S. 1873 was referred to the full committee which met to consider the legislation on August 2-3, 1977. On August 3, the committee, by a vote of 10 to 5, ordered reported to the Senate an original bill. As ordered reported, the bill incorporates, with amendments, title I of S. 1664 and titles II-VI of S. 1873.

Members voting in favor of reporting the bill were: Proxmire, Sparkman, Williams, McIntyre, Cranston, Stevenson, Sarbanes, Brooke, Heinz, and Schmitt. Members voting nay were: Morgan, Riegle, Tower, Garn, and Lugar.

NOW ACCOUNTS

1. Explanation and background of NOW accounts and share draft

accounts

NOW accounts are savings accounts from which funds may be withdrawn by means of a negotiable order of withdrawal. As with all savings accounts, 30 days notice may be required before funds are withdrawn. Since prior notice is not required in practice and since the negotiable order functions essentially like a check, NOW accounts provide the convenience of a checking account while paying interest like a savings account.

Until the introduction of NOW accounts, depositors were forced to choose between these two features-convenience and interest-because the payment of interest on demand deposits (checking accounts) is prohibited by Federal law and the usual passbook form of withdrawal from a savings account is not a convenient substitute for a check.

In July of 1970, Consumer Savings Bank in Worcester, Mass., sought to obtain State regulatory approval to offer NOW accounts on the premise that the State charter for mutual savings banks permitted withdrawals from savings accounts by NOW drafts. Litigation followed an adverse ruling by the State Commissioner of Banks and the NOW authority was affirmed by the Massachusetts Supreme Judicial Court in May of 1972. Thereafter, Consumer Savings Bank and a number of other Massachusetts mutual savings banks began offering NOW accounts. In September of that year, the New Hampshire Savings Bank in Concord began offering NOW accounts for the first time in that State.

The subsequent spread of NOW accounts among mutual savings banks in the two States gave rise to much argument and debate among competing financial institutions and State and Federal regulatory agencies. Ultimately, the issue was left for Congress to decide legislatively.

Congress responded by passing Public Law 93-100, signed into law on August 16, 1973. The law authorized all depository financial institutions except credit unions in Massachusetts and New Hampshire to offer NOW accounts but prohibited them outside these two States. As a result of this legislation, regulations of the Federal Reserve Board, the Federal Home Loan Bank Board and the Federal Deposit Insurance Corporation limited NOW accounts to individuals, and charitable and other non-profit organizations and prescribed a uniform interest rate ceiling of 5 percent. Reserve requirements against NOW accounts were set in the same manner as on other savings accounts. Under these rules, commercial banks, savings and loan associations, and cooperative banks (similar to State chartered savings and loans) were authorized to begin offering NOW accounts as of January 1, 1974. The following years brought newly enacted State laws, particularly in Connecticut and Maine, providing more liberal powers for State

chartered depository institutions, including checking account powers. In order to insure competitive parity for federally chartered institutions in the face of these State laws, Congress enacted Public Law 94-222, authorizing NOW accounts in the remaining New England States of Connecticut, Maine, Rhode Island and Vermont. This legislation became effective on February 27, 1976.

The growth and success of NOW accounts in New England reflect substantial consumer acceptance of the service. Total NOW account deposits at all offering institutions rose from $11 million in September of 1972 to over $500 million by May of 1975, and passed the $2 billion mark in late 1976. As shown in Tables I and II, by May 31, 1977, a total of 1.3 million NOW accounts totalling over $1.8 billion had been opened in Massachusetts and New Hampshire and 79 percent of the financial institutions offered such accounts. In the other four New England States, with the NOW authority in effect a little over a year, a total of 160,000 NOW accounts totalling $520 million had been opened and 55 percent of the financial institutions offered the services. In New England as a whole, 1.5 million NOW accounts totalling $2.3 billion were outstanding and 69 percent of all financial institutions participated.

Commercial banks held 63 percent of total NOW deposits, mutual savings banks held 28 percent and the balance of 9 percent was held by savings and loan associations.

TABLE 1.-NUMBER OF INSTITUTIONS OFFERING NOW ACCOUNTS AS OF MAY 31, 1977

TABLE 11.-NOW ACCOUNT BALANCES AND NUMBER OF NOW ACCOUNTS AS OF MAY 31, 1977

Consumer acceptance of and satisfaction with NOW accounts in New England led to the incorporation of nationwide NOW account authority in S. 1267, the Financial Institutions Act of 1975. S. 1267 passed the Senate in December of 1975 by a vote of 79–14, but was not considered in the House of Representatives.

