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A Series o f O c c a s io n a l Papers in D ra ft F o rm P re p a re d by M e m b e r s
QQ
SM -88-
o f th e R esearch D e p a r tm e n t fo r R e v ie w a n d C o m m e n t
FRS
Chicago
88-8
C O M M ERC IA L BANK CAPACITY T O PAY IN TE R E S T
O N D EM A N D D EP O SITS: EVIDENCE FRO M LARGE W EEKLY
REPO RTIN G BANKS
Elijah Brewer, III and Thomas H. Mondschean
C o m m e r i c a l
D e m a n d
B a n k
D e p o s i t s :
R e p o r t i n g
C a p a c i t y
E v i d e n c e
to
P a y
f r o m
Interest
L a r g e
o n
W e e k l y
B a n k s
Elijah Brewer, III and Thomas H. Mondschean*
The Banking A ct of 1933 established a zero interest rate ceiling on demand
deposits. When Congress decided to prohibit the payment of interest on
demand deposits, it was believed that the regulation would help to dis
courage unsound banking practices. Supporters maintained that banning
interest payments on demand deposits would encourage small, country
banks to reduce their deposits in large, money-center banks and either
maintain greater cash reserves in the bank or meet local credit demands [see
Linke (1966)]. Furthermore, money-center banks would pursue sounder
lending policies because they would no longer be under pressure to seek
high-yielding, risky loans in order to pay competitive rates of interest on
demand deposits. Conventional wisdom has it that the zero interest rate
ceiling has reduced bank demand deposit costs and has improved commer
cial bank profitability. The zero interest rate ceiling, however, has affected
bank earnings in ways other than its direct influence on interest expense.
Competitive pressures induced banks to attract noninterest-bearing deposits
by other means, resulting in the provision of financial and nonfinancial
goods and services in lieu o f explicit interest.1 These benefits acted as im
plicit interest payments to depositors, raising the effective cost of demand
deposits above the zero interest rate ceiling level.
M any methods have been used for estimating the implicit rate on demand
deposits. Barro and Santomero (1972) examined a private survey of large
commercial banks to obtain the rate at which service charges are remitted
to households as a function of average deposit balances. Benjamin Klein
(1974) derived an implicit rate paid on corporate demand deposits by as
suming that Regulation Q is costlessly evaded and market pressures force
banks to offer the equivalent of a competitive rate. Becker (1975) measured
the implicit cost incurred by banks on combined household and corporation
demand deposits as the difference between aggregate bank noninterest ex
penses and noninterest income derived from service charges and fees. The
ratio o f these dollar payments to demand deposits provided an estimate of
♦Elijah Brewer, III is an Economist, Federal Reserve Bank of Chicago; and Thomas H.
Mondschean isan Instructor ofEconomics atDePaul University. The authors would liketo
thank Herbert Baer formany ideas,helpfulcomments and assistance. Theresa Ford provided
excellentresearch assistance. The views expressed herein are solely those ofthe authors and
do not necessarily represent the views ofthe Federal Reserve Bank ofChicago or the Federal
Reserve System.
FRB CH ICAGO Staff M em orandum
1
the implicit rate on demand deposits. Startz (1979) constructed estimates
o f the implicit interest rate from both functional cost accounting data as
well as aggregate expense and balance sheet data on demand deposits and
time and savings deposits for all insured banks. Taylor (1984) computed
implicit interest rates on household demand deposits using functional cost
accounting data.
By contrast, our paper employs a statistical cost accounting model o f bank
net income to derive estimates o f the implicit interest rate on demand de
posits o f individuals, partnerships, and corporations (IPC demand depos
its). The statistical framework allocates those operating and nonoperating
costs attributable directly or indirectly to the deposit liability. This method
has a certain advantage over other studies of implicit rates on demand de
posits. Namely, it does not require any assumption about the specific way
that implicit interest payments are made or the relationship between various
ways of making such payments. It, therefore, avoids some problems, de
tailed in Dotsey (1983b), that potentially affect the previous studies.
Our results show that the implicit demand deposit rate was greater than
zero and moved higher over the 1976:1— 1985:4 period. These implicit rates
are useful because they allow us to determine how much commercial bank
noninterest operating expense results from implicit interest payments on
demand deposits, and thus, how large the scope for operating cost re
duction in the commercial bank industry would be if the zero interest rate
ceiling on demand deposits was eliminated.2 In addition, for the issue o f
interest rate deregulation, it is important to know how high these implicit
rates have been and how quickly they have adjusted to changes in bank
earning-asset rates.
The paper is organized as follows. Section I describes the method used to
estimate the implicit rate on demand deposits. Section II discusses the
sample and data used in the study. Section III reports the cross-sectional
results. The last section summarizes the paper findings.
I. M odel Specification
Estimating the net cost o f providing demand deposit services requires the
allocation of costs and revenues to this liability.3 A statistical cost ac
counting model provides estimates o f the actual relation between demand
deposits and bank earnings.4 The basic model consists of a linear equation
that expresses bank income as a function of a bank’s asset and liability
portfolio composition. Generally, each balance sheet entry—whether asset
or liability—has costs and revenues associated with it and should be in
cluded in the statistical cost accounting model. Thus, the equation ex
plaining bank income is given as
FRB CH ICAGO Staff M em orandum
2
J
Yi— &o
K
^
7=1
^ ^ k^ik
£i
(1)
k=1
for all i, i = 1, 2,...,N
where Y, is the ith bank’s income; A /ymeasures the amount that the /th bank
holds of the yth asset; L ik measures the amount that the ith bank holds of
the k t h liability; a„,
and Y k are parameters; and s, is a stochastic error
term with an expected value of zero. If income net of expenses is used to
measure Y, the estimated
coefficients may be interpreted as net rates of
return, which is interest earned less noninterest costs net o f fees and other
noninterest income per dollar of A,y that arise for holding and servicing the
asset, and should be positive. Similarly, Y^ is interest paid plus noninterest
costs net of fees and other noninterest income per dollar of L ik that arise
from servicing the liability, and should be negative.
The model as specified in Equation (1) cannot be estimated directly because
assets and liabilities are related to each other through the balance sheet
identity. Perfect multicollinearity will occur in the estimation because at
least one of the variables is a linear combination of other variables. This
problem is circumvented, however, by imposing the a p r io r i restriction that
banks derive no income or expenses from the book value of equity capital.
If the Ath liability is the book value of equity capital, then using the bal
ance sheet identity to eliminate this liability gives5
(2)
7=1
k=1
for all i, i = 1, 2,...,N
where Y'k represents deviations of the cost of the A:th liability (for k = l ,
2,...k-l) from that of the book value of equity capital.
The assumption that banks derive no income or expenses from the book
value of equity capital implies that Y* = 0 and Y* = Y^ (for all k=£K). This
assumption is not testable within the model, but it is sufficient to recover
estimates of absolute rates of cost for all liabilities, along with their stan
dard errors.6
The use of cross-sectional data in estimating statistical cost accounting
models of bank portfolio behavior commonly results in a heteroskedastic
error term, £,. To improve efficiency in the estimation of the coefficients,
a weighted least squares approach was employed. All variables in Equation
(2) were deflated by total assets, T A h raised to the power of d. Then
Equation (2) becomes
FRB CH ICAGO Staff M em orandum
3
J
Y ilT A ?
K -1
= aJ T A ? + ^ ( A y /T A ? ) + £
j=l
Y k ( L ikI T A ? ) + v i
(3)
fc=l
for all i, i= 1,2,....,N
where u,( = s J T A f ) is a stochastic error term. Goldfeld-Quandt tests (1972)
were performed for values o f d between 0 and 1.75. The value yielding a
test statistic closest to 1 was selected for each regression over the sample
period.7
II. Sample and Data Sources
The asset and liability data used in this study come from the weekly Report
of Condition filed by large weekly reporting banks (WRBs) during the pe
riod from 1976 to 1985. Naturally, some variation in the number o f banks
in the sample has occurred over the observation period. The number of
W RBs ranged from about 160 to approximately 290. The sample was de
signed to represent approximately one-half of the total assets of all com
mercial banks in the United States. The weekly data source was selected
instead of the quarterly Report of Condition because the thirteen balance
sheets within each quarter could be combined to provide a quarterly aver
age. This is superior to relying on end-of-quarter balance sheets which,
because o f window-dressing, manipulation, and smoothing, may not be
representative of a bank’s actual portfolio behavior throughout the quarter.
