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BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
November 5,
Office Correspondence
Subject:
To
FOMC Staff
From
Murray Altmann
CONFIDENTIAL (FR)
Attached for your information are two reports prepared
recently for the New York Bank's Committee on Foreign Account
Activities and distributed to the Federal Open Market Committee.
One report, prepared by Paul Meek, is entitled "Report on Foreign
Official Investment in the United States - the Federal Reserve Role."
The other, prepared by Peter D. Sternlight, is entitled "Report on
Federal Reserve Guarantee of Acceptances Held for Foreign Accounts."
Attachments (2)
1974
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FEDERAL
RESERVE BANK OF
NEW YORK
Report on Federal Reserve Guarantee
of Acceptances Held for
Foreign Accounts
In recent months there has been a sharp increase in the
volume of bankers' acceptances purchased and held for official
foreign accounts, and carrying the Federal Reserve's guarantee.
While the practice of
guaranteeing these holdings has a long history
in the Federal Reserve System, dating back to 1920, and was undertaken for such desirable purposes as the encouragement of the acceptance market and the provision of suitable dollar-denominated liquid
assets in which foreign official accounts might be invested, the recent
rapid growth has raised a question as to whether the guaranty policy
should be reconsidered and modified in some manner.
Less than two years ago, at the end of 1972, the volume
of bankers' acceptances held at this Bank for foreign accounts, and
carrying the Federal Reserve's guarantee, was $179 million -- within
the approximately $100-$250 million range of fluctuation prevailing
since 1960.1/
During 1973, the amount thus held, and guaranteed,
rose to $581 million, while in late October 1974 the amount soared
to more than $2,000 million.
Orders currently on hand, but not yet
executed, could increase the total by an additional substantial amount.
With other countries developing an increased interest in these investments, it is not out of the question that -- unless present policies
are modified -- the total could approach $3 billion within the next
several months.
1/
A table showing amounts of acceptances held for foreign accounts
at year-end dates back to 1920, is appended to this memorandum.
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2 -
Underlying the rapid growth of foreign official holdings
of acceptances is the development of a significant yield advantage
over such comparably secure investments as Treasury bills.
The yield
advantage over Treasury bills has ranged as high as 3 or 4 percentage
points during the past year, although most recently the spread has been
somewhat over 1 percentage point.
After deducting the 1/8 percent
guaranty fee charged by the Federal Reserve, this still leaves a
considerable yield advantage in favor of acceptances, and foreign
official accounts have become increasingly cognizant of this advantage.
Guaranteed acceptances have always been offered as an investment outlet to foreign central banks as a matter of routine.
Ac-
ceptances are, of course, an attractive investment outlet highly
suitable for some portion of a central bank's dollar reserves.
larly when foreign account demands as well as
Particu-
System demand have driven
Treasury bill rates down to artificially low levels in relation to prevailing money market rates, the advantages of diversifying into other
safe investments --
including acceptances --
has become
crystal clear.
Not only are foreign accounts more interested in acceptances
today than was the case, say, a year ago, but also the total availability of such paper in the U. S. market has expanded at an accelerated
pace.
During 1973,
total outstanding acceptance volume increased by
$1,994 million to $8,892 million.
By earlier standards, this was an
unusually large annual increase; for the five years ended 1973 the
average annual increase was under $1 billion.
But through the first
nine months of 1974 the total shot up by $7,143 million to $16,035
million, dwarfing earlier growth rates by a wide margin.
If the
Federal Reserve System should undertake to purchase finance bills,
and if foreign accounts were also willing to purchase these nontraderelated instruments, the potential for expansion of the acceptance
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market would be
even greater.
Present concern over
the rapid growth in our
two considerations --
acceptance holdings reflects
guaranteed
first,
the size
of the Federal Reserve's exposure; and second, the desirability from
a broad economic policy
guarantee to a sizable
standpoint of extending
segment of
the Federal
Reserve's
the private credit market for foreign
central banks and monetary authorities.
On the first point,
Federal Reserve exposure, there is reason
for increased watchfulness, but
has an unblemished record
for
acceptance market in the U.
in paper accepted by a U.
banks)
not for alarm.
safety.
Since
S. we know of no
S. bank
failed to receive payment.
prises in the banking world, one
the earliest days of
the
instance where an investor
(including U.
1/
The acceptance market
S.
agencies of
In these days of
foreign
unpleasant
sur-
should not of course permit a good
past record to breed complacency.
The second
which has
concern is whether the Federal Reserve's guarantee --
been likened to
extended on an open-ended
a U.
S.
Government guarantee --
basis to a segment
of
should be
the private credit
market for foreign banks and monetary authorities.
While a strong
case could be made for providing this guarantee in the past -- in order
to encourage a fledgling market in bankers' acceptances and help develop
an attractive investment vehicle for foreign official accounts in the
U. S. money market -- there is reason to question now whether such a
guarantee is any longer justifiable.
ah
Especially, it seems question-
whether the Federal Reserve should continue to provide the guarantee
on a nearly unlimited scale, responding to whatever purchase orders
the foreign accounts choose to give us -- restrained only by the
1/
Even in the 1930's when some accepting banks failed, investors
were repaid by the underlying borrowers.
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over-all availability of
"prime" acceptances
in the market and by
internal guidelines such as our present rule that we will not buy
the
acceptances of
of the
a particular bank if we already hold
outstanding acceptances of
foreign accounts.1/
banks may have
percent of
substantial
that bank either for our
Another "limitation"
trade-related acceptances
their
capital and
leeway under this
50 percent
surplus --
is
own or
the fact that member
outstanding only up
to
100
but many accepting banks have
standard.
Historical Background
Before turning to a consideration of specific modifications
in the existing policy of purchasing and
for foreign
of
accounts, it
the acceptance market
is relevant to
in the United
guaranteeing acceptances
look at the earlier history
States and
foreign account
participation in it.2/
The development
United
States is in fact
the Federal
of
the bankers' acceptance market in
the
closely intertwined with the formation of
Reserve System.
Indeed Randolph Burgess wrote in 1927:
"The bankers' acceptance....is a comparatively new
member of the society of credit instruments in this country....
It did not grow up from gradual and unconscious beginnings, as
do most of our institutions, but it was taken over from Europe
at the same time that the Federal Reserve System was inaugurated.
1/
We have a lower
2/
The material that follows draws heavily on a memorandum prepared at the Federal Reserve Bank of New York, dated October 29,
1956, entitled:
guideline for
certain foreign agency banks.
Memorandum for the Board of Governors of
Federal Reserve System Reviewing Federal Reserve Practice of
Buying Acceptances for Foreign Accounts.
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"The adoption of the bankers bill was a matter of
In all of the discussion surcuriously unanimous consent.
rounding....the debate over the Federal Reserve Act, there
was hardly a dissenting voice to the proposal for establishing
The Federal Reserve legislation granted to
a discount market.
banks in this country the power to accept drafts drawn upon them.
These were made eligible for purchase by the Federal Reserve
Banks, and thus the necessary foundations were laid for a discount
market."1/
One of the purposes of the Federal Reserve Act
its
early amendments was
to authorize
an acceptance market in the United
The idea was to
foreign trade.
market
bill on London which had
In 1916,
and foster the development of
States as a means of
create a dollar bankers'
to rival bankers' bill markets
and some of
financing
acceptance
in Europe, notably the
been a leading means of
sterling
financing world trade.
this Bank began to develop reciprocal correspondent
relationships with foreign central banks.
