with current market rates, so that they will not flow out of the institutions.

The facts remain that the thrift institutions on their liability side have to be free to compete for money in an inflationary period at or about current rates.

We have other meetings of the DIDC coming up. December is the next meeting. We can again review this subject. As we have a firmer grasp on what is going on, we can better decide whether or not we want to increase the passbook ceiling rate. Therefore, it was my suggestion to the other members of the DIDC that at least for now it was best, not to put the increase into effect on November 1. The CHAIRMAN. You do intend to have a special meeting of DIDC then?

Secretary REGAN. No, that will be by notation vote. We've already started circulating papers on this to get the necessary signatures and votes from the DIDC members.

The CHAIRMAN. But at this point you do expect that the change will take place or at least the deferral?

Secretary REGAN. Well, assuming that everyone, except myself, votes the same way, it would come out three to two the other way. The CHAIRMAN. It appeared that your vote switch was the only one necessary, in light of the other vote.

Mr. Secretary, my concern with DIDC also has been centered on the complexity of proposals which in my view has led to confusion among officers and employees of depository institutions and among depositors. DIDC has cut a rather wide swath restricting premiums and finder's fees, as well as proposing various phaseout schedules and new titles of certificates. So I am wondering if you could also urge DIDC in your future meetings to simplify the manner in which the phaseout will occur. I mean we centralize on the issue of passbook savings. There are a lot of other procedures that I think have been overly complex. Do you have any comments on that? Secretary REGAN. Well, what we are attempting to do in DIDC is to try to set a long-range deregulation schedule and then allow the thrifts to stay on that schedule rather than to start and stop or have just a short-term solution not know what the long-term implications of that short-range solution might be. I would like to see us stay on the schedule. I think in most cases we are on schedules that will allow the institutions to plan their own futures. I hope that when this legislation that we're discussing now, S. 1720, is passed, and depository institutions get additional asset powers that they know where they're going to be on the liability side of their balance sheets at the same time.

The CHAIRMAN. The Chairman of the National Credit Union Administration is a member of DIDC. The new proposed chairman was before this committee on Friday, and although they are a part of DIDC, they're not subject to DIDC's decisions. I asked him on Friday whether he felt that it was fair for them to be able to participate in a decision like setting the depository accounts at 6 percent and yet go right out and set theirs at 12, if there wasn't some conflict there. He declined to answer, as not having yet been sworn in as Chairman of NCUA.

I would ask you that question. Do you think the NCUA Chairman ought to be a member of DIDC, and if he is, should he not

perhaps be a nonvoting member, like the Comptroller of the Currency?

Secretary REGAN. I haven't reflected on that, Mr. Chairman. It seems to me, as a top-of-the-head answer, that his views are appropriate to that committee. He understands the problem from a different angle. I would hate to think that a member of that committee was voting only from a narrow parochial point of view and trying to hold down competition for his own particular phase of the industry. I would think that the new Chairman could give an unbiased vote in the committee.

CREATE A LEVEL PLAYING FIELD

The CHAIRMAN. Mr. Secretary, at this point I would like a general response. Referring to your opening statement-you and I have talked about this many times, the overall need for attempting to create a level playing field. How do you see the financial services industry evolving in this country over the years ahead, given all that has transpired recently, the money market funds, over $150 billion, all the mergers that I talked about in my opening statement, the American Express-Shearson, Prudential-Bache, and so on. How you feel that is going to evolve, and what do you believe the consequences would be for commercial banks and thrift institutions, if Congress fails to act to increase their competitiveness, as we are attempting to start that process now?

Secretary REGAN. Well, Mr. Chairman, first of all, I have to say that we have to remember that financial people are the same as manufacturers or anyone else. They are ingenious about coming up with new products, products that either there is a demand for or for which a demand can be created. I think that that will continue, not only in the 1980's and 1990's, but with new electronic advances, these new products will probably change even faster. Some of these laws that we are considering today were fashioned in an era when they never heard of advanced electronics, either for computers or for communications or for transfer of funds.

