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For Release on Delivery Thursday, December 28, 1972 2:30 p.m. E.S.T. MULTI-NATIONAL BANKS AND THE MANAGEMENT OF MONETARY POLICY IN THE UNITED STATES Paper By Andrew F. Brimmer Member Board of Governors of the Federal Reserve System Presented Before a Joint Session of the Eighty-Fifth Annual Meeting of the American Economic Association and the Thirty-First Annual Meeting of the American Finance Association Toronto, Ontario, Canada December 28, 1972 MULTI-NATIONAL BANKS AND THE MANAGEMENT OF MONETARY POLICY IN THE UNITED STATES TABLE OF CONTENTS Section Page List of Tables ii Preface iii I. Introduction 1 II. Traditional Perception of Central Banking 4 III. Strategy and Impact of Federal Reserve Monetary Policy in Recent Years 9 IV. A New Framework for the Assessment of Monetary Policy 16 V. Banks' Reactions to Monetary Policy: Sources of Funds 24 VI. Banks' Reactions to Monetary Policy: Uses of Funds 32 VII. Reserve Requirements and Monetary Management 41 VIII. Alternative Credit FlowsApproach to the Stabilization of Sectoral 62 IX. 66 Summary and Concluding Observations Appendix - i- LIST OF TABLES Page Table 1. Table 2. Table 3. Table 4. Table 5. Table 6. Table 7. Table 8. Table 9. Table 10. Table 11. Table 12. Factors in the Bank Reserve Equation, End of Year, 1967-1971 (Millions of Dollars) Sources and Uses of Funds by Commercial Banks, 1968, 1969, 1970 and 1971 (Amounts in Billions of Dollars) 14a Assets and Deposits of Selected Large Banks in the United States, June 30, 1972 (Millions of Dollars) 18a Outstanding Certifices of Deposits of $100,000 and Over, By Class of Bank, By Quarters, 1967-1972 (Billions of Dollars) 25a Average Level of Euro-dollar Borrowings, By Class of Bank and Source of Funds, By Quarters, 1967-1972 (Millions of Dollars) 28a Changes in Average Level of Selected Assets and Liabilities, By Class of Bank, By Quarters, 1968-1972 (Millions of Dollars) ^29a Selected Sources of Funds, By Class of Bank, By Quarter, 1968-1972 (Percentage of Total Sources) 30a Loans and Investments of Weekly Reporting Banks, By Class of Bank, December 31, 1967 and 1971 and June 30, 1972 (Amounts in Millions of Dollars) 32a Changes in Loans and Investments of Weekly Reporting Banks, By Class of Bank, Half-Years, 1968-1972 (Millions of Dollars) 34a-e Share of Major Sectors in the Net Credit Extended By Weekly Reporting Banks, By Class of Bank, 1968-1972 (Half-Years; Percentage of Total Uses of Funds) 35a Liabilities of U.S. Banks to their Foreign Branches (Millions of Dollars) 48a Comparison of Three-month Euro-dollar Deposit Bid Rates with Rates Offered by Prime Banks in New York for Three-month Foreign Official Time Deposits 52a APPENDIX Table I. Sources and Uses of Funds, By Class of Bank, By Quarter, 1968-1972 (Millions of Dollars) Table II. Sources and Uses of Funds, By Class of Bank, By Half-Years, 1968-1972 (Millions of Dollars) 5a - 11 - PREFACE I am grateful to several persons on the Board's staff for assistance in the preparation of this paper. Mr. Frederick M. Struble helped to establish the criteria used to identify and distinguish among multi-national, regional and large local banks. Ms. Jacqueline McDaniel had responsibility for planning and coordinating the computer programming required to obtain the basic statistics needed to analyze sources and uses of bank funds. Mr. Stephen A. Nelick did the programming to obtain data on member bank reserve requirements, borrowing from Federal Reserve Banks, and commercial paper outstanding on a daily average basis. Mr. Thomas A. Orndorff did the programming to retrieve data from the Call Report. Ms. Janet E. Voss did the programming to obtain data from the Weekly Reporting Banks statistics and from the nondeposits * sources of funds* Mrs. A. Cl:rx.st;ne James and Miss Rosanne McKnew provided the statistics on foreign assets held by banks reporting under the Voluntary Foreign Credit Restraint Program and on assets held by foreign branches of U.S. banks. Mr. William E. Rumbarger provided the statistics on deposits at banks' head offices and in their foreign branches. Once these various statistics were in hand, however, they still had to be organized for analytical purposes. Ms. Juliette Bethea, Ms. Barbara A. Lowrey, and Ms. Diane Sower provided this assistance. Mrs. Ruth Robinson and Mr. John Austin, my regular staff assistants, worked on various parts of the project. They were especially helpful in compiling the sources and uses of funds tables and in distributing Euro-dollar flows among the different classes of banks. Mr. Austin was particularly helpful in the resolution of a number of difficult accounting problems where good judgment was required. Mrs. Linda Zuk did the major share of the typing, and Mrs. Tonsa Fuqua also helped in the paper's final preparation. Finally, while I am grateful for the staff's support in this project, the analysis presented and the conclusions reached in this paper are my own. Nor should the views expressed be attributed to my colleagues on the Board. - iii - MULTI-NATIONAL BANKS AND THE MANAGEMENT OF MONETARY POLICY IN THE UNITED STATES By Andrew F. Brimmer* I. Introduction The experience with monetary policy in the United States since the mid-19601s suggests strongly that the evolution of the commercial banking system has altered flows of funds, changed the distributional impact of monetary policy, and placed strains on the traditional instruments of central banking. The mainsprings of this evolution have been a small number of very large multi-national banks constituting the core of the domestic money market but which are also heavily involved in international finance. Because of the activities of these large institutions in mobilizing and rechanneling funds, the financial system in the United States has become much more open to the influence of foreign financial developments than was the case a decade ago. Given these fundamental changes, it would be helpful to provide additional tools to the Federal Reserve's kit with which to moderate the impact of such developments on the domestic economy. *Member, Board of Governors of the Federal Reserve System. - 2In my judgment, efforts to rectify this situation should not be delayed much longer. I have urged such action. On several occasions in recent years, I have also outlined the principal elements in an alternative strategy of monetary control — the keystone of which is a much more flexible use of reserve requirements based on bank assets as well as on a broader range of liabilities. Still another alternative approach has been recommended by the Federal Reserve Board—a recommendation in which I joined. This propo3kJ. ^involves the flexible use of the investment tax credit to achieve greater stability in spending by the business sector for machinery and equipment. In a later section of this paper, I will explain why I believe strongly that one of these alternative approaches should be adopted in the foreseeable future. I am not unaware of the position held by many economists who believe that a central bank should not concern itself with the composition of bank credit—but only with its aggregate level or rate of growth. Still others hold that the behavior of the money supply alone should be the focus of central bank concern. I clearly do not share such a narrow conception of the task of central banking in the United States. Instead, I am convinced that the Federal Reserve - 3cannot be indifferent to the changing composition of commercial bank credit. A posture of indifference would mean that drastic variations in the availability of credit in important sectors could occur—and persist—with serious whole. adverse consequences for the economy as a In my opinion, we need a better way to assure that the overall objectives of monetary policy can be achieved without having some sectors bear a disproportionate share of the burden of adjustment to monetary restraint, while a few other sectors are significantly less affected. Moreover, the time to make such structural improvements is a period of relative quiet in the money and capital markets rather than a period of stress or near financial crisis. These general observations are supported by the analysis which follows. In Section II, the traditional perception of the task of central banking is\ summarized. The strategy and impact of monetary policy in recent years are discussed in Section III. A new framework for the assessment of monetary policy is outlined in Section IV. Banks1 reactions to monetary policy are analyzed in Section V (sources of funds) and Section VI (uses of funds). In Section VII, the broadened use of supplemental reserve requirements to stabilize bank lending to particular economic sectors is assessed. An alternative instrument to accomplish the same goal (a variable investment tax credit) is weighed in Section VIII. A summary of the findings and concluding observations are presented in Section IX. - 4II. Traditional Perception of Central Banking As I indicated above, many economists argue that monetary policy should confine itself to the control of the stock of money in the economy.—^This view implies that, in operation, the central bank should supply a given volume of bank reserves and leave it to the private market to decide how the reserves will be used. In this conception of central banking, there is no scope for special concern with the availability of credit in particular sectors—nor with nondeposit sources of bank funds--such as Euro-dollars. Instead, this traditional prescription for monetary management requires that the central bank vary the volume of bank reserves according to direction of desired changes in the money stock. policy of monetary restraint If a is appropriate, the Federal Reserve should limit the growth of reserves—perhaps even to the point of causing the actual volume of reserves to decline. If an expansionary policy were called for, the volume of reserves should be increased at a faster pace. In either case, however, it is argued that whatever changes do occur in the volume of commercial bank reserves can take 2/ place only at the initiative (or concurrence) of the central bank. The logic of this argument can be demonstrated readily by an examination of the sources and uses of bank reserves. The main factors affecting such reserves are frequently summarized in the bank 1/ ~ 2/ "" I have dealt with this basic issue in a number of places. See, for example, "Monetarist Criticism and the Conduct of Flexible Monetary Policy in the United States,11 Lecture presented at the Institute of Economics and Statistics, Oxford University, Oxford, England, April 14, 1972. See, for example, "CD's, Euro-dollars, and Monetary Policy," The Morgan Guaranty Survey, February, 1969, pp. 4-9. - 5reserve equation—or the monetary base. Data in Table 1 show the elements in the equation as of year-end for the five years 1967-71. By definition, the monetary base consists of funds created by the Federal Reserve System or by the U.S. Treasury in its monetary role as issuer of currency and coin and the locus of gold monetization. These reserve supplying factors are listed under Item A in Table 1. In theory, all of the monetary base is available for use as reserves. However, nonreserve uses (Item B) absorb a substantial part of the base, and the residual (Item C) is left as bank reserves available to support commercial bank deposits. Given the traditional perception of the task of monetary policy, the behavior of the monetary base does enable one to isolate the effects of central bank action on bank reserves. For some observers it may even provide a basis for inferences with respect to the aims of monetary policy. For example, in 1968, the Federal Reserve alternated between a policy of monetary restraint in the first half and one of expansion in the last six months. bank reserves rose by $1.0 billion. Over the year as a whole, member This rise was the net result of an increase of $3.0 billion in the monetary base partially offset by a rise of $2.0 billion in nonreserve uses of the base. The principal sources of the increase in the base were an expansion of $3.7 billion in Federal Reserve holding of U.S. Treasury securities and $867 million in Federal Reserve float. A drop of $1.6 billion in the gold stock - 5a Table 1, Factors in the Bank Reserve Equation, End of Year, 1967-1971 (Millions of Dollars) Member bank borrowings from Federal Reserve Federal Reserve float Gold stock Treasury currency outstanding Special Drawing Rights Total monetary base 4,981 8,866 3 3 0 152 821 365 - 296 82 - 600 11 57 - - 297 400 561 400 1969 1970 1971 49,314 52,995 57,218 62,199 71,065 3,681 141 2,576 11,982 186 3,443 10,367 183 3,440 10,367 335 4,261 10,732 39 4,343 10,132 45 867 -1,615 6,784 6,795 6,852 - - - 7,149 400 7,710 400 - 70,797 73,786 78,060 85,076 93,689 2,989 4,274 7,016 8,613 42,595 1,344 46,040 695 48,763 596 51,670 431 55,325 460 3,445 - 649 2,723 - 99 2,907 - 165 3,655 29 1,123 703 1,312 1,156 2,020 609 - 156 864 788 963 941 1,381 1,293 22 440 773 -1,353 - 824 863 1,063 580 529 1,68" 200 45,077 47,048 50,788 55,501 60,161 1,971 3,740 4,713 4,660 21,092 21,818 22,085 24,150 27,788 726 267 2,065 3,638 4,631 4,921 5,187 5,423 5,743 290 266 236 320 25,723 26,739 27,272 29,573 33,531 1,016 533 2,301 3,958 Factors absorbing reserve funds Currency in circulation excluding amount held by member banks as reserves Treasury cash holdings Deposits at Federal Reserve banks owned by Treasury Deposits at Federal Reserve Banks owned by foreign monetary authorities, international institutions, and nonmember banks Other Federal Reserve accounts (net) Total nonreserve use of monetarv base C. 4,223 1968 Factors supplying reserve funds Federal Reserve holdings of U.S. Treasury securities, Federal agency securities, and acceptances B. 197071 1967 Factors Affectinc Bank Reserves A. Changes 1968196970 69 196768 - - 420 175 - - - 88 Member bank reserves Reserves on deposits with Federal Reserve Banks Reserves in the form of currency and coin (estimated) Total bank reserves Note: The sum of nonreserve use and total bank reserves may not add to the total monetary base due to rounding. Source: Federal Reserve Board. - 6erased a sizable share of the funds created by the Federal Reserve. The expansion in nonreserve uses of the monetary base centered mainly in the public's increased holdings of currency ($3*4 billion). However, this drain was eased appreciably by reductions in Treasury cash holdings ($649 million) and in Treasury deposits at Federal Reserve Banks ($420 million). The growth in deposits at Reserve Banks owned by foreign monetary authorities and international institutions absorbed $175 million of the monetary base. Of the $1.0 billion expansion in member bank reserves, nearly $300 million was held as vault cash, and the rest was held as deposits at Federal Reserve Banks. The policy of severe monetary restraint pursued in 1969 is also reflected in the behavior of the bank reserve equation. For the year as a whole, member bank reserves rose by only $533 million. The monetary base expanded by $4.3 billion (virtually all of which originated in net purchases of U.S. Government securities by the Federal Reserve). However, the funds created by the Federal Reserve were provided primarily to replace the drain arising from nonreserve uses of the monetary base. While $2,7 billion of the drain resulted from an increase in currency in circulation, the Treasury also added over $600 million to its deposits at Federal Reserve Banks. With the shift of monetary policy from restraint to expansion in 1970—and a further liberalization in 1971—the monetary base responded accordingly. billion. In 1970, the monetary base expanded by $7.0 Of this amount, $6.3 billion was supplied by the federal - 7Reserve, and nearly $700 million originated in Treasury operations (including $400 million resulting from the introduction of Special Drawing Rights (SDR's). by $4.7 billion. Nonreserve uses of the monetary base rose A greater volume of currency in circulation ($2.9 billion) was responsible for the major part of this drain, but other Federal Reserve accounts also made a contribution ($1.9 billion). The latter consist mainly of securities held by the Federal Reserve Bank of New York on behalf of foreign central banks—which in turn are a reflection of the deficit in the U.S. balance of payments. Nevertheless, member bank reserves rose by $2.3 billion. In 1971, the expansion in member bank reserves ($4.0 billion) was even more dramatic. Again the growth of Federal Reserve credit ($8.9 billion) was the principal source. These newly created funds were partly offset by declines of $600 million in the gold stock and $300 million in member bank borrowing from Federal Reserve Banks. Treasury currency outstanding and SDR's added $561 million and $400 million, respectively. Nonreserve uses eroded $4.7 billion from the monetary base, leaving an increase of $4.0 billion in member bank reserves. Of course, most economists would not be satisfied with an assessment of monetary policy based primarily on the insights yielded by an analysis of changes in the monetary base. would want to As a minimum, they ask also about the behavior of the money stock. For the years under review here, the various measures of the money stock - 8show essentially the same pattern as that traceable in the behavior of the bank reserve equation. There is no mystery at work here—since the growth of demand deposits (the principal component of the money stock) depends directly on the availability of bank reserves. In 1968, (currency plus demand deposits in the hands of the public) rose by 7.8 per cent. But in 1969, under the impact of monetary restraint, the expansion of M^ amounted to only 3.2 per cent. In 1970 and 1971, as monetary policy sought to counter the effects of recession, the rise in M^ was 5.4 per cent and 6.2 per cent, respectively. The broader measures of the money stock (M2> i.e., M]^ plus time deposits at commercial banks other than large CD's, and M^, i.e., M2 plus deposits at thrift institutions) traced roughly the same contours as M^. Bank credit measures (the adjusted bank credit proxy and total loans and investments) show essentially the same profile—except the amplitude of fluctuation is greater. - 9m * Strategy and Impact of Federal Reserve Monetary Policy in Recent Years This traditional perception of the tasks of monetary policy has a number of adherents in the Federal Reserve System. In fact, in a few places (especially at the Federal Reserve Bank of St. Louis), the advocacy of a monetary policy geared primarily to the behavior 1! of the money stock is strong indeed. However, the latter approach to monetary management is not shared by the vast majority of policymakers in the Federal Reserve. Instead, the System has adopted an essentially eclectic approach: it has employed a variety of instruments to enhance the contribution which monetary policy can make toward the achievement of price stability, high levels of output and employment, and the restoration of equilibrium in the U.S. balance of payments. During a substantial part of the 6-3/4 years that I have been a Member of the Federal Reserve Board, the System has been troubled by a lingering problem. That problem is the differential impact of changing credit conditions on the availability of credit in particular sectors of the economy. widely recognized. The general features of this problem are During periods of strong credit demands and inflationary pressures (such as 1966 and 1969-70), Federal Reserve monetary policy ordinarily assumes a posture of substantial restraint. However, the impact of this restraint is felt unevenly by various groups of borrowers in the country. Some borrowers (most notably the T T I have traced the progress of monetarism in the Federal Reserve in some detail. See "The Political Economy of Money: Evolution and Impact of Monetarism in the Federal Reserve System,11 The American Economic Review, May, 1972, pp. 344-352. - 10 largest business concerns) large share are able to obtain quite readily a of the funds they require to continue their activities— particularly investment in plant expansion. In contrast, other borrowers (especially State and local governments and families attempting to purchase homes) are severely rationed in their efforts to obtain credit. The effects on spending and output that result from this disproportionate shift in the distribution of loanable funds are no less apparent. Business spending on plant and equipment and on inventories continues at a pace essentially unchanged from that prevailing prior to the adoption of a restrictive credit policy; and the expansion continues long after spending by State and local governments— and particularly by home buyers—has been severely retarded. This is a familiar story, and the explanation of the outcome is also widely known: the institutional rigidities pf housing finance (derived from the inflexiblity of the mortgage as a debt instrument and the limited ability of savings and loan associations to compete for funds), combined with the reluctance of home buyers to pay marketdetermined rates of interest, serve to erect formidable obstacles to the continued flow of funds into residential construction during periods of tight credit conditions. Similar rigidities (notably limitations on borrowing costs) inhibit the ability .of State and local governments to compete in the capital market. Numerous proposals have been advanced to cope with the situation by lessening barriers and stabilizing the flow of funds into specific sectors. Some of these have been adopted, and a few have resulted in improvements. - 11 Nevertheless, the basic problem remains, and its manifestation in recent years can be traced clearly in the record. In mid-December, 1968, the Federal Reserve took the first of a series of steps designed to tighten monetary and credit conditions in order to combat inflationary pressures generated by an overheated economy. The impact of this and subsequent