Federal regulators yesterday authorized banks and savings and loan associations to offer a new checking account that permits an unlimited number of transactions and pays market rates of interest provided a $2,500 minimum balance is maintained.
The Super NOW account, as it has been dubbed, can be offered to individuals and nonprofit groups starting Jan. 5, 1983.
The action follows a decision to create a similar Money Market Deposit Account with six transactions permitted, effective Dec. 14. Thus, within less than a month, the Depository Institutions Deregulations Committee has lifted most restrictions on both the savings and checking accounts of Americans, pushing banks and thrifts a giant step further toward total deregulation.
The origin of the DIDC's moves was a mandate from Congress to design new accounts competitive with money market mutual funds, which have accumulated hundreds of billions of dollars that might otherwise have been put in banks and thrifts.
Unlike the money market funds, Super NOWs will be federally insured. But they also will be subject to reserve requirements, which may lower the amount of interest they can pay. Furthermore, institutions would have to reduce the interest rate they pay on a Super NOW account to 5 1/4 percent if the balance falls below $2,500.
William Donoghue, publisher of the Money Fund Report, said after yesterday's meeting that he expected a lot of confusion at first over the new accounts, followed by a small outflow from money market funds, and then a return of capital to the funds "when the public finds out what fees banks will have to charge" to make a profit.
The committee's haste surprised some industry observers who had expected that the idea for a new account with unlimited checking privileges would simply be proposed for public comment. "Our members are yelling at this overnight deregulation and its costs impact," said a spokesman for the Independent Bankers Association of America. "It won't be fatal, but they must be cautious in designing the Super NOW to make it profitable."
Federal Reserve Chairman Paul Volcker and Federal Deposit Insurance Corp. Chairman William Isaac argued against quick approval of the account on the grounds that financial institutions would not have enough time to gear up for it and that it would adversely affect earnings of small and regional banks. With considerably more money in non-interest and passbook accounts than big banks and thrifts, small banks would be hurt more if these deposits shifted suddenly to higher yielding accounts.
Treasury Secretary Donald Regan, who is chairman of the DIDC, Federal Home Loan Bank Board Chairman Richard Pratt and National Credit Union Administration Chairman Edgar Callahan voted in favor of immediate approval.
The members decided to seek public comment on whether for-profit corporations should be allowed to establish market-rate checking accounts with unlimited transactions.
In other action, the board voted to include telephone transactions in the six transfers that are allowed monthly from the Money Market Deposit Account. This is considered a savings account, subject to a smaller reserve, so its yield will probably be higher than that on the Super NOW.
The regulators also voted unanimously to eliminate the rate ceiling on the 7-to-31 day account, and to lower the minimum deposit on all short term accounts to $2,500. This would remove the attraction to savers of the $10,000 six month Money Market Certificate, a mainstay of the banking industry. It now represents 30 to 40 percent of total savings, or $448 billion.
The U.S. League of Savings Institutions, while expressing pleasure at the Super NOW, had reservations about the benefits of eliminating, in effect, these other high-minimum certificates. "The housing markets, which only recently have shown signs of a slow revival, will have to bear the additional savings costs of the lower minimums," said league president William B. O'Connell.
The DIDC voted to seek comment on numerous other technical changes in intermediate-term certificates of deposit, and postponed discussion of accelerating deregulation of rate ceilings until their next meeting Mar. 1.