Commercial Bank Deposits Research Articles

THE EFFECT OF DEPOSIT RATE CEILINGS ON AGGREGATE INCOME

CEILINGS on commercial bank deposits were first imposed in the thirties. Their announced purpose was to help assure the viability of the banking system by reducing competition. It was argued that banks would be less likely to reach for risky loans if they did not face competitive pressure from the cost of their deposits. More recently this argument has been in disfavor. Instead, deposit ceilings seem sometimes to be considered as a tool of monetary policy. However, little agreement seems to exist as to their effect at the aggregate level. Current theory leaves as an empirical question whether raising ceilings when they are effective is expansionary or contractionary. No convincing empirical evidence exists as to which is the case. The theory of the effect of deposit ceilings on GNP is based on the work of James Tobin and William Brainard [8]. They pointed out that the effect of an increase in deposit ceilings is ambiguous as a proposition in comparative statics. Other things equal, a rise in time deposit rates may either increase or decrease the demand for outside money (i.e., currency plus reserves). The demand for currency and demand deposits will fall while the demand for time deposits will increase. The net effect depends on the magnitude of these elasticities as well as the magnitude of the reserve requirements on demand and time deposits. If a rise in time deposit rates produces a net increase in the demand for outside money, the effect of a rise in time deposit ceilings is contractionary. The rate of interest on market securities must rise in order to reduce the demand for outside money and reestablish equilibrium. Conversely, if a rise in time deposit rates produces a net decrease in the demand for outside money, the effect of an increase in time deposit ceilings is expansionary. Tobin and Brainard made no effort to determine which of these cases held for the U.S. economy. In fact, their model was poorly specified for empirical implementation. For instance, it did not contain a product market sector. Recently several papers in a volume edited by Karl Brunner have extended the Tobin-Brainard results: Gramley and Chase [6], Brunner [3], and Hendershott [7]. In particular Brunner and Hendershott add a product market sector to the Tobin-Brainard model. They also attempt to determine whether raising deposit ceilings is expansionary or contractionary using elasticity estimates from various empirical studies of the demand for financial assets. Unfortunately, these estimates do not allow this question to be resolved.

Demand for Financial Assets in the Farm Sector: A Portfolio Balance Approach

AbstractThe demand for financial assets in portfolios of farm business‐household units is viewed as a problem of maximization of utility derived from pecuniary and nonpecuniary services provided by portfolio components and unused credit reserves. The statistical model provides simultaneous equations estimates of structural demand equations for commercial bank deposits. Yields on equities, marketable government bonds, and time and savings deposits as well as the service charge rate on demand deposits are shown to be important determinants of demand. The speed of adjustment of actual stocks to desired levels was estimated and comparisons were made with published estimates for other sectors.

Money, Quasi-Money, and Income Velocity of Circulation in Malaya and Singapore, 1947-1965

Previous articleNext article No AccessMoney, Quasi-Money, and Income Velocity of Circulation in Malaya and Singapore, 1947-1965S. Y. LeeS. Y. Lee Search for more articles by this author PDFPDF PLUS Add to favoritesDownload CitationTrack CitationsPermissionsReprints Share onFacebookTwitterLinkedInRedditEmail SectionsMoreDetailsFiguresReferencesCited by Economic Development and Cultural Change Volume 19, Number 2Jan., 1971 Article DOIhttps://doi.org/10.1086/450485 Views: 3Total views on this site Copyright 1971 The University of ChicagoPDF download Crossref reports no articles citing this article.

Expenditures and the Composition of the Money Supply

Empirical studies of the relationship between money and expenditures frequently seek to explain movements in aggregate expenditures by movements in some appropriate money total. For example, in the most notable recent such study, Friedman and Meiselman 1 conclude that the appropriate money total is currency plus all commercial bank deposits. Past and current changes in this variable better explain expenditure changes than do changes in each of two alternative money totals.2 The assumption implicit in such tests of the money-expenditures relationship is that the behavior of the components of any money total does not matter. Specifically, Friedman and Meiselman estimate:

