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PR-68-79 (6-27-79)

Statement on
S. 1347, the "Depository Institutions Deregulation Act of 1979"f
Presented to
Subcommittee on Financial Institutions^
Committee on Banking, Housing and Urban Affairs


io O

United States Senate


Irvine H. Sprague, Chairman


Federal Deposit Insurance Corporation

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5302 Dirksen Senate Office Building
9:30 a.m.
(7) June 27, 19 79^

FEO ERAL DEPOSIT IN S U R A N C E CO R PO RATIO N , 5 5 0 Seventeenth St. N.W., Washington, D.C. 20429


Mr. Chairman, I appreciate this opportunity to give you our views
on S. 1347, the "Depository Institutions Deregulation Act of 1979."
Generally, I support your legislation.

I do have some comment.

Any extension of asset powers to federally chartered savings

and loan associations, as in the bill, should also be given in total
to mutual savings banks.

The decision on establishing the NOW account interest-rate

ceiling and on delaying the phase-out or reimposing any interest-rate
ceiling should remain with all the regulators and not be shifted
solely to the Federal Reserve Board.

The regulators should be given some leeway during the two-

year freeze period to expedite the phase-out of interest-rate
ceilings should conditions warrant.

Usury ceilings are a question probably best left to the


If variable rate mortgages are added to the bill, specific

safeguards should also be written in.

NOW accounts should be affirmatively authorized nationally

by Federal law.

The legislation should be tailored to what can be signed

into law by October 1.
We are here today because your Committee has shown a keen
interest in the question of interest-rate ceilings and their fairness
to all segments of the industry and the banking public.
We are here with some urgency because of recent court decisions.
The April 20 court decision invalidates the administrative authorization

for automatic transfer services in banks, remote service units for
savings and loan associations, and share drafts for credit unions.
The court has stayed its order until January, but as a practical
matter, we do not have that much time because we must act before the
end of this session of Congress.

The Credit Union spokesmen will

tell you their effective deadline is October 1.

In any event, we

would hope legislative action on this bill could be concluded before
the Senate SALT debate begins.
I believe that enacting nationwide NOW accounts is the most
practicable and acceptable action you can take and the one most
likely to be enacted into law.

If you can do more, fine? I just

would not like to see the entire package go down because it
becomes loaded with too many issues.

You are the best judge of

what is possible within the time constraints.
Your legislation takes a balanced and innovative approach to
dealing with a variety of problems, including interest ceilings,
thrift institution powers, the flow of mortgage credit, and the
general efficiency of our financial system.

If enacted, this bill

would contribute importantly to improved resource allocation within
our economy and more equitable treatment of depositors and potential
borrowers throughout the country.
The proposed legislation sets in motion a process that would
ultimately eliminate interest ceilings on deposits.


they would be raised to levels where such ceilings would cease to be

That would probably occur sometime before the bill

actually eliminates such ceilings.
which has certain advantages.

This is an interesting approach

It gives thrift institutions an

adjustment period and lets them know what is going to happen in the
future so that appropriate planning in portfolio policy can occur.
At the same time, if the bill is properly amended, these institutions
will have the benefit of expanded asset powers which will facilitate
these adjustments.
The proposed bill makes a major effort toward broadening the asset
powers of thrift institutions.

The impact will be greatest for savings

and loan associations which do not presently have consumer lending powers.
Mutual savings banks have a range of consumer lending powers, varying
according to the law of individual states.

This bill should be revised

to provide greater uniformity and improved flexibility to these institu­

The other asset powers recommended in this bill represent

a positive contribution to portfolio flexibility, although the
improvement is likely to be modest.

All new powers in the bill

should specifically be extended to mutual savings banks, although
many of these powers already exist under some state law.
My concern with the specifics of the bill, as it has been proposed,
is that it may be too restrictive with respect to the interest-rateceiling phase-out process.
until 1982.

The bill would freeze existing ceilings

Depending on economic and financial developments, it may

be possible to adjust ceilings more rapidly during this period than
in the proposed bill, and I believe that the bank regulatory agencies
should have the flexibility to move in that direction should economic
events warrant it.
I will turn in a few minutes to the specific provisions of
S. 1347 and give our comments on modifications we believe would
improve the thrust and effectiveness of the legislation.

