Speech

For release on delivery For Release on Delivery Statement by Andrew F. Brimmer Member Board of Governors of the Federal Reserve System before the Subcommittee on International Exchange and Payments of the Joint Economic Committee June 16, 1971 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Mr* Chairman and Members of the Subcommittee, I appreciate this opportunity to respond, on behalf of the Federal Reserve Board, to the invitation to report on the Voluntary Foreign Credit Restraint Program. I t has been almost two and a half years since I last appeared before this Subcommittee to perform the same assignment* The Subcommittee asked that I review the positive and negative impacts of the Voluntary Foreign Credit Restraint Program -- or the VFCR as it is generally known -- on the U.S. balance of payments and to discuss the need to maintain this program in the light of prospective balance of payments developments• It also asked for whatever information the Board might have on the activities of U.S. commercial banks in moving large amounts of short-term funds inter- nationally in late April and early May of this year. In general, the Subcommittee wanted to know what role U.S. commercial banks played in the capital flows that apparently led German authorities to allow the exchange rate of the Deutsche mark to float, I will deal with these two topics in that order. The Voluntary Foreign Credit Restraint Program The Voluntary Foreign Credit Restraint Program is essen- tially a request that U.S. financial institutions restrain their capital outflow by limiting loans to foreigners and the acquisition of investments abroad. The VFCR is part of a Government-wide effort to strengthen the U.S. balance of payments, and it has been in effect since March, 1965. The central feature of the program is a set of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 2 - Guidelines issued to U.S. banfccs and nonbank financial institutions by the Federal Reserve Board. At the beginning of 1968, the Board received by Executive Order authority to make the program mandatory. However, the banks and other financial institutions have generally responded well to the Board's request for their cooperation, and the Board has chosen to keep the program on a voluntary basis. The program is one of three sets of restraints on U.S. capital outflow. The other two are: the Interest, Equalization Tax (applying to purchases by Americans of foreign stock, bonds, and other equity and debt securities); and the Foreign Direct Investment Program (regulating funds supplied by U.S. corporations to their overseas affiliates). I will not discuss the latter two programs. But I must stress that the VFCR is interrelated with both of these programs, and any assessment of the effects of the VFCR must take into account these relationships. Each bank and each nonbank financial institution is asked to keep its loans to foreigners and its other investments abroad within limits. Each institution, in making loans and investments under these ceilings, is to give priority to credits that finance U.S. exports and that meet the financing needs of developing countries. In addition to observing the overall ceilings, the insti- tutions are asked to observe additional restraints on capital out- flow to the developed countries of continental Western Europe and Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 3 - lesser restraints on outflows to developing countries. Exemptions are provided for outflow to Canada and for export credit related to Eximbank financing. Changes have been made in the program from time to time, but its principal features are today the same as when it was estab- lished i n early 1965. For the Subcommittee's information, I submit a fuller description of the program in an appendix to my statement. Effect of the VFCR Program on the U.S. Balance of Payments There is a substantial body of statistical and other infor- mation on which we can draw to ascertain the possible positive and negative impacts of the VFCR on the balance of payments. However, it must be understood that it is impossible to do an exacting assess- ment because of data deficiencies and analytical problems. With these limitations in mind, we can focus initially on trends in assets subject to restraint. On December 31, 1964, the base date for calculating the Guideline ceilings, total foreign assets held by banks were almost the same as they were on the most recent reporting date: $9,495 million at the end of 1964 for 154 banks, compared to $9,536 million on April 30, 1971, for 169 banks (see Table 1). As shown by year-end data, foreign assets subject to VFCR ceilings have fluctuated within a narrow range throughout the period of the program. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 4 - The rather stable level of assets subject to the restraints contrasts markedly with the rapid increase in bank-reported holdings of foreign assets in the years immediately preceding the program. In the period 1961-63, U.S. bank claims on foreigners rose from $6.9 billion to $9.0 billion, a gain of about $1 billion each year. This was a period during which interest rates were comparatively low in the United States. In 1964, the level jumped by another $2.4 billion, partly reflecting the fact that the IET had just been imposed but did not yet cover bank lending. Once the VFCR was instituted in the early part of 1965, the rapid rise ceased, and — apart from short-run fluctuations — has not resumed. The observed trends should not obscure the varying influence of a restrictive U.S. monetary policy on U.S. bank foreign lending. For example, in 1966, aggregate VFCR ceilings were raised, but mone- tary policy became restrictive. Bank foreign assets declined, and banks at the end of the year had large VFCR lending leeway. In 1967, monetary policy eased, and banks increased their foreign assets. During 1968, the impact of monetary policy varied greatly. However, at the beginning of 1968, there x*as a tightening of the VFCR and the Department of Commerce Foreign Direct Investment Program. By the end of the year, banks had reduced their foreign assets more than requested under the VFCR. The reduction was probably attributable both to the restraint program and to monetary policy changes. In 1969 and 1970, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 5 - there were increases in foreign assets subject to restraint. The VFCR ceilings were increased twice during 1969, but a continued restrictive monetary policy and high domestic demand for money in 1969 held down the outflow of bank funds. As monetary policy eased in 1970, there was a large change in the banking sector of the U.S. capital account, banks repaid a large part of their borrowings, but they did not increase their claims on foreigners. Further Impact of the VFCR on Capital Flows One can also get an indirect indication of the possible effect of the VFCR by tracing the behavior of the banks1 foreign lending compared to their total lending. Claims on foreigners by U.S. banks would have been about $16.6 billion at the end of 1970 — instead of $13.8 billion — if they had grown at the same rate as total domestic loans and investments of Reserve City member banks. Moreover, the projected end-of-1970 level probably would have been even higher if we take account of the relatively greater emphasis of U.S. banks on foreign markets. That emphasis has been reflected in part in the rapid establishment of U.S. bank branches and subsidiaries overseas. The VFCR program has been especially helpful in restraining bank lending to residents of the developed countries of continental Western Europe. Special VFCR restraints apply to these countries: Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 6 - Non-export term loans are not to be made at all, and short-term non- export credits are to be kept to within 75 per cent of their end-of- 1967 level. Non-export term loans outstanding to these Western European countries when the subsidiary restraint was introduced in late 1967 have by now been repaid, and no new ones have been granted over the past 3-1/2 years. Short-term non-export credits to these countries have been sharply restrained by the subceiling at a level of about one-half billion dollars. The VFCR Program and Export Financing As Members of this Subcommittee know, there has been considerable discussion of the treatment of export credits under the VFCR bank program. Consequently, it might be helpful to focus on the issue at this point. First, the provisions on export credits are of a lesser degree of restraint; in fact, there are virtual exemptions in some cases. Second, the possible impact of the pro- gram on exports, as well as on export financing, is an essential element of the evaluation of the balance of payments effects of the program. In the fall of last year, the Board, with the assistance of the Department of Commerce and the Federal Reserve Banks, con- ducted a survey of commercial banks and of exporters to determine the possible effects in 1970 of the VFCR on exports and export financing. The survey obtained replies from banks accounting for Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 7 - over nine-tenths of bank foreign lending. The replies were checked in every possible case against the reports