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Financial Deregulation
Historical Perspective and Impact o f the
Gam-St Germain Depository Institutions Act o f 1982

Gillian Garcia
and
The Staff of the
Federal Reserve Bank of Chicago

FEDERAL RESERVE BANK OF CH ICAGO

Staff Study 83-2

Financial D e r e g u l a t i o n

Historical Perspective and Impact of
the Garn-St Germain Depository Institutions Act
of 1982

by
Gillian Garcia
and
The Staff of the
Federal Reserve Bank of Chicago

Staff Study 83-2

March 1983

Preface

The Garn-St Germain Depository Institutions Act, which became law in
October 1982, has been called the most significant legislation for depository
institutions since the 1930s.

This is an exaggeration, particularly as the

same claim has also been made for the current act’s predecessor, the
Depository Institutions Deregulation and Monetary Control Act of 1980.
Nevertheless, the 1982 act is important, particularly for thrift institutions.
Moreover, it has implications for commercial banks and bank holding companies.
These institutions, together with savings and loan associations, provide the
principal depository institution competition in the Seventh Federal Reserve
District.

Consequently, as was done earlier for the 1980 act, a special issue

of the Bank’s journal, Economic Perspectives (March-April 1983) is devoted to
examining the Garn-St Germain Act’s implications for these institutions and
also for the conduct of monetary policy.
This staff study presents, in greater detail, the research conducted by
the Bank’s research staff and consultants— research that is summarized in the
Economic Perspectives special issue.

The study was directed and edited by

Gillian Garcia, who would like to thank her coauthors, the library

and office

staffs and, particularly Yvonne Peeples, for their support and co-operation in
the project.

Contents

Preface

Introduction

Gillian Garcia

History Leading to the Act

Gillian Garcia

Risks in Intermediation.............................................
Steps Toward Ending Regulation Q ...................................
Increased Asset Powers................................................
Congressional Response to the Financial Crisis......................
The Main Features of the Act

Gillian Garcia

Sources of Funds......................................................
Uses of Funds and Other Powers................................... .
Emergency Powers......................................................
Summa ry...............................................................
The Impact on Commercial Banks

Elijah Brewer

The Industry Since 1950...............................................
Legislative Content...................................................
Outlook for the Industry..............................................
The Implications for Bank Holding

Companies

David R. Allardice

3
6
7
8
11
11
12
14
17
18
18
22
26
28

Interstate and Across-Industry Acquisition Powers...................... 28
The Insurance Activities of BHCs...... ..............................
32
Section 23A - Impact on Holding Companies...........................
36
Bank Service Corporations........................................
Conclusion.....................................
The Impact on Savings and Loan Associations

Herbert Baer

The New Asset Powers....................................................
The Potential Benefits from Asset Diversification.....................
Raising New Income...............................
Reducing Risk. ........................................................
Factors Inhibiting the Adoption of the New Powers...................
Tax Considerations....................................................

50
56
60

The New Liability Powers..............................................
The Effect on Costs.................................................
The Effects on Liability Duration..............................
Toward Ending the Threat of Disintermediation.........................

72
72
73
75

The Emergency Powers..................................
The Characteristics that Distinguish Distressed Institutions........
Past FSLIC Policies Toward Failing S&Ls...............................
The Growing Inappropriatiness of FSLIC Policy.......................
The Net Worth Certificate Program.....................................
Summary.........................................

76
77
80
81
82

43
47

Contents

Due on Sale Provisions

Thomas F. Cargill
and John Dobra

Steps Toward Reinstating the Clause.................................
Interpreting the Reinstatement......................................
A Re-Examination of Deposit Insurance

George G. Kaufman

Risk-Sensitive Premiums.............................................
Deposit Insurance Coverage..........................................
Implications for Monetary Policy

89
91
93
94
96

Gillian Garcia, Anne Marie L. Gonczy
and Robert D. Laurent
97

Influence Over the Final Economy.............
Control Over the Aggregates..............................
Conclusion...........................................................
Appendix The New Accounts and MMMF Competition.......................
What Remains to be Done

Larry R* Mote

100
104
105
106

Is Deregulation a Good Thing?........................................
Progress Toward Deregulation.........................................
Conclusion......................................

106
108

Footnotes..............................................................

118

References

123

Financial Deregulation:
Historical Perspective and Impact
of the Garn-St Germain Depository
Institutions Act of 1982

The United States1 well-functioning financial markets have contributed to
its economic growth and continuing prosperity. Recognizing this, successive
governments have been eager to avoid dysfunction in those markets or sections
of them.

This is particularly so as such dysfunction has been judged to have

seriously contributed to the Great Depression of the 1930s.

Consequently, as

the 1970s progressed and it became increasingly clear that the financial
position of the thrifts and, to a lesser degree, the commercial banks was
deteriorating, continued efforts were made to alleviate their problems.

These

attempts (summarized below) led to the most recent legislation, the Garn-St
Germain Depository Institutions Act of 1982.
This paper offers an analysis of the Garn-St Germain legislation.

provides background material for the current (March-April, 1983) edition of
the Federal Reserve Bank of Chicago’s Journal, Economic Perspectives, that is
devoted to the legislation.

It will examine the history leading to the act

and the state of the thrift and banking industries that prompted its passage.
It will then summarize the main points of the legislation, and discuss its
likely impacts.

Particular attention will be given to the act’s implications

for the commercial banking, bank holding company, and savings and loan
industries, for these are the principal depository institution competitors in
this, the Midwestern section of the United States.

It will discuss briefly

the act’s solution to the due-on-sale controversy, the issues underlying
Congress' mandate for an inquiry into deposit insurance, and the likely impact
on monetary policy.

The study will conclude with an examination of the issues

that still remain to be addressed in order to insure the prosperity and
efficiency of U.S. depository institutions.

HISTORY LEADING TO THE ACT

In the past, the savings and loan associations, mutual savings banks, and
credit unions that constitute the thrift industry, have been in the business
of credit risk, denomination, maturity, and interest rate intermediation.
That is, traditionally they have purchased small denomination, short-term
deposits in order to make larger, longer-term fixed rate loans.

Their

intention has been to profit from this intermediation by charging a higher
rate on their loans than that paid on their deposits.^

It is the maturity

imbalance aspect of the thrifts1 business, together with a traditional
inability to revise the interest rate or other terms of the loan on the
occurrence of unforeseen events, that has presented the industry’s recent
serious problems.

Risks in Intermediation
Such intermedtiation exposes depository institutions to three risks. The
first is the traditional and recognized risk of default.

Coping with this

risk has remained the responsibility of management, although the current
problems of potential default by several foreign governments and some large
U.S. corporations is testing this responsibility.
The second risk arises from the possibility that depositors may
unexpectedly withdraw their deposits and the institution may not have enough
liquid assets to meet the demand-liquidity risk.

Central banks in general —

and also the Federal Home Loan Bank (FHLB) and the National Credit Union
Administration (NCUA) in the U.S. —
to limit exposure to this risk.

have long acted as lenders-of-last-resort

The third danger occurs when market interest rates rise unexpectedly.

a world where depository institutions pay market interest-rates on their
liabilities, rising interest rates raise costs and put pressure on profits.
This pressure is particularly acute for institutions that have made long-term
loans at fixed rates, the traditional form of mortgage contract in the United
States since the 1930s.

This predicament —

interest rate risk —

particularly characteristic of the savings and loan industry.^

It has been

exacerbated by an inability, in some states, to enforce due-on-sale clauses in
mortgage contracts, thus extending the contract beyond its expected life.
Avoiding undue exposure to this risk has remained management’s
responsibility.

But a pervasive inability to handle this risk among savings

and loan associations (S&Ls) and mutual savings banks (MSBs) has caused
Congress to intervene.

During the past 2-3 years the position of this

industry has deteriorated so severely as to provide the principal impetus for
the current legislation.

Increasing pressure on thrift earnings, arising from rising market
interest rates, provided a persuasive argument for the 1966 extension of
interest rate ceilings on deposits to thrifts in addition to commercial banks,
on which ceilings were imposed in 1933.

The extension was intended to help

thrift profitability by insuring that their sources of low-cost funds would be
channeled particularly to mortgage lending,
housing industry.

thus sustaining demand in the

In time however, deposit rates —

in the face of rising market interest rates —

fixed under Regulation Q

led to the disintermediation

that became a recurring problem at peaks of the business cycle.
rapid disintermediation can lead to a liquidity crisis.

Sudden and

Liquidity crises are

potentially life-threating to depository institutions, if the lender-of-last-

resort does not satisfy their liquidity needs.
to sell assets.

Then institutions are forced

As the market value of assets is reduced by the higher

interest rates, liquidation does not provide sufficient funds to pay off
depositors and insolvency ensues.
One way to prevent disintermediation is to allow thrifts and banks to pay
market rates on their liabilities.

The problem here is that those institu

tions have followed customary practice and are, therefore, carrying a
portfolio of fixed-rate long-term assets acquired in an earlier period at low
rates, so that they may not be able to afford the higher rates.

If they are

forced to pay such rates in order to prevent disintermediation, profits will
be sharply reduced or eliminated, as they have been in recent years.

industry with continuing years of negative earnings cannot remain viable.
Congress and the industries' regulators have made a succession of
attempts to alleviate these problems.

During the 1960s and 1970s large

depositors, having ready access to alternative instruments paying market
rates, were successful in getting banks and thrifts to pay market rates on
large (over $100,000) certificates of deposits, repurchase agreements, etc.
It has taken much longer for the smaller saver to gain the same
opportunity.

However during the 1970s, efforts were made to prevent

small-saver disintermediation.

Permission was granted for financial

institutions to pay rates above the low, regulated passbook savings deposit
rate.

In this way a hierarchy of Regulation Q rates for time deposits of

increasing maturity was created.

To obtain higher rates the saver was

encouraged to extend the maturity of his certificate.

The intention here was

to lengthen the average maturity or, more precisely, the duration, of the
liability portfolio to reduce the gap between assets and liabilities and also
to discourage disintermediation by placing penalties on early withdrawals.

Steps Toward Ending Regulation Q
As interest rates continued their trend upward, the regulators made
several concessions toward permitting market interest rates to be paid to the
small-saver.

The first step was the short-lived Mwild-cardM certificate

introduced in 1973.

For a short period this allowed uncapped rates to be paid

on a limited amount of long-term certificates of deposit.

The second attempt,

resulting from court action that overruled the regulators* objections, was an
experimental permission for negotiable order of withdrawal accounts (NOWs) in
the New England States.

This allowed interest (at regulated rates) to be paid

on transaction accounts.

Money market certificates (MMCs) were introduced in

June 1978.

Automatic transfer accounts (ATS) followed in November 1978.

The MMC allowed Treasury-bill linked rates to be paid on certificates of
6 months maturity.

These certificates proved very popular and had the

beneficial result of reducing depository institution exposure to
disintermediation.

However, they encouraged depositors to place their medium

denomination ($10,000) deposits in relatively short-term accounts.

This did

nothing to help the S&Ls1 duration and interest-rate-imbalance problem.
Consequently, permission was given in 1979 for a small savers* certificate
(SSC) of 4 year, and later of 2^ year, maturity.

This concession constitutes

the fifth step toward deregulating deposit rates.
In January 1981, NOW accounts became available nationwide in implementa
tion of the Depository Institutions Deregulation and Monetary Control (DIDMC)
Act of 1980.

Progress toward permitting market interest-related accounts was

then stalled until the spring and summer of 1982, when two large denomination,
short maturity (7-31 and 91 day) accounts were authorized and rate ceilings
were removed on the longest-term accounts, according to the schedule for
ceiling-removal established by the Depository Institutions Deregulation

Committee (DIDC) —

the committee, composed of the heads of the federal

government financial agencies, was established by the DIDMCA to oversee the
orderly phase-out of interest rate ceilings by 1986.
Nevertheless, the disintermediation problem remained, although its nature
was changed.

From the late 1960s to the mid-1970s disintermediation could be

sudden and sharp.

After the introduction of the MMC the disintermediation

problem became one of slow attrition and forfeiture of growth.

The money

market mutual fund (MMMF) industry began in 1972, but it was dormant until
1978.

It then began to grow rapidly, as interest rates rose, because it

offered a small denomination, no minimum maturity, market-interest-rate
vehicle to consumers.

By the fall of 1982, MMMFs held $230 billion of the

nation’s funds.

Increased Asset Powers
Successive tinkerings with the unpopular (among small savers and
academics) Regulation Q had raised depository institutions’ interest costs but
had eliminated neither disintermediation nor the duration imbalance of
thrifts’ balance sheets.

Profitability was thus jeopardized.

Attention was

then turned, at the beginning of the 1980s, to encouraging interestresponsiveness for assets as well as liabilities.

While some states, such as

California, already permitted their state-chartered institutions to offer
variable residential rate mortgage contracts, the regulatory agencies did not
permit them for federally chartered thrifts and banks until 1980.
Nevertheless, the S&L industry’s position continued to deteriorate;
Congressional action would be needed to alleviate it.

Congressional Response to The Financial Crisis
As the decade of the 1970s closed, it was increasingly evident that the
patch-work of ad hoc regulatory concessions and adjustments to Regulation Q
was not succeeding.

Furthermore, there were other important deterrents to

depository institution profitability that lay beyond the regulators’ purview.
The earnings and net worth position of the thrifts, in particular,
deteriorated in the high interest rate, accelerating-inflation,
depreciating-dollar, gold, silver and commodity price-explosion environment of
the winter of 1979-80.

The crisis atmosphere prompted the two houses of

Congress to reconcile their differences over legislation proposed during 1979
and to enact the Depository Institutions Deregulation and Monetary Control
(DIDMCA) Act of I960.4
The DIDMCA aimed to strengthen deposit institutions’ positions by
permitting greater flexibility on both the asset and liability sides of their
balance sheets.

It was clear at the time of passage, however, that the act

was not a panacea.

In particular, it would take several years for the new

asset powers to reduce the average duration of the asset portfolio, to raise
earnings and make them more responsive to rising market rates.

The most

immediate solution to the major S&L problem (the backlog of old, fixed, low
rate mortgages) would be a sustained fall in market interest rates.

Such a

fall occurred in the quarter following the passage of DIDMCA, but it was
short-lived and in any case was not caused by the Act.

During the summer of

1980 rates began to rise rapidly and did not fall again significantly until
the late summer of 1982.

In the meantime, the position of the S&L industry

had deteriorated so much that it was seen as the Achilles heel of the

financial system.

The actual and potential failure rate of individual

institutions was almost reminiscent of the 1930s.
Legislation typically derives from the Congress* perception of a crisis.
Such is a description of the process leading to the Garn-St Germain Act.
Previously, different bills had been introduced into the Congress but had been
stalled by the interplay between political parties and lobbying forces. As the
perceived severity of the thrifts* crisis increased, political differences
were suppressed, compromises were reached and action was taken.^
As discussed below in this paper, the resulting Garn-St Germain Act is
primarily a rescue operation for the S&Ls and mutual savings banks.

Titles I

and II of the act contain emergency powers that give the regulators greater
flexibility in dealing with crisis situations.^
optimistically been omitted from the 1980 act.

These powers had
But the new act also contains

matters of import to commercial banks and bank holding companies and
longer-term powers for S&Ls.

As these institutions are the principal

depository institution competitors in the Midwestern region of the United
States, the discussion that follows will focus on these three groups.
Another objective of the act is to move the financial system further
along the path to deregulation, competitive efficiency, and equity for the
small saver initiated under DIDMCA.

The progress toward the removal of

interest-rate ceilings had become stalled within the Depository Institution
Deregulation Committee.
ceiling-removal.

The 1982 act urges the committee toward

It also addresses questions of competition among the

differing depository institutions and exhorts a **level playing field** between
depository institutions in general and other participants in the financial
services industry.

It promotes these objectives by giving thrifts

(particularly S&Ls) increased asset powers, and by permitting all depository
institutions to offer deposit accounts designed to be competitive with money
market mutual fund accounts.
implications.
follow.

These accounts have important monetary policy

These issues are discussed further in the sections which

THE MAIN FEATURES OF THE 1982 ACT

The 1982 Garn-St Germain Depository Institutions Act is complex,
containing eight titles dealing in great detail with different areas of
financial reform.

Many of the minutiae will be passed over in the following

discussion in order to emphasize those aspects that are considered most
important.
The discussion is divided into three sections:

(A) powers permanently

widening the sources of depository institution funds, including progress
toward the removal of interest-rate ceilings, (B) provisions permanently
expanding the uses of funds and other powers for financial institutions, and
(C) enactments that temporarily grant emergency powers for regulators to deal
with depository institution crises.

The Sources of Funds
A number of features of the act increase the ability of depository

institutions to attract funds.
1. All federal insured depository institutions are given the opportunity
to offer a new deposit account that is "directly equivalent to and
competitive with money market mutual funds” (Title III, Part B,
Section 324). In implementing this provision, the DIDC decided that
the account, called the money market deposit account (MMDA) , to become
available on December 14, 1982, should be federally insured, not
subject to transaction account reserve requirements (despite
permission for up to six preauthorized, telephone or automatic
transfers of which no more than three may be by check), and have a
minimum initial and maintained deposit of at least $2,300. The DIDC
authorized (from January 5, 1983) a Super-NOW account to pay market
interest rates on an unlimited transaction account available to all
(except corporations) and to carry a transaction account reserve
requirement (now 12 percent). The NOW account rate would be paid on
either deposit falling below the required maintenance balance.
2. Federal, State and local governments are given permission to hold
negotiable order of withdrawal (NOW) accounts (Title VII, Section
706).

3. Federally-chartered savings and loans associations are permitted to
offer demand deposits to "persons or organizations that have a
business, corporate, commercial, or agricultural loan relationship
with the association" or to "a commercial, corporate, business or
agricultural entity for the sole purpose of effectuating payments from
a nonbusiness customer" (Title III, Part A, Section 312).

The ability of depository institutions to raise funds is affected by the
imposition of interest-rate ceilings.

The 1982 act makes three provisions

that encourage progress toward the removal of such ceilings.
for the money market deposit account is one such step.
authorization for the Super-NOW account.

Authorization

The second is the

A third provision is the removal (on

or before January 1, 1984) of any differential between the ceilings permitted
to federal insured banks and thrifts (Title III, Section 326).

Uses of Funds and Other Powers
Both thrift and banking institutions benefit to some degree from the

act’s provisions for expanded powers.

However, federal savings and loan

associations and savings banks gain the greatest enhancement in their powers.
1. Federal (i.e. federally-chartered) savings and loan associations and
savings banks are authorized to i) offer overdraft loans in connection
with their transaction or savings accounts; ii) invest in the accounts
of federally insured institutions; iii) invest up to 100% of their
assets in state and local government obligations, except that no more
than 10% of capital may be placed in other than the general
obligations of any one issuer); iv) offer real estate loans without
loan to value restrictions; v) make non-residential real property
loans to 40% of assets; vi) make secured or unsecured loans for
"commercial, corporate, business, oy agricultural purposes," either
directly or through participations; vii) make consumer (including
inventory and floor planning) loans and other loans reasonably
incident to personal, family and household purposes to 30% of assets;
ix) invest up to 10% of assets in tangible personal property "for
rental or sale;" x) offer loans to 5% of assets for educational
purposes; xi) invest up to 1% of assets in federally guaranteed
foreign assistance; and xii) place up to 1% of assets in small
business investment companies (Title III, Part B, Sections 321, 322,
323, 324, 328, 329, and 330).
2. State laws and court decisions that prohibit the execution of
due-on-sale provisions of mortgage contracts are pre-empted. However,

the pre-emption is delayed until October 1985 for "window-period"
loans° (Title III, Section 341).
3. Any institution which is, or is eligible to become, a Federal Home
Loan Bank member is authorized to convert its charter to a federal S&L
savings bank or mutual savings bank. Institutions can change between
mutual and stock form. Federal S&Ls and savings banks can convert to
state charter where state law permits. The act also permits the de
novo chartering of a federal S&L or Savings Bank (Title III, 313).
4. State banks and thrifts are empowered to offer the alternative
mortgage instruments permitted to their federal counterparts (Title
VIII, Sections 802-4).
5. The safety and soundness loans limits imposed on national banks are
relaxed. The percentage of capital and surplus loanable to a single
borrower is raised from the existing 10% to 15% plus another 10% for
loans "fully secured by readily marketable collateral." Such limits
are now specifically applied to loans made to foreign governments and
their agencies (Title IV, Section 401).
6 . The act simplifies the real estate lending restrictions imposed on
national banks (Title IV, Section 402) and relaxes the restrictions on
insider loans (Title 4, Sections 429 and 430). Title V, Sections
507— 12 achieve the same objectives for credit unions.
7. The act authorizes the Comptroller of the Currency to charter bankers’
banks to be owned exclusively by depository institutions for the
provision of services to their owners, directors and employees (Title
IV, Section 404).
8 . The powers of bank service corporations are expanded into conformity
with the powers of their owner depository institutions, except that
service corporations may not take deposits (Title VII, Section 709).
9. The act amends the definition of a bank given in the Bank Holding
Company Act to exempt institutions insured by the FSLIC or chartered
by the FHLBBB.
In the absence of such exemption the provision of
demand deposits together with the offering of commercial loans would
have rendered thrifts exposed to the restrictions of the Bank Holding
Company Act. This would have limited out-of-state expansions,
acquisitions and mergers.

The act’s legislative history indicates that Congress intends the S&L
industry to retain its primary role in the provision of credit for housing
despite the increase in their other lending opportunities.

Consequently,

after the act’s passage the FHLBB withdrew its earlier proposed regulation
that substantially increased the activities permitted to S&L holding companies

and service corporations into real estate brokerage, insurance underwriting,
securities activities including the operation of mutual funds.
The ability of federal institutions to engage in commercial and other
activities is intended to give them access to short-maturity and variable rate
loan instruments.
consumer loans.

