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F o r R e l e a s e on D e l i v e r y Monday, November 1 7 , 1969 5 : 3 0 p . m . , L o n d o n Time 11:30 a . m . , W a s h i n g t o n , D.C. Time THE EURO-DOLLAR MARKET AND THE UNITED STATES BALANCE OF PAYMENTS A Paper Presented By Andrew F. Brimmer Member Board o f Governors o f the F e d e r a l R e s e r v e System At the London School o f University of London, Economics London England November 17, 1969 THE EURO-DOLLAR MARKET AND THE UNITED STATES BALANCE _OF PAYMENTS Andrew F. By Brimmer* The enormous e x p a n s i o n o f last the E u r o - d o l l a r few y e a r s has been accompanied by s i g n i f i c a n t character a i d purposes o f short-term capital t u r n have p r o d u c e d i m p o r t a n t m o d i f i c a t i o n s positions o f a number o f c o u n t r i e s , conditions have a l s o been a f f e c t e d . developments, national exchange r e s e r v e s influence national the changes m the flows. These changes i n the balance of Partly i n response to leading roles and d o m e s t i c c r e d i t m a r k e t s Thus, a mechanism c a p a b l e o f on d o m e s t i c stabilization credit these inter- foreign from the s t r o n g p u l l i n o n l y a few y e a r s , m payments on t h e s t a g e have t a k e n s t e p s t o d e f e n d t h e i r the E u r o - d o l l a r market.—/ evolved i n t o m and i n some cases d o m e s t i c several countries which play financial market of t h i s m a r k e t has exerting a powerful external f i n a n c i a l m a r k e t s and on t h e management of policies. As i s w i d e l y r e c o g n i z e d , w h i l e t h e f o c u s o f t h e E u r o - d o l l a r m a r k e t i n L o n d o n , i t s b a s i c d r i v i n g f o r c e d u r i n g t h e l a s t y e a r has c e n t e r e d m about -Member, B o a r d o f G o v e r n o r s o f t h e F e d e r a l R e s e r v e System. I am g r a t e f u l t o s e v e r a l members o f t h e B o a r d ' s s t a f f f o r assistance i n the p r e p a r a t i o n of t h i s paper. M e s s r s . C a r l H. Stem and R o b e r t C. Bradshaw h e l p e d w i t h t h e m a t e r i a l on t h e Euro-dollar market. M r . J o s e p h Burns was r e s p o n s i b l e f o r t h e p r e l i m i n a r y a n a l y s i s o f t h e a s s e t and l i a b i l i t y a d j u s t m e n t o f U.S. banks. M r . I s a a c V. Banks, J r . d i d t h e c o m p u t e r programmi n g w h i c h made i t p o s s i b l e t o s t u d y s e p a r a t e l y t h e b e h a v i o r o f U . S . banks a c t i v e i n t h e E u ~ o - d o l l a r m a r k e t . 1/ A good a c c o u n t o f t h e s e d e v e l o p m e n t s i s g i v e n m " E u r o Dollars: A Changing M a r k e t , " F e d e r a l Reserve B u l l e t i n , October, 1969, pp. 7 6 5 - 7 8 4 . -2dozen l a r g e banks m their the U n i t e d S t a t e s . These banks - - m a i n l y through London b r a n c h e s - - have r e g i s t e r e d t h e s t r o n g e s t demand f o r dollar funds p r i m a r i l y Consequently, t o compensate f o r any assessment o f must n e c e s s a r i l y t h e l o s s o f d e p o s i t s a t home. the behavior of the E u r o - d o l l a r f o c u s on t h e s t r a t e g i c for and made more d i f f i c u l t ment o f m o n e t a r y p o l i c y i n t h e U n i t e d S t a t e s . s t r o n g upward p r e s s u r e s market r o l e of American banks. The s u c c e s s f u l b i d d i n g by these i n s t i t u t i o n s f u n d s has g r e a t l y c o m p l i c a t e d - - Euro- on i n t e r e s t r a t e s It Euro-dollar — t h e manage- has a l s o generated i n European c a p i t a l markets, w h i c h i n t u r n has widened t h e c o n c e r n anoag some c e n t r a l b a n k e r s on the C o n t i n e n t about the s t a b i l i t y two p r e v i o u s o c c a s i o n s , o f f o r e i g n exchange m a r k e t s . I have examined t h e i n t e r r e l a t i o n s On between t h e E u r o - d o l l a r m a r k e t and m o n e t a r y p o l i c y i n t h e U n i t e d S t a t e s . — ^ t h e r e i s no need t o r e p e a t r e c e n t m o n t h s , however, measures adopted i n actions the d e t a i l s of t h a t e a r l i e r partly reflecting the U n i t e d S t a t e s , Thus, discussion. the impact of monetary the c o n d i t i o n s governing i n t h e E u r o - d o l l a r m a r k e t ha^e undergone s e v e r a l b a s i c In policy transchanges. The most i m p o r t a n t o f t h e s e was t h e d e c i s i o n made d u r i n g t h e summer to impose 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 s on E u r o - d o l l a r b o r r o w i n g s by A m e r i c a n banks. In this paper, an e f f o r t w i l l be made t o assess t h e e f f e c t s o f t h i s move on t h e b e h a v i o r o f U.S. banks and on t h e f u n c t i o n i n g o f t h e m a r k e t . 1/ " E u r o - D o l l a r Flows and t h e E f f i c i e n c y o f U.S. M o n e t a r y P o l i c y , " p r e s e n t e d b e f o r e a C o n f e r e n c e on W a l l S t r e e t and t h e Economy, New S c h o o l f o r S o c i a l R e s e a r c h , New Y o r k , March 8, 1959. " F i n a n c i a l I n n o v a t i o n and M o n e t a r y Management i n t h e U n i t e d S t a t e s , " p r e s e n t e d a t a M e e t i n g o f t h e A s s o c i a t i o n o f A m e r i c a n Banks i n London, J u l y 9 , 1959. -3The heavy b o r r o w i n g o f E u r o - d o l l a r s by U. S. banks has had an asyinm^t r i c d l e f f e c t on the b e h a v i o r o f t h e U.S. b a l a n c e o f As measured on t h e o f f i c i a l settlements basis, the U.S. balance payments was a i d e d c o n s i d e r a b l y d u r i n g 1968 and i n t h e f i r s t this year, payments. half since a s u b s t a n t i a l p r o p o r t i o n of the E u r o - d o l l a r was r e f l e c t e d i n a d e c l i n e i n d o l l a r a s s e t s o f f o r e i g n institutions. of inflow official On t h e o t h e r hand, as measured on t h e l i q u i d i t y basis, t h e s e b o r r o w i n g s have had an adverse e f f e c t on t h e U . S . b a l a n c e payments s i n c e t h e h i g h y i e l d s m the E u r o - d o l l a r m a r k e t of E u r o - d o l l a r subjects, These b a l a n c e o f payments flows are a l s o traced aspects However, b e f o r e t u r n i n g t o a c l o s e r e x a m i n a t i o n o f these it Euro- m i g h t be h e l p f u l t o s k e t c h t h e e x p a n s i o n o f t h e p l a y e d by U. S. again the s t r a t e g i c At the end o f Thus, i n the f i r s t 1969 l a s t June, the net size o f the market was a b o u t $32 t o $33 b i l l i o n . billion. role banks. Growth o f t h e E u r o - D o l l a r M a r k e t , F i r s t H a l f o f (See T a b l e s i x months o f t h i s y e a r , Euro-dollar 1 attached.) t h e m a r k e t expanded by The Bank f o r I n t e r n a t i o n a l S e t t l e m e n t s (BIS) t h a t t h e n e t s i z e o f t h e m a r k e t (as measured by U . S . d o l l a r from below. d o l l a r m a r k e t i n 1969 and t o h i g h l i g h t $ 7 - 8 of induced Americans t o s w i t c h a c o n s i d e r a b l e volume o f s h o r t - t e r m f u n d s domestic assets t o E u r o - d o l l a r s . of estimates liabilities -4o r a s s e t s o f c o m m e r c i a l banks i n e i g h t m a j o r European c o u n t r i e s net of i n t e r b a n k d e p o s i t s i n these c o u n t r i e s U ) $25 b i l l i o n a t t h e end o f mation, recent of the e i g h t 1968. was I n t h e absence o f approximately l a t e r BIS c o m m e r c i a l bank d a t a f o r some o f t h e more countries — particularly infor- important t h e U n i t e d Kingdom - - were employed t o e s t i m a t e t h e n e t s i z e o f t h e E u r o - d o l l a r m a r k e t a t $32 t o $33 b i l l i o n as o f midyear.