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Profile: 1933 Banking Act

1933 Banking Act was a participant or observer in the following events:

Fluctuating market interest rates cause many savings and loan associations (S&Ls) to struggle financially. The problems stem from changes made to the Federal Reserve’s “Regulation Q” policy in 1966. Regulation Q was created in accordance with the 1933 Banking Act, with the goal of prohibiting banks from paying interest on deposits in checking accounts. By limiting speculative behavior by banks competing for customer deposits, banks would be prevented from seeking risky means of profit to be able to pay the interest on said deposits. Under the 1966 changes, interest rate ceilings are imposed on thrift institutions, including both mutual savings banks and S&Ls. Recently, the volume of funds raised by business firms in the financial markets has risen sharply relative to the funds by households in the form of residential mortgages. The slowing in the rate of increase in residential mortgage credit is especially pronounced at thrift institutions. The changes made to the Regulation Q policy reflect policymakers’ interpretation of this decline. (Pritchard 4/6/1967; Gilbert 2/1986 pdf file) Since the interest rate ceilings prevent S&Ls from paying competitive interest rates on deposits, every time the market interest rates rise, substantial amounts of funds are withdrawn by consumers for placement in other financial instruments with higher rates of return, such as money market funds. This process of deposit withdrawal, known as disintermediation, and the subsequent deposit influx when rates rise, known as reintermediation, leaves S&Ls highly vulnerable. S&Ls are also restricted at this time by not being allowed to enter into any business venture other than accepting deposits and granting home mortgage loans. As money market funds emerge as a source of competition for S&L deposits, these restrictions become increasingly challenging for S&Ls to deal with. (Federal Deposit Insurance Corporation 12/20/2002)

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