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A review by the

Federal Reserve Bank o f Chicago

Business
Conditions
1965 December

Contents
Trends in banking and finance—
A decade of deposit growth

Banks’ issues of
senior securities

The structure of banking
in the District states

Federal Reserve Bank of Chicago

in banking and finance
A decade of deposit grow th
X n the first postwar decade, total deposits of
commercial banks in the United States rose
about one-third. In the second decade, from
June 1955 to June 1965, deposits rose more
than two-thirds even though the growth in the
nation’s income was somewhat slower than in
the earlier period. A further sharp contrast
may be noted between the first half of the most
recent decade when deposits rose at an aver
age annual rate of about 3 per cent and the
second half when the increase averaged nearly
10 per cent annually.
Time and savings deposits have accounted
for most of the sharp upsurge in total deposits
since 1960. The accelerated rate of growth, to
a large extent, reflects steps taken by bankers
to make time deposits more attractive to in
vestors. These include successive increases in
rates paid on savings and time deposits and
the development of new techniques, especially
the use of the negotiable time certificate of
deposit—CD.
A favorable environment for deposit ex
pansion throughout most of the last five years

was provided by a generally stimulative mone
tary policy and increases in the maximum
interest rates banks are permitted to pay on

Acceleration in bank growth
largely due to time deposits
billion dollars

BUSINESS CONDITIONS is published monthly by the Federal Reserve Bank of Chicago. Dorothy M. Nichols was primarily
responsible for the article, "Trends in Banking and Finance—A Decade of Deposit Growth," David W . Cole for "Banks' Issues
of Senior Securities" and William J. Hocter and George G. Kaufman for "The Structure of Banking in the District States."
Subscriptions to Business Conditions are available to the public without charge. For information concerning bulk mailings,
address inquiries to the Federal Reserve Bank of Chicago, Chicago, Illinois 60690.

Articles may be reprinted provided source is credited.

Business Conditions, December 1965

Ten-year deposit growth
for District areas
metropolitan
areas
Springfield
Lansing
Grand Rapids
Flint
ChampaignUrbana

Kalamazoo1
Greenbay
Muskegon
South Bend
Madison
Rockford
D e tro it
Bay City2
Decatur
Quad Cities

Dubuque
Terre

Haute

Chicago
Muncie
Kenosha
Peoria
M iiw auke e
Sioux

time deposits. Nevertheless, the faster rate of
growth in deposits (and, consequently, in total
bank credit) is largely attributable to more
aggressive competition for funds by the banks.
Several earlier analyses have dealt with the
innovations in bank practices and, in particu
lar, the effects of interest rate changes on net
deposit flows in the short run .1 In this article
growth trends of banks of different types and
in various areas over a longer period of time
are reviewed. To what extent has the growth
been uneven? Where has it been the greatest?
Do recent patterns of growth differ markedly
from those prevailing earlier?
Perspective on the distribution of the de
posit expansion is provided by the accom
panying charts. Growth rates are compared
for all insured banks in the metropolitan and
agricultural areas of the Seventh Federal Re
serve District during the past 10 years. These
comparisons reveal that the deposit gains have
been very widely shared among District areas
and that, for the most part, those areas show
ing the fastest growth since 1960 were the
areas where deposit growth had been most
rapid from 1955 to 1960.
District has a sixth o f n atio n 's deposits

City

Racine
In d ia n a p o lis
Fort Wayne
Waterloo
Des M oines
Cedar Rapids
nonmetropolitan

areas

Mich igan
Wisconsin
Indiana
Iowa
Illinois

’ Includes B a ttle C reek and Jackson areas.
in c lu d e s S aginaw a re a .

Total deposits of all insured District banks
rose 68 per cent from mid-1955 to mid-1965
compared with a 71 per cent growth in the
nation. This resulted in a very slight decline—
from 16.4 per cent in 1955 to 16.1 per cent in
1965—in the District’s share of all commer
cial bank deposits. The overall growth rate for
the District closely approximated the national
pace in both halves of the decade.
In every District area, deposit growth has
been substantial, and the rise has been faster
1See, for example, Business Conditions, May 1962,
pp. 4-9, February 1963, pp. 5-9, October 1963, pp.
10-16, September 1964, pp. 2-9.

Federal Reserve Bank of Chicago

since mid-1960 than in the previous five years.
Nevertheless, some areas have experienced
much faster growth than others. Gains in indi
vidual areas range from 48 to 124 per cent for
the 10-year period. Michigan areas tended to
show the largest growth with a total gain of
82 per cent for the state. Iowa centers had the
smallest gains—49 per cent.
Indiana areas compare quite favorably with
the rest of the District, considering that the
legal maximum interest rate payable on time
deposits in that state was not raised above 3
per cent until the beginning of 1964, about
two years after banks in other states were per
mitted to offer higher returns to savers. Many
banks, however, have maintained rates paid
on savings deposits well below the current
legal ceilings— 3.5 per cent in Indiana and
4 per cent in other District states. Interest
rates on passbook savings tend to be highest
in Michigan—in both urban and rural areas—
while generally lower rates prevail in Iowa
and Wisconsin—particularly in rural areas.
Most banks pay 4 per cent or more on time
certificates of deposit. The legal ceiling on
these deposits is now 4 per cent in Iowa and
4.5 per cent in the other District states.
Interest rates are not, of course, the sole
determinant of deposit growth. Variation in
income among areas is probably the most im
portant factor in the long run, at least in areas
with predominantly small banks which do not
generally obtain funds from outside their local
community. But in recent years deposits of
commercial banks have shown an overall
growth much faster, relative to income, than
in earlier years. This reflects their increased
effectiveness in attracting a bigger share of the
public’s savings and investment funds relative
to both other financial institutions and private
and public borrowers. Both of these factors
have been important in accounting for interarea differences in deposit growth.