Ten asset categories were selected as explanatory variables for the esti
mation. They were designed to add up to total assets. Eight liability cat
egories were used for the years 1976-1983. An additional liability category,
which represents N O W and A T S balances, was added to the weekly Report
of Condition in January 1984. A list of the explanatory variables is con
tained in Table 1.
Income data for the sample banks are from the Report of Income which is
filed quarterly. Net income after taxes and extraordinary items was selected
as the income variable because this measure is the bank’s bottom-line profit
from which dividends may be distributed and which should, for any period,
most closely approximate the objective o f profit-maximization.8
Equation (3) was estimated by ordinary least squares quarter by quarter,
from the beginning of 1976 through the end o f 1985. For each quarter, any
weekly reporting bank that did not report all the necessary data were re
moved from the sample in that quarter.9 Also, the weekly reporting sample
was revised by Federal Reserve at the end of 1978 and reduced by 100
banks. A relatively minor sample revision occurred at the end of 1983.
For these reasons, the size o f our sample changed from quarter to quarter.
FRB CH ICAGO Staff M em orandum
4
Table 1
Asset and liability categories for weekly reporting banks
Variable
Percent of total assets*
Ay
Az
Az
9.10
9.12
4.74
a4
6.06
As
a6
A7
Ag
a9
A 10
15.77
3.09
22.22
12.71
6.03
11.15
Variable
Percent of Total Assets*
c
t-2
f~3
14.53
4.08
4.34
f-4
f~5
f-6
h
17.69
14.66
14.85
16.44
5.36
7.85
L9
Variable name
Cash and due from deposits
U.S. government securities
State and local government
securities
Federal funds sold, reverse RPS,
and loans for purchasing and
carrying securities
Real estate loans
Financial loans
Commercial and industrial loans
Loans to individuals
All other loans
All other assets
Variable name
I PC demand deposits
Other demand deposits
Transactions balances other than
demand deposits
Nontransaction savings deposits
Large time deposits
Small time deposits
Borrowings
Other liabilities
Equity capital
* Based on the 1985 average of the weekly balance sheets and the arithmetic mean of all the
weekly reporting banks in the sample (168 observations).
III. Empirical Results
Ordinary least square estimation of /?7s and T ks obtained using Equation
(3). The resulting implicit rates on demand deposits (T DD) for each quarter
from 1976 to 1985 are presented in Table 2.10 Column (3) of Table 2 pre
sents the 3-month Treasury bill rate adjusted for the implicit reserve re
quirement against net demand deposits and provides an estimate of the
marginal revenue of a dollar of demand deposits [see Startz (1979)]. Table
2 also presents the change in the imputed implicit demand deposit rates and
adjusted Treasury bill rates over the sample period. All but four of the
imputed implicit demand deposit rates are significantly different from zero
at the five percent level, and all but eight are significant at the one percent
level. The table also shows that the implicit demand deposit rate fluctuates,
FRB CHICAGO Staff Memorandum
5
Table 2
Imputed im plicit rates on demand deposits
1976-1985
Percent per annum
(D
Date
Imputed
rate3
(3)
Change in
the imputed
rate
Reserve-adjusted
3-month
Treasury bill
rate^'c
(4)
Change in the
reserve-adjusted
3-month
Treasury bill
Rate
(5)
(3 )-(1 )
Difference 3
1976:1
4.88
(4.18)
-
4.40
-0 .6 5
-0 .4 8
(0,41)
1976:2
2.92
(2.44)
-1 .9 6
4.63
0.23
1.71
(1.43)
1976:3
3.52
(3.14)
0.60
4.62
-0 .01
1.10
(0.98)
1976:4
4.28
(3.37)
0.76
4.19
-0 .4 3
-0 .0 9
(0.07)
1977:1
5.64
(0.80)
1.36
4.14
-0 .0 5
-1 .5 0
(0.21)
1977:2
4.12
(4.08)
-1 .5 2
4.35
0.21
0.23
(0.22)
1977:3
2.48
(2.21)
-1 .6 4
4.95
0.60
2.47
(2.20)
1977:4
2.76
(2.26)
0.28
5.50
0.55
2.74
(2.25)
1978:1
4.88
(4.82)
2.12
5.75
0.25
0.87
(0.85)
1978:2
5.68
(5.08)
0.80
5.84
0.09
0.16
(0.14)
1978:3
4.96
(4.93)
-0 .7 2
6.59
0.75
1.63
(1.62)
1978:4
7.12
(4.86)
2.16
7.76
1.17
0.64
(0.44)
1979:1
4.92
(3.71)
-2 .2 0
8.49
0.73
3.57
(2.69)
1979:2
7.56
(7.01)
2.64
8.52
0.03
0.96
(0.89)
1979:3
5.52
(5.06)
-2 .0 4
8.78
0.26
3.26
(2.99)
1979:4
8.00
(4.54)
2.48
10.18
2.03
2.81
(1.59)
FRB CHICAGO Staff Memorandum
(2 )
Table 2
Imputed im plicit rates on demand deposits
1976-1985
Percent per annum (cont'd)
(D
Date
Imputed
ratea
(3)
Change in
the imputed
rate
Reserve-adjusted
3-month
Treasury bill
rate^c
(4)
Change in the
reserve-adjusted
3-month
Treasury bill
Rate
(5)
(3 )-(1 )
Difference a
1980:1
4.56
(3.13)
-3 .4 4
12.21
1.40
7.65
(5.25)
1980:2
6.52
(4.94)
1.96
8.73
-3 .4 8
2.21
(1-67)
1980:3
6.16
(4.39)
-0 .3 6
8.30
-0 .4 3
2.14
(1.52)
1980:4
5.80
(3.44)
-0 .3 6
12.53
4.23
6.73
(3.99)
1981:1
3.64
(2.18)
-2 .1 6
13.12
0.59
9.48
(5.68)
1981:2
6.96
(3.99)
3.32
13.60
0.48
6.64
(3.81)
1981:3
6.16
(4.39)
-0 .8 0
13.74
0.14
7.58
(5.40)
1981:4
1.56
(0.33)
-4 .6 0
10.66
-3 .0 8
9.10
(1.93)
1982:1
5.88
(2.97)
4.32
11.61
0.95
5.73
(2.89)
1982:2
3.52
(1.57)
-2 .3 6
11.30
-0 .31
7.78
(3.47)
1982:3
4.04
(2.17)
0.52
8.42
-2 .8 8
4.38
(2.35)
1982:4
5.88
(1.59)
1.84
7.13
-1 .2 9
1.25
(0.34)
1983:1
6.32
(3.05)
0.44
7.29
0.16
0.97
(0.47)
1983:2
8.28
(4.49)
1.96
7.56
0.27
-0 .7 2
(- 0 .3 9 )
1983:3
5.76
(1.92)
-2 .5 2
8.25
0.69
2.49
(0.83)
1983:4
6.24
(1.07)
0.48
7.96
-0 .2 9
1.72
(0.29)
FRB CHICAGO Stall Memorandum
(2)
Table 2
Imputed im plicit rates on demand deposits
1976-1985
Percent per annum (cont'd)
(D
Date
Imputed
rate5
(2)
(3)
Change in
the imputed
rate
Reserve-adjusted
3-month
Treasury bill
rate^'c
(4)
Change in the
reserve-adjusted
3-month
Treasury bill
Rate
(5)
(3 )-(1 )
Difference a
1984:1
7.72
(2.85)
1.48
8.30
0.34
0.58
(0.22)
1984:2
7.88
(2.50)
0.16
8.91
0.61
1.03
(0.33)
1984:3
6.80
(1.92)
-1 .0 8
9.39
0.48
2.59
(0.73)
1984:4
8.16
(1.95)
1.36
7.98
-1 .41
-0 .1 7
(0.04)
1985:1
8.84
(3.93)
0.68
7.38
-0 .6 0
-1 .4 6
(0.65)
1985:2
7.04
(1.95)
-1 .8 0
6.70
-0 .6 8
-0 .3 4
(0.09)
1985:3
8.24
(2.79)
1.20
6.37
-0 .3 3
-1 .8 7
(0.63)
1985:4
6.92
(2.02)
1.32
6.52
0.15
-0 .4 0
(0.12)
^ N u m b e r s in p a r e n t h e s e s b e n e a t h t h e e s t i m a t e s a r e t h e c o r r e s p o n d i n g t r a t i o s .
