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FEDERAL RESERVE BANK OF RICH M O N D MONTHLY REVIEW ■ ■ ■ H V U. S. Coal Exports to Europe Fifth D istrict H unting Functional Cost A nalysis The Fifth D istrict NOVEMBER 1967 1950 L ig n ite Coal O il N a tu r a l G as P r im a r y E le c tric ity T o ta l C o m m u n ity S o u rc e s ( c o a l) I m p o rts I9 6 0 196 - 25 34 3E 213 245 237 30 126 240 1 14 20 20 42 37 289 461 572 257 336 327 (2 1 5 ) (2 3 6 ) (2 1 4 125 245 32 * P a r ts d o n o t a d d t o t o t a l d u e t o r o u n d in g . U. S. Coal Export: In July 1967 the three major economic alliances in postwar Europe, the European Economic Com munity (the E .E .C .), the European Coal and Steel Community (the E .C .S.C .) and the European Atomic Energy Community (Euratom ) integrated to form the six-nation European Community. O f these three organizations, the Coal and Steel Community, based in Luxembourg, shows perhaps the most dramatic history. Whereas at the formation of the E.C.S.C. in 1951 coal played a predominant role in the European energy supply and long-term prospects for its con sumption seemed favorable, today the closing of mines and rapidly increasing surplus stocks form a major concern for the E.C.S.C.’s High Authority. In the past decade coal production has dropped by about 14%. Steel plants, once expanding at a very high rate, now suffer from overcapacity and weak prices. In this article, an attempt will be made to describe the complete reversal of the coal market and to trace the role that U.S. coal exports to the E.C.S.C. have played therein. These exports have a special sig nificance for the Fifth District, since a large part of the coal originates in the mines of Virginia and West Virginia, and moves out through District ports. placed under a common High Authority, in an organization open to the participation of the other countries of Europe.” Nowadays it is hard to ap preciate the revolutionary significance of this an nouncement. Five years after the war, however, distrust of Germany was still deeply rooted, and European economic cooperation was only in its in fancy. Through offering to collaborate in this im portant section of both countries’ economies, France opened to Bonn the opportunity to play once again an equal role among the European nations. M ore over, as was explicitly pointed out, “ any war between France and Germany becomes, not merely unthink able, but materially impossible.” From this proposal, a first step towards European economic integration could be made. After a series of fruitful negotia tions, France, Germany, Italy, Belgium, the Nether lands and Luxembourg, on April 18, 1951, signed the Treaty establishing the European Coal and Steel Community. Great Britain, although repeatedly in vited to do so, felt that she could not join the E.C.S.C. The transfer of autonomy over one of The E.C.S.C. On May 9, 1950 the French Minister of Foreign Affairs, Robert Schumann, announced the proposal of his government “ that the entire French-German production of coal and steel be become an associate member in December 1954; and 2 her basic industries to the supranational High A u thority was unacceptable to her. in a Standing Council, both She did, however, parties have since regularly consulted each other and exchanged in formation. a b le I TO TA L IN TER N AL ENERGY REQUIREMENTS OF THE E.C.S.C. is o lu te C o n s u m p tio n 1965 1966 S h a re o f th e M a r k e t ( fo r e c a s t) 1967 ( fo r e c a s t) 1970 (fo r e c a s t) 1980 1950 1960 1964 38 40 9 7 7 6 6 5 74 53 41 38 34 31 2 7 -3 2 [ 10 28 42 45 48 51 5 4 -4 9 \ 19 6 5 m e tric to n s , c o a l e q u iv a le n t) ( fo r e c a s t) 1967 1966 ( fo r e c a s t) 1970 ( fo r e c a s t) 1980 Per C e n t 34 34 35 225 208 201 2 0 0 -2 3 3 ) 271 299 328 3 9 8 -3 6 5 ) r 8 2 5 -7 6 0 5 3 7 3 -6 7 23 27 34 53 1 3 0 -1 6 0 _ 3 4 4 4 5 7 1 2 -1 5 45 49 46 54 1 3 7 -1 7 2 7 9 6 7 8 8 7 1 2 -1 5 598 617 644 743 1 00 100 100 100 100 100 100 100 3 8 -5 1 1 ,1 3 0 * 322 311 310 3 3 1 -3 6 1 4 2 5 -5 8 5 89 73 57 54 50 48 4 5 -4 9 (202) (1 8 5 ) (1 7 8 ) ( 1 6 8 -1 9 8 ) (1 0 0 -1 8 5 ) (7 4 ) (5 1 ) (3 7 ) (3 4 ) (3 0 ) (2 8 ) (2 3 -2 4 ) 276 306 334 4 1 2 -3 8 2 7 0 5 -5 4 5 11 27 43 46 50 52 5 5 -5 1 S o u rc e : " R a p p o r t g e n e r a l s u r I 'a c t i v it e d e la C o m m u n a u te , " L u x e m b o u rg , a v r il 1 9 6 7 a n d e n e rg e tiq u e s a lo n g te r m e d e la C o m m u n a u te e u r o p e e n n e , " L u x e m b o u rg , a v r il 1 9 6 6 . 