As for share draft accounts, the concept of a dividend earning transaction account is not a recent development for Federal credit unions. The practice of members accessing their share accounts, by means other than appearing in person, to pay bills goes back several years. More recently, however, and of particular import to this legislation, the National Credit Union Administration, on October 1, 1974, authorized, on an experimental basis, a share draft program.

The share draft program provided for a more convenient means of withdrawing shares. Operationally it provided for a remote withdrawal of shares by enabling members to access their share accounts by writing a draft to obtain cash or to pay for goods or services. Share drafts are currently payable through a bank and are similar to other forms of "payable through" drafts drawn against other nonbank institutions. Share drafts eliminate the delay and inconvenience inherent in making withdrawals by the more traditional means of presentment for payment.

Continued consumer demand and resultant gth of NOW acmurta in New England have led the commitee to believe that there is no longer any justification for the continued prohibition of NOW

accounts in other States.

Hearings before the Subcommittee on Financial Institutions revealed an impressive list of witnesses who support the extension of NOW woonita nationwide. The list includes representatives of: the Treasury Department, the Federal Reserve Board, the Federal Home Loan Bank Board, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Department of Housing and Croan Development, the AFL-CIO. Consumers Union, the Federal Reserve Banks of Boston and New York, the Federal Home Loan Banks of Boston and San Francisco, the American Bankers Association, the U.S. League of Savings Associations, the National Savings and Loan League, the National Association of Mutual Savings Ranks, the Credit Union National Association, the National Association of Federal Credit Unions, the State Banking Commissioners of Massachusetts, Pennsylvania, and New Jersey, representatives of financial institutions in New England, the Bank of America, the National Association of Home Builders, and numerous other academic, industry, and trade association witnesses.

The benefits of NOW accounts to consumers, the banking industry, and other sectors of the economy are numerous. In the first instance, NOW accounts provide real benefits to consumers, as the New England experience reveals. The committee sees no reason why the Federal Government should prohibit depositors elsewhere from enjoying the same benefits of NOW accounts as are currently being enjoyed by depositors in New England.

The prohibition against the payment of interest on demand deposits enacted in the 1930's did not actually end such payments; rather it changed their form. Instead of explicit payments of interest, the industry has constructed contorted mechanisms to attract consumer deposits through indirect, "implicit" interest payments in the form of goods and services. Common examples of nonprice competition include free or below cost checking services, overdraft protection, numerous gifts and premiums offered to depositors, and expansive and elaborate branching.

Such implicit payments mean that the real question when considering NOW accounts is not whether interest should be paid, but rather whether it should be paid in kind, as at present, or in cash as explicit interest on NOW balances.

The payment of interest in kind has serious drawbacks for consumers, and for financial institutions and for the efficient use of the payments system.

Depositors receive payment in proportion to the services they consume rather than the deposits they provide. This creates inequities, since customers who consume few services receive less than those who consume many. Second, because services are offered below cost or even free, institutions encourage over-utilization of these services by consumers and add unnecessary expenses to their operation. The added costs incurred because of such practices are ultimately transformed into lost dollars to the user of banking services—the average American

consumer.

Ironically, this misallocation of resources tends to be greater as the banking structure becomes more competitive. Competition forces firms to be efficient, but if banks are forbidden to pay interest, competitive pressures forces them to be inefficient to offer higher levels of services at greater discounts from cost. NOW accounts, by paying interest in cash or transaction balances, will reduce or eliminate many of these inequities and inefficiencies. By streamlining the frills devised to attract deposits and replacing these extras with more desirable cash benefits for the consumer, depositors will be compensated for the balances they provide and pav for the services they consume. They will also have an incentive to cut back on wasteful consumption of unneeded services.

Under the present system of implicit interest, businesses and other large depositors have the sophistication and skill to invest surplus funds in short-term investments that can readily be converted to transactions balances. This, in effect, maximizes their explicit return and minimizes their implicit return on transactions balances. NOW accounts therefore provide a means of placing individuals lacking such financial sophistication on a par with more sophisticated money managers in this respect.