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I ll t h i s i s s u e : L ia b ility Its M a n a g e m e n t G ro w th D is tric t B o a rd D is tric t a n d B a n k in g o f B a n k in g : Im p a c t N o te s D ire c to rs B u s in e s s C o n d itio n s L ia b ilit y M a n a g e m e n t B a n k in g I t s G r o w t h a n d I m p a c t A g ro w in g n u m b e r o f banks engage in lia b ility m a n a g e m e n t b a n k in g (LM B). Th is is th e p ra c tic e o f b u y in g reserves, c h ie fly fo r m e e tin g le n d in g c o m m itm e n ts (lines o f c re d it) and reserve re q u ire m e n ts, th ro u g h these m eans: b o rro w in g Federal fu n d s and E uro do lla rs, e n te rin g in to repurchase ag ree m ents, and m a rk e tin g n e g o tia b le ce rtific a te s o f d e p o s it (CD 's) and b a n k -re la te d c o m m e rc ia l paper. U n d e r the c o n c e p t o f LMB, an o u tflo w o f d e po sits o r an increase in loan de m a n d m ay signal a ba nk to raise o ffe rin g rates on Fed fu n d s loans, C D 's, o r o th e r lia b ilitie s in o rd e r to purchase reserves. C o n ve rse ly, a re d u c tio n in loan d e m a n d o r in flo w o f d e po sits m ay cause a ba nk to re d u ce its o ffe rin g rates on lia b ilitie s . The c o n c e p t o f LMB d iffe rs fro m w h a t is k n o w n as asset m a n a g e m e n t b a n k in g — the p ra ctice o f a d ju s tin g th e v o lu m e and cost o f b a n k c re d it in response to changes in reserves and deposits. F o llo w in g this c o n c e p t, a b a n k reacts to a d e c lin e in de po sits and reserves by s e llin g secu ritie s, raising le n d in g rates, and ra tio n in g a va ila b le loan fun ds by scree ning a p p lica n ts m o re c a re fu lly . Banks p ra c tic in g asset m a n a g e m e n t b a n k in g ta ilo r th e ir loan c o m m itm e n ts to a n tic ip a te d le n d in g cap acity, w h ic h is d e te rm in e d by flo w s o f d e m a n d and savings d e p o sits— o v e r w h ic h a ba nk has little c o n tro l. Banks p ra c tic in g LMB, o n the o th e r hand, base th e ir loan term s and c o m m itm e n ts n o t o n ly on a n tic ip a te d m o ve m e n ts in d e m a n d and savings de po sits b u t also o n th e a n tic ip a te d a v a ila b ility and cost o f reserves fro m d is c re tio n a ry sou rces.1 T he c o n c e p t o f LMB and asset m a n a g e m e n t b a n k in g are n o t m u tu a lly exclusive. Banks are s till in te re ste d in m an a g in g th e ir assets— such as a d ju s tin g rates on and v o lu m e s o f o v e rn ig h t loans to G o v e rn m e n t se c u rity dealers— in o rd e r to m a x im iz e earnings and m a in ta in liq u id ity . A lso , banks have alw ays been in te re ste d in m an ag ing de po sits and o th e r lia b ilitie s to increase le n d in g ca p a city and p r o fit p o te n tia l. W h a t is n e w a b o u t LMB is (1) th e ty p e o f lia b ilitie s used— na m ely, m o n e y m a rk e t lia b ilitie s in n e g o tia b le and n o n d e p o s it fo rm s ; (2) c o m p e tin g fo r fu n d s on a p ric e basis; and (3) th e l S in ce m o n e y m arket funds are available at a p ric e — interest rate regulations pe rm ittin g — the p u rch a se o f these funds is at the discre tio n o f banks. H e n c e , th ese so u rce s of funds are so m e tim e s la b e le d " d iscretio n ary so u rce s." M o n th ly R e v ie w , Vol. LVI, No. 2. Free subscription and additional copies available upon request to the Research Department, Federal Reserve Bank of Atlanta, Atlanta, Georgia 3030.5. M O N T H L Y R E V IE W purchase o f reserves by th e sale o f lia b ilitie s , rathe r than th e sale o f liq u id assets, such as Treasury b ills. This a rtic le describes th e h is to ric a l d e v e lo p m e n t and re g u la tio n o f Federal fu n d s loans, n e g o tia b le C D 's, E u ro d o lla r b o rro w in g s , repurchase agree m ents, and b a n k -re la te d c o m m e rc ia l paper. The e ffects o f LMB tra n sa ctio n s o n th e ba la nce sheet o f th e b a n k in g system are d e scrib e d in th e A p p e n d ix , w h ile e lsew h ere in th e a rtic le , special a tte n tio n is given to th e im p a c t o f LMB o n c re d it a v a ila b ility .2 F e d fu n d s v o lu m e e x p a n d s ra p id ly B illion $ - *N et Fed funds purchased - 6 -4 -2 The Funds Market: LMB's Start History. A d e s c rip tio n o f th e e v o lu tio n o f LMB m ust start w ith th e re ju v e n a tio n o f th e Federal fu n d s m a rk e t (the M a rke t) in th e 1950's. Federal fu n d s are d e p o s it balances at Federal Reserve Banks. These de po sits, w h ic h c o n s titu te the m a jo r p o rtio n o f m e m b e r b a n k reserves, are b o rro w e d and le n t in th e M a rk e t, u su a lly fo r on e day. B o rro w in g banks use th e loan proceeds to m ee t reserve re q u ire m e n ts o r to expand loans w h ile le n d in g banks earn in te re st on th e loan. In e ffe ct, th e M a rk e t is a d a y -to -d a y c o n d u it fo r tra n s m ittin g reserves fro m reserve-surplus to re se rv e -d e fic it ba nks.3 The M a rk e t o rig in a te d in th e 1920's w h e n N e w Y o rk bankers rea lize d th e y c o u ld b o rro w th e excess reserves o f o th e r banks m o re ch e a p ly tha n th e y c o u ld b o rro w reserves at th e d is c o u n t w in d o w . B oth le n d in g and b o rro w in g banks s to o d to p r o fit b y such loans. Federal fu n d s tra d in g in th e 1920's was c o n fin e d to o n ly 30 to 40 m a jo r banks. A fte r b e in g d o rm a n t in th e 1930's and 1940's, th e m a rke t revived in th e 1950's w h e n stro n g c re d it de m an ds began to p u t pressures o n ba n k reserve p o sitio n s. As th e M a rk e t m u s h ro o m e d in size d u rin g the 1950's and 1960's, it becam e m o re than ju s t 2LM B also has in terest rate effects, bu t these are not d iscu ssed. 3A few b ro kers and o n e large bank, all lo ca ted in N ew Y o rk C ity, m ake a m arket in F e d funds b y m atching banks w ishing to b u y an d sell F e d funds. Th e se m arketm akers w h o re ceiv e co m p e n sa tio n for this se rv ice , ch iefly from co m m issio n s on secu rity transactions o f banks, have d ire ct lines w ith large N ew York C ity banks an d are in frequ en t telep h o n e co m m u n ica tion w ith large banks all o v e r the cou ntry. T h ese banks, in turn, b u y an d sell funds for n u m erou s c o rresp o n d e n ts b e fo re clearing in the national market. A fter b ein g in fo rm e d b y te le p h o n e , selling banks o rd e r reserves to b e sh ifted to b u yin g banks via Federal R eserve w ires. F E D E R A L R E SE R V E B A N K O F A T L A N T A a means o f la s t-m in u te reserve a d ju s tm e n t. Large banks ta p p e d th e M a rk e t as a re g u la r source o f funds. M a n y sm a lle r banks— u n d e r th e in d u c e m e n t o f h igh rates— re g u la rly invested in th e M a rk e t as an a lte rn a tiv e to in v e s tm e n t in s h o rt-te rm G o v e rn m e n t secu ritie s and, in som e cases, as a su b s titu te fo r loans. T he im p o rta n c e o f Fed fu n d s loans as revenue p ro d u ce rs fo r sm all banks is b ro u g h t o u t b y Sixth D is tric t data, w h ic h sh o w th a t in te re s t on Federal fu n d s loans a c c o u n te d fo r o v e r 5 p e rc e n t o f 1969's o p e ra tin g in c o m e at m e m b e r banks w ith de po sits o f less tha n $10 m illio n . Effects. A b a n k th a t has ready access to reserves in th e M a rk e t does n o t re q u ire large am o u n ts o f excess and seco nd ary reserves (m a in ly T reasury b ills) to m ee t co n tin g e n cie s. In a d d itio n , th e M a rk e t tends to reduce de sire d levels o f excess and secondary reserves by p ro v id in g a lu c ra tiv e s u b s titu te fo r these assets. Thus, th e M a rk e t c o n trib u te d to th e e ro sio n o f excess reserves and s h o rt-te rm G o v e rn m e n t secu ritie s in ba nk assets d u rin g th e p o s t-W o rld W a r II p e rio d .4 W h e n a ba nk de cid es to le n d excess reserves 4 From 1950 to m id-1970, average excess reserves d e c lin e d from $1 billion to less than $.2 b illio n , and G o v e rn m e n t securities m aturing within o n e year d e clin e d from abou t 12 p e rc e n t to 5 p e rce n t o f bank credit. Rising interest rates, the increase in average bank size , advances in co m m u n ica tio n , and the d e v e lo p m e n t of o th e r d iscretio n ary so u rces also w e re partly re sp on sib le for the d e clin e s in excess and se co n d a ry reserves. 23 to a n o th e r bank, these fo rm e rly id le reserves are n o rm a lly used to expand ba nk c re d it and deposits at th e ba nk b o rro w in g th e reserves. Since th e b o rro w e r o f Federal fu n d s is u su ally a large bank, this tra n sa ctio n increases th e a m o u n t o f c re d it a va ila b le to th e custo m e rs o f large banks. In e ffe ct, th e M a rk e t gives b o rro w in g banks— and in d ire c tly th e ir custo m e rs— access to th e le n d in g ca p a city o f lenders o f Federal fu n d s. C o nve rsely, the M a rk e t enables lenders o f fu n d s, u su ally sm a lle r banks, to " p a rtic ip a te " in loans m ade b y larger banks. In th is process, th e M a rk e t tends to fo s te r u n ifo rm c re d it c o n d itio n s th ro u g h o u t th e c o u n try by a llo c a tin g le n d in g ca p a city to g e og raph ica l areas and classes o f banks th a t b id th e m ost fo r Federal fun ds. From th e s ta n d p o in t o f th e b a n k in g system , any e c o n o m iz in g o f excess reserves th a t results fro m Federal fu n d s tra d in g increases th e ra tio o f de po sits and bank c re d it to reserves. In o th e r w o rd s, this e c o n o m iz in g increases th e e ffic ie n c y o f reserves in s u p p o rtin g d e po sits and b a n k c re d it (fo r m echanics, see A p p e n d ix , Case A). M a n y sm all banks sold Treasury b ills in the 1960's and le n t th e proceeds, via th e M a rk e t, to la rge r banks— w h o , in tu rn , used th e proceeds to expand loans. These transa ction s d id n o t a ffe c t th e level o f excess reserves o r to ta l b a n k c re d it, b u t th e y d id a lte r th e c o m p o s itio n o f ba nk c re d it; m o re s p e c ific a lly , loans increased and Treasury b ills decreased. T he increase in loan a v a ila b ility at large banks th a t results fro m these transa ction s does n o t red uce lo an a v a ila b ility to b o rro w e rs at sm a lle r banks; rather, it reduces b ank