'N o u v e lle s R e fle x io n s sur les (9 -1 6 ) 6 2 -4 9 p e rs p e c tiv e s to the European Community Aims of the E.C.S.C. A rticle tw o of the T reaty states the objectives as follow s: to contribute to the expansion of the economy, the development of em ployment, and the improvement of the standard of living in the member countries through the creation of a common market for coal and steel. T o this end all mutual import and export duties and quantitative restrictions, all discrimination based on nationality, all forms of state assistance, and all restrictive E.C.S.C. has always had more power than its E.E.C. The E.C.S.C. Energy Market A s may be seen from Table 1, the 1966 total energy consumption in the E.C.S.C. amounted to 617 million metric tons coal equivalent (c.e .), an increase of 113% since 1950. It is estimated that in 1970 total energy require ments will have gone up to 743 million tons c.e., and in 1980 to 1,130 million tons c.e., an increase of 83% over last year. Changes in the relative importance of each source of energy for the whole market have been large. Coal went down from 74% in 1950 to 34% in 1966, whereas oil increased during that period from 10% to 48% . A continuation of this trend is foreseen. The Community’s growing reliance upon external energy sources for the vital needs of its industries is also clear from the table. In 1950 only 11% of total energy needs had to be covered through imports. This compares with 50% last year and a 62% pre diction for 1980. In 1965, 91% of the total oil con sumption, accounting for 89% of all E.C.S.C. energy imports, had to be covered through shipments into the six member countries. This situation has been counterpart, and in fact was the only truly supra a source of great anxiety to the High Authority. practices would have to be abolished. A five year transitional period was provided for. A t the external frontier a common duty would be levied. In order to carry out these tasks, the following institutions were set up : (1 ) a High Authority of nine members, its decisions to be binding on all member countries; (2 ) a Council of Ministers, con sisting of one representative from each of the six governments; (3 ) an Assembly; and (4 ) a Court of Justice. It is noteworthy that the High Authority of the national body in the European communities. A t the Compared to the changes that occurred in the Six, recent merger of the executive branches of the three changes in the U. S. national energy market have organizations this distinction was lost. been relatively small. The new Over the period 1950-1965, 14-member Commission retains the right of initiative, coal’s share dropped from 42.5% to 23% but the Council will play a decisive role. market, oil increased from a 33.2% to a 39.6% of the 3 share, natural gas went up from 20.3% to 33.5% and primary electricity decreased from 4.7% to 3.9% . Oil and Natural Gas in the E.C.S.C. Since there are no major oil fields in the E.C.S.C. it will con tinually, and to an increasing extent, have to depend upon imports, mainly from the Middle East. By 1970 the need for oil will have gone up to about 380 million tons coal equivalent; its share in the market will then amount to about 54% . Only a small fraction can be met by indigenous production. Natural gas is expected to play an increasingly important role in the energy market. Its share is estimated to rise to 7% in 1970 and to 12% -15% in 1980. The Six will be largely self-supporting in this field, mainly due to the discovery of huge natural gas layers in the northeastern part of the Netherlands. Proved reserves of around 13 trillion cubic feet, not including any future discoveries in the North Sea, make it the largest known field in the world. The Dutch Government plans to exploit these layers over the next 30 to 40 years. It will export some 235 billion cubic feet a year, and intends to keep around 170 billion cubic feet a year for domestic use. The Coal Market A s shown in T able 1, co n sumption of coal in the E.C.S.C. has over the years declined rather rapidly. This is to a large extent due to the structural shift away from the traditional energy sources in favor of oil that started in the late fifties. In an attempt to adapt themselves to this trend, mining companies have decreased production or closed pits altogether. In Belgium, for instance, only 45 pits were in operation at the end of 1966, as compared to 120 in 1957. For the Community as a whole, a 48% drop in the number of pits oc curred during this