Competition for the depositor's dollar is so tough today that banks and thrift institutions are scrambling to find some new wrinkle on a variant of a permutation -- in short, anything to lure customers away from each other and, above all, from money market mutual funds.
These modern miracles offer highest interest rates, initial deposits as low as $1,000, complete liquidity and the privilege of writing checks in $500 minimums on the balance. An ideal investment in every way, except that your assets aren't insured. The ingenious formulas concocted by the banking industry to combine the features of money market funds with insured protection appear to be unceasing.
The industry's first major response to this competition was the six-month, $10,000 money market certificate. You don't have $10,000? A Maine bank in vented a "loophole" certificate to accommodate depositors with as little as $3,000 by lending them $7,000 so they can get the high rate payable on the total amount. You don't have $3,000? The Gray Panthers pushed regulators to create certificates for small savers that pay near market rates on deposits as low as $100 when held for 30 months.
You don't want to lock up your money for 30 months? Enter Eugene Rubin, who laughlingly styles himself "vice president in charge of new wrinkles" for the East New York Savings Bank. He has come up with the idea of combining the "loophole" concept with the 30-month certificate to shorten the maturity date. Presto! the 18-month plan. Deposit a minimum of $500 in a 30-month certificate, currently yielding 11.43 percent annually. After the money has been on deposit at least 18 months, East New York will allow you to withdraw the entire balance without penalty by making you a loan on the same amount for the remainder of the 30-month period. (This sleight of hand is necessary to satisfy federal regulations on premature withdrawal.)
For this loan the bank charges an effective annual interest rate of one percent; i.e., the interest rate on the loan exceeds by one percentage point the interest paid on the entire balance. The annual yield is thus reduced to 10.7 percent. Paying the penalty, on the other hand, would reduce the yield to about half the amount. The availability of the loan at one percent effective interest is guaranteed by the bank, although depositors aren't obliged to take advantage of the offer. East New York initiated the 18-month plan Feb. 1. Reception thus far has been "satisfactory," said Rubin, although he predicted several competitors soon will jump at the idea.
Betsy Cohen, chairman of Jefferson Bank in Philadelphia, has come up with a permutation called "Cash on the Line." It unites checking and the small savers' certificate. Deposit a minimum of $2,500 in a 30-month certificate with an effective annual yield of 11.12 percent. (Commercial banks pay one-quarter percentage point lower interest than thrift institutions.) During the life of the certificate you can write between 20 and 30 third-party checks provided each is for not less then $250. (Almost all money market funds have a $500 minimum.)
Legally the checks are prearranged loans, with an effective annual interest rate of less than one percent (12 percent loan minus 11.12 percent interest on savings). You can borrow up to 90 percent of the face value of your certificate. Payments, if any, are applied to interest, then to principal. Any difference due is paid at maturity.
Response thus far to the plan, which was launched last week, has been "magnificent," according to Cohen. Although Cash on the Line is designed for small savers, she said that if there is customer demand Jefferson Bank will consider increasing the minimum deposit in exchange for decreasing the check minimum, provided calculatins show it to be economically feasible. For example, a deposit of $10,000 might permit the owner to write checks of as little as $100. Should this transpire, Cash on the Line could be turned into the equivalent of a checking account that pays market-rate interest.
Cohen admitted Jefferson's plan was aimed at taking away customers from money market funds. "Cash on the Line is a money market fund covered by the Federal Deposit Insurance Corp.," she remarked. Yet if the plan's present limitations were changed, it could even set a precedent for future NOW (negotiated order of withdrawal) accounts. Currently northeastern banks pay 5 percent on these interest-bearing checking accounts. It is expected that NOW accounts will spread nationwide if Congress authorizes them this spring.
Jefferson's formula already as been adopted by one bank in the Washington area. State National Bank of Rockville last week announced a "Ready Money" plan that combines a $2,500 minimum deposit with $500 minimum checks and one-percent-effective-interest loans.