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federal Reserve Bank of Dallas DALLAS, T E X A S 75222 Circular No. 80-80 April 18, 1980 TEMPORARY SEASONAL CREDIT PROGRAM AND APPLICABILITY OF SPECIAL CREDIT RESTRAINT PROGRAM TO SMALL BANKS TO THE CHIEF EXECUTIVE OFFICER OF ALL BANKS IN THE ELEVENTH FEDERAL RESERVE DISTRICT: Enclosed is a le tte r from Paul A. Volcker, Chairman of the Board of Governors of the Federal Reserve System, which clarifies the applicability of the Board's Special Credit Restraint Program to smaller banks and explains the Temporary Seasonal Credit Program recently adopted to help small banks under liquidity pressure meet the credit needs of their communities. The following are also enclosed: a press release issued by the Board of Governors; an attachm ent explaining the Temporary Seasonal Credit Program; and a form for determining eligibility and calculating the amount of the seasonal credit line available to a particular bank. The Temporary Seasonal Credit Program is available to member and nonmember banks with total deposits of less than $100 million if certain additional criteria are met. These additional criteria are set out in more detail in the enclosures. If your bank appears to qualify for the program and you are interested in obtaining such a line of credit, please contact the individuals listed below at the appropriate office of the Federal Reserve Bank of Dallas: Dallas Jesse D. Sanders, Assistant Vice President, Ext. 6240 Billy J. Hayden, Manager, Loan Dept., Ext. 6241 El Paso Robert W. Schultz, Assistant Vice President, Ext. 201 William L. Wilson, Manager, Accounting and Loan Dept., Ext. 210 (915) 544-4730 Houston C. O. Holt, Jr., Assistant Vice President, Ext. 44 John R. Franklin, Manager, Accounting and Loan Dept., Ext. 50 (713) 659-4433 San Antonio Thomas C. Cole, Assistant Vice President, Ext. 13 LeBlanc McWilliams, Manager, Loan and Service Dept., Ext. 30 (512) 224-2141 (WATS 800-292-5810) Sincerely yours, Ernest T. Baughman President Enclosures Banks and others are encouraged to use the follow ing incom ing WATS numbers in con ta ctin g this Bank: 1-800-442-7140 (intrastate) and 1-800-527-9200 (interstate). For calls placed locally, please use 651 plus the extensio n referred to above. This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) FEDERAL RESERVE press release For immediate release April 17, 1980 The Federal Reserve Board today announced a temporary seasonal credit program that is designed to help small banks under liquidity pressures meet the credit needs of their communities. The practical effect of the program is to extend immediately the coverage of the seasonal borrowing privilege, heretofore limited to smaller member banks, to all small banks under simplified guidelines. This action is taken in further implementation of the provisions of the "Monetary Control Act of 1980" regarding the availability of the discount window to institutions holding transactions accounts or nonpersonal time deposits. As previously announced, by July 1, the Board expects to have more permanent guidelines in place. The seasonal program is aimed generally at banks--both member and nonmember--with less than $100 million in deposits. Seasonal credit will be granted mainly to finance increases in loans by banks operating within the qualitative guidelines of the Board's Special Credit Restraint Program and thus giving special attention to the normal financing needs of farmers and small business. Details of the seasonal program are included in the attached letter to all banks. The letter also clarifies the application of the Special Credit Restraint Program to smaller banks lending primarily to agriculture, small business, or other priority uses. The letter explains that the intent of the guidelines under the Program is to encourage banks to meet the ordinary continuing or seasonal needs of their established local customers, taking account of the special needs of small business, farmers and others. Should a bank's total lending appear to be proceeding at a pace that would exceed the 9 percent guideline on loan growth, small banks, like -2other banks, would be expected to cut back on less urgent forms of lending. In those instances where a bank is essentially confining loan expansion to priority areas, which may particularly be the case with community banks serving agricultural areas and small business, that bank is justified in exceeding the quantitative guidelines of the Special Credit Restraint Program. - Attachment 0- BOARD OF GOVERNORS OFTHE FEDERAL RESERVE SYSTEM WASHINGTON, □ . C. a O S S I PAUL A. V O L C K E R C H A I R M AN April 17, 1980 TO THE CHIEF EXECUTIVE OFFICER OF COMMERCIAL BANKS: A number of questions have risen concerning: (1) The application of the Special Credit Restraint Program to smaller banks, p a rtic u la rly those in rural and agricultural areas, with loan portfolios principally consisting of a g r i c u lt u r a l , small business, and housing paper. (2) The possible a v a i l a b i l i t y to nonmember banks of seasonal borrowing privileges a t the discount window, comparable to the established provisions for member banks, under authority of newly enacted H.R. 4986. This communication is designed to c l a r i f y these issues. Special Credit Restraint Program All conmercial banks have received, and been requested to respect, the general guidelines for bank lending set forth in the Special Credit Restraint Program. Those guidelines indicate that a primary purpose is to "meet the basic needs of established customers for normal operations, pa rtic u la rly smaller businesses, farmers, t h r i f t i n s t i t u t i o n bank customers and a g ri c u lt u ra l ly oriented correspondent banks and homebuyers with limited alte