Full text of Economic Review (Federal Reserve Bank of Cleveland) : September 1966

View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

SEPTEMBER 1966

THIS

I S S UE

Foreign Capital
Borrowing in the
United States,

1964-65 ............................. 3

Distribution of
Bank Deposits in the
Fourth District,

1954-65

FEDERAL

RESERVE

BANK

.........................16

CLEVELAND

Additional copies of the E C O N O M IC REVIEW may
be obtained from the Research Department, Federal
Reserve Bank of Cleveland, P.O. Box 6 3 8 7 , Cleveland,
O hio 4 4 1 0 1 . Permission is granted to reproduce any
material in this publication.

SEPTEMBER 1966

FOREIGN CAPITAL BORROWING
IN THE UNITED STATES, 1964-65

Two previous articles in the Review dis
cussed the general characteristics and terms
of U. S. indirect foreign investment during
the period 1958-63.1 The most striking d e
velopment in that period was the increased
dollar volume of outflows of U. S. funds, par
ticularly in both 1962 and 1963 when foreign
borrowings in the U. S. exceeded $1 billion.
It was concluded in the earlier articles that
there was no single foreign group (for ex
ample, developed nations or private borrow
ers), or geographical area, or major event
which explained the increased capital out
flow. While C an ada dominated new foreign
capital borrowing in the U. S. during 195863, accounting for over 50 percent of the
total, industrially developed nations accounted
for an increasingly greater percent of the
total. It was also suggested in the earlier
1 See "Foreign Capital Borrowing in the U. S .," Eco
n o m ic R eview , Federal Reserve Bank of Cleveland,
Cleveland, Ohio, January 1964, and ''Investment Char
acteristics of New Foreign Capital Borrowed in the U. S .,"
E conom ic R eview , Federal Reserve Bank of Cleveland,
Cleveland, Ohio, June 1964.
U. S. indirect foreign investment refers to the acqui
sition by U. S. investors of financial assets from foreigners,
in contrast to direct investment which refers to the
acquisition of or control over real assets.

articles that the bulk of new foreign capital
was raised in the U. S. for three reasons:
acceptability, accessibility, and availability
of funds in the U. S. capital market.
The purpose of this article is to update the
earlier articles by presenting the findings of a
study of U. S. indirect foreign investment
during 1964 and 1965. The article is divided
into two sections; the first presents an over
view using annual data, while the second
exam ines patterns within each year. Data for
the present study are similar to those for 195863; a description of the data is found on p ag e 4.
FOREIGN BORROW ING IN
1964 AND 1965: AN OVERVIEW
Foreign borrowing in the U. S. in 1964
and 1965 was carried out by a number of
countries at different stages of economic de
velopment and from different areas of the
world. Both public and private institutions
borrowed in the U. S., offering new issues
with various (but overlapping) coupon rates
and maturity lengths. No definite or con
sistent relationships can be found between
or among the variables associated with for
eign borrowing: geographic area, stage of
3

DESCRIPTION OF STATISTICS
The data used in this article were obtained
from announcements of new issues of foreign
securities and bank loans as published in
financial new spapers and as available in in
ternal memoranda of the Federal Reserve
System. Information about individual security
issues in 1964 was checked against a U. S.
Department of Commerce publication "New
Foreign Securities Offered in the U. S.,
1952-64.”
Tabulations were m ade for individual new
issues of foreign bonds and stocks sold in the
U. S. in amounts of $ 5 0 0 ,0 0 0 or moire, as
well as for term loans by U. S. banks to
foreign borrowers. The tabulations did not
include secondary offerings of foreign capital
issues, offerings of rights and warrants to
existing stockholders, financing by foreign
subsidiaries of U. S. companies, new issues
of international organizations such as the
World Bank, and borrowings for which terms
(rates and maturities) were not available. As
used in the article, total borrowing refers to
i s s u e s of bonds and stocks plus notes and
bank loans.
B ecau se of the nature of data sources, as
well as the confidential nature of many bor
rowing negotiations, the dollar amounts dis
cussed in this article are not complete, for
exam ple, in com parison with the U. S. bal

ance of payments statistics. (This is particu
larly true for bank loans m ade to foreigners.)
Nevertheless, it is assum ed that a reasonable
representation of foreign borrowing was ob
tained and that chan ges in dollar volumes
adequately indicate patterns and trends. Su b
totals—specifically, bank loans to foreigners
—are less dependable, but were included in
the analysis in order to give some idea of
the shifts in dollar volumes coinciding with
chan ges in the Interest Equalization Tax.
W henever possible, all types of foreign bor
rowing were cumulated so a s to increase the
size of the sam ple in an individual category
or group, for exam ple, stages of economic
development, business of borrower, etc.
In view of the method of obtaining these
data, com parisons with foreign borrowings
published by other sources should be m ade
with care. To illustrate, a comparison of an
nual totals used in this article with U. S. b al
ance of payments statistics on "N ew Issues
of Foreign Secu rities" (published quarterly
by the Office of Business Economics, U. S.
Department of Commerce) shows the dollar
volumes in the article to be substantially
smaller. But this is to be expected in view of
the exclusions mentioned above (types and
dollar amount) plus Com m erce's access to
complete primary data.

development, the nature (governmental or

debt.

private) or business (manufacturing, finan
cial, etc.) of the borrower, or form of borrow
ing. For exam ple, most capital borrowing in
the U. S. by underdeveloped nations was not
arranged by governments rather than private
concerns, as might be expected, nor did
foreign borrowing chiefly take the form of
notes and loans rather than other types of

The dollar volume of foreign borrowing in
the U. S. in 1964 amounted to $ 1 ,055 million,
as com pared with $ 1 ,259 million in 1963
and an annual average of $ 863 million during
1958-63. In 1965, the volume amounted to
nearly $ 1 ,2 5 0 million. Twenty-three foreign
countries utilized the U. S. capital market in
1964 and 1965, although only eight of these

SEPTEMBER 1966

countries borrowed in both years. Of the
eight, two are developed nations, two are
underdeveloped, and four are agriculturally
developed.2 Thus, there was no strong con
centration of borrowers reflecting a partic
ular stage of development. Presumably, other
characteristics were more important factors
in determining the volume of funds raised.
Chart 1 shows total foreign borrowing and
the percent of the total accounted for by
developed, underdeveloped, and agricultur
ally developed nations in 1964 and 1965,
com pared with an average for 1958-63.
Agriculturally developed nations took 7 4 per
cent of the total funds in 1964 and 79 percent
in 1965, up from an average of 68 percent
in the 1958-63 period. C anada, an agricul
turally developed country, predominated, a c
counting alone for 59 percent of the total
funds in 1964 and 53 percent in 1965. Ex
cluding C anadian borrowing, agriculturally
developed nations accounted for 3 7 percent
of residual borrowings in 1964, and 55 per
cent in 1965; obviously, the agriculturally
developed nations' dem and for U. S. capital
is high regardless of geographical proximity
to the U. S. This was generally true in 195863 as well.
2 The subclassifications by stage of economic develop
ment are determined by the Secretariat of the U. N.,
with the arbitrary addition of a separate grouping of
countries—agriculturally developed—whose well-established economies are based on agriculture or natural
resources rather than industry. The lines separating
stages of economic development are very thin.
The two developed nations borrowing in both 1964
and 1965 were Japan and the United Kingdom; the two
underdeveloped nations were Mexico and Venezuela;
and the four agriculturally developed nations were
Australia, Canada, Finland, and Norway.

