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FEDERAL RESERVE BANK OF RICHMOND MONTHLY REVIEW The World Bank Group M ortgage Terms State and Local Borrowing in 1966 The Fifth D istrict The W orld Bank Group comprises three institutions. A t the heart is the Bank itself, which is more officially known as the International Bank for Reconstruction and Development (IB R D ). Founded at the Bretton W oods conference of 1944, on the same occasion as the International M onetary Fund, the Bank bears witness to the spirit of cooperation in which the nations of the world try to solve a major economic problem of our time. The aim of the Bank is to make long-term loans to member countries on more or less conventional market terms. Immediately following World W ar II, the organisation was solely concerned with financing the reconstruction of war-torn nations. Since 1948, however, it has focused its attention on the financing of economic development. During its fiscal year ending June 30, 1967, it made 47 loans amounting to almost $877 million; about 80% of this sum zvas channeled into the developing countries of Asia, Africa, and Latin America. In the twenty-one years of its operations the Bank has lent a total of some $10 billion. The IB R D is flanked by its two daughter organizations, the International Development Association (I D A ) and the International Finance Corporation (IF C ). The form er provides “ soft loans’ to those countries zvhose debt servicing problems would be critical if they had to borrow all the funds needed for development on conventional terms. During the past fiscal year, ID A extended credit amounting to about $350 million. The IF C , on the other hand, operates exclusively in the private sector where it can invest in share capital or make loans to private borrowers without government guarantees. Structure and Organization of the World Bank The Bank has a corporate structure with, at present, 109 member governments acting as stockholders of $22.9 billion of capital stock. Unless stated other wise, however, the figures used in this article will refer to the situation as of June 30, 1967; on that date the IB R D had 106 members and a capital stock of $22.8 billion. According to the Bank’s charter, the capital subscription of each member is composed of three parts. T w o per cent of the subscription is payable in gold or U. S. dollars while another 18% is payable in the member’s own currency or in its non-negotiable, noninterest-bearing demand notes. The remaining 80% is not available to the Bank for lending but can be called, if necessary, to meet the obligations on its own borrowings or on the loans that it has guaranteed. On June 30, 1967, each nation had paid in 10% of its total subscription, thus leaving some $20.5 billion subject to call. The W orld Bank is an intergovernmental institu tion, that is, it has no supranational powers. The top-ranking body is the Board of Governors on which each member country is represented by one Gover nor, usually its finance minister. The Board meets once a year and deals with broad issues. W ith few exceptions, such as the admission of new members and changes in the capital stock, it has delegated its powers to the 19 Executive Directors who are re sponsible for the Bank’s general operations. The ? five largest stockholders, the United States, the Unit ed Kingdom, Germany, France, and India, appoint one permanent Director each, while the other Direc tors are elected by groups of members. For instance, Canada, Ireland, Jamaica, and Guyana form a pool which is at present represented by a Canadian. All Directors serve two-year terms and meet frequently at the Bank’s headquarters in Washington, D. C. In voting procedures the votes of the members are weighted as follow s: each nation has 250 votes plus one vote for each $100,000 of subscribed capital. Thus the U. S., with the largest ($6.35 billion) sub scription, has 63,750 votes or 25% of the total vot ing power. The five largest stockholders together hold almost 48% of the total voting power. The 1,450 member staff of the Bank is headed by a President who is selected by the Executive Direc tors. A t present this post is held by Mr. Robert McNamara who is in charge of the day-to-day opera tions of the Bank. Both the President and the mem bers of the staff have international servant status and owe no responsibility to any national government. Financial Resources of the Bank A large part of the Bank’s resources stems from the portion that members have paid in on their capital subscription. On June 30, 1967, such funds amounted to around $2.3 