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EXTENSION OF REGULATION Q AND

NOW ACCOUNTS
HEARINGS
BEFORE T111'
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
OF TIlE
COMMITTEE ON
BANKING, HOUSING AND URBAN AFFAIRS
UNITED STATES SENATE
-NINETY-TIIIB I) CONGRESS
FIRST SESSiMN
ON
S. 892, S. 1008, S. 1256, and S. 1257
BILLS TO EXTEN) CERTAIN LAWS RIELATING TO TIIE PAY-
MENT OF INTEREST ON TIME A\N!) S\INOS 1)EIOSITS AND
TO MAKE CLEAR TIIAT FEI)E IAL BANKING STATUTES DO
NOT PROHIBIT I)EPOXITORY INSTITUTIONS FROM OFFER-
ING NEGOTIABLE ORDER OF WITIIT)RAWAL, SERVICES IN
CONNECTION WITII CERTAIN INTEREST-BEARING DEPOS-
ITS, AND FOR OTIIER PURPOSES
MARCII 20. 21, AND 22, 1973
Printed for the uqe of the
Committee on Banking. housing and Urblan Affairs
U.S. GOVERNMENT PRINTING OFFICE
93-211
WASHINGTON 1 1978
.y CZAl/-
/ ..
COMMITTEE ON BANKING, HOUSING AN) URBAN AFFAIRS
JOHN SPARKMAN, Alabama, Chairman
WILLIAM% PRONMIRE, Wisconsin JOHN TOWER, Texas
HARRISON A. WILLIAMS, JR., New Jersey WALLACE F. BENNETT, Utah
THOMAS J. McINTYRE, New Hampshire EDWARD W. BROOKE, Massachusetts
ALAN CRANSTON, California BOB PACKWOOD, Oregon
ADLAI F. STEVENSON III, Illinois BILL BROCK, Tennessee
J. BENNETT JOHNSTON, JR., Louisiana ROBERT TAFT, Ja., Ohio
WILLIAM D. HATHAWAY, Maine LOWELL P. WEICKER, JR., Connecticut
JOSEPH It. BIDEN, JR., Delaware
DUDLEY L. O'NEAL, Jr., Staff Director and General Counsel
MIcIAEL E. BURNS, MinOrity Coun1sel
SUIvOMMITTEE ON FINANC-IAL I\SLTITUTIONS
TIIOMAS J. McINTYRE, New lHampshire, Chairman
JOHN SPARKMAN, Alabama WALLACE P. BENNETT, Utah
WILLIAM PROXMIRE, Wisconsin JOHN TOWER, Texas
LARRISON A. WILLIAMS, JR., New Jersey BILL BROCK, Tennessee
T. J. ODEN, Assistant Coun nl
(II)
CONTENTS
Page
S. 8_2 3
S. 12t)S ----------------------- .---------............. . 11
S. 1257 IT
IIST (W1" WITNlSSES
TuESIJAY. 3.nCI'i 20
Frank \VilIe. ('hirl-an. Federal l)elisit Insurance (irj-C ration ---------- IS.
('2arl ). I;mpii, *vl'ing ('l iri a . Federal llmie loAwn Bd nuI pl I -l--- -. . N
Grover E.nsley. executive ric, president, National Assoviation of Mutual
S savingss B banks --------------------------------------------------- - 45. 65
Gilbert G. Roessner, vice president, National League of Insured Savings
Associations. uc('ij'nlaned by Villiam '. MeKenna. general coinsel.. G
.lames It. Sloale. Massachusetts Bankers Association, Inc .............. 7 2
Edward J. I)nffy, Jr., president, Suburlan National Bank of Arlington,
Mass.. 2111(1 president. 3Massahulsetts ldependent Bankers Association,
on behalf of the Ilidepeldiellt Banikers Association of America, accom-
jnied by John Litneha. secretary, Massachusetts Association, and
Thomas Brickle, counsel, IBAA -------------------------------------- 100
W E,,EOAY, M.RCn 21
Gerge W. Mit Ile, l.i .Member. Bi ,a'd fi, GlIO'vrniws. Fe-doid lReserve Sys-
temn. 4a4cHiii,,Ijied by 'l']ialas ()'olltel, glleral colslll --------------- 1111
Ronahl AV. liaselton, president, (i'lilsulllers Saviigs Bank. WorVester.
Mass.. a'conll allit b 'by ll,,112s Zi04.sll. iol vice ilesidelit, ('c1Isuners
Savings taiik, and llliott A. ('arr. Savings aBank Assm-nition if Massa-
chlustis ------------------------------------------------------------ 19 13f
Tom B. Scott, Jr., United States savings ;iand Loan League, ac'mapanlied by
Stephen Sliplir --------------------------------------------------- 170
Joseph qT. Benedc let. (elh!rtian of the 1oard and president, First Federal
Savings and Loan Association. Worcester. Mass., anl(d past president.
Federal Ilome loa Bank (of Boston, on behalf of the Federal Savings
League of New England, the Massachusetts Federal Savings Council.
and the New hampshire ('Cooerative Federal Savings and Loan League.
aicconpanied by Jack Tracy, Gener'al Counsel, and Robert A. Clark.
president, Massahusetts Federal Savings Council --------------------- 18
John S. l[oIv(e
,
Savinigs Baliks Association if Massachusetts, accompanied
by Clyde S. Casady, executive vice president. and Elliott A. Carr. re-
search director ------------------------------------------------------ 19I
Everett P. lope. Massachusetts Cooperative Batik League, accompanied by
John J. McCarthy, counsel ------------------------------------------ 220
(llI)
lA1ST 1)1" W\IlTNI..ESl.S-t('ottitix,,d
TNIIIiDAY, 3MAum lI 22
Page
Jaie. I.. S.Siith, Deputy tUnder Secretary, )eiartn eit taf the Treasury,
atl' iitll)ai til by lowa'd IBleasley, Sic''ial Assistant t 225
Irancis E. Illinsoxi, executive rive pipsident, Mutual Savings Banks of
New lamnpshire, accomipatied bly Oliver )row'n. )resident. Sugar Hiver
Savings Bank. F'rederick Ilacket, ire.sitdeit, Coilcord Savitgs B:n uk, and
Kezithli ('handle'. presidlntt. Mlitual Savings laniks i)f New Ilanlpslhire 241
Eugenet i. Adams, iresith'lt, Anierica i Banktrs A ssOia tiill, ac.t'oinpal lied
I .y ('1:rl hu It. MeNei11, 'xtcli :ve 'iirec'toir of g'vni' lIIIICIt 'el:lIti s--- ---- -- 57
Walter N. l)eWitt, Nw lanillishire 'oimterciil lanks, act'oilllied loy
RiMia ird B. Ij tggtr, l il'('-i(liI)t, ().slivelt .Nattional hank. l ei',. New
1[ iih ire, 1'rde A. Whiti lwiirsiiletitrI ) t nt -Nat iona! Ian uk. IIall-
liver. New Ilamlhir,, .lI S. Ilh,y. vite resilient. Anioskt'a Na-
i)oinl Baunk, Mainliest or. N.II., aid J. Eugene ['ehih II. president,
Cheshire National Blnuk, l nf tie, N.I .------------------------------- 288
Senator Irving Fishmian, Member, M-ss, nc'listuIs Sftat $i'uia ti, a''voin-
lnild iy lrank I'itzjatrivk, directiir, Sjimi'inlietmtiissio)n Studying lDe-
mianl I liiasts if S:ivtiogs IMitlks -------------------------------------- 298
l,':a,i II. Ninie, jir'siiletit. National Assciatitin 40i" 'Mutual Saviti.s
[itti1- .. ti.(.:i tlfi'tl by C ('ive' V. I-isloy, e\ i't _, ritv e presidet,.
P. jTtnlres Rioranlai, getieriai ciOtl,sel. adl IDoanal[id I, l.\awsotl, assistant
d irpo wl<) of resteni(. --- -- -- ---- ----- -- -- -- --- -- -- -- -- -- .303
AI)I)ITIONAI, STATEMENTI- AND DA'A
lDnt rtee iveil fri Ellio)tt C'arr. dirmtir ol' resea reh. Savings ,Tink
A,4so(i:itiiitt (it' 3ias l4,o iIti't --------------------------------------------- 46
('halrts and ttilhs u''iit l , lf' [o Ftral Hom .... u 5-2
Possible at(,etIItiIets to 8. 1"25i;. lroiloseld Ibiy the Federa:l 11,imti' loia n
]lank i,,:ti -----.------------------------------------------------- 55
National League of Insured Savings Associations. letter anl supple-
minta ry statement l'rIn:i William F. .1ilKeit , genera I(',itinsel-vii'i,
president --------------------------------------------------------- 5
S:iulivips of third-l)arty withdrawal inst'uients ----------------------
Study oil impact of NOW' )int (uu)nnertialI hian ks from ti 3lassChcl iltt, ,lik
-
ens Association ---------------------------------------------------- 7s
Exhibits aeeomlpanying stattenixent Aif hissaliuc''hl tts IBtlakers Ass'o'i;tio-)_ 89
letter from h'lma '. Brickle. legal counsel, Inilepenient l:aukers Assiici-
:)itiiin of Ameria ------------------------------------------------- 103
Statistical s tudy suihiitt bIy tlie Saings lBitnk s Asso'iation oif Massa-
Clusetts ---------------------------------------------------------
104
Stte1' i'e',l'e I'cqirilmli'llts fio' comtmer'cial banks, te ------------------ 125
Er'v'lt ion of Ilie payxneits llei'lhtlli'l, statellitit lrtared iy the Federal -
Reserve System Steering ('uOittee -------------------------------- 130
Ad'ortising fair NOW a''unts ---------------------------------------- 142
Lt ter from Everett I'. Iae ,Massachusetts Cooperative Bank League .... 223
An ll.'is of ehatiges in tax alid i111 an " cunt lvI il:ilv('es.
-
tilll(' i'eo'i t:'l frain
Trtasur' department --------------------------------------------- 230
Ji-'tt'' ]t l liiZ a t l'ai't fr 'ihlgRe'oirdIlt 't'airit. i't''eit'l f'oml i'lvirii's
It. 3h'Ne.Xi 11. e-xt(nt i v aliri'.' ' Amiieri ca"l Bankers Assi i ttin ------------ 20S
St t(iitlit itf Froyldi 1P. K' iiliiw. MAl.ssa(cluetts ('m itl issi)noer of Ba uk ..- . 301
C0iufercuii', if Sltate Bank Sil'vi.'o's, l'1tle' fitnot XW. Smloot llnuliall,
tim irnan. ),ederal Iegislative ('onmittee and Co)mmissioner of Finnncial
lstitimn a. -'th...------------------------------------------------- 311
In\',.,th).. N[hrt-aa t, Insu-rance~t 0').. hott(,r t'r)m John E. H~ome, chairman ol*lO
the bl)i)l ---------------------------------------------------------------
314
Sto teniet-litt If lie 3lassaclet Is C'onsumier Bantkers, mi inp-------------------314
EXTENSION OF REGULATION Q AND NOW ACCOUNTS
TUESDAY, MARCH 20, 1973
U.S. SENATE,
C.03!) TirTr (ON BANK iING. HUSNNo AN) ITiBAx AFr.Ins.
Suw'I, MITT.: qi N INANCIAL INSTITUTIONS,
las/hington, D.C.
The subcoiiilIlittee met. lpiisiant to not ice, zit 10:0 .1., 11) 100111
5302. New Senate Ofice Building, Senator Thomas J. McIntyre
presiding.
Present: Senators Sparkman (chairman of the full committee),
McIntre. a1d Bennett.
Senator McINTYR-. The subcommittee will come to order.
Before discussing the Iamin" we are about to enter into I thought
it, might be of interest to note that this afternoon I will introduce leg-
islation to roll lak the prine interest rate to the Mlare.h 1. 1973 level.
I will do this 1,ecause in my judgment the President has been mani-
festlyv r1,l1,:a11t 1 eXe(lcis e the atiithoit\" graited hima uider tite Eco-
11)lc si al ilizati m Act of I)einbier 1971 to stabilize inteve.t4 rates
"at levels conswi-tent
with orderly economic growth."
I cite Is eviulce i the ablsence( of l)rotest, rest rit ion of protest or
weakness l1v the administration to the three increases in the prime
interest rat, that have been made in the last 2) months.
In late Il)eeemlvW some banks raised their prime interest rates to 6
percent. On .Iannary 4, those who bad not gone toG percent in Decem-
ber joined their colleagues in setting their prime rate at that level. On
February 26. all went to 61' percent and yesterday eight major banks
boosted their irine len(ling rate to 6/ l)ercent.
The Ecoonic Stabilization Act provides that the President-
Shall require the issuance of regulations or orders providing for the stabiliza-
tion of interest rates and finance charges unless lie issues a determination accom-
panied by a statement of reasons that such regulations or orders are not neces-
sary to maintain such rates and charges at levels consonant with orderly economic
growth.
Even if interest regulations or orders were not necessary at the time
the act was extended a year and a half ago, they are certainly necessary
today. Indeed. the prime rate increases announced this week are irre-
sponsible enough to convince me that we cannot wait for an obviously
reluctant President to take the action lie should and that rollback legis-
lation is the quickest and most effective response that we can make.
Ac.ordiuvzlv. ! he legislation I will illtro(lice today will establish
man(latory interest rate levels based on those being charged on
March 16. 1973. before the increase in the prime interest rate an-
nounced yesterday.
I am not saYing I believe these levels are completely justified, but
1 do believe as a practical matter that it is tile best the consumer Call
hope for at. this time. i
,It would be tremendoulsly difti<'ult al an admlinistrative nig-ht-
miiare to apply mandatory controls dating back to levels long in the
j)ast.
Con-ress needs to make a firm commitment to stabilize this econ-
omy and right now that means an end to spiraling' interest rates.
This morningc the subcommittee commenc'es whl1at will be 3 days of
of0111,_,'s with tile primary focus on two issues. First, tile extension
of flexible Reilatioli Q authority and, second. the recent. develop-
ment of what is referred to as NOW at+.oints.
Several bills have been introduced deal ing with both of these sub-
jects alld while 1 (10 not intend to limit tile .ulIcom)llittee to any one
hill. I do request from the witnesses that they concentrate their testi-
mony on S. 10',. a )ill that I introduced which would amend several
Feleral laws to make it clear that all couij)etinlg financial institutions
coull ofler -NOW account services to their cust oniers.
It is my understanding that the House SubIcollmittee on Bank
Su vision and insurance held Ieari ifs on a bill last. veek which is
substantially the same as al bill entitled S. 1256 introduced last, Thurs-
day by Sena'tors Sparmkmain and Tower.
Of 'onceri to me is the fact that dhrimui last week's hearings on the
House side tle great bulk of the discussion centered on how danger-
MIs ('0111
1
)etition is for the linalcial institutions who supposedly are
comlmetlaig with one another and that little, if any. discussion or Coil-
silerationl was given to the consmnuer who might also have a NOW
account.
So I would hope that time witnesses testi fying before the subcom-
mnittee this week would discuss NOWV accomts vith a focus toward
their customers rather than simply concentrating, on the profits of
individual banking institutions.
It has been said that no matter what -on call it, NOW accounts
are in effect cheeking accounts upon which interest is paid.
I canl see w0hv some competing financial institutions would be con-
cerned if only o1e gfou-p. 01W. group such as the mutual savings b:mks.
could offer this service while the others could not.
Because of the possible competitive inequities developing, in that
NOW a,.umints are presently limited to nimtivil saving banks in a few
States. I have introduced S. 100S which would allow commercial banks
and savin,_s and loan associations to also offer this new service to their
customers.
S. l 'ts also included credit anions, but in discussing this section
of the bill with the administrator of the National creditt Union Ad-
minis-tration and spokesman for the credit union industry, it might be
better to delay consideration of third party payment systems to credit
unions intil a later (late.
The Hunt Commission took this aplproach by recommending third
party payment systems for savings and loan associations and mutual
savings banks, bnt did not, suggest at this time extending services to
credit unions.
This is not to say. however, that I personally am opposed to credit
unions having third p'l'arty payment systems, b'ut the issue here today
seems to be more between mutual banks, commercial banks, and sav-
insand loan associations and it is probably necessary and even wise
to keep the smaller credit. union-, out of the'fi 'ght at this time.
In closing. I again wAant, to reiterate that I expect thew\itnesses in
discussing NOW accounts to give some consideration, some thought
to their depositors in this matter.
[Copies of the bills being considered follow:]
93D CONGRESS
InSroxS.
892
IN TilE SE1"NATE OF TILE U-NITEJ) S,'TATES-
'I~ in ft'. ! SPLKM-, Wiii Iv 1 0I :I ~ kNd fii~ V. T( ~ ('MTOii~& iiTi
]m il g. ) I Iii. which wo 1,0:ti \ Wval fhe--4 o htii11ltv il1.1k
A BIL
Tio aIitii(l. ,ectioii 4-1 of(i the -Nat jouni Miio Adt
1 Beh it cimcud 1;! ilhc Sciath mad Jol.Ls of1:jsuq
2 ircs o/ tlu Un i/id S/ohs of AiniriTh (a Conq1'u,,; vsscblcd,
rfht sectiioii 4(4 of thc -Nationoil IHoutbi Act. as a11iiieiide,
5 'i-.c. 4044. (a) (1) The CI IpI- rat ionhll estobIlisil a.
6I plllV reServe Wlit'l :41"1lI lie the getetclal resul-ve (of tilie
7 (oriiip atioli ail, a se(LilAo-y tesurve to vlicl all ,1 ie
S c02(1ted the tmiiouulis (d tile It('I);iiucts i1i,1(h by insur-ed
9 ilistitut iols 1ul'slulit to fo-Ititer
1
11iO iiolts of s"lsetion ((I)
.10 an1d thle credit S madle putistailt. 0 the fit-!t senteiLce of sIJ)-
it1 Section (e)
lid
Col-pontlioll 111,1N. al-colliplish tile purpose,' and
2 provisions (of Olis sertion 11N. rille:4, rcp-111,160W, orders. oi.
31 othenvisv n., it 111,1N. collider IICCVs--;1l,.V 01* App)-opi-inle.
.. 6 d-wh institution '111pliemioll for ilt,11I.-
5 alice is opprovvd bY the Corporation 2.1wil paY to dic Cor-
( ; ponitioll. ilk such Ill.mlicl. n., it -llall prccrilw, a pi-clilitim
7 for sitch jiv-iii-ance vyl.11 to olle-twelfth (of I lick. cell(IIIII of
Ilic tot.11 '111lotilit of all accotillt., of tile ill,111-ed Ill( jo
9 such illslitillioll. "."11,C]l 111-villillilt l),111 lot, paid at tile tinle the
10 cel-tificate k1sttvd hY dw Corporition undcr svc(ion 4039
.11 .1lid Ilicreaftcr ailliwillY, 111,11 luldel. pre-
12 I,\- tit(, Corpor,11joll ,Ilrll pl-cmillm ill,)\- he pnid scilli-
(2) If. It IIIL' CIO -(- Of MV 1)(TVIIIIAT 31, IIIL-
15 rc:- vrvc v(puds or exrecd, 2 per ceiii.ma of tile total oniollill
of '111 m-comils of ill.-Ill-ed Ikw1lll1cI--; (if Al in,111-cd ill"illitiolis
I T is (11, ,lwh vlw-w, Im 111-cmium 1111dul. Jon )-,] i-ra Id k of this
is sill),ectilm hc 11:1.valde bY olly in<111-cd illlitillion \\.itl-L
19 rc-pccl to its pivilimill ycor durill". the vc,11, coill-
20 lllcliciw-- - ()It )I;1Y I licXt --th-vet'di I I,-" 11ch Dccclillwr 31.
21 exccill t1wt 111c forc-4411(-- provisions of Illk sclovilce "hall
22 )MI I)C 0I)J)ilc;1l1lV 10 011V i1i'lli-cd in'tiniti.)II willi 1-cspect to
23 ;mv of Ilic twelity pivillimil ve.11, willi the pi-c-
24 11611111 VVU* COMItit'lWill" With tit(' do(C (oil WhiCh slich cer-
2.5 tificate is i sttvd.
I "(c) The Corporation is further authorized to assess
2 against each iiiured institution. additional preimhiivi for in-
3 surauce until tile amount of such lreinitms equals the aiomunt
4 of all losses and expenses of the Corporation; except that the
5 total amotliit so assessed in any on, year against any s11(.1
6 institution shall ]lot exceel one-eighth (& I per ((littlu of
7 tlie total ailoiuuit of the aot'Oti ts (of its ii u red IlIvI eulcrs.
8 " (d) (1) 'TlI Corporation shall itot, on or a ftcr the date
9 of eC1t inent of this sentence, accept or receive fut llie pay-
10 melits i the lattire of prepaymtients of fittLre prtuinhltis aS
11 -was foruirly required by this sulsection includingn' any ,,ucli
12 paylmntiis which have accrued or are payl le under sich
13 former proviions). Whet. no insured ilstittion has ai y pro
14 r-ata share of the secondary reserve, or has - any sUCLh shaT
15 not im1 ediatcly payal e to it, the ('orporation I rty takv 1,ilclI
16 Steps as it Y dccm appropriate to cost, ollt tiid (liscointimti
17 the secoiidarv reserve.
is " (2) The C rporation miuay provide foir tire adinstteui
19 (if pa lictsi n tade idelr foiner luro vision.i (of this stii .,,,ettim
20 or Ita ti or ti) I' 1uiatie ii u1,der sil.iscctioi s (b) aIud (c) of thiis
21 seetioll ill c ses (if l1er'.)"'e o l C0it(iiilation. trallsfe. of luitk
22 assets or assuiluptii i of liabilities. and sintilar t'a lIsacti us, as
23 dtfIttid )' flue, ( '(rlPolrtioto for tle puirpoises (of this paragraph.
2. (v ) The Corporation sh1al1 credit to tile sccmldlarv
2,5) reSerTV, AS of tile close of (vei Calen(lar Year .laet 1,0 ,
4
1 the outstanding balances of the secondary reserve, during
2 such calendar year, as determined by the Corporation, at a,
3 rate" equal to the average animal rate of return to the Cor-
4 poration during tile year ending at the close of November
5 30 of such calendar year, as determined by the Corporation,
6 on the investments held by the Corporation in obligations
7 of, or guaranteed as to principal and interest by, tile United
S States. Except as provided in subsections (f) and (g), the
9 secondary reserve shall be available to the Corporation
10 only for losses of the Corporation and shall be so( available
11 only to such extent as other accounts of the Corporation
12 wlich are available therefor are insufficient for such losses.
i3 No Iight, tille, or interest of any institution in or with re-
11 aspect to its pro rata, share of tle secoll~d-lry reserve slall
.5 be assignable or transferable whether by operation of law or
1$ otherwise, except to such extent as tie Corporationll ma
.1.7 provide for transfer (f such pro rata share in cases of merger
IS or consolidation, transfer of hulk assets or assunilption of
19 liabilities,'and similar tranisactions, as defined by tie Col-
20 poralion for lirposes of this sentence.
21. "(f) If (i) the statu of an iltsured institution as an
2'2 insned instituti(t,1 is termiiialed pilsiuit Ito ally provision
2:3 of section 407 or tile insurance of acculits of aIll ilsur(l
24 institution is otherwise t terminated, (ii) a conservator, re-
25 ceiver, or other legal custodian is appointed for an illsured
b
1 institution under the circnustances aud for the purpose set
2 forth in subdivision (d) of section 401, or (iii) tile Corpora-
3 tion makes a determination that for tile purposes of this sub-
4 section at insured institution ias gone into liquidation, the
5 Corporation shall pay in cash to such insitution its pro rata.
6 share of the Secondary Reserve, in accordance with such
7 terms and conditions as the Corporation may prescribe, or,
8 at the option of the (orpttion, the Corporation m1ly ap-
9 ply the whole or any part of the anouut -which would other-
10 wise be paid in cash toward the payment of any iudelbteti-
11 fless or obligation, whether matu'ed or not, of such instita-
12 tion to the Corporation, then existing or arising before such
13 payment in cash: Proridcd, That such payment or such ap-
14 1)lication need not be made to the extent that the p1rovisios
15 of the exception in the last sentence of subsectiou (e) are
16 applicable.
17 " (1) If, a1 tit ('10Se of 0i1y ])L'ccilCr :3, occtrri ti20" Oil
18 or after the date of eiactenict of jarag'phl (1) of suhseetion.
19 (d) of this se.t ion, the ammregate of thi primary reserve and
20 the secondary rewcrve equals or exceeds I - per cuntui of
21 the total amount of all accounts of iiiirel mcmbers of al.
22. insured instittiou but tte primary reserve does not, equal
23 or exceed 2 per centumn of such base, each insured institittion.'s
24 pro rata share of the secomldary reserve shall, duringg the year"
S. 892-2
0
I bieginning wvithi May 1 I (eXt q.e(.eediIlg suchi vlosve, he ii~ed,
2 to Owhext eat a voa i I. to di svlla uge stitel ii hiittuii ioll' Oiga-
3 till ol-it. plvilillll 11 are .siliseti (1j)il o the protelt i atllk
5 pel-(eiut age, to lie tilet aii it fl- a i iijI edj inlst ituIt ion ii- il
6 to be ilot Ic!' thianii(- Wi 1101' c liiIhaimi 70 pe.1 kent 11111 uf :'Ic
7 prllill as ilie('uCorpouration 11iily dlet enhlili; '111ill l se1
8 of ,itch. pr rl at a ihaws as V nll vdii1t in i set (e '1 il
10 SiCe iii tis SUMCA ti sc nSh all cuit11A OIiepra iVL. If. at TV1
11 dlom of~ anyix I )tvvtii 3hi 1 ovcti irili h ofiIr tihe Iast s it ei c
12 (of this ,ullset ion s1iali lecoti opera! we. b .~:~;
13) tile prim1airy r'vi-ve a II(1 tie Seconi daryw 1.t1-ve i, not at
34 least equtal Io 1 perci ( il At thle total aliluHml of aill
1( tu (If aity, imiliel 1111 11111 ((i pro( rata ' ian' (if thle sev-
.17 mida rv re~crve mtider I lie firhisitc l: Ie ot i sitlb hellOiL
18 ,;hall teiiiiiite with respect lI" its pr-ctiliiii tiader sulh'cvtiot
19 (bh) for ilit plettlitillIya I~t't' h1161ii1i' dttiig the caiciilir
20 N'tal' contlimenit'. (it M i' I Il(xi 't-cceill'u, stuch AI )ciib
22 fi vidiien te of lids SUiSMD 141111 1=~ i iu1111 Ollia It. If, at
2:3 the ClOo~if a-my Deiembei ir 1.the primary it.:-e equl
24 or' exceeds such(1 2 per ((tlt 1ilie Corpor~atloln siihI.l at .it
t iwe (whidth 1niwl be the euame fur dlh in'lired intituttiolts
I a Id lcaIiot Iew I'lt cri tili .MIN, I cIeX1 smice(il12 m .l1
2 vre)ancd ill iiv mccc iannecr as tile ( icpoitioiall il dttv-
J)Ilin~e. j)a-I ill iao1c to (I ibi'tiell iii!,611iltj its 1pro1 nata
4 (ie f tilie ev 1qayreere
5b (I) E:ach ii isuced instlitutliion shcal mok ci itcli (le-
r) posits i dcc (orioraioli"is iccav fromi time to timeW lie i-
7 (j1il.retI y (.all of Ille lede(J(ral Home11 Loaii Bank Board. Auvt
8 sitc (.;all Sh all be calk-iliat ed )wv opllvi II. a S peci iced jwc cll -
9 age. W1ii hi dhil 1.0 the Saome for all icisijled iicl 4itihulc. to ile
10 total aiiuict, of 11l witihdniab~le or reprciasable shares11
11icivesticcent, (ce-i 1 atcs, alcld deposits i each insured iiti-
2tut iou. No stich call slhall lbe iciade litless. such Board decter-
1:) mIines that tlit total a iiomlit (if suchi call. plus. lie citstmaidiugp
14t deposit pieviou-slY made pursiucij to suchi calls, doe ii14it
13 exceed 1 per ccithin (of the total ailionut of all witldniwahlhu
16 or reiiufcha .alle shaores, icivestucelt certificates, and deposits,
17 iii all inutred in~t itut io's For the purposes of this sulisect loll,
IS tile total accioulcts hierceialicve referred to) shall be (let erin ed
19 or ustimcated lbyv ,ich Board oi- inl sucit mcanuer as it 11caV
20) prescrib~e.
21 (2) Tile Co rpiration shia 1 credit as of c lie close of cztch
2'2 calendar year, to each deposit oittacidinig at suhl :lLc
2:3 return oll tie onita1idiig( balance, as detercieid by the ('or-
24 poratioin, (f such deposit during suich calenidar year, cuat
25 rate equal to the wecrage nnuiial rate of return, ais divteriueui
$
1 by the Corporation, to the Corporation dring tle year end-
2 ing at the close of November 30 of such calendar year, on
3 the investments held by the Corporation in obligations of,
-4 or guaranteed as to principal and interest by, the United
5 States.
GJ "(3) The Corporation iii its discretion, way at any
7 ine repay aill siti.li deposit s, or repay pro rata a portioU
s of each of such dpo'sitsf in such lil:t1mlier. .and under s1ch
-9 procedure a.- ti)'; ('ore iraIti,,u itmy prc- crilie. Ally procedure
10 for such pro rala repayment nIlay provide for total repay-
11 nent of any deposit, if total repayment of ally antd all
1.2 deposits of equal or smaller amount is likewu:,c provided for.
i:1 " (4) 'T'le provisions of sulsction (f) of this section
14 and of tie last sentence of stlIsectiin (e) of this sction
15 shall it' applicalle to deposits unIIder Otis sIlbsection, and for
1G the purposes of this sitlscctio ii tile rcferences ill such sub-
17 section (f) and such last sentence to the prepayments and the
18 pro rata shares therein mentioned shAll be deemed instead
19 to be references respectively to the deposits under this sub-
20 :-ection and the pro rata shares of the holders thereof, and the
21 references ill such stulweetion (f) to that subsection (except
22 the last such reference) and to subsection (d) of this section
23 shall be deemed instead to be references to this subsection."
93D CONGRE! S u
1ST
IES
NATE So?
1008N1FM
TA
Mifr'.N MI -rYnRF introduced tI w following hill I which Nva' rea d twico and referred
to the Committee on Battking. I [ounlg an;d 1Vihan Alinii
A BILL
T1o exte-nd certain hw rehl ing to thle ipaxlltitt of Iiterest on
ili and savings (lepoiits 11( to iiiokc clear that Federal
banking sattutes do lnot proiihit dcjiository institutions'.; Iromi
(ifierimg negotiable order of withidiial scvlice ill COlllive-
lion -withi certain intercst-Iiri iii deposit s.
Be3~ it cnaictd b/ tMe Scnotc mo1,4 Jnse' of IRYjn'cmint-
2 tires of the United States of AmeJrica in Con qpi'ess as-e??I1,cd.
3 That sect ion 7 of the Act (if Sept ci r 2 1 . I9 ( I '1i lic
4 Law 89-597) , is amended LY strikilllw(out "I 973" ziid ill-
51 swing in lien lhereof "1974".
6 Siw',. 2. Sect ion 19 ( i) (if ie Icdeial 1ecrve Ac(t (1 2
7 1S.C. :171 a) is amended by aIdding a t thle elld thiereo f theu
S fiillowinio new scllteicv ''Nothing' ill this Tar1gn1jl sh.1l lIse
HI
1. Const rued -as pro ilibili in p.1-11in (if iiit e itst ii a dlepw-sit
2 w'~ih respect to whiich thle )),ink may reipii c the deposituor
0 - to 4,ive niotie of an iiti)lidVe ilillaow.L not le.S-, thoan thirty
4 days 1iefire the withidni w;1 is liiiae. (Welliit i1I ill pilc( ice
5 1111 nice is no t reqireiid a iid the ic dpiisil or is allowed to.
1; niake Withdrawals bliiutiale ilijti ruieut for. the 1iiii)4ie
it i ' ~ingpymenti ito hird pers(onsi'i i III- oil IV1i-i."
SE. ;. Sectioni I8 ( i f tile Fedeil De)posit JnI'mr-
nte Act (12 U.S.C. 1828 ())is a in dcd by addinii. at,
1)the enld thereof tile foflowiii,7 new selitceitee "Nothing ill
This silbseitioliI shall 1 be olh,ticiel as prilhiiiiii payment of1
12 jjrcs 411 .1i aeoI wltl ili r~cspect to which Ille llik MAY
.i: rcylii'e the deplisiiot 14) gi1ve itotice( of, nu itteiidid wit-
dk(1INNwl 110t, es ICS 1lua1u 1liy r v da s ith oe tile Nvitlidi-awal is
15 ujde, eveit though !it L)ltiv suchi not ice is no4t requir-ed
i;aind the deplosit or is allowed to manke \viitdrNvals ])y iiego-
17 jade ii' ruiieutfor I lie purpose (if mnakiiig ilay,11ints to.
J8 third puersonis or o1terwise.''
i~) S~c.4. Paraglraph (123) of sect ion 10J7 of the Federal
21) Credit Unioni Act ( L2 U.S.C. 1757-1) is amended to i-all as
2t follows:
22) (12~) il a('uldalncv with te. s "1it4 ieL trllatiiol pvc-
23Scrilbed by tile A dilnuinirtor, (A ) to Sell (o Inviluihers
2)- negot able ci ceks ' (inlcludim ng rvelers, checks) andl
25 moneliy orders. muld to) e.aI ch!i , :el 4 tek i iiiuuy orders for
3
1 members, for a fee which does not exceed the direct and
'2 indirect costs incident to providing
such service and (B)
2, to allow its members to make withdrawals from their
4 share accounts 1y negotiable instrument for the purpose
5 of making payments to third persons or otherwise; and".
6 rSEC. 5. The last sentence of section 5(b) (1) of the
7 IIome Owners' Loan Act or'1933-(12- U.S.C. 1404) 'is
S amended to read as follows: "An association may allow
9 holders of savings accounts to make withdrawals from such
.1( accoiiuts by negotiable instrument for the purpose of making
11 payments to third persons or otherwise as lo1mg as the
12 association reins tihe right to require the advance notice
13 referred to in the third sentence of t0i paragr aIp."
93-211--73---2
-93n CONGRESS
So 1256-
IN TIlE,- SENATE OF TILE U1NITE1) STT'S
.. r. SP.ARKA..N (for ]imSel f and Mr. 'I'owl.:,:) (by r(que,.st) iut r(luced the fol.
lowing bill: which was rend twice :aml referred to the committeete on Bank-
ing, Housing ind Urban Affairs
A BILL
To extend certain law- resting to the payment of interest
on time and savigs eposits, to prohilnt depository in-
stitutions from pe'mitting negotiable orders of withdrawil
to be made witi respect to any deposit or account on which
remy interest or dividend is paid, and for other purposes.
1 Be it enacted b! the Scnate and Holuse of Representa-.
2 ties of the United States of America in Congress assembled,
3 EXTENSION OF AUTHORITY FOR THE FLEXIBLE REGULATION
4 OF INTEREST RATES ON DEPOSITS AND SHARE AC-
5 COUNTS IN FINANCIAL INSTITUTIONS
6 SECTION 1. Section 7 of the Act of September 21, 1966
7 (Public Law 89-597), is amended by striking" out "197t:"
8 and inserting in lieu thereof "1975".
1I
2
1 ]JOII II;ITrON ON CEITAI Y AC'IVITIIPS BY I)I"P()SIj'()IY.
2 INSTITUTE IONS
3 SE. 2. (0) No depository institution shall allow the
4 owner of a deposit or account oil which interest or dividends
- are paid to make withdrawals by negotiable instruments for
6 the purpose of making tralisfers to third Pa:ties, except
7 those withdiravals which may b e made. for a pel'iod of six
8 mouths begiuing oi tie (late of enactment, in accordance
9 -with the (otnltracht 'tl arranoent, alteredd into before
0 March 15, 197
0
.
1 1 (b) Foi- purposes of this section, the term "depository
12 institution" iueaus-
18 (1) any insured )ank as deflued in section 3 of tile
14 lederial l)epit Iisuraiee Act;
15 (2 ) any State bank as (le fined ini section #3 of the
1 ; Federal 1)ep sit Insiirace Act
17 (3) any umutal savings hank as (lefiied it section
18 3 of Ilie Fedleral )eposit Insuratice Act;
19 (4) any saving, bmank as defined in sectibin 3 of
'20 the Federal Deposit Inisurance Act;
21 (5) any insured institution as defined in section
22 401 of the National Housing Act;
23 (6) any building and loan association or savings
24 a1nd loan as.ociati u origalized an(1 operated according
2.5 to the laws of the State in which it is cliartereI or
1. organized: and, for uirposes of this piragraph, the term
2 a"Sta Ce" iicaus anlly State (if the United State,, tile I)is-
3 tri. o( C1(liullilia, alIy territory of tie Inited States,
4 l'uerto R ico, ( utam1. A.\icric. , Saiioa, or the Virgin
5 l-lands"
6 (7) aniy Federal credit union as defined in section
7 10 1)( f ilie Federal (C'redit Il lio Act ; or
8 (8) liv State cre(lit ulliol as defined ii section
9 I1)1 of tiec Federal Credit lnion Act.
10 (C) Any depository iltstitution which violates this see-
11 tiol 1,1l [be fiiied 51 .000 for each violation.
12 EXTENSION OF AUTIIORITY OF FEDERAL DEPOSIT INSUR-
13 ANCE COIOIIATIOX OVER. INTEREST RATES PAID ON-
14 DEPOSITSS BY NONINSIREI) BANKS
15 S,1c. 3. Section 18 (g) of the Federal Deposit Iusurance
.1; Act ( 12 1 '.S.('. 1828 (,)) is amended Ny-
17 (1) inserting in the second sentence thereof "or
is dividends" ill mteliately after "tile payment and adver-
19 ti-uii cl lt of intittrest" ; and
20 (2) striking out in the tenth sentence thereof
21 "(1)", and by further striking out in such sentence
22 ", and (2) there does not exist under the laws of such
23 ,State a bmik sulcr'isoiT agency with authority Com-
21 p1r',1ai le to 1111 tonlerred byv this sul Hectiolt, i ,ihuiding
-!5,"" .pecific;aiv tile a111iority to regguiate the rates of interest
4
1 and dividends paid by such noninsured banks on time
2 and savings deposits, or if such agency exists it has not
3 issued regulations in the exercise of that authority".
4 Si.:c. 4. The provisions of this Act shall take effect on
5 the thirtieth day after the date of its e(ac'tment, except that
6 the anendment imade by section 1 shall take effect on the
7 date of vinact meant of ,huis Act.
931) CONGRESS
IS. 1257
IN TIE ESlNATE OL' TH I TE IN I'1',) STATES
M.\ztll 1.). lilT:,
'M Y. SiARMi ANx (f I i ii-'If :i.i . I'. "l' \ i~ n) (hy li-t oil ',dwc , e, It' l-
I .iti I lllsi, I I ia I I i l I I )n I t I A t a t
A BILL
To exitiid for wic , a lr tile nti]i,Wi ' t'l i'l,. ihtxiltht r't la-
tiolil (if llili.\iillill i'atv- of iilliv-t ori di\'idh-lid..
1 D' it cwivtl 'd lJo iht S% ' i l,,dtN l , f I:i/i .. U -
'2 Iir(. of le l.' d Slf' . 1 i"l t'rf<'a in ( il '<q/rv ss .,, ..,cnlud.
3 T[hlalt sttifill 7 oi t let. A (if Sejki-liier 21. HOGl;; (Public
4 Law 89-597; 80 Slat. 82;10) i aiiiiiild. ik furlier
5 aiiild ly srikingl out "1)7:3" aid iwhvriiiig iii lieu
6 thereof "19(.74".
I
Senator M[CINTYRE. Before I call our first, witness I also want to
make it very clear something that is beginning to occur and I an not
going to tolerate it. and that. is tile witness statements.
The rules of the Senate Banking ('ommittee require witnesses to
provide copies of their written statements 24 hours ill advance of their
appearance.
This rule is essential in order for members of the committee and
the committee's staff to have an opportunity to exai line the testimony
(if the witnesses inl order to prepare for these hearings.
Mv letters of invitation to thw witnesses clearly state(d that tins rule
must, be complied with. but yet as )f early vesterday afternoon 2 or
3 *clok yesterday afterno(on, only one of'the witnesses appearing
today. (i'airjnln Wille of tie FI)I(' had complied with tile co i littee
rule.
If this conlinittee is to o)erate 1P1)onsibilv. witless statements mmmst
be receive accEordin- to the committee rules.*
Now, 1 have recently' I)evelle chairman of thiis slubcommittee on
Financial ilstitittilis. Th is is the very first, hearing I have held. In
view of this fact I ilten(I to allow th, witnesses scheduled todav to
testify even though tly did not (oml)ly. altminugh I do nllidelsialld
we d) have most of the statements i now\V, but they caime ill late last
Iight.
I Iowevr., any witneses swhle(lld(l for tomorrow who does not have
his testinmony submitted to tile comlllittee before 2 o'clock in tile after-
11o1 will not be allowed to testify.
In the future. mlter no circ"umstance wilI any witness scheduled
to testify be allowed to (10 so unless lie coinJ)lies'with this committee
rule. This ruild is designed to ap)ply to witnesses who requested to
testify and in hoionring that request the committee may iml)ose what
seems to m, reasonable requirements. Only in those cases where the
committee specifically requests testinmln. frol recalcitrant witmiesses
or iln Cases of overriding extemnuatin g (1ilcu stances or vleme the
subcommittee )v unanimou s colsviltl. the uIemlbers ill attelldal.o woil ul
aglee. to waive te meces-:sit v for a statenemt.
So (only ill these cases Wvill this rule hV OV0, r1iddhhmi hY the sllb(wom1-
mittee.
Now. I am very halpl)v this morning to) wvc'lmle our first witness, tle
Chairman of the Federal i)elosit Iliis'livaice Corpioation. tile loior-
able Frank Wille.
Mr. Wille. will von advance to the witness table ? I have vyour state-
milit. It. will be illcolm4i'ate(I in full ill tle record. Ill such way you
would (leeni it best to make your case. yo-u can proceed to test fv.
STATEMENT OF FRANK WILLE, CHAIRMAN, FEDERAL DEPOSIT
INSURANCE CORPORATION
MNIr. Wuimi . I would appreciate it. very much if the full statements
were included ini the 1cc0I(l. I would like to situimiriiizC ceitaini '))i-tionls
of it so as not to waste the time of the subcommittee (see p. 33).
19
Mr. Chairman. I appreciate the opportunity you have afforded me to
l)resent tile views of tile Federal )eposit, Insurance Corporation with
resl)ect to S. 1008.
Section 1 of the bill would extend until May 31. 1974. tie statutory
anuthiority presently vested in the Board of (overnors of the Federal
Reserve System. the Board of )irectors of the F ederal Deposit Iln-
suran.e Corporation, and the Federal Ilome Loan Bank Board to reg-
ulate in a flexible manner tile rates of interest or (ividends payable by
insured banks on tine and savings deposits and by members of tile
Federal Ilome Loan Bank System on deposit, shares, or withdrawable
The events which led to the initial enactment of legislation con-
ferring the authority, the developments which i indicate a leed for
rel)eated extensions of that authority, and the ('orporation's positionn
re.a rdin tile initial granting and all su)se(quent extensions of that
aulthoity are do(imnente(! ili previous corresl)on(dence alld statements
filed with tile full committee.
For that reason, except to say that the (orloration Su))orts another
temporary extension of its present iliterest-rate control authority, I
shall not recount what already is a matter of public record.
With respect to Noll' accol;ults, nly formal statement sets forth tihe
background of those accounts, tiet extent of their use to (late.
and the di ferences bet ween tile accounts in Massaeluisetts and New
IlHam)shire.
I would go on to say that it has been said that the ability of mutuLal
savings banks in Mlassachusetts and New I lul)shire to offer NOW
accounts gives them a competitive a(hvantage over commercial banks
and savings and loan associations in the same market.
While we have data indicating that savings deposits ill Massachu-
setts mutual savings banks that offer NOW accomits have increased
more rapidly than those il Massachusetts mutual savings banks with-
out NOW accounts. particularly in tle Boston area where savings
(le)osits in iuutuual savings baiiluk without N()OW accounts actually le-
cliled ill the last 5 nnoths of 1972, we have no data indicating a sig-
nificant competitive impl)act vis-a-vis coninercial banks and savings
and loan associations.
Senator Mcl TvrYI. Would von say it is really too earlv, or (10 you
"hl ink that a significant pattern hms been developed ?
M(l. -. ur figures a1d data in(licated initiallyN that the mutual
savings banks were attracting these deposits princilpally from their
own deposit accounts and from their own depositors.
In other woyds. tlere was little introdhuction of mewv nuoney into tile
mutual savings banks that offered N(W accounts but. rather, tile use
of a NOW account t l)v al existing del)ositor beame tile practice. That
was tile first step after the introduction of the NOW accounts.
Sublsequent to that. sonc neV money began flowing into mutual
savings banks-that offer NOW accounts. From wlt we can tell in
Massachuusetts. and I am afraid we do not have the similar data that
we would like for New Hamplire, it would appear that mutual say-
ings banks that dc not offer NOW accounts have been most heavily
hit and that. in fact, insofar as attracting new deposit money is con-
cerned, those inutual savings banks offering NOW accounts have at-
tracted the lion's share of increased deposits. Those that do not offer
NOW accounts have suffered a decline in deposits.
How much of that new money coining into NOW accounts has come
from commercial banks or savings and loan associations is very hard
to docullenit.
The NOW account has )een in existence since last June sometime.
I would say that the imst recent figure indicating soiiie $70 million in
Massachusetts mutual savings banks in these N()W accounts-which
a,'e currently beiiig offered by approximately 50 banks-is not an
oveiwlhiehing percentage of the total savings deposits held by coin-
mt'i(Vial banks, mutual savings banks and savings and loan associations.
Senator M('IN Y'I'E. WVhtt is the 1)er'Centage .
Mr. WILI. It is less than 1 percent, sir.
Senator Mc'I x'i'Ya. Less than 1 percent ?
Mfr. WIJA. Yes. sir. So that as of this imonent we cannot say that
the developmievnt of NolW accounts has had a significant coplletitive
inl~)act on the st rupture of ha king in Massachusetts.
1 would point out, however, that in the last few months the total
involved in 'NOW accounts has been increasing anid somewhat niore
rul)idly than l)efore.
'he l'ootnote on page 5 of my formal statement would indicate that
on Sep)teinler 30. 1972, the total in NOW accounts in Massachusetts
as SI lIl million. By 1)ecemlber 31 the total had increased to .415 inil-
lionm, and at tle enlt! of February of tils vr. only 2 months later,
it thod increased to $71 million.
There seems to be some significant acceleration since the first of
til year vith regard to these NOW accounts, and it is quite possible
that" we will hav'e lmloe information as to where that money is coming
from somewhat later on.
But our figures as of February 28 don't give us information as to
wlwther the ineease is coining froin commercial banks or savings and
loan associations.
Senator MeIviL'yiHE. You said slight. Then you changed it to signiifi-
('ant. Which is it ?
Mr. Wirix With less tlan 1 percent of the total savings and time
deposits ill Massacliisetts in NOW accounts. I would have to char-
aaevize the coinpetitive inipact at this moment as slight."
'l'he fact that there has been an acceleration in tile total in NOW
accounts over the past few months, however, may presage a change
ill that competitive impact.
What we might say has been slight-ul? to around the first of the
,eair may, in other words, become more significant as we go through
this ,,)ri,!f and imore 1,inks offer NOW accounts.
I aill u:niwillilig to say at this point that the couipetitive impact has
been significant to date.
NOWY accounts under present FDIC regulations would be classified
as savings deposits rather than as demand deposits because the bank
may require 35 days written notice prior to withdrawal.
Although our regulations further restrict the manner in which
funds may be withdrawn froni savings accounts, and effectively pre-
clude the use of negotiable orders. of withdrawal. these restrictions
currently apply only to commercial banks, for historical reasons, and
not to insured nonmember mutual savings banks.
Placing all institutions on an equal footing with respect to NOW
accounts remains an elusive goal under existing law in part because
the vast majority of mutual savings banks in Massachusetts are not
insured by the FDIC.
As of Februarv 28 there were only 8 mutual savings banks in
Massachusetts insured by the FDIC huit 159 mutual savings banks
inslred1 exclusiv'ely b the mutual savings central feund.
Senator Mcl It. It will hel
l )
a little bit as you are moving"
around. where are you?
Mr. Vi Lii-:. I'm sorry, Mr. Chairman. I am on page 8 of my formal
statement; at the bottom.
As I pointed out earlier in my formal statement. 49 of these State-
insured savings banks are presently offering NOW accounts to their
customers: that is, 49 out of the 159.
The FDIC, as you know, has no authority at the present time to
limit-or prohibit-the payment of interest or dividends on NOW
accounts offered by mutual savings banks in Massachusetts which are
not insuled
'
by the FDIC.
This is due to the 10th sentence of section 18(g) of the Federal
Deposit Insurance Act which sets forth two tests which must be met
before rate ceilings can be applied to noninsured or exclusively State-
insured institutions.
In the middle of page 9 of my formal-statement, there is a quota-
tion of that section of the law. The first test is that the total amount
of time and savings deposits held in all stich banks in the State. piUs
the total amount of deposits, shares. and withdrawable accounts held
in all building and loan, savings and loan. and homestead associa-
tios--iln 11(11 umli coolmeratire lanksl-in tit, State which are not menil-
bers of a Federal home loan bank. has to be more than 20 percent of
the statewide total of deposits, shares. and withdrawable accounts
held in all commercial banks, savings and loan associations, and
mutual savings banks.
T
hat condition is met in the State of Massachusetts.
Second, the law requires that there does not exist under the laws
of the State-in this case Massaehusetts-a bank supervisory agency
with authority comparable to that conferred on the Federal agencies.
including specifically tile authority to reulalltt tle rItes of interest
and dividends paid by such noninsured hanks on time and savings
deposits, or if such agency exists it has not issued regulations in the
exercise of that aut hority.
Senator MCINTYRE. Are you aware of the bill introduced by the
chairman and Senator Tower?
rNf1'. WIT.t.r. Yes. sir, I am.
Senator MCINTYRE. The effect of that would be to cancel out this
clause 2: is that right ?
'Mr. lmr:. Yes, sir. That would be the effect of that l)rovision and
also of a similar provision in Mr. St Germain's bill on the House
side.
Soeator A[CTN-TYRE. This would in effect make the NOW accounts
illegal pcr so under Federal law?
Mi'. Mr ItT. There are several different sections of both the chair-
man's and Senator Tower's bill an( 'r. St Germain's hill. One sec-
tion of those bills would prolil)it NOW aceolts alto-ether. Another
section would remove the quoted phrase I have just mentioned. which
allows tle 'assaeliiisotts Commissioner of Banks to set interest rates
for the State-insured lnm1tual saving.,s banks in Massaclmuselts.
I would say we are favorably inclined toward the second part of
those bills hlut not time first for reasons which T will get into in just a
minute. We would favor the removal of the interest-rate control power
from the Commissioner of Banks in Massachsetts. therel)v lodging
that power in one of the Federal agremios, w-hile we would object to
the prohibition against NOW accounts and suggest that it not be
enacted.
Senatom' 3MTm'ynv. I thought if you knocked out these NOW ac-
counts the other bills womihl say these are demand d
e
posits and no
interest can he paid on them l and. thmrefore. they are illegal if they
are operating in tim fashion there. Is that the overall effect of the
St Germain hill ?
M '. WILr... T think that is clearly' tie intent of that bill and also tile
chairman's and Senator Towmv:n,'s bills. They would effecti v'elv prohibit
NOW accounts so long as lawyers and bankers don't find a way to get
around the prohibition.
Senator MrlxTvi:. Let me ask you this question at this time. I
don't want to interfere with your testimony. You do suggest at the
end of your statement the various routes?
Mr. WiVjxE. Yes. sir.
Senator MCI'YIE1F. As I understand it. the principal difference
between a normal checking account and a NOW account is that a check
is drawn oni a demandd deposit. this leing a type of account that conl-
mercial banks are required to carry reserves on and that the depositor
has a legal right to close out or demand his money at any time with-
out prior notice. whereas a NOW account is, in effect, a check drawn
on a savings account where the depository institution has the legal
right
to withhold
i)ayment.
for at least
30 (las.
I am concerned that a NOW account holder could write a negotia-
ble order of withdrawal or check to a certain payee and that when
the payee attempted to negotiate it the mutual hank would have the
legal right to withhold payment for at least :30 days.
My concern is whether this is only a hypothetical possibility that
would not happen or it is an iml)edtiment to a NOW accomt that
would make it less desirable to a person accepting it as evidence of
payments.
In other words, is this 30-day requirement really significant to NOW
accounts
Mr. W LEr. T suppose it is not significant until it is called into play,
Mr. chairmann . If ill fact a mutual savings bank were to insist oil its
right to a 30-dav delav ill the payment of that withdrawal order, that
would qluiekly stop the acceptance of checks drawn on NolW accounts.
The cirleustances ullder which a financial institution would (to
that are probably limited to those in which it millt have a significant
liquidity crisis, in which it. finds itself ficed with a mn on the bank
1 s011o sort of failing condition. wlich voild make its ability to
honor the withdrawal order precarious.
If that should happen and if there should be a refusal to honor the
withdrawal order, then I think that Nvould beconie a very Iueaniingful
right insofar as tile financial institution is concerned.
I ntil that happens. I th ink ill ecct there is 1( S practical difference
lecalse the +ist itut ions ofterini.' N( ) accounts preslli ial iy ae solvent
and they are liq(uid. That has been the ease sar a id that is one reason
why the 30-day potice-of-witllrawa 1 rovision has nlot 1been utilized
hv any of the imitual sa'iirs hanks either in New IHampslhire or
MNassac'husetts -which offer these accounts.
But tile technical riglt renllin il the lnk and it could create a
great deal of mischief if it were to be ilsed at solW
p
oint in time,.
In my formuial statement. I urge that tle N()\ ac'count plrohihitioll
ntot. h e enacted b% the ('+/eSS ill Speritic stat utory terms 1lecause of
the fact that there are a variety of ineanus of a voiding" the proli Wition
a rainst payment of interest on demiianl deposits.
I cite one examle th at inlovative minds, both in lawyers and
hankers, could muioulbtedlv (devise other variants which wold accom-
l)1ish the same ends auld yet stay clear of the statutory prohibition.
If a statiitorv definition of precisely] what contstitutes a demand
deposit were avoiledl alnd if tile rate-control section were amended
so as to delete the clause I mentioned relating to the Massachusetts
Commissioner, the FDIC wvoll then have tile aithority-after con-
sultii,' with the Board of Goverors of tle Federal Reserv\e Sy'stem
alid the Federal Iome Loan Banuk Board-to regulate -eleraly tile
payment of interest or dividends lby State-1il1ed lel 1iutial savin..fs
lailks ill Massaclhusetts and to regulate spev li'aliy NOll accounts in
those banks.
I iint lit at tle el of my stateielt starting on page 12 that this
wouid crive the Fl)IC six opt+ous, at a liuuni, and there are varia-
tioils ill turn tihat coniu, to mind with rc-ard to those six options.
I point out, first, that the FDI)( could take no action whaever. In
that evelit mutual savings 1)11ks col coiitillm tol offer NOW accounts
to their customers in those States like Massachuisetts and New Ilamp-
shlire where such accounlits are legally pernliitte(. I[oweri', commercial
banks would not be iillowed to offer NOW accounts becallse of the
current F1)1(I and Federal Reserve regulations which Iar the transfer
of fnids from savings accounts to third parties by check or other order.
Second, the FI)IC could prohibit mutual sa'ings banks ill States
other than Massachusetts and New IIampshire fromn offering NOW
actcoits. This wo]l]( have the effect of fretzie.I , tie 4 .Hveat sitiatiol.
SUhiect only to tile spread of NOW accounts to other nmittal sayin-s
banks in 2 assaehusetts and Ne lampshiire.
T
hird. th e FDIC could define N()W a(-: mints as a f ormi of ,hIuia u
deposit. 'tllis woih l not onlv prevent llutual saving's hall;s t-oill y
lug interest oln s1ellIl av('ollnts blit wouIld prelude thei ic v 5al( vetl; I.
in States such as Iassachusetts which (10 iiot authorize nnitlal savi lqs
banks to accept dnv -,id deposit s.
S'eniator MTIhrii'. lhis would oftet ivelv proliiit iight 'oss tilt,
board the )NO'V account system as (levelopied in Massa,'lmsetts
Mr. WiLIE. Thit's (.'(irlest, sir x as well ;s tIe N()W account sit Iati ll
in New lIamlpsh ire.
Senator MCIN'rYiiv. As I understand it, in New I IaInpshire it is
under legal test, although our constitution is quite similar to Massa-
chulset ts.
.11r. WLE. I believe tlere is :a State VoI'it tet tyii oil. 1but if th e
Federal rate control authorities were to say that the N()W account is
a demand( deposit--alld they have 1lhe power inder existiiir law to
define what is '1 (101;ll(l deposit--tliere is a Federal law whicht pro-
hibits the payment f interest on deitiand deposits. That would mean
that ili New I(ampshire, a NOW account on which 4-percent interest
is paid would ]1(t be possible anid that zvro-pe vent interest would have
to be paid.
Fourth. tile FI)C could permit mutual savings banks to continue to
offer NOW accounts to their customers hut linit the interest pa-valde
oil such accounts to a rate lower than the laxilllliai pehl-lissitle tate
for reg(ilar savings accounis--which is ( irrelitly 5 percent for most
States an11d AIl, peet for A[lassachuiisett -- or e eli set 1'lte I ' zeali
l)erelnit oil these a(.coillts.
Senator xMCINytli:. I n1otiv-in \(<ti statni,+clt tlif:i is \what is uf:ill
on ill N~vw I [a a' aI ilire, that the rate for the N()l" aecoit is less thllan
the rate for tile lejosit , on tie other hanld. in Assaclisetts they are
offering tile full rato.
Ml. W'ILLE. Tilere is a difference between the accounts which tile
statement earlier points out, and that is tha. in New I allhisilire t l ie
is no service Chauge on witlhdrawal orders. In lassaehusetts, 1 i cents
per negotiable order of withdrawal is charged. It is a question of
which becomes nmore attractive to a depositor.
We have found-admittedly on preliminary information-that the
NOW accomt in New 11ampshire is far more actively used than the
Nol' aecount in Massachusetts. that in fact the volume of use approxi-
mates 15 or so withdrawall orders a month in New Hampilshire but only
4 or so il Massachiusetts.
Part of the reason for that may be the charge per check i
Massachusetts.
I would also point oit that il Massachntsetts commercial banks do
not generally inake a service charge for checks drawn oil demand
deposits.
Sellator A[C[N'YRw. This m'ay be a good time to explore just briefly
,vith you the consumer asp e(,t of this thing which I don't think should
1he pa-a motnt hut I think is of interest.
e iove avay from all th legalities of what is what kind of
a,'collt. I have letre a clipping from the Wall Street Journal, of Mon-
day. ilalch 19. It is an account of the Massachusetts and New Ilamp-
sliire exj erieoce. It says here "More Siuliti4IyIt .'tiaps. consumerss
Stivill's--tlhat is tie 1 alk in Vorce.ster--is wIli l1iliv clist olners from
C0oqllll eia]I [lliks. MIS. 'I'|eiesZ 1)oiiaatte, " Voi'tsi er. so vs she closed
le clkiii" atcoiit at a coniei cial hank because she. found she
lakess 110re iionev with her NOW accomlt.
l VWoiwl'tie I ,in he hi cities I see this all-service hank: we are
, llte, I to 3 o'clock in tile 11mio1n11r: we donut close on Saturdays; we
0'0l1-r e Vmv kil Of ol a serViCe to V- lt.
Wl1v should the cohlliml-c IJ ank --et excited? Under my bill we
W 1 1" -'i\'e 0 t0em tile 0
1
)
1
)O t (mit Vto oli'e a. NOV k(cCOlIIt.
M\ove important tthan that. w'hat do yu)11 tlin ik a1ollt M [rs. House-
vife? Ile, beii, e e'. tlhis is onlV a pernatmi account. The NoW ,,croynts
(ouly a personal aIcoinmt. 'Tito Nl)W aiccounlits only go to individual
Mr. W ar:. 'llt is -l. 11N. rlitannding 4)f tle sittiatlon in both
Massachusetts alld Nev; I liipsltive.
obviously, there is a )ioi t (of dilevence Lere I between how (lie con-
sumer looks at this accotuit ,i(l how a iliaiil institution would look
at, it, particularly a commercial hmnk Or a savings and loan associa-
tio ill Masachusetts and Ic,v 11alm >hi ve.
N[rs. )onahue probably doesn't use that N()W account as llnlml ;.s
some people use their eltek il a'Ccotijts. or else seii would be paying
15 cents a cheek and might indeed not Ie miakiio uuonev on her Noll'
accoUnt.
If she is ill the category of so-n,0loie who only draws a check three or
four times a mlonth, then il iced ste mi-hl find it advanta-eous to
continue to collect interest. But to have that 15 cents per Cheek de-
dueed frolli what she says is her profit ill milovit, from a Iloninterest-
hearinl demand deposit ait a commercial 1aik to the NOW iecount at
at mutual savings l)ank miliglt not he to ler advantage if she draws too
imany orders a,raiist it a nioith.
I should think that tie Saelle pe5)sll ill New I[amlpsire has an even
better deal. if I Itav sIy so, becalse lie is not charged 1er check at all
and still obtains 4 percent on a certain Ihaauice, computed as the bank
V\ihld normally compute interest in that State.
So what Mrs, I)onaule said for Massachusetts I think is even more
true in New Ilanl)shire. lut, Clearly, this has an impact on the ex-
peI1se side of tit fi iaiicial inst it tLion oi'e'ii, that kind of atn account.
Whether it is sigiiticant or not lelpeilds on the total deposit mix of
that hank.
For exallle. if most of the NOW accounts 1 iave come from what
otherwise w\odd have been saviil's accounts in New IHallpshire sav-
iiLus 1)i ilS. tw saviil1!.5 blkaik iii ofle.t are lot lsill ni iev. at least
if thev were payil.g 5 ;-)(lveit on a savitnis 0-4(-0lut and nlow only pay
4 percent on a NOW account. It is possible that that 1-percent spread
or difference is the cost of providing this NOW account service, this
check service, for the depositors.
So, maybe for the New Hamlpshire savings banks it is not a sig-
nificant item of new cost to them.
On tle other hand, if a significant influx of money were to coie
into mutual savings banks and other finalicial institutions that night,
under your bill, be enabled to offer NOW accounts. those institutions
would *in effect, be paving a rate of interest oil those NOW accounts
which today they mav not have to pay.
This is triue o'f coninuercial banks'and savings and loan associations
as vell.
So, th)se two types of institutions, cOMMircial banks in particular.
would not be very eager to see a general introduction of Noll' ac-
counts for themselves since they would then have to pay ititerest on
what is in etfect, at least to the customer, a checking account.
Senator MI 'i'vNT:. You are getting off oil the question of what it
inea ns to the hank. For instance. Mrs. I)oialliue thought this was a
pretty good service. On the other hand. I remember when I was a
yoting man growing Ul) the idea was that you put your Iiioiiey ill the
bank with a time clock, that was a savings bank. you got a passbook,
,on didunt touch that iioney. you ac(ciitudated it. 1-1
)
in the other
bank. \o-)i put your checking a('count and you paid bills with it.
])oes tlils be gin to uIhiderinie the rationale behind the thrift instit u-
tion. the idea to encourage savings ? That is what I ant wondering
about.
hi one case Mrs. I])onahue is very la)py with her setpil. Oil the
other halld, we 'New Englaiders p1ut it in a savings bank.
-Alr. lViILL. ()f cour.se. if a s.nvings bank or any financial institution
were able to offer both types of accounts. I would assume an individual
wouilld keep what lie wants to save in a savings account and not touch
it if lie doesn't have to. and pit finIds that lie has to use for checking
accomnt purposes in either a NOW-tylt, account or what commercial
banks offer today il tle form of a (hviiand-del)osit account.
Individuals nuake these decisions todaV as to how they allocate their
savings aid where they put them. letler in a savings'account or ill a
demand-deposit account.
I don't think that situation volld cIunge just because NOW ac-
counts might be offered more generally than they are today.
Senator M('INTYRE. If we said that the NOW account could be
offered by commercial banks. savings and loans and mutual savings
1)anlks and we lit the interest rate mider regulation Q at an equal
level, in other words, every )ank could offer no more than 4 percent,
why would the commercial banks object, to that ?
This rounds out their all-service arrangement. ohev have got an-
other facet of their all-service bank. Why are they objecting to this?
"Mr. WIIuI,. I would much prefer to have them speak for themselves.
Senator MOITYE('l-T . All right. We are going to have some testimony
on it. I thought you would want to comment on why they would object
to across-the-board NOW accounts in favor of Mr. and Mrs. America.
Mr. WILLE. Mr. Chairman, I had mentioned four of the options that
the FDIC would have if tile statutory aiielndilent I sliggested were
enacted. I would like to mention the fifth and sixth.
Fifth, the FDIC could bar the use of NOW accounts but permit
mutual savings banks to offer some sort of limited third-party pay-
ment system in their place. This might take tile form of a nonnego-
tiable, nontransferable withdrawal order-similar to that authorized
for use by Federal savings and loan associations under current regula-
tions of the Fedcral lHome Loan Bank Board-whi.li could be used
only to make certain tyl)es of payments such as mortgage payients
or l)aiyients on utility bills. Those purposes. EInighit say, are more
hiinted thaii those purposes for which the NOW account currently
can be used in Massachuisetts and New Haml)shire.
Finally, the FI)IC could take joint action with the Fedle,'al Reserve
to permit neneber and insured 111ilember comml1er(ial banks as well
as inutual savings banks to oler NolW accounts. sutb.ject possibly to
a lower maxinlium interest rate than tlmt established for regular
savings accounts, or to thle type of restriction l Ilave just referred to
which is applicable to Federal savings and loan associations. l low-
ever, such joilit action would introduce a new disparity between com-
mlercial and n1nitual savings Imlks Oil tile one h.ald and Federal sax-
ings and 10111 associations oil tile other, since savings accounts ill
Federal savings ad 10111 associations may ]lot be trainsferred or witlh-
drawn by negotialue or trainsferable order or authorization, and they
can be used only for certain ll pu)oses. Ill order to avoid stih a dis-
par1-ity, the FIC and the Federal Reserve would have to subject
NOWV accounts to the type of restri.tio previously described in op-
tion 5, or ticp statutory restrictioil on tralnsfTerrig flls in savins
accounts in Fetleral savings mid loan associations wold have to be
removed.
lhis statenmit that I have requested )e elitered into the record and
which I have been remiig t'roil hleretofore is t lie sae statement thlt
I sulibmitted to the 1 louse Subcommniittee oil Ban11k S~lpervisiol 1111d il-
surance ]ast week.
In the course of his testimony before that sul)comimittee, my del)uty
,
who delivered the statement, was asked a number of (lilerent ques-
tions with respect to which of the six Options tile FI) C was presently
proposing to exercise if the statutory changes proposed in my formal
statement were made by the Congress.
I would like to read you. if I may, and into the record this morning,
the response that 1 made to that question.
I pointed out to the chairman of tile subcommittee on the House
side that there are a number of difficulties in attempting to state at
this time how we might exercise our regulatory power over NOW ac-
counts if clause (2) of the tenth sentence of section 18(g) of the
Federal I)eposit Insurance Act, were delted, as proposed by Senator
Sparkman's and Senator Tower's bill.
Senator McIxTYRE. Let me understand now what tile question was
directed to. They were asking you what problems you would have if
yol tried to imlielit tie ' St Germain bill o1 the S1)arkmIan-Ii -'er
p ro
!
osa 1.
Mi. WVILTE. The testiIolNly oh tie 11o11 side was to the effect. that
we would he in favor of that portion of those l)ills-andl that portion
oiily-which would remove the lOwver of the Massachusetts commis-
sil11 to set rates oil State-hislred associations and mutual saviigs
balks in Massachnsetts, hut. that we would not be sympathetic to-a
1
rohilition against NOW accounts. What we were enivisaging was a
law which would Xt extlid present rate-vojitrol powers, not, prohibit
NOW accounts, and re(IMo'e tie Massa,.husetts variation, if vom like,
front interest-rate (ltrols. it would he at that poit that ihose six
o1tiol S tlt I mentioned in mnv statement would come into play.
I think Mr. St Ger imain raised a quite legitimate question as to
which of tile Si.% optii i tie ('01or)oration would exeris.:e. H[e and other
I'll , i 2 of tile 5
1
1i)(Ohlllittee siaid. -All right t, if you get that power,
whi.h of the sik would you he likely to exercise ?"
I 1poilltvt ()t1t ill mY respolse to himht. which was added to his rveord,
that it is dilii(.tl to . 'av preciselv what we would (lo now with respect
to that kintl of a powerr if we ,ot it.
I want to say Just why it. is diliicult and then go on to say what my
1WI'oS1M:l I ]re erel,'es woUld ibe llong those six options.
The first of e h l eas us wly" it is difficult is iwcause the mnamnitude of
tl use of NOW N' acclllt., i2llidIl ," lliir )tl'ti'l slrad to other
States, has not developedl to a poilit where ally valid 011ei usions (.n
1,e Iached with respect 1o t l 'i r coll)etiti\'eiIl)aCt Oil coiim1ierCial
bai k. and savinlgs anid loali associations. That was tlie first Point we
Tniontomed tiiis mroi'Iig.
Second. ou C'rse of aft ion would undoubtedly be iniluhlI ed 1
tit(. admilist ration's rec.om edW , nd101 , resaltilpo)osed legisla-
tion, flovin g out. )f the I hInt Coilni issiori 11e,0( en1llf nations, ol Ihe
hllde. (Illestiolls of interest-rate controls generally and the expansion
(f thrift inst itut ih n powers amnd obliations.
Third. historically, the Board of Governors of the Federal Reserve
S vslcni Is takln tle h eling role ill classifying and establishing
interest-rate ceiling, s on Ialik deposits i)e'.a it, , Ilime re'sp)olsi-
I)ilitv ill the liell (f monetarv policy. anl we would be reluchnt to
ilhqate a specific course of aciion fo the F)IC without tirst c('osilt-
im,1 wi" I the Board ( (Govvl'1e0r5.
Last. we ant iilcate the possibility of rveeivilig so)ie ,uidance from
t]ie ('orgress itself, or froitj its resI)ei'ive comilittees, ill (20n' tioni
\.ith its eniactinelt (f the proposed legislative elhmges now 1befo'e it,
and we would Certainly honor those ex piessioms of cofgiessia
itent.
I hving ill mind thwse fouru limiting factors on the use of our (iso e-
t io1. 1 cal m dit hiless indicated my personal 'eelillgS on how tile FI)IC
iighit lroceed if the aiiendmiient that I have suggested were to bte
ellacted.
In the, first place, I would not be inclinedl to propose an outrighllt
101l o1 tile offering of NOW-tYpu, accounts by mutual silhiLS ]banks
unless comnp)elled to (10so )y the Iaiigmiage of the bill elacte ()r I)v tle
clearly expressed exI)ectati;)ns of the C(lgless (ol of the comimittees of
both I louses having jurisdiction over the subject matter.
I believe that NOW-type accounts are of benefit to hank customers
:111(1 that they have. n) intrinsic deiviehncies which render them undesir-
aile from either a pmlic w' a Sliperismiry stand(lmiit.
()i tile other handle, it strikes mie as bothi ilequitable and, in the longer
terl, an evasion of responsibility to isolate tile use of N()W-type
accounts to one or a few jurisdictions like Massacluetts and .New
I 1aImIpsh ire.
lhius, option 2. prohiilbiting mnitmual savings banks in States other
than New 11 a Iuu)sl'ive ani Massac.llusetts froiiuI o l'ering NOW accomts.
anid option :8, (lefining N()W accl'ijts as I form of demalld deposit.
ire mt those which I pesnmiil wumld cmo.,05 to exercise.
Instead. 1 NN'mild recmlmll il that all three Federal agencies witlh
rate-ccutr ic icowvers work toward sutbstantial equality among coin-
nercial banks. mut ml sa vinii s I imm ks, ai savings atl 1 (ail assj (1iations
ill tie olleriig of N()f -tyl cc a 'clits.
Si c'e only" )tion f)(, alud tie, variants (lisci-cled t l crin. cliteumplates
actiim wlIi('h (il in. ' all ( )riate clia I ies ill tiep regi1latillS
presently apl ic'able to insuredt cmIllercia I balks aliot to inspired sav-
in,, a loa1 associations, it is tlt oltion or soelie variant of it that
1 iIc.smially mwold he lrgi,,' ulpon the regulatory agencies ill our
interagency discussimis.
ThIe Ild result of such]1 discussions vmld. of clrse. include thi es-
tabdishmiment of a Iilaximnnn rate of intere-t below tlat pernmissible on a
trmad itiomal saviu cogs ac'omnt. tile estal lislmenii nt of a limited l)urpose.
noinmegotialle. iontransferalpce tli id-partY la-miieit order, or both,
1lit the imlportant pillt is that (0om lercial bl'nk. uimutiial savings
I ii-s. am(l savings and hmnl associations wvouil( all be authorized to
ol'er tle sameo type ( service ()Ii a silbstliitially equal basis.
Ill short. I am lpersonallv convinced that time p-avnic, lt of interest to
d(1hIsitors oil acemints aga inst vliich ti irl-l)arty (orders inay I)ve dlI\wn
is almost inevitable and in tile pIt
1
lii interest, keel)ing" ill ;Iild at all
time ics. lmvwever. tlie lecesit v for fair treat llnt ainmucompeting cona-
DIercial
and thrift istitit inns.
ei
T iere is 1o inherent viilue in a ri.,.i l Sa( ratio mn Iwt weei tradIi-
tional cieckin an i savi,/fs accounts ill Itie ha lmki u,/ systemiu. Even tltli
li11ite1 x [meVl encl withi N()MV acc''rmits in Massac'hi usetts and New
I lalmisllire stu._,xsets that. depilliiig Ili,)Ii \amiamts sulh as rate of il-
terest 1 i id U lI ilick cliar,,'es. siuch a'cmiuts Icave iee, used more like
saill-zs accounilts ill tit, former State and more like cleckin., accotints
in time latter.
I think that should clarify tile position that I personally would take
wit I regard to the six Optio ls discussed ill mIY statement.
Thank you. Mr. ('mirnmn.
Scntor" McINTrm. As I un(lerstand Nour concli(ling remarks here.
tile thrust of what vo said about tle future of ti( NOW account is
il ]inc with S. 10S. the bill I have introduced ?
Mr. WimL. It is very close to your own al)proach.
Ill fact. witlh respect to the changes that miilit be necessary to )er-
uit commercial banks to intro(luce NOW-type accounts. I think these
could le nlade admministratiyelv by both thle F )IC and the Federal
Reserve Board acting together without legislation.
I3- 211-73-3
On the other hand, if the same NOW account privilege is to be ex-
tended to savings and loanl associations. some change in existing law
is necessary l)eaIllse prwesently tley (an o)nly offer a nonmngotiahle
order, lilitled to lhoiiselol l purposes.
Seiiator McICITyim. Senator Sparkman ?
Senaltor TP-1vKMA..'hank vou.
Mr. Chairman. first of all I want to make it clear that whein Senator
lower ald I agreed to int? 1lu're this bill tait we dil it in order to
have lioth sides before us.
heree has been a great deal of opposition expressed to the NOV
aconlits. as you know. I am sure.
Since Senlator MIelnt\'re's bill would put the stamp of approval oil
it. wve both felt that tie'atter should be .I(lrfllllv (.l wked olb)jec tively
to tisertain both points of view and just what some of time effects of
it might be.
lIv tlie wa , e avlo provide a "2-.year extension of regulation Q. )o
yon' favor that ?
Mr. WILE. I am in favor of any temporary extension of flexible
regulation Q authority and I ama not concerned with whether it is
for 1 year or 2 years or 3 ears or some interme(liate )oint, in tinie.
Senator ,P. ~r.\y. But :on would favor an extension?
Mr. Wir. Yes, sir.
Senator ,r.. u mr.',. I think we hold the same views, but we put in
2 years as the period of time.
I want to say very frankly that I have not made my mind up on this
NOW, account" propositioll' I do know that a great deal of alarm, if
I may use that, word, has been expressed regarding it. Of course,
for revars 11 1a\'v felt that it was quite noticeable that commercial
I)allks. savings 1(1and loan associations. thrift institnitionls alld mutual
banks were (drawing more and Illoure closely together. 1)on't you feel
that is t ie.
Mr. mi,. Yes, sir; I do.
Senator SPARKMANX. You know. of course., that Governor Robertson,
with the Federal Reserve. Board for a g oo(l many years. has pointed
to the likelihood of there being only one system of financial institu-
tions and rather advocating that.
When I look back over the years in this committee when we have
done something for the banks, the savings and loan associations come
along and ask for something comparable.
If we do something for the savings and lo4n associations, the banks
will come in. Little by little they have been drawing more closely
together.
Tihe Ihunt Commission report. I believe, if I understand it, would
help that along, in fact would almost merge them into one system.
Perhaps I am being a little too strong when I say that.
So maybe the thing that Governor Robertson was pointing out is
gradually coming to pass. Would you advocate any such policy as
that?
Mr. WILLE. I have expressed, both in my testimony this morning
and also with respect to the Hunt Commission proposals generally,
aphilosophical agreement with that position. In fact, the ability to
offer oil relatively equal or substantially equal terms the same kinds
of services is a (leelopnlent that I would*Peisolzllv encourage.
I think there will be many difficult issues before the Congress when
it attempts to decide whether to move from the present, system to
that, kind of system. particularly when it. considers how the invest-
ments currentlY- being- lade in the liosinu sector will be affected.
But I believe that these can be worked ont if that is the intention
of the. Congress. and I would look forward to an opportunity later
this y('ai', wetln l teilte a iiliistl'Iltiolli's lii'l sis with re"r1ii'd to the ]I11n1t.
Commission package are preseitedl to the Congress, to have an oeca-
sion again to express my views in that regard.
Senator Sm.%rAN. It seems to me I read something ill the laper
the last few daVs aolillt solUlwbolv ill tle (Goelnien'llt re11o'111i'jlul
that the tax provisions be imadle 'the same for connercial banks and
savings and loan associations, Did )oil see anything like that ?
Mr. Wmr:. h saw an article by Miss Eileen Slialian of the -ew
York Times.
Senator Sl,. N.r F_(lidn* read liat. I di(ln't see it there. I kilow.
But are we coming to that?
I don't know what provoked the laughter. I certainly dol't mean
I don't read Miss Shanahan. I liave known Miss Sliall-aan for many
years, going xvziy back, all( I understand her to be a won(herfill eco-
nomic analyst ol business matters.
Mfr. W rinF. I think there are many reconlmel latiois to the forth-
coming. I think it should be remembered that tile 11mit ('oiuimission
itself recommen(ld tliat there be substantial tax equality among these
different tyle institutions. The Conmmission lid not lliih it that
recommendation.
Indeed, it is a very complex an(l (liflie ult subject. Buit it is clear that
the administration has been wrestling with that problem of tax equal-
ity, anud I would not. be at all surprised to see recolilliendations sur-
face with regard to that subject.
Sellator SPOIIKMAX. Of cour1"., wilen tlat comes. (lont you think the
trade-olf would be giving the savings Hm l Iovi i associatinlis more of the
functions that are now reserved to coimiiiili 1 i m liks
Mr. WViiL,. I Wou1ld leave it to Voll. 1I'. ('liair Pilli' . to sluggest the
trade-off. I think liat is the direction inl Nlviicli Ive are heading.
Senator SiR,\K-lM,\. I told you what our experience had been here.
Mr. WIm.E. Yollrs is a legislative rleactioll. sir.
Senator SPAIIIKM.AN. 'XOil Imiintioned t lit service that savings and
loans l)erform in the liousing field. I call remember when tile cominer-
cial banks were sev'relv limited ill tihe amount, of thle holdings ill their
portfolio of o't!a 1s ind I kiow we iave increased that from time
to time. So I gu(,ss they [lavet blon movilng together pretty well in that
field, too.
Mr. Wrr..:. I tli ink tilis is INart ilellinrly truie of t ile coniiue'cial ballnks
that, are outside major metropolitan centers anl(1. indeed, of some that
are ill major metlropolitm u ce ntfs. Tley are just as nuiiti llortgago
lenders in sonic il'ctis of the coutyllil ti. .s savilgs and loan associations.
Senator S.K~I.\. 7o I (oiu't think i6 is qIluiti as simple as sie
people may tlink. If we, are ,goiiig to hav-e a good strong system of
f~lIanciall inlstitultionis I (lon't know tlit it makes any particular differ-
enl"' w~l~tIli' 01WP Sli1ilI1l be for'biddeni this anld aniother forbidden that
a111d Soon 'Mnd so forth. I think wvv Probably ought to make up our minds
if that, is what wve wvant to move to, n it Pseemlstolie that this has
a (Ii recet. bea in iigOl it.
Mr. WJ.E.I thlin k t liei'e is 110 tjuiest ioll itt tha,.t it (loes. sir-.
Senator SV-iiI{ MyN. Because this is thle first time, isn't it. we are to
give thrift iiistitut ionis the right to the utse of the checkintw account?
M1r. Wi lr.u% ActliallY. ill somew S*tltvs. theine has been a d
7
'iaild (do-
p~osit p)ower(. I lbeliCee ill iial stivinigs l)115.bt it hlas't been
widlyiI~~l Ii te iiajor savings liik StaUtes. climi ues ill State law
-wold hle lievv5501 ,Iv to extei it tat t~ , vp of' p)owt' to a 1iiiitiial savings
baith. But, of voarise, that seeoluis to he, tht' Wa -v il which soiue States, are
ilovi ig-l ike ( onutlect huit. for' examiv . which 01 IIia en ly is 1'prepared
to st't) (liekiiiL act-)tit 5 othvivet I imtua il say iii ,5 baiks.
SenatoB vi.lI~~. t lie wayv. this smtrests sometlifiq, to nie that
really I sup pose is not rlehvant here. buot youi mit inuted the IHunt
(Commnission report ;I few Ilii tttes zil. Iti Yo *11(1W. t hey havey strongly
u11rged-thev did whenm they filed Oli i report and I have a feelingc when
tieV Presidenlt sItmlits it lo ( Its the same ievomuliidat iou will comle to
sI,,hat we .Idop~t t ieo (commilission iv1eloit tis aI I)mok,
1 am tinder the imirssiomi th nie tue thl ogs it, thieve tiat in order to
lit 10lilt i iito t'ffi-vt Nvoulld haIve to l)t' a('tt'(i ithl0l by .S-taIte legislative
hbtotit'. for iiistaiic. the tl h you j ilst Imuit ioiled. Isn't that true?
Mr. W' juT.1:. Thit is (quitte truet. 'Thee aIrea uti1ni116er of revolliiedai-
I ionls inl the I [tint (Coummuission report which woudl require- State action.
I think thalt somew of the ennuutissionlers onl thle I1hi1t C'oluissionl
IWiiel were hoplW tttIhat,1 'dt'al legislation i ilt ecolurage States to
:(1(1111 that kinld of legislationl where changes inl State' hiv wwere needed.
Selator l'~1h MN.But wep cmult" i tt pilt the wh'Iole package' itto
e titut. "'it would he omti feattii't. I tin k thcite arte oit hers. T thitik
Ii ire tile fe-at ittes ill it that C.an1 be hn'ldled t i'hiLm"li admlist rtativ'e
a1ct tolt. .1alt therev
M r. W rt.Yes thevi me 're sonic n 't'il i li t i tlls is well for at -
iistral P1ive' action.
Stitatol' Sr.Al,1K7\1xx. Act1:1 * v -we (lut l"Iii the l'ep ot beICfore 1ts yet
offhv'ihv. hult wt' have 011l Sethl it alot hoyt' had ;I ciice to talk with
S014 it (it, e omIlllisioll's i'egar(Iilig it.
I have talken ttIo iiuthi tline. Mr. Clialivtanl.
Senator' MC IVNYH.. I Ili Ilt obs"erve that tile only 11iiait qualified to
lotik at thle 111111t (Commiission i'e ollI wvold lit' Senlator Beitiet t he-
caullse lie sits oiil tht'ine 14('lit omltittee, 0111 tdw Hiatikitig. C'ommiittee.