de m a n d fo r T reasury b ills . H o w e ve r, w h e n the m o n e y m a rke t tig h te n e d in 1969 and th e Fed fu n d s rate was o fte n a b ove 9 p e rce n t, som e sm all banks u n d o u b te d ly d iv e rte d fu n d s fro m le n d in g to local b o rro w e rs to Federal fu n d s loans to large banks. W h e n th is o c c u rre d , sup plies o f fun ds increased to custo m e rs o f large banks at th e expense o f custo m e rs o f sm a lle r banks. In so fa r as Fed fu n d s loans are c o n s id e re d less p e rfe c tly safe than excess reserves and Treasury b ills , th e s u b s titu tio n o f Fed fu n d s loans fo r excess reserves and s h o rt-te rm Treasury securities lo w ers, if o n ly s lig h tly , th e q u a lity o f ba nk liq u id assets. O n th e o th e r hand, th e M a rk e t a c tu a lly tends to increase ba nk liq u id ity by a ffo rd in g a d is c re tio n a ry source o f reserves and e n a b lin g c u rre n t excess and seco nd ary reserves to be used m o re e ffic ie n tly . Regulation. The M a rk e t has alw ays been re la tiv e ly free fro m re g u la tio n . H o w e ve r, as m o n e y m arkets g re w p ro gre ssively tig h te r in th e late 1960's, banks began to m ake in crea sing use o f b o rro w in g on an o v e rn ig h t basis fro m in d iv id u a ls , c o rp o ra tio n s , and state and lo cal g o ve rn m e n ts. The Board o f G o ve rn o rs ru le d , e ffe c tiv e February 12, 1970, th a t these transa ction s w e re a means th ro u g h 24 w h ic h a ba nk "o b ta in s fu n d s fo r use in its b a n k in g bu sin ess." Thus, lia b ilitie s in c u rre d in such transa ction s w e re ru le d as de po sits, ra th e r tha n Federal fu n d s and w e re su b je c t, th e re fo re , to R egulations D (reserve re q u ire m e n ts) and Q (in te re st rate ce ilin g s). Federal fu n d s tra n sa ctio n s in v o lv in g G o v e rn m e n t s e cu rity dealers, m u tu a l savings banks, savings and lo an associations, and fo re ig n banks re m a in e d e x e m p t fro m re g u la tio n s. The C D : A Giant Leap History. W h ile th e M a rk e t gave large banks d is c re tio n a ry access to th e liq u id ity o f th e b a n k in g system , th e n e g o tia b le C D gave these banks d is c re tio n a ry access to th e liq u id ity o f th e n o n b a n k se cto r o f th e m o n e y m a rk e t (c o rp o ra tio n s , insurance co m p a n ie s, in s titu tio n s , state and lo cal g o ve rn m e n ts, Federal agencies, etc.). T he C D was an in n o v a tio n o f m o n e y m a rke t banks th a t w e re fru s tra te d by th e re la tiv e ly s lo w g ro w th o f c o rp o ra te d e m a n d d e p o sits in th e 1950's. C o rp o ra te d e m a n d de po sits, w h ic h w e re th e b u lk o f de po sits at these banks, d id n o t g ro w m u ch in d o lla r v o lu m e because c o rp o ra te treasurers k e p t trim m in g balances to take advantage o f risin g m o n e y m a rke t in te re s t rates. Thus, le n d in g ca p a city o f large banks g re w s lo w ly at a tim e w h e n c re d it de m an ds w e re g a in in g m o m e n tu m and in te re s t rates w e re tre n d in g u p w a rd . A seco nd ary m a rk e t f o r C D 's— w h ic h was o rg a n ize d by a G o v e rn m e n t se cu rity d e a le r and a N e w Y o rk C ity b a n k in F ebruary 1961— g re a tly increased th e liq u id ity o f C D 's b y p e rm ittin g th e ir sale b e fo re m a tu rity . M o n e y m a rk e t experts at banks in fin a n c ia l centers le arn ed to gauge th e q u a n tity o f C D m o n e y ava ila b le to th e m at variou s in te re s t rates. By a lte rin g rates (in te re st ce ilin g s p e rm ittin g ) a b a n k c o u ld in flu e n c e th e v o lu m e o f C D 's it sold. M o n e y c e n te r banks began p u b lis h in g C D o ffe rin g rates fo r va rio u s m a tu ritie s , b u t rates w e re o fte n n e g o tia te d in d iv id u a lly .5 M o n e y m a rk e t banks a ttra c te d size ab le v o lu m e s o f C D 's in th e ea rly 1960's, g re a tly in crea sing th e ir share o f in te rm e d ia tio n and p e rm a n e n tly b re a k in g th e ir o rie n ta tio n to w a rd d e m a n d de po sits. S ub seq ue nt d e clin e s o f C D 's in 1966 and 1969 w e re an im p o rta n t im p e tu s to th e d e v e lo p m e n t o f o th e r d is c re tio n a ry sources o f fun ds. r'S o m e large banks have a C D d esk w h ich analyzes C D 's d u e to m ature sh o rtly, stu dies C D availability and rates p a id b y co m p e tito rs, m akes d e cisio n s about offerin g rates, and m akes a se co n d a ry m arket in C D 's. A su p p lie r o f C D funds w ill co m m o n ly call a few banks to en su re a co m p e titiv e rate. M O N T H L Y R E V IE W Effects. In try in g to a ttra c t C D 's, large banks c o m p e te w ith n o n b a n k sectors o f th e m o n e y m a rke t— such as c o m m e rc ia l pa p e r dealers, G o v e rn m e n t s e cu rity dealers, e tc.— ra th e r than w ith sm all banks. T h e re fo re , th e d e v e lo p m e n t o f C D 's s h ifte d in te rm e d ia tio n to large banks fro m th e n o n b a n k se cto r o f th e m o n e y m a rk e t ra th e r than fro m sm all banks. Since m o n e y m a rk e t banks d o give m o re em phasis to co n s u m e r loans and sm all business fin a n c in g than th e n o n b a n k se cto r o f th e m o n e y m a rke t, a s h ift o f m o n e y m a rke t fu n d s in fa v o r o f banks m ust have m ade m o re c re d it a va ila b le to consum ers and sm all businesses. From th e s ta n d p o in t o f th e b a n k in g system , th e purchase o f a C D transfers lia b ilitie s fro m d e m a n d de po sits to tim e de po sits. Since th e tim e d e p o s it reserve re q u ire m e n t is a b o u t o n e -th ird th a t o f d e m a n d de po sits, excess reserves are generated by th e transfer. If these excess reserves are n e ith e r de sire d b y banks n o r ab so rb e d b y th e Federal Reserve, th e y are th e basis fo r an exp an sion o f ba n k c re d it and de po sits. (See A p p e n d ix , Case B.). T he Federal Reserve can n e u tra liz e th e b a n k -c re d it and d e p o s it-in c re a s in g effects o f a C D issue by a b s o rb in g reserves equal to th e increase in excess reserves ge ne rated b y th e CD issue.6 Regulation. D u rin g th e e a rly 1960's, re g u la to ry actio ns e n co u ra g e d a rap id exp an sion o f CD 's. D u rin g m u ch o f th is p e rio d , Federal Reserve p o lic y was e xp an sion ary, and th e g ro w th o f C D 's and ba nk c re d it was co n sid e re d to be co n siste n t w ith th is p o lic y . Reserve re q u ire m e n ts a p p lic a b le to C D 's w e re lo w e re d fro m 5 p e rc e n t to 4 p e rc e n t in N o v e m b e r 1962, and C D in te re st rate c e ilin g s w e re raised on fo u r occasions d u rin g th e 1962-1965 p e rio d to p e rm it banks to o ffe r c o m p e titiv e rates o n C D 's. As C D 's c o n tin u e d to exp an d ra p id ly in th e firs t h a lf o f 1966, in spite o f a s h ift to w a rd m o n e ta ry restraint, th e Federal Reserve m o v e d to lim it C D g ro w th . Reserve re q u ire m e n ts w e re raised to 5 p e rc e n t and th e n 6 p e rc e n t (on de po sits o f o ve r $5 m illio n ) in July and S e p te m b e r o f 1966. But E ffe c tiv e R e g . Q . c e ilin g s . . . 1Reg. Q ceilings on CD’s of $100,000 or more, 90 -179 days. -Weekly reporting banks. m o re im p o rta n tly , as c o m p e tin g m o n e y m a rke t rates e clipse d C D rate c e ilin g s in m id -1 9 6 6 , c e ilin g s w e re n o t raised, and thus, p re c ip ita te d a sharp ru n o ff o f CD 's. Then, w h e n m o n e y m a rke t rates d e c lin e d in R ES ER V E R EQ U IR EM EN T S (percent of liabilities) Effective Date 1962-Oct. 25 4 1966-Jul. 14 5 Sept. GT h e generation o f excess reserves from shifts in deposits b e tw ee n categories w ith differing reserve req u irem en ts has lon g b e e n r e c o g n iz e d as a factor affecting the relationship b e tw ee n reserves and bank deposits. From the stan dp o in t o f co n tro llin g bank deposits o r cred it, the generation o f excess reserves, resulting from a shift in funds from d e m a n d to tim e dep osits, is not essentially d ifferen t from the excess reserves g e n e ra ted w h en d e m a n d d ep osits are sh ifted from o n e class o f m e m b e r bank to a n o th er w ith lo w e r reserve requirem en ts. F E D E R A L RE SE R V E B A N K O F A T L A N T A CD’s 1 Eurodollars2 BankRelated Coml. Paper 8 6 1969-Oct. 16 6 1970-0ct. 1 5 10 5 1971-Jan. 7 5 20 5 10 A p p lic a b le to tim e deposits when amounts are over $5 m illio n. 2Since Oct. 16, 1969, member banks have been re quired to m aintain reserves against balances above a specified base due from dom estic office s to th e ir foreign branches. Regulation D imposes a sim ila r reserve requirem ent on borrowings above a speci fied base from foreign banks by dom estic offices of a member bank. 25 ea rly 1967, C D v o lu m e s o n ce again began to c lim b . In te re st rate ce ilin g s w e re a d ju ste d u p w a rd in A p ril o f 1968 w h e n p o lic y was s till expansive. W ith th e re tu rn o f m o n e ta ry re stra in t in D e c e m b e r 1968, ce ilin g s w e re a llo w e d to b e co m e e ffe c tiv e as in 1966, causing a p ro lo n g e d ru n o ff in CD 's. In January o f 1970, ce ilin g s w e re revised u p w a rd in c o n ju n c tio n w ith an easing o f m o n e ta ry restraint. C e ilin g s on C D 's o f 30- to 89-day m a tu rity w e re suspended in June 1970, in o rd e r to a llo w banks to c o m p e te e ffe c tiv e ly fo r s h o rt-te rm fu n d s and to a llo w a re in te r m e d ia tio n o f fu n d s fro m th e c o m m e rc ia l pa p e r Effects o f LMB O n Total C red it A vailability LMB can increase ba nk and n o n b a n k c re d it a v a il a b ility c o m b in e d if it: (1) in du ces bankers to ex pand loans and de po sits by d ra w in g d o w n excess reserves; (2) encourages investors to d ra w d o w n de m a n d de po sits in o rd e r to purchase C D 's o r o th e r m o n e y m a rke t ba nk lia b ilitie s , th e re b y ge n e ra tin g excess reserves th a t are used by bankers to expand loans and d e p o sits; (3) re duces tra n sa ctio n costs o f fin a n c ia l in te r m e d ia tio n , th e re b y in crea sing fun ds a va ila ble to b o rro w e rs ; o r (4) causes the Federal Reserve to s u p p ly m o re reserves to th e b a n k in g system than it w o u ld o th e rw ise . In th e case o f (1) and (2), LMB has te n d e d to