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CONFIDENTIAL (FR)
SUPPLEMENT
CURRENT ECONOMIC AND FINANCIAL CONDITIONS
Prepared for the
Federal Open Market Committee
By the Staff
Board of Governors
of the Federal Reserve System
January 6, 1966
SUPPLEMENTAL NOTES
International Developments
The Bundesbank's discount rate has been reduced, effective
January 6, from 5 per cent to 4-1/2 per cent.
The rate on advances has
been cut by 3/4 of 1 per cent, from 6-1/4 per cent to 5-1/2 per cent.
The Bundesbank's selling rates for money market paper were reduced in
two stages of 1/4 per cent each, one a week ago and one today, making
the 60-to-90 day rate again equal to the discount rate, at 4-1/2 per
cent.
The discount rate change was widely anticipated in Germany in
view of the current weakness in the economic situation and recommendations that have come from government leaders in recent weeks.
From the
Bundesbank point of view the action was made easier by the commitment
labor leaders gave the Economics Minister in the latter part of December,
to moderate their demands for wage increases this year.
However,
unbalanced budgets of the Federal and State governments are still a
source of concern to the Bundesbank.
The half-of-one-point reduction
in the rate was less than government leaders had urged.
Corrections
Page II-1,-The heading should be THE ECONOMIC PICTURE IN
DETAIL, The Nonfinancial Scene.
Page III-15--The page number is repeated but the text follows
properly.
-2-
Page IV-13 - First paragraph:
delete the last sentence,
which takes insufficient account -- especially for the first half of
1966 -- of factors such as the replenishment of foreign central bank
reserves as borrowers of Euro-dollar loans use the proceeds.
Page IV-12 - Table:
"1965."
in column heading, change "1950" to
SA - 1
SUPPLEMENTAL APPENDIX A:
SURVEY OF BANK LENDING PRACTICES. DECEMBER 15, 1966*
The results of the December 15 survey of changes in bank
lending practices are summarized in the following paragraphs and
accompanying table. Reports have been received from 76 of the 81 banks
included in the quarterly interest rate survey. The 5 reports not yet
received are all for West Coast banks.
In marked contrast to other recent quarters, over half of
the banks (43 out of 76 banks) indicated that loan demand was unchanged
in the last quarter of 1966 and an additional 22 banks stated it was
moderately weaker. "Moderate" firming of loan demand was indicated by
only 11 banks, a smaller number with firmer demand than in any previous
survey since September 1964, when banks began submitting this information. Aside from seasonal variation, anticipated loan demand in the
first quarter of 1967 was expected to be unchanged or moderately weaker
at four-fifths of the banks.
During the fourth quarter, most banks found that earlier
firming in their lending practices had been adequate and that no further
change was required. Among the relatively few banks that had changed
specific practices on loans to business borrowers and finance companies,
such as in interest rates and compensating balances, most had firmed
them "moderately" and virtually none had eased. Similarly, most banks
that changed practices with respect to reviewing credit lines and extending loans to new versus established customers also firmed them
"moderately." However, easier policies were reported by 5 banks on
loans to new customers and by 6 banks on loans to established customers,
presumably reflecting in part the recent softening in loan demand.
Three-fourths of the banks reported no change in their
willingness to make term loans to business, consumer instalment loans,
various categories of mortgage loans, broker and dealer loans, and
participations. Those banks that did report a change generally became
"moderately" less willing to extend these types of credit. However,
some forms of lending were more attractive than formerly. For example,
9 banks reported that they were more willing to make consumer instalment
loans and 6 banks to make participation loans and single-family mortgage
loans.
Among the banks that gave reasons for their policy changes,
one indicated that as a result of considerable firming earlier in the
* Prepared by Caroline H. Cagle, Economist, Banking Section, Division
of Research and Statistics.
SA - 2
year, outstanding loans were down from the summer peak; and this,
coupled with fewer requests for loans, put them in the position to
seek new business. Other banks also indicated that the peak in lending
had been reached earlier in the year and with some improvement in their
liquidity, they were cautiously making increases in their loan commitments.
With respect to mortgage lending, an area in which many
banks had indicated reluctance to lend in the September survey, one
bank pointed out that this reluctance sprang not from the type of lending but from inability to attract savings. Several banks that reported
firmer policies in this survey indicated that the run-off in their CD's
had been an important factor in bringing about the change.
Not for quotation of publication
January 6, 1967.
QUARTERLY SURVEY OF CHANGES IN BANK LENDING PRACTICES AT SELECTED LARGE BANKS IN THE U.S. 1/
(Status of Policy on December 15, 1966, Compared to Three Months Earlier)
(Number of banks)
Total
40.
30.
Strength of Demand for Commercial &
Industrial Loans (after allowance
for seasonal variation) Compared
to Three Months Ago
Anticipated Demand in Next 3 Months
76
81
76
81
Number
Answering
Question
Lending to Nonfinancial Businesses
Terms and conditions
Interest rates charged
Compensating balances
Standards of credit
worthiness
Maturity of term loans
40.
30.
