The impact of deregulation on the true cost of savings deposits: Evidence from Illinois and Wisconsin savings and loan associations

Abstract

Ceilings on the savings deposit rates payable by savings and loan associations (S & Ls) under the Interest Rate Adjustment Act of 1966 led to S & L efforts to attract savings deposits by offering inducements other than the dirct payment of competitive deposit rates. In a deposit rate-constrained savings deposit market, competition took the form of provision of financial and nonfinancial goods and services in lieu of explicit interest. These devices are generally interpreted as implicit interest—payments to depositors in some form other than cash. A statistical cost-accounting technique is used to estimate the full cost of S & L regular passbook savings deposits inclusive of explicit and implicit interest. The study focuses on Illinois and Wisconsin S & Ls. The resulting full cost of regular passbook savings deposit estimates over the 1976–1983 period tend to move with competitive rates. However, S & Ls are only able to offer a discrete set of services to pay implicit interest and require market interest rates to move by some threshold amount before offering additional services. Consequently, as the amount of subsidized services increases, the rise in implicit interest induces an overadjustment of the full cost of regular passbook savings deposits to changes in market interest rates.