What is the 3-6-3 Rule?

3-6-3 Rule Details

Cited as one of the factors that led to stricter financial rules by the federal government, the 3-6-3 rule attempted to explain banks' business, and to a lesser degree, savings and loan associations. The easy-going pre-high-strung financial market days of the 50s and 60s saw 3% paid on savings accounts, mortgage loans charging a 6% interest, and the golf game starting at 3 in the afternoon.

This unofficial rule was a faint memory by the time of the 1980s savings and loans crisis. However, it's a pointer to how less competitive the highly restricted banking industry was at the time.

To curb the corruption and the underhand dealings that preceded the economic hardships of the great depression, bank formation, branch location, and how much interest rate got charged or paid were strictly regulated.

The scope of what banks could do was limited to accepting deposits and lending out money, and in essence, there was little business competition, and the industry was stagnating. Some large banks thrived in their monopolies, but bankers, in general, led a settled life, working fewer hours, wielded prestige and power while profits were certain and steady.

These were the days when banks would close at 3 pm sharp and never opened on the weekend.

Example of the 3-6-3 Rule

Today’s banking landscape is considerably more competitive, and banks have leveraged technology while expanding to merge with sectors like insurance and investment brokerage. By 1982, the regulation ceilings relaxed. And with the increased aggressive customer acquisition necessary, bankers could no longer rely on the 3-6-3 rule or existence concept.

A candid example of the financial options available to consumers today exemplifies the stiff competitiveness of the banking, mortgage plus loans, and savings market segments.

Mortgage borrowers need only head online, where hundreds of options by viable lenders from all over the country lie waiting. Not only are these providers seeking to lend or acquire customers, but they also advertise their interest rates and sometimes fees for easier price comparisons.

A mortgage consumer is also inundated with options for non-real estate financing like home equity loans or with credit card solicitations, for which 4 billion get mailed each year. Bank branches or their automated transaction outlets have proliferated shopping areas, even in locations where these banks themselves aren’t located.

Financial delivery technology, which hadn't matured before the 80s, has been the most significant driver of the highly-charged banking sector competitiveness that is essentially at odds with the 3-6-3 rule.

Significance of the 3-6-3 Rule

In the decades that followed the 1970s, banking relegations became phased off or outrightly lifted, and soon after, the onset of technology was widely adopted within the sector. Today's banks operate in a complex, more competitive manner, providing a greater range of service as opposed to when they operated on the 3-6-3 rule.

Banks now offer consumers retail as well as commercial, financial products alongside wealth and investment management services. Individual consumers interact with local branches of bigger commercial banks that offer checking and savings accounts, personal loans, mortgages, certification of deposits, and credit or debit cards.

Investment banks typically manage collective investor funds but can also oversee individual customer’s assets. These bankers also offer alternative opportunities for brokering Initial Public Offerings or IPOs or investment products like hedge funds.

Wealth management banks cater to high-net or ultra-high net worth individuals, offering financial advice that meets these clients' customized needs. These exclusive banking firms also provide specialized tax preparation, estate planning, and investment management.

History of the 3-6-3 Rule

When restrictions in the banking industry post the great depression limited competitiveness, some banks got monopoly power. There is strong evidence pointing to how banks in states that encouraged unit banking, prohibiting branches, performed less than where there were fewer restrictions on branching.

According to economist Mark Flannery, the restriction of branches stunted competitiveness and allowed banks to make above-normal profits in states that restricted unit branching. These banks were anti-competitive, paying lower interest rates on deposits while charging higher rates on loans.

In some states, these restrictions weren’t as binding as in others, and banks often sidestepped them before the liked bank formation. Location limitations loosened from the 1960s through the 70s.

By the time branching regulations got lifted in the 1980s, many areas had begun to experience a rise in the number of banks and their branches.

Michael Lewis mentions the 3-6-3 rule in his book "Liar's Poker," where he paints a picture of a 'thrifter' or moneylender who takes loans at 3%, lends out the money at 6%, and by 3 pm they're out on the golf course. The writer portrays this three-six-three man as a middle-aged, balding gentleman, on whose mind there is nothing but making profits.

Some of the negative effects of the post-depression restrictions were offset or minimized by a banks' ability to sidestep regulation, but the limited competition allowed monopoly profits. This monopoly was, however, checked by the later ability of non-bank loans and savings associations to offer similar financial products.