Full text of Economic Review (Federal Reserve Bank of Cleveland) : July 1969

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IN THIS ISSUE

Negotiable Certificates of
D eposit............................ 3

Joint Venture Activity,
1960-1968 ..................... 16

FEDERAL



RESERVE

BANK

OF

CLEVELAND

Additional copies of the ECONOMIC REVIEW may
be obtained from the Research Department, Federal
Reserve Bank of Cleveland, P. O. Box 6387, Cleve­
land, Ohio 44101. Permission is granted to reproduce
any material in this publication providing credit is
given.



JULY 1969

NEGOTIABLE CERTIFICATES OF DEPOSIT
Negotiable

certificates

of

deposit

(CDs)

The introduction of negotiable CDs reflected an

emerged as a major money market instrument

attempt by some banks to overcome the deteriora­

during the

tion of their competitive position vis a vis nonbank

1960's. CDs are not really a new

instrument, since many banks had issued certifi­

financial institutions and the steady reduction in

cates as early as 1900 to attract consumer and

the proportion of total deposits accounted for by

business savings deposits. Before 1960, however,

large banks. This problem was especially acute for

certificates of deposit were rarely issued in nego­

banks located in major metropolitan areas, such as

tiable form, and those that were negotiable gener­

New York

ally could not be traded. Therefore, the emergence

demand deposits at New York banks, for example,

City and Chicago. The volume of

of a secondary market for CDs was an innovation

remained virtually unchanged during the 1950's.

that contributed importantly to the growth of CDs

Throughout the post-World War II period, corpor­

in the 1960's. This article examines major develop­

ate treasurers adapted their cash management by

ments in both the primary and secondary market

placing increasing amounts of cash assets into

for CDs, as well as their relationship to monetary

short-term, highly liquid investments. The slow

policy. The analysis is confined to the 1960-1968

but steady rise during the 1950's in short-term

period, with only a brief discussion of the decline

market rates of interest served as an incentive for

in the outstanding volume of CDs thus far in 1969.

corporate treasurers to keep demand deposits at a

In essence, a negotiable time certificate of

minimum and instead to invest temporary funds at

deposit is a receipt issued by a bank in exchange

higher rates of interest. Thus, the rise in short-term

for the deposit of funds. The bank agrees to pay

market rates contributed appreciably to the rela­

the amount deposited, plus interest, to the bearer

tive decline in corporate demand deposits held at

of the

"money market banks."

receipt on the date specified on the

certificate. Because the certificate is negotiable, it

Nevertheless, these same money market banks

could be traded in the secondary market before

were called upon to provide a larger share of total

maturity.

bank loans in the post-World War II period. This




3

ECONOMIC REVIEW

situation reflects, in part, the increased size of the

CDs to smaller firms or institutions. Although

loans required by large business firms that were

negotiable CDs have been issued for amounts

growing internally, as well as through mergers.

ranging from $25 thousand to $10 million or

Because the maximum size of a loan that a bank

more,

in

general,

denominations

in

amounts

may make to a single customer is limited by law

greater than $1 million are unusual. The develop­

and is determined by the size of the bank's capital

ment of the secondary market for CDs has led to

and surplus account, many businesses in need of

some standardization of sizes, and as a result, most

large loans can be accommodated only at larger

CDs are issued in amounts of $100 thousand, $500

banks.

thousand, or $1 million.

In addition to the absence of a secondary

In contrast to Treasury bills, commercial paper,

market for CDs, the failure of banks to issue CDs

and bankers' acceptances, all of which are sold on

on a large scale before 1960 also reflected the

a discount basis, CDs are issued and traded on a

common

to time

bond-yield equivalent. In the discount method of

deposits would, in effect, reduce demand deposits,

measuring the return on an investment, the return

and thereby increase bank costs (in the form of

is calculated for a 360-day year. For coupon

belief

that

funds attracted

interest payments) without increasing total depos­

issues, such as Treasury bonds, the return

its.

figured

Nevertheless,

larger

banks, caught in the

on

is

a 365-day year. Thus, when two

dilemma of increasing demands for credit and little

different issues with the same maturity are to be

prospect for increased deposits, chose to issue CDs

compared, and the rate for one is expressed on a

in the hope that they would be able to retain some

discount basis, while the rate on the other is

of the corporate funds that otherwise might have

expressed on a bond-yield equivalent basis, the

been invested in money market instruments, such

former rate must be adjusted upward. For ex­

as Treasury bills or commercial paper.

ample, a three-month Treasury bill yielding 3.00

In retrospect, it appears that the bankers' fears

percent is the equivalent of a coupon issue yielding

about funds being drained away from demand

3.06 percent; the same bill discounted at 6.00

deposits were largely unfounded. Time deposits at

percent has a bond-yield equivalent of 6.18 per­

large Chicago and New York City banks increased

cent.

nearly fivefold during 1961-1968; at the same
time,

demand

deposits remained virtually un­

changed in dollar volume during this period.

DEVELOPMENT OF THE
SECONDARY M ARKET

Denominations and Offering Rates. There are

In February 1961, when a leading commercial

no legal limitations per se on the size in which

bank in New York City announced it would issue

negotiable CDs can be issued. The denomination

negotiable CDs on a large scale, the dollar volume

primarily depends on the needs of the original

of outstanding CDs amounted to considerably less

buyer and the size of the issuing bank. Large

than $1 billion. Shortly after negotiable CDs began

metropolitan banks dealing with large corporations

to be issued in substantial

can and do sell CDs in larger denominations, while

Government securities dealer decided to trade in

smaller banks can place their CDs only in smaller

outstanding CDs. Thus, the secondary market for

denominations and usually concentrate on offering

CDs was instituted. A t yearend 1968, outstanding

4 FRASER
Digitized for


amounts, a U. S.

JULY 1969

CDs with denominations of $100,000 and over

issue, on balance, changed only slightly between

amounted to nearly $23 billion. The growth in the

1961 and 1968, with two exceptions. The share of

dollar volume of CDs during the 1960's clearly

CDs accounted for by the Dallas District declined

demonstrates the success individual banks had in

to about half of its 1961 level, while the Chicago

attracting

District's share of CDs increased from 11.8 percent

funds to supplement bank reserves.

