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F o r R e l e a s e on D e l i v e r y
W e d n e s d a y , J u l y 9 , 1969
3 : 0 0 p . m . , L o n d o n Time
1 0 : 0 0 a . m . , W a s h i n g t o n Time




FINANCIAL INNOVATION AND MONETARY
MANAGEMENT I N THE UNITED STATES

A Paper p r e s e n t e d

by

By
Andrew F . Brimmer
Member
Board of Governors of the
F e d e r a l Reserve System

At a meeting of

the

A s s o c i a t i o n o f A m e r i c a n Banks i n

First

N a t i o n a l C i t y Bank
34 M o o r g a t e
London, E.C. 2, England

July

9,

1969

London

FINANCIAL INNOVATION AND MONETARY
MANAGEMENT I N THE UNITED STATES
By
Andrew F. Brimmer*

The s e v e r i t y
the current
exploit

y e a r has i n d u c e d many o f

intensively

means o f r a i s i n g
extension of

o f monetary r e s t r a i n t

traditional

funds

loans

to

sources of

large

has d i l u t e d

the e f f e c t s

corporate

of credit

--

especially

customers.
the very

restraint

t a s k o f m o n e t a r y management d u r i n g a p e r i o d o f
United

to

f u n d s and t o s e a r c h f o r new

business

from the p o i n t of view of c e n t r a l banking,
efforts

during

t h e l e a d i n g c o m m e r c i a l banks

t o c a r r y on t h e i r
their

i n the United States

the

Unfortunately,

success o f

banks1

the

and c o m p l i c a t e d

intense

inflation

the

in

the

States.
The m o s t n o t i c e a b l e

development

f u n d s u n d o u b t e d l y has b e e n t h e d r a m a t i c
i n g s by American banks - dozen or

so i n s t i t u t i o n s .

the issuance of

primarily

i n the banks1

quest

for

expansion i n E u r o - d o l l a r

loanable
borrow-

t h r o u g h t h e London branches o f

O t h e r w i d e l y - n o t e d new d e v e l o p m e n t s

commercial paper by bank s u b s i d i a r i e s

a

include

or one-bank

holding

^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 S y s t e m .
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 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 t h i s paper.
M r . James B. E c k e r t h e l p e d i n t h e
r e v i e w o f r e c e n t c r e d i t d e v e l o p m e n t s and i n t r a c i n g t h e u s e o f n o n - d e p o s i t
s o u r c e s o f b a n k f u n d s . M r . Thomas Thomson and M r . I s a a c V . B a n k s , J r .
w e r e r e s p o n s i b l e f o r t h e c o m p u t e r p r o g r a m m i n g and r e l a t e d a n a l y s i s n e c e s s a r y
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 commercial banks o f d i f f e r e n t s i z e - e s p e c i a l l y t h e b e h a v i o r o f t h e d o z e n - o r - s o l a r g e banks w i t h London
b r a n c h e s and w h i c h a c c o u n t f o r v i r t u a l l y a l l o f t h e E u r o - d o l l a r
b o r r o w i n g by U.S. b a n k s .
M r . Edward R. F r y was m a i n l y r e s p o n s i b l e
f o r t h e a n a l y s i s o f t h e CD a t t r i t i o n a t c o m m e r c i a l b a n k s .
M r . Henry S.
T e r r e l l and M i s s M a r y Ann G r a v e s , my a s s i s t a n t s , a l s o w o r k e d o n t h e
paper.




-2-

companies,
loans,
the

the

and o t h e r

scope o f

tion,

sale of

participations

steps which permit

interest

the Federal

rate

ceilings

funds market - -

in individual

t h e banks t o o b t a i n

a long-used vehicle

h a s become much m o r e s o p h i s t i c a t e d

funds,

on b a l a n c e ,

thoroughly

i n keeping w i t h
Of c o u r s e ,

financial

innovations

--

n o r has i t

industrial

have grown a t
the highest

banks,

through t h e i r




inflation.

attention

the f i r s t

to

of

source of
--

credit,

a

result
policy.

motivations

t h e methods

the

to b r i n g about

t h e r a p i d e x p a n s i o n o f bank l o a n s

in

general

to

D u r i n g the c l o s i n g months
this

high rate.

Thus,

raising

t o use monetary p o l i c y

year,

Moreover,

business
until

as i n t e r e s t

to

rates

large
of

loans at

this

banks

spring,

loans were r e c o r d e d a t

a t banks w i t h r e a d y access

London b r a n c h e s .

these

t h e F e d e r a l R e s e r v e B o a r d has

expansion i n business

especially

the

the

loanable

t h e new f u n d

of

and

In contrast,

year

of

extent,

While attempting

of

addi-

r e l i e d on by banks

c u r r e n t monetary

result

efforts

f i v e months o f

an e x c e p t i o n a l l y

rates

last

been i g n o r a n t

and c o m m e r c i a l c o r p o r a t i o n s .

1968 and d u r i n g

of

To a c o n s i d e r a b l e

on t h e a v a i l a b i l i t y

given particular

largest

t h e end o f

the o b j e c t i v e s

F e d e r a l Reserve has employed i n i t s

restraint

operation.

the p r i n c i p a l

h a v e b e e n a d o p t e d as a d i r e c t

t h e campaign a g a i n s t

In

has e x p a n d e d e n o r m o u s l y

in its

of

outside

t h e F e d e r a l Reserve has n o t been unaware o f

from which they spring.
techniques

--

traditionally

has s h r u n k s i n c e

funds

and r e s e r v e r e q u i r e m e n t s .

t o meet t e m p o r a r y r e s e r v e d e f i c i e n c i e s

volume o f bank d e p o s i t s ,

loans or pools

the

Euro-dollars
rose under

the

-3-

impact of monetary r e s t r a i n t ,
less

a b l e t o compete f o r

the l a r g e banks f o u n d t h e m s e l v e s

time deposits;

large denomination c e r t i f i c a t e s

t h i s was p a r t i c u l a r l y

of deposit

known as CD's - - w h i c h many b a n k s o f f e r
sizable

cash b a l a n c e s

maximum i n t e r e s t

in turn,

r a t e p a y a b l e on such d e p o s i t s

c e n t f o r minimum m a t u r i t i e s

the banks'

for

effects

this

could not

uncovered domestic
the impact of

last

is

the p a t t e r n t h a t

credit

i n CD's,

actually

Thus,

the

I n the

a partial

the net r e s u l t

by t h e m o n e t a r y a u t h o r i t i e s

g i v e n the magnitude o f
on t h e a v a i l a b i l i t y

As I m e n t i o n e d a b o v e ,
these developments.

per

billion.

To a
How-

adverse
meantime,

increasingly
cushion

against

has been a more

commercial banks t o m o n e t a r y r e s t r a i n t

one w o u l d h a v e e x p e c t e d - -

by

one w o u l d

developed.

t a p t h i s m a r k e t so e a s i l y h a v e

restraint.

the

year,

t o l e n d t o be m o d e r a t e d s u b s t a n t i a l l y .

sources which also provide

response o f U.S.

ignorant of

that

was s e t a t 6 - 1 / 4

Since t h e end o f

CD a t t r i t i o n w e r e c u s h i o n e d and d e l a y e d .

many b a n k s t h a t




fact

those banks w i t h ready access t o E u r o - d o l l a r s ,

of

hesitant

180 d a y s .

competitive

to the

1 9 6 8 , when i t

with

commercial

has n o t been r a i s e d

w i t h the steady a t t r i t i o n

ability

considerable degree,
ever,

of

--

C D ' s o u t s t a n d i n g a t b a n k s has s h r u n k b y m o r e t h a n $7

Consequently,
expect

The l e s s e n e d

and
of

and o t h e r s

Treasury b i l l s ,

c a n be t r a c e d d i r e c t l y

t h e F e d e r a l Reserve Board s i n c e A p r i l ,

the volume o f

to corporations

instruments.

true

$ 1 0 0 , 0 0 0 and o v e r )

i n c o m p e t i t i o n w i t h U.S.

p a p e r and o t h e r money m a r k e t
p o s i t i o n of CD's,

(of

less

the pressure

o f bank

than

exerted

reserves.

t h e F e d e r a l R e s e r v e S y s t e m has n o t
On t h e o t h e r h a n d , t h e r e

has n o t

been
always

-4-

b e e n an i d e n t i t y

of views w i t h i n

significance

o r what - -

if

For example,

early

year,

them)

this

began t o express

dollar

inflows

for

recognized
payments
ments

I

officials)

h a n d , many o t h e r
thought

b o r r o w i n g s b y head o f f i c e s
observers

the E u r o - d o l l a r

f o r A m e r i c a n banks - - w h i c h ,
pursue

a more v i g o r o u s

w o u l d be a b l e
balance of

t o do.

(including

inflows

in turn,

o f U.S.

require-

banks.

some F e d e r a l

of

than i t

On

Reserve

p r o v i d e d a needed s a f e t y

p o l i c y of monetary r e s t r a i n t

p a y m e n t s was a l s o a f a c t o r

reserve

I

of

enabled the F e d e r a l Reserve

The f a v o r a b l e e f f e c t -

in

-- while

on o u r b a l a n c e

c o n s i d e r a t i o n be g i v e n t o t h e i m p o s i t i o n o f

against Euro-dollar

the other

such i n f l o w s

Euro-

being pursued

p e r s o n a l l y urged i n e a r l y March t h a t
of

them.

