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Eurodollars, 1970-73 (3)
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Eurodollars, 1970-73 (3)
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Arthur F. Burns Papers
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The original documents are located in Box B34, folder "Eurodollars, 1970-73 (3)" of the
Arthur F. Burns Papers at the Gerald R. Ford Presidential Library.
Copyright Notice
The copyright law of the United States (Title 17, United States Code) governs the making of
photocopies or other reproductions of copyrighted material. Gerald R. Ford donated to the United
States of America his copyrights in all of his unpublished writings in National Archives collections.
Works prepared by U.S. Government employees as part of their official duties are in the public
domain. The copyrights to materials written by other individuals or organizations are presumed to
remain with them. If you think any of the information displayed in the PDF is subject to a valid
copyright claim, please contact the Gerald R. Ford Presidential Library.
for Buns Paper - B33 (cal)
Esi FRB into k controly - concern for mont anty]
- FRB bothered 4,5RK flow
from " Enodollon Mahit -/ its Public Poly lunglozation"
prepared for Joint Ec Commite or (agous d us
Feb 25, 1970 ( US End Py ofher, 1970
by I. Scott - notes problems for months only
- notes that other study showed that without
euodullm market fayor print dollar Goldis
in us wold be 3.56 less - would
p.28
have found their way into other hands +
been converted (petately) into gold
- "The widespread impact ol the Broddln mahet as
a communizations linh Seliver hat'l k mahts
could be effectives climited through the reinshtute
of a though - going system ol exch. catals.
Their reinstration to could do much to
p.32
destroy the institutal fubric " the maht. the to
catel position ol the dollm + the benefits
be gained thogh a liberalization DC latel k
movents must on the other hand be weighed
memo oc Oct 21,1970 -
in the balance
Soloman recommeds that k cantrols be maintain
though 1971 + that Sys "Fed. Res. could take
an acta to restrain the shat tem k onttlen from America
banhs h the Enoddlus muht the action would
1.5
anahe sense as part ol a package designed to
be welcomed abroad as a coeputere act. 4
improve the rest or the bolp. Furthermar it wold
- he's is suggests
I
GERALD
LIBRARY
DR. MILTON GILBERT
Economic Adviser
Bank for International Lettlements
Basle
Confidential
JOINT SUPERVISION OF THE EURO-CURRENCY MARKET
Developments in the Euro-currency market over the past
several years have caused increasing interest among the cen-
tral banks.
At one time there was some concern over the possibil-
ity of unsound practices by Euro-dollar banks from a purely
banking standpoint, such as excesses of borrowing short and
lending long or overextension of credit to particular borrowers.
But up to the present, at least, experience has shown that
AUTHORITY Sed. Res. 11/10/82;
9/10/09
these fears have had little foundation.
Discussion is now centred on the monetary rather than
DECLASSIFIED
the purely banking aspects of the market - the sheer momentum
NARA, DATE
of the market's growth and the size it has reached, the impli-
cations of this growth for monetary inflation, the potential
of the market's large pool of resources for speculative pres-
sures, the influence of the market on interest rates, the com-
plications that arise for domestic monetary policy, the easy
BY
financing of balance-of-payments deficits and the possibility
that the market's resources would add to monetary disturbances
in the event of severe weakness of the dollar.
It is significant that this view was reflected by
FORD & LIBRARY GERALD
former chairman Wm. McChesney Martin in his recent speech in
Basle, in which he said: "At present there is little, if any,
multilateral supervision of these markets. One need raise no
doubt about the soundness of the claims that are created and
exchanged in these markets to suggest that a case can be made
for giving to an international institution some responsibility
for supervising these markets. " At the IMF meeting in
Copenhagen, Mr. Giscard d'Estaing expressed a similar view and
Mr. Schweitzer, the Managing Director of the Fund, gave it as
his opinion that "maybe the central bankers could do something"
about the market.
At present, virtually all of the central banks influence
the activities of their own banks in the market from a national
point of view in one way or another, but there is no authority
- 2 -
which concerns itself with the market's impact on world mone-
tary conditions as a whole. It may be said that the rationale
of joint supervision of the market by the major central banks
is rather apparent. This, however, leaves open several questions:
what sorts of situation might call for active supervision of the
market; to what extent might such situations arise in any case
with the existing degree of convertibility and freedom for capi-
tal movement; and how might active joint supervision be exercised?
Growth of the market
The expansion of the Euro-currency market has been with-
out precedent in international monetary history. As measured
by the foreign currency credit outstanding through the banks of
eight reporting European countries, the net size of the market
is estimated to have risen from its beginnings in the mid-1950s
to about $11 milliard at end-1964 and to roughly $50 milliard by
June 1970. To put this growth in perspective, it may be noted
that since end-1964 domestic private-sector credit extended by
banks in all OECD countries taken together went up by about $360
milliard, from $415 to 775 milliard.
Out of the net totals for all currencies given above the
component in dollars was about $9 milliard at end-1964 and $41.5
milliard in mid-1970. Over 40 per cent. of this $32.5 milliard
expansion occurred during the first halves of 1968 and 1969
alone under the impact of tight monetary policy in the United
States. However, even from mid-1969 to mid-1970, when US banks'
Euro-dollar indebtedness showed a slight decline, the Euro-dollar
market expanded by about a further $8 milliard. And, despite
large US bank repayments and the usual seasonal slack, the Euro-
dollar market seems to have been well maintained during the
FORD LIBRARY
third quarter of this year also. Hence, it is evident that a
large flow of bank credit is generated through the Euro-market
and that the expansion is continuing.
Sources and uses of funds
As may be seen in the table, the sources of funds for
the growth of Euro-dollar credit have been broadly based and
Estimated net amount of Euro-dollar credit
outstanding through banks in eight European countries, 1964-70
1964
1965
1966
1967
1968
1969
1970
Items
June
Dec.
June
Dec.
June
Dec.
June
end of period, in milliards of US dollars
Total
9.0
11.5
14.5
15.0
17.5
22.5
25.0
33.5
37.5
41.5
Sources
Reporting European area
Banks1
2.7
4.5
5.8
5.1
5.7
7.5
8.1
8.6
9.1
10.2
Non-banks
1.8
2.2
2.8
3.6
4.0
4.8
5.2
8.1
9.4
10.0
Total
4.5
6.7
8.6
8.7
9.7
12.3
13.3
16.7
18.5
20.2
Outside area
Other western Europe
0.8
0.8
1.0
1.2
1.4
1.5
1.9
2.1
2.7
2.8
United States
0.7
0.8
1.1
1.1
1.7
2.9
3.2
4.4
3.8
4.3
Canada
0.8
0.5
0.6
0.7
0.9
1.0
1.3
2.3
2.9
3.4
Japan
-
-
-
-
-
-
-
0.2
0.4
0.3
Eastern Europe
0.2
0.3
0.3
0.3
0.4
0.4
0.6
0.6
1.0
0.8
Other
2.0
2.4
2.9
3.0
3.4
4.4
4.7
7.2
8.2
9.7
Total
4.5
4.8
5.9
6.3
7.8
10.2
11.7
16.8
19.0
21.3
Uses
Reporting European area
Banks
2
2.8
3.2
2.8
2.3
2.9
2.6
3.2
3.8
6.1
6.2
Non-banks
2.3
3.2
3.6
4.0
4.1
4.5
4.7
5.1
5.6
7.0
Total
5.1
6.4
6.4
6.3
7.0
7.1
7.9
8.9
11.7
13.2
Outside area
Other western Europe
0.4
0.6
0.9
1.0
1.2
1.4
1.5
1.3
1.6
1.9
United States
1.8
2.1
4.4
4.2
5.2
8.8
9.5
16.7
16.5
16.4
Canada
0.4
0.6
0.6
0.6
0.7
0.9
0.9
1.2
1.3
1.6
Japan
0.4
0.5
0.6
0.8
1.0
1.4
1.6
1.3
1.4
1.8
Eastern Europe
0.4
0.5
0.6
0.7
0.7
0.8
0.9
0.9
1.0
1.2
Other
0.5
0.8
1.0
1.4
1.7
2.1
2.7
3.2
4.0
5.4
Total
3.9
5.1
8.1
8.7
10.5
15.4
17.1
24.6
25.8
28.3
Net positions³
Reporting European area
Banks
0.1
-1.3
-3.0
-2.8
-2.8
-4.9
-4.9
-4.8
-3.0
-4.0
Non-banks
0.5
1.0
0.8
0.4
0.1
-0.3
-0.5
-3.0
-3.8
-3.0
Total
0.6
-0.3
-2.2
-2.4
-2.7
-5.2
-5.4
-7.8
-6.8
-7.0
Outside area
Other western Europe
-0.4
-0.2
-0.1
-0.2
-0.2
-0.1
-0.4
-0.8
-1.1
-0.9
United States
1.1
1.3
3.3
3.1
3.5
5.9
6.3
12.3
12.7
12.1
Canada
-0.4
0.1
-
-0.1
-0.2
-0.1
-0.4
-1.1
-1.6
-1.8
Japan
0.4
0.5
0.6
0.8
1.0
1.4
1.6
1.1
1.0
1.5
Eastern Europe
0.2
0.2
0.3
0.4
0.3
0.4
0.3
0.3
-
0.4
Other
-1.5
-1.6
-1.9
-1.6
-1.7
-2.3
-2.0
-4.0
-4.2
-4.3
Total
-0.6
0.3
2.2
2.4
2.7
5.2
5.4
7.8
6.8
7.0
1 Including conversions by the banks of domestic or third currency funds into dollars, plus dollar deposits by the official
monetary institutions of the reporting area.
