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FEDERAL RESERVE BANK OF RICHMOND MONTHLY REVIEW Bank A ffiliates and Their Requlation: P a rt I I I International Agricultural Trade and the JJ. S. Balance of P aym ents T he M o n th ly R e v ie w is produced by the Research D epartm ent of the Federal R eserv e Bank of Richm ond. Subscriptions are available to the public w ithout charge. A d d ress inquiries to Bank and Public Relations. F e d eral R eserve Bank of Richm ond, P . 0 . B o x 27622, R ichm ond, Virginia 23261. A rticles may be reproduced if sou rce is given. P lease provide the Bank's Research D epartm ent unth a copy of any publication in which an article is used. BANK AFFILIATES AND THEIR REGULATION: PART III P arts I and I I of this scries discussed the events com m ercial bank deposits in the United States ;2 and that led to the bank affiliate legislation of 1933 and 18 o f these companies with 254 banks and aggregate described the bank affiliate provisions adopted in that deposits year, including the first statutes designed to regulate under the 1933 holding com pany affilate legislation. bank holding companies. The 1933 bank holding company legislation proved to be inadequate; and bills designed to limit and control the grow th of such companies, especially Transamerica C orporation, w ere introduced in C ongress throughout the 1940’s. W h en these bills failed to pass, an antitrust p ro ceeding zvas begun against Transamerica in 1948. T he case was lost, but the defeat spurred new legis of M oreover, $10.8 of the billion 18 were regulated already regulated companies, only Transam erica com bined banking and nonbanking ac tivities to any significant extent. Five o f the 18 companies had no nonbanking subsidiaries at all. A lthough the remaining 13 had 82 nonbanking sub sidiaries with total assets o f $687 million, T rans america and its 23 nonbanking subsidiaries alone ac counted for $654 million, or almost 96 percent.3 lative efforts that resulted in com prehensive Federal T he lengthy, extensive hearings in 1954 and 1955 not only established that bank holding companies as regulation of bank holding companies. a group did not g row appreciably between 1933 and In this con cluding article, current regulatory provisions ap 1955— they also failed to produce any significant plicable to affiliation by means of bank holding com evidence of abuse of pow er or im proper use of bank pany ownership are discussed. resources by such companies in the years follow ing the 1933 holding com pany affiliate legislation. the contrary, E fforts to obtain bank holding com pany legisla tion intensified after the antitrust case against T rans all three Federal bank On supervisory agencies concurred in the view that, on balance, e x perience with bank holding com panies and their o p america failed in 1953. A t least five bank holding com pany bills were introduced in 1955, and extensive erations had been favorable since that time. hearings were held before committees o f both the H ouse and the Senate. A gain, as in prior years, the the 179 national banks controlled by bank holding Independent Bankers A ssociation took the lead in demanding legislation. Indeed, the prim ary reason for existence of this organization was to lead the fight against bank holding companies, and it was supported by many small banks across the nation, who were convinced that bank holding companies were being used as a device to evade Federal and state laws restricting branch banking and to bring about concentration in banking.1 In reality, however, there had been little if any growth of bank holding companies, in the aggregate, since enactment of the holding company affiliate legislation of 1933. A s of Decem ber 31, 1954, only 391 banks were owned by the 46 known multi-bank holding companies, i.e., companies that owned or controlled 25 percent or more of the stock o f each of tw o or more banks. Total deposits of these banks amounted to $14.3 billion, or just 7.7 percent o f total 1 Hearings on S. 76 and S. 118, 83rd Cong., 1st Sess. (1953), p. 58. T he C om ptroller o f the C urrency reported that all of companies were well-rated and were being operated successfully.4 Similarly, the Chairman o f the F e d 2 “ Control of Bank Holding Companies,” Hearings on S. 880, S. 2350, and H.R. 6227, 84th Cong., 1st Sess. (1955), p. 54. 3 Ibid., pp. 62-3. 4 Hearings on H.R. 2674, 84th Cong., 1st Sess. (1955), p. 131. During the 1953 hearings the Deputy Comptroller of the Cur rency discussed one situation in which a finance company based in Dallas, Texas, had purchased control of three small state banks located in Chicago, then proceeded to sell large amounts of doubtful finance paper to the banks on a “ without recourse” basis, and to borrow from the banks. Initially, the Deputy Comptroller took the position that the improper use of bank resources could have been prevented by the pending bank holding company bills. Later, how ever, he revised his opinion to acknowledge that the root of the problem lay in the fact that existing affiliate provisions in Section 23A of the Federal Reserve Act limiting financial dealings between banks and their affiliates did not, at that time, apply to insured state banks that were not members of the Federal Reserve System. This situation was remedied in 1966 by making Section 23A of the Federal Reserve Act applicable to insured nonmember banks. Supra, note 1, p. 103. Section 18(J) of the Federal Deposit Insurance Act now provides as follows: (J) The provisions of Section 23A of the Federal Reserve Act, as amended, relating to loans and other dealings between mem ber banks and their affiliates, shall be applicable to every non member insured bank in the same manner and to the same extent as if such nonmember insured bank were a member bank; and for this purpose any company which would be an affiliate of a nonmember insured bank, within the meaning of Section 2 of the Banking Act of 1933, as amended, and for the purposes of Section 23A of the Federal Reserve Act, if such bank were a member bank shall be deemed to be an af filiate of such nonmember bank. 80 Stat. 242 (1966). FEDERAL RESERVE BA N K OF RIC H M O N D 3 eral Deposit Insurance C orporation filed a statement indicating that banks owned by bank holding co m panies presented few er problem s with regard to as cretion, antitrust principles were incorporated into set control the pattern of affiliate regulation. and management than independently- ow ned banks.5 thority. T o guide the Board in exercising its dis A s stated in a Senate Committee R e p o r t: Y et Transam erica’s uncontrolled grow th and e x pansion over the years demonstrated the inadequacy of the 1933 holding com pany affiliate provisions in certain respects. Board of G overnors acting pursuant to statutory au Com m enting on its experience ad ministering the 1933 provisions, the Board o f G o v ernors advised C on g re ss: These provisions of existing law regulate the ac tivities of a bank holding company only if it hap pens to control a member bank and only if it desires to vote the stock of that bank. In effect, therefore, regulation is largely voluntary on the part of the holding company. Even if a voting permit is obtained, the regulation to which a hold ing company is subject is aimed mostly at protect ing the soundness of the member banks in the group. These provisions, therefore, do not deal at all with two apparent problems in the bank hold ing company field. In the first place, there is nothing in present law which restricts the ability of a bank holding company to add to the number of its controlled banks. Consequently, there can well be situations in which a large part of the com mercial banking facilities in a large area of the country may