( a n d I was among

t h e adverse consequences o f

of monetary r e s t r a i n t

effects

their

s h o u l d be done t o c o u n t e r

some S y s t e m o f f i c i a l s

concern over

the b e n e f i c i a l

--

anything - -

the p o l i c y

the United States.

the System r e g a r d i n g e i t h e r

valve

to

otherwise

these i n f l o w s

on t h e

i n t h e i r minds w e i g h i n g

U.S.

against

such a move.
Nevertheless,
more e v i d e n t

as t h e new y e a r

that Euro-dollar

progressed,

it

became more and

b o r r o w i n g s by head o f f i c e s

of

American

b a n k s w e r e c e a s i n g t o be a s a f e t y v a l v e and w e r e b e c o m i n g a n o b v i o u s
escape

route

around a n a t i o n a l p o l i c y

For example,

during the f i r s t

of U.S.

to

In

the

banks
first

their

5 - 1 / 2 months o f

f o r e i g n branches

t h r e e weeks o f June a l o n e ,

to a l e v e l approximating $13-1/2




of domestic

credit

this

year,

restraint.
liabilities

r o s e b y more t h a n $7
the

"billion.

billion.

r i s e was a b o u t $3 b i l l i o n

--

-5Against

the background o f

this

surge i n E u r o - d o l l a r

t h e F e d e r a l Reserve Board decided t o t a k e steps
On J u n e 2 6 ,

o f U.S. banks f r o m t h e i r

a b o v e t h e amounts o u t s t a n d i n g
comment,

of J u l y .

I

it

requirements,

assuming t h a t

I n the rest
m o n e t a r y management
last

of

e f f e c t i v e around the

the E u r o - d o l l a r

be a b l e t o r a i s e

end

reserve

funds v i a

and o t h e r

will

i n the United States
The p r i n c i p a l

the

instruments

s h o u l d a l s o be k e p t u n d e r c l o s e

t h i s paper, I

December.

and

proposal.

loan p a r t i c i p a t i o n s ,

These d e v i c e s

require-

S i n c e t h e B o a r d a l l o w e d 30 days

the Board adopts

t h e banks w o u l d s t i l l

described above.




i n May.

supported the

commercial paper m a r k e t ,

summarized

inflow.

f o r e i g n branches over

c o u l d make t h e new r e q u i r e m e n t

strongly

But,

was a d o p t e d

the

the Board proposed the i m p o s i t i o n o f m a r g i n a l reserve

ments on b o r r o w i n g s

for

t o moderate

borrowings,

review.

review the main o u t l i n e s

since a p o l i c y
conclusions

of

firmer

restraint

r e a c h e d c a n be

briefly:
I n t h e f i r s t h a l f o f 1969, t h e a v a i l a b i l i t y o f bank
c r e d i t i n t h e U . S . has b e e n s h a r p l y r e d u c e d .
Howe v e r , t h e b u r d e n o f m o n e t a r y r e s t r a i n t has b e e n
b o r n e u n e v e n l y , as some s e c t o r s ( p a r t i c u l a r l y t h e
c o r p o r a t e b u s i n e s s s e c t o r ) have a c t u a l l y expanded
t h e i r access t o bank c r e d i t .
The l e a d i n g b a n k s i n t h e U . S . h a v e b e e n a b l e t o
expand t h e i r l e n d i n g a t a r a p i d pace by r e l y i n g
i n c r e a s i n g l y on n o n - d e p o s i t sources o f f u n d s .
This
h a s b e e n e s p e c i a l l y t r u e o f t h e d o z e n o r so
banks w h i c h have had r e a d y access t o E u r o d o l l a r s t h r o u g h t h e i r London b r a n c h e s .

of

-6Nevertheless, the s e v e r i t y of c r e d i t r e s t r a i n t
i n t h e U n i t e d S t a t e s i s s h o w i n g up i n c r e a s i n g l y .
Even t h e l a r g e s t banks have begun t o moderate
t h e i r lending i n the face of s h r i n k i n g deposits
( c e n t e r e d m a i n l y i n CD a t t r i t i o n ) .
For t h i s
r e a s o n , I p e r s o n a l l y t h i n k i t w o u l d be u n w i s e a t
a t t h i s t i m e t o l i f t t h e c e i l i n g on t h e maximum
i n t e r e s t r a t e s w h i c h t h e banks can pay on such d e p o s i t s .

Impact

of Monetary R e s t r a i n t
It

of

firmer

will

t h e pace o f

last

summer.

vigorous

be r e c a l l e d

restraint

that

i n the United
that

States

t h e F e d e r a l Reserve adopted a

i n mid-December

last

y e a r , when i t

e c o n o m i c a c t i v i t y was n o t

However, by e a r l y

expansion of

spring,

s l o w i n g down as

the o u t l o o k

April.

The d i s c o u n t

anticipated
suggested

Against

this

backearly

r a t e a t F e d e r a l R e s e r v e Banks was r a i s e d

Reserve r e q u i r e m e n t s

against

demand d e p o s i t s

R e s e r v e member b a n k s w&re i n c r e a s e d b y 1 / 2 p e r c e n t a g e p o i n t
a b s o r b e d a b o u t $660 m i l l i o n
year,

t h r o u g h open market

creased pressure

in

reserves.

operations,

on b a n k r e s e r v e

of nearly
7 per

cent




an a n n u a l r a t e o f almost

9 per cent
for

During the

at
--

5-1/2

Federal
which

half

of

the F e d e r a l Reserve brought

i n the

first

1 per cent,

i n the f o u r t h quarter

1968 as a w h o l e .

first

from

this
in-

positions.

T o t a l member b a n k r e s e r v e s ,
declined at

evident

were adopted i n

a d d i t i o n a l measures o f monetary r e s t r a i n t

6 per cent.

still

t h e economy i n c o m i n g m o n t h s .

ground,

to

became

policy

(See T a b l e

of

s i x months o f

1969,

compared w i t h an

last

y e a r and a g a i n

1 . ) Nonborrowed

increase
of

reserves

-7-

(a b e t t e r

i n d i c a t i o n o f F e d e r a l Reserve p o l i c y )

r a t e o f more t h a n 5 p e r c e n t

i n the January-June

Under t h e i m p a c t o f
r i s i n g market y i e l d s ,
and t i m e d e p o s i t s
half

of

this

at

year.

competitive.

to

private

n e a r l y $8 b i l l i o n

half

of

demand d e p o s i t s

at a l l

market

the f i r s t
instruments

rose

The r a t e o f

growth o f

( e x c l u d i n g CD's)

of

this

during

o f what i t

the

10.7 p e r c e n t .

y e a r , h i g h — and r i s i n g

to s e c u r i t i e s .

Reflecting

the

(the Federal Reserve's c r e d i t

a t a n a n n u a l r a t e o f more t h a n 4 p e r c e n t d u r i n g
The d r o p was e s p e c i a l l y n o t i c e a b l e

annual rate)




attrition

i n the f i r s t

quarter.

(5.4 per

1968,

yields

sizable

the

occurred

During

--

proxy)

lost

first

was d u r i n g

i n C D ' s and t h e r e d u c e d e x p a n s i o n i n c o n s u m e r - t y p e d e p o s i t s ,

months.

was

savings

probably d i v e r t e d funds from consumer-type

member b a n k d e p o s i t s

non-

the decline
t i m e and

first

further,

( w h e n h e a v y CD

R o u g h l y 50 p e r c e n t o f

l e s s t h a n one h a l f

half

and s a v i n g s d e p o s i t s

i n the

considerable pressure

a n a n n u a l r a t e o f 4 . 2 p e r c e n t compared t o
much o f

moderately,

banks r e p o r t i n g w e e k l y t o t h e F e d e r a l Reserve

i n CD's.

to

instruments

From mid-December

c o m m e r c i a l banks

1969 f e l l

expanded o n l y

and

r a t e s p a y a b l e o n CD's became i n c r e a s i n g l y

a t b a n k s i n New Y o r k C i t y .
deposits

months.

c o m m e r c i a l banks d e c l i n e d s u b s t a n t i a l l y

large banks.

l a t e June,

an a n n u a l

p r e s s u r e on bank r e s e r v e s

Under t h e s e c i r c u m s t a n c e s ,

f o c u s e d on t h e
began)

this

As t h e y i e l d s o n m a r k e t

t h e maximum i n t e r e s t

declined at

time
attrition
total

declined

January-June
cent at

on

an

-7aTABLE 1.

SELECTED MONETARY AND FINANCIAL INDICATORS
FOR THE UNITED STATES, 1 9 6 8 - 1 9 6 9
( A n n u a l P e r c e n t a g e R a t e s o f Change)

Year

Category

1 9 6 8
4th Qtr.

1st

Qtr.

1 9 6 9
April-May
2nd Q t r .
(Est.)

First Half
(Est.)

