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FEDERAL RESERVE
OF ST. LOUIS
BANK
• P . O . B O X 4 4 2 • S T . L O U IS 6 6 , MO.
Page
Interest Rates in Perspective
2
Reduction of Margin Requirements on Stocks
5
Earnings of District Member Banks in the First Half of 1960
6
Changes in Member Bank Reserve Requirements
7
Commercial Bank Liquidity
8
Bank Debits in the Eighth District
12
This issue released on August 16
VOL. 42 • No. 8 • AUGUST ’60
Interest Rates in Perspective
] M o VEMENTS IN INTEREST RATES have
caused considerable public comment in recent years.
Last year when interest rates on marketable securi
ties were rising to new postwar highs some alarm was
expressed. More recently as interest rates have been
declining there has been concern over the level and
trend of yields. This article comments on interest
rates, reviews recent changes in them, and attempts
to put the changes into perspective.
Preliminary Observations
Interest rates are prices, expressed as percentages
rather than in dollars and cents, paid for the use of
money. In our market system interest rates, like
other prices, serve to allocate a limited supply of
funds among competing demands. Movements in
interest rates reflect changes in the relationship be
tween the demand for and supply of funds. An in
crease in the supply or a weakening in the demand
tends to lower rates. Conversely, a decrease in the
supply or a strengthening in demand tends to raise
them.
There is a wide array of interest rates, reflecting
differences in credit risk, maturity, taxability, and
marketability. Some rates are quite sensitive to
changes in demands and supplies of funds, such as
those on Federal funds, Treasury bills and most other
money market instruments.1 On the other hand,
some administered rates are fairly rigid; for example,
those on savings bonds. Generally, rates on long
term securities are more sluggish than those on short
term issues, but prices of long-term obligations usually
fluctuate more than prices of short-term instruments
as a result of a change in yields.
The supply of credit funds comes primarily from
savings. If people save more, other things equal,
more credit will be available; conversely, if the flow
of saving is reduced the amount of new credit ex
tended tends to contract. Saving can be supplement
ed by an expansion of bank credit (and thus the
money supply), but year-to-year additions to total
bank credit are usually small compared to the flow
of saving. The total supply of new credit—saving
plus bank credit—generally has not changed greatly
within short periods. On the other hand, there have
1 See articles on "The Federal Funds Market’*, and "Treasury B ills", in
the April I960 and July I960 issues of this Review, respectively.
been wide fluctuations in the amount of credit de
manded. Thus, most short-run movements in inter
est rates reflect changes in the demands for funds,
but the amount of saving has an important impact on
longer run interest rate levels.
Interest rate changes usually contribute auto
matically to economic stability. During a period of
business contraction, the demands for credit usually
decrease and interest rates decline. Lower interest
costs and greater availability of credit tend to stimu
late and to encourage economic recovery. On the
other hand, sharply rising business levels are gen
erally accompanied by greater demands for credit
and rising yields. The higher rates tend to restrain
exuberance.
Monetary policy, since 1951, has not attempted to
prevent interest rates from adjusting with changes in
the market demands and supplies of funds. The im
mediate objective of the central bank is to manage
the quantity of member bank reserves with a view to
influencing the money supply. Of course, the central
bank buys and sells securities in order to affect bank
reserves, and these operations influence interest rates.
Also, a change in bank reserves tends to cause com
mercial banks to expand or contract credit which may
further affect interest rates. Nevertheless, monetary
actions are not taken to establish any particular pat
tern or level of rates.
Changes in interest rates affect almost everyone.
Exactly how they affect each person or business
concern is a difficult question to answer. Lenders
obviously benefit from higher rates, and borrowers
gain from lower rates. But it is not always easy to
know who is a net creditor and who is a net debtor.
From the consumer viewpoint, higher interest rates
mean greater costs on new mortgages and automobile
financing, but they also bring increased income from
savings accounts and many other investments. The
net position becomes more blurred and confusing
when changing yields are further analyzed as to
effect on the social security program, pension plans
and insurance premiums, capital gains or losses on
existing assets, tax rates, and the cost of manufac
tured goods. In any case, the nation gains from a
change in interest rates which contributes to economic
stability as against an alternative of economic decline
or price inflation.
corporate bonds from 1890 to 1930 was 4.45 per cent.
