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Federal
losses
posit
$4

by

selling

large

to all other
billion

sectors-in

worth-limiting
6

loss to $1 billion.
thrifts

borrow

window

certificates

and

of de-

desired

expansion

net deposit

Federal

Reserve

the

billion

thus

need

the

thrifts

at

not

the discount
sell mortgages

at a loss.7
to

created

serve and
short-term

after

securities

with

sectors

cause

to

at the

crease in deposits

Reserve

reserves,
would

result

However,
procedure

under

the

for monetary
controls

the

policy,
supply

and sale of short-term
the

Federal

of the

monetary

equal,

a $l-billion

securities
Reserve

aggregates.f
increase

its

cluded

credit

ever, roughly

sales

of

own

portfolio.

short-

To in-

rates)

lion.

Thus,

the tical

as demonstrated

T-account

monetary-policy
can and

Be-

offsetting

Reserve

are

effect on interest

the

in-

of extended

be sterilized

open-market

credit

by equal

operations

with

no

rates or money growth.

as

the purchase
in the open
limits growth
things
with

pledged
the

be affected.
ferent

ex-

8. More precisely,
the Federal
Reserve chooses
short-run
target paths for both total and nonborrowed
reserves that are believed to be consistent with the desired short-run
money path.
As noted above, when the Federal
Reserve increases reserves by lending to the thrifts through
the extended
credit program,
it simultaneously
reduces the supply of reserves by selting government securities
in the open market. In the context of the operating
procedure,
the Federal Reserve reduces its targeted level of non borrowed
reserves by the amount of the increase in reserves
attributable
to extended credit.

relative

Different

portfolio

interest
sectors

preferences.

rates could

sarily

match

the securities

however,

The securities

even

will not neces-

qualify

sold by the Fed-

impact

ever,

that

desire

seems

grows,

as

The

thrifts
assets

would,
that

the notes.
that,

with

industry

to bolster

the industry.

Under the

authority

of the Monetary

Federal
suring

as a lender

the liquidity

the cornerstone
The

extended
any

Credit

credit

retreat

from

recede

to
by

the

the

Federal
reserves

policy,

any

allow

government,

while

the whole spectrum
Thus,
these

of short-term

if MMMFs

buy

paper,

securities

for

way

terest-rate
compare

changes

serves resulting

from the program

offset

open-market

other

ment securities.

But

focuses

implement

undesired

Re-

Reserve

reserves.

Reserve
to

on

in the absence

long-term

would

be

sales of govern-

mortgages
To

all other

tional

mortgages,

Thus,

the program

sectors

mortgage
helps

preventing

is to

to sell

in figure

to hold

1.

mortgage

mortgage

rates

from

rising as much as they would have.
On a related
cannot
extended

sterilize
credit.

point,
an

the Federal
unlimited

At any

point

generally

tively

stable

supply

retaining
accounts

additional

mortgage

short-term
many

in time,

of
it

net
then

Please send mailing label to the Research Department,
Federal Reserve Bank of Cleveland, P.O. Box 6387, Cleveland,

rates

in capital

However,
are

associations,

loan

rowed
first

or

when

higher

than

an additional

Most

institutions

pensate

for

deposit

large-denomination
negotiable
retail

time

certificates

repurchase

time deposits,

of deposit

agreements

outflows
thrifts

are

may

large

exhaust

to sell mortgage

more

to statistics
thrift

compiled

by the

savings deposit

interest

rates that thrifts

of the Federal

Reserve

industry

experienced

$27.2-billion

net

by

this

through

drain.

August

for the inHowever,

as well as on borrowing

regulatory

from

agencies and private sources,

the maximum

Regulation

the

must pay on these

Q

allows;

savings deposit

rate

in most cases the

an

savings

during the first eight months

The liquidity

that

In fact,

sold $29.9 billion of these

dustry's

instruments,

including
(CDs), and

(RPs).

January

industry

outflow

deposits,

compensating

of Governors

l. Thrift
sociations,

savings

than

deposit

the

Federal

have been able to com-

their

from

higher-yielding

bor-

during

from

1981,

funds from their

buy

could be forced out of business.

squeezed

1981

by selling small-denomination

far exceed

of 1981.

example,

$13 billion
of

their

Home Loan Banks (FHLBs).

some thrifts

outflow

for

instruments

to

from

insured savings

withdraw

and be forced

the

heavily

Federally

eigh t months

both

been

OH 44101.

lending.

and

on a relaand earn

borrowed

agencies.

assets at a loss; if the loss is large enough,

deposit

o
o

rates on de-

that are used to support

some

unprecedented
Address correction requested
Correct as shown
Remove from mailing list

are

have

regulatory

the thrift

accounts
If

When

many

as they have been in 1981,

depositors

System,

Reserve

amount

rates,

interest

can depend
of deposits

interest

long-term

and people

mortgages

some of them

net-worth

wish to

funds."

on

than short-term
thrifts

Board

addi-

mortgage
rates

posits,

According

yields must rise.
stabilize

interest

their liquidity

Presumably,

have been forced

at a loss, as shown

induce

markets,

credit

of any program.

greater

serves as an
who

liquid deposits

who wish to borrow

enough,

have happened

people

in re-

savings

in-

primarily

between

save in relatively

assets.

the relative

of extended

would

on

industry

mone-

BULK RATE
U.S. Postage Paid
Cleveland, OH
Permit No. 385

Federal Reserve Bank of Cleveland
Research Department
P.O. Box 6387
Cleveland,OH
44101

securities.

it with what would

many thrifts

rates

The thrift
intermediary

profits,

to fall relative

of viewing

impact

in

CDs and

example,
tend

trade

securities.

negotiable

would

to those on government
Another

MMMFs

by john B. Carlson and K.J. Kowalewski

levels.

Federal
of

How-

through

not

interest

pre-inflationary

availability

because

will

of the Federal

would

the

controlling

Thrifts, Extended Credit, and Monetary Policy

the disinflationary

program

eventually

as-

that is

viability.

program

extended

increases

thrifts

eral Reserve. Specifically,
the Federal Reserve trades primarily in obligations
of the
U.S.

~£Q2QomicCommentary

Act, the

of last resort,

to solvent

of their continued

monetary-policy

tary

Control

Reserve stands ready to play an active

to

would

7, 1981

under

developed

rates

or

is currently

have been

the

with

limit

of programs

that

sterilize

credit

thrift

serve

so could

to

the upper

would be tested.

seige, and a number

be

is no guarantee,

behind

unlikely

could

Thus,

ability

There

pledge

as collateral
it

credit

distressed
to,

of the assets

of extended

sales.

currencies

credit

effort

September

Conclusion

force

some

notes.

