US thrift industry faces squeeze in paying interest

For the financially powerful US thrift industry -- comprising 4,700 savings and loan associations (S&Ls), with assets of close to $600 billion -- the months ahead are expected to add up to a crash course in "banker management."

The reason, financial analysts here say, is clear. S&Ls are finding themselves trapped in the midst of a severe "cost squeeze" as interest rates again inch upward -- thus costing institutions larger payouts to depositors. Yet, the institutions themselves are still saddles with millions of dollars of mortgages negotiated back in the days of low interest rates.

The upshot: fewer dollars earned by the institutions, alongside higher payments to depositors. At the same time, the S&Ls are facing a gradual phase-out of the competitive edge that they have long enjoyed over the US commercial banking industry. Under "Regulation Q," being phased out by Congress , thrift institutions have been allowed to pay depositors a quarter percent higher interest rate on passbook accounts. That differential will be lifted completely by 1986.

For the thrift industry, therefore, the signs of change and turmoil are numerous:

* Scores of S&Ls are expected to disappear in mergers during the months ahead.

* Given the sharp slump in deposit flows into S&Ls, the thrifts are losing important "market share" vis-a-vis their competitors, particularly commercial banks and money-market mutual funds.

* The recent slump in the housing market is expected to be exacerbated by the lack of new lending commitments on the part of thrifts. In fact, argues Edwin B. Brooks Jr., president of the United States League of Savings Associations, the main trade arm for S&Ls, the housing mortgage money contraction is now so serious that "we fear the homeowner may . . . become an endangered species."

For their part, S&L officials are particularly critical of the large-scale swings in interest rates during recent months. This volatility is the result of a decision by the Federal Reserve Board (Fed) to let interest rates rise or fall naturally to their own levels.

But that in turn has made long-range planning very difficult for industry officials.

According to William B. O'Connell, executive vice-president of the US League, the Fed's new policy has meant "unprecedented swings in interest rates."

Thus, for the period from Oct. 6, 1979 (when the Fed began its new policy) to Aug. 9, "hanges in short-term interest rates averaged 52 basis points a week -- 3 1/2 times as much as the average for the decade up to Oct. 6."

The result, Mr. O'Connell contends, has been "a financial environment characterized by extremely volatile interest rates" that has worked to the advantage of commercial banks and money-market funds.

Savers -- because of the swings in rates -- have tended to keep their cash assets in short-term issues (offered by commercial banks and money funds), rather than longer-term S&L accounts.

The impact of rate volatility on S&Ls' market share has been significant.

Savings and loan associations, for example, had an average of 48.8 percent of the increase in total household retail savings during the period 1970 through 1978. Commercial banks, during the period, had a market share of 51.2 percent.

For the period from early 1979 through the first 6 months of 1980, the figures are sharply altered. S&Ls had an average in the increase of household savings of 29.7 percent. Commercial banks, by contrast, had 70.3 percent.

Moreover, if one compares the market share of S&Ls with all of their major competitors, the recent effect of sharp interest rate fluctuations on S&Ls is even more pronounced.

For the first six months of 1980, S&Ls captured 12.9 percent of the total increase in retail savings; mutual savings banks had 2.7 percent; credit unions, 1 percent; money-market funds, 38.7 percent; and commercial banks, 44.6 percent.

As if thrifts didn't have their hands of full with the swings in interest rates prompted by the New Federal Reserve Board policy, they are also attempting to apply the New Depository Institutions Deregulation and Monetary Control Act of 1980, passed last spring.

Under the landmark legislation, more controls on savings interest rate payments will be phased out over a six-year period. But because commercial banks will now be more directly competing with thrifts, pressures will be greater than ever on thrift officials to court the "small saver."

Efforts are already under way to do just that. Here in the Greater Washington area, for example, several S&Ls are promoting new NOW accounts -- for negotiable order of withdrawal -- that will go into effect starting next year. NOW accounts -- in effect, interest-bearing checking accounts -- are allowed in eight states in the Northeastern US.

The NOW accounts, it is hoped, will attract more family "working" accounts -- such as payroll deposits -- to thrift institutions. Currently, these "working accounts" -- by which a family deposits its weekly paycheck -- tend to go to commercial banks.

In addition, thrifts will also be offering enlarged customer services, such as credit and debit cards, as well as personal loans. They are also expected to offer more business-related loans (now largely the purview of commercial banks).

Still, the large backlog of problems for thrifts spells renewed merger activity during the months ahead. "We don't anticipate any actual failures of S&Ls," says Mark Clark, an official of the US League. "But the pressures for merger are now very strong." During the first half of this year alone, according to the league, there were some 118 actual or proposed mergers. That compares with 132 back in 1974 -- at the bottom of the worst economic slump since World War II.

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