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F ederal r eser v e ba n k o f Dallas DALLAS, TEXAS 75222 Circular No. 68-1 January 2,1968 To all Banks, Nonbank Financial Institutions and Other Firms Addressed in the Eleventh Federal Reserve District: There is enclosed a copy of amended guidelines for the 1968 Voluntary Foreign Credit Restraint Program applicable to commercial banks and nonbank financial institutions. These guidelines, which are effective as of January 1, 1968, replace those issued by this Bank on November 17, 1967, Circular No. 67-227. Quoted below is the text of the press release issued by the Board of Governors covering these new guidelines: “The Board of Governors of the Federal Reserve System today issued revised guidelines, effective immediately, for restraint of foreign credits by banks and other financial institu tions. “The revised guidelines, which are substantially more restrictive than those issued on November 16, 1967, are a part of the President’s program announced today, to strengthen the U.S. balance of payments. The new guidelines are designed to achieve a net inflow of at least $500 million during 1968. “Ceilings on foreign credit extensions by banks were revised as follows: “For banks whose ceilings had been set at 109 per cent of their 1964 base (i.e., the amount of foreign credits they had outstanding on December 31, 1964), the new ceiling for 1968 will now be 103 per cent. For other, smaller banks whose ceilings had been set at 2 per cent of their total assets on December 31, 1966, the new ceilings for 1968 will now be an amount equal to their 1967 ceiling plus one-third of the addition to that ceiling envisaged in the original 1968 guidelines. “The banks also are asked to reduce outstanding term loans to developed countries of con tinental Western Europe (i.e., loans with maturities of one year or more) by not renewing such loans at maturity, and by not relending the repayments of such loans to residents of those countries. The guidelines request that short-term loans to developed countries of con tinental Western Europe be reduced during 1968 by 40 per cent of the amount outstanding on December 31, 1967, at a rate of not less than 10 percentage points in each quarter. “Revised guidelines for nonbank financial institutions request that holdings of foreign assets covered by the program be reduced during 1968 by 5 per cent or more compared to the amount of such assets held on December 31, 1967. It is expected that holdings of liquid funds abroad (deposits and money market instruments) will be reduced to zero, or to the minimum working balance required to conduct foreign business activities, even if this entails a decline in foreign assets by more than 5 per cent. The nonbank financial institu tions, which include insurance companies, trust companies, mutual savings banks, etc., are requested to refrain from making any new loans or investments in developed countries of continental Western Europe other than those judged essential for the financing of U.S. exports. “The Board pointed out that the guidelines have been designed to focus the major effect of the reduction on the developed countries of continental Western Europe without adverse effects on credits necessary to finance U.S. exports or on credits to developing countries. “In issuing the revised guidelines the Board expressed its confidence that the financial com munity fully appreciates the urgency of improving the balance of payments and that the splendid cooperation exhibited by participants in the credit restraint program thus far will continue, despite the heavier burden now imposed.” Additional copies of these guidelines may be obtained from this Bank or appropriate branch. Questions concerning this program should be directed to Assistant Vice President Cowan. Yours very truly, Watrous H. Irons President Enclosure This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) E ffectiv e January 1, 1968 PREFACE TO GUIDELINES 1968 The P r e s i d e n t o f th e United S t a t e s has a c t e d to s t r e n g t h e n th e c o u n t r y ' s b a la n c e o f payments. An i n t e g r a l p a r t o f the P r e s i d e n t ’ s program i s a s u b s t a n t i a l t i g h t e n i n g o f r e s t r a i n t on f o r e i g n l e n d i n g by fin a n cia l in s titu tio n s . A ccordingly, th e Board o f G overnors has r e v i s e d th e g u i d e l i n e s f o r banks and o t h e r f i n a n c i a l i n s t i t u t i o n s as fo llo w s: The R e v is e d 1968 Program f o r Commercial Banks The 1968 c e i l i n g f o r banks a c c o u n t i n g f o r about 95 per c e n t o f the 1S67 c e i l i n g w i l l be 103 per c e n t o f th e e n d - 1964 b a s e . whose t a r g e t c e i l i n g f o r 1967 was l e s s as o f December J l , ing. Banks than 2 per c e n t o f t o t a l a s s e t s 1966;, may take the l a t t e r f i g u r e as t h e i r 1968 c e i l However, such banks are asked to use n o t more than o n e - t h i r d of the amount by which t h i s f i g u r e e x c e e d s t h e i r 1967 c e i l i n g d u r in g the c o u r s e o f 1968. c e ilin g , These banks a r e r e q u e s t e i n o t t o e x c ee d t h e i r 1957 e ve n w i t h i n th e l i m i t a t i o n s e t f o r t h a b o v e , e x c e p t to make p rio rity c r ed its, i.e ., e x p o r t c r e d i t s or c r e d i t s to d e v e l o p i n g c o u n t r i e s . A l l banks are r e q u e s t e d to r e d u c e th e amount o f term lo a n s ( l o a n s w i t h o r i g i n a l m a t u r i t i e s o f more than one y e a r ) to r e s i d e n t s o f d e v e lo p e d c o u n t r i e s o f c o n t i n e n t a l W estern Europe by n o t renew ing such l o a n s a t m a t u r i t y , and by n o t r e l e n d i n g the repayments o f such l o a n s to other r e s id e n ts of those c o u n tr ie s . Each bank w i l l r e duce i t s c e i l i n g on each r e p o r t i n g d a t e by the amount of th e r e d u c t i o n i n term lo a n s to W estern Europe d u r in g the p r e c e d i n g month. 