The nationhs small banks yesterday urged that no financial institution -- including savings and loan associations and other thrift institutions -- be exempt from the reserve requirement of the Federal Reserve System.
The action, which came after a meeting here of 140 presidents of small banks from around the country, sets the stage for a heated confrontation between the banking communtiy and the thrift institutions over congressional efforts to solve the Fed's dwindling membership problem.
The reserve requirement is the percentage of a bank's deposits it must keep on reserve with the Fed if it wishes to be a member of the system. In return, the Fed provides certain services to its members free of charge.
Yesterday's meetisng was calaled by the American Bankers Association which has been holding a series of cosnferences in an effort to formulte an association position on the membership problem.
Because the small banks -- defined as banks with less than $100 million in deposits -- hold a majority of seats on the ABA's policy-making board, their position is likely to prove a strong indicator of the official position the ABA will eventually take next month.
In recent years, more banks have been leaving the Fed than joining it. Those who have left say the free services provided to member banks do not make up for the cost of the non-interest bearing reserves.
Fed officials say this exodus could seriously weaken their effective control over the money supply. Several bills have been introduced to strengthen the system. The financial community is divided over what should be done. But on the outcome hinges both the future power of the Fed and the competitiveness of the banking and thrift industries.
"We believe in a strong central bank," said Robert Renner in stating the small banekrs' position. "For this reason, we will be willing to accept a universal reserve requirement."
However, Renner said the Fed should begin to pay interest on these reserves, though he did not specify what the rate should be.
"The Fed has been insensitive to bank shareholders," Renner remarked. "It has not done everything it could to make membership attractive. We feel the Fed can do a lot more in this regard."
The small bankers have gone further in their reform proposal than have either Fed officials or the primary sponsors of baking legislation. They are also sure to invite strong opposition from thrift institutions who currently are exempt from Fed reserve requirements and would prefer to stay that way.
The two leading bills -- one introduced by Rep. Henry Reuss (D-Wis.), the other by Sen. William Proxmire (D-Wis.) -- would extend reserve requirements only to the checking-like accounts at savings and loan associations and credit unions. They also would exempt all small and mediumsized institutions from the requirement with deposits under $40 million or $50 million, depending on the bill.
Fed officials have opted for a lower exemption of $10 million. But they have proposed paying interest on a protion of the reserves held.