7.1

8.6

-1.0

4.9

-1.2

-0.8

5.2

4.3

-4.0

-3.8

-6.4

-5.1

6.5

7.6

1.9

3.7

3.1

2.5

11.3

15.7

-6.5

-2.7

-3.4

-4.9

T o t a l member b a n k
deposits--credit
proxy

8.6

12.2

-5.4

1.4

-3.0

-4.2

Deposits at savings
b a n k s and S & L ' s

6.4

6.5

6.1

3.7

n.a.

n.a.

Total

Reserves

Nonborrowed

reserves

Money s u p p l y ( c u r r e n c y
and p r i v a t e demand
dep.)
T i m e and s a v i n g s
a t banks




dep.

-8-

The money s t o c k
public

as w e l l

(which includes

currency

as p r i v a t e demand d e p o s i t s )

2,5 per cent d u r i n g the

first

the r a t e of growth over

half

of

r o s e a t an a n n u a l r a t e

1969.

1968 as a w h o l e .

i n t h e hands o f

T h i s was a b o u t
Some o f

of

one-third

the reduced r a t e

e x p a n s i o n i n t h e money s t o c k p r o b a b l y c a n be t r a c e d t o a somewhat
average volume o f

stock market a c t i v i t y

Government d e p o s i t s
of

over

this

and a s i z a b l e

6-month p e r i o d .

t h e slowdown i n t h e g r o w t h o f

interest

t h e management o f money

rates

full-year

even l e s s

first

i n the
rate

for

the surge i n A p r i l
for

rather
1968,

this

pressure

1969,

total

has

economies

loans

tax

T h i s was l e s s

1968.

Actually,

than h a l f

in

and

invest-

the r a t e

rate

of

t h e r a t e o f e x p a n s i o n was

(2.3 per cent)

and i n May ( 2 . 8 p e r

t h e 5 - m o n t h p e r i o d as a w h o l e i s due p r i m a r i l y
- - w h i c h was a s s o c i a t e d w i t h T r e a s u r y

financing

cent).
to
and

payments.
extent,

and i n v e s t m e n t s r e f l e c t s

the g e n e r a l l y

slower expansion

the l i q u i d a t i o n of

t h a n any s i g n i f i c a n t m o d e r a t i o n i n b a n k l e n d i n g .
commercial banks expanded t h e i r




source

t h e money s t o c k u n d o u b t e d l y h a s b e e n

f i v e months o f

quarter

To a c o n s i d e r a b l e
bank loans

i n U.S.

the main

and h a s i n d u c e d a d d i t i o n a l

(See T a b l e 2 . )

expansion i n the

borrowing

lower

commercial banks r o s e a t a s e a s o n a l l y a d j u s t e d annual

of 4 per cent.

The h i g h e r

of

balances.

During the f i r s t
ments a t a l l

increase

However,

t h e i n c r e a s e d p r e s s u r e on bank r e s e r v e p o s i t i o n s ;
r a i s e d market

the

h o l d i n g s o f U.S.

securities

in
--

For example,
Government

in

- 8 a-

TABLE 2 .

NET CHANGE I N BANK CREDIT
ALL COMMERCIAL BANKS
( S e a s o n a l l y A d j u s t e d A n n u a l R a t e s , Per c e n t )

Year

Category

Total

l o a n s and
investments

U.S. G o v ' t .
Other Sec.

Sec.

T o t a l loans
Business loans
A l l other loans




1 9 6 8
4th Qtr.

11.0

10.7

2.3

9.6

2.8

3.9

3.0
16.4

-15.6
26.9

-26.7
2.2

4.2
-3.3

-33.3
-3.3

-21.5

11.6
11.1
11.9

13.1
15.2
11.9

9.4
16.3
5.1

14.4
16.8
12.9

12.4
16.6
9.8

11.2
16.8
7.7

1st

Qtr.

1 9 6 9
May
April

F i r s t Five
Months

-

-9-

securities

by 3 per c e n t

and t h e i r

holdings of other

i s s u e s o f S t a t e and l o c a l

governments)

In contrast,

f i v e months o f

i n the

first

securities

b y more t h a n 16 p e r
1969,

their

U.S.

i n v e s t m e n t s d r o p p e d a t an a n n u a l r a t e o f n e a r l y 22 p e r c e n t .
of other

securities

i n both A p r i l
the 5-month

rose s l i g h t l y

and May,

a r a p i d pace,

-- virtually

1969,

sharp.

For t h e f i r s t

g r o w t h was n e a r l y

I n 1968,
quarter of

last

year,

f i v e months o f 1969,

17 p e r c e n t .

business

may a l s o p a r t l y

Moreover,

paper market p r i o r
8 - 1 / 2 per cent




reflect

if

loans were l a r g e

loans
cent.

loans rose

the annual r a t e

by

of

the s u b s t a n t i a l volume
the rate

of

of

I n r e c e n t m o n t h s , some o f

f i n a n c i n g o f i n v e n t o r y accumula-

d i v e r s i o n o f demand f r o m t h e c o m m e r c i a l

t o the increase i n the banks1

i n e a r l y June.

at

and t h e p a c e has c l i m b e d f u r t h e r

the r i s e i n business loans probably r e f l e c t e d

business

for

such l o a n s r o s e a b o u t 11 p e r

e x p a n s i o n i n b u s i n e s s l o a n s w o u l d be e v e n h i g h e r .

it

declined

a t an a n n u a l

The g r o w t h o f b u s i n e s s

l o a n s s o l d b y b a n k s w e r e added t o t h e r e p o r t e d f i g u r e s ,

but

and t h e n

a g a i n o f more t h a n 1 1 p e r c e n t

more t h a n 15 p e r c e n t a t an a n n u a l r a t e ,

tion,

Their holdings

t o t a l bank l o a n s have c o n t i n u e d t o grow

u n c h a n g e d f r o m 1968.

However, d u r i n g t h e f i n a l

then.

Government

l e a v i n g t h e i r n e t p o s i t i o n about unchanged

registering

has been e s p e c i a l l y

since

quarter

cent.

period.

Throughout

rate

i n the f i r s t

(mainly

In the l a s t

prime lending r a t e

few months,

a t b o t h New Y o r k C i t y

to

the increases

and o u t s i d e b a n k s

and

in

-10-

were

fairly

the year

w i d e s p r e a d among i n d u s t r y

and i n

late

New Y o r k and w i t h i n

Comparative

1968 had been c o n c e n t r a t e d
a relatively

Behavior

continue

--

of

ready access to

and e x p a n d - -

their

offsets

some U . S .
lending

o f U.S.

in

behavior

t h e changes

balance

t o CD a t t r i t i o n .

attached Appendix Table.)

dollar

abroad,

borrowings

banks have been a b l e

to domestic

through these

Between mid-December,

during

(The d e t a i l s

for

over

banks
just
of

total

deposits

accounted f o r
under

1968,




of

items

cent of

in

of

with
traced

shown on t h e

are set out

have

groups

c a n be

banks1

the

banks

have

the t o t a l

and t h e e n d o f May t h i s
$6.5 b i l l i o n

(or $6.2 b i l l i o n )
$1.0 b i l l i o n

$3.8 b i l l i o n

three-fifths

banks had o n l y

of

extent,

Euro-

branches.

this

banks w i t h

because

f o r e i g n branches

i n 1966)

90 p e r

Virtually

amount

to

1969 ( c o m p a r e d

CD a t t r i t i o n

to the F e d e r a l Reserve l o s t

of

of

To a c o n s i d e r a b l e

The way i n w h i c h v a r i o u s

r e p o r t i n g weekly
all

customers

W h i l e more t h a n two dozen U . S .

11 b a n k s a c c o u n t

in

categories.

t h e m a j o r a s s e t and l i a b i l i t y

sheets over both periods.

branches

a t banks o u t s i d e

banks f r o m t h e i r

during the period of
in

earlier

Banks

banks have a d j u s t e d t o monetary r e s t r a i n t
their

Increases

the E u r o - d o l l a r market.

b o r r o w i n g s b y head o f f i c e s
s e r v e d as

few i n d u s t r y

of Euro-Dollar

As I m e n t i o n e d a b o v e ,

their

categories.

of

the t o t a l

the

s l i g h t l y more t h a n o n e - t h i r d

of

among

The 11 E u r o - d o l l a r

decline;

CD a t t r i t i o n ,

banks

i n CD a t t r i t i o n .

was c o n c e n t r a t e d

o r more.

total

year,

this

represented

although

this

group

the t o t a l

CD's

outstanding

-11-

i n mid-December
attrition
relative
of

last

i n 1966,
decline

the t o t a l

year.

