View original document

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

FEDERAL RESERVE BANK OF RICHMOND

MONTHLY

REVIEW




THE CHANGING DISTRICT BANKING STRUCTURE
T he evolution of the banking structure of the

expansion subject to both Federal and state law.

U nited States has been a continuing story through­

In each state, state law determines the status of
branch banking for national as well as state banks.

out

the

history

of

the

nation.

T he

process

of

econom ic grow th involves continuous change, and

M ost bank m ergers and holding com pany activities,

the changes that accom panied the development of

on the other hand, fall under the provisions o f F ed ­

the econom y of the United States gave rise to im ­
portant changes in the demands on the banking
system. These changing demands were met not only

eral law, and Federal supervisory agencies exercise
important pow ers in these areas. M oreover, in recent
years the Department o f Justice has played an im ­

by changes in the kinds of services provided by

portant role in the area of bank merger and holding

banks, but also by significant changes in the struc­
ture of the banking system.

com pany activities.
Thus, in some states the form ation o f statewide,

Although

change in the banking structure has

been almost continuous, the rate at which change
has occurred has been by no means steady. In the
first tw o decades of this century, for exam ple, the
number of comm ercial banks increased by about two
and one-half times, to a total o f about 30,000. The
number was reduced substantially by suspensions
and mergers in the 1920's and even m ore sharply
by the virtual collapse of the banking system in the
early 1930’s. F ollow in g these severe shocks, there
was little change in banking structure from the m id1930’s through the decade of the 1940’s. F rom
1934 through 1951, for example, the number of
banking offices changed very little as the number
of banks declined by almost 1,400 while the number
of branches and facilities increased by almost 2,150.
T he period since 1950, however, has been marked
by dramatic changes in the nature of the banking
business and in the structure o f the banking system.
This was a period of great social and econom ic
change, with rapid grow th in population and income,
dramatic shifts in the distribution o f population, and
the birth and development of important new in­
dustries. These dynam ic developments not only in­
creased the demands upon the banking system, but
they created demands for new kinds o f services.
Because of the underlying shifts that had occurred
in dem ographic and industrial patterns, these de­
mands were focused on areas that often were served
inadequately by existing banking offices.

M oreover,

some banks were poorly equipped to meet some of the
demands for new kinds o f services on the part of
their customers.
Changes in banking structure in particular areas
are influenced to a considerable degree by the legal
constraints applicable to various kinds of bank e x ­
pansion.

Commercial banks in the U nited States

operate in a unique legal environment, with Federal
and state chartered banking systems operating side
by side in each state, and with most types o f bank

2




regional, and local branch organizations has been a
prominent feature of bank expansion in recent years.
In states where m ulti-office banking is prohibited or
severely restricted, change has been reflected mainly
in the size and number of banks.

Som e states have

experienced a rapid grow th in the number and size
o f bank holding companies, while others have had
both branch and holding com pany activity.

branching, and in recent years banks in these states
have engaged in widespread merger and branching
operations. Between these extremes, V irgin ia since
1962 has been adjusting to a new branch banking

The Fifth District
T h is article is co n ce rn e d
mainly with changes in the structure of banking in
the Fifth Federal Reserve District from the be­
ginning o f 1960 through 1968. A s the chart on
page 2 suggests, however, the change in the general
structure of Fifth District banking in the past nine
years was for the most part a continuation o f trends
that began earlier in the postwar period. Since 1950,
for example, there has been a continuing decline in

law and has experienced extensive holding com pany
activity. Finally, banks in the District of Columbia
are permitted to branch, but the narrow geographical
area within which they operate has limited merger
and branching activity.

the number of banks in the District and a large in­

Changes by State

crease in the number of branches and facilities. The
changes since the beginning of this decade, however,

est number of changes occurred in V irginia, partly
because of the 1962 changes
F or some years prior to 1962
new branches was restricted to
town, or county in which the

have been larger than those in the decade o f the
1950’s. F rom 1950 through 1959, for exam ple, the
number of banks fell by 6 6 ; since the beginning of
1960 the number has fallen by 176. O n the other
hand, the number of branches increased by 586 from

cated.

Branching through merger or absorption of

25 miles o f the parent bank, and provided that each
of the banks had been in operation five years or more.

recent years, the pace o f change has not been uniform
T his is mainly because

In 1962, the law was amended to permit branching

of differences in the banking laws of the District
states.

in the banking law.
the establishment o f
the limits o f the city,
parent bank was lo ­

an existing bank was permitted provided the m erged
bank was in the same or adjoining county or within

1950 through 1959, and by 1,428 in the 1960’s.
A lthough the tempo o f change has increased in
am ong Fifth District states.

N o t su rp risin g ly , the g r e a t­

through m erger anywhere in the state, but the fiveyear limitation was retained. T he restriction on de

A t one extreme, W est V irginia is a strict

unit-banking state that prohibits all form s of multi­

novo branching was liberalized somewhat to permit

office banking organizations.

the establishment of new branches in contiguous

O n the other extreme,

political subdivisions.

