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ECONOMIC REVIEW Additional copies of the ECO NO M IC R E V IE W may be obtained from the Research Departm ent, Federal Reserve Bank of Cleveland, P. O. Box 6387, Cleve land, Ohio 4410 1 . Permission is granted to reproduce any material in this publication providing credit is given. THE EURODOLLAR MARKET: THE A N A T O M Y OF A DEPOSIT AN D LOAN MARKET PART I: M A R K E T STRUCTURE The E urodollar m arket is now more than ten years old, although in its infancy serious questions were raised about its a b ility to survive. It has been estimated th a t the Eurodollar m arket grew by 60 percent in 1969 and th a t the to ta l volume approached a level o f $40 b illio n . The Eurodollar m arket is now larger than most national money markets. It has d e fin ite ly come o f age, having grown to its present size in periods o f both credit restraint and credit ease and having survived severe crises in foreign exchange and gold markets. The Eurodollar m arket is a money m arket th a t is available to a broad range o f investors and borrowers thro u g h o u t the w orld. It is w id e ly used by banks, especially those in the U nited States, as a means o f balancing liq u id ity and reserve positions. A lthough the Eurodollar m arket is basically a short-term market, borrowers have tapped its resources fo r periods o f up to five years. The m arket also has ram ifications fo r the balance o f payments and fo r m onetary and cre d it policies of the countries whose citizens use the market. Nevertheless, the Eurodollar m arket is not fu lly under stood. C ertainly, one reason w h y the m arket seems hard to conceptualize and to have so many diverse aspects is th a t it is both a deposit m arket and a loan market. In a ddition, the E urodollar m arket has assumed im portance IN T H IS ISSUE beyond the geographic and in stitu tio n a l lim ita tio n s o f the tra d itio n a l boundaries o f a deposit and loan market. Because o f this, it is very d iffic u lt to select a focal p o in t fo r a discussion o f the E urodollar market. This analysis w ill be presented in three articles in the Econom ic Review. The firs t article concentrates on the E urodollar The E urodollar Market: The A na tom y o f a D eposit and Loan M a r k e t..................... market as an example o f a money m arket w ith in a supranational environm ent. In addition, the economic and historical rationale o f the developm ent o f the m arket, the underlying conditions o f supply and demand, and the size of the m arket are discussed. The second and th ird articles w ill describe the interest rate structure o f the m arket and the ram ifications o f the E urodollar m arket fo r several aspects o f the w o rld economy. 3 ECONOMIC REVIEW between the balances in all the currencies in w hich their trade is obvious desire to concentrate on U nited States In an attem pt to invoiced in order to cover normal transactions and involvement in the Eurodollar m arket and the seasonal needs as well as to m inim ize the costs o f need to select a more international focal p o in t, the converting fro m one foreign currency to another. series was w ritte n from the p o in t o f view o f the The amounts held at any one tim e m ight be overall market rather than from the p o in t o f view greater than w hat w ould be expected solely on the of any specific m arket participant. Because the basis o f the volume o f trade w ith each country, U nited is because these foreign currency assets are also used borrowed and loaned in the Eurodollar market, to provide a cushion fo r unexpected nontrade however, some o f the discussion focuses solely on related needs, p a rticu la rly when there is uncer the ta in ty in w orld financial markets. On the other States dolla r compromise is the involvem ent o f the currency United th a t States in the hand, fo r im porters and exporters w ho norm ally market. S U P R A N A T IO N A L C U R R E N C IE S measure their wealth in terms o f th e ir domestic Eurocurrency markets are recent examples o f currencies, it is im p o rta n t to m inim ize the overall financial markets in w hich the assets traded are size o f w o rkin g balances denominated in foreign not necessarily denominated in the currency indig currencies to keep the costs o f carrying the foreign enous to the country in w hich the m arket is currency assets at a m inim um . situated. Such markets are best described as those If im porters and exporters in several countries in w hich vehicle assets and vehicle currencies are m utually traded. A lthough the adaptation o f the theory of conduct th e ir trade w ith one another in a single decided (im p lic itly or e x p lic itly ) to vehicle currencies and vehicle assets to the Euro th ird currency, they w ould need w orking balances dollar m arket does not, as yet, have an empirical in o n ly that specific currency—the vehicle cur basis, an exam ination o f the theory helps to place rency. the Eurocurrency markets in perspective. w orking balances in the vehicle currency w ould Vehicle Currencies and Vehicle Assets. The In this situation, the to ta l am ount o f probably be less than the sum o f the form er development o f a m arket fo r a currency outside w orking balances in each individual currency, the issuing co untry can be, in large part, associated because the reserve fo r unexpected occurrences w ith the currency's acceptance and use as a vehicle could currency. A vehicle currency is one th a t is w idely suggests th a t used to finance th ird party trade; th a t is, trade minim ize th e ir foreign currency assets by a tte m p t between countries that do not include the issuing ing to carry on as much business as possible in one country. The developm ent o f a market fo r such a currency. They w ould also a tte m p t to m inim ize currency, in tu rn , is predicated on certain supply the amounts carried in th a t vehicle currency fo r and demand conditions. the reasons suggested above. T urning firs t to the demand conditions, both be substantially reduced. This argument im porters and exporters tend to A counteracting force in determ ining the de im porters and exporters o rd in a rily need w orking mand fo r vehicle currencies 1 however: This discussion relies heavily on Alexander K. Swoboda, "T h e Euro-D ollar Market: An In te rp re ta tio n ," Essays in Inte rn a tio n al Finance, No. 64 (Princeton, New Jersey: Princeton University, February 1968). 