In 1980 Congress passed the Depository Institutions Deregulation Monetary Control Act (DIDMCA), the most important piece of banking legislation in the United States since the Glass-Steagall Banking Act of 1933. The DIDMCA signaled a marked shift in government banking policy in the direction of a deregulated banking system. This was a sharp contrast to the banking legislation of the 1930s, which had added to the regulation of the banking industry.
One of the more important provisions of the DIDMCA authorized all depository institutions to offer negotiated order of withdrawal (NOW) accounts. These accounts are interest-bearing savings accounts with check-writing privileges that depositors basically treat as checking accounts. The banking legislation of the 1930s had forbidden banks from paying interest on checking accounts. In the 1970s thrift institutions, faced with an outflow of funds and hoping to make their savings accounts more attractive, received permission from banking regulators to let thrift depositors write checks on savings accounts. Before the DIDMCA only savings and loans (S&Ls), credit unions, and other thrift institutions offered NOW accounts. In practical terms, the DIDMCA enabled all depository institutions, including commercial banks, to pay interest on checking accounts. The DIDMCA also removed interest-bearing deposits from the restrictions of state usury laws.
A related provision of the DIDMCA made automatic transfer accounts legal, further lifting restrictions on interest-bearing checking accounts. These accounts let commercial banks automatically transfer unused checking account funds into interest-bearing savings accounts. Because checking accounts could not pay interest before the DIDMCA, the ability to switch funds from checking to savings as needed gave checking accounts some of the advantages of interest-bearing accounts.
By the mid-1970s technology had made switching an inexpensive procedure, but the courts had ruled that automatic transfer accounts violated the law against the payment of interest on checking accounts. Therefore legislation was necessary to remove the prohibition on automatic transfer accounts.
The DIDMCA called for the formation of a Depository Institutions Deregulation Committee charged with overseeing the removal of interest-rate ceilings on all deposits, except business deposits at commercial banks. This committee was composed of the heads of the Treasury Department, the Federal Reserve Board, the Federal Depository Insurance Corporation, the Federal Home Loan Bank Board, and the National Credit Union Administrator. The Comptroller of the Currency served as a nonvoting member.
The DIDMCA freed from state usury ceilings residential mortgages and agricultural and business loans in excess of $25,000 and extended partial exemption to other loans made by state-chartered banks, savings and loan institutions, and credit unions. States had the option to reinstate state usury ceilings on these loans, but action had to be taken by 1 April 1983.
The DIDMCA gave federally chartered S&Ls permission to make consumer loans, and invest in commercial paper and corporate debt securities. Up to 20 percent of a savings and loan’s assets could be committed to these uses. The DIDMCA also added credit cards, trusts, and fiduciary services to the range of services offered by S&Ls. In a nutshell, the S&Ls now compete with commercial banks in a wider range of services.
The DIDMCA authorized mutual savings banks with federal charters to enter the market for business loans. These institutions could invest up to 5 percent of their assets in these loans, and the business borrowers could not receive checking privileges associated with these loans
The DIDMCA put all federally insured depository institutions under the reserve requirements imposed by the Federal Reserve System. Before the DIDMCA the Federal Reserve System set reserve requirements of federally chartered commercial banks. (Reserve requirements set the percentage of checking and savings deposits that must be retained in the form of vault cash or a deposit at a Federal Reserve Bank.) Reserve requirements protect depositors (or the FDIC) by making bank assets more liquid and less risky, but they also leave bank assets less profitable because reserves pay no interest. State laws had invariably set lower reserve requirements, as a percentage, for state-chartered banks. The DIDMCA increased the power of reserve requirements as a tool of monetary regulation, and leveled the playing field between federally chartered institutions and state-chartered institutions.
The consumer is the clear beneficiary of competition in most industries, but when a bank fails the bank’s customers suffer as much as the bank’s owners. Depression-era legislation reduced competition between banks to stem the tide of bank failures. The DIDMCA took an important step toward restoring competition to the banking industry.