Money fund plan for banks draws some fire -- even among bankers
The bankers saidm they wanted to compete with the money market funds. But now that government regulators are about to give them a deposit instrument to fight with, many of them aren't too happy.
And the money market funds, who also said they weren't afraid of competition, have gone to court to make changes in the new invention before it starts working.
On Oct. 18, President Reagan signed the Depository Institutions Act. It directs the Depository Institutions Deregulation Committee (DIDC), a branch of the Treasury, to authorize commercial banks, savings and loans, and mutual savings banks to offer the money fund account. Under the act, the account is to be ''directly equivalent to and competitive with money market mutual funds.'' The DIDC is now accepting comments and suggestions on proposed regulations.
Though the account package isn't all wrapped up yet, these are its main proposed contents:
* No interest-rate ceiling. The banks can offer whatever rate they can afford to pay.
* A minimum balance no greater than $5,000.
* Check-writing privileges three times a month.
* Automatic transfers three times a month.
* Insurance by the Federal Deposit Insurance Corporation or the Federal Savings and Loan Insurance Corporation of up to $100,000 per account.
If this sounds better to you than a money market fund, the money fund people agree, which is why they filed a lawsuit this week. The Investment Company Institute (ICI), the trade organization for the mutual fund industry, argues that the combination of no interest-rate ceiling and insurance makes the money fund bank account more than ''equally competitive.'' Money market funds are not insured.
With no interest ceiling, the institute ''fears predatory pricing,'' says Reg Green, an ICI spokesman. ''It would allow the big banks to offer massive, ridiculously high interest rates for short periods of time, . . . which would harm money market funds, smaller banks, and thrifts.''
Not only did the ICI file suit this week, but it also received a letter from four banks, on behalf of many other banks, supporting the ICI suit. The letter said that, ''By authorizing a ceilingless instrument, the DIDC will allow a relatively small number of the largest banks with immense marketing power to engage in anti-competiitve and predatory practices. . . .''
Fridley State Bank, a suburban Minneapolis bank with about $25 million in assets, was one of the four banks. Bank president William Beery says his bank won't be able to offer money market rates.
''Being a consumer lending bank, and seeing that loan demand has dropped off 50 percent, we won't be able to pay that kind of interest,'' Mr. Berry says. The bank wouldn't be able to loan out, at necessary interest rates, all the deposited money attracted to the new account, he explains.
James Christian, chief economist for the US League of Savings Associations, says banks would have to ''find a lending area first, and then go get money for the account, rather than getting money that's around and finding a place to park it.''
One danger he forsees is banks letting the account take up too much of their deposits. ''If this account turns into 30 to 40 percent of a bank's deposits, you've got a real problem,'' he says.
Mr. Christian says that with the money fund account probably being very liquid - money moving in and out of the account frequently - it will be difficult to move all that money into longer-term, higher-yielding investments.
Despite these anticipated drawbacks, the wary bankers still want a vehicle to compete against money market funds.
The banks blame money market funds for much of their lost deposits. The funds recently reached $228 billion in assets.
The money fund mangers - aside from the ceiling and insurance issue - don't seem overly worried about the new competition.
''As long as the playing field is level, we've got a good chance,'' Mr. Green says. He says there are some advantages to money funds that a bank fund couldn't offer, including: a wider variety of funds (tax-exempt funds, government funds, stock and bond funds); flexibility, being able to move money rapidly from fund to fund; and a satisfied customer base.
The new money market account for banks will not go into effect until Dec. 14. The DIDC still has time to alter it.