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F o r r e l e a s e o n de l i v e r y S t a t e m e n t by R o b e r t C. H o l l a n d Member, B o a r d of G o v e r n o r s of the F e d e r a l R e s e r v e S y s t e m b e f o r e the S u b c o m m i t t e e on Finan c i a l Institutions of the C o m m i t t e e on Banking, H o u s i n g a n d U r b a n Affairs U n i t e d States S e n a t e N o v e m b e r 7, 1973 I a p p r e c i a t e the opportunity to a p p e a r o n behalf of the B o a r d of G o v e r n o r s to d i s c u s s s o m e of the i s s u e s r a i s e d by the A d m i n i s t r a t i o n ' s p r o p o s e d F i n a n c i a l Institutions A c t of 1973. I will c o n c e n t r a t e m y o p e n i n g r e m a r k s t o d a y on t h o s e i s s u e s w h i c h a r e of direct c o n c e r n to the F e d e r a l R e s e r v e S y s t e m . L e t m e say at the cutset that the B o a r d b e l ieves t h e r e is a n e e d for r e f o r m in the s t r u cture of financial i n t e r m e d i a r i e s in this country. S u c h r e f o r m s h o u l d be d e s i g n e d to i m p r o v e the flexibility of financial institutions to r e s p o n d to the c h a n g i n g n e e d s of individuals a n d business, w h i l e m a i n t a i n i n g a b a s e for effective m o n e t a r y policy a n d p r e s e r v i n g the s o u n d n e s s of the overa.ll financial s y s t e m . T h e c h a n g e s n e e d e d c a n be a c c o m p l i s h e d to a l a r g e extent b y eliminating or m o d e r a t i n g p r e s e n t restrictions on the v a r i o u s types of financial institutions, a n d by p r o v i d i n g for g r e a t e r c o m p e t i t i v e equity a m o n g t h e m . S. 2 5 9 1 m o v e s substantia in this direction. T h e effect of S. 2 5 9 1 o n the F e d e r a l R e s e r v e S y s t e m a n d its m e m b e r b a n k s c a n be s e p a r a t e d into four m a j o r a r e a s -loan a n d i n v e s t m e n t p o w e r s , powers, interest ceilings, d e p o s i t a n d c h e c k and reserve requirements. I will d i s c u s s e a c h of the s e a r e a s in turn, r e f e r r i n g to the c u r r e n t l a w a n d the m a i n r e a s o n s - 2- therefor, the k e y a r g u m e n t s for c h a n g i n g the l a w at this time, a n d the B o a r d ’ s v i e w s r e g a r d i n g the p r o p o s e d c h a n g e s . my While s t a t e m e n t s o n the c u r r e n t l a w will b e brief, I can, if the C o m m i t t e e w i s h e s , file a m e m o r a n d u m outlining the legislative history of the relevant statutes in g r e a t e r detail. LOAN AND INVESTMENT POWERS T h e B o a r d s u p p o r t s the p r o p o s e d c h a n g e s relating to the i n v e s t m e n t p o w e r s of c o m m e r c i a l b a n k s , a n d h a s r e c o m m e n d e d e n a c t m e n t of s i m i l a r m e a s u r e s in the past. It is p r o p o s e d to r e m o v e the restrictions o n the authority of national b a n k s to m a k e loans s e c u r e d b y real estate, w h i c h authority is p r e s e n t l y limited b o t h qualitatively a n d quantitatively. A t o n e time, national b a n k s w e r e prohibited f r o m m a k i n g m o r t g a g e l oans b e c a u s e it w a s c o n s i d e r e d u n w i s e to p e r m i t b a n k s a c c e p t i n g d eposits o n a d e m a n d basis, as w a s then usually the case, to m a k e l o a n s w i t h long maturities. T h e prohibition h a s b e e n p r o g r e s s i v e l y r e l a x e d o v e r the y e a r s as b a n k s h a v e generally d e m o n s t r a t e d the ability to obtain funds o n l o n g e r t e r m s a n d to m a n a g e their liabilities, a n d as s e c o n d a r y m a r k e t s h a v e d e v e l o p e d for m o r t g a g e loans. The r e m a i n i n g statutory restrictions a r e n o l o n g e r n e e d e d to a s s u r e s o u n d lending practices, a n d their r e m o v a l w o u l d h a v e the positive effect of i