Reserve's

open-market

may have dif-

that MMMFs want to purchase

the

of extended

Federal

pledged

sales.

that

the extended

behind

the reserve

In actuality,

commercial
6. Although
it has been assumed that all other
sectors purchased
the CDs, MMMFs could also
purchase them without
affecting
the results discussed in this section,

It is conceivable
used to secure

had

to aid the thrifts,

to a sterilization

part if needed

a total of $24.6 billion

available for open-market

and

assets

for open-market

in foreign

making

Re-

available

Additional

Reserve

its assets denominated

Federal

billion

available

Federal

as collateral,

Caveats

the Federal

2, 1981,

hypo-

undesired

volume

operating

Other

would

in this

framework,
effects

of

net

Reserve by $1 bil-

How-

of these assets

behind

$18.2
sales.

been

in-

of such assets.

leaving

open-market

portfolio

billion

as collateral

if the

at the Federal

billion
$110.5

serve

sales

and reduce

Banks'

was pledged

of deposits

securities

Reserve

notes,

programs

market

In June 1981, for example,

$128.7

purchase

in deposits

7. For the week ended September
tended credit averaged $191 million.

from

$1 bill ion
by

it can sell in the open

Federal

have

of reserves

of reserves through

open-market

securities

the

could

the primary means of achieving targets for
growth of money and credit. By adjusting
the supply

the

by extended

stock of assets (dollar-denom-

for this purpose.

for

in additional

current

line in figure 2,

offsets

created

offset.

that

holdings

non-interest-

Federal

immediately

inated)

of short-term

interest-

(interest

would

that the

has a limited

in assets

reserves of the same amount.

market,

Federal

an un-

of bank reserves

below the dotted

of reserves
term

represent

holdings

the

the

of
Re-

have to rise (fail).

depository-institution

Reserve

the

would

These sales increase all other sectors'

the funds.
trade

prices

would

deposits

Federal

MMMFs

for

deposits,

the securities

form

up as an increase

securities

bearing

the

at the

sectors

these

bearing

take

deposits

show

of all other
duce

As shown

simultaneous

Loans
newly

Reserve

this example,

To cover this net outflow,

$1

the Federal

Reserve Bank of Cleveland

of many

thrifts

has

deposit

loss,

and

institutions
include savings and loan asmutual savings banks, and credit unions.

john Carlson and K.j. Kowalewski are economists
with the Federal Reserve Bank of Cleveland.
The views stated herein are those of the authors
and not necessarily those of the Federal Reserve
Bank of Cleveland or of the Board of Governors
of the Federal Reserve System.
NOTE:
No Economic Commentary was published
on August 24, 1981.

rates exceed effective
portfolios
and

net income

fact,

net worth

clined,

yields on the mortgage

of thrifts.2

As a result,

have fallen

drastically.

are widely
industry
grams

abound,

in-

sales of retail

fell $2.8

in place

of the

and

ticipating

October

is designed

to

Insurance

to aid such

tions

in return
equity

to pay back the FSLlC's

securities

injec-

securities.

are essentially

agree-

loans with

when and if the distressed

do so, but the securities
program

would be counted

as

1981,

the

Corporation
and

equal

home

their

conform

Home

(FHLMC)

other

value

Beginning on October

Federal

old,
to

amounts

certificates.
ered, mainly

lenders

of

Although
because

5,

thrifts
at book

mortgages

that

requirements

for

FH LMC
earnings

tax-exempt
maturities

as part

program

institutions

2. As of December 31, 1980, interest-rate ceilings
on thrift time deposits varied from 6 percent to
8 percent,
depending
on maturity.
During July
1981 rates on six-month money-market
certificates
averaged 14.7 percent; rates on two and one-half
year small-saver certificates
were fixed at 12 percent; rates on large CDs and retail RPs varied
around
the three-month
Treasury
bill auction
rate of 14.7 percent;
and rates on FH LB advances varied from 16.25 percent
for five-year
fixed-rate
loans to 20.5 percent
for short-term
variable-rate
loans. By contrast,
interest
earned
on mortgages held by FSLlC-insured
5& Ls as a
percent of average mortgage
balances was 9.44
percent during the second half of 1980.

how

monetary

Federal

Re-

discount

window.

solvent

Reserve

capital

the

discusses

new extended

it affects

the

credit

(MMMF)

lacking

Fed-

program

implementation

of

Effects

amine

credit
the

the

potential

possible

of the thrift-industry
3. The first $1,000
is exem pt from federal

role of the

their

than

afford

alternative

mortgage

terms

while solvent,

to borrow
Home
then

T-accounts.4

of

needed

posit

loss, thrifts
value

and

To

are
rates.

of the first

implications

problem

in an extreme

($2,000
for
incom e tax.

joint

returns)

and

net deposit
the

thrift

loss in this example

outflows,

net outflow

If it appeared
means

use the monies

the

August,

and

term

these

is $5 billion,
of funds

counts.

making

had

with deposit
industry

it difficult

RPs as they
at

is

for
time

mature.

thrifts

In

gained

short-term

Credit

The Depository
and Monetary
izes Federal

4. A T-account
reflects a change in a balance
sheet, typically as a result of a single transaction.
In this Economic Commentary, T-accounts
are
used to illustrate
net changes in balance sheets
resulting from portfolio shifts.

accounts-

to

depository

Control
Reserve

Deregulation

Act of 1980 authorBanks to extend

institutions

that

offer

credit
non-

5. Although
not shown in the T-accounts,
thrifts
have been experiencing earnings losses that also are
written off the capital account and absorb liquidity.

deposits,
service

the Federal

-5
+4

-5
+1

+1
-1

holdings

nego-

funds

sales,

with

operating

new

security

credit

(ATS)

Reserve's

ac-

Regu-

can be made avail-

of cash equivalents,
to

minimum
needs,

of loan portfolios
cumstances.

rate

to accommodate

the needs

tended

credit

tory

institutions

may be experiencing

to

14 percent

to

difficulties
market

that

adjusting
conditions

particularly

over

to

in severe

usual

credit

sources.

mined

that

an

credit

of time

institutions

period,

cent thereafter

Once

institution
could

reasonable

flows from
has

their

special
been

has

60 days,

for the next 90 days, and 16 peron their outstanding
collateral

in-

deter-

a liquidity
for a per-

Monetary-Policy

balance.

for extended

credit

Reserve Bank.

The

mechanics

program

shares.
credit

of

that

deposits

However,
program
many

are

trim

can

at

recoup

because

least

of

withdraw
the

part

$5

MMMF
extended

maintain
the

credit

2. Again,

to purchase

helps

confidence,

extended

in figure

households

in thrift

Borrowing
their

the

are illustrated

suppose
billion

Implications

up to 12 months.
to

borrowers

that
and is

despite

be granted

expected

requires

In addition,

including

for the ex-

for the first

must be held by the Federal

pressures

it

program

loss.

distress

from

expansion

under .special cir-

structure

for extended

liquidity

fun1s

sources,

dustry

iod

a longer

must demonstrate

sustained

to maintain

problem,

15 percent

financial

(such as loss of deposits)
efforts

money-

be eligible

an institution

pay

changing

at times of deposit

In general,

of deposi-

to refrain
and

except

The

such as federal
levels consistent

and

investments

able

experiencing

Institutions

+5

MMMF shares
Personal deposits
at thrifts
Large COS at
thrifts
Short-term
securities
Deposits at
Federal
Reserve

trans-

(NOW) accounts,

transfer

Under

credit,

Program

or reservable

demand

automatic

it is not

Extended

deposits

lation A, extended

totaled

about $64 billion.

$1-

Money-

time

tiable order of withdrawal
and

in the thrift

liabilities

for the

that thrifts

of coping

confidence

personal
actions

chosen

deposits

with

Shares

per dollar

rise with the scale

acquire

the

+5

Short-term
securities

Short-term
securities
Deposits at
Federal
Reserve

fewer

outflows.i'

potential

no effective

sec-

rates, sug-

write-off

of magnitude

much greater.

