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DALLAS
Federal Reserve Bank of Dallas

December 1982

Volcker Addresses Joint Board Meeting
Federal Reserve Board Chairman
Paul A. Volcker told attendees of a
special Federal Reserve Bank of Dallas
joint board meeting that there is “ grow­
ing evidence that the inflationary
momentum has been broken.” Volcker
was guest of honor at the annual event,
which brings together members of the
Dallas Board of Directors and
members of the boards of the branch
offices in El Paso, Houston, and San
Antonio. Special meetings and ac­
tivities were held in conjunction with
the event November 11 and 12 in
Houston.
In addition, former directors of the
Dallas and branch offices attended
and were given a special briefing on
current activities within the Federal

Reserve System.
In addressing the group, Volcker
said that the Fed’s basic thrust of
policy has not changed and that price
stability and maintaining control over
money growth over a period of time are
essential if interest rates are going to
be kept at levels that will support real
growth in the economy.
“ Money growth above the targeted
range has been acceptable to the
Federal Reserve during this recent
period because of precautionary li­
quidity, economic uncertainty and
other factors such as the behavior of
money supply components,” Volcker
said.
Volcker continued by stating that
with appropriate policies, the pro­

spects appear good for continued
moderation of inflation over the
months ahead. Lower interest rates do
not necessarily indicate a change in
basic policy, he said. “ What is needed
now is market validation that the fun­
damentals being expressed in the
economy are consistent with lower in­
terest rates. And I believe that we have
been seeing this for some months
now.”
Volcker also addressed the problem
of international financial strains
caused by large international debts
and the possibility of defaults on these
debts by developing nations. The Inter­
national Monetary Fund should ex­
pand its lending a uthority and
establish a fund to help borrowers
such as Mexico avoid default, he said.
Volcker also stated that the Fed is
prepared to relax some of its loan
classification standards so new loans
to developing nations will not be con­
sidered non-performing loans, and that
commercial banks must help provide
additional credit to these nations if
necessary.

INSIDE
• New Account
• Money Market Funds
• Deregulation

Trust Assets in Texas Total $30 Billion
Trust assets in the state of Texas
totaled over $30 billion in 1981, accord­
ing to the 1981 Trust Assets of Banks
and Trust Companies, recently pub­
lished by the Federal Financial Institu­
tions Examination Council. The 1981
trust asset report includes information
collected from all insured commercial
and mutual savings banks and certain
noninsured trust companies on ac­
counts over which investment discre­
tion is exercised.
In addition to total trust assets
reported in the survey, the information
is reported by type of account, by the
average size of trust accounts, by size
of trust institution, and by state,
among other classifications. For exam­
ple, the breakdown of trust assets in
Texas by type of account is shown in
the graph accompanying this article.
Copies of the 1981 trust asset survey
are available from the FDIC in
Washington D.C.

New Account Guidelines
Established by DIDC
An account that has been called the
most important banking innovation in
years will be offered by the nation’s
fin a n c ia l in s titu tio n s beginning
December 14. Authorized by the GarnSt. Germain Act passed by Congress in
October, the account is designed to
compete with high-paying money
market mutual funds. Specific terms of
the new federally-insured account
were set at the November meeting of
the Depository Institutions Deregula­
tion Committee (DIDC).
N o in te r e s t c e ilin g

The committee agreed to let finan­
cial institutions decide what interest
rate will be paid on the account.
However, institutions will not be al­
lowed to guarantee a fixed rate on the
new account for more than 30 days at a
time. The absence of interest rate
restrictions is designed to help the ac­

count compete effectively with money
market funds.
$ 2 ,5 0 0 m in im u m

The committee also set a $2,500 re­
quired minimum balance on the new
account. Depositors may make
unlimited withdrawals, but if the
average monthly balance falls below
$2,500, the interest rate will be reduced
to the ceiling rate that applies to NOW
accounts, which is currently 5.5 per­
cent. Congress had suggested that the
minimum deposit be no more than
$5,000, but left the final determination
to the DIDC.
As with money market funds,
depositors may write checks drawn on
the new account. Institutions are
authorized to allow three third-party
transactions per month on each ac­
count. Overall, a total of six transfers
are allowed per month per account.

Election Results
Announced
The head office of the Dallas
Federal Reserve has announced
the results of its recent Board of
Directors election.
Robert Ted Enloe, III, president
of Lomas and Nettleton Financial
Corporation was elected a Class
B Director to succeed Robert D.
Rogers whose term expires
December 31. John P. Gilliam,
president and chief executive of­
ficer of First National Bank in
Valley Mills was reelected a
Class A Director. Each director
was elected to a three-year term
beginning January 1.
The head office has nine direc­
tors classified according to
whether they are elected by
member banks (Class A and B) or
are appointed by the Board of
Governors (Class C).