Short-term rates were relatively lower; prime 4-to-6month commercial paper yielded 3.97 per cent on the
average in 1959 as against 5.42 per cent in the 18901930 period. Although the quality of the paper may
have improved over this long period, reducing the sig
nificance of these comparisons, there is little doubt but
that the cost of credit has been higher than in 1959.
T he Postwar Trend in Interest Rates
Interest rates in the United States rose irregularly
from the end of World War II through 1959 as busi
ness activity expanded and as inflationary fears grew.
The average rate on long-term Government securi
ties increased from 2.19 per cent in 1946 to 4.27 per
cent in December 1959 (see chart). Average yields
Long- and Short-Term Interest Rates
The postwar rise in interest rates in this country
has been roughly paralleled by similar increases in
other industrialized nations (see chart). Average in
terest rates on long-term Government bonds in the
United States rose from 2.19 per cent in 1946 to
4.27 per cent in December 1959. By comparison
ovpr the same period similar rates in the United King
dom went from 2.55 per cent to 4.99 per cent.
Recent Decline in Interest Rates
1890
1900
1910
1920
1930
1940
1950
Since the beginning of 1960 there has been a
marked decline in interest rates. Yields on short
term Government securities have fallen sharply.
Average yields on three-month Treasury bills fell
from about 4.50 per cent last December to 2.14 per
cent in early August. The decline in yields of other
Government securities has been large but somewhat
less pronounced. Intermediate-term issues fell from
4.95 per cent in December to 3,45 per cent in early
August, and the rate on long-term bonds declined
from 4.27 per cent to 3.73 per cent.
1960
Latest d a ta plotted: 1960, b a s e d on first 7 months.
on three-month Treasury bills increased from 0.38
per cent to 4.49 per cent over the same period. The
rise was irregular, however, with three major inter
ruptions, in 1949, in 1953-54, and
Y ields on Long-Term G overnm ent Bon ds
in 1957-58.
The average rate on highest
grade corporate bonds in 1959
was 4.38 per cent; by comparison
the average rate on highest grade
Selected Countries
Per Cent
8
Q u a r t e r ly A v e r a g e
1
1
...
1
1
■ ....r
i
....... r
i
i
Per Cent
8
i
Fran ce
/
1
It is not enough to judge any
interest rate per se; one must
place rates in historic and geo
graphic perspective and must look
at the economic forces which have
influenced yields, including the
productivity of capital. Although
interest rates in the United States
were higher at the end of 1959
than at any time in several dec
ades, they were not unusually
high when compared with inter
est rates in other industrialized
countries or in this country his
torically.
f
\1
\
\
Uniteci K ingdom
Canada
^
>
'~ ~ C /
X
/.
jr
*
■'V
/
\
1
United Statfes
.... 1
1946
1
1948
1
,1
Latest data plotted: 2nd Qtr. 1960
1951
1
1
1954
i
i
1957
1
1
1960
Declines in the yields of Government securities as
great as the recent one have occurred only twice be
fore since the end of World War II. These decreases
occurred between May 1953 and June 1954 and again
from November 1957 to July 1958. During both of
these periods the decline in rates accompanied an
economic recession. This is the first time since World
War II that interest rates have declined so much and
for so long a period while business activity continued
at a relatively high level.
Despite the apparent severity of the recent decline
in interest rates, rates are still relatively high com
pared with the other postwar years. In fact the cur
rent rate on long-term Government bonds, 3.73 per
cent in early August, is higher than at any time from
the end of World War II to the fall of 1958. This is
also true of interest rates on many corporate and mu
nicipal securities and on many bank loans.
One feature which distinguishes the current interest
rate decline from those which occurred during the
recessions of 1953-1954 and 1957-1958 is the fact
that the yields on corporate and municipal issues and
on mortgages have declined only slightly. Previously,
yields on these debt instruments moved about the
same amount as yields on marketable Government
bonds. On the other hand, most short-term money
rates have reflected the current decline in the Treas
ury bill rates.
Examination of the factors of supply and demand
for funds may reveal the causes of these developments
Yields on U. S. Government Securities
PerCent
W eekly Averages of Daily Figures
P
in the rate level and structure. From the end of De
cember to the end of July, the money supply con
tracted about 1 per cent, which, everything else equal,
might be expected to cause rates to rise. The flow
of saving apparently changed relatively little. It
would appear, therefore, that the recent decline in
rates primarily reflected a weakening in the demands
for funds.