During 1958-63, industrially developed
and underdeveloped nations had averaged
18 percent and 14 percent, respectively, of
foreign borrowing in the U. S. In 1964, the
underdeveloped nations' share in creased to
20 percent, while industrially developed
nations borrowed only 6 percent of the total.
In 1965, the distribution between the under
developed and industrially developed nations
more closely resem bled the 1958-63 pattern.
Excluding C an ada from the total, under
developed nations accounted for 50 percent
of the remaining amount in 1964 but only
25 percent in 1965. This latter proportion was
a slightly smaller share for underdeveloped
countries than in the 1958-63 period. In
contrast, in 1965 industrially developed n a
tions almost tripled their share of the total,
from 13 percent in 1964 to 33 percent. The
latter figure was still below the average for
the earlier period, as seen in the chart.
There are many ways to classify borrowers
within countries. O ne distinction is the nature
of the borrower: governmental or private.
For this analysis, government borrowers are
divided further into national and local govern
ments and government corporations, primar
ily because in many cases public organiza
tions can obtain funds at lower interest rates.
Private borrowers are simply nongovernmen
tal organizations, including both financial and
nonfinancial concerns.
The bottom panel of Chart 1, which shows
the distribution of total borrowing by the
nature of the borrower, is interesting for three
reasons. First, private borrowing in 1964-65
accounted for a larger share than the 195863 average. Second, local governments sharp
ly increased their share of total borrowings
5

ECONOMIC REVIEW

F O R E IG N C A P IT A L B O R R O W IN G in the U .S .
by Stage of Economic Development
M illio n s of dolla rs

A g r ic u lt u r a lly
D e v e lo p e d

U n d e r
d e v e lo p e d
Ave ra ge

by Stage of Economic Development
(Excluding Canada)

M illio n s of d o lla rs

55%

> A g r ic u lt u r a lly
▼ D e v e lo p e d

25%

E
1964

4 Ud envdeelor p e d

1965

by Nature of Borrower
M illio n s of d olla rs

G o v e rn m e n t:
^

N a t io n a l

Lo cal

G o v t.
C o rp o ra t io n s

1958-63
Avera ge

S o u rc e o f d a t a :

F e d e r a l R e s e r v e B a n k of C le v e la n d

Digitized for 6FRASER

in 1964 from the av erage proportion in the
1958-63 period. Canadian city and provincial
governments accounted for most of this in
crease; cities in Norway and Italy were re
sponsible for the rest. Finally, government
corporations more than doubled their share
of the total from 1964 to 1965. Again, C an a
dian government corporations accounted for
most of the increase, with the rem ainder
going to those in the Philippines and Japan.
The debt instruments used (see Chart 2)
were predominantly bonds and debentures,
or over half of the total dollar amount in 1964
and three-quarters in 1965. As the chart
shows, there was a surge of borrowing in the
form of notes and loans in 1964 to 39 percent
of the total. Although this form of indebted
ness fell to 23 percent of total borrowing in
1965, the 1965 dollar amount was still larger
than any annual volume in the 1958-63
period.
Coupon rates offered by foreign borrowers
varied not only by type of issue, but also
among each type of issue. In general, coupon
rates rose from 1964 to 1965. The largest
dollar volume of borrowing in 1965 carried
rates in the range of 5 to 6 percent, con
trasting to 1964 when the rates accom pany
ing the largest dollar volume were in the 4
to 5 percent range (see Chart 2).
Similar to the wide variation in coupon
rates, the different types of debt carried a
range of maturity lengths. W hereas coupon
rates usually are determined by the quality
of the debt issue, maturity lengths of new
foreign issues sold in the U. S. varied a c
cording to the type of issue and the nature of
the borrower. For example, credit to govern
mental borrowers generally was extended for

SEPTEMBER 196 6

over 20 years. Debt of transportation indus
tries was somewhat shorter in maturity, and
financial concerns borrowed for even shorter
periods. Almost all of the bond issues were
long-term, maturing in 10 years or more. In
fact, until 1965, the largest proportion of
foreign securities carried maturities of 20 to
25 years (see Chart 2). In 1965, however,
over half of the dollar volume fell into the
15- to 20-year maturity range, representing
an unusual concentration of maturity lengths.
Annual data for 1964 and 1965 do not in
dicate any abrupt shifts in foreign use of the
U. S. capital market. Generalizing, total dollar
volume increased moderately in the latest
year; underdeveloped nations borrowed more
than developed nations in 1964; and govern
ment borrowing increased both absolutely
and relatively to private borrowing. According
to the annual data, 1964 and 1965 were
apparently years of gradual change, insofar
as foreign use of the U. S. capital market was
concerned. An entirely different picture, how
ever—one of sharp fluctuations rather than
gradual ch an ge—is seen when semiannual
data are analyzed.

FOREIGN BORROW ING IN 1964
AND 1965: IN TRA-YEAR PATTERNS

F O R E IG N C A P IT A L B O R R O W IN G in the U .S .
by Type of Debt
Millions of dollars

3%
1,200
1,000

since 1950, with the single exception of 1957.
That is, more dollars have been leaving the
U. S .—in the form of payments for imports
of goods and services and in the form of
capital investment ab road—than have been
received as payment for exports of American
goods and services and in the form of foreign
investment in the U. S. Contributing to the

l%
* ___*_

S to c k s

24%

%F-*~

5%
-I— *
---- 2%

800 -

N o te s & L o a n s

39%

i O th e r B o n d s &
V D e b e n t u re s

30%

18 %

60 0
34%

.SSL

25%

S e r ia l B o n d s

400

8 %.

200

33%

24%

1958-63

1964

A S in k in g F u n d
Bonds

38%

0
1965

A v t ra g *
* C o n v e r t i b l e D e b e n t u r e s (none in 1965)

Frequency Distribution of Borrowing by Interest Rates
Percent

| I I I- | I I I- I I I I-

Millions of dollars

None

Frequency Distribution of Borrowing by Metsrities
Y e a rs

The U. S. balance of payments with the
rest of the world has been in deficit position

..I

5 10 15 20 25 0

5 10 15 20 25

Millions of dollars

1958-63
* None
So urc e of d a t a :

1964

1965

F e d e r a l R e s e r v e B a n k of C l e v e l a n d

ECONOMIC REVIEW

balance of payments deficits, foreign borrow
ing in the U. S. gradually had increased to
$970 million by 1959. While such borrowing
fell in 1961 to $376 million, there was a
sharp reversal in 1962, with an increase to
$ 1 ,2 3 5 million. It was at this time, when
concern about the balance of payments was
high, that attention focused on foreign capital
borrowing in the U. S.
It is widely recognized that since dollar
flows in the major components of the U. S.
balance of payments are determined more or
less simultaneously, entire blame for the pay
ments deficits of the last fifteen years cannot
be placed on any one category. In July 1963,
however, in response to a marked increase
in the outflow of long-term capital in the
form of indirect investment—over $1 billion
alone in the first six months of 1 9 6 3 —selec
tive, or direct, action was taken: C ongress
proposed the Interest Equalization Tax (IET).
The m easure places a tax on U. S. residents
who buy foreign securities. The tax was de
signed to reduce investment yields to the
U. S. investor by about one percent—in other
words, to reduce the profitability of investing
in foreign securities and thus deter such in
vesting. To thwart the possibility of immediate
m ass borrowing by foreigners in order to
escape the costs of the proposal, the tax was
designed to be retroactive. It was enacted
into law in August 1964 as a temporary
measure, with the expiration date scheduled
for December 31, 1965. Several exemptions
were incorporated in the tax; the most im
portant were those covering purchases of all
C anadian issues, export credit transactions,
and purchases of securities of underdeveloped
countries. In addition, securities with m a

turities of less than three years originally
were not covered. The purpose of the tax,
of course, was to discourage the outflow of
U. S. investment capital and to help improve
the U. S. balance of payments. In late 1965,
the IET was extended for an additional two
years with only minor revisions in content
and coverage.
Im pact of the IET Proposal. After the IET
was proposed in July 1963, b u t b efore the
m e a su r e w as e n a c te d in 1964, total foreign
borrowing in the U. S. dropped sharply from
$1,078 million in the first half of 1963 to only
$181 million in the second half of that year
(see Chart 3). S a les of debt issues by C an ada
—the largest foreign borrow er—fell from
$699 million in the first half of the year to
$38 million in the second half. Borrowing by
Japan, the second largest borrower in the
first half of 1963, fell from $139 million to
$51 million.
In addition to an abrupt change in dollar
volume, other borrowing patterns shifted
noticeably in the second half of 1963. In
that period, the proportion of the total dollar
volume borrowed by underdeveloped coun
tries increased from 4 percent to 26 percent
(see data in Chart 3), although the dollar
amount of their borrowing increased by only
$4 million. While the dollar volume of bor
rowing by developed countries declined by
half in July-December 1963, their share of the
total increased to 45 percent from 15 per
cent in the first half. The larger proportions
for developed and underdeveloped countries
reflected a very sharp drop in borrowing by
agriculturally developed nations. The chan g
ing shares are explained in part by the section
of the proposed IET that offered an exemption

