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FED ERA L RESERVE RANK DF SAN FRANCISCO Monthly Review LIBRARY J U L - 21969 fE E A tfflft H M(I PHIIM BR I A PHU In this issue The Agencies: RSew Directions Deposits: Growth and Seasonais Z=Day for Consumers May 19B9 The A q @nel@§: Mew Directions ... Federal agencies, whether under private or public ownership, continue to expand their role in the nation's financial markets. Deposits: © row th and Seasonals ... A new seasonally-adjusted series shows the uneven pace of deposit growth over the 1960-68 era, despite rapid growth overall. Z -D a y fa r C ansum ers ... A new act and a new regulation are designed to set advertising standards and spell out disclosure rules for creditors. Editor: William Burke M a y 1969 MONTHLY REVIEW The Agencies: New Direettos he agency market — more exactly, the Federal Agency Security market— deals in the negotiable debt instruments of a num ber of agencies which are instrumentalities of the Federal Government but operate apart from the U.S. Treasury itself. The role of the agencies in the nation’s financial markets has shifted somewhat over time, and so too has their role in the Federal budget picture. The most striking changes over the past year or so have involved a new approach to the marketing of agency securities and, in par ticular, a shifting of some agencies from pub lic to private ownership. One group of agencies provides supple mentary long-and short-term credit to the agricultural sector of the economy. These entities— the Federal Land Banks, the Fed eral Intermediate Credit banks, and the (Federal) Banks for Cooperatives — are supervised by the Farm Credit Administra tion in the Executive Branch of the Govern ment. Another group of agencies is concerned with the residential-mortgage market — the Federal Home Loan Banks, the Government National Mortgage Association (GNMA, or Ginnie M ae), and the Federal National Mortgage Association (FNMA, or Fannie M ae). Under the terms of the Housing Act of 1968, the former Federal National Mort gage Association was split into two parts, GNMA and FNMA. These farm-oriented and housing-oriented agencies were, until recently, the only issuers of agency securities, and they still account for the vast bulk of the total securities outstand ing in this market. In the present decade, T however, the Tennessee Valley Authority (1960) and the Export-Import Bank (1967) have entered the market with their own obli gations to obtain financing for powerplant construction and export-support activities, respectively. The Federal agencies’ credit activities were designed originally to acquire funds from the securities markets so as to supplement the sources of financing already available to the areas of their concern— and, in a growing number of cases, almost all of the financing of these agencies is now obtained in this manner. 107 FEDERAL RESERVE BANK A<£f©ney d e b t outstanding grows along with Federal financing needs Billions of Dollars 108 The financial effects of those activities have developed beyond this original purpose, how ever. Orderly credit markets of national scope have taken the place of isolated local markets, and, as is true of financing general ly, the shift of funds from areas of surplus to areas of deficit has been facilitated. Most of these agencies are intermediaries — they borrow in order to relend their bor rowed funds. Moreover, in many operations they deal directly with other financial institu tions and, in certain cases, they use other financial institutions as vehicles in distribut ing funds to the ultimate borrower. For ex ample, a savings-and-loan association could finance the private purchase of a new home partly on the basis of funds obtainable from its Federal Home Loan Bank. At the end of fiscal 1968, the former Fed eral National Mortgage Association was the largest single supplier in the agency market, with $7.9 billion outstanding in participation OF SAN FRANCISCO certificates — FNMA acting as trustee and issuer of certificates in pools of loans and mortgages assembled by individual Federal agencies— and with $5.9 billion outstanding in its own notes and bonds. The Federal Land Banks were next with $5.3 billion, fol lowed in order by the Federal Home Loan Banks ($4.7 billion), Federal Intermediate Credit Banks ($3.8 billion), the Export-Im port Bank ($2.6 billion), Banks for Coopera tives ($1.2 billion), and the Tennessee Val ley Authority ($0.5 billion). However, only a portion of the total debt now shows up on the Treasury’s books under the heading of agency debt, because of the increasing trend toward “privatization” of Government-spon sored corporations. The amount of debt outstanding in the agency market increased five-fold over the 1958-68 decade, from $5.4 to $34.4 billion —including securities of privately-owned but Government-sponsored agencies — while the Treasury’s public debt expanded from $276.4 to $347.5 billion over the same time-span. Thus, agency debt increased by almost half as much as Treasury debt over this period. Moreover, new issues sold in the agency market amounted to $7.7 billion in calendaryear 1968. This is somewhat less than the $16.4 billion sold by state-and-local govern ments or the $17.4 billion sold on the corpo rate-bond market in 1968. Nonetheless, Federal agencies are a powerful source of substantial competition to other borrowers in the capital market, and this competition is growing rapidly; agencies marketed more issues in the single year 1967, and again in 1968, than in the entire first half of this decade. Agencies and the Treasury What types of debt instruments are traded in the Federal agency market? The answer is just about every type. The market encom passes bonds and notes ranging in maturity (at issue) from 3 months to 20 years. Some M a y S969 M O N T H L Y pay interest only at maturity; most pay semi annually. A few are callable; most are not. Some short-term notes are sold at a discount from par value, in a way similar to Treasury bills. And in addition to bonds and notes, there is the relatively new form of debenture know as the participation certificate (P C s). The unique feature of most agency issues, which sets them apart as a special class of in vestments, is the fact that they are not guaran teed by the Federal Government, even though they are issued by instrumentalities of that Government. (But there are some exceptions; for