be concentrated under the manage ment and control of a single corporation. In the second place, there is nothing in existing law which prevents the combination under the same control, through the holding company device, of both banking and nonbanking enterprises. Ob viously, this makes it possible for the credit fa cilities of a controlled bank to be used for the benefit of the nonbanking enterprises controlled by the holding company. Moreover, the ordinary nonbanking business requires a managerial attitude and involves business risks of a kind entirely dif ferent from those involved in the banking busi ness. Banks operate largely on their depositors’ funds. These funds should be used by banks to finance business enterprises within the limitations imposed by the banking laws and should not be used directly or indirectly for the purpose of en gaging in other businesses which are not subject to the safeguards imposed by the banking laws.0 The Bank Holding Company Act of 1956 was the result of many years of effort. It was intended to apply in the field of banking and bank holding companies the several purposes of the antitrust laws— to promote competition and to prevent monopoly, and the general purposes of the GlassSteagall (Banking) Act of 1933— to prevent un duly extensive connections between banking and other businesses. . . .7 Coverage of the Statute A t the ou tset, the d e cision was made to exclude ownership or control by individuals, acting on their ozvn behalf and in their individual capacity, from the special restrictions on permissible affiliation im posed by the Bank H oldin g Com pany A ct. The rationale for this decision was explained by G overnor R obertson in the course of the h ea rin gs: (Control by individuals) is subject to an inherent limitation, in that the stock is dispersed either through sales while the individuals are alive, or through disposition of their estates after they die. There is very little you can do about that, in my opinion, and I do not believe that it is especially dangerous. In the first place, the number of banks which can be controlled in that manner is limited by the amount of funds which the individual or individuals have, as contrasted with a situation where, in holding company banking, you have a corporation which has the facilities for gathering large quantities of money with which to buy new banks or, by exchanging stock of the holding com pany for the stock of the bank. . . .8 A nother decision at the heart of the 1956 legisla tion— but one that was reversed in 1970— was to e x clude bank holding companies that controlled only one bank. A s pointed out by the Board on num erous occasions during the hearings prior to 1956, abuses that result from com bining both banking and non banking businesses can exist regardless o f whether THE BANK HOLDING COMPANY ACT OF 1956 one bank or m ore than one bank is controlled.9 Nevertheless, Congress excluded one-bank holding T he Bank H oldin g Company A ct of 1956 was designed to remedy the tw o “ apparent problem s” de scribed by the Board of G overnors. Bank holding companies were prohibited from acquiring additional banks or from engaging in nonbanking activities except to the extent authorized by the A ct or by the 5 “ Control of Bank Holding Companies,” Hearings on S. 880, S. 2350 and H.R. 6227, 84th Cong., 1st Sess. (1955), p. 99. 6 Supra, note 4, pp. 13-14. 4 7 S. Rep. No. 1179, 89th Cong., 2nd Sess. (1966), 2 U. S. Code Congressional and Administrative News (1966) at p. 2386. s Supra, note 4, p. 84. Affiliation by means of individual owner ship or control is, of course, subject to the affiliate provisions im posed in 1933, involving restrictions on financial dealings with af filiates, examinations by and reports to Federal supervisory au thorities, and the separation of ownership and control of securities dealers and member banks. Except as prohibited by the 1933 af filiate legislation, therefore, Congress in 1956 decided not to pro hibit affiliation of banks and nonbank businesses where ownership is by individuals on their own behalf and in their individual ca pacity instead of by bank holding companies. 9 See, e.g., “ Hearings on H.R. 2674,” 84th Cong., 1st Sess. (1955), p. 15. M ONTHLY REVIEW, M A Y 1973 companies from regulation in 1956.10 Because o f the members of the Federal R eserve.12 phenomenal grow th of one-bank holding companies cum bersom e machinery, the Bank H old in g Company A ct lodges additional supervisory authority in the after 1966, however, these companies were brought under regulation effective Decem ber 31, 1970. O n top of this A t present, therefore, the term “ bank holding com pany” is defined to include any corporation, partner Board of G overnors over all holding companies and all o f their subsidiaries, including banks as well as nonbanking companies. T he Board is authorized to ship, business trust, association, or similar organiza issue such regulations and orders as may be neces tion, or any long-term trust that owns, controls, or sary to enable it to administer and carry out the p u r holds with pow er to vote 25 percent or m ore o f the poses o f the Bank H old in g Com pany A ct and p re voting shares of any one bank, or controls in any vent evasions of it. manner the election of a m ajority of the directors quire reports under oath to keep it inform ed o f c o m or trustees o f a bank, or which exercises a controlling pliance with the A ct and the B oard’s regulations and influence over the management or policies o f a bank.11 orders issued pursuant thereto. T he Board may also examine all bank holding companies and their bank E very organization com ing within the definition In addition, the B oard may re of a “ bank holding com pany” must register with the and nonbank subsidiaries but is directed “ as far as Board of Governors, and the B oard’s prior approval possible” to use reports o f examination made by other agencies.13 must be obtained for the form ation of any new bank holding com pany. A ll bank holding companies must obtain the B oard ’s prior approval for the acquisition Restrictions on Financial Relationships E very subsidiary bank of a holding com pany is required o f ownership or control of m ore than 5 percent o f to be an insured bank and is therefore subject to the voting shares o f any bank, or for the acquisition of substantially all of the assets of a bank, or for any to, extending credit to, or investing in any other m erger or consolidation with any other bank hold ing com pany. Supervision of Bank Holding Companies F ed eral supervision and examination of banks is divided am ong three a gen cies: the Com ptroller o f the C ur rency for national banks, the Federal Deposit In surance Corporation for insured state banks that do not belong to the Federal R eserve System, and the B oard of G overnors for insured state banks that are 10 In 1956, the Senate Report gave this reason for its decision not to cover one-bank holding companies: Your committee did not deem it necessary to include within the scope of this bill any company which manages or controls no more than a single bank. It is possible to conjure up visions of monopolistic control of banking in a given area through ownership of a single bank with many and widespread branches. However, in the opinion of your committee, no present danger of such control through the bank holding company device threatens to a degree to warrant inclusion of such a company within the scope of this bill. Should legislation of that nature prove desirable in the future, the Congress is free to act upon a showing of need for such a law. S. Rep. No. 1095, 84th Cong., 1st Sess. (1955), p. 7. Ten years later Congress again declined to accept the Board’s recommendation that one-bank holding companies be brought under regulation, but for a different reason. On that occasion the Senate Committee report stated: After considering all of this testimony, the committee came to the conclusion that there was no substantial evidence of abuses occurring in one-bank holding companies. Furthermore, the committee received much testimony to the effect that repeal of the exemption would make it more difficult for individuals to continue to hold or to form small independent banks . . . However, in order to minimize the danger that conflicts of interest might occur in this field, the committee amended the Federal Deposit Insurance Act so as to make the provisions of Section 23A of the Federal Reserve Act relating to transactions between a bank and its affiliates applicable to all banks. S. Rep. No. 1179, 89th Cong., 2nd Sess. (1966), U. S. Code Congressional and Administrative News, Vol. 2, p. 2389 (1966). As has been shown, there was no evidence of substantial abuses occurring in multi-bank holding companies from 1933 to 1956, when the Bank Holding Company Act was enacted. 