The Federal Government changed its position in
the money markets substantially over the past year
or two. The Government operated at an estimated
cash surplus of about $4.5 billion in the first seven
months of calendar year 1960, compared with a $4.7
billion cash deficit during the corresponding period
of last year. The improved fiscal position changed the
Government from a net borrower of funds to a net
repayer of debt, and the shift has centered on rela
tively short-term securities. Rates on short-term Gov
ernment obligations have fallen rapidly partly because
of the sharp turnabout in the Government’s activity in
this market.
Most other short-term money rates declined also,
probably reflecting the smaller total demand for short
term funds. Commercial paper rates on prime fourto-six-month paper declined from 4% per cent in
January to 3% per cent in early August and over the
same period rates on bankers’ acceptances fell from
4V2 per cent to 3Vs per cent.
Partly because demands for funds by businesses
and state and local governments have remained fairly
strong, most interest rates on securities of these issu
ers have decreased much less than rates on Govern
ment securities. Total loans at commercial banks
rose during the first seven months of 1960, and with
deposits drifting lower, loan rates have not eased
much. The rate charged prime business customers,
5 per cent, has not changed at all.
Mortgage debt continued to rise in the first seven
months of 1960 but at a slower pace than during the
like period a year earlier. The smaller demand for
new funds was accompanied by a slight easing in
the availability of mortgage funds. Interest rates on
mortgages have not declined much from the peak
levels reached early this year, but reportedly, credit
can now be obtained in many areas with a smaller
downpayment and for longer terms.
Page 4
Conclusion
Interest rates in our society are set primarily by the
impersonal forces of the market place. They fluctu
ate chiefly in response to changes in demands for
funds, although shifts in saving flows have an im
portant influence on rate levels. Interest rates allo
cate the available funds among competing uses, and
changes in rates contribute automatically to economic
stability.
Experience indicates that for interest rates to serve
their functions best they must continue to be unen
cumbered and free to move with changing economic
conditions. Nevertheless, there is a tendency to
rationalize that what has occurred in the recent past
is normal and any variation is suspect. Thus, when
ever rates change some people become alarmed.
The climb in interest rates from the end of World
War II through 1959 caused concern. However, when
these rates are put into perspective of other times
and places when business activity was at an advanced
level for a prolonged period and when the productivity
of capital was high, they were not unusually high.
More recently there has been a decline in interest
rates, notably the rates on Treasury bills, but when
placed in the perspective of the entire postwar pe
riod, the current interest rate structure does not ap
pear unusually low.
Reduction of Margin Requirements on Stocks
T h e BOARD OF GOVERNORS of the Federal
Reserve System on July 27 amended Regulations T
and U, relating respectively to margin requirements
of brokers and banks, by reducing margin require
ments from 90 per cent to 70 per cent, effective July
28, 1960. The reduced requirements apply to both
purchases and short sales.
Stock Prices and Credit
Billions of Dollars
1941-43 average = 10
History of Regulation
Prior to 1934, the volume of credit flowing into the
stock market was not subject to direct regulation. The
imposition of controls resulted in part from the belief
that excessive use of borrowed funds to purchase or
carry stocks had contributed importantly to market
collapse in 1929. Also, some felt that an excessive
amount of credit tended to flow into the purchase of
corporate' stocks making borrowed funds for other
purposes more difficult to obtain. The Securities Ex
change Act of 1934 directed the Board of Governors
of the Federal Reserve System to prescribe rules and
regulations with respect to the amount of credit that
may be extended and maintained on any security,
with certain exceptions, registered on a national secur
ity exchange. In accordance with the Act the Board
of Governors has issued Regulation T (dealing with
the extensions of credit by brokers) and Regulation U
( dealing with commercial banks).
Margin Requirem ents
The margin requirements on stocks prescribed in
these regulations fluctuated around 50 per cent in
(Continued on page 11)
Page 5
Earnings o f District Member Banks
in the First H alf of 1960
JjARNINGS from current operations of Eighth
District Member Banks set a new record for the pe
riod from January through June. Though expenses
of member banks also rose, the banks ended the first
half-year with a greater profit margin than in the
similar period of 1959. Banks were therefore able to
increase cash dividends paid to stockholders and to
make a substantial addition to capital accounts.
Earnings
In the first six months of 1960 total income from
current operations of member banks in the Eighth
District was $142 million; this was 13 per cent higher
than in the first half of 1959. The greatest source of
increased earnings this year was interest received
from borrowers, as district banks made more loans, at
generally higher rates of interest, than in the first six
months of last year. Between January and June of
1959, district member banks had an average of $2.8
billion in loans outstanding; during the corresponding
months of 1960 their loans had increased to $3.1 billion.
