Deposit Rate Ceilings Research Articles

The Likely Impact of Increases in Deposit Rate Ceilings on Thrift Earnings and Housing Construction*

Simulations of a seventy‐equation econometric model are run in an attempt to deduce the likely impact of increases in deposit rate ceilings on financial markets, the earnings of depository institutions, and the composition of nonfinancial investment. The analysis suggests that the effect of binding rate ceilings during the 1973–75 period was to raise home mortgage rates (by about 30 basis points), accentuate the downturn in single family housing starts (by about 40,000 per year), and maintain earnings at depository institutions. Without the ceilings thrift earnings would have been about a billion dollars less per year. However, this loss might well be more than compensated for by greater thrift earnings in subsequent years and by lower noninterest expenses.

The effect of deposit rate ceilings on bank risk

The effect of deposit rate ceilings on bank risk

Effects of Deposit Rate Ceilings: The Evidence from Massachusetts Savings Banks

Effects of Deposit Rate Ceilings: The Evidence from Massachusetts Savings Banks

The Effectiveness of Recent Policies to Maintain Thrift-Deposit Flows

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

The Effect of Deposit Rate Ceilings on Aggregate Income

The Effect of Deposit Rate Ceilings on Aggregate Income

THE EFFECT OF A CHANGE IN THE CEILING RATE ON DEPOSITS AT COMMERCIAL BANKS*

IN 1961 THE Federal Reserve Board authorized a change in the maximum rates commercial banks could pay on time deposits. This change in the ceiling rates was shortly followed by a substantial increase in commercial-bank time deposits. The purpose of this study was to examine the impact of this change in the ceiling rate and to evaluate the use of changes in Regulation Q as a policy instrument. Any policy move of this type is considered expansionary, in the context of the study, if it lowers the rate of return on the ownership of real capital that the economy requires to induce it to hold the given capital stock. Individual bank behavior concerning deposit-rate determination and portfolio selection under varying liability structures is examined. A theoretical model is then developed which shows that a rise of the rate paid on time deposits will result in an increase in the amount of outstanding short-term government debt, a decline in the rate charged on bank loans, and a decline of the rate of return on capital. It is assumed that the authorities have as a policy goal stability of the Bill rate. The results of this model were then tested using data that related to the December 1961 change in the deposit-rate ceiling. The results show that a majority of time deposits in commercial banks were capable of earning higher deposit rates than was formerly possible. As a result of these higher deposit rates, banks experienced large increases of time deposits relative to demand deposits. The growth of time deposits freed reserves which permitted an expansion of total bank reserves. Because of the lower volatility of time deposits vis-a-vis demand deposits, the banks were able to expand their holdings of longerterm, less liquid assets. The increased buying of long-term assets by the banks coupled with the normal investment flows of other sectors forced a decline of longterm rates. The decline of these long-term rates encouraged borrowing for increased capital-stock expansion. Thus the change in deposit rates allowed the Federal Reserve to twist the yield curve during 1962. It was concluded that power to regulate deposit rates was an effective instrument of monetary control. It was further concluded that changing deposit-rate ceilings may, in some instances and with particular asset markets, prove more effective than the use of Open Market Operations alone.