increase c re d it a v a ila b ility , b u t p ro b a b ly n o t su b sta n tia lly. By p ro v id in g banks b o th a lu c ra tiv e s u b s titu te fo r excess reserves and an adde d means o f a d ju s tin g fo r reserve d e fic its , the Federal fu n d s m a rke t has been p a rtly resp on sib le fo r an ero sio n o f excess reserves in the past tw o decades. H o w e ve r, th e d e c lin e in ex cess reserves in th e p o stw a r p e rio d has n o t been large in a b so lu te term s. S eco nd ly, vig o ro u s ba nk c o m p e titio n fo r fu n d s in th e 1960's has en co u ra g e d som e m o n e y m a r ke t investors to trim th e ir d e m a n d d e p o s it b a l ances, in o rd e r to purchase C D 's, E u ro d o lla r (E$) balances, ba nk RP's, and b a n k -re la te d c o m m e rc ia l 26 m a rk e t to banks. In a m o ve in te n d e d to increase the a v a ila b ility o f fin a n c in g fo r h o u sin g and state and lo ca l g o ve rn m e n ts, reserve re q u ire m e n ts o n tim e d e po sits o f o v e r $5 m illio n — in c lu d in g C D 's— w e re lo w e re d fro m 6 p e rc e n t to 5 p e rc e n t, e ffe c tiv e O c to b e r 1, 1970. Eurodollar Borrowing: LMB Comes of Age History. The 1966 and 1969 C D ru n o ffs te n d e d to reduce th e le n d in g c a p a city o f m a jo r banks a t tim es w h e n th e ir custo m e rs w e re in te n s ify in g loan paper. This, in tu rn , ge ne rated excess reserves (see A p p e n d ix ) used by banks to m ake loans. H o w e ve r, m o n e y m a rk e t in vestors are a s o p h is ti cated g ro u p th a t w o u ld have m a in ta in e d slim de m a n d d e p o s it balances in th e tig h t m o n e y m a rke t c o n d itio n s o f th e 1960's, even w ith o u t vig o ro u s ba nk c o m p e titio n fo r m o n e y m a rke t funds. T h e re fo re , th e a b so lu te e ffe c t o f LMB o n d e m a n d d e p o s it balances and c re d it a v a ila b ility has p ro b a b ly been m in o r. T h ird ly , LMB has p ro b a b ly n o t s u b s ta n tia lly re d u ce d tra n sa ctio n costs o f in te rm e d ia tio n . This is because m o n e y m arkets are c h a ra c te riz e d by a h igh degree o f c o m p e titio n , w ith b o th ba nk and n o n b a n k sectors o f th e m o n e y m a rke t b e in g h ig h ly e ffic ie n t in te rm e d ia rie s . T h e re fo re , any s h iftin g o f fu n d flo w s b e tw e e n b a n k and n o n ba nk channels th a t resu lted fro m LMB p ro b a b ly had o n ly a m in o r e ffe c t o n tra n sa ctio n costs o f in te rm e d ia tio n and, th e re fo re , on th e s u p p ly o f cre d it. A lso LMB's in flu e n c e on th e re se rve -su p p ly actio n s o f th e Federal Reserve has p ro b a b ly had o n ly a m in o r e ffe c t on c re d it a v a ila b ility . First, w h e n m o n e ta ry p o lic y was in som e phase o f ease— n a m e ly th e 1961-1965 and th e 1967-1968 p e rio d s — m ost o f th e g ro w th in LMB lia b ilitie s was in th e fo rm o f C D 's. These increases in C D 's and a tte n d a n t ba nk c re d it g ro w th at large banks w e re v ie w e d as co n siste n t w ith a p o s tu re o f m o n e ta ry ease and w e re a c c o m m o d a te d , rathe r than o ffs e t in any w a y, by Federal Reserve p o lic y . This im p lie s th a t th e Federal Reserve s u p p lie d reserves to satisfy increases in reserve re q u ire m ents o n C D 's. U n d e r th is a c c o m m o d a tiv e p o lic y , th e increases in C D 's caused a n e t in crease in to ta l c re d it o n ly w h e n C D 's w e re purchased w ith fu n d s th a t o th e rw is e w o u ld have re m a in e d d e m a n d d e p o s it balances. W h e n C D 's w e re pu rcha sed instead o f n o n b a n k lia b ilitie s , such as c o m m e rc ia l p a p e r (w h ic h was u su a lly th e case), ba nk c re d it rose instead o f n o n b a n k c re d it M O N T H L Y R E V IE W dem ands and in te re st rates w e re rising. These increased pressures and p r o fit o p p o rtu n itie s s tim u la te d th e in g e n u ity o f m o n e y m a rke t bankers to d e v e lo p a lte rn a tiv e sources o f bank fun ds. A n exa m p le o f th is was th e rap id d e v e lo p m e n t o f E u ro d o lla r (E$) b o rro w in g d u rin g th e 1966 C D ru n o ff. E$'s are d o lla r d e po sits in banks o u ts id e the U. S. Foreign branches o f U. S. banks o b ta in d e p o s it cla im s on U. S. banks in th e ir n o rm a l cu s to m e r re la tio n sh ip s and by b id d in g fo r d o lla r balances. W h e n these cla im s are d e p o s ite d in th e bra nch 's a c c o u n t at its head o ffic e , th e head and th e net su p p ly o f c re d it was u n a ffe cte d . S eco nd ly, w h e n p o lic y was re s tric tiv e — na m e ly, d u rin g 1966 and 1969— an a tte m p t was m ade to red uce c re d it e x te n d e d by m a jo r banks by a llo w in g R e g u la tio n Q in te re st rate ce ilin g s on C D 's to b e co m e e ffe c tiv e . This d e fle c te d C D pro cee ds to o th e r bank and n o n b a n k lia b ilitie s . To th e e x te n t th a t C D pro cee ds w e re used to b u y reserve-free E$ de po sits, ba nk RP's, and bankrelated c o m m e rc ia l paper, excess reserves w e re generated. F iow eve r, th is had o n ly a s lig h t be ar ing o n ba nk o r to ta l c re d it, since th e excess reserves g e n e ra tio n was s lig h t and te n d e d to be ab sorb ed b y o p e n m a rke t o p e ra tio n s. W h e n C D p ro cee ds w e re used to purchase n o n b a n k c o m m e rcia l pa p e r and o th e r n o n b a n k lia b ilitie s , the re also was little ne t e ffe c t on c re d it a v a ila b ility , since d e clin e s in ba nk c re d it w e re o ffs e t by in creases in n o n b a n k cre d it. H o w e v e r, to th e e xte n t th a t LMB was re sp o n sib le fo r increases in ba nk loan c o m m itm e n ts , it m ay have c o n trib u te d to m o n e y m a rke t pres sures in 1969 w h e n large banks had to b id very aggressively fo r fu n d s to m ee t th e ir le n d in g c o m m itm e n ts . Because d a y -to -d a y o p e n m a rke t o p e r atio ns are in flu e n c e d by m o n e y m a rke t c o n d i tio n s, o v e rly in te n s ifie d m o n e y m a rke t pressures, re su ltin g fro m banks scra m b lin g fo r fu n d s, may have caused th e Federal Reserve in its d a y-to day o p e ra tio n s to m ake s lig h tly g re a te r reserve in je c tio n s in 1969 than it w o u ld have o th e rw ise . These a ctio n s by them selves increased c re d it a v a ila b ility . W ith o u t th e access to d is c re tio n a ry sources o f fu n d s p ro v id e d by LMB, banks w o u ld have p re su m a b ly m ade less a m b itio u s loan c o m m itm e n ts , and th e m o n e y m a rke t w o u ld have been u n d e r less stress in 1969. In c o n c lu s io n , LMB has p ro b a b ly increased c re d it a v a ila b ility , th o u g h n o t su b s ta n tia lly , by e n co u ra g in g de clin e s in excess reserves and d e m and d e p o s it balances and by c o n trib u tin g to m o n e y m a rke t pressures in 1969. o ffic e increases its " lia b ilitie s to fo re ig n b ra n ch e s" and co lle cts reserves fro m o th e r U. S. banks. The b u lk o f E$ b o rro w in g has taken th e fo rm o f increases in lia b ilitie s o f d o m e s tic banks to th e ir fo re ig n branches, w ith a b o u t 75 p e rc e n t o f th e b o rro w in g c o m in g fro m branches o f m a jo r N e w Y o rk banks.7 Banks w ith o u t fo re ig n branches can b o rro w E$'s fro m fo re ig n banks o r in d iv id u a ls , e ith e r d ire c tly o r th ro u g h bro kers and dealers. T y p ic a lly , a E$ b o rro w in g is in itia te d by a U. S. bank w h e n it in stru cts its fo re ig n bra nch to b id fo r E$ balances. The bra nch o ffe rs c o m p e titiv e rates fo r E$ balances, in d u c in g a fo re ig n e r to tra n sfe r his de po sits fro m a U. S. bank to th e branch. The fo re ig n e r the n in stru cts his U. S. ba n k to tra n sfe r d e po sits fro m his a c c o u n t to the bra nch 's a c c o u n t (lia b ilitie s to fo re ig n branches) at th e bra nch 's head o ffic e . In th e process, reserves are tra n sfe rre d to th e bra nch 's head o ffic e fro m o th e r U. S. banks. Since E$ d e po sits are e x e m p t fro m in te re s t rate c e ilin g s and m a tu rity m in im u m s , head o ffice s used th e ir branches in 1966 and in 1969 to b id fo r fu n d s th a t c o u ld n o t be a ttra cte d w ith d o m e s tic C D 's. E$ b o rro w in g a m o u n ts to pu rch a sin g reserves, at a ba nk's d is c re tio n , th ro u g h a fo re ig n branch. Effects. Thus, by b o rro w in g E$'s, th e ve ry banks th a t w e re s u ffe rin g th e sharpest d e clin e s in C D 's in 1966 and in 1969— na m ely, large N e w Y o rk C ity banks and m a jo r banks in several o th e r fin a n c ia l centers— w e re ab le to m ake up fo r losses to th e ir le n d in g cap acity. W ith o u t E$ b o rro w in g , le n d in g c a p a city o f m a jo r banks w o u ld have been lo st to th e n o n b a n k se cto r o f th e m o n e y m arke t, to th e d e trim e n t o f those b o rro w e rs w h o o n ly had access to banks. To som e e x te n t d u rin g 1966 and 1969, C D pro cee ds w e re d e p o s ite d in fo re ig n branches o f A m e rica n banks, w h e re th e y w e re , in tu rn , le n t to head office s. A s h ift o f fu n d s fro m a C D to a lia b ility to a fo re ig n bra nch p ro d u c e d a s lig h t increase in le n d in g ca p a city at m a jo r banks, since th e lia b ility to a fo re ig n bra nch is reservefree c o m p a re d w ith a 5- o r 6 -p e rc e n t CD reserve re q u ire m e n t. The effects o f E$ b o rro w in g o n th e balance sheet o f th e b a n k in g system are s im ila r to those o f a C D issue (A p p e n d ix , Case C). Excess reserves are ge ne rated because fu n d s are tra n sfe rre d fro m a d e m a n d d e p o s it to a " lia b ilit y to a fo re ig n b ra n c h " th a t is su b je c t to a lo w e r reserve 777ie n u m b e r of d o m e stic banks w ith foreign branches has b e e n increasing rapidly , rising from 13 in 1965 to 53 in 1969. FE D E R A L R E SE R V E B A N K O F A T L A N T A 27 re q u ire m e n t than de m a n d de po sits o r is a lto g e th e r reserve-free. A g a in , these excess reserves are the base fo r an expansion o f loans and deposits, if th e y are n e ith e r h e ld id le by banks n o r absorb ed by o p e n m a rke t o p e ra tio n s .8 Regulations. As was th e case w ith C D 's, E$ b o rro w in g s w e re s u b je cte d to re s tric tiv e re g u la tio n s d