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n TWELFTH FEDERAL RESERVE i e o i a v ) The Current Reporting Series A s a Guide to Banking Activity . . . 114 DISTRICT FEDERAL RESERVE BANK OF SAN F R A N C I S C O September 1957 District Bank Profits Decline............. 127 The Current Reporting Series As a Guide to Banking Activity BANK LENDING UP IN MOST DISTRICTS Reserve Puts the Total at $227,000,000— Deposits A lso Show a Rise Special to the N ew Y ork T im e s W A S H IN G T O N , Sept. 18— The Federal Re serve Board reported today that the condition state ment of weekly reporting member banks in ninetyfour leading cities showed the following principal changes for the week ended last Wednesday, Sept. 11: A n increase of $1,258,000,000 in demand deposits adjusted. HA decrease of $1,182,000,000 in United States Government deposits, reflecting the usual heavy dis bursements by the Treasury during the early part of the month. Commercial and industrial loans increased in nearly all districts and a total of $227,000,000 at all reporting member banks ; the principal increases were $105,000,000 in New Y ork City, $40,000,000 in the Chicago District, $30,000,000 in the San Fran cisco District and $19,000,000 in the Cleveland Dis trict. Real estate loans increased $25,000,000 . . . he regular reader of the financial pages of Tthe daily newspaper will quickly identify the item here reproduced from the N ew Y ork as a standard feature of the Thursday or Friday edition of his paper. This story, de scribing banking developments during the past week and month and relating these changes to what happened a year earlier, is based upon the “ Principal Resource and Liability Items of Re porting Member Banks in Leading Cities,” a report released Wednesday noon by the twelve Federal Reserve Banks for their respective dis tricts and by the Board of Governors of the Fed eral Reserve System for the nation. This set of se lected balance sheet items states the condition of the reporting banks at the close of business the preceding Wednesday, a reporting lag of only one week, making this information one of the most current— and comprehensive— groups of T im e s 114 economic data available.1 The series is not con tinuous— it has been published for 40 years with several major revisions and numerous minor changes over the years, all to the end of providing a greater amount of information. However, this lack of continuity over the entire range of the series is not a sufficient ground for rejecting the series in an examination of short-run fluctua tions. Because the information contained in the Weekly Reporting Member Bank Series (here after referred to as the W R M B S for the sake of brevity) is given such wide circulation and is is sued on such a current basis, questions naturally arise as to how representative this sample is of the group of banks from which it is drawn and whether the movements of this series have any significance for changes in the level of general business activity. It is the purpose of this investi gation to examine the W R M B S with regard to (1 ) the representativeness of the W R M B S as a measure of the changes in Federal Reserve mem ber bank operations and of all banking activity and (2 ) how the reporting series behaves dur ing the business cycle. The basic data to be used in this inquiry are the same as the figures made available to the public. No adjustments have been made for seasonal or long-run movements, but this is not to imply that seasonal or secular pat terns can safely be ignored. Certain industries and certain classes of borrowers do show a pro nounced periodic movement which must be con sidered in the interpretation of the data.2 W R M B S nof typical of All Banks As the first step in this investigation, it is pro posed to examine the behavior of the W R M B S to see if it is characteristic of the behavior of the 3 Forty-seven percent of all the banks in the United States are mem bers of the Federal Reserve System and hold 86 percent of the coun try’s demand deposits. All national banks must belong, and the non members are mainly the smaller country banks of the nation. The Weekly Reporting Member Banks, then, are a smaller sample of All Member Banks; but, again, this sample of less than 3 percent of All Banks holds 56 percent of the nation’s demand deposits, which in turn constitute a major share of the money supply. 2 For example, of the “ Commercial and Industrial” loan series, the fol lowing show a distinct seasonal pattern: loans to “ Food processing manufacturers,” “ Trade,” “ Commodity dealers,” “ Textile manufac turers,” and to a certain extent, “ Public utilities and transportation” firms. September 1957 M O N T H L Y R E V IEW banking community in general. This article will be confined to the first aspect of the investiga tion. Any careful study of this nature is bound to be somewhat technical, and for those readers without the time to go step by step through our analysis, the conclusions are drawn together at this point. There is a remarkable degree of con formity between movements in the Weekly Re porting Series and in the All Member Bank data; but the relationship between changes in each series is not necessarily proportional. Thus the Weekly Reporting Series is most successful as a qualitative rather than a quantitative indicator of changes in banking activity. In view of the time-lag between the W R M B S release one week after the fact and the more complete data which become available only months later, some precision may be lost but much time is gained. The W R M B S may be spoken of as a “ sam ple,” but not without qualification. The prepara tion and construction of the weekly reporting series cannot be compared with the usual sam pling processes used in statistical analysis for two reasons. First, the sample is not chosen by a method of random selection. That is to say, not every bank nor every city has an equal probabil ity of being represented in each weekly sample that is taken. The “ leading cities” included in the sample are those cities representing 2 percent or more of total commercial bank deposits within the several Federal Reserve districts. The cover age of reporting banks is at least 75 percent of all member bank deposits in the reporting cities. The individual banks represented in the sample are the same each time, subject to infrequent additions or deletions due to mergers of report ing banks, liquidations, etc. There has been a marked movement toward consolidation in the banking field even as in the industrial sector of the economy. The accompanying table shows the number of banks in the sample, together with their assets, compared with the number of mem ber banks and all banks, together with their assets. The second consideration follows from the first. Aside from the fact that each bank in the universe of all banks does not have an equal chance of be ing represented in the sample, it should be noted that each bank is unique— there is no possibility T A. W eekly ,----- reporting banks1----- x 12th United Year District States 1948 31 435 1949 30 426 1950 422 30 1951 30 408 1952 30 401 1953 32 405 1954 32 395 385 1955 31 1956 28 361 B. able 1 NUM BER OF BANKS ^M em ber 12th District 270 268 268 264 262 260 235 209 187 banks1-* United States 6,918 6,892 6,873 6,840 6,798 6,743 6,660 6,543 6,462 ,— All banks1— ^ 12th United District States 521 14,171 516 14,687 509 14,121 508 14,618 504 14,575 14,509 502 14,367 442 14,243 401 14,167 385 ASSETS OF BANKS (millions of dollars) W eekly ,------ reporting banks8------->, ^-Member banks-** 12th 12th United United Year District States District States 14,324 85,015 17,414 131,392 1948 1949 14,691 87,840 17,529 134,431 1950 15,874 94,637 18,854 144,660 1951 16,906 99,810 153,439 20,276 22,004 1952 18,378 104,241 160,826 1953 107,523 22,584 163,983 19,151 1954 20,599 24,169 172,242 114,506 21,548 25,580 1955 114,900 179,414 1956 21,770 115,787 26,512 184,874 /-----All banks----->, 12th United District States 18,870 154,702 19,422 179,170 20,816 168,932 22,388 202,903 24,251 213,837 24,901 220,140 26,758 231,654 28,293 242,008 29,298 250,770 1 Board of Governors of the Federal Reserve System, Federal Reserve Bulletin and Federal Reserve Bank of San Francisco. 2 Board of Governors of the Federal Reserve System, Federal Reserve Call Report. aNot a Statement of Total Assets: The item “ other assets’ ', consisting chiefly of Federal Reserve Bank Stock, Real Estate, etc., is omitted. of the substitution of one bank for another with out affecting the resulting sample. No provision is made for weighting the banks included in the sample according to their relative importance in the total banking structure so as to give a true representation of the composition of the banking system. Banks are not all the same size; and size, the location, whether rural or urban, and the economic region in which the bank is situated largely determine the composition of the bank’s assets and the behavior of the specific items in its loan portfolio. Under these circumstances, an unweighted random sample would be meaning less, and attempts to weight a random sample would entail entirely too much effort to present on a weekly basis. From all of this it may be recognized that the sample banks are not typical of all banks; in point of fact, there is a distinct bias toward large city banks since rural banks are not represented at all except where large branch banking systems exist. The question of whether this impairs the usefulness of the sample will be taken up later. 