Full text of Federal Reserve Notes : June 1977

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Federal Reserve Notes
FEDERAL RESERVE BANK OF SAN FRANCISCO

•

JUNE 1977

Serving Alaska, Arizona, California, HawaiifJ^bj,|5[ge^|j%a9,regon, Utah &Washington
of San Francisco
BURNS DISCUSSES NOW LEGISLATION
IN SENATE BANKING HEARINGS

.III! 8

1977

LIBRARY
Federal

Reserve

Chairman

Arthur

Burns told the Senate Banking Com
mittee this month that the Federal

Reserve supported an Administration
bill that would permit depository insti
tutions nationwide to pay interest on
consumer checking-type accounts
(NOW accounts) and to receive inter
est on their required reserve bal
ances.

He said that the proposed legislation
(S. 1664) addressed two problems:
"First, the distortions caused by the
rather haphazard spread of the pay
ment of interest by depository institu
tions on transactions balances; and
second, the withdrawal of banks from

Federal Reserve membership be
cause of a growing sensitivity to the
financial costs of membership."
Burns argued that the two major ele
ments of the legislative package
should be considered in an integrated
way. "Despite our concern about the
piecemeal and capricious manner in
which the nation's financial institu

tions have been moving toward the
payment of interest on transactions
balances, we could not support na
tionwide extension of NOW account

authority if that action were not cou
pled with action to lighten the burden
of Federal Reserve membership."
The draft bill

authorizes NOW ac

counts (negotiable orders of with
drawal) for all insured commercial
banks, mutual savings banks, savings
and

loan associations, and credit

unions. (The latter could issue both
NOWs and share-draft accounts, or
SDAs.) These interest-bearing

checking accounts would be limited
to the use of individuals. The ceiling
rate payable on NOWs or SDAs would
be set (for a three-year period) by an
inter-agency committee at a uniform
figure below the bank savingsdeposit (Regulation Q) rate, currently
5 percent.

In another major innovation, the legis
lation would impose uniform reserve
requirements on NOWs and SDAs for
all depository institutions. The Federal

A. F. Burns

Reserve Board of Governors would

set these requirements, within speci
fied limits ranging from 3 to 12 percent
of relevant deposits. Fed member
banks' reserve requirements would
continue to range between 3 and 10
percent for other time and savings
deposits, and would range between 7
and 22 percent for demand deposits,
but with a 5-percent minimum for

before payment of interest on reserve
balances. In setting this interest rate,
the Fed would be expected to consid

er the possible effects on Treasury
revenues and on banks' revenues—

as well as the effect on the Federal

Reserve membership problem.
In his testimony, Chairman Burns

banks with less than $15 million in net

expressed reservations about that

demand deposits.

particular part of the legislation. He
urged Congress to set the maximum
payment to depository institutions at
15 percent instead of 10 percent of
Reserve Bank earnings.

The reserve requirements against
NOWs and SDAs would be phased in
over a three-year period for those
institutions offering NOWs and SDAs
which do not now belong to the Fed.
The reserves could be held directly
with the Federal Reserve, or indirectly
with other regulatory institutions for
redeposit with the Fed.
The other major feature of the bill
involves the authorization of payment
of interest on reserve balances, at

rates determined by the Federal Re
serve Board. However, the aggregate
interest paid in any year could not
exceed 10 percent of Reserve Banks'
net earnings for the previous year,

He said that at the present level of
earnings, the indicated maximum
could not exceed $600 million—

roughly equal to 21/4 percent of re
quired reserve balances. "Given the
host of prevailing uncertainties," he

said, "the Board doubts that the pro
posed 10-percent ceiling will prove
adequate for coping with unavoidable
cost problems of member banks." He
estimated that overcoming the bur
den of membership alone would re
quire about $500 million in interest

payments.^

SURVEY SHOWS MEMBER BANKS FAVOR
PAYMENT OF INTEREST ON RESERVES
Editorial Note: The member-bank survey described in the following article was

conducted in late April and early May, priorto the Administration's submission of
specific legislative proposals to Congress.
Angeles Branch); Robert F. Wallace,
Chief executive officers of member
banks in the San Francisco Federal

