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1990 and then only if the inflation rate and/or the market rate were ten percent or less. As this committee is well aware, the average life expectancy of our elderly clients is less than ten years. Thus, the Gray Panthers of this nation will have fought for and aupported a proposal that will not benefit this generation of elderly. Similarly inadequate benefits will be conferred on the small saver. For the next two years, despite an escalating inflation rate, interest rates will be frozen. Thereafter, they will rise at a pace so slow that there will be no inducements to investing savings in a regulated institution until 1990. Further, thrift institutions will not be helped by this bill. As the Secretary of the Treasury stated to Congress, Americans will not save in regulated institutions unless they receive a fair market rate. Unless penalties against the small savers are ended, "the ingeniuity of the free enterprise system . . will find new ways of accomodating investments."4 And when these interest rates from alternative investments get high enough as they now are, savers will transfer their money into other investments resulting in the decline of the housing industry and possibly a recession. (S.F. Chronicle, June 22, 1979, Business Section, pg.1, reporting on Secretary's June 21, 1979 Message.)

Thus, in the absence of dramatic and substantial increases in interest rates for small savers, the small saver will totally remove herself from depositing any money in thrift institutions. The result will be such a severe shortage of funds that mortgage rates will radically escalate at the very time the amount of mortgage money available will radically decrease. We are in the process of observing this now. Even leading savings and loan experts such as Richard Diehl, President of the nation's largest savings and loans (Home Savings) have stated that Regulation Q ceilings are the cause of the insufficiency of funds available for home loans, and that mortgage interest rates are more a product of the supply of money than of the interest rates paid to depositors. (Los Angeles Times, March 12, 1979)

Ironically, only one group possibly stands to gain from the proposed bills: banks. Their survival is not dependent on attracting small saver funds. And, under this bill, whatever small saver funds they have will cost them only half the market rate for the next two years, and well below market rates for most of the next ten years.5

IV. RECOMMENDATIONS

We would urge Congress to take the following actions to benefit the small saver and the elderly:

1. Pooling.—That the Senate issue a resolution condemning the present antipooling regulation of the Federal Reserve Board and urging all regulatory bodies to encourage member institutions to provide pooling for small savers. Further, that if effective pooling is not available within ninety days, legislation be enacted to prohibit the regulatory bodies from barring any form of pooling that is intended to provide for the small saver benefits now available only to those with investments of $10,000 or more.

2. $1,000 certificates.-The Congress enact legislation consistent with SR59 to require regulatory bodies, pursuant to Regulation Q, to allow $10,000 Money Market Certificates to be sold in denominations of $1,000 and up by January 1, 1980, and in denominations of $500 and up by January 1, 1981.

3. Inflation fighter certificate for the elderly.-The Senate should enact legislation to permit the issuance of "Inflation Fighter Certificates for the Elderly". The certificates, to be issued by the Treasury, would be indexed to inflation and pay two percent above the inflation rate. They would be one year term certificates automatically renewable in fifty dollar denominations. No individual would be eligible to hold more than three thousand dollars of such certificates."

4. Amend S. 1347.-That 1347 be amended to increase the ceiling rates by a minimum of 1⁄2 of one percent every year commencing January 1, 1980, except that interest rates shall increase at a rate of one percent per year whenever the inflation rate shall exceed the Regulation Q maximum interest rates by more than one percent. (An alternative that would prevent multinational banks from securing a $9

In the last year alone, from April 1978 to April 1979, the dollar value of alternative investment money market mutual funds rose from $5,500,000,000 to $19,000,000,000; it could go as high as $60,000,000,000 by the end of 1980.

5 For example, in 1978 the Bank of America averaged $14,400,000,000 in low interest passbook and time deposits. The aggregate subsidy (difference between interest rate paid and the market rate) was $504,000,000 per annum. In part, this explains the Bank's 30 percent increase in profits from 1977 to 1978 (from $395,100,000 to $514,200,000). Its 1978 profit based on equity was 18 percent, or a tripling of investment within 7 years.

Great Britian presently has two modified forms of small saver indexed savings deposits. National Savings Certificate for the elderly and an indexed Save as You Earn instrument.

billion a year windfall was previously proposed by the Gray Panthers to this subcommittee on April 11, 1979. This proposal was predicated on direct subsidies to needy savings and loans.

5. Misleading Advertising.-There will be little impetus for change so long as member institutions are free to use Bob Hope type hyperbole to mislead the public. The Senate, via resolution, should urge the federal regulatory bodies to use their statutory powers (for example, 15 U.S.Č. Section 57A (f)) to actively prevent misleading advertising and to affirmatively warn savers of the consequences of leaving their money in low interest passbook accounts over long periods of time in a highly inflationary economy. We would also urge a congressional resolution compelling the federal regulatory bodies to correct the misleading impression provided by their May 30th media blitz by informing the public that the present passbook rate increase of 4 of one percent amounts to less than a penny a day on a one thousand dollar account.

CONCLUSION

Small savers are increasingly aware of the discriminatory anti-consumer rates of interest provided by regulatory bodies. Banks such as Citibank are assisting this process by Truth In Lending ads such as "If you put your money in a short term savings account, you're bound to lose", and "Deposit $500 with us today, and we'll give you back $475 next year."

Thus, the only way to stem the tide of a consumer revolt and a serious savings erosion that will cause the collapse of thrift institutions is to treat all consumers equally as quickly as possible.

7 This windfall in part subsidizes U.S. banks $217,000,000,000 in risky foreign loans. Wall Street Journal, 6/22/79, p. 8.