4 is also operative, To the e xtent th a t fu tu re consump tio n comprises goods and services sup M ARCH 1970 plied by foreign countries, a country's Once the prim ary supply and demand condi residents in fact w ant to accumulate tions fo r a vehicle currency are established, con part foreign- ceptually it is only a short step to postulate the currency assets...From this p o in t o f development o f foreign markets in assets denom i view a w ealth owner should accumu nated in th a t currency. Such assets are known as of their w ealth in late assets in currencies matching his vehicle assets.4 The developm ent o f a market in future vehicle assets is predicated on tw o factors: (1) consum ption denominated Assets of a favorable rate relationships on instrum ents com cou ntry which looms large in w orld peting w ith those in national money markets; and trade w ill account. in needs. be the currency demanded on th a t (2) confidence in the vehicle currency. That is, the 2 vehicle asset market must provide the o p p o rtu n ity Such offsetting desires make it d iffic u lt to esti to invest funds, denominated in the vehicle cur mate the actual demand fo r a vehicle currency, but rency, at higher rates (and to borrow funds at do establish a rationale behind the desire to hold a lower rates) than are generally available in national markets. Furtherm ore, the vehicle currency must vehicle currency and/or vehicle assets. The demand fo r vehicle currencies originates be readily convertible in to national currencies at p rim a rily from tw o sources, although the actual stable rates o f exchange and w ith o u t many in s titu demands are generally funneled through the com tional impediments. mercial banking system o f the co u n try issuing the Eurocurrency Markets. The Eurocurrency mar vehicle currency and the banks w ith whom the kets are good examples o f vehicle asset markets. importers and exporters deal in th e ir own coun A n y national currency can become a Eurocurrency tries. The tw o sources are: th ird pa rty importers if it is freely convertible in to the w orld's major and exporters, and im porters buying from currencies. vehicle currency co u n try the who are required to medium However, in practice, a country's o f exchange becomes a Eurocurrency settle in the vehicle currency. The supply o f such a only when a bank dom iciled in another co u n try currency, once again channeled through the bank accepts a deposit lia b ility (tim e or demand) in th a t ing system, comes from im porters in the vehicle medium of exchange. Usually a bank w ill accept a currency co untry w ho are asked to settle in th a t foreign currency deposit currency. The supply is augmented by th ird party certain it can lia b ility o n ly if it is traders who have excess w orking balances and wish currency at any convenient tim e; hence, there is a to put these funds to w o rk w ith o u t exchanging need fo r c o n v e rtib ility them make use of, or can sell, th a t and a relative lack of into another currency or investing in the exchange controls in these markets. The Euro money or capital markets o f the vehicle currency currency markets are the mechanisms by w hich country. Eurocurrencies are borrowed and loaned, rather 2Ibid., p. 9 . 3 Benefits accruing to the vehicle currency co u n try, which have been labeled gains fro m seigniorage, play a part in determ ining the supply o f a vehicle currency. The discussion of seigniorage is beyond the scope o f this article, but w ill be discussed in the th ird article; see Swoboda, op. cit., pp. 11-14. than places where trading can take place. Trans- 4 The fo rm o f these assets need not be confined to those norm ally traded in the Eurodollar m arket (i.e., money market instrum ents) but may also assume the fo rm of assets norm ally associated w ith capital markets. Hence, this argument serves also as a partial ju stifica tio n fo r the recent development o f the Eurobond market. 5 ECONOMIC REVIEW actions are generally negotiated by telephone, dollar loans to nonbank customers are usually cable, or Telex. Whenever a bank is w illin g to either short-term (less than one year) or medium- denominate an account in a nonresident currency, term (one to five years). Borrowers w ho seek it creates a Eurocurrency account. In a general Eurodollar funds fo r a longer period may have the sense, the Eurocurrency markets today represent optio n o f flo a tin g Eurobond issues denominated in the short-term or money market p o rtio n o f a dollars. E urodollar loan rates are generally tied to supranational m oney and Eurodollar deposit rates. Given the deposit rate, a long-term capital m arket is the or capital m arket; the Eurobond bank negotiates the loan rate w ith a particular market. customer. The loan rate is based p rim a rily on a set N A T U R E OF TH E m arkup m odified by m arket conditions and some EURODO LLAR M ARKET rough Eurocurrency markets are specific examples o f vehicle asset markets; the Eurodollar market is a measure o f the cre d it standing o f the borrower. Medium-term loans are generally acquired specific example o f a Eurocurrency market. The through term loans w ith periodic rate adjustments prefix Euro- is attached to the name o f a currency or through revolving loan com m itm ents. A revolv to diffe re ntia te between that currency circulating ing credit arrangement guarantees th a t a bank w ill w ith in an issuing co u n try and the same currency provide the final borrow er's credit needs at the being deposited and loaned in foreign markets. For going deposit rate plus some specified fraction fo r example, Eurodollars are deposits denominated in a stated period, generally six months, w ith the United States dollars th a t are placed w ith banks right o f a fixed number o f renewals. The bank outside the U nited States. A lthough there are charges the borrower a co m m itm e n t fee on any markets in Eurosterling, Euromarks, Eurofrancs unused p ortion o f the credit line. Such agreements (Swiss, French, and Belgian), Euroguilders, and are generally made fo r large amounts and extend Euroyen, the Eurodollar market accounts fo r the over a three- to five-year period. largest part o f the remaining discussion Eurocurrency market. The focuses p rim a rily on the Eurodollar market. Demands on the E urodollar m arket also come in the fo rm o f interbank deposits; th a t is, one bank deposits Eurodollars in another bank that, in tu rn , A market in a Eurocurrency implies a supply of may redeposit the Eurofunds in another bank. A and a demand fo r th a t currency. Both demand and long chain o f banks may serve as intermediaries tim e deposits constitute the supply o f Eurodollars, between although the vast m a jo rity o f funds are placed in borrower, and the original depositors and all but tim e deposits. Since Eurodollars are a very active the final interm ediary seldom know the u ltim ate Eurocurrency, daily quotations are available fo r borrower. P ro fit margins are very narrow, some overnight money; money on call, tw o days' notice, times as little as one thirty-second o f one percent and seven days' notice; and fo r deposits o f 30, 60, on a deposit fro m one bank to another. 