In contrast,

t h e 11 E u r o - d o l l a r

CD

offsetting

t h a n t h e y were i n 1966.
borrowings

inflows

For example,

CD a t t r i t i o n .

i n g on May 2 8 ,

their

Euro-dollar

i n 1969 w i t h

i n 1966.

period,

their
to

Euro-

about
end-

c l i m b e d by $ 3 . 0 b i l l i o n ,

their

period,

banks

i n the 5 - 1 / 2 months

CD

t i m e and s a v i n g s d e p o s i t s
their

an

attrition.

other

adverse

t h a n CD's

consumer-type

I n t h e most r e c e n t

period,

report-

total

e x p a n d e d b y $400 m i l l i o n .

banks e x p e r i e n c e d a l o s s o f

a b o u t $200

a l s o p u t p r e s s u r e on t h e s e banks t o

than

deposits

such d e p o s i t s h e l d by a l l w e e k l y

t i m e and s a v i n g s d e p o s i t s

These d e v e l o p m e n t s

time,

borrowings

i n g b a n k s r o s e b y $500 m i l l i o n .

of

This

Over t h e e a r l i e r

t h e 11 E u r o - d o l l a r

t h e 11 E u r o - d o l l a r

b a n k s h a v e a l s o had a much m o r e

remained about unchanged, w h i l e

ever,

for

an amount e q u i v a l e n t

t o a b o u t 80 p e r c e n t o f

The 11 E u r o - d o l l a r

consumer-type

four-fifths

y e a r h a v e b e e n a much more

i n the e a r l i e r

rose by $1.4 b i l l i o n ,

their

amount e q u i v a l e n t

this

CD a t t r i t i o n

60 p e r c e n t o f

they did

greater

attrition.

i m p o r t a n t means o f

experience

b a n k s e x p e r i e n c e d an e v e n

i n C D ' s , when t h e y a c c o u n t e d f o r more t h a n

However, E u r o - d o l l a r

dollar

d u r i n g t h e p e r i o d o f CD

Howmillion.

find other

sources

funds.
I n a d d i t i o n t o r e l y i n g more h e a v i l y

11 E u r o - d o l l a r
funds

i n 1969.




b a n k s have g r e a t l y
For example,

on E u r o - d o l l a r

expanded o t h e r n o n - d e p o s i t

other kinds of

indebtedness

inflows,
sources

on t h e i r

the
of

books

-12-

(excluding Euro-dollar
May p e r i o d

this

year;

borrowings)

such i n d e b t e d n e s s

r o s e by o n l y $800 m i l l i o n .
was more t h a n t h r e e
Euro-dollar

times

in

the

for

for

side,

their

total

all

for

t h e 11 E u r o - d o l l a r

banks combined.

only one-third of

1966.

For

the

total

the

rise.

banks have f a r e d

instance,

i n the 5 - 1 / 2

l o a n s d e c l i n e d b y $900 m i l l i o n ,

loans of

banks

banks

I n 1966,

a l l w e e k l y r e p o r t i n g banks r o s e by $ 1 . 8 b i l l i o n .

same p e r i o d ,

December-

a l l weekly r e p o r t i n g

t h e 11 E u r o - d o l l a r

1969 t h a n t h e y d i d i n

e n d i n g on May 2 8 ,
loans of

that

i n the

for

So t h e r i s e

banks a c c o u n t e d

On t h e l e n d i n g
better

r o s e by $2.7 b i l l i o n

far
months

while

total

However,

t h e l a r g e s t b a n k s t a k e n as a g r o u p

in
(those

w i t h t o t a l d e p o s i t s o f $ 1 . 0 b i l l i o n and o v e r ) d e c l i n e d b y $ 1 . 8 b i l l i o n .

Thus,

t h e l o a n e x p e r i e n c e o f t h e 11 E u r o - d o l l a r b a n k s , w h i l e s i m i l a r t o t h a t o f o t h e r
l a r g e banks, r a n s t r o n g l y a g a i n s t the t r e n d f o r o t h e r weekly r e p o r t i n g banks.
T h e i r r e c e n t e x p e r i e n c e was a l s o i n s h a r p c o n t r a s t t o t h a t i n 1 9 6 6 .

In this

p e r i o d , t o t a l l o a n s o f t h e 11 E u r o - d o l l a r b a n k s s h r a n k b y $ 2 . 7 b i l l i o n ,

earlier

while

s u c h l o a n s a t a l l w e e k l y r e p o r t i n g b a n k s r o s e b y $700 m i l l i o n - - and b y a somewhat

larger

amount a t b a n k s w i t h d e p o s i t s

I n the area of business
have j u s t

about k e p t even w i t h

r e p o r t i n g banks.
total

business

of

the expansion i n t o t a l

In

the

1966 p e r i o d o f




last year,

and t h e y a c c o u n t e d
business

CD a t t r i t i o n ,

billion.

t h e 11 E u r o - d o l l a r

the expansion of

I n mid-December

loans,

loans

over $1.0

for

banks i n

such loans a t a l l

1969

weekly

they h e l d about o n e - t h i r d of
a b o u t t h e same

loans d u r i n g

proportion

the next 5 - 1 / 2

they accounted f o r

almost

months.
four-fifths

the

-13-

of

the r i s e

i n business

loans - -

such l o a n s o u t s t a n d i n g a t

U.S.

the beginning of

Banks and t h e E u r o - D o l l a r
Given the g r e a t l y

Euro-dollar
market

borrowings,

their

c a n be s e e n q u a n t i t a t i v e l y

of

funds,

Settlements

insignificant.

In fact,

borrow s u b s t a n t i a l
U.S.

residents

in

(BIS).

$7 b i l l i o n

size of

impact on t h e

--

of

this

(See T a b l e 3 . )

U.S.

i m p a c t has

borrowings outstanding,

sources

been

relatively

remained of

only

1968, U.S.

If

t o t a l uses o f




only

banks

representing

(By m i d - J u n e ,
U.S.

funds at

area i s

considered,

t h e end o f 1968 c l i m b s

to

the U.S.

had

more

t h e $25 b i l l i o n e s t i m a t e d b y BIS t o h a v e b e e n

the outside

hand,

principal

the

this

year,

borrowings

t o $ 1 3 . 4 b i l l i o n w h i c h t h e n r e p r e s e n t s n e a r l y 45 p e r c e n t o f

market.)

the

On t h e o t h e r

t h e m a r k e t had e x p a n d e d t o $30 b i l l i o n .

to

proceeds

have been t h e

a t t h e end o f

for

b e g a n i n 1965

the unused

funds t h r o u g h 1968.

For example,

been

( i n response t o

citizens

banks - -

on

Euro-dollar

I n terms o f

corporations

and t o i n v e s t

particularly

banks

c o m p i l e d b y t h e Bank

the E u r o - d o l l a r market at year-end.

t h e BIS e s t i m a t e d

some U . S .

How l a r g e

even a f t e r U.S.

of Euro-dollar

t h a n one q u a r t e r

of

and Canada have t r a d i t i o n a l l y

as a s o u r c e o f

the U.S.

half

period.

amounts i n t h e E u r o - b o n d m a r k e t

users of Euro-dollars.

rose

t o anyone.

i n short-term instruments,

modest importance

net

substantial

b a l a n c e o f payments program)

temporarily

than

Market

i n the f i g u r e s

the United States

the

increased reliance

comes as no s u r p r i s e

International

although they h e l d l e s s

the

bank share

two-fifths.

of

-13aTABLE 3 .

ESTIMATED SIZE AND UNITED STATES1 SHARE OF THE EURO-DOLLAR MARKET,
( Y e a r - e n d f i g u r e s , e x c e p t f o r J u n e , 1969)
( B i l l i o n s of Dollars)

1964

1965

1966

1967

1968

1.5
3.1
4.6

1.3
3.6
4.9

1.7
4.4
6.1

2.6
5.3
7.9

4.5
7.3
11.8

32.6

Item
S o u r c e s o f Funds
Outside area*
U . S . and Canada
Other areas
Total
U . S . and Canada as
cent of t o t a l

26.5

27.9

32.9

38.1

2.6
1.8
4.4
59.0
9.0

4.4
2.2
6.6
66.5
11.5

5.6
2.8
8.4
66.7
14.5

5.7
3.9
9.6
59.4
17.5

8.0
5.2
13.2
60.6
25.0

16.7

11.3

11.7

14.9

18.0

2.2

2.7

5.0

5.8

10.2

1.2
1.8
4.0

1.3
2.5
5.2

4.0
3.2
8.2

4.2
4.8
10.6

7.0
6.8
17.0

54.8

52.0

61.0

54.8

60.0

30.0

25.0

48.8

39.6

41.2

Uses o f Funds
Outside area*
U . S . and Canada
U.S.
Other areas
Total
U . S . and Canada as p e r
cent of t o t a l
U . S . * * as a p e r c e n t o f
total

- I n s i d e area f o r computation purposes i n c l u d e 8 c o u n t r i e s :
I t a l y , N e t h e r l a n d s , Sweden, S w i t z e r l a n d , and U n i t e d K i n g d o m .
c o n s t i t u t e s outside area.
**U.S.

1969 ( J u n e )
(Est.)

per

I n s i d e area*
Banks
Non-banks
Total
Banks as p e r c e n t o f t o t a l
Grand T o t a l
U . S . and Canada as p e r c e n t
o f grand t o t a l

bank head o f f i c e




1964-1965

liabilities

to foreign

branches.

