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MAY 17, 1977





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George A. LeMaistre
Federal Deposit Insurance Corporation

at the

Annual Conference of the
National Association of Mutual Savings Banks^
© San Francisco, GaTriier-nria--


CD May

17, 1977*®

FEDERAL D EPO SIT IN SU RA N CE CO RPO RATIO N , 5 5 0 Seventeenth St. N.W., Washington, D.C. 20429




Address By
George A. LeMaistre
Federal Deposit Insurance Corporation
at the
Annual Conference of the
National Association of Mutual Savings Banks
San Francisco, California
May 17, 1977

It is a great pleasure to be with you and, of course, to be here in
San Francisco. Because this is my first opportunity to speak with you as a
group, I will touch briefly on several issues which I know to be of interest
rather than focusing in detail on a single subject. I anticipate a lively
and cooperative dialogue in the coming months as we work closely with
you to address what seem to me complex and challenging questions. I do not
purport to have all the answers and, therefore, will welcome and actively
solicit your views.
One subject which has been of concern to us all in recent years, regard­
less of perspective, has been that of financial institution reform. I supportec
the recommendations of the Hunt Commission and the goals embodied in the
Financial Institutions Act. I was disappointed at the demise of this legislate
in the last Congress. I continue to be of the view that a financial system in­
volving more direct competition among financial intermediaries and greater
reliance on the direct operation of free markets is a more efficient and
effective way to allocate deposit funds. Moreover, I believe that the Hunt
Commission was essentially correct in its strong recommendations that financial
restructuring should not be accomplished piecemeal but rather in the context of
a comprehensive legislative package designed to provide as equitably as possibl<
for transition to the new structure.
Nevertheless, events since publication of the Hunt Commission recommenda­
tions in 1971 indicate that supporters of comprehensive financial reform were
perhaps a bit naive. Financial reform is not going to be enacted as a
comprehensive and balanced package at the Federal level
at least not in
the foreseeable future — a judgment confirmed by the leadership in Congress.
Ironically, however, many facets of the package have been achieved through
developments in the marketplace and at the State level.
Reflection on these
developments provide valuable lessons: First, about the politics of financial
legislationj and second, about the responsiveness of the marketplace.
In retrospect, some of the reasons for the failure of comprehensive
financial reform at the Federal level are apparent. Laws and regulations
defining the powers and functions of the various financial intermediaries may
be seen as a series of treaties which define boundaries and establish the rules
of competition. Changes in the rules of the game or the boundaries of the
playing field directly affect a host of interests in complex and unpredictable




w*y». As a result, any comprehensive change among these interests, however
well constructed, is likely to produce winners and losers in relatively large
• Moreover, again because the system is complex and our understanding
of it imperfect, it is often difficult to predict precisely who will be among
the winners and losers. Accordingly, it is neither surprising nor unnatural
that various financial interests, faced with concrete legislative packages,
would break ranks and fight to protect and advance their own interests.
Although comprehensive financial institution reform has failed
miserably in the political arena at the Federal level, technological
innovations, developments in the marketplace and action at the State level
have tended to take us slowly but surely toward the world that the Hunt
Commission envisioned. Mutual savings banks have, of course, taken the
lead in this regard with the legendary development of the NOW accounts and
with such innovations as telephone transfersi The range of consumer and
investment powers which your industry has sought is already available to
savings banks and their customers in many of the 17 States in which savings
banks compete. In some States, present powers, including interest-paying
NOW accounts, actually exceed the goals sought by the Hunt Commission Report.
Other institutions are also pushing vigorously at the traditional boundaries
of their industries so that distinctions among financial institutions are
increasingly blurred. For example, many observers foresee credit unions
emerging as potent competitors for household accounts in the very near
future, if they have not already.
What I take from all of this is that we at the Federal level and you in
the industry should be hard at work developing and supporting proposals which
reinforce, or at least remove the impediments to, progressive developments
which are occurring in the marketplace and in the State legislatures even though
comprehensive financial reform may be beyond our reach. Here the possibilities
are many and varied and I do not today come forward with the LeMaistre plan
^or financial restructuring or to detail precisely my position on all the
possible programs which might surface in the coming months.
I will, however,
touch on several key points with which any package is likely to deal and
which might be of interest to you.
As I indicated earlier, mutual savings banks have moved a long way
down the road in the evolution into "full service family banking institu­
In some States, mostly in New England, this evolution is essentially
complete. In other States, however, there are important gaps in savings bank
powers and restrictions on their operations. In New York, for example, savings
bank lending powers are restricted and there are important limitations with
respect to demand deposits. It is true that some State laws are uncomfortably
binding with respect to commercial banks as well, but the choice provided by
the dual banking system means that innovations which genuinely satisfy
customer needs are adopted over time.
Recent banking history is replete with examples of this phenomenon.
Though many disagreed with the specifics of his decisions, it is clear in


