Federal financial regulators, in an effort to help the nation's troubled savings and loan industry, are expected to consider temporary restoration of the industry's quarter-point interest rate advantage over commercial banks for large savings certificates.
Industry sources yesterday expressed optimism that the Depository Institutions Deregulation Committee would approve such an action when it meets a week from today. Federal officials, however, would not discuss the matter yesterday.
Ever since the differential on six-month money market certificates was almost entirely removed in 1979, thrifts have been clamoring to get it back. The reason is obvious. According to Ed Brooks, an executive of the U.S. League of Savings Associations, savings and loan associations then had 53 percent of the volume of money market certiicates whereas commercial banks had 32 percent. Today the banks have 59 percent; savings and loans, 32 percent.
Restoration of the interest rate differential is just one of the proposals expected to be discussed at the next DIDC meeting.But savings officials yesteday urged the DIDC only to act on restoring the differential because other actions under consideration would cost too much money.
The agenda also includes a final decision on whether to phase out limits on interest rate ceilings on certificates of deposit by maturity.According to this plan, market rates could be paid first on the longest-term certificates, followed by shorter-term certificates. All controls would be ended by April 1, 1986.
Another proposal calls for the withdrawal of the current limit of 12 percent on 30-month certificates and restoration of the differential for a six month period.
New short-term instruments competitive with money market mutual funds will be considered. One suggestion is for a certificate with a minimum balance of $2,500, an interest rate limit tied to the 91-day Treasury bill and a limit to the number of checks that could be written on it. Other items for discussion include withdrawal of the current 12 percent interest rate limit on 30-month certificates, deregulation of Individual Retirement Accounts and Keogh plans.
Yesterday the league sent another plea to DIDC to restore the interest rate differential. In the past it has fallen on deaf ears because it had the support of only one member, the chairman of the Federal Home Loan Bank Board, which regulates thrifts. The other voting members were either opposed philosophically -- imposing of regulations is contrary to their deregulation mandate -- or took the view of banks that thrifts should not have an edge over them.
Since DIDC's last meeting, the plight of savings and loans has worsened: earnings are down, mergers are up. Net withdrawal of funds from S&Ls reached a new record of $4.6 billion in April. Preliminary figures for May, compiled by the league, indictate a positive net inflow (more deposits than withdrawals) of $100 million. This compares to $1.8 billion during May 1980. w
Thrift executives met again last week with Treasury Secretary Donald Regan and Federal Reserve chairman Paul Volcker to plead their case. According to those present, the two pledged to look into restoring the differential, but gave no indication of how they expected to vote. Banking industry representatives said, however, that talks with high-level Treasury and Fed staff members preparing the proposals for DIDC discussion convinced them there was "very strong interest" in restoring the differential.
Such a move could be construed as part of a trade-off on removing the interest rate ceilings on certificates of deposit faster than the thrifts would like. However, a spokesman for the American Bankers Association said that group was Adamantly opposed" to restoration of the differential and would fight it.
During the last few weeks numerous proposals have been advanced for helping thrifts. Many of them have been shot down as being either too costly to the Treasury or unacceptable by one or more segments of the financial industry. Yesterday, Sen.Jake Garn (R-Utah), chairman of the Senate Banking Committee, and nine other senators, threw their support behind tax-exempt savings certificates. However, Regan sid the administration would only consider it as an alternative to expanded IRA eligibility, not an addition that would add more to the budget deficit.