—/ measure t o i n c l u d e t h e a c t i v i t i e s market's net of June, If it we e x t e n d e d t h e n e t o f Canadian b a n k s , t h e 1969. size Euro-dollar 1969, o r about $36 billion. liabilities o f Canada and appears t h a t the net size of the E u r o - d o l l a r market expanded a t an a n n u a l r a t e o f about 60 p e r c e n t i n t h e f i r s t of about s i z e w o u l d be some $3 b i l l i o n g r e a t e r as o f t h e end Leaving aside the U.S. d o l l a r Japan, -- D u r i n g 1968 as a w h o l e , t h e i n c r e a s e was 43 p e r half cent; t h e a v e r a g e a n n u a l r a t e o f i n c r e a s e d u r i n g 1965-67 was about 25 per cent. Thus, p r i m a r i l y u t i l i z a t i o n of i n response t o t h e s h a r p l y t h e m a r k e t by U.S. b a n k s , t h e E u r o - d o l l a r rate of growth accelerated s i g n i f i c a n t l y of increased i n the f i r s t market's s i x months 1969. 1/ Germany, B e l g i u m , N e t h e r l a n d s , U n i t e d Kingdom, I t a l y , F r a n c e , Sweden and S w i t z e r l a n d . Sources i n c l u d e ( i n a d d i t i o n t o d o l l a r l i a b i l i t i e s o f b a n k s ) s w i t c h i n g o f bank a s s e t s f r o m o t h e r c u r r e n c i e s t o d o l l a r s ; and uses i n c l u d e ( i n a d d i t i o n t o d o l l a r a s s e t s ) s w i t c h e s f r o m d o l l a r s t o other currencies. 2/ T h i s e s t i m a t e was o b t a i n e d by u s i n g an a p p r o x i m a t e measure c o m p a r a b l e t o t h a t used by t h e B I S . -5- Source5 a i d Uses o f Funds i n t h e E u r o - D o l l a r I t w o u l d appear t h a t W e s t e r n Europe were t h e c h i e f Market the m a j o r i n d u s t r i a l source of funds f o r countries the of Euro-dollar market d u r i n g the January-June period of t h i s year. A l t h o u g h BIS d a t a g i v i n g s o u r c e s and uses o f E u r o - d o l l a r geographical breakdown are n o t a v a i l a b l e y e t f o r i n d i c a t i o n o f the r e l a t i v e funds by this period, one can g e t a good i m p o r t a n c e o f v a r i o u s g e o g r a p h i c a l areas as s u p p l i e r s o f f u n d s t o t h e E u r o - d o l l a r m a r k e t by e x a m i n i n g changes i n the e x t e r n a l U.S. d o l l a r liabilities o f U.K. b a n k s . h e r e t h e f a c t t h a t London i s by f a r trading center - Euro-dollar There i s no need t o t h e most i m p o r t a n t t h e J a n u a r y - J u n e 1969 p e r i o d , banks t o n o n r e s i d e n t s t h e t o t a l U.S. d o l l a r the e n t i r e e i g h t - c o u n t r y J u s t under 50 per c e n t o f London d u r i n g t h e f i r s t 25 per c e n t o f the In fact, liabilities daring o f U.K. h a l f of the E u r o - d o l l a r the U.S. d o l l a r liabilities funds f l o w i n g 1959 came f r o m W e s t e r n Europe. flows m to About t o London d u r i n g t h i s p e r i o d was f r o m sources o t h e r t h a n W e s t e r n E u r o p e , Of c o u r s e , we must be c a u t i o u s increase m area. f r o m t h e U n i t e d S t a t e s and Canada 2ombmed, the o f t h e U n i t e d Kingdom i n c r e a s e d s l i g h t l y more t h a n about 90 per c e n t o f t h e $8 b i l l i o n we e s t i m a t e d f o r m a c t i v e b o t h i n r e c e i v i n g funds f r o m around w o r l d and i n l e n d i n g them t o t h e m a j o r e n d - u s i n g a r e a s . $7 b i l l i o n , Euro-dollar and London banks are t h e m a j o r p a r t i c i p a n t s system, stress and about 25 par c e n t was the U n i t e d S t a t e s or interpreting these f i g u r e s Canada. as indicating -6the u l t i m a t e sources of the E u r o - d o l l a r funds. Funds r e c o r d e d on t h e books o f a U.K. bank as c o n i n g f r o m a n o t h e r W e s t e r n European may w a l l have come t o t h e l a t t e r world, country country f r o m some o t h e r s p o t i n the h a v i n g s i m p l y passed t h r o u g h t h e European c o u n t r y on t h e i r way t o t h e London bank. eight-country For t h i s reason ( u n t i l complete data f o r a r e a a r e a v a i l a b l e f r o m t h e BIS) t a k e t h e 50 per c e n t f i g u r e for the i t m i g h t be w i s e f l o w s o f f u n d s t o t h e London m a r k e t f r o m W e s t e r n Europe as t h e upper limit. As w o u l d be e x p e c t e d f r o m t h e d e v e l o p m e n t s o u t l i n e d earlier, t h e m a j o r u s e r o f new f u n d s f l o w i n g i n t o t h e E u r o - d o l l a r m a r k e t the f i r s t half of t h e y e a r was t h e U n i t e d S t a t e s . bank b o r r o w i n g s o f E u r o - d o l l a r during The i n c r e a s e i n U.S. f u n d s t h r o u g h t h e i r own o v e r s e a s a l o n e was a l i t t l e more t h a n $7 b i l l i o n . estimate of to branches T h i s was a l m o s t e q u a l t o o u r t h e i n c r e a s e i n t h e n e t volume o f f u n d s i n t h e Euro-dollar system. I n c r e a s e d U.S. bank u t i l i z a t i o n o f E u r o - d o l l a r f u n d s i n 1969 s h a r p l y r a i s e d the U.S. sha , - e o f t o t a l uses o f E u r o - d o l l a r Table 2.) U.S. bank b o r r o w i n g s o f E u r o - d o l l a r s their At midyear, f o r e i g n branches ($13.3 b i l l i o n ) s y s t e m ($32 t o $33 b i l l i o n ) . (See through were about 40 per c e n t o f t o t a l volume o f f u n d s we have e s t i m a t e d o u t s t a n d i n g i n t h e country Euro-dollar funds. the eight- A t t h e end o f the y e a r s 1966, 1967 and 1968, U.S. bank b o r r o w i n g s o f E u r o - d o l l a r f u n d s t h r o u g h t h e i r o v e r s e a s b r a n c h e s a v e r a g e d about 23 per c e n t o f of Euro-dollar funds i n the e i g h t - c o u n t r y the t o t a l volume a r e a as e s t i m a t e d by t h e BIS. -7In prior yea~s, t h a n 14 per t h e U.S. share o f t o t a l uses o f f u n d s had oeen l e s s cent. U.S. Banks and t h e E u r o - D o l l a r Market As I m e n t i o n e d above, t h e r o l e o f U.S. c o m m e r c i a l banks t h e E u r o - d o l l a r m a r k e t i n t h e l a s t year i s t o be e x p l a i n e d i n terms o f t h e i r e f f o r t s in primarily to a d j u s t to domestic monetary restraint a g a i n s t t h e b a c k g r o u n d o f r a p i d l y r i s i n g c r e d i t demands. Wnen t h e F e d e r a l Reserve adopted a s e v e r e l y r e s t r i c t i v e m o n e t a r y p o l i c y last December, interest it a l s o d e c i d e d n o t to i n c r e a s e t h e maximum r a t e s o f w h i c h member banks c o u l d pay on t i m e d e p o s i t s . Almost immediately, i n t e r e s t r a t e s on newly i s s u e d n e g o t i a b l e c e r t i f i c a t e s (CD f s) of deposit r e a c h e d t h e r a t e c e i l i n g o f 6 - 1 / 4 per c e n t on minimum m a t u r i t i e s o f s i x months. rose f u r t h e r , December, As y i e l d s on a l t e r n a t i v e the a t t r i t i o n 1958, s h o r t - t e r m market i n bank CD's a c c e l e r a t e d . From m i d - t o O c t o b e r 29, 1969, t h e volume o f CD's d e c l i n e d f r o m $ 2 4 . 4 b i l l i o n t o $11.5 b i l l i o n , P a r t l y t o compensate f o r t h e bank s u b s i d i a r i e s , of Federal funds - - m affiliates loans, outstanding a drop o f $12.9 loss of deposits, c o m m e r c i a l banks r e s o r t e d t o s e v e r a l o t h e r s o u r c e s o f the sale of p a r t i c i p a t i o n s instruments U.S. funds, i s s u a n c e o f c o m m e r c i a l paper by borrowing and above a l l b o r r o w i n g o f E u r o - d o l l a r s , primarily banks. T o t a l l o a n s and i n v e s t m e n t s a t l a r g e banks d e c l i n e d including or one-bank h o l d i n g c o m p a n i e s , t h r o u g h t h e London b r a n c h e s o f U.S. d u r i n g the f i r s t billion. 