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The Negotiable CD: National Bank Innovation in the 1960s

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The negotiable certificate of deposit (CD) revolutionized the world of finance. Introduced in 1961 by First National City Bank of New York (now Citibank), the flexible CD enabled large banks to quickly and efficiently raise funds for lending. They could now draw liquidity from investors as well as businesses and consumers.

The new product eased a serious deposit shortage that struck National City and other leading banks during the 1950s. With rising market interest rates, many corporate and individual depositors transferred their idle cash from non-interest paying checking accounts in banks to higher-yielding investments, such as Treasury bills, commercial paper (corporate borrowing) and bankers’ acceptances used in international trade. Deposit shortfalls reduced the lending capacity of commercial banks, restricting economic growth.

Legal constraints handcuffed banks in responding to the rising interest rate environment. Anti-branching laws, for example, limited their ability to open new offices, which would have helped them attract deposits. Moreover, banks were forbidden to pay interest on both checking accounts and time deposits held for less than 30 days, and the maximum rate they could pay on time deposits was set by regulation.

In this situation, Walter Wriston, then executive vice president of National City, saw an opportunity. The bank lent $10 million to a New York broker in government securities, which agreed to accept trades in certificates of deposits. With this move, Nat City helped create a viable secondary market. A purchaser of a certificate who needed cash could now immediately sell the certificate to another investor—just as he or she would with a Treasury bill.

Attracted by the safety and marketability of the product, investors bought many large certificates of deposit. By 1966, investors held $15 billion in outstanding negotiable certificates of deposit—ranked second only to Treasury bills ($64 billion) and ahead of commercial paper ($14 billion) and bankers’ acceptances ($3 billion). Negotiable certificates of deposit soared past $30 billion in 1970 and topped $90 billion in 1975.

Barron’s observed that “these certificates gained such widespread acceptance that their rates became the money market’s most keenly watched indicator, more so even than the traditional bellwether, Treasury bill yields.” Wrote a Wriston biographer, the “negotiable CD would in no small measure help fuel [the 1960s economic] expansion by pumping funds into the banking system.”

Today, many of the old limits on deposits and branching faced by National City are gone. The ban against paying interest on business checking accounts was lifted by the Dodd-Frank Consumer Protection and Wall Street Reform Act of 2010. The negotiable certificate of deposit was the device that cracked open the door in 1961.