Will The Removal Of Regulation Q Raise Mortgage Interest Rates?

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Will the Removal of RegulationRaise Mortgage Interest Rates?QR. ALTON GILBERTLEGISLATION passed in March 1980 callsthe gradual phase—out of interest rate ceilings ondeposits b 1986. Some critics of’ this change haveclaimed that banks and thrift institutions will chargetheir borrowers higher interest rates once thesedeposit interest rate ceilings are removed. According to these critics, lenders will raise their lendingrates to cover their increased deposit costs.1This article presents a brief history of deposit interest rate ceilings in the United States and theirefkcts. It then describes the process estahlished hrecent legislation for eliminating ceilings, and itslikely impact on the interest rates that borrowers willpay. Finally, the analysis is extended to cover theeIik ctsof the All Savers Certificate program on interest rates that depository institutions will chargeoil loans.WHY HAS THE FEDERAL GOVERNMENT REGULATED DEPOSITINTEREST RATES?Federal hank regulators received the legal authorto regulate interest rates that commercial banksmay pay depositors in the Banking Acts of 1933 and1935. The interest ceilings have been set underityl’l’hc siew tliattlie elimination of cciii ig iiitcrest rites on deposits55’ oiil ci cal se iiil crest rates pal P liv hi irnswc rs to ii Sc a piiears iL)epo.situeq Instftntiun,s Deregulation Art of 1979. Hearingon S.1:317 before lie Suiiscoiuinittcs’ on Financial Institutions, Senate(Ion nlittl’e on Banking, housing, and Urban Affairs, Part 11113(1l’art III, 96 Cong. 1 Sess. (Government Printing Office, 1979i.See coin n ‘ents Ii’ Hal pu W. Fri tel lard, first vice p re Si lIeu t. National Association cii Realtors (Jnne 27, 1979): Thomas F. Bulgcr.first ‘-ice president, inciejscnclcnt Bankers Association (July 18,1979: :iiicl henry B. Sc’lieclitcr, director, i)e sartnic’nt of l rlsan1Affhirs, AFL-CIO (Jnlv 18, 1979u.Regulation Q of the Federal Reserve and, therefbre,are commonly referred to as Regulation Q. One ofthe primary reasons for imposing ceilings on depositinterest rates was to reduce the number of Jailingbanks by reducing their interest cost. Another objective was to reduce the incentives Ibr rural banks tohold large interest—earning balances with their correspondents in the financial centers.2Much of the concern in the early l93Os centeredon interest payments on demand deposits. Interestpayments on demand deposits were prohibitedunder the Banking Acts of 1933 and 1935. The maximum interest rate on all time and savings depositswas initially set at 3 percent, slightly below theaverage interest rate that commercial banks kindthrift institutions had been paying on time an(l savings deposits, but chore then—existing market yieldson high—grade short—tenn securities.3 The choice ofthe initial ceiling rate on time and savings depositsindicates that the purpose of these ceiling rates ontime and savings deposits was itot to keep themheloxv yields on alternative investments, but to reduce deposit rates slightly and thus lower the interestcosts of depository institutions.l)uring the 20 years from the mid—I 93Os to themid—l9SOs, the ceiling rates on time and savingsdeposits were above market interest rates. In 1957and 1962, when market interest rates rose near orabove the ceiling rates on savings deposits, theseceilings were raised (chart 1).2Alhert H. (ox, Jr., Regulation of Interest Rote.s vu Bank Dcposits, Michigan Business Studies, vol. XVII, no, 4 (Burean of Bnsiness Research. Unisersitv of Michigan, 1966i.Icharlotte E. Ruehi up. ‘‘The Adiiii iistration of Regulation (J,’’this Recietc Fehruary t97oL pp. :30-31.3