The DIDMCA of 1980 had given thrifts powers to make
These powers have not been widely used, however, partly due

to the existence of usury limits on consumer loans in some states.

Neither

the 1980 nor the present act preempts these ceilings.
At the same time the act reduces some of the powers of banks, their
affiliates and holding companies.

For example, Title IV, Section 410 subjects

transactions between banks and their affiliates to stricter regulation, while
easing restrictions on transactions among sister banks of the same holding
company.

Further, Title VI limits the insurance activities of bank holding

companies.

Emergency Powers
Titles I and II of the act enhance for three years the powers of the FDIC

and FSLIC to aid troubled banks and thrifts in emergency situations.

Until

"Sunset" in October 1985, the agencies can more readily aid institutions which
are:
. closed, insolvent or in default;
. in danger of closing, defaulting or becoming insolvent; or where
. "severe financial conditions exist which threaten the stability of a
significant number of insured institutions or of institutions possessing
significant resources" and where "such action is taken in
order to lessen the risk to the corporation..."; or in order to
. facilitate the merger or acquisition of a troubled institution.
Previously the FDIC could provide direct assistance only to an insured
institution that was essential to the community.
given only to reduce any risk or loss to the FDIC.

Merger assistance could be
Similarly, the FSLIC

previously could take action only when an institution was in, or in danger of,
default.

The actions which the insurance agency can take are sixfold.

1. They can issue guarantees.
2. They may purchase an insured institution’s assets or securities
(excluding common and voting stock, to preclude nationalization);
3. They may assume a troubled institution's liabilities; make loans to
deposits in, or contributions to an insured institution or to a company that
has acquired, or will acquire a troubled insured institution (Title I, Part A,
Section III, and Part B, Section 122).
4. They may authorize or require the conversion of a state-chartered
savings bank insured by the FDIC into a federal savings bank or of a mutual
savings and loan association or a mutual savings banks insured by the FSLIC
into a federal stock association or savings bank (Title I, Part A, Section
112, and Part B, Section 121).
5. The FDIC can arrange a merger with, or acquisition of, a closed (or
for an mutual savings bank, an endangered) large insured bank located in one
state by an insured bank chartered in the same state but established by an
out-of-state bank or holding company. The FSLIC has even wider powers with
respect to institutions it insures.
6 . Title II of the act authorizes aid to federally insured savings and
loan associations, savings banks, and commercial banks involved in residential
real estate lending, through the purchase of net-worth certificates.
State-insured institutions may also receive such assistance if the state
agrees to indemnify the federal insurance fund. The net worth certificates
are deemed to be "net worth" for statutory and regulatory purposes.7
7. Section VII of the act, mandates a staff study to consider the
adequacy of and improvements in the present provisions regarding FDIC and
FSLIC insurance of depository institutions.
When arranging extraordinary acquisitions and mergers, the FDIC (and
similarily for the FSLIC with regard to the institutions it insures) may
solicit offers from qualified institutions.

Where the lowest bid is not made

by a like, in-state institution, institutions making adjacent bids, may be
allowed to bid again.

Then the insurance agency must attempt to minimize the

risk of its aid subject to the following priorities:
i)
ii)
iii)
iv)
v)

like, in-state institutions,
like, out-of-state institutions,
different in-state institutions,
different, out-of-state institutions,
among out-of-state mergers, priority is to be given to adjacent-state
institutions.

vi)

the FSLIC (but not the FDIC) is required to give preference to
minority bidders in the case of a failed, minority-owned institution.

Provision is made for consultation with state regulators (Title I, Part
A, Section 116, and Part B, Section 123).

Similar powers are given to the

NCUA with regard to troubled credit unions (Title I, Part C, Section 141).
Prior laws permitted the FDIC to directly assist banks by making loans,
purchasing assets or making deposits only when the bank was "essential to its
community", and the FSLIC to directly assist thrifts only by making
contributions or loans to or by purchasing assets from a defaulting thrift.
Now, both corporations have substantially similar and expanded powers.

Prior

merger powers limited the FDIC to assist mergers only of an FDIC insured bank
with another FDIC insured institution and only in order to avoid loss to
itself.

Now the act allows the FDIC to assist any federally insured

depository institution to acquire a large failed commercial bank and the FDIC
or FSLIC to assist a holding company, an insured institution or any other
acceptable company to acquire a large (over $500 million in assets) troubled
FDIC-insured savings bank, or any S&L.
The act extends the powers the FSLIC had over federally chartered
associations to state chartered thrifts.

Powers are granted to convert

state-chartered institutions into federal institutions.

Further, the FHLBB

can authorize the conversion of mutual associations or savings banks to
federal stock form in emergencies.

The act explicitly permits the emergency

acquisitions such as that of Fidelity Federal Savings and Loan Association of
Oakland by Citicorp which had met strong opposition previously.

For

interstate and interindustry mergers, the FDIC has these powers with respect
to large (over $500 million in assets) troubled banks, while the FHLBB can aid
any troubled institution.

In order to prevent these provisions from readily

leading to interstate banking, limits are placed on branching activities.

The net worth certificates permitted by the act are similar in concept to
the income capital certificates used by the FSLIC prior to the 1982 act.

They

are a hybrid debt and equity instrument carrying fixed notional interest and
having, in the case of failure by the issuing institution, priority over
stockholders but not over creditors. The program can assist not only thrifts
but also community banks that have at least 20 percent of their loans in
residential mortgages or mortgage backed securities.

Summary
The act has several important implications.

In the analysis that follows

attention will be given to the act’s potential contribution toward solving the
problems of savings and loan associations, commercial banks, bank holding
companies.

It will examine: the due-on-sale problem, the deposit insurance

issue and the act’s implications for monetary policy. In so doing, it will
also consider the likely effects on competition between commercial banks and
S&Ls and on the ability of depository institutions in general to compete with
other financial intermediaries.

Finally, it will conclude with a discussion

of what remains to be done to promote the prosperity and usefulness of U.S.
depository institutions.

THE IMPACT ON COMMERCIAL BANKS

In the decades since the second World War, commercial banks have several
times re-evaluated their policies and strategies for generating and deploying
loanable funds in the light of the problems facing the industry.

In the

first half of the century the real bills doctrine influenced bank strategies
so that bank policies traditionally concentrated on ways to match specific
sources of funds to selected uses.

In the 1950s these policies were replaced

by efforts to actively manage assets while taking for granted the supply of
funds —

a feasible approach as interest rate ceilings were not then binding.

During the 1960s policies evolved further; toward actively managing the
sources of funds —

liability management —

an approach necessitated when

market rates rose above the ceilings.

The Industry Since 1950
From the 1950s to the present day, the composition of bank assets and
liabilities changed dramatically.

For example, as Table 1 indicates,

nonearning assets (such as cash, member bank reserves and balances due from
banks) grew only sluggishly in dollar value so that their share in bank asset
portfolios decreased from 23.9 percent in 1950 to 10.5 percent in 1981.

The

share of assets held in the form of Treasury securities also fell, while other
earning assets (particularly loans) increased their percentage share.
During this period the composition of liabilities also changed.

The data

in Table 1 show that reliance on demand deposits decreased while the share of
time and savings deposits, particularly those paying market-related interest
rates, increased.

Table 1
Percentage Distribution of Assets and Liabilities
of
1
Commercial Banks'

Assets
Cash, reserves, and due from banks
Treasury securities
Other securities
Loans
Other assets
Total assets

1950

1964

1981

23.9
36.7
7.3
30.9
1.2
100.0

17.4
18.2
11.2
50.6
2.6
100.0

10.5
6.6
14.0
56.0
12.9
100.0

73.8
24.9

56.3
40.0
0.8
2.9
100.0

23.9
57.6
12.5
6.0
100.0

Liabilities
Demand deposits
Time and Savings Deposits
Borrowings
Other liabilities
Total liabilities

0.0
1.2
100.0

Includes all commercial banks in the United States except branches of
foreign banks; included are members and nonmembers, stock savings banks, and
nondeposit trust companies.
2

Includes federal funds purchased and securities sold under agreement to
repurchase, and other liabilities for borrowed money.
SOURCES:

U.S. Board of Governors of the Federal Reserve System, Banking and
Monetary Statistics 1941-1970 (Washington: U.S. Board of Governors
of the Federal Reserve System, 1976), pp. 27-30; and Federal Reserve
Bulletin 68 (April 1982), p. A17.

Banking strategies were successful overall during the period 1960-81.

the data in Table 2 show, the return on total assets was maintained over the
period, while the return on capital was increased.

Further, as Flannery

[1981] has shown, commercial banks were able to protect their portfolios from
interest-rate risk.
as rapidly as costs.

In periods of rising rates, revenues have risen at least
In this situation, accounting profits provide a fair

representation of the economic position of the industry.

Apparently, in

contrast to the situation in the S&L industry, there was no immediate crisis
during 1982 in the banking industry which legislation needed to address.

This

situation should not be interpreted to mean that the industry was without
problems, rather that any problems had not reached crisis proportions.
The industry-wide profitability to date is due to the commercial banks1
success in overcoming the structural problems that caused the thrift crisis.
For one thing, the threat of disintermediation had been avoided through
increasing reliance on purchased funds paying market interest rates.

This has

prevented any sudden, rapid withdrawal of funds and has permitted growth in
liabilities and assets over the years.

Liabilities paying unregulated

interest rates increased from 1 percent in 1965, to 37 percent at the end of
1979 and 50 percent at the close of 1981.^

Second, average earnings were

maintained at a viable rate by changing asset composition so as to reduce the
share of nonearning assets. Third, emphasis on short maturity and variable
rate assets reduced exposure to interest rate risk [Flannery, 1981].
Although most commercial banks perform similar functions, they have not
been equally affected by the problems facing the industry.

The growth of

money market mutual funds has proved more of a disadvantage to small
commercial banks than to large banks.

The latter, possessing established

credit ratings, are able to issue large CDs to the MMMFs, while the former

Table 2
Profitability of Insured
Commercial Banks

Net Income as Percent of
Total Assets

Year

.78
.72
.68
.69
.66
.67
.67
.70
.68
.82
.84
.82
.77
.79
.78
.76
.66
.66
.71
.76
.76
.73

1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981

U.S. Federal
U.S. Federal
1. Based on
2. Includes

Total Capital

1, 2

9.69
9.02
8.44
8.50
8.32
8.41
8.47
9.24
9.35
10.95
11.36
11.16
10.74
11.38
11.20
10.56
10.14
10.44
11.53
12.44
12.30
11.86

Deposit Insurance Corporation, Annual Report (Washington:
Deposit Insurance Corporation), various issues.
year-end figures.
equity capital, subordinated notes and debentures.

cannot do so directly.

Further, smaller banks, serving the needs of their

local communities, have loan characteristics (fixed rate and longer maturity)
that expose them to interest rate risk.

Nevertheless, as the data in Table 3

show, small banks in general have been able to maintain their profitability as
well or better than the large banks.^

Further, as Eisenbeis and Kwast [1982]

have shown, even banks that specialize in real estate lending remained
profitable during the period 1970 through 1979.

Banks holding 65 percent or

more of their assets as real estate loans for at least 7 of these years
achieved profitability by containing their operating expenses, particularly
interest costs.

Consequently, in 1982 commercial banks did not need

legislation that would raise their average rate of return or reduce their
exposure to interest rate risk.
The major problem that now faces the banking industry is the age-old one
- credit risk.

Banks currently are exposed to actual and potential loan

losses from foreign governments and both foreign and domestic corporations
that are experiencing difficulty in making interest and scheduled capital
payments.

These problems are considered to be part of the normal business of

banking and not in need of Congressional action - in the absence of a
widespread financial crisis.

Legislative Content
Commercial banks have four current concerns.

The first is the increased

level and volatility of nominal and real interest rates during recent years,
which affect both bank costs and returns.

The second concerns the effects of

the world-wide recession on actual and potential default rates on both
domestic and international loans.

A third is the likely impact of the

expanded powers given to S&Ls under the DIDMCA and the Garn-St Germain Act.

fourth concern is for the growing encroachment of nondepository institutions
into what has traditionally been bank-reserved territory.
The act makes contributions toward resolving some but not all, of the
current concerns.

For example, banks have been judged successful and,

therefore, not in need of assistance in dealing with the level and volatility
of interest rates.

With regard to the worldwide recession and heavy exposure

to default risk, action is being taken by the international banking agencies
and central governments.

The act contributes little here.

Greater

flexibility for the FDIC in emergency situations might be utilized if a crisis
were to develop.

Economists and others involved in the re-examination of

deposit insurance will no doubt discuss this risk exposure when reconstituting
the deposit insurance system to meet the new environment.
Nevertheless, the Garn-St Germain Act has several important implications
for commercial banks.

First and foremost, the new MMD and Super-NOW accounts

provide an opportunity for depository institutions in general to compete with
money market mutual funds (MMMFs) for the supply of intermediary funds.
Management’s positioning with regard to the characteristics of these accounts
will determine whether a bank will be able to compete successfully with
thrifts to insure an adequate share of the funds that flow to depository
institutions in response to the new instruments.

Second, the act’s

requirement for the removal by the end of 1983 of any differential in the
Regulation Q rates offered by banks and thrifts, should assist those banks
that wish to compete with thrifts for their sources of funds.
A third advantage given to commercial banks by the act is the ability to
organize bankers’ banks.

Increased powers for bank service corporations can

also be utilized successfully by commercial banks.

The provision, for

example, could enable commercial banks to indirectly invest in the export

trading companies (that were authorized in concurrent legislation, the Export
Trading Company Act of October 1982) even without the need to establish a
holding company for this purpose.
Fourth, banks are given greater flexibility in lending.

For example, the

safety and soundness limits on bank lending to individual borrowers are
relaxed.

The previous 10 percent of capital limit is raised to 15 percent

plus another 10 percent for assets secured by readily marketable collateral.
This should assist small agricultural banks, particularly those that wish to
concentrate rather than diversify their portfolios.

Previously, these banks

have needed to organize loan participations or sales to correspondents.
Henceforth they will have less need for these potentially costly resorts.
However, specialization involves risk.

In times of severe recession and

falling commodity prices - the economic situation existing at the time of the
act’s passage - further concentration of their portfolios could jeopardize the
safety of agricultural banks and others.

Former restrictions on real estate

lending by national banks are removed and the Comptroller of the Currency is
empowered to issue regulations concerning these loans.
Fifth and finally, the clarification of the due-on-sale situation, which
is discussed below in greater detail, may help those commercial, banks that are
heavily invested in residential real estate to dispose of their backlog of
low fixed-rate mortgage assets.
One of the

things which is not clear at this stage of writing is the

likely impact on commercial banks of the act’s emergency powers, contained in
Titles I and II.

Discussion in the financial press has concentrated on the

potential uses of these powers for troubled S&Ls and mutual savings banks.
Nevertheless, threatened commercial banks are eligible for capital assistance
under Title I.

The regulatory view, however, is that few eligible commercial

Table 3
Return on Equity Capital of Insured
Commercial Banks

Large banks^

Year

Small banks

1977

10.99

11.71

1978

12.28

12.36

1979

13.18

13.26

1980

12.91

13.31

1981

12.43

12.73

SOURCE: U.S. Federal Deposit Insurance Corporation, Bank Operating Statistics
(Washington: U.S. Federal Deposit Insurance Corporation), various
issues.
NOTES:

1.
2.

Banks with $100 million or more in total assets.
Banks with less than $100 million in total assets.

banks are likely to receive such aid, as the alternate solution of merger or
acquisition is likely to prove less costly to the FDIC.

It is considered

unlikely that more than a handful of troubled commercial banks would prove
eligible for net worth guarantee assistance under Title II of the act, for
assistance is limited to institutions having at least 20 percent of their
loans invested in residential real estate.

And, as Eisenbeis and Kwast (1982)

have shown, real estate banks in general have remained soundly profitable.
In summary, the relaxation of liability side restrictions is likely to be
important for banks.

However, with regard to increased asset powers, banks

were not successful in achieving what they had sought.

They were not, for

example, explicitly given the opportunity to engage in full brokerage
activities nor to underwrite municipal revenue bonds, corporate bonds or
equities.

Outlook for the Industry
As a result of the new MMDA and Super-NOW account, the average funding
cost will probably rise.

This will put pressure on bank profit margins,

particularly those of retail banks.

Thus the interest rate spread between

attracting and deploying funds may narrow as the act is implemented.

The

ability of the commercial banking industry to handle the effects of
deregulation on this interest rate spread will depend heavily on individual
banks* management skills.
The new accounts may lessen the funding spread - the difference between
the marginal and average costs of bank funds.

In any industry that equates

marginal costs to marginal revenues a level of average costs that is low in
relation to average revenues promotes profitability.

Some funding spread may

remain, however, as a convenience premium reflecting retail depositors1

willingness to forego some interest rate yield in order to gain FDIC insurance
and the advantages of bank’s full-service financial centers.
One way for banks to maintain loan rates high enough to ensure
profitability would be to include more middle-size firms in their future
lending strategies.

However, medium-size firms are exactly the ones whose

business S&Ls, with their knowledge of local market conditions, might seek
successfully as they take advantage of the new powers given in the present act
and the DIDMC Act of 1980.

THE IMPLICATIONS FOR BANK HOLDING COMPANIES

Passage of the Garn-St Germain Act will affect, to a limited extent, the
future activities of the nation’s bank holding companies (BHCs).

The four

most significant developments are the (1) interstate and cross-industry
acquisition provisions; (2) limitations on insurance activities; (3) removal
of some constraints on transactions among sister subsidiary banks of the same
holding company; and (4) expanded powers of the bank service corporations.

general, the legislative changes resulting from the Garn-St Germain Act should
give some bank holding companies a marginally greater ability to expand the
geographic and product scope of their activities in the coming years.

Interstate and Across-Industry Acquisitions by Bank Holding Companies.
The Garn-St Germain Act makes some progress toward addressing the long
standing issues surrounding the interstate and cross-industry acquisition of
financial institutions (particularly of savings and loan associations) by bank
holding companies.

The need for such progress has been clearly identified.

In 1981, a report of the Department of the Treasury to the President, entitled
Geographic Restrictions on Commercial Banking in the United States, noted that
legal prohibitions against interstate acquisitions of commercial banks by bank
holding companies were becoming "increasingly ineffective, inequitable,
inefficient, and anachronistic...11 The study concluded that interstate
expansion by bank holding companies and their acquisition of commercial banks
were the least disruptive methods, for achieving the benefits of interstate
bank expansion in the short-run.

In September of 1981, a study by the staff

of the Board of Governors of the Federal Reserve System, entitled Bank Holding
Company Acquisitions of Thrift Institutions, examined the issue of bank

holding company acquisitions of nonbank financial institutions.

The study

concluded that, "few, if any, important public or private economic or
supervisory factors suggest that BHCs should be precluded from acquiring
thrifts."

The study found that existing antitrust laws and regulatory

structures were adequate to deal with any problems that might arise from such
acquisitions.
Title I, Section 116, of the Garn-St Germain Act gives the FDIC the
authority to seek interstate or cross-industry mergers for insured commercial
banks or mutual savings banks that are closed or, in the case of mutual
savings banks, in danger of being closed.

Such acquisitions are limited to

institutions that have total assets in excess of $500 million, at the time of
the most recent report of examination.
In addition to other requirements, if the lowest acceptable bid is not
from the same type of institution within the state where the financially
troubled institution is located, the FDIC is required to solicit new bids from
those institutions that had bids within the lesser of 15 percent or $15
million of the the lowest bid.

set of priorities are established to guide

the FDIC in choosing among the bidders.

These priorities, as described in a

previous section, are as follows:
.

the same type of institution from the same state

the same type of institution from a different state

a different type of institution from the same state

a different type of institution from a different state

These restrictions impose such severe limitations on the ability of BHCs
to acquire commercial banks on an interstate basis that they seem likely to
insure that only a few such acquisitions take place.

First, the limitation

that the acquired institution have over $500 million in assets will reduce

greatly the number of applicant bank holding companies, for few are large
enough to absorb such a large bank.

Second, the placing of bank holding

companies, as institutions of a different type, last or next to last in the
priority ranking, further limits BHCsf opportunities to acquire commercial
banks on an interstate basis.

The FDIC is also required to give priority to

offers coming from states adjacent to the troubled bank.
Nevertheless, the act has already been utilized in dealing with the
fourth largest failure by a commercial bank.

The United American Bank of

Knoxville, Tennessee failed on February 14, 1983.

And the act’s emergency

provisions did permit the bank to be acquired by a bank holding company—
First-Tennessee National Corp.
the bidding process.

The act’s priority provisions were utilized in

As the highest bids in the first round of bidding came

from an institution headquartered out-of-state, and as First Tennessee’s bid
lay within the 15 percent or $15 million ball park, the holding company was
permitted to bid again, successfully.
The Garn-St Germain Act should make the acquisition of certain S&Ls
easier; however, unanswered questions remain.

For some time, BHCs have been

able to engage in activities beyond commercial banking.

For example, the

Congress, through Section 4 of the Bank Holding Company Act (BHCA), gave the
Federal Reserve Board authority to permit BHCs to engage in certain nonbank
activities.

Section 4(c)(8) of the BHCA sets forth the tests that the Board

is to follow in assessing the permissibility of nonbank activities.

First,

the Board must determine whether the activity is ’’closely related to banking,”
that is, whether as a general matter the activity is permissible for bank
holding companies.

Second, the Board must determine whether the performance

of the proposed activity by a BHC is ”a proper incident to” banking, that is,

whether it may reasonably be expected to produce public benefits that outweigh
any possible adverse effects.
As far back as 1974, the Board determined that the operation of savings
and loan associations was
Section 4 of the BHCA.

closely related to banking in the context of
While the Board has traditionally held that S&L

activities are closely related to banking, it has not determined such
activities to be a proper incident of banking.

Part of the argument used has

been founded on the belief that Congress intended savings and loan
associations to be maintained as specialized institutions, to act as lenders
to the housing industry.

