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For Release on D e l i * Tfy Wednesday, A p r i l 1, ^970 12 noon, P . S . T . (3 p . m . , E . S . T . ) THE BANKING STRUCTURE AND MONETARY MANAGEMENT Remarks by Andrew F. Brimmer Member Board o f Governors o f the F e d e r a l Reserve System Before the San Francsico Bond Club Fairmont H o t e l San F r a n c i s c o , A p r i l 1, California 1970 THE BANKING STRUCTURE AND MONETARY MANAGEMENT By Andrew F. Brimmer* The campaign a g a i n s t i n f l a t i o n has undoubtedly reached a troublesome phase, and the a p p r o p r i a t e r o l e f o r monetary p o l i c y i s one o f the p r i n c i p a l questions on the minds of many observers. I agree t h a t the task of monetary management i s a d i f f i c u l t one under the present circumstances. But, i n my personal o p i n i o n , monetary p o l i c y s t i l l has a c o n t r i b u t i o n t o make i n our n a t i o n a l e f f o r t s to check i n f l a t i o n . I w i l l comment f u r t h e r on t h i s task i n the c l o s i n g s e c t i o n of these remarks. Before doing t h a t , however, i t might be w e l l to review the impact of monetary r e s t r a i n t on the banking system and c r e d i t d u r i n g the l a s t y e a r . flows A comprehensive a n a l y s i s of t h a t experience has convinced me t h a t the time has come f o r a thorough r e e x a m i n a t i o n of the main t o o l s and techniques of monetary c o n t r o l i n the U n i t e d S t a t e s . Also i n these remarks, I w i l l sketch the broad o u t l i n e s of an a l t e r n a t i v e approach which appears t o be q u i t e promising. In fact, the key element on which t h i s p o s s i b l e new d i r e c t i o n i s based - - a more f l e x i b l e use of reserve requirements - - has been r e l i e d on i n c r e a s i n g l y by the F e d e r a l Reserve Board i n r e c e n t years t o accomplish o b j e c t i v e s r e q u i r i n g a s p e c i a l focus on p a r t i c u l a r segments o f the banking system. * Member, Board o f Governors o f the F e d e r a l Reserve System. I am g r a t e f u l t o s e v e r a l members o f the Board's s t a f f f o r a s s i s t a n c e i n the p r e p a r a t i o n of these remarks. Mr. F r e d e r i c k M. S t r u b l e had p r i n c i p a l r e s p o n s i b i l i t y f o r the a n a l y s i s of p o r t f o l i o adjustments by banks, g i v e n t h e i r d i f f e r e n t i a l access to sources of funds. Mr. Peter J . Feddor designed and c a r r i e d out the d i f f i c u l t computer programming tasks on which the a n a l y s i s depended so h e a v i l y . Miss H a r r i e t t H a r p e r , my a s s i s t a n t , a l s o helped w i t h the s t a t i s t i c a l a n a l y s i s . -2- The r e a s o n i n g behind these conclusions i s s e t f o r t h i n some d e t a i l i n t h e s e c t i o n s which f o l l o w . However, i t might be h e l p f u l summarize here the main p o i n t s o f t h e a n a l y s i s : - I n 1969, d e s p i t e the s e v e r i t y o f monetary r e s t r a i n t , the volume o f funds r a i s e d i n the c a p i t a l markets by borrowers o t h e r than the F e d e r a l Government rose m o d e r a t e l y compared w i t h the p r e v i o u s y e a r . However, the d i s t r i b u t i o n among s e c t o r s changed somewhat. The share o b t a i n e d by both households and S t a t e and l o c a l governments d e c l i n e d s l i g h t l y , w h i l e the business s e c t o r ( p a r t i c u l a r l y c o r p o r a t i o n s ) got a l a r g e r s h a r e . - The F e d e r a l Reserve System, on b a l a n c e , p r o v i d e d a s l i g h t l y l a r g e r volume o f c r e d i t ( i n both a b s o l u t e and r e l a t i v e terms) l a s t year than i t d i d i n 1968. - Commercial banks s u p p l i e d a d r a s t i c a l l y reduced p r o p o r t i o n o f t h e c r e d i t advanced i n 1969 compared w i t h the p r e v i o u s year ( j u s t over o n e - t e n t h v s . t w o - f i f t h s i n 1 9 6 8 ) . The banks e x p e r i e n c e d an a c t u a l l o s s o f deposits l a s t year i n c o n t r a s t to a s i z a b l e g a i n the y e a r b e f o r e . Their net a c q u i s i t i o n o f f i n a n c i a l a s s e t s f e l l by over t h r e e - q u a r t e r s from the 1968 l e v e l . - N e v e r t h e l e s s , through heavy s a l e s o f s e c u r i t i e s and r e l i a n c e on nondeposit sources o f funds, t h e banks were a b l e t o expand funds a v a i l able for loans. I n p a r t i c u l a r , business loans on the books o f commercial banks rose almost as much as they d i d i n 1968. When the volume o f loans s o l d by the banks i s added t o the t o t a l , the i n c r e a s e i n business loans l a s t y e a r was even g r e a t e r than t h a t r e g i s t e r e d the y e a r before. - The p a t t e r n o f p o r t f o l i o a d j u s t m e n t d i f f e r e d markedly among banks, depending on t h e i r access t o nondeposit sources o f funds. Banks w i t h ready access t o E u r o - d o l l a r i n f l o w s or w i t h the - to -3- a b i l i t y to s e l l commercial paper were much more s u c c e s s f u l i n cushioning the impact o f monetary r e s t r a i n t than were o t h e r banks which d i d n o t tap these sources o f funds. A g a i n , the g r e a t e r were the a v a i l a b i l i t y of nondeposit sources of funds t o the banks - the g r e a t e r a l s o was the r a t e of expansion o f business l o a n s . - The d i f f e r e n t i a l response of commercial banks t o monetary r e s t r a i n t i n 1969 becomes even more s h a r p l y focused when the banks a r e r e grouped and viewed i n the c o n t e x t o f the s t r a t e g i c r o l e s they p l a y w i t h r e s p e c t t o d i f f e r e n t types of f i n a n c i a l t r a n s a c t i o n s . For t h i s purpose t h r e e groups can be i d e n t i fied: ( 1 ) a h a n d f u l of m u l t i - n a t i o n a l banks a c t i v e i n the domestic money market on a n a t i o n a l s c a l e and a l s o h e a v i l y i n v o l v e d i n i n t e r n a t i o n a l f i n a n c e ; ( 2 ) a s i z a b l e number o f i n s t i t u t i o n s which p l a y a dominant r o l e i n t h e i r r e g i o n s , and ( 3 ) o t h e r banks which c o n c e n t r a t e m a i n l y on t h e i r l o c a l m a r k e t s . Among these t h r e e groups o f banks, the f i r s t was the most s u c c e s s f u l i n expanding i t s t o t a l loans and the second group was n e x t i n l i n e . T h i s was e s p e c i a l l y t r u e of business loans a t the f i r s t group where the r a t e of i n c r e a s e exceeded the average - - w h i l e the r a t e o f expansion i n t h e i r consumer loans was below the average - - f o r a l l banks covered i n the analysis. Sales of business loans were prop o r t i o n a t e l y the h e a v i e s t a t the m u l t i - n a t i o n a l banks, and a d j u s t i n g f o r such s a l e s r a i s e s s i g n i f i c a n t l y the r a t e a t which they s u p p l i e d c r e d i t t o t h e i r c o r p o r a t e customers. When I r e f l e c t on the r e s u l t s o f the a n a l y s i s above, I find i t f a r from c o m f o r t i n g . As emphasized many t i m e s , o b j e c t i v e — a l t h o u g h c e r t a i n l y n o t the o n l y one - restraint loans. summarized one o f monetary i n 1969 was a s i z a b l e moderation i n the expansion o f business Such a m o d e r a t i o n i n t u r n was sought as a means o f dampening -4- excess demand and i n f l a t i o n a r y pressures i n the economy. In it successful i s obvious t h a t the F e d e r a l Reserve was not c o m p l e t e l y i n i t s e f f o r t as f a r as business loans a r e retrospect, concerned. I am f u l l y aware o f the views o f some observers who argue t h a t a c e n t r a l bank should n o t concern i t s e l f w i t h the composition of bank c r e d i t , b u t only w i t h i t s r a t e o f growth - - and b e t t e r s t i l l w i t h the r a t e o f growth of t h e money supply (however d e f i n e d ) . my own v i e w , a c e n t r a l bank composition o f bank c r e d i t ; should n o t be i n d i f f e r e n t Yet, in t o the changing t o adopt such a posture would mean t h a t d r a s t i c v a r i a t i o n s i n the a v a i l a b i l i t y o f c r e d i t i n i m p o r t a n t sectors could occur - - and p e r s i s t - - w i t h s e r i o u s l y adverse consequences the economy as a whole. only for I n my o p i n i o n , we need a b e t t e r way t o assure t h a t the o v e r a l l o b j e c t i v e s o f monetary p o l i c y can be a c h i e v e d w i t h o u t h a v i n g a few s e c t o r s bear a d i s p r o p o r t i o n a t e share o f the burden o f a d j u s t m e n t , w h i l e o t h e r s e c t o r s escape or s i g n i f i c a n t l y moderate its impact. I w i l l r e t u r n t o t h i s p o i n t below. I n the meantime, we can t u r n t o the body o f the a n a l y s i s . C r e d i t Flows i n 1969 The volume o f c r e d i t r a i s e d i n the c a p i t a l markets i n 1969 was o b v i o u s l y r e s t r a i n e d s e v e r e l y by the r e s t r i c t i v e monetary p o l i c y by the F e d e r a l Reserve System as p a r t o f t h e campaign t o check N e v e r t h e l e s s , a f t e r a l l o w i n g f o r the market a c t i v i t i e s followed inflation. o f the F e d e r a l -5- Government, t h e r e was a modest i n c r e a s e i n the amount of funds According t o the p r e l i m i n a r y f l o w o f funds s t a t i s t i c s F e d e r a l Reserve Board, lion compiled by the the n e t volume of funds r a i s e d by a l l s e c t o r s i n 1969 amounted t o about $ 8 5 . 7 b i l l i o n , raised. nonfinancial a decrease o f $ 1 1 . 7 ( o r 12 per c e n t ) compared w i t h the l e v e l i n the p r e v i o u s y e a r . Table 1 a t t a c h e d . ) However, bil(See t h i s d e c l i n e i n the t o t a l was more than accounted f o r by the change i n the p o s i t i o n o f the F e d e r a l Government. I n c a l e n d a r year 1969, the l a t t e r made n e t repayments o f $ 5 . 