As Congress began its third year of debate yesterday on how to stop the exodus of banks from the Federal Reserve System, its chairman, Paul A. Volcker, warned that the trickle soon could become a flood.
During the last four months, 69 banks -- with about $7 billion in deposits -- have withdrawn, a greater loss than in any previous entire year.
Some 670 banks with more than $71 billion in deposits have indicated they would like to leave. If they did, the share of deposits under the control of the nation's central bank would drop to 64 percent from 73 percent when the debate began.
Banks have been fleeing the system because in this time of high interest rates they feel they cannot afford to maintain non-interest-bearing reserves with the Fed. Without these reserves the central bank has difficulty in implementing monetary policy.
Volcker reiterated before the Senate Banking Committee yesterday the Fed's support for mandatory reserves on all transaction accounts, whether at banks or other financial institutions. While recognizing the banking industry's desire to retain the present volunteer membership, Volcker said "we simply cannot rely on nostalgia in conducting monetary policy."
Sen. John Tower (R-Tex.) has introduced legislation to induce member banks to stay by paying them near-market-rate interest on their reserves. Volcker responded that such a plan not only would fail to stop all withdrawals but would cost the Treasury about $500 million annually in interest, an amount far in excess of what the administration would accept.
Tower contends the cost would be minimal provided the Fed charges the going rate for the services, like its clearing house, that it offers members.
He also has proposed graduated reserve requirements for small institutions, and a four-year standby authority requiring a unanimous vote of the Fed to impose interest-bearing supplemental deposits. Volcker called this last provision too restrictive.
William C. Harris, chairman of the federal legislation committee of the Conference of State Bank Supervisors, backed the Tower bill. This calls for reducing the net burden on banks to approximately one-quarter of their present reserve burden.
The House already has approved a drastic decrease in reserves in exchange for extending reserve requirements to all institutions offering transaction accounts.