^ Q u a r t e r l y r a t e s o n 3 - m o n t h T r e a s u r y b ills fr o m v a r i o u s i s s u e s o f F e d e r a l R e s e r v e B u lle tin .
s t a t e d o n a d i s c o u n t b a s i s in t h i s s o u r c e a r e c o n v e r t e d t o b o n d e q u i v a l e n t s .
T h e th re e -m o n th ra te s
^ T h e r e s e r v e - a d j u s t e d 3 - m o n t h T r e a s u r y b ill r a t e w a s o b t a i n e d b y m u l t i p l y i n g t h e 3 - m o n t h T r e a s u r y b ill r a t e b y
(1 - Z R D ) , w h e r e Z R D i s t h e i m p l i c i t r e s e r v e r e q u i r e m e n t a g a i n s t n e t d e m a n d d e p o s i t s f r o m t h e F e d e r a l R e s e r v e
B o a r d M P S Q u a rte rly E c o n o m e tr ic M o d e l o f th e U .S . E c o n o m y .
on average, more than the adjusted Treasury bill rate over the sample pe
riod. For example, between 1976 and 1985, the quarterly change in the
implicit demand deposit rate averaged about 165 basis points, compared
with 85 basis points for the adjusted Treasury bill rate. Over the last three
years of the sample period (1983-1985), however, the quarter-to-quarter
change in the implicit demand deposit rate averaged about 120 basis points,
compared with 50 basis points for the adjusted Treasury bill rate.
Column (5) o f Table 2 presents the difference between the adjusted Treas
ury bill rate and the imputed demand deposit rate for each quarter of the
sample period. This spread measures the level of interest savings net of
expenses per dollar of deposits that banks realized by providing implicit
interest at less than the competitive rate. They ranged from -1.87 percent
FRB CHICAGO Staff Memorandum
8
in 1985:3 to 9.48 percent in 1981:1. The empirical results indicate that at
large WRBs the largest savings appear to have occurred between 1979:3
and 1982:3, when market interest rates rose rapidly. Since 1983:3, however,
the implicit demand deposit rate has been close to the adjusted Treasury
bill rate.
The empirical results provide evidence that large WRBs paid implicit in
terest on their demand deposits. The estimates show that the implicit de
mand deposit rate tended to fluctuate more than market interest rates. The
ability to offer implicit compensation that adjusts rapidly depends, in part,
on the amount and type of bank services used by bank customers. For in
stance, large corporate customers often use many different services ranging
from the extension of credit at favorable terms to sophisticated cash man
agement techniques. The terms at which credit is extended are often related
to average demand deposit holdings, while cash management services are
paid for by some combination of compensating balances and fees. The
method of payment is tailored to each customer and the rate that compen
sating balances yield is tied to market rates adjusted by some portion of the
reserve requirement.11 These rates are usually adjusted monthly, making
the implicit demand deposit rate flexible both for corporate customers and
those depositors who use a large array of bank services.
Some additional insight on the implicit demand deposit rates can be gained
by comparing our results with those of previous studies. The results from
other studies of the implicit demand deposit rate, shown in Figure 1, can
be classified into three groups. First, the competitive yield earned by large
corporations is represented by Benjamin Klein (1974).12 Second, the im
plicit rates examined by Barro-Santomero (1972) and Taylor (1984) are for
household demand deposits only. These two studies draw on survey data:
the former from a survey of the nation’s 23 largest banks who reported the
average rate of remission of service charges and the latter from the Federal
Reserve’s Functional Cost Analysis (FCA ) survey which included data on
expenses attributable to demand deposits. Both estimates suggest that im
plicit returns to households were about 65 percent of the 3-month Treasury
bill rate. The final set of implicit deposit rates by Becker (1975) and Startz
(1979) is based on combined household and business demand deposits.
Becker measures the average implicit rate on demand deposits as the yearly
difference between the reported aggregate noninterest expenses of all Fed
eral Reserve System member banks.13 Beckers implicit rate on demand
deposits averaged about 90 percent of the 3-month Treasury bill rate over
his estimation period. Startz (1979) also uses cost data for all banks to al
locate these expenses among demand deposits and time and savings depos
its. Startz’s estimates suggest that implicit rates have been lower than
competitive rates, averaging only 40 percent of the 3-month Treasury bill
rate.
FRB CHICAGO Staff Memorandum
9
It is important to understand that most of these previous studies of implicit
rates on demand deposits take into account only one easily quantifiable
method o f implicit interest payment: the remission of service charges (i.e.,
the provision o f deposit services—deposit taking, statement maintenance,
and other services—at fees substantially below marginal and average costs).
It is well-known, however, that banks use devices other than the remission
of service charges to compensate depositors. A wide variety of cash man
agement services at subsidized rates is made available to bank depositors.
In addition to the provision of deposit services, a depositor-borrower may
be given preferential lending treatment in the form of reduced loan interest
rates or superior non-rate lending terms. These and other elements of the
complex relationship between a bank and its depositors may be more diffi
cult to quantify but are not any less important than the more easily quan
tifiable remission of service charges. The statistical cost accounting model
used to estimate commercial bank implicit demand deposit rates is able to
allocate overhead, losses, revenues, and costs to demand deposits in a
manner not easily accomplished with traditional accounting methods.
Our empirical results provide evidence that in an interest rate-constrained
demand deposit market, banks endeavor to adjust implicit interest rates in
response to changes in market interest rates. The implication is that any
change in a constrained demand deposit rate environment that raises (low
ers) rates on assets competing most directly with demand deposits will result
in higher (lower) implicit rates. Although the imposition of binding deposit
rate ceilings represented an attempt to hold down the cost of funds to
banks, it appears that this was not totally effective because banks found
other devices to encourage customers to hold more deposits. Rather, these
devices generally led to an increase in bank cost of funds above the zero
interest rate ceiling level. The evasion of this regulation, however, is not
socially optimal because depositors are not properly compensated (in an
efficiency sense) for the use of their funds. Furthermore, Regulation Q
deposit rate ceilings cause banks to tie up real resources in making implicit
interest payments.
In a freely competitive financial system, the demand deposit rate would be
linked closely with rates in other financial markets and the public would
be encouraged to hold the socially optimal quantity of demand deposits.14
Such results would follow if banks were free to pay a competitive interest
rate on the stock of demand deposits and charge the full private and social
costs of servicing demand deposits. Michael Klein (1974), however, has
shown that the practice of paying implicit interest may push deposits to
levels more closely approximating the social norm.
However, some
deadweight losses remain because payments-in-kind are not always equiv
alent in social value to the comparable dollar amount of explicit interest.
FRB CHICAGO Staff Memorandum
10
The removal o f binding interest rate ceilings need not decrease depository
institutions’ profitability, because the increase in explicit interest cost might
be offset by either lower noninterest operating expenses or higher nonin
terest operating income. Although banks can quickly eliminate some types
of noninterest expenditures made to attract deposits, such as gifts or mer
chandise for depositors who open or add to accounts, they will incur losses
in eliminating other expenditures. Particularly if they are associated with
branches, these expenses may take on the character of fixed costs in the
short run. Thus, some of the expenses incurred as implicit interest pay
ments might not easily be reversed, and this could affect the ability of banks
to pay competitive explicit rates on demand deposits in a ceiling-free envi
ronment. However, banks could still cover these costs if interest rates were
deregulated by charging noninterest fees for providing checking account
services.
The implicit rates on demand deposits in Table 2 represent the expense in
curred by banks to attract deposits. By multiplying the implicit interest rate
on demand deposits in each quarter by the stock o f demand deposits for
large W RBs over the same period, an estimate o f the amount o f noninterest
operating expense accounted for by implicit payments o f interest was ob
tained. Figure 2 presents the average proportion of total noninterest op
erating expense for large WRBs attributable to implicit payments o f interest
on demand deposits over the 1976-1985 period. The results indicate that
estimated proportion of noninterest operating expense attributable to im
plicit payments o f interest has been declining over the 1976-1985 period.
