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cor‘94,-(46; ir R19 ) 045 ta-st I https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Collection: Paul A. Volcker Papers Call Number: MC279 Box 9 Preferred Citation: Congressional Correspondence, 1979 August; Paul A. Volcker Papers, Box 9; Public Policy Papers, Department of Rare Books and Special Collections, Princeton University Library Find it online: http://findingaids.princeton.edu/collections/MC279/c299 and haps://fraser.stlouisfed.org/archival/5297 The digitization ofthis collection was made possible by the Federal Reserve Bank of St. Louis. From the collections of the Seeley G. Mudd Manuscript LB:wary, Princeton, NJ These documents can only be used for educational and research purposes ("fair use") as per United States copyright law. By accessing this file, all users agree that their use falls -within fair use as defined by the copyright law of the United States. 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Mudd Manuscript Library 65 Olden Street Princeton, NJ 08540 609-258-6345 609-258-3385 (fax) mudd@princeton.edu https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis S August 31, 1979 The Honorable William Proxmire Chairman Committee on Banking, Housing and Urban Affairs United States Senate Washington, D. C. 20510 Dear Mr. Chairman: I an responding to your letter of August 20 requesting information concerning bank credit utilization by Chrysler Corporation, Chrysler Financial and Chrysler Canada Ltd. The information is summarized in the enclosed table. The table distinguishes between the bank credit facilities cf Chrysler Corporation and Chrysler Financial and between bank credit facilities of U.S. banks as distinct from foreign banks. The first distinction is relevant not because the absolute size of the bank credits to Chrysler Finarcial are larger than to Chrysler itself, but because the assets associated with these bank credits are almost exclusively wholesale and retail receivables. In this sense the assets of Chrysler Financial are to a sizable degree, of a different nature than those of Chrysler the parent. The data indicate that Chrysler Financial has total bank credit facilities of about $3.2 billion of which somewhat more than $2 billion are being used. About two-thirds of these facilities are with U.S. banks. Chrysler Corporation (including Chrysler Canada) has total bank credit facilities somevhat in excess of $1.1 billion, all but $200 million of which are in use. About $600 million of these facilities are with domestic banks. Most of the foreign bank credits to Chrysler and Chrysler Financial are with Canadian banks and with a cross section of the larger British and European commercial banks. . 4 \1 ; eft .1••• • rer". 4k., )rb• .• As the table further indicates, United States banking organizations had aggregate credit facilities to Chrysler and Chrysler Financial in an amount of about $2.9 billion as of July 31, 1979. Almost $2.0 billion of the domestic bank credit facilities, or 64 per cent of the total, were being used by Chrysler and Chrysler Finarcial. While we do not have complete data, we know that the rate of usage of these credit facilities https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis , kiite...3.• Page two The Honorable William Proxmire has risen further during August. For example, due to Chrysler Financial's inability to roll-over commercial paper in any appreciable amount, the amount of loans under commercial paper back-up lines has risen to $1.1 billion as of August 13, 1979. This would place the rate of credit facility utilization for domestic banks at around 73 per cent. As the table indicates, there are a large number of U.S. banks that have at least come exposure to Chrysler and Chrysler Financial. To give you some insight into the distribution of the credits, the 25 largest banks that are creditors to Chrysler account for about $1.3 billion and 66 per cent of the almost $2 billion in bank credits outstanding to Chrysler and Chrysler Financial. Your questions about bank lending limits involve some difficult issues of measurement. For one thing, the agreements to purchase receivables represent third-party paper to the acquiring banks and, as such, are not subject to legal lending limits. In addition, the computation of lending limits for state-chartered banks differs from state to state. Finally, in some instances, individual banks have ''house" lending limits which are more restrictive than legal lending limits. With these factors in mind, we estimate that the direct credit agreements between the group of creditor banks and Chrysler and Chrysler Financial amount to about 50 per cent of legal lending limits in the aggregate. For individual banks, however, the picture can be quite different in part because of the presence of 1h0u8e" lending limits, and in part because of the uneven distribution among the group of banks. pmmem. If I can be of any further assistance to you, please let me know. Sincerely, ' y . S/Paul P Vo!diet Paul A. Volcker Enclosure EGC:mhw https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis , • : I. • 111 Bank Credit Facilities of Chrysler Fiv,incial as of July 31, 1979 Facilities A. Facilities Involving U.S. Banks Comm. Paper Bank-up Lines (247 banks) Whlse Standby Purchase Agreements Retail Standby Purchase Agreements Term Loans (70 Banks) Euro-dollar (4 Banks) Subtotal $1,407 610 150 136 16 $ 860 432 0 136 16 (70 (61)1/ (71) -(100) (100) 1,444 (62) 478 469 (98) 232 206 62 98 (27) (48) 916 630 (69) 3 235 2O74 (64) • 387 27 (71) (54) 593 414 (70) 305 30 300 30 (98) (100) 172 24 30 172 17 16 (100) (71) (53) 561 535 (95) Total Chrysler Corporation I 15!4 949 GRAND TOTAL $4,389 $3,023 Subtotal Total Chrysler Financial Bank Credit Facilities of Chrysler Corporation (parent) A. Facilities Involving U.S. Banks Revolving Credit (95 Banks) Short-term Credit Lines (38 Banks) Subtotal B. Facilities Involving Other Banks Syndicated Euro-dollar Loans Canadian Bank Loans to Chrysler Leasing LTD Canadian Bank Loans to Chrysler Canada LTD Revolving Credit Short-term Credit Lines Subtotal 1/ . 2,219 B. Facilities Involving Other Banks Syndicated Euro-dollar Loans Canadian Bank Loans to Chrysler Credit Canada LTD Commercial Paper Back-up II. Usage 543 50 (82) / (69)1 As of August 13, commercial paper back-up line utilization increased to approximately $1,109 million or 80 per cent of the facility. Primarily due to the draw down on the back-up lines for commercial paper, the total U.S. bank and total facilities utilization percentages increased to 73 per cent and 76 per cent, respectively. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis WILLIAA4 PROXMIRE. W., . NARP11..e.ON A. WILLIAMS. JR., N.J. &AN cRANSTON. CALIF% 044,14.0.44N JARS (LAPIN. UTAH JONN TOwER, ./offN NriNz I . STEVENSON. ILL. ' ROBERT MORGAN, N C. WiLLIAM L_ MICN. DONALD W. RIEGLI. JR ppuL S. SARRANtS, , 1 40. DONALD W STE NA T. A1-.4- *ONO. COLD. NANCY L.ANDON RAISE-SAL/M. KANS. RIC/4A D O. LUGAR. W40. PAUL E. TSONGAS, MASS. rZCrtifeb Zialez Zertafe com URBAN AFFAIRS • ITTEE ON BANKING. HOUSING. AND KENNIETN A. MC LEAN, STAY'," DIRECTOR DANNY WALL_ MINORITY STAPP DIRECTOR fje LA PA V A, Cki1 LP CULP,K MANY PAANCZ WASHINGTON. D.C. 20510 August 20, 1979 v.) 11 ii The Honorable Paul A. Volcker Chairman, Board of Governors of the Federal Reserve System Washington, D.C. 20551 t lp "Ti •••-...4 f •1 =II C= •-• • I r '1 ,-.... ...7— ..._ .--- :- • CO •• I CD I •I •-c .7; Crs Dear Mr. Chairman: The Committee on Banking, Housing and Urban Affairs may be considering legislation to provide a loan guarantee or similar financial assistance to the Chrysler Corporation, in the event that the Administration requests such legislation. In this connectionit is essential that the Committee have before it accurate data on the involvement of U. S. banks in Chrysler's financing arrangements and the potential for additional bank financing of Chrysler under any financial plan that may be proposed. fortmor• The Committee has been told that the Chrysler Corporation (including both the parent company in the U. S. and Canada and Chrysler Financial) has $4.4 billion in lines of credit outstanding with about 300 U. S. banks and that most of these banks are at either their house or legal lending limits. It was also stated that about $3.9 billion of those lines of credit had been taken S. '• •ftfr.; ..., I would appreciate your examining the situation and reporting back to the Committee as soon as possible with regard to the actual amount of U. S. bank financing of both the parent company in the U. S. and Canada and Chrysler Financial and the relation to banking lending limits. Any additional information which you may consider relevant to the Chrysler situation will, of course, be welcome as well. .4,, r71 .. • li !ri. :>•!......: • ik r 11 . ,,,a ••M• .)., Best regards. rel Villiam Proxmire Chairman WP:ebl https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis II Aldr .- .• •. • - • •• • ,ufr• • • • • • ••_•M "4::: 1 , • ••,• „ 14 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The Honorable Heavy Reuss We are, however, working on the problem with the Bank Administration Institute. Ia addition, a task force of the ABA is working to develo2 a procedure for clearing checks of peoele who are relocating. 1 au told that the erobler arises because of the time required to return checks for which there are insufficient funds. Apparently, checks are cleared forward very rapidly, but returned checks are sent beck by mail. Although we don't know the volume of returned checks yet, we expect it is relatively small. We are llanning to obtain this inforeetion in the near future. Under existing instructions, hanks are supposed to clear all consumer checks over $2,500 by wire. However, only about 50 percent of checks of that size or larger are cleared that goy, we are also looking into the possibility of encouraging the banks to use the "bank wire" to notify the receiving banks of checks that won't clear. Another possibility is changing the Uniform (:)mmercial Code to require banks "to return checks as exeeditioualy as The Taskforce of the Bank Administration Inatitute is due to report this fall. re will be back to you with their report and with a more definitive view of the size of the problem and, hopefully, some solutions to the eroblism. Sincerely, SL Eat( Paul A. Volcker tnclosure Tr:PAL:Jr, (&'V.5) bcc: Ton Luck tettherias hallardi (2) https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis .August 28, 1979 rhe Honorable tizmry S. Reuss Chairman committee on Banking, Finance and Urban Affairs House of Representatives .aaltington, r. C. 20515 Dear chairman Reuss: In connection with your letter of August 21 about delays in crediting checks, we do have a good deal of information at hand. Practices in this area mere surveyed during 1978 and a report summariaintv the results of that survey is enclosed. e plan to meet with other banking regulatory agencies to exchange thinking and review possible approaches coward the problem shortly. I should oerhaps indicate my son, very preliminary, thinking in this connection. 1 know from personal experience that delays can be irritating. But is this an area in which we should resort to detailed Federal control--control that almost inevitably would be highly complex in the light of the wide variety of circumstances and practices involved-or should we rather rely primarily on competitive forces and consumer con sense I am not enamored with a regulatory approach that may impose costs on the banks and indirectly on the public, generally far out of proportion to actual abuse. As in other areas, the appropriate focus may be straight-forward disclosure rather than regulatory prohibitions. know that disclosure is not a 5olvent for every problem, but 1 am certain that the temntation to reach all Problems by setting out detailed regulatory standards also needs to be resisted. HENRY S. REUSS, WIS.. CHAIRMAN THOMAS L. ASHLEY, OHIO WILLIAM S. MOORHEAD, PA. FERNAND J. ST GERMAIN, R.I. HENRY B. GONZALEZ, TEX. JOSEPH G. MINISH, N.J. FRANK ANNUNZIO, ILL JAMES M. HANLEY. N.Y. PARREN J. MITCHELL, MD. WALTER E. FAUNTROY. D.C. STEPHEN L. NEAL, N.C. JERRY M. PATTERSON. CALIF. JAMES J. BLANCHARD, MICH. C.ARROLL HUBBARD, JR., KY. JOHN J. LILFALCE, N.Y. GLADYS NOON SPELLMAN, MD. LES AuCOIN, OREG. DAVID W. EVANS, IND. NORMAN E. D'AMOURS, N.H. STANLEY N. LUNDINE. N.Y. JOHN J. C.AVANAUGH. NEBR. MARY ROSE OAKAR, OHIO JIM MATTOX, TEX. BRUCE F. VENTO, MINN. DOUG BARNARD, GA. WES WATKINS. OKLA. ROBERT GARCIA, N.Y. MICHAEL LOWRY. WASH. • • U.S. HOUSE OF REPRESENTATIVES COMMITTEE ON BANKING. FINANCE AND URBAN AFFAIRS NINETY-SIXTH CONGRESS 2129 RAYBURN HOUSE OFFICE BUILDING WASHINGTON, D.C. 20515 J. WILLIAM STANTON. OHIO CHALMERS P. WYLIE. OHIO STEWART B. McKINNEY. CONN. GEORGE HANSEN. IDAHO HENRY J. HYDE, ILL RICHARD KELLY, FLA. JIM LEACH, IOWA THOMAS B. EVANS, JR., DEL. S. WILLIAM GREEN, N.Y. RON PAUL., TEX. ED BETHUNE, ARK. NORMAN D. SHUMWAY, CALIF. CARROLL A. CAMPBELL.. JR.. B.C. DON RITTER, PA. JON HINSON, MISS. U5-4W , r, August 6, 1979 ''I CD T.1 The Honorable Paul A. Volcker Chairman Board of Governors Federal Reserve System Washington, D. C. Dear Chairman Volcker: I am concerned about the delay in crediting deposited checks to customers' accountsin our country's depository institutions. The enclosed two articles recently appeared in the press describing inordinate delays which appear to be completely out of line with the time it takes for normal check clearing. Please provide us with any information that the Federal Reserve has collected on these practices, together with any recommendations for remedying this problem. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Sincerely, Henry S. Rcuss Chairman Removal Notice The item(s) identified below have been removed in accordance with FRASER's policy on handling sensitive information in digitization projects due to copyright protections. Citation Information Document Type: Newspaper articles Citations: Number of Pages Removed: 2 Gold, Bill. "The District Line: Computers Make Life So Pleasant." Washington Post, July 4, 1979. Gold, Bill. "The District Line: Electronic Banking Revisited." Washington Post, July 20, 1979. Federal Reserve Bank of St. Louis https://fraser.stlouisfed.org August 9, 1979 Dear Mr. Chairman: I much appreciate your letter on my appointmen t, and hasten to say that I could not agree more with the importance of maintaining those excellent relations with your Subcommittee that characterized the terms of my predecessors. I would be delighted to meet informally with the Subcommittee after the recess, and I am sure Bob can work out a convenient time with my staff. T look forward to seeing you soon. shortages of problems. There are no With best regards. Sincerely. Paul A. Volcker The Honorable Parren J. Mitchell Chairman, Subcommittee on Domestic Monetary Policy of the Committee on Banking, Finance and Urban Affairs U.S. House of Representatives Washington, D.C. 20515 PAV:smk https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 2 PARREN J. MITCHELL, MD., CHAIRMAN STEPHEN L. NEAL, N C. NORMAN E. D'AMOURS, N.H. DOUG BARNARD, GA. JIM MATTOX, TEX: JOHN J. CAVANAUGH, NEBR. do 225-7315 • • U.S. HOUSE OF REPRESENTATIVES SUBCOMMITTEE ON DOMESTIC MONETARY POLICY OF THE COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS N INETY-Si xTH CONGRESS VVASHINGTON, D.C. 20515 August 2, 1979 The Honorable Paul A. Volcker Chairman, Board of Governors Federal Reserve System 20th and Constitution Avenue N.W. 20551 Washington, D.C. Dear Chairman Volcker: I welcome and warmly endorse your appointment to the Board of Governors of the Federal Reserve System and designation as its chairman -- congratulations! The responsibilities you are assuming are awesome. I wish you well in carrying them out. The Subcommittee on Domestic Monetary Policy has had excellent relations with the Federal Reserve since I became Chairman of the Subcommittee in 1977. We worked closely and constructively with both Chairman Burns and Chairman Miller in carrying out our oversight and legislative responsibilities in regard to the Federal Reserve and the conduct of monetary policy. I look forward to having the same close and constructive relationship with you. I am hopeful that we can arrange for the members of the Subcommittee to meet with you on an informal basis shortly after the House reconvenes in September. I have asked Bob Weintraub to call your legislative liaison about this. With best wishes and warmest regards I am, Sincer 1 Y 5 P rren J. Mitchell Chairman PJM/rw:jlt https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis GEORGE HANSEN IDAHO RON PAUL, TEX. DON RITTER, PA. S • th Members Caucus of the U.S. House of Representatives September 28, 1979 Mr. Paul A. Volcker Chairman, Federal Reserve Board Federal Reserve Building Constitution Avenue Washington, D.C. 20551 Dear Mr. Volcker: On behalf of the Members of the 94th and 95th Caucuses, I would like to thank you for your presentation on Thursday. The analysis and implementation of fiscal and monetary policy can be an elusive and imprecise task. We appreciate the perspective you gave us and shall bear those points in mind as we try to apply some legislative sense to our economic problems. Thank you again for meeting with us. Sincerely, Rich rd A. Gephardt, M.C. Chairman 1041 Longworth House Office Building • Washington, D.C. 20515 • (202) 225-4996 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis BOARD OF GOVERNORS • OF THE FEDERAL RESERVE SYSTEM Office Correspondence To Board of Governors Date August 31, 1979 Subject: Letter to Board Members from Congressman Wes Watkins From Jack Ryan Congressman Wes Watkins sent the attached letter to Chairman Volcker -and apparently to all other Board Members -- regarding the Board's policy on the g companies: retirement of acquisition debt incurred in the formation of one bank holdin Attached for your information is a package of material relating to this n Watkins matter. We are in the process of preparing a response to Congressma for Chairman Volcker's signature. Attachment https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis _ CO M MITTCM VtisA TK INS DISTRICT, OKLAHOMA BANKING (20r) 225-4565 MAJORITY ZONE WHIP CONGRESS OF THE UNITED STATES CHAIRMAN CONGRESSIONAL RURAL CAUCUS HOUSE OF REPRESENTATIVES FINANCE AND URBAN AFFAIRS SCIENCE AND TECHNOLOGY SELECT COMMITTEE ON AGING WASHINGTON. D.C. 20515 August 30, 1979 1 Mr. Paul Volcker Chairman Board of Governors Federal Reserve System Washington, D.C. 20551 Dear Mr. Chairman: Recently I received a copy of a letter from Mr. John E. Ryan to Mr. Forrest Jones of Oklahoma City, Oklahoma, concerning the Board's Committee on Bank Supervision and Regulation decision regarding the policy on the retirement of acquisition debt incurred in the formation of one-bank holding companies. I was disappointed to learn the Committee felt this policy did not need to be changed. um— Title VIII of FIRA alone necessitates a re-examination of the repayment schedules for bank stock loans. Since preferential rates are no longer allowable, higher interest rates are having to be incurred. These increased debt servicing costs have been creating burdens on banks that need to have their repayments stretched out over a longer period of time. Mr. Ryan's letter also states that, ".