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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

October 8, 1965

IN BROAD REVIEW

Overall domestic economic activity has apparently continued
to expand, eventhough industrial production appears to have declined a
little in September, mainly because excess inventories of steel were
beginning to be worked off.

The labor market remained strong in

September, with the unemployment rate dropping slightly to 4.4 per
cent, the lowest in many years.
at a high level.

Retail sales apparently remained

Construction activity in the third quarter was

unchanged from the second.
In financial markets, there was a slackening in bank credit
expansion in September.

The volume of corporate and municipal

security issues in October is expected to be substantially belov the
large September total.

Money market conditions have generally eased

a little,with bill and other interest rates dropping back somewhat
from recent advanced levels.

Stock market trading has remained high

but below the very high September level while prices have moved in
a narrow range around their May highs.

Price-earning ratios, however,

are well below those last May.
U.S. foreign trade in July and August showed improvement as exports rose in both months while growth in imports appeared
to have tapered off.

SUPPLEMENTAL NOTES

The Domestic Economy
A decline in the industrial production index of around 1 point
still appears likely for September but data are not yet available to
make a firm estimate.
strikes

In addition to a sharp drop in steel production,

and Hurricane Betsy were drags on the total index.

With the

manufacturing production index lower in September, the third quarter
rate of capacity utilization was little changed from the 90 per cent
level estimated for the first and second quarters of the year.
Steel ingot production fell 15 per cent in September and is
declining further this month.

Auto assemblies declined about 3 per cent

due to the strike at American Motors, but truck production was not
affected and remained at the August level.

The Boeing strike that began

in mid-September curtailed output in the aircraft industry.

Output of

crude and refined petroleum products was reduced by Hurricane Betsy.
Meanwhile, output of television sets increased further and paperboard
production remained at a high rate.
According to the weekly estimates, the industrial commodity
price index has edged up .1 per cent further since mid-August, bringing
the rise to .3 per cent since May and 1.5 per cent since the summer of
1964.

Foodstuffs have continued to decline from their July peak, and

the total wholesale price index has remained at the June-August level.
The consumer price index, after rising more than 1 per cent
from March to July chiefly because of reduced supplies of foods, declined
.2 per cent in August.

Average food prices fell .7 per cent mainly

as a result of increased supplies of vegetables.

Nonfood commodities

as a group were unchanged and services rose slightly.

Sales of new domestic automobiles in September remained at the
8.9 million annual rate of the previous three months and were about the
same as a year ago after allowance for later new model introductions
With most 1966 models now introduced, prices appear close to

this year.

those for 1965 models.

One company indicated that prices were a little

higher while the other major producers claimed small price reductions
after allowance for added safety equipment.
The growth of consumer instalment credit slowed in August,
seasonally adjusted.

The flow of repayments was higher on most types

of loans, while the rate of new credit extensions leveled off.

First

reports coming in for September suggest that net borrowing returned
to levels somewhat above August.
Commercial bank delinquencies, which usually trend upward
in late summer and early fall, rose somewhat more than seasonally.
Delinquencies in purchased automobile paper which had been stable
during the first half of the year, accounted for most of the recent change.
CONSUMER INSTALMENT CREDIT
(Seasonally adjusted annual rate, in billions of dollars)

1965

Ilet Change
in
Outstandings

Extensions

Repayments

First quarter

7.8

71.7

63.9

Second auarter

8.0

73.7

65.7

July

8.0

75.3

67.3

August

7.3

75.4

68.1

7.7

75.4

67.7

Third quarter

Average of 2 months

S3

-

New orders for durable goods showed somewhat less decline in
August than the advance figures had indicated -- 3 instead of 4 per cent -and

unfilled orders continued to rise.

The improvement was due mainly

to an upward revision in new orders for defense products, which now show
a steady rise from May to August.

Orders for the strategic non-

electrical machinery group also rose, while orders for steel, as expected,
were down sharply.
Business inventory accumulation in August was larger than expected but not so large as in July, and for the two months accumulation
exceeded the second quarter rate and approached the very high rate at
the beginning of the year.