B e l g i u m , F r a n c e , Germany,
The r e s t o f t h e w o r l d

30.0

13.4

-14-

But,

as I

am c e r t a i n a l l w o u l d a g r e e ,

the r e a l l y

dramatic

developments have o c c u r r e d i n t h e E u r o - d o l l a r m a r k e t i n 1969,
b o r r o w i n g s by U.S.
stringency

banks r o s e s h a r p l y

i n domestic

i n r e f l e c t i o n of

f i n a n c i a l markets.

t o t h e t h i r d week o f J u n e ,

liabilities

b r a n c h e s r o s e b y more t h a n $7 b i l l i o n .
relatively
i n June.

large during the e n t i r e
During the

first

growing

From t h e e n d o f

this

p r e s s u r e on E u r o - d o l l a r
t h i r d week i n J u n e ,
to 12-1/2 per c e n t .

period,

t h r e e weeks o f

competition for

deposit rates.

they accelerated
t h a t month,

were

enormously

Euro-dollar

t o r e a c h an

all-time

funds generated

in turn,

extreme

From t h e e n d o f May t o

the

t h e 3 - m o n t h d e p o s i t r a t e jumped f r o m 9 - 3 / 4 p e r
However,

put

as t h e i m m e d i a t e p r e s s u r e o n U . S .

3 - m o n t h r a t e was s t i l l

tax

Nevertheless,

11 per

the sources of

i n the E u r o - d o l l a r market

cent

banks
payments,

l e s s p r e s s u r e on the E u r o - d o l l a r m a r k e t ,

r a t e s d e c l i n e d somewhat.

sources

foreign

While these borrowings

e a s e d somewhat 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

All

December

billion.*

Naturally,

the banks,

last

o f U.S. banks t o t h e i r

b o r r o w i n g s b y U . S . b a n k s e x p a n d e d b y $3 b i l l i o n
r e c o r d of $13.4

as

i n t h e l a s t week o f J u n e ,

and
the

cent.
t h e f u n d s s u p p o r t i n g t h e enormous

i n r e c e n t months

a r e n o t known.

Yet,

a r e k n o w n , and s e v e r a l o t h e r s c a n be r e a d i l y d e d u c e d .

expansion

For

e x a m p l e , we know t h a t d u r i n g m o s t o f
have been m a j o r

suppliers

* $13,609 b i l l i o n




this

of Euro-dollars.

as o f J u n e

25.

period

foreign central

T h i s has b e e n

several

banks

especially

-15-

true

o f Germany, w h e r e t h e d e c l i n e

the r e v e r s a l

of

speculative

Bundesbank a s s i s t e d
opportunities
that

several

i n Bundesbank r e s e r v e s

reflected

f u n d s w h i c h had f l o w e d i n t o m a r k s .

t h e r e f l o w by m a i n t a i n i n g

f o r German b a n k s

to switch

into

relatively
dollar

attractive

assets.

o t h e r European c e n t r a l banks a l s o e x p e r i e n c e d

d e c l i n e s w h i c h had t h e i r

counterparts

in outflows

The

to the

We know

reserve

Euro-dollar

market.
However,
more i m p o r t a n t
Euro-dollar
despite

i n June,

i n the market.

rates

stringent

may h a v e s o l d U . S .

attracted
domestic

is

an i n d i c a t i o n

There i s

that

the E u r o - d o l l a r

the

dollar

inflow of

m a r k e t has a l s o

equity

in Euro-dollar

loans

became much

that

funds i n t o

Moreover,

some B r i t i s h

loans.

funds

resident

(especially

stock purchases w i t h E u r o - d o l l a r
repaid

an i n d i c a t i o n

conditions.

temporarily
that

sources of E u r o - d o l l a r s

some U . S .

securities

i n v e s t e d the proceeds
there

other

In addition,

and

deposits.

t h e i r U.S.

one g e t s t h e

from Middle Eastern countries

reIn

particular,

financed
stocks

enormous e x p a n s i o n i n E u r o - d o l l a r

impression

to the

Euro-

it

was a g a i n s t

the background o f

b o r r o w i n g s by A m e r i c a n banks t h a t

F e d e r a l R e s e r v e r e c e n t l y p r o p o s e d amendements t o i t s r e g u l a t i o n s t o
flow of Euro-dollars




and

increased.

As I m e n t i o n e d e a r l i e r ,

the

--

residents

i n v e s t o r s who h a d

sold out

high

the market

foreign
issues)

the

between U.S.

b a n k s and t h e i r

foreign

the
the

moderate

branches

-16-

and a l s o b e t w e e n U . S .
the

three major channels

credit

availability

funds between U.S.
(2)

and f o r e i g n b a n k s .

the flow of

on E u r o - d o l l a r
dollar

through which E u r o - d o l l a r

i n the United States:
bank head o f f i c e s

c r e d i t between U.S.
funds - -

and U . S .

funds between U.S.

branches.

Briefly,

and t h e i r

the f l o w of
overseas

Euro-dollar

branches,

overseas branches — which

residents,

and ( 3 )

the

to overseas branches

branch loans

d u r i n g a g i v e n base p e r i o d ,
o p t i o n a l ways.

and on

t o U.S. r e s i d e n t s

w h i c h may be c a l c u l a t e d

to calculate

a reserve requirement,

outstanding




two

automatic

to

below the o r i g i n a l base.

Finally,

against which required

A 10 p e r c e n t r e s e r v e r e q u i r e m e n t w i l l
class.

outstandings

amounts s u b j e c t

f o r e i g n bank.

this

be

used

to include

of

to

28,

i n any p e r i o d

are c a l c u l a t e d

deposits

excess

i n one o f

be s u b j e c t

u n l e s s w a i v e d by the Board - - when,

Board proposed to d e f i n e d e p o s i t s

assets

in

i n excess o f

reduction --

fall

is

t h e f o u r weeks e n d i n g May

The r e s e r v e - f r e e b a s e s w i l l

reserve requirements

Euro-

not

A 10 p e r 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 w o u l d a l s o

a p p l i e d to U.S.

draw

flow of

from t h e i r U.S. head o f f i c e s

d u r i n g a base p e r i o d - -

on

affect

a 10 p e r 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

a c q u i r e d by overseas branches

1969.

(1)

f u n d s may

b a n k s and f o r e i g n b a n k s w h i c h a r e

p r o p o s e d on U . S . b a n k l i a b i l i t i e s

of outstandings

These amendments f o c u s

the

reserves

any b o r r o w i n g b y a member b a n k f r o m a
be a p p l i e d

to

-17-

Personally,
ments

against

One o f

t h e same as t h e o b j e c t i v e

t h e p r i n c i p a l new a r r a n g e m e n t s

funds i s

i n the open m a r k e t .

i n the

the paper
carries
of

the issuance of
the bank.

commercial paper

through a

" C o m m e r c i a l paper 1 1 r e f e r s

F o r t h e most p a r t ,

that are

terms.

a l s o have been used f o r
generally

is

t h i s purpose.

recently-

Paper

I n the

of

t h e paper on

i s s u e d by h o l d i n g companies o f
to

the

largest

tap a source of

ceilings,




or

reserve

latter

funds t h a t

requirements

cases,

and
letter

favorable
banks

investors.

Through the commercial paper i n s t r u m e n t ,
to

company

( i n t h e f o r m o f an i r r e v o c a b l e

g e n e r a l l y has been s o l d d i r e c t

able

direct

s o l d through a commercial paper d e a l e r

t o assure ready m a r k e t a b i l i t y

to

sold

banks have used t h e i r

t h e bank or o t h e r bank o r bank h o l d i n g

the bank's guarantee

credit)

year,

c o m m e r c i a l banks have

c r e a t e d o n e - b a n k h o l d i n g c o m p a n i e s as t h e i s s u i n g a g e n t , b u t

affiliates

the

I had i n m i n d .

s h o r t - t e r m unsecured promissory notes of corporations

of

of

Funds

corporation a f f i l i a t e d with

subsidiaries

require-

While the d e t a i l s

somewhat f r o m t h e s u g g e s t i o n I made e a r l i e r

purpose i s

Other Sources o f

used t o r a i s e

to establish reserve

s u c h i n f l o w s w i l l be a d o p t e d .

proposal d i f f e r
the o v e r - a l l

I hope t h e p r o p o s a l

is not
as a r e ,

subject
for

banks have

been

to interest

rate

example,

their

-18-

negotiable

CD's, which are purchased i n the market

same t y p e s o f c u s t o m e r s
ceeds o f

the sale of

that

largely

purchase commercial paper.

The

t h e p a p e r by t h e h o l d i n g c o m p a n i e s

be

used t o purchase

loans

for

t h e b a n k t o engage i n a d d i t i o n a l

lending.

However,

in

and o t h e r a f f i l i a t e s ,

m o r t g a g e s e r v i c i n g company, w i t h o u t

Another device
the market
limitations

outside
is

for

financing

that

loans.

provides

that

the

ceiling

The i n s t r u m e n t

s p e c i f i e d d a t e o r on demand.

s u c h as a
drain

it.

r a t e and r e s e r v e
in individual

loans

t o be

or

generally

the p a r t i c i p a t i o n at

The l o a n s c o n t i n u e

in

requirment

used i n such t r a n s a c t i o n s

repurchase

of

proceeds

banks have used t o o b t a i n funds

t h e scope o f

t h e bank w i l l

room

t h e case

p l a c i n g any a d d i t i o n a l

the sale of p a r t i c i p a t i o n s

pools of

pro-

can

o f t e n are used t o f i n a n c e a s e p a r a t e f i n a n c i a l a c t i v i t y ,

own f u n d s

the

f r o m t h e b a n k , w h i c h i n t u r n makes

paper i s s u e d by bank s u b s i d i a r i e s

on t h e b a n k ' s

by

a

serviced

b y t h e b a n k and t h e b o r r o w e r s whose l o a n s h a v e b e e n s o l d may n o t
e v e n be a w a r e t h a t

their

n o t e s have been i n v o l v e d

transactions.