example, PC’s have been fully guaranteed since January 1967.) Legally, they are the responsibility of the issuing agency. They oc cupy an anomalous position; strictly speak ing, they are neither Government nor private debt instruments. But the agencies, under certain circum stances, have the right either to borrow funds directly from the Treasury or to sell their obligations directly to various Government trust and investment accounts. Thus the agencies do have some degree of recourse to the Government. In the case of participation certificates, this recourse is direct and immeZ@©BfiiEfS<g <gr®w#li of agency issues is major feature of new-issue market Billions of Dollars REVIEW diate; in the case of other securities, the re course is not so explicit. Nevertheless, traders in this market recog nize the unique position of agency securities. As one financial publication puts it, “The agencies are quasi-members of the Govern ment family, and should they need assistance Uncle Sam undoubtedly would come to the rescue.” Thus, only in the most formal sense would there appear to be any greater degree of risk attached to these securities than to direct Government obligations; in fact, na tional-bank regulations classify all of the securities of these agencies as “minimum risk” assets. In addition, the agencies that issue these instruments are, without exception, success ful businesses. They are all able to meet their operating expenses, including defaulted loans, out of the fees they charge for their services, and there is every reason to expect that they will continue to do so. Again, the market recognizes this fact; from a strictly business point of view, these instrumentalities stand on their own feet as income producers with suf ficient collateral behind their debts to satisfy investors. Price and fax status Nonetheless, all of these issues typically sell at a lower price— that is, at a higher yield— than do comparable Treasury notes and bonds. However, this fact may reflect the less-developed nature of the market for agency securities and the recent rapid rise in outstanding securities, as well as the market evaluation of risk involved. The market in deed is fast growing, even though it is still only about one-tenth the size of the Govern ment-securities market. Between 1961 and 1967 alone, the average daily volume of dealer transactions in agency se c u ritie s jumped from $75 million to more than $210 million. Another distinguishing feature of agency issues is their tax status, which sometimes 109 FEDERAL RESERVE BANK differs from that of regular Government se curities and often differs from that of corpo rate securities. The income from all of these issues is subject to Federal income taxes, but differences arise with respect to state-andlocal taxation. Treasury securities are exempt from state-and-local taxes; corporate securi ties are not; and agency issues, neither fish nor fowl, are exempt in some cases and non exempt in others. The question turns on whether or not a given agency’s securities are interpreted to be an obligation of the Federal Government. If they are, then, under the Constitution, income from them is exempt from all state-and-local income taxes. As was noted above, none of these securities (except some PC’s) are for mally guaranteed by the Federal Govern ment, but all of the agencies involved do have some degree of recourse to the Govern ment. To further confuse the issue, the capital stock of the five principal agencies was originally provided by the Treasury but is now largely or totally owned by private investors. However, in each case, private ownership and control is subject to some Federal supervision of general policies and operation. (TVA and Eximbank are still wholly owned by the Government.) 10 Yet another distinctive characteristic of the agency market concerns the marketing of these securities, with a fiscal agent handling all the details of each sale. For example, the Government National Mortgage Association and the Federal Home Loan Bank system each has its own agent, and the Farm Credit Administration employs one agent to handle the sales of all three of the farm-credit agen cies. The fiscal agents are responsible for as sembling selling groups for the purpose of distributing securities to retail investors. A selling group — composed of Governmentbond dealers, banks dealing in securities, stock houses, and similar nationally recog OF SAN FRANCISCO nized organizations— differs in several im portant respects from the type of syndicate that markets corporate and municipal bonds. First, a selling group is set up on a continuing basis, although individual members do enter and leave the group; the typical syndicate, on the other hand, is formed anew to bid on each particular corporate or municipal issue. Secondly, there is no competitive bidding among the group members for an agency issue, whereas several syndicates generally bid against each other for each corporate or municipal issue. Prior to each sale, the fiscal agent consults with agency officials and with selling-group representatives regarding the amount, cou pon, price, and date of sale. The individual agency is responsible for the final determina tion of terms on its issue. On the sale date, the agent telegraphs the price to the members of the selling group. The members then tele graph or telephone their subscription to the fiscal agent’s office in New York, where allotments are made. The new securities are delivered at the Federal Reserve Bank of New York, and payment is in Federal funds at the offering price less the stated commis sion. (Federal-funds transactions are dealings in member-bank reserves in a Federal Re serve bank.) N e w directions: F N M A m arketing The Federal National Mortgage Associa tion (Fannie Mae) changed its mortgagepurchase arrangements about a year ago, largely as a result of lessons learned during 1966, when mortgage money practically dis appeared from the market. Fannie Mae, of course, normally provides increased liquidity to the mortgage market through the purchase —whenever private investment funds are in short supply— of mortgages insured by the Federal Housing Administration, guaranteed by the Administrator of Veterans Affairs, or insured by the Farmers Home Administration of the Department of Agriculture. Mortgages May 1969 MONTHLY FNMA mortgage purchases provide strong support to market Billions