Accumulation in the third quarter at a slower

rate than in the second quarter is still possible, however, if factory
stocks, because of steel liquidation, show little net change in
September and distributors stocks continue to rise at the moderate JulyAugust pace.
At manufacturers, atcumulation totaled $400 million in August
and nearly $800 million in July for a monthly average of about $600 million.
This was double the average for the second quarter and stemmed from:
(a) continued rapid accumulation of steel stocks by metal-using industries; (b) a sharp spurt in work-in-process stocks in machinery and
transportation equipment industries; and (c) an increase in accumulation
by nondurable goods producers following little change earlier in the
year.
At distributors, stocks increased at a steady rate of about
$200 million a month in July and August, as compared with $365 million

Auto and

in the second quarter and $580 million in the first quarter.

apparel stocks rose but most other stocks at retail showed little change
in July and August.

Total wholesale inventories were about unchanged

between June and August.
Expenditures for new construction edged up in September and
Residential

at $68.5 billion remained near the record level reached in June.

construction activity continued down moderately while outlays for business
Public con-

and other private nonresidential construction were higher.
struction expenditures also increased slightly in September.

For the third

quarter as a whole, construction expenditures were unchanged from the
second quarter, as can be seen in the table.
NEW CONSTRUCTION PUT IN PLACE
Q 3 1965
(Billions)
1/

Per cent change
from
Q 2 1964
Q 2 1965

$68.3

--

4

Private
Residential
Nonresidential
Business

48.2
26.5
21.7
16.2

--2
+3
+5

6
1
11
17

Public

20.1

+1

-1

Total

1/

Seasonally adjusted annual rate; preliminary.
Home mortgage markets have recently showed some signs of a

less easy tone.

Symptomatic of the change was a further sharp increase

in offerings of FHA and VA loans to the Federal National Mortgage
Association for purchase under its secondary market operations.

For

August, data just recently available indicate that average loan amounts,

- 5-

loan-to-value ratios, and maturities for conventional first mortgages
on both new and existing homes were slightly less liberal than in July.
Contract interest rates, however, were little changed.
AVERAGE TERMS ON CONVENTIONAL FIRST MORTGAGES FOR HOME PURCHASE

July

August

Per cent increase in
August 1965 from
a year ago

New home loans
Contract rate (per cent)
Purchase price ($1,000)
Loan amount ($1,000)
Loan/price (per cent)
Maturity (years)

5.77
24.7
18.3
75.0
25.0

5.76
24.9
18.2
73.8
24.5

-3
2
1
-1

Existing home loans
Contract rate (per cent)
Purchase price ($1,000)
Loan amount ($1,000)

5.86
20.2
14.5

5.86
19.7
14.1

-1
3
4

Loan/price (per cent)

72.5

72.1

1

Maturity (years)

20.6

20.4

2

Demands for labor continued strong in September.

Unemployment

declined slightly to 4.4 per cent from 4.5 per cent in July and August.
In September 1964, the rate was 5.1 per cent.

The jobless rate for adult

men was down to 3.1 and for married men to 2.2 per cent; a lower rate

also was reported for adult women.

For teenagers and nonwhites, however,

unemployment increased somewhat following fairly sharp reductions in
August, but for these groups rates were slightly lower than in July and
also below a year earlier.

At 8.2 per cent, the unemployment rate for

nonwhite workers remained more than double that of white workers.

-6

-

Another significant labor market development in September was
a fairly sharp reduction to 1.7 million in the number of workers on parttime for economic reasons -- about 300,000 below a year ago and the
smallest number since early 1956.

The decline in this group apparently

reflected fairly large shifts of involuntary part-time workers to fulltime jobs.
In July and August the labor force had expanded sharply as
an unusually large number of students entered the labor market and found
jobs.

As expected, a large proportion of these returned to school in

September and the labor force declined sharply.

Part of the decline in

the labor force in September also was attributed to an unusually large
reduction in farm employment because of generally unfavorable weather
during the survey week.
Despite the large withdrawal of young workers following reopening of schools, there were 550,000 more youths in the labor force
this September than a year ago.