•. the earnings of small banks generally grow at a faster pace in a rising interest rate environment than when rates are stable or declining." The term "generally" does not take into account the position of those banks whose earnings are not growing as fast as some and who need a longer repayment schedule. It would appear that you are not trying to help these banks improve their situations. You are placing these banks in jeopardy and the Fed will have to take full responsibility when these banks run into difficulties, Your action continues to weaken the Federal Reserve's position in the eyes of this country's banks by your lack of responsiveness to their needs and problems. It is no wonder so many are withdrawing from the System. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis OKLAHOMA DISTRICT OFFICES: 203 POST OFFICE BUILDING DUNCAN, OKLAHOMA 73533 (405) 252-1434 118 FEDERAL ElutuDiNo McALESTER, OKLAHOMA 74501 232 POST OFFICE BUILDING ADA, OKLAHOMA 74820 (405) 436-1980 (918) 423-5951 .. . • - c • • -r-- • Pt" .• '3' • C•1;:ift 4.,.;e . 10 .316• ••‘• ••• August 30, 1979 Mr. Volcker Page Two Hopefully, we can work together to improve this situation. I hope you will reconsider the Committee's decision and try to be helpful to this group of people in the banking industry. Thank you for your time and attention to this matter. Sincerely, Member of Congress it https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis P. • t; , V2iZ . •.fr. . • •• t . yike" us 0?wftrZ re"-tfk 41. a •• • . •••-• a a • • •it ‘5. - •e •. -• , • • FIDImrry BANK \ January 29, 1979 FORREST D. JONES PREsinENT Mr. John E. Ryan, Director Division of Banking Supervision & Regulation ,Board of Governors of the Federal Reserve System Washington, D. C. 20551 Dear Mr. Ryan: I sincerely appreciate the time spent with us this last Thursday morning to discuss the maximum permitted repayment program by a one bank holding company on bank stock indebtedness. The group that met with you was composed of several Oklahoma bankers that are senior officers in small to large size banks. It was our common purpose to request consideration of a longer repayment period than the present twelve year maximum. Although the present program has flexibility in that the Federal Reserve System has approved the formation of one bank holding companies wherein the structured twelve year debt contained an escalation of payments, it is believed an extended period is needed under current conditions. . SI To retain sufficient earnings in a wel•l managed bank that will provide capital for growth, there is insufficient dividend paying capability to retire bank stock debt by the holding company within a twelve year period. We respectfully request that the Federal Reserve Board of Governors consider granting a longer repayment period and suggest twenty years. In your consideration of making such a recommendation to your Board, I submit the following comments. 1. Banks are presently selling for prices that range from 2 times book. In unusual situations, they are 1 2 times book to 2/ / 11 selling for a higher multiple. The multiple being primarily determined by the future growth and earning opportunity of the banking facility. We have found that the Comptroller of the Currency will not allow us to extend bank stock credit in excess of book value and believe you will find that most, if not all, lending banks are national banks. • ROBINSON https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis AT ROBERT S. KERR AVENUE P. O. BOX 24128 OKLAHOMA CITY 73124 (405) 272-2000 • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Mr. John E. Ryan January 29, 1979 Page Two It is not our desire to recommend any change that would enhance the market price of a bank, to increase loans beyond a book value maximum, or to do anything that would permit additional borrowing leverage by a one bank holding company. Each borrower, under present requirements, must have supportive collateral and/or cash to provide equity necessary to bring the debt on bank stock to a book value transaction or less. 2. Interest rates are changing. As rates have generally cycled over the last three or four decades, the peaks and valleys have grown higher and while it's difficult to accept this, it's very possible that this gradual change in interest structures will continue to escalate to higher levels. In any event, we could probably agree that it's unlikely that we will see prime rates reduce in the near future to the more comfortable 3% or 4% range that we enjoyed some ten or fifteen years ago. Even with the tax benefits gained through the creation of debt in a one bank holding company rather than by a partnership or individual debt, higher interest rates do diminish the ability of the borrower to repay debt. Recognition of this is evidenced by the extremely long repayment programs being granted under government guarantee on farm properties and on .residential housing, as well as on non-guaranteed real estate loans. In applying for one bank holding company status, the application to the Federal Reserve Bank includes a pro forma based upon an average interest rate over the life of the loan. Most recently the applications that we have observed have included guesstimates that the interest rate would be 7% or 8%. We are beginning to question whether the interest can be forecast for a twelve year period and if it can, whether 8% if high enough to use an an average figure. It probably is not. Under the Federal Institutions Regulatory Act, bank stock loans as well as all other loans are to be made on comparable commercial rates. Although we are not entirely sure that we understand what compliance will mean, we assume that this would cause bank stock loan rates to at least equal New York prime. Recognizing the need for capital retention, we believe that it is to the benefit of the holding company and/or its subsidiary bank to have a longer repayment period if repayment is to come solely from the payment of dividends. High interest costs are difficult to pay, but they must be paid before principal reductions. 4 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • Mr. John E. Ryan January 29, 1979 Page Three 3 Inflation is a problem. If inflation is in the 97 range as it has been this past year, we would expect each bank to grow at least 9% purely from inflationary causes. Any actual growth adds to the capital problem. Using the statistics provided by the most recent F.D.I.C. Annual Report (1977), banks in the size category of $10MM to • $25MM earned an average of 11.34% on capital and banks in the $25M1 to $50MM size range earned 12.5%. Recognizing that a dividend payout would not normally equal even 50% of the net income, it's obvious that the net dividend flow even on a tax free basis through a holding company would have difficulty paying interest in today's market. The need for retained earnings in a heavy inflationary period further diminishes the ability to pay holding company debt through a reasonable dividend program. Once again - a stretched out repayment program needs consideration. 4. In the discussion that we had, someone mentioned that it would be undesirable to permit further leveraging of holding company debt. We submit that this will not, and cannot occur because of the restraints on bank stock lending in effect by virtue of the regulatory action of the examiners from either the F.D.I.C., Comptroller's Office, or state bank commissioners. For many years, the maximum loan acceptable to these regulators has been 100% of book value. Bank stock debt created by borrowers other than a one bank holding company now enjoy longer repayment periods than twelve years and we respectfully request consideration by the Board of Governors of the Federal Reserve Bank to increase the maximum allowable period of repayment to twenty years. To extend the limit only two or three years provides modest relief. 'Cor .411y, • Lviorrest D. :Jones President & Chi.5,Adtii1nistrative Officer jer .•••••116. SOARD OF GOVERNORS FEDERAL RESERVE SYSTEM • OF THE WASHINGTON, D. C. 205 51 DIVISION OF BANKING SUPERVISION AND REGULATION July 25, 1979 Mr. Forrest D. Jones President and Chief Administrative Officer Fidelity Bank, N. A. P. 0. Box 24128 Oklahoma City, Oklahoma 73124 Dear Mr. Jones: This is in response to the request made at a meeting in Congressman Watkins' office by several representatives from the Oklahoma Bankers Association and contained in your letter to me that the Board reconsider its present policy on the retirement of acquisition debt incurred in the formation of one bank holding companies. The Board's staff has completed its review of the amortization policy in connection with your observations relating to the impact of current levels- of interest rates and inflation on the ability of small one bank holding companies to retire acquisition debt. The staff's findings, summarized below, may be of interest. First, there is no question that rising interest rates have increased the debt servicing burden of small one bank holding companies in instances where acquisition debt is priced on a floating rate basis. However, the staff found that the earnings of small banks generally grow at a faster pace in a rising interest rate environment than when rates are stable or declining. This is largely attributable to the fact that small banks tend to have more interest-sensitive assets than interest-sensitive liabilities. Typically, small banks have a large base of stable demand, time and savings deposits, the cost of which is insulated from rising interest rates by rate ceilings. Moreover, vis-a-vis their larger counterparts, small banks do not rely on volatile interestsensitive liabilities to any great extent. Thus, during periods of rising interest rates, their yield on earning assets tends to increase faster than their cost of funds. More importantly, the available evidence suggests that the increase in bank earnings resulting from escalating interest rates typically more than offsets the increased interest costs experienced by the parent company. Consequently, the ability of small one bank holding companies to service their acquisition debt generally does not appear to be adversely affected by rising interest rates. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Mr. Forrest D. Jones Fidelity Bank, N. A. -2 Second, it is recognized that inflation has made it difficult for some small one bank holding companies to retire their acquisition debt on schedule while simultaneously maintaining the capital ratios of their banks at acceptable levels. Inflation usually leads to strong loan demand and to higher rates of growth of bank assets. A bank that is called upon to meet parent company debt servicing requirements will normally have to increase its dividend payout. As a result, its rate of equity growth is likely to fall below its rate of asset expansion, causing some slippage in the capital ratios of the bank subsidiary. An examination of what has actually happened to the capital ratios of bank subsidiaries of small one bank holding companies revealed that while capital ratios declined, the decline was for the most part short-lived, lasting only several years subsequent to acquisition. On average, the capital ratios did not fall to unacceptable levels. There have been occasions when one bank holding companies have had to modify their debt retirement schedules in order to maintain adequate levels of bank capital. The Board has never criticized a holding company for retiring acquisition debt over a longer period than originally stated in an application where the decision to modify the retirement schedule was necessary to avoid undue strain being placed on the bank's capital position. This flexibility in the administration of the amortization policy has enabled the Board to accommodate unanticipated needs of bank holding companies such as those caused by high levels of inflation. Third, although the staff found that the transfer of ownership in small banks would be facilitated by liberalizing the present policy on debt retirement, it is not clear that any improvement in the transferability of small banks is needed. As you noted in your letter, most small banks are being sold for substantial premiums over book value. This suggests that the demand for small banks is strong, particularly when bank stocks in general are selling at a discount from book value in today's market. In addition, the number of one bank holding company applications has risen dramatically in the past two years. In 1978, 259 3(a)(1) applications were approved by the Board, the highest number since the 1970 amendments to the Bank Holding Company Act were passed. This also suggests that the transfer of ownership in small banks has not been a serious problem. Finally, the staff concluded that the liberalization of the debt retirement policy would encourage prospective one bank holding companies to incur more indebtedness than would otherwise be the case. Although it was contended that this cannot occur because "the Comptroller of the Currency will not allow us to extend bank stock credit in excess of book value" there have been numerous 3(a)(1) applications submitted to the Federal Reserve System where the acquisition debt exceeded the book value of the bank to be acquired. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis L • Air. Forrest D. Jones Fidelity Bank, N.A. -3 The staff presented its findings, along with your letter of petition, to the Board's Committee on Bank Supervision and Regulation, which is composed of two governors. The Committee agreed with staff's analysis and was concerned that a liberalization of the debt retirement policy would lead to higher premiums and higher levels of leverage. The Committee concluded that the present policy is sufficiently flexible to accommodate the reasonable needs of applicants seeking to form one bank holding companies under current economic conditions. As you know, several bills have been introduced in Congress which, if passed, would alter the Board's present policy on debt retirement. It appears likely that the Board will be asked to testify on these bills in the near future. In view of your interest in this matter, I will be happy to send you a copy of the testimony as soon as it is available. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Sincerely, John E. Ryan Director • HI )1'11 _ITY July 30, 1979 FORREST D. JONES PRESiDENT Mr. John E. Ryan, Director Board of Governors of the Federal Reserve System Washington, D. C. 20551 Or Dear Mr. Ryan: the As you can imagine, I was disappointed in the decision of ictions Federal Reserve Bank to leave the present repayment restr years. on bank stock loans through holding companies at twelve and Similarly, I disagree with some of the logic that has led you the governors to this decision. cations I agree that there has been an amazing increase in appli are for one bank holding companies in the past two years. There does two reasons for this - one is that an obvious tax advantage rather exist for the repayment of debt through a holding company obligation. than to take dividends personally and then repay a personal Reserve Second, there has been much more activity from the Federal nies these Bank encouraging an application for one bank holding compa past two years at least in our area. attitude While we construe this as being an unusually cooperative aggressive by the Fed, at the same time there has been a far more assume this stance by the Kansas City Federal Reserve Branch and we revised attitude is nationwide. gly about a It's difficult to understand why the Fed feels so stron is indicated twelve year maximum repayment period when by policy, it years that that there is no need to restrict yourself to the twelve period any reasonable request will provide for an extended repayment during the lifetime of the loan. period that is As commercial lenders, we normally ask for a repayment to adhere to within the customers ability and expect the customer the repayment period without an extension of time. PORINSON https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis AT POBEPT S KEPP .VNUf P 0 BOX 24128 OKLAHOMA CITY 73124 40 5 1 77 2 2 000 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Page Two Mr. John E. Ryan July 30, 1979 As a matter of fact, if we allow an instalment customer to have any more than a modest extension during the course of a contract, the Comptroller will charge off the loan or severely classify it. I was unaware that several bills were introduced in Congress which would alter the Board's present policy on debt retirement. The only bill that I am aware of is the legislation introduced by Representative Wes Watkins of Oklahoma. While I assume that the matter has been concluded on the part of the Fed, I sincerely wish that you would reconsider the request and allow a greater percentage of judgment to be exercised by the lending banks, rather than retaining a maximum timeframe for the repayment of what is typically a large debt. Cordially, rForrest D. Jones President & Chief Administrative Officer jer cc: The Honorable Wes Watkins Member of Congress • OARD OF GOVERNORS • OF THE • • • .•,, T) cc;;.. . .• . ‘0 • • . ••^1 ':‘"'• ; • - 1.•;`' • ----•\ 1 $ !Ik—f. • tS17. •((i) •• FEDERAL RESERVE SYSTEM WASHINGTON, O. C. 20551 DIVISION OF BANKING <->"F. SUPERVISION AND REGULATION fR:AE— • •• • ••.Rist August 9, 1979 Mr. Forrest D. Jones President and Chief Administrative Officer Fidelity Bank, N. A. P. 0. Box 24128 Oklahoma City, Oklahoma 73124 Dear Mr. Jones: rve's This refers to your letter of July 30 concerning the Federal Rese of one bank policy on the retirement of acquisition debt incurred in the formation holding companies. impression In my earlier response to you, I did not intend to convey the Although the staff Completed ,that the Board had made a final decision on this matter. findings to the Committee on Bank its analysis of the present policy and presented its nted to the Board. Supervision and Regulation, the matter has not yet been prese policy on debt It is expected that the Board will review the present y on H.R. 2747 (see pages 3 retirement in connection with its upcoming testimon ction with such review, we intend to and 4), Fl. R. 3548, and 11.R. 4004. In conne homa Bankers together with material present to the Board the request of the Okla submitted by you. send you a copy of I have enclosed a copy of each of the bills and will available. the Board's testimony as soon as it is https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Sincerely, Enclosures 96TH CONGP,ESS 1ST SESSION ari..1 Pt, _ 0 0„,z mil. 10 To amend the Bank Holding Company Act and the Bank Merger Act to restrict the activities in which registered bank holding companies may engage and to control the acquisition of banks by bank holding companies. I IN THE HOUSE OF REPRESENTATIVES ! 