While the Board had, before the act, the authority

to approve bank holding company acquisitions of S&Ls, it was reluctant, except
in a few limited situations considered on a case by case basis, to approve
such acquisitions. It preferred to wait until Congress explicitly resolved the
issue.
In a limited sense, Congress has now addressed part of the issue relating
to cross-industry acquisitions.

Title I of the Garn-St Germain Act, for the

first time, explicitly permits the cross-industry and interstate acquisitions
of S&Ls by BHCs. Section 123 of the Garn-St Germain Act provides for the
emergency acquisition of an open or closed insured thrift institution that is
eligible for FSLIC assistance.

This provision will permit certain interstate

acquisition of S&Ls experiencing "severe financial conditions1* by a BHC.
While bank holding companies now have explicit authority to acquire S&Ls
encountering severe financial problems on both an intra and interstate basis,
there is another requirement that is likely to reduce the frequency of such
occurrences.

Bidders located outside the state are to be given priorities

similar to those applicable in the case of large bank failures.

Again, as in

the case of interstate bank acquisitions, BHCs are at the bottom of the

priority list.

Compared to potential bank acquisitions, however, there is a

greater likelihood that a bank holding company will acquire an S&L because
there is no limitation on asset size and because the acquired institution need
not be closed to be acquired.
Thus, the Congress has addressed, in the Garn-St Germain Act, the
short-run issue of interstate and cross-industry acquisitions of financially
troubled thrift institutions and large failed banks.
%

However, it did not

address the long-run issue relating to the acquisition of sound bank or thrift
institutions.

The Insurance Activities of Bank Holding Companies
Title VI of the Garn-St Germain Act amends section 4(c)(8) of the BHCA by
prohibiting bank holding companies from providing insurance as an underwriter,
agent or broker.
activities.

It was Congress’s intent to restrict BHC insurance

However, the initial legislation, through an error in drafting,

actually expanded small (under $50 million in assets) bank holding companies’
ability to provide insurance services.

An amendment was adopted to make

technical corrections to the act and, as a result, small bank holding
companies soon lost this expanded insurance authority.

This unintended result

had initially arisen from one of seven exceptions to the prohibition of
insurance activities.

This exception was quickly removed, but others remain.

Exception A permits BHCs to act as a principal, agent, or broker in the
issuance of insurance that is limited to assuring the repayment of any
outstanding credit balance due to a BHC or its subsidiary, in the event of the
death, disability, or involuntary unemployment of the debtor.

Exception A

could, however, be interpreted broadly to allow BHCs to underwrite credit-life
and credit-accident and health insurance. Whether a broad or narrow

interpretation is given to this subsection of the act depends on the meaning
construed for the word "principal".

It may take court action to resolve this

issue.
Exception B permits BHCs to provide (as principal, agent, or broker)
insurance that is limited to assuring repayment of an outstanding credit
balance in the event of loss or damage to any property used as collateral for
the loan.

A similar exception applies to the extension of credit by a finance

company subsidiary of the BHC.

The losses that can be insured under Exception

B are, during 1982, limited to $10,000 (or $25,000 in the case of extensions
of credit to finance the purchase of a residential manufactured home).

After

1982, the dollar amounts insured are to be adjusted by the percentage increase
in the consumer price index.
It was noteworthy that applications have already been filed and contested
under this exception.

American Fletcher Corporation, of Indianapolis, Indiana

filed an application to engage in the sale of property and casualty insurance
on property taken as collateral for loans made by its finance company
subsidiary, Fletcher Financial Services, Inc.

On December 8 , 1982 the

Independent Insurance Agents of America Inc. and the Independent Insurance
Agents of Alabama filed a protest against this application.

They contend that

Title VI of the Garn-St Germain Act generally prohibits BHCs from acting as
agents in the sale of property and casualty insurance.

As yet, the record in

the case has not been fully developed and it represents one of the areas where
the issues are unresolved.
Exception C allows BHCs to continue to engage in insurance agency
activities in: (1) communities having a population of less than 5,000 persons
as determined by the last census; or (2) a community where the BHC, after
giving notice and an opportunity for a hearing, demonstrates that inadequate

insurance agency facilities are available.

These exemptions should have no

immediate impact upon the insurance activities of BHCs, since these activities
were previously available to them.
Exception D is a grandfather provision that permits BHCs to continue any
insurance agency activity which was engaged in by the BHC or its subsidiaries
or which the Board had approved, before May 1, 1982.

Under certain

circumstances, previously approved insurance agency activities can be extended
to new locations.

Further, new kinds of insurance coverages can be sold as

long as the expanded coverage will insure against the same kinds of risks as
those previously covered.
Exception E allows BHCs to engage in insurance activities involving the
"supervision” on behalf of insurance underwriters the activities of retail
insurance agents.

The retail insurance agent’s activities must be limited to

the sale of: (1) fidelity (e.g. bonding) insurance and property and casualty
insurance on real and personal property that is used in the operations of the
BHC or its subsidiaries; and (2) group insurance that protects the employees
of the BHC or its subsidiary.

If broadly interpreted, this exception could

allow nonbank insurers to sell insurance on bank premises under bank
"supervision".

However, as this exemption was written to cover a unique

situation in the State of Texas, it is not likely to be thus broadly
interpreted.
Nevertheless, Laura Gross [1983] reports that Banc One Corp of Ohio will
soon beginning leasing bank space to agents of Nationwide Insurance Co.
Nationwide plans to offer a full range of insurance services and to sell
mutual funds and annuities.

The letter of the BHC law will be met by

maintaining separate entrances for the agency and the bank, but its spirit
will be tested by the mutual proximity and visability.

The entrance to the

bank and the insurance agency will be from the same lobby and only a glass
wall will separate the institutions.
Due to a drafting error now removed, exception F originally permitted any
insurance agency activity by bank holding companies with total assets of $50
million or less.

Exemption G grandfathers insurance activities by BHCs that

received Board approval prior to January 1, 1971.

Obviously small bank

holding companies would have benefitted from Exemption F, as drafted.

The

Garn-St Germain Act provides little in the way of assistance to the nation’s
smaller banks and BHCs, but, by giving smaller institutions the capability of
selling insurance, they would have acquired a significant competitive
advantage in their struggle with thrifts and other larger financial
institutions.

No doubt, the provision would have prompted protests and

litigation on the part of the insurance industry.
Exception F, as originally drafted, could have led to a major expansion
in the number of small BHCs formed nationwide and, in particular, those within
the Seventh Federal Reserve District.

About 72 percent (10,363) of the

nation’s 14,415 insured commercial banks had assets of less than $50 million,
as of December 31, 1981.^

For the Seventh District states, small banks

constitute about 73 percent of the 3,341 insured commercial banks in the five
state area (Illinois, Indiana, Iowa, Michigan, and Wisconsin).

However, in

two states, Iowa and Wisconsin, small banks represent 84 percent and 82
percent, respectively, of all insured commercial banks.
Before the exception was amended, bank holding company interest in the
expanded insurance activities had begun to materialize.

Small banks and BHCs

inquired at the Seventh District Federal Reserve Bank about the possibility of
acting as agents for the sale of a broad array of insurance.

Furthermore,

applications have been filed, although none have yet been accepted, by three

Seventh District BHCs.

Given this revealed interest, it is likely that

attempts will be made in the future to expand the scope of bank holding
company insurance activities to sell all kinds of insurance pursuant to the
act.
Section 23A - Impact on Holding Companies
Title IV, Section 410 of Garn-St Germain Act amends section 23A of the
Federal Reserve Act.

Prior to being amended, Section 23A limited financial

transactions between a bank and its affiliated companies in order to prevent
the misuse of bank funds.^

The Garn-St Germain Act liberalizes the types of

transactions that may take place between banks affiliated with the same parent
holding company.

The amended section 23A will allow for virtually unlimited

financial transactions to take place between subsidiary banks of the same
parent holding company.
However, one constraint is placed on interbank financial transactions
between affiliates of the same BHC.

Banks are prohibited from engaging in

transactions that involve low-quality assets.

This constraint was adopted to

prevent such transactions where the intent and effect would be to circumvent
the bank examination process.

Furthermore, it reduces the possibility that

well-intentioned bank rescue operations by the parent BHC could go astray and
result in multiple bank failures.
The liberalization should improve the flow of funds that can take place
among affiliated banks in the same holding company network.

Thus, it will

make it easier for a BHC to allocate funds to their highest yielding and best
use and to aid smaller subsidiary banks.
Bank Service Corporations
Title VII, section 709 of the Garn-St Germain Act enables one or more
banks to form a bank service corporation that will provide certain financial

services to all types of depository institutions and the public.

Since

1962, banks have had the ability to form service corporations; however, their
activities have been limited to providing bank services to commercial banks.
Under the Garn-St Germain Act, bank service corporations may undertake
three different types of activities.

They may: (1) provide "depository

institution services"; (2) offer other nondepository services that can be
provided by banks, and (3) engage in the activities that the Board of
Governors has found to be "closely related" to banking.
"Depository institution services" include activities such as bookkeeping,
statement preparation and mailing, and check sorting and posting.

The act

places no geographical limitations on the provision of these services.
"Nondepository services" include all activities that banks can perform, except
for deposit-taking.

In general, these services may be performed only within

the single state where the bank service corporation’s shareholders are
located.
With prior regulatory approval, service corporations may now undertake
all of the activities that have been defined by the Board of Governors as
being "closely related to banking" for purposes of the Bank Holding Company
Act.

Furthermore, these activities can be performed at any geographic

location, and are subject only to applicable branching laws.

Known as the

"4(c)(8) activities", these services have previously been limited to a bank
holding company or its nonbank subsidiaries.

Now a service corporation may

provide these services without forming a bank holding company and/or a nonbank
subsidiary.

Service corporations can now be formed by a number of small banks

not affiliated through a common bank holding company structure.

The bank

service corporation provisions provide small banks having limited financial

and managerial resources (especially rural banks) with the means to offer
nonbank services to their customers.
Conclusion
The Garn-St Germain Act should have only a marginal impact on the
activities of bank holding companies.

It does provide a legislative basis for

expanding their activities in a geographic and product sense.

However, given

the circumstances under which this expansion might arise and the constraints
imposed under the law, it should not produce any dramatic changes in either
the location or types of products offered.
expanded under the law.

Insurance activities have not been

Further, certain nonbank activities are likely to be

conducted via bank service corporations rather than by nonbank subsidiaries of
holding companies.

THE IMPACT ON SAVINGS AND LOAN ASSOCIATIONS

Andrew Carron [1982] has described the precarious condition of the thrift
industry, which has been a subject of concern for over a decade.

Unlike

commercial banks, S&Ls have not been able to insulate themselves from interest
rate risk, nor have they significantly altered the composition of their
balance sheets.

As the data in Table 4 show, since 1950 the S&L asset

portfolio has remained heavily dependent on residential mortgages —
with fixed rates —

primarily

while the liability portfolio has remained dependent on

time and savings deposits.

However, over time an increasing proportion of the

liability portfolio, including time and savings deposits, has come to pay
market interest rates.
The funding of long-term fixed rate assets with short-term liabilities
has been largely responsible for the decline in S&L profitability.

As the

data in Table 5 show, accounting profits have been highly variable for the
last fifteen years and have declined during the the last five years.
were negative in 1981, as they will be in 1982.
understate the extent of the problem.

They

These data, however,

Because S&Ls typically nlend long1* at

fixed rates and "borrow short", the market value of assets declines more
rapidly than that of liabilities when market interest rates rise.

As Richard

Kopcke [1980] and Edward Kane [1982] have shown, economic net worth declines
immediately, while the accounting measure declines only over time.

Utilizing

a measure of economic profits would indicate an earlier and more serious
problem for the industry than that shown in Table 5.
By 1982, the problem had become very serious.

A significant proportion

of institutions had nearly exhausted their accounting net worth.

Large

numbers of institutions had also exhausted their economic net worth.

Only

Table 4.
Percentage Distribution of Assets and Liabilities
of Insured Savings and Loan Associations
Assets

1950

1964

Cash

5.9

3.3

1 . 0

U.S. Govt. Obligation

8.8

5.8

6.3

81.6

84.7

83.3

2.9

Mortgage Loans and Mortgage Backed
Securities

1981

Other Loans

n.a.

Other Assets

3.7

5.3

6.5

Total Assets

100.0

Liabilities
Demand and NOW Accounts
Savings and Time Deposits

. 0

89.5

0 . 0

91.5

1.3
80.9

6.2

t o

C NI

Borrowed Money
Other Liabilities

4.3

3.3

3.6

Total Liabilities

100.0

14.2

n.a. - not available
Sources:

Federal Home Loan Bank Board, Savings and Home Financing Source Book
1955 (Washington: Federal Home Loan Bank Board, 1955); and Federal Home
Loan Bank Board, Combined Financial Statements, 1965 and 1981
(Washington: Federal Home Loan Bank Board, 1955).

Table 5.
Profitability of Insured Savings
and Loan Associations

Net Income as Percent of
Year
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981

Total Assets
.64
.49
.45
.58
.66

.54
.66
.71
.72
.52
.44
.59
.71
.77
.64
.13
-.71

Total Net Worth
9.41
7.00
6.61
8.40
9.29
7.71
9.84
11.45
11.61
8.38
7.58
10.53
12.90
14.00
11.63
2.45
-16.51

Federal Home Loan Bank Board, Combined Financial Statements, 1975 and
1981 (Federal Home Loan Bank Board, 1975 and 1981).

the existence of deposit insurance prevented large scale runs on the S&L
industry.

The FSLIC's resources were under heavy stress.

The need to

recapitalize the industry and prevent future crises forced Congress to
consider a revision of policy towards the industry.

The Garn-St Germain Act

was the result.
This was not the first time that policymakers had considered
restructuring the industry.

It had been recognized as early as 1971, in the

Hunt Commission Report, that S&Ls would need extended powers to enable them to
successfully compete in the changing technological, regulatory, and economic
environment of the 1970s and 1980s.

Regulations designed for a previous

era, by hindering the S&L adjustment process, posed a serious threat to the
industry’s soundness.

Despite Congress' several attempts to meet the

industry's needs, it was not until 1978 that progress began toward achieving
the necessary revisions.

And even then, the changes were initiated by

regulatory decree rather than Congressional action.
With the 1980 pasage of DIDMCA, Congress took the first steps towards
restructuring the industry.

However, only with the passage of the Garn-St

Germain Depository Institutions Act did Congress fully address the industry's
problems.

It chose a two part package to accomplish this goal.

First,

Congress gave S&Ls greater flexibility in constructing their asset and
liability portfolios.

Second, Congress gave regulators emergency powers to

deal with distressed institutions.

The impact of the provisions affecting the

savings and loan industry's asset portfolio, its liability portfolio, and the
regulators' supervisory powers will be considered in turn.

The New Asset Powers
Over the years S&Ls have faced fewer and fewer restrictions on the types
and quantities of assets they may hold.
presented in Table 6 .

The history of this deregulation is

The Garn-St Germain Act’s contribution to this process

is to relax portfolio restrictions in two areas:
consumer lending.

commercial lending, and

The act also relaxes portfolio restrictions relating to

government lending; however, the act’s impact in this area is relatively
minor.

These changes are all documented in Table 6 .

1. Commercial Lending
The most radical departure of Title III is the permission for S&Ls to
engage in commercial lending.

While some minor provision for S&L lending to

business had been made under the Depository Institutions Deregulation and
Monetary Control Act of 1980, the present powers are more substantial.
aspects of these commercial lending powers are discussed below.

Four

The first

provision simply expands S&Ls’ existing power to make loans secured by
commercial real estate.

The second and third provisions are completely new —

they allow S&Ls to make both secured and unsecured loans to business, and to
engage in leasing.

The fourth provision inadvertently removed S&L authority

to make construction loans.
The Depository Institutions Deregulation Act of 1980 had given S&Ls the
power to make commercial real estate loans up to 20 percent of assets.
current act raises this limit to 40 percent of assets.

The

The present act also

drops the 1980 requirement that the association have the first lien on the
property.

Removal of this requirement will enable savings and loan

associations to make loans to business in order to finance the purchase of
capital goods and inventories.

Henceforth, businesses may borrow against the

Table 6
The Changing Portfolio Limitations on the Assets of Federally Chartered
Savings and Loan Associations
(percent of total assets)

Classification

Description

Residential

Residential mortgages
Rate sensitive residential mortgages

Commercial

Loans secured by commercial real estate
Commercial paper and Corporate debt
Securities
Commercial loans
Construction loans
Equpiment loans

Consumer

Government

Footnotes:

Tangible personal property
(inc. leasing)
Consumer loans (incident to household
purposes —
including inventory & floor planning
loans)
Credit card
Overdrafts secured, incident to
transaction accounts
Education loans
Federal government, guaranteed
agency, or housing related
State and local government

“loan to value ratio
^loan to value ratio
.first lien only
?5% before 1984
^general obligations
no more than 10% to

Pre
1979

June
'79

March
'80

Oct.
'82

100
0

100
100

100}
1001

100^
100

0
0
0
5

20
0
5
100

0
0

0
100

100

0
0

100
5

100
100

100
0

100
100^

100
100b

40
100,
104
0
100

90%
removed

(plus limited home-state real estate)
any one issuer, except general obligations

equity in their real estate holdings to finance these non-real estate
activities.
The second provision relating to commercial lending activities allows
associations to invest up to 5 percent of their assets in either secured or
unsecured loans for business purposes.
increased to 10 percent of assets.

On January 1, 1984 this authority is

The 1982 act gives S&Ls a third commercial

lending power; for the first time they may invest up to 10 percent of their
assets in tangible property to be used for leasing purposes.

The fourth

provision has inadvertently reduced S&L commercial lending powers.

The DIDMCA

of 1980 permitted S&Ls to invest up to 5 percent of their assets in
construction loans.

An error in drafting the 1982 act removed this authority.

Attempts, made during December 1982, to amend the act to restore the
construction loan authority, were unsuccessful.

Finally, to facilitate use of

these new powers, S&Ls were allowed to offer demand deposits to corporate
customers.
The impact of these four provisions, taken together, is potentially
important.

Savings and loan associations, if they were to exercise these four

powers to their full extent, could devote up to 60 percent of their assets to
satisfying the funding needs of business.

If the associations make use of the

comparative advantage they have, as a result of their knowledge of local
market conditions and the credit-worthiness and potential profitability of
local enterprises, they could provide significant competition to commercial
banks in this segment of the loan market.

Consumer Lending
The 1980 Depository Institutions Act had made a significant contribution

toward increasing the range of S&L lending activities by permitting up to 20

percent of assets to be used to make consumer loans.
the limit to 30 percent of assets.

The 1982 act increases

The range of activities encompassed within

the consumer lending category is also broadened under the present act to
include inventory and floor-planning loans.

Such a broad interpretation of

the term, "consumer lending," could, in fact raise the percentage of assets
devoted to de. facto commercial lending purposes to a figure as high as 90
percent of assets.

This broad definition of a consumer loan should allow S&Ls

in states that have usury laws imposed on the more traditional form of
consumer loans to escape the interest rate restriction.

Usury ceilings on

consumer loans were not removed either by the DIDMCA of 1980 or the present
act.

Government Securities
The authority, given by the Garn-St Germain Act, to invest in federal,

state, and local government securities is not unprecedented.

The DIDMCA, for

example, permitted S&Ls to invest in fully guaranteed federal government and
agency securities and in the general obligations of any state or locality
without limit.

Further, associations could invest up to 5 percent of assets

and not more than 100 percent of net worth in "prudent" investments of its
home state, its agents and localities.

These latter state and local

investments, however were to be related to residential real estate purposes.
The present act extends S&L powers to invest in state and local
securities.

Associations are permitted to invest as much as they wish in

state and local securities subject only to the safety and soundness provision
that "an association may not invest more than 10 per centum of its capital and
surplus in obligations of any one issuer, exclusive of investments in general
obligations of any issuer" (Title III, Section 324).

While the act does

broaden the power of S&Ls to invest in state and local securities, the
unlimited ability to hold general obligations of state and local governments
was given to S&Ls under the DIDMC Act of 1980.

It will be argued later that

these older powers, together with the new ones, are potentially important to
S&L profitability.

Summary
In short, the act gives savings and loan associations broad powers to
shift their portfolio composition away from dependence on residential real
estate lending to other areas.

To what extent will S&Ls utilize these powers?

In order to answer this question, the potential benefits from asset
diversification must be counter-balanced against the costs of their adoption.
The following two sections of the paper are devoted to a discussion of these
benefits and costs.

THE POTENTIAL BENEFITS FROM ASSETS DIVERSIFICATION
By improving net income, the new powers, granted by the act, make it
easier for S&Ls to recoup their losses arising from their previous exposure to
interest rate risk.

In addition, by making it less difficult to reduce

exposure to this risk, the act will, in time, enable S&Ls to avoid a
repetition of their recent earnings squeeze.

The present section first

discusses the act’s likely impact on net income and then examines its impact
on risk avoidance.

Raising Net Income
The act’s changes offer S&Ls the opportunity to increase net income and
reduce the riskiness of that income.

Net income will increase for two

reasons.

First, there is considerable variation in the efficiency of

individual banks and S&Ls.

Permitting S&Ls to enter commercial and consumer

loan markets will provide relatively efficient S&Ls with an opportunity to
take business away from those commercial banks that are relatively
inefficient.
industry.

However, these new activities do pose some challenges for the

Consumer and commercial lending are considerably different from

mortgage lending.

Loan processing costs are higher for consumer loans, while

both are subject to greater default risk and are less easily resold in
secondary markets.
commercial loans.
lender.

The lending process is also different, particularly for
Mortgage lending is a retail operation:

people come to the

Commercial leading involves more individualized sales effort.

Second, asset diversification may enable thrifts to reduce their average
interest costs below levels that would otherwise prevail.

In the past,

thrifts have often offered a higher interest-rate than have commercial banks.
This differential permitted thrifts to compensate depositors for the lack of
transaction accounts, consumer loan services, commercial loan services and
trust services.

