Big Squeeze

The thrifts cry for help

Once again, it is hand-wringing time at the thrifts. With a 13% inflation rate, people are being driven into investments that offer more than the paltry 5 1/4% or so that savings banks and savings and loan associations are allowed to pay on passbook accounts. The result is that these traditional homes of the small saver are fairly scrambling for deposits. New customers are being lured by both familiar freebies (toasters, tickets to shows) and new appeals. For example, New York's big Bowery Savings Bank (assets: $5 billion) now has its longtime pitchman, Yankee Slugger Joe DiMaggio, asking folks to take money out of stocks and put it into thrift accounts because it is "a calmer investment." And at some banks, depositors wanting to make sizable withdrawals have found themselves practically grilled by officials about their reasons for doing so.

The thrifts are nervous because for the first time since the early 1970s, when interest rates surged on the eve of the 1973-74 recession, they have been losing deposits in a big way. April, for instance, is normally a poor month for the savings banks, since their customers commonly make large withdrawals to pay taxes. But April 1979 was by far the cruelest ever: nationwide, savings and loan institutions lost $1.5 billion in deposits (vs. an increase of $400 million last year). They gained back $1.2 billion in May, but that was considerably below last year's more normal $2.1 billion in new deposits.

"Savings banks," says Saul Klaman, president of the National Association of Mutual Savings Banks, "have the worst of both worlds, high interest costs and disintermediation." Disintermediation is bankers' jargon for loss of deposits to higher yielding investments, such as Treasury bills. For a while, savings officials thought that this had been averted through the introduction in mid-1978 of six-month money-market certificates (M.M.C.s), whose payout is tied to the going Treasury-bill rate, currently 8.87% for six-month bills. But the M.M.C.s did not bring in just new money; they also attracted funds that the thrifts already held in lower yielding savings accounts. Result: the savings institutions' deposits held up, but their profits were squeezed hard, since they were trading low-payout depositors for high-interest M.M.C. holders.

In March the Administration tried to improve the thrifts' earnings by dropping the quarter-point premium that they were required to pay on M.M.C.s. when the Treasury-bill rate was at 9% or above. But this backfired because the commercial banks then moved aggressively to compete for M.M.C. sales, cutting into savings-bank deposits.

Now the thrifts feel threatened by a new development: a conviction in Washington that the small saver should no longer subsidize the mortgage borrower. Under pressure from the Gray Panthers' senior citizens' lobby, the Administration has proposed the lifting of interest ceilings on savings deposits and has urged that all federally chartered savings banks offer interest-bearing checking accounts. Last week Treasury Secretary Michael Blumenthal endorsed Senate legislation to phase out ceilings over a ten-year period.

As of July 1 banking regulators will raise the passbook rate by 1/4%, to 5 1/2%, and abolish minimum deposit requirements, except for the $10,000 M.M.C.s. To offset the higher rates they will have to pay on deposits, next month the thrifts will also be allowed to start offering "variable rate" mortgages whose interest levels will fluctuate with the market cost of money. Up to now those mortgages have been offered only by the big savings and loan associations in California, which has no laws limiting what rates can be charged on mortgages, and where S and Ls are generally in more robust condition than institutions in the East. New York thrift executives are envious. Paul Willax, president of Buffalo's Erie Savings Bank, openly concedes that small savers in the East have been faring poorly. He reckons that a New Yorker who put $1,000 in a time deposit paying 7 3/4% in 1974 now has $890, after inflation and taxes, to show for his prudence. He also claims that his bank would earn twice as much as it does if it were in California. In fact, the Erie has purchased a California S and L, for what Willax calls "diversification."

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