1 mARcii 8, 1979 Mr. IIANLEY (for himself and Mr. Si GERMAIN) introduced the following bill; https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis which was referred to the Committee on Banking, Finance and Urban Affairs A BILL To amend the Bank Holding Company Act and the Bank Merger Act to restrict the activities in which registered bank holding companies may engage and to control the acquisition of banks by bank holding companies. 1 Be it enacted by the Senate and House of Represcnta- 2 tives of the United States of America in Congress assembled, 3 That this Act may be cited as the "Bank Holding Company 4 Amendments of 1979". I—E • . re https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 96TH CONGRESS H 1ST SESSION 3543 To amend the Bank Holding Company Act of 1956 to provide that the Board of Governors of the Federal Reserve System shall not deny any application for the formation of a one-bank holding company because the transaction to form such one-bank holding company involves a bank stock loan which is for a period of not more than twenty-five years. DI THE HOUSE OF REPRESENTATIVES APRIL 9, 1979 Mr. WATKINS introduced the following bill; which was referred to the Committee on Banking, Finance and Urban Affairs A tILL To amend the Bank Holding Company Act of 1956 to provide that the Board of Governors of the Federal Reserve System shall not deny any application for the formation of a onebank holding company because the transaction to form such one-bank holding company involves a bank stock loan which is for a period of not more than twenty-five years. 1 Be it enacted by the Senate and House of Representa- 2 tives of the United States of America in Congress assembled, 3 That section 3(c) of the Bank Holding Company Act of 1956 4 (12 U.S.C. 1842(c)) is amended by adding at the end thereof 5 the following: "Notwithstanding any other provision of this • • 96TH CONGRESS 1ST SESSION • H • To amend the Bank Holding Company Act of 1956 to provide that the Board of Governors of the Federal Reserve System shall not deny any application for the formation of a one-bank holding company because the transaction to form such one-bank holding company involves a bank stock loan which is for a period of not more than twenty-five years, and for other purposes. IN TILE HOUSE OF REPRESENTATIVES - MAY 8, 1979 Mr. IVATKINs introduced the following bill; which was referred to the Committee on Banking, Finance and Urban Affairs 1 A ILL To amend the Bank Holding Company Act of 1956 to provide that the Board of Governors of the Federal Reserve System shall not deny any application for the formation of a onebank holding company because the transaction to form such one-hank holding company involves a bank stock loan which is for a period of not more than twenty-five years, and for other purposes. 1 Be it enacted by the Senate and House.of Representa- 2 tires of the United States of America in Congress assembled, 3 That section 3(c) of the Bank Holding Company Act of 1956 4 (12 U.S.C. 1842(c)) is amended by ?tiding at the end thereof https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ar • • BOARD OF GOVERNORS OF THE • FEDERAL RESERVE SYSTEM Office Correspondence To From Date Board Committee on Bank Regulation and Supervision Division of Banking Supervision and Regulation (Messrs. Cornyn and Talley) I. Subject: May 30, 1979 Petition to Liberalize the Board's Policy on the Retirement of One-Bank Holding Company Acquisition Debt Introduction Recently, a group of bankers from Oklahoma requested that the sition debt Board reconsider its present policy on the retirement of acqui incurred in the formation of one bank holding companies. It is the Board's nable period of policy that acquisition debt should be retired over a reaso time, generally not exceeding 12 years. The bankers argued (see attached of inflation letter) that this policy is inconsistent with current levels https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis extended and interest rates and recommended that the retirement period be to 20 years.1/ Summary ase As argued by the Oklahoma bankers, high interest rates do incre holding companies. the debt servicing burden of the parent of small one-bank ngs of the However, high interest rates also tend to increase the earni have more interholding company's bank subsidiary, because most small banks suggests that the est sensitive assets than liabilities. Available evidence typically more increase in bank earnings resulting from high interest rates parent company. than offsets the increased interest costs experienced by the to service Consequently, the ability of small one-bank holding companies affected by high their acquisition debt does not appear to be adversely interest rates. made it There is evidence, however, that rising inflation has e their acquisidifficult for some small one-bank holding companies to retir capital ratios of tion debt on schedule while simultaneously maintaining the 73 holding companies e their banks at an acceptable level. Data for a sampl of capital ratios of formed during the early 1970s show that, in aggregate, the but their banks declined significantly for several years following formation, duced a bill (H.R. 3548) 1/ On April 9, Congressman Watkins of Oklahoma intro d the Bank Holding Company Act in the House of Representatives that would "amen of the Federal Reserve System of 1956 to provide that the Board of Governors of a one-bank holding company shall not deny any application for the formation holding company javolves a bank because the transaction to form such one-bank twenty-five years." Passage stock loan which is for a period of not more than y. of this bill would presumably nullify the existing polic -2- then bottomed out due to a sharp rise in bank retained earnings. In aggregate, the capital ratios of these holding company banks did not fall materially below their peer group. In some cases, holding companies advisedly have not stuck to their acquisition debt retirement schedule so that their banks could retain more earnings and build up their capital. Also, some holding companies probably have had to constrain the growth of their banks in order to maintain reasonably acceptable capital ratios. The Board's present policy is that acquisition debt should be retired over a reasonable period of time, generally not to exceed 12 years. However, in practice, the Federal Reserve has not insisted that existing holding companies adhere to a 12 year retirement schedule if, due to unanticipated events., retirement would place an undue strain on the bank's capital position. Lengthening the debt retirement period for newly fo/ming holding companies would further facilitate the ownership transfer of small banks. However, it would also tend to result in holding companies incurring even more debt since they would have more years to pay it off. Incurring more debt would place a greater strain on their banks to service this debt. In our judgment, this adverse factor outweighs any likely benefits from increasing the transferability of small banks. II. Discussion of Arguments Advanced by Oklahoma Bankers Impact of Rising Interest Rates The Oklahoma bankers contend that the escalation in interest rates has made it difficult to comply with the Board's debt retirement policy. This is because interest rates on bank stock loans are generally tied to money market rates. As interest rates rise, they argue, a parent company's debt serving capacity declines. The validity of this argument rests upon the capacity of relatively small one bank holding companies to control their exposure to interest rate risk. Generally speaking, a banking organization can minimize interest rate risk by funding interest-sensitive assets with interest-sensitive liabilities and by matching the maturities of assets and liabilities. As long as the rate-mix characteristics of assets and liabilities are in balance, the institution is "protected" against interest rate fluctuations.. Because acquisition debt is usually priced on a floating rate basis, the key issue is whether the impact of rising interest rates on acquisition debt is, or https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -3- can be, offset by the underlying subsidiary bank. On the basis of informa- tion presented below, it appears that the adverse impact of rising interest rates on the variable rate acquisition debt of the parent company is, or can be, minimized and in most cases totally offset by the asset sensitivity of the underlying subsidiary bank. In short, we suspect that most small one bank holding companies perform better in a rising interest rate environment than when rates are stable or declining. We have attempted to measure the interest rate sensitivity of various size groups of banks with less than $100 million in total assets by examining recent Call Report data. Although the sensitivity of a bank's assets and liabilities cannot be measured precisely with the Call Report due to certain data limitations, we believe that it can provide some reasonably accurate measures of rate sensitivity. Interest-sensitive balance sheet items were defined to include the following: Interest-sensitive Liabilities Interest-sensitive Assets Interest bearing balances with other banks Trading Account Securities Securities with a remaining maturity of one year or less Federal funds sold and securities purchased under agreements to Domestic time deposits in denominations of $100,000 or more Deposits in foreign offices Federal funds purchased and securities sold under agreements to repurchase Other liabilities for borrowed money resell It should be emphasized that the definition of interest-sensitive assets understates the actual volume of assets that are highly sensitive to fluctuationsin money market rates as it excludes loans that are priced on a floating-rate basis and other loans with a maturity of less than one year. (These items are not reported on the Report of Condition by banks with less than $300 million in assets.) https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis In contrast, the definition for interest- • -4- sensitive liabilities probably overstates the actual level of rate sensitive funds because the Call Report line item, "Other liabilities for borrowed money," although predominately short-term, often includes fixed rate, intermediate and long-term borrowings. The following ratios were used to measure interest-rate sensitivity: (1) Interest-sensitive assets Total Assets (2) Interest-sensitive liabilities Total Assets (3) Interest-sensitive assets less interest-sensitive liabilities Total Assets Table 1 shows the distributions of each of the ratios for various size categories of banks with less than $100 million in total assets for December 1976, December 1977, and June 1978. As shown in Table 1, banks with total assets under $40 million tend to be asset sensitive, with the degree of asset sensitivity greater the smaller the bank. Banks with total assets between $40 and $100 million were slightly asset sensitive in December 1976 and December 1977, but were modestly liability sensitive in June 1978. Again, it should be stressed that the data in the table understate the degree of asset sensitivity because floating rate loans and short-term 1/ fixed rate loans are not included as interest sensitive assets. Allowing for this factor, it is likely that a sizable portion of banks under $100 million (and particularly those under $40 million) are sufficiently asset 1/ Data on floating rate loans are available on banks with $300 million or more in total assets. These data reveal that floating rate loans represent a significant proportion of the total loans made by larger banks. For example, as of June 30, 1978, floating rate loans averaged 43.33 percent of all loans (except consumer loans) for banks with $300 million or more in assets. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -5- Table 1 NATIONAL BANKS Total Assets (millions) Interest Sensitive Assets/1/ Total Assets Interest Sensitive Liabilities/ Total Assets Interest Sensitive Assets Less Interest Sensitive Liabilities/ Total Assets December 31, 1976 10.83% 15.86% 5.03% 10 - 25 13.11 6.61 6.49 25 - 40 11.89 8.07 3.81 40 - 100 11.88 10.08 1.80 0-10 December 31, 1977 10.61% 15.41% 4.80% 10 - 25 12.59 6.62 5.98 25 - 40 11.21 8.17 3.04 40 - 100 10.48 10.15 .33 0 - 10 June 30, 1978 13.34% 4.87% 8.47% 10 - 25 10.14 7.11 3.03 25 - 40 9.00 8.64 .35 40 - 100 8.15 11.26 0 - 10 1/ Excludes variable rate loans. Source: https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Comptroller of the Currency. (3.11) -6- sensitive to offset much, and in some instances all, of the interest rate risk associated with variable rate acquisition debt issued by the parent company. Moreover, it should be noted that the level of interest-sensitive assets as a percentage of total assets has varied considerably from one period to the next. Looking at banks in the $25-40 million category, for example, interest-sensitive assets have ranged from 11.89 percent of assets to 9.00 percent of assets between December 31, 1976, and June 30, 1978. This suggests that some banks have the capacity to alter the rate sensitivity of the asset side of their balance sheets. In terms of earnings performance, we can expect small banks to perform better when interest rates are rising and worse when they are falling. The key issue, however, is whether the asset sensitivity of small banks is great enough to offset the adverse impact of rising interest rates on floating rate acquisition debt. To answer this question, it may be help- ful to examine a hypothetical transaction involving the formation of a one bank holding company. For purposes of illustration, let us assume that the bank to be acquired is structured so that rate-sensitive assets represent 12 percent of total assets and rate sensitive liabilities represent 8.0 percent of total assets. If the bank has an equity/asset ratio of 8.0 percent, its balance sheet would appear as follows: https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Bank Prior to Acquisition Interest-sensitive assets Fixed-rate assets Total Assets $12 88 $100 Interest sensitive liabilities Fixed-rate liabilities Equity Liabilities & Equity $ 8 84 8 $100 • • -7- Assume further that an applicant purchases the bank at its net asset value of $8 (i.e., no premium is paid) and borrows 75 percent of the purchase price, or $6. The resulting parent company and consolidated balance sheets would look like this: Parent Company Investment in Bank $8 Debt (interest-sensitive) Equity $6 2 Total Assets $8 Debt & Equity $8 Consolidated Interest-sensitive assets Fixed rate assets Total Assets $12 88 $100 Interest-sensitive liabilities Fixed-rate liabilities Equity Liability & Equity $14 84 2 $100 Looking at the consolidated balance sheet, it can be seen that rate-sensitive liabilities now exceed rate-sensitive assets by $2, or by 2.0 percent of total assets. In order to eliminate this mismatch, the subsidiary bank would have to realign its balance sheet by increasing the volume of interest-sensitive assets (and/or by decreasing the volume of interest-sensitive liabilities) such that the excess of rate-sensitive https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis assets over rate-sensitive liabilities represents 6.0 percent of total bank assets, an increase of only 2.0 percentage points from the pre-acquisition level of 4.0 percent. In the above example, it was assumed that 12 percent of the bank's assets and 8 percent of its liabilities were rate sensitive. While these figures are consistent with those shown in Table 1, the data in that table greatly understate the level of asset sensitivity. Therefore, in the typical one bank holding company, the asset sensitivity of the underlying subsidiary -8- bank would probably more than offset the liability sensitivity of the parent company's acquisition debt. If this is true, then contrary to the poon taken by the Oklahoma bankers, we would expect small one bank holding companies to perform better in a rising interest rate environment than they would if rates were stable or declining. Impact of Inflation The Oklahoma bankers contend that the present debt amortization policy is inconsistent with current rates of inflation. The substance of their argument is that it is difficult for a bank to hold asset growth below the prevag rate of inflation and that banks which are called upon to service parent company debt cannot retain enough earnings to keep their equity growth rate from falling below the rate of asset expansion. To illustrate this point, it can be seen that if a bank earns a 12 percent return on equity and distributes 50 percent of its earnings in dividends, then its rate of internal capital generation is only 6.0 percent. Unless asset growth is held to 6.0 percent, the bank's equity to asset relationship will deteriorate. To determine if subsidiary banks of one bank holding companies that have employed acquisition debt have had problems maintaining their capital ratios subsequent to acquisition, we have looked at 73 banks which were acquired during the each of these cases. -5-rod. Acquisition debt was employed in Since formation, 46 of the 73 banks have been retiring their debt on schedule, while 27 have not. The trend in the average capital position, as measured by the ratio of equity to assets of the 73 banks, is shown in the second column of Table 2. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis As can be s--n from the data, there was a noticeable decline rJ https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Table 2 Equity Capital as a Percent of Total Assets For Selected Groups of Insured Commercial Banks Cateory Year-end All banks with less than $100 million in Assets Subsidiary banks of one bank holding companies formed in 1971-19731/ Subsidiary banks of one bank holding companies, formed in 1971-73, that have been retiring acquisition debt on schedule-a/ 1970 7.63 8.84 8.99 1971 7.41 8.61 8.96 1972 7.21 8.68 8.27 1973 7.33 7.92 7.69 1974 7.64 7.56 7.42 1975 7.65 7.28 7.22 1976 7.93 7.57 7.52 1977 7.85 7.57 7.59 1/ Includes 73 banks. 