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Federal Reserve Bank of Dallas ess • ew This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) Monetary Policy- A New Emphasis in Regulations Affects Liability Management ..... 1'h F e Board of Governors of the ment should be in a position to ever, show no significant associat ederal Reserve System has alchoose between different sources tion between such rate competition a:ed .the thrust of its regulations mainly on the basis of cost. a~d b~nking problems involving it' ectmg money market-type liabilSince interest rate ceilings have high-rIsk assets. And until the late pIes of member banks during the been actively used as a tool of 1950's, in fact, RegUlation Q ceilmonetary policy only since the s~s~ few years. In earlier periods, ings were usually raised when necra c. as 1966 and 1969, when the midsixties, the new emphasis might essary to allow commercial banks b P~d expansion of bank loans to to compete freely for time and appear to be no more than a redisinUSll1e~s borrowers was contribut- covery of traditional techniques of savings deposits. Recent administration of ReguF gdto mflationary pressure the restraint. But because the financial ra~eera.l ~eserve had used i~terest structure has changed considerably lation Q has been guided by at least two main considerations. One cert' ceIlings on large-denomination since the 1960's, neither the reguth lficates of deposit to help slow lations affecting bank liabilities nor has been to make restrictive monetary policies more effective as a ~rowt~ ~f b~k credit directly. the conditions under which these brake on business spending for regulations operate are the same. the a slillliar sItuation in 1973, And since the new marginal reserve inventories and plant and equipceil' oard suspended interest rate ad tngs on large CD's entirely and requirement applies only to certain ment by restricting the availability of credit at banks. Fluctuations in apoPted a somewhat different bank liabilities not included in the Proach. money supply, the new approach is business spending of this type have llle~tnew marginal reserve require- really more a selective credit con- contributed greatly to business trol than a traditional tool of mon- cycles. The new emphasis in liaand v w~s placed on large CD's bility regulations has substituted fund ano~s nondeposit sources of etary restraint. This article disvariations in reserve requirements cusses the economics of the new lllenr ThIS new reserve requireemphasis, traces the main develop- on money market-type liabilities of fu mcreased the internal cost of banks for the use of Regulation tend~ds to banks and, in that way, ments leading up to it, and offers Q ceilings as a means of controlling an assessment of its potential cred'td to slow the growth of bank bank credit directly. significance. SiZe ~i T~e Board increased the loan d thIS reserve requirement as Rationales for Regulation Q fUrth eInand at banks intensified r The new emphasis in liability The power of the Board of Goveronce ~d adjusted it downward regulations has substituted nors to impose interest rate ceilings Credit hsmess demands for bank variations in reserve requireon time and savings deposits of mh' ad moderated. .\. IS S.I h'ft'm emphasis from a re- member banks originates in the ments on money market-type Hanc liabilities of banks for the the eon mterest rate ceilings to Banking Act of 1933. These conUSe of . 1 of Regulation Q ceilings use ll1ents f margm~ reserve require- trols, administered under Federal as a means of controlling Reserve Regulation Q, apparently COUld h or c?ntrollmg bank credit bank credit directly. fOr the aVe II?portant implications were enacted in the belief that and b practIces of monetary policy competition for time and savings apPro ank management. The new deposits had contributed to wideRegulation Q ceilings have been spread banking failures in the dethe F ~h could make it easier for used to slow the growth of bank !lolic e eral Reserve to pursue a pression of the 1930's. credit, usually by being left unTo pay competitive rates on time a "c/~f restraint without risking changed as market rates of interlargee t crunch" that prevents and savings deposits, it was beest rose in periods of monetary lieved, banks had to increase their Obtai~umbers of borrowers from restraint. This type of action has A.nd lng money at any price. loan-deposit ratios, seeking out the effect of inducing investors to SOUl' as the availability of anyone risky, high-yield loans and investshift out of time and savings delikel~et o~funds to banks is now less ments to cover the higher cost of posits-particularly large CD's-into o e cut off, bank managefunds. Studies of the period, how- 13;t B b ~Ils'lr1ess n . eVlew I November 1974 1 -Impact of Regulation Q ceilings on bank credit and total credit In principle, Regulation Q could be used as a measure of general monetary control, affecting both business spending and other types of spending through the overall availability of money and credit. But the effect of using Regulation Q ceilings as a general monetary control is somewhat uncertain. The impact-in direction and strength-on credit conditions depends on the net outcome of opposing forces. The circumstances under which Regulation Q ceilings influence credit markets usually entail increases in market rates above the Regulation Q ceilings. But the alternative to holding Regulation Q ceilings constant under such circumstances is to raise them in line with market rates. Therefore, the exact impact of R egulation Q ceilings alone can best be isolated by considering the consequences of a decrease in Regulation Q ceilings from a position in line with market rates to a point somewhere below them. A reduction in Regulation Q ceilings on time and savings deposits at commercial banks would tend to induce the public to shift out of these deposits and into other assets. The effect on overall credit conditions, under these circumstances, depends then on whether the public shifts mainly into interest-bearing securities or into demand deposits and currency.l If the shift is into open market securities, the banking system will, at first, reduce loans and investments by an equal amount to cover withdrawals of time and savings deposits. Suppose, for example, that time and savings deposits fall by $100, leading the banking system to reduce loans and investments by $100 also. Since time and savings deposits are subject to a legal reserve requirement of, say, 5 percent, the banks now have reserves of $5 in excess of the legal requirement. These changes, for all commercial banks taken together, are shown in Balance Sheet 1. At this point, total credit is unaffected even though bank credit falls. The effect on total credit of the shifting of credit supplies to the open market by the public is just offset by the decline in bank loans and investments. (1 ) Assets Liabilities Required reserves - $5 Excess reserves + $5 Loans and investments Time and savings deposits -$100 - $100 The excess reserves permit-and, indeed, induce-banks to expand their credit and demand deposits, causing lower interest rates and a greater availability of overall credit. This adjustment of the banking system to excess reserves is indicated in Balance Sheet 2, which assumes the legal reserve requirement for demand deposits is 20 percent. At this point, both total credit and bank credit expand by $25. (2) Assets liabilities Required reserves + $5 Excess reserves - $5 Loans and investments + $25 + $25 The net result of these operations is an increase in total credit of $25 and a reduction in bank credit of $75. Since reserve requirements on demand deposits are higher than those on time and savings deposits, the relative increase in demand deposits requires that, for the same amount of reserves in the banking system, bank credit must fall. The fall in bank credit and the net changes in bank liabilities are shown in Balance Sheet 3. (3) Assets liabilities Demand deposits 1. For si mplicity, t his a na lysis assumes t hat. fo llow ing a reduction in Reg ulation Q ceili ngs, nondeposit sour ces of fu nds to bun ks-for example, E urodo l1nr borr owings a nd bun k-related comm ercia l paper- n rc not SUbst itu ted f or t ime and savings deposits. Demand deposits Loans and investments - $75 + $25 Time and savings deposits - $100 --------------------------------------------------------------~ 2 If, on the other hand, holders of time and savings deposits-as, for example, small savers-cannot readily invest in market securities, they may want to increase their holdings of demand deposits or currency. There is a greater incentive to do so be?ause the interest they forgo by holding Idle money balances is now less. Banks will then either create new demand deposits for h?lders of time and savings deposits or proVIde currency from their vaults. Since reserve requirements on demand deposits are higher than those on time deposits and vault cash is counted as a legal reserve, banks now have a deficiency of reserves. The more likely shift into demand deposits is illustrated in Balance Sheets 4-6. Assuming $100 is shifted into demand deposits, the banking system now has a reserve deficiency of $15, as shown in Balance Sheet 4. At this point, there is no change in either total credit or bank credit. (4) Assets liabilities Required reserves +$15 Demand deposits +$100 Excess