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rising interest rates. In no event would these ceilings and prohibitions exist later than five years after the date of enactment of this proposed legislation.

There should be no promise of final review of this action before the ceilings are eliminated, because unless institutions are sure of the demise of ceiling rates, they will not engage in the portfolio adjustments necessary to allow them to survive in a world without ceilings on deposit rates. The Federal Depository Institutions Commission, in consultation with the Federal Reserve Board and the Federal Home Loan Bank Board, would have standby authority to reimpose interest rate ceilings, subject to Congressional review, should this be required by any financial emergency.

Savings and loan associations, credit unions and mutual savings banks would also be permitted to issue demand deposits and other third party transfer arrangements. In the case of credit unions, such demand deposits and third party arrangements will be available to the general public only in the case of a community credit union in a low-income area.

3. Uses of Funds

Savings and loan associations, mutual savings banks, and credit unions would retain their present investment powers, and be permitted to engage in expanded consumer lending, including the issuance of credit cards and the establishment of revolving lines of credit. They would also be permitted to invest in commercial paper, corporate debt and bankers acceptances. Savings and loan associations would be allowed to make interim construction loans not tied to permanent financing.

4. Disclosure

To promote competition, the depositors, borrowers, and investors of depository institutions are entitled to more information than they now receive. The Federal Depository Institutions Commission would be required to obtain from depository institutions, and make available by market area to the public, information respecting the amount of interest paid on deposits and charged on loans as well as information relating to capital provisions, foreign activities, loan losses, and the impact of holding company operations on a depository institution. 5. Relationship to Federal Reserve System

All federally insured depository institutions would be required to meet reserve requirements on their deposit liabilities, and on their liabilities to other depository institutions. All reserves would be held at the Federal Reserve. All institutions of a given size would be treated alike in their required reserves for a given type of deposit, except that any institutions that did not formerly have required reserves at the Federal Reserve would have reserve requirements imposed initially only on the increase in their deposits over and above their level at the time of introduction of the legislation. Reserve requirements on this initial level of deposits would be phased in over a five-year period.

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All institutions that are required to meet reserve requirements would have direct, full and equitable access to Federal Reserve services, including the discount window and wire transfer system. Branches of foreign banks would have access to the discount window, but they could not use loans to foreign borrowers as collateral. The designation of a Federal Reserve "member bank" would cease to exist, because all federally insured depository institutions would hold required reserves with the Federal Reserve, thus, "membership" is automatic and meaningless. The Federal Reserve would continue to administer the discount window and the discount rate, and to set reserve requirements, in accordance with general monetary policy considerations. (See Title V-The Federal Reserve System.)

6. Regulatory Agencies

All federally insured depository institutions and their holding companies would be supervised and regulated by the new Federal Depository Institutions Commission. (See Title IV-Regulatory Agencies.)

7. Housing Incentives

Incentives to depository institutions to encourage an adequate supply of funds at reasonable rates for low- and moderate-income housing are explained in Title II-Housing.

8. Taxation

Banks, savings and loan associations, mutual savings banks, and credit unions would each receive the same treatment under federal tax laws.

9. Branching

Interstate branching of all federally insured depository institutions would be allowed if branching did not conflict with state laws. In those states where there is a conflict, out-of-state federally insured depository institutions and within-state federally chartered institutions, would be allowed a branch in all Standard Metropolitan Statistical Areas (SMSA's) with populations of two million persons or above. All branching across state lines would be subject to the approval of the Federal Depository Institutions Commission, which would be responsible for assuring that competition would not be reduced by such branching. Mergers with existing depository institutions to form branches across state lines would not be allowed.

10. Trust Activities

At the present time only commercial banks are permitted to engage in trust activities. In order to increase competition and decrease the possibility of conflicts of interest, this power would be extended to savings and loan associations, credit unions, and mutual savings banks. The Federal Depository Institutions Commission would supervise and regulate trust activities, and only permit them upon a finding that the institution was sufficiently large and strong to support a trust department. Such non-bank depository institutions would, however,

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have to avoid business loans and business investments, which continue to present a conflict of interest problem for banks which engage in trust activities.

11. Securities Underwriting

Banks would be permitted to engage in the underwriting of state and municipal securities, including revenue bonds. The present prohibitions on underwriting of corporate securities by depository institutions would be retained.

12. Electronic Funds Transfer Systems

The Congress would await the receipt of reports from the National Commission on Electronic Funds Transfers before legislating further in this important area of new payment mechanisms. Existing regulatory authority for new payment mechanisms would be transfered to the Federal Depository Institutions Commission.