1 0 - 1 / 2 months o f t h i s yea% sharply i n marked c o n t r a s t to -8sizable of increases 1968. m credit This decline securities reflected and a s u b s t a n t i a l These e f f e c t s o f , evident as w e l l as f o r substantial cutback m loan and r e a c t i o n s m On b a l a n c e , bank h o l d i n g s of expansion. t o , monetary r e s t r a i n t the E u r o - d o l l a r were market Both types of banks l o s s e s of CD funds d u r i n g t h i s p e r i o d . non-Euro-dollar period h e r e a f t e r r e f e r r e d to as E u r o - d o l l a r banks those banks t h a t do n o t . banks had l a r g e r losses of o t h e r And w h i l e banks i n c u r r e d nauch h e a v i e r d e c l i n e s -- experienced Euro-dollar types of time and savings d e p o s i t s , the i n demand d e p o s i t s . t o t a l d e p o s i t s f e l l by a comparable amount a t b o t h k i n d s institutions. I n response to these d e p o s i t branches borrowed h e a v i l y liabilities to which acccu^t for a much l a r g e r m 95 per c e n t o f extent offset m their funds -- T a b l e 3. the Federal deposit t h e sum However, this t h e amount o f means f e l l somewhat s h o r t o f outstanding banks banks, as i n d i c a t e d by Euro-dollar banks m were j u s t of and " o t h e r their r o s e by Federal able these other these deposits. to sources liabilities" total to "total f u n d s o t h e r banks o b t a i n e d by the d e c l i n e -- funds borrowed f u n d s m a r k e t and f r o m t h e of " t o t a l borrowings" while and foreign borrowing - - source o f o u t f l o w s by t h e u t i l i z a t i o n Table 3 - - market, the E u r o - d o l l a r Reserve System than d i d E u r o - d o l l a r borrowings" banks w i t h t h e 14 m a j o r E u r o - d o l l a r Banks w i t h o u t m outflows, the E u r o - d o l l a r f o r e i g n branches a t more t h a n $7 b i l l i o n . of the comparable large reductions a t banks t h a t have access to funds m t h r o u g h f o r e i g n branches - - of a t t h e s e banks d u r i n g in -9Nevertheless, the a s s e t adjustments of both types of banks were g e n e r a l l y s i m i l a r . Both made s u b s t a n t i a l r e d u c t i o n s holdings of s e c u r i t i e s , a l t h o u g h the composition of these varied. E u r o - d o l l a r banks r a n o f f securities declines a s m a l l e r volume o f U.S. -- Moreover, p a r t i c u l a r l y m u n i c i p a l issues - - Government t h e growth i n t o t a l by a much l a r g e r loans a t both types of t i o n s was l e s s than i n the comparable p e r i o d of l a s t y e a r , this their t h a n d i d o t h e r banks, b u t they reduced t h e i r h o l d i n g s of other s e c u r i t i e s amount. m institu- although r e d u c t i o n was much more pronounced a t banks w i t h o u t f o r e i g n branches. However, business l o a n expansion a t b o t h types o f banks remained above t h a t i n the comparable p e r i o d o f l a s t The i m p a c t o f r e s t r a i n t year. and t h e r e a c t i o n o f r e s t r a i n t v a r i e d considerably d u r i n g the f i r s t half of t h e s e banks the year as compared t o t h a t s i n c e m i d y e a r . B o t h t y p e s o f banks e x p e r i e n c e d d e p o s i t o u t f l o w s d u r i n g the f i r s t 6 months o f p e r i o d t h e d e c l i n e was somewhat l a r g e r Table 4 . ) Consequently, banks w i t h i n the E u r o - d o l l a r market, funds i n t h i s manner. their funds The n o n - E u r o - d o l l a r to t h e i r this (See heavily lendable than the funds acquire. Still, total loans and investments a t E u r o - d o l l a r banks d u r i n g the f i r s t half, w h i l e c r e d i t a t o t h e r banks expanded Both types o f banks r a n o f f heavy banks ware a b l e t o add t o a l t h o u g h by much l e s s banks were a b l e t o banks. f o r e i g n branches borrowed a d d i n g o v e r $6 b i l l i o n from other sources, that Euro-dollar 1959, b u t d u r i n g at Euro-dollar to securities m v o l u n e , b u t they fell slightly. also -10mcreased t h e i r than m o u t s t a n d i n g loans - - the f i r s t half o f 1968. largely A t E u r o - d o l l a r b a n k s , however, l i q u i d a t i o n o f s e c u r i t i e s more t h a n o f f s e t t h i s was n o t t h e case a t o t h e r t o b u s i n e s s e s - - by more the r i s e i n loans, f l o w s were much more s e v e r e a t banks w i t h o u t p a r t i c u l a r l y when v i e w e d w i t h r e s p e c t result, the n o n - E u r o - d o l l a r foreign Deposit to d e p o s i t flows a t these p e r i o d i n 1968. But E u r o - d o l l a r (See T a b l e 5 . ) further, two As a banks c o n t i n u e d t o b o r r o w h e a v i l y i n the discount banks s t e p p e d up t h e i r b o r r o w i n g f r o m t h e s e sources, w h i l e i n c r e a s i n g t h e i r borrowings only s l i g h t l y out- branches, F e d e r a l f u n d s m a r k e t and a t t h e F e d e r a l Reserve Banks 1 window. while banks. The p i c t u r e changed m a r k e d l y a f t e r m i d y e a r . t y p e s o f banks d u r i n g t h i s the the l a t t e r i n the E u r o - d o l l a r p r o b a b l y p a r t l y i n response market to r e c e n t a c t i o n by t h e F e d e r a l Reserve Board t o r e g u l a t e such b o r r o w i n g s . Asset adjustments deposit s i n c e m i d y e a r r e f l e c t e d t h e more a d v e r s e f l o w s a t banks w i t h o u t f o r e i g n branches. and i n v e s t m e n t s d e c l i n e d a t b o t h t y p e s o f b a n k s , substantially l e s s at E u r o - d o l l a r banks. tinued to l i q u i d a t e similar However, amounts o f s e c u r i t i e s , In fact, t i n u e t o expand t h e i r b u s i n e s s l o a n s , comparable p e r i o d o f 1968. fell p o s i t i o n s reached v e r y Euro-dollar E u r o - d o l l a r banks were a b l e t o f o r example, by more t h a n i n In contrast, business loans at other a f t e r m i d y e a r , as compared w i t h a r i s e i n t h i s p e r i o d l a s t con- and t h e y a l s o began t h e d e c l i n e i n l o a n s was much l e s s a t banks t h a n a t o t h e r b a n k s . loans t h e r e d u c t i o n was B o t h t y p e s o f banks t o r e d u c e t h e i r o u t s t a n d i n g l o a n s as l i q u i d i t y low l e v e l s . While t o t a l conthe banks year. -11I m p a c t o f F e d e r a l Reserve R e g u l a t o r y Measures on E u r o - P o l l a c B o r r o w i n g s by U.S. Banks As I i n d i c a t e d above, t h e F e d e r a l Reserve Board a d o p t e d s e v e r a l measures i n t h e l a s t few months w h i c h have a l t e r e d t h e b e h a v i o r o f U.S. banks m two o f t h e s e measures (i.e., the E u r o - d o l l a r m a r k e t . greatly The e f f e c t s the i m p o s i t i o n of m a r g i n a l r e s e r v e of require- ments on E u r o - d o l l a r b o r r o w i n g s by American banks and r e s t r i c t i o n s on t h e use o f m a i n l y o v e r n i g h t d e p o s i t s t o r e d u c e r e q u i r e d r e s e r v e s ) can be t r a c e d r e a s o n a b l y w e l l . In addition, o t h e r moves aimed at moderating banks' access t o d o m e s t i c sources o f had i n d i r e c t e f f e c t s i n the E u r o - d o l l a r primarily f u n d s have also market. As I m e n t i o n e d above, U.S. banks i n c r e a s e d t h e i r use of Euro-dollar f u n d s by about $ 7 . 