h e r w i s e
because t h e y d o n o t directly bear t h e full cost,
w h i c h is paid ultimately through higher insurance
rates a n d higher taxes. 17 Insurance thus can be
treated as a shift in t h e d e m a n d curve for health
care t o the right, f r o m D i t o D 2 (see Chart 3a).
Fiscal policy exacerbates this i n d u c e d d e m a n d
as health insurance benefits are not classified as
taxable income. Furthermore, this e x e m p t i o n
spurs e m p l o y e r s t o c o n t r i b u t e t o health benefits
instead of wages, for e m p l o y e e s receive 20 t o 50
percent more than they w o u l d w i t h an equivalent
wage increase. For example, o n l y 50<t to 80c of
an extra dollar in wages is left after taxes t o
purchase health care, b u t t h e same dollar paid
through an e m p l o y e r - b a s e d insurance plan buys
a full dollar's w o r t h of medical care. 18 The healthcare industry is thus b o o s t e d by a tax subsidy,
estimated at $6 billion in 1975. 1 9
Insurance also r e d u c e s t h e price e l a s t i c i t y of
d e m a n d for medical services by desensitizing
consumers t o t h e full effects of higher prices.
Since insurance covers a large portion of a price
11
Chart 3. Elasticity of Demand for Medical Care
\
D;
D,
D
q2
D, — D e m a n d w i t h o u t
insurance
D2 — D e m a n d with insurance
p —
price
q —
quantity
q2q,
^
D — D e m a n d w i t h e l a s t i c i t y of
D' —
Inelastic d e m a n d
approximately 1
Source: Federal Reserve Bank of A t l a n t a
increase, consumers are unlikely t o reduce dem a n d by an a m o u n t equal t o the full price
increase. Insurance not only reduces consumers'
price s e n s i t i v i t y b u t d i s t o r t s d e m a n d t o w a r d
more expensive, c o v e r e d services like i n p a t i e n t
hospital care. If insurance covers many health
charges t h r o u g h a cost-based r e i m b u r s e m e n t
method, consumers have little reason to respond
t o price increases by reducing demand commens urate I y. As elasticity approaches a vertical slope,
a rise in health care prices does little t o r e d u c e
t h e level of d e m a n d (see Chart 3b,c).
If the price elasticity/demand shift e x p l a n a t i o n
of health-care industry g r o w t h is valid, it implies
t h e n e e d for policy changes. The first might be t o
discourage t h e spread of insurance coverage, for
example, by c a p p i n g employers' d e d u c t i o n s for
health insurance premiums, as Congress recently
proposed. A second change might be t o align
consumers' medical costs m o r e closely w i t h
actual costs by charging higher d e d u c t i b l e s or
requiring copayment for more services, especially
routine medical care, as some e m p l o y e r s and
insurers are beginning to do. However, advocates
12
of alternative explanations of industry g r o w t h
d o u b t that increased d e d u c t i b l e s w o u l d lead t o
a more efficient allocation of resources (e.g.,
health-care labor) because of distortions in t h e
health-care market.
Market Failure. Economists w h o emphasize
market failure point out that increased d e m a n d for
services w o u l d not automatically increase average
medical costs. The i m p a c t that shifts in t h e
d e m a n d schedule a n d changes in elasticity ultimately have on prices d e p e n d s on t h e elasticity
of supply. If supply w e r e highly " p r i c e elastic,"
increased d e m a n d c o u l d more readily increase
o u t p u t than prices (see Chart 4a). It is t h e
inelasticity of t h e industry's supply schedule,
t h e y argue, that is critical in t h e rapid inflation in
medical costs, since an increase in d e m a n d
q u i c k l y pushes t h e industry t o capacity and
forces prices higher (Chart 4b).
M e d i c a l care prices are high because theindustry, functions as an "oligopoly," wherein power
is w i e l d e d by a relatively l i m i t e d n u m b e r of
suppliers w h o are not price-takers b u t pricesetters. As t h e first-line suppliers of health care,
O C T O B E R 1984, E C O N O M I C R E V I E W
Chart 4. Elasticity of Supply for Medical Care
«
Si —
S? —
Di —
D2 —
p —
q —
Elastic Supply
Inelastic Supply
D e m a n d without insurance
D e m a n d with insurance
price
quantity
Source: Federal Reserve Bank of A t l a n t a
physicians can direct s u b s e q u e n t consumption
of surgical, hospital, a n d pharmaceutical goods
and services. W i d e s p r e a d price discrimination,
through w h i c h physicians levy fees in accordance
w i t h patients' ability t o pay, is e v i d e n c e of such
price-setting behavior.
M e d i c a l care o u t p u t does not respond to
higher prices i n d u c e d by t h e industry's oligopolistic market because of t h e substantial barriers
t o entry. The supply of physicians is restricted by
professional associations' control over medical
e d u c a t i o n a n d licensing. Q u a c k e r y was widespread in 1 8 4 6 w h e n t h e American M e d i c a l
Association was f o u n d e d t o i m p r o v e professionalism through licensing and medical education.
Barriers t o entry w e r e raised by t h e expense a n d
long training p e r i o d required of physicians. N o t
only is t h e supply of physicians restricted, but so
are t h e alternatives. Whereas t h e a u t o industry
offers consumers a broad array of choices, ranging
in price a n d fuel e c o n o m y a n d a l l o w i n g for
i m p e r f e c t substitutions such as p u b l i c transportation, bicycling, a n d walking, medical care is a
" C a d i l l a c - o n l y " industry, all of whose products
are high-priced. The high cost of m o d e r n medical
e q u i p m e n t also inhibits entry.
During t h e postwar period, t h e federal governm e n t addressed supply problems in t w o respects.
The Hill-Burton Act of 1947 stimulated hospital
construction in rural and underserved areas such
FEDERAL RESERVE B A N K O F A T L A N T A
as t h e Southeast. Then, beginning in t h e 1960s, a
series of acts was passed t o increase medical
manpower. The Health Profession's Educational
Assistance Act of 1963 a u t h o r i z e d loans for
medical students a n d construction of medical
schools. The Allied Health Professions Personnel
Training Act increased enrollment in occupational
a n d physical therapy. The Health M a n p o w e r Act
enlarged t h e s t u d e n t loan program a n d otherwise e x p a n d e d support for nursing and pharmacy
schools. In t h e early 1970s, legislation p r o m o t e d
t h e t r a i n i n g o f nurse practitioners and physicians'
assistants for underserved areas. 20
If barriers t o entry w e r e the critical factor in t h e
rapidly rising health-care costs, then these federal
measures should have l o w e r e d unit costs, as
increased supplies intensified c o m p e t i t i o n a n d
d r o v e prices d o w n . Price increases have been
slow t o abate, however. The f u n d a m e n t a l factor
in t h e divergent supply behavior may be that
medical-care prices f u n c t i o n in a manner unlike
that of most industries. Higher prices raise supplier
incomes more than t h e y reduce d e m a n d for
medical services. Critics of t h e barriers-to-entry
argument thus maintain that measures to increase
supply d o not reduce costs because t h e basic
incentive system, grounded in the unique relationship b e t w e e n buyer and seller in the health-care
market, remains unchanged. This relationship,
t h e y argue, is g r o u n d e d in uncertainty.
Uncertainly. Consumers are uncertain w h a t
health-care products or services t h e y require
because i n f o r m a t i o n in this market is unequal;
that is, the consumer's medical k n o w l e d g e is
necessarily far less than t h e physician's. 2 1 Physicians alone possess t h e i n f o r m a t i o n r e q u i r e d t o
make rational decisions about goods and services
necessary for t r e a t m e n t a n d cure. Thus, t h e
consumer-supplier relationship is not at arm's
length, as in most markets, b u t is rather o n e of
trust. Because of this " a g e n c y " relationship, physicians c o n f o r m to professional norms designed
to preclude self-interest and profit-maximization.
The medical profession's adaptation t o this
peculiarity of t h e health-care industry results in a
s u b o p t i m a l allocation of resources. In a normal
market, individual d e m a n d is d e t e r m i n e d by t h e
price of goods, i n c o m e constraints, and tastes.
Suppliers also pursue their o w n self-interest,
maximizing profits by producing additional goods
and services to the point where marginal revenues
equal marginal costs. The resulting level of prices
and o u t p u t is an e q u i l i b r i u m situation w h e r e b y
each individual d e t e r m i n e s his level and mix of
13
services; no other allocation of resources w o u l d
i m p r o v e t h e position of all participants. N o
i n t e r v e n t i o n on t h e part of g o v e r n m e n t or trade
associations is necessary, e x c e p t perhaps in t h e
area of distribution; subsidies or taxes are sometimes indicated t o make purchasing p o w e r m o r e
equitable.
In t h e health-care industry, however, t h e inequality of i n f o r m a t i o n possessed by consumers
and physicians and the vital nature of health care
render profit-maximization by suppliers unethical.
At t h e same t i m e uncertainty enervates t h e
effect of prices o n consumer choices, t h e r e b y
w o r s e n i n g price inelasticity on t h e d e m a n d side.
Critical medical choices are m a d e n o t by consumers (patients) but suppliers (physicians),
w h o s e cost consciousness is m u t e d by professional standards requiring t h e m t o pursue
patient well-being w i t h little consideration
for prices or i n c o m e constraints. Since reimb u r s e m e n t u n t i l r e c e n t l y has b e e n c o s t based, most hospital administrators also have
had little incentive to control costs. Some analysts
maintain that hospital managers overinvest in
capital e q u i p m e n t because availability of the
latest t e c h n o l o g y is d e e m e d necessary t o attract
and retain t h e best doctors, w h o are t h e chief
source of customers. 2 2
If market failure is t h e key factor in t h e rapid
g r o w t h of t h e h e a l t h - c a r e i n d u s t r y , m e r e l y
d a m p e n i n g d e m a n d by raising d e d u c t i b l e s or
requiring c o p a y m e n t s w o u l d have o n l y an insignificant effect on aggregate costs. Suppliers, not
consumers, w o u l d continue to make the decisions
critical to costs because t h e information possessed
by each group w o u l d remain unequal. Costs
must be controlled by altering supplier incentives,
and rationing has b e e n o n e w i d e s p r e a d m e t h o d
for achieving this change.
Public i n t e r v e n t i o n in health care is m o r e
extensive in most d e v e l o p e d countries t h a n in
t h e U n i t e d States. In many nations, t h e desire for
equity in t h e ability t o purchase such a life-anddeath c o m m o d i t y as health care has resulted in
universal health insurance financed t h r o u g h taxation. In countries f o l l o w i n g this pattern, cost
increases that ensue f r o m rising d e m a n d are held
in check by a rationing system o n t h e supply side.
In Great Britain, for example, m i d d l e - a g e d a n d
elderly citizens can o b t a i n kidney dialysis treatm e n t only o u t s i d e t h e public-sector medical
system. Q u e u e s for regular medical services are
long in such countries. Rationingservices t o stem
spiraling increases in medical costs in t h e U n i t e d
14
States was r e c o m m e n d e d this year b o t h by a
Brookings Institution study and by t h e Southeastern Hospital Conference. 2 3 Currently, certificates of n e e d are a f o r m of rationing hospital
beds o n a geographic basis. The e c o n o m i c drawback of any rationing system is that it does n o t
achieve an optimal solution: some people receive
m o r e medical care t h a n t h e y w o u l d be w i l l i n g t o
pay for o n their own, w h i l e others receive less.
Three major hypotheses regarding health-care
industry growth—induced demand, market structure, and uncertainty—have been reviewed a b o v e
The hypothesis that has been s u b j e c t e d t o t h e
most rigorous empirical testing is t h e demandi n d u c i n g effect of third-party payments. 2 4 Even
t h e simplest historical review of growth trends in
t h e industry suggests t h e greater i m p o r t a n c e of
d e m a n d factors. D e m a n d has changed significantly over t h e last three decades t h r o u g h t h e
spread of insurance, whereas d o c t o r - p a t i e n t relationships and physicians' oligopolistic competition have r e m a i n e d constant or diminished.
The c o n c e p t of uncertainty has been t h o r o u g h l y
specified theoretically b u t not as w e l l s u p p o r t e d
empirically. 2 5 However, private sector initiatives
t o resolve industry distortions e m p h a s i z e d by
t h e uncertainty c o n c e p t are increasing rapidly.
All of t h e hypotheses focus on price elasticity, as
d o reform measures, a n d so changes in t h e
industry d u r i n g t h e next d e c a d e should be inf l u e n c e d largely by greater price elasticity on
b o t h t h e d e m a n d and supply sides.
Outlook and Implications
Demographic Trends. T h e nation's aging population suggests that d e m a n d for health care will
c o n t i n u e t o rise, since t h e elderly c o n s u m e a
d i s p r o p o r t i o n a t e a m o u n t of medical services.
This aging p h e n o m e n o n should have a special
i m p a c t on certain southeastern states because a
larger p r o p o r t i o n of p o p u l a t i o n in t h e region will
be elderly (see Chart 5). In 1980, residents over
age 65 c o m p o s e d 13 percent of t h e Southeast's
p o p u l a t i o n , c o m p a r e d w i t h 11 percent of t h e
nation's. Florida had t h e largest c o m p o n e n t of
r e s i d e n t s age 65 or o v e r ( 1 7 p e r c e n t ) b u t
Alabama and Mississippi also had a slightly larger
percentage of elderly residents than t h e nation.
By 1990, more than one-fifth of all Floridians will
be 65 or over c o m p a r e d w i t h 13 percent for t h e
nation. Alabama and Tennessee also are expected
t o have a slightly higher-than-national p r o p o r t i o n
of senior citizens. By t h e year 2 0 0 0 , Florida's
O C T O B E R 1984, E C O N O M I C
REVIEW
Chart 5. Projected Shares of Population
65 and Over, U.S. and Southeast
Percent
1980
1990
2000
S o u r c e : C o m p u t e d by F e d e r a l R e s e r v e B a n k of A t l a n t a f r o m data in U.S.
D e p a r t m e n t of C o m m e r c e , B u r e a u of t h e C e n s u s ,
Provisional
Projections
ol the Population
of States, by Age and Sex: 1980 to
2000, S e r i e s P-25, No. 9 3 7 ( A u g u s t 1983), T a b l e 4
share should r i s e t o 2 2 percent w h i l e t h e nation's
reaches 13 percent.
This demographic trend suggests that hospitals
and nursing-care facilities will continue to expand
as a source of j o b s as t h e y respond t o rising
d e m a n d for their services. The Southeast, however, has not sought market solutions for nursing
care t o t h e extent that other regions have. The
n u m b e r of beds in nursing facilities per capita is
lower in this region than elsewhere in t h e U n i t e d
States. M o r e o v e r , d e m o g r a p h i c trends reflect
only need, not e c o n o m i c d e m a n d . Changes in
medical prices, b r o u g h t a b o u t through thirdparty p a y m e n t systems, c o u l d d a m p e n this potential d e m a n d by m a k i n g it m o r e difficult f o r t h e
elderly a n d others t o afford medical care.
Third-Party Payments. In t h e private sector,
employers' efforts to control benefit costs should
result in higher deductibles and premiums. These
in turn are likely t o diminish effective d e m a n d for
medical care and t h e r e b y retard e m p l o y m e n t
g r o w t h in traditional health occupations a n d
industries. Congress already has increased deductibles a n d copayments for certain publiclyc o v e r e d treatments. If congressional action t o
control medical costs continues, a cap on tax-free
health benefits c o u l d w i n approval, c o m p l e m e n t i n g efforts by insurers a n d employers t o
harness medical expenditures.
FEDERAL RESERVE B A N K O F A T L A N T A
Of course, doctors still w i l l direct most cons u m p t i o n decisions. In t h e past, costs have
increased w h e n doctors p o i n t e d patients t o w a r d
t r e a t m e n t m e t h o d s c o v e r e d by insurance rather
than t o w a r d less-expensive, u n c o v e r e d alternatives. H o w e v e r , m a n y e m p l o y e r s a n d insurers
have instituted incentives t o foster patient use of
lower-cost alternatives, such as outpatient surgery.
Later this year Blue Cross-Blue Shield of Tennessee
will begin r e i m b u r s e m e n t of h o m e hospice care
for terminally ill patients. For every $1 of hospice
costs, t h e insurer expects t o save $7 in hospital
costs. Such incentives are having an effect nationwide: hospital o u t p a t i e n t care has d e c l i n e d for
several years, w h i l e a m b u l a t o r y o u t p a t i e n t services have risen.
H M O s . Health m a i n t e n a n c e organizations are
likely t o be a n o t h e r c o n s t r a i n t o n h e a l t h - c a r e
costs. H M O s , formerly called "closed panel group
practices," represent a private-sector alternative
t o t h e health-care industry's market failure as
highlighted by the uncertainty hypothesis. Rather
than replicating t h e market model, H M O s increase the degree of integration among consumers,
suppliers, and third-party payers. In this situation,
similar t o a large c o r p o r a t i o n or conglomerate, all
parties share a c o m m o n interest in controlling
costs w h i l e m a x i m i z i n g health. H M O s began in
California in 1933 w h e n Henry Kaiser established a
plan to keep his engineering workers healthy by
having t h e m prepay 10 cents a day for medical
care. H M O s have gained sharply in p o p u l a r i t y
since 1973, w h e n federal legislation m a n d a t e d
that employers begin o f f e r i n g s u c h benefits as an
alternative t o traditional insurance plans. According t o t h e federal O f f i c e of Health M a i n t e n a n c e
Organizations, e n r o l l m e n t in t h e Southeast increased f r o m 100,000 in 1 9 7 6 to 4 2 8 , 0 0 0 in
1983; nationwide enrollment more than d o u b l e d
over this period, reaching 1 2.5 m i l l i o n by 1983.
The g r o w t h of H M O s should be furthered by
recently i m p l e m e n t e d g o v e r n m e n t incentives
f o r t h e nation's 3 0 m i l l i o n M e d i c a r e recipients t o
j o i n H M O s . The c o n t i n u e d g r o w t h of H M O s
augurs better c o n t r o l of costs and greater consideration of productivity when health-care staffing
is increased.
DRGs. The change in Medicare reimbursement
f r o m a cost-based system t o Diagnostic Related
Croups (DRGs) is a m o n g t h e most i m p o r t a n t
recent measures t o control costs. U n d e r t h e n e w
system, hospitals will be r e i m b u r s e d a fixed
a m o u n t for each illness or injury. This change
provides an incentive for hospitals t o reduce
15
costs because t h e y can retain t h e difference
b e t w e e n t h e DRG r e i m b u r s e m e n t a n d their
actual costs; however, they will not be reimbursed
for charges in excess of DRCs. This system was
p i l o t e d in N e w Jersey a n d at t h e e n d of 1983
began t o be i m p l e m e n t e d in stages nationwide.
Extending this system f r o m hospital fees to
medical fees is already u n d e r consideration.
Recent e n a c t m e n t of DRG legislation a n d its
p e n d i n g extension t o doctors' fees suggest a
deceleration in b o t h inflation a n d staff growth. In
fact, some southeastern hospitals already are
laying off e m p l o y e e s even t h o u g h DRGs are
being phased in over several years. Hospitals in
this region have f e w e r full-time equivalent employees per patient, b u t their o c c u p a n c y rates
are lower than elsewhere in t h e nation.
For Profit Sector. A n o t h e r force likely t o cheek
growth in health-care e m p l o y m e n t and other
costs is t h e rise of for-profit firms in t h e industry.
O n e source forecasts a 22 p e r c e n t a n n u a l g r o w t h
rate for hospital m a n a g e m e n t companies. These
firms theoretically are better a t t u n e d t o efficient
allocation of resources and should help i m p r o v e
the performance of hospitals and nursing homes. 26
For-profit health care c o m p a n i e s have b e e n
g r o w i n g rapidly and their profitability is above
average. For example, t h e return o n e q u i t y of 1 5
leading private companies in health-care averaged
19.9 percent over t h e past five years c o m p a r e d
w i t h 15.1 percent for all industries. This return
e x c e e d e d even that of t h e c o m p u t e r industry
and was surpassed only by brokerage and tobacco
firms. Sales grew by 16.2 percent per year in
comparison w i t h an all-industry m e d i a n of 12.4
percent Only energy, office e q u i p m e n t brokerage,
a n d specialty retail companies' revenues grew
faster. 27
The large supply of doctors and dentists should
encourage c o n t i n u i n g g r o w t h in retail m e d i c a l
services such as emergency o u t p a t i e n t surgical
centers. 2 8 In t h e Southeast, t h e gap b e t w e e n
nursing h o m e s a n d p r o b a b l e f u t u r e d e m a n d
should spur t h e h o m e health-care segment of
for-profit providers. Medical merchandise marts are
being c o n s i d e r e d in several southeastern cities,
i n c l u d i n g Ft. Lauderdale, Tampa, and Nashville.
For-profit sector growth is especially significant
in this region because such firms have e x p a n d e d
operations m o r e rapidly in t h e Sunbelt, i n c l u d i n g
many areas of t h e Southeast, than elsewhere.
Beds in i n v e s t o r - o w n e d hospitals increased 60
percent in t h e U.S. f r o m 1972 t o 1982, b u t 189
percent in t h e Southeast. O n e - f i f t h of t h e beds in
16
Chart 6. Share of Hospital Beds by Ownership
U.S. and S o u t h e a s t 1982
Percent
100
U.S.
Southeast
75
50
: L t r L =
Not-for-Profit
State & Local
Government
InvestorOwned
Source C o m p u t e d by Federal Reserve Bank ol Atlanta trom American
Hospital Association data
t h e region are n o w in proprietary hospitals, u p
f r o m o n e - t e n t h a d e c a d e ago, whereas nationally
such hospital beds rose from 7 t o 9 percent over
t h e p e r i o d (see Chart 6). O n a per capita basis,
t h e p r o p o r t i o n of beds in southeastern for-profit
hospitals is m o r e than t w i c e t h e national share.
Rapid p o p u l a t i o n g r o w t h a n d a m o r e c o n d u c i v e
regulatory climate are t h e main reasons for t h e
faster g r o w t h of for-profit hospitals in this region.
M o r e o v e r , a n u m b e r of hospital m a n a g e m e n t
firms are h e a d q u a r t e r e d in the Southeast.
Conclusion
The c o m p l e x i t y of t h e health-care industry
makes it difficult to determine its precise heading,
particularly w i t h o u t t h e s u p p o r t of a formal
m o d e l t o estimate t h e influence each of these
cost-cutting policies may have. Nonetheless, t h e
industry's future over t h e next d e c a d e appears t o
promise slower b u t c o n t i n u i n g g r o w t h and more
p r o d u c t i v i t y consciousness in t h e expansion of
jobs. The U.S. C o m m e r c e D e p a r t m e n t projects a
growth rate of 10.2 percent over t h e next five
years c o m p a r e d w i t h a 13.4 percent pace over
t h e past five. 29 Health m a n a g e m e n t j o b s are
likely t o remain t h e fastest growing o c c u p a t i o n a l
category because t h e m o v e t o w a r d cost control
should intensify d e m a n d for m a n a g e m e n t skills
in t h e delivery of health care. It is less obvious
OCTOBER 1984, E C O N O M I C
REVIEW
w h i c h o c c u p a t i o n a l categories w i l l experience
slower growth as a result of current policy reforms,
b u t t h e already large n u m b e r of doctors a n d
dentists is likely to retard g r o w t h in these categories as well as in physicians' assistants. Since
hospitals have b e e n t h e focal p o i n t of many
r e i m b u r s e m e n t reforms, it seems clear that their
g r o w t h will slacken. O u t p a t i e n t services, w h i c h
t e n d to be more cost-efficient, are likely t o
undergo t h e most rapid growth.
As efficiency b e c o m e s p a r a m o u n t over equity,
traditionally underserved areas of t h e Southeast
c o u l d e x p e r i e n c e a setback in t h e availability of
medical resources a n d services. Rural areas a n d
slow-growing states are likely t o see sharper
staffing cuts than urban areas a n d high g r o w t h
states. Consumers w i t h a greater need for medical
care p r o b a b l y will have t o bear a larger share of
costs or forgo treatment. The relationship b e t w e e n
medical e x p e n d i t u r e s a n d healthiness is not
clear, a n d so any negative conclusions regarding
t h e i m p a c t of this change must be d r a w n w i t h
caution. Nonetheless, the implications concerning t h e d i s t r i b u t i o n of medical services are
t r o u b l i n g c o m p a r e d w i t h a d e c a d e ago in that
t h e region's relatively high infant mortality
rates indicate a greater need, especially o n t h e
part of certain disadvantaged social strata. 30
NOTES
'The Southeast in this article refers to the six states included in the
Sixth Federal Reserve District: Alabama, Florida, Georgia, Louisiana,
Mississippi, a n d Tennessee.
' F i g u r e s given for allied health services and nursing-care facilities have
been adjusted to maintain comparability across the time period
despite taxonomic c h a n g e s m a d e in 1972.
J
G e o r g e von Haunalter, 'Health Issues and Trends in the 1980s'" (Palo
Alto, California: SRI International, 1983), pp. 6-7
4
Victor R. Fuchs, "Though M u c h Is Taken—Reflections on Aging,
Health, and Medical Care,'" Working Paper N o 1269 (Cambridge,
Massachusetts: National Bureau of Economic Research, 1984) DD
30-31.
* Edward S. Sekscenski, "The Health Services Industry: A Decade of
Expansion," Monthly Labor Review, vol. 104 (May 1981), p 10
"Occupations related to the manufacture of medical instruments, supplies,
a n d drugs are not included here because such occupations—operatives, sales, a n d technical a n d administrative support—are not available
in a form disaggregated by industry a n d state.
'This number is larger t h a n that given in the preceding section because
it is based on a different sample, one drawn from households rather
than business establishments.
»See Paula Breen, Raising a New Generation in the South (Research
Triangle Park North Carolina: Southern Growth Policies Board, 1981),
pp. 21-37, for a more extensive description of continuing inadequacies
in resources.
'Augusta's ratio of 2.16 signifies that its share of medical-care jobs is
2.16 times as large as its share of Georgia's employment overall.
'"Roger A Rosenblatt "Health and Health Services," in
Nonmetropolitan
America in Transition, edited by A m o s H. Hawley a n d Sara Mazie
(Chapel Hill, North Carolina: University of North Carolina Press, 1981),
used 1978 U S. Department of Health, Education, and Welfare data to
show that rural areas are underserved medically, according to a variety
of measures.
" S e k s c e n s k i , " H e a l t h Services Industry,' pp. 12-14.
" C o m p u t e d from data in U S. Department of Labor, Bureau of Labor
Statistics, CPI Detailed Report December 1977 (February 1978), p. 25;
December 1981 (February 1982), pp. 10, 24; December 1982 (February
1983), pp. 12, 26; December 1983 (February 1984), pp. 7, 21; and April
1984 (June 1984), p. 22.
,J
U S . Department of Commerce, Bureau of Economic Analysis, U.S.
Industrial Outlook (January 1 984), p. 52-13.
"Health,
United States and Prevention
Protile, U.S. Department of
Health and H u m a n Services, Public Health Service (December 1983),
Table 68, pp. 191-92; Table 77, pp. 189-90; a n d Table 78, pp. 191-92
l3
C a r o l Fethke a n d S. Y. Wu, "A Historical Perspective on the Health Care
Industry," Health Communications
and Informatics,
vol. 5, nos. 5-6
(1979) p. 267.
' " U S. Department of Labor, Bureau of Labor Statistics, Handbook
ot
Labor Statistics (June 1979), pp. 2 8 4 - 8 5
" M a r t i n S. Feldstein, "The Welfare Loss of Excess Health Insurance,"
Journal of Political Economy!March/April
1973), pp. 251-79.
'»Martin S. Feldstein, "The Medical Economy," Scientific American
vol
2 2 9 (September 1973), pp. 151-56.
'«Michael D. Intriligator, "Issues in the Economics of Health, in Economic
Issues of the Eighties, edited by Nake Kamrany a n d Richard H. Day
(Baltimore, Maryland: J o h n s Hopkins University, 1979), p. 120.
FEDERAL RESERVE B A N K O F A T L A N T A
' " F e t h k e a n d Wu, "Historical Perspective," pp. 2 7 8 ff. The training of
physicians assistants was in part motivated by a c o n c e r n to find
e m p l o y m e n t for the large number of medics w h o had served in the
Vietnam War.
" K e n n e t h J. Arrow, "Uncertainty a n d the Welfare Economics of Medical
Care," American Economic Review, vol. 53 (December 1963), pp. 94173, was one of the first to develop the theoretical basis of this
explanation of the health-care industry. See also, Robert G. Evans,
" I n c o m p l e t e Vertical Integration in the Health Care Industry: Pseudomarkets a n d Pseudopolicies," Annals ot the American Academy, vol
4 6 8 (July 1983), pp. 6 8 ff.
" J o s e p h P Newhouse, "Toward a Theory of Nonprofit Institutions: An
Economic M o d e l of a Hospital,' American Economic Review, vol. 6 0
(March 1970), pp. 64-74; a similar theoretical argument is made by
Mark Pauly and Michael Redisch, "The Not-for-Profit Hospital as a
Physicians' Cooperative," American Economic Review, vol. 6 3 ( M a r c h
1973), pp. 87-99.