reserves -$15 Time and savings deposits -$100 The deficiency in reserves leads banks to contract bank credit and demand deposits by $75, causing higher interest rates and a reduction in total credit of $75. This adjustment of the banking system to the deficiency of reserves is indicated in Balance Sheet 5. (5) Assets liabilities Required reserVes -$15 Excess reserves +$15 loans and investments -$75 Demand deposits -$75 The net effect of such a shift into demand deposits is shown in Balance Sheet 6. As in the case of a shift into open market securities, bank credit falls because of the increase in demand deposits relative to time and savings deposits. But in this instance, bank credit and total credit move in the same direction and change by equal amounts, both decreasing by $75. (6) Assets liabilities Demand deposits Loans and investments -$75 + $25 Time and savings deposits -$100 In summary, a shift from time and savings deposits into demand deposits and currency, following a decrease in Regulation Q ceilings, exerts upward pressure on interest rates and diminishes the availability of total credit. A shift into open market securities, on the other hand, leads to a general easing in credit conditions and an increase in the availability of total credit. In practice, of course, both shifts occurthe net result being in either direction, depending on the strength and kind of substitutions made for the different types of time and savings deposits and the composition of such deposits at all banks. This is some combination of the changes indicated by Balance Sheets 3 and 6. But overall, the effect on credit conditions is probably small in any event. Moreover, even if the direction and strength of the overall effect were known, changes in Regulation Q ceilings would have no advantages over System open market operation~ for b~i~ging about changes in general credIt condItIOns. Combined with appropriate open market operations, however, reductions in Regul~ tion Q ceilings can be used to adv~tag~ ill restricting the amount of bank credit WIthout changing the availability of total credit. Bank credit always declines after a reduction in Regulation Q ceilings, whether holders of time and savings deposits shift into open market securities or into cash. Therefore, Regulation Q appears to be more us~ ful as a selective control over bank credIt than as a tool of general monetary control. ~----------------------------------------------------3 I l}\ts. llless Review November 1974 higher-yielding open market securities. At the same time that investors shift their funds to the open market, the banking system must reduce the credit it supplies by an equal amount so as to cover the withdrawals of time and savings deposits. Consequently, the total amount of credit extended to the market is unaffected. Since time and savings deposits are subject to legal reserve requirements, however, the banking system would end up with reserves in excess of the legal requirement. But these excess reserves would normally be absorbed by the Federal Reserve System through sales of securities in the open market in order to offset a potential expansion in the overall availability of money and credit. When combined with appropriate open market operations, therefore, Regulation Q ceilings can be used to restrict the amount of bank credit without changing the availability of total credit. Through its ability to influence the amount of bank credit relative to total credit, the Federal Reserve can exert a more direct influence on business spending. Business borrowers constitute the largest portion of loan customers at banks. And even large corporations-which usually do not do as much of their borrowing at banks as do small businesses-become heavy users of bank credit when faced with the sudden increases in financing needs that are typical of an upswing in business activity. Fluctuations in business spending for inventories and plant and equipment have been a dominant factor in business cycles. When only general monetary restraint is applied during capital investment booms-for example, through System open market sales of securities-businesses can usually bid loanable funds away from other users. Although the shift tends to free labor and physical resources 4 for use in industries supplying capital goods to businesses, such a movement of resources takes timeand is not without cost. And the prices of capital goods may be bid up without price declines necessarily taking place elsewhere, thereby contributing to inflation. A more refined approach to the stabilization of aggregate demand under such conditions is to restrict the availability of credit more precisely in the areas where the demand for it is the strongest. Regulation Q can be used for this purpose so as to limit credit extended to business borrowers by restricting the availability of credit at banks. Another consideration in the administration of Regulation Q-this one unaffected by the new emphasis-has been to shield nonbank thrift institutions from possibly destructive interest rate competition for consumer-type time and savings deposits. Mainly because of legal restrictions, assets of mutual savings banks and savings and loan associations are mostly long-term mortgage loans. By contrast, assets of commercial banks are mostly short-term business and consumer loans and shorter-term Government and municipal securities. One implication of this difference is that, in times of rising interest rates, nonbank thrift institutions are at a disadvantage in competing with banks for deposits. When interest rates rise, the returns on the relatively fixed portfolios of nonbank institutions do not keep pace with the higher interest rates to depositors. In 1966, when demand conditions were very strong and interest rates were rising rapidly, interest rate competition among depositholding financial institutions threatened the solvency of some mutual savings banks and savings and loan associations. As a consequence, Regulation Q ceilings on consumer-type deposits at com- mercial banks were actually reduced that year and interest rate ceilings were put on deposits at nonbank thrift institutions. In the years since, the potential pressure on nonbank thrift institutions may have become even greater because of the increase in inflation. In principle, thrift institutions that borrow short and lend long should be able to accumulate reserves in times of credit ease, when the spread between the return on their assets and their deposit rates is generally larger, and then use the reserves to make interest payments to depositors when credit is tight and this spread is smaller-. maybe even negative. And if thrIft institutions followed such practices, interest rate ceilings would ordinarily not be necessary. ---------------------------One consideration in the administration of Regulation Q has been to shield nonbank thrift institutions from possibly destructive interest rate competition for consumertype time and savings deposits. -------------------------But because participants in financial markets did not anticip~te the recent increase in inflation, Interest rates on seasoned mortgage loans held by thrift institutions are much lower than those on neW mortgage loans. As a result, even if all nonbank thrift institutions had followed reserve policies appropriate for a less inflationary ld time, competitive pressures woU have tended to subject them to all earnings squeeze. This is bec~US~ the return on their large holdJIlg of old mortgage loans is fixed. The immediate solution to .thueed problem of ensuring the contln. solvency of nonbank thrift ins tI · tet tutions was the extension 0 f JD est rate ceilings to time and s~v- S ings deposits at these institutIon, .... ~der the Interest Rate Control authority to reimpose them in type of discretionary access to the thct of 1~?6, an~ coordination of extreme situations. 1 liquidity of the nonbanking sector C ?~e ceilings WIth Regulation Q of the economy, making liability Regulation Q in the 1960's hetn.gS for commercial banks. To management an important alterf e P Insulate thrift institutions Regulation Q ceilings on consumer- native to asset management. hrom deposit withdrawals ceilings type time and savings deposits con- . Before 1966, Regulation Q ceilw'::';: been ~ifferent~ated t~ increase tinue to be used, as in the 1960's, mgs on large CD's and other time depOSIt matunty and size. to moderate interest rate competideposits had usually been raised But this does not appear to be tion between banks and nonbank in line with increases in market Very satisfactory long-term soluthrift institutions. On the other rates to allow banks to compete taoIOn . h ' Wh'lI e Interest rate ceilings hand, as part of the new emphasis for funds. But as money tightened t~1 ~elp~d p:otect the earnings of in the regulation of bank liabiliin mid-1966, the credit demands fu dt InstItutIons, competition for ties, Regulation Q ceilings on large of the large nonfinancial corporau~ s has ten.ded to reduce the vol- CD's were recently suspended. tions that were supporting the Regulation Q ceilings on large cou!dOf deposIts these institutions business investment boom continj"t attract when market rates of CD's were used vigorously in 1966 ued to be satisfied. And market " l erest .. th were rIsmg and, therefore, and 1969 to slow the growth of pressures acted to reduce the ar e amount of savings flowing