policy measures coincided with the advent of expansion in credit demands. Commercial banks (which must necessarily be the fulcrum of monetary policy) became progressively under severe monetary restraint. This was especially true of the large institutions at the forefront of the industry. As 1969 unfolded, interest rates on open market securities increased sharply. However, the Federal Reserve did not raise the maximum rates of interest which banks could pay on 00*8 in denominationsof $100,000 and over. As a result, a substantial volume of funds was drawn away from deposit accounts at commercial banks into higher yielding market securities. At the same time, banks were faced with exceptional loan demands from their customers— with the demand for funds by business borrowers being particularly strong. In the face of the sharp outflow of deposit funds, banks acted to meet the demands of their loan customers by liquidating large blocks of their security holdings. In addition, most comparatively large banks tapped nondeposit sources for a substantial volume of funds, borrowing heavily in the Euro-Dollar market (particularly from foreign branches), In the Federal funds market, and from Federal Reserve Banks. These large banks also sold sizable portions of their loan portfolios, - 12 especially to their holding company affiliates, subsidiaries, and foreign branches. Affiliates obtained the funds to purchase these loans primarily by selling commercial paper. Overall, after adjustment for loan sales, bank holdings of earning assets rose only moderately— as a sharp growth in loans was offset in large part by a marked decrease in investment holdings. During 1970, the course of developments differed markedly. In mid-January of that year, the Federal Reserve, in recognition of the moderating pace of the economy, moved to reduce the degree of tightness in monetary and credit conditions. Subsequently, the System took a number of actions to promote moderate easing of credit conditions. And with the easing of monetary policy and the cooling off of the economy, interest rates on open market securities trended down. A number of other factors also improved the ability of banks to compete for deposit funds. Ceiling interest rates that banks are allowed to pay on consumer-type time and savings deposits were raised by the Federal Reserve Board early in 1970. At mid-year, several steps were taken to help ease pressures in the money market which resulted from the bankruptcy of the Penn-Central Railroad. Rate ceilings on short-dated CD's were suspended in late June, and member banks were allowed to borrow from Federal Reserve Banks under liberal terms if this were necessary to enable them to acconxnodate any of their customers who needed to refinance - 13 maturing commercial paper. In August of that year, reserve requirements on the commercial paper indebtedness of bank affiliates were imposed; this induced banks to reduce these liabilities. At the same time, investors in this paper were encouraged to shift their funds into deposit accounts. In November, the discount rate at Federal Reserve Banks was cut in two 1/4 point moves from 6 to 5-1/2 per cent. In addition to these changes in regulations and the downtrend in interest rates, it appears that the public became more cautious in the management of its asset positions. While all of these factors combined to promote exceptionally strong advances in deposit funds, customer loan demands (particularly the demands of business customers) remained relatively weak. This situation became especially evident in the Spring of 1970, when corporations began floating large amounts of long-term issues partly to replace short-term debt. During 1971, the main thrust of monetary policy was expansionary. The principal aim was to encourage a sizable further increase in bank reserves, money, and bank credit. The growth of these monetary aggregates (which was generally larger than in the year before) was intended to stimulate recovery from the 1969-70 recession. variation in interest rates. There was considerable Among other factors, this wide fluctuation reflected changes in the public's expectations about inflation and large short-term capital flows between the United States and foreign countries. After mid-August, when new economic policies were announced (which Included wage and price restraints and far reaching international - 14 - measures to stem deterioration in the balance of payments), interest rates moved downward. By the end of the year, interest rates—on the average*--were down somewhat from the levels at the beginning of 1971. In mid-December, the Federal Reserve discount rate was cut to 4-1/2 per cent in recognition of the lower levels of market rates. The move was also designed to encourage a faster pace of economic expansion. During 1972, monetary policy has continued to encourage fuller utilization of manpower and plant capacity while continuing to avoid the rekindling of inflation. The impact of monetary policy on credit flows during the last few years can be seen in the behavior of commercial banks. in Table 2 can be used for this purpose. The figures In 1969, commercial banks1 liabilities (the key to their lending ability) rose by less than half as much as in the preceding year. The primary reason for the lag was a noticeable loss of time deposits—especially negotiable CD's of $100,000 and over. The latter experience, in turn, was due to the decision of supervisory authorities to hold the maximum rates of interest which could be paid on time deposits below sharply rising market yields. In 1970 (and particularly after mid-year when the ceilings were suspended with respect to CD's with maturities of less than 90 days), interest rates offered by the banks were again competitive with market yields--which were declining sharply--and the banks gained funds. continued to do so in 1971. They - 14a Table 2. Sources and Uses of Funds by Commercial Banks, 1968, 1969, 1970 and 1971 (Amounts in Billions of Dollars) Source or Use 1968 Per Cent Amount Of Total 1969 Per Cent Amount Of Total 1970 Per Cent Of Total Amount 1971 Per Cent Amount Of Total 46.6 100.0 22.5 100.0 40.4 100.0 57.6 100.0 40.3 86.7 17.9 78.9 33.1 81.9 50.5 87.7 39.0 3.5 2.2 1.3 83.7 7.5 4.7 2.8 18.9 - 9.5 - 9.2 - 0.3 83.6 - 42.2 - 40.9 - 1.3 31.6 9.4 5.8 3.6 78.2 23.2 14,3 8.9 49.8 6.0 2.3 3.6 86.5 10.4 4.0 6.4 8.6 State and local govt, obligations 0.3 Corporate bonds Home mortgages 3.5 3.2 Other mortgages 4.9 Consumer credit 16.2 Bank loans, n.e.c. - 1.1 Open-market paper 18.4 0.6 7.5 6.8 10.5 34.8 - 2.4 0.2 - 0.1 3.0 2.4 3.3 19.0 0.5 0.9 0.4 13.3 10.7 14.7 84.4 2.2 10.7 0.8 0.9 1.6 1.9 4.4 2.0 26.4 2.0 2.2 4.0 4.6 10.8 5.0 12.7 1.3 5.7 4.2 4.8 14.4 0.8 22.0 2.3 9.9 7.3 8.3 25.0 1.3 0.1 1.3 0.2 2.8 0.3 3.4 -- 4.9 0.1 1.4 * - 1.1 0.8 1.2 1.9 1.6 2.8 4.0 3.3 6.0 0.5 2.3 1.9 2.3 10.3 8.5 1.8 2.5 3.0 4.5 6.2 7.4 4.1 1.1 1.9 7.1 1.9 3.3 44.8 95.8 21.5 95.5 38.7 95.7 55.1 95.7 29.0 0.4 29.4 5.3 23.6 5.3 23. 6 8.7 2.9 5.8 21.5 7.1 14.4 14.0 2.2 11.8 24.3 3.8 20.5 44.4 6.7 37.3 0.4 - 9.3 -12.5 3.0 0.2 - 41.3 - 55.6 13.4 0.9 38.0 15.2 22.4 0.4 94.1 37.6 55.5 1.0 41.4 7.9 33.2 0.3 71.8 13.7 57.6 0.5 0.8 0.2 2.5 0.1 - 1.9 2.0 0.5 6.2 0.2 4.7 0.1 - 0.3 1.1 0.6 - 0.4 Net acquisition of financial assets Total bank credit Credit market instruments U.S. Government Securities Direct Agency issues Corporate equities Security credit Vault cash and member bank reserves Other interbank claims Miscellaneous assets Net increase in liabilities Demand deposits, net U.S. Government Other Time deposits Large negotiable CD's Other at commercial banks At foreign banking agencies 13.4 - 0.2 13.7 - 20.7 3.1 17.4 0.2 Federal Reserve float 0.9 1.9 Borrowing at Federal Reserve Banks * -- 1.6 0.2 3.4 0.4 Other interbank claims Bank security issues Commercial paper issues Profit tax liabilities Miscellaneous liabilities Liabilities to foreign affiliates Other -- - 0.1 8.0 2.3 5.6 - - * -- - •k * -- ft -- 2.3 0.1 4.2 10.2 0.4 18.7 - - - 0.2 0.5 1.9 1.0 0.7 J. 0.2 16.9 4.9 12.0 0.1 18.9 7.9 10.9 0.4 83.5 35.1 48.4 0.3 -10.0 - 6.9 - 3.1 0.7 - 24.8 - 17.1 - 7.7 - 1.3 - 4.1 2.8 - 2.3 7.1 4.9 Discrepancy 0.6 1.3 0.9 4.0 1.0 2.5 0.3 0.5 Current surplus Plant and equipment 3.0 0.6 6.4 1.3 3.7 1.8 16.4 8,0 3.8 1.1 9.4 2.7 3.9 1.1 6.8 1.9 NOTE: Data are for chartered commercial banks, their domestic affiliates, Edge Act Corporations, agencies of foreign banks, and banks in U.S. possessions. Edge Corporations and agencies of foreign banks appear together in this table as "foreign banking agencies." * Less than $0.05 billion. Source: Flow of Funds Section, Federal Reserve Board. The figures in Table 2 also show the sharp changes in uses of commercial bank funds in recent years. In 1969, total bank credit expanded by less than half the amount recorded the previous year. However, the rise in bank loans in 1969 was one-sixth larger than that recorded the year before. To meet this private demand for credit, the banks liquidated a sizable amount of U.S. Government securities and switched the funds into loans. In 1970, the growth in bank credit was nearly double that recorded in the preceding year. But the overwhelming proportion of the banks1 funds went into investments, and only a modest growth occurred in bank loans. Last year, credit supplied by commercial banks rose by over $17 billion compared with the year before. Moreover, well over half of the growth was in the form of loans—which was broadly distributed among loan categories. Finally in 1969, commercial banks pulled in a record amount of Euro-dollars through their foreign branches in an effort to offset the loss of domestic time deposits. In 1970, they employed a substantial portion of their enlarged resources to repay liabilities to their foreign branches. These repayments continued in 1971. - 16 IV. A New Framework for the Assessment of Monetary Policy But despite the erosion of tension in money and capital markets during the last year or so, the problem posed by the differential impact of monetary policy remains an urgent one. Moreover, much of the debate over the issue continues to focus on the role of the Federal Reserve. This is not surprising because the reduced availability of funds in the adversely affected sectors becomes most evident as market forces respond to monetary restraint. Of course, one can contend that the objective of monetary policy is to impose general restraints oil borrowing. Consequently, the blame for the differential impact of monetary policy would rest on rigidities in housing finance and on State and local borrowing limitations. is an element of truth in this position. And there Nonetheless, if the impact of monetary policy consistently bears heavily on certain sectors of the economy and just as consistently leaves other sectors less affected, then it is also true that whatever its intent, the effect of monetary policy is specific rather than general. It is recognition of this fact that has led many observers to feel that they need to look no fafcther than Federal Reserve policy for an explanation—and remedy of this problem. When the Federal Reserve is called upon to devise a solution, 4/ it is really being asked to "do something11- to insure greater stability in the allocation of commercial bank credit over the cycle. on the commercial banks is by no means misplaced. This focus While other institutions may play a larger overall role (in terms of total lending) in certain markets than commercial banks, changes in the volume of funds 47 I interpret this to mean that they really want the Congress to "do something1," since the Federal Reserve's authority rests on legislation enacted by Congress. - 17 supplied by the latter over a fairly short period of time can have a disproportionate impact on the level of spending in particular sectors. And the principal beneficiary of such shifts in the availability of funds is the corporate business sector. But, as I emphasized above, this is not a new situation— and taken alone it would not justify a renewed discussion at this time. However, there are forces at work behind the familiar facade which are less readily recognized but whose potential effects on the nation's financial system could be considerable; and the lending behavior of commercial banks is the fulcrum of the situation. In fact, the situation is roughly analogous to that of an iceberg: the proportion below the surface greatly exceeds that which is visible at first glance. What can be seen readily is the changing availability of funds in particular sectors as commercial banks generally respond to monetary restraint. What is less visible is the strategic behavior of a small number of multi-national banks which virtually guarantees that the availability (although not the cost) of loans by them to their preferred business customers will be substantially insulated from monetary restraint. Over the last two and one-half years, I have devoted a considerable amount of effort to studies designed to illuminate the 5/ role of these multi-national banks in the nation's financial system. 5/ See "The Banking Structure and Monetary Management11 presented before the San Francisco Bond Club, April 1, 1970, and "Commercial Bank Lending and Monetary Management," Journal of Commercial Bank Lending, January, 1972, pp. 2-19. - 18 The framework of analysis was constructed by recasting data for about 330 large banks which report to the Federal Reserve on a weekly basis. Depending on the character of their business, the banks were classified as follows: multi-national banks (20); banks (60), and local banks (250). regional However, it should be recalled that the Weekly Reporting Banks (WRB) all have total deposits of $100,il00,000 and over. At the end of June, 1972, they cons-tltiated 2.4 per cent of the 13,669 insured commercial banks in the country; yet they held 57 per cent of the total assets and 55 per cent of the deposits. The multi-national bank category is comprised of exceptionally large commercial banks. Indeed, at the time of original selection in 1970—and this is still true at the present time—all but one of the multi-national banks were drawn from the 20 largest banks in the United States, and the remaining bank was the 21st largest bank in the country. These banks are identified in Table 3, along with several classes of assets and deposits. A second major distinguishing characteristic of these banks is the substantial role played by virtually all of them in international finance. All 20 multi-national banks had one or more branch offices in foreign countries. Deposits in these branches varied from 12 per cent up to 47 per cent of the combined deposits of domestic offices and foreign branches for 19 of the 20 multi-national banks. Each bank had a relatively large volume of loans to foreign borrowers on the books of the head office• In - 18a Table 3. Assets and Deposits of Selected Large Banks In the United States, June 30, 1972 (millions of dollars) Name of Bank Deposits At At Domestic Foreign Offices offices Foreign as per cent of total | Head Office Claims on Foreigners Assets of Foreign Branches b Total domestic assets Total deposits 26,086 19,919 17,847 10,972 10,971 85,795 32,393 22,823 25,035 11,964 10,787 103,002 21,667 14,985 13,471 9,024 8,520 67,667 10,726 7,838 11,564 2,941 2,267 35,336 33.1 34.3 46.2 24.6 21.0 49.28 22.72 9,724 9,162 8,152 7,932 7,405 42,375 53.16 NA 10,717 9,132 9,521 8,176 7,400 44,946 49.82 22.51 6,646 7,721 6,550 5,978 5,195 32,090 60.99 NA 4,071 1,411 2,971 2,199 2,206 12,858 — -- 24.34 11.22 7,016 6,095 5,761 5,110 4,736 28,718 23.19 NA 6,711 5,862 5,083 4,802 4,963 27,421 23.62 10.68 5,589 4,911 4,468 4,222 3,548 22,738 22.19 NA 1,122 951 615 580 1,415 4,683 16.49 7.61 4,043 3,765 3,501 3,136 2,774 17,214 14.15 NA 4,164 3,974 2,946 4,962 2,361 18,407 16.74 7.56 3,165 2,646 2,566 2,610 2,358 13,345 8.08 NA 999 1,328 380 2,352 3 5,062 9.89 4.56 9.50 NA 9.82 4.44 8.74 NA — 9.69 7.07 174)107 46.11 193,776 NA 135,840 45.19 57,939 NA — 71,,180 23..68 93,,563 31.,13 300,,583 NA NA NA NA NA Total Own Account Customers Account Total Claims on Head Office Claims on others Multi-National Banks (20) 1 Bank of America, S.F. 2 Chase Manhattan, N.Y. 3 First National City, N.Y. 4 Manufacturers Hanover, N.Y 5 Chemical Bank, N.Y. Sub-Total Share of Multi-National total (%) Share of Grand total (X) 6 Morgan Guaranty, N.Y. 7 Security Pacific, L.A. 8 Bankers Trust, N.Y. 9 Continental Illinois, Chicago 10 First National Bank, Chicago Sub-Total Share of Multi-National total (%) Share of Grand total 11 Wells Fargo, S.F. 12 Crocker Citizens, S.F. 13 United California, L.A. 14 National Bank of Detroit 15 Mellon National Bk, Pittsburgh Sub-Total Share of Multi-National total (%) Share of Grand total 16 Irving Trust, N.Y. 17 First National Bank, Boston 18 First Penn., Bala Cynwyd, Pa. 19. Marine Midland, N.Y. 20 Cleveland Trust, Cleveland Sub-Total Share of Multi-National total (%) Share of Grand total MULTI-NATIONAL TOTAL Share of Grand total (%) Regional Banks ($0) Share of Grand total (1) Local Banks Share of Grand total (X) GRAND TOTAL Memorandum; All insured cotmercial banks (Number: 13,669) Weekly Reporting Banks (as per cent of all ins. batiks) Multi-National Banks Regional Banks Local Banks Note: — -- 2,552 -— 812 44.59 35.58 34,453 60.78 53.60 1,341 92.74 89.77 33,111 59.94 52.79 24.05 17.56 1,938 22.05 15.82 610 33.50 26.73 13,245 23.37 20.60 93 6.43 6.22 13,152 23.81 20.96 16.7 16.2 12.1 12.1 28.5 -- 1,160 -— 24.0 33.4 12.9 47.4 10.93 7.98 1,105 12.57 9.02 57 3.13 2.50 2 4,458 7.86 6.93 0.14 0.13 4,457 8.07 7.10 —• 1 I 1 1.028 686 342 4,526 10 4,516 j1 92,,116 24..40 Ill,>360 29,.49 377,,583 661,838 NA NA NA NA NA 549,985 57.1 54.6 26.4 13.9 16.8 24.6 12.8 17.2 Head office claims on foreigners and assets of foreign branches are not shown for individual banks to prevent disclosure of confidential data. However, these data are shown for the multi-national banks grouped by sice into four classes of five banks. Not Applicable. 5,059 57.57 41.30 38.0 15.5 31.2 26.9 29.8 Sources: Federal Reserve Board. Total Assets: Call Report, June 30, 1972. Deposits: Consolidated Call Report, June 30, 1972. Head office claims on foreigners, Voluntary Foreign Credit Restraint reports. Assets of branches, monthly reports to Federal Reserve Board. NA 5,871 55.33 40.40 "7.81 5.60 18.7814.99 7.98 7.04 0.69 0.67 8.18 7.20 10,611 73.01 8,788 71.74 1,821 79.80 56,682 88.17 1,446 96.79 55,236 88.05 2,034 14.00 1,887 12.99 14,532 1,859 15.18 1,602 13.08 12,249 176 7.71 285 12.49 2,282 5,302 8.25 2,302 3.58 64,286 29 1.94 19 1.27 1,494 5,273 8.40 2,228 3.55 62,737 - 19 - fact, these 20 banks had nearly three-quarters of all head office claims on foreigners reported under the Voluntary Foreign Credit Restraint Program. Also at the time of their selection, 75 per cent of the banks obtained funds by borrowing in the Euro-dollar market. Another important characteristic which applied to a large segment (18 of 20) of the multi-national banks was that the issuing rates on their large CD's were generally the lowest offered by commercial banks. In addition to these characteristics, a number of other criteria were considered in the selection of the panel. Thus, for example, more than half of the multi-national banks had business loan holdings which amounted to more than 60 per cent of their total loans. Moreover, a large number of these banks were extremely important in the correspondent banking field. This was indicated by the fact that 10 of these banks received more than 10 per cent of their total deposits from other domestic commercial banks. Finally, a large segment of the multi-national banks are major borrowers in the Federal funds market. At the time of selection, for example, nearly half of the banks had a net indebtedness position in that market which equaled about 5 per cent of their total deposits. Using similar criteria but stressing domestic activities and relative importance in one area of the country, the 60 regional banks were classified. However, it should be recalled that some of these regional banks are also capable of registering their presence in the national money and capital markets. designated large local banks. The remaining 250 banks were - 20 As of June 30, 1972, the 20 multi-national banks represented only 0.15 per cent of all insured commercial banks, but they held one-quarter of the total assets and domestic deposits. The 60 regional banks constituted 0.44 per cent of the insured banks, and they held one-seventh of the total assets and domestic deposits. For the 230 local banks, the figures were: 1.83 per cent of insured banks and 17 per cent of total assets and domestic deposits. This classification of banks according to the scope and character of business is used in several of the sections which follow. Having developed a framework for identifying the multinational banks, it was also necessary to fashion a scheme which would make it possible to trace their impact on the U.S. money and capital markets. For this purpose, a modified sources and uses of funds accounting system was developed. The aim was to answer the questions: (1) how did the banks obtain funds and (2) what did they do with their funds? During a given period, the banks could obtain funds from external sources (an increase in capital, deposits, borrowing, or other nondeposit liabilities). Alternatively, they could rely on internal sources— such as the liquidation of existing financial assets. In the same vein, the banks could use their funds for external purposes such as the acquisition of financial assets or the repayment of borrowings or the reduction of other nondeposit liabilities. On the other hand, the banks could use their funds for internal purposes--such as deposit withdrawals. Of course, - 21 during a specific period of time, banks may rely on a combination of internal and external sources of funds, and they may employ their resources to meet a variety of internal and external demands: so, the task is to explain why a particular source or use may be predominant at a given