Moreover, CDs emerged from a relatively insignifi­

in 1961 to 14.0 percent in 1968.

cant position—in terms of volume—in the money

CERTIFICATES OF DEPOSIT
AND BANK SIZE

market to a position second only to that of

Nearly two-thirds of the CDs outstanding at

Treasury bills (of which $75 billion were outstand­

yearend 1968 were issued by banks with total

ing at yearend 1968).
geographical

deposits of $1 billion or more1 (see Table I). In

origin of negotiable CDs also changed during the

contrast, banks with total deposits of less than

1960's. At the end of 1960, more than one-half of

$200 million accounted for only 4.8 percent of

the volume of outstanding CDs had originated in

the outstanding large CDs. As mentioned earlier,

Geographical

Distribution.

The

banks located in the West or Southwest. In fact,

large banks have an advantage in selling large

the

denomination CDs because these banks are located

Eleventh

Federal

Reserve District

(Dallas)

accounted for nearly one-third of the original

in leading financial centers and have on deposit

issues of

CDs, while the Second

working balances of many of the major corpora­

Federal Reserve District (New York) accounted

tions that buy large CDs. Nevertheless, banks with

outstanding

for slightly less than 15 percent. After the intro­

less than $1 billion in deposits have experienced a

duction of negotiable CDs and the development of

slight increase in their share of large CDs (see

the secondary market, the distribution of CDs

Table I).

changed heavily in favor of the East Coast. By

On the demand side, business corporations

yearend 1961, the proportion of outstanding CDs

account for the bulk of CD purchases in the

issued by banks in the Second Federal Reserve

primary

(or when-issued)

Reserve System survey, businesses were

market.

Based on a

District had increased to more than one-third of

Federal

the total (see Chart 1). The Second District's share

the original buyers of 69 percent of the large CDs

of CDs continued to rise, reaching a peak in 1965,

outstanding

when nearly one-half of all outstanding CDs had

survey revealed that this figure had increased to

been issued by banks in that District. Until that

80.1 percent as of January 31, 1967.2 State and

at yearend

1962. A

more recent

time, the increase in the New York District's share

local governments, foreign governments and cen­

of CDs offset a relative decline in issues in the

tral banks, and individuals accounted for the

Dallas and San Francisco Districts. After 1965,

remaining CD purchases at issue.

these trends reversed, with New York's relative

i

share declining and that of the San Francisco

A special survey by the Federal Reserve System of 410

member banks found that at yearend 1961 nearly 50

District increasing. On the other hand, the share of

percent of the negotiable CDs of all denominations had

negotiable CDs accounted for by banks in the

been issued by banks with deposits of over $1 billion. See

Dallas District remained fairly constant after 1965.

Federal Reserve Bulletin, April 1963, p. 460.

Thus, the distribution of CDs according to place of



o

Federal Reserve Bulletin, April 1967, p. 519.

5

ECONOMIC REVIEW

C h a r t 1.

D IS TR IB U TIO N of O U T S TA N D IN G NEGOTIABLE CERTIFICATES of DEPOSIT
By Federal Reserve District
Billions of dollars

D ata f o r
La st

entry :

1961

a n d 1 96 2

include

al l d e n o m in a ti o n s .

1968

S o u r ce s o f d a t a :

F e d e r a l R es e r v e Bulletin

an d B o a r d

of Governors

M A TU R ITIE S AND PRIM ARY RATES

o f the Federal

Reserve

System

than three months was only 1 percent (see Table

Regulation Q, which sets the ceiling rate that

II). Beginning in 1962, however, rates on other

banks can pay on new issues of CDs, has an

three- to six-month money market instruments,

important bearing on both the actual rates paid

such as Treasury bills and commercial paper,

and the maturity distribution of outstanding CDs.

generally rose above the 2.5 percent ceiling on new

In the early 1960's, it was extremely difficult to

issues of CDs. Thus, CDs with original maturities

issue CDs with maturities of less than six months

of less than six months were relatively unattractive

because of the structure of Regulation Q ceilings.

as a short-term investment, and banks were forced

For example, until mid-1963, the maximum per­

to issue most CDs with longer maturities. The

missible rate for CDs with maturities of three to

permissible rates payable on such issues were

six months was 2.5 percent; until November 1964,

higher and more in line with yields on alternative

the maximum rate payable for maturities of less

money market instruments.

6




TABLE I
Outstanding Negotiable Certificates of Deposit
In Denominations of $100,000 and Over
By Deposit Size of Bank
Selected Dates
Deposit Size of Bank (Mil. of $)
$200 to $500

Under $200

Date

Amount
Outstanding

Percent
of
Total

$

4.0%
4.0
4.2
4.8

486
628
855
1,131

Percent
of
Total

$1,634
1,691
2,252
2,957

Percent
of
Total

Amount
Outstanding

13.4%
10.8
11.1
12.6

Over $1,000

Amount
Outstanding

Percent
of
Total

Average
Maturity of
Outstanding
Certificates
of Deposit

(mil. of $)

(mil. of $)

(mil. of $)

(mil. of $)
August 19, 1964
December 28, 1966
December 27, 1967
December 25, 1968

Amount
Outstanding

$500 to $1,000

16.6%
15.4
15.7
17.9

$2,026
2,404
3,195
4,204

$ 8,084
10,911
14,026
15,207

66.0%
69.8
69.0
64.7

3.8
3.0
2.9
3.1

months
months
months
months

Source: Board of Governors of the Federal Reserve System

TABLE II
Maximum Interest Rates Payable Under Regulation Q
On Certain Time Deposits
Effective Date

Maturity
1 year and over
6 to 12 months
90 days to 6 months
Less than 90 days
Denominations of
$100,000 and over
180 days and over
90 to 179 days
60 to 89 days
Less than 60 days
Denominations of
less than $100,000