M aryland and the tw o Carolinas permit statewide

CH A N G ES IN NUMBER OF BANKS AND BRANCHES
Fifth District
1960-1968

All Com m ercial Banks

District of
Colum bia

M aryland

North
C aro lin a

South
C aro lin a

V irgin ia

W est
V irginia

Total

Num ber of Banks
12

Voluntary Liquidations and Suspensions

145

309

159

6

13

43

12

95

35

77

39

114

2

269

-

Mergers and Absorptions

192

17

2

Banks

140

4

(December 31, 1959)
N ew

-

-

1

1

-

2

957

Num ber of Banks
(December

31,

14

1968)

Net Change

+

2

122
-

18

121
-

71

237

118
-

27

-

72

169
+

10

781
-

176

Branches and Facilities
Number of Branches and Facilities
64

226

452

134

255

1,131

33

219

435

184

344

1,215*

4

41

77

43

124

289

1

17

34

10

14

76

100

(December 31, 1959)
N ew Branches

469

930

351

709

2,559
+ 1,428

Conversions, N ew Facilities,
and Replacements
Branches and Facilities Discontinued
Num ber of Branches and Facilities
(December 31, 1968)
Net Change

+

36

+ 243

+ 478

+ 217

+ 454

C hang e in Banking Offices

+

38

+ 225

+ 407

+ 190

+ 382

+

10

+ 1,252

* Does not include four drive-in facilities in W est V irgin ia.
Source:

Federal Deposit Insurance Corporation and Board of Governors of the Federal Reserve System .




3

The accom panying tallies indicate the extent of
the changes in V irgin ia’s banking structure in the
decade of the 1960’s. T he 43 new banks form ed ac­
counted for some 4 5 % of all new banks established

the establishment of 435 de novo branches. O n the
other hand, only six new banks were established in
N orth Carolina during this nine-year period.

in the District.

T he 1962 changes in the banking

were quite similar in nature. In both states the num ­

law stimulated a wave of mergers, and the 114 banks
eliminated by merger or absorption accounted for

ber o f mergers exceeded the number o f new banks
established, so there was a moderate decline in the
number of banks. Each state had a substantial
grow th in banking offices, however, mainly reflecting

about 4 2 % of the D istrict total. A ll of these
changes, together with one voluntary liquidation, re­
duced the number of banks in the state by 72.
Despite the reduction in the number o f banks,
there was a substantial increase in the number of
banking offices in V irginia, as the number of
branches and facilities rose by 454. In addition to
the banks converted to branches through m erger, a
large number of de novo branches were established.
Finally, the form ation and grow th of bank holding
companies has been a prom inent feature of the bank­
ing picture in V irginia in recent years.
T h e N orth Carolina banking structure also under­
went num erous changes in the period.

U nlike V ir ­

ginia, N orth Carolina banks were not responding to
a sudden change in the banking law. Rather, the
merger and branching activity represented a co n ­
tinuation of trends dating back to the early 1950’s.
Nevertheless, the 77 mergers in N orth Carolina e x ­
ceeded by a considerable margin the number in any
other D istrict state except Virginia. M oreover, the
increase in the number of branches was larger than
that of any other District state, mainly because of

PERCENTAGE OF TOTAL DEPOSITS HELD
BY FIVE LARGEST BANKS
Per Cent

100

Developm ents in M aryland and South Carolina

the establishment o f de n ovo branches.
Changes in the banking structure o f the District
of Columbia are limited by the highly urbanized
character of the area and by its limited geographical
scope.

Nevertheless,

there

were

changes

in

the

years 1960 through 1968. F our new banks were
organized and tw o became branches o f other banks
through merger. In addition, the number of branches
and facilities increased by 36.
W est V irginia showed the least num ber of changes
in banking offices during the period, mainly because
of its prohibition of branch banking. T w elve new
banks were established and tw o were eliminated
through merger. T here were no branches during the
period, although several banks established drive-in
facilities.
Bank Holding Companies

The

fo rm a tio n

and

grow th of bank holding companies has been one of
the significant developments in Fifth District bank­
ing in the past decade. A s used in this article, the
term bank holding com pany refers to the effective
control of the operating policies of tw o or m ore
banks through ownership of stock by a separate
com pany established fo r that purpose.
Thus, this
discussion will be concerned with those holding
companies that are required to register under the
provisions of the Bank H oldin g Com pany A ct, but

■
80

I960

not with the num erous one-bank holding companies

■

1968

that have been form ed in recent years.
A t the end of 1960, there were tw o bank holding
companies in the Fifth District. One, a V irginia
corporation with its activities largely confined to

60 -

northern V irginia, was registered under the Bank
H olding Com pany A ct.

A t the end o f 1960, this

group included four V irginia banks with eight o f­
fices, holding $60.8 million o f deposits.

40

T h e other

holding com pany was exem pt from the provisions

il

of the Bank H old in g Com pany A ct in 1960, but this
exem ption was subsequently eliminated.
20

In 1960,

it owned shares in banks in V irginia, M aryland, and
the District of Columbia, as well as in several states
outside the Fifth District.
D. C.

Md.

N. C.

S. C.

Va.

W. V a.

T he accom panying table indicates the extent of
the grow th in bank holding companies since 1960.

