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NOVEMBER 1965

THIS

ISSUE

Sources o f Commercial Bank
Funds: An Example o f
"C reative Response” . . . 2

Survey o f High School
Seniors in Cuyahoga
C o u n ty .............................12

Another Look at
Municipal Portfolios . . . 21

FEDERAL

RESERVE

BANK

CLEVELAND

ECONOMIC REVIEW

SOURCES OF
COMMERCIAL BANK FUNDS:
AN EXAMPLE OF
''CREATIVE RESPONSE"

This article considers the growing impor
tance of newly innovated sources of com
mercial bank funds. It thus is concerned with
the "creative response"1 of an industry—in
this case, commercial banking—to a new
environm ent in w hich old or traditional ways

of conducting business will no longer produce
the same results. In other words, the article
examines what banks have done to attract
funds in a period when traditional ways
proved less than adequate.
Innovation, which is doing something new
or doing something old in a new way, arises
usually out of need. This is true of innovations
in managerial structure, in production, in
marketing, and in finance—to mention only
a few areas of activity closely associated with

COMMERCIAL BANKING SINCE
WORLD WAR II
Since the end of World War II, commercial
banks have declined in importance relative to
other financial institutions, continuing a trend
that originated around the turn of the ce n tu ry .2
While commercial banks have grown in size
and are still the nation's leading financial
intermediary, their growth has not kept pace
with that of other private deposit-type finan
cial institutions.3 This is shown in Chart 1.
Whereas over the 20-year period since World
War II, total sources of funds of commercial
banks rose about 120 percent, those of mutual
savings banks more than tripled, those of
savings and loan associations increased more
than twelvefold, and those of credit unions,

the economic process. The case of commer

2 See Raymond W. Goldsmith, Financial In te rm ed i

cial banking conforms to the pattern of doing

aries in the A m erican E co n o m y Since 1900 (Prince

something new or doing something old in a

ton, New Jersey: Princeton University Press, 1958).

new way.

3 In this article, commercial banks are compared only
with other deposit-type institutions. A broader com
parison with nondeposit-type financial institutions, for

1 The term is borrowed from Joseph A. Schumpeter, ''The
Creative Response in Economic History," Journal o f
E con om ic H istory, Vol. VII, November 1947.

2 FRASER
Digitized for

exam ple, insurance com panies and pension funds,
would yield conclusions similar to those of this article.

NOVEMBER 196 5
l.

TOTAL SOURCES of FUNDS
Deposit - Type Financial Institutions
End of Y e a r *
B il li o ns of d o l l a r s

liabilities and capital—constituted a smaller
proportion of the total resources of all deposit-type institutions. In 1964, however,
there was the first sign of a change in this
pattern. Thus, in 1964 for the only time since
World War II, commercial banks succeeded
in maintaining—in fact, slightly improving—
their relative position. As a result, at the end
of the year, sources of funds of commercial
banks comprised a slightly larger portion of
the total resources commanded by all deposittype institutions than at the end of 1 9 6 3 —
6 5.37 percent in 1964 against 65.35 percent
in 1963.
The primary factor underlying the relatively
poor showing of commercial banks in the
postwar period perhaps has been the change
in attitude of both businesses and individuals
toward holding demand deposit balances.
Both have become increasingly aware of the
income foregone by holding temporarily idle
2.

PROPORTION of TOTAL FUNDS
of D EPO SIT-TYPE FINANCIAL INSTITUTIONS
Accounted for by Commercial Banks
End o f Y e a r
Percent
IUU
Sources o f d a t a:

F e d e r a l D e p o s i t I n s u ra nc e C o r p o r a t i o n ;

U.S. Savi ngs & Loan L eagu e; N a t i o n a l A ss oc ia ti on of
M u t u a l Sav in g Bank s; C r e d i t U ni on N a t i o n a l Asso ci at io n d a t a

90
80
70

though still relatively small in absolute size,
increased some twentyfold.
Put otherwise, while commercial banks at
the end of 1945 had held 86 percent of the
financial resources of all deposit-type finan
cial institutions, the share had dropped to 65
percent at the end of 1964. In each year
through 1963, as shown in Chart 2, financial
resources of commercial banks—the total of

60
50
40
30
20
10
0
1 9 46

'4 8

'5 0

'52

'5 4

'56

'5 8

'60

' 62

'64

' 66

So u rc e o f d a t a ; F e d e r a l De po si t I ns u r a nc e C o r p o r a t i o n

ECONOMIC REVIEW

DEPOSITS and SHARES
Deposit - Type Financia l Institutions
End of Y e a r *
B il li on s of d o l l a r s
600.0
400.0

200.0

100.0
80.0

TIM E and SAVINGS DEPOSITS

6 0 .0

MUTUAL
SAVINGS DEPOSITS J

SAVINGS and LOAN SHARES

of only 2.1 percent; this contrasts sharply to
average annual growth rates of 7.5 percent
for time and savings deposits at commercial
banks, 6 percent for mutual savings deposits,
14 percent for savings and loan shares, and
nearly 17 percent for credit union shares. On
the other side of the ledger, and as shown in
Table I, demand deposit and currency hold
ings of nonfinancial corporations have grown
less rapidly than have their holdings of total
financial assets (which include demand de
posits and currency). Thus, the ratio of demand
deposits and currency to total financial assets
of nonfinancial corporations declined from
nearly 29 percent in 1946 to 12.5 percent
in 1964.

FACTORS ASSOCIATED WITH THE
DECLINING DEMAND FOR CASH
CREDIT UNION SHARES

RATIO SCALE
1 94 6

'4 8

'5 0

' 52

'54

'56

'6 0

'62

'6 4

'66

* L a s t cal l r e p o r t f o r C o mm e r c i a l Banks

The slower growth of demand deposits, re
flecting as it does greater reluctance on the
part of the public to hold idle money, is due
in part to relatively high and generally rising
interest rates that have characterized much of
the postwar period.4An additional influence in
this connection has been the absence of
severe alternations in the level of economic

funds in the form of "money" or, more specif

activity since the end of World War II. Unlike
the previous past when financial and indus
trial crises periodically gripped the nation's

ically, as demand deposits; both have cor
respondingly become increasingly disinclined
to do so. This is evidenced, in part, by the
rapid growth of other deposit-type claims,
which in turn reflects the public's desire to
hold liquidity in income earning forms. Thus,
as indicated in Chart 3, demand deposit lia
bilities of commercial banks over the last 20
years have grown at an average annual rate

4 Lower and / or declining interest rates would not
necessarily reverse the trend. One observer of the
financial scene is probably correct in arguing that "once
companies and individuals begin to economize on cash
and place surplus funds into earning assets, the process
is hard to reverse even though the return available from
this economizing of cash may decline." See Paul S.
Nadler, T im e D eposits and D eb en tu res: The New
Sources o f Bank F unds (New York: C. J. Devine
Institute of Finance, Graduate School of Business Ad
ministration of New York University, 1964), p. 30.

Sources of d at a : F e d e r a l D eposi t I n s ur an ce C o rp o r a t i o n ;
U.S. Sa vi n gs & Loan Leagu e, N a t i o n a l As so ci at i on of
M u t u a l S av in g Banks; C r e di t Un ion N a t i o n a l A s so ci a ti o n d a t a

4 FRASER
Digitized for

NOVEMBER 1965
TABLE I
Holdings of Financial Assets
by N on finan cial Corporations
Demand Deposits

and Currency

Total Financial Assets

One as a

Year

(billions of dollars)

(billions o f dollars)

Percent o f Two

1 94 6

$21 .2

$ 7 4.0

2 8 .6 %

1947

2 3.4

81.2

1948

2 3.6

86.6

2 7.3

1 94 9

2 4 .7

9 0 .7

2 7.2

1950

26.2

107 .5

24.4

1951

2 7 .9

116.1

2 4.0
2 3.5

2 8.8

1952

2 8 .7

122.1

195 3

2 8.8

125.2

2 3.0

1 95 4

3 0.9

130.3

2 3 .7

1 95 5

3 1.9

1 47 .7

2 1 .6

1 95 6

32.1

1 5 3 .0

2 1 .0

1957

32.1

158.1

2 0.3

195 8

33.5

170 .0

19.7

1959

3 2.5

183.4

17.7

196 0

32.1

191.4

16.8

1961

3 3 .7

2 0 8 .4

16.2

1962

3 4.5

2 2 4 .4

15.4

1 96 3

3 2.0

2 4 1 .7

13.2

196 4

3 2.5

2 6 0 .7

12.5

Source: Flow of funds data, Board of Governors o f the Federal Reserve System

economy, the relative stability characterizing
the two most recent decades has enabled
business to plan their financial affairs better

and hence to minimize unprofitable idle cash
balances. Other factors might perhaps be
cited, but whatever the causes of slower
growth of demand deposits, commercial banks
had to find ways of holding on to existing de
posits5 and of attracting newly generated
funds.
5 Shifts of funds out of demand deposits and into interestbearing claims issued by nonbank financial intermedi
aries do not result in a decline in the demand deposits
of the banking system— only a transfer of ownership.
But, such shifts create losses for particular banks and
increase the volatility of deposit balances in general.
Moreover, if carried to an extreme, commercial banks
would evolve into check clearing facilities— not a
useless function, but certainly not one that is particu
larly profitable.

