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April 23, 1973




Federal Open Market Committee


Mr. Broida

Enclosed for your information is a copy of a staff
memorandum, dated April 20, 1973, and entitled "Report on
banks' operations during exchange market crisis preceding
February 12 devaluation."

This report was prepared in response

to the Committee's request at its meeting on February 13, 1973.

Arthur L. Broida
Deputy Secretary
Federal Open Market Committee


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April 20, 1973


Federal Open Market Committee




Report on banks' operations during exchange market crisis
preceding February 12 devaluation.

This memorandum reports the results of a survey of 13 large
U.S. banks 1 / regarding their operations for their own account and for
account of customers during the exchange market crisis preceding the
devaluation of the U.S. dollar on February 12,

and reviews the regular

weekly data on U.S. banks' loans to foreigners and on certain banking
liabilities during this period and in the latter half of February.2 /
Monthly data on foreign assets of the U.S. agencies and branches of
foreign banks, reported in connection with the VFCR program, are also
In the three weeks January 25-February 14, 1973, the U.S.
payments deficit on the official settlements basis was $8.4 billion


The questionnaire (a copy of which is attached as Appendix A) was

prepared in consultation with the Federal Reserve Bank of New York.
The following banks were surveyed by the staff at the respective Federal
Reserve Banks:
New York (9):
Bankers Trust, Chase, Chemical, First National City,
Irving Trust, Manufacturers Hanover Trust, Marine
Midland, Morgan Guaranty Trust, and Republic National.
Continental Illinois and First National Bank of Chicago.
San Francisco (2):
Bank of America and Wells Fargo
These banks accounted for 62 per cent of the foreign assets reported by U.S.
banks in the VFCR program as of the end of February 1973, and for the bulk
of the foreign exchange dealings for commercial customers by U.S. banks.
In this memorandum "U.S. banks" refers to the U.S. offices of banks
organized under U.S. and State laws; "banks in the United States" includes
the agencies and branches of foreign banks.

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(compared with a slight surplus in th e preceding 3-week period).


half of this payments deficit was produced by transactions reflected in
the statistical data.

The principal conclusions of the survey of 13 banks,


account for a large share of the foreign activities of all U.S. International banks, are as follows.

Shifts in the reporting banks' own foreign exchange

positions and those of their foreign branches represented only a small

part of the total increase in demand for foreign currencies in the

The banks reported a total shift in their foreign currency

positions against the dollar of less than $400 million.

More than half

of this shift was in the positions of their foreign branches; changes
in head office positions were thus very small.1 /

Commercial corporate customers' gross purchases of foreign

exchange (spot and forward) from the banks surveyed and from their foreign
branches increased significantly from a level that was already high by
historical standards.

In the 3-week period to February 14 these purchases

were about $600 million greater than in the preceding 3-week period -about $2 billion as against $1.4 billion.

(The data lack precision;

moreover they do not provide a basis for estimating changes in corporate
foreign-currency asset positions, and hence are not additive to the

1/ The shift in the banks' spot positions may have been larger if they
had net forward sales of exchange.

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above-cited data on capital outflow.)

About two-thirds of the estimated

gross purchases by customers were from head offices, one-third from

branches abroad.

U.S. banks noted a substantial increase in their loans to

foreign commercial banks,which included overdrafts.

Apart from these

interbank credits, U.S. banks said they did not discern a strong demand

for dollar credit from either domestic U.S. customers or foreign customers
that they could attribute directly to the exchange crisis.

Several of

the banks surveyed noted, however, that the U.S. agencies and branches
of foreign banks drew on credit lines at the reporting banks.


drawings were doubtless associated with the shifts described below in
the foreign asset and liability positions of the agencies and branches

during this period.
Consideration of the results of the survey in conjunction with
regular data on banking transactions provides a broad picture of large
U.S. banks' operations during the exchange market crisis.

In general,

these banks did not engage in aggressive speculation for their own
account (point 1 on preceding page).

There is no indication that they

actively facilitated their customers' efforts to hedge exchange positions
or speculate

(point 2).

They did not think there was a strong connection

between the speculative outflow and the bulge in domestic commercial and
industrial loans -- which rose by $3.2 billion in the 3 weeks to February 14,
of which $1.3 billion served to replace commercial paper borrowings (point 3).

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The growth in their own foreign assets was largely dollardenominated, and included growth of overnight overdrafts by correspondent
banks abroad as well as drawings on existing credit lines.