It was envisaged
that each
central bank would maintain a substantial balance with the other as
compensation for
carrying the
the bankers' acceptances
ment was with the Bank of
purchases were
in 1920.
with the Bank of
of
England
account, and
that each might invest
in the other's market.
first such agree-
although the first
England, in 1917,
Under the
Our
in
actual
1917 arrangement, this Bank agreed
that each institution would,
at
the request
the other, purchase prime sterling bills or prime dollar bills for
the account of
the other institution, with the
responsible for
on behalf of
the payment at maturity of
Bank of England to be
the sterling bills bought
the Federal Reserve Bank of New York, and the New York
Bank to be responsible for the dollar acceptances bought for the
Bank of
believed
1/
England.
There was no guarantee fee
to be charged,
as it was
that the maintenance of a substantial balance by each bank
The Reserve Banks and the Money Market
(New York, 1927),
pp 126-7.
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with the other would be
6 -
sufficient compensation.
The arrangement was
modeled on the Bank of England's long-standing agreements with its
foreign correspondents.
In 1921 we began charging a 1/4 percent com-
mission instead of relying on a "free balance" for compensation with
all correspondents except the Bank of England;
to
1/8 percent
For
a time --
the charge was reduced
in 1926 and was applied to the Bank of England
1921 to 1934 --
our
standard letter of terms and
in 1929.
con-
ditions provided that in case of purchases without our guarantee of
payment no commission would be charged, but available records do not
indicate that any such nonguaranteed purchases were made.
This Bank has made only limited purchases of foreign bills.
In 1924,
at the suggestion of the Bank of England, we bought a small
amount of sterling bills, while in 1928 we bought some franc bills,
and in 1931 through the BIS we bought Dutch and Polish bills.
In some of the memoranda prepared at this Bank in regard to
the practice of guaranteeing acceptance purchases and charging a fee
for this service, reference is made to a moral commitment on our part
to stand behind the purchases made for foreign accounts.
Thus in N. P.
Davis' Report to the Directors of this Bank on November 8, 1956, he
stated:
"We have also taken the view that we should be unwilling
to purchase bankers' acceptances for foreign account without
giving our guarantee of payment at maturity. Prior to 1937 we
had offered our correspondents the privilege of buying bankers'
acceptances through us either with or without our guarantee,
but we were not taken up on the offer to purchase bankers' acceptances without our guarantee and, as a consequence, we withdrew the offer at the time of the adoption in 1937 of our
standard form of letter of terms and conditions which is still
in use. We feel that in selecting particular bankers' acceptances
for account of foreign correspondents we assume a moral responsibility, and that such moral responsibility should be formalized
by a guarantee.
We also feel that, if we should resume the
practice which we followed in the early days of the Federal Reserve
System of buying bankers' acceptances in foreign markets, we would
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not wish to do so without obtaining the guarantee of the
central bank in the market in which we were investing, since
we would not be in a position to evaluate the credit risks
involved.
Under the doctrine of reciprocity, we should,
therefore, be prepared to supply a similar guarantee to
foreign central banks who wish to purchase bankers' acceptances in this market."
Since we were prepared, prior to 1937,
to buy acceptances
for foreign accounts either with or without the guarantee,
there is
perhaps some question whether Federal Reserve officials in the 1920's
felt
that there was
a moral responsibility for the purchases we made
for foreign accounts.
Our willingness to provide the guarantee was
perhaps largely a matter of
event
seeking the reciprocal guarantee
that we would buy foreign acceptances.
withdraw the offer
Apparently
to purchase acceptances without
lowed a communication from the Bank of England,
that
we omit reference to
in the
our move to
the guarantee fol-
in 1934, suggesting
the possibility of buying bills for their
account without our guarantee;
they also
stated
that they themselves
were no longer willing to buy acceptances for other central bank
accounts on an unguaranteed basis,
responsibility existed
in any case.
on a more recent occasion, in 1971,
certificates of
a guarantee;
deposit for
since they believed
that a moral
It might be noted
further that
this Bank bought
commercial bank
a foreign central bank without providing
the foreign central bank agreed beforehand
to the list
of United States banks whose CDs would be acceptable.
The special role of bankers' acceptances, and foreign
central bank purchases of
these
Federal Reserve Act and also
instruments, was recognized in the
in Federal tax legislation.
A provision
of the Revenue Act of 1928, included at the request of the Treasury
with the support of the Federal Reserve System, in effect rendered
income derived by a foreign central bank of issue from bankers' acceptances exempt from U. S.
taxation, which exemption is present in
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the current
Foreign central banks were
Internal Revenue Code.
further recognized as a special class in
Revenue
Section 895 of
the Internal
Code, which exempts foreign central banks from taxation
on income derived from obligations
of
the United States or of any
agency or instrumentality thereof, and interest
income from bank
such obligations or deposits are held
deposits unless
for or used in
connection with commercial bank activities.
Not
to be overlooked
foreign accounts over
was
the guarantee fee charged
has varied, of
It
In 1973,
acceptances purchased.
$558,000.
that
the years has been a source of
Federal Reserve Banks.
of
is
to
income to the
course, with the volume
the income from this
source
This year it may be three times that figure, having
accumulated to $1,140,000 through October 18.
in the table attached
to
Yearly fees
are shown
this memorandum, along with the information
on year-end holdings for foreign accounts.
Consideration of Alternatives
A wide range of
alternatives,
be considered in response to
or combinations
the questions raised at
The possibilities range all
this memorandum.
of
them, might
the start of
the way from abrupt
termination of existing guarantees to imposition of dollar limits
on the guarantee,
to adjustments
on the fee schedule,
to no action
at all.
As a general comment it might be noted here that
sition of a dollar limit on the guarantee would not be new.
tion was
1937,
the impoA limita-
first imposed on such holdings by the Board of Governors in
equal to
acceptances
for
$25 million.
In earler years, the Bank had
acquired
foreign accounts and, jointly with the other Reserve
Banks, guaranteed
their payment at maturity, without any limitation
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being set by the Board.
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Acquisitions began
reached a high point in 1929
in 1920 and holdings
($548 million held at year-end 1929).
The volume diminished abruptly in the early 1930's,
low ebb
through World War II and in the
September 1950, as
the $25
million
and remained
By
early postwar years.
limit was being approached,
Bank requested either an increase in the limit
to
removal of
in the case of
the limit
(as had been done earlier
for
a
limit was raised again in several
$50 million limit.
The
$150 million by January 1958,
and at the end of
removed altogether "with the....understanding
this
$50 million or a
ment securities purchased
foreign accounts).
at
The Board
Govern-
opted for
steps to
that month it was
that a quantitative
limitation may be imposed again at any time if the circumstances
should make this desirable".1/
In requesting the removal of the limitation, officers of
this Bank made the point that a specific quantitative limitation tended
at
times to impede our
operations on behalf
of
foreign accounts;
same time it was noted that the Board's Division of
at
International
Finance was informed each day in regard to this Bank's activity on
behalf of foreign accounts, and that this could serve the Board's
purposes as a substitute for the previous rigid limit.