SEPTEMBER 196 6

FOREIGN CAPITAL BORR O W ING in the U .S . -

Intra-year Patterns

Millions of dollars
by Stage of Economic Development

■
1st h a lf

2 n d h a lf

1st h a lf

2 n d h a lf

1963

1st h a lf

1964

U n d e r d e v e lo p e d

1965

P e rc e n t D istrib u tio n

A g r ic u lt u r a l ly

81%

29%

81%

Developed

2 n d h a lf

76%

71%

80%

D e v e lo p e d
Developed
U n d e r d e v e lo p e d

Millions of dollars
by Nature of Borrower
1,000

800

600

400
G o v e rn m e n t:

200

mMrnhfl
0

1st h a l f

2 n d ha lf

1st h a lf

2 n d h a lf

1st h a lf

N a t io n a l

Lo cal

G o v t . C o rp o ra tio n s

2 n d h a lf

1965

1964

1963

P e rce n t D istribution
49%

70%
30

S ou rc e of d a t a :

64%

45%

24%

66%

P r iv a t e

G o v e rn m e n t:

N a t io n a l
Lo cal
G o v t . C o rp o ra tio n s

F e d e r a l R e s e r v e Ba nk of C l e v e l a n d

ECONOMIC REVIEW

for underdeveloped nations. An exclusion
for C an ada also was proposed, but uncer
tainty on the part of Canadian borrowers
concerning congressional p assage of this
exemption apparently deterred their use of
the U. S. capital market until the m easure
was well along the legislative route.
In regard to the nature of the debtor,
private borrowers' share of total funds fell
from 70 percent in the first half of 1963 to
49 percent in the second half (see Chart 3).
Whether this shift was due to a preference
for foreign government debt on the part of
U. S. investors in light of the IET, or due to
changes in the source of foreign dem ands
for U. S. funds, cannot be determined from
available data.
Terms of borrowing were influenced sig
nificantly by the IET proposal. The average
coupon rate on new foreign securities sold in
the U. S. rose from 5.19 percent in JanuaryJune 1963 to 5 .8 8 percent in the second half
of the year, an increase much larger than
that occurring in domestic U. S. interest rates.
At the sam e time, average maturity lengths
fell almost 7 years, from 20 years and 5 months
in the lanuary-June period to 13 years and
6 months in the luly-December period. The
sharp jump in rates and sharp drop in maturity
lengths suggest that foreign capital borrowed
in the U. S. in the second half of 1963 was for
planned expenditures that could not be post
poned, regardless of the terms of borrowing.
After Enactment of the IET. The proposal of
the IET thus had a sharp and depressing
effect on the market for new foreign securities.
As stated earlier, there was particular un
certainty on the part of C anadians concern
ing their exclusion from the tax. There was
Digitized forTO
FRASER

also general uncertainty about the structure
of the tax, that is, the amount and imposition.
Nevertheless, as shown in Chart 3, in the first
half of 1964 borrowings doubled over the
preceding six months.3 If there was market
uncertainty, why did borrowings increase
before final p assage of the IET in August
1964? Apparently, the increase was in re
sponse to the p assage of the tax in the U. S.
House of Representatives on December 16,
1963. In the House bill, the final tax structure
and most exemptions were established. (Al
though the C anadian exemption was not
mentioned explicitly, under the bill the
President could grant exemptions to any
country in order to maintain international
economic stability. It is this clause that since
has been applied to both C an ada and lapan.)
The enactment of the IET in A ugust seem ed
to produce just the opposite effect that its
proposal had had originally. In the second
half of 1964, foreign borrowings in the U. S.
increased sharply, advancing to almost twice
the level recorded in the first half of the year,
and earlier patterns in distribution by stage
of development and type of borrower re
appeared. With the final p assage of the IET,
the backlog of foreign dem and for U. S.
capital that had been built up apparently was
released. That is to say, after the tax was pro
posed in 1963, a number of foreign projects
that could be postponed were postponed
either until enactment of the IET or to consider
alternative sources of funds.

3 One-third of the dollar volume in January-June 1964
was accounted for by a loan to Australia, as discussed
on page 11.

SEPTEMBER 196 6

It was clear by August 1964 that new
Canadian issues would be exempt from the
tax. Therefore, C anadian borrowers were
then influenced by the facts that interest
costs were lower in the U. S. than at home
and that Am erican investors might be as
willing as earlier to buy Canadian debt issues.
In response, C anadian borrowings increased
from a low level of $ 38 million in the last
half of 1963 to $46 2 million in the second
half of 1 9 6 4 —and to a higher percent of the
total than before the tax was passed. (*In the
first half of 1965, C anadian borrowings re
ceded somewhat to $ 313 million. Similarly,
borrowings by foreigners other than C an a
dians increased to $231 million in JulyDecember 1 9 6 4 and then slipped to $ 1 8 7
million in the first half of 1965.)
The IET also had a pronounced effect on
the distribution of funds by stage of economic
development in the second half of 1964.
Since C anadian issues and loans continued
to dominate foreign borrowing in the U. S.
in 1964, it may be useful to consider again
the distribution excluding C anada. The ag ri
culturally developed nations accounted for
65 percent of total borrowing in the first half
of 1964 (excluding C anada). Most of this
proportion was accounted for by a loan of
$117 million to Australia. (This single trans
action in 1964 involving an aluminum plant
in Australia was closely connected to Ameri
can concerns supplying financial and tech
nical assistance.) In the second half, how
ever, borrowings by agriculturally developed
nations (excluding Canada) fell to only 13
percent of the total, thus revealing the pro
nounced rise in C anadian dem ands for funds.

Borrowing by underdeveloped nations held
steady in the first half of 1964, but then tripled
to $162 million (70 percent of the total) in the
second half. The exclusion of underdeveloped
nations from the IET m ade their securities
relatively attractive in the U. S. market and
thus may have stimulated new debt issues
from these countries.
Foreign capital borrowing is extremely
complex. Patterns for individual countries
differ; in fact, the motivation behind indi
vidual transactions differ. Even so, it seem s
that the impact of the IET was greatest at the
time it was proposed and not when it was
enacted. The data suggest that the IET may
have used up much of its desired effect by
the time it was m ade law in August 1964.
The purpose of the tax was to restrain foreign
capital borrowing in the U. S. As stated
earlier, foreign borrowing actually increased
in the second half of 1964 after enactment of
the IET. But this does not imply that the tax
did not have any lasting beneficial effect;
indeed, borrowing might have been quite a
bit higher if the tax had not been placed on
new foreign issues.
The rationale behind the IET was that
foreign borrowers in the U. S. capital markets
would assum e all the increased investment
cost to U. S. residents by offering higher
coupon rates and accepting higher borrowing
costs of about one percen tage point. In fact,
this was not always the case. A verage coupon
rates on all new foreign issues were only 18
basis points higher, on balance, in the first
half of 1964 than in the first half of 1963
(see accom panying table); the decreased
11

ECONOMIC REVIEW
Rates on Foreign Borrowing in the U. S.
and Selected Dom estic Rates in the
U. S. and A broad
Average Coupon Rates
on Foreign Securities
Sold in the U. S.*
Halfyear
Periods

All
Issues

Nonexempt
Issuesf

Range
for all
Issues

U. S. Domestic Rates

Corp.
Baa

U. S. Govt.
Long-term
Bonds

C anadian
Borrowing
Costs

In U. S.

At
Hornet

Japanese
Borrowing
Costs

In U. S.

At
Home§

1963
1st h a l f .......................................

5 .1 9 %

4 -7 .5 0 %

4 .8 7 %

3 .9 5 %

4 .9 3 %

5 .3 9 %

6 .0 5 %

7 .4 9 %

2nd h a l f ..................................