115 FEDERAL RESERVE BANK WRA48S a s an indicator of changes in ban kin g activity The first part of the analysis, which now fol lows, is concerned with the W R M B S and its re lationship with the larger groups of banks. The Reporting Banks, the Member Banks, and All Banks stand in the relationship of concentric cir cles of increasing size. The group of Reporting Banks is wholly contained in the larger group of Member Banks, which in its turn is wholly con tained in the largest group of All Banks, regard less of affiliation. Ideally, changes in the Report ing group, the Member Bank group, and the All Bank group will be proportional. Returning to our analogy of the three circles, the radii of the circles, though they will change, will still retain the same proportional relationship. To illustrate, suppose that circles A , B, and C represent the Reporting Bank group, the Member Bank group, and All Banks, respectively. If it be assumed that all banks are of equal size and importance re gardless of whether they are member or non member, reporting or non-reporting banks, then an increase in the size or the radius of A would imply an exactly proportional change in B and C. If the Reporting Bank group ( A ) contains, for instance, 50 percent of the loans outstanding for Member Banks (B ) and 25 percent of loans out standing for All Banks (C ), then a given change in A signifies a change twice as great for B and four times as great for C. However, for reasons already given, the W R M B S cannot be consid ered an ideal, that is, a completely representative sample. The first problem in analyzing the significance of the sample we have, then, is to find specific series of data which will be comparable among the three groups: Weekly Reporting Member Banks, All Member Banks, and All Banks. Since 116 OF SAN F R A N C IS C O there was a major revision in the W R M B S in 1947, the interval covered in this study is from 1948 to 1956. There were minor changes in the presentation of the data during this period, but adjustments have been made to preserve com parability. The series with which the W R M B S will be compared are derived from the formal reports on condition which must be made by all banks to the Comptroller of the Currency and to the Federal Deposit Insurance Corpora tion and by all Member Banks to the Federal Reserve System. The annual report of the Comptroller of the Currency gives a summation of the balance sheets of all active commercial banks as of December 31. The Federal Deposit Insurance Corporation report, “ Assets, Liabili ties, and Capital Accounts, Commercial and Mu tual Savings Banks,” hereafter referred to as the “ Call Report,” states the asset position of all banks semi-annually, June 30 and December 31, since 1950. The Federal Reserve System requires that all Member Banks report at least three, and usually four, times a year, with the second and fourth calls generally occurring on June 30 and De cember 31. The first or third call is sometimes timed to correspond with a reporting date for the W R M B S, offering an added check on this series. The W R M B S data, on the other hand, are re ported every Wednesday. The procedure used here has been to compare the Call Report data to the Wednesday corresponding to or, usually, the Wednesday closest to the call date. This means that the intervals between Call Reports and the corresponding W R M B S reports may vary by two or three days, but any error involved should not be great enough to invalidate the conclusions reached. The set of specific balance sheet items to be used in this investigation is dictated by the W R M B S and involves a certain amount of aggre gation and dis-aggregation in the handling of the Call Report data for Member Banks and for All Banks, wherein the specific items are presented in much greater detail than they are given in the W R M B S releases. The adjustments necessary to obtain comparable sets of data are described in Table 2. MONTHLY September 1957 R E V IEW T able 2 A B a s i c R e p o r t in g S e r ie s t o A c h i e v e D a t a C o m p a r a b l e t h e W e e k l y R e p o r t in g M e m b e r B a n k S e r ie s d ju st m e n t s in to Federal Deposit Insurance C orp or ation Call Report Reports to Comptroller of the Currency Category title this study W eekly Reporting Member Bank Series Federal Reserve reports Commercial, indus trial, and agri cultural loans1. Commercial, in dustrial, and a g ricultural loans. Commercial and industrial loans (including open market paper). Loans to farmers directly guaranteed by CCC. Other loans to farmers. Commercial and industrial loans, agricultural loans. Commercial and industrial loans (including open market paper). Loans to farmers directly guaranteed b y CCC. Other loans to farmers. Loans for carry ing securities. Loans to brokers and dealers for carrying securi ties. Other loans for carrying securi ties. Loans to brokers and dealers. O ther loans for carrying securities. Loans for carry ing securities. Loans to brokers and dealers for carrying securities. Real estate loans. R eal estate loans. Loans secured b y farm lands, residential property, and other properties. Loans insured by F H A or guaranteed by V A . Loans not insured or guaranteed by F H A or V A . Loans on farm land, residential properties, and other properties. Loans insured by F H A and in sured or guar anteed b y V A . Loans not insured o r guaranteed b y F H A or V A . Loans secured by farm land (including im provem ents), residential property (other than farm ), and other property. All other loans. A ll other loans. A ll other loans (including overdrafts). Other loans to individuals for personal expenditures. Passenger automobile in stalment credit. O ther retail consumer credit. Residential repair and modernization instalment. Other instalment. Single payment. A ll other loans (including over drafts). Other loans to individuals. Retail autom o bile instalment credit. O ther retail instalment paper. Residential and modernization instalment. Single pay ment. Other loans. Other loans to individuals. . 1 The agricultural loan series was split off from this series January 4, 19 56. They cannot be separated out from the other loans in the earlier data for this series. The agricultural loans series is added to the commercial and industrial loans series for 1956 to preserve comparability with the preceding series. N ote: N o adjustments in the various Call Reports are necessary in the following categories: “ Total loans” ; “ Total loans and investments” ; “ Demand deposits of individuals, partnerships, and corporations” ; and “ Holdings of United States securities.” For data subsequent to 1952 in “ Total loans,” “ Loans to Banks” is added to the Weekly Reporting Member Bank Series to ensure comparability with earlier data. “ Demand deposits of individuals, partnerships, and corporations” is chosen in preference to “ Demand deposits adjusted” because the adjustments necessary to arrive at the latter— particularly “ Cash items in process of collection” — cannot be obtained from FDIC and Comptroller of the Currency Call Reports. “ Demand deposits of individuals, partnerships, and corporations” is more sensitive to credit de velopments in the private sector of the economy than would be “ Total demand deposits” since operations involving changes in United States Government deposits may come about either as a result of acquisitions of new issues of government secu ities by banks or as a result of tax payments or government disbursements. The series selected do not represent changes in the total balance sheet but were chosen as the more useful indicators of change in the levels of banking and general economic activity. The W RM BS, moreover, does not afford sufficient data to construct complete balance sheets which may be compared, item for item, with those of the more comprehensive reports. A sample il lustration of the W R M B S report is given in Table 3 with the items selected for this investi gation italicized. M ethod of analysis W e are now ready to come to grips with the problem of how to analyze the data. The W R M B S is a sample of the balance sheet items 117 FEDERAL RESERVE BANK of the universe of All Member Banks of the Fed eral Reserve System and of All Banks regardless of affiliation. It will be perhaps most representa tive of All Member Banks; but it is also indica tive of the actions of non-member banks, the functions and decisions of which are similar to those of Member Banks. Since the W R M B S is a sample, this immediately suggests that the data could be processed by the usual statistical tech niques applicable to small sample data. But that would not be true in this case. It is not the num ber of bank units represented that is important but rather the volume of deposits and loans out standing that is covered. It is possible for this coverage of deposits and loans to vary without a change in the coverage of bank offices due to changing patterns of business activity or different rates of growth for different categories of banks. A striking illustration of this occurs in the case T P r in c ip a l R in esource a n d L e a d i n g C i t i e s ’1' in OF SAN F R A N C IS C O of real estate loans, where the share of real estate loans held by Reporting Banks in the national sample has fallen in proportion to Member Banks and particularly in relation to All Banks. Tables 4A and 4B give the proportions of the specific series picked up in the reporting sample. If the proportions of the totals of loans out standing and deposits reported by the Weekly Reporting Member Banks to those of Member Banks and All Banks were constant and inva riant, this would be a priori evidence that the sample was a true gauge and indicator of banking activity. However, these proportions may and do vary, so that the ratio of the W R M B S sample to the group from which it is drawn changes, as can be seen in Tables 4A and 4B, since it is the number of banks as units that can be controlled as a sample, rather than the volume of their assets and obligations. In the first section of this study able 3 L ia b il it y I t e m s of R e p o r t in g M T w e l f t h F ederal R (in millions of dollars) the eserve August 21 Assets 1957 1957 Loans adjusted and investments1 ....................................................................................... 