FEDERAL RESERVE BANK OF ST. LOUISDECEMBER 1981cb ,t3-Month Treasury Bill Rate and Ceiling Rate on Savings Deposits at Commercial Banks39363738394041 4243444546474849 50Si 5253 54 555657 58 59606162636465666768 697071 12731475 76 7778 19801981Loi.l 3,’,, pl tt,d’3,dq,,,,’,, 1961In 1966, interest rate ceilings were imposed ondeposits of thrift institutions. Sponsors of the enactinglegislation assertedl that interest rates werebeing driven up by competition for deposits amongbanks md thrifts, and that ceiling interest rates ondeposits at thrift institutions would stop this escalation. They assumed that by permithng slightly higherceiling rates at thrift institutions specializing in resi—clential mortgage lending, there wouldl be m adequate supply of credit for residential mortgages atreasonable mortgage interest rates.4These controls on interest rates paid by thriftinstitutions were viewed initially as temporary inca—sures to (leal with ‘‘unusual circumstances.’’ Overtime, however, thrift institutions have come to viewthe difforentials between the ceiling interest rateson their deposits andl those imposed on commercialbanks as essential in attracting deposits to Ise used4Tc to; ,u, to eq lute rest Rate Cu,,,tea lu, Re1)011 No. 1777, U Oils d’Csnmn ittee on Banking ansi Cu i eicy, 89 Ccsiig. 2 Se ss, (C PD.I 966): anci In a’ rex t Ha te-s vi ii .11,, ,‘tgoge C ,‘edi t, f-lean n g in, S.3687, 5. 3627 and ‘. .3529 lschsre the Senate Committee onBanking audi CuiTency, 89 Cong. 2 Sees. (GPO, 19661,4for residential mortgage lending. These differentialshave been considered important elements of a public policy designed to expand the supply of mortgage5d’redlit and increase residential construction.If the differentials in ceiling rates between thriftsand commercial banks are to stimulate the flow ofdeposits to thrift institutions, ceiling interest rates onsonic categories of deposits at commercial banksmust be below market interest rates. If all depositinterest rate ceilings were ttbore market interestrates. the higher ceiling rates at thrift institutionswould not induce individuals to hold their depositsthere rather than at commercial banks. This wouldoccur because both commercial banks and thriftswould be paving the lower market interest rate todepositors instead of the higher ceiling rates. Since1966, the ceiling rate on savings (leposits at commercial banks has been below the three—monthTreasur% bill rate (a measure of market rates) exceptfor only a few months in 1967, 1971, 1972 and 1976—77 (cli art I).1Preston Martin. ‘‘A Case for Regulation (4,’’ /,n,rual of tI,eErie,’,, I 1/a mc’ Lao,, lJosik Baa sd (Octo lsc’ r 1970), pp 1—6,

FEDERAL RESERVE BANK OF ST. LOUISTHE EFFECTS OF DEPOSITINTEREST RATE CEILINGSIf maintaining (leposit interest rate ceilings belowmarket interest rates, with slightly bigher rates al—lowecl for thrift institutions, was intended to producea stable supply of’ mortgage credlit available tohomebuvers at moderate interest rates, it has fiuileclto do so. The growth of deposits at thrift institutionshas slowed whenever market interest rates haverisen above the dleposit ceiling rates.6 These fluctuations in the growth of dieposits’’at thrift institutionsmay have contributed to the abrupt changes in thepace of residential construction activity in recentc1ecades. Deposit interest rate ceilings have discriminated8against the relatively less wealthy sayers. There areno ceiling rates on dleposits in denominations of 100,000 or more. The ceiling rate on money marketcertificates (time deposits with maturities of sixmonths) fluctuates with market interest rates, hutthose require a minimum dleposit of 10,000. Debtobligations of the U.S. Treasury, investments withrisk characteristics most similar to deposits of federally insured institutions, are sold in ininimtnndenominations that are substantially larger than theaverage time or savings deposits of indlividluals.DECEMBER 1981Consequently, savers with less than 10,000, whowant an investment with risk and liquidity characteristics similar to Treasury hills, are limited tosavings deposits at federally