1/
The quotation is from S. R. Carpenter, Secretary of the Board,
in a letter to Mr. Hayes dated January 30, 1958.
the
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The alternatives presented below indicate some of the main
lines of choice that might be made.
Alternative 1.
holdings of acceptances.
Discontinue the guarantee on all existing
This step is so drastic as to be well-nigh
unthinkable, involving as it would a change in an existing contract.
It is included only for the sake of presenting a full range of choices.
It would be justified only if the past guarantee practice were regarded
as quite improper.
The risk of misinterpretation would be high.
Should
the feeling develop that this departure from past practice represented
a loss of confidence by the Federal Reserve in the solvency of the
U. S. banking system the costs could be high indeed.
If one did try
to pursue this course, then we might be under some obligation to repurchase the acceptances from the foreign account if they were unwilling to hold the paper without a guarantee.
The main point to be made
about this alternative, however, is that there is no need for such a
drastic step to be given serious consideration, since our acceptance
holdings for foreign accounts are all of short maturity -- generally
coming due within three months.
Thus, merely refraining from guarantee-
ing new purchases would accomplish the same objective of terminating
the guarantee within a relatively short time, without the overtones
of reneging on a contract that would be entailed in this first
alternative.
Alternative 2.
of acceptances.
Discontinue the guarantee on new purchases
This is also a rather drastic alternative, although
it is the one that logically follows if one concludes that the
guarantee has outlived its original purposes of fostering an acceptance
market in the United States, and helping to finance foreign trade.
Another argument used in the past for our guarantee is reciprocity --
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that we would want the guarantee if we were to buy foreign acceptances.
However, given the changes in the world international financial scene
over the past several decades it does not seem too realistic to anticipate that we would want to build up holdings of foreign acceptances,
and there might well be a reluctance on the part of foreign central
banks
to guarantee such acquisitions, particularly if made on a
sizable scale.
Arguing against a sudden cessation of our guarantee, however, is the fact that such a step might have seriously adverse
effects on the general state of confidence in our banking system,
at a time of continuing great sensitivity.
With the Franklin situa-
tion still a very lively memory, and some other banks and financial
intermediaries remaining under something of a cloud, this is hardly
a desirable time to take a step that would seem to advertise our
distrust of
the banks.
There are modifications of this alternative that would
make it less abrupt -- such as posting a future date beyond which
we would not guarantee purchases, or informing our foreign accounts
that we want gradually to decrease the amount we guarantee for them
(for example, by guaranteeing only a portion of the acquisitions
needed to roll over maturing amounts).
But any of
these variations
that have the clearly perceived end-result of getting us out of the
guarantee altogether would partake in some considerable degree in
the confidence-weakening objective noted above.
Alternative 3.
Set a dollar limit on the volume of ac-
ceptances that could be guaranteed.
set
This would follow the precedent
in the years 1937-58 -- except that during that period the limit
did not operate as a real constraint, as it was increased whenever
set
no
were
Iflimit
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a
the ceiling amount.1/
holdings came close to
it would presumably be at some level that might soon be approached,
and at
some point
acceptance market
the
The
setting of an over-all limit, presumably by
Governors, would
acceptances within
guaranteed
Federal Reserve Bank of
tional flexibility, or
example, one
still leave open the question of allocating
This
that limit.
could be left to the
New York, in order to preserve maximum operait might also
approach might be a global limit of
or $300 million of
For
be undertaken by the Board.
$2.5 billion or
billion acceptances, with individual countries limited
million
in the
(dealers and accepting banks) would have to be made
aware of the limits.
the Board of
foreign accounts and other participants
guaranteedholdings.
have in the neighborhood of $400 million of
to,
$3
say, $250
Two countries already
acceptances, so that under
this approach we would have to let their guaranteed holdings decline,
through maturities,
to the prescribed level before purchasing any
more for them on a guaranteed basis.
The case for a global limit is that while recognizing the
validity of a Federal Reserve posture encouraging to the acceptance
market, and the validity of singling out foreign official accounts
for special consideration, the satisfaction of these objectives need
not
require an open-ended commitment.
One does not need to impugn
the soundness of our banking system to say that it is reasonable to
have a ceiling on the volume of acceptance credit that the Federal
Reserve should be expected to guarantee.
1/
The one exception was in January 1958 when the increased limit
did not
come through fast enough to
complete the execution of
a particular order, and the balance of
the order was cancelled.
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On the other side it may be argued that any application
of a rigid
limit will in some degree pose the disadvantages cited
in connection with Alternative 2 above -- namely, tending to cast
some doubt on confidence in the banking system -- and the present
state of confidence is too fragile to take any chances at all with a
new approach.
To this it might be countered, though, that a failure
to act in some restraining way could also impair confidence in our
financial system as the realization grew that the central bank was
unwilling
to limit
the potential growth in its contingent liabilities.
In this connection it might be pointed out that the Federal Reserve's
contingent liability on acceptances is now nearly equal to 100 percent of its capital and surplus accounts -- which is the maxmum ratio
permitted for national banks.
Alternative 4.
As a variant on Alternative 3, or perhaps
in combination with the global dollar limit under that alternative,
the System could limit the guaranteed acceptances to be held for
any one country to specified proportions of its dollar investments
held at the Federal Reserve.
This approach would share the advantages
noted under Alternative 3, in preserving the principle of guaranteeing acceptance holdings for official foreign accounts and limiting
the extent of that guarantee.
At the same time it would provide some
degree of equity in applying a limit to different countries with widely
different dollar reserve resources, and it would do this in a manner
that encouraged the foreign accounts to place the bulk of their dollar
reserves in Government securities.
A disadvantage of this approach is that in practice, the
foreign accounts acceptance holdings are now quite unevenly distributed
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in proportion to other holdings through this Bank.
If one sought to
apply a uniform ratio, some countries would have a great deal of leeway to build up holdings, and others would have to cut back sharply.
Yet
the propensities
of different countries
to hold acceptances might
be quite different and we could engender unnecessary frictions by
seeking to force every account into the same mold.
Thus if this
approach were to be adopted, it should provide for considerable flexibility in its administration, with
liberal use of grandfather clauses
until we could appraise the extent to which some countries not yet
active in acceptances might develop an interest in them.
Alternative 5.
Limit the guarantee to some proportion of
a foreign account's acceptance holdings, such as 50 percent.
One
way that this could be applied would be to guarantee 50 percent of
each acceptance held for the foreign account -- in effect, a losssharing agreement.
This would have the advantage of reducing the
Federal Reserve's theoretical exposure, while preserving the principle
of a guarantee.
It would have some parallel with the loss-sharing
arrangements under the swap-line agreements.
One disadvantage of this
alternative is the considerable uncertainty as to its effect.
It is
very difficult to say how foreign accounts might react to the change.
Probably the reaction would depend to a considerable extent on how
the change was presented to them.
If it was presented as a minor
technical matter, this would do little to discourage their interest
in acceptances, or to meet the problems noted at the outset of this
paper.
If it is presented as a significant change, we might substan-
tially discourage their interest and bring about some of the disadvantages noted earlier in connection with a complete withdrawal of
the guarantee feature.
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Alternative 6.
Raise the guarantee fee.