2 b i l l i o n between J a n u a r y 1 and June 25 t h i s year. This competition for Euro-dollar deposit rates. funds e x e r t e d e x t r e m e p r e s s u r e For example, the 3-month d e p o s i t r a t e w h i c h was 7 p e r c e n t a t the end o f 1968 - - climbed sharply J a n u a r y and F e b r u a r y and a g a i n d u r i n g May and J u n e , 1 2 - 1 / 2 per c e n t on June 10. Euro-dollar on during reaching a record D u r i n g June, U.S. b a n k s ' borrowing f u n d s t h r o u g h t h e i r overseas b r a n c h e s a c c e l e r a t e d and i n c r e a s e d about $3 b i l l i o n d u r i n g t h e f i r s t -- of sharply t h r e e weeks o f that month a l o n e . M a r g i n a l Reserve R e q u i r e m e n t s : Against t h i s background enormous e x p a n s i o n i n E u r o - d o l l a r b o r r o w i n g by A m e r i c a n b a n k s , F e d e r a l Reserve Board p r o p o s e d amendments t o i t s regulations end o f June t o moderate t h e f l o w o f E u r o - d o l l a r s between U.S. of the at the banks -12and t h e i r f o r e i g n b r a n c h e s and a l s o between U.S. and f o r e i g n b a n k s . These amendments f o c u s e d on t h e t h r e e -najor c h a n n e l s t h r o u g h w h i c h Euro-dollar f u n d s may a f f e c t c r e d i t a v a i l a b i l i t y i n the United States: The f l o w o f E u r o - d o l l a r f u n d s between U.S. bank head o f f i c e s and t h e i r o v e r s e a s b r a n c h e s . The f l o w o f c r e d i t between U.S. o v e r s e a s b r a n c h e s - w h i c h draw on E u r o - d o l l a r f u n d s - - and U.S. r e s i d e n t s . The f l o w o f E u r o - d o l l a r f u n d s between U.S. banks and f o r e i g n banks w h i c h are n o t b r a n c h e s . Briefly, a 10 per c e n t 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 p r o p o s e d on U . S . bank l i a b i l i t i e s t o o v e r s e a s b r a n c h e s and on a s s e t s a c q u i r e d by o v e r s e a s b r a n c h e s f r o m t h e i r U.S. head o f f i c e s o f o u t s t a n d i n g s d u r i n g a base p e r i o d , May 2 8 , 196 Q . was i n excess d e f i n e d as t h e f o u r weeks e n d i n g The r e s e r v e - f r e e base was made s u b j e c t t o automatic r e d u c t i o n - - u n l e s s w a i v e d by t h e Board - - when, i n any p e r i o d used calculate a reserve requirement, requirements fall, o u t s t a n d i n g amounts s u b j e c t t o and a r e below t h e o r i g i n a l base. to reserve A 10 per c e n t 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 proposed f o r U.S. b r a n c h l o a n s t o U.S. r e s i d e n t s 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 , w h i c h c o u l d be m one o f two o p t i o n a l ways. F i n a l l y , calculated t h e Board p r o p o s e d t o d e f i n e deposits a g a i n s t w h i c h r e q u i r e d r e s e r v e s are c a l c u l a t e d t o i n c l u d e any n o n - d e p o s i t b o r r o w i n g by a member bank from a f o r e i g n bank. r e q u i r e m e n t was proposed f o r d e p o s i t s o f t h i s A 10 p e r c e n t reserve class. These p r o p o s a l s were a d o p t e d by t h e Board and p u t i n t o A u g u s t 13. The f i r s t effect four-week " r e s e r v e c o m p u t a t i o n p e r i o d ' 1 began -13September 4 . The average l i a b i l i t i e s o f a bank t o i t s overseas b r a n c h e s d u r i n g t h e r e s e r v e c o m p u t a t i o n p e r i o d w i l l be compared w i t h i t s base - - t h e average o f such l i a b i l i t i e s p e r i o d e n d i n g May 28 - i t must h o l d . October 16. The f i r s t d u r i n g t h e f o u r week t o e s t a b l i s h t h e amount o f a d d i t i o n a l f o u r - w e e k " r e s e r v e maintenance p e r i o d 1 ' began D u r i n g the maintenance p e r i o d , a bank must h o l d on the average t h e a d d i t i o n a l r e s e r v e s r e q u i r e d on t h e b a s i s o f i t s Euro-dollar holdings computation reserves from i t s overseas branches d u r i n g the excess previous period. For purposes o f t h i s a n a l y s i s , since midyear i n t o t h r e e s u b - p e r i o d s : I have d i v i d e d t h e (1) period f r o m June 25 t o September 3, t h e p e r i o d d u r i n g w h i c h t h e B o a r d ' s m a r g i n a l r e s e r v e p r o p o s a l s were pending; (2) t i o n period; the f i r s t f r o m September 4 t o O c t o b e r 1, t h e f i r s t and (3) reserve computa- f r o m O c t o b e r 16 t o November 5, c o v e r i n g most o f r e s e r v e maintenance period. U.S. banks c o n t i n u e d t o i n c r e a s e t h e i r b o r r o w i n g s o f dollar f u n d s d u r i n g J u l y and A u g u s t - - r a i s i n g l i a b i l i t i e s to Eurooverseas b r a n c h e s $ 1 . 3 b i l l i o n d u r i n g t h o s e two months t o a new peak l e v e l $14.8 b i l l i o n . during July. Most o f t h e i n c r e a s e , (See T a b l e however - - $1.1 b i l l i o n , rates. occurred 6.) The E u r o - d o l l a r m a r k e t was a b l e t o accommodate t h e demand f o r f u n d s f r o m U.S. banks w i t h o u t any f u r t h e r continuing increase i n Rates had d r o p p e d s h a r p l y i n l a t e June as t h e immediate on U.S. banks eased w i t h t h e p a s s i n g o f c o r p o r a t e b o r r o w i n g f o r of interest pressure tax •Inpayments, market. and t h e banks i n t u r n p u t l e s s p r e s s u r e on t h e By t h e end o f J u n e , per c e n t . It Euro-dollar t h e 3 - m o n t h r a t e was down t o about 10-1/2 r a n g e d between 1 0 - 1 / 2 and 1 1 - 1 / 4 per c e n t d u r i n g J u l y and A u g u s t . I n September - - the f i r s t banks d e c r e a s e d t h e i r E u r o - d o l l a r reserve computation period - - b o r r o w i n g s by n e a r l y $ 1 / 2 b i l l i o n . d u r i n g t h e s i x weeks f r o m A u g u s t 20 t o O c t o b e r 1, b o r r o w i n g s i n a l l b u t one w e e k l y p e r i o d and o u t s t a n d i n g s to $14.1 b i l l i o n . were an i m p o r t a n t U.S. fell from $14.8 In fact decreased billion Reduced demand p r e s s u r e s f r o m U . S . banks no d o u b t factor decline in Euro-dollar i n the g e n e r a l - - a l b e i t v e r y moderate r a t e s up t o t h e l a s t t y p i c a l quarter-end pressures -- few days o f September when i n i n t e r n a t i o n a l money c e n t e r s p u t some upward p r e s s u r e on r a t e s . Taking the t h i r d q u a r t e r as a w h o l e , demand p r e s s u r e s on t h e E u r o - d o l l a r m a r k e t f r o m U.S. banks were much more m o d e r a t e t h a n were d u r i n g t h e f i r s t Euro-dollar h a l f of the year. A m e r i c a n banks i n c r e a s e d their b o r r o w i n g s by o n l y $900 m i l l i o n between June 25 and O c t o b e r compared w i t h a v e r a g e q u a r t e r l y the January-June p e r i o d . d o l l a r s may have r e f l e c t e d i n c r e a s e s o f about $ 3 - 1 / 2 b i l l i o n To some e x t e n t , t h i s r e d u c e d demand f o r t h e i n c r e a s e d r e l i a n c e o f U . S . banks on domestic sources of n o n - d e p o s i t funds discussed above. Because o f a number o f c r o s s - c u r r e n t s i n the market since the beginning of October, they it is d i f f i c u l t Euro-dollar to estimate during Euro- 1, -15quantitatively t h e e f f e c t s o f the 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 s on t h e b o r r o w i n g b e h a v i o r o f U.S. commercial banks m that particular A l t h o u g h E u r o - d o l l a r r a t e s d e c l i n e d d u r i n g most o f O c t o b e r , banks s h a r p l y i n c r e a s e d t h e i r b o r r o w i n g s o f E u r o - d o l l a r first rise. these funds m h a l f o f t h e month and s u b s e q u e n t l y r e p a i d more t h a n t h e A t t h e end o f O c t o b e r , U.S. bank l i a b i l i t i e s b r a n c h e s were $ 1 3 . 