Speech

For Release on Delivery Thursday, December 28, 1972 2:30 p.m. E.S.T. MULTI-NATIONAL BANKS AND THE MANAGEMENT OF MONETARY POLICY IN THE UNITED STATES Paper By Andrew F. Brimmer Member Board of Governors of the Federal Reserve System Presented Before a Joint Session of the Eighty-Fifth Annual Meeting of the American Economic Association and the Thirty-First Annual Meeting of the American Finance Association Toronto, Ontario, Canada December 28, 1972 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis MULTI-NATIONAL BANKS AND THE MANAGEMENT OF MONETARY POLICY IN THE UNITED STATES TABLE OF CONTENTS Section Page List of Tables ii Preface iii I. Introduction 1 II. Traditional Perception of Central Banking 4 III. Strategy and Impact of Federal Reserve Monetary Policy in Recent Years 9 IV. A New Framework for the Assessment of Monetary Policy 16 V. Banks' Reactions to Monetary Policy: Sources of Funds 24 VI. Banks' Reactions to Monetary Policy: Uses of Funds 32 VII. Reserve Requirements and Monetary Management 41 VIII. Alternative Approach to the Stabilization of Sectoral Credit Flows 62 IX. Summary and Concluding Observations 66 Appendix - i - Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis LIST OF TABLES Page Table 1. Factors in the Bank Reserve Equation, End of Year, 1967-1971 (Millions of Dollars) 5a Table 2. Sources and Uses of Funds by Commercial Banks, 1968, 1969, 1970 and 1971 (Amounts in Billions of Dollars) 14a Table 3. Assets and Deposits of Selected Large Banks in the United States, June 30, 1972 (Millions of Dollars) 18a Table 4. Outstanding Certifices of Deposits of $100,000 and Over, By Class of Bank, By Quarters, 1967-1972 (Billions of Dollars) 25a Table 5. Average Level of Euro-dollar Borrowings, By Class of Bank and Source of Funds, By Quarters, 1967-1972 (Millions of Dollars) 28a Table 6. Changes in Average Level of Selected Assets and Liabilities, By Class of Bank, By Quarters, 1968-1972 (Millions of Dollars) ^29a Table 7. Selected Sources of Funds, By Class of Bank, By Quarter, 1968-1972 (Percentage of Total Sources) 30a Table 8. Loans and Investments of Weekly Reporting Banks, By Class of Bank, December 31, 1967 and 1971 and June 30, 1972 (Amounts in Millions of Dollars) 32a Table 9. Changes in Loans and Investments of Weekly Reporting Banks, By Class of Bank, Half-Years, 1968-1972 (Millions of Dollars) 34a-e Table 10. Share of Major Sectors in the Net Credit Extended By Weekly Reporting Banks, By Class of Bank, 1968-1972 (Half-Years; Percentage of Total Uses of Funds) 35a Table 11. Liabilities of U.S. Banks to their Foreign Branches (Millions of Dollars) 48a Comparison of Three-month Euro-dollar Deposit Bid Rates Table 12. with Rates Offered by Prime Banks in New York for Three-month Foreign Official Time Deposits 52a APPENDIX Table I. Sources and Uses of Funds, By Class of Bank, By Quarter, 1968-1972 (Millions of Dollars) Table II. Sources and Uses of Funds, By Class of Bank, By Half-Years, 1968-1972 (Millions of Dollars) - 11 - Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis PREFACE I am grateful to several persons on the Board's staff for assistance in the preparation of this paper. Mr. Frederick M. Struble helped to establish the criteria used to identify and distinguish among multi-national, regional and large local banks. Ms. Jacqueline McDaniel had responsibility for planning and coordinating the computer programming required to obtain the basic statistics needed to analyze sources and uses of bank funds. Mr. Stephen A. Nelick did the programming to obtain data on member bank reserve requirements, borrowing from Federal Reserve Banks, and commercial paper outstanding on a daily average basis. Mr. Thomas A. Orndorff did the programming to retrieve data from the Call Report. Ms. Janet E. Voss did the programming to obtain data from the Weekly Reporting Banks statistics and from the nondeposits * sources of funds* Mrs. A. Cl:rx.st;ne James and Miss Rosanne McKnew provided the statistics on foreign assets held by banks reporting under the Voluntary Foreign Credit Restraint Program and on assets held by foreign branches of U.S. banks. Mr. William E. Rumbarger provided the statistics on deposits at banks' head offices and in their foreign branches. Once these various statistics were in hand, however, they still had to be organized for analytical purposes. Ms. Juliette Bethea, Ms. Barbara A. Lowrey, and Ms. Diane Sower provided this assistance. Mrs. Ruth Robinson and Mr. John Austin, my regular staff assistants, worked on various parts of the project. They were especially helpful in compiling the sources and uses of funds tables and in distributing Euro-dollar flows among the different classes of banks. Mr. Austin was particularly helpful in the resolution of a number of difficult accounting problems where good judgment was required. Mrs. Linda Zuk did the major share of the typing, and Mrs. Tonsa Fuqua also helped in the paper's final preparation. Finally, while I am grateful for the staff's support in this project, the analysis presented and the conclusions reached in this paper are my own. Nor should the views expressed be attributed to my colleagues on the Board. - iii - Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis MULTI-NATIONAL BANKS AND THE MANAGEMENT OF MONETARY POLICY IN THE UNITED STATES By Andrew F. Brimmer* I. Introduction The experience with monetary policy in the United States since the mid-19601s suggests strongly that the evolution of the commercial banking system has altered flows of funds, changed the distributional impact of monetary policy, and placed strains on the traditional instruments of central banking. The main- springs of this evolution have been a small number of very large multi-national banks constituting the core of the domestic money market but which are also heavily involved in international finance. Because of the activities of these large institutions in mobilizing and rechanneling funds, the financial system in the United States has become much more open to the influence of foreign financial developments than was the case a decade ago. Given these fundamental changes, it would be helpful to provide additional tools to the Federal Reserve's kit with which to moderate the impact of such developments on the domestic economy. *Member, Board of Governors of the Federal Reserve System. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 2 - In my judgment, efforts to rectify this situation should not be delayed much longer. On several occasions in recent years, I have urged such action. I have also outlined the principal elements in an alternative strategy of monetary control — the keystone of which is a much more flexible use of reserve requirements based on bank assets as well as on a broader range of liabilities. Still another alternative approach has been recommended by the Federal Reserve Board—a recommendation in which I joined. This propo3kJ. ^involves the flexible use of the investment tax credit to achieve greater stability in spending by the business sector for machinery and equipment. In a later section of this paper, I will explain why I believe strongly that one of these alternative approaches should be adopted in the foreseeable future. I am not unaware of the position held by many economists who believe that a central bank should not concern itself with the composition of bank credit—but only with its aggregate level or rate of growth. Still others hold that the behavior of the money supply alone should be the focus of central bank concern. I clearly do not share such a narrow conception of the task of central banking in the United States. Instead, I am convinced that the Federal Reserve Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 3 - cannot be indifferent to the changing composition of commercial bank credit. A posture of indifference would mean that drastic variations in the availability of credit in important sectors could occur—and persist—with serious adverse consequences for the economy as a whole. In my opinion, we need a better way to assure that the overall objectives of monetary policy can be achieved without having some sectors bear a disproportionate share of the burden of adjustment to monetary restraint, while a few other sectors are significantly less affected. Moreover, the time to make such structural improvements is a period of relative quiet in the money and capital markets rather than a period of stress or near financial crisis. These general observations are supported by the analysis which follows. In Section II, the traditional perception of the task of central banking is\ summarized. The strategy and impact of monetary policy in recent years are discussed in Section III. A new framework for the assessment of monetary policy is outlined in Section IV. Banks1 reactions to monetary policy are analyzed in Section V (sources of funds) and Section VI (uses of funds). In Section VII, the broadened use of supplemental reserve requirements to stabilize bank lending to particular economic sectors is assessed. An alternative instrument to accomplish the same goal (a variable investment tax credit) is weighed in Section VIII. A summary of the findings and concluding observations are presented in Section IX. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 4 - II. Traditional Perception of Central Banking As I indicated above, many economists argue that monetary policy should confine itself to the control of the stock of money in the economy.—^This view implies that, in operation, the central bank should supply a given volume of bank reserves and leave it to the private market to decide how the reserves will be used. In this conception of central banking, there is no scope for special concern with the availability of credit in particular sectors—nor with non- deposit sources of bank funds--such as Euro-dollars. Instead, this traditional prescription for monetary management requires that the central bank vary the volume of bank reserves according to direction of desired changes in the money stock. If a policy of monetary restraint is appropriate, the Federal Reserve should limit the growth of reserves—perhaps even to the point of causing the actual volume of reserves to decline. If an expansionary policy were called for, the volume of reserves should be increased at a faster pace. In either case, however, it is argued that whatever changes do occur in the volume of commercial bank reserves can take 2/ place only at the initiative (or concurrence) of the central bank. The logic of this argument can be demonstrated readily by an examination of the sources and uses of bank reserves. The main factors affecting such reserves are frequently summarized in the bank 1/ I have dealt with this basic issue in a number of places. See, ~ for example, "Monetarist Criticism and the Conduct of Flexible Monetary Policy in the United States,11 Lecture presented at the Institute of Economics and Statistics, Oxford University, Oxford, England, April 14, 1972. 2/ See, for example, "CD's, Euro-dollars, and Monetary Policy," The "" Morgan Guaranty Survey, February, 1969, pp. 4-9. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 5 - reserve equation—or the monetary base. Data in Table 1 show the elements in the equation as of year-end for the five years 1967-71. By definition, the monetary base consists of funds created by the Federal Reserve System or by the U.S. Treasury in its monetary role as issuer of currency and coin and the locus of gold monetization. These reserve supplying factors are listed under Item A in Table 1. In theory, all of the monetary base is available for use as reserves. However, nonreserve uses (Item B) absorb a substantial part of the base, and the residual (Item C) is left as bank reserves available to support commercial bank deposits. Given the traditional perception of the task of monetary policy, the behavior of the monetary base does enable one to isolate the effects of central bank action on bank reserves. For some observers it may even provide a basis for inferences with respect to the aims of monetary policy. For example, in 1968, the Federal Reserve alternated between a policy of monetary restraint in the first half and one of expansion in the last six months. Over the year as a whole, member bank reserves rose by $1.0 billion. This rise was the net result of an increase of $3.0 billion in the monetary base partially offset by a rise of $2.0 billion in nonreserve uses of the base. The principal sources of the increase in the base were an expansion of $3.7 billion in Federal Reserve holding of U.S. Treasury securities and $867 million in Federal Reserve float. A drop of $1.6 billion in the gold stock Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 5a - Table 1, Factors in the Bank Reserve Equation, End of Year, 1967-1971 (Millions of Dollars) Changes 1967- 1968- 1969- 1970- Factors Affectinc Bank Reserves 1967 1968 1969 1970 1971 68 69 70 71 A. Factors supplying reserve funds Federal Reserve holdings of U.S. Treasury securities, Federal agency securities, and acceptances 49,314 52,995 57,218 62,199 71,065 3,681 4,223 4,981 8,866 Member bank borrowings from Federal Reserve 141 186 183 335 39 45 - 3 152 - 296 Federal Reserve float 2,576 3,443 3,440 4,261 4,343 867 - 3 821 82 Gold stock 11,982 10,367 10,367 10,732 10,132 -1,615 0 365 - 600 Treasury currency outstanding 6,784 6,795 6,852 7,149 7,710 11 57 297 561 Special Drawing Rights - - - 400 400 - - 400 400 Total monetary base 70,797 73,786 78,060 85,076 93,689 2,989 4,274 7,016 8,613 B. Factors absorbing reserve funds Currency in circulation exclud- ing amount held by member banks as reserves 42,595 46,040 48,763 51,670 55,325 3,445 2,723 2,907 3,655 Treasury cash holdings 1,344 695 596 431 460 - 649 - 99 - 165 29 Deposits at Federal Reserve banks owned by Treasury 1,123 703 1,312 1,156 2,020 - 420 609 - 156 864 Deposits at Federal Reserve Banks owned by foreign mone- tary authorities, interna- tional institutions, and nonmember banks 788 963 941 1,381 1,293 175 - 22 440 - 88 Other Federal Reserve accounts (net) - 773 -1,353 - 824 863 1,063 - 580 529 1,68" 200 Total nonreserve use of monetarv base 45,077 47,048 50,788 55,501 60,161 1,971 3,740 4,713 4,660 C. Member bank reserves Reserves on deposits with Federal Reserve Banks 21,092 21,818 22,085 24,150 27,788 726 267 2,065 3,638 Reserves in the form of currency and coin (estimated) 4,631 4,921 5,187 5,423 5,743 290 266 236 320 Total bank reserves 25,723 26,739 27,272 29,573 33,531 1,016 533 2,301 3,958 Note: The sum of nonreserve use and total bank reserves may not add to the total monetary base due to rounding. Source: Federal Reserve Board. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 6 - erased a sizable share of the funds created by the Federal Reserve. The expansion in nonreserve uses of the monetary base centered mainly in the public's increased holdings of currency ($3*4 billion). However, this drain was eased appreciably by reductions in Treasury cash holdings ($649 million) and in Treasury deposits at Federal Reserve Banks ($420 million). The growth in deposits at Reserve Banks owned by foreign monetary authorities and international institutions absorbed $175 million of the monetary base. Of the $1.0 billion expansion in member bank reserves, nearly $300 million was held as vault cash, and the rest was held as deposits at Federal Reserve Banks. The policy of severe monetary restraint pursued in 1969 is also reflected in the behavior of the bank reserve equation. For the year as a whole, member bank reserves rose by only $533 million. The monetary base expanded by $4.3 billion (virtually all of which originated in net purchases of U.S. Government securities by the Federal Reserve). However, the funds created by the Federal Reserve were provided primarily to replace the drain arising from nonreserve uses of the monetary base. While $2,7 billion of the drain resulted from an increase in currency in circulation, the Treasury also added over $600 million to its deposits at Federal Reserve Banks. With the shift of monetary policy from restraint to expansion in 1970—and a further liberalization in 1971—the monetary base responded accordingly. In 1970, the monetary base expanded by $7.0 billion. Of this amount, $6.3 billion was supplied by the federal Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 7 - Reserve, and nearly $700 million originated in Treasury operations (including $400 million resulting from the introduction of Special Drawing Rights (SDR's). Nonreserve uses of the monetary base rose by $4.7 billion. A greater volume of currency in circulation ($2.9 billion) was responsible for the major part of this drain, but other Federal Reserve accounts also made a contribution ($1.9 billion). The latter consist mainly of securities held by the Federal Reserve Bank of New York on behalf of foreign central banks—which in turn are a reflection of the deficit in the U.S. balance of payments. Nevertheless, member bank reserves rose by $2.3 billion. In 1971, the expansion in member bank reserves ($4.0 billion) was even more dramatic. Again the growth of Federal Reserve credit ($8.9 billion) was the principal source. These newly created funds were partly offset by declines of $600 million in the gold stock and $300 million in member bank borrowing from Federal Reserve Banks. Treasury currency outstanding and SDR's added $561 million and $400 million, respectively. Nonreserve uses eroded $4.7 billion from the monetary base, leaving an increase of $4.0 billion in member bank reserves. Of course, most economists would not be satisfied with an assessment of monetary policy based primarily on the insights yielded by an analysis of changes in the monetary base. As a minimum, they would want to ask also about the behavior of the money stock. For the years under review here, the various measures of the money stock Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 8 - show essentially the same pattern as that traceable in the behavior of the bank reserve equation. There is no mystery at work here—since the growth of demand deposits (the principal component of the money stock) depends directly on the availability of bank reserves. In 1968, (currency plus demand deposits in the hands of the public) rose by 7.8 per cent. But in 1969, under the impact of monetary restraint, the expansion of M^ amounted to only 3.2 per cent. In 1970 and 1971, as monetary policy sought to counter the effects of recession, the rise in M^ was 5.4 per cent and 6.2 per cent, respectively. The broader measures of the money stock (M2> i.e., M]^ plus time deposits at commercial banks other than large CD's, and M^, i.e., M2 plus deposits at thrift institutions) traced roughly the same contours as M^. Bank credit measures (the adjusted bank credit proxy and total loans and investments) show essentially the same profile—except the amplitude of fluctuation is greater. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 9 - m* Strategy and Impact of Federal Reserve Monetary Policy in Recent Years This traditional perception of the tasks of monetary policy has a number of adherents in the Federal Reserve System. In fact, in a few places (especially at the Federal Reserve Bank of St. Louis), the advocacy of a monetary policy geared primarily to the behavior 1! of the money stock is strong indeed. However, the latter approach to monetary management is not shared by the vast majority of policy- makers in the Federal Reserve. Instead, the System has adopted an essentially eclectic approach: it has employed a variety of instruments to enhance the contribution which monetary policy can make toward the achievement of price stability, high levels of output and employment, and the restoration of equilibrium in the U.S. balance of payments. During a substantial part of the 6-3/4 years that I have been a Member of the Federal Reserve Board, the System has been troubled by a lingering problem. That problem is the differential impact of changing credit conditions on the availability of credit in particular sectors of the economy. The general features of this problem are widely recognized. During periods of strong credit demands and inflationary pressures (such as 1966 and 1969-70), Federal Reserve monetary policy ordinarily assumes a posture of substantial restraint. However, the impact of this restraint is felt unevenly by various groups of borrowers in the country. Some borrowers (most notably the TT I have traced the progress of monetarism in the Federal Reserve in some detail. See "The Political Economy of Money: Evolution and Impact of Monetarism in the Federal Reserve System,11 The American Economic Review, May, 1972, pp. 344-352. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 10 - largest business concerns) are able to obtain quite readily a large share of the funds they require to continue their activities— particularly investment in plant expansion. In contrast, other borrowers (especially State and local governments and families attempting to purchase homes) are severely rationed in their efforts to obtain credit. The effects on spending and output that result from this disproportionate shift in the distribution of loanable funds are no less apparent. Business spending on plant and equipment and on inventories continues at a pace essentially unchanged from that prevailing prior to the adoption of a restrictive credit policy; and the expansion continues long after spending by State and local governments— and particularly by home buyers—has been severely retarded. This is a familiar story, and the explanation of the outcome is also widely known: the institutional rigidities pf housing finance (derived from the inflexiblity of the mortgage as a debt instrument and the limited ability of savings and loan associations to compete for funds), combined with the reluctance of home buyers to pay market- determined rates of interest, serve to erect formidable obstacles to the continued flow of funds into residential construction during periods of tight credit conditions. Similar rigidities (notably limitations on borrowing costs) inhibit the ability .of State and local governments to compete in the capital market. Numerous proposals have been advanced to cope with the situation by lessening barriers and stabilizing the flow of funds into specific sectors. Some of these have been adopted, and a few have resulted in improvements. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 11 - Nevertheless, the basic problem remains, and its manifestation in recent years can be traced clearly in the record. In mid-December, 1968, the Federal Reserve took the first of a series of steps designed to tighten monetary and credit conditions in order to combat inflationary pressures generated by an overheated economy. The impact of this and subsequent policy measures coincided with the advent of expansion in credit demands. Commercial banks (which must necessarily be the fulcrum of monetary policy) became progressively under severe monetary restraint. This was especially true of the large institutions at the forefront of the industry. As 1969 unfolded, interest rates on open market securities increased sharply. However, the Federal Reserve did not raise the maximum rates of interest which banks could pay on 00*8 in denominationsof $100,000 and over. As a result, a substantial volume of funds was drawn away from deposit accounts at commercial banks into higher yielding market securities. At the same time, banks were faced with exceptional loan demands from their customers— with the demand for funds by business borrowers being particularly strong. In the face of the sharp outflow of deposit funds, banks acted to meet the demands of their loan customers by liquidating large blocks of their security holdings. In addition, most comparatively large banks tapped nondeposit sources for a substantial volume of funds, borrowing heavily in the Euro-Dollar market (particularly from foreign branches), In the Federal funds market, and from Federal Reserve Banks. These large banks also sold sizable portions of their loan portfolios, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 12 - especially to their holding company affiliates, subsidiaries, and foreign branches. Affiliates obtained the funds to purchase these loans primarily by selling commercial paper. Overall, after adjustment for loan sales, bank holdings of earning assets rose only moderately— as a sharp growth in loans was offset in large part by a marked decrease in investment holdings. During 1970, the course of developments differed markedly. In mid-January of that year, the Federal Reserve, in recognition of the moderating pace of the economy, moved to reduce the degree of tightness in monetary and credit conditions. Subsequently, the System took a number of actions to promote moderate easing of credit conditions. And with the easing of monetary policy and the cooling off of the economy, interest rates on open market securities trended down. A number of other factors also improved the ability of banks to compete for deposit funds. Ceiling interest rates that banks are allowed to pay on consumer-type time and savings deposits were raised by the Federal Reserve Board early in 1970. At mid-year, several steps were taken to help ease pressures in the money market which resulted from the bank- ruptcy of the Penn-Central Railroad. Rate ceilings on short-dated CD's were suspended in late June, and member banks were allowed to borrow from Federal Reserve Banks under liberal terms if this were necessary to enable them to acconxnodate any of their customers who needed to refinance Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 13 - maturing commercial paper. In August of that year, reserve requirements on the commercial paper indebtedness of bank affiliates were imposed; this induced banks to reduce these liabilities. At the same time, investors in this paper were encouraged to shift their funds into deposit accounts. In November, the discount rate at Federal Reserve Banks was cut in two 1/4 point moves from 6 to 5-1/2 per cent. In addition to these changes in regulations and the down- trend in interest rates, it appears that the public became more cautious in the management of its asset positions. While all of these factors combined to promote exceptionally strong advances in deposit funds, customer loan demands (particularly the demands of business customers) remained relatively weak. This situation became especially evident in the Spring of 1970, when corporations began floating large amounts of long-term issues partly to replace short-term debt. During 1971, the main thrust of monetary policy was expansionary. The principal aim was to encourage a sizable further increase in bank reserves, money, and bank credit. The growth of these monetary aggregates (which was generally larger than in the year before) was intended to stimulate recovery from the 1969-70 recession. There was considerable variation in interest rates. Among other factors, this wide fluctuation reflected changes in the public's expectations about inflation and large short-term capital flows between the United States and foreign countries. After mid-August, when new economic policies were announced (which Included wage and price restraints and far reaching international Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 14 - measures to stem deterioration in the balance of payments), interest rates moved downward. By the end of the year, interest rates—on the average*--were down somewhat from the levels at the beginning of 1971. In mid-December, the Federal Reserve discount rate was cut to 4-1/2 per cent in recognition of the lower levels of market rates. The move was also designed to encourage a faster pace of economic expansion. During 1972, monetary policy has continued to encourage fuller utilization of manpower and plant capacity while continuing to avoid the rekindling of inflation. The impact of monetary policy on credit flows during the last few years can be seen in the behavior of commercial banks. The figures in Table 2 can be used for this purpose. In 1969, commercial banks1 liabilities (the key to their lending ability) rose by less than half as much as in the preceding year. The primary reason for the lag was a noticeable loss of time deposits—especially negotiable CD's of $100,000 and over. The latter experience, in turn, was due to the decision of supervisory authorities to hold the maximum rates of interest which could be paid on time deposits below sharply rising market yields. In 1970 (and particularly after mid-year when the ceilings were suspended with respect to CD's with maturities of less than 90 days), interest rates offered by the banks were again competitive with market yields--which were declining sharply--and the banks gained funds. They continued to do so in 1971. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 14a - Table 2. Sources and Uses of Funds by Commercial Banks, 1968, 1969, 1970 and 1971 (Amounts in Billions of Dollars) 1968 1969 1970 1971 Per Cent Per Cent Per Cent Per Cent Source or Use Amount Of Total Amount Of Total Amount Of Total Amount Of Total Net acquisition of financial assets 46.6 100.0 22.5 100.0 40.4 100.0 57.6 100.0 Total bank credit 40.3 86.7 17.9 78.9 33.1 81.9 50.5 87.7 Credit market instruments 39.0 83.7 18.9 83.6 31.6 78.2 49.8 86.5 U.S. Government Securities 3.5 7.5 - 9.5 - 42.2 9.4 23.2 6.0 10.4 Direct 2.2 4.7 - 9.2 - 40.9 5.8 14,3 2.3 4.0 Agency issues 1.3 2.8 - 0.3 - 1.3 3.6 8.9 3.6 6.4 State and local govt, obligations 8.6 18.4 0.2 0.9 10.7 26.4 12.7 22.0 Corporate bonds 0.3 0.6 - 0.1 - 0.4 0.8 2.0 1.3 2.3 Home mortgages 3.5 7.5 3.0 13.3 0.9 2.2 5.7 9.9 Other mortgages 3.2 6.8 2.4 10.7 1.6 4.0 4.2 7.3 Consumer credit 4.9 10.5 3.3 14.7 1.9 4.6 4.8 8.3 Bank loans, n.e.c. 16.2 34.8 19.0 84.4 4.4 10.8 14.4 25.0 Open-market paper - 1.1 - 2.4 0.5 2.2 2.0 5.0 0.8 1.3 Corporate equities 0.1 0.2 * -- 0.1 0.3 * -- Security credit 1.3 2.8 - 1.1 - 4.9 1.4 3.4 0.8 1.2 Vault cash and member bank reserves 1.9 4.0 0.5 2.3 1.8 4.5 4.1 7.1 Other interbank claims 1.6 3.3 2.3 10.3 2.5 6.2 1.1 1.9 Miscellaneous assets 2.8 6.0 1.9 8.5 3.0 7.4 1.9 3.3 Net increase in liabilities 44.8 95.8 21.5 95.5 38.7 95.7 55.1 95.7 Demand deposits, net 13.4 29.0 5.3 23.6 8.7 21.5 14.0 24.3 U.S. Government - 0.2 - 0.4 •k 2.9 7.1 2.2 3.8 Other 13.7 29.4 5.3 23. 6 5.8 14.4 11.8 20.5 Time deposits 20.7 44.4 - 9.3 - 41.3 38.0 94.1 41.4 71.8 Large negotiable CD's 3.1 6.7 -12.5 - 55.6 15.2 37.6 7.9 13.7 Other at commercial banks 17.4 37.3 3.0 13.4 22.4 55.5 33.2 57.6 At foreign banking agencies 0.2 0.4 0.2 0.9 0.4 1.0 0.3 0.5 Federal Reserve float 0.9 1.9 * -- 0.8 2.0 0.1 0.2 Borrowing at Federal Reserve Banks * -- ft -- 0.2 0.5 - 0.3 - 0.5 Other interbank claims 1.6 3.4 2.3 10.2 2.5 6.2 1.1 1.9 Bank security issues 0.2 0.4 0.1 0.4 0.1 0.2 0.6 1.0 Commercial paper issues -- 4.2 18.7 - 1.9 - 4.7 - 0.4 - 0.7 J. Profit tax liabilities - 0.1 - 0.2 0.1 0.4 0.3 0.7 Miscellaneous liabilities 8.0 16.9 18.9 83.5 -10.0 - 24.8 - 1.3 - 2.3 Liabilities to foreign affiliates 2.3 4.9 7.9 35.1 - 6.9 - 17.1 - 4.1 - 7.1 Other 5.6 12.0 10.9 48.4 - 3.1 - 7.7 2.8 4.9 Discrepancy 0.6 1.3 0.9 4.0 1.0 2.5 0.3 0.5 Current surplus 3.0 6.4 3.7 16.4 3.8 9.4 3.9 6.8 Plant and equipment 0.6 1.3 1.8 8,0 1.1 2.7 1.1 1.9 NOTE: Data are for chartered commercial banks, their domestic affiliates, Edge Act Corporations, agencies of foreign banks, and banks in U.S. possessions. Edge Corporations and agencies of foreign banks appear together in this table as "foreign banking agencies." * Less than $0.05 billion. Source: Flow of Funds Section, Federal Reserve Board. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis The figures in Table 2 also show the sharp changes in uses of commercial bank funds in recent years. In 1969, total bank credit expanded by less than half the amount recorded the previous year. However, the rise in bank loans in 1969 was one-sixth larger than that recorded the year before. To meet this private demand for credit, the banks liquidated a sizable amount of U.S. Government securities and switched the funds into loans. In 1970, the growth in bank credit was nearly double that recorded in the preceding year. But the overwhelming proportion of the banks1 funds went into investments, and only a modest growth occurred in bank loans. Last year, credit supplied by commercial banks rose by over $17 billion compared with the year before. Moreover, well over half of the growth was in the form of loans—which was broadly distributed among loan categories. Finally in 1969, commercial banks pulled in a record amount of Euro-dollars through their foreign branches in an effort to offset the loss of domestic time deposits. In 1970, they employed a substantial portion of their enlarged resources to repay liabilities to their foreign branches. These repayments continued in 1971. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 16 - IV. A New Framework for the Assessment of Monetary Policy But despite the erosion of tension in money and capital markets during the last year or so, the problem posed by the differential impact of monetary policy remains an urgent one. Moreover, much of the debate over the issue continues to focus on the role of the Federal Reserve. This is not surprising because the reduced availability of funds in the adversely affected sectors becomes most evident as market forces respond to monetary restraint. Of course, one can contend that the objective of monetary policy is to impose general restraints oil borrowing. Consequently, the blame for the differential impact of monetary policy would rest on rigidities in housing finance and on State and local borrowing limitations. And there is an element of truth in this position. Nonetheless, if the impact of monetary policy consistently bears heavily on certain sectors of the economy and just as consistently leaves other sectors less affected, then it is also true that whatever its intent, the effect of monetary policy is specific rather than general. It is recognition of this fact that has led many observers to feel that they need to look no fafcther than Federal Reserve policy for an explanation—and remedy of this problem. When the Federal Reserve is called upon to devise a solution, 4/ it is really being asked to "do something11- to insure greater stability in the allocation of commercial bank credit over the cycle. This focus on the commercial banks is by no means misplaced. While other institutions may play a larger overall role (in terms of total lending) in certain markets than commercial banks, changes in the volume of funds 47 I interpret this to mean that they really want the Congress to "do something1," since the Federal Reserve's authority rests on legislation enacted by Congress. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 17 - supplied by the latter over a fairly short period of time can have a disproportionate impact on the level of spending in particular sectors. And the principal beneficiary of such shifts in the availability of funds is the corporate business sector. But, as I emphasized above, this is not a new situation— and taken alone it would not justify a renewed discussion at this time. However, there are forces at work behind the familiar facade which are less readily recognized but whose potential effects on the nation's financial system could be considerable; and the lending behavior of commercial banks is the fulcrum of the situation. In fact, the situation is roughly analogous to that of an iceberg: the proportion below the surface greatly exceeds that which is visible at first glance. What can be seen readily is the changing availability of funds in particular sectors as commercial banks generally respond to monetary restraint. What is less visible is the strategic behavior of a small number of multi-national banks which virtually guarantees that the availability (although not the cost) of loans by them to their preferred business customers will be substantially insulated from monetary restraint. Over the last two and one-half years, I have devoted a considerable amount of effort to studies designed to illuminate the 5/ role of these multi-national banks in the nation's financial system. 5/ See "The Banking Structure and Monetary Management11 presented before the San Francisco Bond Club, April 1, 1970, and "Commercial Bank Lending and Monetary Management," Journal of Commercial Bank Lending, January, 1972, pp. 2-19. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 18 - The framework of analysis was constructed by recasting data for about 330 large banks which report to the Federal Reserve on a weekly basis. Depending on the character of their business, the banks were classified as follows: multi-national banks (20); regional banks (60), and local banks (250). However, it should be recalled that the Weekly Reporting Banks (WRB) all have total deposits of $100,il00,000 and over. At the end of June, 1972, they cons-tltiated 2.4 per cent of the 13,669 insured commercial banks in the country; yet they held 57 per cent of the total assets and 55 per cent of the deposits. The multi-national bank category is comprised of exceptionally large commercial banks. Indeed, at the time of original selection in 1970—and this is still true at the present time—all but one of the multi-national banks were drawn from the 20 largest banks in the United States, and the remaining bank was the 21st largest bank in the country. These banks are identified in Table 3, along with several classes of assets and deposits. A second major distinguishing characteristic of these banks is the substantial role played by virtually all of them in international finance. All 20 multi-national banks had one or more branch offices in foreign countries. Deposits in these branches varied from 12 per cent up to 47 per cent of the combined deposits of domestic offices and foreign branches for 19 of the 20 multi-national banks. Each bank had a relatively large volume of loans to foreign borrowers on the books of the head office• In Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 18a - Table 3. Assets and Deposits of Selected Large Banks In the United States, June 30, 1972 (millions of dollars) Deposits | Head Office Claims on Foreigners Assets of Foreign Branches Total At At Foreign b domestic Total Domestic Foreign as per cent Own Customers Claims on Claims Name of Bank assets deposits Offices offices of total Total Account Account Total Head Office on others Multi-National Banks (20) 1 Bank of America, S.F. 26,086 32,393 21,667 10,726 33.1 2 Chase Manhattan, N.Y. 19,919 22,823 14,985 7,838 34.3 3 First National City, N.Y. 17,847 25,035 13,471 11,564 46.2 4 Manufacturers Hanover, N.Y 10,972 11,964 9,024 2,941 24.6 5 Chemical Bank, N.Y. 10,971 10,787 8,520 2,267 21.0 Sub-Total 85,795 103,002 67,667 35,336 — 5,871 5,059 812 34,453 1,341 33,111 Share of Multi-National total (%) 49.28 53.16 49.82 60.99 — 55.33 57.57 44.59 60.78 92.74 59.94 Share of Grand total (X) 22.72 NA 22.51 NA -- 40.40 41.30 35.58 53.60 89.77 52.79 6 Morgan Guaranty, N.Y. 9,724 10,717 6,646 4,071 38.0 7 Security Pacific, L.A. 9,162 9,132 7,721 1,411 15.5 8 Bankers Trust, N.Y. 8,152 9,521 6,550 2,971 31.2 9 Continental Illinois, Chicago 7,932 8,176 5,978 2,199 26.9 10 First National Bank, Chicago 7,405 7,400 5,195 2,206 29.8 Sub-Total 42,375 44,946 32,090 12,858 -- 2,552 1,938 610 13,245 93 13,152 Share of Multi-National total (%) 24.34 23.19 23.62 22.19 -- 24.05 22.05 33.50 23.37 6.43 23.81 Share of Grand total 11.22 NA 10.68 NA — 17.56 15.82 26.73 20.60 6.22 20.96 11 Wells Fargo, S.F. 7,016 6,711 5,589 1,122 16.7 12 Crocker Citizens, S.F. 6,095 5,862 4,911 951 16.2 13 United California, L.A. 5,761 5,083 4,468 615 12.1 14 National Bank of Detroit 5,110 4,802 4,222 580 12.1 15 Mellon National Bk, Pittsburgh 4,736 4,963 3,548 1,415 28.5 Sub-Total 28,718 27,421 22,738 4,683 -- 1,160 1,105 57 4,458 2 4,457 Share of Multi-National total (%) 16.49 14.15 16.74 8.08 -- 10.93 12.57 3.13 7.86 0.14 8.07 Share of Grand total 7.61 NA 7.56 NA — 7.98 9.02 2.50 6.93 0.13 7.10 16 Irving Trust, N.Y. 4,043 4,164 3,165 999 24.0 17 First National Bank, Boston 3,765 3,974 2,646 1,328 33.4 18 First Penn., Bala Cynwyd, Pa. 3,501 2,946 2,566 380 12.9 19. Marine Midland, N.Y. 3,136 4,962 2,610 2,352 47.4 1 —• 20 Cleveland Trust, Cleveland 2,774 2,361 2,358 3 Sub-Total 17,214 18,407 13,345 5,062 1II 11..002288 668866 334422 44,,552266 1100 44,,551166 Share of Multi-National j1 total (%) 9.89 9.50 9.82 8.74 9.69 "7.81 18.78- 7.98 0.69 8.18 Share of Grand total 4.56 NA 4.44 NA — 7.07 5.60 14.99 7.04 0.67 7.20 MULTI-NATIONAL TOTAL 174)107 193,776 135,840 57,939 10,611 8,788 1,821 56,682 1,446 55,236 Share of Grand total (%) 46.11 NA 45.19 NA — 73.01 71.74 79.80 88.17 96.79 88.05 Regional Banks ($0) 92,, 116 NA 71,, 180 NA 2,034 1,859 176 5,302 29 5,273 Share of Grand total (1) 24.. 40 NA 23.. 68 NA 14.00 15.18 7.71 8.25 1.94 8.40 Local Banks Ill,> 360 NA 93,, 563 NA 1,887 1,602 285 2,302 19 2,228 Share of Grand total (X) 29,. 49 NA 31., 13 NA 12.99 13.08 12.49 3.58 1.27 3.55 GRAND TOTAL 377,, 583 NA 300,, 583 NA 14,532 12,249 2,282 64,286 1,494 62,737 Memorandum; All insured cotmercial banks (Number: 13,669) 661,838 549,985 Weekly Reporting Banks (as per cent of all ins. batiks) 57.1 54.6 Multi-National Banks 26.4 24.6 Regional Banks 13.9 12.8 Local Banks 16.8 17.2 Note: Head office claims on foreigners and assets of foreign branches are not shown for individual banks to prevent disclosure of confidential data. However, these data are shown for the multi-national banks grouped by sice into four classes of five banks. Sources: Federal Reserve Board. Total Assets: Call Report, June 30, 1972. Deposits: Consolidated Call Report, June 30, 1972. Head office claims on foreigners, Voluntary Foreign Credit Restraint reports. Assets of branches, monthly reports to Federal Reserve Board. NA Not Applicable. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 19 - fact, these 20 banks had nearly three-quarters of all head office claims on foreigners reported under the Voluntary Foreign Credit Restraint Program. Also at the time of their selection, 75 per cent of the banks obtained funds by borrowing in the Euro-dollar market. Another important characteristic which applied to a large segment (18 of 20) of the multi-national banks was that the issuing rates on their large CD's were generally the lowest offered by commercial banks. In addition to these characteristics, a number of other criteria were considered in the selection of the panel. Thus, for example, more than half of the multi-national banks had business loan holdings which amounted to more than 60 per cent of their total loans. Moreover, a large number of these banks were extremely important in the correspondent banking field. This was indicated by the fact that 10 of these banks received more than 10 per cent of their total deposits from other domestic commercial banks. Finally, a large segment of the multi-national banks are major borrowers in the Federal funds market. At the time of selection, for example, nearly half of the banks had a net indebtedness position in that market which equaled about 5 per cent of their total deposits. Using similar criteria but stressing domestic activities and relative importance in one area of the country, the 60 regional banks were classified. However, it should be recalled that some of these regional banks are also capable of registering their presence in the national money and capital markets. The remaining 250 banks were designated large local banks. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 20 - As of June 30, 1972, the 20 multi-national banks represented only 0.15 per cent of all insured commercial banks, but they held one-quarter of the total assets and domestic deposits. The 60 regional banks constituted 0.44 per cent of the insured banks, and they held one-seventh of the total assets and domestic deposits. For the 230 local banks, the figures were: 1.83 per cent of insured banks and 17 per cent of total assets and domestic deposits. This classification of banks according to the scope and character of business is used in several of the sections which follow. Having developed a framework for identifying the multi- national banks, it was also necessary to fashion a scheme which would make it possible to trace their impact on the U.S. money and capital markets. For this purpose, a modified sources and uses of funds accounting system was developed. The aim was to answer the questions: (1) how did the banks obtain funds and (2) what did they do with their funds? During a given period, the banks could obtain funds from external sources (an increase in capital, deposits, borrowing, or other non- deposit liabilities). Alternatively, they could rely on internal sources— such as the liquidation of existing financial assets. In the same vein, the banks could use their funds for external purposes such as the acquisi- tion of financial assets or the repayment of borrowings or the reduction of other nondeposit liabilities. On the other hand, the banks could use their funds for internal purposes--such as deposit withdrawals. Of course, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 21 - during a specific period of time, banks may rely on a combination of internal and external sources of funds, and they may employ their resources to meet a variety of internal and external demands: so, the task is to explain why a particular source or use may be predominant at a given juncture. A basic question being raised here concerns the varying supply of bank credit to different sectors of the economy under the changing impact of monetary policy. In this regard, this type of concern is frequently expressed in terms of the availability of bank credit for sectors such as "housing" and "business." The statistics showing changes in banks1 holdings of "residential mortgages" or "business loans11 are frequently taken as proxies for the banks' supply of funds to these sectors. Actually, a much clearer picture can be developed by a fuller definition of economic sectors. In this paper, three sectors have been identified: (1) the household sector; (2) the business sector, and (3) the government sector. The business sector is subdivided into farm, nonfarm, and banks. The government sector is divided between the Federal Government and State and local governments. In terms of the statistics, bank credit to the household sector can be identified in three types of loans: (1) consumer credit; (2) real estate loans on 1-4 family properties, and (3) loans to individuals to purchase or carry securities. Bank loans to the business sector can be traced in (1) loans to farmers and real estate loans secured by farmland; (2) business loans (i.e., commercial and industrial loans), commercial Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 22 - mortgages, real estate loans on multi-family residential properties,and loans to financial institions and brokers and dealers, and (3) loans to banks (Federal funds sold). Bank credit to the government sector can be identified in their holdings of Federal Government securities and obligations of State and local governments. The statistics used to trace the banking sources and uses of funds had to be gathered from a variety of sources. The principal sources of data were the WRB series for 330 large banks and the June and December Gall Reports submitted to the Federal Deposit Insurance Corporation (FDIC) by all insured commercial banks. From the WRB series, it was possible to obtain data on (1) deposits—distinguishing between(a) demand deposits and (b) time and savings deposits (with a further breakout for large CD's); (2) total borrowing (from Federal Reserve Banks and other sources); (3) holdings of U.S. Government securities ( Treasury and Agency issues); State and local government obligations, and other securities; and (4) business loans, real estate loans and consumer loans. A second source provided statistics on (1) outstanding commercial paper issued by bank affiliates, (2) member banks' required reserves, and (3) borrowing from the Federal Reserve Banks. These data are provided in the Short-Run Banking System Reports (SBR) Series which are available on a daily basis for about 5,800 member banks. A third series--nondeposit sources of bank funds—provided data on (1) sales of business loans by commercial banks to their affiliates and (2) Euro-dollar borrowings—directly from foreign branches and through brokers and dealers. From the Call Reports, it was Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 23 - possible to obtain a considerable amount of detailed information on the types of deposits and earning assets held by banks. While the Call Report is submitted to the FDIC four times each year, only the June and December reports are readily available for computer-based analytical work. For the purpose of this paper, the 330 Weekly Reporting Banks were selected for study. Since the interest here focused on the general pattern of response of these banks (divided into the three sub-groups discussed above) to changes in monetary policy, quarterly averages were calculated from the weekly statistics. Quarter-to-quarter changes in these average levels were then used to construct sources and uses of funds tables for the period 1968-1972 (first and second quarters)--a period covering 18 quarters. Using data from the Call Reports, sources and uses of funds tables were calculated for half-year periods--also covering the period 1968-72, or for 9 six-month segments of time. The quarterly tables are shown in Appendix Table I and the half-year tables in Appendix Table II (attached). These data are drawn on rather extensively in the following sections. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 24 - V. Banks1 Reactions to Monetary Policy: Sources of Funds The ways in which commercial banks adjusted their behavior to changes in monetary policy over the last few years can be traced in considerable detail in the sources and uses of funds statistics presented in the Appendix Tables. The quarterly changes data in Table I are particularly useful because they allow one to identify the numerous sources of funds to which different classes of banks had access. Data in Table II showing half-year changes enable one to identify in some detail the sectors—and parts of sectors—to which bank credit was channeled. Only the highlights of the banks1 behavior can be summarized here. As mentioned above, a basic element in the policy of monetary restraint followed by the" Federal Reserve in 1969 and early 1970 was the maintenance of interest rate ceilings on time deposits in member banks below market yields. A major consequence of that policy was a massive attrition in the banks1 time deposits. This run-off was especially marked in the case of large denomination certificates of deposit (CD's). In fact, to a considerable extent, the story of commercial bank behavior since the end of 1967 is the story of their adjustment to the ebb and flow of funds raised through this instrument. The other principal element in the pattern of adjustment—the ebb and flow of Euro-dollar borrowings primarily by multi-national banks--is virtually a mirror image of the gains and losses in CD's. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 25 - To help focus the analysis of the changing sources of bank funds, several types of statistical information have been presented in Tables 4-7. Table 4 shows the average level outstanding and quarterly changes in CD's at weekly reporting banks for the period 1968-1972. Table 5 shows the average level of Euro-dollar borrowings by major source (from foreign branches, direct from other foreign banks, or through brokers and dealers) for the same period. In Table 6 are shown quarterly changes in the average of selected assets and liabilities (CD's, Euro-dollar borrowings, U.S. Treasury securities, and total borrowing—excluding Euro-dollars). Table 7 presents the same data as shown in Table 6--but expressed as a percentage of the banks' total sources of funds. Attrition of CD's Several significant features stand out in these data. The dramatic attrition in the volume of CD's outstanding is clearly evident in Table 4. For all weekly reporting banks, CD's outstanding reached a peak in the fourth quarter of 1968, averaging $23.1 billion. Within the year, CD's declined by $1.2 billion between the first and second quarters. This shrinkage resulted as yields on alternative market instruments attractive to investors rose above bank interest rate ceilings. With the easing of monetary policy in the last half of 1968, banks were able to raise net nearly $4 billion through the issuance of CD's. Most of the variation (gains as well as losses) centered in multi-national banks. In fact, these institutions lost CD's in both the first and second quarters of 1968. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 25a - Table 4s Outstanding Certificates of Deposits of $100,000 and over, By Class of Bank, By Quarters, 1967-1972 (Billions of Dollars) Total: All Weekly Reporting Banks Hultl-Natlonal Banks Regional Banks Local Banks Year & Amount Change during period Amount Change during period Amount Change during period Amount Change during period Quarter Outstanding Amount Per cent Outstanding Amount Per cent Outstanding Amount Per cent Outstanding Amount Per cent 1967 - 4 20.3 11.7 5.1 3.5 20.5 0.207 1.0 11.5 -0.279 - 2.4 5.4 0.316 6.2 3.6 0.171 4.9 19.3 -1.171 - 5.7 10.3 -1.166 -10.1 5.3 -0.080 - 1.5 3.7 0.075 2.1 1968 - 1 21.2 1.904 9.9 11.3 0.980 9.5 5.9 -0.614 11.6 4.0 0.309 8.3 23.1 1,905 9.0 12.3 1.007 8.9 6.5 0.553 9.4 4.4 0.346 8.6 20.2 -2.911 -12.6 10.0 -2.284 -18.6 5.9 -0.576 - 8.9 4.3 -0.051 - C3 17.0 -3.259 -16.1 7.5 -2.528 -25.3 5.2 -0.701 -11.9 4.3 -0.030 - ?!f 1969 - 1 12.9 -4.030 -23.7 5.2 -2.312 -30.8 4.0 -1.218 -23.4 3.8 -0.500 -11.6 11.3 -1.667 -12.9 4.9 -0.254 - 4.9 3.2 -0.780 -19.5 3.2 -0.633 -16.7 10.9 -0.374 - 3.3 5.2 0.259 5.3 2.8 -0.380 -11.9 2.9 -0.253 - 7.9 13.0 2.084 19.1 6.1 0.936 18.0 3.4 0.553 19.7 3.5 0.596 20.5 1970 - 1 19.2 6.216 47.8 9.3 3.176 52.1 5.1 1.748 51.4 4.8 1.291 36.9 24.5 5.291 27.6 12.1 2.848 30.6 6.4 1.336 26.2 5.9 1.107 23.1 27.2 2.733 11.2 13.9 1.822 15.1 6.9 0.465 7.3 6.3 0.445 7.5 27.5 0.251 1.0 15.0 1.030 7.4 6.3 -0.614 -8.9 6.2 -0.164 - 2.6 1971 - 1 30.6 3.190 11.6 17.2 2.191 14.6 7.0 0.683 10.8 6.5 0.316 5.1 33.3 2.642 8.6 18.6 1.479 8.6 7.6 0.571 8.2 7.1 0.592 9.1 33.0 -0.266 - 0.8 17.9 -0.741 - 4.0 7.5 -0.076 - 1.0 7.6 0.552 7.8 34.2 1.196 3.6 18.9 1.031 5.8 7.3 -0.165 - 2.2 8.0 0.329 4.3 1972 - 1 Hote: A2m ounts are quarterly averages of weekly figures. Components may not add to totals because of rounding. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 26 - However, as already indicated, the most striking changes in CD's occurred during the period of severe monetary restraint in 1969 and early 1970* For all weekly reporting banks, between the fourth quarter of 1968 and the first quarter of 1970, outstanding CD's dropped by $12.2 billion—from $23.1 billion to $10.9 billion. This was a decrease of 53 per cent. The shrinkage of $7.1 billion in CD's outstanding at multi-national banks accounted for nearly three- fifths of the decline—although they had just over half of the CD volume in the fourth quarter of 1968. Actually, among multi-national banks, the attrition in CD's ended in the last three months of 1969; and they gained funds through this source in the first quarter of 1970--while other weekly reporting banks continued to experience a net CD outflow. So, from peak to trough, the decline in CD's at the multi-national banks was $7.4 billion, representing 60 per cent of the amount outstanding in the last quarter of 1968. Among regional banks, the decline in CD's was slightly less marked than at multi-national banks--but it was still substantial. During the five quarters of attrition, the regional banks on a net basis lost 57 per cent of the volume outstanding in the fourth quarter of 1968. While they accounted for 28 per cent of the amount outstanding on the eve of severe monetary restraint, they absorbed 30 per cent of the attrition. In contrast, local banks experienced a decline of about one-third in CD's outstanding. This was less than their proportionate Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 27 - share of CD volume at the beginning of the period. In the final quarter of 1968, they had one-fifth of the CD's outstanding, but they absorbed only one-eighth of the shrinkage. In late June, 1970, the Federal Reserve Board suspended the interest rate ceiling on member bank time deposits of $100,000 and over with maturities of 30 to 89 days. This action was taken to ease money market pressures associated with the bankruptcy of the Penn- Central Railroad. In response, banks bid aggressively for CD funds. The amount outstanding rose by $2.1 billion in the second quarter— with nearly half of the growth occurring at multi-national banks. With the lessening of monetary restraint as the year progressed, the volume of CD's outstanding at weekly reporting banks accelerated, and by the fourth quarter it had surpassed the peak established two years earlier. By the last quarter of 1971, the level of CD's outstanding was more than $9 billion above that recorded in the same period of 1970—and more than $22 billion above the low point set in the first quarter of the latter year. Approximately three-fifths of this rise ($13.4 billion) occurred at multi-national banks. The rise in CD's during the first half of 1972 was fairly moderate at weekly reporting banks . Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 28 - Euro-Dollar Inflow The extent to which weekly reporting banks turned to Euro- dollars as CD's ran off can be traced in Table 5. In fact, even before the attrition in CD's got seriously underway, the inflow of Euro-dollars rose appreciably. Between the fourth quarter of 1967 and the same period of 1968, the average level of Euro-dollar borrowings rose by $2.7 billion. Virtually all of this inflow came through the foreign branches of the multi-national banks. During the first three quarters of 1969, the volume of borrowing more than doubled—climbing from $7.1 billion in the final quarter of 1968 to $15.5 billion in the third quarter of 1969. Over 90 per cent of the rise ($7.7 billion out of $8.4 billion) was accounted for by multi-national banks. As discussed more fully below, the imposition of marginal reserve requirements on Euro-dollar borrowings by U.S. banks in the third quarter of 1969 halted the expansion of this source of bank funds. Again, the impact fell mainly on the multi-national banks. In fact, the other weekly reporting banks continued to expand their Euro-dollar borrowing into the first quarter of 1970. The regional and local banks also used their foreign branches (especially "shell" branches located in the Bahamas) as the principal means of attracting Euro-dollars. However, they also made relatively greater use of direct borrowing from foreign commercial banks and Euro-dollar funds raised through brokers and dealers. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 28a - Table Average Level of Euro-dollar Borrowings, By Class of Bank and Source of Funds, by Quarters, 1967-1972 (Millions of Dollars) Total: All Weekly Reporting Banks Multi-National Banks Regional Banks Local Banks Year and Foreign Brokers & Foreign Brokers & Foreign Brokers & Foreign Broker; & Quarter Total Branches Direct Dealers Total Branches Direct Dealers Total Branches Direct Dealers Total Branches Direct Dealers 1967 - 4 4,399 4,399 — -- 4,399 4,399 — -- - — - — — — -- - „ __ „ 1968 - 1 4,484 4,484 4,484 4,484 2 5,468 5,468 « -- 5,448 5,448 -- — 20 20 — — — 3 6,879 6,879 — 6,790 6,790 — — 88 88 -- -- — — 4 7,110 7,110 — -- 7,013 7,013 -- -- 92 92 — — 5 5 — — 1969 - 1 8,542 8.5^2 8,372 8,372 166 166 „ 4 4 — 2 10,897 10,897 « -- 10,610 10,610 -- -- 276 276 -- -- 11 11 — 3 15,537 14,797 366 374 14,684 14,201 179 304 727 529 144 54 126 67 43 16 4 15,461 14,963 232 536 14,290 13,770 99 421 945 747 94 104 224 176 38 10 1970 - 1 13,929 lj.isa .237 534 12,632 12,139 46 447 996 762 157 77 302 257 35 10 2 12,525 12,075 143 307 11,530 11,261 42 227 840 687 76 77 154 127 24 3 3 10,983 10,813 67 103 10,157 10,085 26 46 567 485 28 54 258 242 13 3 4 9,101 9,014 43 44 8,497 8,466 31 -- 340 294 4 42 264 254 8 2 1971 - 1 5,982 5,952 22 8 5,-611 5,644 17 211 202 2 7 110 105 4 1 2 2,139 2,129 6 4 1,996 1,991 5 -- 96 94 1 I 48 45 -- 3 3 1,694 1,684 8 2 1,596 1,588 8 -- 59 59 — — 40 38 2 4 2,366 2,362 3 1 2,232 2,229 3 -- 82 82 -- 52 51 -- 1 1972 - 1 1,280 1,278 2 1,178 1,176 2 -- 35 35 — — 66 66 2 1,378 1,376 2 -- 1,297 1,295 2 -- 30 30 -- — 51 51 — — Note: Amounts are quarterly averages of weekly figures. Components may not add to totals because of rounding. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 29 - The repayment of Euro-dollar borrowings by multi-national banks started in the closing months of 1969, and the pace accelerated as the new year progressed. Through the third quarter, they had repaid $4.5 billion--or nearly one-third of the volume outstanding at the peak. The regional and local banks followed in train. As domestic funds became more available (and less espensive to borrow), all weekly reporting banks accelerated the repayment of Euro-dollar indebtedness. The magnitude and rapidity of the repayment (as also discussed below) led the Federal Reserve Board in November, 1970, to modify its Euro-dollar regulation in an attempt to moderate the reflow of funds abroad. However, it appears that the move checked the outflow only temporarily and to only a slight extent. By the third quarter of 1971, the volume of Euro-dollar borrowings outstanding had dropped to $1.7 billion--of which $1.6 billion was accounted for by multi-national banks. Since then, this level has lingered in that neighborhood. Offset of CD Attrition By Euro-Dollar Inflow and Other Sources As I indicated above, I have been especially interested in the extent to which Euro-dollars were used by commercial banks to replace funds lost through CD attrition. The figures in Table 6 cast some light on this question. For example, for all weekly reporting banks, the rise in Euro-dollar borrowing represented about four-fifths of the attrition in CD's between the final quarter of 1968 and the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 29a - Table: 6. Changes in Average1 T.evel of Selected Assets and Liabilities, by Class of Bank, hy Quarter, 1968--1972 Certificates of Deposit (Millions of dollars) Total Borrowing ($100.000 and over^ Euro-dollar Bnrmuino* U.S. Treasury Securities HuJti- Multi- Multi- Multl- Q Y u e a a r r te a r n d le A p l o l r t W i e n e g k l B y a nks Na B t a i n o k n s al Reg B i a o n n k a s l B L a o n c k a s l Re A po ll r ti W n e g e kl B y a nks nat B i a o n n k a s l Re B g a i n o k n s a l L Ba o n c k a s l Re A D l o l r t W ln e e e kl B y u nks Nat B; i < o n n k n s l Reg B i a o n n k a s l L B o a c n a k l s Re A po l r l t i W n e g e kl B y . nks Nat B i a o n n ks a l Reg B i a o nk n s a l L B o a c n a k l s 1968 - 1 -1,1 20 7 7 1 - - 1,1 2 6 7 6 9 3 8 1 0 6 17 7 1 5 98 8 4 5 96 8 4 5 20 -I,, 4 4 2 5 5 7 _ 4 6 8 0 1 5 - - 5 4 7 3 9 - - 3 2 9 2 7 3 2,, 3 8 4 3 9 1,, 3 5 5 7 4 - 7 1 1 3 7 9 277 1 1 1. , 9 9 0 0 5 4 1, 9 0 5 0 0 7 6 55 1 3 4 3 3 4 0 6 9 1 , * 4 3 1 1 2 1,3 2 4 2 3 2 - 6 4 9 5 1,, 9 7 8 0 3 7 1,, 8 2 7 4 9 8 47 2 2 1 - 3 2 5 4 6 4 1 1 , ,, 4 3 0 0 2 7 1,, 3 1 9 2 9 4 6 31 6 8 8 - 24 3 0 9 _ 1969 - 1 - - - 4 3 2 , , , 2 0 9 5 3 1 9 0 1 - - 2 2 , , 3 2 1 8 2 4 - - - 1,2 7 5 1 0 7 8 1 6 - - - 5 5 3 0 1 0 0 3 2 I , , , , , 9 3 4 0 5 3 1 5 2 2 3 1 , , , 5 2 3 9 5 3 2 9 8 2 1 5 1 7 3 0 4 5 7 6 1 - - - 2 2 1 , , , , , , 4 5 0 2 6 9 5 8 2 -_2 ,, 9 1 0 3 7 4 8 4 - - 7 5 3 1 2 5 8 9 3 - - - 8 6 4 0 0 1 3 0 2 3 , , , , 1 7 0 0 9 7 8 0 4 1., 4 6 9 4 7 9 9 6 9 1, 7 1 1 6 6 6 7 1 8 3 9 3 0 9 4 7 7 6 -1,667 - 254 - 780 - 633 - 79 - 395 218 98 194 196 40 - 42 1,, 808 1,, 016 587 205 1970 - 1 - 5 6 2 , , , 2 2 0 3 9 1 8 7 1 6 4 4 2 3 , , 8 1 9 2 7 4 3 5 6 8 6 9 - 1 1 , , 3 7 5 3 3 4 5 8 6 8 3 0 - 1 1 , , 1 2 5 2 0 9 9 5 7 1 6 3 - - - - 1 1 1 1 , , , , , , , 8 5 5 4 8 4 2 0 1 1 8 7 - - - - 1 1 1 1 , , , , 6 3 1 6 7 6 0 5 3 0 2 7 - - - 2 2 1 5 2 7 5 0 7 3 6 - 1 1 0 7 4 < 6 5 9 > I 2 , , 7 2 4 4 1 7 9 2 0 2 7 3 _ 1 , 4 8 2 4 3 6 5 1 1 7 7 6 - - 5 3 1 3 1 5 8 7 7 3 8 - - 2 5 2 1 4 4 5 0 9 5 5 7 -2 1 1 , , , , , , 5 2 1 2 3 9 7 0 6 5 2 2 -1,, , 4 5 5 0 8 2 5 3 1 9 5 0 - 5 2 5 5 8 3 4 8 3 3 8 - - 20 9 9 2 8 1 9 8 _ 1971 - i 3 2 2 , , , 1 6 7 2 9 5 4 3 0 1 2 3 2 1 1 1 , , , , 1 4 0 8 9 7 3 2 1 9 0 2 - 4 6 5 6 6 7 8 1 5 1 3 4 - 4 3 5 6 1 4 9 1 6 5 2 4 - - - 3 3 , , 8 6 4 1 4 7 4 1 4 2 3 8 - - - 3 2 , , 6 6 8 4 3 6 3 0 7 6 6 0 - - - 1 1 2 1 3 2 4 5 5 9 - 1 n 5 Z 3 a 3 1 - I 1 1 , , , 9 5 4 6 2 4 1 8 2 7 6 8 - - 1 1 , , 5 5 0 0 2 9 4 1 6 8 6 4 - - 2 2 4 1 8 7 5 8 1 1 5 6 - - 7 2 1 9 3 1 3 9 8 8 8 2 2 , , , , 5 1 6 8 8 2 3 6 4 0 5 6 1 1 , , , ] 1 2 7 1 5 0 1 2 5 0 9 1 - 6 9 1 7 3 6 1 6 9 3 0 - 4 5 1 7 5 9 1 2 1 0 1 1972 - 1 - 1,1 2 9 6 6 6 - 1,0 7 3 4 1 1 - 1 7 6 6 5 3 5 2 5 9 2 -1,0 ^ 9 7 9 -1,0 1 5 2 5 0 - 4 5 7 1 1 ) n . 7 . 4 9 1 3 - 4 5 9 5 2 7 8 2 1 7 - 3 1 7 0 5 3 2 , 5 6 3 9 9 4 1,, 3 1 6 9 4 9 9 4 1 0 1 5 1 8 3 4 5 Not*: Amounts are quarterly averages of weekly figures. Components may not add to totals becauae of rounding. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 30 - third quarter of 1969. For multi-national banks during the same period, the proportion was 108 per cent of the CD run off. For regional and local banks, it was one-quarter and one-fifth, respectively. Because CD's outstanding at multi-national banks continued to decline through the fourth quarter of 1969 while their volume of Euro-dollar borrowing shrank somewhat after the third quarter, the latter source offset about 99 per cent of their CD attrition during 1969 as a whole. An even sharper insight into the behavior of commercial banks' sources of funds is provided by the data in Tables 6 and 7. The absolute changes in the average level of banks' CD's, Euro-dollar borrowings, U.S. Treasury securities, and total borrowing shown in Table 6 are expressed in Table 7 as percentages of the banks' total sources of funds. These figures suggest that the relative impact of CD attrition at multi-national and regional banks in the first three quarters of 1969 was rather similar. In both instances, it was substantially greater than in the case of local banks. However, the ways in which the different groups of banks compensated for the loss in CD varied markedly. For the multi-national banks, Euro-dollar borrowings were the principal source—accounting for about two-fifths of their total sources during the periods of most severe CD run off. The proportion averaged about 6 per cent for regional banks and about 2 per cent for local banks. On the other hand, both the regional and local banks relied much more heavily on the liquidation of U.S. Treasury securities and borrowing from domestic sources--including Federal Reserve Banks. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 30a - T'!>1. 7: Scltcted Sources of Funds, by Clas* of :',:tnk, by Ouarter, 1968-1972 (Percentage of Total Sourcr-s". Certificates of Dep sit iqjidation uf Total Borrowing ($100.000 and over) Euro-Dollar Borrowings (Excluding Euro-Dollars) Multi- Mul.ti- Multi- Multi- Yaar & All Waekly national Regional Local All Weekly Natlonal Regional Local All Weekly Nattonal Peglonal Local All Reporting Nat lonal Regional Local Quartar Reporting Bank* Banka Banks Banka Reporting Banks Banks Banks Banks Reporting Sanks Banks Banks Banks Reporting Banks Banks Banks Banks ,2 1968 - 2 1 -1 14 6 . . 4 2 - - 3 1 1 1 . . 7 2 - 3 2 4 . . 2 2 1 4 3 . . 5 8 13 1 . . 6 8 26 3 . . 2 4 1 .1 - - 20 9 . . , , 1 0 - - 1 2 3 4 . , , , 1 3 -30 4 . ., J 4 -2 18 3 . . 0 7 - 32 1 . . . . 5 8 36 2 . . > > 8 2 -1 38 4 . . , 0 1 0 6 . . 1 6 23.1 21,1 35.3 16.7 17.1 28,. 9 4,. 0 11., 9 26., 8 - 1., 2 -13.2 17,. 0 24.2 18., 3 - 2.1 18.8 23.6 18.4 12.2 2.3 5,. 2 0,. 1 0 .2 17,, 0 20.. 6 15,, 7 12.5 12., 9 9.. 3 22., 2 8.5 -31.3 -35.7 -35.3 - 4,1 15.4 21, , 2 4,, 5 - 0 .1 -27.. 6 -34.. 0 -21.> 6 - 3.3 1., 2 - 7.. 0 9., 9 31.6 -34.2 -44.1 -35.7 - 1.6 24.7 39.. 1 5.. 6 0,. 4 -25. -15.. 8 -36., 6 -43.4 32, 2 34., 9 39,, 1 16.6 -26.6 -28.1 -31.3 -16.5 25.7 43. . 7 6, . 5" 1,. 8 - 7., 2 0., 5 -13.. 6 -19.8 18.4 8., 2 30.0 31.2 -17.7 - 5.3 -32.7 27.7 - 0.8 - 8.• 3 9. , 1 4,. 3 2., 1 4., 1 1,. 7 - 1.8 19,2 21., 3 24.6 9.0 - 6.9 7.4 -37.8 -28.8 -28.3 -47., 2 5., 0 9.. 0 -13., 2 - 7., 6 -18., 7 -29.0 24.. 0 15.. 1 55,, 5 4 3 9 0 . . 3 0 4 2 6 4 . . 4 2 4 6 5 1 . . 6 0 4 3 4 5 . . 4 5 - - 1 2 2 0 . . 2 8 - - 2 2 0 8 . . , , 1 5 - - 1 2 9 . ., , 5 9 - f 3 t .