The data in Table 7 illustrate this phenomenon.

The data show that the differential decreased toward the end of the
period.

The decrease is probably a result of two factors:

moral suasion by

the Federal Home Loan Bank Board and rising use of jumbo CD’s by money center
banks.

When thrifts became subject to interest-rate regulation in 1966, the

differential was incorporated into the Regulation Q ceiling.

The removal of

restrictions on thrift activities, under the 1980 and current acts, makes it
increasingly possible for thrifts to offer full-service banking.

This ability

can ultimately, but not immediately, decrease the differential necessary for
thrifts to attract funds.

Table 7
The S&L Commerical Bank Differential Prior to the Extension
of Regulation Q to the Savings and Loan Industry

Average
rates
paid on
Passbook
at S&Ls
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65

SOURCES:

2.52
2.58
2.69
2.81
2.78
2.94
3.03
3.26
3.58
3.53
3.86
3.90
4.08
4.17
4.18
4.23

Average
Rates
paid on
Time Deposit
by CBs
.92
1.01
1.13
1.30
1.30
1.36
1.58
2.08
2.20
2.36
2.58
2.73
3.23
3.34
3.47
3.73

The
Differential
1.61
1.57
1.56
1.51
1.57
1.58
1.45
1.18
1.18
1.17
1.28
1.17
.85
.83
.71
.50

Reg. Q
Passbook
Ceiling
2.5
2.5
2.5
2.5
2.5
2.5
2.5
3.0
3.0
3.0
3.0
3.5
3.5
3.5
3.5/4.0
4.0

Average S&L passbook rates were obtained from Savings and Home
Financing Sourcebook, Washington, D.C.: Federal Home Loan Bank Board
(various years). Average rates for commercial bank time deposits
were obtained from Banking and Monetary Statistics 1941-1970,
Washington, D.C.: Board of Governors of the Federal Reserve (1976).
Regulation Q ceiling rates on commercial bank passbook accounts were
obtained from various issues of the Federal Reserve Bulletin.

Reducing Risk
Utilizing the powers granted in the 1980 and present acts can, however,
benefit earnings in another way.

Institutions, which borrow short and lend

long at fixed rates, have suffered in recent years from the detrimental
effects of unanticipated movements in interest rates.

When the time profiles

of assets and liabilities are mismatched in this way, unexpected movements in
market interest rates that reflect changes in the rate of inflation, cause the
market value of liabilities to change less rapidly than the market value of
assets —

interest rate risk.

That is, interest expense adjusts immediately

while interest income adjusts slowly.

When interest rates unexpectedly rise,

this results in protracted accounting losses, a gradual decline in accounting
net worth, and an immediate decline in economic net worth.

Duration
While the impact of the gap between the maturities of assets and
liabilities is easy to comprehend, it has been found to be too imprecise a
tool for a careful consideration of the thrift industry exposure to interest
rate risk.
received.

Maturities reflect only the date at which the final payment is
During periods of high interest rates, any final payment may be

dominated by the flow of interest payments on the loan made prior to its
maturity.
phenomenon.

The concept of duration has been designed to account for this
Duration measures the average - a weighted average - time at

which cash payments are received. The weights applied to the different time
periods (measured in years), are the ratios of the present values of cash
payments received in different periods to the sum of such present values.

The

discount factor used to calculate these present values is l/(l+r)t where r is
the riskless rate of interest.

The use of duration as a measure of exposure to interest rate risk has
intuitive appeal.

An assetfs duration approximates the percentage decrease

(increase) in its market value which occurs when interest rates rise (fall) by
1 percentage point.

Thus, the longer an asset's duration, the greater is the

loss (gain) in market value when interest rates rise (fall).

The difference

between the durations of assets and liabilities provides, therefore, a good
rule of thumb for measuring an S&L's exposure to interest rate risk.

When

there is no difference, S&L profits are not affected by movements in interest
rates.

Such an association is said to be immunized against interest rate

risk.
Using such an approach then, it is possible to compare, at any time, the
durations of savings and loan assets and liabilities.

Typically, the duration

of assets is considerably longer than that of liabilities.

This mismatch in

durations exposes the institution (and indeed the industry in general) to
interest rate risk.
approaches.

The risk can be reduced by either or both of two

The duration of assets can be reduced or that of liabilities can

be increased.

The contribution of the 1982 act toward lengthening the

duration of liabilities will be discussed in the following section.

The

remainder of this section is devoted to discussing the act's implications for
asset duration.

Accomplishing the Risk Reduction
Part A of Table 8 shows the derivation of the asset duration of a typical
S&L.

The duration of the whole asset portfolio is calculated by weighting the

estimated durations of individual asset components by their relative
importance in the portfolio.

Researchers have estimated that the typical

fixed rate mortgage has a duration of 5 years; this will clearly dominate any

Table 8
The Impact of Loan Portfolio Composition on Asset Duration

Asset Duration of a Typical S&L Pre 1980.

Mortgages
Liquidity Portfolio
Fixed, Long Term Assets
Other Assets

Percent of
Assets

Duration
(years)

82
7
3
8

5.0
0.5
10.0
10.0

Duration of entire asset portfolio

5.235

Asset Duration of a Typical S&L Post Garn-St Germain Holding 18 Percent
Commercial and Consumer Loans.
Mortgages
Liquidity Portfolio
Fixed, Long Term Assets
^
Consumer and Commercial Loans1
Other Assets

64
7
3
18
8

Duration of entire asset portfolio

5.0
0.5
10.0
1.47
10.0
4.602

Asset Duration of a Typical S&L Holding 30 percent Commmercial and
Consumer Loans
Mortgages
Liquidity Portfolio
Fixed Long Term Assets
Consumer and Commercial Loans
Other Assets
Duration of entire asset portfolio

Source:

NOTE:

52
7
3
30
8

5.0
.5
10.0
1.47
10.0
4.176

Harvey Rosenblum, Deposit Strategies for Minimizing the Interest Rate
Risk Exposures of S&Ls.
1.

Assumes that a typical loan has a maturity of 2 years, and is fully
amortized, and that the two end of year cash payments are
discounted at a rate of 10 percent a year.

estimate of an S&Ls average asset duration.

In the example given, two of the

other three asset components have longer durations than mortgages.
Consequently, the institution's average duration is 5.2 years.

A plausible

estimate of the duration of a typical consumer or commercial loan is 1.47
years.

Consequently, shifting assets from any of the three long duration

categories in Table 8 into consumer or commercial loans will reduce the
average duration of the full asset portfolio.

Reducing asset duration will

decrease the duration mismatch between assets and liabilities and lessen the
exposure to interest rate risk.

This will reduce losses suffered when

interest rates rise unexpectedly.
Given present market conditions, it is calculated that shifting 10
percent of the mortgage portfolio to commercial and consumer loans might
reduce asset-side duration by about .35 years.

Part B of Table 8 shows the

assumptions made in deriving the estimate that shifting 18 percent of assets
from mortgages to consumer and commercial lending will reduce asset side
duration to 4.6 years.

Part C of Table 8 demonstrates that redeploying 30

percent of assets from mortgages to consumer and commercial loans would reduce
asset duration to 4.2 years.

Similarly, further shifts to place 40 percent of

assets into short loans would reduce duration to 3.6 years.

The relationship

between asset duration and the percentage of assets held in commercial and
consumer loans is shown in Figure 1.

Using Rosenblum's [1982] estimate that

the average duration of liabilities is 1.27 years, redeploying 10 percent of
assets from mortgages to consumer and commercial loans would reduce exposure
to interest rate risk by approximately 9 percent.

Redeploying 40 percent of

assets would reduce interest rate risk by 35 percent.

Figure 1

The Relationship Between Asset Duration and Portfolio Composition

Duration (in years)

Percent of Assets Shifted from Mortgages to
Consumer and Commercial Loans

Table 9
Use of Adjustable Rate Mortgages by Size Class
(outstanding amounts of adjustable rate mortgages
as a percentage of total mortgages)

Asset size
in millions
of dollars

Illinois

California

Florida

0-100

3.24

13.96

2.90

6.04

100-500

2.97

7.18

3.67

8.60

500-1,000

4.55

6.76

4.00

3.33

11.87

6.26

8.16

7.33

> 1,000
SOURCE:

Texas

Federal Home Loan Bank Board, Semiannual Report of Condition, June
1982.

In summary then, it is argued that utilizing the new asset powers
embodied in DIDMCA and the Garn-St Germain Act can potentially raise earnings
and reduce interest rate risk and costs.

It must be recognized, however, that

such portfolio shifts will also increase credit risk.

Moreover, there exist

factors which inhibit use of the new powers.

FACTORS INHIBITING THE ADOPTION OF THE NEW POWERS
Past experience indicates that S&Ls are reluctant to diversify their
portfolios.

One example is provided by the slow adoption of the variable-rate

mortgage instruments, permitted first in the state of California and
increasingly elsewhere since 1978.

While it is recognized that consumer

preferences for the well-tried fixed-rate mortgage may also be important here,
it may be argued that S&Ls could have promoted the variable rate instruments
more successfully, had they wished to do so.

The data in Table 9 indicate the

slow progress made toward the adoption of variable rate instruments.

By June

1982, the proportion of the outstanding mortgage portfolio devoted to variable
rate instruments by federally chartered S&Ls in four relatively progressive
states, was less than 11 percent, despite the fact that S&Ls could have raised
this percentage as high as 50 percent.

Between January 1979 and June 1982,

funds available for variable rate lending, arising from the repayment of
existing mortgages and the growth of the liability base, equal 49.96 percent
of the value of the June 1982 mortgage portfolio.
In fact, Table 10 indicates that 41 percent of federally chartered S&Ls
in the states of California, Florida, Illinois and Texas held no variable rate
instruments as of June 1982.

Further, under the best of circumstances, only

an estimated 42 percent of the number of new loans closed were for variable
rate mortgages in June 1982.

And this figure had fallen to 38 percent by

Table 10

Use of New Asset Powers by Federally
Chartered S&Ls in Four States in 1982
(Associations Using Powers as a Percent of
Federally Chartered Associations)

California
Credit
Cards
Closed End
Consumer
Loans
Adjustable Rate,
Renegotiable Rate and
Variable Rate
Mortgages
SOURCE:

Florida

Illinois

Texas

Four State
Total

50.5

20.6

9.3

22.4

23.2

13.9

42.1

19.2

13.5

19.4

41.3

76.0

55.6

64.0

58.6

Federal Home Loan Bank Board, June 1982
Semiannual Report of Condition.

December 1982.

Large associations accounted for the majority of variable rate

mortgages, while smaller associations still deal primarily in fixed rate
mortgages.

This slow rate of adoption occurred despite the fact that use of

variable rate instruments was the only option available to S&Ls wishing to
reduce their interest risk until the 1980 act broadened asset powers.
The slow adoption of other new powers provides the second piece of
evidence as to the conservative behavior of S&L managements.

Federally

chartered associations have generally been slow either to issue credit cards
or to make closed end consumer loans, as the data in Table 10 demonstrate.
The behavior of S&Ls in Texas provides the third set of evidence that
argues that S&Ls may be slow to adopt the enhanced powers granted under the
current act.

Since the early 1940s, state-chartered S&Ls in Texas have been

authorized to engage in consumer lending.

Table 11 documents the relatively

slow growth in the proportion of assets devoted to consumer loans.

During the

early years, adoption of consumer lending powers may have been inhibited by
state usury laws positioned at levels below market rates.

Nevertheless,

adoption of the powers did not accelerate after the state of Texas Relaxed
these ceilings in 1980.
This evidence raises two questions.

Why have S&Ls been so slow to

utilize existing opportunities to diversify against interest rate risk?

And,

will their new powers eventually lead them to radically restructure their
portfolios?

Edward Kane [1982] has addressed the first of these questions.

He argues that the existence and modus operandi of deposit insurance are the
principal reasons for S&L hesitancy to diversify.

The absence of

risk-sensitive premiums allows S&Ls to pass their exposure to interest rate
risk on to the shoulders of the FSLIC.

This ability removes the incentive to

diversify and encourages S&Ls to bet on falling interest rates, by continuing

Table 11

Use of Consumer Lending Powers
by State Chartered S&Ls in
Texas 1972-81
Other Loans as
a Percentage ^
of Total Assets
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981

NOTE:

1.5
1.6
1.7
1.7
1.8
1.9
1.6
1.7
1.8
1.9

Does not include mortgage loans, personal loans secured by savings
accounts, unsecured property improvement loans, mobile home loans, or
unsecured education loans.
SOURCE: Federal Home Loan Bank Board Combined Financial Statement 1972-1981.

to offer fixed long-term mortgages.

However, this analysis sheds little light

on the diversification strategy that S&Ls would choose, if confronted with
risk-sensitive premiums.

Would they continue their role of mortgage

specialists, simply switching from fixed rate to variable rate mortgages?

Or,

would they opt for a broad-based diversification into consumer and commercial
lending?

Tax Considerations
A number of observers have argued that the tax system poses a significant
barrier to diversification by S&Ls.

This barrier is the result of a

Congressionally mandated tax system (introduced in 1954 and modified in 1969)
designed to reward S&Ls for specializing in residential real estate lending.
By offering such rewards, Congress originally had hoped to increase the stock
of funds available to finance the construction and purchase of residential
housing.
An association is legally permitted to allocate a portion of its before
tax income to a special fund known as a bad debt reserve.

This reserve is

similar to a commercial bank's loan loss reserve. Income allocated to the bad
debt reserve is not subject to federal income tax. Contributions to the bad
debt reserve cease to be deductible once the bad debt reserve exceeds 6
percent of total assets.

For banks, however, contributions currently cease to

be deductible when the loan loss reserve exceeds the larger of .8 percent of
loans or a measure of the level of losses - either current or historical.
Thus for S&Ls, the bad debt reserve more closely resembles a pool of retained
earnings than a loan loss reserve that is appropriate to managing losses
anticipated as a result of credit risk.

In retrospect, however, it is

apparent that such loss provisions were, in fact, inadequate to deal with the
recent interest-rate risk exposure.

Tax provisions limit the proportion of taxable income that may be
contributed to the reserve.

The limitations are based on an association's

holdings of "qualified" assets - principally mortgages, federal government
securities, and cash.

An association holding 82 percent or more of its assets

in qualified form can contribute to the reserve and deduct from taxable income
up to 40 percent of income.

For associations holding less than 82 percent in

qualified assets, the maximum deductible contribution declines as the
percentage holdings of qualified assets falls.

Each successive 1 per cent

reduction in qualified assets reduces the deductible contribution by an
additional .75 percent of income.

Reducing holdings of qualified assets from

82 percent to 81 percent decreases the deductible contribution from 40 percent
to 39.25 percent.

If an association holds less than 60 percent in qualified

assets, it is not permitted to make any tax deductible contribution to the bad
debt reserve.
Because the bad debt deduction allows an association to shelter income by
retaining earnings, the deduction reduces the association's marginal tax below
what it would be in the absence of such deductions.

Assuming a corporate tax

rate of 46 percent, a savings and loan faces a discontinuous marginal tax
schedule.

The schedule increases as Y, the percentage of nonqualified assets

(consumer loans, commercial loans, etc.) rises,

27.6
27.6 + .345(Y-18)
46

if 0
Y <_ 18
if 18 < Y £ 40
if 40 < Y <_ 100

The tax schedule rises regularly as Y increases between 18 and 40 percent;
then it jumps steeply to 46 percent.
Figure 2.

This tax schedule is illustrated in

Figure 2

Marginal Tax Rata and Tha Share of Qualified Aaaots

Marginal
Tax Rate

Nonqualified Assets as a Percentage of Total Assets

The Bad Debt Deduction as a Barrier to Diversification
It has been argued that the bad debt deduction poses a potential barrier
to diversification since increasing holdings of nonqualified assets beyond 18
percent causes the association’s marginal tax rate to start rising.

The

Report of the Interagency Task Force on Thrift Institutions provides the best
examination of this issue.
Holding risk constant, the report demonstrates that in order to
profitably increase nonqualified assets from 18 to 19 percent of the
portfolio, the nonqualified asset (for example a consumer loan) would have to
have a pre-tax net yield (revenues less interest and operating expenses) at
least 54 percent higher than' the pre-tax net yield on a qualified asset (for
example, a residential mortgage).

Consequently, if mortgages had a net

pre-tax return of 100 basis points, a consumer loan of equal risk would have
to have a net pre-tax yield of 154 basis points.

Assuming that the assets are

equally risky, this is a large differential; one which would appear to
discourage shifts from mortgages to other assets.

The report also

demonstrates that, the greater any contemplated shift towards nonqualified
assets, the greater is the premium necessary to make the change profitable.
Figure 3 illustrates how after-tax income varies with Y, the proportion
of nonqualified assets.

It assumes that all qualified assets have a net

pre-tax yield of 100 basis points, while all non-qualified assets have a net
pre-tax yield of 150 basis points.

Even though nonqualified assets have a

higher pre-tax yield, only a massive restructuring of the portfolio permits an
association to earn as much as it would holding only 18 percent nonqualified
assets.

Profitable diversification beyond the 18 percent cut-off would

require the association to shift its asset composition from 18 percent
nonqualified assets to

92 percent nonqualified assets.

During the transition

Figure 3
Aftar-Tax Income and the Share of Nonqualified Assets

net incom e

from the 18 percent portfolio to the 92 percent portfolio, its after-tax
income would fall.

Since (even if these rates differentials were realistic,

which they are not) a transition of this magnitude would probably require a
decade or more, the short-term losses due to diversification would.likely
outweigh the long-term gains.

Consequently, it is unlikely that an

association would engage in such a massive diversification effort.

On the

other hand, because of the discontinuity in the tax schedule, an association
does not lose much by diversifying, as long as it does not lose all of its bad
debt deduction by devoting more than 40 percent of its portfolio to
nonqualified assets.

Thus, the bad debt deduction might not prevent a modest

increase in holdings of nonqualified assets beyond the 18 percent level.

The Tax Constraint May Not be Binding
While the task force’s study suggests that the bad debt deduction does
act as a barrier to diversification, there are five factors that mitigate its
influence.

First, since most associations currently hold substantially less

than 18 percent of their assets in nonqualified form, it could be many years
before the bad debt deduction became a factor in S&L decision-making.
However, assuming that the new powers are attractive, it is quite likely that
the bad debt deduction would eventually become effective.
Second, it could also be argued that since many associations are losing
money (and therefore have no taxable income) and will continue to be in this
position for some time, tax incentives will not have a strong impact on
behavior.

However, these associations must eventually heal themselves or be

made whole with FSLIC assistance.

At that point, tax incentives will matter.

Although these associations could initially diversify beyond the 18 percent

cutoff, planning to retrench once they return to profitability, the cost of
initially building such a portfolio (and the staff to support it) and later
disposing of it, would make the strategy unprofitable.
Third, it could also be argued that the reported calculations assume that
qualified and nonqualified assets are equally risky.

It may be, from an S&L’s

perspective, that the risk-adjusted return on certain nonqualified assets
greatly exceeds the risk-adjusted return on mortgages.

However, it is not

clear how great these risk premia would be.
Fourth, the tax laws require savings banks to hold only 72 percent of
their assets in qualified form.

Consequently, to partially diversify without

foregoing tax advantages, an S&L could convert its charter to that of a
savings bank.
The fifth and final omission from the report’s analysis is potentially
more important.

The report implicitly assumes that the bad debt deduction is

the only tax shelter available to the association.

However, since 1980 S&Ls

have had the power to hold general obligations of state governments.
powers are extended under the present act.
generally tax-exempt.

These

State and local securities are

The implications of this power are important:

they are

explored below.

The Impact of Tax-Exempt Securities on Diversification by S&Ls
Commercial banks have long used tax-exempt securities to shelter
otherwise taxable income.

The gross yield on prime rated long-term tax-exempt

securities averages only 69 percent of the yield on U.S. Treasury securities
of similar maturity.

Banks are willing to accept such yields because the

revenue from the securities is excluded when calculating net taxable income
while 85 percent of the interest expense is included.

As tax-exempt

securities are substituted for taxable assets, taxable revenues fall more
rapidly than the interest and operating expenses that have to be subtracted
from taxable revenues to compute taxable income.

By holding sufficient

quantities of these securities, taxable income can be practically eliminated,
while after-tax income could rise.

Whether or not an association would

actually adopt such a strategy is another question.
Generally speaking, an institution would only choose to hold the exempt
securities if the relative yield on these securities (expressed as a
percentage of the yield on a taxable asset of similar risk) exceeds (1 - T)
where T is the institution’s marginal tax rate.

As noted earlier, the yield

on tax-exempt long-term securities is approximately 69 percent as much as a
comparable U.S. Treasury security.

S&Ls holding less than 18 percent

nonqualified assets have a marginal tax rate of 27.6 percent.

In this case

(1 - T) equals 72.4 which is more than the relative yield (69), so these
associations have little incentive to hold tax-exempt securities.

However, if

S&Ls begin to utilize powers granted by the act (as well as those granted in
1980), they will soon hit the 18 percent cutoff.

As their holdings of

nonqualified assets rise above 18 percent, their maximum bad debt deduction
will fall and their marginal tax rate T, will steadily rise.

Eventually, the

marginal tax rate will rise to the point where it becomes profitable to hold
tax-exempt securities.

Once this point has been reached, as in the example

below, it is assumed that S&Ls will use "tax-exempts11 to shelter all taxable
income.
Whether or not an association would actually choose to embark on such a
strategy, depends on the yields of tax-exempt securities, nonqualified assets,
and qualified assets.

These factors determine how much diversification must

occur before a highly diversified portfolio would earn as much after-tax

income as a portfolio holding only 18 percent non-qualified assets.

The

quantity of nonqualified assets required to reach this "break-even" point, in
turn determines whether income lost during the transition would outweigh the
long-term improvement in earnings.
While there are no hard and fast answers to these questions, it is
possible to work out examples illustrating the issues involved.

