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F ederal reserve Bank OF DALLAS Dallas, Texas, June 21,1965 To A ll B anks in th e E leventh Federal R eserve D istrict: Enclosed for your information is a copy of the revised guidelines for nonbank financial institutions under the Voluntary Foreign Credit Restraint Program. If your bank has a trust department, please bring the guide lines to the attention of the managing officer of that department. Yours very truly, Watrous H. Irons President This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) F ederal reserve bank O F DALLAS REVISED GUIDELINES ON FOREIGN LENDING AND INVESTING FOR U. S. NONBANK FINANCIAL INSTITUTIONS (IS S U E D P U R S U A N T TO T H E P R E S ID E N T ’S B A L A N C E OF P A Y M E N T S PROGRAM BY T H E F E D E R A L R E SE R V E SYSTEM , J U N E 21, 1965) As an important part of the President’s program to improve the balance of payments position of the United States, announced in February 1965, American businesses and financial institutions have been asked to reduce voluntarily their foreign lending and investment activities. In furtherance of this program, the guidelines on foreign lending and investm ent for financial institutions other than commercial banks are hereby revised. Included among the types of financial institutions to which the guidelines are applicable are life, fire and casualty insurance companies; corporate noninsured pension funds and state-local retirement system s; mutual savings banks, mutual funds and investm ent companies; consumer sales and com mercial finance com panies; college endowment funds and charitable foundations. Trust companies and trust departments of commercial banks are expected to observe the guidelines wherever possible in the investment of funds entrusted to them or for which they serve as investm ent advisors. Investment underwriting firms, security brokers and dealers and investment counseling firms, although they may not directly hold assets subject to the guidelines, are requested to inform customers of the program and enlist their support in following the guidelines recommended. Any nonbank financial institution holding $500,000 or more in foreign loans, investm ents or other foreign financial assets is requested to file a statistical report at the close of each calendar quarter with the Federal Reserve Bank in its district. Such reports are to be filed covering assets held as of June 30, and for any subsequent quarter in which holdings exceed $500,000. Lending institutions not receiving copies of the reporting form by June 30 may obtain them from the Federal Reserve Banks. SPECIFIC GUIDELINES 1. Investm ent of liquid funds abroad should not be increased; if holdings as of the ends of 1963 or 1964 are currently exceeded, such investm ent should be reduced in a gradual and orderly manner to the lesser of these totals. This category includes all deposits held with foreign banks or foreign branches of U. S. banks, whether denominated in U. S. dollars or a foreign currency and regardless of maturity. It also includes all liquid money market claims on foreign obligors written with an original m aturity of one year or less, whether such claims are denominated in U. S. dollars or a foreign currency. The term “liquid money market claims” is interpreted broadly to include the securities of governments and their instrumentalities, commercial paper, finance company paper, bankers’ acceptances and other readily marketable paper. This guideline is not intended to restrict the holdings of working balances needed in the ordinary conduct of business abroad. N either is it applicable to short-term business credits that are not readily marketable (covered under guideline number 2). 2. Investm ents and credits maturing in 10 years or less at date of acquisition, including short-term credits that are not “liquid money market claims” classified under guideline number 1 above, should not be increased by more than 5 per cent during 1965 from end-of-1964 levels. This category includes all bonds, notes, mortgages, loans and other credits carrying maturities at date of acquisition of 10 years or less. The date of final maturity is to be taken in classifying individual credit transactions, except that a credit transaction should not be classified as “long-term” (and hence subject to guideline number 3 below) unless 10 per cent or more of the amount to be repaid is scheduled to be repaid after 10 years. Loans guaranteed or arranged by the Export-Import Bank or insured by the Foreign Credit Insurance Associa tion are not to be considered foreign credits for purposes of this program. N et financial investm ent in foreign branches, financial subsidiaries and affiliates, if any, should be included among the assets subject to the 5 per cent expansion ceiling under guideline number 2. Such financial investm ent includes payments into equity and other permanent capital accounts of, and net loans and advances to, foreign corporations engaged principally in financial or real estate activities, in which the institution has an ownership interest of 10 per cent or more.