The lowest levels appear to have occurred during the 1981-1982 period,
when ceilings on deposit interest began to be phased out. The ratio de
creased from an average of 37.2 percent between 1976 and 1980 to 26.4
percent over the 1981-1985 span. The general decline in this ratio can be
attributed to at least two factors. First, the gradual lowering o f reserve
requirements from 1980 to 1986, as authorized by the Depository Institu
tion Deregulation and Monetary Control Act (D ID M C A ) of 1980, reduced
the implicit cost to banks of holding demand deposits. Second, permission
to offer N O W and money market deposit accounts to their customers, as
required by both D ID M C A and the Garn-St Germain Act of 1982, resulted
in transfers o f consumer funds from demand deposits to these interestbearing transaction accounts. This reduced the proportion o f noninterest
expense generated by demand deposits. Our results show that it may not
necessarily be true that the abandonment of the zero interest rate ceiling
on demand deposits would result in a decline in commercial bank profit
ability.
FRB CHICAGO Staff Memorandum
11
IV. Summary and Conclusions
Empirical estimates o f the cost of demand deposits for a sample of W RBs
have been reported. The estimated quarterly implicit demand deposit rates
over the 1976-1985 period indicate that the imposition o f a zero deposit rate
ceiling led commercial banks to attempt to obtain demand deposits by
means other than the payment o f explicit interest rates. Non-rate compe
tition for demand deposits forced the implicit rate to track the 3-month
Treasury bill rate. In addition, the implicit interest rate tends to fluctuate
more than money market interest rates, responding possibly to the extent
to which bank customers utilize the array o f bank services. Our results
suggest that large W RBs could have paid relatively competitive explicit
rates on demand deposits without a squeeze on profits, because some o f the
increased interest expense would have been offset by lower noninterest op
erating expenses and higher noninterest revenues.
The development of this new data offers possibilities for further research.
We can now calculate a time series o f the own rate of return on M l bal
ances. Gordon (1984) uses such a series, although he assumes that the rate
of return on demand deposits is zero. The own rate of return on M l can
now be approximated by the weighted average o f the nominal returns of
fered on N O W s and the implicit rate on demand deposits, with weights
given by their respective shares in M l. Future research, therefore, would
do well to include this derived measure of the own rate o f return on M l
balances in order to isolate the effects o f interest rates on money demand.
FRB CHICAGO Staff Memorandum
12
Figure 1
Estimates of the Implicit Interest on Demand Deposits
(annual data)
percent per annum
percent per annum
16
14
12
10
N O TE: The yields on 3-month Treasury bills were taken from various issues of the Federal Reserve Bulletin. These yields have
been converted to bond equivalents. Annual averages of the imputed implicit demand deposit rate were constructed from
quarterly figures.
Figure 2
Noninterest Operating Expense Accounted for by Nonprice Competition
percent
50
r
1
I
1
1
I
19 76
19 77
19 78
19 79
I_______ I_______I------------- 1------------- 1------------- 1-------------1
19 8 0
19 8 1
19 8 2
19 8 3
19 8 4
19 8 5
Note: These data are the aggregate im p lic it in te re st expenses of large weekly reporting banks
(WRBs) divided by th e ir total noninterest operating expense. For each quarter, the d o lla r amount
of im p lic it in terest expense was obtained by m ultiplying the estimated im p lic it in te re st rate on
demand deposits by the stock of demand deposits for large WRBs over the same period. These d o lla r
amounts were divided by total noninterest operating expenses over the same period to generate
estim ates of the proportion of to tal nonoperating expense a ttrib u ta b le to im p lic it payments of
in terest on demand deposits. These q uarterly estim ates were then averaged together to generate
annual estim ates.
Footnotes
1 The theory of nonprice competition among firms in price-constrained goods
markets has been developed by Stigler (1968) and probably originated with
Chamberlin (1933). Nonprice competition among financial institutions has been
studied by Havrilesky and Schweitzer (1975) and White (1976) for banks,
Spellman (1977) for S&Ls, and Taggart (1978) for mutual savings banks.
2 Along with removing the prohibition of interest on corporate demand deposits,
it is often recommended that the Federal Reserve pay interest on required reserves
or that banks be allowed to hold reserves in U.S. Treasury securities.
3 The specification of linearity is based on two assumptions. One is the belief that
the markets in which an individual bank participates are sufficiently competitive
that it cannot influence the interest rates at which it borrows or lends through
altering its own portfolio mix. It is also necessary to assume that the error term
in the linear model is independent of the bank’s portfolio elements. For more
details see Hester and Zoellner (1966) and Hester and Pierce (1975).
4 The estimates will be “approximate” because measures of assets and liabilities
will be book values, not market values. Book values are used here because they
are accessible, while unavailable market values have to be derived on the basis of
often arbitrary assumptions. Furthermore, a bank’s cash flow is related to the
book value of its asset and liability portfolio composition. The approach adopted
in this paper implicitly assumes that all current expenses are related to current
profits. Some of these expenses, however, will affect future profits so that current
period profits are not only affected by current expenses but past expenses as well.
This is likely to bias the estimated net return and cost coefficients.
5 See Graham (1977).
6 See Rose and Wolken (1986) for a detailed discussion.
7 The sample for each quarter was ordered by total asset size and divided into
three groups. These groups are usually divided into equal size. However, we have
used a modification suggested by Goldfeld and Quandt (1972). For every 8 ob
servations assigned to the middle group, 11 observations were assigned to each
of the two remaining groups. Estimates of the sum of the squares of the residuals
are then obtained for the largest and smallest banks from separate regressions
using the two end subsamples. The estimated sums of the squares of the residuals
are compared using an F-test. The power of this test depends upon the number
of banks in the middle group. For a very large middle group, the power will be
small.
8 Gendreau (1983) uses this measure of income to estimate the implicit rates of
interest on bankers’ balances during 1929 and 1898-1899.
9 The sample for each period was further adjusted to eliminate the effects of in
fluential observations on the results. For various reasons, noninterest expense
items such as large loan charge-offs are often bundled together and taken during
one quarter. Hence, earnings for that quarter are understated, while past profits
are overstated. One result is that rates of return on balance sheet items in
“good” quarters may be biased upward, while net rates of return in quarters where
large charge-offs are taken may be biased downward. Another effect of this
FRB CHICAGO Staff Memorandum
13
phenomenon is that it often produces outliers that have a significant impact on
the regression results. For example, based on an analysis of the ratio of net in
come to total assets for the sample of banks over the 1976:1—1985:4 period, it
was found that in 39 cases an individual bank return on assets (ROA) was at least
five standard deviations from the mean ROA for a quarter, and in seven of those
cases, the ROA was ten standard deviations away from the mean. The single row
deletion techniques suggested and described by Belsley, Kuh, and Welsch (1980)
were utilized to eliminate influential observations.
10 The complete results of estimating Equation (3) can be found in the data ap
pendix of this paper.
11 See, for example, Simpson (1979).
12 Benjamin Klein assumes that competition among banks means that the Regu
lation Q interest rate ceiling is completely evaded. As a result, banks pay effec
tively all of their earnings to depositors in the form of interest payments to
deposits, including demand deposits. This competitive hypothesis allows Klein to
estimate implicit interest from the rate of return banks earn on their portfolios
which he proxies by the 4-6 month commercial paper rate. This rate is adjusted
downwards by the average reserve requirement on demand deposits to account for
the “tax” imposed on bank earnings by requiring banks to hold a fraction of their
assets in noninterest-bearing form. This work implies that banks adjust the de
posit rate quickly to match changes in market rates in order that deposit rates
remain competitive. However, the reserve requirement tax partially frustrates this
effort. As interest rates rise, the basis point spread between market rates and the
deposit rate widens.
13 Since all noninterest expenses are attributed to the demand deposit function,
Becker’s implicit rate series is almost certainly biased upward.
14 See Michael Klein (1974). However, our results show that implicit demand
deposit rates often respond sluggishly to changes in market rates. One reason for
this, as pointed out in Flannery (1982), is that retail bank deposits should be
viewed as a quasi-fixed factor of production. There are transaction costs to
switching deposit accounts from one bank to another, so implicit deposit rates and
short-term money market rates need not be perfectly correlated.
FRB CHICAGO Staff Memorandum
14
References
Barro, Robert J., and Anthony M. Santomero. “Household Money Holdings and
the Demand Deposit Rate,” Journal o f M on ey, Credit and Banking, Vol. 4
(May 1972), pp. 397-413.
