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PR-30-74 (5-14-74)


Excerpt from an Address by\ » y
Frank Wille, Chairman
Federal Deposit Insurance Corporation

v^May 14, 1974

Before the
54th Annual Conference
of the
National Association of Mutual Savings Banks

The Portland Hilton
Portland, Oregon

The unfortunate time lag between general recognition of
the need for broader thrift institution powers and legislative enactment
at both State and Federal levels has prompted the FDIC to look with a
fresh eye at the powers presently available both to you and to us which
might be utilized to prevent the steady erosion of deposit funds when
significantly higher interest rates are available in the money and
capital markets.

In that regard, the' 7 1/2% four-year certificate is

only partially effective, as recent deposit flows demonstrate.

It is

also expensive - - more expensive, perhaps, than market rates over
a four-year period would require.

And the more in earnings which is

required to pay the deposit costs associated with the ever-increasing
volume of these certificates, the less in earnings which will remain for
additions to surplus, unexpected losses or future changes in the Q
ceilings on passbook savings or shorter term certificates.


in turn, over the four-year period may find mortgage rates maintained
at higher levels than might be the case if fewer 7 1/2% certificates had
been issued.
On the other hand, the 7 1/2% four-year certificate has
proved to be popular with a large number of depositors, particularly
those who prefer a four-year certificate, with or without the required




penalty for early redemption, to a much longer term corporate bond
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even at a higher yield.

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But it is obvious, both from last summer's

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experience and from your present experience, that at least an equal.

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number of thrift institution depositors will opt for a short-term
instrument at high yields rather than a four-year certificate, and
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with each round of disintermediation, such depositors have become
more and more sophisticated about the short-term money market
instruments that are available to them.

Today, as deposit outflows

threaten to exceed last summer's disintermediation in both magnitude
and duration and with the competition from commercial bank time
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deposits no longer a significant factor, the principal threat to your
deposit stability can be more clearly identified than ever before,
namely, the high yields presently available on three-month and sixmonth Treasury bills and on short-term Treasury notes.
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The direct

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relationship between the yields available on these short-term Treasury
obligations and your own deposit outflows has been graphically demon­
strated by many individual savings banks, particularly those in Boston,
New York and Philadelphia, where investments in Treasury bills and
notes are both convenient and cheap for the savings bank depositor who
has the required minimum to invest.

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Yields on short-term Treasury obligations can fluctuate
widely over even brief periods of time, as we all know.

At the May 6

weekly auction, the average yield for noncompetitive bids on a threemonth Treasury bill was 9. 04%, but the average yield in February of
this year for a similar bill was only 7. 06%; in May 1973 it was 6. 35%
and in May 1972 only 3. 72%.

The average yield on newly issued three-

month Treasury bills for all of 1973 was 7. 02% and for all of 1972 was
4. 07%.

Would it not be better, then, in light of these historical market

rates and savings bank earnings, if the thrift institutions of the country
could offer a time deposit which fluctuated with the market rates on
such Treasury bills and notes rather than being forced to offer only a
7 1/2% certificate to which they would find themselves committed for
a full four years?
My associates at the FDIC believe that it may indeed be
feasible to offer a variable-rate time deposit tied to short-term
Treasury yields which might be more effective than the present
7 1/2% four-year certificate in stemming the outflow of your deposit
funds, as well as less expensive to you over the life of the deposit.
Such a variable-rate certificate, which would supplement and not
replace any of your accounts, might have the following characteristics:


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(1) A ceiling rate, specified in accordance with
last October’s legislation, that would be announced monthly
no later than the 24th day of each month, such rate to be
effective for the full calendar month immediately follow­

The purpose of announcing the rate in advance of the

first of the month is, of course, to permit appropriate
advertising and to inform the public of the new rate prior
to any applicable grace days.

(2) A ceiling rate for thrift institutions equal to
the average of the approximate yields announced by the
Treasury each Monday for noncompetitive bids on threemonth Treasury bills during the four or five weekly
auctions immediately preceding the establishment of the
monthly rate.

Thus, the ceiling rate which would have

been announced for April of this year would have been
7. 71% and for May 8. 34%.

The commercial bank ceiling

rate would reflect a differential similar to that which exists
for other time deposits under the present schedule, i. e. ,
either 1/4 or 1/2 of 1% per annum.

While some other

short-term rate or rates could be selected on which to
base such a ceiling, our research staff believes the
average yield on noncompetitive bids for three-month
Treasury bills to be the most publicized, the best
understood, and the most readily available on a recurring
b a sis.
Of course, you will readily see that in times of
rapidly escalating Treasury bill rates, such as we have
had since March 1 of this year, a ceiling rate set in this
way will lag somewhat behind actual yields contemporane­
ously available at the Treasury's weekly auctions, a lag
which would be accentuated if the ceiling rate were set
only once a quarter.

On the other hand, the holder of

such a time deposit would benefit from the same lag when
yields on Treasury bills turned downward.