This would serve
two purposes -- namely, cutting down the yield advantage of acceptances over Treasury issues, and providing a specific contingency
Under present circum-
reserve in the event of losses on acceptances.
stances, the guarantee fee would have to be raised quite steeply to
It
cut into the yield advantage now running in favor of acceptances.
would have to go up, say, to at least 1/2 percentage point -- a level
far in excess of traditional guarantee fees.
No doubt the change would
be viewed as a sort of interest equalization tax, since the move would
be hard
to justify on the basis of
past loss experience.
And
indeed,
if we sought to justify it on grounds of future loss anticipations
this could have an adverse impact on confidence in our market.
Unless
there were flexibility to vary the guaranty fee quite frequently, as
yield relationships changed in
the market,
it would be difficult to
set the fee at just the right level to slow down foreign interest in
acceptances without turning off that interest almost completely.
If
we did not discourage foreign interest, we would still have the problem
of an ever-growing contingent liability.
And if we did substantially
discourage interest there would be seriously adverse effects on the
acceptance market.
Another point to keep in mind is that a sharp
increase in the fee that was not clearly justified by loss experience
could be regarded as somewhat unfriendly by the foreign accounts.
As for building up a reserve fund, say to 1 or 2 percent
of our contingent liability, there would seem to be good reason to
do this, now that our contingent liability is approaching the magnitude of our total capital and surplus accounts.
Some past discussions
in our files have argued against this approach on the ground that it
would tend to distort our income statement since there really is so
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little risk, but perhaps the risk is enough to warrant a small
Another related step that might be taken
is
in this
fund.
same area
small service charge in specific recognition of
to tack on a
the
fact that acceptances are more cumbersome and costly to deal in than
some other
investments that
charging 1/16 of
much of
go
the foreign accounts might make.
1 percent would net
our costs and
Alternative 7.
Independently of
a respectable sum offsetting
permitting the whole of our
toward building the suggested
Tighter
guarantee fee to
reserve fund.
standards for
"prime acceptances".
the other steps discussed above,
there is reason to
consider a tightening of our standards of what constitutes
what the market considers prime, but this has become an
concept.
increasingly
In the past several years the market has tended to
draw greater distinctions between "top
names.
"primeness"
Our general posture has been that we regard as prime
in acceptances.
slippery
Even
tier" and
other accepting bank
This process began a few years ago along with the breakdown
of the system under which all dealers posted fixed bid and offered
rates
for all "prime"
infrequently.
acceptances and
tended to change these
Subsequently, the dealers' rates have become more
flexible, not only as to
the timing of changes but also as
spreads between bid and offered rates, and levels of bid
rates for varius groups of
past year,
fairly
"prime" bank names.
to the
and offered
Particularly in the
following the difficulties at Franklin National and rumors
about other banks, spreads between top tier and lesser accepting bank
names have widened considerably -- at times to more than a full percen-
tage point.
Of course, if the Desk were to take a significantly more
restricted view of primeness, this could operate in somewhat the same
fashion as a general discontinuation of our guarantee to place a cloud
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over
the
soundness of
17 -
the banking system.
a portion of
We have already noticed as a result of
delineated
"tiering"
sized regional banks
are relatively heavily represented
compared with the
these banks in
while our holdings of
the volume of
"top-tier"
and most highly regarded banks
are relatively light.
acceptances --
(at least in
in our own
over-all particiS. acceptances,
drawn on the largest
the market's eyes)
This has developed because
the largest banks, especially
be
outstanding U.
sharply
that medium-
of names in the acceptance market
and our foreign account portfolios,
pation of
the more
the acceptances of
the top seven in the country, tend to
Follow-
taken up by private market investors at premium prices.
ing
our
"best price" policy, we tend to purchase relatively large
amounts of
ing
the less highly regarded names.
to achieve more representation for
folio we hold for foreign accounts
at some
sacrifice
should be
that
in yield --
Alternative 8.
their purchases.
of
Recently we have been
seek-
the top-tier banks in the port-
(as well as our
own portfolio) even
not because we feel the regional names
shunned, but because it
is more representative
either
--
seems prudent
to have a distribution
the market as a whole.
Seek to persuade foreign accounts
Under this approach, rather than
to
limit
set new limits
in dollars or ratios, or raise fees, we would seek through
persuasion to
steer foreign accounts
This approach was
ceptances.
into a reduced emphasis on ac-
taken recently with one account that
had given the Bank an exceptionally large order, and that order was
subsequently
of limited
scaled down.
availability of
Another account was persuaded,
acceptances at the time,
on the
grounds
to refrain from
pressing additional orders on us.
While there is great merit in com-
bining suasion with whatever other
limits may be
set,
there is a real
Authorized for public release by the FOMC Secretariat on 8/21/2020
-
18 -
question whether standing alone it can stem the rising tide of
interest in acceptances.
just beginning to
guarantee.
Some accounts with an enormous potential are
take an interest
And while we
promote such investment,
in holding acceptances with our
can refrain from making special efforts
to
it may be somewhat
these
newcomers entirely away from this type of
buyers are still expanding their
seem right,
inequitable to
steer
investment when established
participation.
Thus
it would not
in outlining investment options, to ignore the acceptance
market as one of
the reasonable possibilities.
Alternative 9.
Make no change in current practice.
the first alternative of immediately abandoning
one
foreign
is included
Like
the guarantee,
this
only to circumscribe the full range of choices.
The
recent growth in guaranteed holdings has been too great to ignore the
problem and hope it will go away.
some
At
the very least there
suasion exercised to discourage instances of
should be
rapid build-up in
guaranteed acceptance portfolios.
Conclusions
While there was merit in the program of
ceptance purchases
for foreign accounts
Federal Reserve, and
early years of
in the early years of the
the acceptance market, the guar-
antee program has outlived its usefulness.
extraordinarily poor
At the same
guaranteeing ac-
The present time
is an
one to abandon the program entirely, however.
time, the rapid build-up in holdings of guaranteed ac-
ceptances is too great to ignore.
There is not only the enlarged
risk exposure, but perhaps more importantly
the sharply expanding and
nearly limitless potential for further expansion in what is effectively
a U. S. Government guarantee of private credit for one class of holder.
Clearly some action should be taken -- including, but not
Authorized for public release by the FOMC Secretariat on 8/21/2020
- 19 -
confined
to persuasion.
The best approach seems to lie along the
lines of an over-all dollar limit set by the Board of Governors,
with the Federal Reserve Bank of New York given some flexibility
to set country standards within that constraint.
Moreover, the
eventual long-run aim should be to terminate the guarantee program
entirely.
Also, in the interim period that a guaranty program is
retained --
and it
could be a lengthy
interim period --
a specific
reserve fund should be designated to cover potential losses.
Finally,
a small service charge might be made for handling acceptance purchases.
Recommendations
A.
of
The Board of Governors should place an over-all limit
$2.5 billion on the volume of acceptances that may be held and
guaranteed on behalf of official foreign accounts.
B.
The Federal Reserve Bank of New York should develop
individual country limits within the foregoing total, giving recognition to past participation in the market but also to the over-all
size of a country's dollar investments maintained through this Bank.
For example, the maximum could be based on a percentage of total holdings at this Bank.
