Nonmember Banks Research Articles

Short-Changing the Small Saver: Federal Government Discrimination Against Small Savers During the Vietnam War: Comment

IT IS SHOCKING TO REALIZE how hard the federal government has worked to prevent the small household saver from sharing in the high interest rates of the past five years. While rates on 4to 6-months commercial paper soared above 9 per cent, Federal Reserve authorities kept the maximum rate that member banks could pay on passbook savings at 4 per cent until January 21, 197O, when they raised the applicable maximum a mere half-point. With the co-operation of the Federal Deposit Insurance Corporation and the Federal Home Loan Bank Board, which have parallel regulatory authority over state nonmember banks, mutual savings banks, and savingsand-loan associations, rates on savings held in other depositary institutions have been similarly restrained. As the diSerentials between depositary savings rates and market rates on open-market instruments grew larger (as high as 4 and 5 per cent), depositors began to shift more and more funds from depositary institutions into openmarket paper. To forestall these shifts, federal authorities first sanctioned discriminatory relaxation of the ceilings on depositary-savings rates on large deposits, specifically those in excess of $10,000 at savings institutions and those in excess of $100,000 at commercial banks. Because growing numbers of small savers began to shift their funds into small-denomination Treasury bills (available in multiples of $1,000) and FMNA debentures (available in multiples of $5,000), the minimum denominations for these instruments were raised on February 25 to $10,000. Commercial-bank subordinated capital notes and debentures (so-called mini-bonds, currently available in maturities as short as two years and denominations as small as $100) are regarded as the next most important threat to nonbank intermediary deposits and shares, and the Federal Reserve Board announced on March 2nd that it is considering establishing for these instruments a minimum denomination of $20,000 and a minimum maturity of five years. Finally, interest rates on U. S. Savings Bonds -long and widely promoted as the perfect vehicle for the small saver and frequently forced down the throat

Controls on Interest Rates Paid by Banks

THE INrEREST RATES that commercial banks may pay on their deposit liabilities are limited by law in two ways. (1) Banks are prohibited from paying any interest on demand deposits. (2) The Federal Reserve Board and the Federal Deposit Insurance Corporation are empowered to specify the maximum rate that banks may pay on various categories of time deposits the Fed for member banks, FDIC for insured, non-member banks. In practice, the FDIC establishes rates for nonmember banks that are identical with those established in the Fed's Regulation Q for member banks.

AN ANALYSIS AND EVALUATION OF ALTERNATIVE RESERVE REQUIREMENT PLANS

ALTHOUGH RESERVE REQUIREMENTS first were imposed on commercial banks in the belief that they would help protect depositors and holders of bank notes, it now is clear that required reserves are virtually the least liquid of a bank's assets. Nor do the funds kept on deposit with the Federal Reserve bear interest. Thus reserve requirements must be evaluated with respect to their effect on (1) the Federal Reserve's control of demand deposits and the money supply, and (2) resource allocation and equity among competing financial institutions. The first criterion in analyzed with respect to control of the demand deposits of member banks (section I), of non-member banks (section II), and of time deposits (section III). The second criterion is discussed in section IV with respect to competition among member banks, between member and non-member banks, and between banks and other financial institutions, and with respect to resource allocation and the general question of legally required reserves.

BANK PURCHASES OF EARNING ASSETS A DECISION UNIT MODEL*

TRADITIONALLY, THE ATTENTION of monetary theorists has been directed toward explaining such aggregate behavior as consumption, saving, and investment. To this end, there has usually been an interest in such aggregate variables as interest rates, the money supply, velocity, and the price level. The advent of powerful computational and data-processing equipment makes feasible research efforts directed toward integrating models of micro behavior with larger systems of models relating to aggregates. This study consists of the specification and testing of several models predicting an individual bank's net purchases of earning assets. The broad hypothesis of the study is that certain underlying environmental, legal, and status variables have systematic influences on the behavior of banks. Therefore, the models are specified largely in terms of variables which differ among banks (e.g., size, population of city in which located, deposit mix, etc.). In addition, however, several tests are performed with models which include such timeseries variables as interest rates, certain broad measures of economic conditions, and variables which seek to account for seasonal movements. The data with which the models are tested stem from statements of condition from member and non-member banks located in the Eighth Federal Reserve District. These statements, or call reports, provide successive cross-sections at six-month intervals during the period from June, 1950, to December, 1958. The empirical portion of the study consists of estimating the parameters relating the inputs and status variables of individual commercial banks (the independent variables) to their output, net purchases of earning assets (the dependent variable). A by-product of this process consists of testing hypotheses relative to the influence of such variables as size, deposit experience, deposit mix, and other environmental variables. The parameters of the models are estimated by multiple linear-regression techniques. A majority of the parameter estimates attain acceptable levels of significance, but the variables