n c r e a s i n g to s o m e extent m o r t g a g e lending activities of national ba n k s . - 3- It is also p r o p o s e d to liberalize the collateral r e q u i r e m e n t s i m p o s e d o n b a n k s w h e n they b o r r o w f r o m the F e d e r a l R e s e r v e at the di s c o u n t rate. O f c o u r s e , all loans f r o m F e d e r a l R e s e r v e B a n k s to m e m b e r b a n k s m u s t be fully collateralized. Originally, all s u c h l o a n s h a d to b e s e c u r e d by a n a r r o w l y defined class of p r e s u m a b l y liquid assets, a limitation b a s e d o n the n o w - a b a n d o n e d ’ ’ real bills1' doctrine. Later, a d v a n c e s w e r e p e r m i t t e d on the security of o t h e r a s s e t s s u c h as m o r t g a g e loans a n d m u n i c i p a l securities, but only at a penalty rate of a n additional o n e half of o n e p e r cent a b o v e the d i s c o u n t rate. T h e p r o p o s e d elimination of the p e n a l t y rate w o u l d e l i m i n a t e a n indirect restriction o n the portfolios of m e m b e r ba n k s , a n d w o u l d also simplify o p e r a t i o n s of the F e d e r a l R e s e r v e B a n k s . A n additional p r o p o s a l is that national b a n k s be p e r m i t t e d to m a k e equity i n v e s t m e n t s in c o m m u n i t y rehabilitation projects. N a t i o n a l b a n k s h a v e b e e n g e n e r a l l y prohibited f r o m m a k i n g equity i n v e s t m e n t s or p u r c h a s i n g equity securities, in o r d e r to protect bo t h d e p o s i t o r s a n d b o r r o w e r s f r o m b a n k efforts to s p e c u l a t e in equity positions. T h e B o a r d b elieves it is w i s e to c o ntinue this g e n e r a l prohibition on all d e p o s i t o r y institutions, but w i t h the m o d i f i c a t i o n s p r o p o s e d to a l l o w for l i m ited equity i n v e s t m e n t s in c o r p o r a t i o n s e s tablished for the p u r p o s e of c o m m u n i t y d e v e l o p m e n t . - 4- INTEREST ON DEPOSIT ACCOUNTS T h e s e c o n d m a j o r a r e a in w h i c h c h a n g e s a r e p r o p o s e d c o n c e r n s interest p a i d o n deposit a c c ounts. The Federal Reserve, Federal Deposit Insurance Corporation, a n d F e d e r a l H o m e L o a n B a n k B o a r d a r e c u r r e n t l y p r o v i d e d w i t h parallel authority to set interest rate ceilings on t i m e a n d s a v i n g s deposits, after consultation w i t h o n e another, w i t h discretion p r o v i d e d to set different ceiling rates for different types of a c c o u n t s . P a y m e n t of interest o n d e m a n d depos i t s is prohibited. T h e restrictions on interest p a y m e n t s by b a n k s c a m e a b o u t as a result of the c r i s e s of 1929 a n d 1933. T h e intended p u r p o s e s w e r e to p r e v e n t the shifting of funds f r o m c o u n t r y b a n k s to big m o n e y c e n t e r b a n k s to finance stock m a r k e t speculation, a n d to p r e v e n t b a n k s f r o m e n g a g i n g in u n s o u n d b a n k i n g p r a c t i c e s by c o m p e t i n g for deposits t h r o u g h p a y m e n t of e x c e s s i v e interest rates a n d then trying to m e e t the i n c r e a s e d cost of d e posits b y a c q u i r i n g high-yielding but risky assets. Subsequently, s c h o l a r s studying this p e r i o d h a v e q u e s t i o n e d t hese t w o original rationales, a n d in p r a c t i c e interest ceilings h a v e c o m e to be u s e d m o r e for oth e r purposes. - In r e c e n t y e a r s , 5- e m p h a s i s h a s b e e n g i v e n to utilizing rate ceilings to hold d o w n flows of funds a m o n g d e p o s i t o r y institutions. A c o m b i n a t i o n of factors h a s led to this result. B e g i n n i n g in the m i d - 1 9 5 0 !s, after t w o d e c a d e s of a m p l e liquidity, c o m m e r c i a l b a n k s b e g a n to feel the p i n c h of i n c r e a s i n g d e m a n d s for