Figure 4

illustrates how allowing an association to hold tax-exempt securities will
alter its diversification decision.

It is assumed that qualified assets yield

i, that nonqualified loans yield (1.05)i, and that the cost of funds is «9i.
In case A (previously illustrated in Figure 3) the association is not
permitted to hold tax-exempt securities.

Under these circumstances, as argued

earlier, diversification beyond 18 percent nonqualified assets is unlikely.
In case B, the association can hold tax-exempt securities.

Here these

securities count as nonqualified assets when computing the maximum allowable
bad debt deduction.

In this case, it is assumed that the yield on these

securities is 66 percent of the yield on the qualified asset (say mortgages)•
The ability to hold these securities reduces the break-even proportion of
nonqualified assets from 92.2 to 51.1 percent.

Unfortunately, in this case

the required adjustment remains so large - from 18 percent nonqualified assets
to 51.1 percent of nonqualified assets - that the present value of such a
strategy is likely to be negative.

Under these circumstances it is not

expected that an association would choose to hold more than 18 percent of its
portfolio in nonqualified assets.
In Case C it is assumed that the yield on tax-exempt securities is 72
percent of the yield on the qualified asset.

Where tax-exempt securities are

allowed to count as qualified assets as in this case, the ability to hold tax-

Figure 4
T a x Ex e m p t Securities and the D iversification D ecision

net income

Proportion of nonqualified assets

exempt securities has a significant impact on the diversification decision.
The break-even point now occurs when an institution holds a portfolio of only
30.2 percent nonqualified assets —
required in Case B.

a little more than half the proportion

Furthermore, the loss in income over the range 18 < Y <

30.2 is relatively small, making the costs of transition negligible.

Under

these circumstances, it is quite likely that the bad debt deduction will not
pose a significant barrier to S&L diversification into nonqualified assets.
However, if S&L diversification is an accepted goal of public policy, it would
be given greater encouragement by changing the law to allow state and local
(along with federal) securities to count as qualified assets in the bad-debt
provision.

Summary
The Report of the Interagency Task Force on Thrift Institutions argued
that the bad debt deduction posed a significant barrier to the S&Ls desiring
to devote more than 18 percent of their assets to commercial or consumer
lending.

There are two major factors the report did not take into account.

The first is the fact that, on a risk-adjusted basis, the yields on these
new activities may grossly exceed the yield on mortgage loans.

The second

recognizes that S&Ls have available an additional tax shelter, tax-exempt
securities.

While it is difficult to assess an S&L!s attitudes toward risk,

it is possible to examine the impact of its being able to offer tax-exempt
securities.

The preceding examination of the different cases suggests that

the significance of tax-exempt securities depends crucially on their yield
relative to the yield on taxable assets.

When this relative yield is low, say

66 percent, tax-exempt securities do little to lower the barriers created by
the bad debt deduction.

In this case, consumer and commercial loans are

unlikely to ever exceed 18 percent of an S&Ls assets.

However, when the

relative yield is high, say 72 percent, the ability to hold tax-exempt
securities effectively eliminates the barrier created by the bad debt
deduction.

This illustration does not imply that S&Ls will cease to

specialize in housing finance, only that their choice will be a result of
economics of specialization and scope, rather than social engineering.

The
The

preceding

associations
powers

and

can

the

solving

implications

sections

promoted

following

discussion

these

THE

areas

COSTS

While

and

depository

money

center

from

the

banks
of

benefit

with

maintaining

entering

the

savings

Germain

section

the

threat

in
of

and

Act's

asset

the

S&L

costs,

loan

new

examines

industry.

reduction

liability

funds,

below

could

any

small

banks

in
and

interest
new

may

might

Average
those
are

profitability
an

increase

disintermediation.

powers

introduction

increase
likely
of

will

examine

The

each

insured

accounts,
staff.

any

costs

accounts

will

they will

simply

change

reaches

heavily

interest
market

thrifts.

their

payments

indication

coming

the

convenient.

costs

services

First,

these

because

be m o r e

the

markets

funds

associated
for

them,

that

these

and

costs.

heavily

from

operating

clear

funds

the m o n e y

funds,

transaction
no

and

proportion

higher

increase,
come

banks

transaction will

There

relying
to

that

the

providing

reduction

S&Ls

money

and

market

supply

and marginal
large

the m o n e y

available

relatively

increase

the

funds

counter-balanced

necessary

result

the

relying

$100,000

This

that

is m o r e

S&Ls

below

average

new

and

deposits

their

the

supply

Second,

depositors.

will

lessening

existing

might

facters

accounts

maintaining

for

acknowledged

supply

retail

currect

powers

act's

problems
Garn-St

by:

the

institutions,

by which

their

Super-NOW

paths

for

the

Powers

turn.

EFFECT

deposit

ways,

the

The

liability

three

duration,

problems.

new

liability

discussed

contribution

these

the

New Liability

retail

because

accounts

large

lower-paying,

can

portion

regulated

expect
of

the

accounts

funds
such

demand

deposits

and

NOW

has

argued,

Edward

Kane

[1982]

[1978]

have

illustrated,

explicit
and/or

interest

gifts.

rates

Some

explicit

payments.

charging

for

there

is n o

the

passbook

that
with

and

the

services
to

Kristine

implicit

same
they

expect

savings

depository

institutions
At

reason

Chase

time,

choose

in
to

the

new

and

the

form

also

switch

free

to
is

Taggart

services
interest

explicitly
correct,

raise

hand,

regulated,

implicit

should

other

Robert

K a n e ’s a r g u m e n t

accounts

the

supplement

replace

they would

provide.

[1981]

institutions

payments

would

that

accounts.

then

retail

31
i n s t i t u t i o n s ’ costs
to

raise

rates
not

costs

high

during
as

the
any

long

unless

differ
an

run .

However,

transition

8 percent,

significantly

accounts,

from

that

can

establishes

new

accounts

Furthermore,

conceivable

rates

association

phase.

the

that

rates

already
a

fee

are

at m a r k e t
on

Super

offered

schedule

expected

interest

NOWs

would

NOW

reflect

its

32
costs.

This

Third,
ultimately

market

rapidly.

illustrated

institutions
shift

the
In

toward

implicit
short,

i n s t i t u t i o n ’s d e p o s i t
near

that

are

greater

and

the

in T a b l e
now

heavily

reliance

explicit

a c t ’s n e w

costs,

12.

costs

deposit

either

retail

funds

accounts
or

orientation,

obtained

retail

explicit

from

deposits
are

the m o n e y

increase

unlikely

implicit,

might

too

reduce

particularly

the

term.

THE EFFECTS ON LIABILITY DURATION
Both
past,

many

long-term
for

the

savers

and
chose

accounts.

short-term

liability

MMDA

Super-NOW
to

account

sacrifice

the

extent

accounts

may

allow

duration may

decrease.

have

instant

liquidity

that

the

people
Thus

for

the

payment
transfer

first

availability.
higher

of m a r k e t
from

glance,

rates

the

paid

interest

long-term

it m a y

rates

accounts,

appear

that

the

Tab l e

H y p o t h e t i c a l Interest Rates for M M D A s and S uper N O W Ac c o u n t s
This table c o mpares (a) interest rates on the n e w a c counts w h e n cu s t o m e r s
are exp l i c i t l y c h a r g e d p e r - i t e m for checks and p r e a u t h o r i z e d tran s f e r s w i t h
(b) deposit rates that are adju s t e d down w a r d to c over a d e p o s i t o r y
I nstitution's e x p e c t e d costs of che c k p r o c e s s i n g and transfers.
A s s u m e that a
depos i t o r y ins t i t u t i o n s e x pects full u t i l i z a t i o n of t r a n s a c t i o n s e r vices for a
MMDA —
i.e., 3 checks and 3 transfers per m o n t h —
and ex p e c t s 20 N O W draf t s
per m o n t h for a "Su p e r NOW" account.
A ssume b a n k o p e r a t i n g costs of 25c per
tra n s a c t i o n —
per c h e c k or p r e a u t h o r i z e d transfer.
[All these d a t a are
illustrative p u r p o s e s and do not r epresent costs of a c t i v i t i e s at a p a r t i c u l a r
or typical d e p o s i t o r y institutions.]
A s s u m e also that the h y p o t h e t i c a l
d e p o s i t o r y i n s t i t u t i o n prices transfers at cost to d e p o sitors.
N o t e that an
8% rate, before a d j u s t m e n t for reserve r e q u i r e m e n t s and the a s s u m e d se r v i c e s
cost for 20 checks, results in an adju s t e d de p o s i t rate that is w e l l b e l o w the
5h percent c e iling rate on regu l a r N O W accounts.
The u n a d j u s t e d d e p o s i t rate
w o u l d need to be 8.51 p e rcent if the a d j u s t e d rate w e r e to e q u a l the c e i l i n g
rate on regular N O W accounts.

D e posit rate for:

$2500

$5000

$10 , 0 0 0

7.282

7.642

7.82%

Super N O W — aft e r reserve
requirement a d j u s t m e n t
w i t h c u s tomer cha r g e d
^
s e p a rately for t r a n sfers^

7.04%

Super N O W — after a d j u s t m e n t s

4.64%

5.84%

6.44%

MMDA— -customer charged
separ a t e l y for t ransfers
M M D A — adju s t e d f o r ^ s e r v i c e
cost of t r a n s f e r s 1
Super N O W — bef o r e adju s t e d
for reserve req u i r e m e n t and
w i t h cust o m e r c h arged
s eparately for transfers

Footnotes

to Table - H y p o t h e t i c a l

A d j u s t e d M M D A rate » R - X ( 1 0 0 ) , w h e r e R *
(percent)
Y
Y *
X *
»

Interest Rates

rate b efore a d j u s t m e n t
aver a g e account bal a n c e
ann u a l service cost
(6 t r a n s f e r s ) ($.25)(12 months)

= $18
R^ * the Super N O W rate ad j u s t e d for r eserve r e q u i r e m e n t s * R(l-k)
w h e r e k * reserve req u i r e m e n t
*

.12

3
Fully adjusted Super N O W rate * R, - Z(100),
*
Y

w h e r e Y * av e r a g e account b a l a n c e
Z * ann u a l s ervice cost
* (20 c h e c k s ) ($.25)(12 months)
* $60

new
a

powers

will

temporary

maturity

exacerbate

effect.

are

curves.

and

longer

influence

TOWARD

the

By
term

average

ENDING

THE

rates

lead

principally
1973,

and

created

late

1970s,

banks

selling

attrition

two

kinds.

large

and

or m o r e
this

pressing

financial

received

their

This

between

only

intermediate

design

the

able

banks

new

their
accounts

favorably

some

deposit

kind

problem.

late
—

1960s

and

early

potentially

threat

rates

1970s

severe

was

removed

CDs

over

$100,000

hampered
market

These

retail

chose

the

avoid

funds,

reduced

the

deposits.

for

the m o n e y

market

mutual
interest

from

rates

1978
of

and

until

funds

that

institutions,

replaced

rates

example,

amount

funds.

Regulation

interest

Larger

ratings,

rose

institutions

rapidly

credit

market

rates

paying market
grew

but

interest

depository

mutual

funds

innovation

disintermediation,

market

households

instrument

When

between

widened.

good

base.

spread

1978.

first

direct,
with

first

the

has

the

of m a r k e t

Money

flexible

rates

substantial
This

payment

capabilities.

CDs,

freedom

spread

During

crisis.

elsewhere.

commercial

the

risk.

deposits

occurred when

deposit

sudden

the

less

This

thrifts

eliminated

liquid,

198 2 .

particularly

regulated

that

funds

the

institution may

has

restrictions

transactions

and

$10,000

have

rate

portfolio.

other

a highly

its

and

offered

Fall

institutions

their

the

ceilings

will

many

placing

having

interest

OF DISINTERMEDIATION

permitting

second,

and

duration

setting

alternatives,

liquidity

accounts

ceilings

judiciously

could

on MMCs

These

the

can

withdrawals
to

Regulation

disintermediation

Disintermediation

enough

exposure

institutions

THREAT

past,

market-interest

deposit

the

phased-out,

own yield
their

S&Ls

lost

Others
were

accounts
suffered

rising,

there were

deposit

outflows.

Whether

the

deposit

costly,

particularly

competition
MMMFs
risk

have
of

held

large

CDs,

has

toward

ending

detrimental

effect

higher-rate

assets.

Growth

ask,

industry

prevent

evidence
Reserve
almost

low
This

the

then,

affirmative
that

and

billion

rate

III

intended

However,

these

that
1980,

have

the

improve

they

powers

and
with

powers

new

were

new

While

the

takes

access

By March

deposited
S&Ls.

the

funds

new,

for

relevant

S&L

retrieve

two m o n t h s
9,

very

The

as w e l l

After

the

new

enable

important

may

important.

will

types

proportion
to

higher

industry.

two

reduce
the

S&L

This

deposits,

the

rates

the

relatively

form.

increase

gives

reductions

with

important.

Federal

in M M D

accounts

and

Powers

soundness

I and

recent

S&Ls

been

housed

Emergency

Titles

the

funds

MMMFs..

had

expected

that

account,

accounts

Act

proved

interest

for
to

implications

therefore,

lost

Germain

deal

is,

billion

significant
Thus,

few

appropriate.

funds

reduced.

b a n k CDs,

facilitated

the

industry's

1982.

been

second

one way

base

$310

cannot

its

growth was

here

Super-NOW

have

answer

Garn-St

the

experienced

1981,

regulators

the

outflow

The
Title

has

return

mortgages

process

these

the

commercial

because

further

over

not,

pay market-related

liability

that

deposit

funds

is w h e t h e r

the

deposits

reported
$100

above,

the

industry.

mutual

the M M D A

argued

question

S&L

caused

times,

replaced

disintermediation

lending.

other

quantities

balance,

beneficial,

some

the

a c t ’s p e r m i s s i o n

transactions
step

were

from money market

S&L

The

losses

the ma n y

and

S&Ls

new powers

viability

remedy

the

problems

accounting

the

act

net

provide

associations

that

are

long

run.

thrifts

worth

during

industry
are

threatened

with

failure

remain

below

purchase

their

assets

institution.

worth

near
1981

from,

acquisitions
net

the

future,
and

make

spells

certificates

1982

interest

levels.

deposits

out

failing

in,

guidelines

institutions,
from

rates,

The
or

association

empowers

a way

and

not
to

failing

interstate

regulators

subsidize

interindustry
it

declined,

authorizes

otherwise

for
and

act

having

improve

its

purchase
b ook net

worth.
The

importance

consideration

characteristics
FSLIC's

these

three
which

sets

reasons

why

the

current

environment.

THE

CHARACTERISTICS

Andrew

recent,

Carron

associations

with

and

scale

make

interest

high
the

than

However,

above

applicable.

associations

(total

less

than

large

the

not

date,

book,

and

costs.

The

Seventh

under

associations.

second,

failing

associations;

and

Plight
as

the

that

summarizes

detail.

and

growing

employee

places

would

particular
of

economies

sufficient

viable.

Reserve
have

Institutions,

C a r r o n 1s c h a r a c t e r i z a t i o n
Federal

third,

INSTITUTIONS

realization

inefficiency

associations

greater

rapidly

Carron

the

institutions

Thrift

officer

the

all

below

smaller,

costs.

$150 million)

Table

for

FROM SOUND

costs,

argues

the

associations;

discussed

S&Ls

after

first,

sufficient

are

of m a n a g e r i a l

clear whether

assets

service

appreciated

sound

DISTRESSED

distressed

the

from

operating

expense,

not

distressed

elimination

half

may

factors

average

operating

better

information:

failing

DISTINGUISH

important

dealing with

These

characterizes

compensation,
emphasis

for

procedures

THAT

can

background

distinguish

the

In h i s

procedures
these

powers

District,
failed

currently

small

proportionately

information

from

the

study

Table

H i g h P r o f i t A s s o c i a t i o n s vs.

Low Profit Associations

in the S e v e n t h D i s t r i c t

in June

1981.

(average)
Variables

Selected

Portfolio Measure

High Profit

Low Profit

Associations

^
Difference1

"t" V a l u e

(million dollars)
60,181

Total assets

167,614

227,795

- 3.24

(percent)
C o n s u m e r loans
Total assets(TA)

1.47

1.72

0.97

0.01

0.96

1.56

3.40

2.65

0.75

0.50

22.65

18.02

4.63

3.04*

63.55

62.14

1.41

0.76

0.89

4.66

3. 7 7

5.00*

1.54

6.53

4.99

8.89*

9.42

9.35

0.07

8.78

10.07

1.2 0

9.69*

1.4 2

1.66

0.24

2.97*

0.66

0.68

0.02

- 0.27

Occupancy, furniture and
fixture expenses/TA

0.24

0.37

0.13

6.77*

Advertising/TA

0.08

0.10

0.02

1.92**

7.83

9.5 5

1.74

-14.30*

Conventional variable

regular

1.27

renegotiable

rate m o r t g a g e / T A
Passbook*

rate

mortgage/TA
Conventional

0.25

NO W *

and other

savings

accounts/TA

Certificates with denominations
of l e s s

than

$100,000/TA

Certificates with
of

$1000,000

denominations

or m o r e / T A

Federal Home Loan Bank
advances/TA
Prices
Mortgage
Deposit

loan rate
rate

Selected

Expense Measures

Total operating
Salaries

Total

expenses/TA

and w a g e s / T A

interest

expenses/TA

*
^Indicates

significant

least

the

.01

l evel.

^Indicates

significant

least

t he

.05

lev e l .

High profit

0.75

a s s ociation * low profit

associations.

Brewer

the

[1982]

study,

S&Ls

operating

income

deviation

above

associations
assigned

profitable

profitable
are

taxes.

the m e a n

for

those
low

association

This

result
Yet
in

is
of

this

returns

difference
points.
to

differences

Eisenbeis

real

and

economies

careful

several
less

for

less

their
large

than

the

$60 m i l l i o n vs.
that

that

the

least

mortgage

portfolios.

profit

correct
not

have
low

facts.

and

who

had

find

[This
that

stable

and

clear

the

First,

deposit
Federal

cost

rate.
Home

primarily

the
seven

basis

profitability

supported

that

the w o r k

specialize

earnings’ performance

particularly

the

risk.

institutions

only

the

rate

among

banks

District.

differences

their

low

reflect

efficiency.
for

profit

Second,

Loan

and

$227

district,

profitable

that

data

high

interest

differences

commercial

expenses,

not

this

finding

are

average

Reserve

are

associations

attributing

operating
it

profit

superior managerial

examination

average

low

returns.

[1982]

However,
or

and

mean

Carron's

differences
In

profit

the

Federal

exposure

standard

high

assets

i n d u s t r y ’s p r o b l e m s

important

net

unprofitable

this

one

below

average

parts

their

that

average

certain

classed

indicate

their

CDs

data

Kwast

interesting

These

Seventh District.

than

deviation

smaller

one

standard

the

according

are

incomplete,

high

scale

than

associations

p o r t f o l i o ’s e x c e s s i v e

cost,

costs.]

all

S&Ls

with

resulted

lending

groups

not

Carron

estate

attributable

between

Thus,

interest

has

two

Associations

suggests

agreed

its m o r t g a g e
exposure

their

generally

into

is m u c h

evidence

unprofitable

group.

assets

characterization may
It

profit

(average

and

divided

before

and
the

association
million).

Bank

the

Seventh

institutions
profitable

advances

District
pay

reveal

significantly

associations

rely

a percentage

their

total

salaries,
the

assets.

Third

occupancy

differences
These

and

are

data

finally,

advertising)

small

support

and

compared

Carron's

This

Second,
simply

suggests

lower

interest

reflect

associations

Carron's
result

fortuitously

managers
support

this

associations

arguments.

active
of

expenses,

Carron's

the

the
to

with

scale

are

primary

funds

better

managed,

associations

the

factor.

profitability,

that

interest

healthy

Regulation

diffficult

lower

the

liabilities— with
to

expense.

First,

important

Q
that

crucial

expense

may

suggesting

Such

may

profitable

argue

ceilings,

better managers.

Unfortunately,

interest

(for

associations,

than

the

finding

Regulation
are

total

larger

subject
be

exploit

not

it w o u l d

the

profitable

determinant

case,

hand,

expenses

two' e x c e p t i o n s .

average

composition

other

arguments.

characterization

the

having

were

attempts

profitable

for

differences

are

the

non-interest

lower

findings

economies

differences

restrictions.
profitable

that

are

S e v e n t h D i s t r i c t weak, i n s t i t u t i o n s
ones.

though

the

that

finding

would

is u n c l e a r w h i c h

correct.

PAST FSLIC POLICIES TOWARD FAILING S&Ls
Traditionally,
on

institution's

book value
of

net w o rth

point
a

was
facto

cutoff

the
were

replacement

level

assets

cutoff

point,

FSLIC's
of

liabilities).

lowered

Such mergers
the

the

book

net

below

4 percent

point

near

FSLIC

has

intervention

percent

intervention

arranged
to o f f e r

in effect.

forced merger,

three
and

1982,

benefits;

iii)

the

occurred

In N o v e m b e r

January
is

have

(the b o o k v a l u e

5 percent.

and,

bad management;

worth

Originally,

fell

intended

decisions

been

predicated

assets
when

1980,

the

3 percent.

the

often with

injection

new

ratio

Currently,

below

the

cutoff

Typically,

economies

less

the

competitor.
scale;

capital.

ii)

The

Growing
While

failures

Inappropriateness
the

due

FSLIC

all well-suited

unanticipated

two

problems.

benefits

agency

The

Problem with

worth

not

decline.
capital

with

interest

economies

value

that

scale

Economies
large

from

risk
as

(total

1979,

the

they

are

large

provide
a

staff

the

limited

necessary

not

part,
face

three
in

size,

mergers.

assets

principal

are
in

the

value

and mo r e

excess

instance,

doubts

economic

to
of

are

lessen

Furthermore,
were

much

rationale

for

better

when

both merging

force

Chicago

S&Ls.

the

banking

Allowing

such

the

retail

large

dealing

the

uncertain.
associations

other

hand,

segment

market,

not

left

continuing

be m o d e s t

genuine

This

rationale

it w a s

this

four

many

the

institutions

competition.

that mergers

recognized

obtain

associations.

