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r http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis aii Eft 11 CONGRESSIONAL April 1983 A Collection: Paul A. Volcker Papers Call Number: MC279 Box 12 Preferred Citation: Congressional Correspondence, April 1983; Paul A. Volcker Papers, Box 12; Public Policy Papers, Department of Rare Books and Special Collections, Princeton University Library Find it online: http://findingaids.princeton.edu/collections/MC279/c460 and https://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 Library, 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 http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Congressional April 1983 409 http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis April 29, 1983 The Honorable James J. Florio Chairman Subcommittee on Commerce, Transportation and Tourism Committee on Energy and Commerce House of Representatives Washington, D.C. 20515 Dear Chairman Florio: Thank you for the invitation • to testify on May 5 before the Subcommittee on Commerce, Transportation and Tourism. However, a echedule conflict will prevent me from appearing at your hearing. I understand that your inyitation to discuss the exchange rate system and the implications of fluctuating exchange rates for international trade was prompted by some remarks I delivered in Rome recently. In this regard, I think ysoku will find helpful the remarks I made yesterday to a group of foreign exchange traders in which I discussed, among other topics, exchange rates and exchange market intervention; a copy is enclosed. These are essentially the same remarks I made in Rome. I have enclosed a cqpy of an international study released today on exchange market intervention, and a copy of a statement by finance ministers and central l..L g?IIovernors onalsoII L subject. that study and I hope that you find thesp itams useful in your Subcommittee's inquiry. Sincexely, Enclosures (4/28/83 speech and Intervention Study & Statement) WRM:EMT:pjt (#V-75) bcc: Mr. Truman Mrs. Mallardi (2)-' Don Winn will be discussing with Chairman: copy given to Ted Truman 44 NINETY EIGHTH CONGRESS ROOM H2-1S1 HOUSE OFFICE EL.W.O.NG ANNEX NO PHONE 1202)226-3160 JAMES J FLORID. NJ. CHAIRMAN eARBARA A MIXULSKI MD W J 13,t LY TAUZIN LA DENNIS E ECKART Or410 WAYNE DOWDY MISS BILL RICHARDSON N MEX. JOHN 0 DINGELL. M;CH (E)1 OFFICIO) NORMAN F LENT N DON RITTFR PA JAMES T BROVHILL NC. (EX OFF iCiO) GREGO. E LANA ER CHIEF COUNal... AND STAFF DIRECTOR 1 1 .*,..i)ou5t of ikeprt5entattin5 committer on (trial! anb Commace •- SUBCOMMITTEE ON COMMERCE, TRANSPORTATION, AND TOURISM Elasbington, D.C. 20513 April 20, 1983 "...1 c.:.) c.c., rn (=I rn c= cz) ...._ -17) . r+; Mr. Paul A. Volcker, Chairman Board of Governors Federal Reserve System 20th Street and Constitution Avenue, N.W. Washington, D.C. 20551 ' 1\.) NJ .......„. >• SIP .-T-I ...1 re, .....-, cl COS ••••• rr" : ..-••• This year the Subcommittee is holding a series of hearings on general trade policy and on related issues under its jurisdiction, including proposals to set domestic content requirements for automobile manufacturers. In the course of its inquiry, the Subcommittee's attention has been drawn repeatedly to the disruptions in international trade caused by fluctuating exchange rates. Noting with interest your remarks on this matter, as reported recently in the press, the Subcommittee wishes to benefit from your knowledge and experience in exploring policy measures that could bring greater stability into the world monetary system and international trade patterns. The Subcommittee will be holding its hearing on these issues on May 5, 1983 at 9:30 a.m. Should this date be inconvenient, we suggest the alternative date of April 28, at 9:30 a.m., when the Subcommittee will be continuing its investigation of problems facing the U.S. automobile industry. On behalf of the Subcommittee on Commerce, Transportation and Tourism, I wish to thank you for your cooperation and express my hopes that you will join us on either May 5 or April 28. James J Sub Commerce, Tran JJF:bgs http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis rio, Chairman nittee on rtation and Tourism 77 c-, ....e. I am writing to invite you to testify at a hearing of the Subcommittee on Commerce, Transportation and Tourism on issues affecting the international competitiveness of U.S. industries. fr (--- 1 -T1"--' 1 --D 7-v-! .."--• CTI "CZ. r'-, r•-1 Dear Mr. Volcker: .erely Alf 2 4.• • ocovk R, '• 'C 1. •• •• S• • "f1 [ OF THE FEDERAL RESERVE SYSTEM t 1▪ . • r • BOARD OF GOVERNORS g• • [ WASHINGTON, O. C. 20551 .• ( 0 ‘ • • - • ' '‘'C" • • •..• • • April 28, 1983 The Honorable James A. McClure United States Senate Washington, D. C. 20510 Dear Senator McClure: Thank you for your recent request for comment on correspondence received by your office from Mr. Robert Bissett of Moyie Springs, Idaho. Mr. Bissett asks several questions concerning the recent revision of Title 31, "Money and Finance". The House Report No. 97-651 on the "Revision of Title 31, United States Code, 'Money and Finance'", is an extremely good explanation of the reasons for, and meaning of, the many changes made to Title 31 during the recodification. Rather than duplicating the time and effort put into preparation of that Report, I have enclosed a copy of the Report, which you may wish to send to Mr. Bissett so he can have the benefit of its thorough discussion of Title 31. Since the Department of the Treasury exercises the authority conveyed by Title 31, that Department may be better able to answer any further questions Mr. Bissett may have concerning Title 31. I hope this information is helpful. know if I can be of further assistance. Please let me Sincerely, -(4 J. 140 Donald J. Winn Assistant to the Board Enclosure ET:GTS:HJ:AFC:vcd (V-47) bcc: E. Boutilier G. Schwartz H. Jorgenson G.C. Log 76 Legal Files (2) Mrs. Mallardi http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Action assigned Mr. Bradfield JAMES A. MC =OM MARK O. HATFIELD. OREG. COWELL P. mucking. JR.. CONN. PETE V. DOMENIC', N. MEX. MALCOLM WALLOP, WYO. JOHN W. WARNER, VA. SIORDON J. MUMPHPtEY N.H. FRANK H. MURKOWSKI, ALASKA DON NICKLES, OKLA. XINN P. EAST, JOHN HEINZ. PA. IDAHO, CHAIRMAN KENNY M. JACKSON. WASH. J. BENNETT JOHNSTON, LA. DALE SUMPCRS, ARK. WIENDEI.J- N. FORD, KY. HOWARD Id. MIETZ(NSA U , MOO SPARK M. IMATIRIPAAGA. HAWAII JOHN Id LLCM Pt imoerr. PAUL C. TVIONCIAS. MASS. DILL IIIIADLIEY. N.J. MICHAEL D. HATHAWAY, STAFF DIRECTOR CHARLES A. TRAmAtirrr, Cf41Ercx)uNsti._ DANIEL A. DREYFUS, STAFF DIRIDC10111 FOR THE MINORITY 'ZCz-titeti Zictiez -Senate COMMITTEE ON ENERGY AND NATURAL. RESOURCES WASHINGTON. D.C. 20510 March 11, 1983 Mr. Paul A. Volcker Chairman Federal Reserve System Twentieth Street and Constitution Ave., N.W, Washington, D.C. 20551 Dear Chairman Volcker: I have enclosed a copy of a letter I received from Robert Bissett concerning the Monetary System of the United States, Mr. Bissett recently read Title 31 of the United States Code, and had several questions regarding our monetary law s. I would appreciate any assistance you could provide me with in answering this request. Thank you for your attention to this matter. Sincerely, Ja Un McC:jck Enclosure http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis s A. McClure ed States Senator 41 jamE1 A. MC • CN.f G. MAI K 0. KATY CO WA. J trArty. P. 10,4 PET," V. VC...At...ICI. N. INLX. *A v. At 10r. WYO, 1.1 JAL JONA/ W. V. A a. AIL 111, VA. 1.4k1sall.mot y. N.H. ON G.E.R., N 16.1.JA• GA SKI, ALASKA LKS).1 Al LK LES, OKLA. JOHN P. LAST, NC.. r RANK 111%A.40. C.44AIPiA4A141 •1.4. POI NAY C.1.4. LA. ' 4 . J. 04 .4.14-17 JC/14 • t 1111J.4P( 44‘. ARK. LA. H. PCJD, AI 4.1.4. 0.410 / M. MI-TEEN,•1 $A AS .114/14 14. NAT 5.1...4•GA .4•A All 11.44 •&H. moNT. JOHN 14( m•sg, PAUL DILL DRADUET, S. ?..C.nifeb ,Sfalcs Zenafe COMMITTEE ON ENERGY AND NATURAL RESOURCES JOHN HL a, PA. WASHINGTON, D.C. 20510 MICHAEL D. HATHAWAY, IETArT DIrCTost C.LAPILES A. TPIALLANOT, 0.41C/1" C.LAJAISEL Y DAM CL A.. °RE vrus. IT AS r DIREcirow FOR TNE MINORIT March 11, 1983 Mr. Robert Bissett Box 38 Moyle Springs, Idaho 83845 Dear Robert: ons in your recent letter You raised some interesting questi I have United States. concerning the Monetary Laws of the r, Chairman of the Federal forwarded your letter to Paul Volcke look into your concerns. I Reserve System, and asked that he and will forward you his have enclosed a copy of my letter Also, I have enclosed a response as soon as I receive it. from the Library of Congress copy of a publication I received I hope you find it tem. concerning the Federal Reserve Sys in e please let me know. If I may be of further assistanc Sincerely, Ja /s A. McClure Una. ed States Senator McC:jck Enclosures http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis February 5, 1983 Seator James McClure Senste Office Building WaFhington, D. C. RE: Lawful Mcnetary System of United St4tes Dear Senator: 2Ct70RT*1 r e C4 , certain questions In reading the new reives Title 31 USC atly appreciated in rehave arisen and your help would be gre case, please give in detail solving them. ,If possible, in each on and title, Public law, the authority for your answer (secti as appropriate) and a photoexecutive order, regulation, etc. copy. this table what is the in d use As 2A: le Tab m fro 1. Terrns te, omitted, superceded, meaning of: Unnecessary, obsole d, expired and technical? executed, obsolete and supersede so labled have in law? What, if any, status do sections ey: As used in this subtitle 2. Terms from Subtitle IV-Mon what is the meaning of: United States coins and curUnited Ststes money, dollars, Federal reserve circulating rehcy, Federal reserve notes, national banks, legal tender, notes, Federal Reserve banks, States currency, bonds of the United States coins, United urity documents, United States United States Government, sec currency notes, and ted direct obligations of the Uni payable to bearer, payable, )), security(5117(b)), gold, States, asset, coins(5116(b)(2 18 d by the U.S., repay, may(51 domestic obligation guarantee 118(b)), exchange(5118(b)), (b)), pay out(5118(b)), deliver(5 paid, pay? em, money, payment, discharged,rede term used in revised title any of g nin mea ic cif spe the If eral meaning ascribed to it 31 is different form the gen please so indicate. s from which revised title 31 3. What is the status of the law ts of such laws as are not was derived, especially those par on? rpealed or restated in the revisi 4. 5. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Is this Act still positive Coinage Act of April 2, 1792: How does it relate to tus? law? If not, what is it's sta ? to revised Title 31? the present lawful monetary system 5118(b), what are the ren tio Sec 31, le Tit d ise rev er Und ary for making the exgulations prescribed by the Secret changes. 6. 7. 8. regUnder revised Title 31, Sec 5119(b)(2), what rules or y ulations prescribe how to present currency to the Secretar prefor redemption? What places hve been designated for sentation? ived, Under 3/ USC 371 from which revised 31 USC 5101 is der ngs are all accounts in the public offices and all proceedi acof in the courts still to be kept and had in the money t of count? Is "United States money" the present equvalen "money of account"? based on Is the monetary , system of the United States now orsilver only, in distinction from gold and silver as iginally? fully What thing(s) can the United States Government law tender for it's debts? to be accepted by 10. What thing(s) can lawfully be required nt in payment the creditors of the United States Governme of debt? by any creditor? 9. for debts to the 11. What thing(s) can lawfully be tendered es? U.S. Government by persons? by the Stat accepted in payment of debt 12. What thing(s) can lawfully be , the U.S. Government? by the States? . by silver dollar as im13. Is the present standard of value the a value of $1.29plied by revised 31 USC 5116(b)(2) with nt, 371.25 grains 2929292 a fine troy ounce or the equivale 1792? per dollar, as in the Coinage Act of April 2, "S" with one vertical 14. What is the meaning of the symbol line through the middle? ‘. in Subchapter I_ 15. What does the term "money" mean as used Deposits and Depositories, revised 31 USC? sitories have been des16. Under revised 31 USC 3303, what depo ignated?' and in view of re17. In E0 10289, as noted under 3 USC 301, bullion", "silver" vied Title 31, what do the terms "silver this "standard silver and "standard silver dollar" mean? Is lawful mondollar" the present standard of value for the s it weight? etary system? How many grains of silver doe fied? What is their 18. Have laws enacted before 1802 been codi ies of them be obstatus?' How may a complete list and cop tained. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis ay • In addition to the answers requested above, any other informption avRilable to explain the present monetary system would be appreciEted. 19. Whet is ,the relationship between the "dollar" of the Federal reserve.banks and the lawful dollar of the United States Government, if any? In view of the extensiveness of this request, please send answers as they become tvallble, if possible. Thank you for your time and effort. Sincerely, (iCdPeLi /JSg Robert Bissett Box 38 Moyle Spring, ID 83845 http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis April a; 1983 The Honorable Donald W. Riegle United States Senate Washington, D. C. 20510 Dear Senator Riegle: In my concern about answering your question this morning, I neglected to thank you for your kind words about my government service. I very much appreciated your remarks. Sincerely, MB:dmg-b cc: Miss Wolfe (2) http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis April 26, 1983 The Honorable Doug Barnard Chairman Subcommittee on Commerce, Consumer, and Monetary Affairs Committee on Government Operations House of Representatives Washington, D. C. 20515 Dear Chairman Barnard: Thank you for your letter of April 11 enclosing the report of the General Accounting Office regarding bank policies on dormant checking and savings accounts. As soon as our review of the report is completed, I will be back in touch with responses to the questions you have raised. Sincerely, 4.4.% RS:AFC:CO:vcd (V-67) bcc: Rugenia Silver (for follow-up) Mrs. Mallardi (2)./ Action assigned Mr. Garwood NINETY-EIGHTH CONGRESS DOUG FI.ARNARD, JR.. GA., CHAIRMAN RONALD D COLEMAN. TEX. JOHN M SPRATT, JR., S.0 JOHN CONYERS, JR.. MICH. ELLIOTT H LEviTAS, GA HENRY A. WAXMAN,CALIF 4 (Unarms of tbt Ztiniteb JUDD GREGG, N.H. WILLIAM F. CLINGER. JR., PA TOM LEWIS. FLA. MAJORiTY-(202) 225-4407 10otti5e of ikepregentatibeg COMMERCE, CONSUMER, AND MONETARY AFFAIRS SUBCOMMITTEE OF THE COMMITTEE ON GOVERNMENT OPERATIONS RAYBURN HOUSE OFFICE BUILDING, ROOM B-377 WASHINGTON, D.C. 20515 April 11, 1983 Hon. Paul A. Volcker Chairman Federal Reserve Board Washington, D. C. 20551 Dear Chairman Volcker: The Commerce, Consumer, and Monetary Affairs Subcommittee has been concerned for some time about the practice of certain banks of imposing dormant account service charges on customers' savings and checking accounts without The U.S. proper notice to or informed consent by the affected depositors. General Accounting Office has recently completed for the subcommittee a report (copy enclosed) on the results of a sample survey of banks' dormant account practices that documents systematically the extent of these practices nationwide. Using very conservative assumptions about the practices of survey nonrespondents, the GAO estimates that U.S. banks service charged approximately 2 million savings accounts and half a million checking accounts for dormancy in 1981, collecting a total of $16 million in such charges. Over $120 million in savings account balances were estimated to be receiving no interest because of the banks' decisions to suspend interest payments when the accounts became dormant. I am writing to request your review of the survey findings with the objective of determining whether there is any basis for further investigation or action by the Federal Reserve under its statutory responsibilities for regulating unfair and deceptive banking practices. In hearings the subcommittee held on this subject in July 1980, numerous instances of banks' practice of service charging dormant accounts without notice to the account owners, as well as some instances of banks stopping interest payments on savings accounts without proper notice, were documented. Some banks were shown at that time to be employing the service charge device to wipe off their books entirely the accounts of small children who did not maintain sufficient activity in their accounts. One witness at this hearing was a young boy whose bank had done exactly that to his savings account and had then refused to reinstate the account or refund the money, even though no notice had ever been given to him or his parents that bank service charges would be imposed that would have this effect. In order to determine whether these reported practices represented isolated cases or an industry-wide phenomenon, the subcommittee then conducted, with substantial technical assistance from the General Accounting Office, a sample survey of the dormant account practices of several hundred banks. The survey results, as compiled and tabulated by the GAO in the enclosed report, clearly show that dormant account service charging and suspension of interest on dormant savings accounts are widespread practices. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Furthermore, a serious question must be raised in most of these cases as to whether the account owners were properly informed in advance about the service riarges or interest suspensions. It seems highly likely that many or most ttpositors, if they had been adequately informed, would have avoided the service charges or interest suspensions by the simple expedient of conducting some activity in the account from time to time: making either an occasional deposit or an occasional withdrawal. There appears to be no benefit that most depositors would derive from having their accounts classified as dormant that would lead them willingly to incur these costs. Finally, it is important to note that these costs are indeed real, notwithstanding the policy cited by many banks of refunding the dormancy service charges if requested. At the banks that provided information on the number of refunds, fewer than one percent of the depositors whose accounts were service charged actually received refunds. Because of these questions about whether the banks gave proper notice to and secured the informed consent of the affected depositors, I am wrng to request the Federal Reserve's review of these survey results and the practices they report in order to assess the need for further investigation and/or regulatory steps under the Federal Reserve's statutory responsibilities for regulating unfair and deceptive practices in banking. This responsibility is assigned to the Federal Reserve, as you know, by the Federal Trade Commission Act. At the time this review is completed, please report to the Commerce, Consumer, and Monetary Affairs Subcommittee on the following questions, including a full statement of reasons for each answer: a. Is there any valid basis for banks to impose a service charge or to •discontinue the payment of interest on a savings or checking account solely because there has been no customer-generated activity in ount for a certain period of time? -.th What standards of disclosure should banks adhere to, and what specific disclosure methods should they employ, in order to assure that their deposit customers are adequately informed of these service charge and interest suspension policies? I. On the basis of the enclosed survey results, can you conclude that substantially all banks -- and especially the largest banks that account for a major portion of retail deposits -- currently employ suitable disclosure methods? d. Will the Federal Reserve undertake further investigation and/or regulatory steps regarding these dormant account service charging and interest suspension practices under its responsibilities for regulating unfair and deceptive practices in banking? I would appreciate your response by Friday, May 20. Sincerely, d ek4".%4Ad/(k Doug Barnard, Jr. Chairman Enclosure DB:dpt:b http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis April 26, 1983 The Honorable Walter E. Fauntroy Chairman Subcommittee on Domestic Monetary Policy Committee on Banking, Fi nance and Urban Affairs House of Representatives Washington, D.C. 20515 Dear Chairman Fauntroy: Thank you for your lett er of April 15 regarding hearings on the prospect s for unemployment both in the nation as a whole and in our industrial heartlan d. Vice Chairman Preston Ma rtin of the Board of Governors and Presiden t Silas Keehn of the Fede ral Reserve Bank of Chicago are both looking forward to appearin g before your Subcommittee on May 5. Sincere.ly, CO:DJW:pjt(V-71) bcc: http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Vice Chrmn. Martin President Keehn Mr. Zeisel Mrs. Mallardi (2) Copies given V. C. Martin and Silas Keehn WALTER E. FAUNTROY, D.C., CHAIRMAN EPHEN L NEAL, NC. DOUG tARNARD, JR.. GA. i CARROLL HUBBARD. JR.. KY. r BILL PATMAN, TEX. BUDDY ROEMER. LA ' BRUCE A. MORRISON. CONN. JIM COOPEI;, (ENN THOMAS R. CARPER, DEL GEORGE HANSEN, IDAHO RON PAUL. TEX. BILL McCOLLUM FLA. BILL LOWERY. CALIF. JOHN MILER, IND. U.S. HOUSE OF REPRESENTATIVES H2-109 ANNEX NO 2 WASHINGTON. DC.20515 (202) 225-7315 SUBCOMMITTEE ON DOMESTIC MONETARY POLICY OF THE COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS NINETY-EIGHTH CONGRESS WASHINGTON, D.C. 20515 41/ April 15, 1983 The Honorable Paul Volcker Chairman Board of Governors Federal Reserve System 20th and Constitution Avenue N.W. Washington, D.C. 20551 Dear Paul: On Thursday, May 5, 1983, the Subcommittee on Domestic Monetary Policy will hold hearings on the prospects for unemployment both in the nation as a whole and in this country's industrial heartland. These hearings will explore the current unemployment conditions, expectations of the Federal Reserve for unemployment this year and afterwards, how much unemployment will and will not be reduced by the currently projected cyclical recovery, and what the Federal Reserve is doing and can do to reduce unemployment. I would like you or your designee to testify at these hearings on the prospects for unemployment in the nation as a whole. I would also like one or more Presidents of the Federal Reserve Banks in regions with high unemployment to testify on the prospects for unemployment in those areas. Specifically, I would like you or your designees from the Federal Reserve Board to address the following questions: http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 1. What are the dimensions of current unemployment? How does the distribution of unemployment by age, sex, race, industry, region, and type of work in this recession compare with those of the past? What is the current status of inflation? 2. What are the Federal Reserve's projections for unemployment and inflation this year and next? What factors could make unemployment and inflation better or worse than projected? 3. To what extent will unemployment be reduced by a cyclical recovery in the economy, and to what extent will structural unemployment persist despite a cyclical recovery? 4. What is the Federal Reserve doing to reduce unemployment? How important is a reduction in unemployment among the Federal Reserve's objectives? • / Volcker Chairman • - 2 - April 15, 1983 a. I would also like the Federal Reserve Bank President(s) who testify to address these questions in regards to their Districts. Accordingly, I ask you or your designee and the Federal Reserve President(s) to appear before the Subcommittee to testify on this issue at 2:00 p.m. on Thursday, May 5, 1983, in Room 2128 of the Rayburn House Office Building. Committee Rules require that 100 copies of your testimony be made available to the Subcommittee 24 hours in advance. If you have any questions, please contact Howard Lee or Andrew Bartels at 202/2267315. Thank you very much for your cooperation. hearing on May 5. I look forward to the Sincerely yours, Walter E. Fauntroy Chairman P.S. I understand that Preston Martin and Silas Keehn have been designated by you to testify at these hearings. That is an acceptable arrangement to me. I extend my deepest welcome to both of them. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis .„ • GOViii•. BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM •c • -4 1 ;(/ [415 ; '.<. "• RAL RE.Sc '• •. • • • WASHINGTON, C. C. 20 551 April 26, 1983 The Honorable Charles E. Bennett House of Representatives 20515 Washington, D. C. Dear Mr. Bennett: Thank you for your letter of April 19 requesting comment on correspondence you received from Mr. Donald K. Jelks regarding the Federal Reserve System. I regret the delay in responding to your original request and hope that the following information will be useful. The Federal Reserve was established by an Act of Congress in 1913. As Mr. Jelks requested, I am pleased to enclose a copy of the Federal Reserve Act. The Federal Reserve is made up of twelve regional Federal Reserve Banks which are supervised by the Board of Governors in Washington. The Reserve Banks are corporate instrumentalities of the United States, and were established by Congress for public purposes. The Board is an agency of the Federal Government, and its seven members are appointed by the President with the advice and consent of the Senate. The Board is required by law to make an annual report to Congress, and members of the Board, especially the Chairman, are called upon frequently to testify before Congressional committees. The Federal Reserve is not operated for a profit and returns substantial sums to the U.S. Treasury each year. The earnings of the Federal Reserve System are derived chiefly from interest on U.S. Government securities held in the System's Open Market Account, which are acquired as a part of the System's monetary policy actions. The System returns all earnings in excess of expenses to the U.S. Treasury; in calendar year 1982 payments to the Treasury by the Federal Reserve amounted to more than $15 billion. With respect to our nation's currency, Section 16 of the Federal Reserve Act (12 U.S.C. Sec. 411) provides that Federal Reserve notes may be issued at the discretion of the Board of Governors. In fact, Federal Reserve notes are issued in response to the public's growing needs for currency. As the economy expands, currency is needed by the public in order to carry out transactions. Virtually all of the new currency issued is put in circulation to facilitate the public's need for cash. The amount of notes that may be issued is not unlimited. For example, the amount of notes in circulation is constrained by Section 16 of the Federal Reserve Act, which http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 1k. r. The Honorable Charlo q Page Two . Rennetf- requires that Federal Reserve notes be ba cked by collateral security with a valu e at least equal to th e notes issued. Th Felcral Reserve Act al e so specifies the type s of collateral that are acceptable. Due to the complex nature of our centra system, it is liffic l banking ult to Provide a brie f explanation of the mechanical process of money creation in a "f han!zing system. Th ractional reserve" erefore, I am enclosin r7 , for Mr. Jelks' information, a copy of "Modern Money Mechan ic the Federal Reserve s", publishel by Rank of Chicago, whic h Provides an uncomnlicated explanation of the process. Please let me know if I can he of further as sistance. Sincerely, (Signed) Donald 1. Win% Donald. J. winn Assistant to the Roard I.:nclosures CO:vcd (#V-73 & 82 ) bcc: http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Mrs. Mallardi CHARLES E. BENNETT TRACY D CONNORS MEMBER 3D DISTRICT. FLORIDA ARMED SERVICES COMMITTEE CHAIRMAN OF SEAPOWER SUBCOMMITTEE 'MEMBER RESEARCH AND DEVELOPMENT SUBCOMMITTEE ADM I NISTRA TIVE ASSIST ANT W DEKLE DAY lioisLATIYE ASSISTANT Congress of the lanited *t tates Uouse of littpresentattes iMashington, D.C. 20515 HOUSE DE1:10CRAT1C STEERING AND POLICY COMMITTEE CHAIRMAN OF FLORIDA CONGRESSIONAL DELEGATION SHARON H SIEGEL BARBARA L FETHEROLF DARLA E SMALLWOOD WENDY S LEAVITT ELIZABETH R. P BOWEN PATRICIA A. CANDELA GRETCHEN A. PEMBERTON J STA/. April 19, 1983 JACKSONVILLE OFFICE: 352 FEDERAL BUILDING 32202 TELEPHONE 1704-79 1-2587 Mr. Paul A. Volcker Chairman, Federal Reserve System 20th Street and Constitution Avenue, N.W. Washington, D.C. 20551 JOHN W POLLARD JR. BRENDA DONALDSON ALUSON R ABBOTT Dear Mr. Volcker: I am writing to you again regarding the matter my constituent, Mr. Donald K. Jelks, brought to my attention. Have you had an opportunity to review the matter? I will greatly appreciate your providing me with a response so that I may be back in touch with my constituent. With kindest regards, I am Sin erely, Charles E. Bennett CEB:bf cc: http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Mr. Donald K. Jelks rri C:73 "r2 rrt CD CZ, C-7) ThC'D rTl 7-0 c= ) rr1 co) r'1 : 5 C=7 rn rn cr) rr C:D ma— r‘, THIS STATIONERY PRINTED ON PAPER MADE WITH RECYCLED FIBERS , CD Copgrett of tile Nnittb *tatet it)ouge of ikepre5entatibet Rlasbington,;IC. 20515 198 February 24 1 Mr. Paul A. Volcker Chairman, Federal Reserve System Twentieth Street and Constitution Avenue NM Washington, DC 20551 Sir: The attached communication is sent for your consideration. Please investigate the statements contained therein and forward me the necessary information for reply. Please refer to the date of my letter to you in your response. Sincerely, Charles E. Bennett, Member of Congress CEB:h1c Enclosure http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis friAlj iwayc 9 c) a o Sce 7ff; /rt-e-o-t-o-'f, r seeL _4/ j r ,crz.oda-Ae .2( http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 1111t6D,INALD_ IE ZLKS BILL GRADISON 2311 RAYBURN HOUSE OFFICE BUILDING WASHINGTON, D.C. 2ND DISTRICT, OHIO 20515 TELEPHONE:(202)225-3164 MARGARET TOTTEN ADMINISTRATIVE ASSISTANT Congretic; of tije aniteb otifse of Ileprefientatibers FEDERAL OFFICE BuiLnir4G tato 550 MAIN STREET CINCINNATI, OHIO 45202 TELEPHONE:(513) 684-2456 190 EAST MAIN STREET 111: assbington, 0.4r. 20515 BATAVIA, 01110 45103 TELEPHONE:(513)732-17M April 26, 1983 Paul A. Volcker Chairman, Board of Governors Federal Reserve 20th and C Streets, N.W. Washington, D.C. 20551 Dear Paul: I am delighted to hear that you will be our guest speaker at the SOS and C & M breakfast meeting on Wednesday, May 25, 1983. .....,...., We meet at 8:00 a.m. in the Members Private Dining Room,H130 of the Capitol, and end promptly at 9:00. Our session is informal and strictly off-the-record. You can say whatever is on your mind for five or ten minutes, or longer, if you wish. We then go around the room with questions. ( t I'm looking forward to seeing you and will meet you a few minutes before 8:00 by the elevators on the first floor of the House side of the Capitol. In the meantime please let me know if I can be of assitance. Sincerely, WU/ Bill Gradison Representative in Congress BG/k http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis C=, http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis April 25, 1983 The Honorable Barber B. Conable, Jr. house of Representatives Washington, D. C. 20515 Dear Lx....