juncture. A basic question being raised here concerns the varying supply of bank credit to different sectors impact of monetary policy. of the economy under the changing In this regard, this type of concern is frequently expressed in terms of the availability of bank credit for sectors such as "housing" and "business." The statistics showing changes in banks1 holdings of "residential mortgages" or "business loans11 are frequently taken as proxies for the banks' supply of funds to these sectors. Actually, a much clearer picture can be developed by a fuller definition of economic sectors. In this paper, three sectors have been identified: (1) the household sector; (2) the business sector, and (3) the government sector. The business sector is subdivided into farm, nonfarm, and banks. The government sector is divided between the Federal Government and State and local governments. In terms of the statistics, bank credit to the household sector can be identified in three types of loans: (1) consumer credit; (2) real estate loans on 1-4 family properties, and (3) loans to individuals to purchase or carry securities. Bank loans to the business sector can be traced in (1) loans to farmers and real estate loans secured by farmland; (2) business loans (i.e., commercial and industrial loans), commercial - 22 mortgages, real estate loans on multi-family residential properties,and loans to financial institions and brokers and dealers, and (3) loans to banks (Federal funds sold). Bank credit to the government sector can be identified in their holdings of Federal Government securities and obligations of State and local governments. The statistics used to trace the banking sources and uses of funds had to be gathered from a variety of sources. The principal sources of data were the WRB series for 330 large banks and the June and December Gall Reports submitted to the Federal Deposit Insurance Corporation (FDIC) by all insured commercial banks. From the WRB series, it was possible to obtain data on (1) deposits—distinguishing between(a) demand deposits and (b) time and savings deposits (with a further breakout for large CD's); (2) total borrowing (from Federal Reserve Banks and other sources); (3) holdings of U.S. Government securities ( Treasury and Agency issues); State and local government obligations, and other securities; and (4) business loans, real estate loans and consumer loans. A second source provided statistics on (1) outstanding commercial paper issued by bank affiliates, (2) member banks' required reserves, and (3) borrowing from the Federal Reserve Banks. These data are provided in the Short-Run Banking System Reports (SBR) Series which are available on a daily basis for about 5,800 member banks. A third series--nondeposit sources of bank funds—provided data on (1) sales of business loans by commercial banks to their affiliates and (2) Euro-dollar borrowings—directly from foreign branches and through brokers and dealers. From the Call Reports, it was - 23 - possible to obtain a considerable amount of detailed information on the types of deposits and earning assets held by banks. While the Call Report is submitted to the FDIC four times each year, only the June and December reports are readily available for computer-based analytical work. For the purpose of this paper, the 330 Weekly Reporting Banks were selected for study. Since the interest here focused on the general pattern of response of these banks (divided into the three sub-groups discussed above) to changes in monetary policy, quarterly averages were calculated from the weekly statistics. Quarter-to-quarter changes in these average levels were then used to construct sources and uses of funds tables for the period 1968-1972 (first and second quarters)--a period covering 18 quarters. Using data from the Call Reports, sources and uses of funds tables were calculated for half-year periods--also covering the period 1968-72, or for 9 six-month segments of time. The quarterly tables are shown in Appendix Table I and the half-year tables in Appendix Table II (attached). sections. These data are drawn on rather extensively in the following - 24 V. Banks1 Reactions to Monetary Policy: Sources of Funds The ways in which commercial banks adjusted their behavior to changes in monetary policy over the last few years can be traced in considerable detail in the sources and uses of funds statistics presented in the Appendix Tables. The quarterly changes data in Table I are particularly useful because they allow one to identify the numerous sources of funds to which different classes of banks had access. Data in Table II showing half-year changes enable one to identify in some detail the sectors—and parts of sectors—to which bank credit was channeled. Only the highlights of the banks1 behavior can be summarized here. As mentioned above, a basic element in the policy of monetary restraint followed by the" Federal Reserve in 1969 and early 1970 was the maintenance of interest rate ceilings on time deposits in member banks below market yields. A major consequence of that policy was a massive attrition in the banks1 time deposits. This run-off was especially marked in the case of large denomination certificates of deposit (CD's). In fact, to a considerable extent, the story of commercial bank behavior since the end of 1967 is the story of their adjustment to the ebb and flow of funds raised through this instrument. The other principal element in the pattern of adjustment—the ebb and flow of Euro-dollar borrowings primarily by multi-national banks--is virtually a mirror image of the gains and losses in CD's. - 25 To help focus the analysis of the changing sources of bank funds, several types of statistical information have been presented in Tables 4-7. Table 4 shows the average level outstanding and quarterly changes in CD's at weekly reporting banks for the period 1968-1972. Table 5 shows the average level of Euro-dollar borrowings by major source (from foreign branches, direct from other foreign banks, or through brokers and dealers) for the same period. In Table 6 are shown quarterly changes in the average of selected assets and liabilities (CD's, Euro-dollar borrowings, U.S. Treasury securities, and total borrowing—excluding Euro-dollars). Table 7 presents the same data as shown in Table 6--but expressed as a percentage of the banks' total sources of funds. Attrition of CD's Several significant features stand out in these data. The dramatic attrition in the volume of CD's outstanding is clearly evident in Table 4. For all weekly reporting banks, CD's outstanding reached a peak in the fourth quarter of 1968, averaging $23.1 billion. Within the year, CD's declined by $1.2 billion between the first and second quarters. This shrinkage resulted as yields on alternative market instruments attractive to investors rose above bank interest rate ceilings. With the easing of monetary policy in the last half of 1968, banks were able to raise net nearly $4 billion through the issuance of CD's. Most of the variation (gains as well as losses) centered in multi-national banks. In fact, these institutions lost CD's in both the first and second quarters of 1968. - 25a Table 4s Total: All Weekly Reporting Banks Amount Change during period Outstanding Amount Per cent Year & Quarter 1967 - 4 1968 - 1 1969 - 1 1970 - 1 1971 - 1 Outstanding Certificates of Deposits of $100,000 and over, By Class of Bank, By Quarters, 1967-1972 (Billions of Dollars) Hultl-Natlonal Banks Amount Change during period Outstanding Amount Per cent 20.3 Amount Outstanding Regional Banks Change during period Amount Per cent 5.1 11.7 Amount Outstanding Local Banks Change during period Amount Per cent 3.5 20.5 19.3 21.2 23.1 0.207 -1.171 1.904 1,905 1.0 - 5.7 9.9 9.0 11.5 10.3 11.3 12.3 -0.279 -1.166 0.980 1.007 - 2.4 -10.1 9.5 8.9 5.4 5.3 5.9 6.5 0.316 -0.080 -0.614 0.553 6.2 - 1.5 11.6 9.4 3.6 3.7 4.0 4.4 0.171 0.075 0.309 0.346 4.9 2.1 8.3 8.6 20.2 17.0 12.9 11.3 -2.911 -3.259 -4.030 -1.667 -12.6 -16.1 -23.7 -12.9 10.0 7.5 5.2 4.9 -2.284 -2.528 -2.312 -0.254 -18.6 -25.3 -30.8 - 4.9 5.9 5.2 4.0 3.2 -0.576 -0.701 -1.218 -0.780 - 8.9 -11.9 -23.4 -19.5 4.3 4.3 3.8 3.2 -0.051 -0.030 -0.500 -0.633 -11.6 -16.7 10.9 13.0 19.2 24.5 -0.374 2.084 6.216 5.291 - 3.3 19.1 47.8 27.6 5.2 6.1 9.3 12.1 0.259 0.936 3.176 2.848 5.3 18.0 52.1 30.6 2.8 3.4 5.1 6.4 -0.380 0.553 1.748 1.336 -11.9 19.7 51.4 26.2 2.9 3.5 4.8 5.9 -0.253 0.596 1.291 1.107 - 7.9 20.5 36.9 23.1 27.2 27.5 30.6 33.3 2.733 0.251 3.190 2.642 11.2 1.0 11.6 8.6 13.9 15.0 17.2 18.6 1.822 1.030 2.191 1.479 15.1 7.4 14.6 8.6 6.9 6.3 7.0 7.6 0.465 -0.614 0.683 0.571 7.3 -8.9 10.8 8.2 6.3 6.2 6.5 7.1 0.445 -0.164 0.316 0.592 7.5 - 2.6 5.1 9.1 33.0 -0.266 - 0.8 34.2 1.196 3.6 17.9 18.9 -0.741 1.031 - 4.0 5.8 7.5 7.3 -0.076 -0.165 - 1.0 - 2.2 7.6 8.0 0.552 0.329 7.8 4.3 1972 - 1 Amounts are quarterly averages of weekly figures. 2 Hote: not add to totals because of rounding. Components may - C3 - ?!f - 26 However, as already indicated, the most striking changes in CD's occurred during the period of severe monetary restraint in 1969 and early 1970* For all weekly reporting banks, between the fourth quarter of 1968 and the first quarter of 1970, outstanding CD's dropped by $12.2 billion—from $23.1 billion to $10.9 billion. This was a decrease of 53 per cent. The shrinkage of $7.1 billion in CD's outstanding at multi-national banks accounted for nearly threefifths of the decline—although they had just over half of the CD volume in the fourth quarter of 1968. Actually, among multi-national banks, the attrition in CD's ended in the last three months of 1969; and they gained funds through this source in the first quarter of 1970--while other weekly reporting banks continued to experience a net CD outflow. So, from peak to trough, the decline in CD's at the multi-national banks was $7.4 billion, representing 60 per cent of the amount outstanding in the last quarter of 1968. Among regional banks, the decline in CD's was slightly less marked than at multi-national banks--but it was still substantial. During the five quarters of attrition, the regional banks on a net basis lost 57 per cent of the volume outstanding in the fourth quarter of 1968. While they accounted for 28 per cent of the amount outstanding on the eve of severe monetary restraint, they absorbed 30 per cent of the attrition. In contrast, local banks experienced a decline of about one-third in CD's outstanding. This was less than their proportionate - 27 share of CD volume at the beginning of the period. In the final quarter of 1968, they had one-fifth of the CD's outstanding, but they absorbed only one-eighth of the shrinkage. In late June, 1970, the Federal Reserve Board suspended the interest rate ceiling on member bank time deposits of $100,000 and over with maturities of 30 to 89 days. This action was taken to ease money market pressures associated with the bankruptcy of the PennCentral Railroad. In response, banks bid aggressively for CD funds. The amount outstanding rose by $2.1 billion in the second quarter— with nearly half of the growth occurring at multi-national banks. With the lessening of monetary restraint as the year progressed, the volume of CD's outstanding at weekly reporting banks accelerated, and by the fourth quarter it had surpassed the peak established two years earlier. By the last quarter of 1971, the level of CD's outstanding was more than $9 billion above that recorded in the same period of 1970—and more than $22 billion above the low point set in the first quarter of the latter year. Approximately three-fifths of this rise ($13.4 billion) occurred at multi-national banks. The rise in CD's during the first half of 1972 was fairly moderate at weekly reporting banks . - 28 Euro-Dollar Inflow The extent to which weekly reporting banks turned to Eurodollars as CD's ran off can be traced in Table 5. In fact, even before the attrition in CD's got seriously underway, the inflow of Euro-dollars rose appreciably. Between the fourth quarter of 1967 and the same period of 1968, the average level of Euro-dollar borrowings rose by $2.7 billion. Virtually all of this inflow came through the foreign branches of the multi-national banks. During the first three quarters of 1969, the volume of borrowing more than doubled—climbing from $7.1 billion in the final quarter of 1968 to $15.5 billion in the third quarter of 1969. Over 90 per cent of the rise ($7.7 billion out of $8.4 billion) was accounted for by multi-national banks. As discussed more fully below, the imposition of marginal reserve requirements on Euro-dollar borrowings by U.S. banks in the third quarter of 1969 halted the expansion of this source of bank funds. Again, the impact fell mainly on the multi-national banks. In fact, the other weekly reporting banks continued to expand their Euro-dollar borrowing into the first quarter of 1970. The regional and local banks also used their foreign branches (especially "shell" branches located in the Bahamas) as the principal means of attracting Euro-dollars. However, they also made relatively greater use of direct borrowing from foreign commercial banks and Euro-dollar funds raised through brokers and dealers. - 28a Table Total: Year and Quarter Total 1967 - 4 4,399 All Weekly Reporting Banks Foreign Brokers & Branches Direct Dealers 4,399 1968 - 1 2 3 4 4,484 5,468 6,879 7,110 4,484 5,468 6,879 7,110 1969 - 1 2 3 4 8,542 10,897 15,537 15,461 8.5^2 10,897 14,797 14,963 1970 - 1 2 3 4 13,929 12,525 10,983 9,101 1971 - 1 2 3 4 5,982 2,139 1,694 2,366 1972 - 1 2 Note: 1,280 1,378 Average Level of Euro-dollar Borrowings, By Class of Bank and Source of Funds, by Quarters, 1967-1972 (Millions of Dollars) — 4,399 -- „ -- « — — -- « -- Total 4,484 5,448 6,790 7,013 8,372 10,610 14,201 13,770 366 232 374 536 lj.isa 12,075 10,813 9,014 .237 143 67 43 534 307 103 44 12,632 11,530 10,157 8,497 5,952 2,129 1,684 2,362 22 6 8 3 8 4 2 1 2 2 -- -- — Total - Regional Banks Foreign Branches Direct — Brokers & Dealers — - Total Local Banks Foreign Direct Branches — — -- __ -- — — — -- -- -- -- 179 99 304 421 12,139 11,261 10,085 8,466 46 42 26 31 447 227 46 5,-611 1,996 1,596 2,232 5,644 1,991 1,588 2,229 17 5 8 3 1,178 1,297 1,176 1,295 2 2 Amounts are quarterly averages of weekly figures. because of rounding. 4,399 4,484 5,448 6,790 7,013 8,372 10,610 14,684 14,290 1,278 1,376 Multi-National Banks Foreign Brokers & Branches Direct Dealers -- ------ Components may not add to totals Broker; & Dealers - „ 20 88 92 20 88 92 166 276 727 945 166 276 529 747 996 840 567 340 762 687 485 294 211 96 59 82 202 94 59 82 35 30 35 30 — — -- -- — — — „ 4 11 67 176 43 38 16 10 35 24 13 8 10 3 3 2 4 1 3 2 1 54 104 157 76 28 4 77 77 54 42 302 154 258 264 257 127 242 254 110 48 40 52 105 45 38 51 66 51 66 51 7 I 2 1 — -— — -- — — 5 144 94 — — — 5 4 11 126 224 -- -- — — — -- -- — — - 29 The repayment of Euro-dollar borrowings by multi-national banks started in the closing months of 1969, and the pace accelerated as the new year progressed. Through the third quarter, they had repaid $4.5 billion--or nearly one-third of the volume outstanding at the peak. The regional and local banks followed in train. As domestic funds became more available (and less espensive to borrow), all weekly reporting banks accelerated the repayment of Euro-dollar indebtedness. The magnitude and rapidity of the repayment (as also discussed below) led the Federal Reserve Board in November, 1970, to modify its Euro-dollar regulation in an attempt to moderate the reflow of funds abroad. However, it appears that the move checked the outflow only temporarily and to only a slight extent. By the third quarter of 1971, the volume of Euro-dollar borrowings outstanding had dropped to $1.7 billion--of which $1.6 billion was accounted for by multi-national banks. Since then, this level has lingered in that neighborhood. Offset of CD Attrition By Euro-Dollar Inflow and Other Sources As I indicated above, I have been especially interested in the extent to which Euro-dollars were used by commercial banks to replace funds lost through CD attrition. some light on this question. The figures in Table 6 cast For example, for all weekly reporting banks, the rise in Euro-dollar borrowing represented about four-fifths of the attrition in CD's between the final quarter of 1968 and the - 29a - Table: 6. Year and Quarter 1968 - 1 1969 - 1 1970 - 1 Certificates of Deposit ($100.000 and over^ HuJtiAll Weekly National Regional leporting Banks Banks Banks 207 -1,171 1,904 1.905 -2,911 -3,259 -4,030 -1,667 Not*: -2,284 -2,312 - 254 - 1971 - i 1972 - 1 - 279 -1,166 950 1,007 - 374 2,084 6,216 5,291 259 936 3,176 2,848 2,733 251 3,190 2,642 1,822 1,030 2,191 1,479 266 1,196 - 741 1,031 Local Banks 316 80 614 553 85 964 1,343 222 20 - 69 4 51 30 500 633 I ,432 2,,355 3,,901 79 - 1,359 2,238 3,592 - 395 74 110 253 218 253 596 1,291 1,107 -1,,528 -1,,407 -1,,541 -1,881 -1,657 -1,102 -1,373 -1,660 445 614 316 592 -3,118 -3,844 443 672 -2,836 -3,666 - 400 637 - 129 115 35 24 552 329 -1,0^7 99 -1,055 120 - 47 5 - - - 465 614 683 571 - 76 165 Amounts are quarterly averages of weekly figures. to totals becauae of rounding. 85 984 1 ,412 *31 - - Euro-dollar Bnrmuino* MultiAll Weekly national Regional Reporting Banks Banks Banks 171 75 309 346 - 576 - 701 -1,218 - 780 380 553 1,748 1,336 Changes in Average1 T.evel of Selected Assets and Liabilities, by Class of Bank, hy Quarter, 1968--1972 (Millions of dollars) Components may not add - 50 156 273 227 Local Banks - - U.S. Treasury Securities MultiRegional Nation nl All Weekly Banks B;<nks ReDortlne Bunks _ 605 481 1,,248 879 - 5 425 -I,,457 983 1,,707 1 7 56 98 -2,,568 -2,,425 -1,,092 194 -2,,174 904 38 196 - 7<> 149 105 6 710 272 I ,423 2 ,497 153 n3 a Z1 I ,547 -1 ,688 922 1 ,416 1) 1n ..93 741 _ _ 267 431 857 1 ,416 526 -1 ,014 598 1 ,046 - 492 557 - - - Total Borrowing Local Banks All Weekly Reporting B. nks 43 579 21 472 - 223 397 244 356 83 2,,349 1,402 1,,307 353 718 529 40 - 41 803 600 42 108 3,,074 2,,790 1,,808 188 53 317 537 - 255 107 249 545 1,,295 536 -2,,202 1,,172 738 218 138 99 120 2,,866 584 2,,635 375 103 539 2 ,694 281 455 186 271 27 81 - - MultlNational Banks 57 1,,354 1,,124 399 Regional Banks - _ 139 717 318 668 449 1.,999 676 1,,016 161 767 1,168 587 529 481 -1,,555 ,030 558 83 548 233 _ 100 1,,719 255 1 ,121 ] 364 1,,199 - - 10 676 139 963 40 911 Local Banks - 1 277 39 240 397 307 946 205 - - 208 28 99 91 11 472 190 551 135 584 - 30 third quarter of 1969. For multi-national banks during the same period, the proportion was 108 per cent of the CD run off. For regional and local banks, it was one-quarter and one-fifth, respectively. Because CD's outstanding at multi-national banks continued to decline through the fourth quarter of 1969 while their volume of Euro-dollar borrowing shrank somewhat after the third quarter, the latter source offset about 99 per cent of their CD attrition during 1969 as a whole. An even sharper insight into the behavior of commercial banks' sources of funds is provided by the data in Tables 6 and 7. The absolute changes in the average level of banks' CD's, Euro-dollar borrowings, U.S. Treasury securities, and total borrowing shown in Table 6 are expressed in Table 7 as percentages of the banks' total sources of funds. These figures suggest that the relative impact of CD attrition at multi-national and regional banks in the first three quarters of 1969 was rather similar. In both instances, it was substantially greater than in the case of local banks. However, the ways in which the different groups of banks compensated for the loss in CD varied markedly. For the multi-national banks, Euro-dollar borrowings were the principal source—accounting for about two-fifths of their total sources during the periods of most severe CD run off. The proportion averaged about 6 per cent for regional banks and about 2 per cent for local banks. On the other hand, both the regional and local banks relied much more heavily on the liquidation of U.S. Treasury securities and borrowing from domestic sources--including Federal Reserve Banks. - 30a T'!>1. 7: Certificates of Dep sit ($100.000 and over) Multinational Regional All Waekly Banka Banks Reporting Bank* Yaar & Quartar 1968 - 1 2 Source: Scltcted Sources of Funds, by Clas* of :',:tnk, by Ouarter, 1968-1972 (Percentage of Total Sourcr-s". iqjidation uf Local Banka Euro-Dollar Borrowings Mul.tiAll Weekly Natlonal Regional Reporting Banks Banks Banks 3 .4 26 .2 28,.9 5,.2 14.4 -16.2 23.1 18.8 -11.2 -31.7 21,1 23.6 32.2 - 4.2 35.3 18.4 13.8 4.5 16.7 12.2 1.8 13.6 17.1 2.3 -31.3 -34.2 -26.6 -17.7 -35.7 -44.1 -28.1 - 5.3 -35.3 -35.7 -31.3 -32.7 - 4,1 - 1.6 -16.5 27.7 15.4 24.7 25.7 - 0.8 21, 39..1 43. - 8.• 3 - 6.9 30.0 49.3 32.8 7.4 24.2 46.4 30.8 -37.8 45.6 61.0 43.1 -28.8 35.5 44.4 29.5 -28.3 -20.8 -12.2 -11.7 21.8 1.6 32.9 26.6 25.5 11.3 39.6 30.4 19.0 -22.8 34.8 26.2 15.2 - A.6 14.4 20.6 - 2.4 11.8 -12.2 20.3 - 5.1 - 8.8 16.5 10.3 Table 6. Local Banks All Weekly Reporting Sanks Total Borrowing (Excluding Euro-Dollars) MultiNat lonal All Reporting Regional Banks Reporting Banks Banks MultiNattonal Banks Peglonal Banks Local Banks -24,,3 -13.,1 26.,8 20..6 4.,4 -30. - 1.,2 15,,7 18.0 -23.7 -13.2 12.5 - 1..8 32..5 17,.0 12.,9 2.>2 36.>8 24.2 9..3 -14. 38.,0 18.,3 22.,2 0.1 16.6 - 2.1 8.5 31.6 16.6 31.2 9.0 ,2 Local Banks 1 .1 4,.0 0,.1 0 .2 - 9.,0 -20.,1 11.,9 17,,0 4,,5 5..6 6, 9. - 0 .1 0,.4 1,.8 4,.3 -27..6 -25. - 7.,2 2.,1 -34..0 -15..8 0.,5 4.,1 -21.>6 -36.,6 -13..6 1,.7 - 3.3 -43.4 -19.8 - 1.8 1.,2 32,2 18.4 19,2 - 7..0 34.,9 8.,2 21.,3 9.,9 39,,1 30.0 24. 6 -47.,2 -28.,5 -20.,1 -17.,9 5.,0 -12.,9 - 9.,5 - 7,.3 9..0 >9 - ft. 3.>6 0.,2 -13.,2 4..0 11..3 15.,5 - 7.,6 11.,2 12.,5 15.»3 -18.,7 - 4..4 11.,1 17,,3 -29.0 - 6.4 8.6 14.5 24..0 7,.9 -17.. 5 7. 3 15..1 12.,5 -22. 11.,1 J 55,,5 6.>8 -19.,1 7,5 -24.9 -25.1 - 4.6 6.8 -39,,7 -40.,4 - 7.2 13. 1 - 5..3 - 4.3 - 1.8 1.,1 - 5.,2 - 1.,8 - 0. 0.,4 12,,4 11..0 - 9.,5 14,,3 7.,4 -11..2 -10. 21..5 11,,5 -16.,9 - 9.,5 12.,4 25.2 - 6.2 - 6.3 3.4 - 1.,0 18.,7 6.0 26. 5 - 1.