credit a n d g r e a t e r c o m p e t i t i o n for funds f r o m thrift institutions a n d m a r k e t securities. B a n k s r e s p o n d e d to this situation by raising their interest rates p a i d o n t i m e deposits, thus creating p r e s s u r e s w h i c h eventually r e s u l t e d in h i g h e r interest ceilings. B a n k s also i n c r e a s e d the variety of their deposit a c c o u n t s by offering v a r i o u s certificates of deposit at attractive interest rates. M e a n w h i l e , savings a n d loan a s s o c i a t i o n s w e r e e x p e r i e n c i n g s o m e w h a t different but related difficulties. w e all k n o w , T h e s e institutions, as a r e a l m o s t totally d e p e n d e n t o n c o n s u m e r t i m e a n d s a v i n g s de p o s i t s for funds, a n d invest the bulk of t h e s e funds in fixed-rate l o n g - t e r m residential m o r t g a g e s . A s a result of this p r a c t i c e of b o r r o w i n g sho r t a n d lending long, m a n y thrift institutions f o u n d t h e m s e l v e s in a d i l e m m a d u r i n g the p e r i o d s of h i g h interest rates w h i c h e m e r g e d . I n c r e a s i n g their s a v i n g s rates to attract d epo s i t s w o u l d h a v e re s u l t e d in o p e r a t i n g losses. O n the other hand, p a y i n g l o w e r interest rates than c o m p e t i n g institutions a n d m a r k e t i n s t r u m e n t s c o u l d h a v e led to a n outflow of deposits. P a r t l y in a n e n d e a v o r to a m e l i o r a t e t h e s e interest rate problems, d e posit rates of m o s t s a v i n g s a n d lo a n a s s o c i a t i o n s w e r e b r o u g h t u n d e r F e d e r a l regulation in 1966. S i nce that t i m e , the c u r r e n t n e t w o r k of d eposit interest ceilings h a s h e l p e d to control rate c o m p e t i t i o n a m o n g institutions o n balance, but it h a s also c o n t r i b u t e d to the d i v e r s i o n of funds f r o m financial i n t e r m e d i a r i e s to m a r k e t i n s t r u m e n t s d u r i n g p e r i o d s of tight m o n e y . T h e m o v e of thrift institutions to offer l o n g e r - t e r m certificates of d e posit h a s b e e n a v e r y helpful, but still insufficient, d e v e l o p m e n t in r e s p o n s e to the continuing p r o b l e m of fluctuations in s a v i n g s flows a n d h o u s i n g finance. S ection 103 of S. 2 5 9 1 p r o v i d e s for a g r a d u a l p h a s e - o u t of interest rate ceilings, w i t h c o m p l e t e r e m o v a l 5 - 1 / 2 y e a r s after e n a c t m e n t of the legislation, a n d a g r a d u a l p h a s e - o u t of the interest differential b e t w e e n c o m m e r c i a l b a n k s a n d thrift institutions. To e n a b l e the thrift institutions to c o m p e t e effectively for funds d u r i n g p e r i o d s of hig h interest rates wit h o u t the protection a f f o r d e d b y rate ceilings, t h e s e institutions w o u l d be given e x p a n d e d p o w e r s to diversify into m o r e liquid types of loans. I m u s t r e p o r t to y o u the B o a r d ' s c o n c e r n that the p r o p o s e d n e w i n v e s t m e n t p o w e r s m i g h t wel l not b e sufficier.t to a s s u r e that - 7- thrift institutions c o u l d c o m p e t e effectively for deposits d u r i n g p e r i o d s of h i g h interest rates. T h e B o a r d is also c o n c e r n e d that the p r o p o s e d a s s e t diversification co u l d h a v e a n a d v e r s e i m p a c t o n h o u s i n g finance that w o u l d n o t be offset b y o t h e r p r o v i s i o n s in S. 2591. T h e s e possibilities s e e m to us to s u g g e s t that r e g u l a t o r y a g e n c i e s b e a l l o w e d s o m e l e e w a y in s p e e d i n g o r s l o w i n g the p r o p o s e d chan g e s . A c c o r d i n g l y , the B o a r d w o u l d f a v o r a g r a d u a l lifting of interest ceilings, contingent o n a d e m o n s t r a t i o n that