4 b i l l i o n compared w i t h n e t borrowings of $ 1 3 . 4 b i l l i o n the year b e f o r e . the y e a r - t o - y e a r change was a decrease o f $ 1 8 . 9 b i l l i o n . -- Thus, W e l l over t w o - t h i r d s o f the swing c e n t e r e d i n d i r e c t p u b l i c debt s e c u r i t i e s , and the r e s t i n Government agency i s s u e s . A l l o w i n g f o r the e x p e r i e n c e of the F e d e r a l Government, funds r a i s e d by o t h e r n o n f i n a n c i a l s e c t o r s i n 1969 amounted to billion. This r e p r e s e n t e d an expansion of $ 6 . 9 b i l l i o n over the l e v e l r a i s e d i n 1969. total $91.0 ( o r 8 per However, the share o f the t o t a l cent) funds r e c e i v e d by the p r i n c i p a l groups o f borrowers changed n o t i c e a b l y . S t a t e and l o c a l governments r a i s e d $ 9 . 2 b i l l i o n ($1.0 or 11 per c e n t l e s s than i n 1 9 6 8 ) , and t h e i r share o f t h e t o t a l declined s l i g h t l y (from 1 2 . 1 per cent t o 1 0 . 1 per c e n t ) . In n e t funds r a i s e d by these S t a t e and l o c a l u n i t s rose by $ 2 . 2 ( o r by 28 per c e n t ) i n 1968. Moreover, also contrast, billion the d e c l i n e of $ 1 . 0 b i l l i o n n e t funds r a i s e d by S t a t e and l o c a l governments l a s t y e a r in represented over f o u r - f i f t h s o f the d e c l i n e o f $ 1 . 3 b i l l i o n i n n e t debt billion financing -6- i n the l o n g - t e r m c a p i t a l m a r k e t s . In fact, obligations of these u n i t s were the o n l y issues among the t h r e e p r i n c i p a l types o f capital market i n s t r u m e n t s t o r e g i s t e r a s i g n i f i c a n t d e c l i n e i n 1969. While a number of f a c t o r s c o n t r i b u t e d to t h i s reduced borrowing by S t a t e and l o c a l governments, t h e lessened i n t e r e s t o f commercial banks i n exempt issues was undoubtedly o f c o n s i d e r a b l e importance. tax- As shown i n T a b l e 2 , commercial banks expanded t h e i r h o l d i n g s of such o b l i g a t i o n s by o n l y $ 1 . 2 b i l l i o n i n 1969, compared w i t h an i n c r e a s e o f $ 8 . 7 i n the previous year. billion Such issues r e p r e s e n t e d about 10 per cent of n e t a c q u i s i t i o n of f i n a n c i a l a s s e t s by banks i n 1969 - p r o p o r t i o n recorded i n 1968. Moreover, only h a l f the the l a s t y e a r t h e change i n the banks 1 h o l d i n g s r e p r e s e n t e d o n l y 14 per c e n t o f t h e n e t funds raised by these governments i n c o n t r a s t to 90 per cent o f the t o t a l i n the preceding year. The consumer s e c t o r r a i s e d about $31 b i l l i o n i n the market i n 1969, or r o u g h l y $ 1 . 0 b i l l i o n l e s s than i n 1968. o f j u s t under 3 per c e n t . o f the t o t a l a l s o d e c l i n e d somewhat - - commercial banks. T h i s was a d e c l i n e Since t h i s occurred w h i l e the t o t a l volume o f funds r a i s e d was expanding m o d e r a t e l y , j u s t over o n e - t h i r d . capital This s e c t o r , t h e household s e c t o r ' s from j u s t under t w o - f i f t h s to on b a l a n c e , a l s o borrowed l e s s at This can be seen i n n e t change i n the volume o f home mortgages h e l d and the amount o f consumer c r e d i t extended by the I n 1969, t h e i r household mortgages rose by $ 2 . 5 b i l l i o n , $ 3 . 5 b i l l i o n the previous y e a r . share latter. compared w i t h The corresponding changes i n consumer -7- c r e d i t were $ 3 , 1 b i l l i o n and $ 4 . 9 b i l l i o n . So the growth i n these forms o f bank c r e d i t eased o f f by o n e - t h i r d (from $8.4 b i l l i o n $5.6 to billion). The p r i n c i p a l s e c t o r which expanded i t s share o f t o t a l funds r a i s e d both i n t h e o v e r a l l c a p i t a l market and a t commercial banks was n o n f i n a n c i a l business. I n the c a p i t a l markets (as shown i n Table t h i s s e c t o r r a i s e d $ 4 7 . 4 b i l l i o n i n 1969, compared w i t h $ 3 9 . 1 the year b e f o r e . one-fifth. T h i s was an i n c r e a s e o f $ 8 . 3 b i l l i o n , billion or more than Whereas businesses accounted f o r 47 per cent o f the funds r a i s e d i n 1968, 1), t h e i r share rose t o 52 per cent l a s t total year. I n d u s t r i a l and commercial c o r p o r a t i o n s were m a i n l y r e s p o n s i b l e f o r rise. I n 1969, they r a i s e d $ 3 7 . 2 b i l l i o n , i n the y e a r b e f o r e . Consequently, from 37 per cent t o 4 1 per c e n t . the or $ 6 . 2 b i l l i o n more than t h e i r share o f t h e t o t a l climbed Business f i r m s a l s o accounted f o r a s i z a b l e share o f the expansion i n commercial bank c r e d i t . As shown i n T a b l e 2 , w h i l e the n e t a c q u i s i t i o n of f i n a n c i a l a s s e t s by the banks amounted t o $ 9 . 6 b i l l i o n i n 1969, bank loans ( o t h e r than mortgages, consumer c r e d i t and c r e d i t extended t o purchase or h o l d rose by $13 b i l l i o n . securities) Loans i n t h i s c a t e g o r y c o n s i s t m a i n l y of s u p p l i e d t o businesses. Consequently, funds commercial bank loans t o the business s e c t o r expanded by more i n 1969 than d i d t o t a l c r e d i t a t institutions. I n 1969, loans t o business had accounted f o r j u s t under t w o - f i f t h s of the these total. -8- Sources o f Funds and Bank Behavior E x p e r i e n c i n g s u b s t a n t i a l d e p o s i t d e c l i n e s i n the face o f s t r o n g demands f o r loans i n 1969, banks a t t e m p t e d t o m a i n t a i n - expand - - t h e i r e a r n i n g a s s e t s i n two p r i n c i p a l ways: by t a p p i n g nondeposit sources o f funds or by s e l l i n g a l a r g e volume o f f i n a n c i a l assets - of both. credit, or existing loans as w e l l as s e c u r i t i e s — or some combination W h i l e they a l s o made i n c r e a s i n g l y s e r i o u s a t t e m p t s t o ration they devoted t h e i r e n e r g i e s p r i m a r i l y to a search f o r ways t o meet t h e i r customers 1 demands. These v a r i o u s methods o f a d j u s t i n g to c r e d i t r e s t r a i n t are c l e a r l y a p p a r e n t i n data r e f l e c t i n g developments a t l a r g e banks i n the United States. About 340 o f these banks r e p o r t weekly t o the F e d e r a l Reserve System, showing t h e i r a s s e t s and l i a b i l i t i e s i n some d e t a i l . Although they c o n s t i t u t e d o n l y 2 - 1 / 2 per cent of the 1 3 , 4 6 4 commercial banks as o f June 3 0 , 1969, they c o n t r o l a s u b s t a n t i a l p o r t i o n o f the t o t a l banking r e s o u r c e s . of t h e t o t a l a s s e t s , insured They h o l d about pro- three-fifths t o t a l loans and i n v e s t m e n t s , and demand d e p o s i t s . They h o l d t h r e e - q u a r t e r s o f t o t a l business l o a n s , about h a l f o f consumer and r e a l e s t a t e l o a n s , and about the same p r o p o r t i o n o f t o t a l time and savings d e p o s i t s . However, they h o l d n e a r l y 90 per c e n t o f the denomination c e r t i f i c a t e s o f d e p o s i t large ( C D ' s ) , and they account f o r v i r t u a l l y a l l of the E u r o - d o l l a r borrowings and commercial paper sold by banks v i a affiliates. W h i l e most o f these weekly r e p o r t i n g banks a r e members o f the F e d e r a l Reserve System, some i n s u r e d nonmembers a r e a l s o A l l o f t h e 340 have t o t a l d e p o s i t s o f $100 m i l l i o n or more. their included. -9- Thus, a study o f t h e b e h a v i o r o f these i n s t i t u t i o n s under c o n d i t i o n s o f monetary r e s t r a i n t p r o v i d e s v a l u a b l e i n s i g h t s i n t o b e h a v i o r o f the banking system as a whole. c r e d i t a t the weekly r e p o r t i n g group quite similar The broad changes i n bank and a t a l l commercial banks were i n 1969, as shown i n the f o l l o w i n g f i g u r e s centage r a t e s o f the (annual p e r - change): All T o t a l loans and Investments U . S . Government s e c u r i t i e s Other s e c u r i t i e s T o t a l loans Business loans Time and Savings d e p o s i t s Commercial Banks Weekly R e p o r t i n g Banks 2.4 -15.9 -1.1 7.7 9.4 0.6 -20.4 -8.4 5.6 9.7 -5.3 -14.7 The n o t i c e a b l e d i f f e r e n c e s among the two sets o f growth r a t e s are these: t h e weekly r e p o r t i n g banks expanded t h e i r e a r n i n g a s s e t s somewhat more m o d e r a t e l y , i n time d e p o s i t s they experienced a much h e a v i e r attrition ( e s p e c i a l l y C D ' s ) , and they l i q u i d a t e d s e c u r i t i e s a much f a s t e r r a t e . rose l e s s r a p i d l y , at W h i l e t o t a l loans a t the weekly r e p o r t i n g banks t h e i r business loans i n c r e a s e d somewhat more r a p i d l y than a t a l l banks i n the c o u n t r y . As i n d i c a t e d i n Tables 3 and 4 , a t the weekly r e p o r t i n g banks i n 1969. t o t a l deposits declined sharply A s u b s t a n t i a l d e c l i n e i n CD's, -10- combined w i t h a more moderate drop i n o t h e r time and savings d e p o s i t s , c o n s i d e r a b l y o f f s e t a s l i g h t r i s e i n demand d e p o s i t s . The d e c l i n e in these d e p o s i t l i a b i l i t i e s was more than c o u n t e r b a l a n c e d ! however, by expansion i n o t h e r forms o f l i a b i l i t i e s . T o t a l borrowings (principally i n the f e d e r a l funds market and a t F e d e r a l Reserve Banks) and o t h e r liabilities ( l a r g e l y E u r o - d o l l a r borrowings from f o r e i g n branches) both advanced s h a r p l y . Although the funds o b t a i n e d from these a l t e r n a t i v e liability sources were l a r g e enough t o f i n a n c e a modest expansion i n t o t a l ings a s s e t s , they were c l e a r l y n o t s u f f i c i e n t earn- t o e n a b l e the weekly r e p o