January 1,
1957

January 1,
1962

July 17,
1963

November 24,
1964

December 6,
1965

3.0%
3.0
2.5
1.0

4.0%
3.5
2.5
1.0

4.0%
4.0
4.0
1.0

4.5%
4.5
4.5
4.0

5.5%
5.5
5.5
5.5

Source: Federal Reserve Bulletin




July 20,
1966

September 26,
1966

April 19,
1968

5.5%
5.5
5.5
5.5

5.5%
5.5
5.5
5.5

6.25%
6.0
5.75
5.5

5.5

5.0

5.0

ECONOMIC REVIEW
In December 1965, Regulation Q ceilings were

according to the size and reputation of the issuing

set at the same level (5.5 percent) for all maturities

bank and according to the denomination of the

of CDs. The 5.5 percent ceiling remained in effect

CD. Therefore, published rates in the primary

until April 1968 for CDs of $100,000 and over,

market for CDs are usually described as approxi­

regardless of maturity length. This ceiling enabled

mations or guides to the actual rates. Nevertheless,

banks to issue shorter maturities of CDs during

the data in Table III confirm that when Regulation

much of the December 1965-April 1968 period

Q ceilings permit, CD rates on new issues are

(except, of course, in the summer and fall of 1966,

higher than rates on comparable issues of new

when most short-term market yields surpassed the

Treasury bills. The actual difference or spread

5.5 percent level). Following the 1965 changes in

depends on the basis of the rates compared. As

Regulation Q, the average maturity of outstanding

mentioned earlier, CDs are issued on a bond-yield

CDs declined steadily in succeeding months, as

equivalent basis, while Treasury bills are auctioned

more new issues were sold with maturities of three

on a discount basis. Using this unlike comparison,

months or less. At yearend 1968, the average

issuing rates on three-month CDs averaged 35-60

maturity of outstanding CDs was about three

basis points higher than rates on three-month

months, compared with nearly four months in

Treasury bills during selected periods in recent

August 19643 (see Table I).

years when

Regulation

Q

did

not

act

as a

Regulation Q, however, is not the only deter­

constraint on CD issuing rates. On the other hand,

minant of the average maturity of outstanding

when Treasury bill rates are adjusted to a bond-

CDs. At times, banks attempt to lengthen or

yield basis—as should be done for an unbiased

shorten the maturities of their CDs in accordance

comparison—the

with their needs for funds and their evaluation of

smaller, in a range of 23-49 basis points for the

future interest rate trends. For example, if banks

periods shown in Table III.

differences

are

considerably

expect interest rates to fall in the near future, they
will try to raise funds by issuing CDs with very

THE SECONDARY M ARKET

short maturities—in the hope that they can renew

Although Regulation Q ceilings may, at times,

the maturing issues at lower rates in the future. On

eliminate certain CD maturities from the primary

the other hand, investors in CDs would prefer long

market, it is generally possible to obtain almost

maturities if they expect interest rates to fall.
Detailed information for issuing rates on new

any maturity in the secondary market. As of 1968,
virtually all the nonbank dealers and many of the

CDs is not readily available. In general, primary

bank

CD rates are negotiated between the issuing bank

bought and sold CDs and maintained inventory

dealers

in

U.

S.

Government securities

and the buyer. Moreover, issuing rates may vary

positions in these issues.
Trading volume, an important measure of activ­

3

It has been estimated that the average maturity of large

ity in any market, is an indicator of the breadth of

CDs outstanding before 1964 was much longer—more

the CD market. During 1968, the volume of dealer

than 5 months in mid-1963 and 7.5 months in November
1962. See Parker B. Willis, The Secondary M arket for

transactions in CDs (purchases plus sales) averaged

Negotiable Certificates o f Deposit, Board of Governors of

$59 million a day, compared with average dealer

the Federal Reserve System, 1967, p. 26.

transactions of $1.9 billion a day in Treasury bills.

8 FRASER
Digitized for


JULY 1969
TABLE III
Primary Rates for Three-month Certificates of Deposit,
Compared with Auction Discount Rates for Three-month Treasury Bills
Selected Dates
(monthly average)
Rate on Certificates
of Deposit Less:

Month

Three-month
Certificates
of Deposit

January 1966
February 1966
July 1967
August 1967
September 1968
October 1968

4.95%
5.03
4.77
4.88
5.62
5.83

Three-month
Treasury
Bills
(Discount)

4.60%
4.67
4.31
4.28
5.20
5.33

Three-month
Treasury
Bills
(Bond-yield
equivalent)

Three-month
Treasury
Bill Rate
(Discount)

Three-month
Treasury
Bill Rate
(Bond-yield
equivalent)

(basis points)

(basis points)

0.35
0.36
0.46
0.60
0.42
0.50

0.23
0.24
0.35
0.49
0.28
0.35

4.72%
4.79
4.42
4.39
5.34
5.48

Sources: Weekly Bond Buyer and Federal Reserve Bulletin

The secondary market for CDs appears to be

from a low of $102 million in 1966 to a high of

considerably thinner than the Treasury bill mar­

$363 million in 1967.6

ket, more so than would be indicated by the ratio

Dealers are reluctant to carry large CD inven­

of the outstanding volume of Treasury bills to that

tories when interest rates are rising (prices are

of CDs. One factor explaining the thinner market

falling) because of the risk of capital losses on

might be the tendency of original corporate buyers

inventories that might have to be sold before

to hold their CDs until maturity.4

maturity. Rising interest rates explain in part the

As shown in Chart 2, dealer transactions and

decline in both dealer positions and transactions in

inventory positions in CDs varied widely in the

the summer and fall of 1966 and in the spring of

1963-1968 period,5 but monthly fluctuations in

1968 (see Chart 2). The relative cost of carrying

the two series tended to be in the same direction.

CD inventories, virtually all of which are financed

During the period under review, average daily

through borrowed funds (short-term loans) rather

transactions per year ranged from a low of $33

than equity capital, also influences dealer positions

million in 1966 to a high of $60 million in 1968,

and transactions. If the interest costs of financing

while dealer positions on an average day varied

inventory positions exceed the interest proceeds
obtained from the inventory, dealers are likely to

4

See, for example, A. Gilbert Heebner, Negotiable Certifi­

cates o f Deposit: The Development o f a Money Market

express their
holdings by

reluctance

to acquire additional

widening the

difference between

Instrument (New York: New York University, 1967), p.
39.

5

In comparison, dealer positions in Treasury bills fluctu­
Data for the period prior to 1963 are not available.




ated around a daily average of $2.8 billion during 1968.

9

ECONOMIC REVIEW

C h o r t 2.