Becker, William E. “Determinants of the United States Currency—Demand De
posit Ratio,” Journal o f Finance, Vol. 30 (March 1975), pp. 57-74.
Belsley, David A., Edwin Kuh, and Roy E. Welsch.
Regression Diagnostics:
Identifying Influential Data and Sources o f Collinearity, New York: John
Wiley and Sons, 1980.
Chamberlin, Edward H. The Theory o f Monopolistic Competition. Cambridge,
MA: Harvard University Press, 1933.
Dotsey, Michael. “The Effects of Cash Management Practices on the Demand
for Demand Deposits,” Working Paper, Federal Reserve Bank of
Richmond, (1983a).
Dotsey, Michael. “An Examination of Implicit Interest Rates on Demand De
posits,” Economic Review, Federal Reserve Bank of Richmond,
(September/October 1983b), pp. 3-11.
Flannery, Mark J. “ Retail Bank Deposits as Quasi-Fixed Factors of
Production,” American Economic Reviews, Vol. 72 (June 1982), pp. 527-536.
Gendreau, Brian C. “The Implicit Return on Bankers’ Balances.” Journal o f
M on ey, Credit and Banking, Vol. 15 (November 1983), pp. 411-424.
Goldfeld, Stephen M., And Richard E. Quandt.
Nonlineral M ethods in
Econometrics, Amsterdam: North-Holland Publishing Company, 1972.
Gordon, Robert J.
“The Short-Run Demand for Money: A Reconsideration,”
16 (November 1984), pp.
Journal o f M on ey, Credit and Banking, Vol.
403-434.
Graham, David K. “Estimating the Earnings Impact on NOW Accounts,” Bank
Structure and Competition. Proceedings of a Conference at the Federal
Reserve Bank of Chicago, April 1977, pp. 53-71.
Havrilesky, Thomas, and Robert Schweitzer. “Non-Price Competition Among
Banking Firms,” Journal o f Bank Research, Vol. 6 (Summer 1975), pp.
113-121.
Hester, Donald D., and John F. Zoellner. “The Relation Between Bank Portfolios
and Earnings: An Econometric Analysis,” Review o f Economics and Statis
tics, Vol. 48 (November 1966), pp. 372-386.
Hester, Donald D., and James Pierce. Bank Management and Portfolio Behavior,
New Haven, CT: Yale Univeristy Press, 1975.
Klein, Benjamin. “Competitive Interest Payments on Bank Deposits and the
Long Run Demand for Money,” American Economic Review, Vol. 64 (De
cember 1974), pp. 931-949.
FRB CHICAGO Staff Memorandum
15
Klein, Michael A. “Deposit Interest Prohibition, Transactions Costs, and Pay
ments Patterns:
A Theoretical Analysis,” Metroeconomica, (GennaioDecembre 1974), pp. 144-152.
Linke, Charles M. “The Evolution of Interest Rate Regulation on Commercial
Bank Deposits in the United States,” National Banking Review, Vol. 3 (June
1966), pp. 449-469.
Meyer, John R. and Gerald Kraft. “The Evaluation of Statistical Cost Account
ing Techniques as Applied in the Transportation Industry,” American E co
nomic Review: Supplement, Vol. 1 (May 1961), pp. 313-334.
Rose, John T. and John D. Wolken. “Statistical Cost Accounting Models in
Banking: A Reexamination and an Application,” S ta ff Studies, No. 150,
Washington, D.C.: Board of Governors of the Federal Reserve System,
(May 1986).
Simpson, Thomas D. “The Market for Federal Funds and Repurchase Agree
ments,” S ta ff Studies, No. 106, Washington, D.C.: Board of Governors of
the Federal Reserve System, (July 1979).
Spellman, Lewis J. “Non-Rate Competition for Savings Deposits,” Journal o f
Bank Research, Vol. 8 (Autumn 1977), pp. 171-178.
Startz, Richard.
“Implicit Interest on Demand Deposits,” Journal o f Monetary
Economics, Vol. 5 (October 1979), pp. 515-534.
Stigler, George J. “Price and Non-Price Competition.” Journal o f Political Econ
omy, Vol. 6 (January 1968), pp. 149-154.
Taggart, Robert A. “Effects of Deposit Rate Ceilings: The Evidence from
Massachusetts Savings Banks.” Journal o f M on ey, Credit and Banking, Vol.
10 (May 1978), pp. 139-157.
Taylor, Herb. “The Return Banks Have Paid on NOW Accounts,” Business R e
view, Federal Reserve Bank of Philadelphia, (July/August 1984), pp. 13-23.
White, Lawrence J. “Price Regulation and Quality Rivalry in a Profit-Maximizing
Model: The Case of Branch Banking,” Journal o f M oney, Credit and
Banking, Vol. 8 (February 1976), pp. 144-152.
FRB CHICAGO Staff Memorandum
76
Data Appendix
In this appendix, we present the estimated rates of return on bank portfolios
which form the basis for this study. The explanatory variables are the assets
(A, through A 10), the liabilities (Lt through L8), and the intercept, a (vari
able names are included in Table 1). T-statistics are in parentheses beneath
the regression coefficients. The summary statistics are presented after the
liability estimates. They are: N, the number of banks in the sample; GQ,
the Goldfeld-Quandt test statistic; F, the regression F-statistic; R 2, the co
efficient of determination corrected for degrees of freedom; and the expo
nent on total assets which was used to correct each regression for
heteroskedasticity.
! RB CHICAGO Staff Memorandum
17
1976:1
1976:2
1976:3
1976:4
1977:1
1977:2
1977:3
-42.32
(-0 .8 1 )
-26.75
(-0 .4 5 )
-72.57
(-1 .2 6 )
-81.72
(-1 .1 9 )
7.01
(0.12)
-86.22
(-1 .6 5 )
-140.10
(-2 .3 2 )
A^
4.89
(3.96)
2.09
(1.64)
2.67
(2.23)
3.35
(2.53)
4.80
(4.13)
3.67
(3.49)
2.78
(2.32)
^>2
5.50
(5.20)
3.54
(3.31)
4.02
(3.98)
5.12
(4.46)
5.42
(5.49)
4.24
(4.68)
3.25
(3.27)
*3
8.86
(8.83)
7.12
(7.19)
7.43
(8.01)
7.65
(7.23)
8.70
(9.51)
7.43
(9.03)
6.36
(6.96)
Aa
4.64
(4.07)
3.04
(2.61)
3.92
(3.62)
4.80
(4.08)
5.37
(5.19)
4.80
(5.03)
-4.18
(3.90)
As
4.24
(3.93)
2.21
(1 9 9 )
2.96
(2.82)
3.35
(2.80)
5.18
(5.01)
4.04
(4.28)
2.80
(2.69)
As
4.90
(4.38)
2.15
(1.77)
2.48
(2.11)
5.25
(3.89)
5.01
(4.29)
3.29
(3.07)
2.68
(2.23)
Ay
4.60
(4.46)
3.06
(2.97)
3.54
(3.69)
4.15
(3.79)
5.04
(5.25)
4.13
(4.73)
3.11
(3.23)
00
5.07
(4.55)
2.72
(2.70)
3.78
(4.01)
4.38
(4.08)
5.40
(5.75)
4.40
(5.20)
3.36
(3.60)
CO
5.22
(4.79)
4.09
(3.60)
4.47
(4.14)
5.19
(4.07)
5.50
(4.97)
4.50
(4.55)
3.24
(2.99)
Ao
4.29
(3.94)
2.47
(2.27)
3.18
(3.11)
3.33
(2.88)
5.13
(5.17)
3.94
(4.35)
2.48
(2.47)
Variable
a
FRB CHICAGO Staff Memorandum
1976:1
1976:2
1976:3
1976:4
1977:1
1977:2
1977:3
*1
-4.89
(-4 .1 8 )
-2.91
(-2 .4 4 )
-3.51
(-3 .1 4 )
-4.27
(-3 .3 7 )
-5.62
(-5 .0 6 )
-4.11
(-4 .0 8 )
-2.47
(-2 .2 1 )
L2
-5.16
(-4 .0 5 )
-2.50
(-1 .9 0 )
-2.99
(-2 .4 1 )
-3.87
(-2 .8 3 )
-5.23
(-4 .3 6 )
-4.02
(-3 .6 9 )
-3.19
(-2 .5 7 )
L3
*
*
*
*
*
*
*
*•4
-4.65
(-4 .1 3 )
-2.59
(-2 .2 7 )
-3.09
(-2 .8 9 )
-3.60
(-2 .9 8 )
-5.35
(-5 .1 4 )
-4.06
(-4 .2 8 )
-2.69
(-2 .5 6 )
*5
-5.17
(-4 .7 7 )
-3.38
(-3 .0 6 )
-3.94
(-3 .8 0 )
-4.76
(-3 .9 7 )
-5.27
(-5 .0 7 )
-4.02
(-4 .2 4 )
-3.03
(-2 .9 0 )
^■6
-4.89
(-4 .3 7 )
-3.03
(-2 .6 3 )
-3.81
(-3 .5 0 )
-4.46
(-3 .5 9 )
-5.51
(-5 .1 3 )
-4.11
(-4 .2 0 )
-3.07
(-2 .8 4 )
h
-3.83
(-3 .3 1 )
-2.35
(-2 .0 5 )
-3.12
(-2 .9 0 )
-3.95
(-3 .3 2 )
-4.61
(-4 .4 9 )
-4.20
(-4 .4 7 )
-3.55
(-3 .4 1 )
LS
-4.86
(-3 .0 0 )
0.86
(0.47)
0.36
(0.21)
3.17
(-0 .1 6 )
-3.89
(-2 .3 4 )
-2.20
(-1 .5 4 )
-0.40
(-0 .2 5 )
N
272
269
271
270
277
277
276
GQ
0.98
0.77
0.79
0.65
0.62
0.90
0.90
169.49
134.68
154.05
119.19
144.64
192.15
169.94
R*
91.77
89.96
91.04
88.74
90.32
92.55
91.68
Weight (d)
TA~d
1.0
1.0
1.0
1.0
1.0
1.0
Variable
F
1.0
'Data for this liability category was not available until January 1984.
