A Program for a Banking Free-for-All

If the Nixon Administration gets its way in Congress, banks and S and Ls could actually heighten their bidding for savings in the future--and broaden it into a battle to provide the most generous terms on mortgage loans, personal loans and checking accounts as well. That is the goal of a sweeping set of legislative proposals that the Treasury unfurled late last week. The Administration will ask Congress to:

>Abolish, over 5 1/2 years, all ceilings on the interest rates that banks and S and Ls can pay to savers. The savings institutions could then pay, even on ordinary passbook accounts, any rate that they thought necessary to attract money. They can do this now only on $100,000 certificates of deposit, or $1,000 CDs running four years or longer.

>Wipe out many of the distinctions between banks and S and Ls, permitting each to invade the other's turf. S and Ls, which now concentrate on making mortgage loans, could offer checking accounts, credit cards and consumer loans. Banks could accept savings accounts from corporations, which only S and Ls can do now, and would be encouraged to expand mortgage lending. Regulations on loan size and collateral that now restrict banks' mortgage lending would be eased.

>Encourage all lenders to make more money available to home buyers by granting a tax credit on income from mortgage loans. In return, though, S and Ls would have to give up the special tax break that they now get by setting up larger tax-free reserves than banks can to cover bad debts.

>Permit banks and S and Ls to offer NOW accounts--checking accounts that pay interest--all over the country. At present, NOW accounts (for negotiable order of withdrawal) are available only from savings banks in Massachusetts and New Hampshire.

If these reforms are approved, the consequences would be profound. President Nixon has said that "the increased competition that would follow should reduce the cost of the entire package of financial services for the consumer." Actually, interest rates are governed by a complex of factors: the strength of the economy and of loan demand, how much inflation borrowers and lenders expect, and how rapidly the Federal Reserve expands the nation's money supply. But rates would tend to be higher on savings because of the removal of ceilings, especially when money is tight. Rates also might be lower on loans to individuals because of the new rivalry between banks and S and Ls. Consumers would also gain one-stop shopping convenience. Instead of going to a bank for a checking account and auto loan, and to an S and L for a mortgage, the consumer could get all these services from the same institution. The proposals are also designed to ensure a steadier flow of loan funds to home buyers.

The Administration came to this position--first developed by a presidential commission that reported in 1971--by a circuitous route. The so-called Hunt Commission was appointed largely to study ways to prevent mortgage funds from drying up in periods of credit pinch. It concluded that the best method was to remove the ceilings on interest rates for savings, so that banks and S and Ls could more easily attract deposits. But that would entail wiping out an advantage that S and Ls had enjoyed: the ceilings have generally permitted them to pay about one half of 1% more than banks for savings accounts. So, the Administration decided, S and Ls had to be allowed to compete against banks in offering consumer loans and checking accounts.

S and L officials are not mollified. They fear that banks will outbid them for funds. Many small bankers are likely to join in opposition; they like having the Government hold down the interest that they can pay to savers while letting them charge whatever they can get for loans. Big banks, easily able to compete for both savers and borrowers, may well back the new policy. A hard fight is likely in Congress, although practically everybody concedes that the present banking apparatus is not working very well. The Administration's program offers enough potential benefit to the consumer to serve as a basis for change.

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