Full text of Federal Reserve Notes : June 1981

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FEDERAL RESCfUIC BiHK

FEDERAL RESERVE BANK OF SAN FRANCISCXX

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June 1981

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

DEREG PANEL ADOPTS PHASE-OUT SCHEDULE

The Depository Institutions Deregu

On August 1, 1983, ceilings would

lation Committee, at its June 25

be eliminated on accounts maturing

meeting, adopted major changes in
its schedule for phasing-out bank
and thrift-institution deposit-rate
ceilings. The committee was cre
ated by Congress last year to imple
ment the Depository Institutions
Deregulation and Monetary Control

in two years or more. Rates for de
posits maturing in one to two years

Act of 1980.

The committee lifted, as of August 1,
the current ceiling on 21/2-year
"small-saver certificates." The rate
will remain tied to the rate on Trea

sury securities of comparable ma
Herman C. Bradley Jr.

NEW FED DIRECTOR
AT PORTLAND BRANCH

Herman C. Bradley Jr., president
and chief executive officer of the Tri-

County Banking Company of Junc
tion City, Oregon, has been ap
pointed a director of the Portland
branch of the Federal Reserve Bank

of San Francisco.

A native of Prineville, Oregon,
Bradley fills the unexpired term of
Merle G. Bryan, a bank executive
from Forest Grove. Directors of the
Federal Reserve Bank of San Fran

cisco appointed Bradley, 50, whose
term runs through December 31,
1982.

Except for a stint with the U.S. Air
Force during the Korean conflict,
Bradley has spent his entire adult
life in banking, starting as a teller
trainee after graduation from Uni
versity High School in Eugene. He
later graduated from the Pacific
Coast Banking School.

turity, but without the present cap of
11% percent for banks and 12 per
cent for thrifts. (There is no cap on
Individual Retirement Account,
Keogh Plan, or governmental de
posits.) Underthe DIDC ruling, how
ever, thrifts would be able to retain

their current 1/4-percentage-point
differential over bank rates. Addi

would be tied to the one-year Trea

sury rate, without any thrift-bank
differential.

On August 1, 1984, ceilings would
be eliminated on accounts maturing
in one to two years. Rates for de

posits maturing in less than one
year would be tied to the compa
rable Treasury rates without any
differential.

On August 1, 1985, ceilings would
be removed from accounts that ma

ture in less than one year, except for
passbook-savings accounts. Under
the law, all rate ceilings would be
removed the following April.
The committee making these deci
sions consists of the Secretary of
the Treasury (this year's chairman),

tionally, the committee removed
completely the rate ceiling for
accounts maturing in four years

and the Chairmen of the Federal

or more.

ration, the Federal Home Loan Bank
Board, and the National Credit

On August 1, 1982, ceilings would
be eliminated for accounts maturing
in three years or more. Interest rates
on deposits maturing in two to three
years would be tied to the rate on

two-year Treasury securities, with

Reserve Board of Governors, the

Federal Deposit Insurance Corpo

Union Association, along with the
nonvoting Comptroller of the
Currency.
Separately, the Senate Finance
Committee and the House Ways

the thrift-bank differential kept

and Means Committee voted in late

intact.

June to authorize issuance of one-

member of the Pacific Coast Bank

year, tax-exempt certificates by the
hard-beset thrift industry. The

ing School. In addition, Bradley is an
executive council member of the Tri-

County Rotary Club of Junction City,

He is chairman of the State Char

and a member of the Oregon Bank
ers Association, Junction City
Chamber of Commerce, Eugene
Country Club and Aircraft Owners

tered Banks of Oregon and a board

and Pilot Association. ij|ji

House version would link the issu

ance of certificates to the amount of

new residential mortgages made by
any institution, but the Senate ver
sion would not require any such
restriction. Wi

ACCESS TO FED's ACH SERVICES TO BEGIN AUGUST 1
This article is another in a series high
lighting Federal Reserve operations

ments. Commercial use of clearing

and services. This month, the Automa

opment, so that commercial trans

ted Clearing House (ACH) operation is

actions account for only about one-

featured. This service becomes avail

quarter of total ACH volume.