into amount of credit supplied to borbank credit in an effort to limit . ily housmg. . selectively the availability of credit rowers in other areas, particularly Ateas th they se~e-pnmar ated e same tIme, the differentihousing. At that time, under a new to business borrowers. But comauthority allowing differentiation mercial banks sought to overcome llated ca1e .of rates has discrimilea t agaInst small savers-those among time deposits according to this constraint on their ability to ter s a.ble to t ake advantage of alsize, Regulation Q ceilings on CD's tap the money market by makX~tIve investment opportunities. ing more intensive use of various of $100,000 or more were not raised th e onger-term solution awaits in line with market rates, and a non deposit sources of funds. This irn tnoderation of inflation. An rapid runoff of large CD's soon response of banks to the use of followed. illl~~tant benefit of a slowing in Regulation Q ceilings on large This policy with respect to Regubar: IO~ would be that institutions CD's was an important factor shaplation Q ceilings was supplemented wou~WIng short and lending long ing the development of the new by a change in the administration "iab} become more economically emphasis in liability regulation. e the discount window at Reserve of ceilin and, ~s a result, interest rate banks to further help in restricting flosit gs on tIme and savings dethe availability of credit to busiB s could be generally relaxed. The response of banks to the ness borrowers. Federal Reserve bou:J as periods of tight credit are use of Regulation Q ceilings credit through the discount winstitut" to recur, nonbank thrift inon large CD's was an impordow was made available to help flab. IOns would benefit from the tant factor shaping the devel.. er to di . individual banks adjust to reserve tY!:>e VerSIfy into more liquid opment of the new emphasis losses resulting from attrition of flete s of loans so they could comin liability regulation. their time deposits. But accomrates tnore effectively when interest modation at the discount window SUgg a~e high. It has also been depended partly on a bank's efforts flo\\1ees ed that they be given the A phenomenal growth in large to moderate the extension of credit able [ ~o offer mortgages with vari- negotiable CD's has taken place to businesses. WOUldn ~rest rates-a change that since the early 1960's. The inAgain in 1968, as a supplement creased issuance of negotiable CD's 60\\1 \\1-feve.them a steadier cash to a general policy of monetary 'the B n Interest rates fluctuate. by large banks appears to have restraint, Regulation Q ceilings "ored oard of Governors has fabeen prompted by the relatively on large CD's were increased only stitut·granting nonbank thrift inslow growth of demand deposits at slightly, inducing a runoff that tlO\\1er~~s expanded investment these banks-which, in turn, was totaled $13.5 billion at all member Illore f 0 allow them to compete partly the result of corporations banks by the end of 1969. This lloard ~~ly. And eventually, the and other large depositors investtate ceili uld ph~se out all int erest ing their excess funds in short-tenn time, however, the use of Reguladeflos't ngs on tIme and savings market instruments. The growth of tion Q was probably less effective 1 s ret· . in curtailing business spending, as ;--...: ' ammg only standby negotiable CD's gave banks a new , );'01' II n elnbol'nt' ' t' ankin~ ..,. Ion of the Boal'd's position see statement of Robert C Holland before the Subcommittee on Financial Instltu IOns 0 o . "'~oU 8 i ' • f th C 'tt e omml ee on ng, a nd U r ba n Affairs, United States Senate, November 7, 1978. IISille.ss n . eVlew / November 1974 5 banks and nonbank corporations had found other sources of funds. Nonbank corporations with good credit ratings were able to bypass commercial banks and obtain short-term funds by issuing commercial paper. Thus, between 1966 and 1970, the volume of nonbank commercial paper tripled, rising from about $10 billion to roughly $30 billion. And banks used existing nondeposit sources of funds more intensively and developed new techniques to obtain the liquidity they desired. The most important innovation in bank liability management prompted by the uncertain availability of CD's was borrowing in the Eurodollar market. Eurodollars are dollar-denominated deposits in banks outside the United States. U.S. commercial banks obtained funds for malting business loans by borrowing dollars from banks in the Eurodollar market. From J anuary through December 1969, for example-a period in which CD attrition at large banks amounted to $10.6 billion-these institutions increased their borrowings in the Eurodollar market by $6.5 billion. The most important innovation in bank liability management prompted by the uncertain availability of CD's was borrowing in the Eurodollar market. Some large lenders that might otherwise have purchased negotiable CD's placed their funds in the Eurodollar market at attractive interest rates. And Eurodollar banks subsequently relent the funds to banks in the United States to meet their loan demands. Besides attracting the deposits of U.S. nationals, the high interest rates paid in the Eurodollar market induced foreigners to purchase dollars for deposit in Eurobanks. 6 At the margin, and under a fixed foreign exchange rate system, these dollars would have been supplied by foreign central banks. But since foreign central banks usually obtained the dollars simply by liquidating some of their holdings of securities in New York, there was generally no direct increase in bank reserves or the money supply in the United States. In September 1969, the Board of Governors amended Regulations D and M to make Eurodollar borrowing less attractive by imposing a 10-percent reserve requirement on any additional funds obtained from this source. As the new reserve requirement became effective, large banks sought other sources of funds that were not as costly. Regulations D and Q had already been amended in 1966 to make bank issues of notes maturing in less than two years subject to the same restrictions as deposits with respect to reserve requirements and interest rate ceilings, blunting the incentive for banks to issue short-term notes directly. But since the restrictions were not explicit in covering bankrelated organizations, proceeds from the sale of commercial paper by a bank holding company or affiliate were used to purchase loans from banks. By late 1969, bank-related commercial paper had come into wide use. From July 1969 to July 1970a period when, in partial response to the new reserve requirement on Eurodollar borrowing, borrowings of U.S. banks from their foreign branches declined $3.9 billionissues of bank-related commercial paper increased $5.9 billion. In the summer of 1970, the Board imposed a 5-percent reserve requirement against funds obtained by member banks through the issuance of commercial paper or similar obligations by their holding companies or affiliates. This action put bank-related commer- cial paper on a more nearly equal footing with Eurodollar borroWings and negotiable CD's as a source of funds for large banks. Banks also used other techniques to tap unregulated sources of short-term funds, but the Board soon closed these loopholes as well. One of these techniques was th~ practice of issuing small-denom~a tion capital notes. These subordinated notes were not subject to reserve requirements or interest rate ceilings, and by issuing thern, banks could raise funds fairly cheaply from small savers. But by June 1970, the Board required that for a note to be exempt frorn Regulations D and Q, it had to have an original maturity of at least seven years and be for at leas~ d $500. Until then, any subordInate note maturing in more than two years had been exempt from these regulations. r Some banks also purchased ove night funds from their corporate customers, usually paying the rna rket rate on Federal funds. Suc~ t transactions were not then subJec to reserve requirements or in terest rate limitations. However, t he Board later narrowed the categorY of Federal funds transactions ed"Q empted from Regulations D an ' effectively eliminating corporat;et access to the Federal funds mar through member banks. Another practice was for ban~i to sell corporate customers partl~: pations in bank loans under repu d chase agreements. Funds obt~~e from such sales were not conSI -e ered deposits and, therefore, werts exempt from reserve requirement and interest rate limitations. Q in July 1969, Regulations D an were amended to cover all repurchase agreements on any assets except U.S. Government obliga tions with anyone besides a ban . Ed k Impact of the new emphasis By the end of 1970, all these te~~e niques banks had used to overc ~noffs of large CD's-Eurodollar maturing in less than 90 days was of a customer that a bank guaran?rrowing, bank-related commersuspended to help banks meet untees will be paid at maturity. These CIal pa . de ~er, promIssory notes, smallusual demands for short-term bills had been growing rapidly and nomInatIOn capital notes accredit, which had been precipitated were the latest innovation by Cesst ' b o th e Federal funds market by uncertainties in the commercial banks for drawing funds from the Y nonbank corporations, and repaper market caused by the failure money market. burchase agreements with nonof the Penn Central