4




A t the end of 1960, the tw o holding companies in
the Fifth District controlled nine banks with 25 o f­
fices and $276 million of deposits. Between 1960
and the end of 1968, three new holding companies
were form ed, all in V irginia. A t the end of 1968,
five holding companies controlled 54 Fifth District
banks operating 375 offices and holding over $3
billion in deposits.

bank in M aryland also increased substantially, while
those in V irginia and South Carolina showed sig­
nificant percentage gains.
Because W est V irginia
is a unit-banking state, and because it is the only

H oldin g com pany banking has had a particular

T he degree o f concentration of banking resources
in District states has also been influenced by the

District state showing an increase in the number
of banks in the past nine years, the grow th in the
size of the average W est V irginia bank was rela­
tively small.

impact on the banking picture in Virginia. A t the
end of 1968, 48 of the 237 banks in V irginia were
members of holding com pany groups. These banks
operated more than one-third o f the banking offices

many changes described in this article. T he per­
centage of total deposits in a particular state or area
held by the largest banks is one measure of co n ­

in the state and held 3 9 %

centration.

of the total deposits.

Three of the state’s five largest banks were lead
banks in holding companies at the end of 1968, and
six of the ten largest were included in such groups.
Effects

of Changes

The

ch a n g es

in

b a n k in g

structure in the Fifth District in recent years are to
a considerable degree a part of the general change
in the nature of the banking industry, one feature
of which might be called a trend toward “ consum er”
or “ retail” banking. A s a result o f rapidly grow in g
population and incomes and changes in the nature
of the demands on the banking industry, com m ercial
banks have been faced with the necessity o f providing
more convenient and readily accessible banking fa­
cilities. In some cases the demands for new services
could be met only by larger banking institutions.
A ll of these factors are reflected in the banking
statistics for Fifth District states.
W ith

the

total

volum e

of

deposits

increasing

sharply and the number of banks declining, the size
of the average bank in the District increased.

A side

from the District of Columbia (w hich may be co n ­
sidered a special ca se ), the largest increase in average
size was in N orth Carolina.

T he accom panying chart shows for each

of the District states and the District o f Columbia
how this measure changed between 1960 and 1968.
N ot surprisingly, the highest degree of concentration
of resources throughout the period was in the D is­
trict of Columbia, although there was almost no
change between 1960 and 1968 in the percentage of
total deposits held by the five largest banks. North
Carolina showed the highest degree o f concentration
for any District state, and it also recorded a sig­
nificant increase in concentration during the period.
A t the end of 1968, the five largest banks in North
Carolina held about tw o-thirds of the state’ s de­
posits.
V irginia showed a significant increase in
concentration during the period, but the degree of
concentration at the end o f 1968 was relatively low.
If bank holding companies are considered single
banking organizations, however, concentration in
V irginia is substantially increased. L ooked at this
way, the five largest banking organizations held
about 4 8 % of the state’s deposits, and tw o-thirds of
the deposits were held by the ten largest organiza­
tions. M aryland and W est V irginia each showed a
small decline in the degree of concentration.

The size o f the average

A u b rey N . Snellings

BANK HOLDING COM PAN IES
Fifth District
December 1960

Decem ber 1968

Holding
C om p anies*

Holding
Banks

O ffices

Deposits

C om p an ies*

Banks

O ffices

($ millions)

Deposits
($ millions)

District of Colum bia

1

2

7

$156.1

1

2

14

M aryland

1

1

3

27.2

1

4

21

142.0

V irginia

2

6

15

92.7

5

48

340

2,668.0

2

9

25

$276.0

5

54

375

$3,102.0

Total
* One holding com pany controlled

banks in M aryland, V irg in ia, and the District of Colum bia.

registered w ith the Board of G overnors; in 1968 it w as registered.




$

292.0

In 1960 this holding com pany w a s not

Monetary And Financial Variables
This article is included in the revised 1969
edition of K eys for Business Forecasting. This
booklet describes in nontechnical terms key sta­
tistical series and techniques used in professional
appraisal of economic conditions. The publication
also includes a listing of reference sources for
current and historical data.
K eys for Business Forecasting (1969 edition)
is available upon request from this Bank.

Banks, other Federal R eserve liabilities and capital,
and member bank reserves. Increases in the first
three items supply reserve funds and decreases in
them absorb reserve funds. T he reverse is true of
the other factors.
In establishing its credit policy, the System takes
into consideration the movements o f each o f these
factors affecting reserves. T he System, however,

T otal spending by consum ers, businesses, and g o v ­

controls directly only tw o com ponents of Federal

ernments affects the general level o f econom ic ac­

R eserve credit— its holdings o f U . S. Government

tivity. In turn, decisions to spend depend to a great
extent upon the availability and cost of m oney and
credit. Thus, there is a strong interdependence

securities and

between econom ic changes and financial changes.
T he business forecaster, therefore, must under­

bookkeeping item connected with its function in the

stand the role of money and credit in a free market
has the

assets.
It is prim arily by purchasing securities in the open

responsibility of fostering a flow of credit and money
to facilitate orderly econom ic grow th and a stable
dollar. T o perform this task the Federal Reserve

market that the Federal R eserve is able to supply
reserves to member banks. Conversely, open market

collects and publishes a mass of statistical data on
the country’ s banking and monetary system. Som e
o f the key measures used in assessing the financial
climate in the nation are discussed below.

policy. If reserves are plentiful, the member banks
are able to expand their loans and investments. This,

Member Bank

fore, their required reserves.

econom y.