6 b i l l i o n , only s l i g h t l y higher l i o n o u t s t a n d i n g a t t h e end o f June. to t h e i r Other c r o s s - c u r r e n t s lower i n t e r e s t r a t e s appreciation) previous overseas in the i n t h e near future initiation f l o a t i n g arrangement f o r t h e mark (and i t s subsequent - - w h i c h was r e f l e c t e d i n a c o n s i d e r a b l e d e c r e a s e o f f i c i a l d o l l a r h o l d i n g s o f t h e German c e n t r a l the Board's m a r g i n a l r e s e r v e against Euro-dollar borrowings. in bank. As I m e n t i o n e d above, September was t h e f i r s t ''computation11 p e r i o d f o r bil- short-lived and a l a r g e f l o w o f f u n d s o u t o f German marks f o l l o w i n g t h e of the t r a n s i t i o n a l the than the $13.2 m a r k e t s i n c e t h e b e g i n n i n g o f October i n c l u d e d a r a t h e r expectation of s i g n i f i c a n t l y market. reserve requirement U s i n g w e e k l y d a t a ( t h e banks will compute t h e i r b o r r o w i n g s on a d a i l y average b a s i s ) , we e s t i m a t e roughly t h a t bank b o r r o w i n g s o f E u r o - d o l l a r s were about $5 b i l l i o n more on t h e average d u r i n g September t h a n d u r i n g May - - t h e base p e r i o d . Thus, d u r i n g t h e f o u r - w e e k p e r i o d b e g i n n i n g October 16, U.S. banks needed t o m a i n t a i n on t h e average s l i g h t l y over $400 m i l l i o n o f a d d i t i o n a l I n passing, of required reserves i t m i g h t be observed t h a t t h i s is not d r a s t i c a l l y d i f f e r e n t reserves. additional from the amount increase -16w h i c h w o u l d have r e s u l t e d e a r l i e r approach had been adopted t h e n . consider i n the year Last March, I a p p l y i n g average reserve r e q u i r e m e n t s , the volume o f the t o t a l of Euro-dollar a slightly that bank t i m e l i a b i l i t i e s consistently A t t h e end o f thus, It to the E u r o - d o l l a r official to the i m p o s i t i o n of to f o r e i g n o f f i c i a l through J u l y , institutions. foreign o f f i c i a l Part of 10 t o O c t o b e r that some o f the marginal in After the increase r e f l e c t s t h e d r o p i n U . S . bank E u r o - d o l l a r in billion a shift ( i n c l u d i n g overseas borrowings such a s h i f t in late o f funds by of branches offices. September foreign institutions. It of U.S. falling time deposits t o t i m e d e p o s i t s h e l d d i r e c t l y w i t h U . S . head a n d s i n c e m i d - O c t o b e r may r e f l e c t official may be t h a t U . S . banks h a v e b e e n a t t e m p t i n g t o i n d u c e foreign o f f i c i a l advantage of f u n d s f r o m b r a n c h t o head o f f i c e b o o k s t o the r e l a t i v e l y t h e b r a n c h to head o f f i c e f o r head o f f i c e For example, a s h i f t o f (assuming t h a t use i n e i t h e r case and t h a t with $1 m i l l i o n t h e f u n d s w e r e made t h e U . S . bank i n shifts take lower r e s e r v e r e q u i r e m e n t a s s o c i a t e d b a l a n c e s on head o f f i c e books. from available question T7 However, i t should be noted t h a t a 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 p r o v i d e s a g r e a t e r d e t e r r e n t to a d d i t i o n a l f u t u r e b o r r o w i n g t h a n does an a v e r a g e r e s e r v e r e q u i r e m e n t t h a t i n v o l v e s t h e same i n c r e a s e i n t o t a l r e q u i r e d r e s e r v e s . in 29. funds from the E u r o - d o l l a r market of U.S. banks) February, scene the sharp i n c r e a s e s i n c e mid-September w o u l d appear to the r i s e U . S . b a n k s r o s e b y $212 m i l l i o n i n A u g u s t and b y more t h a n $ 1 . 0 f r o m September Board t i m e w o u l d h a v e b e e n a b o u t $540 m i l l i o n . — ( a n d one w h i c h c a n be t r a c e d d i r e c t l y is the a t a 6 per c e n t r a t e , borrowings by U.S. banks. A n o t h e r r e c e n t development r e l a t e d reserve requirement) different suggested t h a t s u c h b o r r o w i n g s was j u s t o v e r $ 9 . 0 b i l l i o n ; required reserves at rather if -17p r e s e n t l y has E u r o - d o l l a r b o r r o w i n g s o u t s t a n d i n g m excess o f base) w o u l d r e l e a s e $100,000 f r o m r e q u i r e d r e s e r v e s a g a i n s t d o l l a r borrowings cent) (where t h e 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 Euro- i s 10 per and absorb $60,000 i n t o r e q u i r e d r e s e r v e s a g a i n s t t i m e w i t h t h e head o f f i c e - - a n e t s a v i n g o f $40,000 o f r e s e r v e s . head o f f i c e w o u l d be w i l l i n g t o pay about 4 per c e n t more f o r head o f f i c e books t h a n f o r funds o b t a i n e d t h r o u g h b r a n c h e s . official f u n d s c o u l d be o b t a i n e d f o r branches - - E u r o - d o l l a r s -- its deposits Thus, the funds on If 10 per c e n t per annum t h r o u g h t h e head o f f i c e w o u l d be w i l l i n g up t o 1 0 . 4 per c e n t per annum f o r t h e same funds d i r e c t l y do so because o f t h e e x e m p t i o n o f o f f i c i a l -- t o pay and c o u l d funds from R e g u l a t i o n Q ceilings. T a b l e 7 compares t h e c o s t o f r a i s i n g f u n d s i n t h e s e two a l t e r n a t i v e ways, f r o m t h e p o i n t o f v i e w o f t h e U.S. b a n k s , a d j u s t i n g market q u o t a t i o n s to r e f l e c t w i t h h o l d i n g r e s e r v e s i n each case. the a d d i t i o n a l cost after associated As may be seen, once t h e E u r o - d o l l a r 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 went i n t o e f f e c t , Euro-dollar became c o n s i d e r a b l y more e x p e n s i v e t h a n funds a t t r a c t e d t h r o u g h time deposits. advantage f o r From September 10 t o l a t e O c t o b e r , however, the o f f i c i a l as t h e o f f i c i a l declined. t i m e d e p o s i t s o u r c e was g r a d u a l l y t i m e d e p o s i t r a t e i n c r e a s e d and E u r o - d o l l a r funds official this reduced rates -18Overnight Deposits: Reserve Board amended i t s Effective l a s t J u l y 31, the F e d e r a l Regulation D to eliminate the f o r a member bank t o reduce i t s possibility r e s e r v e r e q u i r e m e n t s t h r o u g h t h e use o f s o - c a l l e d " L o n d o n c h e c k s " and " b i l l s p a y a b l e c h e c k s " t p r e p a y n i g h t and o t h e r d e p o s i t s i n i t s over- f o r e i g n branches. The e f f e c t s o f t h i s a c t i o n (aimed a t s t o p p i n g t h e use o f night borrowing, in itself reserve-free at that t i m e l i k e any b o r r o w i n g f r o m b r a n c h e s , t o reduce r e q u i r e m e n t s a g a i n s t d o m e s t i c d e p o s i t s ) clearly evident. F o r example, a t t h e end o f J u n e , E u r o - d o l l a r i n f o r e i g n b r a n c h e s o f U . S . banks t o t a l e d $ 2 0 f 4 b i l l i o n . $2.4 b i l l i o n (or deposits b u t o v e r n i g h t d e p o s i t s had f a l l e n t o $ 1 . 