period. The process of readaptation has, however, been in creasingly hampered by large scale coal imports from the U.S. Total 1953 imports of this product were approximately 14 million tons, about half of which originated in the U .S. This figure was up to 44 million tons in peak year 1957, when U. S. coal accounted for nearly 86% . Last year’s shipments to the Six, although dowm, still amounted to 25 million tons, and the U.S. share continued to be at a high level of 72% . Expressed as a percentage of coal consumption, total imports in the respective years were 6 % , 16%, and 12% of the Community’s market. Importation has, of course, aggravated the adap tation difficulties and made overcapacity more acute. A clear illustration of this is the sharp increase of stocks. A t the end of 1952 pithead stocks of coal were reported to be some 7 million to n s; in De4 T a b le 2 U. S. C O N S U M P T IO N T o ta l U .S. C o n s u m p tio n T o ta l E x p o rts AND EXPORTS OF C O A L E x p o rts T h ro u g h V a . P o rts S h a re o f U .S . c o a l e x p o r ts to E .C.S.C. m illio n s o f to n s , n e t S h a re o f U.S. c o a l e x p o rts to C a n a d a Per C e n t 1961 3 7 4 .4 3 4 .9 2 2 .7 37 32 1 96 2 3 8 7 .8 3 8 .4 2 4 .9 41 31 196 3 4 0 9 .2 47.1 2 9 .7 45 29 1 96 4 431 .1 4 7 .9 3 0 .5 44 30 196 5 4 5 8 .9 5 0 .2 3 1 .9 43 31 1966 N .A . 4 9 .3 3 1 .5 40 32 N o te : O n e n e t to n is 0 .9 0 7 m e tr ic to n s . S o u rc e s : " B itu m in o u s C o a l Facts 1 9 6 6 ," N a t io n a l C o a l A s s o c ia t io n ; " U . S. E x p o r t s ," D e p a r tm e n t o f C o m m e rc e ; P u b li c a tio n s o f th e V ir g in ia S ta te P o rts A u t h o r it y . cember 1960 this figure had risen to 27 million tons. Last year showed a 32 million tons record : a total increase of about 460% . In addition to this a stock of coke at coking plants that has gradually gone up to 9 million tons should be taken into account. M ore over, large stocks are accumulated at dealers and con sumers; in the fall of 1965 18 million tons were reported. In Germany alone, excess coal amounted to 20 million ton s; in the first six months of 1967 this increased by about 5.5 million tons, bringing the total value of unused German coal up to $375 million. Thus it is clear that these imports are of great concern to the High Authority. But how important are these transactions to the U .S. ? In 1966 the value of total U.S. exports amounted to $29.5 billion, of which 20% went to the European Community. Table 2 indicates that in the period 1961-1965 U. S. coal exports have increased faster than national con sumption, namely, 44% compared to 22.6% . A l though its share has decreased slightly in recent years, the E.C.S.C. remains this country’s main coal customer. Canada holds a stable second position, with Japan ranking third at 15% in 1965. It is hard to predict whether the downward trend in ship ments to the Community will continue; this will de pend in part upon the extent and duration of the protectionist measures taken by the High Authority in 1965. The table also shows how important a role V ir ginia ports play in the U .S. coal export trade. In 1966 about 64% of total shipments went via Norfolk and Hampton Roads, accounting for around 90% of overall business in those ports by weight. How is it that the U.S. has acquired such a con siderable share of the Community’s coal market ? A glance at prices gives the clue. In the Six, the January 1967 price of coal at the mine ranged be tween $15.29 and $17.92 per metric ton. By com parison U. S. coal had a $13.31 per metric ton quotation in the harbors of Antwerp, Rotterdam, and Amsterdam. Thus it appears that, even after over seas transport at a freight of $2.20 per metric ton. the U. S. price is, and has in the past few years always been, considerably lower. W hat is the cause of this large difference? Tw o closely related reasons may be pointed out. First of all, mechanization in the successive phases of coal production is much more pronounced in this country than in the Community. The Six have, however, made considerable progress, as is shown by the fact that the percentage of production from fully mechanized faces has gone up from 30.3% to 71% between 1959 and 1966. Still, labor productivity in U.S. mines remains much higher than it is in the Community, or in fact, than anywhere else in the world. In 1965 the output per man per day, as averaged over all mines, amounted to 17.52 tons in the U .S., as compared to a mean of 2.25 tons in the