T he

Federal

Reserve

Reserves

In

System

fo s te r in g

o rd e rly

bankers’ acceptances,

and

b o rro w ­

ings o f member banks. The other com ponents of
R eserve Bank credit are Federal R eserve float, a
check collection process, and other Federal R eserve

sales reduce member bank reserve funds. Open
market operations constitute another tool o f m onetary

in turn, increases their deposit liabilities and, there­
If reserves are reduced

econom ic grow th, the Federal Reserve System relies
prim arily on its ability to increase or decrease the

below the required minimum, banks may b orrow
tem porarily from the Reserve Banks.
Changing

volum e and cost of member bank reserves. T he
System requires each member bank to hold a fraction

the interest rate charged— called the discount rate—
is another policy tool. A s m onetary policy be­

of its deposits as “ reserves” at the Federal R eserve
Banks. T he ability of the System to vary the frac­
tion for “ required reserves” is one tool of monetary
policy. In addition to deposits held at Reserve

com es m ore restrictive, the ability of the banking
system to buy securities and make loans is also
restricted.

Banks, member banks have been allowed to count
vault cash as reserves since 1960. T he difference
between total reserves and the required minimum
is called “ excess reserves.” W h en member bank

Availability of Data on Reserves and Related
Items F ig u re s on m e m b e r b an k reserv es, R e ­
serve Bank credit, and related items are published
as of W ednesday dates and as weekly and m onthly
averages of daily figures, thus sm oothing out the

borrow ings from the Federal Reserve are deducted

erratic day-to-day movements.

from excess reserves, the result is termed “ free re­

available from 1917 forw ard.

H istorical data are
In addition, reserves

serves” if the figure is positive, and “ net borrow ed

and borrow ings of member banks are published by

reserves” if negative.

class o f bank.

Federal Reserve Credit

T h e a n alyst, h o w e v er,

must look behind the “ reserve measures”
factors supplying or absorbing reserves.

to the

T he Board

A m onthly series on aggregate reserves, adjusted
for changes in reserve requirements, and deposits
subject to reserve requirements is available from
1947 to date.

T he com plim entary weekly series on

of G overnors publishes a weekly statement showing
the credit and currency factors which affect member

reserve aggregates is available back to 1959.

bank reserves.

series are seasonally adjusted and are averages of

T he sum of three items— total R e ­

serve Bank credit, gold stock, and Treasury cu r­
rency— equals the sum of the follow in g ite m s:

cu r­

daily figures.
and

posits and other deposits at the Federal Reserve

published.

6

Current and historical data on the

discount rate, reserve requirements of mem ber banks,

rency in circulation, Treasury deposits, foreign de­




Both

System

open

market

transactions

are

also

KEY M ON ETARY AND FIN A N CIAL VARIABLES
$ Billions___________________________________________________________________
FEDERAL RESERVE CREDIT

Commercial Bank Credit T h e in terrela tion b e ­
tween changes in member bank reserves and changes
in bank credit has been described above. T he bank
credit series, by m ajor com ponents— total loans, U . S.
securities, and other securities— is currently pub­
lished w eekly; prior to February 1969 it was pub­
lished semimonthly, monthly, or for call dates. The

40

data are for W ednesday dates except for June 30
and Decem ber 31 call dates.

0

60

/ -----

50

A lso available is a seasonally adjusted monthly
series, in which the figures are adjusted to exclude
interbank loans, which have little direct effect on

MEMBER BANK RESERVES

26

the volum e of credit available to the public. The
seasonally adjusted series is available from 1948.
In addition the System collects from a sample of
large com m ercial banks a detailed weekly statement
of condition which includes inform ation on types of
loans and types of securities.
weekly

reporting

/~ V

22

A subsample o f the

banks furnishes

inform ation

on

business loans by type of borrow er. These weekly
series are particularly sensitive to short-term d e­
velopments in financial markets.
Money Supply A n o th e r v a ria b le c lo s e ly linked
with the fractional reserve mechanism is the stock
of m oney held by the public. T he m oney supply
is defined a s : ( 1 )

24

0I
0.5

0
-0 .5

currency and coin outside the

Treasury, Federal R eserve Banks, and comm ercial
banks; and ( 2 ) demand deposits at com m ercial

400

banks, other than those due to domestic com m ercial
banks and the U. S. Government, less cash items in

350

process of collection and Federal Reserve float, and
foreign demand balances at Federal Reserve Banks.
Because of the high liquidity of time deposits, some
analysts include these deposits in the definition of
money supply. T he Federal R eserve publications
on money supply include related deposits data.
The average daily series is seasonally adjusted and
extends back to

1947

300

0

200

(m onthly averages for the

entire period, semimonthly averages from 1947-1960,
and weekly averages beginning in 1959). Data on

150

time deposits at com m ercial banks, other than those

100

due to com m ercial banks and the U . S. Government,
are published on the same basis as the tw o com ­

0

ponents of the money supply.

