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Statement by Andrew F . Brimmer Member Board o f Governors o f t h e F e d e r a l Reserve System b e f o r e the Subcommittee on I n t e r n a t i o n a l Trade of t h e House Banking and Currency Committee May 19, 1971 Mr. Chairman, I a p p r e c i a t e the o p p o r t u n i t y to present the F e d e r a l Reserve Board's views on T i t l e I I o f H.R. 8181. T i t l e would p r o h i b i t any r e s t r a i n t under the V o l u n t a r y C r e d i t R e s t r a i n t Program on export c r e d i t g r a n t e d t o by U.S. banks or other f i n a n c i a l This Foreign foreigners institutions. The Board does not b e l i e v e t h a t t h i s T i t l e of the bill should be enacted. Overview o f the V o l u n t a r y F o r e i g n C r e d i t R e s t r a i n t Program The V o l u n t a r y F o r e i g n C r e d i t R e s t r a i n t Program - VFCR, as i t i s g e n e r a l l y known - - the i s p a r t of an o v e r a l l U.S. Government program t o reduce the d e f i c i t i n the U.S. balance o f payment s. Each element o f the o v e r a l l balance-of-payments i s aimed a t r e s t r a i n i n g c a p i t a l o u t f l o w from the U n i t e d States. The VFCR r e s t r a i n s c a p i t a l o u t f l o w through banks and o t h e r institutions; program financial the F o r e i g n D i r e c t Investment Program does so through r e g u l a t i n g o u t f l o w from U . S . c o r p o r a t i o n s t o t h e i r a f f i l i a t e s seas; and the I n t e r e s t E q u a l i z a t i o n Tax l i m i t s o u t f l o w over- resulting from the purchase by Americans of f o r e i g n stocks, bonds, and o t h e r e q u i t y and debt securities. Any a p p r a i s a l o f t h e VFCR should be made i n the context o f the o v e r a l l program of which i t i s a p a r t and i n the l i g h t of the r e l i a n c e which t h e Government continues t o place on the o t h e r programs t o which the VFCR i s i n t i m a t e l y related. - 2 - I n f o r m u l a t i n g and a d m i n i s t e r i n g the VFCR Program, all elements of our balance of payments have been kept i n mind. particular, c a r e f u l a t t e n t i o n has been g i v e n to the In relationship between measures on c a p i t a l t r a n s a c t i o n s and our p o l i c y of aiding i n the growth o f our e x p o r t s . The VFCR Program c o n s t i t u t e s a request by the F e d e r a l Reserve System t h a t a l l f i n a n c i a l i n s t i t u t i o n s exercise restraint i n l e n d i n g of a l l types to f o r e i g n e r s and i n making any o t h e r ments abroad. The request i s embodied i n a set of Guidelines. A l l U . S . banks and o t h e r U . S . nonbank f i n a n c i a l i n s t i t u t i o n s been i n v i t e d t o v o l u n t e e r t h e i r c o o p e r a t i o n i n observing have specific c e i l i n g s and p r i n c i p l e s ; a l l U . S . agencies and branches of foreign banks have been asked t o a c t i n accordance w i t h the s p i r i t of Guidelines. invest- the A f u l l e r account of the o r g a n i z a t i o n and f u n c t i o n i n g of t h e VFCR i s p r o v i d e d i n the Appendix t o t h i s statement. Mr. Chairman, g i v e n the Board f s assignment i n the U . S . Government balance-of-payments e f f o r t , overall I would l i k e t o note a t the o u t s e t the unusual n a t u r e of the approach taken i n T i t l e of H.R. 8181. It i s a p r o p o s a l f o r s t a t u t o r y a c t i o n t o change a program which c a l l s institutions. t o my statement f o r a v o l u n t a r y response by U . S . private As I w i l l i n d i c a t e below, and as the Appendix shows, the Board has always been ready to change II - 3 - the VFCR when the evidence demonstrated t h a t a change was needed t o enhance the Program's c o n t r i b u t i o n to our objectives. balance-of-payments The Board w i l l continue t o review the VFCR G u i d e l i n e s , and i t w i l l r e a d i l y r e v i s e the Program as the need a r i s e s . Mr. Chairman, a t t h i s p o i n t , I n doing so, I would l i k e , first, I w i l l t u r n t o the p r o p o s a l . t o d e s c r i b e b r i e f l y how export c r e d i t s a r e now t r e a t e d under the VFCR G u i d e l i n e s . I will confine my remarks almost e n t i r e l y t o the G u i d e l i n e s as they a p p l y to banks - - p r i n c i p a l l y because t h e issue o f export c r e d i t s and the T i t l e II d i r e c t i v e would have g r e a t e r relevance to banks than t o the nonbank financial institutions. Treatment of Export C r e d i t under VFCR G u i d e l i n e s A l l banks have two sets of c e i l i n g s w i t h i n which they a r e to keep t h e i r o u t s t a n d i n g loans t o f o r e i g n e r s and t h e i r abroad: investments a General C e i l i n g and an Export Term-Loan C e i l i n g . The G e n e r a l C e i l i n g a p p l i e s to a l l c a t e g o r i e s of f o r e i g n assets — by which i s meant a l l types o f loans or other c r e d i t s extended t o f o r e i g n e r s and a l l types of o t h e r f o r e i g n investments. The Export Term-Loan C e i l i n g a p p l i e s t o loans to f o r e i g n e r s w i t h an o r i g i n a l m a t u r i t y of over one year and which f i n a n c e t h e e x p o r t of U.S. goods or the performance of U . S . s e r v i c e s abroad. W i t h i n these two c e i l i n g s , t h e r e a r e a few s u b c e i