XN000022-1981-05-27 — Page 6

WEDNESDAY, MAY 27, 1981

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UNDER THE BILLS, HE SAID, DEPOSIT-TAKING COMPANIES WOULD BE PROHIBITED FROM ACCEPTING DEPOSITS WITH AN ORIGINAL TERM TO MATURITY OF UNDER THREE MONTHS AND UNDER $500 000, BUT NO STATISTICS HAVE BEEN COLLECTED BY THE GOVERNMENT TO ASSESS WHAT PERCENTAGE OF TOTAL DEPOSITS WITH DEPOSIT-TAKING COMPANIES FELL

INTO THIS CATEGORY.

+WHILST I APPRECIATE THAT THESE STATISTICS WOULD FLUCTUATE ACCORDING TO INTEREST RATE EXPECTATIONS AND THAT IT IS IMPOSSIBLE TO JUDGE TO WHAT EXTENT A 90-DAY MARKET FOR DEPOSITS OF BETWEEN $50 000 AND $500 000 WOULD DEVELOP, I DO NOT CONSIDER THIS TO BE SUFFICIENT JUSTIFICATION FOR NOT HAVING EVEN ATTEMPTED TO UNDERTAKE THIS STATISTICAL ANALYSIS.

+CERTAINLY, GIVEN THE TENDENCY FOR DEPOSIT-TAKING COMPANIES TO BORROW SHORT AND LEND LONG, IT IS LIKELY THAT SOME, AT LEAST, WILL FACE SEVERE PROBLEMS AS THE CHOKING PROCESS TAKES EFFECT ON THEIR SOURCES OF SHORT TERM FUNDS.+

ALTHOUGH A TRANSITIONAL PERIOD OF 24 MONTHS HAS BEEN PROPOSED, MR CHEONG FEARED THAT THIS CHOKING EFFECT COULD GENERATE UNDESIRABLE DE-STABILIZING INFLUENCES IN PART OF THE MONETARY SECTOR.

HE THEREFORE URGED THE GOVERNMENT TO MONITOR THE SITUATION CAREFULLY AND NOT TO SHUT THE DOOR TO POSSIBLE EXTENSIONS OF THE TRANSITIONAL PERIOD IF REQUIRED.

QUOTING ANOTHER EXAMPLE OF POSSIBLE DE-STABILIZING INFLUENCES, MR CHEONG POINTED OUT THAT A NUMBER OF SMALL LOCAL LICENSED BANKS HAVE ACCESS THROUGH THE IR DTC SUBSIDIARIES AND OUTSIDE THE CONTEXT OF THE INTEREST RATE AGREEMENT TO COMPETE FAIRLY FOR DEPOSITS INCLUDING THOSE OF OVER $500 000 AND WITH AN ORIGINAL TERM TO MATURITY OF UNDER THREE MONTHS.

HE SAID: THESE DTC SUBSIDIARIES EXIST LARGELY FOR THE PURPOSE OF GARNERING FUNDS FOR ON-LENDING TO THE IR PARENT BANKS.

+WHEN THESE TWO BILLS COME INTO EFFECT, THESE DTCS WILL NOT BE ELIGIBLE FOR LICENSED STATUS AND THE PARENT BANKS INVOLVED WILL BE PLACED AT A SUBSTANTIAL DISADVANTAGE TO COMPETE FOR LARGE DEPOSITS OUTSIDE THE INTEREST RATE AGREEMENT VIS A VIS THOSE BANKS WHICH CAN ESTABLISH THEIR OWN LICENSED DTCS IN ACCORDANCE WITH THE VARIOUS CRITERIA LAID DOWN.+

HE URGED THE GOVERNMENT TO EXAMINE URGENTLY THE SIGNIFICANCE OF THIS TYPE OF DEPOS IT AS A SOURCE OF FUNDING TO THE SMALL LICENSED BANKS.

DEPENDING ON THE OUTCOME OF THIS ASSESSMENT, HE ADDED, THERE MAY WELL BE A STRONG CASE FOR ABANDONING THE INTEREST RATE AGREEMENT FOR DEPOSITS EXCEEDING $500 000.

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