A separate figure for

U. S. Governm ent demand deposits, not adjusted for
seasonal variation, is also shown.

200

T he average daily series is not strictly comparable
with the single-date series on the money supply and

150

related deposits, available for selected dates back to
1892.

T he single-date series, currently published as

of the last W ednesday of the month, is useful in

100

com paring the money supply with other bank and
nonbank asset and liability items.




Elisabeth W . A n g le

0
1966
Note:

Source:

1967

1968

Data in charts 1, 2, 4, and 5 a re monthly
a ve rag es of d a ily figures; in chart 3, a s of last
W ednesday of the month. Data for charts 3,
4, and 5 a re seasonally adjusted.
Board of G overnors, Federal Reserve System.

THE EXPORT-IMPORT BANK
T he governm ents of virtually all industrial nations
extend some form of aid, or subsidy, to their nation’s
exporters. In many o f these countries current p ro ­
duction is heavily geared to export markets.

In the

Netherlands, for instance, exports total well over

tended for relatively short periods of time.
lation passed in M arch

In legis­

1968, the Bank was au­

thorized to function for five more years and its
overall lending limit was increased from $9 billion
to $13.5 billion. Insurance and guarantees may be

half of G N P , and in the United K ingdom the com ­

charged to this limit at a rate of 2 5 % of the B ank’s

parable fraction is about one quarter.

States, merchandise exports constitute only about

contractual liability up to a total of $3.5 billion.
T he same A ct prohibited Bank participation in the

4 % of G N P . T his relatively small fraction is not
a good indicator of the significance of foreign trade

financing of exports to nations whose governments
are engaged in or are assisting any armed conflict

In the United

to the U . S. econom y, however, since merchandise

with U . S. forces.

exports represent a $35 billion industry which has
grow n extrem ely rapidly in recent years.

from aiding or financing exports of military hard­

T he E xp ort-Im p ort Bank is the only U . S. G ov ­
ernment agency engaged solely in the prom otion of
exports. T he Bank was founded in 1934 and re­

unless directed otherwise by the President.

chartered in 1945. Currently, the E xim bank par­
ticipates in the financing of over 10% o f U . S. e x ­
ports through the granting o f direct loans, insurance,
guarantees, and the discounting of export paper.
O rg a n iz a tio n

ware

to

any

F in a n cin g

T he Bank was also prohibited

Communist

or

developing

country

A s w ith m ost G o v e r n m e n t-s p o n so re d

lending agencies, the E xim bank was originally funded
by the U . S. Treasury. Its capital stock of $1
billion is held entirely by the Secretary of the T reas­
ury, and the Bank may b orrow up to $6 billion d i­
rectly from the Treasury. In recent years, however,

In a cco rd a n ce w ith the E x p o r t-

the capital market has becom e the Bank’s most im ­

Im port Bank A ct o f 1945, as amended, the Bank is
with,

portant source of funds, to the extent that no T reas­
ury borrow in g was necessary from 1963 to 1967.

private capital in export financing. E xim bank loans
generally must be for specific purposes and offer

certificates ( P C ’s) in 1962 when it offered for sub­

directed

to

supplement,

and

not

reasonable assurance of repayment.

com pete

T he E xim bank pioneered the use of participation

Finally, the pos­

scription to com m ercial banks $300 million o f P C ’ s

sibility of any adverse effects on the United States
econom y arising from Exim bank loans must be care­
fully considered.
T he responsibility for carrying out these C on ­

collateralized by a pool of the Bank’s exp ort paper.
These new debt instruments were initially guaranteed
by the Exim bank, but in 1966 the A ttorney General
ruled that they were backed by the full faith and

gressional directives rests with a five-m an, bipartisan
Board of Directors appointed by the President, the
Chairman and V ice Chairman of which serve also

credit of the United States Government. P rior to
1966, P C ’s were offered exclusively to those com ­
mercial banks which had actively participated in the
E xim bank’s program s. In that year, how ever, the

as the President and V ice President o f the Bank.
In addition, the E xim bank’s policies are coordinated

squeeze on com m ercial bank credit necessitated a

with overall Governm ent objectives through the N a ­
tional A d v isory Council on International M onetary

change in policy and P C ’s were offered publicly
through a syndicate of underwriters.

and Financial Policies, com posed o f the Exim bank
Chairman, the Secretaries of State, Com m erce, and

for the first time with the sale of short-term p rom is­

the Treasury, and the Chairman o f the Board o f G o v ­

sory notes which closely resemble com m ercial paper.

ernors of the Federal Reserve System.

T hey are sold at a discount to institutional investors

T he Bank

In A pril 1968 the Bank entered the money market

also receives advice periodically from a committee

through several investment banking houses.

of prominent citizens representing the m ajor sectors

maturities range between 30 and 360 days and are

of the U . S. econom y.
Congress maintains broad control over the Bank’s

tailored to investors’ wishes.