11 yo aleingi( to Otilpt 0 pacnkagei y-ou -,luiiost give its an1 ilislil'-
Mounilltab~le pro)I~ll to hvgill with beco ulse we hove this dividing
Sematoi' McIxT-iI. We a1.e happy to welcomec Senlator Bentuett.
Senaor lhFx f :rr.I Sol sorr I couldn't ge,(t herev any earlier. .Sire
I did not hiear Mr. Wilhe's statement . I am' not ill a position toi qiles-
tioll him.
[The full statement of Mr. Wille follows:]
STATEMENT OF FRANK WII.LE, CHAIRMAN, FEDERAL DEPOSIT INSURANCE
CORPORATION
Mr. Chairnlan, I appreciate the opportunity you have afforded ine to present
the views of tile Federal )elposit Insurance Corporation with respect to S. IKIS.
113d Congress, ii Iii -T e xtvind cert i lw.s relittinlg to the laymtent of ilitvrcst
oil time and savings deposits and to make clear that Federal banking statutes do
iot iroililt delisitory institutimis frii offering negt iable order of vithlorawa l
services in connection with certain interest-bearing deposits."
Section I of the hill would extend until May 31, 1974 the statutory authority
presently vested iii the Board of G'overnors of the Federal Reserve System. the
Board of Directors of tite Federal Deposit Insurance Corporation, an-I the Fed-
eril imne Loan Bank BoarI tit regulaite jil U tleXible ilnaitlr the rates (of inter-
est or dividends l pyalle by insured hanks on tile and savings deposits dllal toy
mienlbers of the Feleral Ilie Loan Bank System (other than tliosie the delmsits
of which are insuled by the Federal 1lelosit Insurance ('rporation ) till dhjli'sits.
shlrit's, or withdrawalle laccolli 5. It would also exti'lll for the sllnle per riim of
time ile lnlahorilv of tle Federal Ieli,'sit Insurance ('orioration and of the
Federal Home I ln Bank Board to sil iject ccl tain l ill. llred lalnks and insti-
tutitions to interest-and dividend rate controls comparable to those aipplicaloe to
uilr llred Inalk..' a il institnlions. -
Sections 2-5 of the1 bil1 wiiil amend existing statutes which relate tit, the
laina elit of iliterest oil deposits to make It clear Ihat they do not prohilit s1l('h
depository iistitnitions COllllercill lltl llttilll saviligs banks. savilg- aid
loan associatillsn. and vrelit unions frra lllowving the oilier tf a delsit ill
ll u41llnt fill 'h ichliltc'rest is I aid tip nRike wit hdrawalls biy negiitilhe iistrlmiient
for the pIrlpose if making transfers to third parties or otherwise.
Flexible authority for regulating the rates of interest or dividends that miay
be itald by Insured banks on time and savings deposits and by certain mmlier.4
of the Federal Home Loan Blank System-most of them Insured savings land
loan nssociatlms--on deposits, shares. or withdrawalde accounts vias first iol-
ferred ilpon the three regulatory agency s In Selitemlber of 116 for a o we-year
period. On five different occastons, however, tile authority has, beell extended d
for varying and c(nsectutive periods (if time s o that It now xlres. 1nl4ess further
extended, oi May 31, 1973. The PVeInl. which led to the initial enat.tlient Of
legislation conferring the authority, the developmentsq which indicated a ieed
for repeate(I extensions of that iluthority, lind the torporatioll's position le:ll'ril-
ing the Initial grnilting nn(l all subsequent extolnsions of that authority are lioil-
nieuted It previous corresponldel(e an1d statements filed with tie full Commlnittee.
For that reason, except tot say that tle Corporation supliorts another temiirnry
('xt1i5(lo of Its present iiteirest-rate control authority, I shall not recount what
already is a matter of public record. I \would like. however, to) direct tile SiwoItul-
nlittee's attention, instead, to a niore recent innovation in hianking-the nego-
tiable order of withdrawal (or so-ealled "NOAV") avecount-which has prompted
the introduction oif legislation whiih. oni the one hand. would congress iiiilly
sanctioti the hinovatlimn (as sectionls 2 - of S. 10IS would dio) or, on the uithier
hand. prolillilt it altogether.
On July 28. 1970. tle Chionslmers ,Savings Rank of Worcester. Mass achustts
(formnierly the Wreester Five Cents Savings Baink). asked the .ms'li.i~,'tts
('onlissioner of Banks for hierliihssi i to ffer its clisliners the right ti\ with-
draw funds from their savings aceints iy executing negotillde withdrawal
orders. ''his request was denied on Sehltembeler 28. 11970. Consumers Savings Mink
thereupon filed a bill for declaratory relief with the Massachusetts Sulreile
Court seeking to have the Comlnissioner's denial reversed. On May 2. 1972. the
Masacloisetts Slpreme .1udi-lal (' uirt held that ('Insuiers Savings Bank c would
legally permit its customers to withdraw fullld, from their savings aecimuits by
executing negotlalie withdrawal orders." The court was careful to loilt ot
that its ruling merely went to the inethod of withdrawal nd not to the character
of the accounts In (lilestion. Although it found that the proposed furn of with-
drawal order possessed all the attributes of negotlability required by Massa-
I Con umers Savings Bank v. Commisioner of Banks, 2S2 N.E.2d 416 (Mass. 1972).
chusetts law, the court concluded that there was nothing in the Massachusetts
statutes or the bylaws of the bank which would prevent the bank's customers
from using this type of instrument to withdraw funds from their savings
accounts.
A.s of February 28, 1973, 56 out of 167 mutual savings banks in Massachusetts
weIrte offering NOW accounts to their customers. Of the 56 banks offering such
ace unts, only seven are insured by the FDIC. The remaining 49 banks are in-
sured lby the Mutual Savings Central Fund, Inc., a State-run insurance corpora-
lion.
2
While the mutual savings banks in Massachus-etts which currently offer
NOW accounts comprise only one-third of the total number of mutual savings
banks in that State, their total deposits account for about 60 percent of the total
deposits in all such mutual savings banks.
In Massachusetts, mutual savings banks account for a larger share of total
bank deposits and, particularly, of total time and savings deposits, than do
intiuli sa ings banks iii mst either Stales. As oif .Juine 310, 1972. mutual savings
b:l k deposits wetre a ii .ru ximately -1 percent (of the combined total of comner-
cil and mutual savings lank deposits iii Massachusetts. Mutual savings banks
in flie State had abouIt 77 percent of total time ind -avings deposits and about
83 percent of these deposits in accounts of less than $100,000.
As of February 2s. 11173, it is estimated that there were approximately 37,200
1iilividual Nt1W\ Tectounts ill Massachusetts mutual savings banks with an aver-
ag . I,1lance of slightly more than $1,900. This represents an approximate total
of *T1.5 million in NOW accounts which. in turn, represents ahout three-fourths
41f 0lie litreTit of tile total qvings deposits in all Massachusetts mutual savings
links (S9,571 million as of December 31, 1972). '
Nt 1W accounts are also being offered by. mutual savings banks in New Hamp-
slire. As of March 2. 1973. 11 of the 30 mutual savings banks in New Hiampshire
were offering NtMIV accounts to their customers.
Mutual savings banks in New Ihuapshire also account for a substantial share
of total bank deposits, particularly time and savings depo-its. As of June 30, 1972,
New llampishire mutual savings bank deposits accounted for alwrxlmately 52
i-ruen t lif tile ctm lined total if callillercial anl ini tii l - avi gs laink deposiits
in that State, while their tine and savings deposits were about 66 percent of
total tine and savings deposits.
As oif .March 2. 1973. there \vere just under 2.900 individual NOW accounts in
New Hampshire mutual savings Winks with an average balance of about $550.
This represents a total of approximately $1.5 million which is approximately
one-seventh of one percent of the total savings deposits in all New Ilanipshire
mutual savings- banks ($1.019 million as of June 30, 1972).
Individual NO\\" accounts in New lhampshire mutual savings banks are smaller
and alilcr to) lie substantially imore, active on ti average than those ill Mass-
alinisttts nuitual savings banks. Mutual savings banks in Massachusetts report
Ihat an average of only ive negotiable withdrawal orders were drawn on each
aceulnt each month during tie last three months of 1972. In contrast, the largest
mutual so vings hank in New Hampshire offering NOW accounts reported an
average of 15 negotiable withdrawal orders pet account each month.' This dif-
ference appears to be based on the fact that the New Hampshire mutual savings
banks offering NOW accounts pay interest oh such accounts at the rate of only
three or four percent (as opposed to a maximum rate of five percent for regular
savings accounts) but do not impose a service charge for items drawn on them,
whereas the Massachusetts mutual savings banks offering NOW accounts pay
interest at the rate of 5.25 percent and were imposing a service charge of 15
cents for each withdrawal order on December 31, 19726
* The Mutual Savings Central Fund also Insures excess deposits in the seven banks
insured by the FDIC.
" Although NOW account deposits still represent a very small percentage of total savings
deposits in all Massachusetts mutual savings banks, they have increased at a substantial
rate. There was an approximate total of only $11 million in NOW accounts on Septem-
ber 30, 1972. By December 31, this total had increased to slightly less than $45 million, and
stood at approximately $71.5 million on February 28, 1973.
'On January 31, 1973, this bank had 1,750 NOW accounts out of a total of Just under
2.300 NOW accounts for the entire State, and total deposits in NOW accounts of $900,000
out of the State total of $1,150,000. Its accounts thus represented virtually the entire
NOW account market in New Hampshire at the end of January 1973. We are currently
endeavoring to obtain comparable figures for NOW account activity In other New Hamp-
shire banks.
Massachusetts commercial banks have generally eliminated service charges for checks
drawn on demand deposits.
It has been said that the ability to offer NOW accounts gives mutual savings
banks in Massachusetts and New Hampshire a competitive advantage over com-
mercial banks and savings and loan associations in the same market. While we
have data indicating that savings deposits in Massachusetts mutual savings
banks that offer NOW accounts have increased more rapidly than those in
Massachusetts mutual savings banks without NOW accounts, particularly iii
the Boston area where savings deposits in mutual savings banks without NOW
accounts actually declined in the last five months of 1972, we have no data indi-
cating a significant competitive impact vis-a-vis commercial banks and savings
and loan associations. Should the data we are collecting indicate a significant
change in competitive impact in Massachusetts in the future with respect to com-
mercial banks and savings and loan associations, we will l)romptly inform you.
We are presently trying to obtain comparable data for New Iampshire.
Section 18(g) of the Federal Deposit Insurance Act (12 U.S.C. 1828(g)) re-
quires that the Board of Directors of the FDIC "prohibit [by regulation] the
pmeVni t of interest or dividends on demand deposits in insured nonmember
banks and for such liurpo.-e . . . decline the term *demand deliosits' [subject to
those exceptions prescribed by statute or by regulation of the Board Elf Governors
of the Federal Reserve System]." Tile Board of i)irectors has adropted regula-
tions barring the payment of interest oil demand deposits (12 C.F.R. 329.2). It
has also adopted regulations defining a "demand deposit" as any deposit which
is not a "time deposit" (or a "savings deposit" 112 C.F.R. 329.1(a) ). A "savings
(ltiosit" is delined, in part, as ally deposit with respect to which an insured
nonmember bank may require 301 days' written notice prior to withdrawal (12
('.FI.R. 329.1(e) (ii)). Tile Federal Reserve has adopted a similar definition
for savings deposits ti its member banks (12 C.F.R. 217.1 (e) (2)).
NOW accounts would be classified as savings deposits under present EDIC
regulations because the bank may require 30 days' written notice prior to with-
dra val. Although our regulations further restrict the mann r in which funds
may be, withdrawn from savings accounts, and effectively preclude the use of
negotiable orders of withdrawal, these restrictions currently apply only to
coniniercial lanks an( not to insured nonmember mutual savings bank,.
Placing all in tilntions oil in equl footing with respect to NOW accounts
remains an elusive goal under existing law in part because the vast majority
of mutual savings banks in Massachusetts are not insured by the FDIC. As
of February 28, 1973, there were only eight mutual savings banks in Massa-
chusetts insured by the FDIC but 159 mutual savings banks insured exclusively
- by the Mutual Savings Central Fund. As I pointed out earlier, 49 Elf these State-
insured savings banks are presently offering NOW accounts to their customers.
The FDIC, as you know, has no authority at the present time to limit-or pro-
hibit-the l),ayment of interest or dividends on NOW accounts offered by mutual
savings banks in Massachusetts which are not insured by the FDIC. This is
due to the tenth sentence of section 18(g) of the Federal Deposit Insurance
Act which provides:
"The authority conferred by this subsection [which includes the authority
to prohibit the payment of interest or dividends on demand deposits and to
limit the rate of interest paid on savings deposits]' shall also apply to nonin-
sured banks in any State if (1) the total amount of time and savings deposits
held in all such banks in the State, plus the total amount of deposits, shares,
and withdrawable accounts held In all building and loan, savings and loan, and
homestead associations (including cooperative banks) in the State which are
not members of a Federal home loan bank, is more than 20 per centum of the
total amount of such deposits, shares, and withdrawable accounts held in all
banks, and building and loan, savings and loan, and homestead associations
(including cooperative banks) In the State, and (2) there does not exist under
the laws of such State a bank supervisory agency with authority comparable
to that conferred by this subsection., including specifloally the authority to regn
late the rates of interest and dividends paid by such noninsured banks on time
and savings deposits, or if such agency exsts it has not issued regulations in
the exercise of that authority." (Emphasis added.)
Deposits held in State-insured mutual savings banks In Massachusetts meet
the test established by clause (1) of the passage just quoted and, If that clause
stood alone, such deposits would be subject to regulation as to dividends and
Interest by the FDIC.
However, under Massachusetts law the Commissioner of Banks has authority
to regulate the rates of interest and dividends paid by State-insured mutual
savings banks (Annotated Laws of Massachusetts, c. 167, 1Si1) and the Comn-
missioner has issued regulations in the exercise of that authority. Therefore,
clause (2) bars the FI)IC from using its authority to regulate NOW accounts
in mutual savings banks in Massachusetts which are not insured by the FDI'.
With rate control divided as it is between the FDIC and the Massachusetts
Commissioner, uniformity in treatment between competing institutions becomes
impossible unless (i) the two agencie. agree on the desirability of the same
course of action, aml (ii) the same rules aplply in neighboring States where
financial institutions are subject to deposit competition from mutual savings s
banks in Massachuisetts. The Massachusetts Commissioner is, of course, under
no obligation to consider the interstate ramifications of a particular set of rules,
and the rates applicable to mutual savings banks in Massachusetts are in fact
different today than those applicable elsevwlere in the country.
The use of NOW accounts by mutual savings banks in Massachusetts and
New Hampshire illustrates one of the problenis facing the Federal banking
agencies in their attempts to administer interest rate controls. Congress could
conceivably decide that the best way to deal with NOW accounts would be to
classify them, by statute, as demand deposits and bar the payment of interest
thereon. However, this would get at only part of the problem. There are other
means of avoiding the prohibition against paying interest on demand deposits.
For example, commercial bank-, can permit their customers to draw checks on
a more or less overdraft basis up to the amounts in their savings accounts.
The overdraft would be treated as an interest-free loan szo long as the depositor
repays the loan within a stipulated period of time. Repayment of the loan
may not be nmade automatically or through any prearranged procedure from
the saviimgs ai(ount. loit if course noral*a vwithdrm\wa is fron lie soivin nae lu nt
could in fact be used to repay the loan. This arrangement has the same advan-
tages as a XOW account, yet it avoids the prohibition against, paying interest
on demand deposits under any readily conceivable statutory definition of the
term "deniand deposit." Innovative minds could undoubtedly devise other var-
aits which would accomplish the same ends and yet stay clear of statutory
prohibitions.
If a statutory definition of precisely what constitutes a demand deposit were
avoided and if scctiom t18(g) were amen.jed so as to delete the aforementione(
clause (2). the FDIC would then have the authority-after consulting with the
Board of Governors of the Fedral Reserve System and the Federal Ilomei Loan
Bank Board-to regulate gener-ally the l)aynment of interest or dividends by
State-insured mutual savings banks in 'Massachusetts. and to regulate speeifieally
NOW accounts in those banks. This would give the F'I)IC a minler of options:
1. The FDIC could take no action whatever. In that event mutual savings
banks could continue to offer NOW accounts to their customers in those States
like Massachusetts and New Hiampshire wj, such accounts are legally per-
mnitted. However, comnimercial banks would not be allow( to offer NOW accounts
to their customers because FDIC and Federal Reserve regulations currently bar
the transfer of fumds in commercial bank savings accounts to third parties by
check or other order.
2. The FDIC could prohibit mutual savings bank-s in States other than Massa-
chusetts an(d New Hampshire from offering NOW accounts. This would have
the effect of freezing the current situation, subject only to the spread of NOW
accounts to other mutual savings banks in -Massachusetts and New Ilampshire.
3. The FDIC could define NOW counts as a form of demand deposit. This
would not only prevent mutual savings banks from i.iying interest on such
6 f section 1.(g) were amendld hy deleting clause (2), the sentence immediately follow-
ing clause 12) shoimlfd also be dpletel. This sentence reads:
"Such authority shall only be exere-ed by the Board of Directors with respect to such
noninqureri banks prior to JuIly 31. 1970. to limit the rates of interest or divilends which
such banks may pay on time and savings deposits to maximum rates not lower than 51/2
per centum per annum."
Tihe above sentence was added In order to prevent the FDTC from reducing to less than
51/.5 the maximum interest rate which might he paid on regular savings accounts (pass-
book accounts) by State-insured mutual savings banks in Massachusetts prior to July 31,
1970. However, the sentence Is confusing and might be construed in such a way as to
impede future efforts to regulate thesp banks. By its terms, the sentence is no longer
effective.
accounts but wvouhi preclude their use altogether in States such as Massachusetts
%i4ch do nt authorize itutual savings banks to accept demand deposits.
4. The F1l1IC could permit mutual savings banks to continue to offer NOW
accoitts to their customers but limit the interest payable on such accounts to a
rate lover than the lnaxiimumiiii permissible rate for regular stlvings accounts,
ort, even set a rate of zero prceit.
.5. The FlIi' could lar the use of NOW accou-ts but permit mutual savings
l1.'nk to offer some sort of limited third-party payment system in their place.
This might take tile fo rm of a noiincgotiabl,, nontransferable withdrawal order-
Similar to that aittorized for use by Federal savings and loan associations tnder
current regulations of the Fe(leral lome l.oan Bank Board-which could be used
only to lake ('ertaill types of laynents such as mortgage payments or payments
on utility bills.
6. Finally, ihe FDIC could take joint action with the Federal Reserve to
permit imember and insured nomlteioniber coimlercial banks as well as llutual
savings banks to offer N.AAW accounts, subject possibly to a lower maxiimuimii
inItereIst rtile thanl It;at eItaIlhished fI lt l'IIIli101r W IV-. I I I I accountst. ) ort tLe type
of restriction described in (5) above. However, such joint action would introduce
a new disparity be lveen coimnnercial al 1t lltl savings ball s on liet one h11ld
and Federal savings and loall associaltiols n(it the other,. siWe s.avinhgs aT(olllts
in Federal savings and loan associations may not tie transferred or withdrawn
Iby ntegotiable or transferable order or authorization.' InI order to avoid steh a
disparity, tile FIC and the Feilerat Re.serve would have to subject NOWN"
accounts to the type of restriction describe d in option (5J. or tile statutory
restriclion on transferring funds in savings accounts ill Federal savings and
loan associate ibons would have to be removed.
In any event, section 18(g) of the Federal Deposit Insurance Act requires
that our Board of li rectors consult vith the Board of Governors of the Federal
Reserve System and the Federal H ome Loan Bank Board before prescribing
any rules uichI Would limit tile rate of interest paid on NOW accounts by -
insured nonmeinber banks. I believe that each of tile options which I mentioned
should be thoroughly explored by all three agencies before any particular course
of action is decided upon. We would no doubt have to consider what the probable
effect of any particular course of action would be (on the present structure of
the banking system and the competitive implications for commercial banks and
savings aild loan associations as well as savings hank.%. Also, we would take
cognizance of any expressions of opinion as to preferable courses of action
which might be voiced by Congress in its deliberations on proposed legislation
extending the rate control authority of the three Federal agencies (currently
due to expire June 1, 1973) or in its deliberations on proposed legislation to
implement some or all of the recommendations of the Presidential Commission
on Financial Structure and Regulation.
Senator MCIN"TrE. I want to thank you very much, Mr. Chairman,
for being here. Your testimony has been most helpful, most enlighten-
t .We appreciate it very much.
We call as our next witness. Mr. Carl 0. Kamp, Jr., the Acting
Chairman of the Federal Home Loan Bank Board.
We are happy to welcome you here this morning, Mr. Kamp. We
have before us sour statement, which is some 14 pages.
In the interest of time, to the extent that you desire-you are free
to testify in any manner that you want, but where yo& can hit the
highlights, letting us know what pages you are on, that would con-
tribute to our time.
I want you to feel in the last analysis that if you want to read
the whole thing, it is all right with this committee.
ISectlon 5(b) of the Home Owners' Loan Act of 1933. as amended (12 U.S.C. 51464
(b) iII (1970)).
STATEMENT OF CARL 0, KAMP, JR,, ACTING CHAIRMAN,
FEDERAL HOME LOAN BANK BOARD
Mr. K.\rr. Thank you. Mr. Chairman, and distinguished members
of the committee.
Ini light of your comments, sir, I will summarize most of my testi-
m ,oiv. lloweve', would like it to h, , a pirt of the ,e'ord (see p. 43).
The Federal Home Loan Bank Board supports the 1-year exten-
sion of rate control authority provided for in S. 1008 and S. 1256.
AIs vo know, this authority is scheduled to expire at the end of May
of this year.
This request for an extension of rate control does not prejudice the
position of the administration with respect to any possible recom-
mendations that will be made as a result of the report of the Presi-
dent's Commission on Financial Structure and Regulation-the
so-called hunt, report.
The rate control extension is a matter that must be resolved before
June 1, 1973. whereas any likely legislation arising from the hunt
Commission would require a considerable length of time for both
1-louses of Congress to consider.
The Board's slilplo't t'01, a 1-vyenr extension of rate control is given
in recoornition that a thorough, fi reevaluation of rate control might be
appropriate at, a later date.
The committee also migit, wish to give consideration to the deletion
of two provisions in the section of the Federal Ihome Loan Bank Act
that. have the loactical effect of eliminating the authority of the
Board to set rate ceilings on nonmember saving and loan associations
and cooperative banks in Massachusetts and other States.
The text of this change is contained in an appendix to the testimony.
We note a similar proposal in S. 1256 that would have the practical
impact of permitting the FDIC under section 18(g) of the Federal
Deposit Insurance Act to set interest, rate ceilings paid by savings
banks in Massachusetts that are not insured by the FDIC.
The I[ome Loan Bank Board has noted thit savings inflow into
savings associations has dropped substantially since Novemb'r 1972.
For the month of February we estimate, based on a sample survey,
that net. new savings received were only $1.6 billion compared to $2.7
billion in February 1972
,
a year ago. This is the smallest inlow on a
seasonally adj usted basis since the fall of 1970.
Tihus, while the savings flows have been quite good during the past
several years. the present financial situation threatens to change this.
I might add that we are seeing signs of disintermediation creeping
back into the picture such as we experienced in 1969 and 1970. also
back in 1966-1966 being the. year in which rate controls first became
effective as far as savings and loan associations were concerned.
The disintermediation levels are difficult to determine at this point,
but the recent increase in Treasury bills. with the 13-week bills at about
6.33 and the 26-week bills at, about 6.74 giv'e rise to concern. There is
also some additional evidence of potential disintermnediation. The in-
crease in the odd-lot purchases which are. occurring in the market
indicates that individuals are shifting their funds from the inter-
mediaries to Government bills and bonds.
In summary, the Federal Home Loan Bank Board feels it is essen-
tial to have rate control extended, particularly with the effects of
tighter money conditions that now exist.
With respect to NOW accounts, S. 1008 would generally permit. them
for commercial banks, credit unions, and savings and loan associations.
S. 1256 would prohibit NOW accounts, except that those NOW ac-
counts in existence on March 15, 1973, would be permitted to continue
for a period of 6 months following the enactment of the bill.
With respect to NOW accounts, the House bill, 1I.R. 4070, is the
same as S. 1256 except that it does not contain the provision relating to
the ;-mnmth 'o t inuance of existing accounts.
The Bioard has been carefully monitoring developments in this area.
since N(0W accounts first. began, and we will contim to (1o so. Our,
current (lata show a rapid and significant. growth in the balancesz in
NOW accounts. hut we are unable to draw any firm conclusions at this
time as to the ultimate trend and impact of NOW accounts.
-eivntor McI':Tv. That seems to he somewhat at odds with the
1,reviolsN witness who gave us statistics on the NOW account growth
in .Massachusetts and New Ilamlpshire, which was 1 or 2 percent. You
sa v:
Our current data show a rapid and significant growth in tll, balance in NOW
a'cmlints. but wk are 1nalble to draw ally firrmt conlehsions at this time as to the
ult hitae trend and inpact of NOW accounts.
I tliink :', to tir last part, our previous witness, 'Mr. Wille, would
a'ree with vu. NOW accounts have now beeni in effect since about
June of 197- so we only have about 9 months.
I)o vou INV e any statistics. or would you furnisl for the record,
statistics that indicate there has been a rapid growth ill tile N(W
account field?
Mr. l I.t'. llev scem to be increasin, or they are increasing at an
iicreasini, rate. There. are. 53 savings banks in 'Massactusetts offeriu-,
this type of accomt and 11 in New Iampshire.
Speaking. speifically to Massachusetts. within 1 month's time, we
saw a growth in NOW accounts from $43 to 873 million, which is a
sultstanitial Ur, wtl.
Tile lady rntioncd in the. Wall Street article is indicative of tie
fact that N.OW' accounts are catching on, so to speak, and any new-'
t!ype marketing proram obviously does take time for the Iubli- to
learn about.
Senator D[kxa',nm,. T1o voi think that if S. & L.'s had the rig-ht to
NOW accounts, would that keep them in a competitive position with.
other banks, or put it this way, if other hanks ha ve 'NOW aIecou,
wouldn't the S. & L.'s need to have them to remain competitive '
Mr. K.\mp. Azaiiii. if NOW' accounts were to spread nationwide aid
the savingrs and loans were not to have NOW accounts, yes, it would
put them at a disadvantage from the standpoint of competing with
the other two financial inte'meliaris, mutual savings hmnks.and sav-
ings banks.
Senator M('.\INTY. Would you describe for the record what, a sav-
ings and loans can do now ?
Suppose I have an account with the savinffs and loans and I want to
play a utility bill? I know they will pay my tax bill, will they not?
Mr. KICA-3. That is right.
Senator MCINTYrE. What is it that they can paticularly do non-
negotiable ?
Mr. KA-MP. Under the present statute, the savings and loans are
permitted to (teal in third-party payments. They can (teal in pre-
authorized payments.
However, their ability to do this is limited to household-type items,
utility bills, nlortgac-e, payments. and they cannot issue any kind of
a neg..4otiable or transferable order. It is a direct l meant, iionnegoti-
ahlc, an~d dealing strictly with household-related items.
So they are limited fb statute to where, it would be impossible. as
Clairmaii Wille pointed this out, for the savings and loan industry
as tle law now stands, to issue negotiable orders of withdrawal.
Senator Hrl' ' low (o I acconplish that as the delositor, by
notifving them in letter that all the bills of Pepco and the rest. will be
sent to them, and they will take care of it under my account.?
Mr. Ku.rmp. Yes. Those payments would be made directly to Pepeo.
You could not enjoy the privilege of sitting down at home and
writing an order of m ithdrawal and mailing it direct, to 1Pepco.
Senator MCNTYRE. It can all be armianged beforehand by Pepco,
Washington Gas & Light?
NMr. KA 3rP. Yes, sir.
Senator M'cITn-m.. What else?
M[r. K.vurp. That is it.
Senator M[(CI NTYR, . The city of Waslingjtojl taxes?
Mr. K.vmrr. City of Washinrton taxe.., oth,-. axes.
Senator MCINTYRE. Sewer and water?
Mr. KA.rp. Sewer and water.
Senator SP.\IUKM.N. Not just common bills?
Mr. Kvm P. No, sir; household-related.
Senator SpmnK.t.%N-. I want to bring another element in here that
really plays an important part in the economy of this country, and we
haven't mentioned it: the credit unions.
How do they fit. in? ?
Mr. KAi,,. As I understood Chairman .[i-ntvre before, credit
unions have requested not to be included in any extension of the NOW
account concept.
Senator SI..r.N. I am not. asking about that.
Would they 1he affected by this new change
Mr. KAm.n I would have to presume so, sir.
Senator SP. CrKM'AN. Credit unions (1o receive savings and they pay
interest on those savings. and depositors can withdraw their savings.
I don't know on just what condition. I don't have one myself. I wish
I did.
Senator MCINTYRE. You don't belong to the Senate Employees'
Credit Union?
Senator Sr.\pKr.~N. No, but if I have any money at any time, I am
going
to
join.
Senator McINTYRF. I think I am one of the. few Members who is a
member of the Senate. Employees' Credit Union.
Senator SPARKMANX. They tell me it is a very good thrift institution,
better than some of the others.
Senator MCINTYRE. In order to clarify the situation that you have
raised with the cred it unions, I said in my opening statement that:
,8. 1008 also included erelit unions, but in discussing this section of the bill
with the Administrator of the National Cre(dit Inion Administration and sliokvs-
-man for the credit union ilustry. it might well be better to delay consideration.
of third-party payment systenii to credit unions until a later date.
The Iunt Commission took this al)proach by recommeliding third-
party paymen, bt ems for savings and loan associations and mutnul
savings 6anks, bht did not suggest at this time extending services to
credit unions.
This is not to say, however, that I personally am opposed to credit unions
having third-party payment systems, but the issue here this morning seems to
be more between nmtual banks, commercial banks and the savings and loan
associations, anld it is probably necessary and even wise to keep the smaller
credit unions out of this discussion.
Senator SPARKMAN. I am sorry. I wasn't here when the chairman
made his statement. I just wanted to be sure we didn't overlook a
really important segment. of the thrift business in this country. This
is much more sensitive thai, many people believe.
Mr. ].CA-3. There will be other witnesses, inicluding Deputy lnlder
Secretary, 'Mr. Smith from the Treasmur De pa rtient, who will pre-
sent. the adiniistration's position. I believe, to you on Thursday.
and who will he able to report to you their own research so that you
call form a judgment.
Senator -I'INTYImE. This will be testimony as to the rapid growth
of NOW accounts?
Mr. K(. r. I am not sure what his testimony will be, sir, but I
presume lie will have further data with relation io the NOW account
situation.
I would also. with your l)ermission, like to talk about Senate bill
892. which has to do with the premium structure of the FSLIC.
Senator MCIX'TYRE. I think it, 'would be fine for the record if vou
sunmned up your overall feeling. There doesn't seem to be very Inueh
opposition to this.
I think for the record-
Senator BSNNETTxr. For the record we already have his statement
here, tile detailed statement..
Senator MCINTTE. If you would like to summarize your position
on that. I would 1e happy to receive it, on S. 892.
Mr. K,\rr. If I may, I would like to make one last comment ahout
the NOWV accounts.
The Federal Home Loan Bank Board feels that. the NOW accounts
should be restricted arbitrarily to 'Massachusetts. There the entire
thing call be considered with reference to the IHunt Commission report
and the potential legislation that, will be introduced.
I have my own l)erslnal concerns which deal with the additional
powers that Senator Sparkman referred to becoming a part of the
savings and loan business and the eventual elimination of specialized
financial institutions dealing with thrift and home ownership.
T1he savings and loans last year accounted for about 67 percent of
the total residential mortgages, excluding therefrom the Government
direct lending programs. So they are a very important and vital part
of the entire financial structure as it relates to housing starts which
is important to our GNP.
MyN, conicernls primarily lie around the loss of the specialized thrift
institution. I would hole l hin the recomen(lations of the Ihunt
Commission-and I (1o not know what they will be-when they are
taken in full context, that all of these things will be completely aired
at. that time. I would hate to see a NOW account situation (evefop and
spread rapidly, as it. quite possibly could, throughout the entire coun-
try and find tlat maybe tiat wasn't quite the right way to go.
I am also concerned about the net ellect on the overall (cost of funds
to savings and loan associations were they to have NOW accounts. It
obviously is good for the savings consumer r, but it is a double-edged
swor(. We also have to consider what would happen to interest rates
oil inortgatges if savings costs increased.
So, all of these are things which we are concerned about, and that is
why we ar really not stating any specific positionn at this l)articular
time, Mr. Chairman.
Senator MCIxTYRm:. Can VoU furnish for the record how many sav-
ings and loans the:e are in Massachisetts and in New Ilalipshir ?
Do you know that offhand, approximately how many there are?
Mr. K. rr. No, sir. I can't.
Senator ' INTYIIE. You can furnish that for the record.
[The Fkderal lome Loan Bank Board sub-eijuciitly inforilted the
committee that there are 179 savings and loan associations in Massa-
clusetts and 22 in New Hampshire as of the end of 1972.]
Senator McIx'rrnE. As I understand your position, what you are
saving is you don't want to see NOW accounts spread nationwide, at
least at t his time?
Mr. K.\ r. hilat is right, sir.
Senator McIN'x-m.m. The upshot of what you say is you would leave
the situation alone, allow Massachusetts to go its way with its NOW
accounts, and New Iaml)shire, if it is deemed to be legal by our
Supreme Court, let. it, go its way, until a time had developed so that
a thorough study could be made of it and some better projections made
of it for the future, is that right.
Mr. K.\ip. That is correct.
Senator CINTYRE. tow would you feel if you ran an S. & L. in
Massachusetts, or New Hamplshire?
Suppose you were the president of an S. & L. or a commercial bank
in Massachusetts or New Ilampshire, would you think you would be
put in some unfair competition, that you were being a kind of guinea
pig or an incubator?
Mr. KAMP. It has been referred to as a laboratory test of the NOW
account situation.
I niight add to what I said before by stating that we are also in
favor of some legislation, both for the FDIC and also a change in our
own statutes, which would give us some rate control authority over
uninsured institutions in Masiachusetts. With that standby authority,
if things began to get out of hand, of course, we have one of the six
actions that Chairman Wille m, ntioned to fall back on.
Senator MCINTYRE. You would like legislation to give you standby
authority to move in on this and stop it?
Mr[1'. K.\ p. Effectively stop it by reducing, for example, the rate
on NOW accounts to zero if that became necessary.
Senator MCINTYRE. I see.
You would favor some sort of action that would allow the situation
to continue in New Iampshire and Massachusetts but with standby
authority in the proper agencies to move in and phase it. out or put
a stop if it became obvious that it was bad or not working to the good
of the banking industry ?
Mr. KAmp. That is correct, Mr. Chairman.
Senator MICINTYRE. I would like you, for the record, not here and
now, to comment on the Hunt Commission's recommendation that reg-
ulation Q be phased out. That is just for the record.
[The following statement was received for the record:]
The Board agrees that it is desirable to phase out the use of rate control regu-
lations and to have rate control legislation exist on a standby basis. The Board
believes, however, that such a phase out should be carefully coordinated with
revisions in the asset and liability structure of savings and loan associations
that improve the competitive party of S. & L.'s with other financial institutions
and are consistent with the achievement of this Nation's housing goals.
Senator Mc.INTYR-E. Senator Sparkman ?
Senator SPARK.MA N. I have no questions.
Senator MCIN'ri-nE. Senator Bennett?
Senator BENNE'irr. I would like to get into this for a mimte.
We were talking earlier about the rate of increase in NOW accounts.
in Mr. Will's statement-there are these figures.
There was an approximate total of $11 million in NOW accounts
on September 30, 1972. By December 31. 3 months later, the total had
increased to slightly less than $45 million, and on February 28, 2
months later, it, stool at $71.5 million.
So there isn't any question but what there is a rapid increase in
NOW accomts.
I am interested too, and again I am referring back to Mr. Will's
statement,, where he says that. as of February 28, the average balance
in NOW accounts in fassachusetts was $1,900, and on March 2, in
New Hampshire, the average balance was $550. I need to ask a ques-
tion. Maybe the chairman can answer it.
When did they start NOW accounts in New Hampshire?
Senator McINTYiE. I don't know, but I imagine they picked up the
ball and started running with it immediately, July of 1972, probably.
Senator BE.N Err. I was wondering whether the difference between
the dates on which the two States started, would account for the dif-
ference in the volume in the two accounts.
Senator MCINTYRE. $550 opposed to the $1,000?
Any time I am in Massachusetts, I alivays say how nice it is to be
down'here with my rich cousins from the Sotth. They are a little
more affluent up there.
Senator BEN.',I-ET. The city mouse and the country mouse?
Senator ,MCIN-TYRE. Right..
Senator BENNETr. I think it. would be very interesting if we. could
know, with respect to the accounts that are now NOW accounts, what
the average balance was in those accounts before they, became NOW
accounts, because% the. thing that concerns me. more than anything else
is that, if we are going to have money available to go into the long-
term loans that. are, the. basis for mortgages, we must. be sure that
that money which has hitherto been available isn't now turning over
to pay inonthly bills.
You can't. have short-term deposits as a basis for long-term loans,
or wM are inevitably going to be in serious trouble.
Now. are the holders of these NOW accounts really having two parts
in their NOW accounts? Are they having the saie basis that they
always had, to take care of the loaning on mortgages, plus additional
money they brought out from the. bank because there is interest paid
on it to take care of their daily and weekly expenditures?
What. I am afraid is that 'these people-some of them at least.
and to a certain extent-have been encomraned to take the funds they
have beeni gathering with a long-term motive and turning them over
for their current accounts.
Tf that is the case, then, inevitably, the home mortgage market is
-going to suffer for lack of funds.
Senator ,M'CIT.TYPE. If the Senator will yield at. thit point, we will
have on Tlmrsday the New Hampshire commercial banks represented
here. and I am sure they are opposed to this NOW account theory,
and T am certain if it impossible to make a fair comparison that. they
will be able to bring out, this reduction, as \-ou say, in the home mort-
gaffe and in the mortgage market money as a result of NOW accounts.
I think it. is probably very difficult foll Chairman Kaiup to testify
to that.
)o vou find that difficult?
Mr. I.\ ir. Those are marketing figures, sir, and I do not have
them before ine.
Senator BF.NFrI'. Are we going to liave someone before us repre-
senting the bIanks in Massachusetts that are now using NOW' accounts?
Senator 'McINi'TRtE. Yes.
Senator BENNETTr. Who would that l)e, do you know?
Will von identify the witness?
Mr. K.r. Join Howe on Wednesdav. the Savinzs Bank Associa-
tion of M[assaclmsetts, the Massachusetts Cooperative Bank Teaeue
on Wednesday, the New llampshir-e commercial banks on Thursday.
Senator BENN,,'-rT. That is talking from the other point of view.
I think this is one of the questions we ought to clear up during
omr hearings, whatever witness we can get. the information from.
Senator M. CINTYRIE. There seeme to he two separate accounts.
Senator SPAR MA-N. r. Chairman, - believe Grover Enslev is in
the audience, lie is the executive director of the Mutual savings banks.
You might ask him to supply that. He used to be on the staff of
this committee.
Is Grover Ensley back there?
Senator BEN.E.Tr. Do you have anv information in this field that
would enable us to measure not only'the shift., but the relative pro-
portion of a NOW account which i's turned over as a. result of this
privilege as compared with the basic part that stays in there?
STATEMENT OF GROVER ENSLEY, EXECUTIVE VICE PRESIDENT,
NATIONAL ASSOCIATION OF MUTUAL SAVINGS BANKS
Mr. ExsiEY. Mr. Chairman. members of tle committee, my name is
Grover Ewsle'v. I ail execiltive vice president of tie Nationl Associa-
tion of Mutual Savings Banks.
With respect to your really two-part question. Mr. l1m3nntt., we will
have information on tle first point. luit on the second point it is rather
difficult. I think, but we vili see what we can come u) with.
Senator Ih:x NEi"'. It uiglit l)e interesting. if vo could (to it, to take
a few at ramiomn accoults aid see the ])roportionI Of tIme average Ihalaice
turnover every eminth as a result of issuing of these negotiable
inst rmnetl s.
Mr. Wxsm~:v. w \vill have some information on velo.itv or t mjrnover.
We will have some information on that. But we have h;ad very little
experience with it.
I think that the administration's position the other day was that we
needed a little more time for this laboratory test to w rk.
Senator WIExEr. While vou are looking for statistics I would lbe
interested in knowing whether the average balance in the accounts on
which these negotiable instruments are issued has increased from the
bhegiliiing of the experieilt to the end of tie experiment.
Mr. Exsu.;y. I can tell voi right noV tlevy really haven't noticeably
increase(l. Uhe situation in Massachusetts is (different thaln New I lamp-
shire. not, be,'ause of tle dilfereiwe ill wealth in tie two States, lint
because in the State of New Ilalipshire they do not cllarge for the
withdrawal nor do the.\ pay as munch interest. So th(I account holder
tends to have a smaller balance as compared with Massachusetts where
they pay the higher rate of interest.
Senator B-NNETT. If these accounts have bot increased, then we can
only assume that money which under other circumstances would be
available for mortgage lending is now being drawn out of the account
on a monthly basis because they have the NOW account privilege?
M[r. ENSLEY. I don't really think-if I get your question right-I
don't
think
that
is quite
it.
Senator BIENNETT. Iow else would you say it? If the total account
has not increased, if they have not alded additional money to their
average account but are now using the account to pay current bills,
then it seems to me that the amount that is left inl there against which
those loans can safely be made has been reduced.
,\r. EsLY. The funds are replenished from earnings, from social
security payments, and fitom other institutions, of course.
93-211-73-4
Senator BENNETT. But they were replenished before. You haven't
put new money in to take care of this rapidly turning amount. You
have just simply lowered the static section of the account, and there is
a section of it or a percentage of it now that is being turned every
month on a monthly basis.
Mr. EN,-sLrY. Maiv of those accounts, Senator, were turning before.
It, involved a person getting in a car, going down to the bank, making
two or three withdrawals in the comse of a month, going acro.vs the
street and paying her bills. Now she is able to stay home without. the
fuss and bother and polluting the air in going downtown. She can
(to it in a very convenient way and at, much less cost to the institution,
because she doesn't have to have the teller out there giving the indi-
vidual account service.
So this is a profitable service for the bank. It. is a veryv convenient
service to the individual consumer. It has not, reduced the funds avail-
able for housing, Senator. As a matter of fact, these institutions that
are offering this service. are in a position to attract young and old-
they are gett ing more deposits in.
The rowth of institutions offering this service are greater than
tho. which are not. This makes more money available for housing.
Senate: BENN,,Er. I would like for you to take some random ac-
counts and go back before the NOW account arrangement was set. up
and tell me how many times the woman came down and made a with-
drawal, how many times a month on this account she m.ade with-
drawals under the old system as compared with the withdrawals she
now makes because in effect she has the e(Juivalent of a checki g
account and interest.
Mr. ENsLEY. The average withdrawal of a NOW account in Massa-
chusetts is about five a month. I don't have the figures as to how many
she may have had before she had this convenient service.
Senator BN.xNE-Tr. This is the key to the answer that you have given
,me. You said all it has done is it has given her tIe privilege of staving
home she did it before this was available anyway. I don't think she
did.
I would like to know the average number of withdrawals per month
on some accounts at random compared with the withdrawals that are
made under the present. system.
Mr. ENSLEY. We will'try to get that information. I don't, want to
exaggerate the extent. to which this is done but I know of individuals
that have done this. As a matter of fact., I did it when I first married
until the savings bank caught me and said I had too active a savings
account. A lot of young people particularly use the savings account
as their only account.
Senator BENNE-r. That is all.
[Elliott Carr. director of research, Savings Banks Association of
Massachusetts, has prepared the following information in response to
Senator Bennett's request for data :]
The queJions of how N.O.W. accounts are used In comparison with tradi-
tional savings and checking accounts, and wlhther N.O.W. accounts might have
a tendency to breakdown the thrift habit by nklng it easier for savings delst-
tors to spend can best be answered by examining three facets tof N.O.W. accounts;
their average balance, the numlber of withdrawals from these accounts and the
dollar volume of these withdrawals (their volatity).
A rcragc Balance: The month ending average balance for Mass. N.O.W. accounts
were:
3-month
October November December January growth
1972 1972 197) 1973 (percent)
1OW accounts ---------------.- ------- - $1,719 $1, 745 $1 803 $1,920 11.7
All Massachusetts savings bank deposits . . ... 3.434 3,436 3,445 3,472 1. 1
The average balance of N.O.W. accounts has grown steadily since their incep-
tion, and at a far more rapid rate than the average balance of other savings
deposits. ianuce, if the growth rate of average balances can be used as all indicator
of propensity to save, N.O.W. accounts are more successful in encouraging savings
than other forms of savings deposits.
Although the average balance of N.O.W. accounts is lower than that for regular
savings deposits there has been no reduction in the total savings balances of
depositors switching from regular savings accounts to N.O.W. account. Although
the average savings deposit in Massachusetts is $3472, 75% of all deposits are
under $2000. A relatively small number of large accounts pull the average up.
N.O.W. accounts have been most attractive to small active accounts.
Number of Withdvlruwul.: The average number of withdrawals per Massa-
ltisetts N.O.W. account per month were:
October 1972 -------------------------------------------------------
3.6
November 1972 -----------------------------------------------
45
December 1972 -----------------------------------------------------
4.9
January 1973 -------------------------------------------------------
5.3
February 1973 ------------------------------------------------------
4.7
These figures nmy lie compared with average monthly withdrawals of approxi.
sisattly 15 i IWeLS.sal cllccking counts, 35 in all checking accounts and 1 in
savings accounts.
The greater number of withdrawals in N.O.W. accounts than savings accounts
does not mean that transferred accounts are Iseing used more actively, however,
Obviously the incentive to convert is much stronger in savings accounts with far
above average activity.
Many regular savings depositors made one monthly withdrawal, but while at
the bank purchased several "counter checks" with which to pay regular bills.
Such "multiple" transactions were previously recorded as one withdrawal, but
after more convenient N.O.W. drafts are substituted for the cumbersome "counter
checks" they are now recorded as several withdrawals.
Massachusetts savings banks sold over 9.000,000 "counter checks" in 1972.
Approximately 177,500 N.O.W. drafts cleared in February, 1973, an annual rate
of 2,130,000. hlense, the N.O.W. draft does toot yet even approach counter checks
in volume as a means of withdrawing funds from savings accounts.
Dollar volatility: Total withdrawals from N.O.W. accounts during February,
1973 represented 23.2% of the mouth-end balances, a decline in the rate from
January. Ino comparison monthly withdrawals from clecking accounts approxi.
mate 400% of balances and front savings accounts approximately 3% of balances.
.%gain, however. it is probahla' that N.O.W. aceroumts %'ere previously active
savings accounts far nmore volatile than overall averages.
Summary: Deposit size and activity cover a wide range. Before N.O.W. ac-
counts, depositors had to select one "extreme" or the other, either an inflexible
savings account or a flexible but low return checking account. Depositors with
$500 to $2000 accounts with moderate activity (three to ten items a month) were
severely inconvenienced whether they chose a savings account or checking ac-
count. In the former case withdrawals were cumbersome and in the latter case
no interest was received. This is the type of deposit which has been attracted to
the N.O.W. service. There has been no change in the demographics of such ac-
counts, but rather merely the availability of a new type of account which better
fits the existing size, needs and activity of such deposits.
Senator MICI-NTY1RE. Thank you, 'M. Ensley. Glad to welcome you
back to your old hattnt. _
48
Mr. Kamp, I think S. 892. you have I)retty well stated in your state-
mient your position on it. and there, is very little ol)position to it.
Il inhe interest of time I think I wvill excuse you nmow unless you have
something further to say on the -NOW accounts. which is'tie real
contentious thing today., and tell-you I appreciate very much yotr
coming here to testify anld hell) Us.
[Tlne full statement of Mr. Kamp follows :]
STATEMENT OF CARL. 0. KAMP. JR.. V"TIN; CIIAIRNrAN, FEDFRAT. I.OME LOAN
BAN K IOARD
Mr. Chairman. aun innenulbers of tie ,Siieonnnnntiect, the Board anireciates the
Olhwr'ixii't ty to present its views to you today.
'Phe Ft,<hral IHome Loain Bank Board slsiirn tlie oine year extension of rate
control aitliority lir'otild fujr ill S. IMtIS and ,'S. 1251. As yol knnow. thi, antnlnority
is stlinitilil1 to expire at the in if May. This extenisiml wi ldi ntintlie too nlliim
tin Federal lone IsLmn Bank Board. tine Board (of Cinverinors of tine Federal
Reserve 'Syste n. and tine lBoaid of Diretniurs (of tht, Federal I)epist Inisuraile
Co riporation to lpreserine rin's governing tlie iaynienit an1d advertising of interest
or dividends on tinn, and sni rungs a
,
ieotnnts. Failure to extend tilts rate c'inntril
anuthority woul eliminate all en'ilin.s (in rates charged by thrift institutions.
It woul also eliminate tino ipower of tine Federal Reserve Board and tin lI)tIC
(in St sil, rat ' evililigs fir c'inninnne'in'a: ba nk vertilate atinits if seller size,
w hiv'h art highly colliutitiv' w ith tlie accounts offered ly thrift institutions.
Tli.,; renillnst for aln ex teisil of run te 'ontil o ins tif lirejnnivte the IN)sit[ill
oif il' Amlunninistratiii with reslitnt ti ally jiissilit iei''ollnllninniitiins that will be
niade as a result 4if t(e It'i inrt it' lt' president's (' lintiiss on oil Finam'iolI
Structure and iteguati n (tie so-aidca hlunt ('iminlsiin. The rate volntrol
extension is a iat tter tihat Inust lie restnl'ed bifnire .Itime I whe-reas any Iikly
1 ngislatIiii arising frim the nn' t 1111 'i lnoissin wnnt \vim M<i lii a caonideralod,
length of liine for ll-i n11 lilnlses o f ('igrss to consider. Tne lBoard's sniloort for
a 41ine year extellsliill of rai, cin trol Is girein ill reiognition that a thororughn re-
evaluathon of r'te control might he apqropriate at a biter date.
Tine Climiiitti' night als) wish to give coin-ideration to) the dletlon of two
p provisions In tie svtliiin of tine l+'iuderaI olmno Loan Bink Act that inve the
p ractiael effect of eli i ting the authority nif ti lBoard to set rate ceilings oin
illnmietlliier S & L's anil ciilicrative hanks inn Massachusetts mn rnt her states.
I'mintr tis chaingi'. tin Bnoard would halll , authority to set interest rate ceilings
for nonenmnber S & l's in all states. Tie text of this change is i'ontlilnned In an
aliiindix to tinis testilllnny. We niote a similar lirolosal In S. 1256 that wouhil have
the practical inipact of permitting the t'DITC to set interest ceilings maid iy
savings ianks in .Massachusetts that are not insured by the FDIC.
At the present time we nre approaching a situation in the financial markets
tnat could create series il'~ iilems for savings anmd loan ass ciat ions a ndn the hlls-
ing ninarkets ill the alseli'e cif rate controll authority. As you know. short-term
Interest rates have bneen increasing shalrily ill recent ninntns. At tine present time
til Interest rate on three-nmnth Treasury bills is gett ing close to 41 percent, while
ine Intrest rate nin lnger dated iiills is now above 6 liercent. I'nler these conli-
tions. dlsinternellation is incoming a real piossilility in the foreseeable future.
hir data indicate a considerable slackening off In savings Inflow beginning in
November 1972. For tine month of Feliriary we estimate, based on a sample
surveyy, that net new savings received was only $1.6 billion compared to $2.7 billion
in February 1972. Tints Is the smallest Inflow, on a seasonally adjusted basis, since
tine fall of 1970. Thus. while savings flows have been quite good in the last several
yearns, the present financial sitnation threatens to change this.
As you will recall, rate control legislation was first enacted in Septemler 1966.
At that tine. rate eimpetition froin commercial lianks, .ombined with tight
noney, was diverting funds on a large scale from 4 & 's an drying ill sullies
(of housing credit. In addition. destructive rate conpltetiion lit upward pressure
on savings rates paid by thrift institutions beyond their financial ability to pay
sucl rates, Congress took due note of the fact that savings and loan associations
are statutorily required as a matter of public policy to invest largely in long-term
mortgages and that this requirement places them at a serious disadvantage com-
pared to commercial banks during periods of tight money.
After the enactment of the original rate control legislation in September 1066,
the market share of savings and loan associations iniproved markedly; The result
was a rapid recovery ii housing starts and a halt to what could have been a
serious deterioration in the financial conditions of thrift institutions. While
rale control was not the only factor, it was certainly important. Rate control
once again played a critical role during the renewed tight money period of 19()
and early 1970. This was certainly a major reason wlhy private housing starts
remained much higher than during tihe 196) credit crunch.
Savings and loan1 associations have become more important in supplying fiids
to hijusing markets il recent years as many oiiher lndters htve withdrawn from
tile mortgage market, particularly with respect to nt1iking p nrialielt h1(l10oans.
Il 19172 savings and loan asst-lations accolited for 57 percent of the net increase
ii residential mortgage credit. They are now the doiminant lenders by a wide
ia1 gii inH both homes and apartment buildings .
A number of studies indicate the iilihnrtance of rate control to the housing
market. Tus, i, the Stuidy of tile Savings and ILoan In(ustry indictedtd for the
t',igress and tile Board, Professor Irwin Friend cited a statistical finding that
a itr.s of just $1 billion in savings from S&L's to comninercial banks leads to a
decline of 21.50) housing starts il the same 3year and rolghily 8O,000 units in the
linlg-run. This and other evideiee led Professir Friend lo re-illnlend that standby
authority oil interest rat( ceilings inv retailed by Sulervisory agencies, even
though Ike indiated that it would be desirable to plhase out the norinal use of
such ceilings gradually over time.
lit leeinber, 1972 tile Federal Home Loan Blnk Board requested Professor
)wight .Tffee of Princetin1 Iniversity to investigate the likely results (of a no
rate ((introl situation t. Wilizing a major ecnomiet He model that has been devel-
oped jointly by the Federal Reserve lBoard. MIT, ad University of leilsylVvanit.
At the Board's request. Professor .affee did simulations based upon the 1s.15111111-
tion that the ability of S&L's to my rates in savings is related to their total
portfolio profitalility. Where deposit rates of coitmmiorecial hanks rise to the sam11e
level as that of S&,'s, Professor Jaffee's silulhItiots indicate a sharply higher
hlvel of mortgage interest rates than wouhl otherwise lie the ease and a large
shift ill funds ( 1from savings and (101 associations to commercial banks. Only a
silall fraction of the i-reased deposit intlov at commercial banks go into mort-
g.ages. If the rate paid by commercial bauks on delosits rises less than S&L's,
tIle resIlts as exl'cted. are less adverse to the mortgage market, but the mortgage
rate- is still higher than it would e otherwise.
In our opinion. n-ailable evidence indicates the continued importance of rate
coltrol for tile housing and mortgage markets. Nonetheless, the Board Is aware
that rate ceilings are not in themselves a solution for the problems of thrift
institutions. There is no suhstitute for hasic measures necessary to improve the
olipietltive position of savings and loan assoclatoits. The Board has worked as
vigorously as possible toward this objective. Relying upon existing powers and
no-w statutes. tite Board has broadened the range of assets and linbilities that
S&L's call issue witliout changing the fundamental omnitment of T&L's to
serving tie neetis of housing. To a large extent. savings and loan associations
have Ilemie full service housing lenders with iiuch nimre flexible lmwers to
serve tile while range of housing credit needs. As tine goes o1. tile competitive
position of S&L'. should improve. But. for the tine being S&L's continue to
operate under (isadvantages relative to eomiilercial banks. -
S. 100S would generally permit NOW accounts for commercial banks. credit
unions anti Federal savings and loan associations. 1.. 1256 would prohibit NOW
accounts. except that those NOW accounts in existence on 'March 15, 1973 would
he permitted to continue for a period of six months following the enactment
of the bill. With respect to NOW accounts, the House bill, H.R. 4070, is the
salne as 5. 1256 except that It does not contain tle provision relating to the
six month continuance of existing accounts. The Board has been carefully
monitoring developments in this area since NOW accounts first began and we
will continue to do so. Our current data show a rapid and significant growth
In the balances in NOW acenilnts. tut we are unable to draw any firm con-
clnsions at this time as to the ultimate trend and impact of NOW accounts.
Other witnesses, including Mr. Smith from the Treasury Department who will
present the Administration's position to you on Thursday, will be able to report
to you their own research so that you can form a judgment.
The $3.2 billion Federal Savings and Loan Insurance Corporation is now
insuring each depositor up to $20,000. Its coverage applies to some 53 million
savings accounts with total balances of $201 billion. All but about 3% of this
is estimated to be fully Insured, which clearly indicates the great importance
the savings public attaches to Federal Insurance of accounts. In terms of total
resources, 97% of all savings and loan associations are FSLIC members. These
institutions have become the backbone of the housing credit market and, at the
present time, are supplying close to 60% of the net increase in residential
mortgages.
The Federal Home Loan Bank Board urges the early enactment of S. 892,
which was introduced at our request. Very briefly, this bill would amend Sec-
tion 40- of the National Housing Act. the section which deals with the premium
structure and reserve goals of the Federal Savings and Loan Insurance
Corporat ion.
First, the amendment set out in S. 892 would discontinue further prepayments
of premiums into the secondary reserves of FSLIC, and, second, it would
authorize the Federal Home Loan Bank Board to set each year within a range
of 30% to 70% the portion of the regular annual Insurance premium savings
and loan associations will he required to pay in cash. The present basic premium
rate of 1/12th of 1 percent would be maintained. The portion of the regular
premium not paid in cash would be charged to available secondary reserve
balances, to which the FSLIC would continue to credit earnings each year.
Should the ratio of the Insurance Corporation's total reserves to tle total
deposits held by Its member institutions fall below 1.25 percent, one hundred
percent of this regular premium would be paid in cash until said 1.25 percent
benchmark is again attained.
Before going into details, I'll summarize our principal reasons for proposin.
this amendment. First, after studying the FSLTC's almost 39) years of operating
experience, we have concluded that maintenance of total reserves in the ranue of
1.6% to 2.0%/, of total deposits is no longer necessary. Although the Corioratim
has used its funds to protect more than $2 billion of savings deposits over the
years. its It imate losses have t4ittled kiily aI 11l1iiil .1S .3 llii um--ali ut 7',% oIf
its cumulative income.
Second. the present formula produces a widely fluctuating tax on the resources
of the insured institutions. And third. the premium lrepaynment feature has
created inequities which will become increasingly difficult to correct if such ad-
v nce payments are permitted to co,,tinue. In short, the proposed amendment has
as one of Its principal long range goals a phasing out of the Corporation's sec-
ondary reserve which has been built up from such prenmhum prepayments.
By way of background, when the Congres established the FSLIC in 1934. It
set the annual premiuni rate of one-fourth of 1 percent of the sum of total savinz.o
and creditor obligations. The following year this was reduced to one-eighth of 1
percent and in 1950 the rate was cut to one-tvelfth of 1 percent. In 1969. creditor
obligations (mostly advanes" from the Federal Ilome Loan Bancs) were rem,,ved
from the prenium base. This was only a modest reduction in premium costs since
over the years creditor obligations have averaged about 6% of total (leposits.
The present premium prepayment structure. which was enacted in 1961. was
designated to provide for a fast build-up of FTI("s reserves-both (lollar-wi.se
and in relation to total deposits held by insured savings and loan associations.
Because of the very rapid rate of growth of the industry, as opposed to significa nt
expenses or losses of FSLIC, the Corporalion's reserve ratio had declined to 0.65%.
(FSLTC"s $100 million of government-owned capital stock, plus dividends, had
been retired during the Fifties.)
The 1961 amendment, that Is, the present statute, which was coupled with a
downward adjustment in the amount of stock of the Federal Home Loan Banks
required to be owned by insured associations, provides the following:
1. Until tle FSLIC's total reserves primaryy and secondary) reach 2.0t'% of
total deposits, each insured institution lhays in cash each year the regular ,ruu,-
twelfth of 1 percent premium and, in addition, a cash premium prepayment equal
to 2% of its net deposit growth during the prior calendar year. An off-set is al-
lowed for certain required purchases of Federal Home Loan Bank stock. The
premium prepayments and earnings thereon are credited to the Corporat ion's
secondary reserves.
2. After the 2.0%, total reserve ratio has been attained, prepayments cease and
are not resumed until the ratio drops below 1.60%. During this interim the regular
one-twelfth of 1 percent premium is not paid in cash, but rather by bookkeeping
transfers out of accumulated secondary reserve balances. During 1970. 1971 and
1972 no prepayments were made and tile payment of virtually all regular premi-
ums was accomplished by journal entry transfers.
3. The present statute also provides that once the 1.60% low-side benchmark
is breached, as it was at the end of 1972, full cash payments of both the regular
annual premiums and the 2% premium prepayments are resumed the following
May 1.
The 1961 amendment produced rapid results. The 2% reserve ratio was exceeded
at the end of 1969, at which time the FSIIC's total reserves aggregated $2.801
billion. More than half of this, $1.55S billion, or 56%, was represented by the
secondary reserve. Since 1969, there has been no cash flow from insured institu-
tions to the FSLIC. Even so. the Corporation's
total reserves have continued to
grow through portfolio earnings and now stand at $3.142 billion. However, be-
cause of the unusually strong growth in total deposits during the last two years,
the Corporation's
total reserve ratio dropped below the 1.60% trigger point as
of December 31, 1972. Thus, under the present premium statute, full cash payment
of regular premiums as well as preIium prepayments
will have to be resumed on
May 1. 1973. Such payments in 1973 could approximate $500 million. For the next
five years we have projected payments of $2.3 billion. We do not believe that
such a large diversion of funds from the home mortgage market is needed or
warranted.
The amendment we are proposing would retain the basic one-twelfth of 1 per-
cent premium rate. Also retained are the three emergency sources of funds now
in the statute. These are (1) the authority to assess additional premiums up to
one-eighth of 1 percent, (2) the authority to call upon insured institutions to
deposit with FSLIC up to 1% of their total savings, and (3) the $750 million call
upon the IT.S. Treasury. Today, upward of $3 bHlion of additional funds could
be raised in case of dire emergency.
Under the proposed amendment prepayments
into the secondary reserve would
be terminated. Earnings on secondary reserve balances would continue to be
credited to tile accounts of individual institutions. -So long as FSLIC's total
reserve ratio is not less than 1.25%, the Board would have authority to set each
year the proportion, within a range of not less than 30% nor more than 70%. of
the regular premium to be paid in cash The remainder of this premiun would be
charged to secondary reserve balances, to the extent available. If at any De.em-
Premium would be begun on 'May 1 following and continued until the year-end
bet 31, the total reserve ratio is less than 1.25%, full cash Payment of the regular
premium would be begun on 'May 1 following and continued until the year-end
ratio again reaches 1.25% or more. Split payments would then be resumed. Paren-
thetically, I may note that the proposed amendment has the support of the leading
savings and loan groups.
On the assumption that the patterns of industry growth rates and of FSLIC's
operating experience over the last decade are continued, it is estimated that a
30% cash policy would produce a moderate premium cash flow ranging upward
from $51 million in calendar 1973. This 30% policy is also estimated to produce
a less-than-1.25%
ratio in 1979 and thereafter oscillate around that level, with
100% cash premiums In some years. This plan would amortize the present $1.4
billion secondary reserve to about $0.7 billion by 1979. Total reserves would
then approximate $4.5 billion.
For purposes of illustration,
a consistent 70% cash policy would produce a
premium cash flow ranging upward from $120 million in calendar 1973 and a
much slower decline in the reserve ratio-from the present 1.56% to about 1.45%
In 1979. The dollar amortization
in secondary reserve balances, however, would
be nominal.
52
By way of expanding upon the earlier summary of reasons for proposing this
amenilment, it is noted tlat the Corpoiration now retains all income on tile st-
ondary reserve, although earnings at its averge lortfolio rate are credited to
the respective accounts of each institution. Insured associations, however, carry
their pro rata shares of these lrellyments pls earning.., ol their books a, all
asset which cannot he expensed untHl utilized to pay a regular annual insurance
premium. This feature has already created iniuluities and tax problems which
will be further magnatied under the loresent law. Sonie ilistitut oils which grew
rapidly during the Sixties now have zecmidary reLstrve 1Iala1s whih are earn-
lug ill eXCeSs of their regular annual prenmini charges. As is readily apparent
froiii tie attached hi l1lilatiowis. c. nlim titin ,)f the lreseint lorenliun structure,
ill addition to prodlicii" it widely Il'tlatlill g c1si 1 111w. will coiliid a sec-
olaIry reserve situlltion fi'ili which itrleat will heccillie progressively more
difficult.
Fikllowing ii limy lrep nred text are sevenl talmlation. of proj(ction.- we have
nmaile for the oxt 10 yea rs. T]IsP.ti, ', rV iii the 'it .14WMA iv sjl '1iiisSion. Also)
attached aIre three Hille gniph.; which 'resellt vi.l aalill ciua 'isia lis o " l.ossible
future t rends iiiider both the l'tsenlt lil'trellilltl St:iItlt, 11d I t priit os d ill S. , 22.
T o s! u iii. Ip lie mi r d is c(m'ii iiled tha t a revisim (i f F S I C',;"s Iirt m iumn sIrue-
tiire is liw liit only (d.sirale hut Iinvs ariy. We also) feel that the propomst4d
inell(ln1lelt is a l)rac'aI' oile , which gives ihe 1t 'a d 'eas 'thile diseretion for
dfMii g with the types fir insa lince ri.sk sit lios th e (t' ,,iraiti,, my ie
exisettd to Ierkolve. Ill itihitimi to) guttin.ig aimay ro thlie ulievun tize ilia hilur-
dein inherent ill the Iiweselit pirleaillll ll ii, a fila its tuidhsi rli, i illict uponm the
supply of residential iniirtgage funds, the liri,)ifIl %voui atom'rl opioitiuiily to
allow seo,, iiary res,erve.s to aim lize ti) a level at which t reidyilient prograin
compatile with maI i 1tei:iI('e of 14 lic conferelice 111 lie levelolpetd.
- KkRT A
FSLIC TOTAL RESERVE RATIO PROJECTIONS
(9% Growth - E7. Lar itng
i4% Exp. & Losses)* rerce'it
*Assured rate of growth and onerstions hdsed i avvrn,e over tnbt r&cc
TSLIC TOTAL RESRVES - DOLLAR PRO3ECTIONS
(9% Growth - 5% Earnings - 14.% Exp. & Losses)*
CH ART 9
Ar-LNnts iii Eillio'
-- _-- $12
-- - 10
I
/
Present Law
rI > -'- -" -
$6.25 - -- ". -
- 707. Cash 6
-P" a.nosed Law
4'.4 30". cAsh**
$3.125--$.4.
.
' '
t'01
i '~
'69 '70 '71 '72 '73 '74 75 '-6 '77 '78 '79 W '8' '2 '83 '4 '8S '86 0
* Asr ed rate of 1 rowth and operations bosed on average over last tleca('o
** 100". in sore ycars
FSLIC SECONDARY RESERVE - $ PROJECTIONS
(9. Growth - 57. Earnings - 14. Exo. & Losses)*
CHART C
Amounts in Billions
I * 5. O
** 100% in sov'e years
TABLE 1.-SELECTED PROJECTIONS: PRESENT PREMIUM STRUCTURE
[Dollar amounts in nillionsj
Cash
payments
by insurance
savings Reserve balance-yearend Total reserve
and loan ratio
Calendar year associations Primary Secondary Total (percent)
1969 ............................... $278 $1,243 $1,558 $2,801 12.14
1970 --------------------------------- C 1,394 1,509 2,903 2.C5
1971 --------------------------------- 0 1,529 1,458 2,987 1.77
1972 ................................. 0 1,758 1,384 3,142 12 1.594
1973 ------------------------------- 496 1,949 1,789 3.738 1.749
1974 ................................. 398 2,179 2.096 4,275 1.835
1975 ---- _------------------------- 434 2,432 2,438 4,870 1.917
1976. .............................. 473 2,709 2,818 5,527 1.996
1977 ................................ 515 3,012 3,240 6,252 '2.072
1978 ................................. 0 3.345 3,139 6,484 1.972
1979 ................................. 0 3,711 3,010 6.721 1.875
1980 ................................. 0 4,118 2,849 6,967 1.783
1981 ................................. 0 4,568 2.651 7,219 1.695
1982 ................................. 0 5,065 2,413 7.478 1.610
'Trigger points.
2 These projections were made prior to availability of firm Dec. 31, 1972, data. This yearend ratio proved to be 1.56
percent.
TABLE 2.--FSLIC RESERVE RATIO PROJECTIONS
Total reserve ratios
Proposed law
Present
Dec. 31 30 percent cash 70 percent cash law (percent)
196 ... ......................................................................... 2.14
1970 ............................................................................ 2.05
1971 ................ ........................................................... 1.77
1972 .... .................................................... .............. .. 1.5S4
1973 ..................................................... 1.54 1.57 1.749
1974 ............................................ 1.48 1.55 1.835
1975 ..................................................... 1.43 1.52 1.917
1976 ---------.............. -----------.----...... .......... 1.38 1.50 1.996
1977 ...................................................... 1.34 1.48 2.072
1978 ...................................................... 1.29 1.464 1.972
1979 ...................................................... 1.249 1.446 1.875
1980 ...................................................... 1.264 1.428 1.783
1981 ...................................................... .223 1.412 1.695
1982 ...................................................... 1.239 1.395 1.610
TABLE 3.-CASH FLOW FROM INSURED ASSOCIATIONS TO FSLIC
[In millions of dollars
Proposed law
30 percent 70 percent
Calendar year cash cash Present law
1972 ........................................................................................ 0
1973 ............................................................ $51 $120 $496
1974 ............................................. ............... 56 130 398
1975............. ......................................... ------ 61 142 434
1976 ........................................................... 66 155 473
1977 ............................................................ 72 169 515
1978 .................................. ........... 79 184 0
1979 ............................................................ 86 2D0 0
1980 .......................................................... 312 219 0
1981 ............................................................ 102 238 0
1982 ............................................................ '371 260 0
1 Because or a less than 125 percent reserve ratio at preceding yearend 100 percent of premiums would be paid in cash.
53
TABLE 4.-PROJECTED TOTAL RESERVE BALANCES AND ANNUAL NET CHANGES
lin millions]
Proposed 1.25 percent law
30 percent cash 70 percent cash Present law
Total Net Total Net Total Net
December 31 reErve increase reserve increase reserve increase
1971 ----------------------------------------- ------- _ ----------------............ $3,125 $138
1973 ---------------------------- $3.287 $162 $3,355 $230 3,738 613
1974 ..........................----- 3,458 171 3,604 249 4,275 537
1975 _ .. .............. . -------- 3,639 181 3,872 268 4,870 595
1976 ---------------------------- 3.831 192 ;,162 290 5,527 657
1977 ---------------------......... 4,034 203 4,476 314 6.252 725
1978 --- _------_---- -....... ----- 4,250 216 4,816 340 6,484 232
1979 .. ........... ... ....... 4,478 228 5, 183 367 6,721 237
1980 --------------------------- 4,940 ' 462 5,581 398 6,967 246
1981 ...........--- ------.-------- 5.207 267 6,012 431 7,219 252
1982 .........-------------- 5,750 1 543 6,478 466 7,478 259
Years of 100-percen' cash payment of regular premium.
TABLE 5.-PROJECTED SECONDARY RESERVE BALANCES
[In millions]
Proposed amendment
30 percent 50 percent 70 percent Present
Dec. 31 cash cash cash law
1972 ......................................................................................... $1.387-
1973..... ... .. ... . . ... ...------------- $1,337 $1,371 $1,405 1,789
1974 ............. ............................ 1,273 1,346 1,420 2,097
1975 ................. ............................. 1,195 1,312 1,430 2.438
1976 .............................................. 1, 100 1,267 1,435 2,818
1977 .............................................. 986 1.210 1,434 3,240
1978 ............................................... 852 1,139 1,427 3,139
1979 ............................................. 694 1.053 1,413 3,010
1980 .............................................. 729 950 1,390 2,849
1981 _---------------------------_.. . ............. 527 827 1,357 2,651
1982 .............................................. 553 683 1,313 2,413
APPENDIX-POSSIBLE AMENDMENTS TO S. 1250
Renumber section 4 as section 5 and insert a new section 4 to read as follows:
"See. 4. Subsection (a) of Section 5B of the Federal Home Loan Bank Act
(12 U.S.C. 1424b(a)) is amended by striking the third and fourth sentences
thereof."
ANALYSIS
The amendment would eliminate two clauses that create exceptions to the
Board's authority to regulate interest rates of nonmembers of the Federal Home
Loan Bank System. Elimination of only the second clause of the third sentence
of subsection (a) in line with section 3 of S. 1256, would relieve the restriction
.on the Board's authority only in Massachusetts. However, competition from
nonmember savings and loan associations has also been a problem in other states
as well. Therefore, the Board presents for Committee consideration the poSsi-
bility of deleting the entire third sentence of section 5B(a). The fourth sentence
of subsection (a) relates to Board authority prior to July 31, 1970 and could
therefore be deleted as unnecessary.
Senator MCINTYrE. We call as our next witness Mfr. Gilbert G.
Roessner, vice president of the National League of Insured
Associations.
We are happy to welcome you this morning.
As I just told Chairmtan Kamp, really you don't need to waste any
time. I don't. think, on regulation Q. The only problem on regula-
tion Q is whether it be 1 or 2 years. But we. do have a contentious
item called these NOW accounts which we would like to hear you
on very much.
STATEMENT OF GILBERT G. ROESSNER, VICE PRESIDENT, NA-
TIONAL LEAGUE OF INSURED SAVINGS ASSOCIATIONS; ACCOM-
PANIED BY WILLIAM F. McKENNA, GENERAL COUNSEL, VICE
PRESIDENT, NATIONAL LEAGUE OF INSURED SAVINGS ASSO-
CIATIONS
%fmr. RossxEI. I will be brief. You have my statement for the record
(see p. i;).
However, I would like to summarize the significant points of our
testimony and also, if I may, to add a few of our observations and
perhaps some of my personal observations that I consider responsive
to the nature of tle questions that you asked earlier.
Senator McINTYRE. Fine.
Mr. ROESSNER. First of all, the National League, for a number of
years now. has supported legislation that. would allow Federal savings
and loan associations to offer limited checking account authority to
the savings depositor. We continue to support that service. Therefore,
we do not. recommend the continuation of tle NOW accounts with
interest for some of the reasons that Senator Bennett raised. A con-
fusion can well develop in the management. of the whole money system
of the Nation as to what portion of the account is demand and what
portion of the account is time.
We therefore recommend the more direct approach of the con-
venience checking account. which would be reserved against, in the
same fashion that commercial bank checking accounts are reserved
against.
The National LTeame believes that the savings and loan a&socia-
tions should and will in fact some day become true family financial
centers. With the development of electronic funds transfer systems,
with the broadened powers recommended in the Hunt Commission
report, we feel that it is esseential to serve the family that we have some
form of third-party payment system.
"he question of payment of interest on demandd deposits ve sug-
gest. is wholly another subject: perhaps it is one that deserves thormouh
study. T think it is som'.thin,, like 40 years since the prohibition
against tle payment of interest on demand deposits was enacted. This
could well be the subject of a major commission review.
You recall the hunt Commission recommended tle phasing out of
regulation Q with respect to time deposits. hut it recommended the
continuation of the prohibition against. the payment of interest on d(-
mand deposits. It. did not give much academic. or research support to
that conclusion, but, nonetheless it included the conclusion. Therefore.
that is ouri position with respect to NOW accounts. M \r. Chairman.
With respect to rate control, as you pointed out. our league recom-
mends the extension of rate control on a 2-year basis, and we also
recommend the maintenance of tile ditlerential as between thr-ift insti-
tutions and commercial banks-pending some more complete solution
to the differences in power.
One or two other points with respect to whether thrift institutions,
when offering convenience checking accounts a id l)erhaps even con-
sunmer credit, become commercial banks, we suggest that gicl added
service would not make us commercial banks. We do not wallt to
become involved inl the financing of the commerce of tile Nation. Sales
lease-backs of 747-type airplanes and things of that sort,, we think
belong
with
specialized
institutions.
On tie other hand. we feel. since, we have specialized with the, needs
of the family for so many years,. that. we should have the right to serve
their needs fullv. but still l)e specialized ill providing for their services.
Senator SPARK MAN. I wonder, 'Mr. Chairman. if I may interrupt.
Senator MniTYIIE. (ertainiv.
Senator SI..Ii3I.\.x. I noted with interest whatvon said nholit the
lack of desire of tile savings and loaln associations to collpete in tile
industrial world.
Mr. ROE.sSN El.: 'es, I VS .
Si'ator SI.u:KN IAN. I Idthr the Savings and Loall I loldini, Act.
are't savings atid loan associatIolls (ivent linitcd anthority to own
indus.tial property anld Colilelcial In'oput~y ?J
Mr. loESMNrEl. Not to li\ knowledge. Senator Sparkman. There
might be sonic limiited auth'orit . As you know, we as Federal asso-
ciations have limited authority to make nonresidential loans. h'ley are
gee'1rally shopping centers ald things of that sort. The great iulk of
-our assets are still invested ill resi(lelltial ilIotiages. 11[ lot familiar
with holding company legislatioui specifically. I 'vasiit aware that
there was any broad conmereial (Ilegation of ailtioritv.
Senator S X\'Amrx. Mri\l~e Mi. MeKt-1111. Mho. by til(e way. was
another Ilel)er of the stall of this committee-
Mr. M y.KE.,-.NA. Mv\ iimlressioni is theie w15as 110 ex)insion of the
authority tunctions fi' sav'illo and loan holding collpalies. It is true
that tile 11lavillgs till( loall 1l5t'cct of a holding (lNll)111y illay illllilge
ill llonsavill'Os alid loan activities to a l inltd extent. lit it iS a rather
c(ollllex sitilatioll. lecallse it dlehelldls ol wiletilmr tlev Ownl only one
savings and loan association or ilore tall ole. Hills lbecolimlr a lullti-
Wde savings '( loan losing h .oIll 1 yalay. If tie own more tha I one. tie
Iattern is pretty much 11 l/n tie lines of the !i'k holding company
w\hlere tite\ must divest tlcmnselves of their llolifinalicial activities.
I am afraid I must also sa\v I don't know of any broad authority
prollihiting ent rllue ilto the indl'strial field.
Senator StpPAVNIm AN. I saild it was a limited atthovitv. I ann not sure.
illyVelf. It wassever-al vea I's lgo wve l5,e( tile htMislatiOI -
"M[r. Mc\:x.\N. We ;yill he glad to sulp ly tle information.
Senator SPARMAN I contlluing}j. To allow savings and loan coin-
panies to go into holding company activities.
Mr. MI'KENNA. We Will lie glad to provide a sunlmary of what can
be done under the act.
Senator SPARRM Ax. It is move a matter of curiosity than anything
else.
[The following in foiination was received for the record:]
NATIONAL LEAGUE OF INSURED SAVINGS ASSOCIATIONS.
Wash ington, D.C., March 26, 191.
H=on. JOHN SPARKMAN,
chairmann , Comnifttc on Baniiking, Housing and Urban Affairs, U.S. Senate,
Washington, 1).C.
DEAR SENATOR: II 11",,lE0lISe to your question about savings and loan holding
companies and industrial and commercial loans asked during Mr. Gilbert G.
Rot-,sner's testimony for the Notional League oil NOW accounts oln March 20
before the Subcommittee on Financial Institutions, the enclosed Is a copy of
material prepared for inclusion it the record of that hearing. That material is
being sent directly to Mr. Edward Dicks for that purpose.
It constitutes my opinion of tile answer to your question. based on examination
of the statutes and regulations relating to savings and loan holding companies,
Federal savings and loan ;iss,.ociations and service corporations. I nust adrait
that the results of this examination hold open the possibility of more investment
in industrial anti commercial projects toy savings and loan holding company com-
ponents than I realized existed at the time I responded to your question at tile
hearing. But as your question indicated. at the most any such authority seems
quite limited in scope as far as its application is known to me.
Please let nie know if the enclosed material does not for any reason in your
opinion constitute an adequate response to your question.
Sincerely,
WILLIA.St F. McKENNA.
General CounscllVicc President.
SUPPLEMENTARY STATEMENT OF TIlE NATIONAL LEAGUE OF INSURED SAVINGS
ASSOCIATIONS
Senator Sparkman requested that the National League file for the record a
discussion of his question as to whether savings and loan holding colnpanies-or
their subsidiaries have the authority to make industrial or commercial loans.
1. a. Multiple Savings and Loan Holding Company. A multiple savings and
loan holding company is defined by statute as one that directly or indirectly con-
trols two or more institutions that offer savings accounts insured by the Federal
Savings and Loan Insurance Corporation. (Section 408(a) (1) (E), National
Housing Act). No multiple savings and loan holding company or any of its sub-
sidiaries that is not an insured institution can begin or continue beyond Feb-
ruary 14, 1973 or beyond 180 days after becoming such a holding company or
subsidiary (whichever is later) any business activity other titan the following 6:
1. Management services for a subsidiary insured institution,
2. An insurance agency or an escrow business,
3. Holding, managing or liquidating assets owned by or acquired from a sub-
sidiary insured institution,
4. lHolding or managing properties used or occupied by a subsidiary insured
institution,
5. Acting as trustee under a deed of trust, or
6. Other services or activities approved by FSLIC or prescribed by regulation
. being a proper Incident to operations (of insured institutions andi not detri-
miental to the interest of their savings account holders.
FSLIC may extend the initial l)erini-ssible period, upon a showing of good
cause, on an annual basis for up to three more years, if it finds that the extension
wouhl not he detrimental to the public interest. (Section 408(c) (2), National
Housing Act.)
Therefore. once the permissible period has passed, no multiple savings and
loan holding company or any subsidiary that is not an insured institution could
make "Industrial or commercial loans" In the common connotation of that term.
because no such loans would appear to fit within the six types of activities listed
above.
59
State-chartered savings and loan associations may be insured institutions and
could be subsidiaries of savings and loan holding companies. The authority of a
State-chartered insured institution to make loans depends upon its charter under
State law and restrictions placed on it as an insured institution by FSLIC.
Because all Federal savings and loan associations are mutual in form, they
would not be found aniong the subsidiaries of a savings and loan holding (.,)t-
pany, even though all Federal savings and loan associations must be insured
institutions.
b. Independent FCdcral SRaving.i and Loon A.ssociation. A Federal savings and
loan association having saviligs accounts insured by FSII( C all il-1i it i wi,,t
a subsidiary of a savings and loa,n hlditig 'ompallny) still has Ito authrity too
make "industrial or commercial loais" within tile ciminlotily accepted meaning
of that term.
Up to 20 percent of the assets of Sulch an Itssmcia I oili 14.I 'a1 tll ol on i- i-
curity of a fi',t lien on real lprop-rty. vikich is 1u(t tho 1tstul 1im tlner ill which
industrial or commercial loans are made. (S'ectioim 5-)(vi, lottie Owners" l.mn
Act of 1933.) Within that limitation, some shopping center construtction coul
bend linain(el.
A Federal savings and loan association is also authorized too invest in a 'msi-
ness development credit corporation" ilorl)orated( in the State in. which Ile
assitiatiolins head offie is located. but only if the association's general reseivis.
surplus and undivided lrolits exceed 5 percent of its withdrawable savings aiv.
eonn1ts alld then only it to one-hllf (f 1 percent of the assomiatloWs t4itai wiit-
s standing loans or $250.0000. whichever is less (Sec tii in 54 c, lne 'me {)Wivnvr- Li.'an
Act of 19:33). This financing would only run to tih lisi ness devel(ilietit crd it
corporation, not to the industries or commerce thnt corporalti(n attrats to tile
State.
c. Aequiition of Stock by a Multiple Holding Company. By regulation. a
multiple savings and loan holding conitaity or its subsidiary may acqiire and
retain up to 5 percent of the voting shares of any company not a subsidiary
which is engaged in business activity other than those 6 activities listed above.
