Full text of Federal Reserve Bank of New York Circulars : 7285. "Truth in Savings"

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r

FEDERAL RESERVE BANK
OF NEW YORK

r Circular No. 7 2 8 5 T
December 5, 1973 J

“ TRUTH IN SAVINGS”
Request for Public Comment

T o A ll M em ber Banks, and Others Concerned,
in the Second Federal R eserve D istrict:

The following statement was issued December 3 by the Board of Governors of the Federal Reserve
System:
The Board of Governors of the Federal Reserve System today invited public comment as part of a
study it is undertaking in connection with Congressional review of the so-called “Truth in Savings” bill.
This legislation would require financial institutions to disclose the “annual percentage rate” and other
terms that apply to their savings plans. The subcommittee of the Senate Committee on Banking, Housing and
Urban Affairs that is considering the legislation asked the Board to study the “feasibility and desirability
of requiring uniform methods of interest rate computation on savings accounts.”
In this connection, the Board requested public comment on the following questions:
1. If a single method of interest rate computation were required on savings accounts, what would
be the advantages and disadvantages — including competitive effects — to consumers and to financial
institutions?
2. Assuming that a single method were required, which method is the most appropriate? Please
indicate preferences and the reasons for your preference with respect to frequency of compounding
and crediting, method of calculating the balance on which interest is computed, such as low balance,
LIFO, FIFO or day-of-deposit to day-of-withdrawal, and other terms.
3. What are the advantages and disadvantages — including cost and competitive considerations —
of permitting two or more methods of computation rather than a single method?
During hearings conducted earlier this year by the Senate Subcommittee, concern was expressed that
the wide variety of methods used in computing interest makes it impossible to devise a single annual rate
that would provide an accurate basis for comparing yields on different savings plans.
Variables such as the balance used in the computation of interest, grace periods, service charges and
requirements for minimum balances can have a substantial effect on the yield received by a depositor.
For example, the same hypothetical savings account could yield interest ranging from about $30 to $75
over a six-month period using the same annual rate but varying the other elements in the calculation.
Public comment on these matters should be forwarded to the Secretary of the Board in Washington.

Printed on the reverse side is the text of the Board of Governors’ notice in this matter. Comments
thereon should be submitted by January 31, 1974, and may be sent to our Regulations and Bank Analysis
Department.




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President.
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FEDERAL RESERVE SYSTEM
“Truth in Savings”
A subcommittee of the Senate Committee on Bank­
ing, Housing and Urban Affairs in June held hearings
on proposed “Truth in Savings’’ legislation (S. 1052).
The legislation would require financial institutions to
disclose the “annual percentage rate” and other terms
applicable to their savings plans. The testimony re­
ceived at the hearing generally supported the concept
of full and uniform disclosure as a means of assisting
consumers to understand their accounts better and
to enable them to shop among competing plans. How­
ever, concern was expressed that the multiplicity of
methods of computing interest, which may have a
significant effect upon the actual dollars earned de­
pending upon activity patterns, makes it impossible to
devise a single annual rate that would provide an
accurate basis for comparing different savings account
plans. Although the annual rate may reflect differ­
ences in compounding periods ( continuous, daily,
monthly, etc.), it would not be affected by the balances
to which the rate is applied (e.g., low balance, firstin-first-out, last-in-first-out, day-of-deposit to day-ofwithdrawal), grace periods for deposits and with­
drawals, requirements for minimum balances and end
of period balances, service charges for withdrawals
and other factors. Several of these variables have a
substantial effect on yield, depending upon the pattern
of activity of an individual’s savings account transac­
tions. For example, a study has shown that a given
set of savings account transactions over a six month
period could result in interest payments ranging from
about $30 to over $75 using a six percent annual rate
in each case but varying the other elements of the
calculation.
As a result of these concerns, the Board of Gov­
ernors of the Federal Reserve System has been re­




quested by members of the Senate Committee to
study the “feasibility and desirability of requiring uni­
form methods of interest rate computation on savings
accounts.” A requirement for uniform methods would
make the interest rate the only variable, and would
simplify disclosures required under any possible Truth
in Savings legislation. In connection with that study
the Board desires to receive public comment on the
following questions:
1. If a single method of interest rate computa­
tion were required on savings accounts, what would
be the advantages and disadvantages — including
competitive effects — to consumers and to financial
institutions?
2. Assuming that a single method were required,
which method is the most appropriate? Please in­
dicate preferences and the reasons for your prefer­
ence with respect to frequency of compounding
and crediting, method of calculating the balance on
which interest is computed, such as low balance,
LIFO, FIFO or day-of-deposit to day-of-withdrawal, and other terms.
3. What are the advantages and disadvantages
— including cost and competitive considerations —
of permitting two or more methods of computation
rather than a single method?
Comments on any of these questions and any other
relevant comments of observations should be for­
warded to the Secretary of the Board of Governors
of the Federal Reserve System, Washington, D.C.,
20551, by January 31, 1974.
B oard o f G overnors o f th e
F e d e r a l R eser ve S y s t e m