17,274 Loans adjusted1 ........................................................................................................................ 10,595 Real estate l o a n s ...................................................................................................................... 3,918 Loans fo r purchasing or carrying securities: T o brokers and dealers .................................................................................................. 100 T o o t h e r s ............................................................................................................................... ........ 64 Agricultural loans .................................................................................................................. 234 Comm ercial and industrial loans ..................................................................................... 4,445 Other l o a n s ............................................................................................................................... 1,996 U . S. G overnm ent obligations— t o t a l ............................................................................... 5,025 Treasury bills ........................................................................................................................ 304 Treasury certificates of indebtedness ............................................................................. 452 Treasury n o t e s ........................................................................................................................ 593 U . S. b o n d s ............................................................................................................................... 3,676 Other s e c u r it ie s ...................................................................................................................... 1,654 Loans to banks ...................................................................................................................... 300 Reserve with Federal R eserve Bank ............................................................................. 2,117 Cash in v a u l t ........................................................................................................................... 158 Balances with dom estic banks .......................................................................................... 227 O ther assets ............................................................................................................................ 459 Liabilities Demand deposits— a d ju s t e d ................................................................................................ Tim e deposits, except U . S. G o v e r n m e n t.................................................................... U . S. Governm ent d e p o s it s ................................................................................................ Interbank demand d ep osits: Dom estic b a n k s .................................................................................................................. F oreign banks .................................................................................................................... Borrow ings ............................................................................................................................... O ther liabilities ...................................................................................................................... Capital accounts .................................................................................................................... M em oranda: Demand deposits o f ind., part., and corp ................................................................... Tim e deposits o f ind., part., and corp........................................................................... em ber D Banks is t r ic t t--------------------- Change since— August 14 July 24 August 22 1957 1956 4 -149 +115 +355 4- 55 + 35 +463 0 — 2 10 + -1- 14 0 — 2 4- 40 4- 3 + 74 + 99 — 15 — 4 — 6 + 20 — 28 4 -1 3 — 17 — 22 — 11 + 2 4- 1 4 -5 4- 26 + 3 + 67 +136 + 90 — '132 — 27 + 13 — 19 + 13 — 9 — 16 — 1 + 24 + 9 — 5 +368 + 78 — 166 + 253 +292 — 513 — 198 + 58 + 77 — 39 + 3 — 38 + 82 8,908 8,463 396 — 141 — 8 +181 — 128 — 10 + 97 — 130 + 754 — 65 514 158 142 548 1,406 — 20 + 5 + 59 + 6 + 2 0 + 29 + 68 + 26 + 1 — 9,175 7,614 — 276 + 7 — 50 + 34 — 63 +696 •Including all offices of reporting branch banks. 1 Exclusive of loans to banks and after deduction of valuation reserves; individual loan items are shown gross. 118 21 — 13 —102 — 28 + 45 M O N T H L Y RE V IEW September 1957 T a b le 4 A P e r c e n t a g e s o f S p e c ific M e m b e r B a n k S e r ie s C o n t a in e d in W e e k l y R e p o r tin g M em ber B a n k Total loans and 12th Y ear and district call 1948 I II III* IV 1949 I 85 84 73 69 84 85 71 69 69 84 66 62 66 66 66 66 66 66 67 66 66 66 66 83 85 83 83 66 68 66 66 85 85 85 85 84 84 84 84 66 66 66 66 65 66 66 66 65 86 86 72 70 70 71 71 85 85 84 84 84 85 85 85 84 85 85 85 85 86 70 71 69 68 68 69 69 69 69 70 70 70 69 70 84 IV 1950 I II III 84 83 84 84 84 84 III IV 1953 I II III IV U .S . 66 66 83 84 1952 I II ' 83 83 II III IV 1951 I II III IV U .S . Total 12th District 83 84 83 84 84 1954 I II III IV 1955 I II III IV 84 84 83 84 84 1956 I II III IV 82 83 82 82 65 65 65 64 64 63 63 85 86 85 85 85 84 84 85 85 85 85 85 S e r i e s , S e l e c t e d B a l a n c e S h e e t I t e m s , 1 9 4 8 -5 6 C a l l s Commercial. industrial. and agricul* 69 69 68 68 69 71 70 70 70 71 70 12th District b U .S . b 86 80 87 b 88 b Real estate 12th District b Securities U .S . b 12th District b b 71 100 b 93 b 81 b 69 b 91 b 95 b 80 b 59 b 49 b 91 b 88 b 77 b 59 b 49 88 84 90 74 66 91 92 78 76 58 61 90 85 78 79 91 84 80 81 82 81 78 78 61 61 60 61 60 60 86 80 b 85 b 49 b 78 b 86 b 49 b 88 b 78 b 85 b 91 78 79 80 80 80 83 84 83 83 83 88 89 80 81 80 80 80 83 83 83 83 82 50 50 50 49 49 90 92 92 92 92 81 81 81 81 81 82 83 49 50 90 91 89 90 92 92 93 91 92 91 91 91 79 79 50 50 49 50 80 80 83 83 83 83 83 82 82 81 81 81 82 82 82 80 80 82 82 50 50 88 79 79 79 79 80 79 U .S . b 81 49 90 89 89 89 U .S . b United States 91 86 90 90 Other 12th District 50 50 50 50 50 50 50 50 50 50 50 50 50 86 99 89 98 100 110e 120c 100 100 110« 100 100 91 100 100 100 100 97 89 95 93 87 96 98 103e 96 120c 93 93 90 94 93 92 88 93 92 90 92 91 91 88 89 89 87 85 78 78 76 76 76 74 76 78 76 75 75 75 77 77 77 76 12th District 82 82 82 82 81 82 82 82 84 63 64 64 66 66 65 66 64 82 81 81 79 81 81 80 85 80 60 60 61 61 60 60 80 81 81 81 82 81 81 83 83 83 83 82 82 81 60 59 59 60 60 60 60 61 62 61 61 61 81 80 79 Demand U .S . 12th District U .S . 64 64 82 82 69 68 64 63 63 62 62 62 81 82 68 69 81 81 82 81 81 81 82 82 68 67 68 68 68 68 68 69 82 81 68 67 81 81 67 67 67 67 67 66 62 62 82 80 81 60 61 61 62 62 64 64 64 62 84 83 82 82 82 61 59 59 58 58 56 55 82 82 82 83 82 82 82 82 82 82 82 68 67 70 67 67 68 67 68 68 67 66 66 67 66 66 65 T able 4B P e r c e n t a g e s o f S p e c if ic A l l B a n k S e r ie s C o n t a in e d i n W e e k l y R e p o r t in g M e m b e r B a n k S e r ie s , S e l e c t e d B a l a n c e S h e e t I t e m s , 1 9 4 8 -5 6 C a l l s Total loans and /— investments— \ 12th Y e a r and District U .S . call 47 48 •48 48 48 49 Total \ t------- loans 12th District U .S . --- 78 77 77 77 77 IV IV IV II IV 1952 I I IV 1953 I I 74 75 75 74 75 76 78 75 47 48 IV 1954 I I 75 75 47 47 IV 1955 I I IV 1956 I I IV 75 74 47 46 77 76 76 76 75 74 46 45 44 76 77 78 1948 1949 1950 1951 74 77 77 78 53 50 52 51 52 52 51 51 Commercial, industrial. and agricul* ,— tural loans— \ 12th District U .S . 83 84 86 85 85 84 87 88 71 69 72 72 73 71 73 73 51 48 49 49 49 50 91 87 86 87 73 70 70 71 86 86 71 71 50 86 73 Real estate t---------loans12th District U .S . 73 72 71 71 70 70 69 24 24 24 24 23 22 70 22 22 22 21 21 22 21 21 70 21 70 70 70 69 68 69 Securities /-------- loans-------- % 12th District U .S . 86 82 81 80 94 110° 89 90 84 93 87 84 87 80 79 120* 88 88 81 82 87 88 85 86 82 82 93 78 94 81 Other /-------- loans12th District U .S . 75 72 72 74 76 75 49 48 50 50 72 72 71 69 50 50 50 49 49 71 69 69 66 70 50 50 49 51 50 51 United States ,— securities— N 12th District U .S . 71 73 72 72 72 75 70 71 72 73 74 73 73 71 70 45 48 46 45 45 47 45 43 45 46 47 45 43 41 39 Demand /— deposits— \ 12th District U .S . 76 77 77 77 75 76 76 78 77 77 76 76 76 76 77 59 59 59 59 57 58 58 58 58 58 58 58 57 57 56 ■N o call this period. bT otal loans not available b y com ponent series. cT h e apparent discrepancy for “ Securities Loans” may be explained by the difference o f several days between the W R M B S W ednesday reporting date and the C all Report date. Sources: Federal Reserve Bank o f San Francisco, Principal R esource and L ia bility I te m s o f R eportin g M em b er Banks in Leading C ities in th e T w elfth Federal R eserve D istrict. Board o f Governors o f the Federal Reserve System, Principal R esource and L ia bility Item s o f R eporting M em b er B anks in Leading C ities in th e U nited States. C om ptroller o f the Currency, A nnual R eports through 1950. Federal D eposit Insurance Corporation, Semi-annual R eports since 1951. 