(The bills and agency reports follow :) 90TH CONGRESS S. 2923 IN THE SENATE OF THE UNITED STATES FEBRUARY 5, 1968 Mr. SPARKMAN introduced the following bill; which was read twice and referred A BILL To amend section 14 (b) of the Federal Reserve Act, as 1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled, 3 That section 14 (b) of the Federal Reserve Act, as amended 4 (12 U.S.C. 355), is amended by striking out "July 1, 5 1968" and inserting in lieu thereof "July 1, 1970" and by 6 striking out "June 30, 1968" and inserting in lieu thereof 7 "June 30, 1970". II Hon. JOHN SPARKMAN, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, Washington, D.C., March 1, 1968. Chairman, Committee on Banking and Currency, DEAR MR. CHAIRMAN: This is in response to your request of February 6, 1968, for the Board's views on S. 2923, a bill "To amend section 14(b) of the Federal Reserve Act, as amended, to extend for two years the authority of Federal Reserve banks to purchase United States obligations directly from the Treasury." The current authority expires June 30, 1968. Normally, Federal Reserve purchases of Government securities are made in the open market. Since its original enactment in 1942, the $5 billion direct-purchase authority of section 14(b) has been used sparingly, from the standpoints of frequency, amount, and duration alike, Nevertheless, the Board believes that such authority furnishes a desirable degree of protection to the Treasury against inevitable uncertainties in estimates of receipts and expenditures and in borrowing operations. Its continuing availability permits more economical cash and debt management and assures the availability of an immediate source of funds in the event of a national emergency. Also, timely use of the authority-for example, during periods immediately preceding tax payment dates-can avoid the creation of unnecessary financial strains that might occur if the Treasury were required to draw heavily on its accounts at such times. Accordingly, the Board favors enactment of S. 2923. Mr. SPARKMAN introduced the following bill; which was read twice and referred A BILL To extend for two years the authority for more flexible regu- 1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled, 3 That section 7 of the Act of September 21, 1966 (80 Stat. 4 823), as amended by the Act of September 21, 1967 (81 5 Stat. 226), is hereby amended by striking "two-year" and 6 inserting in lieu thereof "four-year". II COUNCIL OF ECONOMIC ADVISERS, Hon. JOHN SPARKMAN, Chairman, Committee on Banking and Currency, U.S. Senate, Washington, D.C. DEAR MR. CHAIRMAN: The Council of Economic Advisers recommends enactment of S. 3133, a bill "To extend for two years the authority for more flexible regulation of maximum rates of interest or dividends, higher reserve requirements, and open market operations in agency issues." The Council's comments with respect to a similar proposal last year remain valid. The more flexible rate authority, which was originally enacted in 1966, has proved very valuable in permitting the regulatory authorities to restrain, in a coordinated manner, excessive rate competition among different kinds of financial institutions during periods of exceptional pressures in financial markets. As we have stated before, we do not believe that continuous use of interest ceilings on savings accounts is desirable. But interest rates in the open market remain high and continue to threaten the competitive position of many thrift institutions. And so long as enactment of the President's proposed tax surcharge continues to be delayed, the dangers for these institutions and indeed for our whole economy only increase. Thus, we believe that further continuation for a limited period of the present flexible authority to regulate interest rates on savings deposits is a prudent course of action. We are opposed to making permanent the existing authority to regulate interest rates on savings deposits. The Council has already set down in its 1967 Annual Report (p. 67) its views concerning the proper course of action with respect to permanent legislation governing regulation of interest rates on savings accounts. The necessary regulatory authority "could be provided for in either of two ways: (1) through standby authority to impose rate ceilings under particular circumstances; or (2) through permanent ceilings set sufficiently high that they would become effective only in unusual instances." It is also our view that the existing flexible authority for adjusting reserve requirements and for conducting open market operations in agency issues constitutes a useful supplement to our tools of monetary and debt management and should be continued. The Bureau of the Budget has advised that it has no objection to the submission of this report and that enactment of S. 3133 would be consistent with the Administration's objectives. Sincerely yours, ARTHUR M. OKUN, Chairman. FEDERAL DEPOSIT INSURANCE CORPORATION, Hon. JOHN SPARKMAN, Chairman, Committee on Banking and Currency, DEAR MR. CHAIRMAN: Reference is made to your request for the views of this Corporation with respect to S. 3133, 90th Congress, a bill "To extend for two years the authority for more flexible regulation of maximum rates of interest or dividends, higher reserve requirements, and open market operations in agency issues". The Act of September 21, 1966 (80 Stat. 823), among other things, provides a statutory flexible basis for regulating interest and dividend rates which may be paid by insured banks and insured savings and loan associations on time and savings deposits or shares or withdrawable accounts. Additionally, the Act authorizes the Board of Governors of the Federal Reserve System to increase reserve requirements on time and savings deposits to a maximum of 10 percent and authorizes Federal Reserve open-market operations in obligations of agencies of the United States Government. The provisions of the Act originally were effective only during the one-year period which began on September 21, 1966, the date of enactment of the Act. The authority conferred by the Act was extended for an additional one-year period by the Act of September 21, 1967 (81 Stat. 226). S. 3133 would extend the authority conferred by the Act for an additional two-year period. The greater flexibility accorded to the banking agencies by the Act to vary interest-rate ceilings on time and savings deposits on different bases and the extension of interest-rate ceilings for the first time to insured institutions of the Federal Home Loan Bank System and to mutual savings banks insured by the Federal Deposit Insurance Corporation have strengthened significantly the ability of the financial supervisory agencies to moderate excessive competition between various types of financial institutions for savings. The actions taken by the regulatory agencies pursuant to the authority contained in the Act of September 21, 1966, have served to limit escalation of interest rates paid by commercial banks and other financial institutions in the competition for consumer savings. 