able on August 1 to all depository insti
tutions as part of the provisions of the
Depository Institutions Deregulation
and Monetary Control Act of 1980.

house facilities is still under devel

Access and Pricing
The Federal Reserve will provide
expanded access to ACH services

ACHs provide an electronic means

on August 1,1981. Charges for these
services normally will be levied
against the party originating an ACH
debit, and against the receiver of an
ACH credit. The charge for each ser
vice includes receiving, sorting, rec
onciling, settling and delivering of

to exchange paperless debit and
credit entries among financial insti

Charges will be uniform nationwide

In an effort to reduce the growth of
the paper-based check system, the
Federal Reserve is playing a central
role in encouraging development
and operation of the nationwide au
tomated clearing-house system.

tutions for customer accounts. ACH

services are not offered directly to
the public or to corporations.

Automated clearing houses were
established early in the 1970s as a
means of clearing of local items,
and these local systems eventually
were connected to form a nation

wide network. In the meantime, the
number of checks written in the dec

ade of the 70s increased 73 percent
to more than 32 billion per year.
Check usage should slow substan
tially over time, however, as the total
of ACH-processed items increases
above its present total of approxi
mately 234 million a year.

both debit and credit transactions.
and based on the destination of indi

vidual items. Charges will not be
levied upon receivers of govern
ment electronic payments. Addi
tional service charges may be le
vied against any institution which
requires special deliveries outside
its local Federal Reserve service

territory.
To institute a credit or debit system,
a prenotification must be run to in
sure that the billing process will
work and all information is accurate.

The billing office or creditor sends a
zero dollar amount through the ACH
process to the receiving financial
institution. If the latter cannot iden

term objective of this procedure is to
reduce reliance on manual delivery.
Credit Services

Large companies, or companies
with multi-state operations, increas

ingly are using ACH payroll-credit
services to reduce work volume and

operating costs. Employees can
benefit from having a depositing
service because of the built-in se

curity from lost or stolen checks,
and the timely deposit of paychecks.
In order to use an ACH facility to
deposit its payroll, an employer
need only provide payroll data to its
own bank of account; its employees
can maintain their accounts at the
financial institutions of their choice.

Employees with authorized auto
matic deposits can cancel authori
zation of this direct-credit procedure
at any time.
To activate a credit entry, the em
ployee must sign an authorization
form permitting the employer to de
posit a wage, pension or other
source-of-income credit into a des

ignated account. A few days before
the actual date of payment, the em
ployer enters all credit information
on a magnetic tape and forwards
that tape to the employer's financial
(originating) institution.

Federal Reserve Banks operate all

tify the customer or discovers inac
curate information, the prenotifica

The originating institution extracts
data from the tape regarding receiv

but one of the 32 automated clear

tion must be returned to the ACH

ers with accounts at that institution.

ing-house facilities in the United

immediately. The ACH must then
forward the prenotification to the
originator so that errors can be cor
rected by the billing office.

It then records all remaining entries
on another magnetic tape, along

States. ACH associations maintain

the legal and operating framework
necessary for ACH facilities to ac
complish the necessary exchanges
of funds. These associations pro
vide educational, operational and
technical support to financial
institutions.

ACH services can accommodate a

wide range of transactions, such as
direct deposit of payrolls, bill pay
ing, and recurring government pay

ACH Delivery
An originating financial institution
must transmit ACH files to the

processor either by computer link or
manual delivery of magnetic tapes
in the format defined in the Operat

ing Rules of local ACH associations.

ments. U.S. Government transac

The ACH will deliver entries to a re

tions presently account for a major
percentage of ACH usage, because
the U.S. Treasury has made a con

ceiving financial institution or a predesignated processor. This may be
done at the receiver's option, either
through computer links or through
the physical delivery of magnetic
tapes or paper listings. The long-

certed effort to maximize its use of

ACHs for direct-deposit transac
tions such as social-security pay

with credit and debit entries from

other depositors, and forwards the
tape to the local ACH facility. That
local facility consolidates all such
tapes and transmittals from ACH out
lets in other Reserve Bank terri

tories, and after balancing and vali
dating, sorts them for distribution to
the appropriate receiving institu
tions. The data for each receiving
institution are prepared for delivery
on magnetic tape, paper listings, or
via electronic transmission.