retrospect, that Jim Saxon served the banking industry and the public well by
allowing national banks to do things repugnant to his colleagues at the FDIC
and the Federal Reserve Board. In effect, he helped take banking out of the
conservatism that was a holdover from the Depression. Similarly, when Congress
has been unable to act in recent months, State legislatures and State regulators
have taken the lead pursuing alternative strategies of dealing with financial
reform and electronic funds transfer systems. As a result, there exist numerous
laboratories whose experience provide insights as to the most nearly optimal
In my judgment, it is simply unfair that mutual savings banks and their
customers are denied the considerable benefit of this unique and positive
feature of American financial regulation. Thus, I strongly favor immediate
adoption of legislation which would provide a Federal chartering option for
mutual savings banks.
Although I am aware that political reality may dictate a different result,
for my part, I would not restrict the Federal chartering option geographically,
nor would I limit it to existing institutions. Also, while I would not oppose
designation of the Federal Home Loan Bank Board as Federal chartering authority
for mutual savings banks, I do think it appropriate to point out that the FDIC
has had more than 40 years of experience in examining and supervising the
mutual savings bank industry — experience which would be most useful to
the chartering authority. In any event, I would not like to see the FDIC
go out of the business of regulating mutual savings bank altogether. It
seems to me highly desirable that at least one Federal regulator be concerned
with both commercial banks and thrift institutions in order to assure a
balanced perspective.
The financial reform issue likely to receive the most serious attention
in the coming weeks is elimination of the prohibition on the payment of interest
on transaction balances — a development which I have long supported. Until
recently, debate with respect to this has been somewhat academic. Economists
can demonstrate that competition for deposits through the pricing mechanism
would result in a more efficient allocation of resources than competition for
deposits through indirect means such as the building of branches and provision
of free checking, leading to substantial benefits for both institutions and
customers in the long run. In addition, scholars have shown that payment of
interest on demand deposits was not an important factor in the bank failures
of the '30s. Nevertheless, proposals to eliminate the prohibition of payment
of interest on demand deposits have not been politically viable.
A number of factors may have changed this equation. The growth and
success of tne NOW account experiment in New England reflects customer
acceptance of the service, encouraging secure and aggressive institutions
elsewnere to press for nationwide NOW accounts. Second, interest on demand
deposits is almost with us in a variety of other forms, such as credit union
snare drafts and telephone payments mechanisms. Third, many people, including
some Congressmen, perceive this as a consumer issue. Although it may very well
be that small depositors, who are currently receiving a cross-subsidy, will
suffer if banks price service charges properly, this perception certainly
enhances the likelihood of action in this regard.