l i n g s and other supplementary r e s t r a i n t s . example, one of those supplemental r e s t r a i n t s , For i n e f f e c t , asks banks - 4 not t o channel t h e i r own funds i n t o s h o r t - t e r m a s s e t s abroad merely to obtain a f i n a n c i a l return. From t h e e a r l i e s t days of the VFCR Program, t h e G u i d e l i n e s have requested t h a t , w i t h i n t h e i r c e i l i n g s , institutions p r i o r i t y to c r e d i t s that finance U.S. exports. You w i l l give find t h a t request s t a t e d s p e c i f i c a l l y i n the opening sentence o f t h e Guideline textc A l s o from the i n c e p t i o n o f the Program, bank c r e d i t s i n which the E x p o r t - I m p o r t Bank i s i n v o l v e d were exempted from the Guideline C e i l i n g s . Guidelines, As t h e exemption i s expressed i n t h e p r e s e n t c r e d i t s which a r e extended by banks or by nonbank f i n a n c i a l i n s t i t u t i o n s and which a r e guaranteed or participated i n by t h e Eximbank, or insured by Eximbank 1 s a f f i l i a t e d C r e d i t Insurance Agency ( F C I A ) , Foreign or guaranteed by t h e Department o f Defense a r e n o t s u b j e c t to G u i d e l i n e r e s t r a i n t . The exemption was c r e a t e d i n t h e knowledge t h a t t h e e x p o r t f i n a n c i n g activities of the Eximbank and the Department of Defense would be reviewed i n the N a t i o n a l A d v i s o r y C o u n c i l on I n t e r n a t i o n a l Monetary and F i n a n c i a l P o l i c y i n which the F e d e r a l Reserve i s represented. Export c r e d i t s have a l s o been exempted from several special r e s t r a i n t s i n the G u i d e l i n e s . In particular, banks a r e not t o make any new loans of a m a t u r i t y o f over one y e a r t o r e s i d e n t s of the developed c o u n t r i e s o f C o n t i n e n t a l Western Europe, except f o r loans which f i n a n c e U . S . e x p o r t s . Similarly, - 5- banks a r e to hold t h e i r s h o r t - t e r m c r e d i t s t o such r e s i d e n t s 75 per cent of the e n d - o f - 1 9 6 7 finance level, to except f o r c r e d i t s which exports. When the G u i d e l i n e s have been r e v i s e d t o increase ceilings or to e s t a b l i s h procedures so t h a t banks w i t h o u t c e i l i n g s might adopt them - - and t h e r e b y be a b l e t o engage i n f o r e i g n l e n d i n g -- s p e c i a l e f f o r t has been made t o earmark the new l e n d i n g l a t i t u d e export financing. T h i s has occurred many t i m e s . I n the f i r s t r e v i s i o n of G u i d e l i n e s a t the end o f 1965, a change i n the c e i l i n g formula gave some banks an increment l e n d i n g leeway. for They were asked to use t h a t l a t i t u d e f o r export c r e d i t s and c r e d i t s f o r less developed in exclusively countries. I n the s p r i n g of 1969, banks were o f f e r e d two a l t e r n a t i v e methods f o r c a l c u l a t i n g t h e i r c e i l i n g s . w i t h the i n t e n t , and had the e f f e c t , The formula was framed of s i g n i f i c a n t l y the c e i l i n g s of small and medium-sized banks. aggregate amounted t o almost $ 0 . 5 b i l l i o n . increasing The i n c r e a s e i n T h i s was the significant i n r e l a t i o n t o t o t a l c e i l i n g s of a l l banks - - which amounted t o about $9 b i l l i o n . I t was even more s i g n i f i c a n t which b e n e f i t e d most d i r e c t l y , f o r the banks since they accounted f o r only a minor f r a c t i o n of the $9 b i l l i o n of e x i s t i n g c e i l i n g s . One of the most important reasons f o r the i n c r e a s e and f o r i t s allocation t o the s m a l l e r banks was t h a t i t would improve t h e i r to finance exports. opportunity -6- I n December, 1969, each bank was g i v e n a second c e i l i n g t o be used e x c l u s i v e l y financed exports. f o r loans of over one y e a r m a t u r i t y Since t h a t d a t e , e v e r y bank has had a General C e i l i n g and an E x p o r t Term-Loan C e i l i n g . The c r e a t i o n of the second c e i l i n g added about $ 1 - 1 / 4 b i l l i o n i n l e n d i n g all for exports, c e i l i n g then i n that latitude, t o the a p p r o x i m a t e l y $10 b i l l i o n of aggregate existence. I n drawing up p r o v i s i o n s t o guide banks which have had no c e i l i n g s but which have proposed to adopt them - - and to guide the F e d e r a l Reserve Banks which c o n s u l t w i t h them t o a r r i v e specific ceilings -- the p o t e n t i a l c o n c e n t r a t i o n on e x p o r t has had top a t t e n t i o n . at financing The G u i d e l i n e s today p e r m i t new e n t r a n t s i n t o the f o r e i g n l e n d i n g f i e l d to adopt c e i l i n g s up t o a c e r t a i n limit, but those c e i l i n g s - - the General and Export Term-Loan C e i l i n g t a k e n t o g e t h e r - - a r e to be employed "predominantly 1 1 export financing. Finally, has s i g n i f i c a n c e a g e n e r a l e x c e p t i o n i n the G u i d e l i n e s for export financing. o f Canada from t h e Program. That i s the exemption Since e a r l y 1968, bank loans and a l l o t h e r types o f c r e d i t extended t o r e s i d e n t s o f Canada have been exempted from t h e G u i d e l i n e s . T h i s exemption was adopted f o r the VFCR and f o r the o t h e r U.S. Government balance-of- payments