OSeclion 1s4. Ia ) 3 , Federalh Iloitte Loant Bank Board Regulations for Savings
and Loan H1oliing Companies).
d. Acquisition of Control by a Savings and Loan Holding Company Through
Enforcement of a Pledge for a Loan. Also under the regulations, it is permissible
for a savings and loan holding company to acquire control of another savings
an1d loan holding company pursuant to a pledge to secure a loan, or in connection
with liquidation of a loan, made in the ordinary course of business, but it cannot
retain control of such a conmtpany for more titan 1 year after its acquisition or
for an additional period not exceeding 3 years with FSLIC approval. (Section
584.4(e). Regulations for Savings and Loan Holding Comnpanies.) In the unlikely
event that the savings and loan holding comipatny so acquired itself operate an
industrial or commercial business, the acquiring savings and loan holding coui-
pany could only retain that control for up to 1 year (or an additional period of
3 years at most).
2. Dircer.ificd or Unitary kariuig8 and Loan Holding Company. A savings and
loa1 holding cotilnany. that controls only 1 insured institution is classified as a
"diversified savings and loan iholing company" if the subsidiary and its related
permissible activities as listed above represent less than half the company's net
worth at thi, close of the preceding fiscal year and less than half of its consoli-
dated nit earnings for the preceding fiscal year. (Section 408(a ) (1) (F), National
Housing Act).
A savings and loan holding company that controls only 1 insured institution
Is usually referred to as "unitary savings and loan holding comtlpany" if the
tests in the lieceling paragraph are not met.
Because as noted above, the prohibition against engaging in other than the 6
activities listed above applies only to multiple savings -nd loan holding companies
and their subsidiaries that are not Insured institutions, it Is legally possible for
a diversified or a unitary savings and loan holding company or its subsidiaries
that are not insured institutions to engage in other activities in addition to tie
6 so listed. (See Section 408(c) (2), National housing Act). But no savings and
loan holding company of any class or any of Its subsidiaries that are not Insttred
Institutions can, oin behalf of a subsidiary insured institution, engage in any
activity or render any service that would evade tiny law or regulation applicable
to an insured institution. (Section 408(c) (1), National Housing Act). In other
words, such a savings and hln holding company or subsidiary cannot do for a
subsidiary insured institution what that institution itself is not permitted to do.
Present rulings of the Board of Governors of the Federal Reserve System
forbid future acquisition (of a savings and loan association by a commercial bank
holding company. Under those circumstances, a avings and loion holding coin-
pany would not be a commercial bank, thus cancelling the possibility that a
savings and loan holding emiiny could make industrial or commercial loans
because it is a bank. It shouhl be noted. however, that this possibility Is not
otitlawed it the ('se of hanks that became saving" and loan holding companies
prior to that ruling.
This review of the situation appears to hold oln the potential possibility for
the following situations in whic['h a diversified or unitary savings and loan hold-
ing company could possibly make industrial or commercial loans.
a. When the savings and loan holding company which itself is not an insured
institution has legal authority to make an industrial or commercial loan.
1i. When a subsidiary that is not an insured institution Itas legal authority
on its own behalf or on behalf of any organization other than a subsidiary
inspired institution to make an Industrial or commercial loan. (A subsidiary
"service corporation" must get FSLIC approval in any event, nider aln August
23. 1971 opinion of General Counsel of the Board.)
c. When a subsidiary that is a State-chartered insured institution has authority
ilchr State liw tit m itoik' aii industrial r tu t oner'il hail anild is wito pri lild ted
froti dlihngt so tatider FSLIC regulations. (This third potential possibility might
also ntieivalhly apply to such a St:tte-chtartered insured institution that is a
subsidiary of a totultilde savings and loan holding company.) I personally am not
aware of any case in which this third potential possilaility is an actuality. but it
remains a potential possibility.
3. ,ucrrie ('orporation. Becallse so-called "service eorprrations" owned in
whole or in part by a savings and loan association are State-rhartered eorpo-
rations, their loamn and investment piawers initially depend upoKn State law. If
such a service corworaliou is owned in whole or iii part by a Federal savings and
loain aqoeiation, the F-id,rail Homae Iman Banik loald vxerciss regulatory con-
trol over the permissible m-tivities of stuh a service corporation. Industrial or
'ramner.ial loans as such are not inebul(d am ung the ierriissibla ai-tivities to
which that Board has gianted pre-aIpproval by regulation. The alaidicalae regu-
lations do hnld out the potential possibility that. if permitted by State law. such
a service corporation might eoneeivaly lie allowed to imnki' in industrial or
cottercitl loan if it receives prior written approval of the Federal Home Loan
Bink Board ulon alihlication. To my knowledge. the Board too date hms lint
granted any such approval. other than for construction of a modular hoping
factory it ne cast'.
If the "setrVice eorprn tiont" is owiiel iii whileor itt iart by one or Iire savings
and loani assooiationis uone of which is a Federal saviuigs and loaitt lsso-'iatini.
present regulations of the Board (10 not apply tat it to my knowledge. Therefore
tie a authority of silh a service v il-l onna;tin too inake itialtistlna hil ('on.titln'riali
loans would depend ullsn the law of the State or States involv-ed.
In terms of a savings and lon tt lioldiig i'otltjixiuy. a service colotiration ealt-
trolled by a Stfate-chharteretl slisidiiry savings Illd loal nisiiiationill iepolas
another sulbsidiary of tite s iigs n loan hbilaitig 'otnianiy. Suchb] a service
c-orporation thn constitutes a subsidiary other thanti an insut-l itistitution. Its
autthrity to mnake indu'4rial tar commervia 1 hanl Vs olil lie judged itt aeo-laine
with the rules above mentioned that apply to savings and lotn holding co)i-
p;tny subsidiaries tlm t are not suthsidliary insured institutions, but are service
earporn tions.
Sauna uatryi. In sunimary. as to savings and loan iloiditng eOiahianies and their
suhsidiaries. the anthirity to make industrial air eominnrial hians appears to he
rohtihited (except for grave lPeiodst in the' ease of timul tiple savings and atiin
holding companies and their subsidiaries tiat are not insured institutions. As
to their subsidiaries that are State-chartered insured institutions. if autlrity
too illaike ildtistritl and cilinnercitil loan, exists, it tiuat he fmiuid under State
lauu- and If so found. can then only he exercised if not prohibited by the Federal
Home Loan Bank Board waiting for ELI'.
'In the case of diversified or unitary savings and loan holding companies, a
subsidiary other than a gtatehrtered insured institution must look to State
law to determine whether It has authority to make industrial or commercial
loans. (A subsidiary service corporation must also obtain FSLIC approval.) As
to a state-chartered subsidiary insured institution of a diversified or unitary
savings and loan holding company, its authority to make Industrial or com-
mercial loans also depends upon Otate law and FSLIO acquiescence.
WLLAm F. -McKENNA,
* Genera. Counel/Vic Preeldest,
National League of Insured Sang8 Aaaoooat4o%*.
Mr. RoussN. I would like to add that with respect to this family
financial service, the mutual savings banks in New Jersey have been
offering checking account facilities for their depositors for something
like 20 years. This has made them more effective competitors for the
savings and loan associations because they can offer more of the one-
stop banking that the commercial banks promote, but it has not made
them commercial banks I wanted to make that point.
Likewise, the savings and loan associations chartered in thp State of
Texas make consumer loans to their customers, and I understand do a
very effective job of it down there and have helped to keep interest
rates down as a result. But that, too, has not made them commercial
banks. There is a big difference as between this full family financial
notion and a true commercial bank with the emphasis on commerce.
Senator SPAPiuusA-. I know there is an unusual situation with refer-
ence to the savings and loans in New Jersey. I never quite understood
what the full range of their operations are. I suppose it is a situation
that prevails only in New Jersey.
Mr. ROFSNER. Yes, sir; I think I know what you have reference to.
First of all, my association is federally chartered, and we do not, there-
fore, come under New Jersey law with respect to power. But the New
Jersey chartered savings and loan associations have all the investment
authority the New Jersey chartered mutual savings banks have.
On the other hand, they do not have checking account authority,
which the mutual savings banks in our State acquired through a judi-
cial process rather than legislative.
Senator BENziNrr. Is that available to all mutual savings banks in
New JerseyI
Mr. RoEaS .R. Yes, sir, by judicial interpretation. There was liti-
gation by a commercial bank against a mutual savings bank and the
courts held that this was an incidental power of the operation of the
mutual savings bank. Therefore, all of them do have checking account
authority.
Senator BEN=NET. Do they pay interest on those accounts I
Mr. RoEssNER. No, sir. They are classified as demand deposits. This
is why we prefer, Senator Bennett, in our National League the more
direct route. We would like to offer our customers the opportunity to
pay their bills in a convenient system, by some electronic means or
otherwise, to avoid polluting the air in downtown Elizabeth and things
of this kind, but we would rather do it directly rather than through a
savings account.
What Mr. Ensley said is quite true, many of our present customers
do come down, polluting the air in the process, make withdrawals for
93-211 0 - 73 - 5
the payment of utility bills, loan payments, and things of this kind,
but they are subjected to more inconvenience. They have to be more
determined than sitting at home writing out a series of checks.
Senator BENNEIr. Don't. they actually make one withdrawal and
then take tho . money and pay their bills?
Mr. ROESSN ER. Unfortunately, Senator Bennett, they do not. They
often have a list of bills they want to pay. As a matter of fact, we sell
money orders. Some of them, rather than making withdrawals, will
buy money orders at 20 cents apiece and then mail them all to the
payee.
Therefore, there is an element of inconvenient payment of bills in
a savings account. To isolate those two elements would be extremely
difficult. You can find some accounts with very low balances that have
a very high velocity of turnover. Yet others with larger balances have
much lower velocity, even though a portion might be used for the
payment of bills. There are still some people around, you know, that
we think are the more thrifty type who don't like the inconvenience
of a checking account lest it teaa them to spending more.
Senator BE N-NEr. I have learned since I came east there are in-
fortunately some people in the United States who cannot pay a bill
by check, who cannot get a check cashed, and I wonder if that is not
part of the reason for the problem you are mentioning. They are better
off with a money order.
Mr. ROESSNER. It is not our experience, and incidentally, we sell
a rather significant volume of money orders. I don't believeit is for
that reason that they use money orders. It is generally, frankly, the
foreign-born who prefer to pay their bills in that fashion and do not
feel comfortable with a checking account.
Senator BE N N Err. I am sure a lot of them have problems of identifi-
cation. They have had unpleasant experiences when they attempted
to present a check, even if it was someone else's check.
Mr. RoEssNER. That. is quite true.
Senator BENNE1. There is a very substantial part of the popula-
tion in Washington you cannot. pay with a check because they cannot
negotiate the check after they get'it. I am sure the same thing exists
with respect to any check they might write.
Mr. RoEssNR. 'Except for paying utility bills, department stores,
mortgage payments, and things of that kind. Of course, in the banks
these checks are received and deposited.
Senator BEN-m-. That's right.
Senator McINTYR. I would like to just point out for the record
here that the NOW accounts as presently being utilized are restricted
to individuals and not available to any commercial accounts. The bill
I have introduced, S. 1008, would afford to the commercial banks the
very same right that the NOW accounts are being exercised by the
mutual savings banks and being extended to the S. & L's. Does that in
any way change your opinion? You are obviously opposed to the
NOW accounts. I am not that familiar -with the banking world, but I
know every attempt is being made by the commercial banks to be a
well-rounded insitution, to offer as many and varied services as pos-
sible. Here is another service you can offer. Why do you turn this down?
Why do you say you are helping Mr. and Mrs. America if you allow
them to have such a thing as a checking account, but no interest, if
someone can say we will give Mr. and Mrs. America a checking account
and we will pay them interest on it?
Mr. ROESSNER. We recommend the direct route, that direct checking
account authority be given to us to provide the convenience of the
NOW account. We recommend second, a study of the prohibition of
the payment of interest on demand deposits be mounted to review the
question whether it is still valid 40 years later, that all institutions
not pay interest on demand deposits. It may no longer be valid. It is
a major issue in the whole financial system in the Nation.
Senator B.NNErr. What do you think of the suggestion of Chairman
Kanp to allow the New Hampshire and Massachusetts situation to
continue, but with some standby authority, in the event it took on a
turn that indicated it was going out of control to phase it out in an
appropriate time, in the meantime learning from the experience of
Massachusetts and New Hampshire?
Mr. RoEssIER. I personally think there is validity in that position,
of course, though recognizing it is a temporary solution pending an
examination of the consequences, and that during this same time I am
suggesting a study as to whether or not the consumers might not be
properly entitled to some earnings on demand deposit accounts as well.
Very honestly, sir, I have never found any significant documentation
to support that continuing prohibition, including the references made
by the Hunt Commission. There were reasons in 1933 on which Con-
gress acted. I am not sure they continue to exist today.
Senator BENEmTT. I think they would come back very fast.
Mr. ROESSNIER. That is the question, Senator Bennett.
Senator BEN NEr'. I think they would come back very fast.
Mr. ROESSNER. You see, sir, if institutions, including commercial
banks and thrift institutions, in effect pay interest on what a lot of
people think are the equivalent of demand deposit accounts, then you
have opened up that whole question, anyway.
Senator BENNErT. It is opened up, and we are going to have to face
it.
Mr. ROESSNER. That is what we are suggesting, that it be examined
as well. I personally don't think it is responsible to say that we are
simply opposed to NOW accounts if there is a demonstration that this
is a real convenience to consumers.
" Senator BENNETT. Undoubtedly, it is a convenience to consumers. It
is wonderful for them to have the checking account freedom and get
interest on their deposits. But if this goes through the whole banking
system, and I think it, will-I don't think you can stop it-if you are
going to set the pace, then the cost of money to the commercial banks
is bound to rise substantially, which means that the interest they must
charge to loan their money will rise, and this could have a very
unpleasant effect when the consumer comes to borrow. It is a two-way
sword. You can't have all the benefits one way. You have got to face
them both.
I don't think over time that you can allow one segment of the bank-
ing industry to pay interest on demand deposits and shut everybody
else out. I think this is just in the nature of the situation. So, the more
pressure we get for the continuation of NOW accounts, the more pres-
sure we are going to get to spread that privilege, and pretty soon the
S. & L.'s will be in asking for the privilege, because you compete more
directly with mutual savings banks than do the commercial banks.
So, this is a basic decision. It is as important as the decision made
in the early 1930's to take the privilege away. The reason it had to be
taken away was that it was one of the reasons we had to have a bank
holiday and many banks in this country couldn't open up again.
Mr. ROESSNER. Senator, in that respect, you will recall-well, I think
you missed the testimony of Chairman Wille of the FDIC, who recom-
mended or suggested that one of his options might be rate control on
NOW accounts at a somewhat lower level than normal accounts.
Senator BENNErr. It doesn't matter what rate you put it. at, even-
tually you have got to give the other fellow the same right, at the same
rate. You may ameliorate the immediate pressure by saying you can
only pay half as much on a NOW account as you pay on a savings
account, but the effect on the cost of money in the banking system is
there just as definitely.
Mr. ROESSNER. That's correct. Of course, the cost of money in the
thrift institutions is there, too, and that affects mortgage money
directly. Actually the granting of convenience accounts of this kind
does help to attract a greater volume of total deposits, as Mr. Ensley
mentioned, which in effect brings more money into those institutions
that put it in home mortgages.
Senator BENNEr. You have got to do that for the commercial banks
savings departments, and then the two of you are back in just the same
balance as you have now. I don't think it is going to give you an
advantage unless you deliberately deny the same privilege to other
people with whom you are now competing for deposits.
Mr. ROESSNER. I agree that all institutions should have equal powers
in that regard. I think Senator Sparkman mentioned that the national
banks' authority in the mortgage loan field had been enlarged substan-
tially over recent years. There are many banks who have not used that
authority.
Senator BENNETr. I think we understand each other. We are facing
a decision here that may affect the rate levels and the savings patterns
of the American people for many years to come, and we are edging
back into a situation that we had to destroy 30 years ago because of its
effect on the whole banking system. I think we have got to be very
careful.
Senator McINTmrE. In your statement, Mr. Roessner, you say:
Because of the in-and-out nature of funds in checking accounts, particularly
those maintained by individuals as distinguished from corporations, balances in
checking accounts over a sustained period can be expected to be relatively small.
This, in turn, would leave comparatively small amounts available for the deposi-
tory institution itself to invest In order to obtain earnings on demand deposits.
What about these free checking accounts? Are they not costing some-
body something? What does it cost., for instance, to clear a check I
Mr. RoEssNE. Of course, we are not in the business of clearing
checks, sir, being a Federal savings and loan association. I am not
really up, nor am I qualified-
Senator MCINTyRE. You are here representing more than the Fed-
eral savings and loan associations, aren't you?
Mr. RoFssNER. The National League of Insured Savings Associa-
tions, sir.
Senator MCINTYRE. You don't want to answer the question, sir?
ir. ROFSSNER. I could give you my opinion.
Senator MCINTYRE. I don't know that I want your opinion-go
ahead-go ahead.
Mr. RoEss NE. Since the banks would charge 10 or 15 cents a check
and sometimes a monthly maintenance figure of over 50 cents or a
dollar, I am sure those amounts would cover the cost of clearing the
checks and maintaining the balances, obviously. If you go to a free
checking system, you are reducing your income because the expenses
remain the same. Those banks who have offered free checking ac-
counts, that is, no charges whatsoever, tell me. that their average bal-
ances have risen as compared to the system when they charger 15 cents
per check. This free checking account service, of course, has been
spreading as well.
Senator Bennett, as you know one of the difficulties with paying no
interest whatsoever on. demand deposits has led to other ways of pric-
ing the services that the banks render, including compensating bal-
ances, and you raise the whole question asto whether the user knows in
fact what he ispaying for at what rate.
That is another question to be examined in a review of that subject,
it seems to me.
Senator BEN.-Er. The commercial banks obviously believe that they
cannot provide free checking service, even though they pay no in-
terest on the deposits. So, they have minimum balance requirements or
they have a charge per check or they have some other device. The
man who uses that service pays for it. I would like to ask Mr. Ensley,
is there any charge to the man who uses a NOW account? Does he have
in effect a free checking service in addition to interest on his deposit?
FURTHER STATEMENT OF GROVER ENSLEY, EXECUTIVE VICE
PRESIDENT, NATIONAL ASSOCIATION OF MUTUAL SAVINGS
BANKS
Mr. ENSLEY. Senator Bennett, in Massachusetts, the savings bank
charge the customer, the depositer, 15 cents for each one of these with-
drawals.
Senator BENNErr. So they treat them just like an ordinary com-
mercial bank, at least the way some commercial banks do?
Mr. ENSLEY. Yes. The savings banks in Massachusetts say they-are
a profitable service. It is not just altruism.
Senator BENETmP. I just want to get the fact cleared that there is a
charge.
Mr. ROESSNER. Not in New Hampshire. They pay 4 percent rather
than 51/ percent as paid in Massachusetts, but do not charge per item.
Mr. ENSLEY. I was going to take it up State by State. I am glad
that you did that.
Senator BEN NE'r. In New Jersey, it is savings and loans, not mutual
savings banks?
Mr. ROYSSNER. No, mutual savings banks offer checking accounts to
their depositors in New Jersey, straightforward checking accounts.
Senator BExx''rr. No interest.?
Mr. ROESSNE R. That's right. because they are demand deposits, sir.
They are limited, the. same as commercial banks.
Senator BEXN ,ETr. Thank you.
Senator SPARKMAN. Mr.'Chairman, I believe you said that you
would supply us something for the record with refer-ence to the author-
ity granted to savings and loan associations to be engaged in disasso-
ciated kinds of business other than savings and loans under the Savings
and Loans Holding Company Act,
Mr. ROESSNER. Yes, sir. wewill (see below).
Senator SPARKMAN. Mr. Chairman, I am going to have to go. I am
sorry I can't hear the rvst of these witnesses, but as you know, the
Stabilization Act is coming up.
Senator MCINw-TY. I wish I had more time. This is one of these
statements that came in at 1:30 yesterday afternoon.
As I said before I started, in another hearing I wouldn't let. you
testify.
Mr. ROESSNER. My apologies, sir.
Senator MCINTYRE. We want, the statements in on time in order to
take a good look at them. We have-a lot of stulf in there that has a lot
of holes.
Mr. MCKENNA. Our statement was up here yesterday afternoon.
Senator MCINTYRE. Twenty-four hours iln advance doesn't mean
yesterday afternoon.
Mr. McKE, A,, ,. They were not here 24 hours before.
Senator ICINTqR2E. When you are in my court, it is 24 hours.
Thank you very much.
[The complete statement of Mr. Roessner follows:]
STATEMENT OF GILBERT G. ROESSNER, VICE PRESIDENT, NATIONAL LEAGUE OF
INSURED SAVINGS ASSOCIATIONS
Mr. Chairman and members of the Subcommittee, I am Gilbert 0. Roessner,
Vice President of the National lAwague of Insured Savings Associations and Presi-
dent of the City Federal Savings and Iman Association of Elizabeth. New .lersey.
The National League is a trade association compost(! mainly of nmilier savings
and loan associations throughout the country.
The National League has the following observations regar(ling S. 1008.
EXTENSION OF LIFE OF FEDERAL RATE CONTROL AUTHORITY
The first section of that bill would extend for one year -to June 1, 1974 the
authority of the Federal Ilome Loan Bank Board, the Board of ('overnors of the
Federal Reserve System and tie Board of Directors of the Federal I)eposit
Insurance Corporation, after (onsultation with each other, -to regulate payment
and advertising of earnings on deposits or savings accounts in financial lnstitu-
tions within their res,ective regulatory jurisdiction, including limitations on the
rates of interest or dividends piyable on such deposits ond accounts.
The recent 1973 Legislative Conference of the National League recommended
that such rate control authority be extended for two years. It Is respectfully
requested that the Subcommittee consider amending S. 1008 accordingly.
The Legislative Conference further recommended that rate controls be exer-
cised as to banks and that the controls be administered in a way that will pre-
serve the historical differential in ceilings on rates that permit savings and loan
associations to offer higher rates of return on savings accounts and consumer
time deposit-types of funds than those that can lawfully be offered by commercial
banks. Because savings and loan associations as a matter of law and custom
direct-most of their investments into the residential mortgage market, they do
not enjoy the wider scope of loan and investment authority possessed by com-
mercial banks that can produce higher yields than residential mortgage invest-
ments do. Because they do not have authority to offer the "full service" the
commercial banking industry widely advertises, savings and loan associations
should continue to be authorized to offer higher rates of return on savings in
order to keep up their proven ability to attract the amount of funds needed
to render better service in the specialized field of residential mortgage finance.
INTEREST ON ACCOUNTS SUBJECT TO WITHDRAWAL BY NEGOTIABLE INSTRUMENT
Sections 2, 3 and 5 of S. 1008 would permit payment of interest or dividends
on deposits or savings accounts in certain banks, mutual savings banks and
savings and loan associations which retain a right to require at least 30 days'
advance notice of withdrawal, even though withdrawals may be made by ne-
gotiable instruments. Section 4 would permit withdrawal by negotiable instru-
ments from share accounts of Federal credit unions, without making specific
reference to any retention of a right to require advance notice of withdrawal.
Section 2 would apply this plan to member banks of the Federal Reserve
System.
Section 3 would apply it to (1) FDIC-insured banks, (2) FDIC-insured mutual
savings banks, and (3) banks an(l mutual savings banks not carrying FDIC in-
surance in any State in which over 20 percent of all amounts of deposits and
savings accounts is held in banks and mutual savings banks not insured by
FDIC and in savings and loan-type associations that are not members of a
Federal Home Loan Bank, if no State rate controls are exercised over such
institutions. It is our understanding that this category (3) is not presently
applicable in any State. Because section 18(g) of the Federal Deposit LIsurance
Act being amended by section 3 of the bill presently refers to "insured non-
member banks (including insured mutual savings banks)" and also to "non-
insured banks", it becomes somewhat ambiguous as to what connotation the
term "the bank" is to bear %%here used in the amendment to section 18(g) pro-
posed by section 3 of the bill. Apparently it is intended to apply to any of such
banks to which the provisions of section 18(g) happen to apply at any given
time. This point deserves clarification in the bill.
Section 4 would apply the plan to Federal credit unions. It remains silent as
to State-chartered credit unions having share accounts insured by the National
Credit Union Administration.
Section 5 would apply the plan to Federal savings and loan associations. It
remains silent as to State-chartered savings and loan associations having savings
accounts insured by the Federal Savings and Loan Insurance Corporation.
The 1973 National League Legislative Conference recommended instead that
no negotiable orders of withdrawal for the purpose of transferring funds to
third parties be permitted to be used in connection with any deposit or savings
account in a depository institution on which interest or dividends are paid. Such
a provision is contained in section 2 of H.R. 4070 now pending before a House
committee. That section also contains a broad definition of the term "depository
institution" and provides a monetary sanction for violation of its provision. The
National League prefers such a solution at this time to the problems raised by
NOW accounts instead of the approach taken in sections 2 through 5 of S. 1008.
It realizes that action by some approl)riate groups is required to restore the
c-ompetitive balance that has been disturbed by the use of NOW accounts by
some mutual savings banks in Massachusetts and New Hampshire.
The National League -ineerely regrets that this problem has not been settled
in a satisfactory inanner by action of appropriate authorities in the States where
the situation arose. Had that been done, the matter need not have been dumped
into the lap of the Congress, where it encourages further Federal intervention
in the dual Federal-State system of depository institutions, a development pref-
68
erably to be avoided whenever possible. Unfortunately, the lack of a State solu-
tion invites a Federal solution based upon the Constitutional power of the
Congress to regulate commerce among the several States (Section 8, clause 3)
and to regulate the value of money (Section 8, clause 5).
LIMITED NATURE OF THIRD PARTY PAYMENT MECHANISM AVAILABLE TO FEDERAL
SAVINGS AND LOAN ASSOCIATIONS
Under the Housing and Urban Development Act of 1968 (Public Law 90-448
approved August 1, 1968), the last sentence of section 5(b) of the Home Owners'
Loan Act of 1933 was amended to read as follows, with reference to Federal sav-
ings and loan associations:
"Savings accounts shall not be subject to check or to withdrawal or transfer
on negotiable or transferable order or authorization to the association, but the
Board may by Tegulation provide for withdrawal or transfer of savings accounts
upon nontrans.erable order or authorization."
I respectfully invite your attention to the fact that the provision just quoted
already outlaws for any Federal savings and loan association the use of any nego-
tiable order of withdrawal as a means of taking funds from a savings account in
the association. Federal associations cannot sit idly by while other depository
institutions in any State that directly compete with them for savings are allowed
to permit withdrawals by negotiable order from savings accounts upon which
interest or dividends are paid, while at the same time Federal savings and loan
associations are prohibited by Federal law from allowing such withdrawals.
Under the circumstances, the National League feels that such competing deposi-
tory institutions should be brought under the same restraints against use of
negotiable orders of withdrawal to which this Congress has subjected Federal
savings and loan associations.
When the Federal Home Loan Bank Board first Implemented by regulation the
statutory authority for withdrawal or transfer of savings accounts upon non-
transferable order or authorization to Federal savings and loan associations, it
permitted use of the -technique for broad purposes. Issuance of the regulation was
accompanied by a Memorandum No. R-25 dated September 24, 1970 from tile
Director of the Office of Examinations and Supervision at the Federal Home Loan
Bank Board to all Supervisory Agents and Clyief Examiners of the Board. That
Memorandum cautioned Federal associations to move with great care and delib-
eration into this new area. Stressing the importance of an overall analysis of any
plan adopted to make use of third party payment transfer mechanisms, the Memo-
randum warned associations to keep in mind that the plan might be subject to
greater use than one might reasonably anticipate and could be considerably more
expensive than the association might expect. The Memorandum urged that very
careful cost studies be undertaken prior to adoption of third party payment sys-
,tems, giving particular attention to the possible need for a substantial minimum
balance requirement of the saver and higher liquidity to provide for the Increased
volatility of funds. Finally, the Memorandum cautioned that fees charged to
depositors for the service should be in reasonable relationship to the service
rendered and the cost to the association providing the service.
So you can see, gentlemen, that the limited authority for third party payments
were made available to Federal associations by the Board on a conservative
basis with ample precautionary warnings about costs, liquidity requirements and
fees.
The regulation itself (section 545.4-1 of the Regulations for the Federal Sav-
ings and Loan System) repeated the statutory bar against making savings ac-
counts in a Federal association subject to check or to withdrawal or transfer on
negotiable or transferrable order or authorization to the association. It did
permit withdrawal requests to be made in the form of nontranalerrable orders or
authorization to the association for payment of amounts in savings accounts to
third parties periodically or otherwise. It also allowed any such order or au-
thorization to be honored, with consent of the third party, as a transfer to a
savings account of the third party. The regulation required that any form for
any such orders or authorizations for third party payments or transfer contain
language in boldface type of reasonable size to the effect that the order or
authorization is not negotiable or transferrable. It authorized the association to
charge a fee for its services in making any payment or transfer pursuant to the
regulation.
Not long after that regulation was issued, the savings and loan industry heard
rumblings emanating from a Federal Reserve Board member apparently re-
flecting complaints from the commercial banking industry about the scope of the
regulation, despite its limited grant of authority and despite the cautionary
notes about its exercise sounded by the Board's Office of Examinations and
Supervision. In any event, a few months later the regulation was amended by
adding specific restrictions on use by Federal associations of the third party
payment or transfer mechanism. I quote these restrictions for emphasis:
4"An accountholder shall not have a right to transmit or deliver any such
order or authorization to a third party to whom a withdrawal is to be paid or
transferred, and a Federal association shall not accept any such order or au-
thorization which is received by it from or through such a third party. A Federal
association may accept orders or authorizations for payment by the association
to the third parties only for
purchase of obligations of the United States,
payment of premiums on mortgagor or savings member insurance plans,
- systematic payment of withdrawals to a relative of the accountholder, and
payment on behalf of accounthotders -for housing and housing-related
items and loans for such items, including residential real estate mortgages,
taxes, and insurance, rent utilities, home improvements, mobile homes,
fixtures, major home furnishings, major home appliances and similar items."
(Italic added for emphasis.)
In other words, the accountholder must himself present the request for the
payment or transfer to the association. The association cannot honor such a re-
quest in the hands of a third party, as a bank ' ould honor a check or draft on it.
Moreover the added restrictions confine qu!'-. strictly the nature of items the
payment or transfer may be used to satisfy. TIey represent a substantial cut-
back from the permissible purposes for which the limited third party payment
mechanism could be used under the regulation as originally issued.
Frankly, we feel that in its present form, the regulation makes available to
Federal associations a third party payment mechanism that represents only a
very limited portion of the power the Congress in 1968 conferred on Federal
associations subject to Federal Home Loan Bank Board regulation.
In comparison with the negotiable order of withdrawal made available to
mutual savings banks 4n Massachusetts by judicial decision, the Federal savings
and loan association third party payment mechanism is very weak indeed. For
example, the Federal mechanism differs in at least these respects.
1. It is not negotiable.
2. It is not transferable.
3. It cannot be accepted by the association from anyone but the savings account-
holder himself.
4. It can be used only to make the very restricted types of payment authorized
by the revised regulation issued by the Federal Home Loan Bank Board.
It takes only a moment's reflection to realize that in this competition, the Fed-
eral association is armed with a toothpick to parry the thrusts of the mutual
savings banks' sword.
If the Commonwealth and States in which the negotiable order of withdrawal
is being employed by mutual savings banks do not confine the use of that tech-
nique within the reasonable bounds of fair competition, it becomes incumbent
upon the Congress to invoke the doctrine of Federal supremacy by taking appro-
priate action on behalf of the Federal savings and loan associations chartered
under Congressional grant of authority and the State-chartered savings and loanl
associations subject to regulation by the Federal Home Loan Bank Board either
because they handle savings accounts insured by the Federal Savings and Loan
Insumnce Corporation or because they are members of a Federal Home Loan
Bank.
CHECKING ACCOUNTS
The National League certainly does not view the limited third party payments
mechanism made available to Federal savings and loan associations under the
1968 statute as an acceptable alternative to a bona fide demand deposit arrange-
ment under which they could offer checking account services to their customers.
The National League has sponsored and still sponsors legislation that would
grant Federal aasociations the privilege of offering checking account services.
But it has always accompanied that sponsorship with the understanding that
the demand deposits wouid be backed by adequate reserve requirements and
would not bear interest to depositors.
The 11)73 Legislative Conerence of the National League recommended that the
League support authorizing Federal sa"ings ana loan associations to offer check-
ing account services backed by a fractional reserve system to inuiviiuais and to
business organizations of a -type -that do business with savings and loan associa-
tions. The National League Will be supporting this recommenuation and wouid
like to receive the necessary authority from the Congress. But it is not asking
to be permitted to pay interest on tne uemanu deposit, used to service ,te chec-
ing account system. It therefore believes the cflimate for fair competition would
be brought into better balance by arranging as a matter of Federal law (if I is
not done under State law) that no negotiable orders of withdrawal issued by
mutual savings banks be permitted to be honored against savings accounts on
which interest or dividends are paid.
WHY FEDERAL ASSOCIATIONS DO NOT SEEK AUTHORITY TO OFFER NOW ACCOUNTS
The question may be asked why the National League does not seek restoration
of an acceptable climate of competition by seeking ior Feueral barings and loan
associations and otlier FSLIC-insured institutions tile Tight to make ue of the
NOW account technique. We believe there are several answers.
1. It would cause less disruption to customary financial patterns if these in-
stitutions are granted authority to offer checking account services to Individuals
and business organizations of the type that customarily do business with sav-
iugs and loan associations. The demand deposits used for this purpose could be
required to be backed by adequate reserves and could abide by the usual pro-
hibition against payment of Interest on demand deposits.
2. The history of strict limitations placed on Federal savings and loan associa-
tions' use of nontransferrable orders to make third party payments places these
associations in a poor position to change the public's idea of these limited pay-
ments to the far broader uses for which NOW accounts are being employed.
3. Paying interest on NOW accounts inexorably tends to raise the cost of lend-
ing money above the level now required for profitable lending of demand de-
posits. Because most of the funds of savings and loan associations are loaned
for residential mortgages, this would tend to increase the cost of obtaining a
residential mortgage loan.
4. Since 1933 the economic well-being of the United States has thrived under
a Federal statutory prohibition against payment of interest by member banks of
the Federal Reserve System on demand deposits (section 11(b) of the Banking
Act of 1933). Because of the in-and-out nature of funds in checking accounts,
particularly those maintained by individuals as distinguished from corpora-
tions, balances in checking accounts over a sustained period can be expected
to be relatively small. This in turn would leave comparatively small amounts
available for the depository institution itself to invest in order to obtain earnings
on demand deposits. Unless the types of assets in which savings and loan associa-
tions can invest are expanded by statute, any investment by savings and loan
asociations of demand deposits would be generally limited to residential mortgage
loans or government obligations, without access to investment in other types of
higher-yielding assets in which commercial banks can invest. The savings ac-
count is usually far less active than the checking account, affording the de-
pository institution a longer investment period for savings account funds.
5. Unhealthy competition among banks to attract demand deposits by offering
increasing rates of Interest on such deposits reportedly led to the prohibition
against payment of Interest on demand deposits when the Banking Act of 193
was enacted. The practice of paying Interest on demand deposits has been
attributed In part to the banks' desire to attract deposits at a time when re-
strictions were being placed on the issuance of bank notes by banks (Financing
American Enterprise by Trescott, page 145). Since 1933, banks have had to de-
pend on other inducements than the payment of interest in order to attract
demand deposits.
For all of these reasons, the National League would not favor at this time
the enactment of Federal legislation that would authorize Federal savings and
loan associations or other depository institutions to use the NOW account
technique.
SHOULD FEDERAL RATE CONTROLS BE EXTENDED TO MUTUAL SAVINGS BANKS HAVING
ACCOUNTS NOT INSURED BY A FEDERAL AGENCY?
Some have proposed that Federal rate controls be extended to include mutual
savings banks and State-chartered commercial banks in Massachusetts. Such a
provision Is contained In section 3 of H.R. 4070.
In its testimony Cn that section given to the House Subcommittee on Bank
Supervision and Insurance on March 14, 1913, the National League reluctantly
agreed to support such a limited extension on the scope of Federal standby rate
control authority, if the Congress concludes that thb particular extension is
necessary to thwart an unfairly competitive move by such State-chartered finan-
cial institutions in the event NOW accounts are outlawed. In general the Na-
tional League does not favor the enlargement of Federal controls over State-
chartered financial institutions. No problem of extending Federal rate control to
depository institutions not carrying funds insured by a Federal agency arises
under the provisions of S. 1008; but as noted earlier, the National League does
not favor the provisions in those sections of S. 1008 dealing with NOW accounts.
It prefers that action be taken under State, or if necessary, Federal auspices to
prohibit the use of negotiable orders of withdrawal in connection with accounts
that bear interest or dividends.
We appreciate the opportunity of presenting these views on behalf of the
National League.
NATIONAL LEAGUE OF INSURED SAVINGS ASSOCIATIONS,
Washington, D.C., March 20, 1973.
lion. THOMAS J. MCINTYRE,
Chairman, Subcommittee on Financial Institution, Senate Committee on
Banking, Housing, and Urban Affairs, Washington, D.C.
DEAR M. CHAIRMAN: Because, in line with your remarks on March 20 at the
opening of hearings on S. 1008, it was the understanding of the National League
that the testimony of its witness, Mr. Gilbert G. Roessner, was to be confined
primarily to that bill, the testimony did not include any discussion of S. 892
dealing with FSLIC premiums.
Testimony on S. 892, a bill Introduced by Senator Sparkman and Senator
Tower to amend section 404 of the National Housing Act dealing with FSLIC
premiums, was, however, placed in the record of the hearings by Acting Chair-
man Crl 0. Kamp, Jr., of the Federal Home Loan Bank Board with your
permission.
We therefore wish to supplement the National League's testimony by noting
for the record that its recently concluded 1973 Legislative Conference recom-
mended that the National League support the enactment of S. 892. Early Con-
gressional action on the subject matter of that bill is required, if FSLIC-insured
institutions are to be spared the necessity under present Federal law of resuming
prepayments of premiums into the Secondary Reserve of FSLIC on May 1, 1973.
In the opinion of FSLIC and the National League, resumption of such prepay-
ments is not required from the standpoint of adequacy of FSLIC reserves. The
prepayments would, however, decrease the financial resources available to FSLIC-
insured institutions for other purposes, including the financing of residential
mortgage loans.
Under the circumstances, the National League urges the Subcommittee to
take early and favorable action on S. 892.
It will be appreciated if this letter can be included in the printed record of the
hearings.
Sincerely,
VILLIAM F. M CKEN NA,
Genera Counsel/Vice President.
Senator MCINXTYRE. I would like to call as my next witness Mr.
James R. Sloane, president of the Massachusetts Bankers Association.
Mr. Sloane, I am happy to welcome you here. You may proceed to
testify in any manner. I have your stotement here. It will appear in
full in the record. It is of some 14 pages or so with seven exhibits (see
p. 76).
To the extent that you can, without in any way impinging on what
you have to say, I would appreciate your hitting the high spots as
best you can. In the final analysis, if you want to read the whole thing,
Iwill stick with you.
Will you please identify for the record the gentlemen sitting at the
table with you I
STATEMENT OF JAMES R. SLOANE, MASSACHUSETTS BANKERS
ASSOCIATION, INC.
Mr. SLOANE. I first wish, sir, to apologize for the fact that we did
not get our statement up to you 24 hours in advance, and I am very
sorry that we did not comply with the ruling.
Mr. Chairman and distinguished members of the Financial Insti-
tutions Subcommittee, my name is James R. Sloane, and I am presi-
dent of the Massachusetts Banke .s Association and president of the
Berkshire Bank & Trust Co. of "'ittsfield, Mass. Accompanying me
today are Herbert P. Almgren, pi . 'dent of the First Bank & Trust
Co. of Springfield; Frank J. Dowd. Jr., vice president of the First
National Bank of Boston; Harry G. ebster, senior vice president
of the Third National Bank of HampmLi- County in Springfield; John
W. Plant, vice president of the Lee National Bank of Lee; Thomas J.
Roberts, vice president of Guaranty Bai Trust Co. of Worcester;
William G. Fish, president of the Bay B. .... & Trust Co. of Beverly;
and William M. Crozier, Jr., V.'ce president of the Baystate Corp.
We appreciate this opportunity to offer testimony before your sub-
committee today concerning three matters which are of great concern
to all commercial banks in Massachusetts: An extension of the Federal
Government's authority to impose ceilings on interest rates which
financial institutions can pay on time and savings deposits; an exten-
sion of these interest-rate limitations to nonfederally regulated and
insured thrift institutions in Massachusetts; and alternative methods
of dealing with the so-called NOW account.
We are joined in our efforts by the Massachusetts Federal Savings
Council which represents all Federal savings and loan associations in
that State, by the Federal Savings League of New England, by the
American Bankers Association, and by the United States Savings &
Loan League.
We will address our comments to S. 1008 which was introduced by
:[ourself, on February 26, 1973, and S. 1256 which was introduced by
enator Sparkman and Tower on March 15, 1973. The McIntyre bill
would extend the 1,rivilege of offering NOW accounts or similar
accounts to all fitaziial institutions, and would extend regulation Q
authority for an addtional 1-year period.
S. 1256, the Sparl man-Tower bill, would extend for 2 years the
authority of the Federal Government to impose ceilings on interest
rates which financial institutions can pay on time and savings deposits;
extend the interest rate limitations to a large number of thrift institu-
tions which are unregulated presently; and prohibit depository insti-
tutions from permitting third-party negotiable orders of withdrawal
to be drawn on an account on which interest is paid, except for a period
of 6 months after the bill's enactment.
With respect to the extension of regulation Q authority for 1 or 2
years, we would like to observe that the origins of this legislation con-
templated many circumstances which continue to prevail and there-
fore argue for extension of the authority. We would also like to point
out, however, that we do not believe such legislation contemplated
NOW accounts or widespread checking account privileges for thrift
institutions. Should such circumstances continue, the efficacy of the
regulation could be drawn into question.
Nevertheless, under present circumstances, we support an extension
of this authority. However, we would like to point out that commercial
banks in Massachusetts are subject to the controls that are at issue
here, while mutual savings banks are not.
Senator MCINTYRE. To what are you limited on your deposits?
Mr. SLOANE. 41 percent, sir.
Senator MCINTYRE. And the mutual savings banks of Massachusetts
go to 5 percent?
Mr. SLOANE. Yes.
Senator MCINTYRE. Three-quarters of a 1-percent spread?
Mr. SLOANE. That is right, sir. What we object to, sir, is why we
should be subject to controls while our competitors are not. Sections 1
and 3 of the Sparkman-Tower bill, however, are our major concern.
Let us begin by giving you our perspective on these two provisions.
First, Massachusetts is the only State of the Nation in which the
largest segment of its banking industry, mutual savings banks, are not
under Federal control.
Second, Massachusetts is the only State in the Nation where mutual
savings banks have a three-quarters of a percentage point advantage
in payment of interest on savings accounts over commercial banks.
Third, it is now one of only two States, New Hampshire being the
other, where savings banks, in effect, can pay interest on demand
deposits. The NOW- accounts have placed mutual savings banks in
Massachusetts squarely in the commercial banking business.
Senator MCINTYRE. Is that a fair statement, really, to say that the
NOW accounts have put the mutual savings banks squarely in the com-
mercial banking business? Can a mutual do everything a commercial
bank can ?
Mr. SLOANE. To a very large extent, in Massachusetts, they can, sir.
For instance, they can make personal loans up to a limit of $9,500 in
addition to NOW, a service in effect offering checking accounts, which
is a very, very large pairt of our business. In Massachusetts, the mutual
savings banks, in effect., can offer all the services as far as personal
banking is concerned, including charge cards. We also have a leeway
bill which gives them tremendous privileges.
Senator MCINTYRE. I need to get straight on this. They say here that
NOW accounts are limited to personal accounts and cannot be
extended or cannot be extended to commercial accounts for commer-
cial purposes. So, the ABC Pontiac Co. cannot have a NOW account.
Mr. SLOANE. Not a NOW account, but mutual savings banks in Mas-
sachusetts may offer savings accounts to corporations and pay interest
on them.
Senator MCINTYRE. But not a NOW account, not a checking
account?
Mr. SLOANE. Not a checking account. I say in the personal banking
area, they can offer substantially all the services of a commercial bank.
Senator MCINTYRE. Go ahead.
Mr. SLOA.NE. The staggering )roblem that this development loses to
commercial banking becomes clear when one considers that one court
decision on a very narrow legal issue has, in effect., converted overnight
167 mutual savings banks into new commercial banks.
To establish a new branch or banking office, commercial banks must
prove a public need to the regulatory agencies and meet certain estab-
lished criteria. The court decision creating the NOW account, however,
gave no consideration to public need or the economic consequences
thereof. In effect, it increased the number of commercial banking
offices in the State by 435, or about 50 percent.
Senator MCINTYRE. Do the savings banks have credit cards?
Mr. SLOANE. In Massachusetts, yes, sir.
Senator MCINTYRE. Do they have trust departments,
Mr. SLOANE. No, but they are permitted under the Keogh bill to offer
certain trust services to mutual depositors.
Senator MCINTYRE. You wouldn't agree, then, that Massachusetts
makes a good incubator for this NOW account, to be developed in?
Mr. SLOANE. Mlassachusetts, as you know, is a laboratory for many
things. On top of this, mutual savings banks can sell life insurance, sell
mutual funds, invest in common stocks for their own account, and offer
savings accounts to corporations. Mr. Chairman, commercial banks are
prohibited by law fronm offering any of these services.
The mutual savings banks have gained all these expanded powers
while still retaining their special privileges as thrift institutions, such
as no legal reserve requirements against deposits
Senator MCI NTYE. Does that mean savings accounts?
Mr. SLo.AN.E. Right, sir.
Less stringent. capital requirements, special tax advantages, and, of
course, the interest rate differential.
Senator-MCINTYRE. On the interest rate differential, the S. 1008
would require the same interest, rate to be paid on those NOW accounts,
in other words, whatever it is. 4 percent, it would be the same. There
would be no differential there on the interest rate?
Mr. SLOANE'. It wouldn't do us much good to have a NOW account.
on which we were paying only 41/2 percent and our competitor paying
534 percent.
Senator MCINTY-RE. You can't do that under S. 1008 either, can you?
I am talking about the McIntyre bill. We would require that the NOW
account offered by the savings bank would be under the same regula-
tion as you.
Mr. SLOAz;E. Right, sir.
Senator MCIN.TYR. To keep it fair.
Mr. SLOANNE. At the same time, these institutions claim to the public
that their deposits are fully insured; however, the Mutual Savings
Central Fund is clearly inadequate when compared to deposit protec-
tion afforded by the FDIC.
As of October 31, 1971, the latest information available to us, the
Mutual Savings Central Fund, Inc., had $115 million in assets to in-
sure deposits in Massachusetts mutual savings banks equal to $12.5
billion. It should also be noted that in Massachusetts today there are
30 mutual savings banks in the $100-$500 million size range, and 4
over $500 million in size. The Central Fund does not have the full
faith and credit of the Commonwealth of Massachusetts behind it.
It stands alone in contrast to the FIDC which, in addition to its own
assets, has a $3 billion line of credit with the U.S. Treasury.
With the foregoing comments as background, we would now like to
focus on section 2 of the Senate bill 1256 which deals with the NOW
account question. On May 2, 1972, the Supreme Judicial Court of
assachusetts held that Massachusetts law did not prohibit savings
bank depositors frqm making-withdrawals from savings accounts by
means of a withdrawal order in negotiable form. What followed from
the court's consideration of this very narrow legal question was a mas-
sive campaign by the savings bank'industry to enter the checking ac-
count business. Today, 55 of the 167 savings banks in the State are
offering NOW accounts. The participating banks represent 60 percent
of the total deposits of all savings banks in the State.
Moreover, as Chairman Wille pointed out this morning, since Sep-
tember 30, 1972, NOW account deposits in Massachusetts have grown
from only $11 million to approximately $71.5 million. In fact, the
Federal Reserve Bank of Boston has predicted that the level of NOW
account deposits might reach $1 billion by the end of this year.
This situation has spread with equal severity, to the State of New
Hampshire where 11 of the 36 savings banks are offering NOW ac-
counts. As of June 30, 1972, these 11 savings banks held 42 percent of
the total deposits of mutual savings banks in New Hampshire.
In Massachusetts. the small commercial banks will be the first to
feel the consequences of the NOW account, on top of the interest rate
advantage, for, in over half the communities in which commercial
banks and mutual savings banks each maintain offices, the mutuals are
at least twice as large as the commercial banks. There is no question
that the negotiable orders of withdrawals used in Massachusetts con-
stitute checks and are presented as such to the public at large. In fact,
one institution in Massachusetts has advertised as follows: "Having
and using (a NOW account) * * * is the same as having and using
a checking account. But there's a big difference. You'll find 5.25 per-
cent interest added to your balance at the end of the month * * *"
If I may. Mr. Chairman. I would like to insert in the record cer-
tain advertisements where definitely,. in my opinion-
Senator MCINT"RE. These are Massachusetts papers advertising?
Mr. SLOANE. Yes, sir.
Senator MCINTYRE. They will be accepted without objection-
Mr. SLOANE continuingg. That the NOW account is presented to
the public as a checking account.
tWe also have some so-called third-party withdrawal instruments
which the public would not be able to distinguish from a check.
Senator MCI.-TYRE. We will accept those, too, without objection.
[The information follows:]
Q t M E% OLMI[.I REGITRA...
' jl l*lHAOME SAVINGS BANK
*!flhkImflflA9*,
&O 23 MkQ& IG I
,:O -Y wwO-O
-
' ,a P8 0
am "no THmIoae To LIO eNANCIAL PRICING ORA WILL SE cAILea watw
~ 4
WIMsZ~toma
SAYINGS SANK *p
-0DMIIIII a" Tft Cmo
.777
06
40o&&QOw 231: ~31mBO288LNG
O0 000
Mr. SLOANE. This advertising
makes it crystal clear what we are
talking about-paving
5.25 percent interest on demand deposits. Un-
der Federal law, it is illegal for commercial
banks to pay interest on
demand deposits, the cost of which contributed
greatly to the loss of
earnings
and bank instability
during
the 1930s. Significantly,
the
Hunt Commission
has recommended
that the prohibition
against the
payment
of interest on demand deposits be retained.
93-211 0 - 73 - 6
The implications of this problem are not confined to Massachusetts.
They also apply, at least initially, to other States where mutual sav-
ings banks are well established, including New York, Connecticut,
Pennsylvania, Washington, Rhode Islahd, and, of course, New Hamp-
shire. We commend the distinguished Senator from New Hampshire
for offering Senate bill 1008 and recognize, as he stated in his remarks
on the Senate floor, that this bill repr(.sents draft legislation designed
to develop a dialog on the NOW account issue. However, we are
convinced that its scope is so broad that, if enacted, it could produce
consequences most harmful to the public interest.
A recent study prepared for our association sets forth the impact of
NOW accounts on commercial banks.
This was only a model of a $20 to $25 million on commercial banks
in Massachusetts. It concluded as follows:
The major impact on co'.iniercial banks offering NOW accounts or a related
product, would be to initially reduce earnings through higher interest costs,
potentially drive up loan rates and ultimately impact on: commercial bank
borrowers through higher rate costs, stockholders through reduced return on
equity and the government through a reduction in tax revenues. The size of the
impact on any one of the three sectors would depend on the degree to which loan
rates were changed. If loan rates were not increased, stockholders and the govern.
ment would bear the brunt through reduced earnings of commercial banks. On
the other hand, if loan rates were Increased to offset all Increased costs, the
borrower is the prime victim.
We ask that a copy of this study be included in the record of these
hearings.
[The information follows:]
MASSACHUSETTS BANKER ASSOCIATION
STUDY ON IMPACT OF NOW ON COMMERCIAL BANKS
Summary
This financial analysis of an average 20-25 M deposit Massachusetts commer-
cial bank shows that the inajor impact on commercial banks offering NOW ac-
counts or a related product, would be to initially reduce earnings through higher
interest costs, potentially drive up loan rates and ultimately impact on: commer-
cial bank borrowers through higher rate costs, stockholders through reduced
return on equity and the government through a reduction in tax revenues. The
size of the iml)act on any one of the three sectors would depend on the degree to
which loan rates were changed. If loan rates were not Increased, stockholders and
the government would bear the brunt through reduced earnings of commercial
banks. On the other hand, if loan rates were increased to offset all increased costs,
the borrower is the prime victim.
All of the financial data used in this analysis were derived from the 1963. 1964,
1967 and 1971 Functional Cost Analysis studies prepared by the Federal Reserve
Bank of Boston. ,The data for Massachusetts Commercial Banks sampled was
used as the base of information.
79
In order to make the analysis historically accurate, two savings rates were
assumed. The first being at the respective regulation Q maximum and tle second
being at the Regulation Q maximum plus % of one percent. This analysis assumes
that the concept of NOW accounts was introduced in 1963 with the resulting
Impact shown oil historical balance sheets and income statements at two different
savings rates and the necessary changes to restore earnings.
CONTROL STATEMENTS
Exhibits 1, Il
1. These exhibits show the actual historical balance sheet and income state-
ments for an average 20-25 million dollar deposit Massachusetts commercial
bank for the years 1963, 1964, 1967, and 1971.
2. The balance sheet and income statement will be used as a control measure
against which the impact of various changes will be compared.
FINANCIAL MEASURES
1964 1967 1971
After tax earnings ................................................. $230, 000 $295,000 $343,000
After tax return on equity (percent) ............................... 7.0 7.5 9.3
Taxes paid ...................................................... $229,000 $294,000 $342,000
Rate on regular savings (percent) ...................-.............. 2.8 3.6 4.0
Interest rate on loans (percent) ................................... 6.4 6.9 8.2
EXHIBIT I
BALANCE SHEET
[in thousands ofdollars]
1963 1964 1967 1971
Assets:
Cash due from banks .....................................
Investments ............................................
Loans:
B
3, 73 3.787 4,704 4,164
8,984 9,649 12,229 11,657
Installment ......................................... 4.166 4,595 5,763 5,442
Real estate ..................... ............... 4,206 4,832 6,026 6,668
Commercial and other ............................... 6,329 7,118 9,312 8,622
ank premises and other ................................. 610 710 948 1,068
Total assets .............. ........................... 27,868 30,691 36,982 37,621
Liabihties and capital:
Demand ............................................... 15,485 17,025 20,888 18,430
Personal ....................... ----------- (5574) (6, 129) (7,520) (6,635)
Business ...................................------- (9, 911) (10, 896) (13, 368) (11,795)
Time ........---- ------------............... 8,778 9,6 38 13, 527 14, 875
Regular and club .................................... 339)-(8-M) (11,204) (10.178)
Certificate of deposit and other time ........---------- (439) (780) (2, 373) (4,697)
Funds borrowed and oiler liabilities .................... 639 753 fQ9 641
Total liabilities ........................................ 24,902 27,416 35, 044 33,946
Total capital .......................................... 2,966 3,275 3,938 3,675
Liabilities plus capital .................................. 27, 868 30, 691 38,982 37,621
80
EXHIBIT II
INCOME STATEMENT
[in thousands of dollars
1963 1964 1967 1971
Interest income:
Investments ............................................ 266 294 396 633
Loans:
Installment ............................... 368 400 539 590
Real estate ......................................... 227 264 344 468
Commission and other ............................... 354 392 579 632
Service charges and fees (all loans) ................... 14 18 29 24
Certificates of deposit and other time ...................... 21 32 83 144
Total interest income .................................. 1,250 1.400 1,970 2.491
Interest cost:
Personal demand deposits ................................ 0 0 0 0
Regular savings and club ................................. 252 245 402 410
Certificates of deposit and other time ...................... 18 32 113 248
Borrowings ............................................. 3 6 8 21
Capital notes ................................................................... 2 3
Total interest cost ..................................... 273 313 525 682
Banking margin ....................................... 977 1,087 1.455 1,809
Service income:
Deposits:
Personal demand ................................... 96
Business demand ................................... 42
Time: Regulars and club ................................. 2
Miscellaneous service income ........................ 62
Total ................................................ 202
Bank margin plus service income ....................... 1,179
Operating expenses:
Loans:
Installment ......................................... 143
Real estate ............................. ........... 30
Commission and other ......................... 83
Deposits:
Demand:
Personal ....................................... 258
Business ....................................... 11
Time:
Regular and club ................................ 53
Certificates of deposit and other time ... ..................
Ot,, r ..................................................
Total expenses ........................................ 756
Pretax earnings ................................... 423
Total taxes ....................................... 21t
Operating earnings ................................ 212
108
47
3
74
232
1,319
140
60
3
113
316
1,761
117
50
3
107
277
2,086
152 198 264
35 41 51
93 114 146
299 381 429
128 164 185
57 83 114
S96 ~ 191 21
860 1,172 1,401
459 589 685
229 294 342
230 295 343
INCREASE SAVINGS RATE TO Q PLUS THREE-QUARTER PERCENT
Ez1Ubit. III, IV
1. These exhibits show the effect on earnings assuming that the rate of regular
savings accounts is increased to the maximum of regulation Q plus % of one
percent
2. Assume that all personal demand deposits will be interest bearing at Q
plus %c% in order to be competitive with NOW.
3. The initial impact of this Increase in rates is to increase the costs of deposits
to the comercial bank.
81
FINANCIAL MEASURES
1964 1967 1971
After tax earnings (thousands) ------------------------------------- 11 51 107
Change ATE ------------------------------------------------- (219) (244) (236)
After tax return on equity (percent) ................................. .3 1.3 2.9
Change ATROE (percent) ...................................... (6.7) (6.2) (6.4)
Taxes paid (thousands) ............................................ 5 l1 106
Change taxes ................................................ 219) 244) 236)
Rate on regular savings (percent) ---------------------------------- 1. 75 1. 75 5
Change rate (percent) ......................................... 1.95 1.15 1.25
Interest rate on loans (percent) ..................................... 6.4 6.9 8.2
Change rate (percent) ---------------------------------------- 0 0 0
EXHIBIT Ill
BALANCE SHEET
(In thousands of dollars)
1963 1964 1967 1971
Assets:
Cash due from banks ............................ 3 573 3 787 4 704 4, 164
Investments .................................... 8,984 9,649 12:229 11,657
Loans:
Installment ................................. 4,166 4 595 5,763 5,442
Real estate ................................. 4, 206 4:832 6,026 6,668
Commercial and other ....................... 6,329 7,118 9,312 8,622
Bank premises and other ........................ 610 710 948 1,068
Total assets ............... I .................. 27,868 30,691 38,982 37,621
Liabilities and capital:
Demand: ..................................... 15,485 17,025 20,868 18,430
Personal ................................... 5,574 6,129 7,520 6,635
Business ................................... 9,911 10,896 13,368 1, 795
Time ......................................... 8,778 9,638 13, 527 14, 875
Regular and dub ............................ 8,339 8,85 11, 204 10,178
Certificate of deposit and other time .......... 439 780 2,323 4,697
Funds borrowed and other liabilities ............... 639 753 629 461
Total liabilities ................................ 24,902 27,416 35, 044 33,946
Total capital .................................. 2,966 3,275 3,938 3,675
Total liabilities plus capital ..................... 27,868 30,691 38,982 37, 621
82
EXHIBIT IV
INCOME STATEMENT
(In thousands of dollars]
1963 1964 1967 1971
Interest income:
Investments ....................................
Loans:
I ntallment .................................
Real estate --------------------------------
Commercial and other .......................
Service cap and fees (all loans) ...............
Certificate of deposit and other time ...............
Total interest income ..........................
266 294 396 633
1,250 1,400 1,970 2,491
Interest cost:
Personal demand deposits ....................... 0 291
Regular savings and club ----------------------- 252 421
Certificate of deposits and other time .............. 18 32
Borrowings ..................................... 3 6
Capital notes ...............................................................
Total interest cost .............................
Banking margin ...............................
Service income:
Deposits:
Personal demand ...........................
Business demand ...........................
Time: Regulars and club .........................
Miscellaneous service income ..... .........
Total ........................................
Bank margin plus service income ...............
Operating expenses:
Loans:
Installment .................................
Real estate ----------.---------------------
Commercial and other time -------------------
Deposits:
Demand:
Personal ...............................
Busi ness ...............................
273 750 1,012 1,154
977 650 958 1,337
96 - 108 140 117
42 47 60 50
2 3 3 3
62 74 113 107
202 232 316 277
1,179 882 1.274 1,614
198 264
41 51
114 146
258 299 381 429
ill 128 164 185
Time:
Regular and club ............................ 53 57 83 114
Certificate of deposit and other time ................................................................
Other .......................................... 78 96 191-21
Total expenses ............................... 756 860 1,172 1,401
Pretax earnings ------------------------------------ 423 22 102 213
Total taxes ......................................... 211 1t 51 106
Operating earnings ............................ 212 11 51 107
RESULTING LOAN RATE INCREASE WITH SAVINGS RATE AT Q PLUS
THRFEQUARTER PERCENT
Exhibits V, VI
1. Assuming that the increased rate will attract more deposits, it will become
necessary to lend out or invest them. All other liabilities are at lower rates so
that it would not be profitable to reduce other liabilities with the increased vol-
ume of savings. In theory the volume increase of savings deposits should com-
pensate for the decrease in earnings through expanding earning assets.
2. However, loan demand is fixed at any point in time. Any attempt to in-
crease loan demand if at all possible would cause significant inflationary pres-
sures. Therefore. loans could not be increased and additional savings funds
would have to to be utilized elsewhere. In addition, additional funds could not
be utilized for additional investments since their yield is lower than the cost
of savings deposits in each of the years.
83
3. These exhibits show the fallacy of the volume rate trade-off theory since
banks have no cost effective way of deploying these funds.
4. The only remaining avenue for commercial banks to regain the increased
costs of savings accounts is to increase the loan rates in order to offset earnings.
5. This is induced by the increased cost of the deposit base with no means of
compensating with increases in deposit volume.
Financial measures 1964 1967 1971
Aftertax earnings (thousands) ....................................... $230 $295 $343
Change ATE ................................ ......... -------- 0 0 0
Aftertax return on equity (percent) .................................. 7 7.5 9.3
Change ATROE ----------------------- ------------...... 0 0 0
Taxes paid (thousands) ......................------------------ $229 $294 $342
Change taxes ..... -.............................. - ............ 0 0 0
In percent
Rate on regular savings ............................................ 4. 75 4.75 5. 25
Change rate ------------------------------------------------- 1.95 1.15 1.25
Interest rate on loans .............................................. 9. 13 9.38 10.58
Change rate .................................................. 2.43 2. 48 2.38
EXHIBIT V
BALANCE SHEET
[In thousands of dollars]
1963 1964 1967 1971
Assets:
Cash due from banks ............................ 3,573 3,787 4,704 4 164
Investments .................................... 8,984 9,649 12,229 11,657
Loans:
Installment ................................. 4, 166 4, 595 5.763 5,442
Real estate ................................. 4,206 4.832 6,026 6,668
Commercial and other ....................... 6,329 7,118 9,312 8,622
Bank Premises and other ........................ 610 710 948 1,068
Total assets .................................. 27, 868 30.691 38,982 37,621
Liabilities and capital:
Demand ....................................... 15,485 17,025 20,888 18,430
Personal ................................... 5,574 6,129 7,520 6,635
Business ................................... 9,911 10,896 13,368 11,795
Time .......................................... 8,778 9,638 13,527 14 875
Regular and club ............................ 8,339 8,858 11,204 10,178
Certificates of deposit and other time .......... 439 780 2,323 4,697
Funds borrowed and other liabilities ............... 639 753 629 641
Total liabilities ................................ 24,902 27, 416 35, 044 33.946
Total capital ....................................... 2,966 3,275 3,938 3,675
Liabilities plus capital ......................... 27,868 30,691 38,982 37,621
84
EXHIBIT VI
INCOME STATEMENT
Iln thousands of dollars
1963 1964 1967 1971
Interest income:
Investments ----------------------------------- 266 294 396
Loans:
Installment -------------------------------- 368 563 715
Real estate ................................. 227 371 456
Commercial and other ---------------------- 354 552 769
Service charges and fees (all loans) ----------- 14 25 38
Certificate of deposit and other time ........... 21 32 83
633
752
597
806
31
144
Total interest income ----------------------
Interest cost:
Personal demand deposits ............................
Regular savings and club .......------
Certificate of deposits and other time ...........
Borrowings -----------------------------------------
Capital notes .......................................
Total interest cost .............................
Banking margin ...............................
Service income:
Deposits:
Personal demand ...........................
Business demand ...........................
Time: Regulars and club .........................
Miscellaneous service Income .....................
Total ........................................
Bank margin plus service income ...............
Operating expenses:
Loans:
Installment .................................
Real estate --------------------------------
Commercial and other .......................
Deposits:
Demand:
Personal ........... .................---------
Business ...................................
Time:
Regular and club ............................
Certificate of deposit and other time ...........
Other ..........................................
Total expenses ................................
Pretax earnings .....................................
Total taxes -----------------------------------------
Operating earnings ............................
1,250 1,837
0 291
252 421
18 32
3 6
............................
273 750
977 1,087
96 18
42 47
2 3
62 74
2,457 2,963
357 348
532 534
113 248
8 21
2 3
1,012
1,445
140
60
3
113
1,154
1,809
117
50
3
107
202 232 316 277
1,719 1,319 1,761 2.086
143 152 198 264
30 35 41 51
83 93 114 146
258 299 381 429
111 128 164 185
53 57 83 114
78
96
191
212
756 860 1,172 1,401
423 45', 589 685
. 211 229 294 342
. 212 230 295 343
INCREASE SAVINGS BATE TO Q
Exhibits VII, VIII
1. It has been shown In the previous exhibits that offering financial services
similar to NOW at regulation Q plus % of one percent would force loan rates up.
However, what would be the effect if such a product were offered at regulation Q
maximum.
85
2. The exhibits show the effect on earnings assuming that the rate on regular
savings accounts is increased to the maximum of regulation Q.
3. Assume that all personal demand deposits will be interest bearing at Q in
order to compete with NOW.
4. The initial impact of this increase in rates Is to increase the costs of de-
posits to the commercial banks.
FINANCIAL MEASURES
1964 1967 1971
Aftertax earniqis (thousand) ........................................ 68 121 169
Change ATE .................................................. (162) (174) (174)
Aftertax return on equity (percent) .................................. 2.1 3.1 4.6
Change ATROE percent) ....................................... (4.9) (4.4) (4.7)
Taxes paid (thousands) ............................................ 121 169
Change taxes ................................................. (162) (173) (173)
Rate on regular savings (percent) ................................... 4.0 4.0 4.5
Cha nge rate (percent) ---------------------------------------- 1.2 .4 .5
Interest rate on loans (percent) ..................................... 6.4 6.9 8.2
Change rate ------------------------------------------------- 0 0 0
EXHIBIT VII
BALANCE SHEET
[In thousands ofdollars]
1963 1964 1967 1971
Assets:
Cash due from banks ............................ 3, 573 3,787 4,704 4, 164
Investments .................................... 8,984 9,649 12,229 11,657
Loans:
Installment ................................. 4.166 4,595 5,763 5,442
Real estate ................................. 4,206 4.832 6, 026 6,668
Commercial and other ....................... 6,329 7,118 9,312 8,622
Bank premises and other ........................ 610 710 948 1,068
Total assets .................................. 27,868 30,691 38,982 37,621
Liabilities and capital:
Doema nd .................................. 15,485 17.025 20, 888 18,430
Personal .................................. 5,574 6,129 7,250 6,635
Business ................................... 9,911 10,896 13,368 11,795
Time .......................................... 8,778 9,638 13, 527 14,875
Regular and club ............................ 8,339 8,858 11,204 10,178
Certificate of deposit and other time .......... 439 780 2.323 4,697
Funds borrowed and other liabilities ............... 639 753 629 641
Total liabilities ................................. 24. 902 27,416 35, 044 33.946
Total capital .................................. 2,966 3,275 3,938 3,675
Liabilities plus capital ......................... 27, 868 30,691 38,982 37,621
86
EXHIBIT VIII
INCOME STATEMENT
[In thousands of dollars
1963 1964 1967 1971
Interest income:
Investments ....................................
Loans:
Installment ................................
Real estate .................................
Commercial and other .......................
Service charges and fees (all loans) ...........
Certificates of deposit and other time ..............
Total interest
incom
e ..........................
Interest cost:
Personal demand deposits ........................
Regular savings and club .........................
Certificate of deposits and other time ..............
Borrowings .....................................
Capital notes ...................................
Total interest cost .............................
Banking margin ...............................
Service income:
Deposits:
Personal demand ...........................
Business demand ...........................
Time:
Time: regulars and club .....................
Miscellaneous service income .................
Total ............................................
Bank margin plus service income ................... 1,179
266 294 396 633
1,250 1,400 1,970 2,491
273 637 872 1.029
977 763 1,098 1,462
96 108 140 117
42 47 60 50
2 3 3 3
62 74 113 107
202 232 316 277
995 1,414 1,739
Operating expenses:
Loans:
Installment ......................................... 143 152 198 264
Real estate ......................................... 30 35 41 51
Commercial and other ............................... 83 93 114 146
Deposits: -
Deposits:
Personal ........................................... 258 299 381 429
Business .................... .................. 111 128 164 185
Time:
Regular and club ............................... 53 57 83 114
Certificate of deposit and other time ......................................
Other ......................-................- 78 96 - 191 212
Total expenses .......... .................... ........ 756 860 1,172 1,401
Pretax earnings ............................................
Total taxes ...............................................
Operating earnings ....................................
423 135 242 338
211 67 121 169
212 68 121 169
RESULTING LOAN RATE INCREASE WITH RATE AT Q
ERxhibits IX, X
1. Assuming that the increased rate will attract nore deposits, it will become
necessary to lend out or invest them or switch with more expensive liabilities.
In theory, the volume increase of savings deposits should compensate for the
decrease in earnings through expansion of earning assets or reduction of more
expensive liabilities.
2. However, loan demand is fixed at any point in time. Any attempt to increase
loan demand if at all possible would cause significant inflationary pressures.
Therefore, loans could not be increased and additional savings funds would
have to be utilized elsewhere. In addition, these additional funds could not be
deployed into investments, since the yield on investments in each of the years was
less than the cost of the additional savings deposits.
87
3. In this example, because there are more expensive liabilities than regular
savings, all of these (CD's, other time, and borrowings) were eliminated in an
attempt to regain earnings through increasing savings volume and switching of
liabilities. Howevear, even after reducing all of the more costly liabilities (if
possible) to zero, it was still necessary to seek other areas of income improve-
ment to restore earnings.
4. Again, the only remaining avenue for commercial banks to regain increased
costs of savings accounts is to increase the loan rates in order to offset the de-
crease in earnings.
5. This is induced by the increased cost of the deposit base with no means of
compensating with increases in deposit volume.
6. The only way to allow commercial banks to compensate on a volume basis
is to have no rates or nominal rates on NOW related products.
FINANCIAL MEASURES
1964 1967 1971
Aftertax earnings (thousands) --------------------------------...... $230 $295 $343
Change ATE ....................... ....................... 0 0 0
Aftertax return on equity (percent) .................................. 7.0 7.5 9.3
Change ATROE ----------------------------------------- 0 0 0
Taxes paid (thousands) ............................................ $229 $294 $342
Change taxes ................................................. 0 0 0
Rate on regular savings (percent) ................................... 4.0 4.0 4.5
Change rate (percent) ......................................... 1.2 .4 .5
Interest rate on Ic 'percent) ..................................... 8.6 8.8 10. I
Change rate percentt) ......................................... 2.1 1.7 1.8
EXHIBIT IX
BALANCE SHEET
fIn thousands of dollars
1963 1964 1967 1971
Assets:
Cash due from banks .................................... 3,573 3,787 4,704 4, 164
Investments --------------------------- --------- 8,984 9,649 12,229 11,657
Loans:
I nslallment ......................................... 4,166 4,595 5,763 5,442
Real estate ......................................... 4, 206 4,832 6,026 6,668
Commercial and other ............................... 6,329 7,118 9,312 8,622
Bank premises and other ................................. 610 710 948 1,068
Total assets --------------------------------------- 27,868 30,691 38, 982 37, 621
Liabilities and capital:
Demand ............................................... 15, 485 17,025 20,888 18,430
Personal ........................................... 5, 574 6,129 7,520 6, 635
Business ........................................... 9,911 10,896 13,368 11,795
Time ........... ...................................... 8,778 10,391 14, 156 15, 516
Regular and club .................................... 8,339 10, 391 14, 156 15,516
Certificates of deposits and other time ................. 439 0 0 0
Funds borrowed and other liabilities ....................... 639 0 0 0
Total liabilities ........................................ 24,902 27,416 35, 044 33, 946
Total capital ................................................ 2,966 3,275 3,938 3,675
Liabilities plus capital ................................. 27,868 30, 691 38, 982 37,621
88
EXHIBIT X
INCOME STATEMENT
[In thousands of dollars
1963 1964 1967 1971
Interest income:
Investme ts ....................................
Loans:
Installm ent ---------------------------------
Real estate .................................
Commercial and othar .......................
Service charges and fees (all loans) -----------
Certificate of deposit and other time ..........
Total interest income ..........................
266 294 396 633
368 533 672 720
227 352 429 571
354 522 721 771
14 24 36 29
21 32 83 144
1,250 1,757 2,337 2,868
Interest cost:
Personal demand deposits ........................ 0 245 301 299
Regular savings and club ..................... 252 416 566 698
Certificate of deposits and other time .............. 18 0 0 0
Borrowings ------------------------------------- 3 0 0 0
Capital notes -------------------------------------------------------------- 2 3
Total interest cost .............................
Banking margin .................................
Service income:
Deposits:
Personal demand ...................................
Business demand .....................................
Time: Regulars and club .................................
Miscellaneous service income ....................
Total ...............................................
Ban!: margin plus service income .......................
273 661 869 1,000
977 1,096 1,468 1, 868
96 108 140 117
42 47 60 50
2 3 3 3
62 74 113 107
202 232 316 277
1,179 1,328 1,784 2,145
Operating expenses:
Loans:
Installment ......................................... 143 152 198 264
Real estate ......................................... 30 35 41 51
Commerical and other ................................ 83 93 114 146
Deposits:
Demand:
Personal ....................................... 258 299 381 429
Business ....................................... 111 128 164 185
Time:
Regular and club .................................... 53 66 106 173
Certificates of deposit and other time ........... ... ... ... ... ..-----------------------------------------
Other .................................................. 78 96 191 212
Total expenses ........................................ 756 869 1,195 1,460
Pretax earnings ............................................. 423 459 589 685
Total taxes ................................................. 211 229 294 342
Operating earnings ....................................
212 230 295 343
Senator MCINTYRE. Would you comment, too, on this so-called free
checking account? That is costing somebody something. What is the
average cost for a check?
Mr. SLOANE. Well, a rule of thumb is that to operate a checking
account costs between 21/2 percent of demand deposits. I have with
me here Mr. Dowd, who is an expert on operations, from the First Nd-
tional Bank of Bcston in anticipation of this question. I would like
to have him answer that if he would.
Senator ICINTYRE. Come forward, Mr. Dowd.
In the process, I want you to distinguish why this isn't actually
interest.
Mr. DowD. Rather than being described as an expert, I wish to say
I am certainly not an expert in costs; I have considerable experience
in the operation area of checking accounts and to some extent, sav-
ings accounts. Basically, in determining what the cost of operating a
checking account is, I think you have to think in terms o.f how many
checks are going to be drawn. That is a checking account that draws
a few, maybe one or two checks in the course of a month, you have cer-
tain standby costs that would drive your total costs up and you would
not recover them with 15 cents.
For example, in the rendering of a statement, the standby for peo-
ple on telephones to respond to requests, et cetera. You get a lot more of
these, as we know on checking accounts than you do on savings ac-
counts. You also have the handling of various other items such as stop.
payments, and there are, of course, reserve requirements that haven't
been mentioned.
So, basically, your cost tends to go down as you have greater vol-
ume, that is, the cost per check. But I would have to think that the
cost-I don't want to quote our own figures, that is all I would have-
but in round general realities, the cost of operating a checking account
with four or fIve checks a month, rendering a statement, performing all
the functions that you have with a checking account, would probably
allow you to only recover half of your cost with a 15-cents charge.
Senator MCIN-TYRE. About 7 or 7.5 cents?
Mr: DowD. No, I am saying that your actual cost, aside from the
balance maintained, and in many of these, you have very low balances,
the cost could b, even double your 15-cents charged, because the cost
of rendering a statement alone on a commercial account can be close
to 30 cents.
Senator MCINTYRE. Somewhere I picked up the information it has
been generally estimated that on the average checking account, the
average check costs about 7 cents per check.
Mr. DowD. Not if you had a whole bunch of accounts who only drew
four or five checks. Our average runs considerably higher, probably
15 checks anyway and, of course, it is also affected by the number of
deposits. You tend to get more deposits in a checking account than you
do in a savings account. You tend to get more inquiries. So, basically,
there are differences of opinion within the commercial banking com-
munity as to whether banks make money on the so-called free account,
or what we refer to as a minimum balance account.
I happen to be one who thinks that if you eliminate a relatively few
in percentage, a small percentage of your high dollar balances, that
basically .free checking accounts are offered as a public service and
as a leader to bring people into the bank for other services that could
be profitable.
Senator M1CINTYRE. The service performed by that checking account
costs the bank money which in some way, I think if I am right,
Governor Mitchell of the Reserve Board, indicates that this is, in
effect, a disguised interest.
That is my point, a disguised interest being paid on that account.
Mr. CROZIER. M1 name is William Crozier. Senator. I believe that
is essentially so. I believe Governor Mitchell in his speech in Atlanta
referred to it as implicit interest as opposed to the explicit interest
being paid by savings banks. There are undoubtedly, if you carry this
to its extremes, a whole variety of services which have been given
to tile public in lieu of interest, such as the fairly extensive branch-
ing services of commercial banks, bringing services closer and more
conveniently to the customer. This could be considered a form of
iml)licit interest as well.
Senator MII.N1,1rYI. I just wanted to get something like that on the
record. Thank you.
Mr. SLOAN E. As the dialog on these pieces of legislation develops,
a multiplicity of issues will inevitably unfold, relating to the impact
of NOW accounts on the prevailing balance. between commercial banks
and thrift institutions. Questions will surely arise concerning possible
limitations on NOW accounts, such as the policy prohibiting the pay-
ment of interest thereon, the establishment of liquidity reserves, lim-
itations relating to personal and nonbusiness uses, and limitations in-
volving the number of checks drawn in any 1 month. We are genuinely
apprehensive, however, that such dialog may generate too many
variations, primarily because it starts off with too broad a base. The
base is so broad, in tact, that it may address the introduction of many
elements with which the Presidential Commission on Financial Struc-
ture and Regulation-the so-called Hunt Commission-labored on so
long and arduously.
Inasmuch as congressional hearings on the hunt Commission re-
port may commence later this year
Senator MCINTVRE. Have you got some secret information on that?
Mr. SLOANE. Only what I read.
Senator McI.NTrY E. We have been waiting for someone in the admin-
istration to give us some idea on the Hunt Commission report for
how long-15 months. So, if you have any information, we would
love to have it.
Mr. SLOAx. All I know was whlt I read in the VWall Street ,Journal
yesterday:
* * * and thereby produce an in-depth study of all the interrelated problems
of our financial institutions, it would be unfortunate to open this "Pandora's
Box" on problems at this time. It suffices to say that a "lid" should be put on
this set of problems, so that this and a whole host of structural issues can be
dealt with In some systematic manner.
Thus, it follows that we support section 2 of Senate Bill 1256, as it
pertains to curbing the growth of NOW accounts. We respectfully
urge that this provision l)e modified. however, in such a way as to
preclude mutual savings banks from seeking demand deposit priv-
ileges from the legislature of Massachusetts and thereby evading con-
grressional action on this subject. As presentlv written, mutual sav-
ings banks could offer noninterest bearing NOW accounts or obtain
checking account privileges, without being subject to reserve or other
requirements placed on commercial banks.
We believe that a moratorium is justified and will be relatively
short-lived, owingr to the fact that Congress will be addressing itself
to many of the. imbalances which exist between competing financial
institutions in the months to come. This is not the time to experiment
with new financial instruments which may only serve to intensify
competitive imbalances among financial institutions in Massachusetts
which already exist.
Section 3 of Senate Bill 1256 cures an inequity in the 1969 legisla-
tion-the so-called Massachusetts exception to regulation Q. In 1969,
we opposed exempting mutual savings banks from Federal interest
rate control, believing then that such action would lead to serious
imbalances that would not serve the public interest W.e believe our
fears were well-founded.
Congress enacted a provision whereby Federal deposit rate control
authority would apply to nonfederally insured thrift institutions in
Massachusetts, unless under the laws of that State the commissioner
of Banks was given "comparable" rate control authority and she ex-
ercised that authority. Subsequently, however, the commissioner of
banks (lid not adhere to the charge of "comparable" regulation.
Thus, mutual savings banks have been given a quarter percentage
point rate advantage over other thrift institutions nationwide. Fur-
thermore, they are paying this higher rate on NOW accounts and
there is nothing to prohibit, the nationwide solicitation of NOW ac-
counts, with consequent serious repercussions on national financial
markets.
In addition, we offer in support of our concerns, remarks made by
Frank E. Morris, President of the Federal Reserve Bank of Boston,
appearing as a panelist at the 1972 annual convention of the Savings
Bank Association of Massachusetts, as reported on page 42 of the
October-November, 1972, issue of the Savings Banker Magazine:
I asked my research staff to tell me since the beginning of 1971, where have
the savings banks put their deposit growth? The figures they gave me were that
49 percent of the net new money went into corporate securities, 44 percent
into corporate bonds and 5 percent into stocks. Thirteen percent went into home
mortgages, and 28 percent into other mortgages.
Mr. Morris' statement gives further force to the statistics contained
in the monthly report of the Mutual Savings Central Fund for De-
cember 1972. Out-of-State mortgages and securities, other than U.S.
Government items, as a percent of total savings bank deposits, equaled
33.5 percent.
We believe these figures clearly demonstrate that mutual savings
banks presently hold and are attracting funds far in excess of their
requirements for housing in Massachusetts and are spending their
Money elsewhere. All of this is coming at a time when Massachusetts
is struggling to improve its economic climate and find the means to
restore 100,000 manufacturing jobs lost over the past 5 years.
Competitive conditions in Massachusetts and elsewhere demand
that the dominant financial institutions, the mutual savings banks in
that State, not be permitted to operate in total disregard of Federal
dividend rate control applicable to financial institutions throughout
the rest of the Nation.
In short, we cannot permit these institutions to be out of step with
the rest, of the Nation. It is argued by some that any efforts to remove
the so-called Massachusetts exception to regulation Q would severely
jeopardize the interest of savings depositors in that State. However, it
must be realized that homeowners and other borrowers from these in-
stitutions must pay in increased mortgage costs and other interest
costs for the higher interest rates paid by these instituions; All we are
92
asking is that Massachusetts be brought in step with the rest of the- -
Nation.
Senator MCINTYRE. You had your chance November 7 and you
inuffed it.
Mr. SLOANE. We want to compete with the mutual savings banks.
We want to compete with them, however, on an equitable basis and we
feel that fair and equitable competition is the surest safeguard for
the consumer. We were pleased to note during the hearings before the
House last week that both the FDIC and the Federal Home Loan
Bank Board agreed that section 3 of H.R. 4070-and, in turn, Senate
bill 1256--should be enacted.
In conclusion, we support the Sparkman-Tower bill with the sug-
gested amendment and urge its adoption by the distinguished members
of this subcommittee at the earliest possible date. We also commend the
distinguished chairman of this subcommittee for his efforts in this
area of concern and appreciate this opportunity to testify.
[Complete statement of James R. Sloane follows:]
STATEMENT OF JAME8 R. SLOANE, PRESIDENT, MASSACHUSETTS BANKERS
ASSocIATIoN
Mr. Chairman and distinguished members of the Financial Institutions Sub-
committee, my name is James R. Sloane, and I am President of the Massachusetts
Bankers Association and President of the Berkshire Bank and Trust Company of
Pittsfield, Massachusetts. Accompanying me today are Herbert P. Almgren, Pres-
ident of First Bank and Trust Company of Springfield; Frank J. Dowd, Jr., Vice
President of the First National Bank of Boston; Harry G. Webster, Senior Vice
President of the Third National Bank of Hampden County in Springfield; John
W. Plant, Vice President of the Lee National Bank of Lee; Thomas J. Roberts,
Vice President of Guaranty Bank and Trust Company of Worcester; William G.