2 Including conversions by the banks of dollars into the domestic or third currencies; excluding, however, the Italian
banks' use of Euro-dollars for third-currency loans to residents (included under non-bank uses).
3 A minus sign indicates that the area or grouping in question is a net supplier of Euro-dollar funds, whereas the
absence of a sign indicates that it is a net user.
- 3 -
the relative contribution of the various areas has shown little
change. A fairly important exception was the flow of funds to
the market from the United States and Canada which increased
from $1.8 milliard at end-June 1967 to $6.7 milliard at end-
June 1969. Even this figure may be a significant understate-
ment, since substantial US funds have probably entered the
market in indirect ways, such as through trustee and nominee
accounts in Europe. In other words, the figure for funds sup-
plied from within the reporting area is too large and the sup-
plies from the United States too small.
But the growth of Euro-dollars has been much more un-
balanced on the uses side. Nearly two-thirds of the $24.5 mil-
liard expansion between December 1964 and June 1969 was accounted
for by US borrowing, whereas the reporting area's own takings
increased relatively little. The pattern was, of course, mod-
erately reversed in the subsequent twelve months, when well
over half of the new funds were absorbed within the reporting
area, whereas US takings declined somewhat.
The character of the market
The data on net positions of the various areas indicate
more sharply the change in the character of the market over
the past five years. While the United States is shown as a
net taker of funds in 1964 and 1965, this reflected the normal
placements of foreign liquid funds in the New York market;
the real flow of funds between the US and the Euro-dollar mar-
ket at that time was rather from the United States to the
Euro-banks. Starting with the credit squeeze in 1966, however,
the United States became the main borrower from the market and
it has ended up with a very large net debtor position -
probably overstated somewhat as suggested above. In other
words, apart from relatively small net takings by Japan and
eastern Europe, until recently the Euro-dollar market has been
largely a mechanism that on balance channelled short-term funds
from the outside world to the United States.
FORD & LIBRARY 937470
- 4 -
In its earlier years the Euro-dollar market was a mar-
ket that emerged among banks in Europe which found that they
could bid successfully for dollars and re-lend them at a nar-
row operating margin. More recently the character of the mar-
ket has changed with the growing dominance of US banks in it.
For example, only nine US banks had branches in London at the
end of 1963, but the number has grown to about thirty-five at
present, motivated essentially by the attraction of Euro-dollars.
The non-sterling liabilities of the London branches of
US banks went up from $1.2 milliard at the end of 1963 to $23.4
milliard at the end of July 1970; and their share in the total
non-sterling liabilities of banks in the United Kingdom in-
creased over the same period from 24 to 50 per cent. The data
available for the other European financial centres indicate
that US banks are less important there; nevertheless, it is
evident that US banks account for a large share of the market
and an even larger share of its growth.
This surge of interest of US banks in the Euro-market
reflects their desire to compete outside the United States for
dollar deposits even those from their own customers. As
their head offices in the United States were handicapped because
of the cost of reserve requirements and the limitations of
Regulation Q, they put themselves on the same footing as for-
eign banks enjoy by shifting business to branches in foreign
financial centres where dollar deposits are unencumbered by
local regulations. As an official of the Federal Reserve has
put it, 'the United States has been exporting its banking
system'. Thus, the recorded growth of the market is partly
illusory since, to a significant extent, the branches are just
bookkeeping offices for transactions that are arranged in the
United States. That is to say that the reported growth of the
Euro-market has somewhat exaggerated its significance for Europe
and for the world monetary system.
FORD & 070839 LIBRARY
- 5 -
Factors underlying the market's growth
Regulations applicable to the use of the dollar itself
by banks in the United States and to domestic currency opera-
tions of other banking systems constitute one key factor that
explains the existence of the Euro-market, which is relatively
free from such regulations. It is often thought that the
existence and growth of the market has been due to the US
balance-of-payments deficit. That explanation is, however,
insufficient: if the dollars flowing from the deficit had all
continued to be held in the United States itself, the market
would not have arisen.
The factors which explain the existence of an active
Euro-dollar market are: (1) the relative absence of regulations
on foreign currency operations, particularly offshore operations,
of banks outside the United States, coupled with the regulations
which hamper banks' domestic currency operations both in the
United States and elsewhere; (2) the ability of the Euro-banks
(including US banks' foreign branches) to compete effectively,
both because they can operate on narrower margins and because
they are not bound by interest rate conventions and cartel
arrangements; and (3) the willingness of the world to use the
dollar on a large scale, both because of its convenience and
because of the feasibility of doing SO.
Where the US external deficit comes into the matter is
in helping to explain the growth and present size of the market.
Without such a continuing deficit the market would have had to
rely for its growth on attracting the foreign-held dollars that
already existed at the time of its creation, plus its own abil-
ity to create dollar deposits; with these limitations it is
hardly conceivable that the market could have reached its
present size.
At the same time, however, it can be demonstrated that
the cumulative US deficit, even if it had gone entirely into
the Euro-dollar market, cannot account for the present net vol-
ume of Euro-dollar credit. In this connection, it is necessary
BERRAD FORD LIBRARY
- 6 -
to bear in mind that the US payments deficit, to the extent
that it is financed by increases in official dollar liabilities
of banks in the United States, cannot statistically account
for the growth of the Euro-dollar market since these liabil-
ities represent, by definition, dollars held in the United
States itself. What counts therefore is the extent to which
the deficit gives rise to increases in non-official dollar
liabilities.
Over the five and a half years (used in the table) from
end-1964 to mid-1970 the US liquidity deficit financed by in-
creases in non-official liquid liabilities of the United States
to foreigners amounted to $14.6 milliard. During the same per-
iod net Euro-dollar credit expanded from $9 to 41.5 milliard,
i.e. by $32.5 milliard. Moreover, even if we add to the in-
crease of private dollar balances during this period the amount
of such balances outstanding at the beginning of the period -
which was $12.5 milliard . it is clear that the total of
privately-held balances outstanding at mid-1970 was less either
than the net growth of the Euro-dollar market between end-1964
and mid-1970 or than the total of Euro-dollar credit outstand-
ing at mid-1970. Furthermore, it is certain that a large
amount of foreign-owned dollars is held directly in the United
States as working balances and money-market investments -
without passing through the Euro-market.
Thus, recent and more remote US payments deficits can
only account for a share of the present volume of Euro-dollars
outstanding. The rest were necessarily brought into being by
the mechanism of the market. Essentially this has happened in
two ways.
Firstly, Euro-dollars get on the books of the banks
through flows of short-term funds outside the United States
that are denominated in dollars as the vehicle currency, either
for the convenience of the banks or the banks' customers, or
because regulations would not have allowed the flows to take
place in the domestic currencies involved.
BERALD FORD LIBRARY
- 7 -
Secondly, Euro-dollar assets and liabilities may be
created by the Euro-banks as a group, just as banks create
them in a domestic banking system, that is by making advances
which are used, at least partly, within the Euro-dollar system.
Formerly such credit creation was thought to be quite limited,
as the leakages from the system were believed to be very
considerable. However, with the growing share in the market
of US bank branches, which have a considerable amount of busi-
ness with US corporate branches and affiliates, there is now
greater scope for the process of credit creation to operate.
It seems unnecessary to trace here the dynamic forces
on the demand or the supply side that have stimulated the
growth of the market, particularly as only a few major episodes
could be isolated - such as the intense demand for dollars by
US banks in 1969, which sucked liquidity into the market, or
the flight from the franc in 1968, which supplied funds to
the market. It is worth noting, however, that the part played
by monetary authorities in the market's development has not
been insignificant. In addition to the fact that the forces
acting on the market from the private sector have often been
forces created by central banks, there have also been times at
which central banks have contributed directly, or via their own
banking systems, to the market's supply of funds.
Problems raised by the market
The interest in multilateral supervision of the Euro-
market stems from the problems which are believed to have
arisen from, or to have been aggravated by, the market's
behaviour. The nature of these problems has been suggested
earlier, but some elaborations may be useful.
1) The market is a significant vehicle for the inter-
national expansion of bank credit which may at times be
inflationary. The rapid rate of growth of the market itself
gives substance to this view. The market increases the flow
of credit in various ways: for example, by facilitating
BERALD FORD LIBRARY
- 8 -
international movements of funds from areas where monetary con-
ditions are relatively easy to those where there are unsatis-
fied demands for credit; by credit creation within the market;
by drawing down official reserves for use in private credit
markets; and by increasing the credit multiplier through lower
average reserve requirements. In theory the central banks
could adjust their own objectives for the rate of expansion of
their domestic money supply to allow for the effect of the mar-
ket, but in practice it is difficult for them to do so, parti-
cularly if they have to do so unilaterally.
2) The market increases the international pool of
liquid funds and facilitates their rapid shift from one market
to another. At times this blunts the effectiveness of domestic
monetary policy. Similarly, flows of funds facilitated by the
market can interfere with balance-of-payments objectives.
