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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