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D E C E M B E R 1965 IN THIS ISSUE Survey of Changes in Interest Rates on Savings and Time D e p o s it s ..............................3 Sources of Coal Consumed in O h i o ..............................16 M anagement of Cash Assets at Fourth District Reserve City and Country Member Banks . . . 24 FEDERAL RESERVE BANK OF CLEVELAND A dditional copies of the E C O N O M IC R EV IEW m ay be obtained from the Research Department, Federal Reserve Bank of Cleveland, Cleveland, O h io 4 4 1 0 1 . Permission is granted to reproduce any material in this publication. DECEMBER 1965 SURVEY OF CHANGES IN INTEREST RATES ON SAVINGS AND TIME DEPOSITS (Fourth District) The importance of savings and time d e posits has increased substantially in recent years. A s a general matter, the growth of savings and time deposits has accom panied (and/or been a partial response to) changes in the environment within which banks oper ate and has reflected modifications in tradi tional methods of conducting bank operations. More specifically, a number of important developments have influenced the financial system and banking activity during recent years: increased sensitivity on the part of the public to interest rate differentials on similar types of liquid assets; increased innovating activity on the part of commercial banks as reflected by the introduction and growth of new methods to attract funds; and successive increases in the maximum rates of interest that banks are permitted to pay on savings and time deposits, among others.1 O ne result 1 For a review of recent innovations in methods of at tracting funds, see "Sources of Commercial Bank Funds: An Example of Creative Response," E con om ic Review , Federal Reserve Bank of Cleveland, Cleveland, Ohio, November 1965. of these developments has been increased em phasis on analysis that seeks to interpret and evaluate the rapidly shifting financial environment.2 This article attempts to shed some light on how a limited group of banks have responded to some of the developments cited above, by presenting the results of a recent survey of interest rates offered by Fourth District mem ber banks on their savings and time deposits.3 The survey was conducted by the Research Department of the Federal Reserve Bank of Cleveland in April-May 1965. Eighty-five 2 An example is a recent study of the role of time de posits in the financial process: L. E. Gramley and S. B. Chase, Jr., ''Time Deposits in Monetary Analysis," Federal Reserve Bulletin, October 1965, pp. 13801406. 3 The rates offered on savings and time deposits, dis cussed in this article, are not necessarily equal to the actual rates paid by reporting banks. The actual rate paid to a depositor is determined basically by the fre quency with which interest is compounded and, in the case of savings deposits, by the willingness of the de positor to maintain his deposit for the required period of time. 3 ECONOMIC REVIEW TABLE I M a x im u m Interest Rates Authorized Under R egulation Q on S a v in g s and Time Deposits Percent per annum Type and Maturity of Deposit Effective Date Jan. 1, 1957 Savings Deposits: 1 year or more . . . Less than 1 year . . Time Deposits:* 1 year or more . . 6 months to 1 year 90 days to 6 months Less than 90 days . . . . . Jan. 1, 1962 July 17, Nov. 24, 1963 1964 3 3 4 3'/2 4 3'/2 4 4 3 3 4 3Vi 4'/2 4/2 2'A 2'A 1 1 4 4 4 1 AVl 4 *Rates authorized for foreign-owned time deposits not considered here. In this discussion of the survey results, the timing of chan ges m ade by District banks in interest rates on both savings and time de posits and the resulting rate levels are pre sented first. Then, the influence of bank size and location upon rate chan ges and levels are discussed. Tabular summaries of the rates reported by District banks, against various background factors, are contained in Tables II-V. In addition, six m aps are presented in order to highlight locational patterns of rates offered by District banks on selected dates, as well as differences in the responses of banks on savings as opposed to time deposits. Note: Changes made in December 1965, increasing the maximum rates that member banks are permitted to pay on time deposits, are not included in the table. THE NATURE OF TIME AND SAVINGS DEPOSITS Source: Board of Governors of the Federal Reserve System Rates on savings and time deposits have generally risen since 1960. However, there have been differences in the timing and amount of change in rates offered on savings deposits, as com pared with time deposits. In addition, there is evidence of differing in fluences of bank size and location on rates offered on savings and time deposits. Because of these differences, and because savings and time deposits are essentially not the same type of deposits, it might be helpful in inter preting the results of the survey to first com ment briefly on the major characteristics of percent of the member banks in the Fourth District participated in the survey. The survey results provide some indication of the re sponse of banks to recent changes in the general financial environment and, specific ally, to chan ges in Regulation Q, under which maximum perm issible rates on savings and time deposits are governed by the supervisory authorities.4 The time period for which the banks reported levels of rates extended from December 1960 through the first quarter of 1965. This time span is important because it includes, as of this writing, all the occasions when recent changes in Regulation Q becam e effective. Table I lists these effective dates of changes in rates permissible on savings and time deposits. 4 For earlier nationwide survey results of rate changes by member banks, see Caroline Cagle, "Interest Rates on Time Deposits, Mid-January 1962," Federal R eserve Bulletin , February 1962, and "Interest Rates on Time Deposits, Mid-February 1963,'' Federal Reserve B ul letin , June 1963. 4 holders of the two kinds of deposits. Savings deposits, evidenced by a passbook or written receipt or agreem ent, are held only by individuals and nonprofit organizations. Reasons for holding savings deposits vary widely am ong individuals, although a number of motivating forces have been found to be major influences. These include the accum u lation of funds for em ergencies or in antici pation of future expenditures for houses, DECEMBER 196 5 durable goods, or education, as well as the attempt to increase the flexibility of expendi tures beyond the limits imposed by current incom e.5 An important reason for holding savings deposits at commercial banks is that of convenience, that is, "one-stop" banking. That the .rate of return on savings deposits may not be a major consideration to ''savers'' is suggested by the existence of the multi plicity of savings objectives. In addition, the moderate average size of savings deposits (estim ates vary b etw een ap p ro x im ate ly $ l,0 0 0 -$ 2 ,0 0 0 ) tends to limit the number of saving or investment alternatives available to holders of such deposits. In the survey cited in footnote 4, only one out of twelve sam pled savings-account owners reported the rate paid on savings accounts influenced their holdings of such deposits. In households with annual incomes of $10,000 or more, the group logically expected to be most sensitive to yield differentials on similar forms of liquid assets, only one family in ten said that the yield on savings deposits would influence the form of savings they desired.6 In contrast, holders of time deposits, e s pecially in the form of negotiable certificates of deposit (CD's), are considered to be in vestors that are more sensitive to differences in rates available on competing forms of liquid assets. (One indication of this sensi5 The results of a comprehensive survey of consumer attitudes toward savings deposits can be found in E. Mueller and H. Osborne, "Consumer Time and Savings Balances: Their Role in Family Liquidity,” Am erican E con om ic Review , May 1965, pp. 265-275. The survey w as conducted by the Survey Research Center of the University of Michigan for the Board of Governors of the Federal Reserve System. 6 Ibid ., pp. 273-275. tivity is the relative conformity in movement of rates on various types of money market instruments, for exam ple, CD's, short-term U.S. Treasury securities, and commercial paper, am ong others.) In order to attract the funds of such investors, it would seem that banks have to offer competitive rates of in terest. The greater sensitivity of time deposit holders to yield differentials reflects in part the identity of these holders, largely business firm s, state an d lo c a l g o v e rn m en ts, an d foreign official institutions.7 B ecause time deposit holdings tend to be relatively large, the investment alternatives available to hold ers of time accounts often are greater than those available to holders of savings accounts. At the same time, efforts to achieve efficient cash management, plus the potential earnings on large dollar amounts invested at slightly higher rates, encourage the typical time de posit holder to search out the highest paying investment outlet. Thus, in general, differences in the behav ior of holders of savings as com pared with time deposits essentially reflect the different motivations of the two types of depositors, as well as the alternative outlets available to each. Considerations other than the rate of return and the small average size of savings deposits tend to limit the alternatives available to holders of such deposits to a smaller group of liquid assets, for exam ple, savings and loan shares and U .S. Treasury savings bonds, 7 A portion of time deposits at commercial banks is accounted for by deposits accumulated for the repay ment of personal loans, and open-account deposits which include those made by Christmas and vacation clubs. Such deposits account for a small share of total time deposits held by commercial banks. 