Meanwhile, average interest rates on loans rose from
about 6.2 per cent in the first half of 1959 to around
6.3 per cent in the first half of this year.
Average yields on Government securities held by
district member banks were also higher this year than
last, but member banks sold a large volume of these
investments during the first half of 1960. As a con
sequence, interest income from U. S. Government ob
ligations rose only slightly this year above that re
ceived by banks during the first half of last year. Simi
larly returns from other investments and from service
charges on deposit accounts were a little larger this
year than last.
Expenses
Current operating expenses of district member
banks were 12 per cent greater in the first half of
1960 than in the first half of 1959. Banks paid out a
larger sum as interest on time deposits during the
January-June period than in the corresponding period
of 1959: balances in time accounts were greater this
year than last, and a number of banks increased the
interest rate they paid to time deposit holders during
1959 as commercial banks competed with other finan
cial institutions for the public’s savings. Wages, sal
aries, and other costs of carrying on business also con
tinued to rise in 1959 and 1960.
EARNINGS A N D DIVIDENDS
ALL EIGHTH DISTRICT MEMBER BANKS
FIRST SIX M ONTHS OF 1959 A N D 1960*
Bank Earnings and Expenses
as a Per Cent of Total Assets
In Millions of Dollars
Jan. 1 thru June 30 Dollar Percentage
1959
1960 Changes Changes
Interest on U. S. Government
Obligations ...................
$ 28.0
$ 29.0 + i.o
+ 3.6
Interest on Loans ..............
74.7
88.7 + 14.0
+ 18.7
Other Current E arn in gs......
24.5 + 1.5
23.0
+ 6.5
Total C u rre n t O p e r a tin g
E a rn in g s ...................
125 .7
142.2
Total Current Operating
Expenses ......................
76.3
85.3
N e t C urre n t O p e r a tin g
E a rn in g s ...................
49 .4
56.9
Net Losses and Charge-offs...
9.7
N e t Profits b e fo re T a x e s
3 9.7
53.1
Taxes on Net Income ........
16.0
23.8
N e t Profits afte r T a x e s . $ 2 3 .7
Cash Dividends on Common
Stock ...........................
* Preliminary
Page 6
$ 9.4
3.8
$ 2 9 .3
$ 10.8
+ 16.5
+
+ 11.8
+
7.5
+ 15.2
—
5.9
— 60.8
+ 13.4
+ 3 3.8
+
+
8th District Member Banks
+ 13.1
9.0
+
Per Cent
7.8
+ 48.8
5.6
+ 2 3 .6
1.4
+ 14 9
Latest data plotted: 1960, b a se d on first 6 months.
Per Cent
Since the war, operating expenses of district mem
ber banks have grown more rapidly year after year
than their assets (see chart). Annual expenses of
these banks rose from 1.2 per cent of total assets in
1945 to an annual rate of 2.5 per cent in the first half
of 1960. In the first six months of 1960 banks’ current
expenditures totaled $85 million.
In spite of rising expenses, net current operating
earnings of district member banks were nearly $57
million in the first half of I960; this was about 15 per
cent higher than in the comparable period a year
earlier. Net losses and charge-offs were approximate
ly $6 million less this year than in the first six months
of 1959, when banks took losses amounting to nearly
$10 million. Most of the losses in these two years
were on sales of securities, and were taken inten
tionally to reduce tax liabilities or in order to obtain
funds for lending.
N et Profits
After deducting net losses taken in the first six
months of this year, net profits of district member
banks totaled about $53 million, and were more than
$13 million greater than in the comparable period last
year. Income taxes reduced net profits to around $29
million. About $11 million was paid as dividends to
bank stockholders, and $19 million was retained to
strengthen banks’ capital structures.
Changes in Member Bank Reserve Requirements
0 "N
, AUGUST 8 the Board of Governors of the Federal Reserve System amended its Regulation
D, relating to bank reserves and reserve requirements, in three respects. The amendments are to
become effective August 25 and September 1, 1960.