thrift institutions a n d s m a l l c o m m e r c i a l b a n k s c a n p e r f o r m their functions p r o p e r l y w i t h r e l a x e d interest rate controls d u r i n g p e r i o d s of h i g h interest rates. E v e n after ceilings a r e r e m o v e d , the B o a r d w o u l d r e g a r d it as p r u d e n t to h a v e s t a n d b y authority to r e i m p o s e ceilings s h o u l d it b e c o m e cle a r that u n c o n t r o l l e d rates t h r e a t e n to u n d e r m i n e the safety a n d s o u n d n e s s of d e p o s i t o r y institutions o r to conflict w i t h other public interest considerations. R e g a r d i n g the authority to set interest ceilings, the B o a r d s u p p o r t s the A d m i n i s t r a t i o n p r o p o s a l to a d d the T r e a s u r y to the g r o u p of a g e n c i e s r e q u i r e d to consult t o g e t h e r in setting s u c h ceilings, but o t h e r w i s e to l e a v e s u c h authority u n c h a n g e d . - 8- W i t h r e s p e c t to the p r o v i s i o n s for truth in savings, the B o a r d s u p p o r t s the c o n c e p t of full d i s c l o s u r e of the t e r m s a n d conditions applicable to s a v i n g s deposits, o n a u n i f o r m basis for all d e p o s i t o r y institutions. T h e B o a r d w o u l d like to r e p o r t that its study o n certain a s p e c t s of this m a t t e r , m e m b e r s of this C o m m i t t e e , r e q u e s t e d b y four is p r o c e e d i n g . W h e n it is c o m p l e t e d , the B o a r d will also s u b m i t a technical analysis of the d i s c l o s u r e r e q u i r e m e n t s set forth in section 106. DEPOSIT A N D C H E C K P O W E R S L e t m e turn n o w to the third m a j o r issue, depo s i t a n d check powers. It is p r o p o s e d that national b a n k s b e a l l o w e d to offer s a v i n g s a c c o u n t s to c o r p o r a t i o n s . S i n c e the B a n k i n g A c t of 1933, s a v i n g s deposits h a v e b e e n the only class of deposits p a y a b l e o n d e m a n d w i t h r e s p e c t to w h i c h m e m b e r b a n k s a r e p e r m i t t e d to p a y interest a n d to m a i n t a i n r e s e r v e s at levels l o w e r than t h o s e for d e m a n d deposits. O n the b a s i s of its c o n c l u s i o n that the p u r p o s e of so f a v o r i n g s a v i n g s deposits w a s to e n c o u r a g e p e r s o n a l thrift, the B o a r d r u l e d in 1936 that s u c h deposits s h o u l d n o t b e m a d e available to p r o f i t - m a k i n g c o r p o r a t i o n s . T o r e v e r s e that policy a n d a l l o w c o r p o r a t e s a v i n g s deposits w e believe w o u l d e x p o s e - 9- financial institutions to potentially destabilizing shifts of b u s i n e s s funds, a n d c o u l d invite the t r a n s f e r of w o r k i n g b a l a n c e s of c o r p o rations into s a v i n g s deposits in o r d e r to a v o i d the h i g h e r r e s e r v e r e q u i r e m e n t s o n d e m a n d deposits a n d the interest prohibition thereon. It is also p r o p o s e d that all b a n k s a n d thrift institutions b e a l l o w e d to offer negoti a b l e o r d e r of w i t h d r a w a l a c c o u n t s , so called " N O W a c c o u n t s , M to all c u s t o m e r s , w i t h interest ceilings to b e a u t h o r i z e d for 5 - 1 / 2 y e a r s at a level not to e x c e e d the ceiling o n c o m m e r c i a l b a n k s a v i n g s deposits. N O W ac c o u n t s , of c o u r s e , a r e in m a n y w a y s i n t e r e s t - b e a r i n g c h e c k i n g a c c o u n t s e x c e p t that, legally, p r i o r notice m a y b e r e q u i r e d b e f o r e w i t h d r a w a l . P u b l i c policy r e g a r d i n g N O W a c c o u n t s is in the f o r m a t i v e stage. E x p e r i m e n t a t i o n w i t h this f o r m of s e r v i c e is p r e s e n t l y u n d e r w a y in M a s s a c h u s e t t s a n d N e w H a m p s h i r e . T h e B o a r d believes that