of Dollars REVIEW chases. In this way, it guarantees the future availability of money to successful bidders and thus helps smooth out the ups-and-downs of the mortgage market— and meanwhile it assures increased efficiency in the use of its own funds. In each weekly auction, Fannie Mae ac cepts bids, starting with the lowest priced, until the pre-announced volume of funds is committed. A maximum is set for each bid so that a single seller, or area, cannot com pletely dominate the auction. Noncompeti tive bids also may be entered, as in weekly Treasury-bill auctions, and these are awarded at the average price of accepted competitive bids. are purchased from an approved list of hold ers, including mortgage companies, banks, savings-and-loan associations, life-insurance companies, and any Federal agencies autho rized to sell mortgages and to acquire Fannie Mae common stock. Generally, about 70 to 80 percent of total purchases are from mort gage companies, many of which originate mortgages exclusively for resale to Fannie Mae. Under its former mortgage-purchase pro cedures, Fannie Mae announced the price it would pay for any Government-backed mort gages and thus permitted the sellers of such loans to determine its volume. But in the fast-slumping 1966 mortgage market, Fannie Mae with its pre-announced price generally came in above the market price, and conse quently it was deluged by proferred mort gages. Now, under its new “free market” system, Fannie Mae announces each week the volume of mortgages it is prepared to buy and per mits the market, through sealed bids, to de termine the price it will pay for its purchases. Moreover, it deals in advance commitments to buy mortgages three, six, or twelve months in the future, rather than in immediate pur During the first half of this decade, Fannie Mae purchases ranged from 3 to 10 percent of total FHA-VA mortgages issued, but in tight-money 1966 the agency’s share leaped to 27 percent. Then, as the mortgage market improved in 1967 and 1968, the agency’s share of Government-backed mortgages de clined somewhat. Even so, total secondarymarket purchases rose from $1.4 billion in 1967 to over $1.9 billion in 1968 — or close to the $2.1 billion peak of 1966. In general, net purchases of mortgages tend to coincide with periods of heavy demands on the capital markets. Thus, Fannie Mae made large secondary-market purchases in the 1956-57 period, in 1959 and early 1960, and during the credit crunch of 1966. On the other hand, net sales of mortgages tend to coincide with periods of credit ease, when mortgage loans are easily absorbed in the market — and when investors are actively looking for relatively high-yielding invest ments within a context of declining long term interest rates. Thus, sales were concen trated in the recession months of early 1958 and early 1961, but also at times in 1962 and early 1963. Total sales have averaged only about one-fourth of total purchases over the years—not surprisingly, since an aggres- 111 FEDERAL RESERVE BANK sive sales policy during tight-money periods would conflict with FNMA’s aim of encour aging new homebuilding. New directions: private ownership Several Government-sponsored enterprises became privately owned in late 1968, so that their budget figures are now excluded from the Federal budget totals. The Federal National Mortgage Association’s secondarymarket operations fund, fo rm e rly u n d e r mixed ownership, became a privately owned venture on September 30. The twelve Fed eral intermediate-credit banks and the thir teen banks for cooperatives, supervised by the Farm Cerdit Association, became wholly privately owned on December 31. (In this regard, they have joined the twelve Federal land banks, which are co-operatively owned by participant farmers. Similarly, the twelve Federal home loan banks, which are super vised by the Federal Home Loan Bank Board, obtain their funds from capital stock owned by member institutions, as well as from issuance of their own obligations, and from deposits of member institutions.) In fiscal 1969, several major reductions have occurred in the Treasury’s accounts for “outstanding agency debt” because of the conversion of these three types of mixedownership enterprises to wholly private own ership. In September 1968, the responsibility for $6.0 billion of Fannie Mae borrowing, heretofore included in the “Federal debt,” was assumed by private owners, with a con sequent reduction in the total Federal debt as shown on the Government’s books. In December 1968, decreases were similarly re corded for $3.6 billion and $1.4 billion, respectively, in outstanding official borrow ings by the intermediate-credit banks and banks for cooperatives, as these entities were similarly converted to private ownership. I 12 For the housing agencies, this shift was accomplished under the terms of the Housing OF SAN FRANCISCO Act of 1968. The Federal National Mortgage Association has been converted into a pri vately-owned corporation, with the secon dary-market operations under its wing. The Government National Mortgage Association meanwhile has been organized under Federal auspices to handle Fannie Mae’s other orig inal functions — the special-assistance and management-and-liquidating functions. (The former provides subsidies for such activities as housing for the aged, and the latter pro vides mainly portfolio management.) Insofar as its mission or its basic operating methods are concerned, Fannie Mae remains practically unchanged. It continues to im plement Government housing policies while at the same time providing a “reasonable” return to its stockholders. It continues to provide mortgage lenders with fresh funds to support housing activity through its pur chases of Government-backed mortgages on the secondary (resale) market when money conditions are tight. Through its recentlydevised auction method, however, it should do so more efficiently than heretofore. Fannie Mae’s ties to the Treasury have been severed in some respects but retained in others. Preferred stock held by the Secretary of the Treasury has been retired through pro ceeds of a public offering of $250 million in long-term capital debentures. At the same time, Fannie Mae will still be able to call upon the Treasury for up to $2.25 billion in an emergency, since it continues to be con sidered an instrumentality of the Treasury. This operational change, by taking secon dary-market