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RATE OF INTEREST ON DEPOSITS.
18. We proceed to examine the question what rate of interest should be allowed on deposits, with special reference to the main purpose for which savings banks are established by Governments. That purpose is to encourage thrift among the people, especially among the poorer classes, and the requirements of these classes are, we conceive, that they should have easy facilities for depositing their savings in small amounts at a time; that they should be assured of the safety of their money in the hands of the Government; that they should be able to withdraw it easily and quickly when they require it; and that they should receive a reasonable rate of interest, having regard to the advantages offered of security and immediate liquidity and to the expense involved in small transactions. The question then is what is a reasonable rate of interest? Broadly speaking, the rate which the management can afford to pay, on the assumption that the savings bank is to be self-supporting, is the earning-rate of the high-class securities in which deposits are invested with a sufficient deduction to meet administrative expenses. But whereas the earning power of investments is constantly changing, being subject both to long-period fluctuations and to violent disturbances caused by wars and other crises, we are convinced that the needs of depositors of the classes which savings banks are mainly intended to benefit are far better served by a steady low rate of interest than by a fluctuating rate even at a somewhat higher average level. Raising the rate would no doubt afford them satisfaction; but if the higher rate could not be permanently maintained and it became neces- sary to reduce it again, the disappointment caused by the reduction would probably outweigh the previous satisfaction and might lead to discontent and perhaps heavy withdrawals. We think it important therefore that a rate once fixed should be maintained as long as possible, and only changed (or at least We note in this connection only reduced) very rarely and for special reasons.
that the United Kingdom Government has maintained its rate unchanged at 2 per cent. per annum since the inception of its Post Office Savings Bank in 1861, and the United States Government similarly at per cent. since 1910.
19. A further reason for fixing a low rate of interest on savings deposits is that such banks are not intended to compete either with commercial banks offering current and deposit account facilities to a different class of client or with borrowers appealing to investors in the stock markets. If a savings bank offered too high a rate of interest it might, at times of low investment yield, attract comparatively large sums of what may be called uneasy money that is, money which is liable to be withdrawn as soon as investment conditions change. Business of this kind is undesirable business for a savings bank because the money when deposited is likely to be invested in securities standing at high prices which will have to be realized later to meet withdrawals at a time when investment values have fallen.
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20. The criterion, then, for the determination of the savings bank interest rate is the earning power of investments, assessed over a long period, with a deduction for administrative expenses, and with the proviso that the rate should not be too high and should be kept steady for long periods. We have already recommended that administrative expenses should be fully allowed for. estimating the earning power of investments it is obvious that the effective yield, allowing for redemption, should be taken, and not the flat or running yield; thus on a 5 per cent. stock redeemable at par in 10 years and purchased at 118, the effective yield is approximately 3 per cent. although the running yield is 41 per cent. The investments in a savings bank fund, again, are securities of varying term, and the long-term yield is not usually the same as the short-term yield; this must be allowed for. Further, since the investments pro- vide not only the income out of which the deposit interest is met but also the primary security for the repayment of the principal of the deposits, it is desirable to have a reserve, or surplus of assets, against the inevitable risk of depreciation of the investments through changes in market conditions; the necessity of building up an adequate reserve should therefore also be taken into account. The actual rate of interest paid on deposits may be somewhat less than the nominal rate if the arrangements are such that the deposits, either in whole or part, earn no interest for a time; e.g., if interest is not paid on fractions of a pound or for a fraction of a month as is a common practice. On the other hand, moneys received on deposit may also lie idle for a time earning no interest pending invest- ment, and some money must be regularly retained in cash as a working balance.
21.
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In the previous paragraph we have attempted to set out the various factors which must be taken into consideration in order to arrive at the "economic rate "which a savings bank can afford to pay on its deposits if it is on the whole to be just self-supporting. We recognize that some of these factors are extremely difficult to assess, particularly the most important of them all, the earning power of investments; and we are not in any case in a position to recommend a single uniform rate applicable to the Colonies, in each of which the circumstances of the savings bank would require individual examination. General experience does suggest, however, that such examination may be expected to show in most instances that the economic rate is not greater than 24 per cent., the rate paid by the United Kingdom Post Office. In the case of a Colonial savings bank the earning power of investments may be taken as somewhat higher, since the in- vestments are not confined to British Government securities, but on the other hand the ratio of administrative expenses to deposits also no doubt tends to be higher, because the business is on a very much smaller scale. A rate of 24 per cent. would also probably not be too high to satisfy the other conditions to which we have referred. In the draft Ordinance appended to this report we have left the rate to be fixed by the Ordinance in the first instance, but varied, if necessary, by the Governor-in-Council with the approval of the Secretary of State. We may mention at this point that, according to the information in our possession, rates at present vary between 3 per cent. and per cent., and that,
at the end of 1932, 4 per cent. was being paid in two cases.
22. In a few Colonies it is the practice to pay a higher rate of interest on deposits below a stated figure than is paid on deposits upwards of that figure. In theory there is much to be said for this practice. In so far as it is effective in encouraging thrift amongst the poorer classes of the community it is a direct fulfilment of one of the main objects of a savings bank. But we doubt whether, in practice, this result is really achieved, as it is generally agreed that a small difference in interest rates is not a prime factor in the encouragement of thrift. The system provides an additional complication in the management of a bank, and, as we doubt whether the results are commensurate with the work involved, we do not recommend that it should be adopted as a general principle of Colonial savings bank finance.
FINANCIAL RELATIONS BETWEEN SAVINGS BANK FUNDS AND PUBLIC REVENUES.
23. We deal next with the financial relations which should exist between savings banks funds and the public revenues, namely, the question whether, and to what extent, the annual working profit or loss as shown in the revenue and expenditure account, and the capital surplus or deficit shown in the annual balance sheet, should be paid into, or made good from, the general revenues of the Government. In answering this question the following considerations should be borne in mind
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(a) With a steady interest rate on deposits and a variable earning rate on investments, revenue and expenditure cannot be expected to keep pace with each other regularly year after year. Hence, if the interest rate is fixed in the neighbourhood of the true economic rate, there is bound to be sometimes a working profit and sometimes a working loss.
(b) To show the real profit or loss, the apparent profit or loss shown by the revenue and expenditure account would require adjustment for the difference between the running and the effective yield on the investments. (c) The true economic rate of deposit interest is, as already indicated, difficult to determine, and, on the view that the savings bank should not in the long run impose a burden on the general taxpayer and that some advantage to the public revenue is justified by the value of the uncon- ditional guarantee given by the Government to depositors, the deposit rate should, in our opinion (apart from the other reasons for this course already adduced) be fixed rather below than above the economic rate. If this is done, the annual working will normally show a profit, and if the profit is carried to capital account and not paid away, the surplus of assets over liabilites will tend to increase indefinitely.
A +
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