119 FEDERAL RESERVE BANK OF SAN F R A N C IS C O we are interested chiefly in the magnitude and direction of the changes in a series such as, “ De mand Deposits,” rather than the total amount of demand deposits outstanding. In determining whether changes over time in the W R M B S ac curately reflect similar changes in the larger populations of which the samples are a part, the “ first differences” of this series between call dates will be used. First differences are simply the dollar value changes in the individ ual series over the intervals determined by the call reports. This may be illustrated by picking some purely arbitrary figures for two series, as follows: Date First Q u a r t e r ................ Second Q u a r te r ............. Third Q u a r t e r ............. Fourth Q u a r t e r ........... First Q u a r t e r ................ First differences o f Series A Series A Series 210 225 218 215 223 15 —7 —3 8 142 149 138 138 150 -20 0 -4 0 0 -6 0 0 7 — 11 0 12 Index of correspondence of W R M B S with other series In order to quantify the relationship between the W R M B S sample and the larger groups from which it is drawn and to provide a means of rank ing the individual series, it is necessary to cal culate some sort of a number common to all of the series. Some idea of the dispersion of the obser vations of a specific pair of series may be obtained from Chart 1. The vertical axis represents the first differences of the W R M B S and the hori zontal axis is marked off in terms of the first dif ferences of the Federal Reserve Member Bank call series. These pairs of values are plotted as single points and the pattern of all such points— techni cally known as a “ scatter diagram”— gives some clue to the correspondence between the two values, i.e., the degree of correlation. To illustrate, for the third quarter period in 1953, the change in United States securities held by Reporting Banks in the Twelfth District was +$384 million and the change in the amount of United States securi ties held by All Member Banks in the District was +$451 million. By traveling up the vertical SCATTER DIAGRAM First dif ferences of B Series B Since the question asked here is whether the changes in Series A accurately reflect changes in Series B, the first differences are compared by methods which will now be described. 120 C h art 1 800 -6 0 0 -4 0 0 -2 0 0 -Y 200 400 600 800 1000- axis + 384 and out the horizontal axis + 451, the point expressing the relation between this pair of values is located. But it is not enough merely to map all of the pairs of first differences, because the visual comparison of a number of scatter diagrams to determine which have more and which have less “ scatter” around a “ line of best fit” drawn among the points is arduous and in exact. It is much easier and more accurate to determine the degree of correspondence of one series with another by bringing in to play a more powerful tool of comparison useful to the statis tician. This is the correlation coefficient, a single, calculated numerical index of the relationship be tween two sets or series of values. By means of calculations too tedious to relate, an “ index of correlation” is arrived at, which for this particu lar pair of series is: r equals .931. The index of correlation is a measure of the strength of the relationship between two series. As the index approaches 1.0, the correspondence between the series becomes progressively strong er ; and, conversely, as it approaches zero, the re lationship is weaker.1 Table 5 shows the indexes 1The correlation coefficients calculated for these series cannot, how ever, carry the meaning usually attributed to these coefficients, since we are here correlating a sample with the universe of which it is a part. They are therefore to be interpreted technically only as devices to establish a rank order among the series, i.e., as to which of them provide the better and which the worse measures of prediction from the WRMBS to the All Member Bank and the All Bank series. Although the standard procedure is used to obtain the index, it would probably be more accurate to refer to this index as a measure of September 1957 MONTHLY of correlation for the W R M B S and Member Banks and for the W R M B S and All Banks for all eight of the balance sheet items here being compared. The numbers in parentheses repre sent the rank of the series within the group. The prime requisite of a sample should be that it reflect changes in the direction and in the mag nitude of the population that it represents. The index of correlation is influenced principally by the correspondence of the changes in direction between the two items compared: If the amount of total loans outstanding of All Member Banks increases, certainly the sample should indicate a similar movement; not to do so would immediate ly rule out its effectiveness. However, the index of correlation does not give sufficient clue to the change in the universe relative to the size of the change in the sample. T able 5 In d e x e s o f C o r r e la tio n o n E ig h t B a la n c e S h e e t I te m s f o r W e e k l y R e p o r t in g M e m b e r B a n k S e r ie s C om p ared W i t h M em b er B a n k s a n d A l l B a n k s , T w e l f t h D i s t r i c t a n d U n i t e d S t a t e s , 1948-56 W RM BS AND M EM BER BAN K S Twelfth District correlation and rank T otal loans and in v estm en ts... . . .907 (7 ) Total loans ................................... . . . .977 (1 ) Commercial, industrial, and agricultural l o a n s .................... . . . .972 (2 ) . .. .968 (3 ) Real estate loans ................ Loans for carrying securities. . . . . .868 (8 ) .928 (6 ) All other loans ............................. Holdings of United States .9 3 1 (5 ) securities ................................... . . . .965 (4 ) Demand deposits ........................ . . . United States correlation and rank .758 (7 ) .905 (5 ) .984 .906 .893 .696 (1 ) (4 ) (6) (8 ) .952 (3 ) .964 (2) W RM BS AN D ALL BAN KS Total loans and in v estm en ts... Total loans ................................... Commercial, industrial, and agricultural loans .................. Real estate l o a n s ........... .. Loans for carrying securities. . A ll other loans ............................. Holdings, of U nited States securities ................................... Demand deposits ........................ ... ... .889 (6 ) .9 8 6 (1 ) .806 (7 ) .894 (6 ) ... ... ... ... .965 .957 .866 .896 .987 .922 .727 .930 ... . .. .967 (2 ) .798 (8 ) (3 ) (4 ) (7 ) (5 ) (2 ) (5 ) (8 ) (4 ) .932 (3 ) .993 (1 ) Relative m agnitude of ch a nges in W R M B S a n d other series An ideal reporting sample should reflect changes in the larger series but should be con tained within these changes, maintaining a fixed “ correspondence,” or of “ sympathetic movements” rather than as an index of correlation. Nevertheless, in spite of these restrictions, it is possible to infer that an index in the neighborhood of .90 indicates a very high degree of correspondence. R EVIEW proportionality to them. The plotted first differ ences of an “ ideal” sample and the larger series from which it is drawn should appear as follows: An examination of several series will show that the “ ideal” sample finds no exact counterpart in the W RM BS and the more inclusive series with which they are compared. In no case is there a fixed proportionality between changes in the reporting series and the larger series. The plotted first differences of the W RM BS and Member Banks for the Twelfth Federal Reserve District are given in Chart 2. By inspection it can be seen that the movements of the changes in the reporting series show a remarkable de gree of conformity with the Member Banks as represented by the changes in successive Call Reports. At this point, however, a note of warn ing must be interjected. The graphs for the first differences of “ Total Loans” and “ Commercial Loans” shown in Chart 2 seem to demonstrate the existence of a strong relationship between the changes in the W RM B S and changes in Member Banks for these two series, a relationship apparently borne out by the relatively constant ratios or percentages of the to tals of the W R M B S to the totals of the parent series shown in Tables 4A and 4B. Thus, if the reporting sample for, say, “ Total Loans” for the United States contains about 50 percent of All Member Bank commercial loans subject to a range of variation of 2 or 3 percent about this fig ure, it would seem no more than reasonable that the changes in this same W R M B S sample as compared to the Member Bank series should show a comparable range of variation. In other words, knowing that the W R M B S reports a 121 FEDERAL RESERVE BANK OF SAN F R A N C IS C O C hart 2 C OMP A R I S O N OF W E E K L Y R E P O R T I NG M E M B E R B A N K S A N D A L L M E M B E R B A N K S-^ FO R D E S IG N A T E D B A L A N C E SH E E T IT E M S T W E LF T H D IS T R IC T 1 9 4 8 -5 6 T H O U SA N D S OF D O L L A R S _________________________________________ T H O U SA N D S OF O O L LA B S____________________ OR C A R R Y IN ' >TAL L O A N S H O L D IN G S O F U. S. S E C U R IT IE S WRMI OEM ANO D E P O S IT S LOAN: 122 September 1957 MONTHLY given fraction of all of the loans for a given group of banks, we might then,, as with the “ ideal” sample, blow up the change in the W R M B S by a given multiple— the inverse or reciprocal of the aforesaid fraction— and obtain the change in the Member Bank series. There is no better proof that this cannot be done than to calculate a ratio of the first differences of the W R M B S to the first differences of