Large banks in the major cities operate in
the national markets both in making loans and
acquiring funds. These banks have been the
most aggressive in offering high interest rates
and other inducements to depositors. Nego
tiable CD rates offered by these banks are ad
justed frequently as their individual needs for
funds change. Nevertheless, deposits of these
banks have tended to show relatively small
growth. Total deposits of the 10 largest banks
in the District rose about 55 per cent, com
pared with 68 per cent for all insured banks
in the District.
Moreover, the growth of total deposits of
all banks in the major metropolitan areas has
tended to be relatively slow even though the
totals for these areas include many smaller
suburban banks which generally have expe
rienced rapid deposit growth. In the aggregate,
the largest metropolitan area in each District
state—Chicago, Detroit, Milwaukee, Indian
apolis and Des Moines—accounted for 12 bil
lion of the 2 0 billion dollar expansion in total
deposits over the last 10 years. But, Detroit
was the only one of these areas to show growth
faster than the District average.
D em and versus tim e

Demand deposits would be expected to rise
in response to expansionary monetary policies
and rising business activity and income. How
ever, in a period when interest rates were ris
ing, many depositors have attempted to econo
mize on nonearning cash balances. Demand
deposits in the District rose only 25 per cent
in 10 years compared with a 150 per cent gain
in time deposits. In the first half of this period
District banks gained demand deposits at an
annual rate of 1.5 percent while time deposits
grew about 6 per cent annually. In the ensu
ing five years these growth rates rose to about
3 and 20 per cent, respectively. Even though
the growth in demand deposits may appear

Business Conditions, December 1965

Demand deposit gains dwarfed
by time deposit growth in all District areas
per c e n t

metropolitan
areas1

c h a n g e , Ju n e

100

1955 to Ju n e

150

200

tim e d e p o s its
p er c e n t

1965

250

300

to to ta l d e p o s it s

S p r in g fie ld
L a n s in g
G ra n d

R a p id s

F lin t
C ham p aignU rb ana
K a la m a z o o ^
G reen

Bay

M uskegon
S o u th

Bend

M a d is o n
R o c k fo rd

mmL

D e t r o it
Bay

C ity ^

D e c a tu r
Q u ad

C it ie s

Dubuque
T e rre

H a u te

C h ica go

all insured commercial banks
in the Seventh District

M u n c ie
K enosh a
P e o r ia

M ilw a u k e e
S io u x

C it y

R a c in e

In d ia n a p o lis
F o rt W a y n e
W a te r lo o

Des M oin es
C e d ar R a p id s

N o te : Time and dem and deposits fo r

nonmetropolitan
a re a s 1

nonmembers a re ind ivid u a ls, p a rtn e r

M ic h ig a n
W is c o n s in
In d ia n a
Iow a

ships and c o rp o ra tio n s o nly.
’ In o rd e r o f p e rce n ta g e incre a se in
to ta l deposits from 1955 to 1965.
in c lu d e s B attle C reek a nd Jackson

areas.
in c lu d e s S aginaw a re a .

I llin o is

Federal Reserve Bank of Chicago

relatively slow during the decade, the rise was
somewhat faster than in the previous 10 years.
The chart on page 5 shows the relative
changes from mid-1955 to mid-1965 in de
mand and time deposit components for Dis
trict areas in decreasing order of the rate of
gain in total deposits. In addition, ratios of
time to total deposits are shown for these areas
at the beginning and end of this period.
Time deposit growth has far outstripped the
growth of demand deposits in every District
area. Variation among areas in the rate of
growth of demand deposits was considerably
less than for time deposits, but it should be

noted that very large percentage gains indi
cated for time deposits in some areas are at
tributable to the very small amount of time
deposits in those areas 10 years ago.
All the areas showed some gain in demand
deposits in the period and those gains were
much larger from 1960 to 1965—concurrent
with the huge build-up of time deposits—than
in the previous five-year period. This suggests
that the growth in time deposits was not at the
expense of demand balances. Nevertheless, at
the District’s large money market banks time
deposits more than tripled while demand ac
counts rose less than 15 per cent.

Banks’ issues of senior securities*
T . issuance of preferred stock and capital
notes and debentures by commercial banks
provides a controversial chapter in the history
of banking in the United States. Prior to the
depression in the Thirties, commercial banks
were capitalized solely with common equity,
with no use of senior securities. During the
depression years, more than 7,000 banks is
sued preferred stock, capital notes or capital
debentures to bolster bank capital positions
weakened by losses on loans and securities
and declines in value of assets.
Most of the senior securities issued in the
Thirties were purchased by the Reconstruc-

*This article, including the tables, is based upon a
study by David W. Cole, “Senior Securities in the
Capital Structure of Commercial Banks,” unpub
lished doctoral dissertation, Indiana University,
Copyright, May 1965. The study was completed
while Mr. Cole was a research fellow at the Federal
Reserve Bank of Chicago. The conclusions are those
of the author. Used by permission. Mr. Cole is currently on the staff of the Ohio State University.