T heir

D uring the last three

months o f 1968, $487 million of notes were sold.

operations by placing ceilings both on the total of

T he E xim bank’s net income is added to a reserve

loans, guarantees, and insurance which the Bank may

for contingencies and defaults follow in g the pay­

have outstanding at any one time, and the total

ment of a 5 % dividend to the Treasury on its capital

authorizations permissible within each fiscal year.

stock.

In addition, the Bank’s authority to function is e x ­

almost double the

8




T his reserve totaled $1.1 billion in June 1968,
1960 level.

Export Programs In m ost cou n tries, in su ran ce
and guarantees form the m ajor com ponents o f G ov­
ernment export program s.
In the United States,
however, these tw o types of export assistance rank
below direct Government dollar credits (lo a n s) to
foreign importers of A m erican goods and services.
In fiscal 1968, over 7 0 % of the E xim bank’s total
authorizations

of

$3.5

billion

consisted

of

direct

Export Guarantees and Discount Loans Wrhereas
export insurance aids exporters directly by reducing
their risks, the guarantee and discount loan p ro ­
grams boost exports more indirectly by increasing
the attractiveness of export financing to com m ercial
banks. U nder the guarantee program , com m ercial
banks for a fee may secure E xim bank guarantees on
their medium -term loans to foreign im porters of

credits, about 2 0 % was in the form o f short-term
and some medium -term insurance, and about 8 %

A m erican products, provided the loans are without

consisted of guarantees.

lation is meant to encourage banks to make this
type o f loan. T he Exim bank guarantee covers the

Export Insurance

In the fa ce o f a w o r s e n in g

balance of payments situation, President Kennedy
in 1961 m oved to place A m erican exporters on a par
with their com petition in regard to export insurance.
Hitherto, such insurance was unavailable in this
country.

W ith the cooperation of about 70 private

insurance companies, the F oreign Credit Insurance
A ssociation ( F C I A ) was established. T he F C IA ,
an association of marine, casualty, and property in­

recourse upon the exporter.

T he nonrecourse stipu­

comm ercial risk on the later maturities, and the p o ­
litical risks on all maturities. Commercial banks
which are active in the guarantee program may
exercise the same discretionary authority as the
F C I A in guaranteeing export loans up to $1 million
in sound markets. Guaranteed loans are exem pt
from the guidelines of the V oluntary F oreign Credit

surance companies, sells short- and medium-term
insurance covering political and comm ercial risks.
T he E xim bank insures the political risks directly
and reinsures the com m ercial risk. Political coverage,
which may be purchased either by itself or in co n ­
junction with com m ercial risk coverage, protects
against default caused by such occurrences as cu r­
rency inconvertibility, expropriation, riot, or revolu­
tion.

Comprehensive policies cover 9 0 % to 9 5 % of

the political risks plus about 9 0 % of the com m ercial
risks of protracted default and insolvency. Insurance
premiums reflect the credit terms plus the E x im ­
bank’s judgm ent concerning the soundness o f the
foreign buyer’s market.
A sid e from counseling,
neither the F C I A nor the E xim bank plays an active
part in arranging the exp orter’s financing. Proceeds
from the insurance policy, however, may be assigned
directly to the financing source and this feature may
expedite the exp orter’s search for credit or im prove
the terms.
Short-term insurance, which is the m ore com m on
type, covers transactions up to 180 days and the
exporter must insure enough eligible export credit
transactions during this period so that a reasonable
risk

spread

is obtained.

M edium -term

covers credit risks ranging from

insurance

181 days to five

years and is well suited for sales to foreign dealers
and distributors on a revolving credit basis.

The

terms are somewhat stricter than those on short-term
policies.

T he F C I A may issue short- and medium -

term policies at its ow n discretion covering transac­
tions up to $1 million in sound markets.



9

Restraint program as it applies to com m ercial banks,
as are loans which are not guaranteed but which
involve some Exim bank participation.
T he E xim bank’s discount loan program encourages

Bank weighs the foreign exchange position of the
buyer’s country.

comm ercial banks to finance exports by increasing

may be waived in the case of large p roject loans. T he

the liquidity of their export paper. U nder this p ro ­
gram, a bank ( 1 ) may borrow from the Exim bank

Bank may also invite or even require com m ercial
bank participation in financing large transactions.
Since 1968, this has been the pattern with regard to

against 5 0 % of its portfolio of m edium -term export

T he E xim bank generally requires supplier par­
ticipation in financing exports, but this requirement

obligations based 011 shipments after M arch 1, 1966,

jet aircraft financing.

and ( 2 ) may borrow an amount equal to the annual

purchase by

net increase in its total holdings of export obligations.

method.

Recent interest rates on discount loans have ranged
from 5^6% to 6 y 2°/o. T he substantial increase in the
volum e of discount loans from $71.5 million in fiscal

line paid $1.7 million in cash, E xim bank supplied
$3.1 million, First National City Bank loaned $3.4
million, and B oeing extended $344,000 of credit. In

1967 to $203.1 million in fiscal 1968 reflected to a
large extent the E xim bank’s liberalization o f terms
in A pril 1968.

fiscal 1968, over 2 0 % of E xim bank’s loan
thorizations were for jet aircraft purchases.