-1

Deposits

rates thus would

to short-term

sales would

order

-1

reduc-

and

to roll over large-denomination

sell mortgages

acquire

the

Short-term
securities

+1

Deposits

must be in-

mortgages

assets. Mortgage

that

The

sectors

be weakened,

writing

to

more

tend to rise relative
gesting

+1

assets and thrift deposits.

all other

to hold

short-term

and $5-billion

thrifts

account.

sales

duced

that

Discount window
borrowing

in MMMF

might

of $6 billion,

share

tions in short-term
Also note

but

+4
+1

Federal Reserve

sectors
by the

of all bther

increases

net changes

loss off the capital
funds

mortgages

of thrift-deposit

to cover the $5 billion of demust

and

Loan

value

rates

the portfolio
$5-billion

of mortgage

they

book

Thus
shows

from

sold.

1 shows the resulting

thrifts.

is to sell

contract

loss is $1 billion

funds

an

large CDs.

interest

mortgage

no

markets,

assets,

market

thrifts

-5

All other sectors
banks,

assets from all other sectors. These
in turn absorb the mortgages sold

shares

it is useful to ex-

portfolio

+5

--

Sup-

MMMFs

Personal deposits
Large COS
Discount window
borrowing

a. Includes households,
commercial
corporate and noncorporate
firms.

tors

sell and

at a loss from
the

this

Figure

through

to

(e.g., Federal

only

market-mutual

program,

Thrifts

-5
+5
-5

Personal deposits
MMMF shares
Short-term
securities
Mortgages

fund

they

money

assets

$6 billion of mortgages

book

To appreciate

or cannot

current

Assume

in

that

for marketing

sources

because
higher

to the

liquid
basis

Banks). The

acquire

of the affected

also that these thrifts,

industry

billion

extended

both

Suppose

and

to the point

have access

established

thrifts

of the same amount.

pose that the liquidity

mort-

policy.

Portfolio

shares

has deteriorated

This

the

at

money-market-mutual

be sold

Reserve's

policy.

deposited

higher-yielding

must

fear that this

monetary

of funds

pro-

in

+5

Shares

case. Consider
a hypothetical
example
in
which households withdraw (net) $5 billion

of

losses and

Federal

-1

,

ir

some

confidence

analysts

Commentary

credit

to forced

investor

Some

Banks.

+5

Short·term
securities

are unable

problems

extended

attendant

is

depository

liquidity

-5

Personal deposits
Capital account

MMMFs

longer

note.3

of the

conduct

eral Reserve's
and

to

yield

which

will impair

Economic

equal

facility,

reinforces

to

one-

credit

an alternative

thrifts.

31,

with

is the

Reserve's

gage sales with

ability

and com-

December

Treasury

allows

gram provides

to

housing

rates

from the Federal

The Federal

program

thrifts

interest

experiencing

to borrow

are

flows

the

until

program

extended

solvent

the yield of the partici-

at

fourth

thereby

1981.

certificates

on the latest one-year
serve's

1,

deposit

of the annual investment

70 percent

participation
low-

to offer,

widely

was broadened
and

All other sectorsa

par-

by the All

October

act permits

1982,

The

most

to boost
banks

banks

year

the

act later

The

-6

Mortgages

ruling by

permits

Fig.2 T·Account Effects of Extended Credit
Billions of dollars

Thrifts

after the swap.

effective

mercial

This

Mortgage

allow

to swap

low-rate

FHLMC

Loan

will

industry.

available

is designed to strengthen

S&L asset portfolios.

Act,

commercial

S&Ls can

net worth for FHLB regulations.
Another

Savers'

Fig. 1 The Thrift Problem: An Illustration
Billions of dollars

the book value

was authorized

this

for special equity

ments

program

of thrifts,

(FSLlC)

for

Service

perhaps

that

capital

These

known

and

(S&Ls)

Corporation
S&Ls with

Revenue

designed

drains. The Federal Savings

the

a favorable

of their asset portfolios

aid

because

as collateral

S&Ls to maintain

third

mort-

RPs and sold to institutional

Internal

A

swapped

used

In addition,

Originally

pressures

the

is bolstered

large

liquidity

of

be

very

of

associations

plans

interest

the

industry

will be at least 25 basis

that

can

investors.

of 1981.
to aid the

early

ratios
severe

owing to deposit
Loan

by

programs

loan

are experiencing
and

thrift

Proposals

net-worth

savings

liquidity

and at least four new pro-

be

One

buttress

gages,

of all federally

the

recognized.

will

1981.

of

below

certificates

billion during the first eight months
troubles

certificates

de-

savings and loan associations

The

In

pation
points

actually

at many thrifts

and the net worth

sured

cash flow

investor

solvent

thrifts

of their

deposit

rates exceed effective
portfolios
and

net income

fact,

net worth

clined,

yields on the mortgage

of thrifts.2

As a result,

have fallen

drastically.

are widely
industry
grams

abound,

in-

sales of retail

fell $2.8

in place

of the

and

ticipating

October

is designed

to

Insurance

to aid such

tions

in return
equity

to pay back the FSLlC's

securities

injec-

securities.

are essentially

agree-

loans with

when and if the distressed

do so, but the securities
program

would be counted

as

1981,

the

Corporation
and

equal

home

their

conform

Home

(FHLMC)

other

value

Beginning on October

Federal

old,
to

amounts

certificates.
ered, mainly

lenders

of

Although
because

5,

thrifts
at book

mortgages

that

requirements

for

FH LMC
earnings

tax-exempt
maturities

as part

program

institutions

2. As of December 31, 1980, interest-rate ceilings
on thrift time deposits varied from 6 percent to
8 percent,
depending
on maturity.
During July
1981 rates on six-month money-market
certificates
averaged 14.7 percent; rates on two and one-half
year small-saver certificates
were fixed at 12 percent; rates on large CDs and retail RPs varied
around
the three-month
Treasury
bill auction
rate of 14.7 percent;
and rates on FH LB advances varied from 16.25 percent
for five-year
fixed-rate
loans to 20.5 percent
for short-term
variable-rate
loans. By contrast,
interest
earned
on mortgages held by FSLlC-insured
5& Ls as a
percent of average mortgage
balances was 9.44
percent during the second half of 1980.

how

monetary

Federal

Re-

discount

window.

solvent

Reserve

capital

the

discusses

new extended

it affects

the

credit

(MMMF)

lacking

Fed-

program

implementation

of

Effects

amine

credit
the

the

potential

possible

of the thrift-industry
3. The first $1,000
is exem pt from federal

role of the

their

than

afford

alternative

mortgage

terms

while solvent,

to borrow
Home
then

T-accounts.4

of

needed

posit

loss, thrifts
value

and

To

are
rates.

of the first

implications

problem

in an extreme

($2,000
for
incom e tax.

joint

returns)

and

net deposit
the

thrift

loss in this example

outflows,

net outflow

If it appeared
means

use the monies

the

August,

and

term

these

is $5 billion,
of funds

counts.

making

had

with deposit
industry

it difficult

RPs as they
at

is

for
time

mature.

