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September 1980
1

The Deregulation and Monetary Control Act of 1980

5

Regulatory Changes Bring New Challenge to 5&L's,
Other Depository Institutions

10

"Fed Quotes"

12

Regulatory Briefs and Announcements

15

Now Available from the Federal Reserve

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)

The Deregulation
and Monetary Control
Act of 1980
The Depository Institutions Deregulation and Monetary Control Act of 1980 was signed into law
March 31, 1980. Described by some as the most significant piece of legislation since the 1930's, the act
includes a number of major provisions, several of
which may have considerable impact on the structure and performance of financial institutions.
The act provides for the phasing out of interest
rate ceilings on time and savings deposits, a feature
of banking regulation since the Depression in the
1930's. With the elimination of rate ceilings, the
higher ceilings that have been authorized for savings and loan associations than for commercial
banks would disappear. The act acknowledges
that interest rate ceilings have become outdated
and, in an inflationary environment, have caused
substantial shifts of financial resources from depository institutions to money market instruments.
Another part of the act authorizes all depository
financial institutions to offer negotiable order of
withdrawal [NOW) accounts, commonly referred to
as interest-bearing checking accounts. These had
previously been authorized only in the New England
States, New York, and New Jersey. Commercial
banks had been authorized to make automatic transfers from savings to checking accounts, but this has
not been used widely. Thus, the act authorizes thrift
institutions across the nation to participate directly
in the payments mechanism by providing thirdparty payment services.
These two features of the Deregulation and Monetary Control Act will increase financial alternatives
available to most households and may significantly
September 1980/Voice

increase competition among financial institutions.
The act will influence the evolution of financial
institutions in other ways as well. Certainly, the
spread of electronic banking allowed by the new
legislation will be a significant development, as
will the pricing of Federal Reserve services.
Key features of the act
The act is developed in nine parts, or titles. Some
major provisions of the titles are given below.
• Title I requires all depository institutions to
hold reserves against transaction accounts and
nonpersonal time deposits, gives all depository
institutions access to Federal Reserve services on
a fee basis, and extends access to the Fed's discount
window to all depository institutions subject to
reserve requirements.
• Title II provides for the orderly phaseout, as
rapidly as economic conditions warrant and within
a six-year period, of interest rate ceilings on deposits and accounts. The Depository Institutions
Deregulation Committee was created to achieve
this goal, at which time the committee will cease to
exist and rates would thereafter be determined by
market forces. The committee is to try to provide
depositors with a market rate of return on their
savings with due regard for the safety and soundness of depository institutions.
• Title III authorizes all depository institutio~s
to offer NOW accounts, effective December 31,
1980, to individuals and to organizations operated
primarily for nonprofit purposes. It also authorizes savings and loan associations to operate
1

remote service units, allows credit unions to make
mortgage loans to cooperatives, increases the loan
rate ceiling for Federal credit unions from 12 percent to 15 percent, and increases Federal insurance on deposits from $40,000 to $100,000.
• Title IV authorizes new investment opportunities for federally chartered savings and loan associations and expands their authority to make real
estate, acquisition, development, and construction
loans. These associations also may engage in
credit-card operations, exercise trust powers, and
issue mutual capital certificates with fixed or
variable dividend rates. Federal mutual savings
banks may make commercial, corporate, and business loans and are authorized to accept demand deposits in connection with a commercial, corporate,
or business loan relationship.
• Title V preempts state usury laws regarding
residential loans, mortgages, and credit sales or
advances unless reinstated by April 1. 1983, and
preempts state usury laws on business and agriculturalloans of $25,000 or more, such preemption to
expire April 1, 1983, unless overridden by state
legislatures. A ceiling of 5 percent over the Federal
Reserve discount rate is imposed for such business
and agricultural loans.
• Title VI simplifies the truth-in-Iending requirements of Regulation Z in an attempt to increase
consumer understanding and facilitate procedural
matters for creditors.
• Title VII authorizes amendments to the national banking laws relating to the authority of national banks and the operations of the Comptroller
of the Currency.
• Title VIII requires that regulations of the
Federal financial regulatory agencies be reviewed
periodically and revised, when necessary, to ensure that they are as simple and clear as possible,
achieve legislative goals, and do not impose any
unnecessary burden on financial institutions or
consumers.
• Title IX prohibited the approval before July 1,
1980, of any applications relating to the takeover
of domestic financial institutions by foreign concerns, except under specified circumstances.
Since the enactment of the Depository Institutions
Deregulation and Monetary Control Act, the Board
of Governors of the Federal Reserve System has
issued proposals and revised regulations to implement the new law, and the Depository Institutions
Deregulation Committee has issued various proposals for comment and announced several mea2