tion Finance Corporation—a Federal agency
established in 1932 to provide assistance to
firms in financial distress. The RFCs holdings
of bank issues of senior securities reached a
peak of 879 million dollars in the third quar
ter of 1935 and accounted for about 13 per
cent of the total book value capitalization of
all commercial banks at that time.
The amount of senior securities outstanding
declined after 1935. Banks that had sold pre
ferred stock or debentures for emergency pur
poses retired the issues as soon as possible
because of the association of senior securities
with “distress” financing. The amount out
standing declined to 431 million dollars in
December 1940 and to 82 million at the end
of 1950.
In the early Fifties, a few states—including
New York, New Jersey and Minnesota—
authorized issuance of senior securities by
state chartered banks, but this method of ac
quiring funds did not become popular. Less

Business Conditions, December 1965

than 2 0 million dollars of these securities were
issued during the Fifties.
In 1956 an Advisory Committee appointed
by the U. S. Senate to review existing Federal
banking statutes recommended that national
banks be authorized to use debentures, notes
and preferred stock as normal means of capi
tal financing. Opponents of the recommenda
tion (including most Federal and state bank
supervisors) maintained that the use of pre
ferred stock and capital debentures would 1 )
complicate capital structures of banks and,
therefore, confuse potential investors and low
er the quality of banks’ common stocks, 2 )
increase the risk to bank depositors and share
holders by adding a fixed cost to banking
operations and 3) provide only temporary ad
ditions to bank capitalization because of the
mandatory retirement provisions generally as
sociated with senior types of securities. Pro
ponents emphasized that authorization of
senior securities would increase the sources of
capital available to banks.
The Senate Banking and Currency Com
mittee in 1957 concurred with the Advisory
Committee’s proposal that national banks be
authorized to issue preferred stock but did not
recommend authorization of debt obligations.
The House Committee held extensive hearings
on the Advisory Committee’s proposals but
did not issue recommendations. Congress did
not act on the Senate Committee’s recom
mendation.
A new policy toward bank issues of senior
securities was announced in the early Sixties
by the Comptroller of the Currency. Stating
that he was impressed by 1 ) the need of many
banks for additional capital, 2 ) the need for
banks to have alternative sources of capital,
3) the potential advantages to banks from use
of senior types of capital and 4) the successful
use of debt and preferred stock by many firms
in other industries, the Comptroller issued

new regulations permitting national banks to
utilize senior securities as a normal means of
financing.
Not everyone concurred with the new reg
ulations. Some bankers and bank supervisors
expressed concern that issuance of senior se
curities would increase risks to banks and to
the public. The Board of Governors of the
Federal Reserve System ruled that debentures
do not constitute capital for compliance with
certain provisions of the Federal Reserve Act,
and some of the state supervisory authorities
held that notes and debentures could not be
considered as capital under the existing bank
ing statutes of their states.
Despite opposition to bank senior capital
issues, a number of banks—both national and
state—have issued senior securities in recent
months. From January 1963 to July 1965,
130 banks in 35 states issued an aggregate of
1,526 million dollars of such securities. The
issues included 11 offerings of preferred stock
(27 million dollars), 10 issues of convertible
capital debentures (342 million) and 111 is
sues of capital notes and debentures (1,157
million). Two banks have issued more than
one type of senior security.1
Size, ra te and m a tu rity o f issues

The banks that have issued capital notes
and debentures have ranged in size from small
to very large. Size of issues varies directly, of
course, with bank size (see table on page 8 ).
Of the 102 debt issues placed between Janu
ary 1, 1962, and July 1, 1965, 18 were in*
A lthough corporate financial literature normally
differentiates between debentures and notes by 1) ini
tial term to maturity and 2) formality of contract,
bank issues of notes and debentures differ primarily
with respect to formality of contract. Some banks
which have privately placed debt obligations have
called their securities “capital notes” because the
states do not generally assess an issuance or regis
tration tax against “notes.”

Federal Reserve Bank of Chicago

amounts of less than 1 million dollars and five
were 50 million dollars or larger. These five
large issues account for about 50 per cent of
the total nonconvertible capital debt placed by
banks. As of mid-1965, the largest issue of
nonconvertible debt was 250 million dollars,
and the smallest was 150,000 dollars.
Coupon rates on the notes and debentures
range between 4.5 and 5.5 per cent. More
than 80 per cent of the issues have a coupon
rate of 5 per cent and under. The average
coupon rate for all of the 102 issues is 4.89
per cent.
The smaller issues generally have required
higher coupon rates than the larger issues.
While 19 of the 60 issues of less than 5 million
dollars have coupons in excess of 5 per cent,
no issue in excess of 5 million dollars has a
coupon over 5 per cent. Twenty-three of the
issues have a 5 per cent coupon; 15, 4.875
per cent, and 12, 4.75 per cent. The average
coupon rate for the three issues of 100 million
dollars and over is 4.57 per cent; the average
rate for the 18 issues under 1 million dollars is
5.13 per cent.