In general, the Bank should seek to discourage
purchases by relatively heavy buyers.
C.
Additional purchases could be made for any foreign
account on a nonguaranteed basis.
D.
Consideration should be given to placing the present
1/8 of 1 percent guaranty fee in a special reserve fund until it
reaches 1 percent of
the Federal Reserve's contingent liability on
acceptances, and consideration should be given to increasing the fee.
E.
Eventually, as soon as can be accomplished in a non-
disruptive fashion, the Federal Reserve guarantee of acceptances for
Authorized for public release by the FOMC Secretariat on 8/21/2020
-
20 -
foreign accounts should be phased out.
Prepared for Committee on Foreign Account Activities
Peter D. Sternlight
November 4, 1974
Authorized for public release by the FOMC Secretariat on 8/21/2020
Federal Peserve Guaranteed Holdings of Bankers' Acceptances
for Foreign Accounts
and Commission Earnings on the Guarantees
(In millions of dollars)
Year
Year-end
Holdings
1920
16'
1947
2
.007
1921
32
1948
3
.004
1922
34
1949
10
.007
1923
18
1950
22
.017
1924
43
1951
21
.033
1925
65
.125
1952
20
.014
1926
56
.093
1953
24
.033
Commission
Earnings
Year
Year-end
Holdings
Commission
Earnings
1927
227
.271
1954
19
.016
1928
414
.352
1955
33
.036
1929
548
.556
1956
50
.063
1930
439
.598
1957
76
.084
1931
251
.398
1958
68
.135
1932
40
.174
1959
82
.088
1933
4
.041
1960
230
.235
1934
1
.002
1961
126
.189
1935
1.962
86
.116
1936
1963
92
.114
1964
122
.157
1938
1965
144
.185
1939
1966
191
.261
1940
1967
156
.303
1941
1968
189
.149
1942
1969
146
.189
1943
1970
250
.288
1944
1971
254
.334
1945
1972
179
.304
1973
581
.558
2,021
1.140
1937
1946
2
.002
.002
1974*
*Holdings as of October 30, 1974; earnings through October 18, 1974
Authorized for public release by the FOMC Secretariat on 8/21/2020
FEDERAL RESERVE BANK OF NEW YORK
CONFIDENTIAL--F.R.
Report on Foreign Official Investment
in the United States-the Federal Reserve Role
Investment by the OPEC countries this year in U.S.
securities is but the latest wave of a flood of foreign official investment over the past five years.
The key role of
the dollar as an international currency, and the breadth of the
market for U.S. Treasury and Federal agency securities have
made it logical for many foreign countries to invest a major
part of their liquid foreign exchange reserves in this market.
Thus, the foreign account holdings of Treasury and Federal
agency securities and bankers' acceptances at this Bank have
risen from $7.5 billion at the end of 1969 to $56 billion on
September 30, 1974.
This buildup has been accompanied by a
sharp increase in the daily volume of Trading Desk transactions
for foreign central banks.
Assuming continued freedom for international capital
movements, funds are likely to continue shifting between the
United States and other markets and between different foreign
central banks.
There is a question whether the System and the
Treasury would be better able to meet their domestic and
international responsibilities if these flows continue to be
channeled through this Bank or if they were diverted instead
to private financial institutions.
This paper concludes that
Authorized for public release by the FOMC Secretariat on 8/21/2020
this Bank's active involvement in foreign account activity
contributes, on balance, to the System's ability to achieve
its monetary policy objectives through a smoothly functioning
Government securities market, and strengthens the Treasury's
ability to place debt with both foreign and domestic investors.
The paper is divided into four parts:
(1) the
buildup in foreign holdings of securities, (2) System open
market operations and foreign official investment activities,
(3) the Treasury's debt management interest in foreign central
bank activity, and (4) conclusions.
I.
The Build-up of Foreign Official Holdings.
The Federal Reserve System has long sought to foster
cooperation between nations in matters affecting the international financial system.
It has upheld in its own practice
the precept that central banks should keep the central bank of
the host country fully informed about their investment and
foreign exchange activities in its markets.
The System has
provided deposit, investment, and foreign exchange facilities
to foreign central banks and international institutions through
its agent, the Federal Reserve Bank of New York.
The System
has depended, in turn, on foreign central banks to carry out
foreign exchange and other activities on its behalf.
The work-
ing relations built up with 128 accounts over many years provide
the basis for mutual consultation on matters delegated to
central banks by national governments.
Against this background, foreign central banks have
channeled the bulk of their U.S. investment in liquid dollar
Authorized for public release by the FOMC Secretariat on 8/21/2020
assets through this Bank.
The centralizing of this activity
has enabled the Federal Reserve to keep close tabs on these
investments.
In its operational role, the Trading Desk in
close cooperation with Treasury officials has been able to
moderate the impact of major shifts of funds on the market for
Treasury securities and on the reserves of the banking system.
The active management of large flows has contributed significantly to the attractiveness of Treasury securities to foreign
investors, who have been able to invest or disinvest large
amounts on short notice.
Foreign central banks also value the
confidentiality with which the Federal Reserve conducts their
operations.
The growth of foreign and international investments
in U.S. Government and other securities has been explosive
(see Tables 1, 2, and 3).
Foreign holdings of U.S. Treasury
debt rose from 3 percent of the debt held by private investors
at the end of 1969 to over 20 percent on August 31, 1974.
The
$47 billion rise in foreign holdings over the interval exceeded
by $9 billion the total increase in the privately held Federal
debt.
Foreign official investors held more Treasury debt at
mid-1974 than all U.S. commercial banks.
The great bulk of
foreign holdings are at this Bank (see Table 4).
The rapid increase in foreign holdings of Treasury
debt has been accompanied by a substantial increase in the
activity of such accounts.
In the first eight months of 1974,
outright purchases and sales of Treasury and Federal agency
securities averaged $330 million per day, compared with about
Authorized for public release by the FOMC Secretariat on 8/21/2020
$140 million in 1969.
Outright transactions for these accounts
are currently three times the volume of System outright transactions, and have exceeded System transactions since 1967.
As foreign accounts have built up their liquid
assets, they have become increasingly interested in diversifying beyond Treasury bills into Treasury coupon securities,
Federal agency issues, and bankers' acceptances, which offered
higher yields (see Tables 5, 6 and 7).
Germany, Japan, Canada
and Switzerland have been among those extending their portfolios into securities maturing in more than one year.
More
recently, many countries--including the OPEC countries--have
been adding substantially to their holdings of bankers' acceptances, boosting their total portfolio of acceptances by
$1.5 billion so far this year to about $2 billion.
The interest
of the OPEC countries in high-yielding short-term investments
has also led to the investment of funds temporarily in repurchase agreements on Government and Federal agency securities.
A handful of foreign accounts have also placed funds with commercial banks on a renewable overnight basis, equivalent to
sales of Federal funds.
II.
System Open Market Operations and Foreign Official
Investment Activities.
The Federal Reserve System is vitally interested in
the impact of foreign investment activities both on the markets in which System operations are conducted and on the conduct
of operations themselves.
The System shares with the Treasury
a concern for the orderly functioning of the market for
Authorized for public release by the FOMC Secretariat on 8/21/2020
5
Treasury and Federal agency securities.
