Full text of Federal Reserve Notes : April 1979

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

Federal Reserve Notes
FEDERAL RESERVE BANK OF SAN FRANCISCO

•

APRIL 1979

Serving Alaska, Arizona, California, Hawaii, Idaho, Nevada, Oregon, Utah & Washington

NEW DEVELOPMENTS ON HOUSEHOLD DEPOSITS

FED PROPOSES SHIFT
IN RESERVE RULES
The

Federal

Reserve

Board

of

Governors this month proposed
adding a three-percent reserve re
quirement on certain types of bor
rowings through re-purchase
agreements and Federal funds.
Banks have used such borrowings
increasingly in recent months to
help finance the expansion of their
loans and investments.

Household depositors and financial
institutions will be affected signifi
cantly by a regulatory ruling and a
major court decision announced
this month. First, the Federal

imum interest rate would be based

on, but be below, the rate on U. S.

Treasury securities of similar

Reserve and other financial-

maturity; 2) a bonus savings ac

regulatory agencies released a set
of proposals designed to help in
dividuals obtain a higher rate of
return on their savings. On the
other hand, a Federal appeals court

count that would pay an extra one-

in Washington ruled — in a deci
Specifically, the new reserve would
apply to repurchase agreements on
U.S. Government and Federal agen
cy securities made by member
banks or Edge (foreign lending)
corporations with any lenders ex
cept those whose deposits are sub
ject to the Fed's reserve require
ments — and, with the same excep
tions, to Federal funds borrowed
from any eligible lender. Memberbank borrowings from the U.S.
government, principally in the form
of Treasury tax-and-loan account

sion effective January 1, 1980 —
that Federal laws don't permit cer
tain new financial practices, such

note balances, also would become

Governors for action, and

subject to the new reserve require
ment, being treated as a new
category of time deposit.

The proposals would create 1) a
five-year time deposit whose max

as the automatic transfer of funds

half percent on the minimum bal
ance held in the account over a

designated twelve-month period;
and 3) a rising-rate certificate
featuring an interest rate that in
creases during the term of the cer
tificate.

In addition, the proposals would
reduce (from $1,000 to $500)

between bank savings and check
ing accounts.

minimum amount requirements ap

The move toward higher deposit

plicable to existing categories of
long-term deposits (four years or
more), and would eliminate all

rates was initiated last October,
when several senior citizens'

groups presented a petition for
higher rates to the Federal Reserve

minimum-deposit requirements on

savings-and-loan certificates of
less than four-years' maturity. The

Bank of San Francisco. The petition

minimum would remain at $10,000

was forwarded

for money-market certificates,
whose high rates (tied to the Treas
ury bill rate) have made them very
popular since their inception in

to the

Board of

after

review by that body and other
regulatory agencies, the agencies
released the proposals for public

mid-1978.

comment.

A repurchase agreement (RP) in
volves the simultaneous sale and

agreement to repurchase a finan
cial asset at a specified price.
Federal funds historically repre
sented excess reserves lent by

U.S. branch or agency of a foreign
bank, or an Edge corporation.

member banks to each other on an

According to Fed statistics, about
20 percent of the past six months'
growth in commercial-bank credit

overnight basis, but they now in

was financed

clude

commercial-bank

agreements and Federal-funds

borrowings from a specified group

transactions. Since the beginning
of the current business expansion
in March 1975, borrowings of this
kind have almost tripled in amount,

certain

of financial institutions and Federal

agencies. Under the Board's pro
posal, all RPs and Federal-funds
borrowings would be subject to
reserve requirements except bor
rowings from a member bank, a

from

repurchase

reaching $65 billion at the end of
March 1979.

W

These proposed actions would not
change the ceiling rates currently
in effect for existing categories of
time deposits. Accordingly, the pre
sent ceiling rate on IRA and Keogh
retirement accounts (with
maturities of three years or more)
and on government time deposits
would remain at 8 percent.
However, member banks would be
permitted to offer the ceiling rates
applicable to the two new timedeposit instruments to governmen
tal units and to IRA and Keogh
depositors so long as the maturity,
(Continued on page 4)