of exporters identified by the banks, and another sampling was taken of exporters across the country* The survey indicated that there was no significant loss of exports as the result of the VFCR, In virtually every instance, U»S. exporters were able to obtain adequate financing for their shipments — if not through financing from one U.S. bank, then from another, or from sources abroad, I submit a copy of the report of the survey for the Subcom- mittee^ record. Earlier, I noted that all banks, as well as all nonbank financial institutions, were asked, in using their ceilings, to give priority to credits that would finance U.S. exports. This priority was established to ensure credit where it is essential to make export sales. Inquiries were made late last year of banks reporting under the VFCR program, and the Board's staff produced a study which shows how this request for priority treatment has been carried out. The study, the staff noted, is necessarily qualified, since there are limitations on the ability to separate export credit to foreigners from other credit to foreigners and since there are other data problems. However, it appeared that 16 per cent of banks1 holdings of foreign loans subject to the VFCR ceilings are made up of export Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 3 - credits. The export credit figure is 22 per cent if we take both export credits subject to the VFCR ceilings and export credits that are exempt from the ceilings by reason of falling within the exemp- tion tha t applies to Eximbank-related and Department of Defense- related commercial bank credit. The positions of individual banks vary greatly from these averages. In some cases, banks have no export credits among their loans to foreigners; in other cases, the overwhelming majority of their foreign assets are made up of export credits. For the Subcommittee's information, I submit also a copy of the staff study to which I have referred. With regard to export credits exempted because they are Eximbank-related, a category which I have mentioned, there has been a notable growth, particularly over the last year or so. From its earliest days, the program has exempted commercial bank loans to foreigners that have been paralleled by direct credits of the Eximbank, or that have been guaranteed by Eximbank, or that have been insured by Eximbankfs affiliate -- the Foreign Credit Insurance Association (FCIA). Largely as a result of recent growth in Eximbank activities, commercial bank export credits exempted from the VFCR ceilings have almost doubled since the end of 1969 and now amount to $370 million. Since early 1968, when Canada was exempted from all U.S. balance of payments programs, there has been a modest increase in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis ~ 9 - the outflow of U.S. bank credit to Canada. One factor tending to limit growth is the relatively low level at present of borrowing costs in Canada compared with those in this country. Another is the action taken by Canadian authorities to prevent Americans from funneling money through Canada to other foreign areas. The VFCR program has stimulated -- and some might say "caused" — an important expansion of U.S. banking activity abroad, including the creation and expansion of branches and subsidiaries of U.S. banks. A foreign branch, without adverse impact on the U.S* balance of payments and therefore without restraint from the Guide- lines, can lend abroad with funds obtained abroad. Consequently, many banks have established or expanded their facilities overseas. This expansion has been concentrated in the principal financial centers such as London, but it has also occurred in some non-traditional centers -- such as Nassau -- as well. It is hard to estimate the full effect, either short-run or long-run, of this development of the U.S. banking system. How- ever, it is clear that the ability of banks to meet the needs of their customers for financial assistance abroad — without restraint from the Guidelines -- has been substantially ensured. The VFCR Nonbank Program I will not endeavor in this statement to discuss the implication for our balance of payments of the nonbank portion of the VFCR program, since the bulk of the foreign assets held by Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 10 - nonbank financial institutions, being Canadian and international institution securities, is exempt from the restraints. However, I am submitting information on the nonbank portion of the program in the appendix to my statement. The Program's Contribution to the Balance of Payments From a review of our experience since early 1965, when the