2 A l l banks a l s o are asked to r e d u c e the amount o f s h o r t term c r e d i t o u t s t a n d i n g ( l o a n s w i t h m a t u r i t i e s of one year or l e s s ) to d e v e lo p e d c o u n t r i e s o f c o n t i n e n t a l W estern Europe by 40 per c e n t o f the amount o f such c r e d i t o u t s t a n d i n g on December 31, reduction is to be a c h ie v e d a t a minimum r a t e o f 10 1967. This per c e n t per q u a r t e r , c u m u l a t i v e , ana the c e i l i n g w i l l be reduced c o r r e s p o n d i n g l y . That i s , each bank i s asked at the end o f each q u a r t e r t o r e d u c e i t s c e i l i n g fo r 1968 by 10 per c e n t o f the amount o f s h o r t - t e r m c r e d i t s to d e v e lo p e d c o u n t r i e s o f W estern Europe o u t s t a n d i n g on December 31, 1967, and t o a c h i e v e a t l e a s t an e q u i v a l e n t r e d u c t i o n i n such c r e d i t s d uring th e q u a r t e r . These r e v i s i o n s i n th e g u i d e l i n e s a r e d e s ig n e d to induce a n e t i n f l o w o f c a p i t a l to the f i n a n c i a l i n s t i t u t i o n s d u r in g 1968. S i n c e th e major e f f e c t s of the r e v i s i o n s are f o c u s e d on the d e v e lo p e d c o u n t r i e s o f c o n t i n e n t a l W estern Europe, i t should be p o s s i b l e to a c h i e v e t h i s i n f l o w w i t h o u t e n d a n g e r in g o t h e r im portant n a t i o n a l ob je c tiv e s, such as e x p o r t p rom otion and the s u p p l y i n g of c a p i t a l to the d ev elo p in g c o u n tr ie s . The R e v is ed 1968 Program f o r Nonbank F i n a n c i a l I n s t i t u t i o n s The r e v i s e d program f o r 1968 d i f f e r s from the program announced on November 16, 1967, i n the f o l l o w i n g ways: 1. A l l i n s t i t u t i o n s a r e now i n g s o f f o r e i g n a s s e t s c o v e r e d by t h i s r e q u e s t e d to r e duce t h e i r r e v i s e d program by 5 per c e n t or 3 more d u r in g 1968, w i t h t h e t a r g e t r e d u c t i o n based on the amount o f such a s s e t s h e l d on December 31, 1967. 2. I n s t i t u t i o n s g e n e r a l l y are e x p e c t e d to reduce t h e i r h o l d i n g s o f l i q u i d funds abroad t o z e r o d u r in g 196C, e x c e p t t o th e e x t e n t t h a t minimum working b a l a n c e s are r e q u i r e d f o r the c o n d u c t o f f o r e i g n b u sin ess a c t i v i t i e s . 3. I n s t i t u t i o n s a r e e x p e c t e d a l s o t o r e f r a i n from making newi n v e s t m e n t s , i n e i t h e r d e b t or e q u i t y form, any i n th e d e v e lo p e d c o u n t r i e s o f c o n t i n e n t a l W estern Europe, e x c e p t f o r new c r e d i t s judged e s s e n t i a l t o t h e f i n a n c i n g o f U .S . e x p o r t s as e v id e n c e d by e xe m p tion from the I n t e r e s t E q u a l i z a t i o n Tax t h a t o t h e r w i s e would a p p l y . 4. The d e f i n i t i o n o f c o v e r e d a s s e t s i s changed: (a) t o e x c l u d e f o r e i g n a s s e t s o f t y p e s o t h e r w i s e c o v e r e d by t h e program but a c q u i r e d as " f r e e d e l i v e r y " ite m s a f t e r December 31, 1967; and (b) t o p r o v i d e t h a t c o v e r e d e q u i t y s e c u r i t i e s h e l d a t t h e b e g i n n i n g o f 1968 be c a r r i e d th r o u g h o u t 1968 a t th e v a l u e s r e f l e c t e d i n t h e r e p o r t (on Form FR 392R-68) pu r c h ase d file d f o r December 31, 1967, and t h a t c o v e r e d e q u i t i e s d u r i n g 1968 be c a r r i e d a t c o s t . The r e v i s e d program i s unchanged from th e 1968 program announced e a r l i e r , i n th e f o l l o w i n g xrays: 1. Among the t y p e s o f f o r e i g n a s s e t s cove re d by the program, i n s t i t u t i o n s are s t i l l r e q u e s t e d to g i v e a b s o l u t e p r i o r i t y to c r e d i t s t h a t r e p r e s e n t f i n a n c i n g e s s e n t i a l to the s a l e o f U.S. goods abroad. 2. I n s t i t u t i o n s may c o n t i n u e to i n v e s t i n n o n -c o v e re d f o r e i g n a s s e t s as d e s i r e d . 3. Only f i n a n c i a l i n s t i t u t i o n s h o l d i n g c o v e r e d a s s e t s o f $ 5 0 0 , 0 0 0 or more, or t o t a l f o r e i g n a s s e t s o f $5 m i l l i o n or more, are asked t o f i l e q u a r t e r l y r e p o r t s w i t h t h e i r F e d e r a l R e s e r v e Bank. However, i n s t i t u t i o n s w i t h h o l d i n g s below t h e s e amounts are a l s o e x p e c t e d to a b i d e by the p r o v i s i o n s o f the program. 