But, first, Mr. Chairman, it may be useful to this Committee to
have a brief review of the recent, explosive development of NOW accounts
in this decade.

There is clearly a public demand for this service.

Automatic transfer service, or ATS, was authorized by the
regulators beginning November 1, 1978, and we estimate that in
6-1/2 months some 3,300 —

or about 23 percent —

of the Nation's

14,000 commercial banks and 32 mutual savings banks outside New
England have inaugurated the service.

The ATS account balances were

estimated to total $6.8 billion in June 1979.

Patronage is estimated

at more than 750,000 bank customers.
About 1,650 credit unions, some 8 percent of the total, offer
share draft service that is used by over one million persons.
About one-half of these credit unions are federally chartered;
they showed share draft balances of $783 million in 878,000 accounts
at the end of March 1979.

About 10 percent, or 200, of the Nation's

Federal savings and loan associations offer remote service units.
In addition to the institutions already offering these
services, an undetermined number of others have already spent
considerable time and money on preparations to inaugurate service.


The creation and implementation of the NOW account resulted,
in large measure, from growing competition between commercial banks
and thrift institutions for consumer deposits, together with the
defeat of the thrifts' efforts to gain authority to offer checking

In 1970, Consumers Savings Bank of Worcester, Massachusetts,
developed a new type of savings account which permits negotiable
orders of withdrawal payable to third parties.

This new type of

savings account, commonly referred to as a NOW (negotiable order
of withdrawal) account, differs in two respects from the
traditional demand or checking account.

First, interest is paid

on the balance maintained in a NOW account, which is prohibited
by statute for demand accounts.

Second, withdrawal may be

legally delayed by the institution for 30 days, as for other savings
accounts, although depository institutions rarely exercise their
authority to require notice of withdrawal.
On June 12, 1972, Consumers Savings Bank introduced NOWs to
the public.

Two months later, New Hampshire Savings Bank in

Concord offered NOW accounts for the first time in that state.
During the remainder of 1972 and 1973, NOW accounts spread
rapidly among mutual savings banks in these states but not among
other depository institutions which by regulation or law could
not offer NOWs.
By early January 1973, nearly one-third of the 168 savings
banks in Massachusetts and 20 savings banks in New Hampshire
offered NOW accounts.

The Massachusetts mutuals were paying the

same interest rate on NOWs as on regular savings accounts and
were generally charging 15 cents per NOW draft (even though the
state's commercial banks were at that time not imposing service
charges on demand deposits).

In contrast, the New Hampshire

savings banks were paying either 3 or 4 percent interest on NOWs,
substantially less than on savings deposits, but were not


imposing service charges.

Approximately 22,000 NOW accounts existed

in Massachusetts' banks in January 1973, with deposits totaling
$45 million, compared with some 2,300 NOW accounts in New Hampshire,
with deposits totaling $1.1 million.
Such NOW growth and acceptance in Massachusetts and New
Hampshire, coupled with the restriction of such accounts to the
mutuals, quickly resulted in considerable agitation for Federal
curtailment or regulation of NOW accounts.

Public Law 93-100 of

August 16, 1973, sanctioned the offering of NOW accounts by all
depository institutions in the two states, Massachusetts and New
Hampshire, beginning in January 1974.

Regulation of NOWs was

divided among the Federal Reserve Board, the FDIC, and the Federal
Home Loan Bank Board.

Eligible account holders for NOWs were

limited by regulation to individuals and nonprofit institutions.
The NOW experiment in Massachusetts and New Hampshire was
intended to provide information to be used in future assessments
of permitting the payment of interest on demand deposits or
extending NOW account powers nationwide.
Interagency discussions on NOW accounts resulted in relatively
uniform regulations.

Most important, the interest-rate ceiling on

NOWs was set at 5 percent for all institutions, thereby forcing
Massachusetts mutuals to lower the rate on NOWs from 5.25 percent.
Furthermore, the agencies agreed to limit NOWs, to the extent
practicable, to residents of Massachusetts and New Hampshire,
and to restrict NOW advertisements to those states.

Initially, after gaining the power to offer NOWs, commercial
banks generally fought the NOW account movement.