>4 18..9 4.,6 23.,1 - 0.,4 25.,1 7..1 44.,1 - 0.4 13.3 8.7 19.1 -10.0 1.0 -17.4 2.4 - 3.1 - 0.3 0.4 - 0.5 8.,2 - 7.,3 8..1 -11.,0 1..8 - 4.,3 11.2 - 3..2 5.0 26. 6 6.,0 23.,6 2.,7 48..9 4.0 18.3 ,2 .7 .5" ,1 J IP - 3.4 - 2.4 - 31 From the foregoing analysis, I reach the following conclusion; the multi-national banks (through the cushioning benefits of Euro-dollar inflows) were able to avoid—at least for a while—some of the even more costly means of obtaining funds to meet the credit demands of their customers in the face of severe attrition in deposits. Banks less well situated had to adjust their lending behavior more quickly, and they had to rely more heavily on the liquidation of U.S. Treasury issues and borrowing from domestic sources. Because of the ready access to Euro-dollars (although admittedly at a high and rising cost), the multi-national banks found it less urgent to adopt more restrictive current lending standards or to limit their new commitments to lend to the business sector in the future. Of course, under the conditions of substantial monetary restraint maintained through 1969 and into early 1970, even the largest banks with access to Euro-dollars eventually had to reduce the expansion of credit to the private sector. But, for quite a while, they postponed adopting that course through reliance on Euro-dollars. The sectors which benefited most from the banks' access to Euro-dollars can be examined next. - 32 VI. Banks Reactions to Monetary Policy: Uses of Funds The supply of funds by commercial banks to the principal sectors of the economy can be traced in the behavior of their loans and investments. In Table 8 is shown the volume of these financial assets outstanding on December 31, 1967 and 1971 and on June 30, 1972. Several features of these data should be noted, since they provide a rough indication of the distribution of bank credit during periods when the money and capital markets were relatively free of stresses resulting from monetary policy. The ways in which the banks reacted as monetary policy became increasingly restrictive can then be charted. On all three dates, the household sector had received about the same proportion (just under one-fifth) of total bank credit outstanding at weekly reporting banks. (As indicated, bank credit to this sector consists of consumer loans, 1-4 family real estate loans, and loans to purchase or carry securities.) The household share of total bank credit supplied by the different classes of banks was also essentially the same on these dates. However, the three groups of banks vary markedly in the extent to which they lend to households. For example, about one-sixth of the funds supplied by multi-national banks went to households, among regional banks, the proportion was just under one-fifth, and it was around one-quarter among local banks. The business sector had received about half of the credit outstanding at weekly reporting banks on each of the three dates. Table 8. Total Principal Sector Loans and Investments of Weekly Reporting Banks, By Class of Bank. December 31, 1967 and 1971 and June 30, 1972 (Amounts in Millions of Dollars) December 31. 1967 MultiNational Regional Banks Banks Local Banks Total December 31, 1971 MultiNational Regional Banks Banks Local Banks 32a Total June 30. 1972 MultiNational Regional Banks Banks Local Banks Household Sector 16,159 Consumer loans Real estate loans (1-4 family) 18,712 Loans to purchase or carry sec. 2,555 37,426 Sub-Total 4,880 8,183 1,156 14,219 4,394 4,106 614 9,114 6,885 6,423 785 14,093 23,876 22,209 2,604 48,689 6,777 9,300 981 17,058 6,254 4,753 785 11,792 10,845 8,156 838 19,839 25,129 23,903 2,823 51,855 7,055 9,868 1,064 17,987 6,544 5,230 862 12,636 11,530 8,805 897 21,232 18.63 14.92 18.90 24.55 17.82 14.00 17.51 23.60 18.36 14.18 18.28 24.56 1,889 467 2,356 743 187 930 420 68 488 726 212 938 2,322 404 2,726 931 140 1,071 495 49 544 896 215 1,111 2,579 442 3,021 1,052 139 1,191 549 65 614 978 238 1,216 1.17 0.98 1.01 1.63 0.88 0.81 1.32 1.07 0.94 0.89 1.41 66,364 38,504 14,687 13,173 83,756 44,752 19,769 19,235 85,106 44,700 20,392 20,014 9,132 NA 3,010 NA 2,207 NA 3,915 NA 12,688 2,540 4,061 1,078 3,041 690 5,586 772 13,741 3,107 4,579 1,215 1,004 5,962 888 17,678 93,174 10,384 51,898 4,155 21,049 3,139 20,227 25,057 124,041 15,299 65,190 5,813 29,313 3,945 29,538 28,205 130,159 18,056 68,550 6,259 30,855 3,890 30,754 46.37 54.44 43.65 35.25 45.38 53.48 43.54 35.15 46.08 54.05 44.63 35.57 3,147 Share of total (Z) Business Sector Farm Loans to farmers Real estate loans, farmland Sub-Total Share of total (Z) Nonfarm Business loans Real est. loans, nonfarm, nonres. Real est. loans, multi-fam. Loans to fin. inst. & brokers & dealers Sub-Total Share of total (Z) 1.00 2,354 864 753 737 10,439 3,080 4,018 3,341 11,175 4,270 3,758 1.17 0.91 1.56 1.28 3.82 2.53 5.97 3.97 3.96 3.37 5.44 3.64 97,884 53,692 22,290 21,902 137,206 69,341 33,875 33,990 144,355 74,011 35,227 35,117 48.71 56.33 46.23 38.16 50.20 56.89 50.32 40.44 51.11 58.36 50.96 40.62 28,360 2,549 30,909 11,170 959 12,129 7,331 602 7,933 9,859 988 10,847 29,425 5,493 34,918 12,765 1,737 14,502 6,897 1,387 8,284 9,763 2,369 12,132 26,499 5,611 32,110 11,573 1,500 13,073 5,934 1,518 7,452 8,992 2,593 11,585 Share of total (Z) 15.38 12.73 16.45 18.90 12.78 11.90 12.30 14.43 11.37 10.31 10.78 13.40 State and Local Government State & local gov't, sec. 28,972 12,386 7,539 9,047 44,378 16,994 11,384 16,000 45,095 17,384 11,497 16,214 14.42 12.99 15.64 15.76 16.24 13.94 16.91 19.03 15.97 13.70 16.63 18.76 59,881 24,515 15,472 19,894 79,296 31,496 19,668 28,132 77,205 30,457 18,949 27,799 29.80 25.72 32.09 34.66 29.02 25.84 29.21 33.46 27.34 24.01 27.41 32.16 4,263 1,474 5,737 2,031 858 2,889 1,097 244 1,341 1,135 372 1,507 6,025 2,056 8,081 3,095 889 3,984 1,525 469 1,994 1,405 698 2,103 6,536 2,465 9,001 3,367 1,015 4,382 1,694 622 2,316 1,475 828 2,303 2.86 3.03 2.78 2.63 2.96 3.27 2.96 2.50 3.19 3.45 3.35 2.66 200,928 95,315 48,217 57,396 273,272 121,879 67,329 84,064 282,416 126,837 69,128 86,451 Banks: Federal funds sold Share of total (%) All Business: sub-total Share of total (Z) Government Sector Federal Government U.S. Treasury securities Federal agency securities Sub-total Share of total (X) All Government; sub-total Share of total (Z) Qthef Loans Other Securities Sub-total Share of total (X) Total Loans & Investments Source: Call Reports, HA Not Available. - 33 Here also the proportions differed considerably among the classes of banks. Credit to the business sector represented just under three-fifths of the total outstanding at multi-national banks; about one-half at regional banks, and roughly two-fifths at local banks. Within the business sector, loans to the farm segment represented about 1 per cent of total bank credit at each class of bank on each of the three dates. Loans to other banks (defined as Federal funds sold) showed a major change between 1967 and 1971. On the earlier date, such loans represented only 1 per cent of total bank credit at weekly reporting banks; the share was slightly lower at multi-national banks, slightly higher at local banks and still somewhat higher at regional banks. By 1971, however, the proportion had climbed to almost 4 per cent for all weekly reporting banks. banks; It was nearly 6 per cent at regional 2-1/2 per cent at multi-national banks, and it was around 4 per cent for local banks. of this year. Roughly the same profile was evident on June 30 This growth of the Federal funds market is basically a structural change which resulted from the efforts of banks to obtain funds during the period of severe monetary restraint in 1969 and early 1970. Bank lending to the nonfarm business sector, as mentioned above, was pf special interest to the Federal Reserve System in those years. (As defined in this paper, bank credit to this sector consists of commercial and industrial loans, loans secured by nonfarm nonresidential real estate, multi-family mortgages, and loans to financial institutions and brokers and dealers.) As shown in Table 8, bank credit to the - 34 nonfarm sector represented about 46 per cent of the total outstanding on all three dates. The share was approximately 54 per cent at multi-national banks; at local banks. by commercial 44 per cent at regional banks, and 35 per cent The proportion of bank credit to business represented and industrial loans varied somewhat by class of bank. For all weekly reporting banks and for regional banks, the fraction was about two-thirds; for multi-national banks it was around three- fourths, and for local banks it was roughly three-fifths. Bank credit supplied to the government sector declined slightly—from 30 per cent of the total in 1967 to 27 per' cent on June 30 this year. The division between the Federal Government and State and local governments changed somewhat. The former's share declined from 15 per cent at the end of 1967 to 11 per cent at the end of last June, the latterfs share rose slightly from 14 per cent to 16 per cent. Monetary Restraint and the Sectoral Supply of Bank Credit An analysis of the strategy of portfolio adjustment by commercial banks under the influence of changing monetary policy during recent years yields an inescapable conclusion: as policy became increasingly restrictive, the banks shifted credit progressively away from the household and government sectors in order to meet the needs of business borrowers. The details of this shift can be traced in the statistics presented in Table 9, showing changes in loans and investments of weekly reporting banks during,half-year periods for the years 1968-72. - 34a - Table 9. Principal Sector Changes in Loans and Investments of Weekly Reporting Banks, By Class of Bank, Half-Years, 1968-1972 (millions of dollars) Change: First Half, 1968 MultiNational Regional Local Total Banks Banks Banks Cha^e: Second Half, 1968 MultiNational Regional Local Banks Banks Banks Total 942 678 27 1,647 162 119 27 308 308 428 153 889 412 351 763 576 306 87 969 24.98 6.94 12.40 20.43 Household Sector Consumer loans Real estate loans (1-4 family) Loans to purchase or carry securities Sub-total Share of total (%) 283 290 497 269 573 766 1,296 1,085 240 2,621 11.41 35.99 33.26 11.05 139 66 205 92 10 102 38 12 50 9 44 53 3.11 3.78 3.14 2.30 2,442 558 NA 1,330 216 NA 498 113 614 229 — Business Sector Farm Loans to farmers Real estate loans, farmland Sub-total Share of total (7.) Nonfarm Business loans Real estate loans, nonfarm, nonres. Real estate loans, multi-family Loans to fin. inst. & brokers & dealers Sub-total Share of total (7*) Banks: Federal funds sold Per cent of total All Business: sub-total Share of total (7,) — -- — — — -- — -- -- -- -- -- — -- -- 3^000 1,546 611 843 5,012 725 NA 3,115 8,852 45.50 57.28 38.38 36.61 37.34 36.30 40.45 36.07 384 5.82 374 13.86 10 0.63 3,603 15.19 2,740 21.38 624 10.14 239 5.04 3,589 2,022 671 896 12,455 7,391 3,114 1,950 54.43 74.92 42.15 38.91 52.53 57.68 50.59 41.11 1,721 1,721 1,093 45 1,138 757 48 805 - - -- NA NA — -- -- 2,643 186 NA 1,822 4,651 1,516 183 NA 791 2,490 NA 853 356 502 1,711 Government Sector Federal Government U.S. Treasury securities Federal agency securities Sub-total Share of total '(%) State and Local Government State and local government securities Share of total (7.) All Government: sub-total Share of total (X) Other Loans Other Securities Sub-total Share of total (X) Total Loans & Investments « -- -- — — - - — — -- 3,571 93 3,664 — — -- — 15.45 13.43 18.49 16.97 — -- -- 1,030 292 170 568 4,055 2,168 961 926 15.62 10.82 10.68 24.66 17.10 16.92 15.61 19.53 1,030 292 170 568 7,719 3,889 2,099 1,731 15.62 10.82 10.68 24.66 32.55 30.35 34.10 36.50 229 99 328 77 77 170 8 178 59 14 73 762 155 917 542 103 645 135 44 179 85 8 93 4.97 2.85 11.18 3.17 3.87 5.03 2.91 1.96 6,594 2,699 1,592 2,303 23,712 12,814 6,155 4,743 - 34b Table 9 (continued) Principal Sector Total Change: First Half, 1969 Multinational Regional Local Banks Banks Banks Change, Second Half, 1969 MultiNational Local Regional Banks Banks Banks Total Household Sector Consumer loans Real estate loans (1-4 family) Loans to purchase or carry securities Sub-total Share of total (7.) 1,104 123 1,227 10.92 345 264 92 356 31 526 920 296 24 1,240 15.31 11.71 12.46 — 345 7.81 495 251 81 24 356 — — — 669 215 -- 884 15.90 24.68 343 606 231 Eusiness Sector Farm Loans to farmers Real estate loans, farmland Sub-total Share of total (7.) Nonfarm Business loans Real estate loans, nonfarm, nonres. Real estate loans, multi-family Loans to fin. inst. & brokers & dealers Sub-total Share of total (%) Banks: Federal funds sold Per cent of total All Business: sub-total Share of total (%) Government Sector 168 97 265 95 4 99 59 90 149 14 3 17 2.36 2.24 6.41 0.38 4,436 567 1,982 78 7,063 2,185 323 948 78 3,534 1,162 172 441 1,089 72 593 1,775 62.88 80.04 76.30 300 2.67 300 6.79 7,628 3,933 1,924 1,771 6,861 67.91 89.07 82.71 39.44 2,013 82 1,754 3,022 313 245 1,410 4,990 908 3,003 245 184 772 318 1,215 39.06 50.12 72.66 34.48 33.92 544 24.30 1,327 37.04 3,003 1,316 2,542 68.92 72.66 58.78 70.96 768 57 825 143 26 169 30 100 130 19.96 7.55 3.63 -- — — 1,871 18.80 -- — -- -- -- -- Federal Government U.S. Treasury securities Federal agency securities Sub-total 1,763 - - -- 1,763 1,763 - - -- 1,763 941 183 1,124 Share of total (7.) 15.70 — -- 39.27 11.29 -- 373 398 -- -- 8.31 4.00 2,136 — -- 2,136 1,522 825 567 130 19.02 — — 47.58 15.29 19.96 25.32 3.63 305 305 State and Local Goveriment State and local government securities Share of total (%) All Governnent: sub-total Share of total (7.) Other Other Loam Securities Sub-total Share of total (%) Total Loans 6i Investments 373 3.32 « -- 241 138 46 57 241 138 46 57 305 26 331 2.15 3.12 1.98 1.27 3.33 7.38 11,232 4,416 2,326 4,490 9 t 954 4,133 398 -- 17.78 -- -- — 2,239 26 26 0.73 3,582 - 34c - Table 9 (continued) Principal Sector Change, First Half. 1970 MultiNational Regional Local Total Banks Banks Banks Change: Second Half, 1970 MultiNational Regional Local Banks Total Banks Banks Household Sector Consumer loans Real estate loans (1-4 family) Loans to purchase or carry securities Sub-total Share of total (7.) 400 80 480 10.25 111 47 — 158 -- 9.15 -- 1,289 33 1,093 309 215 402 135 1,617 537 6.66 5.66 313 138 451 378 174 77 629 6.54 7.97 -- 322 14.20 -- Business Sector Farm Loans to farmers Real estate loans, farmland Sub-total Share of total (%) Nonfarm Business loans Real estate loans, nonfarm, nonres. Real estate loans, multi-family Loans to fin. inst. & brokers & dealers Sub-total 128 15 143 72 72 31 25 15 40 4.17 4.51 1.76 1.05 798 46 99 160 — -- 2,271 400 700 22 528 132 1,043 246 -- -- 638 46 99 943 — 3.05 -- 31 -- 15 241 256 — — 15 241 256 -- 3.24 160 783 3,367 6,038 1,914 2,636 967 1,627 486 1,775 Share of total (%) 20.14 -- 23.25 34.53 24.89 27.80 23.60 22.49 Banks: Federal funds sold Per cent of total 683 14.59 11 0.64 77 11.19 595 26.23 3,098 12.77 473 4.99 1,456 21.12 1,169 14.81 All Business: 1,769 83 268 1,418 9,392 3,109 3,083 3,200 37.78 4.81 38.95 62.52 38.71 32.79 '-.4.72 40.54 272 272 170 170 47 47 55 55 6,382 1,774 8,156 3,442 686 4,128 1,362 513 1,875 1,578 575 2,153 5.81 9.85 6.83 2.43 33.61 43.54 27.20 27.28 2,009 1,247 327 435 4,476 1,291 1,423 1,762 42.91 72.25 47.53 19.17 18.44 13.62 20.64 22.33 2,281 1,417 374 490 12,632 5,419 3,298 3,915 48.72 82.10 54.36 21.60 52.05 57.16 47.84 49.61 38 38 344 282 626 260 156 416 sub-total Share of total (%) Government Sector Federal Government U.S. Treasury securities Federal agency securities Sub-total Share of total (7o) State and Local Government State and local government securities Share of total (7.) All Government: sub-total Share of total (%) Other Loans Other Securities Sub-total Share of total (7.) Total Loans & Investments 24 128 152 __ • __ 68 68 24 22 46 3.25 3.94 6.69 1.68 2.58 4,682 1,726 688 2,268 24,267 __ 62 62 84 64 148 4.39 0.90 1.88 9,481 6,894 7,892 - 34d - Table 9 (continued) Change: First Half, 1971 MultiLocal national Regional Banks Banks Banks Total Principal Sector Household Sector Consumer loans Real estate loans (1-4 family) Loans to purchase or carry securities Sub-total Share of total Business Change: Second Half, 1971 MultiNational Regional Local Banks Banks Banks Total (%) 681 1,479 1,721 78 3,278 461 686 17 1,164 326 402 2 730 692 633 59 1,384 10.54 14.56 18.81 17.76 14.05 24.37 43 85 3 5 8 585 773 39 1,397 123 377 16 516 98 79 23 200 13.96 15.03 267 139 364 317 Sector Farm Loans to farmers Real estate loans, Sub-total 68 19 87 267 139 43 85 71 24 95 (%) 2.67 4.05 2.27 1.82 0.55 0.12 Nonfarm Business loans Real estate loans, nonfarm, nonres. Real estate loans, multi-family Loans to fin. inst. & brokers & dealers Sub-total 525 451 293 664 1,933 76 175 547 798 159 57 216 525 216 61 117 919 1,777 698 134 2,933 5,542 142 214 26 1,852 2,234 1,001 209 8 745 1,963 634 275 100 336 1,345 19.32 23.26 11.38 19.65 31.79 34.09 37.78 23.68 660 6.59 169 4.92 491 10.50 2,675 15.35 773 11.80 1,234 23.74 668 11.76 2,860 1,106 259 1,495 8,312 3,015 3,197 2,100 28.58 32.23 13.65 31.97 47.69 46.01 61.52 36.97 899 720 1,619 899 88 987 590 590 2,458 501 2,959 1,149 42 42 1,149 694 207 901 615 294 909 16.18 28.76 2.21 12.62 16.97 17.53 17.33 16.00 3,943 823 1,325 1,795 2,260 878 230 1,152 Share of total Share of total farmland (%) Banks: Federal funds sold Per cent of total A I T Business: sub-total Share of total (7.) Government — - - 1.53 - Sector Federal Grvernment U.S. Treasury securities Federal agency securities Sub-total Share of total (%) State and Local Government State and local government Share of total All Government: (X) 39.41 23.98 69.81 38.39 12.97 13.40 4.43 20.28 sub-total 5,562 1,810 1,367 2,385 5,219 2,027 1,131 2,061 55.59 52.74 72.02 51.01 29.94 30.93 21*76 36*28 Share of total (7.) Other Loans Other Securities Sub-total Share of total (%) Total Loans & Investments securities 187 187 - - 72 72 115 115 410 211 621 271 76 347 84 55 139 55 80 135 1.87 — 3.79 2.46 3.56 5.30 2.67 2.38 1,898 4,676 17,430 6,553 5,197 5,680 10,006 3,432 Table 9 (continued) Principal Sector Total - 34e Change: First Half, 1972 MultiNational Regional Local Banks. Banks Banks Household Sector Consumer loans Real estate loans (1-4 family) Loans to purchase or carry securities Sub-total 1,253 1,694 219 3,166 278 568 83 929 290 477 77 844 685 649 59 1,393 23.21 14.43 27.93 33.34 121 121 54 16 70 82 23 105 2.17 1.88 2.32 2.51 1,402 1,053 567 3,203 6,225 518 137 2,757 3,412 623 159 314 446 1,542 779 376 116 1,271 Share of total (7.) 45.64 52.98 51.02 30.42 Banks; Federal funds sold Per cent of total 1,190 8.72 1,190 18.48 7,711 56.53 4,723 73.34 Share of total (%) Business Sector Farm Loans to farmers Real estate loans, farmland Sub-total Share of total (%) Nonfarm Business loans Real estate loans, nonfarm, nonres. Real estate loans, multi-family Loans to fin. inst. & brokers & dealers Sub-total All Business: sub-total Share of total (£) Government Sector 257 39 296 Federal Government U.S. Treasury securities Federal agency securities Sub-total 771 355 1,126 Share of total (%) 8.26 — — — « __ __ — 1,612 53.34 1,376 32.93 131 131 771 224 995 4.33 23.82 State and Local Government 717 390 113 214 5.26 6.05 3.74 5.12 1,843 390 244 1,209 State and local government securities Share of total (%) All Government: sub-total 13.52 6.05 8.07 28.94 Share of total (%) Other Loans Other Securities Sub-total 511 409 920 272 126 398 169 153 322 70 130 200 Share of total (%) 6.74 6.18 10.66 4.79 13,640 6,440 3,022 4,178 Total Loans & Investments - 35 The figures shown in Table 10 cast the situation in even more dramatic relief. These data show the share of major sectors in the total volume of additional credit supplied by the different classes of banks during each of these periods. In the first half of 1968, monetary policy was generally more restrictive than it had been in the previous six months, but the degree of restraint was much less than that achieved a year later. Nevertheless, the impact of restraint was greater for multi-national banks (which experienced some CD attrition in the first half of 1968) than for other weekly reporting banks. flows reflected these circumstances. The pattern of bank credit For example, households got about one-fourth of the net credit extended by all weekly reporting banks; businesses got 54 per cent, and the government sector got 15 per cent. However, the major share of credit supplied by multi-national banks (three-fourths of the total) went to the business sector. It will be recalled that loans to the business sector represented about 56 per cent of total credit outstanding at these banks at the end of 1967. Households and governments each received about 11 per cent in the first half of 1968. At the end of the previous year, households had 15 per cent of the total credit outstanding at these banks, and the government sector had 26 per cent. In contrast, both regional and local banks channel around one-third of their new lending to the household sector in the first six months of 1968, and the business sector got - 35a Table 10. Share of Major Sectors In the Net Credit Extended By Weekly Reporting Banks, By Class of Bank, 1968-1972 (Half-Years; Percentage of Total Uses of Funds) 1/ Year 6t Quarter All Weekly Reporting Banks Household Business Government 1968 I II 1969 I II 1970 I II 1971 I II 1972 I l7 Multi-Natlonal Banks Household Business Government Household Household Local Banks Business Government 25 11 54 52 15 33 11 7 75 58 11 30 36 12 42 51 11 34 33 20 39 41 25 37 11 13 67 69 19 15 8 0 89 73 0 20 15 16 83 59 0 25 12 25 39 71 48 4 10 7 38 38 49 52 9 6 5 33 82 57 0 7 39 45 54 48 14 8 63 41 22 50 14 19 29 48 56 30 15 18 32 46 53 31 11 14 14 62 72 22 15 24 32 37 51 36 23 57 14 14 73 6 28 53 8 33 33 29 vlll Figures not add to 100 per cent because residual amounts of other loans and other securities are not shown here. (See Table 9 for details.) Regional Banks Business Government - 36 roughly two-fifths. The government sector got one-eighth of the credit supplied by regional banks and one-quarter of that supplied by local banks. As monetary policy eased somewhat