w/SSH 5 N ¢>«.%¢;\;" LCILHX/2.3 ‘ NP%$9 GL13JrT”\’FRSlTY -«~43 -7925-3 C * RTYN0v161989 :95 0 IN §.‘3BR Washington nis.-Fm, 0 1-,..,‘1.;,_, ‘I Mini Bfifif CONGRESSIONAL RESEARCH SERVICE D— LIBRARY OF CONGRESS REGULATIONS AND INTEREST ON DEPOSITS Q Smmmnm . ' . 1 ' ’ ~s Y, ,‘ , . (.4 . ‘ L- ' --«_ Q Vt“ / ‘ 4 \ 9‘ '2 1 } 1 . I Q ‘ ( HINI BRIEF NUMBER HB79258 AUTHOR: _Jackson, William Economics Division THE LIBRARY OF CONGRESS CONGRESSIONAL RESEARCH SERVICE MAJOR ISSUES SYSTEH DATE ORIGINATED Qgggggzg DATE UPDATED Qggggggg FOR ADDITIONAL INFORBATION CALL 287‘570O 0307 CRS- 1 MB79258. UPDATE-02/28/80 ISSUE__QEFIN1I_TID§ The federal regulations that put ceilings on interest rates on deposits, informally known as “Regulation Q," have come under debate recently. Double—digit inflation and financial competition have increased pressures for relaxing these regulations, while a falloff in housing -- a prime basis for them -— complicate any changes in them. Recent congressional interest in regulating deposit rates has been from the standpoints of relaxing rate ceilings on time and savings accounts and allowing interest on transactions accounts. ‘ §A§K§BQ§EQ.. "Regulation Q" is shorthand for the body of regulations that fix ceiling rates on deposits paid by federally insured depositoryt institutions, other than credit unions. The current statutory authoritye for limiting deposit rates is Title XVI of P.L. 95-630. It extends rate-fixing power until December 1980 to the Federal Reserve Board (for banks belonging to the Federal Reserve System); the Federal Deposit Insurance Corporation (for other commercial and mutual savings banks); and the Federal Home Loan Bank Board (for savings and loan associations). ~ = These agencies generally fix deposit rate ceilings below rates paid on 1 :egulated debt instruments of similar maturity. See Table 1 for the structure of ceiling rates. Ceiling rates tend to increase as the maturity of the deposits lengthen, and are usually 0.25 percentage points higher for thrift institutions - mutual savings banks and savings and loan associations ("thrifts") ——-than for commercial banks.« Regulation Q prohibits outright payment of interest on conventional checking accounts ("demand deposits"). §i§:2r2_and_Ar9nmen2§-2r2 Rate ceilings, authorized by the Banking Acts of 1933 and 1935, were originally intended to restrain "costly" competition between banks for deposits. The ceilings fixed in 1936 were retained and appeared to be effective during the next two decades, when all interest rates were low. Rate ceilings were raised selectively five times between 1956 and 1966, apparently to allow banks to attract time and savings deposits as interest rates were rising. In the “credit crunch" atmosphere of 1966, P.L. 89-597 extended time and savings deposit rate ceilings to thrifts as a protective measure for them and the housing industry. The temporary authority for ceilings in that Interest Rate Adjustment Act has been renewed before each of its scheduled expiration dates- Supporters of Regulation Q argue that ithese ceilings (1) prevent banks from outbidding thrifts for deposits by paying higher rates than t"ifts can afford; (2) lower mortgage rates by limiting the cost of deposits to mortgagevlending thrifts; and (3) increase the supply of mortgages by encouraging consumers to save at thrifts rather than at banks. Eninsenéeélfiffeei§-enQ-Arennent§ C n CRS- 2 HB79258 UPDATE“O2/28/80 Since 1965, periods of tight money have encouraged savers to place funds with unregulated borrowers, whose debt obligations pay interest rates higher xn depository institutions may pay. As financial flows then have become diverted from thrifts, vdeclining mortgage commitments have made housing suffer. ,Opponents of Regulation Q argue that rate ceilings (1) discriminate against small savers, who lack the‘ opportunity to invest in large-size unregulated debt; (2) make the competition for funds assume socially wasteful forms such as branching and Fgiveaways," rather than cash payments; and (3) generally violate the free-market concept of price competition. §.