Senator CRANSTON. Thank you very much.

PANEL TESTIMONY

Senator CRANSTON. Mr. Gnaizda, you spoke of a subsidy for the savings and loans, but you didn't go into detail. Would you spell out what you were talking about?

Mr. GNAIZDA. Yes. Assuming a $17 billion annual loss to consumers, when I met with Deputy Secretary Carlswell, he said the effective rate of tax on that would be 17 percent, or a little over $3 billion that would be generated to the Treasury if that $17 billion was passed on to the consumers.

We estimate that a subsidy that goes directly to efficiently run savings and loans that have a low rate, of turnover in mortgages, might cost as little as $1 billion.

PROFITS NOT TAXED

So the net gain to the Treasury might be quite substantial. As you know, Senator, a large amount of so-called profits that go to savings and loans and banks are not taxes. One way that they are not taxed is through the distribution of consumer goods consumers don't want, such as toasters. Another is through buildings, artwork, and high salaries. And another is, of course, through

reserves.

So the net to the Treasury might actually be positive.

We do believe, however, that the thrift institutions, particularly in the Northeast, cannot survive without some temporary assistance. The alternative is to continue a windfall that is very expensive, is of no benefit at all to the society, and that includes a $9 billion subsidy to commercial banks.

These banks don't need the subsidy. And as we pointed out in prior testimony, the Bank of America, for example, last year received a subsidy of $504 million based on the difference between the ceiling rates and the market rates.

We asked, Deputy Secretary Carlswell if the Treasury would investigate this subsidy. He said, not at the present time because they didn't believe that the political realities were such that Congress would be interested.

We hope, of course, Congress will be interested and if Congress is, of course, we can phase in S. 1347 far more quickly.

Senator CRANSTON. What $9 billion subsidy to banks are you referring to?

Mr. GNAIZDA. Approximately half of the savings accounts and time accounts that are at low interest rates are held in commercial banks, according to the Federal Reserve statistics.

That is how we get the $9 billion. It is approximately half of the $17.5 billion.

Senator CRANSTON. Would those of you who are regulators comment on his subsidy suggestion?

Mr. PARTEE. I can't vouch for the figures that Mr. Gnaizda has. I would point out that I believe his assumption is that all of the time and savings deposits would be at money market instrument rates in order to get the $17 billion or the $9 billion for the banks.

It seems to me extremely unlikely, given the services that are involved, the insurance transactions costs and the local character of the competition that commercial banks, for one, would pay anything like the Treasury bill rate on passbook savings accounts in the absence of ceilings.

I also would point out that there are quite a few dated certificates in the total of time deposits. Those certificates carry a contract rate of return. And so that contract rate of return would only change gradually.

I agree that the rates are somewhat lower than they would otherwise be, but I have to say I believe that the figures that he has are far greater than of what reality would produce.

Senator CRANSTON. How would those of you who are regulators comment? What are your comments on the suggestions that Mr. Gnaizda and Hilda Cloud made regarding helping the small savers by, one, pooling, and two, reducing the $10,000 minimum money market certificate denomination to $1,000, and three, the inflation fighter certificate for the elderly?

Ms. MILLER. I will go first.
The first one was pooling?
Senator CRANSTON. Yes.

POOLING VIOLATION

Ms. MILLER. The Bank Board had a policy that we reenunciated recently on the issue of pooling. We had not permitted it previously because we felt that it was a violation of the spirit of regulation Q.

And in this instance, we affirmed the fact that savings and loans that were federally insured could not pool funds for the same

reason.

However, we recognized the reality that an individual on the outside may do so, and may wish to do so. It would be very difficult for a savings and loan to police that or be, in fact, responsible for what individuals did.

So we clarified a previous policy statement, but in all truth, did not intend to encourage pooling, because that would really have exacerbated the problem that we were facing and continue to face regarding the high cost of funds associated with the money market certificate for thrift institutions.

Senator CRANSTON. You think the $10,000 minimum?

Ms. MILLER. Right. It was entirely too expensive; when we first issued the money market certificate, the record at the Bank Board will show that the Chairman and I had a lengthy discussion on the fact that this would not be available to small savers at the $10,000 minimum deposit.