in the last half of 1968, the sectoral distribution of bank credit flows moved closer to the long-run contours sketched above. In 1969, however, under the impact of severe monetary restraint, the pattern of bank credit flows was altered markedly In the first half of that year, the share of total bank credit received by the household sector shrank drastically while that received by the business sector rose well above its long-run proportion. For all weekly reporting banks, business got over two-thirds of the credit supplied in both halves of the year, and households got about around one-eighth. Governments got one-fifth in the first six months and one-sixth in the last half of the year. The shift of credit supplied away from households and governments and to the business sector was most marked at multinational banks. In the first half of the year, they channeled 8 per cent of the credit extended to households. However, in the last half, the volume of loans outstanding to consumers actually shrank. Thus, the multi-national banks, in effect, liquidated loans to households and re-employed the funds elsewhere. The same thing had occurred with respect to the government sector in the first six months of the year. - 37 Loans to the business sector absorbed nearly nine-tenths of the total bank credit supplied by multi-national banks in the first six months of 1969, and the share was almost three-quarters during the July-December months. Moreover, within the business sector, the multi-national banks also expanded their commercial and industrial loans (relative to other forms of lending to businesses) as credit conditions became more restrictive. Thus, in both the first half of 1968 and the last half of 1969, these loans accounted for two-thirds of the credit which these banks supplied to the business sector. In the last half of 1968, the proportion was just over one-third, but it climbed to almost three fifths in the first six months of 1969. The regional banks also greatly expanded the proportion of total credit which they supplied to the business sector in 1969. They did so primarily by reducing the proportion of their funds which went to finance the government sector; yet, they also cut back somewhat on the share supplied to households. Thus, in the first half of 1969, the regional banks channeled four-fifths of their credit extensions to business firms compared with two-fifths in the same period of the previous year. In the second half of 1969, the business sector got three-fifths of the total vs. one-half in the July-December months of 1968. The share of credit supplied by regional banks received by the household sector amounted to 15 per cent in the first half of 1969 vs. 36 per cent in the same period a year earlier. In the second - 38 half of both years, the share received by the household sector was not appreciably greater--12 per cent compared with 16 per cent in 1969. The regional banks had a net liquidation of government securities in the first half of 1969, and this sector received one-quarter of the total credit extended by regional banks in the last half of 1969. In the case of local banks, the business sector received roughly the same share (two-fifths) of the credit supplied in the full year 1968 and in the first half of 1969. However, in the last six months of 1969, the proportion rose to 71 per cent. These figures reinforce the general impression one got at the time as officials of large corporations moved progressively down the size scale of banks in search of loans. Nevertheless, of the three classes of banks, the local institutions proved a more reliable source of credit for households throughout the period. The same was true in the case of the governnent sector. The impact of business borrowing at the smaller banks continued to be evident as 1970 unfolded. Throughout that year, both the regional and local banks channeled to the business sector a larger share of the credit they supplied than was true in the case of multi-national banks. In contrast, the latter institutions experienced a substantial diminution in the demand for credit by business firms in the first half of 1970, and only moderate recovery occurred during the following 12 months. To some extent, this slower pace of business credit demands at - 39 multi-national banks reflected the impact of the 1969-70 recession. But it also partly reflected the attempt of large corporations to restructure their balance sheets and restore liquidity through the issuance of long- term debt in the capital market. At the same time, the demand for credit by households (again partly reflecting the impact of the recession) also remained rather moderate. Consequently, the multi-national banks ended up channeling to the government sector a much higher proportion of the total credit they supplied than they normally do in the long-run. In contrast, both the regional and local banks maintained through the first half of 1971 the volume of business lending—compared with alternative outlets for their funds—at levels much closer to the long-run proportion. Beginning in the last half of 1971, multi-national banks began to expand business loans again--relative to other uses of funds—and the pace accelerated in the first half of 1972. The regional banks also saw a relative spurt in business lending in the July-December months of last year. And while the pace slackened somewhat in the first half of this year, business lending remained close to the long-run share. Moreover, lending to business by local banks continued close to the long-run ratio. - 40 The foregoing analysis, in my judgment, clearly supports the conclusion stated succinctly above: during periods of severe monetary restraint in 1969 and early 1970, all of the weekly reporting banks channeled proportionately more of their funds into the business sector and away from the household and government sectors* As monetary conditions became easier, the pattern was reversed-^-but with the government sector serving more as a cushion than was true of the household sector. Among the three classes of banks, the sectoral supply of funds by the multi-national banks was the most volatile. In fact, the degree of variation in the share of funds which they supplied to particular sectors was much greater than is indicated when one looks at the traditional categories (such as business loans, home mortgages, etc.) of commercial bank lending. Sectoral problems arising from the differential impact of monetary policy have been of continuing concern to the Federal Reserve Board, and the latter has taken a number of steps in efforts to cope with the situation. -41VII. Reserve Requirements and Monetary Management Among the measures adopted by the Federal Reserve Board to moderate the differential effects of monetary policy is the imposition of reserve requirements against Euro-dollars which became effective in late 1969. The Board has also suggested to Congress that a major adaptation of the investment tax credit be made with the same objective in mind. I have shared this concern, and I have supported the measures adopted. In fact, I have gone even further and have advocated an extension of the reserve requirement instrument to achieve an even broader range of objectives with respect to monetary policy. In Mach, 1969, I suggested that the Board impose some form of reserve 6/ requirements against Euro-dollar borrowings by American banks.Subsequently, I discussed the possibility of substituting reserve requirements against foreign assets held by U.S. banks for the Voluntary Foreign Credit Restraint Program (VFCR) administered by the Federal 7/ Reserve Board. Over two years ago, I suggested that the latter approach be broadened to include differential reserve requirements against specified 8/ types of domestic assets. This latter proposal ultimately got a 6/ See Andrew F. Brimmer, "Euro-Dollar Flows and the Efficiency of U.S. Monetary Policy,11 presented at the New School for Social Research, New York, New York, March 8, 1969. (A modified version was published in The Banker, April," 1969, pp. 352-355. 2/ "Capital Outflows and the U.S. Balance of Payments: Review and Outlook,11 presented before the Board of Directors of the Federal Reserve Bank of Dallas, Dallas, Texas, February 11, 1970. 8/ "The Banking Structure and Monetary Management,11 presented before the San Francisco Bond Club, April 1, 1970. -429/ hearing before a Congressional Conanittee in the Spring of 1971r These proposalshave had a mixed reception, but I still believe they have merit. Moreover, they are essentially another stage in the long-run evolution of reserve requirements in the United States. Reserve Requirements in Historical Perspective At this juncture, it might be helpful to digress briefly to stress a few points that are frequently overlooked in discussions of the appropriate role of required reserves in the banking system. Unfortunately, even today the fact that such reserves are useful purely as instruments of monetary management is not fully understood by the public at large—and the possibility of extending this function further is even less appreciated. In the United States, several historical experiences with required reserves are quite instructive. It will be recalled that the National Banking Act of 1863 for the first time established legal reserve requirements for Federally-chartered banks. The basic assumption was that required reserves would provide liquidity for both bank notes and deposits. National banks in central reserve and reserve cities had to maintain reserves equal to 25 per cent of outstanding notes and deposits, and for banks in other cities (country banks) the ratio was 15 per cent. T7 Statement before the Subcommittee on Financial Institutions of the Comnittee on Banking, Housing and Urban Affairs, U.S. Senate, April 7, 1971. Reprinted in the Federal Reserve Bulletin, April, 1971, pp. 307-319. -43The requirement for notes was dropped in 1874. The notion that reserves were assumed to provide liquidity for individual banks was evidenced by the form in which required reserves could be held: central reserve cities, vault cash; for banks, in for reserve city banks, half in vault cash and half in deposits in central reserve or reserve city banks; for country banks, two-fifths in vault cash and three-fifths in deposits in reserve city or central reserve city banks. The record of American economic history shows quite clearly that the system of required reserves established under the National Banking Act failed to meet the liquidity goal each time it was tested. The reason for the failure (the impossibility of an individual bank being able to liquidate enough assets to meet withdrawals during periods of crisis) was understood by only a few observers. Perhaps that fact explains why the concept of "pooling11 reserves was carried over into the Federal Reserve Act of 1913. While a few innovations were made in the administration of required reserves, the idea that they were needed as a source of liquidity persisted until the mid-19301 s. By an amendment to the Federal Reserve Act in May, 1933 (referred to as the Thomas Amendment), authority was given for the first time to vary reserve requirements for member banks. However, the authority was subject to the proclamation of an emergency by the President (which was never done in this connection), and the authority was never used. In the Banking Act of 1935, the discretionary authority was given to the Federal Reserve Board directly. This step represented a clear recognition -44of the role of required reserves as a tool of monetary control--which could be used to influence directly the rate of expansion of aggregate bank credit. The Board has made considerable use of this authority since it was first employed in August, 1936. In my opinion, the next step in the evolution of the reserve requirement tool should be to make it more useful in cushioning the impact of shifts in bank credit flows on particular sectors of the economy. The suggestion that the Board have authority to set supplemental reserve requirements on bank assets represents such an innovation. Evolution of Reserve Requirements in Recent Years The suggestion that one of the traditional instruments of monetary policy be reordered to influence the cost and availability of credit in particular economic sectors is not especially startling. As a matter of fact, the Federal Reserve Board has shown considerable flexibility in the use of reserve requirements in the last few years. For the most part, this involved tailoring changes in such requirements to differentiate the impact by size of bank--as implied by deposit size. Moreover, in November of this year, the Board scrapped the geographic element in reserve requirements and instituted a graduated structure based on size of bank. In July, 1966, the reserve requirement on time deposits over $5 million was raised from 4 per cent to 5 per cent—and kept at 4 per cent on deposits below that amount. In September of the same year, the -45percentage was raised further to 6 per cent on the $5 million and over category; again no change was made for amounts below that figure. In March, 1967, in two 1/2 percentage point steps, reserve requirements were cut from 4 per cent to 3 per cent on savings deposits under $5 million. The requirement was left at 6 per cent on time deposits over $5 million. In January, 1968, the Federal Reserve Board also began to differentiate reserve requirements on demand deposits. At that time, the requirement was raised from 16-1/2 per cent to 17 per cent on deposits over $5 million at reserve city banks, while the requirement on amounts below this figure was left unchanged. At country banks, the corresponding increase was from 12 per cent to 12-1/2 per cent for demand deposits over $5 million, while it remained at 12 per cent on amounts below that cutoff. In April, 1969, a 1/2 percentage point increase was made effective at all member banks and on all demand deposits while maintaining the 1/2 percentage point differential on demand deposits above and below $5 million. Reserve Requirements and Euro-Dollar Borrowing by Multi-National Banks Undoubtedly, the most imaginative use of reserve requirements in recent years occurred in 1969-70. Several measures adopted in that period altered greatly the behavior of U.S. banks in the Euro-dollar market. The effects of two of these measures (i.e., the imposition of marginal reserve requirements on Euro-dollar borrowings by American banks and restrictions on the use of mainly overnight deposits to reduce required -46reserves) can be traced reasonably well. In addition, other moves aimed primarily at moderating banks1 access to domestic sources of funds also had indirect effects in the Euro-dollar market. American banks increased their use of Euro-dollar funds by about $7.2 billion between January 1 and June 25, 1969. This competition for funds exerted extreme pressure on Euro-dollar deposit rates. For example, the 3-month deposit rate--which was 7 per cent at the end of 1968--climbed sharply during January and February and again during May and June, reaching a record 12-1/2 per cent on June 10. During June, U.S. banks1 borrowing of Euro-dollar funds through their overseas branches accelerated sharply and Increased about $3 billion during the first three weeks of that month alone. Marginal Reserve Requirements; Against this background of enormous expansion in Euro-dollar borrowing by American banks, the Federal Reserve Board proposed amendments to its regulations at the end of June to moderate the flow of Euro-dollars between U.S. banks and their foreign branches and also between U.S. and foreign banks. These amendments focused on the three major channels through which Euro-dollar funds may affect credit availability in the United States: --The flow of Euro-dollar funds between U.S. bank head offices and their overseas branches. --The flow of credit between U.S* overseas branches— which draw on Euro-dollar funds--and U.S. residents. --The flow of Euro-dollar funds between U.S. banks and foreign banks which are not branches. -47Briefly, a 10 per cent marginal reserve requirement was proposed on U.S. bank liabilities to overseas branches and on assets acquired by overseas branches from their U.S. head offices in excess of outstandings during a base period, defined as the four weeks ending May 28, 1969. The reserve-free base was made subject to automatic reduction—unless waived by the Board—when, in any period used to calculate a reserve requirement, outstanding amounts subject to reserve requirements fall--and are below—the original base. A 10 per cent marginal reserve requirement was proposed for U.S. branch loans to U.S. residents in excess of outstandings during a given base period, which could be calculated in one of two optional ways. Finally, the Board proposed to define deposits against which required reserves are calculated to include any non-deposit borrowing by a member bank from a foreign bank. A 10 per cent reserve requirement was proposed for deposits of this class. These proposals were adopted by the Board with an effective date of September 4, 1969—when the first four-week "reserve computation period" began. The average liabilities of a bank to its overseas branches during the reserve computation period was compared with its base—the average of such liabilities during the four week period ending -48May 28—to establish the amount of additional reserves it must hold. The first four-week "reserve maintenance period11 began October 16. During the maintenance period, a bank must hold on the average the additional reserves required on the basis of its excess Euro-dollar holdings from its overseas branches during the previous computation period. The impact of these measures on the behavior of multinational banks can be assessed fairly accurately. this analysis, three time periods were identified: For purposes of (1) from June 25 to September 3, the period during which the Board's marginal reserve proposals were pending; (2) from September 4 to October 1, the first reserve computation period; and (3) from October 16 to November 5, covering most of the first reserve maintenance period. American banks continued to increase their borrowings of Eurodollar funds during July and August—raising liabilities to overseas branches $1.3 billion during those two months to a new peak level of $14.8 billion. As shown in Table 11, most of the increase, however ($1.1 billion), occurred during July. The Euro-dollar market was able to accomodate the continuing demand for funds from U.S. banks without any further increase in interest rates. Rates had dropped sharply in late June as the immediate pressure on U.S. banks eased with the passing of corporate borrowing for tax - 48a Table 11 Liabilities of U.S. Banks to Their Foreign Branches 1/ (Millions U.S. Dollars) Date Outstandings December 30, 1964 December 29, 1965 December 28, 1966 December 27, 1967 January 1, 1969 Change from previous date 1,183 1,345 4,036 4,241 6,039 + 162 +2,691 + 205 +1,798 May 26 June 25 9,621 13,228 +3,582 +3,607 July 30 September 3 14,324 14,571 +1,096 + 247 October 1 14,111 - 460 October 8 15 14,609 14,970 + + 598 361 22 29 14,306 13,631 - 664 675 November 5 14,358 + 727 1969 1/ Exclusive of branch participations in head office loans to U.S. residents. -49payments, and the banks in turn put less pressure on the Euro-dollar market. By the end of June, the 3-month rate was down to about 10-1/2 per cent. It ranged between 10-1/2 and 11-1/4 per cent during July and August. In September—the first reserve computation period—U.S. banks decreased their Euro-dollar borrowings by nearly $1/2 billion. In fact, during the six weeks from August 20 to October 1, borrowings decreased in all but one weekly period and outstandings fell from $14.8 billion to $14.1 billion. Reduced demand pressures from U.S. banks no doubt were an important factor in the general--albeit very moderate— decline in Euro-dollar rates up to the last few days of September when typical quarter-end pressures in international money centers put some upward pressure on rates. Taking the third quarter of 1969 as a whole, demand pressures on the Euro-dollar market from U.S. banks were much more moderate than they were during the first half of the year. American banks increased their Euro-dollar borrowings by only $900 million between June 25 and October 1, compared with average quarterly increases of about $3-1/2 billion during the January-June period. To some extent, this reduced demand for Euro- dollars may have reflected the innovative skill of U.S. banks in developing domestic sources of non-deposit funds. -50Because of a number of cross-currents in the Euro-dollar market in October and November, 1969, it is difficult to estimate quantitatively the effects of the marginal reserve requirements on the borrowing behavior of U.S. commercial banks in that particular market. Although Euro-dollar rates declined during most of October, these banks sharply increased their borrowings of Euro-dollar funds in the first half of that month and subsequently repaid more than the previous rise. At the end of October, U.S. bank liabilities to their overseas branches were $13.6 billion, only slightly higher than the $13.2 billion outstanding at the end of June. Other cross-currents in the market after the beginning of October included a rather short-lived expectation of significantly lower interest rates in the United States and a large flow of funds out of German marks following the initiation of the transitional floating arrangement for the mark (and its subsequent appreciation)—which was reflected in a considerable decrease in official dollar holdings of the German central bank. As I mentioned above, September was the first reserve computation period for the Board's marginal reserve requirement against Euro-dollar borrowings. Using weekly data (the banks compute their borrowings on a daily average basis), it was estimated roughly that bank borrowings of Euro-dollars were roughly $4 billion more on the average during September than during May—the base period. Thus, during the four-week period beginning October 16, U.S. banks needed to maintain on the average slightly over $400 million of additional reserves. -51In passing, it might be observed that this additional amount of required reserves is not drastically different from the increase which would have resulted earlier in 1969 if a slightly different approach had been adopted then. As already indicated, in March of that year, I suggested that the Board consider applying average reserve requirements, at a 6 per cent rate, to the volume of Euro-dollar borrowings by U.S. banks. At the end of February, the total of such borrowings was just over $9.0 billion; thus, the rise in required 10/ reserves at that time would have been about $540 million; Another development related to the behavior of multi-national banks in the Euro-dollar scene (and one which can be traced directly to the imposition of the marginal reserve requirement) was the sharp increase between mid-September and the end of October in U.S. bank time liabilities to foreign official institutions. After falling rather consistently through July, foreign official time deposits in U.S. banks rose by $212 million in August and by more than $1.0 billion from September 10 to October 29, 1969. It would appear that some of the increase reflected a shift of official funds from the Euro-dollar market (including overseas branches of U.S. banks) to time deposits held directly with U.S. head offices. Part of the drop in U.S. bank Euro-dollar borrowings in late September and after mid-October may have reflected such a shift of funds by foreign official institutions. 