$150 million).

the

net

began

a dominant
in

liabilities)

difficult

failing

applicability

likely

already

substantially

conventionally

than managers

institutions

are

market

associations

and

scale

less

i n d u s t r y ’s e c o n o m i c

surviving

financial

number

largest

three

large

association.

For

there

with

acquiring

markets.

Thus,

hand,

caused,

the

rise

became

banking

could

other

isolated

C o r p o r a t i o n ’s p o l i c i e s

ceasing

the

are

assets

policy;

associations

merge,

the

are

The

with

inefficiency,

failures

rates.

mergers

supervise

began

managers

rate

F S L I C ’s m e r g e r

large

rates

injections

clear

interest

and

Consequently,

even

are

able

dealing

operational

with wide-scale

hand,

above,

Mergers

interest

(market

one

Policy

are w ell-suited

dealing

the

mentioned

the

FSLIC

mismanagement

movements

policies

fraud,

economic

are

currently

benefits.

yielding

any

Nevertheless,

the

mergers

ten
to

continue

explains

the m e r g e r

"By
by

important
policy

using mergers
cost-cutting

as m u c h

trouble

spots

1982,
In

play

the

across

all

the

prior

a means

own

FSLIC's

strategy.

to p a s s a g e

supervisory
securing

industry's

either

interest

spreading

associations,

subsidy was

in u s e

tool w hen

outside

the

Garn-St

a problem

capital we

net worth

Richard

are

possible

conserving

FSLIC's

the

industry's

accounting

Pratt

Germain

Act,

cannot

resolved

seeking

spread

over

insurance

the

industry's

fund"

[Pratt,

84].

other words,

program,

role

rates

would

engineered

authorized

the

FSLIC
fall

was

simply

rescue

Congress.

The

Garn-St

Germain

the

capital more

attempting

the

industry

result

was

the

Act

regulators

use

to
or

buy
some

net

time

until

program

worth

logical

evenly

certificate

extension

such

a policy.

THE

NET

WORTH

Title
purchase

the

net worth

promissory
cash

CERTIFICATE

note

worth

issuance
creates

stock

30,

repayment

unless

excess

ratio
of

The

net w o rth

its

the

contains

worth

2 and
net

bear

act

forces

has

ratio

income

capital
these

broad

risen
the

When

above

FSLIC

the

net

may

same

their

net

way

expires

repayment.

concerning

required

demand

ratio

the

certificates

2 percent.

worth

Since

certificates

guidelines

not

rates,

treat

the

concerning

institution will

has

(much

provisions

interest

regulators

purchase

notes

associations.

purposes

announced

3 percent,
income.

promissory

identical

earlier

authority

FHLBB

distressed

regulatory

certificates.

net

between

percent

act

must

The

for

FSLIC's

however,

repayment

hands.

capital

The

1985.

Recently

worth

issued

certificate

certificates

equity).

on March

the

changes

certificates

authorizes

certificates

and

necessarily

Act

PROGRAM

When

begin

the

repayment

exceeds

the

net
in

percent,

the

FSLIC

may

not

demand

repayment

excess

percent

net

income.
The

issue

guidelines.
guarantees
purchase

these

principal

which

limits

can

percent

are:

a s s o c i a t i o n ’s n e t
the

guarantees

worth

and

these

guidelines

certificates
Table
ratio

and

indicate

14
the

that

net worths
1 982.

valued

They

gives

approximately

953

less

than

associations

percent

total

percent

distressed

worth

interest

program
rates

situation may
worth

may

category may move

0 and

3 percent

all

over

but

percent

were

then

they

savings
have

for

and
net

data

associations

would

not

fallen

Then

eligible,
above

the

net

worth

the

second

some

while

cutoff

point

FSLIC

any

one

their

for

cease

net

The

worth

data
they

had

first

half

They

represent
these
3

approximately

participation

year,

the

year

is ,

negative.

the

However,

their

below

need

can

losses.

2 and

qualify

the

The

between

that

1 and

ratios

formerly
and

y e a r ’s

asssociations, formerly with
others,

percent

suggest

the

between

that
the

FSLIC

associations.

already

half

assistance.

worth

The

in m i d - 1982.

quantity

assets.

money

loan

losses

distressed;

lost

candidates

according

portfolio

the

assets;

purchase

the

and

year.

worth

restrictions

losses

y e a r ’s

not

associations

and

half

their

1 percent
it m a y

one

y e a r ’s

these

since

any

3 percent

However,

improve.

become

the

100

their mortgage

assets.

have

time,

than

therefore,

percent

the

concerning

a s s o c i a t i o n ’s n e t

between
any

a number

guidelines

2 and

associations

distressed

net

the

a breakdown

over

associations

percent

at m o r e

spreads

would,

subject

are

between

y e a r ’s l o s s e s

assets;

percent
is

a s s o c i a t i o n ’s n e t w o r t h
amend

interest

issued

net

the

worth

negative
3 percent

assistance.

net

Table 14
The

Spread

Mortgage

the

Number

Portfolio

Relationship

between

for

Institutions

Reporting

Ratio

Worth

Net
2

Average

Number

100

Worth

on Mortgage

to T o t a l
Losses

to T o t a l

Number

Assets

in J u n e

Assets

1 to

Average

Portfolio
(%)
1982

(%)

Average

Size

100

Net

Spread

the R a t i o

the

and

Number

Size

Total

Average

Number

Size

Average
Size

134

154

$112

13 4

117

293

$149

-100

136

19 3

167

256

$165

-100

to - 2 0 0

225

314

115

301

225

188

402

$593

-300

to - 2 0 0

355

344

466

271

146

$355

300

223

$193

TOTAL

465

$264

$252

11 7

$218

109

$199

953

difference

between

the

SOURCE:

Federal

Home

Semiannual
NOTE:

The

spread

earnings

Loan

Bank

Financial
on

and

Board

Report,

the mortgage
the

262

average

June

1982.

portfolio

interest

cost

the

of m o r t g a g e s .

average

interest

Moreover,
permits
market

the

S&Ls

worth
and

value

distressed

Bank

and

S&Ls

the

augment

a
as

guarantee

program,

While

clear

The
the

the
net

FSLIC

merger,

available
time

worth

number

the

recent

The

guarantee

recognized

that

losses

that

are

chances
time

will

for

decide

that

appropriating

occupancy

or
to

outlay.
a

will

not

interest
has

also

increases

the

will,

the

net

between

two

end,

net

worth without
the

example,

the

futures

total

costs

the

dissipating

the

cut-off

Their

costs

over

point,
net

regain

worth

the

The

occur,

are

measure

worth

approaching

market).

net

worth

cut-off

form

can
of

gambling

Managers

worth

a way

buy

revenues.

interest.
ultimate
can

viability

revenues
Other

nevertheless,

their

they

time.

b o o k net

below

level
and

permits

resorting

reduce
that

are

such

associations
have

certificate

good

program

buys

viability.
is

important.

contribute

If m a n a g e r s
the

process

enhanced

salaries

investments

risky

35
for

the

rise.

the

because

cut-off

ultimately
net

again

important

above

profitability.

once

become

failure.

deplete

below

participate

may

a good

associations

net

features

not

ultimate

permits

ratios

primarily

book

rates

other
is

begin

is u s e f u l

factor which

worth

remaining

expenses

program

associations

reaction

failure

probably

worth

the

large.

association's

Some

latter

Management

net

returning

these

potentially

cash

net

associations

continue

currently

with

This

which

between

participating

how many

doomed

assets.

without

procedure

difference

precisely

program

association.

will

the

rates

fall

book

1982,

accounting

interest

industry,

for

Unfortunately,

June

fixed

worth

associations

guarantee

immediate

worth

certain

net

a new

unless

bolster

their

result,

announced

b ook net

book value

worth

is n o t

their

percent,

assisted,

recently

increase

program.

three

Board

economically

viable

and
(in

associations,
reduced.

previously

This will

management

While

the

also

attempt

has

operate

forever.

extends

long

and

the

decline

mortgages
of

the

not

deposit

observed,

properly.

associations

offsetting

only

managers

associations
viable

agency

worth

threat

and

losses

purchase
this
that

increase
task

the m e a n

for

due

similar
control

program makes

possible

answered

personnel."

This

have
the

old,

this

for

that,

clauses

that
be
the

Growth
process

managed

such mismanaged
merged

out

process

This

that

are

will

give

expenses.
to w e e d

out

incentives

to m a n a g e r s

’’Q u e s t i o n s

the market

claiming

are

Moreover,

assets.

expenses

regulators

offering

not

low-yielding

being

and

accelerate

operating

contended

worth

operating

while

time.

self-healing

is n o t

from non-viable

due-on-sale

very

guarantee

net

group

the m o r t g a g e

with
of

the

some

guidelines

institutions.

dynamics

seems

further

regulators

latter

new higher-yielding

their

to m i s m a n a g e m e n t

decline

longer,

However,

distinguished

association

exhaust

the

pre-emption

guidelines

losses

turnover

process.
an

operate

compensation
be

Repayments

attempted
of

the

institutions.

steady,

incentives

subject

would

this

time-consuming

associations

partial

remain

compensation

has

above

the

rates.

suggest

percent

associations,

viability
the

the

have

net

and

institutions

following

ultimately,

additional

Because

difficult

associations

accelerates

FHLBB

that

a s s o c i a t i o n ’s

interest

partial

10 p e r c e n t

the

will

appropriate

non-viable

rates

associations

will,
The

than

it w o u l d

existence.

viable

respect,

accelerate,

base

The

insure

interest

allow

to
this

cause

should

life

allow viable

portfolio will
turn-over

the

They

to u n d e r t a k e

economically

been made

important.

incentives

closure,

association.

permitting

program

ones.

reduce

willingness

restructuring

threatened with

place,

too much:

long

term

rather

than

it m a y w e l l

that

the

corporation will

associations
It

despite
with

could

net

capital

allowing

these

to
be

that

permit
the

changes
to

The

not

costless

program

operate,

cash.
the

improper management.

particularly

interest

rates

allows

operating without

injection
to

determining

which

fail.

program

continue

due

discretion when

hands.

government

associations

substantial,

values

losses

exercise

realize

cash

explicit

potential

remain

present

and which

important

fact

negative

itself

assist

also

the

private

and

need

the

associations

injection

However,

FSLIC

These

potential

not

FSLIC,

exposing

continue

losses

fall

low.

Summary
In

conclusion,

ability
only
the

the

improves

FSLIC

torwards

increases
these

the

with

delay

mismanagement

to m a k e

successful.

guarantee

incentives,
task

them.

The

non-viable
the

point

cash

Because

unclear,
appear

outlays,

the
to
it

also

finding

viable

due

costs

betting

remains

that
be

of
by

Corporation

merger
of

While

it m u s t
loss

the

less

partners
a

the

does

It n o t
to

for

permit
cash

improper
to

detect

program

delaying,

seen whether

the

avoid
the

many

contribution

begin making
to

improves

associations.

C o r p o r a t i o n ’s a b i l i t y

ultimate
be

allows

associations.

significantly

viable

program makes

at w h i c h

the

program

economically

C o r p o r a t i o n ’s e x p o s u r e

regulators
any

worth

deal with

difficult

associations.

Although

requiring

dealing

Corporation

net

managerial

increasingly

institutions

the

are

outlays,
management
this

also

they w i l l

this

the

tactic

sort

it
of
of

unclear.
not
will

need
be

DUE-ON-SALE

Title
in

the

The

late

clause

gives
part

the
of

Prior

1970s
is

the

lenders

management

case

that

the

during

employ

and

Wellenkamp

periods

When

high

lender must

price

the

t e r m of

loan.

interest

charge

rates

unexpectedly:
he
any

wishes

for
sell,

due-on-sale

rise

loan

borrower

provision

charge
and

the
are

Court
The

that,

often

life

pass

the m o r t g a g e

price

the m o r t g a g e

to
for
on

rate
used
The

retain
the
to

would

over

the

reflect

issue

received
in

the

court

argued

their

property

rate

the

alienation."
a

profit,

expected

the

over

the

lenders

mortgage.

also

the m o r tgage.
if

buyer

set

When

increases,

house

the

used

a portfolio

ruling

the
on

maturity,

the

was

mortgage

to m a k e

before

maturity.

controversy

selling

funds

the m o r t g a g e

1978

restraint

that

all

clause

1970s,

adjust

life

incentive

a higher

before

California

from

cost

repaid

expected

the

a mortgage,

average

the

has

the

controversy.

"unreasonable
rate

little

increasingly

al.

contracts

the

event

emerged

contracts.

payable,

their mortgage

borrowers
and

loan

1970s,

the

that

loan

transferred

during

Supreme
et.

and

the

clause was

interest

due

There was

adjust

rates

mortgages

can

prevented

above

controversy

in m o r t g a g e

loan

however,

America

unexpectedly,
the

the

California

according

sold

considerable

interest

fixed

The

B a n k of

legal

loan

rates

borrower.

represented,
a

interest

clause

the

loan

purpose;

unreasonably

setting

the

raised

the

"clause"

declare

rates.

attention with

clause

the

this

ends

conventional mortgage

security

this

interest

tool

of m a n y

rising

the

Act

due-on-sale

securing

for

existing mortgage

the

1982

a high-risk

clause

higher market

the

option

protect

began

national

the

period

over

property

transferred

use

provision

lender

primarily
be

Ill-Part

PROVISIONS

can

along

If
avoid

with

the

house.
to

recoup

higher

this

situation

their

funds

when

courts

lenders

equally

and

state

California.

Some

clause

existence
toward

the

significant
to

was

In a n

California

sold,

during
in

order

and

the

states

the

other

the

1970s,

lenders

relend

the

for

since

ultimate

sense,

the

real

the

property

estate

the
a

clause

sought

funds

classic

the

parts
1970s

debate

not

laws

clause

decision

operating

enforcement

Despite

attention was

apply

within

prohibiting

decision.

the

directed

had

over
the

controversy were
decision was

the

country.

generated
the

between

being
And

enforceability

California

the

gains

state

clause
in

ruled

regulation.

and

financial

explicity

federal

used

the

windfall

courts

most

enormous

significant

superseded

confrontation

the

reasons.

Wellenkamp

Second,

were

had

national

issues

rights

market.

also

two

in o t h e r
of

Wellenkemp

Wellenkamp

the

market

against

institutions

states,

economic

clause

the

chartered

estate

over

set

lines
in

prohibition

interpreted

other

California,

restricting

decision

the

situation

legal

real

a debate

laws

the

clause

restrict

California
gains.

sixteen

along
the

and

federally

California

First,

model

a house

extended

noninstitutional

the

repeatedly

rate,

California

recurred

the
that

This

regulatory

goals.

Steps

Toward
Even

prior

significant
heard

the

California

Reinstating
to

legal

case
v.

of
de

the

act,

Clause
much

development.
Fidelity
la

Cuesta

of
The

Savings
and

the

controversy

United

States

has

been

Supreme

ended

Court,

and

Loan

Association

Glendale,

decided

that

the

clause,

loan

June

contract

favor of a federally chartered institution, could be enforced despite the

1982,

existence

state

the

federal

issue

regulations,
Board,
room

constituted

for

the

loan

include

the

clause

The
federal
of

ending
The

act

use

The

term

and made

credit

loan

it."

case

the

federal

decided

exclusively

argued

that

the

Federal

Home

Loan

regulation which

federally

unions,
and

was

Court

Thus

contract

relatively

for

clause

sale

a broad
to

property

residential
both

the

federal

refers

secured

for

over

"real

carries

state-imposed

"lender"

remedies

the

This
Supreme

scheme

supplement

controversy

and

include

"pervasive
to

The

Congress

specifically

act

provides

agency,
credit

1982

the

associations,

act

override

the

contrary.

and

chartered

mutual

exercise

Bank

left

banks,

savings

this

banks

option

for

could

portfolio

purposes.

1982

the

pre-emption.

states

and

management

authorized

savings

law

use

the

a person,

manufactured

the

however,

lender

and

real

it w i l l

financial
to

Title

loan

mortgage,

specifies

defined

contracts.

loan

and

government

that
fixed

the

contracts.

advance,

property

toward

restrictions

for

Ill-Part

long way

property

Real

act

are

institution,

loan,

The

providing

property

real

property.

borrower

clause.

state-imposed

lenders

homes.

the

clause

refers

further

short;

override

loan"

matter

restrictions

range

lien

the

defined

all
by

or
to

rights
the

and

loan

contract.
There

are

two

act

defines

First,

the

during

the w i n d o w

ruling

prohibiting

protecting
the

date

enacted

the

important
a

(October

the

are

period"

subject,

enforcement

security

on w h ich

"window

period,
the

qualifications

state

1982).

the

loan.

the

in w h i c h

for

three

general
mortgage

years,

the

clause

for

The

window

period

prohibited

Loan

contracts

the

clause

created

federal

contracts,
any

reasons

during

date

this

state

other

covers

the

override.

the
the

period

created
law

than
period
1982
are

from

Act
thus

subject
1985.
for

state

restrictions

The

state

legislature

state

chartered

act;

however,

made

by n a t i o n a l

banks,

and

federal

S&Ls

courts

banks,

and

the
any

institutions

state

federal

and

savings

state

within

banks

the

case

provides

for

years

cannot

and

Second,

they

exist,

accelerate

three

savings

unions.

can

legislatures

federal

credit

clause,

loan
the
of

until

the

after

federal

enactment

reregulate

loan

associations,

act

forbids

property

October
override
of

the

contracts

federal

savings

enforcement

transfers

family members.
The

act

essentially

restrictions

the

loan
The

contracts
act

also

security
clause

for

over

three

the

Court

lenders,

adjust

the m o r t g a g e

addition,
management

the

that

however,

period

does

explicitly

enact

period

the

can

enforced

clause

state

state-imposed

allow

the w i n d o w

protecting

ruling

those

state

restrictions

states
laws

prior

regulate

chartered
to

lenders.

protect

the

use

the
the

security.

purposes

are

significant

made

are

where

best

progress

mortgaged

against

the

efficiency.

and/or

the

not

act

viewed,

toward

properties,

the

clause

from

settling
and

cannot

an
a dispute

to w i n d f a l l
be

used

rate.

considerations
on

1982

situations

economic

restrictions

the

owners

interest

and

as m a k i n g

arguments

grounds

equity

during

than

gains,

losses

around

grace

irrespective

other

perspective,

year

clause;

override

Reinstatement

the w i n d f a l l

justify

the

states

loan,

reasons

Overall,

originated

Supreme

economic

use

clearly

Interpreting
The

the

federal

use

support
the

compatible

c l a u s e ’s u s e
These
for

clause

with

are

arguments

the

housing

difficult

ultimately

revolve

industry.

lenders

for

recent

efforts

portfolio
financial

and

monetary

reform.

reasonable

approach

interfere with
increasingly

the

a
to

time when

enforcement

portfolio management,

entire

circumvented

the m a r k e t

clause

restrictions

deregulation movement
by

the

and

one way

in
or

the

represents
on

the

end,

another.

clause
are

A RE-EXAMINATION OF DEPOSIT INSURANCE

Federal

deposit

insurance was

after

the wor s t

banking

1933,

one-third

were

than

merged with

slightly

other

better.
became

par

because

value,

arising

from

attempted
reserve

investment

securities

their

sellers

sales

pay

off

all

1933,

guarantees
deposits
this way,
the

United

losses

declined

after

its

until

198 2 .

that

deposit

any measure,

failures

1982,

deposits

amount

the

insurance
4,000

forced

sell

loans

and

been

1933

Thereafter

failures

commercial

banks

fractional

securities
funds

deposit
par

from

value

for
of

rarely

100

per

exceeded

closed

the banks

the

that

their

$100,000.

runs

their

success.

With

these

insurance

currently

sales

and

declined

losses.

need

small

withdrawals.

experienced

to u n d e r

were

result,

the

experiencing

only

full

only

deposits

hurried

has

their

insurance,

eliminates

fared

time

full.

the

closed

deposit

federal

and

simultaneously

sufficient
in

1933

operate

one

depositors

receive

and

loans

acquire

they wil l

suffer

any

either

numbers

redeem

banks

volume

introduced

large

they w ere

they were

prices

and many

almost

the

maturing

deposit

from

hold

and

in
1929

institutions

when

history,

States

Between

failed

could not

Because

large

insurance

banks

introduction.
In

the

States

the m a x i m u m

federal

resulting
By

the

they

United

Thrift

difficulties

in U.S.

unable

bankruptcy

depositors

were

their

banks

liabilities,

than buyers,
banks

into

cash

to m e e t

the

forced

the

banks

occurred

deposits.

deposit

and

were

financial

their

sharply,
to

failures
their

the

c o u n t r y 1s h i s t o r y .

commercial

depression

that

the

institutions.

that

the

to w i t h d r a w

the

fearful

percentage

many

the w o r s t

basis,

sounder

Many

depositors

crisis

introduced

The

banks

and

assets.
number

year

bank

immediately

10 b a n k s
Federal

per

year

Deposit

Insurance
the

Corporation.

banking

structure

introduction
insurance
the

Nevertheless,
has

deposit

system

economy most

changed

time

effectively

to
in

described

dramatically

insurance,

this

and

see
its

the

past

reasonable

whether
present

elsewhere

it
form

continues

this

years

examine
to m e e t

or whether

issue,
since

the

the
the

changes

needs

may

needed.
In
deposit
the

this

insurance

FSLIC

unions—

spirit,

for

savings

structure

and

Gam-St

agencies—

conduct

questions

the

and

loan

studies

considered

operation,

the

insurance,

insurance

public

consolidating

completed
article

and

will

insurance

discuss

premiums

law,

depository
deposits
become

insured

and

for

insured

insolvent.

inequitable,

premiums

of
3)

the

current

NCUA

risk,

for

system

savings

the

for

private

financial

condition

deposit

insurance

agencies.