TRADITIONAL RESPONSE
Though commercial banks did react to the
changing environment, responses— until the
past few years—were pretty much along
traditional lines. As a general matter, com
mercial banks tended to limit their competi
tion for loanable funds — to the extent pos
sible under limitations imposed by Regulation
Q —to raising interest rates paid on time and
savings deposits, and to narrowing the dif
ferential between interest rates paid on such
deposits and on deposit-type claims issued by
other financial institutions as well as to ad
vertising. That commercial banks did compete
in terms of interest rates is seen in Chart 4.
5

ECONOMIC REVIEW

SELECTED INTEREST RATES
Percen t

S o u r c e s o f d at a : F e d e r a l D e po si t I n su r a nc e C o r p o r a t i o n , U.S. S av in gs & Loan L ea gue , N a t i o n a l A ss oc ia t io n of M u t u a l Sa vi n gs Ba nks,
So l om on B r ot her s & Hu t zl er

In each year from 1952 through 1964, the
effective rate paid on interest-bearing claims
issued by deposit-type financial institutions
exceeded the rate of the previous year. Com
mercial banks conformed to this pattern, re
flecting both a willingness to compete for
funds—albeit along traditional lines — and
permissive actions by the regulatory authori
ties in progressively raising the ceiling on
Regulation Q.
Banks were successful, after 1956, in nar
rowing the unfavorable differential between
interest rates paid on their claims and interest
rates paid on the claims of major competitors.
Thus, whereas rates paid by savings and loan
associations between 1952 and 1956 exceeded
rates paid on time and savings deposits of
Digitized for
6 FRASER

commercial banks by more than 1.5 percent
age points, this differential had narrowed to
about M of a percentage point by the end
of 1964.6
Commercial banks have also sought to com
pete in the money market for the highly
mobile short-term funds of both corporations
and well-to-do individuals. The willingness to
compete is also evident from Chart 4, where
it can be seen that the rate paid on negotiable
time certificates of deposit has tended to be
above the bid rate on 9 1 -day U.S. Treasury
6 Various factors enable commercial banks to compete
successfully for loanable funds (particularly long-term
savings) despite payment of lower effective rates of
interest. One reason, for example, is that only commer
cial banks offer complete banking services and, hence,
convenience.

NOVEMBER 1965
5.

SOURCES of COMMERCIAL BANK FUNDS
End of Y e a r *
M i l l i o n s o f d o l la r s

DEF OSIT S

~ D E MANt

TIME

■»>

____

i CAW1»

C EPOSITS

---MIS CELL ANEO US L ABIL TIES

CAP TAL ACCC UNTJ

“ ■
1 95 7

'5 8

'59

'6 0

'61

' 62

LJW
H
'6 3

'6 4

'65

' 66

* Last call r e p o r t o f y e a r f o r C o m m e r c i a l Banks
Source of d a t a : F e d e r a l D e po si t I n s u ra nc e C o r p o r a t i o n

bills, as well as to correlate closely with
variations in that rate.7
Thus, as it became increasingly apparent
that corporations and individuals were less
likely to continue to hold large demand de
posit balances, commercial banks attempted,
7 The behavior of commercial banks in setting interest
rates for different forms of deposits is rather interesting,
and reveals a keen understanding of the advantages of
money market segmentation. It is apparent from Chart 4
that the secondary market rate paid on three-month
negotiable CDs has moved up considerably faster than
the rate paid on total time and savings deposits. More
over, the former rate has moved much more in sympathy
with money market rates than has the effective rate paid
on all time and savings deposits. The major portion of
time and savings deposits is held by individuals as long
term savings. Though such savings are by no means
insensitive to relative interest rate differentials and
levels, they are thought to be less sensitive than the
short-term idle funds of corporations and well-to-do
individuals. Thus, rather than competing for the mar
ginal liquidity of such spending units by raising interest
rates across-the-board, commercial banks have issued
negotiable CDs in large denominations, especially for
acquisition by this segment of the market.

as a second best alternative, to induce such
depositors to keep funds on deposit as either
time or savings deposits by making interest
rates more attractive. In these efforts, par
ticularly in the period beginning in 1957,
some success was achieved.8 Commercial
banks were able to retain, often with the same
deposit ownership, a portion of the funds for
merly held in demand balances that might
have sought profitable investment outside
banks, as well as to attract a share of newly
generated loanable funds.
It is evident from Chart 5, which shows the
various sources of commercial bank funds,
that total time and savings deposits have in
creased at a much faster rate since the end of
1956 than have demand deposits—the former
increased by 1.5 times as compared with the
less than 25 percent increase of the latter.
At the end of 1956, demand deposits con
tributed almost 67 percent of total sources of
funds of commercial banks; by the end of
1964 the proportion had dropped to only
slightly more than 50 percent. Time and
savings deposits, on the other hand, gained
in relative importance, rising from less than
25 percent to 37 percent over the same
period.9 No particularly pronounced changes
8 From 1936 through the end of 1956, maximum interest
rates payable on commercial bank time and savings
deposits under Regulation Q remained unchanged. As
of January 1, 1957, maximum interest rate ceilings were
raised on all types of time and savings deposits, except
ing 30-to 89-day time deposits. This action by the reg
ulatory authorities was initiated in recognition of the
general rise in interest rates beginning in 1951.
9 These percentages are for total demand and total
time and savings deposits, as reported on bank balance
sheets. The proportions thus differ from those usually
derived from adjusted deposit data. Both sets of data,
however, reveal similar patterns over time.

ECONOMIC REVIEW

in the magnitudes of bank capital and other
miscellaneous liabilities appeared in this
period; at the end of 1956, the two compo
nents combined accounted for 9.1 percent of
total sources of funds of commercial banks as
compared with 11.2 percent at the end of
1964. However, recent innovations affecting
these sources of funds have potentially im
portant implications for the future, which are
discussed later.

CREATIVE RESPONSE
To date, the 1960's have seen commercial
banks become considerably more aggressive
in their competitive efforts. This has been
made possible in part by the greater leeway
given by the monetary authority to commer
cial banks in the setting of interest rates.10
But, in addition, commercial banks have
found new ways of competing for funds—
ways which likely will play a major role in
determining the fortunes of commercial bank
ing in coming years.
Prior to the early I9 6 0 's, commercial banks,
as a general matter, apparently had been
content to attract funds from traditional sources
and by traditional means, with rising interest
rates as the primary lure. The past four years,
however, have witnessed a considerable
change, with innovation now playing a domi
nant role in terms of both characteristics of
claims issued by banks and the markets to
which these claims are meant to have appeal.

Most important thus far of the debt instru
ments recently introduced by commercial
banks—at least in terms of magnitude—is the
negotiable certificate of deposit. In sharp
contrast to the past when many banks dis
couraged or refused corporate-owned time
deposits,11 negotiable CDs were issued pri
marily to halt the movement of demand deposit
funds from large commercial banks by cor
porate money managers into investment in
various money market instruments, for exam
ple, Treasury bills, commercial paper, and
bankers' acceptances. Certificates of deposit
were not unknown prior to 1961, when lead
ing New York City banks announced that
they would offer such instruments to both
corporate and noncorporate customers and a
leading Government securities dealer indi
cated that it would maintain a secondary
market for such instruments. But, as seen
from Chart 6, negotiable CDs totaled only
slightly in excess of $1 billion at the end of
1960. By the end of 1964, this almost insig
nificant figure had grown to more than $12.5
billion—by August of this year to over $16
billion.
Negotiable CDs clearly have grown con
siderably faster than the total of time and
savings deposits. While at the end of 1960,
negotiable CDs constituted just 1.5 percent of
total time and savings deposits, by the end
of 1964 they accounted for almost 10 per
cent. Of the $54-billion increase in time and
savings deposits between the end of 1960

10 Permission to raise rates payable on various types of
time and savings deposits has been granted in every
year since 1961. Thus, changes in maximum rates pay
able under Regulation Q were made effective as of
January 1, 1962, July 17, 1963, and November 24, 1964.
As of this writing, there has been no change in 1965.

