Banking for tomorrow

We know of a bank that will actually notm give you a free clock if you open a new account. We mention this footnote to finance because it strikes us as somewhat ironic at this season of the year when the banking community -- and we are here including savings and loan associations (S&Ls) -- begins its traditionally heavy advertising campaign to woo savings deposits into long-range retirement plans. But the mere fact that there are often so few banks now that do not offer gifts -- or some type of come-on -- seems to suggest much about what is happening to the world of banking.

What is happening within that world, in fact, could have far-reaching consequences affecting savings, interest rates, and types of services offered all Americans. The US banking industry is at the edge of an historic turning point, given the congressional enactment this year of legislation gradually deregulating interest rates offered on customer deposits. The current ceiling on rates offered depositors will be completely phased out by 1986, a step designed to boost savings flows into passbook accounts.

Meantime, all financial institutions have found themselves affected by the rise in general interest rates during past months, combined with recession. The result of all this has been not only frantic competition to capture deposits (in part going to mutual funds, or other non-banking sources), but an increase in bank mergers and acquisitions, as well as several failures or near failures of financial institutions. Customer deposits, fortunately, were protected by federal insurance programs.

The important point, though, is that the new Reagan administration will have some tough decisions to make on the banking industry in the months ahead. Among them:

* Should the current timetable on phasing out passbook interest rates be revised? The savings and loan industry, which provides most mortgage funds for the homebuilding industry, is concerned that deregulation (which will have the effect of taking away the S&L competitive advantage over commercial banks) is proceeding too quickly. Currently, S&Ls are allowed to pay a quarter point interest rate differential over commercial banks. The new chairman of the Senate banking committee, Utah Republican Jake Garn, has indicated he will hold oversight hearings on this issue. That seems wise, given the housing slump, although there is little argument among most economists that the lifting of interest rate ceilings will be beneficial to savers.

* Should interstate branch banking be encouraged? The big fellows on the banking block, not surprisingly, argue branching would enhance competition and increase financial services throughout the US. William Proxmire, who currently chairs the Senate banking committee, has been uneasy about interstate branching, fearing smaller banks will be placed at a disadvantage. The Carter administration, meanwhile, is a year late in releasing a special administration study on branching. That study, though still in draft form, reportedly comes down in favor of branching.

Will the incoming Reagan administration, with Citicorp chairman Walter Wriston often mentioned as treasury secretary, be any less inclined to endorse interstate branching? Given the already heavy concentration of overall bank assets within a few metropolitan banks, lawmakers would be wise to exercise special care in enacting any legislation that could undermine smaller locally based institutions.

* Should recently enacted NOW account legislation be revised given changing economic circumstances? NOW (negotiable order of withdrawal) accounts are interest-bearing checking accounts currently available mainly in the New England area. But beginning next year such accounts can be offered throughout the US.

NOW accounts will mean added costs for many smaller financial institutions.

* To what extent should overseas banks be allowed to continue to acquire US owned banks? Some 15 percent of total US deposits are now under the control of overseas ownership. While overseas banks have to comply with general branching laws, there are no regulations directly touching the overseas acquisition question. A moratorium on such acquisitions expired last July. Mr. Proxmire has favored extending that moratorium until there is a clearer understanding of what the impact of acquisitions means for the US banking system.

* Should commercial banks be allowed to buy up S&Ls? The Federal Reserve Board is believed by some observers to be shifting from its position of the early 1970s that such acquisitions are not proper -- and in fact may now be leaning towards allowing acquisitions. The Senate recently passed a moratorium on such acquisitions (favored by both Mr. Proxmire and Mr. Garn), but the House has not followed through with any legislation.

On all of these issues, we think, the overriding objective of federal policy should be nothing less than preserving the maximum diversity and competition of all banks within the US, while ensuring the special protection of smaller locally based institutions. A sound and prosperous banking system is vital to all Americans.

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