Treasury Secretary Donald T. Regan said yesterday that the Reagan administration was preparing to delay a one-half percentage point increase in passbook interest rates at banks and savings and loan associations. The increase was scheduled to go into effect Nov. 1.
The original proposal, announced Sept. 22, would have allowed banks to pay 5.75 percent instead of 5.25 percent and S&Ls 6 percent instead of 5.5 percent on passbook savings accounts. At that time, Regan said it was time "to give the little guy a break."
But Regan told a news conference yesterday that he had "a change of mind" on the wisdom of the increase. It is not inducing savers to keep money in those accounts. Instead, he said, savers are moving "an awful lot of money" from passbook accounts into tax-free "all savers" certificates at the same institutions. The certificates pay in excess of 12 percent.
Savings institutions had attacked the boost in the passbook rate from the start. On Thursday, James Christian of the U.S. League of Savings Associations told a House Banking subcommittee that the higher rate would not induce more passbook savings, but would cost an extra $500 million annually in interest payments.
Yesterday, Regan agreed that the increase "looks unnecessary or even counterproductive." He admitted that the government does not have a good idea of what the combination of the higher passbook rate and the institution of the all savers certificate is doing to the thrift industry.
"We actually don't know what's going on," Regan said. "The industry is in a ferment, and the better part of wisdom is to hold up" the passbook increase. He said, "The industry is telling us that it is costing them billions of dollars." He added that "we don't know that that is an actual fact, but at least that is what they are claiming."
Regan said he had recommended the half-point increase in the belief "that it would hold funds" in the banks and S&Ls. "Now, if actually they're going anyway from the passbook on up to the all savers," he asked rhetorically, "why bother?"
Regan said he will ask his fellow members of the Depository Institutions Deregulation Committee -- Federal Reserve Board Chairman Paul Volcker and Federal Home Loan Bank Board Chairman Richard Pratt -- to hold up the proposed increase "until such time as we can find out the effect of this all savers certificate on passbook savings."
He left the impression that there was agreement among the DIDC members, and that a vote on the question early next week would be a mere formality.
Regan said that the savings institutions "think that they are getting net new money in," an inflow exceeding the transfer of money from savings accounts into the all savers certificates. "But they're not sure either," Regan added, "and we've had no real scientific study of what's going on here."
Indications are that the flow of money into the certificate has far exceeded expectations. Many private economists attribute a further weakening of car sales and sluggish retail business generally to the attractiveness of the new way of saving money, which came into being on Oct. 1.
The certificates pay 70 percent of the Treasury bill rate, with up to $1,000 per individual and $2,000 per married couple exempt from federal taxes. In middle-income brackets above about $35,000, the after-tax yield is superior to the taxable yield on most money market accounts.
But money market funds have continued to grow despite the advent of the all savers certificate, leading to the conclusion that, in large part, the flood of money into all savers comes out of passbooks, which means a near doubling of the interest rate that the savings institutions must pay.
Reagan also said that, in testimony next Monday before the Senate Banking Committee, he would ask for legislation giving banks and S&Ls alike the right to "take an equity position," that is, to own, real estate, and allowing banks, through a holding company relationship, to deal in securities and mutual funds.
He said that these new powers for banks and S&Ls are in line with the administration's commitment to deregulation, and that "the ultimate beneficiary" would be the consumer. Regan, who came to the administration from the Wall Street firm of Merrill Lynch, noted wryly that the proposed new powers for the banks "won't be greeted with joy by the Wall Street houses."