operations outside of the Gov ernment and thereby outside of Federal budget constraints, should help make the agency more responsive to the needs of the general economy. Thus it ameliorates the problem described by HUD Secretary Wea ver in Congressional testimony on last year’s housing legislation: “Sometimes budgetary pressures require the secondary-market ac MONTHLY May 1969 tivities to zig where the ends of the building and mortgage-financing industries may be better served if the activities were to zag.” On the other hand, it should be recognized that the ends of these industries are best served when they conform to general eco nomic-policy goals. New directions: GImnIe M a e 's P C 's In line with the changes initiated by the Housing Act of 1968, the Government Na tional Mortgage Association has taken over the responsibility for the participation-certficate program. Under this program, Ginnie Mae and a number of other entities — the Veterans Administration, the Small Business Administration, the Farmers’ Home Admin istration, the Department of Health, Educa tion and Welfare, and the Department of Housing and Urban Development—partici pate as trustors for the loans in which par ticipations are to be sold. Each of these enti ties enters a trust agreement under which the appropriate agency, function, or department agrees to set certain loans aside on its books, to subject them to trust, and to guarantee the payment of principal and interest on such loans. The trustor fulfills the guarantee when Br@p> In P C soles marks decline of multi-agency pooled-loan program Billions of Dollars 5 f— Other 0 I“_ L 1964 Fiscal 1965 1966 1967 1968 REVIEW necessary by using appropriated funds as well as program funds to which the entrusted amounts are related. Ginnie Mae’s major role, however, is to serve as trustee to the agreement reached with each of the above organizations. (This fidu ciary responsibility is carried out under the agency’s management-and-liquidating func tion. ) As trustee, Ginnie Mae issues and sells the loan participations, normally through some underwriting group. The participations are based on the right to obtain principal and interest payments on pooled obligations. Ginnie Mae, in its corporate capacity, guarantees all payments due on the certifi cates, and it can borrow from the Treasury to make timely debt-service payments. The GNMA guarantee and the Treasury borrow ing privilege have never been needed, how ever, in view of the lending agencies’ guaran tee and in view of their obligation to substi tute loans for any defaulted loans in the orig inal pool. The GNMA guarantee and draw ing authority are designed to provide extra safeguards to help assure a favorable market reception (and lower interest rates) for the participation certificates. A typical offering of PC’s will include certificates with a wide range of maturities, from 1 to 20 years. From its inception in November 1964, the PC program was designed to stimulate ex panded participation by investors in the fi nancing of public credit programs. Almost all investors in the agency market are poten tial purchasers of participation certificates, while in contrast many dealers are con strained by law or preference from dealing in individual mortgages or loans that consti tute the pool underlying the participations. Thus the sources that can be tapped to sup port any particular Federal credit program have been considerably enlarged by the de velopment of this program. PC sales grew by leaps and bounds for several years, but then began to decline. Sales 113 FEDERAL RESERVE BANK totaled $0.8 billion during fiscal 1965, the program’s first year of operation— except for some earlier Eximbank offerings— rose rapid ly to $4.3 billion in fiscal 1967, and then dropped to $3.8 billion in the following year. (To date in fiscal 1969, the only PC sales, $1.3 billion, were recorded last August.) Still, with only small amounts being retired, $11.0 billion worth of participation certifi cates were outstanding in the agency market in March of this year. Outstanding PC’s, in other words, exceeded the outstanding se curities of any single agency, and accounted for more than one-fourth of all securities in the agency market. The PC program has generated a great deal of controversy during its short history, centering primarily around the treatment of PC’s in the Federal budget and in the debt limit. Initially, PC sales were considered as a reduction in Government expenditures. But critics of this procedure argued that it was “gimmickry,” and that the PC sales were just as much a means of financing budget expen ditures as were direct Treasury borrowings. The controversy was for the most part settled in the last year or so. First, Congres sional legislation decreed that participation certificates sold during fiscal 1968 would be treated as Treasury debt, and thus would come under the debt limit. (But this legisla OF SAN FRANCISCO tion did not include PC issues prior to or after fiscal 1968.) Then the Administration’s new “unified” budget changed the treatment of all agency operations, depending on whether the agency in question was wholly owned by pri vate entities or had some Government spon sorship. If partially Government-owned, the agency’s receipts and expenditures are in cluded with the regular Government ac counts. But the new procedures also shift PC sales from the operating budget—where they served to reduce expenditures— to a means of financing the budget. The new housing legislation not only puts Ginnie Mae in business as trustee for the PC program, but it also empowers that agency to guarantee issues of “mortgage-backed” secu rities— that is, packaged obligations issued by private firms dealing in mortgages, such as commercial banks, mortgage-banking firms, and Fannie Mae. With the Ginnie Mae guar antee, these securities would have the “full faith and credit” of the Federal Government behind them. They could be sold to pension funds and other large institutions which nor mally do not deal in individual mortgages be cause of the paperwork involved, and thus they would provide another way of broaden ing the financial support of the mortgage market. Andrew Winnick and William Burke Publication Staff: R. Mansfield, Artist; Karen Rusk, Editorial Assistant. Single and group subscriptions to the M onthly Review are available on request from the Admin istrative Service