The rise this year was more than double

that in the preceding year, owing primarily to the rapid growth in
population of youths of working age.

-7The Domestic Financial Situation
Total loans and investments at all commercial banks are
Even

estimated to have increased only about $500 million in September.

with the large increase in August, the annual rate of growth in the
thi:d quarter fell to 5.8 per cent, compared with almost 10 per cent in
the second quarter and about 12.5 per cent during the unusual first
quarter.
Loan expansion was at a reduced rate in September, mainly
reflecting a large reduction in security loans.

Dealer loans declined

substantially at the end of the month in response to large System purchases
of Treasury issues, and broker loans also declined.

Excluding security

loans, total loans rose at an annual rate of 13-1/2 per cent in the
third quarter, a little below that of the second quarter but 1-1/2 percentage points above the 1964 rate.
Additional factors contributing to the reduced rate of credit
expansion in September were a further decline in holdings of U.S. Government securities and sharply reduced acquisitions of municipal and Federal
agency issues.

The decline in holdings of Governments was associated

in part with the decline in Treasury balances at commercial banks, which
was unusually large in the absence of Treasury cash financing.

The small

rise in holdings of other securities presumably reflects both the reduced
volume of new municipal offerings in August and pressures of other demands
on banks under conditions of reduced liquidity.
Demand for business loans was strong around and subsequent
to the tax date after having moderated considerably in late August and
early September.

For the month as a whole, these loans expanded at an

annual rate of close to 13 per cent, about the same as in August.
standing loans

to the public utilities, trade, and miscellaneous

Out-

-8manufacturing and mining groups all rose more than seasonally.

Those to

the metals group, which had declined in late August and early September,
rose sharply over the tax date and then declined again later in the month.
Loans to finance companies, which had expanded sharply in late
August and early September as these firms borrowed to finance automobile
dealer inventories at the end of the model run, declined substantially
in the second half of the month.

Further liquidation of finance

company loans is expected, mainly of a seasonal character but partly
also in response to recent increases in interest rates on loans to these
companies.
Following a slowdown in August, the money supply rose in
September at a seasonally adjusted annaul rate of almost 12 per cent.
This increase was associated in part with an unusually large run-down
of U.S. Government deposits.

So far this year, however, the money supply

has grown at an annual rate of 3.8 per cent--a little below that for the
whole year 1964.
Time and savings deposit growth in September was at an annual
rate of 12 per cent, considerably below the high rates of the previous two
months.

While savings deposit inflows remained strong, CD run-offs

during the tax and dividend period were unusually heavy, and only about
half the run-off had been replaced by the month end.
Over the last two or three weeks, in response to money market tightness and a large loan demand, prime banks pushed their offering rates
on CD's to or near the Regulation Q ceiling of 4.5 per cent.

New York

banks attracted over $500 million of CD funds at these rates in the
three weeks since the tax date, with rates receding somewhat toward the
end of this period.

Uith prime bank rates at this level, nonprime banks

are likely to encounter some difficulty in rolling over their maturing CD's.

- 9 -

U. S. Government securities market.

The sharp upward movement

of interest rates on U.S. Government securities that had developed in
the latter part of September did not carry into early October.

In fact,

in the early days of this month, yields on Government securities declined.
YIELDS ON U. S. GOVERNMENT SECURITIES
Date
(closing bids)

3-month
bills

6-month
bills

3 years

5 years

10 years

20 years

1965
Highs
Lows

4.05
3.76

4.21
3.81

4.35
4.00

4.34
4.08

4.36
4.17

4.34
4.17

1965
July 28
Sept. 21
29
Oct. 6

3.81
3.93
4.05
4.001/

3.88
4.09
4.21
4.171/

4.09
4.22
4.35
4.30

4.15
4.24
4.34
4.31

4.20
4.28
4.36
4.32

4.21
4.30
4.34
4.32

!/ Yields as of the close of business October 7.