billion. The provision of loans from these re sources is subject to the following rules. The 2% W O R L D B A N K L O A N S BY PURPOSE A N D AREA C u m u la tiv e to ta ls o n J u n e 30, 1 9 5 7 , a n d J u n e 30 , 1 9 6 7 (Initial commitments net of cancellations and refundings, in millions of U. S. dollars) Total Asia and the Middle East Africa 1957 1967 1957 1967 1957 1967 3,025 10,342 367 1,347 575 Electric Power 869 3,589 178 428 145 Transportation 715 3,446 145 567 137 24 128 2 276 802 Industry 439 1,597 Western Hemisphere Europe 22 Agriculture, Forestry, and Fishing Austral asia Total Telecommunications 1957 1967 1957 1967 1957 1967 3,515 317 520 1,088 2,117 678 2,843 767 29 182 186 592 331 1,619 1,553 127 181 59 405 247 740 22 2 46 282 104 103 71 88 55 234 193 172 799 57 53 185 441 23 110 Water Supply 52 27 Education Projects 24 12 Engineering Loans 2 General Development 205 205 Postwar Reconstruction 497 Source: 4 21 12 2 497 Note: 106 95 40 40 75 75 90 90 497 497 Parts may not add to totals due to rounding. Annual reports of the World Bank, 1956-57 and 1966-67. of a subscription that is paid in gold or dollars can be used freely for all purposes. The other 18% that is contributed in the various national currencies may only be used with consent of the member whose cur rency is involved. Another major source of the Bank’s loanable funds is the private capital market. The marketability of the Bank’s notes and bonds has been greatly enhanced by the provision that its paper is guaranteed by the callable capital. Before issuing paper in a certain market, the organization needs the approval of the country concerned. Thereafter, the acquired funds are freely convertible into other currencies. On June 30, 1967, the aggregate outstanding funded debt of the Bank amounted to just over $3 billion, up $269 million from the previous year. Dur ing the last fiscal year new borrowings totaled $390 million, $250 million of which was placed in the United States. The average cost of all issues of fered in 1966-1967 was 5.54%, an increase from 5.08% in 1965-1966. The highest offering yield on any W orld Bank issue yet, 6.41%, was paid in Canada in November 1966. The U. S. capital market has been the scene of more Bank borrowing operations than any other capital market. Since the first issue was floated here in 1947 the organization’s funded debt denomi nated in dollars has increased to $2.3 billion, or about 75% of the total debt outstanding on June 30, 1967. This figure includes a minor portion of se curities denominated in dollars but privately placed outside the U. S. Lately, many issues have also been floated in Germany, Switzerland, and Canada. The growth of the American market for the Bank’s issues has been greatly facilitated by the gradual re moval of legal barriers which prevented banks and institutional investors from purchasing these securi ties. Moreover, in 1949 the U. S. Congress per mitted national banks and state banks that are mem bers of the Federal Reserve System to deal in and underwrite the IB R D ’s securities. Besides the paid-in capital subscriptions and bor rowed money, the Bank gets additional funds from its earnings, from sales of portfolio loans, and from principal repayments. Net earnings for the fiscal year 1966-1967 amounted to about $170 million, increasing total reserves to just over $1 billion. The income was derived mainly from investments and loans whereas expenditures consisted mostly of inter est on borrowings and administrative outlays. Dur ing the same year the Bank sold $69 million worth of assets that it had acquired in the course of its lending activities. These sales are another means by which private sources of funds can be tapped to finance economic development. Th e L ending P o licy of the Bank Len din g opera tions of the Bank can take any of three form s: (1 ) 3 it can guarantee a loan made by a private investor; ( 2 ) it can provide funds from its own resources; or (3 ) it can raise funds in the capital market of a member country and in turn lend those. The total amount of outstanding loans made or guaranteed by the Bank can at no time exceed 100% of the total unimpaired subscribed capital, reserves, and surplus. The practice of Bank guarantees has never caught on, partly because private investors have shown lit tle interest and partly because of technical difficulties attached to such operations. In its lendings activities the Bank may deal with governments, with political subdivisions thereof, or with any private enterprise. However, if the borrower is not a government, the loan must be guaranteed by the