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lo^/ f C&cJjL^ March 17, 1939 DBIAND DEPOSIT BEHAVIOR PRIOR TO SUSPENSION IN A SELECTED GROUP OF BANKS ANALYSIS BY TYPE OF DEPOSIT HOLDER This report is being sent to you for comments which will be utilized in making a final draft for publication in the April Federal Reserve Bulletin. Lauchlin Currie Assistant Director Research and Statistics MAR* 1*7 DEMAND DEPOSIT BEHAVIOR PRIOR TO SUSPENSION IN A SELECTED GROUP OF BANKS ANALYSIS BY TYPE OF DEPOSIT HOLDER The March 1939 Federal Reserve Bulletin presented a preliminary analysis of data recently made available by a Works Progress Administration study of the records of a group of banks suspended in the period 1930-1933. The data introduced there suggested that large demand deposits exhibited a greater instability than small demand deposits. Moreover, the percentage reduction of balances in the period prior to suspension became consistently greater as the sise of the account increased. The present discussion classifies similar statistical material by type of holder. This classification has a twofold purpose. The first is to discover whether or not there exist significant variations in the presuspension behavior of the deposits of different types of holders. The second objective is an exploration of the possibility that the variations observed in the behavior of deposits of different sizes are mere reflections of more significant differences in the behavior of deposits owned by different types of deposit holders. Deposit reductions were measured from a base date to date of suspension* The base dates selected were dates on which banks suspended at different times had not yet experienced serious deposit withdrawals. For the -2- nine banks suspended before June 30, 1931, the base date is June 30, 1928, The base date is June 30, 1931 for the fifty-eight banks suspended thereafter. In the following pages, deposit balances on the base date are referred to as "normal" balances and the composition of total deposits on the base date is referred to as the "normal11 composition. In this article, interbank deposits are treated as a part of total demand deposits. The results of the investigation may be summarised as follows: 1, Withdrawals from business accounts comprised tho largest single item in presusponsion domand deposit reduotionsf accounting for 42$ of tho total. The contribution of business balances to presuspension deposit reductions was somewhat greater than their "normal" contribution to tho composition of total deposits (38,4$), The presuspension reduction of business deposits represented 48% of "normal" business balances• 2, Interbank withdrawals were second in importance, comprising 25,9$ of the total presuspension decline in demand deposits, *The substantial contribution of interbank withdrawals to deposit losses can be explained by the extreme instability of this class of accounts. Interbank deposits decreased 5 9 f o f their "normal" level, a percentage decline considerably in excess of those shown by personal demand deposits, business demand deposits, ot public funds, 3f Personal deposits contributed 12,95? of the total deorease in de- mand deposits, slightly less than their share (13,3$) in the composition -3- of total demand deposits» The presuspension reduction of personal deposits represented 42«S$£ of "normal* personal balanoes. Personal accounts are less stiable than business accounts of comparable size but because personal bklances are predominantly small balances, personal accounts as a whole are more stable than business accounts as a whole* 4. In general, variations distinguishable in the behavior of deposits of different holders are distinctly less pronounced than those discovered in deposits of different sizes• The same general differences in the behavior of accounts of different sizes appear in the data classified by type of holder as in the data for all types of holders * 5* Comparisons of the presuspension behavior of deposits owned by holders engaged in different types of business show relatively minor differences • There appears to be no consistent tendency for withdrawals of certain types of business demand deposits to exceed others. Limitations, of the Data The figlares presented in this discussion have been drawii from a group of sixty-seven medium sized banks, suspended during the period November 1930 to March 1933. The size and location of these banks are described in the March 1939 Bulletin, page 179. As the present analysis consists of a