The attorney general of South Dakota and the secretary of the Treasury clashed publicly yesterday over the issue of whether state banks should be allowed to offer accounts competitive with money market funds.
Mark Meierhenry interrupted the normally staid proceedings of the Depository Institutions Deregulation Committee by demanding his right to be heard. He was twice ordered to sit down by Treasury Secretary Donald Regan, the committee's chairman, after an attorney advised Regan the DIDC was not obliged to hear witnesses.
The DIDC thereupon voted unanimously not to permit individual states to authorize banks to offer so-called Super NOW accounts. These are interest-bearing checking accounts paying 5 1/2 percent interest on the first $5,000 and market rates on balances over that amount. Federal permission is necessary because even state-chartered banks in South Dakota are insured by the federal government.
South Dakota's banking comissioner petitioned the DIDC in June to lift the ban, but the DIDC refused to consider the request. So South Dakota went ahead and authorized the accounts, only to be threatened with loss of protection by the Federal Deposit Insurance Corp. The state banks finally backed down and canceled the accounts. But the state then filed suit to compel the regulators to respond.
Yesterday's rejection applies to all states, including those that also petitioned: New Jersey, Texas and Washington state. The DIDC agreed that granting some states permission would create inequalities. The members insisted that any competitive account should be nationwide and should await passage of enabling legislation by Congress. A competitive account is included in the Senate version of the bill.
For the same reason, Regan declined to take action on any other short-term, high-yielding certificate of deposit despite intense pressure from banks to do so. He expressed concern over the amount of money being shifted from passbook accounts to certificates paying high rates.
Speaking to reporters after the meeting, Meierhenry claimed he should have been given the right to present evidence. (The DIDC maintained it had considered all the information presented in the petition.) He wanted to tell the regulators how his state is being bled by money market funds. South Dakotans have about $800 million on deposit in their state, but have sent about $500 million to funds out of state, he noted. Therefore, he argued that Super NOW accounts would help keep money within the state without really affecting large banks elsewhere.
In other action, a majority of the committee voted to allow financial institutions to pay fees to bona fide brokers for placing demand and time deposits with them. The DIDC prohibited finders' fees originally because some financial institutions were giving them to the "good friends" steering depositors in their direction. The presumption was that the "good friends" would then turn over all or part of the fees to the depositors, thus illegally increasing their yield.