ELIMINATION OF RATE CEILINGS

Mr. BOLGER. I think we are confusing two issues. We are talking about the elimination of rate ceilings and we are talking about interest on transaction accounts. NOW transaction accounts are very volatile. To say they could be used for housing is just an insult to the intelligence of everybody here. They are very volatile and they are available and they will be used. So to say that paying interest on transaction accounts is going to improve the ability of the thrifts to help the housing markets is just ridiculous. People have to be restrained-it's human nature, if money is available, they will spend it, and——

Senator STEWART. Are you saying that a tradeoff between regulation Q and the right to pay interest on transaction accounts will not aid

Mr. BOLGER. No. What I'm saying is we're confusing two things: the elimination of regulation Q will also eliminate the differential and it will eventually possibly create more money for housing, but it will also result in probably 12-, 14-, 15-percent home mortgage rates; at least in today's inflationary markets, if the rates go up, the banks can't pay and the S. & L.'s can't pay 10 percent on the money market CD's and loan it out at 9, so the rates will have to go up.

Now the elimination of the rate ceilings might make more money available, but it would result in costlier money. There are things that confuse me here-the worst problem facing our country apparently is inflation, and I fail to see how any of this legislation would help inflation. In the wisdom of the Congress, they had the Hunt commission which they rejected; they had the Fine study which they rejected; and now by regulation we're coming in the back way, trying to homogenize all financial institutions although Congress did not adopt the Hunt Commission and they did not adopt the Fine study.

Senator STEWART. Well, I'm just trying to determine, very frankly, how we are not only helping the consumer but also providing money in the housing market area.

Mr. BOLGER. By giving thrifts transaction powers and powers

to-

Senator STEWART. Let me say something. I thought that one of the things that thrifts were going to be given is a tradeoff of the phasing out of regulation Q with some of these powers that would be available to them under this act. The rights of regulation Q, of keeping it in force, in effect, was hopefully to save or continue to keep money available for the housing market. If that's not a tradeoff, as I understand you're saying-

Mr. BOLGER. They can't borrow short and lend long. If they're going to get additional powers, they're going to have to get into consumer lending which is short term. You only loan in one place. You can't put it in consumer loans and mortgage loans both and the transaction accounts are very volatile. They move, and so you can't very well put that in 25- or 30-year mortgages. Maybe there's something I've missed, but I don't see how it could help the housing market.

Senator STEWART. That's what I'm trying to find out.

Mr. BOLGER. By the way, there are many commercial banks that are pretty heavy in the housing market also. About 70 percent of our loan portfolio is in home mortgages.

Senator STEWART. I've got some more questions, but I will ask them for the record.

Senator PROXMIRE. Senator Morgan, do you have any more questions for the record?

Senator MORGAN. I have some that I will submit. I do want to say to Mr. Leonard, with regard to consumer affairs, that while I may have been incorrect, I don't find anything in here specifically endorsing interest on checking accounts. There's an endorsement of the entire bill which carries it, although I thought I heard that, so I will follow through with that, but I would still ask the administration's position on whether or not allowing banks to pay interest on checking accounts can benefit the small consumer.

Mr. PROXMIRE. Would you identify yourself? You came with Mr. Bolger?

Mr. MADDOX. Mr. Chairman, my name is Charles Maddox. I'm past president of our association and president of a very small bank that would be about an average size bank. May I address the Chair a moment?

Mr. PROXMIRE. Go right ahead.

Mr. MADDOX. I believe, sir, that the central theme of this whole argument could revolve around the concept of homogenization being the answer of the problems of the financial institutions as well as the consumer, and I'd like to most strongly say, sir, that we do not believe it is. Down through the history of 75 or 80 years the commercial banks have had some very stringent regulations that have affected the way banks operate because of the severe, painful experiences that we have gone through, and through the wisdom of the Congress these separate types of institutions have been set up to serve particular interests and particular areas.

Now our argument, sir, is that all of the institutions as well as the consumers would not be better served by homogenizing them and making them all the same type. The savings and loans were given special powers when they were organized, special tax powers. They were given a differential and we felt that was advantageous because they were organized for the specific reason to serve the housing industry and they have served it well. And the credit unions were organized for a specific service within the common bond and in the industries in which they were located, and they have served it well there.

