Financial History Issue 118 (Summer 2016) | Page 33
The Beginning of Bank
Deregulation in Post-War America
Realizing the need to act swiftly, the
Carter administration summoned a task
force to review the state of the banking,
thrift and savings & loan associations’
health in the US, as well as how to address
these rising problems affecting the economy. In August 1979, the administration’s
Inter-Agency Task Force on Regulation
Library of Congress
spurred companies to adopt financially
innovative investment vehicles that utilized a mixture of regulatory “creative
compliance,” as well as financial engineering to generate better returns for their
customers and to attract new business in
the face of rising costs. Principal among
the emerging products were the negotiable
on withdrawal (NOW) accounts and the
money market certificate.
NOW accounts benefitted depositors by
acting like time deposits, but banks, thrifts
and savings & loans associations could
offer transaction accounts with interest,
which skirted the Regulation Q requirements that barred offering interest on
demand accounts (e.g. deposit accounts
without fixed maturities). Because these
were not subject directly to the interest
rate ceilings under Regulation Q, customers benefitted by way of higher yields and
having the ability to withdraw money on
demand.
On the other hand, money market certificates emerged as a way to earn favorable,
market-based yield with fixed maturity
deposits in fixed sums. These instruments
gained popularity due to the fact that
they issued an interest rate pegged to sixmonth Treasury certificates with the same
maturity date and a minimum deposit of
$10,000. Similarly, mutual funds — which
were competing with banks and thrifts for
investor business from would be depositors-turned-savers, began offering money
market mutual funds, which pooled investor cash into a fund to generate higher
yields on government bonds, commercial
paper and other forms of debt without the
oversight (or FDIC protection) of the government. In the face of the rising pressure
that banks and thrifts faced against inflation, financial innovation and regulation,
the government needed to act in order to
right the course moving forward.
This is not only a
significant step in
reducing inflation, but
it’s a major victory for
savers, and particularly
for small savers. It’s
a progressive step for
stronger financial
institutions of all kinds…
— President Jimmy Carter
Q offered an official report which recommended several key measures the government should effectuate through legislative
means, including liberalizing the market for higher yielding account products,
increasing Federal Reserve oversight of
financial institutions and lifting interest
rate ceilings. Specifically, the report noted
the importance of the financial innovation
taking place in the market, stating:
Traditionally, savings institutions
relied on their interest-rate differential
on deposits to offset their inability
to offer transaction accounts… The
attractiveness to the public of interest-bearing transaction accounts has
been amply demonstrated. Indeed, the
very rapid growth of the money market mutual funds is attributable in
part to the fact that balances can be
withdrawn by means of a check-like
investment.
These recommendations passed both
the House and the Senate, and they were
signed into law on March 31, 1980 by
President Carter as the Depository Institutions Deregulation and Monetary Control Act (DIDMCA). Upon signing the
bill, President Carter noted the impact the
measures would have on easing savings
capacities for smaller investors, access to
financing on behalf of banking and savings institutions and liberalization of the
financial services offerings available to the
industry. He stated:
This is not only a significant step in
reducing inflation, but it’s a major
victory for savers, and particularly
for small savers. It’s a progressive
step for stronger financial institutions of all kinds…our banks and
savings institutions are hampered by
a wide range of outdated, unfair and
unworkable regulations. Especially
unfair are interest rate ceilings that
prohibit small savers from receiving
a fair market return on their deposits. It’s a serious inequity that favors
rich investors over the average savers. Today’s legislation will gradually
eliminate these ceilings and allow,
through competition, higher rates
for savers.
The act effectuated several key changes
which took place over the following several years. First, interest rate ceilings via
Regulation Q were gradually lifted until
1986, when they were completely removed.
Financial institutions of all types could
now offer the NOW account, providing an
alternative to traditional demand and time
deposit accounts. All financial institutions
that accept deposits were required under
the Monetary Control Act to maintain
reserves with the Federal Reserve, which
provided them access to funds and discounts, albeit with some cost when compared against market rates. But did these
changes actually help?
As the DIDMCA went into effect, inflation in the US reached the incredible
height of 13.5%, and the Federal funds rate
reached 18.90% by the end of the year. Even
as thrifts, savings & loans associations and
mutual savings banks were able to offer
a more diverse range of accounts to consumers — in addition to taking on larger
investments
» continued on page 39
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