reclassification of the same basic data, it is subject to similar statistical qualifications. It should be notod that the figures for the percentage composition of deposits in this article are based on -4- "Total demand deposits, inclusive of interbank". The category "Miscellaneous demand deposits" includes fraternal, charitable, inactive, unlisted, unidentified and other nonpersonal deposits as well as certificates of deposit. The largest component of miscellaneous demand deposits is unidentified deposits, that is, deposits whose ownership could not be definitely assigned either to a business ooncem or to a person using the account primarily for nonbusiness transactions. It is probable that the bulk of those deposits are personal balances. The Allocation of the Pre suspension Decrease in Deposits The figures shown in Table 1 indicate the extent to which the withdrawal of different classes of deposit holders contributed to the total decrease in deposits. The contribution of public funds to the total withdrawal was not largo in any group of banks, although the behavior of these deposits was somewhat irregular, showing increases in banks suspending before the end of 1931 and making a small contribution to the total reduction of deposits in banks suspended later. Personal and business deposit reductions were responsible for more than half (54«9j£) of all deposit losses, and the bulk of these were withdrawals of business deposits (42$). The major part of business withdrawals in turn was attributable to the larger accounts; those in excess of $5,000 being responsible for Z7% of the total deposit reduction. Interbank withdrawals represent 25*9% of the total decline, a share considerably greater than that of -5- Table 1 ALLOCATION OF THE DECREASE IN TOTAL DEPOSITS BETWEEN BASE DATEi/ AND DATE OF SUSPENSION BY TYPE OF HOLDER Type of holder Total decrease in demand deposits, inclusive of interbank 9 banks 67 suspended sample before banks June 30, 1931 44 banks 14 banks suspended suspended after between December 31, 1931 June 30, and December 31, 1931 100.0 100.0 100.0 4.3 25.9 2/ 2/ 13.6 42.9 8.6 25.2 14.9 54.9 31.9 69.4 9.2 48.4 12.8 53.4 12.9 42.0 16.6 52.8 10.7 37.7 12.6 40.8 Less than #5,000: Personal Business 7.1 5.0 9.1 1.9 3.9 2.9 7.3 6.0 #5,000 and over: Personal Business 5.8 37.0 7.5 50.9 6.8 34.8 5.3 34.8 Public funds Interbank deposits Miscellaneous demand deposits^/ Personal and business Personal Business 100.0 ^June 30, 1931 for banks suspended after that date; June 30, 1928 for those suspended earlier. For a fuller explanation see p. ^Increase Fraternal, charitable, other non-personal, inactive, unlisted, unidentified, and certificates of deposit -6 all personal accounts* Business and interbank deposits together account for about two-thirds of the total reduction of deposits. The contribution of a class of deposits to the total deposit decline depends upon two factors. The first is the importance of the class in the original composition of total deposits. Clearly any class representing a very large share of a bank1s total deposits may be responsible for substantial deposit reductions even though the accounts in this class are less heavily drawn upon than other accounts. The second factor is the stability of the accounts in the class. It is apparent that any group of accounts showing exceptional instability in times of stross may exercise an influence on deposit lossbs of substantially greater importance than its contribution to the original composition of total deposits. In Table 2, the composition of total deposits is compared with the composition of the deposit docline. Interbank deposits constituted about one-fifth of all deposits, but accounted for about one-fourth of deposit reduction. Personal deposits accounted for slightly loss than their proportionate share of the deposit decline. The reverse was truo of business deposits. If personal and business deposits are divided into comparable sizo groups, it becomes clear that size is a factor of sufficient importance in deposit reduction to obscure the variations between groups of deposits having different size compositions * Withdrawals from business accounts under $5,000 represented only 5% of the total deposit reduction, although -7- Table 2 ALLOCATION OF THE DECREASE IN DEMAND DEPOSITS BETWEEN BASE DATE AND SUSPENSION IN ALL SAMPLE BANKS BY TYPE OF HOLDER Percentage composition of the decrease in demand deposits Percentage composition of total demand deposits on base date 100,0 100.0 4.3 25.9 10.5 19.1 14.9 54.9 18.7 