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F EMm

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NEW S RELEASE

FEDERAL DEPOSIT INSURANCE CORPORATION

FOR IMMEDIATE RELEASE

PR-74-73 (9-9-75)

Statem ent byF ra n k W ille, C hairm an
F e d e r a l D ep osit Insu ran ce C o rp o ra tio n
b e fo r e the
S u bcom m ittee on F in a n cia l Institutions
S u p e rv isio n , R egu lation and Insurance
o f the
C om m ittee on Banking, C u rre n cy and H ousing
H ouse o f R e p re se n ta tiv e s

S ep tem b er 9, 1975

FEDERAL DEPOSIT INSURANCE CORPORATION, 550 Seventeenth St, N.W ., Washington, D. C. 20429



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202*389-4221

A s I in d ica ted on July 21, the FDIC supports a o n e -y e a r ex ten sion
o f the statu tory authority v este d in the F e d e r a l R e s e r v e B oa rd , the FDIC
and the FH LB B to regu la te in a fle x ib le m anner the ra tes o f in te re s t o r
dividen ds payable by in su re d banks on tim e and savin gs d e p o sits and by
m e m b e r s o f the F e d e r a l H om e L oan Bank S ystem on d e p o s its , sh a res o r
w ithdraw al a cco u n ts.

Such an exten sion is contained in T itle I o f H. R. 8024.

You a r e , o f c o u r s e , aw are that the FDIC fa v o r s the eventual elim in a tion of
R egu lation Q -ty p e c e ilin g s through le g is la tio n lik e the p r o p o s e d F in a n cia l
Institutions A ct w hich w ould substantially expand the a b ility o f th rift in s t i­
tutions to co m p e te fo r the savings d o lla r and put to an end the obviou s d is ­
crim in a tio n w h ich p re s e n tly e x ists against th ose d e p o s ito rs with a ccu m u lated
savin gs o f le s s than $100, 000 - - a c a te g o r y w hich e n co m p a sse s the vast
m a jo r ity o f the n a tio n 's c it iz e n s .

We co n s id e r e d it u n r e a lis tic , h o w e v er,

to ex p ect C o n g re s s io n a l re v ie w and a ction on the m any im portan t and c o n ­
t r o v e r s ia l m a tte rs re la te d to that le g is la tio n to be co m p le te d p r io r to
D e c e m b e r 31 when the cu rre n t ra te -s e ttin g authority e x p ir e s , and so
su p p orted the ex ten sion p ro v id e d fo r in H. R. 8024.
The C h a irm a n 's le tte r o f August 28 e x p r e s s e d co n c e r n about the
e ffe c tiv e n e s s o f in te re s t c e ilin g s and existin g rate d iffe re n tia ls , and I
w ould lik e to com m en t b r ie fly on som e o f th ese is s u e s .
The stru ctu re o f in te re s t rate ce ilin g s a p p lica b le to savings
d e p o sits at in su re d banks and th rift institutions im p orta n tly a ffe cts th eir
a b ility to a ttra ct d e p o sits.




It a ls o im p orta n tly a ffe cts th e ir p ro fita b ility

and sou n dn ess-, the p r ic in g of m any banking s e r v ic e s , and the flo w of funds
fr o m one type o f in su red institution to another and fr o m a ll in te rm e d ia rie s
into h ou sin g, jo b -c r e a t in g b u s in e s s e s and oth er s e c t o r s o f the e co n om y .
In setting in te re s t c e ilin g s and draw ing up reg u la tion s to e n fo r c e th ose
c e ilin g s , the F e d e r a l ra te -s e ttin g a g e n cie s a re co n fro n te d with a num ber
o f co m p e tin g , and indeed co n flictin g , co n s id e r a tio n s and seek to strik e a
re a so n a b le and d e fe n sib le b a la n ce betw een them .
I think it fa ir to say that the r a te -s e ttin g a g e n cie s have in v a ria b ly
attem pted to a s s e s s the lik e ly re su lt o f th e ir d e c is io n s on the return s a v a il­
a ble to individual s a v e r s , on both the s h o r t- and lo n g -ru n im p lica tio n s fo r
in su red fin a n cia l institution s and th ose p o rtio n s o f the e co n o m y s e rv e d by
such in stitu tion s, and on v a rio u s fin a n cia l m a rk e ts in w hich in su red in stitu ­
tion s m a y o r m ay not play a sig n ifica n t r o le .

T his evaluation m ay turn out

in r e t r o s p e c t to have been in co m p le te o r w ron g , but I can a s s u r e you an
in te ra g e n cy e ffo r t is m ade to a p p ra ise c a r e fu lly b e fo r e we a ct the lik e ly
co n s e q u e n ce s of s p e c ific a ctio n s .