rn a tiv e sources of funds." Certain types of loans—financing speculative a c t i v i t y , takeovers, or other reasonably postponable a c t i v i t i e s or a c t i v i t i e s that do not contribute to economic effic iency—are to be discouraged. The guidelines go on to indicate t h a t , taking into account such factors as l iq u i d it y and capital positions, growth in bank loans should not generally exceed a range of 6-9 percent. The question has arisen, p a rtic u la rly among smaller banks and t h e i r customers, as to whether the quantitative guideline is designed to discourage lending to farmers or others looking to t h e i r local commercial bank for financing t h e i r ordinary production needs. The answer is no. The clear intent of the guideline is to encourage banks to meet the ordinary continuing operating or seasonal needs of t h e i r established -2- local customers, taking due account of normal standards of liq u i d it y and capital requirements within the lending bank and of the creditworthiness of the borrower. To that end, banks, as appropriate and possible, are expected to take account of the special needs of small businesses, including farmers and others. The Board is conscious that the predominant customers of many smaller banks f a l l into categories where i t is expected th a t reasonable a v a i l a b i l i t y of funds will be maintained, and no special reports under the Special Credit Restraint Program have been requested from smaller banks. Banks in that size group, lik e other banks, are expected to maintain normal lending a c t iv i ty to small businesses, farmers, and others without access to other forms of financing insofar as that lending is consistent with prudent liq u i d it y positions and capital r a t i o s . Should th at lending, looking a t 1980 as a whole, appear to be proceeding at a pace th at would press against or exceed the 6-9 percent guidelines for total lending, the bank would be expected to cut back less urgent forms of lending. These might include, for instance, unsecured personal financing, loans to finance land or other postponable capital acquisitions, p a r t i c i pations in larger business loans of correspondent banks, sales of Federal funds, and the lik e . In other words, every care should be taken to conserve available funds fo r p r i o r i ty uses, and the necessary r e s t r a i n t should fa ll on other areas. In those instances where a bank is e s s e n ti a ll y confining loan expansion to p r i o r i ty areas, which may p a rtic u la rly be the case with community banks serving agricultural areas and small businesses, that bank is j u s t i f i e d in exceeding the quantitative guidelines. Discount Window Accommodation We are aware that stringent c re d i t conditions in many areas of the country, and p a rt ic u l a rl y among community banks with limited access to central money markets, have given r i s e to concern over the seasonal a v a i l a b i l i t y of funds to agriculture or small businesses for ordinary production purposes. Contacts with bankers and others make i t evident that the a v a i l a b i l i t y of c re d i t to individual farmers or others is affected by many factors other than the liq u i d it y of individual lending i n s t i t u t i o n s . However, to the extent that a bank--member or nonmember--is unable to obtain funds for p r i o r i t y lending through ordinary funding sources, use of the discount window may be considered. To f a c i l i t a t e th is process, pending full development of more permanent guidelines fo r discount window access under the provisions of the recently passed "Monetary Control Act of 1980," a seasonal borrowing program will be made available to nonmember banks, supplementing f a c i l i t i e s already available to member banks. This program will be conducted under certain simplified c r i t e r i a providing readily calculated guidelines for -3- the use of the borrowing banks and the discount o fficers of the Federal Reserve Banks. Member banks may, a t t h e ir i n i t i a t i v e , also apply for discount window accommodation according to the same guidelines in lieu of the existing seasonal c re d i t program should they find i t more advantageous. The specifics of the program are described in the enclosure. Sincerely, Enclosure April 17, 1980 Temporary Seasonal Credit Program for Small Banks The following temporary program for seasonal lending through Reserve Bank discount windows has been established effective immediately. It is available to nonmember banks. Member banks may also choose to participate in this program instead of their established seasonal credit arrangements. By July 1, the Board expects to have adopted a more permanent set of guidelines governing all aspects of discount window administration under provisions of the new Monetary Control Act of 1980. That Act provides that depository institutions having transactions accounts or nonpersonal time deposits shall have access to the discount window on the same basis as member banks. Seasonal lending has been available to member banks for some years. Access to seasonal credit under the temporary program will be generally limited to banks with deposits of less than $100 million, though in special circumstances applications by somewhat larger banks without access to national money markets may also be considered. To participate in the program, a bank must provide evidence of liquidity pressures that make it difficult to accommodate the normal seasonal credit needs of its community. Such banks would typically have loan-deposit ratios above the average ratio for banks of similar size in the nation. The minimum gross loan-gross deposit ratio for banks to qualify for this program would normally be 68 