-4..erratle: Thank you for your letter of April 4 recoumending Mr. John R. Riedman for appointment as a possible director of the Buffalo Branch of the Federal Reserve Bank of New York. I will see that Mr. Riedman's name is added to our "pool" of potential directors, both here and at the Bank. We maintai- a constant search for talented indiviauals for possible service in these positions, and we certainly appreciate having his biographical information to draw on in the future. Sincerely, Y144 REB:vcd (V-64) bcc : Mr. Allison Mrs. Robinson (2) (w/copy of incoming) Mrs. Mallardi Action assigned Mr. Allison BARBER B. CONABLE. JR. NEW YORK, 30TH oisTrucr COMMITTEES: WAYS AND MEANS Congraz of tbe tiniteb STANDARDS OF OFFICIAL CONDUCT tate5 WASHINGTON OFFICE: 237 CANNON HOUSE OFFICE BUILDING WASHINGTON, D.C. 20515 (202) 225-3615 11)otuse of Represkntatibeti DISTRICT OFFICES: 311 FEDERAL OFFICE BUILDING 100 STATE STREET ROCHESTER, NEW YORK 14814 likutington,33.e. 20515 (716) 263-3156 JOINT COM M ITTEE ON TAXATION http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis April 4, 1983 P.O. Box 85 10 Et..ucorr STRErr BAT4vut. NEW Yong( 14020 (716) 3,41‘6732 c3 , cr% C:7 Cao rel V:2 40 ) C:' The Honorable Paul A. Volcker, Chairman Board of Governors of the Federal Reserve System 20th St. at Constitution Ave. Washington, D. C. 20551 Dear Mr. Chairman: I would like to recommend for your consideration the appointment of John R. Riedman of Rochester, New York, as a member of the Board of Directors of the Buffalo Branch of the Federal Reserve Bank of New York. John Riedman is one of the outstanding business and community leaders in western New York. As president of the Riedman Corporation he directs one of the nation's leading independent insurance marketing firms, and has developed major office buildings in downtown Rochester. He is a director of the Security New York Corporation; a former president of the Rochester Chapter, Chartered Property and Casualty Underwriters; was a delegate to the White House Conference on Small Business and a member of the President's Commission on Personnel Interchange. Among his community activities, he is a director of the Rochester Museum and Science Center, a member of the Board of Overseers of Strong Memorial Hospital, and a director of Downtown Development Corporation of Rochester. I have known John Riedman for about twenty years and have the highest regard for his personal qualities of competence, reliability and integrity. He is well acquainted throughout the western New York business and banking community and would make a substantial contribution to the Board in western New York. Very truly yours, Barber B. Conable, Jr. C/nm April 22, 1983 The Honorable Jake Garn Chairman Committee on Banking, Housing and Urban Affairs United States Senate Washington, D.C. 20510 Dear Chairman Garn: Thank you for your lettez of April 20 regarding your Committee's oversight hearing. I am looking forward to loping with you on April 26 at 9:30 a.m. Sincerely, ••• CO:pjt (V-74) ,\ http://fraser.stlouisfed.org/ Aimmomminlr' Federal Reserve Bank of St. Louis bcc: Don Kohn 1 http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis April 20, 1933 The Honorabie MorlaG F. O'Neill, Jr. Eptaker of the Pouse of Kopresentatiye Waehinyton, D. C. 20515 Dear T. Spear: In accordance with the reeuire:tents of the Freedon of InforrIstion Act, I ar subAttin OpQrs the Annual Report of the Federcl arket Colittee of: the Federal Reserve System coverinr tht inrlenentarion of its afirinistratiye rexponsit,ilities under the Act eurinr the calenear year 1982. Sincerely, Sgaill A. Volcker iLnclostere Speaker of the House of Representatives Received By N15:crl http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis April 20, 1983 The Honorable Glenn English Chairman Subcommittee on Government Information, Justice and Agriculture Committee on Government Operations House of Representatives Washington, D. C. 20515 near Chairman English: In accordance with the requirements of the Freedom of Information Act, I at submitting the Annual Report of the Federal Open Market Committee of the Federal Reserve System covering the implementation of its administrative responsibilities under the Act during the calendar year 1982. Sincerely, §1141 A. Vo Enclosure NB:crl http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis April 20, 1983 'Me Honorable John Tower United States Senate Washington, D.C. 20510 Dear Senator Tower: I appreciated reading your highly constructive statement on the IMF and related questions. Best regards, PAV:ccm JOHN TOWER COMMITTEES: ARMED SERVICES CHAIRMAN TEXAS ,fate enate BANKING. HOUSING. AND URBAN AFFAIRS WASHINGTON, D.C. 20510 April 13, 1983 The Honorable Paul A. Volcker Chairman Federal Reserve System 20th Street and Constitution Avenue, N.W. Washington, D.C. 20551 Dear Mr. Chairman: I am enclosing for your information a copy of the remarks which I recently made during consideration of S.695 and S .502, regarding the International Monetary Fund, by the Committee on Banking, Housing, and Urban Affairs. I hope you will find these comments of interest. Sincerely, hn Tower JGT/jfh Enclosure http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis BuoGrr http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis STATEMENT BY SLNA1OR JOHN TOWER COMMITTEE UN BANKING, HOUSING AND URBAN AFF AIRS HEARING ON S.695 (RE: U.S. PARTICIPATION IN THE INTERNATIONAL MONETARY FUND), AND S,502, THE INTERNATIONAL LENDING REFORM ACT OF 1983 APRIL 11, 1983 o THANK YOU, MR. CHAIRMAN. I AM PLEASED TO HAVE THIS OPPORTUNITY TO EXPRESS TO THE COMMITTEE AND THE DISTINGUISHED WITNESSES PRESENT MY VIEWS ON THIS MATTER OF ECONOMIC AND POLITICAL IMPORTANCE. I INTEND TO SUPPORT THE PROPOSED INTERNATIONAL MONETARY FUND QUOTA INCREASE. WITH OUR OWN ECONOMIC DIFFICULTIES, IT IS TEMPTING TO SAY NO -- TO TAKE THE POSITION THAT IT IS NOT OUR RESPONSIBILITY TO BAIL OUT EITHER THE NATIONS WHO TOOK ON TOO MUCH DEBT OR THE BANKS THAT MADE THE LOANS. HOWEVER, THE ISSUE IS NOT THAT SIMPLE. THE STABILITY OF THE INTERNATIONAL FINANCIAL SYSTEM IS AT STAKE. IF NATIONS BEGIN DEFAULTING ON LARGE LOANS, THE SYSTEM COULD BEGIN TO CRUMBLE -- SENDING INTEREST RATES UP AROUND THE WORLD AND THUS EFFECTIVELY ENDING ECONOMIC RECOVERY. ADDITIONALLY, IT IS NOT IN THE BEST NATIONAL SECURIlY INTERESTS OF THE UNITED STATES TO THROW THESE DEVELOPING NATIONS INTO FINANCIAL CHAOS. BUT AT THE SAME TIME, WE MUST CORRECT THE CAUSES OF THE PROBLEM SO THAT WE DO NOT FIND OURSELVES IN THIS SAME SITUATION AGAIN. WE IN CONGRESS NEED TO LOOK AT CHANGES IN BANKING REGULATIONS DESIGNED TO MAKE FINANCIAL INSTITUTIONS MORE RESPONSIBLE IN MAKING INTERNATIONAL LOANS. THE IMF MUST WORK WITH THE BORROWING COUNTRIES TO INSURE THAT NECESSARY AND COMPLEMENTARY CHANGES IN TRADE, FISCAL, AND MONETARY POLICIES ARE MADE. THE FINANCIAL DIFFICULTIES OF THE DEVELOPING COUNTRIES ARE NOT ABSTRACT TOPICS OF INTEREST ONLY TO DIPLOMATS AND BANKERS. To THE http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -2PEOPLE OF TEXAS, THE INTERNATIONAL DEBT CRISIS IS ALL TOO REAL. THE DISASTROUS CONDITION OF THE MEXICAN ECONOMY BROUGHT ABOUT BY RUNAWAY DEFICIT SPENDING AND THE WORLD RECESSION HAS BROUGHT DEPRESSION LIKE CONDITIONS TO LOCAL COMMUNITIES ALONG THE 1,952 MILE BORDER WITH MEXICO. BUSINESS SALES IN SOUTH TEXAS ARE OFF 60 TO SO PERCENT WITH UNEMPLOYMENT AVERAGING IN EXCESS OF 25 PERCENT. TOWN OFFICIALS IN EAGLE PASS TELL ME THAT HALF OF THE LABOR FORCE IS UNEMPLOYED. WITH BUSINESS ACTIVITY FALLING AND UNEMPLOYEMNT SKYROCKETING, THE TAX BASE OF LOCAL COMMUNITIES IS RAPIDLY ERODING. IN ADDITION, THE ECONOMIC DIFFICULTIES IN MEXICO HAVE LED TO INCREASED ILLEGAL IMMIGRATION TO THE UNITED STATES. ILLEGAL BORDER CROSSINGS ARE ESTIMATED TO HAVE INCREASED NEARLY 50 PERCENT OVER THE SAME PERIOD A YEAR AGO.. IT IS LIKELY THAT MANY OF THESE IMMIGRANTS WILL SETTLE IN TEXAS, PLACING EVEN GREATER BURDENS ON LOCAL GOVERNMENTS ALREADY STRAINING TO PROVIDE SOCIAL AND EDUCATIONAL SERVICES TO THOUSANDS OF ILLEGAL ALIENS. IT IS MY HOPE THAT AS CONGRESS CONSIDERS EFFORTS TO IMPROVE THE STABILITY OF THE INTERNATIONAL FINANCIAL SYSTEM THAT WE REMEMBER AS WELL THE PROBLEMS FACED BY 11.S. CITIZENS IN THE BORDER COMMUNITIES OF TEXAS, CALIFORNIA, NEW MEXICO, AND ARIZONA. I HAVE BEEN PLEASED WITH THE LEADERSHIP EXERCISED BY THE IMF IN ITS DEVELOPMENT OF AUSTERITY MEASURES AS A CONDITION FOR EXTENDING http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -3LOANS TO THOSE COUNTRIES BURDENED BY THE WEIGHT OF EXCESSIVE DEBT. IT IS THE ASPECT OF CONDITIONALITY THAT DISTINGUISHES IMF LOANS FROM MUCH OF THE WELL-INTENTIONED BUT UNSUCCESSFUL FOREIGN AID EXTENDED IN THE PAST TO THE DEVELOPING WORLD. IT IS CRUCIAL THAT THE IMF CONTINUE ITS INSISTENCE UPON FISCAL AND MONETARY RESPONSIBILITY. AT THE SAME TIME, THE UNITED STATES MUST INSIST THAT TRADE BARRIERS IN BORROWING COUNTRIES MUST BE LIFIED, SOME SAY THAT CONGRESS AND THE UNITED STATES HAVE NO LEVERAGE WITH MULTILATERAL ASSISTANCE ORGANIZATIONS. I DISAGREE, BECAUSE OF ITS 20 PERCENT VOTING BLOC, THE UNITED STATES EFFECTIVELY HAS VETO POWER OVER MAJOR IMF POLICY CHANGES. WE HAVE A RESPONSIBILITY TO CITIZENS OF THE UNITED STATES AND THE WORLD TO EXERCISE THIS POWER TO ENSURE THAT THE CONDITIONS OF IMF LOANS MAKE GOOD ECONOMIC SENSE. WHILE THE 'IMF SETS OUT CONDITIONAL MEASURES IN ORDER FOR A COUNTRY TO QUALIFY FOR ASSISTANCE, WE IN THIS COMMITTEE MUST DEMAND RESPONSIBILITY ON THE PART OF OUR DOMESTIC BANKS INVOLVED IN LENDING ABROAD. IN MY VIEW, THE BEST REGULATION, IF IT IS ALLOWED TO FUNCTION, IS THE FREE MARKETPLACE. HOWEVER, IN OUR HIGHLY REGULATED FINANCIAL SYSTEM, THE FREE MARKET HAS ONLY IN RECENT DAYS BEGUN TO COME INTO PLAY. [HEREFORE, IT IS MY BELIEF THAT THIS COMMINTTEE SHOULD REVIEW THE MYRIAD OF LEGISLATIVE AND REGULATORY PROPOSALS BEFORE US DEALING WITH INTERNATIONAL LENDING PRACTICES AND ACCOUNTING. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 14I BELIEVE THAT THE POSITIONS TAKEN BY CHAIRMAN VOLKER, CHAIRMAN ISAAC, AND COMPTROLLER CONOVER IN THEIR PROPOSALS TO REVIEW THEIR REGULATORY ROLE IN OUR BANK'S INTERNATIONAL LENDING ACTIVITIES HAVE A GREAT DEAL OF MERIT. SEVERAL OF THESE PROPOSALS HAVE APPEAL, WHILE OTHERS, IN MY VIEW, SHUT THE ISSUE OF FREE MARKET DISCIPLINE COMPLETELY OUT OF VIEW, THE IMPORTANT POINT HERE IS THAT WE ACT PROMPTLY ON THE BEST COMBINATION OF THESE MEASURES FOR THE OVERALL BENEFIT OF THE SYSTEM. AS WE PROCEED TOWARD MARK-UP ON 1HIS CRITICALLY IMPORTANT MEASURE, I URGE EACH OF MY COLLEAGUES TO REVIEW THIS REQUEST WITH PRIMARY CONSIDERATION NOT TOWARD PLTROBRAS, PEMEX, OR THE CHASE MANHATTAN, BUT INSTEAD TOWARD THE WELFARE OF THE AMERICAN CONSUMER AND TAXPAYER. 1y4-6 I SAY TO YOU THAT SUPPORTING THIS QUOTA INCREASE IS NOT INCONSISTENT WITH THESE GOALS. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis April 20, 1983 The Honorable Charles F. Crassley Chairman Subcommittee on Administrative Practice and Procedure Committee on Judiciary United States Senate 20510 Washington, D. C. Dear Chairman Grassley: In accordance with the requirements of the Freedom of Information Act, I am submitting the Annual Report of the Federal Open Market Committee of the Federal Reserve System covering the implementation of its administrative responsibilities under the Act during the calendar year 1982. Sincerely, SZPaui _ — Enclosure NB:crl WoIcher http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis April 20, 13 The oncrshle Ge!prge g. W. rmsh President of the U.S. Senate 2O510 WasIlin;!ton, :4;. C. Denr r. Vice Prenient: In sccoresnce with the requirerenta of the FreeAom of Inrnrtion Act, I Oper A:r. subfAttinc! the Annwil Fleort of tho Federal yAr%et Coplittoe of the Fe4lera1 Reserve SyGtet, coverinE the irflidementmtioa of irs ad:Anistrstive resrnnsibi1itie6 under the Act during the calenrlar year 1982. Sincerely, S/Palil A Volcker_ tnclosure President of the U.S. Scnnte Received Ey NB:crl April 20, 1983 The Ponorable David Pryor nnited States Senate Washington, D. C. 2061n Dear Senator Pryor! ding Thank you for your letter of March 21 recommen Advisory Mr. Jack F. Adams for a position on our Consumer Council. ns will I can assure you that Mr. Adams' qualificatio cts new Council receive full consideration when the Roard sele viduals whose members this fall to fill the positions of indi terms expire in December 1983. number of The Board has been gratified at the large d for considerqualified persons whose names have been submitte eciate having ation in previous years, and we very much appr rest in the your recommendation. Thank you for your inte Council. Sincerely, §iPaill A. Mckec CO:pjt (#V-53) bcc: Mrs. Mallardi (2) Mrs. Bray (w/copy of incoming) http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Action assigned Mr. Garwood DAVID PRYOR causirrrerst ARKANSAS AGRICULTURE. NUTRITION. AND FORESTRY EknLorNic Russzu_ SENArz WAS/41,40-mm. D.C. 20510 FINANCE 'Zienifeb -Vales Zertate (202) 724-2353 SPECIAL COMMITTEE ON AGING SELECT COM M 1TTEE ON ET H ICS WASHINGTON. D.C. 20510 ARKANSAS OFTICE/ 3030 FEDERAL BuiLotria Lrnix ROCK, ARK/441AS 72201 (1501) 378-6336 http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis March 21, 1983 , t, sq cz, The Honorable Paul A. Volcker Chairman Federal Reserve System 20th and Constitution Avenue, N.W. Washington, D.C. 205S1 C7 CD Dear Mr. Chairman: T his is to recommend Jack E. Adams, Professor of Economics at the University of Arkansas at Little Rock, who is currently interested in being named to the Consumer Advisory Council of the Federal Reserve. Professor Adams is a man of wide reputation, not only on the campus of the University but throughout the state as well. He is interested in the workings of the Federal Reserve and would bring the point of view of both an expert and a consumer. His qualifications are spelled out in his communications with your office, and I am adding to these my own recommendation and encouragement. Please let me know if there is further information I might supply. With best wishes and thanks for your attention. cerely (A" David Pryor DP/dhk ,l(r- ••••••.. .• of GOvt • BOARD OF GOVERNORS OF THE .O .-, .-A ..•`''A, 11 2: i- • ..."'.. (-). FEDERAL RESERVE SYSTEM WASHINGTON, D. C. 20E51 PAUL A. VOLCKER April 20, 1983 CHAIRMAN The Honorable Claiborne Pell United States Senate Washington, D. C. 20910 Dear Senator Pell: Thank you for your letter of February 22 relating the concerns of the Rhode Island Bankers Association regarding the procedures used by the Treasury Department in claiming refunds from Rhode Island banks for amounts paid out for government checks subsequently found to have been cashed improperly. The Bankers Association is concerned that in many instances the returned checks were, in fact, cashed in accordance with Treasury Department procedures, and the checks are being returned up to two years after they were cashed, making it difficult for the bank to locate the person who cashed the check. The Federal Reserve Banks handle government checks as fiscal agents of the United States, under the direction of the As fiscal agents, the Reserve Banks Secretary of the Treasury. are required to follow the rules, regulations, and policies established by the Treasury Department in the processing of government checks. Treasury's right to recover funds previously paid out for a check bearing an unauthorized endorsement has been recognized by the courts. (See Clearfield Trust Co. v. United States, 318 U.S. 363 (1943).) This is now part of federal law. The Treasury's regulation in this area provides that -The presenting bank and the indorsers of a check presented to the Treasury for payment are deemed to guarantee to the Treasury that all prior indorsements are genuine . . . . (31 CFR Sec. 240.4) This guaranty is similar to that which the Uniform Commercial Code places on endorsers of checks drawn on private sector banks (U.C.0 Secs. 3-417, 4-207). If the check is discovered to have been stolen and the payee's endorsement forged, the collecting banks are deemed to have breached their guaranty to Treasury. Consequently, the Treasury is entitled, as is any private sector payor in similar circumstances, to a refund. This rule is based on the principle that in such cases the person who took directly from the forger should bear the loss. In order to make depository institutions aware of their potential http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis The Honorable Claiborne Pell Page Two liability, the Treasury has printed on the back of each government check a warning that the institution should require proper identification before cashing such checks. Due to the inherent nature of the process, in many instances there are substantial delays before a refund is requested from a depository institution. This delay is due to the fact that a claim for a refund is not made to the depository institution until the payee himself has indicated that he had not received the check or until the Treasury has been notified that the intended payee died before receipt of the check. Until that time, the Treasury is unable to determine that there has been a forged or unauthorized endorsement. Under federal law, a payee may submit a claim up to six years after the date that the check was issued (31 U.S.C. Sec. 3702). The Treasury advises that most delays in beginning a claim for a refund against the presenting bank are caused by the delay in receg the claim from the payee. Further, the law provides the United States with at least six years from the date a check is presented to it for payment to make a claim for a refund against a prior endorserSec. 3712). Generally, the Treasury reclaims funds directly from the presenting institution and does not seek the assistance of the Federal Reserve. If, however, the endorsements on the check are illegible or unclear, the Treasury may ask the appropriate Reserve Bank to identify the presenting institution and forward the request for a refund to that institution. The Reserve Banks usually are able to perform this service within two business days of the time of the Treasury's request. I am advised that the Treasury is taking steps to enable presenting banks to identify prior endorsers so that they may enforce their own rights to refund under the Uniform Commercial Code. The Treasury provides a copy of the check and the payee's claim, where the payee has filed a claim. Recently, Treasury has been able to improve the quality of microfilm check copies provided to presenting institutions. I also understand that a special unit of Treasury's Bureau of Government Financial Operations has been set up to process requests from bankers for information regarding reclamations, and that the Treasury is considering proposing legislation to shorten thS time in which a payee whose check has been stolen may file a claim. The Treasury is also actively promoting the use of direct deposits of payments by electronic funds transfer to reduce claims resulting from loss and theft. In the long run, I believe that this latter approach is a m5st promising one. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis The Honorable Claiborne Pell Page Three kers AssociaI can understcznr. the RIlo'le Island Ban some difficult tion's concern with this issue. There are orts being made to prolems involved and I hope that the eff utions that accept reduce the exposure of dupository instit government checks will be successful. lincerely, S/Paul A. Vo!cket JRA:GTS:DJW:pjt (#V-34) bcc: Gil Schwartz Joe Alexander Legal Records (2) Gene Snyder Elliott McEntee Mrs. Mallardi (2) http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Action assigned Mr. Allison CHARLES MC C. MATHIAS, JR.. MD., CHAIRMAN MARK O. HATFIELD, OREG. WENDELL H. FORD, KY. HOWARD H. BAKER, JR., TENN. HOWARD W. CANNON, NEV. JAMES A. MC CLURE, IDAHO CLAIBORNE PEU-, R.I. JESSE HELMS, N.C. ROBERT C. BYRD, W. VA. JOHN W. WARNER. VA. DANIEL K. INOUYE, HAWAII ROBERT DOLE, KANS. JOHN B. CHILDERS, STAFF DIRECTOR ANN B. COOK. CHIEF CLERK WILLIAM MC WHORTER COC.HRANE., MINORITY STAFF DIRECTOR 'ZICnifeb ....TArtfez ...Senate COMMITTEE ON RULES AND ADMINISTRATION WASHINGTON. D.C. IMH0 February 22, 1983 y The Honorable Paul A. Volcker Chairman Board of Governors of the Federal Reserve System 20th Street and Constitution Avenue, NW Washington, D.C. 20551 Dear Mr. Chairman: The Rhode Island Bankers Association (R.I.B.A.) has recently brought to my attention their concern over the procedures followed by the Federal Reserve System and the Treasury Department in handling of federal government checks which are determined to have been forged or chashed illegally and are returned to Rhode Island banks. The Bankers Association complains first that in many cases the returned checks were in fact cashed in accordance with U.S. Treasury Department procedures. Secondly, the Association complains that the questioned checks are being returned to their members from one to two years after cashing, making it difficult for security personnel to trace the check to its source. The Bankers Association say they have been unable to obtain relief from these problems from either the Federal Reserve System or the Treasury Department and that the continuing cost of these problems to the member banks in Rhode Island is about $400,000 a year. I would appreciate your comments on this situation and your recommendations on how these problems might be resolved. I am making a similar request to the Treasury Department. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis With every good wish. Ever sincerely, aiborne Pell • ..... CON*. BOARD OF GOVERNORS A. OF THE •0 • -13 /1 FEDERAL RESERVE SYSTEM • • • —4 I. „ fe, .as WASHINGTON, 13. C. 20551 .': .i.. ,...) 4<.• .. PAUL A. VOLCKER • • kAL RES • • . •..• • CHAIRMAN April 20, 1983 The Honorable Jack Kemp House of Representatives Washington, D. C. 20515 Dear Mr. Kemp: Thank you for your recent letter on lending by American banks to developing countries and the relationship of the external financing problems of some of those countries to the IMF legislation now before Congress. Your letter raises several important issues. I am pleased to respond to your . questions and provide you with my evaluation of the ways in which the long -run interests of the United States can best be served in this area. The plan you have outlined for dealing with the accumulated debts of selected developing countries appears to have several elements: 1. The debts of these countries should be reduced relative to their exports. 2. The debt service of these countries should be reduced by consolidating short- and medium-term loans to them into longer-term loans, and granting a grace period on the repayment of principal. 3. Interest payments on the consolidated debt would be maintained, and part of this stream of income, as well as other income, should be diverted by the banks to setting up reserves commensurate with their foreign exposure. The arrangements that have been put into place over the past year on a case-by-case basis to deal with the external financial problems of some of the major borrowing countries have a substantial similarity to some elements of your plan. In the cases of Argentina, Brazil, and Mexico, bank lenders have entered into restructuring arrangements governing the public sector, external debts of these countries. The precise structure and terms of the arrangements have differed, as they should, in individual cases, reflecting differences in the situations of the borrowing countries. A common concern in each of these arrangements has been to structure them to ensure as far as possible that their economic terms are realistic. Debt burdens are reduced sharply in the short run, and those burdens shrink in the medium term in relation to the debt servicing capacities of the borrowers. The International Monetary Fund has played a major role in assessing the economic http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis he' The Honorable Jack Kemp Page Two viability of these arrangements. A frequent feature of this ent approach has been a restructuring of maturities so that curr ipal payments (coming due over various time intervals) of princ on most public sector, external debt were postponed (for various time periods). Another main feature is that interest payments are to be maintained. While the actions that have been taken with respect to some of the major borrowing countries have been broadly conersistent with certain elements of your plan, important diff ences are also involved. One of the major differences with your proposal is the process by which the borrowers are expected to adjust their external accounts. In your plan they would be expected to keep up their interest payments, but not es to increase their debts. In simplest terms, this rule impli a that these countries must be in current account balance; as first approximation, their trade surplus must cover their owers, required interest payments. For the three major borr Argentina, Brazil, and Mexico, interest payments to banks ned amounted to about $20 billion in 1982, and their combi these current account deficit was about $21 billion. In 1983, be about countries' interest payments to banks are expected to and $18 billion, reflecting lower interest rates, more debt is higher spreads. Their combined current account deficit rest expected to be about $12 billion, reflecting lower inte 1983 payments and a larger trade surplus. If the expected icurrent account deficits of these countries had to be elim nated while interest payments are maintained, their trade would surplus would have to be increased significantly, which imply a devastating economic and political burden on these already countries on top of the adjustment burden that they are were carrying. Alternatively, if required interest payments nt of reduced by writing off the underlying debt, the adjustme half or claims on these three countries--on the order of oned objectwo-thirds--would hardly be consistent with your state banks' fortive that "a gradual reduction of the ratio of the in eign exposure to their equity must not result either d domestic unintended diminution of the banks' ability to exten countries." loans or in a sharp economic contraction in debtor e that the Thus, I believe it is both realistic and appropriat as they commercial banks continue to lend to these countries adjust their economies. At the same time, such lending by banks to these of the past countries must be reduced from the substantial pace en these counseveral years. Under the plans worked out betwe s would intries, the IMF, and the lending banks, bank claim plans, the crease, but on a much reduced scale. Under these http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis The Honorable Jack Kemp Page Three is at risk in fraction of banks' assets and capital that icing their debts countries that are having difficulties serv ntially, the will be gradually and steadily reduced. Esse gnize as a key breathing space for adjustment that you reco a cessation of element in this situation requires more than ent and careful principal repayments--it also requires a prud economic activity in maintenance of the credit lines that keep these countries alive. me concern Another aspect of your proposal that causes ion of a generalis that it seems to contemplate the applicat s. You mention ized formula to a broad spectrum of countrie tries," but it is that it would apply to "selected debtor coun or by whom. These not clear how the selection would be made, out to be exceedingly troublesome external debt situations turn countries, the debts complex and varied. Within the borrowing also by private are owed not only by the public sector, but s for keeping up borrowers who have different possibilitie U.S. banks' claims service on their debts. About one-third of of claims on non-bank on non-OPEC developing countries consists third is to banks, and borrowers in the private sector, another in the public secless than a third is to non-bank borrowers e country are intor. Moreover, banks of nearly every larg -chartered banks volved in these lending activities--U.S. ms of banks on the account for less than 40 percent of the clai , these countries have major developing countries. In addition require a constant flow significant intergovernmental debts and r external transacof credit to finance their trade and othe February 2 testimony tions. (I am enclosing a copy of my Finance and Urban' before the House Committee on Banking, ussion in the text and Affairs which presents a detailed disc international debt situaattachments of the dimensions of the tion and efforts to deal with it.) to envision the In these conditions, it is difficult uniformly applied on a process by which your approach could be eve, to deal with each multilateral basis. It is best, I beli will manage their borrowing country on its own merits--some luckier, perhaps, in affairs better than others, some will be r events beyond their their experience with oil prices or othe d in dealing with control, and some will be better organize their creditors. , in putting We need to be very careful, in my view borrowers and lenders to forward proposals that might encourage ional scheme for setbelieve that some multilateral internat of meeting obligations tling debts will provide a low cost way schemes are likely to be and avoiding losses. Such generalized http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis The Honorable Jack Kemp Page Four inherently inequitable in their application to individual borrowers. They would also establish precedents that could inhibit the flow of international credit for decades, as was the case after the debt problems of the early 1930s, and inhibit the recovery of the world economy. That is why I believe that the best course is to support the efforts of the parties directly involved to work out solutions, but not to substitute a government-imposed solution for the normal negotiating process. My third concern with your proposal is that it provides no role for the International Monetary Fund. Although one of the main elements of your approach is to reduce the debts of these countries relative to their capacity to service them, you do not provide a mechanism to bring about such adjustment smoothly, which is in the interests of the borrowers, the lenders, and all the participants in the international financial system. The IMF is such a mechanism. It provides temporary financial assistance to the borrowing country; it works with the country to establish an economic stabilization program that is consistent with an open international economic system; and it sometimes works with the country's creditors to ensure that the overall financial program is realistic and viable. Once such an IMF-approved, stabilization program is established, if the country fails to take measures leemed necessary to correct its imbalances, it cannot count on further financing from the IMF, and must expect private financing also to dry up. Thus, the role of the Fund, far from encouraging a continuation of imprudent lending, is to support a continuation of financing only as long as the performance of the borrower is satisfactory within the context of an overall stabilization program designed to establish a sustainable external position. The process of financial and economic adjustment is complex. It is likely that most borrowing countries will prove capable of carrying their current debts and even larger debts, given their potential for growth. But others may not be able to service their debts without interruption, and banks may be required to recognize this impairment of their assets and their earnings capability by writing off assets and taking charges against their earnings. I am enclosing a table that will convey the general picture of the relationships of claims on nonOPEC developing countries to the capital of selected groups of U.S. banks. Given the hypothetical nature of some of your questions, and the wide range of possible economic developments over the next several years, I do not believe it is prudent or realistic to be more specific. As you suggest, the major lending banks are generating substantial earnings. At the same time, their claims on developing countries are substantial. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis The Honorable Jack Kemp Page Five For instance, the enclosed table shows that the nine largest U.S. banks have claims on developing countries on the order of $60 billion; those same banks had earnings after taxes on the order of $3 billion in 1982. Consequently, the fraction of debt that might be written off in any year without a major impact on the equity of these banks is quite limited. The recent external financial difficulties of some international borrowers have raised a number of important questions about the supervision of international lending activities of U.S. banks. In response to these concerns, the federal banking regulators submitted to the Senate and House Banking Committees a "Joint Memorandum" presenting a five-part program for improved supervision and regulation of international lending. (Copies of the Joint Memorandum and my April 11 testimony on the proposal before the Senate Committee on Banking, Housing and Urban Affairs are enclosed.) In light of your comments on the subject, I would note that one element of the proposed program is the establishment of a system of provisioning against certain country exposure; when a country has been unable to service its debt for a protracted period of time, a bank would be required to recognize the diminished quality of the assets represented by most claims on that country. The basic premise of the proposed program is that international lending by banks is in the U.S. interest; it should not be abruptly curtailed, but that banks should maintain adequate financial strength to deal with unexpected contingencies and diversify their risks. Indeed, I believe it would be a mistake to downgrade too drastically the great bulk of the foreign lending by U.S. banks. There have been very few cases of outright default on foreign credits since the 1930s, and I believe the borrowing countries recognize the great advantages of maintaining their credit ratings. The greater part of the accumulated debt of non-OPEC developing countries is accounted for by half a dozen countries that have greatly increased their economic strength over the past decade. Once a they get back on an even keel, I would expect them to resume more normal--albeit somewhat slower--rate of expansion of external debt. Just as with most successful businesses that is expand their use of invested capital, the main consideration that the borrower makes productive use of the capital it employs. On the whole, the main borrowers have done reasonably well on that score. A separate question, involving other considerations, is the debt of Communist countries. I have not dealt specif ically with banks claims on these countries, because they are http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis The Honorable Jack Kemp Page Si:: tered banks are concerned. relatively small as far as U.S.-char Communist countries by At the end of last year, total claims on of which $2.2 billion were U.S. banks were about $6.2 billion, . on Yugoslavia and $1.6 billion on Poland agreement, and a On the whole, we have many points of In particular, I share few important points of disagreement. rgies to ensuring that your view that we should devote our ene a sustainable equilibour efforts to assist the transition to uld not be swallowed up rium of world growth and stability sho ely because of that in a new cycle of crisis. It is precis of the Federal Reserve concern that the Board of Governors stantial strengthening of System has strongly supported a sub ernational Monetary Fund. the financial resources of the Int ources of the IMF does The case for increasing the financial res need to support bank lendnot fundamentally rest on either the need to "bail out" ing to a few of its members or on the not significant borrowers banks--many of the IMF's members are 's central role in the from banks. That case rests on the IMF international monetary system. ader than dealing The IMF's role is considerably bro ing problems--though those with today's critical external financ elerate action to increase the provide the immediate need to acc ger run, the Fund is an resources of the Fund. Over the lon free and open international important influence in maintaining l flows among countries, channels for financial and commercia countries for carrying for establishing rules of conduct among guiding domestic polion their echange rate policies, and for t reduce their international cies of countries in directions tha as borrowers in private imbalances and enhance their viability benefited over the has capital markets. The United States n trade that has been years from the expansion of our foreig tered by the Fund, and we possible in the sort of climate fos is a sudden contraction of stand to lose a great deal if there ed external financing difworld tradE resulting from intensifi kets. From that perspective, ficulties in some of our major mar dangerous to fail to approve it would be unwise, imprudent and resources, since U.S. the U.S. share in the IMF's increased to the IMF's continued support and leadership are essential effective functioning. your longer-run While I sympathize with many of international financial our of ng oni cti fun the ut abo ns concer ental reform of that system dam fun a ise adv not ld wou I , system supporting the efforts of at this time. This is a time for gradually absorb any misalloand te oda omm acc to cEs for market take measures to lessen l wil and can We . dit cre k b,:n cation of http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis The Honorable Jack Kemp Page Seven . Our immethe possibility of a repeat of recent experience crisis that diate problem, however, is to avoid a financial has just might interfere with the economic recovery that the IMF's begun. To accomplish this, I am convinced that should be resources must be increased, and that the banks nable scale allowed to continue to lend abroad on a reaso interests. consistent with the protection of their long-run Sincerely, Enclosures SP:EMT:vcd (i/V-56) bcc: Mr. Pizer Mr. Truman Mrs. Mallardi (2)./ IDENTICAL LETTERS SENT TO: http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis CONGRESSMEN LOTT, LEWIS AND PAUL; SENATORS HUMPHREY, EAST AND GOLDWATER Selected Data on U.S. Banks' Claims on Non-OPEC Developing Countries (Billions of dollars) Dec. 1977 Total claims on non-OPEC developing countries , 1/ All Reporting Banks-Dec. Dec. June 1979 1981 1982 Nine Largest Banks Dec. Dec. Dec. June 1977 1979 1981 1982 Next Fifteen Largest Banks Dec. Dec. Dec. June 1977 1979 1981 1982 46.9 61.8 92.8 98.6 30.0 39.9 57.6 60.3 8.8 11.3 17.4 19.0 a. Banks 13.0 22.1 31.6 33.0 6.5 11.6 15.8 15.9 3.3 7.6 7.5 8.2 b. Public Sector Nonbank borrowers 16.4 19.3 28.7 31.6 10.5 14.3 20.6 22.7 3.1 3.3 4.0 4.3 Private Sector Nonbank borrowers 17.6 20.4 32.6 34.0 13.0 14.0 21.2 21.7 2.5 6.0 5.9 6.5 Reporting banks' total assets 717.1 941.3 1,164.5 1,192.4 372.5 486.1 564.6 566.3 145.0 188.1 233.8 241.1 Reporting banks' total capital 40.9 49.9 62.7 66.2 18.4 21.9 26.1 27.1 8.3 10.1 12.2 12.7 6.5 115 6.6 124 8.0 148 8.3 149 8.1 163 8.2 182 10.2 220 10.6 222 6.1 106 6.0 112 7.4 143 7.9 150 C. Claims as a percent of Total assets Total capital 1/ All U.S. banks reporting the Country Exposure Lending Survey; 167 banks in the survey for June 1982. • Note: Details may not add to totals because of rounding. • http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Mrs. Mallardi Action assigned to Ted Truman (cc: Mike Bradfield) Congre555 of tbe tate5 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM 1°83 MAR 28 AN 9: 10 Wassbington, 33.C. 20515 EIVED OFfCI11 CHAIRMV March 23, 1983 The Honorable Paul A. Volcker Office of the Chairman Federal Reserve System 20th & 21st Streets, N.W. Washington, D.C. 20551 Dear Mr. Chairman: We question the wisdom of increasing by $8.5 billion the U.S. commitment to the IMF. Further lending by the IMF to nations in default or verging on default will encourage further lending by private American banks. It seems illogical to us for the Administration to advocate a heavier debt burden as the salvation of nations whose export surpluses are unlikely to be sufficient to service old debt, much less new debt. It seems illogical to us to advocate further lending to overborrowed nations by overextended American banks as a means of strengthening the balance sheet of our banks. We suggest that a better alternative is to deny the IMF's $8.5 billion request and let the creditors work out repayment with their debtors. In certain cases, of course, some loans would have to be written off. This would lead to lighter debt service for debtor nations and more realistic bookkeeping by banks, a healthier situation in both cases. U.S. official funding, if any, should be self-liquidating, temporary and preferably bilateral. If, instead, the U.S. increases its funding of the IMF and thereby pursues a policy of encouraging more lending by overextended banks to over-indebted nations, we foresee a vicious circle. Repeated threats of default will continue exerting constant pressure on the western governments and private lenders to extend ever more credit. The more intense this pressure, the more blatant the disregard for U.S. interests--economic, financial, political, strategic and diplomatic-is likely to be. Transfer of real resources from the United States to debtor nations--by means of direct government credits and lending by private banks or through the IMF--can continue for a certain period of time, as it did on a massive scale in 1982. Ultimately though, if widespread moratoriums are to be averted, the temptation to defuse http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis The Honorable Paul A. Volcker March 23, 1983 Page Two the situation through the time-tested method of inflation may become irresistible. Needless to say, the consequences of such a course of events for the U.S. economy would be calamitous. It is obvious that the pressures to increase lending to debtor countries are strengthened by the threat of default. Major U.S. banks, and by extension the U.S. government in its capacity as effective guarantor of the integrity of the domestic banking system, have become hostages of their debtors. In this scheme of things, the threat of default has become equivalent to blackmail, requiring us to pay ransom in the form of continuous lending. The position in which the United States has found itself is, on many grounds, totally unacceptable. Yet current initiatives of the Administration, including most notably its commitment to increase the subscription to the IMF quotas, only make matters worse in the long run. In order to extricate ourselves from the position of a hostage of foreign debtors, it is necessary to take urgent steps toward reducing, instead of increasing, our major banks' foreign exposure relative to their capital. A policy of gradually reducing the foreign exposure of U.S. banks relative to their capital must begin by recognizing that the banks' portfolios of high interest yielding short- and medium-term loans to foreign governments are in many cases nothing but a fiction. The economic reality is strikingly different; many of these loans are in effect permanent debt (consols) with interest on them being paid by issuance of more permanent debt by the debtors The first order of business, therefore, must be to bring legal and accounting treatment of foreign loans in line with the economic reality. Such measures would entail legal recognition of economic losses suffered by U.S. lenders, and their equity positions would have to be adjusted accordingly. We are acutely aware that a gradual reduction of the ratio of the banks' foreign exposure to their equity must not result either in unintended diminution of the banks' ability to extend domestic credit or in a sharp economic contraction in debtor countries. A plan aimed at the resolution of the present debt situation must emphasize the reduction of debtor countries' debt relative to their exports, not further debt accumulation--especially when it involves American taxpayers guaranteeing the repayment of loans extended by private institutions to foreign governments. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis The Honorable Paul A. Volcker March 23, 1983 Page Three In its broad outline such a plan would allow selected debtor nations to reduce their debt service. This could be done by consolidating their short- and medium-term loans into long-term loans, and by granting them a period of grace on the repayment of the principal. These steps would give the debtors sufficient breathing space to reorient their economies toward generating export surpluses necessary to fully service their debts in future years. Such an orderly adjustment is clearly preferable to the present practice of sporadic hectic scrambling by borrowers for additional funds in exchange for promises to undertake austerity measures that might not be economically rational or politically tolerable. As the economic recovery in industrial countries becomes broad-based and solid, the debtors should find that higher demand for their exports makes it easier to resume repayments of loans. Since the flow of interest payments on the consolidated debt is to be maintained during the grace period, reported earnings of U.S. banks will suffer only to a limited degree relative to the current fictitious arrangement. The grace period would also enable the banks to start setting aside loan loss reserves commensurate with their foreign exposure. This would require diverting some portion of their earning stream from both domestic and foreign operations toward such reserves at the expense of dividend payments, bonuses for management and tax revenues to the Treasury. It is a good investment that will strengthen the banks and reduce the transfer of U.S. resources to foreign governments. There is no doubt that projected total pre-tax earnings of major banks would be sufficient to fund such loan loss reserves. In fact, most analysts agree that the outlook for major U.S. banks is very good. Lower rates of inflation are increasing the value of their investment portfolios; declines in interest rates are resulting in widening spreads between their lending rates and cost of funds; deregulation is helping them to reclaim the market share lost to money-market mutual funds. By and large, their earning per share and dividends are expected to grow quite rapidly, especially in an expanding economy. Finally, owing to the improved economic climate, the quality of their domestic loans is bound to improve. The bottom line is that the banking industry will be strong enough to establish over a period of several years reserves for possible losses on its foreign loans. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis The Honorable Paul A. Volcker March 24, 1983 Page Four The questions remain as to: * What percentage of foreign loans by U.S. banks would have to be written down to make the remainder serviceable? * What is the minimum period of time over which the reserve funds should be set aside? * What would constitute "sufficient" reserves? * Against which classes of loans are these reserves to be established? * What should be the length of the grace period during which the repayment of the principal would be suspended? * What would be the criteria and procedure for absorbing established loan loss reserves into the banks' capital base if and when loans are repaid? * To what extent U.S. banks or debtor countries can be treated differentially? These questions cannot be answered without data on individual banks' in individual countries and without data on countries' exports and banks' earning prospects. Since regulation of the nation's banking system is within your domain of responsibility, we urge you to have the above questions explored with some urgency. Numerous policy options have been proposed in conjunction with such a study, and we commend these to your attention. These options include, but are not limited to, the following: I * The grace period is to be denied to Communist countries. * The grace period is not to extend beyond 4 years. * Loans are to be consolidated over a period no longer than 12 years following the grace period. * Debtor nations involved should encompass those whose debt was already rescheduled or is expected to be rescheduled in 1983. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis The Honorable Paul A. Volcker March 24, 1983 Page Five • * Long-term targets for loan loss reserves are to be set for all banks whose total foreign exposure exceeds their total equity; these targets are to be specified in such a way that they apply to all loans to a country in excess of a given percentage of a given bank's equity (such as 10, 20 or 30 percent). * A fixed percentage (10, 20 or 25 percent, for example) of pre-tax earnings of each bank involved are to be set aside each year until the specified loan loss reserve targets are attained. Formulating your response with the above options in mind will help us to respond to suggestions being made and to evaluate and determine the proper parameters in which to address this problem. Too much is at stake to allow banks to continue pretending for another year or two that their renegotiated foreign loans, with their outrageous up-front fees and higher interest rates, are profit-yielding, when in fact these profits are entirely a result of dubious bookkeeping rather than cash flows. For the troubled borrowers to resume economic growth, their debt burden must lighten rather than increase. For U.S. banks, the proportion of their assets in the form of loans to less developed countries and Communist countries must be reduced rather than increased. It is, we firmly believe, a duty of the U.S. government to adopt energetic measures leading to this outcome. Detailed examination of these measures would be a sensible and necessary beginning. Finally, coming to grips with the symptoms of the International Debt Crisis can make sense only if we simultaneously address its underlying cause -- the breakdown of a stable and workable international monetary system. Unless we do so, all our efforts to assist the transition to a sustainable equilibrium of world growth and stability will be rapidly swallowed up in a new cycle of crisis. This would be the cruelest blow of all both to American citizens and the people of the developing countries who trust us to put an end to their economic misery. So we urge you also to put international monetary reform on the agenda of the leader of the West. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis The Honorable Donald T. Regan March 24, 1983 Page Six . ( The purpose of this letter is to solicit your evaluation of the plan we have suggested and to request answers to the questions posed. Since this matter is proceeding in Congress, we respectfully request an early reply. ... • Sincerely, John P. East, USS Y Lewis MC arry Go er, USS Ron Paul, MC -4 http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis April 19, 1983 The Honorable Fernand J. St Germain House of Representatives Washington, D. C. 20515 Dear Fred: I appreciate the gavel. It will be a great contribution to the coordination of the Federal Reserve with the House Committee if I can use it with the sane intimidating effect in our meetings! Regards, PAV:ccm FERNAND J. ST GERMAIN, R.I., CHAIRMAN HENRY B. GONZALEZ, TEX. JOSEPH G. MINISH, N.J. FRANK ANNUNZIO, ILL PARREN J. MITCHELL. MD. WALTER E. FAUNTROY, D.C. STEPEEN L NEAL, N.C. JERRY M. P..rIEASON, CALIF. CARR9LL HUBBARD, JR., KY. JO" J. LAFALCE. N.Y. NORMAN E. D'AMOURS, N.H. STAN LUNDINE, N.Y. MARY ROSE OAKAR, OHIO BRUCE F. VENTO, MINN. DOUG BARNARD, JR., GA. ROBERT GARCIA, NY. MIKE LOWRY, WASH. CHARLES E. SCHUMER, N.Y. BARNEY FRANK, MASS. BILL PATMAN, TEX. WILLIAM J. COYNE, PA. BUDDY ROEMER, LA. RICHARD H. LEHMAN, CALIF. BRUCE A. MORRISON, CONN. JIM COOPER, TENN. MARCY KAPTUR, OHIO BEN ERDREICH, ALA. SANDER M. LEVIN, MICH. THOMAS R. CARPER. DEL ESTEBAN EDWARD TORRES, CALIF. U.S. HOUSE OF REPRESENTATIVES COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS NINETY-EIGHTH CONGRESS 2129 RAYBURN HOUSE OFFICE BUILDING WASHINGTON, D.C. 20515 CHALMERS P. WYI E. OHIO STEWART 8. McKINNEY, CONN. GEORGE HANSEN, IDAHO JIM LEACH, IOWA PON PAUL, TEX. ED BETHUNE, ARK. NORMAN D. SHUMWAY, CALIF. STAN PARRIS, VA. BILL McCOLLUM, FLA. GEORGE C. WORTLEY, N.Y. MARGE ROUKEMA, N.J. BILL LOWERY, CALIF. DOUGLAS K. BEREUTER, NEBR. DAVID DREIER, CALIF. JOHN HILER, NO. THOMAS J. RIDGE, PA. STEVE BARTLETT, TEX. 225-4247 April 13, 1983 Honorable Paul Volcker Chairman Federal Reserve Board Washington, D Dear Mr. Ch At our Committee hearing yesterday you seemed to be intimidated by my use of a "man-sized" gavel: I am delighted to give you the twin of my gavel so that you do not feel neglected. Si.erely, F r and J. St Germain hairman Enclosure http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis vt http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis April 19, 1983 J. St Germain d an rn Fe e bl ra no The Ho Chairman ing, Finance and Committee on Bank Urban Affairs tatives House of Represen 20515 Washington, D.C. Germain: Dear Chairman St letter of March 23 ur yo r fo u yo k an Th Congresswoman by d se po s on ti ques enclosing written e hearing held on th th wi on ti ec nn Kaptur in co am enclosing I n, io at rm fo in your February 2. For ptur. ve sent to Ms. Ka ha I s se on sp re e a copy of th Sincerely, Wad Enclosure CO:pjt (#V-57) bcc: Mr. Gemmill Mrs. Mallardi (2) http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis April 19, 1983 The Honorable Marcy Kaptur House of Representatives 20515 Washington, D.C. Dear Ms. Kaptur: tter to me of In Chairman St Germain's _le ten questions you had in March 23, he submitted writ g on February 2. I am connection with the hearin ses to these questions. pleased to enclose respon n be of further Please let me know if I ca assistance. Sincerely, Enclosure CO:pjt (#V-57) bcc: Mr. Gemmill Mrs. Mallardi (2) http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Chairman Vblcker's responses to written questions from Congressman Kaptur submitted in connection with the hearing held on February 2, 1983. Question 1: Answer: What additional supervisory role could be played by an agency in the United States to "help" the banks avoid overexposure in the future? If the banks do not change their attitude towards loans even with a growth in their current account deficits, what role can a surpervisory group play to force them to take account of these factors? There are several ways in which an expanded role for bank supervision could reduce the likelihood that banks would become over exposed on international lending. The bank regulatory agencies submitted a Joint Memorandum to the Senate Banking Cammittee on April 7 (copy enclosed) that outlines our proposals for improved supervision and regulation. The basic approach is to require banks' increased attention to the diversification of risk and the maintenance of adequate financial strength. One element of this approach is to adopt measures that would give banks greater incentives to ensure that loans are priced adequately to cover the risk involved. During the two years to mid-1982 -- a period of substantial growth in bank claims on the main borrowing countries -- lending terms on bank loans tightened only slightly. It has been suggested that changes in banks' accounting and reserving practices could contribute to more realistic pricing of loans, particularly in recognizing the potential risks involved. This approach would http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -2- be more effective, and more compatible with competitive equity, if it were taken on E, coordinated basis by supervisors of all countries whose banks are actively involved in international lendina. Another element is to take steps to increase the amount of information made public on the positions of individual banks, and to rely on market dpline to ensure that banks limited their exposure in various markets and to different borrowers to prudent levels. These elements are not mutually exclusive, and, in fact, U.S. bank supervisors are recommending measures of each type as S.rt of their integrated package. Question 2: Why do not the banks set up laraer risk pools (loan loss reservLiI es) if they want to loan abroad? Answer: Banks are expected to maintain loan loss reserves adequate to meet future losses on any loans, foreign or domestic, in their portfolios. The exact level of reserves is determined by bank management, and many ..ans have increased their loan loss reserves substantially during the past year in recognition of the deterioration in quality of both foreian and domestic loans on their books. One of the recommendations in the banking agencies' proposal is that special reserves be established for certain specified country exposure situations, where a borrower has been unable to service its external debts over a protracted period and the bank has not otherwise recognized the diminished quality of the assets involved. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -3- Question 3: If a major tightening of regulations on U.S. bank lending abroad is insisted upon in exchange for approving U.S. participation in the move to bolster the IMF, what regulatory policies do you think should be adopted? Answer: The bank supervisors have now supplied a memorandum giving their views on desirable changes in regulatory policies and practices. Question 4: How should we insure that money that U.S. hanks loans to foreign countries is not used for the support of human rights violations, military build-ups, and foreign political situations which we don't fully understand? Shat total dollar loan amount can be traced to use for military purposes? Answer: As a general policy, the United States does not impose restrictions on private trade or financial transactions with foreign countries. The Foreign Assets Control Regulations of the U.S. Treasury are a limited exception. Under these Regulations licenses are reauired for commercial or financial transactions with Cuba, Kampuchea, North Korea and Viet Nam by banks and other U.S. persons. In general, countries obtain funds from a wide range of commercial and financial transactions. Because of the fungibility of money, there is not an effective way to trace a particular source of funds to a particular use by a borrowing country. -4- Question 5: Mr. Richard Dale, in his testimony on February 9, suggested that the following safeguards are necessary: a. A mandatory country lending limit equivalent to, say, 25 percent of the lending bank's capital. b. Fuller and more timely information on individual countries' public and private sector external debt. c. Active IMF surveillance of the volume, composition and maturity-distribution of member countries' external debt with a view to preventing, prior to payment interruption, both excessive levels of debt and undue reliance on short-term borrowing. d. New institutional arrangements to provide lender of last resort assistance to country borrowers experiencing a sudden contraction of external credit. Please comment on all of the above. Answer: http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis a. Specific percentage limits relative to capital on bank loans to individual countries might help achieve diversification of portfolios of some banks, but they would inevitably be arbitrary. Because they would not distinguish between the capabilities of individual banks or the size or circumstances of individual borrowing countries they could well raise more problems than they would resolve. If country lending limits were to be set on a case-by-case basis, the supervisory agencies would be put in the position of making controversial, politically- sensitive judgments about other countries, which they are not eauipped to do. b. More complete current information on debt would be useful to lending institutions, as well as to borrowing countries themselves. However, it is also essential that banks make effective use of the considerable information that is already at their disposal. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -5- c. The IMF can play a significant role in helping ensure that borrowing countries avoid excessive build-ups of debt, particularly short-term debt. The Fund's influence can be exerted as part of the annual consultations that occur between the Fund and member countries, and more specifically in conjunction with stabilization programs that individual countries may sumbit to the IMF for approval. Fund influence could also come through comment on general economic and financial developments in connection with its Annual Report or other public documents. For these reasons, the bank regulators' program calls for a strengthening of the role of the IMF in this area. d. The Fund is the appropriate international institution to provide external assistance to countries experiencing reductions in external credits. Such a reduction in credit would generally occur as a result of changes in the position of a borrowing country that called for some adjustment of that country's policies, and a program of adjustment could be worked out in conjunction with the Fund. The historical record shows that once a Fund program is in place, private market financing and/or official credits become more readily available. As an interim measure, some short-term bridge financing may sometimes be required by countries, pending conclusion of an agreed stabilization program and standby arrangement http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -6- with Fund. In the past, such assistance has been supplied on an ad hoc basis, often through the Bank for International Settlements. The additional new financing that has been requested for the Fund should be sufficient to obviate any need new international institution. for aII Question 6: If the Congress passes the Administration's request as presented, how much difference would the additional loan authority actually make to the countries involved? If the IMF portion is less than 15 percent of a country's need, how will the U.S. contribution make a difference? Answer: The Fund's contribution to economic stazation goes far beyond the proportional size of the financial assistance that it provides. As the international institution with major responsiblities for maintaining the stability of the international financial system, the Fund occupies a unique role. Through its surveillance of an inddual country's policies, the Fund helps ensure that are appropriate. eS.lce adopted by that country In this way, Fund surveillance provides the basis for a country to attract commercial bank and other external financing. Through oonditions that are attached to use of its resources, the Fund helps limit and reduce the use of exchange restrictions and other policies that may have disruptive or unfair effects on suppliers or creditors. In addition to these indirect benefits to member countries, the Fund can provide substantial amounts of financing over the course of an agreed stabation program. The United States has a strong interest in supporting the Fund in these efforts which cannot continue without full U.S. support. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 7- QUESTION 7: If the Congress agrees to the Administration's request, describe the crowding out of capital that will occur in U.S. capital markets. Answer: As noted in testimony before the Committee, commitments for increases in Fund quotas and for an increase in the GAB do not immediately reauire budget outlays, or an increase in borrowino requirements by the U.S. Treasury. However, when a cash transfer to the Fund is needed Treasury borrowing requirements rise. (The Treasury also receives money back and its borrowing requirements are reduced when members pay back the Fund.) The amounts that might be required from the United States over the next few years cannot be estimated closely, but they are not likely to involve more than a fraction of the U.S. oalunitment, and in any event could be expected to represent a very small fraction of Treasury cash demands over this period. The disruptive impact on U.S. financial markets that would occur if the role of the Fund were so limited that it could not effectively stabilize the international financial system would be far greater than the market impact of the additional Treasury borrowing that might arise fram IMF use of the additional resources that are being proposed. QUESTION 8: The Interagency Country Exposure Review Committee (ICERC) has failed to achieve its own stated objective which is to ensure adequate diversification of banks' international loan portfolios. What can be done about this? QUESTION 9: What can be done about the fact that the ICERC either does not make recommendations that excessive exposures be reduced or that .such recommendations are ignored? http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -8- QUESTION 10: Do you think that the most important defect of the ICERC approach is the underlying assumption that diversification can itself provide a sufficient safeguard against country risk? What should the underlying assumption be? Answer: As noted above, the supervisory agencies have reviewed the country exposure system, and have just reported to Congress on the results of this review. Diversification of portfolios is a generally accepted principle of sound banking and investment, and it underlies the statutory limit on loans to a single borrower by national banks. Diversification rests on the proposition that all risks attached to any given loan or investment cannot be identified in advance and guarded against. Through diversification, a bank is better protected against the likelihood that a large share of its loan portfolio will be adversely affected by changes in the circumstances of a single borrower, or borrowing country. Of course, diversification alone is not enough -- it must be supplemented by sound lending policies, capital structures and liquidity positions. Banks and bank supervisors need to continue to given close attention to emerging difficulties in borrowing countries. QUESTION 11: There seems to be a boom/bust tendency in the international credit market. What can be done to prevent both excessive expansion and undue contraction of international lending? http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -S- Answer: Wide cyclical variations in spending occur when plans made on the basis of one set of conditions must be revised as the conditions change. This is particularly likely to happen when an economy shifts into or out of an inflationary period. One consequence of inflation is that financing plans are made and loans negotiated on terms that wSSve viable only so long as inflation continues. Wide variations in financing flows have occurred in our domestic economy as well as in the international economy. Particularly pronounced swings in credit market flows have resulted from the sharp changes that have occurred in the oil market in recent years. As the question notes, a primary task is to avoid excessive economy expansion; this can be accomplished if overheating in national economies can be avoided. QUESTION 12: If IMF funding is not increased, what foreign aid alternatives might be good substitutes to ease the internal pain of countries, such as shipments of more U.S. commodities, oil transfers from the glut, etc." Answer: As noted in the answer to question #6, the contribution of the Fund cannot be measured by the amount of resources that it supplied to member countries in connection with stabilization programs. In the absence of a Fund program, some countries might provide official bilateral assistance to debtor countries in the form of credits or commodities. However, such bilateral assistance by itself may often tend to lead to bilateral trade and financial arrangements; in addition, some debtor countries http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -10- might seek to deal with their financial problems through discriminatory restrictions on payments. Historically the United States has been adversely affected by exchange restrictions and discriminatory trade and payments, and it is highly unlikely that the United States would benefit from a shift from the present cooperative international financial system to one based in considerable measure on bilateral arrangements. QUESTION 13: If IMF funding is not approved, describe the likely result on any one of the banking institutions involved. Answer: Failure to approve the IMF funding would sianal a breakdown in international financial cooperation, and would lead to increased uncertainty in financial markets here and abroad. Increased uncertainty could pose problems for some individual banks. Banks that were subject to increased uncertainty might experience deposit run-offs, banks subject to uncertainty might also curtail their lending, both domestic and international. In such an environment, recovery in domestic economies and in international trade could be significantly disrupted. QUESTION 14: Why can not additional funding be obtained through private markets? Answer: In order for the IMF to continue in its present role in the international financial system, it is important that the principal permanent source of Fund financing be the quota subscriptions of member aovernments. Because the Fund is not only a source of short-term financing to member countries but is also expected to provide impartial advice to countries on • http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -11- their domestic and international financial policies, the multinational inter-governmental character of the Fund should be preserved. The Fund's role as the guardian of the principles of a free and open international monetary and trading system would not be enhanced if it were increasingly to take on the character of a financial intermediary. That observation would not, however, rule out the possibility that the Fund might have very occasional recourse to private market financing as an interim measure when official financing has been agreed but has not yet been made fully available. QUESTION 15: If the IMF funding is approved, describe the impact on the U.S. export/import market in the relation to the domestic employment situation in the short-term (1983-85) and in the long term (1985-90). Answer: Approval of the IMF funding will strengthen the role of the Fund, and help ensure preservation of a free multilateral trading and financial system, and it is in this sort of system that U.S. exports are most likely to flourish. Historically, the United States has been adversely affected by exchange restrictions on international trade -- most strikingly in the 1930s. then the Fund provides temporary financing to countries in weak financial positions, it helps stabilize the pattern of trade. Such stability contributes importantly to an environment conducive to growth of U.S. exports. The developing countries that are likely to be most dependent on interim Fund financing have become major customers http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -12- of the United States. Support from the Fund will enable them to grow rapidly not only in the short term, but as emerging industrial countries in the longer term. We would expect to benefit from this growth of markets, especially in the Western Hemisphere. The slowdown in these markets last year was an important contributor to the weakness of our exports. Mrs. Mnllardi .ERN,..111i J. ST GERMAIN, R.I., CHAIRMAN HENRY B. GONZALEZ. TEX. JOSEPH G. MINISH, N.J. . FRANK ANNUNZIO, ILL PARREN J. MITCHELL MD. WALTER E. FAUNTROY, D.C. STEPHEN L NEAL N.C. JERRY M. PATTERSON, CALIF. CARROLL HUBBARD, JR., KY. JOHN J. LAFALCE, NY. NORMAN E. D'AMOURS, N.H. STAN LUNDINE, NY. MARY ROSE OAKAR, OHIO BRUCE F. VENTO, MINN. DOUG BARNARD, JR.. GA. ROBERT GARCIA. N Y. MIKE LOWRY, WASH. CHARLES E. SCHUMER. N.Y. BARNEY FRANK, MASS. BILL PATMAN, TEX. WILLIAM J. COYNE,PA. BUDDY ROEMER, LA. RICHARD H. LEHMAN, CALIF. BRUCE A. MORRISON, CONN. JIM COOPER. TENN. MARCY KAPTUFt, OHIO BEN ERDREICH, ALA. SANDER M. LEVIN, MICH. THOMAS R. CARPER, DEL ESTEBAN EDWARD TORRES, CAUF. Action assigned to Ted Truman (cc: Mr. Bradfield) U.S. HOUSE OF REPRESENTATIVES COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS NINETY-EIGHTH CONGRESS 2129 RAYBURN HOUSE OFFICE BUILDING WASHINGTON, D.C. 20515 CHALMERS P. VVYLIE, OHIO STEWART B. McKINNEY. CONN. GEORGE HANSEN, IDAHO JIM LEACH, IOWA RON PAUL, TEX. ED BETHUNE, ARK. NORMAN D. SHUMWAY, CALIF. STAN PARRIS, VA. BILL McCOLLUM. FLA. GEORGE C WORTLEY, N.Y. MARGE ROUKEMA. N.J. BILL LOWERY, CALIF. DOUGLAS K. BEREUTER. NEBR. DAVID DREIER, CAUF. JOHN HILER. IND. THOMAS J RIDGE, PA. STEVEBARTLETT, TEX. 225-4247 March 23, 1983 Fri CD 4:=1 Honorable Paul Volcker Chairman Board of Governors Federal Reserve System Washington, D.C. g Dear Mr. Chairman: Listed below are questions of Congresswoman Kaptur relating to your testimony of February 2, 1983, on the condition of international financial markets. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 1. What additional supervisory role could be played by an agency in the United States to "help" the banks avoid overexposure in the future? If the banks do not change their attitude towards loans even with a growth in their current account deficits, what role can a supervisory group play to force them to take account of these factors? 2. Why do not the banks set up larger risk pools (loan loss reserves) if they want to loan abroad? 3. If a major tightening of regulations on U.S. bank lending abroad is insisted upon in exchange for approving U.S. participation in the move to bolster the IMF, what regulatory policies do you think should be adopted? 4. How should we insure that money that U.S. banks loan to foreign countries is not used for the support of human rights violators, military build-ups, and foreign political situations which we don't fully understand? What total dollar loan amount can be traced to use for military purposes? 5. Mr. Richard Dale, in his testimony on February 9, suggested that the following safeguards are necessary: a. A mandatory country lending limit equivalent to, say, 25% of the lending bank's capital. b. Fuller and more timely information on individual countries' public and private sector external debt. c. Active IMF surveillance of the volume, composition and maturit distribution of member countries' external debt with a view to preventing, pr to payment interruption, both excessive levels of debt and undue relianc on short-term borrowing. 2:7 CD 2_ - d. New institutional arrangements to provide lender of last resort assistance to country borrowers experiencing a sudden contraction of external credit . Please comment on all of the above. 6. If the Congress passes the Administration's request as presented, how much difference would the additional loan authority actually make to the countries involved? If the IMF portion is less than 15% of a country's need, how will the U.S. contribution really make a difference? 7. If the Congress agrees to the Administration's request, describe the crowd ing out of capital that will occur in U.S. capital markets. 8. The Interagency Country Exposure Review Committee (ICERC) has failed to achieve its own stated objective which is to ensure adequate diversification of banks' international loan portfolios. What can be done about this? 9. What can be done about the fact that the ICERC either does not make recom mendations that excessive exposures be reduced or that such recommendations are ignored? 10. Do you think that the most important defect of the ICERC approach is the underlying assumption that diversification can in itself provide a suffic ient safeguard against country risk? What should the underlying assumption be? 11. There seems to be a boom/bust tendency in the international credit marke t. What can be done to prevent both excessive expansion and undue contraction of international lending? 12. If IMF funding is not increased, what foreign aid alternatives might be good substitutes to ease the internal pain of countries, such as shipment of more U.S. commodities, oil transfers from the glut, etc.? 13. If IMF funding is not approved, described the likely result on any one of the banking institutions involved. 14. Why can not additional funding be obtained through private capital markets? 15. If the IMF funding is approved, describe the impact on the U.S. export/import market in relation to the domestic employment situation in the short term (198385) and in the long term (1985-90). Your answers to these questions, and the direct communication of your answers to Congresswoman Kaptur would be appreciated. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Sincerely, Fernand J. St Germain Chairman BOARD OF GOVERNORS •0 OF THE FEDERAL RESERVE SYSTEM #-• • • fitALREs .- •' WASHINGTON, D. C. 20551 April 19, 1983 PAUL A. VOLCKER CHAIRMAN The Honorable Charles E. Schumer House of Representatives Washington, D.C. 20515 Dear Mr. Schumer: Your letter of April 4 requested my views on H.R. 2378, the International Financial Stability Act, which you have recently introduced. As you know, the bank regulatory agencies have prepared a program for improved supervision and regulation of international lending by U.S. banks. That plan was described in a Joint Memorandum sent to the House Committee on Banking, Finance and Urban Affairs on April 7 and later embodied in a draft bill forwarded to Congress on April 15. Since the regulators' proposal addresses a number of the issues covered in your draft legislation, I believe it would be most useful to compare the two approaches. Section 3 of your bill directs the U.S. Executive Director of the International Monetary Fund to work with other Fund officials to attempt to convert short-term debt to longterm debt, to limit lending rates (including fees and charges) applied by private banks on such restructured debt to no more than the London Interbank Offer Rate, and to assure that principal and interest payments required of a country are a manageable share of its export earnings. As you know, I believe the IMF has an important role in helpling its members put together viable adjustment programs including their financing from IMF, private and official sources. The Fund's role, however, must be flexible and suited to the particular circumstances of its individual members. From that perspective, I am concerned that your approach is too mechanical and rigid. If the Fund were successful in implementing your approach, it would risk discouraging private lenders from putting up new money in support of IMF-approved adjustment programs. In many cases, new money is necessary to make such programs viable. In addition, in these circumstances private banks would be reluctant to make new loans to any countries in fear that the country would borrow from the IMF and the provisions of your bill would subsequently come into force. On the other hand, if the Fund were unsuccessful in its negotiations and in general other Executive Directors loined the U.S. Executive Director in voting against countries' adjustment programs as required by your bill, the IMF would not be discharging its assigned responsibilities with respect to the smooth functioning of the international monetary system. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis The Honorable Charles E. Schumer Page Two Section 3 of your bill also directs the U.S. Executive Director of the International Monetary Fund to request the IMF to establish an insurance fund financed by a levy against banks and borrowers to ensure repayment of rescheduled debt, and requires him to vote against any IMF loans to countries which have rescheduled if that insurance fund is not operational. This part of the draft legislation is also troublesome. First, the existence of the surcharge, or threat of such a surcharge, would raise the cost of international intermediation and induce I. nks to reduce their international lending at a time when parpation in such lending by a wide range of banks is important. Second, the existence of such a fund could lead to pressures from the banks to use it to dispose of certain loans as well as pressures by borrowers to use it to reduce their indebtedness. Although I believe these provisions in your draft legislation are flawed and would fail to offer a viable solution to international debt problems, I share your concern that IMF-approved stabzation programs be soundly based. In some cases external debt restructurings are needed as part of such programs. If the terms of such restructurings are excessively burdensome, the program will not be viable. Similarly, the overall external financing of the program needs to be realistic in terms of coverage and burden sharing. However, the situation of each borrowing country is unique, and such arrangements involve many borrowers here and abroad. A program of "forced" restructuring, triggered by a country's approach to the IMF, could well, on balance, discourage private lenders, result in a lower net flow of resources to borrowers during dcult adjustment periods, and force the adoption of more severe adjustment actions. In the present context, such a result would retard, not sustain, the economic recovery here and abroad that all agree is desirable. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis The program proposed by the banking regulators stresses the importance of continued international lending by I. nks. In this connection, it provides for a strengthening of the role of the IMF--including the suggestion of limits under IMF programs on the amount of short-term, public-sector, external borrowing--without excessive intrusion of the Fund into the decisions of private lenders. At the same time, the proposed program aims at ensuring that ..S.ns maintain adequate financial strength to deal with unexpected contingencies and avoid undue concentration risks. The Honorable Charles E. Schumer Page Three Section 4 of your bill calls for banks to establish loan loss reserves under certain circumstances. I believe that your proon is substantially similar to the proon in the regulators' proposal that would require the establishment of a system of provisioning against certain country exposures when the borrower has been unable to service its debts over a protracted period of time. In general, it is not feasible to link the conditions for loan loss reserves on international lending to those for loan loss reserves on non-performing domestic loans. Reserves are not mechanically required in the case of non-performing domestic loans. Moreover, international lending, especially to foreign governments, is not subject to the same "market test" of potential insolvency, but it may be subject to transfer risk. I would note that the regulators' S roposal recognizes, as does yours, the potential importance of the existence of an IMF program in judging the quality of international loans and whether a reserve should be established against them. Section 5 of the proposed legislation would require limits on short-term loans by banks to individual countries. As noted in the Joint Memorandum, the bank regulators believe that lending limits, in general, would not adequately distinguish between countries whose situations may be quite different. A system of country lending limits as speced in your proposal would involve the regulators in subjective judgments that they might not be able to exercise with the required foresight or to administer fairly while avoiding political complications. Applying such limits to short-term credit, in addition, might interfere with normal flows of trade credit without placing any effective limits on overall exposure of banks to individual countries. In your letter you point out the importance of worldwide growth as a precondition for a satisfactory resolution of the present crisis. I believe that the supervisory proposals that have been submitted to Congress, combined with continued efforts on the part of borrowing countries, the international banking community and the International Monetary Fund, and prompt enactment of the IMF legislation now before Congress, will contribute to achieving the objective of dealing with current extraordinary financial pressures and sustainable economic recovery. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis The Honorable Charles E. Schumer Page Four I appreciate the opportunity to comment on your proposals and hope these comments are useful. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Sincerely, I. HST:EMT:DJW:pjt (#V-62) bcc: Mr. Terrell Mr. Truman Ms. Brown Mrs. Mallardi (2) CHARLES E. SCHUMER 126 CANNON HOUSE OFFICE BUILDING WASHINGTON, D.C. 20515 16TH DISTRICT, INEW YORK (202) 225-6616 COMMITTEES: Congref‘5 of the Ziiniteb BANKING. FINANCE AND URBAN AFFAIRS POST OFFICE AND CIVIL SERVICE 2501 AYEhlUE U BROOKLYN, NEW YORK 11229 (212) 743-3900 tate5 i)otie of 1epre5entatibt5 Itiatbington,31C. 20515 April 4, 1983 The Honorable Paul A. Volcker The Federal Reserve Board Washington, D.C. 20551 Dear Mr. Volcker: I am enclosing a copy of H.R. 2378, The Internat ional Financial Stability Act, which I introduced on March 24. This bill provides a responsible and equitable solution to the inte rnational debt crisis. It authorizes the U.S. quota increase for the IMF, distributes the burden equitably between debtor nations, banks, and developed countries, and increases the probability of rapid worl d-wide growth--the one precondition that everyone agrees is esse ntial for a satisfactory resolution of the current crisis. I look forward to your comments and coop eration as Congress works toward a satisfactory resolution of the IMF quota legislation. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Sincerely, CHARLES E. SCHUMER Member of Congress gill -11 CO (JO C--) , ' 31, '"CO rri Cn .--in --r1 Ri '11 rrl C75 rri 70 1 =E! CP C;:9 (1 ' D THIS STATIONERY PRINTED ON PAPER MADE WITH RECYCLED FIBERS pl. f--- Co CZ) 7X, , cn cD --r1 Fr1 -11 Cr) Cr' rrt —4 c= , . 7„. — 01 rri := C1) ....: = c::, , D (, :;() ---4 (dr, http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 98TH CONGRESS 1ST SESSION H R.2378 • To authorize an increase in the United States quota in the International Monetary Fund, to require the rescheduling of short-term debt incurred by certain countries, and to impose certain restrictions on financial institutions with respect to their lending to foreign countries. IN THE HOUSE OF REPRESENTATIVES MARCH 24, 1983 ttee Mr. SCHUMER introduced the following bill; which was referred to the Commi on Banking, Finance and Urban Affairs A BILL To authorize an increase in the United States quota in the International Monetary Fund, to require the rescheduling of short-term debt incurred by certain countries, and to impose certain restrictions on financial institutions with respect to their lending to foreign countries. 1 Be it enacted by the Senate and House of Representa- 2 tives of the United States of America in Congress assembled, SHORT TITLE 3 4 SECTION 1. This Act may be cited as the "International 5 Financial Stability Act". http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 2 QUOTA INCREASE 1 SEC. 2. (a) The Bretton Woods Agreements Act (22 .C. 286 et seq.) is amended by adding at the end thereof 2 3 U.S 4 the following: "QUOTA INCREASE 5 "SEC. 40. The United States Governor of the Fund is orized to consent to an increase in the quota of the 6 7 auth ion Spe8 United States in the Fund equivalent to 5,310.8 mill appro9 cial Drawing Rights, limited to such amounts as are 10 priated in advance in appropriation Acts.". 11 (b) Section 17 of the Bretton Woods Agreements Act 12 (22 U.S.C. 286e--1a) is amended(1) in subsection (a)- 13 (A) by inserting "as amended in accordance 14 with its terms," after "1962," and; 15 (B) by striking out "$2,000,000,000" and in- 16 18 serting in lieu thereof "4,250 million Special Drawing Rights, limited to such amounts as are 19 appropriated in advance in appropriation Acts,"; 20 and 17 21 (2) in the first sentence of subsection (b), by strikout "$2,000,000,000" and inserting in lieu thereof 22 ing 23 "4,250 million Special Drawing Rights". HR 2378 IH http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 3 DEBT RESTRUCTURING 1 2 SEC. 3. The Bretton Woods Agreements Act (22 3 U.S.C. 286 et seq.) is amended by adding at the end thereof 4 the following: "DEBT RESTRUCTURING 5 6 "SEC. 41. (a)(1)(A) With respect to each country which 7 is experiencing financial difficulties and which may request 8 additional loans from the Fund, the United States executive 9 director of the Fund is directed to work with other officials of 10 the Fund, officials from the central bank of the country in11 volved, the finance minister of such country, and representa12 tives of private banks which have made loans to such country 13 in order to develop a plan to convert short-term debt which 14 was made at high interest rates into long-term debt at a 15 lower rate of interest. 16 "(B)In no case shall such lower rate of interest, includ- 17 ing all points, restructuring fees, and all other charges im18 posed on the borrower, exceed the London Interbank Offer 19 Rate for debt with a maturity of one year. "(2) Each such plan shall assure that the total amount try 21 of principal and interest payments required of the coun 22 involved are both a manageable and prudent percentage of 20 23 the annual export earnings of such country. "(3)(A) The United States executive director of the 25 Fund is directed to request the Fund to establish an insur- 24 HR 2378 IH I • 4 1 ance fund to ensure the repayment of debts which are re• 2 scheduled under a plan developed pursuant to paragraphs (1) 3 and (2). 4 "(B) Such insurance fund shall be financed by a sur- 5 charge, not to exceed one percent, on the outstanding bal6 ance of the debt which is rescheduled under this subsection. 7 Such surcharge shall be jointly paid by the country involved 8 and the private banks which have loans outstanding to such 9 country. 4. 10 "(b) The United States executive director of the Fund 11 shall vote against providing any additional loan to any coun12 try if— "(1) such loan does not meet the requirements of 13 14 paragraphs (1) and (2) of subsection (a); and 15 "(2) the insurance fund specified in subsection 16 (a)(3) is not operational on the date on which such loan 17 is to be made. 18 "(c) For purposes of this section, the term long-term • http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 19 debt' means any debt with a maturity of not less than 10 20 years.". LOAN LOSS RESERVES 21 22 SEC. 4. (a) In any case in which a bank has made any 23 loan to a public or private borrower in a foreign country and 24 such loan cannot be repaid according to the original terms 25 and conditions on which such loan was made, the Financial HR 2378 IH 5 1 Institutions Examination Council shall require such bank to 2 increase its loan loss reserves by the same amount that such 3 bank would be required to increase its loan loss reserve if this 4 loan were a nonperforming domestic loan. 5 (b) The Financial Institutions Examination Council shall 6 waive the requirements of subsection (a) with respect to any 7 loan which is restructured under section 41(a) of the Bretton 8 Woods Agreements Act. 9 COUNTRY LENDING LIMITS 4. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 10 SEC. 5. (a)(1) The Financial Institutions Examination 11 Council shall establish limits on the total amount of short12 term loans which any bank may make to public and private 13 borrowers in any one country. Such limitations shall be ex14 pressed as a percentage of a bank's capital. 15 (2) The Financial Institutions Examination Council shall 16 set different limits for specific countries and shall provide 17 transitional provisions to allow banks and their borrowers to 18 have sufficient time to negotiate an orderly conversion of 19 short-term debt into long-term debt. 20 (b) Whenever the Chairman of the Financial Institutions 21 Examination Council determines that additional short-term 22 lending is required in order to preserve the soundness and 23 stability of the world financial system, the Chairman may 24 waive, on a bank-by-bank basis and for not more than one HR 2378 IH http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 6 1 year at a time, the limitations established under subsection 2 (a). 3 (c) The Chairman of the Financial Institutions Exami- 4 nation Council shall report the limitations established under 5 subsection (a) to the Congress along with the Council's esti6 mate of the amount of short-term debt which will have to be 7 converted into long-term debt as a result of the limitations 8 established under subsection (a). 9 (d)(1) The United States executive director of the Inter- 10 national Monetary Fund shall work with other officials of the 11 International Monetary Fund and with bank regulators in 12 other countries in order to establish uniform short-term lend13 lug limitations for all banks involved in international lending. 14 (2) The provisions of subsections (a) and (b) shall not 15 take effect until the uniform short-term lending limitations 16 specified in paragraph (1) have been established. 0 HR 2378 IH L - 4 . •E GOV • BOARD OF GOVERNORS OF THE • co •0 •• FEDERAL RESERVE SYSTEM 4'74e\ON i;N:,i'• \ It i- • WASH INGTON, D. C. 20551 r-,.. „ 400, •‘AL • •..• • PAUL A. VOLCKER April 19, 1983 CHAIRMAN The Honorable Charles E. Schumer House of Representatives 20515 Washington, D.C. Dear Mr. Schumer: Your letter of April 4 requested my views on H.R. 2378, the International Financial Stability Act, which you have recently introduced. As you know the bank regulatory agencies have prepared a program for improved supervision and regulation of international lending by U.S. banks. That plan was described in a Joint Memorandum sent to the House Committee on Banking, Finance and Urban Affairs on April 7 and later embodied in a draft bill forwarded to Congress on April 15. Since the regulators' proposal addresses a number of the issues covered in your draft legislation, I believe it would be most useful to compare the two approaches. Section 3 of your bill directs the U.S. Executive Director of the International Monetary Fund to work with other Fund officials to attempt to convert short-term debt to longterm debt, to limit lending rates (including fees and charges) applied by private banks on such restructured debt to no more than the London Interbank Offer Rate, and to assure that principal and interest payments required of a country are a manageable share of its export earnings. As you know, I believe the IMF has an important role in helping its members put together viable adjustment programs including their financing from IMF, private and official sources. The Fund's role, however, must be flexible and suited to the particular circumstances of its individual members. From that perspective, I am concerned that your approach is too mechanical and rigid. If the Fund were successful in implementing your approach, it would risk discouraging private lenders from putting up new money in support of IMF-approved adjustment programs. In many cases, new money is necessary to make such programs viable. In addition, in these circumstances private banks would be reluctant to make new loans to any countries in fear that the country would borrow from the IMF and the provisions of your bill would subsequently come into force. On the other hand, if the Fund were unsuccessful in its negotiations and in general other Executive Directors joined the U.S. Executive Director in voting against countries' adjustment programs as required by your bill, the IMF would not be discharging its assigned responsibilities with respect to the smooth functioning of the international monetary system. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis The Honorable Charles E. Schumer Page Two Section 3 of your bill also directs the U.S. Executive Director of the International Monetary Fund to request the IMF to establish an insurance fund financed by a levy against banks and borrowers to ensure repayment of rescheduled debt, and requires him to vote against any IMF loans to countries which have rescheduled if that insurance fund is not operational. This part of the draft legislation is also troublesome. First, the existence of the surcharge, or threat of such a surcharge, would raise the cost of international intermediation and induce banks to reduce their international lending at a time when participation in such lending by a wide range of banks is important. Second, the existence of such a fund could lead to pressures from the banks to use it to dispose of certain loans as well as pressures by borrowers to use it to reduce their indebtedness. Although I believe these provisions in your draft legislation are flawed and would fail to offer a viable solution to international debt problems, I share your concern that IMF-approved stabilization programs be soundly based. In some cases external debt restructurings are needed as part of such programs. If the terms of such restructurings are excessively burdensome, the program will not be viable. Similarly, the overall external financing of the program needs to be realistic in terms of coverage and burden sharing. However, the situation of each borrowing country is unique, and such arrangements involve many borrowers here and abroad. A program of "forced" restructuring, triggered by a country's approach to the I71F, could well, on balance, discourage private lenders, result in a lower net flow of resources to borrowers during difficult adjustment periods, and force the adoption of more severe adjustment actions. In the present context, such a result would retard, not sustain, the economic recovery here and abroad that all agree is desirable. The program proposed by the banking regulators stresses the importance of continued international lending by banks. In this connection, it provides for a strengthening of the role of the IMF--including the suggestion of limits under IMF programs on the amount of short-term, public-sector, external borrowing--without excessive intrusion of the Fund into the decisions of private lenders. At the same time, the proposed program aims at ensuring that U.S. banks maintain adequate financial strength to deal with unexpected contingencies and avoid undue concentration risks. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis The Honorable Charles E. Schumer Page Three Section 4 of your bill calls for banks to establish loan loss reserves under certain circumstances. I believe that your provision is substantially similar to the provision in the regulators' proposal that would require the establishment of a system of provisioning against certain country exposures when the borrower has been unable to service its debts over a protracted period of time. In general, it is not feasible to link the conditions for loan loss reserves on international lending to those for loan loss reserves on non-performing domestic loans. Reserves are not mechanically required in the case of non-performing domestic loans. Moreover, international lending, especially to foreign governments, is not subject to the same "market test" of potential insolvency, but it may be subject to transfer risk. I would note that the regulators' proposal recognizes, as does yours, the potential importance of the existence of an IMF program in judging the quality of international loans and whether a reserve should be established against them. Section 5 of the proposed legislation would require limits on short-term loans by banks to individual countries. As noted in the Joint Memorandum, the bank regulators believe that lending limits, in general, would not adequately distinguish between countries whose situations may be quite different. A system of country lending limits as specified in your proposal would involve the regulators in subjective judgments that they might not be able to exercise with the required foresight or to administer fairly while avoiding political complications. Applying such limits to short-term credit, in aadition, might interfere with normal flows of trade credit without placing any effective limits on overall exposure of banks to individual countries. In your letter you point out the importance of worldwide growth as a precondition for a satisfactory resolution of the present crisis. I believe that the supervisory proposals that have been submitted to Congress, combined with continued efforts on the part of borrowing countries, the international banking community and the International Monetary Fund, and prompt enactment of the IMF legislation now before Congress, will contribute to achieving the objective of dealing with current extraordinary financial pressures and sustainable economic recovery. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis • • The Honorable Charles E. Schumer Page Four I appreciate the opportunity to comment on your proposals and hone these comments are useful. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Sincerely, HST:EMT:DJW:pjt (#V-62) bcc: Mr. Terrell Mr. Truman Ms. Brown Mrs. Mallardi (2) Action assigned Mr. Truman; ink COPY tO Mr. nahl. CHARLES E. SCHUMER 126 CANNON HOUSE OFFICE BUILDING WASHINGTO.I, D.C. 20515 16m DISTRICT, NEW YORK (202) 225-6616 COM M I TTEES: Congre55 of the Enittb BANKING. FINANCE AND URBAN AFFAIRS POST OFFICE AND CIVIL SERVICE tato 2501 AVENUE U BROOKLYN, NEW YORK (212) 743-3800 3/puck of 11epreantatibeZ agbington, ri.e. 20515 • April 4, 1983 (4P The Honorable Paul A. Volcker The Federal Reserve Board Washington, D.C. 20551 Dear Mr. Volcker: I am enclosing a copy of H.R. 2378, The Internat ional Financial Stability Act, which I introduced on March 24. This bill provides a responsible and equitable solution to the inte rnational debt crisis. It authorizes the U.S. quota increase for the IMF, distributes the burden equitably between debtor nations, banks, and developed countries, and increases the probability of rapid world-wide growth--the one precondition that everyone agrees is essential for a satisfactory resolution of the current crisis. I look forward to your comments and cooperation as Congress works toward a satisfactory resoluti on of the IMF quota legislation. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Sincerely, e CHARLES E. SCHUMER Member of Congress THIS STATIONERY PRINTED ON PAPER MADE WITH RECYCLED FIBERS 112.29 98TH CONGRESS 1ST SESSION H R.2378 • To authorize an increase in the United States quota in the International Monetary Fund, to require the rescheduling of short-term debt incurred by certain countries, and to impose certain restrictions on financial institutions with respect to their lending to foreign countries. IN THE HOUSE OF REPRESENTATIVES MARCH 24, 1983 As http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Mr. SCHUMER introduced the following bill; which was referred to the Committee on Banking, Finance and Urban Affairs A BILL To authorize an increase in the United States quota in the International Monetary Fund, to require the rescheduling of short-term debt incurred by certain countries, and to impose certain restrictions on financial institutions with respect to their lending to foreign countries. 1 Be it enacted by the Senate and House of Representa- 2 tives of the United States of America in Congress assembled, 3 4 SHORT TITLE SECTION 1. This Act may be cited as the "International 5 Financial Stability Act". http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 2 QUOTA INCREASE 1 SEC. 2. (a) The Bretton Woods Agreements Act (22 .C. 286 et seq.) is amended by adding at the end thereof 2 3 U.S 4 the following: "QUOTA INCREASE 5 "SEc. 40. The United States Governor of the Fund is horized to consent to an increase in the quota of the 6 7 aut ion Spe8 United States in the Fund equivalent to 5,310.8 mill appro9 cial Drawing Rights, limited to such amounts as are 10 priated in advance in appropriation Acts.". (b) Section 17 of the Bretton Woods Agreements Act 11 12 (22 U.S.C. 286e—la)is amended(1) in subsection (a)- 13 (A) by inserting "as amended in accordance 14 with its terms," after "1962," and; 15 (B) by striking out "$2,000,000,000" and ining in lieu thereof "4,250 million Special 16 sert 17 19 Drawing Rights, limited to such amounts as are ; appropriated in advance in appropriation Acts," 20 and 18 21 k(2) in the first sentence of subsection (b), by stri f out "$2,000,000,000" and inserting in lieu thereo 22 ing 23 "4,250 million Special Drawing Rights". HR 2378 IH http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 3 DEBT RESTRUCTURING 1 2 SEC. 3. The Bretton Woods Agreements Act (22 3 U.S.C. 286 et seq.) is amended by adding at the end thereof 4 the following: "DEBT 5 6 RESTRUCTURING "SEc. 41. (a)(1)(A) With respect to each country which 7 is experiencing financial difficulties and which may request 8 additional loans from the Fund, the United States executive 9 director of the Fund is directed to work with other officials of 10 the Fund, officials from the central bank of the country in11 volved, the finance minister of such country, and representa12 tives of private banks which have made loans to such country 13 in order to develop a plan to convert short-term debt which 14 was made at high interest rates into long-term debt at a 15 lower rate of interest. 16 "(B) In no case shall such lower rate of interest, includ- 17 ing all points, restructuring fees, and all other charges im18 posed on the borrower, exceed the London Interbank Offer 19 Rate for debt with a maturity of one year. 20 "(2) Each such plan shall assure that the total amount 21 of principal and interest payments required of the country 22 involved are both a manageable and prudent percentage of 23 the annual export earnings of such country. 24 25 "(3)(A) The United States executive director of the Fund is directed to request the Fund to establish an insur- HR 2378 IH 4 1 ance fund to ensure the repayment of debts which are re• 2 scheduled under a plan developed pursuant to paragraphs (1) 3 and (2). 4 "(B) Such insurance fund shall be financed by a sur- 5 charge, not to exceed one percent, on the outstanding bal6 ance of the debt which is rescheduled under this subsection. 7 Such surcharge shall be jointly paid by the country involved 8 and the private banks which have loans outstanding to such 9 country. ••• http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 10 "(b) The United States executive director of the Fund 11 shall vote against providing any additional loan to any coun12 try if— "(1) such loan does not meet the requirements of 13 14 paragraphs (1) and (2) of subsection (a); and 15 "(2) the insurance fund specified in subsection 16 (a)(3) is not operational on the date on which such loan 17 is to be made. 18 "(c) For purposes of this section, the term `long-term 19 debt' means any debt with a maturity of not less than 10 20 years.". LOAN LOSS RESERVES 21 22 SEC. 4. (a) In any case in which a bank has made any 23 loan to a public or private borrower in a foreign country and 24 such loan cannot be repaid according to the original terms 25 and conditions on which such loan was made, the Financial HR 2378 IH http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 5 1 Institutions Examination Council shall require such bank to •▪ 2 increase its loan loss reserves by the same amount that such 3 bank would be required to increase its loan loss reserve if this 4 loan were a nonperforming domestic loan. 5 (b) The Financial Institutions Examination Council shall 6 waive the requirements of subsection (a) with respect to any 7 loan which is restructured under section 41(a) of the Bretton 8 Woods Agreements Act. 9 10 COUNTRY LENDING LIMITS SEC. 5. (a)(1) The Financial Institutions Examination 11 Council shall establish limits on the total amount of short12 term loans which any bank may make to public and private 13 borrowers in any one country. Such limitations shall be ex14 pressed as a percentage of a bank's capital. 15 (2) The Financial Institutions Examination Council shall 16 set different limits for specific countries and shall provide 17 transitional provisions to allow banks and their borrowers to 18 have sufficient time to negotiate an orderly conversion of 19 short-term debt into long-term debt. 20 (b) Whenever the Chairman of the Financial Institutions 21 Examination Council determines that additional short-term 22 lending is required in order to preserve the soundness and 23 stability of the world financial system, the Chairman may 24 waive, on a bank-by-bank basis and for not more than one HR 2378 IH http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 6 1 year at a time, the limitations established under subsection 2 (a). 3 (c) The Chairman of the Financial Institutions Exami- 4 nation Council shall report the limitations established under 5 subsection (a) to the Congress along with the Council's estimate of the amount of short-term debt which will have to be 7 converted into long-term debt as a result of the limitations 8 established under subsection (a). 9 (d)(1) The United States executive director of the Inter- 10 national Monetary Fund shall work with other officials of the 11 International Monetary Fund and with bank regulators in 12 other countries in order to establish uniform short-term lend13 ing limitations for all banks involved in international lending. 14 (2) The provisions of subsections (a) and (b) shall not 15 take effect until the uniform short-term lending limitations 16 specified in paragraph (1) have been established. 0 HR 2378 IH AT LARGE MAJORITY WHIP CARROLL HUBBARD CONGRESSMAN COMMITTEES: iST DISTRICT, KENTUCKY BANKING, FINANCE AND URBAN AFFAIRS 2182 RAYBURN HOUSE OFFICE BUILDING WASHINGTON, D.0 20515 Congre of the tato MERCHANT MARINE AND FISHERIES (202) 225-3115 CHAIRMAN, SUBCOMMITTEE ON PANAMA CANAL/OUTER CONTINENTAL SHELF 30oticSe of Repre5entatibe5S Itlacsbington,;D.C. 20515 April 15, 1983 Hon. Paul A. Volcker Chairman Federal Reserve Board Twentieth Street and Constitution Avenue, NW Washington, DC 20551 Dear Paul: Thank you for your letter and the copy of the 69th Annual Report of the Federal Reserve Board covering operations for calendar year 1982, received in my office today. I appreciate your sending the report to me. I reviewed the data, and I believe the publication will N prove helpful to my staff and me. Again, many thanks for your correspondence. With best wishes for you, I am Sincerely yours, Carroll Hubbard member of Congress CH/111 http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 311i 331A 03A13311! Sti :8 NV 8 1 HO MI 1431SO 3/MS311 -M1303i 311130 HON113/\00 30 MO http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis April 14, 1983 The Honorable Fernand J. St Germain Chairman Subcommittee on Financial Institutions Supervision, Regulation and Insurance Committee on Banking, Finance and Urban Affairs House of Representatives 20515 Washington, D.C. Dear Chairman St Germain: In Chairman Volcker's absence, I am writing to thank you for your letters of April 7 and 13 concerning your Subcommittee's hearing on international lending. I am looking forward to Appearing, on behalf of the Board, on April 21 at 9:30 a.m. • Sincerely., /1/ J. Char es P.artee CO:pjt (#V-65 & V-68) bcc: Gov. Partee Mrs. Mallardi (2) FERNAND J ST GERMAIN. RA CHAIRMAN FRANK ANNUNZIO, ILL CARROLL HUBBARD JR , KY NORMAN E 0 AMOURS. N DOUG BARNARD. JR . GA JOHN J utFALCE, N Y MARY ROSE ()AKAR. OHIO BRUCE F VENTO, MINN ROBERT GARCIA. N Y CHARLES E SCHUMER. NY BILL PATHAN. TEX. STEPHEN L NEAL. NC. BARNEY FRANK. MASS RICHARD H LEHMAN. CALIF. JIM COOPER, TENN BEN ERDREtCH. ALA THOMAS R CARPER. DEL Copies to Governor Partee, Messrs. Trurnaniand Ryan U.S. HOUSE OF REPRESENTATIVES SUBCOMMITTEE ON FINANCIAL INSTITUTIONS SUPERVISION, REGULATION AND INSURANCE CHALMERS P WYLE. OHIO GEORGE HANSEN. IDAHO JIM LEACH. IOWA ED BETHUNE, ARK. STEWART B McKINNEY. CONN. NORMAN 0 SHUMWAY, CAUF. BILL McCOLLUM, FLA. BILL LOWERY. CALIF. GEORGE C WORTLEY. N.Y. DAVID DREIER. C.AUF. OF THE COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS NINETY-EIGHTH CONGRESS WASHINGTON, D.C. 20515 April 13, 1983 Honorable Paul Volcker Chairman Board of Governors Federal Reserve System Washington, D.C. Dear Mr. Chairman: In your prepared statement before this Subcommittee on April 21, please include a thorough discussion of the information contained in and copies of the international lending reports published since 1978 by the Bank for International Settlements. This material is needed to assist the Subcommittee in assessing the merits of the fifth component in the Joint Memorandum on international lending and in determining whether international regulators had information at hand regarding the rapid debt buildups in the developing nations. Sincerely, Fernand J. St Germain Chairman FJStG:gDj http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis .•1 1 FERRIII\JD J ST GERMAIN, R.I., CHAIRMAN FRANK ANNUNZIO, ILL CARROLL HUBBARD. JR , KY NORMAN E D'AMOURS, N H DOUG BARNARD JR , GA. JOHN J LAFALc.. N Y MAF Y ROSE OAKAR, OHIO BRUCE F VENTO. MINN. ROBERT GARCIA, N Y. CHARLES E SCHUMER. N.Y. BILL PATHAN. TEX STEPHEN L. NEAL. N.C. BARNEY FRANK. MASS. RICHARD H. LEHMAN, CALIF. JIM COOPER, TENN BEN ERDREICH. ALA THOMAS R. CARPER. DEL Copies sent Messrs. Truman and Ryan CHALMERS P. WYLE, OHIO GEORGE HANSEN. IDAHO JIM LEACH. IOWA ED BETHUNE, ARK STEWART B McKINNEY, CONN. NORMAN D SHUMWAY. CALIF. BILL McCOLLUNI FLA. BILL LOWERY. CALIF. GEORGE C WORTLEY. N.Y. DAVID DREIER. CALIF. U.S. HOUSE OF REPRESENTATIVES SUBCOMMITTEE ON FINANCIAL INSTITUTIONS SUPERVISION, REGULATION AND INSURANCE OF THE COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS NINETY-EIGHTH CONGRESS WASHINGTON, D.C. 20515 April 7, 1983 -r"ta C, r cs• r rl Honorable Paul Volcker Chairman Board of Governors Federal Reserve System Washington, D.C. ,Iz:1 TP. I Ci ) •••46 3 1 cp 4:9 • .s-- trt Dear Mr. Chairman: This letter confirms the discussions of our staffs concerning your testimony or that of your designee before this Subcommittee on April 20 or 21, 1983, at 9:30 a.m. in Room 2128 of the Rayburn House Office Building. It would be most helpful if the prepared statement of the Federal Reserve, contained thorough discussions of the issues noted below: http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 1. What legislative, regulatory, or supervisory actions does the Federal Reserve recommend should be taken to address the international lending problem, particularly with respect to augmenting U.S. bank foreign loan disclosures via the Consolidated Report of Condition and Income, the Country Exposure Lending Survey, or the required reports of the Securities and Exchange Commission; increasing loan loss reserves; preventing undue foreign loan concentrations; changing the manner in which banks account for the fees they charge for loan reschedulings; and strengthening the international examination and supervision practices of the U.S. federal agencies? With respect to each recommendation, please describe in detail the comparable statutory, regulatory, or supervisory requirements in each of the Group of Ten Countries and Switzerland. 2. In recent years, when U.S. banks made decisions to lend to foreign countries, they seem to have had little knowledge about the existing debt structure of the borrowing country. Is this accurate? Do U.S. banks now have the necessary information on which to make sound lending decisions? What does the Federal Reserve know of borrowing country debt structure when the Federal Reserve examines banks? Was that knowledge adequate in past years and is it now adequate? What steps should be taken to provide for better and more timely exchange of information between national regulatory bodies? 3. H.J. Res. 208, the International Recovery Resolution, would require the Reagan Administration to take actions at the Williamsburg Economic Summit to be held in late May, to assure that the assembled nations consider making a multilateral commitment to adopting fiscal and monetary policies that would result in renewed growth and employment, to reducing the financial pressures on the developing nations, and to improving the regulatory programs that govern international safety and soundness. Apart from several suggestions you made when we last O. 2 discussed H.J. Res. 208, I•trust I have your general support for its eventual passage. 4. In this Subcommittee's 1977 hearings, considerable evidence was provided indicatin• g inconsistencies amon• g practices of the federal regulatory •a•gencies with jurisdiction over international lending. Such inconsistencies were to a sig cant degree eliminated by the establishment of the Federal Financial Institutions Examination Council; however, responsibility for the actions of U.S. international I.nks remains in the hands of different agencies with different primary concerns. The result may be that various U.S. international banks are regulated differently depending on which regulator has jurisdiction. What would be the advantages and disadvantages of allocating more of the responsibility for international regulation, examination, and supervision to the Council, for example, as proposed in H.R. 2378, recently introduced by Congressman Schumer? 5. There are several international institutions which apparently are having a growing imI.ct on the safety and soundness and the regulation of U.S. international S.nks. The International Monetary Fund (IMF) is directly involved in many of the decisions U.S. banks make concerning the amount of credit they extend to Ieveloping nations. The Bank for International Settlements (BIS) is becoming an important source of international liquidity for lending banks and borrowing nations alike. The Committee on Banking Regulations and Supervisory Practices of the Group of Ten Countries and Switzerland (also known as the "Basle Committee" or "Cooke Committee") seems to be affecting the evolution of bank regulation and the pattern of central bank lender-of-last-resort responsibility in every member nation. What have been the safety and soundness effects of IMF actions on the banks under the Federal Reserve's jurisdiction? What has been the relationship of the Federal Reserve to the BIS and the Basle Committee? Is the Basle Committee actively considering an international regulatory and lender-of-lastresort agreement that would specify that matters involving the inherent financial strength of a bank (its solvency), should be the responsibility of the central bank authority of the parent bank, and that matters involving the ability of a bank to fund itself (its liquidity), should be the responsibility of the host nation's central bank? If such an agreement were adopted, speccally what would be the responsibes of the Federal Reserve? Responses to the issues noted above in addition to any comments you may wish to make regarding the provisions of H.R. 2378, S.502, and Senate Report 98-35, and any other topic you judge appropriate, would be of great assistance to this Subcommittee in its deliberations on regulatory modification proposals. In accordance with Committee rules and to enable the Subcommittee Members an opportunity to study your testimony in advance of the hearing, please deliver 150 copies of your prepared statement 24 hours in advance of your appearance to rootn I3303 Rayburn. I must also ask that you limit the oral presentation of your testimony to 10 minutes to enable all Subcommittee Members sufficient time fS r questioning. Your prepared statement will be included in its entirety in the hearing record. Fernand J. St Germain Chairman FJStG:gDj http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis *•• cg ▪ GOvtdi,••. •*19 • j-k 0 :6 %, • r -L.J <▪" BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM AL Rt- • WASHINGTON, D. C. 20551 April 11, 1983 The Honorable Henry M. Jackson United States Senator 802 United States Courthouse Seattle, Washington 98104 Dear Senator Jackson: I am writing on behalf of Chairman volcker in response to your request for comment on the enclosed inquiry from your constituent, Mr. Marshall B. Miller, III. Mr. Miller expresses concern about the actions taken by the Depository Institutions Deregulation Committee (DIDC) to eliminate interest rate ceilings on deposits of banks and thrift institutions. In particular, Mr. Miller believes that the removal of interest rate ceilings will increase the costs of funds to small banks, which will then be forced to increase the interest rates they charge to borrowers. He also expresses particular concern about a recent proposal that would permit depository institutions to pay interest on transactions balances of business firms. The DIDC, as you know, is required by the Depository Institutions Deregulation and Monetary Control Act of 1980 (P.L. 96-221) to phase out interest rate ceilings on deposit accounts as soon as possible, consistent with the safety and soundness of depository institutions. This phase-out must be completed by March 31, 1986. As Mr. Miller points out, the purpose of this legislation is to assure that depositors receive a market rate of return on their savings. The deregulation process was given additional impetus in 1q82 by the passage of the Cam -St Germain Depository Institutions Act (P.L. 97-320), which required the DIDC to establish a new deposit account that would enable depository institutions to compete directly with money market mutual funds. This new account, which allows a limited number of third party transfers and is available to all depositors, has been an overwhelming success--more than $300 billion is now maintained in these money market deposit accounts (MMDAs). This has resulted in increased funds that are now available for depository institutions to lend. As a result of the success of the MMDA, the DIDC authorized a Super NOW account--a checking account that requires a minimum balance_of at least $2500 and which is not subject to any interest rate ceilings. This account, however, is available only to individuals, certain nonprofit organizations, and governmental entities. This account has also been popular among depositors, and the DIDC has been considering whether a similar account in the form of an MMDA (but without http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis • • The Honorable Henry M. Jackson Page Two any limits on the number of third-party transfers that may be made) should be made available to business organizations so that they can obtain the advantages of earning interest on their checking balances. A substantial number of comments have been received on this proposal, many of which expressed concerns similar to those of r. Miller. In view of these concerns, at its last -leeting the DIDC deferred further action on the proposal and requested the staff to provide a more detailed analysis of the issues for a future meeting. Some members of the Committee also suggested that this might be an appropriate issue for the Congress to consider. The staff, in its analysis of the issues raised by the proposal, will give careful consideration to the effect that payinq interest on business checking accounts will have upon depository institutions and their customers. It is expected that the Committee may consider this matter again at its June meeting. I hope that this is helpful to you. know if I can be of further assistance. Please let me Sincerely, Donald J. Winn Assistant to the Board Enclosure GTS:TC:MS:JZ:vcd (V-46) bcc: http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Ms. Scanlon Mr. Curry Ms. Wing Mr. Schwartz Legal Files (2) Mrs. Mallardi Action assigned Mr. Kichline JOHN TOWER. TEX CHAIRMAN e STROM THURMOND. Sc BARRY GOLDWATER ARIZ JOHN W WARNER. VA GORDON J HUMPHREY N WILLIAM S COHEN. MAINE ROGER W JEPSEN. IOWA DAN QUAYLE IND. JOHN P EAST, N.0 PETE WILSON. CALIF HENRY M JACKSON WASH JOHN C STENNIS MISS SAM NuNN GA GARY HART, COLO J JAMES EXON NEBR CARL LEVIN MICH EDWARD M KENNEDY, MASS JEFF BINGAMAN, N MEX JAMES F McGOVERN STAFF DIRECTOR AND CHIEF COUNSEL •• ' I ' United eStates eStnatt1983 PIA9 14 COMMITTEE ON ARMED SERVICES r" 9' 00 WASHINGTON, D.C. 20510 v Pt March 10, • •.: 1983 Paul A. Volcker, Chairman Depository Institutions Deregulation Committee 20th and Constitution Avenue, Room B-2120 Washington, D. C. 20551 http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis RE: MARSHALL B. MILLER III inquiry Dear Mr. Volcker: The enclosed is respectfully submitted to you for every proper consideration. Please provide me with a report in duplicate and send your response and the enclosure directly to my Seattle office at 802 United 98104 States Courthouse, Seattle, Washington (telephone 206/442-7476, FTS 399-7476). Sincerely yours, 61.7W Henry M. Hmj: er Enclosure ckso U.S.S. 4 /JP" National 34'' Bank ktiv ( al of Bremerton P.O. Box 459, Br'emerton, WA 9,8310. Phone (206)479-5100 February 16, 1983 The Honorable Henry M. Jackson United States Senate ç19S3 tit C) t1\ AR 1 137 Russell Office Bldg. Washington, D. C. SUBJECT: 20510 The Depository Institutions Deregulation Committee (D.I.D.C.) Dear Senator Jackson: We are a nationally chartered community bank, whose clientele, primarily, consists of businesses with less than $1,000,000 in sales and consumers. During the past two years, we have been watching the actions of and the reactions to the dissolution of Regulation "Q", which primarily mandates interest rate ceilings that commercial banks can pay to depositors in denominations of less than $100,000. The federally mandated deregulation of the liability side of the commercial bank's financial statement does, in fact, allow large and small depositors to receive "a fair and competitive rate of inter est on their funds". However, state and national usury laws historically have been, and may still be in many parts of the country, restricting a "fair" interest rate charge to borrowers. The borrowers that are hurt are not the nationally known corporations, but are, in fact, the small, independently owned compa nies and the wage earners. We believe the D. I. D. C. is poised,at its sched uled March first meeting this year, to further deregulate demand deposits we received from businesses. If this becomes reality, and, for example, a milli on dollars worth of business checking accounts go from zero interest to, say, eight percent interest, this would virtually, over night incre ase our cost by $80,000 per $1,000,000 worth of checking accounts. This would represent approximately, for our small community bank, an over night ten percent increase in the total expenses of our bank. How do we compensate for this? As deposits are, liabilities, and loans are asset s, I suspect we will, again, look to the borrower, the small business person, the consumer, to pay a higher rate of interest. If that $1,000,000 bloc of funds are converted to an eight percent business interest bearing account, to stay equal, we will be forced http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - more - FDIC "Bremerton's Home Owned Bank" http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis PAGE 2 - Letter to Senator Henry M. Jackson February 16, 1983 000,000 worth of loans we presently to increase our interest rate on the $4, that the consumer loans we are have at least two percent. This means ent, will increase to 16 and 16i presently, offering at 14 and 14i perc loans that we are offering at between percent, and that the small business increased. 12 and 15% will also be "inappropriately" ent; Kitsap County unemployment rate Sir, national inflation rate of 4-6 perc rate of nearly 13% really has little of 8.4%; Washington State unemployemnt we have to charge to be a profitable to do with our costs of funds and what organization. upon by the very large multi-bank, We know the D.I.D.C. is looked favorably , but how many problem loans do commulti-national financial institutions ntries? Argentina, or the Communist block cou munity banks have to Mexico, Brazil, eral banks will be looking towards the fed And how many of these small community p them afloat when Brazil, Mexico, and government and our tax dollars to kee interest, let alone begin to repay the other countries cannot even pay back principal that they have received? t, are hurting, and will continue to hur We believe the actions of the D.I.D.C. te and nation. the community banks of our area, sta facts s committee is doing and to review I urge you to please review what thi America. Independent Bankers' Association of and figures, as presented by the Thank you for your time and concern. Sincerely, 711 54.1 MARSHALL B. MILLER, III Senior Vice President MBM:ns http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis April 11, 1983 The Honorable Charles H. Percy Chairman Committee on Foreign Relations United States Senate 20510 Washington, D.C. Dear Chairman Percy: I thought you might like to have a copy of my testimony today before the Senate Banking Committee on the IMF legislation, including the amendments added by the Foreign Relations Committee. I am also enclosing the supervisory proposals recommended by the bank regulators. Sincerely, S/Yaul A. Vol_c' Enclosures (Chrmn. Volcker's statement of 4/11/83 & ltr. dtd./ 4/7/83 to Chrmn. Garn) DJW:pjt bcc: Mrs. Mallardi (2) Identical letter also sent to: Chrmn. Mathias (Sub. on International Economic Policy of _Senate Foreign Relations) 4 http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON, 0. C. 20551 April 8, 1983 PAUL A. VOLCKER CHAIRMAN The Honorable Fernand J. St Germain Chairman Committee on Banking, Finance and Urban Affairs House of Representatives Washington, D. C. 20515 Dear Chairman St Germain: Your letter of March 2 asked for my comments on House Joint Resolution 208 which you introduced to focus attention at the Williamsburg Summit on the need to bring about a sustainable worldwide recovery and to structure a safe and sound international banking system. As you know, I share your general concerns in these areas, and an appropriate resolution could be a vehicle for indicating broad Congressional interest and support. From that perspective, I would like to offer a few comments on the provisions in the resolution. First, your letter to me emphasizes the importance of sustainable recovery--I underline the "sustainable" part because I believe that is the key. That, I believe, requires that we integrate policies for recovery with continued attention to the inflationary danger, and I believe any resolution should, in effect, indicate the urgency of "sustainable, non-inflationary" recovery. That theme seems to me appropriate for the United States and other countries, including countries not represented at Williamsburg. The point is only if inflation, which has been significantly lowered in this country, is generally reduced and remains law, can we expect interest rates, financial markets, and other economic factors to be consistent with a lasting recovery in the world economy. Second, the proposed resolution calls for the establishment of a plan to extend the maturity of foreign debt owed by developing countries. I am not certain what you mean to convey by that provision. I would note that in important cases, as part of comprehensive, IMF-approved, external financial and economic stabilization programs, lenders have negotiated a stretchout of existing loans. Such arrangements are appropriate when they contribute to a viable overall solution; in that sense I sympathize with the apparent intent of the section. However, such arrangements involve private creditors here and abroad and need to be considered on a case-by-case basis; the situation of The Honorable Fernand J. St Germain Page Two "forced" each borrowing country is unique. Moreover, a generalized urage program of restructuring debts could well, on balance, disco during private lenders and result in a lower net flow of resources recovery this difficult period than would be necessary to sustain of and adjustment. In the light of the ambiguities in meaning the section as drafted, I would suggest its deletion. ct Third, the resolution calls for a commitment to corre in the any lack of uniformity or deficiencies which now exist this regulation and supervision of international banking. While a subject is rather technical, would be somewhat unusual for a much Summit agenda, and necessarily involves authorities in n of larger group of countries, I would welcome your recognitio I have the importance and relevance of the issue. As you know, s devoted considerable attention to this area in recent month d even-hande and one key problem is, indeed, the need to insure by treatment of banks that are subject to differing treatment complexitheir respective national authorities. There are great time. ties, and supervisors have been working on them for some Additional impetus that might be supplied by the proposed resolution could be useful. I hope that you find these comments helpful. Sincerely, Tc,Tx,.i; nruei, PAV:EMT:vcd (V-52) bcc: http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Mr. Truman Mr. Dahl Mrs. Mallardi (2) FERNAND J. ST GERMAIN, R I., CHAIRMAN HENRY B. GONZALEZ. TEX. JOSEPH G. MINISH. N.J. FRANK ANNUNZIO. ILL PARREla J. MITCHELL, MD. WALTER E. FAUNTROY, D.C. STEPHEN L NEAL N.C. JERRY M. PATTERSON, CALIF. 'ARROLL HUBBARD. JR., KY. JOHN J. LAFALCE. NY NORMAN E. °AMOURS, N.H. STAN LUNDINE. NY. MARY ROSE °AKAR. OHIO BRUCE F. VENTO, MINN. DOUG BARNARD, JR. GA. ROBERT GARCIA. N.Y. MIKE LOWRY, WASH. CHARLES E. SCHUMER, N.Y. BARNEY FRANK. MASS. PATMAN, TEX ▪ WILLIAM J. COYNE, PA. BUDDYROEMER. LA. RICHARD H. LEHMAN, CAUF. BRUCE A. MORRISON. CONN. JIM COOPER. TENN. MARCY KAPTUR. OHIO BEN ERDREICH, ALA. SANDER M. LEVIN, MICH. THOMAS R. CARPER. DEL ESTEBAN EDWARD TORRE& CALIF. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis U.S. HOUSE OF REPRESENTATIVES COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS NINETY-EIGHTH CONGRESS 2129 RAYBURN HOUSE OFFICE BUILDING CHALMERS P WYLIE. OHIO STEWAR1 B McKINNEY. CONN. GEORGE HANSEN. IDAHO JIM LEACH, IOWA RON PAUL. TEX. ED BETHUNE. ARK. NORMAN D. SHUMWAY, CALIF. STAN PARRIS, VA. BILL McCOLLUM. FLA. GEORGE C WORTLEY, N.Y. MARGE ROUKEMA, N.J. BILL LOWERY, CALIF. DOUGLAS K. BEREUTER, NEBR. DAVID DREIER, CALIF. JOHN HILER. IND. THOMAS .1. RIDGE. PA. STEVE BARTLETT, TEX. WASHINGTON, D.C. 20515 225-1217 March 22, 1983 Honorable Paul Volcker Chairman Board of Governors Federal Reserve System Washington, D.C. Dear Mr. Chairman: Though in recent weeks there have been occasional signs of improvement in the international economic and financial situation, I remain deeply concerned about the longer term outlook. In my judgment, on an international basis, every effort must be made to bring about a sustainable worldwide recovery and to structure a safe and sound international banking system. To encourage the multilateral efforts I feel are so vitally necessary, I have introduced H.J. Res. 208, the International Recovery Resolution, and written to President Ronald Reagan urging his support of the resolution. H.J. Res. 208 would require the U.S. Representative to the Summit of Industrialized Nations scheduled to meet in Williamsburg, Virginia in late May, 1983, to take whatever actions are necessary to assure that multilateral fiscal, monetary, and regulatory reforms are included on the Summit agenda. Copies of H.J. Res. 208, my House Floor remarks upon its introduction, and my letter to the President are enclosed. It is my hope that I will have your support in the coming weeks as I seek to obtain passage of H.J. Res. 208. Sincerely, J. S Germain 4" 0 6 i nd Fe8 g Chairman FJStG:gDj Enclosures H1381-82 Congressional Rttord United States of America Vol 129 n PROCEEDINGS AND DEBATES OF THE yO CONGRESS, FIRST SESSION WASHINGTON, THURSDAY, MARCH 17, 1983 venient, since up. A.return to the Egli rate policies H.J. Res. 208 INTERNATIONAL RECOVERY RESOLUTION The SPEAK:ER pro tempore. Under a previous order of the House, the gentleman from Rhode Island (Mr. ST GERMAIN) is recognized for 10 minutes. •Mr. ST GERMAIN. Mr. Speaker, as you' know. the House Banking Committee recently completed 4 days of hearings on the international lending problem, the U.S. economy, and the IMF quota increase. At-those hearings, we heard the testimony of Treasury Secretary Donald Regan, Federal Reserve Chairman Paul Volcker, representatives of Citibank, Chase Manhattan Bank, and Bank of America, and numerous experts on economics and international banking We also recently completed 2 days of hearings on the rising trend of mortgage foreclosures In the United States. The testimony of hard-working men and women who had never been unemployed in theirlives until this recession and who have lost or are about to lose their homes or farms through foreclosure had a profound impact on me and ins committee colleagues. The committee acted promptly and passed H.R. 1983, the Emergency Housing Assistance Act, which will be considered by the House next week. Admittedly there are signs of improvement in the American economy, but from what I am hearing about unemployment, forced home and farm sales, small business bankruptcies and the like, our economy is a laong way from being what it. could and should be.. From all that I heard in those many days of hearings, four facts became clear to me. First, our primary concern has to be for the well-being of citizens In our country. Second, if there is going to be any hope at all of solving the international debt problem, we clearly need to have a strong and sustained recovery here in the United States and in the other industrialized nations of the world. Third, the large American money center banks did not exercise the judgment they should have in their foreign lending activities, and ultimately gignitirant international bank regulatory reform will be needed if we are to avoid similar situations in the future. And fourth, increasing the U.S. commitment to the International Monetary Fund is an essential element in maintaining world economic stability, and because the U.S. economy is critically dependent on world economic growth and prosperity, the increase will enhance the economic outlook for the United States. One of the major obstacles to a sustained recovery is the potential for another flip-flop by the Federal Reserve Board excessively concerned about inflation and forcing interest rates back http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis th of the first 2 years of the Reagan administration is a prescription for d1-ccter. We must not allow the Federal Reserve to shift once more. For the sake of our own domestic economy and for the economic well-being of the world, it is imperative that we implement monetary and fiscal policies that will bring about interest rate reductions and a return of sound economic growth. Another potential obstacle to a strong recovery is the mounting international debt crisis. Many developing countries are faced with debt payments that they cannot afford, due to the worldwide recession, and high interest rates. In fact, some of these struggling nations are actually unable to afford even the interest payments on their debts. The danger of a default snowballing into international financial disaster grows each day. TO free up resources in the developing nations for growth, we must begin discussions toward a multilateral plan to stretchout foreign debt for developing nations. We have a golden opportunity to express our commitment to a strong and growing domestic economy and a restoration of global economic growth. In late May, representatives of the largest industrial nations in the world will gather for an economic summit in WEIitarnAourg. Va. Bin Speaker, I strongly urge that the United States should not repeat the Toronto mistake of having no agenda and refusing to acknowledge our problems, but instead we should use the WilifArmsburg summit to announce our commitment to lower Interest 'rates, lower deficits, and a strong recovery around the world. In addition, I urge that we take whatever actions are necessary to assure that the agenda of the economic summit includes consideration of multilateral agreements to extend the maturity of the foreign debt of the developing nations and to correct the deficiencies which now exist in the regulation and supervision of international banking To assure that this opportunity is not missed, Mr. Speaker, I am introducing the international recovery resolution, a House joint resolution, expressing the sense of the House that the United States should use the upcorning economic summit to make clear its willingness to pursue monetary and fiscal policies and take those International financial actions which will contribute to world economic recovery. Mr. Speaker, action on the international recovery resolution is needed because for many nations, short-term loans, lasting only a few years, are a convenient fiction. Neither the banks nor the nations believe that the loans will ever be repaid. Instead, the loans will be rescheduled when the payments come due. For banks this is con- No. 34 they collect large sums of cash up front as rescheduling fees. and then continue to pretend that their loans will be paid. Meanwhile, debtor nations find themselves borrowing more money simply to make the interest payments on previous loans. I am fearful that this may prove to be simply a giant, international Ponzi scheme; an international house of cards that must collapse of its own weight. Sooner or later, rationally or in a panic, we must face facts. The developing country debt problem is serious, and getting worse. As nations borrow to make interest payments on earlier loans, the problem simply spirals. Recent declines in oil prices will hurry this process as OPEC nations pull their liquid investments out of western nations, and retrench on lending to their nonoil exporting neighbors. Fortunately, there is still time for a rational appraisal of this debt problem. There is still time for negotiations toward a multilateral stretchout of the existing loans. By converting them to more manageable long-term debt, there is a good chance they can be repaid. But that process must begin soon, and the Williamsburg summit in May is the right place at the right time. We cannot let this opportunity slip by. If a few nations defaulted, there would be increased pressure for banks to pad their bad debt reserves further, and force rates even higher. Higher rates could force other countries into default as their payments increased. The upward spiral of rates, and downward spiral of international solvency has only one end: an international depression. The keys to preventing this di-c2-sterous chain of events- are low interest rates and a rational reordering of developing nations debt. Lower U.S. interest rates will reduce payment for debtor nations as the dollar falls from Its overpriced level on international markets. But lower interest rates will only come from a monetary policy that allows a strong recovery, and from tax and spending changes that reduce budget deficits, in the future. The United States should clearly announce that we are ready to lead the way to a worldwide recovery. The time for retrenchment, high interest rates and recession is past. This measage would reassure our 11 million unemployed citizens, and would be a great relief to the millions of unemployed people across. the. world for whom recovery means jobs, adequate food, and renewed dignity. The international recovery resolution will put the Congress firmly on record in favor of recovery policies by our Nation and other developed countries. It will help assure that the most (over http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis urgent problem of international debt reschedliling is discussed at the near- est appropriate international meeting—the Williamsburg summit Finally, it will send a strong signal to our constituents, and'to our allies that the United States is ready to assume its rightful mantle of leadership in these troubled economic times. H.J. Res. 208 Whereas the economic well-being of all Americans depends on world economic growth and prosperity; Whereas millions of American Jobs have been lost through worldwide recession, and 35 per centum of our GNP decline in the 1981-82 recession was due ta a sharp drop in exports; Whereas world economic recovery is being retarded by high United States interest rates, and by the overwhelming magnitude and short maturity of the developing nations' foreign debt; Whereas if the time allowed for developing nations to repay their debts were lersthened„ the international debt crisis would be substantially eased, and financial resources within these countries could. be • turned to expanding growth; Whereas expanded growth of developing countries will help to restore American export markets lost in the worldwide recession, and bring back millions of American jobsc Whereas bank regulation in individual nations which was designed to meet internal. rather than international needs, lacks uniformity from nation to nation. and may • have contributed significantly to the current international debt crisis: Now, therefore, be it Re-solved by the Senate and House of Representatives of the United States of America In Congress assembled. That it is the sense of the Congress of the United States that the United States should use the upcoming economic summit meetings in Williamsburg. Virginia. to indicate its willingness to pursue monetary and fiscal policies necessary to stimulate growth in this country, and to help lead a world economic recovery by taking such actions as are necessary to assure that the agenda of the economic summit meetings will include: (1) consideration of a multilateral agreement to adopt national fiscal and monetary policies designed to bring about a prompt reduction in worldwide unemployment, and interest rates; (2) inauguration of a plan to extend the maturity of foreign debt owed by developing nations; and (3) commitment to correct any lack of uniformity or deficiencies which now exist in the regulation and supervision of international banking.* FERVA.N0 J. ST GERMAIN, R.I., CHAIRMAN HENRY 8 GONZALEZ. TEX. JOSEPH G MINISH, N.J. FRANK ANNUNZIO, ILL PARREN J. MITCHELL MD. WALTER E. FAUNTROY. D.C. STEPHEN L NEAL N.C. JERRY M PATTERSON. CALIF. CARROLL HUBBARD. JR., KY. JOHN J LAFALCE, N Y. NORMAN E. D'AMOURS. STAN LUNDINE. N Y. MARY ROSE OAKAR, OHIO BRUCE F. VENT°. MINN DOUG BARNARD, JR., GA. ROBERT GARCIA, N.Y. MIKE LOWRY, WASH. CHARLES E SCHUMER. N.Y. BARNEY FRANK, MASS. BILL PATMAN, TEX. WILLIAM J. COYNE. PA_ BUDDY ROEMER, LA. RICHARD H. LEHMAN, CALIF. BRUCE A. MORRISON. CONN. JIM COOPER. TENN. MARCY KAPTUFL OHIO BEN ERDREICH, ALA. SANDER M. LEVIN, MICH. THOMAS R. CARPER, DEL ESTEBAN E. TORRES, CALIF. U.S. HOUSE OF REPRESENTATIVES COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS NINETY-EIGHTH CONGRESS 2129 RAYBURN HOUSE OFFICE BUILDING WASHINGTON, D.C. 20515 CHALMERS P. wYLIE. OHIO STEWART B NIcKINNEY, CONN. GEORGE HANSEN. IDAHO JIM LEACH, IOWA RON PAUL TEX. ED BETHUNE, ARK. NORMAN D SHUMWAY, CALIF. STAN PARRIS, VA. BILL McCOLLUM. FLA. GEORGE C. WORTLEY, N.Y. MARGE ROUKEMA, N.J. BILL LOWERY, CALIF DOUG BEREUTER. NEBR. DAVID DREIER. CALIF. JOHN MILER. IND THOMAS J. RIDGE, PA. STEVE BARTLETT, TEX. 225-4247 March 22,1983 The President The White House Washington, D.C. 20500 My dear Mr. President: I feel strongly that every effort must be made, domestically and internatio nally, to bring about a sustainable worldwide economic recovery and to structure an international banking system that can finance that recovery in a safe and sound manner. This effort will require multilateral commitments to fiscal and monetary policies that will result in renewed growth and employment, to reductions in the financial pressures on the developing nations, and to improvements in the regulatory programs that govern international banking safety and soundness. The United States has a great opportunity to take the lead in this effort at the Summit of the Industrialized Nations scheduled to meet in Williamsburg in late May, 1983. To encourage U.S. leadership at the Williamsburg Economic Summit, I have introduced N.J. Res. 208, the International Recovery Resolution. H.J. Res. 208 would require the U.S. representative to take whatever actions are necessary to assure that fiscal, monetary and regulatory reforms are included on the Summit agenda for consideration by the assembled nations. A copy of that resolution is enclosed. Mr. President, I respectfully urge your support of H.J. Res. 208. In addition to the clear need for substantive improvements in international bank supervision and in worldwide economic conditions, I am convinced that the climate for your request for increased contributions to the International Monetary Fund would be enhanced by.a positive response from your Administration to H.J. Res. 208. Si erely, Fernand J. St -Germain /Chairman Enclosure http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis r http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis April 7, 1983 The Honorable Walter E. Fauntroy Chairman Subcommittee on Domestic Monetary Policy Committee on Banking, Finance and Urban Affairs House of Representatives Washington, D. C. 20515 Dear Chairman Fauntroy: Thank you for your letter. of April 6 concerning your Subcommittee's hearings on the structure and function of domestic institutions engaged in the purchase and sale of United States government debt instruments. As you are aware, I have_asked Mr. Anthony M. Solomon, President of the Federal Reserve Bank of New York, to appear before your Subcommittee on behalf of the Board on Monday, April 25. Sincerely, CO:vcd bcc : President Solomon Mr. Axilrod Mrs. Mallardi (2)1 4", President Solomon will testify accompanied by Messrs. Sternlight and Geng • WALTE.P,‘E. FAUNTROY, D.C., CHAIRMAN GEORGE HANSEN, IDAHO RON PAUL, TEX BILL McCOLLUM, FLA, BILL LOWERY, CALIF JOHN HILER, IND. STEPHEN L NEAL, N C DOUG BARNARD, JR., GA. CARROLL HUBBARD, JR.. KY. BILL PATMAN, TEX. BUDDY ROEMER, LA BRUCE A MORRISON, CONN. JIM COOPER, TENN THOMAS R CARPER, DEL U.S. HOUSE OF REPRESENTATIVES SUBCOMMITTEE ON DOMESTIC MONETARY POLICY H2-109, ANNEX NO 2 WASHINGTON. DC 20 515. (202) 226-7315 OF THE COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS NINETY-EIGHTH CONGRESS WASHINGTON, D.C. 20515 April 6, 1983 The Honorable Paul A. Volcker Chairman Board of Governors Federal Reserve System 20th and Constitution Avenue, N.W. Washington, D. C. 20551 Dear Paul: On Monday, April 25, 1983 the Subcommittee on Domestic Monetary Policy in exercise of its oversight authority will meet to take testimony on the structure and function of those domestic institutions engaged in the purchase and sale of United States government debt instruments. This has been a matter which has previously been studied by this Subcommittee and this hearing continues my deep interest and concern about the safety, soundness, function, and structure of our debt markets. I understand that the Federal Reserve Bank of New York has increased its regulatory efforts in this area since the failures of Drysdale Government Securities, Inc. and Lombard -Wall Inc. last year, and that additional regulatory schemes are being contemplated. I also understand that both this regulatory effort and any subsequent schemes would be applied first, and only directly, to the 36 dealers with whom the New York Bank has a specific relationship with the further effectiveness of any regulatory effort occuring through the insistence by this group that the same standards be followed by other dealers with whom they maintain business relationships. I would like you or your designee to testify on this date to these matters. Specifically, I hope your testimony will address the following questions: http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis L 1. What concerns are held by the System with respect to the conditions of firms engaged in the purchase and sale of government securities including both financial and operational matters? 2. Whether the size of the pending government deficit will have an adverse effect on the ability of the market to absorb the deficit without undue upward pressures on interest rates and the safety and soundness of government security firms. Chairman Volcker 3. 4. 5. - 2 - April 6, 1983 rve Whether the number of dealers with whom the Federal Rese might has a direct relationship should be expanded, how this in the be accomplished, and whether there should be changes and standards governing those who are engaged in the purchase sale of government securities; s by Whether direct regulation of all government security firm ive the Federal Reserve should be undertaken and what legislat changes might be required to implement such a scheme; Exemptions from certain provisions of the bankruptcy law ements. controlling assets when those assets are repurchase agre been I am also very much interested in discussions which have to the possible ongoing at the Federal Reserve Bank of New York related discussion of the imposition of capital ratios. I would like a thorough ntages such issues surrounding this matter which should include the adva as a narrowing a rule could conceivably bring and the disadvantages such of the number of qualified dealers. sal or I realize that the System has not yet finalized any propo any potential suggestion. I am not looking for any finalized version of the issues are regulatory scheme. Rather, I want to be sure that all of I will be holding being fully examined and discussed. Towards that end, be any other further hearings on this matter. There will not, however, it would not be witnesses at this hearing since I have determined that uate time to useful to engage in any debate before there has been adeq industry will assess Federal Reserve System comments or concepts. The be given adequate time to comment on a subsequent date. 1983 The hearing will commence at 1:00 p.m. on Monday, April 25, e Rules in Room 2128 of the Rayburn House Office Building. Committe testimony at provide that witnesses should provide 100 copies of their bring with least 24 hours before the hearing. Witnesses should also the press them additional copies if they want to be sure that members of copies and the public who may be in attendance are to be provided with of their testimony. cted Any questions concerning this oversight hearing should be dire ed be reach to the Staff Director of the Subcommittee, Howard Lee, who may at 226-7315. Sincerely yours, Walter E. Fauntroy Chairman Paul, I understand to testify on this matter officials of the New York am most pleased to extend http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis that Tony Solomon has been designated by you and that he will be accompanied by other Fed. That is an acceptable arrangement and I to him my welcome. NOT FOR RELEASE UNTIL MONDAY, APRIL 11,. 1983 10 a.m. April 7, 1983 The Honorable John Heinz Chairman Subcommittee on International Finance and Monetary Policy Committee on Banking, Housing, and Urban Affairs United States Senate Washington, D. C. 20510 Dear Chairman Heinz: As you know. the bank regulators have been working together to review the regulatory framework and supervisory approaches relating to foreign lending by U. S. banks. Enclosed please find a Joint Memorandum on international lending which summarizes our proposals on the subject. Along with the Joint Memorandum are four appendices covering some topics in greater detail. We appreciate the opportunity for public discussion Congressional hearings on this sublect provide, and we which look forward to any further consideration that the Congress and other interested parties put forward. We appreciate the urgency of action in this area in connection with the IMF legislation, and we will, of course, continue to work with you in the effort to improve public policies on foreign lending by U. S. banks. Sincerely, C. T. Conover William M. Isaac Paul A. Volcker Enclosures http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis IDENTICAL LETTERS TO CHAIRMAN GARN, SENATOR PROXMIRE, CHAIRMAN ST GERMAIN AND CONG. WYLIE EMT:vcd bcc: Mr. Truman Ms. Jacklin Mrs. Mallardi (2) http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis April 7, 1983 Joint Memorandum Subject: Program for Improved Supervision and Regulation of Internationnal Lending • In recent years, the banking systems in the United States and abroad have extended large amounts of credit to foreign borrowers, including foreign governments. As a result of strained economic conditions worldwide, a number of countries, particularly in Latin America, have simultaneously experienced reduced foreign exchange earnings and external financing problems, thus helping to precipitate problems in servicing debt burdens built up over a number of years. As part of the necessary readjustment, many of the major borrowers have adopted economic stabilization programs approved by the IMF and involving, in addition to important domestic ion measures, both the restructuring of existing bank credits and the extens of a limited amount of new credit. This situation has raised concern that ces there should be in place strengthened supervisory and regulatory practi ies. aimed at avoiding excessive concentrations of credit in foreign countr In response to these problems, the federal bank regulators have reviewed a number of suggestions for strengthening supervision and n regulation of United States depository institutions engaged in foreig lending. Some foreign lending (e.g., that to private companies abroad) elements includes elements of credit risk analogous to domestic lending -resources relating to the capacity and willingness of borrowers to generate from operations to repay debts. Lending to foreign governments (i.e., not subject "sovereign lending"), while not entirely free of credit risk, is to the same "market test" of potential insolvency. However, all foreign private or public lending must take account of risks not present in domestic lending, that is "transfer risk." Thus, overall "country exposure" is also foreign lending. a relevant concept for assessing the risks involved in • -2-"Transfer risk" means the possibility that a borrower may not be able to maintain debt servicing in the currency in which the debt is to be paid because of a lack of foreign exchange. A bank's "country exposure" is defined as all cross-border and cross-currency claims and contingent claims on residents of the country, plus other credits guaranteed by residents of the country, less credits guaranteed by residents of other countries and net local currency assets of the bank's offices in the country. As result of our review of the supervision and regulation of foreign lending, a five-point program has been developed. The objective of the program is to encourage prudent private decision-making in foreign lending that appropriately recognizes the risks while permitting the exercise of lender discretion in the funding of creditworthy borrowers both here and abroad. The proposed procedures reinforce two of the basic principles of sound banking -- diversification of risk and maintenance of adequate financial strength to deal with unexpected contingencies. The program will help assure earlier recognition of potential international payments problems, encourage orderly responses to these problems, and http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis provide for stronger reserves to meet adverse conditions when they infrequently, but inevitably, arise. The five-point program consists of the following elements: 1. Strengthening of the existing program of country risk examination and evaluation; 2. Increased disclosure of banks' country exposures; 3. A system of special reserves; 4. Supervisory rules for accounting for fees; and 5. Strengthening international cooperation with foreign banking regulators and through the International Monetary Fund. • -3-The program constitutes an integrated package -- none of the elements alone could accouiplish the intended objectives. summarizes the principal aspects of the five points. This memorandum Separate appendices have been attached providing elaboration for some of them. This program has been designed to create incentives for prudent lending but without establishing arbitrary obstacles to international capital movements or preventing the continuation of credit flows to http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis credit-worthy borrowers. Depending upon particular circumstances, continued capital flows to basically credit-worthy countries in current strained economic conditions remains appropriate -- especially in the context of IMF-approved economic stabilization programs -- in order to encourage appropriate adjustment by borrowers to their problems, to maintain their capacity to service their outstanding debt, and therefore to preserve the integrity of existing bank assets. These considerations are, of course, not unique to international lending, but the scale of the lending to particular foreign borrowers means that broader considerations of the stability of the international financial and economic system are at stake as well; this fact is reflected in the role of the IMF and other official lending. The five-point program set forth in looking toward the future is designed to recognize these circumstances. 1. Strengthening of Country Risk Examination and Evaluation As a first step, the federal banking regulators intend to strengthen their present program of country risk examination and evaluation basically established in its present form in 1979. Our review of the operation of this system indicates that increases in banks' country exposure have not in all cases been brought to the attention of high level management as explicitly and forcefully as they probably should have been. This http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -4- procedure can be made more effective by establishing clearer guidelines for examiners irlformulating exposure warnings and for assuring that these • warnings are considered at the policy-making level within bank management. Its more effective use should help to avoid risk concentration and to increase risk diversification. As a separate part of country risk examination and evaluation, the federal banking regulators will also analyze a bank's capital adequacy in relationship to the level of diversification of the bank's international portfolio. Those institutions with relatively large concentrations of credit in particular countries will be expected to maintain generally higher overall capital ratios than those institutions that are well diversified. As part of this process, the banking regulators will further develop, as a reference point, standards for country exposure concentration as it relates to capital adequacy. Because banks vary in their current capital positions and other elements of risk exposure, the implications for the capital adequacy of any particular bank would have to be evaluated on a case-by-case basis. In general, the characteristics of a bank's country exposure will be considered a factor to be weighed in the application of the capital adequacy guidelines used by the federal banking agencies. Thus, recommendations on capital levels as a function of country exposure concentrations will form an integral part of the overall supervision and regulation process. In accordance with their recommendations in this regard, the banking regulators will expect appropriate corrective action as necessary to conform to safe and sound banking practices, taking full account of the need for flexibility in some circumstances for responding to needs for additional credit as part of well-considered adjustment programs. -5Additional details on the federal bank regulators' development of procedures to strengthen the supervision of country risk are contained in Appendix A. 2. Additional Disclosure Experience suggests that the identification of increased country exposure and transfer risk based on a subjective analysis of economic factors, particularly in cases of larger countries, may not always take place at a sufficiently early stage so as to make adjustment in banks' lending feasible without jeopardizing service of existing debts or, indeed, disruptions of the financial system more generally. Disclosure triggered by subjective risk evaluation may aggravate the problem. However, more routine disclosure, centered around the concept of concentration, may strengthen other approaches, helping to bring appropriate marketplace discipline to bear on lending decisions. Depositors and investors, through their individual decisions, will have the information to assess better the prudence of foreign lending and require greater risk diversification and adequate reserves as the condition for their increased deposits and investments in banks' equity and other securities. Banks will need to be prepared to defend policies leading to large and concentrated country exposure as a consequence of their continuing reporting requirements, and indeed considerable movement has been made in that direction by some institutions. made more uniform. The best current practice should be TO that end, individual banks should make public disclosure of all concentrations of country exposure that are material. Another step toward better analysis of developing trends in international lending is more frequent and earlier availability of aggregate data. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis To this end, reports on material country exposure should be submitted -6-to the banking supervisors quarterly, instead of semiannually as at present. In this connection, the banking supervisors will require that the reports be submitted more promptly than in the past so that the aggregate information on lending by U.S. banks can be made available to the public on a more current basis. Additional details on the proposed reporting and disclosure requirements are contained in Appendix B. 3. Special Reserves Another incentive for risk diversification and increased financial strength can be created through establishment of a system of provisioning against certain country exposures. When a borrower has been unable to service its debts over a protracted period of time, whether or not that borrower is a sovereign, it is appropriate to recognize the risks and the diminshed quality of the assets represented by these loans. Indeed, to the extent interest has not been paid, that by itself diminishes the value of the underlying asset. It is prudent that the lending institutions establish specific provisions against such assets in order to reflect more accurately the current condition of the asset. Although some banks now make reserve provi- sions for such purposes, this approach should be more systematic. Such provisions would be deducted from current earnings and, to the extent required by regulation, would not be included in capital for regulatory and http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis accounting purposes. The prospective requirement for reserving, with its attendant bottom-line earnings impact, should act as a cautionary element when the initial decision to lend is being made. Such reserve provisions would not apply to lending to a country where the terms of any restructuring of debt were being met, where interest payments were being made and where -7- the borrowing country is ccuiplying with the terms of an IMF-approved stabilization program. Appendix C contains additional details on the proposed reserve provisioning for credits to countries with severe and protracted debt servicing problems. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 4. Accounting For Fees This program element would establish rules for accounting for fees charged in connection with international lending. Some concern has been expressed that so-called front-end fees, when taken into income in the auarter or year in which they are charged, provide an added incentive to seek out international loans in order to boost earnings immediately and, once this has occurred, to sustain past earnings levels. The general practice in the industry is, apparently, to treat a portion of these loan fees -- that part which is paid to all participating lenders -- as interest to be taken into earnings over the maturity of the credit and the remainder -- syndication fees -- as current income. However, specific practice apparently varies, and the more conservative practices may not prevail generally. Therefore, it would be desirable to assure uniform rules so that artifical incentives are not created for foreign lending. To this end, the regulators are prepared to establish rules to require that front-end fees be treated as interest except when they are identifiable as reimbursement of direct costs. Appendix D contains an analysis of accounting for fees on syndicated international credits and an explanation of the proposed guidelines for such fees. -8-- 5. International Cooperation Prpsent problems in foreign lending are international in scope, and an effective program for limiting the potential scope for such problems in the future must be coordinated with bank supervisors abroad and with the activities and operations of the International Monetary Fund. Coordination with overseas bank supervisors can help to avoid competitive inequalities, to assure equal treatment of lenders and borrowers, and to reinforce the effectiveness of U.S. programs. The bank regulatory agencies will seek understandings with foreign bank authorities to help achieve the objectives of risk diversification and strengthened financial condition that we have set for ourselves. Similarly, the IMF can play a major role, particularly with borrowers, in avoiding situations involving excessive build-ups of credit, especially short-term credit. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis We intend to work in the following areas to improve information flows and to ensure a more effective IMF surveillance process: 1. In its consultations with member governments on their economic policies, the Fund should intensify its examination of the trend and volume of external indebtedness of private and public borrowers in the member country and comment to the country and in its reports to the Executive Board on such borrowing from the viewpoint of its contribution to the economic stability of the borrower. The IMF might also consider the extent or form that these comments might be made available to the international banking community and the public. 2. As part of any member's stabilization program approved by the IMF, the Fund should place limits on public sector external short- and long-term borrowing; and -9- 3. As a part of its Annual Report, and at such times as it may consider desirable, the Fund should publish information on the trend and volume of international lending in the aggregate as it affects the economic situation of lenders, borrowers and the smooth functioning of the international financial system. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Consideration of Lending Limits The foregoing program does not include the establishment of country lending limits. It was concluded that lending limits based upon objective criteria are likely to be too rigid. Such limits would fail to distinguish between countries capable of carrying substantial debt without significant transfer risk and countries where smaller amounts of debt still raise large transfer risk problems. On the other hand, lending limits based ious on subjective judgments that change over time are likely to have capric and abrupt effects on flows of credit, imply a degree of foresight on the part of the regulators that may not be realistic, and be difficult to administer fairly while avoiding political complications. Finally, in view g limits of the substantial exposures already incurred, a program of lendin would not be workable except with a very long transition period that would tend to vitiate its credibility. The problem that is before the international financial community to today is one of maintaining a reasonable flow of international credit allow time for orderly adjustment. As for the future, as levels of exposure and decrease over time, the program of intensified regulatory surveillance reserves, evalution of country exposures, additional disclosure, special should rules for fee accounting, and improved international cooperation international prove sufficient to deal with build-ups of concentrations of credit that might threaten a sound banking system. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -10- Implenentation Authority The bank regulatory agencies' authority to define and prevent unsafe and unsound banking practices under their enabling statutes and the Financial Institutions Supervisory Act of 1966 could be used to implement the program outlined above insofar as they require regulatory action. A nImber of similar measures have been taken in the past utilizing this authority and the courts have generally sustained the banking agency actions. To be effective, the banking agencies must demonstrate a clear link between the established prudential practice and the safety and sS undness of depository institutions -- a relationship that past experience indicates can 5--stablished in the area of international lending. In view of the existence of this authority it would not be desirable to establish rigid or inconsistent legislative rules that could limit the ability of the banking regulators to adapt the program as they gain experience with its implementation and could have the unwarranted and unintended effect of discouraging the international lending necessary to support world trade and economic recovery. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis APPENDIX A PROPOSED REVISIONS TO EXAMINATION PROCEDURES TO STRENGTHEN SUPERVISION OF COUNTRY RISK In 1979, the bank regulatory agencies put in place new examination procedures for supervising country risk in U. S. bank portfolios. In retrospect, it is clear that these procedures did not have sufficient impact to temper adequately the buildup of concentrations of credit to foreign countries that were potentially vulnerable to external debt service problems. The proposed changes are designed to integrate more fully country risk considerations into the examiners' overall rating of the condition of a bank, to identify problem credits at an earlier stage, to include more specifically transfer risk in the analysis of the adequacy of a bank's capital, and to improve the presentation to a bank's management and directors of concerns of the banking agencies about large concentrations of country exposure. Changes would be made along the following lines: (1) New categories will be employed for identifying credits that are not performing because of a country's debt service problems. categories will replace the traditional classification These categories originally designed for evaluating commercial risk, but also currently used for transfer risk, and would more clearly reflect the types of problems that arise due to transfer risk. (2) Credits in these new categories will be factored into the agencies' evaluation of a bank's asset quality and other measures of financial soundness. (3) Examiners will be required, under guidelines to be developed, to highlight certain large concentrations of credit in the examination report and in communications with the bank's directors. (4) Concentrations of country exposure subject to comment will be factored into the evaluation of a bank's capital adequacy. Banks with large concentrations of country exposure will be expected to have extra capital to support those exposures. (5) Bank managements will be expected to make systematic reports to their boards of directors on country exposures and country conditions. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -2- New Categories for Reflecting Credits Adversely Affected by Transfer Risk The traditional categories that were originally designed for evaluating commercial risk, i.e., substandard and doubtful, have not proved suitable for evaluating transfer risk. The following categories are designed to reflect more closely the types of problems that arise due to transfer risk. The new categories and the definitions for each are: Loss -- Indebtedness considered uncollectible and of such little value that its continuance as a bankable asset is not warranted--for example, repudiated debt. Such indebtedness shall be charged off and no longer be carried on the books of the bank. Reservable — This classification would apply demonstrated protracted debt service problems. when a country had Evidence to that effect would include such factors as (a) full interest payments on indebtedness to banks had not been made for more than six months, (b) the terms of restructured indebtedness had not been met for over one year, (c) IMF or other suitable adjustment programs had not been complied with and there is no immediate prospect for such compliance, or (d) no definite prospects exist for the orderly restoration of debt service in the near future. Debt Service Impaired — This classification would apply when (a) a country has been unable to meet its external debt service obligations and it has not yet adopted viable policies for restoring its debt service capabilities (or is not in the process of doing so), but is generally making required interest payments, (b) there is no evidence that the country will be able to negotiate a successful rescheduling with its creditors in the near future, and (c) the country has not adopted an IMF or other suitable economic adjustment program or is not adhering adequately to such a program. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -3- Other Changes in Supervisory Procedures The other changes under active consideration to strengthen supervisory S rocedures on international lending are: (1) the incorporation into a bank's asset quality rating of credits that fall within the categories just described;(2) the more fS rceful conveyance in examination reports of concentrations of exposure; and of credits to countries currently experiencing liquidity difficulties that have adjustment programs in place; and (3) the inclusion of concentrations of country exposure in the assessment of capital adequacy. Implementation of these changes is complex and requires consideration of many technical factors. Details of these changes, including the criteria to be employed and the guidelines to be followed, are a result still being developed and refined by the banking agencies. In addition, supervisory policies are being developed to insure that boards of directors are adequately reviewing and more fully supervising the international lending policies and decisions of their banks. II APPENDIX B REPORTING AND PROPOSED DISCLOSURE OF COUNTRY EXPOSURE Reporting The federal banking agencies have required U.S. banks since 1977 to file a Country Exposure Report semi-annually for federal supervisory purposes. This report, which is published in aggregate, has proved to be very useful both for the bank supervisors and the banks themselves. Other countries have used it as a model for their own consolidated reporting systems for the country exposure of their banks. The growth of international lending and the increased number of short-term international liquidity problems suggests the desirability of more frequent reporting for supervisory purposes. Therefore, the federal banking agencies propose to require U.S. banks to file the Country Exposure Report quarterly rather than semi-annually, and on a tighter time schedule than is now required. The aggregate data would continue to be published by the supervisors. Disclosure Disclosures of concentration of country exposure in U.S. banks need to be more uniform, complete and timely. To this end, the Country Exposure Report (FFIEC Form 009) would be amended to include a disclosure section which the agencies would make available on request. country risk. The disclosure section would indicate concentrations of A sample form is attached. Country exposures exceeding one percent of bank's total assets would be profiled to detail risk. The profile would show exposure on a gross basis and adjusted for third-country guarantees and would show the exposure by sector and maturities. Country exposures between three quarters and one percent of a bank's total assets would also be indicated, but not profiled. Attachment http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis REPORT OF CONCENTRATIONS OF TRANSFER RISK (This report is being collected for public disclosure h. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis and will be made available to the public upon request) Exiosures Exceeding One Percent of TUtAt Assets Credit outstanding after mandated adjustments for transfers ot exposure (1) Country B. q.Jii Exposure ?LlJIPV.1 Three-quarters Total number If countries Credit outstanding before adjustments (2) Distribution of outstandings reported in col. 2 Maturing in re less mthan oI th ., one one year year (6) (7) of One Percent and One Percent of Total Assets Credit outstanding atter mandated adjustments for transfers of exposure List Individual Countries I Total commitments to provide. credit, after adjustments for guarantees (n) GENERAL INSTRUCTIONS FOR REPORT OF CONCENTRATIONS OF TRANSFER RISK A. Exposures Exceeding One Percent of Total Assets The data required for this section must be submitted for each country where "credit outstanding after mandated adjustments for transfers of exposure," exceed 1 percent of a bank's total assets as of the reporting date. Col 1 - Col Col Col Col Col Col Col B. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 2 3 4 5 6 7 8 - Credit outstanding after mandated adjustments for transfer of exposure. Report the sum of the following columns from the Country Exposure Report ("CER")--Cols. 4-9 + 10-11 + 12 + (18-19 provided greater than 0). Col 4 of CER Col 1 of CER Col 2 of CER Col 3 of CER Col 5 of CER Sum of Cols. 6, 7, & 8 of CER Cols. 14 + 15-16 + 17 of (.ER Exposures Between Three-Quarters of One Percent and One Percent of Total Assets Show in this section the total number of countries in which the bank's "credit outstanding in each country after mandated adjustments for transfers of exposure", as computed above, range between three-quarters of one percent and one percent of total assets as of the reporting date. Also show the aggregate amount of all credit to those countries. Finally, list the names of each country. . http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis APPENDIX C PROPOSED RESERVE PROVISIONING FOR CREDITS TO COUNTRIES WIT.H SEVERE AND PROTRACTED DEBT SERVICING PROBLEMS BACKGROUND As part of the review of their procedures for supervising transfer risk in U. S. banks, the bank regulatory agencies have examined the methods used by banks to account for loans to countries with severe and protracted external payments problems. In the opon of the agencies, present procedures IS not always reflect the reduced quality of the credits to such countries and there is no uniformity among banks in their accounting for these credits. Under current procedures, banks are required to review their credits to determine whether all or parts of particular loans should be declared "loss" and charged off or whether additional provisions should be made to the allowance for possible loan losses in light of such credits. This process has not worked well for credits that have been adversely affected due to country risk. In part, this has been because countries, unlike companies, do not declare bankruptcy and there are no established liquidation procedures to provide a valuation basis for such credits. Although some banks have made special provisions to the allowance for possible loan losses because of such credits, the treatment among banks has been uneven, indicating the need for a more systematic approach. Even though credits to a country, absent repudiation, are not "loss" in the tradonal sense, transfer risk problems can seriously impair the liquidity and earning power of an asset. Indeed, to the extent interest has not been paid that, by itself, diminishes the value of the underlying asset. The bank regulatory agencies believe that when the servicing of bank credits has been adversely affected over a protracted period of time due to a country's inabty or unwillingness to service its international debts, the net carrying value of the affected assets should be adjusted in a bank's financial statements through charges to earnings and balance sheet provisions. -2- Since present procedures seem inadequate in this regard, the agencies propose to require banks to make special allocated provisions against certain assets that are found to be severely affected by transfer risk problems. The "allocated transfer risk provisions"(ATRP) would be separate from the general allowance for loan losses and would not be regarded as capital by the agencies. The reserves would be established by a provision against income. In the alternative, a bank would have the option to write off all or part of the loans that are subject to the special reserves and, consequently, reduce the amount of special provisions and reserve balances that would otherwise be required. In connection with consideration of the special allocated provision proposal, the bank regulatory agencies also reviewed the agreement in 1978 for the examination of transfer risk in U. S. banks. This agreement created an interagency committee, the Interagency Country Exposure Review Committee ("ICERC"), to determine when assets should be classified due to transfer risk, and it provided guidelines to be followed in making those determinations. Experience in applying the procedures indicates a need to clarify and revise the categories and definitions used to identify credits adversely affected by transfer risk. The designation of assets experiencing debt service problems as "substandard" and "doubtful" will no longer be used in characterizing credit problems due to transfer risk. designations to be used include a category termed "reservable." New A "reservable" categorization would trigger the requirement for the ATRP. An example of the proposed changes in the call report to implement these procedures is attached (Attachment A). A new "provision" item would be added to the balance sheet. The amount of the reserve item would be deducted from "gross loans" to arrive at "net loans." The reserve would be created by a charge ("provision") against income. PROPOSED PROCEDURES FOR PROVISIONS ON CREDITS TO COUNTRIES CATEGORIZED AS "RESERVABLE" (1) The new category "reservable" adopted by the banking agencies is defined as follows: A "reservable" categorization is warranted when a country has demonstrated protracted debt service problems. Evidence http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis i http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis _3 to that effect would include such factors as (a) full interest payments on indebtedness to banks had not been made for more than six months, (b) the terms of restructured indebtedness had not been met for over one year, (c) IMF or other suitable adjustment programs had not been complied with and there is no immediate prospect for such compliance, or (d) no definite prospects exist for the orderly restoration of debt service in the near future. (2) An Allocated Transfer Risk Provision ("ATRP") is required for assets categorized as "reservable." The provisions are to be established by a charge to earnings. The ATRP is to be separate from the general Allowance for Possible Loan Losses and will not be included as part of the bank's capital funds. (3) No ATRP provisions are required if the bank has already written down the credit by the requisite amount. (4) Senior executives of the OCC, FRB and FDIC will jointly deter mine_the amount and timing of the provisions after reviewing the report of the ICERC on the "reservable" categorization. The initial provision will normally be 10 percent. The transfer risk will be reviewed annually. Depending on the circumstances, additional reserves may be required. Additional provisions, if warranted, will normally be in 15 percent increments. (5) The ATRP may be reversed when a credit is no longer categorized as being adversely affected by transfer risk. (6) Any payment of interest on credits categorized "reservable" should be applied to reduce principal (or credited to ATRP) and not credited to income. The amount of the mandated ATRP may be reduced by the amount of any interest previously applied to principal. Domestic and Foreign Consolidated Report of Condition of .61 al _ (f) - _ diva. of hilliness _ _ _ . I 0111•• o. I 14 . 1r). Onllar Arno isnl in IlintimIntk -. . -. --__ 1.111 Mal ;1,1, 1 du,. (trim ..1 not low. (I owl t y iti!tit R. (ilium!, A) . . CD 2 U.S. Treasury serail dies 3. 01)hr:10112ns of other U.S. Government agencies and corporations 4. Ohligation; of Stntes aryl politicnI subdivisions in the United-tiFfes 5 Other bonds, noteç. and debentures 6. Fcciel R"scrve stock and corporate. stock 7. Tradinq account securities , 8. FPrir.,ral funds sold and securities purchased under agreements to resell in domestic offices o 1 bank and , of. its Edge and Agreement subsidiaripc I 9. a. I...rans, Total (excluding unearned income)(From Schedule A, item 10, Column A) h. Less: allowance for possible loan losses -____. Less: Allocated Transfer Risk Provicdon c. Loans, Net 10 Lease financing receivables 11. Bank pr cmises, furniture ttld fixtures, and other assets representing bank premises 12. Real estate owned other than bank premises 13. Investments in unconsolidated subsidiaries and associated companies 1 14. Customers' liability to this bank on acceptances.outstanding 15. Other assets.(From Schedule G. item 31 16. TOTAL ASSETS (sum of items 1 thrit 151 a) /ITEMS 17 THROUGH 24.a(2). REFER ONLY TO DEPOSITS IN DOMESTIC OFFICES OF T -IE BANK 17. Demand deposits of individuals, partnerships, and corporations (From Schedule F, item It Co umn AI .18. Time and savings deposits of individuals, partnerships, and corporations (From Schedule F. item It, Columns B and C) :3 19. Deposits of United States Government (From Schedule F, item .2, ColumreriotethB &CI 20. Deposits of States and political subdivisions in the United States (From Schedule F, item 3, CoIumns A & B& C) 21. Deposits of foreign governments and official institutions (From Schedule F, item 4, Columns A & B & C). 22. Deposits of commercial banks (From Schedule F, items 5 8, 6, Columns A & B & C) 23. Certified and officers' checks (From Schedule F, item 7, Column A) 24. a. TOTAL DEPOSITS IN DOMESTIC OFFICES (sum of items .17 thru 23) (1). Total demand deposits (Front Schedule F, item 8, Column A) (2). Total time and savings deposits (From Schedule F, item 8, Columns B & C) b. TOTAL DEPOSITS IN FOREIGN OFFICES AND EDGE AND AGREEMENT SUBSIDIARIES (Schedule F/F, item 8) _ c. TOTAL DEPOSITS (sum of items 24a and 24b) 25. Federal funds purchased and securities sold under agreements to repurchase in domestic of(ices of bank and of its Edge and Agreement subsidiaries 26. a. Interest-bearing demand notes (note balances) issued to the U.S. Treasury b. Other liabilities for borrowed money 27. Mortgage indebtedness andliability for capitalized leases 28. Bank's liability on acceptances executed and outstanding 20. Other liabilities (From Schedule H, item 4) , 30. TOTAL LIABILITIES (excluding subordinated notes and debentures);sum of items 24c thru 29) , 31. Sultordinated notes and debentures • eferred stock a. No. shares outstandion co /32. (par value) 33. Common stock a. No. shares aiithori7ed h. No. shares outstanding (parvalue) C.) >, 34. Sur plus 5 35. thidividoil profits _ . rirsce.f yr lot contingencies and other capital rf'Sfr 5/1!S 37. 101 AL EQUITY CAPITAL (sum of items 32 thru 36) .---.--. 38. 10TAL LIABILITIES AND EOUITY CAPITAL (sum of items 30,31 and 37) / 1. Amounts outstanding as of report date: a(1). Standby letters of credit, total I COt 2 ATIAClivrNi:-.7 A 1 hou .__ 2. 3 4. 5. 6. 7. 8. , 9 a. 9.b. 1 ._ 9.c. o. 1. 1 2. 1 3. 4. 1 5. 1 6. 7. 8. 9. ; 0. i .4 1. ; 2. ; 3. ; 4.a. ; : 4.11(2 _ : 4.b. 4.c. 5. 6.a. , 6.b. 27. 28. 29. 30. 31. , 32. . Memoranda .5. (a). To U.S. addressees (domicile) (h). To non-U.S. addressees (domicile) a(2). Amount of standby letters of credit in Memo item in(1) conveyed to others throug i participations .. b Time certificates of deposit in denominations of S100,000 or more in domestic offices r:...t...i.a :.. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis I I 33. 34, I i _ 35. 36. 37. 33. Memo 1.8(1 tan tat: 1 • prrmmrTIEIQT—A— 19. Section A - Sources and Disposition of Income NI mar • to-dat• Dollar Amount in Thousands P.111 1. OPERATING INCOME: • a. Interest and fees on loans b. Interest on balances with depository institutions c. Incnme on Federal funds sold and securities purchased under agreements to resell in domestic offices of the hank and of its Edge and Agreement subsidiaries d. Interest on U.S. Treasury securities e. Interest on oblioations of other U.S. Government agencies and corporations f. Interest on obligations of States and political subdivisions in the U.S g. Interest on other bonds, notes, and debentures Thou 1 a 1.h • h. Dividends on stock i. Income from lease financing j. Income from fiduciary activities k. Service charges on deposit accounts in domestic offices I. Other service charges, commissions, and fees m. Other operating income (from Section 0, item 4) n. TOTAL OPERATING INCOME (sum of items la thru 1m) 2. O''L RATING EXPEN-;E:S. a. Salaries and employee benefits h. Interest on time certificates of deposit of S100,000 or more issued by domestic offices c. Interco on deposits in foreign offices d. Interest on other deposits in domestic e. Expense of Feder al funds purchased and securities sold under agreemerkysto rtpurchase offices of the bank and of its Edge and Agreement subsidiaries f. (1) Interest on demand notes (note balances) issued to the U.S. Treasury (2) Interest on other borrowed money cl. Interest on subordinated notes and debentures h. (1) Occupancy exPense of bank premises, Gross (2) Less: Rental income (3) Occupancy expense of bank premises, Net i. Furniture and equipment expense I. Provision for possible loan losses (from Section C, item 4) Provision for Allocated Transfer Ti.;). k. Other operating expenses (from Sc.ction E, item 3) I. TOTAL OPERATING EXPENSES (sum of items 2a thru 2k) 3 mcomE BEFORE INCOME TAXES AND SECUR ITIES GAINS OR LOSSES (item In minus 21) el. APPLICABLE INCOME TAXES 5. INCOME BEFORE SECURITIES GAINS OR LOSSES (item 3 minus 4) 6. a SECURITIES GAINS (losses). GROSS h. APPLICABLE INCOME TAXES c. SECURITIES GAINS (losses), NET 7. NLT INCOME (item 5 plus or minus 6c) On 7. INCOME: lil:i ORE DK fliA011DINARY II LW; 1 8. EXTRAORDINARY ITEMS, NET OF TAX EFFECT (From Section F, item 2c) , 9. NET INCOME (item 7 plus or minus 8) http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis •••• 2.1 2 2 2., 2 2 2 2 2 2 2. 3. 4. 15. 6. 6 6. 7. 7 8. 9. APPENDIX D PROPOSED SUPERVISORY GUIDELINES FOR ACCOUNTING FOR FEES ON SYNDICATED INTERNATIONAL CREDITS ' A. Description of types of fees and recent practices ' In addition to the stated interest on international syndicated loans (including stated interest adjustments for late payments), banks often require payment of certain fees in connection with these credits. These fees are identified by a variety of terms, and are intended for a variety of for example, a flat fee added specifically to increase the yield purposes: of the loan; a fee designed to cover costs associated with syndicating a loan (e.g., for structuring and negotiating a loan package, underwriting a syndicated loan, advising the borrower); a fee to cover the costs of committing funds on the prescribed terms for a fixed period of time; or a fee for serving as agent in administering a syndicated credit. In addition, banks frequently provide in the loan agreement that the managing bank(s) is to be reimbursed for all out-of-pocket expenses incidental to the arrangement of a credit facility, as well as collection or enforcement costs. (A glossary of terminology and description of the principal fees associated with the extension of international credits by commercial banks is attached.) A survey of a sample of international syndicated loan agreements, concluded between 1978 and 1983, for borrowers in those countries recently experiencing balance of payments difficulties indicates the following: 1/ "Syndication" is the process of arranging a Multi-bank Credit Facility and is characterized by the formation of a Management Group, assumption of "Underwriting Commitments" and participation of various Lending Banks. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -2-1/4 Over this period, commitment fees have ranged generally between to 1/2 percent on availability period. the undrawn amounts of the loan during the Agency fees have varied for example from $7,500 per year to $300,000, with the complexity of the loans. variations perhaps related Practically all the to the size and agreements surveyed had detailed provisions relating to reimbursement of expenses. -- The stated interest rates on the loans surveyed by-and-large ranged around 1% to 1-5/8% above LIBOR, with only a few notable exceptions. -- Management and other front-end fees were unstated in the loan documents in the majority of cases, with the fees established by a side agreement. It is not clear the extent to which these fees are disclosed to other participants in the syndicate. Where the front-end fees were stated, they ranged from 3/4% to 1-1/2%. B. Current accounting rules and practices applicable to nonrefundable fees We understand that there are differences in the manner banks account for loans. the nonrefundable fees associated with in which international The major difference is the extent to which the fees are amortized over the life of the loan, as an adjustment to the interest yield on the loan, or instead are taken into income at the time the fees are received. Currently, neither generally accepted accounting principles nor regulatory policy definitively specify the manner should be recognized. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis in which fee income to the bank -3Existing guidance on the timing of recognition of revenues is provided in:Accounting Concepts and Principles Board Accounting Principles (APB) Statement No. 4, Basic Underlying Financial Statements of Business Enterprises that states the following realization principle: Revenue from services rendered is recognized under this principle when services have been performed and are Revenue from permng others to use billable. enterprise resources, such as interest, rent, and royalties is also governed by the realization principle. Revenue of this type is recognized as time passes or as the resources are used. Thus, under these accounting principles, each activity for which nSnrefundable fees are received must be analyzed to consider whether the activity provides services and constitutes a separate earning process or is an integral part of the entity's central operations. The American Institute of Certified Public Accountants (AICPA) Industry Audit Guide, Audits of Banks ("Bank Audit Guide") (1983) at pages 52-55, provides very general guidance as to accounting recognon of fees. As to commitment fees, the Bank Audit Guide http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis nS.r states: "Banks have recorded income from commitment fees in a variety of ways including recognition: (a) in full when received. (b) when the commitment period has expired or the loan has S• en drawn down. (c) ratably over the commitment period. (d) ratably over the combined commitment and loan period. "The accounting for recognition of income from commitment fees should be based on the nature and substance of the transactions. However, a bank's method of accounting should ensure that any income that represents an adjustment to the interest yield is deferred until the loan is drawn down and then amortized over the expected life of the loan in relation to the outstanding balance. "Fees representing compensation for a binding commitment or for rendering a service in issuing the commitment should be deferred and amortized over the commitment period using the straight-line method." -4The Guide does not directly address questions of front-end fees in syndicated fnternational credits, but discusses "origination fees" as follows: "Banks also receive fees for originating loans in-house. The normal origination fee (general_lv referred to as points) is essentially a reimbursement for the expenses of the underwriting process, that is, processing the loan application, reviewing legal title to the collateral, obtag appraisals, and other procedures. Origination fees, to the extent they are a reimbursement for such costs, should be recognized as income at the time of loan closing. Loan origination fees that are not reimbursements of such costs should be amortized to income over the expected loan period by application of the interest method." Thus, existing accounting principles exercise of discretion and so disparity in allow for practice for a substantial accounting for front-end and other fees associated with syndicated international credits. Indeed, the accounting profession has recognized that clearer guidance is needed with respect to accounting for institutions on all forms of credits. nonrefundable fees by financial S. has, for this reason,- The formed a task force to prepare an issues paper addressing the diversity in accounting practice. The study has been underway for several months and no recommendations have as yet been made. C. Proposed supervisory guidelines for accounting for fees on synSicated international credits There has developed an increased use of fees to cover a number of different purposes synSicated credits. including addons to the yield of international In view of the present diversity in accounting practice as to those fees among banks, and paucity of definitive guidance as to the aS•ropriate accounting for the wide range of fees that has developed, the federal bank regulatory agencies consider that to achieve conformity and uniformity in established. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis accounting for fees the following guidelines should be -5PROPOSED GUIDELINES 1.. Front-end fees in most instances represent an adjustment to the interest yield and shall be deferred until the loan is issued, and then amortized over the expected life of the loan in relation to the outstanding loan balance using the interest method. Front-end fees, or the portion thereof, that are identifiable as reimbursement of direct costs shall be recognized as income at the time of the loan closing or restructuring. 2. Fees for guaranteeing the funding of a loan (i.e., commitment fees) shall be recognized as revenue over the combined commitment and loan period. Reimbursement of any direct recognized as income at closing. loan processing costs will be Then the straight line method, based on the combined life of the commitment and loan period, shall be applied to the remaining fee to recognize income during the commitment period. When the loan is disbursed, the interest method shall be applied to the balance of the fee to recognize income over the life of the loan. If the loan in fact is not funded, unamortized commitment fees will be recognized as income at the end of the commitment period. 3. Agency fees and advisory fees should be recorded as income when to the extent they represent reimbursements for received identifiable, direct costs, otherwise they should be amortized over the expected period of the loan. COMMENTARY A. In a syndicated credit, it is often difficult to determine what share of the front-end fees represent a reimbursement of direct costs of the Managing Bank(s) and what share represents an adjustment to the interest http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -6yield. A reasonable presumption is that a Managing Bank should recognize a portion of the fee as an adjustment to interest yield based upon the other Participating Banks' share of the fee. consider Hence, it may be appropriate to */ the portion equal to the largest of any Participating Bank's- share of the front-end fee as an interest yield adjustment. The balance of a Managing Bank's share of a front-end fee, or some portion thereof, may be considered as reimbursement of direct costs if such costs are identable. B. Proposed Guideline #2 reflects a presumption that commitment fees often embody three elements -- reimbursement of direct processing costs, remuneration from services in making commitments (such as assumption of risk of adverse changes in market interest rates over the commitment I- riod), and a component that represents a yield adjustment. the amount of each component may be dcult. of the fees cannot reasonably be Determining When the separate components identified, the foregoing guideline provides a reasonable solution for recognizing the total fees over the combined commitment and expected loan period, and is the approach currently recommended in the Bank Audit Guide. eIudene also presumes that it is dcult to determine at the outset of a loan whether the loan in fact will need to be funded. Accordingly, a commitment fee should be accounted for S ver the combined life unless the loan is not actually funded. */ A "Participating Bank" is not included in the Management Group for the _ credit nor does it assume any underwriting risk, i.e., the bank does not commit to lending obligations in excess of the amount it intends to lend in the transaction. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis • Glossary of Fees 1. :Front End Fee: Bank(s). A flat fee paid by the Borrower to the Lending The fee is generally expressed as a percentage of the amount of the Credit Facility and is paid on the signing or disbursement dates of the Credit Facility. This fee is also sometimes referred to as a commission, financing fee, or flat fee. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis a. Management Fee: The portion of the Front End Fee which is distributed to Lending Banks (in a Multi-bank Credit Facility) in differing amounts depending on their roles in the transaction (i.e. Managing Bank, "Underwriting participation amount. share of the numerous Front End Fee than different Participant, etc.) and Managing Banks normally receive a larger alternatives accomplish Bank," for do Participants. payment structure and of the There Management pricing Fee objectives. are to The Management Fee normally represents an interest yield paid in fee form and, in the case of Multi-bank Credit facilities, frequently includes an element of compensation for additional service provided or "underwriting risk" assumed. b. Praecipuum: The portion of the Front End Fee which is distributed to one or more of the Lending Banks (generally Managing Banks) in a Multi-bank Credit Facility. Front End Fee serves as disproportioniate share of compensation the This allocation of the for responsibility handling for Credit Facility or assuming an underwriting risk. a arranging a -2- c. ,Pool: The residual amount resulting from the payment of Participating Banks in Multi-bank Credit Facilities of a less than full share of the Front End Fee. The Pool amount, which may or may not exceed the Praecipuum, is normally apportioned among Managing represents a form of Banks on some preagreed upon formula and compensation for the additional service provided by the Managing Bank(s) during the arrangement of the transaction. 2. Borrower and An annual fee paid to the Agent Bank Agency Fee: is normally to intended reimburse the Agent by the Bank for out-of-pocket expenses incurred in the performance of its administrative duties. Such expenses normally include telex, telephone, postage, printing, and travel. The amount of Agency Fee is generally fixed at the time of the signing of the Credit Agreement and varies in amount depending upon the number of Lending Banks participating in the Credit Facility, the complexity of the transaction and the frequency of communication with the Lending Banks. 3. Commitment Fee: This fee is paid the by Borrower and compensates Lending Banks for legally committing to lend to a Borrower at agreed upon terms and conditions at some future time. referred to as a Reservation Fee. This fee is sometimes This annual fee is customarily expressed as a percentage of the unused commitment from the Lending Bank and is normally paid quarterly in arrears. 4. Advisory Fee: A fee paid by a Borrower to compensate a bank(s) for a specific advisory service provided in relation to a transaction, such as a complex project loan. The advice may relate to the structure of the transaction or its arrangement and execution. in the loan agreement. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis This fee often is not listed . -3- 5. .Expense Reimbursement: It is customary for a Borrower to reimburse banks active in arranging multi-bank or direct (i.e. one-bank) ment Credit Facilities for out-of-pocket expenses incidental to the arrange of such facility. telecommunications, Normally these and other travel expenses expenses include incurred legal, during the arrangement of the Credit Facility and collection or enforcement costs. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis April 6, 1983 The Honorable Doug Barnard Chairman Subcommittee on Commerce, Consumer, and Monetary Affairs Committee on Government Operations House of Representatives Washington, D. C. 20515 Dear Chairman Barnard: Thank you for your letter of March 10. I am pleased to enclose the updated tables you requested. Please note that some of the earlier figures we had furnished have also been revised. I hope this information is useful to your Subcommittee. Sincerely, Enclosures RFG:CO:vcd (V-48) bcc: Mr. Gellunill Mr. Truman Mrs. Mallardi (2) TABLE 1 : , FOREIGN OFFICIAL RESERVES OF FOREIGN EXCHANGE (billions of dollars) I. II. Total Holdings A. OPEC countries 2/ 1. Middle irtern2. Africv3. Other-' B. All other countries Holdings in the United States 1981 1982 337.5 387.9 363.2 331.7 1973 1977 45.4 125.0 249.7 3.6 2.5 0.3 0.7 12.4 8.5 1.3 2.6 67.3 52.4 5.3 9.6 41.8 112.6 182.4 241.7 270.2 301.6 279.5 259.3 23.8 67.4 131.2 162.6 155.1 170.9 173.9 174.5 294.1 52.4 17 34.43.2 8.1 / 67.3L/ 42.17.5 10.9 85.3-li 39.2 13.2 11.6 83.743.5-/ 6.7 12.2 1/ 72.4-35.9-/ 3.7 8.3 Treasury bills and certificates 1. OPEC countries 5/ 2. Other countries 13.5 n.a. n.a. 32.5 n.a. n.a. 47.8 4.2 43.6 67.7 3.3 64.4 47.8 6.6 41.2 56.2 8.0 48.2 52.4 7.5 44.9 46.7 7.8 38.9 B. Marketable Treasury bonds and notes / (approximate) 1. OPEC countries2. Other countries 0.3 n.a. n.a. 5.7 n.a. n.a. 32.2 11.0 21.2 35.9 9.0 26.9 37.6 7.5 30.1 41.4 15.6 25.8 53.2 26.5 26.7 67.7 33.3 34.4 Nonmarketable Treasury bonds and notes 6/ 3.4 15.5 20.4 21.0 22.7 21.1 15.9 10.5 D. Other U.S. securities 0.7 1.3 12.8 14.9 16.5 21.8 25.8 24.8 E. Banking and money market assets 7/ 1. OPEC countries 2. Other countries 5.9 n.a. n.a. 12.4 n.a. n.a. 18.0 9.6 8.4 23.1 10.2 12.8 30.5 8.6 21.9 30.4 6.6 23.8 26.6 4.7 21.9 24.8 4.6 20.2 4.2 n.a. 10.3 n.a. 28.1 19.1 31.9 20.1 35.7 29.2 32.5 30.1 26.0 27.2 19.6 20.8 Holdings at Foreign Branches of . U.S. Banks OPEC countries 5/ 8/ See following page for footnotes. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 1980 1970 A. C. III. December 1979 1978 Footnotes: 1/ Beginning April 1978 data exclude Saudi Arabian foreign exchange cover against the note issue (amounting to about $5.3 billion in March 1978.) The figures on the line for "Middle Eastern countries" also exclude Iraq (beginning December 1978), Iran (beginning December 1980), and Qatar and United Arab Emirates (December 1982). However, estimates for these countries and dates are included in the figures for "OPEC countries." 2/ Iran, Iraq, Kuwait, Libya, Qatar, Saudi Arabia, United Arab Emirates. 3/ Algeria, Gabon, Nigeria. 4/ Ecuador, Venezuela, Indonesia. 5/ Also includes Bahrain and Oman. 6/ None held by OPEC. 7/ Principally bank deposits, CDs, repurchase agreements, bankers acceptances, and commercial paper. 8/ Including private holdings. Sources http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis I.: II.: III.: International Monetary Fund, International Financial Statistics. U.S. Treasury. Federal Reserve System. TABLE 2 FOREIGN OFFICIAL HOLDINGS OF MARKETABLE U.S. TREASURY SECURITIES, SELECTED DATES Bills Amount ($ billions) Bonds Total & Notes Percentage of total outstanding Bonds Total Bills & Notes 6.5 3.8 .5 .5 7.0 4.3 8.9 5.6 0.3 0.3 3.0 1.9 1973 - March 1974 - January 37.6 29.2 6.9 5.2 44.5 34.4 35.8 27.1 4.2 3.2 16.5 12.7 1979 - January - April 68.4 51.6 36.0 36.2 104.4 87.8 42.1 31.5 10.8 10.6 21.0 17.4 1980 - January 1981 - January 48.9 56.5 38.1 42.3 87.0 98.8 27.9 25.6 10.6 10.4 16.2 15.7 1982 - December 46.7 67.7 114.4 15.0 11.9 13.0 1968 - November 1969 - June http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis TABLE 3 DEPOSITS OF MIDDLE EAST OIL PRODUCING COUNTRIES IN FOREIGN BRANCHES OF LARGE U.S. BANKS (billions of dollars) December 1975 Six Second Next Largest Largest Nine Banks Six Banks Banks (1) Total deposits (consolidated) March 1979 Six Second Largest Largest Banks Six Banks 1/ 1/ 273.8- 99.9 - 197.5 76.3 49.9 (2) Deposits of Middle East 2/ Oil Producing Countries- 9.8 1.2 0.7 15.3 (3) Line (2) as percent of line (1) 1.6 1.4 6.0 Note: 1/ 2/ 5.0 Next Nine Banks March 1981 Six Second Next Largest Largest Nine Banks Six Banks Banks December 1981 Six Second Next Largest Largest Nine Banks Six Banks Banks December 1982 Six Second Next Largest Largest Nine Banks Six Banks Banks 1/ 68.4- 328.5 126.5 85.2 338.4 136.2 89.5 342.0 143.6 94.3 1.7 0.5 14.8 2.7 0.9 11.5 3.3 1.2 9.8 2.1 1.2 1.7 0.7 4.5 2.1 1.0 3.4 2.4 1.3 2.9 1.5 1.3 Deposits in foreign branches represent more than 75 percent of total deposits of Middle East oil producers in all U.S. banks. Deposits as of Dec. 1978. Includes Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates. Six largest banks Second largest Next nine Rank of America Chase Manhattan Chemical Bank Citibank Manufacturers Hanover Morgan Guaranty Bankers Trust Continental Illinois Crocker National Bank First National Bank of Chicago Security Pacific Wells Fargo European American Bank & Trust First National Bank of Boston Interfirst Bank Dallas First National Bank of Detroit Irving Trust Marine Midland Mellon Republic Bank Dallas First Interstate Bank of California http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis TABLE 4 NUMBER OF U.S.-CHARTERED BANKS REPORTING LIABILITIES TO OPEC COUNTRIES AT FOREIGN BRANCHES Ecuador Dec. Dec. Dec. 1975E/ 1978 r/ 1981 Dec. 1982 8 13 26 22 Venezuela 28 32 44 38 Indonesia 10 17 24 22 Iran 17 26 19 21 Iraq 5 11 13 12 24 22 28 21 4 9 9 7 Saudi Arabia 18 29 42 41 United Arab Emirates 13 20 22 19 Algeria 14 20 17 15 Gabon 0 1 1 2 Libya 5 10 11 7 Nigeria 4 6 11 12 Kuwait Qatar r/ Revised. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Liabilities of U.S. Banks to OPEC Countries!' (billions $) 3/31/79 3/31/81 19.4 19.8 13.3 11.9 Seeond largest six 2.1 3.0 3.6 2.3 Next nine banks 0.8 1.2 1.4 1.4 Six largest U.S. banks 12/31/81 12/31/82 1/ Data are for foreign branches and domestic offices of the banks. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis _ •4‘ RONALD D COLEMAN, TEX JOHN M SPRATT JR., S.C. JOHP: CONYERS, JR., MICH ELLIOTT H LEVITAS, GA, HENRY A. WAXMAN, CALIF JUDD GREGG NH WILLIAM F CLINGER, JR., PA TOM LEWIS. FLA NINETY-EIGHTH CONGRESS DOUG BARNARD, JR., GA, CHAIRMAN Congrefili of the liniteb Otatess MAJOR1TY-(202) 225-4407 10ouge of Repregentatibto COMMERCE, CONSUMER AND MONETARY AFFAIRS SUBCOMM:TTEE OF THE COMMITTEE ON GOVERNMENT OPERATIONS RAYBURN HOUSE OFFICE BUILDING, ROOM B-377 WASHINGTON,D.C.20515 //' March 10, 1983 Hon. Paul Volcker Chairman Federal Reserve Board Washington, D.C. 20551 Dear Chairman Volcker: Monetary In September 1981, the Subcommittee on Commerce, Consumer, and country Affairs held two days of hearings on the nature and extent of OPEC surpluses worldwide and investments in the United States and the U.S. Governthat ment's response to such investment. To update information we received at time, we require current statistical information on the extent of OPEC country holdings, reserves, and bank deposits as of December 31, 1982. I therefore request that certain data furnished in tabular form by the Federal Reserve Board during the September 1981 hearings and printed on the pages 246 through 250. following hearing transcript pages, be updated: (Attached are copies of the tables involved.) We would like this information by March 28, 1983. If your staff have any questions, they should contact subcommittee counsel Stephen R. McSpadden. • cerely u1L tNA Doug Ba nard, Jr Chai a DB:srm:v http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis (j 247 246 TABLE 2 TABLE 1 EXCHANGE FOREIGN OFFICIAL RESERVES OF FOREIGN (billions of dollars) December 1978 1977 1970 1973 I. Total Holdings 2, A. OPEC countries lastern-' 1. Middle3/ 2. Africa3. Other.41/ 45.4 122.4 243.0 3.6 2.5 0.3 0.7 12.6 8.5 1.3 2.6 67.9 52.4 5.3 9.6 283.3 1/ 53.01/ 41.73.2 8.1 1979 318.6 1980 382.4 1/ 1/ 87.465.91/ 41.9-'40.8 13.4 7.4 11.8 10.7 FOREIGN OFFICIAL HOLDINGS OF MARKETABLE U.S. TREASURY SECURITIES, SELECTED DATES Mar. 1981 371.5 1/ 91.97, 41.4±' 12.2 n.a. Bills 1968 - November 1969 - June Amount (S billions) Bonds 6 Notes Total Percentage of total outstanding Bonds ft Notes Bills Total 6.5 3.8 .5 .5 7.0 4.3 8.9 5.6 0.3. 0.3 3.0 1.9 All other countries 41.8 109.8 175.1 230.3 252.7 295.0 279.6 23.8 66.9 131.1 162.4 162.0 177.0 182.2 II. Holdings in the United States 1973 - March 1974 - January 37.6 29.2 6.9 5.2 44.5 34.4 35.8 27.1 4.2 3.2 16.5 12.7 13.4 n.•. n.a. 31.5 n.a. n.a. 47.8 4.2 43.6 67.7 3.3 64.4 47.8 6.6 41.2 56.5 8.0 48.5 60.6 8.2 52.4 1979 - January - April 68.4 51.3 36.0 36.3 104.4 87.6 42.1 31.3 10.8 10.7 21.0 17.4 43.0 8.2 34.8 46.0 16.3 29.7 49.7 19.3 30.4 1980 - January 1981 - January 49.0 56.6 44.1 46.8 93.1 103.4 27.9 25.7 12.2 11.5 17.4 16.5 B. A. Treasury bills and certificates 1. OPEC countries5/ 2. Other countries B. Marketable Treasury bonds and notes 5/ 1. OPEC countries- (approximate) 2. Other countries C Nonmarketable Treasury bonds and notek§./ D. Other U.S. securities 7/ E. Banking and money market assetss countrie 1. OPEC 2. Other countries III. holdings at Foreigu Branches of U.S. Banks es'!/ A. OPEC countri - s countrie Other B. 0.3 n.a. n.a. 5.7 n.a. n.a. 32.2 11.0 21.2 35.9 9.0 26.9 3.4 15.5 20.4 21.0 22.7 21.1 20.7 0.7 1.7 12.7 14.7 15.7 e/ 21.0- 22.341/ 5.9 n.a. n.a. 12.4 n.a. n.a. 18.0 9.6 8.4 23.1 10.2 12.8 32.8 8.6 24.2 32.4 6.6 25.8 28.9 7.6 21.3 4.2 10.3 28.1 31.9 35.7 32.4 29.9 n.a. n.a. n.a. 19.1 9.0 20.1 11.8 29.2 6.5 30.1 2.3 29.3 .6 11.41. note issue Arabian foreign exchange cover against the 1/ Beginning April 1978 data exclude Saudi "Middle Eastern for line the on figures The 1978). (amounting to about $5.3 billion in March December 1980), December 1978), Iran and Qatar (beginning countries" also exclude Iraq (beginning countries and dates are included in these for s estimate , However 1981). March and Kuwait (for the figures for "OPEC countries." United Arab Emirates. 2/ Iran, Iraq, Kuwait, Libya, Qatar,- Saudi Arabia, Nigeria. Gabon, Algeria, 3/ 4/ Ecuador, Venezuela, Indonesia. 5/ Also includes Bahrain and Oman. 6/ None held by OPEC. commercial se agreements, bankers acceptances, and 7/ Principally bank deposits, CDs, repurcha paper. 8/ Including some private holdings. e Department data. e/ Estimated from Treasury and Commerc al Financial Statistics. I.: Intermational-Monetary Fund, inteTuatiQu Sources . Treasury II.: U.S. III.: Federal Reserve System. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 4. TABLE 3 DEPOSITS OF MIDDLE EAST OIL PRODUCING COUNTRIES IN FOREIGN BRANCHES OF LARGE U.S. BANKS (billions of dollars) Six Largest Banks (1) Total deposits (consolidated) December 1975 Second Largest Six Banks Next Nine Banks Six Largest Banks March 1979 Second Largest Six Banks 1/ 99.9— 197.5 76.3 49.9 1/ 273.8— (2) Deposits of Middle East 2/ Oil Producing Countries— 9.8 1.2 0.7 15.3 1.7 (3) Line (2) as percent of line (1) 5.0 1.6 1.4 6.0 1.7 Note: 1/ 2/ Next Nine Banks 1/ 68.4— Six Largest Banks March 1981 Second Largest Six Banks Next Wine Banks 328.5 126.5 85.2 0.5 14.8 2.7 0.9 0.7 4.5 2.1 1.0 Deposits in foreign branches represent more than 75 percent of total deposits of Middle East oil producers in all U.S. banks. Deposits as of Dec. 1978. Includes Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates. Six largest banks Second largest Next nine Bonk of America Chase Manhattan Chemical Bank Citibank Manufacturers Hanover Morgan Guaranty Bankers Trust Continental Illinois Crocker National Bank First National Bank of Chicago Security Pacific Wells Fargo European American Bank & Trust First National Bank of Boston First National Rank of Dallas First National Bank of Detroit Irving Trust Marine Midland Mellon Republic National Bank, Dallas United California Bank . —AO http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 249 TABLE 4 NUMBER OF U.S.-CHARTERED BANKS REPORTING LIABILITIES TO OPEC COUNTRIES AT FOREIGN BRANCHES Dec. 1975 Dec. 1976 Dec. 1977 Dec. 1978 Dec. 1979 Dec. 1980 Ecuador 31 36 46 45 45 60 Venezuela 80 82 89 81 88 92 Indonesia 48 52 50 43 39 36 Iran 40 50 53 50 43 41 Iraq 11 23 24 13 14 14 Kuwait 28 30 33 29 34 33 Qatar 17 8 15 17 16 9 Saudi Arabia 18 30 31 33 40 43 United Arab Emirates 19 24 34 38 40 27 Algeria 36 44 45 51 54 54 Gabon 16 19 26 19 20 17 Libya 9 15 14 12 13 11 11 IL 13 19 23 26 Nigeria http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis PPOINNSIo= 250 BOARD OF GOVERNORS OF flit FEDERAL RESERVE SYSTEM/UL 1 7 1981 WASHINGTON, D C.P055I July 10, 1981 40NTARY Aiwa 3USSOM:A ry COI IL M C14•11.11111AN CG14GRESSMAffi l ..C.4 lk F.. • The Honorable Benjamin S. Rosenthal Chairman Subcommittee on Commerce, Consumer and Monetary Affairs Committee on Government Operations House of Representatives Washington, D. C. 20515 PALA CLAIlatirN FILZ OWL Dear Chairman Rosenthal: Following up my letter of July 1, I am herewith transmitting to you the data on the liabilities to Middle East oil-exporting countries of both the domestic offices and the foreign branches of three groups of large U. S. banks. The latest data, which are for March 31, 1981, are shown below, together with the earlier data for March 31, 1979, that were transmitted to you by Governor Coldwell in August 1979. The figures are as follows (in billions of dollars); 3/31/79 3/31/81 19.4 19_8 Second largest six 2.1 3.0 Next nine banks 0.8 1.2 Six largest U. S. banks The information on the liabilities of the domestic offices has been supplied by the U. S. Treasury and include the liabilities of all Edge Act and other domestic subsidiaries as well as those of the parent bank itself. Sincerely, (4/100— L._ http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Of GOV;•• . ..*; BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM I- • • • :RAL RE ••4 • •..• •' WASHINGTON, D. C. 20551 April 5, 1983 PAUL A. VOLCKER CHAIRMAN The Honorable Richard J. Durbin House of Representatives 20515 Washington, D.C. Dear Mr. Durbin: Your letter of March 9 raises important questions about the interaction of monetary and fiscal policies. In particular you ask if certain specified growth rates in M1 over the next three years (declining from 5.3 percent in 1983 to 4.6 percent by 1985) are "advisable or achievable" if Phase III of the tax cut were eliminated. Because of the substantial institutional changes that have taken place in recent years and are in process now (e.g., the introduction of nationwide NOW accounts at the beginning of 1981 and of money market deposit accounts and Super-NOWs in late 1982 and early 1983), it is difficult, and probably inadvisable, to provide very precise estimates of the future course of the monetary aggregates as a group, including particularly Ml. For 1983, the Federal Open Market Committee set a relatively wide target band of M1 growth in a 4 to 8 percent range. Growth toward the upper end would be acceptable should the considerable and unusual increase in the demand for M1 relative to GNP in 1982--evident in the sharp decline in the velocity of M1 last year--tend to continue. This increase in demand occurred in part because of precautionary demands for liquidity stemming from the economic uncertainties of the period and in part because of the decline in short-term market interest rates last year, which made it relatively less costly to hold NOW accounts as well as other savings deposits. Should short-term interest rates remain around current levels-or drop further--demand for M1 might be expected to continue to be relatively strong. On the other hand, in a period of economic recovery--which can be expected in 1983--the public often spends more actively out of existing cash balances as attitudes become more optimistic, and the demand for M1 relative to GNP weakens--that is, its velocity rises. If this were to occur, growth of M1 more nearly toward the lower end of the FOMC's range, and more in line with the figure cited in your letter, would be appropriate. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis The Honorable Richard J. Durbin Page Two The FOMC has not yet looked beyond 1983 for establishing growth ranges. However, the general thrust of our policy is to seek behavior of monetary aggregates over time consistent with reasonable price stability. This would generally involve a slowing of money growth rates, but the pace may not be smooth and will depend on institutional changes and the public's adaptation to them. Our evaluation of the appropriate behavior of the monetary aggregates in 1983 assumed that Congress and the Administration will make progress in reducing federal deficits in the coming years. If that progress were to include elimination of Phase III of the tax cut, it need not necessarily involve a substantially different outlook for M1 than I have described above. That would depend in part on effects of the fiscal action on business and investor confidence, actual spending, and on credit market conditions as influenced to a degree by expectations. For example, a reduction in the fiscal deficit would in a sense be "self-rewarding" if it were accompanied by reductions in market interest rates, particularly for longer-term rates. Just how the deficit is reduced--as you well know-is itself a widely controversial issue, beyond the competence of the Federal Reserve. I would point out that the benefits for the market of higher taxes are dependent on a view that time. those taxes would not lead to still higher spending over the Moreover, from the standpoint of incentives and savings, argument has been made that alternative means of recouping revenues would be preferable. But to repeat the general point, significant progress in reducing federal deficits will take pressure off credit ry markets, and contribute to a further weakening of inflationa expectations. It would provide an environment in which time monetary policy designed to restrain money growth over effectively to rates consistent with price stability can be more rates implemented, with less risk to investment and interest over a transitional period. Sincerely, Sgaul A. Volcker SHA:PAV:pjt (#V-45) bcc: Mr. Axilrod Mrs. Mallardi (2) Action assigned Mr. Axilrod, info copy to Mr. Pre11 RICHARD J. DURBIN IN SPRINGFIELD: 1307 S. 7TH ST., 82703 (217)492-4062 OR P.0 BOX 790 62705 20TH DISTRICT ILLINOIS COMMITTEES: AGRICULTURE SCIENCE AND TECHNOLOGY WASHINGTON OFFICE: Congress of the United eStates 417 CANNON BUILDING WASHINGTON. DC 20515 (202) 225-6271 http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis tiouse of Ittpresentatims gaShillgt011, Es.e. 20515 IN DECATUR ROOM 110, 363 S MAIN ST_ 82523 (217)428-4745 OR P.O. BOX 15013 02525 /N QUINCY ROOM 305, 531 HAMPSHIRE ST.. 52301 (217) 228-1042 March 9, 1983 Honorable Paul A. Volcker Federal Reserve System 20th Street and Constitution Ave. N.W. Washington, D.C. 20551 Dear Mr Chairman: We are presently debating the future and fate of Phase III of the Economic Recovery Tax Act which is scheduled to be implemented on July 1 of this year. Information received from the Congressional Research Service indicates that it would be far more beneficial to overall economic recovery if we coupled elimination of the July 1 tax cut with an increase in bank reserves to hold the growth rates of the money supply (M1) sufficient to cause a percentage change in the money supply of 5.3 percent in 1983; 5.0 percent in 1984; and 4.6 percent in 1985. (I would refer you to Mini Brief No. MB83201 published by the Congressional Research Service in January of 1983 for particulars.) Although I know this inquiry places you in a difficult position, I am attempting to formulate a position on this tax cut based on available alternatives. Thus, I would most appreciate it if you would indicate whether or not the monetary policy suggested above would be advisable or achievable in your opinion in the event that we would eliminate Phase III. I look forward to hearing from you at your earliest opportunity. Very truly yours, /46L, Richard J. Durbin Member of Congress RJD:kb THIS STATIONERY PRINTED ON PAPER MADE WITH RECYCLED FIBERS ere." ..54; c? cm u4 10 , April 4, 1983 The Honorable Jake Garn Chairman Committee on Banking, Housing and Urban Affairs United States Senate 20510 Washington, D.C. Dear Chairman Garn: Thank you for your letter. of March 28 inviting the Board to appear before your Committee at hearings on S. 730, the "Credit Deregulation and Availability Act of 1983." I am pleased to let you know that Governor J. Charles Partee is looking forward to appearing on behalf of the Board on Tuesday, April 12, at 9:00 a.m. Sincerely, CO:pjt (V-59) bcc: Gov. Partee Dan Laufenberg Mrs. Mallardi (2) , http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis .4.;• JAKE C•ARN, UTAH, CHAIRMAN JOHN TER,TEXAS JOY...N1 HEINZ, PENNSYLVANIA •WILLIAM L ARMSTRONG. COLORADO ALFONSE M D'AMATO. NEW YORK SLADE GORTON, WASHINGTON PAULA HAWKINS. FLORIDA MACK MATTINGLY. GEORGIA CHIC HECHT, NEVADA PAUL TRIBLE, VIRGINIA WILLIAM PROXMIRE. WISCONSIN ALAN CFtANSTON. CALIFORNIA DONALD W RIEGLE, JR , MICHIGAN PAUL S. SARBANES, MARYLAND CHRISTOPHER J DODD. CONNECTICUT ALAN J DIXON. ILLINOIS JIM SASSER, TENNESSEE FRANK R. LAUTENBERG, NEW JERSEY OA DANNY WALL STAFF DIRECTOR KENNETH A. McLEAN, MINORITY STAFF DIRECTOR • http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis United eStatts e$tnate COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS WASHINGTON, D.C. 20510 March 28, 1983 --111 OD CO (77) rrri Honorable Paul A. Volcker Chairman Board of Governors Federal Reserve System 20th and Constitution Ave. Washington, D.C. 20551 :70 rrl C77) rr: r-ri rrlm-mv[: C7) rin :7410 21›. .74 Dear Chairman Volcker: Senate ComThis letter confirms the invitation of the for you to appear mittee on Banking, Housing and Urban Affairs the "Credit Dereguas a witness to offer testimony on S. 730, hearing will be lation and Availability Act of 1983". The SD-538 and it will be held on Tuesday, April 12, 1983 in Room nning at 9:00 a.m. conducted in two'tegments; the -first begi . A member of my staff willbe—In and the second at2:30,..p.m.t hearing to arrange the contact with your office prior to the morning or afterspecific scheduling of your witness for the noon session. witnesses is enA copy of the Committee's guidelines for eciate careful adclosed for your reference and I would appr of written testimony. herence to the rules regarding submission s to attempt to limit In addition, I am requesting all witnesse Since we have a very their oral presentations to 5 minutes. on an almost identical extensive record from the 97th Congress scheduled to testify bill and a large number of witnesses are ements to be fairly on the 12th, I would like the oral stat questioning. short in order to leave more time for hearing on S. 730. Thank you for agreeing to appear at the I look forward to your testimony. Sincerely, Jake Garn Chairman Enclosure JG:bck BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON, O. C. 205S1 April 4, 1983 PAUL A. VOLCKER CHAIRMAN The Honorable Jim Leach House of Representatives 20515 Washington, D.C. Dear Jim: In your letter of March 1, you asked for views on a possible legislative directive to the Federal Reserve to enter into negotiations with other central banks in order to establish common capital standards for banks engaged in international lending. International bank lending practices, especially pricing practices, have been questioned by some for a number of years for not adequately reflecting the need to provide an adequate return on capital in the light of the various risks involved. The competitive pressures that are reflected in pricing practices in turn owe something to differences in capital requirements or practices among countries. They also reflect, of course, differences in performance standards such as earnings, desires to expand market shares and, more generally, appraisals of country risk and expectations about the world economy and its management. Hence, while your focus on capital is important and appropriate, that focus (as I am sure you realize) needs to be considered in a larger framework. Capital standards within and among national banking systems are not easy to determine. Internationally, definitions of capital vary, accounting standards are not uniform, and national capital requirements cannot readily be equated. Overcoming those difficulties as best one can, it seems that the capital ratios of the large U.S. banks stand somewhere in the middle together with the British banks. At the higher end of the spectrum are the Swiss banks and, at the lower end, the French and the Japanese. There is already some work at the international level to achieve, if not harmonization, greater convergence of approaches to the question of bank capital. These efforts are being made as part of the work of the Committee on Banking Regulations and Supervisory Practices of the Bank for International Settlements. I believe there is some sense of agreement among the leaders of the central banks of the countries represented on the Committee, that this is an important subject; that, as a generalization, capital ratios of the international banks should be improved over time; and that greater homogeneity in the capital levels of those banks is desirable. Work is currently underway on the technical problems of definitions and http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis The Honorable Jim Leach Page Two measurement of capital adequacy as part of the groundwork for further examination and onerative conclusions. Work is continuing, too, at the international level on other methods of improving international lending standards. These include developing better data on international bank risk lending and improving techniques for management of country in bank portfolios. All of this parallels, and is partly dependent upon, efforts among the U.S. supervisors on developing standards within the U.S. As you know, the agencies set out more specific capital standards for smaller- and medium-sized banks made to in the U.S. some time ago, but, while efforts are being encourage larger capital by the multinational U.S. banks, the se of approach is developed more on a case-by-case basis. Becau international competition, that progress is, in turn, partly dependent on attitudes and developments abroad. All this is a long way of indicating sympathy with the Federal concerns motivating your legislative proposal. At the Reserve, we are already committed to work with the other posiFederal bank regulatory agencies to strengthen the capital of the tion of the U.S. banking system, and particularly that larger banks. We are also committed to continue pressing a standards on a worldwide basis. Thus, I do not see that I do legislative prescription is necessary in this area, and not believe any such prescription should he so specific (in s) as terms of prescribing a need for specific numerical ratio of your language may suggest. However, a general expression rns Congressional encouragement and support for prudential conce , it could be reasonable and useful. On a nit-picking point progress would he unrealistic to expect much in the way of a ge of report on international efforts within 180 days of passa such legislation as your draft on international efforts suggests. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Sincerely, fagi FRD:HCW:PAV:pjt (#V-38) bcc: Gov. Wallich Mr. Dahl Mr. Truman Mrs. Mal ardi (2) / \/) Action assigned Fred Struble 1507 LONGWORTH BUILDING DAN GLICK MAN WASHINGTON, D.C. _FOURTH DISTRICT—KANSAS 20515 (202) 225-6216 COMMITTEES: U S. COURT HOUSE AGRICULTURE Box 403—Room 224 JUDICIARY WICHITA, KANSAS SCIENCE AND TECHNOLOGY 67201 (316) 262-8396 CHAIRMAN, SUBCOMMITTEE ON TRANSPORTATION, AVIATION AND MATERIALS CONGRESS OF THE UNITED STATES • HOUSE OF REPRESENTATIVES WASHINGTON, D.C. 20515 MYRNE ROE ADMINISTRATIVE ASSISTANT 407 WOLCOTT BUILDING 201 NORTH MAIN HUTCHINSON, KANSAS 67501 (316) 669-9011 SCOTT FLEMING LEGISLATIVE STAFF DIRECTOR http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis March 17, 1983 j i<t All Honorable Paul A. Volcker Chairman Federal Reserve Board Twentieth Street and Constitution Ave. N.W. Washington, D.C. 20551 Dear Chairman Volcker: We are advised that, to date, little progress has been made in initiating the study mandated under Section 23(a) of the Futures Trading Act of 1982. As you know, this section directs the Federal Reserve to take the lead in conducting a study of the effects on the economy of trading in futures and options contracts. We urge you to move ahead as expeditiously as possible in getting the study underway. The spectacular growth that has occurred in this industry in recent years makes it important for us to carefully consider the effect of this industry on the economy at large. We regard this study as being an important tool for the Congress to have in considering the role that futures and options trading play in the economy, and for determining how this industry can be most productively and responsibly regulated. We are, therefore, very anxious to see that the study is begun soon to insure that a comprehensive and well organized report will be forthcoming. We will appreciate your prompt attention to this matter and request that you make available to us, as soon as possible, a comprehensive draft of your plans for organizing and carrying out the study. With best reg DG:mm THIS STATIONERY PRINTED ON PAPER MADE WITH RECYCLED FIBERS 1 WASHINGTON OFFICE: PA RBER B. CONABLE. JR. 2.37 CANNON HOUSE OFFICE BUILDING NEW YORK. 30TH DISTRICT 20515 (202) 225-3615 WASHINGTON. D.C. COMMITTEES: Congret45 of tbe tiniteb tate5 DISTRICT OFFICES: WAYS AND MEANS STANDARDS OF OFFICIAL 311 FEDERAL OFFICE BUILDING 100 STATE STREET POtIft of RepresSentatibel tElattington, 3D.C. 20515 JOINT COMM ITTEE ON TAXATION http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 14614 ROCHESTER. NEW YORK CONDUCT April 4, 1983 6`f (716) 263-3156 P.O. Box 85 10 ELLICOTT STREIT BATAvu, NEW YoRK 14020 (716) WT6732 CP rill myr, CP V=) tZ2 re% 6A ) r**r• • C") C) The Honorable Paul A. Volcker, Chairman Board of Governors of the Federal Reserve System 20th St. at Constitution Ave. Washington, D. C. 20551 ir-r1 •• (11 CO 9 3 Vl 44- re% C2c, cp qP an "Z• Dear Mr. Chairman: I would like to recommend for your consideration the appointment of John R. Riedman of Rochester, New York, as a member of the Board of Directors of the Buffalo Branch of the Federal Reserve Bank of New York. John Riedman is one of the outstanding business and community leaders in western New York. As president of the Riedman Corporation he directs one of the nation's leading independent insurance marketing firms, and has developed major office buildings in downtown Rochester. He is a director of the Security New York Corporation; a former president of the Rochester Chapter, Chartered Property and Casualty Underwriters; was a delegate to the White House Conference on Small Business and a member of the President's Commission on Personnel Interchange. Among his community activities, he is a director of the Rochester Museum and Science Center, a member of the Board of Overseers of Strong Memorial Hospital, and a director of Downtown Development Corporation of Rochester. I have known John Riedman for about twenty years and have the highest regard for his personal qualities of competence, reliability and integrity. He is well acquainted throughout the western New York business and banking community and would make a substantial contribution to the Board in western New York. Very truly yours, Barber B. Conable, Jr. C/nm 1 y c:D April 1, 1993 The Honorable Ed Jones House of Representatives Washington, D. C. 20515 Dear Mr. Jones: Thank you for your letter of March 17 urging the Federal Reserve to move ahead as expeditiously as possible with the study of futures and options markets that was mandated under Section 23(a) of the Futures Trading Act of 19R2. We have already commenced general discussions with other agencies designated by the Act to participate in the study. These discussions have focused on information to be collected and analyses to be conducted in order to address fully the issues of concern to the Congress--as indicated by the questions outlined in the Act and the discussions that preceded its nassage. In addition, we have also discussed in a general way the assignment of agency responsibilities for carrying out this work. We expect to formulate a specific plan for the study that will be agreeable to all participating aaencies in the near future. Let me assure you that we are fully aware of the Congress' interest in this study and that we have every intention to carry out our responsibilities so that a comprehensive, well-organized renort--one that addresses all of the issues of concern to the Congress--is submitted within the time frame specified in the Act. Sincerely, 4641111 kvoloter IDENTICAL LETTER TO CONG. DAN GLICKMAN FMS:NS:vcd (V-51) bcc: Fred Struble Mrs. Mallardi (2) http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis • http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis April 1, 1983 The Honorable Benjamin A. Gilman . House of Representatives Washington, D. C. 20515 Dear Mr. Gilman: I am pleased to inform yqu that the Board is submitting the name of Robin Fenner for the Congressional Award for Exemplary Service to the Public. Ms. Fenner, a Senior Consumer Affairs Specialist, has rendered outstanding service to consumers in helping to resolve bank-related problems and in supplying information concerning their financial rights and responsibilities. this very lief that employees should be We fully support the goals and objectives of worthwhile program and share with you the bethe important contributions that many federal are making on behalf of the American public recognized. Thank you for your consideration. We look forward to participating in this program again. Sincerely, SiPaul A. Vo!cket IDENTICAL LTR. TO CONG. ELLIOTT H. LEVITAS JRW:vcd (V-29) bcc: Mr. Weis Mrs. Mallardi (2) v/ • - Congre55 of tbe tiniteb &tato 3Dousq of Repressentatibeg 1983 FEB 17 Nit!: 40 EttastingtonAD.C. 20515 The Honorable Paul Volcker Chairman Board of Governors of the Federal Reserve System 20th & Constitution Ave., N.W., Room 2046 Washington, D.C. 20551 e•-• "FIB' 0 1St:3 Dear Mr. Chairman: Our strong convictions about the importance of courtesy and responsiveness by those who serve the public as Federal civil servants led to the establishment of the Congressional Award for Exemplary Service to the Public during 1980. This annual honor awards program is intended to highlight the very important contributions that many civil servants are making on S_ half of the American public. By recognizing a select few each year, this program emphasizes the interest and value that the President, the Congress, and the people of our Nation place on courteous and responsive public service and helps to dispel some of the negative attitudes about Government employees which all too frequently are prevalent among our citizens. During the first two years, this program has generated a great deal of interest. Forty departments and agencies participated in the program last year, each nominating truly outstanding employees. We would like, once again, to invite your agency to participate in this program by nominating that one individual in your organization who, through his or her actions and dedicated efforts, best represents the highest ideals of public service. If the field cannot be narrowed to one employee, a maximum of two employees may be nominated. Our experience has shown that, although many employees frequently are worthy of nomination from any one agency, it is that agency's own personnel who are best able to determine which nominations represent the agency's most exemplary employees. The U.S. Office of Personnel Management is again this year providing assistance in our sponsorship of this Congressional award. Nominations may be to: U.S. Office of Personnel Management: Incentive Awards Branch: LRoom 6H34 1900 E Street, N.W.; Washington, D.C. 20415. Nominations are due March 25, 1983. Enclosed is information concerning the award, the criteria, and the format for nominations. We very much look forward to receiving your nominations and wish to express our appreciation for your interest and support. Benjamin A. Gilman Member of Congress Enclosure http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Member of Congress CONGRESSIONAL AWARD FOR EXEMPLARY SERVICE TO THE PUBLIC Background The nature and quaTity of the contacts citizens have with Federal personnel at all levels strongly influence the way Americans think and feel about their Government. The Civil Service Reform Act of 1978 reflects the concern of the President and the Congress for "ii that high standards for courtesy and responsiveness are maintained in the Government's delivery of services to the public. Congressman Elliott H. Levitas' particular interest in this matter prompted him to author a provision in the Act, supported by Congressman Benjamin A. Gilman, that permits performance standards for Federal employees to address the degree to which employees demonstrate courtesy to the public. As the Federal agency responsible for providing leadership to the program to improve courtesy to the public throughout Government, the U. S. Office of Personnel Management was requested to assist Congressmen Levitas and Gilman in establishing a program of recognition for Government personnel who provide exemplary and courteous service to the public. Objectives To recognize and publicize exemplary and courteou4 service to the public, among to encourage a concerned and responsible attitude toward the ill Government personnel, and to underscore the interest of the President and the Congress in the importance of courtesy throughout Government. Eligibility Individual Federal civilian employees. Criteria The nominee must have demonstrated a degree of courtesy in dealing with the public that clearly exceeds normal expectations, For purposes of this award, "public," means (a) the general public, and organizations, n n etal (2) other organizations or groups, including goverm served by Federal personnel. "Courtesy that clearly exceeds normal expectations" is demonstrated by unusual promptness in responding to requests for assistance or information, willingness to "go the extra step," and a desire to reflect a favorable image of the Government generally and of the employee's own organization. Consideration for nomination should be given those employees who have: http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis (more) Congressional Award for Exemplary Service to the Public Nomination Format • r-• Name of Nominee: (surname, first name, middle initial) Job Title: Employing Agency: Grade or Rank: Organization: Mailing Address: Brief description of employee's exemplary service to the public.: Suggested citation describing the achievement (not to exceed 75 words): Signature of Agency Head (or designee) Name of person to contact regarding nomination: Nominations should be submitted to: http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Phone number: U.S. Office of Personnel Management Incentive Awards Branch, Room 61134 1900 E Street, NW Washington, D.C. 20415 (Due C.O.B. 3/25/83)
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