Much
Stronger
Moderately
Stronger
Essentially
Unchanged
Moderately
Weaker
Much Weaker
40.
4Q.
30.
4Q.
30.
40.
3Q.
40.
.0.
--
24
11
30
43
22
22
5
16
14
40
50
23
11
2
1
Much
Firmer
Policy
4Q.
30.
Moderately
Firmer
Policy
4Q.
30.
Essentially
Unchanged
Policy
40. 23.
Moderately
Weaker
Policy
40.
3L.
--
3Q.
Much Weaker
Policy
40.
--
3o.
1
Reviewing Credit Lines or Loan
Applications
Established customers
New customers
Local service area customers
Nonlocal service area customers
Factors Relating to.Applicant 2/
Value as depositor or source Ff
collateral business
Intended use of the loan
S(continued)
(continued)
Number
Answering
Question
4Q.
3q.
Much
Firmer
Policy
Moderately
Firmer
Policy
Essentially
Unchanged
Policy
4Q.
2Q.
40.
30.
40Q.
30.
Moderately
Weaker
Policy
4A.
30.
Much
Weaker
Policy
40.
3.
Lending to "Noncaptive Cos.
Terms and Conditions
Interest rate charged
Compensating balances
Enforcement of bal. requirements
Establishing new or larger
credit lines
76
80
6
29
18
18
52
33
75
79
12
60
10
6
52
13
Number
Answering
Question
40.
Considerably
less
willing
2. 40.
3.
Moderately
less
willing
4Q0.
32.
1
Unchanged
Moderately
more
willing
40.
40.
Essentially
30.
32Q.
Considerably
more
willing
40.
30.
Willingness to Make Other Types
of Loans
Term loans to businesses
Consumer instalment loans
Single family mortgage loans
Multi-family mortgage loans
All other mortgage loans
Participation loans with correspondent banks
Loans to brokers
Survey of Lending Practices at 76 Large Banks Reporting in the Federal Reserve Quarterly Interest Rate Survey
Reports for 5 banks that regularly report were not available.
as of December 15, 1966.
2/ For these factors, firmer means the factors were considered more important in making decisions for approving
credit-requests, and weaker means they were less important.
./
SB - 1
SUPPLEMENTAL APPENDIX B:
THE U.S.
BALANCE OF PAYMENTS IN THE 3RD OTR.
1966*
Detailed figures for the U.S. balance of,payments in the third
The published liquiquarter of 1966 are summarized in the tables below.
dity deficit for the quarter was at an annual rate of less than $1 billion,
but in the absence of a number of special official transactions, it would
have been at a rate of more than $2 billion. The following notes focus
particularly on items for which monthly data are not available and which
have not, therefore, been covered in regular Green Book reporting.
Current account and Government capital transactions.--Military
expenditures abroad increased further, reaching an annual rate of $3.7
billion, with outlays in the Far East running at an annual rate $950
million higher than before the escalation of the Viet Nam war. After
deducting military sales, net military expenditures were at an annual
rate of $2.9 billion in the third quarter (see Table 1).
Net payments for foreign travel (seasonally adjusted) were
reduced during the third quarter; increased outlays by American tourists
abroad were more than offset by the growth of travel receipts from
Other service outlays were, on
foreigners visiting the United States.
Private investment
half of 1966.
changed from the first
balance, little
income receipts expanded, but this gain was offset by increased payments
to foreigners owing to the higher level of interest rates in the United
States.
In consequence mainly of the increase in military expenditures
and the adverse movement of the trade balance (previously reported in
the Green Book), the surplus on goods, services, pensions and remittances
fell further to an annual rate of $3.8 billion from $4.5 billion in the
second quarter and nearly $6.0 billion in 1965.
During the third quarter,
there was a slight increase in the outflow of Government grants and loans
apart from the advance debt payments received from France and Italy.
U.S. private investment abroad.--Direct investment fell back
from the exceptional level reached in the second quarter when there was
a very large takeover transaction and when oil companies were shifting
funds to their subsidiaries abroad to meet some exceptional tax payments.
The annual rate of direct investment outflow in the third quarter
(seasonally adjusted) was $2.8 billion, and for the first
three quarters
of 1966 it averaged $3.15 billion, compared with $3.4 billion for the
year 1965. To be counted as an offset against this, long-term security
issues and other borrowings abroad by U.S. ("Delaware") corporations to
finance direct investments were at a rate of only $0.1 billion in the
third quarter, compared with a three-quarter rate of $0.7 billion and
a 1965 total of $0.2 billion.
* Prepared by Thomas M. Klein, Economist, Special Studies and Operations
Section, Division of International Finance.
SB- 2
Table 1. U.S. Balance of Payments: Summary
(In billions of dollars; seasonally adjusted annual rates)
Year
1965
Year
1964
Balance on goods, services,
pensions and remittances
Exports, f.o.b.
Imports, f.o.b.