5 ECONOMIC REVIEW among others. Holders of time deposits, on the other hand, tend to be more interest-rate concious and have a greater number of alter native outlets in which to invest temporarily idle funds. Basic differences between the behavior of the two types of depositors were reflected in the interest rates offered on sav ings and time deposits by Fourth District member banks during 1960-65, particularly with reference to bank size and location. This was reported in the recent survey and is discussed in the following presentation ot the survey results. TIMING OF BANK RESPONSE S a v in g D ep o sits. A noticeable shift to higher rates on savings deposits by Fourth District member banks occurred during the first quarter of 1962, following the January 1962 change in Regulation Q. This marked the first change in the regulation since 1957. As the upper portion of Table II shows, 19 percent of the reporting banks moved to rates of 3}/2 percent or more during the first quarter of 1962; 13 percent of the banks moved to the new 4 percent maximum permissible rate. The majority of banks offering the 4 percent maximum at that time were those which had been paying 3 percent—the pre vious maximum. From the end of the first quarter of 1962 until 1964, few adjustments were m ade in rates on savings deposits by District banks. By the fourth quarter of 1964, however, the proportion of reporting banks offering rates of 3Y2 percent or more had in creased to 42 percent. At the end of the first quarter of 1965, the latest period covered by the survey, slightly over one-half of the reporting banks 6 offered rates on savings deposits of 3 ^ per cent or more, with 3 8 percent of the reporting banks at the 4 percent maximum. The pro portion of banks at the 3 percent maximum in effect at the end of 1961, however, had been 80 percent. Thus, fewer banks seem to have taken advantage of the higher maximum per mitted in 1965 than was the case before the 1962 change in Regulation Q, perhaps b e cause of the shorter lapse of time since the latest change in authorized rates. In brief, major shifts to higher rates on savings d e posits occurred during the first quarter of 1962, not again until 1964, and then steadily through the first quarter of 1965. T im e D e p o sits. In contrast, a larger pro portion of reporting banks quickly moved to higher rates on time deposits after the January 1962 change in Regulation Q. Table III shows that 47 percent of District banks moved to rates of 3 }/i percent or more on time deposits during the first quarter of 1962. At that time, 41 percent of the banks reported the 4 per cent maximum authorized. A further contrast between bank actions on time as com pared with savings deposits is evident in the behavior of banks from the first quarter of 1962 until 1964. Banks did not adjust rates on savings deposits to any great extent during this period, whereas the proportion of banks that reported higher rates on time deposits increased at a slow but steady pace. It is interesting that no m a jo r adjust ments in rates were reported by Fourth Dis trict member banks following the July 1963 change in Regulation Q, which applied only to time deposits having maturities of less than one year. TABLE II M a x im u m Rates Offered on S a v in g s Deposits Survey of Fourth District Member Banks Selected Q uarters,0 1 96 0 -6 5 4Q 1960 Size of Bank and Rate Levels b 4Q 1961 IQ 1962 4Q 1962 3Q 1963 4Q 1963 4Q 1964 IQ 1965 Percentage Distribution of Banksc All Reporting Banks (390 banks) Under 3 percent p.a................ 3 p e rc e n t........................... 3'/2 p e r c e n t ........................ 4 p e rc e n t........................... . . . . 26 19 80 15 66 6 13 15 63 10 14 14 62 9 15 13 62 10 15 11 47 12 30 10 39 13 38 . . . . 100 100 100 100 100 100 100 100 . . . . 33 25 75 20 69 5 5 18 66 10 6 17 65 9 8 17 65 9 8 14 53 11 23 13 45 12 29 . . . . 100 100 100 100 100 100 100 100 12 59 12 17 12 60 12 16 11 61 12 16 10 46 17 28 Reporting Banks by Size of Total Deposits Under $10 million (203 banks) Under 3 percent p.a................ 3'A p e r c e n t ........................ $10-under $25 million (114 banks) Under 3 percent p.a............................. 3 p e rc e n t....................................... 3'/2 p e r c e n t .................................... 4 p e rc e n t....................................... All rates.................................... 22 78 100 16 84 12 63 10 15 8 37 16 40 100 100 100 100 100 100 100 6 94 2 64 4 30 2 64 4 30 2 62 4 32 2 62 4 32 -0 49 2 49 -0 43 4 53 100 100 100 100 100 100 100 19 81 8 50 8 35 8 50 8 35 8 50 8 35 8 50 8 35 8 8 19 65 8 -0 19 73 100 100 100 100 100 100 100 $25-under $100 million (47 banks) $100 million and over (26 banks) . . . . . . . . 19 81 a Included are fourth quarter of each year covered by the survey, quarters in which a change in Regulation Q became effective, and most recent quarter covered by the survey. b Rate levels represent maximum rates reported on savings deposits regardless of maturity; banks were grouped according to size of total deposits outstanding on December 31, 1964. The 3’/2 percent and 4 percent rate classifications apply to the first quarter of 1962 and subsequent periods. c Components may not add to totals because of rounding. Source: Federal Reserve Bank of Cleveland 7 TABLE III M a x im u m Rates Offered on Time D eposits Survey of Fourth District Member Banks Selected Q uarters,0 1 9 60-65 Size of Bank and Rate Levels b 4Q 1960 4Q 1961 IQ 1962 4Q 1962 3Q 1963 4Q 1963 4Q 1964 IQ 1965 Number and Percentage Distribution of Banksc All Reporting Banks Number of B a n k s .............................. . . 346 345 359 361 359 362 365 366 Under 3 percent p.a....................... . . 3 and under 3’/2 percent d ............ . . 3'A and under 4 p ercen t............... 4 percent and o v e re ..................... 15 85 11 89 6 47 6 41 4 43 7 45 4 40 8 48 4 39 8 49 3 18 7 72 3 9 7 81 100 100 100 100 100 100 100 100 174 174 182 182 183 183 186 186 17 83 11 89 7 51 5 37 5 46 7 42 5 41 7 47 5 41 7 47 4 19 7 70 3 12 7 77 100 100 100 100 100 100 100 100 102 102 106 107 108 108 108 108 12 88 9 91 6 41 6 48 3 38 7 52 3 36 7 54 3 36 7 54 2 19 7 71 2 8 6 83 100 100 100 100 100 100 100 100 . . 45 45 46 46 46 46 47 47 Under 3 percent p.a....................... 3 and under 3 Vi p e r c e n t d ............ . . 2Vi and under 4 percent............... 4 percent and o v e re ..................... 11 89 7 93 4 46 —0— 50 2 46 -0 52 2 39 2 57 2 39 2 57 2 17 4 77 2 6 9 83 100 100 100 100 100 100 100 100 . . 25 25 25 25 25 25 25 25 Under 3 percent p.a....................... . . 3 and under 3'/2 percent d ............ . . 3Vi and under 4 p ercen t............... 4 percent and over e ..................... 24 76 24 76 12 48 20 20 8 48 24 20 -0 40 32 28 -0 40 32 28 -0 12 16 72 -0 —0— 4 96 100 100 100 100 100 100 100 All rates.............................. Reporting Banks by Size of Total Deposits Under $10 million Number of B a n k s .............................. Under 3 percent p.a....................... . . 3 and under 3'/2 percent d ............ . . 3'/i and under 4 percent............... 4 percent and over e ..................... $10-under $25 million Number of B a n k s .............................. Under 3 percent p.a...................... 3 and under 3 Zi p e r c e n t d ............ 3'/i and under 4 percent............... 4 percent and o v e re ..................... . . All rates.............................. $25-under $100 million Number of B a n k s .............................. All rates.............................. $100 million and over Number of B a n k s .............................. “ Included are fourth quarter of each year covered by the survey, quarters in which a change in Regulation Q became effective, and most recent quarter covered by the survey. b Rate levels represent maximum rates reported on time deposits regardless of maturity; banks were grouped according to size of total deposits outstanding on December 31, 1964. 'Components may not add to totals because of rounding. d Only the lower limit (3 percent) is applicable through the end of 1961. e Only the lower limit (4 percent) is applicable from January 1962 through the third quarter of 1964; the 4 Vi percent ceiling became effective November 24, 1964. Source: Federal Reserve Bank of Cleveland 8 Finally, substantial shifts to higher rates on time deposits occurred in late 1964 and through the first quarter of 1965. About four-fifths of the reporting banks offered 4 percent or more on time deposits at the end of the first quarter of 1965, as com pared with 49 percent at the 4 percent maximum at the end of the fourth quarter of 1963. Thus, the tim in g of major shifts in rates on time d e posits coincided with the timing of movements to higher rates on savings deposits, but a larger number of banks shifted to higher time deposit rates. The distribution of rates paid on savings and time deposits resulting from the forego ing changes is illustrated in the table below: Percentage of Banks Rate Level Under 3 percent . . 