DEALER A C TIV ITY in NEGOTIABLE CERTIFICATES of DEPOSIT
Par V alue
M illions of dollars

NOTE:
Last

P os ition s

en try:

Source

of

and

D ec em be r
data:

tronsactions

data

are

d a il y

averag es

of m onthly

figures

and are based on n u m ber o f tr a d i n g

days.

196 8

F ederal Reserve Bank of New York

buying and selling prices; that is, by increasing the

to bank loans that usually must be renewed daily.7

spread between bid and offered rates from the

In many instances, CDs held in dealers' inventories

usual 4-5 basis points to 15 or more basis points.

are used as collateral for the bank loans. As a rule,

Dealer financing to carry CD inventories can be

CDs originally issued by the lending bank are not

obtained from several sources. Repurchase agree­

used for collateral, because in the event of dealer

ments are preferred, since ordinarily this method

default, the bank would be redeeming its own CDs

of financing involves the lowest costs. Most repur­

before maturity. In addition, when a CD is used as

chase agreements are consummated with corporate

collateral

investors,

requires a 2-percent charge above the rate at which

although

insurance companies, state

governments, and foreign banks also enter into

at the

issuing bank,

Regulation

Q

it was originally issued.

such agreements. The procedures are quite similar
to repurchase agreements involving U. S. Govern­

^Nonbank dealers can often finance positions in Treasury

ment securities: dealers sell CDs, at the same time

bills and, to a lesser extent, bankers'acceptances through

agreeing to buy them back at a stated price on a
specific date in the future.
For any additional financing needs, dealers turn
Digitized for
10 FRASER


repurchase agreements with the Federal Reserve Open
Market Account at the Federal Reserve Bank of New
York. However, CDs have not been eligible for Federal
Reserve repurchase agreements.

JULY 1969

SECONDARY M AR KET RATES
The fact that dealers stand ready to quote bid

CERTIFICATES OF DEPOSIT AND
M O N ETA R Y POLICY

and offer rates for existing CDs suggests that there

There is agreement that the rapid emergence of

should be greater uniformity in interest rates in

CDs and the development of the secondary market

the secondary market than in the primary market.

constitute highly significant innovations in com­

In the

mercial banking. The growth of CDs as a money

secondary

market, the most common

trading unit is $1 million, and dealers very rarely

market instrument has also had an important

handle denominations of less than $500 thousand.

bearing on monetary policy, at times resulting in

Since most of the smaller denomination CDs are

some controversy.

issued by smaller banks and have a greater range of

The role of Federal Reserve policy in the CD

interest rates, the absence of such denominations

market stems largely from the authority of the

from the secondary market removes an important

Board of Governors to change (or not to change)

cause of rate variability.

the maximum interest rates payable on new issues

The relative standing of CDs in the money

under Regulation Q and the ability of the Federal

market, insofar as interest returns are concerned,

Reserve System to influence other interest rates

lies somewhere above Treasury bills and Federal

relative to the CD ceiling. The relationship be­

Agency issues and slightly below finance company

tween the Regulation Q ceiling and money market

paper and bankers' acceptances. For example, a

rates is very important. If the Regulation Q ceiling

comparison of rates (for three-month maturities

is below rates on other money market issues,

the

banks may experience serious difficulties when

1966-1968 period reveals that CD rates in the

offering new CDs or attempting to renew maturing

on

a

bond-yield

equivalent

basis)

for

secondary market averaged:
46 basis points above rates on Trea­

CDs. That is, holders of maturing CDs may prefer
to divert their funds into higher yielding money

sury bills,

market instruments. In turn, when banks are faced

26 basis points above rates on Federal

with a loss of CD funds, they are apt to restrict

Agency issues,

their lending and investing activity, or increase

7 basis points below rates on bankers'

efforts to obtain funds from other sources.

acceptances, and
11 basis points below rates on finance
paper.

The situation during the late summer of 1966
illustrates the effect on CD volume of Regulation
Q ceilings that are out of line with rates prevailing

The relative standing of CD rates was essentially

on other money market instruments. As stated

the same before 1966, although yield differentials

earlier and as Chart 3 shows, rates on three-month

were somewhat smaller.8

CDs in the secondary market and rates on threemonth Treasury bills are closely associated. During
the 1960-1968 period, the rate spread favored

O

For a more thorough discussion of rate spreads on

money market instruments, see "Money Market Instru­
ments: Characteristics and Interest Rate Patterns in the

CDs. However, the spread between the Regulation
Q ceiling and yields on other money market

Current Economic Expansion," Economic Review, Fed­

instruments, especially Treasury bills, is a more

eral Reserve Bank of Cleveland, February 1969.

important indicator of the ability of banks to




11

ECONOMIC REVIEW
renew maturing CDs than is the secondary market
Chart

3.

INTEREST RATE RELATIO NSHIPS and
O U T S TA N D IN G NEGOTIABLE
CERTIFICATES of DEPOSIT

rate. When the maximum rate on CDs of all
maturities was raised to 5.5 percent on Decem­
ber 6, 1965, the Treasury bill rate was within 25
basis points of the Regulation Q ceiling (see Chart

Percent

3). The

1965 increase placed the ceiling rate

substantially above other money market yields,
thus enabling banks to compete more effectively
for CD funds.
Between December 1965 and June 1966, how­
ever, money market yields advanced sharply. In
the last week of June, three-month CD rates in the
secondary market reached the Regulation Q ceiling
and in early July exceeded that level. Thus, buyers
of new CDs at ceiling rates could expect capital
losses, because the price would move below par in
the secondary market if the buyers sold before
maturity. Banks experienced difficulties in renew­
ing outstanding CDs, and the volume of outstand­
ings began to decline in mid-August. A t that time,
the Regulation Q ceiling was about 30 basis points
above the three-month bond-yield equivalent Trea­
sury bill rate and about 15 basis points below the
secondary

market

rate

on

three-month

CDs.

Between the week ended August 13 and the week
ended December 10, the dollar volume of out­
standing CDs dropped from $18.6 billion to $15.4
billion. In several weeks during this period, the
market rate on three-month bills exceeded the
Regulation Q ceiling. Late in December 1966, the
spread between the ceiling rate and the Treasury
bill rate began to widen slowly, and by January,
the spread was more than 50 basis points in favor
of CDs. Banks then sold CDs in greater amounts;
as a result, by mid-February 1967, the dollar
^D enom inatio ns
Last

en tr y :

o f $ 1 0 0 ,0 0 0

and

volume of outstanding CDs approached the levels

over.

prevailing in mid-August 1966.