sures. The actions of the Federal Reserve Board
have included major revisions of Regulations A
and D and the publication of a proposed pricing
schedule for Federal Reserve services.
Regulation A
The revised Regulation A, effective September 1,
1980, implements the Title I provision that all
depository institutions subject to reserve requirements have access to the Federal Reserve's discount window. Nonmember banks and nonbank
depository institutions maintaining transaction
accounts or nonpersonal time deposits now have
access to the loan facilities of Federal Reserve
banks on the same basis as member banks.
The depository institutions are still expected
to rely on other reasonably available sources of
funds before turning to the Federal Reserve banks
for credit. These sources include special industry
lenders, such as the Federal home loan banks. the
Central Liquidity Facility of the National Credit
Union Administration, and corporate central credit
unions. The final revision of Regulation A was
modified slightly from the June proposal to allow
temporary advances on short notice to institutions
experiencing immediate cash or reserve needs when
timely access to their special industry lenders is
not available. These advances would be repayable
when access to the usual lender is again available,
usually the next business day.
According to revised Regulation A, credit is
available under two major programs: short-term
adjustment credit and extended credit. Short-term
adjustment credit, which in the past has accounted
for most Federal Reserve lending, is available to
help depository institutions meet temporary needs
for funds. This type of credit is also available
for longer periods-up to a few weeks-to help
cushion more persistant outflows of funds pending
an orderly adjustment of the institution's assets
and liabilities.
Extended credit includes "seasonal" credit,
which can provide a prearranged line of credit to
smaller depository institutions that lack access to
national money markets to help offset the effects
of a drain on funds at the same time every year.
This type of credit is designed to accommodate
seasonal needs for extra funds that arise from
expected patterns of movement in deposits and
loans. In addition to seasonal credit, "other" extended credit can be made available to assist institutions facing special problems of either a local or
Federal Reserve Bank of Dallas

a widespread nature.
Extensions of any type of credit from Federal
Reserve banks will be in the form of secured advances at the discount rate, although a surcharge
over the basic rate is provided for in certain
circumstances. And prior to the extension of
credit to any eligible institution, the necessary
loan documentation must be on file with the Federal
Reserve Bank.
Regulation D
The Board of Governors also adopted a revision of
Regulation D, under which reserve requirements
will apply to all depository institutions offering
transaction accounts or nonpersonal time deposits.
The reporting of deposits subject to reserve requirements will begin October 30, unless reporting
for the institution has been deferred to a later
date, and the actual maintenance of reserves will
begin November 13.
The initial reserve requirements are as follows:
• 3 percent on the first $25 million of transaction accounts.
• 12 percent on transaction account amounts
over $25 million.
• 3 percent on nonpersonal time deposits with
original maturities of less than four years.
• 3 percent on Eurocurrency liabilities.
Regulation D defines transaction accounts as
demand deposits, NOW accounts, ATS accounts
(savings accounts subject to automatic transfers),
share draft accounts, accounts permitting telephone
or preauthorized transfers to third parties, and
accounts permitting third-party payments through
automated teller machines or remote service units.
Three telephone or preauthorized transfers a month
are permitted before an account is subject to reserve requirements. An account that permits more
than three transfers a month is subject to reserve
requirements even if it is not actively used.
Transfers in connection with a loan made by the
institution holding the deposit do not make an
account subject to reserve requirements.
Nonpersonal time deposits are defined as transferable time deposits or time deposits held by a
depositor that is not an individual or sole proprietor. For transitional purposes, all time deposits
issued to individuals before October 1, 1980, will
be considered personal time deposits. After that
date, a personal time deposit must have a legend
indicating that the instrument is not transferable.
Individual Retirement Accounts, Keogh accounts,
September 1980/Voice

and deposits held by trustees for natural p~rsons
are personal time deposits and are not subject to
reserve requirements.
In addition to transaction accounts and nonpersonal time deposits, Regulation D imposes. rese:ve
requirements on commercial paper, credIt umon
certificates of indebtedness, ineligible acceptances,
due bills remaining uncollateralized by similar
securities within three days, and mortgage-backed
bonds with original maturities of less than four
years. Generally, such items with original maturities of less than 14 days will be considered
transaction accounts, and those with original maturities of more than 14 days will be considered
nonpersonal time deposits.
Reserves may be held as vault cash or as balances
with Federal Reserve banks. Nonmember institutions may choose to hold reserves directly with a
Federal Reserve Bank or indirectly through passthrough arrangements. Pass-through correspondents may be a Federal home loan bank, th~ ~a­
tional Credit Union Administration Central LIqUIdity Facility, or a depository institution holding reserve balances with a Federal Reserve Bank. Where
reserve balances of a nonmember institution are
zero or small, it may be necessary for the institution to maintain clearing balances with a Federal
Reserve Bank in order to utilize Federal Reserve
services involving debits to the reserve account.
Regulation D provides for a gradual phase-in of
the required reserves of depository institutio~s.
Nonmember depository institutions will phase III
their reserve requirements over an eight-year period
beginning November 1980. Member banks will
phase down their required reserves to the lower
level provided in the act over a period of approximately 31/2 years from September 1, 1980, with
the actual phase-down beginning with the reserve
maintenance period starting November 13, 1980.
New banks, new members, new agencies and
branches of foreign banks, and new Edge corporations will phase in reserve requirements over a
24-month period. There will be no phase-in period
for reserve requirements on NOW accounts for
depository institutions outside states where NOW
accounts are currently permitted.
Pricing Federal Reserve services
The Board of Governors has proposed for public
comment a schedule of fees for Federal Reserve
Bank services to financial institutions, including
a statement of the principles upon which the pro3