4. The group o f i n s t i t u t i o n s c o v e re d by the nonbank g u i d e l i n e s c o n t i n u e s to i n c l u d e t r u s t companies and t r u s t d e p artm ents of com m ercial banks, mutual s a v i n g s banks, i n s u r a n c e com p an ies, in v e s t m e n t c o m p a n ie s , f i n a n c e com p an ies, employee r e t i r e m e n t and p e n s i o n f u n d s , c o l l e g e endowment f u n d s , and c h a r i t a b l e f o u n d a t i o n s . th e U .S . b r a n c h e s o f f o r e i g n i n s u r a n c e companies ando f o t h e r f o r e i g n nonbank f i n a n c i a l c o r p o r a t i o n s . A l s o i n c lu d e d are I n v e s tm e n t u n d e r w r i t i n g f i r m s , s e c u r i t i e s brokers and d e a l e r s , and in v e s t m e n t c o u n s e l i n g fir m s a l s o are c o v e r e d w i t h r e s p e c t to f o r e i g n f i n a n c i a l a s s e t s held f o r t h e i r own a c c o u n t and a r e r e q u e s t e d to t h o s e c a s e s where inform t h e i r c u s to m e r s o f th e i t appears a p p l i c a b l e . program in GUIDELINES FOR BANKS 1. C e i l i n g and R e p o r tin g A. Meaning o f term s (1) " F o r e ig n e r s " i n c l u d e i n d i v i d u a l s , p a r t n e r s h i p s , c o r p o r a t i o n s d o m i c i l e d o u t s i d e t h e U n ite d S t a t e s , c itize n sh ip , and irresp ective of e x c e p t t h e i r a g e n c i e s o r b r a n c h e s l o c a t e d w i t h i n th e U n ite d S t a t e s ; b r a n c h e s , s u b s i d i a r i e s , and a f f i l i a t e s o f U .S . banks and o t h e r U .S . c o r p o r a t i o n s t h a t a r e l o c a t e d i n f o r e i g n c o u n t r i e s ; and any government o f a f o r e i g n c o u n t r y or o f f i c i a l agency t h e r e o f and any o f f i c i a l i n t e r n a t i o n a l or r e g i o n a l i n s t i t u t i o n treaty, c r e a t e d by irr e sp e c tiv e o f loca tio n . (2) " F o r e ig n l o n g - t e r m s e c u r i t i e s " a r e t h o s e i s s u e d w i t h o u t a c o n t r a c t u a l m a t u r i t y or w i t h an o r i g i n a l m a t u r i t y o f more than 1 year from t h e d a t e o f i s s u a n c e . (3) se cu ritie s, "Other c la i m s " i n c l u d e a l l l o n g - t e r m c l a i m s o t h e r than r e a l a s s e t s , n e t i n v e s t m e n t i n and a d van c e s t o f o r e i g n b r a n c h e s and s u b s i d i a r i e s , and a l l s h o r t - t e r m c l a i m s ( s u c h as d e p o s i t s , money market i n s t r u m e n t s , c u s t o m e r s ' l i a b i l i t y on a c c e p t a n c e s , and lo a n s). (4) "Nonexport c r e d i t " means a f o r e i g n c r e d i t o t h e r than one t h a t a r i s e s d i r e c t l y o u t o f t h e f i n a n c i n g o f e x p o r t s o f U.S . goods or s e r v i c e s o r t h a t i s r e a s o n a b l y n e c e s s a r y f o r t h e f i n a n c i n g o f such exp orts. 2 (5) "Developed c o u n t r i e s " are Abu Dhabi, A u s t r a l i a , A u s t r i a , t h e Bahamas, B ah rain , Belgiu m , Bermuda, Canada, Denmark, F r a n c e , Germany ( F e d e r a l R e p u b l i c ) , Hong Kong, I r a n , Iraq, Irela n d , Italy, Japan, Kuwait, K uw ait-Saud i Arabia N e u t r a l Zone, L ib ya, L i e c h t e n s t e i n , Luxembourg, Monaco, N e t h e r l a n d s , New Z ealan d , Norway, P o r t u g a l , Qatar, R ep u b lic o f South A f r i c a , San Marino, Saudi A r a b ia , S p ain , Sweden, S w i t z e r l a n d , and t h e U n ite d Kingdom. co u n tries: A ls o t o be c o n s i d e r e d "develop ed " a r e t h e f o l l o w i n g A l b a n i a , B u l g a r i a , any p a r t o f China t h a t i s dominated o r c o n t r o l l e d by i n t e r n a t i o n a l communism, Cuba, C z e c h o s l o v a k i a , E s t o n i a , Hungary, any p a r t o f Korea t h a t i s dominated or c o n t r o l l e d by i n t e r n a t i o n a l communism, L a t v i a , L i t h u a n i a , Outer M ongolia, Poland ( i n c l u d i n g any area under i t s p r o v i s i o n a l a d m i n i s t r a t i o n ) , Rumania, S o v i e t Zone o f Germany and t h e S o v i e t s e c t o r o f B e r l i n , T i b e t , Union o f S o v i e t S o c i a l i s t R e p u b li c s and t h e K u r i l e I s l a n d s , Southern S a k h a l i n , and a r e a s i n E a s t P r u s s i a t h a t a r e under th e p r o v i s i o n a l a d m i n i s t r a t i o n o f th e Union o f S o v i e t S o c i a l i s t R e p u b l i c s , and any p a r t o f Vietnam t h a t i s dominated or c o n t r o l l e d by i n t e r n a t i o n a l communism. B. S p ecific i n c l u s i o n s and e x c l u s i o n s i n c a l c u l a t i n g t h e c e i l i n g (1) o f any o f f s e t s . Claims on f o r e i g n e r s sh ou ld be i n c l u d e d w i t h o u t d e d u c t i o F o r e ig n l o n g - t e r m s e c u r i t i e s h e l d f o r banks' own a c c o u n t sh o u ld be i n c l u d e d . F o r e ig n c u s to m e r s ' lia b ility for a ccep ta n ces e x e c u t e d s h o u ld be i n c l u d e d w h eth e r or not t h e a c c e p t a n c e s a r e h e ld by t h e r e p o r t i n g bank. P a r t i c i p a t i o n s p urchased i n l o a n s to f o r e i g n e r s ( e x c e p t lo a n s g u a r a n t e e d o r p a r t i c i p a t e d i n by t h e E xp ort-Im p ort Bank or i n s u r e d by t h e F o r e ig n C r e d i t I n s u r a n c e A s s o c i a t i o n ) sh o u ld be i n c l u d e d ; 3 a lso , f o r e i g n a s s e t s s o l d t o U .S . resid en ts, i n c l u d i n g t h e E xp ort- Import Bank, w i t h r e c o u r s e sh o u ld be i n c l u d e d . (2) C o n tin g e n t c l a i m s , u n u t i l i z e d c r e d i t s , c l a i m s h e ld f o r a c c o u n t o f c u s t o m e r s , a c c e p t a n c e s e x e c u t e d by o t h e r U .S . banks and l o a n s g u a r a n t e e d or p a r t i c i p a