programs, n o t a b l y the F o r e i g n D i r e c t Investment Program, i n l i g h t o f the s p e c i a l r e l a t i o n s h i p between for - 7- the two economies and i n l i g h t of safeguards the Canadians imposed t o prevent Canada from becoming a "pass-through 1 1 f o r U.S. i n t o o t h e r p a r t s of the w o r l d . T h i s capital geographic exemption serves as an important exemption f o r export f i n a n c i n g , since Canada i s the most important s i n g l e f o r e i g n n a t i o n a l market f o r United States exports. Impact of the VFCR Program on Export F i n a n c i n g I n keeping the a d m i n i s t r a t i o n of the Program under constant review, the Board has watched c l o s e l y f o r any evidence that the savings i n c a p i t a l o u t f l o w might be o f f s e t by a loss of exports or even by a s h o r t f a l l i n the increase i n e x p o r t s f o r which we a r e striving. Last y e a r , as we were moving toward the time when d e c i s i o n s would once a g a i n be made about the p o s s i b l e e x t e n s i o n and r e v i s i o n o f the s e v e r a l c a p i t a l r e s t r a i n t programs, the Board undertook a separate i n q u i r y i n t o the p o s s i b l e e f f e c t i n 1970 of the VFCR on export f i n a n c i n g and on e x p o r t s . That i n q u i r y went t o the h e a r t o f t h e q u e s t i o n represented by t h i s b i l l . The r e s u l t s gave us i n f o r m a t i o n v a l u a b l e f o r the d e c i s i o n s the Board was t o take and t h a t Congress, by v i r t u e of H.R. 8181, i s asked now t o take. W i t h the c o o p e r a t i o n of the Department of Commerce, Board drew up questions t o be asked of banks and of U.S. the exporters about e f f o r t s made i n 1970 to o b t a i n c r e d i t f o r f o r e i g n buyers of U.S. goods. The f u l l r e p o r t , i n c l u d i n g the content of the questions -8- asked, was r e l e a s e d by t h e Board on January 7, when the G u i d e l i n e s were i s s u e d . I will a copy f o r the h e a r i n g s record. present revised t h e h i g h l i g h t s and submit The key questions asked o f banks which accounted over n i n e - t e n t h s of loans s u b j e c t t o the G u i d e l i n e s were: for (1) had they turned down loans requested on b e h a l f of f o r e i g n buyers of U . S . e x p o r t s because of t h e G u i d e l i n e s and ( 2 ) happened t o the contemplated s a l e . q u e s t i o n the e x p o r t e r s i n v o l v e d . if so, what then An e f f o r t was t h e n made t o As a f u r t h e r check, inquiries were made o f a sample of 100 e x p o r t e r s across the country t o a s c e r t a i n t h e i r e x p e r i e n c e i n g e t t i n g U . S . bank f i n a n c i n g for f o r e i g n customers i n the l i g h t of t h e VFCR. The r e s u l t s o f the i n q u i r y were s t r i k i n g . I t was r e p o r t e d t h a t t h e VFCR had r e s u l t e d i n the d e n i a l of e x p o r t c r e d i t i n only a h a n d f u l o f cases. Moreover, on U.S. e x p o r t s themselves. the VFCR had v i r t u a l l y no adverse About a dozen e x p o r t e r s were p u r p o r t e d l y denied c r e d i t i n i t i a l l y because o f the VFCR. cases, However, i n almost they found o t h e r sources o f f i n a n c i n g t o complete t h e i r (See T a b l e 1 , effects all sales. attached). As a b y - p r o d u c t of the i n q u i r y on p o s s i b l e e f f e c t s of the VFCR on e x p o r t s , our s t a f f undertook another i n q u i r y to a s c e r t a i n the p o r t i o n of t o t a l loans under VFCR C e i l i n g s t h a t The r e s u l t s of t h i s s t a f f study, and which a l s o I r e l e a s e d March 3, submit f o r the Committee's r e c o r d , banks have employed t h e i r financed exports. 1971, showed how l e n d i n g leeway w i t h r e s p e c t t o exports. - 9- Of loans under VFCR C e i l i n g s l a t e l a s t y e a r , were documented e x p o r t c r e d i t s . (See T a b l e 2 . ) 17 per cent Of loans s u b j e c t t o c e i l i n g s plus loans exempted from C e i l i n g s because they were E x i m b a n k - r e l a t e d or Department of D e f e n s e - r e l a t e d , were t o f i n a n c e e x p o r t s . 22 per cent The s t a f f paper noted many s t a t i s t i c a l and a n a l y t i c a l q u a l i f i c a t i o n s , and I s t r e s s here t h a t the do not p u r p o r t t o be comprehensive or p r e c i s e . on banks 1 records and e v a l u a t i o n s . figures But they a r e based They suggest s t r o n g l y banks do have the c a p a c i t y - - w i t h i n the c e i l i n g s — t o that finance exports. We have a l s o looked a t the record of u t i l i z a t i o n of Export Term-Loan C e i l i n g s as an i n d i c a t o r o f the Program's p o s s i b l e effect, i f not on e x p o r t s , on export f i n a n c i n g . You w i l l recall t h a t these c e i l i n g s were c r e a t e d a t the end of 1969 i n t h e aggregate amount of $ 1 - 1 / 4 b i l l i o n t o p r o v i d e new leeway f o r e x p o r t of over a year m a t u r i t y - that, r e f e r r e d to as term loans. i n the f i n a n c i n g o f e x p o r t s , magnitude than term loans. credits We r e a l i z e s h o r t - t e r m c r e d i t s a r e of However, we decided t o p r o v i d e greater additional l e n d i n g leeway f o r term loans t o meet the c o n t e n t i o n t h a t c r e d i t s over one year were