posed charges are based. In addition, the Board
announced a series of measures to reduce Federal
Reserve float and a preliminary plan to price remaining float beginning in mid-1982. The Board's
proposed pricing of services and its endeavors to
eliminate Federal Reserve float are in response to
objectives of the act and are meant to offset the
loss in revenue to the U. S. Treasury that will occur as a result of the lower average reserve requirements set by the act and to serve as a means
of encouraging competitive and efficient provision
of services.
The four principles that serve as the basis for
Federal Reserve fees are:
1. All Federal Reserve services listed under the
fee schedule are to be priced explicitly.
2. Nonmember depository institutions are to be
charged the same prices as member banks and may
be subject to other terms, such as clearing balances,
that apply to member banks.
3. Over the long run, the fees are to be based
on all direct and indirect costs actually incurred
in providing the services.
4. Interest on float shall be charged at the
current market rate for Federal funds.
In addition to the basic pricing principles, the
Board set forth further principles as a means of
encouraging competition and an adequate level of
services nationwide.
5. Over the long run, the fee schedule should
recover total costs for all priced services.
6. The schedule should be structured so that it
avoids disruptions in services and facilitates an
orderly transition to pricing.
7. Schedules and services should be flexibly administered to respond to changes in market conditions and demands for the services.
8. Incentives may be provided to improve the
efficiency and capacity of the payments system and
to induce desirable longer-run changes in it.
Fees will be charged the party originating a
transaction and will be for the following services:
1. Currency and coin transportation and coin
wrapping.
2. Check clearing and collection.
3. Wire transfer of funds.
4. The use of Federal Reserve automated clearinghouse (ACH) facilities.
5. Net settlement of debits and credits affecting
accounts held by the Federal Reserve.
6. Book entry, safekeeping, and other services
connected with the purchase or sale of goverment
4

securities.
7. The receipt, collection, and crediting of accounts of depository institutions in connection
with municipal and corporate securities-usually
referred to as noncash collection.
8. Federal Reserve float.
9. Any new services the Federal Reserve System
offers.
The following is the schedule of effective dates
the Board has proposed for pricing services:
Pricin~

Service

Wire transfer
Net settlement.
Check clearing
and collection
Automated clearinghouse
Currency and coin
Securities services
Noncash collection
Float
Phase I
Phase II
Phase III

effective

January 1981
January 1981
April 1981
April 1981
July 1981
October 1981
October 1981
In progress
September 1981
Mid-1982

Float reduction
The Monetary Control Act calls for reducing and,
if possible, eliminating Federal Reserve float
(funds paid on checks or other noncash items prior
to collection from the payee banks). In order to
accomplish this, the Board has proposed a threephase plan. Phase I calls for improvements in
Federal Reserve System operations involving check
clearing and collection. Already under way as part
of this phase are measures to improve the Federal
Reserve's Interdistrict Transportation System for
moving checks.
Phase II involves modification of schedules for
making funds available to institutions that have
presented checks for clearance. Any float remaining after the implementation of Phases I and II
would be charged for explicitly. The charges would
be computed at the prevailing Federal funds rate
and would be reflected in the fees for all check
collection services.
Comments on the proposed fee schedules and
pricing principles must be received by October 31,
1980; should refer to Docket No. R-0324; and should
be addressed to Theodore E. Allison, Secretary,
Board of Governors of the Federal Reserve System,
20th Street and Constitution Avenue, N.W., Washington, D.C. 20551.
Federal Reserve Bank of Dallas

Regulatory Changes Bring
Ne\\T Challenge to S&L's,
Other Depository Institutions
By Branwyn Brock

In the past 15 years, residential construction experienced four substantial declines in sales, production, and employment. These recessions in the
housing industry were directly related to disintermediation at savings and loan associations
(S&L's)-the largest source of mortgage fundsand at other lenders of long-term mortgage funds.
Disintermediation is the shift of funds from depository financial institutions to open market investments during periods of rising interest rates as
holders of liquid financial assets attempt to maximize their returns. A similar phenomenon affects
insurance companies as policyholders borrow policy reserves at contracted interest rates.
Regulators of financial institutions have been
attempting to design policies that would moderate
disintermediation since savings and loan deposits
first showed sensitivity to short-term market
yields in 1965. The inability of thrift institutions
to continue to attract substantial amounts of
funds during periods of high or rapidly rising
interest rates causes a reduced flow of mortgage
credit and contributes to an increase in mortgage
rates. When this happens, home sales decline,
builders' inventories of newly completed homes
rise, and housing starts are reduced. As housing
September 1980/Voice

starts decline, unemployment rises in the construction industry as well as in related industries, such
as lumber, insulation, textiles, furniture, and
appliances.