Department, Federal Reserve Bank of San Francisco, 400 Sansome Street, San Francisco, California 94120 114 May 1969 MONTHLY REVIEW Deposits: Growth and Seasonals otal deposits at Twelfth District mem ber banks, as well as at banks else where in the nation, practically doubled during the almost uninterrupted economic expansion of the 1961-68 period. By type of deposit, rates of growth varied as follows: • Total demand and time deposits (sub ject to reserve requirements) at Western member banks increased at an 8.0-percent annual rate between the beginning and the end of the 1961-68 era. This figure slightly bettered the 7.7-percent figure recorded else where, largely because of a faster rate of growth in the West in the first half of this eight-year period. © Net demand deposits at Western banks — total demand deposits less deposits due to domestic banks and cash items in process of collection— increased at only a 3.6-percent annual rate over this period, reflecting the lack of growth in this category between mid1964 and mid-1967. The comparable figure for banks elsewhere was 3.0 percent. In the West, the private-demand deposit component —net demand deposits less U.S. Government deposits— expanded at a 3.9 percent rate while public deposits declined. • Time-and-savings deposits in c re a se d rapidly throughout almost all of the 1961-68 period. In the District, the average annual gain was a strong 11.4-percent; elsewhere in the nation, the annual gain was an even more substantial 14.4-percent figure. T Outline of seasonal patterns An analysis of seasonally-adjusted data de veloped by this bank’s research staff shows significant differences in various sub-periods of the 1961-68 period. The basic data were computed on a monthly basis in order to pin point, as closely as possible, the timing of shifts in deposit flows. These series were constructed by averaging daily deposits for the reserve-statement weeks (ending Wednes day ) falling within a given month. A Census Bureau adjustment program was then applied to remove normal seasonal variations from the unadjusted monthly series. The seasonal-adjustment procedure was applied to two major series, total deposits and time-and-savings deposits. From these se ries, net demand deposits were derived as a residual, since these deposits are subject to greater irregular movements than are time deposits. Within the demand-deposit cate gory, the adjustment program was applied to the figures for private demand deposits, and the extremely volatile component, U.S. Gov ernment (public) deposits, was derived as a residual. 115 FEDERAL RESERVE BANK OF SAN FRANCISCO Demand deposits exhibit pronounced seasonal pattern, while time deposits move less sharply Annual Average = 100 116 a well-defined sea sonal pattern. They tend to rise in Jan uary, decline slightly in F e b ru a ry and March, then acceler ate sharply in April and M ay. S u b se quently, they tend to d e c lin e g ra d u a lly until November, and then level off in De cember. Banks else w here, ho w ev er, show a somewhat flatter pattern; their inflows tend to peak in March (with a sec ondary peak in August) and to decline grad ually through November. This difference in seasonal patterns reflects the wide seasonal movements in public time deposits, which are a much larger component of the time-deposit category at Western banks. Private demand deposits, in the West as elsewhere, have a pronounced seasonal pat tern. They tend to decline through the first quarter, especially in February and March, then rise during April, but decline in May as income taxes are processed and debited to deposit accounts. They exhibit little trend during the summer, but then rise from Western banks outpace others with 8-percent September to their annual rate of gain in total deposits December peak. But Jan. 1961 =1 00 within the overall de mand - deposit cate gory, these fluctua tions in private de posits are frequently offset by the ex tremely erratic move ments of U.S. Gov ernment d e p o sits. (Public demand de p o sits have also shown wide year-toyear fluctuations, but no overall growth, from 1961 to 1968.) Time-and-savings d e p o sit flow s at Western banks show 1963 1965 1967 1969 May 1969 MONTHLY REVIEW tween early 1961 and early 1964, and then Variation in total deposits ... moved sideways through the summer of District banks’ total deposits rose at a 7.8that year. The series again expanded until percent annual rate between January 1961 mid-1966, but this gain was more than off and July 1966, but this strong upward move set by a sharp 6.5-percent contraction in ment was then broken by the 1966 monetary late 1966 as banks came under heavy reserve crunch. As monetary pressures on bank re pressure. A substantial expansion ensued in serves intensified in the latter part of the year, January-October 1967; this was followed by deposits contracted at a 1.1-percent annual a brief pause, and then by another expansion rate. spanning most of 1968. The expansion was Total deposits, after moving upward at a strongest in the January-August ’68 period, 10.0-percent rate between January 1967 and with a 12.0-percent rate of gain. March 1968, increased at only a 1.8-percent Western banks posted larger demand-de rate over the following several months, under posit gains than others throughout the 1961the impact of rising money rates and a re 64 period, and also during most of the 1967strictive monetary policy. But following this 68 interval. Thus, they were able to record a pause, deposits in second-half ’68 expanded at an 18.7-percent rate, in the strongest surge larger gain for the period as a whole, despite of the entire eightyear period. Dem«nd=(dep@sif gr® w ftiB at 4 percent annually, The expansion in greater at Western banks than at other banks to ta l d e p o sits was Jan. 1961 = 100 greater at Western banks than at other banks between early 1961 and mid-1965, and then again in the second half of 1968. But Western banks e x p e rie n c e d th e same rate of outflow as others during the 1966 tight-m oney period, and they suf fered a more severe outflow than others in the brief pause of TWELFTH DISTRICT MEMBER BANKS second-quarter ’68. SEASONAL FACTORS FOR DEPOSITS .. „ reflects demand-deposit swings D is tric t b a n k s ’ private demand de posits grew at a 3.7percent annual rate, on the average, be 1968 January February March April May June July August September October