WASHINGTON - The new Truth-in-Savings rule has been in effect just three weeks, and the Federal Reserve has begun tinkering with it.
The Fed's board of governors on Wednesday proposed changing the way banks calculate annual percentage yields for some certificates of deposits. While the proposed change is relatively minor, revisiting the rules in any form so soon after implementation raised eyebrows even among the governors.
"I have no taste for changing a regulation that's only been in effect for three weeks," said Fed Governor Edward W. Kelley. "With the ink barely, dry, we're finding flaws in it."
Despite this concern. the board decided that making the formula as accurate as possible justified the added burden on the industry the change will generate.
|We've Got to Do It Right'
"If we are going to specify how, each [bank] should calculate it, we've got to do it right." said Fed Vice Chairman David W. Mullins. "I can't believe it's going to be very pleasant, but I don't think we have an alternative."
The Fed voted to change the way banks calculate the annual percentage yield for CDs that do not compound interest. The proposed change came in response to complaints from both bankers and the securities industry that the existing formula could confuse investors considering these kinds of accounts.
In proposing to change the calculation. the Fed offered two alternatives.
A more simple revision recommended by the Fed's staff would substitute the interest rate for yield on these accounts. A more complex, more precise calculation preferred by the governors would factor in when interest payments are made.
Third Alernative: Inaction
And Fed chairman Alan Greenspan suggested a third alternative: make no change. "When this stuff comes back. do have the alternative of doing nothing and we should give some consideration to that," he said.
While it was willing to propose changing the yield calculation, the board refused to act on another change proposed by the staff. The staff had wanted to exempt certain bonus programs from advertising rules. But the board, noting that no bank had complained about the rule, decided against the exemption.
Also at the meeting, the Fed voted to postpone indefinitely its proposal to extend the operating hours of the Fed Wire funds transfer service. Last October, the Fed proposed opening the wire at 6:30 a.m., two hours earlier. in order to facilitate risk-reduction in settlement activity for futures markets.
Many in the financial industry asked the Fed not to adopt the plan, saying the small change would provide little benefit without broader changes in the Fed's entire payments system. The Fed heeded these concerns, and is planning an in-depth study to explore a more comprehensive plan for expanding Fed Wire hours.
"There is no backing away from our long-run plans to move in the 24-hour direction," Governor Wyne Angell said. "The notion is that the board is somewhat what impatient to move forward."