Introduction to Finance

Monetary Control 
The Monetary Control Act was designed to extend the Fed’s control 
to thrift institutions and to commercial banks that are not members of the system. This was 
accomplished by extending both reserve requirements and general controls to these institutions. 
Because the Fed had more stringent regulations than many state regulatory agencies, many com-
mercial banks had given up their membership in the system to become state-chartered, non-
member banks. The Monetary Control Act, therefore, has had the eff ect of halting the declining 
system membership by transferring much regulatory control from the state to the federal level.
In the past, reserve requirements imposed by the Fed applied only to member banks. 
The requirements were based on a complicated formula involving size, location, and type of 
charter. These diff erential reserve requirements have now been eliminated. Even foreign banks 
and offi
ces operating in this country have been included in these simplifi ed reserve require-
ments. Along with the broadening of control by the Fed, there has also been a broadening of 
privileges to those institutions brought under its control. All depository institutions may now 
borrow from the Fed on the same basis, and the fee schedule for services rendered by the Fed 
applies to all regulated depository institutions.
Garn–St. Germain Depository Institutions Act of 1982 
There had been 
high hopes that the Monetary Control Act would have a quick and benefi cial eff ect on the 
banking system as well as on the eff ectiveness of monetary control by the Fed. However, 
this was not the case. Of special signifi cance was the dramatic increase in interest rates in 
late 1980 and 1981. S&Ls and savings banks were faced with heavy increases in their cost of 
funds as depositors shifted from low-interest passbook savings to the higher-yielding NOW 
accounts and savings certifi cates. Furthermore, since the interest rates on NOW accounts were 
restricted by Regulation Q, money market mutual funds had a clear competitive advantage 
in attracting funds. Rapidly increasing federal defi cits and troubles in the automobile and 
housing industries added to the demand for legislation to address these problems. The 
Garn–
St. Germain Act of 1982
resulted.
Although the Garn–St. Germain Act had many provisions, its principal focus was to assist 
the savings and loan industry, which had deteriorated to dangerous levels. Depository institutions 
in general were authorized, among other things, to issue a new money market deposit account 
with no regulated interest rate ceiling. S&Ls were authorized to make nonresidential real 
estate loans, commercial loans, and variable-rate mortgages.