90, 180, and 360 days. Rates fo r m aturities that exceed one year are generally negotiated. the original depositor and the final Among other characteristics, E urodollar in te r bank transactions are usually made in round The demand side o f the market is made up of numbers in the range o f one-half m illio n to five E urodollar loans and interbank deposits. Euro m illio n United States dollars. Funds are deposited 6 MARCH 1970 and redeposited among banks on an unsecured 1958. London, however, is the center o f Euro basis; o n ly currency the reputation of the borrow er is transactions because of its financial considered. However, the market has su fficie n t tra d itio n s and history o f financing w o rld trade. depth, breadth, and resiliency to support large The foresight o f London bankers contributed in deposits and w ithdraw als and to accommodate large part to London's present preeminence. As borrowers the and lenders over a w ide range o f pound sterling began to decline fro m its m aturities. That is, the E urodollar m arket, like position as a central vehicle currency, the London other banks realized th a t they could deal in United Eurocurrency counter, wholesale markets, m arket is an dealing over in the assets denominated in a nonindigenous currency. States dollars, the emerging vehicle currency, just as easily as they had dealt in sterling. The London Historical Development. A lthough banks have banks, therefore, used their tra d itio n a l business as accepted nonresident currency accounts since the a base and earliest days o f banking, the name Eurocurrency is advantage o f the E urodollar market. recent. It is derived fro m became the firs t banks to take Eurodollar w hich, D uring the ''d o lla r shortage" im m ediately after according to one sto ry,5 is derived from " E uro W orld War II, the U nited States d o lla r came to be b a n k E u r o b a n k is the international cable code of used in a growing number o f th ird party trans the Banque Commerciale p o u r I'E urope du N ord, actions, p a rtly fo r reasons o f confidence. During S. A ., the Paris affilia te o f the State Bank o f the these years, the demand fo r dollars, p rim a rily fo r Union o f Soviet Socialist Republics. In the early covering the U nited States balance o f payments 1950's, governments deficits, outstripped the supply. This situation was decided to transfer the ir dollar accounts from New slowly reversed, and the "d o lla r shortage" was Y o rk to the C ontinent, p artly to avoid having th e ir replaced accounts attached by U nited States claimants and United partly to establish lines o f dollar credit outside the economic a c tiv ity many eastern European by a "d o lla r g lu t." The demand fo r States dollars to of support the postwar Europe was satisfied by United States. The cable code Eurobank became United States balance o f payments deficits as a associated w ith transactions in these dollars, and b y p ro d u ct o f the plan to aid European recovery. eventually, the dollars th a t were on deposit o u t A fte r many o f the European economies regained side their health, the excess demand fo r dollars firs t of the United States became know n as Eurodollars. Today, banks handling Eurodollars and other Eurocurrencies are referred to in general as Euro lessened and then nearly evaporated as European countries improved th e ir trade balances and cen tral banks re b u ilt th e ir international reserves. banks. Eurobanks are located in Europe, as well as Europe continued in financial centers throug h o u t the w o rld , includ States ing Lebanon, Singapore, and the Bahamas. The continued to run deficits in its balance o f pay number o f Eurobanks increased steadily after most ments. The dollar shortage laid the groundw ork fo r the European countries lifte d exchange restrictions in dollars, to be supplied w ith however, as the United United States development o f the Eurodollar m arket by foster 5See Joseph G. Kvasnicka, "E u rod o lla rs—an im p orta n t source o f funds fo r American banks," Business Condi tions, Federal Reserve Bank of Chicago, June 1969, p. 10. ing the use o f U nited States dollars outside the United States. The dollar surplus added to the 7 ECONOMIC REVIEW development by supplying United States dollars to balances and as an instrum ent o f stabilization foreigners w ho policy in an e ffo rt to control domestic liq u id ity .7 found th a t the only o p p o rtu n ity fo r p rofitable S im ilarly, the Bank fo r International Settlements (or transferring ownership to) em ploym ent o f these funds was the U nited States (BIS) in Switzerland is a frequent supplier o f funds money markets. In addition, the United States had to the market, especially in anticipation o f sea been designated as the intervention currency when sonal pressures generally associated w ith end-of- the International M onetary Fund (IM F) was estab period w in d o w lished in 1946.6 Finally, the return to general banks. currency c o n v e rtib ility dressing activities o f European and the dism antling o f Today, commercial banks undoubtedly play the exchange controls in 1958, coupled w ith co n tin u largest role in supplying funds to the Eurodollar ing B ritish sterling crises, led to greater use o f the market, United States dollar throughout the w orld. market, when foreign central banks played a more Major Market Participants. W ith the increased in contrast to the early years o f the dom inant role. From 1968 to early 1969, the use o f the United States dollar as the m ajor vehicle supply o f E urodollar funds was augumented by currency and the rise in foreign ownership of inflows o f capital raised in the Eurobond m arket United States dollar claims, a m arket fo r assets by foreign affiliates o f United States corporations. denominated Borrowers te m p o ra rily invested large amounts o f in dollars developed outside the United States. On the supply side o f the market, participants include national and this capital in the E urodollar market. international On the demand side, E urodollar loan recipients and w ith o u t foreign are as w idely varied as are the suppliers o f funds to offices, insurance companies, w ealthy individuals, the Eurodollar market. Commercial banks, m u lti as well as some foreign governments and supra national corporations, and national corporations corporations, banks w ith holder o f have been known to be heavy users o f the market. United States dollar-denom inated assets who is Very rarely, foreign central banks have p a rtici national o ffic ia l organizations. Any looking fo r a short-term investment o u tle t can put pated on the demand side o f the market, where money into the Eurodollar market, although vari the purpose has been to stabilize foreign exchange ous balance o f payments programs now in effect markets or to obtain dollar balances. In the earlier p ro h ib it or discourage such behavior by American years of the market, Eurodollar loans were chiefly investors. Investors w ith in used to finance trade, and the demand fo r d o lla r foreign currencies who wish to place funds in the loans by exporters and im porters (m ainly the market can obtain dollars in the foreign exchange latter) still plays an im p o rta n t role in the Euro markets, if exchange control regulations so perm it. dollar market. assets denominated Foreign central banks make use o f the Eurodollar market as an investment o u tle t fo r excess dollar 0 That is, under the rules o f the International M onetary Fund, foreign currencies are supported in relation to the United States dollar and, therefore, the m a jo rity o f o f f i cial business in the foreign exchange m arket (spot and forw ard) is carried on in terms of the dollar and the cur rency in question. C urrently, a great deal o f a tte n tio n has focused on the use o f Eurodollars on the part o f United States banks to obtain loanable funds. Liabilities The Federal Reserve System does not participate d irect ly in the Eurodollar market, although it has provided dollars to and absorbed dollars fro m various foreign cen tral banks by means o f swap agreement operations. MARCH 1970 T A B LE I fiscal policies during the 1960's had the effect o f Foreign Branches o f U nited States Member Banks fostering the developm ent o f the E urodollar