3) The use of the market by the banking system in a
particular country, permitted or facilitated by the central
bank in one way or another, can cover up an imbalance in the
balance of payments and can delay corrective action by the
authorities. This is a rather obvious point and need not be
elaborated, except to say that it can apply to surplus as well
as to deficit countries.
4) The Euro-market can have an amplifying effect on
interest rate developments in national markets, as was dramat-
ically illustrated in the 1969-70 episode. The repercussions
of the market in this regard are out of proportion to its mar-
ginal share of world credit flows. In domestic monetary
management many central banks have aimed at controlling the
money supply without changes in interest rates so violent as
to disrupt financial markets. To pursue the same aim in the
Euro-market would require a concerted effort.
5) The market provides a large pool of liquid resources
that may feed speculative excesses. While not without some
substance, it seems to us that this allegation has been
GERATO FORD LIBRARY
- 9 -
exaggerated. If one reviews the major cases of speculative
fever over the past five or six years, one can say first that
where the exchange market was acting against the threat of a
currency devaluation, the Euro-market was of little importance.
It could have aggravated the flight from, say, sterling, the
French franc and the lira at various times, had large Euro-
dollar borrowing in the currencies concerned previously been
built up. Or very attractive rates in the Euro-market could
have added to the outflow of domestic funds. But in fact
neither of these influences seems to have been very signifi-
cant in relation to these countries' total official financing
requirements at the time.
In the case of the 1967-68 gold rush the availability
of the market's funds was more significant. Nonetheless, they
could hardly be called crucial to the total movement.
The rôle of the market was probably largest in the
Deutsche Mark speculation. In the second and third quarters
of 1969 the short-term inflow of funds to Germany outside the
banks was $3.8 milliard and at the same time the German banks
themselves increased their net foreign indebtedness by $1.1
milliard. The inflow outside the banks consisted largely of
foreign firms building up balances with their branches in
Germany, and of changes in the terms of payment (leads and lags).
It is quite likely that both these were to a certain extent fi-
nanced in the Euro-currency market.
Of course, even without the facilities of the Euro-
market, speculative flows would occur when there is threat of
a major monetary upset.
6) A final point may be mentioned, though it is rather
difficult to formulate because it is somewhat nebulous. It is
that the Euro-market has tended to speed up the increasing use
of the dollar as a transactions and financing currency. There
is evident unease at this growing dominance of the dollar and
criticism of the processes which bring it about. Of course,
this has been due not solely to US policies and regulations
BERALD FORD VIBRARY
- 10 -
but also to those of other countries. Obviously, if the compe-
tition of other currencies with the dollar is limited by re-
strictions on their use, then, naturally, the dollar will have
only limited competition.
Perhaps more important is the fear, already mentioned,
that the repercussions of a possible run on the dollar have
been considerably increased as a result of the market's growth.
Procedure
In view of this range of problems to which the central
banks may from time to time give joint consideration, what
sorts of initiatives might be contemplated in the exercise of
multilateral supervision of the market? Four sorts can be
envisaged:
1) Obtaining a better and more up-to-date knowledge
of developments in the market, through more regular and speed-
ier reporting of the banks' foreign currency positions. In
this connection, consideration could also be given to more fre-
quent publication of Euro-currency statistics by the BIS.
2) Exchanges of views by central banks on certain
aspects of the permanent regulations and practices in particu-
lar countries.
3) Exchanges of views by central banks on the ad hoc
regulations or arrangements in particular countries.
4) Discussions concerning possible initiatives of the
FORD
central banks, as was done in the past for end-of-year
LIBRARY
operations.
It hardly needs to be said that the aim of such initia-
tives should be to alleviate specific problems and not to lose
the benefits of the market by stifling it. These benefits in-
clude the stimulation of banking competition, both interna-
tionally and in various domestic credit markets; the speed and
efficiency with which the market is able to handle large trans-
actions; and the advantages which result from the interna-
tionalisation of available liquidity through the market.
- 11 -
As a method of procedure the following suggestions may
be made. Final consideration of any problems raised or pro-
posals for initiatives would take place in a meeting of the
Governors. However, a group of Deputies of the Governors, with
the General Manager of the BIS as Chairman, would be estab-
lished to sift and prepare matters for the Governors'
consideration. Meetings of the Deputies' group would be per-
iodical and would be called on the suggestion of any of the
central banks or of the General Manager of the BIS. The
General Manager would report to the Governors on the Deputies'
discussions.
10th January 1971
GERALD FORD LIBRARY
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
RESERVE THE SYSTEM
WASHINGTON, D.C. 20551
January 11, 1971
CONFIDENTIAL (FR)
TO:
Federal Open Market Committee
FROM: Mr. Broida
Enclosed are (1) a memorandum from the staff dated today
and entitled "Euro-dollar problem: Federal Reserve matched-sale
purchase transactions, " and (2) a memorandum from Mr. Hackley
dated January 8, 1971, and entitled "Legality of 'matched sale-
purchase transactions' to induce banks to retain Euro-dollar
holdings."
It is contemplated that a preliminary discussion of these
materials will be held at the meeting of the Committee tomorrow,
at the conclusion of the discussion of monetary policy.
It is requested that these materials be held in strict
confidence.
arthm L Bro. do
Arthur L. Broida,
Deputy Secretary,
Federal Open Market Committee.
Enclosures
FORD & 07V839 LIBRARY
CONF IDENTIAL (FR)
January 8, 1971.
To:
Federal Open Market Committee
Subject: Legality of "matched
sale-purchase transactions" to
From: Mr. Hackley
induce banks to retain Euro-
dollar holdings.
It has been suggested that, as a means of inducing American
banks to retain Eurodollar liabilities, the System might offer Gov-
ernment obligations for sale to banks having such liabilities, with
a simultaneous agreement to purchase such obligations at a specified
date at a rate that would provide the banks with an attractive yield.
This memorandum relates to the legality of such "matched sale-purchase"
transactions.
Although in form such transactions would involve the sale and
purchase of Government securities, it might be contended that in sub-
stance they would amount to a borrowing of money by the Reserve Banks
and that the Reserve Banks have no authority to borrow money. At times
in the past, purchases of securities with agreements to resell them at
a certain date (straight "RP's") have been questioned as constituting
loans of money rather than legitimate open market operations; but the
validity of such transactions now appears to have the legal support of
almost 50 years of "administrative practice" known to Congress. A1-
though matched sale-purchase transactions have been used as a tool of
domestic monetary policy since 1966 without legal challenge, they are
not supported by such a long period of administrative practice.
One of the arguments advanced in the past in support of straight
RP's is that, even if they amount to "loans", the Reserve Banks have
statutory authority to lend money to both member banks and to individ-
uals, partnerships, and corporations on the security of Government ob-
ligations. The Reserve Banks do not, however, have authority to borrow
money - which, it might be argued, is the effect of matched sale-purchase
transactions.
It might be contended that the proposed matched sale-purchase
transactions would not be designed to effectuate legitimate purposes of
Federal Reserve open market operations. Traditionally, such operations
have been regarded as designed to affect the reserves of member banks and
thereby to regulate domestic bank credit. The present proposal would be
aimed solely at persuading American banks to retain Eurodollar holdings
in order to prevent an outflow of dollars to foreign central banks that
might threaten a reduction of the U.S. gold stock. It appears to be
conceded that the Desk might have to offset the proposed transactions
by substantial purchases of securities in order to effectuate current
monetary policy; and this fact suggests that the proposed transactions
would not be within the usual concept of open market operations.
FORD & LIBRARY GERALD
Federal Open Market Committee
-2-
On the other hand, there are considerations that would appear
to support the legality of the proposed transactions.
In the first place, although it is not believed to be a strong
argument, the transactions would be in the form of sales and purchases
of Government securities and thus literally within the scope of the ex-
press authority of the Reserve Banks.
Even if in substance the transactions should be regarded as
Reserve Bank borrowings, they would be no different in this respect
from matched sale-purchase transactions conducted since 1966 as a means
of absorbing bank reserves. The legality of such transactions has not
been questioned and "administrative practice", even for a period of less
than five years, might be regarded by a court as supporting the validity
of the transactions. In this connection, it may be noted that in recent
years drawings by the System under its network of "swap" arrangements
have in effect constituted borrowings of money and that the legality of
such drawings has not been questioned.
Finally, with respect to the purpose of the proposal, the
System's foreign currency operations have been designed to "help safe-
guard the value of the dollar in international exchange markets" rather
than to affect member bank reserves and bank credit. Such foreign cur-
rency operations were upheld legally in 1962 not only by Counsel for
the FOMC but by the Treasury's General Counsel and, reportedly, by the
Attorney General of the United States.
Section 12A of the Federal Reserve Act provides that the time,
character, and volume of open market operations shall be governed with
a view "to accommodating commerce and business and with regard to their
bearing upon the general credit situation of the country". It may be
argued that, like foreign currency operations, the proposed securities
transactions would clearly have a bearing, even though indirectly, upon
the general credit situation of the country.
While the question is not free from doubt, it is my opinion,
particularly on the basis of analogous precedents, that the proposed
matched sale-purchase transactions contemplated by the present proposal
would be legally supportable.
10"
FORD & LIBRARY 038670
CONF IDENTIAL (FR)
January 8, 1971.
