6) The removal of deposit rate ceilings
and the widespread securitization of FRMs means that credit rationing no longer occurs when interest rates rise.
As interest rate ceilings become more restrictive, lenders are willing to assume only a lower degree of risk.
However, when low interest rate ceilings are in effect, lenders will be unable to raise interest rates (beyond the ceiling rates) to compensate for expected default losses.
In 1980 the Depository Institution Deregulation and Monetary Control Act was introduced and allowed for the gradual phase-out of deposit interest rate ceilings starting with the introduction of interest-bearing NOW accounts in 1981.
Estimates of equation (12) for the remaining years are also presented in Table 1 and can be compared with those for 1981 to see how the phase-out of interest rate ceilings affects the relationship.
The residential construction equation used for the table incorporates no adjustments for the disintermediation effects of bank deposit rate ceilings
in the 1960s and 1970s.
Interest rate ceilings
and/or floors may also be implemented for FRN issuance, as outlined in the corresponding pricing supplement.
We are not seeing symptoms of that kind of widespread, classic crunch, as in the past when deposit rate ceilings
or usury ceilings limited the market's ability to adjust and forced cutoffs of credit.
Moreover, because creditors will find it more difficult to modify terms and conditions on home equity lines owing to the enactment of HELCPA, they may be reluctant to lock themselves into long-term contracts with relatively low rate ceilings
As inflation, and interest rates, rose in the late 1970s and early 1980s, and as deposit rate ceilings
were phased out, the resulting mismatch on the rising cost of deposit liabilities and the fixed return on mortgage assets produced substantial losses and a serious erosion of industry capital.