Savings Deposits in the Definition of Money

Empirical economic analysis requires precise definitions of the variables under study. This has been clearly brought out in the recent discussions regarding the relative abilities of autonomous expenditures and money in predicting income or consumption (see Friedman and Meiselman 1963, 1965; Hester 1964; Ando and Modigliani 1965; and DePrano and Mayer 1965). One of the by-products of the discussion was that the definitions of the variables used are important, and to a certain extent the results may be biased in favor of or against a particular theory by the manner in which the relevant variables are defined. In these studies, a great deal of attention was focused on the concepts of autonomous and induced expenditures, and relatively little was done (except by Friedman and Meiselman 1963) to solve the long-standing problem of the definition of money. It is, therefore, not surprising that in empirical research economists use a narrow (currency outside banks, plus demand deposits adjusted) as well as a broad (currency outside banks, plus all commercial bank deposits) definition of money. In recent years, arguments have been put forward by Gurley and Shaw (1956, 1960), and others inspired by their work, to further broaden the definition of money by including in it liabilities of nonbank financial intermediaries. Gurley and Shaw maintain that the liabilities of the nonbank financial intermediaries are close substitutes for money, and that the rapid growth of these liabilities in recent decades has had the effect of reducing the demand for money. On the other hand, Professor Friedman (1959) and his associates (Friedman and Meiselman 1963; and Friedman and Schwartz 1963) prefer the broad definition of money, and, on the basis of historical evidence, show that only commercial

A Note on the Liquidity and Stabilization Effects of Savings Deposits

Money, conventionally defined as demand deposits and currency held by the nonbank public, has two principal functions. It serves as a medium of exchange and as an asset conferring perfect liquidity on the holder. Savings deposits in commercial banks, savings and loan associations, mutual savings banks, credit unions, and the postal savings system are almost like money. For all practical purposes, they are perfectly liquid assets, or at least considered as such by depositors, and therefore substitutable for asset money. Because interest is paid on savings deposits, and not on demand deposits (except for an implicit return received through checking services provided below cost), it can be reasonably argued that the long-term asset demand for money (money that people expect to hold over six months) is considerably less than it would be in the absence of savings deposits. This does not mean, however, that the sum of currency, demand deposits, and savings deposits measures what the demand for money would be if savings deposits did not exist. Some savings deposits are certainly held in lieu of nonmonetary assets.

Parameters and Relations of Stochastically Lagged and Disaggregative Time Series

A model is constructed for three related time series: an inflow, a stock, and an outflow. The inflow and outflow time series are related via a truly stochastic distributed lag and the three time series are viewed as cumulations of a random number of units of randomly determined size. Among the interesting results are the serial correlations of the stock and outflow time series viewed singly and the cross and cross serial correlations between outflow in t and stock at t -1, outflow in t, and inflow in t - i, as well as between stock in t and inflow in t - i. These relations and others make it possible to evaluate the comparative advantage of lead series in forecasting lag series and as such may be of methodological value for the evaluation of stabilization policies. The model may be viewed as a description of several inflow-stock-outflow phenomena: trade credit and consumer credit processes, demand deposits of commercial banks, population and labor force, the formation and decay of aggregates of capital projects, and some aspects of the income-expenditure process. THIS PAPER develops a model of a stochastic process that gives rise to three time series: an inflow, a stock, and an outflow. These series come into being as sums of subcomponents of differing magnitudes, where the number of subcomponents in the sums differs both between series cross sectionally, and within series over time. The inflow time series is simply the sum of units of unequal size which come into being in period t. The stock time series is the sum of units of unequal size which have come into being in periods preceding t and have not yet vanished in t. The outflow series is the sum of the unequal magnitudes of all those units which came into being in periods preceding t and which cease to exist in t. Additionally, the period between the time a unit comes into being and the time it vanishes is a random variable. Time series that are formed in such a fashion are encountered in both microeconomic and macroeconomic phenomena. Credit sales, receivables and collections of a firm, as well as new loans made, loans outstanding, and loans repaid of a commercial bank, provide microeconomic examples. Income, cash balances 1

Interest-Rate Regulation on Commercial-Bank Deposits: Its Evolution and Impact in the State of Indiana

Interest-Rate Regulation on Commercial-Bank Deposits: Its Evolution and Impact in the State of Indiana

