WASHINGTON -- Almoat a year after implementing Truth Savings rules, the Federal Reserve is still debating how banks should calculate the annual percentage yield of accounts.
On Thursday, the board abandoned a five-month-old proposal to change that formula, agreeing with industry protests that it would be too complex and burdensome to implement.
But the five governors also released a new proposal, overturning the staff's recommendation that it give up on attempts to improve the APY calculation and give the industry some certainty.
"There is no obvious solution to our problem," said Governor Lawrence B. Lindsey, who oversees consumer and community affairs issues for the board.
Fed officials proposed the new plan only bergrudgingly, and only at Mr. Lindsey's strong urging. Several indicated that while they agreed to put the plan out for comment, they might not favor actual implementation of the changes.
"I'm not sure it solves very much," said Fed Chairman Alan Greenspan. "It just pushes the sand pile from one end of the sandbox to another."
Fed officials have been struggling to come up with a calculation of APY that provides the most accurate reflection of the real value different kinds of accounts provide consumers. But after the board's original rules went into effect last June, some complained that the rule treated certain accounts unfairly.
Speficically, the Securities Industry Association said that accounts offered by many of its members would have APY's less than the interest rates they are offering, making them appear less attractive than they really are. This occurred in multiyear, noncompounding CDs.
Responding to this concern, the board put out a proposal last December to rejigger APY. But an overwhelming number of banks and consumer groups asked the Fedc to leave the rule unchanged, anomalies and all.
Worth the Difference?
Fed staff members agreed, and seemed to have much of the board convinced. But Mr. Lindsey persuaded them to try again to come up with a more robust formula.
"This is not the most earth-shattering issue we have had to deal with around this table," said Governor John P. LaWare. "I'm not sure it's really worth the minuscule difference this s will make."
Mr. Greenspan credited the agency's problems with the APY formula to Congress, which he said unrealistically believed a simple formula could adequately capture the returns on a board range of accounts.
Not only consumers, but bankers are probably "vague on the true meaning" of APY, he said.
But governor Susan M. Phillips was the loan dissenter, voting to withdraw the recent proposal but opposing the release of another one. "We've already burdened folks enough," she said.
Two Basic Changes
The plan approved for public comment would make two basic changes to the rule, to make it more closely reflect "the time value of money." First, it would require that as soon as interest is credited to an account, it must be added to the principal amount. Interest must be compounded on that full amount.
Second, the proposal would require lenders to provide the same crediting frequency for all account holders, whenever they offer the option of paying interest by check or posting directly to the account.
Also at Thursday's meeting, the board voted to bring government sponsored enterprises - including Fannie Mae and Freddie Mac - under its daylight overdraft rules that recently took effect. Starting in October, these institutions will be required to pay penalties for over-drafts they incur in Fed accounts throughout the day.