the larger groups as was done for the totals of the series in Tables 4A and 4B. The wide range of variation of this ratio, which is given in Tables 6A and 6B, clearly demon strates the inapplicability of using the known changes in the W R M B S to measure exact changes in the larger series. The changes in the two sets of data do not exactly parallel each other, so that predicting changes in the larger as a given multiple of changes in the smaller series is indeed a chancy business. Changes from one Call date to the succeeding one may vary considerably for the W R M B S relative to, say, the Member Bank series and yet the dollar amounts of these changes in the two series will be so small relative to their respective totals that the relationship of these two total figures will be affected only slightly.1 Differences in structure of ban kin g in District a n d nation An examination of the indexes of correlation in Table 5 for the Member Banks in the nation and for the Twelfth District offers some interest ing contrasts. Since the coverage of the Twelfth District Reporting Series is in all cases greater than the coverage for the nation as indicated by Table 4, it would appear that the correspondence between changes in the sample and changes in the total banking population should be much closer for the District than for the nation. How 1 In Tables 6A and 6B the extreme high values and the zero values may be discounted. In the ratio of changes in the WRMBS to changes in the larger groups, a very small change in the larger group relative to the change in the WRMBS will give an extremely high value, such as , while if there is no change in the WRMBS for the last period, the ratio will be of the form or zero. The negative ratios indicate a change in the direction of the two series; that is, the WRMBS has increased while the All Bank series has decreased, or conversely. The point of these tables is that the size of the change in the universe of member banks or of all banks would be reflected in the size of the change in the sample if there were a fixed or even approximate pro portionality in the ratio of the change in the sample to the change in the universe. This proportionality between changes in the first differences of the two groups does not exist. RE VIEW ever, this is not always the case. The indexes for “ Total Loans and Investments,” “ Total Loans,” “ Real Estate Loans,” and “ All Other Loans” are noticeably higher for the District than for the nation, while “ Commercial, Industrial, and Agricultural Loans,” “ Loans for Carrying Se curities,” and “ Holdings of U. S. Securities” are higher for the nation than for the Twelfth Dis trict. There is a twofold explanation for the dif ference in the relative orderings of the indexes of the series within the two samples. One is the greater weight accorded to branch banks in the Twelfth District relative to the national sample. Branch banking does exist outside this District, but certain states absolutely forbid branch bank ing or restrict it to local political units, so that the relative weight given to branch banks in the nation is much smaller than in the Twelfth District. The second explanation, stemming from the first, lies in the method of branch bank report ing in the W RM BS. Branch bank offices report as a single unit through the head office. A more representative sample of the bank population will therefore be obtained since the country offices of branch banks will be included in the head office report, giving a greater weight to rural banks and banks in the smaller non-reporting cities than does the national sample, where the reporting units are largely non-branch city banks or branch bank systems confined to the reporting cities. Representing as it does a cross section of the banking structure of the District, it stands to reason that the Twelfth District W RM BS will show a higher correspondence to the uni verse of banks from which it is drawn for “ Loans and Investments,” and particularly in loans made to individuals rather than business firms, such as “ Real Estate Loans” and “ All Other Loans,” which are chiefly loans for consumer expendi tures. The higher index of correlation for “ Com mercial, Industrial, and Agricultural Loans,” “ Loans for Carrying Securities,” and “ Holdings of U. S. Securities” could be accounted for large ly by the inclusion of the New York City mem ber banks, which exert a powerful influence upon the national sample, particularly in these categories. 123 FEDERAL RESERVE BANK OF SAN F R A N C IS C O T a b le 6 A R a t io o f F ir s t D if f e r e n c e s : W e e k l y R e p o r t in g M e m b e r B a n k S e r ie s t o A l l 1948-56 M e m b e r B a n k s in S elected B a l a n c e S h e e t It e m s , Y ear and call Total loans and /— investrnents— \ 12th District U .S . .89 1948 I II — 1.27 III* IV .60 1949 I .83 II .79 III .89 .75 IV IV 1952 I II III IV 1953 I II III IV 1954 I II III IV 1955 I II III IV 1956 I II III IV b b 1.08 1.01 .48 .84 b .79 b .50 b .20 b 2.33 b .81 b .49 b .95 b .97 b .42 b 7.00 b 1.01 b .69 b .04 b .48 b .49 b .89 b 1.51 b .52 b .68 .97 .72 .84 .77 .79 .39 .72 .80 .68 .80 1.10 .84 .47 .64 .54 .56 .58 .44 .24 — .01 .70 .50 1.06 .77 .94 .97 .49 .62 .54 .19 .53 .63 1.05 .92 b .08 .39 .85 .03 .76 .79 b .87 b .82 b .85 .59 1.21 1.08 .92 .55 .55 .50 1.64 .49 .91 .90 .98 .77 .94 1.39 .58 .82 — .51 — .43 .73 1.18 129.57 1.18 .43 1.02 .75 .97 .48 .91 .60 .85 .94 .84 .67 .93 .89 .84 .85 — .54 1.10 .83 1.15 1.76 — 0 .50 .25 .81 .88 1.75 — 2.00 .93 .93 .58 1.02 .92 .80 .90 .92 .97 .82 2.77 1.52 1.10 .88 4.33 .72 .79 — .11 — 2.13 .82 .99 2.35 .88 .86 1.14 .68 .68 — .19 .54 1.07 1.59 .99 .67 .91 2.34 2.03 .08 .78 1.81 .43 .03 .74 .99 .80 1.11 — 8.24 .05 1.16 4.53 1.29 — 1.25 .87 .49 .82 .63 .82 .68 .90 .27 1.01 1.12 1.14 .16 .56 .24 0 1.38 — .39 1.79 .98 * .54 .98 .28 1.19 — .56 .47 1.05 .91 3.45 1.45 .30 1.62 .74 — .17 .78 1.66 1.25 .77 .85 .94 8.02 1.31 .71 2.84 .92 .76 .77 — 2.71 .81 .95 .67 .99 .76 1.14 .81 1.05 .83 .59 .60 .55 .57 .59 .82 .74 .30 .43 .50 .99 .45 .44 .23 — 12.20 .52 .49 .51 .66 .55 .25 .99 .93 .81 .83 .80 .43 .66 .52 .47 .14 T a b le 1.33 2.00 — 1.86 .20 2.50 .71 1.35 1.79 1.00 — .40 .30 * .50 .18 1.10 .60 1.20 2.20 .45 .64 Year and call 1948 I V 1949 I V 1950 I V 1951 I I IV 1952 I I IV 1953 I I IV 1954 I I IV 1955 I I IV 1956 I I IV Total loans and 1UCUU— > 12th District U .S . .10 .18 .38 — 2.29 .47 2.07 2.18 — .023 .21 1.43 .27 — .27 .44 — 5.31 .49 — 1.07 .67 .53 1.18 .50 1.23 .12 .77 • .56 — .11 .59 — '3.97 .38 — 7.60 .33 Commercial, industrial. and agricul- 12th District U .S. .52 .33 .28 .34 .33 .93 .5 6 .44 .46 .60 .40 .60 .61 .38 .35 — .27 .33 .85 .56 .48 .39 .53 — .59 .40 — 2.66 .58 .49 .56 .57 .47 12th District — — — — .81 .07 .59 .329 .34 .19 .80 .44 0 .23 1.10 1.53 .81 .82 .90 U .S . .77 .97 .96 .72 .87 2.64 .93 .89 .73 1.41 .62 .84 .71 .81 .91 Real estate 12th District .18 .18 .16 .32 .86 .43 .41 .46 2.52 .24 .23 .35 .46 .37 .27 .90 .40 2.44 12.00 .18 .70 .32 .74 .87 .59 4.75 .71 .88 1.92 — .06 2.54 — 1.56 .63 .79 .61 .73 1.17 1.01 .48 . 80 3.69 .76 3.60 .27 — t----- secu rities-----\ 12th District 1.15 .58 b — 7.91 .31 — 27.70 .36 — .37 5.66 1.01 .08 .62 .39 — — .68 .77 .52 .24 .68 .97 .11 .66 .80 .65 .55 .65 .84 1.28 .52 .50 .49 U .S . •7.9 .57 .77 b .7 0' 1.66 .60 — 2.96 .92 .75 .62 .97 .85 1.08 2.86 1.16 2.70 .48 .84 .27 .79 .81 .47 1.18 4.02 .93 .69 .73 1.25 .81 .16 1.22 .74 .81 1.11 .57 0 .45 .94 .78 .73 .61 .f l .84 1.86 .78 .57 .57 .68 .68 .72 .79 2.03 .49 — .86 .36 — — /----- depo sits----- \ 12th District U .S . 1.38 .82 — 1.29 4.50 1.88 .73 2.22 — 13.63 .41 .78 — .24 .67 1.03 .78 1.05 .67 .75 .98 .82 1.11 .68 .81 .59 .58 .85 .85 — 1.09 — 24.00 .98 .91 2.55 1.10 .85 1.38 .42 1.04 .76 — 5.73 6.63 — 1.04 .11 1.63 .70 .59 .71 .99 .78 .80 4.44 1.10 .79 .85 1.44 .80 .76 .95 3.79 .56 .57 .16 .39 .64 .61 .49 .79 .71 .58 1.95 6.52 .21 .71 — 1.27 .39 .77 .65 2.49 .34 .65 .62 1.77 0 .54 6B S elected B a l a n c e S h e e t I t e m s , Total 1.06 .04 1.86 2.66 .92 1.24 — .95 .24 .89 1.20 1.19 .39 .77 .21 .73 .82 .25 .41 4 .06 * 1.58 R a t io o p F ir s t D if f e r e n c e s : W R M B S in U .S . ,---------lo ins---------\ 12th District U .S . b b b .22 .87 1.53 .73 .51 2.00 1.39 1.19 1.49 .97 .98 .81 .79 .91 .94 .83 .79 1.65 t---------loan 12th District .56 .10 1.31 1.68 United States f------- lo ns------- > 12th U .S . District b .78 .50 2.67 C a l l R eports .89 1.01 .47 1950 I II III IV 1951 I II III Total t-------- loa as--------\ 12th District U .S . Commercial, industrial, and agricul> ✓— tural loans— \ 12th District U .S . b b U .S . to 1948-56 A ll B a n k s C a l l R eports Securities 12th District Other U .S . .26 .06 .17 .26 .17 .10 .06 .18 .23 .13 .12 .21 .26 .11 .21 .58 .25 1.38 .62 1.22 1.63 — 1.20 1.62 — .19 1.68 1.07 3.01 -9 .1 7 .60 1.60 11.00 .86 .56 .04 — .25 6.33 .86 .83 .12 1.05 .71 3.72 .44 .79 1.93 12th District .35 .36 — .003 .22 1.41 .69 .48 .19 .63 .37 — 1.38 .41 .29 .28 — .08 United States U .S . .41 .41 .58 .23 .50 .51 .47 .57 .21 61.75 .76 .50 .74 .37 - -1 .8 7 12th District — — — — .45 .15 .11 .10 .57 1.57 .33 ,2 8 .29 1.15 .07 .50 .22 .23 10.60 U .S . — — .59 1.03 .68 .59 .40 2.42 .55 .64 .73 — 10.87 .61 .83 1.03 .68 — .19 Demand /----- deposits \ 12th District U .S . — .46 .05 .32 .05 .21 — .27 .45 .43 .23 .16 .29 1.31 .23 .60 .37 .75 2.24 .57 .53 .46 .56 .58 .55 .57 .53 .58 .69 .50 .58 .43 ■ N o call this period. *»Total loans not available b y com ponent series. . . . ir * In these cases, the ratio is such that there is a zero change in the denominator (th e member bank series) giving a fraction o f the form, - 5- , which is not a finite number. Sources: Federal Reserve Bank o f San Francisco, Principal R esource and Liability Item s o f Reporting M em ber Banks in Leading Cities in the T w elfth Federal R eserve D istrict. Board o f Governors o f the Federal Reserve System, Principal Resource and Liability Item s o f R eporting M em ber Banks in Leading Cities in th e United States. Com ptroller o f the Currency, Annual R eports through 1950. Federal Deposit Insurance Corporation, Semi-annual R eports since 1951. 