u rin g a p e rio d w h e n m o n e ta ry p o lic y was re strictive . C o n ce rn e d th a t E$ b o rro w in g was e n a b lin g large banks to c irc u m v e n t R e gu latio n Q and to p a rtly o ffs e t m o n e ta ry restraint, the Federal Reserve— in A u g u st 1969— s u b je cte d such b o rro w in g above a sp e cifie d base to a 1 0 -p e rce n t reserve re q u ire m e n t. T his increased th e cost o f a d d itio n a l lo a n a b le fu n d s fro m th is source, since 10 p e rc e n t o f th e b o rro w in g pro cee ds w o u ld be re q u ire d reserves. This, in tu rn , s tim u la te d bankers to d e v e lo p n e w , less-costly sources o f funds. W h e n loan d e m a n d e b b e d and th e cost o f m o n e y fro m d o m e s tic sources p lu m m e te d a fte r m id -1 9 7 0 , banks p a id o ff th e ir E$ lia b ilitie s at a ra p id rate— thus re d u c in g th e ir reserve-free E$ b o rro w in g bases. In an e ffo rt to stem th e o u tflo w o f E$'s, w h ic h was ad verse ly a ffe c tin g th e U. S. balance o f pa ym en ts (o ffic ia l settle m e nts basis), th e Federal Reserve raised th e m arg ina l E$ reserve re q u ire m e n t fro m 10 p e rc e n t to 20 p e rce n t, e ffe c tiv e January 7, 1971. T his a c tio n was in te n d e d to disco u ra g e fu rth e r re d u c tio n s in reserve-free E$ bases b y in crea sing th e m arg ina l cost o f fu tu re increases in E$ b o rro w in g . The Repurchase Agreement: In the Tradition Development and Effects. Intense loan de m a n d d u rin g 1969, as w e ll as re g u la to ry re strictio n s on C D 's and E$ b o rro w in g , sp u rre d m o n e y m a rke t banks to d e v e lo p s till a n o th e r in s tru m e n t— the repurchase a g re e m e n t (RP)— as a d is c re tio n a ry source o f fun ds. A n RP is th e sale o f a fin a n c ia l asset w ith an ag re e m e n t to b u y it back on a sp e c ifie d date and s D u rin g p e rio d s o f rapid increases in b o rro w in g from the E$ an d o th e r n o n d e p o sit m arkets, changes in total bank d ep osits w ill b e a p o o r p ro x y for changes in total bank liabilities o r bank credit. For exam ple, in 7969, the total d e p o s it aggregate d iv e rg e d from a liability series in clu d in g n o n d e p o sit so u rce s o f bank funds. Because E$ b o rro w in g s are clo se substitutes for C D 's an d have bank cre d it effects sim ilar to C D 's , it is appropriate to in clu d e them , for analytical p u rp o se s, in aggregates of bank liabilities that in clu d e C D 's. By sim ilar reasoning, bank-related co m m ercia l p a p e r an d b o rro w in g u n d e r rep u rch a se agreem ents sh o u ld also b e in c lu d e d in these aggregates. 28 at a prearra nge d p ric e o r y ie ld . RP's are m o st c o m m o n ly associated w ith G o v e rn m e n t s e cu rity dealers w h o arra ng ed a b o u t 60 p e rc e n t o f th e ir fin a n c in g in th e 1960's w ith RP's. T he RP has b e co m e an im p o rta n t o u tle t fo r th e o v e rn ig h t o r te m p o ra rily id le fu n d s o f m o n e y m a rk e t investors, since it can be ta ilo re d to m e e t in d iv id u a l m a tu rity needs and is p ra c tic a lly fre e o f c a p ita lloss risk. M a tu ritie s range fro m o v e rn ig h t to several m o n th s, w ith th e b u lk o f m a tu ritie s b e in g very sho rt. W h e n a ba nk sells an asset u n d e r an RP, it receives p a ym e n t e ith e r (1) b y d e b itin g th e purchaser's d e p o s it a c c o u n t at th e ba n k, w h ic h reduces th e ba nk's re q u ire d reserves, o r (2) by re ce ivin g a ch e ck d ra w n o n a n o th e r ba nk, w h ic h gives the se llin g b a n k a c la im o n th e reserves o f th a t bank. Thus, th e RP is useful in reserve a d ju s tm e n t because it e ith e r reduces a ba nk's re q u ire d reserves o r su p p lie s it w ith reserves. D u rin g 1969, RP's on b o th loans and secu ritie s e n a b le d large banks to re trie v e som e o f th e fu n d s b e in g lo st th ro u g h C D re d e m p tio n s . T he v o lu m e o f ba nk loan RP's rose sh a rp ly in 1969 and was at a level o f $1.3 b illio n in A u g u st. T he v o lu m e o f secu ritie s sold u n d e r RP rose ra p id ly th ro u g h o u t 1969 and th e firs t h a lf o f 1970, re a ch in g a level o f $4 b illio n in m id -1 9 7 0 b e fo re d e c lin in g . The c re d it and reserve effe cts o f an RP on th e ba la nce sheet o f th e b a n k in g system are s im ila r to those o f a E$ b o rro w in g (A p p e n d ix , Case D). A g a in , excess reserves are ge ne rated because lia b ilitie s are tra n s fe rre d fro m d e m a n d de po sits to an RP th a t was rese rve-free p rio r to A u g u st 1969. Regulation. The ra p id rise o f loan RP's was reversed in A u g u s t 1969 w h e n th e Federal Reserve ru le d th a t these lia b ilitie s w e re d e p o sits and, th e re fo re , su b je c t to R e gu latio ns Q and D. T his re n d e re d loan RP's n o n c o m p e titiv e and v o lu m e s o f these RP's have d e c lin e d s te a d ily. T he re s tric tiv e re g u la to ry a c tio n on lo an RP's again o c c u rre d d u rin g a p e rio d o f m o n e ta ry re stra in t, b u t th e lag be tw e e n th e in tro d u c tio n o f RP's and th e ir re g u la tio n was s h o rte r tha n in th e case o f C D 's and E$ b o rro w in g s . RP's o n secu ritie s, as d is tin g u is h e d fro m RP's on loans, have re m a in e d e x e m p t fro m R e gu latio ns Q and D and, lik e th e M a rk e t, have b e c o m e a re g u la r sou rce o f fu n d s fo r a b o u t 60 m o n e y m a rke t banks. Comm ercial Paper: A Typical Response Development. D e sp ite th e in g e n u ity o f m o n e y m a rke t bankers in e x p lo itin g sources o f fu n d s (C o n tin u e d o n page 30) M O N T H L Y R E V IE W JANUARY 6, 1971 B a n k THE CARRABELLE BANK C arrabelle, Florida A n n o u n c e m e n t s JANUARY 2, 1971 FIRST NATIONAL BANK L u ced a le, M ississippi Opened for business. Officers: Everette W. O'Neal, chairman; Jack D. Triggs, president and chief executive officer; and James R. Persons, vice president and cashier. Capital, $250,000; surplus and other capital funds, $375,000. JANUARY 4, 1971 BANK O F GONZALES G o n za le s, Louisiana Opened for business as a nonmember. Officers: W. A. Paxton, president; Joe W. Butler, vice president and cashier; and A. Bivin Simmons, vice president. Capital, $140,000; surplus and other capital funds, $106,950. JANUARY 6, 1971 THE SUN COAST CITY BANK O F ST. PETERSBURG St. P etersburg, Florida Opened fo r business as a nonmember. Officers: T. G. Mixson, chairman and president; Jack W. Hayward, vice president; Donald R. Mosher, cashier; and Ralph W. Haskell, Jr., and Julian B. Mathews, assistant vice presidents. Capital, $500,000; surplus and other capital funds, $475,000. Began to remit at par. JANUARY 8, 1971 JANUARY 4, 1971 FIRST BANK O F TREASURE ISLAND CITIZENS BANK & TRUST COM PANY Treasure Island, Florida T h ibo dau x, Louisiana Began to remit at par. JANUARY 4, 1971 UNITED BANK O F C H A TTA N O O G A C hattanooga, T e n n e sse e Opened for business as a nonmember. Officers: George M. Stewart, president; W ilbert P. Rundles, vice president; John L. Riddle, cashier; and Madge M. Ransom, assistant cashier. Capital, $1,000,000; surplus and other capital funds, $1,500,000. JANUARY 5, 1971 BAYSHORE STATE BANK Braden ton , Florida Opened for business as a nonmember. Officers: Al Schmacker, president; Thomas C. Howard, executive vice president; and Arthur E. Campbell, vice president and cashier. Capital $480,000; surplus and other capital funds, $324,000. JANUARY 5, 1971 THE SEBASTIAN RIVER BANK Sebastian, Florida Opened for business as a nonmember. Officers: M errill P. Barber, chairman; L. S. Tiller, vice chairman and executive vice president; John K. Moore, president; Larry T. Hall, vice president and cashier; Warren D. Haffield and A. J. Sanchez, vice presidents; R. Don Deeson and Dorothy Judah, assistant cashiers; and Grady Phillips, auditor. Capital, $300,000; surplus and other capital funds, $105,000. F E D E R A L RE SE RVE B A N K O F A T L A N T A Opened for business as a nonmember. Officers: J. Lee Ballard, chairman; R. V. Eckert, president; W. Howard Hoover, vice president and cashier; and Roy K. Graesser, executive vice president. Capital: $305,000; surplus and other capital funds, $305,000. JANUARY 11, 1971 SECURITY NATIONAL BANK Fort M yers Villas, Florida Opened for business. Officers: A. W. D. Harris, president; Joe L. Norris, executive vice president; Henry A. Caldwell, vice president and cashier; and Dr. Stuart Bean and Heard M. Edwards, vice presidents. Capital, $500,000 surplus and other capital funds, $250,000. JANUARY 28, 1971 BARNETT BANK O F DAYTO N A BEACH D aytona B each, Florida Opened for business as a nonmember. Officers: W. Ernest Allen, Jr., chairman; Randolph S. M errill, Jr., president; and J. Graham Harris, vice president and cashier. Capital, $500,000; surplus and other capital funds, $200,000. JANUARY 29, 1971 THE PEOPLES BANK G ainesville, Florida Opened for business as a nonmember. Officers: Jerry Thomas, chairman; John G. Adicks, president; and Daniel S. Goodrum, cashier. Capital, $500,000; surplus and other capital funds, $250,000. 