OLD AND NEW IDEAS ON RESERVE REQUIREMENTS

THE OLDER VIEW of bank reserves is that they are primarily for liquidity. This view, on the evidence of the Patman investigation, is still held by many bankers and apparently by most spokesmen for state banking authorities. It would probably be expressed in nearly all texts published twenty-five or more years ago but in very few of the recent texts. The prevailing current view is that the primary importance of reserves lies in their being a means of limiting and controlling the volume of bank deposits. This is the view expressed by, among others, the representatives of the Federal Reserve System and by many bankers, especially those in metropolitan areas. There is still another aspect of required reserves that deserves more attention than it has received. That is that they are nonearning assets. Opposition to the control of credit by means of higher reserve requirements is not so much to the control as it is to the enforced holding of non-earning assets. The public relations problem of credit control could undoubtedly be simplified by making it less expensive to the banks controlled. One of the most interesting points in the entire Patman discussion of reserves is the reason given by several member bankers why they did not favor subjecting non-members to the same reserve requirements as member banks. Because non-member banks are not subject to these requirements, they said, the Reserve authorities are inhibited from making greater use of this instrument. That is to say, they approved exempting non-member banks on the ground that this was a check on the raising of reserve requirements. The influence of direct pecuniary considerations on the attitude of bankers and others toward credit control is manifest in the current enthusiasm of lenders of all types for the policies of the Federal Reserve which have resulted in higher interest rates. It would be pleasant to believe that this particular Accord, the remarkable accord between Federal Reserve authorities on the one side and bankers and other lenders on the other side in agreeing that higher interest rates are desirable, was based wholly on broad economic considerations. It seems possible, however, that it is influenced

Monetary Policy and the Management of the Public Debt: The Patman Inquiry

THE documents produced by the Patman inquiry are a remarkable contribution to monetary literature. The first title, Compendium for short, consists of replies to questions propounded by the committee. The first volume of the Compendium contains the careful answers of the Treasury and the Board of Governors of the Federal Reserve System to the lengthy questionnaires submitted to them. The second volume includes replies from the Presidents of Federal Reserve Banks, the Council of Economic Advisers, federal and state bank-examining authorities, the Reconstruction Finance Corporation, economists, bankers, life insurance executives, and dealers in United States government securities. The questionnaires varied with the respondent and were designed to obtain both factual information and expressions of opinion. The answers provide a wealth of legal, institutional, statistical, and historical information. Whether you wish, for example, a complete chronology of Federal Reserve policy actions since I9I4, a summary of the reserve requirements of nonmember banks, a world survey of Treasurycentral bank relationships, or a study of the density of banking offices relative to population in the several states, the Patman Compendium is your source. The replies also provide a variety of opinion, comment, and theory concerning the role of monetary policy in the postwar United States economy. The second title, Hearings for short, reports oral testimony on these same subjects and includes also numerous documents and written statements submitted to the committee. The committee heard testimony from the principal contributors to the Compendium and from many others; the witnesses represented a wide variety of experience, interest, and viewpoint. The Hearings include four panel discussions on aspects of monetary policy. Two of these, How should our monetary and debt management policy be determined? (pp. 747 ff.) and What should our monetary and debt management policy be? (pp. 685 ff.), are especially deserving of the attention of the reader who can only hit the high spots of these volumes. The third title, Report for short, gives the findings and recommendations of the committee majority, with dissenting observations by Senator Douglas. The Report is an admirable review of the events investigated by the committee; and its findings on the issues discussed in the Compendium and Hearings are, in my opinion, well balanced and moderate. For this Report, and indeed for the skillful design of the whole inquiry, there can be no doubt that Henry C. Murphy, the committee's economist, deserves tremendous credit. It is patently impossible for a review to do justice to the masses of material in these three documents. I hope I have given some idea of their scope. For the rest, I shall confine myself to three major topics of the committee's inquiry: (i) the Treasury-Federal Reserve conflict, (2) the theory of the operation of monetary controls, (3) the place of monetary restriction in an anti-inflationary program. -

Should Federal Deposit Insurnace Be Extended?