government of the party involved. The Bank, moreover, will provide the money only if the borrower is unable to obtain a loan on “ reasonable” terms elsewhere. Funds can only be made available for specific development pro jects. The IB R D sees to it that the loan serves the purpose that it was given for and that the money is used efficiently. Contrary to most bilateral aid, the Bank’s multilateral assistance does not tie the re cipient to a particular source of supply in using the funds. Thus the recipient is free and indeed has to make the purchases where he can get the best value. The terms of each loan are negotiated individually. However, in addition to its interest rate, the Bank always charges a commission of around 1 % on the outstanding principal of its loans. During the fiscal year ended June 30, 1967, the Bank charged a rate of interest that ranged between 6 % on new loans to the less developed countries to 7% on new loans to the more advanced members. Since that date the former rate has been raised twice, bringing it to 6 */2 % . The maturities of these new loans varied between 10 and 31 years. As a consequence of the Bank’s practice not to finance the entire cost of any project or program, it frequently cooperates with private investment banks. Although the W orld Bank may handle each loan application in a slightly different way, a certain standard procedure has developed. After prelimi nary, informal contacts, during which the IB R D determines whether the project is eligible for its sup port, the loan request goes through two separate phases. In the first phase the Bank investigates the economic situation in the borrowing country and evaluates the significance of the specific project in the context of the nation’s needs and potentials. It can also make suggestions about a change in priority of the various components of a development program. If the result of this investigation is favorable, a thorough examination of the financial and technical 4 aspects of the project will follow. In this phase the Bank can recommend changes in the financial and economic policy of the member government. Usually the survey will be completed with an on-the-spot investigation by a team of its own or independent experts. Upon negotiation of the terms of the loan, the President of the Bank will then submit the re quest for approval to the Executive Directors. Once the agreement is signed an extensive “ follow-up” machinery conies into action, scrutinizing the con struction and operation of the project and constantly checking on the economic and financial developments in the country. Funds will be disbursed only as the costs for specified goods and services are incurred. Another important line of the organization’s activi ties is its technical assistance program. The IB R D has repeatedly and upon request sent missions to various nations to analyze their over-all economy and to recommend a long-term development plan. The Bank, moreover, has assisted in the founding of several development banks. Loan Operations A s shown in the table, the cumulative adjusted total of loans made by the Bank since its inception amounted to around $10.3 billion on June 30, 1967. This is exclusive of a $100 mil lion loan made to the IF C during the last fiscal year. The 1967 figure was up $777 million from the previ ous year and represented a 242% increase over the cumulative total on June 30, 1957. More than one-third of all loans has been chan neled into Asia and the Middle East. Since 1957 loans to this region have also grown at a faster rate than loans to any other area. India and Japan have been the largest recipients in this region, obtaining respectively around $1 billion and $850 million. In deed, India has received more Bank funds than any other single member. Am ong Western Hemisphere nations, M exico takes first place with receipts of some $625 million, while the Republic of South Africa leads in Africa with about $242 million. The Bank’s earliest operations took place in Europe. In 1947 the IB R D lent some $495 million to several war-torn nations, mainly France and the Nether lands, in the form of reconstruction aid. After adoption of the Marshall Plan, however, the Bank discontinued such assistance to Europe and it has since occupied itself with the finance of economic development. Am ong the purposes for which loans have been made, electric power projects rank first, followed closely by transportation projects. Loans for the im provement of roads and railways constituted about 85% of the total loans in the latter category. Over the 21 years of its existence, the Bank