Trade surplus
Investment income (net)
Foreign travel (net)
Military expenditures
less sales
All other
7.6
25.3
-18.6
6. 7
4.0
-1.1
Government grants and
loans
of which:
Nonscheduled debt repayments
U.S. private capital flows
Direct investment
Foreign securities
Bank-reported claims
Other
(net)
Foreign capital flow, net, excl.
change in liouid dollar assets
Net errors and omissions
Balance on liquidity basis
Plus: Liquid liabilities to
foreign commercial banks
Plus: Liquid liabilities to
other foreign private
Plus: Liquid liabilities to
international organizations
Less: Selected non-liquid liab.
to foreign official
Balance on official
reserve transaction basis
Source:
Note:
Survey of Current Business:
1966
-I
-3
9Q-,
6.0
5.3
26.3
28.7
-24.0
-21.5
4.7
4.8
4.2
4.4
-1.2
-1.2
4.5
28.4
-25.0
3.4
4.6
-1.2
3.6
29.8
-26.6
3.1
4.4
-1.2
-2.1
.1
-2.0
.1
-2.6
.1
-2.6
.3
-2.9
.2
-3.6
-3.4
-3.8
-3.9
-3.2
(-)
(-)
(.1)
-6.5
(.2)
-2.4
-3.7
-3.4
-
-..
.7
8
-3.7
-2.8
-1.3
1. 1
-4.4
-3.9
-
.5
(.9)
-2.9
-2.8
-
.4
.5
.8
.1
.3
.7
.2
1.2
-1.0
- .4
-1.2
-
-2.8
-1.3
-2.2
- .6
.2
.9
2.0
4.7
.3
.6
.2
.3
- .3
- .1
-1.4
-2.5
-
.3
- .2
.3
.1
-1.6
-1.3
December
1966.
Details may not add to totals due to rounding.
-
-
.7
.1
-1.0
.1
3.8
1.1
.7
.5
.9
-
1.0
- .9
3.8
SB - 3
In consequence of the reduction in direct investment outflow and the re-emergence of the inflows of bank-reported claims
(previously reported), the net outflow of U.S. private capital after
deduction of "Delaware corporation" borrowing abroad was at an annual
rate of $2.7 billion, compared with $3.2 billion in the second quarter.
Foreign capital inflows.--Foreign nonliquid investment in
the United States, apart from "Delaware corporation" issues, was at
an $0.9 billion annual rate compared with $1.5 billion in the first
half year (see Table 2). The difference was more than accounted for by
special transactions shifting funds of international institutions and
foreign monetary authorities from liquid to nonliquid investments.
Foreign liquid fund inflows.--Foreign commercial banks
(especially foreign branches of U.S. commercial banks) increased their
liquid claims on the United States by more than $1 billion in the third
quarter as the result of the sterling crisis and as a consequence of
active borrowing by U.S. banks in the Euro-dollar market.
Errors and Omissions.--In the preliminary accounts for the
third quarter, there is a favorable shift in the errors and omissions item
as compared with preceding quarters. It is believed to reflect largely
a shift in unrecorded private capital inflows.
Reserve movements.--As a result of the relatively small deficit
on the liquidity basis, the large build-up of funds by foreign commercial
banks, and other liquid fund inflows (see bottom part of Table 1), official reserve transactions reflected a U.S. surplus in international payments. Despite this favorable result, reduction in the U.S. monetary
gold stock plus drawings on the I.M.F. gold tranche came to around $500
million in the quarter, as foreign monetary authorities drew down their
liquid assets in the United States (see Table 3).
SB - 4
Table 2. Foreign Investment in the United States
other than in Liquid Dollar Assets
(In millions of dollars seasonally adjusted)
1965
Q-l
1966
Q-2
Q-3
TOTAL NET INFLOW
194
289
960
263
Less: U.S. corporate borrowing
abroad to finance foreign
investment
206
184
310
NET INFLOW ON OTHER TRANSACTIONS
-12
105
650
228
168
129
573
115
-520
-42
-46
-19
-53
-26
-23
-135
1.
Net purchases of non-liquid
assets by international
organizations and foreign
official agencies1/
2.
U.K. sales of U.S. securities
other than U.S. Treasury issues 1 /
3.
Nonconvertible Roosa bonds
-7
4.
Foreign direct investment in
the U.S.
71
37
11
276
34
138
5.
All Other
Source: Survey of Current Business, December 1966.
1/ U.K. purchases of U.S. agency securities are included in line
2 rather than line 1.
290
SB - 5
Table 3.
Official Reserve Transactions
U.S. Balance of Payments:
(In millions of dollars)
Changes
1965
Q-1
Q-2
Q-3
-94
22
209
335
173
1,222
134
68
222
424
Liquid liabilities to:
Foreign central banks
and governments
I.M.F.
-51
34
Selected non-liquid liab.
to foreign central
monetary authorities
Official reserve assets
(increase -)
I.M.F. gold tranche
Gold
Convertible currencies
Total
Total
Outstanding
Sept. 30, 1966
-426
372
13,356
1,148
68
82
14,876
-982
131
40
18
-642
28
13,787
1,011
100
25
254
105
1,035
1,305
-402
380
-427
1,665
-349
-163
Source: Survey of Current Business, December 1966.
*/ Not seasonally adjusted.
@FedFRASER