Full text of Business Trends : Bank Credit During Recovery

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SUNDAY, AUGUST 20, 1961

Prepared

in

the

Research

Department

of

the

FEUERJ\L RESER\/E BJ\NK OF CLEVELJ\ND
Serving

the

Fourth

Federal

Reserve

District

BANK CREDIT DURING RECOVERY

Although economic recovery is now in its
sixth month, the resurgence of economic
activity during this period has not been accompanied by an expansion in bank loan portfolios.
A substantial rise in total credit extended by
the banking system did occur during the first
seven months of the year, but the expansion
took place entirely in holdings of investments,
as the amount of loans outstanding during the
period showed a small net decline.
The relative weakness in loan demand during
the first seven months of the year reflects the
interaction of a number of factors. For example, inventory liquidation in some industries
during most of the period contributed to reduced
demands for funds by business borrowers. In
addition, borrowing by nonbank financial institutions such as sales finance companies was
down in the first seven months, pe rhaps mainly
because consumer s did not increase their indebtedness to purchase durable goods.
Developments in banking activity thus far in
1961 are recorded in the statements of condition of the Fourth District member banks
which report weekly to the Federal Reserve
Bank of Cleveland. Although changes in the
balance sheet of Fourth District banks and
banks in the nation, respectively, tend to differ,
they usually can be explained by factors such
as the differences in industrial composition
and financial activity, among others.

Loans. With the exception of temporary increases, for example, over the March and June
tax and dividend payment dates, total loans at
26 weekly reporting member banks in the
Fourth District have been on the downside
during the first seven month of 1961. Over the
entire period, total loans at reporting banks
in the Fourth District declined nearly 3 percent; at weekly reporting banks throughout the
nation, total loans declined by a somewhat
smaller rate. An accretion in security loans
by banks in money market centers and a
smaller decline in commercial and industrial
loans elsewhere in the nation accounted for the
more favorable showing in the national figures.
The decline in bank loans in the Fourth
District in the first seven months of 1961 was
substantially smaller than in the comparable
period of 1958, when total loans of the District
reporting banks declined by more than 6 percent. It should be pointed out, however, that
while the first seven months of 1961 included
five months of economic recovery, the 1958
period included only three months of the recovery, which may have had some influence on
bank lending activity.
In the Fourth District, about two-thirds of the
decline in reporting banks' loan volume in 1961
was due to a drop in commercial and industrial
loans, which were down about 5 percent from

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the year -end level. Although extensions of new
business loans were larger in the seven-month
period of 1961 than in the similar period of any
other recent year, repayments exceeded extensions by a relatively large amount. More
than five-sixths of the net decline in business
loans was due to net repayments of loans by
manufacturers of metals and metal products,
reflecting in part some liquidation of inventories by this group during most of the
period. Net repayments of loans by the metals
group had not occurred in the first seven
months of any year since 1954. The net reduction of indebtedness by public utilities and
commodity dealers appears to be somewhat
less than usual, while a reduction in loans to
textile, apparel, and leather manufacturers was
the first such development in many years. Such
loans usually increase during the first half of
the year and decline during the second half.
Loans by reporting banks to construction firms
declined substantially in the first seven months,
reflecting a lower level of residential construction than a year ago. The decline in loans
to trade establishments was much less than in
1958.
Among the business borrowers which have
increased their outstanding loans so far in 1961
are the petroleum, chemical, and rubber
concerns, and all other unclassified borrowers,
but the increase in the loans outstanding to these
groups was less than the amount of earlier
years.
In addition to business loans, other kinds
of bank loans in the Fourth District have
also fallen below the year-end levels. At
the end of the first seven months of 1961,
nonbank financial institutions, principally sales
finance and personal finance companies, had
repaid nearly one-fourth of their loans outstanding, which compares with little net change
year earlier. At the same time, consumer
and all other loans moved up more than in
1960, but the addition reflected a special
acquisition of customer receivables from a
large retail concern. Bank holdings of real
estate loans so far in 1961 have increased

a

slightly, while in the comparable period of
1960 they remained unchanged.
Security Holdings. Holdings of securities by
weekly reporting member banks in the District
increa·s ed by nearly $450 million during the
seven-month period under review. A pronounced shift in the maturity composition of
U. S. Government securities featured the increase, as holdings of securities maturing
within one year nearly doubled. At the same
time, banks reduced holdings of Treasury
securities with maturities from one to five
years. Two factors were mainly responsible
for the reduction in such holdings: (1) reclassification of some issues into the category
of securities maturing in less than one year due
to the passage of time, and (2) a shift to longer
maturities associated with a Treasury advance
refunding oper ation at the end of March.
Holdings of securities other than U. S. Government securities rose $101 million,-the largest increase in many years.
The shift in the composition of bank assets
over the period under review contributed--10 an
improved liquidity position of the reporting
banks, as measured by both the loan-deposit
ratio and the ratio of short-term assets to
total deposits. While the former ratio showed
only a slight improvement between the end of
December and the end of July, the latter ratio
moved up subs tantially, rising from 16.7 percent to 24.4 percent, due to the sharp rise
in holdings of U. S. Government securities
maturing within one year, as mentioned above.
Deposits. Adjusted demand deposits of individuals and business enterprises, etc., have
declined about 2 percent at Fourth District
reporting banks thus far in 1961; nationally,
such deposits showed a slight increase. While
some of the decline in demand deposits in the
Fourth District was seasonal, a number of
factors, including shifts to time deposits,
were responsible for the decline. However,
the sharp rise in savings and other time deposits, and an increase in U. S. Government
deposits offset the year-to-year decline in
demand deposits.

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