t e d i n by t h e E xp o rt-Im p o r t Bank o r i n s u r e d by t h e F o r e ig n C r e d it I n s u r a n c e A s s o c i a t i o n , C. s h o u ld be e x c l u d e d . C eilin g (1) F o r e ig n c r e d i t s i n c l u d e d i n t h e c e i l i n g a r e a b a n k 's t o t a l c l a i m s on f o r e i g n e r s h e l d f o r own a c c o u n t , w i t h th e s p e c i f i c and e x c l u s i o n s s e t f o r t h i n S e c t i o n B a b o v e . in c lu sio n s The 1968 c e i l i n g f o r a bank r e p o r t i n g on Form F.R. 391 on O ctober 31, 1967, and t h a t had f o r e i g n a s s e t s o f $ 5 0 0 ,0 0 0 or more on t h a t d a t e i s e i t h e r : c e n t o f t h e amount o f f o r e i g n a s s e t s h e l d on December 31, (2) an amount e q u a l t o ( a ) i t s ( 1 ) 103 per 1964, or 1967 c e i l i n g under t h e g u i d e l i n e s i s s u e d i n December 1966 p l u s (b ) o n e - t h i r d o f t h e d i f f e r e n c e betw een t h a t amount and 2 per c e n t o f t h e b a n k 's t o t a l a s s e t s as o f December 31, 1966, w h ic h e v e r i s l a r g e r . (2) A l l banks a r e r e q u e s t e d , e f f e c t i v e from t h e d a t e o f th e announcement o f t h e s e r e v i s e d g u i d e l i n e s , t o r e f r a i n from renewing term l o a n s ( t h o s e w i t h o r i g i n a l m a t u r i t i e s o f more than one y e a r ) t o r e s i d e n t s o f d e v e lo p e d c o u n t r i e s o f c o n t i n e n t a l Western Europe, or r e l e n d i n g amounts r e c e i v e d i n repayment o f such l e a n s , e x c e p t t o make bona f i d e export c r e d it s . The c e i l i n g o f each bank r e c e i v i n g such repayments w i l l be a d j u s t e d monthly by d e d u c t i n g t h e r e f r o m t h e d o l l a r amount o f t h o s e r e payments . (3) A l l banks a r e r e q u e s t e d f u r t h e r to r e duce t h e amount o f ou tsta n d in g sh ort-term c r e d it s ( c r e d i t s w i t h o r i g i n a l m a t u r i t i e s o f one y e a r o r l e s s ) t o r e s i d e n t s o f d e v e lo p e d c o u n t r i e s o f c o n t i n e n t a l W estern Europe by 40 per c e n t o f t h e amount o f such c r e d i t s h e l d on December 31, 1967, d u r in g t h e c o u r s e o f 1968. be made a t a r a t e o f a t l e a s t 10 T h i s r e d u c t i o n sh ou ld p e r c e n t a g e p o i n t s i n each q u a r t e r ; t h e c e i l i n g f o r each bank w i l l be reduced c o r r e s p o n d i n g l y , q u a r t e r l y by an amount e q u a l t o 10 i.e ., per c e n t o f t h e amount o u t s t a n d i n g on December 31, 1967. (4) Any bank t h a t s e l l s a f o r e i g n a s s e t t o a U.S . resid en t, i n c l u d i n g t h e E x p ort-Im p or t Bank, w i t h o u t r e c o u r s e sh o u ld reduce i t s c e i l i n g by an e q u i v a l e n t amount. (5) A bank t h a t had no c e i l i n g i n 1967, o r t h a t had f o r e i g n a s s e t s o f $ 5 0 0 , 0 0 0 o r l e s s on O ctober 31, 1967, may d i s c u s s w i t h the F e d e r a l R e se r v e Bank o f t h e F e d e r a l R e se r v e d i s t r i c t lo ca ted , in which i t i s t h e p o s s i b i l i t y o f a d o p t i n g a s p e c i a l c e i l i n g a d e q u a te t o p e r m it t h e bank t o meet r e a s o n a b l e p r i o r i t y c r e d i t demands o f e x i s t i n g c u s to m e r s or o r i g i n a t i n g i n i t s normal tr a d e a r e a . In d i s c u s s i n g t h e c e i l i n g o f such a bank, th e F e d e r a l Reserve Bank w i l l a s c e r t a i n t h e b a n k 's p r e v i o u s h i s t o r y i n f o r e i g n t r a n s a c t i o n s , i n c l u d i n g a c c e p t a n c e o f f o r e i g n d e p o s i t s or h a n d l i n g f o r e i g n c o l l e c t i o n s , and t h e r e a s o n s why th e bank c o n s i d e r s t h a t i t tran saction s. sh ou ld engage i n f o r e i g n 5 D. R e p o r tin g (1) Banks t h a t r e p o r t on T r e asu r y F o r e ig n Exchange Forms B-2 or B -3, o r t h a t have been g r a n t e d s p e c i a l c e i l i n g s under p r o v i s i o n s o f these g u id e lin e s, (Fo rm F.R. sh ou ld f i l e a Monthly Report on F o r e ig n Claims 391/68R) w i t h t h e F e d e r a l Reserve Bank o f t h e F e d e r a l R e se r v e d i s t r i c t i n which th e bank i s (2) located , C o p ie s o f Form F.R. 391/68R are a v a i l a b l e a t t h e F e d e r a l R e se r v e Banks. 2. Loans Guaranteed by t h e E xp ort-Im p ort Bank Loans g u a r a n te ed or p a r t i c i p a t e d i n by t h e E xp ort-Im p ort Bank o r i n s u r e d by t h e F o r e ig n C r e d i t I n s u r a n c e A s s o c i a t i o n a r e e x c lu d ed from the c e i l i n g . The r o l e o f t h e E xp ort-Im p ort Bank w i t h i n t h e framework o f t h e P r e s i d e n t ' s program i s c o o r d i n a t e d by t h e N a t i o n a l A d v is o r y C o u n c il f o r I n t e r n a t i o n a l Monetary and F i n a n c i a l P o l i c i e s . 3. C r e d its in Excess o f C e ilin g A bank would n o t be c o n s i d e r e d a s a c t i n g i n amanner i n c o n s i s t e n t w i t h t h e program i f i t t e m p o r a r i l y e x c e e d s i t s c e i l i n g as a r e s u l t o f t h e e x t e n s i o n o f bona f i d e e x p o r t c r e d i t s . The bank s h o u l d , however, r e f r a i n from making new e x t e n s i o n s o f n o n - p r i o r i t y c r e d i t s so as t o reduce i t s c l a i m s on f o r e i g n e r s t o an amount w i t h i n t h e c e i l i n g a s q u i c k l y as p o s s i b l e . I t sh o u ld a l s o take e v e r y o p p o r t u n i t y t o withdraw or reduce commitments, lin e s, in clu d in g c r e d it t h a t a r e n o t o f a f ir m n a t u r e and t o a s s u r e t h a t drawings under c r e d i t l i n e s a re kept t o normal l e v e l s and u s a g e . At tim e o f re n e w a l, each c r e d i t l i n e should be revie w e d f o r c o n s i s t e n c y w i t h t h e program. 