4 amount, By t h e end o f A u g u s t , t o t a l E u r o - d o l l a r d e p o s i t s a t t h e s e b r a n c h e s had r e p r e s e n t i n g only 6 per cent of the t o t a l . are Of t h i s 11 p e r c e n t ) was h e l d on an o v e r n i g h t b a s i s . to $22.6 b i l l i o n , over- risen billion, D u r i n g t h e same p e r i o d , t h e p r o p o r t i o n o f d e p o s i t s h e l d on c a l l d e c l i n e d f r o m 19 p e r c e n t to 15 p e r c e n t , and t h o s e o f one month m a t u r i t y d e c l i n e d f r o m 45 p e r cent t o 43 p e r c e n t o f t h e t o t a l . o f $2.3 b i l l i o n In fact, a v e r y l a r g e share of the i n t o t a l E u r o - d o l l a r d e p o s i t s a t these branches J u l y and August was a c c o u n t e d f o r by t h e r i s e i n d e p o s i t s increase during maturing w i t h i n two months - - w h i l e o v e r n i g h t and c a l l d e p o s i t s d e c r e a s e d by $1.4 billion. S a l e s o f Commercial P a p e r : B o a r d announced i t payment o f i n t e r e s t On O c t o b e r 2 9 , t h e F e d e r a l Reserve was c o n s i d e r i n g amending i t s on d e p o s i t s rules governing ( R e g u l a t i o n Q) t o a p p l y t o funds the -19r e c e i v e d b y member banks f r o m t h e i s s u a n c e o f c o m m e r c i a l p a p e r similar o b l i g a t i o n s by bank a f f i l i a t e s . domestic sources o f funds T h i s was t h e l a s t o f t o w h i c h U . S . c o m m e r c i a l b a n k s had a n d w h i c h h a d r e m a i n e d beyond t h e r e a c h o f interest rate ceilings the Federal or reserve requirements. dollar borrowings, other sources w i t h respect or the major resorted Reserve's (In addition to which the to Federal R e s e r v e B o a r d f i n a l i z e d and p r o p o s e d r e g u l a t o r y changes last included sales of pools of participations and t h e c o n v e r s i o n o f w h i c h a f e w banks w e r e At in individual demand d e p o s i t s into "Federal funds this such l i a b i l i t i e s 58 issued s u b s i d i a r i e s o r r e l a t e d one-bank h o l d i n g companies .-i^ paper h a d b e e n s o l d a t y i e l d s i n t e r e s t r a t e s payable on CD's. of October, loans borrowings,11 t h i s a c t i o n on c o m m e r c i a l p a p e r , a b o u t banks had o u t s t a n d i n g a r o u n d $ 3 . 6 b i l l i o n o f A l l of summer attempting.) the time of through t h e i r loans or Euro- f a r b e y o n d t h e maximum Between t h e end o f J u l y and t h e t h e number o f banks o f f e r i n g c o m m e r c i a l p a p e r in end some manner r o s e b y 50 p e r c e n t , and t h e amount o u t s t a n d i n g c l i m b e d by $1.8 b i l l i o n October (or 100 p e r c e n t ) . Of t h e t o t a l o u t s t a n d i n g 2 9 , r o u g h l y $ 0 . 4 b i l l i o n had been i s s u e d b y b a n k Under a p a r a l l e l r u l i n g b y t h e B o a r d , as o f paper i n t h e l a t t e r December c a t e g o r y w i l l become s u b j e c t 1, on subsidiaries. commercial t o t h e maximum r a t e s w h i c h t h e banks t h e m s e l v e s c o u l d pay on t i m e deposits. P a r t l y i n response to t h i s l a t e s t p o l i c y move, U . S . substantially interest increased t h e i r bidding for E u r o - d o l l a r funds banks during 1/ I n L o n d o n , " c o m m e r c i a l p a p e r " means a c c e p t a n c e s ; i n t h e U n i t e d S t a t e s i t means a s h o r t - t e r m p r o m i s s o r y n o t e i s s u e d b y a nonbank corporation. -20t h e week e n d i n g November 5. the sharp r i s e October. will m E u r o - d o l l a r r a t e s d u r i n g the l a s t some o f dollar at the e x i s t i n g i n t e r e s t r a t e probably ceilings. them may a t t e m p t t o expand t h e i r b o r r o w i n g i n t h e Euro* market. On t h e o t h e r hand, t h e h i g h e r cost of o b t a i n i n g resulting this for few days o f As t h e c o m m e r c i a l paper o u t s t a n d i n g m a t u r e s , banks n o t be a b l e t o renew i t Thus, T h i s development may w e l l a c c o u n t Euro-dollars f r o m t h e i m p o s i t i o n o f m a r g i n a l r e s e r v e requirements may dampen tendency. This p o s s i b i l i t y i s suggested by the behavior of banks as t h e y p r e p a r e d t o meet the newly e f f e c t i v e r e s e r v e D u r i n g t h e two weeks O c t o b e r 16 t o O c t o b e r 29, U . S . bank b o r r o w i n g s o f E u r o - d o l l a r s fell sharply. a l s o r e f l e c t e d t h e d e s i r e o f banks t o cut back t h e i r borrowings for aggregate decline i t may have Euro-dollar t h e O c t o b e r c o m p u t a t i o n p e r i o d i n order t o reduce required reserves November 13. requirements. While t h i s may have been r e l a t e d t o d o m e s t i c c r e d i t d e v e l o p m e n t s , the for t o reduce required r e s e r v e s may have o v e r r i d d e n t h e need t o put up a d d i t i o n a l reserves against Thus, t h e second m a i n t e n a n c e p e r i o d beginning t h e need t o r e p a y b o r r o w i n g s t h e b o r r o w i n g s e x i s t i n g i n September. U . S . bank demand f o r E u r o - d o l l a r declining Euro-dollar Euro-Dollar rates u n t i l I n any case, the reduced f u n d s was an i m p o r t a n t f a c t o r the l a s t Flows and t h e U.jS. Balance o f few days o f October, Payments The g e n e r a l l y w i d e s p r e a d movement o f f u n d s i n t o particularly in d u r i n g t h e f i r s t h a l f o f 1969 - - Euro-dollars is clearly reflected in - 2 1 - t h e U.S. b a l a n c e o f payments. from other currencies The movement o f i n t o U.S. d o l l a r s market g e n e r a l l y r e s u l t s m o f U.S. d o l l a r b a l a n c e s . a reduction liquidity m b a l a n c e was m not seasonally adjusted). reflects, primarily, fully the Euro-dollar half of i t s b a l a n c e o f payments on an deficit a t the same time by $5 b i l l i o n the l a r g e i n f l o w of p r i v a t e half of foreign (all And the increase m branches. indication o f what happened i n t h e e n t i r e e i g h t - c o u n t r y BIS E u r o - d o l l a r of the $7.2 b i l l i o n U . K . banks t o n o n - r e s i d e n t s , It resident to residents i n c r e a s e i n U.S. d o l l a r area. liabilities $ 6 . 4 b i l l i o n was an i n c r e a s e m of c o u n t r i e s other is d i f f i c u l t latter Euro-dollar T h i s may be r e l a t e d t o t h e U.K. d a t a w h i c h g i v e an liabilities figures short-term the y e a r . a c c o u n t e d f o r by t h e $ 7 . 3 b i l l i o n b o r r o w i n g s by U.S. banks v i a t h e i r see t h a t , 1969, The d i f f e r e n c e between t h e two b a l a n c e s t h a t o c c u r r e d d u r i n g the f i r s t is nearly m foreigners f o r e i g n c e n t r a l bank h o l d i n g s reserve t r a n s a c t i o n s basis of $2.9 b i l l i o n , t h a t t h e U.S. capital of investment T h i s happened d u r i n g t h e f i r s t and t h e U n i t e d S t a t e s had a s u r p l u s official for funds by p r i v a t e than the U n i t e d We of dollar States. t o make a f i r m e s t i m a t e o f t h e volume o f U.S. f u n d s w h i c h went i n t o E u r o - d o l l a r s from U.S. sources. Reported s h o r t - t e r m c l a i m s abroad o f U . S . nonbanks - - where one w o u l d e x p e c t f l o w s t o appear - t h e U.K. i n c r e a s e d o n l y $78 m i l l i o n m statistics, however, we see t h a t d o l l a r the f i r s t half. liabilities banks a l o n e t o U . S . banks and nonbanks i n c r e a s e d by over $ 3 / 4 So, i t may w e l l i n the f i r s t De t h a t half the f l o w o f U . S . r e s i d e n t funds i n t o such From of U.K. billion. Euro-dollars o f t h e y e a r approached o r perhaps somewhat exceeded -22$1 b i l l i o n . Some o f t h e v e r y l a r g e d i r e c t $ 2 . 