insured institutions.Because of the interest rate ceilings on these deposits, the s-’ield is generally less than that ayailableon Treasury hills. Several studies have estimatedthat savers have ‘‘lost’’ several billion slollars inearnings as a result of the Regulation C) eeilings. ELIMINATINGREGULATIONQOne of the most significant sections of the Depository Institutions Deregulation Act of’ 1980 callsfor the elimination of ceilings on dleposit interestrates over a six—year periodl. The statement of find—ings andl purpose of that section of the act reads asfollows:The Congress hereby finds that(1) limitations ciii the interest rates which are payable oncie95) sits ansi acco nIl ts di scot,rage persons f i’oiii savingmoney, create inequities for rleisositnrs, impede the ability1of die p5)5itory insti tnti ons to compete for fundis, alit h avc’not uchiceseci thein pn rpo use of pros’i dlii) g an cxc- n flow ofhul dis for h r)in e niortgage len dliii g; andi(2) all Pepo sitors, ansi partictdai’l y those with ulocie st savings,are entitiecl to receive a market rate of return on theirsas’i ng.s as soon as it is economically feasible for depositoryinstitutions to pay such rate , Edwand F. MeKel vey, lit/crest Rote Ceilings- and Dis-in teesued,,, tiao. Staff Econonnc Studies 99 (Boar Iof Governors oftheThe act does not specify a timetable for eli m—Fedlerai Reserve System, 1978),matingdeposit interest rate ceilings, hut dlelegates7Dwight M, Jafide and Kenneth T, Rdssen, ‘‘Mortgage Credhtthose decisions to a newly ereatedl committee: theAvid I ahi lit)’ andi Residential Con stru eti Oil ,‘‘ B too kistg-s I’o/ IC es “IiEr-anaissir’ Actiritq fI’. 1979), pp. 333—76; anci Neil G, Berkin ui, Depository Institutions Deregulation Committee‘‘Mortgage Fiiiance and’ the I lansing Cycle,’’ New England(DIDC). Voting members of the DIDC include: SecReanan, ie Rer ide (Septc’inher/October 1979), pp. 54—76, Resultsretary of the Treasury; and chairmen of the Federalof sdnnc’ stnrlie s, however, diO not support the vies” that changes hI)Reserve Board, Federal Deposit Insurance Corporatli c’ avail ahi Iitv of mortgage c:rechiI through thrift institntioi isinfluerice re S isientiai c’dsnstrncti on. See Franci sc’ss Arc’c’i ns-,n i cition, F’ecleral 1-Tome Loan Bank Board, and NationalAl lan U. NI eltzcr, ‘‘The Mankets for [loosing and! [lousing Sen- Credit Union Administration. The Comptroller ofvices, journal of Maoc’u , Credit ‘earl Banking (February 1973),1the Currency isa non—voting member of tile DIDC.pp. 78—99; Allan II. Nleltzen, ‘‘Credit Availability itiidi Eeon sii.ici)c’ci sioiis: Soine Es-idicnce fro ni the NI s rtgagc an ci Uon s 1) gMarkc’ts,lolir,irl/ oJ ci ionec (June 1974), pp. 763—78.- and Paul9Brtice W. Mcsrgan, ‘‘Ceihngs on Deposit Interest Rates, thc’Dc Rosa, ‘‘Mortgage R aioning and Re sirlenthaf Investnient:Saving Public’ and llcstising Finance,’’ Ec;uit,; far the SmallSam s- Re Snl ts from a Brai narci—lobin M ociei ,‘‘ j oi,r,ioI of ,tlc,, eq.cci’, Hc’arin g s on S ,Con, Res, 5 he Ibre the SuP conl in tte e SnCredit a,i,l Booking (February 197Sf, pp 75—87,8Financial lnstitutid)ns, Senate Committee on Banking, I lousing,Edl wal’di J , Kane, ‘‘SI oi’t—Cl ,aii ging the SinaIi S as’c’n: Fe Peril Iand Urban Aflairs, 96 Cong. 1 Sess, (GPO, 1979). p. 175; David II.Goyc’ni tea cut 1) is cninnnati (511 against Sin a! I Savers tIn ring thePvic, ‘‘1’ he Los ses an Savings Deiscssits from interest Rate Reg—1\‘ietnant Wan,’’ Journalof.‘tloney,CreditrindBc,i,king(No—513 22uiaticsn,’’ Bc’ll Jon situ of’ Eranoinir’ our ,‘tlonogeinc’ot Suit-oreveinher 197(4), PP,Edward J. Kane, “Conseqi wIled’s ol(Autumn 1974), pp. 61-4-22; David hi. Pyle, ‘‘Interest RateCmits’ ulporary Cci hi ig s ssn NIortgage and I)eposit Iittei’e st RatesCeilings and! Net \-Vorth Lossc’s by Savc’rs,’’ iii Kenneth E,for households in Diffc’rc’nt Economic Circ’nnistanc’es,’’ inB an I chng and ThOmits Freclerick Wi]soi i, cdls, , Red i-st ‘ih tie itGeonge M. von Fnrstenlserg, cci,. The Garernnirnt and Capitoltltro,,glu the Eiooor-irih Sqstctn )Praeger Pnfshsliers, 1978),Eoruoitio,, (Bailingen Pnislishing Company. 