Most did not offer

NOWs and elected to advertise against NOWs, arguing that consumers'
savings would be eliminated if they used NOW accounts.
NOW accounts continued to grow during 1974.


Finally, in early 1975,

commercial banks yielded to competitive and consumer pressures for
this new payment service and began offering NOWs on a broad scale.
At the outset, commercials followed the example of the thrifts,
offering 5 percent interest on NOWs and offering the accounts free
of charge.

However, after incurring tremendous growth in the number

of NOW accounts and in their dollar volume during 1975, the
commercials began to retreat from free accounts and initiated a
trend of charging for NOWs, particularly, by imposing some minimum
balance requirements.

This occurred at a time when interest rates

were falling from their highs of 12 and 13 percent, and banks were
seeking to offset profit margin pressures by cutting costs, including
NOW account expenses.

By 1976, thrifts in the two states were

following the commercial banks' lead away from free NOW accounts,
although not to the extent of the commercials.

In June of 1978,

84 percent of the NOW-offering commercials in the two states imposed
charges for NOWs, whereas less than one-half (48 percent) of the
NOW-offering thrifts imposed charges.
Through April 1979, 5 years after NOW account powers were
extended to all depository institutions in the two states, NOW
balances totaled nearly $2.8 billion in nearly 1.9 million

NOWs were being offered by 506 institutions, 85 percent


of the commercial bank and thrift institutions in Massachusetts
and New Hampshire.

The average number of drafts written on NOW

accounts currently ranges from 9 to 11 per month, an activity
level closely resembling the average number of debits per month on
personal checking accounts.
For the 28 months ending in April 1979, the average balance
in NOW accounts at commercial banks in Massachusetts and New
Hampshire was more than twice that at the thrifts —


versus $972.
_______________ STATES, 1976 TO APRIL 1979_____________
Public Law 94-222 of February 27, 1976, extended NOW authority
to the remaining New England states of Connecticut, Maine, Rhode
Island, and Vermont.

In many respects, the initial phase of NOW

account availability in these four states has more closely resembled
the current rather than the first-year NOW account experience in
Massachusetts and New Hampshire.

For example, commercial banks

immediately emerged as the dominant NOW account force in the four
states, accounting for about 79 percent of total balances in NOWs.
Moreover, by April 1979, 75 percent of the commercials and 71 per­
cent of the thrifts in the four states offered NOW accounts, which
is like the current situation in Massachusetts and New Hampshire,
rather than the initial experience.

NOW account balances totaled

nearly $1.2 billion in 397,197 accounts.

In marketing strategy, both

commercial banks and thrift institutions in the four states have
adopted the present strategy of commercials in Massachusetts and
New Hampshire, both in service charge and interest-rate patterns.

Nearly 80 percent of the institutions in the four states offered
NOWs with a service charge plan in June 1978; virtually all paid
the maximum 5 percent rate of interest.

The average number of

drafts drawn on NOW accounts in the four states was somewhat
larger than the Massachusetts and New Hampshire experience,
indicating more rapid acceptance of NOWs as a third-party payment
NOW account balances in all New England institutions, amounted
to $3.9 billion in more than 2.2 million accounts for an average
balance of $1,733 on March 31, 1979.

Eighty percent of all depository

institutions in New England that could offer NOW accounts did so.
Other than initially in Massachusetts and New Hampshire, banks in
New England have not hesitated to offer NOW accounts, suggesting
that commercial banks around the Nation would move rapidly to
offer them if such authority is provided.
ATS authority was provided to all commercial banks and savings
banks on November 1, 1978, (by regulation), and NOW accounts were
authorized for New York on November 10, 1978, (by Public Law
About a quarter of New York's 222 insured commercial banks are
offering the ATS service, according to the results of a survey by the
New York Federal Reserve Bank.

More than half offered NOW accounts.

Balances in their NOW accounts totaled $1.6 billion in 196,700
accounts for an average balance of $8,145 on April 30, 1979.
banks offered both ATS and NOW account services.


Nine of the 112 savings banks in New York offered the ATS
account service, seven of which also offered NOW accounts.
55 percent offered only NOW accounts.