D e c e m b e r 1 96 8

Sou rces o f da ta :

Sa lo m on

Broth ers

Go ve rnors o f th e

Digitized12
for FRASER


&

H utzler

Fede ral

and B oard o f

Banks were again faced with a loss of CD funds

Reserve System

in the spring of 1968. In comparison with the

JULY 1969

1966 experience, however, CD attrition was much

TABLE IV

smaller in 1968, due in part to the course of

Liabilities of United States Banks to Their Foreign
Branches and Outstanding Certificates of Deposit
Selected Dates
1966 and 1968

monetary

policy.

The decline in outstandings

began in early March, when Treasury bill rates and
CD market rates were close to the Regulation Q
ceiling. Within five weeks, outstanding CDs de­
creased by $1.5 billion—a decline comparable in

1966

magnitude to that in the first five weeks of the
1966 runoff. Unlike 1966, however, the Board of
Governors of the Federal Reserve System acted on
April 19, 1968, to raise the maximum rate payable
on most maturities of CDs with denominations of
$100,000 and over (see Table II). Following this

July
August
September
October
November
Change for
Period

action, CD drains stopped; in fact, CD outstand­

1968

ings actually increased, although it was mid-July

February
March
April
May
June
Change for
Period

before the dollar volume regained the level prevail­
ing in early March ($21 billion).
Significance of CD Losses. Other things being
equal, the inability of individual commercial banks
to renew maturing CDs weakens their ability to

Borrowings
from Foreign
Branches

Outstanding
Certificates
of Deposit

(mil. of $)

(mil. of $)

$2,786
3,134
3,472
3,671
3,786

$18,294
18,194
16,996
15,738
15,498

+1,000

-2 ,7 5 2

$4,530
4,930
5,020
5,888
6,241

$21,094
20,196
19,708
19,543
19,538

+1,711

-1 ,5 5 6

NOTE: Data are as of the last Wednesday of the month.

meet demands for new credit. Whether bank credit
actually will be curtailed, however, depends on

Source: Federal Reserve Bulletin

several other factors. For example, the decline in

June 1968, the additions to United States banks'

bank funds resulting from the CD drain can be

liabilities to their foreign branches amounted to

offset by using other sources of funds (usually

more than the CD runoff for the period (see Table

nondeposit sources). To the extent that banks are

IV ).

unsuccessful in tapping other sources, they have to
sell assets or cut back lending.

Bank borrowings from their foreign branches
have been sporadic, increasing substantially during

For example, banks, at their own initiative,

periods of CD attrition since 1965. Over the long

have attempted to offset CD losses by borrowing

run, however, banks have relied increasingly on all

from the Eurodollar market through their overseas

new sources of funds. Therefore, the increased use

branches. This was, by far, the primary source

of Eurodollars in 1966 and 1968 should not be

used to balance CD losses in 1966 and 1968. As

considered solely as a substitute for withdrawn

Table IV indicates, between the end of July and

CDs.

the end of November 1966, banks increased their

would have increased as part of the trend in recent

liabilities to their foreign branches by $1.0 billion,

years. However, in the absence of Eurodollar

In

all

likelihood,

Eurodollar borrowings

thereby partially offsetting the decline of over

availability, the impact of CD drains in recent

$2.7 billion in CDs during the period. Over the

years on United States banks would probably have

period of four months from February through

been more severe.




13

ECONOMIC REVIEW

TABLE V
Average Monthly "Bid" Rates* on Certificates of Deposit
In the Secondary Market
January—June 1969
Three-month
Maturities

Six-month
Maturities

Nine-month
Maturities

Twelve-month
Maturities

6.65%
6.61
6.73
6.90
7.36
8.25

6.64%
6.70
6.84
7.58
7.51
8.45

6.72%
6.81
6.91
7.08
7.61
8.54

6.78%

January
February
March
April
May
June

6.86
6.95
7.14
7.67
8.55

* Based on daily figures.
Source: Weekly Bond Buyer

RECENT EXPERIENCE
Between early December 1968 and June 1969,
the outstanding volume of large CDs declined by
about one-third, from $24.3 billion to about $15
billion. The implications of this recent decline for

C hart 4.

commercial banks, as well as for the financial

OUTSTANDING NEGOTIABLE CERTIFICATES
of DEPOSIT and EURODOLLAR BORROWINGS

markets,

W eekly Reporting Banks

are beyond the scope of this article,

because the decline has not ended. Thus, any

Billions of dollars

evaluation of the effects of recent CD runoffs
must

be

qualified.

The

current

relationship

between Regulation Q ceilings and interest rates
on other money market instruments makes it
extremely difficult for banks to renew maturing
CDs and, needless to say, virtually impossible to
attract new CDs at this writing. For example, the
maximum rate now payable under Regulation Q
on three-month CDs is 6 percent—a rate below
that at which three-month Treasury bills were sold
in most weekly auctions this year. Similarly, CD
rates in the secondary market have generally been
well above Regulation Q ceilings in most maturity

1968

categories (see Table V ). Thus, the price of a new

*D e n o m in a tio n s

CD generally falls below par immediately after

L as t e n t r y :

1969




a n d o ve r .

J u n e 25

Sour ce o f da ta :

issuance.

of $100,000

B o a r d o f G o ve r no r s o f t h e Fe de ra l Reser ve S y s t e m

JULY 1969

Predictably, commercial banks reacted to the
recent CD drains by attempting to borrow from

end of June.
The current CD attrition is much greater than

their foreign branches, as well as by tapping other

that experienced in the summer and fall of 1966,

sources of funds; for example, the sale of commer­

when outstandings declined by about $2.7 billion.

cial paper by bank affiliates and the sale of loan

In evaluating the CD losses, it must be recognized

participation certificates; data on the extent of

that the two time periods involve several impor­

these transactions are not available. Thus far,

tant

however, Eurodollar borrowings have offset the

things, the liquidity positions of corporations and

bulk of the CD losses, as can be observed in Chart

banks, the Federal fiscal program, monetary pol­

4. Borrowings of United States banks from their

icy, and relative levels of Eurodollar rates. Thus,

foreign

the impact of a CD drain on credit markets is

branches have increased by about $6

billion, from

a total

of

$7

billion

in early

December to slightly more than $13 billion at the




differences associated with, among other

probably different today from what it was in
1966.