23
Journal ot Commerce, February 10, 1984; Atlanta Journal and Constitution, April 7, 1984, p. 5 - A
" K a r e n Davis, "Theories of Hospital Inflation: Some Empirical Evidence,"
Journal
of Human Resources,
vol. 8, no. 2 (1973), pp. 181-201,
challenges this view empirically. In a cross-sectional regression
analysis, cost-reimbursement variables w e r e not significantly correlated with hospital costs: hospitals with a high proportion of patients
covered by cost-reimbursement insurance plans d i d not have higher
costs than t h o s e with a low proportion of such p a t i e n t s However, her
data set overlapped the years w h e n Medicare and Medicaid were
introduced; therefore, as she admits, the a n n o u n c e m e n t of these
programs may have p r o m p t e d a cost shift. Using patient survey data for
the same periods, Paul B. Ginsburg et al., " M e d i c a r e a n d Health
Services Utilization," in Economics ot Health Care ( N e w York: Praeger,
1982), pp 181-96, f o u n d that economic variables declined in importance relative to need as determinants of medical care use a m o n g
the elderly after the establishment of Medicare. Their research lends
support to the demand-side, price elasticity hypothesis.
" D o n a l d E Yett et al., "A Model of Physician Pricing, O u t p u t a n d Health
Insurance Reimbursement: Findings from a Study of Two Blue Shield
Plans Claims Data," in Economics of Health Care ( N e w York: Praeger,
1982), pp. 197-230, f o u n d physician pricing closer to the competitive
than to the oligopolistic model.
'"However, several studies f o u n d that average patient costs w e r e
slightly higher at for-profit hospitals than at c o m p a r a b l e not-for-profit
hospitals. See Arnold S. Relman, "Investor-Owned Hospitals a n d
Health-Care Costs," New England Journal
of Medicine
vol 3 0 9
(August 11, 1983), pp. 370-72.
2
'Forbes, January 2, 1984, p. 214.
'»Thomas W. Mader, " H e a l t h Services Markets" ( M e n i o Park, California;
SRI International, 1981).
'»U.S. Industrial Outlook, p. 52-16.
30
Southeastern states infant mortality rates rank among the highest in
the nation, ranging from 3 5 t h (Georgia) to 5 0 t h (Mississippi) despite a
decade of federal measures d e s i g n e d to improve a n d equalize health
resources across the nation.
17
T
S&L Use of New Powers:
A Comparative Study of State- and
Federal-Chartered Associations
Robert E. Goudreau
The experience of thrift institutions in Texas, Maine, Florida and the nation indicates h a t t h e y are far
from making full use of recently broadened powers. Their future course promises slow but steady
adoption of these powers as S&Ls strengthen their competitive stance.
To boost the health of the nation s thrift industy,
Congress approved the Depositor/ Institutions
Deregulation and M o n e t a r y C o n t r o l Act of
1980 and t h e Carn-St Germain Depository
Institutions Act of 1982. These w e r e t h e first
major c o n c e r t e d measures taken at t h e federal
level t o address f u n d a m e n t a l causes of t h e
thrift industry's misfortunes. Recognizing that
t h e industry was awash in red ink, Congress
expanded asset and liability powers for federalchartered thrifts, e n a b l i n g t h e m t o avoid problems associated w i t h short-maturity liabilities
a n d long-maturity assets. During this same
period, Florida lawmakers e n a c t e d statutes
that b r o a d e n e d asset a n d liability powers for
their state-chartered thrifts. For example, Floridachartered thrifts w e r e e m p o w e r e d t o grant
consumer a n d c o m m e r c i a l loans a n d t o invest
The
author
is a member
of
the
Atlanta
Fed's
Research
in corporate obligations and service corporation
subsidiaries.
However, e x p a n d e d powers w e r e first m a d e
available t o Texas- and M a i n e - c h a r t e r e d thrift
institutions in 1972 a n d 1975, respectively. As
in Florida, t h e most notable expansion was in
t h e area of consumer and c o m m e r c i a l loan
holdings. Legislators in Texas a n d M a i n e had
t h e insight t o assess t h e industry's lackluster
profit potential and t h e initiative t o enact
m u c h - n e e d e d changes. A l t h o u g h serious problems w e r e p e r c e p t i b l e in t h e early 1970s, f e w
industry observers or participants had envisioned
t h e n that thrifts w o u l d find themselves in such
dire straits at t h e turn of the decade.
Sustained high interest rates w e r e t h e chief
i m p e t u s t o liberalized federal legislation in
1 9 8 0 and 1982 and t o t h e new Florida statutes.
As they soared, interest rates dramatically escalated thrifts' cost of funds w h i l e only sluggishly
increasing yields on their interest-earning assets.
Department
O C T O B E R 1984, E C O N O M I C
18
REVIEW
The high interest rates thrifts were forced to
pay to attract and keep savings deposits resulted
from several developments: e c o n o m i c circumstances that raised t h e general level of interest
rates; intense c o m p e t i t i o n from nonbank institutions offering m o n e y market mutual fund
accounts; and an imbalance in the step-bystep deregulation of depository institutions.
Interest rates began rising sharply in 1977,
inspiring the t r e m e n d o u s growth in nonbank
money market mutual fund accounts. These
m o n e y market funds, offering market interest
rates, virtually instant liquidity, and eventually
free but limited check-writing privileges, caused a
profound drain on regulated, relatively lowyielding savings at depository institutions. To
help redirect savings to depository institutions,
regulatory agencies designed the six-month
money market t i m e deposit. This new account
was introduced on June 1, 1978 w i t h a variable
interest-rate ceiling that m o v e d w i t h changes
in t h e average yield on new issues of six-month
Treasury bills. The m i n i m u m required deposit
per account was $10,000. Although the account
attracted a substantial amount of savings, a
large proportion came out of the offering institution's o w n lower-yielding t i m e and savings
deposits. This initial shift to high-yield shortterm savings p r o m p t e d the subsequent burgeoning of thrifts' cost of funds. Ironically,
these hikes were exacerbated by enactment of
t h e Depository Institutions Deregulation and
Monetary Control Act of 1980 (henceforth
DIDMCA), which called for the gradual removal
of interest-rate ceilings on savings instruments.
The act triggered a j u m p in rates paid on
liabilities w i t h o u t a corresponding rise in asset
yields.
The asset flexibility thrifts had gained from
t h e act proved insufficient not only because of
continued legislative constraints and portfolios
predominated by long-term assets, but because
of weak e c o n o m i c activity, particularly during
the 1980-82 period. Thrifts added high-yielding
mortgages to portfolios only modestly because
home sales were generally at a standstill. Layoffs
as well as personal and corporate income
losses caused increased mortgage delinquencies
that c r i m p e d earnings further, especially in
regions hard-hit by the recession. Furthermore,
unfavorable publicity about the thrift industry's
poor earnings convinced some depositors to
put their money elsewhere. O n g o i n g competition from m o n e y market mutual funds and
FEDERAL RESERVE B A N K O F A T L A N T A
additional competition from new financial conglomerates c o n t r i b u t e d heavily to the savings
drain. At the same time, more traditional competition from commercial banks, credit unions,
and insurance companies continued. 1
The results of this study indicate that S&Ls
have not used their newly granted powers to
anywhere near t h e extent allowed, as the
experience for Texas, Maine, Florida, and the
nation suggests. Because they seem likely to
a d o p t these powers at only a slow but steady
pace in the future, they will c o n t i n u e to encounter problems associated with nondiversification, such as vulnerability to the real estate
cycle. Consequently, S&Ls are not in head-tohead c o m p e t i t i o n w i t h commercial banks and
apparently will not be for some time. Associations' use of new powers will increase because
they must reduce their interest-rate risk exposure; however, managerial reluctance to sail in
unfamiliar waters likely will restrain the degree
of expansion.
A n u m b e r of studies regarding thrift use of
new powers have been published in recent
years; for example, Alan A McCall and Manferd
O. Peterson (1980), Robert Baker (1982), John
Crockett and Thomas A King (1982), Robert A
Eisenbeis (1983), and Constance R. D u n h a m
and Margaret Cuerin-Calvert (1983). These
works focus primarily on thrift behavior at the
state level (Texas, Maine, and Florida), regional
( N e w England), or the national level. The Federal
Reserve Bank of Atlanta d e c i d e d to a d d to that
pool of knowledge by using recent data to
e x a m i n e state- a n d f e d e r a l - c h a r t e r e d S&L
balance sheet behavior for all three states that
broadened asset and liability powers for their
state-chartered associations early on, and to
look at diversification from a n a t i o n w i d e perspective. (For the same geographical groupings,
a future Economic
Review article will examine
the pace and momentum at which the differently
chartered S&Ls availed themselves of broadened
powers.)
The primary purpose of our study is to provide
a statistical analysis that helps evaluate h o w
state-chartered and federal-chartered savings and
loan associations have taken advantage of opportunities presented by the power-broadening
statutes. These statutes w e r e designed to
enhance thrift viability by allowing a closer
matching of maturities on assets and liabilities,
thereby reducing interest-rate risk exposure
and stabilizing earnings and profits. Potentially
19
T a b l e 1 . N e w S&L P o w e r s G r a n t e d by State a n d Federal Legislation
New Powers
Consumer Loans
Texas
Florida
Maine
United States — Federally Chartered Thrifts
(Effective August 3, 1972)
(Effective O c t o b e r 1 , 1 9 7 5 )
(Effective July 1, 1 9 8 0 )
( D I D M C A effective M a r c h
31, 1980)
M a k e c o n s u m e r loans with
e s s e n t i a l l y no p e r c e n t - o f assets limitation.
Grant consumer loans up to
10 percent of total deposits
E x t e n d c o n s u m e r loans of
any t y p e or amount.' 2 ' 13
Grant consumer loans up to
2 0 percent of total a s s e t s ' 6
(Garn-St Germain, effective
O c t o b e r 15, 1982)
E x t e n d c o n s u m e r loans up
t o 3 0 p e r c e n t of total assets'8
M a k e " p r u d e n t " loans, inc l u d i n g c o n s u m e r loans,
u p t o 10 p e r c e n t of total
deposits
Issue credit c a r d s
Issue credit c a r d s
Issue credit c a r d s
Issue credit c a r d s
Educational L o a n s
Yes
Yes
Yes
M a k e educational loans (for
any e d u c a t i o n a l purpose)
up t o 5 p e r c e n t of total
assets
Commercial Loans
Make commercial loans
with essentially no percentof-assets limitation.
Participate in c o m m e r c i a l
loans w i t h M a i n e c o m m e r cial b a n k s u p t o 10 p e r c e n t
of total d e p o s i t s
M a k e c o m m e r c i a l loans of
any t y p e or amount. 1 2 ' 13
Extend commercial real e s
tate loans up t o 2 0 p e r c e n t
of total a s s e t s
Grant commercial real estate loans up t o 4 0 p e r c e n t
of total a s s e t s
M a k e c o m m e r c i a l loans,
direct loans or participat i o n s up t o 5 p e r c e n t of
total assets prior to January
1, 1 9 8 4 (7.5 percent of total
assets for savings banks),
and thereafter up to 1 0 percent of total a s s e t s
M a k e " p r u d e n t " l o a n s including commercial loans
up to 10 p e r c e n t of total
deposits
Extend additional c o m m e r
cial loans, o r i g i n a t i n g or
participating, up t o a perc e n t a g e t o be d e t e r m i n e d
by t h e s u p e r i n t e n d e n t of
banking.
Real Estate Development
Yes
Yes'
No
Yes
Yes"
No
Unsecured Construction
Loans
Yes'
Y e s if c o n s i d e r e d t o
"prudent"
Investment in O b l i g a t i o n s
of State and Local Governments
Yes
Y e s Also allowed t o invest
in o b l i g a t i o n s issued a n d
g u a r a n t e e d by the Dominion of C a n a d a a n d any province or political subdivision
thereof.
Yes'5
Yes
Investment in Obligations
not G u a r a n t e e d by U. S.
Government
Y e s if o b l i g a t i o n a p p e a r s
o n a n " a p p r o v e d " list or
permission o b t a i n e d from
the state commissioner on
an a d hoc b a s i s 3
Yes
Yes'5
Yes
Investment in C o r p o r a t e
O b l i g a t i o n s (including
c o m m e r c i a l paper)
Y e s if p e r m i s s i o n o b t a i n e d
from State C o m m i s s i o n e r
on an a d hoc b a s i s 3
Yes
Yes'5
Invest in commercial paper
and c o r p o r a t e d e b t securities up t o 2 0 percent of
total a s s e t s ' 6
Invest in commercial paper
and corporate debt securities up t o 3 0 p e r c e n t of
total a s s e t s ' 8
Yes. M a y invest in time a n d
No
Invest in t i m e a n d savings
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Yes"
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Investment
Yes. M a y invest in t i m e a n u
Yes. up to 5" percent" of
total assets may be placed
in a s e r v i c e c o r p o r a t i o n
subsidiary. Increased to 10
p e r c e n t o n J u l y 1, 1 9 8 2 .
A l l o c a t e " u p t o 3 p e r c e n t of
total assets to a service
corporation.
Business Investment
Companies
No4'5
Yes " > 4
No4
No
Invest in s m a l l b u s i n e s s investment companies up to
10 p e r c e n t of t o t a l a s s e t s
I n v e s t m e n t in T a n g i b l e
Personal Property and
Engaging in Equipment
Leasing
No"
No4
No4
No
I n v e s t in t a n g i b l e p e r s o n a l
p r o p e r t y a n d e n g a g e in
equipment leasing comb i n e d u p to 10 p e r c e n t of
t o t a l assets.
Trust A c t i v i t i e s
No3'
Yes
Yes
E n g a g e in trust activities,
p r o v i d e d s t a t e l a w s are not
contravened.
R e m o t e Service Units
No3
Yes
Yes
Establish
units.
NOW (Interest-Earniny
N e g o t i a b l e O r d e r of Withdrawal) A c c o u n t s
No3'
7
Yes, b u t o n l y w h e n f e d e r a l
law p e r m i t s s u c h a c c e p t t a n c e . F e d e r a l law w a s
altered
to
allow
NOW
accounts
for
individuals
throughout New England
beginning M a r c h 1 , 1 9 7 6 . 1 - 4
Yes 4
Accept N O W a c c o u n t s from
individuals a n d not-for-profit
organizations
Accept NOW accounts from
governmental units
N I N O W (NoninterestEarning Negotiable Order
of W i t h d r a w a l ) A c c o u n t s
No3'
8
Yes, w i t h n o l o a n relations h i p required.
Accept NINOW
f r o m individuals.
Accept NINOW accounts
f r o m p e r s o n s or organizations that have established
a "business, corporate, comm e r c i a l or agricultural loan
r e l a t i o n s h i p " w i t h t h e institution.
Demand Deposits
No"
Not explicitly stated.
No
6
No. 3 In 1 9 8 1 , a u t h o r i z e d t o
accept NINOW accounts
from customers w n o nad
established a business loan
relationship Loan relationship requirement eliminated
in 1 9 8 3 .
Yes, but for personal checki n g a c c o u n t s only. 4
remote
service
accounts
Accept demand deposits
f r o m p e r s o n s o r organizat i o n s t h a t have established
a "business, corporate, comm e r c i a l or a g r i c u l t u r a l l o a n
r e l a t i o n s h i p " w i t h t h e institution.
Sources: Texas Savings and Loan Act, Article 852a, Vernon's Texas Civil Statutes; Maine Bureau of Banking, Laws Regulations, a n d Bulletin, Maine Revised Statutes Annotated, Title 9 B Financial
Institutions, Laws 1975, Chapter 500; Florida Savings Association Act, Chapter 665, Savings Savings a n d Loan, and Building a n d Loan Associations F.S. 1981, Depository Institutions Deregulation
a n d Monetary Control Act of 1980, Public Law 96-221, March 31, 1980; a n d Garn-St Germain Depository Institutions Act of 1982, Public Law 97-320, October 15 1 9 8 2
'Effective July 1967
Provided that loans to any o n e borrower do not exceed 3 5 0 , 0 0 0 or
2 5 percent of an association's net worth, whichever is greater
J
Granted parity with federally chartered associations effective
March 31, 1980.
"Granted parity with federally chartered associations effective
October 15, 1982
"Only through subsidiaries.
"Authorized in a c c o r d a n c e with State Attorney General's opinion
issued November 25, 1980.
' A s of January 1981. N O W account acceptance ws unlimited, except
for corporate c u s t o m e r s
"As of January 1981, a c c e p t a n c e was authorized without regard to a
requisite loan relationship.
2
'Allowed to place funds in certificates of deposit of financial institutions
authorized to c o n d u c t business in Maine and in insured certificates
of deposit issued by non-Maine banks a n d thrifts
,0
M a y allocate up to 5 0 percent of a thrift's total capital a n d reserves or
its total surplus account to a service corporation subsidiary
" M a y invest in small business investment companies that are located
a n d c o n d u c t i n g business in Maine.
" S u b j e c t to the requirement that at least 6 0 percent of a t h r i f t s
"nonliquid" assets must be placed in real estate loans or interests
therein on h o m e property or primarily residential property for terms
not in excess of 4 0 years.
'••Requirement reduced to 5 0 percent of a thrift's "nonliquid" assets as
of July 1, 1982.
' " U p to the lessor of net worth or 10 percent of total a s s e t s
ls
S u b j e c t to an aggregate 2 5 percent-of-total-assets limitation. The
aggregate limitation includes obligations of state a n d local governm e n t s nonguaranteed obligations of federal agencies and corporate
obligations
'"The 20 percent-of-total-assets limitation applies to c o n s u m e r loans,
commercial paper a n d corporate debt securities combined.
" P r o v i d e d unsecured c o n s t r u c t i o n loans do not e x c e e d the sum of a
thrift's g e n e r a l reserves surplus a n d undivided profits or 5 percent of
total assets, whichever is greater
'"The 3 0 percent-of-total-assets limitation refers to the aggregate of
c o n s u m e r loans, c o m m e r c i a l paper a n d corporate debe securities.
t h e y c o u l d transform thrifts t o resemble commercial banks m o r e closely. Such a transf o r m a t i o n w o u l d increase bank-thrift c o m p e tition, w h i c h in turn w o u l d have notable effects
o n antitrust decisions a n d on b o t h business
and individual consumers of financial services. 2
M o r e bank, thrift, or bank-thrift mergers c o u l d
be p e r m i t t e d if market shares of b o t h types of
depository institutions were considered in merger
applications. 3 And, h e i g h t e n e d c o m p e t i t i o n
w o u l d benefit t h e purchasers of financial services because c o m m e r c i a l banks and thrifts
likely w o u l d p r o v i d e a w i d e r array of services at
lower prices, presumably w i t h t h e same or
higher quality.
O u r study sought to answer t h e f o l l o w i n g
questions:
1) Have savings and loan associations availed
themselves of expanded consumer and commercial l e n d i n g powers a u t h o r i z e d in t h e
relevant state a n d federal legislation?
2) If so, have these institutions deemphasized
their traditional c o m m i t m e n t t o mortgage
lending on residential real estate?
3) Have t h e e x p a n d e d powers i m p r o v e d t h e
liquidity of state and federal-chartered S&Ls?
4) Are associations taking advantage of statutes authorizing t h e m to invest in service
corporations?
5) W h a t effect have t h e p o w e r - b r o a d e n i n g
statutes had on t h e i m p o r t a n c e of N O W
(interest-earning negotiable order of withdrawal) and NI N O W (noninterest-earning
negotiable order of withdrawal) accounts in
the liability management strategies of affected
associations?
These questions focus on specific balance
sheet changes that indicate t h e degree t o
w h i c h affected S&Ls have taken advantage of
certain n e w powers, w i t h t h e d e t e r m i n i n g
forces being profit o p p o r t u n i t y a n d ease of
change. Additionally, these changes indicate,
albeit inconclusively, the probable future direct i o n and extent of change in S&L balance
sheets.
The t e c h n i q u e w e e m p l o y e d t o help answer
these questions is t h e standard statistical twosample t test. 4 W e used this test to d e t e r m i n e if
s t a t e and federal-chartered S&Ls in Texas,
Maine, and Florida, as w e l l as t h e nation, have
e x h i b i t e d statistically significant d i v e r g e n t
asset/liability behavior. The data analyzed are
for t h e four years e n d i n g w i t h June 30, f r o m
22
1 9 8 0 t o 1983. The Florida experience is u n i q u e
because o n l y a handful of Florida-chartered
S&Ls existed for long prior t o July 1, 1980. Thus
t h e post-legislation balance sheets of Florida's
de n o v o associations a n d its federal-chartered
S&Ls that c o n v e r t e d to state-chartered associations can be e x a m i n e d to c o m p a r e t h e b o l d or
novel initiatives taken by de n o v o institutions
w i t h t h e asset/liability behavior of c o n v e r t e d
S&Ls, w h i c h likely w e r e constrained by managerial inertia, i n v e s t m e n t c o m m i t m e n t s , and
restricted liquidity.
Principal Points of Legislation
Thrifts w e r e granted powers, particularly
consumer and c o m m e r c i a l loan powers, that
banks—their major c o m p e t i t o r s for savings
deposits—already possessed. The array of n e w
powers granted t o thrifts by various state and
federal legislation is displayed in Table 1. A
detailed comparison of t h e additional powers
available t o t h e nation's federally chartered
thrifts w i t h those thrifts chartered by Texas,
Maine, and Florida is given below. The comparison is meant t o d e t e r m i n e if and w h e n affected
state thrifts received b r o a d e n e d powers comparable t o t h e c o m b i n e d set of n e w powers
c o n f e r r e d o n federal-chartered thrifts t h r o u g h
D I D M C A ( M a r c h 31, 1980) a n d t h e Carn-St.
Germain Act ( O c t o b e r 15, 1982).
Assets. In general, federal-chartered thrifts
w e r e a l l o w e d t o e x t e n d consumer loans up t o
30 percent of total assets as of O c t o b e r 15,
1 9 8 2 ; t h e initial a l l o w a n c e a u t h o r i z e d by
D I D M C A was 20 percent 5 Texas statutes authorized state-chartered thrifts t o make c o n s u m e r
loans essentially free of any percent-of-assets
limitation beginning August 3, 1972; and t h e
O c t o b e r 1, 1975 M a i n e law a u t h o r i z e d statechartered thrifts t o make consumer loans up t o
10 percent of total deposits, and a l l o w e d an
additional m a x i m u m 10 percent extension of
consumer loans u n d e r p r u d e n t loan rules. 0 As
of July 1, 1980, Florida-chartéred thrifts c o u l d
grant consumer loans of any t y p e or a m o u n t
w i t h t h e proviso that at least 60 percent of a
thrift's " n o n l i q u i d " assets be placed in real
estate-related loans or interests. D I D M C A expressly a u t h o r i z e d thrifts t o issue credit cards
t o individuals, as d i d t h e Texas, Maine, a n d
Florida laws, and a u t h o r i z e d federal-chartered
thrifts to make loans for any educational purpose
up to 5 percent of total assets. The Texas,
O C T O B E R 1984, E C O N O M I C
REVIEW
Maine, and Florida acts a l l o w e d thrifts t o grant
educational loans w i t h only m i n o r restrictions,
if any.
The Gam-St Germain Act a u t h o r i z e d federalchartered thrifts t o grant commercial real estate
loans up to 4 0 p e r c e n t of total assets, a n d t o
make direct or participating c o m m e r c i a l loans
up t o 5 percent of assets (7.5 percent for
savings banks) prior t o January 1, 1 9 8 4 a n d
thereafter up to 10 percent. D I D M C A initially
a l l o w e d for t h e extension of c o m m e r c i a l real
estate loans up t o 20 percent of a thrift's assets.
As of August 1972, Texas-chartered thrifts could
make c o m m e r c i a l loans w i t h essentially no
percent-of-assets limitation, w h i l e Mainechartered thrifts, as of O c t o b e r 1975, c o u l d
participate w i t h M a i n e c o m m e r c i a l banks in
c o m m e r c i a l loans up t o 10 percent of total
deposits and make p r u d e n t loans, including
commercial loans, up to 10 percent of deposits.
M a i n e stipulated that an additional allowance
up t o 10 p e r c e n t for m a k i n g c o m m e r c i a l loans,
direct or participating, was to be d e t e r m i n e d
by t h e State S u p e r i n t e n d e n t of Banking; in
1981 t h e d e p a r t m e n t granted t h e additional
10 percent. As of July 1980, Florida-chartered
thrifts c o u l d grant c o m m e r c i a l loans of any
t y p e or a m o u n t if 60 percent of an institution's
n o n l i q u i d assets w e r e in real estate-related
loans or interests.
t h e constraint i m p o s e d by D I D M C A was 2 0
percent.' Statutes granted Texas-, Maine-, and
Florida-chartered thrifts c o m m e r c i a l paper and
corporate d e b t i n v e s t m e n t powers in 1972,
1975, and 1980, respectively. Garn-St Germain
a l l o w e d federally chartered thrifts t o invest in
t i m e a n d savings deposits of thrift institutions
beginning in O c t o b e r 1982; however, thrifts
chartered in Texas, Maine, and Florida first w o n
similar powers, w i t h some restrictions, w i t h t h e
e n a c t m e n t of their respective statutes.
As of M a r c h 1980, federally chartered thrifts
c o u l d allot up to 3 percent of assets t o a service
corporation. The 1972 Texas legislation d i d n o t
grant this authority, but general parity provisions
of the Texas legislation allowed state-chartered
thrifts to engage in this activity up t o 3 percent
of assets c o i n c i d e n t w i t h t h e e n a c t m e n t of
D I D M C A . (Texas, Maine, and Florida laws contain general parity provisions that authorize
their state-chartered thrifts t o engage in any
thrift activity p e r m i t t e d by federal law.) As of
O c t o b e r 1975, M a i n e - c h a r t e r e d thrifts c o u l d
allocate up t o 50 percent of t h e a m o u n t of their
total capital and reserves or their total surplus
account to a service corporation subsidiary.
The July 1 9 8 0 Florida law a u t h o r i z e d statechartered thrifts t o place up t o 5 percent of
their assets in a service corporation subsidiary;
o n July 1, 1982 t h e limit rose to 10 percent.
Congress chose not t o e x t e n d real estate
d e v e l o p m e n t powers t o federally chartered
thrifts, but Texas a u t h o r i z e d state-chartered
thrifts t o engage in d e v e l o p m e n t as early as
1967. Maine- and Florida-chartered thrifts could
engage in real estate d e v e l o p m e n t beginning
in 1975 a n d 1 9 8 0 , respectively. D I D M C A
a l l o w e d federally chartered thrifts t o make
unsecured construction loans as did the respective August 1972, O c t o b e r 1975, a n d July 1 9 8 0
laws for Texas, Maine, and Florida. Federally
chartered thrifts in 1 9 8 0 and s t a t ^ c h a r t e r e d
thrifts in Texas, Maine, and Florida in 1972,
1975, and 1980, respectively, received authority
t o invest in guaranteed U.S., state, and local
obligations, as w e l l as various obligations n o t
guaranteed by t h e U.S. government. Mainechartered thrifts, moreover, c o u l d invest in
obligations issued and guaranteed by the Dominion of Canada and any Canadian province or
political subdivision.
In October 1982, the nation's federal-chartered
thrifts received authorization t o invest a maxim u m of 10 percent of assets in small business
investment companies. Maine-chartered thrifts
as early as O c t o b e r 1975 c o u l d invest in small
business investment c o m p a n i e s that w e r e located in M a i n e a n d c o n d u c t e d business there.
R e s p e c t i v e state laws g r a n t e d c o m p e t i t i v e
equality regarding small business i n v e s t m e n t
c o m p a n i e s t o institutions chartered in Texas,
Maine, and Florida in O c t o b e r 1982.
The Garn-St Germain Act a u t h o r i z e d federalchartered thrifts t o invest in tangible personal
p r o p e r t y and engage in e q u i p m e n t leasing
c o m b i n e d up t o 10 percent of assets. Statechartered thrifts received c o m p e t i t i v e equality
u p o n t h e e n a c t m e n t of Garn-St G e r m a i n .
D I D M C A a l l o w e d federally chartered thrifts to
engage in trust activities p r o v i d e d state laws
w e r e not contravened. Maine- and Floridachartered thrifts c o u l d engage in trust activities
as of 1975 and 1980, respectively, b u t Texaschartered thrifts had t o wait until N o v e m b e r
25, 1 9 8 0 w h e n t h e State A t t o r n e y General
Garn-St Germain allowed federal-chartered
thrifts t o allocate up t o 30 percent of assets t o
commercial paper and corporate debt securities;
FEDERAL RESERVE B A N K O F A T L A N T A
23
a p p r o v e d such activities in an opinion. Federalchartered thrifts received permission to establish
r e m o t e service units u n d e r D I D M C A . Thrifts
chartered in M a i n e and Florida received this
a u t h o r i t y in 1975 a n d 1980, respectively, a n d
Texas-chartered thrifts secured this p o w e r in
M a r c h 1 9 8 0 w h e n general parity provisions
a l l o w e d such establishment.
Liabilities. The 1980 federal legislation authorized thrifts t o accept N O W accounts from
i n d i v i d u a l s a n d n o t - f o r - p r o f i t organizations.
Later, u n d e r t h e provisions of Garn-St Germain,
federally chartered thrifts w e r e a l l o w e d t o
accept N O W accounts from governmental units.