percent. Seasonal credit will be granted to help finance increases in loans by such banks that are operating within the qualitative guidelines of the Board's Special Credit Restraint Program, and thereby giving special attention to the seasonal financing of such borrowers as farmers -2 and small businesses in the ordinary course of local business. The amount of credit available from the Federal Reserve to finance a bank's increase in loans will normally be limited to a maximum of 5 percent of its total loans outstanding at the time when the bank applies for a credit line and can show that it meets the minimum qualifications. The amount of total loans and the loan-deposit ratio should be computed as the average for the two statement weeks preceding the state ment week in which the bank applies. Thus, for example, the eligibility for seasonal credit of banks applying in the present statement week ending April 23 would be based on average loan-deposit ratios in the two statement weeks ending April 16. The total loans relevant to calculation of its maximum seasonal credit line would be the average amount of loans (excluding any sales of federal funds) in those two weeks. For banks applying in later weeks, loan totals and loan-deposit ratios would be computed from the two statement weeks preceding the later week of applica tion. A bank may draw on its seasonal line to finance no more than 70 percent of the increase in total loans from the level prevailing at the time of application. To the extent that loans subsequently fall back toward the starting level ("the base level") banks will be required to repay a proportionate share of System credit. Also, to the extent that deposits subsequently increase more than loans, a substantial portion of the excess will be expected to be used for repayment of the borrowing from the Federal Reserve. The borrowing should be entirely repaid once the loan to-deposit ratio returns to the starting figure determined at the time of application. -3- In any event, individual loans arranged under this program may be outstanding for no more than six months, but the term of the borrowing may be extended another three months under special circumstances. The surcharge above the basic discount rate does not apply to borrowing under this program. Calculation for Temporary Seasonal Credit Line with Federal Reserve Bank of Dallas (Two-week base period ending ________ , 1980) The base period for demonstrating eligibility and for cal culating the seasonal credit line is the two full state ment weeks just preceding the statement week in which the application is made. For example, for applications made in the statement week ending April 23, the base period is the two weeks ending April 16. SECTION I Date Day of Week Month Thur. Fri. Sat. Sun. Mon. 1Tues. Wed. Thur. Fri. Sat. Sun. Mon. Tues. Wed. TOTAL DAILY AVERAGE Day Year Total Loans, Gross Col. 1 Thous. Mils. Total Deposits Col. 2 Mils. Thous. 1980 1980 1980 1980 1980 1980 1980 1980 1980 1980 1980 1980 1980 1980 (Instructions to nonmember banks for completing the above table are provided on page 2 of this form and those for member banks are provided on page 3.) SECTION II 1. Ratio of daily average of total loans, gross, to total deposits (daily average of Col. 1 divided by daily average of Col. 2; report to two decimal places).... .............. - 2 - INSTRUCTIONS Item Definitions for Nonmember Banks The definitions of items on this report correspond directly to the definitions of items on the Consolidated Report of Condition as shown in the table below. For definitions and instructions for these items (as well as for the consolidation procedure), refer to the referenced items in the instruction pamphlet for the Consolidated Report of Condition. Report of Condition Items Col. 1: gross For banks that submit the Standard Version of the Consolidated Report of Condition for a Bank and Its Domestic Subsidiaries Schedule A, Item 8 Schedule A, Item 8 Asset Item 19 Asset Item 24a Total loans, Col. 2: Total deposits Note: For banks that submit the Simplified Version of the Consolidated Report of Condition for a Bank and Its Domestic Subsidiaries If data are not readily available on a daily basis that exactly meet the definitions described above, estimates are acceptable. Please be certain that gross loans exclude Federal funds sold and that total deposits exclude Federal funds purchased and other borrowings. - 3 - INSTRUCTIONS Item Definitions for Member Banks The item definition for "Total loans, gross" (Col. 1) on this report corresponds directly to the definition of "Total loans, gross" from Schedule A, Item 8 of the Consolidated Report of Condition. For the definition and instructions (as well as the consolidation procedure) per taining to this item, refer to the instruction pamphlet for the Consolidated Report of Condition. The item definition for "Total deposits" (Col. 2) on this report corresponds directly to the sum of the following items from the Report of Deposits and Vault Cash (FR 414): 1) demand deposits due to banks; 2) U.S. government demand deposits; 3) other demand deposits; 4) savings deposits authorized for automatic transfer (ATS accounts) and negotiable order of withdrawal (NOW) accounts; 5) other savings deposits (including club accounts); 6) time deposits (including the three original maturity classifications of 30 to 179 days, 180 days to less than 4 years, and 4 years or more). Refer to the instructions for the Report of Deposits and Vault Cash for the definition of these items as well as the consolidation procedure. Note: If loan data are not readily available on a daily basis that exactly meet the definitions described above, estimates are acceptable. Please be certain that gross loans exclude Federal funds sold.