Maturities of the issues range from 7 to 25
years. However, only a small proportion of
the issues have less than a 20-year life. With
the exception of one 25 million dollar place
ment, all the issues of 10 million dollars and
over have 25-year terms. The average matur
ity of the 102 issues is 22.1 years.
Five of the six largest issues were sold to
the public through underwriting syndicates.
The remaining 97 issues were placed privately
with one or a small group of institutional in
vestors. Most of the banks employed an inter
mediary to “find” buyers for their debt issues.
Purchasers of the private placements include
life insurance companies, mutual savings
banks, trust departments of commercial banks,
state and local government retirement sys
tems, fraternal organizations, educational in
stitutions, religious organizations and hospi
tals.
R elative im portance of funded d eb t

The ratios of outstanding funded debt to
total capitalization on December 31, 1964,
ranged from 11.7 to 39 per cent for the issuing

Characteristics of commercial bank capital notes and debentures
is s u e d J a n u a r y 1, 1 9 6 3 t o J u ly 1, 1 9 6 5
D ecem ber 31, 1964
Issue
Size

C oupon ra te
N um ber

(m illion d o lla rs)

Range

A ve rag e

(per cent)

M a tu rity
Range A verage
(years)

Funded d e b t to to ta l c a p ita l
Range

A ve rag e

(per cent)

Total dep o sits
(m illion d o lla rs)

1 00 and over

4.50 -4.60

4.57

21.6-32.9

26.0

3,217-11,357

50 to 100

4.50

24.1-26.1

25.1

2,746- 3,312

25 to 50

4.60 -4.75

4.645

20-25

24.4-26.9

25.3

838- 1,270

15 to 25

4.50 -5.00

4.735

17.6-33.3

26.7

397- 1,207

10 to 15

4.625-4.875

4.70

19.8-27.1

23.8

309-

644

1 to 10

4.50 -5.25

4.92

7-25

11.7-34.8

24.4

40-

364

Under 1

4.50 -5.50

5.13

10-25

14.9-39.0

25.5

102

4.50 -5.50

4.89

7-25

22.1

11.7-39.0

24.9

5-11,357

All issues

N o te : The 102 issues d o not inclu d e: 10 issues of co n ve rtib le c a p ita l debentures, 11 issues o f p re fe rre d stock and 9
issues of unco n ve rtible c a p ita l notes fo r w hich only lim ite d inform ation was a v a ila b le .
8

Business Conditions, December 1965

banks. Only 12 of the banks had a ratio above
30 per cent. The average ratio for the 20
banks with size of issue of 15 million dollars
and above was 26.1 per cent, and the average
ratio for the other 82 banks was 24.6 per cent.
The average for the 102 banks was 24.9 per
cent. Debt-to-capital ratios for banks grouped
by size of issue are shown in the table on page
8.
A comparison of coupon rates with funded
debt ratios indicates that higher debt to capi
talization ratios did not necessarily lead to
higher coupon rates (see table on this page).
The three banks, for example, whose issues
carried the highest coupons (5.3 per cent and
over) had an average debt ratio of 26.5 per
cent, while the 2 2 banks whose issues carried
coupons of 4.85 to 5 per cent had an average
debt ratio of 28.3 per cent. Furthermore, while
the banks whose issues had the lowest coupon
rates (under 4.55 per cent) had relatively low
average ratio of funded debt to total capital,
those banks whose issues carried coupon rates
of 5 to 5.15 per cent had essentially the same
debt ratio.
Tim es-in terest-earn ed

The ratio of net pre-tax operating earnings
to the periodic interest on funded debt pro
vides some indication of a firm’s ability to
maintain and service such debt. Although an
excess of earnings over interest charges in a
past or present period does not guarantee that
a firm will have adequate cash in the future to
meet debt service requirements, before-tax in
come several times larger than the interest ex
pense during recent years does provide some
assurance of a firm’s ability to cover future
debt charges from future earnings. Many of
the contracts covering bank issues of capital
notes specify that additional funded debt can
be sold only if the average amount of net pre
tax operating earnings for the three years pre

Ratio of debt to capital
Funded d e b t
to to ta l c a p ita l*

Issues
C oupon rate

N um ber

(p e r cent)

Range

A verage

(per cent)

5.3 and over

14.9-39.6

26.5

5.15 to 5.30

17.3-30.6

24.8

5.00 to 5.15

17.8-34.8

22.7

4.85 to 5.00

16.3-31.8

28.3

4.70 to 4.85

19.2-31.4

24.6

4.55 to 4.70

22.6-32.9

25.7

11.7-35.8

2 2 .8

Under 4.55

’ C a p ita liz a tio n is the to ta l o f common stock, surplus, und ivide d p ro fits , outstanding p re fe rre d stock
and outstanding c a p ita l notes o r d ebentures, Decem
b e r 31, 1964.

ceding sale of additional funded debt equals
or exceeds three times the three-year average
amount of 1 ) interest on all funded debt or
2 ) funded debt interest plus a stipulated per
centage of the bank’s lease payments.
The times-interest-earned ratios for the
banks are shown in the table on page 10. These
ratios, based on 1964 net pre-tax operating
earnings and annual funded debt interest pay
able on the principal amount of debt issued,
ranged from a low of 5.3 times to a high of
27.5 times for the 86 banks included. (Earn
ings figures for 16 of the 102 banks were not
available.) The average 1964 coverage ratio
was 12.8 times.
There appears to be an inverse relationship
between interest coverage and coupon rates.
Banks whose issues required relatively high
coupon rates tended to have the lower timesinterest-earned ratios. Those banks with cou
pons in excess of 5 per cent, for example, had
1964 interest-earned ratios lower than those
with coupons below 5 per cent.
A m o rtiza tio n and call provisions

