Federal credit unions would be free to pay whatever interest rate they wish on all their accounts under a proposal made yesterday by the National Credit Union Administration.
In his first major action since assuming the NCUA chairmanship, Edgar Callahan gave a sweeping example of his philosophy of getting the government out of the banking business. No longer would regulators be able to set interest rate ceilings, terms, penalties or maturities on any of the different types of accounts offered by credit unions. Those decisions would be left to management.
The effect of the decision for the public would be the ability of credit unions to offer insured accounts with rates equivalent to those paid by money market mutual funds. (While credit union accounts are insured by the federal government in case of collapse, dividend payments are not guaranteed if the credit union has insufficient funds to pay members.)
Although 199 of the 265 credit unions that contacted the NCUA favor outright deregulation, credit unions are not expected to rush headlong into money market type funds, according to the Credit Union National Association. The trade association says only a handful of those state credit unions eligible to pay market rates do so. "Credit unions are scared of money markets," said CUNA staff economist Bill Hampel. "They don't know how to invest the money and they don't know if they can lend it out."
As for the effect of deregulation on credit unions' competition, Jonathan Lindley, executive vice president of the National League of Savings Associations, said it could be substantial in small communities, but minimal in large cities. There are 21,000 credit unions in the country with deposits of $66.7 billion, or about 4 percent of the nation's savings.
However, the effect may be greater in the form of pressure to deregulate other segments of the financial industry more rapidly. National Association of Federal Credit Unions President John J. Hutchinson said the action would give credit unions a four year jump on their competition. Interest rate ceilings on deposits in commercial and savings banks and savings and loans are not due to be phased out entirely until 1986. Banks are anxious to accelerate deregulation, but hard-pressed thrifts are not. The issue is scheduled for discussion at the next meeting, March 22, of the Depository Institutions Deregulation Committee, the government body that determines interest ceilings.
The U.S. League of Savings Associations registered its "strong opposition" to the NCUA's proposal. Saul Klaman, president of the National Association of Mutual Savings Banks, said it would "clearly make the road a lot harder for regulated institutions." He questioned whether Callahan, who serves on the DIDC although credit unions are not regulated by it, should continue to serve. On the other hand, the American Bankers Association hailed Callahan's move and urged him, in voting for accelerated deregulation, to cite the credit unions' experience as proof that the fears of those concerned with "destructive competition" caused by deregulation are groundless.
Industry sources said yesterday a compromise may be proposed at the next DIDC meeting. This could be the "sweep" account, now offered by brokerage houses for cash management accounts. For depository institutions, all funds in excess of $2,500, for example, in an interest bearing checking (NOW) account would automatically be "swept" out daily by the computer and placed in a money market fund type account.
In related news, Elizabeth Flores Burkhart is now undergoing security checks as a likely nominee for the vacant seat on the NCUA board. Burkhart, 46, is currently associate deputy administrator for information resources at the Veterans Administration.