A STUDY OF THE BORROWING PATTERNS OF EIGHTEEN CLEVELAND-TERRITORY, FOURTH FEDERAL RESERVE DISTRICT MEMBER BANKS OVER THE PERIOD, 1961-1965*

Abstract

Tiis DISSVRTATION INVOLVES a study of daily borrowing and reserve adjustments of 18 member banks in the Cleveland Federal Reserve District during the period, 1961 to 1965. Individual-bank data are studied as well as cross-sectional data for the 18 banks. A linear equation is estimated for the cross-sectional data using the following independent variables: deposit variability, reserve position, bank size (as a proxy for transaction costs), and various liquidity measures. A linear time-series equation is estimated also for each bank using deposits, interest rates, lagged borrowing, lagged reserve-position measures, and seasonal dummy variables as independent variables. A descriptive comparative-ratio analysis of each bank's reserve-adjustment behavior is also made. The study follows in the tradition of those of Goldfeld, De Leeuw, Goldfeld and Kane, Bryan and Carleton, and others who have attempted to estimate aggregate member-bank borrowing and reserve-adjustment behavior. The speed with which banks adjust reserves is studied with comparisons made between large and small banks. Except for a recent study by Bryan and Carleton, little has been published regarding daily reserve adjustments by individual banks. Knowledge about this behavior is important for a better understanding of the effectiveness of monetary policy. The cross-section results indicate that deposit variability is the most significant explanatory factor of borrowing for the 18 banks. The importance of this result lies in the fact that deposit variability is computed to measure unpredictable deposit flows around a given seasonal pattern of variability. This unpredictability of deposits is important for bank asset -managers. Moreover, in other studies of variability done primarily by individual Federal Reserve Banks, the regular calendar-related variability in deposits is not considered. In this study, the latter measure of variability proved highly insignificant in explaining borrowing. Other results of the study indicate that deposit variability itself is subject to influences such as deposit composition and bank size. Variability tends to decline with the percentage of time deposits, and large banks show less overall variability than small banks, because offsetting deposit flows characterize large banks. Bank size served as a proxy for transaction costs in the study and large banks were found to borrow less relative to deposits than small banks because borrowing from the Fed is typically more expensive for large banks than either selling securities or buying federal funds. Small banks appear to borrow more, since borrowing at the Fed is relatively less expensive than other sources of reserves. Results with individual-bank estimates indicate that large banks adjust reserves more rapidly than small banks and that interest rates are more significant for large banks in the adjustment process. Lagged reserves are significantly and inversely related to borrowing for each bank studied. Seasonal borrowing and reserve-adjust-