3 and under 3Yi percent 2 /i and under 4 percent 4 percent and over . . . All r a t e s ............... Dec. 1961 Savings Time March 1965 Savings Time 19 80 11 89 10 39 13 38 3 9 7 81 100 100 100 100 Note: See footnotes. Tables II and III. Although the proportion of banks offering the 3 percent maximum on the two types of de posits was similar at the end of 1961, the structure of rates on time deposits was sub stantially higher than on savings deposits at the end of March 1965. In addition, the dis persion of banks offering less than 4 percent was much smaller for time deposits. BANK SIZE C hanges in rates offered on savings de posits at District banks over the survey period were clearly associated with bank size, in that larger banks adjusted rates upward more quickly than smaller banks. In addition, larger banks offered higher and more uniform rates than smaller banks. In contrast, the relation between size of bank and chan ges in rates offered on time deposits was less clear, with rate changes tending to be less associated with bank size. In other words, rate increases on time deposits during the survey period were dispersed throughout all size groups of reporting banks. Tables II and III contain re ported rates on savings and time deposits classified according to bank size. S a v in g s D ep o sits. Table II indicates that, following the lanuary 1962 change in Regu lation Q, 43 percent of reporting banks with deposits of $ 100 million or more offered rates above 3 percent on savings deposits, while only 10 percent of the banks with deposits of less than $10 million offered similar rates. In the two other size groups, the proportion of banks offering more than 3 percent increased from one-fourth of the banks with $10-$25 million in deposits to one-third of the $25$100 million banks. In addition, the propor tion of banks offering the 4 percent maximum rate increased with bank size, ranging from 5 percent in the smallest size group to 35 per cent in the largest size group. Thus, not only was the incidence of upward movements in rates greater at larger banks, but also the level of rates offered tended to be both higher and more uniform at larger banks. Similar rate patterns prevailed at the end of the first quarter of 1965. At that time, only 8 percent of the banks with deposits of $100 million or more offered rates of 3 percent or less, while almost three-fifths of banks with deposits under $10 million offered rates of 9 ECONOMIC REVIEW 3 percent or lower. Similarly, the proportion of banks reporting the 4 percent maximum again varied directly with bank size. To illu strate, about three-fourths of banks with d e posits of $ 1 0 0 million or more reported the maximum rate, while the proportion of banks in smaller size groups reporting the 4 percent maximum declined with bank size to 29 per cent in the under-$ 10-million deposit-size group. T im e D e p o sits. In contrast, upward adjust ments in rates offered on time deposits over the survey period were more w idespread throughout all size classes of banks (see Table III). In addition, rates offered on time de posits tended to be higher and more uniform than rates offered on savings deposits within given size classifications. At the end of the first quarter of 1962, at least 40 percent of the banks in each size group offered rates of 33^ percent or more on time deposits. The proportion of banks in each size group that reported 4 percent, however, varied substantially, ranging from 20 percent of banks with deposits of $100 million and over to one-half of banks with de posits of $25 to $ 100 million. It is perhaps somewhat surprising that only 20 percent of banks with deposits of $100 million or more reported the 4 percent maximum at the end of the first quarter of 1962. This was primarily because banks in central and southwestern Ohio did not raise rates until mid-1964. Major shifts to higher rates on time de posits had occurred at banks in all size groups by the end of 1964. At that time, 70 percent or more of the banks in each size group reported rates of 4 percent or more. The first quarter of 1965, the latest period covered by the Digitized forTO FRASER survey, found 9 6 percent of the banks with deposits of $ 100 million or over offering 4 per cent or more on time deposits, with slightly over three-fourths of the banks with deposits under $10 million offering similar rates. In addition, the smallest size group showed the greatest increase in the number of banks that instituted time deposit services during the survey period. The number of smaller banks offering time deposits increased from 174 at the end of 1960 to 186 at the end of the first quarter of 1965 (see Table III). LOCATION AND BANK RESPONSE Rate levels on savings and time deposits reported by member banks of course were not uniform throughout the Fourth District. By the end of the first quarter of 1965, a 4 percent rate on savings deposits was repre sentative in many of the major metropolitan areas and surrounding counties. But at the same time, banks in a number of other Fourth District counties continued to offer a 3 per cent rate on savings deposits. In contrast, increases in rates on time deposits were geo graphically w idespread throughout the Fourth District, especially by the end of the first quarter of 1965. Levels of rates on savings deposits are illus trated geographically in Maps 1-3, and rates on time deposits are illustrated in Maps 4-6. The m aps show rate patterns as of June 1961, June 1962, and March 1965, in order to re flect rates prevailing prior to the January 1962 change in Regulation Q, the adjust ments in rates m ade at reporting banks by the end of June 1962 (six months after the 1962 Regulation Q change), and rate levels in effect in the most recent period for which data DECEMBER 1965 TABLE IV Representative Rates on S a v in g s D eposits Fourth District Cou nty Patterns Selected Periods, 1961-65 TABLE V Representative Rates on Time D eposits Fourth District C ou nty Patterns Selected Periods, 19 61-65 County Group and Rate Levels0 County Group and Rate Levels0 June 1961 June 1962 March 1965 June 1961 June 1962 March 1965 Percentage Distribution of Counties b All Reporting Counties (127 counties) Under 3 percent p.a. . 3 percent............... 3'/2 percent............ 4 percent............... All r a t e s ............ All Reporting Counties Number of counties . . . 23 76 17 61 13 8 11 38 13 39 100 100 100 SM SA Counties (41 counties) Under 3 percent p.a. . 3 percent............... 3'/2 percent............ 4 percent............... All r a t e s ............ Number and Percentage Distribution of Counties*3 Under 3 percent p.a. . 3 and under 3'/2 percent 3'A and under 4 percent 4 percent and over . . All r a t e s ............ SM SA Counties Number of counties . . 119 122 122 7 92 3 48 11 38 - 012 7 81 100 100 100 39 39 39 15 85 10 51 20 20 7 24 17 51 Under 3 percent p.a. . 3 and under 3'A percent 3Vi and under 4 percent 4 percent and over . . 8 92 3 44 13 41 -0 8 3 90 100 100 100 All r a t e s ............ 100 100 100 . . 80 83 83 8 92 2 51 10 37 -0 14 8 77 100 100 100 Other Counties (86 counties) Other Counties Number of counties Under 3 percent p.a. . 3 percent............... 3Vi percent............ 4 percent............... 28 72 21 66 10 2 12 44 12 33 Under 3 percent p.a. 3 and under 3Vi percent 3 /i and under 4 percent 4 percent and over . . All r a t e s ............ 100 100 100 All r a t e s ............ 1 See footnote b, Table II. 1 Components may not add to totals because of rounding. Source: Federal Reserve Bank of Cleveland ° See footnotes d and e, Table III. k Components may not add to totals because of rounding. Source: Federal Reserve Bank of Cleveland are available. The color assign ed to each county indicates the rate reported by the majority of responding banks located in the cussion. (Counties in which there were no banks reporting in the survey are shown in white.) Although reported rates did not in- county.8 The rate reported by the majority of banks in each county is referred to as the dicate a high degree of dispersion within counties, rates were not as uniform as might "representative" rate in the subsequent dis- be implied by the single rate assign ed to each county. Finally, Tables IV and V contain rate 8 In a few cases, an average rate was computed for counties in which there were the same number of banks offering different rates. levels grouped accordin g to counties comprising Standard Metropolitan Statistical A reas 11 ECONOMIC REVIEW (SMSA's) and all other counties in which presentative rates on savings deposits, high banks responded to the survey.9 S a v in g s D ep o sits. M aps 1-3, in showing re- light the prevalence of the 3 percent maxi mum reported by banks for the end of June 9 A total of 43 counties are included in the 15 complete and 4 partial SMSA's located in the Fourth District; 39 of the 43 SMSA counties are included in the discussion of time deposits, while 41 SMSA counties reported rates on savings deposits. 