Fish, President of the Bay Bank and Trust Company of Beverly; and William M.
Crozier, Jr., Vice President of the Baystate Corporation.
We appreciate this opportunity to offer testimony before your subcommittee to-
day concerning three matters which are of great concern to all commercial banks
in Massachusetts: an extension of the Federal Government's authority to impose
ceilings on interest rates which financial Institutions can pay on time and savings
deposits; an extension of these interest rate limitations to non-federally regu-
lated and insured thrift institutions in Massachusetts; and alternative methods
of dealing with the so-called "N.O.W. account." We are Joined in our efforts by
the Massachusetts Federal Savings Council which represents all Federal savings
and loan associations in that state, by the Federal Savings League of New Eng-
land, by the American Bankers Association, and by the United States Savings
and Loan League.
We will address our comments to Senate Bill 1008 which was introduced by
the distinguished chairman of this subcommittee, Senator McIntyre, on Febru-
ary 26, 1973; and Senate Bill 1256 which was Introduced by Senators Sparkman
and Tower on March 15, 1973. The McIntyre bill would extend the privilege of
offering N.O.W. accounts or similar accounts to all financial institutions, and
would extend Regulation Q authority for an additional one year period.
Senate Bill 1256, the Sparkman-Tower
bill. would extend for two years the
authority of the Federal Government to impose ceilings on interest rates which
financial institutions can pay on time and savings deposits; extend the interest
rate limitations to a large number of thrift institutions which are unregulated
presently; and prohibit depository institutions from permitting third party nego-
tiable orders of withdrawal to be drawn on an account on which interest is paid,
except for a period of six months after the bill's enactment. Thus, the bill would
differ only slightly from H.R. 4070 introduced by Congressman St Germain, inas-
much as the Sparkman-Tower
bill provides for a phasing out of negotiable order
privileges.
With respect to the extensiQp of Regulation Q authority for one or two years,
we would like to observe that the origins of this legislation c6i-iemplated many
circumstances which continue to prevail and therefore argue for extension of the,
93
authority. We would also like to point out, however, that we do not believe such
legislation contemplated N.O.W. accounts or widespread checking account priv-
ileges for thrift institutions. Should such circumstances continue, the efficacy
of the regulation could be drawn Into question. Nevertheless, under present cir-
cumstances we support an extension of this authority; however, we would like
to point out that commercial banks in Massachusetts are subject to the controls
that are at issue here, while mutual savings banks are not. What we object to,
Mr. Chairman, is why we should be subject to controls while our competitors
are not.
Sections 1 and 3 of the Sparkman-Tower Bill, however, are our major concern.
Let us begin by giving you our perspective on these two provisions:
First, Massachusetts is the only state of the Nation in which the largest seg-
ment of its banking industry, mutual savings banks, is not under federal control.
Second, Massachusetts is the only state in the nation where mutual savings
banks have a three-quarters of a percentage point advantage in payment of in-
terest on savings accounts over commercial banks.
Third, it is new one of only two states (New Hampshire being the other)
where savings banks, in effect, can pay interest on demand deposits. The N.O.W.
accounts have placed mutual savings banks in Massachusetts squarely in the
commercial banking business. The staggering problem that this development
poses to commercial banking becomes clear when one considers that one court
decision on a very narrow legal issue has, in effect, converted overnight 167
mutual savings banks into new commercial banks.
To establish a new branch or banking office, commercial banks must prove a
public need to the regulatory agencies and meet certain established criteria. The
Court decision creating the N.O.W. account, however, gave no consideration to
public need or the economic consequences thereof. In effect, it increased the num-
ber of commercial banking offices in the state by 435 or about fifty per cent.
On top of this, mutual-savings banks can sell life insurance; sell mutual funds;
invest in common stocks for their own account; and offer savings accounts to
corporations. Mr. Chairman, commercial banks are prohibited by law from offer-
ing any of these services.
The mutual savings banks have gained all these expanded powers while still
retaining their special privileges as thrift institutions, such as no legal reserve
requirements against deposits; less stringent capital requirements; special tax
advantages; and, of course, the interest rate differential. At the same time, these
institutions claim to the public that their deposits are fully insured; however, the
Mutual Savings Central Fund is clearly inadequate when compared to deposit
protection afforded by the F.D.I.C.
As of October 31, 1971, the latest information available, the Mutual Savings
Central Fund, Inc., had $115 million in assets to insure deposits in Massachusetts
mutual savings banks equal to $12.5 billion. It should also be noted that in Massa-
chusetts today there are 30 mutual savings banks in the $100-$500 million size
range, and four over $500 million in size. The Central Fund does not have the full
faith and credit of the Commonwealth of Massachusetts behind it. It stands alone
in contrast to the F.D.I.C. which, in addition to its own assets, has a $3 billion
line of credit with the United States Treasury.
With the foregoing comments as background, we would now like to focus on
Section 2 of Senate Bill 1256 which deals with the N.O.W. account question. On
May 2, 1972, the Supreme Judicial Court of Massachusetts held that Massa-
chusetts law did not prohibit savings bank depositors from making withdrawals
from savings accounts by means of a withdrawal order in negotiable form. What
followed from the court's consideration of this very narrow legal question was a
massive campaign by the savings bank industry to enter the checking account
business. Today, 55 of the 167 savings banks in the state are offering N.O.W.
accounts. The participating banks represent 60 percent of the total deposits of
all savings banks In the state. This situation has spread with equal severity, to
the state of New Hampshire where 11 of the 36 savings banks are offering N.O.W.
accounts. As of June 30, 1972, these 11 savings held 42 percent of the total
deposits of mutual savings banks in New Hampshire.
In Massachusetts, the small commercial banks will be the first to feel the conw
quences of the N.O.W. account, on top of the interest rate advantage; for, in over
half the communities in which commercial banks and mutual savings banks each
maintain offices, the inutuals are at least twice as large as the commercial banks.
There is no question that the negotiable orders of withdrawals used in Massa-
93-311 0 - 73 - 7
94
chusetts constitute checks and are presented as such to the public-at-large. In
fact, one institution in Massachusetts has advertised as follows:
"Having and using [a N.O.W. account] . . . is the same as having and
using a checking account. But there's a big difference. You'll find 5% percent
interest added to your balance at the end of the month .. "
I would like to introduce here, if I may, some newspaper advertisements which
appeared in Massachusetts and, in effect, presented the N.O.W. account to the
public as a checking account. I would also like to introduce some checks which
are used in connection with the N.O.W. account, and you will see that It is
difficult (if not impossible) to tell the difference between a third party negotiable
withdrawal instrument and a normal commercial bank check.
This advertising makes it crystal clear what we are talking about-paying
51/ percent interest on demand deposits. Under federal law, it is illegal for com-
mercial banks to pay interest on demand deposits, the cost of which contributed
greatly to the loss of earnings and bank instability during the 30's. Significantly,
the Hunt Commission has recommended that the prohibition against the payment
of interest on demand deposits be retained.
The implications of this problem are not confined to Massachusetts. They also
apply, at least initially, to other states where mutual savings banks are well
established, including New York, Connecticut, Pennsylvania, Washington, Rhode
Island, and, of course, New Hampshire. We commend the distinguished Senator
from New Hampshire for offering Senate Bill 1008 and recognize, as he stated
in his remarks on the Senate floor, that this bill represents draft legislation de-
signed to develop a dialogue on the N.O.W. account issue; however, we are con-
vinced that its scope is so broad that, if enacted, it could produce consequences
most harmful to the public interest.
A recent study prepared for our association setting forth the impact of N.O.W.
accounts on commercial banks concluded as follows:
" [T]he major impact on commercial banks offering N.O.W. accounts
or a related product, would be to initially reduce earnings through higher
interest costs, potentially drive up loan rates and ultimately impact on:
commercial bank borrowers through higher rate costs, stockholders through
reduced return on equity and the government through a reduction in tax
revenues. The size of the impact on any one of the three sectors would de-
depend on the degree to which loan rates were changed. If loan rates were
not increased, stockholders and the government would bear the brunt
through reduced earnings of commercial banks. On the other hand, if loan
rates were increased to offset all increased costs, the borrower is the prime
victim."
We ask that a copy of this study be included in the record of these hearings.
As the dialogue on these pieces of legislation develops, a multiplicity of issues
will inevitably unfold, relating to the impact of N.O.W. accounts on the prevail-
ing balance between commercial banks and thrift institutions. Questions will
surely arise concerning possible limitations on N.O.W. accounts, such as the
policy prohibiting the payment of interest thereon; the establishment of liquid-
ity reserves; limitations relating to personal and non-business uses; and limita-
tions involving the number of checks drawn in any one month. We are genuinely
apprehensive, however, that such dialogue may generate too many variations
and anecdotes, primarily because it starts off with too broad a base. The base is
so broad, in fact, that it may address the introduction of many elements with
which the Presidential Commission on Financial Structure and Regulation-the
so-called Hunt Commission-labored so long and arduously.
Inasmuch as Congressional hearings on the Hunt Commission report may
commence later this year and thereby produce an in-depth study of all the inter-
related problems of our financial institutions, it would be unfortunate to open
this "Pandora's Box" of problems at this time. It suffices to say that a "lid"
should be put on this set of problems, so that this and a whole host of struc-
tural issues can be dealt with in some systematic manner.
Thus, it follows that we support Section 2 of Senate bill 1256, as it pertains
to curbing the growth of N.O.W. accounts. We respectfully urge that this pro-
vision be modified, however, in such a way as to preclude mutual savings banks
from seeking demand deposit privileges from the legislature of Massachusetts
and thereby evading congressional action on this subject. As presently written,
mutual savings banks could offer non-interest bearing N.O.W. accounts or obtain
checking accounts privileges, without being subject to reserve or other require-
ments placed on commercial banks.
95
We believe that a moratorium is Justified and will be relatively short-lived,
owiTg to the fact that Congress will be addressing itself to many of the Im-
balances which exist between competing financial institutions in the months to
come. This is not the time to experiment with new financial instruments which
may only servc to intensify competitive imbalances among financial institutions
in Massachusetts which already exist.
Section 3 of Senate bill 1256 cures an inequity in the 1969 legislation-the
so-called "Massachusetts exception to Regulation Q." In 1969, we opposed exempt-
Ing mutual savings banks from federal interest rate control, believing then that
such action would lead to serious imbalances that would not serve the public
interest. We believe our fears were well founded.
Congress enacted a provision whereby federal deposit rate control authority
would apply to non-federally insured thrift institutions in Massachusetts, unless
under the laws of that state the Commissioner of Banks was given "comparable"
rate control authority and she exercised that authority. Subsequently, however,
the Commissioner of Banks did not adhere to the charge of "comparable"
regulation.
Thus, mutual savings banks have been given a quarter percentage polit rate
advantage over other thrift institutions nationwide. Furthermore, they are paying
this higher rate on N.O.W, accounts and there is nothing to prohibit the nation-
wide solicitation of N.O.W. accounts, with consequent serious repercussions on
national financial markets.
In addition, we offer in suport of our concerns remarks made by Frank E.
Morris, President of the Federal Reserve Bank of Boston, appearing as a panelist
at the 1972 Annual Convention of the Savings Bank Association of Massachusetts,
as reported on Page 42 of the October-November, 1972, issue of the Savings
Banker Magazine:
"I asked my research staff to tell me since the be-ginning of 1971, where
have the savings banks put their deposit growth? The figures they gave me
were that 49 percent of the net new money went into corporate securities, 44
percent into corporate bonds and 5 percent into stocks. Thirteen percent
went into home mortgages, and 28 percent, into other mortgages."
Mr. Morris' statement gives further force to the statistics contained in the
monthly report of the Mutual Savings Central Fund for December 1972. Out-of-
state mortgages and securities (other than U.S. Government items) as a percent
of total savings bank deposits, equaled 33.5 percent.
We believe these figures clearly demonstrate that mutual savings banks
presently hold and are attracting funds far in excess of their requirements for
housing in Massachusetts and are spending their money elsewhere. All of this is
coming at a time when Massachusetts Is struggling to improve its economic
climate and find the means to restore 100,000 manufacturing Jobs lost over the
past five years.
Competitive conditions in Massachusetts and elsewhere demand that the
dominant financial institutions, the mutual savings banks in that state, not be
permitted to operate in total disregard of federal dividend rate control applicable
to financial institutions throughout the rest of the nation.
In short, we cannot permit these institutions to be out of step with the rest of
the nation. It is argued by some that any efforts to remove the so-called "Massa-
chusetts exception to Regulation Q" would severely jeopardize the interest of
savings depositors in that state. However, it must be realized that homeowners
and other borrowers from these Institutions must pay in increased mortgage
costs and other interest costs for the higher interest rates paid by these institu-
tions. All we are asking is that Massachusetts be brought in step with the rest
of the nation.
We want to compete with the mutual savings banks. We want to compete with
them, however, on an equitable basis and we feel that fair and equitable com-
petition Is the surest safeguard for the consumer. We were pleased to note during
the hearings before the House last week that both the F.D.I.C. and the Federal
Home Loan Bank Board agreed that Section 3 of H.R. 4070-and, in turn,
Senate 1256-should be enacted.
In conclusion, we support the Sparkman-Tower Bill with the suggested amend-
ment; and urge its adoption by the distinguished members of this subcommittee
at the earliest possible date. We also commend the distinguished chairman of
this subcommittee for his efforts in this area of concern and appreciate this
opportunity to testify. We will be glad to provide this subcommittee or its staff
with any additional information. With the Chairman's permission, we would
also like to introduce additional information for the record.
96
EXHIBIT I
DEPOSIT RANK OF FINANCIAL INSTITUTIONS IN MASSACHUSETTS
lAmounts in millions of dollars as of June 30,1972 11
Time end
Total Percent of savings Percent of
Number deposits total deposits total
Mutual savings banks .................. 170 $13,490 44.8 $13,490 63.3
Insured commercial banks- - .......... 151 11,550 38. 4 32,781 13.0
Cooperative banks .................... 144 2,409 8. 0 2,409 11.3
Insured Federal savings and loan asso-
ciations ............................ 35 1, 792 6.0 1,792 8. 4
Credit unions:
State chartered ................... 387 673 2. 2 673 3.2
Federally chartered ................ 352 166 .6 166 .8
Total .......................... 1,239 30,080 100.0 21,311 100.0
'Latest data available for State-chartered credit unions is as of Oct. 31, 1971; for federally chartered, Dec. 31. 1971.
I Saving deposits and consumer-type time deposits combined. Consumer-type time deposits, as defined by the Federal
Reserve Bank of Boston, include time deposits of individuals, partnerships and corporations less large negotiable ceri.
cates of deposit in denominations of $100,000 or more issued to individuals, partnerships, and corporations.
Sources: Massachuelts Bankers Association, Inc., Mutual Savings Central Fund Inc , Federal Home Loan Board, Office
of the Commissioner of banks, Commonwealth of Massachusetts, National Credit Union Administration.
EXHIBIT 2
DISIRIBUriON OF INSURED COMMERCIAL BANKS AND MUTUAL SAVINGS BANKS IN MASSACHUSETTS
(Ranked by size of total deposits in millions of dollars as of Dec. 31. 19721
Total num-
ber of
banks In
County Under 5 5-10 10-25 25-50 50-100 100-500 Over 500 county
Barnstable:
Commercial ...................... 1 5 2 1 .................... 9
Mutual ..................................... I ---------- I ........ 3
Berkshire:
Commercial ----- _----- 1 2 1 ........ 2 .................... 6
Mutual .................................... 2 3 3 .................... 8
Bristol:
Commercial ................................ 2 3 6 .................... 11
Mutual ..................................... 1 2 6 2 .......... 11
Dukes and Nantucket:
Commercial ...................... 2 1 ........................................ 3
Mutual ..................................... 2 ........................................ 2
Essex:
Commercial ............ 2 5 6 5 3 2 .......... 23
Mutual ................. I .......... 4 6 4 7 .......... 22
Franklin:
Commercial ............ I I .......... 2 .............................. 4
Mutual ........................... 1 2 1 1 .................... 5
Ham pden:
Commercial ------------------------------- 4 2 .......... 3 .......... 9
Mutual ..................................... 1 2 5 3 .......... 11
Hampshire:
Commercial ...................... 2 3 1 .............................. 6
Mutual ........................... I .......... 2 4 .................... 7
Middlesex:
Commercial --------------------- 2 17 7 5 4 .......... 35
Mutual ..................................... 3 11 13 6 .......... 33
Norfolk:
Commercial -------------------- 2 2 2 1 2 .......... 9
Mutual .....................................
6 4 2 2 .......... 14
Plymouth:
Commercial ...................... 1 4 ......... 3 ....................
Mutual .....................................
5 4 2 .......... 12
Suffolk:
Commercial ...................... 1 4 1 4 .......... 4 14
Mutual ........................... 1 1 3 2 5 4 16
Worcester:
Commercial ............ 2 1 5 2 .......... 3 .......... 13
Mutual ........................... 3 5 8 4 3 .......... 23
State total:
Commercial ............ 6 20 54 27 25 14 4 150
Mutual ................. 1 6 33 46 47 30 4 167
97
EXHIBIT 2--Contnued
BANKS WITH TOTAL DEPOSITS OF $S0 MILLION OR UNDER
Number Percent of
total
Commercial ------------------------------------------------------------------- 107 71. 3
Mut -- l----------------------------------------------------------------------- 86 51.5
Sources: Massachusetts Bankers Association Inc., and Mutual Savings Central Fund.
EXHIBIT 3
MAJOR ASSETS AND LIABILITIES OF MUTUAL SAVINGS BANKS IN MAAACNUSETTS, 1969-1972
Jn millions of dollars]
Total no-
U.S. Gov- Mortgage loans
Total ernment
Dec. 31 Total assets deposits securities' Total Out-of-State In-State
1969 ................... 11,724 .10,468 1,458 8,223 1.401 6.822
1970 ................... 12,596 11 264 1,790 8,670 1, 411 7,259
1971 ................... 14,160 12,665 2,462 9,293 1, 463 7,830
1972 ................... 15,671 14,056 2,852 10, 146 1,570 8,576
1 Virtually all of these amounts are invested in corporate bonds, notes, debentures, and stock, with minor portions
Invested in State and local obligations.
Total non-
U.S. Gov-
ernment In-State In-State
securities mortgages mortgages
as percent as percent as percent
of total of total of total
Dec. -31 assets assets deposits
1969 ............................................................. 12.4 58.2 65.2
1970 ............................................................. 14.2 57.6 64.4
1971 ............................................................. 17,4 55.3 61.8
1972 ............................................................ 18.2 54.7 61.0
Source: Mutual Savings Central Fund.
EXHIBIT 4
COMPARATIVE IMPACT OF TAXES, MUTUAL SAVINGS BANKS AND INSURED COMMERCIAL BANKS IN
MASSACHUSETTS
lin thousands of doflarsi
Mutual Commercial
1960:
Federal .................................................................... 181 46,749
State ...................................................................... 2,409 9,036
Total .................................................................... 2,590 55,785
1961:
Federal .................................................................... 97 46,744
state ...................................................................... 2,515 P, 243
Total .................................................................... 2,612 54,987
1962:
Federal ........................................................ 108 43,466
State ................................................................... 3,155 7,997
Total .................................................................... 3,263 51,463
98
EXHIBIT 4-Continued
COMPARATIVE IMPACT OF TAXES, MUTUAL SAVINGS BANKS AND INSURED COMMERCIAL BANKS IN
MASSACHUSETTS-Continued
[In thousands of dollars
Mutual Commercia l
1963:
Federal ................................................................. 420 38,570
State ..................................................... ........... 3,440 7.239
Total .................................................................... 3,860 45.809
1964:
Federal ..................................................... - .............. 534 37,954
State ......................................................... ........... 3,931 7,863
Total .................................................................... 4,465 45.817
1965:
Federal ......................................................- .............. 1,004 34,259
State ..........................-------------- *-- --------------------------- 4,075 7.623
Total .................................................................... 5,079 41,882
1966:
Federal .................................................................... 1,642 34, 172
State ...................................................................... 4,800 9. 228
Total .................................................................... , 4i 43,400
1967:
Federal ............................................................... .... 1,023 34,090
State ........................................................... .......... 6,768 11,164
Total .................................................................... 7,791 45, 254
1968:
Federal .................................................................... 1,022 30,182
State ...................................................................... 7,361 11, 293
Total .................................................................... 8,383 41,475
1969:
Federal .................................................................... 1,793 35, Ol
State ...................................................................... 7,776 14.367
Total .................................................................... 9,569 49,378
1970:
Federal .................................................................... 3,100 48,457
State ...................................................................... 9,560 17,487
Total ....----------------------------- ---------- ------- 12,660 65,944
1971:
Federal .................................................................... 8,040 29 927
State ........ 1............................................................. 11,089 18:620
Total .................................................................... 19,129 48,547
Sources: Annual Reports Commissioner of Banks, Commonwealth of Massachusetts (for Mutual Savings Banks
Annual Reports ol Income, federal Deposit Insurance Corporation (for Insured Commercial Banks).
99
EXHIBIT 5
DEPOSIT CONCENTRATION BY COUNTY, MUTUAL SAVINGS BANKS IN MASSACHUSETTS OFFERING "NOW"
ACCOUNTS, FEB. 1, 1973
10ollar amounts in millions
Total
Number deposits. Total
Number with banks with deposits, Ratio
banks in "NOW. ."NOW" all banks (col. 4/
County county "accounts accounts in county co . 5)
(1) (2) (3) (4) (5)
Barnstable ..................................... 3 2 $259.2 $277.1 93.5
Berkshire ...................................... 8 7 371.4 398.5 93.2
Bristol ......................................... 11 4 323.4 861.7 37.5
,Dukes and Nantucket ........................... 2 1 20.7 34.0 60.9
Essex .......................................... 22 7 - 665.1 1,552.4 42.8
Franklin ....................................... 5 2 101.1 133.0 76.0
Hampden ...................................... II 6 94.0 1,172.1 80.2
Ha mpshi ........................... 7 2 134.1 329.3 40.7
Middlesex.. ............................... 33 2 409.4 2,544.1 16.1
Norfolk ........................................ 14 3 209.1 722.8 28.9
Plymouth ...................................... 12 3 179.6 476.9 37.7
Suffolk ......................................... 16 9 3,745.3 4,179.3 89.6
Worcester ...................................... 23 7 947.9 1,375.2 68.9
State total ................................ 167 55 8,306.3 14,056.3 59.1
Source: Mutual Savings Central Fund.
EXHIBIT C
DEPOSIT GROWTH OF EARLIEST MUTUAL SAVINGS BANKS IN MASSACHUSETTS TO OFFER "NOW" ACCOUNTS
[Dollar amounts in millions[
Deposit gain, second hall
Deposits, 1971/1972
Dec. 31 -Percent
1971 1971 1972 change
Consumers Savings, Worcester:
Ordinary t . .-------------------------......... $132.0 2.4 4.8 ..............
Total .......................................... 197.8 5.0 7.2 ..............
Provident Institution, Boston:
Ordinary ....................................... 524.2 6.0 16.1 ..............
Total .......................................... 811.3 17.9 30.7 ..............
Fitchburg Savings, Fitchburg:
Ordinary ....................................... 48.3 .3 1.2 .............
Total ----------------------------------------- 72.6 1.5 2,4 ..............
Worcester North Institution, Fitchburg:
Ordinary ....................................... 42.6 .3 2.0 ..............
Total .......................................... 72.0 1.2 -3.4 ..............
Lenox Savings, Lenox:
Ordinary ....................................... 8.7 .3 .8 ..............
Total .......................................... 16.2 .6 1.2 ..........
City Savings, Pittsfield:
Ordinary ....................................... 55.7 1.9 3.0 ..............
Total .......................................... 95.2 3.0 4.7 --------------
Berkshire County, Pittsfield:
Ordinary ...................................... 57.6 1.4 1.9 ..............
Total ---------................................. 94.7 2.8 3.7 ..............
Lee Savings, Lee:
Ordinary ....................................... 19.2 .6 1.6 ..............
Total .......................................... 34.0 1.0 2.3 ..............
Home Savings, Boston:
Ordinary ............... ........................ 248.2 .9 5.8 ..............
Total .......................................... 347.7 6.0 11.0 ..............
Northampton Institution, Northampton:
Ordinary -------------------------------------- 40.6 1.7 2.7 ..............
Total .......................................... 58.0 2.9 3.9 ..............
Total
Ordinary ....................................... 1,177.1 15.8 39.9 52.5
Total ----------------------------------------- 1,799.5 41.9 70.5 68.3
All other Mutual Savings Banks in Massachusetts:
Ordinary ... -................................... 8,394.1 219.6 273.3 24.
Total .......................................... 12,256.8 416.8 496.3 19.
.
j Ordinary (or regular) savings deposits.
Source: Mutual Savings Central Fund. List includes the first 10 institutions to offerr "NOW" accounts during the period,
June 12, 1972 to Aug. 25, 1972.
100
EXHIBIT 7
TOTAL DEPOSITS AND DEPOSIT INSURANCE FUND IN MASSACHUSETTS, 1965-71
11n thousands of dollars
Total deposits,
mutual savings Deposit in-
banks in surance-fund Annual bank
Oct. 31 Massachusetts (MSCF) assessment
1965 ................... ........................... 8,348,084 68,868 2,395
1966 .............................................
8,639,722 74,.175 2,589
1967 ........................ " .... "......................... 9,178, "S 79,831 2 645
1968 .......................-.......--. - -........................ 9,704,076 85,981 2,826
1969 ..................... . . ........................... 10,395,798 94,546 3,009
1970 ...................... ............................... ------- 11,079,680 102,643 3,211
1971 ...................................--.... ;.'-.-....... _ _ 12,502,171 115,415 3,425
Source: Annual Report of the Commissioner of Banks.
Senator MOINTYRE. Thank you very much, Mr. Sloane and your
associates, for being here today and waiting until you had a chance
to testify. Your testimony is very forceful. I think we understand
your position very, very clearly. We will leave it to the full committee
as to what is going to happen.
Thank you very much, gentlemen.
Mr. SLOANE. Thank you very much, Senator McIntyre.
Senator MCINTYRE. We call as-our last witness this morning
Mr. E. J. Dully of the Independent Bankers Association of America.
We are glad to welcome Mr. Duffy here this morning.
I seee an old friend of long standing here with him.
We have your statement, Mr. Duffy, of some 14 pages. This will be
included in its entirety in the record (see p. 113).
In the course of your testimony, such parts of it as you may high-
light in view of the time moving toward 1 o'clock, I would certainly
appreciate.
I would ask you also for the record to introduce the gentlemen who
are accompanying you at this point.
STATEMENT OF E. 1. DUFFY, JR., CHAIRMAN AND EXECUTIVE
VICE PRESIDENT, SUBURBAN NATIONAL BANK OF ARLINGTON,
MASS., AND PRESIDENT, MASSACHUSETTS INDEPENDENT BANK-
ERS ASSOCIATION, ON BEHALF OF THE INDEPENDENT BANKERS
ASSOCIATION OF AMERICA, ACCOMPANIED BY: JOHN LINNEHAN,
SECRETARY, MASSACHUSETTS INDEPENDENT BANKERS ASSOCI-
ATION; AND THOMAS BRICKLE, COUNSEL, I1AA
Mr. DuFFY. Yes, Mr. Chairman. Rather than rush through my state-
ment, I am going to summarize it and then make a few comments
generally.
Oa my left is Mr. John Linnehan, secretary to the Massachusetts
Independent Bankers Association, Inc., and on my right is Thomas
Brickle, counsel for the Independent Bankers Association of America.
Senator MCINTYRE. I am glad to welcome you here this morning,
gentlemen.
101
Mr. DuFry. Mr. Chairman, members of the subcommittee: my name
is Edward J. Duffy, Jr. I am the chairman of the board of the Sub-
urban National Bank of Arlington, Mass., which was chartered in
1963 and is an independent bank and is independently owned and
operated.
I am also the current president of the Massachusetts Independent
Bankers Association which is a Massichusetts organization o Massa-
chusetts independent banks formed this last October.
I am also a member of the Massachusetts Special Study Commission
created by the Massachusetts Legislature to study whether or not sav-
ings banks inl Massachusetts should be allowed to have checking
accounts.-
This study commission has been meeting during the past year and
is continuing to meet on this question. It is also studying the question
of NOW accounts in Massachusetts.
. I am here to present, the considered views of our national association
and to offer comments on my personal experience in the Common-
wealth of Massachusetts regarding the current issue on negotiable
orders of withdrawals from interest-bearing savings accounts.
The Independent Bankers Association of America is a national or-
ganization representing over 7,000 independent banks, the majority of
which do business in suburban areas, small urban and rural com-
munities.
Our member banks are generally the small institutions as measured
by capital, assets or deposits. Each offers a wide variety of traditional
banking services. The relative size of our member banks and the con-
sumers' need for diversified services places great demands on the bank
management.
Senator MCINTYRE. Have you got any members up in New
Hampshire?
Mr. Du"r. Oh, yes. We have quite a few up there. As a matter of
fact, I think we have
Senator MCINTYP. That strengthens your case immediately.
Mr. DuFrY. Thirty or 40.
The members are meeting the challenge, however, the actual or
threatened erosion of the traditional commercial banking practices
coupled with the expanding array of competitive advantages given to
competing financial institutions, generates disproportionate burdens
onf small banks.
These, factors complicate their efforts to compete for available funds
in the local fina ncial market and, in .turn, provide the necessary. lend-
ing services requested by the borrowing community. These conditions,
among others. are the basis of our opinions on the proposals, under
consideration today.
I would like to summarize our positions on these proposals in three
short paragraphs, Mr. Chairman.
SenatorMCINTYRE. You are talking now about NOW?
Mr. DuEFY. I am talking about Senate bill 1008 and Senate bill 1256
and Senate bill 1257.
102
The Independent Bankers Association of America supports and
opposes, in part, the legislation which is the subject. of this hearing.
Our position is as follows:
(1) We support the extension of the enabling authority for the
regulatory control on the rates of interest and dividends payable on
time deposits and savings accounts.
We urge the subcommittee to recommend to the enforcing agencies
that the flexible rates be as narrow as is economically reasonable for all
lending institutions.
(2) We oppose the payment of interest on time deposits or savings
accounts which would be subject to withdrawals by any third-party
payment instrument regardless of the nomenclature.
Senator MCINT,-TY RE. Would you favor a 1-year extension or a 2-year
extension?
Mr. DUFFY. Preferably one.
Senator MCINTYRE. What do you mean regardless of the nomencla-
ture? Are you saying we are hiding something behind a lot of words?
M r. DuFFY. I think there was a question, Mr. Chairman, whether or
not a NOW account is a demand deposit, a checking account or some-
thing different.
The decision rendered by the Supreme Judicial Court, of Massa-
chusetts did not say it was a demand account. It chose to distinguish
it froni a checking account in reaching its legal conclusions, and it
couldn't have reached the legal conclusion it did unless it had made
that distinction. That is the reason we talk about nomenclature.
Senator M CINTYRE. What about Mr. and Mrs. America? Maybe a
better mousetrap has been built. Maybe the savings bank says, well,
Mrs. America, we will give -you personally-we won't give your fils-
band for his business-a modest checking account, and whatever you
have in that account-boy, that bank up in my hometown there, at the
end of the month there was something like $2.40 service charge-this
bank says, depending what is in there we will give you 80 cents, $1.50
interest for the month.
Mr. DiTFFY. There is no question that the consumer would like to
have NOW accounts. I am not questioning that. What I am trying
to point out, Mr. Chairman, and if I might divert for the moment as
a result of this question-what you are asking me I believe is why
shouldn't all banks in the country, pursuant to your own bill, pay in-
terest on NOW accounts so that the consumer can have the benefit of
it? My answer to that would be that we do not think it would be to
the advantage of all banks and in the end to the consumer if we did so
for the following reasons:
(1) The interest rate difference on savings accounts between com-
mercial banks and mutual savings banks and savings and loan associa-
tions will still exist and place commercial banks at a distinct competi-
tive disadvantage;
(2) There appears to be too many uncertainties in NOW accounts:
To thrust such a system on the whole nation without really having
any statistics to refute the commercial banks' position, arguments and
logic as to irreparable injuries which they will suffer would be an
unwise decision in our opinion;
103
(3) I think this is very important, Mr. Chairman. In the State of
Massachusetts alone there would be a devastating impact on the
smaller commercial consumer-oriented banks because mutual savings
banks interest rates would prevent fair competition and even without
interest on NOW accounts it would be like opening 400 new competing
branches overnight. We have approximately 115 independent banks in
Massachusetts, and 60 to 90 percent of their demand deposits,
Mr. Chairman, are in the personal checking account field, and these
banks are all located in the suburban bank areas.
If you look at the banks in Boston, the large banks like the First
National Bank of Boston, and the other large banks, you find that
their demand deposit structure is based on just the reverse ratio, that
between 60 to 90 percent of their deposits are commercial. Therefore,
they have nothing to lose comparing their loss with that of the inde-
pendent banks, the suburban consumer-oriented independent bank.
That is why I stated it would be devastating. It would be-
Senator MCINTYRE. Devastating you say?
Mr. DuFY. It would be a devastating thing to the small suburban
bank.
Senator MfCINTYRE. Has it been devastating in Massachusetts? You
have had it for what, 9 months?
Mr. DUFFY. I think that the statistics which are available-and I
am surprised that the savings banks didn't bring the statistics to your
attention, Mr. Chairman. Last week at a public hearing before the
Joint Legislative Banking Committee in Massachusetts, before which
I supported a bill which would do away with NOW accounts in Massa-
chusetts until the Federal authorities could reach a decision as to
how we should proceed in this whole area; at that hearing the savings
banks brought forth certain statistics which I do not believe were
brought to your attention this morning.
I have a copy here and am prepared to place it in the record because
it contains answers to some of the questions you were asking previously.
Senator MCINTYRE. All right. I need to have it identified. What is it?
Mr. DUFFY. It is entitled "Massachusetts NOW Accounts: A Statis-
tical Study." It is signed by Elliott G. Carr, director of research, Sav-
ings Banks Association of Massachusetts and dated March 6.
[Tihe document follows:]
INDEPENDENT BANKERS ASSOCIATION OF AMERICA,
Washington, D.C., March 22, 1978.
Hon. THOMAS J. MCINTYRE,
Chairmait, Subcommittee on Financial Institution-s Committee on Banking, Hous-
ing, and Urban Affairs, U.S. Senate, Dirksen Office Building, Washing-
ton, D.C.
DEAR SENATOR MCINTYRE, On March 20, 1973, Mr. E. J. Duffy, Jr. testified on
the legislative proposals extending the interest rate control authority and the use
of negotiable orders of withdrawals. He appeared to present the considered views
of the Independent Bankers Association of America.
During the course of his testimony, Mr. Duffy referred to a report compiled by
the Savings Banks Association of Massachusetts bearing the date of March 6,
1973. He advised the Subcommittee of the statistical contents of the report and he
was of the opinion that the date forcefully shows that NOW Accounts are in fact
causing disintermediation of money from demand deposit and savings accounts
in comercial banks and savings and loan institutions.
104
Enclosed are twenty copies of the report which was admitted into the record as
our Exhibit number one.
As you may recall, the morning of testimony was uncommonly devoid of studies
or statistics which persuasively made or negated the argument for negotiable
orders of withdrawals from interest bearing savings accounts. The testimony
suggesting a trend was general but illusory in evaluating the impact of NOW
Accounts on traditional commercial banking activity.
The enclosed exhibit which was prepared and publicized by the proponents for
NOW Account authority implicitly reaffirms our contention as opponents that:
1. NOW Account growth was alarmingly rapid during the short span of the
statistical sample.
2. NOW Accounts are attracting demand and savings deposits from commer-
cial banks.
3. NOW Accounts are interest bearing checking accounts regardless of the
nomenclature.
In reviewing the statistical tables in the exhibit some clarifying comment is
necessary:
1. Page One, Exhibit One . . . The deposit growth for commercial banks is
an aggregate figure for both demand deposits and savings accounts.
2. Page Two, Exhibit One (sic.) . . . More than fifty percent of the growth
in NOW Acount deposits came from sources outside the mutual savings bank
itself.
3. Page Three, Exhibit three . . . The table reflects statistical data from one
county in the State.
4. Page Five, Exhibit Four . . . The proportion of intrabank transfers as
compared to NOW Account deposit growth suggests disintermediation is in fact
occurring.
The Independent Bankers Association of America believes that a broad, accu-
rate and rapid statistical study by the Federal Reserve Board, the Home Loan
Bank Board and the Federal Deposit Insurance Corporation could be completed
long before the expiration of the interest rate control authority. We further
believe that the study would support our contention that NOW Accounts will
attract demand deposits and savings accounts from commercial banks as well as
savings from other thrift institutions.
Respectfully submitted,
THOMAS. C. BroxL, Legal Gounsel.
SAVIN GS BANKS ASSOCIATION OF MASSACHUSMTS
M.ASSACHUSVWrs N.O.W. ACCOUNTS: A STATISTICAL STUDY
Since negotiable withdrawal orders from savings deposits (N.O.W. accounts)
were initiated in Massachusetts in June, 1972, there has been much conjecture
concerning:
1. The competitive impact of N.O.W. accounts on the competitive balance be-
tween various industries, particularly small commercial banks.
2. The differences, If any, between "N.O.W." accounts and regular checking
(demand) deposits.
3. The profitability of N.O.W. accounts and their impact on the availability and
rates of mortgage funds and other investments.
Critics of N.O.W. accounts have maintained that they should be abolished
because of alleged potential injurious impact to competing financial institu-
tions. Proponents contend that they represent a "wave of the future" which
should be made available to consumer-depositors in al types of institutions.
This paper will statistically evaluate the N.O.W. account over the first nine
months of its existence, with particular emphasis on the areas outlined above.
The Competitive Impact of N.O.W. Accounts: Exhibit II on the following page
presents selected summary data on N.O.W. accounts.
Exhibit I below relates the N.O.W. deposit growth over the last half of 1972
to total banking deposits in Massachusetts.
105
EXHIBIT I
MASSACHUSETTS BANK DEPOSIT GROWTH
(Dollar amounts in thousands
Commercial Savings Cooperative Savings and NOW
Month end banks banks banks loans Total accounts
'June 1972- ......... $11,49.920 1491,,589 $408,817 $1,792,168 $2,242.494
December 1972.... a $12,492,920 a$14,0,340 $,5081,032 1,63,836 $30,921,128 $1,5 521
June to December
growth ............... S943,000 $564,751 $99,215 $71,668 $1,678,614 $39,251
percent growth ......... 82 4.2 4.1 4.0 5.7 ..............
I Above estimate, thus includes no growth in nonmember banks, which seems unlikely.
a Deposits of all commercial banks in Massachusetts which are me.nbers of the Federal Reserve System grew from
$9600,000 to $10,543,000.
Exhibit I indicates that over the last half of 1972, N.O.W. accounts had grown
to represent only slightly over one tenth of one percent of the total banking
deposits in Massachusetts. Furthermore, the 39,251,000 growth in N.O.W.
accounts represents only slightly over 2% of the total banking deposit growth in
the state over the six-month period.
EXHIBIT I
MASSACHUSETTS NOW ACTIVITY
Jan. 31
Sept. 30 Oct. 31 Nov. 30 Dec. 29 estimatee) Feb. 28
Number of banks ....... 23 35 46 50 53 ()
Total NOW deposits ..... $11,094,000 $22,386,000 $34, 363,000 $44,521,000 $59,500,000
Number of accounts ... 13, 026 19,6U7 23,936 30,990
Average balance ...... 1,719 745 1,860 1,920
Number of withdrawals in
month ............... (1) 47,500 87,805 118,033 164,194 (1)
Average numberof
withdrawals per ac-
count (month end) .. () 3.6 4.5 4.9 5.3
Total transfers I to date.. () ,913,000 $14,521,000 $19,211,000 $26,180,000
Direct transfers per-
cent of total NOW de-
posits ................ (1) 39.8 42.2 43.2 44.0 C')
I Not Available.
I From an existing savings account at the same bank.
Source: Savings Banks Association of Massachusetts.
As Exhibit II indicates that almost half of the N.O.W. deposit growth was
transfers from savings accounts at the same bank, the maximum amount of
N.O.W. accounts which might have been transferred from other banks amounts
to only approximately 1% of normal deposit growth in Massachusetts, or ex-
pressly differently, approximately half of one week's normal growth, hardly
the substantial outflow which has been claimed by some parties.
Exhibit II also Illustrates that, with the exception of January, 1973 which
was an exceptionally good month for all types of savings bank deposits, N.O.W.
account growth in each bank very quickly stabilizes as the total monthly in-
creases in N.O.W. balances have been quite consistent despite the increasing
number of banks offering the service.
The N.O.W. account growth illustrated In Exhibit I1 Is also far slower than
was the early growth for special notice accounts, term deposits and daily inter-
est accounts when these services were initiated.
Despite this extreme insignificance of N.O.W. accounts in terms of total
banking deposits in Massachusetts, critics still allege that N.O.W. represents
a potential threat which could deal "a mortal blow to smaU commercial banks."
Exhibit III below summarizes the growth of N.O.W. accounts in Suffolk
106
County (Boston). This exhibit indicates that over half of all N.O.W. deposits
are in Boston, further reducing the impact of N.O.W. accounts on small banks
outside of Boston. As considerably less than half of all Massachusetts banking
deposits are in Boston, the N.O.W. account has had a greater proportionate im.
pact on the banking scene in Boston than in the remainder of the state.
EXHIBIT III
NOW DEPOSIT GROWTH IN SUFFOLK COUNTY SAVINGS BANKS
Banks Total
offering NOW
N deposits Percent
Sept. 30 ---------------------------------------------------------
4 $6,330,000 10.16
Oct. 31 ----------------------------------------------------------
5 11,880,000 .29
Nov. 30 ---------------------------------------------------------
9 18,379,000 .46
D ec . 2 9 . . . . . . . . . . . . . .. . . .. . . .. . . . . . .. . . . . . . . . . . . . . . . . .. . .. . . 9 2 4 ,99 0 ,0 0 0 .6 2
Jan. 31 ---------------------------------------------------------
9 30,823,000 .76
Feb. 28 ----------------------------------------------------------
((I)
- I Percentage of total savings bank deposits in Suffolk County.
I Not available.
At the other extreme, several savings banks in small Massachusetts towns
have offered N.O.W. accounts. Among these are the Abington Savings Bank, the
Lee Savings Bank, the Lenox Savings Bank, the Millibury Savings and the
Nantucket Institution for Savings in towns with respective populations of 12,300;
6,400; 5,800; 12,000 and 3,800. Each of these communities is an "isolated" bank-
ing market in that none of the local banks of any type have out-of-town branches
and until recently, there were no in-town branches of out-of-town banks. (Re-
cently out-of-town commercial banks have branched into several of the commu-
nities).
Exhibit IV illustrates that the growth of N.O.W. deposits as a percentage of
total savings bank deposits has been slower than average in these mall commu-
nities. The N.O.W. account has done little to change the relative rate of deposit
growth in these small communities, and has done less harm to the small com-
mercial banks therein then the new branches of their larger commercial bank
brethren.
In summary, there has been meager demonstrable evidence to support the
contention that N.O.W. accounts have disrupted the competitive balance among
Massachusetts banking industries. Nevertheless, N.O.W. critics frequently charge
that N.O.W. accounts are gathering momentum and are sure to have a more sig-
nificant impact in the future.
Exhibit IV presents the monthly N.O.W. deposit growth for 12 sample savings
banks. The banks cover the full range in terms of size, geographic area and suc-
cess. The banks are listed in the order which they initiated N.O.W. accounts.
Exhibit IV indicates that N.O.W. deposits do not yet exceed 1.4% of total de-
posits In any bank. Further, rather than building up each month, the growth
seems to be stabilizing in the more mature banks, all of which have promoted
N.O.W. accounts extensively.
The banks in Exhibit IV can be divided into three groups; large urban banks,
banks In smaller cities, and small town banks.
Large urban banks have been more successful in attracting N.O.W. accounts
than either other category. In this group, N.O.W. growth at Consumers Savings
Bank In Worcester definitely appears to be leveling off. Provident in Boston and
Newton Savings (which relatively recently introduced N.O.W. in a large sophisti-
cated suburban Boston market where no competitors have decided to offer the
service) continue to experience satisfactory growth.
N.O.W. growth in the smaller cities has been far smaller. Despite heavy co-
ordinatd promotion, two Fitchburg savings banks leveled off quite rapidly at a
low level, and again despite heavy coordinated promotion, three Lawrence banks
have experienced steady, but very limited accumulation of N.O.W. funds in terms
of the total market.
107
The small town experience has been mixed. Howevr, N.O.W. growth at most
such banks seems to be leveling off quite quickly or even declining.
(Although Exhibit I indicates that January, 1973 produced larger N.O.W. ac-
count growth than any other month, January is traditionally a good month for
all types of savings bank deposits. Total Massachusetts savings bank deposits
increased $181,000,000 in January, compared to $69,000,000 in .December, 1972.
Henceforth, N.O.W. accounts will always do best in months when regular sav-
ings deposits do best, as a certain portion of new savings bank depositors will
always opt for a N.O.W. account. Nevertheless, In January, 1973, for the first
time, several banks experienced a monthly decline in their total N.O.W. bal-
ances.)
Are N.O.W. Accounts A Form of Checking Accountf
The much disputed question of where N.O.W. accounts fall in the traditional
spectrum of banking services (i.e. are they "pseudo" checking accounts; prac-
tically as well as legally, savings accounts; or somewhere in between?) can best
be answered by evaluating two aspects of N.O.W. accounts, the source of funds
deposited and the usage.
EXHIBIT IV
NOW ACCOUNT GROWTH
Feb. 28 (per-
cent of total
Sept. 30 Oct. 31 Nov. 30 Dec. 29 Jan. 31 deposits)
ConsumersSavings Bank
(Worcester) ........... $1,601,000 $1,895, 000 $2, 191,00O $2, 457, 000 $2, 861.000 (1.4)
Total deposits .............................................................. 199,833,000 ..............
Transfers ................................................................................
Provident Institute
for Savings (Boston)... 3,711,000 5,822,000 7.609,000 8,766,000 11,569,000 (1.4)
Total deposits .............................................................. 821, 325, 000 ..............
Transfers .................................................................. 5, 551,923 (48)
2 Fitchburg Savings Bank 775, COO 939,000 1,060,000 1,149,000 1, 165,000 79)
Total deposits .............................................................. 630,372 (54)
Trins'ers .................................................................. 146,406 ..........
3 Lawrence Savings
Banks ............... 177,000 529,000 746,000 952,000 1,234,000 (.43)
Total deposits .............................................................. 288, 774, 000 ..............
Transfers .................................................................. 316,993 (26
Lee Savings Bank ....... 126, 000 225,000 259, 000 , 281,000 322, 000 (.94
Total deposits ...................................................... 000...........
Transfers ...................... 147,558 (46)
Ludlow Savings Bank .... " - - 6, --- 132, --- t95,00 193,000 (.3)
Total deposits .............................................................. 64,159,000 ..........
Transfers .................................................................. 63,729 (133)
Millbury Savings Bank... 0 48,000 88,000 135,000 155,000 .1
Total deposits ............................................................... 13,993,000 -
Transfers .................................................................. 94, 374 (64)
Abington Savings Bank... 0 54,000 99, 000 117,000 209,000 (.64)
Total deposits ............................................................. 32,541,000 ..............
Transfers .................................................................. 73,915 (35)
Newton Savings Bank .... 0 744,000 1,801,000 2,567,000 3,895,000 (1.2)
Total deposits .............................................................. 326, 069, 000 ..........
Transfers .................................................................. 1,242,323 (32)
I Percent of total NOW deposits not available.
Clearly N.O.W. deposits can only "originate" from four sources:
1. Existing savings accounts at the same bank.
2. New savings accounts at the same bank.
3. Transfers from savings accounts at other financial institutions.
4. Transfers from checking accounts at commercial banks.
Excellent records have been maintained on intra-bank transfers by most banks
as illustrated in Exhibit I, which indicates that 44% of all N.O.W. deposits repre-
sent transfers from existing accounts within the same bank.
Establishing how much of the remaining 56% falls in each of the other three
categories can only be accomplished through estimates, however.
The best approach to such an estimate perhaps comes through comparing the
growth rate at the 50 Massachusetts savings banks which offered N.O.W. ac-
108
counts during the last six months of 1972 with that at the savings banks which
did not. Total deposits at N.O.W. account banks grew slightly over 4.3% com-
pared to slightly less than 4.2% in the non-N.O.W. account banks.
As the two groups grew at almost the same rate during the latter half of
1971, one can hypothesize that the approximately .15% differential in growth
rates represents totally "new money" to the N.O.W. savings banks which would
not have come into the bank were it not for N.O.W. accounts. (Categories (3)
and (4) above combined). This approximately 15 basis point differential equates
to approximately 26% of the total N.O.W. account growth. If this estimate is
correct, by process of elimination it can be deduced that the residual 31%
would have been new regular savings accounts at the same savings bank were
it not for N.O.W. accounts. (Category (2)).
Although this analysis perhaps too closely pinpoints what at best can be con-
sidered rough approximations, the general analysis is borne out by discussions
with individual bankers. Furthermore, two conclusions are beyond doubt.
1. As a N.O.W. account, when compared to a regular account, gives a new
depositor flexibility while taking nothing away, hence, undoubtedly many of
the N.O.W. accounts would have been new regular savings accounts at this
same bank regardless, and a substantial factor must be added to the 44% trans-
fers from existing accounts to determine the true level of intra-bank "transfers".
2. Unquestionably, far more N.O.W. deposits were previously savings accounts
than checking accounts, even if mininfal estimates for categories (2) and (3)
above are utilized.
The summary data on N.O.W accounts presented in Exhibit I supplements the
conclusion, based on source of funds, that N.O.W. accounts are more akin to a
savings account than a checking account.
The average balance in a N.O.W. account, $1920, is closer to the $2700 aver-
age balance in a Massachusetts savings bank regular account than the $660
average personal checking account balance reported by Federal Reserve Bank
functional cost studies.
The 5.3 average transactions per month per N.O.W. account are closer to the
savings account withdrawal level of less than one a month, than the 15 checks
which the Federal Reserve indicates are normally processed through the aver-
age personal checking account.
Although all data puts the N.O.W. account closer to a savings account than a
checking account, in fact it undoubtedly occupys somewhat of a middle ground.
It has attracted the savings account which was used flexibly, and to a lesser
extent the checking account which was used infrequently. The typical N.O.W.
account prototype is probably an individual who previously had a savings ac-
count, but came into the bank once a month to make one withdrawal and pur-
chase four or five "money-orders" to pay his basic bills. (Massachusetts sav-
ings banks sold approximately nine million money-orders in 1972). Now the
customer has a N.O.W. account and writes the five withdrawal orders at home.
The most important structural-aspect of N.O.W. accounts is thus the clear
indication whijh they provide that the public Is ready for further breakdown in
the overly rigid line between time and demand deposits.
Are N.O.W. Accounts Profitable?
Very little dota is available on the Prnfitabilitv of N.O.W. accounts. Two
banks, the Provident Institution for Savings in Boston and the Consumers Sav-
Ines Bnnk in Woreeqter have made prelimfnary ecttmnte.q. Roth eonrluded that
the business is profitable and the latter concluded N.O.W. accounts are more
profitable than personal checking accounts would be if the bank had the ability
and desire to offer them. However. most profitability estimates are preliminary
and sketchy.
Exhibit V uses the 1971 Federal Reserve RAnk of Boston functional cost esti-
mates for checking accounts as a basis for estimating the profitability of N.O.W.
deposits.
In this Exhibit the cost analysis for "Minimum Balance. No" Service Charge
Checking Accounts" is revised in four ways to obtain the N.O.W. account
analysis.
1. The average blnee of N.O.W. accounts Is $1.920 and the average return on
savings bank deposits is over 6.5% and rising. These two figures are used to
estimate "portfolio income".
2. "Service charge income" is derived by multiplying the 154 charge per with-
drawal times the 5.3 average monthly withdrawal orders.
3. "Home debit expense" and "transit item expense" are both reduced 66% to
reflect the 5 withdrawals a month compared to 15 in a checking account.
4. "Interest" expense is added to reflect the 5.25% annual interest paid on
most N.O.W. accounts.
Although these N.O.W. estimates, like all functional cost data, can be used
only as rough guidelines. Exhibit V indicates (1) that the profitability of N.O.W.
accounts falls in the same range as that of the various types of personal check-
ing accounts. (2) that N.O.W. accounts are probably profitable, and (3) most im-
portantly, that N.O.W. accounts are certainly not unprofitable enough to
necessitate an implicit subsidization by loan customers which would result in
higher loan rates.
Thus N.O.W. accounts have neither attracted enough funds away from other
banking institutions to disrupt the flow of lendable funds nor been so expensive
that the loan rate structure has been forced upward.
EXHIBIT V
EARNINGS PER ACCOUNT PER MONTH, MASSACHUSETTS COMMERCIAL BANKS
Minimum
balatce no
Special Personal service charge Massachusetts
checking checking checking Savings Banks
accounts accounts accounts NOW accounts
Income:
Service charge .................................. 1.06 1.30 0.50 0.79
Penalty ........................................ .23 .36 .16 .16
Portfolio--------------------------------1. 1.28 2.69 2.91 10.40
Total ........................................ 2.57 4.36 3.57 11.35
Expense:
Home debts ..................................... 86 1.01 .92 .31
Deposits ....................................... .45 .40 .44 .44
Transit items ...............................- .07 .12 .14 .04
Account maintenance ............................ 1.57 1.96 1.98 1.98
Interest ..................
8................................................................ 8.40
Total ........................................ 2.95 3.50 3.49 11.17
Net earnin ....................................... -. 38 .86 .08 .15
Average balance .................................... $309 $662 $690 $1,920
Source: Federal Reserve Bank of Boston and Savings Banks Association of Massachusetts.
N.O.W. Accounts in the Public Interest
N.O.W. accounts have initiated two substantial breakthroughs in consumer
service.
1. They represent the first time that an interest paying savings account can
be used flexibly for withdrawals at a time and place of the customers choosing.
2. They represent the first time interest is paid on an account which can be
used to "transfer funds."
The limited but enthusiastic consumer response to these two features has
clearly indicated that many consumers are desirous of more flexibility In their
banking relationships.
N.O.W. accounts have created a third market in between traditional savings
and checking accounts. This same "market" is being approached from the oppo-
site direction by commercial banks through "one statement banking," a service
becoming universal in Massachusetts as a response to N.O.W. accounts.
N.O.W. accounts have not produced any substantial disruptions in traditional
banking relationships other than providing a significant new service to those
who desire it. The inter-bank flow of deposits has been very minor compared to
normal deposit growth in Massachusetts, not to mention total deposits, and the
profitability such as to result in no changes in the availability of mortgage funds.
93-211 0 - 73 - a
110
On balance, N.O.W. accounts have given a significant new service to the bank-
ing public and they have taken nothing away. If other industries continue to
worry that their impact will grow in the future, they should seek to offer this
service themselves rather than, through the savings banks, taking it away from
the public.
ELLIOTT G. CARR,
Director of Research.
Senator MCINTYRE. Isn't that favorable to them?
Mr. DUFFY. You were asking a specific question about statistics that
were available. Certainly this is presented in a favorable light-from
their point of view, but there are some statistics in here which I believe
are very revealing from our point of view.
Senator MCIN.TYRE. You have been here during the entire hearing:
Earlier it was said that we had only moved about 9 months down this
road, using Massachusetts as sort of a laboratory, incubator, or what-
ever you want to call it, an experiment, and the initial witness,
Mr. Will, of the Federal Deposit Insurance Corporation, finally ended
up by saying that he felt that, the NOW accounts should be allowed to
continue in Massachusetts and in New Hampshire if they are found
to be legal, but that some sort of standby authority should be given in
the event that the statistics indicate that the unfair competition that
I am sure you are concerned with begins to indicate a general erosion,
a serious erosion-I think you call it a devastation-of the competitive
banking setup.
How do you feel about, his recommendation?
Mr. DuFpy. As you know, *Mr. Chairman, I am assuming that
Mr. Will's proposal of placing the savings banks in Massachusetts
under the jurisdiction of the FDIC would become law, because this is
the real nub of the problem.
In Massachusetts we have all of these savings banks-I think it is
167-and I think only 10 or 12 of them are under the Federal Deposit
Insurance Corporation. All others are insured by State insurance.
They are not under Federal jurisdiction whatsoever.
So unless Mr. Wille's recommendation, which I think he did make
here, to place them under the FDIC takes place first, I wouldn't be
able to answer that question.
Assuming that they were, I would still have to state that as an inde-
pendent banker I don't like being a guinea pig.
It is interesting to hear people talk about laboratory experiments.
But when you are a small banker like I am with $12 million in de-
posits, with 10,000 customers, with three branches, having just been
formed 10 years ago-and there are a lot of other banks like that-
if we let this thing go too far and the NOW accounts turned out to be
something other than we thought they were and they caught on and
we lose a substantial part of our deposits and our customers, how are
we going to regain those customers, Mr. Chairman? We can't. There
is no way you can reverse the tables and tell John Doe you have to
go back to that other bank and you'll be in an even worse predicament
than we are already with 40,000 NOW account customers. It may take
2 to 3 years to establish a definite pattern because these things cannot
be established overnight, although I would like to point out to you at
111
this time that a definite pattern has been established in the statistics
submitted by the savings banks which they must have overlooked when
they put them in their statistical report.
enator MCINTYRE. Do those statistics show serious inroads by the
savings banks on the commercial banks?
Mr. DuFY. As you already know, Mr. Chairman, and as mentioned
in the previous testimony, Robert Eisenmenger, who is the chief econo-
mist of the Federal Reserve B'-rk oBoston, stated that by the end of
September of this year it is anticipated that a billion dollars will be
on deposit in NOW accounts in Massachusetts. That is only with 50 of
the savings banks using it.
The question might arise: Why are only 50 savings banks in Massa-
chusetts using NIOW accounts when there is 160-odd?
Senator MCINTYRE. W
Mr. DuFFY. Why haven't they all adopted it if it so good, if it is so
profitable?
My answer to that is simply this. In Massachusetts, and I know
you are probably familiar with this fact because you come from a sister
State, the largest county in Massachusetts from a population point of
view and from a geographical point of view is Middlesex County,
which borders on the State of New Hampshire. Only two-and this is
amazing--only 2 out of the 33 mutual -savings banks in that county
are offering NOW accounts.
Now, this is the county where we have the highest population. It is
the bedroom county of Suffolk County which is the commercial county
of Massachusetts. It has the highest per capita income in the State and
yet only 2 out of 33 of the savings banks in that county, the wealthiest
county, have chosen to go into the NOW account business.
This is because of several reasons:
State legislation was pending or is still pending on NOW accounts;
the pending Federal legislation before this Senate committee and the
House committee, and pending a clearer understanding of what NOW
accounts mean.
Now, there is one town in the county of Middlesex which just by
coincidence has the greatest NOW account growth of any of the banks
listed in this statistical study, and is the city of Newton.
In the statistics the savings banks brushed this off. In this case,
Mr. Chairman, the growth in NOW accounts in the Newton savings
bank from October 31 to January 31 was just under $4 million. This
is a moderate-size savings bank, just under $200 million.
This is only 1 out of 33 banks.
I say, and it is our contention, that if the Middlesex County sav-
ings banks see their way clear or are given permission to have NOW
accounts-the savings hanks-they will turn to Middlesex County,
which is consumer oriented, which is sophisicated as they say in their
remarks in their statistics. Newton is a very sophisticated city. that
is why so many people are fron to NOW accounts in Newton-
"fMi,,ln-ex Cnintv is a sonhit;nted vontv, nnd thiq is why we in
Middlesex County, we independent banks particularlv, are so con-
cerned about all of this. bhi-i-ise if these sophisticated people in
112
Middlesex County see an opportunity to get a NOW account rather
than go into my bank anU gec a Iree chexIing account and take less
interest on their savings, I uon't think it requires any explanation of
what wini happen.
With the amount of money that has been spent in advertising and
could be spent in advertising in Middlesex County, the depletion of
our deposits would be such, as I said before, it would be devasting to
us on the savings account side as well as on a demand-deposit side.
You can well imagine trying to answer a customer when he comes in
and asks: Why can't you pay interest on your checking accounts? And
I answer: The law doesn't permit me to-and he walks across the
street to the savings bank and takes the savings out of my bank. This
is what we face in Middlesex County.
Senator McINrYRm. Under my bill you would be able to compete,
you would be able to pay interest to people and they would not be able
to pay any more.
Mr. DuFny. As I understand your bill, Mr. Chairman, your bill
only applies to NOW accounts, the interest on NOW accounts, but it
does not--I though this was pointed out earlier-but it does not apply
to the interest rates on savings accounts. So if the individual consumer
comes into my bank and finds that he has a choice of putting his NOW
account in my bank or the savings bank across the street and he
knows that he will get the same interest on a NOW account but can
get a higher interest rate on a savings account, then it doesn't seem
to me to be fair competitively and the customer will undoubtedly go
to the savings bank.
Of course, that three-quarter percent differential in Massachusetts
makes a big difference.
Mr. Chairman, I don't want to hold you much longer. I realize the
time is getting short. I should like to make a few comments in
summation.
One of the questions that is being asked here today is the extent of
NOW accounts in Massachusetts.
I have gone through that and talked to you about Middlesex
County. We don't feel it is time for experiment in the name of
consumerism.
Consumerism has become an overrated misnomer, in my opinion. It
has been misused and many things that shouldn't have occurred have
occurred in the name of consumerism, I believe if NOW accounts are
forced onto Massachusetts banks in the name of consumerism, it will
be a tragic error. This is no time for experimenting in the nams of
consumerism, with the financial institutions of Massachusetts or the
Nation, without a thorough and well-planned formula for transition
and adjustment among banking" institutions.
Senator McINTrn, How about study of this situation? Would you
be opposed to studvin,, this NOW account situation?
Mr. D-rrmv. I certainly have no objection to a study, but in the mean-
time what is aoinq to happen? If this committee or on the House side.
the other ,ommittee. sees fit to place the savings banks under the
113
jurisdiction of the Federal Deposit Insurance Corporation, at least
there would be some Federal control which the independent banks and
other commercial banks in Massachusetts could look to.
As the situation is today, there would be nothing to look to, no way
that the Federal authorities could control them unless they made the
decision to do it today, or unless they had-to enact emergency legisla-
tion at some later date.
We -believe that the purpose of thrift institutions is to encourage
people to save and to provide stable funds upon the basis of which
long-term home mortgages can be provided for the consumers in the
community. In my opinion, NOW accounts do not promote thrift.
Any third-party payment plan must be well though out and if found
to be in the best interest of the financial well-being and the stability
of our Nation and in the best long-term interest of the consumer,
then enacted into law after careful study.
Any precipitous, piecemeal legislation without proper legislative
safeguards would be unwise in our opinion, and would, in my opinion,
pose a threat that could possibly wipe out independent banking
throughout the State of Massachusetts and in our Nation.
Thank you. Mr. Chairman. I appreciate the time.
rThe complete statement of Mr. Duffy follows:]
STATEMENT OF E. J. DUFFY, JR., FOR THE INDEPENDENT BANKERS
ASSOCIATION OF AMERICA
SUM MARY
The Independent Bankers Association of America, IBAA, supports and op-
poses, in part, the legislation which is the subject of the hearings. Our position
Is as follows:
1. We support the extenson of the enabling authority for the regulatory con-
trol on the rates of interest and dividends payable on time deposits and savings
accounts. We urge the sub-committee to recommend to the enforcing agencies
that the flexible rates be as narrow as is economically reasonable for all lending
institutions.
2. We oppose the payment of interest on time deposits or savings accounts
which would be subject to withdrawals by any third party-payment instrifments
regardless of the nomenclature.
Mr. Chairman, members of the subcommittee, my name is E. J. Duffy, Jr. I am
the president of the Suburban National Bank of Arlington, Massachusetts and
the current president of the Massachusetts Independent Bankers Association. I
am accompanied today by Mr. John Linnehan, Secretary to the Massachusetts
Association and Thomas BrIckle, counsel to the IBAA. I am here to present the
considered views of our national association and to offer comments on my per-
sonal experience In the Commonwealth of Massachusetts regarding the current
issues on negotiable orders of withdrawals from interest bearing savings
accounts.
The IBAA is a national organization representing over 7,000 independent con-
mercial banks, the majority of which do business in suburban areas, small urban
and rural communities. Our member banks are generally the small institutions
as measured by capital, assets or deposits. Each offers a wide variety of tradi-
tional banking services. The relative size of our member banks and the con-
sumers' need for diversified services places great demands on the bank manage-
ment. The members are meeting the challenge, however, the actual or threatened
erosion of the traditional commercial banking practices coupled with the ex-
panding array of competitive advantages given to competing financial insti-
114
tutions, generates disproportionate burdens on small banks. These factors comn-
plicate their efforts to compete for available funds in the local financial market
and, in turn, provide the necessary lending services requested by the borrowing
community. These conditions, among others, are the basis of our opinions on
the proposals under consideration today.
EXTENSION OF AUTHORITY FOR THE FLEXIBLE REGULATION OF INTEREST RATES ON
DEPOSIT AND SHARE ACCOUNTS IN FINANCIAL INSTITUTIONS
The IBAA supports the extension of the standing authority for the flexible
regulation on interest rates and dividends payable on tme deposits and savings
accounts. Preferably, we would encourage the Congress to direct the regulatory
authorities to narrow the rate differential between thrift institutions and com-
mercial banks.
We recognize and agree with the Congressional mandate to savings and loan
institutions which directs them to concentrate their lending efforts to foster
family housing. We acknowledge that compliance with that mandate reduces
investment flexibility and consequently narrows the portfolio structure. Or-
dinarily, these factors, among others, would justify a rate differential more
favorable to thrift institutions, however, much change has occurred in the last
decade. Now thrift institutions have additional management options, which, if
exercised, enhance the flow of funds to and through the institutions. The forma-
tion of the Federal National Mortgage Association and its secondary market
function created great flexibility in portfolio management. The recent Home
Loan Bank Board's regulation authorizing long term, high interest, subordinate
debentures under private negotiated sales offers a wholely new device for
increasing the capital structure of the savings and loan associations.
These inducements coupled with an advantageous federal tax treatment, a
specialized range of investment and the evolutionary changes in the structure
of the financial Industry suggest that thrift institutions have reached a stage of
economic maturity which could justify a narrowing of the differential to per-
haps one-quarter of a percentage point with a regulatory option to increase the
differential slightly when economic conditions warrant such action.
The often cited advantage of a commercial bank in attracting deposits
is a fiction particularly when measured against the small community oriented
banks. Mass media advertising has lured deposits to other lending institutions
and often other communities. This disintermediation disrupts the balance of the
financial structure on a local basis. The need for housing is universal; the need
for personal loans is universal; and, the need for adequate funds for community
development Is universal. Some effort must be made to reduce the local deposit
shifts while there are constant local needs for those deposits and the lending
they generate. We are reluctant to see legislated inducements which foster "hot
money" maneuvers on the domestic scene such as those that occur in the Inter-
national Monetary System.
By reducing the favorable rate differential money shifts could be minimized
while the Congressional preference for assisting housing-oriented institutions
would be honored. The years of public relations effort, on the part of thrift in-
stitutions, the increased interest in economically feasible home ownership, the
acknowledged expertise in S & L management, and the developing sophistica-
tion in consumer economics collectively suggest that savings and loan institu-
tions could compete for the deposit or savings dollar with a smaller interest
rate differential. Secondarily, the lower differential could reflect itself in lower
interest rates on residential home mortgages. We urge the Subcommittee mem-
bers to consider the merits of reducing the differential and- if the response iM
encouraging, we request that the regulatory agencies be instructed to act
accordingly.
AUTHORIZATION FOR THE PAYMENT OF INTEREST ON TIME DEPOSITS AND SAVINGS
ACCOUNTS WHICH ARE SUBJECT TO WITIDRAWALS BY( THIRD PARTY PAYMENT
INSTRUMENTS REGARDLESS OF NOMENCLATURE
The IBAA opposes the proposed amendments which would authorize banking
and thrift institutions to pay interest on time deposits or savings accounts which
permit the account owner to make withdrawals by negotiable instrument for
115
third party payments or otherwise. In the alternative the association whole-
heartedly supports a prohibition on withdrawals by negotiable instruments from
any interest bearing time deposit and savings accounts.
The legal axiom of "form versus substance" is entirely appropriate in evaluat-
ing the grant or denial of authority to allow negotiable orders of withdrawal
from interest bearing accounts. Third party transfers, regardless of their no-
menclature, are checking accounts and their expanded authorization should
receive careful assessment.
INTEREST ON CHECKING ACCOUNTS
We do not believe that checking accounts should bear interest regardless of
how attractive this concept may appear. The account owner has the personal
option to manage the level of funds he believes necessary to cover the third party
payments. The checking account is a service account which primarily accommo-
dates the account owner in simplifying his ddy to day business and personal
financial transactions. This is as it should be.
To authorize the payment of interest on a checking account would create
horrendous accounting demands and the costs, thereof. Further, the interest
allowed would have to be obtained either from charging higher interest to bor-
rowers, achieving additional economies in the administration of the financial
institution or a reduction in the profits to stockholders or dividends to mutual
shareholders. Of the three alternatve sources for the suggested interest on check-
ing accounts, we believe that higher rates to borrowers will be the logical source
of funds. Administrative economies in banking have been maximized, and, there-
fore, would provide little if any revenue for payment of the proposed interest.
Profits to stockholders and dividends to mutual shareholders have not been
alarmingly large nor disproportionate to the return on other conservative
investments.
To authorize the payment of interest on checking accounts or whatever they
may be called is, in our opinion, an unwise choice. We do not believe that It
is in the consumers' interest; we do not believe that it is good banking practice;
and, we do not believe that the ultimate result of such action could be anything
but higher interest rates.
We do believe that elementary economics support our position, our collective
experience over years of banking and economic fluctuations suggests that our
position is sound; and, our concern with escalating interest rates and the Innu-
merable varieties and demands of borrowers forces us to conclude that interest on
checking accounts will but achieve one result, specifically, it will reflect itself
in inflationary terms, be they higher interest rates to the borrowers or increased
costs in servicing checking accounts.
NEGOTIABLE ORDERS OF WITHDRAWALr-NOW ACCOUNTS
The IBAA wholeheartedly supports a prohibition on withdrawals by negotiable
instruments from interest bearing time deposit and savings accounts.
We have studied the NOW Account isshe as it is known in Massachusetts
and New Hampshire and we l4ave evaluated the substantive arguments support-
ing their use. The fact that the account users pay for each negotiable order of
withdrawal is an unconvincing rationale. The contention ihat the accounts
enjoy limited use Is specious for that very same sophisticated consumer will
respond to the attractive high interest rate on the NOW Account. It would
reasonably follow that the rate of use of NOW's would dramatically rise if for
no other reasons, interest, plus convenience to the customer. We do not believe
that the Congress can ignore the human experience.
The Independent Bankers in Massachusetts and New Hampshire have experi-
enced great uncertainty in the genesis and growth of the NOW Account issue.
We have watched the use of the accounts enlarge dramatically through an exten.
sive promotional campaign which advises the consumer that the negotiable order
of withdrawal is a checking service. Currently, the charges levied on NOW
Account orders of withdrawal are a bit higher than those assessed on traditional
commercial bank checking account activity. This economically self-supporting,
minimum use theory is illusory for it is temporary.
116
For example, it has been stated that some mutual savings banks are charging
fifteen cents for each order of withdrawal. The account user of twenty items per
month would incur charges of $3.00. Assuming the account has an average daily
balance of $1,000.00 at 5% simple interest the monthly interest would well ex-
ceed the cost of twenty items. The commercial banker assessing charges or
offering free checking accounts would be unable to persuade cost conscious
customers to keep a checking account in the commercial bank. Advising a com-
mercial bank customer that the institution cannot pay interest as offered on
the NOW Account likely would receive an unnerving response.
To further expand on the matter, it is quite likely the item cost of NOW's will
be reduced due to increased volume and the usual economies. Simple competi-
tion between the privileged banks doing business in the same geographic area
would create pressure for a reduced cost for the withdrawal orders. To ignore
the competitive drive of mutual savings banks is foolhardly and it is a reason-
ably safe assumption that the item cost of the negotiable order of withdrawal
will be reduced, perhaps, to the same level as current charges on commercial
checking accounts.
If our thesis is correct in any degree, and my experience in Massachusetts sug-
gests that it is, all that will have been achieved in permitting the NOW Account
is the establishment of interest bearing checking accounts with a coincidental dis-
intermediation of funds from commercial banks and savings and loan institu-
tions. The privileged savings banks would have their druthers, specifically, they
alone could pay interest on checking accounts; they would enjoy less regulation
such as in the case of reserve requirements; and, in some cases, they would be
immune from interest rate restrictions which recent experience suggests were
necessary to thwart erratic interest fluctuations in the most recent tight money
crisis.
We find it difficult to understand how the rationale for Regulation Q, specifi-
cally, a rate differential to encourage and ensure a fair and non-disrupted flow of
funds to mortgage lending institutions, would not be the same rationale for pro-
hibiting NOW Accounts. Why should one segment of the banking structure be
excused from rate controls during money shortages? The financial system cannot
long enjoy some stability if one under-regulated lending institution can, on its own
initiative, offer choice accounts enjoying virtually no competition. Can the Con-
gress rightfully demand interest differentials on the one hand, and, on the other,
ignore a checking account scheme that patently abuses the privilege? More im-
portantly, can the Congress ignore a device that is inherently inflationary?
Under the Housing and Urban Development Act of 1968 (Public Law 90-448
approved August 1, 19068). the last sentence of section 5(b) of the Home Owners'
Loan Act of 1933 was amended to read as follows, with reference to Federal Sav-
ings and Loan Associations:
"Savings accounts shall not be subject to check or to withdrawal or transfer
on negotiable or transferable order or authorization to the association, but the
Board may by regulation provide for withdrawal or transfer of savings accounts
upon nontransferable order or authorization."
The provision prohibits any Federal Savings and Loan Association's use of
interest bearing negotiable orders of withdrawal as a device for removing funds
from savings accounts.
Commercial banks likewise are prohibited by law from paying interest on de-
mand deposits. Section 19 of the Federal Reserve Act (12 U.S.C. 271a) provides
that :
"No member bank shall directly or indirectly, by any device whatsoever, pay
any interest on any deposit which is payable on demand . . ."
And Section 2(18) of the Federal Deposit Insurance Act (12 U.S.C. 1828g) pro-
vides that:
"The Board of Directors shall by regulation prohibit the payment of interest or
dividends on demand deposits in insured non-member banks and for such pur-
pose it may define the term 'demand deposit' . . ."
The Congress clearly has limited the use of certain third party payments by
banks and savings and loan account holders. Mutual Savings Banks with their
use of interest bearing NOW Accounts have avoided Congressional policy and
thereby achieved an advantage in attracting deposits and savings dollars in
virtually a competitor-free market.
117
The alleged fact that the uniqueness of the NOW Account and its inherent
limited use in but a few States will not create a national problem is not convinc-
ing, but economic legerdemain. Mass media advertising reaches well beyond the
border of the State, which, in this case, judicially endorsed a competitive ad-
vantage that contravenes the intent of Congress and ignores the experience of the
financial community in the 1930's. The public convenience and necessity cannot
ignore the economic implications. Because one segment~of the financial structure
chooses to proceed in a manner which summarily discounts American Banking
History the Congress need not agree, if, in its judgment, the action is potentially
or actually disruptive.
For example, a small commercial bank which is prohibited, for good reason,
from paying interest on checking accounts must compete with a protected thrift
institution that boldly promotes a NOW Account system paying 4 to 5h'A% interest.
A small commercial banker facing this situation truly will witness a local dis-
intermediation because bis "hands are tied." Customer Service and a pleasant
personality are not persuasive when matched against money and interest. We
believe the NOW's disruptive and we do not believe that allowing interest on time
deposits and savings accounts using 'the NOW device or anything similar to it, is
a sound economic concept, good banking practice or a consumer conscious solution.
Some mutual savings banks sell mutual funds and life insurance, they offer sav-
ings accounts to corporations; they engage in substantial common stock invest-
ment for their own account; they engage in 'the full array of consumer lending
activity; and they participate in credit card programs. To enhance this activity
mutual savings banks are permitted reduced capital requirements; they are
given special income tax advantages; and they are entitled to favorable interest
rate differentials and substantially lower reserve requirements. Clearly, the
small commercial banker faces ominous if not overwhelming competition if the
mutual savings bank is allowed to pay interest on a deposit or savings account
while the commercial bank labors under sensible prohibitions based on
experience.
It has been suggested that enactment of the NOW Account prohibition would
superimpose Congressional policy over the desires of 40,000 plus NOW Account
holders in one State. One need look no further than the Internal Revenue Code to
see the fallacy in the allegation. A gradual termination of the NOW Account
activity would alleviate the inconvenience.
Further, it has been suggested that the use of NOW Accounts will stabilize
the flow of savings dollars during periods of money shortages. In the most recent
money crisis the disintermediation was caused in part by high interest rates on
government, municipal and corporate bonds, in addition to a great demand for high
interest personal and corporate loans as well as other high return investments.
We find it confusing to understand how a 5% interest bearing NOW Account would
be any more attractive during periods of tight money, unless, of course the in-
stitution substantially raised the rates. If that were to occur the NOW Account
institutions would likely siphon deposits from other thrift institutions such as
savings and loans. We believe it to be a generally accepted principle that money
will flow toward the safest high yield investments or savings accounts paying
the highest rates. We are skeptical of the thesis that NOW Accounts will provide
stability in the flow of savings dollars during periods of tight money.
Of course these are mechanical or ministerial considerations as to the burden
the processing of the negotiable orders of withdrawal will place on the check
clearing system. The Federal Reserve System has expressed concern over the
overburdened system with its problems on back-ups in clearance procedure.
Finally, it has been alleged that mutual savings banks are the leading source
of housing funds in Massachusetts and New Hampshire. This assertion is based
on their numercial dominance.
We believe that NOW Acounts are substantively checking accounts which:
1. Have the singular privilege of being interest bearing.
2. Are less restricted as to reserve requirements and the inherent question of
liquidity.
3. Are unencumbered by the regulation on commercial bank checking activities.
4. Are likely to place new demands on the overburdened check clearing system.
5. Are merely a device to circumvent tra.ditional good banking practice.
We therefore request the Congress to prohibit the use of the negotiable order
of withdrawal from any interest bearing time deposit or savings account.
118
EXTENSION OF AUTHORITY OF FEDERAL DEPOSIT INSURANCE CORPORATION OVER
INTEREST RATES PAID ON DEPOSIT. BY NONINSURED BANKS
To ensure that the NOW Account does not reappear in some other ingenious
form, the IBAA reluctantly encourages the Subcommittee to empower the Fed-
eral Deposit Insurance Corporation to regulate rates of interest on deposits or
dividends paid by non-insured banks.
As Independent Bankers we regard the dual banking system to be absolutely
essential to a sound banking policy. To narrow the distinctions in the dual bank-
ing system, as we believe our proposal would, is of great concern for such a
recommendation is contrary to our philosophy. We have Jealously guarded dual
banking distinctions and we are reluctant to make such concessions, however, we
believe the additional control for the F.D.I.C. is essential to eliminate a resur-
rection of the NOW Account concept in some other form. We believe this addi-
tional control is essential during the interim prior to the expected legislative re-
view of the entire banking structure.
Thank you for the opportunity to present the view of the Independent Bankers
Association of America.
Senator MCIN.TYRE. We appreciate your patience here this morning,
and your testimony, which will be most helpful to the subcommitee and
the full committee.
At this time we will stand in recess until 10 o'clock tomorrow morn-
ing, when we will hear Mr. George W. Mitchell of the Board of
Governors of the Federal Reserve Board.
[Whereupon, at 12 :55 p.m., the hearing was adjourned, to reconvene
at 10 a.m., Wednesd ay,Narch 21, 1973.]
EXTENSION OF REGULATION Q AND NOW ACCOUNTS
WEDNESDAY, MARCH 21, 1973
U.S.
SENATE,
COMMITTEE OX\ BANKING, HOUSING AND URBAN AFFAIRS,
Su-BcoI vrmiEE ON FINANCIAL INSTITUTIONS,
Wa8ington, D.C.
The subcommittee met, pursuant to notice, at 10:02 a.m., in room
5302, New Senate Office Building, Senator Thomas J. McIntyre
presiding.
Present: Senators Sparkman (chairman of the full committee),
McIntyre, and Bennett.
Senator MCINTYRE. The committee will come to order.
This morning our first witness is Hon. George W. Mitchell, member
of the Board of Governors of the Federal Reserve Board. Of course,
this subcommittee is happy to welcome Mr. Mitchell, whose reputation
for excellence comes before him.
I am happy to have you here, Mr. Mitchell.
You have a statement of some 12 to 14 pages. If it would be helpful,
we will incorporate the whole statement in the record (see p. -),
there doesn't seem to be much controversy about regulation Q. I am
particularly interested in the phenomenon that has broken loose in
the Commonwealth of Massachusetts and spilling over into my State
called NOW accounts. I think it represents an interesting develop-
ment. So, I am glad to welcome you here, I will ask you to introduce
your associate with you for the record.
STATEMENT OF GEORGE W. MITCHELL, MEMBER, BOARD OF GOV-
ERNORS OF THE FEDERAL RESERVE SYSTEM; ACCOMPANIED BY
THOMAS 0'CONNELL, GENERAL COUNSEL
Mr. MITCHELL. Thank you, Mr. Chairman.
I have with me Thomas O'Connell, who is the Board's General
Counsel.
The Board appreciates this opportunity to appear before your
committee.
I will drop down to-our treatment of NOW accounts right at the
outset in order to save a little time.
Let me say at the beginning that the present situation, from the
standpoint of the financial institutions that compete with mutual sav-
ings banks in New Hampshire and Massachusetts, is, we think, an in-
tolerable one. The Board shares the concern of those who feel that the
developments in New England have occurred without the needed
guidance from Congress to insure competitive equity.
(119)
120
If NOW accounts are left to develop without proper consideration
of their competitive impact, their adverse effects on other institutions
could become extremely serious. Should this subcommittee, and the
Congress as a whole, find NOW accounts to be a worthwhile initiative,
then ways must be found for an orderly phasing in of similar powers
for all financial institutions along with their assuming of comparable
regulatory constraints.
Now, the Board believes that the program I am about to outline
meets the need for competitive equity while still recognizing the desir-
ability of improvements in the banking and money services offered to
the American family. Corporations, governments, businesses, foreign
institutions, and nonprofit entities, because of their access to money
markets, find it more feasible than individuals to keep surplus funds
continuously invested. By and large, most families are dependent on
the range of services and yields which depository institutions are will-
ing and able to offer them. The Board's program would provide more
leeway for competitive forces to enrich and to extend the services of
depository institutions.
Senator MCINTYRE. Now, the Board's program would provide more
leeway for competitive forces to enrich and extend the services of de-
pository institutions?
Mr. MITCHELL. That's right.
Senator McINTYRE. One of the things that I have been told in the
hearings on the House side that the witnesses came aboard and de-
plored what this was going to do with their institutions, all the com-
petitive factors, and the unfairness and the disturbance of the careful
balance, et cetera, et cetera. So, yesterday when we started out on this, I
said, "Well, one thing I am concerned about, is this something new that
Mr. and Mrs. America is going to enjoy and is going to like and will not
be so devastating to the banking industry as some would portend?"
By this, do you mean the Board's program would provide more leeway
for competitive forces to enrich and extend the services of its depository
institutions, are you talking about the consumer?
Mr. MITCHELL. Yes.
Senator MCINTYRE. That is good.
Mr. MITCHELL. At the same time, however, the public interest and
simple fairness suggest that any such changes be accompanied by
the imposition of competitive equity in interest rate ceilings, reserve
requirements, and tax treatment.
The adoption of the legislative proposals that I am going to outline
could go a ong way toward the establishment of a firm base for a con-
tinued evolution of a banking and financial system geared to the needs
of the economy.
These legislative recommendations are found in a three-part
program.
