Depository Institutions Deregulation and Monetary Control Act of 1980

Verle Johnston

English

Research Papers in Economics

April 4, 1980 
Historic Legislation 
The Depository Institutions Deregulation and 
Monetary Control Act of 1980, which was 
signed into law this week by the President, 
is an historic piece of financial legislation. 
Over time, it should help accomplish three 
major goals; nam~ly, 
* Promoting greater competition in the 
financial markets, primarily by phasing out 
deposit interest-rate ceilings and by broaden-
ing the asset and payment powers of banks 
and thrift institutions; 
*  Supporting equity and improving monetary 
control, by extending reserve requirements 
to all depository institutions with transactions 
(ch~g<-type) accounts and non-personal time 
deposits; and 
* Solving the problem of declining Federal 
Reserve membership, by reducing the cost 
of reserve requirements for member banks. 
A major feature of  the new legislation is its 
increased reliance on market forces to deter-
mine future levels of deposit interest rates. 
The entire process may require six years to 
complete, but in the meantime, the Federal 
regulatory agencies have the authority to 
initiate a gradual phase-out of rate ceilings. 
Also, during the transition period, thrift 
institutions may retain their present 
1  /4-percentage point rate differential on 
many time and savings deposits, in relation 
to commercial-bank rates. 
Phasing-out ceilings 
The new policy reflects the inability of rate 
ceilings, in an era of inflation and high inter-
est rates, to prevent outflows of funds (dis-
intermediation) from depository institutions. 
This phenomenon had occurred despite par-
tial rate decontrol, as evidenced by the 
removal of ceilings on "jumbo" ($100,000 
and over) time certificates a decade ago, and 
by the effective removal of ceilings on large 
($10,000 and over) money-market certifi-
cates almost two years ago. Moreover, the 
effective removal of rate ceilings on large 
time deposits has carried a political handi-
cap, because such deposits recently have 
been paying almost three times as much 
interest as the passbook savings held by 
millions of small savers. 
Still, Congress has ordained a slow phase-
out of rate ceilings because of the difficulties 
created for depository institutions-
principally thrift institutions-by a mismatch 
between the rates they currently pay on short-
term sources of funds and the rates they earn 
on long-term mortgages. Perhaps one-half 
of  the $475 billion in mortgages held by 
savings-and-Ioan associations carry yields 
of 7Y2-percent or less-while only about 
one-fifteenth of S&L mortgage loans carry 
yields approximating those on the money-
market certificates which now account for 
more than one-third of all S&L deposits. 
Recognizing this problem, Congress in the 
new law mandated a study of  the subject 
by the financial regulatory agencies, the 
Treasury~ and the Department of Housing and 
Urban Development. 
Improving the asset mix 
Going further, Congress took several steps to 
improve the asset mix of  thrift institutions. It 
authorized S&L's to issue and extend credit 
on credit cards, to exercise trust powers, and 
to invest up to 20 percent of assets in con-
sumer loans and in various types of  corporate 
debt. Also, it authorized mutual savings 
banks to offer checking accounts to business 
customers and to place as much as 5 percent 
of  their assets in commercial loans to institu-
tions located in the same market area. 
Again, the new legislation eased limitations 
on lending rates at depository institutions. 
Congress increased the interest-rate ceiling 
on credit-union loans from 12 to 15 percent, 
and authorized the Credit Union National 
Administration to impose further short-term 
increases when required by money-market 
conditions. Moreover, Congress pre-empted 
state usury ceilings on mortgage loans and in this  new~~:!ctt(:r do net 
R,~~<:;er\!e Bank of San 
nor 01  the Board of  C~OV(:'iTH:)rS cd  the  h-:del;:t! 
Re~)f'l\!e 
on business and agricultural loans over 
$25,000-and on the latter, permitted 
an interest rate of not more than 5 percent 
above the Federal Reserve's discount rate, 
including surcharge. The pre-emption would 
be permanent for mortgage loans and wou  Id 
cover a three-year period for commercial 
loans, but in both cases could be overridden 
by state legislative action. 
Broadening payments powers 
Congress also broadened depository-
institution payments powers, by legalizing 