The

studies

than

15,

1983.

only

extent

two
of

later
of

these

April

issues;

insurance

bank

purchasing

the

implications
of

banks,

credit

affects

potential
5)

federal

In parti c u l a r ,

depositors
the

three

and m utual

system.

the

basis,

and

the

banks,

and
are

This

risk-sensitive

coverage.

Premiums

not

requires

commercial

possibility

Congress

the

institutions

effectively

briefly

premiums

are

three

submitted

Risk-Sensitive
By

the

how

a voluntary

disclosure

for

insurance
1)

the

Act

associations,

are:

insurance

increased

FDIC

the

additional

basing

Germain

total

the

insurance

in p r o p o r t i o n
and

Thus,

all
large

deposits

subsidize
as

deposit

smaller

and

their

institutions
banks
banks

and/or

beneficiaries

are

that
that

more
not

levied
total

are
tend

the

insured

deposits,

not

equally

to h a v e

operate

risky

banks.

shouldering

their

risky

smaller

less
This

even

risky
not

fair

though
and

all

likely

proportion
fashion

only
share

appears
of

the

costs, but also encourages institutions to assume additional risk, in an
attempt to reap additional rewards from the higher yields that riskier
projects typically offer, while incurring no additional insurance costs.
To discourage such behavior, the deposit insurance agencies have adopted
regulations defining appropriate operating behavior and on-site examinations
to monitor compliance.

This has increased the regulatory burden borne by

insured institutions and constrained the range of activities open to them.
These constraints have interfered with the ability of the banks to provide all
the services that they believe are in their best interests.

As an alternative

to these procedures, it has long been suggested that the insurance premiums be
related to the risk characteristics of the bank balance sheet.

This would

make the premiums comparable to the premium structure for most other types of
insurance.

Race drivers pay higher accident insurance premiums than

university professors, teenage drivers than adult drivers, and owners of
buildings without sprinkler systems than owners of buildings with such
systems.

Likewise, riskier banks would pay higher deposit insurance premiums

than less risky banks.
The major barrier to introducing such premiums has been the difficulty of
measuring default and interest rate risks, the two major risks incurred by
depository institutions, with sufficient precision.

Although still difficult,

recent advances in our knowledge of the operations of financial institutions,
in the ready availability of data on computers, and in examination procedures,
have made quantifying risk somewhat easier and risk-sensitive premiums more
feasible.

In addition, because the higher premiums on riskier activities

would discourage banks from engaging in these operations, shifting to a
risk-sensitive premium structure would permit a significant reduction in the
degree of bank regulation and supervision and would be consistent with the

current trend towards deregulation in financial services as well as in other
industries.
Deposit Insurance Coverage
Future changes in the percentage of deposits insured, resulting from the
study’s proposals, (to be published in April, 1983), could have significant
implications both for the likelihood of runs on banks by depositors and for
the risks incurred by the banks.

The lower the percentage of each deposit

account that is insured, the greater is the number of depositors potentially
imperiled by bank failures and the more likely is a widespread attempt by
these depositors to withdraw their deposits, whenever doubts arise about the
financial integrity of the banks.

On the other hand, at least some

depositors, particularly large ones, will be more careful about the banks they
use.

By choosing those they consider least risky, they implicitly exert

pressure on all banks to avoid assuming undue risks.

This private market

influence on the risk behavior of the banks would be diminished as the
percentage of each deposit account insured increases and may be expected to
disappear altogether when deposit accounts are insured in full.

Then, in the

absence of risk-related insurance premiums, banks would have incentives to
gamble on the outcomes of risky activities.
Two of the proposals to modify the current system of insuring the first
$100,000 of all deposit accounts in different names are to 1) insure only
transaction accounts and, possibly, savings accounts, or those accounts that
can be transferred quickly out of an endangered bank and, thus, cause hurried
sales of assets at depressed prices, and 2) graduate the insurance coverage so
that it insures 100 percent of the first $100,000 of each account and
progressively less of larger amounts, say, 75 percent of the next $100,000, 50
percent of the next $100,000, and so on.

These, as well as other proposals,

are likely to receive thorough examination in the studies.

IMPLICATIONS FOR MONETARY POLICY

The introduction of the Super NOW and money market deposit accounts poses
two questions for the Federal Reserve in its conduct of monetary policy, at
least in the near future.

One question concerns the extent to which continued

emphasis on monetary aggregate growth will enable the Fed to achieve the
desired impact on the economy.

The other question concerns the Fed's ability

to control monetary aggregate growth.
The two questions reflect the two-stage process inherent in the present
conduct of monetary policy.

At the first stage, the Federal Reserve

establishes ranges of growth for a set of intermediate targets that are deemed
consistent with achieving desired economic goals expressed in terms of
employment, inflation, and GNP.

At the second stage, the Federal Reserve uses

its policy instruments (the supply of reserves provided through open market
operations, the discount rate, and reserve requirements) to control the set of
intermediate targets.

At present, these intermediate targets include various

monetary and credit aggregates.

Primary emphasis was given to Ml as an

intermediate target until fall 1982, when emphasis was shifted to the broader
aggregates because of distortions caused by the new accounts and other
factors.
The two-stage process, describing the current conduct of monetary policy
can be summarized as the impact from reserves, R, to money, M, to GNP:
R + M -► GNP
Influence over the Final Economy
The Federal Reserve's influence over the economy via the use of the
monetary aggregates (that is, the transmission of the effects of changing the

growth rate of money to the real economy) is best understood in the context of
the income velocity of circulation.

Income velocity (v) measures the

relationship between the level of nominal GNP and the quantity of money as a
ratio.

If the monetary aggregate rises faster than GNP, velocity falls.

Conversely, velocity increases to the extent that GNP growth is greater than
money growth.

This relationship summarizes the money to GNP stage of Federal

Reserve influence over the economy:
Mv * GNP
In order to maintain that influence, the Federal Reserve needs to
anticipate what effect the new accounts will have on the velocities of the
various monetary aggregates.

The evidence suggests that the MMDAs are

extremely popular, and that shifts of funds into MMDAs from non-M2 sources
have contributed to the recent rapid growth in M2.

Thus, it is highly likely

that M2 velocity in the first quarter of 1983 will be lower than it would have
been without the new accounts.
It is not so easy to predict what will happen to Ml velocity, however.
Shifts into Super NOW accounts from non-Ml sources will raise Ml growth, while
shifts into MMDAs from Ml sources will lower Ml growth.
will be is unclear.

What the net impact

However, while Super NOW accounts have not been as

popular as MMDAS, the limited evidence available suggests that more funds have
been shifted into Ml, than out of it.

Thus, Ml velocity in the first quarter

of 1983, may be lower than it would have been without the new accounts.
Once the transition phase is over, the Federal Reserve will be able to
recognize the new velocity relationships and use them in formulating policy.
In the interim, however, it will be difficult for the Fed to know, for
example, whether faster growth in M2 results from a stimulative policy on its

part or from an increase in the public’s desired holdings of that aggregate,
reflected by a fall in velocity.

In the latter case, holding the growth of M2

during the transition period to its previous rate would exert a depressing
effect on economic activity, because the public, in order to satisfy its
increased desire to hold money, would decrease expenditure levels.

With this

difficulty in mind, the Federal Reserve has decided to calculate the 1983
targeted growth range for M2 from a February/March average base instead of the
usual fourth quarter average base, in anticipation that the bulk of the money
shifts will have occurred by then.

Also, to allow for some further shifts,

the Fed also raised the M2 growth range projected for 1983.
In the past, when transactions balances earned no interest, or (since NOW
accounts became available nationwide in January 1981) regulated interest
rates, the public's demand for the various monetary aggregates fell whenever
market rates rose.

This made velocity a function of interest rates.

In this

situation, when judging what target money growth rates to set, the Fed needed
to take into account the variability in the relationship between money and
income caused by changes in interest rates.

Now that money holders can

receive market rates without foregoing their money holdings, the interest
elasticity complication in policy should be less important.

Thus, after the transition period is over and the new relationships are
established and recognized, it may become easier to conduct monetary policy by
setting intermediate targets for money.
likely to be difficult.

However, the transition period is

This fact has been acknowledged by the Federal

Reserve in its current shift toward greater flexibility in policy
implementation.

100

Control over the Aggregates
Federal Reserve control of any particular aggregate requires that the Fed
know the relationship between its policy instruments and the aggregate to be
controlled.

This relationship can be summarized as,
M = mR,

where M is the monetary aggregate to be controlled, R is the level of reserves
and m is the multiplier.
Imagine that the Federal Reserve wished to control the level of
transactions balances in an ideal situation in which the following conditions
prevail:

transactions balances are clearly distinguishable from other

deposits; all and only transactions balances are included in Ml; all and only
Ml components carry the same reserve requirement; and the Federal Reserve
controls the supply of reserves precisely.

In such a world, the multiplier

relationship, m, between Ml and R would be known exactly and the Federal
Reserve could control the quantity of Ml precisely.
In the real world, however, the multiplier relationship is not known
exactly.
hold.

There are many ways in which the ideal situation does not quite

For example, reserve requirements are imposed on non-personal time

deposits and Eurocurrency liabilities as well as on transactions accounts.
addition, reserve requirements on transactions accounts are graduated —

percent on the first $26.3 million and 12 percent on transactions accounts
above this amount at each depository institution.

Further complicating this

situation is the act’s provision exempting the first $2 million of reservable
liabilities at each institution.

Moreover, the Federal Reserve’s control of

the supply of reserves is imprecise because other factors that are difficult
to predict, such as float and Treasury balances, also affect the supply of
reserves.

101

Furthermore, financial innovations have made it increasingly difficult to
distinguish transactions accounts from other balances.

Money market mutual

funds, repurchase agreements, and other new instruments have some transactions
features, for example, but they are not included in Ml and they are not
subject to reserve requirements.

The existence and growth of these

instruments have complicated the Federal ReserveTs conduct of monetary policy
by raising questions concerning the appropriateness of the current Ml
definition as a measure of transactions balances.

All of these factors serve

to make the multiplier relationship less predictable, thereby impairing the
Fedfs ability to control the monetary aggregates.
How will the latest accounts affect this situation?

Because of its

unlimited transactions features, the Super NOW account has been classified as
a transactions account for reserve requirement purposes, and it has been
included in Ml.

Because a market rate is earned, however, it is possible that

some nontransactions funds might be placed in Super NOW accounts as well.
The MMDA is more difficult to classify, because it has limited
transactions features.

Furthermore, the act mandates that MMDAs not be

subject to transactions account reserve requirements.

Personal (0 percent)

and nonpersonal (3 percent) time deposit reserve requirements have been
imposed on MMDAs, and they have been included in M2 along with other savings
and small time deposits and money market mutual funds.
As the public adapts to the new accounts, funds are shifted from other
sources that may be subject to different or no reserve requirements.

Such

shifts make predictions of the multiplier relationship more uncertain than
normal.

For example, as the data in Table 15 demonstrate, MMDA balances have

grown very rapidly to exceed $300 billion by early March.

It is difficult for

the Federal Reserve to know where these funds have come from and to anticipate

102

Table 15

The New Accounts and Honey Market Mutual Funds
(billions of dollars, not seasonally adjusted)

MMDA

Super NOW

MMMF
241.8
239.8
235.0
226.4
219.7

0.0
0.0

1
8
15
22
29

8.8
59.1
87.5

0.0
0.0
0.0
0.0
0.0

Jan

5
12
19
26

119.8
160.6
192.8
217.6

n.a.
11.7
15.4
17.4

216.2
215.2
212.3
210.7

Feb

2
9
16
23

242.8
261.3
276.2
289.5

19.5
21.6
22.7
23.5

209.0
207.0
204.6
203.4

March

2
9
16

300.4
310.6P
318.8P

24.6P
25.8P
26.6P

205.5
199.91
198.41

Dec

Sources:

Federal Reserve Statistical Release H6 (508) and Board of Governors
of the Federal Reserve.

Note:

p represents preliminary data.
n.a. data are not available.

103

Table 16

Interest Rates Paid on MMFs, MMD, and Super NOW Accounts
(at annual percentage rates)

Week Ended

MMMF

12-1-82
12-8-82
12-15-82
12-12-82
12-29-82
1-5-83
1-12-83
1-19-83
1-26-83
2-2-83
2-9-83
2-16-83
2-23-83
3-2-83
3-9-83
3-16-83

8.3
8.3
8.3
8.2
8.1
8.2
8.0
7.9
7.8
7.8
7.8
7.8
7.8
7.8
7.7
7.8

MMDA
_

10.4
10.5
10.4
10.0
9.8
9.4
9.2
8.6
8.6
8.4
8.4
8.1
8.1
8.1

Super NOW
—

8.2
8.0
7.8
7.7
7.4
7.2
7.2
7.3
7.0
7.0
7.0

SOURCES: Data on the money fund 7-day average rate are taken from the
Wall Street Journal according to Donoghue.
Data on national average MMDA and Super NOW rates are from the Bank Rate
Monitor.

104

what effect they will have on the multiplier relationship.

The data in Table

15 show that money market mutual funds have declined, but their diminution has
been only a small component in MMDA growth.
Further, it is not clear how long the new accounts will continue to draw
funds from other sources.

At first glance the data in Table 16 suggest that

while interest rates paid on the MMDA in paticular have declined since the
early promotional efforts, they still remain above average MMMF rates.

this case it could be expected that MMDAs will continue to grow at an above
long-term equilibrium rate.

However it should be noted that SEC restrictions

force MMMFs to quote simple interest rates, while depository institutions
typically quote compound rates.
more apparent than real.

Consequently, the MMDA-MMMF differential is

In this case MMDA growth may continue to moderate,

and the transition phase may have already run its course.

Conclusion

If
will

the

transition

period

soon be

able

relationship

that

exists

and

reserves,

time,

the

restore

new velocity

should

also

growth

review

the

between
its

indeed

nearing

situation,
the

chosen monetary
over

the

relationships

that

link

accounts

the meantime,

make

completion,

recognize

control

clarified.
new

monetary

the

new

control more

and

of m o n e y .

the m o n e t a r y
the

the

Fed

multiplier

aggregate

quantity

however,

the
At

the

aggregates

introduction

difficult.

level

to
and

same
GNP

105

Appendix
The New Accounts and MMMF Competiton

The data in Table 15 show that money market deposit accounts have grown
rapidly, while Super NOW accounts have been less popular.

At the same time,

money market mutual funds, the chief competitor for MMDAs, experienced 14
consecutive weeks of decline and, by March 9, assets had dropped by almost 17
percent, from their December 1 peak.

It is difficult to determine, however,

how much of this decline represents movements of funds into the new accounts
at banks and thrifts versus how much has gone into other kinds of mutual
funds, the bond and stock markets, or has been spent, because MMMF interest
rates also have declined over this period.

While the new deposit accounts may

have worsened the outlook for the MMMF industry, they are not expected to
destroy it.

In fact, as Salamon [1983] has pointed out, at the same time that

the total value of money market mutual funds has been declining, the number of
funds has been growing.

At the end of November 1982, before the introduction

of the new accounts, there were 270 MMMFs.
by the end of February, 1983.

This number had increased to 304

106

WHAT REMAINS TO BE DONE

The thrust of both the present act and the DIDMCA of 1980 is toward
deregulation of the U.S. financial services industry.

Together, the two acts

take so large a step toward deregulation that they rival in importance the
banking legislation of the 1930s; indeed, they effectively repeal much of that
legislation.

IS DEREGULATION A GOOD THING?
Why is it a good idea today to remove regulation initiated during the
1930s?

The movement toward the deregulation of depository institutions is not

an isolated phenomenon:

deregulation has earlier been applied to the airline,

trucking, and securities brokerage businesses.

The generality of this process

suggests that a change has taken place in the theoretical underpinnings of the
regulatory impetus.
Theory of Regulation
The imposition of regulations can be justified in situations where
external economies or diseconomies exist i.e., where there are effects on
third parties that are not taken into account by industry participants
pursuing their own interests.

In these cases, their actions do not reflect

all the benefits or costs that they entail for society.

To achieve the social

optimum, participants must be shepherded into modifying their behavior.
The shepherding influence can be applied by a governmental authority in
either of two ways.

The actions giving rise to external diseconomies can be

forbidden (or rationed) by regulation or they can be discouraged by imposing a
tariff on unwanted behavior.

Conversely, where external economies exist,

107

society can encourage the activity either by requiring it to be done or by
making it financially rewarding.

Ultimately, then, the choice is between:

1) establishing regulations which impose hidden costs or rewards on the
economy, and 2) directly altering the price system to achieve the desired
objective.

The legislation of the 1930s adopted the regulatory approach.

Historical Background
The regulations of the 1930s arose as a reaction to contemporary
diagnosis of the Great Depression.

It was believed, for instance, that

excessive competition had weakened depository institutions and contributed to
the widespread banking failures.

In turn, bank failures spread and imposed

unreasonable costs on others; that is, they carried (and still carry) external
diseconomies.

After the Great Depression, safety and soundness were to be

ensured by eliminating the opportunities for both excessive competition and
imprudent behavior.

Competition was to be eliminated by Regulation Q, which

placed restrictions on interest payable on savings deposits and forbade the
payment of interest on demand deposits; restraints on permitted product lines;
and stringent standards to be met in chartering new entrants to the industry.
Imprudent behavior was to be limited by restrictions on portfolio composition,
and the prohibition of banks from, for example, the brokerage, investment
banking, and underwriting businesses.
These regulations have been in force since the 1930s, or, in some cases,
even earlier.

But times have changed: higher and more volatile interest

rates, greater ease of travel, and reduced costs of information storage and
processing, have rendered many of the old regulations obsolete and/or unduly
costly to industry participants.

In turn, the high incentives to avoidance

have also raised the governmental costs of enforcing compliance so that a
"regulatory dialectic" has developed.

108

In this situation, it has been judged time to deregulate and to replace
explicit decrees wherever possible, by a system of price incentives.
Nevertheless, it is appropriate to check, in each instance of deregulation,
whether society’s objectives can best be attained in this way.

Further, it

may be necessary henceforth to invoke the existing anti-trust laws to prevent
undue concentration in the financial services industry as in others.
it is necessary to know how to price the targeted activities.

Finally,

Recent advances

in the theory of financial economics make pricing feasible, if difficult.

PROGRESS TOWARD DEREGULATION
Taken together, the DIDMC Act of 1980 and the current Garn-St Germain
legislation constitute an enormous step toward the deregulation of the
financial services industry.

Nevertheless, even if the ultimate goal of these

acts is accepted— the achievement of a highly competitive, minimally regulated
financial system— some issues remain to be addressed.
Geographic Restrictions
Perhaps the most obvious area in which further liberalization would be
desirable— one dealt with only tangentially in the act— is the geographic
restriction of commercial banking.

For example, there remain geographic

restrictions on branching both within and across states.

Further, the Douglas

Amendment to the Bank Holding Company Act prohibits interstate acquisitions of
banks by bank holding companies.

It is odd that banks should remain more

restricted than S&Ls in this regard.

Since the passage of the McFadden Act in

1927, federal banking law has deferred to state law in these matters, and the
laws of most states are highly restrictive, particularly where interstate
banking is concerned.

109

The Garn-St Germain Act deals with these geographic restrictions only in
its emergency powers section.

Titles 1 and II authorize the acquisition of

closed, insured commercial banks and closed, or endangered thrifts by
out-of-state insured institutions.

These provisions expand financial

institutions1 interstate branching capabilities by permitting them to operate
deposit-taking offices in more than one state.

Clearly designed for

exceptional circumstances, the sections of the act allowing limited interstate
acquisitions are subject to a sunset provision calling for their repeal after
three years.

Thus, the deference of federal branching law to state

legislation has been disturbed only to a limited degree, and only temporarily,
except that branches acquired under the act’s emergency authority may be
retained after that authority expires.
Adopted for a variety of reasons in the past, but having the primary
effect of protecting narrow, parochial interests, state branching laws have
Balkanized the banking industry to a degree not experienced by any other
industry.

The kinds of arguments used to justify these restrictions —

states1 rights, the protection of small institutions, the preservation of
personal service, keeping money in the local community, the lack of any
clearcut superiority of branch bank performance, and soon —

have all been

considered and rejected as bases for protectionist legislation in most other
industries.

With some exceptions, students of the issue strongly favor the

dismantling and eventual elimination of state geographical restrictions on
branch and holding company banking.

One way to achieve this objective would

be to override or amend the National Bank Act and the Douglas Amendment to the
Bank Holding Company Act to allow national banks to branch nationally.

110

That these restrictions have been rendered largely ineffectual, except in
the case of deposit-gathering through local offices, by the establishment
across state lines of Edge Act corporations, loan production offices, and the
other, many and various nonbank subsidiaries of holding companies, is
irrelevant.

The restrictions still preclude a particular form of

organization, and a form that many banks and thrifts would choose, if given
the option.

In this event, anti-trust legislation could still be applied to

prevent undue horizontal integration in the industry.
Chartering
Another fundamental area of regulation, that neither the DIDMCA nor the
current act dealt with sufficiently, is entry.

While the two acts reduce

barriers to entry into specific service lines by existing institutions, except
in the emergency titles, they are silent on the issue of chartering of
new banks.

The traditional chartering process used by the Comptroller of the

Currency, the FHLBB, and most state banking departments gave considerable
weight to the financial condition of existing institutions and the
"convenience and needs of the community".

It is now recognized that such an

approach is basically incompatible with a competitive financial system.
Therefore, the chartering agencies, within the broad range of discretion
granted them by legislation, are working to adjust their entry criteria to the
changing environment.
At some point, nevertheless, it may become necessary to amend the
National Bank Act, in order to liberalize further the criteria that are being
applied in judging charter applications.