11 12 U.S.C. §1841. Certain exceptions from coverage of the statute are provided in Section 2 ( a ) ( 5 ) thereof. Probably the most im portant of these permits banks to own shares of other banks in a fiduciary capacity without becoming regulated bank holding com panies, except to the extent that this class of ownership is spe cifically covered in Sections 2 (g ) (2) and (3) of the Act. Section 23 A of the Federal R eserve A ct in lending subsidiary or the parent holding com pany itself, or in accepting the capital stock, bonds, debentures, or other such obligations o f any other subsidiary or o f the parent com pany as collateral security fo r ad vances made to any person, partnership, association, or corporation. These provisions effectively limit the amount o f a subsidiary bank’s funds that may be used for the benefit of an affiliate in the holding com pany system to 10 percent o f the bank’s capital and surplus, in the case o f any one such affiliate, and to a maxim um o f 20 percent of the bank’s capital and surplus in the case o f all such affiliates in the aggregate. Further protection is afforded by the requirement o f Section 2 3 A that even the limited permissible amount of loans to, extensions of credit to, and investments in other subsidiaries in the h old ing com pany system be well secured by stocks, bonds, debentures, or other such obligations.14 REGULATING EXPANSION OF BANK HOLDING COMPANIES T he pow er o f bank holding companies to expand by acquiring banks and nonbank businesses was brought under Federal regulation with the Bank H old in g Com pany A ct of 1956. A fundamentally different approach, however, was used to control bank holding com pany grow th by acquisitions of 12 See, e.g., 12 U.S.C. §1818. « 12 U.S.C. §1844. 1 The relevant paragraphs of Section 23A are quoted in full in 1 footnote 7 of Part II. FEDERAL RESERVE BA N K OF RIC H M O N D 5 banks from the method adopted to regulate non The Geographic Restriction on Expansion A p a r t banking expansion. from the restriction on approval of Section 3 applica Bank Acquisitions and the Formation of Bank Holding Companies U n d er S e ctio n 3 o f the B ank H old in g Com pany A ct, prior approval by the Board of G overnors is required fo r the form ation o f a bank holding com pany, for the acquisition by such a co m pany of m ore than 5 percent of the voting shares of a bank, for the merger or consolidation o f tw o or m ore bank holding companies, or for the acquisition of substantially all of the assets of a bank by a bank holding com pany.15 In every case, the B oard is required to take into consideration the financial and managerial resources and future prospects o f the applicant and the banks concerned, as well as the convenience and needs of the com m unity to be served. The Board, however, has considerable discretion in applying these stan dards. hibited A pproval of an application is absolutely p ro only where very quences w ould result. serious antitrust conse Thus, Section 3 ( c ) of the A ct provides that the Board “ shall not approve” any tions that w ould produce significantly adverse anti trust effects, the A ct in effect confines the grow th of bank holding com panies by means of bank acquisi tions to a single state for each com pany. Section 3 ( d ) prohibits the B oard of G overnors from approv ing any application to acquire any voting shares of, interest in, or substantially all of the assets of a bank located outside o f the state in which the operations of the applicant holding com pany’s banking subsidiaries were principally conducted on July 1, 1966, or the dated the applicant became a bank holding com pany, whichever is later, unless such an acquisition . . is specifically authorized by the statute laws of the State in which such bank is located, by language to that effect, and not merely by im plication.” 17 A s o f the end o f 1972, Iow a was believed to be the only state that had affirmative legislation of this kind, but even this legislation is said to authorize acquisitions by out-of-state holding com panies to a limited extent only.18 such transaction if it will result in a m onopoly, or Growth of Bank Holding Companies be in furtherance o f any com bination or conspiracy to m onopolize or to attempt to m onopolize the busi grow th of regulated bank holding com panies occurred from 1956 through 1965, as shown by data in Table ness of banking in any part of the U nited States. I. V e r y little In the earlier year there were 53 such companies In addition, the B oard is not permitted to approve with 428 banks and total deposits o f $14.8 billion, any other application under Section 3 if the effect or just 7.5 percent of total com m ercial bank deposits of the transaction may be substantially to lessen co m petition, or to tend to create a m onopoly, or which in the United States. Nine years later there were still only 53 registered multi-bank companies, and in any other manner would be in restraint o f trade, unless the Board finds that the anticompetitive ef fects o f the proposed transaction are clearly ou t to $27.5 billion, or 8.3 percent o f total comm ercial bank deposits in the nation. weighed by its probable effect in meeting the co n venience and needs of the com m unity to be served.10 From 1965 through 1970, however, substantial grow th o f multi-bank companies occurred. B y the the aggregate deposits of their 468 banks amounted end of the latter year, 121 companies were registered 15 Mergers of banks are not included within the Board’s jurisdiction under the Bank Holding Company Act. However, prior approval of all bank mergers, where the surviving bank is an insured bank, is re quired under Section 18(c) of the Federal Deposit Insurance Act, and the same statutory standards must be applied by the Federal banking agency acting on the merger application that govern ap plications to acquire a bank by a bank holding company. Under the Bank Holding Company Act, the requirement of prior approval does not apply where shares are acquired by a bank in a fiduciary capacity, with certain exceptions specified in Section 3 (a ) of the Act: to shares acquired in the regular course of securing or col lecting a debt previously contracted in good faith, provided the shares are disposed of within two years from the date they are acquired; and to additional shares acquired by a bank holding com pany in a bank in which such holding company owned or con trolled a majority of the voting shares prior to such acquisition. 1 12 U.S.C. §1842. 