Banks want Congress to let them share in money market mutuals
After taking it on the chin for more than two years, the banks are fighting back. They have lost billions of dollars in deposits to the upstart money market mutual funds, and now they want a chance to get even.
Since mid-1978 money fund assets have blasted from about $6 billion to around savers who are not putting it in banks and savings institutions.
The banking industry got a little unintentional help from the Federal Reserve Board last year when the Fed handed the money funds a 15 percent reserve requirement on new deposits. But that requirement was lifted a few months later around the new rules and continue to grow almost as fast as before.
So now, having gained nothing in trying to restrict the money fund's game, the banks are trying to join in themselves.
The American Bankers Association has let it be know that one of its top priorities in the new 97th Congress will be to see a "comingled agency" bill passed that would allow bank, bank holding companies, or savings-and-loan associations to create and operate investment companies. Although this would permit banks to establish various mutual fund-like investments, experts see its primary purpose as giving the banks a chance to offer money funds of their own.
While the ABA prepares to do battle over the comingled agency bill, it has also petitioned the federal government to let banks offer "a new deposit instrument with higher yield than current passbook rates and greater liquidity than six-month money market certificates."
Currently, banks are able to offer savers Treasury bill money market rates if they purchase six-month certificates with a $10,000 minimum investment. But as interest rates have soared again, the bankers argue, the competitive edge enjoyed by money funds has widened so much the banks need a new instrument "to maintain our deposit base."
The mutual fund industry is expected to oppose the comingled agency legislation -- as it has consistently opposed attempts by banks to broaden their security activity. Up to now, though, the Investment Company Institute, the mutual fund trade organization, has not yet officially commended on it.
"We have no strategy on the bill because we haven't seen it," Matthew P. Fink , general counsel of the ICI said. "we have been traditionally opposed to changes in [the law], but we can't commnent on this until we've had a chance to read it."
As for the banks' request for a lower-denomination savings certificate, Mr. Fink said, "We welcome the competition, in a strange sort of way. Instead of restricting money market funds, we would rather see the banks and S&Ls free to compete. We'd rather have competition that restrictions on money market funds."
The banks have already been given a chance to catch up in the interest rate race. But the new rules of the competition won't be fully in effect to five years. Last year, Congress passed a sweeping bank deregulation bill. Among other things, it gradually lifts interest rate ceilings so that by 1986 banks may pay whatever they can afford.
In the spirit of competition ICI officials say they do not mind these changes , either. But the words of conciliation mask what has been a rapidly deteriorating relationship between the banking and mutual fund industries.
It wasn't always this way.
In the early 1970s the new money market funds were mostly nothing more than a handy place for institutions, companieS, and pension funds to "park" spare cash for a day or so -- some weeks at most -- until they figured out where they really wanted to invest it.
The banks didn't care. In fact, it relieved them of a lot of bother and paper work. Everybody was happy.
But then high inflation crept in, bringing high sport-term interest rates, making money funds more than a financial parking lot. Since then, a lot of "small savers" have moved their money into money funds for the long term, where their deposits can earn interest that is two to three times as high as bank passbook rates.
And the money isn't locked in for a long time, either. While banks require savers to leave deposits for six months to eight years to earn the highest rates , the money funds let you take it out the day after you put in in, if you need it. This liquidity, combined with high yields, has helped drain deposits from the banks.
The fact that people like money fund expert William E. Donoghue were going around saying those who kept their savings in passbook accounts were "losers," did little to improve the relationship between banks and money funds.