Texas' 1975 law did not authorize N O W account
acceptance, but general parity provisions regarding acceptance f r o m individuals and not-forprofit organizations became effective M a r c h
31, 1980. In January 1981, N O W account
acceptance by Texas-chartered thrifts b e c a m e
unlimited, except f r o m corporations. The 1975
M a i n e legislation a u t h o r i z e d t h e acceptance
of N O W a c c o u n t deposits, but only w h e n
p e r m i t t e d by federal law; federal law was
altered t o allow N O W accounts for individuals
t h r o u g h o u t N e w England beginning M a r c h 1,
1976. M a i n e - c h a r t e r e d thrifts received competitive equality w i t h federal-chartered institutions regarding acceptance from not-for-profit
organizations a n d g o v e r n m e n t a l units u p o n
the enactment of D I D M C A and Garn-St Germain.
The 1 9 8 0 Florida legislation a l l o w e d thrifts t o
accept N O W accounts; general parity provisions
e x p a n d e d this authority t o include governmental units.
D I D M C A authorized N I N O W account acceptance from individuals and the Garn-St Germain
Act e x p a n d e d this authority t o i n c l u d e p e o p l e
or organizations that had established a "business,
corporate, c o m m e r c i a l or agricultural loan relat i o n s h i p " w i t h t h e institution. Garn-St Germain
also a l l o w e d d e m a n d deposit acceptance w i t h
t h e above-stated requisite loan relationship.
Texas' general parity provisions allowed N I N O W
account acceptance f r o m individuals u p o n t h e
enactment of D I D M C A In 1981, Texas statutes
granted N I N O W and d e m a n d deposit powers
for business accounts w i t h o u t i m p o s i n g a loan
relationship requirement.
The 1975 Maine law granted d e m a n d deposit
acceptance powers to its state-chartered thrifts
but only for personal checking accounts. General
parity provisions allowed d e m a n d deposit acceptance from p e o p l e or organizations that had
24
established t h e loan relationship stipulated by
Garn-St Germain; M a i n e law e l i m i n a t e d t h e
loan relationship r e q u i r e m e n t in 1983. The
state's general parity provisions a u t h o r i z e d
N I N O W acceptance from individuals in 1980.
Legislators in 1981 granted M a i n e - c h a r t e r e d
thrifts the authority t o accept N I N O W accounts
f r o m business customers w h o had established
a commercial loan relationship; as with d e m a n d
deposits, t h e loan r e q u i r e m e n t was e l i m i n a t e d
in 1983. Finally, t h e 1 9 8 0 Florida law a l l o w e d
N I N O W account acceptance from business
customers w i t h o u t requiring any loan relationship; d e m a n d deposit powers were not explicitly
addressed in t h e 1 9 8 0 law.
Empirical Evidence and
Statistical Inference
Some insight into how quickly S&Ls exploited
their liberalized powers can be gleaned f r o m
examining data for various years. In this section,
w e will e x a m i n e t w o - s a m p l e t tests for various
balance sheet ratios. The tests are used t o
determine whether state legislation authorizing
broader asset/liability powers for Texas-, Maine-,
and Florida-chartered savings a n d loan associations c o n t r i b u t e d to greater balance-sheet
diversification vis-a-vis their respective federally
chartered counterparts. Florida-chartered institutions are s u b d i v i d e d further into de novo
formations a n d conversions f r o m federal to
state charter. This b r e a k d o w n should highlight
t h e increased f l e x i b i l i t y a n d f r e e d o m purp o r t e d l y available t o de novo associations as
t h e y chose a m o n g alternatives. Two-sample t
tests are calculated also for national data t o
ascertain the efficacy of congressional legislation
in p r o m p t i n g federal-chartered associations to
diversify their balance sheets.
The ratios for w h i c h w e calculated twosample t tests are total loans, mortgage loans,
consumer loans, commercial loans, liquid investments, and i n v e s t m e n t in service corporations,
each as a percent of total assets. 6 Also, N O W
accounts a n d N I N O W accounts are c o m p u t e d
individually as a percent of total liabilities.
Semiannual financial statements of c o n d i t i o n
for S&Ls are unavailable prior t o D e c e m b e r
1979; therefore, asset a n d liability developments for t h e differently chartered S&Ls in
Texas and Maine from the inception of expanded
powers (1972 a n d 1975, respectively) cannot
OCTOBER 1984, E C O N O M I C
REVIEW
Table 4. F S U O I n s u r e d Savings and Loan Associations-Florida
As a Percent
of Total Assets
June 30, 1980
Mean/Confidence
Level
June 30, 1981
Mean/Confidence
Level
June 30, 1982
Mean/Confidence
Level
June 30, 1983
Mean/Confidence
Level
Total Loans
.844(F) ***
,788(S)
.866(F) ***
-836(S)
.845(F) *
.818(S)
.837(F)
.864(S)
Mortgage Loans
.819(F) ***
.756(S)
.822(F) ***
.766(S)
.802(F) ***
.745(S)
.794(F)
.784(S)
Consumer Loans
.024(F)
.025(S)
-043(F)
***
.041(F)
•063(S) ***
.041(F)
.070(S) ***
Commercial Loans
.000(F)
.006(S) ***
-000(F)
.006(S) ***
.000(F)
.009(S) ***
-001(F)
.009(S) ***
Liquid
Investments
-103(F)
.1 22(S) *
.101(F)
-110(S)
-102(F)
.102(S)
.140(F)' *
• 115(S)
Investment in
Service Corporations
.002(F)
.003(S) *
•002(F)
•005(S) ***
.003(F)
-008(S) ***
.004(F)
.013(S) ***
NOW (InterestEarning) Accounts
.000(F)
.000(S)
.008(F)
.014(S) **
.013(F)
.023(S) ***
-026(F)
.036(S)
NINOW
(NoninterestEarning) Accounts
.000(F)
.000(S)
-000(F)
.003(S) *
-000(F)
.007(S) ***
-001(F)
•01 2(S)
0 6 2 (S)
As a Percent of
Total Liabilities
F - Federal charter.
S - State charter.
*** 9 9 % c o n f i d e n c e level.
** 9 8 % c o n f i d e n c e level.
* 9 5 % confidence level.
Source: Federal Reserve Board Database.
be measured. Behavioral patterns can be measured for t h e o t h e r t w o g e o g r a p h i c a l areas
from t h e start, however, because t h e powerbroadening provisions for Florida were enacted
on July 1, 1 9 8 0 and federal acts were signed
into law on M a r c h 31, 1 9 8 0 ( D I D M C A ) and on
O c t o b e r 15, 1982 (Garn-St Germain).
Texas and Maine. O n e w o u l d expect that
p o r t f o l i o c o m p o s i t i o n for state-and federalchartered S&Ls w i t h i n Texas and M a i n e w o u l d
diverge significantly, since s t a t e - c h a r t e r e d
associations had many years t o take advantage
of b r o a d e n e d powers. However, t h e 1980 twosample t tests calculated for these states s h o w
m a r k e d l y dissimilar results (see Tables 2 a n d
3). Texas-chartered S&Ls' balance sheets w e r e
FEDERAL RESERVE B A N K O F A T L A N T A
noticeably d i f f e r e n t from their federally chartered counterparts', w h i l e balance sheets for
Maine-chartered S&Ls displayed no statistically
significant disparity from federally chartered
associations in that state.
M o s t of t h e ratios for Texas w e r e statistically
significant; that is, w e can reject w i t h a certain
level of c o n f i d e n c e the hypothesis that no
difference exists b e t w e e n t h e June 30, 1 9 8 0
means of t h e corresponding ratios for Texas'
s t a t e a n d federal-chartered S&Ls (see Table
2). For example, t h e hypothesis for total loans
as a percent of total assets can be rejected w i t h
a 99 percent level of confidence, as it can be for
the comparable mortgage loan and commercial
loan ratios. A 95 percent c o n f i d e n c e level is
25
Table 5. FSLIC-Insured Savings and LoanAssociations-UnitedStates
J u n e 30, 1980
Mean/Confidence
Level
June 30, 1981
Mean/Confidence
Level
June 30, 1982
Mean/Confidence
Level
June 30, 1983
Mean/Confidence
Level
Total Loans
.851(F)
.854(S)
.885(F)
,858(S)
.874(F)
.846(S)
.801(F)
.819(S)
Mortgage Loans
.829(F)
.829(S)
.842(F)
.812 ( S)
.830(F)
.802(S)
.744(F)
.768(S)
Consumer Loans
.023(F)
.024(S)
.043(F)
.046(3)
.044(F)
.043(S)
.051(F)
.050(S)
Commercial Loans
.000(F)
.000(S)
.000(F)
.000(S)
.000(F)
.000(S)
.005(F)
.001 (S)
Liquid
Investments
.100(F)
.097(S)
.082(F)
.110(S)
.088(F)
.117(S)
.138(F)
.133(S)
Investment in
Service Corporations
.000(F)
.000(S)
.000(F)
.000(S)
.000(F)
-OOO(S)
.000(F)
.000(S)
NOW (InterestEarning) Accounts
.038(F)
.022(S)
.042(F)
.023(S)
.045(F)
.023(S)
.051(F) **
.020(S)
NINOW
(NoninterestEarning) Accounts
.000(F)
.001 (S)
.000(F)
.001 (S)
.000(F)
.001 (S)
.002(F)
.001 (S)
As a Percent
of Total Assets
As a Percent of
Total Liabilities
F - Federal charter
S - State charter
" 98% confidence level.
Source: Federal Reserve Board Database.
indicated for the liquid investment and investm e n t in service corporations ratios. In brief, by
1980 Texas-chartered S&Ls had taken advantage
of a portion of their broadened lending powers,
particularly in t h e area of c o m m e r c i a l loans,
w h i l e t h e state's federally c h a r t e r e d S&Ls
remained more heavily committed to traditional
mortgage lending. The t w o differently chartered
Texas S&Ls had pursued consumer lending
a b o u t equally, w i t h each t y p e h o l d i n g a b o u t
2.5 percent of total assets in consumer loans.
Over the three years following 1980, a number
of interesting changes occurred. M o s t import a n t Texas-chartered S&Ls became more highly
concentrated in both consumer and commercial
lending vis-a-vis t h e state's federal-chartered
associations. Texas-chartered S&Ls held a notably larger proportion of total liabilities in NI N O W
accounts, w h i c h presumably w e r e o p e n e d in
26
c o n n e c t i o n w i t h c o m m e r c i a l loans, and t h e y
e m p h a s i z e d service c o r p o r a t i o n investments.
The significant disparity b e t w e e n state- and
federal-chartered associations in total lending
and mortgage l e n d i n g disappeared. In sum, by
1983 Texas-chartered S&Ls w e r e more highly
c o n c e n t r a t e d in consumer and c o m m e r c i a l
loans, NI N O W accounts, and service corporation
investments than w e r e their federal counterparts, b u t equally d i s t r i b u t e d in total loans and
mortgage loans. C o n s u m e r loans for Texaschartered S&Ls c o m p r i s e d a considerable 7
percent of total assets whereas c o m m e r c i a l
loans, although significantly different from those
held by federal associations, c o m p r i s e d only
0.9 percent. Perhaps the difficulty of attracting
commercial loan accounts from well-established
competitors, high start-up costs, and Texas'
sluggish oil-bust economy precluded S&Ls from
O C T O B E R 1984, E C O N O M I C
REVIEW
Table 4. F S U O I n s u r e d Savings and Loan Associations-Florida
June 30, 1 9 8 0
Mean/Confidence
Level
June 30, 1981
Mean/Confidence
Level
June 30, 1982
Mean/Confidence
Level
June 30, 1983
Mean/Confidence
Level
Total Loans
.866(F)
•777(S)
•873(F)
.619(S)
860(F)
604(S)
836(F)
687(S)
Mortgage Loans
.853(F)
.763(S)
•854(F)
•596(S)
840(F)
558(S)
813(F)
642(S)
Consumer Loans
.012(F)
.013(S)
-018(F)
•019(S)
019(F)
039(S)
023(F)
037(S)
Commercial Loans
.000(F)
.000(S)
.000(F)
.002(S)
000(F)
006(S)
000(F)
008(S)
Liquid
Investments
.089(F)
.154(S)
-084(F)
.293(S)
092(F)
262(S)
117(F)
261 (S)
Investment in
Service Corporations
.003(F)
.004(S)
.003(F)
.006(S)
004(F)
017(S)*
006(F)
015(S)*
NOW (InterestEarning)
Accounts
•000(F)
.000(S)
-012(F)
.027(S)
-019(F)
-036(S)
.041(F)
•059(S)
NINOW
(NoninterestEarning) Accounts
.000(F)
.OOO(S)
.000(F)
.002(S)
-001(F)
•018(S)
-001(F)
•015(S)
As a Percent
of Total Assets
As a Percent of
Total Liabilities
F - Federal charter
S - State charter
*** 99% confidence level.
** 98% c o n f i d e n c e level.
* 9 5 % c o n f i d e n c e level
Source: Federal Reserve Board Database.
gaining any appreciable c o m m e r c i a l l e n d i n g
market share d u r i n g most of this three-year
period.
Even t h o u g h t h e legislative u n d e r p i n n i n g for
M a i n e - c h a r t e r e d S&L l e n d i n g and i n v e s t m e n t
was similar t o that for Texas, t h e statistical
results for t h e t w o states differ. Table 3 shows
that Maine's state and federal-chartered associations possessed essentially t h e same balance
sheet structures in 1980, despite roughly five
years of e x p a n d e d powers for t h e former.
Three years later, disparities still had not surfaced,
except for a relatively higher c o n c e n t r a t i o n of
N O W accounts for federal-chartered associations. But that does not mean sizable changes
had n o t taken place. Indeed, from 1 9 8 0 to
1983 state- and federal-chartered S&Ls in Maine
altered their balance sheets almost in lockstep,
FEDERAL RESERVE B A N K O F A T L A N T A
possibly because of greater competition. During
that p e r i o d associations r e d u c e d total loans
and mortgage loans as a percent of total assets.
For b o t h groups, consumer loans rose t o a b o u t
5 percent of total assets in 1983 c o m p a r e d
w i t h 1 9 8 0 ' s a p p r o x i m a t e 2.5 percent, a n d
c o m m e r c i a l loans rose weakly from zero in
1980 to 0.5 percent and 0.1 percent for federala n d state-chartered institutions, respectively.
Florida. The June 30, 1 9 8 0 balance sheet
structures for t h e differently chartered S&Ls in
Florida offer no surprises since t h e statutes
granting n e w powers t o state-chartered S&Ls
w e r e not effective until July of that year. In
1980 state- and federal-chartered S&Ls operating
in Florida possessed virtually identical balance
sheet ratios (see Table 4). Over t h e f o l l o w i n g
three years, though, federal-chartered S&Ls
27
Table 4 a . FSLIC-lnsured Savings and Loan Associations-Florida
State-Chartered De Novo Formations and Conversions (Federal to State)
As a Percent
of Total Assets
June 30, 1980
Mean/Confidence
Level
June 30, 1981
Mean/Confidence
Level
June 30, 1982
Mean/Confidence
Level
June 30, 1983
Mean/Confidence
Level
Total Loans
.815(C)
.660(D)
.859(C) ***
.476(D)
.840(C) ***
.534(D)
.750(C)
.649(D)
Mortgage Loans
.797(C)
.648(D)
.824(C) ***
.456(D)
.785(C) ***
.491(D)
.688(C)
.609(D)
Consumer Loans
.017(C)
.011(D)
.031(C)
.018(D)
.049(C)
.036(D)
.047(C)
.034(D)
Commercial Loans
.000(C)
.000(D)
.004(C)
.002(D)
.004(C)
.006(D)
.020(C)
.005(D)
Liquid
Investments
.089(C)
.266(D)
.076(C)
.419(D)
.070(C)
.322(D) ***
.096(C)
.304(D) ***
Investment in
Service Corporations
.004(C)
.003(D)
.010(C)
.005(D)
.022(C)
.015(D)
.039(C) ***
.010(D)
NOW (InterestEarning) Accounts
.000(C)
.000(D)
.009(C)
.037(D) ***
.017(C)
.041(D) **
.024(C)
.067(D) *
NINOW
(NoninterestEarning) Accounts
.000(C)
.000(D)
.001(C)
.003(D)
.003(C)
.023(D)
.015(C)
.016(D)
As a Percent of
Total Liabilities
C - Conversion
D - De Novo
" " 9 9 % confidence level.
•* 9 8 % confidence level.
* 95% c o n f i d e n c e level.
Source: Federal Reserve Board Database
became significantly m o r e c o n c e n t r a t e d in
total loans and mortgage loans as a percent of
total assets, while Florida-chartered associations
placed greater emphasis on commercial lending,
l i q u i d investments, i n v e s t m e n t in service corporations, and NI N O W accounts (presumably,
c o m m e r c i a l loan-related).
C o n s u m e r lending by Florida's d i f f e r e n t l y
chartered associations deserves special comm e n t (see Table 4). N o significant variation in
consumer lending behavior was registered in
1 9 8 0 for state- a n d federal-chartered S&Ls,
w h i c h is not surprising since b o t h w e r e granted
e x p a n d e d consumer lending powers w i t h i n
m o n t h s of each other. However, consumer
loans as a percent of total assets s t o o d at o n l y
2.3 percent for federal-chartered S&Ls a n d 3.7
28
percent for Florida-chartered associations on
June 30, 1983. Considering the Sunshine State's
general economic prosperity and the traditional
consumer o r i e n t a t i o n of t h e savings a n d loan
industry, these figures reflect relatively slow
growth. The persistent profitability of Florida's
residential real estate may have c o n t i n u e d t o
provide an attractive alternative t o consumer
lending. An increased desire for l i q u i d i t y also
may have contributed to Florida S&Ls' relatively
m o d e s t g r o w t h in consumer lending. (By comparison, in 1983 Texas-chartered S&Ls held a
prominent 7 percent of total assets in consumer
loans versus 4.1 p e r c e n t for their federal
counterparts, a n d Maine's state- and federalchartered S&Ls d e v o t e d a b o u t 5 percent of
total assets to consumer lending.)
O C T O B E R 1984, E C O N O M I C
REVIEW
De Novo and Converted S&Ls. Table 4a
illustrates t h e varied balance sheet behavior of
Florida's de n o v o and c o n v e r t e d institutions.
De novo associations registered a comparatively
higher c o n c e n t r a t i o n in N O W accounts a n d
relatively lower emphasis o n total loans a n d
mortgage loans as of mid-1981. A year later t h e
situation was essentially t h e same, e x c e p t for a
greater c o n c e n t r a t i o n in liquid investments for
t h e state's de n o v o S&Ls. As of June 30, 1983,
however, several changes had occurred: t h e
disparities for total loans and mortgage loans
had disappeared; de n o v o associations cont i n u e d t o place markedly greater emphasis on
l i q u i d investments and N O W accounts; a n d
c o n v e r t e d Florida-chartered S&Ls for t h e first
t i m e posted a comparatively higher concentrat i o n in service c o r p o r a t i o n investment. In sum,
unlike c o n v e r t i n g institutions, de n o v o S&Ls
apparently v e n t u r e d off on n e w paths, h o l d i n g
far less in total loans a n d mortgage loans a n d
m o r e in N O W a c c o u n t s as of m i d - 1 9 8 1 . But
as of m i d - 1 9 8 3 , state-chartered de n o v o S&Ls
w e r e essentially similar t o c o n v e r t e d associations in total loans and mortgage loans, w h i l e
de n o v o institutions w e r e dramatically m o r e
l i q u i d a n d c o n t i n u e d t o h o l d relatively m o r e in
N O W accounts.
R e m e m b e r i n g that o n l y a handful of Floridachartered S&Ls existed for long prior t o July
1 9 8 0 a n d disregarding t h e balance sheet disparities b e t w e e n t h e de n o v o and converting
institutions, w e see that Florida's state-chartered
de novo formations and conversions diversified
considerably m o r e than t h e Sunshine State's
federally chartered associations by using many
of their n e w l y a c q u i r e d powers. As Table 4
shows, n o t w i t h s t a n d i n g statistical significance,
Florida-chartered S&Ls p o s t e d comparatively
higher ratios for consumer a n d c o m m e r c i a l
loans, liquid investments, investment in service
corporations, N O W accounts, a n d N I N O W
accounts. Florida's federal-chartered associations placed relatively greater emphasis o n
total loans a n d mortgage loans, t h e traditional
mainstay of t h e industry. Hence, it is plausible
that many state-chartered de n o v o formations
a n d c o n v e r s i o n s — w h i c h presumably create
institutions intent o n achieving diversification
through use of broadened powers—can appreciably influence t h e degree of diversification
b e t w e e n state- and federal-chartered associations. The Texas a n d M a i n e experiences corroborate this view.
F E D E R A L RESERVE B A N K O F A T L A N T A
From 1972 t o 1980, fully 73 associations
(246 Texas-chartered S&Ls w e r e in existence
on June 30, 1980) received Texas charters
through either de n o v o formations or conversions. By m i d - 1 9 8 0 , divergent balance sheet
behavior could be discerned between the Lone
Star State's s t a t e a n d federal-chartered associations. The i n f l u e n c e of these diversificationseeking Texas-chartered institutions apparently
c o n t i n u e d t o be felt: noticeable balance sheet
differences persisted three years later despite
the numerous expanded powers made available
t o federal-chartered S&Ls d u r i n g that time. In
Maine, only one association o b t a i n e d a state
charter from 1975 t o 1980 (11 M a i n e c h a r t e r e d
associations w e r e extant on June 30, 1980) a n d
t h e data for 1 9 8 0 indicate that balance sheets
for Maine- a n d federal-chartered S&Ls w e r e
essentially t h e same. Furthermore, no M a i n e chartered associations came into existence
from 1980 to 1983. Accordingly, similar balance
sheets are evident for Maine's state- and federalchartered S&Ls in 1983, with only N O W accounts
as a percent of assets differing significantly.
United States. The balance sheet diversification pattern for the U n i t e d States is similar t o
that for Texas (see Tables 2 and 5). In 1980,
federally chartered S&Ls nationwide were significantly m o r e c o n c e n t r a t e d in total loans and
mortgage loans as a percent of total assets and
also in N O W accounts as a percent of total
liabilities; state-chartered associations w e r e
more c o n c e n t r a t e d in c o m m e r c i a l loans, l i q u i d
investments, investment in service corporations,
and N I N O W accounts. Over t h e next t h r e e
years, n o n e of these categories changed in
terms of t h e emphasis placed on t h e m by
either t y p e of association, w i t h t h e e x c e p t i o n
of consumer loans a n d N O W accounts. Statechartered S&Ls' c o n s u m e r loan activity rose
relative t o their federal counterparts', a n d t h e
disparity for N O W accounts disappeared.
The most plausible explanation for the balance
sheet disparities b e t w e e n t h e nation's t w o
types of S&Ls as of June 30, 1 9 8 0 is t h e
c o n t r i b u t i o n that Texas- a n d M a i n e - c h a r t e r e d
associations made to total assets for the nation's
state-chartered institutions. Their 11 percent
share of total assets p r o b a b l y was a large
enough p r o p o r t i o n t o affect t h e t w o - s a m p l e t
test data appreciably.9 The Texas-chartered
institutions' p o r t i o n alone was 10.7 p e r c e n t
A n d for June 1983, t h e c o m b i n e d share of total
assets for Texas-, M a i n e , and Florida-chartered
29
Table 5. FSLIC-Insured Savings and Loan Associations-United States
As a Percent
of Total Assets
June 30, 1980
Mean/Confidence
Level
June 30, 1981
Mean/Confidence
Level
June 30, 1982
Mean/Confidence
Level
June 30, 1983
Mean/Confidence
Level
Total Loans
.857(F) ***
.835(S)
.866(F) ***
.838(S)
.846(F) ***
.818(S)
.830(F) ***
.819(S)
Mortgage Loans
.839(F) ***
.816(S)
.837(F) ***
,804(S)
.818(F) ***
.782(S)
.799(F) ***
.780(S)
Consumer Loans
.017(F)
.018(S)
.028(F)
.032(S) ***
.028(F)
.034(S) ***
.030(F)
,036(S) ***
Commercial Loans
.001(F)
.001 (S) ***
.000(F)
.001 (S) ***
.000(F)
.002(S) ***
.001(F)
.003(S) ***
Liquid
Investments
.096(F)
.108(S) ***
.094(F)
.112(S) ***
.102(F)
.114(S) ***
.130(F)
.142(S) ***
Investment in
Service Corporations
.002(F)
.003(S) ***
.003(F)
.004(S) ***
.004(F)
.005(S) ***
.004(F)
.007(S) ***
NOW (InterestEarning) Accounts
.001(F) **
.001 (S)
.009(F)
.010(S) **
.014(F)
.016(S) ***
.027(F)
.030(S)
NINOW
(NoninterestEarning) Accounts
.000(F)
.001 (S) ***
.000(F)
.001 (S) ***
.000(F)
.002(S) ***
.001(F)
,003(S) ***
As a Percent of
Total Liabilities
F S **•
*"
Federal charter
State charter
9 9 % c o n f i d e n c e level.
98% confidence level.
Source. Federal Reserve Board Database.
associations c o m p a r e d w i t h t h e nation's statechartered S&L aggregate was 18 percent. 1 0 This
share is sufficiently large to affect t h e data,
particularly if federal-chartered associations
w e r e slow t o take advantage of their newly
granted powers.
A l t h o u g h f e d e r a l l y c h a r t e r e d associations
n a t i o n w i d e r e m a i n e d m o r e specialized in total
loans a n d mortgage loans, a sizable r e d u c t i o n
in these categories o c c u r r e d for b o t h types of
S&Ls from 19$0 to 1983 (see Table 5). Federally
c h a r t e r e d associations d u r i n g this p e r i o d decreased total loans f r o m 1980's 85.7 percent of
assets t o 83 percent, a n d pushed mortgage
loans d o w n f r o m 83.9 percent in 1 9 8 0 t o 79.9
percent in 1983. Total loans for t h e nation's
state-chartered S&Ls dropped from 1980's 83.5
30
percent t o 81.9 percent in 1983, a n d mortgage
loans fell f r o m 81.6 percent for 1 9 8 0 t o 1983's
78 percent. For consumer loans, no significant
difference was r e c o r d e d in 1 9 8 0 b u t statechartered S&Ls manifested a comparative specialization in 1983. The consumer loan level
rose f r o m a 1.7-1.8 percent range for 1 9 8 0 to
1983's moderate 3 percent of assets for federalchartered associations a n d 3.6 p e r c e n t for
state-chartered S&Ls. A l t h o u g h state-chartered
institutions consistently logged a relative commercial loan concentration vis-a-vis federal
S&Ls, their level r e m a i n e d minuscule: in 1983
t h e ratio was o n l y a f e w tenths of o n e percent.
In sum, for t h e ratios most directly related t o
t h e newly conferred powers, state-chartered
S&Ls w e r e comparatively m o r e c o n c e n t r a t e d
O C T O B E R 1984, E C O N O M I C
REVIEW
I
f
than federal associations in c o n s u m e r loans,
c o m m e r c i a l loans, l i q u i d investments, investm e n t in service corporations, a n d N I N O W
accounts. N O W account acceptance was basically t h e same for b o t h types of institutions,
roughly 3 percent of total liabilities. Federally
chartered associations continued to emphasize
traditional residential real estate lending. Notw i t h s t a n d i n g t h e differences b e t w e e n t h e m ,
b o t h groups fell far short of achieving t h e
degree of diversification attainable under law.
Even considering t h e increased credit risk that
accompanies rapid expansion of loan portfolios
and t h e overall e c o n o m i c d o w n t u r n of that
three-year period, g r o w t h in consumer and
c o m m e r c i a l loans i n d e e d was languid in light of
S&Ls' urgent n e e d to lessen their interest-rate
risk exposure. For example, t h e 30 percent-ofassets stipulation for federally chartered S&L
holdings of c o n s u m e r loans r e m a i n e d a distant
constraint; as of June 30, 1983, these institutions' consumer loan portfolios t o t a l e d o n l y 3
percent of assets. Furthermore, c o m m e r c i a l
loans for federal-chartered associations, w h i c h
c o u l d have e x p a n d e d dramatically, s t o o d at a
puny 0.1 percent of assets, and their investment
in service corporations was a m i n o r 0.4 percent
c o m p a r e d w i t h t h e a l l o w a b l e 3.0 percent.
First-Year Response:
Florida and the Nation
Florida-chartered associations' first-year response ( 1 9 8 0 - 1 9 8 1 ) t o e x p a n d e d powers was
striking c o m p a r e d w i t h t h e first-year response
( 1 9 8 2 - 1 9 8 3 ) t o t h e e n a c t m e n t of Garn-St
Germain by federally chartered S&Ls nationwide
(see Tables 4 a n d 5). The fact that t h e population of Florida-chartered associations consisted
almost entirely of de n o v o formations a n d
recent federal-to-state charter conversions likely
accounts for the dramatic difference. Managem e n t at these organizations purposely t o o k t h e
state-charter route because t h e y desired t o
diversify, either immediately or within a reasonable period of time. The most m a r k e d initialyear changes for Florida-chartered S&Ls occurred
in total loans, mortgage loans, liquid investments,
and N O W accounts. Total loans for the Sunshine
State's statechartered S&Ls t u m b l e d from 77.7
percent of assets t o 61.9 percent b e t w e e n June
30, 1 9 8 0 a n d June 30, 1981, a n d mortgage
loans plunged from 76.3 percent to 59.6 percent
FEDERAL RESERVE B A N K O F A T L A N T A
Liquid investments m e a n w h i l e leaped f r o m
15.4 percent of assets to 29.3 percent, a n d
N O W accounts j u m p e d f r o m zero t o 2.7 percent of liabilities.