0 Before 1966, substantially different criteria governed the approval of Section 3 applications. From 1956 until the Act was amended in 1966, the Board was required to take into consideration the following factors in acting on Section 3 ap plications: (1) the company or companies and the banks con cerned: (2) their prospects; (3) the character of their management: (4) the convenience, needs, and welfare of the communities and the areas concerned; and (5) whether or not the effect of the acquisi tion or merger or consolidation would be to expand the size or extent of the bank holding company system involved beyond limits consistent with adequate and sound banking, the public interest, and the preservation of competition in the field of banking. (70 Stat. 135.) Between 1957 and 1966 the Board repeatedly advised Coneress of its difficulties in attempting to balance the “ con venience and needs” test of the fourth statutory factor with the “ size or extent” test in the fifth factor. In 1966, Congress re sponded by substituting the antitrust and banking considerations described in the text for the five criteria of the original 1956 Act. 6 with the Board of G overnors, with 895 banks and deposits o f $78.0 billion. T his represented 16.2 p er cent o f total deposits, almost double the percentage just five years earlier. Even m ore dramatic grow th occurred am ong un regulated one-bank holding com panies after however. 1965, In that year there were 550 of these co n cerns, but most o f them were relatively small o r ganizations that controlled rather small banks.19 Their deposits amounted to only $15.1 billion, or 4.5 percent o f total deposits, approxim ately half the size of the deposits controlled by regulated multi-bank companies. 17 70 Stat. 134 (1956), as amended 80 Stat. 237 (1966). 18 Speech, Jerome W . Shay, January, 1973. 1 Federal Reserve Bulletin, December, 1972, pp. 999-1000. 9 MONTHLY REVIEW, M A Y 1973 Table I COMPARISON OF OFFICES A N D DEPOSITS OF BANKS AFFILIATED WITH REGISTERED BANK HOLDING COMPANIES 1956 1960 1965 1968 1969 1971* 1970 53 Banks 47 53 80 97 121 1,567 428 Num ber of companies 426 468 629 723 895 2,420 783 Offices as a percentage of all bank offices 1,037 1,486 2,262 2,674 3,260 10,832 1,211 Branches Total offices 1,463 1,954 2,891 3,397 4,155 13,252 5.7 6.1 6.7 8.9 10.1 11.8 36.1 Deposits (In billions of dollars) 14.8 18.2 27.5 57.6 62.5 78.0 297.0 Deposits as a percentage of all bank deposits 7.5 7.9 8.3 13.2 14.3 16.2 55.1 *The 1971 figure includes one-bank holding companies, brought under regulation by the Bank Holding C om p any Act for the first time on December 31, 1970. A s of December 31, 1965, however, a total of 550 one-bank holding com panies accounted for only 4.5 percent of total United States bank deposits, and multi-bank companies for 8.3 percent, or a total of 12.8 percent. Source: Board of G overnors of the Federal Reserve System. Then, between 1966 and 1968, 201 new one-bank 1970.21 Section 4 o f the A c t prohibits bank holding holding companies were form ed, and between June companies from ( 1 ) ow ning any voting shares o f any 1968 and D ecem ber 1970, an additional 690 such com pany that is not a bank, or companies were created. M any o f the new companies any activities other than banking or managing and owned very large banks. controlling banks, or ( 3 ) furnishing services to or B y the end o f 1968 there (2 ) engaging in were 28 companies w hose banks had $1 billion or perform ing services fo r their subsidiaries, except as more of deposits, and by this time most o f the na specifically authorized by the A ct itself or by the tion’s largest banks had been absorbed into one-bank holding companies. A s o f June 1971, one-bank hold ing companies had aggregate deposits o f $191 billion, B oard of G overnors under authority o f Section 4 or over 33 percent of total bank deposits in the country, com pared with only about 20 percent for multi-bank com panies.20 Combined, by the end of 1971 there were 1,567 multi-bank and one-bank holding companies, accounting for $297.0 billion in deposits, or 55.1 percent of total deposits; and both classes of companies were regulated by the B oard o f Governors on the same basis as a consequence of the 1970 amendments to the Bank H old in g C om pany A ct. ( c ) ( 8 ) o f the A ct. U nder Section 4 ( c ) ( 8 ) , bank holding companies are authorized to acquire shares o f any com pany the activities o f which have been determined by the B oard of G overnors, after notice and opportunity for hearing, to be so closely related to banking or m anag ing or controlling banks as to be a proper incident thereto. In making these determinations, the Board is required to consider whether the perform ance o f a particular activity by an affiliate o f a holding co m pany can reasonably be expected to produce benefits to the public, such as greater convenience, increased Nonbank Activities of Bank Holding Companies Both multi-bank and one-bank holding companies have been subject to the same provisions of law regulating the extent of permissible nonbank ac tivities since the amendments to the Bank H oldin g Com pany A ct became effective on D ecem ber 31, 2° Ibid., pp. 999-1003; Table I. 2 A “ grandfather” clause of the 1970 amendments provides that 1 one-bank holding companies brought under regulation as a result of such amendments may continue to engage in activities that they were engaged in on June 30, 1968, and have been continuously en gaged in since that time. The Board, however, is authorized to terminate this authority if it determines that such action is neces sary to prevent undue concentration of resources, decreased or un fair competition, conflicts of interest, or unsound banking practices. In the case of any company with “grandfather” privileges that controls a bank having assets in excess of $60 million, the Board is required to make a determination regarding continuation of “grandfather” authority within two years after December 31, 1970, or two years after the date on which the bank assets first exceed $60 million. FEDERAL RESERVE B A N K OF R IC H M O N D 7 posals to acquire goin g concerns and proposals to com petition, or gains in efficiency, that outweigh pos sible adverse effects, such as undue concentration of resources, decreased or unfair com petition, conflicts com m ence activities de n ovo (that is, by organizing a new com pany instead of by acquiring an existing of interest, or unsound banking practices. com pany with an established market p o sitio n ). In issuing orders or regulations pertaining t o 4 ( c ) ( 8 ) activities, the Board is authorized to differentiate between p ro T he B oard has, in fact, adopted procedures that favor expansion by de n ovo entry as com pared with acqui sitions o f established companies. T hus far, 10 types of nonbanking activities, which may be broken dow n into at least 16 specific a c tivities, have been authorized under Section 4 ( c ) ( 8 ) . Table II N O N BA N K IN G ACTIVITIES UNDER SECTION 4(c)(8) E ight have been ruled to be not permissible, and three were under consideration at the time this article was com pleted. 