1980), pp. 401—-il 87—101: Robert A, Taggart, Jr., ‘‘Effects of Deisosit Rate Ceilings:Charles Clsstfelter ansi Charles Licherman, ‘‘On the I)istrihn—1‘rhc’ Eu-isic’ncc’ from Nlassachtiscetts Sas-ings Banks,’’ follntr,l oftional Impact of Fccic’rai hnts’rest Rate Rcstnicthssns,’’ burnt, ofilooeq. Credit rain Booking (May 1978), pp. 139—57.1Einci,irs’ fNlarcli 197s, pp. 199—213: Eciwarsi C. Lawrence ailsGrs’gorv F. Elliehauiscn, ‘‘Thc’ impact of i’c’deral Interest Rats’‘ I)c’po-uitr,,’,j lostitution-s- Deregulotioo antI .‘tlotietro’q Crinti’alRc’gnlatiuns on the Small Saver: Fnrtlis’r Evidenc’c’,’ Js,i,rlial ofActs, ofl9hO.s. Rept. No. 96-640,96 Cong. 2 Sess, (dPd), 198W.l”inoure )J uinc’ 1981), pp. 677—84.title II, sec. 2Oifa).5

DECEMBER 1961FEDERAL RESERVE BANK OF ST. LOUISThe act directs the DIDC to provide for theorderly phase-out and ultimate elimination ofmaximum interest rates that may be paid on time andsavings deposits as rapidly as economic conditionswarrant. A primary consideration in determiningwhen conditions warrant raising or eliminatingthese ceilings is the effect of such changes on thesafety and soundness of depository institutions. Theact lists the following methods the DIDC may use inphasing out ceiling interest rates on deposits:The phase-out of such limitations may be achieved by theDeregulation Committee by the gradual increase in suchlimitations applicable to all existing categoriesofaccounts, thecomplete elimination of the limitations applicable to particularcategories ofaccounts, the citation ofnew categories oaccounts not subject to limitations or with limitations set atcurrentmarket rates, anycombination of the above methods, orany other method.”in this section have different implications for theimpact of eliminating the ceiling rates on time andsavings deposits specified under Regulation Q.Tue Mark-up TheoryThose who assert thatborrowers will be charged higher interest rates dueto the elimination of Regulation Q are generallyusing a mark-up theory: Depository institutions arepresumed to determine the interest rates they chargeborrowers as a mark-up over the average interest ratethey pay on deposits. The average interest rate ondeposits will rise as Regulation Q is phased out,unless market interest rates should fortuitously fillbelow the Regulation Q ceilings currently in elTect.The mark-up theory, therefore, predicts that borrowers will pay higher interest rates as a consequence of the elimination of Regulation Q.—One limitation imposed on the DIDC is that it mayThe Competitive Market TheoryUnder thisnot raise interest rate ceilings on all deposit cate- theory, the interaction of several factors influencing—gories above market interest rates before March1986.The DIDC has taken limited actions to raise oreliminate ceilingson deposit interest rates (see table1). The first significant action was to lift caps onceiling rates for time deposits with maturities of 254years, which was effective August 1, 1981, TheDIDC has also created a new category ofIRA/Keoghaccount (with minimum maturity of 154 years) thatwill have no regulated interest rate ceiling as ofJanuary 1, 1982.both supply and demand determine a market interest rate, which all lenders charge on loans withsimilar characteristics. Lenders can make few loansat interest rates above the market rate, since borrowers will search for the lowest rate available.Since lenders can make all the loans they wish at themarket rate, they have no incentive to lend at interest rates below the market rate.To describe this theory in more detail, considerthe determinants of the market interest rate on aparticular category ofcredit residential mortgageloans. Demand for residential mortgage credit isdetermined by personal income and the preferencesof individuals for housing and for home ownership.Several factors influence the supply of residentialmortgage credit. One factor is the interest rates on investments other than residential mortgages. If, forinstance, yields rise on U.S. Treasury securities withmaturities similar to those of residential mortgages,depository institutions and other suppliers of residential mortage credit will supply less mortgagecredit at each level of the mortgage interest rate.