THE EFFECT OF A CHANGE IN THE CEILING RATE ON DEPOSITS AT COMMERCIAL BANKS*

IN 1961 THE Federal Reserve Board authorized a change in the maximum rates commercial banks could pay on time deposits. This change in the ceiling rates was shortly followed by a substantial increase in commercial-bank time deposits. The purpose of this study was to examine the impact of this change in the ceiling rate and to evaluate the use of changes in Regulation Q as a policy instrument. Any policy move of this type is considered expansionary, in the context of the study, if it lowers the rate of return on the ownership of real capital that the economy requires to induce it to hold the given capital stock. Individual bank behavior concerning deposit-rate determination and portfolio selection under varying liability structures is examined. A theoretical model is then developed which shows that a rise of the rate paid on time deposits will result in an increase in the amount of outstanding short-term government debt, a decline in the rate charged on bank loans, and a decline of the rate of return on capital. It is assumed that the authorities have as a policy goal stability of the Bill rate. The results of this model were then tested using data that related to the December 1961 change in the deposit-rate ceiling. The results show that a majority of time deposits in commercial banks were capable of earning higher deposit rates than was formerly possible. As a result of these higher deposit rates, banks experienced large increases of time deposits relative to demand deposits. The growth of time deposits freed reserves which permitted an expansion of total bank reserves. Because of the lower volatility of time deposits vis-a-vis demand deposits, the banks were able to expand their holdings of longerterm, less liquid assets. The increased buying of long-term assets by the banks coupled with the normal investment flows of other sectors forced a decline of longterm rates. The decline of these long-term rates encouraged borrowing for increased capital-stock expansion. Thus the change in deposit rates allowed the Federal Reserve to twist the yield curve during 1962. It was concluded that power to regulate deposit rates was an effective instrument of monetary control. It was further concluded that changing deposit-rate ceilings may, in some instances and with particular asset markets, prove more effective than the use of Open Market Operations alone.

Changing Credit Conditions

A great change has occurred in credit conditions in the past two or three months. Time and savings deposits in commercial banks and other financial intermediaries have risen significantly; the nation’s money supply has stopped declining; most interest rates have declined sharply; and credit has apparently become more readily available. These developments may be most appropriately appraised by comparing recent experience with somewhat longer-run trends and by considering changes in specific factors underlying expansion of money and credit, such as Federal Reserve actions.

Changing Credit Conditions

A great change has occurred in credit conditions in the past two or three months. Time and savings deposits in commercial banks and other financial intermediaries have risen significantly; the nation’s money supply has stopped declining; most interest rates have declined sharply; and credit has apparently become more readily available. These developments may be most appropriately appraised by comparing recent experience with somewhat longer-run trends and by considering changes in specific factors underlying expansion of money and credit, such as Federal Reserve actions.

Interest on Deposits of Commercial Banks in the United States: A Study in Financial Regulation

Interest on Deposits of Commercial Banks in the United States: A Study in Financial Regulation

Characteristics of Owners of Thrift Deposits in Commercial Banks and Savings and Loan Associations

Characteristics of Owners of Thrift Deposits in Commercial Banks and Savings and Loan Associations

TIME DEPOSIT BUILDING BY COMMERCIAL BANKS A PROBLEM ANALYSIS*

THAT THE COMMERCIAL BANKING system has supplied a diminishing portion of the economy's total loanable funds since World War II is a matter of concern to bankers and to borrowers dependent on commercial banks for financing. A continued relative shrinkage of the banking system may have important public policy implications. The allocation of loanable funds among investment alternatives may be less appropriate, in terms of economic criteria, because of the specialized nature of many non-bank lenders. Commercial bank-lending capacity is determined by the availability of reserves in excess of legal requirements. Ex post, growth of the banking system is a function of the volume of deposits that can be supported by the legal reserve base controlled by the Federal Reserve System. Ex ante, however, the lending capacity and deposit growth of the banking system must be viewed as being determined by the objectives of the Monetary Authority and changes in those economic variables to which the Federal Reserve responds. Given that the Federal Reserve attempts to control the economy's total flow of credit, growth of the banking system depends on the amount of claims that the public chooses to hold against commercial banks. This is also true of all non-bank financial institutions. The Federal Reserve has direct control over credit at only one source-commercial banks. An increase in credit from non-bank sources, resulting from a flow of current savings or a decline in the public's aggregate demand for cash balances at existing levels of income (dishoarding), calls for a restriction of bank credit, given any desired level of total credit expansion. The Federal Reserve would make sufficient reserves available to the banking system to accomodate a greater deposit volume in response to an increased demand for commercial bank deposits. Similarly, changing preferences for savings media cannot be allowed to contract outstanding debts because of existing legal reserve requirements. If the public chooses to hold time deposits at commercial banks, it would be reasonable