11 A view in the past often was (and in some cases still is)
that the buildup of interest-earning time deposits owned
by corporations would be at the expense of demand de
posits which earn no interest.

NOVEMBER 1 9 6 5
6.

TIME and SAVINGS DEPOSITS
of COMMERCIAL BANKS
End of Y e a r
B i l li o ns o f d o l l a r s

riME and SAVIN GS
------ DEPOSITS
i
TIA/IE DE POSI

S '

= N EGOT ABLE CER TIFIC M E S
of DEPOSIT t
/
/

J*
/
"t
i
t

RAT 10 SC ALE
1 9 57

'58

'5 9

'60

'61

’6 2

'6 3

'6 4

'6 5

’6 6

S our ces of d at a : B o a rd o f G o v e r n o r s o f t he F e d e r a l R eser ve Syst em
an d F e d e r a l D e p o s i t I n s u r a n c e C o r p o r at i o n

and the end of 1964, negotiable CDs contri
buted more than one-fifth. Since negotiable
CDs are a form of time deposit (as distinct
from savings deposits12), their increase has
contributed far more significantly to the growth
of time deposits. And it is the time deposit
component in recent years that has evidenced
most of the growth recorded in the total of
time and savings deposits. From the end of
1961 to the end of 1964, time and savings
deposits together increased by about 55 per
cent. Time deposits alone, however, expanded
about 2.3 times. The growing volume of ne
gotiable CDs accounted for almost 45 percent
of the nearly $ 2 6 billion increase in time
deposits over the period.
The appeal of negotiable CDs reflects in
part their attractive yields; it also reflects
12 Time deposits are generally held by businesses and
well-to-do individuals, and include: time deposits open
account, time CDs (negotiable and non-negotiable), and
other special accounts. Savings deposits, as evidenced
by the ownership of a passbook, represent generally the
savings of the public-at-large.

their marketability, something the traditional
time deposit lacked. However, while having
much appeal to money managers, negotiable
CDs are not necessarily as pleasing to bankers.
For one thing, CDs tend to be highly sensitive
to interest rates—to the extent that adverse
differentials between interest rates paid on
CDs and on other money market instruments
could cause a loss of CDs and, hence, a source
of funds to the banks involved.
Interest rate considerations aside, there also
exists the possibility of holders failing to renew
maturing CDs, for example, because holders
may want back their funds for working capital
purposes. This is not a surprising situation in
that, in many cases, CDs represent te m p o
rarily idle funds which in former years might
have contentedly remained in demand bal
ances. Negotiable CDs are therefore a po
tentially volatile source of funds, in contrast
to the traditional savings, or even time, de
posit. In this respect, CDs bear a strong
resemblance to demand deposits.13 Moreover,
not only must legally required reserves and
adequate capital be kept against CDs (as in
the case of other deposits), but bankers may
often feel queasy about investing such funds
in high-yielding though relatively illiquid
assets. In short, negotiable CDs can easily
become a rather volatile and expensive source
of funds.
The issuance of negotiable CDs has proba
bly been the most widely discussed aspect of
the renewed vigor with which commercial
banks have sought to strengthen their com
manding position as a financial intermediary.
13 See George R. Morrison and Richard T. Selden, Tim e
D ep osit G row th and the E m p lo y m e n t o f Bank
F unds (Association of Reserve City Bankers, 1965),

Chapter III.

ECONOMIC REVIEW

Of less quantitative importance thus far—but
also possessing significant implications for
the future—are new sources of funds showing
up in the capital and miscellaneous liability
accounts of commercial banks. Of particular
interest are subordinated debentures and
capital notes, and more recently unsecured
short-term promissory notes, which were first
issued in September 1964 by The First Na
tional Bank of Boston. As seen in Chart 7,
the outstanding volume of subordinated de
bentures and capital notes rose from a level
of only $21 million in mid-1963 to over $800
million at the end of 1964. In relation to
total bank capital of nearly $28 billion at the
end of 1964, $ 8 0 0 million is an inconsider
able amount. Yet, in the absence of regula
tory restraints, there is reason for believing
that the total could increase sharply and to
significant proportions.
From a bank's point of view, debentures
and capital notes have much to recommend
7.

CAPITAL ACCOUNTS of
COMMERCIAL BANKS
M i l l i o n s o f d o ll a r s

" TOT AL C * P I T / a AC COUN T S ~

as a source of funds. To the extent that they
substitute for additional sales of common stock,
and to the extent that the rate of interest on
these funds is less than the rate of return on
invested capital, present stockholders stand
to benefit from higher earnings per share and
possibly higher market values of their equity
holdings.14 But, aside from use as a substitute
for the issuance of additional common stock,
unsecured debentures and capital notes may
also substitute for and/or supplement deposits
(demand and time and savings) as a source of
loanable funds to commercial banks.
Compared with negotiable CDs, for ex
ample, debentures and capital notes possess
several distinct and widely accepted advan
tages. First, neither debentures nor capital
notes require the maintenance of legal re
serves, while as a deposit liability, CDs require
such reserves. Second, debentures or capital
notes do not require supporting equity capital
or, at least, not to the extent that CDs or the
more traditional deposit liabilities would re
quire it. Third, neither debentures nor capital
notes are subject to a Federal Deposit Insur
ance Corporation assessment; as a form of
time deposit, CDs are subject to a 1/12 of
one percent annual assessment. Finally, be
cause funds secured through debentures and
capital notes are likely to remain for a rela

llll

>ITAL NOT ES —

- a n d DEB ENTU

♦

RAT 10 S( ALE
195 7

'5 8

’5 9

’61

' 62

'63

'6 4

'65

'66

tively long period of time, there is less need
for maintaining secondary reserves, such as
Treasury bills and other low-yielding though
highly liquid assets. Thus, nearly all the pro
ceeds from debentures and capital notes can
be placed in loans and longer maturity in
vestments.

* E n d o f y e a r t h r o u g h 1 9 6 2 ; s e m i a n n u a l l y b eg i n n i n g 1 96 3
Source o f d a t a : F e d e r a l D ep o si t Ins u ra nc e C o r p o r a t i o n

14 For discussion and illustration of this, see Nadler,
op. cit., pp. 20-24.

NOVEMBER 1965

In the absence of regulatory restraint, it is
likely that unsecured short-term notes will
become an increasingly important source of
funds for commercial banks. Having some of
the advantages of debentures and capital
notes, short-term notes, in addition, are not
burdened with similar marketing problems.15

CONCLUDING COMMENTS
Having said this, however, it should be
remembered that, if not handled properly,
that is, with full appreciation of the costs and
risks involved, these "new " sources of funds
could present serious problems to commercial
banks.16 Thus, it should not be surprising that
15 On August 26, 1965, the Banking Department of the
State of New York gave state chartered banks permission
to offer non-negotiable promissory notes (in amounts
exceeding $ 1 ,0 0 0 ,0 0 0 ) to corporate customers. As of
this writing, six large New York banks have issued such
notes.
16 Acquisition of substantial amounts of loanable funds
through the issuance of capital notes and debentures
commits the issuing bank to fixed interest payments
over, extended periods of time. Should market rates of
interest subsequently decline, the bank's earning power

the supervisory authorities have demonstrated
prudent caution in evaluating such sources
of funds. Nevertheless, the fact that new
sources of funds have been "innovated" does
suggest that commercial banks are seriously
seeking to revitalize their position as a financial
intermediary. The ultimate success of any
single innovation is perhaps not important.
What is important is that creative innovation
has been reintroduced to commercial bank
ing. And this virtually guarantees that the
business of banking will never again be the
same—as it probably should not since change
happens all the time in the various segments
of U. S. business and financial enterprise.
may become jeopardized. An additional source of pos
sible difficulty arises from the relatively high interest
rate paid on these sources of funds. At, say, a 5 percent
rate of interest on debentures, proceeds from this source
could hardly be placed in shorter-term loans and invest
ments. Thus, it might become necessary to place these
funds in longer-term and less liquid loans and invest
ments. At some point the desire for profit might conflict
with prudent behavior. For additional discussion see
L. Wayne Dobson, The Issuance o f Capital N otes
and D eb en tu res b y C om m ercial Banks (Kentucky
Bankers Association, 1965), pp. 22-26.

ECONOMIC REVIEW

SURVEY OF HIGH SCHOOL SENIORS
IN CUYAHOGA COUNTY
The Research Department of the Federal
Reserve Bank of Cleveland is currently en
gaged in a study of the economics of higher
education in the Cleveland area. As part of
this general study, special surveys and analyses
will be conducted from time to time that
should be of interest to many observers. On
such occasions, short articles dealing with
limited portions of the broader study will be
published.The present report is such an article.
In late May 1965, the Federal Reserve
Bank of Cleveland in cooperation with the
Cleveland Commission on Higher Education
surveyed students of the senior classes in the
public and parochial high schools of Cleve
land and Cuyahoga County on their plans
for further education. Nearly three-fourths of
those replying indicated plans for some form
of education after high school graduation.