15

ECONOMIC REVIEW

JOINT VENTURE ACTIVITY, 1 9 6 0 - 1 9 6 8
In

recent years, there has been a marked

increase in the movement toward industrial con­

discussions and research efforts connected with
jo in t ventures.

centration, highlighted in many cases by mergers

Joint ventures are business entities formed by

resulting in conglomerate corporations.1 A t the

the collective participation of two or more existing

same time, there has been a less noticeable, but

companies that have common interests. The most

significant, resurgence o f another means o f com­

frequently cited purposes of joint participation

bining economic resources—the jo in t venture. This

are:

article examines the extent and characteristics o f

developments; (2) to establish joint or combined

jo in t

facilities for greater economy; (3) to accumulate

v e n tu re

activity

during

the

period

(1) to spread the risks of new industrial

1960-1968. The analysis in this article should be

large amounts

of needed capital; and

(4)

to

considered tentative because o f the nature o f the

undertake programs that are too extensive for

underlying data. Statistical information related to

individual companies to handle.3 Joint ventures

jo in t ventures is extremely limited, and the data

may also be formed to share technological knowl­

presented in this article are, to a considerable

edge, managerial skills, experience in production

extent, the result o f original work with basic

and distribution, as well as for numerous other

sources.2 Despite the limitations o f such tentative

reasons.

analysis, the materials should contribute to the

Joint ventures can generally be classified as
either domestic or foreign, depending on the

^ For a discussion of recent merger activity, see "Corpor­

location of the new business entities (progenies)

Reserve

created by the ventures (see Chart 1). In both

District, 1950-1967," Economic Review, Federal Reserve

types of ventures, one or more of the participants

Bank of Cleveland, October 1968, and other articles

may be a foreign firm. In the case of a foreign

ate

Merger

Activity

in

the

Fourth

Federal

contained in the Economic Review, January, March, and
May 1969.

venture, one of the participants may even be a
foreign government. The underlying material for

2

Some of the data for the period 1965-1968 were

obtained from the Federal Trade Commission. Supple­
mental information was obtained from various sources

3

See, among others, Paul R. Dixon, "Joint Ventures:

including newspapers, trade journals, and reports; in some

What is Their Impact on Competition?," Antitrust Bulle­

cases the information was confirmed by personal inquiry.

tin, Vol. 7, 1962, p. 399.

16FRASER
Digitized for


JULY 1969
hand, the very nature of the arrangement creates a

Chart 1.

JOINT VENTURES ESTABLISHED with the
PARTICIPATION of AMERICAN FIRMS

situation that could afford opportunities for reci­
procity, restraints upon existing competition, and
the suppression of potential competition. Thus,

By Location of Joint Venture

the potential anti-competitive effects posed by a

Num ber

multi-firm domestic joint venture could be as
serious as any combination of restraints resulting
from a bilateral merger. Therefore, the problem of
balancing the potential benefits of joint ventures
against the competitive threats posed by these
arrangements presents a perplexing task for anti­
trust policy.

IN D U S TR IA L CLASSIFICATIO N AND
FUNCTIO NAL CHARACTERISTICS
OF DOMESTIC PROGENIES
During the period 1960-1968, 520 new domes­
tic joint ventures were established, but the pace at
which the new ventures were formed was uneven.
As shown in Chart 1, there was a marked increase
N O T E : T h ere a re 21 a d d it io n a l jo in t v e n tu re s b e lie v e d to h a v e
b e e n c o n s u m m a te d b u t n o t in c lu d e d in th e t a b le
d u e to la c k o f s p e c if ic in f o r m a t io n .
* It is n o t k n o w n w h e th e r p ro g e n ie s a re fo re ig n o r d o m e s tic .
L ast e n try : 1968
S o u rc e s o f d a t a :

F e d e r a l T r a d e C o m m is s io n a n d
F e d e r a l R e s e rv e B a n k o f C le v e la n d

in the total number of new joint ventures consum­
mated
number

in
of

1962,

1963,

newly

1965, and

formed

1966. The

domestic ventures

increased sharply in 1963 and 1965 and reached a
high in 1966. The number of domestic ventures
fell in 1967, while the number of conglomerate

this study incorporated foreign joint ventures only

mergers increased by more than 48 percent.5

to the extent that the arrangements involved the
participation

The areas of activity of these new firms range

of American firms;4 this article,

from exploration and research to distribution and

however, is primarily concerned with domestic

sales. Joint ventures involved products as heteroge­

joint ventures.

neous as movable bank buildings and synthetic

Joint ventures can be an effective means of

human hearts. Despite the diverse nature of joint

introducing new products in domestic or foreign

ventures, they can be grouped into broad classifi­

markets, and the arrangement can result in a more

cations based on the primary area of industrial

efficient allocation of resources. On the other

involvement of the progeny. These classifications
are presented in Table I. More than half of all new

4 For a study of foreign joint ventures, see Karen K.
Bivens and Enid B. Lovell, Joint Ventures with Foreign
Partners

(New

York:

National

Board, 1966).




Industrial

Conference

5

See "Corporate Merger Activity in the Fourth Federal

Reserve District, 1950-1967," op. cit., p. 5.

17

ECONOMIC REVIEW
TABLE I
Industrial Classification of Domestic Joint Ventures
1 9 6 0 -1 9 6 8
Industry
Agriculture, forestry.
and fisheries
Mining
Contract construction
Manufacturing
Transportation and
communications
Wholesale and
retail trade
Finance,insurance, and
real estate
Services
Unclassified
Totals

1960

1961

1
13

3
3
11
1

1962

6

1963

10

1
4
27

2

9

2

1

2

15

22

4
1
23

1
7
3
52

1964

1965

1966

1967

1968

Unknown*

Total

3

1
41
24
278

34

9
5
55

1
12
1
59

4
3
29

4
7
37

3

6

8

9

10

48

1

3

5

1

1

13

1
7

1
15
1
95

1
13
5
105

7
9
2
64

8
10
14
91

2

48

1
1
5

19
69
27
520

* Date of establishment unknown.
Source: Federal Reserve Bank of Cleveland

domestic joint ventures formed during the period

used joint venture arrangements to lease automo­

under review were involved in manufacturing, with

biles to credit card holders.

the service, transportation, and mining industries
largely accounting for the remainder.