De n o v o associations (Table 4a) w e r e chiefly
responsible for these a b r u p t changes because
their total loans, mortgage loans, l i q u i d investments, and N O W accounts as of June 30, 1981
stood at 47.6 percent, 45.6 percent, a n d 41.9
percent of assets, a n d 3.7 percent of liabilities,
respectively (see Table 4a).
The other ratios for Florida-chartered S&Ls
e x h i b i t e d sluggish m o v e m e n t : from June 1 9 8 0
t o June 1981, consumer loans inched up f r o m
1.3 percent of assets t o 1.9 percent; c o m m e r cial loans crept up from zero to 0.2 percent;
investment in service corporations increased
f r o m 0.4 percent to 0.6 percent; and N I N O W
accounts e d g e d up f r o m zero t o 0.2 percent of
total liabilities (see Table 4).
W e measured t h e initial-year response for
t h e nation's federal-chartered S&Ls by using
data f r o m June 1982 to June 1983, a year
during most of w h i c h t h e e x p a n d e d Garn-St
Germain powers w e r e available. Use of these
data gives federal-chartered associations an
advantage, because t h e y already had over t w o
years to plan how they w o u l d utilize broadened
powers granted by DI D M C A . Even so, notew o r t h y expansions occurred o n l y in liquidity,
w h i c h rose f r o m 10.2 percent of assets t o 13
percent, and in N O W accounts, w h i c h c l i m b e d
f r o m 1.4 percent t o 2.7 percent (Table 5).
Declines w e r e posted for total loans as a
percent of assets, from 84.6 percent t o 83
percent, and for mortgage loans, from 81.8
percent t o 79.9 percent Again, consumer and
c o m m e r c i a l loans grew meagerly. Of course,
the large n u m b e r of federally chartered S&Ls
i n c l u d e d in t h e calculations retard t h e movem e n t of these ratios, since for many decades
nearly all of these institutions (roughly 1,700)
had been c o m p i l i n g portfolios consisting of
long-term residential mortgages. Only the boldest use of n e w powers by t h e federal-chartered
S&Ls could change the overall ratios substantially.
It is clear, though, from t h e u n i q u e Florida
experience that newly f o r m e d associations are
apt to strive for high liquidity and to reduce the
traditional p r e d o m i n a n c e of mortgages in their
loan portfolios dramatically. Thus far, it is equally
clear that these newly formed associations have
not sought t o expand consumer and commercial
loan holdings substantially despite their freedom.
31
I
The national experience for federal-chartered
associations likewise indicates trends t o w a r d
higher levels of liquidity, r e d u c e d holdings of
mortgage loans, and slow expansion in consumer
and, especially, c o m m e r c i a l loans.
Summary and Conclusions
This study suggests that the most pronounced
balance
sheet
variation
between
stateand federal-chartered associations o n a statew i d e basis occurs w h e n a large n u m b e r of S&Ls
choose to begin their existence as state-chartered
organizations or convert t o state charters. Their
intent in pursuing a state charter is t o take
advantage of t h e e x p a n d e d powers o f f e r e d by
state statutes; the Texas and Florida experiences
support this supposition. The atypical evidence
for Florida-chartered de n o v o associations, t h e
vast majority of w h i c h came into existence
after 1979, indicates that relatively u n b r i d l e d
de n o v o institutions sought high l i q u i d i t y and
markedly r e d u c e d holdings of mortgages, b u t
expanded consumer and commercial loan portfolios very little. Generally, increased liquidity,
decreased mortgage holdings, and slow expansion in consumer and commercial loan holdings
w e r e manifest for state- and federal-chartered
S&Ls in Texas, Maine, a n d Florida, as well as
nationally. O n l y Texas-chartered and Maine's
state- and federal-chartered associations enlarged
their consumer loan holdings significantly, t o 7
percent and 5 percent of assets, respectively,
byjune1983.
Overall, the nation's federal-chartered S&Ls
as of June 1983 w e r e comparatively m o r e
specialized in total loans a n d mortgage loans as
a percent of assets; state-chartered associations
held a relatively greater concentration in consumer loans, c o m m e r c i a l loans, l i q u i d investments, investment in service corporations, a n d
N I N O W accounts. N o relative c o n c e n t r a t i o n
32
existed for N O W accounts. For t h e asset ratios
most relevant to broadened powers (consumer
loans, c o m m e r c i a l loans, l i q u i d investments,
and investment in service corporations), neither
group of S&Ls even a p p r o a c h e d t h e various
limits i m p o s e d by state and federal laws. Their
very measured responses w e r e a t t r i b u t a b l e in
part to high start-up costs, sluggish macroe c o n o m i c activity, lack of expertise, sharply
d i m i n i s h e d S&L earnings, and intense c o m p e t i t i o n f r o m o t h e r financial services entities.
Managerial inertia likely was another major
c o n t r i b u t i n g factor.
In light of savings and loan associations' stepby-step a p p r o a c h to using liberalized powers,
S&Ls as a group c a n n o t yet be considered
head-to-head competitors with commercial
banks. Consequently, it does n o t appear justified at this t i m e for regulators t o consider
savings and loan association market shares
fully in w e i g h i n g all merger applications. A
substantial n u m b e r of associations, however,
are c o n t e n d i n g vigorously w i t h c o m m e r c i a l
banks for consumer and c o m m e r c i a l loans in
various markets, and thus should be considered
significant c o m p e t i t o r s for merger a p p l i c a t i o n
purposes.
Additionally, this study implies that neither
business nor individual consumers have yet
benefited considerably—in terms of price, quantity, and quality of services o f f e r e d — f r o m t h e
generally m o d e r a t e increase in c o m p e t i t i o n
b e t w e e n S&Ls a n d c o m m e r c i a l banks. The
narrow use of new powers thus far leaves S&Ls
seriously vulnerable t o t h e real estate cycle.
A n d finally, t h e y p r o b a b l y will increase use of
new powers t o lessen interest-rate risk o n l y at a
slow pace because of built-in inertia and t h e
current limited expertise of t h e thrift industry.
(Sherley
Wilson
to this
article.)
contributed
valuable
research
assistance
O C T O B E R 1984, E C O N O M I C
REVIEW
F
NOTES
'Beth M. Linnen a n d J o h n N Frank, "Managers' View,'' Savings and
Loan News (April 1982), p. 3 6
' F o r a discussion of how mergers a n d acquisitions that result in fewer
financial institutions can lead t o increased competition, see David D.
Whitehead and Jan Luytjes, "Can Interstate Banking Increase Competitive Market Performance? An Empirical Test'' Economic
Review
(Federal Reserve Bank of Atlanta), vol. 6 9 (January 1984), pp. 4 - 1 0 In
this study, evidence was p r e s e n t e d to support the hypothesis that
increased links (meeting points) between competing firms that operate
in geographically dispersed markets actually may stimulate competition. W h i t e h e a d and Luytjes stated t h a t in addition to the increased
competition presumably fostered by increased links b e t w e e n multimarket firms in various markets, the lack of scale economies f o u n d in
the banking industry can m a k e even relatively small competitors
influential in given markets See George J. Benston, Gerald A Hanweck,
and David B. Humphrey, "Operating Costs in Commercial Banking,
Economic Review (Federal Reserve Bank of Atlanta), vol. 67 (November
1982), pp. 6-21 The authors f o u n d that costs per account for banks
larger t h a n $ 5 0 million in deposits increased as bank size increased,
while c o s t s declined with size for banks with less than S25 million in
deposits.
J
l n the 1963 Philadelphia National Bank-Girard Trust Corn Exchange
Bank merger, the S u p r e m e Court established commercial banking as
an industry offering a unique product, a line of c o m m e r c e separate a n d
distinct from that p r o d u c e d by any other suppliers of financial services.
In 1974. the Supreme Court remanded the Marine Bancorporation
(Washington State) and Connecticut National Bank cases back to
District Courts for further adjudication. The Court reaffirmed the single
line of c o m m e r c e rule a n d r e a c t e d the expansion of the line of
c o m m e r c e concept to include potential competition from savings a n d
loan associations a n d mutual savings banks. More recently, District
Courts in 1 9 8 0 considered the impact of thrifts in cases involving
- commercial bank m e r g e r s Merger of The First State Bank of Central
Jersey a n d the First National Bank of South Jersey was approved a n d
included banking alternatives, namely thrifts, in determining the
resultant competitiveness of post-merger markets. The same rationale
applied to the 1980 Utah merger of the Zions First National Bank a n d
The First National Bank of Logan. See Douglas V. Austin, 'The Legal
a n d Legislative History of the Line of Commerce in Banking, Economic
Review ( F e d e r a l R e s e r v e B a n k of Atlanta), vol. 6 7 (April 1982). pp
12-19
141; October 15, 1982. Also see Constance Dunham. "Thrift Institutions
a n d Commercial Bank M e r g e r s " New England Economic
Review
(Federal Reserve Bank of Boston) (November/December 1982) pp
45-62
"For an explanation refer to SAS (Statistical Analysis System) Institute.
Inc., SAS Users Guide, or Ronald L. Iman and W J. Conover, Modern
Business Statistics (New York, 1983), pp. 2 / 9 - 3 0 2
3
The 20 percent a n d 3 0 percent of total assets limitations apply to the
aggregate of c o n s u m e r l o a n s commercial paper, a n d corporate debt
securities.
"The maximum 10 percent allowance under prudent loan rules applies
to a combination of c o n s u m e r a n d commercial loans In 1981, the
maximum percentage authorized for consumer loans made by Mainechartered thrifts was 20 percent of total d e p o s i t s provided consumer
a n d commercial loans c o m b i n e d d o not exceed 4 0 percent of total
deposits.
' T h e 2 0 percent and 3 0 percent of total assets limitations apply to the
aggregate of consumer l o a n s commercial paper, and c o r p o r a t e debt
securities.
"Mortgage Loans include FHA-VA m o r t g a g e s conventional mortgages,
mortgage-backed securities, a n d mortgage participations. Consumer
Loans include loans on savings a c c o u n t s home improvement loans,
educational loans, automobile loans and other closed-end consumer
loans, credit cards and other o p e n - e n d consumer l o a n s a n d mobile
home loans to c o n s u m e r s (retail mobile h o m e loans).
Commercial
Loans include unsecured construction loans mobile home loans to
dealers to finance inventory (wholesale mobile home loans); loans to
business development corporations; loans for alteration, repair, or
improvement of other than one-to-four unit residential property;
chattel loans other t h a n those reported as wholesale mobile home
loans to commercial borrowers; loans secured by securities; a n d other
miscellaneous loans.
"Total assets for Texas-chartered associations on June 30, 1 9 8 0 w e r e
$ 2 4 b billion a n d for Maine-chartered S&Ls S.b billion Total assets for
the nation's state-chartered associations were $230.6 billion.
'"Total assets on J u n e 30, 1983 for Texas-chartered S&Ls w e r e $ 3 8 1
billion, for Maine-chartered institutions $ 4 billion, a n d :or Floridachartered associations S10.4 billion The n a t i o n s total was $ 2 7 0 1
billion.
The 1982 Garn-St Germain Act authorized emergency acquisitions
of thrifts by commercial banks. See Garn-St Germain Depository Institutions Act of 1982; Public Law 97-320; Title 1; Sections 116 123 a n d
Baker, Robert. "Florida S&Ls' Use of Expanded Powers," Economic Review
(Federal Reserve Bank of Atlanta), vol. 6 7 (July 1982), pp. 7-15.
C r o c k e t t J o h n and Thomas A King. "The Contribution of New Asset Powers
to S&L Earnings: A Comparison of Federal- and State-Chartered Associations in Texas, Research Working Paper No. 110 (July 1982), The
Office of Policy a n d Economic Research, Federal Home Loan Bank
Board.
Dunham, Constance. " M u t u a l Savings Banks: Are They Now or Will They
Ever Be Commercial Banks?" New England Economic Review (Federal
Reserve Bank of Boston) ( M a y / J u n e 1982), pp. 51-72.
FEDERAL RESERVE B A N K O F A T L A N T A
Dunham, Constance R a n d Margaret Guerin-Calvert " H o w Quickly Can
Thrifts Move into Commercial Lending? New England
Economic
Review (Federal Reserve Bank of Boston) ( N o v e m b e r / D e c e m b e r
1983), pp. 42-54.
Eisenbeis, Robert A " N e w Investment Powers for S&Ls: Diversification or
Specialization?" Economic Review (Federal Reserve Bank of Atlanta),
vol. 68 (July 1983), pp. 53-62.
McCall, Alan A and Manferd O. Peterson. "Changing Regulation in Retail
Banking Services The Evidence from Maine," Journal ot Retail Banking,
vol. 2 (September 1980), pp 46-55.
33
What Distinguishes
Larger and More Efficient
Credit Unions?
William N. Cox and Pamela V. Whigham
An Atlanta Fed study shows that the most
efficient of Georgia's 53 largest credit unions
pass along benefits of their efficiency to the
customer, rely less on sen/ice charge income,
have a lower proportion of loans in their asset
portfolios, and run twice as efficiently as the
state's other big credit unions.
Credit unions are increasingly visible in t h e
n e w fabric of t h e financial services industry. In
years past t h e typical credit union, w h o s e
m e m b e r s h i p shared a c o m m o n b o n d such as
place of w o r k or residence, was small, l i m i t e d
to passbook savings accounts and short-maturity
consumer loans, and run by volunteers or partt i m e staffers f r o m t h e sponsoring organization.
But some credit unions today are loosening
restraints o n m e m b e r s and are b e c o m i n g fullservice financial institutions offering c h e c k i n g
accounts, a u t o m a t i c teller machines, mortgage
loans, savings certificates, retirement accounts,
and even credit cards a n d safe d e p o s i t boxes.
A l t h o u g h full-service credit unions still t e n d
t o be small c o m p a r e d w i t h c o m m u n i t y banks
or w i t h savings and loan associations m o v i n g
i n t o t h e c o m m u n i t y b a n k i n g market, t h e newstyle credit unions are o f t e n large e n o u g h t o
c o m p e t e for business w i t h i n t h e b o u n d s of
their m e m b e r s h i p groups. This transformation
has been taking place for t w o reasons. First,
deregulation, w h i c h has o c c u r r e d in t a n d e m
w i t h or even ahead of market changes in t h e
financial services industry, has been t h e principal reason for credit unions' n e w energy a n d
aggressiveness. W i t h the relaxation of many of
their regulatory limitations, credit unions t o d a y
can offer c h e c k i n g accounts (share drafts),
l o n g e r - m a t u r i t y loans, a n d o t h e r p r o d u c t s
d e m a n d e d by full-service customers.
The authors
Department.
are
members
of the
Atlanta
Fed's
Research
34 O C T O B E R 1 9 8 4 , E C O N O M I C
REVIEW
Second, t h e n e w b r e e d of credit u n i o n manager w h o has pushed for deregulation tends t o
be younger, t o have formal training in finance
or economics, and t o v i e w the j o b in t h e same
way as t h e manager of a bank or S&L branch.
Some, in fact come from a bank branch managem e n t background. They see themselves as
professionals w h o s e j o b is t o help their institutions grow a n d e x t e n d additional services t o
customers. Because increased c o m p e n s a t i o n
for t h e manager o f t e n is constrained by regulations that limit credit union growth, this m o r e
aggressive group of executives has pushed for
regulatory relaxation, t o satisfy b o t h their o w n
d e m a n d s a n d those of their members.
M o s t of t h e nation's roughly 20,000 credit
unions still fit the traditional mold, but the non-,
traditional credit unions are t h e ones setting
t h e pace, trying t o b e c o m e full-fledged participants in the retail side of t h e financial services
industry. Looking at t h e 53 largest credit unions
a m o n g t h e 435 total in Georgia, w e a p p l i e d an
analysis of operating ratios t o see h o w t h e
larger credit unions in t h e group differ from
their smaller counterparts, and h o w the profiles
of t h e most efficient institutions in t h e group
c o m p a r e w i t h t h e rest.
A l t h o u g h this study parallels some of t h e
work on "high-performance banks" in the finance
literature, it differs in an i m p o r t a n t respect: at
c r e d i t unions, " p r o f i t a b i l i t y " has no clear
meaning. W e can measure retained earnings as
a percentage of assets or income, just as w i t h a
bank or stock S&L But many credit unions,
even t h e larger ones, routinely transfer a substantial p o r t i o n of earnings back t o depositors
in interest on share deposits. At numerous
credit unions, in fact, interest payments are still
called " d i v i d e n d s . " In cases w h e r e earnings are
paid back t o depositors, o n l y enough i n c o m e
typically is retained t o keep g r o w t h in t h e
capital base c o m m e n s u r a t e w i t h g r o w t h in
assets. Profitability, for such reasons, cannot be
measured meaningfully.
Even t h o u g h t h e r e is no w a y t o profile "highprofitability" credit unions, w e profiled t h e
larger a n d t h e more efficient institutions t o see
w h a t else sets t h e m apart. The results show
that larger credit unions have lower loan/asset
ratios, less loan delinquency, a n d (not surprisingly) a higher proportion of share-draft deposits.
M o r e efficient credit unions have lower loan/asset
ratios, charge lower loan rates and pay higher
rates .on most savings instruments; they rely
F E D E R A L RESERVE B A N K O F A T L A N T A
less on service charge i n c o m e and have a
higher p r o p o r t i o n of regular share accounts.
Methodology
Data for t h e study came f r o m D e c e m b e r
1983 Reports of C o n d i t i o n s u p p l i e d to t h e
Georgia Department of Banking and the regional
office of the National Credit Union Administration
by state- a n d federally-chartered credit unions,
respectively. The ratios, d e f i n e d in A p p e n d i x A,
were derived f r o m data on t h e 53 largest credit
unions in Georgia.
W e analyzed the ratios with a microcomputer
database m a n a g e m e n t program, w h i c h was
used t o identify t h e 13 largest credit unions
and the 13 with the greatest efficiency. Efficiency
was defined as a low ratio of operating expenses
(noninterest) t o assets, a n d alternatively as a
low ratio of operating expenses t o income. The
high-efficiency samples produced by the alternative definitions were identical.
After i d e n t i f y i n g these t w o subsets, w i t h 13
credit unions each, w e c o m p a r e d their performance on other financial ratios to see if t h e y
differed significantly f r o m t h e remaining 4 0
credit unions. The m o r e efficient group of 13
credit unions, for example, s h o w e d an average
loan/asset ratio of 59 percent, w h i l e t h e less
efficient group of 40 s h o w e d an average loan/
asset ratio of 68 percent. Analysis of this difference using standard statistical "t-tests" showed
t h e d i f f e r e n c e t o be significant at the 95 percent level.
W e repeated this same process through a list
of financial operating ratios t o see h o w t h e
financial profiles of t h e more efficient credit
unions differed from their less efficient peers',
and h o w t h e financial profiles of t h e larger
credit unions d i f f e r e d from their smaller peers'.
The High-Efficiency Profile
Since profitability has no m e a n i n g in t h e
w o r l d of credit unions, w e chose efficiency in
c o n d u c t i n g operations as t h e best measure of
performance for our sample of Georgia's 53
largest credit unions. O n t h e average, t h e 13
more efficient credit unions are twice as efficient
as the others (Chart 1). M e a s u r e d by t h e ratio
of operating expense over assets, t h e highefficiency group averaged 1.9 percent; their
less efficient counterparts averaged 4 percent.
35
Chart 1 . Credit Unions in the High-Efficiency Group Are Twice as Efficient as Other
Credit Unions or Typical Commercial Banks
OPERATING EXPENSES
As a Percent of Income
High-Efficiency
Credit Unions*
Other
Credit Unions*
Small Bank
Sample**
High-Efficiency
Credit Unions
Other
Credit Unions
Small Bank
Sample**
- T h e difference b e t w e e n high-efficiency credit unions a n d other credit unions is significant at the 9 5 % confidence
" B a s e d on 1 9 8 3 Federal Reserve Functional Cost Analysis of small banks-
O p e r a t i n g expenses averaged only 17 percent
of income in the high-efficiency group, compared
w i t h a 33 percent average at t h e other credit
unions.
W h e n it comes t o efficiency, Georgia's larger
credit unions also h o l d their o w n against commercial banks. Consider t h e Federal Reserve's
1983 Functional Cost Analysis Report for commercial banks under $50 million in total deposits.
The 169 banks in that sample s h o w e d an
average ratio of o p e r a t i n g expenses t o assets of
3.6 percent, a n d an average ratio of o p e r a t i n g
expenses t o i n c o m e of 31 percent. In each
case, these figures are almost equal to t h e
averages for t h e 4 0 less-efficient credit unions
in our sample. That indicates the high-efficiency
credit unions are efficient not just in relation t o
t h e other large credit unions in Georgia, b u t
also t o their cousins in t h e c o m m e r c i a l b a n k i n g
industry.
The 13 more efficient credit unions are t w i c e
as efficient as t h e others in t h e t w o most
significant categories of noninterest expense
as well. O n personnel expenses ( i n c l u d i n g
fringe benefits) t h e high-efficiency group averaged 8 percent of income, w h i l e t h e others
averaged 15 percent; o n office a n d o c c u p a n c y
expenses the respective averages were 3 percent
and 6 percent. The " t w i c e as efficient" rule also
held for both categories of noninterest expense
w h e n each was measured as a percent of
assets. In addition, w e f o u n d that personnel
36
costs m a d e up 4 6 percent of total o p e r a t i n g
costs for t h e m o r e efficient group a n d 43
percent for t h e others, suggesting that credit
unions f o l l o w t h e "half of noninterest expense
goes t o personnel" rule of t h u m b o f t e n a p p l i e d
t o c o m m e r c i a l banks.
H o w d o efficient credit unions differ f r o m
their peers? Part of t h e reason for higher efficiency lies in t h e balance-sheet c o m p o s i t i o n of
t h e m o r e efficient group (Chart 2). O n t h e
asset side, t h e y c o u n t significantly f e w e r loans
( w h i c h are m o r e expensive t o administer than
investments) t h a n their counterparts—59 percent of assets versus 68 p e r c e n t O n the deposit
side, w e f o u n d a higher p r o p o r t i o n of balances
in regular shares (83 percent versus 65 percent)
and a lower proportion of balances in certificates
(9 percent versus 26 percent).
W e f o u n d no significant d i f f e r e n c e in t h e
p r o p o r t i o n of balances in share-draft accounts,
w h i c h are t h e most costly t o administer. Transactions per share-draft account d o not vary
appreciably w i t h t h e a m o u n t of balances in t h e
account, and thus neither d o t h e expenses
involved in processing them. Possibly, the more
efficient credit unions have f e w e r accounts b u t
w i t h higher average balances. However, w i t h
no i n f o r m a t i o n on average share-draft account
balances at t h e credit unions in our sample, w e
w e r e unable t o investigate this possibility.
O n e other interesting d i f f e r e n c e b e t w e e n
the high-efficiency group and the others emerged
O C T O B E R 1984, E C O N O M I C
REVIEW
Chart 2. High-Efficiency Credit Unions Show a Lower Proportion of Loan Assets, a
Higher Proportion of Regular Share Deposits, and about the
Same Proportion of Share-Draft Deposits.
Loans*
Regular Shares*
Share Certificates*
Share Drafts
Assets
Deposits
Deposits
Deposits
•The difference is statistically significant at the 9 5 % c o n f i d e n c e level.
f r o m our analysis: t h e m o r e efficient group
actually repotted far less service charge income
as a percent of total i n c o m e than t h e others—1
percent versus 3.6 percent (Chart 3). Because
many credit union managers are experimenting
w i t h service charge i n c o m e as an i m p o r t a n t
source of revenue, w e e x p e c t e d t h e m o r e
aggressive a n d (presumably) m o r e efficient
credit unions to make greater use of this avenue.
Apparently, t h e o p p o s i t e is happening: credit
unions in a squeeze because of lower efficiency
are quicker t o t u r n t o service charges than their
high-efficiency cousins. At Georgia's large credit
unions, service charge i n c o m e seemingly has
represented a defensive reaction t o offset expenses rather than an aggressive m o v e to a d d
income.
H o w d o t h e efficient credit unions use their
cost advantages? W e f o u n d that t h e y pass
along t h e financial benefits of their efficiency
b o t h t o borrowers and most depositors. O n t h e
loan side, t h e m o r e efficient group charged
lower interest rates across t h e board (Chart 4).
O n unsecured consumer loans, these institutions
charged 15.6 percent, c o m p a r e d w i t h a 16.9
percent average rate for their less efficient
counterparts. O n secured loans (mainly for
automobiles), t h e more efficient credit unions
charged an average of 12 percent, versus 13.5
percent for t h e others. The more efficient
group also charged slightly lower rates on first
and second mortgages, although the differences
FEDERAL RESERVE B A N K O F A T L A N T A
Chart 3. High-Efficiency Credit Unions
Rely Less on Service Charge
Income.
Service Charge Income
As a Percent of Total Income*
3.6
1.0
Average at
13 High-Efficiency
Credit Unions
Average at
4 0 Other
Credit Unions
"The difference is statistically significant at the 95% confidence level.
37
C h a r t 4 . H i g h - E f f i c i e n c y C r e d i t U n i o n s C h a r g e L o w e r L o a n Rates.
EFFECTIVE INTEREST RATES C H A R G E D
m i
(
High-Efficiency Credit Unions
1 Other Credit Unions
15.6
16.9
1 3 Fi
12.0
Unsecured*
Loans
^
Auto*
Loans
14.1
13 5
First
Mortgages
14.8
14.6
Second
Mortgages
"The difference is statistically significant at the 95% c o n f i d e n c e level.
Chart 5. High-Efficiency Credit Unions Pay M o r e Interest on Savings and Retirement
Accounts, But Less on Share-Draft C h e c k i n g A c c o u n t s and Share Certificates.
EFFECTIVE I N T E R E S T RATE PAID
U H High-Efficiency Credit Unions
I
I Other Credit Unions
10.5
10.0
9.9
^
10.4
7.5
5.7
Regular
Shares*
(Passbook)
Retirement
Accounts
.
6.2
Share
Drafts
(Checking)
Share
Certificates
•The difference is statistically significant at the 95% c o n f i d e n c e level.
were t o o small t o be statistically significant.
Interestingly, the high-efficiency credit unions'
percentage of d e l i n q u e n t loans was no lower
(or higher, for that matter), w h i c h suggests that
t h e lower rates charged o n loans and t h e lower
p r o p o r t i o n of loans on t h e balance sheet probably d i d not result from tighter standards for
granting loans.
The m o r e efficient credit unions also shared
some of t h e benefits of their efficiency w i t h
depositors, at least o n regular share accounts
38
(passbook savings) and r e t i r e m e n t accounts
(Chart 5). O n regular shares, w h e r e five-sixths
of their deposit funds reside, the high-efficiency
group paid an effective rate of 9.2 percent,
versus an effective rate of 7.5 percent at t h e
other credit unions. In each case, these figures
include an u n k n o w n b u t u n q u e s t i o n a b l y small
p r o p o r t i o n of m o n e y market-type accounts.
The high-efficiency credit unions paid slightly
more o n r e t i r e m e n t accounts a n d slightly less
on share-draft c h e c k i n g accounts and share
OCTOBER 1984, E C O N O M I C
REVIEW
Chart 6. The Largest Credit Unions Are
Neither More Nor Less Efficient
Chart 7. Large Credit Unions Show . . .
. . . a) Lower Loan Proportions
OPERATING
EXPENSE*
Loans
Total Assets
TOTAL ASSETS
3.6
69
%
54
13 Largest
Credit Unions
13 Largest
Credit Unions
4 0 Other
Credit Unions
4 0 Other
Credit Unions
. . . and b) Lower Delinquency Rates.
•The difference is not statistically significant at the 9 5 %
c o n f i d e n c e level.
certificates, b u t these differences w e r e small
and statistically insignificant
These findings—that high-efficiency credit
unions pass t h e results of extra efficiency to
their m e m b e r s in t h e f o r m of lower loan rates
and higher deposit rates—highlight the difficulty
of measuring profitability at these institutions.
The more efficient credit unions use their
profits in this way rather than a d d i n g t h e m t o
net worth. Ultimately, there was no difference in
t h e ratio of retained earnings t o assets b e t w e e n
t h e high-efficiency group and t h e others.
Percent of Loans 2 Months
or More Past Due*
2.5
1.3
13 Largest
Credit Unions
4 0 Other
Credit Unions
"The difference is statistically significant at the 9 5 % confidence level.
Size Profile
Georgia's 13 largest credit unions constitute a
different group f r o m its 13 most efficient.
W h e n w e d i v i d e d t h e state's 53 largest credit
unions i n t o t h e 13 largest a n d t h e remaining
40, w e f o u n d t h e size differences were striking:
the t o p 13 averaged $88 m i l l i o n in assets; t h e
other 4 0 averaged a b o u t $9 million.
FEDERAL RESERVE B A N K O F A T L A N T A
It appears that t h e larger institutions are not
necessarily more efficient W e found no significant difference in either t h e ratio of operating
expense to assets (Chart 6) or t h e ratio of
operating expense t o income. This suggests
that credit unions averaging $9 m i l l i o n in assets
have no advantage or disadvantage with respect
39
to their larger peers w h e n it comes to efficiency.