To:
Federal Open Market Committee
Subject: Legality of "matched
sale-purchase transactions" to
From: Mr. Hackley
induce banks to retain Euro-
dollar holdings.
It has been suggested that, as a means of inducing American
banks to retain Eurodollar liabilities, the System might offer Gov-
ernment obligations for sale to banks having such liabilities, with
a simultaneous agreement to purchase such obligations at a specified
date at a rate that would provide the banks with an attractive yield.
This memorandum relates to the legality of such "matched sale-purchase"
transactions.
Although in form such transactions would involve the sale and
purchase of Government securities, it might be contended that in sub-
stance they would amount to a borrowing of money by the Reserve Banks
and that the Reserve Banks have no authority to borrow money. At times
in the past, purchases of securities with agreements to resell them at
a certain date (straight "RP's") have been questioned as constituting
loans of money rather than legitimate open market operations; but the
validity of such transactions now appears to have the legal support of
almost 50 years of "administrative practice" known to Congress. A1-
though matched sale-purchase transactions have been used as a tool of
domestic monetary policy since 1966 without legal challenge, they are
not supported by such a long period of administrative practice.
One of the arguments advanced in the past in support of straight
RP's is that, even if they amount to "loans", the Reserve Banks have
statutory authority to lend money to both member banks and to individ-
uals, partnerships, and corporations on the security of Government ob-
ligations. The Reserve Banks do not, however, have authority to borrow
money - which, it might be argued, is the effect of matched sale-purchase
transactions.
It might be contended that the proposed matched sale-purchase
transactions would not be designed to effectuate legitimate purposes of
Federal Reserve open market operations. Traditionally, such operations
have been regarded as designed to affect the reserves of member banks and
thereby to regulate domestic bank credit. The present proposal would be
aimed solely at persuading American banks to retain Eurodollar holdings
in order to prevent an outflow of dollars to foreign central banks that
might threaten a reduction of the U.S. gold stock. It appears to be
conceded that the Desk might have to offset the proposed transactions
by substantial purchases of securities in order to effectuate current
monetary policy; and this fact suggests that the proposed transactions
would not be within the usual concept of open market operations.
GERALD FORD LIBRARI
Federal Open Market Committee
-2-
On the other hand, there are considerations that would appear
to support the legality of the proposed transactions.
In the first place, although it is not believed to be a strong
argument, the transactions would be in the form of sales and purchases
of Government securities and thus literally within the scope of the ex-
press authority of the Reserve Banks.
Even if in substance the transactions should be regarded as
Reserve Bank borrowings, they would be no different in this respect
from matched sale-purchase transactions conducted since 1966 as a means
of absorbing bank reserves. The legality of such transactions has not
been questioned and "administrative practice", even for a period of less
than five years, might be regarded by a court as supporting the validity
of the transactions. In this connection, it may be noted that in recent
years drawings by the System under its network of "swap" arrangements
have in effect constituted borrowings of money and that the legality of
such drawings has not been questioned.
Finally, with respect to the purpose of the proposal, the
System's foreign currency operations have been designed to "help safe-
guard the value of the dollar in international exchange markets" rather
than to affect member bank reserves and bank credit. Such foreign cur-
rency operations were upheld legally in 1962 not only by Counsel for
the FOMC but by the Treasury's General Counsel and, reportedly, by the
Attorney General of the United States.
Section 12A of the Federal Reserve Act provides that the time,
character, and volume of open market operations shall be governed with
a view "to accommodating commerce and business and with regard to their
bearing upon the general credit situation of the country". It may be
argued that, like foreign currency operations, the proposed securities
transactions would clearly have a bearing, even though indirectly, upon
the general credit situation of the country.
While the question is not free from doubt, it is my opinion,
particularly on the basis of analogous precedents, that the proposed
matched sale-purchase transactions contemplated by the present proposal
would be legally supportable.
FORD i LIBRARY GERALD
January 11, 1971
TO:
Board of Governors
FROM:
Division of International Finance
SUBJECT: Euro-dollar problem: Federal Reserve
matched sale purchase transactions
CONFIDENTIAL (FR)
This memorandum outlines the technical characteristics of
Federal Reserve matched sale-purchase transactions with member banks
designed to help moderate repayments of Euro-dollars. Sales would be
made from the System's portfolio of U.S. Government securities with
offsetting purchase contracts to buy the securities back at specified
future dates. The effectiveness of the matched sale purchase trans-
actions (MSP's) (and of a special Ex-Im security issued to achieve
the same objective) would be increased if certain amendments which
are set forth below were made in the Board's Regulation M.
An amendment by the FOMC to its continuing authority di-
rective would be required to implement the proposal.
In the judgment of the staff, it would be most efficient for
the FOMC to specify in its continuing authority directive certain gen-
eral criteria for MSP transactions, such as the method of allocation to
member banks, an outside limit on the maximum outstanding volume of
matched sales purchase transactions, the maximum maturity of the instru-
ment, and the maximum interest rate spread allowable between sale and
1/ Draft language appears in the Appendix.
FORD & LIBRARY GERALD
Board of Governors
-2-
CONFIDENTIAL (FR)
repurchase price. Responsibility for making other decisions on the
MSP program might then be delegated to a subcommittee, whose decisions
would be dictated by operating experience.
Recommended Program:
It is recommended that the FOMC authorize a total outstanding
volume of MSP's of $1-1/4 billion initially; às necessary, the Trading
Desk could make such agreements at a rate of $300 million a week over
the course of a month. It is recommended that FOMC require that the
MSP be allocated to banks in proportion to their outstanding Euro-dollar
liabilities to branches (plus branch holdings of MSP's and Ex-Im Bank
securities) in the most recent computation period; reasons for reject-
ing other possible methods of allocation are discussed below.
The recommended maturity for the MSP (once the introductory
period is passed) is four weeks, with maturity to fall shortly after
the end of a computation period in order to adjust banks' holdings of
MSP's to their Euro-dollar liabilities as quickly as possible. It is
recommended that the Federal Reserve fix an appropriate yield spread
for each offering of MSP's over the one-month Euro-dollar deposit rate,
perhaps beginning with a spread of 1/8 percentage point.
Through MSP transactions, and through sale of high-yield
Ex-Im Bank securities, allocated to banks along the lines set forth
above, the Federal Reserve, and the U.S. Government, would share with
FORD is LIBRARY 0ERALD
Board of Governors
-3-
CONFIDENTIAL (FR)
the banks the cost of the Euro-dollar borrowings of their branches in
excess of amounts relent abroad. The share borne by the Federal Reserve
or the Government would be influenced both by the yield on the instru-
ment and the volume of such instruments allocated. A total allocation
of Ex-Im Bank securities and Federal Reserve MSP's (along the above
lines) amounting to $3 billion would eliminate the excess cost on 3/8 of
total Euro-dollar liabilities of about $8 billion; this would be equiv-
alent to a cost saving of about 40 basis points on the total amount of
borrowings, and may be compared to an estimated cost of Euro-dollars
over domestic funds of roughly 1 percentage point.
Consultation with the Division of Research and Statistics and
with the Trading Desk indicates that an MSP, patterned along these lines,
could be implemented without creating serious problems for the management
of domestic open market policy.
Discussion:
The particular characteristics of the proposed MSP to be ex-
amined further are the relation of the MSP to requirement-free Euro-
dollar bases, the method of allocation to member banks, and the method
of pricing the MSP.
Relation to requirement-free bases. The MSP could, as a matter of
principle equally well be made with the U.S. head office or with the
foreign branch. If the MSP is sold to the head office, there would be
FORD & LIBRARY GERALD
Board of Governors
-4-
CONFIDENTIAL (FR)
no necessary reduction in head office liabilities to foreign branches;
the head office could purchase the MSP with the funds that otherwise
might be used to repay Euro-dollar borrowings from branches. Thus, the
bank would retain its requirement-free base, unless it took specific
steps to reduce its base.
However, if the MSP were acquired directly by the branch (as
would be the case with the Ex-Im security), there would ordinarily be
a reduction in head office liabilities to branches as the branch paid
for the security by reducing its claim on the head office.
It would be advisable to amend Regulation M to provide specif-
ically that a bank's requirement-free base should not be reduced by amounts
of MSP's or Ex-Im securities held by the branch.
Method of allocation. The security should be allocated among banks ac-
cording to the volume of head office liabilities to branches plus branch
holdings of MSP's (and Ex-Im securities) in the most recently completed
computation period. This method of allocation would probably provide the
best balance of equity and effectiveness. Banks with large outstanding
head office borrowings from branches would obtain large allocations; banks
that held MSP's at head offices and repaid borrowings following the initial
allocation would obtain smaller amounts at future allocations.
FORD & LIBRARY GERALD
Board of Governors
-5-
CONFIDENTIAL (FR)
Alternative methods of allocation that attempt to exert
additional leverage on banks to maintain borrowings appear likely to
involve significant inequities and/or deficiencies in coverage. Two
examples are given below (on the assumption that the MSP's are held at
head office):
a) MSP's could be allocated in such a way that banks
that maintained Euro-dollar borrowings at or close to a recent level
(e.g. the average in the December computation period) would receive
larger allocations in proportion to their borrowings. Thus, one could
provide that banks would receive allocations equal to X per cent of
their Euro-dollar borrowings so long as borrowings (in the current
computation period) were not more than 10 per cent below the December
average, but otherwise allocations would be equal to 1/2 X per cent of
borrowings.