5.88

5-7

4.8 4

4.0 6

5.18

5.5 4

6 .1 7

7 .4 9

1964
1st h a l f .......................................

5 .3 7

5 .6 9 %

4-7

4 .8 4

4.1 6

4.9 6

5.56

5 .8 7

7.4 9

2nd h a l f ..................................

5.26

5 .5 7

4 .5-6.75

4.8 2

4 .1 4

5.0 6

5.5 3

5.5 0

7.4 8

1st h a l f .......................................

5.31

5 .8 0

4 .5-6.75

4 .8 0

4 .1 5

4 .9 7

5.4 9

5 .8 7

7.4 8

2nd h a l f ..................................

5.53

5.83

4 .7 5 -7 .2 5

4 .9 3

4 .2 7

5.0 5

5.82

6.5 0

7.4 8

1965

* For each issue for which a coupon rate was available, the rate w as weighted by the dollar amount of the issue. The weighted rates
were then averaged.
f Includes issues of all countries except C an a d a, underdeveloped nations, and in 1 9 6 5 , Japan. Bank loans were exempt in 1 9 6 4 but not in
1 9 6 5 . A classification of rates on nonexempt securities is not necessary before the IET was passed in the House of Representatives in
December 1963.
t Forty-bond yield averag e compiled by McLeod, Young, W eir of Toronto.
§ Industrial bond yields published by the Bank of Japan.
O ther Sources: Domestic U. S. rates. Federal R eserve Bulletin, Board of Governors of the Federal Reserve System, and averag e coupon
rates on foreign issues, Federal Reserve Bank of Cleveland

dem and for funds by foreigners in early 1964

ties not exempt from the tax—that is, if one

described earlier may have been a factor.4
On the other hand, average coupon rates on
only those foreign issues subject to the IET
rose by 50 basis points between the first half

percentage point is subtracted—resulting
yields fall within a range of market rates on
U. S. domestic long-term issues. (See accompanying table, column 2 and columns 4 and

of 1963 and the sam e period in 1964, more
accurately reflecting the burden of the tax.
A verage coupon rates on all issues fell slightly

5 where, for example, 5.69 percent would be
reduced to 4.69 percent, and com pared with
a range of 4.16-4.84 percent.) A greater

in the second half of 1964.
If the equivalent of the Interest Equalization

proportion of these nonexempt securities were
issued by governments, however, and per-

Tax is subtracted from 1964 rates on securi-

haps yields on such foreign securities should
be com pared only with yields on long-term
U. S. Government securities. On this basis,
foreign issues held a small yield advantage
r.
. i •
. r .v.
/ a cr\
i
alter taking account oi the IET (4.69 percent

4 The large jump in rates on foreign securities in the
last half of 1963 must be discounted because of its tern„ . ..
.
porary nature and the small dollar volume transacted
in that period. In other words, rates may have been less
representative.
Digitized for12
FRASER

v ersu s 4 .1 6 percent). Relative rates of re
turn, plus other factors such as diversification

SEPTEMBER 1966

of asset holdings, were important enough for
U. S. residents to invest $99 million in non
exempt foreign securities in 1964.
Intra-Year Patterns in 1965. From the data,
it appears that 1965, especially the last half
of the year, was an adjustment period, with
the U. S. market for new foreign issues and
the distribution of funds returning to condi
tions that existed before the IET was proposed.
The dollar volume of foreign borrowing in
creased in 1965 as a whole, but the borrow
ing was somewhat more evenly distributed
within the year than in the previous two years
(see Chart 3). In the first half of 1965, $500
million was borrowed and in the second half,
$74 2 million, for an annual total of $1,242
million.
In the second half of 1965, underdeveloped
nations accounted for only 6 percent of the
total dollar volume of foreign capital borrow
ing in the U. S. (see Chart 3). It was con
cluded in the article in the January 1964
E co n o m ic Review that underdeveloped coun
tries were relatively absent from U .S . markets
b ecause the quality of their debt issues may be
lower (as m easured by the possibility of d e
fault, the degree of political instability, and
economic policies of the countries that may
not place foreign investor interest first). Also,
many underdeveloped countries fear foreign
economic domination and do not encourage
foreign investment and control. O n the other
hand, exclusion of underdeveloped nations
from coverage under the IET probabLy had
motivated in creased interest in their securi
ties on the part of U. S. investors from the
second half of 1963 throughout 1964. (In the
President's balan ce of payments report in
July 1963, when the IET was requested, he

suggested an exclusion for underdeveloped
nations.) Nevertheless, in 1965, probably b e
cau se of the reasons listed above, the under
developed countries were once again rela
tively absent from U. S. capital markets, with
their borrowing falling from $162 million in
the second half of 1964 to $43 million in the
second half of 1965.
Industrially developed nations, on the other
hand, increased their share of total borrowing
from 6 percent in the second half of 1964 to
14 percent in the second half of 1965, with
the dollar amount rising from $39 million to
$102 million. In July-December 1965, bor
rowing by industrially developed nations was
2 j/2 times larger than that by underdeveloped
nations.5 In the last half of 1965, borrowing
by agriculturally developed nations was p ar
ticularly large, accounting for 80 percent of
total funds borrowed by foreigners. Such
borrowing included the sale of a $13 5 million
debenture by an Australian corporation, simi
lar to the issue sold in the first half of 1964.
Regarding the nature of the borrower, it
seems that the IET may have diverted U. S.
investment funds from foreign private con
5 It had been hoped that the imposition of the IET would
assist the U. S. balance of payments situation by en
couraging industrial nations in Western Europe to ex
pand their own capital markets sufficiently to ease
world demand for U. S. capital. Although capital markets
abroad are developing, demand for U. S. funds remains
large. There is some reason, moreover, to expect a nearterm increase in borrowing in the U. S. by foreigners.
Planned U. S. direct investment in foreign countries is
at an all-time high, suggesting that plant and equipment
spending by foreigners also may be high. In addition,
current labor shortages abroad are being met increas
ingly by capital investment in labor-saving equipment.
Demands for funds for this increased investment may be
reflected to some extent in the U. S. capital market.

ECONOMIC REVIEW

cerns seeking funds. Private borrowers' share
of total foreign borrowing fell from about 65
percent in January-June 1963 to about 45
percent in the second half of 1964, when the
IET was passed (see Chart 3). Whether the
IET affected the dem and for funds by foreign
borrowers, or the supply of funds from U. S.
sources, cannot be determined from the data
used in this study. In the first half of 1965,
private borrowing fell further to only 24 per
cent of total new capital. A major factor in
this decline was reduced borrowings in the
form of notes and loans, down $13 0 million
in the first half of 1965 alone.
Two developments undoubtedly contrib
uted to the decrease in notes and loans. For
one thing, coverage of the IET was am ended
to include notes and loans; for another, the
President's Voluntary Credit Restraint Pro
gram was instituted, imposing a ceiling on
credits granted by U. S. banks to foreign
borrowers. In Feburary 1965, the IET was
applied to bank loans of one year or more
under authority available (in thq original act)
to the President. When C ongress extended
the life of the IET to December 1967, the tax
m easure also was amended to include non
bank credit of one to three years' maturity,
retroactive to Feburary 1965. The President's
voluntary program, which also was announc
ed in February 1965, asked, in part, that
U. S. financial institutions hold capital out
flows to 105 percent of their loans outstanding
as of Decem ber 31, 1964. As it happened,
banks met the President's request by sharply
reducing foreign credits in the first half of
1965, thus permitting a small increase in the
last six months of that year. Notes and loans
in the second half increased by $ 1 5 0 million,
Digitized for14
FRASER

accounting for 4 0 percent of the increase in
private borrowing in that period. Thus, by
the second half of 1965, private borrowing
reestablished its previous share of total bor
rowings, about 66 percent.
INTEREST RATE PATTERNS
Coupon rates on new foreign securities
sold in 1965 were generally higher than in
any previous period except the second half
of 1963 (see accom panying table). Higher
coupon rates in 1965 reflected the fact that
U. S. capital market yields began to rise after
midyear in response to increased domestic
dem ands for funds. In addition, foreign bor
rowers probably assum ed some of the IET
cost in order to attract U. S. investors by
offering higher coupon rates. As examples,
Canadian and lapan ese borrowing illustrated
the impact of higher interest rates in U. S.
markets, while foreign issues not exempt from
the IET were more affected by a partial ab
sorption of the cost of the tax.
C an ada increased the dollar volume of its
borrowings in the U. S. in 1965, but the
year-to-year chan ges in the av erage yield on
selected securities of that country issued in
the U. S. showed little change (4.96 percent
in the first half of 1964 and 4 .9 7 percent in
the first half of 1965; in the corresponding
second half of each year, the rates were 5.06
percent and 5.05 percent). Increasing U. S.
rates may have influenced yields on C an a
dian securities. Even though there appears
to be a seasonal rise in rates in the second
half of the year, it is interesting to note that
after O ctober 1965 all C anadian securities
sold in the U. S. carried rates of 5 percent
or more.

