The Savings and Loan Industry: Current Problems and Possible Solutions

By Walter J. Woerheide | Go to book overview

Even though any one actual deposit into a NOW account may have a fairly short life, what matters to the institution is the average balance of a NOW account. If the average balance is stable over time, then for all practical purposes, the NOW account may have a fairly long de facto maturity. As a long-lived, interest-insensitive deposit, NOW accounts would have a large effective duration. NOW accounts, then, may make a fairly large contribution to reducing the interest rate risk exposure of SLAs.


CONCLUSIONS

The empirical evidence about NOWs suggests that they will be highly beneficial to the SLA industry. They are the crucial element in attracting other types of business. There is no indication that they have hurt the profitability of the SLAs which have offered them and some indication they may have helped their profitability. It should be noted, however, that not all thrifts have offered NOWs at the first available opportunity. Presumably, the smaller, less aggressive thrifts will be the last ones to offer them.

The NOW accounts should be extremely beneficial in terms of reducing the interest rate risk exposure of SLAs. Although NOW accounts, like passbook accounts, technically have an instant maturity and thus a zero duration, average balances for NOW accounts are highly stable and relatively interest insensitive. This means that the effective duration will be substantially larger than zero. So whereas passbook accounts are prone to periods of disintermediation, NOW accounts are not.


NOTES
1.
Joanne H. Frodin and Richard Startz, "The NOW Account Experiment and the Demand for Money," Working Paper No. 11-79, Rodney F. White Center for Financial Research, University of Pennsylvania, 1979, p. 3.
2.
See B. G. Hartzog Jr., "Nationwide NOW Accounts: Questions and Answers," Federal Home Loan Bank Board Journal, January 1980, pp. 2-5.
3.
Ralph C. Kimball, "The Maturing of the NOW Account in New England," New England Economic Review, July/August 1978, p. 27.
4.
Ralph C. Kimball, "Variations in the New England NOW Account Experiment," New England Economic Review, November/December 1980, p. 25.
5.
Lewis Mandell and Neil B. Murphy, "NOW Accounts: The First Decade," a paper presented at the 1981 Financial Management Association meeting in Cincinnati, Ohio, p. 9.
6.
An AT account is one in which customers may automatically transfer deposits from their savings accounts to their checking accounts.
7.
Mandell and Murphy, "NOW accounts," p. 10.
8.
David A. Walker, "Effects of Financial Deregulation on Bank and Thrift Institution Competition," a paper presented at the November 1981 Southern Finance Association meeting in New Orleans, Louisiana, p. 9.

-160-

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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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