107 However, it should be noted that a marginal reserve requirement provides a greater deterrent to additional future borrowing than does an average reserve requirement that involves the same increase in total required reserves. -52It may be that U.S. banks attempted to induce shifts of foreign official funds from branch to head office books to take advantage of the relatively lower reserve requirement associated with balances on head office books. For example, a shift of $1 million from the branch to head office (assuming that the funds were made available for head office use in either case and that the U.S. bank in question had Euro-dollar borrowings outstanding in excess of its base) would have released $100,000 from required reserves against Euro-dollar borrowings (where the marginal reserve requirement is 10 per cent) and absorb $60,000 into required reserves against time deposits with the head office--a net saving of $40,000 of reserves. The value of this saving of reserves would depend on the interest cost of reserves to the bank. If official funds could have been obtained for 10 per cent per annum through branches-~Euro-dollars-the head office may have been willing to pay up to 10.4 per cent per annum for the same funds directly—and could have done so because of the exemption of official funds from Requlation Q ceilings. Table 12 compares the cost of raising funds in these two alternative ways, from the point of view of the U.S. banks, after adjusting market quotations to reflect the additional cost associated with holding reserves in each case. As may be seen, once the Euro-dollar - 52a Table 12 Comparison of.Three-month Euro-dollar Deposit Bid Rates with Rates Offered by Prime Banks in New York for Three^month Foreign Official Time Deposits (1) Three-month Euro-$ Deposit!' Quoted Adjusted^/ Period 1969 1/ 2/ 3/ 4/ */ (2) * Mar. June 8.48 11.11 July Aug. 10.57 10.91 Sept,. 3 10 17 24 11.25 11.34 11.14 10.68 12.60 12.38 11.87 Oct. 11.08 10.65 10.43 9.63 9.10 12.31 11.83 11.59 10.70 10.11 1 8 15 22 29 * * * * (3) (4) Offer Rate for Foreign Official Time Deposits in New YorkZ' Quoted Adjusted^/ 7.00 8.75 - 7.75 9.62 7.45 9.31 9.00 _ 10.00 9.50 - 10.50 9.57 10.11 (5)=(2)-(4) Differential: Adjusted Euro-dollar Over Adjusted Time Deposit Offer Rate - 8.24 10.23 +1.03 +1.80 +0.24 +0.88 - 10.63 11.17 +1.00 +0.80 -0.06 -0.26 9.50 _ 10.88 9.50 - 10.88 9.88 - 10.88 10.12 - 10.88 10.11 _ 11.57 10.11 - 11.57 10.51 - 11.57 10.76 - 11.57 +1.14 +2.49 +1.87 +1.11 -0.32 +1.63 +0.81 +0.30 10.25 _ 10.88 10.25 - 10.88 9.88 - 10.62 9.38 - 10.50 8.38 - 10.00 10.90 _ 11.57 10.90 - 11.57 10.51 - 11.30 9.98 - 11.17 8.91 - 10.63 +1.41 +0.93 +1.06 +0.72 +1.20 +0.74 +0.26 +0.29 -0.47 -0.52 - - Average of daily figures for the last week (ending Wednesday) of the period. Range of rates offered for 90-179 day funds at prime New York City banks. To reflect the 10% marginal reserve requirement on U.S. bank liabilities to foreign branches. To reflect the 6% reserve requirement on head office time liabilities. Same as quoted rate; reserve requirement computation began in week ending September 10. -53marginal reserve requirement went into effect, Euro-dollar funds became considerably more expensive than funds attracted through official time deposits. From September 10 to late October, 1969, however, this advantage for the official time deposit source was gradually reduced as the official time deposit rate increased and Euro-dollar rates declined. In November, 1970, following significant reductions by some banks in outstanding Euro-dollar borrowings—and in reserve-free bases, the Board increased from 10 per cent to 20 per cent the rate of reserve requirement on borrowings in excess of reserve-free bases, thereby giving the banks an added inducement to preserve their reserve-free bases against a time of future need. applied the automatic At that time, the Board also downward adjustment to banks that operated under a minimum base equal to 3 per cent of deposits. On January 15, 1971, the Board amended its regulations to permit banks to count toward maintenance of their reserve-free bases any funds invested by foreign branches in Export-Import Bank securities offered under a program announced by that institution. At that time, the Board postponed for banks using a minimum base the application of the automatic downward adjustment of their bases. In April, 1971, a further amendment was made to the Board*s regulations which extended to direct Treasury securities the same privilege previously accorded the ExportImport Bank issues. -54On September 7 of this year, the Board proposed to eliminate the reserve-free bases and to reduce reserve requirements on Eurodollar borrowings from 20 per cent to 10 per cent. The proposal was intended to simplify the Euro-dollar regulations and to equalize treatment among banks by unwinding the historical advantages enjoyed by some banks because of the situations prevailing at the time the Eurodollar measures were adopted in 1969. On July 30 of that year, liabilities of U.S. banks to their foreign branches amounted to $14.3 billion. However, as already mentioned, as monetary conditions in the United States became less stringent in early 1970, U.S. banks paid down their Euro-dollar indebtedness. The pace of repayment accelerated. By the end of August, 1972, liabilities of U.S. banks to their foreign branches totaled $1-1/4 billion. Thus, it appeared that elimination of the reserve-free base would have little practical impact on most banks—since only a few banks have continued to borrow in the Euro-dollar market in 1972. On the other hand, while proposing to reduce the requirement from 20 per cent to 10 per cent, the Board indicated that it intended to keep in place the regulation imposing such requirements on Euro-dollar borrowings. Since the Board allowed 90 days for public comment on the proposals, no decision had been made as this paper was being completed. Yet, on the record to date, it seems reasonable to conclude that the Board still looks upon the marginal reserve requirements on Euro-dollar borrowings by U.S, banks as a useful tool in its monetary management kit. -55Reserve Requirements and Sales of Commercial Paper On October 29, 1969, the Federal Reserve Board announced it was considering amending its rules governing the payment of interest on deposits to apply to funds received by member banks from the issuance of commercial paper or similar obligations by bank affiliates. This was the last of the major domestic sources of funds to which U.S. commercial banks had resorted and which had remained beyond the reach of the Federal Reserve's interest rate ceilings or reserve requirements. (In addition to Euro-dollar borrowings, other sources with respect to which the Federal Reserve Board finalized and proposed regulatory changes in the Summer of 1969 included sales of participations in individual loans or pools of loans and the conversion of demand deposits into "Federal funds borrowings,11 which a few banks were attempting.) At the time of this announcement relating to commercial paper, about 58 banks had outstanding around $3.6 billion of such liabilities issued through their subsidiaries or related one-bank holding companies. All of this paper had been sold at yields far above the maximum interest rates payable on CD's. Between the end of July and the end of October, the number of banks offering commercial paper in some manner rose by 50 per cent, and the amount outstanding climbed by $1.8 billion (or 100 per cent). Of the total outstanding on October 29, roughly $0.4 billion had been issued by banks- subsidiaries. -56As matters developed, the Board did not subject commercial paper to the interest rate ceilings. Instead, in late October, 1969, the Board published for comment a proposal to apply reserve requirements to commercial paper when offered by a bank related corporation and when the proceeds are used to supply funds to the member bank. The Board put this issue aside for a time in early 1970, because of a desire to avoid exerting additional restraint on money and credit markets. However, the question was opened again in the summer of that year, and reserve requirements were applied to bank-related commercial paper effective in September, 1970. Demand deposit requirement percentages were applied to paper with initial maturities of less than 30 days, and time deposit requirements were applied to paper with longer maturities. This action was announced a month in advance of the effective date, and banks were able to shift most of their commercial paper funds into the time deposit requirement category. In this action, the Board lowered reserve requirements on time deposits over $5 million one percentage point to 5 per cent and established the new commercial paper requirement at the same time. Extending the Range of Reserve Requirements Against this widening use of reserve requirements, I again suggested that consideration be given to the application of a supplemental reserve requirement on loans extended by U.S. banks to both domestic and foreign borrowers. The arguments which can be advanced to support this proposition are essentially the same as those which I put forward -57in the Spring of 1970. The objective of the measure would be to raise the cost of bank lending by reducing the marginal rate of return to the bank making the loan--and thereby dampen the expansion of bank loans. The basic purpose of the supplemental reserve would not be simply to levy new reserve requirements on the banking system. If it were thought that its adoption would raise the average level of reserves required beyond what the Board thought was necessary for general stabilization purposes, the regular reserve requirements applicable to deposits of Federal Reserve member banks (and hopefully to nonmember banks as well)could be reduced. In making this suggestion, I began with the conviction that the Federal Reserve needs a better means of influencing the availability of credit in different sectors of the economy. At the same time, I am keenly aware of the desirability of assuring that the instrument used would minimize interference with normal business decisions and the economic forces of the market place. The banking community--within whatever outer limits of credit expansion the central bank considers are consistent with stabilization policy—can best allocate financial resources among individual borrowers. Therefore, banks, should be assured as much freedom of choice as the basic objectives of maintaining a balanced economy would permit. Since, during a period of inflation, the object would continue to be to restrain the growth of bank lending, rather than to burden the -58amount of lending achieved by some date in the past, the reserves might apply only to the amount of lending above some determined volume. That is, the cash reserves would constitute marginal, rather than average, required reserves. The approach might be varied so that a cash reserve requirement might be applied against whatever new loans the bank might extend rather than apply a marginal reserve against the amount of loans above the amount outstanding on a particular date. Under either variant of this approach, the percentage reserve requirement would be set on the basis of the Federal Reserve's determination of the degree of influence to be applied, for domestic stabilization or balance of payments reasons, against unchecked bank loan expansion. The restraint would be levied in proportion to the lending. The approach would not require immediate asset adjustments by each bank; instead it would leave the decision to individual banks to adapt their lending to the circumstances at the time. The loans that would be subject to the supplemental reserve requirement could be defined in a way that would take account of any set of priorities that Congress might establish from time to time. For example: if the objective of public policy were to give priority to loans to meet the credit needs of State and local governments, it could be achieved through a lower reserve ratio against State and local security holdings than the ratio applied to other assets. Loans to acquire homes could be encouraged—if public policy sails for giving housing a high -59priority—by setting the requirement very low, or perhaps at zero. In contrast, if policy called for substantial restraint on consumer credit or on loans to business, the reserve ratio applicable to such loans could be set quite high. In fact, any array of loan priorities could be adopted and the reserve requirement scaled accordingly— depending on the changing needs of public policy. Under ordinary circumstances, however, if there were no need to pursue a policy of monetary restraint--and consequently no need to be concerned about the side-effects of such a policy course--less differentiation among types of assets would be necessary. In fact, if there were no need to counteract any adverse by-products of monetary restraint, no supplemental reserve requirements would need to be established. If already employed, they would not have to be changed. Such a supplemental reserve requirement system sketched above would have the effect of cushioning the impact of monetary policy on particular sectors of the economy. As already indicated, the reactions to the proposal to introduce supplemental reserve requirements against bank assets got a mixed reception. In general, economists and bankers who believe that the central bank should not be concerned with the sectoral effects of monetary policy opposed the suggestion. On the other hand, even among those who share my uneasiness about the differential impact of monetary policy, several - 60 - reservations were expressed. The Federal Reserve Board itself was in 11/ the latter category. In testimony presented in the.Spring of 1971, the Board as a whole agreed that the proposal as embodied in a bill then before Congress should not be enacted at that time. the The majority of Board objected to a number of specific features of the draft legislation. I share some of these specific objections. However, the majority of the Board also voiced some more fundamental reservations which I did not share. Subsequently, at least one other Board Member, while not subscribing to the idea of supplemental reserve requirements, did express support for some variety of charge (perhaps a tax or reduced tax deductions) against bank loans to those sectors in which public policy sought to reduce 12/ the availability of credit during periods of monetary restraint."^ n r See Stgfcemefit of Arthur F. Burns on behalf of Subcommittee on Financial Institutions of the Housing and Urban Affairs, U.S. Senate, March in the Federal Reserve Bulletin, April, 1971, 12/ Sherman J. Maisel, "Credit Allocation and the presented before the Banking Research Center, University, April 22, 1971; the Board before the Committee on Banking, 31, 1971. Reprinted pp. 303-306. Federal Reserve11 Northwestern -61I can see the merit in the position taken by those who have reservations about the reserve requirements approach. Yet, my studies of the U.S. commercial banking system—including the analysis presented in this paper--have convinced me that the impact of monetary policy is by no means neutral with respect to particular sectors of the economy. Since the effects of monetary policy have their initial and major impact on the commercial banking system, the ways in which that system allocates credit must be taken into account In the conduct of monetary policy. One of the inescapable facts relating to the lending behavior of commercial banks—particularly the large multi-national institutions—is the extent to which they give priority to satisfying their corporate business customers over the credit demands of other sectors of the economy. Because of this strong network of customer relationships, the banks—in fact—set priorities that are not necessarily consistent with the overall objectives of public policy. For this reason, I believe Congress should legislate some means of coping with this problem. seem to me to be one approach. Supplemental reserve requirements In fashioning the tool to be used, Congress should indicate the priorities to be followed and the degree to which particular sectors are to be favored. -62VIII. Alternative Approach to the Stabilization of Sectoral Credit Flows As I have stressed throughout, my main objective is to smooth the differential sectoral impact of monetary policy. Whether this is done through supplemental reserve requirements or through another instrument is unimportant to me. One such alternative has been recommended by the Federal Reserve Board, and I joined my colleagues in the proposal. The core of the suggestion is the adoption of a variable investment tax credit. The proposal resulted from the Board's quest for means to improve the stability of credit flows to the housing 13/ sector. However, the benefits which would accrue from the implemen- tation of the proposal would extend far beyond this sector. The Board recommended a number of steps to improve the ability of thrift institutions to attract and retain consumer savings in the face of interest rate competition posed by market securities. These moves would lessen the disparity betwe en the intermediaries assets (composed mainly of long-term, fixed-yield loans) and their liabilities (composed mainly of short-term, interest-sensitive deposits). If these institutions were less vulnerable to deposit attrition, they would have available 13/ See "Ways to Moderate Fluctuations in the Construction of Housing," Report of the Board of Governors of the Federal Reserve System, March 3, 1972. Reprinted in the Federal Reserve Bulletin, March, 1972, pp. 215-225. -63a more assured inflow of funds which they could rechannel to finance housing. Another recommendation included the removal of a number of regulatory and legislative limitations which dampen the flow of mortgage credit during periods of monetary restraint. The Board also asked that consideration be given to allowing all depositary institutions to write variable interest rate mortgages — in addition to instruments carrying fixed rates. But, among the several proposals advanced, the Board urged Congress to give first priority to the institution of a flexible investment tax credit as a means of reaching a leading sector of the economy which is more resistent to effective policy control. The result would be an assurance that the corporate business sector would bear a meaningful share of the burden of monetary restraint during periods of excess demand for goods and services. The Board concluded that a new instrument is needed which would influence directly expenditures by businesses for equipment and machinery. As is widely recognized, these outlays are large in absolute terms; they represent a high proportion of total business spending, and they are subject to considerable cyclical variation. More fundamentally, while substantial share of business capital investment is financed with funds borrowed from banks or raised in other parts of the credit market, such outlays are sometimes slow to respond to monetary policy. Consequently, during periods of credit stringency, business firms have repeatedly attracted funds to pay for machinery and equipment which otherwise would have flowed into housing and other sectors. -64The Board recommended that--to assure that the investment tax credit have the necessary flexibility--the President be authorized to vary the tax rate within a specified range. from zero to 10 per cent or 15 per cent. The latter might be To set a limit on using this authority, the Board suggested that, before a rate change could be put into effect, Congress should retain the right to consider the proposed change for 60 days during which it could be disapproved by either the Senate or the House. This provision would make the administration of the investment tax credit parallel to the procedure used in the case of governmental reorganization plans. In operation, the investment tax credit would be liberalized during periods when the economy required stimulation, and it would become less generous when the task was to restrict aggregate demand. Again, the tax rate could be varied from zero up to 15 per cent. Several benefits would be expected to result from the flexible use of the instrument. In the