( 3 ) ^ minimum denomination and a minimum
maturity specified by Federal regulation.

If the prece­

dent of the present 7 1/2% fixed rate certificate were
followed, the minimum denomination would be $1,000 and
the minimum maturity would be four years.





(4) Possibly, a specified interest rate floor set
at some level below the passbook savings rate.


when the ceiling rate as computed above fell below the
specified floor, the depositor would be assured in
advance that his downside risk would be limited, thereby
assisting him in making his initial investment decision.
For example, the interest floor under present circum­
stances might be established at 4. 5% per annum, 75
basis points below the regular passbook rate.

(5) The same minimum penalty presently p re­
scribed by regulations for the early redemption of
other consumer certificates.

Individual banks could,

as they can today, refuse to redeem the certificate
unless the depositor held the time deposit to maturity
or paid a greater penalty.

(6) Interest earned would, of course, have to be
calculated and credited on a monthly basis, while
present rules relating to the compounding of interest
would apply.

I wish to emphasize that the FDIC has not and is not taking
an official position as to the wisdom or desirability of instituting this
type of variable-rate certificate, nor has it seen fit to refer this
specific proposal to the Interagency Coordinating Committee.

I raise

it today in order to begin a discussion of its merits, both in concept
and in detail.

Its adoption is by no means imminent, and, in fact, it

may not see the light of day at all either in a Proposed or Final Regu­

But if the concept is worthwhile, I would hope that all of the

agencies could benefit from your reaction to the details of its imple­

Thus, you. may have operational problems with a ceiling

rate that would change monthly, rather than quarterly.

Or you may

feel strongly that the minimum denomination should be $10, 000 - - the
minimum required for Treasury bill investment - - rather than the
$1,000 now required for 7 1/2% certificates and designated issues of
short-term Treasury notes.

Or you may feel that the guaranteed

floor on the instrument should be more or less than 75 basis points
below the passbook rate in order to increase its attractiveness to
depositors or its acceptability to the institution offering the instru­

On all of these points, your individual and collective views




would be helpful and informative to ourselves, the Federal Reserve
Board and the Federal Home Loan Bank Board.

If, later in the

summer, such a deposit instrument would seem to be of value, the
agencies will then be able to proceed in a much more orderly way
than they did last summer.
In concept, a variable-rate certificate such as I have
described might provide a depositor tempted to invest in Treasury
bills with the benefits of both the high yields available on Treasury
bills and a guaranteed minimum rate, plus the convenience of not
having to reinvest every three months.

The ability to offer a

variable-rate certificate account might thus improve your ability
to hold or even attract deposits in the face of rapidly rising short­
term rates.

To the extent it serves this purpose better during such

periods than a fixed rate time deposit, more money should be avail­
able for housing than under present circumstances.

This, in turn,

would reduce the need to resort to special financial assistance
through the Federal Home Loan Bank system, GNMA and other
government programs when widespread disintermediation is under

These agencies might then avoid adding to the demand for

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funds in the capital markets when the supply of credit is already
limited and interest rates are already high enough to attract so many
of your depositors.

Moreover, if the experience of the past four

years is any guide, your average cost on such a variable-irate
certificate, even with a 4. 5% floor, would have approximated 5. 71%
per annum despite temporary periods of very high Treasury bill

Finally, a variable-rate certificate might assist thrift

institutions in lengthening their deposit maturities and in this
respect serve a function similar to the 7 1/2% certificate, but at far
less cost.
There are, on the other hand, certain risks involved in
a variable-rate certificate pegged to Treasury bill rates.

One is

that the level of such rates over the next few years may be signifi­
cantly higher than the historical pattern of the last four years as the
Federal Reserve pursues with determination and greater persistence
its anti-inflationary policies.

But if this occurs, the loss of depositors’

funds to the market may also be an accelerating phenomenon without
such a variable-rate certificate.

Secondly, the establishment of such

a certificate carries the risk that there will be a substantial shift not
of 7 1/2% certificate money into the new certificate, but of regular



passbook money into the new certificate - - a move which would increase
your interest cost on such funds without reducing the expense of 7 1/2%

Obviously, the terms of the new certificate should be

designed to discourage this kind of a shift of passbook savings money.
This is one reason, although not the only reason, why the establishment
of an interest floor on the new certificate which is a significant number
of basis points below the regular passbook rate may be critically

Finally, there is the risk that a variable-rate certificate

may be too complex for the average depositor to understand and too
difficult an account to advertise adequately and accurately.

Its market­

ability, in other words, m aybe open to question.
It is possible that on reflection and careful analysis, you
and we may each conclude that for some depositors and some institu­
tions a variable-rate time deposit tied to the three-month Treasury bill
rate is an idea worth pursuing.

Others of you may disagree.

But I

think we in the agencies can well profit by your comments as we react,
once more, in the absence of more long-term legislative solutions, to
the pressures of disintermediation.

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