Board Chairman of the First National

Reserve District overwhelmingly fa
vor the payment of interest on
member-bank required reserves, and
they also favor being able to count
interest-earning assets as part of their

Bank of Oregon (Portland); David P.
Gardner, President of the University
of Utah (Salt Lake City); and Lloyd E.
Cooney, President and General
Manager of KIRO Radio and Televi
sion (Seattle).

required reserves. However, member
banks generally oppose paying inter
est on their demand deposits, or even
the widespread adoption of consumer
checking-type
accounts
(NOW
accounts)—although a majority of
large member banks differ with the
consensus

and

favor

NOW

ac

counts.

Survey questionnaires were sent to
the chief executive officers of the 147
member banks in the San Francisco

Federal Reserve District, and 124

banks responded, for an 84-percent
response rate. High response rates
were

recorded

for

all

three

size

G. R. Kelly
KELLY APPOINTED

SEATTLE BRANCH HEAD
Senior Vice President Gerald R. Kelly

serve Bank services—especially
check-collection, wire transfer, and

categories—large banks (deposits of
$500 million and over), medium-sized
banks (deposits of $50 million to $500
million), and small banks (deposits of
$50 million and under).

coin and currency services. Most of
them appear willing to pay for such

The major difference in response by

ran, who is resigning to accept a

services if the Federal Reserve were

size of bank occurred in reference to

position with a commercial bank in

to pay interest on their reserve bal

the question about interest-earning

Seattle.

demand accounts (NOW accounts).
Two-thirds of the large banks, which

San Francisco Fed, has extensive

In another area, the CEO's report a
broad level of satisfaction with Re

ances.

These findings resulted from an opin
ion survey of District member banks,
conducted by the Ad Hoc Member
ship Committee of the Board of Direc
tors of the Federal Reserve Bank of
San Francisco. The committee in

cludes representatives of both large
and small banking systems, as well as
businessmen and academics, to en

sure a wide diversity of views on the
membership issue.

hold the bulk of all member-bank

deposits, favored the adoption of
NOW accounts, while only a small
minority of the medium-sized and
small banks favored this proposal. In
regard to the question of paying inter
est on demand deposits, a significant
proportion (37 percent) of the large
banks favored the change, while the
vast majority of small banks strongly
opposed the proposal. Banks holding
more than three-fifths of all member-

Ronald S. Hanson, President of the

bank deposits favored both nation
wide NOWs and the payment of inter

First National Bank of Logan, Utah.

est on demand deposits.

The chairman of the committee is

Other Head Office committee mem
These differences reflected the na

dent of Crown Zellerbach Corpora
tion, and Dorothy Wright Nelson,

tionwide split in thinking between
large and small banks on the issue.

Dean of the University of Southern

The American Bankers Association,

California Law Center.

representing many large as well as
small banks, recently accepted the
concept of interest-paying consumer
checking accounts under certain
specified preconditions. However, the
small-bank dominated Independent

resent Branch Office Boards of Direc

tors. They include J. R. Vaughan,
President of Knudsen Corporation,

and Rayburn S. Dezember, Board

Bankers Association has continued

Chairman and President of the Ameri

to oppose any such concept. ^

can National Bank, Bakersfield (Los

Federal Reserve Bank of San Fran

cisco, effective July 1, 1977. He re
places Vice President James J. Cur-

Kelly, a 24-year career officer with the
experience in all aspects of opera
tions. Prior to his current assignment,
he was Senior Vice President (Branch

Operations) at the San Francisco
Head Office. He previously served as
Senior Vice President-in-Charge of

the Los Angeles Branch. Kelly is a
graduate of the Pacific Coast Banking
School.