has received aggregate principal repayments in the amount of $1,263 billion. In addition to this, the Bank has sold over $2 billion of its loans to investors. Thus, disregarding minor adjustments, the Bank held on June 30, 1967 a total of $7,126 billion in loans. International Development Association (ID A ) The ID A , founded in late 1960, aims at providing funds for development on more liberal terms than the Bank. It may also finance projects that would be outside the Bank’s realm. Membership in ID A is open only to Bank members and though the two organizations have separate resources, they share the same administration. On June 30, 1967, ID A ’s funds, contributed by its 97 members, amounted to $1.7 billion, of which the U. S. had contributed one-third. Since that date two more countries have joined the organization. Also, a $1.2 billion supplement was recently agreed upon. The members are divided into two grou ps: developing nations that are potential recipients of ID A credits, and highly developed nations that are in principal only contributors. On June 30, 1967. the latter group had supplied around $1.5 billion in fully convertible currencies to ID A ’s resources. ID A , moreover, has received $200 million in grants from the W orld Bank. The Association follows mostly the same operating policy as the IB R D where selection and preparation of projects are concerned. The terms of its credits are, however, considerably easier. No interest is charged except for a ^ of 1% per annum service charge on the outstanding amount to cover its ad ministration costs. Furthermore, maturities run up to 50 years and repayment, due in foreign exchange, does not start until after 10 years. On June 30, 1967, the cumulative total of ID A ’s credits amounted to about $1.7 billion, up $354 mil lion from the previous year. Thus, almost all of its resources have been committed. India and Pakistan have been the leading recipients, accounting together for almost three-fourths of all allotted funds. Around a third of ID A ’s resources has been channeled into transportation projects, although in recent years the finance of industrial imports has gained much in importance. The International Finance Corporation The IFC was established in 1956 to stimulate the growth of private enterprise in the organization’s member countries. T o this end it provides financing, in association with private investors and without gov ernment guarantee, for the establishment, improve ment. and expansion of private enterprises in cases where sufficient private capital is not available on “ reasonable” terms. The terms of the investments are determined in each individual case. The IFC also tries to create new investment opportunities by bringing investors and management together. The administration of the Corporation is largely inter locked with the Bank's. On June 30, 1967, the organization’s capital, con tributed by its 83 members, amounted to about $100 million. The U. S. contributed about a third of this sum. During the fiscal year 1966-1967, the IFC also received a $100 million line of credit from the W orld Bank. The Corporation can replenish its resources by selling its investments to private interests, thus mobi lizing private capital for development purposes. Dur ing the first years of its operation, however, the IFC was seriously restricted in this. Since it was not allowed to make equity investments it had to resort to other types of investments, such as loans in the form of convertible debentures. These were less marketable and therefore less attractive to private investors. Thus the restriction hampered an easy revolving of funds and threatened the growth of the Corporation’s operations. In 1961 the organization’s charter was amended to permit equity investment. On June 30, 1967, cumulative sales of loans and equities had yielded $41 million. A t the end of fiscal 1967 the cumulative total of operational investments amounted to $196 million, of which around 40% consisted of shares. A pproxi mately half of the commitments has been made in Latin America, notably in M exico and Brazil. The vast majority of enterprises financed by the IFC has been manufacturing industries, with chemical and iron and steel industries alone accounting for about 35% of total commitments. A substantial amount, $20 million, has been devoted to another line of the Corporation’s activities: participation in de velopment finance companies. Conclusion The Wrorld Bank Group has becom e the most important institution devoted to the financ ing of economic development. Over the 21 years of its activities, the Bank