The level playing field has arrived. Or has it?
For the past few years, banks and savings-and-loans have demanded a ''level playing field'' of competitive interest rates on which to fight the money market funds for depositors' dollars. Now, Congress and the Depository Institutions Deregulation Committee (DIDC) have given the banks a new deposit instrument that is supposed to satisfy that demand.
Starting Dec. 14, banks will be able to offer a fully insured account paying high money-market rates on deposits of at least $2,500. Many banks and S&Ls will offer interest one or two percentage points higher than the money market funds, in addition to federal deposit insurance up to $100,000 per account.
The same insurance applies to another account announced by the DIDC Dec. 6. It also has a $2,500 minimum, but has unlimited checking privileges. This new ''Super NOW'' account, available Jan. 5, will probably pay slightly lower interest rates, because banks and thrifts will have to keep approximately 12 percent of the assets in these accounts in reserve to meet the requirements of a demand-deposit instrument.
Within days after the committee announced details of the first account, many banks and S&Ls came out with advertisements offering high yields immediately on deposits made before Dec. 14. But until the account is officially available, these deposits are not insured; they are simply bank repurchase agreements - akin to making a loan to the bank - where the money is ''parked'' until it is moved into the new account on Dec. 14.
With two new accounts to deal with, bankers expect a few months of confusion until a fairly firm interest rate and the best deals on withdrawals, terms, and other conditions are established.
According to the deregulation committee's rules on the first, higher-earning account, customers can make no more than six preauthorized or automatic transfers a month and write no more than three third-party checks. There are no restrictions, however, on the number or size of regular withdrawals made in person, by mail, or phone. As long as the average balance for any given month stays at $2,500 or more, the account will pay the high rate. Otherwise, the rate drops to that being paid on negotiable order of withdrawal (NOW) accounts.
The two accounts could become an expensive proposition for some banks, if they significantly raise the cost of their ''core deposits.'' Despite the relative unattractiveness of a 5 1/2 percent passbook rate, many depositors have kept their money in passbooks, preferring the security of deposit insurance over yield. But the new accounts may force banks to pay twice as much interest for a large portion of these core deposits. One observer estimates that to come out ahead or break even, banks may have to attract $2 of new deposits to make up for every $1 of core deposits that move up to the new accounts.
For investors who have been using a money market fund as a high-yield savings account and not making more than an occasional withdrawal, it will pay to switch to the new accounts. Many banks and S&Ls, particularly the larger ones, will be paying higher yields than the money funds. By being able to deal with their neighborhood bank, customers will often find it more convenient to deposit or withdraw money. Finally, despite the money funds' excellent record of security during their years of rocketing growth, people may be more comfortable with that
If you have more than $100,000 to deposit, you can still be completely insured. A husband and wife can have a joint account, they can then open separate accounts, another account can be opened in the wife's name with the husband as trustee, and the wife can be a trustee for the husband. In addition, a variety of accounts can be opened in a child's name, and the whole process can be repeated at separate banks.
This is a good time to shop around among financial institutions for the best deal. Some may offer lower rates, hoping the apparent security of deposit insurance will offset the less attractive yields. While most banks will change rates monthly at first, changes may come more frequently later.
Smaller banks or S&Ls simply may not be able to afford continually paying higher yields. This is one concern that has been expressed about the new account: The stiff competition might hasten the demise or merger of many institutions.
To counter the advantages of the DIDC-approved accounts, the money market funds are expected to put new emphasis on their own pluses. Money funds affiliated with a group of funds, for instance, will note the investor's option to switch to other types of funds, including equity funds, bond funds, and tax-free money funds. They are also likely to point out that many of them have only $1,000 minimum deposit requirements (a few are as low as $500 and one has no minimum), and unlimited withdrawal and transfer privileges.
The funds may also note that the deposit insurance comes from two agencies - the Federal Deposit Insurance Corporation and the Federal Savings and Loan Insurance Corporation - which have never had sufficient money in their coffers to cover all the deposits they are supposed to insure.
While this is true, it is also true that the agencies have become skilled at working out rescue operations for failing institutions. If the situation became serious, most observers believe Congress would appropriate whatever funds were needed to cover America's savings.
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