> >. 6 9 11 4 . . . . 3 0 1 1 2 1 . . , , 5 2 - 11 4 . . , . 1 4 - 8 6 . . 6 4 -17 7 . ,. . 9 5 -2 1 2 2 . . J , 5 -19 6 . . , > 1 8 I - P 3 .4 32.8 30.8 43.1 29.5 -11.7 -17., 9 - 7,. 3 0., 2 15., 5 15.» 3 17,, 3 14.5 7. 3 11., 1 7, 5 - 2.4 21.8 25.5 19.0 15.2 -24.9 -39,, 7 - 5.. 3 - 5., 2 12,, 4 7., 4 11,, 5 25.2 - 1., 0 - 1.> 4 - 0., 4 - 0.4 1.6 11.3 -22.8 - A.6 -25.1 -40., 4 - 4.3 - 1., 8 11.. 0 -11.. 2 -16., 9 - 6.2 18., 7 18.. 9 25., 1 13.3 32.9 39.6 34.8 14.4 - 4.6 - 7.2 - 1.8 - 0. - 9., 5 -10. - 9., 5 - 6.3 6. 0 4., 6 7.. 1 8.7 26.6 30.4 26.2 20.6 6.8 13. 1 1., 1 0., 4 14,, 3 21.. 5 12., 4 3.4 26. 5 23., 1 44., 1 19.1 - 2.4 -12.2 - 5.1 16.5 -10.0 -17.4 - 3.1 0.4 8., 2 8.. 1 1.. 8 11.2 5.0 6., 0 2., 7 4.0 11.8 20.3 - 8.8 10.3 1.0 2.4 - 0.3 - 0.5 - 7., 3 -11., 0 - 4., 3 - 3..2 26. 6 23., 6 48.. 9 18.3 Source: Table 6. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 31 - From the foregoing analysis, I reach the following conclusion; the multi-national banks (through the cushioning benefits of Euro-dollar inflows) were able to avoid—at least for a while—some of the even more costly means of obtaining funds to meet the credit demands of their customers in the face of severe attrition in deposits. Banks less well situated had to adjust their lending behavior more quickly, and they had to rely more heavily on the liquidation of U.S. Treasury issues and borrowing from domestic sources. Because of the ready access to Euro-dollars (although admittedly at a high and rising cost), the multi-national banks found it less urgent to adopt more restrictive current lending standards or to limit their new commitments to lend to the business sector in the future. Of course, under the conditions of substantial monetary restraint maintained through 1969 and into early 1970, even the largest banks with access to Euro-dollars eventually had to reduce the expansion of credit to the private sector. But, for quite a while, they postponed adopting that course through reliance on Euro-dollars. The sectors which benefited most from the banks' access to Euro-dollars can be examined next. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 32 - VI. Banks Reactions to Monetary Policy: Uses of Funds The supply of funds by commercial banks to the principal sectors of the economy can be traced in the behavior of their loans and investments. In Table 8 is shown the volume of these financial assets outstanding on December 31, 1967 and 1971 and on June 30, 1972. Several features of these data should be noted, since they provide a rough indication of the distribution of bank credit during periods when the money and capital markets were relatively free of stresses resulting from monetary policy. The ways in which the banks reacted as monetary policy became increasingly restrictive can then be charted. On all three dates, the household sector had received about the same proportion (just under one-fifth) of total bank credit outstanding at weekly reporting banks. (As indicated, bank credit to this sector consists of consumer loans, 1-4 family real estate loans, and loans to purchase or carry securities.) The household share of total bank credit supplied by the different classes of banks was also essentially the same on these dates. However, the three groups of banks vary markedly in the extent to which they lend to households. For example, about one-sixth of the funds supplied by multi-national banks went to households, among regional banks, the proportion was just under one-fifth, and it was around one-quarter among local banks. The business sector had received about half of the credit outstanding at weekly reporting banks on each of the three dates. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Table 8. Loans and Investments of Weekly Reporting Banks, By Class of Bank. December 31, 1967 and 1971 and June 30, 1972 (Amounts in Millions of Dollars) 32a December 31. 1967 December 31, 1971 June 30. 1972 Multi- Multi- Multi- National Regional Local National Regional Local National Regional Local Principal Sector Total Banks Banks Banks Total Banks Banks Banks Total Banks Banks Banks Household Sector Consumer loans 16,159 4,880 4,394 6,885 23,876 6,777 6,254 10,845 25,129 7,055 6,544 11,530 Real estate loans (1-4 family) 18,712 8,183 4,106 6,423 22,209 9,300 4,753 8,156 23,903 9,868 5,230 8,805 Loans to purchase or carry sec. 2,555 1,156 614 785 2,604 981 785 838 2,823 1,064 862 897 Sub-Total 37,426 14,219 9,114 14,093 48,689 17,058 11,792 19,839 51,855 17,987 12,636 21,232 Share of total (Z) 18.63 14.92 18.90 24.55 17.82 14.00 17.51 23.60 18.36 14.18 18.28 24.56 Business Sector Farm Loans to farmers 1,889 743 420 726 2,322 931 495 896 2,579 1,052 549 978 Real estate loans, farmland 467 187 68 212 404 140 49 215 442 139 65 238 Sub-Total 2,356 930 488 938 2,726 1,071 544 1,111 3,021 1,191 614 1,216 1.00 Share of total (Z) 1.17 0.98 1.01 1.63 0.88 0.81 1.32 1.07 0.94 0.89 1.41 Nonfarm Business loans 66,364 38,504 14,687 13,173 83,756 44,752 19,769 19,235 85,106 44,700 20,392 20,014 Real est. loans, nonfarm, nonres. 9,132 3,010 2,207 3,915 12,688 4,061 3,041 5,586 13,741 4,579 5,962 Real est. loans, multi-fam. NA NA NA NA 2,540 1,078 690 772 3,107 1,215 1,004 888 Loans to fin. inst. & brokers & dealers 17,678 10,384 4,155 3,139 25,057 15,299 5,813 3,945 28,205 18,056 66,,225599 3,890 Sub-Total 93,174 51,898 21,049 20,227 124,041 65,190 29,313 29,538 130,159 68,550 30,855 30,754 Share of total (Z) 46.37 54.44 43.65 35.25 45.38 53.48 43.54 35.15 46.08 54.05 44.63 35.57 Banks: Federal funds sold 2,354 864 753 737 10,439 3,080 4,018 3,341 11,175 4,270 3,758 3,147 Share of total (%) 1.17 0.91 1.56 1.28 3.82 2.53 5.97 3.97 3.96 3.37 5.44 3.64 All Business: sub-total 97,884 53,692 22,290 21,902 137,206 69,341 33,875 33,990 144,355 74,011 35,227 35,117 Share of total (Z) 48.71 56.33 46.23 38.16 50.20 56.89 50.32 40.44 51.11 58.36 50.96 40.62 Government Sector Federal Government U.S. Treasury securities 28,360 11,170 7,331 9,859 29,425 12,765 6,897 9,763 26,499 11,573 5,934 8,992 Federal agency securities 2,549 959 602 988 5,493 1,737 1,387 2,369 5,611 1,500 1,518 2,593 Sub-total 30,909 12,129 7,933 10,847 34,918 14,502 8,284 12,132 32,110 13,073 7,452 11,585 Share of total (Z) 15.38 12.73 16.45 18.90 12.78 11.90 12.30 14.43 11.37 10.31 10.78 13.40 State and Local Government State & local gov't, sec. 28,972 12,386 7,539 9,047 44,378 16,994 11,384 16,000 45,095 17,384 11,497 16,214 Share of total (X) 14.42 12.99 15.64 15.76 16.24 13.94 16.91 19.03 15.97 13.70 16.63 18.76 All Government; sub-total 59,881 24,515 15,472 19,894 79,296 31,496 19,668 28,132 77,205 30,457 18,949 27,799 Share of total (Z) 29.80 25.72 32.09 34.66 29.02 25.84 29.21 33.46 27.34 24.01 27.41 32.16 Qthef Loans 4,263 2,031 1,097 1,135 6,025 3,095 1,525 1,405 6,536 3,367 1,694 1,475 Other Securities 1,474 858 244 372 2,056 889 469 698 2,465 1,015 622 828 Sub-total 5,737 2,889 1,341 1,507 8,081 3,984 1,994 2,103 9,001 4,382 2,316 2,303 Share of total (X) 2.86 3.03 2.78 2.63 2.96 3.27 2.96 2.50 3.19 3.45 3.35 2.66 Total Loans & Investments 200,928 95,315 48,217 57,396 273,272 121,879 67,329 84,064 282,416 126,837 69,128 86,451 Source: Call Reports, HA Not Available. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 33 - Here also the proportions differed considerably among the classes of banks. Credit to the business sector represented just under three-fifths of the total outstanding at multi-national banks; about one-half at regional banks, and roughly two-fifths at local banks. Within the business sector, loans to the farm segment represented about 1 per cent of total bank credit at each class of bank on each of the three dates. Loans to other banks (defined as Federal funds sold) showed a major change between 1967 and 1971. On the earlier date, such loans represented only 1 per cent of total bank credit at weekly reporting banks; the share was slightly lower at multi-national banks, slightly higher at local banks and still somewhat higher at regional banks. By 1971, however, the proportion had climbed to almost 4 per cent for all weekly reporting banks. It was nearly 6 per cent at regional banks; 2-1/2 per cent at multi-national banks, and it was around 4 per cent for local banks. Roughly the same profile was evident on June 30 of this year. This growth of the Federal funds market is basically a structural change which resulted from the efforts of banks to obtain funds during the period of severe monetary restraint in 1969 and early 1970. Bank lending to the nonfarm business sector, as mentioned above, was pf special interest to the Federal Reserve System in those years. (As defined in this paper, bank credit to this sector consists of commercial and industrial loans, loans secured by nonfarm nonresidential real estate, multi-family mortgages, and loans to financial institutions and brokers and dealers.) As shown in Table 8, bank credit to the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 34 - nonfarm sector represented about 46 per cent of the total outstanding on all three dates. The share was approximately 54 per cent at multi-national banks; 44 per cent at regional banks, and 35 per cent at local banks. The proportion of bank credit to business represented by commercial and industrial loans varied somewhat by class of bank. For all weekly reporting banks and for regional banks, the fraction was about two-thirds; for multi-national banks it was around three- fourths, and for local banks it was roughly three-fifths. Bank credit supplied to the government sector declined slightly—from 30 per cent of the total in 1967 to 27 per' cent on June 30 this year. The division between the Federal Government and State and local governments changed somewhat. The former's share declined from 15 per cent at the end of 1967 to 11 per cent at the end of last June, the latterfs share rose slightly from 14 per cent to 16 per cent. Monetary Restraint and the Sectoral Supply of Bank Credit An analysis of the strategy of portfolio adjustment by commercial banks under the influence of changing monetary policy during recent years yields an inescapable conclusion: as policy became increasingly restrictive, the banks shifted credit progressively away from the household and government sectors in order to meet the needs of business borrowers. The details of this shift can be traced in the statistics presented in Table 9, showing changes in loans and investments of weekly reporting banks during,half-year periods for the years 1968-72. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 34a - Table 9. Changes in Loans and Investments of Weekly Reporting Banks, By Class of Bank, Half-Years, 1968-1972 (millions of dollars) Change: First Half, 1968 Cha^e: Second Half, 1968 Multi- Multi- National Regional Local National Regional Local PPrriinncciippaall SSeeccttoorr Total Banks Banks Banks Total Banks Banks Banks Household Sector Consumer loans 942 162 283 497 1,296 308 412 576 Real estate loans (1-4 family) 678 119 290 269 1,085 428 351 306 Loans to purchase or carry securities 27 27 — 240 153 87 Sub-total 1,647 308 573 766 2,621 889 763 969 Share of total (%) 24.98 11.41 35.99 33.26 11.05 6.94 12.40 20.43 Business Sector Farm Loans to farmers 139 92 38 9 — -- — -- Real estate loans, farmland 66 10 12 44 — — -- Sub-total 205 102 50 53 — -- -- -- Share of total (7.) 3.11 3.78 3.14 2.30 -- -- — -- Nonfarm Business loans 2,442 1,330 498 614 5,012 2,643 1,516 853 Real estate loans, nonfarm, nonres. 558 216 113 229 725 186 183 356 Real estate loans, multi-family NA NA NA NA NA NA NA NA Loans to fin. inst. & brokers & dealers -- -- -- — 3,115 1,822 791 502 Sub-total 3^000 1,546 611 843 8,852 4,651 2,490 1,711 Share of total (7*) 45.50 57.28 38.38 36.61 37.34 36.30 40.45 36.07 Banks: Federal funds sold 384 374 10 3,603 2,740 624 239 Per cent of total 5.82 13.86 0.63 -- 15.19 21.38 10.14 5.04 All Business: sub-total 3,589 2,022 671 896 12,455 7,391 3,114 1,950 Share of total (7,) 54.43 74.92 42.15 38.91 52.53 57.68 50.59 41.11 Government Sector Federal Government U.S. Treasury securities — « -- -- 3,571 1,721 1,093 757 Federal agency securities -- — — 93 -- 45 48 Sub-total -- — — -- 3,664 1,721 1,138 805 Share of total '(%) — — -- — 15.45 13.43 18.49 16.97 State and Local Government State and local government securities 1,030 292 170 568 4,055 2,168 961 926 Share of total (7.) 15.62 10.82 10.68 24.66 17.10 16.92 15.61 19.53 All Government: sub-total 1,030 292 170 568 7,719 3,889 2,099 1,731 Share of total (X) 15.62 10.82 10.68 24.66 32.55 30.35 34.10 36.50 Other Loans 229 170 59 762 542 135 85 Other Securities 99 77 8 14 155 103 44 8 Sub-total 328 77 178 73 917 645 179 93 Share of total (X) 4.97 2.85 11.18 3.17 3.87 5.03 2.91 1.96 Total Loans & Investments 6,594 2,699 1,592 2,303 23,712 12,814 6,155 4,743 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 34b - Table 9 (continued) Change: First Half, 1969 Change, Second Half, 1969 Multi- Multi- national Regional Local National Regional Local Principal Sector Total Banks Banks Banks Total Banks Banks Banks Household Sector Consumer loans 1,104 345 264 495 920 251 669 Real estate loans (1-4 family) 296 — 81 215 Loans to purchase or carry securities 123 — 92 31 24 — 24 -- Sub-total 1,227 345 356 526 1,240 — 356 884 Share of total (7.) 10.92 7.81 15.31 11.71 12.46 15.90 24.68 Eusiness Sector Farm Loans to farmers 168 95 59 14 Real estate loans, farmland 97 4 90 3 Sub-total 265 99 149 17 Share of total (7.) 2.36 2.24 6.41 0.38 Nonfarm Business loans 4,436 2,185 1,162 1,089 3,022 2,013 343 606 Real estate loans, nonfarm, nonres. 567 323 172 72 313 82 -- 231 Real estate loans, multi-family 1,982 948 441 593 245 -- 245 -- Loans to fin. inst. & brokers & dealers 78 78 — -- 1,410 908 184 318 Sub-total 7,063 3,534 1,775 1,754 4,990 3,003 772 1,215 Share of total (%) 62.88 80.04 76.30 39.06 50.12 72.66 34.48 33.92 Banks: Federal funds sold 300 300 — 1,871 544 1,327 Per cent of total 2.67 6.79 — -- 18.80 -- 24.30 37.04 All Business: sub-total 7,628 3,933 1,924 1,771 6,861 3,003 1,316 2,542 Share of total (%) 67.91 89.07 82.71 39.44 68.92 72.66 58.78 70.96 Government Sector Federal Government U.S. Treasury securities 1,763 -- -- 1,763 941 768 143 30 Federal agency securities 183 57 26 100 Sub-total 1,763 -- -- 1,763 1,124 825 169 130 Share of total (7.) 15.70 — -- 39.27 11.29 19.96 7.55 3.63 State and Local Goveriment State and local government securities 373 -- 373 398 « 398 -- Share of total (%) 3.32 -- -- 8.31 4.00 -- 17.78 -- All Governnent: sub-total 2,136 — -- 2,136 1,522 825 567 130 19.02 — — 47.58 15.29 19.96 25.32 3.63 Share of total (7.) Other Loam 241 138 46 57 305 305 Other Securities 26 26 Sub-total 241 138 46 57 331 305 -- 26 Share of total (%) 2.15 3.12 1.98 1.27 3.33 7.38 — 0.73 Total Loans 6i Investments 11,232 4,416 2,326 4,490 9t954 4,133 2,239 3,582 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 34c - Table 9 (continued) Change, First Half. 1970 Change: Second Half, 1970 Multi- Multi- National Regional Local National Regional Local Principal Sector Total Banks Banks Banks Total Banks Banks Banks Household Sector Consumer loans 400 111 -- 1,289 1,093 402 313 378 Real estate loans (1-4 family) 80 47 — 33 309 135 -- 174 Loans to purchase or carry securities 215 138 77 Sub-total 480 158 -- 322 451 629 1,617 537 Share of total (7.) 10.25 9.15 -- 14.20 6.54 7.97 6.66 5.66 Business Sector Farm Loans to farmers 128 72 31 25 15 15 Real estate loans, farmland 15 -- -- 15 241 — 241 Sub-total 143 72 31 40 256 -- 256 Share of total (%) 3.05 4.17 4.51 1.76 1.05 — 3.24 Nonfarm Business loans 798 160 638 2,271 700 528 1,043 Real estate loans, nonfarm, nonres. 46 — -- 46 400 22 132 246 Real estate loans, multi-family 99 -- -- 99 Loans to fin. inst. & brokers & dealers 3,367 1,914 967 486 Sub-total 943 — 160 783 6,038 2,636 1,627 1,775 Share of total (%) 20.14 -- 23.25 34.53 24.89 27.80 23.60 22.49 Banks: Federal funds sold 683 11 77 595 3,098 473 1,456 1,169 Per cent of total 14.59 0.64 11.19 26.23 12.77 4.99 21.12 14.81 All Business: sub-total 1,769 83 268 1,418 9,392 3,109 3,083 3,200 Share of total (%) 37.78 4.81 38.95 62.52 38.71 32.79 '-.4.72 40.54 Government Sector Federal Government U.S. Treasury securities 6,382 3,442 1,362 1,578 Federal agency securities 272 170 47 55 1,774 686 513 575 Sub-total 272 170 47 55 8,156 4,128 1,875 2,153 Share of total (7o) 5.81 9.85 6.83 2.43 33.61 43.54 27.20 27.28 State and Local Government 2,009 1,247 327 435 4,476 1,291 1,423 1,762 State and local government securities 42.91 72.25 47.53 19.17 18.44 13.62 20.64 22.33 Share of total (7.) 2,281 1,417 374 490 12,632 5,419 3,298 3,915 All Government: sub-total 48.72 82.10 54.36 21.60 52.05 57.16 47.84 49.61 Share of total (%) __ • __ __ Other Loans 24 24 344 260 84 Other Securities 128 68 22 38 282 156 62 64 Sub-total 152 68 46 38 626 416 62 148 Share of total (7.) 3.25 3.94 6.69 1.68 2.58 4.39 0.90 1.88 Total Loans & Investments 4,682 1,726 688 2,268 24,267 9,481 6,894 7,892 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 34d - Table 9 (continued) Change: First Half, 1971 Change: Second Half, 1971 Multi- Multi- national Regional Local National Regional Local Principal Sector Total Banks Banks Banks Total Banks Banks Banks Household Sector Consumer loans 585 123 98 364 1,479 461 326 692 Real estate loans (1-4 family) 773 377 79 317 1,721 686 402 633 Loans to purchase or carry securities 39 16 23 78 17 2 59 Sub-total 1,397 516 200 681 3,278 1,164 730 1,384 Share of total (%) 13.96 15.03 10.54 14.56 18.81 17.76 14.05 24.37 Business Sector Farm Loans to farmers 267 139 43 85 71 3 68 Real estate loans, farmland 24 5 -- 19 Sub-total 267 139 43 85 95 8 87 Share of total (%) 2.67 4.05 2.27 1.82 0.55 0.12 - 1.53 Nonfarm Business loans 525 525 1,777 142 1,001 634 Real estate loans, nonfarm, nonres. 451 76 159 216 698 214 209 275 Real estate loans, multi-family 293 175 57 61 134 26 8 100 Loans to fin. inst. & brokers & dealers 664 547 117 2,933 1,852 745 336 Sub-total 1,933 798 216 919 5,542 2,234 1,963 1,345 Share of total (%) 19.32 23.26 11.38 19.65 31.79 34.09 37.78 23.68 Banks: Federal funds sold 660 169 — 491 2,675 773 1,234 668 Per cent of total 6.59 4.92 10.50 15.35 11.80 23.74 11.76 AIT Business: sub-total 2,860 1,106 259 1,495 8,312 3,015 3,197 2,100 Share of total (7.) 28.58 32.23 13.65 31.97 47.69 46.01 61.52 36.97 Government Sector Federal Grvernment U.S. Treasury securities 899 899 2,458 1,149 694 615 Federal agency securities 720 88 42 590 501 207 294 Sub-total 1,619 987 42 590 2,959 1,149 901 909 Share of total (%) 16.18 28.76 2.21 12.62 16.97 17.53 17.33 16.00 State and Local Government State and local government securities 3,943 823 1,325 1,795 2,260 878 230 1,152 Share of total (X) 39.41 23.98 69.81 38.39 12.97 13.40 4.43 20.28 All Government: sub-total 5,562 1,810 1,367 2,385 5,219 2,027 1,131 2,061 Share of total (7.) 55.59 52.74 72.02 51.01 29.94 30.93 21*76 36*28 Other Loans 410 271 84 55 Other Securities 187 -- 72 115 211 76 55 80 Sub-total 187 72 115 621 347 139 135 Share of total (%) 1.87 — 3.79 2.46 3.56 5.30 2.67 2.38 Total Loans & Investments 10,006 3,432 1,898 4,676 17,430 6,553 5,197 5,680 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Table 9 (continued) - 34e - Change: First Half, 1972 Multi- National Regional Local Principal Sector Total Banks. Banks Banks Household Sector Consumer loans 1,253 278 290 685 Real estate loans (1-4 family) 1,694 568 477 649 Loans to purchase or carry securities 219 83 77 59 Sub-total 3,166 929 844 1,393 Share of total (%) 23.21 14.43 27.93 33.34 Business Sector Farm Loans to farmers 257 121 54 82 Real estate loans, farmland 39 — 16 23 Sub-total 296 121 70 105 Share of total (%) 2.17 1.88 2.32 2.51 Nonfarm Business loans 1,402 623 779 Real estate loans, nonfarm, nonres. 1,053 518 159 376 Real estate loans, multi-family 567 137 314 116 Loans to fin. inst. & brokers & dealers 3,203 2,757 446 Sub-total 6,225 3,412 1,542 1,271 Share of total (7.) 45.64 52.98 51.02 30.42 __ __ Banks; Federal funds sold 1,190 1,190 Per cent of total 8.72 18.48 — All Business: sub-total 7,711 4,723 1,612 1,376 Share of total (£) 56.53 73.34 53.34 32.93 Government Sector Federal Government U.S. Treasury securities 771 771 Federal agency securities 355 — 131 224 Sub-total 1,126 — 131 995 Share of total (%) 8.26 « 4.33 23.82 State and Local Government 717 390 113 214 State and local government securities 5.26 6.05 3.74 5.12 Share of total (%) 1,843 390 244 1,209 All Government: sub-total 13.52 6.05 8.07 28.94 Share of total (%) Other Loans 511 272 169 70 Other Securities 409 126 153 130 Sub-total 920 398 322 200 Share of total (%) 6.74 6.18 10.66 4.79 Total Loans & Investments 13,640 6,440 3,022 4,178 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 35 - The figures shown in Table 10 cast the situation in even more dramatic relief. These data show the share of major sectors in the total volume of additional credit supplied by the different classes of banks during each of these periods. In the first half of 1968, monetary policy was generally more restrictive than it had been in the previous six months, but the degree of restraint was much less than that achieved a year later. Nevertheless, the impact of restraint was greater for multi-national banks (which experienced some CD attrition in the first half of 1968) than for other weekly reporting banks. The pattern of bank credit flows reflected these circumstances. For example, households got about one-fourth of the net credit extended by all weekly reporting banks; businesses got 54 per cent, and the government sector got 15 per cent. However, the major share of credit supplied by multi-national banks (three-fourths of the total) went to the business sector. It will be recalled that loans to the business sector represented about 56 per cent of total credit outstanding at these banks at the end of 1967. Households and governments each received about 11 per cent in the first half of 1968. At the end of the previous year, households had 15 per cent of the total credit outstanding at these banks, and the government sector had 26 per cent. In contrast, both regional and local banks channel around one-third of their new lending to the household sector in the first six months of 1968, and the business sector got Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 35a - Table 10. Share of Major Sectors In the Net Credit Extended By Weekly Reporting Banks, By Class of Bank, 1968-1972 (Half-Years; Percentage of Total Uses of Funds) 1/ Year 6t All Weekly Reporting Banks Multi-Natlonal Banks Regional Banks Local Banks Quarter Household Business Government Household Business Government Household Business Government Household Business Government 1968 I 25 54 15 11 75 11 36 42 11 33 39 25 II 11 52 33 7 58 30 12 51 34 20 41 37 1969 I 11 67 19 8 89 0 15 83 0 12 39 48 II 13 69 15 0 73 20 16 59 25 25 71 4 1970 I 10 38 49 9 5 82 0 39 54 14 63 22 II 7 38 52 6 33 57 7 45 48 8 41 50 1971 I 14 29 56 15 32 53 11 14 72 15 32 51 II 19 48 30 18 46 31 14 62 22 24 37 36 1972 I 23 57 14 14 73 6 28 53 8 33 33 29 l7 Figures vlll not add to 100 per cent because residual amounts of other loans and other securities are not shown here. (See Table 9 for details.) Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 36 - roughly two-fifths. The government sector got one-eighth of the credit supplied by regional banks and one-quarter of that supplied by local banks. As monetary policy eased somewhat in the last half of 1968, the sectoral distribution of bank credit flows moved closer to the long-run contours sketched above. In 1969, however, under the impact of severe monetary restraint, the pattern of bank credit flows was altered markedly In the first half of that year, the share of total bank credit received by the household sector shrank drastically while that received by the business sector rose well above its long-run proportion. For all weekly reporting banks, business got over two-thirds of the credit supplied in both halves of the year, and households got about around one-eighth. Governments got one-fifth in the first six months and one-sixth in the last half of the year. The shift of credit supplied away from households and governments and to the business sector was most marked at multi- national banks. In the first half of the year, they channeled 8 per cent of the credit extended to households. However, in the last half, the volume of loans outstanding to consumers actually shrank. Thus, the multi-national banks, in effect, liquidated loans to households and re-employed the funds elsewhere. The same thing had occurred with respect to the government sector in the first six months of the year. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 37 - Loans to the business sector absorbed nearly nine-tenths of the total bank credit supplied by multi-national banks in the first six months of 1969, and the share was almost three-quarters during the July-December months. Moreover, within the business sector, the multi-national banks also expanded their commercial and industrial loans (relative to other forms of lending to businesses) as credit conditions became more restrictive. Thus, in both the first half of 1968 and the last half of 1969, these loans accounted for two-thirds of the credit which these banks supplied to the business sector. In the last half of 1968, the proportion was just over one-third, but it climbed to almost three fifths in the first six months of 1969. The regional banks also greatly expanded the proportion of total credit which they supplied to the business sector in 1969. They did so primarily by reducing the proportion of their funds which went to finance the government sector; yet, they also cut back somewhat on the share supplied to households. Thus, in the first half of 1969, the regional banks channeled four-fifths of their credit extensions to business firms compared with two-fifths in the same period of the previous year. In the second half of 1969, the business sector got three-fifths of the total vs. one-half in the July-December months of 1968. The share of credit supplied by regional banks received by the household sector amounted to 15 per cent in the first half of 1969 vs. 36 per cent in the same period a year earlier. In the second Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 38 - half of both years, the share received by the household sector was not appreciably greater--12 per cent compared with 16 per cent in 1969. The regional banks had a net liquidation of government securities in the first half of 1969, and this sector received one-quarter of the total credit extended by regional banks in the last half of 1969. In the case of local banks, the business sector received roughly the same share (two-fifths) of the credit supplied in the full year 1968 and in the first half of 1969. However, in the last six months of 1969, the proportion rose to 71 per cent. These figures reinforce the general impression one got at the time as officials of large corporations moved progressively down the size scale of banks in search of loans. Nevertheless, of the three classes of banks, the local institutions proved a more reliable source of credit for households throughout the period. The same was true in the case of the governnent sector. The impact of business borrowing at the smaller banks continued to be evident as 1970 unfolded. Throughout that year, both the regional and local banks channeled to the business sector a larger share of the credit they supplied than was true in the case of multi-national banks. In contrast, the latter institutions experienced a substantial diminution in the demand for credit by business firms in the first half of 1970, and only moderate recovery occurred during the following 12 months. To some extent, this slower pace of business credit demands at Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 39 - multi-national banks reflected the impact of the 1969-70 recession. But it also partly reflected the attempt of large corporations to restructure their balance sheets and restore liquidity through the issuance of long- term debt in the capital market. At the same time, the demand for credit by households (again partly reflecting the impact of the recession) also remained rather moderate. Consequently, the multi-national banks ended up channeling to the government sector a much higher proportion of the total credit they supplied than they normally do in the long-run. In contrast, both the regional and local banks maintained through the first half of 1971 the volume of business lending—compared with alternative outlets for their funds—at levels much closer to the long-run proportion. Beginning in the last half of 1971, multi-national banks began to expand business loans again--relative to other uses of funds—and the pace accelerated in the first half of 1972. The regional banks also saw a relative spurt in business lending in the July-December months of last year. And while the pace slackened somewhat in the first half of this year, business lending remained close to the long-run share. Moreover, lending to business by local banks continued close to the long-run ratio. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 40 - The foregoing analysis, in my judgment, clearly supports the conclusion stated succinctly above: during periods of severe monetary restraint in 1969 and early 1970, all of the weekly reporting banks channeled proportionately more of their funds into the business sector and away from the household and government sectors* As monetary conditions became easier, the pattern was reversed-^-but with the government sector serving more as a cushion than was true of the household sector. Among the three classes of banks, the sectoral supply of funds by the multi-national banks was the most volatile. In fact, the degree of variation in the share of funds which they supplied to particular sectors was much greater than is indicated when one looks at the traditional categories (such as business loans, home mortgages, etc.) of commercial bank lending. Sectoral problems arising from the differential impact of monetary policy have been of continuing concern to the Federal Reserve Board, and the latter has taken a number of steps in efforts to cope with the situation. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -41- VII. Reserve Requirements and Monetary Management Among the measures adopted by the Federal Reserve Board to moderate the differential effects of monetary policy is the imposition of reserve requirements against Euro-dollars which became effective in late 1969. The Board has also suggested to Congress that a major adaptation of the investment tax credit be made with the same objective in mind. I have shared this concern, and I have supported the measures adopted. In fact, I have gone even further and have advocated an extension of the reserve requirement instrument to achieve an even broader range of objectives with respect to monetary policy. In Mach, 1969, I suggested that the Board impose some form of reserve 6/ requirements against Euro-dollar borrowings by American banks.- Subsequently, I discussed the possibility of substituting reserve requirements against foreign assets held by U.S. banks for the Voluntary Foreign Credit Restraint Program (VFCR) administered by the Federal 7/ Reserve Board. Over two years ago, I suggested that the latter approach be broadened to include differential reserve requirements against specified 8/ types of domestic assets. This latter proposal ultimately got a 6/ See Andrew F. Brimmer, "Euro-Dollar Flows and the Efficiency of U.S. Monetary Policy,11 presented at the New School for Social Research, New York, New York, March 8, 1969. (A modified version was published in The Banker, April," 1969, pp. 352-355. 2/ "Capital Outflows and the U.S. Balance of Payments: Review and Outlook,11 presented before the Board of Directors of the Federal Reserve Bank of Dallas, Dallas, Texas, February 11, 1970. 8/ "The Banking Structure and Monetary Management,11 presented before the San Francisco Bond Club, April 1, 1970. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -42- 9/ hearing before a Congressional Conanittee in the Spring of 1971r These proposalshave had a mixed reception, but I still believe they have merit. Moreover, they are essentially another stage in the long-run evolution of reserve requirements in the United States. Reserve Requirements in Historical Perspective At this juncture, it might be helpful to digress briefly to stress a few points that are frequently overlooked in discussions of the appropriate role of required reserves in the banking system. Unfortunately, even today the fact that such reserves are useful purely as instruments of monetary management is not fully understood by the public at large—and the possibility of extending this function further is even less appreciated. In the United States, several historical experiences with required reserves are quite instructive. It will be recalled that the National Banking Act of 1863 for the first time established legal reserve requirements for Federally-chartered banks. The basic assumption was that required reserves would provide liquidity for both bank notes and deposits. National banks in central reserve and reserve cities had to maintain reserves equal to 25 per cent of outstanding notes and deposits, and for banks in other cities (country banks) the ratio was 15 per cent. T7 Statement before the Subcommittee on Financial Institutions of the Comnittee on Banking, Housing and Urban Affairs, U.S. Senate, April 7, 1971. Reprinted in the Federal Reserve Bulletin, April, 1971, pp. 307-319. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -43- The requirement for notes was dropped in 1874. The notion that reserves were assumed to provide liquidity for individual banks was evidenced by the form in which required reserves could be held: for banks, in central reserve cities, vault cash; for reserve city banks, half in vault cash and half in deposits in central reserve or reserve city banks; for country banks, two-fifths in vault cash and three-fifths in deposits in reserve city or central reserve city banks. The record of American economic history shows quite clearly that the system of required reserves established under the National Banking Act failed to meet the liquidity goal each time it was tested. The reason for the failure (the impossibility of an individual bank being able to liquidate enough assets to meet withdrawals during periods of crisis) was understood by only a few observers. Perhaps that fact explains why the concept of "pooling11 reserves was carried over into the Federal Reserve Act of 1913. While a few innovations were made in the administration of required reserves, the idea that they were needed as a source of liquidity persisted until the mid-19301 s. By an amendment to the Federal Reserve Act in May, 1933 (referred to as the Thomas Amendment), authority was given for the first time to vary reserve requirements for member banks. However, the authority was subject to the proclamation of an emergency by the President (which was never done in this connection), and the authority was never used. In the Banking Act of 1935, the discretionary authority was given to the Federal Reserve Board directly. This step represented a clear recognition Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -44- of the role of required reserves as a tool of monetary control--which could be used to influence directly the rate of expansion of aggregate bank credit. The Board has made considerable use of this authority since it was first employed in August, 1936. In my opinion, the next step in the evolution of the reserve requirement tool should be to make it more useful in cushioning the impact of shifts in bank credit flows on particular sectors of the economy. The suggestion that the Board have authority to set supplemental reserve requirements on bank assets represents such an innovation. Evolution of Reserve Requirements in Recent Years The suggestion that one of the traditional instruments of monetary policy be reordered to influence the cost and availability of credit in particular economic sectors is not especially startling. As a matter of fact, the Federal Reserve Board has shown considerable flexibility in the use of reserve requirements in the last few years. For the most part, this involved tailoring changes in such requirements to differentiate the impact by size of bank--as implied by deposit size. Moreover, in November of this year, the Board scrapped the geographic element in reserve requirements and instituted a graduated structure based on size of bank. In July, 1966, the reserve requirement on time deposits over $5 million was raised from 4 per cent to 5 per cent—and kept at 4 per cent on deposits below that amount. In September of the same year, the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -45- percentage was raised further to 6 per cent on the $5 million and over category; again no change was made for amounts below that figure. In March, 1967, in two 1/2 percentage point steps, reserve requirements were cut from 4 per cent to 3 per cent on savings deposits under $5 million. The requirement was left at 6 per cent on time deposits over $5 million. In January, 1968, the Federal Reserve Board also began to differentiate reserve requirements on demand deposits. At that time, the requirement was raised from 16-1/2 per cent to 17 per cent on deposits over $5 million at reserve city banks, while the requirement on amounts below this figure was left unchanged. At country banks, the corresponding increase was from 12 per cent to 12-1/2 per cent for demand deposits over $5 million, while it remained at 12 per cent on amounts below that cutoff. In April, 1969, a 1/2 percentage point increase was made effective at all member banks and on all demand deposits while maintaining the 1/2 percentage point differential on demand deposits above and below $5 million. Reserve Requirements and Euro-Dollar Borrowing by Multi-National Banks Undoubtedly, the most imaginative use of reserve requirements in recent years occurred in 1969-70. Several measures adopted in that period altered greatly the behavior of U.S. banks in the Euro-dollar market. The effects of two of these measures (i.e., the imposition of marginal reserve requirements on Euro-dollar borrowings by American banks and restrictions on the use of mainly overnight deposits to reduce required Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -46- reserves) can be traced reasonably well. In addition, other moves aimed primarily at moderating banks1 access to domestic sources of funds also had indirect effects in the Euro-dollar market. American banks increased their use of Euro-dollar funds by about $7.2 billion between January 1 and June 25, 1969. This competition for funds exerted extreme pressure on Euro-dollar deposit rates. For example, the 3-month deposit rate--which was 7 per cent at the end of 1968--climbed sharply during January and February and again during May and June, reaching a record 12-1/2 per cent on June 10. During June, U.S. banks1 borrowing of Euro-dollar funds through their overseas branches accelerated sharply and Increased about $3 billion during the first three weeks of that month alone. Marginal Reserve Requirements; Against this background of enormous expansion in Euro-dollar borrowing by American banks, the Federal Reserve Board proposed amendments to its regulations at the end of June to moderate the flow of Euro-dollars between U.S. banks and their foreign branches and also between U.S. and foreign banks. These amendments focused on the three major channels through which Euro-dollar funds may affect credit availability in the United States: --The flow of Euro-dollar funds between U.S. bank head offices and their overseas branches. --The flow of credit between U.S* overseas branches— which draw on Euro-dollar funds--and U.S. residents. --The flow of Euro-dollar funds between U.S. banks and foreign banks which are not branches. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -47- Briefly, a 10 per cent marginal reserve requirement was proposed on U.S. bank liabilities to overseas branches and on assets acquired by overseas branches from their U.S. head offices in excess of outstandings during a base period, defined as the four weeks ending May 28, 1969. The reserve-free base was made subject to automatic reduction—unless waived by the Board—when, in any period used to calculate a reserve requirement, outstanding amounts subject to reserve requirements fall--and are below—the original base. A 10 per cent marginal reserve requirement was proposed for U.S. branch loans to U.S. residents in excess of outstandings during a given base period, which could be calculated in one of two optional ways. Finally, the Board proposed to define deposits against which required reserves are calculated to include any non-deposit borrowing by a member bank from a foreign bank. A 10 per cent reserve requirement was proposed for deposits of this class. These proposals were adopted by the Board with an effective date of September 4, 1969—when the first four-week "reserve computation period" began. The average liabilities of a bank to its overseas branches during the reserve computation period was compared with its base—the average of such liabilities during the four week period ending Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -48- May 28—to establish the amount of additional reserves it must hold. The first four-week "reserve maintenance period11 began October 16. During the maintenance period, a bank must hold on the average the additional reserves required on the basis of its excess Euro-dollar holdings from its overseas branches during the previous computation period. The impact of these measures on the behavior of multi- national banks can be assessed fairly accurately. For purposes of this analysis, three time periods were identified: (1) from June 25 to September 3, the period during which the Board's marginal reserve proposals were pending; (2) from September 4 to October 1, the first reserve computation period; and (3) from October 16 to November 5, covering most of the first reserve maintenance period. American banks continued to increase their borrowings of Euro- dollar funds during July and August—raising liabilities to overseas branches $1.3 billion during those two months to a new peak level of $14.8 billion. As shown in Table 11, most of the increase, however ($1.1 billion), occurred during July. The Euro-dollar market was able to accomodate the continuing demand for funds from U.S. banks without any further increase in interest rates. Rates had dropped sharply in late June as the immediate pressure on U.S. banks eased with the passing of corporate borrowing for tax Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 48a - Table 11 Liabilities of U.S. Banks to Their Foreign Branches 1/ (Millions U.S. Dollars) Date Outstandings Change from previous date December 30, 1964 1,183 December 29, 1965 1,345 + 162 December 28, 1966 4,036 +2,691 December 27, 1967 4,241 + 205 January 1, 1969 6,039 +1,798 1969 May 26 9,621 +3,582 June 25 13,228 +3,607 July 30 14,324 +1,096 September 3 14,571 + 247 October 1 14,111 - 460 October 8 14,609 + 598 15 14,970 + 361 22 14,306 - 664 29 13,631 - 675 November 5 14,358 + 727 1/ Exclusive of branch participations in head office loans to U.S. residents. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -49- payments, and the banks in turn put less pressure on the Euro-dollar market. By the end of June, the 3-month rate was down to about 10-1/2 per cent. It ranged between 10-1/2 and 11-1/4 per cent during July and August. In September—the first reserve computation period—U.S. banks decreased their Euro-dollar borrowings by nearly $1/2 billion. In fact, during the six weeks from August 20 to October 1, borrowings decreased in all but one weekly period and outstandings fell from $14.8 billion to $14.1 billion. Reduced demand pressures from U.S. banks no doubt were an important factor in the general--albeit very moderate— decline in Euro-dollar rates up to the last few days of September when typical quarter-end pressures in international money centers put some upward pressure on rates. Taking the third quarter of 1969 as a whole, demand pressures on the Euro-dollar market from U.S. banks were much more moderate than they were during the first half of the year. American banks increased their Euro-dollar borrowings by only $900 million between June 25 and October 1, compared with average quarterly increases of about $3-1/2 billion during the January-June period. To some extent, this reduced demand for Euro- dollars may have reflected the innovative skill of U.S. banks in developing domestic sources of non-deposit funds. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -50- Because of a number of cross-currents in the Euro-dollar market in October and November, 1969, it is difficult to estimate quantitatively the effects of the marginal reserve requirements on the borrowing behavior of U.S. commercial banks in that particular market. Although Euro-dollar rates declined during most of October, these banks sharply increased their borrowings of Euro-dollar funds in the first half of that month and subsequently repaid more than the previous rise. At the end of October, U.S. bank liabilities to their overseas branches were $13.6 billion, only slightly higher than the $13.2 billion outstanding at the end of June. Other cross-currents in the market after the beginning of October included a rather short-lived expectation of significantly lower interest rates in the United States and a large flow of funds out of German marks following the initiation of the transitional floating arrangement for the mark (and its subsequent appreciation)—which was reflected in a considerable decrease in official dollar holdings of the German central bank. As I mentioned above, September was the first reserve computation period for the Board's marginal reserve requirement against Euro-dollar borrowings. Using weekly data (the banks compute their borrowings on a daily average basis), it was estimated roughly that bank borrowings of Euro-dollars were roughly $4 billion more on the average during September than during May—the base period. Thus, during the four-week period beginning October 16, U.S. banks needed to maintain on the average slightly over $400 million of additional reserves. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -51- In passing, it might be observed that this additional amount of required reserves is not drastically different from the increase which would have resulted earlier in 1969 if a slightly different approach had been adopted then. As already indicated, in March of that year, I suggested that the Board consider applying average reserve requirements, at a 6 per cent rate, to the volume of Euro-dollar borrowings by U.S. banks. At the end of February, the total of such borrowings was just over $9.0 billion; thus, the rise in required 10/ reserves at that time would have been about $540 million; Another development related to the behavior of multi-national banks in the Euro-dollar scene (and one which can be traced directly to the imposition of the marginal reserve requirement) was the sharp increase between mid-September and the end of October in U.S. bank time liabilities to foreign official institutions. After falling rather consistently through July, foreign official time deposits in U.S. banks rose by $212 million in August and by more than $1.0 billion from September 10 to October 29, 1969. It would appear that some of the increase reflected a shift of official funds from the Euro-dollar market (including overseas branches of U.S. banks) to time deposits held directly with U.S. head offices. Part of the drop in U.S. bank Euro-dollar borrowings in late September and after mid-October may have reflected such a shift of funds by foreign official institutions. 107 However, it should be noted that a marginal reserve requirement provides a greater deterrent to additional future borrowing than does an average reserve requirement that involves the same increase in total required reserves. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -52- It may be that U.S. banks attempted to induce shifts of foreign official funds from branch to head office books to take advantage of the relatively lower reserve requirement associated with balances on head office books. For example, a shift of $1 million from the branch to head office (assuming that the funds were made available for head office use in either case and that the U.S. bank in question had Euro-dollar borrowings outstanding in excess of its base) would have released $100,000 from required reserves against Euro-dollar borrowings (where the marginal reserve requirement is 10 per cent) and absorb $60,000 into required reserves against time deposits with the head office--a net saving of $40,000 of reserves. The value of this saving of reserves would depend on the interest cost of reserves to the bank. If official funds could have been obtained for 10 per cent per annum through branches-~Euro-dollars-the head office may have been willing to pay up to 10.4 per cent per annum for the same funds directly—and could have done so because of the exemption of official funds from Requlation Q ceilings. Table 12 compares the cost of raising funds in these two alternative ways, from the point of view of the U.S. banks, after adjusting market quotations to reflect the additional cost associated with holding reserves in each case. As may be seen, once the Euro-dollar Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 52a - Table 12 Comparison of.Three-month Euro-dollar Deposit Bid Rates with Rates Offered by Prime Banks in New York for Three^month Foreign Official Time Deposits (1) (2) (3) (4) (5)=(2)-(4) Offer Rate for Differential: Three-month Foreign Official Time Adjusted Euro-dollar Euro-$ Deposit!' Deposits in New YorkZ' Over Adjusted Time Period Quoted Adjusted^/ Quoted Adjusted^/ Deposit Offer Rate 1969 Mar. 8.48 * 7.00 - 7.75 7.45 - 8.24 +1.03 +0.24 June 11.11 * 8.75 - 9.62 9.31 - 10.23 +1.80 +0.88 July 10.57 * 9.00 _ 10.00 9.57 10.63 +1.00 -0.06 Aug. 10.91 * 9.50 - 10.50 10.11 - 11.17 +0.80 -0.26 Sept,. 3 11.25 * 9.50 _ 10.88 10.11 _ 11.57 +1.14 -0.32 10 11.34 12.60 9.50 - 10.88 10.11 - 11.57 +2.49 +1.63 17 11.14 12.38 9.88 - 10.88 10.51 - 11.57 +1.87 +0.81 24 10.68 11.87 10.12 - 10.88 10.76 - 11.57 +1.11 +0.30 _ _ Oct. 1 11.08 12.31 10.25 10.88 10.90 11.57 +1.41 +0.74 8 10.65 11.83 10.25 - 10.88 10.90 - 11.57 +0.93 +0.26 15 10.43 11.59 9.88 - 10.62 10.51 - 11.30 +1.06 +0.29 22 9.63 10.70 9.38 - 10.50 9.98 - 11.17 +0.72 -0.47 29 9.10 10.11 8.38 - 10.00 8.91 - 10.63 +1.20 -0.52 1/ Average of daily figures for the last week (ending Wednesday) of the period. 2/ Range of rates offered for 90-179 day funds at prime New York City banks. 3/ To reflect the 10% marginal reserve requirement on U.S. bank liabilities to foreign branches. 4/ To reflect the 6% reserve requirement on head office time liabilities. */ Same as quoted rate; reserve requirement computation began in week ending September 10. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -53- marginal reserve requirement went into effect, Euro-dollar funds became considerably more expensive than funds attracted through official time deposits. From September 10 to late October, 1969, however, this advantage for the official time deposit source was gradually reduced as the official time deposit rate increased and Euro-dollar rates declined. In November, 1970, following significant reductions by some banks in outstanding Euro-dollar borrowings—and in reserve-free bases, the Board increased from 10 per cent to 20 per cent the rate of reserve requirement on borrowings in excess of reserve-free bases, thereby giving the banks an added inducement to preserve their reserve-free bases against a time of future need. At that time, the Board also applied the automatic downward adjustment to banks that operated under a minimum base equal to 3 per cent of deposits. On January 15, 1971, the Board amended its regulations to permit banks to count toward maintenance of their reserve-free bases any funds invested by foreign branches in Export-Import Bank securities offered under a program announced by that institution. At that time, the Board postponed for banks using a minimum base the application of the automatic downward adjustment of their bases. In April, 1971, a further amendment was made to the Board*s regulations which extended to direct Treasury securities the same privilege previously accorded the Export- Import Bank issues. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -54- On September 7 of this year, the Board proposed to eliminate the reserve-free bases and to reduce reserve requirements on Euro- dollar borrowings from 20 per cent to 10 per cent. The proposal was intended to simplify the Euro-dollar regulations and to equalize treatment among banks by unwinding the historical advantages enjoyed by some banks because of the situations prevailing at the time the Euro- dollar measures were adopted in 1969. On July 30 of that year, liabilities of U.S. banks to their foreign branches amounted to $14.3 billion. However, as already mentioned, as monetary conditions in the United States became less stringent in early 1970, U.S. banks paid down their Euro-dollar indebtedness. The pace of repayment accelerated. By the end of August, 1972, liabilities of U.S. banks to their foreign branches totaled $1-1/4 billion. Thus, it appeared that elimination of the reserve-free base would have little practical impact on most banks—since only a few banks have continued to borrow in the Euro-dollar market in 1972. On the other hand, while proposing to reduce the requirement from 20 per cent to 10 per cent, the Board indicated that it intended to keep in place the regulation imposing such requirements on Euro-dollar borrowings. Since the Board allowed 90 days for public comment on the proposals, no decision had been made as this paper was being completed. Yet, on the record to date, it seems reasonable to conclude that the Board still looks upon the marginal reserve requirements on Euro-dollar borrowings by U.S, banks as a useful tool in its monetary management kit. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -55- Reserve Requirements and Sales of Commercial Paper On October 29, 1969, the Federal Reserve Board announced it was considering amending its rules governing the payment of interest on deposits to apply to funds received by member banks from the issuance of commercial paper or similar obligations by bank affiliates. This was the last of the major domestic sources of funds to which U.S. commercial banks had resorted and which had remained beyond the reach of the Federal Reserve's interest rate ceilings or reserve requirements. (In addition to Euro-dollar borrowings, other sources with respect to which the Federal Reserve Board finalized and proposed regulatory changes in the Summer of 1969 included sales of participations in individual loans or pools of loans and the conversion of demand deposits into "Federal funds borrowings,11 which a few banks were attempting.) At the time of this announcement relating to commercial paper, about 58 banks had outstanding around $3.6 billion of such liabilities issued through their subsidiaries or related one-bank holding companies. All of this paper had been sold at yields far above the maximum interest rates payable on CD's. Between the end of July and the end of October, the number of banks offering commercial paper in some manner rose by 50 per cent, and the amount outstanding climbed by $1.8 billion (or 100 per cent). Of the total outstanding on October 29, roughly $0.4 billion had been issued by banks- subsidiaries. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -56- As matters developed, the Board did not subject commercial paper to the interest rate ceilings. Instead, in late October, 1969, the Board published for comment a proposal to apply reserve requirements to commercial paper when offered by a bank related corporation and when the proceeds are used to supply funds to the member bank. The Board put this issue aside for a time in early 1970, because of a desire to avoid exerting additional restraint on money and credit markets. However, the question was opened again in the summer of that year, and reserve requirements were applied to bank-related commercial paper effective in September, 1970. Demand deposit requirement percentages were applied to paper with initial maturities of less than 30 days, and time deposit requirements were applied to paper with longer maturities. This action was announced a month in advance of the effective date, and banks were able to shift most of their commercial paper funds into the time deposit requirement category. In this action, the Board lowered reserve requirements on time deposits over $5 million one percentage point to 5 per cent and established the new commercial paper requirement at the same time. Extending the Range of Reserve Requirements Against this widening use of reserve requirements, I again suggested that consideration be given to the application of a supplemental reserve requirement on loans extended by U.S. banks to both domestic and foreign borrowers. The arguments which can be advanced to support this proposition are essentially the same as those which I put forward Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -57- in the Spring of 1970. The objective of the measure would be to raise the cost of bank lending by reducing the marginal rate of return to the bank making the loan--and thereby dampen the expansion of bank loans. The basic purpose of the supplemental reserve would not be simply to levy new reserve requirements on the banking system. If it were thought that its adoption would raise the average level of reserves required beyond what the Board thought was necessary for general stabilization purposes, the regular reserve requirements applicable to deposits of Federal Reserve member banks (and hopefully to nonmember banks as well)could be reduced. In making this suggestion, I began with the conviction that the Federal Reserve needs a better means of influencing the availability of credit in different sectors of the economy. At the same time, I am keenly aware of the desirability of assuring that the instrument used would minimize interference with normal business decisions and the economic forces of the market place. The banking community--within whatever outer limits of credit expansion the central bank considers are consistent with stabilization policy—can best allocate financial resources among individual borrowers. Therefore, banks, should be assured as much freedom of choice as the basic objectives of maintaining a balanced economy would permit. Since, during a period of inflation, the object would continue to be to restrain the growth of bank lending, rather than to burden the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -58- amount of lending achieved by some date in the past, the reserves might apply only to the amount of lending above some determined volume. That is, the cash reserves would constitute marginal, rather than average, required reserves. The approach might be varied so that a cash reserve requirement might be applied against whatever new loans the bank might extend rather than apply a marginal reserve against the amount of loans above the amount outstanding on a particular date. Under either variant of this approach, the percentage reserve requirement would be set on the basis of the Federal Reserve's determination of the degree of influence to be applied, for domestic stabilization or balance of payments reasons, against unchecked bank loan expansion. The restraint would be levied in proportion to the lending. The approach would not require immediate asset adjustments by each bank; instead it would leave the decision to individual banks to adapt their lending to the circumstances at the time. The loans that would be subject to the supplemental reserve requirement could be defined in a way that would take account of any set of priorities that Congress might establish from time to time. For example: if the objective of public policy were to give priority to loans to meet the credit needs of State and local governments, it could be achieved through a lower reserve ratio against State and local security holdings than the ratio applied to other assets. Loans to acquire homes could be encouraged—if public policy sails for giving housing a high Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -59- priority—by setting the requirement very low, or perhaps at zero. In contrast, if policy called for substantial restraint on consumer credit or on loans to business, the reserve ratio applicable to such loans could be set quite high. In fact, any array of loan priorities could be adopted and the reserve requirement scaled accordingly— depending on the changing needs of public policy. Under ordinary circumstances, however, if there were no need to pursue a policy of monetary restraint--and consequently no need to be concerned about the side-effects of such a policy course--less differentiation among types of assets would be necessary. In fact, if there were no need to counteract any adverse by-products of monetary restraint, no supplemental reserve requirements would need to be established. If already employed, they would not have to be changed. Such a supplemental reserve requirement system sketched above would have the effect of cushioning the impact of monetary policy on particular sectors of the economy. As already indicated, the reactions to the proposal to introduce supplemental reserve requirements against bank assets got a mixed reception. In general, economists and bankers who believe that the central bank should not be concerned with the sectoral effects of monetary policy opposed the suggestion. On the other hand, even among those who share my uneasiness about the differential impact of monetary policy, several Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 60 - reservations were expressed. The Federal Reserve Board itself was in 11/ the latter category. In testimony presented in the.Spring of 1971, the Board as a whole agreed that the proposal as embodied in a bill then before Congress should not be enacted at that time. The majority of the Board objected to a number of specific features of the draft legislation. I share some of these specific objections. However, the majority of the Board also voiced some more fundamental reservations which I did not share. Subsequently, at least one other Board Member, while not subscribing to the idea of supplemental reserve requirements, did express support for some variety of charge (perhaps a tax or reduced tax deductions) against bank loans to those sectors in which public policy sought to redu1c2e/ the availability of credit during periods of monetary restraint."^ nr See Stgfcemefit of Arthur F. Burns on behalf of the Board before the Subcommittee on Financial Institutions of the Committee on Banking, Housing and Urban Affairs, U.S. Senate, March 31, 1971. Reprinted in the Federal Reserve Bulletin, April, 1971, pp. 303-306. 12/ Sherman J. Maisel, "Credit Allocation and the Federal Reserve11 presented before the Banking Research Center, Northwestern University, April 22, 1971; Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -61- I can see the merit in the position taken by those who have reservations about the reserve requirements approach. Yet, my studies of the U.S. commercial banking system—including the analysis presented in this paper--have convinced me that the impact of monetary policy is by no means neutral with respect to particular sectors of the economy. Since the effects of monetary policy have their initial and major impact on the commercial banking system, the ways in which that system allocates credit must be taken into account In the conduct of monetary policy. One of the inescapable facts relating to the lending behavior of commercial banks—particularly the large multi-national institutions—is the extent to which they give priority to satisfying their corporate business customers over the credit demands of other sectors of the economy. Because of this strong network of customer relationships, the banks—in fact—set priorities that are not necessarily consistent with the overall objectives of public policy. For this reason, I believe Congress should legislate some means of coping with this problem. Supplemental reserve requirements seem to me to be one approach. In fashioning the tool to be used, Congress should indicate the priorities to be followed and the degree to which particular sectors are to be favored. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -62- VIII. Alternative Approach to the Stabilization of Sectoral Credit Flows As I have stressed throughout, my main objective is to smooth the differential sectoral impact of monetary policy. Whether this is done through supplemental reserve requirements or through another instrument is unimportant to me. One such alternative has been recommended by the Federal Reserve Board, and I joined my colleagues in the proposal. The core of the suggestion is the adoption of a variable investment tax credit. The proposal resulted from the Board's quest for means to improve the stability of credit flows to the housing 13/ sector. However, the benefits which would accrue from the implemen- tation of the proposal would extend far beyond this sector. The Board recommended a number of steps to improve the ability of thrift institutions to attract and retain consumer savings in the face of interest rate competition posed by market securities. These moves would lessen the disparity betwe en the intermediaries assets (composed mainly of long-term, fixed-yield loans) and their liabilities (composed mainly of short-term, interest-sensitive deposits). If these institutions were less vulnerable to deposit attrition, they would have available 13/ See "Ways to Moderate Fluctuations in the Construction of Housing," Report of the Board of Governors of the Federal Reserve System, March 3, 1972. Reprinted in the Federal Reserve Bulletin, March, 1972, pp. 215-225. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -63- a more assured inflow of funds which they could rechannel to finance housing. Another recommendation included the removal of a number of regulatory and legislative limitations which dampen the flow of mortgage credit during periods of monetary restraint. The Board also asked that consideration be given to allowing all depositary institutions to write variable interest rate mortgages — in addition to instruments carrying fixed rates. But, among the several proposals advanced, the Board urged Congress to give first priority to the institution of a flexible investment tax credit as a means of reaching a leading sector of the economy which is more resistent to effective policy control. The result would be an assurance that the corporate business sector would bear a meaningful share of the burden of monetary restraint during periods of excess demand for goods and services. The Board concluded that a new instrument is needed which would influence directly expen- ditures by businesses for equipment and machinery. As is widely recognized, these outlays are large in absolute terms; they represent a high proportion of total business spending, and they are subject to considerable cyclical variation. More fundamentally, while substantial share of business capital investment is financed with funds borrowed from banks or raised in other parts of the credit market, such outlays are sometimes slow to respond to monetary policy. Consequently, during periods of credit stringency, business firms have repeatedly attracted funds to pay for machinery and equipment which otherwise would have flowed into housing and other sectors. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -64- The Board recommended that--to assure that the investment tax credit have the necessary flexibility--the President be authorized to vary the tax rate within a specified range. The latter might be from zero to 10 per cent or 15 per cent. To set a limit on using this authority, the Board suggested that, before a rate change could be put into effect, Congress should retain the right to consider the proposed change for 60 days during which it could be disapproved by either the Senate or the House. This provision would make the administration of the investment tax credit parallel to the procedure used in the case of governmental reorganization plans. In operation, the investment tax credit would be liberalized during periods when the economy required stimulation, and it would become less generous when the task was to restrict aggregate demand. Again, the tax rate could be varied from zero up to 15 per cent. Several benefits would be expected to result from the flexible use of the instrument. In the first place, business demands for external financing should become much more stable. This in turn should produce greater stability in market interest rates and in the flow of funds to savings intermediaries. Since the latter are the principal sources of mortgage funds, the availability of housing finance would be more assured. But beyond the effects on housing, the stabilization of business demands for funds would also contribute to stability in the flow of funds to other sectors—such as State and local govern- ments and consumers in addition to home buyers. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -65- The benefits resulting from greater stability of credit flows, in my judgment, are clearly worthwhile. I am convinced per- sonally that they outweigh the costs (in terms of interference with private decisions) which would have to be incurred to bring them about. In my view, it does not matter whether the instrument employed is a flexible investment tax credit or a supplemental reserve requirement against bank assets. It is mainly a question of the locus of the burden. The reserve requirement would rest on commercial banks, and the investment tax credit would rest on nonfinancial corporations. Both would represent the use of a market mechanism: the reserve requirement would be set by the Federal Government, and the banks would decide how much to lend to particular categories of borrowers. The investment tax would also be set by the Federal Government, and business firms would decide how much to spend on particular types of capital equipment. I hope personally that, as a nation, we adopt one of these courses (or still another if it is equally promising) while we still have time to act. If we delay indefinitely, we may again find ourselves facing a need to rely too much on monetary restraint— with its clearly recognized' differential effects on particular sectors of the economy. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -66- IX. Summary and Concluding Observations The main conclusions reached in this paper have been already stated along the way. However, it might be helpful to summarize them here: --In recent years, especially during periods of monetary restraint, significant shifts have occurred in the availability of credit in key sectors of the American economy. To a considerable extent, these variations in credit flows have reflected structural deficiencies in the prevailing arrangements through which credit is supplied. This is especially true of home financing because of its dependence on mortgage loans and the flow of funds to savings and loan associations. --But the mainspring of the wide fluctuations in the availability of credit in leading economic sectors is the behavior of commercial banks as they react to the changing requirements of monetary policy. The comprehensive analysis undertaken here clearly demonstrates that a disproportionate share of the instability in bank credit flowing to particular sectors can be traced to the activity of roughly 20 multi-national banks (which are an integral part of the Euro-dollar market) and around 60 other large banks which are dominant in their regions. —As monetary conditions swung from ease to restraint and back to ease in the last several years, commercial banks generally shifted the supply of credit away from households and governments and into the business sector. Again, the multi-national banks were the fulcrum on which the pattern rested. Relying heavily on Euro-dollar inflows, they were able to maintain a high volume of lending to business in the face of severe attrition in time deposits—especially in large denomination certificates of deposit. Other banks had to rely more substantially on liquidation of government securities and borrowing from domestic sources to obtain funds. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -67- --But, in general, all classes of commercial banks demonstrated a strong and persistent preference for business borrowers over others seeking credit accommodation. The reasons for this are understandable: a network of frequently longstanding customer relationships and the propensity of banks to commit themselves to make future business loans give to business firms a high standing in the parade of would-be borrowers at commercial banks. In contrast, while consumer loans are clearly quite profitable for banks, the household sector generally has a somewhat lower standing. The results are a rising share of bank credit for businesses and a shrinking share for households and governments during periods of monetary restraint. In the light of this experience, the Federal Reserve System has taken a number of steps to ameliorate the differential impact of monetary policy on particular sectors of the economy. To a considerable extent, the maintenance of ceilings on the maximum rates of interest which member banks can pay on time deposits rests on the desire to cushion the effects of market rate competition on savings and loan associations--and through them on housing. Moreover, the imposition of marginal reserve requirements on Euro-dollar borrowing in 1969 was intended to moderate the access of multi-national banks to additional funds--which they in turn channeled to the business sector. Yet, these and other measures still left essentially untouched the key element underlying the marked instability in the availability of credit in leading economic sectors. That key element is the demand for funds by major corporations to finance expenditures on machinery and equipment. To cope with this situation, the Board Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -68- has recommended the adoption of a flexible investment tax credit which could be varied on a contra-cyclical basis. While the proposal was advanced initially in connection with recommendations aimed at improving housing finance, it would also yield benefits for all those sectors dependent on raising funds in the money and capital markets. Another approach designed to overcome the same problems resulting from the differential impact of monetary policy involves the use of supplemental reserve requirements based on bank assets. I personally favor this approach, but the majority of the Federal Reserve Board has a number of reservations about it. I believe these reservations have considerable merit, but I also believe that--on balance--the idea is worth pursuing. But, in the final analysis, which particular approach is adopted is unimportant to me. What is important is a decision by the Congress to put in place some kind of instrument to assure that some sectors of the economy do not carry a disproportionate burden from monetary policy while others are affected much less severely. - 0 - Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Appendix fable I. Sources and Uses of Funds, By Class of Bank, By Quarter, 1968-1972 (millions of dollars) 1968 (1st quarter) 1968 (2nd quarter) 1968 (3rd quarter) 1968 (4th quarter) Multi- Multi- Multi- Multi- National Regional Local NatlonaL Regional Local National Regional Local National Regional Local Sources of Funda Total Banks Banks Banks Total Banks Banks Banks Total Banks Banks Banks Total Banks Banks Banks External Sources 3,630 1,532 927 1,171 5,036 2,756 1,079 1,201 7,736 4,452 1,720 1,564 10,090 4,241 3,013 2,836 ToCal deposits 2,933 1,014 839 1,080 1,237 237 227 773 4,271 1,564 1,176 1,531 7,410 2,840 2,191 2,379 __ Deaand deposit* 989 538 119 332 — -- 1,141 158 336 647 3,365 933 1,133 1,299 Tim & savings deposits 1,944 476 720 748 1,237 237 227 773 3,130 1,406 840 884 4,045 1,907 1,058 1,080 Large CO'a 502 16 315 171 178 -- 83 95 1,903 981 614 308 1,905 1,006 553 346 IPC 342 — 202 140 — — -- -- 1,510 832 422 256 1,438 804 369 265 Other 160 16 113 31 178 -- 83 95 393 149 192 52 467 202 184 81 Other time & savings 1,442 460 405 577 1,059 237 144 678 1,227 425 226 576 2,140 901 505 734 Total borrowing 297 160 46 91 2,371 1,377 717 277 1,459 1,124 323 12 1,381 437 677 267 Federal Reserve Banks 297 160 46 91 95 « 13 82 30 30 -- -- -- — -- -- Other borrowing -- -- 2,276 1,377 704 195 1,429 1,094 323 12 1,381 437 677 267 Euro-dollars 85 85 984 964 20 " 1,412 1,343 69 " 231 222 4 5 Coonerclal paper NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA Other liabilities 315 273 42 — 444 178 115 151 594 421 152 21 1,068 742 141 185 Interpal Sources 1,073 954 54 65 1,731 605 678 448 312 21 291 33 32 1 U.S. Treasury securities 648 605 43 -- 1,457 481 579 397 265 -- 21 244 — — -- Federal agency securities 144 144 — -- 69 9 41 19 LI -- 11 33 32 1 State and local gov't, sec. « -- -- -- -- -- -- -- T- -- -f -- Other securities 11 -- -- 11 205 115 58 32 36 -- -- 3366 -- —' Business loans — — — -- -- -- -- -- — -- — -- -- Real estate loans — — -- -- — — — -- -- — Consular loans -- -- -- — — -- -- — -- — — -- Other loans 270 205 11 54 — — -- Other Sources - 471 317 131 23 199 199 TOTAL SOURCES 4,703 2,486 981 1,236 7,238 3,678 1,888 1,672 8,247 4,651 1,741 1,855 10,123 4,273 3,013 2,837 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Page 2 Appendix Table I (continued) 1968 (1st quarter) 1968 (2nd quarter) 1968 (3rd quarter) 1968 f4th quarter) Multi- Multi- Multi- Multi- national Regional Local national Regional Local national Regional Local national Regional Local Total Banks Banks Banks Total Banks Banks Banks Total Banks Banks Banks Total Banks Banks Banks Uses of Funds Internal Uses 295 295 -- 2,084 1,455 520 109 - - — Deposit withdrawals 295 295 - 2,084 1,455 520 109 - -- „ „ Deaand deposits 736 289 358 89 TUte & savings deposits 295 295 « -- 1,348 1,166 162 20 — — — — — ... Large CD's 295 295 -- -- 1,348 1,166 162 20 -- -- — — — IPC 295 295 — — 1,146 964 162 20 — -- -- — Other — — — — 202 202 — — — — — — Other tine & savings -- — — — -- — External Uses 3,700 1,649 963 1,088 5,154 2,223 1,368 1,563 7,961 4,651 1,512 1,798 9,371 4,077 2,855 2,439 Repayment borrowing 380 103 185 92 23 23 — -- 56 — 5 51 74 38 9 27 Federal Reserve Banks — — — -- 23 23 -- — 56 -- 5 51 74 38 9 27 Other borrowing 380 103 165 92 — — -- — -- — -- Repayment of Euro-dollars " — — — - Coonercial paper run-off NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA Other liabilities 31 — — 31 — " — -- -- -- U.S. Treasury securities 223 223 -- — — — 1,248 1,248 -- — 1,707 879 472 356 Federal agency securities 60 — 11 49 — — -- -- 57 45 12 -- 34 — 34 -- State & local gov't, sec. 666 219 223 224 966 409 179 378 1,063 721 109 233 2,062 1,023 516 523 Other securities 348 298 51 — -- — -- — L8I 153 28 168 28 62 78 Busines loans 1,367 935 199 233 2,262 1,227 506 529 1,366 743 274 349 2,067 997 614 456 Real estate loans 467 68 231 168 697 184 205 308 958 317 312 329 868 314 264 290 Consumer loans 157 26 63 68 535 73 136 326 799 171 239 389 622 114 234 274 Other loans 671 307 342 22 2,233 1,253 S33 447 1,769 684 650 435 Other Uses 708 542 18 148 286 229 57 752 196 158 398 IOTAL USES 4,703 2,486 981 1,236 7,238 3,678 1,888 1,672 8,247 4,651 1,741 1,855 10,123 4,273 3,013 2,837 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Appendix Table II (continued) page 3 1969 (1st quarter) 1969 (2nd quarter) 1969 (3rd quarter) 1969 (4th quarter) Multi- Multi- Multi- Multi- National Regional Local Nat ional Regional Local Nat ional Regional Local Nat ional Regional Local Total Banks Banks Banks Total Banks Banks Banks Total Banks Banks Banks Total Banks Banks Banks Sources of Funds External Sources 6,052 3,829 1,109 1,114 6,424 4,555 1,017 852 7,325 4,468 1,661 1,196 3,039 3,918 2,056 2,115 Total deposits 3,536 2,045 774 717 365 « 19 346 5,218 2,902 846 1,470 Demand deposits 2,009 1,376 337 296 „ if,513 2,301 846 1,366 Time & savings deposits 1,527 669 437 421 365 19 346 705 601 — 104 Large CD's 20 — 20 601 601 IPC „ „ Other 20 20 601 601 Other time & savings 1,527 669 437 421 345 19 326 1U4 -- 104 Total borrowing 558 161 397 3,073 1,999 767 307 2,927 737 1,222 968 1.8S8 1,016 605 267 Federal Reserve Banks 191 — 78 113 274 58 122 94 :J8 38 — -- Other borrowing 367 83 284 2,799 1,941 645 213 2,927 737 1,222 9 "iS 1,810 978 605 267 Euro-dollars 1,433 1,359 74 " 2,355 2,238 110 7 3,901 3,592 253 56 316 " 218 98 Coonerclal paper NA NA HA NA NA NA NA NA NA NA NA NA NA NA NA NA Other liabilities 525 425 100 — 631 318 121 192 497 139 186 172 667 — 387 280 Internal Sources 3,208 2,570 525 113 2,901 1,174 842 885 7,829 3,759 2,233 1,637 1,076 576 329 171 __ U.S. Treasury securities 2,568 2,174 353 41 2,425 904 718 803 1,129 529 600 42 42 Federal agency securities 30 20 10 — 77 15 32 30 194 17 103 74 34 9 -- 25 State & local gov't, sec. 269 269 — — 346 255 91 -- 1,012 1,005 7 -- 708 436 229 43 Other securities 125 107 18 53 1 52 336 280 56 53 45 8 Business loans :: Real estate loans Consumer loans 86 86 Other loans 216 144 72 5,158 2,457 1,538 1,163 153 -- 100 53 Other Sources 30 - 30 214 102 112 271 271 - TOTAL SOURCES 9,290 6,399 1,634 1,257 9,539 5,729 1,961 1,849 15,154 8,227 3,894 3,033 9,436 4,765 2,385 2,286 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Appendix Table I (continued) Page 4 1969 (1st quarter) 1969 (2nd quarter) 1969 (3rd quarter) 1969 (4th quarter) Multi- Multi- Multi- Multi- Nat ional Regional Local National Regional Local National Regional Local National Regionat Local Total Banks Banks Banks Total Banks Banks Banks Total Banks Banks Banks Total Banks Banks Banks Uses of Funds Internal Uses 2,910 2,283 576 51 4,767 3,651 871 245 7,200 3,966 2,218 1,016 3,469 1,804 1,032 633 Deposit withdrawals 2,910 2,283 576 51 4,767 3,651 871 245 7,200 3,966 2,218 1,016 3,469 1,804 1,032 633 __ „ Demand deposits — — ... 1,156 790 170 196 956 29 594 333 Time & savings deposits 2,910 2,283 576 51 3,611 2,861 701 49 6,244 3,937 1,624 683 3,469 1,804 1,032 633 Large CD*s 2,910 2,283 576 51 3,279 2,529 701 49 4,031 2,312 1,218 501 2,268 855 780 633 IPC 2,272 1,802 448 22 2.398 i,yo6 443 49 2,821 1,782 732 307 1,728 855 475 398 Other 638 481 128 29 881 623 258 — 1,210 530 486 194 540 — 305 235 Other time & savings — 332 332 — — 2,213 1,625 406 182 1,201 949 252 — External Uses 5,581 3,445 930 1,206 4,445 1,751 1,090 1,604 2,284 866 528 890 4,065 2,646 422 997 __ Repayment of borrowing 449 449 -- — — — 137 61 54 22 80 18 62 Federal Reserve Banks 22 22 — -- — — — — 137 61 54 22 80 18 62 Other borrowing 427 427 -- -- -- -- — Repayment of Euro-dollars 1 - 1 — -- 395 395 Commercial paper run-off NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA Other liabilities- 9 -- 9 — 979 979 — U.S. Treasury securities — -- — — — 38 38 236 196 40 Federal agency securities 29 — -- 29 — -- -- — — -- -- -- 16 — 16 State & local gov't, sec. 479 — 111 368 213 — — 213 4 -- -- 4 -- — -- -- Other securities 19 -- — 19 45 45 — 12 — 12 30 -- 30 — Business loans 3,058 2,042 640 376 2,802 1,245 832 725 843 447 140 256 1,275 989 33 253 Real estate loan's 663 277 151 235 622 295 117 210 588 222 114 25? 813 303 143 367 Consumer loans 414 217 28 169 568 126 122 320 662 98 220 344 396 -- 92 304 Other loans 460 460 195 40 19 136 -- -- 99 99 — Other Uses 799 671 128 -- 327 327 -- 5,670 3,395 1,148 1,127 1,648 981 667 TOTAL USES 9,290 6,399 1,634 1,257 9,539 5,729 1,961 1,849 15,154 8,227 3,894 3,033 9,436 4,765 2,385 2,286 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Appendix Table I (continued) Page 5 1970 (1st quarter) 1970 (2nd quarter) 1970 (3rd quarter) 1970 (4th quarter) Multi- Multi- Multi- Multi- National Regional Local National Regional Local National Regional Local Nat ional Regional Local Total Banks Banks Banks Total Banks Banks Banks Total Banks Banks Banks Total Banks Banks Banks Sources of Funds External Sources 2,392 1,177 650 565 4,563 2,105 1,008 1,450 11,456 5,706 2,864 2,886 15,302 8,447 3,102 3,753 Total deposits 861 631 230 3,629 1,624 717 1,288 10,519 5,003 2,778 2,738 12,045 5,679 2,777 3,589 „ __ Demand deposits 135 52 83 45 45 1,011 295 403 313 4,016 1,868 827 1,321 Time & savings deposits 726 579 — 147 3,584 1,624 717 1,243 9,508 4,708 2,375 2,425 8,029 3,811 1,950 2,268 Large CDTs 579 579 -- --- 2,085 936 553 596 6,214 3,175 1,748 1,291 5,446 3,002 1,337 1,107 IPC 985 533 221 231 4,773 2,810 1,114 849 4,895 3,002 1,086 807 Other 579 579 -- 1,100 403 332 365 1,441 365 634 442 551 251 300 Other time & savings 147 — -- 147 1,499 688 164 647 3,294* 1,533 627 1,134 2,583 809 613 1,161 . -- Total borrowing 1,304 529 558 217 622 481 83 58 172 172 1,293 1,193 100 Federal Reserve Banks 56 37 19 — 14 10 4 -- 172 172 — -- -- — Qther borrowing 1,248 492 539 217 608 471 79 58 -- -- — 1,293 1,193 100 - Euro-dollars 129 - 50 79 — 105 — 105 6 -- 6 Commercial paper 70 17 42 11 1 1 647 531 86 30 1,958 1,575 225 158 Other liabilities 28 — 28 311 -- 208 103 13 -- -- 13 — -- Internal Sources 1,933 1,263 355 315 1,174 750 194 230 153 134 19 -- - -- « U.S. Treasury securities 710 267 188 255 160 53 107 -- Federal agency securities 55 8 -- 47 36 6 — 30 33 14 -- 19 State & local gov't, sec. 71 71 — 120 120 — -- Other securities Business loans 453 453 455 455 Real estate loans 484 371 113 — 131 — 131 — -- -- — — -- -- — Consumer loans 24 — 24 — 29 19 10 — — — -- — -- -- — Other loans 136 93 30 13 363 270 -- 93 -- -- — — — — Other Sources 1,070 1,070 -- 1,020 1,008 12 999 999 805 805 -- -- TOTAL SOURCES 5,395 3,510 1,005 880 6,757 3,863 1,214 1,680 12,608 6,839 2,864 2,905 16,107 9,252 3,102 3,753 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Appendix Table I (continued) Page 6 1970 (1st quarter) 1970 (2nd quarter) 1970 (3rd quarter) 1970 (4th quarter) Multi- Multi- Multi- Multi- National Regional Local National Regional Local National Regional Local National Regional Local Banks Banks Banks Total Banks Banks Banks Total Banks Banks Banks Total Banks Banks Banks Uses of Funds Internal Uses 1,648 692 703 253 945 636 309 153 153 Deposit withdrawals 1,648 692 703 253 945 636 309 - 153 153 „ Demand deposits 166 166 945 636 309 Time & savings deposits 1,482 692 537 253 -- -- — -- -- — -- -- 153 153 — -- Lar I g P e C CD's 9 81 5 2 3 3 3 2 2 0 0 3 3 0 8 7 0 2 1 5 8 3 5 -- — — 153 153 — Other 141 73 68 153 153 Other time & savings 529 372 157 External Uses 3,604 2,818 296 490 5,594 3,227 905 1,462 u, ,706 6,839 2,705 2,360 14,446 9,099 2,612 2,735 Repayment of. borrowing 9 86 — — 86 2 ,375 1,728 548 99 387 163 133 91 Federal Reserve Banks 9 86 -- 86 99 — 62 37 380 163 133 84 Other borrowing — -- 2 ,276 1,728 486 62 7 -- 7 Repayment of Euro-dollars 1,657 1,657 1,407 1,102 156 149 1, 646 1,373 273 1,887 1,660 227 „ „ Commercial paper run-off 43 43 20S 208 -- — 1,,4 19 1,310 109 3,548 3,207 294 47 Other liabilities 1,077 1,022 55 431 431 1,, 423 857 317 249 2,498 1,416 537 545 U.S. Treasury securities 27 — 27 — 11 -- 11 -- 113 5 43 65 Federal agency securities 22 — 22 1,932 1,338 232 362 669 — 223 446 2,568 962 702 904 State & local gov't, sec. 58 — 29 29 323 147 86 90 226 145 21 60 851 415 212 224 Other securities 270 71 113 86 Business loans 256 -- 77 179 796 -- 296 500 1,, 264 350 369 545 775 277 143 355 Real estate loans 46 — — 46 62 1 -- 61 307 5 41 261 421 105 126 190 Consumer loans 209 68 -- 141 214 -- -- 214 682 245 120 317 446 189 89 168 Other loans 65 -- 65 1., 684 826 475 383 952 700 106 146 Other Uses 143 — « 137 218 218 902 357 545 1,508 « 490 1,018 TOTAL USES 5,395 3,510 1,005 880 6,757 3,863 1,274 1,680 12,, 60 A 6,839 2,864 2,905 16,107 9,252 3,102 3,753 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Page 7 Appendix Table I (continued) 1971 (1st quarter) 1971 (2nd quarter) 1971 (3rd quarter) 1971 (4 th quarter) Multi- Multi- Multi- Multl- National Regional Local Nat Ional Regional Local Nat ional Regional Local Natlonal Regional Local Total Banks Banks Banka Total Banks Banks Banks Total Banks Banks Banks Total Banks Banks Banks Source* of Fundi External Source* 9,968 4,, 781 2,, 323 2,864 9,950 4,394 2,234 3,322 8,142 4,414 1,706 2,u22 9,927 4,841 2,206 2,880 Total depoaita 9,806 4,, 716 2,, 229 2,861 6,967 2,636 1,551 2,780 7,448 4,159 1,538 1,751 3,736 2,647 995 2,094 Demand depoaita 1,481 534 405 542 1,041 133 323 58S 3,759 1,969 856 934 1,629 746 157 726 Time & savings deposits 8,325 4,, 182 I,, 824 2,319 5,926 2,503 1,228 2,195 3,689 2,190 682 817 4,107 1,901 838 1,368 Large CD*a 2,733 1,8 23 464 446 1,255 1,029 — 226 3,188 2,190 682 316 2,644 1,480 571 593 IPC 2,119 1,7 15 246 158 286 286 — — 1,719 1,154 408 157 2,126 1,213 496 417 Other 614 108 218 288 969 743 -- 226 1,469 1,036 274 159 518 267 75 176 Other tine & savings 5,592 2,, 359 1., 360 1,873 4,671 1,474 1,228 1,969 501 — 501 1,463 421 267 775 Total borrowing 85 65 17 3 2,913 1,758 683 472 584 255 139 I9u 2,780 1,121 1,050 609 Federal Reserve Banka 85 65 17 3 30 -- -- 30 248 55 119 74 96 96 — — Other borrowing 2,883 1,758 683 442 336 200 20 116 2,684 1,025 1,050 609 Euro-dollars 672 637 24 11 Cowercial paper - Other liabilities 77 77 70 70 110 29 81 739 436 137 166 Internal Sources 782 596 119 67 1,914 1,241 455 218 1,548 1,124 259 16 22 22 U.S. Treasury aacurltlea 1,687 1,014 455 218 922 598 186 138 Federal agency securities . 2 2 27 27 18 — 18 — State & local gov't, sec. -- 237 237 -- -- Other securities 371 289 55 27 22 22 Business loans 321 321 200 200 Real estate loans 74 — 74 — Consumer loans 67 -- 67 Other loans 318 275 43 — Other Sources 1,770 1,, 770 - 3,446 3,446 TOTAL SOURCES 12,520 7,, 147 2,, 442 2,931 15,310 9,081 7,689 3,540 9,690 5,538 1,965 2,187 9,949 4,863 2,206 2,880 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Appendix Table II (continued) page 3 1971 (1st quarter) 1971 (2nd quarter) 1971 (3rd quarter) 1971 (4th quarter} Multi- Multi- Multi- Multl- Natlonal Regional Local National Regional Local National Regional Local National Regional Local Total Banks Banks Banks Total Banks Banks Banks Total Banks Banks Banks Total Banks Banks Banks Uses of Funds Internal Uses 1,, 004 613 391 362 'il9 43 Deposit withdrawal 1,, 004 - 613 391 362 319 :: Demand deposits Time & savings deposits __ 1,, 004 613 391 362 319 43 Large CD's -- i,, 004 — 613 391 -- — -- - IPC — — 902 — 511 391 -- — -- Other -- -- 102 — 102 -- -- -- Other tine 6 savings -- — 362 319 43 External Uses 11,944 7,147 2,043 2,754 14, 150 9,081 1,947 3,122 7,, 166 3,, 781 1,475 >910 7,209 3,796 1,324 2,089 Repayment of borrowing 206 165 27 14 46 3<* 7 - 145 87 58 Federal Rese.-ve Banks — -- — 46 39 7 - - 145 87 58 Other borrowing 206 165 27 14 -- Repayment of Euro-dollars 3,118 2,836 129 153 3 ,844 3,666 115 63 443 400 35 g Commercial paper run-off 1,470 1,096 303 71 367 243 81 43 138 126 1 11 130 114 14 2 Other liabilities 1,232 1,188 44 3,, 006 2,923 83 881 881 — :: ... U.S. Treasury securities 1,545 526 281 738 1,416 1,046 271 99 Federal agency securities 60 4 — 56 16 16 169 9 160 120 21 20 79 State & local gov't, sec. 2,812 1,063 809 940 2,, 513 522 787 1,204 703 -- 287 416 1,310 907 42 361 Other securities 919 198 351 370 701 393 48 260 - - -- 282 -- 145 137 __ Business loans 398 113 285 886 128 758 864 565 229 70 543 87 224 232 Real estate loans 90 21 69 655 233 107 315 1,,5 36 745 287 504 1,269 502 285 482 C O o t n h s e u r m e l r oa n l s oa ns 1 8 4 0 — 50 — 30 — 14 1,, 4 6 2 9 6 0 1,0 5 1 1 1 4 9 9 4 7 2 1 8 8 1 2 1;, 9 4 6 6 7 5 2 8 1 4 5 0 2 3 3 9 9 7 5 2 1 2 3 8 1, . 