Asymmetrically, the Federal Home

Loan Bank Board has already been given the necessary flexibility in chartering
S&Ls and savings banks.

Title III, Section 311 of the act empowers the Board

to create and charter S&Ls and savings banks, "giving primary consideration to

Ill

the best practices of thrift institutions in the U.S."

Most state governments

are expected to respond by liberalizing their entry requirements for
state-chartered institutions, in order to avoid giving any advantage to
federally chartered institutions.
Product Line Restrictions
The original Garn bill would have liberalized restrictions on the
securities activities of banks, allowing them to both underwrite all types of
municipal revenue bonds and to manage money market mutual funds.

These

provisions were eventually dropped in one of the compromises necessary to
secure passage of the act.

The legislative history of the act also makes it

clear that, while permitting diversification, the Congress wishes S&Ls to
continue as major providers of funds for residential housing.

In recognition

of this, immediately on passage, the FHLBB withdrew its proposals to permit
S&L service corporations to engage in a wide range of activities, including
real estate brokering, the manufacture of mobile homes, insurance
underwriting, securities activities, and the operation of mutual funds.
During the pre-act hearings, commercial banks sought powers to underwrite
all municipal revenue bonds and to offer full brokerage services.

While the

act does not explicitly grant these powers, recent rulings under existing laws
by the Comptroller of the Currency, the FDIC, and the Federal Reserve Board
will enable banks, their holding companies, or service corporations to offer
discount brokerage services.

They do not, however, have authority to act as

dealers or underwriters of corporate securities or most municipal revenue
bonds.

Further, William Isaac, the chairman of the FDIC has recently

questioned the legitimacy of nonbanks1 (such as Sears Roebuck’s and Merrill
Lynch’s) entry into the banking industry.

Consequently, the question of

112

competition between banks and nonbanks (and, in particular, the securities
industry) is likely to surface again soon, and with greater urgency.
Nevertheless, the restrictions on the securities activities of banks are
one of the areas that need to be reconsidered carefully in light of their
original rationale, the possible inefficiencies they may create, and any
advantages they provide.

While such restrictions originated in the 1930s, in

response to abuses perceived at that time, the contribution of the securities1
abuses of a relatively few banks to the banking debacle of the 1930s, has
never been clearly isolated from that of other events occurring at the same
time.

The economic importance of these abuses —

egregiousness —

may have been exaggerated.

though not their

Moreover, there may be means,

short of divorcement, to achieve the ends intended by the Glass-Steagall Act,
means that do not sacrifice the potential efficiencies of combining banking
and underwriting in the same institution.
On the other hand, it is also possible to exaggerate the benefits of such
a recombination of commercial and investment banking.

The legal separation

restricts entry into investment banking only by a single class of institutions
— banks; ail others are free to enter.
Secondly, it has not been clearly demonstrated that potential conflicts
of interest, arising from a bank’s fiduciary relationship with two sets of
clients (borrowers and depositors), can be avoided by simply restructuring the
bank’s internal operations.

To the extent that this result is achieved by the

erection of a ’’Chinese Wall” , analogous to that separating bank lending and
trust department activities, the synergism alleged to inhere in such a
combination of activities —
to offer both of them —

which is the major argument for allowing a bank

would be lost.

The benefits to be derived from

commercial bank entry into expanded securities activities —

e.g., municipal

113

revenue bond underwriting —

appear miniscule, although this remains a point

of considerable controversy.
Third, there is little or no evidence on how much value customers place
on the convenience of being able to bank and carry out securities transactions
at the same institution.

On balance, the close matching of advantages and

disadvantages suggests the need for a much more fundamental reappraisal of the
Glass-Steagall restrictions than has been undertaken to date.
Depository Institution Powers
Both DIDMCA and the Garn-St Germain Act do much to expand the asset and
liability powers of nonbank depository institutions, particularly in the areas
of consumer and commercial lending, the offering of transaction accounts, and
—

since DIDCfs actions in late 1982 —

the offering of a savings deposit

instrument (almost) free of reserve requirements and interest rate
restrictions and a transaction account paying market interest rates. These
changes greatly lessen, but do not eliminate, legally enforced specialization
by depository financial institutions.

To achieve complete elimination would

require not only the removal of all maximum percentage restrictions on various
types of assets that thrift institutions may acquire, but also the repeal, or
further pruning, of the bad-debt deduction provisions that give savings and
loan associations such an enormous incentive to concentrate on residential
lending.

If the country still wishes to subsidize housing construction, it

would be preferable to make such subsidies direct and explicit, so that their
costs can be more clearly perceived and evaluated.
The intention of the broadened asset powers is to allow thrifts to
diversify their portfolios, in order to reduce their (and ultimately the
FSLIC’s) exposure to interest rate risk.

However, use of these powers may, at

the same time, increase thrift’s exposure to default risk.

While the judge-

114

merit at this time is that asset deregulation will reduce the risks to thrifts,
on balance, that may not always be so,
A less dramatic, but, as the discussion of the act’s effects on savings
and loan associations suggests, potentially effective way to achieve the riskreducing benefits of diversification, while continuing an emphasis on residen
tial housing, would be to add state and local securities to the list of assets
qualifying for the bad-debt deduction.
Ending Regulation Q
Interest rate deregulation, though a central purpose of DIDMCA and one
pushed still farther by the Garn-St Germain Act’s authorization of the new
money market deposit and Super-NOW accounts, is still incomplete.

At the time

of writing, the DIDC has postponed until its June 28, 1983 meeting, a decision
on a proposal to allow depository institutions to offer business organizations
an MMD account with unlimited transaction features and on a more far-reaching
proposal to accelerate the timetable for the complete removal of interest rate
ceilings on deposit accounts.

Until this provision is adopted, the prohibi

tion of interest on corporate demand deposits will continue to be circumvented
by such devices as repurchase agreements, subsidized loan rates, etc.

should be noted, however, that while a business market-interest-paying deposit
would be useful to small business, it would not prove attractive to larger
corporations.

Transactions accounts carry reserve requirements.

and, therefore, earn a higher rate.

RPs do not

Consequently, even though RPs must be

collateralized by government securities, they may remain a preferred
instrument for larger corporations.
Nevertheless, such circumventions are inherently clumsy and RPs, for
example, give rise to unresolved legal issues, concerning ownership of the
securities subject to repurchase.

Moreover, they have destructive

115

implications for the meaning and accuracy of Ml and pose at least transitional
difficulties for the conduct of monetary policy.

Again, the judgement has

been made that allowing depository institutions to set unregulated rates on
their liabilities will not involve them in excessive and unsafe competition
and further, that removal of Regulation Q will not interfere more than
transitionally with the conduct of monetary policy.
In this regard however, it must be pointed out that the problems caused
by deregulation for monetary policy may be more serious and long-lasting.
Complete removal of regulations on depository institution instruments, would
allow managements to change the characteristics of the accounts they offer,
whenever they judged it appropriate.

In this way, the situation could arise

that deposit characteristics could change with market conditions.
could in this way switch from Ml to M2 type and the reverse.

Instruments

Conducting a

monetary policy that uses a monetary intermediate target would become
difficult and could also demand a sizeable staff to monitor, record, and
interpret the continuing changes, as they occur.
Whether the market will, in fact, respond in this way is an empirical
question.

In contrast, it may transpire that freedom to pay market interest

rates will remove the incentive to modify the characteristics of financial
instruments and and to create new ones.

Such an outcome would favor the

conduct of monetary policy.
Emergency Powers
The ultimate consequences of those provisions of the Garn-St Germain Act
that are clearly of a transitional nature —

in particular, those authorizing

the issuance of net worth certificates to troubled thrift institutions —
not clear.

are

Whether the great majority of those certificates can be retired

within a reasonable time is questionable at best; repayment provisions are not

116

specified in the act, and the Federal Home Loan Bank Board has recently
established guidelines for the FSLIC to follow concerning repayment.
Repayment thus becomes conditional on the industry’s return to profitability.
The current provisions buy some time for further scrutiny of the problem, for
the natural healing process to occur as assets are repaid and reinvested on
better terms, and, most importantly, for interest rates to fall.

Absent these

events, the thrift problem will recur.
Deposit Insurance
The establishment of deposit insurance for banks and thrifts has largely
removed the external diseconomy arising from runs on depository institutions.
Although accounts are currently insured only to $100,000, in recent decades
prior to 1982, no depositor had incurred a loss as a result of a large bank
failure.

Secure in this knowledge, some banks have conducted operations that

are more risky than they would be in the absence of deposit insurance.

deposit insurance premiums do not reflect risk, risk-takers expose the
insurance agencies (and ultimately other depository institutions) to loss.
In the past, unacceptable degrees of risk-taking have been prevented largely
through regulations that prohibit specific types of unacceptable behavior.
As the deregulatory process successively removes restraints on depository
institution behavior, new ways must be found to prevent or discourage
unacceptable behavior, possibly by pricing insurance according to risk
exposure.

117

CONCLUSION
In short, the Garn-St Germain Depository Institutions Act takes a second,
important legislative step towards the deregulatory process set in motion by
the DIDMCA of 1980.

In doing so, it is expected to further the objectives of

efficiency and equity, spelled out in the DIDMCA of 1980.
nor the current one is a panacea.
be done.

Neither that act,

Progress has been made but much remains to

118

Footnotes

As Kaufman (1972) has pointed out, it is not necessary that the mortgage
loan rate exceed the institution's cost of funds at every moment in time. At
certain stages of the business cycle short-term rates are likely to exceed
long-rates. Then losses will be made, which must be recouped and dominated
over the full term of the loan by profits made during other stages of the
cycle.
2

While come commercial banks, mutual savings banks and credit unions also
have these problems, the position of those industries is not so precarious as
that of the savings and loan industry. Credit unions' assets are principally
consumer loans, which have shorter maturity than mortgages. Consequently, the
industry's earnings have had a better chance to rise with market interest
rates. Similarly, most commercial banks, having a loan portfolio with shorter
duration than S&Ls and making more use of variable-rate lending arrangements,
have been less exposed to interest-rate risk than S&Ls [Flannery, 1981]. The
mutual savings bank industry has been exposed to interest rate risk but it has
been protected by its high capital ratios.
3
The position of the thrift industry is examined by Carron [1982].
4
Cargill and Garcia [1982] gives the act's history, summarizes its
content, discusses its impact and the issues it leaves to be addressed.
^Fischer, Gentry and Verderamo [1982] provide a succinct description of
the bills that originated in the two houses of Congress and the reconciliation
process that led to the present act.
^Indeed Title I is based on a bill introduced into Congress by the
federal insurance agencies. Hence, it is widely called the "Regulators'
Bill."
^Such loans are subject to the same safety and soundness provisions as
apply to national banks.
g
"Window period" loans are those made between the date of state
prohibition and the date of enactment.
q

Title I, Part C, Section of the act gives similar flexibility to the
National Credit Union Administration (NCUA).
^During much of the 1950s and 1960s the ceilings were not binding.
However, although Regulation Q interest rate ceilings were raised several
times during the 1960s to permit banks to offer market rates on large time
deposits, there were other times when those ceilings were binding, resulting
in a run-off in the amount of large time deposits outstanding. Regulation Q
interest rate ceilings on large time deposits in denominations of $100,000 or
more were eliminated in the Spring of 1973. Such liabilities paying market
interest rates include MMCs, SSCs, jumbo CDs, federal funds and RPs, and other
liabilities for borrowed money.

119

^See also Hanweck and Kilcollin [1982] for a demonstration of small bank
success in dealing with interest rate risk.
12

This opinon was expressed during a telephone discussion with Gary
Gilbert of the FDIC, on December 16, 1982.
13
Under Section 2(c) of the BHCA the term "bank*' is defined to be "any
institutions...which (1) accepts deposits that the depositor has a legal right
to withdraw on demand, and (2) engages in the business of making commercial
loans."
14

The Board made this determination in considering the application by
American Fletcher Corp., of Indianapolis, Indiana to acquire Southwest Savings
and Loan Association, in Phoenix. The application was denied on the basis of
adverse financial considerations. See The Federal Reserve Bulletin Vol. 60,
1974, p. 868.
^However, his exemption was quickly amended through the passage of
Senate Joint Resolution 271, which limits the provision of insurance
activities by prohibiting the sale of life insurance and annuities.
16

These data are taken from the FDIC's 1981 Statistics on Banking.

^Fo r a more detailed discussion of the changes (and their implications)
to section 23A: Rose and Telley [1983] and Talley [1982].
18

The statute continues to define the parent holding company and its
subsidiaries as affiliates of the bank and thus limits financial transactions
between them.
19

Section 709 of the act prescribes that "an insured bank may invest not
more than 10 per centum of paid-in and unimpaired capital and unimpaired
surplus in a bank service corportion. No insured bank shall invest more than
5 per centum of its total assets in bank service corporations."
20

See the Report of the President's Commission on Financial Structure and
Regulation [1971], popularly called the Hunt Commission Report after its
chairman.
21

Jones [1979], provides a detailed analysis of progress toward financial
reform in the years to 1979.
22

For a summary and analysis of the DIDMC Act see Cargill and Garcia,

[1982].

A widely used measure of duration (D) is given by the equation,

m
Z
D

t=0

(l+ r)t

m
Z
(l+r)t
t=0

120

where Ct is the payment received in period t, m is the maturity of the asset,
and r is the riskless discount rate. The market value of a debt security is:
m
MV =

t=0

( l +r )

The rate of change in the market value of this security (given a permanent
change in the riskless rate r) is:

9MV
3r

m
I
t=0

1
l+r

tC.
(l+r)'

The percentage change is:
m
l

t-Q
——

■ / MV

- - - L

l+r

m
l

t=0

V
(l+r)*1 =
C

l+r

( l +r)

For more information on duration see Reilly and Sidhu [1980]. They discuss
three definitions of duration which correspond to different measures for r.
24

This example is that of Rosenblum [1982].

The estimate of the duration of a consumer commercial loan presented in
Table 5 assumes a loan paid off in two equal year end payments. It is assumed
that the discount rate is 10 percent. Therefore

( 1 . 1)

( — 1)- = 1.47

( 1.

( 1 . 1 )'

26,
Stephen T. Zabrenski and Virginia K. Olin [1982] report that, in March
1982, fixed rate mortgage commitments account for only 30 percent of all
mortgage commitments at large associations. On the other hand, the Federal
Home Loan Bank Board’s "Monthly Mortgage Survey of Mortgage Interest Rates,"
which includes both large and small associations, found that fixed rate
mortgages accounted for 53.5 percent of all loans closed in the first five
days of March. These results suggest that most of the variable rate mortgages
are being made by the large associations'.
^ S e e the Thrift Task Force Study of 1980 (pp. 107-123) for the basis of
the current calculations. For a discussion of the history and relative
severity of S&L taxation, see Biederman and Tuccillo [1974].
28

The report shows (p.Ill) that the minimum pre-tax net yield on a
nonqualified asset R ^ required to profitably hold more than 18 percent

121

nonqualified assets is:

R^ = (1 *00690-.00345(Y-18)
g ( .66190-.00345(Y-18) Q

1.54RQ ,if Y = 19.

Here R is the pre-tax net yield on qualified assets, and Y is the percentage
Q
of nonqualified assets and S&L desires to hold.
excess of 18 percent.

Y is always assumed to be in

Based on yields for Aaa municipal securities and Treasury securities,
1970-82. Data were obtained from Moody's Municipal and Government Manual,
1980, and Moody's Bond Survey.
30

A preliminary Federal Home Loan Bank Board Survey [1982] suggests that
a large portion of the money flowing into the MMDA will be drawn from other
accounts within the offering institution (38 percent from maturing
certificates of deposit and 30 percent from passbook savings accounts).
31

Kane's analysis is relevant to competitive markets. However, there is
evidence that depository institution markets are not perfectly competitive in
some areas of the country. In non-competitive markets firms price below
market rates. The Federal Reserve's Monthly Survey of Selected Deposits and
Other Accounts provide evidence of unaggressive pricing among Seventh District
banks of the 60 banks serveyed, only 3 offered a rate more than 100 basis
points below the ceiling on MMCs, and only 35 offered such a rate on SSCs. By
similar reasoning, banks in Chicago priced more competitively than those in
Detroit. Non-competitive institutions may continue such practices by not
aggressively pricing their new MMD and Super-NOW accounts. Where, however,
the opportunity exists for S&Ls to compete more effectively with banks both in
the deposit and loan segments of the market, institutions may be forced to
compete more aggressively than in the past. Such extra competition would
raise depository institution costs, while benefitting the consumer.
32

The authors thank Randall C. Merris for providing Table 12.

See the Federal Reserve Statistical Release, H6 (508) for March 18,
1983, table 3A.
Carron [1982, p. 91] found that economies of scale are exhausted for
institutions holding assets in excess of $140 million. Research on economies
of scale in commercial banking have, in general, found that scale economies
are exhausted at even smaller asset sizes. For a summary of such studies see
Taddesse [1980].
There are two problems with these studies. On the one hand they do not
control for changes in product quality; secondly, they may be vitiated by
changes in technology that render increased size desirable. See also McNulty
[1981, 1982].
35
36

Examples of such behavior are provided in Baer [1982].
The quotation is taken from Pratt [1982, p. 89].

122

In the context, the phrase "market interest rates" does not refer to
Treasury bill rates. Rather, the phrase means rates that are set by market
forces and are appropriate to instruments of immediate liquidity, high
security and substantial convenience. Such rates are expected to be below
Treasury bill rates.
38

The arguments for and against deregulation are discussed in greater
detail by Kaufman, Mote, and Rosenblum [1982].
39
Kane.

The phrase "regulatory dialectic" was coined by Professor Edward J.
See, for example, Kane [1982].

123

References

Baer, Herbert, "An American Tragedy: The Economics of the Savings and Loan
Industry," unpublished paper, June 1982.
Biederman, Kenneth R., and John A. Tuccillo, Taxation and the Regulation of
the Savings Loans Industry, Lexington, D.C. Heath, 19761975.
Board of Governors of the Federal Reserve Staff Study, Bank Holding Company
Acquisitions of Thrift Institutions, 1981.
Board of Governors of the Federal Reserve System, Banking and Monetary
Statistics, 1941-1970, Washington, D.C. 1976.
_____________________ Federal Reserve Bulletin, 60, 1974, 868; 68, April and
November 1982, 693-699.
_____________________ Monthly Survey of Selected Deposit and Other Accounts,
various issues.
Statistical Release, H6 , various issues, 1983.

Cargill, Thomas F. and Gillian G. Garcia, Financial Deregulation and Monetary
Control, Stanford, California, Hoover Institution Press, 1982.
Carron, Andrew S., The Plight of the Thrift Institutions, The Brookings
Institution, Washington, D.C. 1982.
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Loan Industry in the 1980s," Federal Home Loan Bank Board Research
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Chamberlain, Charlotte, and Robert R. Shullman, "How Consumers See Thrifts:
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______________ Bank Operating Statistics, Washington, D.C., various issues.
Federal Home Loan Bank Board, Survey 1982.

124

Federal Home Loan Bank Board, Savings and Home Financing Source Book,
Washington, D.C., 1955.
____________________________ , Combined Financial Statements, Washington, D.C.,
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____________________________ , Semi-Annual Report of Condition, June 1982.
Fischer, L. Richard, Elizabeth A. Gentry and Petrina M.E. Verderamo,
The Garn-St Germain Depository Institutions Act of 1982: What's in it
for You?11 The Consumer Bankers Association, Arlington, Va. 1982.
Gross, Laura, "Banc One to Lease Branch Space to Insurer,11 American Banker,
February 10, 1983, 1-20.
Jones, Sidney L., The Development of Economic Policy: Financial Institution
Reform, Ann Arbor, Michigan, The University of Michigan Press, 1979.
Kane, Edward J., "S&Ls and Interest Rate Regulation; the FSLIC as an In-Place
Bailout Program,” Housing Finance Review, Vol 1, No. 3, July 1982,
219-243.
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An Empirical Investigation," Journal of Finance, Vol 36, No. 5, December
1981, 1085-1101.
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Bank Research, Spring 1972.
_________________ , Larry Mote, and Harvey Rosenblum "Implications of
Deregulation for Product Lines and Geographical Markets," Federal Reserve
of Chicago Proceddings of a Conference on Bank Structure and Competition,
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Koch, Donald L., Delores W. Steinhauser and Pamela Wigham, "Financial Futures
as a Risk Management Tool for Banks and S&Ls," Federal Reserve Bank of
Atlanta, Economic Review, September 1982, 4-14.
McNulty, James E., "Economies of Scale in the Savings and Loan Industry,"
Federal Home Loan Bank of Atlanta, Review Vol. 30 No. 1, January 1981.
______________ , "Economies of Scale: A Case Study of the Florida Savings and
Loan Industry," Federal Reserve Bank of Atlanta, Economic Review,
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Moody's Municipal and Government Manual 1980 Moody's Bond Survey.

125

Moran, Micheal J., "Thrift Institutions in Recent Years," Federal Reserve
Bulletin, 68, December 1982, 725-738.
Pratt, Richard Testimony, U.S. Congress, Senate Committee on Banking, Housing
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Hearings before the Committee on Banking, Housing and Urban Affaris on
S2531 and S2532. 97th Congress, 2nd session 1982. p. 84.
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Rose, John T. and Samuel H. Talley, "The Bank Affiliates Act of 1982:
Amendments to Section 23A," Federal Reserve Bulletin November 1982,
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Risk," Federal Home Loan Bank of San Francisco Proceedings, of the
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Wall Street

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Review of the Literature,

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Zabrenski, Stephen T., and Virginia K. Ohlin, "Characteristics of Adjustable
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Journal, Vol. 15, No. 8 , August 1982, 21-24.

Full text of Working Papers (Federal Reserve Bank of Chicago) : Financial Deregulation : Historical Perspective and Impact of the Garn-St Germain Depository Institutions Act of 1982, Staff Study 83-2

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