FRB CHICAGO Staff Memorandum
19
Variable
1977:4
1978:1
1978:2
1978:3
1979:1
1979:2
- 1 7 0 .4 0
(- 2 .6 4 )
- 6 8 .7 4
(- 1 .4 1 )
- 8 7 .2 0
(- 1 .5 8 )
- 6 6 .7 2 -1 7 1 .9 4
(-1 3 5 )
(- 2 .0 1 )
- 4 3 6 .4 6
(- 2 .3 4 )
-424.21
(- 2 .5 6 )
A,
3.27
(2.61)
5.22
(5.01)
5.52
(4.76)
6.14
(5.81)
7.11
(4.74)
6.89
(4.65)
8.93
(7.38)
a2
3.89
(3.62)
4.49
(5.52)
6.06
(6.13)
5.21
(5.84)
7.53
(5.77)
6.04
(4.97)
7.52
(7.47)
a3
7.42
(7.47)
8.37
(10.12)
9.66
(10.64)
8.17
(9.99)
10.45
(8.68)
9.35
(8.69)
11.03
(12.01)
An
4.81
(4.22)
6.24
(6.56)
7.82
(7.26)
6.47
(6.52)
8.98
(6.39)
7.97
(6.26)
9.30
(8.99)
a5
3.13
(2.77)
4.76
(5.07)
5.81
(5.59)
5.12
(5.46)
6.97
(4.96)
6.98
(5.29)
9.20
(8.56)
Aq
3.97
(2.99)
5.40
(4.98)
5.67
(4.73)
5.97
(5.62)
8.09
(5.22)
5.55
(3.75)
6.00
(4.66)
Ay
3.31
(3.13)
5.19
(5.89)
6.29
(6.49)
5.56
(6.39)
7.69
(6.04)
7.23
(6.14)
9.40
(9.91)
Aq
3.82
(3.74)
5.24
(6.25)
6.38
(6.86)
5.22
(6.33)
7.01
(5.68)
4.05
(3.73)
6.44
(7.17)
Aq
4.27
(3.66)
5.21
(5.31)
6.22
(5.76)
5.77
(6.04)
9.03
(6.29)
7.07
(5.17)
8.86
(7.55)
A10
2.93
(2.69)
4.95
(5.63)
6.29
(6.38)
4.96
(5.60)
8.20
(6.43)
7.47
(6.42)
9.91
(11.08)
a
FRB CHICAGO Staff Memorandum
1978:4
20
1977:4
1978:1
1978:2
1978:3
1978:4
1979:1
1979:2
-2.74
(-2 .2 6 )
-4.87
(-4 .8 2 )
5.69
(-5 .0 8 )
-4 .9 5
(-4 .9 3 )
-7.13
(-4 .8 6 )
-4.91
(-3 .7 1 )
-7.56
(-7 .0 1 )
-3 .6 8
(-2 .8 1 )
-5.90
(-5 .3 7 )
-6.80
(-5 .4 9 )
-6.41
(-5 .7 1 )
-8.21
(-5 .2 9 )
-7.35
(-4 .7 9 )
-9.14
(-7 .3 8 )
*
*
*
*
*
*
*
U
-3.63
(-3 .1 7 )
-5.14
(-5 .4 1 )
-6.41
(-6 .1 1 )
-5.13
(-5 .4 2 )
-7.14
(-5 .0 8 )
-6.37
(-4 .6 8 )
-8.50
(-7 .5 3 )
L*
-3 .8 4
(-3 .3 9 )
-5.24
(-5 .6 1 )
-6.43
(-6 .2 7 )
-5.58
(-6 .0 5 )
-7.97
(-5 .9 0 )
-7.09
(-5 .7 6 )
-9.02
(-8 .9 1 )
L6
-3.39
(-2 .9 0 )
-5.11
(-5 .3 2 )
-6.35
(-5 .9 5 )
-5.52
(-5 .7 6 )
-8.16
(-5 .6 7 )
-6.36
(-4 .9 1 )
-8.78
(-8 .1 9 )
l7
-4.16
(-3 .7 5 )
-5.61
(-6 .0 7 )
-6.87
(-6 .7 8 )
-6.26
(-6 .8 4 )
-8.77
(-6 .6 4 )
-7.32
("5 .9 2 )
-8.64
(-8 .6 2 )
L8
0.12
(0.06)
-2.70
(-1 .7 7 )
-3.96
(-2 .5 5 )
-3.04
(-2 .2 3 )
-5.44
(-2 .8 1 )
-7.14
(-4 .7 5 )
-9.58
(-7 .9 6 )
N
275
292
291
291
288
170
169
GQ
0.88
1.14
0.91
0.89
0.81
1.02
1.17
F
154.92
224.41
200.27
272.36
134.85
143.85
221.29
JP
90.97
93.23
92.50
94.38
89.32
93.80
95.91
Weight (d)
TA~d
1.0
1.0
1.0
1.0
Variable
*2
h
0.75
1.0
0.75
*Data for this liability category was not available until January 1984.