has gained a wealth of ex perience that enables it to advise member govern ments as an expert on the whole range of develop ment problems. The policy to serve as a “ lender of last resort,” as well as the thorough way in which it investigates loan applications have contributed to the organization’s prestige. The close cooperation be tween the three members of the Group has resulted in maximum efficiency in the use of available funds. Jan H. W . Beunderman 5 Mortgage Terms 1966 Source: 1967 Federal Home Loan Bank Board. __1 J —L 1 _L I__I I 1 I 5 FAMILY ROOM I^ W IO " I I I__I__ L i__1 1 1 1 I 1967 1968 il Home Loan Bank Board and +he of Governors of the Federal Reserve System. GARAGE 2l,4/ /x23,4/ / BEDROOM n o " x 1 'io" 2 FIRST FLOOR • In th e fir s t q u a r te r o f th is y e a r in te re s t ite s o n re a l e s ta te lo a n s s u rp a s s e d th e p re v io u s h ig h s set d u r in g th e " c r e d it c ru n c h " o f 19 66 . Rates c o n tin u e d e s ta b lis h in g n e w re c o rd s . In A p r il th e y ie lc >n 3 0 -y e a r h ig h e r th a n th e p re v io u s p e a k o f 6 .8 1 % in b v e m b e r to rise in th e second q u a r te r , FHA lo a n s 1966. re a c h e d F o llo w in g 6 .9 4 % , th e re m o v a l s lig h t ly of th e 6% s ta tu to r y c e ilin g a n d th e e n a c tm e n t o f a >4 % a d m in is tr a tiv e c e ilin g in M a y , th e y ie ld o n 3 F H A -in s u re d m o rtg a g e s ju m p e d to 7 .5 2 % in jn e . h o m es h a v e a ls o rise n a b o v e re c e n t re co rd s, C o n v e n tio n a l fir s t m o r tg a g e ra te s o n n e w fh e FH A series f o r such ra te s a v e r a g e d 7 .2 5 % in J u n e , w e ll a b o v e th e 6 .7 0 % h ig h re c o rd e d ir >oth O c to b e r a n d N ovem ber F e d e ra l H o m e Loan B a n k B o a rd series w a s .03% ba sis re a c h e d in J a n u a r y 1967. • U n lik e b e e n as re s tr ic tiv e as in th e in June, a n d e x is tin g ho m es w e re 2 5 .4 a n d 2 2 .6 y e a r e x is tin g ho m es. 1966, a n d above th e th e peak .v e ra g e m a tu r itie s , a f t e r to u c h in g lo w s in th e f a ll J u n e 1 9 6 8 , th e la te s t m o n th f o r w h ic h in fo rr a tio n on of p o in ts ra te s ^ fe 'n ra te te rm s , a s re p o rte d b y th e FHLBB, h a v e n o t 1 9 6 6 p e rio d , o f 1 9 6 6 , rose s h a r p ly in e a r ly 1 9 6 7 a n d sine th a t tim e a s im ila r u p w a r d p a tte r n . 44 is h a v e tre n d e d a v a ila b le , re s p e c tiv e ly . g r a d u a lly a v e ra g e u p w a rd . m a tu ritie s on In new L o a n -to -p ric e ra tio s h a v e fo llo w e d The r a tio in J u n to f th is y e a r w a s 7 4 .4 % o n n e w h o m es a n d 7 3 .1 % • D e s p ite re la tiv e ly h in lo a n -to - p ric e ra tio s , a v e ra g e dow n p a y m e n ts h a v e ris e n b e ca u se o f in c re a s e d s e le c tiv ity tf.vard b o rr o w e rs on u p g r a d e d o r m o re e x p e n s iv e s tru c tu re s a n d b e ca u se o f s h a r p ly h ig h e r p r : j s f o r h o u s in g . a n e w h o m e fin a n c e d up 1966 1967 fro m th e Federal Home Loan Bank Board. Source: 12 .2% sa m e p e rio d . th e f a ll o f 1966. R e fle c tin g th e th e h ig h o f $ 7 ,6 0 0 re a c h e d d u r in g dow n $ 3 0 ,4 0 0 in J u n e , The a v e rg e p ric e o f a n e x is tin g ho use rose 15 .1% d u r in g h ig h e r pr:es o f h o m e s, th e a v e ra g e n e w h o m e fin a n c e d b y a c o n v e n tio n a l fir s t 'o r tg a g e th e a v e r a g e The a v e r a g e p u rc h a s e p ric e o f b y a c o n v e n tio n a L tU ^ -rn p rtg a g e , f o r e x a m p le , w a s was $ 7 ,8 0 0 th e tig h to o n e y p e rio d o f 1 9 6 6 . p a y m e n t o n e x is tin g in dow n p a y m e n t on a June, s o m e w h a t a b o v e O v e r th e sa m e tim e s p a n hores ro se fr o m $ 6 ,4 0 0 to $ 6 ,8 0 0 . I « I » t 1966 Source: » I t » I > » » » 1 i i 1967 Federal Home Loan Bank Board. 1 - I - 1— 1 1 1 1 1 - 1 .. State And Local B o r r o wi n g The effects of tight money are felt, with varying intensity, by all sectors of the economy. The hous ing sector, for example, is especially sensitive to restrictive credit conditions, due in part to certain statutory and institutional rigidities which channel funds away from mortgage markets in periods of tight money. Experience in the credit crunch of 1966 suggests that the borrowing and spending plans of state and local governmental units might also bear a disproportionate share of the burden of tight money. T o study the effects of the 1966 tight money episode on the financing plans of state and local units the Federal Reserve System recently