This method of allocation would place banks that had
maintained borrowings at or close to original base-period levels at
a disadvantage compared to banks that had reduced borrowings earlier.
A bank that reduced its Euro-dollar borrowings in February 1971 would
obtain a smaller allocation than it would have obtained had it made
the same reduction in early December. Such a method of allocation
would be inconsistent with the commitment in the Board's press release
of November 30, 1970:
FORD is LIBRARY 036830
Board of Governors
-6-
CONFIDENTIAL (FR)
Although the steps announced today were deliberately
made of modest scale, the Board has under review other
measures that might be adopted for the purpose of temper-
ing the repayment of Euro-dollars while avoiding penalty
to banks that operate so as to retain their reserve-free
bases.
b) Alternatively, one might provide that banks' eligi-
bility to acquire the MSP would be inversely related to the shortfall
of their Euro-dollar borrowings from the original base (May 1969 or
November 1970, whicever is higher). Most of the MSP's will, in
any event, be allocated to banks that in the December computation period
were close to their original historical bases; these banks account for
75-80 per cent of total Euro-dollar borrowings. Allocating them a
significantly larger than proportionate share of the MSP's would result
in only a minimal allocation for banks that have repaid substantial
amounts of Euro-dollars. Yet, these latter banks still have substantial
amounts of borrowings outstanding; three major New York City banks that
have reduced borrowings by 30-40 per cent from May base levels, still
account for about $2 billion of borrowings.
A formula for allocation providing that banks with borrowings
of at least 80 per cent of May 1969 bases (or November 1970 bases, if
higher) would obtain MSP's equal to X per cent of borrowings, and other
banks only 1/2 X per cent of borrowings, would encourage banks not to
repay below 80 per cent of the original base, but might well appear to
FORD & LIBRARY GERALD
Board of Governors
-7-
CONFIDENTIAL (FR)
sanction repayments down to this level. It would probably be inadvisable
to imply sanction of such a reduction (which would total nearly $1-1/2 billion,
if it were general.)
It should be noted that there would be little or no basis in
equity for application of a formula that used the original May 1969 base--
given the widely differing positions of individual banks in May 1969.
Moreover, a special formula would be required for banks that have been
using minimum bases (3 per cent of deposits) and are now required to
establish historical bases by January 20.
Neither the MSP nor the Ex-Im security should be transferable to
other banks, particularly in view of the fact that either would count toward
avoiding reduction of a bank's requirement-free base. Transferability would
result in sale of the allocations by banks that did not value their bases
highly to banks that would retain their bases anyway. Thus, the MSP (or
Ex-Im security) would tend to substitute for the most stable component of
Euro-dollar borrowings.
Maturity. The MSP is more likely to be an effective technique for inducing
banks to retain Euro-dollar borrowings if its maturity is relatively short;
the shorter the maturity, the more closely branch or head office holdings
of it can be matched to the bank's performance in retaining Euro-dollars.
FORD is LIBRARY
If an auction technique were used as a method of distributing a
limited supply, banks that wished to maintain reserve-free bases anyway
would bid most strongly for the securities, since the yield to them on
the preferential asset would be pure gravy. As a result, the yield
under the auction could be bid down to a point where it was not attractive
to banks on the margin between repaying or retaining Euro-dollar borrowings.
Board of Governors
-8-
CONFIDENTIAL (FR)
With a maturity of four weeks, holdings could be adjusted following the
end of each computation period; banks that repaid borrowings would obtain
correspondingly smaller allocations upon maturity of their current holdings.
Pricing. It is recommended that the Federal Reserve set both the sale and
the repurchase price on the MSP, as well as specifying an allocation for
each bank. These prices would be fixed to provide a yield to the bank equal
to the one month Euro-dollar deposit rate plus a small margin (e.g., 1/8 per-
centage point); at current Euro-dollar rates the yield would be about 6-1/4
per cent. Additional information on appropriate pricing may be obtained
from the experience in offering the Ex-Im security.
An alternative technique that was examined by the staff was for
the Desk to solicit bids from each bank for its specified allocation. The
bank making the bid would presumably attempt to guess the Desk's reserva-
tion price. But given the purpose of the MSP (and the constraint that
allocations reserved for one bank would not be offered to another bank),
it was not clear how the Desk could arrive at meaningful reservation prices.
Thus, it appeared advisable, at least in the initial offerings, for the
Federal Reserve to set a price that clearly covered the cost of Euro-
dollars plus a reasonable margin.
1/ The one-month rate would be appropriate both in light of the maturity
of the MSP and of the fact that about 45 per cent of the Euro-dollar deposits
of foreign branches mature within one month.
2/ Little is known about tax considerations that might affect the willing-
ness of foreign branches to acquire securities. The issue is probably not
significant so long as the margin between the yield on the MSP and the cost
of Euro-dollars is very small.
FORD & LIBRARY 0FRALD
Board of Governors
-9-
CONFIDENTIAL (FR)
Amount. Although the MSP, as outlined above would provide no
special marginal incentive for banks to retain Euro-dollar borrowings,
it would lessen the costs to banks of retaining requirement-free bases.
(Alternative methods of allocation would provide marginal incentives,
but at some cost in coverage or equity; see pages 5-7 above.) The cost
sharing could take the form of either a high rate of return (over and
above the cost of Euro-dollars) on a small volume of MSP, or a slight
margin over the Euro-dollar rate on a larger volume of MSP's. By and
large, the latter form of cost sharing would be preferable from the
standpoint of minimizing the political risk.
If one assumes total liabilities to branches are $8 billion,
an offering of $2 billion of MSP's (at a yield equal to the cost of
Euro-dollars to the bank) would eliminate the excess of cost to banks
on 1/4 of their total borrowings. This would be equivalent to a cost
saving of 25 basis points on the total amount of borrowings. It would
be a somewhat greater cost saving on that portion of their Euro-dollar
borrowings that the banks are considering repaying, since in any case
borrowings would not be repaid completely. If banks repaid $2 billion
of borrowings in addition to reducing their liabilities to branches by
$2 billion to enable the branches to acquire the securities, the second-
round allocation to refund the maturing MSP would provide a larger cost
saving: the $2 billion of refunding MSP's would be allocated to banks
FORD & LIBRARY GERALD
Board of Governors
-10-
CONFIDENTIAL (FR)
with $6 billion of borrowings (together with maturing MSP's); the cost
saving would be 33 basis points on average outstanding borrowings. Thus,
it would probably not be necessary to issue MSP's equal to the total
volume of borrowings; at some point the cost saving would be sufficient
to induce banks to preserve the remainder of their bases.
It would appear that a combined authorization of MSP's plus
Ex-Im securities of, say, $3 billion would represent an adequate amount
for planning, at least initially. Issuance of this amount would enable
the Federal Reserve and the Government together to cover almost one-half
of the excess cost of total Euro-dollar borrowings--at the present
1 percentage point cost of Euro-dollars over domestic funds--and to
cover a somewhat higher proportion of the excess cost on those borrow-
ings that are potentially subject to repayment. The entire amount may
not be required, but the need can best be assessed only after the response
of banks to the initial tranches has been determined.
FORD-LIBRARY is GERALD
APPENDIX
Add the following paragraph 4 to the Continuing Authority Directive
With Respect to Domestic Open Market Operations:
"4. For the purpose of moderating movements of Euro-dollar
liabilities of member banks, the Federal Open Market Committee authorizes
and directs the Federal Reserve Bank of New York, for the System Open
Market Account, to enter into special agreements ('paragraph 4 agreements')
with member banks providing for the sale of U.S. Government securities by
the Reserve Bank to the member bank on a cash or regular delivery basis,
and for the purchase by the Reserve Bank from the member bank of the same
amount of the same issues of securities within weeks or less, subject to
-
the following conditions:
"A. A member bank shall be eligible to buy securities under
paragraph 4 agreements in an amount equal to a specified frac-
tion of its (A) daily average deposits described in § 204.5(c)
of Federal Reserve Regulation D and (B) daily average net bal-
ances described in § 213.7(a)(1) (reduced by the daily average
amount of any deposits subject to § 204.5(c)), each for the
latest computation period as described in the specified sections.
The fraction, which shall be the same for all member banks, shall
be specified from time to time by the Federal Open Market Com-
mittee, or on behalf of the Committee by the Subcommittee named
in paragraph 6 of the authorization for System foreign currency
operations.
FORD is LIBRARY 07WU39
APPENDIX
-2-
"B. The aggregate amount of paragraph 4 agreements outstand-
ing at any one time shall not exceed $ - billion.
"C. Paragraph 4 agreements, which shall be non-transferable,
shall specify prices for the sale of securities to the member
bank and for the subsequent purchase of securities by the Reserve
Bank from the member bank, in such a manner that the net yield
to the member bank under the agreement is not more than basis
-
points in excess of the current market rate on one-month Euro-
dollar deposits.
"D. Within the limitations set forth above, the terms of
paragraph 4 agreements, and the timing and size of specific
offerings of such agreements, shall be subject to such directions
as may be issued from time to time by the Federal Open Market
Committee, or on behalf of the Committee by the Subcommittee
referred to in paragraph 4A above."