PARTICIPATING FIRMS

More than one-half of the new ventures resulted
in joint or combined facilities (see Chart 2). On

Further insight into the nature of joint ventures
may

be gained from

an examination of the

the basis of available information, it appears that a

characteristics of the firms that participated in

majority of the new manufacturing progenies were

these arrangements.

formed

to

produce conventional

During

the

period

under

products for

review, 1,131 domestic firms were involved in the

well-established markets rather than truly new

formation of 520 domestic joint ventures (see

products. These products included, among others,

Table II). The number of companies that partici­

beer cans, corrugated containers, window shades,

pated in the formation of any single domestic joint

automotive trim moldings, and metal fasteners for

venture ranged from 1 to 11 firms.

footwear.

As Table

III

indicates, the participants in

In the service industries, joint ventures were

domestic joint ventures were primarily United

formed to develop resort areas and to construct

States manufacturing firms. Since 1963, however,

and operate hotels, motels, and parking lots. A

joint ventures have also become popular among

significant number of these arrangements involved

firms in the transportation, mining, finance, and

communications networks and film and recording

other service industries.

recent years, some automobile

During the period 1960-1968, participants in

manufacturers and credit card companies have

joint ventures were, in general, large firms. In fact,

companies.

In

Digitized18
for FRASER


JULY 1969

same stage of producing essentially identical prod­
Chart 2.

ucts. A vertical relationship exists when one or

FUNCTIONAL CLASSIFICATION of
DOMESTIC JOINT VENTURES

more of the participating firms and/or at least one
participant and the progeny serve as a source of

1960-1968

supply, a fabricator, or a distributor of the same
Number
0
25

50

75

100

product.
The precise determination of these relationships

PRODUCTION

requires considerably more information than is

OTHER
SERVICES

currently

D IST RI BU TI ON

available.

Nevertheless, some limited

insights into the nature of these relationships may

CONSTRUCTION

be obtained from a classification of the participa­

FINANCE

ting firms on the basis of their major function and
primary area of industrial involvement. This classi­

RESEARCH
T RAN SPOR­
TATI ON

m

fication was made by comparing the firms' stan­
i

UNKNOWN

_________________ I__________________ L

S o u rce o f d a ta :

dard industrial classification codes.7
The

pre-venture

competitive

relationships

F e d e ra l R eserve B a n k o f C le v e la n d

among participating United States firms involved
in domestic joint

ventures during the period

1960-1968 are summarized in Table V . Nearly
more than three-fourths of the participating firms

one-half of all participating firms were horizon­

had assets of $100 million and over, and nearly

tally related on the basis of this classification, with

one-half had assets of over $250 million (see Table

more than 80 percent having some horizontal or

IV ).6

vertical relationship.

C O M PETITIVE RELATIONSHIPS

and their progenies are summarized in Table V I.

The relationships between participating firms

The competitive effects of joint venture ar­

More than one-half of all domestic joint ventures

rangements depend primarily upon the competi­

resulted in a vertical relationship between one or

tive relationships among the participating firms

more of the participants and their progeny, and

before the venture, as well as on the relationships

more than 80 percent of the arrangements resulted

between the participants and the new venture that

in horizontal and/or vertical relationships.

is established. The competitive relationships may

Thus, it appears that a majority of the domestic

be generally classified as horizontal, vertical, a

joint ventures consummated during the period

combination of horizontal and vertical, or unre­

1960-1968 involved horizontally related firms and

lated. A horizontal relationship exists when one or

resulted in progenies that involved some vertical

more of the participating firms and/or at least one
participant and the progeny are engaged in the

7The primary sources used for the classification of firms
were 15,000 Leading U. S. Corporations (New York: Year
Inc., 1967) and Standard Industrial Classification Manual

6Th e same pattern of asset size applies to domestic firms

(Washington, D. C.: U. S. Government Printing Office,

that participated in foreign joint ventures.

1967).




19

ECONOMIC REVIEW

TABLE II
Number of United States Firms Participating in
Domestic Joint Ventures

1960-1968

Number of
Domestic
Joint Ventures

Year
1960
1961
1962
1963
1964
1965
1966
1967
1968
Unknown1
Totals

Average
Number of Domestic
Participating Firms
per Domestic
Joint Venture

Number of
Domestic
Participating
Firms
34
51
48
110

15

22
23
52
48
95
105
64
91
5
520

2.3
2.3

2.1
2.1
2.1
2.1

102
195
230
133
216

2.2
2.1
2.4

12
1,131

* Date of consummation unknown.
Sources: Federal Trade Commission and Federal Reserve Bank of Cleveland

TABLE III
Industrial Classification of United States Firms Participating in
Domestic Joint Ventures

1960-1968
Industry
Agriculture, forestry.
and fisheries
Mining
Contract construction
Manufacturing
Transportation and
communications
Wholesale and
retail trade
Finance,insurance, and
real estate
Services
Unclassified
Totals

1960

1961

1964

1965

1966

1967

1968

5
86

10
2
148

2
18
5
164

7
3
87

6
6
123

4

12

14

12

37

96

1

3

8

1

1

20

2
2
2
102

4
10
6
195

5
10
4
230

9
7
7
133

21
10
14
216

1
4

3

30

36

37

8
3
69

1

1

2

18

4

1

3
1
1
51

2
3

1

34

Source: Federal Reserve Bank of Cleveland

48

Unknown*

1963

2

* Year of participation unknown.