—THE EFFECTS OF ELIMINATINGREGULATION Q ON INTERESTRATES PAID BY BORROWERSThe effects ofeliminatingceiling rates on depositscannot be determined by examining the efl ctsofactions already taken by the DIDC, since few actionsto eliminate the ceiling rates have been taken so far.Effects of eliminating deposit ceiling rates on theinterest rates paid by borrowers must, therefore, beanalyzed by considering the effects of eliminatingRegulation Q in the context ofatheory thatdescribeshow interest rates are determined.The Mark-up Theory vs. the CompetitiveMarket TheoryThere are several competing theories of howdepository institutions determine the interest ratesthey charge borrowers. The two theories discussed“Ibid., title II, sec. 204(a).6Another important determinant of supply is theinterest rate on deposits not subject to Regulation Qceilings. For example, depository institutions maypay whatever interest rate they wish on time deposits in denominations of 100,000 or more. In thecompetitive market, depository institutions will bidup the interest rates they are willing to pay ondeposits free of Regulation Q ceilings until theserates are sufficiently close to their lending rates toeliminate the incentives to make additional loans.Consequently, it is the interest rate that depository1

FEDERAL RESERVE BANK OF St. LOUIS\\\ \ ( \\Ta4. t 1L M \ c \\/\/\y29 t 3\\\\\ \\ e\\ \ 4km\\\\ \\\cea\mattfl\ \ \\\/A//N,Cideposaa/ ,\N’’ N’/‘NNAC’‘N//NNN/‘K/N//N /‘K/NN/N /A //A ’AN//A‘2//A N/C ,‘K’i jr‘N‘/‘N/ArK ,,’/NK/ ‘A,’Ar// /‘A‘A,4/AA N;1C //N‘//C///N/‘A/Attsr”/a/A ‘4’ ‘2’/‘ “2‘ S”//‘NA//NC,’NK A////// “2‘K’/ *1N//N//‘‘N‘N‘2//N////‘‘ AK/N/“// ‘N///‘N////tfr /A//N’N A’,,N’//N’N’/”N,“NC’; C ,’N/A“Ks,//A/A///C”,A’N//N/ /‘/N,Art ’’ ,7///,/A’///‘N’C’’’4A/’N /N’/ /////////‘N///‘N’N N/// pefle M / %‘N/ /2r y’N AK K’,’rKK /\//‘CN/N ArN’‘A ‘‘N,/N,N”NN N7// ‘N’7 mat eq*tN AAr//N,,,‘‘,‘ AN/N’b/A /‘N’N/ //‘N///NNN/A /AN/,N N/// /A/“/N/NI Ar‘N‘A/A /CNA /‘N’N”////K//NWIr S ** r/////mmN’tbtmt /N/ r .////N,//N/ N‘A/////Ar//NNN6G pøm‘NN”‘NK”’A/\\lb ’,A’C’r /,SN.NN/flue t bI pee i ta\A//\,A/) ,\/// \fl (.e ,.N //SS K’/2NNNjr‘NN/ ,//es es7 \/A/t/A//NAN/KNN////N/CV øt/\ nswsr pem A/KA NN//NA A ‘A , A //K/,// *r \4.//A/V N’\ r ’ \ /KAr/\ , Ar’ArN Ar‘2/‘Kfs’ \,N\\I aJw r UA EbtiN‘\\K,//KN\ \: \Y \\ mff7 percent\t ft \t\ \\\ P S ’. N ’K N\nh\ / \ ot0ArN\:tcnn , t o tWmdat, nunSo ,\\\/\V. ma \(me\\\N,\ \\\\\\\\\\\H\\\:TP\. W2\N\\ \ \ fl \ \\k\thstge in1nt* vestSate Cezrtngs nfleposas\\/\\/ \DECEMBER iSSiN/Nt/Ar N’‘A ’//,////A/N’ ,N/N‘N’//////C7K NKinstitutions pay on deposits ui caustrunied byRegulation 9 that influences the interest rates theycharge on loans.rates kr borrowers, ifindividuals are induced to savemore of their income in response to the higher inter—tinder the competitive market theory, a change inRegulation Q ceilings will affect interest rates onresidential mortgages only if it affrcts interest rateson unregulated deposits or on alternative invest—ments. One inplication of this theory is that elim—mating Regulation 9 ceilings might reduce interestThe effects of eliminafing Regulation 9 under thecompetitive market theory are in sharp contrast tothe effects under the mark—up theory. The mark—uptheory predicts that the elimination of Regulation 9would cause interest rates paid by borrowers to rise,while the competitive market theory suggests thatest rates available on deposits.7