Legal Reserve Requirements for Deposit Institutions

Would uniform reserve requirements for all deposit institutions significantly increase the effectiveness of the Federal Reserve policy and end adverse discrimination against commercial bank deposits? This article says it's not likely and shows why.

Variable Reserve Requirements against Commercial Bank Deposits

IXED LEGAL OR CUSTOMARY RESERVES against deposits have long been employed for the purpose of assuring the liquidity or solvency of commercial banks. These reserves, of course, limit the availability of bank credit and thus have important implications for monetary policy. As long as the reserve ratios are not subject to change by the monetary authorities, however, reserve requirements cannot be actively used as an instrument for carrying out a stabilizing monetary policy flexibly adjusted to changing conditions. In the past two decades, and particularly in the postwar period, the potentialities of variable reserve requirements as an instrument of monetary policy have come to be widely recognized, and many countries have given the monetary authorities power to vary reserve requirements against commercial bank deposits. The purposes of the present study are (1) to examine the functions of variable reserve requirements; (2) to consider objections to variable reserve requirements and limitations on their proper use; (3) to describe the conditions in which reserve requirements have been, or may be, changed; and (4) to examine technical questions relating to the form and operation of variable reserve requirements. The status of the reserve requirements in various countries is summarized in Appendix II.

SOME IMPLICATIONS OF THE GROWTH OF FINANCIAL INTERMEDIARIES

THERE IS A GROWING impression that secular inflationary forces pose a serious threat to a fully employed market economy. Whether the authorities of the Federal Reserve can contain these forces through general monetary controls is increasingly questioned in light of the rapid postwar growth of non-commercial bank financial intermediaries whose operations are not directly controllable by these authorities. The rapid growth of these financial intermediaries is not open to question.' The public has shown a rising preference for holding financial assets in the form of deposits and shares of intermediaries rather than in commercial bank deposits. In terms of total assets of principal financial institutions (commercial banks, life insurance companies, savings and loan associations, and mutual savings banks), the share of commercial banks has dropped from 70 to 55 per cent between 1945 and 1956, and over these same years deposit liabilities of commercial banks have declined from 64 to 52 per cent of total liabilities. Interestingly, the relative drop in commercial bank deposits has taken place solely in their demand deposits. Some students apparently feel that the relative decline of commercial banks in financial operations has seriously reduced the power of the Federal Reserve to control inflation. They contend that the central banker, in attempting to promote sustainable economic conditions by controlling the over-all quantity and quality of liquidity and finance, is manipulating a relatively shrinking sector of the total financial apparatus and that its controls are increasingly