Most of the bank debt securities provide for

Federal Reserve Bank of Chicago

periodic retirement of principal during the
term of the issue. (Available information indi
cates that at least six of the 102 issues do
not provide for amortization of principal.) A
study of the sinking fund provisions of 26 of
the issues indicated that four provide for sink
ing funds to begin one year after date of issue.
The remaining 22 require initial debt repay
ment to start five to ten years after date of
issue. Twelve of the 26 debt issues provide for
equal annual amortization of principal during
the period from sinking fund starting date to
final maturity. One of the issues requires a
stipulated annual increase in sinking fund pay
ments over the life of the issue. The other 13
issues provide for “balloon” final payments
ranging from 20 to 60 per cent of the initial
principal.
In addition to mandatory prepayment pro
visions, many of the 26 debt agreements ana
lyzed permit the banks, at their option, to pre
pay annually without premium an amount
equal to periodic sinking fund requirements.
The provision is noncumulative, so that an op
tional payment skipped in any one year can
not be used in subsequent years. One note
agreement, for example, requires the bank to
retire 400,000 dollars of notes annually start
ing in 1975, but the bank may, under a non
cumulative optional prepayment provision, re
tire without premium up to 400,000 dollars
of notes each year beginning in 1970.
All of the 26 agreements studied give bank
management the option to call, at a premium,
outstanding securities for redemption prior to
maturity. The call provisions for 14 of the
issues do not become effective until five to ten
years after date of offering. The call options
for the other 12 issues are available through
out the lives of the issues.
Although the premium applicable to the
first call year ranges from 3.375 to 7 per cent
10
of par for the 26 issues reviewed, only one of

Ratio of earnings to interest
on capital notes and debentures
is su e d J a n u a r y 1, 1 9 6 3 t o J u ly 1, 1 9 6 5
Times interest
e a rn e d , fisca l 1964*

Issues
C oupon rate

N um ber

(p e r cent)

Range

A ve rag e

(number of times)

5.3 and over

5.15 to 5.30

8.0-12.5

9.6

9.6
9.9

5.00 to 5.15

5.3-19.1

4.85 to 5.00

6.4-13.9

4.70 to 4.85

7.3-25.6

11.2

4.55 to 4.70

7.9-16.3

11.9

10.4-27.5

16.4

Under 4.55

9.9
10.1

‘ N e t pre-tax o p e ra tin g earnings to p e rio d ic fund
ed d e b t interest.

the issues provides for an initial call premium
in excess of the coupon rate on the issue. All
of the issues provide for a declining schedule
of call premiums as maturity approaches. One
issue, for example, is callable from June 1,
1965, to May 31, 1966, at a premium of 4.618
per cent of par. In the following year, the call
premium is 4.361 per cent, and the premium
declines by .257 percentage points each year
thereafter until one year prior to maturity.
Fourteen of the issues are nonrefundable
for a specified period after issuance. This
nonrefunding provision prevents management
from retiring or replacing notes through appli
cation of funds obtained from another debt
issue with an interest rate lower than the cou
pon on the initial issue.
D ividends and a d d itio n a l b o rro w in g

Most capital note agreements provide some
restriction on the amount of cash dividends
that management can pay to common share
holders. Only three of the 26 analyzed have
no such restriction. All the others either place
minimum limits on total capital funds or re
strict cash dividends to net income after a
given date or to net income plus a stated dol

Business Conditions, December 1965

lar amount. Five of the agreements stipulate
the minimum amount of capital funds that the
firms must maintain. Only net income in ex
cess of that required to maintain the stated
amounts of capital may be used for cash divi
dends. Three of the agreements restrict total
cash dividend payments to net income earned
during the term of the notes. Ten of the issues
permit the banks to pay maximum cash divi
dends equal to net income during the term
plus a stipulated dollar amount. The other five
issues, all under 4 million dollars in principal,
limit cash dividend payments to between 50
and 75 per cent of the net after-tax earnings
reported after date of issue.1
Twenty of the 26 note agreements prohibit
sale of any unsecured funded debt which, in
liquidation, would have claims to bank assets
prior to claims of outstanding notes or deben
tures. Seven of the 26 either permit the issuer
A ddress by author before the Finance Session of
the 19th Annual Indiana Business Conference,
Bloomington, Indiana, April 30, 1965.

to sell a stipulated amount of secured funded
debt or permit the issuer to assume or guaran
tee secured debt issued by a real estate sub
sidiary.
S um m ary

Although less than 1 per cent of the total
number of insured banks in the United States
have participated in the post-1962 senior se
curity offerings, the dollar amount of senior
securities outstanding represented over 5.2
per cent of the June 30, 1965, total capital of
insured banks. Since December 1962, banks
have issued over 1,526 million dollars of pre
ferred stock, capital notes and debentures.
This financing represents a significant increase
from the 36 million dollars of bank senior
capital outstanding at the end of 1962. Fur
thermore, the placement of senior capital is
sues by banks in recent years represents financ
ing under nonemergency conditions, a very
different situation than in the Thirties when
almost all of the issues represented “distress”
financing.