mar End of Year ket as an attractive haven fo r short-term funds. Number of United States Member Banks Having Foreign Branches 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 Number of Branches Number o f Countries in which Branches are Dom iciled 124 135 145 160 180 211 244 295 373 459 33 35 39 42 45 50 53 54 57 60 10 10 11 13 13 15 26 53 T w o such in stitu tio n a l factors have served to increase the supply tors w ho wished totaled $1.8 b illio n to hold d o lla r-d e n o m in a te d assets, especially when domestic m arket rates were above Regulation Q ceilings. O f course, dollars available fo r less than 30 days are always attracted balances. States banks greatly increased the attractiveness o f the Eurodollar m arket to inves to United First, the United States th a t is placed by the Federal Reserve to of Eurodollars. System under Regulation Q Source: A n n u a l Report, Board of Governors o f the Federal Reserve System, 1960-1969 overseas branches of ceiling on interest rates on tim e deposits in the Eurobanks because U nited States banks are forbidden to pay interest on such short-term at the end o f 1965 and Second, central banks in countries th a t have had exceeded $2.0 b illio n fo r the firs t tim e during the surpluses in th e ir balance o f payments, recognizing last half o f 1966. On November 19, 1969, lia b ili the im portance o f the s ta b ility o f the dollar to ties to overseas branches o f United States banks w o rld prosperity, have sometimes chosen not to amounted to slightly more than $15.0 b illio n , a use dollars to drain U nited States gold reserves. record high th a t demonstrates the huge increase in These dollars instead are often deposited in the the participation in the Eurodollar m arket by United States banks. As an indication o f the importance o f United States bank participation, the number o f United Eurodollar market, either d ire c tly , in order to earn income fo r the central bank, or in d ire c tly under swap agreements w ith commercial banks in their country. States member banks w ith foreign branches and Sim ultaneously, tw o in stitu tio n a l factors have the number o f foreign offices operated by these tended to dim inish the supply o f Eurodollars. In banks has grown phenomenally in recent years (see 1962, Regulation Q was suspended on deposits of Table I). Between 1966 and 1969, the number o f foreign member banks w ith overseas branches increased United States banks to compete w ith the Euro three and one-half times to 53 (w hile the number dollar market fo r the d o lla r deposits o f foreign o f foreign branches increased by 88 percent to central banks. U nited States commercial banks 459). As o f December 31, 1969, the m axim um rates which could be paid by domestic banks on single m a tu rity de posits o f $100,000 or more were: Institutional Constraints. A lthough the Euro dollar market is based on tra d itio n a l supply and demand theory, in stitution a l constraints have in fluenced its grow th and operation. For example, several aspects o f U nited States m onetary and o ffic ia l agencies. This action perm itted 1-29 20-59 60-89 90-170 180+ days days days days days no interest paid 5 1/2 percent per year 5 3 /4 percent per year 6 percent per year 6 1 /4 percent per year 9 ECONOMIC REVIEW were noticeably successful in attracting such de make abroad w ith funds raised in the U nited posits during the last half o f 1969. Second, in States. early 1965, the Federal Reserve Board announced businesses were, therefore, focused more d ire ctly the V o lu n ta ry Foreign Credit Restraint Program on the E urodollar market. (VFCR ). This program was one part o f a com pre in Federal Reserve regulations announced in the hensive attack on the United States balance o f summer o f 1969 th a t govern member bank over payments problem and was directed tow ard finan night borrow ing o f Eurodollars and place reserve The cre d it demands o f 10 U nited States Second, the changes cial institutions. The VFCR program was m odified requirements on a member bank's to ta l Eurodollar and updated on a number o f subsequent occasions. borrowings may tend to reduce demand. Both new The original and revised VFCR programs were regulations served to increase the effective interest designed to lim it the am ount o f foreign credit th a t rate on such borrowings by U nited States banks. banks and nonbank financial in stitu tio n s in the N ot o n ly have U nited States policies affected United States could extend abroad. Specifically, the developm ent o f the E urodollar m arket b u t so banks were to ld have the actions o f foreign central banks. Central not to place th e ir own funds abroad "w hethe r such investments are payable in banks foreign payments currencies or in U. S. d o lla rs.''9 (An in countries w ith persistent balance o f surpluses or central banks th a t are exception is made fo r w orking balances held w ith offered large amounts o f dollars in times o f foreign foreign correspondents.) The overall lim ita tio n s exchange market unrest have fre q u e n tly initiated were based on a share o f the total cre d it each bank swap arrangements w ith th e ir commercial banks to extended in 1964. In a ddition, banks were also induce the banks to make use o f dollars, thus urged to discourage th e ir customers from investing increasing the supply o f available funds in the abroad. The combined effects o f these programs E urodollar market. In these cases, the foreign served to reduce the potential supply o f Euro commercial banks are encouraged to accept the dollars. dollars because forw ard cover can be acquired On the demand side, tw o United States pro cheaply. Foreign central banks also have found grams have affected the E urodollar market. First, such swap arrangements a useful means to control the O ffice o f Foreign D irect Investment (O FD I) domestic cre d it expansion. regulations, w hich w ent in to effect on January 1, 1968, in itita te d m andatory compliance to the The increase in demand fo r Eurodollars by United States banks, p articularly since December volunta ry regulations, originally spelled o u t by the 1968, has prom pted some foreign central banks to U. S. Departm ent o f Commerce in early 1965, establish controls to lim it the flo w o f domestic governing the international financial transactions funds o f nonfinancial organizations. The OFDI regula protect o fficia l reserves. Several European coun tions in to the E urodollar m arket in order to increase demands on the tries have required individual commercial banks to E urodollar m arket by lim itin g the am ount and balance th e ir net foreign positions (generally w ith form o f investment United States businesses could out lim itin g gross positions or w ith o u t regard to have served to Q "Balance o f Payments Program: Revised Guidelines For Banks and Nonbank Financial In stitu tio n s,” Federal Reserve B ulle tin , January 1968, p. 68. 