Balances in their' NOW accounts

totaled $109 million in 112,470 accounts, for an average balance
of $970 on April 30, 1979.

Twenty-nine percent of the 126 savings and

loan associations in New York offered NOW accounts on April 30.
Balances totaled $35 million in 32,956 accounts, for an average
balance of $1,074.
Next I would like to comment on specific provisions in S. 1347,
as introduced.


Title I would remove the Federal prohibition on interest-bearing
NOW accounts for individual and nonprofit-organization depositors in
all insured banks and savings and loan associations and on comparable
share draft accounts in credit unions.

The effect would be to permit

depository institutions nationwide to offer NOW accounts if otherwise
permitted under Federal and state law.

We support this objective.

However, we foresee potential for a problem if applicable Federal or
state law does not otherwise clearly authorize such accounts for
particular types of depository institutions.

Therefore, your

Committee may want to give consideration to an affirmative approach
in S. 1347 which would expressly authorize all federally regulated
depository institutions, whether federally or state-chartered, to offer
NOW accounts.
In any event, we believe that a transition period would be
useful to permit institutions to adjust to NOW accounts, and we
would recommend that the bill be amended to authorize NOW accounts

effective 6 months after enactment and to delay the effective date
of the court decision as necessary to accommodate.
This, together with the provision already in the bill limiting
NOW accounts to individuals and nonprofit organizations, would help
minimize the likelihood of adverse effect on institutions.
Also, we would draw the Committee's attention to a modification
which the bill would make in the existing definition of NOW accounts.
The bill would define NOW accounts, in part, as accounts from which
"the depositor is allowed to make withdrawal by negotiable
or transferable instrument for the purpose of making payments to
third persons or otherwise."

(Underlining added.)

The two under­

lined words are new and could be interpreted broadly.

We would

recommend either deleting the words "or otherwise" or specifying
more precisely what this terminology is intended to cover.
Section 106(a) of the bill would mandate a statutory uniform
interest-rate ceiling on NOW accounts for all depository institutions
which would be one-quarter percentage point below the lowest rate
ceiling prescribed by the Federal Reserve under its Regulation Q.
The lowest rate, under the regulators' actions effective July 1,
will be 5 percent for NOW accounts, which would mean that NOW interest
rate ceilings under the bill would be reduced to 4.75 percent (except
in New England and New York where the existing 5-percent rate would
be grandfathered).

This would not seem to be the intent of the

legislation, and we suggest the bill be amended to specify the
commercial passbook rate as the benchmark for NOW accounts.

Section 106(b) would “grandfather" from the bill's ceiling for
NOW accounts all depository institutions in New England and New
York, even those that do not at present offer NOW accounts.

We favor

the grandfathering, but we believe that the provision should be more
tightly drawn and limited to some temporary duration, such as 2 years.
Finally, Section 107 would provide for interest-rate deregulation,
a goal I strongly support.

Section 107(a) would freeze existing

Regulation Q ceiling rates and, beginning January 1, 1982,
Section 107(b)(1) would require the agencies to raise Regulation Q
ceilings by at least one-quarter percentage point every 6 months
through July 1, 1989.

Under Section 107(b)(2), the Federal Reserve,

after consulting with the other agencies, could postpone any semi­
annual increase if it finds a serious economic emergency to exist.
Likewise, under Section 108, the Federal Reserve, after similar
consultation, could reimpose Regulation Q ceilings for periods
up to 1 year under similar circumstances after Regulation Q authority
under S. 1347 expires on January 1, 1990.
I support the thrust of this effort, but I believe that all
regulators should have equal authority as under present law and long­
standing practice.
work toward it.

The important thing is to set a deadline and

If thrifts can know where interest—rate ceilings

will be in the next several years, and if they are given added
powers, they can do the necessary planning and make the necessary
changes in their portfolio policies and begin to take advantage
of their new asset powers.

We note that the Treasury recommends a new definition of the
conditions under which interest-rate increases may be delayed.
The Treasury suggests a standard incorporating safety and soundness
considerations and monetary policy considerations and proposes
to make clear that such emergency delays may apply to any maturity,
type of institution, or geographical area.
Under Section 107, it is not clear whether one or more of the
regulatory agencies may opt for a semi-annual increase exceeding
one-quarter percent (the bill mandates an increase of Mat least*'
one-quarter percent) or whether a greater increase may be effected
only with the concurrence of the Congress.