Such a market is
essential to the effective control of bank reserves through open
market operations under the instructions of the Federal Open
Market Committee.
The Federal Reserve and Treasury have worked
closely for many years to assist the development of a broad
competitive institutional secondary market for Treasury securities--one which provides them with a degree of marketability
unique among debt instruments.
Foreign central banks have placed
the major part of the U.S. component of their dollar foreign exchange reserves in these securities.
Through close cooperation the System and the Treasury
have been able to manage the impact of enormous swings in
international monetary flows on U.S. securities markets and bank
reserves during recent years. 1 /
The importance of being able
to take concerted defensive action can be illustrated by the
actual experience of the two weeks ended February 14, 1973.
During that brief interval the speculative flood of dollars
into foreign central banks resulted in their channeling $8.1
billion of investment orders to the Federal Reserve Bank of
New York during the two weeks.
Given the existing market sup-
ply of securities, such orders could not have been executed
within such a brief period, and an all-out effort to do so
1/See memorandum to the Federal Open Market Committee entitled
"Foreign Official Holdings of United States Debt--Issues and
Problems" by the staff of the Federal Reserve Bank of New York
dated March 16, 1973.
Authorized for public release by the FOMC Secretariat on 8/21/2020
would have disrupted the Treasury's market and been inconsistent
with the FOMC's existing policy posture.
In the event, the
Trading Desk bought $2.5 billion net of Treasury issues in the
open market and the remaining $5.6 billion was placed with the
Treasury's agreement in special Treasury certificates of indebtedness.
To avoid the reserve drains to the banking system that
would have resulted from the high Treasury balance, the Treasury
made temporary redeposits to tax and loan accounts at the "C"
depositories.
Timely concerted defensive action by the Federal
Reserve and Treasury allowed the abrupt impact of these foreign
flows to be attenuated, leaving policymakers free to concentrate
on the appropriate response to the economic implications of
these flows.
Yet the Treasury was embarrassed by the resulting
high level of its tax and loan account balances at commercial
banks.
To be sure, the inflow in February and later largely
met the Treasury's cash needs for the balance of the fiscal
year.
But the Treasury has been pressured by Congress to re-
duce, or be compensated for, its balances with commercial banks.
In 1974 the Treasury has developed procedures for placing
similar excessive inflows, should they develop, in time deposits
with commercial banks.
Normally, the flow of foreign purchase and sale
orders through the Trading Desk is very helpful to the Manager
of the Account as he plans System open market operations.
Each
day from 20 to 30 foreign accounts will typically be selling
Treasury securities and a similar number will be buying.
The
Authorized for public release by the FOMC Secretariat on 8/21/2020
Manager's ability to buy from, or sell to, these accounts
immediately increases his options for managing reserves in the
light of current conditions in the Treasury securities market,
taking into account the nuances of his instructions from the
FOMC.
Frequently, the System's sale of the issues being pur-
chased by foreign accounts will meet the Manager's current
estimate of the need to absorb reserves.
The subsequent Trading
Desk execution of foreign sale orders usually has considerably
less psychological impact than would outright System sales.
At
other times, System and foreign account transactions can be
combined in a single market entry.
Operations with foreign ac-
counts have accounted for half or more of outright System
transactions in recent years (see Table 8).
The usefulness of having this extra dimension to the
Manager's options was again evident in 1974, taken as a whole.
Through mid-year the System increased its pressure on the
banking system by holding back on the provision of nonborrowed
reserves relative to the growth of deposits.
Government se-
curities dealers and others tended to keep their positions at
very low levels because of their expectations of rising interest
rates, with the result that there were frequently market scarcities
of Government securities.
Nearly all of the System's outright
sales of Treasury bills undertaken during the year were conducted unobtrusively by selling to foreign accounts--$4 billion
out of total sales of $4.3 billion (Table 9).
Equally important,
the purchase of bills directly from foreign accounts was instrumental in helping the System meet reserve need unobtrusively
Authorized for public release by the FOMC Secretariat on 8/21/2020
when market supplies of bills were often scarce and Treasury
bill rates were well below other short-term rates.
System
purchases from foreign accounts exceeded purchases in the open
market in all but one of the inter-meeting periods before System
policy shifted direction in August.
(System purchases of
Treasury coupon securities and Federal agency issues were the
primary market channel for supplying reserves.)
There are, of course, occasions on which the Manager
will find that foreign accounts are sizable net buyers when he
is having difficulty supplying the volume of reserves he would
like through System purchases of Treasury and Federal agency
securities.
(Given the size of the System's portfolio, there
is less often difficulty in absorbing an adequate volume of
reserves.)
Such was the case in early July 1974 when the
Manager was temporarily unable to supply as large a volume of
reserves as desired and the Federal funds rate rose over 1
percentage point above its desired level for a number of days.
One is tempted to conclude on such occasions that the Manager
would have been better able to meet his objectives if he had
not had to execute foreign orders.
It should be pointed out,
however, that for July as a whole the System was able to purchase $988 million securities from foreign accounts.
The question is really not one of whether the conflicts between System reserve management and foreign investment activities are increasing.
Rather it is one of whether
the Manager's ability to achieve System objectives would be
enhanced if foreign investment activities were channeled
Authorized for public release by the FOMC Secretariat on 8/21/2020
principally outside, rather than inside, the Federal Reserve
Bank of New York.
Almost certainly such a shift would compli-
cate, and interfere with, the pursuit of System objectives.
The real problem in July was the marketwide scarcity of eligible collateral in relation to a short-run reserve need.
Had
the flow of foreign orders been placed outside of the Federal
Reserve Bank of New York, the spirited competition of a number
of agents to execute foreign orders might well have increased
the short-run scarcity of available securities.
Market pro-
fessionals, observing the competition, would probably have
overestimated the extent of demand and withheld securities for
sale later at higher prices.
The Manager can manage much better
with full knowledge of foreign operations and with the option
of dealing with these accounts than if he has no knowledge of,
nor role in, such activities.
The larger these variable and often unpredictable
foreign investment flows is, the more important it becomes for
the Manager to be able to assess, and affect, their impact on
By and
System operations and the Treasury securities market.
large the System has not experienced significant difficulty in
achieving the short-term reserve and money market objectives
sought by the Federal Open Market Committee.
To a considerable
extent this result reflects the willingness of the FOMC to allow the Manager increased flexibility for dealing with the
investment backlash of international currency flows.
The
Manager has been able to tailor operations to objectives,
sometimes swapping maturities with foreign accounts or
Authorized for public release by the FOMC Secretariat on 8/21/2020
bridging short intervals between large foreign sales and
purchases.
Basic to the generally smooth management of the total
impact has been the large volume of foreign orders that could
be simply crossed between foreign accounts.
Over half of all
foreign account orders were crossed in this way in the first
eight months of 1974, compared with less than one-sixth in
1969 (Table 10).
In sum, it seems vital in a world of large international dollar investment flows for the Federal Reserve Bank
of New York to be in a position to know about such flows and
manage their impact in the light of System objectives.
Large
central bank activity in our markets can be expected to continue.
More and more central banks are diversifying their
portfolios out of Treasury bills.
The challenge is to cope
with these shifting investment preferences in a way that provides the Manager of the Account with a full range of options
for managing the impact on domestic markets and reserve objectives.