SEPTEMBER 1966

Coupon rates on new Japanese issues of
fered to U. S. investors increased from 5.5
percent in the second half of 1964 to 6.5
percent in the second half of 1965, even
though only $20 million was borrowed in the
U. S. in the latter period. Securities guaran
teed by the Government of Japan are exempt
from the IET if the total amount borrowed
does not exceed $ 1 0 0 million in a calendar
year. lapanese borrowings in 1965 apparent
ly were within this limit. Accordingly, higher
coupon rates on Japanese issues reflected
U. S. capital market conditions rather than
an IET impact. Looking further, the increased
cost of borrowing in the U. S. as contrasted
to no change in rates in Japan (see accom
panying table) may explain in part the d e
cline in Japanese borrowings in the U. S.
from $ 1 3 9 million in the first half of 1963 to
only $20 million in the second half of 1965.
The $ 1 0 0 million limit also may have acted
as a constraint on the dollar volume of Jap a
nese borrowing.
While av erage interest costs to all foreign
ers borrowing in the U. S. rose from 5.19
percent in the first six months of 1963 to an
average 5.32 percent in 1964, rates paid by
foreigners not exempt from the IET in the
latter period averaged 5.63 percent (see a c
com panying table). (For this study, the group
of nonexempt securities includes all issues
except those of the underdeveloped nations,
Canada, and, in 1965, Japan. There were no
Japanese issues in the U. S. in 1965 before
the Executive O rder exempting them from
the IET.) The larger increase in nonexempt

rates can be interpreted to represent that
part of the IET assum ed by foreign borrowers.
A verage interest costs on nonexempt issues
rose 23 basis points further in the first half
of 1965, perhaps representing an additional
absorption of the IET by foreigners. The seem
ing stability of interest costs to nonexempt
foreigners during 1965 is m isleading. The
second half av erage of 5.83 percent was held
down by a large British issue bearing a 5.5
percent coupon rate. If this issue were ex
cluded, the av erage rate for the second half
would be considerably higher. In fact, after
October, the weighted av erage rate on new
foreign issues not exempt from the IET was
almost 6 percent.
CONCLUDING COMMENTS
Annual data on foreign capital borrowing
in the U. S. for 1964 and 1965 do not suggest
new developments as sharp as those that
occurred in the 1958-63 period. Nonetheless,
intra-year patterns reveal that there was a
definite impact on foreign borrowing when
the Interest Equalization Tax was first pro
posed and then passed.
After the impact of the IET had apparently
worked itself through by the second half of
1965, earlier characteristics reappeared in
the dollar volume of borrowing, the distribu
tion of funds among countries (by stage of
development) and groups (government or
private), and in the terms of borrowing.
Whether the same characteristics will pre
vail in 1966, or whether new ones will ap
pear, will not be known until the data become
available.

ECONOMIC REVIEW

DISTRIBUTION OF BANK DEPOSITS
IN THE FOURTH DISTRICT, 1954-65

An earlier article in the E con om ic Review
traced the chan ges that had occurred in the
number of banks, branches, and banking
offices in the Fourth District during 1954-65.1
As that article pointed out, no clear-cut over
all pattern em erged from the chan ges in the
numbers taken by themselves. To go a step
further, this article considers chan ges in the
number of banks, branches, and banking
offices in relationship to changes in the d is
tribution of bank deposits. The purpose of the
analysis is to develop some impression of pos
sible influences of these types of chan ges on
banking structure and banking competition
in the Fourth District during 1954-65.2
The analysis relies largely on the "deposit
concentration ratio." The deposit concen
tration ratio is not necessarily a complete or
1 ''The Anatomy of Fourth District Banking, 1954-65/'

E conom ic R eview , Federal Reserve Bank of Cleveland,
Cleveland, Ohio, May 1966.

2 There is no discussion in this article of the relationship
between population and the number of banks, branches,
and banking offices, nor of the relationship between
population and deposit concentration; this will be done
in a subsequent article.
Digitized for16
FRASER

fully satisfactory m easure of banking structure
and banking competition, but it is one of the
very few tools available, and is frequently
used by analysts.3 In the following discussion,
deposit concentration ratios are used to m ea
sure chan ges in the distribution of bank d e
posits by counties and Standard Metropolitan
Statistical A reas within the Fourth District
3 "O ne commonly used measure of the potential market
power of individual firms is the ratio of the size of the
firm to the size of the industry in the relevant market
area. For commercial banking, this 'concentration' ratio
is frequently computed in terms of deposits . . . deposits
represent only one of the many services offered by banks.
Furthermore, the market area for customers having large
deposits may be expected to be quite different than for
customers having small deposits. Hence, concentration
ratios based on total deposits provide an over-simplified
view of mafket structure and probably tend to overstate
the relative importance of large banks in most metro
politan areas. In addition, this concentration ratio does
not reflect the importance of either banks located out
side the area but having customers in the area or non
bank financial institutions . . . . Nevertheless, these ratios
provide a crude basis for comparing the structure of
banking in more or less similar communities." See "The
Structure of Banking in the District States,'' B usiness
C on d itio n s, Federal Reserve Bank of Chicago, D ecem
ber 1965, p. 16.

SEPTEMBER 1966

during the period 1954-65.4
DISTRIBUTION OF
DEPOSITS WITHIN COUNTIES
A majority of counties within the Fourth
District experienced increases in the propor
tion of total deposits accounted for by the
largest bank and the top three banks during
1954-65. Such a pattern was not limited to
major metropolitan centers, and in fact occured in counties of various sizes and loca
tions.5
4 Total deposit figures for banks in the Fourth District
were obtained from June 1954 and June 1964 call reports
of the Federal Deposit Insurance Corporation, the Board
of Governors of the Federal Reserve System, and the
Federal Reserve Bank of Cleveland. Total deposits for
counties within the District, as of the end of June, were
obtained from the biennial D istrib u tio n o f B ank D e

p o s its b y C o u n ties a n d S ta n d a rd M etro p o lita n
A reas, published by the Board of Governors of the

Federal Reserve System. In computing the percentage
of deposits held by the largest 100 banks in the District,
the banks were ranked according to total deposits as of
June 1954 and June 1964. On the county level, the con
centration ratios were derived by taking the total of
deposits held by the largest bank and the top three banks
as a percent of total deposits in the country. The fact
that deposit figures for June 1964 are compared with
end of 1965 data for banks, branches, and banking
offices should not distort the evaluation.
5 Because Pennsylvania state law permits branch bank
ing in contiguous counties, the 19 counties of western
Pennsylvania lying within the Fourth District were
lumped into ten districts in order to better measure
changes in deposit distribution. The ten districts and the
counties included are: (1) Erie; (2) Venango, Mercer,
Clarion, Crawford; (3) Warren; (4) Forest; (5) Jefferson;
(6) Lawrence; (7) Indiana; (8) Allegheny, Armstrong,
Beaver, Butler, Washington, and Westmoreland; (9)
Greene, Fayette; (10) Somerset. While not a "perfect"
redistricting, such a procedure more closely approxi
mates the realities of the situation than do county
boundaries.