FEDERAL RESERVE BANK OF St LOUISDECEMBER 1981Chart 2Comparison of Mortgage Interest Rate with Cost of Fundsto S&Ls and 10-Year Treasury Bond Yield ‘ TTTTTTTTT1966 1967196819691970197119721973197419751976 19770197819791980 1981Li Semiannual averagesLatest data platted 1st half 1981interest rates on loans would either he unaffected orwould decline.month intcn ik since 1966 is shown in conjunction ith the uei ige int it st i ite on con’. ntion ilresidential mortgages and the average yield on U.S.Ireasurv securities with maturities of 10 years overthe same six—month periods.sixWhat’s the Evidence?Chart 2 presents someevidence on whether U.S. interest rates on residential mortgages are cletennined according to the markChart 2 clearly indicates that there is no fixedup or competitive market theory. The average cost offunds to savings and loan associations (S&Ls) over mark—up between the average cost of hinds to S&Ls—8

FEDERAL RESERVE BANK Of St LOUISand the average interest rate on residential mortgages. The difference between the average mortgage interest rate and the average cost of hinds toS&Ls has variedwidely, from 165 basis points in thefirst halfof 1966 to 386 basis points in the first half of1980.Chart 2 shows that there is a much closer relationship between the average mortgage interest rateand the average yield on U.S. Treasury securitieswith maturities of 10 years than the relationshipbetween the mortgage interest rate and the avengecost of hinds.12 The difference between the mortgage interest rate and the yield on 10-year Treasurybonds has a standard deviation of 27 basis points,compared with a standard deviation of 59 basispoints for the difference between the mortgageinterest rate and the average cost of hinds to S&Ls.DECEMBER 1901chart 3aremore consistent with the competitivemarket theory than with the mark-up theory.Is the Mongage MarketSeparate From Other Credit Markets?Despite the above evidence suggesting that interest rates charged borrowers are more closelyrelated to market interest rates uncontrolled byRegulation Q than to the average interest rates paidon deposits, the possibility that the elimination ofRegulation Q would increase the interest rates paidby one class of borrowershomebuyers has notbeen ruled out, This possibility, produced by certainregulations and tax incentives affecting thrift institutions, Is discussed in this section.——Since 1966, the existence of higher ceilings ontheir deposit interest rates have given thrift instiThese comparisons provide evidence thatinteresttutions an advantage over commercial banks in atrates on residential mortgages are determined in a ti-acting deposits. At the same time, however, thriftcompetitive credit market Homebuyers must payinstitutions are faced with regulations thatlimit theirinterest rates on mortgages that are competitive withinvestments in types of assets other than mortgages.yields on alternative investments in order to receive In addition to these regulations, thrift institutionscredit.are also given tax incentives to specialize in resiChart 3 presents additional evidence on whether dential mortgage lending: The deductions frominterest rates are determined according to the mark- gross income allocated to bad debt reserves, whichup or the competitive market theory. The difference are, therefore, not subject to income tax, are larger forbetween the prime loan rate charged by commercialinstitutions that invest more of their assets inbanks and the average interest rate they pay their mortgages.depositors on total time and savings deposits isAs a result of the higher ceiling interest rateshighly variable, ranging from 49 basis points in 1972allowable(which attract deposits) and the regulato 461 basis points in 1980. Thus, once again, theretionsandtaxincentives thatfavor mortgage lending,appears to be no fixed mark-up between the primethriftinstitutionsmight charge residential