However, t h e larger credit unions may be m o r e
efficient o n a transaction-for-transaction basis
since t h e y have a higher p r o p o r t i o n of deposit
funds in share-draft accounts: 10.4 percent
versus 2.9 percent. W i t h share drafts being t h e
most costly f u n c t i o n t o process, t h e lack of any
efficiency d i f f e r e n c e overall may m e a n t h e
larger credit unions are m o r e efficient in nonshare-draft operations. O n t h e o t h e r hand, t h e
higher p r o p o r t i o n of share drafts may be no
costlier t o process if it reflects higher balances
per account rather than a larger n u m b e r of
accounts. Unfortunately, w i t h o u t i n f o r m a t i o n
on average balances of share-draft accounts at
each credit union, w e cannot determine whether
t h e larger institutions have a larger n u m b e r of
such accounts and hence higher costs in processing t h e m .
The larger credit unions showed some intriguing differences in loan ratios (Chart 7). The
p r o p o r t i o n of their assets held in loans was
significantly l o w e r — 5 4 p e r c e n t versus 6 9
p e r c e n t — w h i c h may reflect a saturation of t h e
m e m b e r s h i p eligible t o b o r r o w f r o m t h e credit
union. Interest rates on loans showed no significant d i f f e r e n c e b e t w e e n t h e t w o size groups.
Interestingly, t h e larger credit unions show a
sharply lower percentage of delinquent loans—
1.3 percent versus 2.5 percent. W e e x p e c t e d
t h e loan administrators of smaller institutions
t o be closer t o t h e m e m b e r s h i p a n d t h e r e b y
better able t o j u d g e credit risks. But it seems
40
that t h e reverse may be true: larger credit
unions apparently are able to administer their
loans m o r e professionally w i t h a lower degree
of d e l i n q u e n c y .
These are t h e o n l y significant differences w e
found between the larger group and the others.
The larger credit unions d i d not differ from
smaller peers in their reliance on service charge
income, in interest rates charged o n loans or
paid o n deposits, or in efficiency of operations.
Conclusion
W e have investigated h o w t h e most efficient
quartile of t h e 53 largest credit unions in
Georgia d i f f e r e d f r o m t h e remaining three
quartiles. W e f o u n d that t h e y appear to pass
along t h e benefits of their efficiency b o t h
t h r o u g h lower loan rates a n d higher savings
interest; they rely less o n service charge income;
their asset portfolios have a lower proportion of
loans; and, by our definition, they are twice as
efficient as their contemporaries.
Turning our a t t e n t i o n t o t h e largest 13 credit
unions a m o n g t h e 53, w e f o u n d that size seems
t o bring less in t h e way of distinctions than does
efficiency. The larger credit unions appear
neither m o r e nor less efficient. They have
lower d e l i n q u e n c y rates, a lower p r o p o r t i o n of
loans, a n d a higher p r o p o r t i o n of share-draft
deposits. Otherwise, there seem t o be few
financial differences b e t w e e n t h e largest institutions a n d t h e others.
O C T O B E R 1984, E C O N O M I C
REVIEW
APPENDIX
Variables considered in examining the performance of
the largest and most efficient among the 53 largest
credit unions in Georgia are outlined below.
Total assets composition
Total loans/Total assets
Investments/Total assets
Fixed assets/Total assets
Loan composition
Real estate loans/Total loans
Other loans to members/Total loans
Return on assets
Income from investments/Total investments
Income from loans/Total loans
Loan delinquency rates
All delinquent loans/Total loans
Loans delinquent less than 12 months/Total loans
Income composition
Interest income/Gross income
Fee income/Gross income
Expense ratios
Total operating expenses/Total assets
Total operating expenses/Gross income
Personnel expenses/Total assets
Personnel expenses/Gross income
Office occupancy expenses/Total assets
Office occupancy expenses/Gross income
FEDERAL RESERVE B A N K O F A T L A N T A
Educational and promotional expenses/Total assets
Educational and promotional expenses/Gross income
Personnel expenses/Total operating expenses
Office occupancy expenses/Total operating expenses
Educational and promotional expenses/Total
operating expenses
Deposit composition
Regular shares/Total deposits
Share drafts/Total deposits
Share certificates/Total deposits
IRAs/Total deposits
"Profitability" ratios
Retained earnings/Total assets
Retained earnings/Gross income
Loan interest rates offered during the last week of
December 1 9 8 3
Unsecured loans
New vehicle loans
Second mortgage loans
First mortgage loans
Dividend rates offered during the last week of December
1983
Regular shares
Share drafts
IRA/KEOGH retirement accounts
Share certificates
41
The Banking Act of 1933, a i m e d at p r o t e c t i n g
c o m m e r c i a l banks, i m p o s e d t w o constraints o n
their ability t o pay interest. T h e act p r o h i b i t e d
interest payments o n d e m a n d deposits and
authorized t h e Federal Reserve to impose ceilings
o n t i m e a n d savings deposit interest. Savings a n d
loan deposits w e r e covered by interest ceilings
in 1966. Beginning in 1 9 8 0 w i t h t h e Depository
Institutions Deregulation a n d M o n e t a r y C o n t r o l
Act, many constraints on interest payments o n
t i m e a n d savings deposits have b e e n lifted, a n d
t h e process w i l l c o n t i n u e in stages t h r o u g h 1986.
Today, explicit interest is paid o n n o n - c o r p o r a t e
N O W (negotiable order of withdrawal) accounts
at t h e Regulation Q passbook rate a n d SuperN O W accounts at unregulated rates, even though
these accounts are indistinguishable by t h e cust o m e r from d e m a n d deposits. Congress is considering r e m o v i n g t h e p r o h i b i t i o n o n all d e m a n d
deposit accounts.
M a n y economists and bankers believe that
interest controls o n d e p o s i t accounts have been
d e t r i m e n t a l b o t h t o depositors a n d t o t h e depository institutions they w e r e designed t o aid.
Furthermore, t h e y believe t h e controls, particularly t h e p r o h i b i t i o n of interest on d e m a n d deposits, have m a d e it m o r e difficult to c o n d u c t
monetary policy. If their v i e w is correct, t h e
remaining constraints should be r e m o v e d — a n d
t h e sooner t h e better. But an alternative v i e w
holds that constraints o n deposit interest payments may be necessary t o prevent, or at least
delay, destructive c o m p e t i t i o n for funds.
Those w h o w a n t t h e remaining controls
c o n t i n u e d , and t h e o l d controls reimposed and extended to other institutions
offering third-party transfers (such as
brokers' cash m a n a g e m e n t accounts),
believe c o m p e t i t i o n for funds results in
burgeoning expenses for depository institutions
a n d overly risky investments by banks s e e k i n g t o
cover these expenses. Lifting t h e p r o h i b i t i o n
w o u l d mean, t h e y fear, a return t o t h e bank
failures of the 1920s and 1930s. If their p r e
d i c t i o n is valid, t h e m o v e m e n t t o w a r d deregulation should be halted or reversed.
Interest on
Deposits and the
Survival of
Chartered Depository
Institutions
George J. Benston
Demand deposit interest payments should
be reinstated, according to a scholar who
argues that a new market-related ceiling
would discourage fraud and would enhance
the comparative advantages of depository
institutions
The f o l l o w i n g analysis a t t e m p t s t o
determine which alternative is correct
The author is professor
of
accounting,
economics,
and
finance,
Graduate
School of Management
University
of Rochester,
and visiting
scholar,
Federal Reserve Bank of Atlanta.
42
O C T O B E R 1984, E C O N O M I C
REVIEW
a n d w h a t specific measures should be taken. The
situations that led to deposit interest controls in
t h e 1930s a n d 1960s are described first a n d
empirical e v i d e n c e presented. Next, t h e effect
of t h e controls and reaction t o t h e m by financial
institutions and their customers will be delineated.
Finally, I will spell o u t t h e present costs a n d
benefits of the legal constraints, as well as consider
those to w h o m t h e y apply. Unless specified
otherwise, t h e t e r m " b a n k s " is used t h r o u g h o u t
t o d e n o t e thrift institutions as well as c o m m e r c i a l
banks.
This analysis leads strongly t o t w o conclusions.
First, if t h e constraints are left in place, t h e y are
likely t o be costly t o financial institutions, their
customers, and t h e general p u b l i c Second, because of t h e moral hazard inherent in d e p o s i t
insurance, an interest rate ceiling o n d e m a n d
deposits should be i m p o s e d that is s o m e w h a t
b e l o w b u t t i e d t o a market rate.
interest Payments on Demand Deposits
Before t h e Banking Act of 1933 was v o t e d into
law, banks paid interest on t h e relatively large
d e m a n d deposit balances held by individuals,
businesses, a n d other banks. Then, as now,
depositors were paid indirectly for their deposits,
principally w i t h such " f r e e " services as check
processing, deposit collection, and preferable
lending arrangements. But explicit interest also
was paid w h e n these means w e r e insufficient in
t h e c o m p e t i t i o n for deposits. Thus, banks in
larger cities t e n d e d to pay interest on deposits
w h i l e those in smaller cities a n d rural areas
c o m p e t e d less vigorously. 1 In particular, moneycenter banks, especially those in N e w York City
and Chicago, bid for t h e deposits of c o u n t r y
banks w h e n t h e latter sought t e m p o r a r y investments for their depositors' seasonally fluctuating
funds. N o t surprisingly, t h e m o n e y - c e n t e r banks
w o u l d have preferred not t o c o m p e t e against
each other. The N e w York Clearing House agreed
at various times to a m a x i m u m rate, b u t some
banks y i e l d e d t o t e m p t a t i o n a n d t h e cartel
agreements w e r e b r o k e n often. 2
T w o arguments have b e e n used to justify t h e
Banking Act of 1933's p r o h i b i t i o n of interest
payments on d e m a n d deposits. O n e is that
interest payments resulted from destructive comp e t i t i o n a m o n g banks. An overly a m b i t i o u s or
risk-preferring banker, t h e argument goes, seeks
t o gain deposits by offering relatively high interest
FEDERAL RESERVE B A N K O F A T L A N T A
rates. C o m p e t i t o r s must f o l l o w this lead or forfeit
customers. Bankers w h o pay higher interest rates
are forced t o c o m p e n s a t e by investing in riskier
assets that p r o v i d e greater gross revenues b u t
eventually result in greater losses. Bankers w h o
refuse t o f o l l o w t h e leader lose deposits, w h i c h
weakens their banks. The consequence, it is
claimed, is bank failures. In fact, some 6 0 0 banks
failed each year in the d e c a d e of t h e 1920s, a n d
more t h a n 9,000 banks w e r e closed f r o m 1 9 3 0
through 1933.
The second a r g u m e n t was e m p h a s i z e d by
Senator Carter Glass, t h e principal author of the
Banking Act of 1933. H e c o n t e n d e d that t h e
interest o f f e r e d by t h e m o n e y - c e n t e r banks t o
their c o u n t r y cousins drained funds from t h e
rural areas t o t h e large cities. W o r s e yet, t h e
m o n e y - c e n t e r banks w e r e said t o have invested
these funds in high-rate brokers' loans, w h i c h
allegedly h e l p e d fuel t h e 1920s' speculative
stock market b o o m that triggered the subsequent
crash a n d depression. 3
The e v i d e n c e is inconsistent w i t h b o t h these
arguments in three principal regards: (1) there
was no positive relationship b e t w e e n interest
payments, risk-taking, a n d bank failures; (2) t h e
pre-1933 bank failures appear to have resulted
f r o m factors other t h a n interest payments o n
deposits; a n d (3) m o n e y - c e n t e r banks d i d not
" d r a i n " t h e c o u n t r y areas of funds.
First, banks that paid interest on d e m a n d
deposits t e n d e d n o t t o invest in riskier assets.4
Indeed, data f r o m t h e 1920s, w h e n interest was
paid, reveal that interest payments on deposits
w e r e unrelated t o t h e banks' investments in risky
assets, such as loans rather than bonds a n d
corporate b o n d s rather than U.S. g o v e r n m e n t
obligations. N o r w e r e losses o n loans associated
w i t h interest payments. Furthermore, banks in
t h e larger cities t e n d e d to pay higher rates o n
deposits w h i l e earning lower yields on loans, as
compared w i t h banks in smaller cities and country
banks that paid less o n deposits w h i l e earning
higher rates o n their loans. These data show that
interest paid o n deposits reflected market conditions rather than risk-taking. Indeed, w h e n the
banks' expenditures for salaries and other variable
operating expenses are c o m p a r e d w i t h their
interest payments, a one-to-one substitution is
f o u n d : on average, a bank that paid a dollar m o r e
in interest incurred a b o u t a dollar less in other
expenses. Importantly, the early 1930s' failure
rates of national banks that paid more interest o n
deposits w e r e lower than t h e failure rates of
43
those that incurred less interest expense, perhaps
because banks faced w i t h sharply r e d u c e d revenues c o u l d reduce interest payments faster t h a n
those that c o m p e n s a t e d their customers w i t h
services.
Second, w i t h respect t o bank failures (or"suspensions," as they were once called), t w o periods
should be distinguished. The decade 1920 through
1929 is roughly comparable t o the present period,
since its suspensions w e r e attributable more to
banking practices and local economic conditions
than t o macroeconomic events and public policies.
Furthermore, w h i l e t h e 1920s' suspension rate of
a p p r o x i m a t e l y 6 0 0 banks annually n o w w o u l d
be considered a major crisis, at t h e t i m e it was of
equivalent or less concern than is t o d a / s m u c h
lower level of failures. The Great Depression
years of 1 9 3 0 t h r o u g h 1933, however, s a w a t h i r d
of t h e nation's banks closed, a debacle that
seems highly unlikely t o recur.
It appears that t h e suspensions of t h e 1920s
were due primarily to economic distress in specific
areas of t h e c o u n t r y c o u p l e d w i t h unit banking,
which severely constrained banks from diversifying
their portfolios a n d deposits. In particular,, over
t h e years 1 9 2 0 through 1929, fully 4 7 percent of
the suspended banks were located in t h e western
grain states, 18 percent in t h e Southeast, a n d 11
percent in t h e southwestern c o t t o n states—a
total of 76 percent. 5 T h e suspended banks represented 28 percent of t h e banks in o p e r a t i o n in
t h e w e s t e r n grain states in 1920, 35 percent of
those in t h e Southeast, and 19 percent of those
in t h e s o u t h w e s t e r n states. For the U n i t e d States
as a w h o l e , suspended banks represented 19
percent of t h e total. 6 M o s t of t h e suspended
banks w e r e small and located in small towns; 43
percent had earning assets of less t h a n $ 1 50,000
a n d 85 percent had less than $500,000; 35
percent w e r e in t o w n s w i t h under 5 0 0 residents,
and 73 percent in t o w n s w i t h a p o p u l a t i o n less
than 2,500. In each period, f e w of t h e s u s p e n d e d
banks o p e r a t e d branches: of t h e 8,716 suspensions f r o m 1 9 2 1 t h r o u g h 1931, o n l y seven
had m o r e than ten branches, a n d o n l y three of
these o p e r a t e d branches o u t s i d e t h e head office
city.
Over t h e years 1930-31, fully 3,505 banks
w e r e suspended. O f these, 31 percent w e r e in
t h e western grain states, a n d 1 5 and 10 percent
in t h e southeastern and southwestern c o t t o n
states, for a total of 56 percent These suspensions
represented 18 percent, 31 percent, and 14
44
percent respectively, of the number in operation
on j u n e 3 0 , 1 9 3 0 . During these years t h e relative
n u m b e r of banks s u s p e n d e d in other areas of t h e
c o u n t r y increased dramatically over t h e l o w
rates that prevailed d u r i n g t h e 1920s, ranging
f r o m 6 percent of t h e N e w England banks in
1 9 3 0 t o 1 7 percent of t h e N o r t h Central banks.
For t h e U n i t e d States as a whole, s u s p e n d e d
banks a c c o u n t e d for 15 percent of all banks.
Thus t h e Great Depression, w h i c h was attributable primarily t o t h e 25 percent decrease of
t h e m o n e y supply ( d e m a n d and t i m e deposits)
f r o m M a r c h 1929 t h r o u g h M a r c h 1933, d i f f e r e d
f r o m t h e 1920s in having failures d i s t r i b u t e d
across t h e nation. 7
The t h i r d argument against t h e p r o h i b i t i o n of
interest on d e m a n d deposits concerns the alleged
" d r a i n " o n c o u n t r y bank funds. A study by Brian
C Gendreau (1979) of the relationship between
c o u n t r y banks' balances w i t h other (largely city)
banks and t h e changes in their deposits less
loans (free funds) over t h e years 1 9 1 9 - 1 9 3 3
revealed that o n l y a b o u t 4 6 percent of t h e
change in their free funds was invested in bankers'
balances; t h e a m o u n t s w e r e s o m e w h a t lower
w h e r e t h e c o u n t r y banks held relatively m o r e
g o v e r n m e n t securities. 8 These data suggest that
t h e c o u n t r y banks first served local d e m a n d s a n d
then either invested their surplus deposits through
t h e city banks or in t h e t h e n l i m i t e d supply of
g o v e r n m e n t securities. Charles M . Linke also
points o u t that t h e m o n e y - c e n t e r banks acted
"as direct agents in t h e m a k i n g of security loans
for interior banks and n o n b a n k lenders." 9
Thus the e v i d e n c e fails t o support t h e claim
that interest payments on d e m a n d deposits
resulted in unsafe investments by banks; in t h e
i n a p p r o p r i a t e f l o w of funds away from smaller
cities a n d rural areas into t h e m o n e y centers; or
in t h e bank failures of t h e 1920s a n d 1930s.
Rather, interest o f t e n was a desirable means for
banks t o pay their customers ( i n c l u d i n g country
banks) for funds. Furthermore, t h e reasons cited
here d o not appear t o be those that principally
m o t i v a t e d t h e p r o h i b i t i o n of interest on d e m a n d
deposits. As Linke (1966) reports, t h e r e was little
discussion of d e m a n d deposit interest, except
for Senator Glass' concerns for t h e f l o w of funds
f r o m c o u n t r y t o m o n e y - c e n t e r banks. Rather, t h e
p r o h i b i t i o n was a q u i d pro q u o o f f e r e d to large
c o m m e r c i a l banks in exchange for their acceptance of FDIC insurance, w h i c h b e n e f i t e d small
banks b u t was paid for primarily by large banks. 10
O C T O B E R 1984, E C O N O M I C
REVIEW
Interest Payments on Time Deposits
The Pre-1933 Experience. Early concern over
interest payments on time deposits was expressed
chiefly in c o n n e c t i o n w i t h deposit insurance.
The eight states that a d o p t e d deposit guarantee
programs d u r i n g 1 9 0 8 - 1 9 1 7 legislated statutory
limits on interest rates, o n t h e expressed ass u m p t i o n that t h e insurance program " w o u l d
encourage reckless b a n k i n g because depositors
w o u l d seek t h e bank w i t h t h e most liberal terms
rather than t h e safest bank." 1 1 Bankers w h o
d e m a n d e d interest rate controls asserted t h a t
soundly managed banks w o u l d be at a competitive
disadvantage w i t h o u t t h e m .
During t h e 1920s bankers o f t e n c o m p e t e d by
offering higher interest rates o n t i m e deposits.
C o n c o m i t a n t l y , other bankers called for voluntary and government-mandated constraints. From
t h e passage of t h e 1 9 2 7 M c F a d d e n Act, w h i c h
a m o n g other things p e r m i t t e d states t o regulate
t h e interest payments of nationally-chartered as
well as state-chartered banks, until t h e Banking
Act of 1933 was enacted, 12 states a d o p t e d
interest rate ceilings. Controls w e r e e x t e n d e d
nationally, first t o m e m b e r banks by t h e 1933 act
w h i c h vested authority in t h e Federal Reserve
Board, and t h e n t o n o n m e m b e r insured banks by
t h e Banking Act of 1935, w h i c h vested a u t h o r i t y
in t h e Federal Deposit Insurance Corporation.
(The FDIC's Regulation IV is almost identical t o
t h e Federal Reserve's Regulation Q.)
Thus federal controls on interest rates paid on
t i m e a n d savings deposits seemingly w e r e motivated by d e p o s i t insurance, a n d w e r e primarily a
means t o limit c o m p e t i t i o n a m o n g banks. U n l i k e
d e m a n d deposits, t i m e a n d savings deposits are
not a m o n o p o l y p r o d u c t of c o m m e r c i a l banks.
Therefore, c o m m e r c i a l banks w o u l d have been
at a serious c o m p e t i t i v e disadvantage had a zero
ceiling or m u c h less than market ceiling on t h e m
been imposed.
The 1960s' Experience. Until 1965 t h e Reg Q
ceiling r e m a i n e d above t h e rates that commercial banks w e r e willing t o pay for t i m e a n d
savings deposits. In that year inflation d r o v e
market rates above t h e ceiling a n d banks lost
funds as t h e p u b l i c shifted t o higher y i e l d i n g
unregulated investments, such as treasury bills
a n d c o m m e r c i a l paper, and t o thrifts (savings
and loan associations and mutual savings banks)
as t h e y increased their rates. As a " t e m p o r a r y "
measure t o p r o t e c t thrifts f r o m c o m p e t i t i o n
F E D E R A L RESERVE B A N K O F A T L A N T A
among themselves, which w o u l d have increased
interest expense, a n d t o relieve c o m m e r c i a l
banks from competition by the thrifts, Congress
e n a c t e d t h e Interest Rate A d j u s t m e n t Act of
1966. It e x t e n d e d d e p o s i t rate ceilings t o cover
all federally-insured savings and t i m e deposits
e x c e p t those at credit unions. As interest rates
c o n t i n u e d at high levels, t h e t e m p o r a r y ceiling
became permanent The Depository Institutions
Deregulation a n d M o n e t a r y Control A c t of
1 9 8 0 prescribed an " o r d e r l y phase-out and t h e
u l t i m a t e e l i m i n a t i o n of t h e m a x i m u m rate of
interest a n d d i v i d e n d s " over six years, d u r i n g
w h i c h t i m e a u t h o r i t y t o d e t e r m i n e t h e ceilings
was transferred t o t h e Depository Institutions
Deregulation C o m m i t t e e (Title II, Section 202).
In d e c i d i n g t h e extent of decontrol, t h e comm i t t e e was charged to exercise d u e regard for
" [ t j h e safety and soundness of depository
institutions" (Title II, Section 204).
W h i l e t h e charge t o t h e deregulation comm i t t e e gives t h e appearance that ceilings o n
savings and t i m e deposits (and later on N O W
accounts) w e r e i m p o s e d t o prevent t h e failure
of d e p o s i t o r y institutions, such was o n l y tangentially t h e case. The initial i m p o s i t i o n of
Regulation Q in 1933 was set t o o high to be
effective, w h i c h is inconsistent w i t h t h e belief
that t h e ceiling was s u p p o s e d t o prevent banks
from engaging in " d e s t r u c t i v e c o m p e t i t i o n . "
The extension of t h e ceiling t o thrifts in 1966
came at a t i m e w h e n there was little danger of
their failing. H o w e v e r , t h e higher interest payments t h e y w o u l d have had t o offer depositors
w o u l d have increased their costs, a result that
was believed t o be d e t r i m e n t a l t o t h e housing
industry. Hence, though the imposition of savings
a n d t i m e d e p o s i t interest rate ceilings d i d help
t h e thrifts—at t h e expense of their depositors,
w h o failed t o receive the benefits of c o m p e t i t i o n — i t was not a c c o m p a n i e d by changes in
the regulations that determined the composition
of their assets a n d liabilities. Thrifts still w e r e
r e q u i r e d to, or w e r e subsidized to, invest primarily in long-term assets (mortgages) w h i l e
h o l d i n g short-term liabilities (savings). Thus,
t h o u g h t h e extension of Reg Q gave thrifts
respite f r o m higher market interest rates, it
failed t o solve t h e underlying p r o b l e m : thrifts
could not offer services d e m a n d e d by their customers (checking accounts and consumer loans)
or structure their portfolios so as t o reduce t h e
risk of u n e x p e c t e d changes in interest rates.
45
A n d it is this same vulnerability that creates
financial t r o u b l e for many thrifts today.
Effects of Deposit Interest Rate Controls
Bankers' Balances. Initially, a governmentmandated prohibition of payment for a resource
benefits those t o w h o m t h e resource must
be sold. In this instance the resource is demand
deposits and t h e benefit goes t o c o m m e r c i a l
banks. As n o t e d above, savings t o moneycenter banks of interest that w o u l d have been
paid, particularly o n bankers' balances, almost
exactly e q u a l e d t h e a m o u n t those banks paid
for FDIC insurance o n smaller banks' deposits.
However, given t h e very low market rates of
interest that prevailed until t h e 1950s, it is
likely that c o r r e s p o n d e n t banks easily c o u l d
have c o m p e n s a t e d the respondents for their
balances w i t h services. Indeed, it is d o u b t f u l
that t h e m o n e y - c e n t e r banks c o u l d maintain a
cartel against t h e c o u n t r y banks even w i t h t h e
aid of law. N o t h i n g prevents a smaller bank
f r o m using many correspondents, and such
appears t o be t h e case. For example, a study by
Robert J. Lawrence and Duane Lougee (1970)
indicated that t h e average $10 m i l l i o n asset
bank in t h e Denver Federal Reserve Z o n e had
t h r e e correspondents a n d t h e average $40
m i l l i o n asset bank had nine t o ten correspondents. Robert E. Knight's (1976) survey of
c o r r e s p o n d e n t b a n k i n g in t h e Kansas C i t y
Federal Reserve District f o u n d that t h e average
bank w i t h less than $5 m i l l i o n in deposits had
five correspondents, w i t h the n u m b e r increasing
for larger banks (for example, 1 3 for banks w i t h
$50 t o $ 1 0 0 m i l l i o n in deposits, a n d 31 for
banks w i t h $100 million or more). Furthermore,
in t h e 1970s Federal Reserve m e m b e r banks
c o u l d use t h e t h e n free services of t h e System.
In addition, t h e increasing g o v e r n m e n t d e b t
after 1933 o f f e r e d c o u n t r y banks an alternative
liquid investment Consequently, correspondent
banks c o m p e n s a t e d their respondents w i t h a
plethora of services, including acting as brokers
for the respondents' funds via loan participations
a n d transactions in g o v e r n m e n t securities. 1 2
Nevertheless, as market interest rates rose it
became increasingly difficult for c o r r e s p o n d e n t
banks t o c o m p e n s a t e their respondents for balances. This p r o b l e m is reflected in t h e data,
d e p i c t e d in Chart 1. w h i c h shows a decreasing
percentage of interbank deposits to total deposits.
Additionally, the percentage of interbank deposits
classified as t i m e deposits has increased; and t h e
46
Chart 1 . Interbank Deposits and Treasury Bill Rates
Percent
• As a percent
•* As a percent
Note: Interbank
Source. Federal
o l total deposits.
ot interbank d e p o s i t s
deposits redefined in 1978
Reserve
Bulletin.
a m o u n t of federal funds lending a m o n g banks has
increased dramatically. Thus t h e c o r r e s p o n d e n t
banks are paying for deposits of c o r r e s p o n d e n t
banks w i t h services a n d interest, b u t t h e y have
been unable to maintain their pre-1933 proportion
of bankers' d e m a n d balances.
Business Demand Deposits. C h e c k i n g is an
efficient means of paying bills w h i l e maintaining
c o n t r o l over cash receipts and disbursements.
Since c o m m e r c i a l banks until recently e n j o y e d a
m o n o p o l y o v e r t h i s service, it m i g h t a p p e a r t h a t a
legally e n f o r c e d p r o h i b i t i o n against paying dem a n d d e p o s i t interest w o u l d benefit banks a n d
hurt business depositors. But many banks c o u l d
profit f r o m attracting business d e p o s i t balances.
As means of c o m p e t i n g for these deposits, t h e y
have alternatives t o explicit interest payments,
a m o n g w h i c h are " f r e e " b a n k i n g services, loan
c o m m i t m e n t s , and lower interest on loans. Indeed, even w h e n banks w e r e p e r m i t t e d t o pay
interest on d e m a n d deposits, depositors w i t h
smaller balances were compensated with services.