c r u c i a l i f U . S . e x p o r t e r s were to match the f i n a n c i n g terms being o f f e r e d by e x p o r t e r s i n f o r e i g n As of the end o f March, f i f t e e n months a f t e r the Export Term-Loan C e i l i n g had been made a v a i l a b l e , countries. banks had used only of - 10 - 17 per cent o f i t . its utilization. Even t h i s f i g u r e i s an i n f l a t e d i n d i c a t o r of I f we look a l s o a t the f i g u r e s showing repayments o f term loans f o r exports t h a t banks had granted b e f o r e the new c e i l i n g became a v a i l a b l e and compare them w i t h the f i g u r e s showing new c r e d i t s o f t h i s t y p e placed on t h e i r books since t h a t time, we f i n d t h a t o u t s t a n d i n g e x p o r t t e r m loans s u b j e c t t o VFCR c e i l i n g s have grown by o n l y $67 m i l l i o n . today, A g g r e g a t i n g almost $ 1 - 1 / 2 billion the E x p o r t Term-Loan C e i l i n g c o n s t i t u t e s v i r t u a l l y an unused exemption. Reasons f o r Not Exempting Export C r e d i t s from VFCR If if the VFCR has had l i t t l e adverse e f f e c t on e x p o r t s and the r e s t r a i n t s have not been s u b s t a n t i a l l y h o l d i n g back e x p o r t c r e d i t s , why should t h e r e be F e d e r a l Reserve o p p o s i t i o n to the exemption proposed by T i t l e II? A complete exemption o f e x p o r t c r e d i t s from the capital r e s t r a i n t e f f o r t would weaken - - not improve — t h e o v e r a l l U . S . balance-of-payments First, large increase, program. exemption would l e a d to an i n c r e a s e , possibly to a i n c r e d i t but not t o an e q u i v a l e n t i n c r e a s e i n e x p o r t s . Second, exemption would undermine t h e e f f e c t i v e n e s s of whole set of U . S . c a p i t a l c o n t r o l s . removed from r e s t r a i n t , For example, if e x p o r t c r e d i t were a t t e n t i o n would have t o be g i v e n t o up on o t h e r forms of c r e d i t t o f o r e i g n e r s and o t h e r forms of the tightening - investments overseas. It 11 - i s h i g h l y q u e s t i o n a b l e t h a t we could s u c c e s s f u l l y i n t e n s i f y r e s t r a i n t s i n v a r i o u s c r e d i t areas t o compensate f o r the loss o f r e s t r a i n t on e x p o r t Finally, t h e r e i s as much need today - - more need than ever - United States. credits. perhaps even to r e s t r a i n the o u t f l o w o f funds from the P a r t i c u l a r l y i n the face o f our c o n t i n u i n g balance-of-payments d e f i c i t and of the l a r g e s h o r t - r u n large capital o u t f l o w s , we should take the g r e a t e s t care to a v o i d weakening the stand we have t a k e n , i n the common i n t e r e s t , flow of U.S. c a p i t a l i n t o f o r e i g n markets. to moderate the Any r e l a x a t i o n o f our c a p i t a l c o n t r o l s could j e o p a r d i z e the i n t e r n a t i o n a l c o o p e r a t i o n which we have been h e l p i n g to monetary build. There i s today no shortage o f c a p i t a l to f i n a n c e purchase o f U.S. goods. foreign The Board a t no p o i n t has denied t h a t the r e s t r a i n t s may l i m i t the o p p o r t u n i t i e s of an i n d i v i d u a l bank to provide export f i n a n c i n g . But the f a c t remains t h a t i n the banking system o f t h i s country as a whole, i n c l u d i n g the network o f foreign branches of U.S. banks t h a t a r e o u t s i d e the G u i d e l i n e s , and i n the f i n a n c i n g systems a v a i l a b l e i n other c o u n t r i e s - - particularly those which have strong balance-of-payments surpluses - adequate c r e d i t t o ensure the growth of U.S. For these reasons, Mr. Chairman, exports. the Board does not b e l i e v e t h a t T i t l e I I o f H.R. 8181 should be adopted. there in is Table 1 Summary of Banks' and Exporters' Responses to Inquiry on the Effects of the VFCR on Export Financing and on Exports Banks No. of banks No. of rejecting Value of exporters Possible loans No. of No. pf loan beNo. acknowlnet loss Export loans rejected exporters edging of banks cause of of sales sale F.R. rejected (000's) identified rejection completed (000's) VFCR Dist. responding 1 2 3 4 5 6 12 10 8 10 7 6 1 0 0 0 1 1 1 0 0 0 1 3 $200 0 0 0 Unknown $100 1 0 0 0 0 2 I 0 0 0 0 0 7 8,9 10 11 12 20 5 4 13 14 0 0 0 2 2 0 0 0 4 2/2 0 0 0 $1,450 $300 0 0 0 2 0 0 0 0 0 0 Total 1 3/109 7 11 $2,850 $ 0 Yes - - Unknown Yes • - - Yes Unknown Exporter* Net loss No. of of No. of exporters export Export exporters reporting sales sales responding rejections completed (000's) 0 0 0 0 Unknown 0 11 73 4 4 1 4 1 0 Yes Not a l l No 0 $18,000 $1,200 - * - - - - 1 0 - - 0 0 0 0 $300 12 6 0 1 9 9 1 0 $300 129 8 - „ „ Unknown - - • No $2,000 - - $2L,200 1/ Exporters not identified i n i t i a l l y by banks but drawn from separate sample. 2/ One bank said i t rejected many loans, but that I t kept no records. This case is listed here as one rejection. 