mortgagerate and the average interest rate paid on time andlendingrates thatare below market interest rates (onsavings deposits.securities with characteristics similar to residentialThere is a much closer relationship, however, mortgages). Eliminating Regulation Q would rebetween the prime loan rate and the rate that com- move the advantage that thrift institutions have inmercial banks pay on their three-month certificatesattracting deposits. As a result, the share of creditof deposit, which are free of Regulation Q ceilings. channeled to residential mortgages would declineThe differential between the prime rate and the and interest rates on residential mortgages wouldthree-month certificate of deposit yield has a rise relative to other interest rates.standard deviation of73 basis points, compared withThis result is unlikely for several reasons. First,a standard deviation of 144 basis points for thethereactions by other suppliers of credit would tenddifferential between the prime rate and the averagetooffsetthese effects, as long as non-thrift instituinterest rate paid on time and savings deposits.tionsaremakingresidential mortgage loans as well. IfAgain, the interest rate relationships presented inthrift institutions increase the amount of mortgagecredit they offer at prevailing interest rates, other‘tThe conclusion that mortgage interest rates are more closelylenders will simply reduce the quantity of resirelated to the yield on U.S. Treasury securities with maturitiesdential mortgage credit they supply, shifting theirof 10 years than to the average cost of hinds to S&Ls has beenconAnned using regression analysis. See Thomas Mayer and investments to other sectors of the credit market.Harold Nathan, “MortgageRates and Regulation Q,” WorkingPaper Series No. 111 (Department of Economics, University of The net result might be no change in mortgage inCalifornia at DavIs, July 1981).terest rates, but an increase in the proportion of9

FEDERAL RESERVE BANK OF ST LOUISDECEMBER 1981Chart 3Relationship Between the Commercial Bank Prime Rateand Selected Deposit Interest RatesPercentPercent16161972Li At19131974197519761977191819791980commercial banksLatest data plotted; 1980residential mortgage loans nmde by thrift institutions relative to non—thrift institutions.Of course, it is possible that the increase in thesupply of mortgage credit by thrifts may not bejhllqoffset by reductions in supply by other lenders.10Again, however, an increase in the net supply ofresidential mortgage credit would not necessarilydepress mortgage interest rates relative to yields onalternative investments. The reason is that predictable adjustments in the demand fhr credit would

FEDERAL RESERVE BANK OF ST. LOUISDECEMBER 1*1tend to offset the effects ofthis shift in the supply onmortgage interest rates. Suppose that, initially,Therefore, eliminating Regulation Q would notaffect mortgage interest rates adversely.interest rates on residential mortgages are decreasedrelative to other market interest rates due to anincrease in the supply of deposits and mortgageloans at thrift institutions. This triggers increases inthe quantity of mortgage credit demanded at prevailing mortgage interest rates until these rates are,once again, in line with other interest rates. Thereare a variety of reactions by individuals that wouldcause an increase in demand for mortgage credit. Forexample, those seeking to borrow to invest inbusiness firms would take out second mortgages ontheir homes rather than seek business loans atcommercial banks. Also, individuals buying homeswould obtain mortgages with smaller percentagedownpayments, and invest their wealth instead atinterest rates higher than the rates they pay onmortgages.There is a simple method to test whether theresidential mortgage market is truly separate fromother credit markets. We can determine this by examining the correlation between the difference