Railroad. BeIn October 1973, the marginal Gank corporations on anything but cause this measure was originally reserve requirement on the total I oVermnent obligations-were no thought to be only temporary, of large CD's, bank-related coma~~g~r exempt from Regulation D ceilings on large CD's maturing mercial paper, and finance bills was a ' ln some cases, Regulation Q in 90 days or more were not lifted raised from 8 percent to 11 percent Well. And during the next period at that time. But in 1973, when in an effort to curb a continued q ~onetary restraint, reserve rerapid expansion of bank credit. strong demands for business loans had helped drive up money marBut in December, the requirement of~~ements on the largest portion aI ese nondeposit liabilities ket rates, rather than choosing to was dropped back to 8 percent as ,,, ong with those on large CD:s business demands for bank cre'dit reimpose the ceiling on shorter. d'In a coordinated fash, had moderated. And in September maturity CD's, the Board of Govi"'ere raIse bon to help slow the growth of 1974, the supplemental marginal ernors suspended entirely the inark credit. reserve requirement of 3 percent terest rate ceilings on CD's of was removed for these types of q . ncreases in these reserve re$100,000 or more. bank liabilities having initial mafeu~rements have both a general efturities of at least four months. se~ o~ credit conditions and a The impact of the new regulage ectIve effect on credit flows. The Increases in reserve requireis neral deficiency: in reserves that ments on nondeposit liabilities tory emphasis on major bank liabilities other than demand deposits by raising reserve reand large CD's have both a qU~reated · SlIDl . '1ar to that crelremen tSIS is suggested by a comparison of general effect on credit conated the growth of these liabilities befro by a withdrawal of reserves ditions and a selective effect fore and after the shift in emphaop III the banking system through on credit flows. sis. In 1968-70, before the new th e~market sales of securities by emphasis, banks in both the nation te~d :de~al Reserve. Interest rates as a whole and the Eleventh DisWithout these ceilings on large tot I 0 nse, and the availability of trict more than offset runoffs in Th credit i~ reduced. CD's, the Federal Reserve employed increases in reserve require- large CD's with borrowings in the ab T e selectIve effect is on the Eurodollar market and issues of el{~ lty of the banking system to ments on money market instrucommercial paper by holding comments to help slow the growth of fun~n1 bank credit by channeling 01' affiliates. panies business loans at banks. In May spen~ rom savers to ultimate Standing in marked contrast is 1973 the Board imposed a new 8larg . t~rs through the medium of , . e the 1972-74 period, by which time sour lme deposits and non deposit percent marginal reserve reqUlrethe new emphasis was being imrese ces of funds. An increase in ment--composed of the regular 5 Without any Regulaplemented. tnonl'Ve requirements on these percent plus a supplemental 3 Q ceilings on large CD's and tion effe market instruments has the percenir-on any further increases with roughly the same marginal \\>iU~ of reducing rates banks are in large CD's and bank-related on major reserve requirements al1dl~g to pay suppliers of funds commercial paper, but in no case Incr . market sources of funds, money the amount outstanding where qui!.' f easIng the rates they rebanks have shown a clear preferth er: o borrowers. The increase, was less than $10 million. f ence for large CD's over other In July 1973, this new marginal able fu,re, tends to channel loansources of discretionary liquidity. into t nds away from banks and reserve requirement was extended This has been true not only in the to cover finance bills so as to ap~l1an ~e ~pen market and other nation but also in the District. effectclalInstitutions. In fact, the ply to the total of finance bills, the volume of outNationwide, and bank-related comlarge CD's, OUght ~n the allocation of credit standing large CD's has more than the regular 5mercial paper. And caused be quite similar to that tripled since 1970. And it has alpercent reserve requirement was tion Q :y ~ reduction in Regulathe District. Euromost doubled in In thCelhngs on large CD's. applied to the amount of finance the other dollar borrowings, on bills already outstanding. A finance terest e SUmmer of 1970, the inhand, have been substantially berate ceiling on large CD's bill is basically a marketable note 0; ? b ntts·1Iless n . eVlew / November 1974 7 Impact of Regulatory Changes' on Selected Liabilities of Commercial Banks ... the Nation BILLION DOLLARS BILLION DOLLARS 350 350 --------------------------TIME AND SAVINGS _ DEPOSITS OTHER THAN 250 - 250 LARGE CD'S 150 -.....-----------~ Ir==-------,r.--------r--------r-----------------------~-------T----------------~ 150 ___________________________ 100 100 -------------------------- LARGE CD'S 50 - -50 Orl--------r--------r--------~----------------------~------_,--------~------~10 ------------_____________ 16 16 - - - - - - - - - - - - - - - - LIABILITIES TO THEIR FOREIGN BRANCHES -8 ~~-.-.---.~--~~~.,~~---;-~~ Orl--------r--------r--------T,-----------------------~------_,--~----~------~10 __________________________ 10 10 - - - - - - - - - - - - - - - - - BANK-RELATED _5 COMMERCIAL PAPER 5- °1r-----.------.------~----------------~----~------~----~1° 1968 1969 1970 1972 1973 1974 SOURCE: Board of Governors, Federal Reserve System ------------------------------------------------------------~~ 8 ... the Eleventh District BILLION DOLLARS 4 -____________________ _ BILLION DOLLARS ~ ~4 TIME AND SAVINGS 3- DEPOSITS OTHER THAN -3 LARGE CD'S 2 ..... r I 4 __________________________ 2- 2' --------------------------4 LARGE CD'S -2 orr-------,------__~------_r---------------------,--------r-------~------,IO .100 ____________ --------------------------.100 LIABILITIES TO THEIR .050_ -.050 FOREIGN BRANCHES O~~ ~ ____ ________ ~ ~--------------------II~ -------r~~~=-,IO ____ ________________________ .400 ,400 -_ _____._ _ _ _ _ _ __ BANK-RELATED .200 _ -.200 COMMERCIAL PAPER 0r---__-.c-____ - r____ 1968 1969 ~~----------------_r~~rrm ~~~~~T4~~~10 1970 1972 1973 1974 ~---------------------------------------------R . 9 SS I nUSine eVlew November 1974 low their peak levels of 1969 in recent years-both in the nation and in the District. Although use of bank-related commercial paper has continued to grow in the nation as a whole, the total amount of paper outstanding is still less than in the peak months of 1969. And in the District, use of bank-related commercial paper has shown hardly any new growth. The amount outstanding in the District is now about a tenth of what it was in the peak months of 1970, with several large banks not using such paper at all as a source of funds. New emphasis in perspective The use of discretionary changes in marginal reserve requirements to influence the growth of bank credit-and, thereby, loans to business borrowers-appears to have important advantages over use of Regulation Q. Because variations in reserve requirements do not abruptly change the availability of a particular source of bank funds, their effects are easier to predict than those of interest rate ceilings. And there is less risk that bank credit will cease to be available at any price to many borrowers. Nevertheless, the use of marginal reserve requirements as a device for controlling the flow of shortterm credit to business borrowers has an important limitation. Because variations in reserve requirements do not abruptly change the availability of a particular source of bank funds, their effects are easier to predict than those of interest rate ceilings. By extending the coverage of reserve requirements to various nondeposit sources of funds available to banks, the Board of Governors has endeavored to tighten 10 its control over bank credit. But the new emphasis on reserve requirements has probably been as subject to circumvention through the use of nonbank financing as the old approach that emphasized interest rate ceilings. The most important substitute for bank credit has been the commercial paper market. Although most business borrowers are not known well enough to obtain shortterm credit outside banks at reasonable cost, a significant number can. Similarly, investors that are in a position to purchase money market-type liabilities of commercial banks are also generally willing to supply funds directly to well-known business borrowers through the commercial paper market if they are provided the proper incentive. In 1969, when Regulation Q was being vigorously used to curb the growth of bank credit, a decline of $13 billion in the outstanding volume of large negotiable CD's was largely offset by an increase of $11.5 billion in the outstanding volume of nonbank commercial paper. And the ease of substitution of commercial paper for bank credit-for some borrowers and lenders-was demonstrated again in 1973. That year, the Government's Committee on Interest and Dividends acted to restrain increases in the prime rate on loans at commercial banks. From February to September, the prime rate was held about 50 basis points below the 90 to 119-day commercial paper rate. Usually, this relationship is almost exactly the opposite. The result was a shift of about $15 billion in credit from the commercial paper market