The changes, made in further implementation of an Act of Congress relating to vault cash and
reserve requirements, will make available about $600 million of additional reserves for expanding
bank credit as the economy enters the season of rising credit needs. The changes are as follows:
1. Effective August 25, 1960, member banks outside of central reserve and re
serve cities (“Country banks”) will be permitted to count, in meeting their reserve
requirements, any vault cash that they hold in excess of 2V2 per cent of their net
demand deposits. At present they can only count any vault cash that they hold in
excess of 4 per cent of net demand deposits.
2. Effective September 1, 1960, reserve city and central reserve city banks simi
larly will be permitted to count vault cash in excess of 1 per cent of their net demand
deposits, instead of the present 2 per cent.
3. Effective September 1, 1960, the -reserve requirement of central reserve city
banks against their net demand deposits, now 18 per cent, will be reduced to 17V2
per cent. This change is a first step toward compliance with a provision of the 1959
Act that the differential between the requirements of central reserve city and reserve
city banks be eliminated by July 28, 1962. Since the requirement for banks in re
serve cities is now I6V2 per cent, the present action reduces the differential from IV2
percentage points to 1 point.
As a result of the first two changes, it is estimated that about four-fifths of the 6,200 member
banks will be in a position to count a part of their vault cash in meeting their required reserves.
The amount of reserves made available by the Board’s actions on vault cash will be around $480
million, of which somewhat more than half would be at country banks and almost all of the re
mainder at reserve city banks. The reduction in the requirement of central reserve city banks aris
ing from the third change will release about $125 million of reserves.
Page 7
COMMERCIAL BANK LIQUIDITY
O v e r THE PAST NINE YEARS, total loans held
by commercial banks in the United States have grown
steadily. As economic activity has expanded, busi
nesses and individuals have sought more bank credit.
During the same period, deposits in these banks have
also increased, but at a less rapid rate. A sharp in
crease in the rate of deposit turnover in recent years
has made possible a large increase in the volume of
money payments with a less rapid growth of bank
reserves and deposits. While commercial banks more
than doubled the volume of their loans outstanding
from the first half of 1951 to the first six months of
this year, demand and time deposits increased by
little more than one-third.
In order to expand their lending activity, commer
cial banks have reduced the proportion of their assets
invested in U. S. Government securities. Banks now
hold somewhat fewer short-term Treasury securities
than in 1951 and, in relation to their deposits, a
smaller amount of intermediate- and longer term Gov
ernment obligations. Commercial banks have also
reduced the proportion of their resources held as cash
as they have increased their loans. Changes in the
composition of bank assets have caused some observ
ers to caution banks on maintaining a balance be
tween liquid and illiquid assets.
T he Risk of Being Illiquid
The funds a bank obtains from its depositors and
stockholders may be used in a number of ways: a
bank may make various types of loans; it may pur
chase a range of securities maturing at different times;
and it may hold cash. Within the limits of banking
laws and regulations, the management of each bank
decides what proportion of its funds will be used in
each of these ways, trying to get the highest return
and yet to risk as little loss as possible. There are
several kinds of risk that a bank takes by holding
earning assets. One is that the borrower will not be
able to repay the borrowed sum. The bank tries to
keep this credit risk at a minimum by acquiring only
high-grade assets.
Another risk—the liquidity risk—is that the bank
will have to sell an asset at a loss in order to obtain
cash. The smaller the loss the bank might have to
take by selling the asset, the more liquid the asset is
Page 8
considered to be. Cash, of course, is liquid; debt in
struments are more liquid the more likely it is they
will continue to have an immediate market value
close to their ultimate promise of payment. Since
the deposits of a bank may decline sharply within a
short period of time, a bank will pay attention to the
liquidity, as well as to the financial soundness, of the
assets it holds.
W hich Assets A re Liquid?
There is often an inverse relationship between the
yield of an asset and its liquidity. Interest on loans
is usually the main source of a bank’s income. On
the other hand, many types of loans, even the most
sound, can only be sold by the bank at a discount.
They are, then, relatively illiquid. U. S. Government
and other securities yield less income than most loans
do, but a bank can more easily find a market for its
securities. The prices of obligations fall when inter
est rates rise, however. The farther an obligation is
from maturity, the more its price generally fluctuates
with changes in interest rates. Intermediate- and
long-term investments must, therefore, be considered
relatively illiquid even though they may be sold at a
profit when interest rates are low. Prices of very
short-term investments seldom fluctuate widely; for
this reason Treasury bills are considered almost the
equivalent of cash.1 Whether an asset is said to be
more or less liquid, then, depends upon how much
loss might have to be taken in exchanging it for cash.