2/ Includes 46 banks. Source: Consolidated Reports of Condition. • -10- in capital ratios during and immediately following the years in which debt This downward trend bottomed out in 1975 financed acquisitions occurred. and from there capital ratios rose through 1977. By year-end 1977, the capital ratios of 36 of the 73 banks were below their pre-acquisition levels. Looking at the average level of capital for the 73 banks, it can be seen that the ratio of equity to assets for the group had declined to 7.57 percent by 1977, a drop of 1.27 percentage points, from the 8.84 percent level of 1970. In contrast, the capital ratio for all insured commer- cial banks with less than $100 million in assets rose from 7.63 percent to Nevertheless, it is comforting to note 7.85 percent over the same period. that by the end of 1977, the average capital position of the 73 banks was not dangerously low, and, in fact, was only slightly below the average for all banks with less than $100 million in assets. Table 3 provides a comparison of the average returns on equity, dividend payout ratios, and rates of internal capital generation of the 73 banks with those of banks in the $100 million and under size category. As might be expected, parent company debt servicing requirements led to a pronounced increase in the dividend payout ratios of the 73 banks in 1971 and 1972. The payouts were relatively stable from 1972 through 1975 and then declined in 1976 and 1977. On average, the payouts of the 73 banks remained well above the norm for banks in the less than $100 million category from 1972 through 1977. Another noteworthy observation is that the average return on equity for the 73 banks rose sharply in 1973 and 1974 and remained significantly above the average of all banks with less than $100 million in total assets. This dramatic increase in profitability has enabled the group to maintain respectable rates of internal capital https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Table 3 PROFITABILITY, DIVIDEND PAYOUT, AND INTERNAL CAPITAL GENERATION RATES, 1970-1977 Year-end All banks with less than $100 million in Assets ' Rate of Internal Dividends/ Net Income/ Capital Generation Net Income Average Equity 1970 12.7 28.47 Subsidiary banks of one bank holding companies formed in 1971-731/ Rate of Internal Net Income/ Dividends/ Capital Generation Net Income Averaae Equity 9,1 10.27 22.47 7.6 30.6 6.8 1971 12.2 28.4 8.7 10.3 1972 12.1 27.2 8.8 10.7 46.4 6.6 1973 13.3 25.2 10,0 13.1 47.4 7.2 1974 12.7 27.4 9.3 15.4 47.8 8.0 1975 11.3 29.5 7.9 14.4 48.5 7.0 1976 11.7 27.7 8.4 15.3 2/ 44.2- 8.7 1977 12.0 26.3 8.9 15.7 36.1 9.9 • • 1/ Includes 73 banks. 2/ Excludes data on one bank that had a dividend payout ratio of 512 percent. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -12- generation, despite higher than average dividend payout ratios. The be increase in profitability does, however, suggest that these banks may taking greater risks in order to generate the earnings needed to meet debt servicing requirements while simultaneously trying to maintain capital ratios. In conclusion, while these results gloss over wide variations the in the performance of individual banks, they nevertheless show that ration in need to service acquisition debt tended to lead to some deterio the capital ratios of banks during the years following acquisition. This cause deterioration tended to be short-lived, and, on average, did not bank capital ratios to fall to unacceptable levels. the However, it is also clear that subsequent to acquisition, been rate of internal capital generation experienced by these banks has in the 7 to 10 percent range, which is below recent rates of growth in nominal GNP. constrain Consequently, some banks are undoubtedly having to their growth in order to maintain reasonably acceptable capital ratios. III. Policy Considerations The Board's present policy is to allow small one bank holding companies to issue relatively large amounts of acquisition debt compared to their equity, but to require these companies to demonstrate the capacity to retire the debt within a reasonable period, generally not to e:zceed 12 years, The reason for allowing small holding companies to issue sizable amounts of acquisition debt is to facilitate the transfer of ownership of small banks. The reason for requiring the debt to be retired is to bring both parent and consolidated holding company leverage down to a lower and safer level over the longer run. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The choice of 12 years as the normal retirement period was • -13- deemed to be a reasonable tradeoff between facilitating the transfer of ownership of small banks and keeping holding company leverage within safe limits.1/ It is important to recognize that the Federal Reserve has not insisted that small one-bank holding companies adhere to the 12 year debt retirement schedule irrespective of subsequent developments. In the last few years, some banks in these holding companies (due largely to stepped-up inflation) have grown much faster than originally anticipated by either the holding companies or the Federal Reserve. In some cases, the capital ratios of these banks have come under pressure, and the holding companies have decided not to extract sizable dividends from the banks in order to retire the parents' debt on schedule. Typically, the Federal Reserve has not criticized this practice because it contributed to the maintenance of adequate capital ratios in the banks. As a matter of policy, the Board continues to require newly forming small one-bank holding companies to demonstrate the capacity to retire their acquisition debt within 12 years. If this retirement period were extended to 20 years, as proposed by the Oklahoma bankers, it would tend to further facilitate the ownership transfer of small banks since it would probably increase the number of potential buyers. However, it is not clear that improving the transferability of small banks is greatly needed. First, most small banks are now being sold for approximately 1 1/2 to 2 times book value; and there does not appear to have been any marked deterioration in this premium in 1/ Setting a specific retirement period for acquisition debt (such as 12 years) tends to establish an effective ceiling on the amount of such debt, given projected holding company cash inflows and outflows. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -14- recent years, as one would expect if ownership transfer problems were increasing. Secondly, the number of one-bank holding company applications filed and approved during 1977 and 1978 was substantially above the level for 1971 through 1976--additional evidence that ownership transfer is not becoming considerably more difficult. •• 3(a)1 Applications Percent Approved Year Number of Applications Number Approved 1971 1972 1973 1974 1975 1976 1977 1978 67 123 147 154 156 155 236 273 65 112 146 138 141 143 220 259 97.0% 91.0% 99.3% 89.6% 90.4% 92.2% 93.2% 94.9% 1,311 1,224 93.3% Total The major disadvantage of extending the normal 12 year retirement period is that it would probably result in some newly forming holding companies taking on significantly more acquisition debt. At present, the Board does not have a policy that sets a specific debt/equity ceiling on parent company leverage. In the absence of such a ceiling, the extension of the acquisition debt retirement period would increase the effective leveraging capacity of newly forming holding companies (just as an individual can take on more mortgage debt if he has 30 years to repay rather than 10 years). An increase in leverage would raise holding company risk. Conclusion In our judgment, the Board's present acquisition debt retirement policy is working reasonably well and should not be changed. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The policy is • - -15- designed to put a cap on holding company indebtedness and to encourage al parent company and consolidated holding companies to reduce their leveragesystematic fashion. At the same time, the Federal Reserve permits existing holding companies to extend the repayment period in individual cases in order to avoid undue strain being placed on the bank's financial resources. Finally, we see no compelling reason to lengthen the 12 year retirement period in order to alter the current tradeoff between facilitating the transfer of small bank ownership and protecting banks from excessive holding company leverage. Board staff discussed the acquisition debt retirement question with Reserve Bank personnel at a System conference in early June. The Reserve Bank staff reported that there did not appear to be significant banker agitation for liberalizing the Federal Reserve's current policy. Likewise, it did not appear that the Reserve Banks would favor any liberalization. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis . https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis NIPrat ZS, arri liserseble Auks K. ilatyky am*elItereeeesteiriese smidagem. D.C. MIS *as aro ativity1 esry Show Ilea you lir 'Sal letter of August Ut es the e of essionel Asit of 1979 viol* esmosibelsingly pima do asee s lesielosissisesairstiese absitly beam the &wet Issiisio Thi rel ties iisse *bison•way issilare potables hails trbe ?Mo * losisletive etles in tNe sew liesesto est lads lhotece, I jets do Mbar siabest sti the Semi sit liseiresre is iseias. tio pst.i eitissities iiggessisittea diNfilkeetli Sum lisaides tattoo ha* bees seeerobsi by(bottom Remo. mI plea Csimittee, *ad as Sam leadership.Is ibis sieir &a kia$ tone& to 41111110101t with the Sumo'waft Comilla* tAli expedittes the semeisiesetion f legisinties is ibe lesete, ,ats ceseassed *best son soma el do bill as it ed as.soda. beipseei dust the bill ems be etreetbes istetisi is my view Is die Sesete. I *CU be Piseeed too keep vat tetereed os *is ispartita 1111608Altim oohs* Sincerely taut A. Vole:1%1'1r .AGpjtt (#V-18) b=: s. &Ursa (2) V 2187 RAYBURN HOUSE OFFICE BUILDING WASHINGTON. D.C. 20515 JOHN M. MURPHY 17m NEW YORK 411 TELEPHONE.:(202) 225-3371 550 MANOR ROAD, ROOM 107 STATEN ISLAND , NEW YORK 10314 TELEPHONE (212) 981-9800 CHAIRMAN: Congre55 of tbe Einiteb iptate5 26 FEDERAL PLAZA, Room 1643 NEW YORK. NEW YORK 10007 3/)0115t MERCHANT MARINE AND FISHERIES COMMITTEE of 11epre5entatibe5 CHAIRMAN, TELEPHONE (212) 264-9335 tillasbington, 33.e. 20515 AD HOC SELECT COMMITTEE ON OUTER CONTINENTAL SHELF ADMINISTRATIVE ASSISTANTS: CHARLES F. BOYLE, SR. August 10, 1979 JANE H. NACKE RITA Y. RUSSO tip 11•ITEIRSTATELAND FOREIGN CCM MERCiL•ctOMMITTrE 7.!Ml •. - ! Mr. Paul Volcker, Chairman Board of Governors of the Federal Reserve System Washington, D.C. 20551 ,i I 1 A4 411IP co •r _.._ __. Dear Mr. Volcker: This letter is in response to correspondence sent by Mr. G. William Miller in which he expressed his support for H.R. 7, the Monetary Control Act of 1979. This bill was introduced on January 15, 1979 by Representative Henry Reuss, and is designed to facilitate the implementation of monetary policy and to promote competitive equality among depository institutions. This measure, as amended, passed the House by a vote of 340 yeas to 20 nays. I am happy to report the I was among those who voted in favor of this measure. Ian& 4' • 5:41,41 A compromise was reached regarding the freedom of choice amendment, an aspect of the bill that was of particular concern to Mr. Miller. Introduced by Representative Stanton, this amendment would require the mandatory participation of banks only if the total percentage of deposits in the nation's reserve banking system covered by reserve requirements falls below 67.5%. It is believed that this "trigger" mechanism will serve to stabilize the amount in reserve and improve the Federal Reserve's ability to conduct monetary policy. I greatly appreciated Mr. Miller's advising me of his views on this matter. It is my hope that you will contin ue this practice. With kind regards, I remain, Sincerely, ill lit HN M. MURPHY f Member of Congress (2 THIS STATIONERY PRINTED ON PAPER MADE WITH RECYCLED FIBERS /fig. • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis * •-•? 'r : f :i https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Melon 2$, 1971/ Ur* Wattle 1110lbesky Ce-ditalamee ebeirlatese aripMeelliettliae Grasp cie West CoedUM INS %PAW. Soaitaase united states 11eawas veeklest-unt D.C. rows Mt. Cieekeityt membi bs pliesase tsarist vidi Chiptsmsee ampeseetatiteee Sinop et al metually esoreeteet tine. MAO' caLl MWS4 Catherine Mallatda to work out the asesiew firrlyisealentlia stasersty, tli,\ rayl Peel A. %ask* KAG:pjt (FV-19) beg: Mrs. Mallardi (2) OS 4101•3201 w=1/12GAYLORD NELSON. WIS.. CHAIRgo, LOWELL P. ER. JR.. COPO4. SAM NUNN, GA. SOS PACK1N . OREG. JOHN C. 'CULVER, IOWA ORRIN 0. HATCH. UTAH WALTER D. HUDOLESTON, KY. S. I. HAYAKAWA. CALIF. DALE BUMPERS, ARK. HARRISON H. scHmrry. N.M. ROBERT MORGAN, N.C. JAMES R. SASSER, TENN. RUDY SOSCHWITZ, A•ip•tr• DONALD W. STEWART. ALA. LARRY PRESSLER, S. DAK. MAX SAUGUS. MONT. CARL LEVIN. MICH. WILLIAM O. CHERKASKY, EXECUTIVE DIRECTOR INCASE-NT SPINA, CHIEF COUNSEL ROBERT .1. ociTcHoL MINORITY frArpr DIRECTOR Att.tr l' tartifeb Zfafez Zenate SELECT COMMITTEE ON SMALL BUSINESS WASHINGTON, D.C. 20510 August 23. 1979 rtA , f r SICI r-• ,06\ Honorable Paul A. Volker Chairman Federal Reserve Board Federal Reserve Building Washington. DC 20551 r - Dear Mr. Chairman: On behalf of the Chairmen's Renresentatives Grout), I would like to extend an invitation to you to he our guest brea!tfast speaker at one of our regularly scheduled meetings on the first and third Fridays of each month. • The Chairmen's Representative Group is comnrised of administrative assistants, committee staff directors and other top majority staff to the chairmen of the Senate committees. This is an informal group which meets twice a month for breakfast to discuss national and international issues in 5-120 of the Capitol iluilding. Breakfast is held from 9:30 to 9:00 followe d by the guest speakers remarks of ten to fifteen minutes. A question -and -answer period follows and adjournment occurs no later than 9:30. Since this group began over five years ago, we have had as speakers: Walter Mondale - Vice President of the United States Robert Strauss - Special Trade Representative )04' Stuart Fisenstat - Domestic Policy Staff Chief Harold Brown - Secretary of Defense Michael Blumenthal - Former Secretary of Treasury Simcha Dimitz - Former Ambassador from Israel H.F. Alejandro Orfila - Secretary general, OAS Joseph Califano - Former Secretary of HFW Robert Byrd - The Senate Majority Leader Juanita Kreps - Secretary of Commerce Zbig,niew Przezinski - National Security Advisor to the President ;414 -• ; 1 ••`4. : • •• . https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • .1. • •. •,-t. ..• :••••..L.ti • ";.:4 F: —• • • ''s. •••"' ..•.,• I. .- - . • w/A0114 '14.-. ;••••• • • AO PO . GO•4* We hope your schedule will Permit you to join us as a spea'<er on a Friday between now and mid -November. We are in the process of trying to firm up the sneakers schedule for the fall and would very much appreciate your advising us whether and when you would prefer to address the group. Should you be interested in meeting with us but find it impossible to do so this fall, please let me know if you can be with us during the neriod of January to September, 1980. -e• Your early response would be most helpful. Sincerely, William R. Cherkaskv Co-chairman Chairmen's Representatives Group r; nit 1.7 • -• 0.• . • r•. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis t- !.• •.4 . . • , •:••••• •••• • 41,• , it• • V •11 I . •1 k1 : 64 illianto, Aiztt-rixran * Xettl 31troga ArtMt .tcvf.ez-- nM WASH INGTON, D.C. August 27, 1979 Dear Paul: Your note caught up to me upon my return from Europe. I hope very much that we can spend some time together soon. With warmest regards, Mr. Paul A. Volcker Chairman of the Board of Governors Federal Reserve System Washington, D.C. 20551 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Aw/Pat 276 nip J• Mass gtaates Ihe Sepresestatives listee lifelkiestoest D.C. 2051.5 Dem Sill: the ~ere thet In your letter et J4sly 311 yes Wm beta hold wi sestesims tam htorillIP a odor prdaloo 11•11. 2255 osoi rolatod Wile to amid the ileth 11.141afi Ceapetty Act was the absease• is may feetasseee. of bast am to oapplet the w& geetitiast a/ *Wier those tat law ad sr mead to the Row. usellii awes thew tide kelt el &to is & siontillemat erst. 1 es toted with the eimplie last that mot at the emit you may teem. estrest aro et yreseet simply imit aarellable to se.f WPM IA disee data wireati be aneeemely mostly to eelleatto AMP ports ail its relePoset date oty I* to our Mee. es dope Eit edmir evailvas tow igaik got imagblik in -conveniently vstrisereble 10isto Ilhohar alt bed. abstit eatittiel and esteeiotieirsore0 see beak held*. aeopeatee(am* their assibedtias sollosti* &wise) that *re eagesios Le oath off the 40MtiVittIMP *et 2741*" wo:314 be prohibited by Dewlap 3 011 Mei *sty porgies of diall4k dot& Ow es& be esaiLy easplikel is Wats at bask bailee" sorpaatee setikorised to mows Le oath a the activities Ore* ollitessr the Fame beldies esapsey *r owl ft* pripswitiss ouch • Hotta; Mil eit its aotheuktig otheidiertee, 1110111101, tie ems* seteeiteta fro* mr cappotschted Val WWI it to• asta Ail* 01 the aediveizollemilmdes 1111 ssallisg is tab* eettvitif reetimet. we mould iota dot et Os astivities ta be prow ilipit• 21417 ealy ITU sthristais *edit volatoi inseraste **lee Ihilbited mot solo laseieig. Whitt striot otastraiote# how boot etessollyi eipproved by the liesitil• The otiose IIIMM *Mew most oatherised by mesigetiea, vete deeded by the lend et amirts, or flab warriad 4111117 of tho proritvioNg Soak aleillhot veiher yortotta essepthist mei IpPsediather our Mos es these eneoptioilk. eitiptow Act* Ito hato es inikmustlies 40.14111,14 Ihdiosetiee so die The Ardent ileseroo limed IMMO IMP either net,4161.tetodi oetkeel belie (so distinct free esittlities 8he * Wallas seopeey), *thee enthetriestion el these settritioo https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Zb.d000rAblo J. will(setteseso Tt.40 1161.116194tity of the CompeteLlet of doe lionamme sr dee 'tato eilitetetiog ossberity mod met the Paderal Lemlow Prassmibly* imamatins aseibi be *tabbed by tevimmims aesb bete emeeimetiem mojert but We wadi be levy anti, and labor ove as osegotorleelik biltionive beam* taw onotteotioe as abgeosoir, mist se Awe smiporte =sooliateimed by dee Campersiller of do Curfew Mg dm MC ema set the Ikaimma liessree• 2) Ike dolier*Am of bestow of bees ow* astiesol cad stoseateseemiod) AEA book WU*" esopedee (sllose* their lesiboilik irebeidiartos) that aro eimpod in amok of the eattelitime thee vaeld be pemlibitad WSmuts, 3 fa CR. 2741.. tor the osiblome to shoos weed diem oboe *xi addlidess 0dUarviessms" ore *Um "Am imemmemties isameated. lusimess tar Sedimideel olittvities ere. As, Ohs at ipagt, get saliested iless moshaihim, aabsidlortee et te the iiiisiddieed wpm* mow ropirts* 3) (is nem a/ samammt 'The psortiostikan rates esbilopod al total seelket Oen) awl bolo (Web estbsed sad otebenv olhorteto4) and book bolding sowidee Ohm* dote embelk admidisirtaii) idiot sae mapeed la es*of s astivittes elute veal be prabilbotied is illeatime I 441 ILL 1747.'' Want smosor sitinidise see isst ssokiesty oe$ksi4,susert is the coateast teeame seditt Man imillormatilam /kw 4111110iiii twit 41 