conducted a two-stage nationwide survey of both large and small state and local governmental units. Specifically, the survey was aimed at determining how, if at all, the financing and spending plans of these units were affected by the tight money conditions that existed in 1966. Results of the survey of large units over the nation as a whole have been tabulated and analyzed in an article in the July 1968 issue of the Federal Reserve Bulletin. Detailed survey data are now available by Federal Reserve Districts and the results in the Fifth District are reviewed in this article. Survey Participants The first stage of the sur vey, directed exclusively at large state and local gov ernmental units, embraced the following types of units above the specified minimum size: Counties 250,000 population Cities or Townships 50,000 population Special local districts $5 million debt outstanding Local school districts 25,000 enrollees States All State agencies All except very small State and local institutions of higher education All except very small 8 O f the approximately 1,000 such units surveyed in the nation as a whole, 64 were located in the Fifth District. The survey attempted to record the borrowing and spending experiences only of governmental units which had definite intentions to borrow in 1966. Respondents indicating no intention to borrow were not questioned further. The criterion for judging the definiteness of intentions to borrow was whether the appropriate officials had actually arrived at a decision, whether or not publicized, to go through with a bond issue some time in 1966. Because of its informal and somewhat subjective nature, this admittedly imprecise criterion may be the source of some bias in the survey results. State and Local Financing Needs Since W orld W ar II state and local government programs and facilities have been growing by leaps and bounds. T o finance increased spending for such programs, local units have been large sellers of bonds. Between 1946 and 1966 new issues of long-term municipals increased from $1.2 billion to $11.1 billion per year. Between 1956 and 1966 total state and local govern ment securities outstanding rose from $47.4 billion to $104.8 billion. These governments currently fi nance about half of their capital outlays from the sale of bonds. The increased demand for funds from state and local units as well as from corporations, the Federal Government, and others has been a major factor raising borrowing costs over the last several years. Over much of this period the market for municipal securities has grown rapidly, most notably through increasing commercial bank participation. Neverthe less, state and local borrowers have had to raise offer ing yields to attract funds. Rising capital market rates, of course, increase the cost of financing new projects and municipal units must either be pre pared to pay more for money or abandon or post In 1 9 6 6 pone borrowing. In some cases statutory limitations 82% of the $7.56 billion total originally planned. Of on interest rates that can be paid have kept some the $1.36 billion shortfall, $1.29 billion represented municipal borrowers out of the market. abandonments, i.e., issues canceled indefinitely or Changes in Borrowing Plans In both the Fifth District and the nation as a whole, most survey re spondents noted that their borrowing plans were moderately curtailed in 1966. O f the 64 Fifth Dis trict units, 37, or almost 58% , indicated having had definite plans to borrow long-term (over one year) in 1966. O f these 37, only four cancelled or postponed beyond 1966 all of their borrowing plans. A t the national level, just over half of the 983 re porting units indicated definite plans to borrow and 11 % of these completely canceled or postponed be yond 1966 their intended offerings. Furthermore, of the 33 District units which did borrow in 1966, five altered their original plans in some way, in most cases by postponing, abandoning, or reducing at least some issues. This experience matches closely the national figures, which show that just over 15% of all units which borrowed altered their original plans in some way. Thus, of all units that expressed a definite intention to borrow in 1966, about a fourth indicated some change in their original plans. This fraction holds both nationally and for the Fifth District. O f the 440 units across the nation which borrowed long-term in 1966 there were 185 cities and town ships, 80 state institutions of higher education, 43 special districts, 39 counties, 36 school districts, 34 state agencies, and 23 states. Borrowing units in the