Sales of p a r t i c i p a t i o n s

in

established practice

of

l o n g s t a n d i n g among l a r g e c i t y

have been i m p l i c i t l y

s a n c t i o n e d i n e x i s t i n g F e d e r a l Reserve

tions.

The n o v e l a s p e c t

such p a r t i c i p a t i o n s




loans t o correspondent

i n such

i n t r o d u c e d more r e c e n t l y

banks a r e

is

an

banks

the

and
regula-

sale

t o nonbank c u s t o m e r s , where t h e y p e r m i t

a

of

-19-

bank t o b i d

for

funds at

n o t be p e r m i s s i b l e
time deposits

under e x i s t i n g

to those

While

interest

of

credit

by t h e i r

own f u n d s .
similar
of

funds f o r

lending,

t h e y have

of

of

t o those

referred

interest

to

banks
also

facilitate

e x t e n d i n g any

some b a n k s h a v e i s s u e d

t o above t o g u a r a n t e e

c o m m e r c i a l paper i s s u e d by customers

on paper

guarantee.

customers w i t h o u t

F o r one t h i n g ,

Such g u a r a n t e e s a s s u r e t h a t
and a t a r a t e

would

on the issuance

c e r t a i n types of guarantee arrangements

at maturity

require

regulations

that

t h e a b o v e a r e t h e p r i n c i p a l new a r r a n g e m e n t s

short-term financing
the bank's

and on m a t u r i t i e s

customers.

have used t o o b t a i n a d d i t i o n a l
made u s e o f

rates

the paper w i l l

of

be r e a d i l y

below what t h e market would

the

of
letters

redemption
bank.

saleable
otherwise

i s s u e d b y t h e same c o r p o r a t i o n w i t h o u t

such a

For p r o v i d i n g t h e g u a r a n t e e , t h e bank charges a s m a l l f e e ,

w h i c h i s m a i n l y t o compensate f o r a s s u m p t i o n o f r i s k .

Since such

is

t h e b a n k becomes

distributed

t h r o u g h a commercial paper d e a l e r ,

administratively
only

if

involved,

the borrower

w h i c h case t h e

aside

fails

investor

to

from issuance of

the

guarantee,

redeem t h e n o t e s a t m a t u r i t y ,

has an a u t o m a t i c

paper

c l a i m on t h e bank

in
for

payment.
As I

said e a r l i e r ,

these devices

enable banks t o escape o r d e l a y
I

am h o p e f u l

repair

of




that

careful

these openings

are c l e a r l y

the e f f e c t s

consideration w i l l
in

the Board's

of monetary

designed

restraint.

be g i v e n t o t h e

regulations.

to

timely

-20-

The F e d e r a l Funds M a r k e t
F o r many y e a r s b a n k s h a v e b e e n e x t e n d i n g c r e d i t
other

through transactions

transfers

i n F e d e r a l funds — t h a t

o f b a l a n c e s on d e p o s i t a t

Such t r a n s a c t i o n s ,

which generally

represent

in particular,

years,

had remained r e l a t i v e l y
sharply.

For example,

are

an

positions.

temporary

financing.

t h e d a i l y volume o f

small,

reserve

these

b o r r o w i n g s as a c o n t i n u i n g s o u r c e o f p o r t f o l i o
In earlier

Banks.

1-day loans,

o f t e n make use o f

each

through

the F e d e r a l Reserve

i m p o r t a n t means u s e d b y b a n k s i n a d j u s t i n g t h e i r
Large banks,

is,

to

these

transactions

but r e c e n t l y t h e volume has

increased

f i v e years ago, the d a i l y average volume o f

p u r c h a s e s p l u s g r o s s s a l e s o f F e d e r a l f u n d s was b e l o w $3 b i l l i o n ,
i n May t h i s y e a r

it

was more t h a n $9

has tended t o a c c e l e r a t e d u r i n g p e r i o d s

of

the F e d e r a l funds

restrictive

1 9 6 6 , as m a j o r b a n k s came u n d e r i n c r e a s e d p r e s s u r e

reserve a v a i l a b i l i t y

and t h e e n f o r c e d r u n o f f o f

t h e y b e g a n t o c o m p e t e more a g g r e s s i v e l y
market.

As i n t e r e s t

but

billion.

The t r e n d t o w a r d more a c t i v e use o f

In

gross

for

their

market

monetary
from

policy.

restricted

negotiable

CD's,

funds i n the F e d e r a l

funds

r a t e s p a i d on t h e s e f u n d s r o s e ,

and t h e

efforts

o f many l a r g e b a n k s t o e n c o u r a g e more w i d e s p r e a d p a r t i c i p a t i o n

in

market,

success,

particularly

t h e volume o f
of

transactions

about $3.8 b i l l i o n

billion




among t h e i r

correspondent

rose r a p i d l y

f r o m an average d a i l y

i n the f o u r t h quarter

i n t h e autumn o f

1966.

b a n k s , met w i t h

of

this

volume

1965 t o m o r e t h a n $5

-21Despite
in

1967,

that

the

relatively

the volume of F e d e r a l funds

had been reached i n

policies
funds

beginning

trading

to

in

late

introduced

But

the record

levels

recently

amounts o f

this

on d e p o s i t s

for

stimulus

t o manage t h e i r

p a i d on these

funds.

Federal

last

the purchase or

available

to

is

that

their

that

I

calculate

and t o c a r r y

forward
from

e n a b l e d s m a l l e r banks

should

corporate depositors

requirements

in

sharp r i s e

i n May,

like

as a
in

rates

rate

it

reserve

on

was

9 per

8.67,

cent.

to note before

some b a n k s h a v e b e g u n t o make t h e F e d e r a l

on such t r a n s a c t i o n s




authorization

time to

has a v e r a g e d i n e x c e s s o f

a bank's

reserve

The

the average e f f e c t i v e

I n the Board's

liability

of

procedures

sale of Federal funds f o r

short-term funds.

ing

that

December was 6 . 0 2 p e r c e n t ;

One new d e v e l o p m e n t
subject

level

B u t p r o b a b l y more i m p o r t a n t

For example,

and t h r o u g h most o f June i t

this

growth.

s u c h t r a d i n g has b e e n t h e u n u s u a l l y

funds

i n the

r e s e r v e p o s i t i o n s more c l o s e l y and t o make

reserve adjustments.
to

restrictive

e x c e s s r e s e r v e s as w e l l as r e s e r v e d e f i c i t s

more e x t e n s i v e u s e o f
funds

plateau

recorded.

two weeks e a r l i e r

one r e s e r v e - c o m p u t a t i o n p e r i o d t o a n o t h e r
particular

rise

the

t h e change i n r e s e r v e - c o m p u t a t i o n

September f a c i l i t a t e d

reserves

policy

remained near

the r e l a t i v e l y

t o F e d e r a l R e s e r v e member b a n k s a t

required
limited

last

1966.

trading

of monetary

1968 s t i m u l a t e d a f u r t h e r

To some e x t e n t ,

granted

easy p o s t u r e

and t h e

as a means o f p r o v i d i n g

judgment,

no j u s t i f i c a t i o n

t o be exempt

funds

market

them w i t h

exists

from rules

legal p r o h i b i t i o n against

leaving

for

govern-

payment

of

-22interest

o n demand d e p o s i t s .

a proposed r e v i s i o n of
arrangements
Impact

--

its

Accordingly,

Regulations

o r a l or otherwise

of I n t e r e s t

Rate

— are

that

that

6 - 1 / 4 per cent

t h e c e i l i n g be

reflects

since A p r i l ,

1968.

Naturally,

s u c h a move i n t o d a y ' s

i n my o p i n i o n ,

of monetary r e s t r a i n t

for

funds

it

would

i n the United

i n the domestic market,

reduce t h e i r

incentives

for

particularly

lending

in

circum-

further

States.

C o m m e r c i a l b a n k s c o u l d be e x p e c t e d t o use a n y new h e a d r o o m g i v e n
compete v i g o r o u s l y

large

raised.

such a step were t a k e n ,

undermine the e f f e c t s

in turn,

( n o t o n l y by U.S. banks b u t

p e r s o n a l l y would not support

If

i n CD's,

in

to

r a t e p a y a b l e o n s u c h money m a r k e t

t h e s u g g e s t i o n h a s b e e n made s t r o n g l y

stances.

the s c r a m b l e by U . S . banks

This a t t r i t i o n

i n s t r u m e n t s has been k e p t a t

I

covered.

f u n d s c a n be t r a c e d t o t h e s h a r p a t t r i t i o n

t h e maximum i n t e r e s t

E u r o p e as w e l l )

such

Ceilings

denomination time deposits.
the f a c t

recently

D a n d Q t o make s u r e t h a t

As I m e n t i o n e d a b o v e , much o f
f i n d new s o u r c e s o f

the Board p u b l i s h e d

and t h i s

Limitations
forcing

on t h e a v a i l a b i l i t y

them t o r a t i o n

loans,

especially

i n an i n f l a t i o n a r y

pay r i s i n g

interest

t o bend e v e r y e f f o r t
prospective




rates

customers.

are a c r i t i c a l

Thus,

if

thereby

element o f monetary

to obtain funds.

loanable

lending,

funds t o lenders,

p e r i o d when many b o r r o w e r s

i n order

to obtain

of

on

would

business.

to

e x e r t i n g much n e e d e d r e s t r a i n t

to

restraint,

are w i l l i n g

Banks c a n be

f u n d s so as n o t

to

lose

t h e y were g i v e n leeway under

to

expected

any

Regulation

-23Q, t h e y w o u l d l i k e l y
the a v a i l a b i l i t y
ready access
havior

of

rush t o take advantage of
funds

to other

to borrowers,

sources of

c a n be i n f e r r e d

it,

including

funds.