thrifts

In

gained

short-term

Credit

The Depository
and Monetary
izes Federal

4. A T-account
reflects a change in a balance
sheet, typically as a result of a single transaction.
In this Economic Commentary, T-accounts
are
used to illustrate
net changes in balance sheets
resulting from portfolio shifts.

accounts-

to

depository

Control
Reserve

Deregulation

Act of 1980 authorBanks to extend

institutions

that

offer

credit
non-

5. Although
not shown in the T-accounts,
thrifts
have been experiencing earnings losses that also are
written off the capital account and absorb liquidity.

deposits,
service

the Federal

-5
+4

-5
+1

+1
-1

holdings

nego-

funds

sales,

with

operating

new

security

credit

(ATS)

Reserve's

ac-

Regu-

can be made avail-

of cash equivalents,
to

minimum
needs,

of loan portfolios
cumstances.

rate

to accommodate

the needs

tended

credit

tory

institutions

may be experiencing

to

14 percent

to

difficulties
market

that

adjusting
conditions

particularly

over

to

in severe

usual

credit

sources.

mined

that

an

credit

of time

institutions

period,

cent thereafter

Once

institution
could

reasonable

flows from
has

their

special
been

has

60 days,

for the next 90 days, and 16 peron their outstanding
collateral

in-

deter-

a liquidity
for a per-

Monetary-Policy

balance.

for extended

credit

Reserve Bank.

The

mechanics

program

shares.
credit

of

that

deposits

However,
program
many

are

trim

can

at

recoup

because

least

of

withdraw
the

part

$5

MMMF
extended

maintain
the

credit

2. Again,

to purchase

helps

confidence,

extended

in figure

households

in thrift

Borrowing
their

the

are illustrated

suppose
billion

Implications

up to 12 months.
to

borrowers

that
and is

despite

be granted

expected

requires

In addition,

including

for the ex-

for the first

must be held by the Federal

pressures

it

program

loss.

distress

from

expansion

under .special cir-

structure

for extended

liquidity

fun1s

sources,

dustry

iod

a longer

must demonstrate

sustained

to maintain

problem,

15 percent

financial

(such as loss of deposits)
efforts

money-

be eligible

an institution

pay

changing

at times of deposit

In general,

of deposi-

to refrain
and

except

The

such as federal
levels consistent

and

investments

able

experiencing

Institutions

+5

MMMF shares
Personal deposits
at thrifts
Large COS at
thrifts
Short-term
securities
Deposits at
Federal
Reserve

trans-

(NOW) accounts,

transfer

Under

credit,

Program

or reservable

demand

automatic

it is not

Extended

deposits

lation A, extended

totaled

about $64 billion.

$1-

Money-

time

tiable order of withdrawal
and

in the thrift

liabilities

for the

that thrifts

of coping

confidence

personal
actions

chosen

deposits

with

Shares

per dollar

rise with the scale

acquire

the

+5

Short-term
securities

Short-term
securities
Deposits at
Federal
Reserve

fewer

outflows.i'

potential

no effective

sec-

rates, sug-

write-off

of magnitude

much greater.

-1

Deposits

rates thus would

to short-term

sales would

order

-1

reduc-

and

to roll over large-denomination

sell mortgages

acquire

the

Short-term
securities

+1

Deposits

must be in-

mortgages

assets. Mortgage

that

The

sectors

be weakened,

writing

to

more

tend to rise relative
gesting

+1

assets and thrift deposits.

all other

to hold

short-term

and $5-billion

thrifts

account.

sales

duced

that

Discount window
borrowing

in MMMF

might

of $6 billion,

share

tions in short-term
Also note

but

+4
+1

Federal Reserve

sectors
by the

of all bther

increases

net changes

loss off the capital
funds

mortgages

of thrift-deposit

to cover the $5 billion of demust

and

Loan

value

rates

the portfolio
$5-billion

of mortgage

they

book

Thus
shows

from

sold.

1 shows the resulting

thrifts.

is to sell

contract

loss is $1 billion

funds

an

large CDs.

interest

mortgage

no

markets,

assets,

market

thrifts

-5

All other sectors
banks,

assets from all other sectors. These
in turn absorb the mortgages sold

shares

it is useful to ex-

portfolio

+5

--

Sup-

MMMFs

Personal deposits
Large COS
Discount window
borrowing

a. Includes households,
commercial
corporate and noncorporate
firms.

tors

sell and

at a loss from
the

this

Figure

through

to

(e.g., Federal

only

market-mutual

program,

Thrifts

-5
+5
-5

Personal deposits
MMMF shares
Short-term
securities
Mortgages

fund

they

money

assets

$6 billion of mortgages

book

To appreciate

or cannot

current

Assume

in

that

for marketing

sources

because
higher

to the

liquid
basis

Banks). The

acquire

of the affected

also that these thrifts,

industry

billion

extended

both

Suppose

and

to the point

have access

established

thrifts

of the same amount.

pose that the liquidity

mort-

policy.

Portfolio

shares

has deteriorated

This

the

at

money-market-mutual

be sold

Reserve's

policy.

deposited

higher-yielding

must

fear that this

monetary

of funds

pro-

in

+5

Shares

case. Consider
a hypothetical
example
in
which households withdraw (net) $5 billion

of

losses and

Federal

-1

,

ir

some

confidence

analysts

Commentary

credit

to forced

investor

Some

Banks.

+5

Short·term
securities

are unable

problems

extended

attendant

is

depository

liquidity

-5

Personal deposits
Capital account

MMMFs

longer

note.3

of the

conduct

eral Reserve's
and

to

yield

which

will impair

Economic

equal

facility,

reinforces

to

one-

credit

an alternative

thrifts.

31,

with

is the

Reserve's

gage sales with

ability

and com-

December

Treasury

allows

gram provides

to

housing

rates

from the Federal

The Federal

program

thrifts

interest

experiencing

to borrow

are

flows

the

until

program

extended

solvent

the yield of the partici-

at

fourth

thereby

1981.

certificates

on the latest one-year
serve's

1,

deposit

of the annual investment

70 percent

participation
low-

to offer,

widely

was broadened
and

All other sectorsa

par-

by the All

October

act permits

1982,

The

most

to boost
banks

banks

year

the

act later

The

-6

Mortgages

ruling by

permits

Fig.2 T·Account Effects of Extended Credit
Billions of dollars

Thrifts

after the swap.

effective

mercial

This

Mortgage

allow

to swap

low-rate

FHLMC

Loan

will

industry.

available

is designed to strengthen

S&L asset portfolios.