1. T hese are described in T able II. N o official figures have yet been published by the AUTHORIZED B oard o f G overnors indicating the extent o f entry Issuing letters of credit and accepting drafts 2. M a k in g m ortgage loans by 3. Consum er finance activities 4. Operating credit card com pany tivities authorized under Section 4 ( c ) ( 8 ) since this bank holding companies into nonbanking ac section was amended on Decem ber 31, 1970. A v a il 5. Factoring 6 . O perating an industrial bank able unofficial inform ation indicates, how ever, that 7. Servicing loans during 1971 and 1972, bank holding com panies 8 . Providing trust services 9. Acting as investment and financial adviser as specifically authorized 10. Furnishing general economic information and advice published the required notification of de n ovo ac 11. Providing portfolio investment advice 12. Leasing of personal property on a full-payout basis Table I II, the principal activities proposed to be undertaken appear to have been com m ercial and co n 13. M a k in g investments in community w elfare projects 14. Providing bookkeeping or data processing services 15. Acting as insurance agent or broker w here insurance is connected with an extension of credit 16. Underw riting of credit life insurance and credit accident and health insurance that is directly related to extensions of credit by the bank holding com pany system tivities in 504 different instances, and filed 174 ap plications to acquire goin g concerns. A s shown by sumer finan ce; m ortgage banking; insurance; per sonal property lea sin g; furnishing investment, fi nancial, and econom ic advisory serv ices; data p ro cessing; and factoring. It seems clear that a substantial degree o f affilia tion already exists am ong banks ow ned b y bank holding companies and nonbanking organizations au DENIED 1. Insurance premium funding thorized under Section 4 ( c ) ( 8 ) . 2. Underwriting general life insurance believe that affiliation of this type will becom e even m ore substantial in the future. 3. Real estate brokerage 4. Land development 5. Real estate syndication 6 . Property m anagem ent Acting as Investment Adviser 7. M anagem ent consulting 8 . O w n in g savings and loan associations (This activity m ay be the subject of further consideration by the Board) It is reasonable to T h e c o n tin u in g influence of the 1933 affiliate legislation on per missible affiliation under the Bank H old in g Com pany A ct is particularly evident in the restrictions im posed by the B oard of G overnors on the perform ance o f in UNDER C O N SID E R A T IO N 1. vestment advisory services. 2. Furnishing armored car and courier services 3. Providing m ortgage guarantee insurance Source: ' sidiaries may act as investment advisers to both openend and closed-end investment companies, a bank Regulation Y, 12 C.F.R. 225.4(a), for authorized activities; 12 C.F.R. 225.126 for activities denied on ground that they are not closely related to banking. The authorized activities set forth in 12 C.F.R. 225.4(a) have been broken dow n into their constituent parts for purposes of this table. Section 225.4(a) of Regulation Y and applicable interpretations by the Board should be consulted for precise language of authorization by the Board of G overnors to engage in permissible non banking activities. 8 T h e B oard has ruled that while bank holding com panies and their sub Leasing real property holding com pany may not sponsor, organize, or co n trol a mutual fund. T his restriction does not apply, however, to closed-end investment com panies that are not prim arily or frequently engaged in the is suance, sale, and distribution of securities. In no case may a bank holding com pany act as investment adviser to an investment com pany having a name that is similar to, or a variation of, the name o f the holding com pany or any o f its subsidiary banks, nor M ONTHLY REVIEW, M A Y 1973 may it sell or distribute securities of any investment Permissible Geographic Expansion com pany for which it acts as investment adviser. contrast to the provision of the Bank H old in g C om pany A ct limiting acquisitions o f banks by bank h old ing com panies to a single state, except where the M oreover, in view o f potential conflicts o f interest that may exist, bank holding companies and their subsidiaries are not permitted t o : ( 1 ) purchase for their ow n account securities of any investment com pany for which the bank holding com pany acts as investment adviser, ( 2 ) purchase in their sole dis cretion any such securities in a fiduciary capacity In m arked state to be entered specifically allows it by statute, nonbanking subsidiaries may expand and operate across state lines unless prohibited by state law o f the state into which they are expanding, except where the Board of G overnors may im pose limita tions by order in individual cases.24 M any leading (including as managing a gen t), ( 3 ) extend credit bank holding companies have already established to any such investment com pany, or ( 4 ) accept the substantial business operations in authorized non securities of any such investment com pany as c o l lateral for a loan which is fo r the purpose o f pur banking areas, both within the states where their banking activities are principally conducted and chasing securities of the investment com pany.22 across state lines as well. Other Permissible Nonbanking Activities A p a rt from Section 4 ( c ) ( 8 ) , eleven other paragraphs o f pany activities along these lines. Section 4 of the Bank H old in g Com pany A c t au CONCLUSION thorize various types of activities for bank holding companies, some of which may be perform ed by banks themselves and some o f which may not. example, Section 4 (c )(5 ) permits bank F or holding companies to acquire investment securities o f the kinds and amounts eligible for purchase by national and state member banks under Section 5136 o f the Revised Statutes, while Sections 4 ( c ) ( 6 ) and 4 ( c ) (7 ) enable bank holding companies to acquire It is reasonable to expect further significant expansion o f bank holding co m T he present structure of Federal regulation o f re lationships am ong banks and their affiliates is the product o f tw o different but not entirely unrelated events. T h e first of these was the development of: affiliates by many large banks beginning about 1908, principally to engage in the securities business. A buses developed and legislation was enacted in specified amounts of com m on stocks and other se 1933 to correct these abuses. curities that are prohibited to national and state was broadly defined in this legislation to include T h e term “ affiliate” member banks for their ow n account. These and situations involving com m on ownership or control other provisions o f Section 4 setting forth perm is of banks and nonbanking businesses by individual sible activities for bank holding companies are sum owners, bank holding companies, or other organiza marized in the footnote below .23 tions. A pattern o f regulation was based upon this definition involving com plete separation o f ow n er 22 Interpretation of Regulation Y , 12 C.F.R. 225.125. The interpre tation also imposes certain other restrictions on bank holding com panies acting as investment advisers. 23 The following are authorized under Section 4 ( c ) : (1) Acquiring shares of any company engaged or to be en gaged in (a) holding or operating properties used by banking subsidiaries or acquired for future use, (b) conducting a safe deposit business, (c) furnishing services to or performing services for the bank holding company or its banking sub sidiaries, and (d) liquidating assets, to the extent authorized; (2) Acquisitions of shares by a bank in satisfaction of a debt previously contracted in good faith; (3) Acquiring shares from subsidiaries that have been requested to dispose of the shares by Federal or State examining au thorities; (4) Acquiring or holding shares in good faith in a fiduciary capacity, except where specifically prohibited by Sections 2 (b ) and 2 (g ) of the Act; (5) As discussed in the text, acquiring shares of the kinds and in amounts eligible for investments by national and State mem ber banks and, in addition, (a) acquiring shares of any com pany which do not include more than 5 percent of the out standing voting shares of such company, and (b) acquiring up to 5 percent of the voting shares of an investment company that is not a bank holding company and is not engaged in any business other than investing in securities, which securities