The upard interest rate pressure in the bill market toward
the end of last month occurred as the Treasury's announcement of a $4
billion March and June tax bill offering came into a market in which the
supply of bills already in dealer hands was heavy in relation to current
demand and in which there were rumors of a discount rate increase.

The

supply situation was eased considerably by large System bill purchases
in the market, totaling $1.3 billion from September 22 through October 1.
In good part as a result of these purchases dealer bill trading positions
declined by $1.9 billion over the interval to a level of only $500 million.
In last Monday's auction, dealers rebuilt positions somewhat,
but they were cautious bidders.

Dealer awards of the 3-month bill, now

carrying a less favorable maturity date than the previous such bill, were
about average at the 4.05 per cent issuing rate.

Awards of the 6-month

- 10 -

bill were on the light side, however, at their 4.20 per cent issuing
rate.

Rates declined from these levels in subsequent trading.
The abatement of bill market pressures enabled the tax bills to

be auctioned with 100 per cent tax and loan credit on October 5 at lower
rates than earlier anticipated -- 3.78 and 3.94 per cent for the 6- and
Demand for these bills by corporations and

9-month bills respectively.

others in the secondary market proved to be better than many had earlier
expected.

As a result, dealers were willing to take bills into position

at rising prices.

By the close of business on October 7, both tax bills

were quoted at 4.20 per cent.
The bond market, too, improved in tone along with, and partly
in response to, the bill market, with some of the price rise attributable
to remarks by high officials in the Administration suggesting there was
no need for further interest rate increases, at least of any magnitude.
Bond market activity, according to reports, has been largely professional,
however.

There was evidence of some increase in dealer gross short posi-

tions in the period of market weakness during the latter part of September,
which was followed by a minor amount of short covering later.
The Treasury can be expected to announce terms for its November
refunding in late October.

Only $3.3 billion of maturing issues are in

the hands of the public, and this can be expected to be a fairly routine
refunding, given the current state of the market.

The possibility exists,

however, that the Treasury could raise some additional cash at this time

if the market outlook

turns more favorable.

Current projections of the

- 11 -

Treasury balance indicate that additional cash will be required at least
by late November, with the market expecting $3 billion more in bills.
Corporate and municipal bond markets.

Public offerings in both

corporate and municipal bond markets this month are expected to be substantially lower than the very large September totals.

As a result, the

pressure of new offerings on bond yields has diminished somewhat since the
last Committee meeting, and yield movements in both markets have tended
to reflect chiefly shifts in expectations prompted by recent changes in
short-term interest rates.
BOND YIELDS
Corporate
AaaMoody's
New
Seasoned

State and local government
Bond buyer
dy
(mixed qualities)

1964
High
Low

4.53
4.30

4.45
4.35

3.16
2.99

3.32
3.12

1965
High
Low

4.71(8/27)
4.33(1/29)

4.53(9/17)
4.41(3/12)

3.31(9/30)
2.94(2/11)

3.41(10/7)
3.04(2/11)

Week ending:
July 23
Sept. 10
Sept. 24
Oct. 8

4.56
4.70
4.64*
4.72*

4.48
4.52
4.52
4.57

3.16
3.21
3.31
3.31

3.25
3.30
3.39
3.41

* Not representative.

In the corporate market, underwriters bid strongly for two to?
quality utility issues early this week with reoffering yields down slightly
from the high last month.

Later in the week, however, the new issue yield

series, as adjusted to a Aaa basis, was forced to a new high by the more
liberal reoffering yield assigned a lower-rated gas utility issue which

- 12 -

was expected to pose more marketing problems.

With quick sell-outs for

the high-rated issues and satisfactory reception of the week's other
offerings, primary market yields appear to have stabilized at levels close
to or slightly below recent highs.

Secondary market yields on recently

distributed issues no longer in syndicate have declined slightly in the
past few days.

While yields on seasoned Aaa-rated bonds have continued

to rise, this series typically lags behind quotations on newer issues
that are more actively traded.
Yields on high quality municipal bonds have shown little further
change following a 16 basis point advance from mid-August to late September.
The lighter calendar and apparent stability in municipal yields have been
accompanied by some dealer success in reducing inventories, reportedly
after substantial price concessions.