We were concerned that this would, indeed, be the case, but felt that it was better to wait and determine what the popularity and impact would be. At that time, our best estimates were about a third of what actually developed in terms of money market certificates. With their running 17 percent of savings on a national average and as high as 20 and 22 percent in some associations around the country, it was really impossible for us to respond to the request to lower the denominations on that. We wished we could have.

The third issue was

Senator CRANSTON. Inflation fighter certificate.

Ms. MILLER. It is an interesting concept. I don't think I could really comment on it off the top of my head.

Mr. PARTEE. May I say something about the inflation fighter? Senator CRANSTON. Would you give us a written comment on that?

[The following was subsequently submitted for the record:]

WRITTEN COMMENT BY MRS. MILLER ON INFLATION FIGHTER CERTIFICATES FOR THE ELDERLY

Under this proposal, elderly individuals would be eligible to buy Treasury certificates that would have an interest rate two percentage points above the inflation rate as measured by the consumer price index. These could be purchased in $50 denominations up to a $3 thousand maximum per person.

At the present time, the inflation fighter certificate would carry an interest rate of about 15 percent per annum. This would be substantially above any rate that S&Ls are permitted or could afford to offer. It would also be substantially above the interest rate available to large investors who can put their funds into large negotiable bank CDs, commercial paper, and other wholesale money market type certifi

cates.

Clearly, these proposed certificates would carry so high a yield that they would attract funds up to the maximum allowable amount away from depository institutions or from government debt other than special certificates. There would be a serious impact on savings flows into savings and loan associations, with a consequent adverse impact on housing, and a significant increase in the Federal deficit. I am sympathetic to the plight of the elderly. Yet there are real problems with this proposal. Not all the elderly are fortunate enough to have the $3 thousand or, in the case of a couple, the $6 thousand eligible for this certificate. Thus, we would have an unfair situation. Those elderly individuals that have adequate funds would benefit from the high rate on this special certificate whereas those that do not have the money and whose financial needs would be greatest would not be in a position to earn this interest rate.

The issuance of these special certificates at such a high interest rate would really represent a government subsidy to the elderly. If it is felt that such a subsidy is desirable, a more equitable means of providing this is not through the issue of special Treasury certificates. Rather, it is through the payment of a direct subsidy to the elderly.

A direct subsidy would ensure that the really poor elderly who do not have the full $3 thousand (or $6 thousand in the case of a couple) necessary to achieve maximum benefit from this proposal would, nonetheless, receive the same benefits as those elderly individuals who do have the funds. Moreover, a direct subsidy would make it possible to provide the money only to those elderly whose income falls below a certain level and who, thus, have a definite need for the money. Finally, a direct subsidy would eliminate the adverse impact that the issue of Treasury certificates would have on funds for the housing market. This comment should not be construed as an endorsement of the direct subsidy proposal but merely as a means of noting that a direct subsidy would be more equitable than the high interest rate certificate.

The suggestion for a certificate for the elderly raises the general policy question of the groups that we are attempting to benefit. My understanding was that the criticism of rate control reflected the fact that the small saver was not in a position to obtain the same high money market yields as the large saver. This plan, however, would permit even higher interest rates to be paid the small than the large saver. Even more importantly, it raises the difficult question of those who should be eligible for a special certificate that would bear a high interest rate. There are certainly a large number of non-elderly individuals who are small savers and would appear, on public policy grounds, to be just as worthy as the elderly to receive a high interest rate on their savings. Of course, the broader the number of individuals who become eligible for such a high interest rate certificate the greater the adverse impact on the Treasury deficit and on the housing market.

Mr. PARTEE. The proposed inflation fighter certificate would pay 2 percent more than the inflation rate-why would an institution pay 15 percent for funds? The most it can get on a mortgage is 11.

It has to have some administrative expenses. I think it is confusing social purposes with economics of finance.

Mr. GNAIZDA. It is not an institution. It would be issued by the Treasury.

INFLATION FIGHTER CERTIFICATE

Mr. PARTEE. Right. That would be something that the general taxpayer would subsidize then for the benefit of those who could buy the inflation fighter certificate.

Senator CRANSTON. What would the cost be?