Forecasting Net Foreign Investment

t-MHE first step in forecasting a given statistical magnitude is to know i what it is. In a well-ordered world foreign and would be quantitatively identical, being merely two aspects of same set of transactions. This is not so in world of today. We must therefore note difference. Net exports of United States represent excess of value of all sales of goods and services to foreigners over all purchases from foreigners. The figures for purchases and sales include not only merchandise transactions but also shipping, insurance, tourist travel, interest, dividends, and other service items. The net figure, commonly called the balance of trade, can conveniently be thought of as exports of gross national product, or foreign expenditure on gross national product.' It is an outflow of part of our production. Net foreign investment, in a wellordered world, would represent corresponding net inflow of financial obligations and cash (IOU's) from foreign countries to United States. That is, foreigners would pay for their net purchases from us by (a) selling us either their own stocks and bonds or some of their previously acquired American security holdings; or (b) selling us firms and properties; or (c) giving us claims in form of short-term commercial paper or bank deposits; or (d) selling us gold (a potential claim on foreign countries in general). The first two of these categories constitute what is usually called longterm investment, portfolio and direct. The third constitutes short-term investment, and fourth represents investment by United States in monetary gold. Together these four categories constitute net foreign investment. However varied composition of investment package might be, and however great volume of international transactions in aggregate, net flow of claims would, in our well-ordered world, be precisely equal in numerical magnitude and opposite in direction to net flow of gross national product. On balance, United States would have purchased IOU's with goods and services; foreigners would have acquired goods and services by relinquishing IOU's. The beautiful simplicity of this relationship has been spoiled by war and its aftermath. For well-known reasons, foreign countries have been permitted, since 1940, to acquire large amounts of United States goods and services without relinquishing IOU's. A sizable portion of our net exports has been financed by gifts instead of by loans. Before war, international giving * Associate professor, Cornell University. 1 The practice of treating net investment (and wage) income as if they were receipts from sale of products soils purity of notion that balance of trade represents a net international transfer of gross national product. But statistical convenience of treating net sales of productive services to foreigners as if they were sales of products, together with relatively small magnitude of figure, has been deemed to outweigh advantages of conceptual rectitude.

Trends of Yields on the Investments of Financial Institutions

The trend of yields on institutional investments has become a matter of considerable importance for an increasing number of people. The growth of institutional assets has been widely publicized in recent years, but little has been said about the ultimate ownership of this wealth. The fact is that the ownership of the resources of financial institutions becomes more widespread every year. There are now estimated to be some 83 million life insurance policyholders as compared with 64 million in I938, 53 million in 1927, and only io million in i900. There are nearly I5 million regular mutual savings bank accounts as compared with i2 million in I938earlier data are not available. The increase in the number of savers and investors in savings and loan associations is even more impressive. The I936 total was 4.3 million. By I950 the total had increased to I0.7 million. Comparable figures on the ownership of commercial bank deposits apparently are not available, but these too have undoubtedly increased substantially in recent years. This paper will first review the trend of yields on the investments of life insurance companies, commercial banks, mutual savings banks, and savings and loan associations, and then consider the implications of these trends in the light of the growth of institutional assets and their increasingly widespread ultimate ownership.

Current Trends and Developments in the Investment Practices of Endowments and Pension Funds

During the inflationary period of the past ten years, and particularly during the more violent phase of the past five years, the most immediate and pressing problem of the investment managers of funds has been to attempt to increase income at a rate commensurate with the decrease experienced in the purchasing power of the income received. Most funds have succeeded only partially in maintaining their income as expressed in terms of what that income can accomplish. Some, however, have been much more successful in this respect than have others. The reasons behind this variation in results afford an interesting picture of conflicting investment theories and practices. In speaking of endowments, or endowed funds, or of funds, it is important to realize that one is not speaking of a homogeneous entity, but rather of a group of capital aggregations having some, but far from all, common characteristics. It is, therefore, not possible to speak with definiteness and exactness of the total dollar amount of such endowed funds, as one can speak, for example, of the total of commercial bank deposits. The total size of in this country is conditioned to a considerable extent by the definition applied to endowments. Even after a satisfactory definition has been agreed upon, there still remains the fact that there is no central reporting agency or association having contacts with endowment or pension funds. In general, endowments fall into one of several generic groupings. Institutions of higher education, chiefly colleges and universities, form one such group. The I95I World Almanac' lists I93 colleges with endowments of 2 million dollars or more, the total endowments of these I93 colleges having a reported value in excess of i12 billion dollars. Philanthropic foundations with assets of i million dollars or more are listed in the I95I World Almanac in the number of 35. Their total assets exceed i2 billion dollars.2 Many hospitals depend upon income from endowment to help meet annual operating deficits. There are over 6,500 registered hospitals in the United States,3 and although their total of funds is not available, there are many metropolitan hospitals whose known endowments run into multiple millions of dollars. The growth of pension fund assets is a relatively new phenomenon. No *A.B. I926, Dartmouth College. Author, BANKER'S HANDBOOK OF BOND INVESTMENT (1939). Member of faculty, Graduate School of Banking, Rutgers University. Financial Associate, The Commonwealth Fund. 1THE WORLD ALMANAC 577-578 (1951). 'Id. at 587-590. ' Id. at 439.