partistasit oppitimeileme• Mora ans impartattlyt dile balk of the ta sale seetittlAe Sifted its SUL 22ns talligy by *ow beellimme 1 baeisseese. lb* beer4 demi met *Wet slats untimely hue asibmikitei firm in time* imilmeerias ameept me tam data sir be awitable too outilli tottrose. Ibeis Asaio meld nod to be solladmodi if weanmasone of aselhet *wee 1111111110 NO be emetieseeie M. We to ho a reseitt, it ia unismiestaity apt sivedris less the SOW* 01 imilsemettoe yes tu4 like Wain the time trim 3pag gamin". it vauld emotime a war salkatmetiel steeereb prejeet to illemieste the data is a Wow Om period, Stsweirety kig Lok:?AV:pit (#Y-6) bcc: Bob Eiseobeis Nrs. Mallardi (2) Paul A. ilisisiber • 1 • .11, 'V S. REUSS. WIS., CHAIRMAN 11 .AS .r•ASH1 FY. OHIO _IAM S. MOORHEAD, PA. v RNAND J. ST GERMAIN. R.I. HEN r,Y B. GONZALEZ. TEX. 4 JOSEPH G. MINISH, N.J. FRANK ANNUNZIO, ILL. ' JAMES M. HANLEY, N.Y. PARREN J. MITCHELL. MD. • U.S. HOUSE OF REPRESENTATIVES COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS WALTER E. FAUNTROY, D.C. STEPHEN L. NEAL, N.C. JERRY 144 PATTERSON. CALIF. JAMES J. BLANCHARD, MICH. NINETY-SIXTH CONGRESS 2129 RAYBURN HOUSE OFFICE BUILDING CARROLL HUBBARD. JR., KY. JOHN J. LAFALCE. N.Y. GLADYS NOON SPELLMAN, MD. LES AuCOIN. OREG. DAVID W. EVANS. IND. WASHINGTON, D.C. 20515 J. WILLIAM STANTON, OHIO CHALMERS P. WYLIE. OHIO STEWART B. McKINNEY. CONN. GEORGE HANSEN, IDAHO HENRY J. HYDE, ILL. RICHARD KELLY, FLA. JIM LEACH, IOWA THOMAS B. EVANS. JR., DEL. S. WILLIAM GREEN. N.Y. RON PAUL, TEX. ED BETHUNE, ARK. NORMAN D. SHUMWAY. CALIF. CARROLL A. CAMPBELL. JR., S.C. DON RITTER. PA. JON HINSON. MISS. US-420 July 31, 1979 NORMAN E. D'AMOURS, N.H. STANLEY N. LUNDINE, N.Y. JOHN J. CAVANAUGH, NEEIR. MARY ROSE °AKAR. OHIO : JIM MATTOX, TEX. BRUCE F. VENTO, MINN. DOUG BARNARD. GA. WES WATKINS. OKLA. •_/:z4 • :-) ROBERT GARCIA, N.Y. MIKE LOWRY. WASH. ..41116 C.A.) Honorable Paul A. Volcker Chairman Designate Federal Reserve Board Washington, D.C. CD Dear Mr. Chairman: The Subcommittee on Financial Institutions Supervision, Regulation and Insurance has been conducting a series of hearings on several bills (H.R. 2255, H.R. 2747, and H.R. 2856) pertaining to the activities of bank holding companies. Section 3 of H.R. 2747 would amend Section 4(c)(8) of the Bank Holding Company Act to prohibit bank holding companies from engaging in a number of specified activities. Throughout these hearings it has been my opinion that there has been an absence of hard data regarding precisely how bank holding companies in particular are affecting each of the industries that is seeking legislative redress in Section 3 of H.R. 2747. As far as the insurance industry is concerned, for example, former Chairman Miller stated in a letter to me, dated June 16, 1978: "there is...no empirical evidence supporting the need for a limitation on the insurance activities of bank holding companies at this time." The problem as I see it is a lack of data or evidence to support either side. For the record, will you please provide me with the following data: https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis (1) the number of banks (both national and state-chartered) and bank holding companies (through their nonbank subsidiaries) that are engaged in each of the activities that would be prohibited by Section 3 of H.R. 2747. (2) the dollar volume of business of banks (both national and state-chartered) and bank holding companies (through their nonbank subsidiaries) that are engaged in each of the activities that would be prohibited by Section 3 of H.R. 2747. k * • -2- . 4 • (3) the penetration rates achieved by (in terms of per cent of total market share) banks (both national and statechartered) and bank holding companies (through their nonbank subsidiaries) that are engaged in each of the activities that would be prohibited in Section 3 of H.R. 2747. I would greatly appreciate receiving this information before the full Committee marks up these bills. / Sincere4, / , 1--/ J.-- illiam Stanton (1 JWS/gw/a https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis kast;st 27 979 immaaablit Illommire dolmas Cammittere am amaking i HOWing amd When Affairs' ilitiod States Swats Illokington, 0. C. 20310 Dear Chairman rvammira:. Monk you for forwarding a ompy of your Yommittee's Sesamd Nimmtary Policy Import for 1979. Copies are being distrfbeted be the gam Himeers of the Board amd to the Immorvw Amok Plammidamts so that they will be cepaisant of the view mad isaammamdstioma set forth in the Seport. 1111maaroly. Saaut Pawl A. "stator bcc: Nts. Mellardi (2) WILLIA WIS., CHAIRMAN IIIt HARRISON A. WILLIAM ALAN CRANSTON, C.ALIF ADLAI E. STEVENSON, IL ROBERT MORGAN, N.C. DONALD W. RIEGLE. JR. MI PAUL S. SAREtANES, MD. DONALD W. STEWART, ALA. PAUL E. TSONGAS, MASS. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis KE GARN, UTAH OHN TOWER, TEX. JOHN HEINZ, PA. WILLIAM L. ARMSTRONG. COLO. NANCY LANDON KASSEBAUM, KANS. RICHARD G. LUGAR, IND. KENNETH A. MC LEAN, STAFF DIRECTOR M• DANNY WALL, MINORITY STAFF DIRECTOR MARY FRANCES DE LA PM/A, CHIEF CLERK • '11Cnifeb -.Stafez Zenale COMMITTEE ON BANKING, HOUSING. AND URBAN AFFAIRS WASHINGTON. D.C. 20510 September 15, 1979 711 The Honorable Paul A. Volcker Chairman, Board of Governors Federal Reserve System Washington, D.C. 20551 CO - •Cw Dear Mr. Chairman: Transmitted herewith for your review is the Second Monetary Policy Report for 1979. The report was submitted by this committee pursuant to Public Law 95-523, the Full Employment and Balanced Growth Act of 1978. xmire Chairman WP: kml Enclosure 0 96th Congress 1st Session f SENATE { REPORT No. 96-310 SECOND MONETARY POLICY REPORT FOR 1979 FROM THE COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS UNITED STATES SENATE NINETY-SIXTH CONGRESS FIRST SESSION A REPORT together with ADDITIONAL VIEWS SUBMITTED PURSUANT TO PUBLIC LAW 95-523 AUGUST 9, 1919.—Ordered to be printed Printed for the use of the Committee on Banking, Housing, and Urban Affairs U.S. GOVERNMENT PRINTING OFFICE 49-368 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis WASHINGTON: 1979 COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS • WILLIAM PROXMIRE,Wisconsin, Chairman HARRISON A. WILLIAMS, JR., New Jersey ALAN CRANSTON, California ADLAI E. STEVENSON,Illinois ROBERT MORGAN,North Carolina DONALD W. RIEGLE, JR., Michigan PAUL S. SARBANES, Maryland DONALD W. STEWART, Alabama PAUL E. TSONGAS, Massachusetts https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis JAKE GARN, Utah JOHN TOWER, Texas JOHN HEINZ, Pennsylvania WILLIAM L. ARMSTRONG, Colorado NANCY LANDON KASSEBAUM, Kansas RICHARD G. LUGAR,Indiana A. MCLEAN, Staff Director WALL, Minority Staff Director STEVEN M. ROBERTS, Chief Economist ANTHONY T. CLUFF, Minority Professional Staff. Member KENNETH M. DANNY .1116=Mm LETTER OF TRANSMITTAL U.S. SENATE, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, D.C., August 9, 1979. Hon. WALTER F. MONDALE, President of the U.S. Senate, Washington, D.C. DEAR MR.PRESIDENT:Transmitted herewith is the Second Monetary Policy Report for 1979 on the Conduct on Monetary Policy, pursuant to Public Law 95-523 and oversight hearings held on July 23 and 24, 1979. Sincerely yours, WILLIAM PROXMIRE, Chairman. (m) https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis CONTENTS Page Introduction Statement of long-term goals to be pursued Monetary policy oversight procedures II. Monetary policy plans and objectives III. Views and recommendations 1. Our limited ability to fine-tune the economy must be recognized 2. The slowing of inflation is still our number one economic problem 3. The role of the dollar in the international finance should be reexamined 4. The meaning of growth in monetary aggregates is unclear because of financial innovations 5. The target ranges for growth in the monetary and credit aggregates should be narrowed 6. The Federal Reserve should devote more attention to the growth of the credit aggregates Additional views of Senators Garn, Tower, Lugar, Heinz and Kassebaum_ I. 1 1 1 2 4 4 5 6 6 7 9 10 TABLES AND CHARTS Federal Reserve System target ranges and actual growth rates Midyear forecasts for the economy Money supply M2 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis (V) 3 3 8 SECOND MONETARY POLICY REPORT FOR 1979 I. INTRODUCTION The Senate Committee on Banking, Housing, and Urban Affairs held its second hearing on the conduct of monetary policy for 1979 on July 23 and 24, 1979, pursuant to the requirements of the Full Employment and Balanced Growth Act of 1978 (Public Law 95-523). The committee received the "Midyear Monetary Policy Report to the Congress"from the Board of Governors of the Federal Reserve System on July 17, 1979. The committee heard testimony on the Federal Reserve's proposed plans and objectives for monetary policy from four private sector economists on July 23, 1979: Prof. Benjamin Friedman, Department of Economics, Harvard University; Mr. Henry Kaufman, partner and member of the Executive Committee, Salomon Bros.; Prof. Lawrence Klein, Department of Economics, University of Pennsylvania; and Prof. Allan Meltzer, Graduate School of Industrial Administration, Carnegie-Mellon University. The committee received the testimony of Hon. Henry C. Wallich, a member of the Board of Governors of the Federal Reserve System, on July 24, 1979. Governor Wallich testified in place of Chairman G. William Miller because Mr. Miller had been designated to become Secretary of the Treasury by President Carter on July 19, 1979. The process of congressional review of monetary policy is based on the following major provisions of section 2A of the Federal Reserve Act, as amended by Public Law 95-523: Statement of long-term goals to be pursued The Federal Reserve is required to pursue monetary policies— growth of money and credit—consistent with the economic potential to increase production, and to promote the goals of maximum employment, stable prices, and moderate long-term interest rates. Monetary policy oversight procedures The Board of Governors of the Federal Reserve System is required to submit written reports to the Congress by February 20 and July 20 of each year. These reports are to consist of four parts: (1) a review and analysis of recent developments affecting economic trends in the Nation; (2) the monetary policy objectives and plans of the Federal Reserve Board and the Federal Open Market Committee in terms of the ranges of growth of the monetary and credit aggregates for the calendar year during which the report is transmitted (and in the July 20 report for the next calendar year.) Those plans and objectives are to take into account past and prospective developments in employment, unemployment, production, investment, real income, productivity, international trade and payments, and prices; (1) https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 2 (3) the relationship of the Federal Reserve's monetary policy plans and objectives to the numerical goals for the current and the next calendar year as set forth by the President in the Economic Report for employment, unemployment, production, real income, productivity, and prices or to any revisions to those of the Board's objectives and plans to the goals established by the President and any subsequent goals established by the Congress, it is expected that the Board will provide the Congress with a full discussion concerning the extent to which the Federal Reserve's intended policies will help to achieve those goals; and (4) if any changes in monetary objectives or plans are made by the Federal Reserve between reports to the Congress, the Board is required to include in the next report an explanation of the reasons for those revisions to or deviations from the previously announced objectives and plans. II. MONETARY POLICY PLANS AND OBJECTIVES In its report to the Congress on its monetary policy plans and objectives the Federal Reserve indicated that the Federal Open Market Committee had decided to retain the growth rate ranges for the monetary and credit aggregates for 1979 that had been selected last February. Those ranges, measured from the fourth quarter 1978 to the fourth quarter 1979, are: MI, 1.5 to 4.5 percent; M21 5.0 to 8.0 percent; M3) 6.0 to 9.0 percent; and bank credit, 7.5 to 10.5 percent. The Open Market Committee also decided to initially establish the same target ranges for growth in these aggregates for the period fourth quarter 1979 to fourth quarter 1980. The report indicated that these ranges are consistent with a policy of gradual reduction in rates of increase of the monetary aggregates in order to curb inflation. It also said; "Since satisfactory economic performance remains the basic economic objective of the Federal Reserve, monetary policy, from time to time, may have to permit growth rates in the aggregates that temporarily interrupt the downward trend." In its report the Board noted that growth of Automatic Transfer Services (ATS) and NOW Accounts had been expected to reduce the growth of M1 by 3 percentage points. But, during the first 6 months of 1979, actual experience indicated that the impact of ATS and NOWs on M1 growth had been only 2% percent, at an annual rate. The report indicated that the growth rate ranges for M2 and M3 imply that depository institutions will receive adequate inflows of lendable funds during the remainder of 1979 and into 1980. The range for bank credit reflects the Board's expectations that loan demand at commercial banks will begin to moderate in the months ahead. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 3 TABLE I.-FEDERAL RESERVE SYSTEM TARGET RANGES AND ACTUAL GROWTH RATES [Percent] Change from 4th quarter to 4th quarter (ending in period shown) 1976, 4th quarter 1977, 4th quarter 1978. 4th quarter 1979, 4th quarter 1980, 4th quarter M1 Target M Bank credit M3 Actual Target Actual Target Actual Target Actuai 5.8 7.9 7.2 '12.7 NA 7. 5-10.5 7.0-10.0 &5- 9.0 5.0- 8.0 5.0- 8.0 10.9 9.8 8:4 t5.3 NA • 9.0-12.0 8.5-11. 5 7. 5-10.0 6.0-, 9.0 6.0- 9.0 12.7 11.7 9.4 16.4 NA *6. 0-9.0 7. 0-10.0 7. 0-10.0 7. 5-10. 5 7. 5-10. 5 *8.0 11.3 11.4 112.9 NA 4. 5-7. 5. 4. 5- 6. 5 4. 0-6. 5 1.5- 4.5 1. 5 4.5 *The credit aggregate used by the FOMC as a target for monetary policy was the bank credit proxy in 1976. After November the credit aggregate targeted by the FC MC became total bank credit. tActual growth rate 1978 4th quarter to 1979 2d quarter annualized. NA-Not applicable. Definitions: Mr-Private demand deposits plus currency in circulation. M:.--M1 plus time and savinis deposits at commercial banks other than large negotiable CD's at weekly reporting banks. M.;--M2 plus deposits at mutual savings banks, savings and loan associations, and credit unions. Bank credit: Total 'can and investments at commercial banks. In order to improve the understanding of its monetary objectives the :Board provided an economic projection representing the consensus of the Board members at the .present time ,and given present infoimation on the economy. That, forecast summarized . in Table II, along with the midyear forecasts .of Abe-Administration and the Conaressional Budget Office. The committee would- like to take special note of the fact that this is the first time that the Board of Governors has provided a consensus economic forecast- in its discussion of monetary policy 'objectives. Previously, the Chairman (both G. William Miller and Arthur Burns) has offered his personal forecast, but not a consensus forecast Of the Board. The committee believes that. such- forecasts are an aid to the understanding of the .Board's policy objectives. The committee looks forward to a continuation of this practice by the Board of .Goveinots. TABLE II.-MIDYEAR FORECASTS FOR THE ECONOMY Administration Change from 4th quarter to 4th quarter percent: Nominal GNP Real GNP Implicit price deflator Average level in 4th quarter percent: Unemployment rate _ C.B.O. Federal Reserve Board Actual 1978 1979 1980 13. 1 4.4 8.3 9.2 -.5 9.8 10.3 6. 2 10. 3 9.9-14. 1 8- 10.0 2.0 -2.0- 0 1.9 3.9 -2--.5 8.1 8.4-10.4 7.9- 9,9 9. 5-11.0 5.8 6.6 6.9 1979 1980 1979 6.4- 7.4 6.7- 7.7 6.25--7.0 1980 8. 5-11.5 -.5- 2.0 8. 