The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
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.