See testimony of Robert Gnaizda, April 11, 1979. The proposal was as follows:

(a) Passbook rates be set at 80% of Treasury Bill rates by July 1, 1979 and rise to full market rates by July 1, 1981, in two to three incremental steps. Savings and loans would be permitted to pay a 4 percent differential.

(b) Money Market Certificates be permitted to be issued, as of July 1, 1979, in denominations of $500 and up, and be pegged at 11⁄2 percent below Treasury Bills, gradually increasing to full market rates by July 1, 1981. Savings and loans would be permitted to pay a 4 percent differential.

(c) A direct subsidy go to those efficiently-run savings and loans that hold an unduly large number of low interest mortgages relative to all assets and the cost of borrowing. (It should be noted that no subsidy should be applicable for mortgages that exceed twice the median mortgage size in a region or are on a second home.)

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LAWRENCE CONNELL, JR., ADMINISTRATOR, NATIONAL CREDIT UNION ADMINISTRATION

Mr. CONNELL. I would like to summarize my statement and have it included in the record.

Senator CRANSTON. It will be.

Mr. CONNELL. We are already on record in prior hearings in favor of more liberal regulations with respect to consumer savings deposits. So I would like to concentrate most of my remarks on the portions of S. 1347 that relate to payment of interest on third party payment accounts.

I would like to begin by reviewing the action of the National Credit Union Administration in approving share drafts for Federal credit unions. On October 1, 1974, this agency approved three experimental share draft programs on the basis of examining a new and innovative means for members to access their savings accounts.

This experimental program was expanded and as of February 1, 1977, the National Credit Union Administration had approved some 585 share draft programs. After determining that indeed it provided credit union members with a contemporary means of withdrawing from their savings accounts and the ability of the credit unions to manage such a program had been demonstrated, we issued a final regulation implementing the program on November 30, 1977.

EXPERIMENTAL PROGRAM A SUCCESS

The growth and success of the program was remarkable, when we considered the dampening effects of the lawsuit challenging the legality of the program which was filed in September of 1976.

The programs have moved from the experimental category March 6, 1978, and by yearend 1978 the National Credit Union Administration had approved some 976 Federal credit union share draft programs. Of this number some 821 were operational, with some 878,000 Federal credit union members having over $783 million in these interest-bearing accounts. During the last quarter of 1978, some 26 million share drafts were processed, totaling almost $1.7 billion. Additionally, there were approximately 800 State-chartered credit unions operating in 33 States, with a total of half a million accounts.

The major issue involved in the promulgation of the share draft regulation was whether Federal credit unions could legally permit their members to make withdrawals of funds from a share account by means of a negotiable or nonnegotiable draft. While the legality of any new program is always at issue, it was a major issue in this instance because of the potential for litigation.

At the time the proposed rule was published, this Administration made the determination, which we believe continues to be valid, that share drafts were lawful for Federal credit unions.

In addition to the operational difficulties that arise because of the court decision, the possibility exists for even greater and potentially more serious adverse implications. It would appear that the court has set in motion the possibility that the National Credit Union Administration must receive congressional approval for evolutionary or technologically advanced procedures developed to im

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plement express or implied powers of the Federal credit unions, but which were not specifically contemplated or in place at the time of the enactment of the statute.

The regulation of financial institutions, particularly Federal credit unions, would be unduly restricted. There is no question that the efficient and proper administration of Federal credit unions would be undermined. In many instances, regulatory authorizations will be tied to standards and procedures that will be obsolete. In our view, this conflicts with the well-established principles of law and, insofar as the National Credit Union Administration is concerned, its congressionally mandated responsibility, "to be more responsive to the needs of credit unions and to provide more flexible and innovative regulations." From Senate Report 91-518.

In attempting to portray for the subcommittee the likely effects of a lack of congressional action in response to the court's action, we examined several areas. Our assessment of the situation led to the conclusion that if remedial congressional action is not completed by October 1, 1979, the tentative adjournment date for Congress, the National Credit Union Administration will be required to announce phaseout plans for all Federal credit union share draft programs approximately on that date.

The effects are quite considerable. The first would be, of course, the economic impact on credit union members, who would be forced to change from a share draft account in a credit union to a demand deposit account in a bank. Closing down the share draft program means that the 2.1 million members of households with share draft accounts will be forced to use a system which in our analysis would be twice as expensive.

Not only will these consumers be forced to use a less efficient method, they will in addition suffer the loss of an estimated $21 million in dividends.

The second effect would be the adverse impact on the incomes of the credit unions. A number of credit unions appear to be dependent on revenues from share draft programs. Our concern here is with the safety and soundness of those credit unions which would lose a substantial portion of their income when the shutdown of these programs occurs.

Moreover, it appears that share draft programs are becoming an important reason for consumers to choose credit unions. In addition to the income loss effects, we feel that substantial numbers of persons may actually terminate their membership in their credit union or substantially reduce their depository relationship.

While credit union membership is not a direct concern or responsibility of ours as a regulator, a sudden drop in membership, accompanied by a sudden outflow of funds, could have a considerable adverse effect.

The third effect is the actual outflow of funds. We cannot at this time say precisely how much money would flow out of the credit unions starting on October 1, it would probably be at least $500 million. In the unlikely event that all members with these accounts withdrew not only their share draft balances, but also their other share accounts, the outflow could be as high as $2.1 billion.

We feel that a realistic estimate would probably range between $500 and $800 million. Such an outflow at the very least would

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