first place, business demands for external financing should become much more stable. This in turn should produce greater stability in market interest rates and in the flow of funds to savings intermediaries. Since the latter are the principal sources of mortgage funds, the availability of housing finance would be more assured. But beyond the effects on housing, the stabilization of business demands for funds would also contribute to stability in the flow of funds to other sectors—such as State and local governments and consumers in addition to home buyers. -65The benefits resulting from greater stability of credit flows, in my judgment, are clearly worthwhile. I am convinced per- sonally that they outweigh the costs (in terms of interference with private decisions) which would have to be incurred to bring them about. In my view, it does not matter whether the instrument employed is a flexible investment tax credit or a supplemental reserve requirement against bank assets. burden. It is mainly a question of the locus of the The reserve requirement would rest on commercial banks, and the investment tax credit would rest on nonfinancial corporations. Both would represent the use of a market mechanism: the reserve requirement would be set by the Federal Government, and the banks would decide how much to lend to particular categories of borrowers. The investment tax would also be set by the Federal Government, and business firms would decide how much to spend on particular types of capital equipment. I hope personally that, as a nation, we adopt one of these courses (or still another if it is equally promising) while we still have time to act. If we delay indefinitely, we may again find ourselves facing a need to rely too much on monetary restraint— with its clearly recognized' differential effects on particular sectors of the economy. -66IX. Summary and Concluding Observations The main conclusions reached in this paper have been already stated along the way. However, it might be helpful to summarize them here: --In recent years, especially during periods of monetary restraint, significant shifts have occurred in the availability of credit in key sectors of the American economy. To a considerable extent, these variations in credit flows have reflected structural deficiencies in the prevailing arrangements through which credit is supplied. This is especially true of home financing because of its dependence on mortgage loans and the flow of funds to savings and loan associations. --But the mainspring of the wide fluctuations in the availability of credit in leading economic sectors is the behavior of commercial banks as they react to the changing requirements of monetary policy. The comprehensive analysis undertaken here clearly demonstrates that a disproportionate share of the instability in bank credit flowing to particular sectors can be traced to the activity of roughly 20 multi-national banks (which are an integral part of the Euro-dollar market) and around 60 other large banks which are dominant in their regions. — A s monetary conditions swung from ease to restraint and back to ease in the last several years, commercial banks generally shifted the supply of credit away from households and governments and into the business sector. Again, the multi-national banks were the fulcrum on which the pattern rested. Relying heavily on Euro-dollar inflows, they were able to maintain a high volume of lending to business in the face of severe attrition in time deposits—especially in large denomination certificates of deposit. Other banks had to rely more substantially on liquidation of government securities and borrowing from domestic sources to obtain funds. -67--But, in general, all classes of commercial banks demonstrated a strong and persistent preference for business borrowers over others seeking credit accommodation. The reasons for this are understandable: a network of frequently longstanding customer relationships and the propensity of banks to commit themselves to make future business loans give to business firms a high standing in the parade of would-be borrowers at commercial banks. In contrast, while consumer loans are clearly quite profitable for banks, the household sector generally has a somewhat lower standing. The results are a rising share of bank credit for businesses and a shrinking share for households and governments during periods of monetary restraint. In the light of this experience, the Federal Reserve System has taken a number of steps to ameliorate the differential impact of monetary policy on particular sectors of the economy. To a considerable extent, the maintenance of ceilings on the maximum rates of interest which member banks can pay on time deposits rests on the desire to cushion the effects of market rate competition on savings and loan associations--and through them on housing. Moreover, the imposition of marginal reserve requirements on Euro-dollar borrowing in 1969 was intended to moderate the access of multi-national banks to additional funds--which they in turn channeled to the business sector. Yet, these and other measures still left essentially untouched the key element underlying the marked instability in the availability of credit in leading economic sectors. That key element is the demand for funds by major corporations to finance expenditures on machinery and equipment. To cope with this situation, the Board -68has recommended the adoption of a flexible investment tax credit which could be varied on a contra-cyclical basis. While the proposal was advanced initially in connection with recommendations aimed at improving housing finance, it would also yield benefits for all those sectors dependent on raising funds in the money and capital markets. Another approach designed to overcome the same problems resulting from the differential impact of monetary policy involves the use of supplemental reserve requirements based on bank assets. I personally favor this approach, but the majority of the Federal Reserve Board has a number of reservations about it. I believe these reservations have considerable merit, but I also believe that--on balance--the idea is worth pursuing. But, in the final analysis, which particular approach is adopted is unimportant to me. What is important is a decision by the Congress to put in place some kind of instrument to assure that some sectors of the economy do not carry a disproportionate burden from monetary policy while others are affected much less severely. - 0 - Appendix fable I. Sources of Funda Total 1968 (1st quarter) MultiNational Regional Banks Banks Sources and Uses of Funds, By Class of Bank, By Quarter, 1968-1972 (millions of dollars) Local Banks 1968 (2nd quarter) MultiNatlonaL Regional Total Banks Banks Local Banks 1968 (3rd quarter) MultiNational Regional Total Banks Banks Local Banks 1968 (4th quarter) MultiNational Regional Banks Banks Total Local Banks 3,630 1,532 927 1,171 5,036 2,756 1,079 1,201 7,736 4,452 1,720 1,564 10,090 4,241 3,013 2,836 2,933 1,014 839 1,080 1,237 237 227 773 4,271 1,564 1,176 1,531 7,410 2,840 2,191 2,379 Deaand deposit* T i m & savings deposits Large CO'a IPC Other Other time & savings 989 1,944 502 342 160 1,442 538 476 16 16 460 119 720 315 202 113 405 332 748 171 140 31 577 158 1,406 981 832 149 425 336 840 614 422 192 226 647 884 308 256 52 576 3,365 4,045 1,905 1,438 467 2,140 933 1,907 1,006 804 202 901 1,133 1,058 553 369 184 505 1,299 1,080 346 265 81 734 Total borrowing Federal Reserve Banks Other borrowing 297 297 160 160 46 46 91 91 12 1,381 External Sources ToCal deposits Interpal Sources U.S. Treasury securities Federal agency securities State and local gov't, sec. Other securities Business loans Real estate loans Consular loans Other loans Other Sources TOTAL SOURCES -- - - 85 85 NA 315 NA 273 1,073 954 54 648 144 605 144 43 Euro-dollars Coonerclal paper Other liabilities — NA NA 42 — 65 - - - — 178 1,059 237 - — -- 237 1,731 605 678 448 312 1,457 69 481 9 579 41 397 19 265 LI - - - - - - -- - - — — — — — 2,486 981 1,236 NA 152 NA 151 — 4,703 NA 421 NA 115 — - - - NA 594 NA 178 -- 54 69 NA 444 — 11 1,343 20 — 205 1,412 964 — 270 1,124 30 1,094 1,377 - - - - 1,459 30 1,429 984 - - - - 277 82 195 - - 717 13 704 « — - - 11 95 678 -- 773 95 1,377 - - 11 83 144 1,141 3,130 1,903 1,510 393 1,227 227 83 2,371 95 2,276 -- « __ -- — 1,237 178 205 — - - " -- 12 32 - - - - — - - — - - — 677 267 222 4 5 21 NA 1,068 NA 742 NA 141 NA 185 21 291 33 21 244 11 — - - - - -f - - - - —' NA — -- 131 23 199 199 7,238 3,678 1,888 1,672 8,247 4,651 1,741 1 - -- — — - 317 1 32 33 --- 32 — 36 --- 471 267 - - 437 --- 677 - - 231 " T36 437 — 1,381 323 - - - - - - - - 58 115 323 -- 1,855 — -- - 10,123 4,273 3,013 2,837 Page 2 Appendix Table I (continued) Total 1968 (1st quarter) MultiRegional national Banks Banks Local Banks 1968 (2nd quarter) Multinational Regional Banks Banks Total Local Banks 1968 (3rd quarter) Multinational Regional Banks Banks Total Local Banks Total 1968 f4th quarter) Multinational Regional Banks Banks Local Banks Uses of Funds Internal Uses Deposit withdrawals Deaand deposits TUte & savings deposits Large CD's IPC Other Other tine & savings External Uses 295 295 - - 2,084 1,455 520 109 295 295 - 2,084 1,455 520 109 295 295 295 295 295 295 736 1,348 1,348 1,146 202 289 1,166 1,166 964 202 358 162 162 162 89 20 20 20 — 3,700 380 — Repayment of Euro-dollars " Coonercial paper run-off Other liabilities NA 31 Busines loans Real estate loans Consumer loans Other loans Other Uses IOTAL USES -- - - -- — — — — — — 380 1,649 103 — 103 963 1,088 185 — 5,154 92 — — 223 60 666 348 NA NA — — — 23 23 23 23 92 - - 165 2,223 1,368 1,563 — - - - - — — — — - — - - — - - - - — — — — — — NA NA NA NA 223 49 224 - - — — — — — -- -- 11 223 51 1,367 467 157 935 68 26 199 231 63 233 168 68 708 542 18 148 4,703 2,486 981 1,236 — — 966 - - 2,262 697 535 671 409 — 1,227 184 73 307 179 - - 506 205 136 342 56 56 4,651 -— 3,678 1,888 „ ... — — — — — — — 1,512 — NA 1,798 5 5 - - - - — 9,371 4,077 2,855 2,439 74 74 38 38 9 9 27 27 51 51 — - - NA NA NA " 378 — 529 308 326 22 1,248 57 1,063 L8I 1,248 45 721 153 1,366 958 799 2,233 743 317 171 1,253 286 7,238 — -- - NA 31 219 298 7,961 - - — - „ — - - Repayment borrowing Federal Reserve Banks Other borrowing U.S. Treasury securities Federal agency securities State & local gov't, sec. Other securities — « - 1,672 8,247 4,651 -- 12 109 28 — -- 233 NA NA NA NA — - - - - - - 1,707 34 2,062 168 1,023 28 472 34 516 62 879 — 356 - - 523 78 274 312 239 S33 349 329 389 447 2,067 868 622 1,769 997 314 114 684 614 264 234 650 456 290 274 435 229 57 752 196 158 398 1,741 1,855 4,273 3,013 2,837 10,123 page3 Appendix Table II (continued) 1969 (1st quarter) MultiNational Regional Total Banks Banks Local Banks 1969 (2nd quarter) MultiNat ional Regional Total Banks Banks 6,052 1,114 6,424 Local Banks Total 1,017 852 7,325 19 1969 (3rd quarter) MultiNat ional Regional Banks Banks 1969 (4th quarter) MultiNat ional Regional Banks Banks Local Banks Local Banks Total 1,196 3,039 3,918 2,056 2,115 346 5,218 2,902 846 1,470 2,301 601 601 846 346 20 if,513 705 601 — 1,366 104 20 326 601 1U4 601 19 -- 104 1.8S8 :J8 1,810 1,016 38 978 Sources of Funds External Sources 3,829 1,109 3,536 2,045 774 717 Demand deposits Time & savings deposits Large CD's IPC Other Other time & savings 2,009 1,527 1,376 669 337 437 296 421 Total borrowing Federal Reserve Banks Other borrowing 558 191 367 Total deposits 669 1,527 — 3,073 274 2,799 1,999 58 1,941 767 122 645 307 94 213 2,927 737 1,222 2,355 2,238 110 7 3,901 3,592 253 56 316 NA 631 NA 318 NA 121 NA 192 NA 497 NA 139 NA 186 NA 172 NA 667 2,901 1,174 842 885 7,829 3,759 2,233 1,637 1,076 HA 100 Internal Sources 3,208 2,570 525 U.S. Treasury securities Federal agency securities State & local gov't, sec. Other securities 2,568 30 269 125 Other Sources TOTAL SOURCES 30 9,290 353 10 — " NA — 113 41 — — 18 144 1,634 2,425 77 346 53 904 15 255 718 32 91 1 803 30 -- 52 72 30 - 6,399 „ 397 113 284 NA 425 216 „ 161 78 83 NA 525 Business loans Real estate loans Consumer loans Other loans — 19 1,661 421 1,433 2,174 20 269 107 „ 4,468 437 74 Coonerclal paper Other liabilities 365 20 « 20 345 1,359 Euro-dollars 365 4,555 1,257 102 214 9,539 5,729 1,961 2,927 737 1,222 1,129 194 1,012 336 17 1,005 280 529 103 7 56 5,158 2,457 1,538 968 9 "iS 600 74 -- 1,163 112 1,849 15,154 8,227 3,894 3,033 42 34 708 53 86 153 605 — 605 267 218 98 NA 387 NA 280 329 171 " NA — 576 __ 9 436 45 -- 229 271 9,436 4,765 42 25 43 8 :: 86 100 53 2,385 2,286 -- 271 267 -- - Page 4 Appendix Table I (continued) Total 1969 (1st quarter) MultiRegional Nat ional Banks Banks Local Banks Total 1969 (2nd quarter) MultiNational Regional Banks Banks Local Banks 1969 (3rd quarter) MultiNational Regional Total Banks Banks Local Banks Total 1969 (4th quarter) MultiNational Regionat Banks Banks Local Banks Uses of Funds Internal Uses Deposit withdrawals Demand deposits Time & savings deposits Large CD*s IPC Other Other time & savings External Uses Repayment of borrowing Federal Reserve Banks Other borrowing 2,910 2,283 576 51 4,767 3,651 871 245 7,200 3,966 2,218 1,016 3,469 1,804 1,032 633 2,910 2,283 576 51 4,767 3,651 871 245 7,200 3,966 2,218 1,016 3,469 1,804 1,032 633 51 51 22 29 1,156 3,611 3,279 2.398 881 332 790 2,861 2,529 i,yo6 623 332 170 701 701 443 258 196 49 49 49 956 6,244 4,031 2,821 1,210 2,213 29 3,937 2,312 1,782 530 1,625 594 1,624 1,218 732 486 406 333 683 501 307 194 182 3,469 2,268 1,728 540 1,201 1,804 855 855 949 1,032 780 475 305 252 2,284 866 528 890 4,065 2,646 422 997 137 137 61 61 54 54 22 22 80 80 18 18 62 62 — U.S. Treasury securities Federal agency securities State & local gov't, sec. Other securities Business loans Real estate loan's Consumer loans Other loans Other Uses TOTAL USES ... 576 576 448 128 2,283 2,283 1,802 481 — 5,581 3,445 449 22 427 449 22 427 1 Repayment of Euro-dollars Commercial paper run-off Other liabilities- — 2,910 2,910 2,272 638 NA 930 — 1,206 NA — -- — — NA 3,058 663 414 460 — — - - 2,042 277 217 460 - - 111 — 640 151 28 799 671 128 9,290 6,399 1,634 — — -- - - NA NA 9 - - 29 368 19 376 235 169 -- 1,257 1,604 --- NA NA NA NA NA — - - — — — — - - - - — — — 213 45 2,802 622 568 195 45 1,245 295 126 40 327 327 9,539 5,729 213 — 832 117 122 19 725 210 320 136 - - 1,961 1,849 — __ 38 38 — 4 12 843 588 662 - - -- -- -- 4 12 — 447 222 98 140 114 220 256 25? 344 - - -- 5,670 3,395 1,148 15,154 8,227 3,894 395 395 NA 979 NA 979 236 16 -- 1,127 3,033 30 1,275 813 396 99 633 633 398 235 — 40 16 -- -- 30 -- 989 303 - - 99 4,765 NA — 196 1,648 9,436 NA — — -- „ — - - — NA NA 1,090 — — — 1 — 29 479 19 1,751 — - 9 4,445 - - — __ 33 143 92 — 253 367 304 — 981 667 2,385 2,286 Page 5 Appendix Table I (continued) 1970 (1st quarter) MultiNational Regional Banks Banks Total 1970 (2nd quarter) MultiNational Regional Banks Banks Local Banks Total 565 4,563 2,105 230 3,629 1,624 83 147 45 3,584 2,085 985 1,100 1,499 1,624 936 533 403 688 717 553 221 332 164 622 14 608 481 10 471 83 4 79 1970 (3rd quarter) MultiNational Regional Banks Banks 1970 (4th quarter) MultiNat ional Regional Total Banks Banks Local Banks Total 1,008 1,450 11,456 5,706 2,864 2,886 15,302 8,447 3,102 717 1,288 10,519 5,003 2,778 2,738 12,045 5,679 2,777 3,589 45 1,243 596 231 365 647 1,011 9,508 6,214 4,773 1,441 3,294* 295 4,708 3,175 2,810 365 1,533 403 2,375 1,748 1,114 634 627 313 2,425 1,291 849 442 1,134 4,016 8,029 5,446 4,895 551 2,583 1,868 3,811 3,002 3,002 827 1,950 1,337 1,086 251 613 1,321 2,268 1,107 807 300 1,161 58 172 172 172 172 1,293 1,193 Local Banks Local Banks Sources of Funds External Sources 2,392 1,177 861 631 Demand deposits Time & savings deposits Large CD T s IPC Other Other time & savings 135 726 579 52 579 579 Total borrowing Federal Reserve Banks Qther borrowing 1,304 56 1,248 Total deposits Euro-dollars Commercial paper Other liabilities Internal Sources 579 147 129 70 28 1,933 579 529 37 492 — --- - - - 147 558 19 539 - 17 217 — 217 50 79 42 11 28 1 311 315 1,174 — 1,263 U.S. Treasury securities Federal agency securities State & local gov't, sec. Other securities 267 8 71 Business loans Real estate loans Consumer loans Other loans 453 484 24 136 453 371 Other Sources 1,070 1,070 5,395 3,510 „ - - — 710 55 71 TOTAL SOURCES 650 — 93 355 188 -- 255 47 __ -- 58 — -- 750 208 1 103 647 13 194 230 153 53 160 36 6 — 107 30 — — 13 - - 1,005 880 455 131 29 363 — - - -- — — 105 — 113 24 30 -- . -- 86 531 -- -- - - 100 — 1,293 105 6 30 13 1,958 19 134 809 3,753 1,193 100 - 6 - - 1,575 225 — - - -- - - - — - - 158 « -- 33 120 14 120 - - 19 455 — 19 270 131 10 — -- — — 93 - - 1,020 1,008 12 6,757 3,863 1,214 1,680 — -- — -- -- — — — - - - - — - - -- -- — — — 999 999 12,608 6,839 2,864 2,905 — 805 805 16,107 9,252 - - 3,102 - - 3,753 Page 6 Appendix Table I (continued) 1970 (1st quarter) MultiNational Regional Banks Banks Local Banks 1970 (2nd quarter) MultiNational Regional Banks Total Banks Local Banks Total 1970 (3rd quarter) MultiNational Regional Banks Banks Local Banks 1970 (4th quarter) MultiNational Regional Banks Total Banks Local Banks Uses of Funds Internal Uses Deposit withdrawals Demand deposits Time & savings deposits Large CD's IPC Other Other time & savings External Uses Repayment of. borrowing Federal Reserve Banks Other borrowing Repayment of Euro-dollars 1,648 692 703 253 945 636 309 1,648 692 703 253 945 636 309 166 1,482 953 812 141 529 692 320 320 3,604 253 253 185 68 372 166 537 380 307 73 157 2,818 296 490 U.S. Treasury securities Federal agency securities State & local gov't, sec. Other securities Business loans Real estate loans Consumer loans Other loans Other Uses TOTAL USES - - 309 - - — 5,594 1,407 1,657 1,077 22 58 270 256 46 209 143 5,395 1,022 — 3,510 - - 3,227 — 905 153 - - 153 153 153 153 153 153 — u ,,706 6,839 2,705 2,360 14,446 9,099 2,612 2,735 2 ,375 99 2 ,276 1,728 99 37 62 387 380 7 163 163 133 133 1,728 548 62 486 91 84 7 1,646 1,373 273 1,887 1,660 1,,419 1,310 109 3,548 3,207 294 47 857 145 317 11 223 21 446 60 2,498 113 2,568 851 1,416 5 962 415 537 43 702 212 545 65 904 224 350 5 245 826 369 41 120 475 545 261 317 383 775 421 446 952 277 105 189 700 143 126 89 106 355 190 168 146 357 545 1,508 490 1,018 2,864 2,905 16,107 9,252 3,102 3,753 - - 156 149 — 431 27 1,932 323 1,338 147 - - - - 227 „ 43 208 - - 86 86 -- 43 20S — — 1,462 — 1,102 153 153 — „ 55 — — 71 -— 68 — — — 1,657 -- - - 86 86 9 9 Commercial paper run-off Other liabilities 636 945 - - „ 153 - 22 29 113 77 — -- « 1,005 29 86 179 46 141 137 880 796 62 214 65 431 — - - 27 232 86 296 1 -- - --- 3,863 362 90 500 61 214 65 218 6,757 — 1,274 1,,423 11 669 226 1,,264 307 682 ,684 1. 218 902 1,680 12,,60 A - — 6,839 249 - - « Page 7 Appendix Table I (continued) Total 1971 (1st quarter) MultiNational Regional Banks Banks Local Banka 1971 (2nd quarter) MultiNat Ional Regional Total Banks Banks Local Banks Total 1971 (3rd quarter) MultiNat ional Regional Banks Banks Local Banks 1971 (4 th quarter) MultlNatlonal Regional Total Banks Banks Local Banks Source* of Fundi 9,968 4,,781 2,,323 2,864 9,950 4,394 2,234 3,322 8,142 4,414 1,706 2,u22 9,927 4,841 2,206 2,880 9,806 4,,716 2,,229 2,861 6,967 2,636 1,551 2,780 7,448 4,159 1,538 1,751 3,736 2,647 995 2,094 Demand depoaita Time & savings deposits Large CD*a IPC Other Other tine & savings 1,481 8,325 2,733 2,119 614 5,592 534 4,,182 1,823 1,715 108 2,,359 405 I,,824 464 246 218 ,360 1. 542 2,319 446 158 288 1,873 1,041 5,926 1,255 286 969 4,671 133 2,503 1,029 286 743 1,474 323 1,228 58S 2,195 226 226 1,969 3,759 3,689 3,188 1,719 1,469 501 1,969 2,190 2,190 1,154 1,036 856 682 682 408 274 934 817 316 157 159 501 1,629 4,107 2,644 2,126 518 1,463 746 1,901 1,480 1,213 267 421 157 838 571 496 75 267 726 1,368 593 417 176 775 Total borrowing Federal Reserve Banka Other borrowing 85 85 65 65 17 17 3 3 2,913 30 2,883 1,758 472 30 442 584 248 336 255 55 200 139 119 20 I9u 74 116 2,780 96 2,684 1,121 96 1,025 1,050 1,050 609 672 637 24 11 739 436 137 166 22 22 External Source* Total depoaita -- 1,758 — — -- 1,228 683 - - 683 — — Euro-dollars Cowercial paper Other liabilities Internal Sources U.S. Treasury aacurltlea Federal agency securities State & local gov't, sec. Other securities - 782 596 110 119 455 218 1,548 1,124 259 16 1,687 27 1,014 27 455 218 922 18 237 371 598 186 18 138 67 -- Other Sources 1,770 1,,770 12,520 7,,147 70 1,241 2 321 74 67 318 TOTAL SOURCES 70 1,914 . 2 Business loans Real estate loans Consumer loans Other loans 321 — 74 — 43 — -- 275 81 29 77 77 200 200 3,446 3,446 15,310 9,081 — 237 289 609 — — — -- - - 55 27 22 22 1,965 2,187 9,949 4,863 67 - 2,,442 2,931 7,689 3,540 9,690 5,538 2,206 2,880 page 3 Appendix Table II (continued) Total 1971 (1st quarter) MultiNatlonal Regional Banks Banks Local Banks Total 1971 (2nd quarter) MultiNational Regional Banks Banks Local Banks Total 1971 (3rd quarter) MultiNational Regional Banks Banks Local Banks Total 1971 (4th quarter} MultlNational Regional Banks Banks Local Banks Uses of Funds Internal Uses 1,,004 Deposit withdrawal 1,,004 Demand deposits Time & savings deposits Large CD's IPC Other Other tine 6 savings External Uses Repayment of borrowing Federal Rese.-ve Banks Other borrowing __ :: 1,,004 i,,004 902 102 -- — — - - -- - — — — 613 391 362 'il9 613 391 362 319 613 613 511 102 391 391 391 -- 11,944 206 7,147 2,754 14 ,150 9,081 1,947 27 14 46 46 3<* 39 7 7 - - — -- — - - -- - - 362 319 43 3,,781 1,475 - 14 Repayment of Euro-dollars 3,118 2,836 129 153 3 ,844 3,666 115 63 443 400 Commercial paper run-off Other liabilities 1,470 1,232 1,096 1,188 303 71 44 367 3,,006 243 2,923 81 83 43 138 881 126 881 U.S. Treasury securities Federal agency securities State & local gov't, sec. Other securities 1,545 60 2,812 919 526 4 1,063 198 738 56 940 370 16 2,,513 701 522 393 __ Business loans Real estate loans Consumer loans Other loans 398 90 80 14 — Other Uses 576 -- TOTAL USES 12,520 113 21 50 7,147 30 — 285 69 — 14 7,209 3,796 145 145 - 27 809 351 >910 - 165 281 - 7,,166 206 — 43 — -- -- 3,122 319 -- — 2,043 165 — 362 43 1,324 2,089 87 87 58 58 -- 886 655 426 1,,690 399 177 156 2,442 2,931 15,,310 169 703 9 35 g 1 11 — :: 130 114 14 2 1,416 120 1,310 282 1,046 21 907 271 20 42 145 99 79 361 137 70 504 513 228 543 1,269 ."90 1,404 87 502 129 990 224 285 135 101 232 482 326 313 ... 