6 A bank whose f o r e i g n c r e d i t s a r e i n e x c e s s o f t h e c e i l i n g w i l l be i n v i t e d p e r i o d i c a l l y t o d i s c u s s w i t h the a p p r o p r i a t e Federal. R eserve Bank t h e s t e p s i t has t a k e n and p r o p o s e s t o ta k e t o reduce i t s c r e d i t s to a l e v e l w ith in the c e i l i n g . 4. Loan P r i o r i t i e s W ithin t h e c e i l i n g , f id e export c r e d i t s . a b s o l u t e p r i o r i t y s h o u ld be g i v e n to bona C r e d i t s t h a t s u b s t i t u t e f o r c a s h s a l e s o r for s a l e s c u s t o m a r i l y f in a n c e d o u t o f nonbank o r f o r e i g n funds are not e n t it le d to p r io r it y . With r e s p e c t t o n o n e x p o r t c r e d i t s , banks should g i v e th e h i g h e s t p r i o r i t y t o l o a n s t o d e v e l o p i n g c o u n t r i e s and s h o u ld a v o id r e s t r i c t i v e p o l i c i e s t h a t would p l a c e an undue burden on Canada, Japan, and t h e U n it e d Kingdom. A bank a d o p t i n g a 1968 c e i l i n g e q u a l t o 2 per c e n t o f i t s t o t a l a s s e t s on December 31, u s e o f any e x c e s s o v e r i t s 1966, w i l l be e x p e c t e d t o r e s t r i c t the 1967 c e i l i n g t o p r i o r i t y c r e d i t s ( i . e . , e x p o r t c r e d i t s and c r e d i t s t o d e v e l o p i n g c o u n t r i e s ) o r i g i n a t i n g among t h e b a n k 's r e g u l a r c u sto m e r s or r e s i d e n t s o f i t s t r a d e t e r r i t o r y . is, That s u b j e c t t o t h e l i m i t a t i o n s s e t f o r t h i n G u i d e l i n e 1C (1 ), h o l d i n g s o f f o r e i g n c r e d i t s on any r e p o r t i n g d a t e sh ou ld not e x c ee d t h e 1967 c e i l i n g by more than t h e i n c r e a s e i n h o l d i n g s o f p r i o r i t y c r e d i t s b e t w e e n O ctober 31, 1967, and t h e r e p o r t i n g d a t e . 7 5. T r u s t Departments T r u s t d e p artm ents o f comm ercial banks should f o l l o w th e g u i d e l i n e s w i t h r e s p e c t t o nonbank f i n a n c i a l i n s t i t u t i o n s . 6 . T r a n s a c t i o n s f o r t h e Account o f Customers A bank sh o u ld bear in mind t h e P r e s i d e n t ' s b a l a n c e o f payments program when a c t i n g f o r t h e a c c o u n t o f a cu s to m e r . i s o b lig e d to fo llo w a custom er's i n s t r u c t io n s , A lth o u g h the bank i t sh o u ld t o t h e e x t e n t p o s s i b l e d i s c o u r a g e c u s to m e r s from p l a c i n g l i q u i d funds o u t s i d e t h e U n ite d S t a t e s . A bank sh o u ld n o t p l a c e w i t h a custom er f o r e i g n o b lig a tio n s th at, i n t h e a b s e n c e o f th e v o l u n t a r y c r e d i t r e s t r a i n t program, i t would have a c q u i r e d o r h e ld f o r i t s own a c c o u n t . 7. F o r e ig n Branches The v o l u n t a r y c r e d i t r e s t r a i n t program i s not d e s i g n e d to r e s t r i c t t h e e x t e n s i o n o f f o r e i g n c r e d i t s by f o r e i g n branches i f t h e funds u t i l i z e d a r e d e r i v e d from f o r e i g n s o u r c e s and do not add to t h e o u t f l o w o f c a p i t a l from t h e U n it e d S t a t e s . T o t a l c l a i m s o f a b a n k 's d o m e s t ic o f f i c e s on i t s f o r e i g n b r anches ( i n c l u d i n g permanent c a p i t a l i n v e s t e d i n a s w e l l as b a l a n c e s due from such b r a n c h e s ) r e p r e s e n t bank c r e d i t to n o n r e s i d e n t s f o r t h e p u r p o se s o f t h e program. 8 . "Edge Act" C o r p o r a t io n s "Edge Act" and "Agreement" C o r p o r a t io n s a r e i n c l u d e d i n th e v o l u n t a r y c r e d i t r e s t r a i n t program. F o r e ig n l o a n s and i n v e s t m e n t s o f such c o r p o r a t i o n s may be combined w i t h t h o s e o f t h e p a r e n t bank, or a s e p a r a t e c e i l i n g may be adopted f o r t h e par e n t bank and each such su b sid iary corporation. company, i t s I f such c o r p o r a t i o n i s owned by a bank h o l d i n g f o r e i g n l o a n s and i n v e s t m e n t s may be combined f o r p u r p o s e s o f t h e program w i t h any one o r a l l o f th e banks i n t h e h o l d i n g company group. 9 ^ U .S . Branches and A g e n c i e s o f F o r e ig n Banks Branches and a g e n c i e s o f f o r e i g n banks l o c a t e d i n t h e U n ited S t a t e s are requested to a c t in accordance w ith th e s p i r i t o f the d o m e s t i c comm ercial bank v o l u n t a r y c r e d i t r e s t r a i n t program. 