do not include more than 5 percent of the outstanding voting shares of any company; (6) Acquiring shares of companies authorized under Section 4 (c ) ( 8 ), as discussed in the text; (7) Ownership of shares by or activities conducted by foreign bank holding companies, the greater part of whose business is conducted outside of the United States, under conditions im posed by the Board of Governors if the Board determines that the exemption would not be substantially at variance with the purposes of the Bank Holding Company Act and would be in the public interest; ship and control of securities companies and m em (8) Continued ownership of shares lawfully acquired and owned prior to May 9, 1956, by a bank which is a bank holding company, or by any of its wholly-owned subsidiaries; (9) Shares owned directly or indirectly by a one-bank holding company brought under regulation by the amendments effective December 31, 1970, in a company which does not engage in any activities other than those in which a bank holding company may engage under Section 4 (c ) ( 8 ), except that such subsidiary may not acquire any interest in or the assets of a going con cern other than one which was a subsidiary on June 30, 1968; (10) Ownership of shares or activities engaged in by com panies brought under regulation in 1970 which, within specified time limits, either (a) cease to be bank holding companies or (b) cease to retain unauthorized shares or engage in unau thorized activities; (11) Ownership of shares or activities engaged in by any company which does no business in the United States except as an incident to its international or foreign business, if the Board of Governors determines that, under the circumstances and subject to such conditions as it may impose, the exemption would not be substantially at variance with the purposes of the Bank Holding Company Act, and would be in the public interest. The full text of Section 4 (c ) of the Bank Holding Company Act is found at 12 U.S.C. §1843. 24 “ Statement by Board of Governors of the Federal Reserve System Regarding Proposal by NCNB Corporation to Operate a Trust Company in South Carolina Through American Trust Company,” March 9, 1973. In addition, the Board of Governors has per mitted Edge Act corporations to operate in more than one state. Their activities, however, are restricted to international or foreign banking and financial operations. FEDERAL RESERVE B A N K OF R IC H M O N D 9 Table III DE NO VO NOTIFICATIONS AND PROPOSED ACQUISITIONS UNDER SECTION 4(c)(8) OF THE BANK HOLDING CO M PAN Y ACT 1971 and 1972 Total Notifications De N ovo Com m ercial an d Consum er Finance * Proposed Notifications Acquisitions 84 109 M o rtg a g e B an k in g Insurance Personal Property Leasing Investment, Financial an d Economic A d v iso ry Services D ata Processing 68 92 Trust O perations Factoring C om m unity Developm ent 64 36 49 148 145 117 8 100 3 3 2 4 77 37 15 21 1 4 13 5 174 678 13 17 12 1 74 34 Other 504 and Proposed Acquisitions * Includes industrial banks. Figures reflect multiple activities involved in some notifications and proposed acquisitions. Sources: Unofficial tabulations, staff, Board of G overnors of the Federal Reserve System; Bank Expansion Quarterly. ber banks of the Federal R eserve System. In ad whether such control is by individuals or by organ i dition, limitations w ere placed upon financial re zations. lationships between insured banks and their affiliates, and Federal bank supervisory agencies were em Unlike the 1933 legislation, which was designed to remedy actual abuses, the Bank H old in g C om pow ered to examine and obtain reports from af pany A ct is intended to prevent potential abuses that filiates. T h e second might result from the uncontrolled ability o f bank holding com panies to acquire banks and engage in significant event that led to the present pattern of affiliate regulation was the grow th nonbanking activities. o f bank holding companies. 1933 by the B oard is required for any bank holding com legislation contained provisions applicable to bank pany to acquire additional banks or to engage in holding companies, these provisions proved to be nonbanking inadequate and were entirely replaced with the Bank specified nonbanking activities are permitted by the H old in g Bank H old in g C om pany A ct itself. C om pany A ct of A lthough 1956, as the extensively amended in 1966 and 1970. Although both the 1933 legislation and the Bank H oldin g Com pany A ct activities, A ccordin gly, prior approval except to the extent that A cquisitions of banks are, in effect, limited to the state in which the principal banking activities o f a bank holding cover situations where there is com m on ownership com pany are conducted. or control of a bank and other banks or nonbanking Federal law upon the geographical expansion o f bank organizations, they differ significantly in the ways holding com panies in nonbanking areas, how ever, in provided the perform ance o f such activities is not which they specify ownership or control. what constitutes com m on T here is no restriction in A m on g other things, control inconsistent with state law in the state to be entered, by individuals in their individual capacities is not except to the extent that the Board o f G overnors subject to regulation under the Bank H old in g C om may im pose such limitations by order or regulation pany A ct, although the 1933 affiliate provisions ap in individual cases. ply to situations of com m on control regardless o f 10 M ONTHLY REVIEW, M A Y 1973 W illiam F . Upshaw INTERNATIONAL AGRICULTURAL TRADE AND THE U. S. BALANCE OF PAYMENTS A gricultural com m odities have figured importantly in U . S. foreign trade since colonial times. Foreign cou ntry’s share of w orld soybean exports has risen from 2 percent in 1934-38 to approxim ately 90 per markets have always been im portant to U . S. farmers cent in 1972. and appear likely to be o f increasing importance in o f U . S. soybean acreage is exported, and more than nine-tenths o f all soybean and soybean product e x the future. Currently, they provide an outlet for about 15 percent of total U . S. farm output. Trade in agricultural com m odities is, o f course, a tw o-w ay street and the U . S. is also a m ajor market for many agricultural products produced abroad. In 1972,1 for example, agricultural com m odities accounted for Production from m ore than one-half ports are com m ercial sales for dollars. Fifth District tobacco producers also have a large stake in the export market. T he United States is the w orld ’s largest exporter o f unmanufactured to But at the bacco, accounting for about one-fourth o f w orld e x ports o f this com m odity. In recent years between 55 same time, they accounted for approxim ately 18 per cent of total exports, leaving this country with and 60 percent of this tobacco has been produced in Fifth District states. about 12 percent of total U . S. imports. a sizable balance o f trade surplus in agricultural products. Prospects that this surplus may be en larged in the near future are a m ajor reason to hope that the unsatisfactory balance in this cou ntry’s trade with the rest of the w orld can be corrected soon. Importance of Agricultural Exports Chart 1 10 LEADING U. S. AGRICULTURAL EXPORTS A S PERCEN TAG E OF FA R M SALES, 1972* U . S. fa rm ers in 1972 supplied about one-sixth o f the agri cultural com m odities entering free world trade, with U. S. agricultural exports reaching a high of $8.05 billion. This was an increase of m ore than 57 per Rice Soybeans t Tallow cent since 1960. T he output o f 1 of every 5 har vested acres was exported in 1972 and foreign sales Hides, cattle accounted for 15 percent of the total cash receipts W heat J from farm