No. 1: All financial institutions should be authorized to offer money
transfer services on savings accounts that bear interest, and that are
used primarily for household purposes. These accounts, designated as
"family accounts," would be subject to regulation.
121
No. 2: Family accounts in all financial institutions should be sub-
ject to identical interest rate ceilings set by appropriate Federal
regulatory authorities. This requirement applies to all financial
institutions, whether they operate under Federal or State charter.
And third: All institutions that offer "family accounts" should be re-
quired to maintain identical reserves against these accounts with the
Federal Reserve System, in accordance with the regulations to be
established by the Board of Governors. Limited access to the Federal
Reserve's discount window might be provided institutions maintain-
ing such reserves.
Yow, the first recommendation extends to commercial banks, savings
and loan associations, savings banks, credit unions, and certain other
depository institutions the right to offer their customers what are in
effect checking services on savings accounts. This power may be cir-
cumscribed by respective regulatory authorities. Checking or money
transfer privileges for interest-bearing accounts should be limited, in
the first instance, to accounts that are owned, by individuals. Savings
and loan associations at this time have limited money transfer powers,
but they exercise them very little. Other institutions generally have not
acquired this power, even though there are some exceptions established
under State law.
Now, under the second recommendation, the Federal regulatory
agencies would establish competitive equality among various types of
institutions with respect to the category "family accounts." A permis-
sible interest rate ceiling for such accounts might lie somewhere be-
tween the rate currently allowed on passbook savings accounts, which
is between 41/2 and 51/4 percent, and the zero level that presently is ac-
corded demand deposits. The flexibility with respect to interest rate
ceilings would allow for an orderly phasing in of "family accounts"
in institutions that chose to offer them.
The regulatory agencies should be given sufficient latitude to distin-
guish accounts affording instant liquidity in the form of molley transfer
privileges from other savings and time deposits for the purpose of es-
tablishing interest rate ceilings. Regular savings accounts, at higher in-
terest rate ceilings but without checking or transfer privileges, would
continue to be available to individuals and to others who now may hold
such accounts under existing regulations.
The third recommendation, relating to reserve requirements, reflects
a position that the Board has held for some time. That position is that
there be universal applicability of reserve requirements, established by
the Federal Reserve to all institutions offering money transfer services.
In part, this recommendation arises out of the need for competitive
equity-having all institutions that share the competitive advantage of
a money transfer function also share the economic burden embodied in
the reserve requirements set forth by Congress in the Federal Reserve
Act.
Senator MCINTYRF. This doesn't impose any insurmountable obsta-
cle, does it, to a mutual savings bank or an S. & L. at the present time
who would want to take advantage of this proposed "family account"?
122
Mr. MITCHELL. My understanding, Mr. Chairman, is that the
mutual savings banks have not expressed any opposition to having
reserve requirements imposed on any accounts with this privilege. I
don't know what the position of the savings and loan associations is.
Senator MCINTYRE. Why do the savings and loan institutions seem
to oppose this idea? They were here yesterday en masse. They don't
like it at all. Why is that?
Mr. MITCHELL. Well, because a reserve requirement means that you
have to lock up a portion of your total assets in a nonearning form,
and that is just the nature of the reserve requirement.
Senator MCINTYRE. I didn't mean my question to be so specific. I
really meant it to be, why do they oppose this whole idea of the so-
called NOW accounts?
Mr. MITCHELL. Well, I don't know that I can answer that. The
counterpart of the NOW account on the west coast is the SCOPE
project. The savings and loan associations are very much interested
in being able to receive payroll deposits in their accounts and to have
the accounts of their customers debited under preauthorization agree-
ments. The matter is being actively discussed with the banks out there.
This, to me, indicates that they'have a great interest in electronic
transfers. What their position is with respect to reserve requirements,
I have never seen.
Senator MCINTYRE. Yesterday they seemed to be opposed to the
idea of the NOW account, that-is, the checking account.
Mr. MICHELL. I don't think they are opposed to the idea of having
money-type transfers out of accounts that are held with them. At least
this is what I would infer from their position on the west coast.
Senator MCI rNTR.. I can understand why the commercial banks,
so-called, oppose this, and certainly the Massachusetts commercial
banks that are feeling the impact. As you pointed out originally, it is
an unfair situation. I just wonder why the savings and loans don't
like this idea. I would think they would want to provide such a service
to their customers.
So much for that. Go right ahead.
Mr. MITCHELL. I have just mentioned the importance of having
competitive equity among the various institutions. Beyond this, the
Board believes that the monetary control that is exercised through
reserve requirements ought to impinge on all institutions that really
participate in the Nation's monetary processes and mechanisms.
To require the maintenance of nonearning reserve assets by only one
class of institutions---commercial banks that are members of the Fed-
eral Reserve System-is not only unfair competitively, and, there-
fore, likely to be less beneficial to the public, but it also makes reserve
requirements less useful as an instrument of Federal Reserve policy.
As the institutional source of the money supply broadens-and that
is what we are talking about-and it will if savings institutions con-
tinue to move in the direction indicated by the NOW account-the
123
reserve base should also broaden, in order that monetary policy ac-
tions can be smoothly transmitted through the entire financial system.
As it applies to "family accounts," this argument would require that
member and nonmember commercial banks, as well as thrift institu-
tions, should have identical reserve requirements on accounts of this
character.
Now, if the Congress were to accept this principle with respect to
"family accounts," the Board would want somewhat greater flexibility
in the range of reserve requirements which can, by statute, be imposed
on various types of deposit liabilities. The statutory range on time
deposits, now from 3 percent to 10 percent, might well be extended
downward. Then consideration could be given to reducing to minimal
levels reserve requirements on the smaller personal time and savings
accounts of the types now held by banks and thrift institutions. The
new "family accounts" might bear a reserve requirement somewhere
between the present statutory minimum for savings accounts-which
is 3 percent-and the minimum on demand accounts-which is 7 per-
cent. Commercial banks and thrift institutions would add to their
reserve accounts with the Federal Reserve at this rate as their "family
account" business grew.
Senator MCINTYRE. Mr. Mitchell, doesn't the Federal Reserve al-
ready have problems regarding reserve requirements, and isn't it true
that a number of banks are dropping out of the Federal Reserve be-
cause of these reserve requirements?
Mr. MITCHELL. That's correct. This is why the Federal Reserve has
contended consistently that the reserve requirements that are imposed
on member banks ought to be extended to all other banks; and, if you
are going to permit thrift institutions to have money transfer privi-
leges, similar reserve requirements should be extended to them. That
is the argument that I make.
Senator 'MCINTYRE. All right.
Mr. MITCHELL. Now, the transition to this new structure of reserve
requirements would require care and time to work out any monetary
policy effects and to prevent any unfavorable effects on particular in-
stitutions; but, with cooperation on the part of the Federal regulatory
authorities, that adjustment could probably be accomplished without
great difficulty.
The Board looks forward to the extension of transfer powers to
thrift institutions; therefore, only if there is a corresponding assump-
tion of costs and public responsibilities by those institutions. The de-
velopment of the NOW account and similar instruments makes it clear
that the need for Congress to deal with the question is urgent, even
though implementation of any changes Congress authorizes will nec-
essarily be gradual.
Let me turn in the balance of my statement to how all of this relates
to the payments mechanism. The board's legislative recommendations
have been developed while keeping in mind the Federal Reserve's
124
present responsibilities in operating a clearing system for the han-
dling of checks. The Federal Reserve regards its role in expediting
and accommodating money transfers as highly important.
The Board believes, first, that so far as public participation and
support are concerned, there should be a single, integrated, nationwide
mechanism for the efficient transfer of funds. The existing system,
which uses checks and drafts primarily, and functioning through
commercial banks and the Federal Reserve banks, is substantially of
that character. In this connection, the Federal Reserve's Steering
Committee on Improving the Payments Mechanism issued a statement
in December elaborating on this and other points, and I am attaching
a copy of that for the record.
Second, even allowing for the existence of private clearing arrange-
ments, the Board believes that the public system using check or elec-
tronic transfers of funds from one institution to another should be
such as to insure that the conditions of entry into a general clearing
arrangement are fair, and that equitable treatment is assured for in-
stitutions with similar powers and responsibilities.
Third, the costs of the transfer system and the benefits of partici-
pating in it should be equitably distributed among all of the institu-
tions that are involved and among their depositors.
As implied in the foregoing, the Board believes in comparable treat-
ment for institutions having like powers, but the existing situation
fails to meet this standard. Some institutions, namely banks which are
not members of the Federal Reserve Systen, have a competitive ad-
vantage. Although in most States the nominal reserve percentage for
banks is comparable to that imposed on member banks, the reserves
required by the States may be carried in the form of what are pre-
dominantly effectively earning assets: Government obligations and
correspondent balances.
(Nonmember reserve requirements and the form in which they may
be kept are shown in the accompanying exhibit. Requirements shown
are as of March 20, 1973:)
125
e Rojromonts for Coe
n affect March 20, 1973
nlese etheroe tedicsted
reserves sket be held it
vailt cash, doeo0d beLeecee
Rleerve requirement ehowa as oercettie is bae (collected aee
Oesand
TIM uncollected)*
oderal Reserve (leserve City) $50.760,000 plue L
17
% of 3 SvLnee & club acts. Demand balance@ Met be is
at. in ette of $41001 3 Other under 1SK Relrve Bank
5 Other over OHM
#o1r4at Reserve (lot in Reserve Under $24 - 8 3 Savctoe 4 club ace. Daewand belances must be it
Citly) $241 to 1001 -Xl60,000 ple 3 Other under 01511 teeerv" slat
10% of eat. over SI4 3 Oher over $5140
$100 to Loom94 - $9%0.000 Plc
12% of mt, over $lam
Over $10014 - $L1.760,000 plu
13t of mt. over $tO541
tSab
m
m i 3
Alaska 20 S
,Loi|e.a 10
ArIaies
Sine ae F1 t
Sam as 1t
Cltfornia Sme as rl 5 80 1 in U. S. sct ittee
Colorado i 1,5 100$. to U. S. securities
Connecticut is up to $S10 0 Savings
12N1 over $50 3 Other il,7 ,I 0. 1$ec ol
Delawre
8 cp to oo5
e.e'O $
10 oor $110141
lorida 20 20 100 7In U. S. Securities
Geortia is 3 1001 T it U.S. or Ge. sec.
50% in U. S. eec. matur-
let within 1 yr. or CO's
"witl 12 3
Idaho 1 11 33-1113. in U. S. see.
Illinois 0 0
21,143 a
10t
3
t.ll! 7 3
14e1011 12% (20 - deposlit
of other baobli 5
KeRtockyl/ 7 3 25. 0, 100% 1 in U. S. ot Ky.
eac. or CD'e
lutLine , 20 0
laie aup to $10Hh 3 Svtngs
1i over $10 Other 3 up to S50
Otbhi 5 over SSW41
Marland I3 100% T in U. S. or ?.J. see.
ttaeeehulettll1 0 t0 In U. S. or "ago. sot.
xichiXan .. 6 90% 0 in U. S. sec.
Minneeote 1l 3 30% it U. S. sec. turning
aichlc I or.
.lississippi Seat go n Sm as Fit 30to0 U. . leC. (ill of the
30% may be it CD's)
Hiseour3 -Sea. asR 3
Ortecc a up to 5070
10 over $ 4 M.3
tbraee,!k is 0 307 in U. . sec.
revLe .... o, ias F Sea eo FN
leetHfmpehtre 12 $ 40% in U. S. eec. tataring
leo JorseX -- SasF O ea r
lo Maxice 12 4 50% in U. S. sec. mutring
within 100 dMy.
Nov York 17 less than FR 1% tIe than rt
North Carolina Is "
North kota 8 2
Ohi1o 1 60% i n U. S. get.
Cllhoma3 Sme as fe Sa am YR
Oregon 12 A 60% 1 in U. 5. sec. maturing
within I yr.
Pennylvania 12 3 up to 1101 10% in U. S., U.S. JuenC or
2 over $15M Penn. sec.
Rhode lesld i 0 607 in U. S. see. mtsturi
I
g
within 91 days
Sooth Crolice7 3
oRb kot . 171-- 17v 60_ in _. S. _ec.
Tennessee 10 1
Tecee is
Utah Some as nI Some anS~
Veroni 27 7 (111 of 60 In Vt. eec.)
607 in U. S. ec. maturing in
i yr.
Virgllie t0 3
WthinLton Sam. as re Se e R
Wteat Vttroil I
blletac l2/ 12 12 )3.113% D aod 58.3% T In U.S.
ecr. taticni In to eCI.
Wvowln 20 10 30? tO Treasiy Bilel
It 10 pot cent of demand deposits of bankt located in reserve city.
it 10 per cent of demand in reserve cities.
ItI ostelon: 20 per cent of doruacd
n In citles of 23.000 or =tro 20 per cat deemad.
t except. 1I per conl on defend over 130 million.
1/ 50 per cont for commisioner epprcvd "reserve" banbs.
Figure below roproeret Per cent of reserve re citemet, "U' Indicates reserve requiresert
oeeerve reqiresent on tist depoitls.
on demand depoelit. -r indicated
93-211 0 - 73 - 9
mental Rank StotcRose
126
Senator McINTyR. Is this one of the reasons you are losing mem-
bership?
Mr. MITCHELL. Yes.
Senator McINTymu. Would you suggest legislative changes to correct
this?
Mr. MITCHELL. We have consistently suggested legislative changes.
Senator BENNETr. He is suggesting them again.
Mr. MITCHELL. We are suggesting them again, that's correct.
Reserves maintained with the Federal Reserve, on the other hand,
are generally nonearning assets, except as these reserves can be used as
a clearing account. Although nonmember banks do not keep reserves
with the Federal Reserve, nevertheless they are accorded certain Fed-
eral Reserve check-clearing services deemed essential to the public's
need for prompt money payment. If, in the future, extensive checking-
account powers are developed for savings institutions, the extension
of the benefits of the payments mechanism, whether conventional or
electronic, to such institutions, without their assuming a fair share
of the costs, would exacerbate the existing inequities.
Now, describing some of the background behind the principles that
I have just enumerated can help indicate how NOW accounts are re-
lated to larger developments in the payments system. For some years,
concern has been growing that the volume of checks being handled is
reaching a point where our present check collection and clearance sys-
tems will soon be inadequate.
Last year, for example, individuals and institutions in this country
wrote over 25 billion checks. Those checks were drawn on 94 million
accounts with balances aggregating $192 billion; 79 percent of these
accounts had balances of less than $1,000. The average of these accounts
was only $253. Obviously, almost all of these accounts are family
accounts.
Senator McINTRm. How much does it cost to clear a check ? What is
your estimate?
Mr. MITCHELL. It depends on the check and who is handling it.
Senator MCINTYRE. Average cost?
Mr. MITCHELL. I think a reasonable average would be about 16 cents.
Senator McINTnm. 16 cents?
Mr. MITCHELL. 16 cents.
Senator BENNMEr. 16 cents?
Mr. MITCHELL. 16 cents.
Senator MCINTrm . You referred to that in a speech recently as im-
plicit interest?
Mr. MITCHELL. Sure.
Do you want me to digress on this point for a moment?
Senator McIN.-Tnmz. We would be happy to have you as long as it is
germane.
Mr. MITCHELL I have jotted down some numbers. I thought this
question might come up. Obviously, you ought to be getting a com-
mercial banker to answer this question, too. Using the number that I
gave you, you would find that most families with incomes of less
than, say, $20,000 annual income probably would not write over 20
checks a month. So, I have used 20 checks a month as a reasonable
127
fl re. We have some evidence supporting this. There are some people
w write a lot of checks if it doesn't cost anything, but 20 checks a
month is not a bad average.
If you had an account with 20 checks written a month, with no
service charge, paying 3 percent interest on the deposit, and if the
bank were earning 6 percent on its investment in these funds after
"reserve requirements-that's
not hard to do today, but impossible to
do a year ago-then assuming 16 cents per check average processing
cost, the break-even point in that account would be $1,280. If you offer
that service on an account that averages less than that, you have got a
loss leader.
If you charge 10 cents a check and leave everything else the same, the
break-even point is $480.
What are they doing in your State-what are they charging? A
dime?
Senator MCINTYRE. My State?
Mr. MITCHELL. Yes.
Senator MCINTRE. That account is pretty small.
Mr. MITCHELL. I think in Massachusetts they are charging 15 cents.
At 15 cents, the break-even point -
Senator LfCINTrRE. On the NOW accounts? They are not making
any service charge. I understand they offer a lesser rate of interest.
Mr. MITCHELL. Less than 3 percent?
Senator MCINTYRE. About 3 percent; I think.
Mr. MITCHELL. Then their break-even point is $1,280, if they are
giving the checks away. The break-even point at 15 cents a check is
$80, with these assumptions.
[The following information was supplied for the record by Gov-
ernor Mitchell:]
A bank's profitability on demand deposits may be calculated according to the
following formula:
Profitability=service charge Income
+interest earned from Investing deposits
-operating expenses
-interest paid on deposits.
Mir. MITCHELL. Let me return to my statement. I am almost through
here, I think.
To process nearly 500 million checks a week, about 30 percent of
which flow directly through Federal Reserve facilities, we in the
Federal Reserve have stepped up our check processing activities, re-
vised procedures and installed new electronic processing and wire
transfer equipment. Yet we anticipate that in 5 years, money transfers
will increase about one and a half times from the levels in 1972. Ob-
viously, we must move, and should move quickly, to a system which puts
a great deal more reliance on the electronic transfer of funds.
Up to now, the bulk of the expenditures for research and develop-
ment in the payments area has been borne either by the Federal Re-
serve or by the commercial banks. The activity is bearing tangible re-
sults. In the summer of 1970, the Federal Reserve System opened a new
electronic communications center, equipped with special-purpose mes-
sage switching units capable of high-speed transmission, to provide for
128
an anticipated increase in funds transfer and other types of ef&ctronic
messages.
Individual banks are experimenting with electronic payments sys-
tems using terminals in retail stores that can be activated by plastic
cards; the so-called point of sale terminal. On a more comprehensive
basis, the Federal Reserve has cooperated with banks in Georgia and
California in drawing up plans for payments systems which will mini-
mize paper and emphasize electronics. More recently, the thrift in-
dustry has begun to consider the implications of electronics payments.
The mutual savings bank industry last July incorporated MINTS
(Mutual Institutions National
T
'rlsfer Systemn) as an affiliate of their
association.
There appears to be no questionn that this attention to the future
shape of the l)aiments system, shared by the Federal Reserve, is both
timely and necessary. Tihe more innovative thinking that is applied
to the problems involving the payments system. the better the ultimate
solutions will be.
Mr. Chairman. in this next, paragra)h, I have a few numbers relative
to the size and the number of savings accounts. Some of these data ar
based u)on fragmentary sources. We have done some more estimating
on the data, and I have attached a table which I would like, to substitute
for the one attached to my statement. It is better and gives a little
more information.
But let. mne-say just drawing from that revised table that there are
163 savings accounts at finan-ial institutions with balances totaling
$310 billion. The difference here was that in the S & L's, it is difficult.
to break out the. passbook accounts from the certificate accounts by size
of account. That is what we have succeeded, I think, in doing that on
a reasonable basis, and that accounts for the revision in this )aragraph.
About 52 percent. of those accounts are in commercial banks and
20 percent at savings and loan associations, and 13 percent at mutual
savings banks. and 15 l)ercent credit unions. About 7 1 percent of these
accounts have balances of less than $1,000, and they average about $1.89
per account. The bulk of the money in savings deposits, about 74 per-
cent, is found in accounts with balances between $1.000 and and $20,000.
Now, the institutional shares in savings accounts of this character.
leaving out, certificates. measured in dollars rather than number of ac-
counts, are as follows:
Commercial banks, 39 percent : savings and loan associations, 32 per-
cent ; mutual savings banks, 22 percent: and credit unions, 7 percent.
I will supply, you with a revised table.
Senator McIxrn. That will be made a part. of the record, and you
indicate those figures- ou have revised. You are saying that one of
these should not l)e made a part of the record?
Mr. MiTciiEL,y. What I have just read should be. made part of the
record. The table which I have appended should not be made a part of
the record.
Senator BExx-I. The first table?
Mr. MrIC ELL. Yes. We. have only one table.
Just in conclusion, today, large corporate customers monitor their
demand balances with great skill, keeping them just at the levels re-
129
quired to cover credit availability and the costs of money transfer serv-
ices they receive. Any additional funds they have are invested in such
assets as Treasury bills, commercial paper, and bank negotiable certif-
icates of deposit, and the like. Individuals, too, have moved some of
their funds from demand deposit balances into interest-bearing ac-
counts. They may want to further reduce the proportion of their funds
ke)t in demand balances.
rhus, by offering the convenience of NOW accounts, some mutual
savings bankers have gained an early start in a possible evolution of
the payments system that is logical and probably feasible. They have
opened an aveixue of exploration as to what type of deposit account
ought. to be available to consumers in coming years, regardless of what
ouir past practices have b(-en.
By building on our experience, it should be both prudent and re-
sponsive to afford household savings accounts greater flexibility
through granting regulatory agencies the authority to approve money
transfer arrangements as technology evolves. T he proposals that I have
bet forth above are consistent with this view.
That is the end of my statement.
Senator MCINTYRE. Mr. Mitchell, to your knowledge, are NOW ac-
counts threatening the financial solvency of any financial institution .
Mr. MiTcim:LL. Not to my knowledge, 11.
Senator MCINTYRE. I)o yoU see any danger in permitting NOW
accounts to continue w Ihile Congress considers the Board's
relnommendations ?
Mr. MITCHIELL. I think that I would say we need to have legislation
which would inake it possible to ini)ose comparable interest rate ceil-
ings for all thrift institutions, and that does require some legislation.
The position that was taken by Chairman Wille yesterday, the posi-
tion that he has taken-
Senator M'CINTYRE. You agree with his suggestions?
Mr. 'MIIIELL. Yes, I do.
Senator MCINTYIE. Thank you.
Senator Bennett ?
Senator BENNETT. Thank you very much.
Under your approach, it would seem to me that individual de-
positors at commercial banks would tend to switch funds out of their
demand deposits into the so-called "family accounts."
Mr. ITCHELL. I think there would be ain incentive to do that.
Senator BE.NErTT. What we are doing really is creating a new type
of account. In a thrift institution there would be two of these?
Mr. MITCHELL. I think that is right.
Senator BENNET-r. There would be the savings account and the
NOW account?
Mr. MITCHELL. That's right.
Senator BENNETr. And in the commercial bank there would be
three, the saving account, the NOW account-
Mr. MITCHELL. That could very well happen; yes.
Senator BFNxErr. And it is your feeling that there should be iden-
tical regulations affecting the NOW accounts in every type of institu-
tion in which the, appear?
Mr.. MITCHELL: That's absolutely correct.
130
Senator BENNE-Tr Moreover, in order to justify the existence of
this new account, there should be separate reserve requirements for
this account in every institution in which they appear?
Mr. MITCHELL. That's correct.
Senator BENErrr. Do you think there should be any dollar limit
to the amount of money that could be put into a NOW account trans-
ferred out of an ordinary demand deposit account?
Mr. MiTcHxLL.. Well, by restricting it in the first instance to per-
sonal accounts, we think that the banks or the thrift institutions that
offer this service would make a business judgment as to how low they
would let the balance in that account be. They would have no objec-
tion to its being large. The larger it is, the better, from their stand-
point. But there is a reason for the individual not to have a large
balance in that account, because he can get a higher rate of interest
in a nontransfer thrift account or in a certificate. The movement is
away from instant liquidity of thrift accounts for all large amounts.
The number of transfers, the price that an institution might charge
for a transfer, and the interest rate it would pay on a NOW-type
account all would presumably be set by competitive forces under uni-
form regulations with respect to ceilings and reserve requirements.
Senator BENNETr. How can you distinguish as a "family account"
between an individual who is operating a business as an individual
and an individual who is employed and receiving salary?
Mr. MITCHELL. Well, there is a bill in Connecticut that attempts
to do this.
Another way of distinguishing it is by the number of transfers.
You could permit up to 20 or 25 transfers. Beyond that, it is a busi-
ness, as far as you are concerned, and the customer couldn't have this
account. Some banks have offered unlimited checking account facili-
ties for a balance of $500 a year, but it is only available to individuals.
It is not available to businesses. They just police the account, I think,
in terms of the number of transactions. It it is a business account, it
is gong to have 100 transactions in all probability.
Senator BENNEr. So, you would police in terms of transactions?
Mr. MITCHELL I think that is the way the institutions would do it.
It is to their advantage to police it. If they are paying 16 cents, they
are out 16 cents on each check.
Senator BENNETr. It is a little difficult for an account that is on
the border today-
Mr. MITCHELL. That's right.
Senator BENNEr [continuing]. To pay their interest, and next
month they wouldn't.
Mr. MITCHELL, I don't think they would do it that way. If you are
a salesman, you might be writing 35 or 40 checks. I don't think the
banks would pay any attention to them.
Senator BENNETr. Your recommendations would require nonmem-
ber State banks to maintain reserves with the Federal Reserve?
Mr. MITCHELL. That's right.
Senator BENNETT. Would this impose a serious threat to our dual
banking system ? Isn't one of the reasons that banks move out of the
Federal Reserve and the National system into the State system is in
order to avoid the reserve I
131
Mr. MITCHIELL. I think that is a very important consideration, Sen-
ator, but there are other considerations involved. For a small bank, I
wouldn't think the incentive to move out would be very great. The
banks are able to count their vault cash toward reserve requirements.
Senator BENNErr. It would require legislation to bring the credit
unions, the savings and loans, and all these other thrift institutions,
under the Federal Reserve's requirements?
Mr. MITCHELL. It would; yes sir.
Senator BE.NNETr. And I think this would be a very interesting
experience to sit through on this committee as these things are dis-
cussed.
Mr. Chairman, I think Governor Mitchell has given us the clearest
picture I have had as a member of this committee of what I think is
going to happen over the coming years and decades in the banking
industry.
I think we are going to end up with one type of thrift institution
offering all of these services, and every time we take one step as we
are considering taking now, we move closer. I also serve on the
Finance Committee, and we write the tax laws, and I think the con-
comitant to what we have been talking about here is that as we allow
institutions, credit unions,, savings and loans, to become more like
commercial banks, we will be under pressure to level the tax burden
out, too. It is interesting to have a temporary advantage when you
move into an innovative situation where you invade the other man's
territory and he hasn't got a chance to strike back at you, but over
time I think we are moving in that direction.
I am glad to see that the Federal Reserve Board is willing to face
the whole problem and tell us if we are going to do these things, we
must impose requirements, we must have similar regulatory patterns,
and all the rest of the business; otherwise, we are going to set up little
enclaves of privilege here for one group or another, which-I don't
think Congress will do. I think the most difficult problem we will hear
is with the credit unions. They have had a privileged position for a
long time, and I don't think they are going to be very happy to be
told that they must maintain reserves as required by the Federal
Reserve System.
I have no other comments.
Senator MCINTYM. I agree, Senator Bennett, that the Governor's
statement here this morning has been very helpful indeed and far-
reaching, and it is going to be of real assistance as we try to solve
this problem, by some legislation, perhaps.
So, I thank you, Governor.
[The prepared statement of George W. Mitchell follows:]
STATEMENT
OF GEORGE W. MITCHELL, MEMBER, BOARD OF GOVERNORS OF THE FEDERAL
RESERVE SYSTEM
I appreciate this opportunity to present the views of the Board of Governors on
S. 1008.
The Board welcomes chairman McIntyre's call for a constructive
dialogue on
the issues addressed by this legislation: namely, extension of the authority to
regulate interest rate ceilings on deposits and the development of negotiable orders
of withdrawal
("NOW's") for use by savings account customers as currently
offered by mutual savings banks in Massachusetts
and New Hampshire. In par-
132
ticular, the appearance of NOW accounts as a competitive mutation somewhere
between traditional demand deposits and savings deposits compels a reconsidera-
tion of the roles of thrift and banking institutions in the-payments mechanism
today an in the future.
First, let me commen on section 1 of S. 1008, which would extend for one year,
through May 31, 1974, the authority granted in 1966 for flexible and coordinated
regulation of rates payable on time and savings deposits. The Board continues to
recommend that this authority be made permanent. This is not to say that interest
rate ceilings on time and savings deposits should be forever in place. In making the
authority permanent, Congress would, of course, enable the regulatory agencies to
adjust or suspend the ceilings when conditions warrant.
NOW accounts
With respect to NOW accounts, let me say at the outset that the present situa-
tion, from the standpoint of the financial institutions that compete with mutual
savings banks in New Hampshire and Massachusetts, is an intolerance one. The
Board shares the concern of those who feel that the developments In New England
have occurred without the needed guidance from Congress to insure competitive
equity.
If they are left to develop without proper consideration of their competitive
impact, the adverse effects of NOW accounts on other institutions could become
extremely serious. Should this subcommittee, and the Congress as a whole, find
NOW accounts to be a worthwhile initiative, then ways must be found for an
orderly phasing-in of similar powers for all financial institutions along with their
assumption of comparable regulatory constraints.
The Board believes the program I shall outline below meets the need for com-
petitive equity while still recognizing the desirability of improvements in the
banking and money services offered to the American family. Corporations, govern-
ments, businesses, foreign institutions, and nonprofit entities and find it more
feasible than individuals to keep surplus funds continuously invested. By and
large, most families are dependent on the range of services and yields which de-
pository institutions are willing and able to offer them. The Board's program
would provide more leeway for competitive forces to enrich and extend the services
of depository institutions.
At same time, however, the public interest and simple fairness suggest that any
such changes be accompanied by the imposition of competitive equity in interest
rate ceilings, reserve requirements, and tax treatment. The adoption of the legis-
lative proposals I shall outline could go a long way toward the establishment of a
firm base for continued evolution of a banking and financial system geared to the
needs of the economy.
Legislative Recornnwndation8
The Board.suggests a three-part legislative program:
(1) All financial institutions should be authorized to offer money transfer
services on savings accounts that bear interest, and that are used primarily
for household purposes. These accounts ("family accounts") would be sub-
ject to regulation by the appropriate Federal regulatory authorities and to
the conditions set forth in (2) and (3) below.
(2) "Family accounts" in all financial institutions should be subject to
identical interest rate ceilings set by the appropriate Federal regulatory au-
thorities. This requirement applies to all financial institutions, whether they
operate under Federal or State charter.
(3) All institutions offering "family accounts" should be required to main-
tain identical reserves against these accounts with the Federal Reserve
System, in accordance with regulations to be established by the Board. Limit-
ed access to the Federal Reserve's discount window might be provided in-
stitutions maintaining such reserves.
The first recommendation extends to commercial banks, savings and loan as-
sociations, savings banks, and certain other depository institutions the right to
offer their customers what are in effect checking services on savings accounts, as
this power may be circumscribed by their respective regulatory authorities. Check-
ing or transfer privileges for interest-bearing accounts should be limited, in the
first instance, to accounts owned by individuals. Savings and loan associations
at present have limited money transfer powers, but have exercised them very
little. Other institutions generally have not acquired this power, though there are
some exceptions established by State law.
133
Under the second recommendation, the Federal regulatory agencies would
establish competitive equality among various types of institutions with respect
to the new category of "family accounts." A permissible interest rate ceiling for
such accounts might lie somewhere between the rate currently allowed on pass-
book savings accounts and the zero level accorded demand deposits. The flexibility
with regard to Interest rate ceilings would allow for an orderly phasing-in of
"family accounts" in institutions choosing to offer them.
The regulatory agencies should be given sufficient latitude to distinguish
accounts affording Instant liquidity in the form of money transfer facilities from
other savings and time deposits for the purpose of establishing interest rate ceil-
ings. Regular savings accounts, at higher interest ceilings but without checking or
transfer privileges, would continue to be available to individuals and others who
now may hold such accounts under existing regulations.
The third recommendation, relating to reserve requirements, reflects a position
the Board has held for some time, namely that there be universal applicability
of reserve requirements established by the Federal Reserve to Institutions offering
money transfer services.
In part, this recommendation arises out of the need for competitive equity-
having all institutions that share the same money transfer functions also sharing
the economic burden embodied in the reserve requirements set forth by Congress
in the Federal Reserve Act.
Beyond this, however, the monetary control exercised through reserve require-
ments should impinge on all institutions participating in the nation's monetary
processes and mechanisms.
To require the maintenance of nonearning reserve assets by only one class
of institutions-commercial banks that are members of the Federal Reserve
System-is not only unfair competitively, and, therefore, likely to be less ben-
eficial to the public, but it also makes reserve requirements less useful as an
instrument of Federal Reserve policy. As the institutional source of the money
supply broadens-and it will If savings institutions continue to move in the
direction indicated by the NOW account-the reserve base should also broaden,
so that monetary policy actions can be smoothly transmitted through the
entire financial system. As It applies to "family accounts," this argument
would require that member and nonmember commercial banks, as well as
thrift institutions, should have identical reserve requirements.
Transition to New Structure
If the Congress accepts this principle with respect to "family accounts," the
Board would want somewhat greater flexibility in the range of reserve re-
quirements which can, by statute, be Imposed on various types of deposit
liabilities. The statutory range on time deposits, now from 3 percent to 10
percent, might well be extended downward, for instance, so that consideration
could be given to reducing to minimal levels reserve requirements on the
smaller personal time and savings accounts of the types now held by banks
and thrift institutions. The new "family accounts" might bear a reserve re-
quirement somewhere between the present statutory minimum requirement
on savings accounts-3 percent-and that on demand accounts-7 percent.
Commercial banks and thrift Jnstitutions would add to their reserve accounts
with the Federal Reserve at this rate as their "family account" bustnesss
grew.
The transition to this new structure would require care and time to work out
any monetary policy effects and to prevent any unfavorable effects on particular
Institutions; but, with cooperation on the part of the Federal regulatory
authorities, it could probably be accomplished without great difficulty.
The Board looks forward to the extension of transfer powers to thrift in-
stitutions, therefore, only if there is a corresponding assumption of costs and
public responsibilities by those institutions. The development of the NOW ac-
count and similar instruments makes It clear that the need for Congress to
deal with the question is urgent, even though implementation of any changes
Congress authorizes will necessarily be gradual.
Three General Principles
The Board's legislative recommendations have been developed while keeping
in mind the Federal Reserve's present responsibilities in operating a clearing
system for the handling of checks. The Federal Reserve regards its role In ex-
pediting and accommodating money transfer as highly important.
134
The Board believes, first, that so far as public participation and support are
concerned, there should be a single, integrated nationwide mechanism for
efficient transfer of funds. The existing system, using checks and drafts, and
functioning through commercial banks and the Federal Reserve Banks, is sub-
stantially of that character. In this connection, the Federal Reserve's Steering
Committee on Improving the Payments Mechanism issued a statement in
December elaborating on this and other points and I am attaching a copy of
it for your use.
Second, even allowing for the existence of private clearing arrangements,
the Board believes that the public system using check or electronic transfers of
funds from one institution to another should be such as to insure that the
conditions of entry into a general clearing arrangement are fair, and that
equitable treatment is assured for institutions with similar powers and
responsibilities.
Third, the costs of the transfer system and the benefits of participating in
it should be equitably distributed among all of the institutions involved, and
among their depositors.
As implied in the foregoing, the Board believes in comparable treatment for
institutions having like powers, but the existing situation fails to meet this
standard. Some institutions, namely, banks which are not members of the
Federal Reserve System, have a competitive advantage. Although in most States
the nominal reserve percentage for banks is comparable to that imposed on
member banks, the reserves required by the States may be carried in the form
of what are effectively earning assets: Government obligations and corre-
spondent balances. Reserves maintained with the Federal Reserve, on the other
hand, are generally nonearning assets. Although nonmember banks do not keep
reserves with the Federal Reserve, nevertheless they. are accorded certain
Federal Reserve check clearing services deemed essential to the public's need
for prompt money payment. If, in the future, extensive checking account powers
are developed for savings institutions, the extension of the benefits of the pay-
ments mechanism, whether conventional or electronic, to such institutions,
without their assuming a fair share of the costs, would exacerbate existing
Inequities.
Background for the Evolving Paymente Syatem
Describing some of the background behind the principles enumerated above
can help indicate how NOW accounts are related to larger developments in
the payments system. For some years, concern has been growing that the volume
of checks being handled is reaching the point where our present check collection
and clearance systems will soon be inadequate. Last year, for example, in-
dividuals and institutions in this country wrote somewhat over 25 billion checks.
Those checks were drawn on 94 million accounts with balances aggregating
$192 billion. Seventy-nine percent of these acounts had balances of less than
$1,000-the average was $253; nearly all of these accounts were "family" or
personal.
To process nearly 500 million items weekly, about 30 percent of which flows
directly through Federal Reserve facilities, we have stepped up check processing
activities, revised procedures and installed new electronic processing and wire
transfer equipment. Yet we anticipate that in five years, money transfers will
increase about 1 time from the levels in 1972. Obviously, we must move, and
should move quickly, to a system placing much greater reliance on the electronic
transfer of funds.
Up to now, the bulk of the expenditures for research and development in the
payments area has been borne either by the Federal Reserve or by commercial
banks. This activity has had tangible results. In the summer of 1970, the Federal
Reserve System opened a new electronic communications center, equipped with
special-purpose message switching units capable of high-speed transmission, to
provide for anticipated increases in funds transfer and other types of electronic
messages.
Individual banks are experimenting with electronic payments systems using
terminals in retail stores that can be activated by plastic cards. On a more com-
prehensive basis, the Federal Reserve has cooperated with banks in Georgia and
California in drawing up plans for payments systems which will minimize paper
and emphasize electronics. More recently, the thrift industry has begun to con-
sider the implications of electronics payments. The mutual savings bank industry
last July incorporated MINTS (Mutual Institutions National Transfer System)
as an affiliate of their association.
135
There appears to be no question that this attention to the future shape of
the payments system, shared by the Federal Reserve, is both necessary and
- timely. The more innovative thinking that is applied to the problems involving
the payments system, the better the ultimate solutions will be.
At present there are 183 million savings accounts at financial institutions with
balances totaling $396 billion. About 46 percent of those accounts are at com-
mercial banks; 28 at savings and loan associations, 12 percent at mutual savings
.banks and 14 percent at credit unions. About 67 percent of these accounts have
- balances of less than $1,000, and they average about $205 per account. The bulk
of the money in savings deposits, about 79 percent, is found in those accounts
with balances between $1,000 to $20,000. The institutional shares in savings ac-
counts, measured by dollars rather than number of accounts, are: commercial
banks, 30 percent; savings and loan associations, 47 percent; mutual savings
banks, 18 percent; and credit unions, 5 percent. (See table attached.)
Today, large corporate customers monitor their demand balances with great
skill, keeping them Just at the levels required to cover credit availability and
* the costs of money transfer services they receive. Any additional funds they have
are invested in such assets as Treasury bills, commercial paper, and bank nego-
tiable certificates of deposit. Individuals, too, have moved some of their funds
from demand deposit balances into interest-bearing accounts. They may want to
reduce further the proportion of their funds kept in demand balances.
Thus, by offering the convenience of NOW accounts, some mutual savings
bankers have gained an early start in a possible evolution of the payments sys-
tem that is logical and probably feasible. They have opened an avenue of explora-
tion as to what type of deposit account ought to be available to consumers in
coming years, regardless of present practices.
By building on past experience, it would be both prudent and responsive to
afford household savings accounts greater flexibility through granting the regula-
tory agencies authority to approve money transfer arrangements as technology
evolves. The proposals set forth above are consistent with this view.
DEPOSIT ACCOUNTS IN FINANCIAL INSTITUTIONS, JUNE 30.1972
IPC
demand Savings accounts (excluding time certificates of deposit)
deposits I it
commercial Commercial Credit
banks banksS S. L.'s' MS's' unions Total
Number of accounts (millions):
Size of account:
Less than $1 00 ------------ 74.8 63.7 18.4 12.6 20.4 115.1
1. to$ ............ 182 20.2 12.8 8.8 4.7 46.5
.o 1 . ......... . 9 .5 .7 .5
Over $100, .............. .2 (() () ())
Total .................... 94.2 84.4 31.9 21.9 25.1 163.3
Amounts (billions):
Size of account:
Less than $1000 ............ $18.9 $11.6 P. 8 $2.6 $3.8 $21.8
$1,000 to $2000 ............ 62.8 85.1 6.6 52.5 15.8 230.0
20,000 to$1 0000 .......... 36.9 17.0 19.3 13.2 .6 50.1
Ov'r $100,000. ............ 73. 0 6. 4 . S .5 (1) 7. 7
Total .................... 191.7 120.1 100.5 68.9 20.2 309.7
Average size of account:
Accounts less than $1,000 ........ 253 183 208 208 186 189
Accounts $1,000 to $10,000 ....... 3,443 4,212 5.967 5,967 3,338 4.946
'Demand deposits of Individuals, partnerships, and corporations.
FOIC summary of accounts and deposits in all commerical banks, June 30,1972.
N Number of regular accounts (exclusive of special accounts) and dollar amounts for size categries partially estimated
from mutual savings bank data. Total dollar amount in insured regular accounts from FHLBB; total dollar amount in
uninsured regular accounts estimated by Federal Restve staff.
I FOIC summary of accounts and deposits In all mutual savings banks, June 30, 1972.
6 NCUA-Breakdowns by account size estimated, based on Dec. 31, 1971 NCUA figures.
6 Lss than .05.
Note: Totals may not add due to rounding.
136
Evolution of the Payments Mechanism
The following statement was prepared by the
Federal Reserve System Steering Committee on
Improving the Payments Mechanism to inform
the Nation's bankers and the public of the
general direction of payments mechanism de-
velopment as currently envisioned by the Com-
mittee.
The essential features of the payments system
that is evolving in response to electronic tech-
nology are reasonably clear. These features are
not likely to change drastically unless a new
technology develops. Private and public roles
in this system probably will be very similar to
those in being today with financial institutions
interfacing with the public and the Federal Re.
serve maintaining the interface among financial
institutions. The Federal Reserve has indicated
its intent to accommodate visible evolution in
the payments mechanism by continuously im-
proving and updating its facilities to handle a
growing volume of funds transfers along the
channels of lHkely development. Thus, the re-
gional processing centers and expanded clearing-
house arrangements now being established by
the Federal Reserve System in some 40 trade
centers for handling checks may become the
nuclei of interconnected regional com-
munications networks for handling wire
transfers of funds and financial data.
The System's role in facilitating the develop-
ment of automated clearing facilities and the
linkage of such facilities to provide a nationwide
network for automated crediting syijems or
preauthorized debiting systems may pioneer a
similar role in the experimental point-of-sale
terminals. Such terminals, now linked to a
single bank's computer and energized by a
unique credit-card authorization system, with
appropriate standards and interlinkage, may po-
tentially provide merchants and consumers with
a convenient means of consummating transac-
tions at the point of sale over a broad range
of merchants and financial institutions and over
large geographic areas. These transactions en-
compass use of an electronic communications
network to -transfer payments originating (a) at
a point of sale, (b) with a wage, salary, or other
income payment, or (c) with an authorization
to charge a depositor's account. This network
would serve all accounts from, which, or to
which, payments are made.
CHANGES IN PROSPECT
The Nation's payments mechanism can be ex-
pected to evolve in the direction of a system
where credit to the payee's account is made at
the same time the payor's account is charged.
Increasingly, these transfers will be made over
a computer-directed communications network.
As electronic transfers become technologically
and economically superior, checks would be
largely displaced. The use of the credit card.
or a similar means of activating electronic pay-
ments transfers, should expand greatly. Much
of today's paper-oriented operation would be
displaced by electronic terminals at the point
of sale for making direct funds transfers, with
the related accounting being done by computers.
Significant reductions in the volume of transac-
tions made through the use of paper currency
may also take place-by the use of point-of-sale
terminals and through other electronic tech-
'niques.
The electronic funds transfer system is ex-
pected to evolve in a modular fashion through
the development and interlinkage of a compre-
hensive series of computer-directed com-
munications networks. At the local level, the
system would include commercial banks and
possibly other depositary institutions linked to
point-of-sale terminals in retail establishments,
to computers in businesses, and possibly to
terminal devices in homes. Through these fi-
nancial institutions, connection would be made
to regional, national, and international net-
works, enabling the movement of funds nearly
everywhere in the world.
REPRINTED FROM
FEDERAL RESERVE BULLETIN
FOR DECEMBER 1972
137
OBJECT:'"ES
'he payments system as it evolves will reed
to be aimed at providing the public with a
convenient, economical, and secure means of
moving funds. In comparison to the present
check and other funds transfer systems, the new
payments system should:
a be more efficient, as electronic data processing and
communications technologies replace labor-inten-
sive processing procedures.
* provide a more secure method of payment, less
subject to theft, loss, forgery, and alteration of
payments data, and a method of tracing all trans-
actions.
* assure a more equitable balance of the debit and
credit effect on participants.
a accommodate both debit and credit transfers.
The system would continue to:
* provide for the continuation of competition among
financial institutions.
* involve public participation and surveillance over
private institutions' money role.
* be capable of providing timely and detailed data
on money flows, trade volumes, and other pay.
ments-related information for use in monetary
policy and other relevant applications.
FEDERAL RESERVE INVOLVEMENT
The Federal Reserve Act directs the Federal
Reserve System to provide an efficient payments
mechanism for the public. The policy statement
of the Board of Governors on June 18, 1971,
called for "basic changes in the Nation's system
for handling money payments (as] essentially
transitional steps toward replacing the use of
checks with electronic transfer of funds."
In further development of the payments
mechanism, the convenience and needs of the
participants should continue to be the primary
considerations. These needs may be sum-
marized as follows:
Consumers need an economical means of
payment that is acceptable anywhere; is less
subject to theft than cash; is less subject to loss,
forgery, and alteration than checks; facilitates
the keeping of necessary personal records; and
enables them convenient access to a wide rAnge
of services from financial institutions.
Businesses need a system that reduces the
time, costs, and risks in making and receiving
payments; that facilitates the transmitting,
storage, and retrieval of associAted information;
and that provides better integration of business
electronic data processing capabilities with the
payments mechanism.
Financial institutions need a more efficient
system of transferring funds--one that is less
labor intensive-a system that will enable them
to offer customers a wider variety of services,
including informational services based on the
improved data generated by the payments sys-
tem.
Government needs are similar to those of
business, but with the additional special need
for greater security against theft of checks issued
to the public.
ROLE OF THE FEDERAL
RESERVE SYSTEM
It is anticipated th'tt the Federal Reserve will
install and manage a nationwide com-
munications network through which interre.
gional settlements between financial institutions
will be made.
A number of other networks may exist. In
part, these will be local and regional funds
transfer networks in which Federal Reserve in-
volvement may be minimal. The total of
transfers internal to banking institutions may
expand if demand deposit market shares become
more concentrated. Thrift institutions may set
up their own networks. Credit-card clearing
networks may become more widespread.
The level of Federal Reserve involvement in
different regional or local networks for transfer
of funds will vary depending on the banking
structure. The Federal Reserve should expect Io
monitor the regional and local networks to as-
sure that a satisfactory degree of security is
being maintained and that the capability for
interfacing with the national network is ob-
tained.
Since the payments mechanism will"evolve
conhinuodisly, the Federal Reserve should expect
to continue its participation in this evolutionary
process in order to assure the desired develop-
ment and coordination of the payments system,
to insure the continued competition among pro-
viders of financial services, and to protect the
public interest.
138
ROLE OF FINANCIAL INSTITUTIONS
It is anticipated that private financial institutions
will continue to play the predominant role in
local and regional communications networks
through which intraregional payments will flow.
The number of private facilities engaged in
processing payments transactions may decline
as branching systems and holding companies
centralize their accounting operations, or as
correspondent banks expand their accounting
services, or as smaller institutions use special-
ized service bureaus or band together to perform
demand deposit and other accounting services.
Nearly all financial institutions will be linked
together through local, regional, or national
communications networks by means of compat-
ible input and output devices. Customers with
larger volumes of transactions will interface into
their banks' equipment. Competitive marketing
of collection and payments services may be-
come less localized. Through the use of ad.
vanced equipment, more and better services will
be available to customers.
ROLE OF BUSINESS
The evolution of the payments system will en-
able business and governmental units to utilize
electronic data processing equipment more fully
and streamline their payments procedures. It
will be possible to submit payments data to and
receive payments data from financial institutions
in electronically transferable form. Businesses
can now use computer-oriented input to initiate
payment from their own deposit accounts or,
through preauthorization agreements, initiate
payment from the deposit accounts of custom.
ers. They will be able to send to their customers
machine-readable invoices that, when for-
waided to the issuing companies or the custom-
ers' banks, will be transformed into electronic
payment messages.
Larger business and governmental depositors
will establish computer.to-computer connec-
tions with the financial institutions that hold
their accounts. This option will permit greater
competition for accounts because distances will
have a diminishing cost impact.
Instantaneous funds transfers will signifi-
cantly simplify corporate funds management.
Float will largely disappear and will not be h
significant factor to consider in determining in-
vestable funds. Corporate treasurers will be able
to obtain more timely information from financial
institutions on the status of corporate balances.
and the timing of certain classes of funds' re-
ceipts and disbursements will become more
predictable.
Informational services provided by financial
institutions will enable small- and medium-sized
businesses to manage investment of funds in a
manner previously practicable only in large
businesses.
ROLE OF THE INDIVIDUAL.
It is anticipated that, due to rising costs and
delays and given a more convenient, cheaper
alternative, most individuals will minimize their
writing of checks. Salaries, wages, pensions,
dividends, and other income items will pre-
dominantly be credited directly into individuals'
accounts and, through preauthorization, recur-
ring payments will be deducted automatically
from accounts. In addition, a consumer will be
able to pay some bills simply by signing a
machine-readable invoice and forwarding it to
the issuing company or the financial institution
holding the consumer's account. Other pay-
ments will be made through point-of-sale termi.
nals, with either the individual's demand deposit
account or possibly an interest-bearing de-
ferred-payment account being debited.
The consumer will be able to complete finan.
cial transactions through the use of a card or
similar identifying device, and this procedure
will be accomplished through automated teller
units conveniently located'in shopping centers,
in other places handling numerous consumer
sales, and in the home.
FUTURE STEPS
As the electronic payments system continues to
develop, some areas that may need continuing
attention by the Federal Reserve System are as
follows:
* public reaction and changes in public attitudes
toward payments system improvements.
* impact of payments system improvements on the
public's use of coin and currency.
139
0 bank cards and hear relationship to the pyments cent transmittal and intrchange of payments in-
mecbuaism; the competitive impact of bank cards formation.
with respect to retail credit cards. 0 legal comnsdralions surrounding actions designed
4 international elecuonic funds transfer develop, to improve the payments system.
meets.
" impact a( payments system developments on Fed- The Federal Reserve System will need for
eal Reserve System. -perations and policy. some-time to continue to devote significant
" sechnolo ,,al developments in data handling ono
ransmission. resources to the development of the Nation'&
" developtment of the standards necessary for efi- payments mechanism. 0
Senator McIxTrFm We are happy to welcome Mr. Ronald Haselton,
president of the Consumers Savings Bank in Worcester, Mass.
This is the bank that started the whole thing, isn't it, the NOW ac-
counts? So we are delighted to welcome you here this morning and
your associates. I hope you will -for the record introduce them so we
know who they are.
I don't know how correct or incorrect you were, but let's say you were
out in the frontier, as Governor Mitchell just said.
I have your statement here. It is a good 10 to 12 pages and some ad-
vertising. Anything you can do to abbreviate your testimony will be
helpful to this committee. I don't want to impinge on what you think
is necessary for us to hear from you. When you can hit the highlights,
I know I will appreciate it.
So, proceed.
STATEMENT OF RONALD W. HASELTON, PRESIDENT, CONSUMERS
SAVINGS BANK, WORCESTER, MASS., ACCOMPANIED BY:
THOMAS ZOCCO, SENIOR VICE PRESIDENT, CONSUMERS SAVINGS
BANK; AND ELLIOTT CARR, SAVINGS BANK ASSOCIATION OF
MASSACHUSETTS
Mr. HASELTON. Thank you, Mr. Chairman.
My name is Ronald Haselton. I am president of Consumers Savings
Bank in Worcester, Mass.
Accompanying me here this morning
2
on my left is my associate
Thomas Zocco, who is senior vice president at Consumers Savings
Bank, and on my right Mr. Elliott Carr, from the Savings Bank
Association of Massachusetts.
We are very grateful to have the opportunity to speak to your com-
mittee this morning, Senator, particularly with respect to S. 1008.
I would like first to apologize that these pages are not numbered,
and I shall do my best to try to make my statements brief and try to
follow along in the basic text.
As you suggested, Consumers Savings Bank sought and achieved the
privilege of offering negotiable order to withdraw called NOW
through the courts in Massachusetts after approximately 2 years.
We did so for what we considered to be three main reasons.
No. 1, we asked ourselves should our depositors have to come to the
bank or use the mail, and I suggest that this committee probably knows
as well as I how badly the mails are being handled these days, in order
to do their modest banking and to pay their bills.
140
The second major area is that all too often these people are required
to stand in line at various times of the month to secure for themselves
Treasury checks and personal money order in order to pay their few
small bills.
The third major area of our concern was that in order to insure
the highest possible return on their life savings and at the same time
have the convenience to pay those few bills people were required to
maintain two deposit relationships.
Finally-
Senator MN[CINTYRE. Before you get to that, I thought that you gen-
tlemen who ran thrift institutions, you were going to try to get me
to put money in your bank and then make it as hard as possible to
get it out, you were doing me a favor because I was going to accumu-
late some savings and I would be able to build a home with it.
Are you making a checking account out of this thing?
I never had any money to speak of. but the bank down at the corner
is where I put the money that I wanted to save. Are you a savings
bank?
fr. HASELTON. Yes.
Senator MCINTYRE. What are you getting into the checking account
for ?
Mr. HASELTON. We are trying to get into the transfer of your funds
at you convenience.
I would like to suggest that the reason for people not being thrift
conscious today is that they cannot in fact oversave. they cannot
afford to oversave.
By that I mean from their incomes, if they take a particular amount
of money, place it in their account and it develops during the month
that they have overspent to get the money from the account is very
difficult.
If they use a NOW account, oversave, as I suggested some people
try to do, try to live within their budget and then find they" cannot.
they can get at the money whenever they need it.
Senator MCIN.-TYRE. Incidentally, there is some sort of an account
running around that I heard on the radio coming in that says all I
have to do is join this trust company and put some money tn there
and then I write checks and pay all ny bills and don't worry whether
I overdraw or not because they will not consider it an overdraft, they
will consider it a loan.
The only trouble, they don't tell me what the interest rate on that
overdraft is going to be.
Senator BE.NNETr. They will tell you if you call them. This is the
British Banking System. The British Banking System is based on the
idea of overdrafts'. This is an attempt to transfer it to the United
States.
Senator MCINTYRE. I should have been an Englander.
Mr. HASE:LTO.,. I think there are some similarities of the IHritish
Banking System with respect to NOW if you consider the so-called
current account, which is, I am sure you distinguished Senators know.
is the account in which funds are maintained and interest is paid
thereon and drafts can be drawn against the same.
141
Senator Bz-.E,-.--Er. I would just like to make the comment with re-
spect to your third paragraph on page 2. It is technically true that
your deposits are there and that a certain time period must pass before
you can be required to pay them out, but we just ignore that in prac-
tice. So there is a technical difference between your deposits and the
demand deposits of a bank which just has been ignored by tradition.
Technically it should be possible for you to demand 30 days' notice
before you pay any out.
As I say, that has been honored in the breach rather than in the
observance, and if somebody should say we will go back to the law
and we will require you to require 30 days' demand, there goes your
NOW account.
Mr. IASELTON. With respect to that, Senator, I did bring with me
today a sample of the regulations which we require that our depositors
sign for in terms of receipt, spelling out very clearly the rights under
the law that exist with respect to the suspension of withdrawal
privileges.
Senator BENNEr. I understand that.
Mr. HASELTO.,. Senator Bennett has touched on the last reason that
prompted us to seek this service, and that was the question of are
these funds that we have had in our savings accounts-I a-in speaking
now about regular savings deposits-payable on demand, and I think
lie said it more eloquently than I could.
Specifically we looked at the Savings Bank of Baltimore case which
I think rather eloquently describes the condition which we found in
Massachusetts, and we have tried to quote here the testimony of those
witnesses appearing at that time, and specifically the remarks of Pro-
fessor Morton when he said in simple terms the creation of money
is the distinguishing feature with respect to demand deposits as op-
posed to time deposits.
Senator BENX'rr. NOW accounts move in practice out of the time
sense into the demand sense.
Mr. HASELTO,. Yes, sir. The difference in the volatility of the so-
called NOW account versus the volatility of demand deposit accounts
we think is another indication of the characteristic difference between
the so-called checking account and the NOW account.
Senator BEN.N xErr. What difference is there given a depositor with
the same amount of money to deposit?
Mr. HASELTON. I think Mr. Carr may have some figures. We tried
to include some, too.
Senator BENIN ETW. I want the philosophy. What difference is there
between a man who deposits $100 in a commercial account on which
lie can draw checks and a man who deposits $100 in your bank on
which he can draw NOW instruments I Is there any difference to him?
Mr. HASELTON. I think philosophically there is. Our experience,
limited as it is today, indicates that there is, and I think philosophi-
cally it is, he is more reluctant to give up his interest rather than
pay out something on which he gets no interest.
Senator BEN,,ETr. If he has to write the same number of checks, the
effect on the financial system is exactly the same, writing the same
number of NOW withdrawals.
93-211 0 - 73 - 10
142
Mr. HASELTON. I think philosophically, this type of individual is
maintaining two banking accounts. We are seeing that-now. One is
- _. that regular checking account that he pays his bills with and this
other thing in which he tries to save money.
Senator BNTrrr. Then you are telling me that your NOW account
depositors maintain checking accounts to p'ay their bills?
Mr. HASELTON. Oh, yes, a great many of them do.
Senator MCINTYRE. I have an account in New Hampshire, not very
much in it, a checking account, and I have one down here. I think if the
NOW accounts come in I 1ould probably want to put everything I had
in one NOW account and get a little interest if I was lucky enough to
have a little left at the end of the month. I think it has a very direct con-
sumer appeal.
The only thing that I am worried about. is we don't disrupt the bank-
ing system that Senator Bennett knows so much about, and we don't
make it unfair, we don't give anyone an advantage.
Mr. HASELTON. My associate, Mr. Carr, would like to address him-
self to this issue.
Mr. CAME. I would just like to say that although philosophically a
consumer comparing a NOW account with a checking account might
not see any difference, at least in Massachusetts there are two very
pronounced financial differences, one being that he gets 5.25 percent
interest and the second that he pays 15 cents a check, whereas almost
every commercial bank in Massachusetts has some kind of a free check-
in g system.
So, any consumer can sort of weigh the impact of these two differ-
ences, the 5.25-percent interest and the 15-cent charge, and for many,
many customers, we would estimate as many as 70 or 80 percent of all
checking accounts, they are better off staying with the checking account.
The people where the 5.25 percent add up to more than the 15 cents
a check are the larger accounts or the very inactive accounts that are
not being hit with many of these 15-cent items.
So, although there is not perhaps a philosophical difference, there
is a very strong one in Massachusetts, at least right now.
Senator BiE.-;N.r. Where would you say the breakeven point is on an
average deposit, say, of $200 and 15 cents a check?
Mr. CARR. I think it comes out to about three checks per hundred.
So somebody with a $200 balance could write six checks a month. If
he got over that he would be better off with his checking account. Most
$200 checking accounts do write more than six checks per month.
Senator MOINTYRF. It is obvious to me that under your system I
wouldn't want your NOW account because I write a lot of checks.
Mr. CARR. You probably wouldn't.
Senator MCINTYRE. In New Hampshire they tell me the way it has
worked out there, the savings account draws 5 percent, I believe, and
their NOW account is reduced to 3 percent, and no charging for checks,
I don't believe. That might be more appealing.
Let's proceed or we will be here until 2 o'clock this afternoon.
Mr. HAsEUrN. We also followed the Maryland court decision fur-
ther, and on the fifth page of this unnumbered testimony we have
-143
quoted what we think is a succinct statement with respect to what
the savings customers presently face. I would like to quote from the
Savings Bank of Baltimore case.
If, as would seem to be conceded, a depositor of the bank, on making a with-
drawal, has the option of requesting cash, or a treasurer's check, or of purchas-
ing a money order, it seems abundantly clear to us that according him a further
-option of drawing a check on his own account, whether or not he presents his pass-
book, is a distinction without difference.
That is the practical fact of the fairly typical savings depositor in
passbook savings these days.
I should like to try to address myself to the question about whether
the borrower pays for this service or whether somebody else does.
I am on the following page, Mr. Chairman, headed "Escalation In
Mortgage Interest Rates.'
It has been alleged that the introduction of a NOW account might
tighten the supply of mortgage money and increase the cost of family
shelter. It is alleged that banks offering NOW's would charge more for
the money they lend, tending to favor high-yielding investments and
some securities over residential mortgages and that this NOW account
service is bound to be costly and would impose new pressures to in-
crease earnings.
Pricing money, in our opinion, should have nothing to do with the
extension of services to those who require them.
It is my opinion that outside of inflation the most serious additional
cost to a bank borrower in these times has come from the avalanche of
services and costly give away programs.
Senator MCINTYRIE. Do the banks still give away crockery and china
and umbrellas and plants? If you open an account they used to give
you a blanket. Do they still do that?
Mr. HASFM N. Yes, sir. In the City of Worcester today two savings
and loan associations-domiciled therein are offering transistor radios
in one case for a $500 deposit, a clock in another case for a $100 deposit
ranging up to hair dryers, blankets and almost any other of that basic
type.
Senator MCINTYRE. With all due respect, they are not very innova-
tive, would you say ? They were doing that back during the days they
used to have the movies, get the customer in on the serial, give him
another dish.
Go ahead.
Mr. HAsELTONx. We believe that these kinds of give away programs
are beneficial for the few, those parenthetically who move money from
one institution to another to get the gift and for those who happen to
be fortunate enough to have a sufficient amount of money to deposit at
a particular moment in time, but they are certainly not in our opinion
in the interest of the many depositors and the communities in which
the banks are domiciled.
We believe in the basic responsibilities of mortgage lending, and
our bank, for example, which is a 119-year-old institution, has 75.9
percent of its deposits today invested in mortgages.
In 1966 and again in 1969-70, and as Chairman Kamp mentioned
yesterday beginning to appear again, we saw substantial outflow of
144
deposits from thrift institutions to open market instruments paying
rates of return substantially higher than savings bank dividends.
In these types of money crunch or disintermediation, we could loan
out in our bank that portion of our monthly payments which was not
needed to meet this outflow of demand.
We asked ourselves who would finance housing. Federal subsidies on
mortgages is disappearing. The Federal Government is required to
finance a staggering amount of public debt, and the growth in savings
in the so-called full service or one-stop banks have restricted seriously
the supply of funds to thrift institutions available for mortgages.
I try to point out here from 1962 to 1971 savings and time deposits
in Massachusetts commercial banks increased 276.8 percent while in
savings banks the figure was 89.7 percent.
I might also suggest that I am very well aware that, the base from
which these growths took place was'substantially lower in the first
instance than in the second.
Of the total savings deposits in Massachusetts, insured commercial
banks, excluding so-called special notice accounts, $1,946 million. 35.5
percent in 1971 was invested in residential real estate loans.
Savings banks at the end of 1971 had total deposits of $1.6 billion
with 73.3 percent invested in real estate mortgage loans.
The State association informs me that approximately 85 percent of
all these are for residential housing.
I try here, gentlemen, in the following, to tell a little bit about how
the NOW account works in our banks. I think it has been covered
rather exhaustively by witnesses who have preceded me.
The simple fact is we charge 15 cents for every draft used outside the
bank. We do not charge for the draft used as a withdrawa- order inside
the bank. We are paying currently 5.25 percent interest on the moneys
and deposits.
I have also pointed out that each of these drafts which is used out-
side of our bank is cleared through a local commercial bank corre-
spondent who charges us 8 cents for each of these drafts.
We then charge the customer's account and we reimburse the com-
mercial bank for the amount of money represented by the total
drafts.
We believe that our operation to date has been modestly profitable.
We anticipate that it will become more profitable as the number of
accounts and total balances grow.
Incidentally, I should like to point out that our average balance
per account-and you will find this information on an exhibit attached
headed "Consumer Savings Bank, History of NOW Account Bal-
ances"-has increased from an average of $1,247 on June 30, 1972 to
an average of $1,391 on February 28, 1973.
If I may summarize, my bank in pioneering negotiable order of
withdrawal tried to strike a blow for the average man, but particu-
larly for the saver.
We tried to add an element of convenience so that there might be
some offsetting compensation to encouraging thrift.
I should like to point out here that this service introduced as it was
by us in June spawned another service which I believe to be in the
145
interest of the consumer. A copy of the advertisements of the bank
offering this service, the Guaranty Bank and Trust Co. in Worcester,
is attached for your perusal.
Basically what this service amounts to is a free checking account
for the maintenance of $100 minimum balance in a savings account.
Additionally, moneys will be transferred from the savings account
to cover checks at any time you call a toll-free number 24 hours a day.
7 days a week.
With the introduction of S. 1008 it is obvious that there are those
who realize that the negotiable order to withdraw is not a threat to the
banking systeni but merely a convenience to the saver.
With tle passage of S. 1008 the depositors of mutual banks can be
assured that their best. interests are not lost in a wave of interinstitu-
tional competition.
We hope that this committee on reflection will spread the use of
the negotiable order so that the average person who tries to save will
be granted some additional small convenience.
We believe every institution should be able to serve its customers
in this manner and we, therefore, support wholeheartedly S. 1008.
We would like to parenthetically indicate our opposition to sections
2 and 3 of S. 1256.
Senator MCINTYRE. Senator Bennett?
Senator BENN,,F-Err. You heard Governor Mitchell. Would you ap-
prove the Federal Reserve's policy as he outlined it?
Mr. HASELTOX. Yes, sir. I wholeheartedly approve of it.
Senator BE,,NETT. That would mean that'in your bank for each
account you would have to maintain two accounts, one paying the
full interest as a savings account, the other paying a lower interest
as a NOW account?
Mr. HASELTON. Yes, Sir.
Senator BE.NxETT. And you could operate on that basis?
Mr. HASELTON. Yes, sir; and with the addition of reserves.
Senator BEN.Err. And you would be perfectly willing to have the
other thrift institutions operating on the same basis?
Mr. HASELTON. Senator, I don't think I am qualified to speak for
them.
Senator BExNErTT. Would you be willing or would you feel secure
in competing with the other institutions if they were given the
same privileges?
Mr. HASELTON. Yes, sir; I would be delighted to do so.
Senator B.N,,'xETr. I have no other questions.
Senator MCINTYRE. You do think competition is good?
Mr. ItASELTO.. I believe it is the basis of this country.
Senator MCINTYRE. 'Mr. Chairman, do you have any questions?
Senator SPARKMAN. I want to follow up on the question that
Senator Bennett asked you, for those having NOW accounts you
really operate on a two-fold basis, one, a NOW account and the
other an ordinary checking account; is that right?
Senator BENxE r. No, no.
Senator SPARKMAN. What was your question?
146
Senator BNNrr. Governor Mitchell testified-I don't think you
heard his testimony.
Senator SPARKMAN. I wasn't here.
Senator BENNETr. Governor Mitchell testified that the Federal
Reserve Board would support a program under which every deposi-
tory could have the privilege of having what you might calla NOW
account, which is an account which pays a lower rate of interest than
if it were a regular thrift account but against which orders of with-
drawal or checks or what-have-you could be written provided they
were limited to so-called family accounts.
I was asking him since he now operates out of one accounts, which
pays the highest rate of interest, if he could accept the Federal Re-
serve Board's idea of having two types of account, one of which
operates at a lower rate of interest but which can be drawn upon.
Presumably, the account with the higher rate of interest would not
be open for withdrawal or, if it were-it must be open for withdrawal
but within limitations which would keep it outside of the NOW ac-
count privilege.
Senator SPARKMAN. Do I understand-I believe I heard you say
this-that your NOW account is separate and apart from the regular
account? Do you have two accounts?
Mr. HASELTOiN. Yes, sir.
Senator SPARKMAN. One of them is a checking account-I said that
a while ago, but I realize you don't have an ordinary checking ac-
count, do you?
Mr. HASELTON. No.
Senator SPARKM AN. One of them is one you are paying interest on
at a certain rate and is subject to withdrawal under the regulations
by which you operate. The other one is a NOW account on which they
can draw checks at any time.
Mr. HASELTON. It is very difficult to answer the question, Senator,
because in Massachusetts, speaking only for Massachusetts, we are
currently required-allowed, if you will-to pay the same rate of in-
terest on a so-called no passbook savings account on which negotiable
orders to withdraw can be drawn and a passbook savings account on
which such orders cannot be drawn because of mechanical difficulties.
Senator SPARKMAN. You pay the same rate of interest?
Mr. HASELTON. That's correct, sir.
Senator SPARKMAN. I presume that is the reason you have the
charge on each check; is that right?
Mr. HASFLTON. That's correct, sir.
Senator SPARK AN. That is the differential?
Mr. HASELTON. We prefer to think of it that we are charging the
customer for the service he uses. If he doesn't use it we don't charge
him.
Senator SPARKMAN. And that is 15 cents for each check?
Mr. HASELTON. Yes, sir.
Senator SPARKMAN,-. How many checks will the average NOW ac-
count holder draw a month?
Mr. HASELTON. Our experience in the 9 months we have had the ac-
count, Senator, is that the number is five. That is the average number
147
that we have seen each month for the 9 months we have had the
account.
If I may, gentleman, I would also like to make this point. When the
supreme judicial court of the commonwealth handed down its deci-
sion in May we requested of our bank commissioner that the issuer pay
a lower rate of interest on these types of accounts be considered. It was
. ,deemed by her office to be not possible.
Our position with respect to the position outlined by Governor
Mitchell is consistent with what we originally proposed to try to do.
If I may also, I would like to make one final request of this com-
mittee. I would hope that if the recommendations of Governor Mitch-
ell in some form and Chairman Wille in some form are enacted into
law that in the meantime those presently holding NOW accounts
in Massachusetts be allowed to continue because I would like to believe
it would be fair to them if they could do so.
Mr. Chairman, what I am trying to say is while you are studying
the issues-
Senator McIN Trau. There are all sorts of possibilities that might
occur here. As I hear the testimony, I think you are in the right direc-
tion. I don't know whether you are going too fast or whether you
are unfair or whether you are threatening the banking industry. I am
not that brilliant.
But there are forces that want you phased out.
So, I am not making any promises.
Senator BENNETr. We will hear from them next.
Senator MCINTYU. I am delighted, as I said in the beginning, that
you are out in the frontier, and I think you are moving in the right
direction. Whether you are going to get there now or not, I don't
know.
Mr. H sELToN. Before coming to Worcester I was 3 years in New
Hampshire.
Senator McINTYRE. That speaks very well for you.
Senator BENNmIr. You mean he is working his way out now?
Senator MCINTYRE. What he did, Senator Bennett, all the good
things and good principles he learned in New Hampshire, he has now
taken down to a much more fruitful monetary field.
Senator BENNirr. A place where they have more money.
Senator McINTym. All my rich cousins live down there.
Thank you, gentlemen. We appreciate your coming.
rThe prepared statement of Mr. Haselton follows.
148
Statement of Ronald W. Haselton, President
Consumers Savings Bank
Testimony On S.1008
March 21, 1973
Before Sub-Committee On Financial Institutions Of The Senate
Committee On Banking, Housing And Urban Affairt
Mr. Chairman, my name is Ronald W. Haselton, I am President of
Consumers Savings Bank in Worcester, Massachusetts.
I welcome this opportunity to present my Bank's views on S.1008,
specifically Sections (2) and (3).
Consumers Savings Bank sought and achieved the negotiable order
to withdraw called NOW through the courts in Massachusetts. We
did so because we believed completely in service to the people.
THE RATIONALE OF NOW
The greatest number of depositors in my Bank are people of limited
means. People 65 years of age and older hold 56.3% of our total
deposits and 43.4% of our total number of accounts.
1
For these
people the savings account, social security check and retirement
income are the only source of income for living. This condition
exists in almost every mutual savings bank.
Should our depositors have to come to the bank or use mail (and
this Committee knows how fast mail service is today) in order to
do modest banking and pay bills? In our community, public
transportation is limited and expensive and older people with
physical infirmities find such trips very difficult.
1 See Consumers Savings Bank, "Total Deposit Base"
Consumers Savings Bank
Total Deposit Base
1) Elderly Depositors
2) Family Unit -
Wage Earner
3) Younger Citizen -
Student
Age
65+
Average
Balance
I %Total
Number of
I
Number of
Accounts Accounts
t r
r
$4829
25-64 $2591 2
$932
27872
:8846
7
7312
%Total
$
43.5
45.01
11.39
56.3
40.9
2.82
- I I
".d
150
Should these same people have to stand in line - all too typical
of banks at certain times of the month - to secure Treasurer's
checks or personal money orders for the payment of their few small
bills? In our bank alone, we sold 90,000 personal money orders,
on average, for each of the past five years.
Why should these people be forced to maintain two deposit
relationships at two different banks in order to receive the
highest rates on their life-savings and at the same time for the
convenience of paying their few bills from their homes? Prior to
the NOW, there was no other choice.
Finally, are regular savings deposits payable on demand? If a
depositor put $50.00 in the bank in the morning, he can take that
$50.00 out the same afternoon. By law, these deposits are subject
to emergency notice requirements which have not been exercised by
any Massachusetts mutual savings bank in over 40 years. By law,
all deposits in every type of institution in Massachusetts are
subject to emergency measures by the Governor of the state to
suspend payments of any outstanding withdrawal instrument whether
by a so-called check or NOW.
As a bank charged by law to seek means to promote thrift and well-
being of depositors, we were forced to take action in behalf of
those individuals who are depositors of our bank.
S151
A RESPONSE TO MAJOR CRITICISM
Savings Versus Demand Deposits
The difference in the method of withdrawing funds has never been
the distinguishing hallmark between types of bank accounts. Bank
accounts differ from one another by reason of the statutory powers
of investments of bank deposits more than any other factor. The
important distinction between commercial banks and thrift institu-
tions is set forth in the landmark Savings Bank of Baltimore case
at Page 474: "The principle thrust of Professor Morton's testimony,
however, was that the basic distinction between a commercial bank
and a savings bank is the commercial bank's ability to create money
through the extension of credit. In simple terms, this means that
the demand deposits of a commercial bank, being part of the nation's
money supply, can be made available to a borrower by a bookkeeping
entry, and may, in fact, never leave the bank. Time deposits of a
savings bank are, theoretically, at least, fully invested; not
immediately spendable; and not regarded by economists as part of the
money supply."
Much has been said about the NOW as a means of paying interest on
demand deposits. For anyone to confuse savings deposits with demand
deposits because of the manner in which they are withdrawn, is to
totally ignore the regulations governing bank investment and whether
or not such funds are used in whole or in part in the nations's
money supply.
152
Savings banks and savings and loan institutions are the most
closely regulated of all banks regarding investments. The use of
negotiable orders to withdraw has not changed the character or
functions of these institutions.
The savings bank does not become a commercial bank merely because
a withdrawal of dividend or deposit is made by a negotiable instru-
ment. Negotiability is strictly for the convenience of transferring
funds and making the banking system work. Negotiability has nothing
to do with the regulation of banks and to restrict the method of
withdrawal because it happens to be from a savings deposit as against
a demand deposit is, I submit, unconstitutional discrimination.
This Committee in understanding this basic difference between the
functions of savings accounts and demand deposits, understands that
the method of withdrawing monies has no impact on the functions and
purposes of accounts. This is the reason why our State Supreme
Judicial Court, and the State Supreme Court of Maryland have allowed
the use of negotiable withdrawal orders for depositors of savings
banks. As the lower court of Maryland said in the Savings Bank of
Baltimore Case:
"If, as would seem to be conceded, a depositor of the bank,
on making a withdrawal, has the option of requesting cash,
or a Treasurer's Check, or of purchasing a money order, it
seems abundantly clear to us that according him a further
option of drawing a check on his own account, whether or
not he presents his passbook, is a distinction without
difference."
153
Escalation In Mortgage Interest Rates
Bankers have said that the NOW might tighten the supply of mortgage
money and increase the cost of family shelter. It is alleged that
banks offering NOW's would charge more for the money they lend,
tending to favor high yielding investments and some securities over
residential mortgages and that this new account service is bound to
be costly and would impose new pressures to increase earnings. I
submit that this is a clear misunderstanding of the basic legal
restraints on investment powers. Pricing money should have nothing
to do with extending services to those who require them. Outside of
inflation, the most serious additional cost to a bank borrower has
come from the avalanche of services and give-away programs. These
same factors have had a negative effect on bank earnings. These
"gimmicks" are for the benefit of the few and certainly not in the
interest of the many, or their communities. Our bank has 75.9% of
its deposits invested in residential mortgages. We have for 119
years supported the social responsibilities to the public implicit
in providing decent shelter.
In 1966 and in 1969/70, we saw a substantial outflow of deposits to
open market instruments paying rates of return substantially higher
than savings bank dividends. We could loan only that portion of our
monthly payments which was not needed to meet the demand of with-
drawal of funds.
154
Who will finance housing? 'With Federal subsidies for mortgages
no longer available and the Federal Government financing stagger-
ing amounts of public debt, the growth of savings in the "full
service" or "one stop" bank becomes critical to the supply of
residential mortgage funds. From 1962 through 1971 savings and
time deposits in Massachusetts commercial banks increased 276.8%
while savings banks grew 89.7%. Of the total savings deposits
in Massachusetts,, insured commercial banks in 1971 reached
$1,946,000,000. Their total residential real estate loans were
$690,000,000 or 35.5%. Savings banks had total deposits of
$12.6 billion with 73.3% invested in real estate mortgage loans
(source - Mutual Savings Central Fund, Federal Deposit Insurance
Corporation).
It is estimated by the Savings Bank Association of Massachusetts
that 85% of the total mortgage loans for savings banks are invested
in residential real estate.
NOW ACCOUNTS AT CONSUMERS SAVINGS BANK
In my bank, a person who opens a NOW Account receives a printed
set of rules and regulations governing the use of the account and
acknowledges this receipt by signature. These rules specifically
and clearly state that this savings account is subject to the
requirements of a notice to withdraw in accordance with the By-Laws
of the bank, as well as the action of the Commissioner of Banks.
155
He is also told that a charge of 150 will be made for each NOW
not used in the bank.
Each negotiated draft is cleared through our local commercial
'bank correspondent. For a charge of 8 per draft, this bank
presents the drafts to us daily. We charge each individual
account for the drafts in the clearing and then pay the corres-
pondent the total amount of drafts presented. The customer
receives a monthly statement which itemizes all transactions,
subtracts charges and adds interest. In Massachusetts, we are
required by the present regulation of our Bank Commissioner to
pay 5 1/4% interest on money deposited so long as the balance
does not drop below $10.00.
We believe that our operation to date has been modestly profit-
able. We anticipate that it will become more profitable as the
number of accounts and total balances grow. To accomodate the
activity from these accounts, we have added one clerk and we do
not anticipate any further expense in operating up to 5,000
accounts. Footnote #2 following compares the operation of NOW
Accounts with the operation of a checking account.
CONSUMERS SAVINGS BANK
ESTIMATED PROFITABILITY OF NOW ACCOUNTS VS. CHECKING ACCOUNTS
NOW
ACCOUNTS
Gross Income - Investments
- Service Fees
Operating Costs - Paper Processing
- Other (including advertising)
Dividends - 5.4% Effective Rate
Estimated Income (Loss)
Assumptions Used - Number of Accounts
- Average Balance
- $ Outstanding
- Monthly Transaction Volume
- Gross Income Return
$355,000
21,600
29,000
45,000
259,000
333,000
$ 43,600
4,000
1,200
4,800,000
6
7.4%
CHECKING
ACCOUNTS
$ 48,000
34,000
45,000
79,000
$(31,000)
4,000
300 *
1,200,000
12 *
4% *
If the $900 difference were put in a savings account, earnings of $18,000 would be
realized, computed as follows: $900 x 4,000 accounts x .005 (CSB's 1972 pre-tax
return against average deposits)
COMPARISON OF NOW ACCOUNT ACTIVITY TO SPECIAL CHECKING ACCOUNTS
AVERAGE SPECIAL
NOW (1) CHECKING (2)
Number Of Accounts
Amount Outstanding
Average Balance Per Account
Number Of Withdrawals Per Month
Number Of Withdrawals Per Account Per Month
Amount of Withdrawals Per Month
Withdrawals As A % Of $ Outstanding
1,893
$2,304,355
$1,217
9,000
4.8
$ 700,000
30.4%
34,139
$10,898,441
$319
409,668
12
$ 4,977,449
45.7%
NOTES: 1. December Activity
2. Taken from 1971 (latest data available) Federal Reserve functional cost
analysis - 160 banks with deposits over $200 million.
w-
CONSUMERS SAVINGS BANK
History of NOW Account Balances
Balances No. Of Average
DATE
000's Accounts Balance
June 30, 1972 $ 283 227 $1,247
July 31, 1972 646 494 1,308
August 31, 1972 1,174
916 1,282
September 30, 1972 1,598 1,249 1,279
October 31, 1972 1,944 1,564 1,243
November 30, 1972 2,192 1,765 1,242
December 31,'1972 2,429 1,921 1,264
January 31, 1973 2,862 2,149 1,332
February 28, 1973 3,212 2,381 1,391
The above illustrates the moderate growth of NOW Accounts in terms of
amount outstanding, number of accounts, and average balance since they
were first offered to our customers in June 1972.
Even though the number of accounts and the average balance has steadily
risen, the average activity per account has remained at about 5 per
account per month.
At the end of February 1973, NOW Accounts represented 1.6% of the total
deposits of the Bank.
158
IN SUMMARY
My bank, in Worcester, Massachusetts, in pioneering negotiable
order of withdrawal services has struck a blow for the average
man. We added a little convenience to this life in order that
he might enjoy his hard-earned leisure time (see Exhibit A).
We did not change the functions of a savings bank nor disrupt
the functions of a commercial bank, for each of these institu-
tions must continue to comply with the law regarding the proper
investment of funds.
I should like to point out that commercial banks in Worcester,
Massachusetts, and around the nation will not charge him to
transfer his funds, will pay him interest on his savings account
and will provide these services for a minimum of $100. deposit
in his savings account (see Exhibit B).
With the introduction of S.1008, it is obvious that there are
those who realize that the negotiable order to withdraw is not a
threat to the banking system but merely a convenience to the
working man. With the passage of S.1008, the depositors of mutual
banks can be assured that their best interests are not lost in a
wave of inter-institutional competition. I hope and trust that on
reflection, this Committee will insure the use of negotiable orders
so that the average person who tries to save will be granted some
small personal convenience in this hectic world.
159
Why shouldn't every institution serve its customers in this
contemporary manner? And why shouldn't we encourage more thrift
by giving this convenience to savers? Let this Committee help
the people, not the vested banking interests!
Mr. Chairman, members of the Senate Sub-Committee on Financial
Institutions, Consumers Savings Bank endorses wholeheartedly
S.1008.
.xhibit A
NOW Account Marketing - Features and Benefits by Market
1) Elderly Depositors
a) Safery
I) Elimination of cash transactions
2) Automnt:c records keeping
b) Cnveniencc
Ill health, lack of transportation, inclement weather can be and often are serious obstacles
for the elderly in the management of financial affairs.
c) Added Income
A savings account as the basic banking relationship stretches minimal income to its fullest.
d) Automatic Funds Transferal
The social security check is the single most important factor in the lives of a majority of
elder citizens. having these funds transferred automatically from the Treasury Dept. to
the Bank (see following) combines the features of safety, and convenience together with the
accessibility of the interest bearing NOW account.
2) Family Unit - Wage Earner
a) Safety
b) C1 nvenience
c) Goal/Emergency Savings
Encouragement of the thrift habit at a time when the accumulation of savings is most dif-
ficult. The ability to utilize accumulated goal savings at the time, place, and for the
reasons deemed appropriate by the depositor.
d) Automatic Funds Transferal
Appropriate particularly to Welfare disbursements through Dept. of Public Welfare (s I'e
attached). This service combines features of safety and convenience while providing
m,,dest dividend earnings to subsistence income.