92-562-68 If the added authority to regulate rates paid by savings and loan associations as well as by banks and the more flexible authority with respect to bank interest rates are retained, the supervisory agencies will continue to be able to take prompt and appropriate action in this area in the future, whenever necessary. It is essential, in our opinion, that the authority not be permitted to lapse. The Corporation therefore favors the enactment of S. 3133. The Corporation believes that the advantages of the flexible interest-rate authority have substantially been demonstrated since enactment of the original legislation and that consideration should be given to the need for permanent legislation and its appropriate scope and form. We understand that the Department of the Treasury has been requested to work with the other interested agencies, including the Council of Economic Advisers, toward developing a legislative proposal along these lines for possible transmittal to the Congress early next year. The Bureau of the Budget has advised that it has no objection to the submission of this letter and that enactment of S. 3133 would be consistent with the Administration's objectives. Sincerely yours, K. A. RANDALL, Chairman. FEDERAL HOME LOAN BANK BOARD, Hon. JOHN SPARKMAN, Chairman, Committee on Banking and Currency, DEAR MR. CHAIRMAN: In response to your request, the Federal Home Loan Bank Board submits its views as to S. 3133 of the present Congress. This bill would amend section 7 of the Act of September 21, 1966 (80 Stat. §23), which, as amended by the Act of September 21, 1967 (81 Stat. 226), provides that the authority conferred by the Act of September 21, 1966, shall be effective for a two-year period beginning on that date. S. 3133 would change the two-year period to a four-year period, thus extending the authority for an additional two years. The Act of September 21, 1966, conferred standby rate-control authority on the Federal Home Loan Bank Board with respect to interest and dividends on deposits, shares, or withdrawable accounts of Federal Home Loan Bank members (other than those whose deposits are insured under the Federal Deposit Insurance Act) and of institutions insured under title IV of the National Housing Act. The Board was authorized to prescribe different rate limitations on the basis (among others) of the amount of the account, or on such other reasonable bases as the Board might deem desirable in the public interest. In the banking field, the act converted the then existing mandatory rate-control authority of the Board of Governors of the Federal Reserve System and the Board of Directors of the Federal Deposit Insurance Corporation into standby authority and authorized those agencies to differentiate on the same bases as those provided the Federal Home Loan Bank Board. Each of the three agencies was directed to consult with the other two before exercising this authority. In addition, the act provided stronger provisions as to reserves of member banks of the Federal Reserve System and authorized the Federal Reserve banks to buy and sell in the open market, under direction and regulations of the Federal Open Market Committee, any obligation which is a direct obligation of or is fully guaranteed as to principal and interest by any agency of the United States. The Federal Home Loan Bank Board considers it essential that the standby authority conferred on it by the Act of September 21, 1966, as amended, be continued. Further. the Board believes that continuance of the authority thus granted to the Federal Reserve banks to buy and sell agency obligations would be in the public interest. While we would prefer that there be no time limit, we regard the provisions of the bill as definitely desirable, even on the basis of an additional temporary extension, and recommend that the bill enacted. The Bureau of the Budget has informally advised us that there is no objec tion to the presentation of this report and that enactment of S. 3133 is consistent with the Administration's program. With kindest regards, I am, Sincerely, JOHN E. HORNE, Chairman. STATEMENT OF J. L. ROBERTSON, VICE CHAIRMAN, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Mr. ROBERTSON. Thank you, Mr. Chairman. I appreciate this opportunity to present the views of the Board of Governors on S. 2923 and S. 3133. Senate bill 3133 would extend for 2 additional years the provisions of Public Law 89-597, which would otherwise expire September 21 of this year. This statute provides the authority for coordinated regulation of the maximum rates payable by federally insured financial institutions to attract savings funds. It also fixes a 10-percent statutory maximum on reserve requirements for member banks on time and savings deposits-in place of the former 6-percent maximum, and authorizes the Federal Reserve banks to buy and sell in the open market obligations of any Federal agency. Senate bill 2923 would extend for 2 years the authority for Federal Reserve banks to purchase up to $5 billion of obligations of the United States directly from the Treasury. In the 6 months or so that have passed since the Congress voted to extend Public Law 89-597 for 1 year the need for continuation of the rate ceiling authority provided in that statute has increased rather than diminished. Interest rates in the money market have risen, and banks have had to raise their offering rates on large negotiable certificates of deposit. Banks are paying the 512-percent ceiling rate on shorter and shorter maturities in an effort to avoid sizable runoffs in funds. The rise in yields available on market instruments also has contributed to a marked slowing over recent months in the inflows of consumer savings to banks and other depositary-type institutions, compared with the very high rates of increase experienced last spring and summer. Under these conditions, the competition for savings funds has tended to intensify. From the January 31 survey of time and savings deposits at insured banks we have thus far been able to process returns for the 700 banks that are most active in this business. The survey shows that the great majority of those banks are paying the maximum permissible rate for consumer-type deposits-4 percent on savings accounts and 5 percent on most varieties of time deposits under $100,000. And we have the impression that the same situation exists with respect to savings banks and savings and loan associations that most active competitors, desiring to protect their existing funds and stimulate the maximum inflow of new savings, are offering the maximum rates allowed currently by the regulations. The situation obviously is one in which some institutions, if unrestrained by rate ceilings, would see an advantage in offering somewhat higher returns to savers. And if such competition were permitted, I have no doubt that a rate war would develop. Furthermore, I see no reason to expect a diminution of pressures on the funds position of banks and savings institutions any time soon. It may become necessary to adjust the structure of ceiling rates if financial markets continue to tighten, in order to make it possible for the institutions to compete with the market and attract a reasonable share of new savings flows. But if such a change does become necessary-and I hope it will not surely it would be best to limit the extent and nature of |