Direct Credits

In 1968 a u th o riza tio n s fo r lo n g ­

term loans totaled $1,719 million of which about half
were to im porters in 37 countries for the purchase of
Am erican capital equipment and related services.
Seventeen countries used Exim bank loans to buy
com m ercial

jet airplanes

and ten

bought electric

Royal

The financing o f a recent jet
A ir

M o ro c

typifies

the new

O f the total cost of $8.6 million, the air­

au­

T h e E xim ban k’s direct credit program has been
criticized in some quarters of the com m ercial bank­
ing

comm unity.

Bankers

have

charged

that

the

Exim bank does, in fact, com pete with private export
financing contrary to the Bank’s charter instruc­
tions. T hey note that E xim bank loans bear interest
rates well below goin g market rates.

generating equipment. Other U . S. exports fre­
quently financed by the Bank include diesel lo co ­

Export Expansion Facility

motives and equipment for satellite comm unications
ground stations. E xported services include co n ­

to broaden the E xim bank’s lending authority as a
key part of his balance of payments program . T he

struction supervision, econom ic and geologic surveys,
and architectural and engineering design.

resulting law earmarked $500 million o f the B ank’s
$13.5 billion lending authority for export transac­

In the su m m er o f

1968 Congress acted on President Johnson’s request

T he other half of 1968 long-term loan authoriza­

tions carrying a somewhat higher degree o f risk

tions were to friendly foreign governm ents for the
purchase of defense-related items. A m ajority of

than that associated with the “ reasonable assurance
of repayment” stipulated in the charter. T he facility

these loans were to industrial countries, but about

was designed to increase the market penetration of
U . S. exports, prim arily in developing countries,
and to enable exporters to make sales which might

one quarter consisted of obligations purchased from
and guaranteed by the Defense Department, repre­
senting loans to developing nations for the purchase
of military equipment. Changes in the flow of
Exim bank loans to m ajor geographic areas since
1950 are illustrated in the chart.
T h e terms of direct credits are negotiated between

have been lost without E xim bank assistance. T he
full value of direct credits is applied against the $500
million ceiling, but only 2 5 % o f the principal value
o f insurance and guarantees is counted.
Separate
applications are not needed to tap this fund.

Rather,

the E xim bank and the foreign buyer, which may be

the Exim bank decides whether an application in­

a corporate or noncorporate business, a governm ent

volves extra risk and allocates it to the new fa­

or a governmental agency, a bank acting as inter­

cility.

mediary, or the foreign branch of a U . S. enterprise.

the interest, maturity, and repayment terms are the

T he maturity may range from 5 to 15 years.

same as those on the Bank’s other loans.

The

Such loans offer no special concessions since

interest rate is tied loosely to U . S. capital market

So far the new facility has not been used exten­

con d ition s; in fiscal 1968 virtually all loans were at
6 % except some loans fo r military hardware which

sively, due in part to the reluctance of com m ercial
banks to finance higher risk transactions as long as

carried

the E xim bank will not guarantee the entire co m ­

lo w e r

rates.

I f the b o r r o w e r ’s cr e d it­

worthiness is at all suspect the E xim bank requires

mercial risk.

an unconditional endorsement by a financially re­

the F C IA which is reluctant to insure higher risk

sponsible institution or

ventures lacking total E xim bank reinsurance.

country.

10

individual

in the foreign

Because repayment must be in dollars, the




A similar problem has occurred with

Jane F . N elson

The Fifth District
BUSINESS REVIEW
A lthough a few signs of econom ic slow dow n were
evident on the national scene, the District econom y
remained relatively buoyant through the first quarter
of 1969, as was true in the latter part o f

1968.

M anufacturing activity, with the exception of the
textile industry, im proved, and retail sales increased
steadily. Em ploym ent also increased with
ployment declining further.
Personal Income

unem­

P erson a l in co m e fo r the first

by an estimated 9 .5 % over the first quarter o f 1968,
while nationally it increased 8 .9 % .
Estimates o f
M arch personal income, prepared by B usiness W eek ,
increase in Fifth District states

over M arch of 1968, about the same percentage in­
crease as for the nation ( 8 .6 % ) for the same period.
Em ployment

and

Unemployment

The

tracts in M arch increased 4 .2 % .

T he M arch d e­

cline for the District was the largest since September
of last y ea r; yet, the M arch index of total construc­
tion contracts in the District (1 8 3 ) continued to run
ahead of that o f the nation (1 7 7 ). T he District
figures fo r M arch showed declines in both residential

quarter of 1969 in the Fifth District states increased

indicate an 8 .7 %

after a 4 .3 % increase in January and a 16.1% in­
crease in February.
Nationally, construction con ­

unem ­

ployment rate for the nation has moved from the
15-year low of 3 .3 % of the labor force in both Janu­
ary and February of this year up to 3 .4 % in M arch

and nonresidential construction contracts, with the
latter suffering the greater m onth-to-m onth decline
( 3 5 .5 % ) .