124 September 1957 MONTHLY Conclusion In assessing the value of the W R M B S as a representative indicator of banking activity there is a strong temptation either to look at the high indexes of correlation for the specific series (Table 5) and conclude that the series perform this function in a highly satisfactory fashion or to look at a comparison of the relative magni tudes of the changes in the compared series be tween Call dates— i.e., the ratio of their first dif ferences (Tables 6A and 6 B )— and conclude that the W R M B S is a hopeless misfit cast in the role of prophet. To satisfy one’s self with either of these findings is to be guilty of oversimplifica tion, for there is an element of truth in each of these seemingly contradictory conclusions. At this juncture it might be well to reconsider just what function the W R M B S is intended to perform and the limitations imposed by the type of data and the method of reporting. From a purely statistical standpoint, the series lacks the more desirable qualities of a random weighted sample, since a given change in the sample does not imply a given change in the universe of all banks within predictable limits of error. How ever, it would be almost physically impossible to construct and maintain a weighted represen tative sample of over 6400 separate banks on a weekly basis; hence, a continuing sample with the shortest possible reporting lag cannot be too complex. The point has been made earlier that the re porting banks are not similar, since each bank, with its location and function, is unique. This ad mission is less damaging than it might appear to be, for the basic functions and operations of banks are very much the same whether the bank is located in Manhattan or Milpitas. Bankers will react in the same manner to changes in the busi ness climate, although there may be differences in the speed and the intensity of their reaction to the stimuli. Banks in the financial and commercial centers are much more sensitive to changes in business conditions and will react strongly and perhaps more quickly to meet these changes. This may account in part for the divergent movements of the W R M B S and the larger series as shown in Table 5. Another reason for these divergent RE VIEW movements may be the differences to be found in the composition of banks’ loan portfolios. Banks in the larger cities have a larger share of “ Com mercial and Industrial” loans and, since the W R M B S is drawn from these cities, there should be a strong relation between changes in commer cial loans for the reporting sample and for Mem ber Banks and for A ll Banks. An examination of the time series for commercial loans outstanding for New York City Member Banks and for All Member Banks (using the Call Report series) shows a striking similarity between the two series. On the other hand, the “ All Other Loans” series, which is made up chiefly of consumer loans, demonstrates the weakest correspondence between Reporting Banks and Member Banks and All Banks. This may be due to the fact that the volume of these loans outstanding is not con centrated in the larger cities, as are commercial loans, where a greater proportion of them will be included in the reporting sample, but are dis tributed more widely since loans are made to individuals rather than to business firms. In this case, movements in the series will correspond more directly to changes in local conditions rather than to changes in the larger centers of commerce from whence the W R M BS sample is chiefly drawn. The W R M B S finds its greatest success as a qualitative rather than a quantitative indicator of changes in the level of banking activity. It has been demonstrated, particularly in the graphs of Chart 2, that there is a consistent pattern of con formity between increases or decreases in the Weekly Reporting Series and in the Member Bank group from which it is selected and also between the W R M B S and activity of the entire banking system. The relation between the dollar amounts of the changes in the sample and of the system is less strong. Thus, a “ large” increase or a “ moderate” decrease in the W RM B S sample will probably indicate a similar movement in member bank or all banking operations. Because the reporting banks do not represent a true cross section of the banking community, it would not be wise to conclude that a given dollar change in the reporting sample therefore implies a propor tionate dollar change in total banking operations. 125 FEDERAL RESERVE BANK Granted that the W R M B S is not a consistent indicator of the exact dollar changes in general banking activity, the questions remain: Does the sample serve as a useful tool of economic analy sis, and does it compare favorably with other cur rent economic series ? The answer must be “ Yes,” in both cases, because the series indicates what is currently happening to the resources of the bank ing system: whether total bank credit outstand ing is increasing or decreasing, as well as whether the change is moderate or large. And equally im portant, the series describes changes in the com position of bank credit outstanding. For example, total loans of reporting banks may be increasing because of a rise in loans to business while, at the same time, real estate loans and loans to consumers are falling off. Or, in the case of Treasury debt operations, the weekly reporting banks, holding as they do a sizable fraction of bank-held United States securities, give a con tinuing picture of the actions of one of the lar gest holders of these securities. Again, the W R M B S contains over half of the demand de posits of all banks or not quite a half of the total money supply of the nation, since demand de posits make up about 80 percent of the total money stock. The exact dollar amounts of the various bal ance sheet items of the Member Banks of the Federal Reserve System and of the entire bank ing system must wait upon the Call Reports for 126 OF SAN F R A N C IS C O the two groups, which are only available several months after the Call dates. It is the intended function of the W R M B S to describe changes in the disposition of the resources of the banking system. Trends which are developing or changes in certain sectors of the economy may be ob served in the W RM BS and followed between Call Reports. Published every week with a reporting lag of only seven days, the W R M B S might be said to purchase timeliness at the cost of arith metical exactness. In view of the unquestioned usefulness of the information supplied, this may not be a bad bargain. At this point in the investigation the wheel has come half turn. The task of this first part of the inquiry has been to ascertain whether the Weekly Reporting Member Bank Series is a suitable ve hicle for measuring variations in total banking activity. It has been found that the series to be used in the second part of this study are adequate and useful indicators of the actions of the groups from which they are drawn. In the examination of the behavior of the banking series in the busi ness cycle in a subsequent article, the emphasis will shift from the District data to the national sample because the best economic indicators are available only on a national basis. The frame of reference of the investigation will become the variations in the level of business activity rather than merely the banking sector which, after all, is only one segment of the total economy. September 1957 M O N T H L Y R E V IEW District Bank Profits Decline w e l f t h District bankers found their business Table 1 less profitable to all appearances in the first half of 1957 than it had been in 1956. This was not an unexpected development; at the end of P rincipal Resource and L iability Items of A ll M ember Banks in the T welfth D istrict D ecember 31, 1956, and June 6, 1957 T 1A C / • , , . j i, (in m illions of dollars) 1956r the anticipated increased expenses, result\ r ’ ing from a higher authorized interest rate on time deposits, made the course of bank profits in 1957 fairly obvious. Monetary authorities main- Dec. 31, 1956 ^oans^ndTscoZfne't:! ! ! ! ! ! $i 2 ,6 i6 CoS r c!a\and.indu.stri.a! . .. 4,630 June 6, „Percent_ 1957 _ change $i 2;692 4 624 + 0.6 — 01 tained a close rein on the expansion of credit in the first half of 1 9 5 7 , and loans outstanding in- RflPestate1 loan" 8 ............. Loans to individuals ........... 4 859 2I310 4 797 2^90 i * i '3 + 3's c r e a s e d v e r y l i t t l e d u r in g - t h e p e r i o d . 1 h u s , e a r n , ,1 • r • obligations ............................... Other securities ........................ Total a s s e t s ........................................ 6,454 1,879 26,512 6,288 1,962 25,965 — 2.6 4- 4.4 — 2 .1 Demand d e p o s its ............................. T >K»e deposits ................................. Totai d e p o sits ................................... i 4,8i 8 9,427 24,246 13,429 10,017 23,446 — 9.4 + 6.3 — 3.3 Capital acco u n ts............................... 1,675 1,709 + 2.0 , , , . , . , 0 mgs on loans, the m ajor source of earnings, although at a record high, did not keep pace with , * 1. . . increased expenses. A s a result, net current earnings declined from last year’s peak. Another type of factor enters the net profit . . . ,. p ic tu r e . H e r e a p p e a r e d a g a in th is y e a r d is c r e . . , r . . , •, 1 • r t io n a r y a c tio n b y th e b a n k s m s w it c h in g fr o m •, • 1 j i. 1 • 1 • United States Government *!