November December Total Deposits 1 100.9 99.4 99.3 100.7 99.9 100.0 100.7 99.9 99.5 100.3 99.7 100.2 Subject to reserve requirements 2Residual series Time & Savings Deposits Net Demand Deposits 100.2 100.1 100.1 100.4 100.9 100.6 100.5 100.3 100.0 99.4 98.8 98.8 102.2 98.3 97.9 101.4 98.2 98.9 100.9 99.2 98.7 101.8 101.1 102.7 2 Private Demand Deposits 103.1 98.0 98.0 101.9 96.6 97.5 99.0 98.3 99.7 101.7 102.3 103.7 117 FEDERAL their relatively larger contraction in late 1966, as well as their more protracted pe riods of sluggishness in early 1965 and late 1967. ns RESERVE BANK SAN FRANCISCO Tim e d e p o sits g r o w at rapid I I-percent pace in West, but at even faster pace elsewhere Jan. 1961 = 1 0 0 .. „ and lime category's wider swings D is tric t b a n k s ’ time-and-savings de p o sits grew fa irly s te a d ily over the 1961-65 period, at a 12.0-percent annual rate. In 1966’s more volatile atmosphere, however, this series fluctuated wildly. During the first quarter of that year, Western banks posted a net decline in pass book savings— and recorded no growth in total time deposits—because of the intensi fied competition for savings, especially from savings-and-loan associations. But banks were able to expand time deposits at a 12.0percent rate in the spring and early summer, when they aggressively bid for funds by offering various savings certificates which carried competitive rates. Nonetheless, the ensuing monetary crunch brought about a reversal of the situation; banks suffered a 0.8-percent rate of decline in the SeptemberNovember period, as they lost substantial amounts of large-denomination time certifi cates (and also public time deposits) when market rates rose to a point exceeding the legal rate payable on these CD’s. From November 1966 through March 1968, time deposits resumed their upward trend at about the 1961-65 pace. This move ment was halted temporarily in the second quarter of 1968, when rising income taxes OF caused heavy withdrawals of savings, and when rising market rates (plus a speed-up in corporate-tax payments) generated a siz able run-off in the CD category. But then, in the second half of the year, time deposits spurted ahead at an 18.9 percent annual rate; public deposits increased, because of the temporary lodgment of funds received from a heavy volume of municipal-bond flotations, and business deposits in CD form also rose. Because of the very rapid growth of timeand-savings deposits at banks elsewhere in the nation, the deposit structure of the two groups of banks came to resemble each other more closely over the course of the 1961-68 period. At the beginning of this period, time deposits accounted for 50 percent of total deposits at District banks, but for only 34 percent of total deposits at other banks— but by the end of 1968, the time-deposit share had risen to 64 percent for District banks and to 54 percent for banks elsewhere. Ruth Wilson Z^Oay for Consumers -Bay is coming. July 1, 1969 is the ef $34.1 billion followed by personal loans fective date of Regulation Z, written by totaling $26.9 billion— and another $23.3 the Federal Reserve System’s Board of Gov billion in non-instalment credit. All too often, ernors at the direction of Congress, to im however, consumers are virtually unaware of plement the Truth in Lending Act, a major what the pay-later portion is costing them. part of the Consumer Credit Protection Act In the past, shoppers have been confronted of 1968. with a bewildering array of credit inform a tion—no two disclosures of which are directly This pair— the Act and the Regulation— comparable. The Truth in Lending provi are designed to spell out disclosures (includ sions assume that most consumers will be ing finance charge and annual percentage able to make intelligent decisions regarding rate) that creditors must make to their cus credit buying if they are given the facts. tomers, and to set standards for advertising Truth in Lending does not fix any mini credit terms. mum or maximum charges for credit. It Disclosure of “the finance charge” will tell simply insures that a customer is advised of the customer how much he is paying for all the costs and conditions of the credit he is credit. At the same time, disclosure of the seeking. Regulation Z applies to banks, annual percentage rate— the relationship of savings-and-loan associations, d e p a rt m e n t the total finance charge to the total amount stores, credit unions, credit-card issuers, au financed— will tell the consumer the relative tomobile dealers, residential mortgage brok cost of that credit in percentage terms. When ers, craftsmen, doctors, and anyone else who the Act is in effect and the general disclosures extends or arranges for consumer credit. are in use, people will be able to shop for credit as carefully as they do for merchandise, During 1968, commercial banks extended with the annual percentage rate functioning $36.3 billion in instalment credit, while exas a p ric e tag on credit. C@M§Mmer§ ©wed $90 billion in instalment credit and $23 billion in noninstalment credit at end of '68 $ I ! 3 billion to Dec. 1968 Outstandings be paid later Billions of Dollars The buy-now-p aylater tone of t h e 30 A m e ri c an market place has contrib uted to making con Service Credit sumer credit one of the fastest growing — Charge Accounts sectors of the n a tional economy. At the end of 1968 Single Payment Loans shoppers owed $89.8 b i l l i o n in i n s t a l Auto Paper Other Consumer RepairPersonal Loons ment credit — with Goods Modernization --------------------- IN S T A L M E N T C R E D IT N O N IN S T A L M E N T C R E D IT auto loans leading at Z FEDERAL RESERVE BANK tensions totaled $15.9 billion for sales-finance companies, $25.8 billion for other financial institutions, and $19.0 billion for retailers. (All of these lenders, except sales-finance firms, extended at least twice as much credit in 1968 as they did in 1960.) The most popular type of noninstalment credit proved to be single payment loans— $9.1 billion out standing, mostly at commercial banks— while charge accounts totaled $7.8 billion and ser vice credit $6.4 billion at the end of the year. The primary test of credit covered by the Regulation is not so much the form of the credit as the purpose for which it is extended. Consumer credit is defined as credit offered or extended to an individual for purchases of real estate, household goods, or