r t i n g banks t o meet the demands o f t h e i r l o a n customers. a d d i t i o n a l f u n d s , l a r g e blocks o f s e c u r i t y h o l d i n g s were To g a i n liquidated. I n a d d i t i o n , a l a r g e volume of loans was s o l d , p r i m a r i l y t o bank h o l d i n g companies and a f f i l i a t e s . (These l a t t e r transactions are reflected i n the l a r g e volume o f commercial paper s a l e s which s u p p l i e d the funds t o f i n a n c e the purchase o f these loans.) The expansion i n loans m a i n t a i n e d on bank books, made p o s s i b l e by s a l e o f s e c u r i t i e s and t a p p i n g o f a l t e r n a t i v e liability sources o f funds, was q u i t e s u b s t a n t i a l — and a g a i n i t should be remembered t h a t t h i s g a i n i s n e t of the loans s o l d from bank p o r t f o l i o s . evidence of l o a n r a t i o n i n g i s r e f l e c t e d i n the d a t a . t o t a l l o a n s , even w i t h loans s a l e s accounted f o r , Y e t , some The growth i n f e l l somewhat s h o r t o f t h e expansion which occurred i n 1968, when these banks were w e l l s u p p l i e d w i t h funds. The change i n volume a l o n e , o f course, does' -11- n o t p e r m i t one t o d i s t i n g u i s h between a change i n supply and a change i n demand f o r c r e d i t , but i t seems a r e a s o n a b l e assumption t h a t loan demands were a t l e a s t as s t r o n g i n 1969 as i n 1968. Most o f the l o a n r a t i o n i n g which occurred appears t o have been focused on nonbusiness borrowers. Business loans on the books o f weekly r e p o r t i n g banks, on the o t h e r hand, i n c r e a s e d by as much i n 1969 as they d i d i n 1968. Moreover, s i n c e business loans comprise the major p r o p o r t i o n of loans s o l d , t o t a l business c r e d i t e x t e n d e d through weekly r e p o r t i n g banks i n 1969 was s i g n i f i c a n t l y h i g h e r than i n 1968. much d i f f e r e n c e these l o a n How s a l e s d i s g u i s e the growth of bank c r e d i t extended to business f i r m s i s i n d i c a t e d i n one o f the f o l l o w i n g sections o f these remarks. Behavior o f E u r o - D o l l a r Banks As may be seen i n Table 3, the 19 weekly r e p o r t i n g banks that a r e major borrowers i n t h e E u r o - d o l l a r market e x p e r i e n c e d a l a r g e deposit drain. However, they were more than a b l e t o compensate t h i s loss by drawing funds from a l t e r n a t i v e liability sources. for Similar a d j u s t m e n t s can be seen i n the case o f a l l o t h e r weekly r e p o r t i n g banks. However, the E u r o - d o l l a r banks r e l i e d much more h e a v i l y on the Euro- d o l l a r m a r k e t , w h i l e the o t h e r banks m a i n l y u t i l i z e d domestic of sources funds. Whether the E u r o - d o l l a r banks were a b l e liability sources) (by u s i n g a l t e r n a t i v e to make a more s u b s t a n t i a l compensation f o r their d e p o s i t d r a i n s than were o t h e r weekly r e p o r t i n g banks i s d i f f i c u l t to -12- d i s c e r n from an e x a m i n a t i o n o f the a b s o l u t e change f i g u r e s i n Table 3 . To overcome t h i s d i f f i c u l t y , the changes i n the banks 1 balance sheet can be converted t o percentage terms. Table 4 . The f i g u r e s a r e p r e s e n t e d in These d a t a show t h a t the d e p o s i t d e c l i n e a t E u r o - d o l l a r banks was n e a r l y t w i c e as l a r g e i n r e l a t i v e r e p o r t i n g banks. experience, terms as a t the o t h e r weekly However, d e s p i t e t h i s sharp d i f f e r e n c e i n d e p o s i t growth i n t o t a l e a r n i n g a s s e t s a t E u r o - d o l l a r banks was r e l a t i v e l y quite similar was due, o f course, t o t h a t a t the o t h e r weekly r e p o r t e r s . This t o the s t r o n g advance which the E u r o - d o l l a r banks were a b l e t o a c h i e v e i n nondeposit sources o f funds. (The percentage changes i n these nondeposit f i g u r e s a r e not p a r t i c u l a r l y revealing because t h e o u t s t a n d i n g l e v e l s f o r some o f these items were q u i t e compared w i t h t h e i r small change.) What i s perhaps of even g r e a t e r i n t e r e s t i s the growth i n t o t a l loans a t these two groups o f banks. relative As may be seen, t h e E u r o - d o l l a r banks recorded somewhat l a r g e r gains i n b o t h total loans and i n business loans than d i d the o t h e r weekly r e p o r t i n g banks. The d i f f e r e n c e s were q u i t e s m a l l , however, so t h a t perhaps the b e s t g e n e r a l i z a t i o n i s t h a t both groups o f banks made about the same k i n d o f adjustments t o the problem o f m e e t i n g s t r o n g l o a n demands d u r i n g a p e r i o d o f heavy d e p o s i t d r a i n . I n this regard, it i s worth restating t h a t , a l t h o u g h the percentage i n c r e a s e s f o r 1969 i n d i c a t e d i n the t a b l e f o r each groups o f banks f e l l w e l l below those recorded i n 1968, these d a t a do n o t r e f l e c t i n 1969. the c o n s i d e r a b l e volume o f l o a n s a l e s made -13- Behavior o f Commercial Paper I s s u i n g Banks As i s g e n e r a l l y known, a number o f banks r e s o r t e d to the s a l e o f commercial p a p e r , m a i n l y through one-bank h o l d i n g companies b u t a l s o t o some e x t e n t through a f f i l i a t e s , t o r a i s e funds i n an e f f o r t t o compensate f o r the loss i n d e p o s i t s . Some o f the banks a c t i v e t h e E u r o - d o l l a r market have a l s o issued commercial p a p e r . in As i n d i c a t e d i n Table 3 , a t the end o f l a s t y e a r , $ 4 . 3 b i l l i o n o f commercial paper was o u t s t a n d i n g a t weekly r e p o r t i n g banks. lion Of t h i s amount, $ 2 . 4 (or 56 per c e n t ) had been issued by E u r o - d o l l a r banks. remainder ($1.9 b i l l i o n ) Euro-dollar It bil- The had been s o l d by banks which do n o t r e l y on i n f l o w s t o supplement t h e i r deposits.* i s e v i d e n t t h a t the banks which r e l i e d only on commercial paper d i d n o t r e g i s t e r a growth i n t h e i r e a r n i n g a s s e t s as d i d either the E u r o - d o l l a r banks or the banks which d i d not r e s o r t t o non- d e p o s i t sources a t a l l . W h i l e the d i f f e r e n c e s among the groups were s m a l l , those banks r e l y i n g on commercial paper had expanded t h e i r a s s e t s more r a p i d l y i n 1968. Last year, these banks had a percentage d e c l i n e in time d e p o s i t s about as l a r g e as t h a t f o r a l l weekly r e p o r t i n g banks ( a l t h o u g h s m a l l e r than t h a t recorded a t E u r o - d o l l a r b a n k s ) , and t h e i r s a l e s o f U . S . Government s e c u r i t i e s were p r o p o r t i o n a t e l y almost as l a r g e as f o r the o t h e r banks. indebtedness t o t h e i r W h i l e E u r o - d o l l a r banks i n c r e a s e d f o r e i g n branches by $ 7 . 0 b i l l i o n l a s t y e a r , * T r e n d s i n bank s a l e s o f commercial paper through mid-March, a r e shown i n T a b l e 7• their those 1970, -14- banks r e l y i n g on commercial paper i n c r e a s e d the volume o f l a t t e r by o n l y $ 1 . 9 b i l l i o n . Yet, the the two groups came out not v e r y f a r a p a r t when t h e i r s a l e s o f s e c u r i t i e s and the expansion i n nond e p o s i t sources a r e s e t a g a i n s t the a t t r i t i o n i n t o t a l deposits. The Banking S t r u c t u r e and the D i f f e r e n t i a l Impact o f Monetary R e s t r a i n t To o b t a i n a d i f f e r e n t - - and more i n f o r m a t i v e - - perspective on banking developments i n 1969, a n o t h e r grouping o f weekly banks was made. On the b a s i s o f a c o n s i d e r a b l e number of reporting criteria, 20 banks were i d e n t i f i e d and l a b e l e d " M u l t i - N a t i o n a l Banks." c r i t e r i a used i n c l u d e d s i z e , volume o f business l o a n s , The importance the F e d e r a l Funds market i n p a r t i c u l a r and the money market i n in general, the volume o f f o r e i g n l e n d i n g and p a r t i c i p a t i o n i n the Euro-dollar market. activities Using s i m i l a r c r i t e r i a but s t r e s s i n g domestic and r e l a t i v e importance i n one a r e a of the c o u n t r y , a d d i t i o n a l 60 banks were d e s i g n a t e d as fl an Major R e g i o n a l Banks." r e m a i n i n g 260 banks were d e s i g n a t e d "Large L o c a l Banks." The The changes i n b a l a n c e sheet items a t these groups o f banks i n 1968 and 1969 a r e p r e s e n t e d i n T a b l e 5 and 6 . As one would e x p e c t , this information p r e s e n t s a r o u g h l y s i m i l a r p i c t u r e to t h a t p r o v i d e d by the o t h e r ings o f banks. Yet, the e x p e r i e n c e i s put i n t o much sharper group- focus. The M u l t i - N a t i o n a l Bank group, which i s h e a v i l y comprised o f l a r g e Eurod o l l a r banks, was s u b j e c t t o the l a r g e s t percentage d e c l i n e i n d e p o s i t s . -15- The d e c l i n e a t M a j o r R e g i o n a l Banks n e a r l y matched t h a t r e c o r d e d a t the M u l t i - N a t i o n a l Banks, w h i l e a much s m a l l e r d e p o s i t occurred a t the L o c a l Bank group. deposit flow, reduction But d e s p i t e t h i s d i s p a r i t y in the percentage advances i n t o t a l e a r n i n g a s s e t s a t groups o f banks were e s s e n t i a l l y s i m i l a r . T h i s suggests t h a t the imbalances i n d e p o s i t flows were o f f s e t by an o p p o s i t e imbalance the growth o f nondeposit sources o f these in funds. The n o t i c e a b l e d i f f e r e n c e s a r e e v i d e n t w i t h r e s p e c t t o e a r n ing assets. T o t a l loans and business loans expanded more s h a r p l y the M u l t i - N a t i o n a l Banks than a t the o t h e r two groups