Early this week the total of dealers'

advertised inventories fell below $700 million for the first time since
mid-summer.
BOND OFFERINGS(In millions of dollars)
Corporate
Public
offerings

Private
placements

State & local govt.

1965/

1964

19651/

1964

1965/

Jan.-Oct. average

462

327

655

502

924

907

August
September
October

380
640
300

183
376
181

500
700
700

433
672
642

700
1,000
700

799
920
852

1964

1/ Includes refundings -- data are gross proceeds for corporate offerings
and principal amounts for State and local government issues.

-13-

Stock market.

Trading activity in the stock market continues

high, although volume has fallen somewhat below the 7.4 million daily
average for the month of September.

Prices, as measured by Standard

and Poor's 500 stock index, have continued to move in a narrow range
at about the highs reached last May, but the price-earnings ratio of
17.2 (based on the October 7 close of 90.47) remains well below the
high of nearly 20 associated with the May price peak and the lower
earnings reported at that time.
Intense activity in a limited number of highly volatile issues
and industry groups has recently accounted for an increased proportion
of total trading.

The percentage accounted for by the 10 most active

issues (usually about 1/8 of the total) averaged 17 per cent in the last
two weeks of September and ran as high as 25 per cent.
issues have been speculative in character.

Most of these

In comparing current price

levels with the previous high in May, a relatively few favored industry
groups have accounted for most of the upward movement.

Group indexes of

aerospace, radio-TV manufacturers, electronics, and air transport, for
instance, now exceed their mid-May levels by amounts ranging from 10
to 30 per cent.

With the composite index at about its May high, only

33 of the component industrail group indexes are above their mid-May
levels, while 49 remain below.

- 14 -

International Developments
The U.S. merchandise trade surplus in June-August was at
an annual rate of over $5-1/2 billion, after correction of the import
statistics as noted below.

For July-August alone, the surplus ex-

ceeded a $6-1/2 billion rate.
Exports, after rising 4 per cent from June to July, increased another 4 per cent in August.

The average for the three months

June-August ($27 billion at a seasonally adjusted annual rate) shows
an 8 per cent increase over June-August 1964, and a 7 per cent increase
over the average rate for the six months December 1964-May 1965.

It

is perhaps questionable whether the underlying trend of exports has
turned up so suddenly and so sharply as these comparisons seem to
show. An alternative interpretation is that the underlying trend of
demand for U.S. exports may have been gradually upward throughout the
first half of the year, contrary to the impression previously given
by the disappointingly low December-May total.

(On this interpretation,

the dock strike may have caused not only delays in shipment but also
some losses of export sales.)

The excellent summer export performance

might then be regarded as confirming a favorable underlying trend,
rather than calling for special explanation.
Imports in July-August averaged about $21 billion (annual
rate) after adjustment for a change in statistical procedure and for
delays in unloading due to the maritime strike in the summer.

This

figure is 10 per cent above the imports of July-August 1964 and 5 per
above the average rate for December-May.

In comparison with June,

- 15 -

however, July-August imports were clearly down.

Petroleum imports

fell off after the end of the quota year in June, coffee imports
were low, and steel imports appear to have leveled off.
In foreign exchange markets, the outstanding development

of the past two weeks has been the further recovery of sterling. This
week the forward discount has averaged about 1.3 per cent per annum,

and the spot rate about $2.803.

The change in market attitudes toward

sterling reflects growing satisfaction with the measures the British
Government took at the end of July and in early September.

The actual

effects of these measures on the balance of payments -- apart from
induced capital flows and changes in leads and lags -- will not appear
until later in the year.
newed growth.

However, exports in July-August showed re-

Despite a rise in British imports in those months, the

trade balance averaged about the same in July-August as in the first
half of the year.
British industrial output has not changed significantly
since February, and through July the production index remained within
a 132-130 range (1958 = 100).

Retail trade in volume terms tended to

ease off after March, but a dip in June was followed by return in July
to the April-May level.