District included 16 cities and townships, 5 coun ties, 4 states, 4 special districts, 2 school districts, and 2 state agencies. For the entire nation, the surveyed units completed $6.20 billion of long-term borrowing in 1966, about delayed until 1967. Another $0.1 billion repre sented reductions, i.e., a scaling down of the amount originally planned. Increases in offerings amounted to only $34 million, thus giving the net $1.36 billion shortfall of borrowing. Postponements, or issues delayed but sold later in 1966, and accelerations amounted to $0.4 billion and $0.1 billion, respec tively, but did not affect annual totals. In the Fifth District, the net change in planned borrowing amounted to a decrease of $56 million. This amounted to 9.5% of the planned level of $591 million, a notably lower level than the 18% for the nation as a whole. A s in the national figures, abandonments accounted for the largest part of the cutback, $44 million. There were $12 mil lion of reductions and no increases in the District. Postponements in the District amounted to $54 million and there was no offering whose issue date was accelerated. The primary cause of alterations in borrowing plans was high interest costs. In some cases govern ment officials deemed the going market rates to be excessively high and in other cases interest rate ceil ings established by bond referenda or statutory or constitutional law prevented the sale of securities. Nationally, units which abandoned offerings, by far the largest and most frequent way in which plans were altered, indicated that 78% of all abandon ments were primarily due to high interest rates. In the Fifth District no other primary reasons were cited. Similarly, over 75% of all postponements in the nation were due to credit market conditions and in the Fifth District it was the only primary reason cited. High interest rates and expectations of higher 9 rates were also variously the causes of all reductions, trict, abandonments of borrowings for education accelerations, and increases in offerings occurring in were largest, nearly $15 million, with utilities rank ing second with $13 million, and transportation next this District. with $9 million. Characteristics of Offerings For the nation as a whole, the number of municipal offerings by large units in 1966 totaled 741, of which 414 were general obligation securities. The pattern for reductions, in creases, accelerations, and postponements did not show variations as significant as those just mentioned, in part because of the small amounts involved. In the Fifth District there were 46 offerings, of which 37 were general obliga Capital Spending tions. The distribution of these offerings among rowing in 1966 had a relatively small immediate im borrowing units showed that, on the national level, pact on the spending plans of large municipal units 279 units had one offering, 95 units had two offer across the nation during 1966. ings, 31 units had three offerings, and 35 units had reported canceling or postponing about $120 million four or more offerings. of contract awards in 1966 because of borrowing Of the 33 borrowing units in the District, 23 had one offering, eight had two difficulties. T h e cutback of long-term b o r Twenty-six units This is less than one-tenth of the total offerings, two had three offerings, and there were no shortfall from planned borrowing. units with four or more offerings. part of the cutbacks in awards was associated with For the nation as a whole, nearly all long-term borrowing in 1966 was effected through the private The very large abandonments rather than temporary postponements or reductions of offerings. In the Fifth District only market. Nationally, only $271 million was sold e x one unit reported a cutback of contract awards. This clusively and directly to other governmental units, amounted to $2.29 million. including the Federal Government. The remainder Three principal reasons appear to explain large In government units’ ability to continue with their 1966 the Fifth District, only $2 million was borrowed di capital spending plans despite cutbacks in borrowing rectly from other governmental units out of the total of $535 million of long-term borrowing. in 1966. Over half of the national total of $1.1 billion of capital outlays which were continued despite of the $6.2 billion total was from private sources. O f the $6.2 billion borrowed in the United States during 1966, almost $2.0 billion was for educational purposes. The next largest amount, $1.7 billion, was destined for transportation facilities. Another billion dollars was intended for