1 b i l l i o n d u r i n g the f i r s t h a l f a v a i l a b l e by U.S. c o r p o r a t i o n s dollar investment o u t f l o w - - - - may have r e f l e c t e d b a l a n c e s made to t h e i r placement i n s t e a d of f o r d i r e c t foreign subsidiaries investment o u t l a y s ; w o u l d n o t show up i n t h e European d a t a as l i a b i l i t i e s Another p a r t of the e x t r a o r d i n a r i l y large f i r s t half for Euro- these balances t o U.S. errors residents. and o m i s s i o n s i t e m s i n t h e U.S. b a l a n c e o f payments a c c o u n t s p r o b a b l y r e f l e c t s movement o f s p e c u l a t i v e about the f u n d s i n t o German m a r k s . I n the t h i r d q u a r t e r , w e r e q u i t e changed f r o m e a r l i e r i t w o u l d appear t h a t E u r o - d o l l a r i n the year. flows Whereas i n t h e f i r s t half t h e f l o w o f f o r e i g n f u n d s t o E u r o - d o l l a r s was l a r g e enough t o r e s u l t a $2.6 b i l l i o n r e d u c t i o n i n f o r e i g n o f f i c i a l d o l l a r holdings United States, holdings i n the July-September p e r i o d f o r e i g n i n c r e a s e d s h a r p l y - - by a b o u t $ 1 . 7 b i l l i o n . a b r u p t change i n t h e f l o w o f may w e l l be t h a t dollars into funds i n t o official in A l t h o u g h t h e U.S. after the dollar This r e f l e c t e d the E u r o - d o l l a r market, t h e r e was some movement o f f o r e i g n f u n d s o u t o f foreign currencies in and an it Euro- July. liquidity deficit continued large i n the t h i r d q u a r t e r - - n e a r l y $3 b i l l i o n b e f o r e s e a s o n a l a d j u s t m e n t - - we a r e i n c l i n e d to doubt t h a t resident this reflected funds d i r e c t l y In closing, t o p o r t r a y the U.S. t o any m a j o r e x t e n t i n t o the E u r o - d o l l a r I would l i k e liquidity flows of market. t o comment on t h e w i d e s p r e a d deficit as a " s o u r c e o f f u n d s f o r tendency the Euro- d o l l a r market 1 1 and hence a s o u r c e o f f u n d s f o r U . S . bank b o r r o w i n g the E u r o - d o l l a r market. This p o r t r a y a l U.S. i s u s u a l l y combined w i t h an in -23a s s e r t i o n t h a t a r e d u c t i o n of f o r e i g n o f f i c i a l d o l l a r balances i n United States i s a l s o a " s o u r c e o f funds f o r t h e E u r o - d o l l a r I believe t h a t are a t work. not r e f l e c t s ments, market." t h i s v i e w g i v e s t h e wrong i m p r e s s i o n o f t h e Whether t h e U n i t e d S t a t e s has a l i q u i d i t y t h e w h o l e s p r e c t r u m o f developments i n U . S . and i s q u i t e d i f f e r e n t assets are r i s i n g or f a l l i n g . m a r k e t comes d i r e c t l y factors deficit Euro-dollar Of c o u r s e , one f l o w o f f u n d s i n t o although i t has that apparently a c c o u n t e d f o r o n l y a r e l a t i v e l y modest p a r t o f t h e m a r k e t ' s growth. T h a t f l o w o f f u n d s m i g h t be r e g a r d e d as a r e c y c l i n g o f U . S . funds can be d i s c o u n t e d i n j u d g i n g t h e e x t e n t o f t h e U . S . In this liquidity a t t r a c t e d by h i g h y i e l d s t o h o l d these assets r a t h e r nated i n other currencies. deficit. foreigners than assets are denomi- T h i s p r o c e s s , as o u t l i n e d above, t e n d s p u t p r e s s u r e on c e n t r a l b a n k s 1 d o l l a r h o l d i n g s . T h i s i s where t h e t i o n between t h e E u r o - d o l l a r m a r k e t and t h e l i q u i d i t y to connec- d e f i c i t m i g h t be When t h e l i q u i d i t y d e f i c i t p r o v i d e s ample s u p p l i e s o f d o l l a r s f o r e i g n c e n t r a l banks, private holdings Even i n t h i s t h e e f f e c t on t h e i r r e s e r v e s o f case, had n o t been so large. in to in cushioned. some p i n c h i n g has o c c u r r e d , b u t c e n t r a l bank w o u l d c e r t a i n l y have been much more i n e v i d e n c e i f the growth i n the E u r o - d o l l a r market i s c o m f o r t a b l y t a n c e i n one f o r m o r a n o t h e r t o such l a r g e i n v e s t m e n t s deficit that c o n t e x t , by f a r t h e most i m p o r t a n t a s p e c t o f t h e E u r o - d o l l a r m a r k e t w h i c h s h o u l d be s t r e s s e d i s t h a t p r i v a t e made. or t r a d e and pay- from t h e q u e s t i o n o f w h e t h e r f r o m U.S. r e s i d e n t s , the resis- Euro-dollars t h e U.S. liquidity Table 1 Estimated Net S i z e of E u r o - d o l l a r Market ( B i l l i o n s of U.S. d o l l a r s ) Sources A. B. End-1968 (BIS E s t i m a t e ) ! / Total Per cent Sources/Use s of T o t a l Outside Area^/ U.S. and Canada Japan Eastern Europe Other Total 4.5 0.1 0.6 6.6 11.8 18.0 0.4 2.4 26.4 47.2 I n s i d e Area Non-banks Banks Total Grand T o t a l 5.2 8.0 13.2 25.0 20.8 32.0 52.8 100.0 Outside Area U.S. and Canada Japan Eastern Europe Other Total 10.2 1.7 0.9 4.2 17.0 40.8 6.8 3.6 16.8 68.0 I n s i d e Area Non-banks Banks Total Grand T o t a l 4.7 3.3 8.0 25.0 18.8 13.2 32.0 100.0 End-June 1969 (Estimated from change i n Published U.K. D a t a ) ! / Per cent Total Sources/Uses of T o t a l Estimated Change: End-1968 to End June 1969 Per cent o f Chg. i n Change T o t a l Sources/Uses 6.3 19.5 +1.8 25 9.2 28.5 +1.9 26 15.5 48.0 +3.7 ~51 16.8 52.0 +3.6 49 16.8 32.3 52.0 100.0 +3.6 +7.3 ~49 100 16.8 52.0 +6.6 90 6.9 21.4 +0.1 2 23.7 73.4 +6.7 ~92 8.6 26.6 +0.6 8 8.6 32.3 26.6 100.0 +0.6 +7.3 8 100 Uses A. B. 1/ 2/ 3/ B . I . S . ( T h i r t y - n i n t h ) A n n u a l R e p o r t , June 1969, p . 149. Bank o f England Q u a r t e r l y B u l l e t i n , September 1969, p . 331. The 8 - c o u n t r y B . I . S . E u r o - d o l l a r a r e a i n c l u d e s t h e U . K . , Sweden, S w i t z e r l a n d , Germany and t h e N e t h e r l a n d s . Italy, France, Belgium, Table 2 Use o f E u r o - d o l l a r Funds by the U n i t e d S t a t e s R e l a t i v e E s t i m a t e d Net S i z e o f the E u r o - d o l l a r M a r k e t ( B i l l i o n s o f U.S. D o l l a r s ) to 1964 1965 1966 1967 1968 June-19691/ Net S i z e 9.0 11.5 14.5 17.5 25.0 32.0 Uses: i n U.S. and Canada^/ 2.2 2.7 5.0 5.8 10.2 16.8 (40.8) (52.5) Per c e n t o f Net Size U.S. Bank B o r r o w i n g s Through T h e i r Overseas Branches Per c e n t o f Net S i z e (24.4) 1.2 (13.3) (23.5) 1.3 (11.3) (34.5) 3.4 (23.4) (33.1) 3.7 (21.1) 6.0 (24.0) 13.3 (40.3) 1/ E s t i m a t e d oy F e d e r a l Reserve Board. E s t i m a t e s f o r o t h e r y e a r s made by t h e BIS. Net s i z e i s f< an a r e a i n c l u d i n g o n l y e i g h t European c o u n t r i e s : U. K . , B e l g i u m , N e t h e r l a n d s , F r a n c e , Germany, I t a l y Sweden, and S w i t z e r l a n d . 2 / T o t a l s h o r t - t e r m a s s e t s i n t h e U.S. and Canada owned by banks i n the e i g h t - c o u n t r y area. Table 3 NET CHANGE I N MAJOR BALANCE SHEET ITEMS FOR WEEKLY REPORTING BANKS December 25- October 15 1/ (In billions Items of d o l l a r s , not seasonally Total 1969 1968 T o t a l l o a n s and i n v e s t m e n t s 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 l o a n s - 4.6 - 6.9 - 3.4 5.7 5.5 1.9 1.4 14.0 .3 4.2 9.6 4.4 2.5 1.7 T o t a l deposits 3/ Demand d e p o s i t s 3 / Time and s a v i n g s d e p o s i t s Large CD's 4 / Other -18.6 - 3.6 -15.0 -11.9 - 3.1 5.0 - 2.4 7.4 2.8 4.5 8.8 9.2 8.3 4.5 4.5 3.0 T o t a l borrowings 5/ Other l i a b i l i t i e s Euro-dollars 6/ 1/ 2_/ adjusted) 14 M a j o r Banks w i t h London Branches 1969 1968 - 2.6 - 2.4 - 2.4 2.2 2.7 .7 .3 5.6 .6 2.2 2 .9 2.1 .2 .1 9.2 .3 8.9 6.6 2.3 - 1.7 - 2.6 .9 .1 .8 - 2.6 7.1 7.4 2.4 3.9 3.0 1969 - 2.0 - 4.5 - 1.0 3.5 2.8 1.2 1.1 - - 8.3 .3 2.0 6.7 2 .3 2 .3 1.6 9.4 3.3 6.1 5.3 .8 6.7 .2 6.5 2 .7 3.7 6.2 2.1 .9 2.1 .6 7/ Dates a r e f o r 1969, comparable dates used f o r 1968. E x c l u s i v e o f l o a n s and F e d e r a l funds t r a n s a c t i o n s w i t h domestic commercial banks and n e t o f reserves . 