1961 (Map 1), a geographical concentration of counties with representative rates of 4 per cent at the end of June 1962 (Map 2), and the spread of higher rates by the end of the first Digitized12 for FRASER DECEMBER 1965 quarter of 1965 (Map 3). The proportion of counties with representative rates of 3 per cent or more increased from about threefourths at the end of June 1961 to over fourfifths at the end of June 1962, and to 90 per cent at the end of March 1965 (see Table IV). As indicated in Map 2, at the end of June 1962 a representative rate of 4 percent (the legal maximum) was reported in only 10 counties, concentrated in north central Ohio (Cleveland and surrounding counties), and in the Lexington, Kentucky area. A somewhat lower rate of 3 ^ percent was representative of reporting banks in 16 counties scattered throughout Ohio and Kentucky, and concen trated in western Pennsylvania around Pitts burgh. By the end of the first quarter of 1965, however, a representative rate of 4 percent was reported for 39 percent of the Fourth District counties in which banks responded to the survey. Table IV shows that representative rates in SM SA counties were higher, on the average, than in other counties. This was true for all time periods. At the end of March 1965, for example, a representative rate of 4 percent was recorded for over one-half of the SM SA counties, while only one-third of all other counties in which banks responded to the survey had similar rates on savings deposits. Many of these "oth er" counties classified at 4 percent were contiguous to SM SA's. Thus, representative rates of 4 percent on savings deposits were characteristic mainly of eco nomically integrated areas including large population centers and surrounding counties. T im e D ep o sits. A gain in contrast to the ex perience for savings deposits, representative county rates on time deposits reflected a greater degree of uniformity throughout the Fourth District. Only 7 percent of the counties at the end of June 1961, for example, had representative time-deposit rates of under 3 percent, as com pared with 23 percent at rates under 3 percent on savings deposits (com pare Maps 1 and 4). By the end of June 1962, six months after the legal maximum on time deposits with maturities of one year or more was increased from 3 percent to 4 percent, representative rates of 4 percent were reported by banks in almost two-fifths of all reporting counties. Map 2 shows the location of such counties; at that time, rates of 4 percent were predomi nant in counties in southwestern Pennsyl vania, in a large number of counties located in north central and eastern Ohio, in a group of counties north of Dayton, Ohio, and around Lexington and Corbin, Kentucky. Banks lo cated in non-SMSA counties seem ed to have been as active in raising rates on time d e posits during the first six months of 1962 as banks in SM SA 's (see Table V). In central and southwestern Ohio, banks did not increase rates on time deposits until mid-1964. Map 6 illustrates representative county rates on time deposits as of March 1965. Slightly over four-fifths of the reporting coun ties in the Fourth District had representative rates of 4 percent or more by then, and none of the counties were reported as having rates under 3 percent at that time. Furthermore, in only 4 of 39 reporting counties located in SM SA 's were representative rates under 3 Yi percent on time deposits reported for March 1965. Thus, shifts by reporting banks to higher rates on time deposits were more widespread, 13 ECONOMIC REVIEW geographically, than those on savings de posits. At the end of the first quarter of 1965, the latest period for which data are available, banks in almost all areas in the Fourth Dis trict offered rates of 4 percent or more on time deposits. The influence of bank location, although important with respect to the changes in rates and levels of rates reported by banks on savings deposits, apparently was minimal with regard to time deposits. CONCLUSION Results of the Fourth District survey provide evidence on the importance of bank size in relation to changes in rates on savings and time deposits, but one must realize that many 4. J U NE 1961 REPRESENTATIVE RATES on TIME DEPOSITS Fourth District C oun tie s f i s i i r . - \ rJ—-HTVrfl . . tfrVQ.1 [ I Under 3.0% J 3 . 0 % to 3 .5 % ] 3 . 5 % to 4 . 0 % 4 . 0 % and over □ S o u r c e of d a t a : F e d e r a l R e s e r v e B a n k of C l e v e l a n d Digitized for 14FRASER N o n re p o rtin g DECEMBER 1965 elements in turn influence both bank size and decisions to adjust rates. Such factors include the general economic environment in which a bank is located and the policies and objec tives of bank management. In addition, the number and importance of competing financial institutions are likely to have played a major role in influencing the decision of bankers to adjust rates offered to depositors. The asso ciation between bank size and bank perfor mance, therefore, is by no means a clear-cut relationship—size is both the cause and effect of a number of characteristics of individual banks and banking markets. Similar consid erations apply to the discussion of bank lo ca tion. Further statistical analysis of the per formance of banks as indicated by the results of the survey, incorporating some of the vari ables cited above, is currently under way at the Federal Reserve Bank of Cleveland. It is hoped that the research in progress will result in a better understanding of the relationship between banking structure and bank per formance. RECENTLY PUBLISHED The Board of Governors of the Federal Reserve System has an nounced a new publication entitled Monetary Theory and P olicy: A Bibliography, Part 1 : Domestic Aspects. The publication is available from, the Board’s Division of Administrative Services, Washington, D .C . 20551, at a price of $1.00. 15 ECONOMIC REVIEW SOURCES OF COAL CONSUMED IN OHIO C oal consumption in Ohio increased from 1958 to 1963 due to larger amounts of coal required by electric utilities and industrial users. This increase more than offset an un changed level of coal consumption by coke producers and a decline in sales to retail u sers.1 The near-term outlook appears bright for total coal consumption in Ohio (barring technological changes that might result in the replacem ent of coal as a fuel), although individual markets are likely to exhibit di vergent trends as they did from 1958 to 1963. This article exam ines the sources of coal used in Ohio and, in that context, is concerned with coal production in the state. Ohio ranks as the second largest coal con sumer in the U.S., accounting for over 10 per cent of national coal consumption. At the sam e time, the state is the fifth largest coal producer, following West Virginia, Kentucky, Pennsylvania, and Illinois in descending order. The 37 million tons of coal produced PART OF THE APPALACHIAN COAL FIELD The Ohio coal field is part of the A ppala chian coal field, lying in the eastern and south eastern one-third of the state, as shown in Chart 1. It extends over 25 counties whose individual coal production ranged in 1963 from less than 100,000 tons to over eight mil lion tons. Most of the coal in Ohio is mined in l. OHIO COAL FIELD in Ohio during 1963 represented 8 percent of all coal mined in the nation, a proportion that has changed little in recent years. In terms of at-mine value, coal production in Ohio totaled $ 1 3 6 million in 1963, one-third of the value of the state's total mineral pro duction. N ot e: C o u n t i e s t h a t p r o d u c e d more t h a n 2 mil li on ton s 1 See "Consumption of Coal in Ohio," E con om ic R eview , Federal Reserve Bank of Cleveland, Cleveland, Ohio, October 1965. Digitized for16 FRASER of c o a l in 1 9 6 3 o u t li n e d b y h e a v i e r b o r d e r S o u r c e of d a t a : U.S. D e p a r t m e n t of the I nt er io r DECEMBER 1965 only five counties, which are located near the central portion of the coal field (heavily out lined in the chart), and whose production in each case exceeded two million tons in 1963. Like the A ppalachian coal field as a whole, the areas in Ohio have large coal reserves. Although approxim ately four billion tons of coal had been either mined or lost in mining by the end of 1963, an estimated 42 billion tons rem ained in the state's coal field, which is enough to last 600 years based on present levels of coal production and current tech nology. The Ohio coal field differs in several im portant aspects from most other areas of the A ppalachian coal field. First, coal found in Ohio is of relatively low quality, containing too much sulfur and ash to be suitable for coke production or other special applications re quiring high-quality coal. However, in cases where coal of widely varying quality can be used, such as for electric power production or general industrial use, Ohio coal is satis factory. Locational and geological factors that tend to influence the cost of mining and transport ing coal provide a further distinction between Ohio and other portions of the A ppalachian coal field. With reference to location, major coal-producing areas in Ohio are nearer the industrial centers and the large electric util ities in the state than are those of Pennsylvania, Kentucky, or West Virginia, thereby giving Ohio coal an advantage in lower transporta tion costs to such users. In addition, the pres ence of navigable water on both the north and south sides of the state provides low-cost, easily accessible routes for shipment of Ohio coal to other states. With reference to geological factors, the Ohio coal field has the further advantage of lying in an unglaciated area, where the land is gently rolling or hilly, making coal less difficult to mine than in the mountainous sections of Pennsylvania, Kentucky, and West Virginia. Partly due to the absen ce of glacial deposits, virtually all coal reserves in Ohio are found within strip mining depth where coal can be mined more productively than by underground methods. INTERSTATE TRADE PATTERNS C oal flows within and in and out of Ohio in a complex pattern. Despite extensive coal d e posits and a substantial volume of coal pro duction, Ohio is a net importer of coal. This is largely b ecause Ohio coal is unsuitable for coke production and some other industrial uses. On the other hand, the central location of Ohio coal on the western edge of the A ppa lachian coal field facilitates exportation of Ohio coal to markets in states mainly north west of Ohio. Although total consumption of coal in Ohio during 1963 (49.2 million tons) exceeded total production (36.7 million tons) by only 12.5 million tons, slightly more than one-half of total consumption (25.7 million tons) rep resented coal that was imported into the state. To complete the picture, it should be noted that 13.2 million tons of Ohio-produced coal were exported to other states. Coal production in Ohio + Coal im ports Coal consum ption + in Ohio 36.7 25.7 49.2 m illion tons m illion tons m illion tons , Coal exports 13.2 m illion tons 17 ECONOMIC REVIEW TABLE I Coal Consumption in Ohio by Source and Use, 19518-63 (thousands of tons) Change 1958-63 1958 1959 I9 6 0 1961 1962 1963 T o ta l................................................. Im ports.............................................. 