marketings. In that year, export sales accounted for m ore than one-half of the U . S. p ro duction of soybeans and rice, m ore than tw o-fifths of the cattle hides and tallow, and over one-third of the wheat and tobacco. Details of U. S. agricultural exports, by com m odity groups, are given in Chart 1 and Table I. In terms of value, oilseeds and products was the most important exp ort item in Tobacco Cotton, raw Nonfat dry milk Corn G rain sorghum s 1972, follow ed by feed grains and wheat and wheat flour. Soybeans and soybean products accounted for 0 20 40 60 Percent a large fraction of the value o f oilseeds and products. A ggressive marketing in the face of strong foreign *Y e ar ended June 30. demand flnclud in g oil and meal. for high-protein feed, coupled with the sharply increasing U . S. harvest, has made soybeans Jlncluding products. the leading dollar earner in foreign markets. Note: S oy beans now account for more than one-fourth o f the total value of U . S. agricultural exports. This Source: Exports com pared with farm sales, except with production for rice, cattle hides, tallow, cotton, tobacco, and nonfat dry milk. U. S. Department of Agriculture. 1 Except where otherwise noted all data are for fiscal year 1972. FEDERAL RESERVE BA N K OF RIC H M O N D 11 Table I Japan is the number one foreign custom er for U. S. AGRICULTURAL EXPORTS U . S. agriculture, and the U nited States is placing increasing emphasis on exports of food and agri Fiscal Y e ar 1972 cultural raw materials to Japan to help alleviate its overall trade imbalance with that country. Exports Under Government Commercial Financed Sales for Program s Dollars Commodity In 1972 the U nited States shipped approxim ately 14 percent Total of its total agricultural exports to Japan. Japan is the m ajor foreign market for U . S. soybeans, feed 1 [millions of dollars) grains, wheat, cotton, cattle hides, tallow, lem ons, W heat and w heat flour 371.7 675.3 1,047.0 Feed grains, excluding products Rice 78.1 1,040.0 1,118.1 306.7 shipments o f tobacco, poultry, nuts, fruits, and meats. out the prom ise o f a steady expansion in Japanese alfalfa meal, and raisins. 198.3 108.4 96.2 433.3 22.5 135.9 547.4 529.5 569.9 2,086.5 2,222.4 Dairy products 96.0 99.1 195.1 Anim al and anim al products except dairy products 29.7 Cotton Tobacco, unmanufactured Oilseeds and products purchases of a g row in g variety of U. S. farm 786.4 816.1 381.3 229.9 381.3 229.9 could be eliminated or liberalized. In any case, it appears likely that Japan will continue as a m ajor 93.2 542.3 635.5 custom er for U . S. farm exports. 1,121.6 Vegetables and preparations Other exports Source: R ising incomes and living standards in Japan hold products. T his important market w ould also be en larged further if existing barriers to U . S. good s 6,929.9 8,051.5 Fruits and preparations Total Japan also takes sizable U. S. Department of Agriculture, Foreign Agricultural Trade of the United States, Novem ber 1972. Agricultural Exports by States T h e v a lu e o f agricultural exports as a proportion o f cash receipts from farm marketings is one way to measure the im portance of farm exports to individual states. On this basis the five leading agricultural exporting Financing of Agricultural Exports A g r icu ltu ra l exports are made through normal com m ercial chan states in 1972 were Illinois, Iow a, California, T exas, and N orth Carolina. nels resulting in dollar payments or through G ov ernment-financed program s. In recent years co m mercial sales for dollars have accounted for a rising proportion of total agricultural exports. Rankings o f other Fifth D is- Table II Between 1960 and 1972 com m ercial exports increased from VALUE OF U. S. AGRICULTURAL EXPORTS TO 15 MAJOR MARKETS 72 percent to 86 percent o f the total. M ost G overn ment-financed program s for farm exports are under Fiscal Y ear 1972 the authorization of the Agricultural Trade D evelop ment and Assistance A ct, popularly known as Public L aw 480, or the F ood for Peace Program . E xports under this program include sales for foreign cu r Country 1972 (millions of dollars) Japan C an ad a Netherlands 1,163.0 804.7 616.4 rency, long-term credit sales, and donations. M ore than $21 billion w orth o f agricultural com m odities W est G erm any United Kingdom 607.3 429.9 have been exported under the authority o f P L 480 Korea, Republic of 316.9 since its inception in 1954. Governm ent-financed e x Italy 305.6 security (A ID ) program s. 214.1 Spain 200.8 India ports are also made under authority o f the mutual France 193.0 Taiw an 169.0 Belgium-Luxem bourg 147.8 ucts were shipped to 165 countries in 1972 but 15 USSR 136.0 countries received 60 percent of the total. Mexico 130.8 Indonesia 120.4 M ajor Export Customers A m e rica n farm p r o d T he 50 largest markets accounted fo r 98 percent of total e x ports. Developed countries, such as Japan, Canada, Spain, and members o f the European E conom ic Community, are the largest markets for U . S. agri cultural exports. Nevertheless, shipments to d e veloping countries are sizable. 12 15 M ajor Markets 5.555.7 Other 2.495.8 Total 8,051.5 Source: U. S. Department of Agriculture, Foreign Agricultural Trade of the United States, Novem ber 1972, p. 39. MONTHLY REVIEW, M A Y 1973 trict states were South Carolina, 2 0 th ; V irginia, 2 9 th ; M aryland, 35th ; and W est Virginia, 46th. A p proxim ately 9 percent of U. S. farm exports in 1972 were produced in Fifth District states. T he value of these exports represented m ore than one-fifth of District cash farm marketings. In both N orth and South Carolina the value of farm exports accounted for m ore than one-fourth of total cash farm receipts. Table III U. S. AGRICULTURAL IMPORTS BY COUNTRY OF ORIGIN Fiscal Y e ar 1972 Value in Millions of Dollars Country Brazil $ 617 Mexico N early three-fourths of U . S. tobacco exports and 53( Australia 15 percent of the poultry exports were produced in the Fifth District. In terms of value, tobacco was Philippines C anad a 409 369 322 New Zealand 222 Colom bia the most important export item for the District follow ed by feed grains, soybeans, and cotton in Denmark that order. Dominican Republic 195 166 161 Netherlands 152 Agricultural Imports Im p o rts of a g ricu ltu ra l products into this country rose from around $3.7 billion in 1962 to about $6 billion in 1972. T hey Source: U. S. Department of Agriculture, U. S. Foreign cultural Trade Statistical Report, Fiscal Year 1972. com e chiefly from developing countries and from such established agricultural suppliers as Australia, T en cou n agricultural exports in helping curb the flow of d o l tries listed in Table III supplied 59 percent of our agricultural im ports in 1972. A gricultural imports lars from the U . S. may be measured by their co n can be divided into tw o ca teg ories: those that com payments. pete between the value o f total merchandise exports and Canada, Denmark, and the Netherlands. directly with com m odities produced United States and those that do not. in the T he form er tribution to our balance of trade and the balance of T he balance o f trade is the difference total merchandise im ports. T he balance of pay class includes such items as animal, grain, cotton, ments, on the other hand, records all types o f e co and tobacco products. Som e foreign goods, such as bananas, coffee, tea, and rubber, are noncom nom ic transactions involving the exchange of goods, petitive because they either are not produced in this country or are produced in small quantities. services, and financial assets between U . S. residents and residents of the rest of the world. A lthough the U. S. has experienced deficits in its Sixty-five percent of the agricultural com m odities imported in 1972 