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Statement of J. L. Robertson, Vice Chairman

Board of Governors of the Federal Reserve System

before the

Subcommittee on International Trade

of the

Committee on Banking and Currency

House of Representatives

M a y 19, 1971

Mr. Chairman, I a m pleased to appear before your Committee
to discuss with you the views of the Board of Governors on H. R. 8181.
The Board has a strong interest in this bill because two of its three
titles would directly affect important aspects of our operations.
Title I would require the Federal Reserve to grant credit, under
certain specified interest rate spreads, to any Federally! insured
bank seeking funds to finance the production or sale of goods for
export from this country.

Title II would require the Federal Reserve

to exclude from the coverage of its Voluntary Foreign Credit Restraint
Guidelines any credit extended by banks or other financial institutions
to finance exports of U. S. goods.
Governor B r i m m e r and I would like to present the Federal
Reserve position on these two sections of the bill in two parts.

I

will c o mment first on Title I Although I was responsible for
.
managing the Board's Voluntary Foreign Credit Restraint program in
its early years, Governor B r i m m e r has had responsibility for its
administration since m i d -1968 -- and 1 might add that he has done an
excellent job of i . I is, therefore, m o r e appropriate for him to
t
t
co m m e n t on that part of the bill.
Another topic of epecial interest to our Board, which I
understand your subcommittee is also considering, is the question
whether the Export-Import Bank should be placed outside Federal




-2budget totals and ceilings on expenditures and net lending.

"While

Title III of H. R. 8181 contains several amendments broadening the
authority of the Export-Import Bank, i leaves the budgetary status of
t
the Bank unchanged.

H. R. 5846, on the other hand, -- which I under­

stand is also on your subcommittee's agenda -- would take the Bank out
of the budget totals.

Near the end of m y remarks I would, therefore,

like to reiterate briefly the Board's position, already communicated
to other Committees of Congress, supporting retention of the Bank
in the budget.

H o w Title I would work
Title I of the proposed bill would, in effect, provide any
Federally insured bank automatic access to Federal Reserve credit
in amounts limited only by the volume of export paper in the bank's
portfolio.

Such paper would be discounted by Federal Reserve Banks

at the discount rate or 6 per cent, whichever was lower, for short­
term paper.

For l-to-5 year paper, the m a x i m u m rate would be 5

per cent; and for longer-term paper, 4 per cent.

Under this arrange­

ment the spread to the commercial bank ( . e., the difference between
i
the rate charged the customer and the rate at which the loan was
discounted by the Reserve Bank) would be allowed to range from
3/4 to 2-1/2 percentage points, depending on the remaining maturity




-3 -

of the loan« whether the exports involved were destined for a developed
or a developing country, and whether the loan was guaranteed or insured
by the Export-Import Bank,
The extent to which U. S, banks would take advantage of such
an opportunity to discount their export loans could be expected to vary
with domestic interest rate conditions since banks would be limited as
to the interest rate they could charge the exporter and still use the
Federal Reserve facility. At times when banks were highly liquid
and time deposits or other funds to finance their loans could be
obtained in the market at rates below the prescribed Federal Reserve
minimums, there would be little disposition to take advantage of the
facility.

But in periods when bank funds were m o re costly than the

m a x i m u m 6, 5, and 4 per cent discounting rates specified, banks
would be encouraged to use the facility both to m a k e new export loans
and to unload their holdings of outstanding export paper on the System.
The opportunity to obtain instant liquidity by unloading export
loans on the Federal Reserve would, of course, be quite valuable
to a bank in periods when monetary policy was in a posture of antiinflationary restraint.

I should be noted in passing, however, that
t

this advantage would be available only to a relatively small number
of institutions.




The bulk of U. S. foreign lending is carried on by

-4-

less than 200 banks, and most o£ the dollar volume of export
financing is concentrated in a m u c h smaller number of large city
banks.
Where banks did unload outstanding export loans in periods
of general monetary restraint, the reserve funds they so acquired
would most likely be used to support additional lending to preferred
customers for domestic purposes rather than to export customers.
However, the combination of low m a x i m u m discount rates and fixed
spreads would at the same time assure unusually favorable rates on
new export loans.

In these circumstances foreign customers who

might normally finance their imports from the United States in their
own countries would be perfectly free to seek and, so long as the
bargain rate relationships were maintained, to obtain through their
American bankers unlimited credit from the Federal Reserve to
finance imports.
I is important to distinguish the basic difference between
t
this proposed discount facility for export loans and the operation
of the existing Federal Reserve discount window.

As already noted,

under the proposed facility a bank would have the right to obtain
Federal Reserve credit, at its own option and at guaranteed m a x i m u m
rates, so long as it possessed or could generate export loan collateral
eligible for discounting.

Such credit could be used in turn to finance

a m o r e o r less permanent expansion of domestic lending.




-5-

The purpose of the Federal Reserve discount window, on the
other hand, is simply to provide m e m b e r commercial banks with
temporary liquidity, as needed to adjust their reserve positions
and help meet weekly average reserve requirements.

The window is

not designed to provide credit for the purpose of inducing an expansion
in bank lending.

Consequently, borrowings at the discount window

are limited in maturity to 15 days or less.