TABLE 1
High School Seniors in Cuyahoga County Who
Planned to Continue Their Education as of
M a y 1965

Area

Number

Percent

Planning

Number

Continue

Respondents

Education

City of Cleveland
public high schools

4 ,2 5 5

2 ,7 4 0

6 4 .4 %

10,691

8 ,4 4 8

7 9 .0

Parochial high schools .

3 ,0 2 3

2 ,2 1 7

7 3 .3

1 7,9 69

1 3 ,4 0 5

Public high schools
in Cuyahoga County
outside Cleveland

T o ta l........................

7 4 .6 %

Source: Federal Reserve Bank o f Cleveland

(75 percent) planned to continue their edu
cation than is the case in either the nation or
the State of Ohio. (In the fall of 1964, first
time college enrollment was 54 percent of
high school graduates nationally and just a

Table I summarizes replies received from
students in 13 public high schools in the City
of Cleveland, 3 0 suburban high schools in
28 school districts, and 27 parochial high

shade over 50 percent for Ohio.)
On the basis of the survey, what is the
typical high school senior in Cuyahoga County
like? A composite picture drawn from replies

schools (25 Catholic and 2 Lutheran). The
percent of those who planned to continue
their education differs among the three groups
of schools, and may overstate somewhat the

to the questionnaire would show an eighteenyear-old, slightly more apt to be a girl than
a boy,1 from a family with an income between

percent who actually will continue. However,
it does indicate that a larger proportion of the
graduates of Cuyahoga County high schools
Digitized for12
FRASER

$ 5,0 00 and $10,000. The chances are one
in three that the student's father attended
college and slightly better than one in five
1 Girls outnumbered the boys in the responses by 1,481.

NOVEMBER 1965

that the mother went to college. The vast
majority of those who planned to continue
their education expected to do so not later
than the fall of 1965. More than a thousand
planned to hasten the process by attending
summer school. However, some 500 planned
to defer their education for at least a year—
most commonly in order to earn necessary
funds.
Thus far the data collected in the survey
have been subjected only to the following
tabulations: (1) aggregates for city, suburban,
and parochial schools; (2) a breakout for
those who answered affirmatively the ques
tion, "Are you planning to continue your
education?"; and (3) a breakout for those who
said that they already had been accepted.
This article follows essentially the same pat
tern.2
A word of caution is necessary at this point.
While the survey sample comprised approxi
mately 80 percent of the universe of high
school seniors in Cuyahoga County, generali
zations to a broader universe would be un
warranted. Thus, only to the degree that
Cleveland typifies other large, urban, north
ern, industrial communities might inferences
be drawn. No attempt has been made to deal
with the question, "Is Cleveland typical?"
The purpose of the survey was simply to
obtain some preliminary insights into educa
tion plans of high school seniors in Cuyahoga
County and possible implications concerning
the demand for higher education in the
Cleveland area.
2 Currently, the data are being cross-sorted and evalu
ated for relationships. Should additional patterns of
interest appear, they will be reported in a later issue of
the E con om ic Review .

HOW MANY WILL ACTUALLY ENTER
COLLEGE IN SEPTEMBER 1 9 6 5 ?
Do the 13,405 students who said they
planned to continue their education repre
sent a realistic figure? First, this figure in
cludes 500 students who expected to defer
this step for a year or more. Second, it also
includes some 700 who indicated that their
plans for continued education involved a
vocationally oriented school, for example,
beauty college, key punch school, or a prac
tical nursing course. Third, there are several
normal attrition factors: some girls may have
married by the time this analysis is written;
some boys may have decided to fulfill their
military obligations before continuing their
education; and still others may have found
what promises to be permanent employment
which is to their liking.
Another figure is available—the number
who actually had been accepted by one or
more colleges at the time of the survey (late
May 1965). Table II shows the number ac
cepted and the number of those accepted who
actually planned to continue their education.
There is no precise way of determining from
the survey results why the second figure is
lower. However, several possible explanations
TABLE II
N um ber of Students Who Had Been
Accepted as of M a y 1965
Number who Planned
to Continue of
Area

Number Accepted

Those Accepted

Cleveland

1,242

1,206

Suburban

6 ,1 7 0

5 ,9 9 0

Parochial

1,7 3 6

1,638

9 ,1 4 8

8 ,8 3 4

Total

Source: Federal Reserve Bank of Cleveland

ECONOMIC REVIEW
TABLE III
Pattern of Acceptances Received by Those
Students Who Had Been Accepted as of M a y
1965
Number of Acceptances Received
Location o f School

Cuyahoga County

. .

3 ,1 5 0

2 92

Ohio ex Cuyahoga
C o u n ty ........................

. .

3 ,9 3 2

843

1 17

,. .

1,596

385

124

T o t a l............................. .

8 ,6 7 8

1 ,5 2 0

270

Outside Ohio

Source: Federal Reserve Bank of Cleveland

suggest themselves: simply a change of plans;
difficulty in financing the projected educa
tion; or the fact that the acceptance received
was not from the school to which the student
really wanted to go. It is interesting that the
data show 35 who decided not to go although
they were accepted by two or more schools
(and of these, four had also been offered
scholarships).
Between the high figure of 13,405 from
Table I and the low figure of 8 ,8 3 4 from
Table II what realistic compromise figure can
be reached? It is reasonable to assume that
the totals in Table II are on the low side
because only the first round of acceptances
had gone out from most colleges at the time
the questionnaires were completed. Locally,
the transfer of Fenn College to Cleveland
State University was in process with all the
delays and complications attendant upon the
conversion of a private to a public institution.
Table III, which shows the pattern of single
and multiple acceptances, evidences the fre
quency of both multiple applications and
resulting acceptances. On the assumption
that each person who receives more than one
acceptance actually does go to one of the
Digitized for14
FRASER

accepting schools, a spot is thereby released
simultaneously for one who has not yet been
accepted.
A final factor suggesting that the low figure
of 8 ,834 will have risen substantially by the
time colleges opened in the fall is the state
law in Ohio which requires that, "The grad
uate of any chartered Ohio high school should
be entitled to admission to publicly assisted
colleges or universities, but some distribution
of this enrollment among various institutions
and branches will be necessary to insure
full utilization of all facilities."3 While this
rule does not guarantee to every Ohio appli
cant immediate admission to the state-assisted
school of his choice, it does give each high
school graduate an opportunity to demon
strate that he qualifies for advanced educa
tion. In the light of the foregoing factors, it
would seem reasonable to conclude that the
actual number of Cuyahoga County high
school graduates who registered in September
at some college or university, public or private,
was around 12,000.

THOSE WHO PLAN TO CONTINUE
AND THOSE WHO HAD BEEN
ACCEPTED
Tables IV and V make it possible to com
pare those who indicated an intent to continue
their education with those who had been
accepted at the time of the survey. Approxi
mately equal numbers of boys and girls
planned to continue, but more girls were
accepted in the first go-round. Similarly,
3 Provisional M a ster Plan for Public H igher E du
cation in Ohio, Ohio Board of Regents, April 1965,

page 3.

TABLE IV
Profile o f Those H igh School Seniors W ho Planned to Continue Their Education
Area

Sex

Age

19 &
over

1,194
3,752

n.a.

1,341
3,953
1,375

4
32
5

13
30

Parochial

1,395
4,463
837

1,073

1,310
4,107
1,002

Total

6,695

6,669

6,019

6,419

Cleveland
Suburban

Father Attended College

Family Income

16 &
under

Under

$5,000-

n.a.

$5,000

$10,000

157
210
17

55
349
88

305
323
161

1,331

384

492

789

Over
$10,000

Mother Attended College

Unknown

n.a.

Yes

n.a.

Yes

3,179
1,074

239
2,489
330

825
2,281

423
3,247
580

2,273
5,041
1,594

44
160

310
2,195

599

40
176
53

349

5,584

3,058

3,705

269

4,250

8,908

247

2,854

Accepted May 1965

Total

n.a.

Yes

n.a.