Act,

commercial

S&Ls can

net worth for FHLB regulations.
Another

Savers'

Fig. 1 The Thrift Problem: An Illustration
Billions of dollars

the book value

was authorized

this

for special equity

ments

program

of thrifts,

(FSLlC)

for

Service

perhaps

that

capital

These

known

and

(S&Ls)

Corporation
S&Ls with

Revenue

designed

drains. The Federal Savings

the

a favorable

of their asset portfolios

aid

because

as collateral

S&Ls to maintain

third

mort-

RPs and sold to institutional

Internal

A

swapped

used

In addition,

Originally

pressures

the

is bolstered

large

liquidity

of

be

very

of

associations

plans

interest

the

industry

will be at least 25 basis

that

can

investors.

of 1981.
to aid the

early

ratios
severe

owing to deposit
Loan

by

programs

loan

are experiencing
and

thrift

Proposals

net-worth

savings

liquidity

and at least four new pro-

be

One

buttress

gages,

of all federally

the

recognized.

will

1981.

of

below

certificates

billion during the first eight months
troubles

certificates

de-

savings and loan associations

The

In

pation
points

actually

at many thrifts

and the net worth

sured

cash flow

investor

solvent

thrifts

of their

deposit

rates exceed effective
portfolios
and

net income

fact,

net worth

clined,

yields on the mortgage

of thrifts.2

As a result,

have fallen

drastically.

are widely
industry
grams

abound,

in-

sales of retail

fell $2.8

in place

of the

and

ticipating

October

is designed

to

Insurance

to aid such

tions

in return
equity

to pay back the FSLlC's

securities

injec-

securities.

are essentially

agree-

loans with

when and if the distressed

do so, but the securities
program

would be counted

as

1981,

the

Corporation
and

equal

home

their

conform

Home

(FHLMC)

other

value

Beginning on October

Federal

old,
to

amounts

certificates.
ered, mainly

lenders

of

Although
because

5,

thrifts
at book

mortgages

that

requirements

for

FH LMC
earnings

tax-exempt
maturities

as part

program

institutions

2. As of December 31, 1980, interest-rate ceilings
on thrift time deposits varied from 6 percent to
8 percent,
depending
on maturity.
During July
1981 rates on six-month money-market
certificates
averaged 14.7 percent; rates on two and one-half
year small-saver certificates
were fixed at 12 percent; rates on large CDs and retail RPs varied
around
the three-month
Treasury
bill auction
rate of 14.7 percent;
and rates on FH LB advances varied from 16.25 percent
for five-year
fixed-rate
loans to 20.5 percent
for short-term
variable-rate
loans. By contrast,
interest
earned
on mortgages held by FSLlC-insured
5& Ls as a
percent of average mortgage
balances was 9.44
percent during the second half of 1980.

how

monetary

Federal

Re-

discount

window.

solvent

Reserve

capital

the

discusses

new extended

it affects

the

credit

(MMMF)

lacking

Fed-

program

implementation

of

Effects

amine

credit
the

the

potential

possible

of the thrift-industry
3. The first $1,000
is exem pt from federal

role of the

their

than

afford

alternative

mortgage

terms

while solvent,

to borrow
Home
then

T-accounts.4

of

needed

posit

loss, thrifts
value

and

To

are
rates.

of the first

implications

problem

in an extreme

($2,000
for
incom e tax.

joint

returns)

and

net deposit
the

thrift

loss in this example

outflows,

net outflow

If it appeared
means

use the monies

the

August,

and

term

these

is $5 billion,
of funds

counts.

making

had

with deposit
industry

it difficult

RPs as they
at

is

for
time

mature.

thrifts

In

gained

short-term

Credit

The Depository
and Monetary
izes Federal

4. A T-account
reflects a change in a balance
sheet, typically as a result of a single transaction.
In this Economic Commentary, T-accounts
are
used to illustrate
net changes in balance sheets
resulting from portfolio shifts.

accounts-

to

depository

Control
Reserve

Deregulation

Act of 1980 authorBanks to extend

institutions

that

offer

credit
non-

5. Although
not shown in the T-accounts,
thrifts
have been experiencing earnings losses that also are
written off the capital account and absorb liquidity.

deposits,
service

the Federal

-5
+4

-5
+1

+1
-1

holdings

nego-

funds

sales,

with

operating

new

security

credit

(ATS)

Reserve's

ac-

Regu-

can be made avail-

of cash equivalents,
to

minimum
needs,

of loan portfolios
cumstances.

rate

to accommodate

the needs

tended

credit

tory

institutions

may be experiencing

to

14 percent

to

difficulties
market

that

adjusting
conditions

particularly

over

to

in severe

usual

credit

sources.

mined

that

an

credit

of time

institutions

period,

cent thereafter

Once

institution
could

reasonable

flows from
has

their

special
been

has

60 days,

for the next 90 days, and 16 peron their outstanding
collateral

in-

deter-

a liquidity
for a per-

Monetary-Policy

balance.

for extended

credit

Reserve Bank.

The

mechanics

program

shares.
credit

of

that

deposits

However,
program
many

are

trim

can

at

recoup

because

least

of

withdraw
the

part

$5

MMMF
extended

maintain
the

credit

2. Again,

to purchase

helps

confidence,

extended

in figure

households

in thrift

Borrowing
their

the

are illustrated

suppose
billion

Implications

up to 12 months.
to

borrowers

that
and is

despite

be granted

expected

requires

In addition,

including

for the ex-

for the first

must be held by the Federal

pressures

it

program

loss.

distress

from

expansion

under .special cir-

structure

for extended

liquidity

fun1s

sources,

dustry

iod

a longer

must demonstrate

sustained

to maintain

problem,

15 percent

financial

(such as loss of deposits)
efforts

money-

be eligible

an institution

pay

changing

at times of deposit

In general,

of deposi-

to refrain
and

except

The

such as federal
levels consistent

and

investments

able

experiencing

Institutions

+5

MMMF shares
Personal deposits
at thrifts
Large COS at
thrifts
Short-term
securities
Deposits at
Federal
Reserve

trans-

(NOW) accounts,

transfer

Under

credit,

Program

or reservable

demand

automatic

it is not

Extended

deposits

lation A, extended

totaled

about $64 billion.

$1-

Money-

time

tiable order of withdrawal
and

in the thrift

liabilities

for the

that thrifts

of coping

confidence

personal
actions

chosen

deposits

with

Shares

per dollar

rise with the scale

acquire

the

+5

Short-term
securities

Short-term
securities
Deposits at
Federal
Reserve

fewer

outflows.i'

potential

no effective

sec-

rates, sug-

write-off

of magnitude

much greater.

-1

Deposits

rates thus would

to short-term

sales would

order

-1

reduc-

and

to roll over large-denomination

sell mortgages

acquire

the

Short-term
securities

+1

Deposits

must be in-

mortgages

assets. Mortgage

that

The

sectors

be weakened,

writing

to

more

tend to rise relative
gesting

+1

assets and thrift deposits.

all other

to hold

short-term

and $5-billion

thrifts

account.

sales

duced

that

Discount window
borrowing

in MMMF

might

of $6 billion,

share

tions in short-term
Also note

but

+4
+1

Federal Reserve

sectors
by the

of all bther

increases

net changes

loss off the capital
funds

mortgages

of thrift-deposit

to cover the $5 billion of demust

and

Loan

value

rates

the portfolio
$5-billion

of mortgage

they

book

Thus
shows

from

sold.

1 shows the resulting

thrifts.

is to sell

contract

loss is $1 billion

funds

an

large CDs.

interest

mortgage

no

markets,

assets,

market

thrifts

-5

All other sectors
banks,

assets from all other sectors. These
in turn absorb the mortgages sold

shares

it is useful to ex-

portfolio

+5

--

Sup-

MMMFs

Personal deposits
Large COS
Discount window
borrowing

a. Includes households,
commercial
corporate and noncorporate
firms.

tors

sell and

at a loss from
the

this

Figure

through

to

(e.g., Federal

only

market-mutual

program,

Thrifts

-5
+5
-5

Personal deposits
MMMF shares
Short-term
securities
Mortgages

fund

they

money

assets

$6 billion of mortgages

book

To appreciate

or cannot

current

Assume

in

that

for marketing

sources

because
higher

to the

liquid
basis

Banks). The

acquire

of the affected

also that these thrifts,

industry

billion

extended

both

Suppose

and

to the point

have access

established

thrifts

of the same amount.

pose that the liquidity

mort-

policy.

