Federal regulators yesterday moved a step closer to equalizing the interest rates paid by different financial institutions on similar accounts and agreed that slightly less interest should be paid on these accounts than on savings deposits.
The affected transactions are savings-to-checking, telephone transfer, preauthorized drafts, negotiable orders of withdrawal, share drafts and third-party payments by remote service units.
Instead of setting a specific uniform ceiling, the Depository Institutions Deregulation Committee decided to offer for banking industry comment four alternative ceilings on all transaction accounts: 5 percent, 5 1/4 percent, 5 1/2 percent or a higher, as yet undetermined, percent. Maximum rates on savings would be either one-quarter or one-half percentage point higher than the ceiling the DIDC will choose for transaction accounts.
Comments will be solicited until August, with a decision expected in September. The new ceilings would go into effect concurrently with NOW (interest-on-checking) accounts on Dec. 31.
The procedures differs from both the standard agency practice of issuing proposed regulations for comment and the flat approach used by the DIDC in secret sessions last month to change the ceilings on money-market and small-saver certificates virtually overnight. The U.S. League of Savings Associations protested these changes as a violation of the law and set up the DIDC to conduct the phase-out of interest rate ceilings over a six-year period. The league has sued to get this DIDC decision rescinded, alleging it will deprive S&Ls of $17 billion this year and seriously affect housing. Rep. Fernand St Germain announced Monday he will open hearings on the DIDC next Wednesday.
The DIDC, which maintaiins in the law set no timetable for the phase-out, believes the suggested rate changes would promote competitive equality among depository institutions as Congress ordered. However, a staff memo admitted the regulators face a problem or where to set the rates between the 5 percent currently paid by commerical banks on NOW accounts and the 7 pecent nominal interest that credit unions can pay on share drafts, which are another form of interest-on-checking account.
The staff said it makes sense to raise the 5 percent ceiling rather than lowering the 7 percent ceiling because the DIDC's mandate is to raise interest rates until they become market rates. On the other hand, the greater the increase in interest rates, the higher the costs and lower the earnings for financial institutions.
The separation of savings from checking accounts through different interest rates is aimed at facilitating monetary policy by making it easier for the Federal Reserve to determine the money supply. The Fed wants to include all interest-bearing transaction accounts in the M1-B measure, whereas inactive savings balances would be included in the M-2 measure.
In other actions, the DIDC rejected proposals by St Germain to let banks and S&L offer accounts with the liquidity characteristics of money market funds shares. Under one proposal, certificate holders would have been able to withdraw a certain percentage of their funds without penalty. Chairman Paul Volcker declared such certificates would be "inappropriate at this time" because, although they would allow depository institutions to compete with mutual funds, they would increase the cost of funds "very sharply" for banks and thrifts.
Finally, the DIDC voted to make the premature withdrawal of funds from Keogh and Individual Retirement Accounts uniform. It declined to take action eliminating the interest rate differential in Rhode Island where most thrifts also operate commercial banks.