NEW YORK — Regulation Q will have to be relaxed if interest bearing negotiable term certificates are to compete successfully with other short-term investments for idle corporate funds, leading bankers here indicate.
The new interest bearing negotiable deposit certificates, introduced recently by leading banks, here, are being scrutinized with renewed interest by many bankers as a possible vehicle for attracting, as time deposits, some of the idle corporate funds which are being invested in highly liquid securities.
Bankers who are most enthusiastic about the potentials of this program generally give the new certificates little chance for success under current interest regulations.
Treasury bills and other short-term investments, which corporations currently favor because of their easy marketability and non-restricted yields, constitute the drain away from deposits.
Several bankers stated they felt Regulation Q should be eased to allow special interest rates for sizeable domestic time deposits. They stressed this flexibility would be exercised only to meet competition. They added the new certificates could be a valuable tool, if fully competitive for short-term markets.
Such a chance is considered quite possible by some bankers, due to the attention focused on the interest-limiting regulation earlier in February.
At that time, President John F. Kennedy asked Congress to give the Federal Reserve System the authority to establish special limits of interest rates which member banks may pay on time and savings deposits owned by foreign governments and monetary authorities.
President Kennedy's proposal is aimed at retaining foreign deposits and preventing a repetition of last year's loss of funds when these deposits were withdrawn from domestic commercial banks and placed in money centers offering higher rates of interest. At that time some corporate funds also went overseas, to take advantage of the higher rates of interest.
President Kennedy's request may have been prompted in part by a report submitted to him Jan.18, by a special economic task force headed by Allan Sproul, former president of the Federal Reserve Bank of New York. In the section of the report covering domestic economic policy, one of the recommendations urged by Mr. Sproul and his associates was the repeal of Regulation Q.
Supply of Corporate Funds
The supply of idle corporate funds which the banks hope to tap includes over $25 billion now invested in Treasury bills. Counting all short-term investments, the sum is much higher.
The reaction by potential depositors seems to be proportional to the efforts planned by the banks in attracting the deposits. Several bankers indicated they will only meet competition in issuing the interest bearing certificates and report only slight interest. Bankers predicting a good potential, report deeper interest on the part of prospective depositors.
One major corporation, International Business Machines Corp., has over $260 million invested principally in Treasury securities, and a spokesman said there are two factors that would be studied before the company would consider interest certificates. These are rates of interest and negotiability.
Even though it is conceded the plan will not become a large scale success under existing Regulation Q limits, some bankers expect to increase their time deposits.
But they anticipated these deposits will be volatile and will stay with a bank only as long as the depositor earns the best return possible. This, the bankers point out, will hamper lending activities based on these deposits.
Even with these drawbacks, one banker stated the funds could be useful for call loans or investment in longer term Governments.