VFCR program was established, we can see that the restraints have been most effective when monetary conditions in the United States have eased. Understandably, following any easing relative to conditions abroad, U.S. financial institutions reassert their interest in placing funds abroad and, conversely, prospective foreign borrowers are attracted by declines of U.S. interest rates and an easing of other credit terms and conditions. The program has kept an overall limit on capital outflow through these institutions, with leeway expanding and contracting as monetary conditions here and abroad have changed. U.S. credit has been restrained most with regard to foreign countries which are best able to rely on non-U.S. financial resources, principally the developed countries of continental Western Europe. Institutions have been asked throughout the period to give priority to export credit, and export sales have not been lost because of the partial inclusion of export credit in the program. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 11 - Banks have made adjustments compatible with the restraint program so that they can continue to service their customers abroad, particularly the foreign affiliates of American corporations. These adjustments have taken the form largely of new, or expanded, foreign bank branches and the use by those branches of Eurodollars. Possible Offsetting "Leakages11 An evaluation of the effectiveness of the VFCR on checking capital outflow must take account, not only of the direct restraining force, but of any negative indirect effects. A gain reflected in one balance of payments account might be offset — partially, wholly, or even more than wholly -- by a cost reflected in another balance of payments account. In our judgment, there have been no substantial offsetting losses -- or "leakages," as they are sometimes known. The area we have looked at most carefully has been that of exports. As I have already said, we have carried out extensive investigations to see whether, and, if so, to what extent, there was evidence to substantiate the apprehension and allegation that the restraint on export credit has led to a loss of exports. We found abundant evidence to the contrary. Responses from banks and exporters showed that the VFCR has not caused any significant loss of U.S. exports. Examination of this and other areas in our international accounts which might reflect offsets to the direct contributions of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 12 the VFCR to the balance of payments indicates that these offsets have not been of significant size compared to the balance of payments savings. Role of U.S. Commercial Banks in Recent Short-Term Capital Flows I would now like to turn to the Subcommittee's question regarding the role of U.S. banks in the international movements of short-term funds during the latter part of April and the first week of May. We have two sets of information on which we can draw: the first source is reports received from banks covered by the VFCR, and the second so ,rce is information that can be derived from statistical reports submitted weekly by some banks. With respect to the VFCR data, the information regularly collected is available through April (Table 1). To obtain data for May, we have prepared a special tabulation covering the 49 largest banks under the program. These data show that in April these reporting banks increased their foreign assets covered by the VFCR by $125 million, of which $26 million was for export term loans. At the end of April, total foreign assets subject to the VFCR for all banks were about as large as they were at the beginning of the year. Our special tabulation for May showed that the 49 largest banks increased their foreign assets by about $500 million. The reports showed that only six banks had increases of more than $10 million; most banks had little activity, and 16 reduced their Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 13 - foreign assets. In addition, these banks reported an increase of $70 million in foreign claims held for account of their customers ~ which would include collections on exports —» and this too was largely accounted for by a few banks. The data on foreign assets of banks derived from weekly statistical reports are shown in Table 2. These data reflect a sharp increase in certain foreign assets in the week of May 12, the statement week during which the results of transactions undertaken at the height of market activity would appear in the reports. The increases were as follows (millions of dollars): Balances with foreign banks 165 Loans to foreign commercial banks 331 