The Savings and Loan Industry: Current Problems and Possible Solutions

By Walter J. Woerheide | Go to book overview

8
The Introduction of NOW Accounts

The prohibition of interest payments on demand deposits was established in 1933 at the same time and for the same reasons as the creation of interest rate ceilings for the commercial banking industry. This prohibition can be viewed as setting the interest rate ceiling on checking accounts at zero. Savings and loans were not at that time authorized to issue demand deposits. As described in Chapter 1, the first thrift NOW account was offered by the Consumer Savings Bank in Worcester, Massachusetts in 1972. This offering represented a successful attempt to by-pass one aspect of the regulatory control of the industry. The idea for the NOW account had originated in 1970. Savings banks in Massachusetts were already then allowed to waive the 30-day withdrawal notice for regular savings accounts and could give withdrawals in the form of counterchecks made payable to a third party. The Worcester bank only proposed changing the site of the creations of the third party draft. It was not until two years later that the Massachusetts Supreme Judicial Court decided that the Consumer Savings Bank had a valid point. 1 The initial spreading of the NOW account to commercial banks in Massachusetts, to the rest of the New England states, and then to New York and New Jersey was a regulatory-controlled evolvement. The spreading of NOW accounts to the rest of the country was accomplished in one quick jump through Title III of the DIDMCA which was called the Consumer Checking Account Equity Act. The final, full authorization for NOW accounts was given as part of the compensation to the SLA industry for the phasing out of the interest rate differential that was implicit in the interest rate ceilings. 2 By the time of this writing, the NOW accounts have become an extremely widespread deposit offering.

As with their many other new powers, the relevant questions concerning the NOW accounts are how will they affect the risk exposure and the profitability of the SLA industry? The fact that NOW accounts have been utilized in the New England area for several years and nationwide for over two years permits examination of their effect on the SLA industry and allows us to draw some conclusions with respect to the above-mentioned questions.

-152-

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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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