I any particular m e m b e r
f

bank returns to the discount window too frequently and appears to be
becoming "a continuous borrower", its management is brought under
surveillance by the regional Federal Reserve Bank and advised to
sell sufficient assets to repay the Federal Reserve borrowing.

In

short, the opportunity to borrow is a privilege provided only so
long as a bank uses i to acquire temporary liquidity.
t

If the bank

attempts to stretch its use of Federal Reserve credit to finance
asset holdings on a m o r e permanent basis, the privilege is with­
drawn.

Evaluation of Title I
The preceding sketch of the way in which the proposed Title I
facility would work raises serious doubts about the advisability of
its enactment.

Because the Title I arrangements would provide

automatic liquidity to the export loans held by any insured bank,




-6-

they could seriously inhibit general monetary policy at timos when
the Federal Reserve was seeking to restrain inflation. At such
times, banks would be likely to unload their outstanding export loans
on the Federal Reserve as a means of continuing to meet the heavy
credit demands of their domestic customers.
In addition, banks would very likely continue making new
export loans, despite the conditions of general monetary restraint.
Foreign customers would be attracted by the bargain rate6 and U. S.
banks could immediately unload any new loans m a d e on the Federal
Reserve.

Not only would this provision of Federal Reserve credit

be automatic, the large banks receiving it would gain a discount
interest rate advantage over other bank* whenever the m a x i m u m
discounting rates on export loans were below the regular Federal
Reserve discount rate and rates on other short-term sources of
bank funds.
W h e n banks transferred export loans to the Federal Reserve,
high powered central bank dollars would be released which could
serve as the basis for a multiple expansion of bank credit.

In such

circumstances, if the System's anti-inflation policy was not to be
seriously eroded, this release of high powered dollars would have to
be offset through other System actions.




-7 -

If the offsetting System actions could be m a d e without too
m u c h lag, the total volume of bank credit expansion allowed by
Federal Reserve policy would be no larger, but the share allocated
to foreign lending would be.

Thus, the effect of the selective

expansion of export financing would be to reduce the amount and
raise the costs of the credit supply remaining to finance such
domestic ne.eds as housing and State and local government programs.
In short, the Title I arrangements would at times have the
inadvertent result of setting a higher priority on financing of export
loans than on some domestic needs which might generally be regarded
as socially m o r e pressing.

This is one of the difficulties of attempting

to introduce a program of selective credit allocation within a frame­
work of general monetary control.

I also illustrates why the Board
t

of Governors has consistently opposed the use of its discount facility
for selective credit allocation purposes.

Budgetary status of Ex-Im Bank
Turning now to the question of the appropriate budgetary status
for the Export-Import Bank, the Board continues to r e c o m m e n d
against proposals that would exclude the Bank's receipts and disburse­
ments from the totals of the Federal budget and exempt them from any




-8

limitations on annual expenditures and net lending imposed through
the budget.

These proposals would m a k e possible an expansion of

Export-Import Bank operations by freeing them from budget restraints
imposed on other Federal programs.

Such restraints are designed

to limit the demands of the Government on the real resources of the
economy and to enable the Congress and the Administration to establish
priorities among Federal programs, so that the m a x i m u m benefit is
derived from the total outlays of the Government.
I this exclusion from the budget is to have any effect, i will
f
t
be to allow Export-Import Bank outlays to exceed those that i would
t
m a k e under present restraints.

As a result, total Federal outlays

will rise without being reflected in the budget totals.

In addition,

exclusion of the Export-Import Bank from the budget would set a
precedent that undoubtedly would be invoked by other government
agencies seeking the same privilege.

There are a number of agencies

with this potential interest, and i would be hard to maintain that the
t
Export-Import Bank is the only institution that merits such treatment.

Promotion of exports
The Board's reservations about the desirability of enacting
Title I of H. R. 8181 should not be interpreted as a lack of interest




*9-

in promoting U. S. exports.

The Federal Reserve is second to no one

in its desire to see an improvement in the U. S. balance of payments.
Hence we are very m u c h export minded.
W e also fully recognize the importance of providing adequate
financing to assist our export sales abroad and believe that the
Export-Import Bank plays a positive role in achieving this goal.

For

this reason w e favor the amendments in Title III of H. R. 8181 which
would increase the loan, gurantee, and insurance authority of the
Ex-Im Bank -- and, among other things, would permit an expansion
of the existing discounting facility for m e d i u m term export loans.

Of

course, our support of these expanded financial activities carries
with it the proviso that they wiil be fully coordinated by the U. S.
Treasury.
Finally, we believe that there is an irpportaat part to be played
by such new organizations as the Private Export Funding Corporation.
The Board, along with other federal agencies, has helped in the
establishment of that corporation.

And w e expect i to assume
t

important responsibilities in marshalling financial resources in
this country and abroad to support major U. S. exports.

As a

private venture operating with official guarantees and insurance
paid for by users of the credits, P E F C O holds promise of providing
substantial financial resources on competitive terms.




-10

This completes m y testimony, &ir. Chairman.

At this point

I would like to have Governor B r i m m e r testify on the V F C R program,
if that meets with your wishes.