Both the

extension of credit in these forms and the drawing down by banks abroad
of their balances in this country (liabilities of banks in the United
States) provide indirect evidence of hedging and speculative activity

abroad; these transactions at banks in the United States could be the
result, for example, of foreign banks' reactions to Eurodollar deposit
withdrawals and Eurodollar borrowings by businesses and investors located
in other countries.

It seems probable that much of this activity abroad

occurred at foreign banks other than U.S. bank branches.
Analysis of the statistical data and survey results.

In the 3 weeks ending February 14, the U.S. payments

balance moved into massive deficit.

On the official settlements basis

the deficit was $8.4 billion (compared with a slight surplus in the
preceding 3-week period).

This deficit reflected (1) something like

$1/2 billion of deficit on current and Government capital accounts;
(2) about $2 billion of outflow from balances held at banks in the
United States

(including foreign agencies and branches) by banks abroad

(including U.S. banks' branches) and other private holders; and (3) about

$6 billion of other net private capital outflows and unrecorded transactions (compared with $6-1/2 billion net in the full year 1972).


this $6 billion, about $2 billion is accounted for by increases in the
foreign assets of banks in the United States (including foreign agencies
and branches).

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With a rearrangement of the classification, it appears that
about $4 billion of the 3-week deficit in private capital transactions
shows up in asset and liability figures of banks in the United States,
leaving about $4 billion for other private assets and liabilities.


The survey does not help much toward identifying the

nature of the latter $4 billion -- the net movement in private assets

and liabilities (of foreign as well as U.S. residents) outside the U.S.
banking system.

Corporations here and abroad doubtless purchased large

amounts of foreign exchange from banks abroad, as well as from banks

in the United States other than the 13 banks surveyed.

Such purchases

could have been financed in many ways: by drawing down liquid assets
in the United States, by selling stock market securities, by obtaining

dollar advances from affiliated companies in the United States, by
borrowing dollars from banks here or abroad, and so on.

Also, normal

sales of foreign exchange for dollars to make dollar payments in the
United States could have been delayed, causing increases in U.S. residents'
accounts receivable from abroad.

Many of these transactions would not

show up directly or indirectly in the data for U.S. banks' foreign assets

and liabilities, and would therefore form a part of the $4 billion to
be explained.

Of the other $4 billion part of the total movement, the

part that leaves its trace in the banking statistics, $2 billion shows
up in a reduction in private balances at banks

in the United States,

including U.S. banks' liabilities to their foreign branches and the

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liabilities of U.S. agencies and branches of foreign banks to their
overseas affiliates.

Such liabilities often fluctuate from week to

week in response to random forces, but the $2.0 billion outflow in the
three weeks to Frbruary 14 seems clearly related to the change in the

exchange market atmosphere that began to develop before the end of

(In the three weeks to January 24, these liabilities had risen

by $1.5 billion.

Liabilities of U.S. banks to their foreign branches

accounted for $1.0 billion of the earlier rise and for $1.1 billion of
the decline in the three weeks to Frbruary 14).
These liabilities to banks abroad often change in response
to changes in interest rate differentials, especially between Federal
funds and overnight Eurodollars.

On this occasion, although 1-month

and 3-month Eurodollar deposit rates were already rising contraseasonally
during January, the overnight Eurodollar rate did not begin to rise
until Thursday, February 8, shortly before official exchange markets in
Europe were closed after that Friday's business.

It seems possible

that the withdrawal of balances from the United States by banks abroad
in late January and early February was in part not a voluntary response
by those banks to the normal demands for Eurodollar credit that had
been pushing up Eurodollar loan and deposit rates, but an involuntary
reaction to sudden large loan demands and withdrawals of Eurodollar
deposits for conversion into Euro-Swiss-franc or Euro-DM deposits.
In this situation, despite the relatively high yield of Federal funds,
the banks were constrained to adjust their positions by drawing down

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their dollar balances in the United States in order to buy Swiss franc
claims on Switzerland or German mark claims on Germany.

Finally, the weekly reporting banks' statistics and the

VFCR reports from the U.S. agencies and branches of foreign banks
indicate an increase in external assets of banks in the United States
that probably amounted to roughly $2 billion in the three weeks to
February 14.

Weekly data on the foreign assets of the agencies and

branches of foreign banks are not available, but the increase in the
month of February was $1.2 billion.

The 3-week increase in foreign

loans at the weekly reporting banks was $1.2 billion, and the increase
in their balances with foreign banks was $0.3 billion.
As already noted, the bulk of this increase in foreign claims
of weekly reporting banks was in loans and overdrafts denominated in
dollars, and hence was not evidence of speculation by the banks.
Nor is the increase in banks' balances with foreign banks
evidence of speculation, per se, since spot holdings may merely represent
cover against forward sales.