4 " 0 9 4 0 9 12 9 9 0 1 1 3 0 5 1 3 3 2 1 6 3 Other Uses 576 -- 399 177 156 129 27 2,, 162 I,,4 38 447 277 2,740 1,067 882 791 TOTAL USES 12,520 7,147 2,442 2,931 15,, 310 9,081 2,689 3,540 9,,6 90 5 ,538 1,965 ,187 9,949 4,863 2,206 2,880 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Appendix Table I (continued) Page 9 1972 (1st quarter) 1972 (2nd quarter) Multi- Multi- National Regional Local National Regional Local Total Banks Banks Banks Total Banks Banks Banks Sources of Funds External Sources 9,426 5,007 1,081 3,338 8,887 4,500 1,431 2,956 Total deposits 8,285 4,371 966 2,948 5,711 3,181 355 2,175 Demand deposits 2,933 2,224 68 641 1,229 773 35 421 Time & savings deposits 4,542 2,147 898 2,307 4,482 2,408 320 1,754 Large CD's 621 2 68 551 1,360 1,031 -- 329 IPC 184 — -- 184 956 928 -- 28 Other 437 2 68 367 404 103 — 301 Other time & savings 4,731 2,145 830 1,756 3,122 1,377 320 1,425 Total borrowing 930 614 112 204 2,694 1,199 911 584 Federal Reserve Banks -- « -- 204 110 41 53 Other borrowing 930 614 112 204 2,490 1,089 870 531 Euro-dollars 15 — « 15 120 120 « — ... Commercial paper 193 22 171 9 9 Other liabilities 3 — 3 — 353 —- 165 188 Internal Sources 1,455 1,043 412 -- 772 588 81 103 U.S. Treasury securities -- -- -- -- 741 557 81 103 Federal agency securities 9 9 -- — 31 31 — State & local gov't, sec. — — — — -- -- -- — Other securities 183 183 -- -- -— -— —- - - Business loans 1,258 851 407 -- -- — -- — Real estate loans — — -- -- -- -- -- -- Consumer loans 5 -- 5 -- -- -- -- -- Other loans -- -- -- — — —— —— — — -— Other Sources — — -- -- 478 -- 352 126 TOTAL SOURCES 10,881 6,050 1,493 3,338 10,137 5,088 1,864 3,185 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Appendix Table I (continued) Page 10 1972 (1st quarter) 1972 (2nd quarter) Multi- Multi- National Regional Local National Regional Local Total Batiks Banks Banks Total Banks Banks Banks Uses of Funds Internal Uses 886 743 143 166 166 Deposit withdrawal 886 743 143 166 166 Demand deposits Time & savings deposits 886 743 143 166 166 Large CD's 886 743 143 166 166 IPC 886 743 143 101 101 Other 65 65 Other time & savings External Uses 8,148 4,507 903 2,738 8,847 3,964 1,698 3,185 Repayment of borrowing 391 250 72 69 Federal Reserve Banks 391 250 72 69 Other borrowing Repayment of Euro-dollars 1,102 1,055 47 21 16 Commercial paper run-off 22 22 — 180 160 20 Other liabilities 890 844 -- 46 22 22 — — U.S. Treasury securities 894 492 27 375 -- -- Federal agency securities 114 28 86 60 -- 13 47 State & local gov't, sec. 872 148 39 685 970 414 114 442 Other securities 377 — 128 249 212 45 51 116 Business loans 206 206 1,950 458 372 1,120 Real estate loans 1,100 309 275 516 1,667 578 472 617 Consumer loans 361 151 -- 210 761 174 154 433 Other loans 1,819 1,258 265 296 3,004 2,113 497 394 Other Uses 1,847 800 4 47 600 1,124 1,124 -- « TOTAL USES 10,881 6,050 1,493 3,338 10,137 5,088 1,864 3,185 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Appendix Table II. Sources and Uses of Funds, By Class of Bank, By Half Years, 1968-1972 (Millions of Dollars) First Half, 1968 Second Half, 1968 Multi- Multi- National Regional Local National Regional Local Total Banks Banks Banks Total Banks Banks Banks Sources of Funds External Sources 9,917 5,857 1,684 2,376 25,217 11,177 7,669 6,371 Total deposits 2,200 633 1,567 22,187 9,572 6,717 5,898 Demand deposits 14,305 5,917 4,578 3,810 Time and savings deposits 2,200 633 1,567 7,882 3,655 2,139 2,088 Capital Accounts 798 386 156 256 654 276 170 208 Federal funds purchased 1,367 424 594 349 1,031 442 513 76 Borrowings 709 483 120 106 6 6 -- -- Euro-dollars 1,961 1,931 30 - 61 -- 61 -- Other liabilities 2,882 2,633 151 98 1,278 881 208 189 Internal Sources 5,822 2,480 1,751 1,591 847 725 80 42 U.S. Treasury securities 2,835 1,316 898 621 Federal agency securities 149 75 33 41 12 12 — — State & local gov't, securities -- -- — Other securities — — -- — -- Consumer loans -- Real estate loans (1-4 family) — Loans to purchase or carry securities 47 4 43 47 47 Loans to farmers -- — 89 57 30 2 Real estate loans - farmland — -- 56 13 3 40 Business loans Real estate loans - nonfarm, nonres. Real estate loans - multi-family NA NA NA NA NA NA NA Loans to fin. inst. and brokers & dealers 1,309 753 316 240 Reserves with Federal Reserve Banks 189 189 541 541 Balances with banks in United States 706 62 190 454 102 102 Foreign bank balances 51 35 14 2 -- — Currency and coin 414 190 107 117 Other loans 49 49 -- -- — - -- -- Federal funds sold 73 - -- 73 -- - -- — Other assets — — -- -- -- -- Other Sources 71 — 23 48 2,558 2,558 -- — TOTAL SOURCES 15,810 8,337 3,458 4,015 28,622 14,460 7,749 6,413 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Appendix Table II (continued) page 2 First Half, 1968 Second Half, 1968 Multi- Multi- national Regional Local National Regional Local Total Banks Banks Banks Total Banks Banks Banks Uses o£ Funds Internal Uses 6,134 3,181 1,735 1,218 -- -- -- „ Deposit withdrawals 6,124 3,181 1,735 1,218 Demand deposits 5,178 2,225 1,735 1,218 -- — -- -- Time and savings deposits 956 956 -- -- -- -- -- — Capital Accounts — -- — — -- -- -- -- External Uses 7,677 3,157 1,723 2,797 28,120 14,460 7,423 6,237 Repayment of borrowings « — -- -- 67 — 64 3 Repayment of Euro-dol?.ars « — — — 224 224 -- -- Repayment of Federal funds purchased — — -- — -- — -- -- Other liabilities — -- — -- -- -- - — Household Sector 1,647 308 573 766 2,621 889 763 969 Consumer loans 942 162 283 497 1,296 308 412 576 Real estate loans (1-4 family) 678 119 290 269 1,085 428 351 306 Loans to purchase or carry sec* 27 27 -- -- 240 153 — 87 Business Sector 3,589 2,022 671 896 12,455 7,391 3,114 1,950 „ Farm 205 102 50 53 Loans to farmers 139 92 38 9 -- Real estate loans - farmland 6& 10 12 44 — -- — -- Nonfarm 3,000 1,546 611 843 8,852 4,651 2,490 1,711 Business loans 2,442 1,330 498 614 5,012 2,643 1,516 853 Real estate loans - nonfarm, nonres. 558 216 113 229 725 186^ 183 356 Real estate loans, multi-family NA NA NA NA NA NA NNAA NNAA Loans to fin. inst. & brokers & dealers — -- -- -- 3,115 1,822 791 502 Banks Federal funds sold 384 374 10 3,603 2,740 624 239 Government Sector 1,030 292 170 568 7,719 3,889 2,099 1,731 Federal Government — — 3,664 1,721 1,138 805 U.S. Treasury securities — — -- — 3,571 1,721 1,093 757 Federal agency securities -- -- -- -- 93 — 45 48 State and local government State and local govJt. sec. 1,030 292 170 56fr 4,055 2,168 961 926 Other Earnings Assets 328 77 178 73 917 645 179 93 Other loans 229 — 170 59 762 542 135 85 Other securities 99 77 8 14 155 103 44 8 Cash and Due from Banks 638 365 273 2,675 363 974 1,338 Reserves with Federal Reserve Banks 638 365 — 273 397 181 216 Balances with banks in United States — — — 1,202 515 687 Foreign bank balances -- — — -- 37 21 13 3 Currency and coin — — -- -- 1,039 342 265 432 Other Assets 445 93 131 221 1,442 1,059 230 153 Other Uses 1,999 1,999 — — 502 -- 326 176 TOTAL USES 15,810 8,337 3,458 4,015 28,622 14,460 7,749 6,413 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Appendix Table II (continued) page 3 First Half, 1969 Second Half, 1969 Multi- Multi- Nat ional Regional Local Nat ional Regional Local Total Banks Banks Banks Total Banks Banks Banks Sources of Funds External Sources 23;346 18,141 2,947 2,258 14,196 8,564 4,773 1,059 Total deposits 138 — 138 9,252 6,273 2,979 — Demand deposits 9,252 6,272 2,979 Time and savings deposits 138 13& Capital Accounts 888 297 284 307 570 133 119 318 Federal funds purchased 3,175 1,025 1,275 875 3,355 2,021 910 424 Borrowings 1*707 651 567 489 420 137 283 « Euro-dollars 7,738 7,506 211 21 593 -- 321 272 Other liabilities 9,700 8,662 610 428 206 — 161 45 Internal Sources 1Z,004 6,009 4,450 1,545 2,062 1,762 109 191 U.S. Treasury securities 4,461 2,559 1,902 -- - — Federal agency securities 153 5T 62 40 State and local gov't, securities 1,464 1,271 193 1,022 964 58 Other securities 419 365 35 19 82 82 ;; Consumer loans 15 15 Real estate loans (1-4 family) 1,314 662 438 214 13 13 Loans Co purchase of carry securities 4 4 228 194 34 Loans to farmers 131 68 19 44 Real estate loans - farmland « « -- — 59 25 11 23 Business loans Real estate loans - nonfarm, nonres. - 76 76 Real estate loans - malti-family 74 55 19 Loans to fin. inst. and dealers and brokers 642 308 334 Reserves with Federal Reserve Banks 1,632 922 527 183 Balances with banks in United States 826 441 385 — Foreign bank balances 20 20 10 10 Currency and coin 508 155 154 199 ... Other loans — — — — 6 3 3 Federal funds sold 561 -- 390 171 148 148 -- Other assets -- — — — 198 198 -- — Other Sources 4,973 -- 1,062 3,911 10,050 1,773 731 7,546 TOTAL SOURCES 40,323 24,150 8,459 7,714 26,508 12,099 5,613 8,796 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Appendix Table II (continued) page 4 First Half , 1969 Second Half, 1969 Multi- Multi- national Regional Local national Regional Local Total Banks Banks Banks. Total Banks Banks Banks Uses of Funds Internal Uses 18,563 11,045 4,897 2,621 8,809 2,962 2,069 3,778 Deposit withdrawals 18,563 11,045 4,897 2,621 8,809 2,962 2,069 3,778 Demand deposits 10,118 4,332 3,165 2,621 2,621 -- -- 2,621 Time and savings deposits 8,445 6,713 1,732 — 6,188 2,962 2,069 1,157 Capital Accounts -- — — — — — -- External Uses 16,677 8,022 3,562 5,093 17,699 9,137 3,544 5,018 Repayment of borrowings - — — -- 284 — -- 284 Repayment of Euro-dollars « -- — 1,385 1,385 — — Repayment of Federal funds purchased -- -- — — -- -- « — Other liabilities — — — — 2,563 2,563 -- — Household Sector 1,227 345 356 526 1,240 356 884 Consumer loans 1,104 345 264 495 920 — 251 669 Real estate loans (1-4 family) -- — -- -- 296 — 81 215 Loans to purchase or carry sec. 123 — 92 31 24 -- 24 — Business Sector 7,628 3,933 1,924 1,771 6,861 3,003 1,316 2,542 Farm 265 99 149 17 Loans to farmers 168 95 59 14 -- -- — Real estate loans - farmland 97 4 90 3 — — — -- Nonfarm 7,063 3,534 1,775 1,754 4,990 3,003 772 1,215 Business loans 4,436 2,185 1,162 1,089 3,022 2,013 343 666 Real estate loans- nonfarm, nonres. 567 323 172 72 313 82 — 231 Real estate loans, multi-family 1,982 948 441 593 245 — 245 -- Loans to fin. inst. & brokers 6. dealers 78 78 — -- 1,410 908 184 318 Banks Federal funds sold 300 300 -- -- 1,871 -- 544 1,327 Governnent Sector 2,136 — — 2,136 1,522 825 567 130 Federal Government 1,763 1,763 1,124 825 169 130 U.S. Treasury securities 1,763 — -- 1,763 941 768 143 30 Federal agency securities — -- -- -- 183 57 26 100 State and local government State and local gov't, securities 373 -- -- 373 398 — 398 — Other Earning Assets 241 138 46 57 331 305 26 Other loans 241 138 46 57 305 305 — -- Other securities -- — -- — 26 -- -- 26 Cash and Due from Banks 342 327 1 14 2,973 1,056 1,053 864 Reserves with Federal Reserve Banks -- — — — 1,453 698 489 266 Balances with banks in United States 327 327 -- 883 164 374 345 Foreign bank balances 15 — 1 14 47 8 39 Currency and coin — — — -- 590 186 151 253 Other Assets 5,103 3,279 1,235 589 540 — 252 288 Other Uses 5,083 5,083 -- -- — — — — TOTAL USES 40,323 24,150 8,459 7,714 26,508 12,099 5,613 8,796 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis page 5 Appendix Table II (continued) page 3 First Half, 1970 Second Half, 1970 Multi- Multi- National Regional Local National Regional Local Total Banks Banks Banks Total Banks Banks Banks Sources of Funds External Sources 8,507 2,271 1,378 4,858 32,705 15,138 8,039 9,528 Total deposits 6,743 2,075 920 3,748 29,935 13,664 7,372 8,899 Demand deposits 1,883 1,883 10,613 3,835 2,869 3,909 Time and savings- deposits 4,860 2,075 920 1,865 19,322 9,829 4,503 4,990 Capital Accounts 728 196 234 298 680 163 187 330 Federal funds purchased 788 — 173 615 1,625 1,311 314 — Borrowings 66 -- — 66 166 — 166 — Euro-dollars 51 -- 51 -- 133 — — 133 Other liabilities 131 — -- 131 166 — — 166 Internal Sources 7,681 4,905 1,530 1,246 583 162 182 239 U.S. Treasury securities 1,590 711 419 460. Federal agency securities « -- — — State and local gov't, securities -- — Other securities — — — — — — Consumer loans 87 87 Real estate loans (1-4 family) 106 106 186 12 174 Loans to purchase or carry securities 304 161 57 86 29 29 Loans to farmers — 125 88 31 Real estate loans - farmland 69 23 46 32 3 49 -- Business loans ly964 1,964 Real estate loans - nonfarm, nonres. 126 68 58 Real estate loans - multi-family 56 14 42 83 2 19 62 Loans to fin. inst. and dealers and brokers 2,138 1,453 306 379 Reserves with Federal Reserve Banks 133 133 Balances with banks ln United States 581 50 276 255 < „ Foreign bank balances 6 6 51 40 11 Currency and coin 156 131 25 47 43 3 Other loans 365 330 — 35 11 -- 11 Federal funds sold -- — « -- — — Other assets — — -- — — — Other Sources 1,262 1,121 141 — 7,249 6,449 800 — TOTAL SOURCES 17,450 8", 297 3,049 6,104 40,537 21,749 9,021 9,767 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis page 6 Appendix Table II (continued) First Half, 1970 Second Half, 1970 Multi- Multi- Nat ional Regional Local National Regional Local Total Banks Banks Banks Total Banks Banks Banks Uses of Funds Internal Uses 5,071 3,204 1,867 - — -- - Deposit withdrawals 5,071 3,204 1,867 -- -- — — Demand deposits 5,071 3,204 1,867 - — -- — Time and savings deposits- -- — — -- -- Capital Accounts — -- — - -- - -- — External Uses 8,646 5,093 1,182 2,, 371 40,406 21,749 9,021 9,636 Repayment of borrowings 886 654 232 - 241 232 -- 9 Repayment of Euro-dollars 636 631 -- 5 4,589 4,257 332 — Repayment of Federal funds purchased 171 171 - 212 -- — 212 Other liabilities 1,105 992 113 - 4,731 4,493 238 -- Household Sector 480 158 322 1,617 537 451 629 Consumer loans 400 111 — 289 1,093 402 313 378 Real estate loans (1-4 family) 80 47 -- 33 309 135 -- 174 Loans to purchase or carry securities -- — -- 215 -- 138 77 Business Sector 1,769 83 268 ,418 9,392 3,109 3,083 3,200 Farm 143 72 31 40 256 256 Loans to farmers 128 72 31 25 15 -- -- 15 Real estate loans - farmland 15 — -- 15 241 — -- 241 Nonfarm 943 160 783 6,038 2,636 1,627 1,775 Business loans 798 — 160 638 2,271 700 528 1,043 Real estate loans - nonfarm, nonres 46 -- — 46 400 __ 2 2 132 246 Real estate loans, multi-family 99 -- — 99 — -- Loans to fin. inst. & brokers & dealers -- -- -- — 3,367 1,914 967 486 Banks Federal funds sold 683 11 77 595 3,098 473 1,456 1,169 Government Sector 2,281 >4 374 490 12,632 5,419 3,298 3,915 Federal Government 272 170 47 55 8,156 4,128 1,875 2,153 U.S. Treasury securities — — — -- 6,382 3,442 1,362 1,578 Federal agency securities 272 170 47 55 1 ,774 686 513 575 State and local Government State and local gov't, securities 2,009 1,247 327 435 4,476 1,291 1,423 1,762 Other Earning Assets 152 68 46 38 626 416 62 148 Other loans 24 -- 24 344 260 84 Other securities 128 68 22 38 282 156 62 64 Cash and Due from Banks 288 236 25 27 3,488 1,427 986 1,075 Reserves with Federal Reserve Banks 220 193 — 27 1,330 182 688 460 Balances with banks in United States -- — -- — 2,029 1,159 298 572 Foreign bank balances 44 43 1 -- 43 — 43 Currency and coin 24 -- 24 -- 86 86 -- -- Other Assets 878 683 124 71 2,878 1,859 571 448 Other Uses 3,733 — — 3 ,733 131 — — 131 TOTAL USES 17,450 8,297 3,049 6 ,104 40,537 21,749 9,021 9,767 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Appendix Table II (continued) page 3 First Half, 1971 First Half, 1971 Multi- Multi- National Regional Local National Regional Local Total Banks Banks Banks Total Banks Banks Banks Sources of Funds External Sources 15,511 8,001 3,108 4,402 23,404 9,098 6,632 7,674 Total deposits 10,850 5,669 1,785 3,396 18,728 6,808 5,477 6,443 Demand deposits 9,781 3,288 3,194 3,299 Time and savings deposits 10,850 5,669 1,785 3,396 8,947 3,520 2,283 3,144 Capital Accounts 1,156 613 294 249 936 493 145 298 Federal funds purchased 3,228 1,609 1,029 590 3,681 1,797 1,010 874 Borrowings 158 110 -- 48 -- - — -- Euro-dollars 119 -- -- 119 8 — — 8 Other liabilities — -- -- -- 51 -- — 51 Internal Sources 4,286 1,868 1,289 1,129 147 123 22 2 U.S. Treasury securities 739 507 232 -- -- Federal agency securities -- 85 85 State and local gov't, securities -- -- Other securities 2 2 « -- — -- Consumer loans **** Real estate loans (1-4 family) -- Loans to purchase or carry securities 38 38 Loans to farmers 10 -- 10 Real estate loans - farmland 258 2 — 256 12 12 - Business loans 927 801 126 Real estate loans - nonfarm, nonres. -- — — -- -- Real estate loans - multi-family Loans to fin. inst. and dealers and brokers 99 99 Reserves with Federal Reserve Banks 400 250 150 Balances with banks in United States 421 421 Foreign bank balances -- Currency and coin 40 38 2 Other loans 104 55 17 32 -- « « — Federal funds sold 290 -- 290 — -- — — -- Other Assets 1,008 1,008 — -- -- -- — -- Other Sources 7,207 6,351 116 740 1,168 736 432 — TOTAL SOURCES 27,004 16,220 4,513 6,271 24,719 9,957 7,086 7,676 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis page 8 Appendix Table II (continued) First Half, 1971 Second Half, 1971 Multi- Multi- National Regional Local National Regional Local Total Banks Banks Banks Total Banks Banks Banks Uses of Funds Internal Uses 3,270 805 1,256 1,209 -- -- -- - Deposit withdrawals 3,270 805 1,256 1,209 Demand deposits 3,270 805 1,256 1,209 — — -- -- Time and savings deposits — — — — — -- — -- Capital Accounts — -- -- — — — — External Uses 24,734 15,415 3,257 5,062 24,512 9,957 7,086 7,469 Repayment of borrowings 675 — 675 — 351 219 9 123 Repayment of Euro-dollars 6,066 5,810 256 — 591 563 28 -- Repayment of Fedreal funds purchased — -- -- « -- — -- -- Other liabilities 4,969 4,830 61 78 579 528 51 - Household Sector 1,397 516 200 681 3,278 1,164 730 1,384 Consumer loans 585 123 98 364 1,479 461 326 692 Real estate loans (1-4 family) 773 377 79 317 1,721 686 402 633 Loans to purchase or carry securities 39 16 23 — 78 17 2 59 Business Sector 2,860 1,106 259 1,495 8,312 3,015 3,197 2,100 Farm 267 139 43 85 95 8 87 Loans to farmers 267 139 43 85 71 3 68 Real estate loans - farmland -- -- — — 24 5 — 19 Nonfarm 1,933 798 216 919 5,542 2,234 1,963 1,345 Business loans 525 — — 525 1,777 142 1,001 634 Real estate loans - nonfarm, nonres . 451 76 159 216 698 214 209 275 Real estate loans, mutli-family 293 175 57 61 113344 2266 88 110000 Loans to fin. inst. & brokers & dealers 664 547 -- 117 2,933 1,852 745 336 Banks Federal funds sold 660 169 — 491 2,675 773 1,234 668 Government Sector 5,562 1,810 1,367 2,385 5,219 2,027 1,131 2,061 Federal Government 1,619 987 42 590 2,959 1,149 901 909 U.S. Treasury securities 899 899 -- — 2,458 1,149 694 615 Federal agency securities 720 88 42 590 501 207 294 State and local Government State and local gov't. securities 3,943 823 1,325 1,795 2,260 878 230 1,152 Other Earning Assets 187 72 115 621 347 139 135 Other loans — — « 410 271 84 55 Other securities 187 — 72 115 211 76 55 80 Cash and Due from Banks 1,833 1,343 365 125 3,852 1,348 1,140 1,364 Reserves with Federal Reserve Banks 973 973 — 2,723 887 931 905 Balances with banks in United States 636 318 318 1,030 431 171 428 Foreign bank balances 50 11 12 27 87 3300 26 3311 Currency and coin 174 41 35 98 12 12 Other Assets 185 -- 2 183 1,709 746 661 302 Other Uses — — -- — 207 — « 207 TOTAL USES 27,004 16,220 4,513 6,271 24,719 9,957 7,086 7,676 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Appendix Table II (continued) page 9 First Half, 1972 Multi- national Regional Local Total Banks Banks Banks Sources of Funds External Sources 16,896 8,422 4,499 3,975 Total deposits 8,099 4,100 1,152 2,847 Demand deposits Time and savings deposits 8,099 4,100 1,152 2,847 Capital Accounts 1,355 742 347 266 Federal Funds purchased 5,169 2,214 2,275 680 Borrowings 641 312 312 17 Euro-dollara 566 536 16 14 Other liabilities 1,066 518 397 151 Internal Sources 5,937 3,160 1,845 932 U.S. Treasury securities 2,155 1,192 963 — Federal agency securities 237 237 State & local gov't, securities —— Other securities Consumer loans Real estate loans (1-4 family) Loans to purchase or carry securities Loans to farmers Real estate loans - farmland 1 1 Business loans 52 52 Real estate loans - nonfarm, nonres. Real estate loans - multi-family Loans to fin. inst. and brokers and dealers 55 55 Reserves with Federal Reserve Banks 511 177 98 236 Balances with banks in United States 216 216 Foreign bank balances 12 12 Currency and coin 526 183 124 219 Other loans Federal funds sold 454 260 194 Other Assets 1,718 1,318 400 Other Sources 1,253 1,253 TOTAL SOURCES 24,086 11,582 6,344 6,160 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Appendix Table 11 (continued) page 10 First Half, 1972 Multi- Nat ional Regional Local Total Banks •Banks Banks Uses of Funds Internal Uses 5,611 1,356 2,362 1,893 Deposit withdrawals 5, 611 1,356 2,362 1>89T Demand deposits 5,611 1,356 2,362 1,893 Time and savings deposits -- — -- -- Capital Accounts -- — — External Uses 15,460 8,117 3,076 4,267 Repayment of borrowings — — — -- Repayment of Euro-dollars — -- -- — Repayment of Federal funds purchased — -- -- — Other liabilities — — -- Household Sector 3,166 929 844 1,393 Consumer loans 1,253 278 290 685 Real estate loans (1-4 family) 1,694 568 477 649 Loans to purchase or carry securities 219 83 77 59 Business Sector 7,711 4,723 1,612 1,376 Farm 296 121 70 105 Loans to farmers 257 121 54 82 Real estate loans - farmland 39 — 16 23 Nonfarm 6,225 3,412 1,542 1,271 Business loans • 1,402 — 623 779 Real estate loans nonfarm, nonres . 1,053 518 159 376; Real estate loansx multi-family 567 137 314 '116' Loans to fin. inst. & brokers & dealers 3,203 2,257 446 Banks Federal funds sold 1,190 1,190 -- -- Government Sector 1,843 390. 244 1,209 Federal Government 1,126 — 131 995 U.S. Treasury securities 771 -- — 771 Federal agency securities 355 131 224 State and local Government State and local Government 717 390 113 214 Other Earnings Assets 920 398 322 200 Other loans 511 272 169 70 Other securities 409 126 153 130 _ „ Cash and Due from Banks 1,731 1,677 54 Reserves with Federal Reserve Banks — — — Balances with banks in United States 1,590 1,581 9 Foreign bank balances 141 96 45 Currency and coin — -- — — Other Assets 89 — — 89 Other Uses 3,015 2,109 906 -- TOTAL USES 24,086 11,582 6,344 6,160 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Andrew F. Brimmer (1972, December 27). Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/speech_19721228_brimmer

@misc{wtfs_speech_19721228_brimmer,
  author = {Andrew F. Brimmer},
  title = {Speech},
  year = {1972},
  month = {Dec},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/speech_19721228_brimmer},
  note = {Retrieved via When the Fed Speaks corpus}
}