#“ thfn °?.s percent Note. A preliminary tabulation of all items of condition of Twelfth District member banks as of June 6, 1957 is now available for distribution. Requests for copies should be directed to the Federal Reserve Bank of San Francisco, 400 Sansome Street, San Francisco 20, California. government securities purchased at higher prices to others with similar maturities bought at pres- weekly, this borrowing was considerably smaller ent low prices— prices which are dictated by the higher interest rate structure. This process, which shows up as an undetermined portion of than last year. Real estate loans on residential properties declined in 1957, while those made primarily for commercial and industrial purposes net charge-offs, losses, and transfers to reserves, showed some gain. Borrowing by farmers and serves to defer profits by converting today’s charge-offs into tomorrow’s capital gains, and in lowering this year’s net profit figure may contribute to that in the years ahead. In addition, many of the actual losses incurred through selling securities to procure funds for more profitable loans at today’s rates have not yet had time to be offset fully by those higher earnings. other individuals also showed a net increase during the first six months of this year, In contrast to large sell-offs of United States Government securities by District member banks in 1955 and 1956, holdings declined less than 3 percent during the first six months of 1957. D emand deposits of individuals, partnerships, and corporations also declined in the six months ending June 6, 1 9 5 7 ; but time deposits increased over 6 percent during the same period. It was this o an expansion s ows The combined balance sheet of Twelfth D is- growth in time deposits at increased interest cost trict member banks shows only minor changes in condition over the past six months. (Table 1) Total loan expansion of $76 million was hardly comparable to the increase of $655 million in the that determined the course of bank profits in the first half of the year. first half of 1956. Commercial and industrial A ll sources of operating income showed gains loans actually declined $6 million from December in 1957 at Twelfth District member banks, to put 31, 1956 to June 6, 1957, compared with an increase of $174 million during the six months ending June 30, 1956. Business borrowing later in gross current earnings at a record high for any half-year period (T able 2 ) . Earnings on loans were an even larger portion of total earnings June this year for tax payment purposes undoubtedly increased, but from the condition state- than last year, and the rate of return (on an annual basis) shows a gain over the first six ments of a sample of member banks which report months of 1956 as well as over the full year Earnings at record high 127 FEDERAL RESERVE BANK 1956. Since the average rate of return increases more slowly than the substantially higher inter est rate structure would suggest, earnings from new loans made at the prevailing higher interest rates will only be reflected slowly as they be come a larger part of the loan portfolio. Interest on United States Government securi ties increased slightly in spite of decreased hold ings of these securities by District banks. Yields on United States Governments have increased markedly during the first half of 1957, and the average rate of return to District member banks increased from 2.30 percent to 2.47 percent. Earnings from interest and dividends on other securities, up almost 8 percent, reflect the higher yields during 1957 on municipal and corporate securities. The largest single percentage increase in earn ings in 1957 over the first half of 1956 was from charges on deposit accounts, in part reflecting, as it did in 1956, the increased activity of demand deposit accounts as well as increased charges for transactions. OF SAN F R A N C ISC O Expenses increase faster than earnings Expenses at District banks for the first half of 1957 increased by more than one-fifth over those of the same period a year earlier. The most significant increase in expenses was the 55 per cent gain in interest paid on time deposits— the primary cause for the decline in net profits. The interest cost ratio (that is, the total interest ex pense divided by the average level of time de posits) increased from 1.77 percent to 2.54 per cent. This is more than the one-half of 1 percent increase in the maximum allowed by authorities because many banks were not paying the max imum rate permissible before the beginning of 1957. If the interest paid on time deposits had not been raised and the interest cost ratio of 1956 were applied to 1957 deposits, net profits would have shown an increase in the first half of 1957 over 1956. The other major expense item— wages and salaries— again increased, by 9 percent, over the previous year. The number of officers and em ployees in Twelfth District banking also in T able 2 E a r n in g s a n d E x p e n s e s o f M em b er B a n k s S i x M o n t h s E n d i n g J u n e 30, 1956 a n d J u n e 30, 1957 Earnings and expenses o f Percent changes, 1st half o f 1956 /—Twelfth District banks—', ,------------------------ to 1st half of 1957-----------(in millioiis of dollars) -Twelfth Disitrict----------- \ United States 1st half 1956 1st half 1957 All 13 largest Other all banks 352.1 4-13.3 + 13.0 + 15.0 + 14.0 Earnings on l o a n s .................................................................... Interest and dividends on Governm ent s e c u r it ie s ....................................................... Other s e c u ritie s .................................................................... 78.5 22.1 43.5 15.1 23.6 + 0.2 + 7.7 + 19.7 + 13.6 + 13.5 — + + + + 1.8 6.1 18.2 13.2 13.5 + 7.5 + 15.1 + 2 5 .8 + 15.5 + 13.5 + 14.4 + 3.3 Trust department e a r n in g s .................................................. 13.3 T otal e a r n in g s ...................................................................... 480.0 535.0 + 11.4 + 10.7 Interest on time deposits ..................................................... Other e x p e n s e s ......................................................................... 80.2 148.5 124.4 95.8 368.7 + 8.4 + 56.4 + 7.9 + 2 1 .4 + 11.2 + 4 8 .4 + 12.6 304.5 + 8.9 + 55.1 + 8.9 + 2 1 .1 + 20.0 + 15.3 175.5 166.2 — 5.3 — 7.3 + 3.8 + 5.4 + 0.7 — 0.5 — 5.1 — 11.7 — 1.6 — 18.3 161.1 72.7 88.4 42.6 45.8 147.9 67.3 80.6 46.3 34.3 + 2 6 .9 — 8.2 — 7.3 — 8.9 + 8.6 — 25.1 + 58.9 — 12.3 — 11.0 — 13.3 + 8.9 — 35.3 — 44.4 + 11.6 + 9.0 + 14.1 + 6.2 + 19.3 + + + + + — 4.7 5.5 6.5 4.6 11.1 1.0 T otal expenses .................................................................... N et current e a r n in g s ............................................................. N et recoveries and profits (— losses)1 On s e c u r itie s ............................................................................. . . . ... Net profits before incom e t a x e s .......................................... Taxes on net i n c o m e ............................................................. N et profit after t a x e s ............................................................. Cash dividends declared ....................................................... Undistributed profits ............................................................. *For the United States, other earnings include all earnings except those on loans and United States Government securities. No breakdown of expense data is available. 1Including transfers to ( — ) and from ( + ) valuation reserves. 128 + 10.8* + 11.3 September 1957 M O N T H L Y RE VIEW creased to 71,000 persons (10,000 officers and 61,000 employees). All other categories of ex pense also rose except interest paid on borrowed money, which declined by 12 percent. This is partly due to smaller daily average borrowings of member banks from the Federal Reserve Bank in the first six months of 1957 than in the com parable period a year ago. C hart 1 E A R N I N G S AND E X P E N S E S OF M E M B E R B A NK S S I X M O N T H S E N D IN G J U N E 3 0 ,1 9 5 6 A N D JU N E 3 0 ,1 9 5 7 M IL L IO N S OF D O L L A R S 600 EARNINGS EXPENSES A B C Profits down from 1 9 5 6 in the District Increased expenses caused net current earn ings to fall 5 percent below the level of the first half of 1956. The ratio of net current earnings to capital accounts declined from 22.28 percent in the first half of 1956 to 19.69 percent this year. From these operating earnings non-operating adjustments are made by means of valuation re serves on both bad debts and other contingencies. Transfers to loan reserves as well as net chargeoffs and losses on loans resulted in a net decrease in current earnings of $11.7 million. Profits on securities increased in the first six months of this year, but so did losses and charge-offs and trans fers to reserves with a resultant net charge to current earnings of $5.1 million. Adjustments in other valuation reserves decreased earnings by $1.6 million so that the total net losses, chargeoffs, and transfers to reserves of all types de creased net current earnings by $18.3 million, or 27 percent more than in the first half of 1956. Net profits before taxes amounted to $147.9 million, 8.2 percent less than the first half of 1956. From this total, member banks in the District made provisions for $67.3 million in Federal and state income taxes. Thus, net profits after taxes were reduced to $80.6 million, a decline of 8.9 percent from last year. As a percent of capital accounts, or the return on the investment in bank ing in the Twelfth District, these after-tax profits were down from 11.22 percent in 1956 to 9.54 percent in 1957. This latter ratio is the lowest since this series of half-year statistics on member bank earnings began in 1948. Stockholders fared somewhat better this year than last as $46.3 million was declared in cash dividends, an increase of 8.6 percent over 1956. These distributed profits amounted to 5.48 per cent of capital accounts compared with 5.41 per cent in 1956. 