U.S. banks this week will make a bid for approval to pay rates of interest that would make them competitive with money market mutual funds.
That bid, the latest, salvo in the bitter war between money market mutual funds and virtually every other financial institution, is disguised as the seemingly innocuous "consideration of petitions for ceiling rate adjustments" or item five on the agenda for next Thursday's meeting of the Depository Institutions Deregulation Committee (DIDC).
The U.S. banking community accuses the money market mutual funds of stealing away their depositors and, in so doing, of attracting $100 billion plus -- $30 billion of it since the start of the year. The bank's battle plan is two-pronged: legislation to curb the funds and regulatory approval to match them.
The DIDC -- which is composed of the heads of the Federal Reserve, the Federal Home Loan Bank Board, the Federal Deposit Insurance Corp., the National Credit Union Administration, the Comptroller of the Currency, and the secretary of the Treasury -- was set up by Congress last year to oversee deregulation of the banking industry, including the elimination of interest rate ceilings.
When the Federal Reserve set reserve requirements on money market funds during last year's credit crunch, the Investment Company Institute -- the trade organization for mutual funds -- objected on the grounds the regulator had no legal authority over the funds. Eventually the requirements were withdrawn along with other controls. After suffering criticism for allegedly doing more regulating than deregulating, The DIDC appears to have gotten the message about what its mandate really is.
Congressional action would be needed to curb the funds, but regulatory approval for banks to match the funds is the tactic that the DIDC will be concerned with next week. It will be considering the petition of the American Bankers Association to permit banks, mutual savings banks, savings and loans and credit unions to offer a new deposit instrument they hope can compete with money market funds.
The bankers asked the DIDC to propose the precise items of such a new certificate -- because they could not agree among themselves -- but its general characteristics would be a higher yield than current passbook rates and greater liquidity than six-month money market certificates.
Industry sources say two different types of new instruments are worth considering. The first is a certificate requiring a minimum deposit of $1,000 to $2,000, having a 30- to 60-day maturity, and yielding somewhat less than current money market certificates. (These certificates have a $10,000 minimum a six-months' maturity and a current yield of 12.34 percent.) The ABA believes a new instrument with greater flexibility but a lesser yield could successfully compete with money market funds because customers would appreciate the fact the certificates are insured whereas fund shares are not.
The other possibility is a so-called wild card certificate, meaning that financial institutions would be able to offer certificates at whatever interest rate they wish up to 5 percent of their assets. Such certificates could be expected to come much closer to the yield offered by money market funds. Their current average yield is 15.31 percent and the average maturity 33 days, according to Donoghue's Money Fund Report.
Secretary of the Treasury Donald T. Regan, who was instrumental in establishing Merrill Lynch's money market funk, the largest in the country, said through a respresentative he does not intend to absent himself from the discussion when the DIDC begins its deliberations.
When interest rates are descending, as they are now, money market fund yields come down less quickly.With a discrepancy in yields of three percentage points, depository institutions fear the loss of billions of dollars in maturing certificates to the money market funds, further swelling their current $104.9 billion in assets. Some $70 billion in six-month money market certificates are due to mature in March; another $105 billion in April.
Another consequence of falling interest rates is that banks and thrifts will be spared the onerous cost of renewing billions of dollars worth of certificates at much higher interest rates than the 11 or 12 percent they were paying six months ago.
Lower rates may take some of the pressure of the DIDC to do something about creating a new instrument to compete with money market funds. Indeed, an ABA newsletter issued last week remarked that "the overt signals from the comitttee so far have given bankers no reason for optimism."
Separately, the Federal Home Loan Bank Board currently is considering whether to let savings and loans' savings corporations set up money market funds, a proposal supported by the National Savings and Loan League.
Yet the issue -- like money market funds themselves -- is not likely to go away. Last summer, when the yield on money market certificates, issued by banks and thrifts, exceeded those of money market funds, individuals continued to add to their money market fund accounts. Only institutional investors withdrew their funds for higher yields elsewhere.