Fixed investment outlays in manufacturing,

which had reached a record high in the first quarter of this year,
declined a little in the second quarter.
Industrial production and foreign trade in other leading
countries, so far as the available statistics show, have undergone no
marked shifts from trends noted earlier this year.

No significant

- 16 -

upturn has yet developed (through August) in Japanese or French
imports, and those of the Netherlands and Switzerland appear also
to have changed their level very little since mid-1964.

Recovery

in Italian imports was continuing last summer, though the levels
reached were still well below the peak of 1963.

Strong advances in

imports were continuing in Germany, Sweden, and Canada.

German imports

in July-August were 18 per cent larger in value than a year earlier,
and there were no indications of any interruption of their growth.
In general, the trends of imports noted above are closely
related to trends of domestic demand in the various countries.
Expansion of production in France, Italy, and Japan has
received stimulus from rapid growth of these countries' own export
sales.

However, in each of these three countries business capital

expenditures apparently had not begun to pick up last sunaer, and
renewed expansion of consumer buying was only just starting in Italy
and France.

According to French official estimates, inventory accumu-

lation in France this year will have been virtually nil; a moderate
resumption of inventory investment is expected next year.

With domestic

demands so slack, neither in Japan or France has industrial production
broken through to levels higher than in the autumn of 1964.

In Italy,

however, industrial production reached new highs in May and June.
In Germany demand has continued to expand, but no significant
increase in industrial production has been possible since early this
year, as resource supplies -- especially labor -- remain hard pressed.
Average hourly earnings in industry have been increasing almost twice

- 17 -

as fast as productivity in recent months.

During the summer, relaxation

of export and inventory demands was offset by increased consumer and
public spending; and business outlays for machinery and equipment continued to rise.

The strong rise in consumer prices through June re-

flected mainly rising food prices.

SA -1

SUPPLEMENTAL APPENDIX A:

SURVEY OF BANK LENDING PRACTICES. SEPTEMBER 1965

The results of the fifth quarterly survey of changes in bank
lending practices are summarized in the following paragraphs and
accompanying table. Reports were received from the 81 banks included in
the quarterly interest rate survey.
Nearly three-fifths of the respondents (48 out of 81 banks)
reported that demand for commercial and industrial loans had strengthened
in the third quarter and over half of these had indicated increased loan
demand in the second quarter as well. So widespread and sustained has
loan demand been in the past year that more than one-third of the banks
in the survey indicated strengthened demand in at least three of the past
four quarters, and only five banks reported no increase in this period.
Two of these were large banks in Chicago and Dallas, and the others
were smaller banks in New Orleans, St. Louis, and Salt Lake City.
Accompanying the heavy demand for loans, and the tauter monetary
policy of recent months, more than half of the banks firmed interest
rates on loans to business borrowers in the third quarter and most of
these also tightened requirements with respect to compensating balances.
Another five per cent of the banks firmed compensating balance requirements but made no change in interest rates.
Pressure on bank loan rates has been rising continuously since
late November 1964, when the discount rate was raised and ceiling rates
of interest payable on time and savings deposits were increased. Many
banks responded by adjusting upward their rates on such deposits,
thereby adding considerably to their expenses. With the cost of deposits
and borrowed funds increased, bank profits have been under pressure.
Since last November, all except 9 of the survey banks have reported firmer
policies on interest rates on loans to business borrowers with most of
the banks tightening rates in at least two quarters and nearly 40 per
cent in three or more.
Thus far, the overall average rate shown by these banks in
the Ouarterly Interest Rate Survey has provided no clear confirmation
that rate increases were occurring. The average rate for September was
5.00 per cent, about the same as it has been throughout this business
upswing. Within all loan size categories below $200,000, however, average
rates have moved upward over the past year, with increases ranging from
3 to 9 basis points. The effects of these increases on the overall
average, however, have been offset by the increased volume of large loans
at the prime rate.
Aside from interest rates and compensating balance requirements,
policies with respect to other terms and conditions of the loan were firmed