to banks, as business borrowers took advantage of the more favorable terms at commercial banks and banks obtained the necessary funds by issuing large CD's. It is hard to isolate the amount of commercial paner that has been substituted for bank credit under the new emphasis. Actions of the Committee on Interest and Dividends significantly affected shortterm credit flows at about the time reserve requirements on all money market-type liabilities were increased in 1973. But since changes in reserve requirements on money market instruments and changes in Regulation Q ceilings on large CD's should have similar effects on credit flows, such substitutions probably occurred again. When reserve requirements on money market-type liabilities of commercial banks are increased, banks should tend to raise their loan rates relative to interest rates on those liabilities. Large corporations that can obtain funds from either market would then tend to shift their credit demands from banks to the commercial paper market, and larger nonbank len~ers would similarly shift their supplies. The new emphasis, therefore, ought to be as subject to circumvention outside the banking system as the earlier approach was .. But even when such circumventIon takes place, the cost of short-term credit is still increased for most business borrowers. And this is true even if the net deficiency of reserves caused by the increase in reserve requirements is offset by a like amount of System open market purchases of securities. Borrowers that can shift to n017bank sources may be able to obtaJD credit at nearly the same cost as before. But most business borrowers, not being able to change sources, are forced to pay more ~or the short-term credit they obtaIn at banks. This is because the internal cost of funds to banks is boosted by the higher reserve re- tquirements on their money marke type liabilities. An alternative approach A more comprehensive device for selectively influencing business spending might be found in the investment tax credit-an instrument of ~scal, rather than monetary, polIcy. First introduced in 1962 as a means of stimulating capital expenditures over the longer run, the Investment tax credit allows businesses to deduct from tax liabilities a proportion of their expenditures on depreciable machinery and equipment. It has been suggested however that the investment tax 'credit be' ~sed flexibly to moderate fluctua~Ions in business investment spend~~g, effectively substituting for e Use of changes in marginal b:s.e:ve requirements on bank Hat ilihes. When business spending hreatens to become excessive fhnerating i~flationary pressu~e, te e t:u credi.t could be lowered, ndmg to dIscourage business spending without increasing the Cost of credit to the rest of the eC?nomy. Similarly, it could also be raIsed to stimulate business in- ::--- vestment spending selectively. To be fully effective for this purpose, though, the coverage of the investment tax credit would need to be broadened to apply to investment in inventories and buildings. As its influence could not be weakened by shifts between different forms of financing, the investment tax credit might well be more effective than selective controls over bank credit as an instrument for stabilizing business spending. Variations in the investment tax credit could affect the profitability of all kinds of business investment, regardless of the channels through which projects were financed. As its influence could not be weakened by shifts between different forms of financing, the investment tax credit might well be more effective than selective controls over bank credit as an instrument for stabilizing business spending. Recognizing the advantages of such an approach, the Board of Governors has recommended to Congress that priority consideration be given to legislation allowing more flexible use of the investment tax credit. 2 Experience suggests that, if the investment tax credit is to be adjusted promptly as circumstances change, authority for making such adjustments would have to be delegated to the executive branch. But this could be done without seriously undermining the ultimate power of Congress over taxes by prescribing limits to the changes the President could make and by reserving for Congress the power to veto any such changes within, say, 60 days. -Adrian W. Throop 2. Se" "Ways to Moderate Fluctuations in the Construction of Housing," Federal R eBerve Bulletin, March 1972, especially pp. 228-225. llllS' !neSS Review / November 1974 11 Digest of recent changes in Federal Reserve regulations affecting liability management banking Regulatory change December 6, 1965 Increased the maximum interest rates on all time deposits and certificates of deposit from 4 percent to 51;2 percent for those of less than 90 days and from 41;2 percent to 51;2 percent for those of 90 days or more. Maintained the maximum rate on passbook savings deposits at 4 percent. July 14, 1966 Raised from 4 to 5 percent the reserve requirement against time deposits (other than savings deposits) in excess of $5 million. July 20, 1966 Reduced the maximum interest rates on multiplematurity time deposits from 51;2 to 4 percent for those of less than 90 days and from 51;2 to 5 percent for those of 90 days or more. September 1, 1966 Amended Regulations D and Q to bring certain promissory notes issued by member banks within the coverage of the definition of deposits. September 8, 1966 Raised from 5 to 6 percent the reserve requirement against time deposits (other than savings deposits) in excess of $5 million. September 26, 1966 Reduced from 51;2 to 5 percent the maximum interest rate on single-maturity time deposits under $100,000, under a new authority allowing differentiation among time deposits according to size. April 19, 1968 Allowed graduated increases in the maximum interest rates on single-maturity time deposits of $100,000 or more. Maintained the interest ceiling on those maturing in 30 to 59 days at 51;2 percent. But increased the ceilings from 51;2 percent for other large time deposits: to 5% percent for those with maturities of 60 to 89 days, 6 percent with maturities of 90 to 179 days, and 67'4 percent with maturities of 180 days and over. Purpose To enable member banks to attract and retain deposits. To exert a tempering influence on the issuance of large CD's and to apply some additional restraint on the expansion of bank credit to business and other borrowers. To help forestall excessive interest rate competition among financial institutions at a time when monetary policy was aimed at curbing the rate of expansion of bank credit. To prevent future use of these instruments as a means of circumventing the regulations governing reserve requirements and the payment of interest on deposits. To further discourage reliance on large CD's as a base for credit expansion in the face of continuing strong loan demands. To limit further escalation of interest rates paid in competition for consumer savings and to moderate the growth of bank credit. To enable banks to resist further large reductions in large CD's but not permit a significant expansion in them and, thus, in bank credit. July 25, 1969 Narrowed the scope of member bank liabilities under repurchase agreements that are exempt from Regulations D and Q. To prevent the avoidance of reserve requirements and the rules governing payment of interest on deposits by the use of repurchase agreements. September 4, 1969 Established a 10-percent reserve requirement against certain foreign borrowings, primarily Eurodollars, by member banks and against the sale of assets to their foreign branches. To remove a special advantage to member banks that had used Eurodollars not subject to reserve requirements to adjust to domestic credit restraint. ---------------------------------------------------------------------~ 12 Regulatory change January 21, 1970 !ncreased from 4 to 4Yz percent the maximum mte~est rate on savings deposits. Increased the maxunum rate on all time deposits of less than $100,000 by one-half to three-fourths of a percentage point, depending on maturity. Increased the maxunum rate on all time deposits of $100,000 or mor~ by three-fourths to 1~ percentage points, dependmg on maturity. February 12, 1970 Amended Regulations D and Q to narrow the category of Federal funds transactions that are exempt from reserve requirements and interest rate limitations. June 24, 1970 Susp~nded ceilings applying to the interest rates on smg!e-maturity time deposits of $100,000 or more wlth maturities of less than 90 days. Purpose To introduce greater equity into rates payable to small savers while facilitating an increase in the pool of savings for investment in mortgage loans. To prevent the future use of Federal funds transactions with business customers as a means of circumventing the regulations governing reserve requirements and the payment of interest on deposits. To place member banks in a better position to obtain funds with which to meet unusual demands for short-term credit accommodation as a consequence of serious uncertainties in financial markets. June 30,1970 Narrowed the category of member bank subordinated notes that aFe exempt from reserve requirements and interest rate limitations increasing the minimum original maturity from two to seven years. To prevent the future use of these instruments as a means of circumventing the regulations governing