The structure of banking
in the District states
T h e number of commercial banks in the
United States has increased since 1962, re
versing the downward trend of earlier post
war years. Nevertheless, at the end of 1964,
the number was considerably smaller than in
1950.
In the five states included in the Seventh
Federal Reserve District, however, the num
ber of banks rose to a postwar high in 1964

after remaining relatively constant for most
of the period since 1950. The increase was
small—a net gain of only 41 banks or 1 per
cent in the 14-year period.
The growth of population and income have
been reflected largely in the average size of
banks instead of the total number. Between
1950 and 1964, average deposits at banks in
the District states rose from near 9 million

Federal Reserve Bank of Chicago

dollars to more than 17 million dollars.
Changes in the number of banks are affect
ed by decisions of both private investors and
Federal and state supervisory authorities. The
establishment of new banks and branches,
consolidations of existing banks and acquisi
tions of banks by holding companies are all
subject to the approval of one or more public
officials. Since the laws administered by these
officials differ from state to state (as well as
between the states and the Federal Govern
ment), the numbers and types of banks and
banking offices in individual states reflect, in
part, the differences in state statutes.
Although the overall change in the number
of banks in the District states has been small,
the pattern has varied significantly for indivi
dual states. In Illinois, Iowa and Wisconsin
the number of banks increased, while in Indi
ana and Michigan the number decreased. The
three states showing increases are all “unit
banking” states—that is, states in which banks
are prohibited, for the most part, from estab
lishing additional branches engaged in “fullservice” banking.1 The number of banks in
these states increased by 177, about 8 per
cent, between 1950 and 1964.
Indiana and Michigan are “limited branch
ing” states. With the approval of the relevant
public officials, banks in these states are per
mitted to establish full-service branches within
a designated area or distance from the bank’s
home office. In Indiana, branches are con
fined to the same county as the head office,

!In Wisconsin, banks are effectively permitted to
maintain full-service branches that were established
prior to 1947. In Iowa, banks are permitted to estab
lish offices to receive deposits and pay checks in cit
ies in the same or adjoining counties not served by
existing banks.
In this article, banks refer to separate corporate
entities, branches to all offices, whether limited or
full-service, in addition to the head office and offices
to all banks and branches as defined above.

Num ber of banks
in District states at postwar high
number of banks
thousands

while in Michigan banks may establish
branches within the home county or a distance
of 25 miles from the home office. Although
the number of banks in Indiana and Michigan
declined by 136 in the 1950-65 period, the
number of branches increased enough to boost
the total number of bank offices by 662, more
than 50 per cent.
At the end of 1964, there were more than
1,000 banks in Illinois. This was the largest
number in any of the District states and ac
counted for one-third of all banks in these
states. Iowa was second with 675, followed by
Wisconsin with 578, Indiana with 431 and
Michigan with 361. Banks are thus more
numerous in the states which prohibit fullservice branch banking than in states which
do not.
Group b an kin g

Banking facilities may be interconnected
through a system of branches or the common
ownership of individual banks. Common own-

Business Conditions, December 1965

ership may take the form of either group
banking or chain banking. In the former, a
holding company owns the controlling interest
in more than one bank. In the latter, an indivi
dual stockholder or an associated group of
individuals own the controlling interest in
more than one bank.
Group banking is regulated by both Federal
and state statutes. The Federal Government
defines a bank holding company as any corpo
ration which owns at least 25 per cent of the
stock of two or more commercial banks. Any
firm coming under this definition must receive
the approval of the Board of Governors of the
Federal Reserve System before acquiring 5
per cent or more of the stock in any additional
banks. Holding companies must also comply
with state laws, some of which are more re
strictive than the Federal laws. Although hold
ing companies may operate across state boun
daries, acquisition of additional banks in
states other than those in which the head office
of the holding company is located has been
severely restricted since 1956 by the Federal
Bank Holding Company Act.

Group banking most important
in Iowa and Wisconsin
G ro u p banks

State

H o ld in g
com pa n ies'

Illin o is
In d ia n a
Iow a
M ic h ig a n
W isconsiri

Deposits
to to ta l
deposits

F acilities
to to ta l
fa c ilitie s

Banks

1957

1964 1957

2
3
3

(number)
2
5
2
5
2
14

1964

3.3

7.6

20.9

34.6

4
3
18

1957
0.5

1.0
2.8

1964

1957

1964

(per cent)
0.4
0.9
0.7
2.2
3.6
7.6

0.4
0.9
8.7

’ C om panies re giste re d pursuant to Bank H o ld in g Com

Banks increased
in unit banking states and
declined in branch banking states
number of bonks

Illinois

Indiona

Iowa

Michigon

Wisconsin

Acquisition of banks by holding companies
is permitted in Iowa and Wisconsin but is
effectively prohibited in Michigan, Illinois and
Indiana. A few holding companies exist in
Illinois and Indiana under “grandfather”
clauses which permit the retention of such
systems in existence at the time the restricting
state legislation was enacted.
Group banking is significant in the District
states only in Wisconsin and Iowa. In Wiscon
sin, seven holding companies controlled a total
of 31 banks at the end of 1964, accounting for
8 per cent of all banking offices in the state
and more than one-third of total deposits. In
Iowa, two holding companies controlled 18
banks, representing 4 per cent of the banking
offices and 9 per cent of total bank deposits.2

pany A ct o f 1956 having su bsid iary banks in the respective
state.

-’Four banks in Iowa and one in Wisconsin were
controlled by the same holding company operating
in both states.

