Abstract
The topic of financial disintermediation has received a great deal of attention since 1966, when severe monetary restraint led to a sharp decrease in the rate of growth of deposits at filnancial institutions, particularly at savings and loan associations and mutual savings banks. The 1966 experience led to fears of widespread insolvency among thrift institutions and to the development of new regulations, or reinforcement of existing regulatory powers, designed to protect thrift institutions. Chief among these changes were the shift in the rationale for the Federal Reserve System's power to establish maximum rates payable on commercial-bank time deposits (Regulation Q) and the extension of deposit-rate ceilings to member institutions of the Federal Home Loan Bank Board and the Federal Deposit Insurance Corporation. The new rationale for Regulation Q was as a means of protecting the deposit inflows of thrift institutions (particularly weak ones) from commercial-bank competition in periods of monetary restraint, when in the absence of such restrictions commercial banks would raise their rates offered more rapidly than would thrift institutions.l The extension of deposit-rate ceilings to thrift institutions in The Interest Rate Regulation Act of 1966 was at least partially motivated by a desire to limit interest rate competition among thrift institutions.2
Published Version
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