Unless legislation is passed to stop them, 575 more banks with deposits in excess of $70 billion may withdraw from the Federal Reserve system, Fed Chairman Paul A. Volcker warned in a letter released yesterday.
That would be almost twice the number of member banks -- and quadruple the deposits -- that have left the system in the past four and a half years. Member banks have been leaving because the Fed requires them to keep a certain percentage of their deposits on reserve in non-interest-bearing accounts. These banks feel the free services provided by the Fed are not worth the lost interest.
In his letter to House Banking Committee Chairman Henry S. Reuss (D-Wis.), Volcker predicted that "any marked pickup in the rate of withdrawals would accelerate quickly and that the actual rate of withdrawals will exceed that suggested by our informal survey."
Not only does the Treasury stand to suffer a net annual loss of $129 million in Federal Reserve revenues, but the Fed's ability to exercise effective control over the money supply will be weakened, Volcker wrote. "There is a point where the erosion of the membership base will result in acute problems for the conduct of domestic monetary policy," he said in the letter. "We have not reached that point yet. I do not want to reach that point."
If all 575 banks withdrew, the percentage of the nation's savings and checking funds subject to Fed reserve requirements would be reduced from 70 percent to 63 percent.
Volcker urged prompt action by Congress to remedy the situation, but legislation appears to be stalled. Last July in the House approved a reduction in reserve requirements for Fed members. The Senate, which leans toward mandatory reserves, hasn't acted on Fed membership. Last week the House voted to attach its Fed membership bill to one authorizing checking-with-inerest accounts.