44,390 24,735 50,069 28,278 49,624 27,865 44,998 24,893 48,324 25,894 49,157 25,718 + 10.7% + 4.0% O h io P r o d u c e d .................................... 1 9 ,6 5 5 2 1 ,7 9 1 2 1 ,7 5 9 2 0 ,1 0 5 2 2 ,4 3 0 2 3 ,4 3 9 + 1 9 .3 % 44% 44% 44%, 45% 46% 48% 18,306 6,370 20,599 6,923 21,375 7,631 20,243 7,312 21,918 7,736 22,991 8,163 +2 5.6% +2 8.1% 1 1 ,9 3 6 1 3 ,6 7 6 1 3 ,7 4 4 12,9 31 1 4 ,1 8 2 1 4 ,8 2 8 + 2 4 .2 % 66% 64% 64% 65% 64% 12,475 12,475 11,880 11,880 9.129 9.129 9.482 9.482 9.061 9.061 All Markets A s % o f t o t a l .............................. Electric Utilities T o ta l................................................. Im ports.............................................. O h io Prod u ce d ................................. As % of t o t a l .............................. 65% Coke Producers T o ta l......................................................8,886 Im ports............................................. .....8,841 O h io Prod u ce d ................................. + + 2.0% 2 .5 % 45 — 0 .5 % — T o ta l................................................. Im ports.............................................. 12,093 5,489 13,043 6,023 12,898 5,908 12,713 6,425 13,822 6,675 14,482 6,958 O h io Prod u ced ................................. 6 ,6 0 4 7 ,0 2 0 6 ,9 9 0 6 ,2 8 8 7 ,1 4 7 7 ,5 2 4 As % of t o t a l .............................. 55% 54% 54% 49% 32% 32% 5,105 4,035 3,952 2,857 3,471 2,446 2,913 2,027 3,102 2,001 2,623 1,536 — 4 8 .6 % -6 1 .9 % 1 ,0 7 0 1 ,09 5 1 ,0 2 5 886 1,101 1 ,0 8 7 + 1-6% 21% 28% 30% 30% 35% 41% A s % of t o t a l .............................. Other Industries + 19 .8 % + 2 6 .8 % + 1 3 .9 % Retail Sales T o ta l............... ................................. Im ports.............................................. O h io Prod u ced ................................. As % of t o t a l .............................. Source: U.S. Department of the Interior Table I shows that the volume of Ohiomined coal consumed in Ohio rose by almost 20 percent from 1958 to 1963 (19.7 to 23 .4 million tons). That gain was due primarily to increased use of Ohio-produced coal by electrie utilities (plus 2.9 million tons) and, to a lesser extent, by general industrial consumers (plus 0.9 million tons). As shown in the table, during the same five-year period total coal imports increased by only 4 percent, with reductions actually sustained in the retail mar 18 ket. As a result, the proportion of all coal consumed in Ohio that was mined in the state, increased from 44 percent to 48 percent. At the same time, the volume of exports of Ohiomined coal rose 28 percent, Over 90 percent of the coal imported into Ohio originates in the A ppalachian coal field, with the remainder coming from western Kentucky, as shown in Chart 2. By far the largest source within the A ppalachian coal field, supplying nearly one-half of the total tonnage DECEMBER 1965 2. SOURCES of COAL IMPORTED into OHIO By Producing District a nd by M a jo r Industry M illio n s of tons x 4 District 1 0 Of the 23.0 million tons of coal consum ed during 1963 by electric utilities in Ohio as a group, 14.8 million tons (64 percent) cam e from Ohio mines (see Table I). Most of the rem ainder was imported from Kentucky and West Virginia (see Chart 2). The sources of coal used by individual electric utility com panies in Ohio are depicted in Chart 3. While there is no clear pattern as to sources of sup ply, a few general observations can be made. Utilities located in or near the Ohio coal field, as might be expected, use Ohio coal exclusively except for imports from West Virginia and Pennsylvania by some power com panies lo cated along the Ohio River. As for other parts of the state, coal from Kentucky and West Virginia is also used by electric utilities in southwestern Ohio, while the power com panies located along Lake Erie import some 1 E L E CT RI C U T I L I T I E S OTHER INDUSTRIES District 2 EL E CT RI C U T I L I T I E S COKE a n d GAS P L A N T S OTHER I NDUSTRI ES R E T A I L SAL ES ELECTRI C UTI L I T I E S D istricts 3 & 6 OTHER I NDUSTRI ES 3. R E T A I L SAL ES District 7 District 8 SOURCES OF COAL FOR ELECTRIC UTILITIES C OK E a n d G A S P L A N T S OTHER I NDUSTRI ES R ETAI L SALES S OURCES of COAL CON S U MED by ELECTRIC UTILITIES in OHIO F 1 E L E CT RI C U T I L I T I E S CO K E a n d G A S P L A N T S OTHER I NDUSTRI ES R E T A I L SAL ES District 9 ELECTRI C UT I L I T I E S M illio n s of tons 0 S o u r c e of d a t a : 1 2 3 4 U.S. D e p a r t m e n t of the I nt er io r shipped into Ohio, is District 8, which in cludes parts of West Virginia, Kentucky, Vir ginia, and Tennessee. Western Pennsylvania (District 2), which accounted for one-fourth of the total tonnage imported in 1963, is also a major supplier, particularly of coking coal. H N ot a va ila b le No te: D iv i s i o n of b l o c k s not in t e n d e d to d e n o t e p r o p o r t io n of c o a l from a n y st at e; t h e y a r e u s e d o n l y to s ho w so u rc e of c o a l S o u r c e of d a t a : F e d e r a l P o w e r C o m m is s i o n 19 ECONOMIC REVIEW coal from those two states as well as from Pennsylvania. On the surface it may seem incongruous for electric utilities in Ohio to import coal from other states, considering that coal mined in Ohio is plentiful, of suitable quality and, in many cases, located closer to the importing utilities. However, electric utilities, more than most other industrial users, are tied to the lowest cost fuel in an area—which in the case of Ohio is coal—becau se fuel expenditures con stitute 50 percent of total production expenses. A power company, therefore, is importantly concerned with the delivered price of coal, and not with the place of mining. Out-of-state coal fields are apparently able to offset pre sumed advantages of the Ohio coal field in some cases either by lower mining costs, by more favorable transportation rates, or by a combination of the two. Although mining costs are not the only de terminants of selling prices of coal, and al though data on the cost of coal mined are not available by state, some indication of differ entials in cost of mining coal can be derived from information on mine size and w age scales. L arge mines, for exam ple, are generally able to produce coal at a lower cost becau se of better utilization of manpower and capital re sources and greater operating efficiencies resulting from economies of scale that do not exist in a small mine. Hence, since there are a greater number of large mines in West Vir ginia, Kentucky, and Pennsylvania than in Ohio, it is conceivable that a larger volume of coal is being mined at lower average costs in the states other than Ohio. In 1963, there were 2 2 7 large m ines2 in West Virginia, pro 2 Mines that produce more than 100,000 tons of coal annually. Digitized for 2 FRASER 0 ducing 110 million tons of coal; Pennsylvania had 113 com parable mines producing 54 million tons; and Kentucky had 98, with an output of 53 million tons. In Ohio, by contrast, there were only 68 large mines, whose 1963 production was 28 million tons. Mining costs may also differ becau se of differences in w age rates and productivity. In 1963, output per man-day in Kentucky strip mines averaged 47 tons, or nearly double that of all Ohio strip mines. Transportation costs are a large part of the delivered price of coal becau se the mineral is heavy and bulky. Consequently, freight costs are an important determinant of the place where an electric utility purchases coal. Some of the electric utilities in northeastern Ohio, for instance, may turn to Pennsylvania coal b ecause of the proximity of the Pennsylvania coal field rather than to the major producing areas of Ohio. Those utilities located along the Ohio River, on the other hand, can utilize low-cost river rates in transporting coal and are able to ship coal farther by barge than by rail at com parable costs. The bargaining position of an electric utility is also a factor in determining its source of coal b ecause it can affect both the at-mine price and transportation costs. An electric utility using large amounts of coal is generally able to negotiate a lower price per ton than a small electric utility and will purchase coal wherever the most favorable price can be ob tained without regard to state origin. Since there is a greater number of large mines in West Virginia, Kentucky, and Pennsylvania that can supply the needed volume of coal, it is likely that a lower price could be negotiated at more mines in those states than in Ohio. DECEMBER 196 5 Moreover, large electric utilities have been able to negotiate lower freight rates on volume shipments of coal as railroads have turned to the use of unit trains. 