Portfolio

shares

has deteriorated

This

the

at

money-market-mutual

be sold

Reserve's

policy.

deposited

higher-yielding

must

fear that this

monetary

of funds

pro-

in

+5

Shares

case. Consider
a hypothetical
example
in
which households withdraw (net) $5 billion

of

losses and

Federal

-1

,

ir

some

confidence

analysts

Commentary

credit

to forced

investor

Some

Banks.

+5

Short·term
securities

are unable

problems

extended

attendant

is

depository

liquidity

-5

Personal deposits
Capital account

MMMFs

longer

note.3

of the

conduct

eral Reserve's
and

to

yield

which

will impair

Economic

equal

facility,

reinforces

to

one-

credit

an alternative

thrifts.

31,

with

is the

Reserve's

gage sales with

ability

and com-

December

Treasury

allows

gram provides

to

housing

rates

from the Federal

The Federal

program

thrifts

interest

experiencing

to borrow

are

flows

the

until

program

extended

solvent

the yield of the partici-

at

fourth

thereby

1981.

certificates

on the latest one-year
serve's

1,

deposit

of the annual investment

70 percent

participation
low-

to offer,

widely

was broadened
and

All other sectorsa

par-

by the All

October

act permits

1982,

The

most

to boost
banks

banks

year

the

act later

The

-6

Mortgages

ruling by

permits

Fig.2 T·Account Effects of Extended Credit
Billions of dollars

Thrifts

after the swap.

effective

mercial

This

Mortgage

allow

to swap

low-rate

FHLMC

Loan

will

industry.

available

is designed to strengthen

S&L asset portfolios.

Act,

commercial

S&Ls can

net worth for FHLB regulations.
Another

Savers'

Fig. 1 The Thrift Problem: An Illustration
Billions of dollars

the book value

was authorized

this

for special equity

ments

program

of thrifts,

(FSLlC)

for

Service

perhaps

that

capital

These

known

and

(S&Ls)

Corporation
S&Ls with

Revenue

designed

drains. The Federal Savings

the

a favorable

of their asset portfolios

aid

because

as collateral

S&Ls to maintain

third

mort-

RPs and sold to institutional

Internal

A

swapped

used

In addition,

Originally

pressures

the

is bolstered

large

liquidity

of

be

very

of

associations

plans

interest

the

industry

will be at least 25 basis

that

can

investors.

of 1981.
to aid the

early

ratios
severe

owing to deposit
Loan

by

programs

loan

are experiencing
and

thrift

Proposals

net-worth

savings

liquidity

and at least four new pro-

be

One

buttress

gages,

of all federally

the

recognized.

will

1981.

of

below

certificates

billion during the first eight months
troubles

certificates

de-

savings and loan associations

The

In

pation
points

actually

at many thrifts

and the net worth

sured

cash flow

investor

solvent

thrifts

of their

deposit

Federal
losses
posit
$4

by

selling

large

to all other
billion

sectors-in

worth-limiting
6

loss to $1 billion.
thrifts

borrow

window

certificates

and

of de-

desired

expansion

net deposit

Federal

Reserve

the

billion

thus

need

the

thrifts

at

not

the discount
sell mortgages

at a loss.7
to

created

serve and
short-term

after

securities

with

sectors

cause

to

at the

crease in deposits

Reserve

reserves,
would

result

However,
procedure

under

the

for monetary
controls

the

policy,
supply

and sale of short-term
the

Federal

of the

monetary

equal,

a $l-billion

securities
Reserve

aggregates.f
increase

its

cluded

credit

ever, roughly

sales

of

own

portfolio.

short-

To in-

rates)

lion.

Thus,

the tical

as demonstrated

T-account

monetary-policy
can and

Be-

offsetting

Reserve

are

effect on interest

the

in-

of extended

be sterilized

open-market

credit

by equal

operations

with

no

rates or money growth.

as

the purchase
in the open
limits growth
things
with

pledged
the

be affected.
ferent

ex-

8. More precisely,
the Federal
Reserve chooses
short-run
target paths for both total and nonborrowed
reserves that are believed to be consistent with the desired short-run
money path.
As noted above, when the Federal
Reserve increases reserves by lending to the thrifts through
the extended
credit program,
it simultaneously
reduces the supply of reserves by selting government securities
in the open market. In the context of the operating
procedure,
the Federal Reserve reduces its targeted level of non borrowed
reserves by the amount of the increase in reserves
attributable
to extended credit.

relative

Different

portfolio

interest
sectors

preferences.

rates could

sarily

match

the securities

however,

The securities

even

will not neces-

qualify

sold by the Fed-

impact

ever,

that

desire

seems

grows,

as

The

thrifts
assets

would,
that

the notes.
that,

with

industry

to bolster

the industry.

Under the

authority

of the Monetary

Federal
suring

as a lender

the liquidity

the cornerstone
The

extended
any

Credit

credit

retreat

from

recede

to
by

the

the

Federal
reserves

policy,

any

allow

government,

while

the whole spectrum
Thus,
these

of short-term

if MMMFs

buy

paper,

securities

for

way

terest-rate
compare

changes

serves resulting

from the program

offset

open-market

other

ment securities.

But

focuses

implement

undesired

Re-

Reserve

reserves.

Reserve
to

on

in the absence

long-term

would

be

sales of govern-

mortgages
To

all other

tional

mortgages,

Thus,

the program

sectors

mortgage
helps

preventing

is to

to sell

in figure

to hold

1.

mortgage

mortgage

rates

from

rising as much as they would have.
On a related
cannot
extended

sterilize
credit.

point,
an

the Federal
unlimited

At any

point

generally

tively

stable

supply

retaining
accounts

additional

mortgage

short-term
many

in time,

of
it

net
then

Please send mailing label to the Research Department,
Federal Reserve Bank of Cleveland, P.O. Box 6387, Cleveland,

rates

in capital

However,
are

associations,

loan

rowed
first

or

when

higher

than

an additional

Most

institutions

pensate

for

deposit

large-denomination
negotiable
retail

time

certificates

repurchase

time deposits,

of deposit

agreements

outflows
thrifts

are

may

large

exhaust

to sell mortgage

more

to statistics
thrift

compiled

by the

savings deposit

interest

rates that thrifts

of the Federal

Reserve

industry

experienced

$27.2-billion

net

by

this

through

drain.

August

for the inHowever,

as well as on borrowing

regulatory

from

agencies and private sources,

the maximum

Regulation

the

must pay on these

Q

allows;

savings deposit

rate

in most cases the

an

savings

during the first eight months

The liquidity

that

In fact,

sold $29.9 billion of these

dustry's

instruments,

including
(CDs), and

(RPs).

