COBA, Winter 1983 Page: 6 of 20
19 p. : ill.View a full description of this periodical.
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"Local banks will be paying more to get
the money, the money will stay around,
and they'll have it to lend out to the
local businessman. I think that's better
for the local business environment."
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reserve requirements. This higher rate of return on the funds
invested from these deposit accounts may be passed on to
the depositors. If you weren't going to use your money very
much, you may be better off finding a money market deposit
account, park your money in it and get a higher rate of
return.
Because of reserve requirements on the Super NOWs, the
bank will have to set aside some reserves and therefore can't
earn as high a rate of return and thus can't pay as high a rate
of return to the depositor as it can pay on money market
deposit accounts.
Is it better for banks to be competing with
each other than with money market funds?
Banks competing with each other keeps local money in
the local community for reinvestment purposes. Money
market funds tend to take the money out of the community
to re-invest in U.S. treasury bills and certificates of deposit
in large banks. That money doesn't get re-invested in the
local community. Local banks will be paying more to get the
money, the money will stay around, and they'll have it to
lend out to the local businessman. I think that's better for the
local business environment.
Will the Super NOWs have any effect on the
government and its bid for money?
Not particularly. Things might change a little because
money market funds often buy a lot of U.S. treasury securi-
ties, and local banks are more likely to make local loans. In
that sense, there could be a shift from deposits used to
acquire U.S. treasury bills, to deposits used to acquire more
local loans. In that case, there might be some tendency for
interest rates, particularly treasury bill rates, to rise. On the
other hand, because higher interest rates on savings are
going to be readily available to the consumer for the first
time in many, many years, consumers may increase their
savings rate. In that case, there will be more funds available
for everyone and interest rates, in general, might fall a bit.
What is the reaction of the Federal
Reserve to these new accounts?
I think it is apprehensive. The Federal Reserve is having
trouble right now defining what money is. In addition, the
new money market deposit accounts are not subject to
direct control by the Federal Reserve at all because they
have no reserve requirements. Both money market deposit
accounts and balances in money market funds can be used
as money, since they can be substituted for bank deposit
money in some transactions. However, they are a portion of
the money supply that the Federal Reserve can't control
directly, since no reserve requirements apply to them. I
think maybe that's one reason the Super NOW accounts
were authorized. They at least have reserve requirements
which are subject to control by the Fed. Because of that, the
Fed has a mechanism by which it can directly control their
expansion.
The Fed is going to have to determine how many transac-
tions deposits there are in the economy. The volume of tran-
sactions deposits outstanding is of great importance in con-
trolling the money supply. If the Fed wants to control the
economy, it must know how many deposits are available for
people to use in conducting their economic transactions.
Professor Richard L. Peterson, who holds the I. Wylie and
Elizabeth Briscoe Chair of Bank Management in the Texas
Tech University College of Business Administration, is an
internationally-known expert in consumer credit, banking,
and financial institutions.
He was a research scholar and associate director of the
Credit Research Center in the Krannert Graduate School of
Management at Purdue University. In addition he has served
as financial economist with the Board of Governors of the
Federal Reserve System in Washington, D.C.
Peterson has more than 50 professional publications to
his credit, and has co-authored a leading college textbook,
entitled Financial Institutions, Markets, and Money.
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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/m1/6/: 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.