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For Release on Delivery Statement by George W. Mitchell Vice Chairman, Board of Governors of the Federal Reserve System before the Subcommittee on Financial Institutions, Supervision, Regulation and Insurance of the Committee on Banking, Currency and Housing U.S. House of Representatives September 9, 1975 I am pleased to present the views of the Board of Governors of the Federal Reserve System on additional issues raised in connection with Title I of H.R. 8024, which would extend the authority to set interest rate ceilings on deposits at commercial banks, savings and loan associations, and mutual savings banks. As it has indicated in its earlier comments on this bill, the Board believes that it is essential at this time to extend the authority of the Federal regulatory agencies to establish interest rate ceilings. Coordinated application of interest rate ceilings on deposits has become more complicated in the past few years. There have been a series of market and regulatory innovations, Congressional mandates, and changes in State legislation that have led to modifications in types of accounts at the various institutions. In consequence, the traditional distinctions between commercial banks and nonbank thrift institutions have become increasingly blurred. Some of these changes have also blurred the distinction between savings and demand deposits, and thereby eroded the statutory prohibition on the payment of interest on demand deposits. While the ceilings have been made more difficult to administer, they retain importance in present circumstances for moderating excessively disruptive shifts of funds. Many of the issues that have come before the Inter-Agency Coordinating Committee indicate the need for a responsive approach to -2interest rate ceilings and deposit structures in light of the evolving financial environment. For example, the NOW account experiment in the States of Massachusetts and New Hampshire has provided thrift insti tutions with negotiable transfer powers which traditionally have been offered by commercial banks. In the next few months, mutual savings banks and State-chartered savings and loan associations in Connecticut and Maine will be permitted— by recent State legislation— to offer demand deposit accounts to the public. On a national basis, Congress has permitted savings and loans to offer certain types of nonnegotiable transfer accounts, and more recently the Federal regulatory agencies have allowed commercial banks and S&L's to offer such transfers over a wider range of transactions. The Federal Reserve and the FDIC have permitted commercial banks to accept telephone transfers of funds from savings accounts to checking accounts. Moreover, the banking regulatory agencies have received comments from the public on proposals to permit commercial banks to acquire corporate savings deposits— a power possessed for some time by the thrift institutions— and to establish special types of accounts for use in Individual Retirement Act programs. In considering each of these matters, our position has been to attempt to balance public interest factors before arriving at a decision. It is highly desirable to promote increased benefits to the public in the form of equitable returns to savers, reduced costs to borrowers, and greater convenience and efficiency to the public at large. At the same time regulation of types of accounts and maximum rates payable must take into consideration the flows of funds to the various institutions, recognizing that housing construction is -3 especially sensitive to developments in the mortgage market. The administration of interest rate ceilings and deposit structures must also recognize the need to move toward greater competition among financial intermediaries, while maintaining the viability of these institutions. In the case of the NOW account experiment, the Board believes that Regulation Q has been administered with appropriate regard for consumer benefits, the relative competitive positions of the depositary institutions, and their financial soundness. At the present time, the Board has been reviewing the competitive structure in New England in response to petitions from various groups. The petitioners assert that the commercial banks— by the virtue of the NCW account experiment and State action--are presently, or will soon be, at a competitive disadvantage in the market for consumer savings. These parties feel commercial banks should be permitted to offer rates on savings and time deposits equivalent to those offered by nonbank thrift institutions. Although this matter has not yet been decided, the available evidence suggests that commercial banks in the aggregate have not been at a significant competitive disadvantage and thus generally have been able to maintain their total market share, although often at some higher cost. Where recent State actions are about to change the powers of thrift institutions, as in Connecticut and Maine, there is no evidence avail able yet to assess developments. Since the situation is quite fluid, however, it requires constant monitoring. -4 The question of maintaining existing ceiling rate differentials has also been raised with relation to special Individual Retirement Accounts at commercial banks. The Board invited public comments on various issues raised by these types of accounts, including whether or not the existing differential between commercial banks and nonbank thrift institutions should be eliminated on this type of account. This question has not been resolved. The logic that prompted the Board's inquiry regarding the elimination of the differential had three bases. First, the IRA deposits are designed to encourage individuals to save for their retirement in line with the intent of Congress. Attainment of this objective would be encouraged by permitting institutions to offer high rates of interest on ISA deposits. Second, insurance companies and mutual funds also accept IRA funds, and relatively low rate ceilings might place commercial banks and thrift institutions at a disadvantage with these other invest ment outlets. Finally, at existing rate ceilings, there is evidence that banks have been experiencing a declining total share in the longerterm deposit market in which relative yields play a more important role than liquidity and convenience. Since ISA accounts will be for the most part of a long-term nature, it seemed to the Board that maintenance of rate ceiling differentials among institutions on longer-term IRA accounts could place banks at a significant disadvantage vis-a-vis thrift institutions. In the shorter-term markets, where banks have more than held their own positions, the Board tentatively supports maintenance of the existing ceiling differential. -5In the present changing structural environment, the Board believes that Regulation Q authority should remain in effect, but the Board also believes that the differential in interest rate ceilings need not remain static for every type of account in every circumstance. Moreover, it is important for the managements of individual institutions to have full freedom to set their deposit interest rates at whatever level they think best within the regulatory ceilings, in the light of their particular markets and customers. Technological advances are changing the capabilities of financial institutions and State legisla tion is continuing to alter relative competitive positions by increasing the powers of one or another category of financial institutions. Indeed, as these changes occur, unless the Federal regulatory agencies retain the flexibility to analyze the appropriateness of the ceiling differen tials and to make adjustments where necessary, undue competitive imbalances will undoubtedly occur. And in present circumstances such imbalances could impose disruptions of flows of funds among financial institutions. In the Board's judgment, there is no need for removal, reductions, or increases of existing interest rate ceiling differentials at this time, except perhaps in the special case of IRA deposits now under consideration by the Board. Over the longer run, however, the Board still favors the eventual elimination of not only ceiling differentials but of interest rate ceilings themselves. In principle we believe the public interest is best served with minimal government -6interference with the payment of as high an interest rate to savers as is affordable. We recognize, though, that these goals can only be accomplished in a gradual and systematic fashion if disruptions to financial markets are to be avoided and institutions are to remain viable.
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