Debit Service
Institutions handle debits in much

the same way as credits. The billing
company sends a magnetic tape
with debit entries to its financial in-

VOLCKER PROPOSES MONEY-FUND RESERVES
Federal Reserve Chairman Volcker

incentives for savings," Volcker

asked Congress on June 25 for au
thority to impose reserve require
ments on money-market funds that

explained.

provide transaction (check-type)
services. Under this proposal,
money-market funds would have to
set aside in noninterest-bearing re
serves a certain portion of their
check-type deposits, similar to the
reserves required on transaction
and nonpersonal time deposits of
banks and thrift institutions.

The Fed chairman said that, under

this plan, money-market funds
would probably segregate checking
from other deposits. People wishing
to write checks on their fund bal
ances would then receive a lower

yield, since part of these balances
would be in noninterest-earning re
serves. Others who don't use such

check-writing services wouldn't be
affected, he added.

"The approach I am proposing is
designed to provide a framework for

The Federal Reserve Bank of San

Speaking on the same day at a
meeting of the Depository Institu
tions Deregulation Committee,
Volcker proposed considering a
new thrift-institution saving vehi
cle—a 90-day account that would
pay a market rate, require a $10,000
minimum deposit, and require a
week's notice on withdrawals. The

panel didn't make a decision on that
proposal, but it decided to consider
another proposal for improving the
thrifts' competitive position against
money-market funds—the calcula
tion of six-month certificate rates on

the basis of a moving average of
six-month Treasury-bill rates.

Currently, the institutions adjust the
certificate rate each week according

fund rates whenever market interest

rates decline. The proposed ap

market funds and established de

proach would help depository insti
tutions stay competitive with
money-market funds during such

to measure and control the money
stock, and to maintain attractive

Francisco has published a new con
sumer's guide to credit-protection
laws titled "Give Yourself Credit!"

The 40-page booklet can assist po
tential borrowers looking for a loan,
as well as creditors who want to

improve their customers' under
standing of credit transactions. It
discusses the meaning of credit,
what determines creditworthiness,

and what a person's legal rights are
when he or she applies for credit.

The booklet's text follows two typi
cal loan applicants through several
credit transactions they are apt to
encounter. These include applica
tions for credit cards, auto loans,

home-mortgage loans and homeimprovement loans.

to the most recent rate set at the

Treasury's weekly bill auction. But
under this system, certificate rates
fall more rapidly than money-market

fair competition between money-

pository institutions over time, to
protect against erosion in our ability

CONSUMER BOOKLET
RELEASED BY SF FED

Give
Yourself
Credit!
A_Consumer*s

periods.-^

stitution which, in turn, forwards the

entries for closed accounts or for

The illustrated booklet contains a

data to the local ACH. This service

accounts containing insufficient

is most commonly used for regularly
scheduled bill payments, such as
insurance premiums, loan pay
ments, utility bills or rent payments.

funds. These items should be re

typical credit-application form,
truth-in-lending disclosure state

Customers may choose among
three types of debit services—preauthorized bill payment, one-time
authorization, and customer-initi

ated entries. A preauthorized bill
payment involves a debit which re
curs at regular intervals and does
not vary in amount, such as insur
ance premium payments. One-time
authorization allows a billing com
pany to debit a customer's account
for payments which recur at a peri
odic rate, but which may vary in
amount, such as utility bills.
Return Items

When posting ACH items to custom
ers' accounts, receiving financial
institutions occasionally encounter

turned on paper or transmitted elec
tronically to the local Federal Re
serve office—ACH facility. Returns
must be submitted by midnight of
the business day following the day
of receipt. The Federal Reserve—
ACH facility, upon receipt, makes
proper settlement entries for the

ment, bank credit-card statement,
credit-denial statement and resi

dential-loan application form. In
cluded in the booklet is a glossary
containing more than 40 definitions
of common credit terms.