SUMMARY OF KEY FED DEVELOPMENTS

MONEY ORDER SALES

LOANS TO BANK OFFICIALS

The Board of Governors announced permission for
bank holding companies to sell money orders, travelers
checks and U.S. savings bonds to the public at their
nonbank offices. The ruling, which came in the form of
an amendment to Federal Reserve Regulation Y, fixed a
maximum face value of $1,000 on all such money-order
sales... In a related action, the Board approved an ap
plication by Citicorp (New York) to utilize a Utah sub
sidiary to sell money orders, travelers checks and U.S.
savings bonds, and to provide consumer-oriented fi
nancial-management courses. The subsidiary, Citicorp
Person-to-Person Financial Centers, maintains eight

The Board of Governors issued a final regulation imple
menting the new Section 22(h) of the Federal Reserve
Act, as part of Title I of the Financial Institutions
Regulatory and Interest Rate Control Act of 1978
(FIRA). Section 22(h) establishes four requirements for

offices in Utah.

CRA QUESTIONS AND ANSWERS
The four Federal regulatory agencies responsible for
enforcing the Community Reinvestment Act (CRA) have
issued two staff papers to answer inquiries which have
been frequently asked about the act and its implement
ing regulations. The first set of questions and answers
provides staff guidance on the subjects of community
delineation, contents of CRA statements, CRA public
notices, and maintenance of files of public comments
and recent CRA statements. The second set provides

staff guidance on assessment of institutions' records of
performance, agency encouragement of institutions
under CRA, available sanctions, and the impact of CRA

on holding companies and their affiliates. For further in
formation, call the Consumer Affairs Unit of the Federal
Reserve Bank of San Francisco, at (415) 544-2224. .

CLASSIFICATION OF DELINQUENT DEBT
The Board of Governors issued a proposed plan to

standardize industry classification of delinquent con
sumer-instalment loans, including bank card, check
credit and overdraft credit. The new plan is a revision of

an earlier plan which incurred industry criticism when
implemented briefly last year...Under the new plan,
most outstanding consumer instalment loans that are
delinquent for more than 120 days (or five monthly pay
ments) would be classified as losses "unless a recent
record of regular contractual payments is evident."
Loans would be classified as "substandard" in this

situation if there is a record of such payments, or if
loans are past due for 60 to 120 days (or three to four
monthly payments). Under the current practice, most
banks charge off delinquent loans which are more than
90 days past due.

loans by member banks to bank officials or their related

interests: 1) an aggregate lending limit of 10 percent of
the bank's capital and surplus on loans (subject to cer
tain exceptions) to any of its executive officers or prin
cipal shareholders and their related interests; 2)
prohibition of payment by the bank of an overdraft by an
executive officer or director; 3) a requirement that every
extension of credit by the bank to a bank official or to a
related interest be made on substantially the same
terms as those prevailing at the time for comparable
transactions with other persons not associated with the
bank, and not involve more than the normal risk of

repayment; and 4) a requirement that every extension of
credit by the bank to a bank official or any related in
terest that would exceed $25,000 in the aggregate be
approved in advance by a majority of the bank's entire
board of directors, with the interested party abstaining.
EFT CARD LIABILITY

The Board of Governors approved regulations to limit a
consumer's liability for unauthorized use of electronic
fund-transfer cards (EFT cards) and to set consumerprotection conditions for their unsolicited distribution.
The new regulations were developed to implement
several provisions of the new Electronic Fund Transfer
Act. Before the effective date of the legislation (Febru
ary 8), there were no limits on distribution of cards, and
liability for unauthorized use was determined only by
contract if at all. However, as of February 8,1979, finan
cial institutions must follow certain procedures when
distributing cards. For example, the distribution of un
solicited cards must be accompanied by certain dis
closures, such as a consumer's liability for
unauthorized transfers, how to report the loss or theft of
a card, and the institution's business days. While these
disclosures are required only in certain instances, the
regulation's liability provisions for unauthorized use
are applicable to all cardholders, regardless of whether
a card was issued prior to or after February 8, 1979, if
the card falls under the definition of "accepted access
device" and the financial institution has provided a
means of identifying the consumer to whom the card
was issued. In addition, the Federal Reserve Board has
issued for comment a proposal which would require fi
nancial institutions to inform all consumers now hold

ing cards of their potential liability and of the need for

prompt reporting.