3_/ Less cash i t e m s i n t h e process o f c o l l e c t i o n . 4/ N e g o t i a b l e t i m e c e r t i f i c a t e s o f 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 funds market 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 . 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 . Other 1968 valuation Table 4 NET CHANGE I N MAJOR BALANCE SHEET ITEMS FOR WEEKLY REPORTING BANKS December 25- June 25 1 / ( I n b i l l i o n s of d o l l a r s , not seasonally a d j u s t e d ) Total Items 1969 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 - T o t a l deposits 3 / Demand d e p o s i t s 3 / Time and savings deposits Large CD's 4 / Other -14.6 - 6.2 - 8.4 - 8.2 .2 T o t a l borrowings 5 / Other l i a b i l i t i e s Euro-dollars 6/ 1/ 2_/ 1.0 6.7 1.2 6.8 5.2 1.3 1.1 4.7 8.9 6.6 1968 14 Major Banks w i t h London Branches 1968 1969 .8 1.2 .5 1.6 1.7 .1 .1 2.9 2.8 1.2 4.6 3.1 1.4 .9 - 1.3 2.8 .9 2.4 2.0 .5 .3 2.8 3.7 .9 - 1.1 2.0 - 8.6 2.3 6.3 5.6 .7 - 2.8 - 1.2 - 1.6 - 1.8 .2 .8 7.7 6.2 1.5 2.2 2.0 - - 2.5 2.4 2.0 - Other - - 1969 1968 .3 3.9 .2 4.4 3.2 .8 .8 2.1 1.6 .7 3.0 1.4 1.3 .8 6.0 3.9 2.1 2.6 .5 7/ 2.5 2.6 .7 1.8 3.9 1.2 .4 1.0 .3 7/ Dates a r e f o r 1969, comparable dates used for 1968. E x c l u s i v e of 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 of v a l u a t i o n reserves . 3J 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 of deposit i n denominations of $100,000 or more. 5/ 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. 6_/ Bank l i a b i l i t i e s to f o r e i g n branches. 7/ Less than 50 m i l l i o n . NOTE: F i g u r e s may not sum e x a c t l y due to rounding. Table 5 NET CHANGE I N MAJOR BALANCE SHEET ITEMS FOR WEEKLY REPORTING BANKS June 25- October 15 1/ ( I n b i l l i o n s of d o l l a r s , not seasonally T<a t a l Items T o t a l loans and investments 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 T o t a l deposits 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 T o t a l borrowings 5 / Other l i a b i l i t i e s Euro-dollars 6/ 1/ 2/ 2/ 1969 1968 - 3.6 .2 - 2.2 - 1.2 .4 .6 .3 11.0 3.1 3.0 5.0 1.3 1.1 .8 14 Ma;jor Banks w:Lth Loiidon Branch<;s 1969 1968 - 1.3 .4 1.5 .2 .8 .2 7/ 4.0 2.5 - 6.5 -3.7 - 2.8 7.7 1.3 6.4 3.9 2.6 .6 1.9 - 2.5 - 1.0 - 1.5 4.1 .3 1.7 1.9 2.0 1.0 - - adjusted) - 1.8 .6 1.2 - ()ther 1969 1968 4.7 1.8 1.7 1.3 .4 .1 .1 - 2.3 .6 .7 1.0 .4 .4 .3 6 .3 1.3 1.3 3.8 .9 1.0 .7 1.1 1.4 2.5 1.9 .7 - 3.4 .6 4.0 2.7 1.3 6.6 2.7 3.9 2.0 1.9 2.3 .9 .5 1.1 .3 7/ .8 1.7 1.0 - Dates are f o r 1969, comparable dates used for 1968. E x c l u s i v e of loans and F e d e r a l funds t r a n s a c t i o n s w i t h domestic commercial banks and net of v a l u a t i o n reserves . 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 of denosit i n denomination of $100,000 or more. 5 / L a r g e l y borrowing i n the Federal funds market and from F e d e r a l Reserve banks. 6/ Bank l i a b i l i t i e s t o f o r e i g n branches. 7 / Less than 50 m i l l i o n . NOTE: Figures may not sum e x a c t l y due to rounding. Table 6 L i a b i l i t i e s of U.S. Banks to T h e i r ^ Branches 1/ ( M i l l i o n s U.S. D o l l a r s ) Date Outstandings December 30, 1964 December 29, 1965 December 28, 1966 December 27, 1967 January 1, 1969 Foreign ~ Change from previous date 1,183 1,345 4,036 4,241 6,039 + 162 +2,691 + 205 +1,798 May 26 June 25 9,621 13,228 +3,582 +3,607 J u l y 30 September 3 14,324 14,571 +1,096 + 247 October 14,111 - 460 October 8 15 14,609 14,970 + + 598 361 22 29 14,306 13,631 - 664 675 November 5 14,358 + 727 1969 1 1/ E x c l u s i v e of branch p a r t i c i p a t i o n s i n head o f f i c e loans to U.S. res i d e n t s . Table 7 Comparison of Three-month E u r o - d o l l a r Deposit Bid Rates w i t h Rates O f f e r e d by Prime Banks i n New York f o r Three-month Foreign O f f i c i a l Time Deposits (1) (2) Three -month Euro-$ D e p o s i t i ' Quoted Adjusted^' Period * (4) (3) O f f e r Ra t e f o r Foreign Of f i c i a l Time Deposits i n New York£' Ad i u s t e d V Quoted 7.00 8.75 - 7.75 9.62 7.45 8.24 9 . 3 1 - 10.23 +1.03 +1.80 +0.24 +0.88 9.00 9.50 - 10.00 10.50 9 . 5 7 - 10.63 1 0 . 1 1 - 11.17 +1.00 +0.80 -0.06 -0.26 - 10.88 10.88 10.88 10.88 10.11 10.11 10.51 10.76 - 11.57 11.57 11.57 11.57 +1.14 +2.49 +1.87 +1.11 -0.32 +1.63 +0.81 +0.30 - 10.88 10.88 10.62 10.50 10.00 10.90 10.90 10.51 9.98 8.91 - 11.57 11.57 11.30 11.17 10.63 +1.41 +0.93 +1.06 +0.72 +1.20 +0.74 +0.26 +0.29 -0.47 -0.52 1969 - Mar. June 8.48 11.11 * July Aug. 10.57 10.91 * Sept. 3 10 17 24 11.25 11.34 11.14 10.68 12.60 12.38 11.87 9.50 9.50 9.88 10.12 Oct. 11.08 10.65 10.43 9.63 9.10 12.31 11.83 11.59 10.70 10.11 10.25 10.25 9.88 9.38 8.38 1/ 2/ 3/ 4/ */ 1 8 15 22 29 * * ( 5 ) = C>-)-( 4 ) Differ*jntial: Adjusted IS u r o - d o l l a r Over A d j iisted Time Deposit (Dffer Rate Average of d a i l y f i g u r e s f o r the l a s t week (ending Wednesday) of the p e r i o d . Range of r a t e s o f f e r e d f o r 90-179 day funds at Prime New York C i t y banks. To r e f l e c t the 10% marginal reserve requirement on U.S. bank l i a b i l i t i e s to f o r e i g n branches. To r e f l e c t the 6% reserve requirement on head o f f i c e time l i a b i l i t i e s . Same as quoted r a t e ; reserve requirement computation began i n week ending September 10. Table 8 U . S . BALANCE OF PAYMENTS ( m i l l i o n s of d o l l a r s , s e a s o n a l l y a d j u s t e d ) 1968 Balance on goods, s e r v i c e s , r e m i t t a n c e s and pensions Balance on goods and s e r v i c e s Remittances and pensions U . S . G o v ' t , g r a n t s and c a p i t a l f l o w s , net U.S. p r i v a t e c a p i t a l flow, net Foreign c a p i t a l flow, n e t , l i q u i d assets i n U . S . e x c l u d i n g change i n E r r o r s and unrecorded transactions Balance on l i q u i d i t y b a s i s , Less: seasonally Liquid l i a b i l i t i e s to a l l foreigners To o f f i c i a l agencies To commercial banks 1/ To o t h e r f o r e i g n r e s i d e n t s and u n a l l o c a t e d To i n t ' l and r e g i o n a l o r g a n i z a t i o n s n.a. 2,516 -1,159 363 -271 283 -286 n.a. n.a. -3,955 -793 -1,103 n.a. -5,157 -1,345 -1,971 n.a. 8,565 1,633 203 n.a. -642 -1,239 -838 n.a. -1,653 -3,711 -2,533 -395 -64 355 168 -1,258 -3,647 -2,888 -880 -48 -299 -686 712 -3,099 3,382 374 55 1,306 -1,707 3,124 -23 -88 3,946 -556 4,567 -147 82 3,574 2,238 1,519 -191 8 1,143 1,243 -933 -567 29 107 1,638 1,710 1,214 -1,040 -880 -48 -299 -686 -3,099 -1,707 -556 2,238 2,341 45 -359 -512 Seasonal adjustment Balance b e f o r e seasonal adjustment O f f i c i a l r e s e r v e assets Liquid l i a b i l i t i e s to foreign o f f i c i a l Nonliquid l i a b i l i t i e s agencies 1/ to foreign agencies Qtr.3P -3 Balance on o f f i c i a l r e s e r v e t r a n s a c t i o n s b a s i s , seasonally adjusted Less: 6 9 Qtr.2 92 Seasonal adjustment U . S . o f f i c i a l r e s e r v e assets 9 1,357 adjusted Balance b e f o r e seasonal adjustment 1 Qtr.l official I n c l u d e s d e p o s i t s o f f o r e i g n branches o f y . S . banks and of f o r e i g n commercial banks, a s s o c i a t e d w i t h t h e i r U . S . - d o l l a r denominated l i a b i l i t i e s to f o r e i g n o f f i c i a l agencies. 2/ preliminary. n . a . / Not a v a i l a b l e . Source: F e d e r a l Reserve B u l l e t i n , October 1969, pages A72 and A73.
@FedFRASER