C) Family Budget
Typically the family budget involves disbursals of two kinds: I) )aily. weekly, and
regular monthly bills: 2) Periodic payments - insurance, taxes, etc., quarterly and
semi -annually. In order to meet periodic payments, funds are set aside from regular
income o,,ver time. Having those funds accumulate and grow in an interest bearing
account which has convenient disbursement capabilities encourages the thrift necessary
to accumulate these important funds.
3) Y,,unger Citizen - Student
The mobility of younger people, particularly the student. presents geographical obstacles
to sound financial management. Convenience. additional dividend income, safety and
record -keeping all combine to benefit this age category.
(over)
Exhibit B
Trends to Automatic Transfers in Commercial Banks
A Louis Harris survey indicated that 47% of the public would like to receive one monthly statement
for all of their banking needs. In the past two years more and more Massachusetts commercial
banks have introduced "one statement banking", as well as automatic payroll depositing by corpora-
tions.
- Nationally. two projects, one in California known as SCOPE (Special Committee on Paperless
Entry) and the other in Atlanta, Georgia, called COPE (Committee on Paperless Entry) provide
a service which eliminates "checking." It will additionally involve the commercial bank's take-
over of the savings function, by-passing the savings & loan function.
Excerpt from Annual Report 1972, The First National Boston Corporation which owns the six
billion dollar First National Bank of Boston:
On the whole, the year was a satisfactory one for 'ur personal banking activities.
Individual checking accounts registered a small gain in numbers with an increase of re-
lated demand deposits of about 4%. More recently the competitive situation has been
further complicated by the introduction of a number of local savings banks .)f the NOW
account, (Negotiable Order to Withdraw) which offers the customer the equivalent of
an interest bearing demand deposit account. We were quick to counter with liberal pro-
visions for our charge-free checking accounts, currently held by more than 40%, of our
customers, whereby both savings and checking balances qualify for the $100.00 minimum.
Savings deposits, by contrast, continue the strong upward trend which has been main-
tained over the past five years. T'he gain for 1972 was some 207,; that over the longer
period was a solid 8097. Further, our continuing survey indicates that we are in-
creasing )tir share of the market....".
- A sCrvicc provided by a Massachusetts commercial bank provides 24 hour a day 7 day a
week transfer of savings funds to checking accounts. If this "Teller/Phone" service is
wide:Iv ursed in -hc U.S., the aggregate demand deposit balances will be substantially
reduced. (see attached ad copy)
162
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Slop in ofok bor* or* los tie MwoWnd w yoismonry to
fte savings ooulx that has toe NOW..."h sovlngs ocomu
w WS isyou go yoke ma YonySfyu vwr 0t
COkSU,
4
NI
SAVINGS
BANK
163
beca chcing
wasn't bor free
Guaranty would like to set Your
free, Keep $100 in savings and get
free checdng-no service charges.
Having both accounts on one
count number allows you
to brWnW between them.
Aatomatlcltb By mail. By
Teidphone. It's wild.
Guant/as Tota Service
Cheddng AooounL
r GuaraMy Bank
-.. ask us about Rti
To tm fro m igst cmcdng orcheclo weig
Ute11eibsc
24
Lourbanlktg
In W f or aywem n MasOeceI t dki the npjmuba
1-800-262-2977
To bmsfel from avi ng to chcldng or checdng to savings
24/
zbankig
In Worcester or anywhere In Masschuet dl" the t rMamberf .
1-800-262-2977
QGuwmnty Bank
164
Now,.ifyoure a Guarant Bank monthly
sine statement custom, you can do
you bankng ,, , w"We ,
Guaranty
htroduces
24 hour banking
Now... for the first time anywhere you can bank 24 hours a day by
telephone wt neveryou want to, whereveryou want tot
J tel7i"x s'lets you transfer from yor savings to your checking of
loan accounts or, from your checking to your savings or loan accounts.
With a quick, easy phone call to 1-800-262-2977 toll free anywhere in
Massachusetts, including the Worcester area. Elsewhere a toll call to 1417-
791-8365. All you need is to have your checking, savings and loan accounts
on a single number. Its a cinch to open or switch to Single
Statement at anyGuaranty office t yoWsuta Free.
No forms. Were trying to uncomplicate your life ... MOB h.mty
day or night, 7 days week. asl ymoe.
wheevet you are
Guaaty Bank
... mnore b3ank for you monw
24 hours every day
16~5
NOW
Tfe t ith- dubu
Mywtiere
And ~ y %n t~ w v~ots ffney write you".Of some. Or orwnels 9Wou
waON to pay Aler om, itsyoij money and you OWNt to be able to W" it
%""wev you wort it, The N O.W Wes you do Wus tW.. .koelike a
cheki ggvi. Iv ou9 the Ui Sx% irtefest thal you hm7e yowx
Stop in today (perhps your last visit tooa borr) and transfef yow, savings
accourt to our bor* .. the bariktweo you oan got a
savings accout to go.
COSUMEtS
SAVINGS
BANK
"Pernonet Kvngsare
ou*oi~hecn dg
now.Welu fa uetclde
os much aswecon unliwe
have enough for the par-
ftcularitg we need. Then
we gobuyIt."
"1 getlh 0 arnourtlo lve
on.see?..Aothewhoie
bog:11loobclal
room.foodEve/llIe
W hemyw ow?"
Ame Kou a yount oplMh
sawe up for ceiaun plannd
WMen you -lay away" for something, you don't get rmuch help Lay away
yvo money in a savings bank where you gt the most interest anywhere
a full 5-4/4% And whole you re at it make it o K)OW account at
Consumers so that when the time comes. you ju" wr te out a NOW
at the store. just like a personal chec'
It couldn't be easier, and it couldn't be more Irotitable Check it out right
away The NOW Because eveyyoung family needs all the help it can gel
T tW rm CO U ERS SAVINGS BANK Ev,, ,.%,ww ,,,,, ofw.,a
Areayou a sudeni trying o m e
Iail fth way through school?
We know tots of you spend a lot of time running back and forth to fthe
bank, because your money earns the most interest in a savings bank,
and to you, lthe,hassle is worlh it The NCIW account remnoes the
hassle You get your money by writing NOWs lust like a personal check
ana still have you 5-1/4% interest besides
Study up on like right away As long as we're helping more students
into college than any other Wo:cester bank, we might as well make It
easier for you once you're there
The N.Wfvom CONSUMERS SAVINGS BANK smo ,,,n,,o,,,o,,,n ,,,n.w
N4
needmasntch Wxcmm
alI cangmtf
Are you a Senior Cfiten who Eve
on your molH income?
at never seerns to beenofi, does rtThfswhy o unxlerstand the wsctomnot
pjtng"xx nxr''osngs bank vkeeou get the ery Ng-iest interest rate
The N O W aconit at Connrnersgives vcaIl that, plus tie conveniencect not
tng towne to the bank because hf od vveater lock of franspotvton orany
other reasoYn)~a rcte Srptypaiywo~rtnpht WcfA'savings ocxxuV
frcrnvoiw ownhane bvvvnbfngo NOW t
Ybu can find Wall o i t by calling 754-2653, and askfo ta PLMRt Mcmao
The NO trm COSMERS SAVINGS BANK Sgeoo~lmmo ndw. ammdngconut
168
169
The N.ON.
It lets you withdraw
anytime, anyplace --
to anyone without
coming to the bank.
Ask us about it.
170
Senator McITym . We will call as our next witness, Mr. Tom B.
Scott, Jr., who will be accompanied by Mr. Stephen Slipher, repre-
senting the United States Savings and Loan League.
We are happy to welcome you here this morning, gentlemen. We
have your statement which will be included in the record in full. I
think you probably heard my admonition about Regulation Q. but
the NOW accounts or anything else you want to say, we would be
happy to hear, and any highlights or important points you want to
make to save us time would be helpful. We have three more witnesses
after you, and it is now almost 11:30.
Anything you can do to expedite, but I don't want to interfere on
your ability or desire to make your case.
STATEMENT OF TOM B. SCOTT, JR., UNITED STATES SAVINGS AND
LOAN LEAGUE; ACCOMPANIED BY STEPHEN SLIPHER
Mr. ScoTr. Our prepared statement which we submitted to the com-
mittee is only seven pages long. But I could make it considerably
shorter in view of the points that have already been covered. So, with
your permission, I will present about half of my statement and then
take a minute or 2 to specifically address the question from the point
of view of the consumer.
I am Tom B. Scott, Jr., of Jackson, Miss., and I appear here as
legislative chairman of the United States Savings and Loan League.
I am accompanied by the legislative director, Stephen Slipher. Since
this is the U.S. League's first Senate committee appearance of the 93d
Congress, I will identify it briefly.
The United States Saving and Loan League has 4,800 members,
with about 98 percent of the total assets of the business. This includes
all types-large and small, Federal and State, insured and non-
insured, mutual and stock. At the March meeting of our national
board of directors, our position on this legislation was discussed and
app roved overwhelmingly.
So, I have confidence that it is truly representative of current "sav-
ings and loan" thinking.
In summary, we support: (1) A-2-year extension of rate control;
(2) a prohibition on NOW accounts; and, (3) enactment of the mod-
ern plan of financing the Federal Savings and Loan Insurance
Corporation.
In terms of pending legislation, this amounts to support of S. 1256
and S. 892, introduced by Senators Sparkman and Tower. Rate con-
trol extension has broad support, as you know. Since rate control
appears to be noncontroversial, I will skip to the middle of page 2
regarding extending rate control to the State of Massachusetts.
Enlarging the scope of rate control, since section 3 of S. 1256 also
relates to rate control, I will discuss it at this point. The general posi-
tion of the U.S. League is that Federal rate control should extend
to all financial institutions anywhere in the Nation that are actively
soliciting savings from the public whether they have Federal insur-
ance or not. When institutions of $100 million in size are advertising
-daily in the Washington Post, it defeats the purpose of rate control
171
if they can offer a 6 percent passbook account, compared to the 5 per-
cent ceiling on federally-insured associations. I refer to several Mary-
land State insured savings and loans.
However, in the interest of expediting the legislation, we will not
press the point of extending the coverage of rate control to all deposit-
type institutions throughout the Nation. S. 1256 would extend rate con-
trol to those States in which nonfederally insured institutions hold
more than 20 percent of the total savings-a condition that exists only
in Massachusetts. In that State, the nonfederally insured savings banks
and State-chartered savings and loan associations--known as coo ra-
tive banks--have more than $15 billion in savings, which is actually in
excess of the total savings deposits in commercial banks and federally-
insured thrift institutions.
The absence of rate control over savings banks, handcuffed the
Federal agents in attempting to deal with NOW accounts when these
instruments first appeared last fall.
Senator MOINTYRE. What do you mean attempted to deal with them?
Mr. Scorfr. Control them.
Senator MCINNTYRE. Put a squelch on them, right?
Mr. ScoTr. Yes, squelch.
Senator MCINTYRE. OK.
Mr. Scorr. It is imperative that Federal rate control be extended
to Massachusetts so that at least the partial solutions can be arrived
at by drawing rate distinctions between NOW accounts and regular
savings accounts and/or between institutions that offer NOW accounts
as compared to traditional thrift institutions.
Now, I would like to skip the descriptive paragraph about NOW ac-
counts and turn to the top of page 4. Changes in financial services
required study. We certainly do not intend to imply that there can
never be any change or innovation in financial services. Indeed, every
study or projection of the long-range future of financial institutions
recognizes the impact of the computer and electronic transfer systems.
Inevitably, there will be changes in- the way Americans receive their
checks, pay monthly bills, and make major purchases. Some version of
a "less-check" society is coming, but there is wide disagreement as to
Just what institutions will be engaged in this area and what changes
in the financial structure will be required.
The savings and loan business has for sometime looked into the
question of checking accounts and the type of changes and restrictions
that might be necessary or desirable if we moved in that direction.
We never reached the point of questioning congressional action and
are not ready at this time to present a ong-range blueprint to Con-
gress. We feel that this is a major area which would be considered
along with other basic proposals which we understand President
Nixon will submit to Congress based on the Hunt Commission report.
Senator MCINTYRE. Where did you let that information, the Presi-
dent is going to submit something to us.
Mr. So0r. We have been under that impression; yes.
Senator MCINTYRE. Haven't you been for years very close to a NOW
account I For instance, when I took out a mortgage here, the first time
172
I took out a mortgage in Washington, I got involved with a savings
bank, and I found out that they would not escrow, for instance, my
taxes.
Later, when I got involved again, I went directly to a savings and
loan, because I wanted to have that advantage of being able to have
these people take that money out, make that monthly statement, and
put it aside so I would have my taxes. Now, I am told, too, that you
can-I think yesterday they testified to-the fact that public utility
bills you can pay on order from your depositor, also you could pay sewer
and rental charges-could you not?
Mr. ScoTT. Yes.
Senator MCINTTYRE. So, you might have two or three, in effect, pay-
ments that you made on my behalf over a period of time and, as I un-
derstand it, this NOW account in Massachusetts, for instance, where
they penalize you and say if you want to write 20 checks, go ahead, we
are going to charge you 20 checks; ouch, I am not going to write that
many; if you write five or six, it is all right, but I can't see that you are
that far apart, and I can't see why you people object to the NOW
account theory.
Mr. Scorr. I think our objection runs to the philosophy of the idea.
If this spreads nationwide. it could be very troublesome,/I think, and
this is our concern about it.
Senator MCINTYRE. Are you going to tell us why it would be very
troublesome or have you already told us?
Mr. Scorr. I think it relates to the control of money which is es-
sential at this time in our history, and if this became widespread, I
just don't believe that, the supervisors of finance could control it. It
would just get completely out of hand. I think Congress would have to
end up legislating something to get it under control.
Senator M.%CINTYRE. All right.
Mr. Scorr. I will continue. I am on page 4.
The savings and loan business has for some time looked into the
question of checking accounts and the type of changes and restrictions
that might be necessary or desirable if we moved in that direction.
We never reached the point of questioning congressional action and
we are not, ready to present. a long-range blueprint right now. In the
meantime, we are faced with the problem of the actual existence of
NOW accounts in Massachusetts and New Hampshire. and their pos-
sible spread.
Section 2 of S. 1256 would prohibit these accounts. We endorse this
section. I am on page 5. the paragraph at the bottom of the page. There
is virtually universal agreement that NOW accounts in their plisent
form require some affirmative legislation or regulatory action. Even
their advocates agree that these accounts should be subject to liquidity
reserve requirements similar to the reserve requirements for checking
accounts in banks. Almost everyone agrees that there should be interest
differentials between these accounts and the regular savings accounts.
It is generally conceded that if savings banks can have NOW ac-
counts, then other financial institutions should have them also. The
point is that these are complex questions and relate to many other
173
questions which the administration intends to deal with when it sends
proposals to Congress in June, implementing the Hunt Commission
report.
Tn the long range, something may be worked out with respect to
reserve requirements and interest rate differentials so that interest-
bearing checking accounts can exist in an appropriate relationship to
the "old-fashioned" checking account on the one hand, and the "old-
fashioned" savings account on the other hand, but rate control must
be extended by June 1 and something must be done to keep the exist-
ing NOW accounts from spreading Further, particularly across State
lines.
We conclude that the practical method of dealing with this subject
is to enact a prohibition and then proceed to study the underlying
issues. Enactment of S. 892 is essential.
As the Chairman said yesterday, this insurance corporation pro-
posal appears noncontroversial and I will skip it other than to say
that the U.S. League certainly endorses it.
Senator, that does complete my statement.
Senator MCINTYm. On page 5, you say at the end of the first para-
graph, "The question is what will be the impact of these accounts if
they continue to grow and if they spread throughout the Nation." You
seem to have some ominous feeling insofar as the industry is concerned.
Mr. Scor. Yes.
Senator MCINTYRE. I just want to say we had Hon. Frank Wille,
the Chairman of the Federal Deposit Insurance Corporation; we had
Hon. Carl 0. Kamp, Jr., Acting Chairman of the Federal Home Loan
Bank Board. and this morning, we have Mr. Mitchell of the Board of
Governors of the Federal Reserve Board, and certainly they all agree,
as you have stated so well on page 4, these areas of agreement, that
there has got to be fairness, that we have got to move slowly and we
have got to control them.
As Mfr. Wille said, you might let it go unless it gets out of hand
and then move in to cut it down, use it as sort of a laboratory. None of
them came in here with the feeling that this was such a departure
from the normal, that it portended today great harm to the overall
industry. I do appreciate the fact what your feelings are, it is very
troublesome.
Senator BEN.-E,-k;,rr. What is your reaction to the testimony of Mr.
Mitchell this morning, since I assume you were here and heard it?
Mr. Sco'rr. I will let Mr. Slipher answer that.
Mr. SLIPHER. Mr. Scott was detained a little bit this morning and
didn't hear it all.
First, I think it shows the benefit of these hearings, because Gov-
ernor Mitchell has presented a pretty concrete plan. We just had a
lot of rumors before.
Our off-hand reaction is he has presented about half of the Hunt
Commission report. He has presented the guts of the Hunt Commis-
sion report in advance. It is a complicated thing. It involves reserves
for thrift institutions, Federal Reserve membership, changes in the
interest rate rules. Frankly this is why the Hunt Commission report
has been about 3 years getting up here.
93-211 0 - 73 - 12
174
There are very big questions. The Hunt Commission goes on a num-
ber of other things, which Governor Mitchell didn't spell out, such as
taxes and State supervision of institutions. It is a very big package.
As Mr. Scott indicated, I just don't see how the committee could re-
solve all those questions on a rate control bill. I think you would have
about a year's job in trying to resolve reserves, membership in the
Federal Reserve and realignment of interest rate differentials.
I think it is a matter of timing, Senator. As Mr. Scott said, we see
this coming down the road sometime.
Also, as Senator Sparkman said, we are not ready to lose our spe-
cialization as housing institutions yet. This would be a gigantic step
toward taking savings and loans into the general banking business,
and we know if we did, we would lose our specialization. On balance,
we are not ready to do it-we are not ready to do it.
Senator BmNNETT. No other questions.
Senator McIzTnm. I want to thank you, Mr. Scott, and thank you,
you, Mr. Slipher, for your appearance herb this morning. We appre-
ciate your testimony.
[The complete statement of Mr. Scott follows:]
175
STAT ENT OF
TOM B. SCOTT, JR.
LEGISLATIVE CHAIRMAN
UNITED STATES SAVINGS AND LOAN LEAGUE
BEFORE
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
OF THE
SENATE BANKING, HOUSING AND URBAN AFFAIRS COMMITTEE
RE: S. 1256
S. 1008
(RATE CONTROL AND "NOW" ACCOUNTS)
AND
S. 892
(Federal Savings and Loan Insurance Corporation Premiums)
March 21, 1973
The United States Savings and Loan League has a membership of 4,800 savings
and loan associations, representing over 987. of the assets of the Savings and
Loan business. League membership includes all types of associations - Federal
and state-chartered, insured and uninsured, stock and mutual. The principal
officers are: Richard G. Gilbert, President, Canton, Ohio; George B. Preston,
Vice President, West Palm Beach, Florida; Tom B. Scott, Jr., Legislative Chair-
man, Jackson, Mississippi; Norman Strunk, Executive Vice President, Chicago,
Illinois; and Stephen Slipher, Legislative Director, Washington, D.C. League
headquarters are at 111 East Wacker Drive, Chicago, Illinois (60601); and the
Washington Office is located at 1709 New York Avenue, N.W.. Washington, D.C.;
Telephone: 785-9150.
176
STATEMENT OF TOM B. SCOTT, JR., LEGISLATIVE CHAIRMAN, UNITED STATES SAVINGS
AND LOAN LEAGUE, Re: S. 1256, S. 1008, S. 892
I am Tom B. Scott, Jr., of Jackson, Mississippi, and I appear here
as Legislative Chairman of the United States Savings and Loan League. I am
accompanied by Legislative Director, Stephen Slipher.
Since this is the U.S. League's first Senate Committee appearance
of the 93rd Congress, I will identify it briefly. The United States Savings
and Loan League has 4,800 member savings and loan associations with about
98 percent of the total assets of the business. This includes all types --
large and small, Federal and state, insured and non-insured, mutual and stock.
At the March meeting of oar national Board of Directors, our position on this
legislation was discussed and approved overwhelmingly. So, I have confidence
that it is truly representative of current "savings and loan" thinking.
In summary, we support:
(1) A two-year extension of rate control,
(2) A prohibition on NOW accounts,
(3) Enactment of the modern plan of financing the Federal Savings
and Loan Insurance Corporation.
In terms of pending legislation, this amounts to support of S. 1256
and S. 892, introduced by Senators Sparkman and Tower.
Rate Control Extension Has Broad Support
The continuation of the present law authorizing Federal agencies
to set ceilings on savings rates paid by banks and thrift institutions has
very wide support from both the public and private sectors. Support comes
from the financial community -- commercial banks, savings banks and savings
and loan associations -- from housing groups such as the Home Builders and
Realtors -- and from the Administration and many members of Congress.
177
Since there is such overwhelming support for rate control, I have included
my general comments on the justification for controls as a supplement to
this statement which I will not read, but hope will be placed in the record.
I would like to call your attention to the paragraph in the supple-
ment dealing with differentials. Since rate controls were established in
1966, Federal agencies have honored the original Congressional intent that
thrift institutions mui eathorized to pay a higher savings rate to
compensate for their lower earning power and their inability to offer the
public a full package of services -- including checking accounts, personal
loans, trust departments, etc. This difference should be restated because
quite a few years have elapsed and there is an evolution in the personnel
at the various Federal agencies who establish these savings rate ceilings.
Enlargini the Scope of Rate Control
Since Section three of S. 1256 also relates to rate control, I will
discuss it at this point.
The general position of the U.S. League is that Federal rate con-
trol should extend to all financial institutions anywhere in the nation
that are actively soliciting savings from the public whether they have Federal
insurance or not. When institutions of $100 million in size are advertising
daily in the WASHINGTON POST, it defeats the purpose of rate control if
they can offer a 6 percent passbook account, compared to the 5 percent
ceiling on federally-insured associations. I refer to several Maryland
state insured savings and loans.
However, in the interest of expediting the legislation, we will
not press the point of extending the coverage of rate control to all deposit-
type institutions throughout the nation. S. 1256 would extend rate control
178
to those states in which non-federally insured institutions hold more than
20 percent of the total savings -- a condition that exists only in
Massachusetts. In that state, the non-federally insured savings banks and
state-chartered savings and loan associations (known as "cooperative banks")
have more than $15 billion in savings, which is actually in excess of the
total savings deposits in commercial banks and federally-insured thrift
institutions. The absence of rate control over savings banks handcuffed
Federal agencies in attempting to deal with NOW accounts when these instruments
first appeared last fall. Massachusetts does have state regulations for
rate ceilings but the Banking Commissioner determined that she lacked the
authority to deal with NOW accounts.
It is imperative that Federal rate control be extended to
Massachusetts so that at least partial solutions can be arrived at by
drawing rate distinctions between NOW accounts and regular savings accounts
and/or between inst .ritions that offer NOW accounts as compared to the
traditional thrift institutions.
NOW Accounts
The second section of S. 1256 would prohibit all financial insti-
tutions from offering interest-bearing checking accounts. By now, the
Subcommittee is familiar with the background on this subject. In a nutshell,
some savings banks in Massachusetts, after a court decision, and then in
New Hampshire, have established an interest-bearing checking account referred
to as the "NOW" account (Negotiable Order of Withdrawal). Through modern
banking history, it has been assumed that financial institutions could not
pay interest on checking accounts. It has also been assumed that thrift
Institutions could not offer checking account services on savings accounts.
Congress established the pattern when it prohibited interest on demand
179
deposits in 1933 and we have never seen any Congressional action to change
that position. Yet, by legal accident, savings banks are offering checking-
type services on 5 to 5J percent savings accounts in Massachusetts and New
Hampshire and there is no assurance that this will change unless Federal
legislation is enacted.
Changes in Financial Services Require Study
We certainly do not intend to imply that there can never be any
change or innovation in financial services. Indeed, every study or projection
of the long-range future of financial institutions recognizes the impact of
the computer and electronic transfer systems. Inevitably, there will be
changes in the way Americans receive pay checks, pay monthly bills, and make
major purchases. Some version of a "less-check" society is coming, but there
is wide disagreement as to just what institutions will be engaged in this
area and what changes in the financial structure will be required.
The savings and loan business has for some time looked into the
question of checking accounts and the type of changes and restrictions
that might be necessary or desirable if we moved in that direction. We
never reached the point of requesting Congressional action and are not ready
at this time to present a long-range blueprint to Congress. We feel that
this is a major area which would be considered along with other basic proposals
which we understand President Nixon will submit to Congress based on the
Hunt Commission Report. We are sure this Comittee will want to study these
matters carefully and we would expect to testify on that broad area when
hearings are held.
In the meantime, we are faced with the problem of the actual
existence of NOW accounts in Massachusetts and their possible spread.
Section two of S. 1256 would prohibit these accounts. We endorse this section.
180
The advocates of NOW accounts contend that these accounts have had no
appreciable impact on savings trends, financial competition, or interest
rate levels. Frankly, very few people have suggested that NOW accounts at
their present levels have created havoc in our financial system. But, these
accounts are in their infancy, constituting far less than 1 percent of the
savings business even in the affected areas. When you have accounts amounting
to such a tiny fraction of your total, you can do almost anything with them
in the way of free services, checking accounts, or give-aways, and it would
not be a life or death matter. The question is -- what will be the impact
of these accounts if they continue to grow and if they spread throughout the
nation?
We recall that only a few years ago, savings certificates consti-
tuted only 1 percent of our business. The rest was all straight passbooks.
Today, certificates represent 45 percent of our savings, which shows how
these things can change. Obviously, the savings banks expect NOW accounts
to grow or they wouldn't be conducting aggressive full-page advertising
campaigns. So, I think it behooves us to look at NOW accounts not in terms
of a small program today, but in terms of where we will be in a year or so
if legislation is not enacted.
There is virtually universal agreement that NOW accounts in their
present form require some affirmative legislative or regulatory action.
Even their advocates agree that these accounts should be subject to liquidity
reserve requirements similar to the reserve requirements for checking accounts
in banks. Almost everyone agrees that there should be interest differentials
between these accounts and regular savings accounts. It is generally conceded
that if savings banks can have NOW accounts, then other financial institutions
should have them, too. The point is that these are complex questions and
181
relate to many other questions which the Administration intends to deal with
when it sends proposals to Congress in June implementing the Hunt Commission
Report.
In the long range, something may be worked out with respect to
reserve requirements and interest rate differentials so that interest-bearing
checking accounts can exist in an appropriate relationship to the "old
fashioned" checking account on the one hand and the "old fashioned" savings
account on the other hand. But, rate control must be extended by June 1 and
something must be done to keep the existing NOW accounts from spreading further,
particularly across state lines. We conclude that the practical method of
dealing with this subject is to enact a prohibition and then proceed to study
the underlying issues.
Enactment of S. 892 Is Essential
Chairman Sparkman and Senator Tower have introduced the Adminis-
,tration's bill, S. 892, to provide a permanent plan for the financing of
the Federal Savings and Loan Insurance Corporation by its insured member
savings and loan associations. This legislation has been carefully drafted
after more than a year of study and consultation of interested parties and
we urge its prompt enactment.
Unquestionably, the insurance of deposits has been one of the
finest programs ever enacted and has been a major factor in the growth,
stability and service of financial institutions. The Federal Savings and
Loan Insurance Corporation is entirely financed by member savings and loans.
In the nearly 40 years since the establishment of the FSLIC, a variety of
payment plans have been used to deal with the changing times, the different
rates of growth and changing experience. It is significant that adjustments
have always been made in a timely and successful manner so that the insurance
182
program has always done its job. Currently, the Corporation is being financed
by transfers from previously paid-in prepaid premiums. Under existing law,
associations must resume the prepaid premium plan on Hay I since its reserve
ratio fell below the temporary ceiling of 1.60 on December 31, 1972. To prevent
a similar triggering of prepayments last year, the Congress unanimously
enacted legislation to reduce the reserve level.
A further reduction could be enacted now but it is far preferable
to adopt a permanent long-range plan that will provide the Corporation with
adequate strength on a more balanced financial method. The plan is S. 892
providing for an insurance premium of one-twelfth of 1 percent to be paid
partly in cash and partly by drawing on the secondary reserve which was
built up by prepaid premiums. The cash portion would vary between 30% and
707. as determined by the Federal Home Loan Bank Board based on the financial
needs of the Corporation.
The Bank Board is presenting a full explanation of this plan to
the Subco mittee and I want to simply state that the United States Savings
and Loan League concurs fully with the Board's position. It is a sound plan
which has the support of the Administration and the savings and loan business
and we know of no opposition to it.
We appreciate this opportunity to present our views to this
Subcommittee.
183
ATTACHIMENT "A" -- STATEKWIT OF TOM SCOTT, JR., BEFORE SENATE SUBCOMMITTEE
ON FINANCIAL INSTITUTIONS, March 21, 1973
SUPPL&(NrTAL CO11ENT ON RATE CONTROL
Rate Control Has Promoted Stabil.ty. Helped Housing
For the past several years, financial institutions have experienced
excellent savings growth at the same time this nation has been establishing
record levels of home building. It would be most unwise to jeopardize the
existing strength and -stability by removing rate ceilings at this time. Lets
not rock the boat.
Savings Rate War Would Drive Interest Rates Up
No one wants to return to the chaotic situation that originally
convinced Congress of the need for statutory controls. It is abundantly
clear that without rate ceilings, some -- or perhaps many -- banks, savings
banks, or savings and loan associations would increase their savings rate in
an attempt to achieve a quick competitive advantage. Competing institutions
would match the rate increase, which would drive all lending interest rates
up, particularly those on home mortgages. Ironically, this would happen with-
out really attracting additional savings -- just reshuffling it. With pressures
already apparent on the general interest rate structure, it would be most
harmful to compound it with a wave of increases in the "cost of money" to
financial institutions.
Savings and Loans Are Still "Home Lenders"
Those few who advocate a phasing out of rate control do so on the
assumption that savings and loans are on the verge of achieving equal operat-
ing powers with coazercial banks. This simply is not so. Commissions have
made recommendations, the financial press has engaged in speculation, and
individual financial spokesmen have made speeches on the subject. But, the
fact is that savings and loan associations today are virtually unchanged in
operating powers and practices compared with five or ten years ago. Of the
loans held at the end of 1971, 90.5 percent were residential loans, compared
to 92 percent in 1968. Stated another way, we continue to place all but 10
percent of our lending in single-family and apartment loans.
Even if the new powers now in the discussion stage -- such as
consumer loans and investments in corporate securities -- were to become
a reality, it would be far more than two years before these could have any
appreciable effect on the earning power of savings and loan associations
and probably a decade before all of the new authorities put together would
enable thrift institutions to compete with full-service banks. Even a major
new program such as mobile home loans (authorized for savings and loan
lending in 1968) constituted less than 1 percent of savings and loan lend-
ing activity by the end of 1971.
Differential in Rate Necessary
The fact that savings and loan associations have remained almost
exclusively home lenders and changes are extremely slow to come about leads
me to a second very important point. In addition to extending rate control,
184
it is imperative that Congress restate its intent that a difference exists
between rates paid by full-service commercial banks and the rates paid by
housing-oriented thrift institutions. -ince rate controls were established
in 1966, Federal agencies have honored the original Congressional intent
that thrift institutions must be authorized to pay a higher savings rate to
compensate for their lower earning power and their inability to offer the
public a full package of services -- including checking accounts, personal
,joans, trust departments, etc. This difference should be restated because
quite a few years have elapsed and there is an evolution in the personnel
at the various Feder4l agencies who establish these savings rate ceilings.
A simple but firm statement by the Co nittee that Congress intends to con-
tinue the rate differential is needed.
Flow of Savings to Home Lendina Institutions Must be Protected
This rate differential is the only practical means for assuring
an adequate flow of savings into thrift institutions and maintaining a
good supply of home mortgage credit. Not many savers will choose a
specialized institution such as a savings and loan association where the
savings rate is exactly the same as they could receive right in the insti-
tution where they do their family banking and maintain their checking account.
The significance of savings and loans in the housing market is
at an all-time high. There is attached a chart showing the mortgage lend-
ing statistics at the end of 1972. In the last "pie" chart, you will notice
that 65.7 percent of the increase in residential mortgage loans in 1971
and 1972 by private lenders was accounted for by savings and loan associations.
Our institutions dominate the home lending market because we have been
receiving a heavy volume of savings and because other financial institutions
which are not tied to hoping loans have shifted investments to corporate
securities and non-housing items. We have prepared an entire paper entitled
"The Case for Savings Interest Rate Differentials" which we will leave with
the Comnittee and which may be added to the Committee record if it is felt
appropriate.
185
AVINGS OIATIO an o MI 2IAL
JCRTGAGE LOANS OLflSTANDING, YEAR-END 1972
ALL LENDERS ALL PRIVAz IUE
SAVINGS ASSOCIATIOS' SHARE Or TE INCREASE IN RZS IM AL
NORM= WOARS IN 1.971 AND 1972
ALL PRVTr L2D4S
All others 2.4%-_
ALL LZNDZRS
186
Senator MCINTyRE. Senator Bennett, yesterday I made a firm rule
we were not going to hear any witness who failed to get his statement
in 24 hours in advance, but I did leave in that unless there was an ob-
jection, unanimous consent of those members of the members sitting,
that we would waive the rule and allow them to go forward.
So, our next witness, I believe, is Mr. Benedict of the Federal Sav-
ings League of New England. His statement was not filed within the
24 hours. Unless there is some objection, I will welcome him here and
break the rule I put in effect yesterday.
Let me say, of course, Mr. Benedict, that you full statement will be
incorporated in the record. You have heard my admonition to the
previous witnesses, wherever you can hit the high spots, make your
points clear, if you can save us any time, we appreciate it, and we
would also like you to introduce those gentlemen who are accom-
panying you.
STATEMENT OF JOSEPH T. BENEDICT, CHAIRMAN OF THE BOARD
AND PRESIDENT, FIRST FEDERAL SAVINGS AND LOAN ASSO-
CIATION, WORCESTER, MASS., AND PAST PRESIDENT, FEDERAL
HOME LOAN BANK OF BOSTON, ON BEHALF OF THE FEDERAL
SAVINGS LEAGUE OF NEW ENGLAND, THE MASSACHUSETTS
FEDERAL SAVINGS COUNCIL, AND THE NEW HAMPSHIRE
COOPERATIVE FEDERAL SAVINGS AND LOAN LEAGUE; ACCOM-
PANIED BY JACK TRACY, GENERAL COUNSEL; AND ROBERT A.
CLARK, PRESIDENT, MASSACHUSETTS FEDERAL SAVINGS COUN-
CIL
Mr. BENEDICT. Thank you, Mr. Chairman.
On my right is Jack Tracy, general counsel, and on my left is Mr.
Robert A. Clark, president of the Massachusetts Federal Savings
Council, who accompany me.
At the outset, Mr. Chairman and members of the committee, I
would like to apologize for not having my testimony in the prescribed
time. I did write I had problems getting it in. Thank you for per-
mitting me to appear.
Senator MkCINTYRE. I believe our letter indicated that we would like
to have it 24 hours in advance, and I think you can understand how
much more helpful it is to our staff and ourselves if we have an idea
in what direction you are testifying.
Anyway, we have waived the rule. So, go right ahead.
Mr. BENEDICT. My name is Joseph T. Benedict, and I am chairman
of the board and president of First Federal Savings and Loan Asso-
ciation of Worcester, Mass., and have also served as president of the
Federal Home Loan Bank of Boston.
I appear here today in behalf of the Federal Savings League of
New England, the Massachusetts Federal Savings Council, and the
New Hampshire Cooperate Federal Savings and Loan League.
I appreciate this opportunity to appear and testify concerning the
matters before the committee and, for clarity of the record, may I
say that whenever I speak of "we," it is my intent to include each of
the above groups for whom I am testifying.
187
It is my understanding that although this hearing was originally
scheduled on S. 1008, sponsored by Senator McIntyre, it has since been
expanded to include testimony on S. 1256, jointly sponsored by
Senator Sparkman and Senator Tower.
Since S. 1256 is essentially similar to H.R. 4070 on which hearings
were held last week, references to the latter bill will necessarily occur
in the course of this hearing.
S. 1008 extends the authority for the flexible regulation of interest
rates on deposits provided under Public Law 890597 for a period of 1
year. S. 1256 and H.R. 4070 each contain provision for such an exten-
sion for a period of 2 years.
We emphatically support the 2-year extension as the more realistic
provision.
S. 1008 is silent on the issue of extending the authority of the
Federal Deposit Insurance Corp. respecting interest rates paid on
deposits to cover also deposits in certain uninsured institutions hither-
to exempt. S. 1256 and H.R. 4070 explicitly provide for such broad-
ened authority.
We strongly support the position set out in the latter bills and
urge the extension of such control to these uninsured banks.
Each of, the three bills deals with the use of negotiable orders for
withdrawal from deposits or accounts in depository institutions.
S. 1008 authorizes such use of negotiable orders for withdrawal
with no limitations on payment of interest or other restrictions. We
oppose the provisions of S. 1008 on this issue.
H.R 4070 prohibits the use of such negotiable orders for with-
drawal in connection with any deposit or account on which interest or
dividends are paid. We completely support H.R. 4070 on this issue.
S. 1256 contains a similar prohibition to that in H.R. 4070, but in
addition permits the phasing out of existing accounts over a 6 months'
grace period.
We support the prohibition in S. 1256, and do not object to the
granting of a grace period for a maximum of 6 months if that is deter-
mined to be in the public interest.
Since the bills we are considering today deal almost entirely with
the same areas of concern covered in my testimony before the House
subcommittee on H.R. 4070 1 would like to incorporate that testimony
and also an additional statement relating to questions raised at that
hearing in my comments before this committee.
Senator MCINTYRE. No objection (see p.--).
Mr. BENEDICT. Our concerns with respect to interest-bearing NOW
accounts may be summarized as follows:
The national housing problem is one of the most urgent priorities
facing our country. The savings and loan movement which has a spe-
cial mandate from Congress to provide economical home financing is
sustaining the dominant and an increasing role in residential mort-
gage lending. The moratorium on mortgage and housing subsidies in-
tensifies our responsibility to meet housing needs.
An adequate flow of capital to the savings and loan industry at a
cost which permits reasonable mortage rates to homeowners is crucial.
The homeowner and the mortgage borrower are consumers just as
188
much as the saver. Each is entitled to equal treatment and neither is
entitled to a preferential benefit which is achieved at the expense of
the other.
For these reasons we oppose interest-bearing NOW accounts because
we foresee the following consequences:
Interest-bearing NOW accounts will sharply increase the cost of
money to savings banks using them. If permitted for savings banks,
savings and loans will be forced to use them for competitive survival,
and their cost of attracting capital will also go up. These costs will
be reflected in mortagage rates.
Such a result is especially bad in Massachusetts where mutual sav-
ings banks operate, carrying with them an upward pressure on mort-
ga e rates.
If permitted, NOW accounts will spread into all States where sav-
ings banks operate, carrying with them an upward pressure on mort-
gage rates.
he use of interest-bearing NOW accounts is unjust and against
the public interest because it disrupts the balance between thrift in-
titutions and commercial banks who are forbidden to pay interest on
demand deposits, must set up liquidity reserves, and are subject to
the rate differential under regulation Q.
Insofar as it tends to undermine the rate differential in regulation
Q it poses a serious threat to the capacity of the savings and loan
movement to meet its mandate for housing.
It represents a pre-emption of special privilege by a group of
mutual savings banks who have escaped the disciplines imposed by
national rate ceilings and now seek to use checking accounts while
escaping the disciplines relating to them which are imposed on others.
The above summary statements are supported in detail in our testi-
mony on H.R. 4070 and the statement supplementing it. We respect-
fully submit that the public interest will be most truly served by the
enactment of legislation in the form of S. 1256.
The courtesy of the chairman and the committee members is sin-
cerely appreciated.
Senator MCINvTYR. You seem to infer that NOW accounts that have
arisen in Massachusetts have forced the highest rates on savings de-
posits in the Nation. Isn't it true that Massachusetts has always had a
higher savings rate, with or without NOW accounts?
Mr. BFNEDIcT. No. I think what I am referring to here, Mr. Chair-
man, is that we do now pay 5.25 percent on regular accounts, whereas
the Federal rate control imposed on all other 49 States is at 5 percent.
So, in Massachusetts if you have a regular savings account you get
5.25 percent on it. If you had the same account in New Hampshire,
they are only permitted to pay a maximLun of 5 percent. So we are at
the highest rate.
Senator MCINTYRE. Before NOW accounts you still were paying the
highest?
Mr. BENF.DMICT. Yes. The NOW accounts just compounds that.
Senator MCINTYRE. I yield to Senator Bennett.
Senator BEN.FTr. No questions.
189
I presume on the basis of your testimony that your answer as to
what your reaction is to Governor Mitchell's recommendation would
be the same as Mr. Shriver's?
Mr. BENEDICT. Yes, sir.
I might expand on that philosophic approach, and that is that we
recognize there is a basic difference between thrift institutions that is
not generally recognized by all people.
We do have a special mandate from Congress to invest up to 80
percent of our funds into residential mortgages whereas this mandate
is not so for the other types of thrift institutions, although I must
agree they do put a great portion of their funds into the mortgage
market.
However, they do have that latitude or flexibility in their invest-
ment portfolio to meet the situation. We do not. We depend on the
residential mortgage market practically totally, Senator.
Senator BENNETt. You also have a tax advantage?
Mr. BENEDICT. I don't know that it is that much of an advantage,
really. In Massachusetts I might state, Senator, we have filed a bill
in the legislature to have us taxed on the same basis as commercial
banks are taxed because commercial banks have urged tax parity be-
tween our systems, and in Massachusetts where the existing tax on sav-
ings and loan associations has been challenged in the courts, and the
Federal courts found in our favor, we have filed a bill which will put
us on the commercial bank level, which we feel will give us a fair tax.
Senator MCINTYRE. You represent and speak for the New
Hamsphire Cooperative Federal Savings & Loan League. That is all
the S. & L.s up there?
Mr. BENEDICT. Yes, sir. They are also included as members of the
New England league, but they have asked us to be listed in this
testimony.
Senator MCINTYRE. Do you want me to include these statements that
are part of this brochure, being in your testimony before the House
subcommittee on March 13 and the additional information that was
furnished at the request of the chairman?
Mr. BENEDICT. If you would, Mr. Chairman. I think it contains
some very valuable testimony.
Senator MCINTYRE. Without objection, then, we will include the
whole thing in the record.
[Documents follow:]
STATEMENT OF JOSEPH T. BENEDICT, PRESIDENT AND CHAIRMAN FIRST FEDERAL
SAVINGS AND LOAN ASSOCIATION, WORCESTER, MASSACHUSETTS ON BEHALF OF
FEDERAL SAVINGS LEAGUE OF NEW ENGLAND AND MASSACHUSETTS FEDERAL
SAVINGS COUNCIL AND NEW HAMPSHIRE COOPERATIvE FEDERAL SAVINGS AND
LOAN LEAGUE
Mr. Chairman and Members of the Committee: My name is Joseph T. Benedict
and I am Chairman of the Board and President of First Federal Savings and
Loan Association of Worcester, Massachusetts, and have also served as President
of the Federal Home Loan Bank of Boston. I appear today in behalf of the Federal
Savings League of New England, the Massachusetts Federal Savings Council,
and the New Hampshire Cooperative Federal Savings and Loan League. I ap-
preciate this opportunity to appear and testify concerning the matters before the
Committee, and for clarity of the record may I say that whenever I speak of "we"
it is my intent to include each of the above groups for whom I am testifying.
93-211 0 - 73 - 13
190
It is my understanding that although this hearing was originally scheduled
on S. 1008, sponsored by Senator McIntyre, it has since been expanded to include
testimony on S. 1256, jointly sponsored by Senator Sparkman and Senator Tower.
Since S. 1256 is essentially similar to HR 4070 on which hearings were held last
week, references -to the latter bill will necessarily occur in the course of this
hearing.
S. 1008 extends the authority for the flexible regulation of interest rates on
deposits provided under Public Law 89-597 for a period of one year. S. 1256
and HR 4070 each contain provision for such an extension for a period of two
years. We emphatically support the two year extension as the more realistic
provision.
S. 1008 is silent on the issue of extending the authority of the Federal Deposit
Insurance Corporation respecting interest rates paid on deposits to cover also de-
posits in certain uninsured institutions hitherto exempt. S. 1256 and HR 4070
explicity provide for such broadened authority. We strongly support the position
set out in the latter bills and urge the extension of such control to these uninsured
banks.
Each of the three hills deals with the use of negotiable orders for withdrawal
from deposits or accounts in depository institutions.
S. 1008 authorizes such use of negotiable orders for withdrawal with no limita-
tions on payment of interest or other restriction. We oppose the provisions of S.
1008 on this issue.
HR 4070 prohibits the use of such negotiable orders for withdrawal in connec-
tion with any deposit or account on which interest or dividends are paid. We com-
pletely support HR 4070 on this issue.
S. 1256 contains a similar prohibition to that in HR.4070, but in addition per-
mits the phasing out of existing accounts over a six months' grace period. We -
support the prohibition in S. 1256, and do not object to the granting of a grace
period for a maximum of six months if 'that is determined to be in the public
interest.
Since the bills we are considering today deal almost entirely with the same areas
of concern covered in my testimony before the House Sub-Committee on HR 4070,
1 would like to incorporate that testimony, and also an additional statement relat-
ing to questions raised at that hearing, in my comments before this Committee.
Our concerns with respect to interest bearing NOW accounts may be summarized
as follows:
The national housing problem is one of the most urgent priorities facing our
country. The Savings and Loan movement which has a special mandate from
Congress to provide economical home financing, is sustaining the dominant and an
increasing role in residential mortgage lending. The moratorium on mortgage
and housing subsidies intensifies our responsibility to meet housing needs.
An adequate flow of capital to the Savings and Loan industry at a cost which
permits reasonable mortgage rates to home owners is crucial.
The home owner and the mortgage borrower are consumers just as much as
the saver. Each is entitled to equal treatment and neither is entitled to a prefer-
ential benefit which is achieved at the expense of the other.
For these reasons we oppose interest-bearing NOW accounts because we foresee
the following consequences.
Interest bearing NOW accounts will sharply increase the cost of money to
Savings Banks using them. If permitted for Savings Banks, Savings and Loans
will be forced to use them for competitive survial, and their cost of attracting
capital will also go up. These costs will be reflected in mortgage rates.
Such a result is especially bad in Massachusetts wenere Miytual Savings Banks
are exempt from rate control and have forced the highest rates on savings de-
posits in the nation.
If permitted NOW accounts will spread into all states where Savings Banks op-
erate carrying with them an upward pressure on mortgage rates.
The use of interest bearing NOW accounts is unjust and against the public
interest because it disrupts the balance between thrift institutions and com-
mercial banks who are forbidden to pay interest on demand deposits, must set up
liquidity reserves, and are subject to the rate differential under Regulation Q.
Insofar as it tends to undermine the rate differential in Regulation Q, it poses
a serious threat to the capacity of the Savings and Loan movement to meet its
mandate for housing.
191
It represents a pre-emption of special privilege by a group of Mutual Savings
Banks who have escaped the disciplines imposed by national rate ceilings and now
seek to use checking accounts while escaping the disciplines relating to them
which are imposed on others.
The above summary statements are supported in detail in our testimony on HR
4070 and the statement supplementing it. We respectfully submit that the public
interest will be most truly served by the enactment of legislation in the form of
8. 1256.
The courtesy of the Chairman and the Committee members is sincerely
appreciated.
STATEMENT OF JOSEPH T. BENEDICT, PRESIDENT AND CHAIRMAN, FIRST FEDERAL
SAVINGS & LOAN ASSOCIATION, WORCESTER, MASS., ON BEHALF OF FEDERAL
SAVINGS LEAGUE OF NEW ENGLAND AND MASSACHUSETTS FEDERAL SAVINGS
COUNCIL BEFORE HOUSE BANKING SUBCOMMITTEE
Mr. Chairman and members of the Committee: My name is Joseph T. Benedict
and I am Chairman of the Board and President of First Federal Savings and
Loan Association of Worcester, Massachusetts and have also served as President
of the Federal Home Loan Bank of Boston. I appear today in behalf of the Fed-
eral Savings League of New England and the Massachusetts Federal Savings
Council. I appreciate this opportunity to testify with respect to H.R. 4070, and
to be recorded in support of Sections 1 and 3 of the bill and in sympathy with
the objectives of Section 2.
Under our system of government, the function of legislation is to serve the
overriding public interest by defining the rights enjoyed by individuals or groups
within our society which are consistent with the public interest, and protecting
those rights from Infringement. The recent introduction by some Mutual Savings
Banks of quasi-checking accounts featuring negotiable orders for withdrawal
and commonly called NOW accounts raises very sharply the question of infringe-
ment of rights within the various groups of the banking industry. Since banking
is a public service profoundly affecting every individual the public interest is
vitally involved.
The three principal segments of the banking industry are the commercial
banks, savings and loan associations, and mutual savings banks. By statutes and
regulations salutary balances have been established to enable them to carry
out effectively their respective mandates in our free enterprise system and to
protect each of them from undue competitive encroachments.
Commercial Banks operate in the area of trade and commerce. Mutual savings
banks are primarily chartered to receive the thrift savings of individuals and
invest them prudently so as to return a fair yield to their depositors. Savings
and loan associations have a similar responsibility for the investment of thrift
savings, but in addition have an express and unique Congressional mandate to
provide economical home financing.
By the introduction of NOW accounts in Massachusetts and their spread into
other states, savings banks are offering what amount to checking accounts with
full interest earnings, while commercial banks are prohibited from paying any
interest on their demand deposits. This produces a competitive inequity which
the commercial banks naturally protest and disrupts the existing balance be-
tween the two types of institutions.
It is our urgent concern that in rectifying this situation a solution be found
which will not substitute new difficulties. HR 4070 does thrust directly at the
center of the problem by prohibiting anyone from paying interest on a demand
deposit, which will greatly relieve the competitive injustice inherent in this type
of account, and also extending the authority to continue the rate differential on
savings accounts under Regulation Q.
However, we respectfully suggest two amendments of Section 2 which we be-
lieve to be constructive and beneficial. The first would require any institution
offering such accounts to safeguard them by maintaining liquidity reserves similar
to those imposed for the protection of demand deposits in Commercial banks.
The second would prohibit the offering of checking services to commercial
accounts. Since thrift institutions are favored in the attraction of their savings
deposit capital by the differential in rate under Regulation Q it would seem
192
unfair to allow them with this advantage to compete actively in the field of com-
mercial accounts. Both of these provisions serve the public interest and are
reasonable.
Apart from the issue of unfair competition with commercial banks. NOW
accounts which pay full interest are against the public interest because they
represent a costly method of attracting capital which will inevitably exert up-
ward pressure on home mortgage rates. It Is at this point that NOW accounts
become a very real threat to housing, and the diverging goals of the two types
of thrift institutions become significant.
Savings Banks have never had any mandate other than for the saver. In
the past they have been an important factor in residential mortages, but they
have always had broader investment latitude than savings and loan associations,
and mortgage lending has always been a matter of optional expedience for them.
In recent years their influence in the home financing field has dwindled as they
have promoted shorter term and more lucrative consumer loans and have
also diverted their capital into high yielding corporate securities. A striking
example of this has existed in Massachusetts where only seven of more than
160 saving banks are federally insured and all of the rest are exempt from rate
ceilings. When federal associations in Massachusetts became controlled by
the national 5% ceiling on savings interest the self insured Massachusetts Mutual
Savings Banks proceeded to pay from 5-Y4% to 5-
1
/% on regular accounts and
siphoned off a large volume of savings capital from the federals until the Federal
Home Loan Bank Board granted a special exception for Massachusetts federals
to stop the attrition. Much of this capital was rolled over into securities, whereas
it would have gone Into home mortgages had it remained with savings and loan
associations. From 1966 through 1971 the deposits held by 'Massachusetts savings
banks increased 45.7%. In the same period their mortgage portfolios increased
37.0% while their security investments increased 59.2%. In 1971 alone Massa-
chusetts Savings Banks increased their mortgages by $654 million but diverted
$710 million away from housing by purchases of non-government corporate securi-
ties! Their 1972 figures are not available to use, but there are no indications that
they have suddenly changed their investment policies.
At the same time the payment in Massachusetts of the highest interest rates
on savings accounts in the nation exerted a sequential upward pressure on res-
idential mortgage rates in the face of a critical shortage of low and moderate
Income housing. When the administrative cost of servicing NOW accounts is
superimposed on these exceptional interest rates on savings, it will make an
additional contribution to the cost of capital acquisition, and hence an additional
influence for increasing mortgage rates.
The savings bank Justification is that all this helps the "consumer" by giving
him a piece of the action, and they equate the consumer solely with the saver.
The fact is that every human being is a consumer and has basic human needs.
There is no saver who does not need housing shelter, and no homeowner or tenant
who does not have the need to save. It is a fallacy to say that an Individual as a
"saver" is benefitted by a higher return on his savings when that is produced by
a corresponding or greater increase in his mortgage debt burden. It is true. if one
wishes to play with numbers, that there are more savings accounts than resi-
dential mortgages but this is simply because a family may have several savings
accounts while its dwelling unit secures only one mortgage, generally larger than
the total of the family's combined savings. The persons who gain are the affluent
ones whose savings capital exceeds their mortgage debt or who have no mortgage;
but those who are struggling to own their home or to pay a landlord's mortgage,
and who stand in greater need, are the ones who lose, and they are consumers
too !
A view point has been expressed that the interest-free use of demand deposits
is unjust to delositors. Commercial banks contest this on the ground that the
servicing of checks has a substantial value which fairly offsets the non-payment
of interest. At the opposite end of the spectrum is the readiness of savings banks
to pay full interest on these accounts, relying upon a nominal charge per check
to cover their costs. While we believe that reality is somewhere between these
extremes we support the prohibition of interest as contained in the bill. Experi-
ence in the future may demonstrate that some reduced level of interest below
the basic rate on regular deposits could be warranted. Any conclusions based on
193
experience tc date, however, would have to be quickly reviewed when the Immi-
nent impact of electronic funds transfer systems and other technological ad-
vances becomes measurable. At the present time, in our judgment, it would be
impossible to develop a formula for interest credits to demand deposits which
could be applied even-handedly to both commercial and savings bank demand
deposits. Given the present prohibition of interest on commercial bank demand
deposits, we consider the corresponding prohibition contained in HR 4070 to be
correct and necesary.
Under the Home Owners Loan Act savings and loan associations were directed
by Congress to provide economical home financing. They are the only financial
system charged by Congress with this direct mandate. They have grown from
assets of $15 billion in 1950 to $245 billion at the present time. They have
financed more residential units than any other financial system. They have in-
creased their leadershipin the home financing field until in the year ending in
September 1972 they provided 78.8% of the net increase in home mortgages out-
standing held by the private sector, more thaii three times as much as all other
financial institutions-commercial banks, mutual savings banks, and life insur-
ance companies--combined. Limited in their investments to government
securities and mortgages, and locked in to long term lending, competitive influ-
ences which drive up their cost of money are not only critical to savings and loan
associationslbut are of necessity passed on to the consumer public.
If NOW accounts are permitted to savings banks, without appropriate limi-
tations safeguarding the public interest, either savings and loans will have to
receive equivalent authority, or their savings capital will be so decimated that
they cannot continue as an effective support for housing. The inevitable effect
on the supply of mortgage funds will be either higher cost or greater scarcity,
or both, and the consumer public will suffer.
The enactment of Section I of HR 4070 is a necessary preliminary step in the
avoidance of an especially serious danger inherent in the solution of the problem
created by NOW accounts. Preliminary discussions of this problem brought out
the suggestion that one adjustment might involve the removal of the rate differ-
ential under Regulation Q. This would have a disastrous effect on housing and
would be hostle to the public interest. This rate differential is a matter of sur-
vival for savings and loan associations whose only source of capital is the thrift
savings of the American people. We are a specialized segment of the banking in-
dustry, trained and dedicated to the role of providing ec-nomical home financing.
There is a job for us to do in housing which serves one of our country's highest
domestic priorities, and at this point in our national history there is no one else
equipped to take our place. The recent executive moratorium on residential
mortgage subsidy programs has made our home firrincing role even more impor-
tant and confronts us with increased responsibility. With subsidies removed even
temporarily, the pressures related to placing families of low or moderate income
in decent housing sharply intensify, and the mandate laid upon us by Congress
to provide "economical home financing" becomes more difficult even as it be-
comes more urgent. To provide decent shelter, whether owned or rented at a
cost ordinary people can afford, will require greater use of 90% arid 95% pri-
vately insured, long term, conventional loans, and every other resource and skill
we can muster. That we are already producing nearly four-fifths of the annual In-
crease in home mortgages held by the private sector clinches our statement that
there is no one else comparably equipped to do this job. It is our hope that the
same legislative authority which moulded us for this function will continue to
protect our flow of capital, and not permit Regulation Q to become a casualty
in any adjustment between savings and commercial banks.
We support and endorse the position paper prepared by the United States
Savings and Loan League stating the case for the savings rate differential,
which we are confident will be available to the members of the Committee. It
presents a clear and excellent analysis and effectively demonstrates the critical
importance to housing of the rate differential provided under Regulation Q.
W'e strongly urge the enactment of Section 3 of H1R 4070 providing for the
extension of rate ceilings to non-federally insured Institutions. The original
exception by which rate ceilings were not applied to such institutions as were
under state supervisory agencies with rate fixing power was a gesture of comity,
intended to give such agencies a fair opportunity to conform local institutions
194
to the national policy in an orderly and appropriate manner. It was not in-
tended, in our Judgment, as an invitation to assert special privilege for any group
of local institutions in defiance of the public interest. The lapse of time now
makes it obvious that the holdouts have no thought of complying with the
national rate ceilings which control federally insured institutions, but seek to
perpetuate a policy which contributes to higher mortage rates and aggravates
the housing shortage, hitting especially hard at low and moderate Income units.
Section 3 is a necessary provision to make possible a uniform national rate level
which is supported by every consideration of reason and justice.
The Massachusetts Banker's Association has extended to us the courtesy of
seeing a preliminary draft of the statement prepared in their behalf. We -wish
to record our support of its substance and conclusions, and fully share their
concern over the urgency of the housing problem in our nation, and the con-
sequent importance of retaining the rate differential under Regulation Q.
CONCLUSION: For the reasons set forth above, I respectfully urge the
enactment of Sections I and 3 of HR 4070 in their present form and the enact-
ment of Section 2 thereof with the additional requirements that no depository
institution shall maintain a deposit or account subject to withdrawal by transfer
to third parties without maintaining appropriate liquidity reserves therefor, and
that thrift institutions shall maintain such accounts only for non-commercial
depositors.
May I extend my thanks to the Commitee and the Chairman for their courtesy.
SUPPLEMENTAL INFORMATION
1. The following information is submitted in response to the request of Chair-
main St. Germain for a breakdown of residential mortgages held by Savings and
Ioan Associations, Mutual Savings Banks, and Cooperative Banks.
BREAKDOWN OF ALL RESIDENTIAL MORTGAGES HELD BY ALL MASSACHUSETTS SAVINGS AND LOAN ASSOCIATIONS
AS OF DEC. 31, 1972, SUPPLIED BY FEDERAL HOME LOAN BANK OF BOSTON
Percentage
Amount Percentage of savings
(thousands) of assets capital
Total assets ............. ........................................ $2,334, 330 ............................
Total savings capital ...............................................
,861,234.....................
Residential mortgages:
(a) 1- to 4-family units ........................................ 1,388,452 59.47 74.59
(b) Multiple housing .......................................... 490, 101 21 26.34
Total residential mortgages I.............................. 1,878, 553 80. 47 100. 93
I Residential mortgages represent 93 percent of all mortgages held by all Federal Savings and Loan Associations in
Massachusetts.
Similar figures for First Federal Savings of Worcester are as follows:
Total assets, 414,241,387; total mortgage portfolio, 371,553,139-85.6% of total
assets; -Residential mortgages, 354,529,927-95.5% of total mortgages; (a) 1-4
family units, 263,959,164-71.1% of total mortgages; and (b) multiple housing
1
,
90,570,763-24.4% of total mortgages.
2. In response to a question put by Chairman St. Germain whether as a
result of the increase of the interest (from 5% to 51%) being paid to de-
positors there has been an increase in interest charges to the borrowers, to the
home purchaser particularly, the following is submitted.
The answer is definitely-Yes. The Massachusetts institutions Involved, Sav-
ings Banks, Cooperative Banks, and Federal Savings and Loan Associations are
mutual institutions. After deducting operating expenses and allocations to re-
serves all of the rest of their income Is distributed to their saving depositors
or members. They do not have stockholders as in the case of a commercial bank.
Their dominant Income is from mortgage loans, and the rates on these loans
I More than $80- million of the multiple housing loans are low- and moderate-income
units.
195
are determined by their reserve-requiremehts and their operating costs, of which
the cost of money is the largest factor. Hence their mortgage rates rise and fall
in response to their cost of money, which is the only significant variable in their
operations, Just as a boat must rise and fall with the level of ti" water which
supports it. Any increase in the rates charged to attract savings capital pro-
duces an inevitable increase in the mortgage rates of the institution.
Traditionally New England has been an area of conservative financial prac-
tices for many years, where mortgage rates have been lower than the national
average, and at times among the lowest in the nation. This was true in 1965, and
the following figures show the subsequent rise in mortgage rates for the Boston
statistical metropolitan area, which are generally typical, until they caught
up with and passed the national averages in 1970.
AVERAGE RESIDENTIAL MORTGAGE RATES AS OF DECEMBER IN EACH YEAR
Boston SMA National
Existing Existing
New homes homes New homes homes
1965 ............................................... 5.25 5.34 5.95 6.01
1966 ............................................... 6.17 6.46 6.58 6.76
1967 ............................................... 6.37 6.47 6.54 6.64
1968 .............................................. . 6.83 6.89 7.23 7.23
1969 ............................................... 8.09 8.19 8.24 8.22
1970 ............................................... 8.47 8.40 8.37 8.26
1971 ............................................... 7.22 7.36 7.78 7.64
1972 ............................................... 7.06 7.52 7.66 7.59
It is true that mortgage rates increased more steeply than the increase in
the interest paid on deposits. Home mortgages are long term investments with
a fixed yield. Many institutions are still carrying a residue of old 4% and 4 %
FHA and VA mortgages and other conventional loans granted when interest
rates on deposits were much lower. When the rate on deposits is increased that
i'art of the mortgage portfolio whose yield is below an institution's break-even
point becomes considerably larger, and the borrower's rate has to cover not
only the higher cost of attracting current capital, but also the increased portion
of the portfolio which is under water.
It is also true that in the last two years mortgage rates have eased both in the
Massachusetts area and nationally. There is opinion that they may shortly turn
around and move upward again, depending on economic conditions and monetary
policy. But the one fact that is incontrovertible is, that regardless of the relation-
ship of present mortgage rates in Massachusetts to the national average, the
cost of mortgage money for home financing in lassachusetts is higher than it
would have been without the action of the uncontrolled Massachusetts Savings
Banks in breaking through the national rate ceiling. No rhetorical bleaching
can get id of that spot!
2. On the contention that at a given point the processing and maintenance of
NOW accounts will cost money, the Chairman suggested that illustrations f-e
presented on the basis of NOW accounts-bayjng an activity of five to ten checks
per month and balances averagiigromuir oX td $1000.
Rule of thumb figures accepted by commercial bankers are that it costs ap-
proximately nine cents to process each check, thirty-one cents to handle each
deposit, and a cost of about fifty-eight cents monthly for maintenance of a
checking account which includes the preparation and mailing of statements.
Five checks per month means sixty checks per year at a cost of $5.40. At least
one additional deposit monthly, which the need for replenishing the account for
checks drawn would occasion, means an added cost of $3.72. The annual main.
tenance cost would be $6.96. These total $16.08, and after crediting charges of
fifteen cents on sixty checks, or $9.00, the net cost of the account to the bank
would be $7.08.
If we assume a monthly activity of ten checks, with two deposits monthly, and
the maintenance charge constant at $6.96, the total cost of operating the account
becomes $25.20, which is reduced by-the sui-of $18.00 recouped by charges for
the checks, and the net cost becomes $7.20.
The following table shows the effect of the operation of these NOW accounts
on the cost of acquiring the savings capital they represent.
196
COST OF SERVICING NOW ACCOUNTS
In percent
Net cost of Cost as a
servicing percentage Regular Actual cost
Average monthlyp;aance account of principal dividend of capital
(a) Assuming activity of 5 checks per month:
$100 ...................................... 7.08 7.0 5. 5 12.25
$250 ....................................... 7.08 2.8 5. 25 7.95
$500 ....................................... 7.08 1.4 5.25 6.65
$750 ....................................... 7.08 .9 5.25 6.15
$1,000 ------------------------------------ 7.08 .7 5.25 5.95
(b) Assuming activity of 10 checks per month:
$100 ....................................... 7.20 7.2 5.25 12.45
$250 ....................................... 7.20 2.9 5.25 8.15
$500 ...................................... 7.20 1.4 5.25 6.65
$750 ....................................... 7.20 .9 5.25 6.15
$1,000 ..................................... . 7.20 .7 5.25 5.95
This table shows that the median balance of $500.00 will involve an additional
cost of 1.4% on NOW acconuts with an activity ranging between five and ten
checks monthly. Adding this to the regular interest rate being paid on the account
of 5.25%, the cost of such accounts to the bank servicing them jumps to 6.65%
and Is inexorably passed on into the mortgage rates paid by borrowing consumers.
It will be urged that the average balances of NOW accounts will substantially
exceed $1000, but the probabilities are otherwise, as the banks themselves tacitly
admit by advertising the availability of such accounts with an opening deposit of
$10.00. This constitutes a direct pitch for all accounts regardless of balances car-
ried, and if one eliminates the exceptionally large accounts which would not be
attracted to NOW accounts, commercial bank experience indicates the average
balances of such accounts will be well below $1000, and correspondingly expensive
to operate.
It is also pertinent to note that of 171 Massachusetts saving banks covered
by this self-inusring fund, at least 26 have individual assets totalling more than
the entire deposits insurance fund, and of these, II have more than double the as-
sets of the fund, 5 have more than three times its assets, 3 have more than four
times, its assets, and 2 have more than five times its assets!
Mr. CLARK. Responding to Senator Bennett's questioning concerning
Mr. Mitchell's testimony this morning, I think Mr. Mitchell's testimony
indicated a need for controls or control of this type of -NOW account
should it spread and so forth.
The only point I want to bring out is historically savings banks.
Savings and loan associations have been known as time account, in-
stitutions. This relates to our financial structure and the continuing of
our financial structure as it is today.
I believe the commercial banks have been known as demand deposit
institutions. But the threat of the NOW account and people placing
money in that they can withdraw quickly is that, time institutions may
soon be considereddemand deposit. facilities. I would also point out in
the State of Massachusetts the savings banks do not have any required
liquidity formula to carry to meet any such demands, but should this
spread nationwide, I can see some very seriofis difficulties in our fi-
nancial structure occurring unless certain very strict controls and
liquidity requirements are imposed on these institutions.
Senator MCINTYRE. Leaving aside these giant questions of the in-
dustry about liquidity and reserves, this seems to be a natural for the
savings and loans. The savings and loan, as I understand it, is the bank
where my little home was built, or a mother and dad put their money
197
in and built the home, and they know the savings and loan president
and they trust him.
I am not sure you fellows are as smart as you think you are.
Mr. BENEDICT. May I respond so that, so to speak, we are not
painting ourselves into a corner. I think our testimony brings this out.
We do feel that if it is a service to the customer we would like to
offer it, providing we abide by the disciplines which apply and which
are already set, by Federal regulation-we will accept that; but to
have an act of this type, which is a kind of hybrid which gives them
special advantages, which in effect will hurt our ability to perform our
mission and mandate given to us by Congress, now, that is the im-
mediate problem we think in Massachusetts.
Now, the long-range one is we realize if we take on all these flexible
things, we have got to pay the price and give up something. What we
don't want to give up is that differential that exists under regulation Q
because once that is gone we are all one banking system and I just do
not know what will happen to the poor housing consumer who has
to get a mortgage.
This is our concern down the road.
We in New England have experienced this very clearly in Mas-
sachusetts when the uninsured saving banks were not under rate con-
trol.- Some of them paid up to 5.5 percent on regular accounts, and
we could only pay 5 percent. This took a tremendous drain of capital
from the savings and loans in Massachusetts.
Now, if that money went into the housing market it at least would
be something, but a good portion of it went into corporate bonds and
stocks which are legal for savings banks and they are able to do it.
We are not able to do it.
I think this, to me. is the basic difference, Mr. Chairman, and it
needs resolution down the road.
Senator MCINTYRE. Thank you very much, gentlemen.
Mr. CLARK. Could I make one other point, Mr. Chairman?
Speaking of the little fellow, the homeowner, and I know just what
you are talking about because I am the fellow who sat across the desk
for many years with that little fellow, you hear all these big fellows
talking about the electronic fund transfers coming down the road.
There are thousands of small savings and loan associations today that
are serving the homeowner, serving the consumer well, stitting across
the table or across the desk counseling with them, advising them as
to remodeling procedures. repairing and building a home or buying a
home.
I feel in mv heart that this has been the fault with many of the
Federal subsidy programs, that there has not been enough counseling
of these people, enough understanding, but if we get into this great
big ball game with all these electronic fund transfers, what is going
to happen to these little institutions?
In Massachusetts, only one-third of the savings banks themselves
now offer NOW accounts. How many of them have the expertise to
evin enter this field? In Massachusetts. of the 34 Federal savings and
loan associations, at a recent meeting I think there were 23 institutions
represented.
198
Not one of them was interested in offering NOW accounts or check-
ing accounts at the moment because they didn't feel that they had
the expertise-many of them felt they didn't have the expertise. The
large ones yes, but the small ones, I doubt very much if they could
provide the service.
Senator MCINTYRE. That across-the-desk conversation with the
prospective wage earner and his wife, I have seen it operate as a
practicing lawyer in a small town, I recognize too much the ad-
vantage of the people who went to the S. & L's.
Thank you very much for your testimony here. We will now proceed
to the next witness, Mr. John S. Howe, representing the Savings
Banks Association of Massachusetts. We are happy, on behalf of the
subcommittee, to welcome you here this morning, Mr. Howe.
STATEMENT OF JOHN S. HOWE, SAVINGS BANKS ASSOCIATION OF
MASSACHUSETTS, ACCOMPANIED BY CLYDE S. CASADY, EXECU-
TIVE VICE PRESIDENT; AND ELLIOTT CARR, RESEARCH
DIRECTOR
Mr. HOWE. Yes.
Mr. Chairman and Senator Bennett, my name is John S. Howe. I
am president of the Provident Institution for Savings in Boston, and
a past president of the Savings Banks Association of Massachusetts,
and presently on the executive committee.
I have with me here on my left Mr. Clyde S. Casady, who is execu-
tive vice presedent of the association; and once again MIr. Elliott Carr,
who is research director of the association.
Senator MCINTY7RE. How does Elliott get to be a double witness?
Mr. HOWE. He is such a smart person that everybody warits him.
Senator MCINT E. We had better talk to him, then.
Mr. HOWE. I do appear on behalf of the association, which includes
all of the 167 savings banks in the State, and we are expressing our
strong support for S. 1008 and S. 1257, which would extend the exist-
ing authority for State and Federal agencies to regulate interest rates
at various financial institutions.
S. 1008 would also clarify the ability of financial institutions to pro-
vide interest-paying savings accounts from which withdrawals can
be made by means of negotiable instruments.
We strongly oppose sections 2 and 3 of S. 1256 which would pro-
hibit the payment of interest on negotiable withdrawal order accounts
and in effect would stop NOW accounts in Massachusetts. And these
same sections would substitute FDIC interest rate controls for the
present State control over all State-chartered savings banks not in-
sured by FDIC.
Now, to keep within my time limit, sir, I propose not to read the
whole statement here, but I will try to emphasize the highlights as
we go along.
Senator MCINTYRE. I am delighted to hear that.
Mr. HowE. Massachusetts savings banks are the principal source
of home mortgage funds in Massachusetts. Although our total de-
199
posits exceed those of any other banking industry in Massachusett&
we are indeed and in fact made up of many small units because the
largest savings bank in Massachusetts ranks only 26th nationally, and
it is less than one-fifth the size of the largest Massachusetts com-
mercial bank.
We particularly commend the realization implicit in S. 1008 that
NOW accounts are a great thing and a value to the public which
should be encouraged. We also commend the fact that in S. 1008 and
S. 1257 don't attempt to extend Federal rate controls to State-
chartered institutions in Massachusetts where the deposits are fully
insured by a State fund and savings banks are capably regulated by
the commissioner of banks.
We believe that our statement today will demonstrate that NOW
accounts are a new service which has resulted in many benefits and
caused no undue harm to any financial institutions or markets-
The negotiable withdrawal orders on NOW accounts should be
evaluated in the light of what forms and distribution of banking
services are good for the banking public, and ever recent major study
of banking services in the country has reached the same conclusion,
that it is in the public interest to remove from all banking industries
some of their traditional monopolies and to open up these markets to
free competition, all with the idea of encouraging better ways to serve
the public.
The NOW accounts were originally sanctioned in May of 1972 by
a favorable decision of our Supreme Judicial Court of Massachusetts,
and 56 of the savings banks in Massachusetts have since initiated this
service. It has brought three major benefits to consumer-depositors,
while inflicting no demonstrable harm to anyone.
For the first time, savings account depositors have a new flexibility
in making a withdrawal from their own savings account at a time
and place of their own choosing.
Many users of these NOW accounts have been existing savings bank
customers, anyway, who came into the bank occasionally to make a
withdrawal and to buy several "counter checks" or registered checks
or money orders to pay their usual bills. The Massachusetts savings
banks sold over 9 million of these slightly inconvenient counter checks.
Senator McINTYRE. What did you charge for those?
Mr. HowE. We charged 15 cents each, and I think that seems to be
a prevailing general rate in the Boston area.
It should be emphasized that the added flexibility for savings de-
positors is the major consumer benefit of NOW accounts, because in
all respects NOW accounts are closer to savings deposits than demand
deposits.
Legally, NOW deposits are regular savings deposits and they are
not demand deposits.
Practically, the majority of NOW deposits are savings-type de-
posits, not checking deposits, with regard to the average balances and
the withdrawal activity.
Senator McInRaE. Before you leave that point, is a NOW account-
a separate account from a regular passbook savings account?
200
Mr. HowE. Yes, sir, it is, because it is a statement account, and we
have a separate account open for each NOW account. Our bank in
fact had statement accounts for many years, but this is a separate
account, separate sets of rules which the depositor acknowledges. The
most usual account we have is the passbook type of account.
Senator BEN NErr. May I ask one question?
Senator MCI TYRE. Of course.
Senator BENNEr. Under the separate set of rules for the statement
account, is the depositor told he may withdraw his statement account
on demand?
Mr. HowE. No, he is not, sir. I have a copy in here, and I am positive
it says we have the right to defer payment.
Senator BENNErr. The same right you have with the passbook?
Mr. HowE. Yes, sir.
The second benefit for consumers of NOW accounts is that interest
is now paid on an account which can be used to "transfer funds." In
-Massachusetts, the commissioner of banks has determined that the
interest rate must be the same rate as on regular accounts. There is
debate about this. Some banks might prefer the New Hampshire sys-
tem. Some banks might not want to do that. In our case, we have had
no choice.
Appendixes B and C illustrate the break-even points between NOW
and checking activities of various sizes and levels of activity. Mr.
Haselton went over this with you before, but they indicate that many
present checking depositors would be better off to retain the checking
account they now have, again depending on the average balances and
the activity.
The final consumer benefit of NOW accounts is that the Massachu-
setts public now has a reasonable choice between financial institutions
in making third-party transfers of their own funds, whereas for the
last 150 years the commercial banks have had a monopoly in this type
of transfer of funds mechanism.
NOW accounts have not-have not disrupted the competitive bal-
ance between financial institutions.
As of March 1, the total NOW accounts in Massachusetts had bal-
ances of $71 million, which sounds like a lot of money to me, but it
is only two-tenths of 1 percent of the total banking deposits in the
State.
Senator MCINT E. Why is it that only 56 out of 167 have gone to
this NOW account?
Mr. HowE. I have various personal opinions. There has been great
pressure brought by our bank commissioner against these. She doesn't
like them. She has declared a moratorium on savings bank branch
offices until she says this question is "settled." We don't know what
she means by settled, I presume stopped, but this doesn't seem the
proper thing to do. So, there are many banks that feel a little bit
tender about antagonizing the bank commissioner.
Other people probably are reluctant to start up a system and incur
any startup costs like paying for a few forms or doing a little ad-
vertising when all this fuss is going on. I think some banks may be
run by people that are not to happy with any kind of changes.
Senator MNCINTYRE. What does? I think I have known somelof those.
Mr. CASADY. I might add that many of our banks have been pre-
pared to offer NOW accounts, but with the threat of legislation, both
201
on the State and Federal level, they have simply deferred action, not
wanting to start up something and advertise it and then suddenly say
it has been taken away. This is just a natural apprehension and delay,
and I think, if this were all settled, particularly alorig Governor
Mitchell's lines or something like that, you would find most of our
savings banks immediately offering them.
Mr. HowE. Banks representing about 60 percent of the State de-
posits are in it now, although only a third in number.
On the competitive disruption, which doesn't exist, 44 percent of
all NOW deposits or balances were direct transfers from existing
savings accounts at the same savings bank, and we keep records of
this, and enough more represent the normal savings account growth
at the same bank. In other words, if a person comes into our bank and
wants to open a savings account, which they do by the hundreds every
day, I think, we say, "Why don't you have a NOW account? It is the
same as a savings account, but it, might be better for you."
So, I think it is safe to say that the majority of all these NOW
balances are savings-oriented funds and do not represent flows from
other banks.
In the last half of 1972, the total growth of NOW accounts-and
this covers almost their entire period-was approximately 2 percent
of the total growth of all banking deposits in Massachusetts. Of all
the growth in banking deposits in Massachusetts, only 2 percent was
NOW account growth.
Senator MCINTYRE. I think that your previous testimony damages
that somewhat. In other words, only 56 have gone in because of the
shadow that lurks over it. So, we don't get an appropriate number.
You said 60 percent of the deposits are now involved. So, you have 40
percent that are nct involved. If you had the green light, the growth
might be more sizable.
Senator B NE.-',.rT. I would like to comment on that. You have grown
from zero to $71 million in 6 months, and while you are only two-
tenths of 1 percent of the total deposits, your rate of growth is 10 times
your percentage of the total deposits. So, that is a pretty rapid rate of
growth. Your growth is 2 percent of the total growth against a base
of two-tenths of 1 percent of the total deposits. So, you have got a
very substantial rate of growth in th-ere ."
Senator MCINTYRE. You seem to have a very good idea.
Mr.HowE. When you compare starting from zero, it is pretty hard.
Mr. Carr has some statistics here.
Mr. CARR. Not statistics. I would like to say in regard to the chair-
man's point that you implied that because banks with 60 percent of the
deposits presently offer NOW accounts and 40 percent do not, that
40 percent of the potential was still out there, and I don't think this is
the case, because in every community there is a certain limited poten-
tial market for a NOW-type account, and in many of these communi-
ties where one bank is offering the account and others are not, the one
bank offering it has sucked up more than its share might be, particu-
larly in one community where one bank offers it and 10 or 12 banks
nearby do n6t. They have been the most successful ones. I don't think.
the remaining banks as they come in will experience a growth that is
proportionate to those that began the service.
202
Mr. CASADY. May I comment, too. In answer to your question, Sena-
tor Bennett, much of the growth in the NOW accounts would have
come in the regular accounts, anyhow. So if you take the combined
growth of the regular savings and the NOW accounts, it is not an ab-
normal growth.
M.
Senator BENNETr. You are saying that the savings banks are grow-
ing at a rate 5 to 10 times as fast as the normal deposits would with-
out the NOW accounts?
. Mr. CASADY. I am saying that the amounts in the NOW accounts
would be in the regular accounts. About 45 percent represent a transfer
within the banks from regular to NOW accounts, and a good part of
the rest of the money in NOW accounts would have come in, anyhow.
Senator BENNETr. You say 45 percent of it, so the other 55 percent
came from somewhere else:
Mr. CASADY. Yes; and as Mr. Howe pointed out, many of the people
whQ come into a bank to deposit, they asked them whether they would
rather have a NOW account or a regular checking account. So they
would take the NOW account.
Mr. HowE. If Massachusetts banks grow $100 million this year and
$2 million of it are in NOW accounts, that is 2 percent of the growth.
I don't think this is anything like a disaster which the commercial
banks and the savings and loans try to make you believe it is.
Senator BEN NEr. I am not saying it is a disaster. I am saying you
are growing at a very rapid rate. I am surprised that you are not
proud of that.
Senator McIxTnRE. I think to allay your feelings somewhat, at least
some of those people that are vitally concerned with this have not in-
dicated that we are in any disaster area. There are a lot of red flags
flying. As I said, I think you have come up-who was that fellow in
here, I told him he was on the frontier of something.
Senator BENNETt. Our problem is not to rescue the country from
disaster. Our problem is to try to see how we steer into the future, this
idea that you have pioneered in Massachusetts. That is what we are
thinking about.
Mr. fowE. NOW accounts have been better accepted by the public
in the larger cities such as Boston than in the smaller cities and towns,
according to our savings banks association statistics. So, the argument
that the NOW account is a particular threat to small financial institu-
tions, I think, is not valid.
But if NOW accounts are, and again I agree with you, are or become
successful, it seems to me it would be much more logical to extend any
benefits they have or may have to other financial institutions as pro-
posed in S. 1008 rather than to deprive the public of their availability.
I will skip over the discussion at the bottom of page 5 about reserves
and taxes, unless there are questions, and move on to interest rate ceil-
ings, which are the concern of S. 1008, S. 1256, and S. 1257. Any ad-
justment in this area should take cognizance of the needs of the mort-
gage market and the many exclusive powers retained by commercial
banks, including all corporate'banking powers and.trust services. Ap-
pendix D highlights the various powers of banking institutions with
different industries in Massachusetts. The table also indicates that
savings and loans also have powers not available to savings banks,
including the ability to borrow from the Federal Home Loan Board
and the ability to branch across county lines.
203
Skipping to the bottom of the page on this question of availability
of mortgage funds, some critics h ave contended that NOW accounts
also threaten the mortgage markets, and this is utterly ridiculous in
my opinion. They theorize that the payment of interest on these ac-
counts must raise the bank's costs and that these higher costs must be
passed on to the mortgage customers in the form of higher rates.
Although we only have preliminary data, it appears that the NOW
accounts are self-supporting and have not been a "loss leader." Studies
of my own bank lead me to believe that NOW accounts are achieving
a modest profit.
The positive or neutral impact of NOW accounts on a savings
bank's net profitability can best be understood if I repeat that nego-
tiable orders of withdrawal represent an additional service to existing
savings deposit customers, and the 15 ceiits charge covers the cost of
this additional service, leaving the profitability of the basic account
unchanged.
I think it is well known that Massachusetts' mortgage rates have
long been and still are well below the national averages. Massachu-
setts' mortgage rates have not increased since the introduction of
NOW accounts. Nationally, the savings banks' average mortgage rate
are lower than those of commercial banks, savings and loans, and
insurance companies.
I do not see how the NOW accounts could do anything but help
mortgage markets. Thrift institutions invest a far larger portion of
their savings deposits in mortgages than do commercial banks. Hence
anything which helps to bring deposits to a thrift institution, even in
a very moderate way, cannot help but spur the availability of mort-
gage funds.
Regarding rate controls, we maintain that the FDIC control of
Massachusetts savings banks is not necessary and is not desirable.
Section 3 of S. 1256 would substitute FDIC rate control over Massa-
chusetts savings banks in place of the present control of the commis-
sioner of banks.
The Massachusetts legislature created this system of deposit insur-
ance for all its mutual savings banks in 1934, and has maintained such
a system continuously from the years of the Great Depression to the
present time. It is a system of which we are very proud. Every single
depositor in every Massachusetts savings bank has been successfully
protected against loss of any portion of its deposits, which cannot be
sai-
Senator MCINTYRE. Has it been tested on a number of occasions and
come through with flying colors?
Mr. HowE. The fund has never lost a penny and that can't be said
about FDIC-protected depositors. We think this is a better fund in
many ways. In considering the risks involved, I think it may well be
a better insurance than FDIC.