10 ^9See Fred H. Klopstock, "Im p a c t of Euro-Markets on the United States Balance of Paym ents," Law and Con tem porary Problems, Vol. X X X IV , No. 1, W inter 1969, pp. 159-162. MARCH 1970 m a tu rity structure or currency) or otherwise to can transfer demand deposits in a U nited States reduce th e ir net foreign assets. bank FLOWS OF E U R O D O L L A R FU N D S denominated assets, the switch to a E urodollar to a Eurobank. For holders o f dollar- Against this o utline o f the historical develop deposit, w hich is generally a tim e deposit, can be ment o f the E urodollar market and the present accomplished by means o f d ire ct commercial or day institu tio n a l setting, fu rth e r understanding o f investment transactions. A fte r receiving title to a the operation o f the market may be gained by demand deposit, fo r example, the asset owner abstracting the structure o f the market described could transfer the ownership o f th a t deposit to above. A ll the organizations and in stitu tio n s th a t Eurobank A 1, thereby creating a E urodollar de are potential suppliers in the Eurodollar m arket posit. For holders o f foreign currency assets, the have one thing in com m on: ownership o f financial procedure is com plicated by the need to exchange assets. E urodollar the foreign currency asset; th a t is, the foreign market also have one thing in com m on: the need currency must be sold fo r dollars in the foreign fo r a dollar-denom inated asset or fo r credit. In the exchange fo llow ing discussion, the market participants are dollars, usually in the fo rm o f a demand deposit in identified o n ly by the ir motives fo r entering the a United States bank, the owner can then transfer Eurodollar market. them to a deposit (demand or tim e) in Eurobank The potential users o f the As in the case w ith other financial markets, the flo w o f funds w ith in market. 11 Upon receipt o f title to A1. the E urodollar m arket is The United States bank continues to hold the basically circular; therefore, any discussion must deposit lia b ility it created when the asset owner necessarily break into the flo w rather than starting acquired the original demand deposit. The transfer at a well-defined beginning. Transactions in Euro o f ownership o f th a t deposit does not affect the dollars fall in to three general phases o f m arket size o f the original lia b ility , w hich remains as the a ctivity: Eurodollar only foreign claim against the U nited States. The deposits; Phase II, the pyram iding or interbank transfer o f the deposit's ownership to a Eurobank transfer o f E urodollar deposits; and Phase III, the creates a lia b ility fo r the Eurobank. The Euro Phase I, the creation of lending o f E urodollar deposits and the accompany bank's matching asset is ownership o f a dollar- ing opportunities fo r credit generation based on denominated demand deposit at a U nited States relationships analogous to the fractional reserve 1 system in U nited States banking. The Creation of Eurodollars. A ll Eurodollars have as th e ir origin a demand deposit in a U nited States bank, the ownership o f which has been transferred to a bank outside the United States. These demand deposits are created in various ways; fo r example, as a result o f trade or fro m the liq uidation o f other assets denominated in dollars or in a foreign currency. As shown in the figure, United States and foreign owners o f dollar assets 1 Central banks are shown in the figure as overlapping foreign exchange markets because o f the unique position such authorities have in relation to the E urodollar mar ket: often they provide dollars in the foreign exchange markets as "last resort” lenders. T hat is, a central bank that conform s to IMF regulations supports the price o f its national currency in terms o f the United States dollar around the currency's par value. In doing so, when faced w ith an excess supply o f its domestic currency, the cen tral bank w ould sell dollars; when faced w ith an excess demand fo r the domestic currency, it would purchase d o l lars. As described earlier, central banks can also place funds d irectly in the Eurodollar market fo r either invest ment purposes or in the im plem entation o f m onetary and credit policy. 11 ECONOMIC REVIEW FLOW D IA G R A M OF THE EURODOLLAR MARKET PHASE I: EU R O D O LLA R C REATIO N Foreign Asset Holders SUPPLIERS Dollar Assets Foreign Currency Assets N ' PHASE II: E U R O D O LLA R P Y R A M ID IN G IN T E R M E D IA T O PHASE III: E U R O D O LLA R CREDIT G E N E R A T IO N USERS PARTIAL LEAKAGE Source of data: Federal Reserve Bank of Cleveland 100 P E R C E N T L E A K A G E MARCH 1970 bank. If the Eurobank's bank correspondent is not deposit by sh iftin g the funds in to a E urodollar the United States bank fro m which the E urodollar deposit at a second Eurobank (A 2). Eurobank A1 deposit was received, the Eurobank may elect to now owns a E urodollar asset (its tim e deposit at transfer its asset to its own correspondent. Such a Eurobank A2) and a E urodollar lia b ility (its own transaction has no effect on the credit creating tim e deposit payable to the original owner o f the abilities o f the United States banking system as a funds). Eurobank A2 thus has gained an asset in whole; the original bank loses reserves, w hile the the fo rm o f a demand deposit w ith a United States New Y o rk correspondent o f the Eurobank gains a bank (the deposit fo rm e rly owned by Eurobank like am ount o f reserves. A1) and a E urodollar lia b ility due Eurobank A1. E urodollar creation is In this phase, in the Eurobank system as a w hole based solely on the transfer o f a demand deposit both a new E urodollar asset (at Eurobank A1) and lia b ility fro m a U nited States bank to a Eurobank. a new lia b ility (at Eurobank A2) are created and In the process, the ownership o f the U nited States cancel each other out, leaving the system w ith one Thus, the process o f bank's demand deposits changes, and the asset net asset (the demand deposit in the United States owner, w ho originally held a demand deposit in an bank) and one net lia b ility (the E urodollar tim e American bank, now owns a deposit in a Euro deposit due the original owner). However, the bank. The Eurobank now has a new lia b ility to the ownership o f the assets and liabilities has changed depositor (usually a tim e deposit) and obtains a hands w ith in the Eurobank system. This process new asset (a demand deposit in a U nited States can be repeated as long as E urodollar deposits are bank). transferred, usually at successively higher rates o f Obviously, if the owner o f a E urodollar deposit interest. The effect o f such pyram iding is to eventually chooses to repatriate his funds, the accommodate a lengthening chain o f borrowers Eurodollars are destroyed. For the most part, and lenders. Eurodollar transactions take place e n tire ly on Pyramiding does not, however, increase the net paper and involve the w ritin g o f checks and drafts size o f the E urodollar market, although it does or the transfer o f a balance w ith o u t any o f the increase the gross assets or liabilities associated participants ever gaining physical possession o f the w ith the market. The problem o f using net or gross currency th a t serves as backing fo r the Eurodollars. Eurodollar Pyramiding. The second or in te r mediation phase o f the Eurodollar m arket has estimates o f outstandings has been pointed o u t by the above, may elect to use its United States demand 12 A possible exception occurs in Phase I. One m ethod of acquiring a demand deposit is, o f course, by depositing coin and currency. If the demand deposit were to be transferred im m ediately to a Eurobank, it could be argued that the process involved the actual cash used to back the Eurodollar deposit. International Settlements, which publishes the most w idely accepted measures o f the Eurodollar m arket.14 Eurodollar come to be known as pyram iding. Eurobank A1, which received a Eurodollar deposit as described Bank fo r Credit Generation. The th ird or credit generation phase begins w ith Eurobank AN 13 For a description o f T-accounts explaining the same phenomena, see Jane Sneddon L ittle , "T h e Euro-Dollar Market: Its Nature and Im p a ct," New England Econom ic Review, Federal Reserve Bank o f Boston, M ay/June 1969, p. 13. Ta For example, see Bank fo r International Settlements, T h irty -fifth A n nual Report, June 14, 1965, p. 133 and T h irty-n in th A n nual Report, June 9, 1969, pp. 147-158. 