✏️ The 3-6-3 Rule

In class, Bruce discussed how banks were heavily regulated until the 1980s. A joke, known as “the 3-6-3 rule” illustrates this. Here’s what Wikipedia has to say about the rule:

The term 3-6-3 Rule describes how the United States retail banking industry operated from the 1950s to the 1980s.^[1]: 51The name 3-6-3 refers to the impression that bankers had a stable, comfortable existence by paying 3 percent interest on deposits, lending money out at 6 percent, and being able to “tee off at the golf course by 3 p.m.”^[1]: 51[2]

The implication was that the banks were less competitive during that period than in subsequent years due to tight regulations that limited the formation and location of banks as well as restrictions on interest rates that could be charged or paid.^[1]: 51As a result, bankers had “power and prestige… while profits were steady and certain”.^[2]These regulations were loosened in the 1980s.^[1]: 51

✏️ What is the Net Interest Spread under the 3-6-3 Rule?

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You pay $3\%$ on deposits and lend money out at $6\%$. The spread between these numbers is $6\%-3\%=3\%$.
The mission of a bank is to borrow money at a low interest rate and then lend it out at a higher interest rate. The difference between the two interest rates is the Net Interest Spread, so if the bank is doing well, the Net Interest Spread will be above $4\%$. This spread allows it to cover its costs, such as the costs involved with maintaining its locations.