As shown in Table I, the proportion of d e
posits accounted for by th e la rg e st b a n k in
each county did not follow a consistent pat
tern in each subarea of the District. Thus, in
Ohio 55 counties showed in creases in con
centration of deposits and 31 showed de
creases. In Kentucky, the number of counties
where concentration in creased barely ex
ceeded the number of counties where con
centration fell.6 W est Virginia had four coun
ties where concentration decreased, but only
two where it increased. Finally, in Pennsyl
vania the share of deposits held by the largest
bank in creased in seven of the ten districts.
A s shown in Table II, the share of total de
posits accounted for by th e th ree la rg e st
b a n k s in each county of the District increased
much more frequently than it d ecreased dur
ing 1954-65. Concentration of deposits b ased
on the three largest banks in creased more
than was the case for the largest bank.7
Additional light on chan ges in banking
structure and deposit concentration is pro
vided by the relationship between the net
change in banks and banking offices, on the
one hand, and the distribution of deposits,
on the other. Table III illustrates the relation
ship between the number of banks and de
posit distribution within the subareas of the
District. In Ohio, more than one-half of the
counties experienced in creased deposit con
centration for the largest bank, while the
number of banks either declined or were un
changed (see columns 1 and 2). In Kentucky
6 Concentration ratios are meaningless
having no banks, or only one bank.

in counties

7 A number of counties are excluded from the com
putation because they had three or less banks.

ECONOMIC REVIEW
TABLE I
Changes in Deposit Concentration

TABLE II
C hanges in Deposit Concentration

for the Largest Bank in Each County of
the Fourth District

for the Three Largest Banks in Each County of
the Fourth District

1954-65

Increase in
Deposit
Concentration:
Less More
Than Than
1%
1%
Ohio
(88 counties)
Pennsylvania
(10 districts)
Kentucky
(56 counties)
W est Virginia
(6 counties)

9
2
3
0

1954-65

Decrease in
Deposit
Concentration:

Increase in
Deposit
Concentration:

Does Not
A pply—
Less More
Not Enough
Than Than
No
Banks
1%
1 % Change in Sample

Decrease in
Deposit
Concentration:

Does Not
A pply—
Less More
Not Enough
Than Than
No
Banks
1%
1 % Change in Sample

Less More
Than Than
1%
1%

Ohio
(88 counties)

Pennsylvania
(10 districts)

Kentucky
(56 counties)

W est Virginia
(6 counties)

Source: Federal Reserve Bank of Cleveland

TABLE III
Change in Number of Banks Related to Change in Percent of
Total Deposits Held by L a r g e s t B a n k , by County, Fourth District

1954-65

Counties With:

Ohio
(88 counties)
Pennsylvania
(10 districts)
Kentucky
(56 counties)
W est Virginia
(6 counties)

(1)

(2)

(3)

(4)

(5)

(6)

(7)

(8)

No. of
Banks
Down and
Deposit
Concen
tration
Up

No. of
Banks
No Change
and
Deposit
Concen
tration
Up

No. of
Banks
Up
and
Deposit
Concen
tration
Up

No. of
Banks
Down
and
Deposit
Concen
tration
Down

No. of
Banks
Up
and
Deposit
Concen
tration
Down

No. of
Banks
No Change
and
Deposit
Concen
tration
Down

No Change
in
No. of
Banks or
Deposit
Concen
tration

Does Not
Apply—
Not Enough
Banks
in Sample

18*

10*

0
0

5**

1**

15*

3**

1*
1**

0
1*

More than 1 % change in deposit share.

** Less than 1 % change in deposit share.

Source: Federal Reserve Bank of Cleveland

Digitized for 18
FRASER

2
0

7**

24*
2**

5**

1**

SEPTEMBER 196 6

counties where there were enough banks for
evaluation, the majority had in creases in de
posit concentration similar to the pattern in
Ohio (19 counties in Kentucky had less than
three banks and were excluded). Seven of
Pennsylvania's ten districts also had increased
concentration, while two of West Virginia's
six counties had an increased share of d e
posits for the largest bank in the face of a
declining or unchanged number of banks.
As columns 5 and 6 of Table III show, 37
counties (and districts) in the District ex
perienced reduced concentration of deposits
at the largest bank, along with either more or
an unchanged number of banks; such a pat
tern, however, was not nearly as dominant as
the one in which increased deposit concen
tration was associated with the sam e number
or less banks. Finally, 23 counties (and dis
tricts) in the District experienced "m ixed "
trends during the period under review, that
is, either a declining number of banks and a
decrease in the largest bank's share or a
larger number of banks and increased deposit
concentration. The "m ix ed " pattern predom i
nated in Ohio where there were 14 counties
with the number of banks down and concen
tration down, and four counties where both
deposit share and the number of banks rose.
As a general matter, the dominant pattern
throughout the District was increased deposit
concentration by a county's largest bank with
the number of banks remaining stable or de
creasing in num ber (columns 1 and 2 of
Table III).
Increased concentration of deposits also
prevailed when the change in the deposit
share of the three largest banks in each county
was com pared with a decline or no change in

the number of banks (see Table IV). In Ohio,
the number of counties experiencing in
creased deposit concentration rose to 54
(from 51) when the deposit share of the three
largest banks was considered. In Pennsyl
vania, five districts experienced increased
deposit concentration, while in W est Virginia
three counties had in creased concentration.
A com parison of Tables III and IV shows
that deposit concentration declined in less
counties when the three largest banks in each
county are considered than when the largest
bank is considered. While increased con
centration was generally evident throughout
the District, the results for Kentucky are not
as conclusive becau se of the small number of
counties for which the figures can be used.
It was noted in the earlier article that
chan ges in the number of banks were quite
different from that of banking offices within
the District during 1954-65. Thus, it is inter
esting to com pare the trend of deposit con
centration by county with chan ges in the
number of banking offices. The most frequent
pattern revealed in the data was an increase
in both the number of banking offices and the
percentage of deposits held by the total bank
ing offices of the largest and the three largest
banks.
Table V shows the number of counties (and
districts) in which the deposit concentration
of the largest bank in creased or decreased as
com pared with chan ges in the number of
banking offices. Only in West Virginia was
there a majority of counties in which deposit
concentration decreased. In Kentucky, the
counties were almost equally distributed be
tween concentration in creases and decreases,
and nonapplicable counties. In both Ohio
19

TABLE IV
Change in Number of Banks Related to Change in Percent of
Total Deposits Held by T h r e e L a r g e s t B a n k s , by County, Fourth District

1954-65

Counties With:
(1)

(2)

No. of
Banks
Down
and
Deposit
Concen
tration
Up

No. of
Banks
No
Change
and
Deposit
Concen
tration
Up

Ohio
(88 counties)

31*

15*
8**

0
Pennsylvania
(1 0 districts)
Kentucky
(56 counties)
W est Virginia
(6 counties)

(3)
No. of
Banks
Up
and
Deposit
Concen
tration
Up

(4)
No. of
Banks
Down
and
Deposit
Concen
tration
Down

1*
•J**

(5)

(6)

(7)

(8)

No. of
Banks
Up
and
Deposit
Concen
tration
Down

No. of
Banks
No
Change
and
Deposit
Concen
tration
Down

No. of
Banks
Up
and
Deposit
Concen
tration
No
Change

No. of
Banks
Down
and
Deposit
Concen
tration
No
Change

(9)

(10)

No
Does
Change
Not
in
No. of
Apply—
Not
Banks or
Deposit
Enough
Concen
Banks
tration
in Sample

10*

7*
■
j**

1*
■
J**

31
0

More than 1 % change in deposit share.