^ Earnings of a foreign affiliate that are reinvested in the business are not to be included under the guideline target, although institutions are requested to repatriate such earnings to the fullest extent feasible. In administering restraint in foreign lending and investing, institutions are requested to observe the following priorities or guides: (1) credits and investm ents that represent bona fide U. S. export financing should receive absolute priority; (2) nonexport credits and investm ents in the less developed countries are to be given priority consideration second only to bona fide export financing; (3) the flow of investm ent funds to Canada and Japan, which are heavily dependent on U. S. capital markets, need be restricted only to the extent necessary to remain under the guideline target; (4) unduly restrictive policies should be avoided with regard to credits and investm ents in the United Kingdom, which has balance of payments problem s; (5) nonexport credits and investm ents in other developed countries (see list below) should ordinarily not be made until acceptable investm ents under the first four priorities have been accommodated, and then only within the 5 per cent ceiling for overall expansion under this guideline. It is recognized that some individual institutions may temporarily exceed the guideline target, because of investm ents made under the first two priorities above, or the taking down of firm prior com m itments to lend or invest, or normal seasonal fluctuations. In any case, an institution that exceeds its target should consult with the Federal Reserve Bank in its district regarding a program for moving back within the ceiling in a reasonable period of time. 3. Long-term credits (exceeding 10 years in m aturity) and stock investm ents in foreign companies are not subject to an aggregate target. This category includes bonds, notes, mortgages, loans and other credits maturing more than 10 years after date of acquisition, as well as preferred and common stocks. (Loans and investments in subsidiaries and affiliates, however, are covered by guideline number 2.) Term loans and serial-payment notes and bonds are to be included in this category if 10 per cent or more of the total amount of the credit is scheduled for repayment to the lender after 10 years beyond date of acquisition. No percentage ceiling is suggested on long-term credits and investm ents in the priority categories relating to export financing, to less developed countries, and to Canada, Japan, and the United Kingdom described under guideline number 2 above. On credits and investm ents in the fifth priority category, however, lending institutions are requested to exercise substantial restraint, and normally would be expected to avoid any increase in the total of such holdings. The attention of lending institutions is directed to the need to refrain from making loans and invest m ents inconsistent with the President’s balance of payments program. Among these are the following: (1) long-term credits covered by guideline number 3 which substitute for loans that commercial banks would have made in the absence of the voluntary foreign credit restraint effort administered by the Federal Reserve S y stem ; (2) credits to U. S. borrowers which would aid in making new foreign loans or investm ents inconsistent with the voluntary restraint program administered by the Department of Commerce; (3) credits to U. S. subsidiaries and branches of foreign companies which otherwise m ight have been made to the foreign parent, or which would substitute for funds normally obtained from foreign sources; (4) credits to U. S. companies with foreign activities which would take the place of funds normally obtained abroad. Reasonable efforts should be made to avoid accommodating credit requests of these types, regardless of specific guideline targets detailed in this circular. NO TES None of the guidelines in this circular are intended to apply to the reinvestm ent of reserves on insurance policies sold abroad in assets w ithin the country involved, in amounts up to 110 per cent of such reserves. Developed countries other than Canada, Japan, and the United Kingdom are: A ustralia, A ustria, the Bahamas, Belgium, Bermuda, Denmark, France, Germany (Federal Republic), Hong Kong, Ireland, Italy, Kuwait, Liechtenstein, Luxembourg, Monaco, Netherlands, New Zealand, Norway, Portugal, Republic of South Africa, San Marino, Spain, Sweden, and Switzerland. Also to be considered “developed” are the following countries w ithin the Sino-Soviet bloc: Albania, Bulgaria, any p a rt of China which is dominated or controlled by International Commu nism, Cuba, Czechoslovakia, Estonia, Hungary, any p art of Korea which is dominated or controlled by In ter national Communism, Latvia, Lithuania, Outer Mongolia, Poland (including any area under its provisional adm in istratio n ), Rumania, Soviet zone of Germany and the Soviet sector of Berlin, Tibet, Union of Soviet Socialist Republics and the Kurile Islands, Southern Sakhalin, and areas in E ast P russia which are under the provisional adm inistration of the Union of Soviet Socialist Republics, and any p art of Viet-Nam which is dominated or controlled by International Communism.
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