51,7 12.9 42.0 13.3 38.4 Less than #5,000: Personal Business 7.1 5.0 9.3 9.3 #5,000 and over: Personal Business 5.8 37.0 4.0 29.1 Type of holder Total demand deposits, inclusive of interbank Public funds Interbank deposits Miscellaneousi/demand deposits Personal and business Personal Business Fraternal, charitable, other non-personal, inactive, unlisted, unidentified, and certificates of deposit .8- these accounts constituted 9#3% of total deposits on the base date. 4 Corresponding figures for personal accounts are 7.1$? and 9.3%. In the oase of accounts of $5,000 and ovor, both business and personal accounts showed withdrawals representing a larger share of total deposit losses than their original contribution to total deposits. Large business accounts represented 29*1% of total deposits, but had a substantially greater share in deposit reduction (37%). Large personal accounts constituted only 4% of all deposits, but were responsible for 5*8% of all deposit losses. Table 3 measures directly the presuspension instability of deposits owned by different types of holders. The decrease in deposits between base date and date ef suspension is measured as a percentage of the deposits in each class on the base date. Considering all sample banks, total demand deposits, inclusive of interbank, decreased 43f9%m Over the entire peried, interbank deposits exhibit considerably greater percentage reductions than personal or business deposits or public funds; in the case of banks suspending during the last six months of 1931 more than five-sixths of the normal balances in this class of accounts were withdrawn before suspension. Personal accounts are consistently less stable than business accounts of comparable size, but business balances are predominantly large balances and thus business accounts as a whole are less stable than personal acoounts as a whole. The percentage reductions in personal accounts exceed those of business acoounts in the oase of accounts under $5,000 as well as in the case of accounts of $5,000 and over. Table 3 PERCENTAGE CHANGES IN DEMAND DEPOSIT BALANCES BETWEEN BASE DATE AND DATE OP SUSPENSION BY TYPE OF HOLDER 67 sample banks 9 banks suspended before June 30, 1931 14 banks suspended between June 30, and December 31, 1931 44 banks suspended after December 31, 1931 -43.9 -35.6 -38.9 -47,0 -17.8 -59.6 +80.4 -21.1 +2J2 -84,5 -34.5 -60.9 -35.0 -46.6 -56.3 -44.2 -17.5 •37.1 -33.4 -49.3 Personal Business -42.6 -48.0 -40.7 -45.4 •31.8 -38.9 -45.5 -50.6 Less than #5,000: Personal Business -33.4 -23.8 -30.3 -8.7 •18.0 -10.9 -37.3 -29.8 |5,000 and over: Personal Business -64.5 -55.7 -69.7 -54.0 -57»2 -49.4 -65.0 -57.6 Type of holder Total demand deposits, inclusive of interbank i i Public funds Interbank deposits Miscellaneous demand deposits!/ Personal and business 1/ Fraternal, charitable, other non-personal, inactive, unlisted, unidentified, and certificates of deposit -10- Table 4 presents a more detailed comparison of the behavior of business and personal deposits of different sizes. Tho presuspension decrease in personal deposits exceeds the decline in business deposits in each size class shown, but the excess is clearly of a different order of magnitude than the difference in variation of large and small deposits. Certain classes of accounts show significant variations of behavior in banks suspended during different periods. Both public funds and small business deposits exhibit a tendency toward increasingly heavy withdrawals over tho period. Although the contrast in the behavior of small business accounts and large business accounts is marked throughout tho period, the rate of reduction in accounts of loss than $5,000 moro closely approaches the rate of reduction in larger business accounts in banks suspended after tho end of 1931 than in banks suspended earlier. Increasingly heavy withdrawals of public funds and small business deposits may reflect the widening spread of apprehension from the middle of 1931 until tho Banking Holiday 4 Behavior of Business Demand Deposits Classified by Typo of Business In Table 5, business demand deposits are grouped according to tho type of business in which their holders arc engaged. Similar tabulations are made for aocounts loss than $5,000 (Tablo 6) and for accounts of $5,000 and ovor (Table 7). Tho differences in tho percentage reductions shown appear to bo too small to justify statement that somo typos of business accounts are moro unstablo than othors. Such differences as -11- Table 4 PERCENTAGE CHANGES IN BUSINESS AND PERSONAL