farm goods for which a finance charge is or may be imposed, or which is repayable in more than four instalments. The regulation as signs all consumer-credit transactions into one of two categories— open-end credit, in cluding credit-card transactions and depart- C©msMiMi©r°eir®dif field now involves twice as many dollars as in 1960 Billions of Dollars 120 1955 I960 1965 OF SAN FRANCISCO ment-store revolving charge accounts; and credit other than open-end, which includes instalment credit, mainly used by consum ers for big-ticket items such as automobiles, refrigerators, washing machines, and tele vision sets. Some types of credit are exempt from the regulation, such as business and commercial credit, other than for agricultural purposes, and credit to governmental units. Also ex empt are securities and commodities trans actions with a broker-dealer registered with the Securities and Exchange Commission, along with some types of transactions under regulated public-utility tariffs. Credit ex ceeding $25,000 is also exempt — except real-estate credit, which is covered regard less of amount. (The Act stipulates the right of a customer to cancel some types of con sumer credit arrangements within three business days if his residence is used as col lateral. ) Open-end arrangement Under the open-end arrangement, credit can be extended from time to time with finance charges levied against any unpaid balances each month. With this type of credit the annual percentage rate may be computed by the following method: Di vide the finance charge by the unpaid bal ance to obtain the rate for one month or whatever other time period is used; then multiply this result by 12 or by the num ber of time periods used by the creditor during the year. In the case of a typical charge of IV2 percent of the unpaid balance with bills presented monthly, the annual per centage rate would be 18 percent. The following information must be dis closed to those opening a new open-end account: — The conditions under which a finance charge may be imposed and the period within which payment may be made without incur ring a finance charge. May 1969 MONTHLY — The method of determining the balance upon which a finance charge may be imposed. — The method of determining the finance charge. — The periodic rate or rates used, the range of balances to which they apply and the corresponding annual percentage rate or rates. — The conditions under which additional charges may be imposed and the method for determining them. — The conditions under which a creditor may acquire any security interest in any property owned by the customer and a de scription of the interest which may be ac quired. — The minimum periodic payment re quired. Similar information must be sent to cus tomers who already have open-end accounts by July 31 if the account has a collectible unpaid balance on July 1, and by the first billing which follows use of the account for those on which no balance is owed. Instalment-credit arrangement For instalment credit, primarily used by customers for purchases of big-ticket mer chandise, the annual percentage rate must be computed by one of several alternatives, such as (for instance) the actuarial method. Here is an example of how the actuarial method would work. With a bank loan of $100 repayable in 12 equal monthly instal ments at a 6-percent add-on finance charge, the annual percentage rate would be 11 per cent. In this case the borrower would repay $106 over one year but would have use of the $100 loan only until he made his first payment. At that point he is repaying part of the principal and has less money at his disposal. Using the same set of circumstances but this time with a 6-percent finance charge dis counted in advance, the annual percentage REVIEW rate would be IIV 2 percent. That’s because the customer in this case would receive $94, must repay $100 and again would have full use of the loan only until he made his first payment. For credit other than open-end, the cus tomer must be furnished the following in formation as applicable, plus additional information relating to the type of credit extended: — The total dollar amount of the finance charge, except in the case of a transaction to finance a dwelling. — The date on which the finance charge begins to apply if different from the date of the transaction. — The annual percentage rate. — The number, amount and due dates of the payments. — The sum of these payments, except in the case of a first mortgage to finance pur chase of a dwelling. — The amount or method of computing any default, delinquency or similar late-payment charges. —A description of any security interest to be acquired by the creditor. — A description of any penalty charge for prepayment of principal. — The method of calculating the finance charge in the case of prepayment and a statement of charges deducted from any re bate. The Federal Reserve Board has prepared sets of tables which are available to creditors to determine annual percentage rates. The two booklets— one for regular payments and one for irregular payments, or multiple ad vances— are available for $1 each or 85 cents in lots of 10 or more from the Federal Reserve Board in Washington, or from any of the 12 Federal Reserve Banks. All credit advertising is covered by Truth in Lending. Under the regulation, no ad vertisement may advertise a specific amount 12 1 FEDERAL RESERVE BANK of credit or instalment unless the creditor ordinarily arranges terms of that type. Also, no advertisement may spell out a specific credit term unless all other terms are stated clearly and conspicuously. For example, statements such as “only $3 per week,” “two years to pay,” and “no money down” will not be allowed unless a more complete disclosure of terms is given. Although Regulation Z has been issued by the Federal Reserve Board, enforcement will be supervised by nine different Federal agen cies. These agencies are: The Federal Re serve Board for State banks which are mem bers of the Federal Reserve System; the Federal Deposit Insurance Corporation for other insured State banks which are not members of the Federal Reserve System; the Comptroller of the Currency for national banks; the Bureau of Federal Credit Unions; the Federal Home Loan Bank Board for fed erally insured savings and loan associations; the Interstate Commerce Commission for in OF SAN FRANCISCO dustries it regulates; the Civil