First National City Bank (Citibank), 1961

问题

A federal rate cap on bank deposits was legally fixed, but corporate cash kept fleeing to higher-yielding Treasury bills

背景

By 1960 the Federal Reserve's Regulation Q capped the interest a bank could pay on time deposits at 3 percent for six-month money — generous when it was set, no longer competitive once market rates on short-term Treasury bills and commercial paper climbed through the late 1950s. Corporate treasurers, who could move millions overnight, simply pulled idle cash out of bank certificates of deposit and into Treasury bills instead, a flight regulators called disintermediation. First National City Bank, competing hardest for that corporate cash, watched a growing share of its deposit base drain into instruments it was legally barred from matching.

The bank could not simply raise the rate it paid — Regulation Q was federal law, and evading it risked the charter itself. A similar fix had already been tried in 1959 and gone nowhere for lack of anyone willing to commit real capital to it. What the bank could not offer competitively in rate, though, corporate treasurers might accept in an entirely different currency: the ability to get their money back before maturity without penalty, the one feature a locked six-month CD could never match against a freely tradable T-bill.

换别人会怎么做

Lobby the Federal Reserve to raise or repeal the Regulation Q ceiling, or simply accept the loss of corporate deposits to Treasury bills as a cost of doing business under a rate cap nobody at the bank had the power to change.

他们看到了什么

The corporate treasurer's real complaint wasn't the coupon rate on a bank CD — it was that the money was locked up until maturity while a Treasury bill could be sold at any moment for whatever it was worth that day. If the CD itself could trade in an open secondary market before maturity, its resale price would move to reflect prevailing rates regardless of what coupon was printed on it, solving the liquidity problem directly instead of attacking a rate ceiling the bank had no power to move.

那一手

Walter Wriston, then an executive vice president, persuaded the Discount Corporation of New York — an established government-securities dealer not itself bound by Regulation Q — to make an open market in First National City's certificates of deposit, buying and selling them for its own account so any holder could sell before maturity. To get Discount Corporation to commit capital to an unproven product, Wriston backed the arrangement with a $10 million unsecured loan from the bank itself. On February 20, 1961, First National City announced the negotiable CD and Discount Corporation simultaneously announced it would make that market.

为什么管用

Making a CD negotiable only matters if someone will actually buy it back before maturity, so Wriston needed a real market maker, not just a legal feature — he got Discount Corporation of New York, a securities dealer outside Regulation Q's reach, to commit its own capital to buying and selling the certificates, backed by a $10 million unsecured loan from the bank to make that commitment credible. With genuine two-way liquidity behind it, the certificate's market price could float to whatever yield investors demanded, so a holder earned a market-competitive return through the resale price even though the bank's stated interest payment never breached the legal ceiling.

值了多少

The CD's stated coupon still sat under the Regulation Q ceiling, but because it could now be resold at any time, its market price moved to whatever yield the secondary market demanded — giving corporate treasurers a liquid, market-priced instrument in every way that mattered to them, issued by a bank still technically obeying its own rate cap. Outstanding negotiable CDs reached $15 billion by 1966, second only to Treasury bills, and topped $90 billion by 1975; Barron's came to treat the negotiable CD rate as one of the money market's most closely watched benchmarks.

什么时候会失灵

Negotiability alone creates nothing without a market maker willing to commit real capital to trading the instrument — the 1959 attempt at the same idea went nowhere for lack of exactly that commitment. And the whole arbitrage only works while the underlying regulatory gap exists: once Regulation Q's ceilings were phased out in the early 1980s, the negotiable CD's original advantage over an ordinary deposit vanished entirely.

后来呢

The negotiable CD gave commercial banks a durable tool to compete for corporate cash without technically violating deposit-rate law, and other banks — eventually foreign banks operating in the U.S. — copied the template within a few years. Regulation Q's ceilings, undermined by exactly this kind of workaround alongside money-market mutual funds, were phased out entirely by the early 1980s, after which the negotiable CD's original regulatory-arbitrage advantage disappeared and it settled into being simply a standard money-market instrument.

资料来源

[1]The Negotiable CD: National Bank Innovation in the 1960sOffice of the Comptroller of the Currency, 2016occ.treas.gov
[2]Negotiable Certificate of Deposit Is IntroducedEBSCO Research Starters, 2021ebsco.com

Citibank couldn't legally raise the interest rate it paid, so it made its deposits resellable instead

问题

背景