FORD & LIBRARY GERALD
TITLE 12--BANKS AND BANKING
CHAPTER II--FEDERAL RESERVE SYSTEM
SUBCHAPTER A--BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
PART 213--FOREIGN ACTIVITIES OF NATIONAL BANKS
[Reg. M]
ReservesAgainst Eurodollar Borrowings
1. Effective January 15, 1971, $ 213.7(a) of Regulation M
is amended to read as follows:
$ 213.7 Reserves against foreign branch deposits.
(a) Transactions with parent bank. During each week of
the four-week period beginning October 16, 1969, and during each
week of each successive four-week ("maintenance") period, a member
bank having one or more foreign branches shall maintain with the
Reserve Bank of its district, as a reserve against its foreign
branch deposits, a daily average balance equal to 20 per cent of
the amount by which the daily average total of
(1) net balances due from its domestic offices to such
GERALD FORD LIBRARY
branches, and
(2) assets (including participations) held by such branches
which were acquired from its domestic offices,
during the four-week ("computation") period ending on the Wednesday
fifteen days before the beginning of the maintenance period, exceeds
the greater of
11 Excluding (1) assets so held on June 26, 1969, representing credit
extended to persons not residents of the United States and (2) credit
extended or renewed by a domestic office after June 26, 1969, to persons
not residents of the United States to the extent such credit was not
extended in order to replace credit outstanding on that date which was
paid prior to its original maturity (see definition of United States
resident in
-2-
(1) the lowest corresponding daily average total8/ for
any computation period ending after November 25, 1970, or
(11) 3 per cent of the member bank's daily average deposits
subject to $ 204.5(a) of this chapter (Regulation D) during the
current computation period, or the lowest corresponding daily average
total⁸/ for any computation period beginning on or after December 24,
1970 and after the bank has had a foreign branch in operation for
more than 90 days, whichever amount is the lesser:
Provided, That the applicable base computed under (i) or (11) shall
be reduced by the daily average amount of any deposits of the member
bank subject to $ 204.5(c) of this chapter (Regulation D) during the
computation period.
2a. The change provides a means by which a member bank
may retain its reserve-free base with respect to its Eurodollar
borrowings from its foreign branches by counting within its
base the amount of purchases by its foreign branches of certain
Export-Import Bank obligations.
8 Including the principal amount paid by a foreign branch of the
member bank for obligations held by such branch that were purchased
by it from the Export-Import Bank of the United States pursuant to
its program announced on January 15, 1971, and excluding assets
representing credit extended to persons not residents of the United
States.
FORD & LIBRARY 076870
-3-
b. The requirements of section 553(b) of title 5,
United States Code, with respect to notice, public participation,
and deferred effective date were not followed in connection with
this amendment because the Board found that following such
procedures with respect to this amendment would be contrary to
the public interest and serve no useful purpose.
By order of the Board of Governors, January 14. 1971.
Kenneth A. Kenyon
Deputy Secretary
RFS:srs
FORD & LIBRARY GERALD
BOARD THE OF FEDERAL OF GOVERNORS RESERVE SYSTEM
FEDERAL RESERVE
press release
6
For immediate release
January 15, 1971
The Board of Governors of the Federal Reserve System today
amended its regulations to permit U.S. banks to count toward mainte-
nance of their reserve-free Eurodollar bases any funds invested by
their overseas branches in Export-Import Bank securities offered under
the program announced today by the Export-Import Bank.
The amendment is a further step resulting from the Board's
continuing review of measures needed to temper the adverse impact of
Eurodollar outflows on the U.S. balance of payments.
Eurodollar borrowings by a member bank are subject to a 20
per cent reserve requirement to the extent that they exceed a bank's
reserve-free base.
For those banks that have had a minimum (3 per cent of
deposits) reserve-free base, the Board postponed for four weeks, through
the computation period ending February 17, 1971, the application of the
automatic downward adjustment of their bases.
Attached is a copy of the amendment to the Board's Regulation M
which governs the foreign activities of member banks.
-0-
FORD & LIBRARY GERALD
TITLE 12--BANKS AND BANKING
CHAPTER II--FEDERAL RESERVE SYSTEM
SUBCHAPTER A--BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
PART 213--FOREIGN ACTIVITIES OF NATIONAL BANKS
[Reg. M]
Reserves Against Eurodollar Borrowings
1. Effective January 15, 1971, § 213.7(a) of Regulation M
is amended to read as follows:
§ 213.7 Reserves against foreign branch deposits.
(a) Transactions with parent bank. During each week of
the four-week period beginning October 16, 1969, and during each
week of each successive four-week ("maintenance") period, a member
bank having one or more foreign branches shall maintain with the
Reserve Bank of its district, as a reserve against its foreign
branch deposits, a daily average balance equal to 20 per cent of
the amount by which the daily average total of
(1) net balances due from its domestic offices to such
BERRAUF FORD LIBRARY
branches, and
(2) assets (including participations) held by such branches
which were acquired from its domestic offices,
during the four-week ("computation") period ending on the Wednesday
fifteen days before the beginning of the maintenance period, exceeds
the greater of
71 Excluding (1) assets so held on June 26, 1969, representing credit
extended to persons not residents of the United States and (2) credit
extended or renewed by a domestic office after June 26, 1969, to persons
not residents of the United States to the extent such credit was not
extended in order to replace credit outstanding on that date which was
paid prior to its original maturity (see definition of United States
resident in footnote 9).
-2-
(i) the lowest corresponding daily average total8/ for
any computation period ending after November 25, 1970, or
(ii) 3 per cent of the member bank's daily average deposits
subject to § 204.5(a) of this chapter (Regulation D) during the
current computation period, or the lowest corresponding daily average
total for any computation period beginning on or after January 21,
1971 and after the bank has had a foreign branch in operation for
more than 90 days, whichever amount is the lesser:
Provided, That the applicable base computed under (i) or (ii) shall
be reduced by the daily average amount of any deposits of the member
bank subject to § 204.5(c) of this chapter (Regulation D) during the
computation period.
*
*
*
*
*
2a. The change provides a means by which a member bank
may retain its reserve-free base with respect to its Eurodollar
borrowings from its foreign branches by counting within its
base the amount of purchases by its foreign branches of certain
Export-Import Bank obligations.
FORD & LIBRARY GERALD
8/ Including the principal amount paid by a foreign branch of the
member bank for obligations held by such branch that were purchased
by it from the Export-Import Bank of the United States pursuant to
its program announced on January 15, 1971, and excluding assets
representing credit extended to persons not residents of the United
States.
-3-
b. The requirements of section 553(b) of title 5,
United States Code, with respect to notice, public participation,
and deferred effective date were not followed in connection with
this amendment because the Board found that following such
procedures with respect to this amendment would be contrary to
the public interest and serve no useful purpose.
By order of the Board of Governors, January 15, 1971.
(Signed) Kenneth A. Kenyon
Kenneth A. Kenyon
Deputy Secretary
[SEAL]
FORD : LIBRARY 0FRALD
CHAIRMAN BURNS
R.FORD i LIBRARY GERALD
FOR INFORMATION
PRIOR TO CONSIDERATION AT A
MEETING OF THE BOARD.
CONFIDENTIAL (FR)
January 18, 1971
TO:
Board of Governors
FROM:
Division of International Finance
SUBJECT: Reserve requirements and Euro-dollar borrowings
The table attached to this memorandum presents a calculation
of the release of reserves involved in:
a) an across-the-board reduction in reserve require-
ments by 1/2 percentage point against net demand deposits
up to $1 billion at all member banks, and
b) a special reduced rate of reserve requirement of
7-1/2 per cent against demand deposits to the extent that
they are matched by Euro-dollar liabilities.
This possibility was noted in the last paragraph of the
Division's memorandum of December 30, but no calculation was presented.
Under this proposal, the large banks would continue to
hold reserves equal to 17-1/2 per cent against net demand deposits in
excess of $1 billion; they would obtain a release of reserves of only
$85 million as a result of step (a) above, compared to a release of $492
million for other banks. This smaller release for the largest banks
would help offset criticism that might arise from the release of reserves
involved in step (b) above: the special reduced requirement on amounts
equal to Euro-dollar borrowings would release $890 million of reserves
for the largest banks, and $64 million of reserves for the remainder.
FORD & LIBRARY GERALD
Board of Governors
-2-
CONFIDENTIAL (FR)
The total release of reserves from both measures would be
about $1.5 billion.
(As a matter of equity, if the Board were to consider
establishment of a special reduced rate of requirement for reserve
city banks, it might also establish a special reduced rate for country
banks--although, in fact, country banks have not been significant
borrowers of Euro-dollars. The appropriate rate for country banks
might be 2-1/2 per cent.)
An alternative proposal would be to reduce reserve require-
ments on total net demand deposits of all banks by 1/2 percentage point,
in combination with a special reduced rate of requirement. This would
involve a total reserve release of $1.66 billion, of which $705 million
would result from the general reduction in reserve requirements, and
$954 million from the special reduced reserve requirement.
