Hike in passbook savings interest draws S&L fire

Will the savings-and-loans be the next group to march on Washington? Initial reaction from the S&L industry to the decision to increase interest rates on passbook savings account by half a percent, to 6 percent, is as negative as the country's reaction to paying high interest rates.

William O'Connell, executive vice-president of the US League of Savings Associations, in a statement issued after the Depository Institutions Deregulation Committee took its action, said, "This is another monumental and incredible blunder by the DIDC. . . . The DIDC is a menace to the financial system, and the Congress should move promptly to abolish the DIDC before it does further damage."

In a slightly more restrained reaction, Saul Klamen, president of the National Association of Mutual Savings Bank, commented, "I am completely mystified by the economic logic. There is no justification for this action at all. I can only see it if it had so me political basis to justify some action that might appear to be responsive to the needs of small savers for a higher rate."

And, in fact, Donald Regan, the secretary of the Treasury and the chairman of the DIDC, said the rate increase was made "to strike a blow for the little guy." Roughly 40 million Americans, it is estimated, have passbook savings accounts, which currently pay interest rates of 5 1/2 percent at thrifts and 5 1/4 percent at commercial banks. The new increase will be effective Nov. 1. Commercial banks will pay 1/4 percent less than the thrifts -- or 5 3/4 percent.

However, even those organizations that represent "the little guy," said they were unhappy with the size of the increase, but for a different reason. Steve Mehlman, manager of editorial services for the American Association of Retired People, commented, that "the half a percent is in the right direction, but it's not what we want or need." Many retired people had written into the committee asking for as much as a 5 percent increase in the rate.

The thrift industry is upset because the increase it must pay small savers comes at a difficult time for the banks. They are steadily losing deposits to the money market mutual funds and demand for mortgage rates running between 16- 17 percent has dried up. George Hanc, chief economist for the NAMSB estimates the new rates will cost the industry $250 million annually on its $50 billion in passbook deposits. James Christian, chief economist for the US League, thinks the cost will be higher -- about $500 million.

The DIDC was split on its decision to increase the rate. Paul Volcker, chairman of the Federal Reserve Board, and Richard Pratt, chairman of the Federal Home Loan Bank Board, both voted against the increases. However, Mr. Regan, William Issac, the chairman of the Federal Deposit Insurance Company, and Lawrence Connell, chairman of the National Credit Union Administration, all voted for the change.

The DIDC also approved a new retirement savings account without an interest rate ceiling. This plan will allow individuals to set up individual retirement accounts (IRAs) or Keogh accounts with a minimum maturity of 1 1/2 years and without any limit on the interest rates. The thrift industry likewise was unhappy over this change as well. "The DIDC seems hell bent for deregulation too rapidly on the liability side and too slow on the asset side," Mr. Klamen commented.

James Kendall, a spokeman for the US League Savings Associations, said it was still too early to access the impact of this change.