The banking industry and financial regulators squared off again before the Senate Banking Committee yesterday over the way the Depository Institutions Deregulation Committee is phasing out interest rate controls.
Representatives of savings institutions and credit unions charged the DIDC did in six weeks what Congress empowered it to do over a six-year period, thus putting thrifts at a competitive disadvantage with commerical banks and making mortgage funds more expensive. The U.S. League of Savings Associations already has filed suit to get a DIDC decision reversed.
Federal Home Loan Bank Board Chairman Jay Janis agreed with the thrifts; Federal Reserve Chairman Paul Volcker -- who wears a second hat as DIDC chairman -- disagreed. The Senate committee also divided, with William Proxmire (D.-Wis.) siding with Volcker and Robert Morgan (D-N.C.) agreeing with Janis.
At issue are Congress' intent when it created DIDC last spring and several controversial decisions DIDC has taken since then. These include issuing a ban on premiums banks can offer to attract deposits, eliminating the differential or higher interest rate thrifts can pay on certain certificates of deposit in a number of circumstances as well as raising rates on some above-market levels, and requiring despositors to forfeit part of their prinicipal in addition to interest in case of very premature withdrawal.
Volcker defended DIDC's actions and interpretation of its congressional mandate. "We see our central responsibility under the law as one of managing interest rate ceilings in a manner that supports the nation's economic goals and prepares the way for ultimate deregulation; the controversial matter of the differential on various types of deposit instruments created after December 1975 should be evaluated in taht larger context." He observed that Congress had not set a deregulation timetable.
Volcker said actual experience since DIDC altered the rates in late May shows that both banks and thrifts have had only a small increase in certificates of deposit, but he added that the thrifts would probably have had an outflow of savings had the committee not acted. He also noted that the "biggest surprise" has been in the substantial increase in regular savings accounts, due to the fall of interest rates and the onset of the recession.
Janis argued that substantially eliminating the differential before sayings institutions get new powers to make consumer loans and undertake other compensating business is contrary to the spirit of the law. He added that the Bank Board is currently contemplating more liberal terms for renegotiable rate mortgages to help thrifts over this difficult interim period. rPossibilities include combining it with a graduated payment to facilitate more upwardly mobile first-time buyers, and allowing thrifts to up the interest rate a maximum of 1 percent a year instead of the present 1/2 percent.
Morgan, who sides with the industry, has introduced a bill allow thrifts to pay a differential on savings accounts until 1985. It would start 1/4 percent and diminish yearly to 0.05 percent before ending. It won the endorsement of the industry and Janis who advocated a higher differential to be applied when housing goes into a slump. Opposing the bill. Volcker said he preferred that DIDC retain flexibility to set interest rates in accordance with economic conditions.
Both Proxmire and Morgan took issue with Volcker over the question of stringent penalties for premature withdrawal. They said many bankers had complained it was "immoral" that a bank could not insure the safety of the principal. Volcker likened the situation to that of an investor liquidating a market security prior to maturity when interest rates are rising. The investor in effect, is asked to share more of the interest rate risk formerly borne by the banker. Because of customer withdrawals, the Fed chairman continued, lenders were unwilling to commit their funds to long-term mortgages.
Proxmire opposed a ban on premiums, though not on finder's fees, as contrary to free enterprise. Volcker replied the situation had gotten out of hand, with examiners spending more time trying to make sure banks did not exceed the $5 to $10 gift limit than they were on overseeing the soundness of the banks.