Six. Germany, which ranked highest in the Com munity at 2.56 tons, also showed the most pronounced increase, namely, 84% from 1957 to 1966. The price differential is to a large extent also due to a second factor: the difference in the prevailing mining conditions. Whereas in the E.C.S.C. almost all coal has to be extracted from underground mines, nearly one third of total coal production in this country originates in strip mines. Needless to say, open-air layers are highly favorable to efficient and low-cost mining. The output per man-day in U.S. strip mines amounted in 1965 to 31.98 tons as com pared to 14 tons in underground mines. A s distinct from the first factor, there is little that the Six can do in this field to improve its position. Considering then these two causes, it is no wonder that European mines have a very hard time com peting with imported U.S. coal. the Community’s mines. Only last year, for example, the total number of persons employed in E.C.S.C. mines fell by almost 62,500 men to 637,400, a 10% drop, following a 5% decline in the previous year. Am ong them were some 43,000 underground mine workers. An even more rigorous adaptation, though perhaps desirable from an economic point of view, is considered socially unacceptable. Through re training programs and financial aid, the High A u thority tries to facilitate the transition to new kinds of employment. T o protect themselves against the imports of coal, some member countries have also resorted to protectionist measures such as quantitative restric tions and import duties ($5 per metric ton in Ger many). Often a subsidy is given to keep coking coal prices competitive with those of foreign coal. Both practices in fact run counter to the principles of the E.C.S.C. In view of the very difficult situa tion, however, the High Authority has generally given approval upon request of the governments. ways tried to lower production, such as by curtailing The Future A t this point a look forw ard seems tempting. According to recent estimates, it is likely that the share of coal in the Community’s energy market will decrease further from 38% in 1965 to about 2 7 % -3 2% in 1970. It is predicted that in 1980 it will have dropped to 9 % -1 6 % . T o what level production will fall is hardly predictable. Much will depend on the relative competitive strength of the various energy sources in the many different sectors of consumption. It is certain, however, that some coal mining will always go on, if it were only because the recent Middle East war has once again proved that the E.C.S.C. cannot rely unconditionally upon continuous availability of oil. Besides, it would be unwise if the Six increasingly exposed themselves to outside price pressure by importing both oil and all coal. This would imply, for instance, that in 1970 the Community would have to rely upon external sources for about 85% of her energy requirements. As to how such a minimum production quantum would be divided among the member countries nothing can be said, but it seems likely that Germany would claim a large part of it. However this may be, considering the historical position of the coal mining industry, the number of laborers involved and the importance of a sound working time and by closing marginal pits or mines. energy situation, intricate and complicated discussions T o meet the competition of imports, large scale both among the ministers and in the newly integrated Policy of the High Authority W h at has the H igh Authority done to meet the problems brought about by the secular decline in coal consumption and the increased imports ? Considering the long term nature of the shift, a continuous adaptation seemed indicated. Consequently, the High Authority has in various mechanization and rationalization schemes have been Commission may be foreseen before the Community set in motion. can reach a satisfactory “ European” solution of her Their effects were noted above. This policy, of course, very intensely affects the lives of all those who are directly connected with energy problems. Jan H . IV. Bennderman 5 □ H a v in g opernound th e m id d le o f S e p te m b e r f o r som e ty p e s o f g a m e , th e h u n tin g season is n o w \n d e r w a y in th e F ifth D is tric t. W ith its a b u n d a n c e o f w o o d e d a re a s a n d o p e rjs as w e ll as p ro te c te d w a te r w a y s , th e D is tric t is a n id e a l h u n tin g g ro u n d . D istrioj-tsm en f in d a v a r ie t y o f g a m e fr o m a re a a ls o o f f e r |v e