The ABA's Gerald M. Lowrie concluded in a December letter to the DIDC: "In part, this no doubt reflects small investors without the requisite $10,000 to purchase money market certificates. However, equally important is the recognition by investors that in a period of rapidly rising interest rates, the liquidity of money market funds is a highly desirable feature."
Money market funds, with their low minimum investments, high yields, high liquidity and high degree of safety, have made, in the words of ICI's president David Silver, "6 million happy shareholders." They also have made it difficult to legislate against the small saver.
Efforts in state legislatures to curb money market funds by taking away the check-writing features have failed thus far, although the contest was very close in Utah. Yet the changed complexion of Congress as well as heavy lobbying by beleaguered thrifts and envious banks made some attempt at curtailment probable.
Silver -- like many fund executives -- seems resigned. He declared in an interview: "I'm afraid that in a crisis atmosphere, whether real or contrived, [anti-fund measures] will be part of a package of emergency legislation. But the industry will fight like hell!"
Senate Banking Committee Chairman Jake Garn (R-Utah), who has stated he feels money market funds have an unfair competitive advantage over banks and thrifts, will hold hearings on possible curbs next month. In the House, Jim Leach (R-Iowa) has introduced a bill to set reserve requirements on the funds, thus reducing their yeilds. He declared recently, "If we allow the continued spectacular growth of these funds, in all probability it will drive the death nail into the coffin of the savings and loan institutions."
Banks and thrift institutions claim they have been injured by the funds, that they have drained their deposits. As evidence, the U.S. League of Savings Associations cites statistics showing new deposits were down $4.33 billion or 29 percent last year; $570 million or 47 percent during january 1981 and $200 million or 18 percent in February from the corresponding periods in 1980.
Savings banks, on the other hand, suffered actual outflows (more funds withdrawn than deposited) of $7 billion in 1979 and $4.8 billion in 1980 (including $2 billion in the first two months of 1980, as compared with $1.4 billion during January and February 1981). "So you could say that things are getting better," Saul Klaman of the National Association of Mutual Savings Banks said bitterly.
Banks and thrifts are unable to say how much of that money actually has gone into money market funds and how much is being spent by consumers to combat the ravages of inflation or unemployment, or being invested in the stock market or Treasury bills.
But in a survey of 1,556 people commissioned last June by the ABA, 7.8 percent said that they had money market fund shares, of whom 48 percent said the primary source of the funds they put into those accounts was passbook savings and certificates of deposit.
According to ICI, money market funds accounts now held by individuals and small businesses -- the traditional savers at banks and thrifts -- amount to $84 billion. If the same 48 percent ratio were true today, these financial institutions might claim money market funds had taken $40 billion of their funds.
David Silver doesn't pretend to know how much the funds have taken from the banks and thrifts. He says only that if money market funds did not exist, the amount that would find its way back to banks and thrifts is just $10 billion.
He bases his assertion on the fact that only 10 percent of the funds are in accounts of less than $10,000. The remainder, he contends, would not go into 5 1/2 percent passbook savings, but into higher yielding certificates, Treasury bills or other investments.
Thus he concludes that reducing money market funds yields would only hurt small investors without helping competitive industries.
Banks and thrifts do not agree. Besides setting reserve requirements to put money market funds on an equal basis with them, they have a long list of other proposed legislation to counter the funds.
The ABA wants a modification of the Glass-Steagall Act to allow banks to compete with the funds by comingling their agency accounts for investment purposes.
The U.S. League of Savings Association has asked for a ceiling on fund rates and a requirement that a substantial percentage of fund assets be invested in short-term U.S. securities to bring down inflation.
Silver said if reserve requirements were reimposed, he could envision two kinds of funds -- without checking privileges and without -- with different yields. But he said ICI would fight in court any attempt to impose the reserve requirements because of the importance of electronic funds transfers to institutions.
Similarly ICI will oppose any change in Glass-Steagall to allow banks to sell money market funds because it would open the door to a full spectrum of new powers that would give them a competitive advantage over mutual funds. As for the league's proposals, he dismissed them as "pure protectionism."