o f banks. i s p a r t i c u l a r l y t r u e when compared w i t h the L o c a l Banks. at This So t h a t there i s some suggestion t h a t the M u l t i - N a t i o n a l Banks were more s u c c e s s f u l i n a v o i d i n g the r e s t r a i n t s o f a t i g h t monetary p o l i c y . This conclusion i s f u r t h e r supported by the f a c t t h a t l o a n s a l e s which were h e a v i e s t a t t h e M u l t i - N a t i o n a l Banks were not i n c l u d e d i n the computation. The expansion of r e a l e s t a t e l o a n s , which i n c l u d e a s i z a b l e p r o p o r t i o n of nonr e s i d e n t i a l p r o p e r t y a l o n g w i t h home mortgages, was a l s o considerably l a r g e r a t the M u l t i - N a t i o n a l Banks than a t e i t h e r of t h e o t h e r two groups. On the o t h e r hand, both of the l a t t e r expanded t h e i r loans more r a p i d l y than d i d the M u l t i - N a t i o n a l Finally, a t the end of 1969, consumer Banks. the M u l t i - N a t i o n a l Banks had a somewhat l a r g e r share o f t o t a l l o a n s , o f business loans and o f real e s t a t e loans — and a s l i g h t l y s m a l l e r share o f consumer loans — than -16- t h e y had a t the end o f 1968. in their relative The R e g i o n a l Banks made a modest g a i n share of business l o a n s , about h e l d t h e i r p l a c e in the case of r e a l e s t a t e l o a n s , and e x p e r i e n c e d a s l i g h t d e c l i n e i n the p r o p o r t i o n of b o t h t o t a l loans and loans to consumers. Banks 1 share of a l l The L o c a l of these a s s e t c a t e g o r i e s d e c l i n e d m o d e r a t e l y . The g e n e r a l c o n c l u s i o n which emerges from t h i s a n a l y s i s be expressed s u c c i n c t l y : can The l a r g e s t banks w i t h both n a t i o n a l and i n t e r n a t i o n a l customers - - and which m o b i l i z e funds i n both the domestic and i n t e r n a t i o n a l c a p i t a l markets - - a r e a b l e to a v o i d a p r o p o r t i o n o f the impact o f monetary r e s t r a i n t . m a i n t a i n — or even expand - - substantial I n doing so, t h e i r earning assets. they can The l a r g e regional banks can succeed almost as w e l l i n f o l l o w i n g a s i m i l a r course. The l a r g e r l o c a l banks, a l t h o u g h a l s o much l a r g e r than the average bank i n the c o u n t r y , can do so t o a much l e s s e r extent. Loans Sales and the Growth of Business Loans As i n d i c a t e d a t s e v e r a l places i n t h i s d i s c u s s i o n , the expansion of business loans a t commercial banks d u r i n g 1969 was c o n s i d e r a b l y obscured by s a l e s o f loans t o o b t a i n funds t o meet new demands. Trends i n such l o a n s a l e s a r e shown i n T a b l e 7. At the end o f l a s t October, 143 banks were i n v o l v e d i n such loan s a l e s , and the amount s o l d o u t r i g h t t o t a l e d $ 5 . 7 b i l l i o n . More than four-fifths of t h i s t o t a l r e p r e s e n t e d s a l e s to the banks 1 a f f i l i a t e s and s u b s i d i a r i e s and the r e s t t o the nonbank p u b l i c . Most of the loans sold t o bank s u b s i d i a r i e s and a f f i l i a t e s r e f l e c t a c q u i s i t i o n s by the l a t t e r f o r which -17payment was made from t h e proceeds o f t h e i r s a l e s o f connnercial paper t o the p u b l i c . However, some o f the loans were s o l d by banks t o f o r e i g n branches, w i t h the l a t t e r proceeds o f E u r o - d o l l a r d e p o s i t s . paying f o r the t r a n s f e r out o f their the As of March 11, 1970, the volume o f loans s o l d had climbed to $ 7 . 8 b i l l i o n ; the d i s t r i b u t i o n between a f f i l i a t e s and the nonbank p u b l i c was about the same as i t was a t the end of October. As mentioned e a r l i e r , the loans s o l d by the commercial banks c o n s i s t m a i n l y o f loans t o business borrowers. If these s a l e s a r e added t o the volume o f business loans o u t s t a n d i n g on the books o f t h e banks, the r a t e of growth i n business loans i n 1969 i s r a i s e d as shown i n the f o l l o w i n g s t a t i s t i c s C l a s s i f i c a t i o n o f Banks A l l W e e k l y R e p o r t i n g Banks E u r o - d o l l a r Banks Commercial Paper I s s u e r s A l l O t h e r Banks M u l t i - N a t i o n a l Banks M a j o r R e g i o n a l Banks L a r g e L o c a l Banks 1968 11.4 10.6 16.4 9.8 11.2 11.3 11.9 substantially, (1968 d a t a need no a d j u s t m e n t ) : A n n u a l Perc«; n t a g e Rate ojt Change i n B u s i n e s s Lotins A f t e r A d j ii s t m e n t f o r Loan S a l e s After Before Adjustment Adjustment Difference 4.0 9.7 13.7 9.9 15.4 5.5 7.8 10.2 2.4 10.6 12.6 2.0 10.4 9.9 7.6 16.0 12.3 8.0 C l e a r l y t h e l o a n s a l e s have been h e a v i e s t a t t h e 5.6 2.4 0.4 largest b a n k s , and t h e u n d e r s t a t e m e n t o f t h e r a t e o f g r o w t h o f b u s i n e s s shown i n t h e p u b l i s h e d s t a t i s t i c s , institutions. it has a l s o been g r e a t e s t a t When t h e l o a n s s o l d a r e f o l d e d b a c k i n t o t h e appears t h a t the r a t e o f expansion o f business loans a t loans, these figures, the weekly -18- r e p o r t i n g banks was more than t w o - f i f t h s h i g h e r than o r i g i n a l l y A t the E u r o - d o l l a r banks, the expansion was more than 50 per cent h i g h e r . Among those i s s u i n g commercial paper o n l y , i t was about o n e - t h i r d and a t o t h e r banks i t was o n e - f i f t h h i g h e r . When the banks a r e a c c o r d i n g t o the s t r a t e g i c r o l e s they p l a y w i t h r e s p e c t to types of f i n a n c i a l t r a n s a c t i o n s , sharper focus. shown. larger, classified different the same p a t t e r n emerges - - but w i t h The growth r a t e i s r a i s e d by more than o n e - h a l f a t the M u l t i - N a t i o n a l Banks; by o n e - q u a r t e r a t the R e g i o n a l Banks, and by o n l y 5 per cent a t the L o c a l institutions. But what i s even more s t r i k i n g , i s s u e r s and the l o c a l banks, 1969 - - except f o r commercial paper the growth r a t e f o r business loans once the s a l e s a r e accounted f o r - - was c o n s i d e r a b l y than t h a t recorded i n 1968. The u n a d j u s t e d f i g u r e s , in higher except f o r one group o f banks, would have suggested a n o t i c e a b l y lessened pace o f expa . o i o n i n business loans i n 1969 compared w i t h T^us, the a b i l i t y of some of the s t r o n g e s t commercial banks t o s e l l p a r t of t h e i r e x i s t i n g p o r t f o l i o s demands f o r lighten -- 1968. t o o b t a i n funds t o meet new funds i s another way open t o them t o escape - the impact o f monetary or a t least restraint. Long-Run TagV of Monetary Management As I r e f l e c t on the d i f f e r e n t i a l impact o f monetary policy as m i r r o r e d i n the behavior of d i f f e r e n t segments of the banking structure, I become more and more convinced t h a t the F e d e r a l Reserve -19- System should g i v e s e r i o u s c o n s i d e r a t i o n to revamping i t s o f monetary c o n t r o l . the t r a d i t i o n a l I p e r s o n a l l y see no need t o c a s t a s i d e any of tools - - and r e s e r v e r e q u i r e m e n t s . be used - - instruments i.e., the d i s c o u n t r a t e , open market operations, These have been used - - and can c o n t i n u e t o i n f l u e n c e the cost and a v a i l a b i l i t y of to credit. But, i n my o p i n i o n , n e i t h e r of these instruments has been the c u t t i n g edge of monetary p o l i c y d u r i n g the l a s t few y e a r s . This has been p r o v i d e d by the c e i l i n g s set by the F e d e r a l Reserve Board under R e g u l a t i o n Q, l i m i t i n g the r a t e s o f i n t e r e s t which member banks can pay on time d e p o s i t s . This has been p a r t i c u l a r l y t r u e o f c e i l i n g s on n e g o t i a b l e c e r t i f i c a t e s f r e q u e n t l y r e f e r r e d t o as CD's. April, 1968, of d e p o s i t o f $ 1 0 0 , 0 0 0 and above the maximum r a t e payable was s e t a t 5 - 1 / 2 per c e n t . ( e s p e c i a l l y U.S. Treasury b i l l s ) , J u l y t o the end o f November o f t h a t y e a r , d e c l i n e of 15 per c e n t . p o l i c y was i n f o r c e , ceiling From the end of CD's a t the weekly reporting from $ 1 8 . 3 b i l l i o n t o $ 1 5 . 6 b i l l i o n , I n e a r l y 1968, when a more r e s t r i c t i v e the banks a g a i n l o s t CD's. February and the end o f June i n t h a t y e a r , by $ 1 . 8 b i l l i o n - - In instruments the maintenance of the induced a sharp a t t r i t i o n i n bank CD's o u t s t a n d i n g . banks shrank by $ 2 . 8 b i l l i o n - - -- From e a r l y December, 1965, u n t i l mid- 1966, as y i e l d s rose on o t h e r s h o r t - t e r m money market 9 per c e n t . the a monetary Between the end o f the volume o u t s t a n d i n g from $ 2 1 . 1 b i l l i o n to $ 1 9 . 3 b i l l i o n , declined a decrease of But the sharpest c u t - b a c k occurred d u r i n g the p e r i o d of -20- severe monetary r e s t r a i n t last year. A t the end o f 1968, the weekly r e p o r t i n g banks had $ 2 2 . 8 b i l l i o n of CD's o u t s t a n d i n g . 1970, the amount had d e c l i n e d t o $ 1 0 . 