r s ity o f ty p e s o f h u n tin g fr o m a rro w to th e p ttry o f " r id in g to th e h o u n d s ." q u a il to b e a r. O ur p r im it iv e s ta lk in g w ith b o w a n d Q] H u n tin g is a t le a s t as p o p u la r in th e ;t as in th e rest o f th e n a tio n , a n d n a tio n a lly , th e re a re a b o u t 2 5 n- h u n te rs w h o p o u r a p p r o x im a t e ly e q u ip m e n t, lic e tra v e l, and p u rs u it o f g a m u r p r is in g ly , th e m o re 1.5 b illio n d o lla r s y e a r ly in to m u ltitu d e o f o th e r e xp e n se s in v o lv e d in th e is s p e n t o n g a s a n d o il f o r t r a v e lin g th a n f o r g u n s a n d a m m u n it io i 1 9 6 5 , h u n te rs d ro v e a lm o s t 9 b illio n m ile s to re a c h d e s ire d h u n tin g a re a s . A n tin g license s as w e ll as th e 11% F e d e ra l e xcise ta x im p o s e d on sp< g o o d s a n d a m m u n itio n a re a n im p o r ta n t so u rce o f re v e n u e to s u p p o r t s ta te g co m m issio n s. A s ta te h u n tin g license , g o o d f o r o n e y e a r, costs a re s id e n te s ta te o n ly a n o m in a l a m o u n t, b u t n o n -re s id e n ts m u s t p a y a s u b s ta n tia lly laliee. H u n tin g licenses p u rc h a s e d in th e D is tric t c o m p ris e 9 .2 % o f th e m o re th a n 14 . f o r th e n a tio n in 19 64 . C o n s id e rin g th e n u m b e r o f h u n tin g licenses issu e d iD is tric t in 1 9 6 4 , N o rth C a r o lin a a p p e a rs to be th e m o st p o p u la r h u n tin g a re a w 'rg in ia f o llo w in g close b e h in d . FIFTH DISTRICT N o . o f p a id H u n tin g cense H o ld e rs ' H U N T IN G L IC E N S E S -1 9 6 4 S ta te % o f F ifth D is tr ic t T o ta l H u n te rs ($) S ta te % o f F ifth D is tr ic t T o ta l G ro s s C o st to 1 6 4 ,3 7 2 12.6 8 1 5 ,2 1 7 .2 5 15.8 3 9 6 ,8 9 9 30.4 1 ,4 0 6 ,9 5 6 .3 8 2 7 .3 1 9 2 ,2 3 7 14.8 6 0 8 ,2 9 6 .6 5 11.8 3 5 1 ,0 4 8 27.0 1 ,4 6 6 ,7 0 3 .7 5 2 8 .5 1 9 7 ,9 6 6 15.2 8 5 6 ,9 6 3 .0 0 16.6 1 ,3 0 2 ,5 2 2 fo ta l 5 ,1 5 4 ,1 3 7 .0 3 is o n e in d iv id u a l r e g a rd le s s o f th e n u m b e r o f lice n se s he m a y p u rc h a s e , la r t m e n t o f th e I n te r io r , B u re a u o f S p o rt F ish e rie s a n d W ild lif e . Functional Cost Analysis A Tool of Bank Management High interest rates on time deposits, rising salary and wage expenses, and increases in other cost factors affecting earnings have made it increasingly difficult for banks to employ available funds in areas that will yield a return large enough to pay the in terest and other costs and still produce adequate profits. For a bank to obtain the total cost or the total income for a year’s operation is a relatively simple task. Information in the aggregate such as this does not lend itself readily to analysis by management, however. Before any meaningful evaluation can be made, income and expense figures must be allocated to the proper functions. A s a result of these alloca tions, management can more readily answer such questions a s : W hat does it cost to maintain demand deposits Do we have more tellers than are needed for our volume of transactions? What are the break-even points on our con sumer instalment loans? W hat is the cost of issuing a certificate of deposit ? W hat is the officer expense per $1,000 of loans? Functional Cost Analysis T o assist managem ent in answering these and related questions is the over all objective of Functional Cost Analysis, a cost accounting service that eleven Federal Reserve Banks sponsor for the member banks in their respective Districts. Although Functional Cost Analysis has been in existence since 1956, it has grown signicantly only in the past three years. In 1964, 279 banks in three Federal Reserve Districts participated and time deposits? in the program. Where can expenses be reduced for a particular eleven Federal Reserve Districts took part in the function if they are considered excessive? voluntary study. W hat is the average cost of making a loan? In 1966, however, 1,022 banks in The program is offered without charge each year What is the average cost of processing each loan payment? 8 to member banks. are not required to remain in the program in con- Even though participating banks SOURCES A N D D ISTR IBU TIO N OF IN C O M E BY SIZE OF B A N K EXPENSE O F A V A IL A B L E F U N D S IN C O M E F R O M A V A IL A B L E F U N D S R e al E s ta te M o r t g a g e Loans I n s ta lm e n t L o a n s C o m m e r c ia l a n d A g r ic u lt u r a l L o a n s In v e s tm e n ts D e m a n d D e p o s its T im e D e p o s its C a p it a l F u n d s Per C e nt f~ l D e p o s its U p T o $ 5 0 M il. (7 7 4 B ks.). N o te : □ D e p o s its $ 5 0 t o $ 2 0 0 M il. (1 9 8 B k s .). □ D e p o s its over $ 2 0 0 (6 8 B ks.). 