The survey indicated that at the head offices

of the 13 banks the shift in foreign exchange positions was only about
$150 million, from a short position of about $100 million to a position
about $50 million long of foreign currencies.

Some banks were still in

a short foreign-currency position; only three had long positions over

million, and of these only one was over $25 million.

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The outflow of funds from U.S. agencies and branches

of foreign banks to their head offices and to other foreigners, which
amounted during the month of February to more than $2 billion (including
reduction of liabilities and increase in claims) necessarily involved,

within the United States, withdrawals by the agencies and branches of
funds they had been lending in the money market and/or new borrowings
by them from U.S. banks.
on such borrowings.

Some of the banks in the survey commented

It is a question of judgment as to whether this

shift in the money market supply/demand position of the foreign agencies,
arising from factors external to the United States, was or was not large
enough to affect significantly the level of the Federal funds rate.

March crisis.

The foreign exchange crisis of March 1 was

reflected in U.S. payments statistics in the week ending March 7,

when the official settlements deficit was $4.3 billion.


loans to foreigners by weekly reporting banks rose about $0.8 billion
in that week, and liabilities of the agencies and branches of foreign
banks to private foreigners were reduced by $0.2 billion, but liabilities
of U.S. banks to their branches increased by $0.7 billion.

Thus less

than one-tenth of the week's over-all deficit was reflected in these


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For the four weeks from February 15, to March 14, the payments
deficit was $3.4 billion, and the rise in outstanding loans of weekly
reporting U.S. banks to foreign commercial and others was $1.3 billion.
The weekly reporting banks' balances with foreign banks declined $0.1

There was little net change in bank liabilities to commercial

banks abroad and other foreigners;

liabilities of U.S. banks to their

branches rose by $0.7 billion, while liabilities reported by New York
agencies and branches changed little on balance, and other liabilities
fell by $0.7 billion.

No information is available on loans by the U.S.

agencies and branches of foreign banks.
exchange transactions by banks.

Nor was a survey made of foreign

It would be reasonable to assume that

if such information were obtained, we would still be a long way from
a full picture of the transactions associated with the crisis.


commercial and industrial loans of weekly reporting U.S. banks rose
by $3.4 billion in this four-week period, while outstanding dealer-placed
commercial paper declined by $1.3 billion.

Even if a significant part

of this domestic loan expansion financed growth of corporate claims abroad,

it is likely that much of the speculative buying of foreign currencies
took place abroad.

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(except columns 4, 5, and 7)
Weekly Data on Changes in External
Assets and Liabilities of Banks in United States
(in millions of dollars)

Liabilities to
Private Foreign




Banks to

of N.Y.
& Br. of



Jan. 3

Feb. 7






Assets of
Loans with Fgn.



Ag.& Br. (6)



- 159

+ 174
+ 340
+ 715




- 235







+ 27
+ 184







+ 253




Mar. 7









+ 289
+ 78










Apr. 4

4 wks. of


3 wks. Jan. 25
to Feb. 14




- 146

7 wks. Jan. 25
to Mar. 14




- 817







+ 278



+ 156


1,245 -4,410





(1,245+) ...



Primarily the liabilities of the N.Y. agencies and branches of foreign banks to
their head offices and affiliates abroad.


Loans to foreign commercial banks, loans to foreign governments and official
institutions, and foreign component of commercial and industrial loans.

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Survey of Bank Operations during the
period January 22 to February 9, 1973

1) Did your bank change its spot or forward foreign exchange
position on balance over that period? If so, by how much? How did your
position at the close of the period compare with your average position
during the first three weeks of January?

Please answer the above questions for the aggregate

positions of your foreign branches.
2) How much foreign exchange did you sell to customers in
the period, and how does that compare with sales in the preceding three

a) To the extent possible, we would appreciate the same
information with respect to the operations of your foreign branches.
3) How large were foreign drawings on dollar loans or other
types of credit during the period, and how does that compare with total
drawings in the preceding three weeks? To what extent would you attribute this to normal seasonal requirements?
Did you experience unusually large loan demands from
To what extent was this related
domestic customers in this period?
in your judgment to an outflow of funds from the U.S.?

5) If you experienced abnormally large demands for foreign
currency purchases or dollar loans in this period from domestic customers,
to what extent was either of these attributable to a) large corporate
customers, b) other corporate customers, c) other financial institutions,
or d) the general public?
6) What was the increase in liabilities of your foreign branches
or affiliates (if any) to a) your bank, b) other U.S. residents, between
January 22 and February 9, 1973?