13 ECONOMIC REVIEW lending Eurodollars to a final borrow er (see the sta tu to ry provisions. Even in those countries w ith figure). The im pact o f the loan in the Eurodollar out such sta tu to ry provisions, however, it is highly m arket depends on the use to w hich the borrowed u n like ly th a t any given Eurobank w ould lend an funds are put. T hat is, in order to trace the credit am ount equal to 100 percent o f its E urodollar generation process, it must be determ ined w hether deposits. For example, if Eurobank AN considered the funds stay w ith in the E urodollar system or it prudent to keep a reserve o f 10 percent against not. Presumably the loan recipient borrows funds its deposit liabilities, it w ould o n ly lend $90 o u t o f to purchase goods, services, or investments. The every $100 o f Eurodollars deposited.16 goods, services, or investments can be purchased d ire ctly w ith the Eurodollars or w ith foreign The Eurodollar loan recipient gains both an asset (a demand deposit at a Eurobank) and a currencies th a t are obtained by selling the Euro lia b ility (a E urodollar loan due the same Euro dollars bank).17 In terms o f the im pact on the E urodollar in the foreign distin ctio n w ill exchange market. (This be discussed in greater detail below.) market, the loan recipient can dispose o f his loan proceeds in fo u r separate ways, tw o o f which The decision o f the seller of the goods, services, result in some leakage and tw o o f which result in or investments also influences the process o f credit 100 percent leakage. First, in an u n lik e ly but generation. T hat is, m u ltip le possible action, the loan recipient could im m edi credit generation depends on the p ro p o rtio n o f the loan proceeds ately th a t finds its way d ire c tly back in to the E urodollar Eurobank, say Eurobank B1. In this case, Euro m arket. The p ro p o rtio n redeposit the loan proceeds in another o f loan proceeds not bank B1 could in itia te a new pyram iding process recaptured by the m arket escapes in the form o f by redepositing the funds in another Eurobank (in "leakages.” zero, in the figure, Eurobank A2) or lend a p o rtio n o f the w hich case all the proceeds are redeposited in the Leakages can range fro m funds (after accounting fo r the necessary reserves) market, to 100 percent, when none o f the pro d ire c tly to another E urodollar loan recipient. ceeds are redeposited. occurs. In actual practice, some Second, in a more usual procedure, the loan leakage always For one thing, sound recipient purchases goods, services, or investments banking practices dictate th a t a bank keep a from a seller w ho keeps his dollar assets outside certain p ro portion o f all deposits on reserve, rather the United States. Generally, the borrow er than lend the to ta l am ount. In the United States, instructs w ith its fractional reserve system, the requirem ent amounts o f the loan to dollar accounts in given to banks, and the lending bank makes payments o u t hold statutory. reserves against deposit liabilities is 1R In several o f the European countries served by the Eurodollar market there are sim ilar 15 In the United States banking system, required reserves are generally not considered a leakage as such, although that p ro p o rtio n o f deposits held as required reserves does represent a "s ta tu to ry leakage." Excess reserves, on the other hand, do represent a leakage in th a t a bank's de cision to carry excess reserves is a behavioral one. In an analogous sense, since a Eurobank's decision to hold any reserves is p rim a rily behavioral, all reserves held against Eurodollar deposits can be considered a leakage. 14 the Eurobank "...to transfer given 16 For an example o f the T-accounts showing this process, see L ittle , op. cit., p. 15. Generally the Eurobank credits "...th e entire am ount o f the loan to the borrower's account in th e ir bo o ks..." or authorizes "...h im to make overdrafts on his a cco u nt." Both are the same as providing the borrow er w ith a de mand deposit account. See Fred H. Klopstock, "The Eurodollar Market: Some Unresolved Issues," Essays in In te rn a tio n al Finance, No. 65, March 1968 (Princeton, New Jersey: Princeton U niversity), pp. 5-6. MARCH 1970 o f balances it holds in the United S tates/ 1 ft The A p a rtia lly analogous developm ent involves the ownership o f the d o lla r deposit in some United behavior o f foreign central banks. In the 1960's, States bank has now been transferred to the seller when certain foreign central banks accumulated o f the goods, services, or investments, w ho can unwanted dollars, they established swap arrange elect to transfer any or all o f that dollar account ments w ith commercial banks in th e ir countries. to the E urodollar market. If the seller elects to Under these arrangements, the banks could obtain transfer only part o f his proceeds, this action dollars in the spot m arket and sell them forw ard constitutes a fu rth e r leakage. That p o rtio n th a t (at a given m a tu rity) at an exchange rate more finds its way back in to the Eurodollar m arket can, favorable than was obtainable in the foreign o f course, support another E urodollar loan, the exchange markets. This action was taken in an size o f which is subject to the reserves considered e ffo rt to induce the commercial banks to purchase prudent by the lending Eurobank. Thus, total the credit generation is lim ited by tw o factors: (1) the commercial banks generally placed the funds in reserves held against deposit liabilities; and (2) the the am ount o f loan proceeds th a t the loan recipient or causation is reasonably direct, it is a fu n c tio n o f a the seller of goods elects to w ith h o ld from dollars. A fte r purchasing the dollars, the E urodollar market. A lthough this line o f behavioral decision dictated by foreign exchange or stabilization p o licy on the part o f the central redepositing in the E urodollar market. There are tw o fu rth e r options open to the loan bank rather than a m arket-oriented decision on the recipient; the impact o f these actions, however, part o f commercial banks and, therefore, is not differs su fficie n tly fro m those already discussed d ire c tly m arket determ ined. Consequently, flow s th at greater elaboration is necessary. If the loan generated in this fashion should more properly be recipient elects to exchange his d o lla r deposit fo r considered another currency, figure, such indirect flow s are shown by dashed