The Seattle Branch serves most of

the state of Washington and all of
Alaska. The area served by the
Branch

includes

952

commercial

banking offices, if1
PUBLICATION

bers include Charles R. Dahl, Presi

Five other committee members rep

has been appointed Officer-inCharge of the Seattle Branch of the

AVAILABLE
"The Monetarist Controversy" is a
new Federal Reserve Bank of San

Francisco publication featuring a
paper by Professor Franco Modigliani with discussion by Professor
Milton Friedman. To obtain a copy,
write or phone the Public Informa
tion Section, Federal Reserve
Bank of San Francisco, P.O. Box

7702, San Francisco 94120, phone
(415) 544-2184.

SMITH NAMED CREDIT, CONSUMER OFFICER

OVER ONE MILLION
DIRECT DEPOSITS

Every month, over one million govern
ment payments are being deposited
directly at financial institutions in the
San

Francisco

Federal

Reserve

District—and most of them are going
to-commercial banks.

W. Gordon Smith has been named
District Credit and Consumer Affairs

Officer by the Federal Reserve Bank
of San Francisco. In his new position,

he supervises activities involving the
discount window, consumer-affairs

regulations, and securities-credit reg
ulations at the five offices of the San

According to Treasury Department

Francisco Fed.

data, the million mark was reached in

Smith previously served as the Bank's
Assistant General Counsel, repre
senting the bank in litigation and con
tract negotiations and providing gen
eral legal advice. He also assisted the
bank's Supervision, Regulation and
Credit Department in administering
laws and regulations governing banks
and bank holding companies.

April, when 1,008,605 payments were
made at District institutions. Commer

cial banks received 908,000 or 90

percent of these direct deposits.
Savings-and-loan associations re
ceived 85,000 direct deposits (8 per
cent), with the remainder being split
among mutual savings banks, credit

Smith has served in a number of other

Under the Treasury's direct-deposit
program, an individual can have gov
ernment payments transferred direct
ly to his savings or checking account
in a designated financial institution by
electronic means, instead of receiv
ing his checks by mail. The program
covers such recurring payments as
social security, supplemental security
income, civil service retirement, rail
road retirement, and revenue sharing

payments. Every month, about $3.5
billion is disbursed nationwide in this
fashion.

Direct deposit offers a number of
advantages aimed at saving time and
cutting down on paperwork. It elimi
nates problems of theft and loss,
delays in getting the deposit to a
financial institution and standing in
line, and problems of receiving or
depositing a payment when the reci
pient is out of town.
In April, California led the way in the
number of direct deposits with
570,263, followed by New York with
464,671. Two other District states
California

to a member of the Federal Reserve
Board of Governors.

unions and others.

besides

W. G. Smith

had

more than

100,000 direct depositsWashington and Arizona.
According to the Treasury, almost
one-sixth of the 36 million monthly
payments eligible under directdeposit programs are actually han
dled electronically. In the San Fran
cisco District the proportion is even
higher, with roughly one out of five

areas since joining the bank in 1968,
including Manager of Personnel, Fis
cal Officer, and Cash Officer. In 1974,
he served as administrative assistant

He graduated from the University of
Texas at El Paso with a B.A. degree in
1963, and earned his J.D. degree in
1972 from Golden Gate University of
Law. He was a member of the Law

Review staff at that institution, iflr
payments being made electronically.
Among individual states, Florida leads
the list with 30.2 percent of its eligible
government payments being handled
through the direct-deposit program,

but it is closely followed by Arizona,
Utah, and Washington.
In coming months, the Treasury De
partment will intensify its efforts to
convince more individuals to utilize

the system, through a program called
SPREDD (Systematic Promotion of
Effortless Direct Deposits). Contacts
will be made with local-government
officials, social-service organizations
and groups representing the aged, to
create more awareness among sen
ior citizens of the benefits of electronic

transfers. The Treasury is asking
commercial banks and financial insti

tutions to join in the project by organ
izing promotions of their own.