1956 1957 1956 1957 N ote: The Earnings categories are as follows: A. All other; B. Charges on deposit accounts; C. Interest and dividends on other securities; D. Interest on United States Governments; E. Earnings on loans. The Expenses categories are: A. All other; B. Interest on time deposits; C. Wages and Salaries. Net profits rise in the nation Earnings increased at about the same rate in both the nation and the District, but expenses in the country as a whole grew less rapidly than in the Twelfth District. No breakdown by types of expense is currently available for the country as a whole, but since the ratio of time to total de posits is much less at all member banks than at District member banks, it seems evident that the increased interest cost factor which caused the decline at District banks had less effect on total bank profits in the nation. Net current earnings increased 5 percent in the United States, and the ratio of these earnings to capital accounts decreased only slightly, from 18.0 percent in 1956 to 17.9 percent in 1957 (Table 3 ). Net losses, charge-offs, and transfers to valuation reserves decreased net earnings by $178 million, so that net profits before taxes amounted to just over $1 billion. Taxes on in come increased 5.5 percent and reduced net profits to $569 million. These after-tax profits were 4.6 percent greater than profits in the first half of 1956, but as a percent of capital accounts decreased from 8.3 percent last year to 8.2 per 129 FEDERAL RESERVE BANK cent in 1957. Cash dividends were declared in the amount of $281 million, an increase of 11 percent over 1956. Outlook Assuming time deposits in the Twelfth District remain close to present levels, the expense item associated with them will continue to be a drain on net profits. Some increased income can be ex pected to be derived from the loans which have been made at increased interest rates, but this growth in earnings is a relatively slow process with returns spread over the maturity of the loans. As noted above, moreover, there has been some switching of government securities by banks from issues that were bought at higher prices to other issues bought at lower prices. This results in capital losses currently, but net profits may be bolstered later by capital gains on the 130 OF SAN F R A N C IS C O T able 3 E a r n i n g s R a t io s o f M e m b e r B a n k s T w e l f t h D is t r ic t a n d U n it e d S t a t e s (percent ratios, annual basis) U NITED STATES Return on l o a n s ...................................... Return on Government se cu ritie s.. . . Current earnings to capital a cco u n ts.. N et profits after taxes to capital a c c o u n t s ................................... First half First half 1956 1957 4.9 2.3 18.0 5.2 2.5 17.9 8.3 8.2 5.4 2.3 22.3 5.6 2.5 19.7 11.2 9.5 T W E LFT H DISTRICT Return on loans ..................................... R eturn on Governm ent securities-----Current earnings to capital accounts. N et profits after taxes to capital a c c o u n t s ................................... substituted issues. Even though a steadily in creasing income from loans at higher interest rates and capital gains on maturing issues may improve second half net earnings, the effect of the hike in the time deposit rate may well keep bank earnings for the year as a whole below those the industry has learned to expect. M O N T H L Y RE VIEW September 1957 BUSINESS INDEXES — TWELFTH DISTRICT* ( 1 9 4 7 - 4 9 a v e ra g e = Year and m on th T otal C a r Dep’ t nonagrl- T o tal cu ltu ra l m f’g loadings store sales E le c tr ic em p lo y em p lo y Copper* power bar)1 (value)* m en t m en t In d u strial p rod u ction (p h ysical volu m e)1 Lum ber Petroleum * C ru d e R e fin e d C e m e n t Lead* 95 40 71 104 100 113 113 110 118 111 121 116 87 52 67 101 99 98 100 107 109 100 100 105 78 50 03 100 103 103 112 116 122 119 122 129 54 27 50 104 100 112 128 124 130 133 145 150 165 72 93 105 101 109 89 87 77 71 75 77 105 17 80 101 93 113 115 112 111 101 117 118 29 26 40 101 108 119 136 144 161 172 192 210 1950 July August September October November December 120 117 112 110 111 112 105 105 104 104 104 103 132 128 130 128 135 132 160 171 168 163 146 139 75 84 78 81 79 72 110 123 122 127 123 123 1957 January February March April M ay June July 108 115 115 111 111 114 109 102 102 101 101 101 101 101 131 130 132 132 138 131 133 120 127 140 154 157 152 79 88 88 78 82 75 66 125 138 133 135 126 130/133 1929 1933 1939 1948 1949 1950 1951 1952 1953 1954 1955 1956 100) R etail food prices S. 4 W aterbo rn e fo reign trade** * E x p o r t s Im p o rts i02 99 103 112 118 121 120 127 134 '55 102 97 105 120 130 137 134 143 152 102 52 77 100 94 97 100 101 100 96 104 104 30 18 31 104 98 105 109 114 115 114 122 129 64 42 47 103 100 100 113 115 113 113 112 114 190 110 163 86 85 91 186 171 140 131 164 195 124 72 95 98 121 137 157 200 308 260 308 443r 212 212 209 217 216 210 134 135 135 136 137 138 152 153 153 154 156 159 102 101 107 102 100 106 132 131 131 130 132 131 115 114 114 115 116 116 215 207 212 256 242 234 559 500 459 563 401 436 220 211 221 228 229 239 139 138 138 138 138 139 138 160 159 159 159 159 160 159 105 96 100 103 99 101 94 131 127 133 127 126 131 132 116 117 116 117 117 118 118 237 269 267 298 283 421 417 489 534 698 BANKING AND CREDIT STATISTICS — TWELFTH DISTRICT (a m o u n t s in m illio n s o f d o lla r s ) M em ber bank reserves and related item s Facto rs affectin g reserves: C on dition item s of all m em b er banks* Year and m on th Loans U .S. and G o v ’t d isc o u n ts s e c u r itie s B an k rates on short-term D em and T o tal deposits tim e business ad ju ste d 7 deposits loans* 1929 1933 1939 1949 1950 1951 1952 1953 1954 1955 1956 2,239 1,486 1,967 5,925 7,093 7,866 8,839 9,220 9,418 11,124 12,613 495 720 1,450 7,016 6,415 6,463 6,619 6,639 7,942 7,239 6,452 1,234 951 1.983 8,536 9,254 9,937 10,520 10,515 11,196 11,864 12,169 1,790 1,609 2,267 6,255 6,302 6,777 7,502 7,997 8,699 9,120 9,424 1956 August September October November December 12,173 12,423 12,384 12,504 12,804 6,439 6,491 6,468 6,431 6.383 11,356 11,581 11,747 11,867 12,078 9,286 9,305 9,326 9,235 9,356 1957 January February March April May June July August 12,488 12,556 12,576 12,649 12,094 12,911 12,912 12.945 6,505 6,356 6,177 6,520 6,315 6,249 6,319 6.313 11,812 11,279 11,129 11,622 11,210 11,310 11,407 11.329 9,587 9,690 9,794 9,839 9,995 10,155 10,188 10,220 Reserve bank credit* — — + + + 3.20 3.35 3.66 3.95 4.14 4.09 4.10 4.50 + + — 4.57 + + 4.65 — ‘ 4.74 — + — + + — — ’ i.’s i ' + — — + M oney in c irc u lation* B an k d ebits Index 31 cities** ** C o m m er cial'" T reasu ry 10 34 2 2 13 39 21 7 14 2 38 52 0 110 192 - 930 -1 ,1 4 1 -1 ,5 8 2 -1 ,9 1 2 -3 ,0 7 3 -2 ,4 4 8 -2 ,6 8 5 -3 ,2 5 9 + 23 -I- 150 + 245 + 378 +1,198 +1,983 +2,265 +3,158 +2,328 +2,757 +3,274 _ 6 — 18 31 + 65 — 14 + 189 + 132 39 + 30 + 100 — 96 175 185 584 1,924 2,026 2,269 2,514 2,551 2,505 2,530 2,654 42 18 30 102 115 132 140 150 154 172 189 4 3 5 0 17 — - 315 454 417 143 303 + + + + 247 466 312 209 451 — 103 — 59 — 2 38 + 38 + 2,565 2,640 2,542 2,579 2,654 198 182 195 195 200 33 41 37 35 56 29 49 50 — 558 816 170 445 261 374 426 145 + + + + 249 494 170 430 209 402 320 292 — 2,548 2,517 2,495 2,560 2.526 2,483 2,457 2.592 206 200 199 202 200 203 205 197 - - + + + + + — — — + + + 144 139 9 31 54 20 6 39 Reserves11 (1 9 4 7 -4 9 100)* 1Adjusted for seasonal variation, except where indicated. Except for department store statistics, all indexes are based upon data from outside sources, as follows: lumber, California Redwood Association and U.S. Bureau of the Census; petroleum, cement, copper, and lead, U.S. Bureau of Mines; electric power, Federal Power Commission; nonagricultural and manufacturing employment, U.S. Bureau of Labor Statistics and cooperating state agencies; retail food prices, U.S. Bureau of Labor Statistics; carloadings, various railroads and railroad associations; and foreign trade, U.S. Bureau of the Census. * Daily average. 1 N ot adjusted for seasonal variation. * Los Angeles, San Francisco, and Seattle indexes combined. 6 Commercial cargo only, in physical volume, for Los Angeles, San Francisco, San Diego, Oregon, and Washington customs districts; starting with July 1950, “ spe cial category” exports are excluded because of security reasons. * Annual figures are as of end of year, monthly figures as of last Wednesday in month. 7 Demand deposits, excluding interbank and U.S. G o v’t deposits, less cash items in process o f collection. Monthly data partly esti mated. • Average rates on loans made in five m ajor cities. • Changes from end of previous month or year. 10 Minus sign indicates flow of funds out of the District in the case of commercial operations, and excess of receipts over disbursements in the case of Treasury operations. 11 End of year and end of month figures. 11 Debits to total deposits except interbank prior to 1942. Debits to demand deposits except U.S. Government and interbank deposits from 1942. t>— Preliminary. r— Revised. 131
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