1/ These 109 responses came from 113 commercial banks surveyed. The non-'responding banks a l l had very few outstanding foreign credits subject to the VFCR. Table 2 EXPORT CREDIT UNDER VFCR CEILINGS AND UNDER E X - I M , FCIA. AND DEPARTMENT OF DEFENSE VFCR EXEMPTIONS (millions of dollars) (i) Outstanding Credit Subject to VFCR A l l VFCR banks (167) 8,841 (2) Export C r e d i t Subject to VFCR - - (3) Exim, FCIA, DoD Exempt Credits (4) (5) (6) (2)+(3) ( 2 ) as % of (1) ( 4 ) as % of ( l ) + ( 3 ) — — — 8,208 1,374 628 2,002 17 23 7,235 1,161 543 1,704 16 22 973 213 85 298 22 28 156 22 14 35 14 21 4,970 926 397 1,323 19 25 Philadelphia 203 33 11 44 16 21 Cleveland 179 12 21 33 7 17 Richmond 65 30 1 31 46 4.7 Atlanta 30 2 12 14 7 33 Chicago 822 105 84 189 13 21 S t . Louis, Minneapolis and Kansas C i t y 46 12 7 19 26 36 Dallas 41 19 2 21 46 49 1,696 213 79 292 13 17 A l l banks i n i n q u i r y (72) 17 L a r g e s t banks ( o v e r $100 mn f o r e i g n a s s e t s ) A l l others (55) By F e d e r a l Reserve Boston District New York San F r a n c i s c o NOTE: September 30, 1970, d a t a , except August 3 1 d a t a f o r New York p r o j e c t e d t o September 3 0 . Appendix t o Statement by Andrew F . Brimmer Member Board o f Governors o f t h e F e d e r a l Reserve System The O r g a n i z a t i o n and F u n c t i o n i n g o f the V o l u n t a r y F o r e i g n C r e d i t R e s t r a i n t Program before the Subcommittee on I n t e r n a t i o n a l of Trade the House Banking and Currency Committee May 19, 1971 Appendix THE ORGANIZATION AND FUNCTIONING OF THE VOLUNTARY FOREIGN CREDIT RESTRAINT PROGRAM The V o l u n t a r y F o r e i g n C r e d i t R e s t r a i n t (VFCR) Program i s a p a r t o f an o v e r a l l Government program t o reduce the i n t h e U . S . balance o f payments. The VFCR Program i s deficit embodied i n a s e t o f v o l u n t a r y g u i d e l i n e s ^ which c o n s t i t u t e a r e q u e s t by t h e F e d e r a l Reserve System t h a t U . S . commercial banks and o t h e r nonbank f i n a n c i a l i n s t i t u t i o n s e x e r c i s e r e s t r a i n t i n v e s t i n g abroad. i n l e n d i n g and U . S . branches and agencies o f f o r e i g n banks, whose o r g a n i z a t i o n and o p e r a t i o n s d i f f e r from those o f U . S . a r e asked t o observe the s p i r i t o f the G u i d e l i n e s . The VFCR Program does n o t a p p l y t o f o r e i g n branches o r s u b s i d i a r i e s U.S. banks, of banks. The G u i d e l i n e s were o r i g i n a l l y issued i n e a r l y 1965, t h e y have been r e v i s e d once or more i n each subsequent y e a r . frequent r e v i s i o n , and Despite t h e p r i n c i p l e s u n d e r l y i n g t h e G u i d e l i n e s have remained the same, and i t s v o l u n t a r y c h a r a c t e r has n o t been a l t e r e d . A l t h o u g h t h e Board o f Governors was g i v e n a u t h o r i t y by E x e c u t i v e o r d e r a t the b e g i n n i n g o f 1968 t o s h i f t t h e Program t o a mandatory basis, t h e Board has not chosen t o e x e r c i s e t h i s a u t h o r i t y . Rather, t h e Board has r e l i e d on the c o o p e r a t i o n of t h e banks and nonbank financial institutions t o continue t h e Program on a v o l u n t a r y l j The Revised G u i d e l i n e s appear i n the F e d e r a l Reserve January 1971. pp. 9 - 2 0 . basis. Bulletin. -2- The f l e x i b i l i t y of the G u i d e l i n e approach a l l o w s the Board to r e v i s e the Program t o a l t e r any p o s s i b l e the degree of r e s t r a i n t and t o inequities. The a d m i n i s t r a t i o n of t h e VFCR Program i s by the Board t o one of i t s members. delegated The Board member changed w i t h Program a d m i n i s t r a t i o n i s a s s i s t e d by a v e r y small s t a f f . f o r the d a y - t o - d a y a d m i n i s t r a t i o n a r e d e l e g a t e d , extent, correct Responsibilities t o an important t o the F e d e r a l Reserve Banks, which seek guidance from the Board as necessary. principles, financial The f i r m e s t a b l i s h m e n t of a few g u i d i n g and the c o o p e r a t i o n of the commercial banks and nonbank institutions, have p e r m i t t e d the Program t o be c a r r i e d out w i t h an e x c e p t i o n a l l y modest input of resources. P r i n c i p a l F e a t u r e s of the VFCR Program The G u i d e l i n e s cover a l l U . S . f i n a n c i a l Actually, because t h e b u l k of them have l i t t l e institutions. or no f o r e i g n a s s e t s -- loans to f o r e i g n e r s or investments abroad — o n l y about 170 banks and roughly 335 nonbank f i n a n c i a l i n s t i t u t i o n s a r e a c t i v e i n the Program. participants The banks f i l e monthly VFCR r e p o r t s , w h i l e nonbank f i n a n c i a l i n s t i t u t i o n s r e p o r t on a q u a r t e r l y the basis. The c e n t r a l f e a t u r e of t h e VFCR Program i s a set of c e i l i n g s which banks a r e requested to observe i n making loans t o f o r e i g n borrowers and i n a c q u i r i n g o t h e r f o r e i g n a s s e t s . has two c e i l i n g : Each bank ( 1 ) a General C e i l i n g which a p p l i e s t o the o u t - - 3- s t a n d i n g amount of any type o f f o r e i g n a s s e t covered by the Guidelines, and ( 2 ) an Export Term-Loan C e i l i n g a p p l i c a b l e t o loans o f over one y e a r i n m a t u r i t y which f i n a n c e U . S . e x p o r t s . Originally, c e i l i n g s were adopted on the basis of a percentage a p p l i e d o u t s t a n d i n g f o r e i g n assets as of December 31, 1964. This to rigid r u l e proved i n e q u i t a b l e to banks which had not been a c t i v e in t h e f i e l d o f f o r e i g n l e n d i n g , and the G u i d e l i n e s were m o d i f i e d t o g i v e banks the a l t e r n a t i v e of computing