he may do so through the foreign exchange market. When the proceeds o f a E urodollar loan are exchanged fo r another cur part o f E urodollar creation. In the lines. If the E urodollar loan recipient purchases rency, there can be no fu rth e r d ire ct expansion o f goods, services, or investments, and the seller does Eurodollars. T hat is, a transfer o f the E urodollar not deposit the dollars in the market, the leakage loan proceeds through the foreign exchange mar is effectively 100 percent (even though this in ket represents a com plete leakage. (There is, o f creases the stock course, a corresponding redistribution o f dollar p o te n tia lly, be redeposited in the E urodollar mar and foreign exchange assets, and to the extent th a t ket). the new asset holders are more lik e ly to transfer United States banks (w hether or not such b o rro w th eir assets to the E urodollar market, there may be ing is accomplished increased results in a 100 percent leakage. E urodollar m arket activity. This response is tenuous at best, and, therefore, any For o f d o lla r assets th a t could, example. E urodollar through borrow ing by foreign branches) In short, leakages occur at any p o in t in the Eurodollar deposits resulting fro m this redistri loan-spending (investing)-redeposit cycle whenever bution part o f the some p o rtio n o f the original deposit or succeeding should not be considered E urodollar creation process.) redeposit is not made available to the E urodollar 1 8 /6/ c/ ., p . 5 . market in the fo rm o f another deposit. A n y tim e 15 ECONOMIC REVIEW the loan foreign proceeds are transferred through the exchange m arket or the title to the Volume of Funds.Comprehensive and consistent estimates o f the size o f the E urodollar m arket fo r Eurodollars is transferred to a seller w ho keeps all the entire his assets in the U nited States, the leakage is Bank fo r International Settlements did n o t begin complete, u n til 1966 to publish estimates o f the size o f the im m ediately stopping the m u ltip le effects o f Eurodollar credit generation. The capacity of the 1960-1969 period do n o t exist. The market, w ith back in fo rm a tio n to 1964. Moreover, Eurodollar m arket to the in fo rm a tio n is presented on an annual basis generate credit apparently is more im p o rta n t on a only and suffers fro m several lim itations. Many theoretical level than on a practical level. United States dollars held outside the United The w eight o f the evidence indicates States cannot be classified as Eurodollars; th a t is, th a t the process o f m u ltip le expansion some foreign-held dollar balances w ithheld fro m terminates at a very early phase o f the the E urodollar m arket are kept in the fo rm of circuit....O n the whole, therefore, it w orking balances w hile others have been used to appears th a t the Eurobank m u ltip lie r make investments in United States money m arket is very low, lying approxim ate probably in the range of 0.50 instruments. Furtherm ore, n o t all countries report and to the BIS and the BIS does n o t have complete in fo rm a tio n on many o f the reporting countries 0.9 0 .19 This means that, on average, fo r every dollar regarding banks' d o lla r assets and liabilities vis-a-vis deposited in the Eurodollar market, Eurobanks their own domestic residents. Nor are there precise w ill lend $0.50 to $0.90 to th e ir customers. The data on the am ount o f double counting due to remaining pyram iding. Nevertheless, the available estimates leakages are sufficie n t to lower the deposit m u ltip lie r to slightly above one. T hat is, indicate the recent explosive grow th o f the Euro fo r dollar market, even if they cannot be considered every d olla r deposited in the Eurodollar market, only a few cents find th e ir way d ire c tly com pletely accurate. The BIS data measure the dollar and other back in to the market. SIZE OF TH E E U R O D O L L A R M A R K E T To put the various aspects o f the E urodollar foreign currency nonresidents liabilities and assets vis-a-vis o f the banking systems in eight market in to perspective from an abstract fram e European countries.20 These foreign liabilities and w o rk is very d iffic u lt. It w ould be helpful if the assets are denominated in U nited States dollars, three phases described earlier could be given some German marks, Swiss francs, French francs, D utch empirical in fo r florins, Italian lire, and the British pound sterling m ation is n ot available, and instead, the discussion and give an indication o f the size o f the Euro content. U nfortunately, such o f the size o f the Eurodollar m arket must be currency m arket (see the dotted line on the chart). lim ited to an exam ination o f the volume o f funds When o n ly liabilities denominated in U nited States transacted w ith in the m arket and the geographical dollars are considered, the size o f the Eurodollar d istrib u tio n o f the sources and uses o f these funds. m arket in the reporting countries is revealed (see 19 the solid green line on the chart). The annual K lopstock, ib id ., p. 8. Also see Fred H. K lopstock, "M oney Creation in the Euro-Dollar M arket—A Note on Professor Friedman's V ie w s," M o n th ly Review, Federal Reserve Bank o f New Y o rk , January 1970, pp. 12-15. 16 20 Belgium, France, Germany, Ita ly, the Netherlands, Sweden, Switzerland, and United Kingdom . MARCH 1970 SIZE of the E U R O C U RR E NC Y and the E U R O D O L L A R MA RK E TS B illio n s o f U. S. d o l l a r s I960 La st entry: Sources of '61 1969 data: ’62 ’63 '64 ’65 ’66 '67 '68 '69 '70 est. Bank fo r I n t e rn a tio n a l S e tt le m e n ts ! * fo r 1960-62, for 196 9, Oscar Federol L. A ltm an, Reserve B an k In te rn a tio n a l of M onetary Fund S t a f f Papers; C le ve la n d E urodollar estimates from 1964 to 1968 are also evaluate recent grow th in the Eurocurrency mar shown in the chart by the solid black line. The kets. The usefulness o f the three measures is BIS estimates o f the net size o f the Eurodollar fu rth e r m arket a ttem pt to adjust fo r nonreporting and 1964-1968 period, all three series grew at approxi also fo r the double counting o f interbank trans m ately the same approxim ate average annual rate actions. In an e ffo rt to provide some indication o f (30 percent). On a basis sim ilar to the adjusted BIS evidenced by the fa ct th a t over the the size o f the E urodollar m arket before 1964, measure, estimates o f the size o f the Eurodollar estimates were derived by this Bank from the m arket at m id-1969 ranged fro m $32 b illio n to studies o f the late Oscar A ltm an, one o f the early $33 b illio n .22 Yearend estimates are in the neigh oI A lthough borhood o f $40 b illio n .23 These estimates indicate these early figures are not s tric tly comparable w ith an increase o f a pproxim ately 60 percent in the size the BIS figures, they provide some perspective to o f the Eurodollar m arket in 1969. experts on the Eurodollar market. As shown by the solid green line on the chart, 21 See Oscar L. A ltm a n , "Foreign Markets fo r Dollars, Sterling, and Other Currencies,” International M onetary F und S ta ff Papers, V III, 3 (December 1961), pp. 313-352; "R ecent Developments in Foreign Markets fo r Dollars, and Other Currencies,” International Monetary Fund S ta ff Papers, X, 1 (March 1963), pp. 48-96; and "Euro-D ollars: Some Further Comments,” International M onetary Fund S ta ff Papers, X II, 1 (March 1965), pp. 1-16. the United States d o lla r is by far the most 22 See Andrew F. Brim m er, "E u rod o lla rs and the U. S. Balance o f Paym ents," E urom oney (December 1969), pp. 13-22. 