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Introduction of the No 3 (Special Investment) Department
 
Depositors' Department
 
 
Account Types
 

January 1st 1967 saw the introduction of a third deposit product becoming available to the Bank's depositors. This product was presented as an Investment Account (withdrawals subject to 1 month's notice, with interest paid at 5%) for deposits that could be made on a longer term basis than the two Savings Accounts (No 1 Department paying 3%; No 2 Department paying 2%). This new account was the Bank's attempt to provide a competitive product in a time of high interest rates.

1967, however, was not the first time that the Bank had contemplated providing a Special Investment account - a facility that had been available to customers of Trustee Savings Banks for many years. As the following report (dated November 16th 1934) by the General Manager to the Bank Committee shows, the introduction of an Investment Department had also been considered previously at some time prior to 1934.

Report of General Manager on Rate of Interest on Deposits

In view of the fact that the City Treasurer has intimated that the present rate of interest allowed on Bank moneys placed with the Corporation cannot be continued after the 31st March 1935, and that a reduction in the rate between % and % must be expected, I have to submit the following observations:

I understand it is not advisable, at the moment, to determine the definite rate of interest which will apply at the 1st April 1935, because the financial position is so changeable, and that the practice which has been followed for many years, of adjusting the rate of interest from time to time to a figure mutually satisfactory to the Finance and Bank Committees, would be the most prudent course to adopt. For the purpose of my calculations I have, however, assumed the reduction would be at the average of 3/8%.

A  drop of 3/8% on the money held by the Corporation at the 31st March 1934 would mean a reduction in income of 47,078, and with a view to meeting such reduction I have examined various savings bank schemes in operation and one suggested scheme. Those in operation relate to (1) Trustee Savings Banks in general; (2) Airdrie Savings Bank; and (3) Greenock Provident Bank; the suggested scheme is that outlined in the Bradbury Committee Report; and they are all dealt with under separate headings.

Trustee Savings Banks

The ordinary rate of interest allowed on deposits is 2%, limited to deposits not exceeding 500 per year, and withdrawals are subject to a maximum notice of seven days. Those Banks, which, in the opinion of the Treasury, have accumulated a sufficiently strong reserve fund to justify it, are allowed to establish a special investment department and to pay a higher rate of interest on deposits transferred to or placed therein. To qualify for an account in the special investment department a depositor must have not less than 50 in the ordinary department, and that sum must remain in such department so long as he has an account in the special investment department. Subject thereto, the depositor may, from time to time, transfer sums in multiples of 50 from his ordinary account, up to a limit of 1,000. Withdrawals from special investment accounts are subject to one month's notice. Interest is allowed at a higher rate, and varies as between one bank and another according to the financial position of the bank and the decision of the Treasury. Out of 63 banks operating special investment departments, 39 are paying 2% at the present time, and the remainder 3%. The investment of funds in the ordinary department is in the hands of the National Debt Commissioners, but the investment of funds in the special investment department is controlled by the Trustees.

The Trustee Savings Bank system encourages those who are able to deposit lump sums by offering a higher rate of interest, and thus give preferential treatment to the more wealthy of their depositors. The administration is simple to work, and there is much to be said for a system which has been in operation for a long number of years.

The Committee will recall that when this Bank attempted to secure powers to set up a special investment department and pay a higher rate of interest on deposits placed therein, the Treasury refused consent, principally on the grounds that the Reserve Fund was not sufficiently strong to justify a higher rate than 3%, which was then being allowed. The position has, however, changed, and I have reason to believe that the Treasury would not now oppose the creation of a special investment department, if that method is favoured. It must, however, be realised that to reduce the present rate of interest to 2% without offering some other advantage would place this Bank in an inferior position to the larger Trustee Savings Banks.

The last Government Return embracing all Trustee Savings Banks shows that the amounts due to depositors were as follows:

Ordinary Department 88,791,286

Investment Department 82,607,135

During recent years the Investment Department figure has been built up at a rapid rate owing to the high rate of interest allowed, which, in recent years gone by, reached 4%. No doubt such an attractive rate induced many to transfer sums from one department to the other or to make additional deposits at the higher rate. The way in which the balances in the Investment Department have grown will be seen by reference to Statement A attached hereto. It is also interesting to note the proportion of balances in the two departments as they affect the larger Trustee Savings Banks, which information is given on Statement B attached hereto. Having regard to the nature of the investments, a good proportion of which are in Corporation Mortgages, the unreasonable growth of an investment department with higher interest rates can be an embarrassment, and is no doubt giving rise to anxiety at the present time.

Of the 17,063,593 standing to the credit of 374,799 depositors in the Municipal Bank at the 31st March last, 2,182,070 represents 299,614 depositors with balances of less than 50 who would not be able to take advantage of an investment department. Applying the percentage disclosed by the figures relating to Trustee Savings Banks (roughly 50%) to the remaining 14,881,523, representing 75,185 depositors, the following result is arrived at:

 
 
2,182,070 
at 2% = 
54,552
 
7,440,762
at 2% =
186,019
 
7,440,762
at 3% =
223,222
Totals:
17,063,593
 
463,793

Our present rate of interest (3%) on 17,063,593 equals 511,907, and, therefore, the saving effected in interest allowed to depositors by the adoption of the Trustee Savings Banks method would be 48,114, but against this must be set the loss of income by reduction of the rate allowed by the Treasurer, viz  47,078. It will be appreciated that it is impossible to estimate the amount which might be transferred to an investment department, subject to one month's notice, and the percentage taken, viz 50%, represents the worst position in which this Bank may be placed.