§§§1.l£-Z§§.§£§.3L..A£EEi!i11.I The federal financial regulatory agencies, longtime proponents of Regulation Q, now favor it primarily to prevent unsettled financial markets. They tend to favor abolishing it in the future, however, by providing a transition 'period of less ystringent regulation in which financial institutions may adapt to its ultimate removal. Responding to increasing competition in financial markets in the 1970s, they have relaxed Regulation Q in several ways. In 1978, six-month money market certificates, whose rates were linked to six-month Treasury bill rates, were authorized in amounts of $10,000 or more. As of July 1, 1979, four—year or longer savings certificates paying somewhat less than the four-year Treasury note rate were authorized; minimum size amount requirements for savings certificates - other than money market certificates -- were ended; and rate ceilings for passbook savings were raised 0.25 percentage points. z Effective January 1980, the federal financial regulatory agencies authorized 2 1/2-year savings certificates, which supersede the four-year certificates authorized as of July 1979. The new certificates had ceiling interest rates set slightly below the rates on Treasury notes of similar maturity. Unlike money market certificates; the 2 1/2-year certificates can be issued in any denomination, can receive compounded interest, and could receive the traditional 0.25 percentage point higher rate allowed at thrift institutions than allowed at banks. Effective Ear. 1980, the maximum rates on these certificates were limited to 11.75% at banks and 12.00% at thrifts, or the rates based on the Treasury note rates if lower. Also effective January 1980, the federal financial regulatory agencies increased the ceiling rates on 90-day to one-year deposits by 0.25 percentage points. ' Also, Congress has authorized a regional experiment with Ainterest-bearing check-like transactions accounts. These "negotiable order of withdrawal“ (NOW) accounts pay 5% interest and are treated as if they were checking accounts, even though their balances are technically not payable "on demand." They were authorized in New England and New York in the 1970s, and in New Jersey as of 1980 (see below). A In April 1979, a ‘U.S. District lcourt of Appeals ruled on lawsuits concerning three services that allow interest on transactions balances. The services addressed in the ruling are automatic transfer service (ATS), remote service units (R505), and share drafts. ATS allows individuals to place f“uds in savings accounts form later automatic shifting into ychecking a sounts. msus allow savings; and loan association depositors to obtain electronic access to their avingr balances through terminals in shopping areas. Share drafts -- not covered under Regulation Q -- are check-like instruments that allow credit union members to pay third parties from credit union savings balances. The Court h ld that these services are not authorized by current law. Hence, it declared them illegal as of January cns- 3 un7925a UPDATE-02/28/80 1980, unless Congress authorizes them in a new public law. In Dec. 1979, Congress did pass a temporary extension for such accounts through mar. 31, ' ‘0 (P.L. 96-161), and additional legislation is under consideration. A In August 1979, the 0.5. Solicitor General filed a brief with the Supreme Court, asking it to review the District Court's decision. The Supreme Court declined to hear this appeal in October 1979. 2r9n2§el§.£er_Qhan9e.§e§2re.