certain innovations which had been devel-
oped by the industry in recent years, but 
which had been ruled illegal by a Federal 
court last year. (This gave a certain urgency to 
passage of the legislation, because interim 
authorit)dor these activities was scheduled· 
to expire on March 31.) Commercial-bank 
automatic-transfer (from savings) accounts, 
credit-union share drafts, and thrift-institution 
remote service units may operate henceforth 
without legal restriction. NOW accounts 
(negotiable  orders  of withdrawal)  for  indi 
viduals and non-profit organizations will 
receive permanent authorization nationwide 
next December 31, broadening the foothold 
which they now hold in New England, New 
York and New Jersey. 
While broadening thrift-institution powers, 
Congress also recognized that they had 
already begun to offer deposits similar 
to commercial-bank deposits-and thus 
decided that they should conform to similar 
ground rules, for both equity and monetary-· 
control purposes. Hence, it made transaction 
accounts and non-personal time accounts 
2 
of all depository institutions subject to 
Federal Reserve reserve requirements. 
"Transaction" accounts include bank 
demand deposits, interest-bearing NOW's, 
share drafts, ATS accounts, and phone trans-
fers and other accounts subject to transfer 
to third parties. 
Imposing reserve requirements 
On transaction accounts, the reserve require-
ment after a phase-in period will be 3 per-
cent on the first $25 million and, initially, 
12 percent on larger amounts. (The $25-mil-
lion base will be indexed at 80 percent, i.e., 
increased at a rate equal to 80 percent of the 
annual growth:  rate of aggregate transaction 
accounts at all depository institutions.) On 
non-personal time deposits, the initial reserve 
requirement will be 3 percent. The Federal· 
Reserve wi  II have the power to change re-
serve requirements within a range of 8 to 
14 percent for transaction accounts, and 
within a range of 0 to 9 percent for non-
personal time deposits. Under certain condi-
tions, the Fed can impose a supplementary 
reserve up to 4 percent on transaction 
accounts, which will earn interest at the aver-
age yield earned by the Fed's portfolio of 
securities during the preceding quarter. Also, 
under certain emergency conditions, the Fed 
will have standby authority to impose reserve 
requirements outside the normal limits, or 
to impose requirements on any liability. 
For most depository institutions which aren't 
Federal Reserve members, the reserve provi-
sions will be phased-in over an eight-year 
period, starting six months from now. (How-
ever, NOW accounts will be subject to full 
reserve requirements after next December 31.) 
Federal Reserve members can expect reduc-
tions in reserve requirements, as noted 
below, and these will be phased-in over a 
four-year period. 
Shifting the burden 
Roughly 17,000 institutions will be subject to 
reserve requirements, including about 5,400 
member banks, 9,000 nonmember banks, 
and initially, about 3,400 S&L's and mutual savings banks. Somewhat over two-fifths 
of all these institutions, as well as a number 
of large credit unions, will have to hold 
balances at Federal Reserve Banks, over and 
above the portion of their reserve require-
ments met by hold  i  ngs of vau It cash -wh  i  ch 
means that vault cash alone will satisfy 
reserve requirements at the other institutions. 
Based on December 1979 data, required re-
serves held at the Fed (when fully phased-in) 
wou  Id amou nt to about $1 3  V2  bi II ion for 
member banks and about $3  billion for 
other institutions. 
Member banks will benefit considerably from 
the new reserve structure, which will result in 
a 43-percent reduction in their aggregate 
reserves, and a 58-percent reduction in re-
serves at the Fed~ This"action carrie not a 
minute too soon, however, because the Fed-
eral Reserve has been subject to heavy attri-
tion recently, reflecting financial innovation, 
shifting competitive patterns, and strong in-
!Iationary pressures with their related high 
Interest rates. Thus, many banks have found it 
progressively more costly and more difficult 
to justify continuation of membership, since 
they (unlike their non-member competitors) 
cou Id not earn interest on thei r reserves. In 
late 1979 and early 1980,69 banks dropped 
their membership, and about 670 other banks 
reportedly were considering withdrawal-
altogether, more than 11  percent of the Sys-
tem's membership. If all had actually with-
drawn, deposits of banks holding reserves 