t h e i r c e i l i n g s on t h e ' b a s i s of a given percentage of t h e i r t o t a l assets as of December 31, A f t e r t h i s G u i d e l i n e r e v i s i o n , most r e p o r t i n g banks switched 1968. to computing t h e i r c e i l i n g s on t h e basis o f t h e i r t o t a l a s s e t s as of y e a r - e n d 1968. The h i s t o r i c a l record o f t o t a l a s s e t s many banks a more generous c e i l i n g than a h i s t o r i c a l t o t a l foreign assets, since many of the r e l a t i v e l y offered f i g u r e on s m a l l e r banks had not e s t a b l i s h e d themselves i n the f i e l d of f o r e i g n lending. E v o l u t i o n of VFCR C e i l i n g s The G u i d e l i n e s have been amended so t h a t banks which have had no previous c e i l i n g , activities, but which want to e n t e r f o r e i g n lending may adopt c e i l i n g s i n c o n s u l t a t i o n w i t h the F e d e r a l Reserve Bank i n t h e i r d i s t r i c t . These new c e i l i n g s a r e established w i t h the understanding t h a t they a r e t o be used predominantly export financing. As of the l a t e s t r e p o r t i n g d a t e , of the for 36 banks, or 2 1 per cent 170 banks f i l i n g VFCR r e p o r t s , have c e i l i n g s based on t h e i r f o r e i g n a s s e t s o f December 31, 1964; 134 banks, or 79 per cent of -4- all r e p o r t i n g banks, u t i l i z e a c e i l i n g based on t h e i r t o t a l of December 31, assets 1968. The i n f l u e n c e of the h i s t o r i c a l record of participation i n f o r e i g n l e n d i n g on the c u r r e n t a l l o c a t i o n of VFCR c e i l i n g s is ishown by t h e share of t o t a l c e i l i n g s h e l d by the 36 banks which compute t h e i r G e n e r a l C e i l i n g s on the basis o f the t o t a l assets t h e y h e l d on December 31, 1964. foreign These banks c o n s t i t u t e about o n e - f i f t h o f the t o t a l r e p o r t i n g banks, y e t they have an e s t i m a t e d 82 per cent of the t o t a l G e n e r a l C e i l i n g s cent of a l l f o r e i g n a s s e t s r e p o r t e d under the General ( I n terms of t o t a l domestic and f o r e i g n a s s e t s , and 86 per Ceilings. these 36 banks accounted f o r 65 per cent of the t o t a l o f such assets of a l l banks r e p o r t i n g under t h e VFCR Program.) The 36 banks w i t h more f i r m l y e s t a b l i s h e d records of f o r e i g n l e n d i n g and investment tend t o utilize t h e i r VFCR General C e i l i n g s more f u l l y than the o t h e r banks. These more f i r m l y e s t a b l i s h e d banks have an average n e t leeway ( c e i l i n g s minus a s s e t s s u b j e c t t o t h e c e i l i n g s ) o f o n l y 2 - 1 / 2 per cent of t h e i r t o t a l General C e i l i n g s , compared t o an average n e t leeway of 30 per cent f o r a l l o t h e r r e p o r t i n g banks a t t h e end o f March, 1971. The second type o f c e i l i n g under t h e VFCR, t h e E x p o r t Term-Loan C e i l i n g , was i n t r o d u c e d i n December, 1969. earlier, t h e Export Term-Loan C e i l i n g a p p l i e s t o loans w i t h a m a t u r i t y o f over one y e a r \rfiich f i n a n c e U . S . e x p o r t s . As noted The s i z e o f - 5- t h e Export Term-Loan C e i l i n g i s r e l a t e d t o the t o t a l a s s e t s o f a bank as of December 31, 1968. To d a t e , banks have not tended t o u t i l i z e t h e i r Export Term-Loan C e i l i n g s e x t e n s i v e l y . March 31, As of 1971, t h e banks had an aggregate Export Term-Loan C e i l i n g of $ 1 , 4 4 3 m i l l i o n , of which only $248 m i l l i o n , or 17 per c e n t , was being u t i l i z e d . Coverage o f t h e Program Having discussed t h e g e n e r a l procedures u t i l i z e d establishing Guideline Ceilings, coverage o f the Program. it in i s i m p o r t a n t t o note t h e In general, the VFCR Program p r o v i d e s f o r t h e p a r t i c i p a t i n g banks t o m a i n t a i n r e s t r a i n t on f o r e i g n a s s e t s o f a l l types h e l d f o r t h e i r own account, and on assets h e l d in virtually a l l foreign areas. t i o n s t o t h i s coverage. There a r e , however, several The two most i m p o r t a n t exceptions excep- are: ( 1 ) E x p o r t - I m p o r t B a n k - r e l a t e d f i n a n c i n g and Department of Defense-related financing, and ( 2 ) loans t o Canada. For the nonbank f i n a n c i a l i n s t i t u t i o n s , t i o n s i n a d d i t i o n to those which apply t o banks. t h e r e a r e excepAside from t h e e x c e p t i o n s f o r E x i m b a n k - r e l a t e d and f o r Department of Defenserelated credit, and f o r loans and investments i n Canada, exceptions f o r l o n g - t e r m investments i n the developing c o u n t r i e s a p p l y nonbank f i n a n c i a l to institutions. Trend of F o r e i g n Lending Under the VFCR Program For banks, f o r e i g n loans and investments s u b j e c t t o VFCR G u i d e l i n e s i n c r e a s e d m o d e r a t e l y i n the e a r l y stages of the Program. -6- Currently, however, a t $ 9 . 4 b i l l i o n , they a r e a c t u a l l y less than when the Program was i n i t i a t e d . slightly (See Appendix Table The r e d u c t i o n i n r e p o r t e d bank claims on f o r e i g n e r s is the r e s u l t of the G u i d e l i n e r e s t r a i n t and not o t h e r factors. As data i n Table A - l show, w h i l e f o r e i g n assets s u b j e c t 1.) to VFCR c e i l i n g s have d e c l i n e d s l i g h t l y since the end of 1964, t o t a l f o r e i g n assets h e l d f o r the banks 1 own account (which i n c l u d e the exempted loans and investments i n Canada and Eximbank-related loans) have a c t u a l l y i n c r e a s e d from $ 9 . 