FRB CHICAGO Staff Memorandum
21
Variable
1979:3
1979:4
1980:1
1980:4
1981:1
-515.81
(-2 .9 0 )
-426.42
(-1 .3 5 )
-206.39
(-0 .8 7 )
-260.89
(-0 .8 5 )
-641.67
(-2 .2 1 )
*1
6.54
(5.35)
9.49
(4.95)
6.83
(4.37)
7.96
(5.66)
7.92
(5.22)
7.40
(4.02)
6.79
(3.76)
2
5.98
(5.94)
7.94
(4.95)
6.32
(4.68)
7.72
(6.27)
6.65
(5.22)
6.79
(4.38)
5.73
(3.84)
*3
9.27
(10.16)
11.27
(7.46)
9.10
(7.54)
10.40
(9.27)
9.99
(8.56)
9.63
(6.83)
8.86
(6.52)
8.47
(7.82)
11.38
(6.70)
8.68
(6.23)
9.60
(7.47)
8.88
(6.46)
8.90
(5.36)
9.11
(5.66)
*5
7.53
(6.91)
10.59
(6.34)
7.18
(5.06)
8.32
(6.42)
7.85
(5.80)
8.10
(4.91)
6.43
(4.03)
*6
6.13
(4.89)
8.63
(4.31)
6.19
(3.56)
5.74
(3.59)
6.06
(3.79)
8.32
(4.30)
5.47
(2.95)
7.72
(8.03)
9.83
(6.62)
7.15
(5.76)
8.48
(7.44)
7.52
(6.21)
7.96
(5.45)
7.43
(5.30)
**
5.58
(6.13)
6.92
(4.89)
3.87
(3.29)
5.44
(5.06)
5.57
(4.90)
4.97
(3.59)
3.82
(2.82)
^9
6.84
(5.41)
8.99
(4.60)
7.26
(4.26)
8.66
(5.32)
6.56
(3.93)
7.42
(3.75)
4.79
(2.52)
^10
8.16
(8.16)
11.45
(7.83)
8.33
(6.40)
10.12
(8.38)
8.19
(6.39)
7.07
(4.48)
6.59
(4.32)
a
a
FRB CHICAGO Staff Memorandum
1980:2
1980:3
-300.61 -357.65
(-1 .2 9 ) (-1-52)
22
1979:3
1979:4
1980:1
1980:2
1980:3
1980:4
1981:1
£1
-5.54
(-5 .0 6 )
-8.02
(-4 .5 4 )
-4.56
(-3 .1 3 )
-6.53
(-4 .9 4 )
-6 .1 4
(-4 .3 9 )
-5.82
(-3 .4 4 )
-3.65
(-2 .1 8 )
L2
-7 .4 0
(-5 .8 0 )
-10.04
(-4 .9 8 )
-7.01
(-4 .3 1 )
-7.75
(-5 .2 7 )
-7.81
(-4 .8 4 )
-7.79
(-3 .9 6 )
-6.97
(-3 .6 6 )
LZ
*
*
*
*
*
*
*
-6 .6 0
(-5 .8 0 )
-9.21
(- 5 2 2 )
-7.35
(-4 .8 5 )
-8.41
(-5 .9 6 )
-7.97
(-5 .4 6 )
- 7 .2 t
(-4 .0 6 )
-6.31
(-3 .6 4 )
L*
-7.09
(-7 .0 2 )
-9.79
(-6 .2 7 )
-7.29
(-5 .5 5 )
-8.55
(-7 .0 6 )
-7.22
(-5 .6 2 )
-0.80
(-5 .1 3 )
-7.16
(-4 .7 7 )
L6
-7.28
(-6 .7 5 )
-10.28
(-6 .0 6 )
-6.33
(-4 .5 5 )
-8.24
(-6 .4 8 )
-7.41
(-5 .5 2 )
-7.29
(-4 .4 4 )
-6.39
(-4 .0 1 )
h
-7.47
("7 .2 7 )
-10.18
(-6 .3 9 )
-8.08
(-5 .9 8 )
-8.37
(-6 .8 1 )
-8.04
(-6 .1 3 )
-8.12
(-5 .1 4 )
-7.37
(-4 .7 9 )
t-8
-8.07
(-6 .4 8 )
-11.09
(-5 .9 4 )
-7.68
(-4 .9 2 )
-8.10
(-5 .5 0 )
-7.42
(-4 .6 5 )
-7.93
(-3 .9 1 )
-5.96
(-3 .0 3 )
169
171
Variable
N
168
169
171
169
GQ
0.91
1.02
1.05
0.97
0.95
0.73
0.82
F
185.80
71.73
97.17
144.35
115.30
76.42
88.78
m
95.19
88.28
91.01
93.85
92.33
88.93
90.23
1.0
0.75
1.0
1.0
1.0
1.0
1.0
Weight (d)
171
TA-0
'Data for this liability category was not available until January 1984.
FRB CHICAGO Staff Memorandum
23
Variable
1981:3
a
-500.28
(-1-53)
-357.65
(-1 .5 2 )
a
9.27
(4.81)
7.92
(5.26)
9.37
(1.81)
a2
8.04
(5.24)
6.65
(5.22)
A
10.61
(7.22)
A,
1982:1
1982:2
1982:3
1982:4
-868.74
(-2 .1 7 )
-771.59
(-2 .3 3 )
-2242.55
(-3 .4 8 )
7.57
(3.69)
5.40
(2.34)
4.90
(2.56)
5.41
(1.49)
3.02
(0.75)
6.89
(3.97)
5.89
(2.92)
6.86
(4.10)
9.19
(2.79)
9.99
(8.56)
8.72
(2.28)
10.68
(6.61)
9.43
(5.08)
9.12
(5.77)
13.38
(4.35)
11.61
(7.08)
8.88
(6.46)
7.56
(1.79)
8.47
(4.68)
6.62
(3.16)
5.61
(3.23)
8.06
(2.38)
A
9.29
(5.69)
1.96
(5.80)
1.75
(0.42)
6.93
(3.75)
5.24
(2.47)
4.95
(2.77)
7.71
(2.20)
A,
9.06
(4.96)
6.06
(3.79)
6.66
(1.42)
3.96
(1 9 9 )
1.96
(0.83)
0.86
(0.43)
2.91
(0.75)
A
9.89
(6.73)
7.52
(6.21)
8.09
(2.06)
7.48
(4.46)
5.07
(2.64)
4.98
(3.08)
5.01
(1.55)
A*
6.54
(4.63)
5.57
(4.90)
5.79
(1 5 7 )
4.73
(3.03)
1.56
(0.92)
2.21
(1.54)
3.74
(1.29)
Aq
9.30
(4.59)
6.56
(3.93)
6.21
(1.19)
4.52
(1.98)
4.05
(1 5 7 )
3.01
(1.37)
4.25
(1.03)
9.51
(5.95)
8.19
(6.93)
7.81
(1.93)
6.19
(3.53)
4.99
(2.52)
4.86
(2.95)
7.43
(2.29)
FRB CHICAGO Staff Memorandum
1981:4
1981:2
-512.19 -1099.57
(-3 .2 5 )
(-0 .5 8 )
24
Variable
1981:2
1981:3
1981:4
1982:1
1982:2
1982:3
1982:4
L:
-6.97
(-3 .9 9 )
-6.14
(-4 .3 9 )
-1.57
(-0 .3 3 )
-5.89
("2 .9 7 )
-3.53
(-1 .5 7 )
-4.06
(-2 .1 7 )
-5.88
(-1-59)
L2
-9.66
(-4 .7 3 )
-7.82
(-4 .8 4 )
-8.54
(-1 .5 8 )
-6.19
(-2 .8 9 )
-4.02
(-1 .6 0 )
-0.39
(-1 .8 2 )
-4.15
(- 1 0 3 )
*
*
*
*
*
*
*
f-A
-9.11
(-5 .0 3 )
-7.97
(-5 .4 6 )
-2.66
(-0 .5 9 )
-6.56
(-3 .3 0 )
-4.47
(-2 .0 5 )
-5.51
(-2 .8 4 )
-7.49
(-1 .9 7 )
<-5
-9.65
(-6 .6 2 )
-7.22
(-5 .6 2 )
-6.57
(-1 .6 5 )
-6.64
(-3 .8 3 )
-4.81
(-2 .3 9 )
-4.44
(-2 .6 0 )
-6.24
(- 1 8 4 )
f-6
-9.34
(-5 .5 2 )
-7.41
(-5 .5 2 )
-8.16
(-1 .8 6 )
-7.00
(-3 .8 2 )
-4.59
(-2 .1 8 )
-3.94
(-2 .2 1 )
-6.11
(-1 .7 4 )
h
-10.37
(-6 .5 5 )
-8.04
(-6 .1 3 )
-8.99
(-2 .1 5 )
-7.14
(-3 .9 8 )
-5.36
(-2 .6 4 )
-4.15
(-2 .3 8 )
-5.78
(-1 .7 0 )
L8
-9.24
(-4 .3 4 )
-7.42
(-4 .6 4 )
-6.81
( -1.18)
-5.94
(-2 .4 2 )
-5.23
(-1 .8 8 )
-4.31
(-1-97)
-7.36
(-1 .7 4 )
L3
N
169
171
167
170
170
170
170
GQ
0.88
0.95
1.44
0.71
0.70
1.02
0.76
F
73.89
115.30
18.15
57.89
39.11
72.34
15.73
R2
88.59
92.33
64.89
85.76
80.14
88.31
60.94
Weight (d)
0.75
1.0
0.75
1.0
1.0
1.0
1.0
TA d
*Data for this liability category was not available until January 1984.