2,384
6,051

1,206
5,990
1,638

1,447
2,068
453

87
390

1,808

46
202
60

126

2,217

10,243

308

8,834*

3,968

603

13,405

2,740
8,448

* The difference between the number who reported having been accepted in Table IV (8,834) and the number who reported acceptance
in Table V (9,148) is due to the fact that 314 o f those in the tabulation on which Table V is based either indicated that although
accepted they did not plan to continue (35 responses) or did not answer the question (279 n.a.'s) on which the tabulation for Table IV
was based.
Source: Federal Reserve Bank o f Cleveland

TABLE V
Profile o f Those High School Seniors W ho Had Been Accepted as of M a y 1965
Area

Sex

Age
16&
under

n.a.
3
20
5

6
21

Parochial

3,149
681

608
3,001
1,050

Total

4,461

4,659

Cleveland
Suburban

631

648
2,831
848

527
2,978
781

4,327

4,286

Family Income
19 &
over
34

n.a.

Under
$5,000$5,000 $10,000

Over
$10,000

127
201
130

692

142

99
12

27
241
64

2,189
827

145

332

458

3,708

Father Attended College

Unknown

2,078
288

271
1,575
455

2,508

2,301

Multiple Acceptances

Total

Yes

n.a.

Yes

n.a.

1,004

127
36

220
2,736
486

3,323
1,220

18
111
30

179
1,867
292

1,047
4,161
1,400

16
142

218
1,420
346

24
61
11

1,242
6,170

86
532
128

173

3,442

5,547

159

2,338

6,608

202

1,984

746

9,148*

n.a.
10

* The difference between the number who reported having been accepted in Table IV (8,834) and the number who reported acceptance
in Table V (9,148) is due to the fact that 314 o f those in the tabulation on which Table V is based either indicated that although
accepted they did not plan to continue (35 responses) or did not answer the question (279 n.a.’s) on which the tabulation for Table IV
was based.
Source: Federal Reserve Bank o f Cleveland

Mother Attended College

1,736

ECONOMIC REVIEW

about 4 0 0 more eighteen-year-olds than seventeen-year-olds planned to continue but when
it came to acceptances, the seventeen-yearolds had a slight edge. Fewer than half the
nineteen-year-olds who planned to continue
had received acceptances by May. In much
the same manner, the boy or girl whose
father or mother had attended college would
appear to have had an advantage in terms
of first-round acceptances. Any inferences
concerning the role of family income in
college plans are somewhat limited so far as
the present survey is concerned, by the fact
that 30 percent of all respondents marked
this item "unknown," while an additional 2
percent did not answer the question at all.
The evidence does suggest, however, not
only that a higher proportion of students
from higher income families and/or students
in the suburban and parochial schools plans
to continue their education, but even more
significantly that these students received sub
stantially more first-round acceptances and
multiple acceptances. This observation is sub
stantiated by the figures in the last column
of Table VI, which are essentially first-round
acceptances, when they are related to the
number planning to continue their education
as shown in Table I.

The geographic distribution of acceptances
has considerable significance for those re
sponsible for educational planning. A grand
total of 10,468 acceptances had been received
at the time of the survey. Of these, 3,471
were from schools in Cuyahoga County and
4,892 from other colleges and universities in
Ohio. Thus, 80 percent of all acceptances
originated in Ohio. This indicates that by
choice or necessity a great majority of the
students in Cuyahoga County look to their
home community and/or state for education
beyond high school. The necessity may be in
part financial and, in this era of keen com
petition for admission, it may also arise in
considerable measure from greater assurance
of acceptance from the public colleges of
one's own state. Whatever the balancing of
forces which determined the students' appli
cations, it is only in the suburban high schools
that out-of-state acceptances accounted for
more than one-fifth of the total (21 percent),
as compared with 16 percent for city schools
and 15 percent for parochial schools.
On the questionnaire the students were
asked in the following order: Are you plan
ning to continue your education? Yes [~~1
No □ ; Have you been accepted at a college,
university, or other educational institution?

TABLE V I
Geographic Pattern of Single and M ultiple Acceptances as of M a y 1965
Location and Number o f Acceptances
Cuyahoga County
Area

Rest of Ohio

Total

Outside Ohio
Total

Cleveland

582

632

423

527

1 76

Suburban

1,6 4 8

1 29

1,792

3 ,0 0 5

668

3 ,7 6 3

1,151

Parochial
Total

Total
Total

2 90 100

223
1,541 5 ,8 0 4

1
1,181

2
1 76

1 ,0 8 7

Total

1,382

205

7 ,0 9 6

920

1 15

1,0 4 7

504

602

269

341

1,6 9 3

257

1,9 9 0

3 ,1 5 0

292

3,471

3 ,9 3 2

843

117

4 ,8 9 2

1 ,5 9 6

385

124

2 ,1 0 5

8 ,6 7 8

1 ,5 2 0

270

10,4 68

Source: Federal Reserve Bank o f Cleveland

Digitized for16
FRASER

Federal Reserve Bank of Cleveland
Cl eveland, Ohio

ERRATA
EC ON OM IC R E V IE W , November 1965
Page 17

TABLE VII
Schools Which the Students Who Had Been Accepted Planned to Attend
College

Area

Baldwin-

Case

John

Notre

W allace

Institute of

Carroll

Dame

College

Technology

University

College

St John

Ursuline

College of College for
Cleveland

Women

Western

Cleveland

Cuyahoga

Reserve

State

Community

University

Universtiy

College

Other

Cleveland

150

148

Suburban

2 82

442

330

115

158

168

188

124

176

121

590

758

611

(a)

130

102

194

124

805

1,3 0 0

840

(b)

135

104

199

133

8 30

1,364

875

Parochial
Total

College
Bowling
Kent
Ohio
Area

P riv a te *

Ohio

Central

Green

State

Miami

Ohio

State

Outside

University

College

University

Ohio

Cleveland

150

Suburban

629

371

204

473

706

3 92

1,143

Parochial

165

—

Total

863

521

242

604

867

(a)

938

6 00

257

658

935

(b)

979

617

263

673

965

227

477

1 ,5 2 0

511

1,663

516

1,709

(a) Total for all those who planned to continue their education (including those who had been accepted).
(b) Gross total of preferences expressed by all respondents.

*T he
th re e m unicip a l U n i v e r s i t i e s ( A k r o n , C i n c i n n a t i , and T o le d o )
“ Oh io P r i v a t e ” to d is tin g u i s h them from th e State U n i v e r s i t y System.
Source: Federal Reserve Bank of Cleveland

have

been

in clud ed

under

NOVEMBER 1965

Yes |~1 No Q Which one(s) specifically?---------------- ; Which one are you planning to
attend?_______________ It was expected that,
if a student said he was not planning to con
tinue his education, or if he said he was
planning to continue his education but had
not yet been accepted, he would not in the
following question name any institution. In
stead, many students must have construed,
"W hich one are you planning to attend?” as
the equivalent of "W hich one do you want
or hope to attend?" Specific schools were
named repeatedly by those who answered
that they had not yet been accepted, and
even by those who said they did not plan to
continue their education.

Table VII attempts to adjust for these pat
terns of thought. It shows in detail—for
Cleveland public, suburban public, and pa
rochial schools—the college, university, or
other educational institution that each student
who had received one or more acceptances
said he planned to attend. It also shows in
aggregates the schools (a) as indicated by all
those who said they planned to continue their
education regardless of whether or not they
had been accepted at the time, and (b) as
answered by all respondents.
The chief item of note perhaps is the sharp
rise in the totals for Cleveland State University
and Cuyahoga Community College in items
(a) and (b). The push of those who were not

TABLE V II
Schools Which the Students Who Had Been Accepted Planned to Attend
College

Area

Baldwin-

Case

John

Notre

W allace

Institute of

Carroll

Dame

College

Technology

University

College

Cleveland

Suburban

Parochial

1 15

124

1 76

(a)

1 30

102

194

(b)

1 35

104

1 99

Total

St John

Ursuline

College of College for
Cleveland

Women

Western

Cleveland

Cuyahoga

Reserve

State

Community

University

Universtiy

College

Other

1 50

148

282

442

330

158

168

1 88

121

590

758

611

124

805

1 ,3 0 0

840

133

830

1,3 6 4

875

College
Bowling
Kent
Area

Ohio

Central

Green

Ohio

State

Miami

Ohio

State

University

State

Outside

Private

University

of Toledo

College

University

Ohio

Cleveland

Suburban

615

371

204

473

Parochial

1 65

—

227

Total

848

521

242

604

867

477

1 ,5 2 0

1 50

706

3 92

1,1 4 3

(a)

921

600

257

658

935

511

1,6 6 3

(b)

962

617

263

673

965

516

1,7 0 9

(a) Total for all those who planned to continue their education (including those who had been accepted).
(b) Gross total o f preferences expressed by all respondents.
Source: Federal Reserve Bank of Cleveland

ECONOMIC REVIEW

yet sure that they actually would be going to
college at the time of the questionnaire ap
peared to be toward local, public institutions.