Section 107(d) requires

that any determination by the Federal Reserve that it would be
desirable to accelerate the phase-out be reported to the Congress.
We believe these provisions should be revised to clearly specify the
procedure by which an accelerated phase-out may be achieved.


Title II would require all depository institutions (including
nonmember banks, savings and loan associations, and credit unions)
to maintain reserves against NOW accounts in ratios set by the
Federal Reserve between 3 percent and 22 percent.

Such reserve

balances could be maintained by nonmember institutions at depository
institutions other than the Federal Reserve Banks provided such
balances are "passed through" in toto to a Federal Reserve Bank.
For a nonmember institution, reserve requirements would be phased in
over a 3-year period.
This would be the first time that nonmember institutions —
including banks, savings and loan associations, and credit unions —

- 14
would be required to post federally mandated reserves and be subject
to the unilateral regulation of reserve requirements by the Federal

This innovation would bring us very close to the entire

area of Federal Reserve membership which is addressed in separate
legislation also pending before your Committee.
As I testified on March 27, required reserves could produce
a substantial increase in the number of banks joining the Federal
Reserve System because banks would feel that if they must post
reserves, they might as well take advantage of the other benefits
of Federal Reserve membership, including access to the discount

The Federal Reserve thus could easily find itself with

an unintended increase in its bank supervisory work load —


additional responsibility that would only further detract from
the Federal Reserve's primary concern of conducting monetary policy.
I know you will have this in mind as you consider the broader
question of required reserves.

You may well decide that this added

burden leads to the conclusion that the Federal Reserve should
remove itself from bank supervision.


Title III would give broader asset powers to Federal savings and
loan associations by granting them consumer loan authority and authoriz­
ing them to invest in commercial paper, bankers acceptances, and
corporate bonds, subject to an aggregate limit of 10 percent of assets.
The bill would also grant trust powers to Federal savings and loan
associations, subject to regulations issued by the FHLBB.
the bill's provisions in this area.

We support

While we are somewhat less

sure of the need or desirability for savings and loan associations

15 to get into the trust business, we would not oppose such authority
if Congress considers it advisable.
We note that these enhanced powers in S. 1347 are limited to
federally chartered savings and loan associations.

State law already

grants certain of these powers to mutual savings banks.

We are

concerned that competitive balance among institutions be maintained.
Title III would also preempt state usury ceilings on mortgage
loans by federally insured institutions by repealing such ceilings with
a provision that any state may reimpose usury ceilings within a 2-year
per iod.
It is not clear to me that we should be moving into the area
of usurping states' rights in such issues as usury ceilings which
historically have been the prerogative of the states.

Market pressures

have forced a significant number of states to amend or eliminate their
mortgage interest rate usury ceilings during the past several months.
These include the District of Columbia, Georgia, Idaho, Indiana, Iowa,
Maryland, New Jersey, New York, South Carolina, South Dakota, Tennessee,
Vermont, and Wyoming.

Beyond that, Section 303(a)(1), as written, may

have the unintended effect of encouraging lenders in search of higher
returns to require an interest in real property as security for
various other types of loans.
We see another difficulty in the fact that some security
instruments automatically extend the security to cover any other
obligations of the same borrower.

In such cases, all future loans

to the same borrower would be exempt from the state usury laws

once the borrower had executed a real property mortgage containing
such an open-end provision.
Also, Section 303(b) would give the states 2 years within which
to override the Federal usury exemption by adopting a provision of law
limiting the rate or amount of interest.

This would be unduly

State law may require that the preempted usury provision,

if contained in a state constitution, be reenacted by amendment
to the constitution, rather than by simple legislative enactment.
You are aware of this problem in recent legislation on usury
ceilings in Tennessee and Arkansas.
provide insufficient time.

In such cases, 2 years may

If this provision is enacted, I see

no reason for any time limit for reinstatement of a state usury

This seems to be a matter best left to the states themselves.
Mr. Chairman, I appreciate this opportunity to share our views

with you.