A bank needs to keep a reserve of cash and rela
tively liquid assets so that it may more easily meet
possible deposit withdrawals, and also to be able to
take advantage of more favorable lending opportuni
ties. How large this reserve should be depends on
how large a deposit drain the bank might have to
meet, and also upon the nature of its other assets.
Financial arrangements and banking practices
change from year to year. Debt instruments which
were once considered illiquid have been modified to
make them more readily marketable. For instance,
the Government now insures some types of loans, and
secondary markets have developed for others. On
the other hand, longer term Government obligations,
l See article on Treasury Bills, July issue of this Review, pp. 7-10.
which could be sold to the Federal Reserve at a rela
tively fixed price from 1942 until 1951, have since
then lost some of their liquidity.
While loans are usually thought to be less liquid
than securities, Federal funds—one-day loans to other
banks—are probably the most liquid asset banks can
hold next to cash. Commercial paper and bankers'
acceptances are highly negotiable loans and, like Fed
eral funds, have grown in importance in recent years.
In addition, long-term bank loans, which are spoken
of as relatively illiquid, are now frequently paid off in
regular instalments; these payments provide banks
with a fairly steady inflow of funds.
Some Attempts to Measure Liquidity
A number of ratios have been used to measure com
mercial bank liquidity. Each has certain limitations;
and none can be used to gauge the aggregate liquidity
of the nation’s banks. These ratios only give a rough
indication of the average bank’s ability to obtain cash
when it needs to. The ratios also obscure the great
differences within classes of bank assets. But several
measures taken together can indicate trends, if not
the exact state, of bank liquidity.
The most commonly used measure of bank liquidity
is the ratio of commercial bank loans to total deposits.
This ratio gives a rough guide to the proportion of
assets which are not immediately available to meet
deposit withdrawals, although we have seen that
there are wide variations in the liquidity of loans and
also of other assets. As commercial bank loans have
increased more rapidly than deposits from the first
half of 1951 to the first half of 1960, the ratio of
loans to deposits has risen by nearly one-half (Chart
I-A).
Another commonly used measure of bank liquidity,
the ratio of loans to U. S. Government securities held
by banks, illustrates changes in the composition of
bank earning assets (Chart I-B). There has been a
great increase in this ratio over the past nine years:
commercial bank lending has more than doubled while
Government securities held by banks have decreased
slightly. But again, the ability of banks to obtain
cash when they need it has changed much less dra
matically during this period, as many of the new bank
loans are in the form of relatively liquid short-term
advances.
Shorter term securities fluctuate less widely in
price when market interest rates rise or fall, and are
therefore considered more liquid, than longer term
securities. For this reason, a maturity breakdown of
bank-held Government obligations, showing the pro
portion of funds invested in shorter and in longer
term obligations, is sometimes used as an indicator of
bank liquidity. In early 1960 banks held a smaller
proportion of securities maturing within one year,
than in the first half of 1951 (Chart I-C). As a result,
there appears to have been a slight decline in the
liquidity of bank investments. More important, in
1951, when prices of Government securities were
pegged, obligations of all maturities were much more
liquid than they have been since that time.
Attempts have been made to develop a more re
fined way of comparing bank liquid assets to their
maximum potential needs for cash. One such meas
ure is the "short-term liquid assets ratio” (see table,
page 10). Since it is based on a more detailed ex
amination of bank assets and liabilities, this ratio can
be computed for all member banks in the country only
four times each year, while deposits and liquid assets
can change widely from day to day as banks receive
and pay out funds. Even this ratio contains arbitrary
classifications; for instance, Government securities ma
turing within one year are called liquid, while all
those over one year (even thirteen months) from ma-
Chart I
Ratios of Commercial Bank Liquidity
Chart A
Chart B
Loans as a Per Cent
of Deposits
Loans as a Per Cent
of Government Securities
Per Cent
60 r-
Per Cent
200
Chart C
Chart D
Maturity Distribution of Bank-Held
Government Securities
Short - Term Liquid Assets Ratio
Per Cent
15
Per Cent
100
1951
1960
Short-Term
Intermediate-Term
Long-Term
Page 9
less volatile than demand accounts, the shift reduces
liquidity needs.
Table I
SHORT-TERM LIQUID ASSETS RATIO
All Weekly Reporting Member Banks in The
United States
{Dollar Figures in Billions)
Liquid Assets
Cash in V a u lt ...........................