23 See "T h e money-machine magic o f E urodollars," Bus iness Week, February 21, 1970, pp. 114-120. 17 ECONOMIC REVIEW TA B LE II Net Uses o f Eurodollars Selected Areas (Yearend Figures in B illions o f U nited States Dollars) Area 1964 United States and Canada Japan Eastern Europe Western Europe* O th e rt + + + + - $0.7 0.4 0.2 0.6 1.9 1965 + + + - 1966 $1.4 0.5 0.2 0.3 1.8 + + + - $3.3 0.6 0.3 2.1 2.1 1967 1968 June 1969e + $3.2 + 1.0 + 0.3 - 1.8 - 1.7 + $5.7 + 1.6 + 0.3 - 5.2 - 2.4 + $10.5 n.a. 2.3 8.2 n.a. NOTE: (+) indicates uses of funds; (—) indicates net sources o f funds. * The eight reporting countries are Belgium, France, Germany, Netherlands, Sweden, Switzerland, and the United Kingdom, t Principally Latin America and the M iddle East. Sources: Bank fo r 1969, p. and the 1969), p. Ita ly, the International Settlements T h irty -n in th A n n u a l R eport June 9, 149. June 1969 estimates: Andrew F. Brim mer, "E urodollars United States Balance o f Payments,” Eurom oney (December 15 im p o rta n t Eurocurrency. A t the end o f 1968, the Geographical Distribution. A n exam ination o f United States dollar accounted fo r 80 percent o f the relative im portance o f the foreign currencies in the com bined external foreign currency liabilities which o f banks in the reporting countries, fo llo w e d by denominated is o n ly one way to study the size o f banks' reported external positions are the German mark (9 percent o f foreign liabilities); the E urodollar market. The sources and uses o f Swiss francs (7 percent); the pound sterling (2 Eurodollars by co u n try can also be examined by percent); D utch flo rin s (1 percent); French francs using data fro m the BIS. Table II presents the net (1 percent); and Italian lire (less than 1/2 percent). uses o f Eurodollars during the 1964 to m id-1969 The relative importance o f various Eurocurrencies period by selected geographic areas. has shifted over the years. For example, at the end Several sharp changes in uses o f funds are o f 1965, United States dollars accounted fo r 79 apparent fro m the data in Table II. First, during percent o f bank-reported external foreign currency the liabilities, w hile the Swiss franc accounted fo r 7 Canada increased th e ir annual net demands on the 1964-1968 period, the United States and percent. The German mark and the pound sterling Eurodollar m arket by $5 b illio n . D uring the same both accounted fo r 6 percent, and the D utch period, the eight western European countries, as a flo rin and French franc each accounted fo r 1 group, shifted fro m percent. Italian lire liabilities amounted to about A lthough Japanese net demands grew noticeably, net users to net suppliers. 1/2 percent. A lthough the growth in the relative eastern European net demands remained nearly importance o f the German mark has n o t been constant. Latin Am erica and the M iddle East steady, these figures indicate the notable s h ift to increased th e ir net supply m arginally. The fact Euromarks in the past few years, p rim a rily at the that Latin America and the M iddle East are net expense o f Eurosterling. suppliers o f dollars to the m arket is n o t d iffic u lt to 18 MARCH 1970 explain. In both o f these areas, investors have end o f year figures, when available in m id-1970, relatively lim ited o ppo rtu nitie s to p u t th e ir wealth may present a d iffe re n t picture. It is certain, to w ork in local capital or money markets (if such however, th a t U nited States banks continued to be markets even exist). Consequently, this money substantial users o f the Eurodollar market. The finds its way in to the Eurodollar market. growth in outstanding liabilities o f U nited States Second, there appear to have been some marked shifts in the patterns o f sources and uses o f banks to th e ir own foreign branches indicates the continued U nited States demand on the Euro E urodollar funds. In 1966 and 1968, a sudden d ollar market. Recognizing th a t these liabilities do increase in demands by the United States and not represent all U nited States Eurodollar b o rro w Canada apparently was satisified by western Euro ing,24 and also th a t they include a certain am ount pean sources. This phenomenon was p a rtly a o f funds supplied by U nited States residents, they fu n ctio n o f interest rate relationships between the still serve as a p ro xy measure fo r U nited States United demands on the E urodollar market. For example, States and Europe and the concurrent m onetary policies on both sides o f the A tla n tic . the liabilities of United States banks to th e ir Table II also indicates that, over the five-year foreign branches amounted to $6.9 b illio n at the period, certain geographical areas were tra d itio n a l end o f 1968. The outstanding liabilities had grown suppliers, w hile to $13.3 b illio n by the end o f June 1969. A fte r other areas became consistent users. This pattern became more pronounced w ith reaching a record high o f $15.0 b illio n in Novem the massive shifts in supply and demand during the ber, outstanding liabilities fell to $13.0 b illio n as 1966-1968 period. Furtherm ore, there is evidence o f December 31, 1969. (The firs t half increase in that these recent patterns were even more p ro m i liabilities o f $6.4 b illio n is comparable w ith the nent in 1969 than in 1968. For example, based on net increase in demands on the Eurodollar market June by the United States and Canada am ounting to 1969 estimates, the United States and Canada increased th e ir net demands on the Euro $4.8 b illio n , as shown in Table II.) A lthough there dollar m arket by nearly $5 b illio n in the firs t half was a net decline o f $0.3 b illio n in U nited States o f 1969. As has been the case since 1966, much o f liabilities to foreign branches between the June 25 the increased demand fro m the U nited States was and December 31 reporting dates. U nited States met by funds from western Europe. A s h ift in the demands on the E urodollar m arket can be seen to eastern European countries' behavior, however, is have remained at a very high level. suggested by the data; these countries appear to 24 have become im p o rta n t suppliers o f funds, rather than remaining marginal users. The mid-year 1969 figures must be interpreted w ith caution, because the Eurodollar m arket flow s engendered by the anticipated revaluation o f the German mark should be considered transitory. The For example, as o f December 31, 1969, the liabilities o f United States banks to th e ir own foreign branches represented 88.4 percent o f the Eurodollar borrow ing recorded on the books o f the reporting banks. Branches in United States te rrito ries and possessions accounted fo r 5.4 percent, while 4.1 percent was obtained through brokers and dealers and 2.1 percent was obtained d irectly. Disaggregate in fo rm a tio n o f this nature is available only from May 1969 and so the " lia b ility to own foreign branches" series remains the best p ro xy measure. 19
@FedFRASER