7 a t the end of 1964 to $10.5 b i l l i o n on March 3 1 , billion 1971. I n a d d i t i o n t o l i m i t i n g the o v e r a l l c a p i t a l o u t f l o w from the U n i t e d S t a t e s , the VFCR has placed s p e c i a l r e s t r a i n t on o u t f l o w s t o the developed c o u n t r i e s of c o n t i n e n t a l Western Europe. c o u n t r i e s have enjoyed p a r t i c u l a r l y strong These balance-of-payments p o s i t i o n s and have r e l a t i v e l y w e l l - d e v e l o p e d c a p i t a l markets. they have less j u s t i f i c a t i o n than others f o r drawing on U.S. credit. The f i g u r e s i n T a b l e A - 2 , foreigners 1 / show t h a t f o r e i g n claims on the developed c o u n t r i e s to $ 2 . 2 b i l l i o n a t the end of 1964. from $ 0 . 9 of billion From the end of 1965 t o t h e most r e c e n t d a t e , a p e r i o d of VFCR G u i d e l i n e 2J bank c o v e r i n g a l l bank claims on c o n t i n e n t a l Western Europe increased by $ 1 . 3 b i l l i o n - a t the end of 1961 Thus, restraint, These d a t a a r e comparable, but not s t r i c t l y i d e n t i c a l , w i t h t h e data i n T a b l e A - l on f o r e i g n assets covered by the VFCR. For the d i f f e r e n c e s , see the f o o t n o t e s t o T a b l e A - l . - 7- t o t a l b a n k - r e p o r t e d claims on r e s i d e n t s of the developed of c o n t i n e n t a l Western Europe were reduced by 50 per countries cent. The VFCR G u i d e l i n e s have f u r t h e r requested t h a t banks from e x t e n d i n g any nonexport term loans to r e s i d e n t s of these refrain countries. The f i g u r e s i n T a b l e A-2 show t h a t , between the end of 1961 and the end of 1964, l o n g - t e r m bank claims on these c o u n t r i e s increased by about $ 1 . 0 b i l l i o n . Between the end of 1965 and January 31, the years of VFCR G u i d e l i n e r e s t r a i n t , long-term bank-reported claims on these c o u n t r i e s d e c l i n e d by almost e x a c t l y $ 1 . 0 The data i n Table 1971, billion. A-2 i n d i c a t e t h a t the VFCR Program has been s u c c e s s f u l i n r e v e r s i n g the growth of bank c r e d i t t o the developed c o u n t r i e s of c o n t i n e n t a l Western Europe, and p a r t i c u l a r l y i n c u t t i n g back the amount of l o n g - t e r m bank c r e d i t t o these Thus, w i t h i n t h e G u i d e l i n e s , the main focus of r e s t r a i n t countries. has been d i r e c t e d a t those c o u n t r i e s which have the l e a s t j u s t i f i c a t i o n u t i l i z e U . S . bank c r e d i t . the most from the s h i f t The f o r e i g n c o u n t r i e s which have to benefited i n the focus of bank l e n d i n g from Western Europe a r e the developing c o u n t r i e s , which have gained better access t o U . S . bank c r e d i t . At t h i s p o i n t , it i s i n s t r u c t i v e to examine the of the VFCR nonbank program which i s d i r e c t e d toward cial institutions, operation nonbank finan- such as insurance companies, pension funds, and the t r u s t departments of commercial banks. Nonbank financial i n s t i t u t i o n s hold about $ 1 5 . 3 b i l l i o n i n f o r e i g n a s s e t s , which i s -8- l a r g e r than the amount h e l d by banks. or about 10 per c e n t , line restraint. However, o n l y $ 1 . 5 billion, of these assets a r e covered by VFCR Guide- The d a t a i n T a b l e A-3 i n d i c a t e c l e a r l y t h a t the nonbank p a r t of the Program has r e s t r a i n e d the amount of covered 3/ f o r e i g n a s s e t s h e l d by nonbank f i n a n c i a l i n s t i t u t i o n s . - - On the o t h e r hand, t h e r e has been a steady growth i n t o t a l - - and i n the uncovered p o r t i o n of - concerns. f o r e i g n a s s e t s h e l d by nonbank financial T h i s i n c r e a s e has centered p r i m a r i l y on c r e d i t s to Canada and t o the d e v e l o p i n g countries. Summary The VFCR Program has been a f l e x i b l e p o l i c y instrument t o r e s t r a i n the amount of bank l e n d i n g and i n v e s t i n g i n countries. foreign A v a i l a b l e evidence has shown t h a t the Program has been s u c c e s s f u l i n a c h i e v i n g t h i s o b j e c t i v e and has done so w i t h a minimum of a d m i n i s t r a t i v e machinery. The Program has emphasized the p r i o r i t y under the c e i l i n g s t o c r e d i t s which f i n a n c e U . S . e x p o r t s and t o s e r v i n g t h e f i n a n c i n g needs of the d e v e l o p i n g countries. 3/ T a b l e A-4 p r e s e n t s a chronology of which f o r e i g n assets a r e covered by the VFCR G u i d e l i n e s , and thus s u b j e c t t o r e s t r a i n t . May 19, 1971 Voluntary Foreign Credit Restraints Appendix T a b l e 1 Foreign Assets of United S t a t e s Banks ( d o l l a r amounts i n m i l l i o n s ) Number of r e p o r t i n g banks General C e i l i n g 1964 Dec. 1965 Dec. 1966 Dec. 1967 Dec. 1968 Dec. 1969 Dec. 1970 Dec. 1971 Jan. 1971 Feb. 1971 Mar. 154 161 148 151 161 169 171 164 164 170 9,973. 