At least t w o banking practices can be traced to
t h e p r o h i b i t i o n of interest on business d e m a n d
deposits. O n e is the practice of requiring compensating balances; that is, customers w h o are granted
a line of credit must keep a specified percentage
o n deposit at t h e bank. Several writers (such as
J a c k G u t t e n t a g a n d Richard G. Davis, 1961) have
s h o w n that, if t h e c o m p e n s a t i n g balances w e r e
funds that t h e customer w o u l d not have k e p t on
deposit e x c e p t for t h e requirement, b o t h t h e
O C T O B E R 1984, E C O N O M I C
REVIEW
bank and t h e c u s t o m e r w o u l d be better off if
additional interest or a fee was substituted for
t h e funds. This conclusion is reasonable because
t h e bank must h o l d part of t h e c o m p e n s a t i n g
balance in non-interest-bearing reserves, a n d so
t h e c u s t o m e r gives up m o r e than t h e bank can
lend. As David W . Mullins, Jr. (1976) and others
have shown, however, the compensating balance
r e q u i r e m e n t may be rational if t h e customer
w o u l d have k e p t t h e funds at t h e bank either to
pay for services r e n d e r e d or in response t o an
explicit payment. O n e such p a y m e n t is a contract
t o borrow funds at the customer's option, perhaps
at a favorable rate, in t h e f o r m of a guaranteed
line of credit The compensating balance requirement, then, is a means by w h i c h t h e bank can
enforce this contract. Surveys of compensating
balance r e q u i r e m e n t s c o n f i r m that t h e practice
may be logical, since t h e y s h o w t h e following: (1)
t h e r e q u i r e m e n t s are most c o m m o n l y used w i t h
large, national firms that have accounts in many
banks, f o r t h e s e firms c o u l d readily transferfunds
in t h e absence of an agreement; (2) t h e requirements are stated in terms of average d e m a n d
deposits, w h i c h imposes no b u r d e n o n a firm that
w o u l d otherwise maintain w o r k i n g balances; (3)
t h e y t e n d t o be n e g o t i a t e d rather than set
uniformly; a n d (4) t h e c o m p e n s a t i n g balance
requirements are e n f o r c e d m o r e strictly w h e n
interest rates are high. 13 Furthermore, c o m p e n sating balance requirements w e r e rarely used
prior t o t h e p r o h i b i t i o n of interest payments on
d e m a n d deposits.
The prime rate convention is the second practice
that appears t o o w e its existence t o t h e Banking
Act of 1933. M u r r a y E. Polakoff a n d Morris Budin
(1973) state that the p r i m e rate was not introd u c e d until 1934. They ascribe its emergence t o
t h e t h e n current belief that " e c o n o m i c recovery
lay in the fixing and m a i n t e n a n c e of m i n i m u m
prices," as e x e m p l i f i e d by t h e National Industrial
Recovery Act of 1933. 1 4 The rate was set at 1.5
percent until 1947, after w h i c h it f l u c t u a t e d in
steps that roughly f o l l o w e d market rate changes.
The steps w e r e a n n o u n c e d by o n e of t h e moneycenter banks until 1971, w h e n t h e First National
City Bank of N e w York ( n o w Citibank) introduced
t h e floating prime. T h o u g h t h e rate has been
described as that o b t a i n e d by a bank's most
c r e d i t w o r t h y customers, Polakoff a n d Budin
clearly are correct in i d e n t i f y i n g it as a cartel-like
m i n i m u m price. H o w e v e r , other than p o i n t i n g t o
contemporaneous price-fixing arrangements, they
do not consider w h y the prime came into existence
FEDERAL RESERVE B A N K O F A T L A N T A
in 1934 r a t h e r t h a n before or w h y it lasted so long
after t h e Depression. M y study suggests that t h e
legal p r o h i b i t i o n of interest o n d e m a n d deposits
was t h e reason t h e rate d e v e l o p e d a n d persisted.
Even for many years after t h e Depression, t h e
" b e s t " customers had l i m i t e d alternatives t o t h e
relatively f e w large banks that c o u l d m e e t their
b o r r o w i n g a n d f u n d transfer requirements. For
these customers t h e large banks established a
m i n i m u m loan rate, t h e prime, t o restrict c o m p e t i t i o n a m o n g themselves a n d take advantage of
t h e p r o h i b i t i o n of interest on d e m a n d deposits.
Warren T. Trepata (1981) d o c u m e n t s that as
rates on alternative uses of funds increased,
the banks' customers and others found it worthw h i l e t o d e v e l o p alternatives that eventually
e r o d e d t h e p r i m e rate's benefit to banks.
Commercial paper is one important alternative
t o bank loans. W h i l e this avenue for funds
existed before 1933, its g r o w t h seems t o o w e
m u c h t o t h e p r o h i b i t i o n against interest o n
d e m a n d deposits. W i t h o u t a constraint on banks'
ability t o pay for deposits, a n d w i t h o u t a tax o n
d e p o s i t e d funds in t h e form of non-interestbearing required reserves, there is little reason
for companies t o b o r r o w through c o m m e r c i a l
paper or for investors to purchase these obligations
rather than hold deposits. Banks offer borrowers
e c o n o m i e s of scale a n d scope in t h e processing
of information that investors d e m a n d . A l t h o u g h
investors' information-processing costs are low
for w e l l - k n o w n companies w i t h little default risk,
investors experience no disadvantage from using
banks' services unless banks are u n w i l l i n g or
unable t o price these services competitively. The
p r i m e rate represents an effort by banks at
n o n c o m p e t i t i v e pricing. However, as long as t h e
p r i m e is close t o the rate that borrowers w o u l d
have t o pay o n c o m m e r c i a l paper, t h e banks can
keep most of their customers.
In fact, Polakoff and Budin show p r i m e rates
being above t h e four- to six-month c o m m e r c i a l
paper rate by a b o u t 50 basis points ( h u n d r e d t h s
of a percent) from 1947 through 1960, d u r i n g
w h i c h period t h e p r i m e rose from a b o u t 2 t o 5
p e r c e n t Until 1 9 6 0 virtually no nonfinancial
c o m p a n y c o m m e r c i a l paper was outstanding,
perhaps because the 50 basis p o i n t spread
b e t w e e n t h e c o m m e r c i a l paper rate and t h e
p r i m e lending rate was insufficient to offset t h e
large companies' transactions costs of i n f o r m i n g
potential investors of their risks. 15 Finance companies, on the other hand, could avail themselves of
lower-cost b o r r o w i n g because t h e safety of their
47
assets—portfolios consisting of many loans w i t h
a consistent and verifiable record of r e p a y m e n t c o u l d be c o m m u n i c a t e d readily t o investors.
From 1 9 6 0 through 1965 t h e spread w i d e n e d as
t h e p r i m e was unchanged at 4.5 percent w h i l e
t h e c o m m e r c i a l paper and U.S. Treasury threem o n t h bill rates declined. The spread was a b o u t
150 basis points in 1961. Over this period,
nonfinancial corporations increasingly floated
c o m m e r c i a l paper. Thereafter, o u t s t a n d i n g s
increased almost exponentially, even t h o u g h t h e
spread b e t w e e n t h e p r i m e and t h e c o m m e r c i a l
paper rates narrowed, until by 1 9 6 6 a n d t h r o u g h
June 1977 it was close t o zero. After that date,
t h e spread w i d e n e d to b e t w e e n 125 a n d 150
basis points.
This pattern can be e x p l a i n e d by considering
t h e o p p o r t u n i t y cost of funds (as measured by
t h e U.S. Treasury t h r e e - m o n t h bill rate) together
w i t h information costs to borrowers and investors.
The considerably increased spread in 1961 was
paralleled by a 224 basis p o i n t r e d u c t i o n in t h e
treasury bill rate from D e c e m b e r 1 9 6 0 t o Dec e m b e r 1961. Until a b o u t 1968 t h e bill rate was
b e l o w 5 percent. A t that level, banks are able t o
offer large depositors services that c o m p e n s a t e
t h e m for their deposits. Additionally, t h e tax o n
non-interest-bearing reserves is not so great as t o
put banks at a serious c o m p e t i t i v e disadvantage
w i t h alternative investments. Hence, w h i l e there
may have been a d e m a n d by borrowers f o r f u n d s
via c o m m e r c i a l paper, t h e additional yield t o
investors f r o m m o v i n g their funds f r o m bank
deposits apparently was insufficient t o reward
t h e m for learning a b o u t c o m m e r c i a l paper. This
may explain w h y there was little relationship
b e t w e e n t h e bill rate and t h e ratio of c o m m e r c i a l
paper t o bank loans. 16 The c o m m e r c i a l paper t o
bank loans ratio increased after 1968 w h e n t h e
opportunity value of funds had increased beyond
the level where banks could sufficiently compensate depositors w i t h non-interest rewards. From
that point, as Chart 2 indicates, w h e n m u c h of
t h e i n f o r m a t i o n cost a b o u t nonfinancial commercial paper became a " s u n k " or irreversible
cost, until t h e present, t h e relative a m o u n t of
c o m m e r c i a l paper appears t o be a f u n c t i o n
primarily of the o p p o r t u n i t y value of funds. 1 '
Banks' legal inability to compensate depositors
sufficiently has inspired a n u m b e r of other alternatives. These include t h e growing use of
bankers' acceptances t h a t are not held by t h e
a c c e p t i n g bank. In effect, t h e bank takes a
48
Chart 2. Commercial Paper of Nonfinancial Corporations
as a Percent of Banks' Business Loans
deposit and makes a loan, b u t does not b o o k
either, t h e r e b y avoiding reserve r e q u i r e m e n t s
a n d interest-rate controls. 1 8 Bankers also are
serving increasingly as brokers for direct placement loans and commercial paper. These activities
have been challenged by i n v e s t m e n t bankers,
w h o charge that c o m m e r c i a l banks are violating
t h e Glass-Steagall provisions of t h e Banking Act
of 1933 t h a t m a n d a t e separation of c o m m e r c i a l
and i n v e s t m e n t banking. Security brokers, however, have o f f e r e d their services t o corporations
in l e n d i n g and i n v e s t m e n t activities that banks
w o u l d have handled, w e r e it not for t h e legal
constraints of deposit interest p r o h i b i t i o n and
required reserves. N o t surprisingly, as t h e o p p o r tunity value of funds has increased, these activities
have likewise Moreover, they have been enhanced
by steady reductions in transactions costs as
c o m p u t e r t e c h n o l o g y has c o n t i n u e d t o improve.
These extensive cash m a n a g e m e n t activities
of corporate depositors are perhaps t h e most
i m p o r t a n t c o n s e q u e n c e of banks' inability to
compensate depositors for the opportunity value
of their funds. Evidence of this familiar phen o m e n o n is t h e percentage of corporate liquid
assets ( d e m a n d deposits, currency, time deposits,
U.S. government securities, short-term municipal
securities, a n d other o p e n market paper) held in
t h e f o r m of d e m a n d deposits. This ratio has
decreased from 54.4 percent in 1953 t o 34.9
percent in 1982 (see Chart 3)..
O C T O B E R 1984, E C O N O M I C
REVIEW
Chart 3. Cash Balances as a Percent of Liquid Assets
and Treasury Bill Rates
Percent
Source: Bill rate: Federal Reserve Bulletin Cash balances: Federal Reserve,
Flow of Funds; Sector Statements of Assets and Liabilities.
Household Demand Deposits. Before 1933
banks generally d i d n o t pay interest on d e m a n d
deposits. Thus it is d o u b t f u l that t h e y w o u l d have
paid interest o n t h e d e m a n d deposits of households until t h e market value of funds reached the
levels of t h e late 1970s. Ironically, banks can pay
interest o n h o u s e h o l d c h e c k i n g accounts by
labeling t h e m as savings accounts subject t o
negotiable orders of w i t h d r a w a l ( N O W ) . This
i n n o v a t i o n was created by a savings banker as a
means of offering check services to consumers,
since only c o m m e r c i a l banks c o u l d accept dem a n d deposits. T h o u g h t h e c o n c e p t was initially
disapproved, t h e adverse ruling was o v e r t u r n e d
by t h e Massachusetts Supreme Court in 1972.
Federal legislation l i m i t e d N O W accounts to t h e
N e w England states, N e w York, a n d N e w Jersey
until t h e Depository Institutions Deregulation
and M o n e t a r y C o n t r o l Act of 1 9 8 0 e x t e n d e d
a u t h o r i t y t o issue N O W s t o all depository institutions. 1 9 The Carn-St Germain Depository Institutions Act of 1982 permits banks a n d thrifts to
offer m o n e y market d e p o s i t accounts ( M M DAs)
that pay depositors an unregulated interest rate
on balances over $2,500, b u t limits transfers t o
six a m o n t h . S u p e r - N O W accounts, a u t h o r i z e d
in January 1983, allow depositors t o w r i t e as
many checks as t h e y wish, b u t require reserves,
which reduces the interest depository institutions
are willing t o offer. These accounts can be
o f f e r e d only t o nonbusiness consumers. 2 0
F E D E R A L RESERVE B A N K O F A T L A N T A
Since interest on h o u s e h o l d d e m a n d deposits
essentially is n o t controlled, banks' experience
w i t h them can indicate the probable effect of
allowing interest p a y m e n t s on other d e m a n d
deposits. Indeed, that experience is likely t o
overstate t h e adverse effect of d e c o n t r o l on
banks' net profits, since households have fewer
means of o b t a i n i n g market interest rates on
transactions balances than do corporations. Those
w h o o p p o s e d p a y m e n t of interest o n checking
accounts feared that bank profits w o u l d suffer
a n d that thrifts w o u l d have t o raise mortgage
rates to c o m p e n s a t e for higher expenses. The
many studies of " t h e N O W e x p e r i e n c e " show
that profits initially declined s o m e w h a t but not
nearly enough t o threaten t h e institutions' existence. 2 1 Indeed, the profit reductions are better
characterized as market entry costs than as
losses. Those institutions offering N O W accounts
also e x p e r i e n c e d significantly greater deposit
and asset growth than did comparable institutions
not offering such accounts, and the thrifts increased
their mortgage loans outstanding. 2 2
Furthermore, it appears that the interest-bearing N O W accounts are no more costly t o banks
than regular c h e c k i n g or savings accounts. H e r b
Taylor (1984) used the Federal Reseive's Functional Cost Analysis Program data for mernber.banks
n a t i o n w i d e for t h e years 1 9 7 6 t h r o u g h 1982 t o
estimate t h e average rates of return paid o n
h o u s e h o l d N O W , regular checking, and savings
accounts. H e i n c l u d e d i m p l i c i t interest, in t h e
form of t h e expense of services less service
charges, plus explicit interest paid on N O W and
savings accounts. The calculated total return for
t h e seven years averaged 6.89 percent for N O W
accounts, 5.42 percent for regular c h e c k i n g accounts, and 6.75 percent for savings accounts.
A l t h o u g h t h e N O W a n d regular c h e c k i n g accounts have a b o u t t h e same activity a n d hence
a b o u t t h e same operating cost per account,
TayloKs analysis f o u n d t h e average balance of
t h e N O W account was larger by almost e n o u g h
t o offset t h e average 4.95 percent interest paid.
The lesser activity, a n d hence operating cost, of
t h e average savings account also was offet by a
smaller balance. Thus, as e c o n o m i c t h e o r y predicts, banks a n d their h o u s e h o l d customers have
a d a p t e d successfully t o t h e p a y m e n t of explicit
interest on d e m a n d deposits t o t h e degree that
returns to different types of accounts are approximately t h e same.
49
W h i l e t h e availability of N O W accounts may
encourage households t o keep larger cash balances, data for t h e past 30 years indicate a
pattern of relative decrease in balances that
mirrors t h e pattern for corporations. T h e percentage of d e m a n d deposits a n d currency t o
total l i q u i d asets for households d e c l i n e d f r o m
28.5 percent in 1953 t o 13.0 percent in 1982
(see Chart 3).
Time and Savings Deposits. Regulation Q ceilings
on savings and time deposit rates have benefited
banks in t h e short run, but appear t o have hurt
savers by an even greater a m o u n t . Banks a n d
thrifts b e n e f i t e d f r o m those savers who,because
t h e y valued c o n v e n i e n c e a n d deposit insurance
or w e r e unfamiliar w i t h alternatives, d i d not shift
their funds to higher yielding investments. Hence,
w h e n Reg Q was e x t e n d e d t o thrifts in 1966,
they w e r e able t o retain t h e smaller-balance
depositors despite t h e difference b e t w e e n t h e
average U.S. Treasury t h r e e - m o n t h bill rate of 5.1
percent and t h e Reg Q ceiling savings deposit
rate of 4 percent. Subsequent increases in t h e
Reg Q ceiling for t i m e deposits t o 5.5 percent
also h e l p e d stem t h e f l o w of funds away from
thrifts. H o w e v e r , thrifts' d e p o s i t g r o w t h rate
decreased markedly, f r o m 8 percent in 1965 t o 2
p e r c e n t in 1 9 6 6 , w h i c h c u r t a i l e d m o r t g a g e
lending sharply. 2 3
In 1969-70 depository institutions experienced
" d i s i n t e r m e d i a t i o n ; " that is, their role as an
intermediary in t h e channeling of funds was
lessened as savers sought direct routes. Yields on
t h r e e - m o n t h treasury bills rose t o above 5 perc e n t in 1968, reaching 6 percent in D e c e m b e r
1968 and 7.8 percent in D e c e m b e r 1 9 6 9 ; by
D e c e m b e r 1 9 7 0 t h e y had d e c l i n e d t o t h e Reg Q
ceiling o n bank savings deposits of 4.75 p e r c e n t
D i s i n t e r m e d i a t i o n was partly s t e m m e d w h e n , in
February 1970, t h e U.S. Treasury increased t h e
m i n i m u m purchase of bills from $1,000 to $10,000,
t o the obvious detriment of small savers. Depositors
w i t h large balances, however, c o u l d channel
their funds t o alternative investments. C o m mercial banks in effect paid t h e market interest
rate on these large depositors' funds. By February
1970 bank holding companies had issued some
$4.6 billion of c o m m e r c i a l paper. An additional
$8 billion was b o r r o w e d f r o m n o n b a n k sources
by means of federal funds and repurchase sales
of securities (RPs).
A sharper period of disintermediation occurred in
1973-74, w h e n the three-month treasury bill rate
50
e x c e e d e d 5 percent in D e c e m b e r 1972, increased to 9 percent in August 1974, and declined
again t o a b o u t 5 percent in January 1976. The
Reg Q ceiling o n savings was raised f r o m 4.5 t o 5
percent in July 1973, and interest rate ceilings o n
certificates of d e p o s i t above $ 1 0 0 , 0 0 0 w e r e
entirely suspended in M a y 1973. W h e n t h e Reg
Q ceiling was b e l o w t h e market rate a n d for a
year thereafter, banks and thrifts experienced
sharply lower g r o w t h rates in t i m e a n d savings
deposits. Mortgages written also declined sharply
through mid-1975.
M o n e y market m u t u a l funds ( M M M F s ) began
to attract savers' funds at this time. Their balances
w e r e $1.7 billion at year e n d 1 9 7 4 b u t grew only
t o $3.7 billion in 1 9 7 6 and 1 9 7 7 as market
interest rates d e c l i n e d t o t h e Reg Q level. H o w ever, w h e n t h e t h r e ^ m o n t h treasury bill rate
increased again t o 6 percent in S e p t e m b e r 1977
and c o n t i n u e d t o c l i m b almost c o n t i n u o u s l y t o
15.5 percent in August 1981, the M M M F balances
increased t r e m e n d o u s l y . They reached $10.8
billion at year e n d 1978, $45.2 billion in 1979,
$74.5 billion in 1980, $181.9 billion in 1 9 8 1 , and
$206.6 billion in 1982. N o t until D e c e m b e r
1982, w h e n d e p o s i t o r y institutions c o u l d offer
M M D A s at a market rate of interest, d i d t h e
assets of M M M F s decline. As aggregate M M D A
balances w e n t f r o m zero t o $375 billion in 1983,
M M M F assets d r o p p e d by $66 billions.
The brief chronology of interest rate changes
and disintermediation, together w i t h some additional facts, shows first that t h e Reg Q ceilings,
w h e n s u p p l e m e n t e d by other constraints on
disintermediation, have given d e p o s i t o r y institutions t e m p o r a r y relief f r o m market pressures.
However, these benefits w e r e dissipated w i t h
t h e d e v e l o p m e n t of other instruments, particularly M M M F s a n d brokers' cash m a n a g e m e n t
accounts, that paid depositors a rate close t o a
market return o n their funds. Second, w h i l e the
housing market m i g h t have b e n e f i t e d f r o m Reg
Q ceilings that restrained disintermediation away
from mortgage makers, t h e market was damaged
by considerable declines in mortgage lending
w h e n sharp market interest rate increases eroded
t h e ability of thrifts and banks t o h o l d depositors'
funds. As John T. Boorman a n d M a n f e r d O.
Peterson (1973) show, t h e Reg Q constraints
exacerbated t h e cyclical swings in housing construction and sales. Third, t h e interest rate ceilings
i m p o s e d o n chartered financial institutions led
t o t h e d e v e l o p m e n t of other institutions and
O C T O B E R 1984, E C O N O M I C
REVIEW
market instruments that n o w c o m p e t e for savers'
funds.
Though Reg Q initially helped chartered financial institutions, many of the benefits were
dissipated through nonprice competition. The
convenience p r o v i d e d by branches is an important attraction banks have employed in the
c o m p e t i t i o n for deposits. The consequence has
been greater operating expenses as is reported
for commercial banks by Lawrence J. W h i t e
(1976) and for mutual savings banks by Robert
Taggart (1978). In a study of savings and loans
associations, Lewis Spellman f o u n d that about
half t h e increases in net revenues from interest
rate ceilings are expended in implicit rate competition. Furthermore, as he points o u t while"[sJome
techniques, such as advertising and the provision of
goods and financial services, can be adjusted
easily each year. . . , [oJther capital intensive
techniques, such as branching, parking or drivein facilities cannot be as quickly adjusted if
current rate spreads change!,J but once in place
b e c o m e part of t h e fixed cost structure." 2 5
On the other hand, implicit payment of interest
for deposits has been found to decrease depository institutions' risk, measured as the coefficient
of variation of net income (the variance of net
income over time divided by average net income).
John J. M i n g o (1978) regressed this measure of
risk on a n u m b e r of variables, including the ratio
of interest to total expenses, for a sample of
1,866 banks over the years 1961 -72. He concluded
that " [ t ] h e results of the regression provide
support for the view that reliance on nonprice
means of competing for deposit funds can increase
bank risk (i.e. t h e regression coefficient for t h e
interest expense variable is negative and significant at the 0.01 level)." 2 6 Michael F. Koehn and
Bruce S. Stangle (1980) extended Mingo's study
by regressing t h e systematic risk of the banks'
shares (measured with t h e capital asset pricing
m o d e l f o r a s a m p l e o f 110 banks) on a n u m b e r o f
variables, including the ratio of interest expense
to total operating expense. They report a coefficient for this variable that is strongly insignificant
(not different from zero), w h i c h indicates that
investors d o not regard interest payments as
increasing the riskiness of bank stocks. Thus
Koehn and Stangle c o n c l u d e d t h a t " [ r ] e m o v a l of
such [Reg Q] ceilings w o u l d not affect the
stockholders of these institutions and may reduce
t h e chance of technical bankruptcy defined by
the regulators." 27
F E D E R A L RESERVE B A N K O F A T L A N T A
Whereas t h e regulated depository institutions
may not have benefited fully—or, in some important aspects, even at all—from the Reg Q ceiling,
savers certainly lost. They were poorer (gross of
taxes) by the difference b e t w e e n the interest
they w o u l d have received had there been no
Reg Q and t h e a m o u n t they were paid plus the
value to t h e m of nonprice c o m p e t i t i o n (for
example branches and gifts) for their funds. As in
any constrained situation, the cost of nonprice
c o m p e t i t i o n to the financial institutions is almost
always greater than its value to consumers. 2 8
Monetary Control. The prohibition of interest
payments on d e m a n d deposits and, to a lesser
extent, t h e Reg Q ceiling on savings and t i m e
deposits have detracted from the Federal R e
serve's ability to control the m o n e y supply. The
most detrimental effect has been on the velocity
of deposit money: its level has increased while
its stability has fallen. ("Velocity" is a measure of
t h e relationship b e t w e e n money and spending:
An increase in velocity means that money changes
hands more frequently.) Since depository institutions are not p e r m i t t e d t o pay market rates on
deposits, depositors have incentives to seek
more efficient uses for balances as interest rates
rise. Consequently, the velocity of deposits is
heightened. Furthermore, both depositors and
nonbank suppliers of financial services also have
incentives to develop and substitute alternative
means of effecting transactions and investing
funds, w h i c h in turn boosts velocity. M a n y of
these changes are predictable, and so could be
offset by t h e Federal Reserve through its o p e n
market operations. But the increase in velocity
expands the extent to w h i c h changes in the
monetary base (reserves plus currency outside
of banks) bear on the effective m o n e y supply
(monetary base times money multiplier). Ultimately, therefore, the velocity increase has a
direct impact on t h e e c o n o m y as reflected in
nominal G N P ( t h e m o n e y supply times velocity).
Small changes in the variables the Fed can and
cannot directly affect (such as bank reserves and
currency) have a greater effect on the variables it
wishes to affect (including the price level and
real income).
Constraints on interest payments tend to make
velocity unpredictable, for t w o reasons. First,
w h e n market interest rates change, depository
institutions cannot react as quickly w i t h noninterest rewards as they could w i t h direct interest
payments. D e p e n d i n g on the transactions costs
51
t h e y face, depositors switch their funds t o alternative investments, w i t h t h e resulting change in
velocity. Second, it is difficult for t h e Federal
Reserve to forecast the development and success
of many particular financial innovations. For example, the money market deposit accounts
( M M D A s ) i n t r o d u c e d in D e c e m b e r 1982 a n d
January 1983 had an e n o r m o u s a n d almost
instantaneous positive effect o n bank and thrift
deposits, b u t S u p e r - N O W accounts garnered a
relatively small a m o u n t of funds. 2 9 If t h e m o n e y
s u p p l y w e r e m e a s u r e d as M l (transactions
accounts, excluding M M D A s but including SuperN O W s ) a n d S u p e r - N O W s rather than M M D A s
had been favored by depositors, velocity w o u l d
have decreased sharply. Since M M D A s w e r e
favored, M l velocity was unchanged, unless t h e
funds came f r o m regular d e m a n d depositors or
N O W accounts. But if M 2 ( M l plus passbook
savings accounts, small d e n o m i n a t i o n t i m e
deposits, overnight Eurodollar balances and repurchase agreements, M M D A s , a n d M M M F s ) w e r e
t h e m o n e t a r y aggregate of interest, measured
velocity w o u l d have decreased sharply. W h i l e
t h e preferred d e f i n i t i o n of m o n e y is debatable, it
seems clear that financial innovations and changes
a m o n g deposits and m o n e y substitutes make
t h e Fed's j o b m o r e difficult.
A useful analysis of t h e d e t r i m e n t a l effects on
t h e e c o n o m y of interest rate controls a n d other
regulatory strictures is provided by Donald Jacobs
and Almarin Phillips (1983), w h o were co-directors
of t h e 1 9 7 0 - 7 1 Presidential C o m m i s s i o n o n
Financial Structure and Regulation (the H u n t
Commission). They show that, as a c o n s e q u e n c e
of c o n t i n u e d deposit interest rate controls, deposit t u r n o v e r rates rose substantially, w h i c h
f u e l e d financial instability. In particular, t h e y
report that " i n N e w York City t h e t u r n o v e r rates
o n d e m a n d deposits rose f r o m a b o u t 150
times per year in 1 9 7 0 t o almost 250 times per
year in 1973 a n d — w i t h t h e large post-1977
increase in interest rates—to over 1,200 per
year by 1 9 8 2 . " 3 0 The authors list ways that
p e o p l e c o n t r i v e d t o use funds m o r e efficiently,
such as m o r e extensive use of t h e federal funds
market a n d Eurodollar borrowings, greater use
of overnight a n d t e r m repurchase agreements
and bankers' acceptances, and shifts of deposits
f r o m higher t o lower reserve accounts. They
conclude: "As a c o n s e q u e n c e of many of these
changes, default risk and interest rate risk
increased. In particular, default risk a n d t h e risk
52
of technologically related transaction breakd o w n s rose t r e m e n d o u s l y for t h e c o m m e r c i a l
banks at t h e center of t h e transaction process." 3 1
Removing Deposit Interest Rate Ceilings
and Other Controls
The Positive Effects. From t h e history and
analysis s k e t c h e d above, it seems clear that most
banks and their customers w o u l d benefit if all
controls o n d e m a n d a n d t i m e deposit interest
w e r e removed. If p e r m i t t e d t o pay interest on
deposits, banks could offer people and companies
an efficient vehicle for making fund transfers and
investments. Banks c o u l d gain e c o n o m i e s of
scale in funds m a n a g e m e n t by h a n d l i n g m o r e
deposits a n d loans t o achieve a smaller and less
variable net cash balance. Banks' expertise in
investing or borrowing the balance is an important
c o m p a r a t i v e advantage, as are their e c o n o m i e s
of scale and scope in acquiring a n d interpreting
information about borrowers, and in administering
monitoring, a n d collecting d e b t a n d other investments. Hence, banks should be able t o offer
many customers a m o r e desirable alternative t o
direct i n v e s t m e n t a n d other means of transferring funds a n d claims over assets. 32 In the
absence of restrictive regulations such as interest
rate controls, and special taxes such as noninterest-bearing r e q u i r e d reserves, banks thus
should be able t o offer significant c o m p e t i t i o n t o
most other suppliers of financial services. A n d
since many banks c o m p e t e in almost all markets,
customers should benefit from banks' comparative
advantages.
The Negative Effects. Evidence f r o m t h e period
prior t o interest-rate controls (essentially, before
1933) offers no s u p p o r t f o r t h e belief that uncont r o l l e d interest rates help cause bank failures.
Q u i t e t h e contrary was f o u n d : unlike alternative
means of o b t a i n i n g deposits, interest payments
seem t o provide banks w i t h t h e flexibility to
decrease e x p e n d i t u r e s w h e n necessary. Furthermore, Reg Q ceilings have m a d e t h e f l o w of
mortgage m o n e y more erratic, since t h e ceilings
encourage disintermediation. Finally, interest rate
constraints have m a d e it m o r e difficult for t h e
Federal Reserve t o c o n t r o l t h e effective m o n e y
supply.
