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Fram e


June 1,1973

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Last year, savings-and loan associa­
tions garnered $32 billion in net
savings inflows and made $59 billion
in new mortgage loans— both new
records, by a long margin—but
conditions may be somewhat dif­
ferent for them in 1973. To begin
with, personal saving declined in
the first quarter, as a surge in
consumer spending outpaced the
rise in consumer after-tax income.
Even then, the saving decline might
have been even more pronounced
had consumers not been willing to
finance much of their spending in­
crease with new borrowings.

S&L's maintained a brisk pace of
mortgage lending; new loans to­
talled $17 billion for the first four
months of the year, and out­
standing commitments at the end of
April reached a record $15 billion—
almost one-third above the year-ago
level. To finance these commit­
ments, the associations reduced
their holdings of cash and invest­
ments by $1 billion in April alone,
and meanwhile turned to the Fed­
eral Home Loan Banks for another
$1 billion, raising their outstanding
advances and other borrowings to
almost $11 billion.

At the same time, a constant rise in
short-term market rates progres­
sively altered the yield structure to
the disadvantage of thrift-institution
saving flows. For example, the bell­
wether 90-day Treasury-bill rate rose
from 5.06 percent in December to
6.69 percent in late May, while the
rate payable on S&L passbook sav­
ings remained at 5.00 percent
throughout this period.

These developments were accom­
panied by increased pressure on
both mortgage lending rates and
non-price terms of lending (in­
cluding down-payment require­
ments). By early May, rates on new
conventional loans in some areas
exceeded 8 percent— 45 basis
points above year-ago levels—and
at that stage the Committee on
Interest and Dividends "urgently"
requested all mortgage-lending in­
stitutions to "exercise restraint" in
their rate-setting. Towards the same
end, the Federal Home Loan Bank
Board permitted S&L's to reduce
their liquidity from 7 to 6% percent
of their savings funds (including
short-term borrowings), thus
freeing roughly an additional $1
billion in loanable funds.

Inflows (— and outflows (+)
Net savings inflows through April
($91/2 billion) consequently fell 20
percent below the record figure of
the comparable year-ago period.
New savings increased by 12 per­
cent over a year ago, but with­
drawals were up by 30 percent. In
April alone, the net inflow was less
than half that of a year ago, and
S&L's in some sections of the
country actually experienced net
In the face of this slowdown, the

Factors in '73
Carl Kamp, Acting Bank Board
Chairman, estimated early this year
that both savings inflows and mort­
gage loans could fall about one(continued on page 2)





o c=3

third below last year's levels, and
the S&L performance to date sug­
gests that he may well be right.
However, much will depend upon
the state of consumer expectations
regarding incomes and prices. For
example, if prices should continue
to rise at a rapid rate, consumers
could decide to spend more and
perhaps even dissave. Should they
do so, the flows of funds to the
S&L's could be sharply affected.
Another factor could be the state of
the long-term capital markets,
which have been relatively stable in
recent months because of the lack
of heavy financing demands. Cor­
porations, being heavy with liquid­
ity, have been relatively minor par­
ticipants in the market for some
months, but they could begin bor­
rowing again to fulfill their very
heavy capital-investment programs,
and in that case could put upward
pressures on long-term rates. That
development, in addition to its
impact on mortgage-lending rates,
could also affect S&L savings in­
flows by providing some savers
an attractive alternative for their
Still another factor could be the
strength of housing demand. In
early 1973, housing starts and home
sales both remained at very high
levels. However, declining activity

in March and April, along with
rising vacancy rates and rising in­
ventories of unsold homes, sug­
gested that the long-awaited adjust­
ment had finally arrived. This would
be no surprise, in view of the
record pace of activity of the 1971­
72 period, but industry spokesmen
feared that the magnitude of the
adjustment could be exacerbated by
tightening of mortgage-credit con­
ditions. According to the National
Association of Homebuilders, a
one-percentage-point increase in
mortgage rates could lead to a de­
cline of some 150,000 housing starts
and of some 400,000 sales of ex­
isting homes— a large part of which
is financed by S&L's.
Agency intervention
These considerations suggest that
the various housing agencies may
intervene increasingly to help stabi­
lize mortgage-lending rates and
prevent an excessive downturn in
housing activity. (Already, as noted
above, S&L's have increased their
borrowings at Home Loan Banks by
$1 billion.) Intervention could take
the form not only of Federal Home
Loan Bank advances, but also of
secondary-market purchases of
mortgages by FNMA (Federal Na­
tional Mortgage Association),
GNMA (Government National Mort­
gage Association) and the recently
created FHLMC (Federal Home Loan
Mortgage Corporation).
Very few believe that the housing
agencies will again account for over
two-fifths of net residential mort­