20FRASER
Digitized for


1962

5
4
3
110

1
9

2
12

Total

3
65
19
797

49
48
34
1,131

JULY 1969
TABLE IV

courts have repeatedly noted that joint ventures

Asset Size of Domestic Firms that Participate
in Establishing Domestic Joint Ventures
1 9 6 0 -1 9 6 8

are not illegal per se under the Sherman Act.9

Asset Size
(mil. of $)

Number
of Firms

Under $10
$ 1 0 - $ 25
$ 25 - $ 50
$ 50 - $100
$100 - $250
Over $250
Unknown
Total

71
62
69
80
169
507
173
1,131

Thus, joint ventures became a reasonable alterna­
tive to mergers when the courts, in a series of cases
beginning in 1962, expressed their determination
to carry out the "mandate of Congress" and to
halt concentration through mergers in its "incipiency. ,10
The slight decrease in the number of newly
formed joint ventures in 1964 may be partially
explained by the Supreme Court's decision in the
Penn-Olin Chemical case in that year.1 1 This was

Sources: Federal Trade Commission and Federal Reserve
Bank of Cleveland

the only case to reach the Supreme Court that

extensions of existing markets. The added fact

the

involved the consideration of a joint venture under
Celler-Kefauver

A ct.12

In

this

case,

the

that most of the participating firms had assets in

Supreme Court ruled on June 22, 1964, that joint

excess of $100 million would seem to raise some

ventures

are

subject to

the

proscriptions

of

question regarding the vulnerability of these ar­

amended Section 7, but are subject to different

rangements to antitrust laws.

criteria than those applicable to straightforward

PUBLIC POLICY AND
JOINT VENTURES

firms to reconsider joint arrangements. The signifi­

acquisitions. This ruling undoubtedly caused some

cance of the ruling, however, was short lived. The

The growth of joint ventures reflects to some
extent the unsettled state of the law applicable to
these arrangements. Antitrust laws refer only to

United States v. Imperial Chemical Co., 100 F. Supp.
504, S.D.N.Y. (1951), and Pan American World Airways,
Inc., 193 F. Supp. 18, S.D.N.Y. (1961).

"combinations" and leave to the courts the deter­
mination of which combinations are unlawful and

1<"*Brown Shoe Company v. United States, 370 U. S. 294

under what conditions. However, the courts have

(1962). Also, see United States v. El Paso Natural Gas

never established standards of legality for joint

Company, 376 U. S. 651 (1964), and United States v.
Aluminum Company of America, 377 U. S. 538 (1964).

ventures. The Supreme Court did, in 1951, make it
clear that restraints incidental to joint arrange­

11

United States v. Penn-Olin Chemical Company 378

ments could not escape consideration by merely

U.S. 538 (1964).

labeling an arrangement a "joint venture."8 How­

12

ever, the legality of the joint venture arrangement

The Celler-Kefauver Act that amends Section 7 of the

Clayton Act reads in relevant part as follows: That no

itself, aside from consideration of its practices, has

corporation...shall

been established only in the vague sense that the

whole or any part of the stock or...assets of another

acquire,

directly

or

indirectly the

corporation...where in any line of commerce, in any

8.

Timken Roller Bearing Company v. United States, 341

U. S. 593 (1951).




section of the country, the effect of such acquisition may
be substantially to lessen competition, or tend to create a
monopoly.

21

ECONOMIC REVIEW

TABLE V
Competitive Relationships Among United States Firms
Participating in Domestic Joint Ventures*
1 9 6 0 -1 9 6 8

Industry of Participating Firms

Horizontal

Agriculture, forestry,
and fisheries
Mining
Contract construction
Manufacturing
Transportation and
communications
Wholesale and retail trade
Finance, insurance, and
real estate
Services
Totals

Vertical

15

Horizontal
and
Vertical

26
4
115

6
175

Unrelated

1

2

5

76

Unclassified

1
1

1
45

7

378

2

47
4

Total

12

2

53

6

19

4

12

11

278

166

1
2
9

4
13
99

3
2
14

31
40
566

* Includes only domestic joint ventures involving the participation of two or more
United States firms.
Source: Federal Reserve Bank of Cleveland

TABLE V I
Competitive Relationships Between United States Participating Firms
and Their Domestic Progenies*
1960-1968

Industry
Agriculture, forestry.
and fisheries
Mining
Contract construction
Manufacturing
Transportation and
communications
Wholesale and retail trade
Finance, insurance, and
real estate
Services
Totals

Horizontal

Vertical

Horizontal
and
Vertical

Unrelated

Total

1
32
11
344

1
7
2
164

25

28

29

11
7

37

1

5

2

56
7

11
11
172

8
12
231

2
6
34

3
5
40

4
8
43

27
42
520

25
9
98

* Includes only domestic joint ventures involving at least one United States
participant.
Source: Federal Reserve Bank of Cleveland

Digitized 22
for FRASER


Unclassified

JULY 1969
case was remanded to the District Court, which,

1968. First, the arrangements consummated gener­

after consideration of the question of potential

ally involved large firms that were, in most cases,

competition, ruled that the joint venture arrange-

horizontally related. Second, a majority of the

ment did not violate Section 7.

progenies represented vertical extensions into the

again

The case was

appealed to the Supreme Court, which

manufacture of products for existing markets.

allowed the District Court's decision to stand as

During the period 1960-1968, it appears that

the result of a 4-4 vote in December 1967.14

many firms achieved through joint ventures some

Thus, the standards of legality that apply to joint

of the benefits normally associated with horizontal

venture arrangements are still unclear.

or vertical expansion—benefits that, for a variety

CONCLUDING COMMENTS

conditions, through the more traditional merger

of reasons, were not available, under prevailing

Two general conclusions emerge from an exam­

approach. It is not surprising, therefore, that the

ination of the nature and characteristics of joint

growth in the number of joint ventures reflects, to

ventures formed during the period from 1960 to

some extent, the aggressiveness of antitrust en­

13

forcement in the area of horizontal and vertical
United States v. Penn-Olin Chemical Company, D. C.

Del. (1965).

mergers. These developments point up the d iffi­
culty of formulating antitrust policy toward con­

14United States v. Penn-Olin Chemical Company, 389

glomerate combinations in general and joint ven­

U.S. 308 (1967).

tures in particular.

CORRECTION
ECONOMIC REVIEW , June 1969
Page 5, lines 12-21 should read as follows:
Banks are divided into three call classifications

the stated time period. The Group A commercial

based upon the amount of deposits credited to tax

banks are those with the least amount of activity

and loan accounts over a specific survey period, as

in terms of amounts credited to these accounts

determined by the Treasury Department. Banks

and the Group C banks are those with the greatest

are then ranked into A, B, or C groups according

degree of activity. The classifications are then re­

to the deposits made into these accounts during

viewed periodically, to keep the groupings current.




23