Periods of disintermediation
The year 1965 marked a turning point for the savings and loan industry. The preceding years had
been characterized by fast and stable growth of
deposits at savings and loan associations. The
years since have been marked by greater instability of savings deposit inflows.
Monetary policy was tightened in 1966, 1969-70,
and 1973-74 (as in the first quarter of 1980)
to slow an overheated economy and an accelerating rate of inflation. Each time, the yields on shortterm open market securities rose sharply. Depositors at S&L's responded to these higher money
market yields by withdrawing substantial portions
of their savings deposits for reinvestment in such
items as U.S. Treasury bills. Each period of disintermediation was characterized by a peak-totrough decline of at least 26 percent in the annual
rate of housing starts, due largely to the reduced
availability and high cost of mortgage funds.
5

Interest rate peaks in 1966, 1969, 1973·74,
and 1980 have been accompanied
by significant declines in housing starts ••.
SIX·MONTH TREASURY BILLS
15 PERCENT PER ANNUM - - - - - - - - - - - - - - (QUARTERLY AVERAGES)

10-

5-

0---------------------PRIVATE HOUSING STARTS
3 MILLION UNITS - - - - - - - - - - - - - - - - - (QUARTERLY AVERAGES OF SEASONALLY ADJUSTED
MONTHLY FIGURES AT ANNUAL RATES)

2-

1-

0----------------------FEDERALLY INSURED SAVINGS AND LOAN ASSOCIATIONS
40 BILLION DOLLARS - - - - - - - - - - - - - - - - (QUARTERLY FIGURES)

30 -

20MORTGAGE LOANS CLOSED

10-

o

I

I

I

I

I

'67

I

'65

'69

'71

'73

'75

I

'77

I

'79

SOURCES: Board of Governors, Federal Reserve System.
Federal Home Loan Bank Board.
U.S. Department of Commerce.

6

Federal Reserve Bank of Dallas

Regulators' efforts to offset disintermediation
Federal regulators of the nation's depository institutions have authorized the issuance of new types
of liabilities in recent years, in addition to authorizing higher yields on passbook and certificate accounts, to enable these financial intermediaries to
continue to attract funds during periods of high
interest rates. In 1973, a new four-year $1,000minimum-balance certificate was authorized on
which there was no rate ceiling. The response to
this instrument, which came to be known as the
"wild card" certificate, quickly disrupted the balance between deposits at commercial banks and
deposits at savings and loan associations.
Rate wars waged in several major cities. Commercial banks, because of their more quickly maturing assets, were able to offer higher yields than
savings and loan associations and swiftly gained
depositors. The result of the disruptive experiment was congressional legislation requiring the
Federal regulatory agencies to set maximum rate
ceilings on certificate accounts with balances of
less than $100.000. The rate wars were ended,
but depository financial institutions, with interest
rate ceilings on deposits, were still exposed to
the competition of money market instruments.
The second offering of the financial intermediaries in competition with open market investments was the money market certificate, first
available in June 1978. This certificate was designed to moderate deposit outflows during periods
of high market interest rates.
Withdrawals of funds during peaks in market
interest rates typically were from passbook accounts rather than certificate accounts, because
of the withdrawal penalties associated with the
latter. And disintermediation usually occurred for
accounts with high average balances, as most of
the funds were used to purchase Treasury bills,
which had minimum denominations of $10,000.
Finally, the funds withdrawn from accounts at
depository institutions during interest rate peaks
were removed for periods of only six to nine
months.
The money market certificate was designed to
counter these characteristics of disintermediation.
The result was a certificate with a minimum denomination of $10,000, a maturity of six months,
and a rate ceiling pegged to the going yield on
six-month Treasury bills. Savings and loan associations were authorized to offer a yield on money
market certificates a quarter of a point above that
September 1980/Voice

... as households shifted funds
into open market investments
in response to higher yields
125 BILLION DOLLARS - - - - - - - - - (ANNUAL CHANGES)

DIRECT INVESTMENTS

-25

i i i

'65

'67

'69

i i i

'71

'73

'75

i

i

'77

'79

SOURCE: Board of Governors, Federal Reserve System.

offered by commercial banks in order to preserve
their advantage in attracting depositors' funds.
While it was recognized that these certificates
would increase the cost of funds for S&L's, the
higher costs were recognized as temporary. The
revenues locked in by the availability of funds for
mortgages during periods of high interest rates
were expected to swell revenues of S&L's in subsequent years.
The test
The most recent bout of high interest rates occurred
in the first quarter of this year. The economy,
which had expanded sluggishly throughout 1979,
showed renewed growth in the first two months of
1980. The inflation rate surged as well, reflecting
the impact of both price increases by the Organization of Petroleum Exporting Countries in 1979
and rising mortgage rates. From January to midMarch, bond prices fell as much as 15 percent.
The turbulence of the bond markets and the subsequent postponement of new issues resulted in
sharply increased credit demands in commercial
paper markets, as well as at commercial banks.
Vigorous bidding for short-term funds pushed
short-term interest rates to unprecedented levels.
The yield on six-month Treasury bills peaked in
March, averaging 15.1 percent-over 560 basis
points above the year-earlier level and 325 basis
points above the level for January this year.
7

Money market certificates have accounted
for an increasing share of deposits at S&L's
since their introduction in 1978
600 BILLION DOLLARS - - - - - - - - - - (END OF YEAR)

o
=

MONEY MARKET CERTIFICATES

500

CERTIFICATES AND SPECIAL ACCOUNTS

0.