160 416 787 48 16 1,204 260 233 51 1,011 128 107 94 497 758 315 281 182 864 1,,536 967 1;,465 565 745 215 840 129 27 2,,162 I,,438 447 277 2,740 1,067 882 791 9,081 2,689 3,540 9,,690 5 ,538 1,965 ,187 9,949 4,863 2,206 2,880 - -- 287 - - - 229 287 239 397 - - Appendix Table I (continued) Total 1972 (1st quarter) MultiNational Regional Banks Banks Local Banks Total Page 9 1972 (2nd quarter) MultiNational Regional Banks Banks Local Banks Sources of Funds External Sources 9,426 5,007 1,081 3,338 8,887 4,500 1,431 2,956 8,285 4,371 966 2,948 5,711 3,181 355 2,175 Demand deposits Time & savings deposits Large CD's IPC Other Other time & savings 2,933 4,542 621 184 437 4,731 2,224 2,147 2 68 898 68 641 2,307 551 184 367 1,756 1,229 4,482 1,360 956 404 3,122 773 2,408 1,031 928 103 1,377 35 320 320 421 1,754 329 28 301 1,425 Total borrowing Federal Reserve Banks Other borrowing 930 204 204 2,694 204 2,490 1,199 110 1,089 911 41 870 584 53 531 15 120 120 171 9 353 Total deposits 15 193 3 Business loans Real estate loans 1,455 - - Other loans Other Sources TOTAL SOURCES 22 ... 3 9 183 851 1,258 — — 772 588 - - - - - - — 741 31 557 31 « — 165 9 188 81 103 81 103 — — - - - - - - — - - - - -— -— —- - - - - - - — - - — - - - - - - - - - - - - - - - - - - - - —— —— —— -— 407 - - 5 - - - - - —— — — - - - - 6,050 - — — - - 10,881 - - —- - - 412 1,043 — 5 112 — 183 Consumer loans - - « — - - — 112 « 614 9 — 68 830 614 930 Commercial paper Other liabilities U.S. Treasury securities Federal agency securities State & local gov't, sec. Other securities 2 2,145 - - Euro-dollars Internal Sources - - — 1,493 3,338 478 10,137 - - 5,088 352 126 1,864 3,185 Page 10 Appendix Table I (continued) Total 1972 (1st quarter) MultiNational Regional Batiks Banks Local Banks Total 1972 (2nd quarter) MultiNational Regional Banks Banks Local Banks Uses of Funds 886 743 143 166 166 886 743 143 166 166 886 886 886 743 743 743 143 143 143 166 166 101 65 166 166 101 65 8,148 4,507 903 2,738 391 391 250 250 72 72 69 69 1,102 1,055 47 Commercial paper run-off Other liabilities 22 890 844 U.S. Treasury securities Federal agency securities State & local gov't, sec. Other securities 894 114 872 377 Internal Uses Deposit withdrawal Demand deposits Time & savings deposits Large CD's IPC Other Other time & savings External Uses Repayment of borrowing Federal Reserve Banks Other borrowing Repayment of Euro-dollars 22 492 148 — 8,847 180 22 375 86 685 249 60 970 212 265 206 516 210 296 27 28 39 128 — 160 22 - - - - - 47 442 116 1,950 1,667 761 3,004 458 578 174 2,113 372 472 154 497 1,120 617 433 394 Other Uses 1,847 800 4 47 600 1,124 1,124 10,881 6,050 1,493 3,338 10,137 5,088 — 13 114 51 309 151 1,258 TOTAL USES 20 — 414 45 206 1,100 361 1,819 - - 3,185 16 Business loans Real estate loans Consumer loans Other loans 275 1,698 21 46 - - 3,964 - - 1,864 « 3,185 Appendix Table II. Sources and Uses of Funds, By Class of Bank, By Half Years, 1968-1972 (Millions of Dollars) First Half, 1968 MultiNational Regional Banks Banks Second Half, 1968 MultiNational Regional Banks Banks Local Banks Total 1,684 2,376 25,217 11,177 7,669 6,371 2,200 633 1,567 2,200 633 1,567 22,187 14,305 7,882 9,572 5,917 3,655 6,717 4,578 2,139 5,898 3,810 2,088 Total Local Banks Sources of Funds External Sources 9,917 Total deposits Demand deposits Time and savings deposits Capital Accounts 5,857 798 386 156 256 654 276 170 208 1,367 424 594 349 1,031 442 513 76 709 483 120 106 6 6 Euro-dollars 1,961 1,931 30 Other 2,882 2,633 151 98 1,278 5,822 2,480 1,751 1,591 2,835 149 1,316 75 898 33 621 41 Federal funds purchased Borrowings liabilities Internal Sources U.S. Treasury securities Federal agency securities State & local gov't, Other securities securities - - 4 — - - 725 80 42 12 12 — — — - - 47 62 35 190 189 190 14 107 454 2 117 loans 49 49 Federal funds sold 73 — 71 15,810 - - - - - — - - — 8,337 47 89 56 189 706 51 414 189 847 — NA 240 TOTAL SOURCES 208 43 NA 316 Other Sources - - 881 — 47 NA 753 Other assets - - - - 1,309 Other 61 -- - - Reserves with Federal Reserve Banks Balances with banks in United States Foreign bank balances Currency and coin - - - - — — farmland Business loans Real estate loans - nonfarm, nonres. Real estate loans - multi-family Loans to fin. inst. and brokers & dealers 61 - - — Consumer loans Real estate loans (1-4 family) Loans to purchase or carry securities Loans to farmers Real estate loans - - - - 73 - - NA 30 3 57 13 NA 2 40 NA NA - - — 541 102 541 102 — - - - - - - - - - - — - - - - - - — 23 48 2,558 2,558 3,458 4,015 28,622 14,460 7,749 6,413 Appendix Table II page 2 (continued) First Half, 1968 Multinational Regional Total Banks Banks Local Banks 6,134 3,181 1,735 1,218 - - 6,124 5,178 956 3,181 2,225 956 1,735 1,735 1,218 1,218 Total Second Half, 1968 MultiNational Regional Banks Banks Local Banks Uses o£ Funds Internal Uses Deposit withdrawals Demand deposits Time and savings deposits Capital Accounts External Uses — 7,677 - - 3,157 - - „ - - — - - - - - - - - - - - - - - — — — - - - - - - - - 1,723 2,797 28,120 Repayment of borrowings « — -- - - 67 Repayment of Euro-dol?.ars « — — — 224 Repayment of Federal funds purchased — — - - — - - Other — - - — - - - - liabilities 14,460 224 - - - - -- - — 3,589 2,022 671 896 205 139 6& 102 92 10 50 38 12 53 9 44 Nonfarm 3,000 Business loans 2,442 Real estate loans - nonfarm, nonres. 558 Real estate loans, multi-family NA Loans to fin. inst. & brokers & dealers — 1,546 1,330 216 NA 611 498 113 NA 843 614 229 NA 8,852 5,012 725 NA 4,651 2,643 186^ NA -- - - 3,115 Farm Loans to farmers Real estate loans - farmland Banks Federal funds sold Government Sector Federal Government U.S. Treasury securities Federal agency securities State and local government State and local g o v J t . sec. 384 374 10 1,030 292 170 — — — -- — -- - - - - - - 1,030 328 229 99 Cash and Due from Banks Reserves with Federal Reserve Banks Balances with banks in United States Foreign bank balances Currency and coin 638 638 Other Uses TOTAL USES 568 — Other Earnings Assets Other loans Other securities Other Assets - - -- — 3 — Business - - 64 - - 308 162 119 27 766 497 269 6,237 - - 1,647 942 678 27 573 283 290 7,423 — Household Sector Consumer loans Real estate loans (1-4 family) Loans to purchase or carry sec* Sector - - 2,621 1,296 1,085 240 889 308 428 153 12,455 7,391 763 412 351 — 3,114 969 576 306 87 1,950 „ - - - — - - — 2,490 1,516 183 NA 1,711 853 356 NA 1,822 791 502 3,603 2,740 624 239 7,719 3,889 2,099 1,731 3,664 3,571 93 1,721 1,721 1,138 1,093 45 805 757 48 — 292 170 56fr 4,055 2,168 961 926 77 178 170 8 73 59 14 917 762 155 645 542 103 179 135 44 93 85 8 273 273 2,675 397 1,202 37 1,039 363 21 342 974 181 515 13 265 1,338 216 687 3 432 1,442 1,059 230 153 326 176 7,749 6,413 — 77 365 365 — — — - - — — - - — — - - - - 445 93 1,999 1,999 15,810 8,337 131 — 3,458 221 — 4,015 502 28,622 - - 14,460 Appendix Table II (continued) Total First Half, 1969 MultiNat ional Regional Banks Banks page 3 Second Half, 1969 MultiNat ional Banks Local Banks Total 2,258 14,196 8,564 4,773 138 9,252 9,252 6,273 6,272 2,979 2,979 Regional Banks Local Banks Sources of Funds External Sources 23;346 18,141 2,947 1,059 Total deposits Demand deposits Time and savings deposits 138 Capital Accounts 888 297 284 307 570 133 119 318 Federal funds purchased 3,175 1,025 1,275 875 3,355 2,021 910 424 Borrowings 1*707 651 567 489 420 137 283 Euro-dollars 7,738 7,506 211 21 593 - - 321 272 Other 9,700 8,662 610 428 206 — 161 45 1Z,004 6,009 4,450 1,545 2,062 109 191 U.S. Treasury securities Federal agency securities 4,461 153 2,559 5T 1,902 62 40 State and local gov't, Other securities 1,464 419 1,271 365 193 35 19 1,314 4 662 4 438 214 liabilities Internal Sources securities Consumer loans Real estate loans (1-4 family) Loans Co purchase of carry securities Loans to farmers Real estate loans - farmland Business loans Real estate loans - nonfarm, nonres. Real estate loans - malti-family Loans to fin. inst. and dealers and brokers Reserves with Federal Reserve Banks Balances with banks in United States F o r e i g n bank balances Currency and coin O t h e r loans Federal funds sold Other assets Other Sources TOTAL SOURCES 138 « — « — - - — 561 - - 4,973 40,323 922 308 334 527 441 183 385 20 155 — - - — - - 24,150 « — 1,022 82 964 82 15 13 228 15 13 194 131 59 68 25 76 74 642 1,762 - - - - 1,632 826 20 508 — 13& 58 ;; 34 19 11 44 23 76 19 55 — 10 10 154 199 — — 390 — 171 — 6 ... 148 148 198 198 3 3 - - - — 1,062 3,911 10,050 1,773 731 7,546 8,459 7,714 26,508 12,099 5,613 8,796 Appendix Table II Total (continued) First Half , 1969 Multinational Regional Banks Banks page 4 Local Banks. Total Second Half, 1969 Multinational Regional Banks Banks Local Banks Uses of Funds Internal Uses Deposit withdrawals Demand deposits Time and savings deposits Capital Accounts External Uses 18,563 11,045 4,897 2,621 8,809 2,962 2,069 3,778 18,563 10,118 8,445 11,045 4,332 6,713 4,897 3,165 1,732 2,621 2,621 8,809 2,621 6,188 2,962 2,069 3,778 2,621 1,157 — - - 16,677 — Repayment of borrowings - Repayment of Euro-dollars « Repayment of Federal funds purchased - - Other liabilities — — — 8,022 — 3,562 5,093 17,699 - - 284 - - — 1,385 - - — — — — — 1,227 1,104 -123 345 345 — Business Sector 7,628 2,563 92 31 3,933 1,924 1,771 6,861 265 168 97 99 95 4 149 59 90 17 14 3 7,063 Nonfarm 4,436 Business loans 567 Real estate loans- nonfarm, nonres. 1,982 Real estate loans, multi-family Loans to fin. inst. & brokers 6. 78 dealers 3,534 2,185 323 948 1,775 1,162 172 441 1,754 1,089 72 593 Banks Federal funds sold Governnent Sector Federal Government U.S. Treasury securities Federal agency securities State and local government State and local gov't, securities Other Earning Assets Other loans Other securities Cash and Due from Banks Reserves with Federal Reserve Banks Balances with banks in United States Foreign bank balances Currency and coin Other Assets Other Uses TOTAL USES -- — 78 300 300 526 495 - - - - 2,069 - - — 9,137 — 1,385 - - - - 1,240 920 296 24 Farm Loans to farmers Real estate loans - farmland 356 264 2,962 — — Household Sector Consumer loans Real estate loans (1-4 family) Loans to purchase or carry sec. - - 2,563 3,544 — — « — - - — 356 251 81 24 — - - 1,316 - - - - — — — — 4,990 3,022 313 245 3,003 2,013 82 908 — - - 1,410 - - - - 1,871 284 - - — 3,003 5,018 — 245 -- — 2,542 -- 772 343 — 884 669 215 1,215 666 231 -- 184 318 544 1,327 2,136 — — 2,136 1,522 825 567 130 1,763 1,763 — -- 1,763 1,763 - - -- 1,124 941 183 825 768 57 169 143 26 130 30 100 - - - - — 373 241 241 - - 138 138 327 15 — 327 — 5,103 3,279 5,083 5,083 40,323 24,150 — 57 57 331 305 26 305 305 -- 2,973 1,453 883 47 590 1,056 698 164 8 186 14 1 — -1 — — 398 — — 327 373 46 46 -- — 342 - - - - — 1,235 -8,459 14 -- 589 -7,714 540 — 26,508 — — 12,099 398 — 26 - - — - - 26 1,053 489 374 39 151 864 266 345 252 288 — 5,613 253 — 8,796 page 5 Appendix Table II (continued)page3 Total First Half, 1970 MultiNational Regional Banks Banks Local Banks Total Second Half, 1970 MultiNational Regional Banks Banks Local Banks Sources of Funds External Sources 8,507 2,271 1,378 4,858 32,705 15,138 8,039 9,528 Total deposits Demand deposits Time and savings- deposits 6,743 1,883 4,860 2,075 920 2,075 920 3,748 1,883 1,865 29,935 10,613 19,322 13,664 3,835 9,829 7,372 2,869 4,503 8,899 3,909 4,990 Capital Accounts 728 196 234 298 680 163 187 330 Federal funds purchased 788 — 173 615 1,625 1,311 314 — Borrowings 66 - - 66 166 — 166 — Euro-dollars 51 - - 133 — — 133 131 — 131 166 — — 166 1,246 583 Other liabilities Internal Sources U.S. Treasury securities Federal agency securities State and local gov't, Other securities — 51 - - 7,681 4,905 1,530 1,590 711 419 — 87 106 304 161 87 106 57 69 23 46 ly964 126 56 2,138 1,964 68 14 1,453 58 42 306 50 133 276 Reserves with Federal Reserve Banks Balances with banks ln United States Foreign bank balances Currency and coin 133 581 6 156 131 Other loans 365 330 Federal funds sold -- Other assets — Other Sources TOTAL SOURCES 86 — Loans to farmers Real estate loans - farmland Business loans Real estate loans - nonfarm, nonres. Real estate loans - multi-family Loans to fin. inst. and dealers and brokers — — « -- — — 88 3 2 255 6 25 51 47 40 35 11 31 49 < — -- — — 3,049 12 83 — 8", 297 — 125 32 -- 17,450 — 174 -- 19 62 11 43 3 379 — 141 239 — 29 — 1,121 182 — 186 29 « 1,262 162 460. - - securities Consumer loans Real estate loans (1-4 family) Loans to purchase or carry securities - - — 6,104 „ -- 11 — — 7,249 6,449 800 40,537 21,749 9,021 — 9,767 page 6 Appendix Table II (continued) Total First Half, 1970 MultiNat ional Regional Banks Banks Local Banks Total Second Half, 1970 MultiNational Regional Banks Banks Local Banks Uses of Funds Internal Uses 5,071 Deposit withdrawals Demand deposits Time and savings deposits- 5,071 5,071 - - — Capital Accounts 3,204 3,204 3,204 1,867 1,867 1,867 — — - - — 1,182 Repayment of borrowings 886 654 232 Repayment of Euro-dollars 636 631 171 171 1,105 992 480 400 80 158 111 47 liabilities Household Sector Consumer loans Real estate loans (1-4 family) Loans to purchase or carry securities Business Sector Farm Loans to farmers Real estate loans - farmland Nonfarm Business loans Real estate loans - nonfarm, nonres Real estate loans, multi-family Loans to fin. inst. & brokers & dealers Banks Federal funds sold Government Sector Federal Government U.S. Treasury securities Federal agency securities State and local Government State and local gov't, securities — - - 238 1,617 1,093 309 215 537 402 135 451 313 783 638 46 99 6,038 2,271 400 - - — - - — - - - - — 11 — - - 3,109 212 138 3,083 3,200 - - - - — - - __ - - 629 378 174 77 - - 2,636 700 22 — 256 15 241 1,627 528 132 1,775 1,043 246 - - 3,367 1,914 967 486 77 595 3,098 473 1,456 1,169 374 490 12,632 5,419 3,298 3,915 55 4,128 3,442 686 1,875 1,362 513 2,153 1,578 575 170 47 272 170 47 55 8,156 6,382 1 ,774 2,009 1,247 327 435 4,476 1,291 1,423 1,762 68 46 24 22 38 626 344 282 416 260 156 62 62 148 84 64 3,488 1,330 2,029 43 86 1,427 182 1,159 986 688 298 71 2,878 1,859 3 ,733 131 6 ,104 40,537 — — 288 220 4,493 256 15 241 - - 332 4,731 40 25 15 160 160 9 — - - 9,636 - - - 31 31 Cash and Due from Banks Reserves with Federal Reserve Banks Balances with banks in United States Foreign bank balances Currency and coin TOTAL USES - - 9,021 212 322 289 33 — — - - - 72 72 272 - - 4,257 143 128 15 2,281 — 4,589 9,392 683 - - 232 ,418 - - — 241 268 152 24 128 Other Uses - 5 113 — — 21,749 83 943 798 46 99 - — 40,406 1,769 Other Earning Assets Other loans Other securities Other Assets 2,,371 - - — - - - - - - - - 4> Other purchased - - 5,093 Repayment of Federal funds - - - - 8,646 External Uses — - - - — - - 68 236 193 — 44 24 878 3,733 17,450 - - 25 43 8,297 — 1 24 - - — 27 27 — - - 683 38 124 — 3,049 - - - — 86 — 21,749 - - 571 — 9,021 1,075 460 572 43 - - 448 131 9,767 Appendix Table II (continued) Total First Half, 1971 MultiNational Regional Banks Banks page 3 Local Banks Total First Half, 1971 MultiNational Regional Banks Banks Local Banks Sources of Funds External Sources 15,511 8,001 3,108 4,402 23,404 9,098 6,632 7,674 10,850 5,669 1,785 3,396 10,850 5,669 1,785 3,396 18,728 9,781 8,947 6,808 3,288 3,520 5,477 3,194 2,283 6,443 3,299 3,144 Capital Accounts 1,156 613 294 249 936 493 145 298 Federal funds 3,228 1,609 1,029 590 3,681 1,797 1,010 874 Borrowings 158 110 Euro-dollars 119 Total deposits Demand deposits Time and savings deposits Other purchased liabilities Internal — 4,286 Sources U.S. Treasury securities Federal agency securities State and local gov't, Other securities - - 48 - - - - 119 - - - - 1,868 - - 1,289 1,129 507 232 739 Loans to farmers Real estate loans - farmland 8 51 - - — 51 123 85 85 2 22 - - - - - - — **** - - 38 38 927 801 99 99 Reserves w i t h Federal Reserve Banks Balances with banks in United States Foreign bank balances Currency and coin 400 421 250 Other loans 104 Federal funds sold 290 — - - Business loans Real estate loans - nonfarm, nonres. Real estate loans - multi-family Loans to fin. inst. and dealers and brokers TOTAL SOURCES — - - « 2 Other Sources 8 - - - - 2 2 258 Other Assets — 147 - - securities Consumer loans Real estate loans (1-4 family) Loans to purchase or carry securities - - - 10 12 256 — 10 12 - - - 126 — - - — - - -- 150 421 - - 40 55 1,008 1,008 7,207 6,351 27,004 16,220 - - « « — — - - — — - - - - - - - - — - - 32 17 -- 290 — 116 4,513 2 38 740 1,168 6,271 24,719 736 432 9,957 7,086 — 7,676 page 8 Appendix Table II Total (continued) First Half, 1971 MultiRegional National Banks Banks Local Banks Total Second Half, 1971 MultiRegional National Banks Banks Local Banks Uses of Funds Internal Uses Deposit withdrawals Demand deposits Time and savings deposits Capital Accounts External Uses Repayment of borrowings Repayment of Euro-dollars Repayment of Fedreal funds purchased Other liabilities 3,270 805 1,256 1,209 - - - - - - - 3,270 3,270 805 805 1,256 1,256 1,209 1,209 — — - - - - — — — — — - - — - - — - - - - — — — — 24,734 675 6,066 — 15,415 3,257 — 5,810 - - 5,062 24,512 9,957 7,086 7,469 123 675 — 351 219 9 256 — 591 563 28 « -- - - — - - - - - - - 4,969 4,830 61 78 579 528 51 Household Sector Consumer loans Real estate loans (1-4 family) Loans to purchase or carry securities 1,397 585 773 39 516 123 377 16 200 98 79 23 681 364 317 — 3,278 1,479 1,721 78 1,164 461 686 17 730 326 402 2 1,384 692 633 59 Business Sector 2,860 1,106 259 1,495 8,312 3,015 3,197 2,100 267 267 139 139 43 43 85 85 95 71 24 8 3 5 919 525 216 61 5,542 1,777 698 134 2,234 142 214 26 1,963 1,001 209 8 1,345 634 275 100 Farm Loans to farmers Real estate loans - farmland - - Nonfarm 1,933 Business loans 525 Real estate loans - nonfarm, nonres . 451 Real estate loans, mutli-family 293 Loans to fin. inst. & brokers & dealers 664 - - — — 798 216 — — 76 175 159 57 — 87 68 19 547 - - 117 2,933 1,852 745 336 660 169 — 491 2,675 773 1,234 668 5,562 1,810 1,367 2,385 5,219 2,027 1,131 2,061 Federal Government U.S. Treasury securities Federal agency securities 1,619 899 720 987 899 88 42 590 — 1,149 1,149 42 590 2,959 2,458 501 901 694 207 909 615 294 State and local Government State and local gov't. securities 3,943 823 1,325 1,795 2,260 878 230 1,152 72 115 72 115 621 410 211 347 271 76 139 84 55 135 55 80 365 125 — 1,348 887 431 30 1,140 931 171 26 12 1,364 905 428 31 746 661 302 Banks Federal funds sold Government Sector Other Earning Assets Other loans Other securities Cash and Due from Banks Reserves with Federal Reserve Banks Balances with banks in United States Foreign bank balances Currency and coin Other Assets Other Uses T O T A L USES 187 — 187 1,833 973 636 50 174 185 — 27,004 — - - « — 1,343 973 318 11 41 318 12 35 27 98 3,852 2,723 1,030 87 12 2 183 1,709 - — 16,220 - - 4,513 — 6,271 207 24,719 — 9,957 « 7,086 207 7,676 Appendix Table II (continued) Total page 9 First Half, 1972 Multinational Regional Banks Banks Local Banks Sources of Funds External Sources 16,896 8,422 4,499 3,975 Total deposits Demand deposits Time and savings deposits 8,099 4,100 1,152 2,847 8,099 4,100 1,152 2,847 Capital Accounts 1,355 742 347 266 Federal Funds purchased 5,169 2,214 2,275 680 Borrowings 641 312 312 17 Euro-dollara 566 536 16 14 1,066 518 397 151 5,937 3,160 1,845 932 2,155 237 1,192 237 963 Other liabilities Internal Sources U.S. Treasury securities Federal agency securities — —— State & local gov't, securities Other securities Consumer loans Real estate loans (1-4 family) Loans to purchase or carry securities Loans to farmers Real estate loans - farmland Business loans Real estate loans - nonfarm, nonres. Real estate loans - multi-family Loans to fin. inst. and brokers and dealers Reserves with Federal Reserve Banks Balances with banks in United States Foreign bank balances Currency and coin 1 1 52 52 55 55 511 216 12 526 177 98 183 124 236 216 12 219 260 194 Other loans Federal funds sold Other Assets Other Sources TOTAL SOURCES 454 1,718 1,318 400 1,253 1,253 24,086 11,582 6,344 6,160 Appendix Table 11 Total U s e s of Uses Deposit withdrawals Demand deposits T i m e and s a v i n g s deposits Accounts External Repayment Local Banks of Repayment 5,611 1,356 2,362 1,893 5, 6 1 1 5,611 1,356 1,356 2,362 2,362 1>89T 1,893 - - — - - — 15,460 Uses R e p a y m e n t of Other First Half, 1972 MultiNat i o n a l Regional •Banks Banks 10 Funds Internal Capital page (continued) - - - - — 8,117 3,076 4,267 borrowings — — — - - Euro-dollars — - - - - — — - - - - — — — - - of F e d e r a l f u n d s purchased liabilities Household Sector C o n s u m e r loans R e a l e s t a t e l o a n s (1-4 f a m i l y ) L o a n s to p u r c h a s e or c a r r y s e c u r i t i e s 3,166 1,253 1,694 219 929 278 568 83 844 290 477 77 1,393 685 649 59 Business 7,711 4,723 1,612 1,376 296 257 39 121 121 70 54 16 105 82 23 6,225 1,402 1,053 567 3,412 1,542 518 137 623 159 314 3,203 2,257 446 1,190 1,190 Sector Farm L o a n s to f a r m e r s Real estate loans - farmland Nonfarm • Business loans Real estate loans nonfarm, nonres . Real estate loansx multi-family L o a n s to f i n . i n s t . & b r o k e r s & dealers Banks Federal Government funds sold 1,126 771 355 Federal Government U.S. Treasury securities Federal agency securities S t a t e and l o c a l G o v e r n m e n t S t a t e and l o c a l G o v e r n m e n t Assets O t h e r Uses TOTAL USES Banks States - - 390. — - - 1,271 779 376; '116' - - 244 1,209 131 131 995 771 224 — 717 390 113 214 920 511 409 398 272 126 322 169 153 200 70 130 1,731 1,677 Other Earnings Assets Other loans Other securities Other — 1,843 Sector C a s h and D u e f r o m B a n k s Reserves with Federal Reserve B a l a n c e s w i t h b a n k s in U n i t e d Foreign bank balances Currency and coin — — — 1,590 141 — 89 3,015 24,086 54 _„ — 1,581 96 9 45 - - — — — 2,109 906 11,582 6,344 — 89 - - 6,160
@FedFRASER