This

and t h e r e b y

increase

t h o s e who do n o t

expected p a t t e r n of

from the data i n Table 4, which

have
be-

provides

i n f o r m a t i o n o n t h e d i s t r i b u t i o n o f CD a t t r i t i o n

i n three

1966-69,

1966 a n d 1968 as C D ' s

and the

speed o f

recovery

became c o m p e t i t i v e w i t h m a r k e t
The r e c o v e r y
d e c l i n i n g market

f r o m lows i n

rates.

from runoffs a f t e r

rates

periods,

following

the

the s h i f t

1966 l o w r e f l e c t e d

rapidly

toward e a s i e r monetary

While

1966 l o s s e s a t New Y o r k b a n k s w e r e n o t

year,

t h e CD i n f l o w t o t h e s e b a n k s was v e r y s t r o n g d u r i n g t h e e a r l y

when s m a l l e r banks r e c o v e r e d t h e i r
In

1968,

interest

the r u n o f f

rate

period,

losses

during

until

a b o u t m i d - y e a r when e x p e c t a t i o n s

New Y o r k r e c o v e r y

to

i n f l o w s were v e r y

strong

It

is

net

of

increase




i n t h e wake o f

to note that

the

available.

30,

weeks

again.

While

longer

the

begin

size

i n the

latest

the

than smaller
the

banks,

recovery.

categories

1966 and

s i z e g r o u p was s t i l l
1969,

in

surtax

the smallest

e x p e r i e n c e any r u n o f f s

and t h e s m a l l e s t

upward

i n f l o w o f CDfs d i d n o t

high again took

i n CD's t h r o u g h A p r i l

the bank s i z e d a t a are

net

i n New Y o r k i n t h e e a r l y weeks o f

interesting

attrition,

the

r a t e s b e l o w CD c e i l i n g s

the e a r l i e r

shown i n T a b l e 4 d i d n o t
periods

but

one-half

fully.

c e i l i n g s were r e s t r u c t u r e d

April

l e g i s l a t i o n brought market

recovered f o r over

policy.

1968

reporting

date f o r

which

a

-23a-

TABLE 4 . CD ATTRITION AND RECOVERY BY SIZE OF BANK, 1966-69
(Amounts are i n millions of d o l l a r s on CD maturity survey dates)

Total
WRBs
reporting

200 &
under

Size of ba n k - - t o t a l d eposits ($ iia i l l i o n s )
1,000 and over
200500Prime
500
1,000
Total
Other
N.Y.

Nonprime

1966 period
O^^tanding CD's:
July 27, 1966
Nov. 30, 1966
CD change--$ m i l .
%
Number of months a f t e r
low to recover CD losses:
90%
100%

18,272
15,460

599
621

-2,812
-15.4

+22
3.7

1,779
1,692

2,381
2,367

13,513
10,780

6,976
5,115

2,359
2,279

-14
-0.6

2
2

2
3

-87
-4.9

1
1

4
4

8
9

2
3

2
2

2,421
2,424

3,504
3,443

14,240
12,448

6,222
5,406

5,071
4,303

2,947
2,739

-2,733
-20.2

-1,861
26.7

4,178
3,419
-759
-18.2

-80
-3.4

1968 period
Outstanding CD's:
Feb. 28, 1968
June 26, 1968

21,085
19,268

Cltf*hange--$ m i l .
W
%

-1,817
-8.6

Number of months to
recover CD losses:
90%
100%

920
954
34
3.7

3
0.1

-61
-1.7

-1,792
-12.6

-816
-13.1

-768
-15.1

-208
-7.1

1

1
1

1
1

1
2

4
4

2
2

1
1

4,387
3,429

15,948
10,334

6,985
3,519

5,503
4,069

3,460
2,747

1969 period
Outstanding CD's
Nov. 27, 1968
Apr. 30, 1969
(most recent)
Change:

$ mil.
%


MEMO: Number of banks


24,307
17,612
-6,695
-27.5
265

1,102
1,151
49
4.4
93

2,871
2,698
-173
-6.0

-958
-21.8

85

50

-5,614
-35.2
37

-3,466
-49.6
7

-1,434
-26.1
12

-713
-20.6
18

-24The t a b l e a l s o g i v e s an i n d i c a t i o n
decline

i n CD's r e l a t i v e

showing deeper a t t r i t i o n

and 1968.

The c u r r e n t

The a t t r i t i o n
in

as b o r r o w e r s

find

i n CD's a n d c o n s t r a i n t

funds

loaned,




on o t h e r d e p o s i t s

and a s t i f f e n i n g

should help

intentions

of

i n cooling

t o c u r b i n f l a t i o n and

recognized.

In this

t o be g a i n e d — a n d much t o be l o s t

to bid aggressively

all
1966

(without

i n c l u d i n g CD f u n d s .

some s e n s e o f

--

context,
if

the

terms

economy
and as

inflationary
one c a n see

banks a r e

constraint)

has

loan

l e s s r e a d i l y a v a i l a b l e a n d more c o s t l y ,

p s y c h o l o g y becomes w h o l l y
little

1969, w i t h

periods.

These developments

the Federal Reserve's

greater

i n the recent p e r i o d than i n

compression o f bank l i q u i d i t y

o f f e r e d by banks.

in

of

a t t r i t i o n h a s gone on l o n g e r a n d has b e e n more

than i n previous

resulted

the extent

to p r e - a t t r i t i o n highs

categories

intense

of

for

permitted
funds t o

be

APPENDIX TABLE
NET CHANGE I N MAJOR BALANCE SHEETS ITEMS FOR WEEKLY REPORTING BANKS, BY SIZE OF BANKS
( A u g u s t 17, 1966-December 14, 1966 and December 18, 1968-May 2 8 , 1969)
(In b i l l i o n s of dollars)

S i z e o f Banks *
(Total Deposits)
Selected
B a l a n c e Sheet
Items

1966
Held
8/17/66
amount
per

cent

1969

Held
12/14/66
amount p e r

Change
cent

amount

per

cent

Held
12/18/68
amount p e r

cent

Held
5/28/69
amount p e r c e n t

Change
amount

per

cent

(1)
Total Deposits
under $0.5
0.5 - 1.0
over 1.0
Total

45.4
25.3
86.0
156.7

29.0
16.1
54.9
100.0

42.7
28.2
85.5
156.4

27.3
18.0
54.7
100.0

-2.7
2.9
-0.5
-0.3

900.0
-966.7
166.7
100.0

44.4
32.1
114.9
191.4

23.2
16.8
60.0
100.0

44.7
31.2
102.9
178.8

25.0
17.4
57.6
100.0

0.3
-0.9
-12.0
-12.6

7.1
95.2
100.0

11 E-D Banks

52.1

33.2

48.5

31.0

-3.6

1200.0

59.1

30.9

52.4

29.3

-6.7

53.2

20.6
11.4
33.2
65.2

31.6
17.5
50.9
100.0

19.5
12.8
35.4
67.7

28.8
18.9
52.3
100.0

-1.1
1.4
2.2
2.5

-44.0
56.0
88.0
100.0

19.3
14.2
45.7
79.2

24.4
17.9
57.7
100.0

18.4
13.3
41.0
72.7

25.3
18.3
56.4
100.0

-0.9
-0.9
-4.7
-6.5

13.8
13.8
72.4
100.0

21.9

33.6

20.9

30.9

-1.0

-40.0

25.5

32.2

23.5

32.3

-2.0

30.8

(2)
Demand D e p o s i t s
under $0.5
0.5 - 1.0
over 1.0
Total
11 E - D Banks

* Number o f

banks i n

under $0.5
0.5 - 1.0
over 1.0
Total




sample

261
46
35
342

250
53
36
339

232
57
48
337

235
56
45
336

-

NET

CHANGE

I N

MAJOR

BALANCE

SHEETS

ITEMS

FOR

WEEKLY

REPORTING

BANKS,

BY

SIZE

OF

BANKS

(continued)

S i z e o f Banks
(Total Deposits)
Selected
Held
B a l a n c e Sheet
8/17/66
amount p e r
Items
(3)
T o t a l Time
and S a v i n g s
under $0.5
0.5 - 1.0
over 1.0
Total