ofthe average mortgage interest rate and the yield on10-year Treasury bonds with the rate of growth intime and savings deposits at mutual savings banksand savings and loan associations. If the correlationis significantly negative if the spread between themortgage interest rate and the 10-year bond ratetends to narrow when time and savings deposits atthrift institutions grow at a faster ratethe residential mortgage market is, to some extent, separated from other credit markets. When their depositsincrease rapidly, thrift institutions reduce themortgage interest rate relative to other interest rates——in order to acquire enough residential mortgages toretain the tax advantages from specializing inmortgagelending.In fact, the correlation between the interest ratespread and the growth rate of time and savingsdeposits at thrift institutions is positive. Usingmonthly observations from January 1968 throughJuly 1981, the correlation coefficient is 0.234, whichis statistically significant at the one percent level.Using quarterly averages for 111968 through 1111981,the correlation coefficient is 0.262, which is not stattistiailly significant at the five percent level.This resultconfirms the conclusion reached in theprevious section. The competitive market theory isconsistent with the actual behavior ofinterest rates.IMPLICATIONS FOR INTERESTRATES OF ALLSAVERS CERTIFICATE SThe analysis presented above has implications forthe effects of the All Savers Certificate (ASC) program on interest rates paid by borrowers at depository institutions. ASCs are special time depositswith maturities of one year. The ceiling rate on ASCsis equal to 70 percent of the average yield set in themost recent auction of one-yearTreasury securities.’3Individuals may declare up to 1,000 in interest onASCs tax free (up to 2,000 on joint returns).Depository institutions issuing ASCs are receiving deposits at interest rates below market rates. Forindividuals subject to relatively high marginal taxrates, the tax-free yield on ASCs is greater than theafter-tax return on many alternative investments.Depository institutions are required to invest 75percent of the funds raised by issuing ASCs inhousing and agricultural loans. Details of the legislation and the regulations issued to implement theprogram provide depository institutions with a greatdeal of flexibility in meeting these investment requirements. The objectives for establishing

duce deposit rates slightly and thus lower the interest costs of depository institutions. l)uring the 20 years from the mid—I 93Os to the mid—l9SOs, the ceiling rates on time and savings deposits were above market interest rates. In 1957 and 1962, when market interest rates rose near or above the ceiling rates on savings deposits, these

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On an exceptional basis, Member States may request UNESCO to provide thé candidates with access to thé platform so they can complète thé form by themselves. Thèse requests must be addressed to esd rize unesco. or by 15 A ril 2021 UNESCO will provide thé nomineewith accessto thé platform via their émail address.

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Le genou de Lucy. Odile Jacob. 1999. Coppens Y. Pré-textes. L’homme préhistorique en morceaux. Eds Odile Jacob. 2011. Costentin J., Delaveau P. Café, thé, chocolat, les bons effets sur le cerveau et pour le corps. Editions Odile Jacob. 2010. 3 Crawford M., Marsh D. The driving force : food in human evolution and the future.

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Regulation 6 Assessment of personal protective equipment 9 Regulation 7 Maintenance and replacement of personal protective equipment 10 Regulation 8 Accommodation for personal protective equipment 11 Regulation 9 Information, instruction and training 12 Regulation 10 Use of personal protective equipment 13 Regulation 11 Reporting loss or defect 14