1963 as in 1958, there was a significant shift in sources, as the amount of coking coal ship ped from western Pennsylvania in creased and that from Kentucky and West Virginia declined. SOURCES OF COKE AND COKING COAL COAL SUPPLIED TO INDUSTRIAL CONSUMERS Ohio is the second largest consumer of coke in the nation, which reflects O hio's position as a leading iron and steel producer. How ever, since Ohio coal contains too much sul fur and ash to be suitable for coking purposes, all coal consumed in this market must be im ported or the coke itself must be shipped to Ohio from outside the state. In recent years, steel producers have tended to bring more coke than coking coal to Ohio so that, although coke consumption in Ohio increased 8 percent from 1958 to 1963, coke production in the state declined 3 percent. The volume of coal consumed by Ohio coke producers, however, was nearly the sam e in 1963 as in 1958, as The amount of coal used by industrial con sumers in Ohio (other than electric utilities and coke plants) in creased significantly b e tween 1958 and 1963, as shown in Table I. However, the rise of almost 20 percent in total industrial consumption was accom panied by only a 14-percent gain in the Ohio-produced portion, while the tonnage of coal shipped from out-of-state sources rose by 27 percent. Reasons for the failure of Ohio-mined coal to maintain its share of the industrial coal market in Ohio cannot be determined from available data. However, the fact that the chem icals and allied products and stone, clay, and glass products industries accounted for one-half of the entire gain in industrial coal consumption from 1958 to 1963 points to quality requirements and transportation costs as possible reasons for the relative loss.4 The stone, clay, and glass industry requires a higher quality coal than is produced in Ohio for many of its industrial processes. The chem ical industry, on the other hand, has been ex panding at locations along the Ohio River, particularly in the Cincinnati area, and may find it more econom ical to purchase coal in an adjoining state. shown in Table I.3 While the total volume of coking coal im ported into Ohio was virtually the same in 3 The increased volume of coke shipments into Ohio has resulted in part from more favorable freight rates for coke than for coal. The process of coking coal re duces the weight of coal about 30 percent, and coal freight rates would have to be 30 percent below those of coke to be competitive. Since a 30-percent rate differ ential has not existed in recent years, shipment of coke instead of coal has been more economical. The shipment of coke has been further encouraged by better methods of loading and handling coke so as to prevent damage in transit. Spokesmen for some steel companies also cite additional reasons for shipping coke from Pennsylvania coke ovens to Ohio blast furnaces: the reduction of perunit coke requirements through greater blast furnace efficiency, closer proximity of the Pennsylvania coke ovens to the coking coal mines, consolidation of by product operations, and more efficient operation of coke plants in face of changing steel mill production. By far, most out-of-state coal for industrial consumption in Ohio originates in Kentucky and West Virginia, as shown in Chart 2. From 4 See Table II on page 17 of the October 1965 issue of the E con om ic R eview , Federal Reserve Bank of Cleve land, Cleveland, Ohio. 21 ECONOMIC REVIEW 1958 to 1963, most supplying areas increased shipments about in proportion to their earlier share of the market. There was some shift am ong West Virginia suppliers, however, with shipments from the southern part of the state sharply increasing, while those from the northern section declined slightly. THE RETAIL MARKET The retail market is the smallest of the four coal markets in Ohio. It is also a net importer, having, in fact, the largest margin of imports am ong the four markets, even though that m argin declined sharply from 1958 to 1963 (see Table I). With total retail sales dropping significantly, the Ohio-produced portion of the market held its own in absolute tonnage and gained as a percent of total sales. West Virginia and Kentucky, which are the major out-of-state suppliers of coal for the Ohio retail market (see Chart 2), suffered the largest declines in sales to Ohio retail con sum ers from 1958 to 1963, although the vol ume of coal shipped from all out-of-state sources declined during that period. THE EXPORT MARKET Slightly more than one-third of the coal pro duced in Ohio in 1963 (13.2 million tons) was shipped to other states. Such exports increased 28 percent between 1958 and 1963 and main tained about the sam e proportion of total pro duction in Ohio. As Table II indicates, states which either adjoin Ohio or are accessible by G reat Lakes shipping are among the major consumers of Ohio coal. Most coal exported from Ohio is destined for the electric utility market, as would be ex pected in view of the suitability of Ohio coal 2 Digitized for 2 FRASER TABLE II Destination of C oal Exports from O hio , 1963 (thousands of tons) Electric Other Retail Utilities Industries0 Sales M ic h ig a n ............... West Virginia . . . . W isconsin............... Minnesota............... New Y o r k ............... Pennsylvania . . . . Other..................... T otal............... 5,994 927 336 351 215 41 228 8,092 2,167 408 403 248 212 132 508 4,078 136 4 467 154 4 11 300 1,076 Total 8,297 1,339 1,206 753 431 184 1,036 13,246 ° Except electric utilities and coke plants. Source: U.S. Department of the Interior for producing electric power. Electric utilities in M ichigan are by far the largest out-of-state market for Ohio c o al—consuming 6.0 million tons in 1 9 6 3 —and were responsible for a large part of the 35-percent gain in shipments to electric power producers outside Ohio from 1958 to 1963. M ichigan also is the largest buyer of Ohio coal for general industrial use, with imports from Ohio totaling 2.2 million tons in 1963, or 16 percent more than in 1958. Retail ship ments of coal from Ohio, although very small in volume, were more than four times as large in 1963 as in 1958. CONCLUDING COMMENTS Ohio coal producers' growing share of the state's coal market from 1958 to 1963 reflects divergent developments in the three major markets for which Ohio-mined coal is used. Consumption of Ohio-produced coal by elec tric utilities in the state in creased at about the sam e rate as consumption of coal from all sources. Due to the large amount of Ohiomined coal used, the increase in total coal consumption by power com panies in Ohio DECEMBER 1965 resulted in a rising percentage of Ohio coal in the state's total consumption. The increase in consumption by general industrial users tended to have the sam e effect upon total con sumption of Ohio-produced coal, albeit to a lesser extent, because consumption of Ohio coal increased at a slower pace than total con sumption. Retail sales indirectly contributed to the rise in the proportion of Ohio-produced coal used in the state, by maintaining steady tonnage from Ohio mines despite a sharp de cline in total consumption by retail consumers. It does not appear likely that Ohio-mined coal will continue to gain as rapidly in pro portion to the state's total coal consumption in the near-term as was the case from 1958 to 1963. Although Ohio coal production will probably continue to grow in absolute terms as total coal consumption moves up, growth may be tempered somewhat by increasing em phasis placed on abating the air pollution problem. Burning coal, or any other fossil fuel, with a high sulfur content such as that mined in Ohio, has been identified as a prime contributor to air pollution through the release of sulfur dioxide into the air. Although methods are being studied to reduce the sulfur content of coal before burning and to remove flue gases after burning, the most immediate and seemingly economical m eans of reducing such pollution may be to use coal with a lower sul fur content. In the short run, electric utilities may attempt to avoid the expense of sulfur re moval facilities by purchasing higher cost coal from out-of-state coal fields. Ohio coal producers will probably continue to ship more coal to general industrial users as they did from 1958 to 1963, but it is likely that consumption of imported coal will rise even faster. In that case, Ohio-mined coal would continue to ed ge down as a percent of total coal consumption in the industrial m ar ket. The outlook for shipments of Ohio-mined coal to retail consumers depends on how far this market declines before the dem and for Ohio-produced coal is also reduced. 23 ECONOMIC REVIEW MANAGEMENT OF CASH ASSETS AT FOURTH DISTRICT RESERVE CITY AND COUNTRY MEMBER BANKS This article concludes a series of articles on bank managem ent of cash assets appearing in the R eview .1 The first article considered the managem ent of cash assets by all member banks of the Federal Reserve System for the period 1954 through the middle of 1963. The second contrasted cash management of all Reserve City member banks to that of Coun try banks. This final article com pares cash m anagem ent at Fourth District Reserve City and Country member banks with that of simi larly classed member banks throughout the nation.2 The first section briefly reviews the major findings of the more recent of the two preceding articles.3 1 See "Bank Management of Cash A ssets" and ''Man agement of Cash Assets at Reserve City and Country Member Banks," E con om ic Review , Federal Reserve Bank of Cleveland, Cleveland, Ohio, April 1965 and July 1965, respectively. 2 For reasons mentioned in the July article, Reserve City banks in New York City and Chicago are excluded from consideration. 3 The first study is summarized in "Management of Cash Assets at Reserve City and Country Member Banks," op. cit., pp. 3-4. Digitized for24 FRASER RESTATEMENT OF EARLIER CONCLUSIONS For the long-term period 1954 through mid1963, Reserve City and Country member banks succeeded in reducing the proportion of cash assets4 to total assets. Such su ccess as was achieved resulted almost entirely from reductions in the m an aged,5 or discretionary, component of cash assets. Though m anaged 4 Similar to the earlier articles, "cash assets" are defined as the sum of vault cash (sometimes referred to as cur rency and coin), reserves maintained with regional Federal Reserve banks, balances with other commercial banks in the U.S., and cash items in process of collection. 