The Savings and Loan Industry: Current Problems and Possible Solutions

By Walter J. Woerheide | Go to book overview

7
The Elimination of Interest Rate Ceilings

The revolution in the liability structure of the SLA industry which began during the seventies has accelerated during the first half of the eighties. This acceleration has occurred in part because of the inclusion in the Depository Institutions Deregulation and Monetary Control Act of the provisions that require interest rate ceilings be phased out by 1986 and all SLAs be given the authority to offer negotiable order of withdrawal or NOW accounts beginning January 1, 1981. As part of the phaseout process, several new types of accounts, such as the money market deposit account and the "Super NOW" account, have been authorized for SEAs. These two events will greatly affect the interest rate risk exposure and profitability of the thrift institutions.


THE CREATION OF INTEREST RATE CEILINGS

Most of the aspects of the actual history of interest rate ceilings in the SLA industry were provided in Chapter 1, so it will be unnecessary to repeat all of that material here. However, it will be appropriate to start the discussion by reviewing briefly the history of ceilings in the banking industry.

Although interest rate ceilings were not imposed on the thrift industry until 1966, they were established for the commercial banking industry in 1933. Ostensibly, the banking ceilings were established to eliminate the "cut-throat" competition among commercial banks which was supposedly one of the causes of the banking collapse in that period. 1 As a practical matter, Congress gave ceilings to the banking industry as compensation for getting it to accept federal deposit insurance? 2 Compensation was needed because in 1933, the premiums associated with deposit insurance were viewed by many in the banking industry as too expensive.

This imposition of ceilings was not an economically significant event because from 1933 until 1956, market interest rates (defined here as the yield on three- month Treasury bills) were continually and substantially below ceiling rates. In 1957 and 1962, the ceilings were raised as market rates approached the ceilings.

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The Savings and Loan Industry: Current Problems and Possible Solutions
Table of contents

Table of contents

  • Title Page iii
  • Contents vii
  • Tables ix
  • Acknowledgments xi
  • Introduction xiii
  • Note xv
  • Abbreviations xvii
  • 1 - History of the Federal Home Loan Bank System 3
  • Notes 23
  • 2 - The Determinants of Profitability for Savings and Loans 28
  • 3 - Measuring the Interest Rate Risk Exposure of Savings and Loans 49
  • Notes 67
  • 4 - Alternative Mortgage Instruments 70
  • Notes 97
  • 5 - Financial Futures and Forward Commitments 104
  • Notes 121
  • 6 - Consumer Lending 124
  • Notes 135
  • 7 - The Elimination of Interest Rate Ceilings 138
  • Notes 148
  • 8 - The Introduction of Now Accounts 152
  • Notes 160
  • 9 - Mergers and Conversions 163
  • SUMMARY AND CONCLUSIONS 184
  • 10 - The Future 189
  • Notes 195
  • Bibliography 197
  • Index 211
  • About the Author 217
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