3 b i l l i o n , By February 4 , a l o s s of 55 per cent. U n d e r l y i n g the d e c i s i o n o f the F e d e r a l Reserve Board t o a l l o w t h i s a t t r i t i o n t o t a k e p l a c e - - and, i n f a c t , to encourage i t by r e s t r i c t i v e open market o p e r a t i o n s - - was the assumption t h a t banks would become l e s s w i l l i n g t o make new commitments t o l e n d as they became l e s s assured of t h e i r a b i l i t y to o b t a i n d e p o s i t s t o meet such commitments. The r e s u l t s would be a m o d e r a t i o n i n the growth of bank c r e d i t , i n g i n excess demand f o r r e a l r e s o u r c e s , and a dampening o f pressures. inflationary I b e l i e v e t h a t assumption was a reasonable one, and supported the a c t i o n s based on i t . bank b e h a v i o r which i t I a lessen- I t h i n k t h a t the p e r c e p t i o n of i m p l i e d was a l s o r e a s o n a b l e . In retrospect, it i s e v i d e n t t h a t i n both 1966 and 1969 - - as the F e d e r a l Reserve System a t t e m p t e d to employ monetary p o l i c y t o r e s t r a i n the a v a i l a b i l i t y credit -- the banks d i d not m o d i f y t h e i r lending policy of appreciably u n t i l i t became obvious t h a t they would see s u b s t a n t i a l a t t r i t i o n deposits. 1968, Moreover, i n e a r l y 1967 and a g a i n i n the second h a l f in of the banks q u i c k l y r e c o v e r e d t h e i r p r e v i o u s CD losses as monetary p o l i c y became e a s i e r - - and they a l s o q u i c k l y expanded loans and r a p i d l y b u i l t up a s i z a b l e backlog of commitments to l e n d t o t h e i r customers. W i t h the i n c r e a s e i n the c e i l i n g s i n January of t h i s ( t o a maximum o f 7 - 1 / 2 per c e n t ) year the p o s s i b i l i t y of a q u i c k r e c o v e r y of CD losses w i l l a g a i n e x i s t i f market y i e l d s d e c l i n e business sharply. -21- I n my judgment, the s p r e a d i n g tendency on the p a r t o f banks t o accept commitments i s a development which may pose a s e r i o u s f o r monetary management i n the f u t u r e . estimate, W h i l e I have no q u a n t i t a t i v e I do have the impression t h a t such commitments a r e pinned down by the payment o f a f e e . problem To the e x t e n t t h a t t h i s increasingly practice spreads — and t h e banks a r e thus locked i n t o b i n d i n g agreements to l e n d — the a b i l i t y o f the F e d e r a l Reserve to i n f l u e n c e the r a t e of growth of bank loans would be reduced. However, the l i m i t a t i o n on maximum i n t e r e s t r a t e s payable on time d e p o s i t s has become p a r t of the F e d e r a l R e s e r v e ' s k i t o f policy tools. i n my On s e v e r a l occasions i n the p a s t , I have s a i d t h a t - - judgment - - the F e d e r a l Reserve should t a k e t h e f i r s t o p p o r t u n i t y has t o l i f t such c e i l i n g s and t o put them on a standby b a s i s . nately, such an o p p o r t u n i t y it Unfortu- has n o t a r i s e n - - m a i n l y because the move would probably s t i m u l a t e a new round of i n t e n s e c o m p e t i t i o n among banks and savings i n t e r m e d i a r i e s , associations) some of whom ( p a r t i c u l a r l y savings and l o a n a r e not i n a good p o s i t i o n to bear the f u l l impact o f such c o m p e t i t i o n . However, t h i s r e a s o n i n g a p p l i e s p r i m a r i l y t o the r a t e c e i l i n g s on consumer-type time d e p o s i t s and t o a much l e s s e r extent t o the c e i l i n g s on CD's — which a r e r e a l l y money market i n s t r u m e n t s c o m p e t i t i o n w i t h T r e a s u r y b i l l s and o t h e r s h o r t - t e r m investment outlets. Thus, I am s t i l l p e r s o n a l l y h o p e f u l t h a t t h i s p o s s i b i l i t y w i l l not be forgotten. in -22- E v o l u t i o n o f Reserve Requirements i n Recent Years I n the meantime, I t h i n k i t would be w e l l to e x p l o r e p o s s i b i l i t y o f r e o r d e r i n g the way i n which the t r a d i t i o n a l the instruments o f monetary p o l i c y a r e employed t o i n f l u e n c e the cost and a v a i l a b i l i t y of c r e d i t . In particular, reserve requirements. I t h i n k more emphasis should be focused on As a m a t t e r o f f a c t , has shown c o n s i d e r a b l e f l e x i b i l i t y i n the l a s t few y e a r s . the F e d e r a l Reserve Board i n the use o f r e s e r v e For the most p a r t , t h i s has i n v o l v e d changes i n such r e q u i r e m e n t s t o d i f f e r e n t i a t e bank - - a s i m p l i e d by d e p o s i t s i z e . requirements tailoring the impact by s i z e of For example, in July, 1966, the r e q u i r e m e n t on time d e p o s i t s over $5 m i l l i o n was r a i s e d from 4 per cent t o 5 per c e n t — and k e p t a t 4 per cent on d e p o s i t s below t h a t amount. I n September o f the same y e a r , the percentage was r a i s e d f u r t h e r to 6 per c e n t on the $5 m i l l i o n and over c a t e g o r y ; a g a i n no change was made f o r amounts below t h a t f i g u r e . I n March, 1967, i n two 1 / 2 percentage p o i n t s t e p s , r e s e r v e requirements were c u t from 4 per c e n t to 3 per cent on savings d e p o s i t s and on time d e p o s i t s under $5 m i l l i o n . The r e q u i r e - ment was l e f t a t 6 per cent on time d e p o s i t s over $5 m i l l i o n . That r e s u l t i n g s t r u c t u r e o f r e s e r v e requirements has remained unchanged f o r the l a s t t h r e e years. I n January, 1968, the F e d e r a l Reserve Board a l s o began t o d i f f e r e n t i a t e r e s e r v e requirements on demand d e p o s i t s . At that time, t h e r e q u i r e m e n t was r a i s e d from 1 6 - 1 / 2 per c e n t to 17 per c e n t on -23- d e p o s i t s over $5 m i l l i o n a t Reserve C i t y banks, w h i l e the r e q u i r e m e n t on amounts below t h i s f i g u r e was l e f t unchanged. A t c o u n t r y banks, corresponding i n c r e a s e was from 12 per cent t o 1 2 - 1 / 2 per cent the for demand d e p o s i t s over $5 m i l l i o n , w h i l e i t remained a t 12 per cent on amounts below t h a t c u t o f f . I n A p r i l l a s t y e a r , a 1 / 2 percentage point i n c r e a s e was made e f f e c t i v e a t both Reserve C i t y and c o u n t r y banks and on demand d e p o s i t s both above and below $5 m i l l i o n . But undoubtedly the most i m a g i n a t i v e use o f r e s e r v e require- ments i n r e c e n t years has been t h e i r a p p l i c a t i o n on E u r o - d o l l a r ings by American banks. I n March, 1969, I borrow- suggested t h a t such a step be considered as a means of making domestic monetary p o l i c y more e f f i c i e n t . E f f e c t i v e l a s t October, a 10 per cent m a r g i n a l r e s e r v e r e q u i r e m e n t was s e t on member bank l i a b i l i t i e s t o overseas branches and on a s s e t s a c q u i r e d by such branches from t h e i r head o f f i c e s ings d u r i n g a base p e r i o d - - the four weeks ending i n excess o f May outstand- 28, 1969. A 10 per c e n t m a r g i n a l r e s e r v e requirement was a l s o s e t on loans extended t o U . S . r e s i d e n t s by overseas branches o f member banks i n excess o f o u t s t a n d i n g s d u r i n g a g i v e n base p e r i o d . A s i m i l a r 10 per cent r e s e r v e r e q u i r e m e n t was f i x e d on borrowings by domestic o f f i c e s o f member banks from f o r e i g n banks; i n t h i s i n s t a n c e , however, only a 3 per c e n t reserve i s r e q u i r e d a g a i n s t such borrowings t h a t do n o t exceed a s p e c i f i e d base amount. The r e s e r v e - f r e e bases a r e s u b j e c t t o a u t o m a t i c r e d u c t i o n -- unless waived by the Board - - when, i n any p e r i o d used t o c a l c u l a t e a -24- reserve requirement - - o u t s t a n d i n g amounts s u b j e c t to r e s e r v e ments f a l l below the o r i g i n a l I n the same v e i n , require- base. the F e d e r a l Reserve Board p u b l i s h e d for comment a p r o p o s a l t o a p p l y r e s e r v e r e q u i r e m e n t s to commercial paper when o f f e r e d by a b a n k - r e l a t e d c o r p o r a t i o n and when the proceeds a r e used t o supply funds t o the member bank. L a s t October, the Board p u b l i s h e d f o r comment a p r o p o s a l t o a p p l y i n t e r e s t r a t e c e i l i n g s commercial paper used i n t h i s way. Late i n February, to the Board announced t h a t c o n s i d e r a t i o n of the i s s u e was b e i n g put a s i d e a t that time because o f a d e s i r e t o a v o i d e x e r t i n g a d d i t i o n a l r e s t r a i n t on money and c r e d i t m a r k e t s . However, the q u e s t i o n i s s t i l l open, and the p o s s i b i l i t y of applying a reserve requirement along w i t h - - or in l i e u o f - - an i n t e r e s t r a t e c e i l i n g a l s o remains open f o r t h e Board to decide. E x t e n d i n g the Range o f Reserve Requirements I t was a g a i n s t t h i s background t h a t I suggested i n February t h a t c o n s i d e r a t i o n might be g i v e n t o a p p l y i n g a supplemental r e s e r v e r e q u i r e m e n t on loans extended by U . S . banks t o f o r e i g n borrowers as a replacement f o r the p r e s e n t v o l u n t a r y f o r e i g n c r e d i t r e s t r a i n t program. A t the t i m e , I emphasized t h a t such a m a r k e t - o r i e n t e d approach would be superior and a t of t o one based on c e i l i n g s f i x e d by a d m i n i s t r a t i v e d e c i s i o n the same time i t would o f f e r m e a n i n g f u l p r o t e c t i o n t o our balance payments. -- -25- I n my judgment, thought might a l s o be g i v e n t o the possibility o f a d o p t i n g such a r e q u i r e m e n t f o r domestic purposes as w e l l . The o b j e c t i v e o f the supplemental r e s e r v e on domestic loans would be t o r a i s e the cost of bank l e n d i n g by r e d u c i n g the m a r g i n a l r a t e o f return t o the bank making the l o a n — and t h e r e b y dampen the expansion of bank loans. The b a s i c purpose o f the supplemental r e s e r v e would n o t be simply t o l e v y new r e s e r v e requirements on the banking system. If it were thought t h a t i t s a d o p t i o n would r a i s e the average l e v e l o f r e s e r v e s r e q u i r e d beyond what the Board thought was necessary f o r g e n e r a l t i o n purposes, stabiliza- the r e g u l a r r e s e r v e