SA -

2

by a much smaller number of banks. Higher standards of credit worthiness were imposed on business borrowers by one-fourth of the banks in
the third quarter, while about one-eighth instituted firmer policies on
the type and amount of collateral and on the maturity of loans. In
these categories, the proportions were about in line with earlier quarters.
Lending standards were tightened more generally for certain
types of customers than for others. About two-fifths of the banks said
they had firmed their lending standards for new customers and those
located outside the local service area of the bank. As in previous
surveys, only a few banks indicated any change in policy for established
customers.
Among those banks that submitted explanatory comments on their
recent firming of lending standards, the two most often mentioned reasons
were an increase in expenses and a high loan-deposit ratio. A large
money market bank in New York City stated that in light of the rise in
loan deposit ratios and in the cost of deposits, the banking system is
struggling against an artificial prime rate. A number of banks also
mentioned the tightening of their reserve positions. One stated that
the strong loan demand was putting pressure on loanable funds and it would
need to develop additional funds to meet the increasing requirements.
A large bank in Kansas City summarized the situation as follows: "Whatever the superlative of tight money is, that is the situation at present."
More than two-fifths of the banks reported in the third quarter
that the applicant's value to the bank as a depositor or source of collateral
business was more important than three months ago -- a higher percentage
than in any previous quarter of this year. One-fifth of the banks indicated they were less aggressive in seeking new loans -- the same as
in the June survey. Banks that were "less willing" to make term loans
represented a larger proportion than in all previous surveys except
September 1964 and, conversely, the number "more willing" to make such
loans was smaller than in other surveys,
While only 12 per cent of the banks firmed interest rates to
finance companies in the third quarter, and about half that proportion
tightened compensating balance requirements, these included a number of
the big money market banks in New York, Chicago, and San Francisco,
many of which had not previously increased their rates to finance companies.
Presumably interest rates and compensating balance requirements for finance
companies operating on a nationwide basis are determined for the most
part by these big money market banks. Subsequent to the survey, several
large banks have announced that they were raising the rate on loans to
finance companies from 4-1/2 to 4-3/4 per cent, and it is not yet clear
whether this increase will become generalized.

SA - 3

In nonrate areas of loan policy, where smaller banks appear to
have somewhat more leeway in establishing terms and conditions for loans
to finance companies, 38 banks -- a greater number than in any previous
survey -- reported firmer policies on establishing new or larger credit
lines for such companies. Firmer policies on enforcement of balance
requirements were indicated by nearly one-fourth of the respondents,
about the same as in other recent surveys.

Not for quotation or publication

SA-4

October 6, 1965.

U. S. Total
Survey of Changes in Bank Lending Practices
June-September 1965
(Numbers of banks)

Lending to Nonfinancial Businesses

Stronger
1.

Strength of loan demand

48
Greater

2.

7
Less

Unchanged
26
Unchanged

Aggressiveness of bank
in seeking new loans

3.

Weaker

Factors considered in deciding
whether to approve credit
requests:
More
important

Less
important

Unchanged

Applicant's value to the
bank as a depositor or

source of collateral
business
Applicant's intended use

of loan proceeds
4.

Practices with respect to
reviewing lines of credit
or loan applications of:

Firmer

Easier

75
49
73

Established customers
New customers
Local service area customers
Nonlocal service area
customers
5.

Unchanged

Terms and conditions of
loans:
Firmer
Interest rates
Compensating or supporting
balances
Standards of credit-worthiness
Type and amount of collateral
Maturity

Easier

Unchanged

44

37

39
22
10
13

42
59
71
65

SA=5

6.

More
willing

Willingness to make

Less
willing

1

Term loans

15
Shorter

Longer

Unchanged
65
Unchanged

Maximum maturity bank
will approve
Years

Number of banks

3
5
6
7
8
10
n.a.

5

Lending to Finance Companies
Firmer
Interest rates
Size of compensating or
supporting balances required
Enforcement of balance
requirements
Establishing new or larger
credit lines
Source:

10

Easier

Unchanged
71

5
18
38

Survey of Lending Practices at Large Banks in the Federal Reserve
Quarterly Interest Rate Survey conducted as of September 15, 1965.