DEMAND DEPOSITS BETWEEN BASE DATE AND SUSPENSION BY SIZE OF ACCOUNT 67 Sample Banks Size of Deposit on Base Date Business Personal >11.1 Less than $500 -13. A 500 999 -19.9 -38.9 1,000 2,499 -27.6 -46.4 2,500 4,999 -36.6 -53.8 5,000 9,999 -40.3 -59.2 10,000 24,999 -50.0 -62.5 25,000 49,999 -53.0 50,000 99,999 -60.4 100,000 and over -66.7 Total -48.0 -70.8 -42.6 -12- Table 5 PERCENTAGE CHANGES IN DEMAND DEPOSIT BALANCES BETWEEN BASE DATE AND DATE OF SUSPENSION BY TYPE OF BUSINESS Accounts of all sizes Type of business All business demand deposits 9 banks 67 suspended sample before banks June 30, 1931 -48,0 Manufacturing and mining -51.1 Building and construction -57,8 Transportation, public utilities, etc. -44.3 Automobile distribution and related -53.6 services -40.9 Trade and service -50f3 Financial Other, including agriculture 44 banks 14 banks suspended suspended after between December 31, 1931 June 30, and December 31, 1931 -45.4 -38.9 -50.6 -47.2 -37,4 -54.9 -58.8 -53.3 -59.2 -49.7 -28.4 -43.4 -54.3 -34.0 -44.8 -23.0 -31.6 -55.6 -57,4 -44.9 -50.1 -13- Table 6 PERCENTAGE CHANGES IN DEMAND DEPOSIT BALANCES BETWEEN BASE DATE AND DATE OF SUSPENSION BY TYPE OF BUSINESS Accounts of less than $5,000 Type of business All business demand deposits 9 banks 67 suspended sample before banks June 30, 1931 -23.8 Manufacturing and mining Building and construction -29.7 Transportation, public utilities, etc. +15.6 Automobile distribution and related services -39.4 Trade and service -28.8 Financial -15.2 Other, including agriculture -8.7 44 banks 14 banks suspended suspended between after June 30, and December 31, 1931 December 31, 1931 -10.9 -29.8 -60.4 +18.7 -31.5 +30.9 -6.0 +17,3 -21.8 -15.4 -30.0 -8.8 -16.0 -2.1 -47.8 -34.7 -14.5 +54.1 -14- Table 7 PERCENTAGE CHANGES IN DEMAND DEPOSIT BALANCES BETWEEN BASE DATE AND DATE OF SUSPENSION BY TYPE OF BUSINESS Accounts of #5,000 and over Type of business All business demand deposits Manufacturing end mining Building and construction Transportation, public utilities, etc. Automobile distribution and related services Trade and service Financial Other, including agriculture 9 banks 67 suspended sample before banks June 30, 1931 -55.7 -54.0 14 banks 44 banks suspended suspended after between December 31, 1931 June 30, and December 31, 1931 -49.4 -57.5 •57.5 -68.7 -57.6 -67.4 -70.8 -48.2 -51.7 -31.6 -48.1 -66.1 -49.4 -59.0 -76.1 -45.2 -49.1 -46.8 -42.5 -66.9 -65.7 -52.2 -59.1 -76.8 -15- exist become loss as the number of banks considered is enlarged. Moreover, no single business class consistently outranks other classes in the percentage of its "normal11 balance withdrawn prior to suspension. Chart 1 compares the variations in presusponsion reductions of doposits of different sizes and those of different types of business. Tho data plotted in tho bar diagrams on tho left of this chart were presented in Table 6, p. 181f in the March 1939 Federal Resorvo Bulletin.. Tho diagrams on the right aro plotted from figures presented in Table 5. Tho bars on the right have been ranked in accordance with the severity of tho deposit reductions of different typos of businoss holders when all banks and sizes of accounts aro included. The summary bar preceding tho size of account diagrams is based on the percentage reductions in total demand deposits; tho bar preceding tho typo of business diagrams is basod on total businoss demand deposits; both sets of basic figures exclude interbank deposits. The chart illustrates tho marked contrast both in tho extent and the consistency of variation in deposit behavior. The diagrams measuring variations in pre suspension reductions in deposits by size of account exhibit a clearly discernible trond of tho porcontago reduction to incroaso as the size of tho account becomes greater . ; This trend becomos more reg2/ 1f The figures for classes of accounts whoro increases in balances aro shown because of technical reasons aro not charted. For a fuller explanation soe March 1939 Foderal Rosorve Bulletin, p. 182• -16- ular as the number of banks oonsidorod is increased. Business doposits, when classified by typos of business, show no such distinct variation. Tho arbitrary ranking shown by tho bars based on data derived from all the banks in the sample is not followed by tho data derived from any of the separate groups of banks, classified according to date of suspension. It is noteworthy also that the extent of tho divergence between types of business decreases markedly as the number of banks in the groups considered increases.