5 For reasons discussed in the April article, the defi nition of "m anaged cash assets" for the subperiod 1954 through mid-1960 differs from that for the subperiod from mid-1960 through mid-1963. For the first subperiod, managed cash assets are defined as vault cash plus cor respondent balances with commercial banks in the U.S. plus the difference between balances maintained at the regional Federal Reserve banks and the volume of re quired reserves (that is, excess reserves). For the second subperiod, managed cash assets include correspondent balances plus excess reserves, which are redefined as the difference between the total of balances maintained at Reserve banks plus vault cash and the volume of re quired reserves. DECEMBER 196 5 cash declined as a proportion of total assets throughout the long-term period 1954 through mid-1963, rates of decline were more pro nounced in the period after mid-1960 (the end of 1960 in the case of Country banks). The more pronounced declines in the latter period followed largely from changes in the regulation affecting reserve requirements that took effect between December 1959 and November 1960. The change permitted mem ber banks to count vault cash as part of legally required reserves, and, as explained in the first article, enabled substantial additional reductions in m anaged cash to be effected. The data revealed that throughout the long term period Reserve City banks held propor tionately more cash assets than Country banks. That situation, however, was the result (direct and indirect) of factors beyond m anagerial control: larger required reserve ratios on de mand deposits, greater proportions of demand deposits, and more active turnover (velocity) of dem and deposits at Reserve City banks. (The latter two cause a relatively large share of assets being allocated to cash items in the process of collection.) With respect to the m anaged cash ratio, which is perhaps a truer m easure of m anagem ent's efficiency, Reserve City banks fared much better, allocating con siderably sm aller proportions of assets to non earning discretionary cash balances. Several factors, which are discussed in some detail in the previous article and are only enu merated here, account for the cash m anage ment efficiencies realized by Reserve City banks. First, deposit instability is greatest at small banks—typically Country banks. To cope with this instability, Country banks are usually willing to hold relatively large cash balan ces —in the vault, at the regional Federal Reserve bank, or at city correspondents. Second, for various reasons, Country banks make con siderable use of Reserve City correspondents, and as compensation for services received, Country banks keep large deposits with such correspondents. A final factor considered was the possibility that Country bankers place less em phasis on efficient cash m anagement than do their Reserve City counterparts. A rather extended argument was m ade in support of this contention. It was su ggested that limited m anagerial resources together with the rela tively high opportunity cost of m anaging cash cau ses Country bankers to concentrate their efforts in other directions. Put otherwise, the lower m anaged cash ratio experienced by Reserve City banks does not necessarily re flect "better” management but, instead, a different optimum asset mix. CASH MANAGEMENT AT RESERVE CITY AND COUNTRY MEMBER BANKS IN THE FOURTH DISTRICT The present analysis begins with a consid eration of the data plotted in Chart 1, which shows the relationship between cash and total assets for Reserve City and Country member banks in both the U.S. and the Fourth District. Similar to national patterns, the data reveal that Reserve City banks in the Fourth District held larger proportions of cash to total assets than did Country banks in the District. A gain similar to national patterns, Fourth District member banks (both Reserve City and Country banks) experienced declin ing cash to total asset ratios over the long-term period 1954 through mid-1963. Finally, again paralleling national experience, these declines 25 ECONOMIC REVIEW l. RATIO of CASH AS S ETS to TOTAL ASSETS R e serve City a n d C o u n try M e m b e r B a n k s -U n it e d States a n d Fourth District Percent 35 35 30 30 E S E R V E C ITY - 4D 25 RE SERVE CIT Y 25 - U.S.(,> 20 1 i 20 \ ^ ----- 15 ►________ l \ . - -*' COUNTR Y - 1 1 1 1 1 1 R A T I O SC iLE 10 1.. 1 1 1954 1 1 1 1 1 I 1956 1 1 1 —, / i ► X" U.S. COUNT RY - 4 D 11 1 .. I I .1 1958 19 6 0 15 3 uarterly 1 1 1 _1_L..i 10 19 62 A V E R A G E A N N U A L R ATE of D E C L I N E RESERV E CITY B A N K S - U.S.<2> RESERV E CITY B A N K S - 4 D (2) C O U N T R Y B A N K S - U.S.(3) C O U N T R Y B A N K S - 4DU) 1 9 5 4 -1 9 6 3 2.0 0 0 % 2 .8 9 1 % 3 .2 7 8 % 2.9 5 0 % 1 9 5 4 -1 9 6 0 1 .0 2 8 % 1 .2 2 4 % 2 .4 7 5 % 2 .6 3 9 % 1 9 6 0 -1 9 6 3 4.2 0 3 % 6 .7 1 9 % 6 .3 9 2 % 4 .5 3 5 % (1) E x c l u d i n g R e s e r v e Ci ty B a n k s in N e w Y o r k Cit y a n d C h i c a g o (2) 1 9 5 4 , first h a l f ; 1 9 6 0 , first h a lf ; 1 9 6 3 , first h a lf (3) 1 9 5 4 , first h a l f ; 1 9 6 0 , s e c o n d h a lf ; 1 9 6 3 , first h a lf S o u r c e of d a t a : B o a r d of G o v e r n o r s of th e F e d e r a l R e s e r v e Sy st em becam e more pronounced beginning in mid1960 (the end of 1960 in the case of Country banks), reflecting in large part regulatory changes that enabled member banks to count vault cash as part of legal reserve require ments. It should be noted that Fourth District Reserve City banks succeeded in reducing the cash ratio faster (both over the long-term per iod and in each of the sub-periods) than did Reserve City banks in the U.S. as a whole. On the other hand, Fourth District Country banks showed smaller rates of decline in the cash ratio in the long-term period and in the 19601963 subperiod. As shown in Chart 1, Fourth District mem ber banks (both Reserve City and Country banks) consistently allocated smaller portions of total assets to cash categories than did sim ilarly classed member banks throughout the Digitized for26 FRASER nation. This situation, in itself, is not n eces sarily indicative of any differences in m ana gerial quality between Reserve City and Country banks located in the Fourth District and in the nation. For example, part of the observed differences in the magnitude of the cash ratio may reflect factors over which management exerts little or no control. Such, in fact, is suggested from data plotted in Chart 2, which shows for the various categories the relationship of nonm anaged (nondiscretionary) cash holdings—cash items in process of collection and required reserv es—to total assets. It is evident from the chart that operat ing circum stances permit Fourth District mem ber banks to commit relatively less cash to nondiscretionary uses. This was the case over the long term for Fourth District Country banks and from about 1958 on for District DECEMBER 1 9 6 5 TABLE I Time Deposits as a Percent of Total Deposits (Subject to Reserve Requirements) Based on December Figures Reserve City Banks Fourth District U.S.* 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 28 .4 % 29.4 29.9 32.3 33.9 34.4 35.5 38.3 42.4 45.9 47.7 2 7 .9 % 28.2 28.7 29.8 31.0 34.1 35.9 38.8 43.1 48.3 51.0 Country Banks U.S. Fourth District 3 5 .3 % 35.2 35.6 38.0 39.7 40.3 42.8 43.9 46.4 48.2 49.3 4 2 .6 % 42.1 42.1 43.6 45.1 46.1 48.7 49.4 50.8 52.2 53.8 * Excluding Reserve City banks, New York City, and Chicago. Source: Board of Governors of the Federal Reserve System Reserve City banks. Why this is so is not altogether clear at this time, and is currently under further investi gation. O ne tentative explanation reflects the differences in deposit composition between Fourth District banks (Reserve City and Coun try) and banks in the nation (in each reserve class). From Table I, it can be noted that Country banks in the District have derived a larger portion of their deposit liabilities from time and savings deposits than have Country banks in the U.S. However, while time and savings deposits are generally growing faster than total deposit liabilities (demand plus time and savings deposits), growth is more pro nounced for Country banks in the U.S. as a whole than for those in the Fourth District (note the narrowing of the gap in Table I). Until 1959, time and savings deposits at Fourth District Reserve City banks accounted for slightly smaller proportions of total de posits than was the case at Reserve City banks in the nation. Beginning in 1960, however, the situation was reversed, with Reserve City banks in the Fourth District holding propor tionately more time and savings deposits than their counterparts in the nation. This turn of the data helps explain the be havior of the nonmanaged cash ratio shown in Chart 2. Legal reserve requirements are substantially lower on time and savings de- 2. RATIO of N O N M A N A G E D CASH AS S ET S to TOTAL AS S ET S R e se rve City a n d C oun try M e m b e r B a n k s - U nited States a n d Fourth District 1 9 54 1 9 56 19 58 1960 1962 * E x c l u d i n g R e s e r v e Cit y B a n k s in N e w Y o r k Cit y a n d C h i c a g o S o u r c e of d a t a : B o a r d of G o v e r n o r s of the F e d e r a l R e s e r v e S y st em 27 ECONOMIC REVIEW TABLE II C ash Items in Process of Collection as a Percent of Total A s s e t s 1 Reserve City Banks 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 Country Banks U.S.2 Fourth District U.S. Fourth District 6 .5 1 % 6.34 6.58 7.12 6.79 7.15 8.61 8.18 6.92 7.98 5 .8 1 % 5.55 5.19 6.69 5.85 6.04 7.10 6.15 5.37 6.26 2 .3 4 % 2.25 2.08 2.19 2.22 2.05 2.49 2.31 2.29 2.57 1.31 % 1.51 1.18 1.52 1.32 1.44 1.75 1.47 1.59 1.81 1 First