Banks are in open rebellion against federal laws that prevent them from competing effectively with money-market mutual funds. If the government fails to change the law this month, some banks plan an act of civil disobedience. They say they will offer something similar to money funds, and let the chips fall where they may.
The revolt reared its head in South Dakota, where the state banking commission has just approved a new, combined savings and checking account called the Super NOW.
It allows depositors to simplify their lives by putting all their ready cash into a single account. They would receive 5 1/4 percent interest on accounts up to $5,000.
But if your checking and savings funds exceeded $5,000, banks could pay you any higher interest rate they wanted. There would be no limit on your use of this money. You could withdraw it without penalty at any time.
That's the point where Super NOWs conflict with federal law. Interest rates on federally insured NOW accounts are not supposed to exceed 5 1/4 percent, regardless of the account's size. The South Dakota NOW accounts probably would be linked to three-month Treasury bills, which now are yielding 12 percent.
High-interest Super NOWs would offer several advantages over money-market mutual funds:
1. You could write checks for any amount of money you wanted, in order to pay your regular bills. Most money funds accept checks only in denominations of $250 to $500 or more.
2. It's more convenient for most people to do business with their local bank than with a money fund that might not be located in the city where they live.
3. A Super NOW account would carry Federal Deposit Insurance--a matter of central importance to people worried about the safety of their money. Money-market mutual funds, while considered safe, are not federally insured. Neither are the money-fund look-alikes now being offered by many savings and loan associations (although some of them carry private deposit insurance).
In one respect, money funds would continue to offer a slight edge. Most of them pay high interest rates on savings of $1,000 or more, whereas South Dakota banks would require your deposit to exceed $5,000. It is also not known how the fees and yields of Super NOWs would compare with those of money funds.
But assuming no major difference between the two, the average saver would probably choose the convenience, and insurance, offered by his or her local bank. Money funds would take a back seat.
The South Dakota Banking Commission will appeal to the Depository Institutions Deregulation Committee in Washington to approve the Super NOW account. The DIDC could take up the matter at its next meeting on June 29. A spokesman for the committee, however, says that its chance of approval is practically nil.
"If the DIDC doesn't approve this instrument, or some instrument that can be competitive with money funds, we're going to offer the Super NOWs anyway," an irate J.I. Milton Schwartz, executive manager of the South Dakota Bankers Association, told my associate, Virginia Wilson. "I think you'll find more than just South Dakota banks doing this."
The American Bankers Association, in its trade paper, Bankers News Weekly, is actually encouraging other banks to revolt. "The pressure on the DIDC could be stepped up considerably if other states were to emulate the South Dakota pioneers," the ABA wrote enthusiastically.
The Boston Five Cents Savings Bank recently announced plans to establish its own money-market mutual fund. The Investment Company Institute, trade association for the mutual funds, thinks this action is illegal, and is suing the Federal Deposit Insurance Corp. for doing nothing--so far--to prevent it.
Any rebellion against federal interest-rate ceilings could be short. The FDIC has already notified South Dakota bankers that it "stands ready to take prompt and speedy enforcement action" against any bank attempting to offer a high-interest NOW account.
Informal threats may be enough to quash the rebellion. But if the bankers hang tough, the fight for higher bank interest rates will wind up in court. Stay tuned.