Now we fail to understand the concept, sir, that the consumer would be better served or there would be more money available by changing the banking industry basically from 14,000 banks to 40,000. The funds that are provided through transaction accounts, as brought out by my associate, are very volatile. It runs between 80 and 110 percent a month in deposits in regards to checks. They certainly would in no way help the housing industry.

VARIABLE MORTGAGE

The biggest help that we feel the housing industry could have through the savings and loans is some type of variable mortgage

that would provide the margin that they must have to operate. None of us can operate without a margin and maintain their financial integrity. Excuse me, sir. My time has run out.

Senator PROXMIRE. No. The timeclock should have been clicked off on Senator Stewart. That was run on Senator Stewart's time. So you may talk as long as you wish. Once we ask a question, you're free to go ahead. That's a technique a lot of witnesses don't catch on to. You seem to have done it very quickly.

Let me just say in response to Senator Morgan's very proper concern, I think you're right that we have to be cautious about this and careful about it. It's my understanding that this would only permit 10 percent of the assets of the S. & L.'s to be in consumer loans and commercial paper. It would be of some benefit some people feel for the S. & L.'s and housing because with VRM's, the Canadian rollovers and so forth they would have greater flexibility than they have had in the past in receiving a higher rate of interest to correspond to the fact that they would be paying a little more out. We don't have limitations on the checking accounts. The experience with NOW accounts in New England has been that they have been a very limited part in the operations up there and by and large, with some exceptions, they have been well received by the financial community.

Senator MORGAN. Mr. Chairman, if I knew that S. & L.'s would be limited to 10 percent consumer loans in the future, I wouldn't be so concerned for the homebuilding industry, but I'm convinced that once you remove the regulation Q and the interest benefits they have that if they are to compete in the money market they're going to have to go to more and more consumer loans, and this is a foot in the door and they will be right back here the next year and the next year saying: "We've got to go to 25 percent or 35 percent consumer loans in order to earn enough money to compete with the banks to get the money.'

Let me comment on Mr. Maddox' statement. Mr. Maddox, you made a very fine statement I think which is what concerns me because these institutions were tailored along some very special lines. S. & L.'s were created really to generate the home market for homeowners. The credit unions, because there was a common bond. The banks, for other purposes. And, as I say, all of them have been developed over a period of years with very strict and stringent rules and restrictions on the operations of all of them.

In these times of economic uncertainty, do you think that it would be wise to homogenize all of these institutions into sort of a single type financial institution, even over a period of 10 years, institutions which have been developed over a period of 75 or 100 years or what have you?

Mr. MADDOX. Well, Senator, as you well know, the banking industry has done a pretty good job down through the years, except the depression. After that period the banking industry has done a pretty fair job of serving the community and remaining silent. They have done a poor job when it came to bidding against each other on an unrestricted market. You are well aware of what happened when the wild card rights were taken off and they were bidding against each other. The money just went out like a flood and you know what happened, too, in 1973 and 1974 when the rates

went up and the Federal funds went up and some of the banks had to bid for this 14 and 15 percent money. Some extremely large banks were embarrassed.

Now there's no way you can get something for nothing. If you're going to pay a high interest rate on savings, you're going to charge more. I just came back from England and Scotland and they pay 11, 12, and 13 percent for savings; that's true; but they also charge 15-, 16-, 17-percent interest. If you're buying consumer products, it's 19 to 22 percent.

Now I recognize, sir, and I completely concur that your larger demand deposit individual is subsidizing the small checking account. I made an analysis in our bank and of the 4,923 accounts that would be affected by this NOW account interest, 3,168 of them only made up 10 percent of the money or 64 percent numerically of the individuals only made up 10 percent of my total funds. I could lose them all and not know it. Well, you know, I'm not interested in losing 10 percent of my demand funds, but the point I'm making is 719 or 15 percent of individuals made up $3,138,000. Now you're going to benefit consumers all right, but which consumers? I'm a consumer. You're not going to benefit the little consumer out there. This will average out somewhere around $150 an account. Senator MORGAN. These large savers or checking accounts? Mr. MADDOX. That's the heart of our bank.