F ew d e c is io n s in volvin g rate ce ilin g s or

the reg u la tion s w hich im p lem en t them im p a ct fa v o ra b ly on e v e ry o n e , h ow ­
e v e r , and they m ay be m ade in a n ticip ation o f m a rk et d evelop m en ts rath er
than subsequ ently.

F o r th ese re a s o n s , am ong o th e rs , ou r rate d e cisio n s

a re am ong the m o s t se n sitiv e and c o n t r o v e r s ia l we m a k e.
G e n e ra lly speaking, rate c e ilin g s have tended to w o rk in a s a t is ­
fa c t o r y m an n er so long as th e ir le v e ls have been not too fa r out of lin e with •
m a rk e t r a te s .




The past six m onth p e r io d p ro b a b ly p ro v id e s a g ood exam ple

o f th is.

H o w e v e r, when m a rk et ra tes m o v e up sh a rp ly , as they have on

s e v e r a l o c c a s io n s during the p ast ten y e a r s , the esta b lish m en t o f a p p r o ­
p ria te rate c e ilin g s b e c o m e s m o r e d ifficu lt and so m e re a l e n fo rce m e n t
p r o b le m s e m e r g e .

At such tim e s a g g r e s s iv e institutions have been c o n ­

stra in ed fr o m paying h ig h er ra te s , and as a re s u lt, they have lo s t funds to
m a rk et in stru m en ts.

S m a lle r d e p o s ito r s , eith er b e ca u se of lim ite d r e s o u r c e s

o r la ck of fin a n cia l so p h istica tio n , have r e c e iv e d fa r lo w e r retu rn s on th eir
funds than they cou ld on a ltern a tiv e m a rk et in v estm en ts.

At such tim e s ,

in stitu tion s with lim ite d p o r tfo lio fle x ib ility , lim ite d earn in gs ca p a b ilitie s
and lim ite d ca p ita l funds and r e s e r v e s have been p a r tic u la rly v u ln era b le to
sig n ifica n t d e p o sit ou tflow s and lo w e r annual ea rn in g s.

If, h o w e v e r, rate

c e ilin g s a re not r e v is e d upw ard under such c ir c u m s ta n c e s , d isin te rm e d ia tion
m a y be e x a ce rb a te d and the d e te r io ra tio n in cu rre n t and retain ed earn in gs
a g grav a ted by the need to m aintain a h ig h er than n o rm a l d e g re e o f liq u id ity ,
p a r tic u la r ly if f o r c e d s a le s o f a s s e ts and p o s s ib ly sig n ifica n t ca p ita l lo s s e s
a r e re q u ir e d .
A d d ition a lly , w h en ever rate c e ilin g s have sig n ifica n tly im p a ire d the
a b ility o f in su red institution s to co m p e te against an open m a rk et rate s t r u c ­
tu re fo r the savin gs d o lla r, the in ce n tiv e s fo r circu m v e n tin g rate c e ilin g s
in c r e a s e p ro p o r tio n a lly and e ffe ctiv e en fo rce m e n t of the sp irit and intent o f
R egu lation Q -ty p e c e ilin g s b e c o m e s m o r e and m o r e d ifficu lt.

In the past,

this has le d to a tightening o f the d efin ition of d ep osits su b ject to the ce ilin g ,
to get at s h o r t -t e r m n o te s; to tougher p repaym en t pen a lties to d is co u r a g e




re d e m p tio n o f .c e r tific a te s - - and the paym ent o f even h ig h er ra tes - - p r io r
to m a tu rity ; and to in c r e a s e d s u r v e illa n c e o f in stitu tion al ’ 'p o o lin g " a rra n g e ­
m en ts and d e p o sit a d v e rtisin g .
S in ce 1966 c e ilin g s on co n s u m e r d e p o sits have been set at h igh er
ra te s fo r th rift in stitu tion s than f o r c o m m e r c ia l banks.

The ra tion a le fo r

this d iffe re n tia l has been p r in c ip a lly to a s s u r e a s a tis fa c to r y flo w o f funds
to savin gs and loan a s s o c ia tio n s and m utual savin gs banks and fr o m th ese
in stitu tion s to the m o rtg a g e m a rk e t.

In p e rio d s o f ris in g in te re s t ra tes,

a v e ra g e retu rn s on th rift institution p o r t fo lio s , w hich a re dom inated by
a s s e ts c a r r y in g long m a tu r itie s , tend to lag behind m a rk et ra te s.