GERALD FORD LIBRARY
Estimated Reserves Released by Amended Demand Deposit Reserve
Requirements for 17 Banks with Net Demand Deposits in Excess
of $1 billion and for All Other Member Banks
(millions of dollars)
(1)
(2)
(3)
(4)
(5) =
Reserves Released by:
(3) + (4)
1/2% lower
Special 7-1/2%
/
Net
reserve ratio
reserve ratio on
Total
Demand
Euro-dollar
on Net DD up
Net DD equal to
Reserves
Deposits
Borrowings
2/
to $1 billion
Euro-$ borrowings
Released
First National Boston
$1,175
$453
5
45
50
Bankers Trust
2,601
724
5
72
77
Chase Manhattan
5,633
2,263
5
226
231
Irving Trust
1,314
241
5
24
29
Morgan Guaranty
2,331
1,223
5
122
127
Chemical
3,298
820
5
82
87
First Nat'1. City N.Y.
4,835
649
5
65
70
Manufacturers Hanover
3,452
570
5
57
62
Mellon
1,208
117
5
12
17
Continental Illinois
2,087
674
5
67
72
First National Chicago
1,769
348
5
35
40
Nat'l Bank Detroit
1,337
2
5
*
5
Bank of America
5,182
794
5
79
84
United California
1,429
*
5
*
5
Crocker Citizens
1,316
--
5
--
5
Wells Fargo
1,442
39
5
4
9
Security Pacific
2,196
--
5
--
5
TOTAL
42,605
8,917
85
890
975
Other Member Banks
98,483
644
492
64
556
All Member Banks
141,088
9,561
577
95.4
1,531
/ Daily average in the statement week ended December 9, 1970.
/ Daily average in the four week computation period ended December 23, 1970.
/ Less than $500 thousand.
LIBRARY GERALD R. FORD
January 15, 1971
CONFIDENTIAL (FR)
To:
Federal Open Market Committee
January 18, 1971
From: Charles A. Coombs
Subject: Euro-dollar reflow
problem
As the Committee is aware, I have been very much in favor
of using some Government borrowing device to help absorb an unduly
heavy return flow of Euro-dollars previously borrowed by U.S. banks.
The device actually chosen to initiate such an approach, i.e., issuance
of Export-Import Bank paper, strikes me as probably the best option
available. As you know, a number of European government agencies
have previously borrowed in the Euro-dollar market, thereby providing
a useful precedent. I also like the tie-in of such Export-Import Bank
borrowing in the Euro-dollar market with the foreign trade financing
activities of the Bank. I was particularly pleased by the soft-pedal
approach used in the press release and would expect that the action
taken would be warmly received by both our banks and by the European
central banks. In view of the limited amount of the Exim offering,
which the market may well construe as a one-shot operation, I would
not think that the offering would have any major stiffening effect
on market rates in the Euro-dollar market and should thus minimize
the risk of inducing still further outflows from this country of both
foreign and resident money into the Euro-dollar market.
As the Committee is also aware, I had earlier suggested that
the Treasury might also usefully explore the possibility of employing
the BIS to mop up short-term Euro-dollar money for placement in
FORD & LIBRARY GERALD
Federal Open Market Committee
-2-
deposits with the Stabilization Fund or in Treasury certificates
ranging up to 30 days' maturity. I am still inclined to think that
this might be the simplest and most efficient way of absorbing
surplus Euro-dollars at this time. In this connection, the BIS may
now be increasingly acting as intermediary in the placing of foreign
central bank reserves in the Euro-dollar market, rather than in U.S.
Treasury bills. Such shifts from normal placements of foreign
official dollar reserves in New York to placements in the Euro-dollar
market are almost identical in effect with U.S. bank repayments of
Euro-dollar debt. Accordingly, may I suggest an approach to the
European central banks who control the BIS, involving:
(a) An appeal to the European central banks to
cease further placement of official reserves in the
Euro-dollar market, either directly or via the BIS,
and to shift existing Euro-dollar placements insofar
as possible back into U.S. Treasury bills, and
(b) A request that the BIS management desist
from encouraging other foreign central banks to shift
money from U.S. Treasury bills into the Euro-dollar
market via the BIS.
(c) A shift of a substantial part of existing
BIS short-term placements from the Euro-dollar market
into U.S. Government debt instruments at rates match-
FORD & LIBRARY GERALD
ing Euro-dollar rates in the overnight to 30-day range.
Federal Open Market Committee
-3-
Even if the BIS route were not taken, I would still see con-
siderable merit in U.S. Treasury placements of short-term paper with
the London Branches of U.S. banks in amounts ranging up to, say,
$2 billion. Whatever the Treasury fails to borrow through the Euro-
dollar market may well have to be financed through sale of gold,
SDRs, or drawings upon the IMF, not to mention interim drawings by
the Federal Reserve upon the swap lines. On the other hand, direct
and overt Treasury borrowing from the Euro-dollar market might well
stiffen Euro-dollar rates unduly if the market were to assume that
Treasury issues perhaps going well beyond a billion or so might be
in the pipeline.
As for the third possibility, that of Federal Reserve "matched-
sale-purchase transactions", I should be inclined to hold this approach
in abeyance to help deal with a possible future emergency, which might
well require even more striking departures from usual practice. So
long as other, more normal possibilities of financing the deficit
remain, I would be gravely concerned by four aspects of such Federal
Reserve intervention:
First, I find myself deeply troubled by the essential feature
of the operation, namely that the Federal Reserve would be creating
dollars on the one hand and then borrowing them back at a premium
price. I cannot escape the feeling that such an operation is inher-
ently unnatural and know of no precedent in other central bank operations.
Second, in any circumstances short of a major emergency, in
which such a System operation might be mounted for a brief holding
FORD is LIBRARY GERALD
Federal Open Market Committee
-4-
action, I can see a considerable risk that the Federal might become
progressively more deeply involved in financing on a longer term basis
a sizable part of the U.S. payments deficit, thus assuming a responsi-
bility which should fall directly upon the Treasury.
Third, the proposal for "matched sale-purchase transactions"
represents a 180 degree turn from the previous approach of imposing
penalties upon banks going below their Euro-dollar base. Having
accepted the carrot of a $1 billion or so of such MSPs, the banks
might push us into a further distribution of such MSPs by renewing
their recent warnings of a massive running down of Euro-dollar debt
and continue this process until the Federal had absorbed the bulk of
their outstanding Euro-dollar debt.
Fourth, I can see a risk in the case of Federal Reserve
intervention, even greater than that involved in a Treasury operation,
that the massive potential of Federal Reserve operations in this area
might very well lead to a stiffening of Euro-dollar rates in the
maturity range in which we were operating, thereby opening up an
even larger gap between U.S. and Euro-dollar rates with consequent
inducement to shifts of both foreign central bank and U.S. resident
money into the Euro-dollar market. We could get into a situation in
which the Euro-dollar rate effects of Federal Reserve intervention
might indirectly pull almost as much new money into the Euro-dollar
market as we were absorbing by our intervention.
FORD is LIBRARY GERALD
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
CONFIDENTIAL (FR)
January 26, 1971.
TO:
Chairman Burns
FROM:
Robert Solomon and A. B. Hersey
SUBJECT: The BIS Paper of January 10 on Joint Supervision
of the Eurocurrency Market.
The paper mentions several problems connected with the Euro-
dollar market that have been of interest to central banks. After pre-
senting some statistics and then discussing some of the factors re-
sponsible for the growth of the market over the years, the paper goes
through the list of problems, briefly describing each. It concludes
with suggestions for four sorts of joint action:
1. Improvement of statistics
2. Discussion of "certain aspects of the permanent
regulations and practices in particular countries"
3. Discussion of "ad hoc regulations or arrangements
in particular countries"
4. "Initiatives of the central banks," aimed "to
alleviate specific problems," but not otherwise
described.
The suggestion is made that "any problems raised or proposals for ini-
tiatives" might be considered in a meeting of the Governors after
preparation by a group of Deputies of the Governors, which would meet
periodically.
Comments
The paper is unfortunately not entirely free of overtones of
annoyance at the continuation of the U.S. balance of payments deficit and
DECLASSIFIED
AUTHORITY red Res System th. 11/16/82;
BY Cab NARA, DATE 9/10/09
FORD is LIBRARY GERALD
To: Chairman Burns
-2-
at the increasing use in Europe of the dollar as a liquid asset to
hold and as a currency in which loans are made. The paper also
goes farther than it should in taking former Chairman Martin as
authority for the view that "monetary rather than purely banking
aspects" of the market deserve attention. Mr. Martin's statement,
which is fully quoted, was quite noncommittal as to what sorts of
reasons may exist "for giving to an international institution some
responsibility for supervising these markets."
There follows a brief comment on each of the six "problems"
described on pages 7-10 of the paper (and to some extent discussed in
other parts of the paper).
1. Potentially inflationary expansion of bank credit inter-
nationally, which some countries find it difficult to allow for in
adjusting their own domestic monetary and credit objectives. The paper
exaggerates the magnitude of this problem. There is no reason for
European countries to worry about the sizable amounts of credit the
Eurodollar market extended in some years to U.S. banks or businesses.
At mid-1970, the amount of Eurodollar credit outstanding to nonbanks
within the European eight-country area and to banks and nonbanks in
all other countries except the United States was $19 billion, according
to the table given in the paper. In comparison with the $775 billion
the paper cites as a total of "domestic private-sector credit extended by
FORD & LIBRARY GERALD
To: Chairman Burns
-3-
banks in all OECD countries," this is a tiny figure. Moreover, in
the absence of a Eurodollar market other forms of bank credit across
national boundaries would unquestionably be larger than they now are.