The promotions emphasize the safety
and convenience of the program,
especially for senior citizens. This
month, direct-deposit stuffers will ac
company all checks made to those
who are eligible for the program. In
addition, the Treasury has an
nounced that direct deposit will be
extended to Veterans Administration

payments programs, being operative
nationwide by this fall.

NEW TIME-DEPOSIT

RULE TAKES EFFECT
A Federal Reserve ruling announced
earlier this spring takes effect on July
6, permitting member banks to pay
the same deposit interest rate as thrift
institutions on long-term retirement
accounts. The Board of Governors,

by amending its Regulation Q, has
established a new category of time
deposit for so-called IRA and Keogh
funds deposited with member banks.
Banks henceforth may pay a maxi
mum 7%-percent rate on individual
retirement accounts (IRAs), which
are established for persons not
covered by on-the-job retirement
programs—and also for Keogh plans,
which are similar plans for selfemployed persons. Up to now, banks
could pay no more than IV2 percent
on such accounts.

Persons eligible for IRA savings ac
counts are allowed tax-deferred con

tributions up to $1,500 annually, or 15
percent of gross income, whichever is
less. The Keogh law allows selfemployed persons to deposit tax-

deferred contributions up to $7,500
annually, or 15 percent of gross in
come, whichever is less. ^

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EQUAL CREDIT
PAMPHLETS AVAILABLE

The rights of women and senior citi
zens under recently enacted credit
legislation are explained in two free
pamphlets produced by the Federal
Reserve System. Another new
pamphlet describes the meaning of
the act for professional people and
small retailers.

BRANCH DATA EXCHANGE PROGRAM
EXPANDS THROUGHOUT DISTRICT

A record 171 banks participated in the

er participants include 15 out of 16

Federal Reserve Bank of San Fran

banks in Arizona, and 38 out of the 84

cisco's Branch Data Exchange (BDX)
program in 1976—a 43-percent in
crease over the previous year. The
BDX program helps banks measure
their market position, the success of
advertising efforts, and the efficiency

banks in Washington.

of individual branches.

The pamphlets—available to bank
ers, service organizations, communi
ty groups and others—are entitled

"The Equal Credit Opportunity
Act. . . and Women," "The Equal
Credit Opportunity Act. . . and Age,"
and "The Equal Credit Opportunity
Act and. . . Doctors, Lawyers, Small
Retailers and Others."

The Equal Credit Opportunity Act
prohibits discrimination against any
applicant for credit on the basis of

tions

of creditworthiness, such as the abili
ty and willingness of individuals to
repay their debts. However, it aims to
prevent arbitrary denial of credit on
the basis of other factors.

older

citizens

should

know

about. The third pamphlet contains
similar information for certain types of
lenders, such as professionals, small
retailers and other providers of credit.

For copies of the pamphlets, contact
the Consumer Banking Affairs repre
sentative at any office of the Federal

Reserve Bank of San Francisco.%
"Equal Credit and Women" provides
definitions of creditworthiness, and
explains how to apply for credit, how
persons are rated as credit risks, and

tion to exchange data with other
branch-banking systems. Next, they
supply the Fed with individual branch
data,

The program was established in Cali
fornia five years ago, and has since
expanded to two other states. In Cali
fornia, 118 banks accounting for over
95 percent of the state's total banking
deposits take advantage of BDX. Oth-

how to establish a credit history. The
pamphlet on age also provides gener
al rules for rating individuals as credit
risks, and notes special considera

such factors as age, sex, marital sta
tus, race, color or religion. The act
does not change the basic standards

BDX participants initially provide the
San Francisco Fed with an authoriza

in the form of

a

schedule,

punched cards, or tape for each sur
vey date. The information is proc
essed and compiled into a confiden
tial report for each bank, detailing the
bank's comparative position for each
county or market subarea where it
has an established branch. Surveys
are conducted semiannually in June
and December.
For further information about the BDX

program, contact the Bank and Public
Services Department at the nearest
Fed office or—in San Francisco-

Paul Van Etten, Manager of Banking
and Statistical Reports, (415) 544-

2183. ''fa