As a

re s u lt, the co m p e titiv e p o sitio n o f th irfts , at such t im e s , tends to d e t e r io r a t e ^
v i s - a - v i s c o m m e r c ia l banks.

Rate ce ilin g d iffe re n tia ls w e r e o r ig in a lly intended

to insulate th rifts , to so m e d e g r e e , fr o m c o m m e r c ia l bank co m p etition , the
ra tio n a le fo r such p ro te ctio n re stin g p r in c ip a lly on m a tte rs o f p rod u ct line
and re su ltin g a s s e t s tr u c tu r e s .

S in ce c o m m e r c ia l banks o ffe r e d a w id er range

o f s e r v ic e s , including ch eck in g a cco u n ts , and cou ld g e n e ra lly a ffo rd to pay
h ig h er ra te s on d e p o sits than th rifts in p e r io d s o f ra p id ly e sca la tin g m arket
ra te s (b eca u se of a m o r e fle x ib le a s s e t stru c tu re ), it w as argu ed that a d if­
fe r e n tia l w as n e c e s s a r y to a s s u r e an adequate flo w o f funds into th rift in stitu ­
tion s and fr o m them to the m o rtg a g e m a rk e t.

I b e lie v e the d iffe re n tia l a lso

r e fle c t e d a fe e lin g in 1966 that th rift institution s w e r e r e la tiv e ly v u ln era b le to
ea rn in gs p r e s s u r e re su ltin g fr o m an u p su rg e in ra tes they had to pay on
d ep o sits and n eed ed tim e fo r a p p ro p ria te p o r tfo lio adju stm en ts to im p ro v e




£

th e ir ea rn in gs p e r fo r m a n c e b e fo r e being su b je cte d to g re a te r c o m m e r c ia l
bank rate co m p e titio n .
In re ce n t y e a r s , the p e r m is s ib le p o w e rs of th rift institution s have
expanded co n s id e r a b ly .

Som e of this has taken p la ce at the F e d e r a l le v e l

fo r fe d e r a lly c h a rte re d savin gs and loan a s s o c ia tio n s and c r e d it un ions, but
even m o r e has taken p la ce at the State le v e l, p a r tic u la rly in New England,
f o r s ta te -c h a r te r e d th rifts including m utual savings banks.

With d e v e lo p ­

m en ts taking p la ce at unequal ra tes o f speed at F e d e r a l and State le v e ls , it
is only natural to e x p e ct in c r e a s e d c o m m e r c ia l bank p r e s s u r e to r e v is e the
b a s ic ground ru les o f d e p o sit co m p e titio n p re s e n tly found in R egu lation Q
and its FDIC and F H L B B co u n te rp a rts.

They argue now, and w ill no doubt

continue to argue in the fu tu re, that the expanded a sse t p o w e rs and lia b ility
s e r v ic e s o f th rift institution s m ake th em able to co m p e te with c o m m e r c ia l
banks on À r e la tiv e ly equal footin g and that it is m o r e and m o r e inequitable
to m aintain the d iffe re n tia ls as they a r e .
In this c lim a te , it se e m s to m e that the ra te -s e ttin g a g e n cie s have
an o b lig a tio n , su b ject to any s p e c ific a ction the C o n g re ss m ay take on eith er
d ep osit rate c e ilin g s o r the m o r e b a s ic qu estion o f a s s e t and lia b ility p ow ers
fo r in su red in stitu tion s, to re v ie w the fa ir n e s s to sa v e rs of existin g le v e ls
o f d ep osit rate c e ilin g s , the u n derlyin g re a so n s fo r rate d iffe re n tia ls betw een
th rift institution s and c o m m e r c ia l banks, the e x p e r ie n ce o f the past as to
w hether c e ilin g s and d iffe re n tia ls have a ctu a lly a cco m p lis h e d th e ir intended
p u r p o s e s , and the lik e ly c o u r s e of m a rk et and institutional d evelop m en ts both
in the sh ort run and the long run.




N u m erou s, in te rre la te d fa c t o r s a re in v olv ed

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6

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in the c o m p le x b u sin e ss o f a d m in iste rin g a sy ste m of d e p o sit rate ce ilin g s ,
as this C om m ittee undoubtedly r e c o g n iz e s through its FINE study and its
co n s id e r a tio n o f le g is la tio n lik e the p r o p o s e d F in a n cia l Institutions A ct.
A ll th re e r a te -s e ttin g a g e n cie s take th e ir r e s p o n s ib ilitie s with the utm ost
s e r io u s n e s s , and I am su re this attitude w ill continue to p r e v a il.