were competitive, com pared to 55 balance o f payments in most years since the early percent in 1962. trade deficit occurred. T he three leading com petitive im 1950’s, 19712 was the first year since 1935 that a A gricultural, nonagricultural, ports are meat and meat products, sugar, and fruits, and total balance of trade data since 1962 are shown nuts and vegetables. Im ports of meat and meat products in 1972 totaled 1.9 billion pounds. B one less fresh or frozen beef accounted for roughly in Chart 2. In agricultural trade, the U . S. balance with the rest of the w orld has been in surplus in three-fifths Similar to U . S. cow beef, it is used to $1.9 billion in 1971, only slightly below the peak for the period reached in the middle 1960’s. W ith prim arily for hamburger or other meat products and is im ported primarily from Australia, N ew Zealand, out this surplus, the overall U . S. trade deficit of $6.4 billion in 1972 w ould have been $9.4 billion. products. of total im ports of meat and Central Am erica. T he M eat Im port Law , enacted in and meat 1964, p ro every year of this period. Balance of P aym en ts This surplus amounted T he U S D A estimates the vided for restrictions on imports o f fresh, chilled, gross contribution of agriculture to the balance of and frozen beef, veal, mutton, and goat. payments in the follow in g manner. In response Realized dollar to increased demand and higher meat prices, h ow returns and savings on noncom m ercial exports are ever, quantitative restrictions added to the dollar value of com m ercial sales. imposed under this These realized dollar returns and savings are in the form law were suspended in June 1972. of ( 1 ) the dollar value o f foreign currencies gene The Agricultural Trade Balance E x p o r ts of rated under P L 480 and used overseas by the G o v agricultural com m odities exceed imports by a sub ernment to pay such bills as embassy expenses, m ili stantial margin and, consequently, provide one of the m ajor bright spots in an otherwise negative U . S. balance of payments situation. T he role of 2 In the remainder of the paper data are on a calendar year basis unless otherwise noted. FEDERAL RESERVE BA N K OF R IC H M O N D 13 tary outlays, and costs of market development operations and ( 2 ) repayments fo r exports made around 250 million bushels of corn, and 40 million bushels o f soybeans. under Government credit to foreign nations. A g r i cultural im ports are then subtracted from this figure trade position is grow ing, agricultural trade as a W h ile agriculture’s net contribution to the U . S. to determine the net contribution to the balance of payments (T a b le I V ) . In 1971 agriculture’s net contribution to the balance of payments was $1.13 share o f total trade has declined recently. Since 1960 agricultural exports have declined from 24 to billion, the second largest net contribution since comm unist bloc nations and im proved prospects for 1960. A griculture has had a positive net influence additional sales to these countries notwithstanding, on the U . S. balance of payments every year since potential grow th of farm exports faces several re 1961. T he peak year in agriculture’s net contribu tion was 1966 when it totaled $1.17 million. 18 percent of total exports. stricting factors. Recent large sales to F orem ost am ong these are ( 1 ) in creased agricultural production in the less developed nations, which is dim inishing the need for our aid Factors Affecting Export Prospects E stim a tes for fiscal year 1973 place agricultural exports at about $11 billion, almost $3 billion above record high. and soybeans. 1972’s M ost o f the increase will be in grains W h ile exports of these com m odities to m ost custom ers will be up over last year, the e x p o rts; ( 2 ) num erous tariff and nontariff barriers on agricultural com m od ities; and ( 3 ) expansion ot the European E conom ic Com m unity to include the United K ingdom , Ireland, and Denm ark3 in the area under the Com m unity’s Com m on A gricultural P olicy ( C A P ) . large purchases by the Soviet U nion are the single m ost important item. A s o f January 1973, Russia had purchased over 400 million bushels o f wheat, 3 Other members are France, Italy, Germany, Brussels, the Nether lands, and Luxembourg. Chart 2 U. S. TRADE BALANCE $ Billions Calendar Years Source: U. S. Department of Agriculture. 14 MONTHLY REVIEW, M A Y 1973 E xports to the Com m on M arket are restricted by Table IV the Com m unity’s Com m on A gricultural Policy, and THE CONTRIBUTION OF AGRICULTURE TO THE U. S. BALANCE OF PAYMENTS Item 1961 1971 (millions of U.S. dollars) Commercial agricultural exports Plus: $3,569 $6,556 Realized dollar returns 155 322 Mutual Security (AID) foreign currencies used by U. S. agencies 15 Export-lm port Bank principal and interest dollar repayments 31 80 Gross contribution 3,770 6,958 Less: Agricultural imports 3,756 5,826 14 1,132 Net contribution of agriculture to U. S. balance of payments series of agreements am ong members designed to establish free agricultural trade within the C om munity and to protect domestic agriculture from im and savings on noncommercial agricultural exports PL 480 the recent expansion of the Com m on M arket area is certain to have an unfavorable impact on U . S. e x ports of agricultural com m odities. T he C A P is a ports. T he C A P protects agricultural producers in member countries through variable levies and other devices that force final import prices above domestic prices. The biggest impact o f Com m on M arket e x pansion to include nations with previously less re strictive agricultural im port policies will be on to bacco, grains, rice, and fresh and canned fruits and juices. Soybeans have been entering the Common M arket countries without duties or other restrictions .... less than $500,000 Source: and will continue to do so in the expanded market. U. S. Department of Agriculture, World Monetary Con ditions In Relation to Agricultural Trade, M ay, 1972, p. 29. W h ile a record year for agricultural exports in fiscal 1973 seems assured, the factors listed above serve to make long-term forecasts difficult if not im Com m on Market countries account for nearly tw ofifths of the w orld ’s total imports and, in fiscal 1972, these nine nations took nearly a third of total U . S. farm exports. The United K ingdom alone bought $430 million worth of our farm products in fiscal possible. Nevertheless, it seems reasonable to as sume that U . S. agricultural exports will continue to make significant contributions the nation’s Thom as E. Snider 1972. to balance of trade and balance of payments positions. FEDERAL RESERVE BANK OF RIC H M O N D 15 1972 ANNUAL REPORT T he 1972 Annual R ep ort o f the Federal Reserve Bank o f R ichm ond features an article entitled “ T he Check Payments System and the Fifth District Regional Clearing Plan.” T he article reviews the historical development o f the payments mechanism and describes the proposed Fifth District regional clearing system. T he R ep ort also includes highlights o f the Bank’s operations during 1972, com parative financial statements, and current lists o f officers and directors of our Richm ond, Baltimore, and Charlotte offices. Copies of the 1972 A nnual R ep o rt are available upon request from the Bank and Public Relations Department, Federal R eserve Bank o f R ichm ond, P. O . B o x 27622, Richm ond, V irginia 23261. NOTE Corrected figures for year-to-year increases in cash receipts from farm marketings, which appeared on page 17 o f the A pril 1973 M on th ly R eview , are as fo llo w s : 18 per cent in W est V irginia, 13 percent in South Carolina, 8 percent in N orth Carolina and V irginia, and 5 percent in 16 M aryland. M ONTHLY REVIEW, M A Y 1973