reserve requirements and the payment of interest on deposits. September 17,1970 Amended Regulation D to establish a 5-percent reserve requirement against bank-related commercial paper. To put instruments of this kind on a more nearly equal footing with negotiable CD's issued by banks. October 1, 1970 Lowered from 6 to 5 percent the reserve requirement against time deposits (other than savings deposits) in excess of $5 million. To offset the increase in required reserves stemming from the September 17 change and to release extra resewes to the banking system. May 16,1973 Lo,,:"ered to 8 percent the reserve requirement agamst certain foreign borrowings, primarily Eurodollars, by member banks. Established an 8percent marginal reserve requirement (the reguIa~ 5 percent plus a supplemental 3 percent) agamst the sum of further increases in singlematurity time deposits of $100,000 or more and bank-related commercial paper, . but in no case w~e~e the amount outstanding is less than $10 ~lllihon. And suspended ceilings applying to the mterest rates on single-maturity time deposits of $100,000 or more with maturities of 90 days or more. To curb the rapid expansion of bank credit, while at the same time assuring the availability of credit on a reasonable scale, and to provide roughly parallel treatment with respect to reserve requirements against Eurodollar borrowings, large CD's, and bank-related commercial paper. Recent growth of bank credit had been stimulated considerably by increases in loans to business corporations, which were largely financed by increased issuance of the money market instruments covered by this change. (Continued) "---------------------------------------------------n llsin ass Review I November 1974 13 Regulatory change Purpose July 1,1973 Increased the maximum interest rates on passbook savings deposits from 4112 to 5 percent and on all time deposits of less than $100,000 by one-fourth to three-fourths of a percentage point, depending on maturity. To provide a greater measure of equity in the payment of interest to consumers and enable member banks to bid more effectively for consumer deposits in an environment where interest rates were generally rising. July 12, 1973 Established a basic 5-percent reserve requirement against funds raised by member banks through sales of finance bills. Established an additional 3-percent reserve requirement against the sum of finance bills, all time deposits of $100,000 or more, and bank-related commercial paper in excess of the amount outstanding during the week ended May 16, 1973, or $10 million, whichever is larger. And eliminated the distinction between multiplematurity and single-maturity time deposits in the regulation of maximum interest rates and reserve requirements. October 4, 1973 Raised from 8 to 11 percent the marginal reserve requirement against the sum of time deposits of $100,000 or more, bank-related commercial paper, and finance bills. December 13, 1973 Lowered from 11 to 8 percent the marginal reserve requirement against the sum of time deposits of $100,000 or more, bank-related commercial paper, and finance bills. September 5,1974 Reestablished a uniform 5-percent reserve requirement against all time deposits of $100,000 or more, bank-related commercial paper, and finance bills with maturities of at least four months. Maintained an 8-percent marginal reserve requirement against such instruments with maturities of less than four months and in excess of the amount outstanding during the week ended May 16, 1973, or $10 million, whichever is larger. To provide parallel treatment with respect to reserve requirements against funds raised through finance bills, large time deposits, and bank-related commercial paper. To further curb the rapid expansion of bank credit to business firms. To reduce the costs to banks of accommodating credit demands of their customers, in recognition of the recent moderation in bank credit growth, including a much slower pace of expansion for business loans. Primarily to encourage banks to lengthen maturities on large time deposits and related obligations. NOTE: Adapted from "Record of Policy Actions of the Board of Governors," Annual Report of the Board of Governors of the Federal Reserve System, 1965 through 1973, and Federal Reserve Bulletin, September 1974 ------------------------------------------------------------------------~ 14 New member bank The West Loop National Bank, Houston, Texas, a newly organized institution located in the territory served by the Houston Branch of the Federal Reserve Bank of Dallas, opened for business October 7, 1974, as a member of the Federal Reserve System. The new member bank opened with capital of $600,000, surplus of $600,000, and undivided profits of $300,000. The officers are: W. H. Fenoglio, Jr., President; Raymond Mikeska, Jr., Vice President and Cashier; and J. Doug Toole, Jr., Vice President. New par banks The Harlingen State Bank, Harlingen, Texas, a newly organized insured nonmember bank located in the territory served by the San Antonio Branch of the Federal Reserve Bank of Dallas, opened for business September 23, 1974, remitting at par. The officers are: Wayne D. Grayson, President, and Michael O'Connell, Cashier. The Addicks Bank, Addicks, Texas, a newly organized insured nonmember bank located in the territory served by the Houston Branch of the Federal Reserve Bank of Dallas, opened for business October 1, 1974, remitting at par. The officers are: James L. Emerson, President, and Jon A. Franz, Vice President and Cashier. ...... lluSine R . Ss eVlew / November 1974 15 Federal Reserve Bank of Dallas November 1974 Statistical Supplement to the Business Review ~otal ~redit at weekly reporting anks m the Eleventh District rose COntraseasonally in the four weeks :nded October 16. All of this rise . epresented net bank investment In " . Secun't'Ies, pnnclpally municipal ~ues, as overall loan demand conlnued to be subdued. l' 'I'otalloans declined about in slne with seasonal expectations. A ntnaller than usual decline in busiwess loans, however, offset greater Ceakness in other types of loans inonsumer loans weakened, reve~s ovg the trend of recent weeks. More£ er, real estate loans declined qor the first time since the third Uarter of last year. Concern over COntin' '. abl umg pnce mcreases has probC y been the main factor in the re~~t ~eakening of loan demand, t h Increasing costs and high in. consumers terest r a t es promptmg o.j,pend very ?autiously. 1'0 otal depOSIts at District banks sharpI~ in the four-week peto refi~ctmg large net additions an~ bec~mg accounts of individuals S usmesses in the final week. d~rne of this increase probably was ite~to. a SUbstantial gain in cash th s In the process of collection at Week 1'he . '. CO, nse m the volume of large con ~ outstanding continued to be w slderably more than usual but oth P~tially offset by decreases in l'h er hme. and savings deposits. sa~esultmg. gain in total time and With gs depOSIts was about in .line seasonal expectations. l'hes ind e~sonally adjusted Texas tno~:tnal.production index rose OUtpust~y m September. Industrial thto t In Texas had been strong cl'ea~gh~ut most of the year, intnOllt ng In seven of the first nine hs. The September gain, which l'i:J h followed a slight decline in August, was well diversified among the state's industries. Manufacturing activity turned upward after declining in August. The upturn was due primarily to sizable increases in the output of chemicals and in petroleum refining-the two most heavily weighted components of the index. Durable goods production was also up, even with continued weakness in building-related industries. Lower recovery of crude oil and natural gas resulted in a fall in mining activity. Output of utilities was up sharply, however, as the distribution of both electricity and gas was well above August. were off 13 percent from the previous year. Seasonally adjusted department store sales in the Eleventh District fell 2 percent from mid-September to mid-October. Sales had softened since midsummer, with the sharpest reductions in purchases of furniture and appliances. Agricultural conditions in states of the Eleventh District were generally mixed in October. Cool, wet weather slowed the harvest of cotton and grain sorghum but boosted pasture and range growth, filled stock tanks, and provided a favorable start for small-grain crops. Early-planted wheat provided limited grazing in the Texas PanSeasonally adjusted employment in handle, and demand for stocker the five southwestern states was cattle for winter grazing increased. mixed in September, but, on balLivestock in most areas of the Disance, the labor market appeared to trict were in good condition. In weaken. The number of jobholders Texas, the citrus crop was expected was up for the third consecutive to be a fifth less than last year, or month, although the rate of inthe smallest since 1969. crease was down slightly from the Based on October 1 conditions, previous two months. Accelerated crop production in District states growth of the labor force, however, was sharply below the 1973 harvest. resulted in a sharp rise in unemRice, corn, soybean, and sweet poployment statistics. The number tato crops were larger, but most of jobless workers jumped 5.6 perother crops were considerably cent to a level 12 percent higher smaller. than a year earlier. As a result, Beef production, on