A s com pared to the same month a year

ago, total construction contracts for the District fell
4 .7 % while in contrast nonresidential construction
increased slightly.

for total, residential, and nonresidential construction.
Building permits issued, an indicator o f future
construction activity, showed substantial increases
in the District for the first quarter over the last

and 3 .5 % in A p ril and M ay. T he quarterly unem­
ployment rate for the nation was 3 .3 % of the labor
force, a significant decline from 3 .7 % for the same
period a year ago. A s is evident from the chart,

T he unadjusted cumulative index

of construction contracts for the first three months
of the year was well above the same period last year

UNEMPLOYMENT RATES
United States

Fifth District states with quarterly rates below the
national figure were M aryland with 3 .1 % , V irginia
with 2 .7 % , and N orth Carolina with 2 .8 % . The
weighted average for the District for the first quarter
of 1969 was the same as the national rate.

In all

District states, the unemployment rate was low er
than the rates reported for the same period a year
earlier, with N orth Carolina showing the greatest
decline, from 3 .7 % to 2 .8 % .
O n a m onth-to-m onth basis, seasonally adjusted

Fifth District
(Excluding D. C.)

—

5

.

1

W est V irginia

,
1

South C aro lina
—

North C aro lin a

1

nonagricultural employm ent for the District and the
nation has increased steadily since O ctober
with the M arch increase of 0 .1 %
being

the

quarter of

smallest
1969,

monthly

gain.

1968,

M aryland

for the District
F or

the

District employm ent was

first
3 .4 %

1

V irginia

1

ahead of the same 1968 period while national em ­
ployment

increased

3 .7 %

from

the

comparable

0

period a year ago.
Construction

S ea son a lly a d ju sted total c o n s tr u c ­

tion contracts for the D istrict fell 2 7 .4 % in M arch



i

■

□
Source:

2

i

4
Per Cent

1st. Qtr. 1969

□

i

6

8

1st. Q tr. 1968

U. S. Departm ent of Labor and various state d e ­
partm ents of em ploym ent security and labor.

11

quarter of 1968 and over the same period a year
earlier. A s shown in the accom panying table, permits
in all District states registered considerable increases
in the first quarter of 1969 com pared with the last

brief flurries o f activity have occurred.

Buying for

future delivery— an im portant indicator o f conditions
in the industry— has recently been confined to the
short-term future and has been in small lots. Prices,

quarter of 1968 with the exception of M aryland and

nevertheless, have remained firm.

V irginia, both of which showed very slight declines.
H ow ever, in com paring the first quarter o f 1969 to

according to trade sources, has been print cloths

the similar period of 1968, all District states co n ­
tributed to the quarterly increase.
F or A pril the
seasonally adjusted District building permit index
declined for the second consecutive month to its
lowest point since last N ovem ber and was 10.0%
below the index for A pril of last year.
District construction employment in A pril declined
for the second consecutive month to 374,900 but was
2 .8 % above that of A pril 1968. A ll states reported
employm ent dow n except South Carolina and the
District of Columbia, both of which registered slight
increases.
Textiles

F o r the m o st part, the te x tile in d u stry

has been somewhat sluggish during 1969, although

T he exception,

where mills had been sold well ahead, discouraging
further buying for future delivery, and causing
prices to ease.

R educed production has been typical

of the gray g ood s area and other significant sectors
o f the industry in 1969, beginning with a decline in
military procurem ent of textile good s in the fall
o f 1968.
A ccord in g to trade sources, the wage increase
that has recently been announced will affect most
mills. T his increase, which will average about one
per cent higher than other preceding increases, will
take effect in most cases in July, and for some mills
an extra paid holiday as a fringe benefit will also
occur. Therefore, industry sources do not anticipate
any price cuts on textile goods.

Secondary effects

are expected on apparel prices in forthcom ing seasons.
Recent surveys by this Bank also reveal the slump

VALU ATIO N OF BUILDING PERMITS ISSUED

in activity that has been evident throughout m ost of
the year. T his is evidenced by continuing reports

Fifth District States
($ millions)

o f low volum es o f new orders, backlog o f orders, and
% C hang e

1st Qtr.
1969
D.

4th Qtr.
1968

1 st Qtr.
1968

% Change

from 4th

from 1st

Q tr. 1968

Q tr. 1968

N. C.

has

A lthough

also

recent

reportedly
activity

in

de­
the

textile industry has appeared on the bearish side

61.1

48.4

30.4

+ 26.2

+ 100.8

46.7

26.5

-

5.5

+

66.4

140.4

94.7

94.8

+ 48.3

+

48.1

appear to be somewhat uncertain, trade sources,
nevertheless, feel that the demand for cloth, and

38.8

22.8

21.6

+ 69.9

+

79.8

V a.

81.8

87.3

77.1

-

+

6.1

W. Va.

10.7

6.9

4.4

+ 55.0

+ 143.1

376.9

306.8

254.8

+ 22.8

+

C.

5th Dist.

12

Em ploym ent

slightly.

44.1

C.

Md.

S.

shipments.
clined




6.4

47.9

and prospects fo r business in the second half of 1969

synthetic

blends

in

particular,

seems

to

be

on

the upswing.
Susan S. Jester


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102