However, federal deposit insurance has been
i n t r o d u c e d since t h e pre-control period, w h i c h
profoundly changes t h e situation. N o w depositors
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w h o have $ 1 0 0 , 0 0 0 or less in any account need
n o t be c o n c e r n e d w i t h t h e failure of a depository
institution. Until recently most depositors, no
matter w h a t their balances, have been p r o t e c t e d
by the insuring agencies' policy of merging almost
all failing institutions into healthy ones. Consequently, many depositors have had no incentive
to m o n i t o r their institution's activities. Because
d e p o s i t insurance is n o t p r i c e d directly t o reflect
t h e risk t o t h e FDIC or t h e FSLIC, bankers
generally have additional incentives t o take risks
they otherwise w o u l d avoid. A few opportunistic or
desperate bankers might take great risks or
engage in fraud on t h e theory, " h e a d s I win, tails
t h e g o v e r n m e n t loses." 33 W e r e d e p o s i t rate
controls r e m o v e d altogether, these bankers a n d
others c o u l d offer interest e x c e e d i n g t h e market
rate for deposits (which, being risk-free t o depositors, should grow rapidly). Bankers c o u l d
invest t h e funds in ventures in w h i c h risk was
very great.
The risk incentives of t h e current insurance
system, then, suggest that w e need a m e t h o d
for l i m i t i n g t h e interest that banks can pay o n
deposits. But w e might ask if that n e e d is
particularly c o m p e l l i n g in light of t h e past
success of b a n k regulation in l i m i t i n g b a n k
failures.
Supervision a n d field e x a m i n a t i o n is t h e
principal m e t h o d used by federal a n d state
deposit insurance agencies to control excessive
risk-taking, a n d this close m o n i t o r i n g has b e e n
quite effective. In fact, during b o t h t h e mid1800s and early 1900s, t h e state-run deposit
insurance funds in states that d i d not e m p l o y
strong supervision generally failed as unscrupulous operators e x p l o i t e d t h e public's belief
that their funds w e r e guaranteed safe. 34
W h y does this m e t h o d , w h i c h has w o r k e d so
well for almost 50 years o n the federal level
and before that o n t h e state level, n o w appear
t o be insufficient? The answer is that t w o
essential changes have taken place in t h e
financial e n v i r o n m e n t , o n e of w h i c h is t h e
increase in insurance coverage t o $ 1 0 0 , 0 0 0
per a c c o u n t This increase was i n t r o d u c e d as
i m p r o v e d c o m p u t e r e q u i p m e n t m a d e it inexpensive for depositors and their agents t o
break d o w n a n d distribute deposits in fullyinsured $ 1 0 0 , 0 0 0 increments and, thus, invest
almost any a m o u n t w i t h o u t risk. The other
change is t h e r e d u c e d capital i n v e s t m e n t in
banks by shareholders and managers, w h i c h
FEDERAL RESERVE B A N K O F A T L A N T A
decreases t h e e x p e c t e d loss f r o m risk-taking.
C o m m e r c i a l banks' capital decreased w h e n
inflation-driven high n o m i n a l interest rates,
interest rate regulation, a n d m o r e efficient
t e c h n o l o g y c o m b i n e d t o encourage nonchartered, nonregulated companies t o enter banking.
Their entry r e d u c e d t h e e c o n o m i c value of t h e
banks' charters, and hence t h e shareholders'
capital investments. In t h e late 1970s a n d
1980s, thrift institutions' capital was reduced,
and in many cases eliminated, by the unexpected
surge in interest rates that l o w e r e d t h e value of
their long-term assets (mortgages) m o r e t h a n
t h e value of their liabilities (largely short-term
savings and time deposits). Consequently, many
bankers t o d a y have greater incentives a n d
greater o p p o r t u n i t i e s t o take excessive risks.
A l t h o u g h better surveillance by the banking
authorities is a desirable response t o this situation, it is d o u b t f u l that it will be sufficient
since depositors' m o t i v a t i o n t o m o n i t o r banks
has been d i m i n i s h e d along w i t h an increase in
banks' leverage. 35
Proposed reforms in deposit insurance are
unlikely t o reduce substantially t h e n e e d for
some limit on deposit interest a n d / o r d e p o s i t
insurance. Charging bankers risk-related deposit
insurance p r e m i u m s has b e e n suggested for
years by academics a n d has been p r o p o s e d by
b o t h t h e FDIC and t h e FSLIC.36 This reform has
t h e advantage of charging bankers for t h e risks
t h e y take. However, t h e idea has f o u n d e r e d
because t h e relevant risks cannot be measured
actuarially a n d because risk-related insurance
premiums w o u l d not deter a banker w h o wanted
to take dangerous risks. 37
Privately^supplied deposit insurance also has
been proposed. 3 8 Despite this plan's merits, it
cannot be i m p l e m e n t e d as long as t h e federal
g o v e r n m e n t essentially provides 100 percent
insurance, since the guarantee of the U.S. governm e n t d o m i n a t e s all others.
Finally, greater investments by shareholders
and uninsured creditors w o u l d decrease their
incentives t o " b e t t h e bank." ( M u t u a l s c o u l d
be required t o sell uninsured debentures. 3 9 )
This proposal has the additional advantage of
revealing the stock and bond markets' evaluation
of t h e issuing bank, i n f o r m a t i o n that can be of
value t o t h e supervisory authorities. Unfortunately, one doubts if depository institutions w o u l d
be able to achieve a sufficiently high proportion
of actually uninsured liabilities.
53
In summary, w h i l e some of these proposals
can help alleviate t h e difficulties w i t h deposit
insurance, t h e y are n o t likely t o alter t h e basic
problem, namely, t h e incentive and opportunity
for banks t o exploit t h e fact that depositors are
essentially u n c o n c e r n e d a b o u t t h e failure of
their bank. This is particularly true for o p p o r t u nistic or desperate bankers, o n w h o m most of
t h e reform proposals w o u l d have little effect.
Therefore, I suggest t h e f o l l o w i n g three proposals. First, since t i m e - d a t e d deposits are not
subject t o instant w i t h d r a w a l s except w i t h a
considerable penalty, t h e y need n o t be fully
insured. Limiting de facto government insurance
to, say, $40,000 person w o u l d prevent investors
w i t h large sums f r o m investing free of risk of
m o n i t o r i n g b a n k performance. Furthermore, it
w o u l d encourage risk-taking by bankers a n d
make it m o r e difficult for t h e m t o defraud t h e
insurance fund. 4 0
The second proposal is that interest o n t i m e
deposits above a m u c h smaller a m o u n t w o u l d
not be c o v e r e d by g o v e r n m e n t insurance. Thus
a depositor need not fear losing principal b u t
w o u l d have some concern a b o u t t h e perform a n c e of t h e bank. This change w o u l d make it
difficult to acquire large sums by offering above
market rates if depositors have reason t o fear
that higher risk a c c o m p a n i e d t h e higher rates.
W i t h these reforms in place, c o n t r o l of t h e
interest rate that banks can offer time depositors
w o u l d be unnecessary. Those w h o respond t o
higher rates w o u l d have reason to be concerned
a b o u t their funds.
However, it is neither desirable nor feasible to
insure d e m a n d d e p o s i t s o n l y partly, since
depositors w i t h uninsured balances w o u l d have
cause to remove their funds at t h e first r u m o r of
failure. These depositors, therefore, w o u l d need
t o m o n i t o r t h e bank's activities only t o t h e
extent of being able t o o b t a i n i m p o r t a n t negative i n f o r m a t i o n quickly. In any event, d e m a n d
deposits must c o n t i n u e t o be w i t h d r a w a b l e on
d e m a n d ; t h e FDIC was forced t o recognize this
and t o e x t e n d its guarantee t o all deposits
w h e n t h e C o n t i n e n t a l Illinois Bank's uninsured
depositors started t o w i t h d r a w their funds.
Because d e m a n d deposits are virtually fully
insured a n d probably will c o n t i n u e t o be, risktaking bankers can offer a b o v e - m a r k e t interest
rates for risk-free investments simply by labeling
t h e accounts " d e m a n d deposits." The handiness of this ploy dictates t h e necessity for a
t h i r d p r o p o s a l — a n interest rate ceiling o n
54
d e m a n d deposits. But t h e ceiling should n o t
constrain a b a n k offering true transactions
accounts f r o m o f f e r i n g depositors t h e highest
risk-adjusted rate possible. Transactions accounts
yield t h e depositor returns in t h e f o r m of
service, a n d necessarily require a bank t o incur
operations costs. Therefore, t h e ceiling rate
should be no less t h a n t h e market rate for lowrisk funds plus t h e value of t h e transactions
services t o t h e depositor. O n e such ceiling
might be t h e U.S. Treasury 30-day bill rate less
100 basis points. 4 1 T h e depositor c o u l d be
charged for items processed and given credit
for f u n d s d e p o s i t e d at any rate so long as t h e
net return t o t h e customer d i d not e x c e e d the
ceiling. This regulation w o u l d be effective in
preventing o p p o r t u n i s t i c bankers f r o m t a k i n g
advantage of d e p o s i t insurance w h i l e a l l o w i n g
p r u d e n t bankers t o c o m p e t e for transactions
balances.
Summary and Conclusion
Federal controls w e r e i m p o s e d o n deposit
interest rates in t h e early 1930s. Some fear that
removing the prohibition against paying interest
on d e m a n d deposits a n d Regulation Q ceilings
o n t i m e d e p o s i t interest rates w o u l d prove
devastating to t h e b a n k i n g system. Reasoning
that t h e controls w e r e i m p o s e d in response to
t h e severe b a n k i n g crisis of t h e 1930s, they
c o n c l u d e that such c o n d i t i o n s w o u l d recur
w e r e t h e controls removed.
However, several studies show that before
t h e 1930s interest payments o n deposits were
not associated w i t h risky bank investments or
w i t h bank suspensions. N o r w e r e interest payments on bankers' balances linked to the adverse
m o v e m e n t of funds f r o m c o u n t r y t o city banks
and to stock market speculators. Rather, interest
payments provided an efficient means of paying
depositors, i n c l u d i n g c o u n t r y banks, for the
use of their funds.
Indeed, were depository institutions permitted
t o pay interest for deposits a n d w e r e t h e y not
subject t o a special tax in t h e f o r m of r e q u i r e d
noninterest-bearing reserves, t h e y w o u l d be
able t o offer t h e p u b l i c a superb product
D e p o s i t o r y financial institutions possess comparative advantages in information and portfolio
m a n a g e m e n t that generally are o f t e n superior
t o alternatives, such as m o n e y market mutual
funds a n d c o m m e r c i a l paper. Federal controls
OCTOBER 1984, E C O N O M I C
REVIEW
insurance l i m i t a t i o n o n d e m a n d deposits.
Furthermore, o p p o r t u n i s t i c bankers c o u l d take
advantage of a l o o p h o l e that enables t h e m t o
offer above-market interest rates on mislabeled
" d e m a n d deposits." Hence, interest rate ceilings
slightly b e l o w t h e U.S. Treasury bill rate should
be placed on d e m a n d deposits, ceilings designed
so that t h e transactions value of a true d e m a n d
deposit w o u l d make up the difference between
t h e interest rate ceiling and the bill rate. In this
way, t h e control w o u l d be operational o n l y
w h e r e deposits w e r e not really used for transactions. W i t h these changes in place a n d w i t h
special taxes removed, chartered d e p o s i t o r y
institutions c o u l d e m p l o y their inherent comparative advantages for t h e great benefit b o t h
of themselves and t h e nation.
on deposit interest rates, in fact are responsible
for the development of substitutes and banking
practices.
In t h e absence of deposit insurance, interest
rate controls should be removed. But deposit
insurance makes it possible—indeed, likely—
that some bankers will take advantage of depositors' c o n f i d e n c e by engaging in overly risky
or even fraudulent practices. W i t h loss t o t h e
depositors obviated, these bankers c o u l d offer
a return higher than t h e market interest rate t o
attract large sums in deposits. This i m p o r t a n t
concern can be dealt w i t h by l i m i t i n g t h e
m a x i m u m a m o u n t of insured deposits to, say,
no more than $ 1 0 0 , 0 0 0 per person in all
accounts. D e p o s i t o r concern, a n d bank supervision, t h e n w o u l d reduce t h e moral hazard
that accompanies deposit insurance so that
interest rates c o u l d be freed f r o m control. But
fear of bank runs prevents placing such an
(The author is gratetul to H. I rank King ior his considerable intellectual and editorial
contributions to this article.)
NOTES
' S e e G e o r g e J. Benston (1964).
' B r i a n C. Gendreau (1 979, p. 507) reports that "[t]he interest rate paid on
bankers' balances was effectively constant—at approximately 2 percent—
for most of the 1 8 8 5 - 1 9 3 0 period." However, he points out that policymakers (such as Senator Carter Glass) w h o expressed puzzlement at the
c o n s t a n c y " d o not appear to have appreciated that interbank deposits
provided country banks w i t h convenience and services in addition to a 2
percent interest return" (p. 507). In addition, Charles M. Linke (1966, p.
456) reports that " t h e available literature indicates that t h e r e was s o m e
manipulation of interest rates paid via c h a n g e s in service charges '
J
l n his history of deposit interest regulation, Charles M. Linke (1966)
reported that although "the most important argument f o r t h e regulation of
interest on deposits arises from t h e role that deposit interest was t h o u g h t
to have played in causing financial crises, concern during the t w e n t i e t h
century emphasized bankers' balances (pp. 452-53).
J
The conclusions are taken from an analysis in George J. Benston (1964).
' T h e s e a n d the following statistics are from George J. Benston (1973), pp.
22-31
" I n the Rocky Mountain states, 3 4 percent of the banks were suspended;
however, these represented only 2.5 percent of the suspensions nationwide.
'Robert F. Stauffer(1981) finds no significant correlation b e t w e e n failures
in 1930 and 1931 a n d c h a n g e s in c o t t o n a n d agricultural income as a
ratio of personal income in the 11 c o t t o n states, w h i c h indicates that,
unlike the 1920s, the Great Depression was a period of general failures
"The study used semi-annual d a t a See Brian C. Gendreau (1979), p. 511
The coefficients are significant at the .01 level.
••Charles M. Linke (1 966), p 4 6 0 .
'"See George J. B e n s t o n (1979) for a more c o m p l e t e explication.
" C h a r l e s M. Linke (1966), p. 461.
'•'See Robert J. L a w r e n c e a n d Duane Lougee (1970) a n d Robert E Knight
(1976) for surveys of correspondent bank services
'•»See David Wiley Mullins, Jr. (1976) for references to the surveys.
'"Murray E Polakoff a n d Morris Budin (1973), pp. 5-6.
"Ibid., Charts 1 a n d 2.
' " U s e of the ratio of commercial paper to bank business loans removes the
effects of inflation on the apparent growth of nominal balances.
" M u r r a y E Polakoff a n d Morris Budin (1973, p. 14) explain the lack of
growth of nonfinancial commercial paper before 1966 as " t h e result of
rate insensitivity on the part of nonfinancial borrowers at this time or .to
market segmentation w h i c h effectively disbarred many of them from
taking advantage of favorable rate differentials. (In any event], the large
banks w e r e obviously content.' They explain the growth of commercial
paper outstanding after 1966 as a result of t h e " c r e d i t squeezes" of 1 9 6 6
a n d 1 969, w h e n banks did not have funds to lend and borrowers had to
turn to other sources.
'"For an explication of the relevant regulations a n d data on the levels a n d
types of bankers' acceptances, see Jack L. Hervey (1983).
FEDERAL RESERVE B A N K O F A T L A N T A
w
F o r a history of N O W a c c o u n t s a n d an analysis of their impact, see
Federal Reserve Bank of Boston (1981) and Joanna H Frodin a n d
Richard Startz (1982).
' " F o r details of the regulations governing these accounts, see Gillian
Garcia a n d Annie M a c M a h o n (1984).
- " S e e Federal Reserve Bank of Boston (1981), J o a n n a H. Frodin a n d
Richard Startz (1982), a n d references therein.
" A s reported by B. G. Hartzog, Jr. (1 978), w h o studied the experience of 6 0
thrifts in Massachusetts a n d New Hampshire over the period 1972-1975.
" E d w a r d F. McKelvey (1978), p. 28.
" I b i d . , pp. 33-34.
" L e w i s Spellman (1980), p 134
' " J o h n J. M i n g o (1978), p. 3 7 3 Emphasis in the original.
" I b i d . , p. 385.
' " S e e David H. F>yle (1974) for estimates of the cost of Reg Q ceilings to
savers
"Gillian Garcia and Annie McMahon (1984) compute and show graphically
the sharp a n d considerable deviations from trend that occurred
JU
Donald Jacobs a n d Almarin Phillips (1983), p. 2 5 5
-"Ibid, p. 257.
•"For a more c o m p l e t e discussion, see George J. Benston a n d Clifford W
Smith (1976).
JJ
See George J. Benston (1984) for a description of the ways in w h i c h the
deposit insurance fund can be defrauded.
•"•Descriptions and evaluations ot the state deposit guarantee plans may
be f o u n d in George J. Benston (1973), pp. 50-52.
" S u r v e i l l a n c e and early warning systems are described and discussed in
several articles in Economic Review (Federal Reserve Bank of Atlanta),
vol. 6 8 (November 1983)
J
°For concisely stated arguments against a n d for risk-related deposit
insurance premiums, see Paul M. Horvitz (1983) and Paul T Peterson
(1983)
•"Indeed, the maximum differentials proposed by the FDIC a n d FSLIC are
only 4 to 5 a n d 12.5 basis points per dollar of deposits.
" F o r example, the Final Report of the Sixty-Fourth American
Assembly
(1983, p. 7) r e c o m m e n d e d that "|g]overnment insurance, approved
private insurance, or s o m e combination thereof, should be required for
d e m a n d transactions accounts that are fully backed by liquid assets and
for savings a n d time d e p o s i t s "
J
-For an elaboration of this suggestion, see George J. Benston (1976)
40
For a detailed discussion of such proposals see George J. Benston,
Deposit Insurance and Bank Failures' (1983), pp. 4-17.
" ' B a s e d on Functional Cost Analysis data, which includes allocations of
overhead. Herb Taylor (1984, Table 1) reports operating costs on NOW
accounts of no less than 1.9 percent. Large business a c c o u n t s are likely
to have lower per dollar c o s t s
55
REFERENCES
Benston, George J "An Analysis of the Capital Requirements of S&L
Associations," in Change in the Savings and Loan Industry,
Proc e e d i n g s of the S e c o n d Annual Conference, Federal H o m e Loan Bank
of San Francisco, December 1976, pp. 159-66
. Bank Examination. The B u l l e t i n ( N Y U Institute of Finance), nos.
89-90 ( M a y 1973).
"Brokered Deposits and Deposit Insurance Reform," Issues in
Bank Regulation, vol. 7 (Spring 1984), pp. 17-24
Deposit Insurance a n d Bank Failures," Federal Reserve Bank
ot Atlanta Economic Review, vol. 6 8 (March 1983), pp. 4-17
, ed. Financial Services: The Changing Institutions and Government Policy. Englewood Cliffs, N. J.: Prentice-Hall tor the American
Assembly, 1983.
_
. "Interest Payments on D e m a n d Deposits a n d Bank Investment
Behavior," Journal ot Political Economy, vol. 72 (October 1964), pp.
432-49
"Why Did Congress Pass New Financial Services Laws in the
1930s? An Alternative View," Federal Reserve Bank of Atlanta Economic
Review, vol. 67 (April 1982), pp. 7-10.
Benston, George J and Clifford W. Smith, Jr. "A Transactions Cost
Approach to the Theory of Financial Intermediation," Journal ot
Finance, vol. 31 (May 1976), pp. 215-31.
Boorman, John T and Manferd O. Peterson. "Instability of Savings Flows
and Mortgage Lending by Financial Intermediaries," Southern Economic Journal, vol 4 0 (October 1973), pp. 297-312.
Federal Deposit Insurance Corporation. Deposit Insurance in a Changing
Environment: A Report on Deposit Insurance to the Congress from the
Federal Deposit Insurance Corporation. Washington, D. C., 1983.
Federal H o m e Loan Bank Board. Agenda for Reform: A Report on Deposit
Insurance to the Congress from the Federal Home Loan Bank Board
Washington, D C, 1983.
Final Report of the Sixty-Fourth American Assembly on the Future ot
American Financial Services Institutions
New York: Columbia University, 1983.
Frodin, J o a n n a H. a n d Richard Startz. The NOW A c c o u n t Experiment a n d
the D e m a n d for Money," Journal of Banking and Finance, vol. 6 (1982),
pp. 1 79-93.
G a r c i a Gillian a n d Annie McMahon. "Regulatory Innovation: The New
Bank Accounts, Federal Reserve Bank of Chicago Economic Perspectives, vol. 8 (March/April 1984), pp. 12-23.
Gendreau, Brian C. Bankers Balances, D e m a n d Deposit Interest, a n d
Agricultural Credit Before t h e Banking Act of 1933," Journal of Money,
Credit, and Banking, vol. 11 (November 1979), pp. 506-14.
Guttentag, J a c k a n d Richard G. Davis " C o m p e n s a t i n g Balances, Federal
Reserve Bank of New York Monthly Review, vol. 4 3 (December 1961),
pp. 205-10.
Hartzog, B. G., Jr "The Impact of NOW Accounts on S&L Behavior and
Performance, Research Working Paper No. 78, Office of Economic
Research, Federal H o m e Loan Bank Board (March 1978).
Hervey, J a c k L. " B a n k e r s ' A c c e p t a n c e s Revisited, ' Federal
Reserve
Bank of Chicago Economic Perspectives, vol. 7 ( M a y / J u n e 1983), pp
21-31.
56
Horvitz, Paul M. "The Case Against Risk-Related Deposit Insurance
Premiums, - Housing Finance Review, vol. 2 (July 1983), pp. 253-63.
Jacobs, Donald and Almarin Phillips "Reflections on the Hunt Commission,"
in The Future ot American Financial Services, ed. George J. Benston,
pp. 104-1 7. New York: American Assembly. 1983.
Knight, Robert E. "Account Analysis in Correspondent Banking," Federal
Reserve Bank ot Kansas City Monthly flewew(March 1976), pp. 11-20.
Koehn, Michael F a n d Bruce E Stangle. "The Effect of Deposit-Rate
Ceilings on Bank Risk: A Comment, Journal of Banking and Finance,
vol. 4 (1980), pp. 3 8 1 - 8 6
Lawrence, Robert J. a n d Duane Lougee. " D e t e r m i n a n t s of C o r r e s p o n d e n t
Banking Relationships," Journal ot Money, Credit and Banking, vol. 11
(August 1970), pp. 358-69.
Linke, Charles M. "The Evolution of Interest Rate Regulation on Commercial Bank Deposits in the United States," The National
Banking
Review, vol. 3 (June 1966), pp. 49-69.
McKelvey, Edward F. "Interest Rate Ceilings and Disintermediation," Staff
Economic Study, Board of Governors of the Federal Reserve System,
S e p t e m b e r 1978.
Mingo, J o h n J. "The Effects of Deposit-Rate Ceilings on Bank Risk,' Journal
ot Banking and Finance, vol. 2 (1978), pp. 367-78.
Mullins, David Wiley, Jr. "Restrictions on the Rate of Interest on D e m a n d
Deposits a n d a Theory of Compensating Balances," Journal of Finance.
vol 31 (May 1976), pp. 233-52.
The NOW Account Experience in New England. Boston: Federal Reserve
Bank of Boston, 1981
Peterson, Paul T The Case Against Risk-Related Deposit Insurance
Premiums: A Contrary View, Housing Finance Review, vol. 2 (July
1983), pp. 265-68.
Polakoff, Murray E. a n d Morris Budin. The Prime Rate. Chicago: Trustees of
the Banking Research Fund, Association of Reserve City Bankers,
1973.
Pyle, David H "The Losses on Savings Deposits from Interest Rate
Regulation, The Bell Journal of Economics and Management
Science,
vol. 5 (Autumn 1974), pp. 614-22.
Spellman, Lewis J. "Deposit Ceilings a n d the Efficiency of Financial
Intermediation," Journal ot Finance, vol. 3 5 ( M a r c h 1980), pp. 129-36.
Stauffer, Robert F. "The Bank Failures of 1930-31, Journal ot Money,
Credit and Banking, vol. 13 (February 1981), pp 109-13.
Taggart, Robert A, Jr. "Effects of Deposit Rate Ceilings: The Evidence from
Massachusetts Savings B a n k s Journal of Money, Credit and Banking,
vol. 10 (May 1978), pp 139-57.
Taylor, Herb. "The Return Banks Have Paid on NOW Accounts, Federal
Reserve Bank ot Philadelphia Business Rewew(July/August 1984), pp.
13-23.
Trepata, Warren T. " C h a n g e s in Bank
Lending Practices," Federal
Reserve Bulletin, vol. 67 (September 1981), pp. 6 7 1 - 8 6
Warning Lights for Bank Soundness: Special Issue on Commercial Bank
Surveillance, Federal Reserve Bank ot Atlanta Economic Review, vol.
6 8 (November 1983).
White, Lawrence J.'Price Regulation and Quality Rivalry in a Profit Maximizing
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Banking, vol. 8 (February 1976), pp. 97-106
O C T O B E R 1984, E C O N O M I C
REVIEW
INTERSTATE BANKING:
STRATEGIES FOR A NEW ERA
A Conference Sponsored by
The Federal Reserve Bank of Atlanta
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banking?
Congress,
the
states,
and
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courts
encouraging—or
stifling—interstate
• W h a t strategies are available t o large a n d small banks?
• S h o u l d banks acquire or be acquired?
• A r e large interstate banks a threat t o c o m m u n i t y banks?
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TT
FINANCE
JUL
1984
JUN
1984
JUL
1983
Commercial Bank
Demand
NOW
Savings
Time
C r e d i t Union D e p o s i t s
Share Drafts
Savings & Time
314,187
88,711
358,996
659,078
52,997
5,526
47,264
318,975
90,640
361,157
650,632
52,569
5,650
46,932
324,565
81,761
344,649
580,314
61,395
5,535
49,847
Commercial
Demand
NOW
Savings
Time
C r e d i t Union Deposits
Share Drafts
Savings & Time
36,336
11,402
40,807
73,111
6,209
540
5,498
ANN.
%
CHG.
savings & Loans*
Total Deposits
NOW
Savings
Time
Mortgages Outstanding
Mortgage Commitments
savings & Loans
Total Deposits
NOW
Savings
Time
144,736
37,317
10,441
38,019
63,480
5,875
485
4<)74
Commercial Bank Deposits
Demand
NOW
Savings
Time
C r e d i t Union D e p o s i t s
Share Drafts
Savings & Time
Mortgages Outstanding
Mortgage Commitments
15,284
3,897
922
3,194
7,896
911
85
774
S a v i n g s Sc L o a n s * *
Total Deposits
NOW
Savings
Time
Mortgages Outstanding
Mortgage Commitments
C o m m e r c i a l Bank Deposits
Demand
NOW
Savings
Time
C r e d i t Union D e p o s i t s
Share Drafts
Savings & Time
55,623
12,792
4,717
19,201
20,161
2,728
272
2,300
55,565
13,346
4,919
19,271
19,681
2,693
280
2,272
50,393
13,309
4,411
17,195
16,795
2,570
245
1,994
Savings & Loans**
Total Deposits
NOW
Savings
Time
Commercial Bank Deposits
Demand
NOW
Savings
Time
C r e d i t Union Deposits
Share Drafts
S a v i n g s <5c T i m e
24,109
7,363
1,506
5,498
10,993
1,303
82
1,213
23,877
7,472
1,538
5,417
10,835
20,71C
7,080
1,382
4,668
8,844
1,334
Savings & Loans
Total Deposits
NOW
Savings
Time
C o m m e r c i a l Bank
Demand
NOW
Savings
Time
C r e d i t Union Deposits
Share Drafts
Savings & T i m e
25,881
5,689
1,502
5,533
13,688
211
23
207
25,887
5,826
1,530
5,560
13,569
210
24
206
24,986
6,025
1,378
5,307
12,877
192
22
189
+
Commercial Bank D e p o s i t s
Demand
NOW
Savings
Time
Credit Union Deposits
Share Drafts
Savings & T i m e
12,147
2,352
829
2,402
6,880
12,121
2,384
855
2,450
6,811
11,497
2,481
784
2,459
6,128
+
Commercial Bank Deposits
Demand
NOW
Savings
Time
C r e d i t Union D e p o s i t s
Share Drafts
Savings & Time
365
4,428
1,827
4,851
12,538
993
67
935
Notes:
1,280
Mortgages Outstanding
Mortgage Commitments
Mortgages Outstanding
Mortgage Commitments
84
1,197
4
Savings & Loans**
Total Deposits
NOW
Savings
Time
Mortgages Outstanding
Mortgage Commitments
6
savings & Loans
Total Deposits
NOW
Savings
Time
Mortgages Outstanding
Mortgage Commitments
23,294
4,508
1,872
4,893
12,405
988
79
930
21,866
4,525
1,564
5,196
10,940
868
65
821
7
2
17
7
15
14
3
14
Savings & Loans*
Total Deposits
NOW
Savings
Time
Mortgages Outstanding
Mortgage Commitments
JUL
1984
JUN
1984
JUL
1983
674,306
19,742
170,782
485,834
JUN
563,565
47.330
665,403
20,359
173,689
474,331
MAY
553,748
48,316
612,257
17,744
186,991
411,194
JUN
489,007
31,773
89,238
3,084
21,307
65,182
JUN
71,107
5.533
88,505
3,255
21,692
64,093
MAY
70,345
5,427
N.A
N.A.
