Tomorrow is D-Day in the banking industry, the final assault on the deregulation of interest rates. But both here and across the country, experts are predicting only scattered skirmishes, not an all-out rate war.
On Deregulation Day, statutory limits expire on the amount of interest banks can pay on various types of accounts, as well as penalties set by law for premature withdrawal from certificates of deposit. Thus ends a period of rate regulation that began in the Great Depression for banks and in 1966 for savings institutions. Deregulation was set in motion when high interest rates drained funds from banks and thrifts and sent them to Treasury Department securities and money market funds.
The only remaining withdrawal penalty for individuals is one aimed at keeping them from opening and closing accounts rapidly in quest of the highest rate. Individuals face a seven-day loss of interest if money put into a certificate of deposit is withdrawn within the first week.
The major exception to deregulation is the prohibition of interest-bearing checking (NOW) accounts for commercial users. And commercial depositors also will have to forfeit one month's interest on accounts with maturities between seven days and 18 months in the event of an early withdrawal.
D-Day itself is expected to be something of a nonevent because almost no banks or thrifts plan to change passbook rates or eliminate penalties, at least not in the immediate future. Most institutions still are engaged in a fierce campaign for Individual Retirement Account dollars. But when that battle ends at sundown on April 15, a longer war of attrition could begin.
Robert Heady, publisher of the Bank Rate Monitor, said that rate wars could be possible if enough banks decide to try to lure customers from their competitors. And the trade publication American Banker noted last week that skirmishes already had begun in Connecticut, Pennsylvania, Illinois and California.
It is unlikely there will be interest-rate wars here, said Washington banking consultant Edward Furash of Furash & Co., because there is a surplus of funds in the metropolitan area and most institutions do not have to bid for money. A very limited number of Maryland and Virginia thrifts that are in trouble probably will raise rates to gather more funds, but the larger, solid institutions undoubtedly will sit tight until the promotional, or teaser, rates end.
"Some small banks will be aggressive," predicted Arnie Danielson of Danielson & Associates in Laurel, "but consultants like me will advise big bank clients not to move." He cited the example of credit card rates: Despite a highly publicized 14 percent rate offered by a local thrift, most banks have maintained 18 percent or higher rates.
Another factor in any rate war could be the presence of money-center banks, which have a huge need for funds and huge advertising budgets to get them. For example, Chase Bank of Maryland, which began operations at the end of last year, offered an introductory rate of 8.75 percent on a short-term certificate. "We intend to be very aggressive in this market," said Kathleen Carpenito, director of product management. Yet she denied Chase was planning any surprises for D-Day.
The passbook interest rate of 5.5 percent is the last barricade to fall under deregulation, which under congressional mandate has been phased in over a six-year period. Yet, because banks and thrifts still hold $305 billion in 86 million regular savings accounts, they will be most reluctant in a period of declining interest rates to pay more for these low-cost deposits. Besides, noted Henry Berliner, president of Second National Building and Loan in Annapolis, if banks need money, it is cheaper to borrow from government banks than retail customers.
Finally, banks are counting on customer apathy and the little incentive small savers have at this time to switch from a passbook account to one paying perhaps 1 percentage point more. Recent declines in interest rates have sharply narrowed the gap between passbooks and other forms of savings plans.
None of the financial institutions questioned in this area had any plans to eliminate regular savings accounts or raise their rates. All said they planned to continue the current penalties for premature withdrawal on certificates of deposit that amount to one month's interest on accounts under one year and three months' interest on accounts over one year. Most of the respondents said they were waiting to see what their competition would do.
The first shot in what could be a rate war, American Banker observed, was fired in January in Bridgeport, Conn., when City-Trust Bancorp began offering a hybrid product: a money market deposit account -- paying 11 percent for the first month -- that came with a passbook.