One approach under study is the development of one
or more diversified investment facilities, which would both be
attractive to foreign accounts and consolidate a sizable part
of daily investment activity.
Such new initiatives should be
thought of principally in relation to the non-OPEC accounts,
for which we hold $53 billion in assets.
They would, of
course, be available as well to the OPEC countries, whose
holdings in recent weeks have risen to about $5 billion.
Authorized for public release by the FOMC Secretariat on 8/21/2020
III.
The Treasury's Debt Management Interest in Foreign
Central Bank Investment Activity.
The Treasury has a substantial interest in foreign
activity because of the size of foreign ownership of Treasury
debt and the impact of international flows on the market for
Treasury securities.
Foreign central banks owned about 20 per-
cent of privately held Treasury debt on August 31, 1974.
The
buildup in their holdings over the past four and one half years
amounted to $46 billion out of the $114 billion increase in the
debt since the end of 1969.
(Federal Reserve and Government
trust account holdings rose $77 billion over the same period.)
Moreover, the concentration of foreign account investments in
Treasury issues, notably short-term debt, may well have reduced
Treasury interest costs during the period.
The extent of this
effect is hard to measure, of course, since interest sensitive
investors with other options tended to reduce their Treasury
holdings over the period.
Much of the increase in foreign holdings took place
during the speculative currency flows of recent years, with
growth quite moderate in 1973 and 1974.
As noted earlier, the
Treasury has often issued a large volume of special nonnegotiable certificates or notes during turbulent periods,
facilitating foreign investment but at the same time reducing
the Treasury's cash requirements.
Often the timing of the in-
flows did not mesh well with the Treasury's cash needs, so that
the Treasury paid interest on money it did not need.
The con-
centration of these flows may still have conveyed benefits in
Authorized for public release by the FOMC Secretariat on 8/21/2020
terms of lower over-all
interest costs.
But the Treasury has
in recent months developed procedures for placing excess funds
at interest for 30 days with depository banks.
This innovation
should reduce the marginal cost should large unexpected inflows
develop in the future.
The Treasury has also a great interest in the impact
of these flows on the secondary market for its securities.
It
has used non-negotiable issues flexibly in working with the
Manager of the System Account to manage sudden large flows.
The Treasury has also funded some of the shorter foreign debt
into spaced maturities of intermediate-term debt.
It has also
played an important cooperative role in the management of bank
reserves in the face of unexpected international and domestic
flows.
The Treasury has often been willing to adjust its bal-
ances at Reserve Banks to help the Manager deal with reserve
surpluses or deficiencies.
In recent months, however, the
Treasury's efforts to maximize its balances at Reserve Banks
has often made the reserve management job more difficult, contributing at times to the variability of Treasury bill rates
in the secondary market.
To sum up, foreign central banks have become such
large holders of Treasury debt that the Treasury has a strong
interest in taking account of the needs of this class of investors.
It seems likely that the flexibility the Treasury
has demonstrated in the past will continue to be needed in the
future--in the issuance of special securities, the management
of the Treasury's balance, and the coordination of developments
Authorized for public release by the FOMC Secretariat on 8/21/2020
with the Manager of the Account.
The Treasury does not appear
to have yet developed an integrated marketing approach that
balances the special liquidity needs of this class of investors
against its own cash management problem.
Developing such an
approach would be highly beneficial both to international relations and the continued interest of this class of investors.
Failure to do so could well contribute to, or speed up, the
diversification of foreign central banks into Federal agency
and private securities.
IV.
Conclusions.
Both the Federal Reserve and the Treasury appear to
have strong reasons to foster centralized handling of foreign
official investments in Treasury and other securities.
Both
have a responsibility for moderating the transactional impact of
large scale flows on the domestic securities markets.
Both
need a viable Government securities market with depth
and
resiliency.
The Manager of the System Account can do a better
job of achieving the FOMC's objectives if foreign investment
activities are concentrated at the Trading Desk because that
increases the options for action available to him.
The Treasury,
in turn, benefits from full knowledge of such operations and
the fact that the Reserve Bank is a stronger advocate of central
bank investment in Government securities than any private agent
is likely to be.
Two major avenues appear indicated to improve the
operational procedures for dealing with foreign flows.
First,
the Federal Reserve Bank of New York needs to push on with the
Authorized for public release by the FOMC Secretariat on 8/21/2020
re-evaluation of the investment and other facilities offered
foreign central banks.
On the investment front, more diversi-
fied investment facilities that reduce paper work or might
serve to cover a portion of costs seem to be indicated.
The
Treasury for its part might find it useful to draw on the
experience of the Federal Reserve Bank of New York in evaluating and reshaping its own marketing approach to this class
of investors.
Paul Meek
Prepared for
Committee on Foreign Account Activities
November 4, 1974
Authorized for public release by the FOMC Secretariat on 8/21/2020
Table 1
Holdings of United States Treasury Debt, by Selected Groups
(amounts in billions of dollars)
End of
Calendar
Period
Gross
Federal
Debt
Outstanding
Federal
Gov't.
Accounts
Held by
Federal
Reserve
System
Foreign
Official
Accounts a /
Others
Percentage held by
Federal
Federal
Foreign
Gov't.
Reserve
Official
Accounts
Accounts
System
Others
1969
368.2
89.0
57.2
6.9
215.1
24.2
15.5
1.9
58.4
1970
389.2
97.1
62.1
16.0
214.0
24.9
16.0
4.1
55.0
1971
424.1
106.2
70.2
43.1
204.6
25.0
16.6
10.2
48.2
1972
449.3
116.9
69.9
50.8
211.7
26.0
15.6
11.3
47.1
1973
469.9
129.6
78.5
52.0
209.8
27.6
16.7
11.1
44.6
8/31/74
481.8
141.6
81.0
53.2
206.0
29.4
16.8
11.0
42.8
9/30/74
481.5
81.0
53.4
16.8
11.1
a/ Held at Federal Reserve Bank of New York. Excludes Treasury securities held by these accounts
elsewhere, which totaled $1.0 billion at the end of 1973. Also excludes holdings of international and
regional institutions, which totaled $1.2 billion at the end of 1973. Also excludes holdings of Federal
agency securities, of which only holdings at this Bank are known. At the end of 1973, these totaled $0.9
Also
billion for official foreign accounts and $2.7 billion for international and regional institutions.
excludes Treasury securities held under repurchase agreements, which totaled $0.7 billion on August 31, 1974
and $0.3 billion on September 30, 1974.
Authorized for public release by the FOMC Secretariat on 8/21/2020
Table 2
Changes in Holdings of United States Treasury Debt, by Selected Groups
(amounts in billions of dollars)
Change in holdings of
Percentage of increase taken by
Increase
in Gross
Calendar
Period
Federal
Debt
Outstanding
Accounts
Federal
Reserve
System
Federal
Gov't.
1970
21.0
8.1
4.9
1971
34.9
9.1
8.1
1972
25.2
10.7
-0.3
1973
20.6
12.7
8.6
through
August
11.9
12.0
2.5
September
11.6
Foreign
Official
Accounts a/
Others
Federal
Federal
Gov't.