PASSBOOK SAVINGS ACCOUNTS

&i~~~
==~~

400 -

300 -

~

iii==-==
=0

-=====
--------=========
------===
======
---=-=!!!-=
iii====
== === ----iii

200 -

100-

o-.=:......==-==.....;;:;;;;...;=-=;;..;::::...=;....::=-=....:::=-'ro

'n

'n

76

'n

~o

Midyear lor 1980.

SOURCE: United States League 01 Savings Associations.

This time, money market certificates were important in maintaining the flow of funds into savings and loan associations. New savings received
(savings inflows net of interest) fell to $1.6 billion,
the smallest first-quarter inflow in 10 years. But
money market certificate accounts, increasing 28
percent from the fourth quarter of 1979, rose to
$162.4 billion. The proportion of total deposits at
S&1's accounted for by money market certificates
grew from 28 percent in that quarter to 35 percent
in the first quarter of 1980. Passbook account balances were eroded as in past periods of disintermediation, however, as these and the funds in lowyield certificate accounts were diverted to money
market certificates. While such certificates were
effective in attracting deposits to S&L's in this
period of high interest rates, the resulting record
mortgage rates that lenders charged to cover the
cost of these high-priced funds eliminated many
prospective home buyers from the market for
8

mortgage loans.
As rates on mortgage loans climbed to new
highs, total loans closed by S&L's in the first quarter of this year fell 37 percent from the preceding
quarter to $13.9 billion, or 53 percent below the
peak of $29.4 billion in the second quarter of 1979,
resulting in the smallest first-quarter lending volume since 1976. The level of housing starts, which
had declined to an annual rate of almost 1.6 million units in the last quarter of 1979, dropped 21
percent to an annual rate of less than 1.3 million
units in the first quarter of 1980. Although S&L's
currently have ample liquidity and mortgage rates
have declined from the first quarter's high levels,
home sales remain slack as consumers' incomes
continue to be eroded by inflation.

Outlook for S&L's
Adjustments of the regulatory and legislative environment of depository intermediaries continue
to facilitate the access of savings and loan associations and other financial institutions to the
available supply of funds. The passage of the
Depository Institutions Deregulation and Monetary
Control Act of 1980 marks the beginning of a new
era for the U.S. financial system, one that will be
characterized by greater competition among all
types of depository institutions and greater dependence on market-determined interest rates. The
general thrust of the provisions in the act is to
put financial institutions on a more equal basis
with respect to the types of investments offered
to the public as well as the investment opportunities of which the institutions may avail
themselves.
An important part of the act concerns the phaseout of interest rate ceilings on time and savings
deposits within six years. Regulatory agencies
have been required to set interest rate ceilings on
savings deposits for commercial banks since 1933
and for savings and loan associations since 1966.
Enabling depository institutions to compete for
funds by paying market rates of interest is expected not only to provide households with a new
incentive to save but also to end the discrimination
against small savers in the form of below-market
yields for those with less than $100,000. The phaseout of interest rate regulation also means an end
to the irregular flows of credit to the housing industry due to disintermediation during periods of
high market interest rates.
The act also authorizes additional activities for
depository institutions, both to improve financial
Federal Reserve Bank of Dallas

services to consumers and to enable the institutions to attract and retain funds in competition
with the money and capital markets. Depository
financial institutions will be permitted to offer
negotiable order of withdrawal [NOW) accounts
and other interest-earning transaction accounts.
In addition, S&L's are authorized to invest up to
20 percent of their assets in consumer loans, commercial paper, and corporate debt securities. They
may also invest in shares or certificates of openend investment companies registered with the
Securities and Exchange Commission if the company's portfolio is restricted to investments that
S&L's may make directly. The associations' authority to make real estate loans is expanded by removing any geographical lending restriction, by replacing the existing $75,000 loan limit with a
90-percent loan-to-value limit, and by removing
the first-lien restriction on residential real estate
loans. Their authority to make acquisition, development, and construction loans is also expanded.
Federally chartered savings and loan associations are authorized to offer credit-card services
and to exercise trust and fiduciary powers. The
act also makes it easier for state S&L's to convert
to Federal charters, and under regulations of the
Federal Home Loan Bank Board, mutual S&L's are
authorized to expand their capital bases with the
issuance of mutual capital certificates.
To oversee the phaseout of ceilings on interest
rates payable on deposits and accounts at depository institutions, the act established the Depository Institutions Deregulation Committee comprising the Secretary of the Treasury, the Chairman of
the Board of Governors of the Federal Reserve
System, the Chairman of the Board of Directors
of the Federal Deposit Insurance Corporation, the
Chairman of the Federal Home Loan Bank Board,
and the Chairman of the National Credit Union
Administration Board, as voting members, and
the Comptroller of the Currency, as a nonvoting
member.
The Deregulation Committee is vested with all
the statutory authority of the Federal Reserve Act,
the FDIC Act, and the Federal Home Loan Bank
Act to oversee the transition from regulated rates
of interest payable on deposits and accounts at
depository institutions to rates of return consistent with market yields. The committee is charged
with the responsibility to oversee this transition
with all due regard for the safety and soundness
of depository institutions. During the six-year
September 1980/Voice