January

industry

outflow

deposits,

compensating

of Governors

l. Thrift
sociations,

savings

than

deposit

the

Federal

have been able to com-

their

from

higher-yielding

bor-

during

from

1981,

funds from their

buy

could be forced out of business.

squeezed

1981

by selling small-denomination

far exceed

of 1981.

example,

$13 billion
of

their

Home Loan Banks (FHLBs).

some thrifts

outflow

for

instruments

to

from

insured savings

withdraw

and be forced

the

heavily

Federally

eigh t months

both

been

OH 44101.

lending.

and

on a relaand earn

borrowed

agencies.

assets at a loss; if the loss is large enough,

deposit

o
o

rates on de-

that are used to support

some

unprecedented
Address correction requested
Correct as shown
Remove from mailing list

are

have

regulatory

the thrift

accounts
If

When

many

as they have been in 1981,

depositors

System,

Reserve

amount

rates,

interest

can depend
of deposits

interest

long-term

and people

mortgages

some of them

net-worth

wish to

funds."

on

than short-term
thrifts

Board

addi-

mortgage
rates

posits,

According

yields must rise.
stabilize

interest

their liquidity

Presumably,

have been forced

at a loss, as shown

induce

markets,

credit

of any program.

greater

serves as an
who

liquid deposits

who wish to borrow

enough,

have happened

people

in re-

savings

in-

primarily

between

save in relatively

assets.

the relative

of extended

would

on

industry

mone-

BULK RATE
U.S. Postage Paid
Cleveland, OH
Permit No. 385

Federal Reserve Bank of Cleveland
Research Department
P.O. Box 6387
Cleveland,OH
44101

securities.

it with what would

many thrifts

rates

The thrift
intermediary

profits,

to fall relative

of viewing

impact

in

CDs and

example,
tend

trade

securities.

negotiable

would

to those on government
Another

MMMFs

by john B. Carlson and K.J. Kowalewski

levels.

Federal
of

How-

through

not

interest

pre-inflationary

availability

because

will

of the Federal

would

the

controlling

Thrifts, Extended Credit, and Monetary Policy

the disinflationary

program

eventually

as-

that is

viability.

program

extended

increases

thrifts

eral Reserve. Specifically,
the Federal Reserve trades primarily in obligations
of the
U.S.

~£Q2QomicCommentary

Act, the

of last resort,

to solvent

of their continued

monetary-policy

tary

Control

Reserve stands ready to play an active

to

would

7, 1981

under

developed

rates

or

is currently

have been

the

with

limit

of programs

that

sterilize

credit

thrift

serve

so could

to

the upper

would be tested.

seige, and a number

be

is no guarantee,

behind

unlikely

could

Thus,

ability

There

pledge

as collateral
it

credit

distressed
to,

of the assets

of extended

sales.

currencies

credit

effort

September

Conclusion

force

some

notes.

Reserve's

open-market

may have dif-

that MMMFs want to purchase

the

of extended

Federal

pledged

sales.

that

the extended

behind

the reserve

In actuality,

commercial
6. Although
it has been assumed that all other
sectors purchased
the CDs, MMMFs could also
purchase them without
affecting
the results discussed in this section,

It is conceivable
used to secure

had

to aid the thrifts,

to a sterilization

part if needed

a total of $24.6 billion

available for open-market

and

assets

for open-market

in foreign

making

Re-

available

Additional

Reserve

its assets denominated

Federal

billion

available

Federal

as collateral,

Caveats

the Federal

2, 1981,

hypo-

undesired

volume

operating

Other

would

in this

framework,
effects

of

net

Reserve by $1 bil-

How-

of these assets

behind

$18.2
sales.

been

in-

of such assets.

leaving

open-market

portfolio

billion

as collateral

if the

at the Federal

billion
$110.5

serve

sales

and reduce

Banks'

was pledged

of deposits

securities

Reserve

notes,

programs

market

In June 1981, for example,

$128.7

purchase

in deposits

7. For the week ended September
tended credit averaged $191 million.

from

$1 bill ion
by

it can sell in the open

Federal

have

of reserves

of reserves through

open-market

securities

the

could

the primary means of achieving targets for
growth of money and credit. By adjusting
the supply

the

by extended

stock of assets (dollar-denom-

for this purpose.

for

in additional

current

line in figure 2,

offsets

created

offset.

that

holdings

non-interest-

Federal

immediately

inated)

of short-term

interest-

(interest

would

that the

has a limited

in assets

reserves of the same amount.

market,

Federal

an un-

of bank reserves

below the dotted

of reserves
term

represent

holdings

the

the

of
Re-

have to rise (fail).

depository-institution

Reserve

the

would

These sales increase all other sectors'

the funds.
trade

prices

would

deposits

Federal

MMMFs

for

deposits,

the securities

form

up as an increase

securities

bearing

the

at the

sectors

these

bearing

take

deposits

show

of all other
duce

As shown

simultaneous

Loans
newly

Reserve

this example,

To cover this net outflow,

$1

the Federal

Reserve Bank of Cleveland

of many

thrifts

has

deposit

loss,

and

institutions
include savings and loan asmutual savings banks, and credit unions.

john Carlson and K.j. Kowalewski are economists
with the Federal Reserve Bank of Cleveland.
The views stated herein are those of the authors
and not necessarily those of the Federal Reserve
Bank of Cleveland or of the Board of Governors
of the Federal Reserve System.
NOTE:
No Economic Commentary was published
on August 24, 1981.

Federal
losses
posit
$4

by

selling

large

to all other
billion

sectors-in

worth-limiting
6

loss to $1 billion.
thrifts

borrow

window

certificates

and

of de-

desired

expansion

net deposit

Federal

Reserve

the

billion

thus

need

the

thrifts

at

not

the discount
sell mortgages

at a loss.7
to

created

serve and
short-term

after

securities

with

sectors

cause

to

at the

crease in deposits

Reserve

reserves,
would

result

However,
procedure

under

the

for monetary
controls

the

policy,
supply

and sale of short-term
the

Federal

of the

monetary

equal,

a $l-billion

securities
Reserve

aggregates.f
increase

its

cluded

credit

ever, roughly

sales

of

own

portfolio.

short-

To in-

rates)

lion.

Thus,

the tical

as demonstrated

T-account

monetary-policy
can and

Be-

offsetting

Reserve

are

effect on interest

the

in-

of extended

be sterilized

open-market

credit

by equal

operations

with

no

rates or money growth.

as

the purchase
in the open
limits growth
things
with

pledged
the

be affected.
ferent

ex-

8. More precisely,
the Federal
Reserve chooses
short-run
target paths for both total and nonborrowed
reserves that are believed to be consistent with the desired short-run
money path.
As noted above, when the Federal
Reserve increases reserves by lending to the thrifts through
the extended
credit program,
it simultaneously
reduces the supply of reserves by selting government securities
in the open market. In the context of the operating
procedure,
the Federal Reserve reduces its targeted level of non borrowed
reserves by the amount of the increase in reserves
attributable
to extended credit.

relative

Different

portfolio

interest
sectors

preferences.

rates could

sarily

match

the securities

however,

The securities

even

will not neces-

qualify

sold by the Fed-

impact

ever,

that

desire

seems

grows,

as

The

thrifts
assets

would,
that

the notes.
that,

with

industry

to bolster

the industry.