Aeronautics Board for airlines; the Agriculture Depart ment for creditors under the Packers and Stockyards Act; and the Federal Trade Com mission for all other creditors, such as retail stores, small loan companies, service estab lishments, and professional people. Creditors who willfully and knowingly violate the Truth in Lending law or Regulation Z face a maximum criminal penalty, upon convic tion, of a $5,000 fine, a year in jail, or both. A creditor who fails to make the required disclosures may be sued by a customer for twice the amount of the finance charge, but not less than $100 nor more than $1,000, plus court costs and attorney’s fees. In order to provide creditors with complete information on Regulation Z, printed copies of the Regulation and statute, together with an explanatory question-and-answer series on Truth in Lending, are being sent to creditors through the agencies enforcing the law. Karen Rusk Silver: End of an Era The Treasury in mid-May lifted its ban on the melting and exporting of silver coins, thus freeing large amounts of the metal for industrial use. In following the recommendation of the Joint Commission on the Coinage, the Treasury noted that the two-year-old melting ban “no longer either keeps silver coins in circulation or contributes to the Treasury’s supply of silver coins.” Industry sources estimate that old silver coins still outstanding, if turned in for melting, would yield about 1.7 million ounces of silver— more than ten times the current annual silver requirements of U.S. industry. The Treasury also announced a reduction in the amount of silver to be offered at its weekly auctions. Henceforth, 1.5 million instead of 2.0 million ounces will be offered each week in the sale held by the General Services Administration, and the auction will be open to all instead of only to domestic industrial users. In addi tion, the department announced that it would ask Congress to authorize the minting of silverless half-dollars and dollars, to replace the part-silver part-copper halfdollars and the all-silver coins that have virtually disappeared from circulation. Finally, it announced plans for the sale of 2.9 million rare silver dollars through a GSA “bid-sale” arrangement designed to net anywhere between $15 million and $75 million. May 1969 MONTHLY REVIEW Western Dngest Credit Gain During Tax Week Large District banks showed a sharp increase in bank credit over the mid-April tax date. Total credit rose $800 million during the tax week, mostly because of a $751-million increase in loans. (Almost one-third of the loan increase was in securi ties loans.) . . . Business borrowing soared by $214 million— compared to a $75million gain in the comparable year-ago week. Thus, between mid-March and mid-April, large District banks accounted for 29 percent of the national increase in business loans and for 27 percent of the increase in total bank credit. . . . Borrowing by Western business firms was fairly widely dispersed among major industrial cate gories during the mid-April tax week. The heaviest borrowers, however, were retail-trade firms and public utilities. Rebound in Housing Starts Housing starts in the West rebounded sharply in April to a 361,000-unit annual rate after a 46-percent recovery in March from February’s depressed levels. The April figure showed a gain of 11 percent over a year ago, resulting in the highest rate since February 1964. The April increase contrasted with a 5 percent overall decline in starts in the rest of the nation. . . . Builders’ demand for mortgage financing appeared to be fairly strong in early spring, with the critical question centering more around the availability of funds and offering terms rather than the high cost of mortgage funds (8 percent or m ore). On the supply side, vacancy rates still appeared to be falling in most metropolitan areas of the District, with the exception of Seattle. Strength in Metals Markets Steel production remained strong at Western mills during the early spring period. Throughout most of April, production fell below the rapid March pace, but it was still higher than during the inventory boom of a year ago. District producers felt enough confidence in their markets to raise prices on hot-rolled bars and semi finished products by an average of 3.6 percent in late April. . . . Several other price increases occurred in metals markets during the spring period. Major aluminum producers raised prices on a number of sheet products, accounting for about half of all mill shipments, and lead producers meanwhile posted their fourth price increase of the past six months. Then, in early May, major copper producers raised the domestic price of refined copper from 44 to 46 cents a pound, and most leading fabricators immediately followed suit. Publications Silver: End of an Era (32 pp. 1969) — Report on silver coinage, industrial devel opments, and silver mining in the West Copper: Red Metal in Flux (60 pp. 1968) — Historical study of copper mining, copper markets, and the outlook for the future Farm Lending in the West (20 pp. 1968) — Results of 1966 farm loan survey Credit — and Credit Cards (12 pp. 1968) — Report on recent developments in bank credit cards and check credit plans throughout the nation. Law of the River (16 pp. 1968) — Report on present and future sources of water supply for the Pacific Southwest to meet its 21st-century needs Price Tag on the Nation’s Health (12 pp. 1968) — Report on medical care costs Wages and Prices . . . Men of Steel (20 pp. 1968) — Two labor-market articles Centennial Summer (12 pp. 1967) — Report on Alaskan industrial and resource development as providing vast potential for growth of this area Trees, Parks and People (12 pp. 1967) — Study of the economic issues involved in the Redwood National Park along California’s northern coast Down the Ways (12 pp. 1967) — Report on U.S. and foreign shipbuilding in dustries Aluminum—Lightweight Rebounding (24 pp. 1966) — Study of aluminum pro duction and aluminum markets and their importance in the national economy Men, Money and the West (60 pp. 1964) — Historical survey of national and regional developments and growth over the past half-century Individual and bulk copies are available by writing to: Administrative Services Department Federal Reserve Bank of San Francisco 400 Sansome Street San Francisco, California 94120
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