I think that we now know that that process cannot be slowed down. If we don't do something for the banks and the thrift institutions, they're going to be unnecessarily held back and other institutions are going to come in and take their place.

A thought comes to mind that we might look at the transportation industry to see what happened there, where the railroads thought they were just in the business of running railroads, and other modes of transportation came in and superseded them, trucking and the airlines. And as a result, many of our great railroads ended up in a great deal of trouble.

I think the same thing could happen in the financial services industry, if we don't keep the main portions of it, the banks and the thrift institutions, in a position where they can compete effectively. I don't think there is any way that you can slow down the ingeniousness of others in the financial services industry. I don't think you would want to, even if you could. And unless you are prepared to say that the banks have had it, you are going to have to do many of the things that are not only in S. 1720, but the successive steps in years ahead, in order to keep them competitive.

And when you look at it, who is the chief beneficiary of all of this? It has to be the consumer. You get corporations of this size that are competing, and that necessarily means better service, it means faster service, it should mean cheaper service. And to the extent that the consumer is the beneficiary I think the Nation is better off.

The CHAIRMAN. Mr. Secretary, my time is up on this round. I would like to thank you for your general support of the legislation. I will look forward to working with you on the mechanics of it and changing it. I would also share your view that the market is changing so rapidly. I believe Congress would be irresponsible to sit back and do nothing and not attempt to recognize these traumatic changes that are taking place in the marketplace.

So I do thank you for the administration's support in general of this legislation. Senator Cranston?

Senator CRANSTON. Thank you very much, Mr. Chairman. Welcome, Mr. Secretary.

QUESTION WISDOM OF DIDC

Like many others, I'm very pleased that you had second thoughts about the November 1 passbook ceiling increase and decided to delay that proposal. That action does lead to questions about the wisdom of the validity of the structure of the DIDC, I think. The passbook rate increase, as I understand it, has been repeatedly considered and turned down by the DIDC, due to the earnings problems of the thrifts, the earnings problems have deteriorated since that first decision was made not to have an increase, and although you have now reversed it, I would like to ask what information you and other members of the Board had that caused you to vote for that in the first place.

Secretary REGAN. I was convinced at that time that something had to be done to stanch the flow of funds out of the thrift institutions. They were losing funds out of passbook savings rapidly. The reason had to be that they were not paying competitive interest rates, and while there was a certain basic amount that probably would stay in the institutions, gradually most of it would erode, as more and more people came to realize that 52 percent or 5 percent does not compete effectively with 15 percent. And in an effort to make them more competitive, I wanted to take the first step, however small. And a half a percentage point increase was a small step in that direction of making them more competitive in interest rates.

We have been told that the money for all savers certificates is not coming out of the money market funds to the extent that we initially assumed it would. Later this may turn out to be a false blip or something of that nature, but at least the initial indications are that in the first week of all savers, money market funds increased rather than decreased.

To put it mildly, I'm confused as to what is going on there. I can find no one who has made any detailed study of where the money is coming from. So we decided, "We can always revisit this question. We are going to have further meetings of the DIDC, so let's back off now to see what is going on and find out if most of that

ASC money is coming from passbook savings, so that the halfpercent increase isn't going to stanch that flow.'

Senator CRANSTON. The DIDC changed the way the MMC rate is indexed to include a 4-week averaging process. As I understand it, that would allow financial institutions to pay a high MMC rate when interest rates are falling. How is that action going to help depository institutions? Isn't it simply going to increase their cost? Secretary REGAN. Well, it will give them a competitive advantage over other types of instruments whose interest rates are falling, at least on a temporary basis, and to that extent, they should keep funds in there institutions. Now to the extent that the institutions can take those funds, for example, at 12 or 13 percent and translate them into other instruments on the asset side that are going to return them 15 or 16 percent, there is an arbitrage figure there that increases their earnings.

Senator CRANSTON. Can you explain why the DIDC removed all rate ceilings on IRA/Keogh accounts at its September 22 meeting, that occurred just as Congress increased the eligibility for these tax-free accounts? And it would appear to me that the action is apt to produce rate wars and increase the cost to the financial industry.