Under the

authority

of the Monetary

Federal
suring

as a lender

the liquidity

the cornerstone
The

extended
any

Credit

credit

retreat

from

recede

to
by

the

the

Federal
reserves

policy,

any

allow

government,

while

the whole spectrum
Thus,
these

of short-term

if MMMFs

buy

paper,

securities

for

way

terest-rate
compare

changes

serves resulting

from the program

offset

open-market

other

ment securities.

But

focuses

implement

undesired

Re-

Reserve

reserves.

Reserve
to

on

in the absence

long-term

would

be

sales of govern-

mortgages
To

all other

tional

mortgages,

Thus,

the program

sectors

mortgage
helps

preventing

is to

to sell

in figure

to hold

1.

mortgage

mortgage

rates

from

rising as much as they would have.
On a related
cannot
extended

sterilize
credit.

point,
an

the Federal
unlimited

At any

point

generally

tively

stable

supply

retaining
accounts

additional

mortgage

short-term
many

in time,

of
it

net
then

Please send mailing label to the Research Department,
Federal Reserve Bank of Cleveland, P.O. Box 6387, Cleveland,

rates

in capital

However,
are

associations,

loan

rowed
first

or

when

higher

than

an additional

Most

institutions

pensate

for

deposit

large-denomination
negotiable
retail

time

certificates

repurchase

time deposits,

of deposit

agreements

outflows
thrifts

are

may

large

exhaust

to sell mortgage

more

to statistics
thrift

compiled

by the

savings deposit

interest

rates that thrifts

of the Federal

Reserve

industry

experienced

$27.2-billion

net

by

this

through

drain.

August

for the inHowever,

as well as on borrowing

regulatory

from

agencies and private sources,

the maximum

Regulation

the

must pay on these

Q

allows;

savings deposit

rate

in most cases the

an

savings

during the first eight months

The liquidity

that

In fact,

sold $29.9 billion of these

dustry's

instruments,

including
(CDs), and

(RPs).

January

industry

outflow

deposits,

compensating

of Governors

l. Thrift
sociations,

savings

than

deposit

the

Federal

have been able to com-

their

from

higher-yielding

bor-

during

from

1981,

funds from their

buy

could be forced out of business.

squeezed

1981

by selling small-denomination

far exceed

of 1981.

example,

$13 billion
of

their

Home Loan Banks (FHLBs).

some thrifts

outflow

for

instruments

to

from

insured savings

withdraw

and be forced

the

heavily

Federally

eigh t months

both

been

OH 44101.

lending.

and

on a relaand earn

borrowed

agencies.

assets at a loss; if the loss is large enough,

deposit

o
o

rates on de-

that are used to support

some

unprecedented
Address correction requested
Correct as shown
Remove from mailing list

are

have

regulatory

the thrift

accounts
If

When

many

as they have been in 1981,

depositors

System,

Reserve

amount

rates,

interest

can depend
of deposits

interest

long-term

and people

mortgages

some of them

net-worth

wish to

funds."

on

than short-term
thrifts

Board

addi-

mortgage
rates

posits,

According

yields must rise.
stabilize

interest

their liquidity

Presumably,

have been forced

at a loss, as shown

induce

markets,

credit

of any program.

greater

serves as an
who

liquid deposits

who wish to borrow

enough,

have happened

people

in re-

savings

in-

primarily

between

save in relatively

assets.

the relative

of extended

would

on

industry

mone-

BULK RATE
U.S. Postage Paid
Cleveland, OH
Permit No. 385

Federal Reserve Bank of Cleveland
Research Department
P.O. Box 6387
Cleveland,OH
44101

securities.

it with what would

many thrifts

rates

The thrift
intermediary

profits,

to fall relative

of viewing

impact

in

CDs and

example,
tend

trade

securities.

negotiable

would

to those on government
Another

MMMFs

by john B. Carlson and K.J. Kowalewski

levels.

Federal
of

How-

through

not

interest

pre-inflationary

availability

because

will

of the Federal

would

the

controlling

Thrifts, Extended Credit, and Monetary Policy

the disinflationary

program

eventually

as-

that is

viability.

program

extended

increases

thrifts

eral Reserve. Specifically,
the Federal Reserve trades primarily in obligations
of the
U.S.

~£Q2QomicCommentary

Act, the

of last resort,

to solvent

of their continued

monetary-policy

tary

Control

Reserve stands ready to play an active

to

would

7, 1981

under

developed

rates

or

is currently

have been

the

with

limit

of programs

that

sterilize

credit

thrift

serve

so could

to

the upper

would be tested.

seige, and a number

be

is no guarantee,

behind

unlikely

could

Thus,

ability

There

pledge

as collateral
it

credit

distressed
to,

of the assets

of extended

sales.

currencies

credit

effort

September

Conclusion

force

some

notes.

Reserve's

open-market

may have dif-

that MMMFs want to purchase

the

of extended

Federal

pledged

sales.

that

the extended

behind

the reserve

In actuality,

commercial
6. Although
it has been assumed that all other
sectors purchased
the CDs, MMMFs could also
purchase them without
affecting
the results discussed in this section,

It is conceivable
used to secure

had

to aid the thrifts,

to a sterilization

part if needed

a total of $24.6 billion

available for open-market

and

assets

for open-market

in foreign

making

Re-

available

Additional

Reserve

its assets denominated

Federal

billion

available

Federal

as collateral,

Caveats

the Federal

2, 1981,

hypo-

undesired

volume

operating

Other

would

in this

framework,
effects

of

net

Reserve by $1 bil-

How-

of these assets

behind

$18.2
sales.

been

in-

of such assets.

leaving

open-market

portfolio

billion

as collateral

if the

at the Federal

billion
$110.5

serve

sales

and reduce

Banks'

was pledged

of deposits

securities

Reserve

notes,

programs

market

In June 1981, for example,

$128.7

purchase

in deposits

7. For the week ended September
tended credit averaged $191 million.

from

$1 bill ion
by

it can sell in the open

Federal

have

of reserves

of reserves through

open-market

securities

the

could

the primary means of achieving targets for
growth of money and credit. By adjusting
the supply

the

by extended

stock of assets (dollar-denom-

for this purpose.

for

in additional

current

line in figure 2,

offsets

created

offset.

that

holdings

non-interest-

Federal

immediately

inated)

of short-term

interest-

(interest

would

that the

has a limited

in assets

reserves of the same amount.

market,

Federal

an un-

of bank reserves

below the dotted

of reserves
term

represent

holdings

the

the

of
Re-

have to rise (fail).

depository-institution

Reserve

the

would

These sales increase all other sectors'

the funds.
trade

prices

would

deposits

Federal

MMMFs

for

deposits,

the securities

form

up as an increase

securities

bearing

the

at the

sectors

these

bearing

take

deposits

show

of all other
duce

As shown

simultaneous

Loans
newly

Reserve

this example,

To cover this net outflow,

$1

the Federal

Reserve Bank of Cleveland

of many

thrifts

has

deposit

loss,

and

institutions
include savings and loan asmutual savings banks, and credit unions.

john Carlson and K.j. Kowalewski are economists
with the Federal Reserve Bank of Cleveland.
The views stated herein are those of the authors
and not necessarily those of the Federal Reserve
Bank of Cleveland or of the Board of Governors
of the Federal Reserve System.
NOTE:
No Economic Commentary was published
on August 24, 1981.