The question of whether or not federal deposit insurance should be extended requires an examination into the number of banks included under the fund, as well as the coverage of deposits in such banks. The provisions regarding FDIC membership have been complicated by a persistent effort on the part of advocates of unified banking to employ federal deposit insurance as a means of forcing non-member banks into the Federal Reserve System. The insurance coverage provisions have been founded on the desire to protect the largest number of depositors with the least possible risk to the insurance corporation. Because of the calamity hazard inherent in commercial banking, and in view of the pressure to keep insurance assessments at a minimum, the drafters of federal deposit insurance decided that it was necessary to place a limit on the coverage. There was also the hope that with partial coverage large depositors would act as a restraining influence upon reckless or unsound bankers. It is for these reasons that the existing law insures bank deposits up to $5,000 only.

Security Loans in Recent Years

A FREQUENT tendency in interpreting the available figures as to security loans has been to follow one series and to base conclusions on that series with little regard other data that are available. A year ago, much attention was given to the mounting totals of brokers' loans, and very little to the figures on the total security loans of weekly reporting member banks. Recently the tendency has been to direct attention chiefly to the fact that the total security loans of the reporting banks are close to the highest levels ever reported. No single series is sufficiently comprehensive to give an adequate view of the situation. All of the more important series loans to brokers and dealers in securities reported by the principal New York City banks, the borrowings of Stock Exchaange members, and the total security loans of all weekly reporting member banks overlap to a considerable degree, yet each of them contains elements that are not included in the others. Consequently, in order to obtain an idea of the total amount of security loans, or of changes in the total, it is necessary to combine the various series, using part of each. The following table presents such a combination of the available figures June 30, 1930, together with the corresponding figures a year previous, and October 4, 1929, when approximately the highest level of security loans was reached. For these dates it was possible to use the figures on security loans of all member banks which have been compiled recently by the Federal Reserve Board. By deducting the loans of reporting member banks on approximately the same dates from the loans of all member banks, it was possible to obtain close estimates of the amount of security loans of member banks that do not report weekly, and these estimates are shown in the table. In view of the fact that the data weekly reporting banks include loans to banks on securities whereas the data all member banks do not, it was necessary to make a small estimated adjustment such loans. The loans to New York City brokers non-member banks and other out-of-town lenders were obtained by deducting the street loans of member banks outside New York City from brokers' loans placed for account of out-of-town banks. Undoubtedly this latter item, which is included in the weekly brokers' loan reports, included last year a considerable amount placed, not the out-of-town banks' own account, but their customers. The figures in the table have been rounded off, and some adjustments have been made differences in dates between the weekly member banks reports and the condition (all member banks) reports. This compilation leaves unaccounted the loans of non-member banks to brokers and dealers in securities outside of New York City, and to the other customers of these banks. It may be estimated that, as these non-member banks include only a small proportion of the large banks in leading cities and a considerable proportion of country banks, their total security loans may have amounted to between 2 and 3 billion dollars during the past two years. The indicated totals of all reported security loans show that, notwithstanding the fact that the security loans of weekly reporting banks have been higher recently than ever before, except two weeks at the time of the stock market break last autumn, the total volume of security loans at the end of June was about 412 billion dollars less than at the high point of last autumn, and about 3 billion dollars less than in June of last year. All of the decrease has been in brokers' loans placed lenders other than member banks; in fact, withdrawals of funds by such lenders have exceeded the large reduction in the total amount of brokers' loans. The recent high level of security loans in the reporting banks is due chiefly to their replacing with their own funds a part of the brokers' loans withdrawn by other lenders at the time of the break in the stock market last autumn and during the subsequent decline in call loan rates to unattractive levels. The security loans of the weekly reporting member banks now constitute at least two-thirds of reported security loans, whereas last autumn they represented less than one-half of the total.

Banks and Banking. Par Clearance System. Coercion of Non-Member Banks

Banks and Banking. Par Clearance System. Coercion of Non-Member Banks

Banks and Banking. Right of Federal Reserve Bank to Force Non-Member Banks to Cash Checks at Par

Banks and Banking. Right of Federal Reserve Bank to Force Non-Member Banks to Cash Checks at Par