%

average return on thrifts' mortgage
portfolios is more than 2 1/2 per
centage points higher than in 1966,

PARTEE DISCUSSES

DEPOSIT RATE PROPOSALS
Federal

Reserve

Governor

J.

inflation-induced

Charles Partee, in Congressional
testimony last month, placed the
Fed's new deposit-rate proposals in

3 1/2 percentage points in shortterm markets and about 4 percen
tage points in intermediate-term
markets over the same period.

the context of several factors that

have existed since 1966, when Con
gress instructed the Federal finan
cial-regulatory agencies to estab
lish a coordinated set of depositrate ceilings. In his view, the
regulatory agencies have been

forced throughout this period to
balance a number of conflicting
goals — equity for the small saver,
adequacy of mortgage credit flows,
competitive balance among
depositary institutions, and the fi
nancial strength and viability of
many of those institutions.
Partee noted that thrift institutions

Partee said that the Federal
Reserve could take action on its
J. C. Partee

own to create an attractive instru

vantage in relation to commercial
banks. That disadvantage resulted,
in part, from the thrifts' inability to
offer a full range of deposit and
lending services to their customers,
who were predominantly in the con
sumer sector. The argument for the
differential, of course, has
weakened as the thrifts began to
assume bank-type lending and
deposit powers.

are faced with constraints on the

Partee argued that commercialbank earnings generally have not
been a limiting factor in regulators'

Partee noted that regulatory ceil
ings have changed over the years,
either through increased ceiling
rates on existing account catego
ries, or through the introduction of
new deposit instruments — pri
marily the latter. The introduction of
successively longer-term certifi
cates dramatically changed the
maturity structure of thrift-institu
tion deposit liabilities. When rate
ceilings went into effect in 1966, 85
to 90 percent of thrift deposits were
in passbook form, but by mid-1978,
that proportion had declined to only

decisions to

one-third

kinds of assets they hold, and thus
remain unable to pay marketoriented

rates of return

on

all

deposit liabilities during periods of
high interest rates. He added,
"Before the thrift institutions can

pay such rates, without jeopardiz
ing the financial solvency and
stability of individual institutions,
reform of their asset powers will be
necessary.

set

maximum

rates

payable on deposits, because of the
broader

asset

mix

available to

banks than to their thrift-institution

competitors. Thus, in setting the in
itial schedule of deposit-rate ceil
ings, the regulatory agencies tried
to determine the maximum rates
that thrift institutions could afford to

pay, given their portfolio returns.
This set the thrift-institution ceil

ings. The maximum rates payable
by commercial banks then were es
tablished at levels up to one per
centage point below the thriftdeposit ceilings.

The regulatory agencies in this way
intended to give savings-and-loan
associations and mutual savings
banks a premium or differential to
help offset their competitive disad-

increases in

market rates have amounted to over

to

one-half

of

ment for member banks to offer to

the small saver, but "we are aware
that such unilateral action would
risk shifts of funds from thrift in

stitutions, thereby threatening the
flow of mortgage credit." He added
that when inflationary pressures
moderate, and market interest rates
decline, thrifts will be in a much

better position to compete. "Over

the longer run, however, any
depositary institution that special

izes in fixed-rate mortgages is
likely to remain vulnerable to the
pressures of disintermediation,
which

include

the

risks

of

illi-

quidity, insolvency and possible
forced merger."

Partee said that Congress should
authorize nationwide variable-rate

mortgages, with provisions to
assure the protection of consumer
interests, so that thrift and other in
stitutions could build up asset
portfolios providing earnings more

flexibly attuned to market develop

total

ments. He also said that Congress

This maturity lengthening has been

should consider exempting
Federally insured depositary in
stitutions from state usury ceilings

deposits.
welcome, he said, since the thrifts

hold predominantly long-term
assets. Also, substantial early-with
drawal penalties have helped en
sure the stability of these longerterm deposits in subsequent
periods of rising rates, blunting po
tential disintermediation.

But he continued, "After 13 years of
deposit-rate ceilings, the same set
of problems prevailing in 1966 still
constrain the options available to
the regulators to increase rates of
return paid to small savers." Thrift-

on residential mortgage rates,
especially considering that usury
ceilings today are below freemarket

mortgage yields

in

14

states.