requirements a p p l i c a b l e t o d e p o s i t s o f member banks o f t h e F e d e r a l Reserve System could be reduced. I n suggesting t h a t t h i s p o s s i b i l i t y be e x p l o r e d , convinced t h a t the F e d e r a l Reserve needs a b e t t e r means o f I am influencing the a v a i l a b i l i t y of c r e d i t i n d i f f e r e n t s e c t o r s o f t h e economy. A t the same t i m e , I am k e e n l y aware of the d e s i r a b i l i t y o f a s s u r i n g t h a t — as f a r as p o s s i b l e - - the i n s t r u m e n t used would m i n i m i z e i n t e r f e r e n c e with normal business d e c i s i o n s and the economic f o r c e s o f the market p l a c e . The banking community — w i t h i n whatever o u t e r l i m i t s o f c r e d i t expansion the c e n t r a l bank considers a r e c o n s i s t e n t w i t h s t a b i l i z a t i o n p o l i c y — can b e s t a l l o c a t e f i n a n c i a l resources among i n d i v i d u a l b o r r o w e r s . There- f o r e , banks should be assured as much freedom o f choice as t h e b a s i c o b j e c t i v e s o f m a i n t a i n i n g a balanced economy would p e r m i t . Since, during a period of i n f l a t i o n , t h e o b j e c t would continue t o be t o r e s t r a i n the growth o f bank l e n d i n g , r a t h e r t h a n t o burden t h e -26- amount of l e n d i n g a c h i e v e d by some d a t e i n t h e p a s t , the r e s e r v e s might a p p l y o n l y t o the amount of l e n d i n g above some determined volume. is, the cash r e s e r v e s would c o n s t i t u t e m a r g i n a l , required That r a t h e r than a v e r a g e , reserves. S o l e l y f o r the sake of i l l u s t r a t i o n , l e t us assume t h a t such a supplemental r e s e r v e r e q u i r e m e n t had gone i n t o e f f e c t a t the end of 1968. L e t us t a k e $220 b i l l i o n as the amount o f loans on the books of member banks on t h a t d a t e . Suppose f u r t h e r t h a t a bank were required t o s e t a s i d e cash r e s e r v e s equal t o 20 per cent of the amount by which i t s o u t s t a n d i n g loans exceeded the amount of such loans o u t s t a n d i n g b e f o r e the r e s e r v e program went i n t o f o r c e . rose by about $20 b i l l i o n l a s t y e a r , just Since loans a t member banks they would have been r e q u i r e d p u t up an a d d i t i o n a l $4 b i l l i o n - - under these assumptions. Since to their r e q u i r e d r e s e r v e s averaged about $27 b i l l i o n i n 1969, t h i s would have r e p r e s e n t e d an i n c r e a s e of roughly 15 per cent. T h i s f o r m u l a t i o n might be v a r i e d so t h a t a cash r e s e r v e require- ment might be a p p l i e d a g a i n s t whatever new loans the bank might extend rather than a p p l y a m a r g i n a l r e s e r v e a g a i n s t the amount of loans above the amount o u t s t a n d i n g on a p a r t i c u l a r To i l l u s t r a t e , date. a bank t h a t extended a l o a n d u r i n g 1969 would have been r e q u i r e d t o s e t a s i d e cash r e s e r v e s of 20 per cent of the amount of t h a t l o a n . Loans a l r e a d y o u t s t a n d i n g as o f the b e g i n n i n g of 1969 would have r e q u i r e d no r e s e r v e s nor would they have been under any quantitative -27- restraint. Any e x t e n s i o n o f those o u t s t a n d i n g l o a n s , as w e l l as any drawdowns of t h e n - e x i s t i n g l i n e s of c r e d i t , would have been t r e a t e d as new loans and would have been s u b j e c t t o the r e s e r v e requirement. This v a r i a n t would be e s p e c i a l l y a t t r a c t i v e i n being f r e e o f any r e l a t i o n s h i p r e p r e s e n t e d by d i f f e r i n g volumes o f loans o u t s t a n d i n g among i n d i v i d u a l banks a t a g i v e n base d a t e . Under e i t h e r v a r i a n t o f t h i s approach, the percentage r e q u i r e m e n t would be s e t on the b a s i s o f the F e d e r a l R e s e r v e ' s t i o n o f the degree o f i n f l u e n c e t o be a p p l i e d , f o r domestic reasons, a g a i n s t unchecked bank l o a n expansion. l e v i e d i n p r o p o r t i o n t o the l e n d i n g . reserve determina- stabilization The r e s t r a i n t would be The approach would n o t require immediate a s s e t adjustments by each bank; i n s t e a d i t would l e a v e d e c i s i o n t o i n d i v i d u a l banks t o adapt t h e i r l e n d i n g t o the a t the the circumstances time. The loans t h a t would be s u b j e c t t o the supplemental r e s e r v e requirement could be d e f i n e d i n a way t h a t would take account o f whatever s e t of p r i o r i t i e s example: if the o b j e c t i v e of p u b l i c p o l i c y were to g i v e p r i o r i t y loans to meet the given e f f e c t t h a t might be e s t a b l i s h e d from time t o t i m e . needs of S t a t e and l o c a l governments, to could be through a r e s e r v e r a t i o a g a i n s t such loans s m a l l e r the r a t i o f o r o t h e r l o a n s . if it than Loans t o a c q u i r e homes could be exempted p u b l i c p o l i c y c a l l s f o r g i v i n g housing the h i g h e s t p r i o r i t y — by s e t t i n g the r e q u i r e m e n t a t z e r o . I n contrast, if For policy called for -- -28- s u b s t a n t i a l r e s t r a i n t on consumer c r e d i t or on loans t o b u s i n e s s , reserve r a t i o applicable t o such loans could be s e t q u i t e h i g h . f a c t , any a r r a y o f l o a n p r i o r i t i e s the In could be adopted and the r e s e r v e r e q u i r e m e n t s c a l e d a c c o r d i n g l y - - depending on the changing needs of public policy. Such a supplemental cash r e s e r v e requirement system sketched above would have the e f f e c t o f r e s t r a i n i n g bank l e n d i n g , b o t h i n and t o p a r t i c u l a r s e c t o r s of the economy. total However, i t would do so w i t h - o u t any d i r e c t i n t e r f e r e n c e by the F e d e r a l Reserve i n l e n d i n g d e c i s i o n s by i n d i v i d u a l banks. The new r e s e r v e r e q u i r e m e n t , being a f a i r l y p r o p o r t i o n o f the r e s e r v e s now r e q u i r e d a g a i n s t d e p o s i t small liabilities, would n o t cause a s i g n i f i c a n t d i s t u r b a n c e o f domestic monetary policy. W h i l e t h e r e would be an impact on the r e q u i r e d r e s e r v e s o f member banks, if t h e F e d e r a l Reserve wished, t h i s could be e a s i l y o f f s e t by an a p p r o p r i a t e r e d u c t i o n i n r e s e r v e requirements on d e p o s i t s or by open market operations. I have s t r e s s e d c o n s i d e r a t i o n o f the supplemental reserve r e q u i r e m e n t a g a i n s t loans as a l o n g - r u n approach. Aside from the time t h a t would be needed t o e x p l o r e i t s r a m i f i c a t i o n s , the F e d e r a l Reserve Board does not now have the a u t h o r i t y t o a p p l y r e s e r v e r e q u i r e m e n t s to domestic loans o f member banks, a l t h o u g h i t does appear t o have such a u t h o r i t y w i t h respect to t h e i r ing further foreign loans. Moreover, t o a v o i d add- t o the a l r e a d y e x i s t i n g i n e q u i t i e s between nonmember and -29- member banks o f the F e d e r a l Reserve System, a l l commercial banks should be made s u b j e c t t o the new p r o v i s i o n . Thus, i f the system were t o be adopted f o r domestic purposes, e n a b l i n g l e g i s l a t i o n would have t o be passed by Congress. I t might be r e c a l l e d t h a t , for several years, the Board has urged i n i t s Annual Report t h a t l e g i s l a t i o n be passed which would p e r m i t the e s t a b l i s h m e n t of a system o f graduated r e s e r v e require- ments, w h i l e e x t e n d i n g the coverage t o nonmember banks — who would a l s o be g i v e n access t o the F e d e r a l Reserve Banks 1 d i s c o u n t window. Congress ever gets around t o t a k i n g up t h a t e a r l i e r p r o p o s a l , If it a l s o consider an even f u r t h e r broadening o f t h e scope o f r e s e r v e might require- ments t o i n c l u d e the o p t i o n t o impose such requirements on p a r t i c u l a r types o f bank loans or investments. Short-Run Tasks o f Monetary Management The p r o s p e c t i v e course o f monetary p o l i c y over the months ahead i s o b v i o u s l y the main t o p i c o f i n t e r e s t I r e c o g n i z e and understand such i n t e r e s t , satisfy i t . t o many o b s e r v e r s . While I must r e f r a i n from t r y i n g By l o n g - s t a n d i n g t r a d i t i o n , members o f the F e d e r a l Reserve Board t r y t o a v o i d commenting on f u t u r e p o l i c y a c t i o n . The F e d e r a l Open Market Committee has c l e a r l y s t a t e d r u l e s s p e c i f y i n g t h e of time ( c u r r e n t l y 90 days) which must e l a p s e b e f o r e the u n d e r l y i n g i t s p o l i c y d e c i s i o n s a r e made p u b l i c . length considerations I believe that the t r a d i t i o n of the Board and the r u l e s o f the Open M a r k e t Committee a r e both well-founded. to Moreover, t h e r e i s a l s o a long t r a d i t i o n that, -30- when Board members do speak on monetary m a t t e r s - - and when they do so w i t h o u t e x p l i c i t d e l e g a t i o n from t h e Board those of t h e s p e a k e r - - a n d should not the views expressed a r e be a t t r i b u t e d to h i s colleagues. W i t h t h a t background, I do have a p e r s o n a l assessment of the r e q u i r e m e n t s o f monetary p o l i c y a t the p r e s e n t j u n c t u r e o f the against i n f l a t i o n . I n my o p i n i o n , fight the time has c e r t a i n l y not come to l a y a s i d e the e f f o r t t o a c h i e v e and m a i n t a i n a reasonable degree o f price s t a b i l i t y i n t h i s country. And we should remind o u r s e l v e s that t h e a t t a i n m e n t o f t h a t o b j e c t i v e