the other the unemployment rate reached hand, had increased considerably 5.0 percent-the highest level in over a year earlier, even with a three years. sharp drop in the number of cattle on feed. A gain in marketings of New car sales, seasonally adjusted, cows and grass-fed cattle more than in the four largest metropolitan offset a decline in grain-fed cattle counties of Texas rose 0.4 percent slaughter. Milk production had in September. That was the third slowed, primarily because dairyconsecutive month that sales had men, in an effort to lower feed costs shown a gain. The rate of growth and improve depressed incomes, declined steadily over the three have reduced their herds. Pork months, however, as inventories of production and wool and mohair 1974 models were depleted. Sales of (Continued on back page) new cars in the 1974 model year CONDITION STATISTICS OF WEEKLY REPORTING COMMERCIAL BANKS Eleventh Federal Reserve District - (Thousand dollars) ASSETS Federal funds sold and securiti es purchased under agreements to resell ......... Other loans and discounts. gross Commercial and Industrial loans . Agricultural loans. excluding CCC certi fic ates of interest ............. Loans to brokers and dealers for purchasing or carrying : U.S. Government securities ...... Other securiti es Other loans for purchasing or carrying : U.S. Government securities .. Other securities ................................ Loans to nonbank financial Institutions: Sales finance. personal finance. factors. and oth er business credit companies ... Other . Real estate loans ..................................... Loans to domestic commercial banks . Loans to foreign banks . Consumer Instalment loans ......... Loans to foreign governments. official Institutions. central banks. and International .................... institutions .. Other loans ......... Total Investments . Total U.S. Government securities ... Treasury bills .................... Treasury certificates of Indebtedness Treasury notes and U.S. Government bonds maturing : Within 1 year .. 1 year to 5 years .. After 5 years ................................................ Obligations of states and political subdivisions: Tax warrants and short-term notes and bills . ..................... All other Other bonds. corporate stocks. a"'(j securities: Certificates representing participations In federal agency loans .......................... All other (Including corporate stocks) ..... Cash Items In process of collection ......... Reserves with Federal Reserve Bank Currency and coin ..................................... Balances with banks In the United States ................ Balances with banks In foreign countries ................ Other assets (Including Investments in subsidiaries not conSOlidated) . Oct. 16. 1974 Sept. 18. 1974 Oct. 17. 1973 1.073,481 10.502.711 1.202.129 10.517.817 1.059.511 9.595.161 4.725.929 4.734.735 4.285.195 243.247 252.659 283.662 1.232 33.014 1.253 35.309 850 47.923 5,409 428.010 5.292 432.765 6.903 471.767 Oct. 16. 1974 LIABILITIES Total deposits . 154,455 740.559 1.558.894 53.160 73.194 1.119,427 169.578 719 .125 1.564.974 47.054 93.745 1.121.050 150.357 632.246 1.368.282 29.465 71.673 1.050.424 17 1.366.224 4.253.610 73 1.340.205 4.175.540 270 1.190.144 4.006,499 904.277 93.692 0 910.294 96.375 0 976.211 172.942 0 154,465 483,482 172.638 135.506 521.900 156.513 158.366 487.526 157.371 158.982 2.871.526 183.454 2.766.108 138.965 2.622.730 20.358 298.467 2.235.520 1.121 .518 133.D47 502.860 27.356 14.336 301 .348 1.541.540 1.059.898 130.248 420.699 26 .067 8.363 260.230 1.581.719 991 .786 121,450 443,460 16.046 924.037 804,481 921 .944 Total demand deposits . Individuals. partnerships. and corporations .. States and political subdivisions .. U.S. Government ........ Banks In the United States . Foreign : Governments. official Institutions. central banks. and international Institutions . Commercial banks ...... Certified and officers' checks: · ~ic . . Total time and savings deposits ........................... Individuals. partnerships. and corporations: Savings deposits ......................................... Other time deposits ........................ States and political subdivisions .................... U.S. Government (Including postal savings) .. Banks In th e United States ............................ Foreign : Governments. official Institutions. central banks. and International Institutions ... Commercial banks Federal funds purchased and securities sold under agreements to repurchase ..... Other liabilities for borrowed money . Other liabilities ...... ...................... Reserves on loans ......... Reserves on securities . Total capital accounts TOTAL LIABILITIES. RESERVES. AND CAPITAL ACCOUNTS . - Oct. 17. 1973 15.659.393 14.965.583 13663. 628 ~ 7.826.228 7.178.912 6838.7 12 5.632.867 5.099.677 4'951.855 '309.516 479.946 533.837 138.846 166.417 92.891 4 1.271,61 1,383.605 1.209.144 3.142 77.997 155.780 7.833.165 2.385 64.945 102.507 7.786.671 3.112 49.829 113.9 40 6.824.856 1.138.131 4.536,409 2.004.399 10.289 120.174 1.129,426 4.445.869 2.064.971 10.272 114.366 1135.169 3'799. 194 1'131 .482 . 21.53 4 111 .451 12.676 11 .087 11.780 9.981 2.185.871 160.563 582.571 187.564 21,441 1.374.692 2.640. 137 229.304 591.366 187.963 20,436 1.363.186 20.712.107 19.997.975 25.40 0 20 2180. 005 '220.598 535.56~ 161.82 14.421 1 231,105 ~ ~ DEMAND AND TIME DEPOSITS OF MEMBER BANKS Eleventh Federal Reserve District -- (Averages of dally figures. Million dollars) I TOTAL ASSETS .. Sept. 18. 1974 TIMEDEPOS~ DEMAND DEPOSITS 20 .712.107 19.997.975 18.619.753 U.S. I gs Date Total Adjusted ' Government Total S~ -19-7-2-:-S-ep-t-em-be-r-..--1-2-.6-1-9 ---8.-9-33---- 2-5-4----1-1.-49-2- - - - : 2:•744 1973: September... October .. November .... Decem ber .. .. 1974: January ........ February ...... March April .. May .. ........ June July . August.. .. September.. CONDITION STATISTICS OF ALL MEMBER BANKS Eleventh Federal Reserve District (Million dollars) Item ASSETS Loans and discounts. gross . .. .................. . U.S. Government obligations Other securities ................................. . Reserves with Federal Reserve Bank Cash in vault .............................................. . Balances with banks In the United States . Balances with banks In foreign countrlese Cash items In process of collection Other assetse .................................................. . TOTAL ASSETse LIABILITIES AND CAPITAL ACCOUNTS Demand deposits of banks .................. . Other demand depoSits Time deposits .... Total deposits .................... .................... . Borrowings ....... Other lIabllltiese Total capital accountse TOTAL LIABILITIES AND CAPITAL ACCOUNTSe e-Estlmated Sept. 25. 1974 Aug. 28. 1974 Sept. 26. 1973 20.920 2.064 6.803 1.683 381 1.227 35 1.872 1.662 20.981 2.100 6.775 1,473 383 1.286 33 1.682 1.691 18.945 2.244 6.089 1.562 350 1.249 17 1.722 1.523 36.647 36.404 33.701 1.597 11 .826 15.678 1.662 11.834 15.579 1.584 11 .317 13.716 29.101 3.363 1.590 2.593 29.075 3.174 1.572 2.583 26.617 3.394 1.347 2.343 36.647 36.404 33.701 13.039 13.289 13.455 14.008 14.384 13.949 13.933 13.984 13.553 13.742 13.809 13.634 13.740 9,442 9,461 9.816 10.086 10.276 10.082 10.150 10.289 9.880 10.030 10.056 9.988 9.973 208 239 167 244 302 264 260 236 278 240 212 175 222 13.618 2 .~~~ 13.795 2. 71 13.953 2'~83 14.154 2. 14.533 2.~~g 14.919 2'958 15.126 ~'915 15.143 2:962 15.148 2.979 15.333 83 15,442 2.9 2956 15.509 2'952 15.586..::::---- ------~---------------------------------------------- s ca5~ 1. Other than those of U.S. Government and domestic commercial bankS. le5 Items In process of collection RESERVE POSITIONS OF MEMBER BANKS Eleventh Federal Reserve District (Averages of dally figures. Thousand dollars) ~ ----------------------------------------------~:n~ded 4 weeks ended 4 weeks ended 4 weekS e913 Item Oct. 2. 1974 Sept. 4. 1974 O~ -T-o-ta-l-re-s-er-v-es-he-ld-- -.-.. -...----2-.0-0-1.-94-1---2.0-21-.-58-1---::-: 1·m·g~~ With Federal Reserve Bank ... 1.659.000 1.684 .363 1. 3'092 Currency and coin ... 342.941 337.218 1 ~~6:588 Required reserves ....... 1.975.887 2.005.361 . _499 Excess reserves ............ ............. 26 054 16 220 535 Borrowings ..... ............................ .. .. 164:702 177:019 _1~~:034...-Free reserves ........................ - 138.648 -160.799 ~ --------~~~~--------------~------ BANK DEBITS, END-Of-MONTH DEPOSITS, AND DEPOSIT TURN OVER SMSA's in Eleventh Federal Reserve Distri ct (Dollar amounts In thousands, seasonally adjusted) - DEBITS TO DEMAND DEPOSIT ACCOUNTS ' DEMAND DEPOSITS' Percent change Standard metropolitan statistical area ARIZONA: Tucson LOUISIANA: Monro~ :: .... Shreveport NEW MEX ICO: Roswell ' TEXAS: Abilene ........ Amarillo ........ ~~~~~O;;i~PortArthur~6;ii;;ge· •••••••• Brownsville-Harlingen-San Benito . Bryan-College Station ...... gorpus Christi ............... orslcana' .. Dallas .... EI Paso .. .. ...... Fort Worth .................... Galveston-Texas City .. ~~I~!t~_~e;;;pie """"'''' ................. " .. Laredo ...... Lubbock .......................... McAlien-Pharr-Edlnburg ......... , ............. ~~~:~~ ............................ San Angelo ... ~~~r~~~-~~;;iso;; ... .. ............... iexarkana (Texas-Arkan;iils) ·. -- W!~~ Wichita Falls .................... ...................... Total-30 centers Sep\. 1974 from Sep\. 