Balances with other Commercial
Banks .................................
Excess Reserves ........................
Loans to Other Banks ................
Loans to Securities D eale rs..........
Treasury Bills ...........................
Treasury Certificates .................
Government Notes and Bonds
maturing within 1 y e a r ...........
Less Borrowings .................
Net Liquid Assets .....................
Short-Term Liabilities
Total Deposits .........................
Less
Cash Items in Process of
Collection ......................
Required Reserves..............
Net Short-Term Liabilities...........
Ratio of Net Liquid Assets to Net
Short-Term Liabilities .............
Jan.-June, 1959
Jan.-June, 1960
Average
Average
(Last Wednesday of Month)
$
.9
$
2.2
.1
.4
1.4
1.9
.1
2.8
.1
2.2
1.7
1.5
.7
3.5 e
.5
1.5
2.4
10.1
9.4
$85.7
$116.3
5.9
13.9
9.8
12.9
65.9
93.6
15.3%
10.0%
e— Estimated in part
turity are termed illiquid. Table I
shows the averages of the selected
assets and liabilities held by larg
er (weekly reporting) banks in
the Federal Reserve System. The
short-term liquid assets ratio has
also shown a decline over the
past nine years.
These ratios indicate that the
liquidity of the average bank has
decreased to a certain extent in
the past nine years. It should be
noted, however, that there is some
evidence of a declining need for
liquidity. Federal insurance of
deposits lessens the possibility of
severe deposit runs. And, in the
last nine years, banks in this coun
try have added to their capital ac
counts, so that many feel com
fortable with a higher proportion
of risk to total assets. Also, time
deposits have risen faster than
demand deposits over the past
decade. Since time deposits are
Page 10
1.3
The Ultimate Source of Bank Liquidity
In the final analysis, though, the liquidity of the
entire banking system is influenced by Federal Re
serve monetary actions. Federal Reserve purchases
of securities in the open market and loans to banks
can convert less liquid assets into cash reserves. The
central bank can supply the banking system with the
credit-creating ability that will be consistent with
growth and stability in the nation’s economy.
Variations Among Groups of Banks
Any ratio which expresses the average liquidity of
commercial banks in the nation obscures variations
among banks of different sizes and in different loca
tions. During the nine years from the first half of
1951 until now, the differences between the lending
activities of banks have increased, as can be seen
from Chart II. The larger banks in New York and
Chicago, known as central reserve city banks, tend
to hold a larger proportion of their resources in loans
than banks in the rest of the country. Their lending
activities have also responded more to cyclical changes
in the demand for funds. By June of 1960, the loanto-deposit ratio of central reserve city banks had risen
to 62 per cent.
Chart II
Ratio of Loans to Deposits
A ll C o m m e rc ia l B an ks in U. S.
P er C e n t
S e m i- A n n u a lly
P er C e n t
Similarly, larger banks in other major cities of the
United States have generally carried a greater volume
of loans in relation to their deposits than most other
banks. In June of 1960, loans made by reserve city
banks were equal to 58 per cent of deposits.
But the majority of commercial banks in the nation
—the country member banks and the nonmember
banks—hold deposits about twice as great as their
loans. Country banks in the Eighth Federal Reserve
District, for instance, had a loan-to-deposit ratio of
46 per cent in June of this year.
Variations in the liquidity of banks may reflect dif
fering management policies and objectives, as well
as difference in customers' demands for credit and in
rates of deposit growth. Variations may also arise
as bigger banks are more able to compete in making
large-scale loans to corporations throughout the na
tion.
Conclusion
It is important for an individual commercial bank
to be able to meet unexpected cash withdrawals with
out having to take great losses. It is therefore im
portant for the individual bank to maintain an ade
quate cushion of highly liquid assets. But there is no
“best” structure of assets for every bank. An asset
distribution which provides sufficient liquidity at one
time may be inadequate at another time, under dif
ferent conditions.
Over-all measures of bank liquidity have many
shortcomings, but they indicate that there has been a
modest decrease in liquidity over the past decade.
The management of each bank must continually re
view the portfolio of assets to make sure that cash
and secondary reserves are adequate.
Despite a decline in liquidity at some banks, requir
ing more conservative lending policies, the over
whelming majority of commercial banks are able to
continue supplying credit to businesses, consumers,
and real estate owners. Fear that the country may
suffer a shortage of total bank credit and money as
a result of a decline in bank liquidity is unfounded,
since the Reserve System can provide additional cash
reserves to the banking system whenever monetary
policy objectives call for an expansion in bank credit.