10. Loans t o U .S . R e s i d e n t s and S u b s t i t u t i o n o f D om estic C r e d i t f o r C r e d i t from F o r e ig n S o u r c e s _________________________________________ There a r e a number o f s i t u a t i o n s i n which l o a n s t o d o m e s t ic custom ers, i n d i v i d u a l a s w e l l as c o r p o r a t e , may be d e t r i m e n t a l t o the P r e s i d e n t ' s b a l a n c e o f payments program and hence should be a v o i d e d . Examples a r e : (A) Loans t o U.S. r e s i d e n t s - - i n d i v i d u a l s as w e l l a s c o r p o r a t i o n t h a t w i l l a i d t h e borrower i n making new f o r e i g n l o a n s o r i n v e s t m e n t s i n c o n s i s t e n t w i t h t h e P r e s i d e n t ' s program. Banks should a v o i d making new l o a n s t h a t would d i r e c t l y o r i n d i r e c t l y e n a b l e borrow ers t o u s e funds abroad in a manner i n c o n s i s t e n t w i t h t h e Department o f Commerce program o r w i t h th e g u i d e l i n e s f o r nonbank f i n a n c i a l i n s t i t u t i o n s . (B) Loans t o U .S. s u b s i d i a r i e s and branches o f f o r e i g n companies t h a t o t h e r w i s e might have been made by t h e bank t o t h e f o r e i g n p a r e n t o r o t h e r f o r e i g n a f f i l i a t e o f t h e company, o r t h a t n o r m a ll y would have been o b t a i n e d abroad. 1 1, Management o f a Bank's L i q u i d Funds A bank sh ou ld not p l a c e i t s own funds abroad f o r s h o r t - t e r m i n v e s t m e n t p u r p o s e s , w h eth er such i n v e s t m e n t s a r e p a y a b le i n f o r e i g n c u r r e n c i e s o r i n U.S. d o l l a r s . T h i s does n o t , however, c a l l for a r e d u c t i o n i n n e c e s s a r y working b a l a n c e s h e l d w i t h f o r e i g n c o r r e s p o n d e n t s . 10 GUIDELINES FOR NONBANK FINANCIAL INSTITUTIONS Through th e end o f c a l e n d a r y e a r 1968, each i n s t i t u t i o n i s r e q u e s t e d to reduce i t s a g g r e g a t e h o l d i n g s o f "covered" f o r e i g n f i n a n c i a l assets t o 95 per c e n t or l e s s o f i t s " a d ju ste d b a s e - d a t e h o l d i n g s . " Covered f o r e i g n f i n a n c i a l a s s e t s , s u b j e c t t o the g u i d e l i n e c e ilin g , i n c l u d e th e f o l l o w i n g t y p e s o f i n v e s t m e n t s , e x c e p t f o r " f r e e d e l i v e r y " item s r e c e i v e d a f t e r December 3 1 , 1967: 1. F o r e ig n bank d e p o s i t s , i n c l u d i n g d e p o s i t s i n f o r e i g n branches o f U .S . b a n k s, and l i q u i d money market c l a i m s on f o r e i g n o b l i g o r s , g e n e r a l l y d e f i n e d t o i n c l u d e m ark etable n e g o t i a b l e in s t r u m e n t s m aturing in 1 y e a r or l e s s . 2. A l l o t h e r c l a i m s on f o r e i g n o b l i g o r s w r i t t e n to mature i n 10 y e a r s or l e s s a t d a t e o f a c q u i s i t i o n . This c a t e g o r y i n c l u d e s a l l b o n d s, n o t e s , m o r t g a g e s , l o a n s , and o t h e r c r e d i t s , r e g a r d l e s s o f c o u n t r y of o rig in . Excluded a r e bonds and n o t e s o f i n t e r n a t i o n a l i n s t i t u t i o n s o f w h ic h th e U n ite d S t a t e s i s a member, and l o a n s g u a r a n te ed or p a r t i c i p a te d i n by the E xp ort-Im p ort Bank or i n s u r e d by th e F o r e ig n C r e d it In s u r a n c e A s s o c i a t i o n , r e g a r d l e s s o f m a t u r i t y . 3. Net f i n a n c i a l in v e s t m e n t i n f o r e i g n b r a n c h e s , f i n a n c i a l s u b s i d i a r i e s , and a f f i l i a t e s , Canada and Japan.^ l o c a t e d in d e v e lo p e d c o u n t r i e s o t h e r than Such f i n a n c i a l i n v e s t m e n t i n c l u d e s payments i n t o e q u i t y and o t h e r c a p i t a l a c c o u n t s o f , and n e t lo a n s and a dvances t o , f o r e i g n c o r p o r a t i o n s engaged p r i n c i p a l l y i n f i n a n c e , i n s u r a n c e , or r e a l estate a c t iv it ie s , in which th e U .S . i n s t i t u t i o n has an ow n er sh ip i n t e r e s t o f 10 per c e n t or more. Excluded are e a r n i n g s o f a f o r e i g n a f f i l i a t e d i r e c t l y r e t a i n e d i n t h e c a p i t a l a c c o u n t s o f the f o r e i g n c o r p o r a t i o n . 11 4. Long-term c r e d i t s o f f o r e i g n o b l i g o r s d o m i c i l e d in d e v e lo p e d c o u n t r i e s o t h e r than Canada and Japan.^ I n c lu d e d i n t h i s c a t e g o r y are b o n d s, n o t e s , m o r t g a g e s , l o a n s , and o t h e r c r e d i t s m aturing more than years a f t e r date o f a c q u i s it io n . 10 Excluded a r e bonds o f i n t e r n a t i o n a l i n s t i t u t i o n s o f w h ic h t h e U n ite d S t a t e s i s a member. 5. E q u it y s e c u r i t i e s o f f o r e i g n c o r p o r a t i o n s d o m i c i l e d in d e v e l o p e d c o u n t r i e s o t h e r than Canada and Japan^ e x c e p t t h e s e a c q u ir e d a f t e r September 3 0 , 1 965, i n U .S . markets from American i n v e s t o r s . The t e s t o f w h eth e r an e q u i t y s e c u r i t y i s c o v e r e d w i l l depend on the i n s t i t u t i o n ' s o b l i g a t i o n t o pay the I n t e r e s t E q u a l i z a t i o n Tax on a c q u i s i t i o n . E x c l u s i o n from c o v e r e d a s s e t s under t h i s program n o r m a lly w i l l be i n d i c a t e d when, i n a c q u i r i n g an e q u i t y s e c u r i t y t h a t o t h e r w i s e would be c o v e r e d , the purchasing i n s t i t u t i o n r e c e iv e s a c e r t i f i c a t e of p r io r American o w n e r s h ip , or brokerage c o n f i r m a t i o n t h e r e o f . " B a s e - d a te " h o l d i n g s f o r any r e p o r t i n g d a t e i n 1968 a r e d e f i n e d as: (1 ) t o t a l h o l d i n g s o f c o v e r e d f o r e i g n a s s e t s as o f December 3 1 , 1967; (2 ) m