Federal banking regulators, in a series of decisions designed to attract new savings deposits to the nation's beleaguered savings and loan industry, yesterday authorized a new 91-day certificate aimed at large investors and moved to eliminate interest rate ceilings on small savers' certificates.
Starting May 1, banks and savings institutions will be able to offer a new 91-day insured savings certificate with $7,500 minimums and an interest rate tied to comparable Treasury bills, to permit the financial institutions to compete for large deposits with rapidly expanding money market mutual funds.
In addition, banks and savings and loan associations will be able to offer 3 1/2-year or longer-term savings certificates with small minimum deposits and no interest rate ceilings, also starting May 1. Institutions must offer a $500 minimum certificate but may elect to offer other denominations as well; some banks and S&Ls currently have $100 minimums, for example.
The 91-day certificate represents a compromise between the interests of commercial banks and S&Ls. Bankers wanted to be able to offer an instrument that could compete with money market mutual funds while thrift institutions feared anything that would drive up their costs by giving savers a chance to turn their low-yielding passbook accounts into high-yielding time deposits.
Savings and loans and mutual savings banks will be able to pay one-quarter percentage point more interest than commercial banks for one year or until Treasury bill rates decline to 9 percent for four consecutive weeks; bill rates at yesterday's weekly auction exceeded 12 1/2 percent.
These terms were set during a 90-minute meeting yesterday of the Depository Institutions Deregulation Committee (DIDC). At one point the panel's chairman, Treasury Secretary Donald T. Regan, referred to the new certificate as a "camel," meaning an imperfect creature created by a committee.
Given the dissension among the regulators, Federal Reserve Chairman Paul A. Volcker asked that action be delayed for a month. But Regan insisted the DIDC come up with something forthwith because "we can't sit idly by and do nothing for the thrifts." The DIDC staff was also charged with suggesting modifications or a new certificate in the next 30 days.
Savings and loans and mutual savings banks suffered operating losses of $6.4 billion last year. Depositors withdrew $25 billion more from savings accounts than they deposited, moving their funds to higher-yielding money market funds or similar accounts at commercial banks that they perceive to be sounder. Money market fund investments, meanwhile, rose to a record $190 billion as of last week.
The American Bankers Association denounced the new certificate, saying it would not stem the flow of funds out of depository institutions into money market funds. "The one-quarter percentage point differential will mean that thrifts will become even more reliant on short-term, interest-rate-sensitive funds at a time when they need to stretch out the maturity and stabilize their deposits. This shortsighted action only postpones and possibly exacerbates the day of reckoning for thrift institutions," said the bankers' trade group.
Roy Green, chairman of the U.S. League of Savings Associations, hailed the new short-term certificate. "We believe it will appeal to many savers who up to now have been investing the money market funds, but who have been asking for a short-term insured certificate account with a market level interest rate. The differential will mean a resumption of savings flows into thrift institutions," he forecast.
Before DIDC's deliberations, Regan made a statement pledging the administration would take "all necessary steps" to assure that the federal agencies insuring Americans' deposits would have enough funds to meet any emergency.