29 d u rin g 1969, large banks w e re u n a b le to keep up w ith in te nse lo an de m a n d . T he im p o s itio n o f m arg ina l reserve re q u ire m e n ts on E$ b o rro w in g and th e s u b je c tio n o f loan RP's to R egulations Q and D increased pressure on large banks. As w e m ig h t exp ect, in n o v a tiv e bankers resp on ded by d e v e lo p in g a n e w in s tru m e n t to co m p e te fre e ly fo r m o n e y m arke t funds. The in s tru m e n t was c o m m e rc ia l p a p e r (CP) issued by ba nk h o ld in g com p an ies, a ffilia te s , and subsidiaries. CP is a s h o rt-te rm p ro m is e to pay, signed by the b o rro w e r— a n o n fin a n c ia l c o rp o ra tio n , fin a n c e co m p a n y, o r a ffilia te o f a ba n k— and sold at a d is c o u n t, e ith e r to a d e a le r o r d ire c tly to m o n e y m a rke t investors. M o s t o f th e p ro cee ds fro m the sale o f b a n k -re la te d CP w e re used to purchase loans fro m th e related bank. Effects. If b a n k a ffilia te s are c o n s o lid a te d in to th e b a n k in g system , th e issue o f b a n k -re la te d CP has effects o n the balance sheet o f the b a n k in g system th a t are s im ila r to a E$ b o rro w in g (A p p e n d ix , Case E). W h e n th e a ffilia te sells CP, it receives a che ck (and cla im on reserves) and de po sits it in a related bank. W h e n the a ffilia te purchases loans fro m th e related bank, p a ym e n t is m ade by d e b itin g th e a ffilia te 's a cco u n t. From th e s ta n d p o in t o f th e b a n k in g system , fu n d s have been sh ifte d fro m a d e p o s it to a reserve-free CP cate gory, and thus, ge ne rate excess reserves. Bank c re d it (in c lu d in g loans sold to a ffilia te s) increases unless o p e n m a rke t sales com p en sate fo r th e increase in excess reserves. CP p ro ve d to be a p ro d u c tiv e source o f fun ds to m o re tha n 60 m a jo r banks th a t issued CP, th e v o lu m e rising fro m a n e g lig ib le a m o u n t in m id -1 9 6 9 to ne arly $8 b illio n by July 1970. M a n y banks th a t w e re s u ffe rin g C D re d e m p tio n s w e re ab le to re co u p losses o f fu n d s by issuing CP to h o ld e rs o f m a tu rin g C D 's. In a d d itio n to b e in g reserve-free, CP had an advantage o ve r C D 's in th a t it c o u ld be issued in m a tu ritie s o f less tha n 30 days.9 Regulation. R e strictive re g u la to ry a ctio n s against b a n k -re la te d CP w e re p ro p o se d by th e Board o f G o ve rn o rs o n O c to b e r 29, 1969, s h o rtly a fte r banks °Lo a n sales to affiliates ro se in tandem w ith the expansion o f b ank-related co m m ercia l p a p e r in 1969 and in 1970. S in ce loan sales are n o t in clu d e d in the n arro w d e finition o f bank loans o r bank cre d it, a d iv e rg e n ce d e v e lo p e d b e tw e e n the narrow ly d e fin e d series on bank loans o r bank cred it an d those series a d ju ste d for loan sales. Thus, analysts c o u ld d erive differen t co n clu sio n s abou t the b eh a v io r o f bank len din g, d e p e n d in g on the series stu died . 30 began to issue CP on a large scale. H o w e v e r, it was n o t u n til S e p te m b e r 1970 th a t th e d e fin itio n o f de po sits was exp an de d to in c lu d e b a n k -re la te d CP if th e pro cee ds o f th e CP w e re used to purchase assets fro m th e re la te d ba nk. CP, cla ssified as de po sits, was su b je c te d to reserve re q u ire m e n ts eq ua l to tho se o n d e p o sits o f th e same m a tu rity . T h e re fo re , CP issued w ith a m a tu rity o f less than 30 days was s u b je cte d to d e m a n d d e p o s it reserve re q u ire m e n ts. This a c tio n was in c o n s is te n t w ith th e e a rlie r Federal Reserve p a tte rn th a t b ro u g h t o th e r lia b ilitie s u n d e r re s tric tiv e re g u la tio n s o n ly d u rin g p e rio d s o f m o n e ta ry restraint. T he Federal Reserve was p u rs u in g a m o d e ra te ly e xp a n sio n a ry p o lic y w h e n CP was s u b je cte d to reserve re q u ire m e n ts in O c to b e r o f 1970. H o w e v e r, re s tric tiv e re g u la to ry a c tio n against b a n k -re la te d CP was firs t p ro p o se d a yea r e a rlie r. This a c tio n was a cco m p a n ie d b y th e a fo re m e n tio n e d re d u c tio n in reserve re q u ire m e n ts o n tim e d e p o sits w ith the resu lt th a t C D 's and CP w e re p u t o n an eq ua l fo o tin g re g a rd in g reserve re q u ire m e n ts. T he n e t e ffe c t o f these a ctio n s was a re d u c tio n in re q u ire d reserves o f a b o u t $350 m illio n fo r all m e m b e r banks. S h o rtly b e fo re reserve re q u ire m e n ts to o k effe ct, th e v o lu m e o f b a n k -re la te d CP began to d ro p lik e a lead b a llo o n and c o n tin u e d s h rin k in g in the late m o n th s o f 1970. Summary W h a t m a jo r co n c lu s io n s can w e d ra w fro m th e g ro w th and d e v e lo p m e n t o f LMB? First, LMB has given large c o m m e rc ia l banks access to surp lu s le n d in g ca p a city at sm all banks— via th e Fed fu n d s M a rk e t— and access to te m p o ra rily id le fu n d s o f c o rp o ra tio n s , g o ve rn m e n ts, o th e r fin a n c ia l in te rm e d ia rie s , e tc.— via C D 's, E$ b o rro w in g s , RP's, and b a n k -re la te d CP. M o n e y m a rk e t banks by a d ju s tin g o ffe rin g rates on Federal fu n d s loans and o th e r LMB lia b ilitie s , have succeeded in a ffe c tin g th e v o lu m e o f th e ir lia b ilitie s m a rke te d . This a b ility has increased th e ir o p tio n s fo r m e e tin g loan c o m m itm e n ts and fo r o ffs e ttin g reserve de ficie n cie s. S eco nd ly, th e aggressive c o m p e titio n fo r b a n k fu n d s on th e basis o f p ric e (a re su lt o f th e d e v e lo p m e n t o f LMB) has led to som e s h iftin g o f fu n d s fro m n o n b a n k to b a n k cha nn els o f th e m o n e y m a rke t. In so fa r as con sum e rs and sm all businesses rely o n large banks fo r p a rt o f th e ir fin a n c in g , these b o rro w e rs m ust have b e n e fite d fro m the s h ift in m o n e y m a rke t fu n d s in fa v o r o f banks. W ith fe w e xce p tio n s, o n ly th e largest, w e ll-k n o w n b o rro w e rs have access to th e n o n b a n k m o n e y m arke t. By in d u c in g bankers to d ra w d o w n excess reserves in o rd e r to expand loans and by e n c o u ra g in g in vestors to d ra w d o w n d e m a n d M O N T H L Y R E V IE W N o n d e p o s it sources: e n c o u ra g e d b y C D ru n o ffs , d is c o u ra g e d b y re g u la tio n s o f these sources o f fu n d s and to d e v e lo p n e w ones in th e fu tu re . The la tte r d e v e lo p m e n t w o u ld o c c u r sh o u ld m o n e y m a rke t pressures m o u n t and if banks c o n c lu d e th a t R e gu latio n Q w ill be used to sever th e m fro m C D 's and e xistin g n o n d e p o s it lia b ilitie s . O n th e o th e r hand, if bankers c o n c lu d e th a t q u ic k Federal Reserve d e te c tio n and re g u la tio n w ill lim it th e p r o fita b ility o f lia b ility in n o v a tio n , th e in c e n tiv e to in n o va te w ill be re d u ce d — b u t it p ro b a b ly c o u ld n o t be e lim in a te d e n tire ly . ARNOLD DILL R e p r in t s o f th is a r t ic le a re to th e R e s e a r c h of A tla n ta , a v a ila b le upon re q u e st D e p a rtm e n t, F ed e ra l R e serv e Bank A tla n ta , C e o r g ia 30 3 0 3 . d e po sits in o rd e r to purchase C D 's and o th e r m o n e y m a rke t lia b ilitie s , LMB p ro d u c e d an increase in to ta l c re d it a v a ila b ility . This increase, h o w e ve r, was n o t sub stantia l because L M B -in d u c e d de clin es in excess reserves and in de m a n d de po sits w e re sm all in a b so lu te term s. D u rin g th e 1960's, LMB becam e in cre a sin g ly reg ulated by th e Federal Reserve, w h ic h acted to in flu e n c e LMB in a m o re o r less c o n tra c y c lic a l fashion. In p e rio d s o f restraint, th e Federal Reserve su b je cte d C D 's to h ig h e r reserve re q u ire m e n ts and, by n o t liftin g in te re st rate c e ilin g s w h e n m a rk e t in te re s t rates w e re rising ra p id ly , c u t o ff C D 's as a sou rce o f b a n k fun ds. This a d de d to th e pressure o n m o n e y m a rke t banks and, co n s e q u e n tly , led to o r en co u ra g e d th e d e v e lo p m e n t o f E$ b o rro w in g , b a n k-re la te d CP, and RP's. The Federal Reserve la te r su b je cte d these sources o f fu n d s to reserve re q u ire m e n ts th a t p u t th e m o n a m o re equal fo o tin g w ith C D 's. C onversely, d u rin g p e rio d s w h e n m o n e ta ry p o lic y was exp an sion ary, th e Federal Reserve en co u ra g e d the expansion o f C D 's and d id n o t in te rfe re w ith the d e v e lo p m e n t o f o th e r lia b ilitie s . As th e m o n e y m a rke t eased in 1970, C D 's surged and banks c u t back th e ir o u ts ta n d in g CP, RP's, and th e ir expensive E$ debts. H o w e v e r, bankers can be e xp ected to keep on hand eve ry o n e FE D E R A L R E SE R V E B A N K O F A T L A N T A 31 A P P E N D IX THE EFFECTS OF LIABILITY MANAGEMENT BANKING ON THE BALANCE SHEET OF THE BANKING SYSTEM Deposit com position is altered, w ith demand deposits contracting and CD's increasing. To neutralize the bankcredit and deposit-increasing effects of the CD issue, the Federal Reserve would have to absorb reserves equal to the initial $12.50 increase in excess reserves. In a E$ borrowing (Case C), dollars are transferred from a demand deposit account at a U. S. bank to a foreign branch's account (due to branch) at its head office. If the "due to branch" is reserve-free, excess reserves of $17.50 are generated and w ould eventually support $100 (5.714 x $17.50) of loans and demand deposits. Again, the ratio of loans and liabilities to reserves increases. If the "due to branch" is subject to a 10-percent marginal reserve requirement, in effect after August 1969, excess reserves of only $7.50 are generated and loans and de posits would increase by about $43 (5.714 x $7.50). Because of accounting peculiarities, RP's can have tw o effects on the balance sheet of the banking system (Case D). When a non-mortgage loan or security is "s o ld " under an RP, deposits are debited in payment for the RP and an RP liability is incurred (Step 1). If the RP is reserve-free, excess reserves of $17.50 are generated, and the effects are the same as in Cases A or C. If the RP is subject to reserve requirements, w hich is the case for loan RP's effective August 1969, excess reserve genera tion would be less, of course. When a mortgage loan is sold under an RP, the loan is transferred to the pur chaser (Step 1a). Excess reserves o f $17.50 are generated when demand deposits are debited $100 in payment for the loan. When an affiliate of a bank sells CP (Case E), it receives a check, which it deposits in its related bank. W hen the affiliate purchases loans from the related bank, payment is made by debiting the affiliate's account. From the stand point of the banking system, $100 has been shifted from a demand deposit to the reserve-free CP category, gener ating excess reserves of $17.50. Since O ctober 1, 1970, bank-related CP has been subjected to a 5-percent reserve requirement and the balance sheets effects of an issue are identical to those of a CD issue (Case B). The balance sheet effects of transactions involving Fed funds, CD's, E$'s, RP's, and CP are illustrated here. De mand deposits are assumed to be subject to a reserve requirement of 17V2 percent, and negotiable CD's to a requirement of 5 percent (currently in effect at member banks for amounts over $5 m illion). For sim plicity, it is assumed that total reserves are constant and that excess reserves