inu s, e q u i t y s e c u r i t i e s o f companies d o m i c i l e d i n d e v e lo p e d c o u n t r i e s ( e x c e p t Canada and J a p a n ) ,^ t h a t are in c lu d e d in (1 ) but had been s o l d to American i n v e s t o r s p r i o r t o th e c u r r e n t q u a r t e r ; ( 3 ) p l u s , or m inus, t h e d i f f e r e n c e betw een s a l e s p r o c e e d s and " c a r r y in g " v a l u e o f c o v e r e d e q u i t i e s s o l d p r i o r t o t h e c u r r e n t q u a r t e r to o t h e r than American i n v e s t o r s or i n o t h e r than U .S . m a r k e t s . On e ac h r e p o r t i n g d a t e i n 1968, " c a r r y in g " v a l u e o f c o v e r e d e q u i t i e s sh ou ld be th e v a l u e r e f l e c t e d i n the i n s t i t u t i o n ' s r e p o r t (on Form FR 392R-68) f o r December 3 1 , 1967, i n t h e c a s e o f e q u i t i e s h e l d on t h a t d a t e , and i t sh o u ld be c o s t i n the c a s e o f e q u i t i e s purchased a f te r that d a te. 12 "Adjusted" b a s e - d a t e h o l d i n g s , t o w hich t h e 95 p e r c e n t c e i l i n g a p p l i e s , are e q u a l t o " b a s e - d a t e " h o l d i n g s as d e f i n e d a b o v e , w i t h t h e two t y p e s o f ad ju stm e n t f o r s a l e s o f in c lu d e d c o v e r e d e q u i t i e s d u r in g the current quarter. In making f o r e i g n l o a n s and i n v e s t m e n t s t h a t are s u b j e c t t o the g u id e lin e c e i l i n g , i n s t i t u t i o n s are asked t o g i v e a b s o l u t e p r i o r i t y t o c r e d i t s t h a t r e p r e s e n t t h e bona f i d e f i n a n c i n g o f U .S . e x p o r t s , t h a t is, f i n a n c i n g n e c e s s a r y to consummate t h e e x p o r t s a l e . At th e same t im e , i n s t i t u t i o n s g e n e r a l l y are e x p e c t e d t o reduce t h e i r h o l d i n g s o f f o r e i g n l i q u i d funds (b o th d e p o s i t s and money market i n s t r u m e n t s ) t o z e r o d u r in g 1 963, e v e n though i t e n t a i l s a r e d u c t i o n i n t o t a l c o v e r e d a s s e t s c o n s id e r ' a b l y l a r g e r than 5 p e r c e n t . However, an i n s t i t u t i o n may m a in t a i n such minimum working b a l a n c e s abroad as a r e needed f o r th e e f f i c i e n t c o nduct of its foreign b usiness a c t i v i t i e s . In a d d i t i o n , i n s t i t u t i o n s are r e q u e s t e d t o r e f r a i n from making any new i n v e s t m e n t s , i n e i t h e r d e b t or e q u i t y form, i n t h e d e v e lo p e d c o u n t r i e s o f c o n t i n e n t a l Western Europe, e x c e p t f o r new c r e d i t s judged e s s e n t i a l t o the f i n a n c i n g o f U .S . e x p o r t s as e v id e n c e d by exem ption from t h e I n t e r e s t E q u a l i z a t i o n Tax t h a t o t h e r w i s e would a p p l y . For some i n s t i t u t i o n s , r e p a t r ia t io n o f liq u id funds, c e s s a t io n o f new i n v e s t m e n t i n t h e c o u n t r i e s o f c o n t i n e n t a l W estern Europe, and maximum r e s t r a i n t on r e i n v e s t m e n t o f c u r r e n t m a t u r i t i e s of o t h e r c o v e re d a s s e t s may n o t be s u f f i c i e n t t o reduce t o t a l c o v e r e d a s s e t s by t h e t a r g e t o b j e c t i v e o f 5 p e r c e n t or more. In such i n s t a n c e s , or when t h e r e are o t h e r s p e c i a l c i r c u m s t a n c e s - - s u c h as the e x i s t e n c e a t y e a r -e n d 1967 o f 13 f i r m commitments t o i n v e s t , o r th e need t o accommodate r e q u e s t s f o r th e bona f i d e f i n a n c i n g o f U .S . e x p o r t s - - a n i n s t i t u t i o n may c o n s u l t w i t h i t s F e d e r a l R e se r v e Bank w i t h a view t o working o u t an i n d i v i d u a l l y t a i l o r e d program f o r a c h i e v i n g an o r d e r l y r e d u c t i o n i n t h e i n s t i t u t i o n ' s c o v e r e d foreign a s s e t s . In th e a b s e n c e o f such an ar r an ge m e n t, i n s t i t u t i o n s w i l l be e x p e c t e d t o make p r o g r e s s from q u a r t e r t o q u a r t e r on th e r e d u c t i o n t a r g e t e d f o r t h e y e a r as a w h o l e . F o r e i g n f i n a n c i a l a s s e t s n o t c o v e r e d by th e g u i d e l i n e a r e s t i l l r e p o r t a b l e on t h e q u a r t e r l y s t a t i s t i c a l r e p o r t s t o t h e F e d e r a l Reserve Banks, but a r e n o t s u b j e c t t o t h e t a r g e t r e d u c t i o n . Such n o n - c o v e r e d fo r e ig n investm ents includ e the fo llo w in g : 1. Bonds and n o t e s o f i n t e r n a t i o n a l i n s t i t u t i o n s o f which the U n it e d S t a t e s i s a member, r e g a r d l e s s o f m a t u r i t y . 2. Long-term i n v e s t m e n t s i n Canada, Japan, and a l l d e v e l o p i n g c o u n t r i e s , i n c l u d i n g c r e d i t i n s t r u m e n t s w i t h f i n a l m a t u r i t i e s o f more than 10 y e a r s a t d a t e of a c q u i s i t i o n , d i r e c t i n v e s t m e n t i n f i n a n c i a l s u b s i d i a r i e s and a l l e q u i t y s e c u r i t i e s i s s u e d by fir m s d o m i c i l e d i n t h e s e c o u n t r i e s . 