s u c h e x p e r i m e n t a t i o n will w o r k best if it p r o c e e d s in a c o n s t r u c t i v e a n d orderly m a n n e r . C o n s i s t e n t w i t h this belief, the B o a r d h a s p u b l i s h e d for c o m m e n t p r o p o s e d restrictions, at least initially, o n N O W a c c o u n t s of m e m b e r b a n k s in the t w o States that a r e d e s i g n e d to c o n s t r a i n p o s s i b l e deposit shifts into N O W a c c o u n t s a n d to m o d e r a t e the i m m e d i a t e e a r n i n g s i m p a c t , particularly on s m a l l e r c o n s u m e r o r i e n t e d c o m m e r c i a l b a n k s w h i c h m a y r e q u i r e t i m e to adjust o p e r a t i n g policies a n d s e r v i c e c h a r g e s to this n e w e n v i r o n m e n t . - 10 - In p r e v i o u s t e s t i m o n y b e f o r e this C o m m i t t e e , the B o a r d h a s r e c o m m e n d e d that all d e p o s i t o r y institutions b e a l l o w e d to offer N O W accounts, so long as all s u c h institutions a r e subject to the s a m e interest ceilings a n d the s a m e s c h e d u l e of r e s e r v e r e q u i r e m e n t s on these accounts. T h e B o a r d also believes that N O W a c c o u n t s s h o u l d b e restricted to families a n d specified types of n o n - p r o f i t institutions. C o r p o r a t i o n s g e n erally find it p o s s i b l e to k e e p s u r p l u s funds c o n t i n u o u s l y i n v e s t e d in m a r k e t i n s t r u m e n t s a n d often e a r n interest implicitly o n d e m a n d deposits t h r o u g h receipt of free b a n k services. Individuals, o n the o t her hand, a r e m o r e d e p e n d e n t on the r a n g e of s e r v i c e s offered by financial institutions a n d h a v e the m o s t to gain t h r o u g h N O W a ccounts. T h e B o a r d believes that N O W a c c o u n t s s h o u l d h a v e l o w e r r e s e r v e r e q u i r e m e n t s than d e m a n d deposits, but only if s u c h a c c o u n t s a r e l i mited p r i m a r i l y to families. A l l o w i n g thrift institutions to offer N O W a c c o u n t s rai s e s a q u estion w i t h r e s p e c t to the clearing of c h e c k s . S i n c e thrift institutions h a v e ge n e r a l l y b e e n limited in the offering of c h e c k i n g acc o u n t s , existing legislation d o e s not deal specifically w i t h c h e c k collection for thrift institutions o r the F e d e r a l H o m e L o a n B a n k s . T h e existing p r a c t i c e is for thrift institutions to clear c h e c k s through c o m m e r c i a l banks with w h o m they k e e p b a l a n c e s . The B o a r d b e lieves that thrift institutions s h o u l d h a v e a c c e s s to F e d e r a l R e s e r v e c h e c k p r o c e s s i n g s e r v i c e s o n a n equitable basis w i t h m e m b e r b a n k s , p r o v i d e d that they m e e t F e d e r a l R e s e r v e r e s e r v e requirements. RESERVE REQUIREMENTS T h e fourth m a j o r a r e a in w h i c h the p r o p o s a l s w o u l d directly affect the F e d e r a l R e s e r v e is r e s e r v e r e q u i r e m e n t s . The B o a r d is a u t h o r i z e d to set r e s e r v e r e q u i r e m e n t s o n d e posits of F e d e r a l R e s e r v e m e m b e r b a n k s within statutory limits. T h e B o a r d strongly b e l ieves that a u n i f o r m s c h e d u l e of r e s e r v e r e q u i r e m e n t s s h o u l d ap p l y to d e m a n d a n d N O W - t y p e a c c o u n t s of all d e p o s i t o r y institutions. T h a t authority will be_ s o u g h t in a s e p a r a t e bill to b e s u b m i t t e d by the B o a r d later. T h e provisions of S. 2 5 9 1 e x t e n d i n g F e d e r a l R e s e r v e r e s e r v e r e q u i r e m e n t s to the d e m a n d a n d N O W deposits of F H L B m e m b e r s a r e a step in the right direction. M e m b e r s h i p in the F e d e r a l R e s e r v e S y s t e m h a s a l w a y s b e e n optional for State ba n k s . Formerly, n o n m e m b e r s were collectively s m a l l in c o m p a r i s o n to m e m b e r b a n k s , b a n k s in l a r g e r cities w e r e m e m b e r s . however, a n d the m a j o r T h i s situation is changing, in a m a n n e r w h i c h h a s s e r i o u s l o n g - r u n i m p l i c a t i o n s for - m o n e t a r y policy. 