Senator BENNETT. Do you put more into it than the FDIC members
put into their fund?
Mr. HowE. We put in this year one-twenty-seventh of a percent of
deposits and I think the FDIC, not being a member, puts in about
the same amount and gives back a reduction; but I would have to
ask a commercial banker on that. I think at the moment we are putting
in a little bit more than they do.
204
To this day, our State-administered system of savings bank deposit
insurance and rate controls retains a unique combination of strengths
and advantages, because all Massachusetts banks are insured in full,
not just up to the $20,000.
The Massachusetts public has received over the years many benefits
from the intensive competition produced by the several strong com-
petitive banking industries in the State, and although various break-
throughs may have at times seemed disruptive to competitors, they are
obviously very much in the public interest.
If Federal rate control authority is extended to cover Massachu-
setts thrift institutions, and if the FDIC and Federal Home Loan
Bank choose to roll back the ceiling rates paid by over 300 Massachu-
setts savings banks, cooperative banks, and savings and loans, the
savings depositors in Massachusett will receive a reduction in divi-
dends of over $50 million a year or around $1 million a week. This
could lead, of course, to heavy withdrawals from all Massachusetts
thrift institutions and thereby impair liquidity and curtail money
available for mortgages on residential housing.
After the detailed hearings and deliberations in Washington in
1969 and 1970, through the leadership of Senator Brooke, Congress
made the fundamental policy decision that nonfederally insured fi-
nancial institutions, including commercial banks, savings and loans, co-
operative banks and savings banks, should be regulated at the state
level when the state authority exists, and is implemented. There is
no need to change that fundamental policy in 1973. In Massachusetts,~
we are regulated by the State banking commissioner and a healthy
and viable type of dual banking system exists. We see no need for the
extension of federal controls.
Since that time the earnings of Massachusetts thrift institutions
have increased approximately 60 basis points. Our mortgage rates
lave declined. Our savings deposits have grown slower than those at
savings banks in other New England States. In other words, we are
no threat to our neighboring New England States, because the results
are that our rate of growth in Massachusetts has been less than the
other New England States. And savings deposits at Massachusetts
commercial rates have grown faster than those in the other five New
England States. So, Massachusetts savings banks can be no threat
from the record to Massachusetts commercial banks.
Thrift depositors in Massachusetts have thus benefited from the
compromise worked out in the Senate in 1969, and no one has been
hurt. We thus find it incredible that other banking industries have
again attempted to bring about a rollback of savings account rates in
Massachusetts.
The Massachusetts savings bankers hope that we will be able to
find more ways to better serve our customers. If other institutions are
interested in NOW accounts, we urge this committee to make them
available, as would be accomplished by S. 1008. However, if other
banking industries are not interested in providing broader service,
they should not be allowed to inhibit the progress of more consumer-
oriented institutions. We urge this committee and the Congress to pass
S. 1008 or S. 1257 without amendment and to reject S. 1256.
Thank you, sir.
[The complete statement follows.]
205
STATEMENT
OF THE
Savings Banks Association of Massachusetts
Before The
Sub-committee on Financial Institutions
Of The
Senate Committee on Banking, Housing and Urban Affairs
March 21, 1973
My name is John S. Howe. I am president of the Provident Institution for
Savings in Boston, Massachusetts, and a past-president and member of the Executive
Committee of the Savings Banks Association of Massachusetts. I appear on behalf of
our Association which represents all of the 167 mutual savings banks within the
Commonwealth to express our strong support for S 1008 and S 1257 which would extend
the existing authority of State and Federal agencies to regulate interest rates at
various financial institutions. S 1008 would also clarify the ability of financial
institutions to provide interest-paying savings accounts from which depositors can
make withdrawals by means of negotiable instruments.
We strongly oppose Sections 2 and 3 of S 1256 which would prohibit the
payment of interest on negotiable withdrawal order accounts and substitute F.D.I.C.
interest rate controls for the present state control over all state-chartered
savings banks not insured by F.D.I.C.
Massachusetts savings banks are mutual thrift institutions operated solely
for the benefit of their depositors and communities. They have no stockholders.
They are the principal source of home mortgage funds in Massachusetts. Their
deposits, which now exceed $14 billion in over 4 million savings accounts,
represent approximately 75% of all savings deposits in thrift institutions in
Massachusetts. These deposits are invested primarily in residential mortgage loans.
Although our total deposits exceed those of any other banking industry in Massach-
usetts, we are an industry comprised of many small units. The largest Massachusetts
savings bank ranks only 26th nationally, and is less than one-fifth of the size of
the largest Massachusetts commercial bank.
g3-211 0 - '73 - 14
206
We particularly commend the realization implitit in S 1008 that N.O.W.
accounts are a service of considerable value to the public which shoLld be
encouraged,- and the fact that S 1C08 and S 1257 do not attempt to extend federal
rate controls to state-chartered institutions in Massachubetts where deposits are
fully insured by a state fund and savings banks capably regulated by the
Commissioner of Banks.
We believe that our statement today will demonstrate that N.O.W. accounts
are a new service which has resulted in many benefits to the banking public, while
causing no undue harm to any financial institutions or markets.
I. Issues Must Be Resolved in Terms of Public Interest
Negotiable withdrawal orders, a check-like device which can be used to make
withdrawals from interest paying savings accounts (henceforth referred to as
N.O.W. accounts), and interest rate ceilings, undoubtedly appear to be issues which
represent primarily a battle over services and markets between competing financial
industries.
They should not be evaluated in this light. The primary issue involved is
what forms and distribution of banking services are good for the banking public.
Every recent major study of banking services in the United States has reached the
conclusion that it is in the public interest to remove from all banking industries
some of their traditional monopolies and to open up these markets to free
competition with all individual institutions encouraged to devise better ways to
serve the public.
Before this public goal can be accomplished, all banking institutions are
going to be subjected to changes resulting from increased competition and lost
monopolies.
The issues involved today, N.O.W. accounts and interest rate ceilings, must
thus be resolved in terms of the long-run public benefit rather than minor short-
run disruptions of traditional competitive relationships in banking.
207
IIM N.O.W. AccoanteHave Produced New Public Benefits
N. 0. W. accounts were originally authorized in May, 1972 by a favorable
decision of the Supreme Juducial Court of Massachusetts, the highest state court.
Since that time 56 Massachusetts savings banks have initiated this service. It
has resulted in three major benefits for consumer-depositors, while inflicting no
demonstrable harm to consumer-borrowers.
1. For the first time, savings account depositors have a new flexibility
as to making a withdrawal from a savings account at a time and place of their own
choosing.
Many users of a N.O.W. account have been existing savings bank customers who
came into the bank occasionally to make a withdrawal and to buy several "counter
checks" in order to 'ay regular bills. Massachusetts savings banks sold over
9,000,000 counter checks in 1972.
It must be emphasized that this added flexibility for savings depositors is
the major consumer benefit of N.O.W. accounts, because in all respects N.O.W.
accounts are closer to savings deposits than demand deposits.
Legally, N.O.W. deposits are regular savings deposits nt demand deposits.
Practically, the majority of N.O.W. deposits were previously savings deposits,
not checking deposits.
In my own bank 44% of the N.O.W. balances which we have attracted during the
nine months which we have offered N.O.W. accounts have been direct transfers from
existing savings accounts and many more would have been new savings accounts
anyway.
And, functionally, the average balance of a Massachuisetts N.O.W. account,
$1920, is closer to the $2700 dollar average savings account balance than the
$670 average personal checking account balance, and the average number of with-
drawals per month, 5.3, does not approach the 15 average withdrawals from a personal
checking account.
208
2. The second new consumer benefit of N.O.W. accounts is that interest is
now paid on an account which can be used to "transfer funds". In Massachusetts
the Comissioner of Banks has determined that the interest must be at the same
rate as on regular accounts. This is offset by a charge of 150 per withdrawal order.
However, as opposed to prior savings account customers, all of whom are
better off with a N.O.W. account if they are willing to give up the use of a
passbook, many commercial bank customers with active accounts are better off to
retain their checking account because of the 15# charge on N.O.W. drafts. Almost
all Massachusetts commercial banks presently offer "free" checking accounts.
Appendix B illustrates the breakeven point between N.O.W. and checking
accounts for various sizes and levels of activity. It indicates that many present
checking depositors would be better off to retain that form of account.
3. The final consumer benefit of N.O.W. accounts is that the Massachusetts
public now has a reasonable choice between financial institutions in making third
party transfers of their own funds.
III. N.O.W. Accounts Have Not Disrupted Competitive Balance Between Financial
Industries.
As of March 1, 1973, 56 Massachusetts savings banks had total N.O.W.
balances of about $71,500,000, approximately two-tenths of one percent of the total
banking deposits in Massachusetts.
44% of all N.O.W. balances were direct transfers from existing savings
accounts at the same bank and enough more represent the normal savings account
growth at the same bank that it seems safe to say that the vast majority are
"savings" oriented funds and do not represent flows from other banks.
In the last six months of 1972 the total growth of N.O.W. accounts was
approximately 2% of the total growth of all banking deposits in Massachusetts.
Excluding internal transfers and normal growth, the maximum amount which might
have been transferred from other financial institutions was lebs than 1% of total
deposit growth. This is hardly the substantial outflow feared by competitors.
-N 209
N.O.W. accounts have been better accepted by the public in larger cities
such as Boston, than in smaller cities and towns. Hence, the argument that N.O.W.
is a particular threat to small financial institutions is not valid.
The growth of N.O.W. accounts appears to be leveling off at most banks
which have offered the service for a number of months. Growth in February was
less than in recent months in terms of absolute dollars, despite an increased
number of banks offering the service.
As you can see there is absolutely no evidence to support the contention
that N.O.W. accounts have resulted in major disruptions in the flow of deposit
funds to the various financial industries.
There is a chance that these accounts may grow faster in the future. This
will only be the case, however, if their usefulness to the consuming public is
even greater than we have anticipated. If so, it would seem to be far more logical
to extend the service to other financial institutions as a means of avoiding
potential injury, as proposed by S 1008, rather than to deprive the public of
its availability.
Furthermore, testimony by regulatory agencies last week before the House
Sub-committee on Bank Supervision and Insurance clearly indicated that the
Commissioner of Banks in Massachusetts and the F.D.I.C. in other states presently
have the powers necessary to control N.O.W. accounts should they become more
disruptive.
It has also been alleged by opponents of transfer accounts in thrift
institutions, that such new powers should be accompanied by changes in the
treatment of reserves, taxes and interest rate ceilings.
As the N.O.W. account function
a
l 3lits %pewhere between savings and
demand deposits, any reserve requirements should likewise be somewhere between
those presently required for these two types of account.
210
In 1969, Massachusetts savings banks paid combined federal and state income
taxes of slightly over $9,000,000. This rose to $12.5 million in 1970, $19 million
in" 1971 and over $27 million in 1972. They will rise considerably further before
1978. Most of these changes came as a result of the Federal Income Tax Act of
1969. Since 1969 our combined federal and state taxes have risen to over 20% of
earnings. We do not have the 1972 tax figures for Massachusetts commercial banks.
However, in 1971 their combined payments fell from $65 million the previous year
to $48 million, a figure representing 24% of earnings. Hence, savings banks are
approaching full tax equality with commercial banks.
Interest rate ceilings are of course the primary subject of S 1008, S 1256
and S 1257. Any adjustment in this area must take cognizance of the needs of the
mortgage market and the many exclusive powers retained by commercial banks includ-
ing all corporate banking powers and trust services.
Appendix D highlights the various powers of banking industry in Massachusetts
at present. The table indicates that savings *nd loans also have powers not
available to savings banks, including the ability to borrow from the F.H.L.B.
system and the ability to branch across county lines.
Prohibition of N.O.W. accounts by the U. S. Congress could create a
dangerous precedent if all banking industries get the idea that Congress is willing
to eliminate the new services originated by other industries. Savings banks might
soon, for instance, try to halt the branching of savings and loans across county
lines which was unilaterally originated by the Federal Home Loan Bank two years
ago, despite the fact Massachusetts law prevents all other banking industries
from expanding in this fashion.
IV. N.O.W. Has Not and Will Not Alter The Availability of Mortiare Funds.
Some critics have contended that N.O.W. accounts also threaten the mortgage
markets. They theorize that the payment of interest on these accounts must raise
the bank's costs and that these higher costs must be passed on to mortgage
customers in the form of higher rates.
N 211
Although only preliminary data is available, it appears that Massachusetts
N.O.W. accounts are self-suppcrting and have not been a "less leader". Studies
of my own bank, comparisons with Federal Reserve Functional Cost studies for
personal checking accounts, and a preliminary survey of several banks offering
N.O.W. accounts all indicate N.O.W. accounts fall in the moderate profitability
range.
The positive or neutral impact of N.O.W. on a savings beank's net profitability
can best be understood if it is emphasized that N.O.W. representsprimarily an
additional service to existing savings-deposit customers. The 15t charge covers
the cost of this additional service, leaving the profitability of the basic account
unchanged.
Mortgage rates have always been and still are well below the national
averages in Massachusetts. For example Federal Home Loan Bank Board data for all
lenders in January of 1973 indicates an average effective rate of 7.01% on new
home loans in the Boston area compared to 7.68% nationally and 7.35% on existing
homes in the Boston area compared to 7.60% nationally. The Massachusetts rates
have not increased since the introduction of N.O.W. accounts.
The same data indicates that nationally savings bank average mortgage rates
are lower than those of commercial banks, savings and loans and insurance companies.
Savings banks mortgage rates are lower because, at least in Massachusetts,
the average savings bank has a lower average cost of money than their savings and
loan counterparts. Presently the average cost of funds for Massachusetts savings
banks is 5.35%. This lower cost is achieved because the savings bank mix of
deposits is more heavily weighted towards the lower interest rate regular accounts
than higher rate special notice and term certificate accounts than is the savings
and loan "mix", and because savings an,! loans generally borrow funds from the
Federal home Loan Bank to supplement deposit flows as a source of lendable funds.
New England Federal Savings and Loans currently pay.a considerably higher late
(in excess of 6%) to the Federal Home Loan Bank of Boston (and through the Federal
Home Loan Bank to institutional investors) for lendable funds, than to pay to
their depositors. Massachusetts savings banks rarely borrow money.
212
If there is presently a serious threat to the stability of mortgage rates in
Massachusetts, it is the recent increase in lending rates of the Federal Home Loan
Bank of Boston, not N.O.W. accounts or the attractive rates paid to depositors at
Massachusetts thrift institutions.
Indeed, I do not see how N.O.W. accounts could do anything but help mortgage
markets. As you know all thrift industries invest a far larger portion of their
savings deposits in mortgages than do commercial banks. Hence, anything which helps
to bring a savings deposit into thrift institutions, even in a moderate way, can not
help but spur the availability of mortgage funds.
V. F.D.I.C. Control of Massachusetts Savings Bnik.s is not Necessary or Desirable.
It is A Threat to One of the Remaining Bulwarks of Federal-State Duality in Savings
Banking.
Section 3 of S 1256 would substitute F.D.I.C. rate control over Massachusetts
savings banks for the present control of the Commissioner of Banks.
Massachusetts is the only state in the country which has created a system of
deposit insurance for all of its mutual savings banks and cooperative banks and
maintained such a system continuously from the years of the Great Depression to the
present time. It is a system of which we are justly proud and one which our members
believe has advantages over the federal deposit insurance system.
The savings banks deposit insurance system in Massachusetts was created by an
act of the Massachusetts Legislature in 1934 as a separate fund to be administered
by the Mutual Savings Central Fund which had been created two years before to provide
liquidity for Massachusetts savings banks. Through a practical administration of it
liquidity fund and the Deposit Insurance Fund, the directors of the Central Fund
guided the savings banks of Massachusetts through the hazardous depression years,
shoring up a few hard-hit banks in depressed areas with timely injections of needed
capital. As a result of these efforts in cooperation with and under the supervision
of the Comissioner of Banks, every single depositor in every Massachusetts savings
bank has been successfully protected against loss of any portion of his deposits.
This is an example of how members of a responsible industry within a single state
can solve their own problems with their own resources.
213
To this day, our state-administered system of savings bank deposit insurance
and rate controls retains a unique combination of strengths and advantages.
Deposits in all Massachusetts savings banks are insured in full, not just up to
$20,000. Member banks may choose to join F.D.I.C. and to have the first $20,000
of each deposit insured by it. Eight banks have done so. The excess over $20,000
must be insured by the Central Fund so that all deposits in Massachusetts savings
banks are insured in Cull.
We submit that the experience of the Massachusetts savings banks in the
area of deposit insurance and rate controls demonstrates there are advantages
to having a state system as well as a federal system. Each system may develop
its own improvements and benefit from the innovations of the other, and everyone
benefits from this constructive interaction.
The Massachusetts public has received many benefits from the intensive
competition produced by the several strong competitive banking industries in
the state.
1. Massachusetts savings depositors currently receive higher rates of
interest than their counterparts elsewhere in the country while, as I have
indicated, Massachusetts loan customers pay less.
2. The N.O.W. account was introduced in Massachusetts, and other services
such as low-cost Savings Bank Life Insurance and the special notice account also
originated in Nnssachusetts.
3. Recently in response to N.O.W. accounts many Massachusetts commercial
banks have brought one statement banking further along than it is in other states.
Although these breakthroughs may at times seem disruptive to competitors,
they are obviously very much in the public interest. Indeed, we believe that the
banking environment in Massachusetts is currently more healthy from the public
standpoInt than that in any other state in the country.
We urge the rejection of unnecessary extension of Federal Controls that
could only erode the dualism that remains.
214
VI. A Roll-back Could Harm Many Massachusetts Citizens.
If federal rate control authority is extended to cover Massachusetts thrift
institutions, and the F.D.I.C. and F.H.L.B. choose to roll the ceiling rates paid
by over 300 Massachusetts savings banks, co-operative banks and Savings and Loans
back from 54, to 5% on Special Notice Accounts and from 5% to 5% on Regular
Accounts, savings depositors in Massachusetts will receive a reduction of
dividends of over $50,000,000 annually, or $1 million a week.
Why?
After detailed hearings and deliberations in 1969 =nd 1970 and, through
the leadership of Senator Brooke, Congress made the fundamental policy'decision
that non-federally insured financial institutions, including commercial banks,
savings and loans, co-operative banks and savings banks, should be regulated at
the state level when the state authority exists and is implemented. There is no
need to change that fundamental policy in 1973. In Massachusetts, we are regulated
by the State Banking Commissioner and a healthy and viable type of dual banking
system exists.
Since that time the earnings of Massachusetts thrift institutions have
increased approximately 60 basis points (which rate ceilings prevent us from
passing on to the public). Our mortgage rates have declined. Our savings deposits
have grown slower than those at savings banks in the other New England states,
and those at Massachusetts commercial banks have grown faster than those in the
other five New England States.
Thrift depositors in Massachusetts have thus benefited from the compromise
worked out in the Senate in 1969, and no one has been hurt. We thus find it
absolutely incredible and selfish that other banking industries have again
attempted through HR 4070 and S 1256 to bring about a rollback in Massachusetts
If Massachusetts savings and loans have an earnings problem, it is up to the
Federal Home Loan Bank Board, not the people of Massachusetts to solve this
problem.
215
VII. s
The savings banks of Massachusetts hope that we will be able to continue to
find more ways to better serve our customers. If other institutions are interested
in N.0.W. accounts or others of our services, we urge this Committee to make them
available, as is accomplished by S 1008. However, if other banking industries
are not interested in providing broader service, they should not be allowed
to inhibit the progress of more progressive institutions. Stripped of their
veneer, Sections 2 and 3 of HR 4070 and S 1256 represent an effort by two powerful
banking industries to use the U.S. Congress to protect themselves from increased
competition and to prohibit expanded services to the public.
If any other banking industry truly has a competitive problem a situation
we doubt, it should be alleviated by expanding their ability to serve the public
rather than by depriving the public of the benefits of a healthy competitive
environment.
We urge this Committee and the Congress to pass S 1008 or S 1257 without
amendment, and to reject S 1256.
-j1
Rassachucetts N.0.1i. Activity
Sept. 30
111. of !3znks
Total N..;
Deposits
No. of Accounts
;aerage L& lance
:lip 09,
NO. of ti~raals
In VAnth
;:.;.71,. r of
uLrt(Yonth
0, CCL '0'4: 1:(A-.'
23
4,0OO
N/A
N/A
W/A
NI/A
N/A
Oct. 31
35
*i22,3$36,0Cs
13,026
1,719
47,500
3.6
A8,91-3, CG,
39.8%
Nov.- 30
46
.$34,363,Mou,
19,687
1,745
87, 805
4.5
'.14,521 ,Grj
42.2%
Dec. 29
A~4, 521,~000)
23,936
1,660
118,033
4.9
43.2%
Jan. 31 +
53
'j59,500,000
3C,990
164,194,
5.3
.26,91So, coo
44.C%
Fe L-. 28 -1-
$71., 500,COO
37,230
1t,20
197,3W
.5.3
4.60, 000
44. 0V_
*Fremn ezinting savinf~s nscotirit at the sarne ixnk.
+Ectnted on the basis of -cPlit. from 49 of 53 banks.
.4)L Eatizated on Uie basis of replies from 43 of 56 banks.
217
Aroendix B
Customer Breakeven Analys-s: N.O.W. vs. Regular Checking
0 - $200
-- 4 .7 %
1
Better off with
checking account
$200 - $500
$500 - $1000 C
- 4h30% ,- 20.621,
Better off with
N.OW. account
$100 $200 $300
$400 $500 S600 $700 $o
9o 0 o000
EXPLAWATION:
A customer when comparing
a N.O.. account to a personal checking account in
Massachusetts,
must evaluate the financial
impact of two differences:
the 154 per draft
charge on a N.O.W. account compared to the "free" checks available at most commercial
banks,
and the 5-% interest on a N.O.W. account compared to the lack of interest on a checking
account. The solid line above presents the "breakeven"
for each size of balance and number
of transactions.
If a customers account statistics
are above this line he is better off
with a checking account, and if they are below he may be better off with a N.O.W. account.
The broken line tracesthe
15 transactions
per month which Federal Reserve Functional
Cost Studies indicate are cleared through the average personal checking account. The
percentage
figures along this line indicate what percentage
of the total checking
accounts in Massachusetts
fell in the indicated
size category in 1971, as reported by
Federal Reserve Functional
Cost Reports.
These percentage
breakdowns
include corporate
checking accounts which clear more
than 15 items per month, and carry high average balances.
If such corporate checking
accounts were deleted, the total Dercentage
of checking accounts to the left of the
line above, and hence better off t1o retain their checking account than to transfer to
a N.O.W. account, would be higher than the approximately
65% indicated
above.
Appendix C
CHARGES IN CONNECTION WiTh THE USE OF
1MGOrIABLE ORDERS OF WITHDRAWAL ON
N.O.W. ACCOUNTS
1. $ .15 per order paid
2. $2.00 per stop payment order
3. $1.00 - orders returned for any reason
4. No charge for drafts presented and paid at any 1ranoh
N.O.W. ACCOUNTS - EARNINGS COMPARISON CHART
MONTHLY COST FOR DRAFTS USED 0 150 EACH
(Plus cost of draft (1 /8 cents each) at most popular t
IQ DRAFTS 15 DRAFTS 0 DR S 25 DRAF
$1.62 $2.41 $ 3.23 $ 4.04 $4
$1.62 $2.41 $ 3.23 $ 4.04 $ 4
$1.62 $2.41 $3.23 $ 4.04 $4
$1.62 $2.41 $3.23 $ 4.04 $ 4
$1.62 $2.41 $3.23 $4.04 $4z,
ype)
RAFTS
.84
.8-4
.84
.84
Datc t. or 1 1/8e
200 2.25
MINIMUM
MONTHLY
BALANCE
$ 40
$ 500
$ 700
$ 900
$ 1000
MONTHLY
AVERAGE
INTEREST
$ 1.72 +
$ 2.19 +
$ 3.06 +
$ 3.94 +
$ 4.38 +
each
Drafts cost
219
Appendix D
Comparison of Powers: Vajor Ylassachusetts
Banking Industries
Cormercial
Savings
Savings And
Banks
Banks
Loan Associations
Accept Personal Deposits
Checking
Saying
Accept Corporate Deposits
- -r"t'i. t-Servies-
Inveatment Powers
Mortgages
Personal Loans
Corporate Loans
Corporate Securities
B6ranch-Across
County Lines
Backup Borroing Poers
..... n AreoySev..
X
X
x
U)LMIrTED
x
x
r x
LDM ED
____-_____ I ___________________________
THROUGH FEDERAL
RESERVE SYSTEM
Investment Advisory Services
Security Safekeeping
Holding Company Activities
Inter-Bank Ownership
X
Date Processing Services
Z
Insurance
x
Other
x
UnderrTite and Sell Micipal
X
Securities
Factoring
x
'Edge Act Corporations
International
Branches
TRON FED YSTE)
LOAN
BANK
SYSTEM
I.
220
Senator MCINTYRE. Anything further you gentlemen want to say
after that?
Thank you very much, Mr. Howe. In view of the hour, I won't
pursue you with any questions. It was a very excellent statement,
comprehensive, and I must say hard-hitting, which, I think, is good.
Thank you very much.
We call as our last witness this afternoon Mr. Everett P. Pope,
representing the Massachusetts Cooperative Bank League. I am
happy to welcome you here, Mr. Pope. I have your statement here. It
will appear in full in the record.
STATEMENT OF EVERETT P. POPE, MASSACHUSETTS COOPER-
ATIVE BANK LEAGUE; ACCOMPANIED BY JOHN J. McCARTHY,
COUNSEL
Mr. POPE. I shall summari':e very briefly. With me this morning is
Mr. John J. McCarthy, counsel for the Massachusetts Cooperat;.ve
Bank League.
We have one or two pages of description of the Massachusetts co-
operative banks which are unique institutions.
Senator MCINTYRE. Are they different from S. & L.'s.
Mr. POPE. We are State chartered savings and loan associations in
disguise. We are a bank of deposit under the statute of Massa-
chusetts. We are members of the United States Savings and Loan
League with whose testimony this morning, I regret, I shall sharply
disagree. There are 144 coolperative banks in Massachusetts, average
size about $20 million, with gross assets about $3 billion.
Senator MCINTYRE. Do we have anything like this in New
Hampshire?
Mr. POPE. There are one or two cooperative banks in New
Hampshire, two or three or four. Very briefly, we support the extension
of rate control, of course; turning to the situation on NOW ac-
counts, the cooperative banks in Massachusetts cannot offer NOW
accounts.
The Massachusetts Cooperative Bank Leagub has filed bills in the
Massachusetts legislature seeking such authority.
In Massachusetts, cooperative banks compete for deposits with
mutual savings banks, Federal savings and loan associations and
credit unions as well as commercial banks. In order to compete effec-
tively, cooperative banks must be able to offer the same services as
those offered by competitors. If savings banks offer NOW accounts,
cooperative barks must offer NOW accounts.
The League favors the concept of NOW accounts for cooperative
banks and for the institutions with which it competes. Accordingly,
th- League supports sections 2 through 5 of S. 1008.
We heard this morning for the first time, the suggestions of
Governor Mitchell, and I think it is ouite reasonable to say that the
Massachusetts
Cooperative Bank League would support the
Governor's suggestions relative to the reserve requirements
and per-
haps some modification
of the interest rates. Our testimony, therefore,
perhaps is unique, Senator, in that we do not now have NOW ac-
221
pointss , and we (1o not seek to stop those who have them. We seek to
joi those who have them. and velcone the competition from all other
types of financial inst itut ios, s11l0ld they choose to have this type
of acollit s.
As far as the provisions of the extension of Federal rate control to
Massachusetts. may J siitll*y say, I would like to he associated with the
testimony of 'Mr. Howe. the previous speaker, whose remarks eertailly
reflect the thinking of our institutions, the cooperative banks of
Massachusetts.
Senator .McIxT-y:. What interest rate are vou allowed ?
Mr. Por. We pay 5.25 percent oti passbook savings . sir. On certif-
icates. ot1w rates in Massachusetts are the sanie as the rates paidt.
throuihout the United States. It is only on passbook savings that we
have a quarter of I percent rate differential.
Senator M'cIx'nuv,. You are the same as an S. & L. ?
Mr. Por. We have the mutuality concept.
Senator McINTrm'. The S. & L's are so strongly against this. Why
wild von take a different attack ?
Mr. PourF. I can only tell yotu whiy Ae take our position. We believe
this is a Consumer service that we wrant very ueh to offer. We believe
it is in favor of the consumer and our depositors and in the long run,
iii favor of our institutions.
Sector IN,'rrI:r:. 1)o you go to their meetings?
Mr. Por. We are good f riends: yes. sir. We ditfer on this point.
Senator M.cINT-r. You do go to their meetings?
Mr. Pr'r. On a nationwide level : yes. sir.
Senator Mc'Ix,,ry:. Give me an idea of how big you are in
Massachusetts.
Mr. Pour:. Our assets are just under .3 billion. 144 cooperative banks,
average size institution. about $20 million.
[The full statement and a subsequent letter of Mr. Pope follows:J
STATEMENT OF EVERETT P. POPr. PRESIDENT. WORKImNMEN'S CooPERATIVE BANK,
ON BEHALF OF TImE MASSACIIU5ETTS COOPERATIVE BANK LEAGUE
I. CO-OPERATIVE BANKS, A DESCRIPTION
The Massachusetts Co-operntive Bank League is the statewide trade associa-
tion to which all 1-44 Co-operative Baiks voluntarily belong.
Co-oljrative Banks are a system of independent state-chartered nintual thrift
institutions which have been serving Massachusetts since 1877. Their prime futie-
tion is lrsonal service-service to peol(- rather than to comme rce and industry.
As a "'ole's lbank" they provide safe. protitable itnvestment for depositors'
funds ini saving, a.ccmnts and savings certificates. 'I'ie~e savings are lustd to
finale the blyitig, building, repair atid inl)rloveiciat of holies and other real
state.
This simple. uncomplicated function provides high earnings for depositors and
low-cost finlieil.ig for homeowners. Every dollar deposited is insured inl full
unler Massachusett.s Law by the Share Insurance Fund of the Co-operative Cenx-
tral Bank, No depositor has ever lost a dollar of savings in any 'Massaehusetts
C('-olerat ive, Bank.
.ks mutual thrift institutions. Co-operative Banks are owned and governed by
their depositors and are supervised ,Ind examined by the Office of the Commis-
sioner of Banks of the Comaonwealth of Massachusetts. Each depositor is an
corner (sometimes referred to as a member or shareholder), to whom the net
93-211-73-- 15
illoolil' 4)f i';i'l Bat11i1 i isftiliiitqi( fl it'e flitlil off *liitlidils Izlil ititi-rest, ntftor
iltatt 10-0Ii i Il fai Il' ri' si't'rvt'S. 11'I.(. aI t'V I s i c Ip (lI' I 'iiijti'i ly. ifI is
J''i ' i-itll fIillt';tt't l1w-41 O ('1l-'l orl II Itk fIif4i in(, 1 Ma);llits't cih'
J~Il tons, 3 11 sri Irg z 4li-i11xitiafely 1fi11111 iI t'lllsiI' aii 1 2(1 iif1 i~s ltIi twers
,r t'fit Iiiziit'II if adIssets a s o f I I-I'Ifii'r :II 172 roir -]ieil a w 114 highl of' 2.N1 h!Iiliri
(I oll1 t1- ;< 1 Ji lI I reasI'So, If :01 111 tiIlIlIitI1 i'liis. or1 111 S, rier fIt'I p2-li 1 'a I %
1j1o Jiiit rI,'1 'i-4 Iii If i 4.1i1;ti1k hIts;I a .5('l si f 196 1 tilzi t l II 1lrs ItIr-ItA ilet(]i ii)
ill Ii ili 1 h pjpIa-s Cit lip-lsi IiliIf 1iis ( .531; . arlid 2 12 tiiiffipiti illnlrs4 'if hirinps JUL41
Ii Ie*S, 01i1i , I ttVi IIt Iit 'l I 1an-i, il -I~ l aw c.IIII p thI li ,tS.f '111 If I 'zt'(St single I ;.tsst
i I t'tr-it I lad y 177.iiifi It Jtf t'st;Ip Ill'a1 ot.i"op ltil li's, with an it1'int' C tttts
aitei (if 6,93 , a l111];itl .'t'itliri fpifeiip-i' fNI I '7
'Ilii 2.5- Nlillt dlollatis ilifitiil ii Ii-li-'i Is Mfaiths is lirkinwi down as
to)li~
Average rate
Percent of of interest
Type of account Amount assets (percent)
Seirof shares---------------- -------- ----- $91.,238,000 3. 21 5. 27
Puid-up shares - --- -- 901,733,000 31. 78 5. 39
Savings share accounts --- --- 824. 507. 000 29.06 5. 17
Term deposit accounts . .233,056. 000 8. 21 51.82
Special ialice ac~ons-.- 53, 895. 000 1.90 5. 49
Daify interest accounts.. . 384, 478,000 11 55 5. 14
HI. 1'OSIOtiNS OFi S. 110118
A. Secit iP!) I would q'xfeiiidlk leiilt 1111 fur iptp' ser.
1'.. Sie'-ftiolns 2 f hi'l1-1 -gh 1 Woid uhf icitiif1tlit 111115i~li silbijeit to filE Fedel'i lkt-
splwt' .a%0. 1ii Wii 111 1Is it 1 isil Iliii'o Au t'ie'i I Ii't'l ifi IUnion Ac.t. enid fill'
1141tl I Iwlipus j,41,1i1 At o fiAlpss f fiii ihl'isftts toi nilct ilfirttsl friint their
Jiillt iy litlz I 1111 ott odlt's iioyriflo't 141 Iiti liolss 440 (if hiersiis'.
11!, 1'iSlIFJN A5Nil AIMii 51t-N-rs l-iF 'ril. 3tA sA.Xc l :-rS CO-oi't-RA11V Bi ANK Jlf-Ar(tl-
Ak. F>ill theit -i-pilli mat ira rof a sfroll'gfli-i ft fintlnsftry inl Ma ssai'huiset Is. it is
e~&l tia hit rate coipntroals ip' e'xtetili'il. Tfue Ixt'1tgip fanit's Ilii iltei-sinin ill tiii
IP\ If a1 t Ii reef i V(e 0ti 1 lIe, ,;IV i Iizs iIt crest rae te' Ili ft'i'rt'nt i a Is tI a.1t exist I Ietwiet'n1
will fit Jofli. tIP dra1w sniiiig flin )illpl'iisf itlilis with a t'iiiii'ililit4 Lt Jul01 st'riaiis
'flp' i'ialillitii'if t' il tipt' for itiiitit't'i'iil baiks sinls froim their- tradlitional rile
as5 siiiit-tortut fenders. 'lii b1i airt'h eit' piirtfoiaois I ii vria111,0-,I l 1 ntitel' is! lililt s.
As ilitirest rtft's rise'. they' are. alilt' fai itl- ell l' elriliaigs raiiidly anti thus,
('Jl- tail tIo 1411.5 liigfi''t' tip o afit flew\ sainitgs.
lIn g-llt 11sf. Co'a-olrififlvi' Bantks Jil t li't't1 itntioI iig,-ft''in. fixedl-raete ittortg-ag's,
11141 tiililty tif' Ihtil' iinilts 4ilae biacik too leii't'iil xvhii ititirest raft'-s wereI~ lower. i
eliiit. I h4iit i'at'tliiti jiiwt't'is It, .11.1-y froipn d i Hey Jit' 1ii11.1ilh' tri iiake IJallit
iplj dii te111,lwljf ti'is ilt raft's. I u.liew C-lljiirlitit' Mfinks at'( nttialtht. inl lirifids
(i'f i i ll il ret iii'tl to lii tiesut fo sPill et l a liaii deirlil 1insaing gi ils
ltlliiwt'i sw\iftly biy tlilfrl'5JVilk.5 unit iliis. os 1111111 sa sers wold] shlift fintids tti
('P '1tiil''(iul I11iis. )flauey for hitnew lainsl would hiti-ottit I' 111VaIilt'l.
I li 1141 thIiis is ext i'tly wliat li licit : its 1111 rt.it -v fiiils dii d 11p. so did limit
hit' 11liiww. l1iurliii''ilo t'5t l Jue Vi~ik'situall i'tt'liiitilbea lyIr(e hwI^
Ill t't5-ii attlil fi tip lii l'1i5J by paiissiiig flu' itWO N 1; Itt'S't Tiato Atiifstuueiit A1t
liii o-sten11ilng it inl 1101. 4 itgrt's a 'igIi ~ 'etiIhuat iii'i' oeaf 1I liir vastly iloi'
lexiihh l' iifii'i;fJl55. t'iitttiit'i'll Iinitks iI'fat' Ililraleuhiht to u-apt Wiithi suidden
i'ises ill ittri'ist i'att's : that iltl itiie's if iiiJliiill t'd iSitt' i-aV te levels, it is ilkt-
'223
possOlle for the thrift industry to collipetv with colmilvi'vial hoilks sm I I"Isis
of equal ,lvillgs rates; alld that "rate uqtlalil '" Z1.1111FUS ;I dVjil'V:--'1Cd 11,111S ill - 111d
reai estate
While lil()St tilmlicial 4111sent-I-S 11"plerst,1110 the sequelive of evelits lemlill"", up
to lia, [IlIvrest R"Itol. Adjustilwill Act. mally 111) 111)1 ivalize Unit ille I'm. Invi-cly
givus the hanging ogviicit s alithilrily to) "I'l 11 d(It's Ilof vslnbli -Ik nite
difft-l-t-litial, hotweell c(silillien-i'li 10.1ilks and thrift hist it lit bills. be
do )It 4, at t I I i -, I i I I w.
There are those \%-]to hold that fliv it Iml !fill ill i ;Irly 1117:1) is much fli:Tt-relit th:111
that oof 19GI; mld HIM therv j, lit, :1 Iwcd 611. t rate diffel-cliti:11. 1111t the
position off Balii is iiiat tiwar-mmo.w., ror
a diffuremial. are as valid IiIPW as, ill 1966. The lessl0iis of 1066 must iiot lie igwired
Ili ShIllilk, torill", tile Mas:"14-1111sells Cli-opel"Ithe Boilk Le'r-'lle belit-ves that
Nvil Ili Out I he extellsioll 411, l'a1V C4 1111 1-411S l Ild I he 4-10111 ill IM 11 h ill (if 1110 41 i f-
fervill fil I it, luvillbers will Ili it be it)](- to ineet Iliv doma nd for hmiiv mort -,.t-,e
loalis. The Lea'Ile bvI ieves t Im t Ili c\ tew4bpu of I -wI I yvars for rate cf)Iltrilk is
111(we I'vasmiolole peril ill vivw off tile if lit(,- inturesr nitv
turv of t he ecolloilly.
B,. ( '0-0IWl',1tiVV B:11LI\S C,1111lot 441,1q. N( M, Accl '11111 S. The Co-
ope,-4itive Batik Lvatl0tv li,IS I i 144 1 10 i I IS i I I t I W .11 . t 14 11 11 , P I I N I A I I t 11-0 So 4 'k i I)g
co-open'tive 1'(w Alt'llosit., \N ilh 11111timl - :Iv-
hi-s limits, fe(teral. savings wid 141.111 :1-. Slpcklliolls :11id crellit llllimi ; :I, well aq
(101111LIVITial lit 111-dvi. lo cmilpi-tv effectively , v. C10-(1j1f.ra1ivv Dmlk ', limst
be ahle to ojl,(,I. the saim, servicv.-Z ns tllw-- v 4011'ervil by cimipi-litlins. It* Snvillgi
bank , iiII'vi- NoW Accilunts, CO1-(1jWl',lli\V B;IjLk- must (ilTer No M' vc,punts.
T) I v Lv. I -liv f. I vf I I-S I It v 1.4111col it (i f N 4 1 W A 4 -4 -4 111111 s l 4 i I* ( '4 1 q pe r. i t i vv 1 1); 111 ks
allfl fill. 1114. illstilllliml, with which it vollip-tv's. Accoinfill.-Ay, tho Low-'ut. sup-
portz Sections 2 t Iii-mi-li .5 off 's. I I His.
.%ss.\cI1 I I's 1\ rm. ur.
1M.,410ii, '11118s., Harch 1971-3.
THIONIAS T. MCINTYEF.
Chflir 0111)1. Sit bromm it Ice ou Fiomowifd histillitifoliv. V.S. scmitc, Cojimlittt'r on
B(tolkilsq. lt(wxin q (fild Urblin At flirx. 11,01.4thl I110m, D.C.
DFAH SENATOR AICIN-IN-HE 4 )11 March 21- 1973. 1 olilwarvd os I NvIliivs.,4 before
.VOIII' Slit WMIJ Illit t UL' 011 IfVIMIf fit' tilt- .1f.i -sarlmsOls ( '4j-ipIwr;i1 ivv Bailk Lt'o-jiv. at
which tilliv jlvarill.L.-s wvrv held fill S. DO.S. S. 127d; nnd 'S. 1257. 75 ci)pios iif my
reiii.irks relatimg t () S. 11110,S W(TV lilVd With Ailll' :-lIlWo1LIIllittVV. 1 W41111d likV W
taike this iipportimity to set flordl ille l1witilm of the %issachusetts Co-(ilwnitive
Malik Lvagme oil S. 12--ol; mid S. 12.57.
With 1-t-spect too S. 12-717 whiCh M(Ollil VXtVILd C0lltI'0IS f0l' oll(I V001', our
position is the sallit, as it \vI...; foil' SOCH(Ol I Ill' S. 10111,S. IMILIVIV. HIP 1,0:11_01V f;lVf1l',Q
tll(. vXtvilsioll of rwe (.4011trolls hill 11vIjv\f-, timt oll i'Xit-lisioll r(w two ye'lrs is fair
mort, clesirahle th.111 ;111 vx1vlp, j1qI foir 41111y olle
With respect to S . 125G. tilt, Lva-Viv stippirls Sectiom I which would v\totill nite
volltrols fill, Woo yeors.
M (h respect tii Sectimi 2 ilf N. 100S. ille wislit's (40 Imilit 4011t 111:1t Co-
(Olwnitive Ballks (.;Illlltlt falfor N( M" Accimuts. 'I'lle Ims lilvd hill's ill tile
Levistit un. st-okin., slich :111thority.
In Mas ,avllilsvtt ,, 01-Oplit'rotive 11.1liks (.411111wh, foir delwSils with 111111 lial -,Iv-
111"s fedel-A ";kvill'_'S ;IILd 110,111 :ISN0Vi8ti(OllN ;11141 MOONS. t,, Wo'll ats
11,01111111PI-Cittl Ill 411-41N, iio v4pijipvt(. i-lTectively, Co-()Iqrntivv K ink.; IL111st 1*
lible to offer till, s'llm. svrvicv. ; os 0141st. differed hy cipillpetifill.s. If h;IllIfm
offer N( M, Accollljt, *. 01-11111-1-ative 11ollks 11111st offel. N( AV A4.1-willt.s.
11)"I'milich as ( 'o-openitive B:mks do not lizive Me :mthority to 401'er NOW Ac.
coljljt, . tilt- _MI,4.-.Ichlls1-tts Oi-tilivniih-v B:111k Lelgill. does ilot 1,1ki. a ptisilioll on
Svetimi 2 of S. 12-16.
It iS 110tVill 11L.It 'SOCti-Ill :3 off S. 12:11; 11(ws iwt sovk to amend ScOfim :111 (if tile
Fedi-ral limited Lqoan 111mik Act j 12 VSC 14:!.-)111. Thus. the Co-liponitive Boiiks of
224
M:issachu11setIs are Ilot Il beci.ne subject to federal rate (iontro, as tie provisions
of tilit so-called "lroctike Anidmhent" will contine in full force aml effect for
Co-operative Banks.
The so-called "Brooke Amendment" [P.L. 91-151, 2(a) (2) aml ' 2(b) (2)]
VX t11iii d fl'(1 f lt ll 11ti ols thi . I l lik .s ( rI t ed b er v ly lie I'ilt itl iNNV ail th of
.l;lssaliulhsetts and iiwither feherally insured nor inennhers of federal a zencies. so
lonr tis the Stale Sipiervistiry Authority set rate eilings. Sueh authority was
gr itt'd to the (',mumissi i ner ,f i;tanks biy 'haliter 587 of the Act., if 1970 enacted
by tiw 'Ma, sa.lusetts legislative effective ,Jily 24, 1970. Thi Coiuiissioner of
Banks lhs set rates tn piasshioiil savings which are / of 1% higher in Massf-
(huseltS tha ii those t-sewhiere in the ouitry. Oin certificates issued for terms
of tie year orI lon ger, rates set for Msszlchllsetts are the same as rates through-
out the IUnited States.
The Massachusetts ('o-ol erative lank league is not aware at this motnent
-wh ,ther this iinissi-ii is iltenitional or im;voertent. If it is intentionall, we supq-
lort Sectiiiii 3 of S. 1257. If the iitission is. inadvertent, ani if it is tihe intention
of this levis atioii to elililii te the '"lrooke Aniendmient" from Section fiB, and
thereby toi subject the C(r-oIperl tive lI'cuks of Massahitisets to fedral controls,
thku. forcing a re(ct ion in the rates presently paid to savers, then the Massa-
(.itiset s 'Co-operative I:uik League resl'ectfully opposes that concept.
The elimination of the "Brooke Ameoitnenlt" would result in a roll-back of '/4
of I /' on the dividends paid (o a ssaook savings accounts. Alart froin tle hun-
dreds i-f thousands of dolh:trs involved, there is a very serious psychological
effect tl depositors who receive notice that the tate of return on their money has
been reduced, not by the economics involved, but by the imposition of federal
controls.
The tiaximum rates of interest authorized for Massachusetts mutual thrift
institutions on passbook savings are I/t of 1% higher than those prevailing else-
where in the country Statistics inlicate that thrift institutions elsewhere grew at
a greater rate during 1972 than Massachusetts thrift institutions. Federal Home
Loan Bank Board publications show that savings and loan associations nation-
wide grew 15.l% during 1972 while the Massachusetts (' ominissioner of Bnks
Report shows that Co-operative Banks grew 10.8% in a comparable period. More-
over, home mortgage loan rates in Massachusetts are among the lowest in the
nation, clear evidence that Massachusetts Co-operative Banks have been able to
pay the higher passbook rate, while at the same time holding down costs of
home ownership.
Thus the League seeks merely to maintain a position which has not been unduly
a dvanta geouis to uls nor injurious to our competitors.
In summary, the 'Massachusetts Co-operative Bank Leagne suggests that as
thrift institutions Its members are engaged primarily in the home mortgage mar-
ket and, as such, must have a continuing and ever-increasing flow of deposits. Any
action by Cotgress which reduces that flow or tends to divert these monies to
other investments will necessarily impair the ability of Co-otirative Banks to
grant home mortgage loans. Accordingly, the Massachusetts Co-operative Bank
League supports a continuation of rate control but sluggests that It be for two
years.
Massachusetts Co-operative Banks cannot offer NOW Accounts and therefore.
the Massachusetts Co-operative Bank League does not have a position on Section 2
of S. 1256.
The Massachusetts Co-operative Bank League supports the continuation of the
exemption from federal rate controls of Massachusetts Co-operative Banks. To do
otherwise would contribute to the disintermediation of deposits in Massachuctts,
when experience has shown that for the past three years Co-operative Banks in
Massachusetts have not enjoyed nii undue competitive advantage.
Respect fully sulhin ittod.
EVFRETT P. POPr.
Senator MCIxTYE. Thank you very much for being here. We will
have to take a good look at who you are. Thank you.
We will now recess our subcommittee until tomorrow morning at 10
o'clock.
IWhereulpon. at 1'2 :22 ).111.. the 1eaiiug wa. atd1jourtle1. to reim-
voe at 10 a.m.. Thursday. March 22. 1973.]
EXTENSION OF REGULATION Q AND NOW ACCOUNTS
THURSDAY, MARCH 22, 1973
U.S. SENATE,
CuMlMITrrul.: ()N BANKING. HOUSINGG AND URBAN ItFFAIRS,
uI.cI;O313IMITrEE ON FINANCIAL INSTITUTIOXS.
Wash ington, D.O.
The subconmiittee met, pursuant to notice, at 10:05 a.m. in room
5,302, New Senate Office Building, Senator 'h'liomas J. Mcintyre,
presiding.
Present : Senators Sparkman (chairman of the full Committee),
Proxmir'e, McIntyre, andl Bennett.
Senator MUNTYH:. 'he subcommittee will come to order. We will
move into our third day of hearings. This morning we are very pleased
to have a good friend, a governmental association of some years ago,
here to testify before the subcommittee, Ilon. James E. Smith, Deputy
under Secretary of the Treasury.
Mr. Secret'r'. we are ,lelighted to welcome you here this morning.
\(l have \'t r 'tatelliimt. It is not too volumious. You go ahead now
an(test ifv" in any manner that you wish. We are delighted to have you
here with" us. We wish to hear what you are going to say about these
matters.
STATEMENT OF JAMES E. SMITH, DEPUTY UNDER SECRETARY,
DEPARTMENT OF THE TREASURY; ACCOMPANIED BY HOWARD
BEASLEY, SPECIAL ASSISTANT
Mr. S31u'riu. 'l'hanl you very much, Mr. Chairman. It is a great
pleasure for lte to appear lbefore this distinguished committee and
most. especially a colninittee chaired by the distinguished Senator and
a distinguishewl personal friend.
I have W ith ite this ni)rmlilig, Mr. Chairman , at my right, Dr.
Iloward 13vasle', Speeial Assistant to the Depluty Secretar\ at the
r.easury and a'man who, working with other l)eople within" the ad-
ministration and wvith several agencies of the adni station has over
the past year engaged in a rather arduous evaluation of the financial
statutes as they relate to all of the deposit financial ilistitilti(ils, and
made an evaluattion directed at, legislative recommendations for com-
1irehensive reform of that statutory structure.
I will not take the committee's timv to read my statement this orn-
ing. . I kniow t!at you have a number of witnesses whom you wish to
hear. So. 1 will just briefly sui u
1
p the administration's position with
(225)
226
respect to tile pending legislation and then N e will proceed to endeavor
to answer such (Ilestions as you 1nay have.
Mr. chairmann, as von now, earlv ]lst week, the alliinistralion
tiiililitted to both I ouses of the (milre'(ss a draft bill, pro )osing
extelisioli of the l)iesellt statutory authority for flexible control of ill-
teiest ceilinS oil tinle and savin-s a',t nits for aln a(lditional 1-year
lw '" 1lld its erur'ent expiration date of M rch :1. 197:. We believe alg
witi the (tlwer i gtvilts that have appeared as well as 11a wit nesses al)-
pea rII' il behalf of tile dej)oSit fiamluitl ilSlitutiollS. that thiiS Vegi-
latoiv"s tAute should lie ,olitilmed for atniotl er i-year period.
Ve (do think that 1 year is a sulliicielt lcriod inw l-iiil to pe illit thie
Con-vess. this ,oinmittee, to (consi elr the htture efli(aies of this t'ype
Of raIte c'0ntrol1 on tiliv '11i s' ilu's Aleposits. Itd to consider the vole
of J'ate (oiit.il ili Ilie eoiitext ot, the (Atbel. I''riulhton' slatltes atlfe'tirig
deposit fill"lniial ilit it Il iol n.
li short, we tlin k there is a we(d For a very comprehensivee review
(if tile deposit fiianvial iistit tins and the, statutes whichi govern
their operation at the Federal level.
So. we are 1lol)osingL a 1-year extewsion of this re,,_iato'y a"t11lor-
it\" ill the hope that 'ithii that 1 year. the Inioire (ollprei 'l;i%'v re-
viewv call Occur. Whamt Nve. ill effect'a 1,, V)OPO(SIlly isnpro '-v
,we deem Iona enoug..,h for' a careful volsihrationOf opo osed jo-osis-
Jution, yet sl'ort e()Ith to kild of keep thW lp'essir' (I all (f 11s
to ,olil)hto tle jol) tlat needs to be done.
I'n that connection. tle administration is now driving, hard to
('0l ilete its policy review of a 1broad- used ami,1 compiviensi ye rlfotrm
of these statutes a irectinur the deposit financial ilist ittit i10(s.
Our tilmetal 'Ie is suc'lh tlat. we wold ho
1
pe to Ib i1ble 1 y erlyv tIiis
coliln' uni11nth to publ icly ano1nce our legi-slative reeolilieildlti1,ns
il :a ]iai'irtive Or ]limtei'linical. nlstatitolv (Ira'It formu. rid4 thien
follow on in (.i:i1 v ,11in of this year 'with1 the actlial draft l,,.eislation
its.l 1,. So. w iat I all sayi n is we wol]d[ liope-
Senw to' McI N-1II. Call you assure the col1ittee of tihis. tiis .JTiie
(lute that you are talking about,?
.i'. S.\rrri'. Senator. I tlink I call g-ive you la quite ,i'lod assiura lce.
We ar list Ie i1in the dra fting project itsel f. It seelnIs to 11, I I lt
a 2-loltil period should 1le a suffitient time within wliell to comjplete
tlt. I think we will come verve close to lneetinx that target date.
Implicit ill 0111 position of t'ecolnlenliv ,dil jtst a simple 1-'ea , ex-
tensirn of tle regulation Q statutory :mtloritv is a leeO I flhllei(la(ition
to thiis ,(Itllnittev and to the Congress that no interim or isol' te(d st i-s
le taken with respeet to the NOW account wh' ich l):is eler-d ill the
mtual .-aings bank industry in Massachilsett", :1nd New Ilapslo ie.
Setlator McI,,rYn:. If we take iio action on I li(,se recounts, 'ilwat is
your positionn with reference to some of tile testiiiioii- of tle, 1Issa-
chrsetts commercial banks? Thley ale pretty upset. 'i-. I)rfl'y and
ofi,,rs were quite upset at what they consider all unfair situationl that
i prevailing ill the Commonwealth.
MI. S-mirlr. Senator McInt're. our review of tle statistics that hlave
been made available to its and have been male availa ble to woll
through the FDIC, indicate a situation that (hoes not appear to be
highly disruptive, if disruptive at all, in a competitive sense.
22 7
We (lonut see it as a set of' facts :a14 id e rilillstaii('es whichl justifies
ilcdei'al intervention at this point. We thin ik. inl fact. t hat this coinl-
jietitive ininovationi reallyN (lC5Cives to 1he reviewed and~ ('valiiatedl ill
oper'ation1. There are ske'pti('s oil all sides of this issue,. as to whether
tilie p)aymen&t of ijitere-st Oil all alccoinit wh~ichl has dlill1(1 acc'ounft
('liai'actel'istics to it is ilid~eedl a pir)1itable i(ei'ta kin,(r. what iii pact
it could ('olicevlN1) havye oil bI orioi lug costs wvithinI inst it utionls that,
offer such services. think wve wvill hlaNve no "mood answeri to these qules-
t buS if wve quash t his dev'elopiuaeit, ill its begin liiii, fou'Ila ill Mass-a-
ehuisetts an(1_Xw 11aml ,s hire.
Ill short. WCe jlit ( not sev a case at this point for Federal
intervention.
Senator' iAIN'xrvil. You don't sov any vase for Federal interv'en-
tion. Th'ierefou'e. if there is aiv i-viuuc I to be hi keii, ,voiii' ,11urestion
impillies that it should( be taken by the State legrlslatire ?
Mr. S.riI1. Y~es.
SvIlatoi' McIvNIVnzE. I f it e ire(IlS nl
Mr. Smriii. I f so, right.
SPenatot' MICI NiYIW. 'oi realize. MrIt. Seecretaiv. what is 1happ)ening to
tlie ( olimgres a ; we Nvait for tile aIdil ill istration is that these problems
,tile ('0O1lig ~on uts. It ila v well he thiat we call (10 as I-oil Siiu'est here
'ndIul iayhe I w Suihconliiiittee- and~ the 'onimlittev will 41o this. huit as
h'lese prolills of cliaiiige that arie -oili!X Oil ill tile biiikinL woirldl
Octil'. it lbellooives you a 11( the adiniist ration to get busy and( vomle
ilp with somi e Slig",vst ins not oil]\ iii iiai'iat i e form 1)ilt Some siug-
,rested( le~riSlatiouu.
i'-4 miuir. We aie levidlv awa ie of that. T would lie fin k to admit
to 'Ioil. M\lr. C hiaiirmuan. that the dlevelopmlient or the NOW, ac-counlt inl
Newm En~vlaiid. hias cawused its to h ast en ouri efforts downownI.
Senator MThT~i:.Iat is i,,oodl news. inldeed.
Mr. S-miMi. T tink. 'Mr. C ha irmnan. that tlhis- sums1w u l) tilie es'sve of
ill *vStateliit. lit :slinit. we ri e imilIit'lilila ns imlple l-Yeai' eXtenI-
oil1 cif s;o-calledl retziilat ion Q a1tliorit v 11a ml uuther recoinmeiundiuic,
t hat no0 inteimi ori isolated d actio hel ta kenl Nvith r'esp~ect to tilie M)M
Nvci~it5 ith the 1uu'ueistanldiiiu that wve will iiove priomlptly to lay
before 'oll '1 rel i en ~vsiv~e lvgi -I1at i e uecolil liilknat io(ill v n V11(-yveal.
Se;vunitoi 1M h x'rvuin. Thesu anld Si ihstai of x'ourl test inionlv, here0
tlhis ini'ii um is we Aluild take nio act ion wvit I respect to tilie two hills
t 1 Iat look to ei i l~uoijit iiil or- gi Vi iit soiiue Sort of blessing to tile
NOW ac'iomiits,. You are sa'in , ur to0 Ibid the iiue a little i t. that wve a ie
cMing 1ll) withi some 1'ecoluuieillat ions from tile adiinistrat ion. lit
tile menit i me. in view of 011' u'ev ort soonl to he lnadle. your extensionl
of the( revullitiou Q Should he for oid1' 1 Y'ear'
Mr. S -'N .,1. Yes. siu'.
S eiiator' MCI Nivizi'. Snll- Ou' Bennett
Seiiatou' BiEXNE-';''. I have no questions.
Senator McI'Yl . Senator' Piroxmirie.
SeiiatOr' I 'ia (M iMi. TUiSt oneV que1(st ion. Mr. Sin itli. What would he
tile sp)ecific adv~ers5e eff'cts, ill \-Mll- juiIiijleiit. o.1' eXteu~ilg u'erilatioli
Q foi' 2 years?
Mr. Su''ir I at S.y that there would be .9ny necessary adverse
eile('ct. Seinator'. 'We think there is ,Olie beuuelit to lie d1erived ill keeping
228
the pressure on all of us, and I most expressly include the administra-
tion and the executive branch, in moving forward for a comprehen-
sive review of the Federal statutes affecting all of the deposit institu-
tions.
We think that a 1-year extension of "Q" tends to keep the pressure
on us a little more strongly.
Senator PRoxmiRE. Maybe 1-year is wiser because it is so hard to pre-
dict. Housing is going to be u under more pressure next year than it
has been. It has done very, very well in the last year or so. It appears
that the likelihood of a bad crunch may be more definite next year than
it is now.
I however, maybe wve should wait and take a look. Thank you.
Mr. SMm!. Thank you.
Senator M1CINTYRE. Mr. Smith, interestingly enough, while we are
on the subject of interest being laid to del)ositors of so-called NOW
accounts, I would like to raise another issue concerning the lack of a
payment of interest on deposits owned by the Federal Government.
Isn't it correct, Mr. Secretary, that today oin a month-by-month aver-
age. the Federal Government has on deposit in a number of commer-
cial banks, over $7.75 billion representing various tax receipts and
other revenues, in non-non. I repeat-non-interest bearing accounts.
Mr. SMtrI. I am not certain of the exact numbers on tie balances,
but it is true that throughout the commercial banking system, we do
collect and maintain through tax and loan accounts. il what I believe
is some 13,700 commercial banks. what are, in fact, Government re-
ceipts from corporate taxes, from employee withholding taxes paid by
corporatioIs and payment of excise taxes, and those are held in de-
inand accounts.
They are drawn upon by the Treasury in many cases on a daily basis,
in other cases on a weekly basis. It is a system that began during Pres-
ident Wilson's administration, ald is directed toward handling the
Government's financial business in a way that is least disruptive in
terms of the reserves of the commercial banking system and the money
markets of the country as well.
But you are correct that those particular Government accounts are
held in a non-interest bearing form.
Senator MCINTYI:. It is also a fact that these commercial banks in
which those non-interest hearing accounts of 1Federal funds are located
are in the business of lending money, right ?
Mr. S tITH. That is correct.
Senator McINTYmE. So, it is also a fact that one of the major assets
of commercial banks in this country are interest-bearing Federal Gov-
ernment bonds?
M1. S3IiTvm. Which among other things, they hold as collateral
against these Government accounts. The system is also used for the
sale of Government obligations, obligations purchased both for the ac-
count of the institution and for the account of customers of the insti-
tution.
If I just might expand a bit, Senator, I think one misconception of
the tax and loan account system is that somehow the Treasury col-
lects the money and then deposits it in these institutions. This is, in
229
effect, tile collection system. and banks compete in encouraging cor-
porate customers to pay their corporate taxes and their employee with-
held taxes through the tax and loan account system so that you have
within an institution an automatic debit from the corporate account
and a credit into the Government's tax and loan account, and then, we
periodically (raw on those accounts ' ltt tle Federal Reserve banks.
Senator MCINTYR1W. It seems to me you have the situation in which
taxpayers' money is deposited by the Federal Government in certain
choice commercial banks. iin non -interest bearing accounts, and these
batiks in turn. either loan these funds back out to the citizens of this
country and. in effect. charge the borrower interest on his own money,
while at the same time. these commercial banks are taking Federal rev-
enues and purcihsihig interest-bearing Government bonds. So, what
you have is the Federal Government giving certain commercial banks
a sidv in which the Federal (iovernmeut ends p1) paying interest on
its money.
I have ' O aliv comment on that ?
Mr. S.'irmi. If a subsitlN exists. we are not. giving it to certain com-
mierchil banks. 'Fihis is ail opportunity broadly available to all the fed-
erailv insured comnimercial banks. It is a system which was created and
has )een maintaiied( Iv some 12 or 1:1 Secretaries of the Treasury, not
as a convenience to the commercial banks, but primarily as a conven-
ience to time Government. The last, analytical study of the tax and loan
account system was done in 1(63 or 19(64. We are undertaking another
one. wN'hichll was begun late last vear and which we hope to complete
till-wi iilit tie (' ilo'se of this (.a'len(la r year. to evaluate the effective-
ness of time system. with reslpeet to certain services which are performed
by .ov iiiiiiercal lbanks for the benefit of the Government, whether we
oiuglit to have a more direct system of compensation or rather to look
to thin's such as t le tax and loan system as sort of an aggregate means
of compeimsatill._ for these services.
Se1itor 1('1 NTYRZm:'. Fu'mIl a laymnan's standpoint, T am no banker, the
practice .eemmms iI)([hfelmsille and I caln see no justification for maintain-
iii r on a month v I hasis. total deposits of Federal revenetts in excess of
millionn ill noniiiterest accruing accounts. What exactly is the
Delpart la et of the Treasury justification for this practice?
You have said :it thlie outset that the practice got into being some-
time lurin, Presideient Wilson's administration back in 1916, 1917 and
191s, is that correct ?
Mr. S-t.Nrr. Yes.
Senator M hc! .rvm.:. Is there any better justification?
Mr. S-mirii. Senator. time Gover/memnt, like any business, has to main-
tain operating balances. In terms of monthly outlays and expenditures,
I am told that these tax and loan accounts. in the aggregate, have de-
clined from, approximately 60 l-rcent of monthly disbursements in
tie early sixties downi to a range (,f 23 to 30 percent of monthly dis-
bursemnents, which represents ai olperating balance that is at least as
low as many corporate iist itut ions maintainn. and considerably lower, I
believe, than that maintained by most State and local governments. It
is a very eflieient stemm for making various types of tax collections
and for'handling purchases of U.S. C-ov'ernment ol)igations.
230
It is a svsteml thlt is inllediatcl\v responsive to our needs.
'lwre a're tIiree ci a.ses of I iniks.'T l arrest money market b anks are
clas.'ed as ( IISt itIIt io,)Ins. nanl tIIose ;IIStitIitiolls l'rIleqIItlv have their
bahilitce (1laNt11I (n oil a dail v basis, I'rijiielltly withI adjulstmelts mnade,
tliiriuif the colrse of' tiy. (lV.
If we O\it'stiiiiate opr tl, eliestilliit' ol cash leeds. there are We-
Sl)hic ctlllllllll(t i ro)ll;s wviti tlll'M ilistiniitionis ilivolvilgl creditillg and
eIitii" with the Federal Resvr\ 4, lbalks.
I tlilnk til s*'stei. Svilat(r. is tiiui estionallv a meritorious one.
Til' ljilst loll it 'P(lliplisat ioll is o11e that is lill(derl coilside ratioii now.
'he last stiil\ c'litlllth'(I t ltat tite ar,'.,re(rate ret0llt, to the 'oimiercial
Ialks from t'llese ba.nlances tid lott quleite equal what that study coln-
clutiet! tie 't -t to) tie (Gn \i' 1ll1illelit wo lild } 'ave Ie l IIP' .Se'vices 1)ro
-
vitled lY the baillks, h1ad tley oziwned ill .ollle dilect system of
COll] 1t'sati n).
Senator ICINT'Rr. I IPali to dra ft some legislation tllut will require
the Federal (iovernllt to hli:-it Ilii'st billions of dollars in eveiue
in iltel'est-)eaill, " at'('Ollnts. an1d I initeniti, if tillie ('ives us a chance
this vear. to htiltl 11aril's (lit sulih legislation, n1av)ye later tils spring,
to 1'et -a better ari
1
p (ii it illYself.
Senator PlaIx.miili. Wolld tle clmirmnan yield on that issue?
Senator Mel NTViI. Yes.
Senator JicoxniilE. I want to coimend the chairman. I think this is
sonlethin,,s that slioublt Ilave 1 een purslled before. You say there ire
13.1lt0 banks in w-hicll there is $7 billion deposited. I ca'I'ulate that
US NP4I ),(1t il)r ank. liat is I whale of a big average deposit. I also
Cah'llate that, if we coidd la'e it all invested at p;t. iercefnt interest,
thle taxpayer would eijoy an ic'reas(, in reveniiie of $400 miillion. In the
third place, I just can't. bliy the notion. as the thairnan obviously
en Id buy it either, that this is all riglht because it is Stometling that
was dolne byal ] admillistrations.
Tle-y were all wvro . This is something in which State administra-
tiol after State :tlllliilistl'atiol hills discovered they we'e derelict. Ill
my own'l State, mvlieli I first entered tile legislative 20 years ago, they
uiiade tile salle hlst'e idle deposits. The State olicers sa ild they couldn't
change it, they said it was only fair and efficient. I found the bankers
were iumaking biig contributions to ca plpaigns. that they enjoyed this
idle ioev wlich tlev coul ill turn use. We find now in Wisconsin
that both the Republicani and )emuo'i'at ic administratins have found
they can do it far niore efliciently, and tile\- have cut very sharply
ilt) that amount of money tlev'liad before . What I-wou'ld like to
suggest, and I think the 'llailnan has a good suggestion, holding
fuirthevr hearings. I would hope that we \vouuld get sometlhing other
than a 3-year study-it has been 3 years now Aoi fellows have been
Studying'this with 110 result-.I would hope we could get the GAO to
inake a study of this in a fe\\ months to (ome up with some recoluinen-
dations as to wlat we can do to put every single penny of money we
call to work.
I know it is hard. You have probably done better than many adminis-
trations. As you say, you have reduced the idle amount. I feel we
should hare t h clet'cst kind of assurance that every single penil1y of
231
Federal money that can be put out to earn a return is put out, and
that only the lmininmn amount required to be held in demand deposits
without 'yiedin interest is held in that capacity.
You wouthln't be unhappy about the Congress having its own investi-
gative a tm conluct its own investigation, would you ?
Mr. SNti'rit. Of course, I would not be unhaj)py. I know Congress
does it frequently.
Seiator Mc.'xt Yr. Thank you very much, Senator Proxmire. I
think, Mr. Secretary' I would like to ask that the Treasury 1)epart-
nent -upply this subcommiittee with a list of commercial banks in this
coulit ivY ill which lFetlral funds are now being deposited in noninterest
iteariugn, c oin ts. almg with the average monthly balance in these
a,.'littt b\. ltiik alid th criteria applied by Treasury and other
lanlhies of1' thie Flederal (Government in determining which commer-
cial banks receive tlicse noninterest bearing funds.
I'llie t'ollowing information was subsequently received for the
J)e.rTMrENT OF TIIE TREASURY
Thli atthtotid dtlts.rilti ii Iif the Depository System of the United States shiiws
ti .scvet I[ aLotprties il' dtelosits of Public Moneys of the United States wit])
(ODttitlt'i t I l1tli
1
s. ['aot A relates to accounts maintained by the Tr'eastry. Of
Iht,.-e t t'tpitlits I1y for the greatest poit is maintained in Treasury t x an1d 1i ian
altoll.s. Ill aIdditi ntl ta ix and lolan accoutits, the 'J'tisI'y miailtaills ( 1 a
Sia i nitotte4l" if slpecial a ('('tillis in which the balances simply represent fidt(s
in ltk 'i.'. ' tiCtl l<dh(ti !l, tlid 12, deposits placed -olely for the purpose (if i-'l-
lin-: ftinc itlh'4 f 'till ' de. s-ital'y services authorized by the Treasury. The
('101lll1tHISatillg ait pi'tllits, W ith ill the f(Ill'Il O)f tile 1111d(l thltMldll ZI(:(01lll1tS, 11.1; eX-
ploilwd ill the attcliltiltii, arke in f'tect iterest-leatilng witlh the intre-t eatn-
il.;zs Icii.gV c'eii lt' agoiot xlitnse'L incurred b.3 the batiks ili providing specific
StiX is t41 ilie ( \verlliellt,
A, Ilii li c' flds itdiiod ill th g'eiry if "'Pultic Moneys of the Uniteti
toics" illt li iilli f .,' (tf ttlic,' attititltl lit ers ir tnider the olltr(il of (uv-
'i-ttlit dil tnictits it 4 1g oti.li s, ilie T'lr'asIlry has it) tila other than the
111lili i' t t t r l lti l jtlt i t'd Iby Itolil.s ti i. i' ]t4iaili liilit .ances ini excess of
FI!C i.Vt'er"e. Ttp the I'xlt'lit :ltltl'ciiiill fids ie 114 fto Irelite ltiy Aif SUCht
i 'taiil 0Vliltes. t lit' Ti i'.5 Ititai'y til t i-n is tht the funds tie drtawi
froi wt t Ure oily ii wliti ;tlttill y ittyled 1 ilItt lit he 1tyiilellts. This is lc(colill-
pli- i< l iy I lt' i i's cit credit ali w itt l tivites c igo'd to) int'1 withdrawals withIi
iii.til]tll l~tii't~ lt iids.
li t ,lii lit t li l \ith the (.i rellitt sIlitly 11 tildi'\v ;ly ill treasuryy of it', tlx ind
Io~lli alct.olillit .systlili Ns li~ii ill Ilitv i1l lwh d press., release t
,
we are aisking-
flI' Feilc 1:11 ll serve I t;li Is, top rt1(01rt t Trt :lea itry hI t I virage dl i ly ti x a itd loain
iti.( lt I lt li.tes tlti'hg t;luloiiir year 1 7 l'1i' OII oif f lit' 6 til tks fronm wholm
Wi i ti', silicitilt it lt y ti'lt tis (if I itt'stiiiunalire. This satlltli ug includes the
3t004 ltllik.s with I le Illt'gt'st tix a tidlo aia a.cttint halltves together with 300 hatIks
ill t' tttil lli .i;e toitry Isith''i s l ilvt i I ll.si s wihivh iprovides the hest so ii-
lili i f t thi' lital systtill. This dlit;i lost' relreseiis ttill esse titil elenielit (f \i:t
ytlltr I '(llilt tit tee is se.ekiltg tllicl will It suinitted to the sit i-conilttit tee wliit
reteivett. Thlit'itly statistics at 'nilily at aitlilt' ill TrIca sity Its tortax and loan
antiptultiit t l 'ttiills : lit] 41laiii's are Ottililete tlat wit li 'es let To totals for
all lilttiks. "lI', tttltt'td slittliitnt, whit'h is pultlisltid monthly in the T'reit siry
]lutletitt. r'llt'o'fs t ,i tyli' 4if Ever-ll statistics which are a'ailhlte. Fill details
as ti ocl'tollits with toaeh lik art' tmainta<tined at Federal ]Reserve hatiks atdl
brtiii'tto's For inilivhlilill Itotks. fle only information we norially receive in
Treasury is the liillani<e with elicth hank on the last day of each calendar quarter.
With the radical tituatiots in lbalaices that take place throughout the year,
it wllhlliatn 1ity har m ilitlrtnar dlay would, obviously, be far less reltresentative than
the daily average over an extended period.
232
During the hearing, reference was made to findings by the Comptroller Gen-
eral in 1943 with respect to Treasury tax and lion accounts. The General Ac-
countitig Plice report was responded to ty a Treasury report on "Treasury Tax
and ,Loan Accounts and Related Matters" dated l)ecember 21, 1964. So far as we
are aware, the General Accounting OAlice has taken 11o further position with
respect to tax and loan accounts since that time.
DESCRIPTION OF TILE DEPOSITARY SYSTEM OF TILE U.S. GOVERNMENT
Tile depositary system encompasses all aspects of tile deposit of public moneys
of the United States with financial institutions. The term "Public Moneys of the
United States has a broad connotation la)1led on its statutory definition as "Any
funds of the IUnited States or any funds the d(epo.sit of if'hic' is subject to con-
trosl or regulation by Gocernnir'nt ugenci8 or office's." As implied by the italic
in the definition. lie term embodies two distinct classes of funds, f,' which the
following explanations may be helpful.
i. CASI ASSETS OF TIE FEIIERAL GOVERNMENT
rn Category I are all the moneys which, in balance sheet terms, have the com-
mom characteristic of being cash assets of the Government, all representing
credits to the Governient's accounts for revenues or appropriations and funds
(including trust funds) Or accounts for deposit funds which the Government is
holing in a banking capacity. By the .same token, all of the cash assets have
the common characteristic of being incorporated in the central accounts of the
Government on the books of the Bureau of Accounts in the Treasury's Fiscal
Service on the basis of the official accounts rendered by all accountable officers
of the Ioverment for audit and settlement.
A. 7'.rcomurcr of the United statcs. By and large, the Government's cash assets
are in the Ti-easury within the accountability ortlie Trea-murer of tile United
States, &id most of that lonev, by far, is in tile forl of dlelnanlnd account ball-
an.es. Tie primary demand acllounts are those (a) for day-to-day Treasnry
operations at the Federal Reserve Banks (including also funds in process of
collection at the Federal Reserve Banks), and (b) for tile tblfw of most of the
Government's' cash into tile Treasury through the tax and loan accounts of
most of the nation's commercial bank,. The lortions, of the Treasurer's cash
accounildlity that are iii the forn of deposits ini commercial banks consist of:
(1) The tax and loan accounts through which most of tile receipts of tile
Government flow into tilh' Treasury. As business concerns pay their withhold-
ing taxes. corporation taxes oi11d1 (olier types of Federal taxos, and as banks
suibscribe for new issues of designated Treasury securitie (f'oir their own or
customers' accounts) the funds are transferred on the bank's books from its
count with the payer to its account with the Treasury (tile tax and loan
a.ctunt). The T'easury then draws on the tax and loan account balances as
it actually needs tile flnls to cover its disbursements, thereby matching the
flow of collections and lnymnents with mninuni disruption of hank reserves and
with no undue impact on the money market. All incorporated banks and trust
comlkanies (sonle 1-t.0011I are eligible to have a tax and loan iicOulIt with the
Treasury, and some 13.00i banks (o. They all compete for handling tax payments
and subscriling for Government securities for their customers and themselves.
The incentive-ti avoid llnnecessary contraction (of bank reserves-is built into
the system. Whatever flows through a bank's tax and1(1 loau account. whether a
large or small bank, is the result of the bank's own business operations. The
Treasury is entirely neutral.
(2 j A small number of special demand accounts, tie balance. of which repre-
sent arnounts of funds in process of collection, which are imminently to be cred-
ited to the Treasury's operating accounts at the Federal Reserve Banks. By
way of further explanation. the funds for various classes of collections de-
posited by Government officers throughout the country reach the Treasury's
operating accounts at the Federal Reserve Banks through about 1,000 so-called
"Treasurer's General Accounts" at commercial banks designated to provide these
local facilities. These are entirely "flow-through" bank accounts in which, with
233
a few exceptions. there are no balances at the close of each lay's business, because
the banks transfer the funds every (lay to the respective Federal Reserve Banks.
About 30 of these accounts serve the same "flow-through" function but they are
special collection accounts (primarily for voluminous deposits by Internal Rev-
enue Service offices) under arrangements permitting the funds to be transferred
to the Federal Reserve Banks as the commercial bank collects the proceeds (with
the conventional distinction between funds immediately available, one-day, and
two-day deferred availabilities). Therefore, whatever the balance of any such
special collection account happens to be at the close of any day, that balance
simply represents funds in process of collection.
(3) Some relatively minor demand accounts, as checking accounts, needed for
day-to-day operations through a few commercial banks overseas; and
(4) Deposits placed solely for the purpose of compensating banks for specific
delp)sitary services authorized by the Treasury. Periodically, the Treasury adjusts
these balances to perlnit each bank to earn on its balance an income equivalent
to what it is entitled to charge for its services. The.se services include such things
as (i) processing deposits made by all Government officers through the "Treas-
urer's General Accounts" referred to in item (2) above: (i) operating military
banking facilities, both stateside and overseas; (iii) handling special bank ac-
counts for State unemjdoymnent comipensati, payments; (iv) furnishing bank
drafts to Government officers in special situations where this technique gives
the Government advantages in the handling of individual collection instruments;
and (v) meeting currency and coin needs ocf certain Government installations.
These Treasury balances placed in banks for compensation purposes are of tw,.
types :
(a) Time Deposits, which apply to virtually all of the banks; and
i h) D, mand Depositx. which apply to just a few banks-under special arrange-
ments advantageous to the Government. Prior to 1972, these deposits were mainly
in the preceding time deposit category; their conversion to demand account
status was especially arranged to permit more prompt recall int) the Treasury's
operating: cash balance as and when desirable in managing the Treasury's cash
posit
ion.
B. Other Accmntable Officers. With relatively minor exceptions, all account-
able officers who serve as Governnent disbursing and collecting officers deposit-.
all of their collections into the Treasury and draw checks on the Treasury for
their disbursements. (if necessity, disbursing officers operating in foreign coun-
tries are largely an exception insofar as they have to draw checks on checking
accounts with local Itinks. for payinents in foreign currencies or denominated
in military payment certificates. Some accountable officers operating within
the United States are authorized, for slecified purposes, to have funds tem-
porarily (otside the Treasury. including money on deposit ill commercial banks
at levels commensurate with authorized needs.
(1) The largest single class of deposits in United States banks in this cate-
gory consists of Indian Tribal funds and Individual Indian moneys in the
custody of accouilaldle officers 'if the Bureau of Indian Affairs serving as
agents of the Tribes. all such funds lieing in interest-bearing accounts with
banks timviudi na certilieates of deposit).
(2i Other funds authorized to lie on deposit in demand (checking) accounts
or interest t-bearing accounts in banks include:
(a ) Postmasters' checking ac-counts throughout the country, largely for the
flov nf their rollections into the Treasury (to a minor extent also for certain
small purchases best handled locally) ;
(h) Checking accounts of the Veterans Canteen Service, similar to Item (a)
alb ov:
(c) Registry fitd temporarily in checking accounts of clerks of the United
States courts tto the extent that the clerks of the United States courts do not
deposit such funds directly with the Treasury) ; and
(d) CheckIna aeeounts and interest-bearing accounts required under local
operating conditions by a few agencies.
234
11. otLIER FUNDS INCLUDED IN "PUBLIC MO.NIA. ' OF 111E U.Ni1lD SIATE"'
All moneys in Category I1 have thu colUmou cl:raclR'ristic of not bling part
of tile Guvermelin's cash assets. They are not included ini the ollicial alcc'tlleis
rentiered by ally accountable olficer for audit aild Settleilielit iLltt rJl'e not lo
credit, o a1Ily of the Uov'eriitlient's accounts for revenues, appropratil.s and
fluds (including trust, ulds) or del)osiL fulds. The (only ting they have in
colliwoll Nih actual Goverlll'liit mUIolney ill CIttgoV'
"
1 is tiat tiny to( fail
within the statutory delinition of "Public Monen s of tile United tate." beclse
they are subject to- certain control or regtllatii'l by certaill G,'ernmlnllt
agencies or oflicers. By virtue o being Nuch 'Ptilblic Mon'lieys" the Go;erilitiens
intere-st extends to requiring th'e depo-its in c nlnwrcial balnks lo lie S-iClredl
by collateral, for Category 11 as wvell as Category I Imolley, to tie extent exceed-
ing the plrotectiil covered by the Fedr'il 1e/lisit Itistiralice Corporation
(2JAPtHJ per depositor). Ii that connection tile Treasury keeps a special set of
reci lds (entirely outs.-,idle the forlnl hiilliicila system) representing solely tle
atit lllzed iaxinuni hlits of illdiitilti bnkIl accoUnllttS eicii ltithl4'ivatloll
is tile all onilt of co llateral tVie 1il k has ljied.ed to) secure the liaiii xi nitin 1111int
that may be on dvepisit ill he , actmlt it aity thnue ill excess iof tile FtYileraI
Del/sit insuralie (_'erporili', c et'irge). T'tvy do toot rprc'vt (toliints
Ucti tl/y on dcposit in 1/nl," atccot s (i t !/ lim'." All iileys il Cate-ory 11,
entirely am deli.sit ill 'aniInert'ial haiks, fill illta tw() giu tl1 s, as foilaws.
A. ('tLi Xi'o -O i'optr r iUtd iFl'ows. For lie liost part ths. il1 i-a1l pl'opi'iat(ed
flilds I'e lilifllt'ys tuller tI lie cPll 1' 1 (f I/'l'I/ li o' If l il ha ry eIlgai IiiZ it iens
serving ill tile calpicity f club treaiurrs. iiess of'liccrs. txmlualge o liv-rs, eli.
Rlah tiv'ely st-11a mounltill ts tof Ilom)-:llppl',opli;att' fun~tds pet'tlill .I]o l l t ILlloll "s ill
the ctitody of 'nltuce aind colliniidily coliiitt'e s Llt IiL'ils tiiil 1e ;Itdmlliis-
titti'e UlitlOl 41f the C1sliuer ii Ma itrtill' irvic' (at' tie Iep1,artl ntiiLt of
Agricult ure. These accounts it 14 fliiiiiit'(Li I k ki.i r / i/t ii:
1 , Demanild checkingg) t'e(/ulits. with 1/ll aies at I evils n//eiltl far 'rr'lt
olperatiolls (ill some foreign lf;i nks as we] is iii liias I llited Stats Iha ks ; .1adil
(2) interest-bearing aCColnts (lit']tlulg ct rilicali-s of doliosit) fI'L iforaimtints
not iIlt'd for current operations.
it. Fids of Certain Private Entities. With respect to certain Federal pro-
grans, fur which the statutory delinitian of "'Public .h l'ys 4f the I'Uiti'4 SIls"
is applicable, the Government makes dislirtiseients which are deliosited dirv'ly
to cheeking accounts that private entities maintain, ii their own liLtm's, ill tleir
OW 1 coninercial banks. These are a(couhts of somec grtlttees, f'vtaIili i'ltt rl t itlrs,
and other private organizations which the Governnti funds I lir'ittgh grants and
other advances. The "Public Moneys" definitim allies only Ievatuse th (ov'rn-
lDIuLt agency administering the particular prograni is fJllsed rest rid.tons on
these private accounts. Apart froii the protection this al'ford., ili tilt' forll iif
collateral. the Goveriment's interest in these pfartiular llcfoulits iltso extils
to providing assurance that money funding current operations (f the private
entities involved ;will le wvillidravn from the Treasury and credited to tii' private
checking accounts as closely as lssible to the tinii' actually needed fori disbirse-
luient by thit private organizations. This is ai'-cnplished by I v'a rit'ty if devices,
icl('|njlildg extensive use of letters of credit (I teclhniqle which. ineiituitally, ap-
1lies also to grant progratns for which the statutory definitioni of "I'bli' Molieys
of the United States" is not applicable.) The private checking arcints in i this
category (based ulsn the Treasury's records of lileigei t'ollateial are fnidh'd
by dishfursenients iliade in programs adIllilistered by the agencies identified In
the following.
