Federal credit unions, getting a jump on their competition, received authorization yesterday to raise the interest rate on small certificates of deposit from 12 percent to 14.35 percent.
In addition, the National Credit Union Administration proposed to allow federal credit unions to offer money market type funds in which the minimum deposit is $10,000 and the account is insured.
Yesterday's meeting followed a similar meeting last Thursday of the Depository Institutions Deregulation Committee, which adopted an accelerated four-year phase-out of controls on interest rates on savings accounts, starting Aug. 1. Many of NCUA's actions paralleled those of the DIDC, but there were significant differences.
NCUA yesterday approved an immediate removal of the current 12 percent ceiling on share certificates (of deposit) with maturities ranging from 14 days to six years. During July, credit unions may open such accounts paying the equivalent of the 2 1/2-year yield -- currently 14.35 percent -- on Treasury securities plus compounding. Savings and loans, mutual savings and commercial banks must wait a month. The customary minimum purchase price of these certificates is $1,000 or less. A spokesman for NCUA said the regulators wanted customers to have an insured alternative to retail repurchase agreements, or repos, also recently approved.
As of Aug. 1, credit unions will follow the same deregulation schedule as other depository institutions, starting with the removal of interest rate ceilings on certificates of four years or more. Those with maturities of between 14 days and four years will continue to pay up to the 2 1/2-year yield.
The NCUA also sanctioned an increase in the maturity of $10,000 money market certificates up to six years. The rate last week was 14.19 percent. This presents the investor who believes interest rates are declining the opportunity of locking up funds at this rate for as many as six years instead of six months.
The DIDC last week deferred action on creating new weapons with which banks and thrifts can battle their arch-rivals, the money market funds. Yesterday the NCUA voted instead to get comment on a new account that would pay market rates and permit withdrawal at any time. The minimum deposit would be $10,000 and the account would be federally insured. Money market funds are not insured, but the initial investment is often $1,000 or less.
Credit union regulators also proposed raising the premissible interest ceiling on regular share draft accounts by 5 percentage points to 12 percent. The DIDC last week suggested a similar raise to 10 1/2 percent for savings institutions and 10 1/4 percent for commercial banks. Considerable opposition has already developed in the thrift industry to such a move because of the costs involved.
In other action, the NCUA voted to retain for nine more months the 21 percent usury ceiling on loans. Without action the temporary ceiling would have reverted to 15 percent in September. A bill to wipe out all existing state usury ceilings was introduced last week by Sen. Richard Lugar (R-Ind.). The NCUA also suggested that penalties for premature withdrawal of certificate funds, which are now mandatory, should be left to the discretion of individual credit unions.
There are 12,500 federal credit unions in the country with assets of $39 billion. Together with 5,000 state chartered credit unions, also insured by the NCUA, credit unions have total assets of $73 billion.