In a move calculated to slow the drain of money out of commercial banks, savings banks and savings and loan associations into government securities, a federal committee voted yesterday to allow financial institutions to pay generally higher interest rates on six-month money market certificates and 30-months small-saver certificates.
At the same time, the group acted to narrow a competitive advantage held by savings and loan associations over commercial banks and acted to protect both industries from uncertainties caused by massive early withdrawals of funds invested in money market certificates and certificates of deposits.
The Depository institutions Deregulation Committee, a five-member group created by Congress to deal with such issues, acted in a series of complicated changes in investment yield rates and differentials.
Under the changes, "the saver will be better off" because of higher allowable interest rates, said Federal Reserve Board Chairman Paul Volcker, who chaired the six-member committee. Volcker predicted "larger flows of money" into banks, savings and loan associations, credit unions and mutual savings banks as a result of the actions.
He also labeled the labyrinth of decisions "an exceeding modest step in deregulation" -- the task the committee was charged with by Congress.
At least two of the groups affected by the moves immediately criticized the committee's actions.
Edwin B. Brooks Jr., president of the U.S. League of Savings Associations, called the changes "a major new defeat for housing" because of its limitations on a differential that allaws savings and loans to pay higher rates than commercial banks on money market certificates under certain circumstances.
Congress clearly intended "that the housing differential must be preserve during transition toward removal of savings-rate controls," he said, adding that his group is exploring possible legal actions against the committee.
The National Association of Mutual Savings Banks also faulted the actions. "In introducing additional, complexity into the deposit-rate structure, (the actions were) clearly not a step toward deregulation," according to a statement issued by the association. The group also predicted that the actions would adversely affect the depressed housing industry.
What the committee did was to change the relation between interest rates paid by financial institutions and the government security rates to which they are pegged in a way that allows financial institutions to pay higher interest.
For instance, on six-month money market certificates, where financial institutions have been limited to paying the same rates as Treasury bills when Treasury bill rates reached 9 percent, banks and savings and loan associations now may pay 1/4 percent more than Treasury bill rates of 8.75 percent or more.
On 30-month small saver certificates, the committee modified a decline in allowable rates that financial institutions may pay and to set rates more frequently.
In its biggest step forward deregulation, the committee came up with a concept called "minimum cielings" for both investment instruments. In essence, no matter how low government security rates float, financial institutions may pay rates as high as 7 3/4 percent on six-month money market funds and 9 1/4 percent for thrifts and 9 1/2 percent for commercial banks on 30-month small certificates.
The minimum cielings allow financial institutions considerably more leeway in setting rates of return than existed before. The concept "might induce institutions to experiment with setting deposit rates" and lay the groundwork for six years from now when controls on interest rate ceilings are supposed to be phased out, according to a briefing paper prepared for the DIDC.
In other actions, the committee voted to require larger penalties on withdrawals before six months on longterm certificates of deposit and withdrawals before three months on six-month money market certificates.