FINANCING EDUCATION
Basically there are three ways of financing
education beyond high school: from the family
exchequer, by scholarships and loans, and
by the earnings of students themselves. Those
students who answered the question on family
income appeared to regard themselves as pre
dominately middle income, that is $5,000$ 1 0 ,0 0 0 (see Tables IV and V). In line with
this, more than a third of those who planned
to continue their education said that they
expected "to be employed while studying."
Depending on whether the percentages are
computed on those who said they planned to
continue or those who said they had been
accepted, those who expected to be employed
ranged from a high of 4 8 percent (43 percent
of those who had been accepted) in the city
schools to a low of 3 4 percent (30 percent of
those accepted) in the suburbs.
These figures should also be interpreted
with some caution for they encompass a wide
variety of student employment situations. Al
though the question, "Do you expect to be
employed while studying?" was intended to
refer to the academic year, some students
construed the question as, "Do you expect to
be employed during your years of college?"
and replied in the affirmative, specifying sum
mer jobs. Others gave in some detail the
arrangements of scholarship c u m college job
or loan cu m college job, which had been
worked out in advance between the college
and the prospective student. Students in both
the foregoing situations may reasonably be
regarded as full-time students.
Digitized for 18
FRASER

In addition, a large number of those plan
ning to attend local colleges (Cuyahoga Com
munity College and lohn Carroll University
in particular) indicated that they expected to
go to college part-time, usually in the evening,
and to hold a full-time or part-time job as
well. Several indicated that their employers
would aid in the financing of their studies.
On scholarships and loans, it can be gen
eralized that scholarships were both more
numerous and for larger amounts than loans.
Slightly over 10 percent of those planning to
continue their education, or 14 percent of
those accepted at the time of the survey,
had received scholarships. The vast majority
received a single scholarship; some 10 per
cent received two; and four students reported
three scholarships. About one-third were for
less than $ 5 0 0 a year, slightly more than
one-fourth for between $ 5 0 0 and $1,000, and
7 percent for over $ 2 ,0 0 0 a year. The balance
fell in the range of $ l,0 0 0 -$ 2 ,0 0 0 .
Almost three times as many students re
ceived scholarships as loans. Only four stu
dents reported receiving more than one loan.
Almost half the loans were for $ 5 0 0 or less;
another third were for amounts between $ 5 0 0
and $1,000. There were only 60 loans as
compared with more than 200 scholarships
in the $ 1 ,0 0 0 -$ 2 ,0 0 0 range, and five loans
in contrast to 81 scholarships for amounts in
excess of $2,000.
While the colleges themselves were the
chief source of scholarships, providing more
than half the total number, government was
the chief source of loans, with the colleges as
the second most important source. In the case
of scholarships, private organizations ranked
second, and government third. Apparently, the

NOVEMBER 1965

use of banks and other financial institutions
as a source of loans, despite recent publicity,
has not become a usual practice, for only
11 were reported.
When the pattern of loans and scholarships
is regarded from the standpoint of the schools
from which the students were graduated,
nearly one student in five graduating from the
city schools received a scholarship, slightly
more than one in ten from the suburban
schools, and approximately 13 percent of
those from the parochial schools. The distri
bution of loans among schools was similar;
approximately 7 percent of those from the
city schools, 4 percent from the suburban,
and 5 percent from the parochial schools had
received loans. The share of the larger
scholarships—those in excess of $ 1 ,0 0 0 a
year—was practically constant at 25 percent
of the total number for all three school groups.

THOSE WHO DO NOT PLAN TO
CONTINUE THEIR EDUCATION
About 25 percent of those completing the
questionnaire said they had no plans for con
tinuing education. The range was from 35
percent in the city to 21 percent in the suburbs.
The parochial school students, who are both
urban and suburban, were in the middle at
approximately 2 6 percent.
If any attempt is made to see why some
students had no education plans, only two
clues are available. (The questionnaire pro
vided no information on the scholastic attain
ments or aptitudes of the respondents beyond
the simple fact that all were high school
seniors.) One clue is parental income. Of
those who plan to continue their education 6
percent reported family incomes of under

$5,000, 42 percent incomes of $5,000-$ 10,000, 23 percent incomes of over $10,000,
and 29 percent income unknown or not
available. In comparison, the pattern for those
who reported that they did not plan to con
tinue their education is interesting; 7 percent
reported incomes under $5,000, 42 percent
incomes between $5,000-$10,000, 9 percent
incomes in excess of $10,000, and 42 percent
incomes unknown or not available.
A second clue as to students' plans for
continuing education may be found in the
record of college attendance of parents. The
replies on college attendance by father or
mother appear both to be consistent with
known patterns and to have a low "no answer"
factor (351 in father's and 4 2 4 in mother's).
It is also in this area that relatively sharp
contrasts appear. While 31 percent of the
fathers and 21 percent of the mothers of
those who expected to continue their educa
tion attended college, only 10 percent of the
fathers and 5 percent of the mothers of those
who did not plan to continue their education
themselves attended college.

PRIVATE PREPARATORY SCHOOLS
IN CUYAHOGA COUNTY
Although the students in the several private
preparatory schools in the county were not
included in the original survey, in September
the headmasters or principals were asked to
provide information concerning the college
plans of their lune graduating classes. The
responses confirmed the traditional pattern
associated with such schools. Of the 284
graduates for whom reports were made, 98
percent were continuing their education with
the great majority, over 200, going to schools
19

ECONOMIC REVIEW

outside Ohio.4 Less than 10 percent were
going to schools in Ohio exclusive of those
in Cuyahoga County, and with the exception
of one school which had a substantial number
of graduates going to college within the
county, only three students were continuing
their education at local colleges.
4 One school indicated that final reports were not in on
all students and gave first and second choices on a few
students so that the total of "where-going" figures was
slightly higher than the total number of graduates. For
this reason, the exact number of going out-of-state and to
schools in Ohio but outside Cleveland cannot be stated
with absolute precision.

CONCLUDING COMMENTS

This article of necessity has been descriptive
rather than definitive. It has been intended
only to share some preliminary insights into
a subject that is of primary interest to the
Cleveland area. The article tells something of
the plans for further education of the bulk of
high school seniors in the central county of
a large metropolitan area. As such, it is a
reasonable beginning of a broader study that
will be continued in time and in more detail.

NOVEMBER 1965

ANOTHER LOOK AT
MUNICIPAL PORTFOLIOS
One of the more significant changes in the
asset management policy of commercial banks
in recent years has been a shift in the com
position of investment portfolios. Holdings of
U. S. Government securities, which have
historically accounted for the bulk of bank
investments, have constituted a steadily de
clining proportion of total investments in recent
years, while holdings of other securities (prin
cipally state and local government obligations
— "municipals") have risen sharply. As hold
ings of municipals gained increasing promi
nence as a component of total bank credit,
attempts to assess the nature and composition
of such holdings, for example, maturity and
quality, were frustrated by a lack of detailed
data.
In late 1963, the Research Department of
this bank initiated a survey of holdings of
municipals by Fourth District weekly report
ing member banks. The initial survey obtained
detailed information on the composition of
municipal portfolios as of the end of each
year from 1956 through 1962 and at midyear
1963. Analysis of the information provided by
24 of the 26 weekly reporting banks docu
mented the growing importance of municipal

securities in commercial bank investment
portfolios and evaluated differences in port
folio behavior of banks in different communi
ties and among various classes of banks.1
Similar surveys have been conducted by this
bank on a regular semiannual basis (as of
December 31 and June 30) since midyear
1963. All 26 weekly reporting banks in the
Fourth District are now included as regular
respondents.2
This article reviews changes in the volume
and composition of municipal portfolios of the
2 6 banks since midyear 1963, including an
analysis of the maturity distribution, quality
characteristics, and rates of return. While
information obtained from this sample of large
Fourth District banks cannot be construed as
entirely representative of the situation at all
commercial banks, it does seem realistic to
assume that the findings are a reasonable
approximation of conditions prevailing at
other banks of comparable size.
1 See "Survey of Municipal Portfolios, Fourth District
Weekly Reporting Banks,'' M o n th ly Business Review ,
Federal Reserve Bank of Cleveland, December 1963.
2 The banks range in size from $ 8 6 million to $ 2 .7 bil
lion in total deposits.

ECONOMIC REVIEW
TABLE I
Holdings of M unicipal Securities
26 Fourth District W ee kly Reporting Banks
Amount Outstanding
(in thousands o f dollars)
Maturity

6 /3 0 /6 3

Under 1 y e a r ..................................................................$

2 9 7 ,9 5 8

1 2 /3 1 /6 3
$

6 /3 0 /6 4

3 7 7 ,0 9 2

2 9 0 ,8 2 5

1 2 /3 1 /6 4
$

3 2 6 ,5 7 0

6 /3 0 /6 5
$

2 4 4 ,2 9 2

1-5 y e a r s ..................................................................