5-10.5 6.75- 8.25 Pursuant to the reporting requirements of Public Law 95-523, the Federal Reserve's report to the Congress. explained the relationship between 'the administration's goals and the Federal Reserve's plans for monetary growth, as follows: • "The monetary ranges set by the Federal .Reserve should be adequate to. finance the amount of spending in current dollars projected by the administration. nowever, the administration's forecast does seem to envision a. somewhat more favorable combination of real output and inflation than that suggested by the Board's consensus projection. The actual .price-output mix will be determined primarily by surlily conditions and by other 49--36S-79 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4 structural or behavioral characteristics of the economy. These relationships are not known with certainty, of course, and thus ma-97- different . price-output . combinations must be viewed as possible for given rates of monetary growth. "Monetary growth rates are much more closely related in the short run to nominal GNP than they are to the -division of nominal GNP between output and prices. The tradeoff between output and price might be improved, however, through the use of other policy. tools. Governmental action to eliminate regulatory or market impediments to price competition. could be helpful .in tempering inflationary pressures. So, too, could • a continuing program of voluntary wage-price guidelines, which may help in restraining the anticipatory actions that have made the wageprice spiral so intractable. The nation's ability to avoid an escalation over the next year or so—without serious recession—will depend in considerable degree on whether a means is found to overcome the tendency for workers and businesses to seek higher wages and prices in an effort to offset the effects of the income transfer associated with the rise in oil prices. Over the longer run, the ability of the nation to achieve sustained growth of real income will depend importantly on whether it can solve its energy problem." III. VIEWS AND RECOMMENDATIONS 1. Our limited ability tofine-tune the economy must be recognized Our economy is in a period of significant uncertainty because of long-term energy shortages and deep rooted inflation. The enormous and unexpected increases in the price of imported oil and the recent shortages of refined oil products pose problems of fundamental importance to the future well-being of our Nation. Increases in energy costs have exacerbated our already serious inflationary problems. Energy shortages have disrupted the economy's productive and distributive processes. They have also resulted in some postponement or curtailment of consumer purchases that has depressed aggregate demand. The result has been a pause in economic activity during the second quarter. While this pause is reason for concern about the economic outlook, there is not as yet conclusive evidence that the economy has actually entered into a recession. The committee recognizes the possibility that the economy may be entering a period of continuing inflation combined with reduced real economic activity and rising unemployment. The Administration's latest unofficial forecast predicts a higher rate of unemployment through 1980 compared to earlier projections. However, such a scenario is still uncertain. Thus, it is important to recognize the limits to our ability to fine-tune the economy in the formulation of both monetary and fiscal policies. Most forecasts of recession expect only moderate declines in real output lasting two to three calendar quarters. At this late date policies designed to forestall Or dampen a mild recession could prove to be too much too late, with the resulting stimulus manifesting itself in additional inflationary pressures. The lag between implementation and maximum effect of stimulative monetary policy has been estimated to be three to four calendar quarters. Personal income tax cuts or increases in transfer payments have relatively small effects the first year and then only moderate effects the second year. Business tax cuts, either accelerated depreciation or investment https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 5 tax credits, have small initial effects, but sizeable effects on GNP in 3 to 4 years. Thus, the maximum effects of macro-economic stabilization policies designed to provide stimulus to the economy now, either monetary or fiscal in nature, could very well occur at a time when the economy has already turned around by virtue of its own underlying strength and resiliency, or because of new programs to increase energy supplies and capital formation. The committee recommends, therefore, that the Federal Reserve continue to restrict the growth of monetary aggregates in a firm and stable manner until significant progress has been made in reducing inflation. The Fed should also restrain the growth of bank credit, and credit availability generally, so as to meet the targets set by the FOMC. 2. The slowing of inflation is still our number one economic problem The committee continues to believe that the slowing of inflation is still our number one economic priority. The pursuit of price stability is of fundamental importance to the long-run social well-being of our Nation. In the committee's view, therefore, it is proper for the Federal Reserve to pursue policies that foster financial conditions which will both tend to moderate inflationary pressures and facilitate the implementation of other national policies to control inflation. The Federal Reserve's task of gradually- reducing; the growth rates of the monetary and credit aggregates will be made more easily achievable if Federal spending is restrained and the Federal deficit reduced or eliminated. The Committee recognizes, of course, that should the economy- experience a recession the deficit may use because of declining tax receipts and rising outlays for built-in countercyclical programs. Smaller Federal deficits would reduce Federal financing requirements and thus permit credit flows to be distributed among private sector needs. The committee recognizes that aggregate monetary and fiscal policies alone have been unable to achieve price stability and full employment and production. This point is hilly recoo:nized in the HumphreyHawkins Act approved by the Congress last'', year. Coordinated .fiscal and monetary policies to deal with the problems of stagflation Must be complemented by a structural approach to policy formulation which can take into account demographic and institutional changes that have been going on in the economy and our special need for additional energy supplies and teChnology.. Overall ,tax cuts, expenditure increase, and accelerated- monetary growth are Seriously 'inadequate. Structural polities .ate needed to deal with inflation, productivity growth, age-ex inequities in the unemployment situation, changing financial arrangements, and shortfalls in energy supplies. Structural programs to help reduce inflation should take several forms. First, it is critical that we devise improved policies relating to our needs for adequate supplies of food and energy. Exogenous shock to,supplies of food and energy have had an important contributing role in our inflation. It is not sufficient to say year after year that we can do nothing about price increases generated by shortages of food and energy: those shortages must be remedied if we are to attain price stability. Second, the process of examining the inflationary effects of federal regulations must be continued, and those inflationary regulations that are not necessary revised or eliminated. Third., https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis productivity growth must be revived. Capital investment should be stimulated in order to bring into the production stream new technologies. It must be recognized that' business investments generally take several years to generate increases in productivity. Thus, the return from such Programs will not be immediate, but rather 3 to 5 years away. Those long-term rewards are worthwhile, beCause capital investment will tend to raiSe productivity'and attack inflation at the same time. Finally, ways must be sought to cut through the wage-price spiral which Continues to feed the underlying rate of inflation. The public must be convinced that 'widespread moderation in wage and price increases is necessary if inflation is to be stopped. 3 . The role of the dollar in the internationalfinance should be re-examined The U.S. dollar has played a key role in international transactions for many years. In view of the historically sizable position of the United States in international trade and finance, this role as the key international currency is 'certainly undet4andable . . In a world of flexible exchange rates and large deficits,, due largely from our dependence'on foreign oil, the role,of the dollar 'should be reexamined. International events of the 'past year'have brought into clear foCus the serious problems, for domestic monetai* policy that the Federal Reserve faces becarise of the instability .of the dollar on international exchange markets.- The fad that the dollar is fundamentally sound hos not stopped speculative pressures on the dollar. Maintaining a strong dollar is important to our economy. A decline in the value of the dollar will, in the short-run, create additional inflationary pressure domestically. ,But, increases in interest rates to attract dollars into' this country in order to prop up the value of the dollar may come at a time when the domestic economy is heading into a recession. Monetary Policy, the most flexible macroeconomic tool we have, has been partially immobilized by the role of the dollar internationally. It is the committee's recommendation that the, Federal Reserve and the Treasury not hesitate in reviewing the current role of the dollar as the key currency in international finance. Perhaps that role should be shared with the Stronger currencies of our major trading partners, especially the West German mark and the Japanese yen. Perhaps, special drawing rights (SDR's) should play ft: wider role. Other alternatiVes certainly exist and should be explored. The problem is not likely to be self-correcting because national interests are involved. But that is the precise reason Why the committee, believes this problem can no longer be ignored by our central bank and our Treasury. 4. The meaning of growth in the monetary aggregates is unclear because offinancial innovations The committee recognizes the uncertainties•concerning the meaning of growth in the monetary aggregates—Mi, M2, and M3—as those variables are currently defined. Such growth is difficult to interpret because of recent regulatory changes and financial innovations. M1 growth is difficult to predict because of ATS, NOW accounts, and https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis •7 • repurchase agreements. Growth of M2 and M3 depends on developments relating to the issuance of money market certificates issued by banks and thrift institutions. Several developments have increased the uncertainty surrounding the behavior of M1 according to the Federal Reserve's report to the Congress. The estimated effect of transfers of' funds to ATS and NOW accounts on M1 growth has been somewhat smaller than expected. Future growth of these money substitutes cannot be known with certainty because of the April Appeals Court decision barring ATS and certain other payment services as of January 1, 1980. The committee recommends that the Federal Reserve Board moveahead with its review and consideration of the appropriate definitions of the monetary aggregates. 5. The target ranges for growth in the monetary and credit aggregates. should be narrowed The committee has in several of its previous reports on the conduct of monetary policy indicated its view that the widths of the target ranges for the monetary and credit aggregates set by the Federal Reserve are too wide, making the target ranges less useful as indicators of Federal Reserve policy. The committee believes that the Federal Reserve should re-examine the manner in which the ranges are chosen. Under the requirements of section 2A of the Federal Reserve Act, the Board of Governors must report its target ranges for the monetary and credit aggregates twice each year, by February 20 and July 20. In the February report the targets are to cover the entire calendar year, that is, a one year horizon. In the July report the targets cover the current calendar year and the next calendar year, that is, two sets of targets with horizons on 6 months and 18 months, respectively. In its July 17, 1979 report to the Congress the Federal Reserve has stated its target ranges for 1979 without indicating that they imply very considerable latitude over the next 6 months by virtue of the fact that one-half of the policy period has elapsed. This is demonstrated clearly in the chart showing the M2 target range. Such wide flexibility imposes little or no discipline on the Federal Reserve's conduct of monetary policy. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis MONEY SUPPLY (M2) Actual Levels from Fourth Quarter 1976 and Fedefal Reserve Projected Growth Range from Fourth Quarter 1978 to Fourth Quarter 1979 Billions 1050 Upper bound of projected growth range: 8.0%• 1000 10.8%* • 950 5.3%* 40. 4. .•1 .000 900 8.4V * Growth rate range for the period IIQ 1979 to IVQ 1979 consistent with the 5.0% to 8.0% one-year growth range announced Feb. 1979. 4.7%* 850 I Lower bound of projected growth range: 5.0%• 800 750 IV 1976 I IQ I. II I Ill I . IV I IQ I II I III I IV I IQ t II I III 1 IV I ft..? I II I III IV `------1977-11.--"----1978--"--1979--A--1980--/' •Growth rates are seasonally adjusted cornoound annual rates. Data Source: Quarterly observat;ons .rc: .7-::,wth rates are calculated from seasonally adjusted data series of tie Board of Governor;0; the Fec:eral Reserve System as revised in May 1979, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 11111mm• • 9 • The committee recommends that the Federal Reserve narrow the target ranges for growth in the monetary and credit aggregates. This will make those target ranges more meaningful indicators of the direction which the Federal Reserve intended policy will take in the future. The committee also recommends that the Federal Reserve carefully explain the reasons for the width of the target ranges in explicit terms, including such factors as the probability of attaining the desired growth in each aggregates, and the time horizon covered by the target ranges. 6. The Federal Reserve should devote more attention to the growth of the credit aggregates The Federal Reserve has provided the Congress with its target ranges for growth in bank credit, the credit aggregate it has selected in accordance with the requirements of section 2A of the Federal Reserve Act. During each of the last two years growth in bank credit has exceeded its target range by a wide margin. Over the first half of this year bank credit was again above the target range by a significant amount, as compared with the monetary aggregates which are within the specified ranges. Even with our relatively high interest rates, credit remains readily available in the economy, which may contribute to inflationary pressures. Three of the four economists testifying before the committee indicated that the Federal Reserve should pay more attention to credit availability. Governor Wallich indicated that he found himself looking more at credit than in the past. It would, therefore, be appropriate for the Federal Reserve to examine the relationship between credit bank economic activity, to take a critical look at the various credit aggregates that might be used as policy targets— bank credit, total liquid assets, M7, and the debt proxy—and report back to the committee. This would provide the committee with a greater understanding of the usefulness of bank credit aggregates in evaluating monetary policy. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis I ADDITIONAL VIEWS OF SENATORS GARN, TOWER,. LUGAR, HEINZ AND KASSEBAUM We agree with the committee report that inflation is still our Nation's No. 1 economic problem, and we agree with the recommendation that the Federal Reserve should continue to restrict the growth of money in a firm and stable manner until significant progress has been made in reducing the rate of inflation. We also agree that restraint on Federal spending and the reduction or elimination of the Federal deficit is important because it would make it easier for the Federal Reserve to achieve that goal. Finally, we agree that the target ranges for growth in the monetary and credit aggregates should be narrowed. All of these steps are essential if the Nation is to reduce the rate of inflation and achieve stable economic growth over the period ahead. However, we believe that the committee report failed to emphasize the crucial role which fiscal and monetary policies have played in creating inflation and causing a recession. We believe that the presently high rate of inflation and the unfolding recession are due to more funda-mental factors than fuel and food shortages. In our opinion, inflation has been caused by massive Federal deficits and excessive monetary growth. Deficit spending by the Federal Government persisted far too long in the expansion to be considered .fiscally prudent, and the excessive rate of growth in money and credit has.often proceeded at a pace that is totally inconsistent with price stability. The economy has been overly stimulated in the process, and the Federal Reserve has been required to take a number of steps toward increased monetary restraint, highlighted last fall by the rather severe and almost desperate measures to prop up the dollar abroad. The excesses of monetary and fiscal policies created the inflation, and the reversals in monetary policy to compensate for those earlier excesses have laid the groundwork for recession. We do not believe that inflation can be dealt with until the fundamental sources of it have been rooted out. We recognize that supply shortfalls in certain sectors of the economy have complicated efforts. to achieve inflation-free economic growth. But, monetary policy should not attempt to compensate for those shortfalls by expanding the money supply at a rate that is clearly inappropriate under existing economic conditions. We view with particular concern the rapid rate of growth in the monetary aggregates which has occurred since last February or March. If allowed to continue, this growth in money will underwrite and accommodate the price increases associated with sectoral shortfalls, with more inflation occurring in the process. Unwinding the presently high rate of inflation will be a long and trying process that cannot be achieved in the face of a rapidly expand— ing money supply. There are limits to the, output of real, g9o4s and services'bode, within certain etors of the eeonomy or across the (10) https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4111 • board, and the hopes of reducing inflation cannot be hinged on unreasonable expectations of what is possible on the supply side. Nor do we believe that inflation can be solved through a system of wage-price guidelines or controls, no matter how elaborate they may be. The prospect for reducing inflaton lies elsewhere in prudent and reasonable monetary and fiscal policies. In our opinion, the Federal Reserve should pursue a monetary policy that is consistent with noninflationary economic growth. It should avoid excessive monetary growth and the severe reversals which such growth in the money stock necessities at a later date. Economic forecastina has not yet reached the stage where it can predict every bend and6twist in the economy, particularly those associated with the oil-pricing decisions of the OPEC nations or the weather. We believe the Federal Reserve should pursue a policy of gradually reducing its monetary targets over time to noninflatonary rates and maintaining the growth of the monetary aggregates within those targets. In our opinion, the Federal Reserve should not pursue a policy of chasing interest rates downward by an accommodative and expansionary monetary policy, particularly at a time when inflation is accelerating. Such a policy will only produce more inflation and higher interest rates in the long run. High interest rates are a reflection of the rapid rate of inflation, and interest rates can only be expected to decline when the rate of inflation has been reduced and inflationary expectations dissipated. A reduction in interest rates is an important economic goal because high interest rates are not only disruptive to our Nation's financial system but discouraging to increased fixed investment, which is needed if productivity is to increase in the future. Productivity growth has lagged considerably in recent years. Larger increases in production are needed in the future to offset higher production costs, moderate upward pressure on prices and provide meaningful employment opportunities. In all of this, it is important to recognize the role of the dollar. A declining dollar in foreign exchange markets is not in the long run best interest of the United States or its major trading partners. It feeds inflation at home by increasing the prices of imported goods, and it encourages restrictive economic policies that do not serve any useful purpose. But, the future of the U.S. dollar abroad is unavoidably intertwined with our economy and the perception which dollar holders abroad have of our Nation's ability or resolve to put its own house in order. An overly expansionary monetary policy at this point in time would, unfortunately, be perceived as a clear lack of resolve in reducing inflation. The end result will be downward pressure on the dollar abroad and heightened uncertainty over the future course of the economy at home. The economic outlook for the United States is highly uncertain. The depth and extent of a recession are unknown. But, it is clear that the recession which appears to be emerging is one that is starting with an unacceptably high rate of inflationary steam behind it. That unfortunate turn of events is the product of the mismanaged fiscal and monetary policies of the past which were based on the mistaken belief that such events could be fine tuned out of existence. Under https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 12 these conditions, we believe it is still prudent to recognize the inflationary and disruptive effects which rapid expansions in the money supply can have on the economy. A recession may not be avoidable at this point in time, but the opportunity to put the economy back on the path to inflation-free and sustainable economic growth is still within the Nation's grasp, providing that prudent and responsibleeconomic policies are adopted and pursued. JAKE GARN, JOHN TOWER, DICK LUGAR, JOHN HEINZ, NANCY LANDON KASSEBAUM. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 0 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Augoot 22# 1079 Iliseswobto Sestiamits S. ammethei Choiewe Silloormaittes ea Cesetraits, Ceestaaar, set loesetary Attain Gttes as Gewaramaat •porstiese dewS of legiesseetathiss *NOlitimitas. D.C. MIS Deer Claim* Ressathal d Um* yes Ilse yam Weer el Auseet IA iewitbo do lew to tastily git year Seesawatikeete biseasiege ea sepseogies of b.* /4,vertiu1oli O1O04,040 01111011111101 amett 3. glee will be yiliseeed to Weer se losibett ot she lewd ea lereestor 12, $tseerely, /s( Peal A, Volcker CO:pjt (#V.7) bce: Ow. lice Joust Mort mrs. Nellardi Mt/ https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Most 17, MD The Ilisassviola Senjasis 114 ismsaahal Chaistest eihommmilitessmiCemmamme4 Cesinow aid MOMONIfy Affairs COmaittes as ewenos* Ipanatima *Ms al ampsesamtaciiss ilashimehiss LG. 2015 rem Claims* lassesschsit Wag Shahs Sow pour 'totter of most 2.3 regardiag the asessiels providad by *he lems4 awn is oesseSties with your Subeimaittee's hewing, en fassio asystaishoma et CC Mahe, xt s gratifying to hem that this lap* is essiel to the Sehasmaittos, mai Urns *tali asibmis involved be bays astifiod d war oesophagi.** Wu nay be assured that rem suboammotttoolsill be hapt spoefied of any further analysis assiuste4 by the federal Saserve sa this albject, Sinceraly yourss toil A. volokor J*;jar (ff-9) bac: Governor Schultz Governor Wallich Jack Ryan Ire& Doha led lallsr Jima Seept iiisilowsk https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Anspect 17, 1979 biomerable Portnoy It. f;tifk. Jr. Woo of Sepseeestatives Ileehlestes. D.C. 20515 bear r. stark_ Thank you ter your letter of .Aiguet 2. neemeraing Nesting of funds to obtain higher imtereet rates. As former Chairman Miller indicated in his letter to sans of July 9, in adopting the interpretation repording peeled deposits the Memel followed the course that it reseeded se be um consiscent with aeintainina the deposit interest rate ceiling *fracture that is required wider Federal law. In this regard, me emetintie to believe that the prohibitior *et forth in the interrretation romirdini ehertialag of 'waling by member banks constitutes a remeemeble restraint in Iiiht of the strong Congressionel iutent to maintain the ceiling rate stru _turn. I appreciate the beset?: of your views on this matter cis SAMMIII you that the Soard will continue to support end seams. that load result in the eventual iiinatt. 1 all rata 0111111100, as that trie markets may e4trete oars efficteet0 and depositors me, Met,* the maximum .-.,-onlyetitive return on their savings. lieeeirety, Is,, Paul A. Volcker 4-An) 3 / AFC:PSP:jar( G.C. f215 bee: Mr. Pilecki Mr. Cole Legal Files (2) Mt. fletersen BENJAMIN S. ROSENTHAL. N.Y., CHAIRMAN 111 RoarriiT T. MATSUI, CALIF. EUGF...E. V. ATK.NSON, PA. FFUNAND J. ST GERMAIN, R.I. riN CONYERS, JR., MICH. H. LEVITAS, GA. NINETY-SIXTH CONGRESS Congre55 of tbc liniteb *tato LYLE WILLIAMS, OHIO JIM JEFFRIES, KANS. JOEL DECKARD, IND. MAJORITY—(202) 225-4407 3f)ou5e of IkcprOentatibet4 COMMERCE, CONSUMER, AND MONETARY AFFAIRS SUBCOMMITTEE OF THE COMMITTEE ON GOVERNMENT OPERATIONS RAYBURN HOUSE OFFICE BUILDING, ROOM B-377 WASHINGTON, D.C. 20515 August 13, 1979 (JD U=s Hon. Paul A. Volcker Chairman Federal Reserve Board Washington, D. C. 20551 :21 0-) Dear Mr. Chairman: I am writing to express my thanks to the Federal Reserve staff, and particularly to Mr. Houpt, for the excellent work that was done in preparing statistical materials in response to my request of July 24. I especially appreciate the promptness with which the materials were assembled for the subcommittee's use. These materials proved very useful and informative. If the Federal Reserve does any further analysis of this or similar data to study the banks that have been acquired by or merged with foreign interests, please convey a copy of your analysis to the Commerce, Consumer and Monetary Affairs Subcommittee. Sincerely, ( a. Benjamin S. Rosenthal Chairman BSR:tb https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis I August 17, 1979 Tha Honorable Abrahau Ribit:off Chairman Committee Se Sevonliental Affairs United States Senate Washington, D.C. 2051C Dear Chalruan Ribicoff. lhank you for your letter of July 12 conterning the applicability of Title rv of the Civil Service Worm Act, which eetablishee a sewerament-wide Senior Siecutive Service, to the board of Omemesee of the Yedamml Reeerve System. It is gratifying to be made mere of your vim that alegrees in amec-ting the Livil Service Worm Act, did mot intend Se alter the long-standing indepeedeoce of the Board. This view zoincides with the Board's interpretation of that legislation. With respect to your smegestion that the Board /teak a presidential waiver pursuant to 5 U.S.C. 3 3132(c), the staff of the Board has considered this option and diecuased it with the staff of the Office of Personnel lianagenent. Miumer, in light of recent developments, it appears unnecessary to Tmrsue this alternative. On July 30. 1979, the Comptroller General of the United States, at the request of the Office of Personnel Management, issued a ruling on wheaber the Senior Executive Service legislation was applicable to the Board. The decision was that Title IV of the Civil Service Modem Act does not apIlly to employees of the Baird, (File No. B-195418). A copy of the decision is enclosed for your r,lonveniance. The Ceeptroller General's conclusion isee based on the finding that the Pedieskal Reserve Act, as immaded, 4111preeilly grants the lewd indepemesece with regard to its swn personnel system. The specific provisions of the Federal Reserve Act must. according to the decision, be given priority over * subsequently-enected statute, such as the Civil Service Reform Act, that Is applicable gemerally to all federal agencies, unless there is a clear indication that Converse intended otherwise. The Comptroller General found no such clew intent to supersede the Federal Reserve Act. The ilocerable A,brotbes Ilibi off Pais Two lias Moon 8, 1979, the Off Lio 1Peresprial Ileasasiont fameselly eshshei$14 Oast: in arraordesee with the Comptreller OfOrneral s 000AL the heard Ls sot subject to the previsions 01 legialaties• 11111 further action by the Seettri; iler-utive the Sees4 la ,_oransctle. with title matter is esticiAateli. efforts in ?AMMON; ant samems interest in preserving the iedietseeielize of the rodattel. hieerie $pain lie greetly apprealated. Situ:Apr*1y* Pau! A. Veleiter ,z.n.losture (Comptroller General Decision (B-195418) dated 7/30/19) Li:jarivcd (f14-258) beg: Ma. Illalardi (2)i/ KA Ashton 4 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 411 .. • 0 Ali-`14.J.L-;..: A 2 ' .77 lit': • —I ...5. .N..c.7. ....r. vi, CHAIRMAN OF THE BOARD OF GOVERNORS FEDERAL RESERVE SYSTEM WASHINGTON, D. C. 20551 . Ril L FtE-S • • • .. • • • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ••:- August 16, 1979 The Honorable Henry S. Reuss Chairman Committee on Banking, Finance and Urban Affairs House of Representatives Washington, D.C. 20515 Dear Chairman Reuss: I have read with interest the second report of the House Committee on Banking, Finance and Urban Affairs dealing with monetary policy for 1979. In doing so, I also noted at one place in the report, your Committee seemed to suggest the monetary targets for 1980 were not clearly specified, and in any event, further justification of the rationale for the monetary targets would be useful. Permit me to clarify any possible misunderstanding. The FOMC set the same ranges for M-1, M-2, M-3, and bank credit for 1980 as for 1979. II.ing so, it emphasized the ranges for next year are tentative. By law, they will of course need to be reconsidered in February in the light of emerging economic conditions. But beyond that normal caveat, as the Board's mid-year monetary policy report noted, adjustments might be needed in light of legal and legislative developments affecting particularlyincluding specifically the uncertain status of NOW and ATS accounts. Moreover, the current period, S. rtly because of inflationary distortions and pressures, has seen a proliferation of new payment and investment instruments, such as money market funds. As a consequence, the Board is undertaking a funS.mental study of the aggregates, looking toward possible rede tion of money stock measures to make them more consistent with emerging S. yments practices and to improve their usefulness as guides to monetary policy. I expect that by the time the 1980 targets are reassessed, such new definitions will be available, and the revised aggregates may have some sufficiently different characteristics to affect the precise tarI.ts. While adjustments may be required for these reasons, or because of changing economic conditions, the ranges recently set for 1980 were designed to encourage a reduction in the rate of inflation, without starving the economy of money needed for a resumption of real growth. The projected growth range for M-1 would permit a slowing in monetary expansion in 1980; we are very conscious of the need over time to achieve such a slowing, as expressed by your Committee. As the Board's report • • n'y .r.:*ortizek' 4,141:114 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis lb, SasomelisIlk I Lb loos PeSi !ft ladiastaas• si(titmg teesisey hove to he imeerempeed from time to time boomese of imottemiSOMMi IhroelOpmadlear besomee of the mimed to taboo eesommt of abottsetaseleesee in ostmedot 00140110mo. lath mull to dim becoder sOirmisemea saticillated lima vete* for 1980 allow for a flow of foe& tote bogs mmil thrift imetitutiome that would eloper apple meow* to salittele the similtbility of =edit taboo buyers, bweimeemoo t sod commemere osmoistemt 1.1th rostommUmsotesseemic arworikt provided trflsttiposourea are set emmesebotod. greatly look loomerd to ceattemins the fruitful &ALSIP' 4011mmulstari Polley# sod other logics 01 motusl iebeteet s that bee op valkapit in seises 'more betmeet your Committee sad the redes el ileseeies It hoe bees holgiel to ea 01 es, Ile that spirit, Zhao* mat a espy of this letter to ugh mai* of the lisakihs Caseeittosti, StmeemelYip )5/ Paul A. Volcker SHAtl'AV:pjt cc: To all members of the House Banking Committee bcc: Mt. Azilrod Mrs. Mallardi (2) https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis tlat 16, 1979 The Mieerable Pernond J. It Goomsin Chnisnan Subsommittee on Financial tatitutiens Sepervisieet Regulation eed Laurence Affairs Ceedttee se lanking, Filaftak O *ban Mises of Isposiontativo$ ihmillapan, D.C. 201, over hairless It OMMItill: g eemeenta Thenk you for yeux letter of June 29 requestin cy and Foreign Wanowtions on three bills which weetd emend the Curren enforcemeet of its **porting Act( het') to 'emit more effective ed in, illicit activities provisions to Impede the flow of funds utilis bills you'd snood the (1.R. 40/1, ELL 4072, and 46R. 403). Thome ers to make it illegal Act to allow payment of cempeeeetioe to inform s of .-urrency without M to attempt to export or import large amount ed 3tates custom officials ins the required reports. Sa4 to allow Unit presently authorized to search for curviacy in the lourse of their search for contrand4erticlee. t in its enfor, eThs Seard assists Cue Treasury Arn-,lartmen Banks ame of State ssm at the Act by monitoring the con*li ainere cheek to see in eassection with its examinations. Board exm rency tressecties tf gloss institutions are obtaining required cur each institutieels list reports from their customer*, and they review Beard's staff hes reof persons who are easmot from reporting. The ir operation, if enacted, viewed the bills and has determined that the in enforcement of the Act. uoutd not alter or effect the Sead's role t BeeVd staff meibers are Bouever, yea may be interested to know tha ablished by the Financial currently participating in a task force est atiaa with the Troseury laatitutialla Zeadostion Council in crApar lWaa far diatas-ting violations alportwont to Swum Saminatien procad of the Act. r ossistent.e. Moon tot mo heft if we can boat furthe Sincerely /f/ ftul A. Volcker bcc: Fred Dahl, Bob Gamin, Nike Prell, Gil Schwartz CBB:JB:jmr #244 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis inseet 14* 191, 211. llenennble Soh Stoup Sum of Impresestotimies ibmiblestesi, DA* "wit. M. $teep Shenk leefir yai&t Smeihen es I IleliMet i4r4 Ss seesemesiiins er of the board•ihniumny Midway Ctmellas tes ay be essemei act Snehnee quelitteeftems as oho 10111 weeeies Sell esseideeetios by tikc sent Aim it WOO eppeinensefie tesfliU ate tall. lie sill b* In sem* It* pen whea the sehoehiess see emie, Tbs Ilserd appreciates sessiving yaw miesioeirtlas end your interest Ls tmo Camosesiwilisisory Cl. Sineerely* tc) Was Alk lisiSker 00:pjt (#14) bet: Anne Geary (wfawa. scoccace) Mrs, MIsllardi (2) ARMED SERVICES COMMITTEE BOB STUMP 3D DISTRICT, ARIZONA SUBCOMMITTEES: 211 CANNON HOUSE OFFICE BUILDING WASHINGTON, D.C. 20515 (202) 225-4576 Congroz of tbe Tiniteb a)tate5 DISTRICT OFFICE: 5001 FEDERAL BUILDING PHOENIX, ARIZONA 85025 (602) 251-6923 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis PROCUREMENT AND NUCLEAR SYSTEMS NATO li)oue of Repreistntatibeti tactoington, n.e. 20515 August 1, 1979 77.* ) G. William Miller Federal Reserve System 21 Street and Constitution Avenue, NW Washington, D. C. 20551 Dear Mr. Miller: It has come to my attention that Mr. R. D. Dunham of Scottsdala Arizona is interested in an appointment on the Consumer Advisory Council to the Federal Reserve System. a I support Mr. Dunham's nomination, as he has previously been iation member of the Board of Directors of Consumer Finance State Assoc of for Louisiana, Georgia and Florida, and is presently on the Board In addition, he has been the Directors of Arizona Association. immediate past President and current member of Executive committee the board of Nationa Second Mortgage Association and is presently on I feel that Mr. Dunham's of the Arizona Mental Retardation agency. tive 23 years of business and position of President and Chief Execu the Officer of the Wells Fargo Credit Corporation will provide Consumer Advisory Council a tremendous resource to draw on. application. Appreciate your every consideration of Mr. Dunham's Thank you. Sincerely, BOB STUMP MEMBER OF CONGRESS BS:cj Atistutt 13, 1.97 a.Ileserible Meer 14 Tates Nese. tIkepiamaststLimts Waiddi*too* D.C. 20111 *Mit Niro Tomes Theo* glee foeyir letter of USN*. 1010411111110140161$ INN awns Ito 11.00troa S. of the Iseiri•Ceesuser Advisory disessa, Yee toy 11106111.1 that Si* queliftestiese wLU feestve fell ceestillsottise ivy the illesoi sties it 'ashes the DSO sippolallsosti toe tesseit this fall. Iffe will be is Sash vlth yes AM the eeketises axe seas. The pond spipostieltee eleeetvial year reseenstilstisse *ad mot interest is tam likosesser Mitififity emumeil. timoserely. Peul A. Voleker co:pit (V-3) bee: Mrs. Mallardi (2) 4 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Aube Geary (w/copy of incoming) SIDNEY R. YATES 49#1, DicTR:cr. ILLING:s COMMITTEE • • , WASHINSTON OFFICE 230 RAYOuRN HouSF OFFICE BUILDING 20515 (202) 225-2111 CHICA,riO OFFICE, 230 S Or ARBoRN STREET 60604 (3121 353-4596 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis APPROPRIATIONS Congre55 of the aniteb 6tate5 A Ci /L3 SUBCOMMITTEES CHAIRMAN. INTERIOR FOREIGN OPERATIONS jOotige of ileproentatibess LEGISLATIVE Ulacsbington, 33.C. 20515 kX=1 FA*, August 8, 1979 r -• '77 The Honorable Paul A. Volcker Chairman Board of Governors of the Federal Reserve System Federal Reserve Building Constitution Avenue, N.W. Washington, D.C. 20551 Dear Mr. Chairman: I am writing on behalf of my constituent, Ms. Andrea R. Rozran, 4248 North Hazel, Chicago, Illinois 60613. Ms. Rozran has been nominated as a candidate for the Federal Reserve Board's Consumer Advisory Council. As you can see from the enclosed resume, Ms. Rozran has had a wide range of experience including work with consumer, volunteer, and community organizations. Most recently she has been an Associate of the Woodstock Institute and a member of the Illinois Health Facilities Planning Board and has formed a consulting firm specializing in health regulation. Ms. Rozran is a very bright and warm woman whose membership on the Council would bring much credit to the Federal Reserve Board. r •—•rt I would be most grateful if you would give Ms. Rozran's nomination your sympathetic consideration. Si cierely yours, s. /SIDNEY R. Member of ress ••• . .• .•,.,0V COvt,:. . ) ,1 - -i,(7 .•r4 ' C --- .,s, ' \r:1/.:-)... . .'r '. ) ;c-ri -,...'.:::-, e,,,',.°A,\.C 4, :: . 1 / I ;41"'!;..,....'., -;;'• ''',..,'' -" CHAIRMAN OF THE BOARD OF GOVERNORS FEDERAL RESERVE SYSTEM r' ,....'.- • • -i--\A ....•-•,-/k:• ' ''',.. 'A.:s- „:-. .• (, ...)',., -:1 .-_/, _ i'''• • ' '' • WASHINGTON,0. C. 20551 - August 8, 1979 The Honorable Jack Brooks Chairman Committee on Government Operations House of Representatives Washington, D.C. 20515 Dear Chairman Brooks: This letter relates to General Accounting Office Report B-172255 entitled "Are OPEC Financial Holdings a Danger to U.S. Banks or the Economy?" This report contains recommendations concerning the Federal Reserve and therefore requires comment in accordance with Section 236 of the Legislative Reorganization Act of 1970. The recommendations essentially provide that the Federal Reserve should inform the House Committee on Gov?rnment Operations why it does not disclose data on assets in U.S. banks, or loans by U.S. banks, for individual members of OPEC. On July 18, Governor Coldwell, a member of the Board, testified on behalf of the Board before the Subcommittee on Commerce, Consumer and Monetary Affairs of the House Committee on Government Operations on the issue raised by the GAO's recommendations. A copy of Governor Coldwell's statement is enclosed. The Federal Reserve attaches considerable importance to the principle of maintaining the confidentiality of particular accounts in U.S. banks, whether held by OPEC monetary authorities or others. The GAO assessment of the potential problems involved in large OPEC deposits with U.S. banking institutions is in general in accord with our own concerns. We would not agree, however, that the information on this subject that has been made available is not sufficient to permit appropriate analysis and assessment of any problem related to these assets. 