Single copies of "Give Yourself

total of return items. The ACH sorts
the return items and returns them to

Credit!" can be ordered from Jana

originating financial institutions for

ACH services can be obtained by

partment at the Federal Reserve
Bank of San Francisco, P. O. Box
7702, San Francisco, CA 94120.
Phone (415) 544-2765. Bulk orders
will be individually considered

contacting the following ACH de

based onthe available supply. 1jj|j

resolution.

Detailed information on the Fed's

partments:

San Francisco
Los Angeles
Portland
Salt Lake City
Seattle

(415) 544-2298
(213)683-8354
(503)221-5950
(801)355-3131
(206)442-1668

Henkel in the Consumer Affairs De

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FED SEEKS COMMENTS
ON OPTIONS MARGINS

FED AUTHORIZES IBFs FOR U.S. BANKS
The Federal Reserve Board of Gov

from the original proposal of a

The Federal Reserve Board of Gov

ernors has authorized U.S. deposi
tory institutions to establish interna
tional-banking facilities (IBFs) begin
ning December 3, in hopes of at
tracting offshore-banking business

$500,000 minimum. Holders of IBF
deposits would be required to give
at least two days' notice of inten

ernors is seeking comments on pro
posed Regulation T amendments
concerning margin requirements for
trading of options on government-

to the United States.

In approving the proposal, the

gin requirements for options con

Board said that it intends to limit IBF

The Fed will permit IBFs to engage

tracts on Government National

accounts to international banking,

in international banking free of the
domestic reserve requirements of
Regulation D and the interest-rate
limitations of Regulation Q. Be
cause of those regulations, many

so they would not be used to evade

Mortgage Association (GNMA)
securities approved for trading on
the Chicago Board Options Ex
change, and for options contracts
on Treasury bills, notes and bonds
proposed for trading on the New

U.S. financial institutions had set up

tions to withdraw from IBF accounts.

debt issues. Affected would be mar

controls on domestic banking. Ac
cording to the policy statement:
"The Board expects that, with re

branches outside the mainland—

spect to nonbank customers located
outside the United States, IBFs will

primarily in the Caribbean and
London—to compete in internation

accept only deposits that support
the customer's operations outside

al markets.

the United States and will extend

The Board said that IBFs would be

allowed to offer time deposits and
extend credit to foreign residents,
foreign banks, other IBFs, and par
ent institutions of IBFs. Advances

by an IBF to U.S. offices of its parent
institution would be subject to the
reserve requirement on Eurocur
rency liabilities of the U.S. office.
IBF loans and deposits could be

either in dollars or in foreign
currencies.

Minimum deposits and withdrawals
would be set at $100,000, down

credit only to finance the customer's

non-U.S. operations.

Deposits

should not be used as a means of

circumventing interest-rate restric
tions or reserve requirements."

York

and

American

stock

ex

changes and the Chicago Options
Exchange.
Comments, which should refer to

Docket No. R-0082, may be mailed
to the Secretary, Board of Gov
ernors of the Federal

Reserve

System, 20th Street and Constitu
tion Avenue, N.W., Washington,
D.C.20551.

IBFs will be subject to the same ex
amination and supervisory proce
dures applying to other operations
of parent institutions. The Board
may require special reports from
IBFs for monitoring monetary and
credit conditions and for other

purposes. H

Meanwhile, the Board said it will

prohibit the holding of foreign cur
rency in securities' margin accounts
beginning July 13. Margin accounts
are the cash that investors must

produce when buying stock. Fed
rules require that these cash de
posits equal at least 50 percent of

the stock's value, qffij