1. C a lc u la tio n s E x c lu d e th e C o m p u te r , T ru s t, S a fe D e p o s it a n d O th e r N o n -F u n d U s in g D e p a r tm e n ts . 2. A v a ila b le F u n d s A r e D e fin e d A s : T o ta l L ia b ilit ie s a n d C a p it a l Less F ix e d a n d O th e r A s s e ts . secvitive years, experience has shown that there is very little attrition from one year to the next. One of the advantages of participating in consecutive years is that comparisons are given for each bank with its own year-ago figures. T o participate, all a bank must do is fill in the five reporting schedules that are supplied by the Federal Reserve. The time required to fill in the schedules varies, of course, from bank to bank depending on the size, accounting procedures, and operational set up that each bank has. Functional Cost Analysis has two primary ob jectives. First it is designed to give an itemized The work schedules are filled out on a calendar year basis and returned to the Federal Reserve Bank for processing in February of the ensuing year. About six weeks later the finished report, consisting of 28 computer printout pages and several printed pages, list of the various current income and expense items to be the fund-providing functions. as they relate to the major banking functions. Also, deposit analysis includes a detailed breakdown of comparative figures for groups of other banks are the processing, administrative and overhead expenses. is mailed to the participating banks. The report gives an analysis of three fund-providing functions, four fund-using functions, and four categories of nonfund-using service departments. F u n d -P ro v id in g Fun ction s Dem and deposits, time deposits, and net capital funds are considered The demand provided to aid in the analysis of an individual bank’s This analysis, like all others in the Functional Cost performance. Analysis report, is developed from information sup The uniform reporting of all partici pating banks makes possible interbank comparisons plied to the Reserve Bank on the reporting schedules that are not generally available in any other cost and includes information such as the average cost of program. handling a home debit, a deposit, and a transit check. Where overall comparisons are made— such as between balance sheets— banks are compared Demand deposits are also segregated into, and an with other banks that have a similar dollar volume analysis is given for, regular and special checking of total deposits and a similar percentage of time accounts. deposits. break-even balance on a checking account is also pro Information for determining the average 9 vided. This is expressed as the average annual balance required to p a y : (1 ) the account maintenance, Service Departments T h e com puter, trust, and safe deposit functions are service departments that (2 ) the home debits cost, (3 ) the transit checks cost, do not use balance sheet funds and are included in and (4 ) any added services cost. the non fund-using section of the report. A deduction is made for any activity income earned on the account. In addition to the comparisons with its own year- Interbank comparisons for the computer department are made with ten banks that have a rental expense for com ago figures, interbank comparisons are also given. puter hardware similar to the subject bank. For the demand deposit function, demand deposits parisons for the trust function are with banks that Com of ten banks— five having a dollar volume of demand have similar 5-year average incomes, while total deposits just above and five having a dollar volume number of boxes is used for selecting group average of demand deposits just below the subject bank— banks in the safe deposit analysis. make up the group average. For the time deposit function, the average cost per transaction of a deposit, a withdrawal, opening an account, and closing an account is given. A separate analysis, complete with information for determining the average annual break-even balance, is given for passbook savings, certificates of deposit, and Christmas and similar club accounts. The group average for the time deposit analysis consists of average time deposits of ten banks with similar dollar volumes. The third fund-supplying