generated by transactions are used for loan- and demand-deposit expansion. Demand deposits w ill even tually expand by a m ultiple of ( 1 or 5.714) of any 17V2 excess reserve increase. This is, of course, a naive as sumption. In fact, a part o f any generation of excess reserves w ould be lost to leakages— such as currency drains— during the loan- and deposit-expansion process. In Case A, Step 1, excess reserves are transferred be tween banks as a result of a Fed funds loan. In Step 2, the borrowing bank uses the excess reserves to expand its loans and deposits. In reality, of course, an increase in loan demand may have caused the borrowing bank to step up its Fed funds borrowing. In either case, if thetransactions eventually result in a $100 reduction in ex cess reserves, these reserves would then be in a position to support demand deposits of $571 (5.714 x $100), according to the assumptions made above. As a result of the transaction, the ratio of loans and deposits to reserves increases. In Case B, Step 1, excess reserves of $12.50 are gen erated when a $100 CD (5-percent reserve requirement) is purchased w ith a $100 demand deposit (17’/2-percent reserve requirement). According to our assumptions, the $12.50 of excess reserves would eventually be used to support an increase of $71.47 (5.714 x 12.50) in demand deposits and loans. The ratio of loans and deposits to reserves increases as a result of the purchase, but loans and deposits each increase by less than the CD purchase. B A L A N C E SH EET Case A: Loaning Excess Reserves in the Fed Funds Market Lending Bank Assets ($) Step 1 reserves Fed funds lent Borrowing Bank Liabilities ($) -100 Liabilities ($) Assets ($) reserves +100 Fed funds borrowed +100 demand deposits + 100 4-100 loans Step 2 + 100 Banking System Liabilities Assets Step 1 Fed funds lent +100 Fed funds borrowed +100 Steps 2, loans +571 demand deposits +571 671 32 671 M O N T H L Y R E V IE W Case B: Purchasing a CD with Demand Deposits Banking System Assets ($) Liabilities ($) Step 1 (excess reserves +12.50) demand deposits CD's -100.00 +100.00 Steps 2, . . . , n loans +71.47 demand deposits + 71.47 loans +71.47 CD's demand deposits +100.00 - 28.53 Case C: A Head Office Borrowing Eurodollars from its Foreign Branch Banking System Assets ($) Step 1 (excess reserves Steps 2 , . . . , n loans Liabilities ($) +17.50) demand deposits due to branch -1 0 0 +100 +100 demand deposits +100 +100 +100 Case D: Buying an RP with Demand Deposits Banking System Assets ($) Step 1 (excess reserves Steps 2 , . . . , n Step 1a Steps 2 a,.. n Liabilities ($) +17.50) demand deposits RP's -1 0 0 +100 loans +100 demand deposits +100 loans +100 RP's +100 mortgages (excess reserves -100 + 17.50) demand deposits -100 loans +100 demand deposits +100 0 0 Case E: Purchasing Bank-Related Commercial Paper with Demand Deposits Banking System (including bank affiliates) Assets ($) Step 1 Steps 2 , . . . / n Liabilities ($) -100 +100 + 17.50) demand deposits CP -1 0 0 +100 loans +100 demand deposits +100 loans +100 CP +100 loans at banks loans at affiliates (excess reserves FE D E R A L R E SE R V E B A N K O F A T L A N T A 33 i B A N K IN G S T A T IS T IC S Billion $ DEPOSITS 23.5 Net Demand* j D J J 1969 1970 LATEST MONTH PLOTTED: DECEMBER Note: All figures are seasonally adjusted and cover all Sixth District member banks. *Daily average figures **Figures are for the last Wednesday of each month. SIX T H B A D ISTR IC T N K I N G N H O LD IN G S O F O T H E R T H A N O T E S U . S. G O V T. S E C U R IT IES Billion $ — 3 Dec. '69 Dec. ’70 32 Large banks Dec, ’69 Dec. ’70 Other m ember banks** ‘ Includes participation certificates in Federal agency loans and bonds of U. S. Government corporations ‘ Breakdown of Dec. 1970 figures is estimated. 34 M O N T H L Y R E V IE W DISTRICT BANKS: HEAVY BUYERS O F MUNICIPALS District bankers expanded their holdings of securi ties by more than $1 billion in 1970. Roughly three-fourths of this expansion went into securities that were other than U. S. Government obligations (usually grouped under the classification of "other securities"). Country banks accounted for over 70 percent of these purchases of "other securities".1 Two important factors in the heavy buying of securities were the strength of deposit inflows and the sluggishness of loan demand at both large and small banks. To illustrate: Reserve city banks in creased their holdings of total time and savings deposits by $500 million, and country banks gained over $1 billion. The overall slack in loan demand— especially during the second half of 1970— was reflected in the loan-to-deposit ratio of District banks. This ratio dropped from 72.9 percent in July 1970 to 68.2 percent in December 1970. Clarification of the legislative question regarding the tax-free status of interest earned on municipal securities strongly influenced the placement of investment funds in these issues. An early version of the Tax Reform Act of 1969 indicated that Con gress was considering the removal of the Federal tax-exempt status of municipals. However, the final form of the bill that emerged at the end of 1969 did not remove the tax-exempt status and thus, maintained the attractiveness of municipal obliga tions. In expanding their municipals during 1970, banks took advantage of a plentiful supply of new municipal issues. Concern over the tax issue dis couraged many investors from buying municipals, thereby keeping some government units from issuing securities in 1969. Removal of the taxexempt status would have forced issuers to raise yields, thus increasing their financing costs. When the tax reform legislation did not change the tax- 1The classification " o th e r se cu ritie s" in clu d e s obligations o f state an d lo ca l g o ve rn m e n ts (m u n icip a l secu rities), participation certificates in Fed e ra l ag en cy loans, b o n d s o f U. 5. G o v e rn m e n t co rp o ra tio n s, a n d any co rp o ra tion sto ck h eld. M u n icip a l se cu rities a c co u n te d for o v e r 80 p e rc e n t o f D istrict b ank ho ld in gs o f " o th e r se cu rities" at th e e n d o f 1970. F E D E R A L R E SE R V E B A N K O F A T L A N T A Member Bank Holdingsof“OtherSecurities” (Millionsof$) End ofYear 1969 % chg. 1970 Ala. 546 697 + 28 Fla. 1632 2,017 + 25 Ga. 579 653 + 13 La.* 440 509 + 16 Miss.* 172 184 + 7 Tenn.* 426 534 + 25 Sixth District 3,795 4,594 +21 ‘ Represents only District portion exempt status these uncertainties disappeared, and units that had postponed borrowing in 1969 be cause of interest cost began again to offer secur ities. By the end of 1970's third quarter, new Dis trict issues totaled $1.9 billion and exceeded the total amount issued in 1969 by more than $100 million. With the drop in interest rates in the third and fourth quarters of 1970, most state and local governments were again able to offer securities with competitive yields. Prior to this, a combina tion of record high yields and legal interest rate ceilings had kept some governmental units from issuing competitive long-term securities in 1969 and the early months of 1970. Many bankers traditionally purchase municipal securities because they feel a responsibility toward their local communities. During the last ten years, country banks increased their holdings of munici pals even in periods of peak loan demand. In early 1971, the average banker's appetite for municipals showed no let-up. However, any future strengthening in loan demand will probably cause bankers to expand their holdings of state and local securities at a slower rate. Banks tend to favor loans over investments because of their greater profitability. JOSEPH E. ROSSMAN, JR. 35 B o a D i r e r d c o t o f Class C1 r s F e d e ra l R e s e rv e A t la n t a a n d ATLANTA Edwin I. Hatch (Chairman)— 1971 President, Georgia Power Company Atlanta, Ga. Bank of B ra n ch e s E f f e c t i v e J a n u a r y 1 ,1 9 7 1 BIRMINGHAM BRANCH Appointed by Board of Governors W illiam C. Bauer (Chairman)— 1971 President, South Central Bell Telephone Company Birmingham, Ala. E. Stanley Robbins—-1972 President, National Floor Products Company, Inc. Florence, Ala. + David Mathews— 1973 President, University of Alabama University, Ala. F. Evans Farwell— 1972 President, M illike n and Farwell, Inc. New Orleans, La. **John C. W ilson (Deputy Chairman)— 1973 President, Horne-W ilson, Inc. Atlanta, Ga. JACKSONVILLE BRANCH A ppointed by Board of Governors Castle W. Jordan (Chairman)— 1971 President, AO Industries, Inc. Coral Gables, Fla. Henry King Stanford— 1972 President, University of Miami Coral Gables, Fla. **Henry Cragg— 1973 Vice President The Coca-Cola Company Foods Division O rlando, Fia. Appointed by Federal Reserve Bank Appointed by Federal Reserve Bank K. M. Varner, Jr.— 1971 President, The First National Bank Auburn, Ala. Edward W. Lane, Jr.— 1971 President, The Atlantic National Bank Jacksonville, Fla. Harvey Terrell— 1972 Chairman, The First National Bank Birmingham, Ala. James G. Richardson— 1972 Chairman and President The Commercial Bank & Trust Company Ocala, Fla. + W. D. Malone, Jr.— 197.3 President and Chairman, The First National Bank Dothan, Ala. + M alcolm C. Brown— 1973 President and Chairman Florida First National Bank at Brent Pensacola, Fla. + C. Logan Taylor—1973 Chairman, The First State Bank Oxford, Ala. + A. Clewis H ow ell— 1973 President, Marine Bank & Trust Company Tampa, Fla. NOTE: Expiration dates of terms occur on December 31 of the year beside each name. 36 ’ Nonbankers appointed by Board of Governors, Federal Reserve System ‘ Re-elected for three-year term M O N T H L Y R E V IE W Class B2 Class A 3 Owen Cooper— 1971 President, Mississippi Chem. Corp. and Coastal Chem. Corp. Yazoo City, Miss. John W. Gay— 1971 President, First National Bank Scottsboro, Ala. Philip j. Lee— 1972 Vice President, Tropicana Products, Inc. Tampa, Fla. *Hoskins A. Shadow— 1973 President, Tennessee Valley Nursery, Inc. Winchester, Tenn. NASHVILLE BRANCH W illiam B. M ills— 1972 President, Florida National Bank Jacksonville, Fla. *A. L. Ellis— 1973 Chairman, First National Bank Tarpon Springs, Fla. NEW ORLEANS BRANCH A ppointed by Board of Governors Appointed by Board of Governors Edward J. Boling (Chairman)— 1971 President, University of Tennessee Knoxville, Tenn. Frank G. Smith, Jr.