with the System wou  Id have fallen to 
64 percent of total banking-system deposits 
-compared with a 73-percent share held 
three years ago. 
Access and pricing rules 
Nonmember institutions, being subject to 
reserve requirements for the first time, in 
return will receive access to certain Federal 
Reserve services, including access to the 
Fed's discount window. Any depository insti-
tution with transactions or non-personal time 
deposits will be entitled to the same discount 
and borrowing privileges now open to mem-
3 
ber banks. Moreover, in administering the 
discount window, Reserve Banks will take 
into consideration the special needs of sav-
ings and other depository institutions. 
Another far-reaching change will be the 
implementation, no later than 18 months 
from now, of pricing schedules for most 
Federal Reserve services. These would 
encompass the provision of currency and 
coin, check clearing, wire transfers, 
automated clearinghouse services, securities 
safekeeping, float (checks in process of col-
lection), and "any new service which the 
Federal Reserve provides." These services 
shall be made available to non-member 
depository institutions at the same prices 
available to member banks. The fees would 
cover all directand indirect costs actually. 
incurred in providing services, including the 
taxes and return on capital that would have 
been incurred by a private firm providing 
similar services-but with due regard to 
competitive factors and the provision of an 
adequate level of services nationwide. 
The new law covers a great deal more, in-
cluding a Congressional mandate to simplify 
the mass of regulations stemming from earlier 
Congressional legislation. But Congress' 
main purpose has been to reduce competitive 
barriers and to institute a "more level playing 
field" in the American financial system, 
while broadening and strengthening the Fed-
eral Reserve's monetary-control procedures. 
In these respects, it is truly the most far-
reaching piece of financial legislation of the 
past generation. 
Verle Johnston .JUt':) 'o:)sput'J:I ut'S 
ZSL ·ON llWH:ld 
GIVd 
:l9V  lSOd ·s·n 
llVW SSV1:) lSHI:I 
55'o'1!:> 15l:J1:J 
U01SU!4SEM.4Eln •  uoSaJO •  EpEl\aN  •  o4EPI 
!!EMEH  •  E!UJoJ!IE:)  EUOZpV.  E>jsEIV 
CD):2)~  ~:2)  \~JT~  ell d[ \ill,@cg 
~  CD)  4I 'ill'@car 
@~ell@~@(Q( TI,@ell@~@d[ 
:{J, \ill~m:{J,Jl~dI~cm ~~J(~~<§~CQI 
RANKING DATA-TWELfTH FEDERAL RESERVE DISTRICT 
(Dollar amounts in millions) 
Selected Assets and liabilities 
large Commercial 8anks 
Loans (gross, adjusted) and investments* 
Loans (gross, adjusted) - total# 
Commercial and industrial 
Real estate 
Loans to individuals 
Securities loans 
U.s. Treasury securities* 
Other securities* 
Demand deposits - total# 
Demand deposits - adjusted 
Savings deposits - total' 
Time deposits - total # 
Individuals, part. & corp. 
(Large negotiable CD's) 
Weekly Averages 
of Daily Figures 
Member 8ank Reserve Position 
Excess Reserves (  +  )/Deficiency (  -) 
Borrowings 
Net free reserves (+  )/Net borrowed( - ) 
Federal Funds** 
.* Excludes trading account securities. 
#  Includes items not shown separately. 
Amount 
Outstanding 
3/19/80 
138,540 
116,414 
33,798 
45,202 
24,506 
1,340 
6,725 
'15,401 
43,475 
30,698 
27,321 
61,080 
52,462 
21,601 
Weekended 
3/19/80 
20 
263 
243 
Change 
from 
3/12/80 
- 72 
49 
+  159 
+  220 
+  10 
+  50 
- 11 
- 12 
519 
-1,317 
- 290 
+  708 
+  706 
+  187 
Change from 
year ago 
Dollar  Percent 
+  15,882  +  12.9 
+  16,192  +  16.2 
+  4,442  +  15.1 
+  8,943  +  24.7 
+  3,488  +  16.6 
- 183  - 12.0 
- 1,047  - 13.5 
+  737  +  5.0 
+  4,445  +  11.4 
+  1,872  +  6.5 
2,509  - 8.4 
+  10,671  +  21.2 
+  11,629  +  28.5 
+  3,660  +  20.4 
Weekended 
3/12/80 
Comparable 
year-ago pericid 
11 
182 
- 171 
44 
34 
78 
** The  revised  series  on, Federal  Funds  and  Repurchase  Agreement  Borrowings  (FR 2415)  is available on 
request from the Statistical and Data Services Department of the Federal Reserve Bank of San Francisco. 
Editorial comments may be addressed to the editor (William 8urke) or to the author .... Free copies of this 
and other Federal Reserve publications can be obtained by calling or writing'the Public Information Section, 
Federal Reserve 8ank of San Francisco, P.O. Box 7702, San Francisco 94120. Phone (415) 544-2184. 

Historic legislation

http://www.frbsf.org/publications/economics/letter/1980/el80-14.pdf

Historic legislation

Abstract

Similar works

Full text

Available Versions

Research Papers in Economics