Airdrie Savings Bank

This Bank, which remained outside the provisions of the Trustee Savings Banks Act of 1863, has greater freedom in the matter of interest rates and investment of funds, and operates three types of accounts, viz:

(1) current accounts on which 2% interest is allowed;

(2) ordinary deposit accounts on which 3% interest is allowed; and

(3) special deposit accounts on which 3% interest is allowed.

The 3% and 3% rates apply to sums which remain in the Bank for the whole year, but if withdrawals take place during the year only 2% is allowed. New deposits are not received in the special deposit accounts, but transfers from the other types of accounts are allowed in multiples of 10. The Trustees have imposed, for the time being, a deposit limit 250 in the year.

The Airdrie system is more complicated to work, and gives advantages in interest rates to the more wealthy type of depositor.

The last annual report of the Airdrie Savings Bank does not disclose the proportion of depositors whose accounts are credited with the different rates of interest; it merely shows the total amount due to depositors in the Bank as a whole, viz 4,946,404.

Greenock Provident Bank

This Bank, which is also outside the scope of the Trustee Savings Banks Act of 1863, has freedom in the matter of interest rates and investment of funds, and operates two types of accounts, viz (1) current accounts, and (2) fixed deposit accounts. On current accounts where the balance has not exceeded 100 during the year, 3% interest is allowed. On fixed deposit accounts, subject to one month's notice of withdrawal, 3% is allowed. For the time being deposits are restricted to a total of 200 in the year on current accounts and 100 on fixed deposit accounts.

The Greenock method, whilst being more complicated to work, does give preference to the ordinary type of depositor, with less favourable terms to the more wealthy depositor.

According to the last annual report of the Greenock Provident Bank, the balances on 5,923 fixed deposit accounts bearing interest at 3% total 1,459,267, and represent 62.5% of the funds; and the balances on 37,661 current accounts amounting to 876,564 represent 37.5% of the funds. An analysis of the current accounts discloses the fact that 84.5% of the current accounts balances do not exceed 100 and, therefore, bear interest at 3%, and the remaining 15.5% of current account balances exceed 100 and bear interest at 2%. Applying the above percentages to our figures at the 31st March last, the following result is arrived at:
 
Fixed deposits (50,972 accounts)
10,664,745
at 3% = 
319,942
Current deposits (323,827 accounts)
5,407,026
at 3% =
189,245
 
991,822
at 2% =
24,795
Totals:
17,063,593
 
533,982

Our present rate of interest (3%) on 17,063,593 equals 511,907, and, therefore, the excess interest to be allowed to depositors by the adoption of the Greenock Provident Bank method, and at their rates, would be 22,075, irrespective of the loss of income already referred to, viz 47,078.

Bradbury Committee Scheme

The Committee set up by the Treasury in 1927, and presided over by Lord Bradbury, went exhaustively into the question of an extension of Municipal Savings Banks, and reported against extension. They made no adverse criticism of the Birmingham Municipal Bank, but rather praised its achievements and the manner in which it had been conducted. They did, however, put forward the suggestion that had they been dealing with the question entirely afresh they would have thought it desirable that, to increase the stability of the deposits, the Bank should pay a low flat rate of interest on monthly balances, and a higher rate on money that proved in fact long term money, the higher rate not to be limited to deposits for a fixed period or subject to additional notice, but to begin to run only as from the end of a fixed period, say, three years from the date of the original deposit.

The Bradbury Scheme is untried, but should not be ignored on that account. By imposing a qualification of membership representing a period of years, it aims at giving some advantage to what might be termed genuine savings bank depositors.

Dealing with the Bradbury Scheme, and assuming a three years' qualification would be required, the total balances for 1932 in respect of 344,584 depositors, and amounting to 13,682,646, would qualify for interest at the higher rate, unless in the last three years individual balances had been reduced below the amount at which they stood in 1932. It is, however, difficult to form an estimate of any such variations, and, therefore, for calculation purposes, the whole amount at 1932 has been taken on the above figures, and the following result is reached:
 
13,682,646 (344,584 accounts)
at 3% = 
410,479
3,380,947 (30,215 accounts)
at 2% =
84,523
17,063,593
 
495,002

Our present rate of interest (3%) on 17,063,593 equals 511,907, and, therefore, the savings effected in interest allowed to depositors by the adoption of the Bradbury Scheme would be 16,905, but against this must be set the loss of income caused by a reduction of the rate allowed by the Treasurer, viz 47,078.