(1 ) Accounts of private insurance carriers serving as intermediaries for mak-
ing payments under tile Medicare program. fer which alvutanc.es are authorized
by the Social Security Administration, Department of Health, Education, and
Welfa re : and
(2) Accounts of grantees and contractors funded through programs of:
1a) Atoniic Energy Comnission;
1) Department of Labor, Manpover Adniiistration (which includes
Neighborhood Youth Corlos;) : and,
Ioi) 1)epartment of Agriculture, Farmers HIone Adniinistration.
I Natwlthstandtng precautions taken and explanations made by the Treisary, figure
furnish ed by the Treasury with respect to these authorizations have at tlImes been nllsrep-
ogeAted as actual deposits In banks.
235
'rE I)EPrAR TMENT OF -lii1. TiEASC'URY
,Sridlcni b,:' 1.3, 19";2.
1 ('ws rclase
IlEAtiUY RlESTtUDYING TAX AND LOAN ACCOUNTS
Secretary of lie Treasury Shull Z today a 1141111i(t d tlint the ''tel.isty is 1 ,gili-
Iiinrg a re-study ot tine value to c'illitlcial 1,1111ks (of ''reasuy Llx anrdt lia at-
cIEI iiits ill relai ishil to servic-es th1t tilt- lallks Irov'ide tr tlit' (AlIVei't nietil.
'The tax arid 144111 lccoliit syserit w's t'wa ;stablished Illore than -Al yeal's ago to
Ilor' Itt the sill oth ltfu tilling of the econoniy by iiiinimiziig the impact of
'l'lsury linanicial oi ,w'rat il' (41l resrt'l'Ves (if tie lk living syst ciii and Ol1 tile
1111 uriey market. I uril ' t, Ilie last 31 yen l's tie syst euii hiis 1tt'n l 41 ,lnlelL Ih ) o .,tivr
1111aet1icilly aill t lie Ut (iVeititvit'uit.
,
lt'\ut'5,,. so t11t th "t vastill situns are col-
1e041t4d iLtd Inal1 llVtilhle ti the Treasury ill tike flastst lpssible way nlld itli
tilt least (4o1tr!ll.ug tN lv'ti'*. Jhese 1iiliI'\" objt'i'tv1 ot' r lt['einrg 1chi'eveid rio40st
satisfactorily loy til' systveml.
Virtually till (of tilt, lnutiitollis 10llks hiaive tht.I51 I nx ilt ll r 11 ctillits. ''livy
ilitll' t'4)Sts ini opjtlttinig th' systi v lirni ini 1j'pitling nt variety (it" 1itt 51vlkit'
Ill tilt iviiit'liet without ion! e( t coriiri-atiori..As iA a byIV ti't ti tie,. systill.
tire eaning \'lte if tint, talix and 14111 lllla laiies with lit' links ilas s'i'vtd to)
ciillipt'i.lte thir fi r I lhs,, services. TIti . t''clll ll'y .;ii NCt of lit' system was the
.si! iject Elf a ctolillIrt'ht'iisi' 'Vt 't'lslry stdlly in i.H- Thtt 115)1(4t IS the' subject
i1f tO lINe s1iily Dow being undertakeii ini light of a variety of changed clndi-
tims during ilt' il st dectde,.
The first lhItlse, of this nw" sttdy vil In, 1 (4itilt'ed wvith suchl questions as
1. For which services, iider pl't,'et cI hditiors, sholtd Illks cOtitiniue to be
ci('1i141'isliteil, aniil at what dollar values?
2. Shlmld services c'intililit' to lIe conitleltlsl'il for t]lirouglh tax atid loan ac-
-llit IlaceIst's )r should any lie cmplllelaltttl foir through soeie other te'hniilu?
3. Sliild the valut' of services offset by tax alto loan account balances be
14ooked at ini rent? liii to each Iank inidiviidually. or should tit' systtlnwide value
of sNtl s ii nd lothIlti o4 t iWrate to lIe the guiditg cmishdl'rtio ?
The first iht'se of this rt,-studly is exiiectt o 4 i be Colih'tt'tl t rly in 1173, when
sflicielt cllrrent information should le available for consideration of any recoill-
IlmeitlieliM for chtlllges in the tireSt'elt systelm.
February 1973
-ACCOUNT OF THE TREASURER OF THE UNITED STATES_________
Table TUS-2. - Analyss ot Changes in Tax and Loan Account Balances
T r- 1 r rr-r,
f al.' Y'.'b. o
e't n Y 1.1 r
~A%1raz
iraphic re~orts.
/ .-isl drlto reno " o rr ed t' - h-.ov 'I.te fo"of a
, I'ojt credit rar th purchitr priro Of U..- 'Ossrnmcni . soorit I
.ndby tt., for tisir on account, or for too .ss.o~t GC theri
ZtOZ 7 wa eter sonnriptlon3 through ties, wsnen this s.1.lsd of
r.;ji.ft !. ;eroiti t .eor 1.5. term. of the nircadara Invitiq., *ub-
scip-) to lavage..
Uitdt -staxe 4.oltn notes first offered for male a, of May 1, 1967
nd serv disotrnueio after J4na, 30, 1970.
Pf ?-ir..nt pln Un'S first Offered for&al.an of January 1, 1963.
1.ax nd. Ira bao,5 firnt Issued in kfarO. 1960.
fj :oes eligini. for credit onaieft of those depoited by Lhapayer. in
196 dopoita7 btoo as foli... Witold iLwo' %AO. beginning
-,.. - - e. ,1. ns- ]rI'r.. --- ~
~~.ilo..'1. oi. r ohnt _in .0odno Arl~ 1-i15 ; '.]
a!F1.7A texe - ;.-rl 1970.
*,/ odrra...pn 1.1 ;rotrd~.e begiio In Y~rc~n 1MA, a..tharizt'n wa gve
Shrine certain periods for inome. tax pay-vol.. or apo rtion o. them
=&C ; by ,ks o $11000 or more drawn on aspoelal depooitar, bank,
to t ore~itel 1.o the too .9. loan &,!count itohat0 bank. This prno.-
lurw. iscntinued1 in April 1)67.
6/Repr"nantsa crrsied cissnnltatltoa of * Decmber 1972 tran.ctlon.
Lesso tt6n $50,30.-
237
Senator BE.Nr. r. You are asking for a volume, and you are asking
for figures that will be out of date the minute you get them, because
the balances change from day to day.
Senator MCIXTYRE. At any given time, we can stop the clock and
look at them for one moment.
Mr. S.ITH. May we have our technical experts work with the staff
of the committee .
Senator MCINTYRE. Yes.
Senator PboXsinw. Maybe an interim report would he helpful. You
said 13,000 banks?
M r. -NT. I think the number is 13,700.
Senator Itrox.-IEw. We would have the 100 or 500 biggest banks to
begin with. That would be helpful.
Senator MiNCTYRE. You can scale it down to a practical matter by
discussing it with the staff of the Banking Committee. Senator Bennett.
Senator BENNrr. We have been over this before, and this is not
the place to discuss it because we are working on another bill. I under-
stand you are going to suggest a bill in which we can actually discuss
it. But the theory that all of this money can sit there in interest-bear-
ing accounts and that the Federal Government can operate without the
opl)portunity to write a check, is just ridiculous. The question then be-
eonies, how much of a deposit does the Federal Government have to
have in order to do its business? $7 billion is about 4 percent of $280
billion.
Senator PROX.mIRE. What is that ?
Senator Brxx-r-r. $7 billion is about 4 percent of $280 billion, which
represents the annual turnover of the Federal Government.
Senator M[CINTYRE. We don't say all of it. but maybe some of it.
Senator B:N.,Nr i. The Federal Government has to have enough
of a checking account so that it can operate. If you pursue this, the
Federal Government will have to quit depositing money in little banks
which it cannot really draw on as checking balances and concentrate its
money in the big banks to'pay its bills. I think when you get all
through, you will discover that as a practical fact this is an efficient
way to operate.
Otherwise, the banks have got to charge the Federal Government
for selling savings bonds. they have got to charge them for other
services that they now do for nothing on the theory that they get this
Comn)nsating balance. You may want to go to another system, but I
tlink in the end, you will have something that is more cumbersome.
and more difficult to operate. and you will not have saved the Federal
Government any money.
1 say this because I want to emphasize that there are values on the
other ide, and I dont want the record to show that there is, in fact,
$00 million worth of income that is being shut off because it is not jiut
in an interest-bearing account.
Senator PRoxnMIRE. Would the Senator yield?
Senator BENNErT'. Yes.
Senator PRoxMWE. 'Would there be any objection on the part of the
Senator to having the kind of study we have suggested, the kind of
hearings the chairman has suggested?
98-211-78- 16
23S
Senator I nxNE'r'lr. Not a lit.
Stwitor ll, x. iI. lecognizing that some States lhve had great
s'c'ess, i r\l amlI right now is doing tile same kiid of thing. They
re,'ognize tihey are vastilii all kinds of money because they are failing
to provide tile siie kild of opportunity are talking about here
for the State to take advaltage of its idle money which is not earning
tij rest.
Sellator lI:N NE'r. Te Federal Government doesn't have (le money
like a St ate does. The St,:ies property taxes (ome in at one time in the
year aUil tile mlo-i' sits tlivle iitil iit is hiiallv expended. The Federal
(iiovermlint's ilole is colli :y ill on a nmuch'more level basis than the
States il'omje. I f you want to have tihe GAO make a study of it, 1 think
ti, It ay splinr tlie Treasury to 1mmake sure thmt their related study is
also availalle at tle t ine the Iearimigs are set.
I wouldn't wait tile record ali(l time newsmen here to go out with
ti1' idea tlht ti ts Ias l1een a steal all these years.
There is another side to this story. and I think we should have it.
Mal ve when the Ammericaln Balikers Association testifies, Mr. Adlams
1a"v have a word or two to say today.
v[. S..i'lli. I would like, also, to reimplmlasize the point that this is
not a s\'steli ill wlichl tme Wl'easilrV collects tile money and pllaces it o
deposit ill banks. It is. in fact, tilt'collection system itself while deter-
iminles whlat., particullar 1halaice in a particular bank is. The Treas-
urvs role is a lmeimtral One iuitil it commes to the actual drawdown from
tl;).-mos accounts into the various IFederal Reserve banks.
Sellator BEN NET*I'. (iteoeseall
"
dies not Inake deposits.
Mr. S.mil'rT. That, is correct.
Seliator BENNEi'r. That is the point that I think should be reemplhia-
sized.
Senator AfcINxrTYI. I agree with everything that has been said here.
1 just feel that with 47.75 billion in demand deposits noninterest bear-
ii.,. we ouglit to take a g(ood look at it. If we can skim off $100 million
of income, let's get alout doimig it. I am not p)rejudging it, but in the
face of it. 7.75 sitting around in noninterest bearing, it (toes look to mne
that we oliglht to pilirsu what the Senator from Wisconsin has said
]as been done in many States.
Mr. Sxrrru'. Mr. chairman , I think vou would have to take that
number and lay it upil against time Lederal Government's expenditure
numbers for any particular period, too, to put it in perspective as to
wMltlier the Federal Government is effectively managing its operating
cash balance. I know 7.75 souls like a very'large sum of money, but
tlits Federal (overlment spends a very large sum of none.
Senator IENNE'rr. If that were the last 7.75 billion, the Federal
(overment would draw it out in a week.
Senator Ihtox.utm. May I make one more point ? It has just been
called to my attention that this is not something new, this is some-
thing at least 10 years old. Ten years ago, during the I)emocratic ad-
ministration in 1963, the ('ompt roller General made a finding that was
critical of the 'reasury at that time. and I think on the basis of every-
thing I have heard, would still apply.
239
"l]VV were lpoiltinl

olt lllat. '"l'liv TlreasilryN Depart III.] t's com-
.it-uts (1o not Overcome tlie previ 1s fiilinig tihat tht present sy4eill
provides an inequitable arangenent, with tle latrger banks. Tle Treas-
IIv I apartmentt has not lyoxi(['(l newv ,'onkicl,, ex idence tlat tile
nriarieient is fair and equitable to tie (overuiinLt. v! we renain of
tile o11inion that, modification along, the lis reconi|ineided by us
earlier, is desirable. We believe t1hat thlie modification would not inter-
fre with the wvorkinigs of tile pvestc systeni as the banks wvoltd ('on-
tiliiie to handle tax anid ]1an acc mits so lolng as the anlillits earned
li banks oi1 these accounts ex,'eeded tlhe cla r'es hbv tliw Federal GoV-
Notliting Ias been done al oit titis d(urin," tle ist 10 Years 1y the
Ienel.v administration, tle Joliison adinii' tratioii, or the Nixon
auliiiistration.
I have a list of solne of tle holding of tile live biggest banks vilich
are as follows:
Chase Manhattan ---------------------------------- $177, 00. 000
First National ('ity B:tk f N'w Yrk ---------------------- 139, 000. 0
St'vtrity IPaciti." Bank 4if lDs Alh-'I': ---------------------- 09, ( X), 00
'Iheuical1 Baik ------------------------------------------ 102, OW, 000
''lese are some of tie I auksz. and tiive' are 50 listed here, ldhlinlg tile
Ia'irgest
amounts
of tax andl loal accomits
as of Fel,'uarv
1972.
Mr. Smiri . These are 1higlily volatile numbers. Tlhtre vill be periods,
as in ,July and Augii-t. wv'lln oil), tax iayivients fall oil' and our ex )end-
itu 11es ale miov'ing up where we draw tlese accoi its dowii, especially
it the hi-,, hauks. on soime dlays to zero.
We ale perfect. prepared to cooperate with tlie eomuiittee ill this
stud'. We iave a great d feal rv lesilect fo'r the general accounting of-
lice. As you know. tile tle ps I )pa 'tiiilt and other executive de-
partients working with tle sali facts. s iolltiiiies reach di i'erent con-
clisionis th al the general acemnting office.
Senator IzoxIIM lm. hle gental ac.omltilig oftiee is human. Like all
institutious. it is run ,v lpeople who 'an imke mistakes. but by and
larg, 1 think they bring to this an objectivity and a degree of profes-
sioiilis511, because the\- are acountants and aluditols. This is the kind
of thing they do best: and I t hink tlieir criticism sh iuld give us real
coicern. I thiink this is especially true liecaiuse tlhe Treasuiry Iepart-
Illent tends to be oriented toward tlie banks and tilenders.
Thiey work with tliemn tley uvderstaild them, they Cooperate with
them. I think it is good to get this outside opinion from a professional,
capable agent that can show its w'hiere tley tliink we can save hundreds
of millions of dollars for th, taxpayers. I think the chairman really
has 1101d of something'. I colugratII ate (lairman Mclntvre on it.
Senator McIx'TYIE. I want to thank \ou very much, Mr. Secretary,
for appearing here this Inoniug. Yo1' testimo y w1as1very helpful to
us ill view of this NOW account situation.
Most of the testimony. we have almost agreed to go 2 years. You
say the administration would prefer 1 yearI
Mr. SMITh. We would prefer that.
240
[Tile complete statement of Mr. Smith follows:]
STATEMENT OF JAMES E. SMITH, DEPUTY UNDER SECRETARY OF THE TREASURY
Mr. Chairman, I am pleased to appear before this distinguished Committee
today to discuss the Administration's position on S. 1008, S. 1256 and S. 1257
dealing with the extension of deposit Interest rate controls and other related
matters. Accompanying me is Dr. Howard Beasley, the Special Assistant to the
Deputy Secretary. who has played a major role in assessing various recommen-
dations for financial institution reform.
As you know, the Administration transmitted to the Congress on Tuesday,
March 13, a draft bill extending for one year, through May 31, 1974, the existing
flexible authority for regulating time and saving deposit rates in Federally-
Insured financial institutions.
We believe that there is real merit in extending for a period of time the cur-
rent deposit rate controls but only as an interim measure which will pro-
vide us the time to take a comprehensive look at the spectrum of laws which
affect not only financial institutions but also consumer-savers.
The control of deposit rates is but one aspect influencing the competitive
relationships among depository institutions and the return which consumer-
savers receive on their savings accounts. The Administration deems a total
review of the deposit institution structure and services, rather than of Just one
component, to be the appropriate method to assure that the public is best served
by our financial insitutions.
Since the inception of the present structure of rate controls in 1966, there
has been a continuing debate as to the efficacy of ceiling rates on deposits-
both from the standpoint of the institution and its ability to compete for
funds and from the standpoint of the consumer and his right to a fair return
on his savings. Unquestionably, these are two valid, and highly important, con.
sideratlons. however, balanced analysis demands that we not only look at the
liability struvture of these institutions but also at their aset structure in order
to determine whether or not they van generate sufficient earnings to pay freely
competitive rates on deposits. This essential interdependence between assets and
liabilities points up the difficulty of dealing with any of these institutional pow-
ers in Isolaton.
I recognize, Mr. Chairman, that the Administration's suggested approach,
S. 1257, is explicitly responsive only to the extension of the Regulation Q
authority. We are recommending a one-year extension rather than a two-year
extension. But Implicit in the position of the Administration is the recommenda-
tion that no interim or isolated action be taken by the Congress with respect to
N()W accounts.
We are, in fact. recommending that the Committee not adopt those sections
of the proposed bills which deal with NOW accounts and the related extension
of FDIC authority.
Our reasons for taking that posture are several
One, we are not convinced by the data which we have thus far seen with
respect to the development of the NOW accounts in both 'Massachusetts and
New Hampshire that there is a solid case for Federal intervention at this
nonent.
We do not see a competitive disruption of such a magnitude. If indeed there
Is a competitive disruption at all, which would suggest that the Federal Govern-
ment is compelled to Intervene.
The NOW account represents a competitive innovation-a competitive break-
through which many commentators on the financial community will argue is
inevitable with the growing role that terhunlngv is plqyint it the transfer (if
funds process. The benefit to the smaller consumer-saver seems obvious. We (1o
not yet have sufficient empirical evidence to judge the impact on the offering
Institution.
We have in Massachusetts and New H1ampshire a laboratory experiment, which.
does not at this time appear to be highly disruptive in a competitive sense. Rather,
this situation provides us with an opportunity to see whether the permitting
of negotiable orders of withdrawal out of interest-hearing accounts Is indeed a
feasible undertaking for financial institutions. There are those who will argue-
241
that it Is not feasible, that these Institutions simply cannot afford over any lung
period of time to provide this type of process out of an interest-bearing account,
because of their asset structure.
The only way we are going to get a real answer to that question is to permit
this experiment to continue.
It Is an experiment that in no way threatens the safety of soundness of the
institutions; it Is a question of profitability. And obviously, if it proves to be an
unprofitable situation, good management is either going to eliminate the service,
or make modifications in it.
Lastly, our reason for urging you not to undertake a short-term interim solu-
tion is that we think that what is desperately needed is a comprehensive review.
4of the competitive interrelationships of the thrift and commercial deposit Institu-
tions.
The Administration Is now concluding the policy review of a comprehensive
set of legislative recommendations which address the major issues with respect
toi the structure and regulation of deposit financial institutions.
Tie Administration hopes to be able to announce these legislative recomen-
dations in narrative form by early April, with transmittal of draft legislation
to follow by early June of this year. For these reasons the Administration believes
that a simple extension of existing interest rate control authority for one year,
through May 31, 1974, is the appropriate approach at this time. Such an approach
will provide sufficient time for Congress to consider carefully the Administra-
tion's comprehensive legislative reconunendations.
It does not seem wise to us to attempt merely to patch up the existing financial
system which the momentum of competitive forces, spurred on by consumer
interests, see destined to restructure. Our financial depository system is far too
c, mplex and important to attempt to redesign by using any method short of
a comprehensive and thorough review.
Senator "[INTYRE. Thank you very much.
I call as out- next witness, M1r. Francis E. Robinson, executive vice
president, New 11ampshire Association of Savings Banks. We are
happy to welcomme you here tils in g together with your
alss )(ia-t(s.
I"
e
STATEMENT OF FRANCIS E. ROBINSON, EXECUTIVE VICE PRESI-
DENT, MUTUAL SAVINGS BANKS OF NEW HAMPSHIRE, ACCOM-
PANIED BY: OLIVER DROWN, PRESIDENT, SUGAR RIVER
SAVINGS BANK; FREDERICK HACKETT, PRESIDENT, CONCORD
SAVINGS BANK: AND KENNETH CHANDLER, PAST PRESIDENT,
MUTUAL SAVINGS BANKS OF NEW HAMPSHIRE
M'. RoB.,INSo. Thank you. Mr. Chairman.
I have with Imw on my left the vice president of our association,
Mr. Oliver I)rown, president of the Sugar River Savings Bank.
()n my right, Frederick Ihackett, president of our association and
president of the Concord Savings Bank.
And on my far right a forim, president, the iinediate past presi-
dent of oir associat ion. Mr. Kenneth Chandler.
senator [CINTYRE. .Mr. Bol)iinlson. we hav'e your statement here. It
will be included in its entirety in the record. knv place that you can
hit tie highl spots, savinli us a little time, it would be helpful. But I
want vou to feel free to testify in any manner that suits you.
Mr." Ron,,soN. ith your perimission, I will paraphrase this but
follow it l
i
tee closely.
We are especially pleased. being from Yew Ilampshire, that we are
here in sUtpport of a bill filed by a Senator from our State. Our coin-
242
merits, howe~'er. vill be confined to section :1 of S. 100S because New
]Iampshlire is one of only two States where NOW accounts are being
i1h,1de availalhle at the present time.
We favor the enactmellt of section .3 for three major reasons:
I aii,se we thJink it has been demonstrated that savings bank de-
posito's have benefited directlv and commercial bank depositors ani
eustoninevs have benelite,1 indirci ly as a result of the offering of these
SenatoI' MCJlTI'hE. !lat is 'o1r )OSition. they have benefited imli-
retlv. ''llev dolnt feel that way.
Ali'. 1oI1NSoX. W~e think tle customers have beliited indirectly.
'MnIl asis on the customer.
We believe tliv record siows also thmt these accounts have not
created competitive inequality. eitlier with the commercial banks or
with the savings and on asso.iat lls in oue Own State.
'I'liird, we believe that tlie contilmtio of thlse 'accomiits will hlp
sa ving.rs banks to maint ain their position as sa vings )anks. and I em -
Ihasize as savings hantks, in com)etitioin w ithl the full-service cool-
Illercial banIks because tdmse banks have leen attracting mio'e ailt
more savings accounts awiay from us ii spite of lie interest rate differ-
elt ial of regulation Q.
I think perhaps 1 shioth1., as I go along, emphasize some of the
di ffereices between the NOW accounts as i'urrentlv being ol'eed in
New HlamIpshire anl those Ieillig olf'ered in Massac:husetfs because it
i- soewhat significant.
In New ]lampsire we (10 iot pay as hiili a rate of interest on NOW
accut(O sllS as they do and wiedo oft regular savings aecoilts.
I'lme rate paid in New llaiulslsire in 'irvsl4 from bank to alnk. It
lages from 1 lei"'ent to 4 lervont in individual anks. and that coln-
plles with a regular pmsslook rate il New l lamllpshie of Z percent,
-which is also lower tltau in 'Massa('lllsetts.
Senator I(. ,,"ivvm.:. In the dlevvlolptt id of liese NOW a(Colilits the
Massaelusetts b unks are paying 5.25 1 ecau-e tlhei' commissioner of
banks told themu todo that.,
Mr. Th 'iixso-x. Right.
S1e1at,' AI'I N'YRm:. To Ialan'e that off they have 1leen charg-ing 15
cents per chi'ck.
Mr. BMolINsx. Yes.
Senator MC I'1 Tv:. As V, look at thi, and as your arniumei is. as T
uldevi'stalll it. tiis is an accollnt to be used personallyy. it is a personal
accolt as opposed to a coiiuercial ac'cotit. wy uoln't t1ll theory
of paying a bt6ter rate of interest as MAIassachuselts does hut cliatintr
thlem for the che,'ks in oiler to keep tle checks down to 4 or 5 or G for
each a'couint. uAliv wouldn't thbat )e a better way to sct up what I think
YoU call a family NOW account ?
Mr. B ollIN'o. I think the record is going, to show us whether that
is a better wvay or not, because e have both systems Operating in New
I ralipsh ire and also. of coulul'se. one sy-stell ope rating ill lassachlisetts.
Senator McIN'TIrEn. )o we have a' sv-tein ill New Iailipshlire that
charges per cleck
243
Mr. Romil.sox. We have azreale ( flexibility, I might )oinlt out, Mr.
Chairman, tlan they have in iMassachiusetts, both under the tattooo
a(id under the bank commission.
We hare a wide range of ollerings.
I might say parenthlletically that is wily New I lamlpshire would make
fl (rood ) l'abato'V aS SOlIleolie has jig4r.e t ed|. l)al'CaSe we have the ralge
'of l>ossibilities of combinations.
We think the direct benefits are obvious and they hare been covered
pretty much and will he covered bv other wit nesses at this bearing.
IVe know that mny people come to savings banks already and they
withdraw from their accounts. Sonie of theiti have very active regular
accounts because tihey need the monev. ()thers coli, regularl.y to tile
bank and biy bank iiiolev order cliecfs to paY certain blills.
These are the people who blelefit most from the N()W accounts, we
believe, aml that is what tie\- are designed to take care of.
Tihe indirect blellits to cistomeis---nplta.-tze agaill customers-of-
the commercial Ialaks I think has leen olvioUs in New Hlampshire if
not to the world at large.
For example. just from tie time when NOW accounts were to be
Started in New I [ampishire. the nearest conhmuercial bank offered what
was, \\ very good and appeal n..oimuerciaI account package of services
whicl that bank could ofler to its customers: completely free checking
account. no service charges, ]no minimum balance. a quarter percentage
point off of current anmal percent ,,'e rate for home mortgage lon s
an(I new pointgaies. 1 percentage
1
)iit ott the annumal pereltage rate
on all automobile lonas. 2 lercelltnage points oil the a annal percelltige
rate on all personal loans, 2 pemceitz~ie points oil all home imprv'e-
menits loans. 11o charge for travelers, checks purchased if the travel
delartmedit of that bank arranges a trip.
In other words, tile commercial baillk is aile to compete, and coin-
petes siecessfuily and quite properly, anl lore power to then.
That is how tile citstomer bellelits, not only tile customir of the
savings hank but the customer of tle commer'ial bank, hr the very
fact of a very moderate amount of compete ition so far in'the No)\
accounts.
All of this is in tile tradition of the American Comtpetitive system.
It is the way it is intended to work.
Fear that it would be uidulv eoinlwtitive is lnot suported hy tile
facts in Now Hampshire. Both'tue savings and loan associations and
tile commercial hanks in or State have grown at a faster rate than
savings banks since NOW accounts were started.
I might say at a faster rate tihan either the savings balks with NOW
accounts or those without.
From August to )ecemher 1972. for example, tile growth of say-
in.s aiid loan associations in New I lalipsilire was il'oe thllan one andI a
half times that of the savings banks \vio had N()W' accounts, and dlii-
ing that same period commercial banks grew aioult three amnd a half
times.
Duringithe same period, as I say. the other savings banks that did
not have NOW accounts grew as did those vith.
244
So, we fell far short, of the financial chaos that has been mentioned
or suggested.
As a matter of fact, we feel in New Hampshire that this is a par-
ticularly good time to develop a new service for customers because we
all can benefit by a rising economy.
As you know and I am sure are very proud of, as we are, New
ltampshire has an unusually fast growing economy, the fastest grow-
ing i N ew England. I can't think of a better time to start a new serv-
ice of this kind because all kinds of banks can benefit by this growth
and bv the increasing market.
At the present time, as a matter of fact, the NOW accounts amount
to only 45 cents in NOW accounts for every $100 of demand deposits
in commercial banks. and that is hardly devastating competition, in
our opinion.
Senator "MCINTYR-. I think the evidence produced here indicates
pretty strongly, as the Secretary just testified, there is no very devas-
tatin increase so far as you hav{e been in the grrowth of tWe NOW
accounts as opposed to the overall comniercial demand deposits.
Mr. RolusoN. In the light of your comment I might progress to
page 5 just parenthetically. I have had some additiona figures tele-
phoned to me that supplement the sheet. in my testimony called
"Growth in New Hampshire NOW Accounts."
As of the 16th day of March, which was later than-his testimony
was prepared. the number of accounts had increased from 3.023. which
is on vour sheet, to 3.146, but the number of dollars in these accounts
Ias already leveled off and at that point had decreased by .01,159.
In other words, the figures for March 16, still 12 banks, 3,146 ac-
counts, but only $1,793,090.
So I think the evidence is as we expected, that this would have quite
a sharp rise, as it should with any new service. that it would level off
fairly quickly and it certainly h a's leveled off at, this point, well, even
to a slight downtun, perhaps not a significant one but it least to a
leveling period.
I might point out the Federal Reserve Bank of Boston reports
regularly the financial indicators on the growth of d
e
posits of various
kinds, both in commercial banks and in savings banks since 1967.
It happens to lie a convenient time for them.
Since 1967. which is roughly when regulation Q became fully effec-
tive, the savings deposits in commercial banks of New 11ainmp.sl4ie
increased by 69 percent. while the increases in savings banks during the
same period was only 58 percent.
So, regiulation Q )hs not been completely effective and the Federal
Reserve Bank of Boston I guess. gives us a clue as to why that is so.
In it, 1962 annual report the Federal Reserve Bank of Boston
reported that-
Onc- ,top ,anking is an advantage which c mmercial banks possess over their
nobI IIInmcI( ial couwpetitors. Many bankers feel that this convenience is sufficient
to overcome at least a one-half percent higher rate paid by competitors. Advocates
for commercial banks argue that this factor of convenience is a distinct
competitive advantage,
And so it has 1)roved--I am now leaving the quote-so it has proved
in New Hampshire over the past 5 years as stated from the report
of the bank itself.
245
I might say that even in local markets there isn't evidence that this
-is quite such "ftearsome competition as some people have said.
In the very center of NOW account country in New Hampshire,
that is the city of Concord, where there are three savings banks, all
offering NOW accounts at 4 percent, and where there are two well-
established commercial banks, since NOW accounts were started two
banking groups have filed petitions for establishing inew, and I empha-
size small banks, the kind that are supposed to be devastated by some
witnesses' testimony under the NOW account corn petition.
One of these groups is New Hampshire's biggest and first bank
holding company, a very knowledgeable, aggressive, active, and intelli-
gent organization.
Obviously NOW accounts don't. scare them. They are goinl into a
market which is the very center of NOW accounts.
Another group is a local group headed by the former Commissioner
of Banks in New Hampshire. His group intends to establish a bank
right in the center of the NOW accounts.
Our banks don't want to become commercial banks. They want to
remain as banks for the saver and mortgage borrower. That is why
they like these accounts, because they believe that these accounts, whife
giving some additional flexibility aid additional service to customers,
keeps them as savings banks instead of true commercial banks, and as
has been pointed out by representatives of regulatory agencies, these
might be considered as intermediate type accounts.
f course, as your bill proposes. MIr. Chairman, it would permit
this kind of an intermediate kind of service to customers by other
banks than ourselves.
We have taken note of the warning contained in the Riestad research
report of Mardh 1971 which reminded us, and I quote.
Conmnercfal banks are unquestionably in the forefront in the competitive pay-
ment system rates. They have the credit cards, SCOPE and SCOPE-type proto-
types, and strong industry planning via the American Bankers Asso(iation, the
Bank Administration Institute, the Bank Marketing Association, and others...
Finally, commercial banks have the very important checking account and revolv-
ing credit powers.
Senator McINxTriv . Do mutual savings banks in New 1 Iamipshlire
have credit cards?
Mr. RoBI,so,,. We do not.
With these advantages, an a firm grasp on the mymnent system, it now apipears
quite possible for the commercial bank to "control" the evolving payment systeni.
Our savings bankers know that if the commercial hankers come to
control the payment system, the fuds for mortgages will dilnini-h at
tIv very time when it is needed most.
The NOW' accounts dltt amoinit to lilie.h ill tihe total economy of
the United States. especially those in New Hampnl)shire alone. only" 12
banks, $1 ,80o.00, but they are important to our members, and we fIn e
Congress will pass section 3 of your bill to make it, clear that this
service call be continued.
Senator MCINTY.RF, Mr. Robinson, in light of Secretary Smnith's
testimony, what would your comment be if we said as to this question
of the aipropriateness of NOW at-counts which is basically a relatively
localized problemathat it should be left to the two States affected and
let them decide.
246
MY'. lMI NsOx. Of course, as far as New I fanpsllire is concerned-
I cuald (il v aiswe*
-in- New Ila lire-that would leave us in tile
p(JSitiml we are Omv. wiich we are Hlad to have.
I can't speak fo n iankers il (lther parts )f the country who might
not le satisfied with that-siti;ation. but as far as New flIampshire is
concerned. of course, that leaves is whei'e we aie.
SeIatol' MCINTYI'. vvr'etarV Smith seesls to indicate it is not a
Feetiva] quiiestio in il\'o] 'ved ie e. thlat if there is any ](a phi rol)eis thiey
sh(ml ie handled I \v tile local legislature. 'Tlie'testimony yesterday
liv .4(1ille ()f |lie associqal ions wiich were (ii)l)osed to tile NOW accounts
ge 11 in tile impression tiat they felt that it oligIlt to be spl'ched right
awaV before it sp1rea(s.
Thank oli v, ' erv iih.
Mr. ]( lii sX.' 1y nia1l l)iuiiit is we (lou't wvalt it sqiUelched. I)lease,
Sir. if it ca lie a voided.
Serlatmi M'I1c'vrE. WOmild ou v,,i'e the slilcoimlittee a brief ]his-
torv .11 iiv N()W' ai' iilils (hevelo)ed ill New 11a1ml psiire .
N11'. ]h BINSO-N-. I lil\e ()'teli saidl it is lik he aine ililwIoll finding him-
self iii Ilt water takes a batI.
We iead albolit the decisionn of tIe Suprenle .11dli('ial Court of Massa-
('li '::etts. wlhicl you have Ibeard alout. We asked 0111. attorney to re-
view the statutes in New lainllpshire in the ligl it of that decision be-
cause it seemed to us hat wre lad quite paral el language in our law and
in tIh charters of savi's 1lanks ill New Hainpshire.
lie is ali aile ntiorm-\. You know liim. Aid Ile came to the Coll-
(iAiionu that the New lampltsli ire law was so parallel that it was likely
I]1at NoWl' acuiiiits Nvoul(l 1o, Considered h,,,"l in New I [mpsii re.
The New Ilanupsi ir Sa\vin-s Bank. of course. worked o this in-
dic'wildent lv a liid de'ided 10 OIi'er N()W accounts iii September of 1972.
*",uhse(iuentlet or almost imlumediately w( sent information to all of
(1111' iieiners tllat oe, bank llad started it, ga've them the information
f1 ' them to nlake t1eir own decisiolis.
Sini.e then It other iIanks have Started to offer this service on the
basis of that.
Senator M(rITvn-rvi. Is the NOW a'cout process beinm .iallenged
ii (1 r i'oii's ?
\i. l )ur
n-s.
Yes.
l]e New
lBaalnks]uire
B:ners
Association
las
differed with the 1banik ('oiimissioni oJi this. The banik collmissioner
lid nuot stop the N()W accounts whieh. of Course, would 1e his pre-
ri_'o.ive if lie felt they" were illegal ill New llamlpshire.
I Iv was. of colliiz'e. convinced they were not. lie took no action against
th~e Newv I lailslie Savingzs lank. which was the first, and, of course,
silwe tlen ]) against 1(1 others.
'The New Ilailslhire Bankers Association questioned that eonclu-
sioll by the ba uk comm issioner and has carried a lietition to the Su-
iii1uae (Court Oil that poilit.
'lhe Supreme ('on it has iot decided on that point. The case is pend-
imua liefore the Courlt.
l'tie Attonlev general. acting oil behalf of the bank commissioner,
mui've(i to have the ('se (isiissed on the grounds that they did not
have .,tallillg ill this Case.
247
I tilti not a law ver. I am sure von midemnn( this better- thtan L. And
tllit is thet (11ueStio t-Iiit iS I)(tliflg tIt tlC L)I'('e'lt titite.
1111101' MI(J'LNyvfE. How about our State legislature ? Is there a, hill.
ill thle legislature at the(, present tinlie affectingc Noll' ac'oitlts ill New
I hitupslitie or' is thiCt one0 (XIWe~tcd What is thte.sittuatiol there
Mr. RolnNsox. There is Iot a bill prinilted nlor 1 timnogiapled to my
knowledge. Thteie is lioite visible to mil. Bitt I (to kniow that lobbyist's
for thle t'oniiiurcial I annkei's arie working vet' hard in tlite legislature
l it (inse, a bill Should happe.i to come ouit atrniust Noll' accoiunts.
So 1 assiumte there is (lit' ont file ill thle (Jlhice of Lefrislat ixe Service.
Senator lIKN rrr. I h ave nto priltilar commiient to make exeelplt t Itat
IY ty untPar1ing, tite inicrease inl NMM ( ) cottlit s and the total iliewtSC ill
s_!it II,,s banks. 'omparnrug lit' fart that inl 6 Ilnihs NOW account S
have increatse(l, 20i tiieS inl iiuiiiihei anid perhaps 30 times ini volume
ill New I npSIilte. roiiw', front11 aI ' :l00 ) balance ill SepteIkIbRT Of last
viti i to SI .797J1 II()Or appioximtatelY Vs4.81)(1moo1(. 1 at is a pretty r'apidl
I;tte of imlereitse.
If all blik dci tusits i wnt''A-l at that rateyvn wouldi icahl v 5(esome-
tliiin. *Soq whl , \-il say I hex'\ have ntot sub)Stanltially inealsedl, this
1101 tthit' evt't ltslI~ililli(Ilata rapitI rate.
Mir ~ nx . Well. as a i tttr of' facnt. it hias muilt iplied at ant
imifiiiie rate if von tart frlout Atigt. whv~icI is zero.
What I think s.houild beb kept inl wind is what we are talking" about
is total aitrshiolditigS Inl savings bnks. 'Ilw N ( )Mi ac'i'onts aitre ntit
tot il lv niew. you se(. 'ihex' are a niew I"iiof' witiludrnwal front a sy
W't l It', it is go(ing~ to0 1wt altrtittive a iid.] therefore. att raet-soine new
accounts. N s )etio about it. ( )laioislY that is of' interest to its.
T() a Iar _-e (idei'-e-aio I. it is a little I in i'd to sI-%' to wh at d1i('v--xvc
k 11ow hi ow 11111 nitv ie ti1-15 bitt' I fro iou 1the ra l11ilts. hi it wve (lut.
kituv pre-i-ly it()\\- mucth'l of this mloneY wvouldl have cronle into a1 re(gil-
I'l- '.'iiit iI: it ha(n not tut'inlto a N( W ai(count. biut we kitowx a
snh.-IAitifl .Imitlitt w~ouldi har' nd thin' statisiit' , Support that.
Sentor UiEx xE'r'i. Within ou o\\1 itltit".acordingj~ to thle figures,
p ~~~eet wa-,s tta us lettell (;lt Of von r, owni re-.iilttr itetounits, but 11)
pt'i'etit tatite out of eolttHIiie aiu actt't'Oit5.
Afti'. IZo itoN si N. '(IWA iev il t Ii 'teks from commiM t b'' an aks. We gyet
chletks fiom Oi 1 t'otimiit'lil hauml into i''.rtti'a(ollt. too. So I (lut
knlow of anlv wav' ill xx'] i(i' we 'ane get tilie Pittvct izt imouit except It
ilitet'iv i n.tut initivi(Ilt peoph.li( hiih loltlhas (lt at this point.
StIitl' kEN ,~ TTli. 111hi11t Mxouldi lit voItir reart ion to the suggest ion
bY ( ;ovei'ior iMlitc'ii'll of the( l'tdei'al Ih'sei've(ster'(ay , that all ill-
lt ititiots lbv 1'i veii thilt, oppoitliltiitY' to offtl thliis Saime type~ of account,
anti(. ill t'tlct. (it', aiiitouint of interest A-Ott coulhd pa.\ lie controlledd so
that it was :ottiewhv ide i wtei Zero .1i ti t Itit rest 01l voni'. regrula 1'
sax'utixs tit'oott
Mr. 1l utNsiIN. We ate inl sitpphoit of sect ion 2 of 'S. 1n -0 and have
1to olijen'tion to (lie paiss:ig' of the( ot hers. though~ Nve didn't commentt
Onl those. wiic would inl efleeVt dto \x'hat (Gov'ernor iMhitehiell stuz~ested.
T might say the answer on the second is we are practicing exactly
what lie suggested in New Hampslire: th.at is. a lower interest rate
than on regular deposits.
Senftor B.xxE'rr. That is true, althou h you ldot have a uniform
interest, rate. Every Iank makes his own deci-sion. and according to the
inforiat ion-unfortunately you didn't nlmlier your pages, so it is
har1A to identify them--bult th'ey range from a man who gets by paying
1 percent interest and still .harges 15 cents for a dra ft over 20 to a
mall who charges 4 percent interest and charges nothing for
processing.
Mr. Rou.x'sox. 'We wo~ have no objetion to a ceiling.
Senator BxN-T. You wonhln't fe,,l bad if savings and loan aso-
ciat ions offered the same service to their depositors?
.[r. RnBmNso--. 'We would not. We believe this is the kind of service
that thrift institutions should have in order to compete with the one-
stop/full-service so-ealled banking because we i link it is the kind that
is needed.
Senator BEWN N.'rr. If commervinl baInks offered the sIme service to
their household :,ouints voil wiml), feel all righ.lt aholt tlat, too?
Ir. ROBS-,so. Y6es. sir, we would have to be absolutely consistent.
'Ve have never asked for anybody to hve, A-vtlin., takell awaY from
them. We have iewcr asked anything to be taken away from them
in all the veal's I have worked with the association. I am proud of
that record.
Senator MCIN1~vn:. I think S. 1008 does that.
Mr. ROBINso'. l'hat's ('onect. We slipport it.
Senator MfcINTYRE. ,eiiatoi' l lrrOxIil'(' .
Senator Pnox--\i i. 'MI. Rolinson. 1 am1111 v'' in il>'ssed. You :are a
remarkable man. You an, so logital thnt it is vc'rv hiarl to resis-t vDi,.
Frankly. I cance in this roo1 without l,,,wm- in;lii' al ioit NOW
accounts. We lon't have the'm ill Wi(onslwi. as you know. I have
learned a lot th is !iiolnin,.
Youm answer to Senatoi' lemitt sounds :,s i ' thiis is ani idea whose
time has come. If it lhas. you say ht ,v,,vl get ill 11 tle a't
M r. ROINSON. We hoe so.
Semnator PI+ox1a-:. VlV' do von1 silullut tihe notion of h1aving! the
Federal Government linit tle i'iC11111 of iutrest to be pilid.?
Mr. RoBixsox. I think I said we weve willimg. Seiiator.
Senator Pm-ox.mil'. l ow (10 you feel 'l1 mt it Wou11 veyo fa vor
that
?
Mi. ROBIsN. We would a0e 110 olbjc.'t ioul Iecaise we feel these
are intermediate type of accounts betm\;'J meg 1,a1i' sIiis accounts
ail regular eihecki'ng aiCCOulliits. and being imte(riuediate accounts there
is every reason. I think. for them to !,., ilterlnediate as to rate.
Senator PRoXmio :. Perhaps von could+i let competition detc'l-imie
that. You would have to (10 that if vonl \evre to hm e a sulccessfl
Ol)eration.
'M. ROIIsoN. I might say thlat i'omijetitinil did (letel-mille Ilhis 4
Percent that. Senator leimie; ielic ed. I wil! shtow youl why.
In the city of Concord the commercial bank that is next door to
M1r. lackett's bank had a veryV good make iig concept. It said gi\'e
249
lis -,1,0Oi) wvhilch wc call Ilit ill a hI-diay li)ti', tccollilt. thlc ',i ,an
have a little as v(l \valit Hi a (e1.,ilf! '(',,lllt. you will ,Ot 0 P)lCIlt
(loII 1 yr l.lOO). yoI Van have a checking acctmt free vith no mini-
mu1m ialance. \ Vhen you calculate what this me.ans. it ni'a u- that
a1N, i11ai \1Who keeps hi, ;isc 'lcing accot at s2.-() or le-, ,etQ 4 percent
o(l his ,Ia , r more tm i aii 4 j)r(cet t on less thaii i1."7, .
4o the savi li, bank. ill New llamnp shire. in ('micord. N.![., felt
that they lad tI (1111WV 1) witi a 4-percent NOW ao-count to comlpllte
with what, tle commercial Ihank was loiii,4 vcry successfully. anid I
might say that the commerei bal zank .ail(l 1any inore tines as many
(lposits fr'i the othcr .savii s.. banks ill ( 'olncor(d (d1rinn tile )ein-
ling (lays of tlhat f ml HIM Ition than ArI. Ilacelwtts bank htas been able
to get right next door in all of his NOW accomts from all sources.
Senator Pizox.ium. You d(hli't seek legislation to prevent the banks
from doing this?
Mr. Ronlsox. We did not.
Senator PIzox.IRE. Now, the banks are doing that to you, you say.
You say the lobbyists tip there are waiting to pounce the minute they
C1n get that bill introduced which they support which will eliminate
NOW accounts.
Mr. RoIIINsoN. I don't know how high g to potece. I
have
been
down
here.
Senator Piox-lmuE. Now they ,.o to the extraordinary step of get-
ting legislation introduced that would affect New ILtimpshire and
Massac'husetts primarily. Ve have the administration coming up tak-
ing a fine position thai this ought to be a chance for you to experi-
ment. They believe in States' riplits. They don't believe'in abrogating
contracts. They say let New Iiampshire and Massachusetts tr'y and
see if it. works If it doesn't \work. then they can take a position.
I )oesn't that seem logical
'Mr. ROBINSON. We thiik wve make a good laboratory. We are a
laboratory of a sort every 4 veai
v,
in Presidential election.,. We haven't
had as m4eih publicity in Ne Iam)shire since the Presidential elec-
tion as we have had o1 tie NOW accounts.
Senator PxOm :. I [ow many of your customers woul(l be de-
prived of their NOW accounts if the Sl)arkinan-Tower bill should
pass ?
Mr. Romxsox. 3.116 as of last Friday.
Senator Pitox.riJ. tlowmtanv in Massachusetts?
Mr. Romusox. I am sorry. I don't, have thse figures immediately
at hand.
Senator Pnoxmrim:. About 39,000?
Mr. RomINsox. Soiietlhiiig like that. I believe. I (lont remember.
Senator Pnoxmmi. I)o you think it would be fair for the Federal
(ioveinlnemir to ahiogate. those contracts?
Mr. RomxsoN. Well. I (on't.
Senator Lrox.mt.E. Wouldn't it he taking away an opportunity for
a prudent saver or consumer to make his choice ?
M\r. ROBINsoN. I think so. We believe that the customer benefits bv
it and we are trying to provi(le a service. It is one that has been ,
let's say, moderately popular.
25 0
SenIato1 PRx0VNr.V On . 0 1 tini that concernlli e is T ceita july don't
wanlt to Sve I iiiid come out ofsvn~ and loans' at n1 tiiiie wit hlis-
ingi is so vei'Yv Vitadl to th leconom]iiic pro~ ,gess of o111, country cand to
t~l -1he il ,vl-Iir of people who need shelter.
JI(1uii1lZ lims beenl in an lot of, tr'ouldle. '1'lint is wlvIfa vor' rcgiilatioi
C) lthll lIuhrr eouh to) iiiniuaize r'estiions andW v1(1 iiiiiii.atv
them as fas-t as we -.Ill.
Buht 1 a in1 conce-i'ied th at i1i. Ow i N ( )W could halve that e ffect. I
IVas W0fnilii, it' one of11 the reon1s for tile Mitchell proposal to limit
tile 1i1ioulilt of interest to be paid womild be to provide a kind of re.-it-
loItionl Q- ivstittoi So tha-t volu woild !-t't le's5 mionec oilimg oiut of
sav~ilitgs 011(1 101111 inito (his kinid ofl ecouijit.
.F. 'I ( I I N.t )I' ree1l a~ is that Sa VilI~ L vIS oan Iuli to I
ill this, kind of' blsines:,. too. I know t hey don't all slia ic this feel iIll
wi th us. but I do knmow Sonic of them (10. anld for. the -samle reasons.
We believe this is a wav for 1is to sthiv inl the thiri ft busine-s. an1d
ani~~ ;id 1(011115 ai Il ilwth thrift buIsiness,.; anld we think that this
kind of' th lid-pIm'ty Imyielt -vste11 is veryv good.
Senator a hlioXv tin:. They ae n: ol Opoev to tille N MlV alccolnfns ?
Mi'.IU. S, IN '. -SMIi W4Oif I hemiviae. There a rc no spolkesilleill for tiho
New I lan11psui re onles. Thle New Ih1illp Ihiii' onles that have talked to
meil Would like to have 'NOW accounts. as one nieals of competing.
S-en a't y o ix Min -:. Thl l i ame 4io opposed to your hiavill~g NO W ac-
.11'. RoIiN.oYN. No. not inl Nowv I Ialih11si'. not thle (ills that,11 have
tal kcd to meI(. Maybe not those I laivi~t heard from.
S"eniator' Twell Nil.lvit A.-fil lIi lpiervet ouf tile mone . y ill tile 'NOW
aciois c'ame ouit ofJ the ' :ivilvios aWCco1uits anid the saviiigs inistituitionis.
Talking to) the Massaclisetts people * estei'daiv. appro'(ximlately 2-4 he'-
ceut of their accounts ale tuingiiL over oil the NOW basis whlichI likes
thil le SS available folii-tern~li invc tinleiit.
Seiatror l
1
z(Iliu-:. What yon are -s-viiq, is 24 percent of the NOW1
w-o'its c'kiliv from11 these inistituitionis. but this could1( aimOllt to a vci'v
small drain. 1 or :2 p~erc(ent orI less ?
S011:0 01- BEN NuT-. I 'Ill)i]lot Sure~ it would h~e approxi ntelY thle snil1W
p-ren. ,gifpe'ople fouind( thieY coul d turni their11 say ill'as a m1( loai I ac
oinsoverl oM a4 M AV basis.
Semitoi' I~oia)Iin-:. AS I miner-tand it. there are only seveni .1 & Us
inl thiiis area where tile -NOWN accOll its operate. So. it is not a veu'y lig
laboratoryv experiment.
,SVia ti)1' lIEN NEi'. 1 a.11 n1ot ('()iijaini with the savings and( loans in
'New H amipshirei. Thle New I La iihshir c Xl elieiie anidt the Mlass-41
clitset ts expeice. wile not identical, would inic~iiate that about oiie-
qiiam'1ter. of tile 11nonev inl the Inutual savings banks thait offei 'NOW
accoilits iiOesinto the NO W section. lea vinhg threec-quariteis to I C
a \-.ai ahe .
So. thiis illay iot ble a fair coiii
1
tntioi. but a hiorsebac'k 'iizmii w'oid
vindicate taon-ai'i of thIl ioiie v inl States that do not permiiit
NO W accounts Hinat is available oly~ for iiior-t-age leniiliug has iiow
moved over to become available for' iaidliiig thim'l ''uii'i'it expenses.
251
Sellator PHox iii:. As I understand it. No. 1. the S &l Us ill New
llampslire dou't oI)jcct to tis, and they are tile oties lost f'aniliar
with it.
No. 2, to what extent have the Noll' accounts 1)irlI;nded yo to put
less of 'our deposits tinto housing
Mr. f'Blxsox. Not a hit. Not tile slightest.
Selator Pirox.miim:. Ant you are a \very i aor t nrovihier of' fills
for houses ?
.M. lWitx!s -,. That's corrct.t. about(1;I l)60 (.iit oir nou'e.
"9ellator I)I-i)xM IEn
,'
. Sixty lercei it or' il ( )I' of \'(lii res(ll.-es () iito
hollsing .?
Mr. IR(oI. soN. ()l. yes: mIore thain tliat.
Senator lJI)xM-mIr. So if NOW attoults n'itr't lew nlollev. muth
of it Uyoes into lioisiio' I
Mr. ROBI)NsON. About 7t)
1
wt'eiit 0Of 0111' (le)4,sits I() inito liiusuig.
I would like to get hacik to tle question of Senuator Beuiiiett 01. lie
comment of Senator Bennett I)et'alse I tlhinik this is ve, r imiportanit.
Peol)le who are putting their n)ione' i flise N( )\ aecoulits are
mt nuecessarilv jputting it ill just to "tke it )iult iuuii.tly, l(,'a'se
what hal)pens in savings banks I thin ik ,vcer'wlt're. lt ili New Ilamp-
shire, and quite particularly in small towns. is that iiuany of the peo-
ple who have regular sav'in'gs accounts put their i oiev in over a pe-
riod of 2 or 3 moutls, but then they 11a1Y take, it out quite rapidly
over another period. So this is not a 24-percent (it'ereice at all.
The percent of difference is not ascertainalile at this point.
Bit this is money that probably would he ill the savings bank and
that soumebodv would coie lown and dr)'aw out with a passbook iilea
the Old sstem or would ask the banik to make out a Treasury check
to soiuebodv.
N(,w. he' toes it with, a NO\V account. biut it hasn'tt take any mi ore
money out of the bank at all for that person.
Senator BENNE'r. I doiit quite agree w'ith that iiiterpretation 1e-
cause 20 percent of the money von recei\'ed came from commercial
banks. and you can't tell me that some of it didn't come over because
(lepositors could get interest on what is their checking account, andi in a
commercial bank they can't.
Mr. Rouuxsox. W'e agree. Some of it did not.
Senator BENNETT. Some of them diseou'ered that the,- coil(l get in-
(erest on a checking account so tle)' took the money out of x'our normal
savings account and put it into y'M' NOW account in order to have it
for checking.
Mr. RoBINSOx. I agree some of them did. But the percentage is not
the 24 or the 20.
SeIiator ItENNE'r. We can't prove it. lit in discussing this matter
olit of the room with rel)iesentatives of the Massachusetts group I ot
the impression that 25 percent of tliFota] account in mutual savings
hanks turns over monthly on a NOW account basis, so that this money
that is tui'ning over nioithl. heing drawn out in checks, is not avail-
able for investment in mortgages.
Mr. RomBx-soxN. Yes, buIt it woull be turning over also if we didn't
have NOW accounts, some i)art of that would be turning over also
at al)out the same rate.
252
Senator BENNETT. Some of it, but not all of it. We can't agree as to
the figures. Whrit you are doing in effect-we cannot measure it-you
are taking money ihat under the previous method of operation would
be left in largely for investment and now it becomes a counter part of
a commercial bank's checking account, and I think that does affect the
amount of money available for investment in new houses.
Mr. Rom.sO.-. I think that is why we would be a good laboratory.
It hasn't yet, and we don't think it will, because we think we need this
to keep the present customers we have.
We are not talking entirely about new customers. We are just talk-
ing about keeping the people we have got who have been going over
and making these increases in the savings accounts in commercial
banks.
Senator MCINTYRE. I think the record should show that the Federal
Savings League of New England, speaking for the savings and loans
of New Hampshire, did object to NOW accounts.
Mr. RoBi.soN. I noticed that. The ones that spokes to me, which
are perhaps State chartered dont' object. But I can't speak for them.
[The full statement of Mr. Robinson follows:]
r.VTEME.NT OF FRAN('IS E, ROBINSON,. EXECUTIVE VICE PRESIDENT, 'MUT(TAL
SxAVINGS IANKS oF NEW IIAMI'sunRE
My name is Francis E. Robinson.
I an Executive \*ice President, Mutual Savings Ilanks (of New lampnshire, an
iirganizatimi consisting of all of the thirty mutual savings banks in that state.
All imeilners of ay association are members also of the National Association
of Mutual .Savings Banks anti ve support the testimony given her by representa-
tives of that organization.
My voilitlts \vii' be Contined to Section 3 of S. 1008 because New iHampshire is
one, of only two states where cc.r'liable orders of witlidrawal are being made
available to savings bank customers.
Tht. savings banks which I represent favor the enactment of Section 3 of
S. l )8 because :
1. Savings batik customers have benefitted directly and commercial bank cus-
tbmers benefit indirectly as a result of the offering of NOW accounts by New
Hampshire savings banks.
2. These accounts have not created competitive Inequality either with savings
ani inan associations or with commercial banks in our state.
3. Continuation of NOW accounts helps savings banks to maintain their service
as savings institutions in competition with the so-called "full service" commer-
cial links which have been attracting more andt more savings accounts away
from savings institutions in recent years despite Regulation Q differentials.
Differences between NOW accounts in New tIampshire and Massachusetts
should be noted:
Most important difference is that savings banks in New Hampshire do not pay
as high a rate of interest tl NOW accounts as they do on regular savings accounts.
The rate paid ranges from 1% to 4% In New hlampshire. compared with the reg-
ular passbook rate of 5% (which also is lower than In Massachusetts).
All New Ilaipshire tanks charge NOW accounts customers for the printing of
their NOW acvoint drafts and for overdrafts and stop payments.
w' lianks charge ftor processing NOW drafts, while the remainder do not.
It vill be aiparent from thn above facts that New Itampshire law and regula-
tions permit sminewvhat wvider flexibility from bank to bank in New Hampshire
ttant in MassaChus4,tts.
,The direct benefits to savings lank customers from this new type of account are
(ovii 'us in ir state. They are (esigntd to b( of sl)ecial benefit to younger Ipeole
antlder pelij
,
who have few third party transaetionls. Many of these have been
ilm.listolliell t) lmaklig w\ithdrawnls from ;iavill.g accounts by going personally to
253
savings banks with their passbooks to get cash for paying some bills or buying
money orders from a teller for the purpose. With NOW accounts they can accoin-
plish the same thing by mailing NOW drafts to their creditors.
The indirect benefits that commercial bank customers have received since
savings banks started offering NOW accounts also are obvious here in New laImp-
shire. Under the stimulation of NOW competition, for example, one commercial
bank started offering a "package" of services to its customers which included.
free checking account service and lower rates on loans along with free travelers
checks for those who took their travel through the bank's travel department.
other commercial banks now are offering free checking accounts for the first time.
Still others are extending their banking hours to meet the expected NOW coin-
petition from savings banks.
All of this is in the tradition of the American competitive system, and the public
benefits from this.
Fear that NOW accounts might pose a serious danger to the principle of fair
and equitable competition between financial institutions is not supported by the
facts In New Hampshire. In our state both the savings and loan assoziatlons
and the commercial banks have grown at a faster rate than savings banks (both
those with and those without NOW accounts) since NOW account service was
offered first in Sepfember, 1972.
From August to December, 1972, the growth of savings and loan associations
in New Hampshire was more than one-and-a-half times that of savings banks
with NOW accounts, while commercial banks in the state grew almost three-
and-a-half times as fast. During the game period other savings banks gained at
about the same rate as the NOW account banks. It is obvious that NOW ac-
counts have not created financial chaos in New Hampshire.
In fact the situation in New Hampshire suggests that this is a particularly
good time for developing new services for bank customers. It Is a time when
all banking institutions can share a growing market for savings accounts. S.
1008 would permit all types of financial institutions to offer this new kind of
convenient savings account to take advantage of an expanding savings market.
Thus, passage of S. 1008 would benefit the general public whose interest is a
primary concern of the members of this committee and of the Congress as a
whole.
Certainly, the scope of the competition does not threaten the security of any
commercial bank in New Hampshire. At the present time, the total NOW
deposits amount to only 45 one hundredths of one per cent of the demand deposits
of commercial banks in the state. In other words, for every $100 of demand
deposits held by commercial banks, the savings banks have 45 cents in NOW
accounts.
Furthermore, every NOW account is processed through a commercial bank
which is the beneficiary of deposits for this purpose from its neighboring NOW
account savings bank.
Rather than creating an inequality for commercial banks, it is our hope that
the NOW accounts may restore equality of competition for savings banks. De-
spite the rate differentials of Regulation Q, the commercial banks of New Hamp-
shire have Increased their savings deposits by 69%0 since 1967 (Ne England
Economzie Indicator8, published monthly by the Federal Reserve Bank of Boston)
while savings banks have increased savings deposits by only 58% over the same
period.
This record confirms the conclusion reached by the Federal Reserve Bank of
Boston some years ago. In Its 1962 annual report (Time Dcposits in New Eng.
land) the staff of the bank noted that "One-stop banking Is an advantage which
commercial banks possess over their noncommercial competitors. Many bankers
feel that this convenience is sufficient to overcome at least a one-half percent
higher rate paid by competitors. Advocates for commercial banks argue that this
factor of convenience is a distinct competitive advantage," and so it has proved
in New Hampshire over the past five years.
Neither does it appear that all commercial bankers share the apprehension
expressed by some relative to the future of small commercial banks In compett-
tion with NOW accounts. In the very center and origin of NOW accounts in New
Hampshire two groups of bankers have petitioned for permission to open new
small banks.
,1;3-211-7-7217
254
The center is Coword. New llamlpshire where three savings hanks offer N(O\W
fl'ecoults "lld where two long-establislied commrci.al banks already operate. in
spite (of the established competition fr m both savings banks and other cointler-
c.al banks, New llampshire's largest blank holding company proposes to .tart a1
:-riall national honk and at grolo of lal l nsiness mne proqose to start a slate-
chartered conimercial bank. Petitions for both groups were tiled after NOW
accounts were started in Concord.
Savings hankers expect the ratio of NOW accounts to demand depo.;its of
commercial banks to remain at a relatively hKv level. because tile savings 11;n ks
of New IIam ishire do not seek to liecionie coolmer.ial b)a nks. They walt to rtomliii
as banks for the saver and tile mo rtare horro\'er. Solie olve .hosent not to ,tter
NOi\W accio'uits as yet. But they Ihelieve that s'me illetin d of offering third I:t rly
payment service to their customers must lie availtile eventually if they :arto to
continue in business in this day of increasig lullii demand fir checkili, i r
other third party payment ) aCCMOllits aml of ele.rollic transfer if funis whicl
are limited to those institutions with third lparty layment systems. ( br fclin
oh this point is shared by tile PrVsidt-ts '01n1ihni1s40o on in I'inal1(.l Stru rliit'
amd Regulation wivIch recommends third party liaymnt powers for .. i viics
ijst it lt ions.
We have taken note of the warning contained in tile Reistad Research Repiirt
of March 1971, (published hy h ayment Systimis Incoriorated. New York. N.Y.)
which reminded us that, "'Citiiercial ballks are llnqlluestional y in the t',,rvfr,,lit
in the competitive payment system race. 'lTiey have th credit card. S(:'1' 1 adi
SCO(IE'-type prototypes. and strong industry planning via tile American ianke's
.Assiwiation, the Bank Administration Institute. Bank 'Marketling Associatiion and
others .... Finally. commercial iamks have the very important t checking iiiiut
and revolving credit powers.
"With these advantages, and1 a firm grasp on the 1'p mwiet system, it now
appears quite possible for the commercial baiks to 'cnltii'I tie evodving payliemvit
system."
Savings bankers know that if comloercil banks omne to (mtrid tile paynlilit
system th, funds availale for ti Irtgages will dinish slirl ily il tinutS if
greatest needi for the loimne buyers uif this comint ry.
NOW accounts do llot aloulint to muich ill tile itital econlloly of time Uniteid
States. But they are imlrtant to the savings lianks in New Ilain ishire all, \we
hope that the Congress will pass S. 1(H)8 to make it clear that this service (can lie
tint illued.
TIRMs UPON W I 1('lI NOW ACt'oI'Nis ARY OFFERED IN NEV JIAMP'SIFRE
As of February 28. 1973 NOW accounts were being offered l)y twtdve saviru-
llanks (out of the 30 lmulltutal aid 6 guaranty soi vinmgs balks in New l si iro.
All of them limit the accounts to "ntural tiersos" i liersonli and family
accounts,. not connercial accommtsI.
One bank pays I G interest anti makes no charge for processing 21 drafts or
fewer per ninth and 150 per draft for additional draft. if any. One Iank Iays
2% interest and makes no charge for proecAssing drafts. Three banks pay 3r; and
make no charge for processing drafts. One bank pays 40, an( charges lt r per
draft cashed outside the ank. Six banks pay 4r/ nnd make it iharz'e for pro-
essing drafts. All hilliks charge cost of lo|intilg drafts for ('1stimers and iiaar1e
for overdrafts
and stop paymelnts.h
Swircs rif i'rning dh'lowri.s in NOW ,wcowilg
New deposits If cash. ptyciecks and other inco oe item-s_ ,7
Transfers from regular stivillgs to NIO1W accoulits within iaink ----------- 24
D eposits Ili forin of checks from cmmnerial bank checking '(0 il.u.ts --------- 11
NOTE-As of .Ttinunry :t1, 1073. sgT a imutig lks with NO 1W avo'iit u Itatlnt',o t.,r~ti.
tog $1. 922itt2 with til~r rvi1wotiv. loi' i commit rctal biuks Mltk *100!i4s of thk
a titOtitt allocated Slitili:llv to 'ov,r Nm\ aW t-wint acgltiiy.
253
Local commercial banks generally are clearing NOW drafts for their neighbor-
ing savings banks without making specific charges per NOW draft handled.
GROWTH OF NEW HAMPSHIRE "NOW" ACCOUNTS-1972-73
Number Number Total
Date of banks of accounts balance
Sept. 30, 1972 .......................................-............. 1 127 $64,488
Oct. 31, 1972 ........................................ ............ 1 547 706.962
Nov. 30, 1972---- . ................................-........... 6 (1) 459, 588
Dec. 31,1972 ...... ............................... ........ 9 (L) 750,290
Jan. 19, 1973 ..................................................... 9 1,775 948,003
Jan. 26, 1973 ....................--....----------------------- 10 2,138 1. 064,701
Jan.31,1973 .................... 1................................0 1 2,251 1,112,202
Feb. 2, 1973 ............ ........................................ 1 293 1,154,327
Feb. 9, 1973 ............................ -------------------------- 1 489 1,299,998
Feb.16,1973 ......................-............................ 12 2,638 1.416.905
Feb.23 1973 ................................................. 12 2,759 1,475.705
Feb.28,1973 ..................................... ---------------- 12 2,842 1,498.590
Mar. 2,1973 .........................-.......................... 12 2,870 1,547.322
Mar. 9,1973 ........................-............................ 12 3,023 1,797,249
I Not available.
NOTES
NOWaccounts amount to only 0.26 percentof the total deposits of the 12 banks offering such accounts asof Feb. 28,1973.
The percentage for individual banks ranged from 0.01 percent to 0.48 percent.
Total balance of NOW accounts equals only C.10 percent of total deposits for all 36 banks.
Average account $594.52.
Source: Reports of NOW account activity, New Hampshire Association of Savings Banks.
COMPARATIVE BANK DEPOSIT GROWTH, STATE OF NEW HAMPSHIRE, AUG. 31 TO DEC. 31, 1972
Iollar amounts in millions
Savings banks offering
Commercial banks Savings and loans All savings banks NOW accounts
Total Percent Total Percent Tota , Percent Total Percent
deposits growth deposits growth deposits growth deposits growth
Aug. 31, 1972 ....... $756 ........... $405 ........... $1,432 ........... $499 ........
Dec.31,1972 ....... 827 9.4 423 4.4 1,472 2.8 512 2.6
This exhibit demonstrates that in spite of NOW accounts, commercial banks
have displayed a rate of deposit growth iore than three tinies that of savings
banks and the savings ani loans have grown almost twice as fast.
(1) Source-Federal Re-serve Bank of Boston (FHB members-as of last
Wednesday of nionth).
(2) Source-Federal IHome Loan Bank of Boston.
(3) Source-New Hlampshire Bank Cotsssissioner-Ctirrently, eleven savings
banks in New lamlpshire offer NOW accounts.
NOTE.-Even in the local area of greatest concentration, NOW accounts in
savings banks aniount to only 1.7% of demand deposits :
Merrieiaark (.'ouaaty, N.I1. Demand deposits of all commercial banks Julie 30,
1972, $46,061,0M); N01V accounts in three savings banks, February 28, 11973,
$807,01=1.7% of above.
Ratio of NOW1 accounts to demand deposits in other counties
Perccrr t
Cheshire County, N.I - -------------------------------------------- 0.8
Crafton Comnty. N.---------------------------------------------- 0. 1
lloskingbann( Cwtnty. N. 11-------------------------------------------- 0.3
Sullivan County, N.i ------------------------------------------------- 1.5
New Ih1mmn.u1uire .Assc-latisn of Savings Batiks report of NOWA' account activity.
256
flOrTIABUI.TY 01 NOW ACCOUNTS
NOW accounts were designed by New Hampshire savings bankers to pay their
own way as a new customer service and figures available so far from individual
banks show that they are doing so, as the following cost analyses will show
NOWV account cost analy.Os, savings bank A-March 15, 1973
Based on 45 at-counts-average for month. During month, 89 deposits; 373
withdrawals.
Expenses:
)ata processing charges 4-5 at .06 ------------------------------- 2.70
1Postage 45 at .08 ----------------------------------------------- 3. 60
Labor --
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
2. 25
Materials ----------------------------------------------------- 3.00
Interest paid ---------------------------------------------------- 172. 00
Administrative overhead --------------- ------------------------ 10 00
Total ----------------------------------------------------- 212.
Income (profit) *
Average balance, $45, X 6.5 percent yield=$243.75
Total ---------------------------------------------------- 31.20
Per account -------------------------------------------------. 69
Assuming 13% re.-ervcs-Average balance $40,000 X 6.5 percent yield
$Z216.67
Total ----------------------------------------------------- 4.12
Per account ------------------------------------------------- 09
Computed on basis of $2.55 per hour.
NOW account cost analysis (per account pcr wonth) savings bank B
(PLays interest at rate of 4%) (Has 10 Item service charge).
Income:
5Iervice charge ------------------------------------------------ $. 26
Penalty --------------- -----------------------------------------. 16
Return on invested funds ---------------------------------------- 5. 31
Total -------------------------------------------------------
5.73
Expevnse:
Home debits ---------------------------------------------------.
16
Deposits -------------------------------------------------------..
44
T ransit item s ----------------------------------------------.
02
Account maintenance ------------------------------------------- 1. 98
Interest ------------------------------------------------------- 3. 10
Total -------------------------------------------------------
5.70
Net earnings ----------------------------------------------------.
03
Average balance ---------------------------------------------- 928.00
1 Computed at 6.87% (average rate of return on bank's total invested funds). (This bank
used the 1971 Federal Aeserve Bank of Boston functional cost estimates for no service
charge checking accounts as a basis for estimating the profitability of NOW deposits.)
Senator McINTYPF. I would just like to thank you, Mr. Robinson,
for your tine testimony. Thank you very much.
I call as our next W-itness Mr. Eugrene I. Adams, )resident of the
American
Bankers
Association.
We. have your statement of four pages. Your statement is short and
brief. You may proceed.
1 would like for you to identify for the record the gentleman with
you and then proceed to testify in any manner you see fit.
257
STATEMENT OF EUGENE H. ADAMS, PRESIDENT, AMERICAN
BANKERS ASSOCIATION; ACCOMPANIED BY CHARLES R. McNEILL,
EXECUTIVE DIRECTOR OF GOVERNMENT RELATIONS, AMERICAN
BANKERS ASSOCIATION
Mr. An.is. Thank you, Senator.
As you have already announced, I am Eugene II. Adams. Il addi-
ti,,l to being president of the American Bankers Association, I am
president of the First National Bank of Denver. Colo.
I have with me today Mr. Charles R. MeNeill, who is the executive
director of government relations of the American bankers Associa-
tion, whom vou all know, I am sure.
We are eve to tc4ify in Oplosition to S. 1008 and in favor of ,.
1256. If this statement, as you said, Senator [cintyre, is short. I
would by vour leave read it. and also a very short one-page supplenien-
tal statement ill re,,'ard to t iet constinier aspect. of this whole policy
question.
Senator IBENXr. ,ImmSt as a footnote. everv witness who says the
statement is ]oi". I ;n,, oinu. to iparal phrase it, always takes twie as
iti1101i I lie to i,.,r.. hase it as it does to read tle statement. inc' lud ing
the last wit So. So. I w on!,l be very 1 mlpy to I ave hti read his state-
MIt'. A t.Ar. LI'mik you, Senator Benmett.
(CoIei'll'illL eXtxtn--;mil of tlh. Interest Rate Control Act. the Amneri-
Can I Bamkers A-oiation is on record supporting past extensions of
tlis act nlld'l t !e eo"iolllie conditions of those tillies. ''hat act gives
l'ederal Supervisory mgemucies flexile authority to regulate the mamxi-
umumn rate- of ilnterest fimmcial instituttions (all pay on tine and sa'-
ius lelo,-its. It is a fl,.ilble statute, which allows the agencies the dis-
ccltiI l'arV atint lut to illaintain 1' 'elOVe ceilings in response to
,hciiaigmug1 money market conditions.
Action to extend the h terest Rate Control Act cannott le delayed,
silwue that act expire" on .1 me 1 of this year. A sudden discolitinuation
of interest rate 4'eili gs (O uld ie disru'iptive under present economic
(10imlit ionls.
Wt lelie'e. loxvevr, thlat a comprelen ive Congressional review of
our svstemu of depoeaitory financial institutions and their interrelation-
shis Is lee(Tsary. A reassessment of deposit interest rate ceilings
would e an integral )art of such an investigation. Accordingly, the
Interest lZte ('ontrol Act should be extended for a period' long
emuomuzl to (oml)hete this overall review and (levelopment, of a coordi-
nated group of chmges.
The remaining provisions of S. 1008 and S. 1256 deal with the NOW
county issiu,, which hias developed in two States as a result of an un-
exlect#'(d Judicial decision.
Speci'ically. . 125X would prohibit withdrawals by negotiable in-
strummemts from initerest-bearinmg savings accounts, bitt would provide a
6-month "grandfathei' clause from (late of enactment for accounts in
existence oi March 15, 1973.
It v,'ould alo bring nonfederallv insured mutual savings banks in
Massuchmusetts under I IIC deposit mate-setting authority.
258
S. 1008, on the other hand, would )ermit all depository institutions
to offer NOW accounts and to pay interest on them.
()ur association favors S. 1256 and opposes S. 1008.
For all practical lpurposes, NOW accounts are clheckint accounts and
are often referred to as such by regulators and by financial institutions
a-11 t heir customers. But the NOW account concept is contrary to one
of the basic rules the Federal Govermnent has imposed upon the bank-
ing industry i1mamelv. tile prohibition of interest on checking accounts.
While the I)ayileiit of interest on checking accounts was permitted
ntil 1!)::) , the ('ollgress found the 1)ratice undesiralle and has ban-
neid it ever sin(e. O)nly because tle mittial savings banks ill two States
VCI\'ell permitted to offr i lit erest -bea ring Noll' accomits. payment
of ijiterest on ('leckilr accolts ] is been rev ied alter these 40 years.
'Hiis is a haphazard way to introduce a major revision ill our financial
Sqleator MAcJI'-w. Isn't the NOW a'comilt really a savings account ?
Mr. AA.kms. Yes, sir. it is a savings acc('ount which is subject to witll-
drawal by a draft which looks for every purpose like a check. It is
a draft draNvil oil the savings account in1 the savings mnk. but it is
payable t through a commercial abank. That is tle onlv difference be-
twvcen a checking accolt ail this )articular type of transaction.
M1aim changes in tile powers or responsibilities of financial institut-
tions should bie I uiade only aftvi careful assessment of all the im lic-
t ions. And the imp] icat ions of ilt erest-paving checking accounts touch
n,4arlv everything in tle financial system.
FoW exalilie. a raiiiclation of tie NOll ac(oulit 'oncept affect
miiouetary l)olicy, competitive equality among types of financial insti-
tilt ionls, stability of the financial system. (,,le pository protection, and the
flow of funds to housing anld to other areas of tile (ononiv.
Without thorough consideration of these ranmificat ions, no one can
bA, sure just where the true public interest lies. Thus. before we permit
NoWl' accounts to proliferate, a full exploration of the public interest
is an absolute necessity. Accordingly, we recommend that Coigress
undertake an orderly evaluation of tie entire financial system.
Senator MAC']TYE:. In the interim, while we are evaluating it, you
v lt t lie NOW accounts prohibited ?
Mr. A Ims. Yes. sir.
Senator MCINTYIm. What are we going to say to the 40.000 or so
depositorss ?
Mr. AD.m\rs. S. 1256 has a grandfather clause. Senator, for 13 months.
If you wanted to make it 12 months or 18 months, I don't think we
wolll object to that. So. it would )rotect tile contractual relationships
whit-h exist in regards to those accounts.
Senator McINnYimE. You would just phase them out ?
Mi. ADAMS. Slowly 1)lhaise them out over such period of time as you
saw fit.
One aspect of tle evaluation should be a congressional reexamination
(f the existing proliibitiolu of the )mayielit. of interest (o demand de-
posits. but this should be done in thev context of a total package of
chani.'es in the lowers functions and the responsibilities of depository
institutions.
259
We Oppose .. 1008. If evaantion shouhl show that NOW 'ccotinits
a tr indeed hainful to tile linalncial system, it would greatly coinpli-
cate matters if their use. had already Spnread nationwide amng all
depo sitory institution. Ve lppreciat tQthe thrust and intent of the bill,
which would 1ilove ill tile direction of equalizing competition by per-
1IIilting all lelpositorV institutions to o(l't N()W aci onts.
I lowe ver+ this is a pliecotel apIproach which omits consideration
of ihe differences along iistitutins with regard to taxation required
reser\ves acniniist sa viigs (llcking a(-(onIts, and the (ilt, remIes ill
rates that iay be paid on saints deposits.
v l suplori S. 1'..; wi'ich pr)Iilbits interest-lwaringz NOW accounts.
As a matter of equity. thrift institutions offering dellialid deposits ill
the filiil of NOIN avomiits shoull 1be objectt to) tihe same prohilbition
a,(a ust payimg ilnterletst on demand depo .,its that applies to coilliier-
cil b~atiks,.
1 Ime\'ver, we (1 loit object to tw ;-uoliutI grandlfather clause for
eXistily -jstoIilqs. pqmli.,, the overall review f iilm liicial system.
We e,'01mmnetl( fitrther-in tie interest of fairness to all con-
(eItId-t Ia S. 12.,G lie strengtliened by app)lyilg to all depository
institiltiofls which otlhq' N()W accouints oi- otliev, services equivalent to
clincki w. accounts. even (il a zero interest b asis. tile s:mne interest vate
oe'iliios oi all tiii, ad S.1aings atc'illtS that alpply to those accounts
at b nmmereia i ks.
T1 implement the foregoing recommendation we support section
()f , . 125i6 . Mti ld allow tile FDC' to iv,11olato the Savings
de lsit interest rates paid lv 1m(fedleially insured mutual savings
Ianks ill Massalinset ts.
Since 19611 inisured savings banks in Massachusetts have had a spe-
,ial (.Xeililti<,i ill the Federal Depoisit ilisurance Act. which has al-
lowe, t hem to pay 'I" iliterest. onii regular sailingzs accounts to nmatelh
similar' rates paid biy l federally isiired savings baniks in that
State.
()i lie other ha nd, umtual saviniys blanks in other States may pay
OllIV ) lpercelt and ,'oliiliiCial 1 liks ill Massachusetts, as well as in
itlieu States. mav pay onl1- pelvent on sa\i Igs aI(mcounts. Tbhis large
dill'hrontjial has i uteisified tile competitive disadvantages engendered
IY N(V accounts.
Finall\'. any consideration of tile 'NOW accomn t issue clearly re-
qui res a leviewv of all O her elenlents (f competitive eqluity. including
taxation. reserves and regiulatom lirdens. commercialal bankers have
said ', nsistentlv that they aie prepared tom compete in (lie market-
placte with othei 11lC limcal 'institut i iiis undei conditions of equal com-
])et iliye ground rllh(es.
Certainly tile public would lienit under those conditions. But a
mummihelr ofactions shimiltl le take cumncurireitl'. Piecemeal action on
individual aspects could produce new and greater imbalances ill our
financial system.
Accordiyglv, we support S. 12.56. and urge Congress to begin a
Colliiel tellsiv'e review of oiut entire depository system.
Mr. Chairman, the suplemental statement' is only slightly over
one page.
260
Senator CIXTYRT . Do we have a copy of that?
Mr. ADA31S. Yesj sir.
You have heretofore requested, Senator McIntyre. that witnesses
attempt to express their points of view in terms of the interests of con-
sumers and the general public. Accordingly, I submit that the issues
posed by the pending bills may be divided into two parts from the
standpoint of the interests of consumers.
The first part concerns the public policy question of which classes
of competing financial institutions should be permitted to offer to
the public third-party l)aYIfents systems-or demand accounts. It is
my point of view that consumers will be better served if all classes
of competing financial institutions are permitted to offer such serv-
ices on competitive terms.
This is to say, MJr. Chairman, that consumers will be the bene-
ficiaries of any'public policy whicii permits commercial banks. mu-
tual savings banks, and saviiugs and loan associations to offer demand
accounts for the satisfaction of their financial needs.
Such general permissive authority, however, should be coupled with
other changes in law and regulation which would( enable these differ-
ent classes of financial instituttions to compete on an equal basis.
I have in mind equality in the burden of taxation, the burden of
reserve accounts and thie Iurden of supervisory controls. Such equal-
ity in burdens, coupled with an equality in rates to he paid depositors
would, by providing competitive equality. benefit the consumer.
The second issue l)ose(1 by the pending bills is whether, and to what
extent, financial institutions should be" permitted to pay interest on
demand deposits. Such payments have been prohibited'for 40 years
and this public policy is grounded in the. experience prior to 1933
which resulted in what proved to be unsound banking practices.
I do not now recommend that this existing policy be chan ' zed. The
committee may well wish to undertake a full-scale' review or present
prohibitions on the payment of interest-on-demand deposits. It is
axiomatic that. an intermediary must charge the consumer-burrower
more than lie pays the consumer-depositor. to cover the cost of doing
business and a reasonable return for the business itself.
Senator MclITYr, :. The 1933 experience, of course, has to be coil-
)led with the fact that todav we have all the supervision hiat vont
can tolerate now, the bank examiners at the State and Federal level
and all that. So many of those banking practices that contributed to
our difficulties in 1933, our oversight on them is pretty strong, so I
all not sure-I
MI. ADAM3S. Senator. I think I would have to disar.,ee wvitlh -oi on
that. If interest-on-demand deposits is going to be l)ermittd(1. you
are going to revert back to the situation that existed in the 1920's and
early 1930's, prior to 1933, when banks-one of the problems, one of
the things that apparently led to the great depression of 1929 to 1933
was some adhuse of this (lemnand deposit interest paying custom tlat
was then in existence. It is very difficult to document this, but com-
mittees of students of banking generally. I think, agree that this was
one of the contributing factors.
I feel that this qiui-t4ion that von are talking ahout hire to(lay of
iliterist oil dn iuad dol)osits, 0n1d this is wl:at it really hoil to. T think.
261
is a huge philosophical question involving all of the financial institu-
tions of America, and it involves total assets in those institutions of
something over $1 trillion.
So, we are talking about a great deal of money possibly moving
about and possibly drawing interest in varying amounts, but iu huge
aggregates. I think it is a subject that tei Congress should look at
very carefully. It's inherent in the remarks I think made hy Mr.
Smith earlier today, that the recommendations that are coming up
from the adninistrat ion and the Treasury Department which emanate
from the Hunt Commission's recommendations may have some policy
question on this
It may not. I don't know. Mr. Smith said around the 1st of April
they expect to have these recommendations in narrative form and
hopefully by early June they will have a bill for your consideration.
'[iTe thrust of our position here today in brief is you stop these NOW
accounts in place, grandfather the ones that exist, and then have a
whole look, a complete look at tle entire financial structure of the
United States.
Another point that I think is worth commenting on. Senator
McIntyre, is in some States mutual savings banks are seeking and
aggressively seeking the power to make consumers loans more than
have ever made before. They have been basically makers of real estate
mortgages. In some States they have other lending powers. They are
pushing in additional States for additional lending powers as are the
S. & L.s in some areas.
What we are sayi