** Less than 1 % change in deposit share.
Source: Federal Reserve Bank of Cleveland

TABLE V
Change in Number of Banking O ffices Related to Change in Percent
of Total Deposits Held by L a r g e s t B a n k , by County, Fourth District

1954-65

Counties With:

Ohio
(88 counties)
Pennsylvania
(10 districts)
Kentucky
(56 counties)

(1)

(2)

(3)

(4)

(5)

(6)

(7)

(8)

(9)

No. of
Banking
Offices
Down;
Deposit
Concen
tration
Up

No. of
Banking
Offices
No Change;
Deposit
Concen
tration
Up

No. of
Banking
Offices
Up;
Deposit
Concen
tration
Up

No. of
Banking
Offices
Up;
Deposit
Concen
tration
Down

No. of
Banking
Offices
No Change;
Deposit
Concen
tration
Down

No. of
Banking
Offices
Down;
Deposit
Concen
tration
Down

No. of
Banking
Offices
Up;
Deposit
Concen
tration
No Change

No Change
in No. of
Banking
O ffices or
Deposit
Concen
tration

Does Not
Apply—
Not Enough
Banks
in Sample

9*
2**

36*
■j**

19*
y**

3**

3*
1**

6*
1**

<p*

8*
2**

2 **

1*
0

W est Virginia
(6 counties)

More than 1 % change in deposit share.

** Less than 1 % change in deposit share.

Source: Federal Reserve Bank of Cleveland

SEPTEMBER 196 6

and Pennsylvania, the dominant character
istic was in creased concentration of deposits
coupled with an increased number of bank
ing offices.
When chan ges in deposit concentration of
the three largest banks in a county are com
pared with chan ges in the number of banking
offices, as shown in Table VI, the relationships
are almost identical to those of the preceding
paragrap h —the largest bank situation. A c
cordingly, although many counties experi
enced decreases in the number of banking
offices and in creases in deposit concentration,
as well as decreases in both banking offices
and deposit concentration, the most frequent

situation was an in crease in both the number
of banking offices and the deposit share held
by the three largest banks (column 3). The
most striking difference in behavior patterns,
perhaps, is that three counties in Kentucky
experienced no change either in banking
offices or in the share of deposits held by the
three largest banks (see column 8). These
three counties plus the 31 counties in which
no banking offices were located indicate that
over half of the counties in the portion of
Kentucky within the Fourth District were un
affected significantly by chan ges in banking
structure and shifts in deposits in the period
under study.

TABLE V!
Change in Number of Banking O ffices Related to Change in Percent of
Total Deposits Held by T h r e e L a r g e s t B a n k s , by County, Fourth District

1954-65

Counties With:

Ohio
(88 counties)
Pennsylvania
(10 districts)
Kentucky
(56 counties)

(1)

(2)

(3)

(4)

(5)

(6)

(7)

(8)

(9)

No. of
Banking
Offices
Down;
Deposit
Concen
tration
Up

No. of
Banking
Offices
No Change;
Deposit
Concen
tration
Up

No. of
Banking
Offices
Up;
Deposit
Concen
tration
Up

No. of
Banking
Offices
Up;
Deposit
Concen
tration
Down

No. of
Banking
Offices
No Change;
Deposit
Concen
tration
Down

No. of
Banking
O ffices
Down;
Deposit
Concen
tration
Down

No. of
Banking
O ffices
Up;
Deposit
Concen
tration
No Change

No Change
in No. of
Banking
Offices or
Deposit
Concen
tration

Does Not
Apply—
Not Enough
Banks
in Sample

14*
1 **

3**

6**

4*
1**

0
W est Virginia
(6 counties)

41*

1*
1**

0
31

* More than 1 % change in deposit share.
** Less than 1 % change in deposit share.

Source: Federal Reserve Bank of Cleveland

ECONOMIC REVIEW
TABLE VII
Changes in Deposit Concentration Within
the S M SA ’s of the Fourth District

1954-64

Share of Deposits Held By
Three Largest Banks in SMSA

Share of Deposits Held By
Largest Bank in SMSA

SMSA

1954

1964

Net Change
(percentage
points)

1954

1964

Net Change
(percentage
points)

O H IO
3 6 .6 %

4 3 .0 %

6.4

7 4 .0 %

7 8 .3 %

19.1

21.5

2.4

50.4

61.5

+ 11.1

. .

A k r o n .................................................

. . . .

Canton

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

4.3

C i n c i n n a t i.......................................

. . . .

25.3

27.9

2.6

63.0

70.4

7.4

C l e v e l a n d .......................................

41.6

35.8

— 5.8

79.8

73.3

—

6.5

Columbus

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

. . . .

46.6

43.3

—

3.3

82.1

87.8

5.7

D a y t o n ............................................

. . . .

42.5

39.3

—

3.2

64.9

69.6

4.7

Hamilton-Middletown....................

. . . .

28.5

31.3

2.8

68.1

72.5

4.4

Lima

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

. . . .

37.0

39.9

2.9

81.4

83.2

1.8

L o r a in - E ly r ia ..................................

. . . .

22.7

22.1

—

0.6

50.4

61.9

+ 11.5

S p rin g fie ld .......................................

31.5

33.5

2.0

87.2

72 .7

— 14.5

Steubenville-W eirton....................

. . . .

24.3

32.1

7.8

65.9

70.3

T o le d o .................................................

. . . .

46.5

44.0

—

2.5

72.4

76.2

3.8

Y o u n g sto w n -W arre n ....................

23.8

23.3

— 0.5

63.4

57.4

—

6.0

. .

4.4

PENNSYLVANIA
E r i e .....................................................

32.9

31.6

—

1.3

74 .7

71.6

—

3.1

J o h n s t o w n .......................................

14.3

13.2

—

1.1

35.1

32.3

—

2.8

P it t s b u r g h .......................................

. . . .

49.0

49.4

0.4

70.3

79.0

8.7

3.8

KENTUCKY
Huntington-Ashland........................

. .

48.5

40.1

—

8.5

85.0

81.2

—

L e x i n g t o n .......................................

. .

31.4

50.0

+ 18.6

54.5

80.0

+ 2 5 .5

41.9

31.1

— 10.8

66.9

64.5

—

W EST VIRGINIA
W h e e l i n g .......................................

2.4

Note: Deposit figures as of June 30, 1 954 and June 30, 1964.
Source: Federal Reserve Bank of Cleveland

DISTRIBUTION OF
DEPOSITS WITHIN SMSA's

within the 19 SM SA 's.8 (See earlier article.)
As the data in Table VII show, changes in
deposit concentration in the 19 SM SA's were

In addition to a breakdown of changes in
deposit concentration in each county of the
District, a breakdown has been assem bled
for the metropolitan areas of the Fourth Dis
trict. These figures assum e special signifi
cance when it is remembered that most bank

mixed during 1954-64. Thus, the share of d e
posits held by the la rg e st b an k within each

ing structure changes in the District occurred

8 During the first half of 1966, Richland County, Ohio,
was designated a Standard Metropolitan Area, increas
ing the number of SMSA's in the Fourth District to 20.
Banking structure changes in the Richland SMSA are
not included in the article.

SEPTEMBER 1 9 6 6

SM SA of the District decreased more fre
quently (10) than it increased (9). Except for
the Lexington and W heeling SM SA's, net
chan ges in deposit concentration in either
direction were less than eight percentage
points, reflecting relative stability in deposit
share despite significant chan ges in banking
structure within the same area. Especially
significant, perhaps, was the pattern in each
of the District's largest SM SA 's—Pittsburgh,
Cleveland, Columbus, and Cincinnati; in
only Cincinnati was there a significant in
crease in the largest bank's share of total de
posits. A ccording to the deposit concen
tration, Columbus and Cleveland showed less
concentration of deposits in 1964 than in
1954, at least b ased on the position of the
largest bank, with the figures for Pittsburgh
virtually unchanged.
In contrast to the situation in share of d e
posits held by the largest bank in each SM SA
in the Fourth District, a majority of SM SA 's
showed in creased deposit concentration when
th e th ree la rg e st b a n k s were considered.
Twelve SM SA 's experienced an in crease in
the share of deposits held by the three largest
banks and seven, a decrease. In four of the
SM SA 's—Columbus, Dayton, Lorain-Elyria,
and Toledo—the share of deposits held by the
three largest banks increased, while that of
the largest bank declined; in the Springfield,
Ohio SMSA, the share of the three largest
banks decreased at the same time that the
largest bank in creased its share. The largest
increase in deposit concentration in the Dis
trict occurred in the Lexington SMSA.
Most chan ges in deposit share were within
a narrow range, however, with only four metro
politan areas experiencing a shift of more

