Economic Report of the President

TABLE 11.—Selected financial regulatory changes, 1970-80DateChangeJune 1970September 1970June 1972May 1973January 1974August 1974November 1974April 1975November 1975.. . . .,February 1976May 1976June 1978October 1978November 1978July 1979January 1980March 1980Regulation Q ceilings on time deposits of $100,000 or more with maturities of 30-89days suspended.Federally chartered savings and loan associations permitted to make preauttiorizednonnegotiable transfers from savings accounts for household-related expenditures.State-chartered mutual savings banks in Massachusetts began offering NOW accounts.Regulation Q ceilings on time deposits of $100,000 or more with maturities exceeding90 days suspended.All depository institutions in Massachusetts and New Hampshire authorized byCongress to offer NOW accounts.Selected Federal credit unions permitted to issue credit union share drafts, check-likeinstruments payable through a commercial bank.Commercial banks permitted to offer savings accounts to State and local governmentunits.Member banks authorized by the Federal Reserve to make transfers from a customer'ssavings account to a demand deposit account upon telephone order from thecustomer.Commerciat banks authorized to offer savings accounts to businesses.Congress extended NOW accounts to all New England states.New York permitted checking accounts at State-chartered mutual savings banks andsavings and loans.'Six-month money market certificates (MMCs) introduced at banks and thrifts.Congress extended NOW account authority to New York State.Commercial banks and mutual savings banks authorized to offer automatic transfer(ATS) from a savings account to a checking account or other type of transactionsaccount.A floating ceiling for time deposits at banks and thrifts with a maturity of 4 years ormore established.The floating ceiling extended to time deposits with a maturity of 2Vz years or more.The Depository Institutions Deregulation and Monetary Control Act of 1980 enacted.ADAPTING TO GREATER RATE VARIABILITYWhile the depository institutions were adapting to greater competitionand the high interest rate environment, they also faced the problemof growing interest rate risk. Increased rate variability and theupward ratcheting of interest rates have been especially troublesometo these institutions because their liabilities have traditionally maturedmore quickly than their assets. Moreover, while the new typesof variable-rate instruments have allowed them to keep many of theirdepositors, these instruments have facilitated a shift of funds fromstable, low-interest savings accounts to more variable and higher interestliabilities. Consequently, as market interest rates rise, so do therates they must pay on their liabilities. When this happens, banks andthrifts lose income because the yield on their longer-term assets doesnot rise commensurately.Depository institutions have responded to this problem by shorteningthe maturities of their loans and by offering loans whose interestrates are frequently adjusted over the course of the loan to prevailingmarket rates. In 1980, for example, almost 70 percent of term businessloans extended by commercial banks had floating interest rates.Similarly, banks and thrift institutions have introduced new mortgageinstruments—including the variable-rate mortgage and the rolloverratemortgage—whose rates are adjusted every year or so—in starkcontrast to the traditional 30-year, fixed-rate mortgage. The thrift institutionsalso sought to remove the legislative restrictions on their110