Digitized for f Ra SER

gage financing, as they did in the
1969 tight-money period. Still, in
the context of a surging economy
and the counter-measures required
to curb the boom, increasing
agency intervention is likely to ease
the impact on housing activity and
the S&L's. The other side of the
coin, however, is increased bor­
rowing by the agencies themselves
to support their increased activity in
the mortgage market. Through early
May, agency borrowings exceeded
$1.7 billion—only about one-fifth
less than their total borrowings for
all of 1972—and these activities of
course created further pressures on
the credit markets.
Longer-term issues
S&L's are concerned about a
number of other issues besides the
state of the 1973 housing market.
These longer-term issues involve
the curbing of the much-publicized
NOW accounts (negotiable orders
of withdrawal) currently being of­
fered by mutual savings banks in
several New England states; the
question of permanent interest-rate
controls on savings accounts, in­
cluding the possible elimination of
preferential rates for the S&L's; the
Hunt Commission recommenda­
tions to expand S&L lending and
investment powers while more
nearly equalizing regulatory treat­
ment vis-a-vis commercial banks;
and lastly, the question of the pos­
sible participation by S&L's in an
electronic-payments system. The
last-named issue is probably the
most crucial in the long run.

A priori, S&L participation would
seem to fit in well with the Federal
Reserve's goal of achieving an inte­
grated nationwide system for the
transfer of funds. S&L participation
would help reduce the heavy
volume of checks and paper-related
transfers, and by increasing the
volume of paperless transactions,
would help realize the economies
of scale which are essential to the
ultimate success of an electronicpayments system. Related to this is
the question of just what services
might have to be offered to justify
the costs of participation in such a
system. The range is relatively
broad, and could include consumer
lending, overdraft privileges, and
various services tied to a credit or
cash card. In addition, there are
legal questions with antitrust
implications—for example, joint
operation of financial facilities, and
also freedom of access to such
facilities as cash-dispensing ma­
chines, automated "satellite" of­
fices and automatic clearinghouse
arrangements. But all of this gets
back to the larger issue regarding
how much diversification the S&L's
should be permitted if their main
function is to finance housing—a
role which now guarantees them
preferential tax treatment and in­
terest-rate differentials on savings
Verle Johnston

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(Dollar amounts in m illions)
Selected Assets and Liabilities
Large Commercial Banks
Loans adjusted and investments*
Loans adjusted— total*
Com m ercial and industrial
Real estate
Consum er instalment
U .S. Treasury securities
O ther securities
Deposits (less cash item s)— total*
Dem and deposits adjusted
U .S. Governm ent deposits
Tim e deposits— total*
O ther time I.P.C .
State and political subdivisions
(Large negotiable C D 's)
Weekly Averages
of Daily Figures
Member Bank Reserve Position
Excess reserves
Net free (+ )/ N e t borrowed ( - )
Federal Funds— Seven Large Banks
Interbank Federal funds transactions
Net purchases (+ ) / Net sales ( - )
Transactions: U.S. securities dealers
Net loans (+ )/ Net borrow ings ( - )

Am ount

Change from
year ago

5 /9/73




+ 9,262
+ 9,833

+ 21.72


+ 18
+ 75
+ 13
- 221



+ 3,320
+ 2,632
+ 1,380
+ 122
+ 7,452
+ 1,337
— 753
+ 6,876
+ 4,841
+ 1,136
-l- 4,330

+ 19.88
+ 19.74
+ 20.29
-1 0 .5 0
+ 1.10
+ 11.91
+ 7.06
-4 7 .1 2


- 217
- 320
+ 32
+ 87
— 133
+ 158

W eekended
5/16 / 73

W eekended
5 / 9 / 73



Com parable
year-ago period

- 199





+ 449

+ 206



+ 103

+ 79




* Includes items not shown separately.

Inform ation on this and other publications can be obtained by callin g or w riting the
A dm inistrative Services Departm ent. Federal keserve Bank of San Francisco, P.O. Box 7702,
Digitized for F R A S E R c is c o , Califo rn ia 94120. Phone (415) 397-1137.