3. E q u it y s e c u r i t i e s o f fir m s i n d e v e lo p e d c o u n t r i e s o t h e r than Canada and Japan t h a t have b e e n a c q u i r e d i n U .S . markets from American in vestors ( s e e P o in t 5 a b o v e ) . F o r e ig n a s s e t s o f t y p e s c o v e r e d by th e program and a c q u i r e d as "free d eliv ery " ite m s--th a t i s , i n new a c c o u n t s d e p o s i t e d w i t h t r u s t com p a n i e s or t r u s t departm ents o f comm ercial b a n k s, or as nev; g i f t s r e c e i v e d by e d u c a t i o n a l i n s t i t u t i o n s - - a r e n o t now d e f i n e d as c o v e r e d a s s e t s , a r e a c q u i r e d a f t e r December 3 1 , 1967. i f they Such a s s e t s sh o u ld be r e p o r t e d as a memorandum i t e m , as sh o u ld l o a n s g u a r a n te e d or p a r t i c i p a t e d i n by th e Export Import Bank o r i n s u r e d by th e F o r e ig n C r e d i t I nsurance A s s o c i a t i o n . 14 Each nonbank f i n a n c i a l i n s t i t u t i o n h o l d i n g , on any q u a r t e r l y r e p o r t i n g d a t e , c o v e r e d a s s e t s o f $ 5 0 0 ,0 0 0 or more, or t o t a l f o r e i g n f i n a n c i a l a s s e t s o f $5 m i l l i o n o r more, i s r e q u e s t e d t o f i l e a s t a t i s t i c a l r e p o r t, covering i t s t o t a l h o l d i n g s on t h a t d a t e , w i t h t h e F e d e r a l R eserve Bank o f t h e F e d e r a l R eserve d i s t r i c t i n w hich i t s p r i n c i p a l o f f i c e lo ca ted . is The r e p o r t s are due w i t h i n 20 days f o l l o w i n g the c l o s e o f each c a l e n d a r q u a r t e r , and forms may be o b t a in e d by c o n t a c t i n g t h e F e d e r a l R e se r v e Bank. GENERAL CONSIDERATIONS In c o o p e r a t i n g i n t h e v o l u n t a r y f o r e i g n c r e d i t r e s t r a i n t program, t h e nonbank f i n a n c i a l i n s t i t u t i o n s are r e q u e s t e d t o r e f r a i n from making l o a n s and i n v e s t m e n t s i n c o n s i s t e n t w i t h o t h e r a s p e c t s o f th e P r e s i d e n t ' s b a l a n c e o f payments program. Among t h e s e are th e f o l l o w i n g : ( 1 ) n o n - c o v e r e d c r e d i t s under t h i s program t h a t s u b s t i t u t e f o r lo a n s t h a t com m ercial banks would have made i n t h e a b s e n c e o f t h a t p a r t o f t h e p r o gram a p p l i c a b l e t o them; ( 2 ) c r e d i t s t o U .S . c o r p o r a t e borrow ers t h a t would e n a b l e them t o make new f o r e i g n lo a n s and i n v e s t m e n t s i n c o n s i s t e n t w i t h t h e c o r p o r a t e p a r t o f t h e program; (3 ) c r e d i t s t o U .S . s u b s i d i a r i e s and branches o f f o r e i g n companies t h a t o t h e r w i s e would have been made to t h e f o r e i g n p a r e n t , o r t h a t would s u b s t i t u t e f o r funds n o r m a ll y o b t a in e d from f o r e i g n s o u r c e s . The v o l u n t a r y f o r e i g n c r e d i t r e s t r a i n t program f o r nonbank f i n a n c i a l i n s t i t u t i o n s d o e s n o t a p p ly t o t h e i n v e s t m e n t , w i t h i n t h e c o u n t r y i n v o l v e d , o f r e s e r v e s accum u lated on i n s u r a n c e p o l i c i e s s o l d 15 a b r o a d , i n amounts up t o 110 p e r c e n t o f su c h r e s e r v e s . F urtherm ore, i n v i e w o f th e b a l a n c e o f payments o b j e c t i v e s o f th e program, i t i s n o t e d t h a t c o v e r e d i n v e s t m e n t s o f nonbank f i n a n c i a l i n s t i t u t i o n s may be p e r m i t t e d t o e x c e e d th e g u i d e l i n e c e i l i n g to t h e e x t e n t t h a t t h e funds f o r su c h in v e s t m e n t a r e borrowed i n d e v e lo p e d c o u n t r i e s o t h e r than Canada and Japan. Any su c h arrangements t o o f f s e t f o r e i g n borrowing a g a i n s t f o r e i g n i n v e s t m e n t s h o u ld be d i s c u s s e d w i t h t h e F e d e r a l R eserve Bank. NOTE - D eveloped c o u n t r i e s o t h e r than Canada and Japan: c o n t i n e n t a l W estern E u r o p e - - A u s t r i a , Belgiu m , Denmark, F r a n c e , Germany ( F e d e r a l R e p u b l i c ) , I t a l y , L i e c h t e n s t e i n , Luxembourg, Monaco, N e t h e r l a n d s , Norway, P o r t u g a l , San Marino, S p a i n , Sweden, and S w i t z e r l a n d ; o t h e r d e v e lo p e d c o u n tr ie s are: Abu D h a b i, A u s t r a l i a , th e Bahamas, B a h r a in , Bermuda, Hong Kong, I r a n , I r a q , I r e l a n d , Kuwait, K uw ait-Saudi Arabia N e u t r a l Zone, L ib y a , New Z e a la n d , Q a ta r , R ep u b lic o f South A f r i c a , Saud i A r a b i a , and the U n ite d Kingdom. A l s o t o be c o n s i d e r e d " develop ed " a r e t h e f o l l o w i n g c o u n t r i e s : A l b a n i a , B u l g a r i a , any p a r t o f China which i s dominated or c o n t r o l l e d by i n t e r n a t i o n a l communism, Cuba, C z e c h o s l o v a k i a , E s t o n i a , Hungary, any p a r t o f Korea w h ich i s dominated or c o n t r o l l e d by i n t e r n a t i o n a l communism, L a t v i a , L i t h u a n i a , Outer M o n g o lia , Poland ( i n c l u d i n g any a r e a under i t s p r o v i s i o n a l a d m i n i s t r a t i o n ) , Rumania, S o v i e t Zone o f Germany and th e S o v i e t s e c t o r o f B e r l i n , T i b e t , Union o f S o v i e t S o c i a l i s t R e p u b li c s and th e K u r il e I s l a n d s , S o u th e r n S a k h a l i n , and a r e a s i n E a s t P r u s s i a w h ich a r e under th e p r o v i s i o n a l a d m i n i s t r a t i o n o f t h e Union o f S o c i e t S o c i a l i s t R e p u b l i c s , and any p a r t o f Vietnam t h a t i s dom in ated or c o n t r o l l e d by i n t e r n a t i o n a l communism.
@FedFRASER