12 - T h e p r o p o r t i o n of c o m m e r c i a l b a n k deposits held by n o n m e m b e r s h a s a l r e a d y c l i m b e d to 22 p e r cent a n d s e e m s to b e i n c r e a s i n g at a n a c c e l e r a t e d rate. T h e v a r i o u s State r e s e r v e r e q u i r e m e n t s applicable to n o n m e m b e r b a n k s a r e d e s i g n e d to a s s u r e at least a m i n i m u m d e g r e e of individual b a n k liquidity a n d s o u n d n e s s . reserve requirements, however, important purpose: namely, Federal Reserve s e r v e a n additional a n d v e r y they p r o v i d e the f u l c r u m a g ainst w h i c h m o n e t a r y policy operates. A t present, r e s e r v e r e q u i r e m e n t s for F e d e r a l R e s e r v e m e m b e r s a r e substantially m o r e o n e r o u s than t h o s e for n o n m e m b e r s , m a i n l y b e c a u s e of the f o r m in w h i c h r e s e r v e s a r e held. Although the r e q u i r e m e n t s v a r y f r o m State to State, n o n m e m b e r s a r e g e n e r a l l y p e r m i t t e d to include as r e s e r v e s b a l a n c e s h e l d at o t h e r b a n k s , for w h i c h s e r v i c e s a r e often r e c e i v e d in return. States c o u n t as r e s e r v e s u n c o l l e c t e d b a l a n c e s M o r e than half the at o t h e r b a n k s , a n d n e a r l y half the States a l l o w i n t e r e s t - b e a r i n g securities to b e c o u n t e d t o w a r d p a r t o r all of their r e s e r v e r e q u i r e m e n t s . F o r m e m b e r banks, in contrast, vault c a s h a n d collected b a l a n c e s at F e d e r a l R e s e r v e B a n k s a r e the only p e r m i s s i b l e w a y s of m e e t i n g o u r r e s e r v e r e q u i r e m e n t s . - 13- S u c h w i d e differences in r e s e r v e r e q u i r e m e n t s c r e a t e a n incentive for m e m b e r b a n k s to w i t h d r a w f r o m the S y s t e m a n d for n e w l y c h a r t e r e d b a n k s to c h o o s e not to s e e k S y s t e m m e m b e r s h i p . S h o u l d the p e r c e n t a g e of b a n k deposits subject to F e d e r a l R e s e r v e r e s e r v e r e q u i r e m e n t s continue to decline, p r o g r e s s i v e l y g r e a t e r i m p r e c i s i o n , uncertainty, a n d delay w o u l d b e injected into the F e d e r a l R e s e r v e ' s ability to i m p l e m e n t m o n e t a r y policy. T h e B o a r d will no t p r o p o s e that S y s t e m m e m b e r s h i p b e r e q u i r e d for all institutions offering c h e c k i n g a c c o u n t s , as w a s r e c o m m e n d e d by the H u n t C o m m i s s i o n . However, for p u r p o s e s of b o t h effective m o n e t a r y policy a n d a m o r e n e a r l y equitable s h a r i n g of the b u r d e n of m o n e t a r y policy, the B o a r d c o n s i d e r s it essential that all d e m a n d a n d N O W a c c o u n t s b e subject to u n i f o r m r e s e r v e r e q u i r e m e n t s , w i t h all r e s e r v e s r e p r e s e n t e d b y vault c a s h or d e posits at the F e d e r a l R e s e r v e B a n k s . S. 2 5 9 1 p r o p o s e s that the B o a r d b e g i v e n authority to d e t e r m i n e the f o r m in w h i c h r e s e r v e s m a y b e held. It is the B o a r d 1s p r e s e n t intention, if s u c h authority is p r o v i d e d , to continue the c u r r e n t policy of allo w i n g only deposits at F e d e r a l R e s e r v e B a n k s a n d vault c a s h to b e c o u n t e d t o w a r d the r e s e r v e r e q u i r e m e n t . In the c a s e of thrift institutions, the B o a r d d