— 1971 Vice President Mississippi Power and Light Company Jackson, Miss. Roy J. Fisher— 1972 Manager, Tennessee Operations Alum inum Company of America Alcoa, Tenn. D. Ben Kleinpeter (Chairman)— 1972 Wholesale Manager Kleinpeter Farms Dairy, Inc. Baton Rouge, La. + James W. Long— 1973 Farmer Springfield, Tenn. + Broadus N. Butler— 1973 President, Dillard University New Orleans, La. A ppointed by Federal Reserve Bank Appointed by Federal Reserve Bank Hugh M. W illson— 1971 President, Citizens National Bank Athens, Tenn. E. W. Haining— 1971 President, First National Bank Vicksburg, Miss. Edward C. Huffman— 1972 Chairman and President First National Bank Shelbyville, Tenn. H. P. Heidelberg, Jr.— 1972 President Pascagoula-Moss Point Bank Pascagoula, Miss. + Dan B. Andrews— 1973 President, First National Bank Dickson, Tenn. + Tom A. Flanagan, Jr.— 1973 President, Lakeside National Bank Lake Charles, La. + Kenneth L. Roberts— 1973 Executive Vice President Commerce Union Bank Nashville, Tenn. + Lawrence A. Merrigan— 1973 President The Bank of New Orleans and Trust Company New Orleans, La. MEMBER, FEDERAL ADVISORY COUNCIL Harry Hood Bassett Chairman, The First National Bank Miami, Fla. 2Nonbankers elected by member banks **Reappointed for three-year term FE D E R A L RE SE R V E B A N K O F A T L A N T A 3Member bank representatives elected by member banks +New member 37 S ix t h D is t r ic t S t a t is t ic s S e a s o n a lly A d ju sted (A ll d a ta a r e in d e x e s , 1 9 5 7 - 5 9 = Latest Month 1970 One Two Month Months Ago Ago 261 129 128 154 261r 167 124 175 260 142 102 179 262 156 133 193 348 347 323 327 338 329 338 296 152 145 136 152r 144r I36r 12 0 r llO r 175r 126r 156r 141r 158r 106r 129r 130r 174r 258r 179r 154r 131r 134r 148r 165r 174r 125r 188r 54 152 144 135 118 152 149 138 117 116 176 131 354 144 168 108 133 135 180 265 120 110 175 127 157 141 159 106 130 130 173 256 186 154 132 135 147 165 174 126 189 112 175 123 156 142 159 106 130 131 174 259 179 155 130 135 148 165 178 125 186 212 152 141 132 145 161 174 123 181 5.0 2.9 40.4 291 383 214 166 97 309 242 209 170 235 264 193 166 270 281 170 185 168 196 242 342 626 341 3.0 40.3 217 230 207 168 3.1 40.1 311 246 209 169 235 265r 196 167 269 291 169 184 169r 311 245 207 167 234 260 195 165 268 290 168 184 169 372 311 254 210 289 101 202 241 358r 657r 360 201 233 174 165 102 202 1.9 40.8 292 332 258 164 98 272 241 205 161 229 257 201 171 265 284 167 190 167 200 241 370 615 378 244 371 571 370 362 299 360 300 338 286 252 204 292r 247 203 286r 238 199 268 ALABAMA INCOME Manufacturing Payrolls ..........................Dec. Farm Cash R e c e ip ts .................................... Nov. EMPLOYMENT Nonfarm Em ploym entt...............................Dec. Manufacturing ......................................... Dec. Nonmanufacturing ...............................Dec. C o n stru c tio n ......................................... Dec. Farm Em ploym ent......................................... Dec. 38 5.6 39.7 5.3r 40.2r 5.1 40.4 3.9 40.8 336 240 257 332 233 258 327 230 246 306 218 238 337 124 347r 286 349 198 343 198 . Dec. 181 173 181 126 90 180r 174r 181r 128r 90 181 173 182 130 93 177 177 176 134 85 . Dec. . Dec. 4.2 40.7 4.2r 41.3r 3.9 41.2 2.5 41.4 . . Dec. . . Dec. . . Dec. 420 294 308 408 292 312 402 286 309 379 278 284 Manufacturing P a y r o l l s ..................... Farm Cash R e c e ip ts .......................... . . Nov. 258 93 258r 129 251 172 278 160 Dec. 152 136 160 148 50 152r 135r 160r 145r 48 152 136 160 141 48 154 145 157 151 54 Dec. 4.2 39.4 4.0r 39.4r 4.1 39.0 3.1 40.5 . . Dec. . . Dec. . . Dec. 369 252 339 357 252 340 358 246 331 347 242 307 Manufacturing Payrolls .......................... Dec. Farm Cash R e c e ip t s ............................... Nov. 229 167 229r 187 132 132r 119r 134r 118r 49 6 .8 r 132 119 135 116 43.2r 41.9 295 198 295 195 213 FINANCE AND BANKING Member Bank L o a n s............................... Member Bank Deposits . . . . Bank D e b it s * * .................................... FLORIDA INCOME EMPLOYMENT AND PRODUCTION FINANCE AND BANKING Loans* All Member B a n k s .................................... Dec. Large B a n k s ...............................................Dec. Deposits* All Member B a n k s .................................... Dec. Large B a n k s .............................................. Dec. Bank D ebits*/**...............................................Dec. One Year Ago Latest Month 1970 Unemployment Rate (Percent of Work ForceJt ■ • • . . Dec. Avg. Weekly Hrs. in Mfg. (Hrs.) . . . Dec. INCOME AND SPENDING Nonfarm E m p lo ym e n t...............................Dec. Manufacturing ......................................... Dec. Nondurable G o o d s ..........................Dec. Food ....................................................Dec. T e x t i l e s .............................................. Dec. Apparel .............................................. Dec. P a p e r ................................................... Dec. Printing and Publishing . . . Dec. C h e m ic a ls ......................................... Dec. Durable G o o d s ....................................Dec. Lbr., Wood prods., Furn. & Fix. Dec. Stone. Clay, and Glass . . . Dec. Primary M e t a ls ...............................Dec. Fabricated M e t a ls ..........................Dec. Machinery, Elec. & Nonelec. . Dec. Transportation Equipment . . Dec. Nonmanufacturing ...............................Dec. C o n stru c tio n .................................... Dec. Transp., Comm., & Pub. Utilities Dec. T r a d e ....................................................Dec. Fin., ins., and real est.....................Dec. S e r v ic e s ...............................................Dec. Federal G o vernm ent.....................Dec. State and Local Government . Dec. Farm Em ploym ent......................................... Dec. Unemployment Rate (Percent of Work F o rc e )t.....................DecInsured Unemployment (Percent of Cov. E m p .)..........................Dec. Avg. Weekly Hrs. in Mfg. (Hrs.) . . . Dec. Construction C o n tra c ts * ..........................Dec. R e s id e n tia l....................................................Dec. All O th e r.........................................................Dec. Electric Power Production** . . . . Oct. Cotton Consumption**...............................Nov. Petrol. Prod, in Coastal La. and Miss.**Dec. Manufacturing P ro d u c tio n .....................Nov. Nondurable G o o d s ....................................Nov. Food .........................................................Nov. Textiles ....................................................Nov. Apparel ....................................................Nov. P a p e r .........................................................Nov. Printing and Publishing . . . . Nov. C h e m ic a ls .............................................. Nov. Durable G o o d s ......................................... Nov. Lumber and W o o d ............................... Nov. Furniture and F ix t u r e s .....................Nov. Stone, Clay and G l a s s .....................Nov. Primary M e t a ls ....................................Nov. Fabricated M e t a ls ...............................Nov. Nonelectrical Machinery . . . . Nov. Electrical M achin ery..........................Nov. Transportation Equipment . . . Nov. One Two Month Months Ago Ago One Year Ago SIXTH DISTRICT Manufacturing Payrolls ..........................Dec. Farm Cash R e c e ip ts .................................... Nov. C r o p s ..............................................................Nov. L iv e sto c k .........................................................Nov. Instalment Credit at Banks* (Mil. $) New L o a n s ....................................................Dec. Repayments .............................................. Dec. 1 0 0 , u n le s s in d ic a te d o th e r w is e .) Manufacturing P a y r o l l s ..................... Farm Cash R e c e ip ts ............................... EMPLOYMENT Nonfarm Employmentt ..................... Manufacturing ............................... Nonmanufacturing.......................... . C o n s tru c tio n ............................... Farm Em ploym ent............................... . Unemployment Rale (Percent of Work Forceit . . . , Avg. Weekly Hrs. in Mfg. (Hrs.) . . . Dec. . Dec. FINANCE AND BANKING Member Bank Lo a n s .......................... Member Bank Deposits..................... Bank D ebits**......................................... GEORGIA INCOME EMPLOYMENT Nonfarm Employmentt . . . . Manufacturing ............................... . . Nonmanufacturing.......................... C o n s tru c tio n ............................... Farm Em ploym ent............................... Unemployment Rate (Percent of Work Forceit . . . Avg. Weekly Hrs. in Mfg. (Hrs.) . . . Dec. Dec. Dec. FINANCE AND BANKING Member Bank Lo a n s .......................... Member Bank Deposits..................... Bank D ebits**......................................... LOUISIANA INCOME EMPLOYMENT Nonfarm Employm entt............................... Dec. Manufacturing ......................................... Dec. Nonmanufacturing ............................... Dec. C o n s tru c tio n ..........................................Dec. Farm Em ploym ent..........................................Dec. Unemployment Rate Dec. (Percent of Work F o rce Jt..................... Avg. Weekly Hrs. in Mfg. (Hrs.) . . . Dec. 120 134 122 222 116 213 158 133 122 135 133 FINANCE AND BANKING Member Bank L o a n s * ............................... Dec. Member Bank D e p o sits * ..........................Dec. Bank D ebits*/**...............................................Dec. 295 201 210 221 281 186 204 MISSISSIPPI 224 114 228r 114 232 133 225 131 132 133 131 132r 133r 131r 132 133 131 134 137 132 125 lOOr 53 100 INCOME Manufacturing Payrolls ..........................Dec. Farm Cash R e c e ip ts .................................... Nov. EMPLOYMENT Nonfarm Employm entt............................... Dec. Manufacturing ..........................................Dec. Nonmanufacturing.................................... Dec. C o n s tru c tio n ..........................................Dec. Farm Em ploym ent..........................................Dec. 295 146 297r 131 152 160 149 160 152r 160r 149r 159r 46 274 126 152 159 149 160 150 160 147 169 M O N T H L Y R E V IE W Latest Month 1970 One Two Month Months Ago Ago One Year Ago One Two Latest Month Month Months 1970 Ago Ago One Year Ago Dec. Dec. Dec. Dec. Dec. 149 153 147 163 55 149r 152r 147r 157r 53 148 153 146 154 57 149 157 145 165 58 Dec. Dec. N.A. 40.0 4.9 39.6r 5.2 39.7 3.6 40.4 Member Bank L o a n s * ................................ Dec. Member Bank D e p o sits*........................... Dec. Bank Debits*/**......................................... .... . Dec. 366 232 283 347 230 277 355 226 284 319 213 273 EMPLOYMENT Unemployment Rate (Percent of Work F o rce Jt..................... Dec. Avg. Weekly Hrs. in Mfg. (Hrs.) . . . Dec. 4.5 40.4 5.1r 40.0r 5.2 40.0 3.7 40.6 FINANCE AND BANKING Member Bank L o a n s * ..............................., Dec. Member Bank D e p o sits * .......................... Dec. Bank D ebits*/**.............................................. Dec. 470 305 296 460 301 298r 449 298 283r 408 279 264 Nonfarm Employm entt.......................... . Manufacturing .................................... . Nonmanufacturing............................... . C o n s tru c tio n .................................... . Farm Employm ent.................................... ..... Unemployment Rate (Percent of Work ForceJt . . . . , Avg. Weekly Hours in Mfg (Hrs.) . . TENNESSEE FINANCE AND BANKING INCOME Manufacturing Payrolls .......................... Dec. Farm Cash R e c e ip ts .................................... Nov. 254 156 247 r 249 116 12 2 250 147 *For Sixth District area only; other totals for entire six states ‘ Daily average basis tPreliminary data r-Revised N.A. Not available Sources: Manufacturing production estimated by this Bank; nonfarm, mfg. and nonmfg. emp., mfg. payrolls and hours, and unemp., U.S. Dept, of Labor and cooperating state agencies; cotton consumption, U.S. Bureau of Census; construction contracts, F. W. Dodge Div., McGraw-Hill Information Systems Co.; petrol, prod., U.S. Bureau of Mines; industrial use of elec. power, Fed. Power Comm.; farm cash receipts and farm emp., U.S.D.A. Other indexes based on data collected by this Bank. All indexes calculated by this Bank. D e b it s to D e m a n d D e p o s it A cc o u n ts In su re d C o m m e rc ia l B a n k s in the S ix th D istrict (In T h o u s a n d s o f D o lla rs ) Percent Ch ange Dec. 1970 Nov. 1970 Dec. 1969 Year to Dec. date 1970 1 2 mos. From 1970 Nov. Dec. from 1970 1969 1969 STANDARD METROPOLITAN STATISTICAL AREASt Birmingham . . . Gadsden ..................... Huntsville . . . . Mobile ..................... Montgomery . . . Tuscaloosa . . . . 2,301,729 78,170 247,584 685,712 464,322 141,018 2,074,560 70,488 216,401 592,923 407,256 130,176 2,026,191 75,572 232,575 642,848 414,754 130,569 +11 +1 1 + 14 + 16 + 14 + 8 + 14 + 3 + 6 + 7 + 12 + 8 + 8 + 6 + 8 + 13 + 8 + 4 Ft. LauderdaleHollywood . . . Jacksonville . . . M ia m i.......................... O r la n d o ..................... Pensacola . . . . Tallahassee . . . Tampa—St. Pete. W. Palm Beach . . 1,219,240 2,256,347 4,708,264 1,015,083 323,472 235,605 2,513,506 778,517 1,096,614 2,068,112 3,665,857 803,671 264,498 221,555 2,177,820 651,673 1,188,891 2,117,522 4,077,135 865,205 289,451 199,410 2,431,998 714,643 +1 1 + 9 +28 + 26 + 3 + 6 + 15 + 17 +12 + 18 + 3 + 9 + 8 + 6 +10 + 15 + 13 + 15 + 13 +10 Albany ..................... +22 + 6 + 15 + 19 139,921 126,903 125,157 + 10 +12 349,627 344,707 294,697 376,178 382,427 +20 + 19 + 19 +1 2 + 1 + 13 + 7 + 5 + 15 + 14 + 3 + 5 + 5 + 2 793,071 166,585 180,997 3,015,465 + 3 + 4 + 9 +2 2 + 4 + 10 + 0 + 9 + 18 + 7 - 1 + 5 173,542 854,612 + 2 + 16 + 1 + 17 + 18 + 8 401,162 292,417 279,894 338,757 358,261 Baton Rouge . . . Lafayette Lake Charles . . . New Orleans . . . 821,797 183,502 181,423 3,263,373 797,328 176,105 166,939 2,668,292 Biloxi-Gulfport Jackson ..................... 175,372 1,002,898 Chattanooga . . . Knoxville . . . . Nashville . . . . 967,578 675,991 2,089,748 876,231 607,687 1,788,069 881,706 630,543 2,110,042 + 10 +1 1 + 17 +10 + 7 - 1 +11 + 4 + 4 A n n is to n ..................... Dothan ..................... S e l m a .......................... 83,962 97,772 60,416 79,134 91,390 53,072 83,594 89,153 59,501 + 6 + 7 + 14 + 0 +10 + 2 + 5 +12 + 1 Bartow ..................... Bradenton . . . . Brevard County . . Daytona Beach Ft. MyersN. Ft. Myers . . 44,734 112,171 260,735 117,367 36,399 88,574 206,232 92,231 46,067 107,654 272,604 106,312 +23 +27 +26 +27 3 + 4 - 4 -+1 0 - 3 + 4 - 2 + 3 168.481 129,966 142,282 4 30 + 18 + 172,052r 864,163 OTHER CENTERS Bristol •Includes only banks in the Sixth District portion of the state FE D E R A L R E SE R V E B A N K O F A T L A N T A 6 tPartially estimated Dec. 1970 Nov. 1970 Dec. 1969 Gainesville . . . . Lakeland . . . . Monroe County . . O c a l a .......................... St. Augustine . . St. Petersburg . . S a r a s o ta ..................... Tampa ..................... Winter Haven . . . 142,031 219,125 60,358 106,681 27,576 603,813 199,376 1,324,278 99,139 118,940 157,778 44,918 94,965 20,959 513,586 165,502 1,148,556 80,427 121,746 167,546 44,787 99,014 27,236 490,593 211,410 1,361,756 93,374 R o m e .......................... V a ld o s ta ..................... 165,884 66,985 143,529 20,078 102,292 53,693 25,358 36,248 109,461 75,693 129,334 54,951 124,357 17,743 89,082 39,840 23,276 32,086 90,370 67,722 118,188 58,159 128,685 17,216 92,984 45,917 25,155 30,066 103,497 67,783 A b b e ville ..................... Alexandria . . . . Bunkie ..................... Hammond . . . . New Iberia . . . . Plaquemine . . . Thibodaux . . . . 17,332 178,611 10,471 52,117 50,461 17,469 33,251 12,358 157,589 11,046 46,200 42,135 13,452 26,638 Hattiesburg . . . L a u r e l .......................... M e rid ia n ..................... N a t c h e z ..................... Pascagoula— Moss Point . . Vicksburg . . . . Yazoo City . . . . 81,821 55,208 82,676 48,739 ..................... Johnson City . . . Kingsport . . . . Percent Ch ange Year to date Dec. 1970 1 2 mos. From 1970 Nov. Dec. from 1970 1969 1969 +19 +39 +34 + 12 +32 +17 +17 +31 +35 + 8 + 1 +20 +22 - 6 + 15 +23 - 3 + 6 +28 +40 + 15 +12 + 17 +10 + 17 + 1 +22 + 15 + 13 + 15 +35 + 9 + 13 + 21 + 18 - 7 + 15 + 6 +13 +12 +24 +10 - 2 +10 + 15 + 14 - 4 +24 + 5 + 9 +21 +12 + 6 +12 15,635 +40 9,012 45,087 47,849 14,730 32,103 —5 + 13 +30 +25 +1 1 —1 + 16 + 16 + 6 + 19 + 4 + 8 + 5 - 1 + 2 76,226 48,063 74,170 41,961 60,282 52,430 84,156 52,767 + 7 + 15 +16 + 16 + 36 + 5 - 2 - 8 - 1 + 9 - 8 - 5 96,473 64,457 38,601 86,825 57,883 30,943 94,010 49,547 27,487 +12 +1 1 +25 + 3 +30 +40 + 6 + 16 + 7 113,427 115,135 200,414 100,158 93,335 172,588 103,996 107,797 189,825 + 13 +23 + 16 + 9 + 7 + 6 +1 1 + 7 - 1 + +20 SIXTH DISTRICT, Total 48,571,904 41,811,049r 45,075,662 + 16 + Alabama^ . . . . F lo r id a } :..................... G e o r g ia J..................... Louisiana!* . . . M ississippi* • • • Tennesseet* . . . 5,679,876 16,410,773 13,153,350 5,407,682 2,153.311 5,766.912 5,127,966 5,253,868 13,632,199 15,153,705 11,232,053 11,938,671 4,817,095 5,243,153 1,914,937r 1,921,707 5,086,799 5,564,558 +1 1 + 8 + 8 +10 + 3 +12 + 4 ^Estimated + 11 + 10 + 12 +20 + 17 +12 +12 + 13 8 —5 8 + 7 + 9 +1 1 + 6 + 7 + 6 r-Revised 39 D is t r ic t B u s in e s s C o n d it io n s As in women's fashions, the Southeastern economy continues to experience its ups and downs. Latest available data indicate that the unemployment rate increased; manufacturing production declined; and nonfarm employment edged up. The dollar volume of residential construction contract awards reached a record high for December. Consumers continued to make moderate use of instalment credit. With deposit inflows strengthening further, commercial banks became more active in the sale of Federal funds. Freezing weather damaged citrus and vegetable crops, but farm prices continued to decline. In December, nonfarm employment rose only slightly; average weekly factory hours increased; and the unemployment rate climbed to 5.0 percent. The re tu rn o f a u to w o rk e rs at an A tla n ta area p la n t adde d to th e jo b to ta ls, b u t d e clin es in o th e r d u rable goods in d u strie s o ffs e t this gain. C o n s tru c tio n e m p lo y m e n t w e n t u p ; and January fig u re s w ill p ro b ab ly sh o w fu rth e r increases because o f the s e ttle In December, the dollar volume of instalment loans made by commercial banks to consumers in creased somewhat; the amount of repayments also went up. C o n s e q u e n tly , to ta l co n s u m e r c re d it o u t sta n d in g increased o n ly s lig h tly . m e n t o f B irm in g h a m 's 135-d ay c o n s tru c tio n strike. In th e fo u rth q u a rte r, p u b lic a n n o u n ce m e n ts o f n e w At many District banks outside the larger metro politan areas, strong deposit inflows and slack loan demand have encouraged increased sales of excess reserves through the Federal funds market. Because and exp an de d plants d e c lin e d fro m o f s lo w le n d in g a c tiv ity and lo w e r b o rro w in g costs, th ird q u a rte r levels. fu rth e r d o w n w a rd ad ju stm e n ts in le n d in g rates to o k place d u rin g January. D is c o u n t a c tiv ity has re m a in e d Sieges of severe winter weather battered the Dis trict in January. F lorida vegetables and citru s w e re w e ak since late fa ll. The d is c o u n t rate o f th is Bank dam aged by fre e z in g tem p e ra tu re s. Because o f the fe c tiv e January 11 and fro m 5 V 4 p e rc e n t to 5 p e r cent, e ffe c tiv e January 19. b u m p e r c ro p , h o w e ve r, the freeze dam age p ro b ab ly w ill n o t resu lt in general p rice increases fo r was lo w e re d fro m 5 V 2 p e rc e n t to 5 V 4 p e rc e n t, e f the citru s in d u stry. The D e ce m b e r citru s p ric e level The dollar volume of residential construction con tract awards recorded a new December high. For was m o re than 50 p e rc e n t b e lo w th a t re co rd e d fo r 1970 as a w h o le , th e D e ce m b e r 1969. B roilers and c o tto n also registered aw ards s ig n ific a n t p ric e d e clin e s th a t w e re p a rtia lly o ffse t s ta n tia lly by advances fo r eggs and corn . Cash farm in c o m e surge o f n e w fo r th e D is tric t rem ains h ig h e r than it was a year the rece nt easing in cost and a v a ila b ility o f m o r t gage m on ey. ago. was ju s t b e lo w gain over 9 th e in to ta l p e rc e n t; p re vio u s c o n s tru c tio n th is year's was su b increase. A a p a rtm e n t c o n tra c t aw ards re fle cts NOTE: Data on which statements are based have been adjusted whenever possible to eliminate seasonal influences. 40 MONTHLY REVIEW February 1971
@FedFRASER