utilities. The re mainder was divided among health and welfare pro jects, administrative facilities, and other purposes. In the District, $212 million was for education facili ties, $173 million for transportation, and $72 million abandonments of borrowing was apparently due to the length of time between borrowing dates and the letting of contracts. be needed only in the future. In essence, the units were reducing their liquidity. The substitution of short- for long-term borrowing and the drawing down of large liquid assets were apparently equally responsible for most of the rest of the $1.1 bil lion. for utilities. W hile borrowing for education was larger than Abandonments were not seen to be affecting 1966 spending because the funds would Approximately $240 million of spending was maintained by each method. for any other activity, the volume of abandonments Memorandum across the nation which had been intended originally 1966 appears to have had a definite effect on borrow for education, $166 million, was significantly below ing of large municipal units during the year and a the volume of abandonments transportation, somewhat limited effect on capital spending, gener $568 million, and the $231 million of abandoned alizations about all municipal units are not in order. borrowing intended for utilities. for W h ile the tight m oney period of Health and wel Results of the survey of smaller units are being fare projects also accounted for a disproportionately tabulated high $107 million of abandonments. characteristics. Digitized for10 FRASER In the Dis now and may show some different Joseph C. Ramage TOTAL INVESTMENTS FIFTH DISTRICT WEEKLY REPORTING BANKS Cumulative Percentage Change has been tighter, and the demand for loans greater. Reflecting these changes in conditions, banks have slightly reduced their holdings of Government se curities and added to their holdings of other securities at a considerably slower pace. Loan-Deposit Ratio T h e change in the ratio of total loans to total deposits, a measure of the bank ing system’s ability to meet future loan demand, is indicative of the contrast between this year and last. Deposits have grown less rapidly this year than in 1967, while loans have shown more strength. Con sequently, District banks are in a more “ loaned-up” condition than in 1967. Depicting these changes, the loan-deposit ratio for such banks rose from 64.1% in July 1967 to 64.5% in July 1968. LOAN-DEPOSIT RATIO FIFTH DISTRICT WEEKLY REPORTING BANKS Per Cent The rapid expansion that characterized total in vestments at Fifth District weekly reporting banks in 1967 all but disappeared in the first seven months of this year. From January through July of 1967 total investments increased by 12.5%, while over the same period in 1968 the cumulative increase was a mere 0.7% . The cause of this sharp contrast lies mainly with the shift in credit conditions. Last year the Federal Reserve was injecting reserves into the banking system at a fast pace. This situation, coupled with slack loan demand, left banks with funds to buy securities, and so total investments rose quick ly and substantially. But this year monetary policy 11 INVESTMENTS FIFTH DISTRICT WEEKLY REPORTING BANKS $ Millions Digitized for12 FRASER Changes in Investments A s the grow th of time deposits slowed from 1967 and investors allowed maturing certificates of deposits to run off in the presence of high market rates, banks were faced with the decision of how to accommodate loan demand. T o increase their supply of funds, banks began to liqui date their holdings of U. S. Government securities. One-to-five year Federal Government issues declined as early as November of last year, remained practi cally unchanged from February to May, and then dropped substantially in both June and July. H old ings of long-term Governments have fluctuated nar rowly for most of 1968, while remaining well below the level of the comparable seven-month period last year. Holdings of short-term Governments began decreasing in February, reached a low point in April and May, and then rose in June and July. Treasury financing of $4 billion tax anticipation bills in early July could have influenced this upward movement. W ith the beginning of 1968, banks also began investing less heavily in tax-exempt state and local government securities. Municipals leveled off at the first of the year to increase only slightly through July. The general movement, then, of total investments suggests that banks have reduced their investment portfolios to meet the changes brought about by the rising demand for loans. Carla W . Russell