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90TH CONGRESS HOUSE OF REPRESENTATIVES 2d Session

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REPORT No. 1814

EXTENSION OF INTEREST RATE CONTROLS

JULY 26, 1968.-Committed to the Committee of the Whole House on the State of the Union and ordered to be printed.

Mr. PATMAN, from the Committee on Banking and Currency, submitted the following

REPORT

[To accompany H.R. 16092]

The Committee on Banking and Currency, to whom was referred the bill (H.R. 16092) to extend for 1 year the authority for more flexible regulation of maximum rates of interest or dividends, higher reserve requirements, and open market operations in agency issues, having considered the same, report favorably thereon with an amendment and recommend that the bill as amended do pass.

The amendment is as follows:

Strike all after the enacting clause and insert in lieu thereof the following:

SECTION 1. Section 7 of the Act of September 21, 1966 (Public Law 89-597; 80 Stat. 823) is amended to read:

"SEC. 7. Effective September 22, 1969

"(1) section 19(j) of the Federal Reserve Act (12 U.S.C. 371b) is amended to read as it would without the amendment made by section 2(c) of this Act;

"(2) the second and third sentences of section 18(g) of the Federal Deposit Insurance Act (12 U.S.C. 1828(g)) are amended to read as they would without the amendment made by section 3 of this Act; and

"(3) section 5B of the Federal Home Loan Bank Act (12 U.S.C. 1425b) is repealed."

GENERAL STATEMENT

The act of September 21, 1966 (80 Stat. 823) gave the financial regulatory agencies flexible authority to set interest rate ceilings on savings accounts, authorized higher reserve requirements for member banks, and permitted open market operations in direct or fully guaranteed obligations of any agency of the United States. The legislation was to be effective for a period of 1 year. By the act of September 21, 1967 (81 Stat. 266) the authority was extended for an additional year. Thus, the legislation will expire on September 21 of this year.

This bill would provide an additional 1-year extension. Your committee has consulted with affected industry groups and no objection has been filed. The regulatory agencies-the Federal Reserve Board, the Federal Deposit Insurance Corporation, and the Federal Home Loan Bank Board-have recommended that the extension be authorized.

Temporary extension of this authority appears clearly to be in the public interest. It would permit the regulatory agencies to act in a timely fashion if necessary in light of developments in the financial markets. This authority has contributed significantly to a moderation in the excessive competition for consumer savings, has facilitated an increased flow of funds into thrift institutions, and has improved the mortgage market. In view of the continued uncertainty as to conditions in the financial market, it seems clearly desirable to extend the authority of the financial supervisory agencies to regulate time and savings deposit interest rates in a coordinated manner.

In addition to the interest-ceiling authority, this bill would also extend the authority of the Federal Reserve to vary reserve requirements on time and savings deposits between 3 and 10 percent, and conduct open market operations in securities issued or guaranteed by any agency of the United States. Both are valuable potential tools to promote financial stability and the efficient function of our financial markets.

While reserve requirements on time and savings deposits have not been raised beyond the 3 to 6 percent range permitted under earlier legislation, the reserve required on time deposits in excess of $5 million is presently at 6 percent. The broader latitude inherent in the 3 to 10 percent range is clearly desirable.

Federal Reserve open market operations can contribute gradually to the improvement of the market for agencies securities. In time, the yield-spread between agency and Treasury securities should narrow as the agency market becomes broader and more responsive. The legislative authority for Federal Reserve operations in agency markets was originally granted, and has since been used in a minor way for this purpose.

COMMITTEE AMENDMENTS

Your committee adopted two amendments which make permanent provisions of this statute which under existing law are temporary. Both of these amendments affect the Federal Reserve Board and System. Both amendments have the full support of the Federal Reserve Board as testified to by Chairman Wm. McC. Martin.

One amendment would make permanent section 2(b)(3) of Public Law 89-597 which provides for member bank reserves for other than demand deposits shall be not less than 3 percent and not more than 10 percent.

Chairman Martin best described the desire for making this provision of the law permanent when he said, "Statutory expiration dates confront the Board with the prospect that if they should raise reserve requirements on time deposits about 6 percent, the action might be automatically reversed, thereby reducing reserve requirements, at a time when such a reduction would have undesirable consequences."

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