He concluded, "If our institutional

lenders are restricted from earning

squeezed today by their effort to
compete for funds in a period of

market rates of return on assets,
then they cannot be expected to
pay market rates of return on
deposit liabilities. This is the funda
mental problem that impedes
progress toward unconstrained in
stitutional competition for smalldepositor funds — an outcome that
the Board has long supported and

high interest rates. Even though the

continues to seek."

institution earnings are being

if

031.^6'em

Awv9 / y

-joj!|BO 'oos|0ubjj ubs 'ZOll xog o'd 'oosp
-ubjj ubs jo >(UBg a/uasay |Bjapaj 'uouoas
uo!)blujoju| onqnj au,} Aq s^uBq |Bpjaw
-ujoo oi pa^nquisip S| uo|iB0i|qnd auj. >|sny
uaJB>i pus '}u,6|ux >(onqo 'a>|jng lubhmm
Aq paonpojd si sa)Ofg aAjasay |ejapaj

dllVO OOSIDNVdd NVS
29/ ON HWddd
aivd

0Zlfr6 VO oospuejj ues 'JS eujosues OOfr

39VlSOd s n
1IVW SSV10 ISHId

oospuejj ues J°
Mueg 9AJ9S9H lejepej

MINT DIRECTOR
SHOWS DOLLAR COIN

ing only about 18 months each. At
minimum, the new coin has a ten

Stella B. Hackel, Director of the
Mint, visited San Francisco this

fold service-life advantage over the
paper note. Therefore, each coin
saves over 80 percent of the pro

month to demonstrate the advan

duction costs for those notes dis

tages of the Anthony dollar coin

placed.

before a convention of the National

Automatic Merchandising Associ
ation. She said that production of

coin is larger than a quarter and

the new dollar had reached the 260-

much smaller than the half-dollar

million

level, and added that

Ms. Hackel said that the new dollar

to the public on July 2. For this par

coin. Its surface is a 75-percentcopper and 25-percent-nickel alloy
bonded to a 100-percent-copper
core. This copper-nickel 'clad' is

ticular audience, she noted that the

the characteristic of all U.S. coins

new coin is "the most slug- and
counterfeit-proof coin in the

10 cents or more.

roughly 500 million would be
available when the coin is released

now being produced with a value of

world."

The Mint Director pointed out that
production of the new coin means
cost savings for both the Treasury
Department and the Federal
Reserve. The cost of each of the

smaller, new dollar coins is about
three cents — a saving of more than
60 percent over the eight-cents unit
production cost of each large Ei
senhower dollar coin. In addition,

the life expectancy of the new dol
lar coin is at least 15 years.

The Susan B. Anthony face ('ob
verse') surface of the new coin
shows a profile of the woman
whose pioneering efforts to gain
women the right to vote helped
bring about the ratification of the
19th Amendment to the Constitu

tion in 1920. The opposite
('reverse') surface pictures the sym
bolic eagle of Apollo 11 moon land
ing. This design originally ap
peared on the larger Eisenhower
dollar coin

to

commemorate the

By comparison, the unit cost of
each one-dollar note produced by

first U.S. landing on the moon's sur

the Bureau of Engraving and Print
ing is somewhat lower — 1.8 cents

minted at the San Francisco,
Denver and Philadelphia Mints, and

each. However, the three billion

each coin carries the appropriate
mintmark designation of S, D or P.

Federal Reserve dollar notes now

in circulation wear out rapidly, last

face. The new dollar is being

w

HOUSEHOLD DEPOSITS
(Continued from pg. 1)
minimum

amount

and

other

re

quirements of the new instruments
were met.

In the U.S. Court of Appeals deci
sion, the panel said that recent ex
periments in automatic transfer

(ATS) accounts and various thriftinstitution innovations are not per

mitted by existing Federal statutes.
Because of various regulatory deci
sions, banks now offer automatic
fund transfers between savings and
checking accounts, savings-andloan associations operate remote
service units in shopping centers
and other locations, and credit
unions permit their customers to
write check-like share drafts on

their savings accounts.
As a result, the panel said, "three
separate and distinct types of finan
cial institutions" created by Con
gress to serve separate needs now
are offering "virtually identical ser
vices to the public, all without the
benefit of Congressional con
sideration and statutory enact
ment." But the court recognized
that

an

immediate

shut-down

of

these services would "necessarily
have a deleterious impact on the fi
nancial community as a whole," so
it delayed its order until next Janu
ary in the expectation that Con
gress will adopt new legislation to

solve the problem.

"fr