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FEDERAL RESERVE BANK OF NEW YORK r Circular No. 7 4 5 9 "1 L September 17, 1974 J Statement by the Federal Advisory Council on Bank Lending Policies T o A ll M em b er B anks, and O thers Concerned, in the Second Federal R eserv e D istrict: Following is the text of a statement issued September 16 by the Board of Governors of the Federal Reserve System: T h e B oard o f G overnors of the Federal R eserve System today released the attached statement on bank lending policies that was received from the Federal A dvisory C ouncil, a statutory body established under the Federal R eserve A ct. T h e statement suggests how banks can effectively adapt lending policies in the current period of credit restraint. T h e B oard believes the C oun cil’s statement can be helpful to com m ercial banks in form ulating their lending policies under current circumstances. T h e B oard regards restraint in lending policies as essential to the national effort to control inflation. R e straint best serves the public interest when limited credit resources are used in ways that encourage expansion o f productive capacity, sustain key sectors o f national and local econom ies, provide liquidity for sound busi nesses in tem porary difficulty, and take account of the legitimate needs of individuals and o f small as well as large borrow ers. T h e B oard noted particularly that the C ouncil in its statement recognized “ the special vulnerability o f the hom e-building industry.” A n active hom e-building industry is vital to the w ell-being of local comm unities as well as o f the N ation as a whole, and it is to the interest o f banks and other financial institutions to give reasonable support to the financial needs of that industry. T h e Federal A d v isory C ouncil is com posed of tw elve leading bankers, one from each Federal Reserve District. It was created by the Federal R eserve A ct and under law is required to meet with the Board of G overn ors at least four times a year. T he attached statement stems from a discussion o f bank lending policies during a recent F A C meeting with the Board. * S T A T E M E N T O F T H E F E D E R A L A D V IS O R Y C O U N C IL O N C O M M E R C IA L B A N K L E N D IN G P O L IC IE S T h e m em bers o f the Federal A d v iso ry C ouncil firmly believe that inflation remains our m ost acute dom estic problem and that the effort to reduce it deserves the full dedication o f all Am ericans. W e have been pleased recently to observe the renewed efforts o f the A dm inistration and other segments of our N ational Governm ent, in consultation with a broad representation o f interested groups in the private sector, to identify appropriate and effective policies to deal with this problem . A s bankers we are acutely aware o f the dispro portionate role which a restrictive m onetary policy has had to bear thus far in the fight against inflation. W e are particularly hopeful that fiscal and other measures w ill be adopted which will soon alleviate this excessive reliance on m onetary restraint and high interest rates, because governm ent spending and budget deficits are a m a jor cause of inflation. * * W e recognize, how ever, that regardless of the measures adopted, m oney and credit will necessarily remain limited in supply as long as inflationary pres sures persist. W e are confident that sufficient m oney will be made available to assure orderly operation of credit markets and to provide for the resumption of real grow th in the econom y. H ow ever, we foresee a period o f considerable duration when the supply of lendable funds will be limited, and when, therefore, it will be necessary fo r banks to restrict the grow th in their loan portfolios by selecting carefully and responsibly the uses to which they put their loanable funds. It is also clear that this process contributes to the very desirable objective of reducing interest rates, a development banks welcom e. Relief from the pres ent unprecedentedly high rates would be particularly beneficial to those segments o f the econom y that are by their nature heavily dependent on borrow ed m oney, such as housing and public utilities. In view, therefore, of the extreme importance of ( over) is that it tends to produce an uneven impact, bearing m ore heavily on some sectors of the econom y than others. T herefore, banks should make an effort to utilize their limited funds equitably, giving considera tion, for instance, to the special vulnerability of the hom e-building industry. bank lending policies in today’s environm ent, we should like to describe those policies which we believe are appropriate in present circumstances and which, we feel, are already being follow ed by many banks. T h e basic credit needs for normal operations o f all established business custom ers should, o f course, be met to assure the production and distribution o f goods and services. L oans to finance capital investment by business are also appropriate, where access to capital markets is not available and where the investment is reason able in size and necessary to maintain or im prove productivity, or to increase capacity to meet existing or clearly anticipated demand. In considering such loans, banks should weigh the relative im portance o f the particular business with respect to such factors as the nature o f its product or service and its signi ficance as an em ployer in the local area. Particular consideration should be given to the needs of estab lished businesses which are basically sound but which suffer a tem porary lack of liquidity because of present conditions. Similarly, consum er credit should receive its share o f bank funds. T he basic requirements o f individuals fo r household needs and autom obiles should be ac com m odated, but discretionary spending which might be deferred should not be encouraged. Loans to foreigners which are funded from dom es tic sources should also be weighed against the above criteria. In addition, banks should give careful con sideration to the diversion o f loan funds from United States custom ers through such loans. Im plicit in these policies is a need for close com munication and counseling between bankers and their custom ers to agree on ways to reduce o r defer b or row ing needs or to identify alternate sources of financing. T h e C ouncil recognizes that it is im possible to pre scribe a precise and particular list o f priorities for proper bank lending. W e d o feel, how ever, that the policies outlined describe a responsible posture that is appropriate to present circumstances. W e believe that G overnm ent credit allocations are not needed and that they would be counter-productive. L oans for purely financial activities, such as acqui sitions or the purchase of a com pany’s ow n shares, w ould norm ally not be appropriate uses of limited bank funds. Loans for speculative purposes, such as purchasing securities or com m odities other than in the ordinary course o f business, excessive inventory accumulation, or investing in land w ithout well-defined plans for its useful developm ent, are not generally suitable. A regrettable aspect o f restrictive m onetary policy * W e are confident that the N ation’s banks will con tinue to cooperate with our G overnm ent and all sec tors o f the econom ic com m unity in implementing sound and necessary national policy. * * Additional copies o f this circular will be furnished upon request. A lfr ed H a y e s , President.
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