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Deregulation and withdrawal penalties

  • Economics


December 9_1983 Deregulation and Withdrawal Penalties For the most part, minimum early with- drawal penalties appear to have been, or at least were perceived to have been, suffi- ciently harsh to discourage massive early withdrawals by depositors merely to take advantage of sharp rises in interest rates. Data available on penalty income associ- ated with premature withdrawals suggest that, while early withdrawals responded to increases in interest rates, the volume of withdrawals in the aggregate never repre- sented a large fraction of total small- denomination time deposits. Minimum early withdrawal penalties also may have Minimum early withdrawal penalties, however, had another function that made them an important adjunct to interest-rate ceilings on deposits. For many years small- denomination deposits (less than $100,000) were subject to fixed interest rate ceilings. These ceilings were structured so that maximum rates payable were lower on short-term accounts than on longer-term accounts. In this context, early withdrawal penalties were needed to enforce the rate- ceiling differentials on the various time and savings accounts. For example, in the absence of regulatory minimum penalties, an institution would have been able to cir- cumvent the lower cei Iing On passbook savings accounts by issuing a higher-ceiling long-term time deposit that allowed imme- diate access to the funds without penalty. In the late 1970s and early 1980s, as fixed ceilings on some time deposits were re- placed by indexed ceil ings Or were removed completely, early withdrawal penalties also were required to prevent de facto deregula- tion of all time and savings deposits. establishing withdrawal penalties, regu- latory minimums may never have been needed since depository institutions could be expected to set their own penalties or make other arrangements to be compen- sated for allowing premature withdrawals. lF~(dl~ffa\ll ~~~~ffW~ lBCC\Jl\llK (SJ)~ ~ <;'i' j"'\ l-~<;'P -?\ jn r('; 11° § (C~ (('\\W/(9,\" .,

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