Margin Requirement Reduction (Continued from Page 5)
value of stocks on the New York Stock Exchange in
the thirties and early forties (see chart). Reflecting
recent months. In June the total amount of credit
a rapid increase in volume of credit extended on
being used to purchase or carry stocks was $4.2 bil
stocks, cash margin requirements were raised in three
lion, down about 12 per cent from the peak in April
steps to 100 per cent during 1945 and early 1946.
and May 1959.
Hence, new purchases of stocks had to be made en
tirely without borrowing, but
there was no requirement to liq
M argin Requirements
uidate outstanding indebtedness
P e r C e n t o f M a r k e t V a lu e
on stocks. Since early 1947 mar P e r C e n t o f M a r k e t V a lu e
100
100
gin requirements have fluctuated
between 90 per cent and 50 per
cent, in general being raised at
times when the volume of stock
market had been expanding and
50
50
being lowered when credit had
a
D
been contracting.
Volume of Credit
The volume of credit extended
on stocks has probably amounted
to less than 2 per cent of the total
_L_
1936
J ----- 1----- 1----- L
1940
1945
J ------ 1------L_
1950
1955
1960
La te st c h a n g e p lo tte d: J u ly 28, 1 9 6 0
Page 11
Bank Debits in the Eighth District
D ' URING THE THREE MONTHS ENDING WITH JULY debits to deposit accounts, that
is the volume of checks and other charges against bank balances, at reporting banks in the St.
Louis District totaled nearly $18 billion. This was about 3 per cent more than in the corre
sponding three months a year earlier.
Since the bulk of the flow of
money payments is made by
check or other transactions
affecting deposits, debits fig
ures have been frequently
used as a measure of the trends
in local business activity.
However, figures on debits
can be influenced by certain
financial transactions and
other movements of funds
which may not reflect the state
of economic activity, especial
ly within short periods of time.
District cities which had
relatively large increases in
debits from the May-July
quarter last year to the like
quarter this year were: Cape
Girardeau, Missouri, Owens
boro, Kentucky, and Jefferson
City, Missouri. Of the 22 re
porting centers, 10 were high
er in the period under review
this year than in the compar
able period last year, 10 were
lower, and 2 were virtually the
same.
Page 12
BANK DEBITS1
Reporting Banks in Eighth District
(In Millions of Dollars)
Per Cent
Change
May, June and July
1960
1959
Six Largest Centers:
East St. Louis— National
445
Stock Yards, Illin o is......... $
554
Evansville, In d ia n a ..............
742
Little Rock, A rk a n s a s...........
2,782
Louisville, Kentucky.............
2,613
Memphis, Tennessee...........
8,510
St. Louis, M isso u ri..............
Total— Six Largest Centers. .$15,646
$
452
580
740
2,913
2,490
7,997
—
—
+
—
+
4-
1.6%
4.5
0.3
4.5
4.9
6.4
$15,172
+
3.1 %
$
— 4.1 %
+ 1 1 .3
— 10.2
— 5.0
— 2.1
-0 — 2.7
+ 1-1
+ 7.6
- f 8.2
+ 6.3
— 4.0
+ 1-3
+ 1.8
— 2.0
Other Reporting Centers:
Alton, Illinois .................... $
Cape Girardeau, Missouri . . .
El Dorado, A rk a n s a s ...........
Fort Smith, A rk a n s a s...........
Greenville, M ississip p i.........
Hannibal, Missouri .............
Helena, A rk a n sa s................
Jackson, Tennessee.............
Jefferson City, M isso u ri.......
Owensboro, Kentucky.........
Paducah, K entu cky.............
Pine Bluff, A rk a n sa s.............
Quincy, Illinois ..................
Sedalia, M isso u ri................
Springfield, M is so u r i...........
Texarkana, Arkansas .........
Total— Other Centers
Total— 22 Centers
142
69
97
190
96
42
36
96
409
172
118
145
160
58
353
82
148
62
108
200
98
42
37
95
380
159
111
151
158
57
360
82
-0 -
.$ 2,265
$ 2,248
+
0 .8 %
$17,911
$17,420
+
2 .8 %
1 Debits to demand deposit accounts of individuals, partnerships and corporations
and states and political subdivisions.
@FedFRASER