N.A.
N.A.
JUN
66,196
4,593
5,436
158
877
4,441
JUN
4,166
289
5,391
166
902
4,362
MAY
4,096
279
5,054
140
894
4,086
JUN
3,657
205
57,273
2,155
14,687
40,425
JUN
41,759
3,386
56,706
2,296
14,960
39,581
MAY
41,305
3,387
54,403
2,138
17,068
35,709
JUN
39,068
3,241
8,020
266
1,787
6,075
JUN
8,799
553
7,926
274
1,786
5,999
MAY
8,653
541
N.A.
N.A.
N.A.
N.A.
JUN
8,144
455
9,540
236
2,275
7,150
JUN
8,865
712
9,424
237
2,325
6,992
MAY
8,734
591
9,407
178
2,453
5,864
JUN
7,529
462
2,031
78
388
1,596
JUN
2,076
214
2,010
80
394
1,585
MAY
2,083
217
N.A.
N.A.
N.A.
N.A.
JUN
1,997
40
6,938
191
1,293
5,495
JUN
5,442
379
7,048
202
1,325
5,574
MAY
5,474
412
N.A.
N.A.
N.A.
N.A.
JUN
5,801
190
ANN.
%
CHG.
+ 10
11
9
+ 18
+
+ 15
+ 48
+
8
13
2
+
9
+
+ 14
+ 41
+
5
1
- 14
+ 13
+
+
+
7
4
+
+
1
33
-
7
+ 22
+
18
+ 54
-
6
+
All d e p o s i t d a t a a r e e x t r a c t e d f r o m t h e F e d e r a l R e s e r v e R e p o r t of T r a n s a c t i o n A c c o u n t s , o t h e r D e p o s i t s a n d V a u l t C a s h ( F R 2 9 0 0 ) ,
a n d a r e r e p o r t e d f o r t h e a v e r a g e of t h e w e e k e n d i n g t h e 1st W e d n e s d a y of t h e m o n t h . T h i s d a t a , r e p o r t e d by i n s t i t u t i o n s w i t h
o v e r $ 1 5 m i l l i o n in d e p o s i t s a s of D e c e m b e r 31, 1 9 7 9 , r e p r e s e n t s 9 5 % of d e p o s i t s in t h e six s t a t e a r e a . T h e m a j o r d i f f e r e n c e s bet
t h i s r e p o r t a n d t h e " c a l l r e p o r t " a r e s i z e , t h e t r e a t m e n t of i n t e r b a n k d e p o s i t s , a n d t h e t r e a t m e n t of
float.
T h e d a t a g e n e r a t e d tr<
t h e R e p o r t of T r a n s a c t i o n A c c o u n t s is f o r b a n k s o v e r $ 1 5 m i l l i o n in d e p o s i t s a s of D e c e m b e r 31, 1 9 7 9 . T h e t o t a l d e p o s i t d a t a ^ g e r
f r o m t h e R e p o r t of T r a n s a c t i o n A c c o u n t s e l i m i n a t e s i n t e r b a n k d e p o s i t s by r e p o r t i n g t h e n e t of d e p o s i t s " d u e t o " a n d " d u e f r o m ot
d e p o s i t o r y i n s t i t u t i o n s . T h e R e p o r t of T r a n s a c t i o n A c c o u n t s s u b t r a c t s c a s h i t e m s in p r o c e s s of c o l l e c t i o n f r o m d e m a n d d e p o s i t s , w
t h e c a l l r e p o r t d o e s n o t . S a v i n g s a n d l o a n m o r t g a g e d a t a a r e f r o m t h e F e d e r a l H o m e L o a n B a n k B o a r d S e l e c t e d B a l a n c e S h e e t Ua
T h e S o u t h e a s t d a t a r e p r e s e n t t h e t o t a l of t h e six s t a t e s . S u b c a t e g o r i e s w e r e c h o s e n o n a s e l e c t i v e b a s i s a n d do n o t a d d t o t o t a l .
* = f e w e r than four institutions reporting.
** = S&L d e p o s i t s s u b j e c t t o
N . A . = not c o m p a r a b l e w i t h
http://fraser.stlouisfed.org/
Federal Reserve
Bank of St. Louis
58
revisions due to reporting changes.
previous d a t a at this t i m e .
CONSTRUCTION
JULY
1984
12-month Cumulative
JUNE
1984
JULY
1983
ANN
%
CHG
JULY
1984
JUNE
1984
JULY
1983
ANN
%
CHG
Rate
Mil.
58,587
7,730
14,014
8,883
1,865
891
57,260
7,468
13,777
8,536
1,874
829
46,560
5,079
11,512
5,827
1,889
846
+
+
+
+
+
26
52
22
52
1
5
Residential Building P e r m i t s
V a l u e - $ Mil.
Residential Permits - Thous.
Single-family units
Multi-family units
T o t a l Building P e r m i t s
V a l u e - $ Mil.
N o n r e s i d e n t i a l B u i l d i n g P e r m i t s - $ Mil.
8,972
Total Nonresidential
897
Industrial Bldgs.
Offices
2,015
1,741
Stores
475
Hospitals
116
Schools
8,899
887
2,040
1,662
479
117
7,184
622
1,696
1,076
424
166
+
+
+
+
+
-
25
44
19
62
12
30
R e s i d e n t i a l Building P e r m i t s
V a l u e - $ Mil.
Residential Permits - Thous.
Single-family units
Multi-family units
T o t a l Building P e r m i t s
V a l u e - $ Mil.
+ 94
+ 557
+ 51
+ 68
- 53
- 25
Residential Building P e r m i t s
V a l u e - $ Mil.
Residential Permits - Thous.
Single-family units
Multi-family units
T o t a l Building P e r m i t s
V a l u e - $ Mil.
Nonresidential Building P e r m i t s
Total Nonresidential
Industrial Bldgs.
Offices
Stores
Hospitals
Schools
- $
N o n r e s i d e n t i a l Building P e r m i t s
Total Nonresidential
Industrial Bldgs.
Offices
Stores
Hospitals
Schools
- $
Mil.
736
184
80
111
14
6
725
180
81
110
13
8
379
28
53
66
30
8
Nonresidential Building P e r m i t s
Total Nonresidential
Industrial Bldgs.
Offices
Stores
Hospitals
Schools
- $ Mil.
4,362
428
933
995
218
45
4,290
413
907
957
223
43
3,636
324
809
596
258
52
+
+
+
+
-
20
32
15
67
16
13
R e s i d e n t i a l Building P e r m i t s
V a l u e - $ Mil.
Residential Permits - Thous.
Single-family units
Multi-family units
T o t a l Building P e r m i t s
V a l u e - $ Mil.
Nonresidential Building P e r m i t s
Total Nonresidential
Industrial Bldgs.
Offices
Stores
Hospitals
Schools
- $ Mil.
1,608
168
517
236
62
17
1,632
176
554
221
61
17
1,125
155
320
114
26
24
+ 43
+ 8
+ 62
+ 107
+ 138
- 29
R e s i d e n t i a l Building P e r m i t s
V a l u e - $ Mil.
Residential Permits - Thous.
Single-family units
Multi-family units
T o t a l Building P e r m i t s
V a l u e - $ Mil.
N o n r e s i d e n t i a l Building P e r m i t s
Total Nonresidential
Industrial Bldgs.
Offices
Stores
Hospitals
Schools
- $
Mil.
1,184
29
307
204
148
41
1,165
30
329
175
149
41
1,148
56
380
120
60
65
+
3
- 48
- 19
+ 70
+147
- 37
R e s i d e n t i a l Building P e r m i t s
V a l u e - $ Mil.
Residential Permits - Thous.
Single-family units
Multi-family units
T o t a l Building P e r m i t s
V a l u e - $ Mil.
N o n r e s i d e n t i a l Building P e r m i t s
Total Nonresidential
Industrial Blc^s.
Offices
Stores
Hospitals
Schools
- $
Mil.
246
14
27
51
13
1
243
14
27
53
14
1
165
6
15
34
14
8
+ 49
+ 133
+ 80
+ 50
7
- 88
R e s i d e n t i a l Building P e r m i t s
V a l u e - $ Mil.
Residential Permits - Thous.
Single-family units
Multi-family units
T o t a l Building P e r m i t s
V a l u e - $ Mil.
Nonresidential Building P e r m i t s
Total Nonresidential
Industrial Bldgs.
Offices
Stores
Hospitals
Schools
- $
Mil.
836
74
151
144
20
6
844
74
142
146
19
7
731
53
119
146
36
9
+
+
+
-
R e s i d e n t i a l Building P e r m i t s
V a l u e - $ Mil.
Residential Permits - Thous.
Single-family units
Multi-family units
T o t a l Building P e r m i t s
V a l u e - $ Mil.
14
40
27
1
44
33
74,834
74,849
57,555
+30
920.1
764.1
924.7
766.5
787.6
595.1
+ 17
+ 28
133,421
132,109
104,115
+ 28
14,195
14,159
10,333
+ 37
190.7
180.6
191.4
181.9
162.1
125.2
+ 18
+44
23,167
23,058
17,517
+ 32
478
479
353
+35
8.2
8.2
8.2
8.9
7.2
6.4
+ 14
+ 28
1,214
1,204
732
+66
8,300
8,230
5,920
+40
104.4
99.7
104.5
98.9
84.8
70.0
+23
+42
12,662
12,520
9,556
+ 33
2,733
2,732
2,062
+33
43.4
27.7
43.6
27.5
37.4
21.2
+ 16
+31
4,341
4,364
3,187
+ 36
1,170
1,177
923
+27
15.5
17.5
15.9
17.7
15.9
12.5
- 3
+40
2,354
2,342
2,071
+ 14
383
374
256
+50
5.5
6.1
5.4
5.8
4.6
3.1
+20
+97
629
617
421
+49
1,131
1,167
819
+38
13.7
21.4
13.8
23.1
12.2
12.0
+ 12
+78
1,967
2,011
1,550
+27
HOTES:
D a t a s u p p l i e d b y t h e U . S . B u r e a u of t h e C e n s u s , H o u s i n g U n i t s A u t h o r i z e d By B u i l d i n g P e r m i t s a n d P u b l i e C o n t r a c t s , C - 4 0 .
N o n r e s i d e n t i a l d a t a e x c l u d e s t h e c o s t of c o n s t r u c t i o n f o r p u b l i c l y o w n e d b u i l d i n g s . T h e s o u t h e a s t d a t a r e p r e s e n t t h e t o t a l of
t h e six s t a t e s . T h e a n n u a l p e r c e n t c h a n g e c a l c u l a t i o n is b a s e d on t h e m o s t r e c e n t m o n t h o v e r p r i o r y e a r . P u b l i c a t i o n of F . W.
Dodge c o n s t r u c t i o n c o n t r a c t s has been discontinued.
http://fraser.stlouisfed.org/
FEDERAL
RESERVE
ATLANTA
Federal
Reserve
BankB AofN KSt.O FLouis
59
GENERAL
LATEST
DATA
UNITED STATES
Personal Income
($bil. - SAAR)
T a x a b l e Sales - $bil.
Plane P a s s . A r r . 000's
P e t r o l e u m P r o d , (thous.)
Consumer P r i c e Index
1967=100
Kilowatt Hours - mils.
SOUTHEAST
P e r s o n a l Income
($bil. - SAAR)
T a x a b l e Sales - $ bil.
Plane Pass. A r r . 000's
P e t r o l e u m P r o d , (thous.)
C o n s u m e r P r i c e Index
1967=100
Kilowatt Hours - mils.
m
Personal I n c o m e
($bil. - SAAR)
T a x a b l e Sales - $ bil.
Plane Pass. A r r . 000's
P e t r o l e u m Prod, (thous.)
C o n s u m e r P r i c e Index
1967=100
Kilowatt Hours - mils.
FLORIDA
Personal Income
($bil. - SAAR)
T a x a b l e Sales - $ bil.
Plane Pass. A r r . 000's
P e t r o l e u m P r o d , (thous.)
Consumer P r i c e Index N o v . 1977 = 100
Kilowatt Hours - mils.
YEAR
AGO
ANN.
ANN.
%
CURR.
PERIOD
PREV.
PERIOD
2,824.2
N.A.
N.A.
8,728.7
2,647.2
N.A.
N.A.
8,648.6
+ 10
JUN
AUG
2,910.0
N.A.
N.A.
8,781.2
AUG
MAY
313.0
175.0
311.7
174.9
300.3
158.6
+ 4
+ 10
341.9
N.A.
4,970.9
1,483.5
318.8
N.A.
4,411.0
1,381.0
+ 10
JUN
AUG
350.6
N.A.
4,669.3
1,482.5
MAY
N.A.
28.2
N.A.
26.4
N.A.
24.9
JUN
AUG
38.0
N.A.
122.8
52.0
37.7
N.A.
120.3
52.0
35.2
N.A.
123.7
53.0
MAY
N.A.
3.7
N.A.
3.4
N.A.
3.3
CHG.
AUG
1983
J U L (R)
1984
AUG
1984
CHG.
^gneunure^
1Q
+ 2
P r i c e s R e c ' d by F a r m e r s
144
Index (1977=100)
84,353
Broiler P l a c e m e n t s (thous.)
58.1
Calf P r i c e s ($ per cwt.)
30.6
Broiler P r i c e s (<t per lb.)
Soybean P r i c e s ($ per bu.)
6.46
Broiler F e e d C o s t ($ per ton)
225
144
83,960
58.5
35.5
6.95
233
139
79,386
58.3
31.8
8.09
228
+ 4
+ 6
- 0
- 4
-20
- 1
Prices R e c ' d by F a r m e r s
144
Index (1977=100)
32,059
Broiler P l a c e m e n t s (thous.)
55.5
Calf P r i c e s ($ per cwt.)
28.9
Broiler P r i c e s (« per lb.)
Soybean P r i c e s ($ per bu.)
6.54
Broiler F e e d Cost ($ per ton)
224
139
31,861
54.8
34.3
6.77
237
131
30,270
53.7
31.4
8.03
217
+ 10
+ 6
+ 3
- 8
-19
+ 3
Agriculture
F a r m Cash R e c e i p t s - $ mil.
808
(Dates: MAY, MAY)
10,720
Broiler P l a c e m e n t s (thous.)
52.7
Calf P r i c e s ($ per c w t . )
28.0
Broiler P r i c e s ($ per lb.)
Soybean P r i c e s ($ per bu.)
6.35
Broiler F e e d Cost ($ per ton)
220
10,723
53.4
32.5
6.60
240
762
10,034
52.1
31.5
7.79
225
+ 6
+ 7
+ 1
-11
-18
- 2
^ruiumir^^
1Q
1Q
1Q
AUG
JUN
AUG
Miami
MAY
Personal I n c o m e
($bil. - SAAR)
1Q
T a x a b l e Sales - $ bil.
2Q
Plane Pass. A r r . 000's
JUN
P e t r o l e u m P r o d , (thous.)
C o n s u m e r P r i c e Index - A t l a n t a
1967 = 100
Kilowatt Hours - mils.
MAY
128.8
80.0
2,514.5
41.0
JUN
166.4
7.1
+ 13
+ 8
- 1
- 2
+ 12
118.7
70.7
2,142.1
59.0
JUL
160.8
6.8
+12
+ 14
+ 3
-32
+ 4
+ 18
62.8
47.5
1,788.8
N.A.
AUG
315.9
4.5
61.0
46.2
1,801.0
N.A.
JUN
314.0
4.1
56.7
42.1
1,676.7
N.A.
AUG
303.9
4.2
+ 11
+ 13
+ 7
48.5
N.A.
345.5
1,300.0
47.3
N.A.
330.0
1,300.0
45.6
N.A.
276.1
1,185.0
+ 6
N.A.
4.7
N.A.
4.3
N.A.
3.9
JUN
AUG
22.3
N.A.
37.3
90.5
21.8
N.A.
35.2
90.5
20.2
N.A.
37.5
84.0
MAY
N.A.
1.9
N.A.
1.8
N.A.
1.7
AUG
JUN
AUG
46.6
50.4
176.2
N.A.
45.3
49.3
169.9
N.A.
42.4
44.7
154.9
N.A.
MAY
N.A.
5.4
N.A.
5.7
N.A.
5.0
Personal I n c o m e
1Q
($bil. - SAAR)
T a x a b l e Sales - $ bil.
JUN
Plane Pass. A r r . 000's
P e t r o l e u m P r o d , (thous.) AUG
C o n s u m e r P r i c e Index
1967 = 100
MAY
Personal I n c o m e
(Jbil. - SAAR)
T a x a b l e Sales - $ bil.
Plane Pass. A r r . 000's
P e t r o l e u m Prod, (thous.)
C o n s u m e r P r i c e Index
1967 = 100
Kilowatt Hours - mils.
TENNESSEE
Personal I n c o m e
($bil. - SAAR)
T a x a b l e Sales - $ bil.
Plane Pass. A r r . 000's
P e t r o l e u m P r o d , (thous.)
C o n s u m e r P r i c e Index
1967 = 100
K i l o w a t t Hours - mils.
132.4
80.7
2,198.7
40.0
JUL
167.0
8.0
+ 6
+ 7
1Q
1Q
+25
+ 10
+21
+ 10
- 1
+ 8
+ 12
+ 10
+ 13
+ 14
+ 8
-
• 1
Agriculture
F a r m Cash R e c e i p t s - $ mil.
2,009
(Dates: MAY, MAY)
1,852
Broiler P l a c e m e n t s (thous.)
59.0
Calf P r i c e s ($ per cwt.)
Broiler P r i c e s (<t per lb.)
29.0
Soybean P r i c e s ($ per bu.)
6.35
Broiler F e e d Cost ($ per_ton)_
245
1,918
59.3
34.0
6.60
255
Agriculture
Farm Cash R e c e i p t s - $ mil.
1,122
(Dates: MAY, MAY)
N.A.
Broiler P l a c e m e n t s (thous.)
53.0
Calf P r i c e s ($ per c w t . )
28.0
Broiler P r i c e s (« per lb.)
6.34
Soybean P r i c e s ($ per bu.)
245
Broiler Feed C o s t ($ per ton)
N.A.
52.0
34.6
6.86
255
Agriculture
Farm Cash R e c e i p t s - $ mil.
515
(Dates: MAY, MAY)
N.A.
Broiler P l a c e m e n t s (thous.)
56.5
Calf P r i c e s ($ per c w t . )
31.0
Broiler P r i c e s (<S per lb.)
Soybean P r i c e s ($ per bu.)
6.75
Broiler F e e d Cost ($ per ton)_ 265
N.A.
56.5
35.5
6.90
270
Agriculture
F a r m Cash R e c e i p t s - $ mil.
704
(Dates: MAY, MAY)
6,358
Broiler P l a c e m e n t s (thous.)
56.3
Calf P r i c e s ($ per cwt.)
31.5
Broiler P r i c e s (4 per lb.)
Soybean P r i c e s ($ per bu.)
6.60
Broiler F e e d C o s t ($ per t o n )
178
6,376
54.7
36.5
6.73
188
Agriculture
Farm Cash R e c e i p t s - $ mil.
(Dates: MAY, MAY)
Broiler P l a c e m e n t s (thous.)
Calf P r i c e s ($ per cwt.)
Broiler P r i c e s (4 per lb.)
Soybean P r i c e s ($ per bu.)
Broiler F e e d C o s t ($ per ton)
626
N.A.
55.1
29.5
6.47
200
2,626
1,956
59.3
31.0
7.79
235
-
-
-
-
N.A.
52.7
34.5
6.79
205
1,046
N.A.
50.4
30.5
7.68
210
-23
- 5
- 1
-
6
-18
•
+ 4
-23
+ 5
- 8
-17
+ 17
514
N.A.
56.0
32.5
8.33
270
+ 0
787
6,068
53.4
32.5
8.03
197
-11
+ 5
+ 5
- 3
-18
-10
670
N.A.
50.8
31.5
8.08
215
- 7
+ 1
- 5
-19
- 2
+ 8
- 6
-20
- 7
S B r ^ r e ^
rate?
The S o u t h e a s t d a t a r e p r e s e n t t h e t o t a l of t h e six s t a t e s .
on most r e c e n t d a t a over prior y e a r .
http://fraser.stlouisfed.org/
60
Federal Reserve Bank of St. Louis
N.A. = not a v a i l a b l e .
T h e annual p e r c e n t c h a n g e c a l c u l a t . o n is based
R = revised.
OCTOBER 1984, E C O N O M I C REVIEW
EMPLOYMENT
JULY
1984
JUNE
1984
JULY
1983
ne
ANN.
%
CHG.
TED S T A T E S
lian L a b o r F o r c e - t h o u s .
Total Employed - thous.
Total Unemployed - thous.
U n e m p l o y m e n t R a t e - % SA
Insured U n e m p l o y m e n t - thous.
Insured Unempl. R a t e - %
M f g . A v g , Wkly. H o u r s
M f g . A v e . Wklv. E a r n . - $
107,484
8,714
7.5
N.A.
N.A.
40.4
370
115,392
106,812
8,582
7.1
N.A.
N.A.
40.8
373
113,980
103,273
10,707
9.5
N.A.
N.A.
40.0
354
Civilian Labor F o r c e - thous.
Total Employed - thous.
Total Unemployed - thous.
U n e m p l o y m e n t R a t e - % SA
Insured U n e m p l o y m e n t - thous.
Insured Unempl. R a t e - %
M f g . A v g . Wkly. H o u r s
M f g . A v g . Wkly. E a r n . - $
15,040
13,796
1,244
8.1
N.A.
N.A.
40.7
326
14,941
13,744
1,197
7.8
N.A.
N.A.
41.4
330
14,746
13,235
1,510
9.7
N.A.
N.A.
40.4
310
+2
+ 4
-18
Civilian Labor F o r c e - thous.
Total Employed - thous.
Total Unemployed - thous.
U n e m p l o y m e n t R a t e - % SA
Insured Unemployment - thous.
Insured Unempl. R a t e - %
M f g . A v g . Wkly. H o u r s
M f g . A v g . Wkly. E a r n . - $
1,799
1,587
211
11.1
N.A.
N.A.
40.8
328
1,795
1,600
195
10.9
N.A.
N.A.
41.3
329
1,799
1,545
253
13.5
N.A.
N.A.
40.7
309
0
+ 3
-17
Civilian Labor F o r c e - thous.
Total Employed - thous.
Total Unemployed - thous.
U n e m p l o y m e n t R a t e - % SA
Insured Unemployment - thous.
Insured Unempl. R a t e - %
M f g . A v g . Wkly. H o u r s
M f g . A v g . Wkly. E a r n . - $
5,162
4,811
351
7.0
N.A.
N.A.
41.3
316
5,067
4,731
336
6.7
N.A.
N.A.
41.5
317
5,006
4,598
408
8.5
N.A.
N.A.
40.6
297
; i v u i a n [ LLaab o r F o r c e - t h o u s .
Total Employed - thous.
Total Unemployed - thous.
U n e m p l o y m e n t R a t e - % SA
Insured Unemployment - thous.
Insured Unempl. R a t e - %
M f g . A v g . Wkly. H o u r s
M
Earn. - $
Mftgg. ^Avv gg. ^Wkly.
^
LOUISIANA
Civilian Labor F o r c e - thous.
T o t a l Employed - thous.
Total Unemployed - thous.
U n e m p l o y m e n t R a t e - % SA
Insured Unemployment - thous.
Insured Unempl. R a t e - %
M f g . A v g . Wkly. H o u r s
M f g . A v g . Wkly. E a r n . - $
2,818
2,638
181
6.2
N.A.
N.A.
40.8
307
2,817
2,643
174
6.1
N.A.
N.A.
41.3
312
1,953
1,771
I
JUNE
1984
JULY
1983
ANN.
%
CHG.
Nonfarm Employment- thous.
Manufacturing
Construction
Trade
Government
Services
Fin., Ins., & Real E s t .
Trans. C o m . & Pub. Util.
94,264
19,690
4,647
21,871
15,208
20,878
5,755
5,199
94,948
19,780
4,522
21,885
16,010
20,817
5,721
5,200
90,112
18,464
4,185
20,920
15,111
19,901
5,552
5,020
+ 5
+ 7
+11
+ 5
+ 1
+ 5
+ 4
+ 4
Nonfarm Employment- thous.
Manufacturing
Construction
Trade
Government
Services
Fin., Ins., & R e a l E s t .
Trans. C o m . & Pub. Util.
12,029
2,262
748
2,950
2,095
2,437
703
706
12,097
2,276
740
2,933
2,169
2,446
701
703
11,523
2,157
671
2,786
2,081
2,339
671
694
+ 4
+ 5
+11
+ 6
+ 1
+ 4
+ 5
+ 2
Nonfarm Employment- thous.
Manufacturing
Construction
Trade
Government
Services
Fin., Ins., & Real E s t .
Trans. Com. & Pub. Util.
1,351
347
67
281
289
218
62
72
1,360
354
66
281
291
219
62
73
+ 3
+ 5
-14
Nonfarm Employment- thous.
Manufacturing
Construction
Trade
Government
Services
Fin., Ins., & R e a l E s t .
Trans. Com. & Pub. Util.
4,078
496
309
1,107
610
1,006
309
231
4,119
498
307
1,105
644
1,015
309
230
3,847
457
270
1,032
597
962
288
231
+ 6
+ 9
+14
+ 7
+ 2
+ 5
+ 7
0
2,711
2,502
209
7.5
N.A.
N.A.
40.8
289
+ 4
+ 5
-13
Nonfarm Employment- thous.
Manufacturing
Construction
Trade
Government
Services
Fin., Ins., & R e a l E s t .
T r a n s . C o m . Sc P u b . U t i l .
2,408
531
139
598
418
429
129
154
2,412
535
136
590
437
424
127
153
2,273
508
117
549
421
399
123
150
+ 6
+ 5
+19
+ 9
- 1
+ 8
+ 5
+ 3
1,934
1,700
234
+1
9.0
N.A.
N.A.
41.0
414
1,965
1,780
185
8.6
N.A.
N.A.
41.8
419
N o n f a r m E m p l o y m e n t - thous.
Manufacturing
Construction
Trade
Government
Services
Fin., Ins., & Real E s t .
Trans. Com. & Pub. Util.
1,573
182
114
377
311
310
84
117
1,581
182
114
377
317
312
84
117
1,566
180
117
372
312
304
84
119
+
+
+
+
Civilian Labor F o r c e - thous.
Total Employed - thous.
Total Unemployed - thous.
U n e m p l o y m e n t R a t e - % SA
Insured U n e m p l o y m e n t - thous.
Insured Unempl. R a t e - %
M f g . A v g . Wkly. H o u r s
M f g . A v g . Wkly. E a r n . - $
1,079
962
117
10.2
N.A.
N.A.
39.9
274
1,070
957
113
9.6
N.A.
N.A.
40.8
283
1,085
941
144
12.5
N.A.
N.A.
39.8
266
Nonfarm Employment- thous.
Manufacturing
Construction
Trade
Government
Services
Fin., Ins., & R e a l E s t .
Trans. C o m . & Pub. Util.
795
210
34
170
173
126
35
39
800
211
33
170
177
127
35
39
788
206
35
166
174
126
34
39
Civilian Labor F o r c e - thous.
Total Employed - thous.
Total Unemployed - thous.
U n e m p l o y m e n t R a t e - % SA
Insured Unemployment - thous.
Insured Unempl. R a t e - %
M f g . A v g . Wkly. H o u r s
M f g . A v g . Wkly. E a r n . - $
2,229
2,027
202
8.8
N.A.
N.A.
40.4
314
2,227
2,033
194
8.7
N.A.
N.A.
41.7
322
2,211
1,949
262
11.5
N.A.
N.A.
40.3
301
Nonfarm Employment- thous.
Manufacturing
Construction
Trade
Government
Services
Fin., Ins., & R e a l E s t .
Trans. C o m . & Pub. Util.
1,824
496
85
417
294
348
84
93
1,825
496
84
410
303
349
84
91
1,717
469
70
394
282
328
82
84
i ;
Notes:
182
+ 2
+ 4
-19
JULY
1984
+ 1
+ 5
+ 1
+ 5
+ 0
+ 6
+ 6
+ 4
-22
11.8
N.A.
N.A.
40.2
400
- 1
+ 2
-19
+ 3
+1
+ 4
-23
+ 0
+ 4
1,332™^^
337
+ 3
62
+8
273
+ 3
295
- 2
220
- 1
60
+ 3
71
+ 1
0
1
3
1
0
2
0
- 2
+1
+ 2
-
+ 3
0
6
+ 6
+ 21
+ 6
+ 4
+ 6
+ 2
+11
A l l l a b o r f o r c e d a t a a r e f r o m B u r e a u of L a b o r S t a t i s t i c s r e p o r t s s u p p l i e d b y s t a t e a g e n c i e s .
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T h e S o u t h e a s t d a t a r e p r e s e n t t h e t o t a l of t h e s i x s t a t e s .
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