A new and, perhaps, most important element in this equation is current
Federal Reserve concern with attrition from the System. In the past, decline
in membership has led the Federal Reserve Board to propose mandatory reserve
requirements or mandatory membership. This has proved politically unrealistic.
Now faced with the prospect of increasing abandonment by large institutions, th
Federal Reserve seems likely to propose payment of interest on reserve balances
as a means of reducing the burden of membership. Because this might be viewed
as a "give away" of Government revenue to the banks, the Fed may link this
proposal with the call for nationwide NOW accounts or the payment of interest
on demand deposits.
Taken together, these factors suggest greatly increased likelihood that
Congress will provide for the payment of interest on transaction balances in
one fashion or another. Nevertheless, I consider it naive to think that the
passage of this legislation, even when linked with a Federal Reserve proposal
for interest on reserves, faces easy sledding in the Congress. Although there
is an air of optimism now, concrete proposals are not yet on the table. When
specific legislation is proposed, it may be very difficult for the various
interests to work out a compromise sufficiently acceptable to achieve passage.
A third facet of the financial institution reform which will certainly
be the subject of attention in Congress later this year is that of the
Regulation Q ceilings and the differential.
I should state quite frankly that
I have long favored elimination of interest rate ceilings as soon as that can
be accomplished consistent with the principles of equity and the soundness of
the banking system. This, of course, is consistent with my support of the Hunt
Commission recommendations and the Financial Institutions Act.
My reasons for this view are several. I believe that the market mechanisE
and not Government regulators should make the resource allocation and pricing
decisions in our economy. While price controls may be necessary on a temporary
or standby basis in some cases, I do not favor them as long-run solutions.
Almost inevitably, they lead to inefficiencies in the allocation of resources
and rigidity in our economy. Interest rate ceilings are a case in point.
Certainly, your own experience suggests that they have not protected financial
institutions against disintermediation and the squeeze on earnings that occur
when interest rates are high. Indeed, there is reason to believe that the ceil
ings have themselves been a cause of disintermediation. Moreover, notwithstanc
the historical linkage of interest rate ceilings and housing goals, the ceiling
are an inefficient and disfunctional means of assisting housing. Because the
subsidy involved is indirect, real costs to society are hidden.
In addition,
benefits of the subsidy are not targeted with precision. As a result many
recipients of the subsidy do not need it while needed housing goes unbuilt.
Finally, and perhaps most importantly, interest rate ceilings constitute
a regressive and inequitable tax on small savers.
In short, because I believe that interest rate ceilings are an ineffective
and sometimes disruptive form of credit allocation and because I believe that
they impose some inequities on small savers, it is my judgment that the proper
focus of our attention should be upon how and when and not whether to phase


out interest rate ceilings. For this reason, I iavor designation of a specific
date for their demise.
I believe that only in the context of such certainty
will bankers and regulators begin to plan seriously, as Saul Klaman suggests
that we should — for a "Q-less" world.
In this area, I should make clear the FDIC's position in one regard.
One important defense against possible future interest rate increases and
disintermediation that more savings banks are taking advantage of is associated
with membership in the Federal Home Loan Bank System. The most recent figures
I have seem to indicate that 77 mutual savings banks are members of that System,
which reflects a substantial increase. In the past, the FDIC discouraged
Federal Home Loan Bank borrowing by insured savings banks. While there may be
certain circumstances under which such borrowings may be excessive or inappropriate,
the FDIC's policy is in no way to discourage such borrowings. We believe that
such borrowings serve as an important source of liquidity for thrift institutions.
Moreover, expanded lending by the Federal Home Loan Bank can increasingly play
an important role in cushioning the impact of tight financial market conditions
on thrift institutions and on home building.
It seems to me that the availability
of such a facility exemplifies the possibility of developing strategies which
more effectively cushion thrifts and the housing markets from interest rate
swings. Progress that has been made in developing and marketing new and flexible
mortgage instruments represent another productive strategy.
Before concluding, I would like to turn to a matter which should be of great
concern to banks and bank regulators — the problem of devising regulatory systems
which involve the least cost and minimum amount of governmental intervention
necessary to achieve the desired public purpose. There is a growing consensus
among both liberals and conservatives that regulation has gotten out of hand.
This consensus is reflected in the regulatory reform movement which includes
such strategies as Sunset legislation, zero-based budgeting, regulatory re­
organization, and increased reliance on economic incentives to replace detailed
regulations. And, of course, President Carter's strong commitment to achieving
efficient and effective government provides the leadership force.
In the banking industry, the focus recently has been upon the burdens
imposed by various types of consumer regulations such as the Truth-in-Lending
Law. I am hopeful that by working in a cooperative spirit with Congress and
consumer groups, we can devise strategies that will protect consumer interests
and minimize the burden on affected institutions. At the same time, I also
believe that we can and should broaden our horizons. There are a variety of
regulations, laws, and reporting requirements which ought to be reexamined to
determine whether the costs involved are reasonable when compared with the
benefits realized. It is my intention, within the limits of our resources at
the FDIC, to seek such reexamination.
As I indicated at the outset I do not purport to have all the answers
nor do I think that they are to be found in Washington alone. For that reason
I actively solicit your criticism, your assistance and support. I hope that
we can work together in the coming months to make our system of supervision
and regulation more efficient and more effective and that we can devise
reasonable solutions to the problems which face us.