Foreign commercial and industrial loans 201 Loans to foreign governments and official institutions _41 738 There were a number of factors which led to this unusually large rise in foreign assets. Probably most important was the use by foreign banks and other borrowers of the credit lines that had been established with U.S. banks in earlier periods. Drawings on these credit lines may have represented a hedge by the foreign borrowers against exchange rate changes, but since the loans are primarily in dollars they do not represent foreign exchange activity for the U.S. banks involved. The increase in balances held with foreign banks was also unusually large, although it was substan- tially reversed in the following week. In this case, banks may Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 14 - have been acting both on their own account and in order to be in a position to meet the demands of their customers. I believe these data help to delineate the role of the banks in the large international capital flows that occurred in late April and early May, However, this is only a limited part of the total flow of capital in that period. While we cannot measure this flow directly, it was evidently large. This conclusion is clearly suggested by changes in reserve assets of major foreign countries. These reserves -- as recorded — increased by about $1-1/4 billion in Apri l and by some $4 billion in May — mainly in the early part of the month. Although we have tried to put together the data most rele- vant to your questions, I must emphasize that it will still be some time before we have available the full set of statistical reports with which we can measure all the types of capital flows that enter the balance of payments. Concluding Comment I would like to conclude by emphasizing again the role of the VFCR and the other restraints on capital outflows under present circumstances. Over the last few months, banks have consumed much of the leeway that they have had under their ceilings, so that the restraints have pressed increasingly on bank outflow of funds* The largest banks, in particular, are just about at their General Ceilings. There is every reason to expect that a significant relaxation or a removal of the Guideline restraints at this time would be followed by a substantial outpouring of funds from the United States. Digitized for FRASERA ttachments 3« http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Table 1 Voluntary Foreign Credit Restraints Foreign Assets of United States Banks June 3, 1971 (dollar amounts in millions) 1964 1965 1966 1967 1968 1969 1970 1971 1971 1971 1971 Dec, Dec. Dec. Dec. Dec. Dec. Dec.r Jan. Feb.r Mar/ Apr. Number of reporting banks 154 161 148 15 i 161 169 171 16S 165 169 169 General Ceiling 1/ Aggregate ceiling 9,973 10,407 11,069 9,729 10,092 9,968 9,947 9,914 9,908 9,905 Assets under ceiling 2/ 9,495 9,652 9,496 9,865 9,253 9,398 9,353 9,069 9,073 9,174 9,262 Change from previous date +157 -156 +369 -612 +145 -45 -284 +4 +101 +88 Apparent leeway 321 911 1,204 476 694 615 878 841 734 643 Export Term-Loan Ceiling 3/ Aggregate ceiling 1,264 1,423 1,431 1,425 1,442 1,442 Assets under ceiling 4/ -- -- 16 190 210 218 248 274 Change from previous date -- — -- +174 +20 +8 +30 +26 Apparent leeway 1,248 1,234 1,221 1,206 1,194 1,168 Total General and Export Term-Loan Ceilings Aggregate ceilings 9,973 10,407 11,069 9,729 11,356 11,391 11,378 11,339 11,350 11,347 Assets under ceilings 9,495 9,652 9,496 9,865 9,253 9,414 9,543 9,288 9,291 9,422 9,536 Change from previous date +157 -156 +369 -612 +161 +129 -255 +3 +131 +114 Apparent leeway 321 911 1,204 476 1,942 1,942 1,849 2,099 1,928 1,811 Total Foreign Assets Held for Own Account 5/ 9,719 9,958 9,844 10,202 9,844 10,158 10,614 10,262 10,285 10,509 10,634 Change from previous date -- +239 -114 +358 -358 +314 +456 -352 +23 +224 +125 1/ Prior to December 1969, "Target Ceiling11. 3/ 0.5 per cent of reporting banks' total 2/ Total foreign assets reported on Treasury Foreign Ex- assets as of December 31, 1968. change Forms B-2 and B-3: minus (1) amounts held for accounts 4/ See point (4) of footnote 2. of customers, (2) loans guaranteed or participated in by the 5/ Total foreign assets reported on Treasury Export-Import Bank, guaranteed by the Department of Defense, Foreign Exchange Forms B-2 and B-3, plus for- or insured by the FCIA, (3) beginning March 1968, changes eign assets held for own account not reported after February 29, 1968, in claims on residents of Canada held on those forms, minus amounts held for account for own account, and (4) export term loans (maturity over one of customers, year) placed on banks' books after November 30, 1969, plus for- eign assets held for own account but not reported on Forms B-2 Note: Data are for end of months listed, and B-3. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Table 2 SELECTED FOREIGN ASSETS OF U.g, BANKS REPORTED WEEKLY (Mllions of dollars) March April May June 3 10 17 24 31 7 14 21 28 5 12 19 26 2 A. Loans to foreign commercial banks (Amt.) 1504 1507 1450 1395 1338 1451 1474 1412 1488 1384 1715 1861 1866 1750 (Chg *) +3 -57 -55 -57 +113 +23 -62 +76 -104 +331 +146 +5 -116 Foreign commercial and industrial loans (Amt.) 2420 2462 2517 2525 2549 2475 2487 2464 2535 2480 2681 2665 2703 2826 (Chg.) +42 +55 +8 +24 -74 +12 -23 +71 -55 +201 -16 +38 +123 Balances with foreign banks (Amt.) 381 464 476 508 430 531 546 539 585 535 700 563 544 601 (Chg.) _ +83 +12 +32 -78 +101 -+15 -7 +46 -50 +165 -137 -19 +57 TToottaall (Amt.) 4305 4433 4443 4428 4317 4457 4507 4415 4608 4399 5096 5089 5113 5177 (Chg.) +128 10 -15 -111 140 50 -92 193 -209 697 -7 24 64 B. Loans to foreign governments and (Amt.) 760 762 757 789 783 770 802 786 805 767 808 800 814 836 official institutions (Chg.) +2 -5 +32 z6 -13 +32 -16 +19 -38 441 -8 +14 +22 TOTAL (Amt.) 5065 5195 5200 5217 5100 5227 5309 5201 5413 5166 5904 5889 592/ 6013 (Chg.) +130 +5 +17 -117 +127 +82 -108 +212 -247 +738 -15 +38 +86 Source: Loans to and balances with foreign banks and loans to foreign governments and official institutions are Weekly Condition Report data; fdreign commetcial and industrial loans are from weekly (Federal Reserve) Commercial and Industrial Loans series; data for May 26 and June 2 are preliminary. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis For release on delivery Appendix to Statement by Andrew F. Brimmer Member Board of Governors of the Federal Reserve System Operation of the Voluntary Foreign Credit Restraint Program before the Subcommittee on International Exchange and Payments of the Joint Economic Committee June 16, 1971 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis OPERATION OF THE VOLUNTARY FOREIGN CREDIT RESTRAINT PROGRAM The Guidelines for the Federal Reserve Voluntary Foreign Credit Restraint Program are divided into provisions for U.S. banks and for U.S. nonbank financial institutions. Commercial Bank Program Each reporting bank has a General Ceiling and an Export Term-Loan Ceiling. Each bank is also to observe several additional restraints, including a prohibition on loans to Western Europe of over one year maturity (except to finance exports) and a limitation on deposits or other short-term investments abroad for its own account. Priorit y is to be given to loans to finance U.S. exports and which meet the needs of developing countries. The Guidelines exempt loans and investments in Canada or loans which are related to Eximbank programs and several other specific categories of foreign assets. The principal features of the program are today the same as they were when the program was established in early 1965. Fre- quent changes, however, have been made in the level of ceilings — a few intensifications and more relaxations. Some changes have been made to mitigate apparent inequities resulting from an initial freezing of the relative lending positions among banks. Canada was exempted from the program in early 1968, and Canadian authorities simultaneously acted to insure that the exemption would not create a pass-through for Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 2 - U.S* funds to other areas of the world. The most recent change of major importance was the creation of a separate Export-Term Loan Ceiling for each bank at the end of 1969. This ceiling provided added leeway for loans of over one year maturity granted td finance exports of U.S. goods and the performance of U.S. services abroad; All banks in the United States are asked to observe the VFCR Guidelines* However, reports are asked only from banks which have $500,000 or more in foreign assets. Currently about 170 banks report monthly (out of almost 14,000 banks in this country). More- over, 18 of the reporting banks account for about four-fifths of the bank lending and investment subject to the restraints* The banks1 aggregate ceilings amount to $11.3 billion at the end of April; $9.9 billion represented the General Ceiling, and $1.4 billion represented the Export Term-Loan Ceiling. Also, at the end of April, there were $9*6 billion of loans outstanding under the combined ceilings; $9.3 billion were under the General Ceiling, and $274 million were under the Export Term-Loan Ceiling, The VFCR restraints apply to loans and investments for the account of the banks. However, banks are requested to discourage customers from engaging in certain transactions that would be inconsistent with the objectives of the VFCR or of the other capital restraint programs. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 3 - Nonbank Financial Institutions Program The nonbank part of the program applies to several kinds of specified financial institutions, including insurahce companies, mutual funds, endowment funds, trust departments of banks, and finance companies• Foreign assets held by these institutions are large* than the foreign assets held by banks. However, only a minor fraction of these foreign assets is subject to restraints, since the principal investments -- Canadian bonds and long-term securities of international institutions — are exempt. At the end of last year, the 336 reporting nonbank institutions had over $15 billion in total foreign assets, $1-1/2 billion being subject to restraint. Generally speaking, the Guidelines for the nonbank insti- tutions call for restraints similar to those applying to banks. However, these restraints are more extensively differentiated by type of foreign asset because of the more varied nature of the nonbank institutions and of their activities. Several changes have been made in the program since its inception in 1965, In addition to the exemption of Canada in 1963 (and aside from both increases and decreases in ceilings), certain categories of foreign assets have been exempted from the nonbank Guideline restraints. The last change of major importance was made in late 1969 when an exemption for long-term investment in Japan was terminated. Since then, restraints have applied equally to such investments in Japan and in other developed countries. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 4 - Data in the attached table indicate the trend of holdings of foreign assets by nonbank financial institutions since the begin- ning of the program. These data show that the VFCR nonbank program has restrained the amount of assets subject to the VFCR Guidelines held by nonbank financial institutions. On the other hand, there has been a steady growth in the total -- and in the uncovered portion -- of foreign assets held by nonbank financial institutions. This increase has centered primarily on credits to Canada and the developing countries. The nonbank part of the program is also of special impor- tance in buttressing the Department of Commerce Foreign Direct Investment Program (FDIP). For example, a U*S. direct investor might wish to transfer funds to a subsidiary in a less developed country, but might find he had no leeway under the FDIP. If it were not for the VFCR nonbank program, he could arrange for a U.S. nonbank financial institution, such as an insurance company, to make a loan to his foreign subsidiary. However, under the con- sultative process required by the VFCR nonbank program, nonbank financial institutions are requested not to provide financing that would cause the Commerce Department program to be evaded* Attachment: Foreign Assets of U.S. Nonbank Financial Institutions Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Appendix Table Foreign Assets of U.S. Nonbank Financial Institutions (dollars in millions) Number of Reporting Covered Assets—^ Noncovered Total I nstitutions Liquid Other Assets 1965 Guidelines Dec. 1964 584 511 1,234 10,441 12,186 Dec. 1965 571 276 1,266 11,365 12,907 1966 Guidelines Dec. 1965 571 268 2,912 9,941 13,121 Sept. 1966 571 208 2,653 10,188 13,049 1967 Guidelines Dec. 1965 572 265 2,239 10,609 13,114 Sept. 1966 572 208 1,850 11,016 13,074 Dec. 1966 572 194 1,757 11,153 13,105 1968 Guidelines-^' Dec. 1966 352 189 1,695 10.770 12,654 Dec. 1967 352 185 1,719 11,659 13,563 1968 Rev. Guidelines Dec. 1967 346 51 1,631 11,885 13,567 Dec. 1968 346 16 1,427 12,517 13,959 1969 Guidelines Dec. 1968 336 14 1,416 12,508 13,939 Dec. 1969 336 15 1,241 13,563 14,820 1970 Guidelines Dec. 1969 336 25 1,702 13,086 14,813 Dec. 1970 336 35 1,478 13,749 15,262 1/ See table A-4 for shifts in covered/noncovered status of reportable assets. 2/ Reporting requirements changed from $500,000 or more in total foreign assets to: (a) $500,000 or more of covered foreign assets or, (b) $5,000,000 or more of total foreign assets. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Andrew F. Brimmer (1971, June 15). Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/speech_19710616_brimmer

@misc{wtfs_speech_19710616_brimmer,
  author = {Andrew F. Brimmer},
  title = {Speech},
  year = {1971},
  month = {Jun},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/speech_19710616_brimmer},
  note = {Retrieved via When the Fed Speaks corpus}
}