phaseout period, each committee member is to
make an annual report to the Congress on the
economic viability of these institutions.
The act also called for the President to establish
an interagency task force composed of the Secretary of the Treasury, the Secretary of Housing and
Urban Development, and representatives of the
Federal Home Loan Bank Board, the Board of
Governors of the Federal Reserve System, the
Board of Directors of the Federal Deposit Insurance
Corporation, the Comptroller of the Currency, and
the National Credit Union Administration Board.
The task force was called upon to conduct a study
and make recommendations to Congress by June 30,
1980, on the options available for improving the
balance of asset and liability maturities in the
thrift portfolio structure, on the options available
to increase the ability of thrifts to pay market
yields during periods of rapid inflation and high
interest rates, and on the options available through
the Federal Home Loan Bank System and other
Federal agencies to assist thrift institutions in times
of economic difficulty. Finally, as of March 31,
1980, the insurance on accounts at federally insured banks, savings and loan associations, and
credit unions was increased from $40,000 to
$100,000.
The cumulative effect of this legislative package
represents a congressional effort to increase reliance on the forces of the marketplace to determine the most appropriate uses among the nation's credit needs. There has been some concern
that the removal of Regulation Q will end the protection of the flow of funds to housing via the
nation's savings and loan associations, the largest
source of mortgage funds. Actually, the legislation
is intended to improve the consistency of the flow
of funds to S&L's by allowing them to compete
more effectively for funds when interest rates are
rising. Depository intermediaries, to remain economically viable in the 1980's, must offer a competitive array of services to the public as well as
pay interest on deposits at levels consistent with
market yields.

9

"Ped Quotes~~
Brief Excerpts from Recent Federal Reserve Speeches, Statements, Publications, Etc.

"We must not be timid in setting our goals for inflation. It would be a mistake to
take as our goal merely the prevention of any further increase in the underlying
inflation rate. If we tell the public that inflation rates above 10 percent are
unacceptable, but that anything less is satisfactory, businesses and consumers may
well begin to borrow and spend in ways that make a higher rate of inflation virtually
inevitable.
"Our goal must be much tougher. It must be to bring the underlying inflation rate
down even as the economy moves from recession to higher levels of economic activity.
"This is a very ambitious goal. During each and every economic recovery during
the postwar period, the underlying inflation rate has always risen. Moreover, with the
passage of time. inflationary expectations have worsened substantially: mechanisms
to index wages, social security benefits and other income payments to prices have
become more widespread; shocks to prices from the food and energy sectors have
become more common; and for other reasons, also, the inflationary bias in the U.S.
economy has increased. Nonetheless, despite these difficulties, history during the
forthcoming economic recovery must be stood on its head. The hard core inflation
rate must be brought down."
"In today's economy, any fresh impetus to inflation-whether it comes from
rising OPEC prices, a food shortage, a productivity disaster, or a mistake in economic
policy-tends to worsen the long-term trend of inflation. Using monetary policy
actively as a countercyclical device, in the way we once did, is extremely risky
because mistakes are inevitable, and they tend to aggravate the long-term inflation
problem. This does not mean that the dials of monetary policy should be set on
automatic pilot. It does mean, however, that to have any real hope of ultimately
regaining price stability, the principal focus of monetary policy now must at all times
be to find and pursue the course of action most likely to bring down the long-term
rate of inflation.
"The differences in developments affecting financial markets and the real economy
that stem from such a course of policy will probably be less evident during periods of
recession than during the early phases of economic recovery. Historically, monetary
policy has not moved dramatically toward stimulus when the economy headed into
recession. Simply holding to a fairly steady course of policy has resulted in substantial
declines in interest rates because of weakening credit demands. But during the earlier
phase of economic recoveries, growth in supplies of money and credit has often begun
to accelerate because the Federal Reserve did not let credit markets tighten sufficiently
while unemployment and excess capacity were still relatively high. That is the
mistake we must be particularly careful to avoid when the current recession bottoms
out and recovery begins again."
Lyle E. Gramley, Member, Board of Governors of the
Federal Reserve System (At a joint meeting of the
Board of Directors of the Federal Reserve Bank of
Kansas City and its Denver Branch Board of Directors,
Denver, Colorado, July 17, 1980)
10

