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PR-43-74 ( 7 -1 5 -7 4 ) FO R R E L E A S E ON D E L IV E R Y 3? $ O AÔ \JK, Q> Qr À? /•v •< S tatem en t by V \ I 9. O F ra n k W ille, C hairm an F e d e ra l D ep osit In su ra n ce C orp oration ( b e fo re the C om m ittee on Banking and C u rre n cy •> House of R e p r e s e n ta tiv e s , Ju ly 15, 1974 FEDERAL DEPOSIT INSURANCE CORPORATION, 550 Seventeenth St. N.W., Washington, D. C. 20429 • 202-389- The proposed C itico rp note is s u e r e p re s e n ts a c re a tiv e and im ag in ativ e fin an cin g plan fo r its is s u e r sin ce it is lik e ly to red uce the a v e ra g e c o st and lengthen the a v e ra g e m a tu rity of C itic o rp 's funds. In its o rig in a l fo rm and in its p re se n tly re v ise d fo rm , the iss u e is a lso designed to appeal to a broad range of in v e sto rs and s a v e r s . T h ese include m any who have been c o n siste n t d ep o sito rs at the n a tio n 's th r ift in stitu tio n s and s m a lle r c o m m e rc ia l banks - - and th e re in lie s the rub. The n a tio n 's th r ift in stitu tio n s and s m a lle r c o m m e rc ia l banks have b een the p rin cip a l su p p liers of funds fo r re s id e n tia l home m o rtg a g e s , with savings and loan a s s o c ia tio n s having the h ig h est p e r cen tage of the th re e typ es of in stitu tio n s in to ta l a s s e t s com m itted to r e s id e n tia l hom e m o rtg a g e s and m utual savings banks the second h ig h est p e rce n ta g e of a s s e t s so co m m itted . B oth fo rm s of th r ift in stitu tio n s in r e c e n t m onths have b een hard hit by a slowdown o f incom in g funds a v a il ab le fo r housing in v e stm en t. In the c a se of m utual savings banks (m ost o f whom a r e su p erv ised and exam in ed a t the F e d e r a l le v e l by the F D IC ), p re lim in a ry d ep osit p ro je c tio n s in d icate re c o rd net outflow s of funds fo r the c u rre n t m onth. A d d ition ally, th e se banks su ffered a net outflow of a p p ro x im a tely $350 m illio n la s t m onth - - the w o rst Ju ne fig u re s e v e r re c o rd e d . The F e d e r a l Home L oan B ank B o a rd ca n , I a m s u r e , give you the d e ta ils of d ep o sit tre n d s am ong the n a tio n 's F e d e r a lly in su red savings and loan a s s o c ia tio n s . - 2 - T h r ift in stitu tio n s and banks w hich have a lre a d y found th e m se lv e s unable to a t t r a c t funds e ffe c tiv e ly in the c u r r e n t high in te r e s t ra te en v iron m en t now fa ce the added com p etitiv e ch allen g e of proposed is s u e s , lik e C itic o r p 's , which w ill have undoubted appeal to th e ir tra d itio n a l c u s to m e rs - - a ch allen g e w hich cannot be r e a lis t ic a lly an sw ered in the c a se of the th r ift in stitu tio n s by som e d ra m a tic , a c r o s s th e -b o a rd in c r e a s e in d ep osit ra te c e ilin g s b e c a u se the e a rn in g s of such in stitu tio n s would not p e rm it the paym ent of the m uch h igh er r a te s p re se n tly needed to a t t r a c t d ep osit funds. A s you know, R eg u lation Q and co m p a ra b le p ro v isio n s of FD IC and F H L B B reg u latio n s p re se n tly lim it the r a te s of in t e r e s t which can be paid by m o st d e p o sita ry in stitu tio n s to th e ir d ep osit c u s to m e r s . R a te s of in te r e s t on d ep osits of $ 1 0 0 ,0 0 0 o r m o re a r e p re se n tly u n regu lated , but p assbook savings r a te s below th at am ount cannot ex ceed 5% per annum fo r c o m m e rc ia l banks and 5 1/4% fo r the n a tio n 's th r ift in stitu tio n s. C e r tific a te accou n ts pay m o r e , depending on m a tu rity and denom ination, ranging up to 7 1/4% p er annum fo r c o m m e rc ia l bank tim e d ep osits of $1 , 0 0 0 o r m o re held on d ep o sit fo r four y e a r s o r m o re and up to 7 1/2% p er annum fo r a co m p arab le th r ift in stitu tio n c e r t if ic a t e . S u b stan tial in t e r e s t ra te p en alties a r e im posed i f the d e p o sito r se ek s e a r ly red em p tion . In add ition, under the reg u la tio n s of a ll th r e e r a t e -s e t tin g a g e n c ie s , the - 3 - ce ilin g r a te s apply to nondeposit ob ligation s of in su red banks and a s s o c ia tio n s u n less they fa ll into c e r ta in sp e cified c a te g o r ie s . The only subordinated note c a te g o ry w hich is excep ted a r e th ose w hich have "an o rig in a l m a tu rity o f seven y e a r s o r m o r e " and w hich a r e "in an am ount of