FRB CHICAGO Staff Memorandum
25
Variable
1983:1
1983:2
-850.17
(-2 .4 9 )
-468.71
(- 1 5 4 )
7.32
(3.67)
8.67
(4.83)
6.81
(2.31)
8.68
(1.51)
7.88
(2.98)
9.17
(3.25)
10.02
(2.77)
8.43
(4.61)
9.95
(6.07)
7.44
(2.78)
11.07
(2.21)
8.15
(3.45)
8.21
(3.07)
6.69
(2.36)
10.36
(6.25)
12.06
(8.33)
12.76
(5.48)
15.01
(3.31)
12.60
(5.56)
11.90
(4.58)
11.17
(3.79)
7.48
(4.00)
9.14
(5.57)
7.91
(2.99)
10.84
(2.73)
7.77
(3.39)
8.23
(3.10)
5.93
(2.09)
6.77
(3.48)
9.65
(5.63)
8.40
(3.02)
10.19
(1.96)
6.48
(2.64)
6.59
(2.31)
4.79
(1 6 3 )
*6
5.41
(2.55)
7.25
(3.91)
6.27
(2.09)
15.10
(2.53)
6.98
(6.69)
5.02
(1.82)
4.52
(1.38)
*7
6.02
(3.35)
8.40
(5.24)
5.95
(2.29)
6.63
(1.32)
7.45
(5.77)
7.56
(2.87)
5.77
(2.03)
*8
6.09
(3.73)
8.44
(5.76)
7.17
(2.97)
10.26
(2.15)
9.35
(4.26)
9.22
(8.73)
7.64
(2.88)
5.95
(2.63)
8.57
(4.34)
8.49
(2.52)
9.42
(1.51)
10.61
(4.54)
10.32
(3.65)
7.02
(2.26)
7.47
(4.14)
9.35
(5.82)
8.40
(3.20)
11.18
(2.31)
8.48
(3.70)
9.02
(3.34)
7.79
(2.94)
a
a4
^10
FRB CHICAGO Staff Memorandum
1983:3
1983:4
1984:1
-241.02 -2317.59 -5407.51
(0.02)
(-0 .4 8 )
(-0 .1 0 )
1984:2
-473.39
(-.8 5 8 )
1984:3
-361.46
(-0 .4 9 )
26
1983:1
1983:2
1983:3
1983:4
1984:1
1984:2
1984:3
*1
-6.31
(-3 .0 5 )
-8.27
(-4 .4 9 )
-5.74
(-1 .9 2 )
-6.26
(-1 .0 7 )
-7.72
(-2 .8 5 )
-7.89
(-2 .5 0 )
-6.79
(-1 .9 2 )
t-2
-5.12
(-2 .3 0 )
-7.87
(-4 .0 4 )
-6.79
(-2 .1 0 )
-7.00
(-1 .0 7 )
-5.66
(-1 .9 6 )
-6.20
(-2 .0 9 )
-8.60
(-2 .2 3 )
*
*
*
*
-7.85
(-2 .5 1 )
-7.12
(-2 .1 6 )
-5.80
(-1 .5 1 )
^■4
-7.16
(-3 .6 8 )
-9.69
(-5 .6 4 )
-9.08
(-3 .2 5 )
-12.79
(-2 .5 1 )
-8.57
(-3 .5 0 )
-8.25
(-3 .0 9 )
-6.20
(-2 .1 3 )
^5
-6.35
(-3 .3 5 )
-8.82
(-5 .1 8 )
-7.55
(-2 .7 4 )
-11.67
(-2 .2 2 )
-8.12
(-3 .2 8 )
-7.83
(-2 .7 4 )
-6.69
(-2 .2 3 )
-6.76
(-3 .4 2 )
-9.12
(-5 .1 8 )
-7.61
(-2 .6 5 )
-9.26
(-1-64)
-7.85
(-3 .0 8 )
-7.62
(-2 .5 6 )
-5.95
(-1 .8 7 )
t-1
-6.97
("3 .7 7 )
-9.05
(-5 .4 4 )
-7.99
(-2 .9 5 )
-12.11
(-2 .4 1 )
-8.40
(-3 .4 8 )
-8.58
(-3 .1 3 )
-6.42
(-2 .1 7 )
L*
-7.06
(-3 .0 3 )
9.23
(-4 .4 3 )
5.79
(-1 .7 3 )
7.93
(-4 .4 3 )
-8.47
(-3 .0 8 )
-10.02
(-3 .1 8 )
-6.17
(-1 .9 3 )
Variable
N
170
169
169
166
162
161
165
GQ
0.89
1.01
0.68
1.01
1.23
1.57
0.88
F
69.33
84.88
27.99
40.30
58.37
26.74
R*
87.86
89.93
74.19
41.76
82.17
87.13
74.78
Weight (d)
TA~d
1.0
1.0
1.0
0.75
1.0
1.75
1.75
7.612
*Data for this liability category was not available until January 1984.
FRB CHICAGO Staff Memorandum
27
Variable
a
1984:4
1985:2
1985:3
1985:4
-1629.00
(-2 .1 0 )
-5.09
(-0 .0 1 )
94.00
(0.13)
-108.90
(-0 .1 8 )
95.84
(-0 .1 1 )
A1
12.91
(3.32)
10.91
(5.01)
10.34
(3.07)
9.43
(3.37)
9.96
(2.79)
*2
8.24
(2.39)
9.98
(5.33)
7.48
(2.40)
8.35
(3.27)
7.71
(2.57)
^3
13.25
(3.77)
12.66
(6.29)
10.86
(3.39)
13.82
(5.18)
11.32
(3.45)
*4
7.10
(2.05)
7.62
(4.15)
5.26
(1.75)
6.68
(2.69)
6.41
(2.18)
*6
6.31
(1.72)
7.87
(3.96)
5.13
(1-59)
6.45
(2.45)
6.80
(2.20)
5.24
(1.39)
6.08
(2.76)
5.54
(1.73)
6.49
(2.56)
7.89
(2.37)
*7
7.57
(2.23)
7.59
(4.16)
6.03
(2.02)
7.08
(2.90)
5.82
(2.03)
*8
9.67
(2.98)
8.73
(4.87)
7.49
(2.59)
8.38
(3.55)
7.79
(2.77)
^9
8.66
(2.28)
9.65
(4.70)
7.20
(2.20)
10.62
(3.96)
8.47
(2.61)
^10
9.85
(2.92)
9.35
(5.24)
7.84
(2.61)
8.77
(3.58)
8.36
(3.04)
FRB CHICAGO Staff Memorandum
1985:1
28
1984:4
1985:1
1985:2
1985:3
1985:4
-8.18
(-1 .9 5 )
-8.86
(-3 .9 3 )
-7.04
(-1-95)
-8.24
(-2 .7 9 )
-6.93
(-2 .0 2 )
L2
-9.37
(-2 .2 7 )
-10.52
(-4 .4 3 )
-9.76
(-2 .6 0 )
-9.48
(-3 .1 8 )
-10.55
(-2 .7 4 )
L3
-8.38
(-1 .8 1 )
-9.46
(-3 .7 3 )
-4.67
(-1 .1 6 )
-7.27
(-2 .1 3 )
-8.83
(-2 .1 5 )
U
-8.53
(-2 .4 4 )
-8.71
(-4 .4 8 )
-6.40
(-2 .0 3 )
-7.13
(-2 .7 6 )
-7.12
(-2 .2 9 )
L*
-8.89
(-2 .4 3 )
-8.80
(-4 .3 9 )
-7.20
(-2 .1 9 )
-8.15
(-3 .0 2 )
-8.03
(-2 .5 4 )
t-6
-7.65
(-2 .0 2 )
-8.48
(-4 .0 7 )
-7.12
(-2 .1 3 )
-8.63
(-3 .1 6 )
-6.89
(-2 .1 1 )
h
-7.66
(-2 .1 2 )
-8.25
(-4 .2 3 )
-5.47
(- 1 7 2 )
-6.95
(-2 .6 3 )
-6.20
(-1 .9 7 )
L8
-8.93
(-2 .2 6 )
-7.21
(-3 .2 5 )
-7.27
(-2 .0 7 )
-8.39
(-2 .9 3 )
-6.67
(- 1 9 9 )
Variable
N
163
165
165
164
164
GQ
0.95
1.42
0.97
0.65
0.96
F
22.90
68.73
30.29
44.92
25.78
R2
71.85
88.63
77.13
85.58
74.16
Weight (d)
TAd
1.0
0.75
1.0
1.0
FRB CHICAGO Staff Memorandum
0.75
29
@FedFRASER