1966

cent

1969

Held
12/14/66
amount
per

Change
cent

amount p e r

cent

Held
12/18/68
amount p e r

cent

Held
5/28/69
amount p e r c e n t

Change
amount

per c e n t

24.8
13.9
52.8
91.5

27.1
15.2
57.7
100.0

23.2
15.4
50.1
88.7

26.1
17.4
56.5
100.0

-1.6
1.5
-2.7
-2.8

57.1
-53.6
96.4
100.0

25.1
17.9
69.2
112.2

22.4
15.9
61.7
100.0

26.4
17.9
61.9
106.2

24.8
16.9
58.3
100.0

1.3
0
-7.3
-6.0

-21.7
0
121.7
100.0

11 E - D Banks

30.2

33.0

27.6

31.1

-2.6

92.9

33.6

29.9

28.9

27.2

-4.6

76.7

(4)
Time & S a v i n g s
Less CD's
under $0.5
0.5 - 1.0
over 1.0
Total

21.9
11.5
39.4
72.8

30.1
15.8
54.1
100.0

20.9
12.7
39.7
73.3

28.5
17.3
54.2
100.0

-1.0
1.2
0.3
0.5

-200.0
240.0
60.0
100.0

21.8
14.3
52.7
88.8

24.5
16.1
59.4
100.0

22.9
14.7
51.6
89.2

25.7
16.5
57.8
100.0

1.1
0.4
-1.1
0.4

100.0
-275.0
100.0

11 E - D Banks

21.1

29.0

21.1

28.8

24.4

27.5

24.2

27.1

-0.2

-50.0

(5)
Money M a r k e t CD' s
under $0.5
0.5 - 1.0
over 1.0
Total

2.9
2.3
13.4
18.6

15.6
12.4
72.0
100.0

2.3
2.7
10.4
15.4

14.9
17.5
67.6
100.0

-0.6
0.4
-3.0
-3.2

18.8
-12.5
93.7
100.0

3.3
3.6
16.6
23.5

14.1
15.3
70.6
100.0

3.4
3.2
10.4
17.0

20.0
18.8
61.2
100.0

0.1
-0.4
-6.2
-6.5

-1.6
6.2
95.4
100.0

9.4

50.5

6.8

44.2

-2.6

81.3

8.4

35.7

27.1

-3.8

58.5

11 E - D Banks




4.6

NET

CHANGE

I N

MAJOR

BALANCE

SHEETS

ITEMS

FOR

WEEKLY

REPORTING

BANKS,

BY

S I Z E

OF

BANKS

(continued)

S i z e o f Banks
(Total Deposits)
Selected
B a l a n c e Sheet
Items

1969

1966
Held
8/17/66
amount p e r

cent

Held
12/14/66
amount p e r

Change
cent

amount

per

cent

Held
12/18/68
amount
per

cent

Held
5/28/69
amount
per cent

Change
amount

per c e n t

(6)
Other L i a b i l i t i e s
under $0.5
0.5 - 1.0
over 1.0
Total

1.6
1.0
7.5
10.1

15.8
9.9
74.3
100.0

1.6
1.1
9.1
11.8

13.6
9.3
77.1
100.0

0
0.1
1.6
1.7

0
5.9
94.1
100.0

1.7
1.4
15.5
18.6

9.1
7.5
83.4
100.0

1.9
1.5
19.0
22.4

8.5
6.7
84.8
100.0

0.2
0.1
3.5
3.8

91
100.0

11 E - D Banks

6.2

61.4

7.7

65.3

1.5

88.2

10.0

53.8

15.7

70.1

5.7

150.0

(7)
L i a b i l i t i e s to
F o r e i g n Branches
under $0.5
0.5 - 1.0
over 1.0
Total
11 E - D Banks
(8)
Other L i a b i l i t i e s
Less those t o
F o r e i g n Branches
under $0.5
0.5 - 1.0
over 1.0
Total
11 E - D Banks




-

-

-

-

-

-

-

-

-

-

2.9
2.9

4.3
4.3

1.4
1.4

7.3
7.3

10.3
10.3

4.3

1.4

7.3

10.3

? *

3.0
3.0

2.9

5.3

3.0

-

1.6
1.0
4.6
7.2

22.2
13.9
63.9
100.0

1.6
1.1
4.8
7.5

21.3
14.7
64.0
100.0

0
0.1
0.2
0.3

0
33.3
66.7
100.0

1.7
1.4
8.2
11.3

15.0
12.4
72.6
100.0

1.9
1.5
8.7
12.1

15.7
12.4
71.9
100.0

0.2
0.1
0.5
0.8

25.0
12.5
62.5
100.0

3.3

45.8

3.4

45.3

0.1

33.3

2.7

23.9

5.4

44.6

2.7

337.5

NET CHANGE I N MAJOR BALANCE SHEETS ITEMS FOR WEEKLY REPORTING BANKS, BY SIZE OF BANKS
(continued)

S i z e o f Banks
(Total Deposits)
Selected
Balance Sheet
Items

1966
Held
8/17/66
amount
per

cent

1969

Held
12/14/66
amount p e r

Change
cent

amount

per

cent

Held
12/18/68
amount p e r

cent

Held
5/28/69
amount p e r c e n t

Change
amount

per c e n t

(9)
T o t a l Borrowings
under $0.5
0.5 - 1.0
over 1.0
Total

1.1
0.9
4.4
6.4

17.2
14.1
68.7
100.0

0.8
1.0
5.2
7.0

11.4
14.3
74.3
100.0

-0.3
0.1
0.8
0.6

-50.0
16.7
133.3
100.0

1.1
1.7
9.6
12.4

8.9
13.7
77.4
100.0

2.0
2.3
11.1
15.4

13.0
14.9
72.1
100.0

0.9
0.6
1.5
3.0

30.0
20.0
50.0
100.0

11 E - D Banks

3.2

50.0

3.7

52.9

0.5

83.3

5.5

44.4

6.4

41.6

0.9

30.0

34.7
20.9
76.1
131.7

26.3
15.9
57.8
100.0

32.1
23.2
77.1
132.4

24.3
17.5
58.2
100.0

-2.6
2.3
1.0
0.7

-371.4
328.6
142.9
100.0

32.1
24.8
103.3
160.2

20.0
15.5
64.5
100.0

34.5
26.0
101.5
162.0

21.3
16.0
62.7
100.0

2.4
1.2
-1.8
1.8

133.3
66.7'
-l^V)
lcMb

11 E - D Banks

47.8

36.3

45.1

34.1

-2.7

-385.7

58.1

36.3

57.2

35.3

-0.9

-50.0

(11)
R e a l E s t a t e Loans
under $0.5
0.5 - 1.0
over 1.0
Total

8.5
4.8
13.7
27.0

31.5
17.8
50.7
100.0

8.3
5.4
13.7
27.4

30.3
19.7
50.0
100.0

-0.2
0.6
0
0.4

-50.0
150.0
0
100.0

8.2
6.0
17.8
32.0

25.6
18.8
55.6
100.0

8.9
6.0
18.1
33.0

27.0
18.2
54.8
100.0

0.7
0
0.3
1.0

70.0
0
30.0
100.0

7.2

26.7

7.2

26.3

-0.2

-50.0

7.2

22.5

7.6

23.0

0.4

40.0

(10)
T o t a l Loans
under $0.5
0.5 - 1.0
over 1.0
Total

11 E-D Banks




NET CHANGE I N MAJOR BALANCE SHEETS ITEMS FOR WEEKLY REPORTING BANKS, BY SIZE OF BANKS
(continued)

S i z e o f Banks
(Total Deposits)
Held
and S e l e c t e d
Balance Sheet
8/17/66
amount
per
Items

1966

cent

1969

Held
12/14/66
amount p e r

Change
cent

amount

per

cent

Held
12/18/68
amount p e r

cent

Held
5/28/69
amount p e r

Change
c e n t amount p e r c e n t

(12)
B u s i n e s s Loans
under $0.5
0.5 - 1.0
over 1.0
Total

12.1
8.0
38.9
59.0

20.5
13.6
65.9
100.0

10.9
9.0
40.5
60.4

18.0
14.-9
67.1
100.0

-1.2
1.0
1.6
1.4

-85.7
71.4
114.3
100.0

11.1
9.8
52.2
73.1

15.2
13.4
71.4
100.0

12.1
10.6
53.9
76.6

15.8
13.8
70.4
100.0

1.0
0.8
1.7
3.5

2 P r->
2. J
48.6
100.0

1 1 E - D Banks

27.0

45.8

28.1

46.5

1.1

78.6

33.2

45.4

34.4

44.9

1.2

34.3

(13)
O t h e r Loans
under $0.5
0.5 - 1.0
over 1.0
Total

14.1
8.1
23.5
45.7

30.9
17.7
51.4
100.0

12.9
8.8
22.9
44.6

28.9
19.7
51.4
100.0

-1.2
0.7
-0.6
-1.1

109.0
-63.6
54.6
100.0

12.8
9.0
33.3
55.1

23.3
16.3
60.4
100.0

13.5
9.4
29.5
52.4

25.8
17.9
56.3
100.0

0.7
0.4
-3.8
-2.7

-25.9
-14.8
140.7
100.0

1 1 E - D Banks

13.6

29.8

9.8

22.0

-3.8

345.5

17.7

32.1

15.2

29.0

-2.5

92.6





Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102