TITLE II. HOUSING

It is not possible to consider meaningful reform of depository institutions without confronting the problem of housing. Existing housing programs are clearly deficient, as evidenced by the wild swings in housing starts that continue to plague the economy and by the large quantity of remaining substandard and deteriorating housing.

A keystone to housing policies has been the existence of specialized depository institutions that were created to devote most of their resources to granting and servicing mortgage loans. These institutions have been protected from inter-depository institutional competition for funds by interest rate ceilings on their deposit accounts. These interest rate ceilings prevent small investors from receiving a fair return on their savings. And they have not succeeded in insuring a stable flow of funds into thrift institutions. Because savings and loan associations hold almost exclusively mortgages which yield a fixed interest income, it has not been possible for them to afford to pay high enough interest rates on their thrift accounts to maintain a steady inflow of funds.

Yet if thrift institutions are to be allowed to invest a significant proportion of their resources in assets other than mortgage loans, there is the danger that the mortgage market and hence housing would suffer in the process. While thrift institutions could afford to pay a higher interest rate on their liabilities if they could hold more diversified portfolios, there is no assurance that housing would be any better off in the process. The Hunt Commission and the supporters of the Financial Institutions Act have gone to great lengths to demonstrate that if thrift institutions were allowed greater investment powers, and if ceiling rates on their deposits were removed, a miracle would occurhousing and the mortgage market would be better off. But the sole basis for this rosy conclusion is a questionable series of simulations of sophisticated econometric models. Stronger measures than wishful thinking are required to assure an adequate flow of funds into housing. The proposals that follow are designed to aid low- and moderateincome housing without using the depository institutions as the whipping boys of a housing program. While the depository institutions would continue to play a key role in financing housing, they would receive incentives to participate rather than be coerced. The incentives would be applied in such a way that broader uses of funds would be possible, and interest ceilings on thrift accounts would no longer be needed.

1. Mortgage-interest tax credit.-Any financial institution would be eligible for a mortgage-interest tax credit, along the lines proposed in the Financial Institutions Act of 1975 with one important exception. Eligible mortgages would be restricted to those on property destined for dwellings for low- and moderate-income owners and renters. This restriction will reduce the estimated $725 million annual cost

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significantly when the program is fully operative. There is no reason to subsidize housing for upper income people, as the Financial Institutions Act of 1975 proposes.

2. Federal Home Loan Bank Board.-The Federal Home Loan Bank Board would be empowered to lend directly to any depository institution, provided that the procceds were used for purposes of granting mortgage loans for low- and moderate-income housing. Construction loans for rental units to house low- and moderate-income families would be included as well as mortgage loans on these structures. The maturity of the loans from the FHLBB would be determined at the discretion of that institution and could be up to the maturity of the mortgage loans granted by the depository institution. The interest rate charged to the mortgagor by the mortgage lender would have to reflect the lower interest rate the mortgage lender obtains from the FHLBB.

The FHLBB as reorganized under Title IV would raise its funds through the capital markets under the auspices of the Treasury. In this lending program two factors would have to be determined: the amount of lending that would be made to depository institutions and the interest rate they would be charged. During periods in which it is desirable to stimulate mortgage granting activities of depository institutions, a relatively large volume of funds would be lent at a subsidized rate, i.e., the FHLBB would charge depository institutions a rate below what it must pay to borrow in the open market. The lower rate would be passed on to eligible mortgage borrowers because of the requirement that mortgage lenders add only a fixed charge to their borrowing costs from the FHLBB. The cost of this subsidy (the difference between borrowing and lending rates) would be met from general revenues, and would have to be the subject of prior Congressional budget and appropriation procedures.

The FHLBB would be guided in its lending program by a coordinating committee comprised of the Chairman of the Federal Home Loan Bank Board, the Secretary of the Department of Housing and Urban Development, the Secretary of the Treasury and the Chairman of the Federal Reserve Board. The Chairman of the Federal Home Loan Bank Board would be required to issue an annual report describing the planned lending program for the coming year and describing how the execution of the program over the previous year accorded with the program that was planned.

3. Mortgage Reserve Credit.-The Federal Reserve Board would be given authority to provide reserve credits to all depository institutions on new and outstanding low- and moderate-income housing and construction loans for all depository institutions. All depository institutions that are required to hold reserves at the Federal Reserve would be eligible for the credit.

Thus, for each dollar of reserves held at the Federal Reserve, each institution would receive a reserve credit against these reserves equal to a fixed percentage of its new and outstanding dollar volume of mortgage and residential construction loans. The reserve credit would enhance the attractiveness of mortgage and construction loans relative to other assets because the act of granting these loans would free reserves that could be used for investment purposes. The credit would also ease the burden on those depository institutions that would experience large reserve requirements for the first time.