1974 (Annual-rate basis) Aug. 1974 $16.686.222 5.681.226 20.229.310 1.350.632 3.938.666 10.089.725 22.352.381 11,405.896 3,477.002 1.786.697 11 .284.200 730.355 260,457.734 14.185.369 35.894.042 4.747.452 249.750.830 2.622.370 1.987.391 9.067.973 3.827.725 3,893.586 2.968.204 2.692.702 32.878.429 1.712.986 2.137.752 3.658.259 6.011.551 5.974.290 -5% - 3 - 13 -7 - 12 - 13 11 2 -27 9 8 - 11 - 1 3 - 6 0 9 1 -2 - 10 - 5 - 6 -5 -7 3 4 -1 - 3 13 21 $753,480.957 2% Annual rate of turnover 9 months, 1974 from 1973 Sep\. 30. 1974 Sep\. 1974 Aug. t974 Sep\. 1973 16% 20 21 14 19 -2 36 38 23 3 33 11 19 13 13 28 53 11 23 14 24 51 27 26 22 2 12 15 32 69 23% 15 24 20 31 13 35 31 32 15 36 17 33 24 21 20 35 9 31 35 19 41 23 31 15 9 8 15 15 43 $360.392 123,407 384.680 52.151 146.665 236,637 451.305 322.827 120.329 59.057 297.283 38.566 3.091 .610 317.200 932.679 145.948 3.876.064 125.335 68.331 222.614 157.675 213.837 119.569 89.387 900.172 86,461 96.960 147.345 159.618 172.926 45.1 45 .2 55.3 25.9 26.9 43 .1 49.0 36.0 28.5 30.0 38.1 18.9 83.0 44.8 39.6 33 .2 65.9 21 .5 29.5 38.9 24.2 18.9 24.8 29.2 36.7 19.9 22.6 25.7 38.1 35.2 47.0 46.0 65.4 27.5 30.1 49.7 43.8 35 .7 38.1 27.0 35.1 20.3 83.3 40.8 42.9 33.6 61.0 21 :6 30.8 41 .3 25.6 20.6 25.8 30.2 35.6 19.4 23.1 26.3 32.9 29.5 41 .0 39.7 52.4 23.5 23.7 46.9 37.3 28.9 24.0 30.3 29.5 16.1 78.0 39.7 37.3 28.5 49.6 19.9 25.0 35.5 19.9 16.1 22.4 26.5 30.2 20.3 21.2 25.6 29.7 23.6 30% $13.517.030 56.1 55.2 47.7 29% Sept. 1973 1. Co Oep as Its of Individuals. partnerships and corporations and of states and political subdivisions 2. • unty basis CONDITION Of THE fEDERAL RESERVE BANK Of DALLAS BUILDING PERMITS (ThOusand dollars) ...... VALUATION (Dollar amounts In thou sands) - Oc\. 23. 1974 Item lotal I lOan go d certificate reserves . Othe~ I~ member banks .... ....... ~aderal ans .............................. U.S G agency obligations ...... lotil! e~~~;nment securities ..... Mambe b ng assets ................. !'Odar rank reserve depOSits Clrc~\~~~~rve notes In actual ---=::: 335.763 139.961 0 180,667 3,589,503 4,245,894 1,712,333 ......... 2,594,840 Sep\. 25. 1974 Oct. 24. 1973 554.472 133,417 0 176,368 3,525,418 3,835,203 1,683 ,109 676.011 181 .061 0 73 ,015 3,215,171 3,469,247 1,832,663 2,576,235 2,370,621 VALU E Of CONSTRUCTION CONTRACTS (Milil on dOllars) ........ January-September ~eaa ndtyp e !'IVE SI~~EUS~HWESTERN Sep\. 1974 Aug. 1974 July 1974 1,538 930 369 398 665 Non~eSldential building 321 504 211 UNllEOUlldlng construction 9,295 Ras STATES 8,416 3,350 Nonl~entlal building 3,060 3,698 3,246 Nonb~~:~rntlal building . ~ ng construction .... 2110 2247 Arl20na L " NQ~eVlsed' oulslana, New Mexico, Oklahoma, and Texas ~~~Identlal building r 1,255 325 561 370 8,359 2,503 3,320 2,536 SOUE: Details RCE: F Wmay not add to totals because of rounding . . . Dodge, McGraW-HIli , Inc. 1974 1973r 9,562 3,487 3,779 2,296 72,882 28,304 26,270 18,308 8,917 4,224 3,137 1.556 76,761 36,633 24,138 15,990 Percent change Sep\.1974 from NUMBER Sep\. 1974 9 Mos. 1974 Sept. 1974 9 mos. 1974 421 4,611 $4,471 $65,922 60 693 579 6,595 815 5,415 15,846 80,105 TEXAS 65 Abil ene ............ 433 Amarillo ........ 454 Au stin... 125 Beaumont . 102 Brownsville .. 197 Corpus Christi .. 1,055 Dallas 23 Denison 511 EI Paso. 288 Fort Worth ........ 41 Galveston 1,489 Houston ....... 25 Laredo .............. Lubbock ............ 155 58 Midland 59 Odessa ............ 78 Port Arthur ........ 46 San Angelo San AntoniO ..... 2,773 24 Sherman 55 Texarka na 170 Waco ............ 43 Wichita Falls 693 3,776 4,298 1,624 979 2,167 12,478 203 4,635 3,268 480 18,003 315 1,437 652 915 622 603 17,214 263 583 1,911 656 992 5,579 38,479 1.013 3,049 5,728 12,892 171 11,730 5,368 827 28,164 111 4,543 1,130 359 313 720 5,882 332 486 748 952 12,499 49,302 205,7701 34,325 23,521 49,462 253,452 1,434 137,763 111 ,824 30,152 494,856 7,968 109,106 26,232 14,960 1,967 11 ,042 147,954 4,300 6,581 31,774 11 ,134 9,443 89,560 Area ARIZONA Tucson .. LOUISIANA MonroeWest Monroe .... Shreveport.. ..... Total 26 ci ties .. - - $140,269 $1,939,252 Sep\. 1973 9 months, 1974 from 1973 -61% -51% - 81 48 -59 -32 - 30 22 - 9 - 19 286 - 6 - 1 119 -21 122 44 -24 -9 -58 - 8 -55 2 -73 78 14 -21 101 13 -90 17 180 139 591 - 90 455 - 9 -61 - 81 - 8 2 70 0 - 7 -39 14 - 59 122 - 12 - 68 -229 163 - 82 - 61 - 36 25 11 5 2 14 - 2 -49 - 1 25 316 - 5 -46 96 15 31 - 58 34 - 21 - 16 35 2 -59 Aug. 1973 11 % - 16% - 14% 0% DAILY AVERAGE PRODUCTION OF CRUDE OIL LABOR FORCE, EMPLOYMENT, AND UNEMPLOYMENT (Thousand barrels) Five Southwestern States' Percent change from Area Sept. 1974 Aug. 1974 Sept. 1973r Aug. 1974 FOUR SOUTHWESTERN STATES ......................... , Louisiana .. New Mexico .. Oklahoma . Texas .... ...... .. ... Gulf Coast . West Texas . East Texas (proper) ." Panhandle . Rest of state .. UNITED STATES 6,23.0.9 1,939.6 263 ..0 476.7 3,551 .6 7.01 .3 1,869.8 23.0.8 6.0.1 689 .6 8,8.09.1 6,313.1 1,964.9 271.7 479.6 3,596.9 712.8 1,887.7 234 ..0 61 ..0 7.01.4 8,913.9 6,482.4 2,137 ..0 268.3 54.0.9 3,536.2 691 .3 1,843.1 2.03.9 58.9 739 ..0 9,.076.8 -1 .3% -1.3 -3.2 - .6 -1.3 -1 .6 -1 ..0 -1.4 -1 .5 -1 .7 -1 .2% - (Seasonally adjusted) Sept. 1973 - 3.9% - 9.2 -2 ..0 -11 .9 .4 1.5 1.5 13.2 2..0 -6.7 -3 ..0% r-Revlsed SOURCES : American Petroleum Institute U.S. Bureau of Mines Federal Reserve Bank of Dallas Percent change Sept.1974f~m Thousands of persons Item Civilian labor force Total employment ........ Total unemployment.. Unemployment rate Total nonagricultural wage and salary employment .. Manufacturing .. Durable Nondurable . Nonmanufacturlng Mining ... .............. Construc tion ............ Transportation and public utilities Trade ... Finance Service .. ...... .... Government . Sept. 1974p Aug. 1974 Sept. 1973r Aug . 1974 9,.013 .1 8,566.1 447 ..0 5 ..0% 8,961 .8 8,538.6 423.3 4.7% 8,738.3 8,34.0 ..0 398.3 4.6% .0.6% .3 5.6 7,5.04.4 1,286.8 723.8 563 ..0 6,217.6 249.2 494.2 7,444.6 1,277 .7 713.8 563.9 6,166.9 246.3 493.6 7,27.0.8 1,264.8 712.5 552.3 6,0.06.0 238.4 493.5 509.1 1,803.7 416.7 1,246.8 1,497.9 505.7 1,793.6 414.4 1,24.0.1 1,473.1 489.5 1,736.5 395.6 1,208.8 1,443.6 - 3.1% 2.7 12.2 '.3 '.4 .8 .7 1.4 - .2 .8 1.2 .1 3.2 1.7 1.6 1.9 3.5 4.5 .1 .7 .6 .6 .5 1.7% 1. Arizona, LOUisiana, New Mexico , Oklahoma, and Texas 2. Actua l change p-Prellmlnary r-Revlsed NOTE : Details may not add to totals because of rounding . SOURCES : State employment agencies Federal Reserve Bank of Dallas (seasonal adjustment) CROP PRODUCTION sept. 1973 4.0 3.9 5.3 - U% (Thousand bushels) FIVE SOUTHWESTERN STATES' TEXAS Crop Cotton' Corn . Winter wheat .. Oats .. . Barley ....... ... Rye ............... Rice' ............. Sorghum grain . Flaxseed Hay' .. Peanuts' .. Irish potatoes' ...... Sweet potatoes' . Pecans' Soybeans .. 1974, estimated Oct. 1 3,126 69,75.0 52 ,80.0 8,10.0 1,350 200 25,335 295,00.0 374 4,810 454,50.0 2,863 65.0 4.0,.00.0 6,500 1973 1972 4,699 60,80.0 98,600 26,650 3,510 648 2.0,530 417,.000 80 5,808 471,225 3,778 855 2.0,.000 8,5.0.0 4,277 39,56.0 44,00.0 9,720 1,980 630 22,122 319,780 165 3,899 48.0,455 3,182 813 75,.0.0.0 5,46.0 1. Arizona, LouiSiana, New Mexico, Oklahoma , and Texas 2. Thousand bales 3. Thousand hundredweight 4. Thousand tons 5. Thousand pounds SOURCE: U.S. Department of Agriculture output had been sharply reduced. And even though broiler production had increased swnewhat, fewer eggs had been marketed. Average prices received by Texas farmers and ranchers in the month ended September 15 were down slightly to a level 13 percent below a year earlier. Prices for both meat animals and wool and mohair reflected big month-to-month and year-to-year declines. By contrast, prices for all feed grains and hay were up during the same periods. 1974, estimated Oct. 1 1973 1972 5,117 81,634 2.09,013 11 ,892 12,71.0 965 48,339 343,376 374 1.0,795 722,64.0 6,251 3,975 57,5.0.0 52,9.05 6,446 73,118 280,442 34,948 21,645 1,981 41,924 478,164 8.0 12,964 743,867 6,880 3,825 96,5.0.0 51 ,80.0 6,140 52,795 150,115 16,149 19,334 1,89.0 42,.089 378,218 165 9,734 743,566 6,665 4,113 99,3.0.0 47,371 INDUSTRIAL PRODUCTION (Seasonally adjusted Indexes, 1967 - 1.0.0) Area and type of Index TEXAS Total Industrial production ..... ...... Manufacturing ..... ... ........................ Durabla ........ Nondurabla .. Mining ..... ...... ,., ................. Utilities ...... ............ " ..... UNITED STATES Total Industrial production Manufacturing .. ...................... Durabla ........ ,', ............... Nondurable Mining . Utilities Aug. 1974 July 1974 Sept. 1973 141.6 148.4 164.1 137..0 118.1 167.8 14.0.7 147.5 162.8 136.5 119 ..0 159.5 141 .1r 147.9 161.8 137.9 117.4r 167.9r 14.0.2 145.4 161.3 133.8 12o.e 165.7 125.5 125.5 121.4 131.2 1.09.7 153.1 125.1 124.7 12.0.5 13.0.5 1.07.6 153.4 125.6r 125.2r 121 .6r 13.o.4r 11.o ..or 152.4r 126.8 126.3r 123.3r 130.7 111 .8 155.8 p-Prellmlnary r-Revlsed SOURCES : Board of Governors of the Federal Reserve System Federal Reserve Bank of Dallas While prices farmers and ranchers received fell, prices they had to pay continued to climb-intensifying the cost-price squeeze. The index of prices paid by farmers and ranchers was 17 percent higher than in September 1973. Cash receipts from farm and ranch marketings in District states in the first eight months of this year totaled $6.9 billion-only slightly higher than a year before. A sharp rise in crop sales more than offset a marked decline in livestock receipts. - Sept. 1974p ----