Senator MORGAN. Aren't there people that understand the banking system well enough that if they wanted to earn interest, if they didn't have immediate need for their money, they would put it in a savings account?

Mr. MADDOX. All they've got to do is write a check and put it in or we'll do it automatically. If they give us instructions to take it out, we'll take it out.

Senator MORGAN. It seems to me what we're trying to do is we're saying we perhaps know better how to look after their business than they do and we would provide for them.

Excuse me, Mr. Williams. I know you had a comment.

CONSUMER LOANS

Mr. WILLIAMS. Senator Morgan, if I could make a comment. I agree that's why all the organizations-you know, credit unions were organized to make consumer loans because the banking industry made commercial loans. Consumer loans were not available to the general public. Therefore, in the early 1900's credit unions came into existence. Mortgage lending companies came into existence and became very dominant after World War II, if you will, but I just heard Mr. Bolger I believe state a moment ago that 70 percent of his loan portfolio were in mortgage loans. So it would appear to me there's already been even in the small community bank a change in the manner in which they're operating. I have no objection to 70 percent of his loan portfolio being in mortgage loans, but if a community bank is there to make commercial loans in the community and also now making consumer loans, I wonder if his bank has not become more of an S. & L. than it has a commercial bank.

Mr. BOLGER. I'd like to answer the gentleman if I may. We didn't just get into the mortgage field. We have been in it because that's what the demand is. We are a bank of $125 million in a town of 8,500 people. We got there on the idea that we're an all-service bank. We cannot solicit a commercial account if a new business comes to town and say we are not interested in taking care of the mortgage for your executives and we're not interested in your consumer loans. We are a full-service bank. The demand in our particular area is for home loans. The Community Reinvestment Act doesn't bother us at all. All the Community Reinvestment Act says is do what you have been doing for 75 years. So we are a commercial bank. We make a return for our stockholders, and while we are on the subject, I would like to correct a statement made by somebody that the credit unions' profits go to their depositors instead of a few stockholders. I have never chartered or attempted to charter an S. & L. or a credit union, but I know what it costs in capital in American dollars to charter a commercial bank. I don't think there's a commercial bank chartered anywhere in the country under $1 million capital today. So there is private investment that stands to be lost by the investors. That's one of the differences. We say why adopt the Hunt commission or the Fine study since Congress has turned it down before, and I think we're going at it the back way.

COST OF SHARE DRAFT PROGRAM

Mr. GEORGE. Senator Morgan, you asked earlier about the cost of the share draft program or that type account. It should be noted in a statement by Robert H. McKinney, Chairman of the Federal Home Loan Bank Board, that he stated on May 16 to the Subcommittee on Financial Institutions:

It is significant that the records in New England indicate, and in Massachusetts, that only a handful of commercial banks offer free NOW accounts. The Federal Reserve data indicates that during March 1978 commercial banks paid $4.4 million in interest on NOW accounts and collected $228,000 in service charges. In Connecticut, where NOW accounts have been priced more conservatively, banks paid $1.1 million in interest in March 1978, and collected $3,000 in service charges. Savings and loans associations in New England, which typically pay 5 percent from the date of the deposit to the date of withdrawal and have paid $1.1 million in interest in 1978.

It's kind of hard to argue with these figures.

Senator MORGAN. If you trust them, it is, but that's not the testimony. You have taken them a little out of context. These people were down here from New England and testified themselves as to the breakeven for it and if you go back and look at the record you will find there is a breakeven point, and that the consensus was it was around $900.

Senator PROXMIRE. Gentlemen, thank you very much. I think you have made an excellent record and we are very grateful for your fine testimony.

Our next witnesses are Mr. Henry B. Schechter, director, Department of Urban Affairs, AFL-CIO; Mr. Vondal S. Gravlee, president, National Association of Homebuilders; and Mr. Paul Schosberg, president, Savings Association League of New York.