Mr. GNAIZDA. We estimated there are 24 million senior citizens in the United States, 40 percent of whom have savings accounts. Assuming all 40 percent opted to put some of their saving in this account, with the $3,000 maximum, there would be 10 million persons with savings accounts at an average of $1,000 per saving account. Assuming the inflation rate and the money market rate per Treasury bills is roughly the same, the cost to the Treasury would be 2 percent per $1,000, or $20 per senior citizen. Multiplied by 10 million accounts, the cost is $200 million per year, plus administrative expenses.

Great Britain has two certificates somewhat like this, one especially for the elderly and another which is for persons in general. They have set a maximum amount of 20 pounds a month over a 60month period.

Senator CRANSTON. Back to a question to those of you who are regulators.

Hilda Cloud and Bob Gnaizda suggest that we go faster in lifting the ceiling in removing the regulation. The concern has been expressed widely that, A, people are losing money by leaving money in savings accounts in smaller amounts under current circumstances, and, B, that we are driving those people to look for other ways to invest their funds, such as into the unregulated, uninsured lending market.

How fast can we go? And can we go faster in your opinion than what is proposed in the legislation to lift the rates and remove the controls?

Mr. SPRAGUE. Your legislation proposes a very gradual approach. I think all of us in our testimony have requested that you provide us some flexibility to move more swiftly or perhaps with some delay along the way should the economic conditions warrant.

I think we are united in wanting to have that kind of an option should it be possible.

Senator CRANSTON. To be flexible.

Mr. SPRAGUE. Right. Keep the absolute deadline, but give us the opportunity to move more swiftly if we can.

Senator CRANSTON. Any other comments on that?

Mr. CONNELL. I would agree, Mr. Chairman, that this is probably the minimum program of phase-in that would be suitable. I would also support greater flexibility in a shorter time frame for the phase-in.

Mr. PARTEE. To be realistic, I would have to say that this is a very rapid rate of increase in average payment on deposits. It is 50 basis points a year. Over the last 13 years, the rate of return on

assets has increased by only 20-25 basis points a year. Now, you can't have a 20 basis points a year increase in earnings and a 50 basis points a year increase in expenses. What the bill does-and what we agree with-is the effort to stimulate the thrifts to have more rapid growth in earnings.

I would have to say, based on my experience, that the 8-year phase-in is rapid, given what changes are contemplated.

Senator CRANSTON. We go up a quarter percent a year, what would be the effect on mortgage rates? Will they go up proportionately or what?

Ms. MILLER. I think we can presume that they will go up.

Our studies have shown that there would be an increase in mortgage rates, but a lot will depend, I think, on how well we smooth out the credit cycles and to what extent thrifts do achieve earnings from the other new powers that they are able to undertake under the bill.

I would like to say that we also would like to move up interest rates paid on savings faster. We understand the dilemma. It is not good for the small saver; it is not good for the thrift industry to be out of whack with the marketplace.

But as I spelled out in my brief oral testimony, we have serious concerns about the ability to move quickly. We know we are entering an uncertain and unpredictable period. We realize that flexibility is essential.

Hopefully, we will be able to get there faster than the 1990 time table, but here again I think that we do want to make sure that we end up with a sound and a safe and viable thrift industry to meet the housing and mortgage credit needs of our country.

Senator CRANSTON. Thank you very much.

My time has expired.

Senator Proxmire.

Senator PROXMIRE. I want to thank all of you for your statements. I think they are very helpful.

Mr. Partee, you indicated that the bill should be modified to permit you to waive, as I understood you to say, to waive the increase three times; is that right?

PHASEOUT

Mr. PARTEE. In three 6-months intervals-a year and a half out of the 8 years of phaseout.

Senator PROXMIRE. The 10 years of phaseout, if it goes to 10 percent.

Mr. PARTEE. Yes.

The point is, Mr. Chairman, that we need that, because as I say, I think it is distinctly possible that the earnings of the thrifts aren't going to increase fast enough to permit us to stay on that schedule, but we will have to wait and see.

Senator PROXMIRE. We tried to provide some flexibility in the bill. We say that you can, in the event of an emergency, after consulting with other regulators, that you can slow-you can postpone for 6 months. You have to make it up, but you can postpone

it.