3-6-3 Rule: Slang Term for How Banks Used to Operate (original) (raw)

What Is the 3-6-3 Rule?

The 3-6-3 rule is a slang term that refers to an unofficial practice in the banking industry in the 1950s, 1960s, and 1970s that was the result of non-competitive and simplistic conditions in the industry.

The 3-6-3 rule describes how bankers would supposedly give 3% interest on their depositors' accounts, lend the depositors money at 6% interest, and then be playing golf by 3 p.m. In the 1950s, 1960s, and 1970s, a huge part of a bank's business was lending out money at a higher interest rate than what it was paying out to its depositors (as a result of tighter regulations during this time period). The difference between what a bank earns on interest-accruing endeavors and what it pays out in interest-bearing accounts is known as the net interest rate spread.

Key Takeaways

• The 3-6-3 rule is a slang term from the 1950s, 1960s, and 1970s, which involved paying depositors 3% interest on account, lending money at 6% interest, and the ability to be playing golf by 3 p.m.
• The 3-6-3 rule describes the structure behind paying account holders a lower interest rate on deposits and changing a higher rate when loaning out the money
• The net interest rate spread is the difference between the rates a bank pays customers and what it receives in income-generating activities
• The government implemented tighter banking regulations after the Great Depression controlling the rate banks could lend money and reducing bank-to-bank competition
• Looser regulation after the 1970s allowed banks to operate in a more competitive and complex fashion and provide additional services to customers

Understanding the 3-6-3 Rule

After the Great Depression, the government implemented tighter banking regulations. This was partially due to the problems–namely corruption and a lack of regulation–that the banking industry faced leading up the economic downturn that precipitated the Great Depression. One result of these regulations is that it controlled the rates at which banks could lend and borrow money. This made it difficult for banks to compete with each other and limited the scope of the services they could provide clients. As a whole, the banking industry became more stagnant.

With the loosening of banking regulations and the widespread adoption of information technology in the decades after the 1970s, banks now operate in a much more competitive and complex manner. For example, banks may now provide a greater range of services, including retail and commercial banking services, investment management, and wealth management.

Types of Banking Services

For banks that provide retail banking services, individual customers often use local branches of much larger commercial banks. Retail banks will generally offer savings and checking accounts, mortgages, personal loans, debit/credit cards, and certificates of deposit (CDs) to their clients. In retail banking, the focus is on the individual consumer (as opposed to any larger-sized clients, such as an endowment).

Banks that provide investment management for their clientele typically manage collective investments (such as pension funds) as well as oversee the assets of individual customers. Banks that work with collective assets may also offer a wide range of traditional and alternative products that may not be available to the average retail investor, such as IPO opportunities and hedge funds.

For banks that offer wealth management services, they may cater to both high-net-worth and ultra-high-net-worth individuals. The financial advisors at these banks typically work with clients to develop tailored financial solutions to meet their needs. Financial advisors may also provide specialized services, such as investment management, income tax preparation, and estate planning. Most financial advisors aim to attain the Chartered Financial Analyst (CFA) designation, which measures their competency and integrity in the field of investment management.

Does the 3-6-3 Rule Still Apply?

The 3-6-3 rule was a slang term for banking conditions in the 1950s, 60s, and 70s when government regulations were stricter and bank lending practices were more uniform. The term suggested banks paid account holders 3% interest, loaned out money at 6% interest, and were done with their work day and playing golf by 3 p.m. Looser regulations in the 1970s changed this.

Why Is the 3-6-3 Rule No Longer True?

When banking regulations changed in the 1970s, banks were allowed to operate in a more competitive manner, generating a different profit structure than the 3-6-3 rule would have allowed.

What Does the Expression Banker's Hours Mean?

Banker's hours as an expression means a shorter work day than what most businesses have, which was once 9 a.m. to 5 p.m. By comparison, bankers were said to work between 10 a.m. and 3 p.m., the hours that banks used to be open.

The Bottom Line

The 3-6-3 rule is an outdated slang term from the 1950s through the 1970s that referred to the perception that banking at the time consisted of paying account holders 3%, charging 6% when lending money, and calling it a day and leaving by 3 p.m. when banks used to close. The term became less relevant after regulations changed in the 1970s and banks became more competitive with each other and offered a greater variety of rates.