Full text of Statements and Speeches of Andrew F. Brimmer : Financial Innovation and Monetary Management in the United States : A Paper Presented at a Meeting of the Association of American Banks in London, First City National Bank, London, England

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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

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

April.

The d i s c o u 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

anticipated
suggested

Against

this

back-

were adopted i n

early

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

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

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 )

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




Year

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

that

for

for

side,

their

total

all

for

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

banks combined.

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

only one-third of

1966.

i n the

for

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

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)

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

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

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,

in turn,

However,

put

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

enormously

Euro-dollar

t o r e a c h an

all-time

funds generated

extreme

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

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 .

Nevertheless,

11 per

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

tax

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

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 .

For

i n r e c e n t months

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




payments,
and
the

cent.

Yet,

suppliers

cent

banks

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

a r e n o t known.

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

the

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 ,

the sources of

have been m a j o r

were

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

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

this

of Euro-dollars.

as o f J u n e

25.

period

expansion

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

business.

to

Limitations
forcing

further

States.

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

Thus,

of

are a c r i t i c a l

if

lending,

thereby

element o f monetary

to obtain funds.

loanable

on

to

would

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

customers.

and t h i s

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

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

in

circum-

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

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

surtax

again.

While

longer

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

available.

30,

weeks

size

i n the

the

latest

in
begin

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,

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

2
3

1,779
1,692

2,381
2,367

13,513
10,780

6,976
5,115

2,359
2,279

-87
-4.9

-14
-0.6

2
2

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

3.0
3.0

2.9

4.3

1.4

7.3

10.3

3.0

5.3

? *

-

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