Federal Reserve Bank of Chicago

In no other District state did banks controlled
by holding companies account for more than
1 per cent of the total deposits in the state.
Only in Wisconsin has group banking in
creased significantly since the enactment of
the Bank Holding Company Act in 1956. In
this period, the number of holding companies
operating in the state has increased from three
to seven. The banks controlled by these hold
ing companies have expanded their share of
total bank offices in the state from 3 to 8 per
cent and their share of deposits from 21 to 35
per cent.
The control of more than one bank through
direct stock ownership by one or several indi
viduals is not restricted by either Federal or
state law, and little information on the extent
and importance of chain banking is available.
However, a recent study by a Congressional
committee indicates that interlocking bank
ownership by individuals is not uncommon.
Population p er b a n k

Population per bank is sometimes used to
provide a rough measure of the relative avail
ability of banking services. In 1964 District
banks served an average of about 1 0 ,0 0 0 per
sons, considerably below the national average
of 14,000. The average number of persons per
bank varied substantially from state to state,
however. Population per bank averaged near
22,700 persons in Michigan, 11,300 in Indi
ana, 10,300 in Illinois, 7,100 in Wisconsin
and 4,100 in Iowa. The pattern is influenced
strongly by state branching legislation; the
population per bank being greater in states
permitting full-service branches than in states
prohibiting such branches.
Although limited-service branches typically
cannot provide loan services, they can accept
deposits and cash checks. The availability of
deposit services, therefore, may best be approximated by population per overall bank

A verage population
served by bank offices
varies widely among District states

office. The accompanying chart shows that the
average population per office is lowest in Iowa
and highest in Illinois which, except for mil
itary bases, permits no branch offices.
The number of banks has increased less
rapidly than population in each of the Dis
trict states, so that at the end of 1964 banks
served on the average a larger population than
in 1950.
M e tro p o lita n a reas

The market areas served by individual
banks vary greatly. Most bank customers tend
to do business with banks located nearby.
Some customers, primarily large business
firms, may utilize the services of banks located
beyond the immediate vicinity. Business firms
that are well known and have a need for large
amounts of banking services have access to
large banks throughout the country and even
in foreign countries.

Business Conditions, December 1965

Banking structure in District metropolitan areas
Population
Banks
M e tro p o lita n a re a s ’

1950

Bank o ffices

1964

1950

1964

Per bank
1950

(number)

D eposit

Per bank o ffic e

1964

1950

1964

c o n c e n tra tio n 3
1950

1964

(per cent)

(number)

Illinois
Champaign-Urbana
Chicago

19
208

Decatur

273

5,579

6,905

5,579

6,905

52.0

52.4

208

273

24,894

24,330

24,894

24,330

54.2

48.2

1 1 ,0 0 0

10,500

1 1 ,0 0 0

10,500

90.7

80.6

Peoria

10,040

10,233

10,040

10,233

58.9

59.0

Quad Cities3

11,143

11,077

10,174

9,290

58.5

48.3

25,333

19,083

25,333

19,083

8 6 .6

74.4

10,917

9,500

10,917

9,500

87.9

81.4

Rockford
Springfield
Indiana
Fort Wayne

18,400

32,500

18,400

1 0 ,0 0 0

86.5

82.2

Gary-Hammond

20,400

29,905

17,739

11,630

52.3

53.0

Indianapolis

32,470

165,500

11,500

10,564

72.1

96.1

12,857

19,666

11,250

6,211

8 8 .2

94.2

20,500

28,400

10,250

8,114

69.4

6 8 .2

2 1 ,0 0 0

36,000

15,000

9,818

92.9

1 0 0 .0

18
17

6,933

9,313

5,778

6,773

82.7

73.6

16,143

13,619

13,294

10,214

81.9

73.0
84.7

Muncie
South Bend
Terre Haute
Iowa
Cedar Rapids

Des Moines

Dubuque

7,100

7,636

6,455

7,000

84.2

Sioux City

5,778

6,474

4,727

5,125

64.8

69.5

Waterloo

12,500

13,100

10,077

81.7

74.9

11,250

19,000

9,643

7,308

73.5

76.1

14,667

37,000

9,778

10,091

93.4

1 0 0 .0

Detroit

186

406

52,000

81,020

16,215

9,778

71.8

67.7

Flint

24,636

68,667

11,292

9,581

79.0

95.5

Grand Rapids

18,000

29,769

9,290

6,143

80.2

91.1

15,429

22,833

15,429

7,211

93.6

97.7

11,111

Michigan
Ann Arbor
Bay City

Jackson
Kalamazoo

25,400

45,000

12,700

5,000

90.9

98.4

10,167

16,200

7,625

7,714

73.5

75.5

Muskegon

20,333

40,000

17,429

8,889

90.5

95.8

Saginaw

19,250

2 2 ,2 2 2

14,000

11,765

90.0

88.7

7,000

8,625

6,533

7,667

60.5

55.3

15,000

22,400

15,000

22,400

97.4

91.3

Lansing

Wisconsin
Green Bay
Kenosha
Madison

6,036

8,419

5,281

8,156

61.8

54.3

Milwaukee

24,538

24,755

15,190

16,198

75.2

60.4

Racine

1 1 ,0 0 0

13,083

9,167

11,214

70.9

63.4

’ S ta n d ard m e tro p o lita n s ta tistica l area s e n tire ly w ithin the Seventh Federal Reserve D istrict.
’ Deposits of th re e la rg e st banks d iv id e d by to ta l deposits.
’ In cluding Scott C ounty, Iow a.