o e s not object to h a v i n g - 14- reserves h e l d in the f o r m of deposits at F e d e r a l H o m e L o a n B a n k s , so long as s u c h r e s e r v e s a r e r e d e p o s i t e d w i t h the F e d e r a l R e s e r v e B a n k s a n d thus not u s e d to c a r r y out policies that m a y at t i m e s b e inconsistent w i t h F e d e r a l R e s e r v e m o n e t a r y policy. In v i e w of the B o a r d ' s responsibility for m o n e t a r y policy, the B o a r d is c o n c e r n e d w i t h the p r o p o s a l that it consult w i t h the F K L B B in setting r e s e r v e r e q u i r e m e n t s . In particular, the B o a r d strongly o p p o s e s consulting w i t h the F H L B B in c h a n g i n g d e m a n d deposit r e s e r v e r e q u i r e m e n t s . Furthermore, the B o a r d d o e s not believe that thrift institutions s h o u l d be e m p o w e r e d to offer d e m a n d deposits. T h e B o a r d als o d o e s not object to the n e w statutory limits p r o p o s e d for r e s e r v e r e q u i r e m e n t s , r e a s o n to c h a n g e the existing limits. a l t h o u g h it s e e s n o p r e s s i n g A t s o m e future date, h i g h e r r e s e r v e r a n g e s m i g h t b e n e e d e d o n certain t i m e depo s i t s s u c h as l a r g e certificates of deposit, d e p e n d i n g u p o n h o w the p r e f e r e n c e s for a n d u s e s of the v a r i o u s types of a c c o u n t s e v o l v e o v e r time. OTHER KEY ISSUES S e v e r a l o t h e r k e y is s u e s a r e r a i s e d by S. 2591, s o m e of w h i c h a r e so i m p o r t a n t that this t e s t i m o n y w o u l d not b e c o m p l e t e w it h o u t a d i s c u s s i o n of t h e m . - 15- T h e B o a r d w i s h e s to stress the n e e d for g r a d u a l transition in the i m p l e m e n t a t i o n of the p r o p o s e d r e f o r m s . E v e n w i t h careful p l a nning a n d detailed study, it is i m p o s s i b l e to d e t e r m i n e in a d v a n c e the results of the interaction of the v a r i o u s r e g u l a t o r y c h a n g e s that are proposed. It is po s s i b l e that u n p l a n n e d transitional d e v e l o p m e n t s c o u l d result in strain to s o m e financial institutions or to s o m e s e c t o r s of the e c o n o m y . T h e B o a r d believes, h o w e v e r , that the goal of a m o r e flexible financial s y s t e m is sufficiently i m p o r t a n t to u n d e r g o the transition. T h e bill calls for g r a d u a l i m p l e m e n t a t i o n of s e v e r a l c h a n g e s t h r o u g h steps. Thrift institutions w o u l d be a l l o w e d to i n c r e a s e their i n v e s t m e n t in c o r p o r a t e debt securities by t w o p e r cent p e r y e a r until the a l l o w a b l e p e r c e n t a g e is ten p e r cent. transition m e a s u r e s , The Boa r d endorses such a n d r e c o m m e n d s the g r a d u a l p h a s i n g - i n of all n e w i n v e s t m e n t p o w e r s for thrift institutions. A n o t h e r transition m e a s u r e of g r e a t i m p o r t a n c e is discretion for r e g u l a t o r y a g e n c i e s to r e act to u n f o r e s e e n d e v e l o p m e n t s . I cited earlier the n e e d for close coordi n a t i o n of the g r a d u a l r e m o v a l of interest ceilings w i t h the p r o p o s e d a s s e t diversification for thrift institutions. O t h e r a r e a s that call for s u c h d iscretion in t i m i n g include the introduction of N O W a c c o u n t s a n d the r e m o v a l of the differential in interest ceilings b e t w e e n b a n k s a n d thrift institutions. - 16- CONCLUSION In summary, the Board hopes that Congress will enact legislation to implement the basic thrust of S. 2591. In a few areas that I have mentioned, we would suggest some modifications. W e look f o r w a r d to helping the C o m m i t t e e in a n y w a y that w e c a n a s the deliberations m o v e a h e a d . - 0 -
@FedFRASER