Secretary REGAN. Well, I think that the reason that we took the ceiling rates off was again to make them more competitive with others seeking these IRA and Keoghs. We want the nonbanking financial institutions to have some competition from the thrifts, and if we had not taken the ceilings off, they would not have been in a position to compete.

Senator CRANSTON. The DIDC has proposed for removing all rate ceilings on accounts of 31⁄2 years or longer, and a proposal also for a $5,000 minimum transaction account with no interest rate ceilings. In each of these actions, what do you believe the effect will be on the thrift industry under current conditions? And has it been considered whether it might not be wiser to wait until the whole financial sector is stronger and interest rates are lower, before we take these actions?

Secretary REGAN. Well, again, this is a judgment call. You have a good and a bad effect from this. The good effect is that by taking the ceilings off, you allow them to compete more effectively with other money market instruments. To the extent that means additional cost to them, I would submit that is probably bad. But I think the ability to compete, the ability to get new funds in, outweighs the additional cost that would result to the institutions.

REVIEW OF DIDC ACTIONS

Senator CRANSTON. Do you think it might be wise to have a 30day review period in Congress after DIDC actions, before they actually take effect, given those affected by them an opportunity to have their say on recommended actions?

Secretary REGAN. As a practical matter, we generally do that. For example, take our most recent action with regard to increasing passbook ceilings by a half a percent. For physical reasons you cannot have something happen in DIDC on x date and then x-plus 1, put it into effect, because you have to allow time in order to

accomplish the necessary changes, to notify customers and, in fact, to notify all of the institutions.

Senator CRANSTON. I mean a 30-day review by Congress.

Secretary REGAN. Well, to the extent that the Congress wishes to get into the nitty-gritty of this type of thing. But I would submit that in all probability during this period when we are notifying institutions, if any Member of Congress were to make his views known to the DIDC, I'm sure that we could consider those views. I think if you were to hold a hearing, you might just as well have the Congress doing the work of the DIDC.

Senator CRANSTON. No, we don't want to do that. [Laughter.]

Senator CRANSTON. The law requires that the DIDC not increase interest rates above market rates, but isn't that actually going to be the effect of some of the actions that have been taken?

Secretary REGAN. No, because money rates are competitive, and to the extent that we just free them up, we allow the institutions to compete for funds, and they will compete at the market.

Senator CRANSTON. What would you think of a proposal that would require unanimous votes of the DIDC.

Secretary REGAN. I think it would be horrible. I think that would be the same thing as asking a congressional committee to have unanimous vote. I don't think you could possibly get that. You want differences of opinion expressed, but to have everybody required to get aboard before you make a decision might prolong the discussions ad nauseam.

The CHAIRMAN. That's what happens here. And we don't even need unanimous consent.

[Laughter.]

Senator CRANSTON. On the administration's bill submitted by the Federal Home Loan Bank Board, thrifts would virtually become the same as commercial banks, allowed to invest 100 percent of their assets in nonresidential investments, such as commercial corporate business, agriculture, et cetera, loans. Presently, as you know, thrifts are limited to 20 percent of that sort.

What do you think would happen to housing financing under that proposal and who would there be to focus on housing financing?

Secretary REGAN. Well, first of all, the thrift management is going to have to make a decision here, because as a thrift goes go more toward banking, according to S. 1720, and in accordance with tax laws, it will become taxed as banks, and it will come further under banking regulation. If it wishes to stay in the housing market and continue to get that tax advantage that goes along with housing, the thrift will not change its asset structure. Now it has been my experience that most of these financial institutions as they change, usually make better than half, and probably closer to three-quarters of their efforts, in the field they know best.

The thrifts have a history of knowing the housing industry and the real estate markets. It would, in my opinion, be only logical that they stay primarily in that market. At the same time commercial banks will be encouraged to get more into the housing market, which they, in many cases, have left. We want them to come back

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