COBA, Winter 1983 Page: 4 of 20
This periodical is part of the collection entitled: Texas Tech College of Business Newsletters and was provided to The Portal to Texas History by the Texas Tech University Rawls College of Business.
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Dr. Richard L. Peterson
Professor, /. Wylie and Elizabeth Briscoe Chair
of Bank Management
,s*e
mm
Super NOW Accounts Examined by Banking Expert
(Editor's Note: Dr. Peterson was interviewed by Carrie White of Texas Tech University News and Publications on the economic
effects of the new "Super NOW" accounts recently approved by Congress.)
What is a "NOW" account?
The NOW account, which actually developed about 1970
or sp, was a way that savings banks were allowed to pay
interest on demand deposits. The savings banks gave
checking privileges to savings account holders, calling the
checks written on the accounts "negotiable orders of with-
drawal," even though the written instruments functioned
just like checks. In this way, a customer could have a check-
ing account which paid interest.
What led to the development of NOW accounts?
Federal Reserve Regulation Q has traditionally prohibited
the payment of more than a limited amount of interest on
deposit accounts, and that regulation has historically
caused two problems. One problem was disintermediation
as people took their money out of depository institutions
and put their funds directly into the market in treasury bills
or other securities so they could get higher returns as inter-
est rates went through a rising phase of the interest rate
cycle, The other problem, and more important recently, was
the development of money market mutual funds. When
these funds were developed, consumers took their money
out of depository accounts in regulated institutions and put
the funds in unregulated money market mutual funds.
Because of these problems, Congress mandated that inter-
est rate ceilings, as limited by Regulation Q, be liberalized.
If NOW accounts were started in 1970, why did
it take so long for them to become popular?
Basically, Congress did not take readily to the idea of
paying interest on demand deposits. It originally banned the
development of NOW accounts, except in New England
where they originated. It was not until 1980 that Congress
legitimized NOW accounts nationwide. This was done to
allow depository institutions to compete with money market
mutual funds which offered accounts with limited checking
privileges that earned current market yields.
Did NOW accounts provide that competition?
Originally NOW accounts—on the very restricted basis
allowed—provided only limited competition to money
market mutual funds, which continued to grow very rapidly.
These funds had approximately $60-70 billion in total assets
at the time Congress allowed nationwide NOW accounts, (n
the fall of 1982, just two and a half years later, money market
mutual funds had about $230 billion in total assets. Money
market mutual funds thus grew explosively at the expense of
the depository institutions during this period.
Why did Congress approve "Super NOW" accounts?
In order to let depository institutions compete better with
money market mutual funds, Congress, in October 1982,
amended the Depository Institutions Deregulation Act
allowing depository institutions to offer an account on
which there is no rate ceiling at all, provided there is a bal-
ance of at least $2,500 in the account.
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Texas Tech University. College of Business Administration. COBA, Winter 1983, periodical, Winter 1983; Lubbock, Texas. (https://texashistory.unt.edu/ark:/67531/metapth393231/m1/4/?rotate=270: accessed July 17, 2024), University of North Texas Libraries, The Portal to Texas History, https://texashistory.unt.edu; crediting Texas Tech University Rawls College of Business.