was the m i s s i o n on which the F e d e r a l Reserve s e t out i n December, It 1968. i s obvious t h a t the e f f o r t t o d a t e — i n v o l v i n g both f i s c a l and monetary p o l i c y — has n o t been wasted. The over-hang o f excess demand which had plagued the economy f o r s e v e r a l years has been eliminated. In particular, the defense s e c t o r , which became a major source o f i n f l a t i o n a r y pressures i n mid-1965 when the Vietnam War was a c c e l e r a t e d and t a x e s were n o t i n c r e a s e d t o pay f o r i t , p l a y i n g the same r o l e . i s no longer The nondefense component o f the F e d e r a l budget a l s o r o s e much more s l o w l y i n the l a s t y e a r ; and i n the c u r r e n t y e a r , a f u r t h e r s l o w i n g seems i n p r o s p e c t . ditures (particularly calendar P e r s o n a l consumption expen- f o r d u r a b l e goods) expanded j u s t over h a l f as r a p i d l y i n 1969 as they d i d i n 1968, and the slower pace seems t o p e r s i s t through the r e s t o f t h i s y e a r . likely L a s t y e a r o u t l a y s by S t a t e and l o c a l governments rose somewhat l e s s i n percentage terms than they -31- d i d i n the previous year - - and here a l s o the c u r r e n t y e a r may see a still s m a l l e r r a t e o f growth. I n the housing s e c t o r , w h i l e the b a c k l o g o f p o t e n t i a l demand remains s t r o n g , a c t u a l spending has d e c l i n e d more or l e s s s t e a d i l y since the second q u a r t e r o f l a s t y e a r . s u b s t a n t i a l pickup appears on the h o r i z o n i n the months ahead. The one a r e a s t i l l f i x e d investment. Moreover, no immediately showing c o n s i d e r a b l e s t r e n g t h i s business L a s t y e a r , e x p e n d i t u r e s f o r t h i s purpose rose almost t w i c e as r a p i d l y as they d i d i n 1968, and r e c e n t f o r e c a s t s o f p l a n t and equipment o u t l a y s suggest t h a t a n o t h e r s i z a b l e g a i n can be expected t h i s year — a l t h o u g h perhaps n o t as l a r g e as some o f the surveys might imply. But t a k e n as a whole, the r a p i d pace o f expansion i n economic a c t i v i t y e v i d e n t i n 1968 and through much of 1969 has moderated substantially. Moreover, when the r i s e i n the g e n e r a l p r i c e l e v e l i s f o r , r e a l o u t p u t — as measured by the GNP — grew v e r y l i t t l e allowed after the f i r s t q u a r t e r o f l a s t y e a r , and a s l i g h t d e c l i n e occurred i n t h e fourth quarter. August t e l l s The downtrend i n i n d u s t r i a l p r o d u c t i o n s i n c e the same s t o r y . The r a t e o f c a p a c i t y u t i l i z a t i o n last in m a n u f a c t u r i n g has a l s o d e c l i n e d n o t i c e a b l y from t h e l e v e l s reached in the s p r i n g o f 1969, and the e x c e s s i v e a c c u m u l a t i o n o f i n v e n t o r i e s seems t o have moderated. Above a l l , the r e c e n t r i s e i n the unemployment t o j u s t over 4 per c e n t c l e a r l y suggests t h a t the pressures on r e a l resources have slackened i n the l a s t s e v e r a l months. rate -32- Unfortunately, prices. the same cannot be s a i d about the pressures on The simple f a c t i s t h a t - - r e a l economy have had l i t t l e so f a r - - these developments i n the impact on the r a t e o f i n c r e a s e i n p r i c e s , and t h e r e i s no b a s i s f o r concluding t h a t the b a t t l e a g a i n s t has been won. It inflation i s t r u e t h a t i n March w h o l e s a l e p r i c e s advanced by 1 / 1 0 o f 1 per c e n t , a c c o r d i n g t o the p r e l i m i n a r y e s t i m a t e s . The advance i n February was 3 / 1 0 o f 1 per c e n t , and i t was 8 / 1 0 o f 1 per cent i n January. stability W h i l e these trends might suggest t h a t the r e t u r n of i n p r i c e s may become more e v i d e n t i n the months ahead, outcome remains t o be a c h i e v e d . Currently, the w h o l e s a l e p r i c e i s 4 . 3 per cent above the l e v e l i n March, 1969. the GNP d e f l a t o r index Measured i n terms o f ( t h e most b r o a d l y based o f the v a r i o u s p r i c e t h e p e r s i s t e n c e o f i n f l a t i o n i s even more c l e a r . that Last year, indexes), this rose by 4 . 7 per c e n t , compared w i t h 4 per cent the year b e f o r e . index During the f o u r t h q u a r t e r of 1969, the annual r a t e of i n c r e a s e was 4 . 5 per c e n t , and the c u r r e n t q u a r t e r may r e g i s t e r a g a i n almost as l a r g e . by the end o f t h i s y e a r , In fact, t h i s comprehensive measure of the pace o f infla- t i o n may s t i l l be r i s i n g a t a r a t e w e l l above what most Americans would f i n d a c c e p t a b l e i n the long-run. I n s t r e s s i n g t h a t i n f l a t i o n i s s t i l l a problem, I r e c o g n i z e t h a t one should expect a l a g between t h e time measures a r e t a k e n and the time when t h e i r l e v e l can be seen. fully stabilization impact on the g e n e r a l p r i c e I am a l s o aware t h a t r i s k s a r e i n h e r e n t i n an a t t e m p t -33- f o e x e r t enough r e s t r a i n t maintain i t through s t a b i l i z a t i o n p o l i c i e s - - and t o long enough — t o b r i n g i n f l a t i o n under c o n t r o l . n o t b l i n d t o the p o s s i b i l i t y t h a t the c u m u l a t i v e e f f e c t s o f I am fiscal and monetary r e s t r a i n t could reduce the r a t e o f growth o f r e a l output so much - - w i t h i t s consequent impact on r e s o u r c e level use and t h e o f unemployment — t h a t the p u b l i c would f i n d t h e costs u n a c c e p t a b l e . On the o t h e r hand, I am a l s o f u l l y aware o f how d e e p l y imbedded t i o n a r y e x p e c t a t i o n s have become. So, g i v e n t h e c o n t i n u e d infla- strength i n business i n v e s t m e n t and the s t r o n g p e n t - u p demand f o r h o u s i n g , think i t i s extremely important t h a t n a t i o n a l s t a b i l i z a t i o n I policies be conducted i n a way t h a t w i l l a v o i d p r o v i d i n g so much s t i m u l u s that a new b u r s t o f i n f l a t i o n w i l l be g e n e r a t e d b e f o r e we have succeeded i n checking the i n f l a t i o n a r y pressures we s t i l l face. T a b l e 1. Amount and Sources of Funds Raised i n C a p i t a l Markets by Major S e c t o r s , 1968 and 1969 (Amounts i n b i l l i o n s o f d o l l a r s ) SECTOR Amount T o t a l f u n d s r a i s e d by sectors 1968 Per Cent of t o t a l Amount 1969 Per Cent of t o t a l nonfinancial 97.4 100.0 85.7 100.0 U . S . Government P u b l i c debt s e c u r i t i e s Budget Agency i s s u e s 13.4 10.3 3.0 13.5 10.6 2.9 -5.4 -2.8 -2.6 -6.3 -3.3 -3.0 A l l other nonfinancial 84.1 86.5 91.0 106.3 D i s t r i b u t i o n among s e c t o r s 84.1 100.0 91.0 100.0 S t a t e and l o c a l g o v e r n m e n t s Households N o n f i n a n c i a l business Corporate Nonfarm n o n c o r p o r a t e Farm Foreign 10.2 31.8 39.1 31.0 5.2 2.9 3.0 12.1 37.7 46.5 36.8 6.2 3.5 3.6 9.2 30.9 47.4 37.2 6.6 3.5 3.6 10.1 34.0 52.0 40.9 7.3 3.8 3.8 97.4 100.0 85.1 100.0 3.7 5.0 5.2 -0.2 39.0 33.5 13.8 2.5 3.8 5.1 5.3 -0.2 40.0 34.4 14.2 2.6 4.2 2.3 2.5 -0.2 9.5 31.5 38.2 -0.1 4.9 2.7 2.9 -0.2 11.2 37.0 44.8 -0.1 Sources o f f u n d s sectors advanced F e d e r a l Reserve System U . S . Government Direct C r e d i t agencies ( n e t ) C o m m e r c i a l banks P r i v a t e nonbank f i n a n c e P r i v a t e domestic n o n f i n a n c i a l Foreign Source: F l o w o f Funds A c c o u n t s D i v i s i o n o f Research and F e d e r a l Reserve B o a r d Statistics Table 2. Sources and Uses o f Funds by Commercial Banks, 1968 and 1969 (Amounts i n b i l l i o n s o f d o l l a r s ) 19( 58 SOURCE OR USE Per cent of t o t a l Amount 43.2 39.2 38.0 2.8 8.7 0.3 3.5 3.2 4.9 15.7 -1.1 100.0 90.5 85.0 6.5 20.2 0.7 8.1 7.3 11.3 36.4 -2.6 11.5 9.6 10.9 -11.5 1.2 -0.3 2.5 2.5 3.1 13.0 0.5 100.0 83.5 94.5 -100.0 10.4 -2.6 20.4 20.4 27.0 113.0 0.4 1.3 3.0 -1.2 -10.4 2.1 1.9 4.8 4,4 0.2 1,6 1.7 13.9. 41.4 9.3 20.6 2.5 18.1 1.0 100.0 22.4 49.8 6.0 43.8 2.4 9.6 7.3 -11.2 -12.0 0.8 -0.1 100.0 76.0 -116.5 -125.0 8.5 1.0 Amount Net a c q u i s i t i o n of f i n a n c i a l assets T o t a l loans and i n v e s t m e n t s C r e d i t market i n s t r u m e n t s U . S . Government s e c u r i t i e s S t a t e and l o c a l o b l i g a t i o n s C o r p o r a t e bonds Home mortgages O t h e r mortgages Consumer c r e d i t Bank loans ( n . e . c . ) Open market paper Security credit V a u l t cash and member bank r e s e r v e s Miscellaneous assets Net i n c r e a s e i n l i a b i l i t i e s Demand d e p o s i t s , n e t Time d e p o s i t s L a r g e n e g o t i a b l e CD's Other F e d e r a l Reserve f l o a t Borrowing a t F e d e r a l Reserve Banks Security Issues Other l i a b i l i t i e s 196 9 - 0.2 10.3 - 0.4 24.8 Per c e n t of t o t a l - 0.1 13.4 - 1.0 139.0 Discrepancy 0.9 - 1.1 - Current 3.3 - 3.7 - Source: Surplus Flow o f Funds Accounts D i v i s i o n o f Research and F e d e r a l Reserve Board Statistics Table 3 ANNUAL CHANGES I N MAJOR BALANCE SHEET ITEMS, WEEKLY REPORTING BANKS 1968 and 1969 1 / ( I n b i l l i o n s of d o l l a r s , not seasonally adjusted) A l l Weekly Report ing Banks 1969 1968 Items Banks: With Sel.ected Nondleposit Sc•urces of 1Funds Euro- d o l l a r Commeir c i a l Borro wins§/ Paper O n l y ! / Tot a l 1968 1969 1969 1968 1969 - .5 1.1 .3 1.1 1.0 .3 .1 .1 9 4 .. 9 4.4 1.8 1.1 .8 - 2.7 - 1.7 .4 4.9 2.6 .8 1.5 7.2 2.3 4.9 1.4 3.5 -8.6 1.2 - 9.8 - 6.9 - 2.9 2.6 .7 1.9 .1 1.8 - 3.1 .3 - 2.9 - 2.5 .4 4.6 1.6 3.0 1.3 1.7 - 6.3 8.2 7.0 3.3 4.5 2.7 4.0 7.2 7.0 2.3 4.2 2.7 2.3 1.0 1.0 .3 4.3 n. a. 19.7 1.0 5. 