471Mplippowzmullniallarr•eprsvPROPIIIIIIIMIPIlliarel,or••••https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis .07 717 1""., 1.!14.4-10411111M91971e'r" • alliagaidAirdb.464.4,44 , 440.41..r.ar 'At46.4.1. dd https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The Honorable Jack Brooks -2 The Federal Reserve has provided several detailed tabulations responding to specific requests by the Subcommittee; however, we do not believe it appropriate to change our current data disclosure policy. Sincerely, i S ) hia Paul A. Volcker Enclosure https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • 'typist t, 979 Xtik aka 11. liortirlf Jr. Cadet cissasat comities ea itsgo sod *was D•S• awn fot Illepvesslatotivall ilimblagtio, b.., ICSIS DOW ISPIPtla as* jos foe ploviitaist eltaiti offor cossem so Wk. 460. tie *Capitol Wet ilisessery Act of 109,4 la on satin gir 1110441: tins Camailitia ite Lt. elvatuattia Or WS Amassed Ialaistfok I so oaclostits Mon Pw/Pagni kg OM *toff at the rums* of Seim asostyoso tiess sad ti ti a is sempseibie sissio•—ths **1-9.-1C aecol*rated depossialties ivhaa• NW* this glues aim provides fox five Year oPtisseat wirtimogoffe sad W-yimir titiNk.tuas sarite-offfc it *44t. 1.14.111 ere time esveastai ofasossodotod !lomatats.fitsisiec fats lottsr imam* asse sot iffoot soxko4ly oat ase lopes* osslyaso disisiopof ay the staff. Kam kw so know it 1. e be of Arnim masistanes. Sialsomity, /5/ PV641 J4 fa;lat.Ttia /41/1411/31.1E:jar Sof, boct Mr, icicklias Ns. Ilioach 1,01'1 tdier https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Auivat rho eerssibis Miry asso Maas Maim dappreeilitettilii Vialostoos 1).c. WILS IOW /doe eihort; Seek tee your tatter et July JAI oesomettoit on the . 0 peepeest easokenits 111080 Sootlattak lee urge do beers to swift she meshilattoo oistoot , :rodleoso etoossmohe aollablo income too peast-ttiss otkli.oposo. allooey, sod piesteno. noise be siumated timet the Ikered AMMO la toogies it. 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Malian https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis klut erob4 swain ota40011, *woo fit lisparessitintves 1***Ittagura Lc4 2011 Libor Nt Migatimisr; notft awe patersise ilipma Meet* Onortabtor Mit) sad wigwag• 700.3.41 Ilkwut vim Staissimit sit dm awl* MA. *Solo sopt die Mansi .10 math do vesibibitilias 4110**astias rot -ablit hitelike taa vartotimok awlipient 0110.1.06 40zOr slimoLt ;54:astr pra Us, 0,;*pilittanity Aot And *pub iissida zone. le pen boom taamoattagly swam *slot tileacity 41.essisdasstop spy sorittoissitly tosatat the* otoska impalt two oft sesomseas s am *NO ANN de illes et irsAwtty die arikeetes Woo to woe Liston**. ofidgetlies et ta* *plat Mitt f* voinsialift saittersal re es te *xtiou1as 7 , 1110116 by "Win 110 an oit do tomes aillitoosod wow wise to *We sessixoto NNW kepis dtaig pablia https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 141h oit the renift.z.ettofte of owit eryt on. vuoisi as the opor Ili issue =hotyovand ko. 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Schultz Nrs, malaria OTC:11: jet, 26t anzetsfl* sip surpfluse *NIP mon Jof jILIIP mem Ira amnpmars alp estodies asme mak t 1 10 4110 4411811* fit3 In les . mama sop .0144 emeseqs 10 samsy ampe Ossyme empermya mai "pp smogs smonin itigimesses seepiiim op Was mohTe pai win wog Maw op po mom lownsillis it AP um my pomp Artersommemas mollmosmognom liegaimlem movsetilin 10 mosasymai * 14 Am $ow op op. elltal S Op pow allamp smimme me an pelegam S lP egoolni asMy TOW alp amionon3 is .111111411MI Olt pmerpakes mg ma ameypeas aim *emort*P7110 11412 411 pmeumpIs*pamemeaspom my aslikt is WM somyeami op az *Nov) maw ellimimMed wow vmsvampNM s Sommoll omit so 1111131,1061111P setae per ameetimelp so astmkgre Woos mom ***11000P min *0 $1110 , 14011 P* 1111011 el* al IMMO imey amo OMS Immo ;pi myrdimee isiimenses Ow"Sq itysammlad mom ors aersompow 41p armg *2 -op soospous NM* ismitialle. *7 07 moll 111101110 Sae je sompoos wpm* IMF onarrso solkowdoso fropomprog us 11 , 171**** sorlowtota Josoomsol•nip **414,1110,/ ow*** is sq_zseqs owls Ass sueles a use tal 41.11*** as ft** *7vompmemeis AI gemedomyp = s usyloyame ape smergelqmommoymm yourvirs *Pi **010804 4 , 4 4,11111Pmed sst own Tintype* is 101111*** ittletramesse sea an smirneas 'mi n -arm op moot sop ova Med is 07n Plalo 1 **11104. at *wit itag as in wig smillsapmeas mei mart amp Ana= is *Pot 11*/*1**** 1111 Atalmolos op osopoob iinempolis yawn essmot am.is mitemptamem IONNINSIMIS Saysamprot on pip say 1104155 1014* 41100100110.1 swortmilmaflMSI Ihrommy my Wm op man.* is um empasee itaimovalms winnow linowsli TIMM WU v.*00 5131. 41m7sommas. emiges ammo arommtd tionterre luta , 4 mow wio 044110111 . *PPP (eseritifetee) suelletalill al, &7T ipsesespi vesameas• *mei view ais illmpumomme iffitart 55IS mei mag owl wog yams almsmolimmmilmi ammi 5110$*311. mMIMIV40111 ammemsersadmitJ0 sow era moo TM *14,10411 ail WI https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Xis Illoseable yintl Siam eall veto isibionewoosto paws* to tine tistieliasso Use avediteee maw sow include al SWIlleellies latee osereeseell state **NW 374* and all elodoesoll Maw oletworehed otthia anodaation tot efhieli the violation see eseell. this Ms.ei pieneibine I. *wiped to imam Oat all oevreboreal eamosom, .___jut those nikeee lame hopper to fell la tio emaiaree sanoloo oilabersompet, The shwa of itsitithrig 1974, van min* memeisill l seeeidarition ost swum essitaties, itmas tittimstaly St dtpoislot dot* i bidaille4 the fissataii dot *no vould be met opliesible eonsittors. veins this *ono lame samher *0 bedi esesnaiete voila lie peetestad by the resabussonema polity bat the aleiatetvanto bunks es ameilteene seutd be haw thes it asp MI he motiat all of their Mae beak to die Mese 1.969 eflootive atop Mist *sea vise oleo veld Is tbe eittlitation peevielone el the bills to slow plifir Ito Truth is Ismails. Nit list passe de Itemiee derisig the INS Cowles sad do sisesot ileasmon• Kees* tat se hese it I son be of further essistance. siammas. /Si rimidert4 is abaft liec: Tin Incitiston Sm. Selanits are* aliallardis/ 1111:CO:jar 4111-272 FEDERAL RESERVE BANK NEw yOPPC. AREA CCFC"C Resibri. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Or NEW YORK Y_ 100-45 FZ" e44-73 VOLCft C 011 July 31, 1979 The Honorable William L. Armstrong Senate Office Building Washington, D. C. Dear Senator Armstrong: I am attaching answers to the questions you submitted to me in your letter today. I apologize for the lateness of the hour, but I hope you find then responsive. Sincerely yours, ditteadize,c Paul A. Volcker Attachment (1.a.) Many economists believe that we are now beginning a stagflationary cycle. Inflation is well into the double-digit range while real growth in the economy appears to be grinding to a halt. Under the circumstances, what do you consider to be prudent monetary and fiscal policy? Under present circumstances, I believe a prudent monetary policy is broadly reflected in the ranges for monetary growth recently adopted by the Federal Open Market Coimaittee and discussed with your Senate Committee last week. Because current problems stem in substantial part from inflation and inflationary expectations, I believe we cannot prudently depart from disciplined monetary growth withS ut jeopardizing in a still more serious way prospects for future gains in employment and productivity. I also believe the budget should be brought into balance as soon as possible, but what is possible and prudent in the short run will depend on business developments. As I suggested yesterday, a broad program of tax reduction at this particular time seems premature. I believe that this is even more true of expanded spending programs, which might add to the difficulty of achieving budgetary balance. (1.b.) What extent, if any, do you believe the federal budget deficits constrain efforts to reduce inflation? Federal budget deficits, other things equal, bring pressures on financial markets and in some conditions may private sector. bit productive investment by the For both reasons, budget deficits may make it more difficult to reduce inflationary pressures both in the long and short run. However, the speed with which we can move toward budgetary balance will depend on, among other things, shorter-range business trends. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis (1.c.) You mentioned in your testimony that it was your personal goal to slow the rate of growth in the money supply to near zero while accommodating real economic growth through increased monetary velocity. How soon do you expect to implement this policy? Over what period of time would you expect to achieve this goal? You may recall that I noted that a very low rate of monetary growth would be consistent with overall price stability. Under present circumstances, that condition must be considered an objective that can be reached only over a period of years and toward which we should move in prudent steps. The speed with which we can move will depend in considerable part on the strength of price and cost pressures arising from other economic forces. We can begin to move in that direction, but I cannot now reasonably suggest a precise date for reaching the objective of essential stability in the stock of money and the general price level. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis (2) While you served at the Treasury Department, you managed the policy of demonetizing gold. At the time, did you foresee that the price of gold would increase from $35 per ounce to more than $300 per ounce? In retrospect, was this policy wise? Do you foresee circumstances under which the United States might return to metallic backing for its currency? Would you favor or oppose such a change? I should note first that the process of demonetizing gold began before I served at the Treasury Department and continued after that period of service. In any event, I cannot say that I foresaw a price of gold at $300 per ounce. can say, and have always thought, that the combination of domestic inflation and instability of the dollar internationally could prove unsettling in terms of both expectations and economic performance. In retrospect, I believe a change in the value of the dollar was necessary in the early 1970s. However, insuf- ficient attention was paid to the importance of damping inflationary forces arising during that period from a variety of sources, among which the effects of the changes in the value of the dollar through the devaluations of 1971 and 1973 were relatively minor. I do not foresee circumstances under which the United States would return to backing the dollar by gold, and I would not favor such a change. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis (3) Last November, President Carter inititated the dramatic "dollar rescue program." This forced the United States to borrow from the International Monetary Fund for the first time since World War II. As a result, the United States will have to issue bonds I- nominated in foreign monies. This is a crcal benchmark in our economic history. At the time, many thoughtful people predicted the program would ultimately fail. They may be right. The dollar is weak on foreign exchange markets. Inflation continues unabated at double-digit levels at home. In the past three months, monetary aggregates for the Federal Reserve have exploded past its own targets. In light of this evidence, is you believe the President's program is sound? Does the program reflect that the United States has forsaken its role as the world's economic leader? As Chairman of the Federal Reserve, what would you recommend to strengthen the dollar abroad and reduce inflation at home? In light of the sharp monetary expansion, does it indicate that the Federal Reserve has not placed an appropriately tight rein on money supply? As I indicated yesterday, I was in full sympathy with the program undertaken last November. It was desirable in light of the inflationary situation at home and the instability of the dollar abroad, and it was fully consistent with appropriate domestic economic policies. Obviously, the particular steps taken at that time do not provide in themselves an adequate program for the future. Monetary, fiscal, and other measures need to be kept under continuous review, but I do believe the general direction and tenor of the measures taken were sound. And I do not believe that these actions were in any way contrary to the role of the United States as the world's economic leader. In fact, they supported that role. In regard to measures to strengthen the dollar abroad and to reduce inflation at home, I have touched upon those concerns in my testimony yesterday and in my answer t5 question 1 (above). https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis I w5uld emphasize again (3 Continued); that a successful attack on inflation and on our external problems will require actions and programs that extend beyond monetary and fiscal ISlicies. Quite clearly an effective energy program must be an important ingredient in any solution, and I am very conscious of the strong cost pressures arising both in the private economy and directly and indirectly from a variety of government programs. As you noted, there has been a sharp monetary expansion in recent mS nths. I would IS been rather short.. out, however, that the period of rapid growth has Taking the first and second quarters of this year tI.ether, there is evidence of some moderation in monetary growth. I am sure that the Federal Reserve will continue to monitor developments closely and take those actions necessary to keep monetary growth wn appropriate ranI.s. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis I (4) The press recently reported an economic minister in a major European government saying, "I hope that whoever becomes dominant will pursue a conservative monetary policy, and not delude themselves into thinking they can float the United States off its difficult energy and other economic problems by adopting an inflationary policy." What is your reaction to this advice? As I have stated, I find myself in broad agreement with the sentiment expressed in the quotation. It would be an illusion to believe that we can resolve our present dilemmas and difficulties by permitting inflation to accelerate or even by maintaining the current rate. I believe that ultimately the only sound foundation for the continuing growth and prosperity of the American economy is much greater price stability. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Although the Federal Reserve has no direct responsibilities tax policy, the Chairman of the Federal Reserve has influence on all economic decisions. Therefore, I would appreciate knowing whether you 1) favor utilization of the tax code to achieve income redistribution?; 2) favor major tax reductions this year for individuals and corporations?; 3) favor faster depreciation allowances and postponement of Social Security tax increases to spur economic growth? (5) https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis I' 1) The tax code has over a great number of years been used in part to achieve some income redistribution and I would expect that that objective will remain relevant. But also I believe we have learned that there are limits on the extent to which the tax code can be used for that purpose consistent with the achievement of other objectives. 2) As I indicated yesterday, I believe consideration of tax reductions at this point is premature. 3) Should circumstances arise in which tax reductions appear desirable-- and over a period of time I hope such circumstances will arise--I believe attention should be given to both faster depreciation allowances and some method of achieving relief from heavy payroll taxes which tend to contribute to cost and price pressures. Obviously before a decision could be reached, other desirable tax changes would also need to be reviewed, and I recognize the importance of maintaining some relationship between social security taxes and Senefits. • • A (6) To follow up on a question I asked earlier today. I understand, the Federal Reserve is limited by law to the amount of U.S. Securities it can purchase. The Federal Reserve, however, often works in concert with the Treasury to create favorable conditions to enhance the marketability of these securities. If that fails, the Reserve can, up to its statutory limits, purchase either directly or indirectly, those outstanding securities. Is it appropriate for the Federal Reserve to work in concert with the Treasury Department to create a financial climate favorable to enhance purchase of U.S. Securities? To what extent, if any, does this responsibility conflict with your advocacy of slowing the rate of growth of the money supply? You refer to the Federal Reserve working in concert with the Treasury ies. to create favorable conditions to enhance the marketability of Treasury securit While that comment may be relevant to some earlier periods of history, particularly is a in the period of World War II and its aftermath, I do not believe that it fair characterization of relationships in recent years. There are very strict e limits, recently reinforced, on the ability of the Federal Reserve to purchas securities directly from the Treasury. While the Federal Reserve does purchase d Treasury securities in the open market, such purchases (and sales) are arrange to in a manner to achieve the objectives of the Federal Reserve with respect ng monetary policy rather than to meet the convenience of the Treasury in marketi its securities. The Federal Reserve does of course consult with the Treasury ation Department about its financing activities, and I would expect such consult to continue. As I suggested in my answer to your first question, a heavy supply of in finanTreasury securities on the market can influence adversely the climate account by the cial markets generally and to some degree would be taken into Federal Reserve in arriving at decisions on monetary policy. That is one eliminated important reason why I would like to see the Federal budget deficit over a period of time. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis
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