Accounts
Reserve
System
Foreign
Official
Accounts
Others
-1.1
38.6
23.3
43.3
27.1
-9.4
26.1
23.2
77.7
-26.9
7.7
7.1
42.5
-1.2
30.6
28.2
1.2
-1.9
61.7
41.7
5.8
-9.2
1.2
-3.8
100.8
21.0
10.1
9.1
-5.2
1974
See footnote to Table 1.
12.1
-31.9
Authorized for public release by the FOMC Secretariat on 8/21/2020
Table 3
Holdings of United States Treasury Debt by the Public
(amounts in billions of dollars)
Held by
End of
Calendar
Period
Gross Federal
Debt Held
by the Publica /
Foreign
Official
Percentage held by
Foreign
Official
Others
Accounts
Accounts b /
Others
6.9
215.1
3.1
96.9
7.0
93.0
1969
222.0
1970
229.9
16.0
213.9
1971
247.9
43.1
204.8
17.4
82.6
1972
262.5
50.8
211.7
19.4
80.6
1973
261.7
52.0
209.7
19.9
80.1
8/31/74
259.0
53.2
205.8
20.5
79.5
9/30/74
53.4
a/ Excludes holdings of Federal Government Accounts and
Federal Reserve System.
b/ See footnote to Table 1.
Authorized for public release by the FOMC Secretariat on 8/21/2020
Table 4
Foreign Official Holdings a /
of U.S. Government Securities-Year-ends 1969-1973, and September 1974
(In billions of dollars)
End of
Held at
FRBNY
Held in
"Street"
0.5
Grand
Total
1969
6.9
1970
16.0
1.4
17.4
1971 b/
43.1
1.0
44.1
1972
50.8
1.9
52.7
1973
52.0
53.2
1.0
8/31/74
53.0
0.7
53.9
9/30/74
53.4
n.a.
n.a.
a/
7.4
Excludes holdings of international and regional institutions which totalled
$1.2 billion at the end of 1973. Also excludes holdings of Federal Agency
securities, only holdings at this Bank are known: $0.9 billion for foreign
Also excludes
official and $2.7 billion for international and regional.
$0.3 billion of Treasury securities held under repurchase agreements as of
September 30, 1974, and $0.7 billion as of August 31, 1974.
b/ Nonmarketable Treasury issues denominated in foreign currencies were revalued.
The figures given here are at the new valuation. Holdings at FRBNY for this
date at the old valuation were $42.4 million. ("Street" holdings were not affected.)
n.a. -- not available.
Authorized for public release by the FOMC Secretariat on 8/21/2020
Table 5
Holdings of Federal Agency Securities by
Foreign Accounts at FRBNY
(amounts in billions of dollars)
End of
Calendar
Period
Agency
Held by Foreign Official
Accounts at FRBNY
Percent of Outstanding
Amount b/
Securities
Outstanding a /
1969
$44.4
1970
51.4
$ .021
1971
52.7
.002
1972
59.1
.268
1973
77.0
.862
1.12
8/31/74
87.5
1.048
1.20
n.a.
9/30/74
n.a.
.004
1.091
a/ Federal agencies and Federally sponsored private agencies.
b/ Excludes participations in Export-Import Bank loans in the
following amounts (in billions of dollars):
1970
1971
1972
1973
8/31/74
9/30/74
$
.255
.400
.349
.454
.447
.447
Also excludes securities held under repurchase agreements.
Authorized for public release by the FOMC Secretariat on 8/21/2020
Table 6
Holdings of Bankers' Acceptances by
Foreign Accounts at FRBNY
(amounts in billions of dollars)
End of
Calendar
Period
Bankers'
Acceptances
Outstanding
Held by Foreign Official
Accounts at FRBNY
Percent of Outstanding
Amount
1969
$ 5.451
$ .146
2.68
1970
7.058
.250
3.54
1971
7.889
.255
3.23
1972
6.898
.179
2.59
1973
8.892
.581
6.53
8/31/74
16.167
1.202
7.43
9/30/74
16.035
1.459
9.10
Authorized for public release by the FOMC Secretariat on 8/21/2020
Table 7
Foreign Official Holdings of Bankers' Acceptances and U.S. Government
Agency Securities at FRBNY a/
(In millions of dollars)
Bankers'
As of end of
Aug.
Sept.
Acceptances
1969
1970
1971
1972
1973
145.9
1974
1974
250.1
254.5
U.S. Government
Agency Securities b/
n.a.
21.0
Total
n.a.
179.0
581.1
2.3
267.8
862.4
271.1
256.8
446.8
1,443.5
1,202.3
1,458.5
1,047.7
1,091.1
2,250.0
2,549.6
n.a. - Not available
a/
Holdings of bankers' acceptances and U.S. Government Agency securities in
the "Street" are not known for any of these dates. The Treasury collects
periodic surveys of "Other short-term liabilities to foreigners." Foreign
holdings of bankers' acceptances are shown in the total. However, separate
data are not included in these surveys of U.S. Government Agency issues.
Foreign holdings of long-term agency issues in the "Street" also are not available.
b/
Excludes foreign holdings of any Ex-Im Bank participation certificates.
Includes holdings of Ex-Im Bank debentures. Also excludes U.S. Government
Agency issues held under repurchase agreements.
Authorized for public release by the FOMC Secretariat on 8/21/2020
Table 8
Outright System Transactions
in Treasury and Agency Securities 1/
(amounts in billions of dollars)
1969
1972
1973
1974
(8 mos.)
Transacted with:
Dealer Market
Foreign
Treasury 2/
6.4
9.4
11.0
9.5
1.8
0.6
19.2
19.5
7.3
15.4
2.6
25.3
5.8
8.9
2.9
17.6
1/
Excluding direct acquisitions of special certificates of indebtedness
with the Treasury.
2/
Redemptions of maturing Treasury issues.
Authorized for public release by the FOMC Secretariat on 8/21/2020
Table 9
System Transactions in Government and Federal Agency Securities
(in millions of dollars)
Inter-
meeting
period
ending:
System transactions
with foreign accounts
Treasury Bills
Purchases
Sales
System transactions
in the market
Purchases
Coupons &
Tr.
Bill
Agencies
Bills
Sales
1974
1/22
1,376.4
2/20
1,181.7
3/19
255.0
335.2
498.0
140.8
683.7
36.6
4/16
611.6
286.2
348.2
359.9
5/21
551.2
100.0
952.7
532.4
6/18
245.0
293.7
100.0
407.5
7/16
574.5
360.4
289.0
782.4
8/20
976.7
477.7
9/11
321.2
1,041.7
422.0
6,260.3
397.5
3,976.1
10/15
Cumulative
Totals
299.5
588.6
336.1
922.4
237.9
589.6
3,597.7
383.2
3,789.9
Note: Dates listed are the meeting dates of the Federal Open
Market Committee
Authorized for public release by the FOMC Secretariat on 8/21/2020
Table 10
Outright Foreign Transactions
in Treasury and Agency Securities
(amounts in billions of dollars)
1969
1972
1973
1974
(8 mos.)
Transactions with:
Dealer Market
17.6
25.6
29.5
System
11.0
9.5
15.4
6.7
21.9
28.8
29.6
35.3
57.0
73.8
55.4
Other Foreign 1 /
1/
Includes small amount of transactions with the Treasury.
16.9
8.9
@FedFRASER