New Account May Rival Market Funds
In 1975, Merrill Lynch offered the
first money market mutual fund. These
funds pool investor contributions and
invest in short-term instruments such
as Treasury bills, bank certificates of
deposit, and commercial paper. Merrill
Lynch’s success resulted in other
firms offering similar accounts and, in
less than eight years, total assets in
money market funds (MMFs) amount to
approximately $230 billion. From the
end of 1978 alone, MMF assets have in­
creased more than 2000 percent.
Because these funds offered a
market rate of interest on accounts, in­
vestors were quick to take advantage
of their return, which reached a high of
17.2 percent in August 1981. Funds in­
vested in MMFs often came from
deposits in banks and savings and
loan associations, which could not of­
fer a similar high-yield account. MMF
accounts also allow check writing
privileges which keep invested funds
highly liquid.
With the recent establishment of a
new money market account that banks
and savings and loans can offer this
month, money market funds will face
some new competition. Now that finan­
cial institutions have a ceilingless in­
terest rate account to offer, dif­

ferences between the two industries
are becoming less distinct.
One difference that will exist,
however, is that the new account
authorized by the Garn-St. Germain Act
will be insured up to $100,000. This in­
surance feature might help banks and
savings and loans attract some of the
funds in MMFs back to their institu­
tions. The insurance feature is ex­
pected to be the major promotional
point when the accounts begin to be
marketed to the public.
It is possible that firms offering
MMFs will develop new strategies by
obtaining private funding for insurance
purposes. They may also begin to work
with banks and savings and loans
through brokerage arrangements.
Financial institutions have been
gradually entering into discount
brokerage services as a direct result of
deregulation activities occuring since
the passage of the Monetary Control
Act of 1980 and the Garn-St. Germain
Act of 1982. As brokerage houses and
retail establishments increasingly of­
fer financial services similar to banks,
some industry analysts believe that
traditional financial institutions will of­
fer brokerage services in a continuing
effort to gather investors’ funds.

YIELD ON MONEY
MARKET FUNDS
SINCE 1980
DATE
1980— Jan.

Y IE L D *
1 2 .9

Feb.

1 2 .7

M a r.

14.1

A p r.

1 6 .3

M ay

1 3 .4

June

9 .8

J u ly

8 .5

Aug.

8 .2

S e p t.

9 .2

O c t.

1 0 .5

Nov.

1 2 .3

D ec.

1 5 .6

1981— Jan.

17.1

Feb.

1 6 .3

M a r.

15.1

A p r.

14.1

M ay

1 5 .6

June

1 6 .9

J u ly

1 7 .0

Aug.

1 7 .2

S e p t.

1 6 .6

O c t.

1 5 .3

Nov.

1 4 .0

D ec.

12.1

19 82— Jan.

1 2 .0

Feb.

13.1

M a r.

1 3 .5

A p r.

1 3 .8

M ay

1 3 .6

June

13.1

J u ly

12 .9

Aug.

1 1 .0

S e p t.

9 .7

O c t.

9 .2

N ov.

8 .7

(A s o f N o v . 19)

* 30-day average yield.
SOURCE: Donoghue’s Money Fund
Report and Treasury
Department.

Deregulation Topic of Wallace Speech
“ One of the lessons that all of us
have learned over the last few years is
that no one who is in the business of
providing financial services operates
in a vacuum.”
With these introductory words,
Dallas Fed First Vice President William
H. Wallace spoke recently on deregula­
tion and its impact on the financial in­
dustry. Speaking before the TexasLouisiana chapter of the Bank Ad­
ministration Institute, he stated that
not only does deregulation change the
operational environment of the in­
dustry, com petition from money
market funds, retailers, and brokerage
firms changes the structural environ­
ment. “ There are so many different
players in the game . . . that the future
assumes more the nature of a free-forall, not a neat, organized endeavor
which can be analyzed and projected
with confidence,” Wallace stated.
Even though it has become increasing­

ly difficult to accurately predict what
banking is going to look like in another
ten years, Wallace said, that doesn’t
mean “ we should give up and let
nature take its course.”
Although the banking industry has
been evolving rapidly over the last few
years, future changes can be an­
ticipated by studying recent legisla­
tion. Trends toward deregulation have
become stronger as competition from
outside the ’’traditional” banking in­
dustry has increased.
New competition from firms outside
the banking industry has caused tradi­
tional customer loyalty to erode,
Wallace said. Customers are also
becoming increasingly sophisticated
with regard to rates and yields. Banks
cannot operate effectively and pro­
fitably without these customers who
have been attracted to new com­
petitors offering high-paying accounts.
These changes, coupled with the rapid

advancements of electronic tech­
nology, will shape the environment to
which bankers will have to adjust.
Because of these complex interrela­
tionships, Wallace said, “ it is not clear
that the decisions made by individual
banks, by banking in general, or even
by the Fed, will play the deciding role
in shaping that environment.”
Wallace feels that the organizations
which will be able to adjust best are
the ones who diversify their services.
He states there may be a tendency for
banks to want to “ retreat into
specialization, on the assumption that
it is better to do a few things well than
try to be all things to all people.”
Although he feels that small banks can
benefit by offering some degree of
specialization in services, larger banks
should resist temptation to specialize
extensively, “ for to do so would be to
give up the unique ability of banks to
react to changed conditions.”

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