6 5 5 ,3 8 7

6 4 6 ,3 9 0

6 7 1 ,0 0 7

6 5 5 ,8 6 5

6 7 7 ,6 4 0

5 -1 0 y e a r s ..................................................................

4 6 4 ,8 7 8

5 0 3 ,2 7 5

5 3 2 ,5 6 3

564,451

5 7 2 ,2 7 9

O ver 10 y e a r s .........................................................

5 0 4 ,8 0 6

5 3 9 ,5 1 5

6 2 1 ,8 4 5

7 1 3 ,0 1 5

8 1 9 ,8 9 6

M ,9 2 3 ,0 2 9

$ 2 ,0 6 6 ,2 7 2

$ 2 ,1 1 6 ,2 4 0

$ 2,259,901

$ 2 ,3 1 4 ,1 0 7

Percentage Distribution
Under 1 year ..................................................................

1 5 .5 %

1 8 .2 %

1 3 .7 %

1 4 .5 %

1 0 .6 %

1 -5 y e a r s .......................................................................

34.1

31.3

3 1 .7

2 9.0

2 9.3

5 -1 0 y e a r s .......................................................................

24.2

2 4.4

25.2

2 5.0

2 4.7

Over 10 y e a r s .............................................................

26.2

26.1

2 9.2

3 1.5

3 5.4

Total

......................................................................

1 0 0 .0 %

^Includes holdings of Public Housing Authority bonds.
Source: Federal Reserve Bank of Cleveland

VOLUME AND MATURITY
As indicated in Table I, the volume of
municipals held by reporting banks increased
from $ 1.9 billion at midyear 1963 to $2.3
billion at midyear 1965, or by 20 percent.
The increase, while impressive, is only mod
erate when compared with the gain of 143
percent in such holdings in the 2}/£-year
period from yearend 1960 to midyear 1963
(not shown in table). It should be remembered,
however, that the earlier period was marked
by the large-scale entry of banks into the
municipal market, as banks attempted to im
prove rates of return on earning assets; this
situation reflected at least in part sharply
increased expenses associated with a growing
proportion of time deposits in the total deposit
mix.
The appeal to banks of investment in muni
cipals was also probably heightened in the

earlier period by relatively moderate demands
for loans as an alternative outlet for funds, at
least as compared with the recent period. For
example, total earning assets of Fourth District
weekly reporting banks increased by 21 per
cent from yearend 1960 to midyear 1963.
(See Table II). During that period, adjusted
loan volume rose by only 14 percent, while
total investments increased by nearly onethird. All of the gain in investments was
centered in holdings of municipal securities,
as holdings of U. S. Government issues were
reduced slightly. Putting it another way, loan
volume fell from 58 percent of earning assets
at yearend 1960 to about 55 percent at mid
year 1963. In contrast, investments increased
steadily as a proportion of earning assets,
with holdings of municipal securities rising
from 9 percent to 18 percent of the total.
Moreover, as a proportion of total investments.

NOVEMBER 1965

municipal holdings increased to nearly twofifths of the total at midyear 1963 from about
one-fifth at yearend 1960.
In the two-year period from midyear 1963
to midyear 1965, the pattern at reporting
banks was unlike that in the earlier period,
with loan volume assuming an increasingly
important role in bank portfolios. In the 196365 period, earning assets increased by only
one-seventh, but loan volume rose by nearly
one-third. Total investments actually declined,
as the banks accommodated a part of rising
loan volume and further additions to holdings
of municipal securities by reducing holdings
of U. S. Treasury issues about one-fifth. During
the recent period, therefore, the composition
of earning assets at reporting banks was
noticeably changed. At midyear 1965, loans
constituted 63 percent of total earning assets,
a substantially higher proportion than had
prevailed two years previous. In contrast,
municipal holdings rose only moderately as
a proportion of earning assets, and the share
represented by holdings of U. S. Government
issues fell sharply. Nevertheless, despite the

more moderate rate of accumulation of muni
cipal securities in the 1963-65 period com
pared with the earlier period, holdings of mu
nicipal securities amounted to slightly more
than one-half of total investments of reporting
banks at midyear 1965.
In addition to continued accumulation of
municipal securities, reporting banks shuffled
the composition of such holdings substantially
in the 1963-65 period, as indicated by the
maturity distribution in Table I. Holdings of
short- and intermediate-term issues (due in
less than 5 years) showed a steady decline as
a proportion of total volume, while holdings
of longer-term issues (due in over 5 years)
represented a steadily growing proportion.
At midyear 1963, holdings were divided
about equally between issues maturing in
less than 5 years and those maturing in over
5 years. By midyear 1965, in contrast, over5-year maturities accounted for three-fifths of
total volume, with virtually all of the added
concentration in longer-term maturities ac
counted for by issues maturing in more than
ten years. The marked preference for issues

TABLE II
Changing Composition of Earning Assets
26 Fourth District W eekly Reporting Banks
(in millions o f dollars)
Yearend Percentage M id ye a r Percentage % Change
Items

1960

Total Earning A s s e ts .......................................... $ 8 ,8 0 5
Loans ( a d ju s te d ) * .......................................... 5 ,1 0 9
Total In v e s tm e n ts * * ......................................

3 ,6 9 6

Distribution
1 0 0 .0 %
5 8 .0
4 2 .0

1 96 3
$ 1 0 ,6 8 5

Distribution

M id year Percentage % Change

1 9 6 0 -6 3

1965
$ 1 2 ,2 2 0

Distribution 1 9 6 3 -6 5

1 0 0 .0 %

+21.3%

1 0 0 .0 %

+ 1 4 .4 %

5 ,8 3 8

5 4.6

14.3

7 ,7 3 0

6 3.3

+ 3 2 .4

31.1

4 ,4 9 0

3 6 .7

— 7.4

4 ,8 4 7

4 5 .4

U.S. G o ve rn m e n ts ...................................... 2 ,7 7 6

3 1 .5

2 ,6 9 2

2 5.2

—

3.0 2 ,1 3 2

17.4

— 2 0.8

M u n ic ip a ls .................................................... 7 9 2

9 .0

1 ,9 2 3

18.0

+ 1 4 2 . 8 2 ,3 1 4

18.9

+ 2 0 .3

* Adjusted to exclude interbank loans.
* * Includes corporate and Federal Agency securities, Federal Reserve bank stock and some miscellaneous investments, not shown separately.
Source: Federal Reserve Bank of Cleveland

ECONOMIC REVIEW
TABLE III
Holdings of U.S. G overnm ent and M unicipal Securities
26 Fourth District W e e kly Reporting Banks
(in millions o f dollars)
Percentage Distribution
by Maturity

Date

Total

Under

1-5

Over

Holdings

1 yr.

yrs.

5 yrs.

......................................

..........................................

$ 4 ,6 1 5

2 1 .4 %

4 6 .5 %

3 2 .1 %

1 2 / 3 1 / 6 3 ......................................

..........................................

4 ,6 4 0

2 4.8

4 4 .4

30.8

6 /3 0 /6 4

6 /3 0 /6 3

......................................

..........................................

4 ,3 9 4

2 2.6

4 2 .4

3 5.0

1 2 / 3 1 / 6 4 ......................................

..........................................

4 ,5 9 4

2 4.8

3 8.0

3 7.3

......................................

..........................................

4 ,4 4 6

18.9

35.1

4 6 .0

6 /3 0 /6 5

Percentage Distribution
by Maturity

Date

Holdings of

Under

1-5

Over

U. S. Governments

1 yr.

yrs.

5 yrs.

2 5 .7 %

5 5 .3 %

1 9 .0 %

30.1

5 4.9

15.0
16.8

6 /3 0 /6 3

......................................

..........................................

$ 2 ,6 9 2

1 2 /3 1 /6 3

......................................

..........................................

2 ,5 7 4

6 /3 0 /6 4

......................................

3 0.9

52.3

1 2 /3 1 /6 4

......................................

..........................................

2 ,3 3 4

3 4 .7

4 6 .7

18.6

6 /3 0 /6 5

......................................

..........................................

2 ,1 3 2

2 8 .0

4 1 .4

3 0 .6

Percentage Distribution
by Maturity

Date

Holdings of

Under

1-5

Over

Municipals

1 yr.

yrs.

5 yrs.

6 /3 0 /6 3

...........................................

......................................

$ 1 ,9 2 3

1 5 .5 %

3 4 .1 %

5 0 .4 %

1 2 /3 1 /6 3

...........................................

......................................

2 ,0 0 6

18.2

31.3

5 0.5

6 /3 0 /6 4

..........................................