Federal Reserve Bank of Dallas

"For all the developing consensus on the need for 'supply side' tax reduction, and
I happen to share in that consensus, some time seems to me necessary to explore the
implications of the competing proposals and to reduce them to an explicit detailed
program for action.
"I have emphasized the need to achieve not only productivity improvement, but
also a lower trend of costs and wages. Despite its importance, I have seen relatively
little discussion in the current context of how tax reduction plans might be brought
to bear more directly on the question of wage and price increases.
"The continuing sensitivity of financial markets, domestic and international, to
inflationary fears is a fact of life. It adds point and force to these observations
and questions.
"Tax and budgetary programs leading to the anticipation of excessive deficits and
more inflation can be virtually as damaging as the reality in driving interest rates
higher at home and the dollar lower abroad.
"I believe it is obvious from these remarks that a convincing case for tax reduction
can be made only when the crucial questions are resolved, questions that are not
resolved today. The appropriate time for decision seems to me late this year or
early 1981."
Paul A. Volcker, Chairman, Board of Governors of the
Federal Reserve System (Before the Committee on
Banking, Finance and Urban Affairs, U.S. House of
Representatives, July 23, 1980)

"While the recent easing of financial pressures helps provide an environment
conducive to growth, we should not be misled. A resurgence of inflationary pressures,
or policies that would seem to lead to that result, would not be consistent with
maintenance of present-much less lower-interest rates, receptive bond markets,
and improving mortgage availability. We in the Federal Reserve believe the kind of
commitment we have made to reduce monetary growth over time is a key element in
providing assurance that the inflationary process will be wound down."
Paul A. Volcker, Chairman, Board of Governors of the
Federal Reserve System (Before the Committee on
Banking, Housing, and Urban Affairs, U.S. Senate,
July 22, 1980)

September 1980/Voice

11

GJ?eguJatory GJ3riefs
andc./lnnouncements
Mandatory Effective Date
Deferred for New APR Rules

Regulation Q Penalty Suspended
for Emergency Areas in Texas

The Board of Governors of the Federal Reserve
System has delayed the date on which new
methods of calculating and disclosing the annual
percentage rate on consumer loans under Regulation Z (Truth in Lending) become mandatory.
In January the Board adopted annual percentage
rate (APR) amendments to Regulation Z that were
to become mandatory October 1, 1980. For the most
part, the amendments would provide greater flexibility and protection to creditors in calculating
and disclosing the rate.
After these amendments were adopted, the
Truth in Lending Simplification and Reform Act
was enacted, and the Board has recently proposed
a revised Regulation Z to implement the act. The
proposed regulation contains rules for calculating
and disclosing the annual percentage rate on
consumer loans that are similar to those adopted
by the Board in January. The new rules will
become effective April 1, 1981, and will become
mandatory April 1, 1982.
Creditors may wish to comply with the APR
changes when the new rules take effect next year,
or earlier, but are not required to do so until
April 1, 1982. Deferral of the mandatory effective
date does not affect creditors that have already
made APR changes conforming to the amendments
adopted in January.

The Federal Reserve Board has granted a temporary suspension of the Regulation Q penalty for
early withdrawal of time deposits from member
banks for depositors affected by Hurricane Allen.
The temporary lifting of the early-withdrawal
penalty will affect depositors suffering property
losses in the Texas counties of Cameron, Nueces,
Willacy, Kleberg, San Patricio, Jim Wells, Aransas,
Hidalgo, and Brooks. The waiver of the penalty
will be in effect until 12:00 midnight, February

12

15,1981.

Under the waiver, a member bank is permitted
to pay a time deposit before maturity without
imposing the penalty as long as the depositor can
show that a property loss has been suffered in the
emergency area. The bank should receive from
the depositor a signed statement describing the
loss, and the statement should be approved and
certified by an officer of the bank.
Any questions regarding Regulation Q may be
directed to Consumer Affairs, Bank Supervision
and Regulations Department, Federal Reserve
Bank of Dallas, (214) 651-6169.

Federal Reserve Bank of Dallas

Amended Regulation T
Expands Lending Powers
of Brokers and Dealers

Bank Holding Companies
Allowed to Establish
Services Subsidiaries

The Federal Reserve Board has announced approval
of an amendment to Regulation T (Credit by
Brokers and Dealers) to allow brokers and dealers
to lend on mutual fund shares.
Under the amendment, brokers and dealers can
extend and maintain credit only on fully paid-for
mutual fund shares. A broker-dealer would be prohibited under provisions of the Securities
Exchange Act and existing rules of the Securities
and Exchange Commission from giving credit on
the initial purchase of mutual fund shares.
The amendment is effective November 3,1980.

The Federal Reserve Board has issued a final interpretation of Regulation Y (Bank Holding Companies and Change in Bank Control), effective
August 11, 1980. This interpretation permits a
bank holding company to establish, without the
Board's prior approval, an operations subsidiary
to perform services for the bank holding company
and its banking and nonbanking subsidiaries that
could be executed directly by a division or
department of the holding company itself.