Federal Reserve Bank of Chicago

Because banks are multi-service firms, their
market areas differ according to the service.
The markets for consumer loans and pass
book savings, for example, are typicaly more
confined than those for large business loans
and negotiable certificates of deposit.
While no single measure of market area will
be accurate for all banks or all the services of
any one bank, metropolitan areas may reason
ably be expected to approximate the average
market area for many of the banks and bank
customers located in the major cities and the
surrounding suburbs. Banks generally provide
most of their services for customers within
commuting distance of their offices.
Changes in the number of banks in indi
vidual metropolitan areas have followed pat
terns similar to those in the respective states
as a whole. Banks tended to increase in
metropolitan areas in unit banking states and
to decline in metropolitan areas in branch
banking states. In all but one of the 17 areas
located entirely within the unit banking states
of the District, the number of banks increased,
and in all but three of the 16 areas in the
branch banking states, the number declined.3
Population per bank increased in all but six
areas, and all of these were in unit banking
states. Population per bank office, on the
other hand, declined in all but two of the 16
areas in states p erm ittin g full-service
branches.
C oncentration ratios

One commonly used measure of the poten
tial market power of individual firms is the

3This statement refers to the 33 metropolitan areas
located entirely within the Seventh Federal Reserve
District states. The 1962 definitions of standard
metropolitan areas are used in this article. For areas
crossing state boundaries, only the portions lying in
the District states are included in this calculation.

ratio of the size of the firm to the size of the
industry in the relevant market area. For
commercial banking, this “concentration” ra
tio is frequently computed in terms of depos
its. As noted above, deposits represent only
one of the many services offered by banks.
Furthermore, the market area for customers
having large deposits may be expected to be
quite different than for customers having
small deposits. Hence, concentration ratios
based on total deposits provide an oversimpli
fied view of market structure and probably
tend to overstate the relative importance of
large banks in most metropolitan areas. In
addition, this concentration ratio does not re
flect the importance of either banks located
outside the area but having customers in the
area or nonbank financial institutions such as
savings and loan associations and insurance
companies. Nevertheless, these ratios provide
a crude basis for comparing the structure of
banking in more or less similar communities.
The table on page 15 shows that in 1964
the three largest banks in each of the metro
politan areas entirely within the District states
accounted for between 45 and 100 per cent of
the total deposits in the areas. Because con
centration tends to be inversely related to the
number of banks, it is not surprising that con
centration ratios tend to be greater in metro
politan areas in branch banking states than in
unit banking states. In only two metropolitan
areas, both in Illinois, did the three largest
banks account for less than half of total depos
its. In ten areas, nine in states permitting
branches, the three largest banks accounted
for more than 90 per cent of deposits. Con
centration increased in 12 of the 16 metropoli
tan areas in the branch banking states between
1950 and 1964 and in only four of the 17
metropolitan areas in the unit banking states.

Business
Conditions
Federal Reserve Bank of Chicago

In d e x f o r th e y e a r 1 9 6 5

Month

Pages

January
March
September

4-8
8-12
7-12

December
February

6-11
2-6

August
May
October
December
September

8-12
2-8
11-16
11-16
2-7

A gricultu re and fa rm finance

Agriculture—review and prospects.............................
Beef futures.................................................................
Commercial fertilizer and agricultural production. . .
B anking and m o n e ta ry policy

Banks’ issues of senior securities.................................
Banks, too, post collateral..........................................
Marketing money: How “smaller” banks
buy and sell Federal funds......................................
Patterns of private debt growth.................................
The rise of CDs at District banks...............................
The structure of banking in the District states...........
Trends in banking and finance....................................
Trends in banking and finance—
Bulge in business borrowing....................................
Trends in banking and finance—
Correspondent banking..........................................
Trends in banking and finance—
A decade of deposit growth......................................
Where’s all the currency?............................................

April

3-8

March

13-16

December
August

2-6
13-16

Month

Pages

February
November
November

11-13
13-16
8-12

C redit and savings

Crosscurrents in savings deposit flows—
some recent evidence..............................................
Interest rate patterns in prosperity.............................
Loan losses up in Sixties............................................
Economic conditions, g e n e ra l

Food stamps for the needy..........................................
The trend of business..................................................
The trend of business..................................................

July
January
August

8-11
2-4
2-8

October
July
June

3-10
11-16
2-16

Income and e m p lo ym e n t

Full employment in the Midwest...............................
Seasonal patterns in Midwest employment.................
Seventh District economic growth...............................
The trend of business—Personal income:
its regional cyclical variations.................................

November

2-7

Industry and tra d e

Autos: output, sales and credit.................................
Bankers’ acceptances used more widely.....................
Capital expenditures—further orderly rise indicated.
The trend of business—Rising inventories—
an economic storm signal?......................................

July
May
April

2-8
9-16
8-16

March

2-8

In te rn a tio n a l economic conditions

Capital outflows slow..................................................
Common Market policy expected
to restrict U. S. farm exports....................................
World sources and uses of gold...................................

September

12-16

February
February

6-10
13-16

Full text of Business Conditions (Federal Reserve Bank of Chicago) : December 1965

FRASER