......................................

2 ,1 1 6

1 3.7

3 1 .7

5 4.4

1 2 /3 1 /6 4

...........................................

......................................

2 ,2 6 0

14.5

29.0

5 6.5

6 /3 0 /6 5

...........................................

......................................

2 ,3 1 4

10.6

29.3

60.1

Source: Federal Reserve Bank of Cleveland

of longer maturity undoubtedly reflected the
effort to increase, or at least maintain, the
rate of return on municipal portfolios. This
effort was complemented, as will be seen, by
appreciable shifts in the quality composition
of portfolios. Both factors — lengthening and
quality adjustments—worked toward reducing the liquidity of municipal holdings.
With reference to liquidity, it should be
added that the 26 banks reported a decline

ments and municipals due in less than one
year) in the 1963-65 period, with all of the
decline occurring between the yearend 1964
and midyear 1965 surveys. This development
is evident from Table III, which shows the
changing relationship of municipals and U.S.
Government securities in bank portfolios. It is
apparent that reporting banks reduced holdings of U.S. Governments somewhat faster
than they accumulated municipals, with total

in total short-term investments (U.S. Govern-

investments consequently lower at midyear

NOVEMBER 1965
TABLE IV
Holdings of M unicipal Securities
26 Fourth District W eekly Reporting Banks
Percentage Distribution by Q uality Rating
Moody Ratings
Date

Aaa

Baa

Below
Baa*

Total
1 0 0 .0 %

6 /3 0 /6 3 .

. .

2 1 .4 %

2 5 .1 %

3 8 .9 %

7 .1 %

7 .5 %

1 2 /3 1 /6 3 .

. .

19.3

2 8 .7

34.8

8.0

9.2

100 .0

6 /3 0 /6 4 .

. .

2 0.0

25.2

36.2

8.5

10.1

100 .0

16.2

2 7 .7

3 7.0

10.2

8.9

100 .0

15.8

3 0.6

34.4

8.8

10.4

100 .0

1 2 /3 1 /6 4 . .
6 /3 0 /6 5 .

* Unrated securities are included in the “Below B aa” quality category. This grouping is not intended as an indication of the qua
such issues.
Source: Federal Reserve Bank of Cleveland

as a proportion of total municipal holdings),
the liquidity of investment portfolios was re
duced (see top panel in Table III). The total
volume of Governments and municipals due
in less than one year at midyear 1965 was 15
percent below the level at yearend 1963, and
constituted less than one-fifth of total holdings.
Holdings in the 1-5 year maturity range de
clined by 27 percent and constituted a stead

1965 than two years previous. The maturity
distribution of holdings of Treasury issues also
changed. The proportion of the total due in
under one year rose steadily from midyear
1963 until yearend 1964, and then retreated
from nearly 35 percent to 28 percent. Hold
ings in the 1-5 year maturity range declined
steadily as a percent of the total (from 55 per
cent to 41 percent), while the proportion of
the total maturing in over 5 years fluctuated
in a relatively narrow range until yearend
1964, and then rose sharply (to nearly 31 per
cent). As a result, the proportion of holdings
of U.S. Governments maturing in more than
one year was somewhat less at midyear 1965
than at midyear 1963, but a considerably
larger share of the total was concentrated in

ily declining share of the total. In contrast,
the volume of holdings maturing in over 5
years rose by 38 percent and accounted for
an increasing share of the total.
Bank management efforts to bolster bank
revenue, in the fa ce of steadily rising ex
penses, have involved a growing emphasis on
acquisition of higher yielding assets. This

over-5-year maturities.
Although holdings of short-term U.S. Gov
ernment issues actually represented a some
what larger share of total Government hold

program has been implemented, in part, by
reducing the proportion of assets allocated to
short-term investments, which, despite their
traditional importance as secondary reserves,

ings at midyear 1965 than at midyear 1963,
the dollar volume of issues in the under-oneyear maturity category was less than two
years earlier. Since holdings of short-term
municipals also declined (both absolutely and

require some sacrifice in yield. It has been
suggested by some observers that this invest
ment rationale is justified, given the smaller
degree of deposit volatility associated with a
growing porportion of savings deposits and

ECONOMIC REVIEW

the development of new techniques for bank
liquidity adjustment, for example, more in
tense use of the Federal funds market and
issuance of negotiable certificates of deposit
or unsecured promissory n o tes.3 W ithout
arguing the merits of the policy, it seems
reasonably accurate to describe the programs
that have been adopted by Fourth District
reporting banks as consistent with such a
policy.
The lengthening of municipal maturities
has been accompanied by a reduction in
overall quality of municipal holdings, as shown
in Table IV. The volume of issues carrying a
rating of less than A (including unrated issues)
rose steadily, from 14.6 percent of the total
at midyear 1963 to 19.2 percent at midyear
1965. A growing proportion of such issues
clearly reduces the marketability of banks'
municipal portfolios. The marketability of
lower quality issues is limited by the narrower
range of investors to whom such issues appeal,
partly as a result of quality restrictions that
govern the investment policy of many in
stitutional investors. At the same time, while
unrated issues may be well supported by a
sound financial statement of the obligor, mar
ketability is similarly limited by the relatively
small size of such offerings, the consequent
small supply of such issues in the market,
and a name that is often not familiar to a wide
range of investors.
About four-fifths of total volume at midyear
1965 was centered in holdings of issues carry
ing a rating of A or above, with the proportion
represented by such higher quality issues
3 See the discussion in the accompanying article in this
issue.

TABLE V
Yields on M unicipal Securities Held by
26 Fourth District W eekly Reporting Banks and
Open M arket Yields Semiannually, 1 9 6 3 -1 9 6 5
Open M arket Yields

Reporting Banks**

M oody Ratings*

W eighted

A aa

Aa & A

Baa

A verage Yield

First H alf

2 .9 9 %

3 .2 3 %

3 .5 7 %

2 .6 4 %

Second H alf

3 .13

3 .32

3 .6 0

2 .68

Period
1 96 3

1 96 4
First H alf

3 .1 0

3 .3 0

3 .5 5

2 .7 3

Second Half

3 .0 8

3 .2 7

3 .54

2 .83

3 .0 6

3 .2 5

3 .4 9

2 .9 0

1965
First H alf

* Open market yields are semiannual averages o f monthly
figures. Only general obligation bonds are included, and the
average term is 2 0 years.
* * For reporting Fourth District banks, the yield is the weighted
average reported as of the end o f each period.
Sources o f data: Moody's Investors Service and
Federal Reserve Bank of Cleveland

having receded steadily since midyear 1963.
Higher quality holdings at midyear 1965
were more heavily concentrated in issues
rated Aa than at midyear 1963; the propor
tion of the total carrying the highest rating
(Aaa) declined fairly steadily during the
period, and that centered in A rated issues
declined irregularly.

YIELD
During most of the period from midyear
1963 to midyear 1965, the behavior of in
terest rates on state and local government
securities was one of general stability with a
slight downward bias.4 As indicated in Table
V, average market yields on outstanding state
4 Recent behavior of municipal yields is outside the scope
of this discussion because of the time period included in
the survey data.

NOVEMBER 1965

and local government securities (issues rated
Baa and above) were somewhat lower in each
successive six-month period after the second
half of 1963. The trend of yields during the
period was clearly influenced, to some un
known extent, by growing commercial bank
demand for municipal securities, particularly
in view of the fact that the supply of new
municipal issues continued to expand steadily.
Despite the slight downdrift in market yields,
the average weighted yield on municipal
holdings of Fourth District reporting banks
rose continuously from midyear 1963. Thus,
while market yields were, on average, eight
basis points lower during the first half of 1965
than during the second half of 1963, the
average weighted yield on portfolios of District
banks showed an increase of 22 basis points.
The banks were obviously able to achieve

increased yields by lengthening maturities
and lowering the quality of holdings.

CONCLUDING COMMENTS
The foregoing analysis documents a de
cided change in the attitude of management
toward the function that investment portfolios
of Fourth District weekly reporting banks
should perform. A growing representation of
municipal securities, and the shifting com
position (longer maturities and lower quality)
of holdings, reflect the adoption of asset
management policies designed to increase
bank revenue in the face of steadily rising
expenses. When coupled with a steadily rising
proportion of loans and a declining propor
tion of U. S. Government securities in the
earning asset mix, an increase in the risk
asset ratio and consequent decline in bank
liquidity is an obvious result.

Additional copies of the

E C O N O M IC

REVIEW

m ay be obtained from the Research Departm ent,
Federal Reserve Bank of C leveland, Cleveland,
Ohio 4 4 1 0 1 . Permission is granted to reproduce
any m aterial in this publication.

Fourth Federal Reserve District