function, net capital funds, consists of capital and valuation reserves plus “ other” liabilities and borrowings less fixed and “ all other” assets. Federal funds purchased are analyzed Summary Reports T w o reports in addition to those for individual banks are produced by the Fed eral Reserve. The “ National Average” report and the “ Performance Characteristics of High Earning Banks” report both contain virtually the same in formation as the individual bank report except that the “ National” report contains average figures for all banks in the program and the “ High Earnings” report contains average figures for banks in the top earnings quartile. A review of all three reports will give a fairly ac curate evaluation of how a bank is doing on the na tional level as well as how it compares with the best earning banks. W hile participation in Functional Cost Analysis as part of the capital funds function. is limited to Federal Reserve member banks, the Fund-Using Functions T h e fund-using functions “ National” and “ High Earnings” reports are avail consist of real estate mortgage loans, instalment loans, able free of charge to non-member and non-parti cipating banks upon request. commercial and agricultural loans, and investments. For each of the fund-using functions, the clerical expense per thousand dollars is given along with such Conclusion miscellaneous information as the average cost of bank. T here are many w ays of costin g a The important thing, however, is that a bank making a loan, the average cost of collecting a pay is doing some type of costing. ment, the average volume of loans serviced per per fering more and more services to their customers Today banks are of son, and the break-even points for the consumer beyond the traditional banking functions of receiving instalment loan function. Gross yield on investments deposits and making loans, and the trend will no and liquidity loans are included in the analysis of doubt continue in the future. the investment function. Liquidity loans are re banking is becoming more complex and competitive, stricted to Federal funds sold, commercial paper and the banker that has more detailed and reliable purchased, brokers’ loan participations with a cor cost and income information has the advantage. respondent, purchased certificates of deposit, bankers’ acceptances and commodity credit certificates of interest. The Federal Reserve’s role, so far as Functional Cost Analysis is concerned, is to diagnose— not pre scribe. For each of the fund-using functions, as was the It is no secret that Once a bank has its cost report, it has a medium of unlimited potential as a management tool. case with the fund-providing functions, a comparison The report can be a prelude to budgeting, profit is made with ten other banks that have similar planning or any other use that management can dollar volumes determine with its discerning eye. studied. 10 of the particular function being W . 0 . Pearce « THE FIFTH DISTRICT Most of the latest data suggest that the pace of business in the Fifth District may be picking up after showing a rather lackluster performance for most of the year. Demands for textiles and furniture show signs of renewed strength and the chemical industry appears to be recovering from a mild slump in the first half of the year. Construction activity has in creased, and employment continues at a high level in most industries. Financial data for the District so far this year reflect a distinctly slower pace of growth than in the same period of 1966. Loan Demand Off The chart shows that business loans at Fifth District weekly reporting banks rose steadily in 1966, but after the seasonal peak at the end of the year they failed to rise in the first three quarters of 1967. They fluctuated around the yearend level and were no higher in September than nine months earlier. Real estate loans after the first quarter of this year rose at about the same pace as in other recent years, but all other loans, including consumer loans, were still well below the December 1966 level. Banks have had adequate reserves and have borrowed very little from the Federal Reserve. The slow growth in loans appears to be due pri marily to sluggish demand. Time Deposits Up T im e and savings deposits at Fifth District banks rose steadily in 1966, but in LOANS early 1967 they turned up sharply and continued to increase rapidly until the end of August. Rising personal income, due chiefly to higher wages and rising employment, gave individuals additional