§2n9re§§ A presidential Message to Congress in Hay 1979 urged that deposit rate ceilings be increased gradually until they reach market levels, and that nationwide interest-bearing transactions accounts be available to individuals. H.R. #986 has passed the House once, the Senate once, and the House fa second time, in different versions. The first version passed by the House sought to authorize nationwide HOW accounts at banks and thrifts on Sept. 30, 1980; and to continue ATS, RSUS, and share drafts as of Dec. 31, 1979. The Senate passed an amended version of this bill. Its amendments substitute the provisions of H.R. #986 reported out by its Committee on Banking, Housing, and Urban Affairs (following the markup of S. 1347), as modified by floor amendments, for the text that had passed the House. Among the provisions of the Senate measure are those that would allow interest-bearing transactions accounts; raise ceiling rates on time and savings accounts; and lower the minimum size of money market certificates--all subject to certain conditions c exceptions. The House has passed amendments to the Senate amendments that restore the text of its first version; remove the additional provisions passed by the Senate; and add provisions concerning monetary control that it had passed in H.R. 7. An early December 1979 conference on this bill did not reconcile the differences in its various versions. Another conference on it is scheduled for Mar. 1980. 1 Later in Dec. 1979, both the House and the Senate agreed to several amendments to another bill, H.R. 4998, among which is the extension of ATS, RSUs, and share drafts through Mar. 31, 1980. This bill also authorizes now accounts in New Jersey. In late December, President icarter signed ,the amended bill into law as P.L. 96-161. i Hearings on H.R. H986, H.B. 6198, and H.R. 6216 (plus an alternate proposal to phase out Regulation Q suggested by Rep. St. Germain) were held in Jan. and Feb. 1980 by the House Subcommittee on Financial vlnstitutions Supervision, Regulation, and Insurance. TABLE 1 at ——— *1- V__‘__ T —— REGULATION Q DEPOSIT INTEREST CEILINGS (Effective Harch 1, 1980) _Int.re§t-§e£e§.--------- — atw at Thrift 2e29§i:.§ete92rx-hz-AeLaritr §em.ercia1 Banh------In§;itu:ien§ SAVINGS PASSBOOKS 5.25% 5.50% CBS-14 CERTIFICATES: FIXED-RATE MB79258 UPDATE-02/28/80 090 days to 1 year 5.75 6.00 1 year to 30 months ' 6.00 6.50 30 months to'u years 6.50 6.75 0 years to 6 years 7.25 7.50 6 years to 8 years 7.50 7.75 8 years or longer 7.75 8.00 CERTIFICATES: VARIABLE—RATE 6-month Money Market Certificate ($10,000 or more)(1) 2 1/2~year Savings Certificate 6-month Treasury bill rate 0.75% below: 0.50% below: 2 1/2-year Treasury note rate, subject to a ceiling of: I 11.75 12.00 I INDIVIDUAL RETIREMENT ACCOUNTS AND KEOGH PLAN ACCOUNTS, 3 years or longer 8.00 8.00 Govnnnnrum TIME DEPOSITS, any maturity 8.00 8.00 TIHE DEPOSITS of $100,000 or more no ceiling rates since 1973 TRANSACTIONS ACCOUNTS »NOW Accounts . ' (new England, N.I. and N.J.) 5.00 5.00 checking accounts (demand deposits)i payment of interest prohibited _______________ (1)/' Thrift institutions may pay 0.25% more than the 6-month Treasury bill rate when the Treasury bill rate is 8.75% or less. when that rate is between 8.75% and 9.00%, thrift institutions may pay 9.00%. Depository institutions cannot compound interest on these certificates, as they can on other accounts. Source: Board of Governors of the Federal Reserve System, Board of Directors of the Federal Deposit Insurance Corporation, and Federal Home Loan Bank Board. AQ2L$$Q!A..E§E§B§!§§.§QQ§§§§ U.S. Library of Congress. Congressional Research Service. An Analysis of Share Draft Programs at Credit Unions [by] Carol A. Leisenring and Pauline Smale.* [Washington] September 13, 1979. 15 p. (CBS.typed report). -----.High-Interest-Rate Savings Certificates and the Small Saver [by] William Jackson. [Washington] February 22, 1980. 22 p. (CR5 typed report). cns- 5 HB79258 UPDATE-(‘)2/28/80 Regulation Q and Interest on Deposits: Controversies and Recent Developments, by William Jackson. [Washington] 1979. 27 p. (Report No. 79-185 E). u U.S. Department of the Treasury. Deposit Interest.Rate Ceilings and Housing Credit: The Report of the President's Inter-Agency Task Force on Regulation Q. Washington: U.S. Govt. Print. off., 1979. 272 p. ' '