New nonmember bank

Bank of Cypress Trails, Houston, Texas, a newly organized nonmember bank
located in the territory served by the Houston Branch of the Federal Reserve
Bank of Dallas, opened for business August 4, 1980.

September 1980/Voice

13

New member banks
City National Bank. Weslaco, Texas, a newly organized institution located
in the territory served by the San Antonio Branch of the Federal Reserve
Bank of Dallas, opened for business August 1. 1980. as a member of the
Federal Reserve System. The new member bank opened with capital of
$1,000,000 and surplus of $1,000.000. The officers are: Rodolfo Margo. M.D.•
Chairman of the Board; W. Kenneth Hearn, President; Frank N. Trevino.
Vice President and Cashier; Linda Gray, Assistant Cashier; and Lily Escalon,
Assistant Cashier.
First City National Bank, Carlsbad. New Mexico, a newly organized institution located in the territory served by the EI Paso Branch of the Federal
Reserve Bank of Dallas, opened for business August 11. 1980, as a member
of the Federal Reserve System. The new member bank opened with capital
of $1,000,000 and surplus of $1,000,000. The officers are: Reed H. ChiUim,
Chairman of the Board; Stanley E. Newman, President; Jim R. Hobbs. Vice
President and Cashier; Ruthie Loy, Assistant Vice President; Joan Stone,
Operations Officer; and Bari Cogburn, Assistant Cashier.
American National Bank. Abilene, Texas, a newly organized institution
located in the territory served by the Head Office of the Federal Reserve
Bank of Dallas, opened for business August 25, 1980, as a member of the
Federal Reserve System. The new member bank opened with capital of
$1.000,000 and surplus of $1,000,000. The officers are: Fred Lee Hughes,
Chairman of the Board; John M. Stroud, President and Chief Executive
Officer; and David Runnels, Vice President and Cashier.
Alvin National Bank, Alvin, Texas, a newly organized institution located in
the territory served by the Houston Branch of the Federal Reserve Bank of
Dallas, opened for business August 26. 1980, as a member of the Federal
Reserve System. The new member bank opened with capital of $750,000
and surplus of $750,000. The officers are: Brian W. Garrison. Chairman
of the Board; Shirley H. Burwell. President; and Tolbert N. Newman. Vice
President and Cashier.

14

Federal Reserve Bank of Dallas

(}Vowc/Ivailable
Recently issued Federal Reserve circulars, speeches. statements to Congress. publications, etc., may be
obtained by contacting the Bank and Public Information Department, Federal Reserve Bank of Dallas,
Station 1<, Dallas, Texas 75222, unless indicated otherwise.

Circulars

Speeches and Statements

Interpretation of Regulation Y-Bank Holding Companies
and Change in Bank Control: Disposition of Property
Acquired in Satisfaction of Debts Previously Contracted. 3 pp. Circular No. 80-151 [August 5, 1980).
A Reminder Concerning Attempts to Perpetrate Fraudulent
Transfers of Funds. 1 p. Circular No. 80-152 [August
6,1980).
Amendment to Regulation Z [Truth in Lending]. 1 p. Circular No. 80-153 [August 7, 1980).
Policy Regarding Assessment of Civil Money Penalties. 4
pp. Circular No. 80-156 [August 11, 1980).
Interpretation of Regulation V-Bank Holding Companies
and Change in Bank Control: Bank Holding Companies-Operations Subsidiaries. 2 pp. Circular No. 80157 [August 14, 1980).
Revised Regulation A-"Extensions of Credit by Federal
Reserve Banks": Access to the Discount Window by
Depository Institutions. 12 pp. Circular No. 80-160
[August 21, 1980).
Election of Directors-Nomination Procedures. 16 pp. Circular No. 80-161 [August 19, 1980).
Regulation Q [Interest on Deposits]: Temporary SUlpension of Early Withdrawal Penalty [For depositors affected by Hurricane Allen]. 1 p. Circular No. 80-162
[August 21, 1980).
Amendment to Regulation T-Credit by Brokers and Dealers. 5 pp. Circular No. 80-163 [August 28, 1980).
Amendments to Rules Regarding Delegation of Authority.
2 pp. Circular No. 80-164 [August 28, 1980).
Cross-Zone Presentment of Cash Letters. 1 p. Circular No.
80-165 [August 28, 1980).

Statement by Paul A. Volcker before the Committee on
Banking, Housing, and Urban Affairs, U.S. Senate. 14
pp., including attachments. August 5, 1980.
Remarks of Frederick H. Schultz before the Commonwealth
Club of California, San Francisco. California. 15 pp.
August 15, 1980.

September 1980/Voice

Pamphlets, Brochures, and Reports
By the Way. Prepared by the Federal Reserve Subcommittee
on Communications of the Committee on Communications and Payments. [A pamphlet to help banks reduce
the chance of fraud, particularly in funds and securities transfer) 15 pp. May 1980.

15