Alternatives

From the foregoing it will be seen that we are not in a position to adopt any of the methods referred to in their entirety, and with a view to finding a method which would ensure this Bank being in no more than a Trustee Savings Bank, and embodying part of the Bradbury Scheme, the following alternative is submitted for consideration:

(a) The normal rate of interest to be 2%

(b) Transfers of sums of 50 or multiples of 50, which have been in the Bank for a minimum period of five years, to be accepted at the request of the depositor, and interest at 3% to be allowed thereon

(c) Withdrawals to be effected as at present, viz within a maximum period of 7 days.

Of the 11,534,834 standing to the credit of 311,980 depositors at 1930, 2,476,307 representing 255,214 depositors with less than 50 to their credit would not be affected. Of the remaining 9,058,527 it is assumed for the purpose of calculations that 75%, or 6,793,895 might be transferred to the higher rate, and in applying this percentage to our figures for March 1934 the following result is arrived at:
 
6,793,895
at 3% = 
203,816
10,269,698
at 2% =
256,742
17,063,593
 
460,558

Our present rate of interest (3%) on 17,063,593 equals 511,907, and, therefore, the savings affected in interest allowed to depositors by the adoption of this scheme would be 51,349 as against the loss in income of 47,078.

Another alternative would be to reduce the rate of interest all round to 2%. Taking the March 1934 figures, the saving affected would be 85,317 as against the loss in income of 47,078, but the Bank would be in a decidedly inferior position to the larger Trustee Savings Banks.

Note by General Manager dated November 16th 1934

At the request of the Chairman (Councillor Cooper) and Alderman Barrow, I have worked out figures for a still different scheme, viz:

(a) The normal rate of interest to be 2%

(b) Transfers of sums of 50 or multiples of 50, which have been in the Bank for a minimum period of three years, to be accepted at the request of the depositors, and interest at 3% to be allowed thereon

(c) Withdrawals on such transfers to be subject to one month's notice

Of the 13,682,646 standing to the credit of 344,584 depositors at 1932, 2,169,303 representing 280,151 depositors with less than 50 to their credit will not be affected. Of the remaining 11,513,343 it is assumed, for the purpose of calculation, that 50% of 5,756,671 might be transferred to the higher rate, and in applying this percentage to our figures for March 1934 the following result is arrived at:

and the saving in interest would be 62,672 as compared with 51,349

 

 

 

 

 

 
5,756,671
at 3% = 
172,700
11,306,922
at 2% =
282,673
17,063,593
 
455,373

No record exists of the deliberations or decision of the Bank's Committee, but 3% continued to be paid on a single deposit product - that rate continuing to be paid until June 30th 1946. It is noteworthy that a major consideration of the General Manager's report was that the BMB should not be seen to be paying a lower rate than the larger Trustee Savings Banks. Historically, the BMB had always paid a very competitive rate of interest (3% from its inception; 3% from December 1st 1932) - the position vis-a-vis Trustee Savings Banks being referred to in a discussion in Parliament in 1929 that considered raising the TSB rate from 2%:

.... we are not proposing to raise the deposit rate for the trustee savings bank or the Post Office Savings Bank as high as the rate in the joint stock banks or the Birmingham Municipal Bank. We are only proposing to raise it half as far, that is, to make it 3%.

In 1934, approximately 84% of the Bank's assets were placed with Birmingham Corporation - a reduction in the rate paid by the Corporation to the Bank on this sum, therefore had a critical impact on the Bank's income. The early 1930s was a period of low interest rates - the Bank of England's Lending Rate was constant at 2% from June 1932 to August 1939.

Continuing to pay 3% in 1934/35, with a reduction in income of 47,078 as predicted by the General Manager, would have had a major effect on the Bank's interest margin. In fact, the interest margin for 1934/35 only fell by 15,793. This smaller than anticipated fall in margin may have been due to Birmingham Corporation placing some of the Bank's funds in higher-yielding Government Securities. It may, therefore, have been the Bank Committee's decision to maintain the 3% rate by requesting the City Treasurer to diversify the investment portfolio in order to minimise the fall in income.

The possibility of introducing a Special Investment Department appears to have been considered again in 1942, and again rejected. The 3% rate payable on No 1 Department deposits continued until 1946, and boosted by wartime savings, total deposits continued to increase.

It was not until 1967 that a Special Investment Department was introduced to both offer a higher rate of interest and (with its requirement for a month's notice of withdrawals) to provide a greater stability of deposits. To reflect the higher rate of interest being paid, a superior style of passbook was introduced.

Our present rate of interest (3%) on  17,063,593 equals 511,907, and, therefore, the saving affected in interest allowed to depositors by the adoption of this scheme would be 56,534 against the loss in income of 47,078. 

 

Supplemental to Report dated November 19th 1934

If withdrawals under the .... scheme [headed 'Alternatives' above] are made subject to one month's notice instead of 7 days, the percentage of transfers to the higher rate would be less, and, consequently, instead of 75%, it may be assumed that 50% of the depositors would avail themselves of the opportunity to transfer.

This would affect the figures as follows:
 
5,756,671
at 3% = 
172,700
11,306,922
at 2% =
282,673
17,063,593
 
455,373
 
The Bradbury Committee