at le a s t $ 5 0 0 " (so long as oth er te c h n ic a l re q u ire m e n ts a r e m e t, the purpose of w hich is to d istin g u ish such n otes fro m deposit in stru m en ts of the sam e in stitu tio n ). The proposed C itico rp note is not a d ep o sit, but it w ill obviou sly com pete with a d ep osit along with o th er m a rk e t in stru m en ts p re s e n tly a v a ila b le to the pu blic. What m ak es the C itico rp n ote, even in re v ise d fo rm , look m o re lik e a d ep osit than o th er m a rk e t in stru m en ts is its r e la tiv e ly low denom ination ($5, 000 in itia lly but $ 1 , 0 0 0 su b sequ en tly ), its issu a n c e by a bank holding com pany whose p rin cip a l a ffilia te and public id e n tifica tio n is synonym ous with the n a tio n 's second la r g e s t in su red bank, and its optional red em p tion fe a tu re s w hich a r e a v a ila b le to an in v e sto r long b e fo re its p oten tial 15 -y e a r m a tu rity . W hile a ll of th ese fe a tu re s have a b e a rin g on the com p etitiv e th r e a t w hich som e of the n a tio n 's d e p o sita ry in stitu tio n s see in the C itico rp n o te, and o th e rs like w hich m ay be issu ed in the fu tu re , it is the e a r ly red em p tion fe a tu re at the h o ld e r's option w hich m o st d ir e c tly com p etes with the tim e deposits w hich p re se n tly can be o ffered by the n a tio n 's th r ift in stitu tio n s and b an ks. - 4 - To illu s t r a te , a tim e d ep osit o f a m utual savings bank o r a F e d e r a lly in su red savings and loan a s s o c ia tio n , issu ed fo r the 23 m onths p re se n tly contem plated a s the req u ired te r m b e fo re the e a r l i e s t p erm itted red em p tion of the C itico rp n o te, could c a r r y a m axim u m in te r e s t ra te of 6 1/2% p e r annum fo r th r ifts and a m axim u m in te r e s t r a te of 6% p er annum fo r c o m m e rc ia l banks under R eg u lation Q. E ven i f the e a r l i e s t p erm itted red em p tion w ere extended to four y e a r s r a th e r than 23 m on th s, the m axim u m p erm itted ra te under R eg u lation Q would be 7 1/2% fo r th r ifts and 7 1/4% fo r c o m m e rc ia l b a n k s. Only at the s e v e n -y e a r point would a com peting bank be ab le to o ffe r an in stru m e n t of co m p arab le a t tr a c tiv e n e s s . P u t an o th er way, i f an in su red bank o r a s s o c ia tio n w ere to copy word fo r word the te r m s of the C itico rp note and w ere a b le to pay the r a te s re q u ire d , it would find th at the optional red em p tion could not be e x e r c is a b le under our p re se n t reg u la tio n s until seven y e a r s had p a ssed . O f c o u r s e , the a g e n cie s have the option, under e x istin g law , o f changing th e ir Ms e v e n -y e a r " ru le fo r subordinated note is s u e s and the option o f p erm ittin g a v a r ia b le - r a t e tim e d ep osit som ew hat s im ila r to the C itic o rp n o te, a su gg estion w hich I put forw ard fo r com m en t on b e h a lf of the FD IC in M ay. B u t a lm o s t no th r ift in stitu tio n would have the earn in g s pow er a t p re se n t to pay a 9. 70% p er annum r a te fo r long - 5 - on any sig n ifica n t p rop o rtion of its to ta l d e p o sits. To rem ed y th is b a s ic p ro b lem of the th r ift in stitu tio n s , it is ap p aren t th at the lo n g -ru n le g is la tiv e o b je ctiv e should be to im prove the p oten tial ea rn in g s power o f the n a tio n 's th r ift in stitu tio n s , th e re b y enabling th em to a t t r a c t funds in our in c re a s in g ly co m p etitiv e fin a n c ia l m a rk e ts and enabling th em to continue th e ir p re se n t com m itm en t to the n a tio n 's housing and m ortgag e m a rk e t. A s to the b ill p re se n tly b e fo re the C o m m ittee , its te r m s go fa r beyond any p ro v isio n s n e c e s s a r y to d eal with the p oten tial m is c h ie f to the flow of funds to the n a tio n 's th r ift in stitu tio n s and to housing w hich m ay be caused by the optional red em p tion fe a tu re s of the proposed C itico rp n ote. The FD IC th e r e fo r e opposes its en a ctm en t. A m o re lim ited b ill dealing e x c lu s iv e ly w ith the proposed e a r ly red em p tion fe a tu re can be draw n, h ow ever, and m ay appeal to the m e m b e rs of th is C om m ittee if it b e lie v e s the C itic o rp change announced la s t F r id a y does not go su ffic ie n tly fa r to d istin g u ish the proposed note fro m a d ep osit accou n t su b je c t to R eg u lation Q c e ilin g s .