call date in each year. 2 Excluding Reserve City banks in New York City and Chicago. Source: Board of Governors of the Federal Reserve System posits than on demand deposits. Since the former have accounted for a larger share of deposit liabilities of Fourth District Reserve City banks (since 1959) as well as of Country banks, it follows that the av erage required reserve ratio applicable to these banks would be lower than that for banks in the nation. Prior to 1959, the magnitude of the nonman ag ed cash ratio at Fourth District Reserve City banks more or less coincided with the m ag nitude of the ratio for all Reserve City banks. Since that time, the ratio evidenced a larger decline at Fourth District Reserve City banks, reflecting in part the relatively more rapid expansion of time and savings deposits. In addition to legally required reserves, cash items in process of collection are in cluded in the total of nondiscretionary cash holdings. Differences in the magnitude of the latter are, as in the case of required reserves, partly the result of differences in deposit com position. As checks are written only against dem and deposits, cash items in process of 28 collection understandably make up a sm aller proportion of the total assets of Fourth District member banks (see Table II). In addition, the gap is proportionately wider in the case of Country banks, reflecting the fact that Coun try banks in the Fourth District hold (though to a diminishing extent) significantly larger proportions of time and savings deposits than do Country banks in the nation. The categories of cash over which m anage ment can exert some discretion in matters of magnitude and composition are presented in Chart 3, where m anaged (discretionary) cash assets are plotted as a proportion of total a s sets. Here, too, the behavior of the m anaged cash ratio for Fourth District Reserve City and Country member banks is found generally to conform to the national patterns discussed in the preceding article of this series. In step with national behavior, Fourth District Reserve City and Country banks su cceeded in re ducing discretionary cash balan ces as a pro portion of total assets over the long-term period 1954 through mid-1963, with the rates of d e cline much in excess of those recorded by the total cash ratio (see Chart 1). Further evidence of Fourth District correspondence to national patterns is found in the accelerated declines recorded after mid-1960 (the end of 1960 for Country banks). This development, again, reflected in large part a response to the changes in regulations affecting vault cash, which were initiated in late 1959. Similar to national patterns, Fourth District Reserve City banks operated with considerably smaller m anaged cash ratios than did Fourth District Country banks. Despite these basic similarities, however, some interesting contrasts are apparent re- DECEMBER 196 5 3. RATIO of M A N A G E D CASH AS SET S to TOTAL AS S ETS R e serve City a n d C oun try M e m b e r B a n k s - U nited States a n d Fourth District Percent A V E R A G E A N N U A L R A TE of D E C LI N E R E SE R V E CITY B A N K S - U .S. (2) R ESERV E CITY B A N K S - 4D (2) C O U N T R Y B A N K S - U.S.(3) C O U N T R Y B A N K S - 4D(3) 1 9 5 4 -1 9 6 0 2 .9 1 8 % 0 .1 4 0 % 3.8 8 0 % 4 .1 8 8 % 1 9 5 4 -1 9 6 3 5 .5 1 9 % 6 .8 9 0 % 5 .3 2 6 % 4 .6 2 4 % 1 9 6 0 -1 9 6 3 1 3 .0 0 0 % 2 0 .5 6 3 % 12 .1 52% 7 .9 1 4 % (1) E x c l u d i n g R e s e r v e C i t y b a n k s in N e w Y o r k Ci t y a n d C h i c a g o (2) 1 9 5 4 , first h a lf ; 1 9 6 0 , first h a lf ; 1 9 6 3 , first h a l f (3) 1 9 5 4 , first h a lf ; 1 9 6 0 , s e c o n d h a l f ; 1 9 6 3 , first h a lf S o u r c e of d a t a : B o a r d of G o v e r n o r s of th e F e d e r a l R e s e r v e S y st em garding cash m anagement at Fourth District member banks (Reserve City and Country) and at banks in the nation. Reserve City banks in the District clearly m anaged cash more closely than did Reserve City banks in the U.S. as a whole, as evidenced by the almost con sistently smaller proportion of assets placed in non-earning m anaged cash. In the case of Country banks, performance is not as clearcut. Through 1958, as suggested by the lower m anaged cash ratios, Fourth District Country banks were more efficient than Country banks in the nation. Since that time, however, no significant differences are noticeable in the corresponding ratios, indicating that cash m anagement at Country banks in the U.S. improved relative to cash managem ent at Country banks in the Fourth District. A complete explanation of the foregoing is not presented here, as a research project in a closely related area is currently under way and should shed some light on these relation ships. However, one factor that does suggest itself as an explanatory variable is that of 29 ECONOMIC REVIEW TABLE III Bank Size— A v e ra g e V a lu e of A sse ts Per Bank (millions of dollars) Reserve City Banks 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 Country Banks U.S.* Fourth District U.S. Fourth District $223.9 241.4 252.1 266.9 291.2 307.3 384.6 440.8 496.9 524.4 599.2 $356.7 389.8 391.8 396.6 429.3 467.7 484.9 519.2 515.9 629.3 720.6 $10.2 10.8 1 1.4 1 1.8 12.8 13.4 14.2 15.4 16.6 17.6 18.8 $ 9.2 10.0 10.5 10.9 1 1.4 12.0 12.5 13.4 13.4 15.5 17.4 * Excluding Reserve City banks in New York City and Chicago. Source: Board of Governors of the Federal Reserve System bank size. Table III shows that the average size of Reserve City banks in the Fourth Dis trict is more than $ 100 million larger than the average size Reserve City bank in the nation. Although most studies have found that cash m anagem ent improves with bank size, it has not been confirmed that perform ance in creases step-by-step with bank size, particu larly as relatively large bank size, say, assets of over $ 2 0 0 million, is reached. In other words, whatever efficiencies larger bank size may permit could becom e exhausted beyond a certain size. Nevertheless, it would seem that an average bank size differential of more than $ 1 0 0 million leaves room for the intro duction of additional practices that have made possible more efficient cash management at Fourth District Reserve City banks. No such size advantage favors Country banks in the Fourth District. It is evident from Table III that the av erage size of these banks is smaller than the average for the nation. The average differential of about $1.5 million, 30 however, implies that cash managem ent poli cies would not be significantly different, as is indicated in Chart 3, at least for the period since 1958. Undoubtedly there are other var iables that explain differences in cash man agem ent policies, for exam ple, deposit com position, deposit volatility, and loan demand. But for reasons cited earlier, the matter is not pursued further in this article. CONCLUDING COMMENTS The preceding discussion suggests that com parisons with national counterpart figures reflect more favorably on Fourth District Re serve City banks than on District Country banks. It may be, however, that the seemingly better perform ance of Fourth District Reserve City banks is related more to structural fac tors, for example, size, deposit composition, rate of change in deposit composition, and strength of loan demand, than to "b etter" management. Although not necessarily conclusive, data in Table IV tend to support this contention. The table illustrates the response of the var ious categories of banks discussed in this article to the vault cash change referred to earlier. Since the response was discussed in detail in the preceding articles of this series, it need only be pointed out here that Fourth District Country banks experienced a greater response than did Country banks in the U .S. —a 50-percent reduction in m anaged cash against a less-than-40-percent reduction by the latter — and performed relativ ely better than did Fourth District Reserve City banks, which experienced slightly smaller declines in m anaged cash than did Reserve City banks in the U .S. as a whole. TABLE IV M a n a g e d C ash A sse ts (A verage Q uarterly Dollar Volume — in Millions of Dollars) Reserve City B an k s— U.S. + 667 + $2,071 2,192 839 + 2,1 13 760 — 612 + 172 + 42 825 (2) Vault Cash First Quarter 1954 through Second Quarter 1960 $2,804 Third Quarter 1960 through Second Quarter 1963 Net Change . . (1) as a % of (4) (4) Maintained Reserves (3) Balances with Other Commercial Banks ( 1) Managed Cash Assets $ + $ 65 (74.2%) Reserve City B an ks— Fourth District (2) (4) Maintained Reserves — Required Reserves (3) Balances with Other Commercial Banks (1) Managed Cash Assets Vault Cash + First Quarter 1954 through Second Quarter 1960 . . $ 288 $ 102 + Third Quarter 1 960 through Second Quarter 1963 . . 206 122 + 197 113 — 82 (69.5%) + 20 + 16 118 Net Change . . (1) as a % of (4) $ 181 + $ 5 Country B an ks— U.S. First Quarter 1 954 through Fourth Quarter 1960 First Quarter 1961 Through Second Quarter 1963 Net Change . . (1) as a % °f (4) ( 1) Managed Cash Assets (2) Vault Cash + (3) Balances with Other Commercial Banks (4) Maintained Reserves $5,999 $1,310 + $4,296 5,384 1,652 + 4,929 1,197 —615 + 342 + 633 1,590 + $ 393 (38.7%) Country B an k s— Fourth District ( 1) Managed Cash Assets First Quarter 1954 through Fourth Quarter 1960 (2) + (3) Balances with Other Commercial Banks 129 + $ 307 Vault Cash (4) Maintained Reserves + . . . $ 478 First Quarter 1961 through Second Quarter 1963 . . . 403 154 + 357 107 — 75 (50.3%) +25 + 50 149 Net Change . . (1) as a % of (4) ..................... ..................... $ $ 42 * Excluding Reserve City banks in New York City and Chicago Source: Board of Governors of the Federal Reserve System 31 Fourth Federal Reserve District