funds to save. Corporations and state and local govern ments rebuilt their liquidity through record offerings of securities with at least some of the proceeds going into time and savings deposits. Relatively high in terest rates on time deposits thus succeeded in at tracting funds from all types of depositors. banks. Savings and loan associations and other financial intermediaries also received heavy inflows of funds. Demand deposits, which reflect to some extent the volume of loan activity, dropped somewhat more than seasonally in early 1967, and have in creased only moderately since then. Loan-Deposit Ratio Down T h e ratio of total loans to total deposits, an indicator of the banking system’s ability to meet future loan demand, rose at Fifth District weekly reporting banks in 1966 from less than 64.5% to more than 66.5% . It began dropping in the second half of last year, however, and as deposits grew rapidly with little increase in total loan volume, the ratio fell steadily and by Sep tember it was well below 64% . DEPOSITS $ M illio n The in crease in savings was not restricted to commercial LOAN -D EPOSIT RATIO FIFTH DISTRICT W EE KLY R E P O R TIN G B A N K S M illio n J Per C e n t INVESTMENTS * BANK DEBITS* INTEREST RATES $ M illio n $ M illio n * S M S A s a n d S e le c te d C itie s , F ifth D is tr ic t kF ifth D is tr ic t W e e k ly Per C e n t R e p o rtin g B a n ks S o u rc e : Higher Deposit Turnover Bank debits to demand deposits show primarily the dollar volume of checks written and are measured for major population centers in the District and across the nation. They frequently are used as indicators of financial activity in individual metropolitan areas, but the sum of all debits for major District cities also gives some in dication of the trend of business activity in the Dis trict as a whole. The series fluctuates widely, but the general trend in bank debits was upward through the end of 1966. They turned down and fell for about four months in 1967, but since then have moved up sharply. Investment Volume Up W h en the flow o f re serves was reduced and money became tight in 1966, the banking system liquidated substantial amounts of securities in order to meet loan demand and also to pay off maturing certificates of deposit. W ith the advent of an easier monetary policy late last year, banks began rebuilding their investment portfolios. In 1967, total investments at Fifth District weekly reporting banks have risen at a record pace. During most of the first three quarters, holdings of tax exempt state and local Government securities rose most rapidly. The demand for short- and inter mediate-term tax exempts was especially strong. One-to-five year Federal Government issues also rose substantially. Holdings of short-term Governments B o a rd o f G o v e r n o r s o f th e F e d e ra l R e serve S y s te m . Large new supplies of short-term Treasury debt have contributed to the increase in bank liquidity. Interest Rates Dip M ost interest rates turned down late last year and fell during the first half of 1967. Mortgage money became more easily available as funds poured into savings and loan associations and mutual savings banks, and rates declined steadily until the second quarter. They have been edging upward since then, however, and in some areas have passed their 1966 highs. Many mortgage investors have already committed all their available funds well into the future. Others are finding alternative in vestments at attractive rates. The demand for business loans has been much less vigorous this year than last, and the Federal R e serve’s quarterly interest rate survey shows lower average rates on business loans for each quarter this year. Business borrowing from banks apparently has been affected by inventory reductions, postpone ments of expansion plans, and by the acquisition of funds from alternative sources. Rates on 3-month Treasury bills fell sharply from their late 1966 high until June, when they turned up again. W ith several large new issues reaching the market, they continued to rise in the third quarter. Harmon H. Haymes fluctuated during the first half of the year and turned up sharply in June as large new issues were marketed. The volume of long-term Governments held has de clined steadily since mid-1966. of investments suggests that banks have added con siderably to their net liquidity so far this year. 12 PHOTO The overall pattern 6. & 7. F is h e rie s . V ir g in ia CREDIT C o m m is s io n of G am e and In la n d