The administration gave its support yesterday to a universal and uniform system of reserve requirements for all depository institutions offering transaction accounts.
G. William Miller, the only man ever to head both the Federal Reserve and the Treasury, said such a system had the advantage of giving the Fed enough reserves to conduct monetary policy while causing the Treasury an acceptable level of revenue losses.
Miller declared that only a system of mandatory non-interest-bearing reserves, coupled with open access to the Fed's discount loan window, would come in under the administration's ceiling of $200 million to shore up the Federal Reserve system. He priced the cost of mandatory reserves proposed by Sen. William Proxmire (D-Wis.) at $74 million annually. A House version would cost $357 million, and Sen. John Tower's (R-Tex.) proposed voluntary system of Fed membership that calls for payment of interest on reserves would mean $579 million in foregone revenues each year.
An increasing number of banks are opting out of the Federal Reserve system because they feel that the interest they could earn by investing their Fed reserves elswhere is worth more than the services the central bank provides them. Up to this time, most of the banks that have withdrawn from the Fed have been small ones, their reserves unimportant to the Fed in controlling the money supply.
But recently Equibank NA of Pittsburgh, the country's 61st largest bank with $1.9 billion in deposits, gave up its Fed membership. So did National Central Bank of Lancaster, Pa., with $1.2 billion in deposits. New England, which once had the highest participation level now has the lowest since banks there began offering NOW (interest on checking) accounts.
The American Bankers Association, whose president, C. C. Hope Jr., testified yesterday before the Senate Banking Committee, favors elements from each of the bills introduced. The ABA wants to retain voluntary membership in the Fed while at the same time receiving a reduction in reserve requirements and payment of interest on reserves.
The ABA also reiterated its stand that money market mutual funds -- which have been draining deposits from financial institutions -- should be subject to reserve requirements on their transactions accounts. Many funds now offer check-like privileges to shareholders.
Miller responded that reserves on money funds aren't necessary now, but added that if these funds evolved into transaction accounts "then we can deal with them."
Many banks have objected to non-interest-bearing reserves as a form of hidden taxation. To that Miller replied, "If we were to use reserves in the management of monetary policy for the benefit of everyone in society, the cost of holding such reserves should be regarded as a price or franchise tax for participation in the monetary system."
Proxmire added that if this form of taxation were phased out, the government should take a look at banks' effective income tax rates, which he termed low.