6 17.1 7.5 3.4 2.3 - 3.1 - 2.5 - 5 ..63 4.9 1.3 .3 13.5 .8 3.6 11.2 5.6 1.6 1.1 T o t a l deposits 3\J Demand deposits 3/ Time and savings deposits Large CD's 4 / Other -15.5 .9 -15.5 -12.3 - 3.2 15.1 5.2 9.9 3.2 6.7 -11.7 .9 -12.7 - 9.4 - 3.3 T o t a l borrowings 5 / Other l i a b i l i t i e s E u r o - d o l i a r s 6/ +10.1 9.3 7.6 3.7 5.0 2.7 4.3 n.a. 1/ ~ 2/ 3/ 4/ 5/ j>/ 1969 8. 6 .7 2.7 6.8 3.8 .5 .3 1.4 - 5.8 - 2.9 10.5 7.5 2.1 1.8 Tj 1968 .2 2.0 2.2 4.5 3.9 1.0 .2 T o t a l loans and investments 2 / U.S. Treasury s e c u t i r i e s Other s e c u r i t i e s T o t a l loans 2/ Business loans Real e s t a t e loans Consumer loans MEMO: Commercial paper A l l C)ther Bariks 1968 - — — n.a. 2.4 1.9 n.a. Comparable dates were used t o compute 3.8 - - - 2.8 2.9 .1 commercial 8.9 2.9 5.0 1.8 3.2 3.8 1.1 .6 — Changes f o r 1969 are from December 25, 1968, t o December 24, 1969. 1968 changes. Exclusive of loans and Federal funds transactions w i t h domestic commercial banks and net of v a l u a t i o n reserves. Less cash items i n the process of c o l l e c t i o n . N e g o t i a b l e time c e r t i f i c a t e s of deposit i n denomination of $100,000 or more. Largely borrowing i n the Federal funds market and from Federal Reserve Banks. Bank l i a b i l i t i e s to foreign branches. 2 / I s s u e d by a bank h o l d i n g company or o t h e r bank a f f i l i a t e . 8/ 19 m a j o r banks t h a t a c c o u n t f o r a p p r o x i m a t e l y 90 p e r c e n t o f b o r r o w i n g f r o m f o r e i g n banks. 9/ banks t h a t do n o t borrow i n E u r o d o l l a r m a r k e t b u t whose a f f i l i a t e s or h o l d i n g company s e l l NOTE: F i g u r e s may n o t sum e x a c t l y due t o r o u n d i n g . 6.2 .2 2.0 5.9 1.9 1.8 1.2 paper. .4 5 — Table 4 Annual Changes i n Major Balance Sheet I t e m s , Weekly R e p o r t i n g Banks 1968 and 1969 ( I n per c e n t , n o t s e a s o n a l l y a d j u s t e d ) Banks Wi . t h Selc>cted Nond e p o s i t Soiirees o f Funds Commercial Euro- - d o l l a r paper o n l y Borrc iwer 8 / Total 1968 1969 1968 1968 1969 1969 A l l Weekly R e n o r t i n e Banks 1968 1969 T o t a l loans and investments U.S. T r e a s u r y s e c u r i t i e s Other s e c u r i t i e s T o t a l loans Business loans Real e s t a t e loans Consumer loans 0.6 -20.4 - 8.4 5.6 9.7 5.5 8.4 11.5 3.7 16.8 11.8 11.4 11.7 14.2 T o t a l deposits Demand d e p o s i t s Time and savings d e p o s i t s Large CD's Other - -14.7 -53.2 - 4.5 7.5 5.3 9. 6 16.0 8.1 T o t a l borrowings Other l i a b i l i t i e s Eurodollars -71.6 52.1 109.4 48.8 38.9 63.0 7.6 — AT 1 Other Bank 1968 1969 11.0 5.1 19.2 12.4 12.0 10.6 14.3 .3 -18.9 -14.3 6.4 9.9 10.1 5.4 11.7 7.1 21.2 10.6 10.6 6.0 8.6 - 0.8 -21.3 - 5.2 5.8 7.8 4.5 2.4 14.5 1.0 15. 6 14.1 16.4 18.6 20.8 -21.2 - 4.4 5.8 10.6 3.0 12.4 8 .0 13. 7 10.7 9.8 12.8 14.1 9.4 1.5 -19. 7 -57.9 - 6.8 6.1 3.9 8.2 9.2 7.8 -10.3 3.0 -22.8 -60.1 - 9.1 3.2 1.8 4.7 1.3 5.9 - 7.6 - 1.3 -13.4 -52.7 - 2.5 12.2 8.3 16.0 35.2 11.6 - 5.2 - 2.0 8.0 -42.9 - 1.8 9.5 7.2 11. 6 34.3 8.4 + 72.0 56.2 100.0 60. 6 44.9 64.0 -84.0 55. 7 100.0 58.4 46.7 63. 0 -59.7 60.1 66.4 31. 7 54.0 32.7 600.0 21.0 16.4 -19. 6 -11.3 5.5 9.4 7.9 3.8 - - - - - 1/ Changes f o r 1969 are from December 25, 1968, t o December 24, 1969. Comparable dates were used t o compute 1968 changes 2 / E x c l u s i v e o f loans and Federal funds t r a n s a c t i o n s w i t h domestic commercial banks and net o f v a l u a t i o n r e s e r v e s . 3 / Less cash items i n the process of c o l l e c t i o n . 4 / N e g o t i a b l e time c e r t i f i c a t e s o f d e p o s i t i n denomination o f $100,000 or more. 5 / L a r g e l y b o r r o w i n g i n the Federal funds market and from F e d e r a l Reserve Banks. jS/ Bank l i a b i l i t i e s t o f o r e i g n branches. T j Issued by a bank h o l d i n g company or o t h e r bank a f f i l i a t e . 8 / 19 major banks t h a t account f o r a p p r o x i m a t e l y 90 per cent of b o r r o w i n g from f o r e i g n banks. S)/ banks t h a t do not borrow i n E u r o d o l l a r market but whose a f f i l i a t e s or h o l d i n g company s e l l commercial paper. NOTE: F i g u r e s may not sum e x a c t l y due t o r o u n d i n g . TABLE 5 ANNUAL CHANGES I N MAJOR BALANCE SHEET ITEMS, WEEKLY REPORTING BANKS 1969 and 1968-^ ( I n b i l l i o n s , not seasonally adjusted) 20 M u l t i Nat ' 1 Banks**/ 1969 1968 60 Major Re260 Large g i o n a l Bks. 2J Local Banks 1969 1968 1969 1968 Items Total 1969 1968 T o t a l loans and investments 2 / U . S . Treasury s e c u r i t i e s Other s e c u r i t i e s T o t a l loans 2 / Business loans Real e s t a t e loans Consumer loans 1.4 -5.9 -2.9 10.5 7.5 2.1 1.8 19.7 1.0 5.6 l?.l 7.5 3.4 2.3 .5 -2.1 -2.6 5.3 4.4 1.1 .3 11.6 .9 2.8 7.9 4.2 .9 .5 - .1 -1.7 - .4 2.0 1.6 .4 .4 5.9 .1 1.2 4.5 1.6 1.1 .7 1.0 -2.1 .1 2.2 1.1 .6 1.1 2.2 .1 1.6 4.7 1.6 1.4 1.1 -15.5 .9 -15.5 -12.3 -3.2 15.1 5.2 9.9 3.2 6.7 -8.9 1.2 -10.0 -7.2 -2.9 4.0 1.0 3.0 .5 2.5 -4.5 - .5 -4.0 -3.4 - .6 4.6 1.6 2.9 1.4 1.5 -2.1 - .6 -1.5 -1.7 .3 6.5 2.5 4.0 1.3 2.7 T o t a l borrowings 5 / Other l i a b i l i t i e s " Euro-dollars 6 / 10.1 9.3 7.6 3.7 5.0 2.7 5.0 7.4 6.7 2.2 4.1 2.6 3.0 1.2 .6 1.3 .5 .1 2.0 .7 .3 .2 .3 MEMO: Commercial paper 7 / 4.3 n.a. 2.4 n.a. 1.3 • .a. .6 T o t a l deposits Demand deposits 3 / Time and savings deposits Large CD's 4 / Other 2/ 2/ 37 4/ 5/ §J 7/ 8/ 9[/ — n.a. Changes f o r 1969 are from December 2 5 , 1968 t o December 2 4 , 1969. Comparable data were used t o compute 1968 changes. Exclusive of loans and Federal funds transactions w i t h domestic commercial banks and n e t of valuation reserves. Less cash items i n the process of c o l l e c t i o n , Negotiable time c e r t i f i c a t e s of deposit i n denomination of $100,000 or more. L a r g e l y borrowing i n the Federal funds market and from F e d e r a l Reserve Banks. Bank l i a b i l i t i e s t o f o r e i g n branches. Issued by a bank holding company or other bank a f f i l i a t e . These banks were selected on the basis of a number of c r i t e r i a i n c l u d i n g s i z e , volume of business l o a n s , r e l a t i v e p a r t i c i p a t i o n i n Federal Funds market, E u r o - d o l l a r market and commercial paper market. The same c r i t e r i a as those l i s t e d i n fpotnote 8 were used to s e l e c t these 60 banks. However, these banks, i n g e n e r a l , are smaller and each region of the country was given r e p r e s e n t a t i o n . NOTE: F i g u r e s may n o t sum e x a c t l y due t o rounding. Table 6 ANNUAL CHANGES I N MAJOR BALANCE SHEET ITEMS, WEEKLY REPORTING BANKS 1968 and 1969 1 / ( I n per c e n t , not seasonally Items T o t a l loans and investments 2 / U . S . Treasury s e c u r i t i e s Other s e c u r i t i e s T o t a l loans 2 / Business loans R e a l e s t a t e loans Consumer loans Total 1969 1968 20 M u l t i N a t ' 1 Banks 1968 1969 60 M a j o r R e - g , g i o n a l Bks. — 1968 1969 260 Large L o c a l Banks 19b 8 1969 .6 -20.4 -8.4 5.6 9.7 5.5 8.4 9.5 3.7 16.8 11.8 11.4 11.7 14.2 .5 -17.9 -15.6 6.7 10.4 9.0 5.6 12.1 7.8 19.7 11.2 11.2 8.3 9.4 -0.2 -24.1 -4.6 5.2 9.9 5.4 8.1 11.9 1.3 14.8 13.4 11.3 17.1 16.8 1.3 -20.6 -1.5 4.1 7.6 2.0 10.5 3. 8 .8 14.6 11.5 11.9 12.2 15.9 -7.6 -9.4 2.6 -20.1 -59.0 4.4 2.4 6.3 4.8 -8.2 -1.7 -14.7 -53.1 9.2 6.5 12.1 27.3 -4.6 -1.9 -7.1 -39.1 10.5 8.3 12.7 36.0 68.0 -75.1 98.0 6.8 52.5 45.9 76.0 -70.6 600.0 8.1 61.6 95.0 -59.7 9.7 16.9 T o t a l d e p o s i t s 3/ Demand d e p o s i t s 3 / Time and savings d e p o s i t s Large CD's 4 / Other -14.7 -53.2 -4.5 7.5 5.3 9.6 16.0 8.1 T o t a l borrowings 5 / Other l i a b i l i t i e s Euro-dollars 6/ -71.6 52.1 109.4 48.8 38.9 63.0 1/ adjusted) — - - Changes f o r 1969 a r e f r o m December 2 5 , 1968, t o December 2 4 , 1 9 6 9 . Comparable d a t e s were u s e d t o compute 1968 c h a n g e s . 2 J E x c l u s i v e o f l o a n s and F e d e r a l f u n d s t r a n s a c t i o n s w i t h d o m e s t i c c o m m e r c i a l banks and n e t o f valuation reserves. 3/ Less cash i t e m s i n t h e p r o c e s s o f c o l l e c t i o n . 4 / N e g o t i a b l e time c e r t i f i c a t e s of d e p o s i t i n d e n o m i n a t i o n o f $100,000 or more. 5 / L a r g e l y b o r r o w i n g i n the F e d e r a l f u n d s m a r k e t and f r o m F e d e r a l Reserve B a n k s . 6/ Bank l i a b i l i t i e s t o f o r e i g n b r a n c h e s . JJ These banks were s e l e c t e d on t h e b a s i s o f a number o f c r i t e r i a i n c l u d i n g s i z e , volume o f b u s i n e s s l o a n s , r e l a t i v e p a r t i c i p a t i o n i n F e d e r a l Funds m a r k e t , E u r o - d o l l a r m a r k e t and c o m m e r c i a l p a p e r m a r k e t . 8/ The same c r i t e r i a as those l i s t e d i n f o o t n o t e 7 were used t o s e l e c t t h e s e 60 b a n k s . However, t h e s e b a n k s , i n g e n e r a l , a r e s m a l l e r and each r e g i o n o f t h e c o u n t r y was g i v e n r e p r e s e n t a t i o n . NOTE: F i g u r e s may n o t sum e x a c t l y due t o r o u n d i n g . Table 7 . Selected Nondeposit Sources of Bank Funds By Number of Banks and Amounts Outstanding (Amounts i n b i l l i o n s of d o l l a r s ) Oct. 29 , 1969 No. of Banks Amount Commercial paper Issued by s u b s i d i a r i e s Issued by other a f f i l i a t e s Loans sold o u t r i g h t To a f f i l i a t e s ^ . / To nonbank p u b l i c 1/ Jan. 7 , 1970 No. of Banks Amount Mar. 11 , 1970 No. of Banks Amount 58 9 49 3.7 .4 3.3 62 10 52 4.4 .5 4.0 65 10 55 143 72 71 5.7 4.7 1.1 145 73 72 6.0 4.7 1.4 151 74 77 Change: Change: Change: Oct. 29, 1969 Oct. 29. 1969 Jan. 7 , 1969 Mar. 11, 1970 Jan. 7 , 1970 Mar. 11, 1970 5.6 .15 5.4 2.4 .0 2.4 .8 .0 .7 1.7 .0 1.7 7.8 6.3 1.5 2.3 1.8 .5 .3 0.0 .3 2.0 1.8 .2 Most of the loans sold to subsidiaries and a f f i l i a t e s r e f l e c t a c q u i s i t i o n s by those s u b s i d i a r i e s and a f f i l i a t e s out of the proceeds of t h e i r sales of commercial paper to the public or other methods of f i n a n c i n g , but they also include some a c q u i s i t i o n s by foreign branches of the bank out of the proceeds of E u r o - d o l l a r deposits.
@FedFRASER