BEFORE THE DEPOSITORY INSTITUTIONS DEGULATION COMMITTEE: Premiums, Finders Fees, and the Payment of Interest in merchandise

by Bruce D. Fitzgerald on July 16, 1980
by Bruce D. Fitzgerald, R. Robert Russell and Thomas D. Hopkins

The Council on Wage and Price Stability has urged that the Depository Institutions Deregulation Committee (DIDC) reconsider its proposed regulations which would prevent banks from giving gifts to new accounts, paying finders’ fees to third parties, and paying interest in the form of merchandise.  The Council reasoned that these practices result largely from restrictions (which the DIDC was established to phase out) on maximum interest rates available to savers, and they reflect banks’ willingness to pay higher interest rates. If these practices are prohibited before banks are allowed to pay higher interest to depositors, banks will likely adopt even less efficient methods of competition, effectively depriving savers, and reducing banks’ abilities to compete for funds. The Council noted that where market prices are artificially constrained, as in the case of interest rate ceilings, other forms of competition
invariably arise. It is the Council’s position that until regulations mandating artificially low interest rates are removed, lending institutions will continue to seek alternative ways to attract customers.  Prohibiting practices like gifts would almost certainly lead to new substitutes less desirable than the practices DIDC wants to ban, the Council said.

The Council suggested that these practices underscore the need for DIDC to phase out interest rate ceilings. The Council urged the DIDC to treat the causes and not the symptoms of the problem. The Council also identified alternative regulations which would achieve the DIDC’s regulatory objectives without banning premiums and prepayment of interest in merchandise.  A copy of the Council’s comments is attached.

 Download the Complete PDF   Share Share    Print Print    Email Email

Previous post:

Next post: