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FEDERAL RESERVE BANK OF RICHMOND 1970 Annual Repat F E D E R A L R E S E R V E B A N K O F R IC H M O N D W e are pleased to present the Federal Reserve Bank o f Richm ond. 1970 Annual Report o f the This report features a review o f the grow ing international activities and rapid overseas expansion o f United States banks. It also includes com parative financial state ments, highlights o f the year’s operations, and current lists o f officers and directors o f our Richmond, Charlotte, and Baltimore offices. W e wish to thank you for your continued cooperation support. Sincerely yours, C h a i r m a n of t he B o a r d and UNITED STATES BA N K IN G A B R O A D . . . 4 A Late Start The Legal Underpinnings Early Rise and Fall The Recent Expansion Incentives for Overseas Expansion Recent Trends and Developments International Banking in the Fifth District 4 5 7 9 14 19 21 H I G H L I G H T S ............................................................ 23 Summary of Operations 27 CO M PARATIVE S T A T E M E N T S ........................ 28 Condition Earnings and Expenses 28 29 D IR E C T O R S .................................................................. 30 O F F I C E R S .................................................................. 31 BRANCH D I R E C T O R S .......................................... 32 UNITED STATES BANKING ABROAD W a r I, its financing continued fo r the most part to be left to others. The United States relied on the banking facilities and services of its European trading partners, especially those of G reat Britain. M ost o f its foreign trade was financed by London banks in ster ling, the w orld’s forem ost trading currency at that tim e. The dollar was still a stranger in foreign markets and financial centers. Even if economic conditions had warranted it, however, active participation o f United States banks in international finance was pre cluded by legal barriers. National banks were not em pow ered to create acceptances, the principal financial instrument then used to finance international trade. Nor were they permitted to establish foreign branches or subsidiaries. Only a few private (unincor porated) and state-chartered banking organi zations conducted the nation’s limited inter national banking business. By the end of 1913, when the Federal Reserve A ct was passed, 26 overseas branches were in opera tion. Only six of these were direct branches of four N ew Y o rk b an k s; the remaining 20 were branches o f two state-chartered inter national banking corporations. Several shifts in the international position of the United States became discernible around the turn o f the century and called for greater United States participation in inter national finance. First, there was the rapid expansion of United States exports, which increasingly included m anufactured products as well as agricultural goods and raw m a terials. A growing share of those exports went outside Europe to the relatively capitalpoor areas o f the Caribbean, South Am erica, and A sia. The United States also shifted from a net importer to a net exporter after the turn o f the century and thus from a debtor nation to a creditor nation. Recogni United States banks are relative newcomers to the international scene. Economic realities and legal barriers kept them at home during the nineteenth century. By the turn of the century, however, the growing United States role in the world economy had set the stage for an expansion of international banking activities follow ing the removal of legal re strictions by the Federal Reserve A c t and its early amendm ents. The initial expansion, however, was halted and reversed by the eco nomic downturn of 1 920-21 and the slowing of the postwar foreign trade boom. Growth resumed in the late 1 9 2 0 ’s but was inter rupted again, first by the Depression of the 1 9 3 0 ’s and then by W o rld W a r II. Recovery after the W a r was delayed by lingering war time exchange controls and restrictions on in ternational trade and investment. O nly in the past decade or so has international banking finally come of age in the United States. During the past decade, the number, size, and activities of international departments have m ultiplied sharply. Overseas branches, affiliates, and subsidiaries have proliferated. The dollar— the product of United States banks— now stands at the center o f new in ternational m oney and capital m arkets. M ul tinational banks are emerging to serve multi n a t i o n a l business corporations. Regional banks are challenging N ew Y ork in the in ternational arena. Fifth District banks are sharing in this international banking boom. International banking in the United States has a relatively brief history. A lth ough the foreign trade of the United States expanded tenfold between the Civil W a r and W o rld 4 member banks by virtue of the Banking Act of 1933 and Section 9 of the Federal Reserve A ct. tion of these trends, together with the in creasing strength and importance of the United States in the world economy, led many observers to call for legal and institutional changes that would permit Am erican banks to engage in international banking. The N a tional M onetary Commission, established by Congress to study the nation’s banking and financial system and to make recom m enda tions, reported in 1911 as fo llo w s: ACCEPTANCE FINANCING Section 13 of the Federal Reserve A ct authorized national banks to accept drafts or bills of exchange arising from import or export transactions. It also authorized Federal Reserve Banks to discount or purchase the resulting bankers’ acceptances. These provisions paved the way for the development of a dollar acceptance m arket of great benefit to the foreign trader. Such a m arket enabled the importer or ex porter to transfer the burden of financing his transactions to the banking system at a cost. The Federal Reserve’s readiness to discount acceptances gave the m arket depth and pro vided it with an ultimate source of liquidity. We assume that it is not necessary to call at tention to the desirability of making every reason able effort to promote our foreign trade and to establish closer commercial and financial relations with foreign countries. The impediments in the way of the development of our international trade are numerous. Perhaps none of these is more im portant than the absence of American banking fa cilities in other countries and the lack of knowledge abroad of our financial resources and of the strength and character of our banking institutions. The status of the United States as one of the great powers in the political world is now universally recognized, but we have yet to secure recognition as an important factor in the financial world. This condition of affairs is likely to remain un changed as long as practically all our purchases and sales abroad are financed by foreign bankers. FOREIGN BRANCHES Section 25 of the Federal Reserve A c t permitted national banks with capital and surplus of $1 million or over to establish foreign branches, subject to the approval of the Federal Reserve. W h ile overseas branches of United States banks are foreign entities subject to local laws and regulations, they are also subject to the regulations of the Board of Governors. Before 1962, these regulations limited branch activities to those permitted in domestic bank ing and were more restrictive than those of many foreign countries. Dual regulation put many of these branches at a competitive dis advantage by denying them many banking practices common in their host countries. To rectify this situation C o n g r e s s in 1962 am ended Section 25 of the Federal Reserve A ct to authorize the Board to permit foreign branches to exercise “ such further powers as may be usual in connection with the trans action of the business of banking in the places where such foreign branch shall transact business.” The revisions to the B oard’s Regulation M, which resulted from the 1962 statute, broadened the powers of foreign branches to issue guarantees, to accept drafts, to take liens on foreign real estate, to invest in the securities of the local central bank, clearing Accordingly, the Federal Reserve A ct, based in large part on the Commission’s recom m en dations, opened the door to international banking by United States banks. c J lie J ^e c ja l l^riderpL rinL riq s The Federal Reserve A ct of Decem ber 1913 and its amendments still form the legal fram ew ork for the international operations of Am erican banks. The A c t permitted na tional banks for the first time to accept drafts to finance foreign tr a d e ; it also permitted them to open foreign branches. A 1916 am endm ent permitted national banks to in vest in state-chartered international banking subsidiaries called “ A greem en t” corpora tions. A 1919 amendment to the Federal Re serve A ct, provided fo r the national charter ing of such subsidiaries called “ Edge A c t” corporations. A more recent am endm ent per mits national banks directly to purchase stock in foreign banks. W h ile these pro visions refer specifically to national banks, they are now generally applicable to all 5 houses, government entities, and development banks, and to underwrite and trade in the se curities of the national government. The amendment specifically precluded the Board from authorizing branches to underwrite other securities or to deal in commodities. The revisions to Regulation M also simplified foreign branching procedures by requiring Board approval fo r only the first branch of a national bank in a given foreign country. Additional branches in the same country may be opened after giving 30 days notice to the Board. Jersey. The Edge A ct, which added Section 2 5 ( a ) to the Federal Reserve A ct, authorized the Federal Reserve Board to charter cor porations “ for the purpose of engaging in in ternational or foreign banking or other in ternational or foreign financial operations . . . either directly or through the agency, ownership, or control of local institutions in foreign countries. . . .” E dge A ct corporations must have a mini mum capitalization of $2 million, with con trol remaining with United States citizens. Their domestic transactions can be only inci dental to their international business. Their banking powers are similar to those of inter national departments of commercial banks. They m ay accept foreign dem and and time deposits, m ake foreign loans and investments, issue letters of credit, accept drafts, deal in foreign exchange, and provide collection services. They m ay also operate overseas branches and, unlike commercial banks, they m ay in addition invest in foreign banks and other foreign enterprises. A commercial bank may derive important advantages from an Edge subsidiary. The subsidiary m ay purchase stock in foreign en terprises not engaged in banking. Since the subsidiary m ay be established outside a parent bank’s own area, it can give a bank located elsewhere the advantages of a N ew Y ork or other convenient location. A n Edge corporation m ay also establish subsidiary banks and thus provide the only access to foreign countries that prohibit or severely re strict direct foreign branches of domestic banks. AGREEM ENT CORPORATIONS The second m ajor piece of legislation affecting interna tional banking structure was a 1916 am end ment to Section 25 of the Federal Reserve Act. This amendment permitted national banks to invest, singly or jointly, in corpora tions chartered under federal or state law to conduct i n t e r n a t i o n a l banking activities. Since the am endm ent did not provide for the federal chartering of international banking corporations, its main effect was to enable national banks to invest in existing or newly created state-chartered corporations. Before the Board could approve such an investment by a national bank, however, the corporation had to enter into an agreement with the Board “ to restrict its operations or conduct its business in such m anner or under such limitations and restrictions as the said board may prescribe. . . The legislative provision fo r Agreem ent corporations was designed to provide small banks unable to afford their own foreign branch an opportunity to expand abroad through joint ownership of a foreign bank ing subsidiary. A greem ent corporations may themselves establish overseas branches and engage in many foreign activities not open to foreign branches and their parent banks. FOREIGN B A N K OW NERSHIP Until re cently Edge A ct and Agreem ent corporations provided the only corporate vehicle for United States banks to acquire an equity in terest in foreign banks. A 1966 amendment to Section 25 of the Federal Reserve A c t and the resulting regulatory changes in 1967 au thorized national banks directly to acquire stock in foreign banks. The investment must be approved by the Board of Governors and, together with investments in E dge A c t and Agreem ent corporations, shall not exceed 25 EDGE A C T CORPORATIONS The failure of the 1916 amendment to provide fo r the fe d eral chartering of international banking cor porations gave rise to the A c t of D ecem ber 24, 1919, commonly called the Edge A ct for its sponsor, Senator W a lte r Edge of New 6 percent of the investing bank’s capital and surplus. The foreign affiliate m ay not con duct business in the United States beyond what the Board considers incidental to its international business. state m em ber banks. The foreign branch records of state m em ber and nonmember banks are subject to examination by state authorities. Banks are generally required to furnish periodic reports of condition and re lated financial statements of their foreign branches to their exam ining agency. Edge A c t and A greem ent corporations and their foreign branches must also submit to examination by the Board of Governors at least once a year and must file reports of condition on them selves and their controlled subsidiaries twice a year. In addition, they must report quarterly their acquisition and disposition of shares. In fact, when the Board permits an E dge corporation to acquire con trolling interest in a subsidiary, the condi tions it imposes generally have the effect of subjecting the subsidiary to the same restric tions that apply to the Edge corporation under Regulation K . THE REGULATORY FRAM EW ORK Con gress through the years has delegated the primary responsibility for regulating and su pervising the in te r n a tio n a l operations of A m erican banks to the Board of Governors of the Federal Reserve System. The Board’s responsibilities are shared in part by other federal regulatory agencies and various state authorities. The regulatory authority of the Board of Governors over the foreign activities o f m em ber banks is based on and governed by Sec tion 25 of the Federal Reserve A ct. To im plem ent that section, the Board has issued Regulation M, which governs the establish ment and the operations o f m em ber banks’ foreign branches. Regulation M as amended is also the regulation that governs m em ber banks’ acquisition and holding of stock in foreign banks. Edge A c t corporations were placed under the B oard’s regulatory authority by Section 2 5 ( a ) of the Federal Reserve A ct. To im ple ment the provisions of that section, the Board issued Regulation K. Regulation K — the gen eral provisions o f which m ay be inferred from the previous discussion of permissible ac tivities— applies both to Edge A c t corpora tions and to A greem ent corporations. Of course, since Agreem ent subsidiaries are state-chartered corporations they are also subject to state law and regulation. Foreign branches of United States banks are usually examined by the regulatory au thorities of their host countries, the United Kingdom and Ireland being notable excep tions. The home office records of foreign branches are also subject to examination by United States authorities, usually as part of the examination of their parent banks. The Com ptroller of the Currency examines the foreign branches of national banks at their overseas location; the Federal Reserve Sys tem examines the foreign branch records of W o rld W a r I and its afterm ath provided a setting especially congenial to the expansion of the international activities of United States banks. A p a rt from the legislative changes described in the previous section, the rapid growth o f United States foreign trade, its changing pattern and composition, the emer gence of the United States as a creditor na tion, heavy European demand for postwar reconstruction credits, and the weakening of the dominant role of sterling in international finance invited enlarged United States par ticipation in international banking. Once the legal barriers were rem oved, United States bankers m oved prom ptly to make up for lost time and in the space of three or four years established an impressive position in the in ternational area. But this promising start proved to be a false one, as world economic and political conditions conspired to undo much of this advance. The rapid developm ent of the new bankers’ acceptance m arket reflects the expansion of international financing activities in the im 7 mediate postwar years. A s shown in Chart 1, the volume of acceptances outstanding rose sharply, and by the late 1 9 2 0 ’s it exceeded $1.5 billion, a level that would not be reached again for three decades. National banks and banking subsidiaries lost no time expanding their overseas fa cilities. By 1 92 0, state and national banks together had 100 direct foreign branches. Counting the branches of their subsidiaries the total number of foreign branches reached a peak of 181 in 1920. In these early years few er banks had overseas branches than did their subsidiaries although multiple branch ing by some banks m ade the total of bank branches greater. This early overseas ex pansion was concentrated largely in Latin Am erica and the Far East. Given the relative inexperience of A m eri can banks abroad, their initial overseas ex pansion under favorable conditions was prob ably too rapid. Banks that had overextended their i n t e r n a t i o n a l operations were par ticularly vulnerable to the economic contrac tion of 192 0-2 1 and the abrupt halt in the unusually rapid postwar expansion in world trade in the early 1 9 2 0 ’s. postwar reconstruction The drying up of credits was also a factor unfavorable to the continued growth of international banking. Under the influence of the reverses of the early 1 9 2 0 ’s, Am erican banks curtailed their international activities and overseas branch network. cut back their The number of foreign branches of Am erican banks and sub C hart I VOLUME OF BANKERS' ACCEPTANCES OUTSTANDING IN THE UNITED STATES (b illio n s of d o lla rs) 1925 Source: 1930 1935 Federal Reserve Bulletins. 1940 1945 1950 1955 1960 1965 1970 sidiaries declined by one-half in four years, from the 1920 high of 181 to 91 in 1924. Edge A ct and Agreem ent corporations fo l lowed the same early pattern of rapid rise follow ed by sharp contraction. Agreem ent corporations proved to be more popular than Edge corporations in the early years. Fifteen A greem ent corporations had been form ed by 1925. Thirteen of these were subsequently liquidated or absorbed by other institutions. Eleven of them had disappeared by 1 9 3 0 ; the other two were dissolved in 1932 and 1947. A s late as 1959 only three A greem ent cor porations were in operation. Edge A ct corporations never really got o ff the ground in this early phase of ex pansion into the international area. One was chartered in 1920, and another in 1 9 2 1 ; both were liquidated in 1925. A third was chartered in 1 92 6, but it was liquidated in 1933. The next three were chartered in 1930, 1949, and 1955. Edge A ct corporations did not catch on in any significant way until the 1 9 6 0 ’s. The international operations of Am erican Another slight recovery in international banking and branching paralleled the mild recovery from the Depression in the late 1 9 3 0 ’s. It was interrupted by W o rld W a r II and its accompanying trade restrictions and exchange controls. International operations continued to contract, and by the end of 1945 the overseas branches of A m erican banks and subsidiaries numbered only 78, and only five Edge A c t and Agreem ent corporations were in operation. e Jvecent OxpansLon THE ECONOMIC ENVIRONMENT banks began to recover in the second half of the 1 9 2 0 ’s. Overseas branches grew in num ber from 91 in 1924 to 132 in 1931. This re covery was cut short, however, by the Great Depression of the 1 9 3 0 ’s. In this greatest of all world economic debacles, the volume of world trade declined precipitately and in ternational lending and capital movements virtually dried up. Trade restrictions and capital controls m ultiplied. Competitive de valuations and beggar-m y-neighbor economic policies became the order of the day. Given this economic background and the specter of domestic bank failures, active international departments and overseas branch networks became superfluous. By 1937, the number of foreign branches of banks and subsidiaries had fallen to 108, and the scope and ac tivities of those that remained were severely restricted. The volume of bankers’ accep tances outstanding, which had reached $1.7 billion in 1929, was down to practically nothing in the 1 9 3 0 ’s. The years im mediately follow ing W o rld W a r II were not especially conducive to the develop ment of United States interest in international banking. W h ile the United States emerged from the war as the w orld’s forem ost eco nomic and financial power, the general cli mate in the world economy and in interna tional financial markets was not congenial to private economic activity of any kind. The erstwhile trading nations of the world— the United Kingdom , the countries of Continental W estern Europe, and Japan— were bent on crash programs of economic reconstruction and to that end carried over into the postwar world the elaborate systems of exchange con trols characteristic of the depression and war years of the 1 9 3 0 ’s and early 1 9 4 0 ’s. Private capital movements and private business initia tives were closely circumscribed, and, while foreign trade grew rapidly, much of it, along with most capital movements, was under gov ernmental or intergovernmental auspices. In the early and middle 1 9 5 0 ’s, however, this situation began to change. Under the impetus of Marshall Plan aid, reconstruction and recovery abroad proceeded rapidly, al lowing a progressive relaxation of both trade and exchange restrictions. Private trade and attendant capital flow s grew apace. The grow th in world trade in the postwar period, shown in Chart 2, accelerated with the estab lishment of the European Economic Com munity in 1958. Also after 1958, the m ajor 9 in m any cases made direct investment the most attractive avenue fo r many firm s to gain access to that expanding market. The rela tive scarcity of capital outside the United States, combined with the broad, w ell-de veloped capital m arkets in this country, also made the United States an attractive place for foreigners to flo a t debt and equity issues. In addition to the growth in international trade and investment in the postwar period, the emergence o f the dollar as the key inter national currency increased the role of United States banks in international finance. The use of the dollar worldwide as an interna tional trading currency and its use by foreign monetary authorities as an intervention cur rency gave rise to a substantial foreign de mand for dollar balances. The United States became the reserve center for private foreign traders and foreign m onetary authorities alike. By the end o f the 1 9 6 0 ’s the United States banking community had a large stake trading nations progressively dismantled their exchange control systems and m oved over to virtually free currency convertibility. International lending and investment also received a fillip from the relaxation of ex change controls and the return to currency convertibility in the late 1 9 5 0 ’s and early 1 9 6 0 ’s. W ith its productive capital stock relatively unimpaired by W o rld W a r II, it was natural that the United States should resume and expand its role as capital ex porter once the restrictions were eased. It did so in a world o f increasing financial in tegration. The extent to which the interna tional investment of the United States grew during the 1 9 6 0 ’s is shown in Table I. W h ile attractive returns lured United States capital to points all over the world, investment in a newly resurgent W estern Europe was especially popular with investors. This was partly because the external ta riff shields of the new European customs unions C hart 2 TOTAL WORLD EXPORTS (b illio n s of d o lla rs) 3 0 0 ---------------------------------------------------------------------------- 1946 Source: 1950 1954 1958 International Financial Statistics. 10 1962 1966 1970 Table I UNITED STATES INTERNATIONAL INVESTMENT BALANCE SHEET. 1960-1969 (billions of dollars) U. S .-O W N E D F O R E I G N A S S E T S U. S. L I A B I L I T I E S TO F O R E IG N E R S 1960 1969' $61.4 $126.7 Nonliquid U. S. Government assets 17.0 30.7 Nonliquid U. S. Government liabilities Private 44.4 96.0 Private 31.9 9.5 70.8 18.7 1.7 1.4 3.0 3.6 Long-term assets: Direct investments Foreign securities Claims reported by U. S. banks Other 24.4 Short-term assets: Claims reported by U. S. banks Other TO TAL 3.6 1.4 .3 9.6 4.5 $157.8 4.9 18.4 41.0 6.9 11.8 10.0 22.9 1.6 2.5 3.7 22.6 Short-term liabilities: 17.0 14.1 $85.8 Private 19691 $ 45.9 Direct investments Corporate and other securities Liabilities reported by U. S. banks Other 31.1 19.4 5.0 Liquid U. S. reserve assets 1960 $18.7 Long-term liabilities 45.0 Liquid U. S. Government liabilities 10.5 7.0 Private 12.1 38.0 Liabilities reported by U. S. banks 11.1 Other 1.0 TO TAL $41.2 35.0 3.0 $ 90.8 U. S. international net worth 44.6 67.0 $85.8 $157.8 1 Prelim inary. S ource: irrent Business, October Compiled from D epartm ent o f Comm erce, Survey in international finance, 1970, page 23. international departments are employing over with m any of its m ajor institutions serving as bankers to the 14 percent of their assets abroad, with ap entire trading world. proxim ately 15 percent of their total deposits arising from overseas sources and up to 15 percent of their profits deriving from over THE RECORD OF G R O W T H Table II shows that total claims on foreigners reported by seas operations. Chart banks in the United States more than doubled 3 shows that member banks in during the past decade to reach $ 12 .8 bil creased their overseas branch network four lion in Septem ber 197 0. fold in the past decade. Total foreign lia Over 50 member bilities reported by United States banks also banks were operating 460 foreign branches doubled, reaching $ 42 .6 billion. in 59 countries at the end of 1 96 9. W h ile these Total as figures include some claims and liabilities of sets (and liabilities) of these branches, shown the banks’ customers, the growth reflects a in Table III, exceeded $41 billion, a sixfold substantial international involvement of the increase from only five years earlier. banks them selves. A recent Journal of Commerce survey esti total loans had reached almost $13 billion by mates that the large United States banks with total 1969, a fourfold increase from 11 number of member Their 1964. banks’ The foreign num ber in W estern Europe, including Eng land and Ireland, increased fivefold from 1960 to 116 in 1 9 7 0 ; the number of branches in the Far East tripled in the past decade to reach 79 in 1970. Branching during 1970 favored Nassau. A fte r approxim ately three decades of rela tive inactivity, Edge A c t corporations have once again become prominent institutions o f branches reached 532 by the end o f 1 9 7 0 ; figures for their loans and total assets in 1970 are not yet available. The regional d i s t r i b u t i o n of foreign branches remained fairly constant over the past decade. A s shown in Chart 3, the num ber in Latin A m erica (including the Ba h a m a s), the area with the largest num ber of branches, quadrupled to 280 in 1 9 7 0 ; the Table II FOREIGN CLAIMS AND LIABILITIES REPORTED BY BANKS IN THE UNITED STATES (millons of dollars) 1960 1965 1968 1969 September 19701 5,312 12,251 12,278 12,844 12,788 Short-term claims Payable in foreign currencies Payable in dollars Loans Collections outstanding Acceptances made for foreign account Other short-term dollar claims 3,614 480 3,135 1,296 605 7,734 492 7,243 2,970 1,272 2,508 492 8,711 450 8,261 3,165 1,733 2,854 509 9,606 516 9,091 3,278 1,954 3,202 656 9,646 479 9,167 3,253 2,275 3,052 587 Long-term claims Payable in foreign currencies Loans payable in dollars To official institutions To banks To other foreigners Other long-term claims 1,698 4,517 9 4,508 3,567 16 3,158 528 237 2,393 394 3,238 18 2,806 502 209 2,096 414 3,142 28 2,739 447 244 2,047 376 21,279 26,064 34,883 42,674 44,481 21,272 113 21,159 7,639 4,103 25,551 59 25,492 8,092 5,557 8,356 3,487 31,717 636 31,081 14,387 5,484 6,797 4,413 40,182 429 39,753 20,481 6,946 5,015 7,311 42,561 360 42,201 17,234 7,236 10,856 6,875 7 513 3,166 2,492 1,920 311 203 777 2,389 2,341 8 40 889 1,602 1,507 55 41 851 1,070 891 121 58 Total claims __ 1,233 Total liabilities Short-term liabilities Payable in foreign currencies Payable in dollars Demand deposits Time deposits U. S. Treasury bills and certificates Other short-term liabilities I ) Q 41 7 Long-term liabilities To international and regional organizations To foreign countries Official institutions Banks Other foreigners 1 Prelim inary. S ource: Federal R eserve Bulletins. 12 Chart 3 FOREIGN BRANCHES OF UNITED STATES MEMBER BANKS 500 Other England and Ireland Continental Europe 400 300 200 100 1950 1955 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 Source: Board o f Governors o f the Federal Reserve System. international finance although Agreem ent has increased rapidly since the revision of Regulation M in 1967. corporations have not enjoyed a similar re vival. Chart 4 shows that the number of A nother the of the phenom enal grow th to 63 at the end of 1969. National banks tivities of United States banks is the recent had over $547 million of capital invested in growth in the bankers’ acceptance market. these subsidiaries. in measure Edge firm s grew from 6 at the end of 1959 international financing ac There were 69 Edge cor Chart 1 shows that by the end of 1970 the porations with an estimated total capitaliza tion of approxim ately $600 million and total volume of dollar acceptances outstanding had resources of $3 billion at the end of 1970. cent of these acceptances financed United Also, while precise data are not available, it States imports, a quarter financed exports, is clear that direct and a third financed goods stored in or ship investment by reached the $7 billion level. United States banks in foreign banking institutions A bout 40 per ped between foreign countries. 13 U nited States ban k in g services. T hese u n der lyin g fa cto rs, h ow ev er, do n ot fu lly explain the in creasing ten d en cy o f U nited States banks to seek fo r e ig n location s f o r their in ternational business. T w o sp ecial incentives fo r overseas expan sion have been the r e strictions on cap ital o u tflo w s o f the m id1960’s and the tig h t m on etary p olicies o f the late 19 6 0 ’s. 1Incentives for Overseas Expansion G row th in in tern ation al trade and invest m ent and th e cen tral role o f the d o lla r in the w orld e co n o m y h elp expla in the e x p o rt o f Table III U. S. M E M B E R B A N K S ’ F O R E IG N BRANCHES A B A L A N C E S H E E T R E C O R D , I9 6 4 - I9 6 9 f 1969 1968 1967 1966 1965 1964 Cash, total England and Ireland Continental Europe Latin America Bahamas Far East U. S. overseas areas and trust territories Other areas $ 8,004 5,806 1,178 267 507 146 59 41 $ 3,335 2,201 638 251 $ 2,397 1,543 441 212 150 42 53 137 43 21 $ 1,732 1,057 318 173 * 118 32 34 $ 1,510 877 301 175 ❖ 76 81 $ 1,140 489 362 138 * 69 * 82 Loans, total England and Ireland Continental Europe Latin America Bahamas Far East U. S. overseas areas and trust territories Other areas 12,979 6,990 1,813 863 891 1,585 703 134 9,225 4,933 1,416 880 * 1,308 551 137 6,551 3,155 1,120 591 ❖ 1,047 500 137 4,951 2,169 753 576 4,610 2,020 664 465 * 866 * 595 3,217 1,156 377 403 * 784 * 497 Due from head offices and U. S. branches, total England and Ireland Continental Europe Latin America Bahamas Far East U. S. overseas areas and trust territories Other areas 14,337 9,836 1,809 26 1,328 408 918 12 6,147 4,291 923 97 * 418 411 7 4,045 2,712 359 119 * 422 411 21 3,727 2,613 360 85 1,995 1,083 198 131 * 359 * 224 1,805 900 225 160 * 311 ❖ 209 Other assets, total England and Ireland Continental Europe Latin America Bahamas Far East U. S. overseas areas and trust territories Other areas 5,800 2,121 1,664 428 267 1,118 124 78 4,311 1,752 1,144 508 ❖ 787 33 87 2,665 768 801 348 * 660 11 78 1,974 606 591 218 * 450 19 90 987 277 191 107 * 399 13 776 145 133 109 * 379 ❖ 10 Total assets England and Ireland Continental Europe Latin America Bahamas Far East U. S. overseas areas and trust territories Other areas 41,120 24,753 6,464 1,584 2,993 3,257 1,804 265 23,018 13,177 4,121 1,736 ❖ 2,663 1,037 284 15,658 8,178 2,721 1,270 * 2,267 965 257 12,384 6,445 2,022 1,052 * 1,808 787 270 9,102 4,257 1,354 878 * 1,700 ❖ 913 6,938 2,690 1,097 810 * 1,543 * 798 ASSETS: (Millions) 14 845 470 138 395 266 8 overseas fa cilities and seek fo re ig n sources o f fu n d s in o rd er to pa rticip a te in interna tion al fin an ce. T h e first o f these m easures w as the In terest E qu alization T ax, e ffe c tiv e July 1963. Its pu rp ose w as to d iscou ra g e fo re ig n b o r row in g in U nited States ca p ita l m arkets by raising the e ffe ctiv e interest cost to fo r e ig n ers. T h e tax initially a p p lied to securities C A P IT A L C O N T R O L S T h e restriction s on cap ital o u tflo w s im posed in the m id -1 9 6 0 ’s w ere design ed to cu rb the private capital o u tflo w fr o m the U nited States in ord e r to re d u ce the d e ficit in th e ba la n ce o f paym ents to m a n ag eab le p rop ortion s. But in sh ifting the dem and fo r cre d it fro m the U nited States to E u rope and the E u ro d o lla r m arket, th ey fo r c e d U nited States ban ks to ex p a n d th eir L IA B IL IT IE S : (Millions) 1969 1968 1967 1966 1965 1964 Demand deposits, total England and Ireland Continental Europe Latin America Bahamas Far East U. S. overseas areas and trust territories Other areas $ 4,102 1,508 791 614 86 630 402 71 $ 3,443 1,343 623 570 * 513 294 100 $ 2,705 838 569 $ 2,649 895 589 437 ❖ 402 237 88 $ 2,069 520 488 425 298 * 338 $ 1,918 573 388 373 * 258 * 326 Time deposits, total England and Ireland Continental Europe Latin America Bahamas Far East U. S. overseas areas and trust territories Other areas 30,418 21,223 3,871 344 2,733 1,020 1,054 173 14,932 10,501 2,283 638 9,767 6,534 1,454 372 839 505 166 777 492 138 7,411 4,832 976 342 * 717 386 159 4,954 3,193 461 226 * 652 * 422 3,260 1,762 309 203 * 623 * 363 806 15 117 112 25 322 213 2 738 64 105 152 * 193 223 1 536 32 28 53 * 209 213 1 1,227 315 247 131 * 396 * 138 1,134 219 307 173 * 338 * 97 Cither liabilities, total England and Ireland Continental Europe Latin America Bahamas Far East U. S. overseas areas and trust territories Other areas 5,794 2,007 1,685 514 149 1,285 135 19 3,905 1,269 1,110 376 * 1,118 15 17 2,650 774 669 334 * 842 15 16 1,717 663 410 181 * 430 14 19 852 229 158 96 ❖ 354 * 15 626 136 93 61 * 324 * 12 Total liabilities England and Ireland Continental Europe Latin America Bahamas Far East U. S. overseas areas and trust territories Other areas 41,120 24,753 6,464 1,584 2,993 3,257 1,804 265 23,018 13,177 4,121 1,736 15,658 8,178 2,721 1,270 12,384 6,445 2,022 1,052 6,938 2,690 1,097 810 2,663 1,037 284 2,267 965 257 1,808 787 270 9,102 4,257 1,354 878 * 1,700 ❖ 913 Due to head offices and U. S. branches, total England and Ireland Continental Europe Latin America Bahamas Far East U. S. overseas areas and trust territories Other areas t A s o f December 31. * N ot reported separately. S ource: Board o f Governors o f the Federal Reserve System. 15 511 439 245 103 607 55 47 92 * ! • 259 150 4 1,543 * 798 stitutions on foreigners, and a set o f guide lines was prom ulgated as ground-rules fo r a cooperative effort to limit capital outflow s. The second program applied to direct invest ment abroad by nonfinancial corporations and was placed under the D epartm ent of Com merce. This program , which was m ade m andatory in 1968, limited the am ount of United States financed direct investments abroad but placed no restrictions on invest ment financed by borrowing abroad. These constraints mean that beyond certain speci fied limits overseas expansion by Am erican firm s must be financed from foreign sources. They also mean that if United States banks purchased from foreigners, but it was later extended to commercial bank term loans to foreigners. N ext came the President’s Balance of Pay ments Program , inaugurated in February 1965. This program encompassed two com panion measures of voluntary restraint on United States lending and investing abroad. The first of these, the Voluntary Foreign Credit Restraint Program , was administered by the Federal Reserve and applied to the lending and investing activities of commercial banks and nonbank financial institutions. U nder this program ceilings were established on the outstanding claims o f individual in- Chart 4 EDGE ACT AND AGREEMENT CORPORATIONS 80 1950 Source: 1955 1960 1961 1962 1963 Board o f Governors o f the Federal Reserve System. 16 1964 1965 1966 1967 1968 1969 1970 the center of the Eurodollar m arket— so im portant to United States overseas interests the world over— has also attracted numerous new branches. United States banks now have 38 branches in London, com pared to 21 as re cently as 1965. T able III shows that the total assets of European branches have also in creased faster than those o f other m ajor areas in recent years, although data fo r 1970 are not yet available. The Foreign Credit Restraint Program has also influenced the recent pattern of foreign branching am ong United States banks. Since the initial lending ceilings were historically based— although this has since been m odi fied— the larger banks with established in ternational departm ents received higher ceil ings and were not as restricted as sm aller banks just m oving into international business. M any of the latter had low historical bases (or if they had no historical base, received relatively m odest special ceilings) and found a foreign branch or some type o f foreign a f filiation helpful in getting their international operations o ff the ground. This factor con tributed som ew hat to the recent increase in foreign branching by sm aller, m edium -sized banks. This, in turn, has been a m ajor factor in the emergence o f Nassau as an inexpensive access to the Eurodollar m arket. want to participate in financing the overseas operations of their domestic customers, they must obtain access to foreign sources of funds. The indirect incentive for Am erican bank expansion abroad provided by the direct in vestm ent controls is supplemented by the con trols applied to the banks them selves. The extension of the Interest Equalization Tax to bank loans to foreigners of more than one year put United States banks at a disad vantage in competing with overseas sources of funds. M aking foreign loans at a foreign branch or affiliate was one way to lessen this handicap and was deliberately encouraged by regulations. A more im portant and a more direct in ducement for overseas expansion was pro vided by the ceilings on the foreign credits of banks and their Edge and A greem ent sub sidiaries under the Foreign Credit Restraint Program . Even if United States firm s had been permitted to finance their overseas operations from domestic sources, the re strictions on banks would have limited their participation. Since these restrictions did not cover their overseas branches or affiliates so long as the funds used were raised abroad, they provided an added incentive fo r banks to seek foreign locations and foreign sources of funds. This incentive, of course, was in addition to the existing one o f financing foreign customers. Given the important role o f these capital control program s in stimulating overseas ex pansion by United States banks, it is not sur prising that they should have affected its geographical pattern as well. In the years since the controls were instituted, the share of new branches and affiliates has increased in Continental W estern Europe, an area where a large portion of United States direct over seas investment has been concentrated and an area where the ceilings on foreign lending have been especially restrictive. From the end of 1965 to the end o f 197 0, the number of foreign branches in Continental W estern Europe increased from 21 to 71. W h ile the guideline restrictions on the United Kingdom are less restrictive, its strategic location as TIGHT M O NEY A N D R EGULATION Q W h ile the various capital control program s have encouraged banks to seek funds abroad to finance their foreign lending, tight m one tary policies at hom e, especially in 1 96 9, sent banks abroad in search of funds fo r domestic use. Rising interest rates in 1 96 8 and 1969 coupled with interest-rate ceilings led to a heavy run-off o f time deposits and forced many larger banks to seek funds elsewhere. Unable to attract domestic deposits, m any of these banks, especially those with foreign branches, turned to the E urodollar m arket. Foreign branches in c r e a s in g ly b o rro w e d Eurodollars and loaned the proceeds to their parent banks. Since domestic banks’ Euro dollar borrowings were not classified as de posits, they were not subject to domestic re serve requirements or F D IC insurance pre 17 miums. They were, therefore, not subject to the same cost-increasing restrictions as do mestic deposits. Neither were they subject to the interest-rate ceilings of Regulation Q. The liabilities of United States banks to their foreign branches, shown in Chart 5, reached a peak of over $ 1 6 .5 billion in 1969 at interest rates in excess o f 10 percent. The use of the Eurodollar m arket fo r domestic liquidity pur poses is reflected in the composition of the foreign branches’ balance sheet shown in Table III. O ver h a lf the increase in the branches’ total deposits in 1969 was used to increase claims on their home offices. The Board of Governors, effective Sep tem ber 4, 1969, imposed reserve requirements o f 10 percent on banks’ liabilities to their foreign branches in excess of the daily average am ount outstanding in the four w eeks ending M ay 28, 1969. The provision included an automatic downward adjustment of the reserve-free base as borrowings were repaid in order to retain their outstanding liabilities. Nevertheless, banks began to re pay their borrowings, and that repaym ent was accelerated in 1970 by the easing of monetary policy and the partial suspension of Regulation Q. Liabilities of United States banks to their foreign branches declined from their peak of $ 14.5 billion in A ugust 1969 to $8.6 billion in N ovem ber 1 97 0. To curb this repaym ent and its adverse effect on the o f ficial settlements measure o f the deficit in the balance of payments, the Board raised the marginal reserve requirement to 20 percent, effective Decem ber 23, 1970, and changed the reserve-free base date to the computation period ended N ovem ber 25. These measures were designed to discourage banks from losing their reserve-free bases by further reducing their outstanding liabilities. These regulatory changes have lessened the Chart 5 LIABILITIES OF UNITED STATES BANKS TO THEIR FOREIGN BRANCHES (billions of dollars) 1 6 ----------------------------------------------------------------------- 1964 1965 1966 1967 1968 (last Wednesday in each quarter) Source: Federal Reserve Bulletins. 18 1969 1970 incentive to open foreign branches to at tract deposits fo r domestic use. O f course, the other incentives for overseas expansion remain. have total foreign assets o f at least $ 5 0 0 ,0 0 0 each, the minimum limit fo r reporting under the program. This is, of course, quite apart from credit extended directly to domestic customers to finance their exports and im ports. Contrary to past experience, most o f the banks establishing new foreign branches in recent years have been banks outside N ew York, with an increasing share o f these b ra n ch es re p r e s e n tin g th e fir s t fo r e ig n branch of banks ju st entering the interna tional field. The recent grow th in the num ber of foreign branches, phenom enal as it has been, does not adequately reflect the growing number o f domestic offices involved. The number o f foreign branches o f m em ber banks increased from 2 44 in 1966 to 532 in 1970— an increase o f 118 percent. But the number of m em ber banks represented by these branches increased from 13 to 7 9 — an increase of 500 percent. Thus the num ber of member banks with foreign branches in creased almost five tim es faster than the number of branches. This trend was es pecially pronounced in 1969 and 1 9 7 0. A similar trend m ay be developing with the reappearance recently o f m ultiple-ow nership Edge A c t subsidiaries. A s banks pool their resources and reduce the costs o f inter national operations through m ultiple owner ship, the number of banks represented by Edge subsidiaries increases faster than the number of subsidiaries. F or exam ple, one Edge A ct corporation, organized in 1 96 8, is now jointly owned by 18 regional banks in cluding two in the F ifth District. In addition to the rem arkable overall growth in international banking operations, several recent trends and developments are worth mentioning. A m ong the more notable is the grow ing involvem ent of m ajor banks outside N ew Y o rk . Closely related to this trend is the new prominence of Nassau as a m ajor access to the Eurodollar m arket, es pecially for the newer entrants into the inter national field. The emergence of m ultina tional banks to serve the new breed of m ulti national business corporations is another recent developm ent of far-reaching conse quences. MORE BANKS GOING INTERNATIONAL International banking in the United States has traditionally been dominated by a few large banks concentrated largely in N ew York. The deposits of their overseas branches now account fo r about a third of the total net deposits of N ew Y ork banks. But while in ternational banking is more important than ever to N ew Y o rk banks, their relative share has declined in recent years. N ew Y ork Clearing House banks now account fo r about two-thirds o f all United States banks’ over seas deposits and assets, com pared to threefourths a couple of years ago. Large and m edium size banks all over the country have recently expanded previously dormant international departments or moved into the international field for the first time. Figures on the total num ber of banks with international departments or significant in ternational business are not available. There are, however, approxim ately 170 banks cur rently reporting under the Foreign Credit Re straint Program . This means that 170 banks THE TREK TO NASSAU Closely related to the broadening o f the base o f international banking in the United States is the recent emergence of N assau as a m ajor center o f Eurodollar activity in the W estern H em is phere. Nassau has becom e the most con venient and least expensive access to the Eurodollar m arket fo r m any United States banks, especially those in the early stages of their international operations. A t the end of 1970 the Baham as had 60 direct branches of member banks, 52 o f which were opened 19 the home office, in turn, m ay be a special file cabinet or drawer, or a separate “ in” box fo r the Nassau m ail, xxiese suptjriiciai ar rangements are designed to provide a foreign address fo r business that is conducted at the home office. They are necessitated by the various capital controls and other restrictions on the home offices. The main substance to these arrangements is that loans made by N assa u b ra n ch es be from funds raised abroad. in the past two years. M ost of the Nassau branches represent the only branch of their parent bank. A N assau branch offers many of the ad vantages of a branch in Europe, but at a fraction o f the cost. Through a Nassau branch an A m erican bank, even one with limited resources, can attract offshore de posits without domestic interest-rate ceilings or reserve requirements. It can make foreign loans not subject to the Interest Equalization T ax or the limits set by the Foreign Credit Restraint Program . It is also eligible to fi nance, through funds raised abroad, the over seas operations of Am erican corporations under the D irect Investment Control Pro gram . F inally, an Am erican bank can use its Nassau branch, as well as foreign branches elsewhere, to augm ent its domestic resources with Eurodollar borrowings, although its ability to do so has been severely restricted by regulatory changes in 1969. A t the end o f 1 96 9, Nassau branches had $1.3 billion in outstanding claim s on their head offices out o f $ 3.0 billion total assets. This 44 percent repatriation exceeded that of any other area except United States overseas areas. W h e re a s branches in many areas offer a full range of local retail banking services, Nassau branches are essentially wholesale operations in the Eurodollar market. Indeed, Baham ian regulations permit only offshore business fo r banks chartered to engage in such business and prohibit the acceptance of local deposits. M ost Nassau branches— including all those of F ifth D is tr ic t b a n k s — are essentially “ shell” operations. A ll the business usually originates at the home office and is trans acted there fo r the account of the Nassau branch. The “ typ ical” Nassau branch of Fifth District banks m ay be characterized as a local address, telephone number, and a duplicate set of books. The physical fa cilities, usually a single office or even a single desk in an office, are rented. The routine Nassau bookkeeping is done at the instruction of the head office by a local “ agent” firm on a fee basis. About the only tangible evidence of the Nassau branch at MULTINATIONAL BANKING A nother sig nificant and far-reaching recent development in international banking is the appearance o f a new breed of multinational banks to serve multinational business corporations in inter national financial m arkets. These m ultina tional consortia banks are the joint ventures o f banks located in several different coun tries. They typically have their own identity and small staffs but derive tremendous fi nancial strength from their large capitaliza tion and strong backing from their parent banks. The forerunner o f the new multinational banks was established in 1964 without A m eri can participation. Others did not follow until 1967. M ost of the 20 or so multinational banks in operation today are located in Europe, with the m ajority of them in London, and leading regional banks in the United States are well represented. For exam ple, Rothschild Intercontinental, form ed in Lon don in 1969, is jointly owned by five Euro pean banks and banks in Cleveland, Houston, and Seattle. A Fifth District bank recently announced plans to form such a multinational bank in London in conjunction with a London m erchant bank and four other m ajor regional banks in the United States. W h ile these multinational banks usually have broad charters that permit them to o f fe r a full range of commercial and investment banking services, they specialize in large medium -term loans to large international bor rowers utilizing funds acquired in the Euro currency and Eurobond markets. Loan m a turities generally range from two to eight years and are designed to fill the gap between 20 short-term commercial bank loans and capital m arket credit. The principal borrowers are the large multinational business corporations, foreign subsidiaries of Am erican corpora tions, and lately E u r o p e a n g o v e rn m e n t agencies and public utilities. Loans may be made by the banks directly, but more often they are made through the private placement of notes with other banks. the country, began m oving into the interna tional area. They not only m ade a bid fo r a share of the existing business, but many began to generate new business by pointing out the many profitable export and import opportunities to their customers. By the end of the decade there were probably 13 to 15 banks in the Fifth District th at could offer “ full service” international banking. A t the end of 197 0 ten Fifth District banks had foreign claims large enough (at least $ 5 0 0 ,0 0 0 ) to report under the Foreign Credit Restraint Program . These banks reported foreign claims o f $85 million, most of which were short term. Their short-term liabilities to foreigners were in excess of $14 0 million. A s their international operations grew, and because of the potential limitations on that growth imposed by the restrictions on capital outflows, Fifth District banks recently began to supplement their netw ork of foreign correspondents with their own overseas fa cilities. By the end of 197 0 six District banks had direct foreign branches, all of them in Nassau. Five banks had Edge A ct corporations. A s noted earlier, one Fifth District bank, in conjunction with other re gional banks, recently form ed a multinational bank in London. A nother recently pur chased considerable equity interest in a London m erchant bank and opened two rep resentative offices in Latin A m erica. Fifth District banks were am ong the first to go to Nassau to gain access to the Euro dollar market. Unlike m any other banks, however, banks in the Fifth District have made no attem pt to use those branches fo r domestic liquidity purposes. T hey have used them primarily as an external source of funds for foreign lending outside the limits imposed on home office lending under the Foreign Credit Restraint Program . If international trade and investment con tinue to grow at record rates and if the trend of worldwide m onetary and financial in tegration continues, the opportunities in in ternational banking will expand further in the next few years. M ore and more banks in the nation, and in the F ifth District, will be come bankers to the world. International CBankim] in the S. ^Fifth CDistrict International banking on a scale worthy of the term has come to the Fifth Federal Reserve District only recently. W h ile foreign trade has always been important to Fifth District states, its financing has traditionally been left to N ew Y o rk banks. A few District banks maintained token international depart ments, but these were m odest operations de voted for the most part to collections and other miscellaneous services fo r regular do mestic customers. M ost of the limited inter national services were handled through New York correspondent banks. Only a handful of Fifth District banks could offer anything close to a full range o f international banking services as recently as 1965. The late m ovement of Fifth District banks into international finance is som ewhat sur prising in view of the District’s large stake in international trade. N ot only does much of the nation’s foreign trade originate in the Fifth District, but a large part of it is shipped through Fifth District ports. During 1969, for exam ple, almost a quarter of the nation’s waterborne export tonnage went through Fifth District ports, most of it through the H am pton Roads ports o f Virginia. Fifth Dis trict ports accounted fo r a tenth of the na tion’s import tonnage in 1969. In value terms, Fifth District ports accounted fo r 13 percent of United States waterborne exports in 1969 and nine percent of the imports. During the 1 9 6 0 ’s Fifth District banks, along with the larger regional banks across 21 HIGHLIGHTS OF 1970 EARNINGS A N D C APITAL ACCOUNTS Y ork N et earnings before paym ents to the United Jacobus conducted a site evaluation and fe a architectural firm of Francisco and States Treasury increased $ 3 5 ,3 4 6 ,0 7 6 .7 2 to sibility survey to determine the suitability of a record $ 2 5 9 ,4 8 7 ,1 5 5 .6 4 in 1 97 0. Six percent the location fo r a new bank building fo r the statutory Baltimore Branch. dividends totaling $ 2 ,1 0 0 ,4 8 7 .0 9 The results of the study were paid to Fifth District m em ber banks, were that the proposed area is both desirable and $ 2 5 5 ,8 8 9 ,4 6 8 .5 5 was paid to the T reas and adaptable to the needs o f the Federal Reserve Bank. Planning is continuing on the ury as interest on Federal Reserve notes. C a p ita l sto c k rose $ 1 ,4 9 7 ,2 0 0 .0 0 development o f this project. to $ 3 5 ,7 0 0 ,5 5 0 .0 0 as m em ber banks increased their stockholdings, as required by law , to DISCOUNT RATE reflect Richmond Reserve Bank, with the approval plus. the rise in their capital and sur The B ank’s surplus account increased On N ovem ber 11, the of the Board o f Governors, low ered its dis $ 1 ,4 9 7 ,2 0 0 .0 0 to a total o f $ 3 5 ,7 0 0 ,5 5 0 .0 0 . count rate from 6 percent to 5 % percent in an effort to bring the rate into alignm ent with other short-term interest rates. NEW BANK BUILDINGS Plans fo r the con struction of a new building on the north bank In recognition o f the further dow nw ard of the James River were announced M arch trend in short-term interest rates, the dis 16. It is anticipated that the building will be count rate again was reduced from 5 % per a high-rise structure with considerable un cent to 5 i/2 percent on D ecem ber 11. derground area fo r check processing, cur rency and coin operations, security courts, CHANGES and vaults. On A large portion of the site will be open space which will be landscaped and IN DISCOUNT Decem ber 1, the PROCEDURES Board of Governors announced certain changes in the procedures beautified to serve as a focal point fo r re connected developm ent of the “ Main to the Jam es” from area in downtown Richmond. changes, effective in February 1 9 7 1 , a re : It is hoped the with the F ederal borrow ing Reserve of System. funds These that construction will begin in 1972, with oc 1. cupancy by 1975. In D ecem ber 1969, the Departm ent of mal application and promissory note. H ousing and Urban Developm ent of the city tionally to repay all advances m ade pur the privilege o f exclusive negotiation fo r a suant to the agreem ent. lot in the Inner H arbor project developm ent This property, approxim ately A m em ber bank would be obliged uncondi o f Baltim ore granted to the Baltim ore Branch area. The initiation o f a “ continuing lend ing agreem ent” as a substitute fo r the fo r 2. 9 ,00 0 The adoption o f the practice o f col square feet, is bounded by Pratt, Calvert, lecting interest on borrowings by m em ber Lom bard, and South Streets and overlooks banks Baltim ore’s harbor. rather than deducting interest in advance. During 1970, the N ew 23 at the time the loan is repaid 3. The m aking of any changes in the January 1970 fo r installation of a third gen discount rate im m ediately applicable to all eration M odel B -35 0 0 check processing unit outstanding borrowings. at the Richmond office. The equipment was installed in 1970, and the system ’s design and CULPEPER FACILITY On August 20, 1970, program m ing work was almost complete by the first “ live tr a ffic ” new communications system located at our the end of the year. It is expected that the processing of checks through the new system Communications will begin during the first quarter of 1971. peper, Virginia. and moved through the Records Center, Cul W ire transfers of funds and securities constitute the bulk of the present FISCAL AGENCY traffic, administrative ury Departm ent increased the minimum for communications A lso, a new $ 1 5 ,0 0 0 Treasury Bill was in which messages. Conversion also includes On M arch 2, the Treas Treasury Bill tenders from $ 1 ,0 0 0 to $ 10 ,0 0 0 . to the new system has proceeded in phases and by the troduced, effective September 1. end of 1970 approxim ately 60 percent of the On June 1, the rate on U. S. Savings Bonds total teletype traffic am ong Federal Reserve held to maturity was increased from 5 per offices throughout the country was being cent to 51/2 percent. The sale of U. S. Savings transmitted over the new computer-controlled Notes, commonly referred to as “ Freedom network Shares,” was terminated June 30. of approximately 150 It is anticipated that Shares were first offered to the public on com plete conversion to the new system will M ay 1, 1967, with an approxim ate yield of be achieved by the third quarter of 1971, at 5 percent if held to maturity. words at a speed per minute. Freedom which time economic research data will be A switchover from the old 8 1 -D -l to the moving over the netw ork at an approximate new M -1 0 0 0 /M -3 7 system for wire transfers speed of 3 ,0 0 0 words per minute. of securities was made for all transactions ACCOUNTING The AND BANK installation, testing, except those involving the Federal Reserve ACCOUNTS Bank of N ew Y ork. and final switch N ew Y ork Bank will begin participating in over of the wire transfers of funds operation to the M -1 0 0 0 /M -3 7 early 1971. private wire network occurred during 1 9 7 0. This system is capable o f transm itting and It is anticipated that the receiving transfers NEW MEMBER BANKS Seven Fifth District of banks became members of the Federal Re funds am ong Federal Reserve Banks at 150 serve System during the year. words per minute, an increase in the overall Citizens N a tional Bank of St. A lbans, St. A lbans, W e st transmission rate o f 40 percent in comparison Virginia, with its predecessor, the 8 1 -D -l system. opened for business in January. First Manassas Bank and Trust Company, A private-line netw ork between this Bank M anassas, Virginia, opened in A pril. The Suncrest National Bank, M organtown, W est and its m em ber banks that will interface with the M -1 0 0 0 /M -3 7 system is being developed. Such systems will facilitate the transfers of funds between our m em ber banks and those in other Federal Reserve districts with auto matic processing of accounting entries and a minimum o f physical handling. W arrenton, CHECK tional Bank, Marion County, W e s t Virginia, Virginia, and Barbour County Bank, Philippi, W est Virginia, Jefferson COLLECTION with the operations Bank, in June. Lynchburg, V ir ginia, opened in A ugust. Bank of W arrenton, October. signed began National A contract was Burroughs Corporation in Virginia, started In Decem ber, the M iddletow n N a began serving the public. 24 operations in CHANGES IN DIRECTORS The election, by Chairman of the Board, First National Bank Fifth District m em ber banks, of one Class A of Director to a three-year term on the Rich Richmond Board also reappointed Jam es J. mond Board of Directors was held in the fa ll. Robinson, Thom as P. M cLachlen, President, M cLachlen Cashier, Bank of R ipley, Ripley, W e s t V ir National was ginia, as a director o f the Baltim ore Branch. elected to succeed Giles H . Miller, Jr., Chair H. Phelps Brooks, Jr., President and Trust Bank, W ashington, D. C., M aryland, Baltim ore, E x e c u tiv e M aryland. V ic e The P re sid e n t and man of the Board, The Culpeper National O fficer, The Peoples National Bank, Chester, Bank, Culpeper, Virginia, South Carolina, and C. C. Cam eron, Chairman pired D ecem ber 31. H. whose Dail term ex Holderness, of the Board and President, First Union Carolina, Char President, Carolina Telephone and Telegraph National Company, Tarboro, North Carolina, was re lotte, North Carolina, were reappointed to elected to a three-year term as a Class B three-year terms on the Charlotte Board of Director of the Richmond Bank. Directors. Bank of N orth W ilson H . Elkins, President, University of M aryland, College Park, M aryland, was re FEDERAL A D V ISO R Y COUNCIL The Board appointed Chairman of the Board and F ed of Directors selected Joseph W . Barr, Presi eral Reserve A g en t for 1 97 1. dent, Am erican Security and Trust Com pany, Renamed as Deputy Chairman of the Board of Directors W ashington, D. C., to serve as the m em ber for 1971 was Robert W . Lawson, Jr., M anag of the Federal A dvisory Council representing ing Partner, Charleston the Fifth Federal Reserve Johnson, Charleston, O ffice, Steptoe W e st Virginia. & year 1971. The District fo r the Mr. Barr succeeded Robert D. H. Board of Governors also reappointed Stuart H arvey, Chairman of the Board and Chief Shumate, President, Richmond, Fredericks Executive O fficer, M aryland National Bank, burg and Potomac Railroad Com pany, Rich Baltimore, M aryland. mond, Virginia, to a three-year term as a Class C Director of the Richmond Reserve CHANGES IN OFFICIAL STAFF Bank. of changes were m ade in the official sta ff during The Board of Governors appointed Charles the year. E ffective M ay Miss W . D eBell, General M anager, North Carolina W o rk s, Vice President in the Research Departm ent. Electric Company, Inc., was nam ed 1, Elizabeth W . W estern A n g le A number Assistant Jimmie R. M onhollon was appointed Senior W inston-Salem , North Carolina, to a threeyear term on the Board of Directors of the Vice President in charge Charlotte Branch. Mr. DeBell succeeded W i l Branch effective July 1. liam mund F. Mac D onald, who elected to take an B. M cGuire, President, Duke Power Company, Charlotte, North Carolina, whose early retirement after term expired. John H. Fetting, Jr., President, of the Charlotte H e succeeded E d guished service. 24 years of distin A . H. Fetting Com pany, Baltimore, M aryland, A lbert D. Tinkelenberg joined the sta ff of was reappointed by the Board of Governors the Culpeper Facility as Assistant Vice Presi to a three-year term on the Baltimore Board dent on August 17. of Directors. The Richmond were effective January 1, 1 9 7 1. The Board of Directors ap follow ing promotions and changes Raym ond E. pointed J. Stevenson Peck, President, Union Sanders, Jr., was elected Senior Vice Presi Trust Baltimore, dent and given responsibility fo r the Person Baltimore nel, Protection, General Service, M oney, and M cCardell, Printing and Supplies D epartm ents. W e lfo rd Com pany M aryland, Branch as a of director at the succeeding M aryland, Adrian L. 25 S. F arm er was appointed Senior Vice Presi Assistant Vice President in the Accounting dent and Special Legal Adviser. In addition and Bank Accounts Departm ents and W i n i to being in charge o f the Discount and Credit fred O. Pearce was elevated to Assistant Vice President in Check Collection. H obert D. D epartm ent, he has general supervision over the new building program and will handle Pierce was named Assistant Cashier in charge special assignments. W illia m F. Upshaw was of Building and Equipm ent and Barthonhue nam ed Vice President and General Counsel W . Reese was nam ed Assistant Cashier in the and is now in charge of the Legal Depart Personnel Departm ent. H . Ernest Ford was elevated to Vice A t the Charlotte Branch, O. Louis Martin, President and will be responsible for the new Jr., was promoted to Assistant Vice President, building program and Charles H . Imel was named Assistant Cashier o f the Culpeper Facility. ment. Farm er. and will work with Mr. G eorge B. Evans was promoted to 26 SuMManj o f Operations CHECK CLEARING & COLLECTION 1970 1969 Dollar amount Commercial bank checks1 Government checks2 _____ Return items ____________ L89,905,006,000 15,503,843,000 1,746,610,000 154,553,326,000 14,184,745,000 1,055,809,000 Number of items Commercial bank checks1 Government checks2 _____ Return items ____________ 636,923,000 68,261,000 7,359,000 499,162,000 66,058,000 5,898,000 CURRENCY & COIN ' 3,318,065,890 147,146,575 1,131,836,112 3,046,362,299 150,655,860 1,079,930,385 4,438,573 792,338 4,235,021 764,219 5,126,845,000 33,055,397 95 10,698,050,400 57,452,742 112 16,857,927,029 355,646 13,969,235,175 352,267 Coupons redeemed Dollar amount . Number _______ 116,116,823 366,297 86,260,506 304,453 Savings bond and savings note issues Dollar amount _____ _________________ Number ______________________________ 361,648,172 9,408,269 371,618,450 10,389,683 531,196,284 11,946,924 ‘V ' ' * ' * 546,468,910 12,309,004 9,028,901,905 2,134,725 8,591,714,516 1,975,201 Currency disbursed— Dollar amount Coin disbursed— Dollar amount ______ Dollar amount of currency destroyed Daily average of currency destroyed Dollar am ount_________ _____________ Number _____________________________ DISCOUNT & CREDIT Dollar amount Total loans made during year ___________ Daily average loans outstanding _________ Number of banks borrowing during the year FISCAL A G E N C Y ACTIVITIES Marketable securities delivered or redeemed Dollar amount ______________________________ Number ---------------------- --------------------------------- . Savings bond and savings note redemptions Dollar amount _____________________________ Number ________________ ___ ________________ Depositary receipts for withheld taxes Dollar amount ____ _ ____ ___________ _ Number ________ _____________________ TRANSFERS OF FUNDS Dollar amount __________________________ _______-......... ......... ............ ..... Number _____ ________ ___________ ______________ _____ ____ _______ _____ 1 Excluding checks on this Bank. 2 Including postal money orders. 27 384,495,547,822 I 425,529 289,995,671,461 389,437 COMPARATIVE STATEMENTS Condition ASSETS: DEC. 31, 1970 DEC. 31, 1969 $1,043,808,340.57 36,000,000.00 82,642,870.00 12,797,592.30 $ 926,579,929.99 1,932,823,000.00 1,664,937,000.00 2,474,114,000.00 218,878,000.00 2,347,358,000.00 261,448,000.00 _________________ 4,625,815,000.00 4,273,743,000.00 Gold certificate account ________ ____ ______________________ Special Drawing Rights certificate account _____________ Federal Reserve notes of other Federal Reserve Banks Other cash _________________________ ____________ _____ _______ Discounts and advances ____________________________________ U. S. Government securities: B ills ________________________________________________________ Certificates _______________________________________________ Notes _____________________________________________________ Bonds _____________________________________________________ TOTAL U. S. GOVERNMENT SECURITIES 67,815,864.00 6,414,018.09 12,150,000.00 SECURITIES _____________ ___ _____ _____ 4,625,815,000.00 4,285,893,000.00 Cash items in process of collection _______________________ 996,018,127.33 1,070,079,540.79 Bank premises ______________________________________________ 11,417,938.52 10,858,191.24 Other assets__________________________________________________ 58,185,422.04 137,232,291.92 TO TAL ASSETS _____________________________ $6,866,685,290.76 $6,504,872,836.03 Federal Reserve notes _____________________________________ $4,604,378,958.00 $4,327,423,885.00 Deposits: Member bank reserves ___________________________________ U. S. Treasurer— general account _______________________ F oreign ____________________________________________________ Other _______________________________________________________ 1,306,815,256.74 38,828,985.64 6,375,000.00 30,087,116.20 1,089,525,344.69 130,767,416.21 6,760,000.00 30,296,932.65 1,382,106,358.58 766,518,464.43 42,280,409.75 1,257,349,693.55 808,930,309.66 42,762,247.82 6,795,284,190.76 6,436,466,136.03 Capital paid in ______________________________________________ Surplus ______________________________________________________ 35.700.550.00 35.700.550.00 34.203.350.00 34.203.350.00 TO T AL L IA B ILITIE S AN D CAPITAL ACCOUNTS $6,866,685,290.76 $6,504,872,836.03 $ $ TOTAL LOANS AND LIABILITIES: TOTL DEPOSITS ________________ ___ ______________________________ Deferred availability cash items __________________________ Other liabilities______________________________________________ T O T A L L I A B IL IT IE S ________________________ C A PIT A L A C C O U N T S: Contingent liability on acceptances purchased for foreign correspondents ___________________________ 28 12,755,100.00 7,586,800.00 armnqs ana £(expenses d > £ 1970 Discounts and advances _________________ Interest on U. S. Government securities Foreign currencies ______________________ Other earnings __________________ _________ TOTAL CURRENT EARN INGS 2,086,332.79 281,255,061.17 2,488,230.63 37,585.36 & 3,404,671.02 236,068,720.12 6,333,270.83 49,694.63 245,856,356.60 23,289,429.24 1,084,700.00 2,815,300.03 $ 1969 285,867,209.95 E A R N IN G S : 18,843,497.13 780,700.00 1,892,778.10 EXPEN SES: Operating expenses (including depreciation on bank premises) after deducting reimbursements received for certain Fiscal Agency and other expenses ___________________________________ Assessments for expenses of Board of Governors ______________ Cost of Federal Reserve currency ______________________________ N E T E X P E N S E S __________________________ 27,189,429.27 21,516,975.23 CURRENT N ET E A R N IN G S _____________ 258,677,780.68 224,339,381.37 616,332.07 251,152.58 306,622.09 867,484.65 306,622.09 58,109.69 448,948.42 55,976.12 ADDITIONS TO CURRENT N ET E A R N IN G S: Profit on sales of U. S. Government securities (net) All oth er_________________________________________________ TOTAL ADDITIONS __________________________ -________ DEDUCTIONS FROM CURRENT NET E A R N IN G S: Loss on sales of U. S. Government securities (net) All other ______________________________________________ TOTAL DEDUCTIONS ______________________________________ ___ ____________________ 58,109.69 504,924.54 N E T A D D ITIO N S OR DE D U CTIO N S _________________________ + 809,374.96 -198,302.45 $259,487,155.64. $224,141,078.92 $ 2,100,487.09 255,889,468.55 1,497,200.00 $ 2,008,397.94 220,778,680.98 1,354,000.00 $259,487,155.64 $224,141,078.92 $ 34,203,350.00 1,497,200.00 $ 32,849,350.00 1,354,000.00 $ 35,700,550.00 $ 34,203,350.00 $ 34,203,350.00 1,674,150.00 $ 32,849,350.00 1,721,000.00 35,877,500.00 176,950.00 34,570,350.00 367,000.00 $ 35,700,550.00 $ 34,203,350.00 N E T E A R N IN G S BEFORE P A Y M E N T S TO U. S. TR EA SU R Y . Dividends paid _________________________________________-_____________ Payments to U. S. Treasury (interest on Federal Reserve notes) Transferred to surplus _______________________ _______________________ TO TAL SURPLUS ACCOUNT Balance at close of previous year . _____________________________ Addition account of profits for year __________________________ B ALA N CE A T CLOSE OF CU RREN T YE A R CAPITAL STOCK ACCOUNT (Representing amount paid in, which is 50% of amount subscribed) Balance at close of previous year ___________________________________________ Issued during the year ______________________________________________________ Cancelled during the year _______________________________________ B AL A N C E A T CLOSE OF C U RRENT Y E A R 29 DIRECTORS (December 31, 1970) Wilson H. Elkins Chairman of the Board and Federal R eserve A gen t Robert W . Lawson, Jr. D epu ty Chairman o f the Board CLASS A Hugh A . Curry President, The Kanawha Valley Bank Charleston, W est Virginia (T erm expires D ecem ber 31, 1972) Giles H. Miller, Jr. Chairman of the Board, The Culpeper National Bank Culpeper, Virginia (T erm expired D ecem ber 31, 1970) Succeeded b y : Thomas P . McLachlen President, M cLachlen National Bank W ashington, D. C. (T erm expires D ecem ber 31, 1973) Douglas D. Monroe, Jr. President, Chesapeake National Bayik Kilmarnock, Virginia (T erm expires D ecem ber 31, 1971) CLASS B H. Dail Holderness President, Carolina Telephone and Telegraph Company Tarboro, North Carolina (T erm expires D ecem ber 31, 1973) Charles D. Lyon Retired President, The Potomac Edison Company H agerstown, M aryland (T erm expires D ecem ber 31, 1971) Robert S. Small President and Chief E xecu tive O fficer, Greenville, South Carolina (T erm expires D ecem ber 31, 1972) Dan R iver Mills, Inc. CLASS C Wilson H. Elkins President, U niversity o f Maryland College Park, M aryland (T erm expires D ecem ber 31, 1971) Robert W . Lawson, Jr. Managing Partner, Charleston O ffice, Steptoe & Johnson Charleston, W est Virginia (T erm expires D ecem ber 31, 1972) Stuart Shumate President, Richmond, Fredericksburg and Potomac Railroad Company Richmond, Virginia (T erm expires D ecem ber 31, 1973) MEMBER FEDERAL AD VISO R Y COUNCIL Robert D. H. Harvey Chairman of the Board and C hief E xecu tive O fficer, M aryland National Bank Baltimore, Maryland (T erm expired D ecem ber 31, 1970) Succeeded b y : Joseph W . Barr President, Am erican Security and Trust Company W ashington, D. C. (T erm expires D ecem ber 31, 1971) 30 OFFICERS C ^ L ck m on ^ J Aubrey N. Heflin, P resident Robert P. Black, F ir st Vice P resident Welford S. Farmer, Senior Vice President and H. Ernest Ford, Vice President Special Legal A d v iser William C. Glover, V ice President Upton S. Martin, Senior Vice President Arthur V. Myers, Jr., Vice P resident James Parthemos, Senior Vice President and John L. Nosker, Vice President D irector o f Research John F. Rand, Vice President Raymond E. Sanders, Jr., Senior Vice President Aubrey N. Snellings, Vice P resident John G. Deitrick, Vice President William F. Upshaw, Vice P resident and General J. Gordon Dickerson, Jr., Vice President Counsel Wenifred 0 . Pearce, A ssista n t Vice President J. Lander Allin, Jr., A ssista n t Vice President Elizabeth W . Angle, A ssista n t Vice President Chester D. Porter, Jr., C h ief E xa m in er Clifford B. Beavers, A ssista n t Vice President Victor E. Pregeant, III, A ssista n t Vice President and Secretary Lloyd W . Bostian, Jr., A ssista n t Vice President Frank D. Stinnett, Jr., A ssista n t Vice President Wm. T. Cunningham, Jr., A ssista n t Vice President Andrew L. Tilton, A ssista n t Vice P resident George B. Evans, A ssista n t Vice President Albert D. Tinkelenberg, A ssista n t Vice President William C. Fitzgerald, A ssista n t General Counsel William H. Wallace, A ssista n t Vice President John E. Friend, A ssista n t Vice President Jack H. Wyatt, A ssista n t Vice P resident Fred L. Bagwell, Exam ining O fficer Joseph C. Ramage, A ssista n t Cashier Wyatt F. Davis, Exam ining O fficer Barthonhue W . Reese, A ssista n t Cashier Charles H. Imel, A ssista n t Cashier Wilbur C. Wilson, A ssista n t Cashier Hobert D. Pierce, A ssista n t Cashier Joseph F. Viverette, General A uditor John C. Horigan, A ssista n t General A u ditor G. Harold Snead, Senior A d viser arlotte ^Branch Baltimore bran ch Jimmie R. Monhollon, Senior Vice P resident H. Lee Boatwright, III, Senior Vice President A. A. Stewart, Jr., Vice President Stuart P. Fishburne, V ice P resident B. F. Armstrong, A ssista n t Vice President Boyd Z. Eubanks, A ssista n t Vice President E. Riggs Jones, Jr., A ssista n t Vice President Winfred W . Keller, A ssista n t Vice President Gerald L. Wilson, Assistayit Vice President Fred C. Krueger, Jr., A ssista n t Vice President Charles P. Kahler, A ssista n t Cashier 0 . Louis Martin, Jr., A ssista n t Vice President 31 BRANCH DIRECTORS (December 31, 1970) irnore James R. Chaffinch, Jr. Tilton H. Dobbin John H. Fetting, Jr. James M. Jarvis Arnold J. Kleff, Jr. Adrian L. McCardell James J. Robinson E xecu tive Vice President, The Denton National Bank Denton, M aryland (T erm expires D ecem ber 31, 1972) President and Chairman o f E xecu tive Committee, Maryland National Bank Baltimore, Maryland (T erm expires D ecem ber 31, 1971) President, A . H . F ettin g Company Baltimore, M aryland (T erm expires D ecem ber 31, 1973) Chairman o f the Board, Jarvis, Downing & Em ch, Inc. Clarksburg, W e st Virginia (T erm expires D ecem ber 31, 1971) Manager, Baltimore R efin ery, Am erican Smelting and Refining Company Baltimore, M aryland (T erm expires D ecem ber 31, 1972) Chairman o f the Board, F irst National Bank o f M aryland Baltimore, Maryland (T erm expired D ecem ber 31, 1970) Succeeded b y : J. Stevenson Peck President, Union Trust Company o f Maryland Baltimore, M aryland (T erm expires D ecem ber 31, 1973) E xecu tive Vice President and Cashier, Bank o f Ripley Ripley, W e st Virginia (T erm expires D ecem ber 31, 1973) Ckartolte H. Phelps Brooks, Jr. C. C. Cameron J. Willis Cantey L. D. Coltrane, III John L. Fraley William B. McGuire E. Craig W all, Sr. President and Trust O fficer, The Peoples National Bank Chester, South Carolina (T erm expires D ecem ber 31, 1973) Chairman of the Board and President, F irst Union National Bank of N orth Carolina Charlotte, N orth Carolina (T erm expires D ecem ber 31, 1973) President, The Citizens & Southern National Bank o f South Carolina Columbia, South Carolina (T erm expires D ecem ber 31, 1972) President and Trust O fficer, The Concord National Bank Concord, N orth Carolina (T erm expires D ecem ber 31, 1971) President, Carolina F reigh t Carriers Corporation Cherryville, N orth Carolina (T erm expires D ecem ber 31, 1971) President, Duke P ow er Company Charlotte, N orth Carolina (T erm expired D ecem ber 31, 1970) Succeeded b y : Charles W . D eBell General Manager, N orth Carolina W orks W estern E lectric Company, Inc. W inston-Salem , N orth Carolina (T erm expires D ecem ber 31, 1973) Chairman o f the Board, Canal Industries, Inc. Conway, South Carolina (T erm expires D ecem ber 31, 1972) 32