9,652 +157 321 10,407 9,496 -156 911 11,069 9,865 +369 1,204 9,729 9,253 -612 476 10,092 9,398 +145 694 9,956 9,350 -48 606 9,935 9,068 -282 868 9,902 9,072 +4 831 9,919 9,173 +101 746 1,264 16 1,248 1,423 187 +171 1,236 1,428 210 +23 1,218 1,421 218 +8 1,203 a, 443 248 +30 1,195 1/ Aggregate c e i l i n g Assets under c e i l i n g 2 / Change from previous date Apparent leeway Export Term-Loan C e i l i n g 9,495 3/ Aggregate c e i l i n g Assets under c e i l i n g 4 / Change from previous d a t e Apparent leeway - - - - - - - - - T o t a l General and Export Term-Loan C e i l i n g s Aggregate c e i l i n g s Assets under c e i l i n g s Change from previous d a t e Apparent leeway T o t a l F o r e i g n Assets Held f o r Own Account 5 / Change from previous date 9,495 9,719 - - 9,973 9,652 +157 321 10,407 9,496 -156 911 11,069 9,865 +369 1,204 9,729 9,253 -612 476 11,356 9,414 +161 1,942 11,379 9,537 +123 1,842 11,363 9,278 -259 2,086 11,323 9,290 +12 2,034 11,362 9,421 +131 1,941 9,958 9,844 10,202 9,844 10,158 10,607 10,261 10,284 10,509 +239 -114 +358 -358 +314 +449 -346 +23 +225 1 / P r i o r t o December 1969, " T a r g e t C e i l i n g " . 2 / T o t a l f o r e i g n assets r e p o r t e d on Treasury Foreign Exchange Forms B-2 and B - 3 : minus ( 1 ) amounts held for accounts o f customers, ( 2 ) loans guaranteed or p a r t i c i p a t e d i n by the E x p o r t - I m p o r t Bank, guaranteed by the Department of Defense, or i n s u r e d by the FCIA, ( 3 ) beginning March 1968, changes a f t e r February 2 9 , 1968, i n claims on r e s i d e n t s of Canada held f o r own a c c o u n t , and ( 4 ) e x p o r t term loans ( m a t u r i t y over one y e a r ) placed on banks' books a f t e r November 30, 1969, plus f o r e i g n for a sFRASER s e t s h e l d f o r own account but not r e p o r t e d on Forms B-2 Digitized http://fraser.stlouisfed.org/ and B - 3 . Federal Reserve Bank of St. Louis 3/ 0 . 5 per cent o f r e p o r t i n g banks 1 t o t a l assets as o f December.31, 1968. 4 / See p o i n t ( 4 ) of f o o t n o t e 2. 5 / T o t a l f o r e i g n assets r e p o r t e d on Treasury F o r e i g n Exchange Forms B-2 and B - 3 , plus f o r e i g n assets held for own account not r e p o r t e d on those forms, minus amounts held for account o f customers. Note; Data are for end of months listed. Appendix Table 2 Claims on F o r e i g n e r s Reported by Banks i n the U n i t e d S t a t e s ( i n m i l l i o n s of d o l l a r s ) Year-end A l ]L c o u n t r i e s Long-term Short-term Total Developed c o u n t r i e s of c o n t i n e n t a l Western Europe 1 / S h o r t - t e r m Long-term T o t a l 1961 4,777 2,034 6,811 473 466 939 1964 7,957 4,285 12,242 734 1,479 2,213 1965 7,735 4,517 12,252 713 1,330 2,043 1967 8,606 3,925 12,531 810 520 1,330 1968 8,711 3,567 12,278 714 312 1,026 1969 9,667 3,250 12,917 864 291 1,155 1970 10,751 3,049 13,800 871 310 1,181 January 3 1 , 1971 10,345 2,936 13,281 867 312 1,179 If I n c l u d e s A u s t r i a , Belgium, Denmark, F r a n c e , the F e d e r a l Republic of Germany, I t a l y , Luxembourg, N e t h e r l a n d s , Norway, P o r t u g a l , S p a i n , Sweden, S w i t z e r l a n d . Appendix Table 3 F o r e i g n Assets of U . S . Nonbank F i n a n c i a l (dollars in millions) Number of Reporting Covered Asset s ^ Institutions Liquid Other 1965 G u i d e l i n e s Dec. 1964 Dec. 1965 1966 G u i d e l i n e s Dec. 1965 S e p t . 1966 1967 G u i d e l i n e s Dec. 1965 S e p t . 1966 Dec. 1966 1968 Guidelines-^ / Dec. 1966 Dec. 1967 1968 Rev. G u i d e l i n e s Dec. 1967 Dec. 1968 1969 G u i d e l i n e s Dec. 1968 Dec. 1969 1970 G u i d e l i n e s Dec. 1969 Dec. 1970 Institutions Noneovered Assets Total 584 571 511 276 1,234 1,266 10,441 11,365 12,186 12,907 571 571 268 208 2,912 2,653 9,941 10,188 13,121 13,049 572 572 572 265 208 194 2,239 1,850 1,757 10,609 11,016 11,153 13,114 13,074 13,105 352 352 189 185 1,695 1,719 10.770 11,659 12,654 13,563 346 346 51 16 1,631 1,427 11,885 12,517 13,567 13,959 336 336 14 15 1,416 1,241 12,508 13,563 13,939 14,820 336 336 25 35 1,702 1,478 13,086 13,749 14,813 15,262 1/ See t a b l e A-4 f o r s h i f t s i n covered/noncovered s t a t u s of r e p o r t a b l e assets. 2/ R e p o r t i n g requirements changed from $500,000 or more i n t o t a l f o r e i g n assets t o : ( a ) $500,000 or more of covered f o r e i g n assets o r , (b) $ 5 , 0 0 0 , 0 0 0 or more of t o t a l f o r e i g n a s s e t s . Appendix Table 4 Covered/Noncovered S t a t u s o f F o r e i g n A s s e t s , Nonbank F i n a n c i a l I n s t i t u t i o n s , by G u i d e l i n e Year 1965 Liquid assets Canada Japan O t h e r Developed C o u n t r i e s Less Developed C o u n t r i e s Short & i n t e r m e d i a t e c r e d i t s Canada Japan O t h e r Developed C o u n t r i e s Less Developed C o u n t r i e s International organizations D i r e c t investments Canada Japan O t h e r Developed C o u n t r i e s Less D e v e l o p e d C o u n t r i e s Long-term c r e d i t s Canada Japan O t h e r Developed C o u n t r i e s Less Developed C o u n t r i e s International organizations Stocks Canada Japan O t h e r Developed C o u n t r i e s acquired before 9/30/65 acquired a f t e r 9 / 3 0 / 6 5 Less Developed C o u n t r i e s 1966 1967-1968 1968r-1969 r r c p NC u ——— c c .— .—" Li — p \J c NC 1970-1971 MP JN VJ T iTL P* JN WL. c p c c C MP Mr Nf NC C n Nf NC NC NC NC NC NC c p /I C MP ML
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