than eight percentage points in the share of
deposits held by the three largest banks.
Furthermore, only Cleveland of the larger
SM SA 's had less deposit concentration at the
end of the period than at the beginn ing—for
the three largest banks as well as the largest.
In the case of Pittsburgh, where there were
2 6 m ergers, 4 4 less banks but 120 more
offices by the end of the period, the concen
tration figures were virtually unchanged for
the largest bank and up nearly 9 percent for
the three largest banks.
If the deposit concentration figures for the
Cleveland and Pittsburgh SM SA 's are ex
tended to cover the share of deposits of the five
largest banks the following pattern em erges:
P ittsb u rg h 's five la r g e s t b an k s, th rou gh
m erger and expansion, improved their share
of deposits from 77 percent to 9 0 percent of
the total deposits in the SMSA, while the share
of C leveland's five major banks declined
from 97 percent to 94 percent of total de
posits in the SMSA.
DEPOSITS HELD BY LARGEST
100 BAN KS IN FOURTH DISTRICT
A third way to m easure deposit concen
tration in the Fourth District is to compute the
shares of total deposits accounted for by the
100 largest banks. As background, it might
be noted that the range of deposits held by
the 100 largest banks in the Fourth District,
as of June 30, 1964, was from $ 2 .5 billion
down to $25 million, or alternatively stated,
the 100th largest bank held an amount of d e
posits equivalent to one percent of that of the
largest bank in the Fourth District. This m eans
that the other 743 banks in the Fourth District
each held less than $25 million in deposits,
23

ECONOMIC REVIEW
TABLE VIII
Deposit Shares of 100 Largest Banks
in the Fourth District
1954-64
1954

Cumulative
Deposits
1st Bank
Top

$ 1 ,6 1 3 ,9 2 6

1 964
Cumulative
Percentage of
Total Deposits
in District

Cumulative
Deposits

Cumulative
Percentage of
Total Deposits
in District

1 1 .3 %

$ 2 ,5 4 3 ,0 3 7

1 2 .0 %

2 ,8 5 6 ,9 7 2

20.0

4 ,1 3 9 ,8 7 6

19.5

3 ,5 5 9 ,8 7 5

24.9

5 ,2 1 8 ,6 3 5

24.5

4 ,1 4 8 ,5 7 8

29.0

6 ,1 3 7 ,5 6 7

28.8

4 ,6 0 3 ,7 0 4

32.2

6 ,8 8 9 ,2 8 4

32.4

6 ,1 3 5 ,4 1 7

43 .0

9 ,1 4 3 ,7 5 7

4 3 .0

7,568,641

53.0

1 1 ,8 7 9 ,7 9 7

55.8

8,248,031

57.8

12,981,931

61 .0

8,67 9 ,1 5 2

60.8

1 3 ,7 8 9 ,7 6 2

64.8

8 ,9 7 6 ,5 0 2

62.9

1 4 ,3 4 0 ,2 3 3

67.4

9 ,2 2 0 ,3 8 7

64.6

1 4 ,7 6 7 ,6 6 5

71.1

9,425,181

66.0

1 5 ,1 3 2 ,0 8 9

71.1

9 ,6 0 7 ,6 3 9

67.3

1 5 ,4 5 8 ,3 0 6

7 2 .7

9 ,7 6 2 ,9 3 7

68.4

1 5 ,7 4 9 ,1 7 3

75.2

100

9 ,9 0 1 ,1 8 4

69.3

1 6 ,0 1 0 ,6 4 9

75 .2

Note: Deposit figures as of June 30, 1954 and June 30, 1964.
Source: Federal Reserve Bank of Cleveland

with the sm allest holding deposits of $202,000.
Thus, 100 banks, or 12 percent of all banks
in the District, held 75 percent of total d e
posits, while the remaining 88 percent of the
banks held only 25 percent of total deposits.9
As Table VIII shows, the 100 largest banks
held 69.3 percent of District bank deposits in
1954. By mid-1964, the share had increased
to 75.2 percent. Although this represented an
increase in deposit concentration that may
not be significant, it was not accom panied by
a uniform pattern throughout the range of the
9 The economic and financial influence of the 100
largest banks in the Fourth District is currently under
study, with emphasis on relationships between and
among rates of growth, location, and merger and branch
ing activity since 1954. If the results of the study are
meaningful, they will be discussed in a subsequent
article.

100 largest banks.10 As the table shows, the
share of total deposits held by the ten largest
banks in the District did not increase at all
during the period under review. However,
moving down the bank-size range, deposit con
centration in creases gradually but steadily,
until it is almost six percentage points greater
for the 100 largest banks. The unchanged
share of deposits held by the ten largest banks
tends to support the earlier indications that
in creased deposit concentration did not occur
in many of the major centers of the Fourth
District—implying that, as a general matter,
the largest banks did not grow as fast as banks
10 Due to attrition and expansion of facilities the 100
largest banks in June 1964 were not totally the same
banks that made up the top 100 in 1954; in fact only
80 of the original 100 were still so classified in 1964.

SEPTEMBER 196 6

behind them on the size scale.
What this does suggest is that the second,
third, and fourth largest banks in major met
ropolitan centers other than the largest cen
ters and large banks in other Fourth District
areas experienced greater rates of expansion,
which enabled them to gain increased shares
of total deposits in the District, as reflected in
the gradual but steady increase in the per
centages shown in Table VIII. These patterns
are currently under study (see footnote 8).
At this point, it seem s conceivable that the
expansion patterns of the less than largest
banks are associated with the advan ce of
economic activity in the faster growing major
metropolitan areas in the District, for example,
Columbus, Dayton, Toledo, and Cincinnati.
CON CLUDING COMMENTS
G enerally speaking, deposit concentration
within the Fourth District increased during

1954-65, while the number of banks declined
and the number of banking offices increased.
Nevertheless, the mixed trends in banking
structure and deposit concentration chan ges
for the Fourth District as a whole do not per
mit a generalization concerning the current
status of banking competition within the
Fourth District. It would appear that, on the
basis of limited evidence and a p r io ri reason
ing, increased deposit concentration within
m a n y individual counties and metropolitan
areas of the Fourth District could not help
but have had some adverse influence on
banking competition in those areas. It is con
ceivable that a more detailed evaluation of
patterns of growth, locational factors, and the
like should shed some light on this matter of
banking competition. If current research is
successful, as indicated earlier, the results
will be reported in a future article.

Additional copies of the m ap on the inside
b a c k cove r of this issue a re a v a ila b le
upon request from the Research D e p a rt
ment, Federal Reserve Bank of Cleveland,
P.O . Box 6 3 8 7 , Cleveland, O hio 4 4 1 0 1 .

Fourth F ed e ra l Reserve District

j MONTCALM

----- 1

<GRATIOT!

.----- H
..........r~~
K E N T ',

IONIA ! CL,HT0N!

____ I SANILAC
j
i __j
‘l
I----I
j______
7 # ! g ENESEE', LAPEER ;

SAGINAW

li f

— T - ^— r
1
l
* ~ —i
J BARRY ! EATON ' INGHAM J

.f^
r

'CALHOUN

I
'

r . _ L _ . _ T. * —
i

OAKLAND j
i.J f

Ij JACKSON I! W A S H T E N A W i i
'
' _ _ _ i _____

BRANCH |

LENAWEE

I IA I
"J

NOBLE I ^

i
J / ! ALLEN
Tf v
!<
1l| £X=> ! I IQ
. <
^Y rr~WELLS*
r^----

Main Office — Cleveland, Ohio

66»s Federal Reserve Office SMSA's

n _____ i

.* • ; Other SMSA's over 500,000 Population

Branches -

C in c in n a t i, O h io

Pittsburgh Pa

District Boundary
Branch Boundaries

NOTE: Population based on 1960 U.S. Census.

III

SMSA's - 250,000 - 499,000

SMSA's less than 250,0 00

Fourth Federal Reserve District