2. International flows of funds facilitated by the market
at times "blunt the effectiveness" of national monetary policies. This
problem certainly deserves consideration and, in fact, is already re-
ceiving attention in Working Party 3 of the OECD. It is a problem that
will face any group of countries trying to use monetary policy for
domestic purposes in conditions where capital can flow more or less
freely. It is a problem that would exist even if there were no Euro-
dollar market.
3. Use of the market can delay action to correct imbalances
in the balance of payments. Although the paper says this point can
apply to surplus countries as well as to deficit countries, it is
doubtful whether anyone believes that revaluation of the German mark
was delayed by measures that encouraged German commercial banks to
place funds in the Eurodollar market, thereby diminishing a little the
growth of German official reserves. The point is obviously aimed at
the United States, which masked a large basic deficit in 1969 by
attracting short-term funds. Italy did the same in 1963. In rebuttal,
we would ask what further "corrective action" anyone thinks we should
have been taking in the tight money year of 1969?
4. The market's "amplifying effect" on interest rate develop-
ments is "out of proportion to its marginal share of world credit flows. "
FORD & LIBRARY GERALD
To: Chairman Burns
-4-
This is a proposition for serious economic analysis to confirm or
refute. (The emphasis here is on world levels of interest rates,
rather than on the inter-country differences which contribute to
problem number 2.) One conceivable conclusion from a study of the
1969 experience might be that without a Eurodollar market to turn to,
the big U.S. banks might have driven U.S. market rates up even more
than they did, which would certainly have put some pressure on other
national markets as funds were attracted directly to the United States.
However, it is a central fact about the Eurodollar market that interest
rate competition, both for loans and for deposits, is less constrained
in that market by official regulations and private conventions than
in any national market. When borrowers of high credit standing,
thwarted elsewhere, turn to the Eurodollar market they get the money
they want, but at a price.
Supposing it were thought desirable, what sort of "concerted
effort" could central banks conceivably undertake in the Euromarket
that would somehow run parallel to their domestic actions "aimed at
controlling the money supply without changes in interest rates so
violent as to disrupt financial markets?" One proposal might be
that all countries be prepared to regulate access of their borrowers
and lenders to the market and that the application of such regulations
be discussed regularly at Basle. A proposal to impose a set of interest
rate ceilings on the market would be unlikely to carry; it would tend
to destroy one of the great virtues of the market--namely, "the
FORD & LIBRARY GERALD
To: Chairman Burns
-5-
stimulation of banking competition, both internationally and in
various domestic credit markets," as the BIS paper puts it.
5. The market may feed speculative excesses. The paper
devotes several paragraphs to showing that this is not a major problem.
One point explicitly made is that speculative flows could occur "even
without the facilities of the Euro-market."
6. Dangers of "the repercussions of a possible run on the
dollar" have been increased. The writers of the paper report "unease"
at the "growing dominance of the dollar" and "fear ... that the re-
percussions of a possible run on the dollar have been considerably
increased as a result of the market's growth." They do not attempt
to consider what if any changes in practices -- short of abolition of
the market, if that is conceivable -- might be undertaken to reduce
such repercussions, For example, might it be useful to impose
regulations requiring closer matching of the maturities of Eurodollar
assets and liabilities?
If we had been drawing up such a list as this, we might have
omitted two or three of these questions but we would have added another:
should or should not central banks place reserves in the Euroddlar market
(either directly or through the BIS). The writers of the paper seem to
have assumed unquestionábl injly that such operations (a type of central bank
"initiatives") are not undesirable and may be required. This assumption
needs to be questioned. The paper itself does note that "the part played
GERALDO FORD LIBRARY
To: Chairman Burns
-6-
by monetary authorities in the market's development has not been
insignificant." From the United States point of view, the main
thing to be sought in any discussion of this question would be a
recognition by the governments and central banks of other countries
that the United States cannot be held responsible for all the growth
of official reserves in dollars.
It is hard to predict what kinds of recommendations for
joint action might eventually come out of a Basle study of problems
2, 4 and 6 (the ones that seem most worth studying). Perhaps the
Federal Reserve would be advised not to let Regulation Q ceilings
again force U.S. banks to borrow heavily from the Eurodollar market.
Perhaps countries will be advised to be prepared to control access of
the
their nationals to one market. If it were not for the EEC thrust
toward narrower exchange rate margins, a recommendation for somewhat
wider margins 8 uld well get serious consideration as a device for
helping to preserve autonomy for national monetary policies. Perhaps
the Bank of England would be asked to devise new regulations on Euro-
dollar deposit and loan maturities. Some of these ideas might be
unwelcome to the American banks that operate in the market, but
they might not raise serious problems from the national point of view
of the United States.
aBH RS
FORD is LIBRARY 938870
OF
BOARD OF GOVERNORS
THE OF FEDERAL GOVERNORS RESERVE SYSTEM
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON, D.C. 20551
STRICTLY CONFIDENTIAL (FR)
January 29, 1971
To:
Federal Open Market Committee Subject: Expression of views
.on MSP contingency
From: Robert C. Holland, Secretary
plan.
At the direction of Chairman Burns, all voting members of the
Federal Open Market Committee were contacted on or around January 19,
1971, to ascertain their views with regard to the possible contingency
plan for Federal Reserve matched sale-purchase transactions with
member banks to help moderate Euro-dollar repayments. That plan had
been outlined in a staff memorandum dated January 11, 1971, and had
been discussed by the Committee on a preliminary basis at its
January 12, 1971, meeting.
In response to my telegram of January 19, 1971, seeking their
views, nine of the twelve voting Committee members indicated that
they agreed in principle with the proposed amendment of the contin-
uing authority directive as a useful contingency plan, to be acted
on finally at a subsequent time if deemed necessary. Governor
Robertson, Governor Brimmer and President Hayes indicated they dis-
agreed in principle with this type of approach.
FORD i LIBRARY
-2-
The Committee members agreeing with the proposal generally felt
that the contingency plan should be in readiness so that the Federal
Reserve System would be prepared to do whatever it could if circum-
stances became compelling and all preferable courses of action were
unavailing. However, these members felt strongly that sales of
securities by the Treasury Department (or by the Export-Import Bank
or other Government agencies) designed to moderate Euro-dollar repay-
ments would be a much better method of dealing with the problem.
Some of the members of the Committee who approved in principle
expressed various reservations concerning the MSP proposal. Question
was raised about the legality of the transactions, and the possibility
was noted that litigation might be brought by some bank not included
in the arrangement. It was observed that the operation was easy to
misinterpret and thus vulnerable to criticism if and when exposed to
public view. Concern was also expressed that the Federal Reserve
might be drawn into MSP's up to the full $8 billion of Euro-dollar
liabilities presently outstanding at U.S. banks to their foreign
branches. Several Committee members believed that the scheme for
reduced reserve requirements against an amount of deposits equal to
Euro-dollar liabilities might be preferable both politically and on
substantive grounds. Finally, the view was expressed and agreed to
by Board members of the Committee that if the MSP proposal were to
be implemented, the duration of the Federal Reserve liability should,
in principle, be limited to one year.
FORD is LIBRARY GERALD
-3-
Committee members Hayes, Robertson and Brimmer, in disapproving
of the plan, expressed several points of disagreement in principle.
They believed that the problems associated with Euro-dollar repayments
were primarily a Treasury responsibility. They were also very much
concerned that if the FOMC began to engage in MSP transactions, there
would be pressure for the System to finance more and more of the U.S.
balance of payments deficit in this fashion, and for an indefinite
span of time.
If events developed in a way that compelled Federal Reserve
action, they much preferred resort to the proposal for reduced reserve
requirements mentioned above. Additionally, Governor Robertson
emphasized that, in his view, there was no justifiable legal founda-
tion for either the purpose of the proposed System MSP transactions
or the means chosen.
Governor Brimmer added that he felt the probable size of further
Euro-dollar repayments was not large enough to warrant the kind of
extraordinary action that MSP transactions would represent, given the
likelihood that U.S. banks and their foreign branches would want to
retain some of their Euro-dollar liabilities for operating purposes.
President Hayes also objected to the idea of a central bank in effect
borrowing back its own currency and at a premium.
In the light of these expressions of views by the members of the
Committee, the Chairman instructed the staff to proceed with further
FORD & LIBRARY GERALD
-4-
development and refinement of contingency plans on both the MSP and
the reduced reserve requirement proposals. In particular, the staff
was directed to explore procedures that might help to limit the dura-
tion of any such Federal Reserve MSP operations to one year or less.
FORD is LIBRARY GERALD
Chairman Burus
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Date February 3, 1971
To
Governor Daane
Subject: Central Bank Holdings of
From Robert Solomon & A. B. Hersey
Reserves in Eurodollars
STRICTLY CONFIDENTIAL (FR)
This memorandum (1) describes very briefly the magnitude
of central bank holdings of reserves in Eurodollars, (2) mentions
some of the motives behind these holdings, (3) analyzes the effects
of changes in these holdings on interest rates, exchange rates, flows
of funds, aggregate foreign official reserves, and the U.S. balance
of payments, and (4) considers briefly the question of what help or
enlightenment might be got from a study of Eurocurrency market prob-
lems which the central bank governors who meet at Basle may be about
to plan. (We are asked to keep information about this study highly
restricted.)
Magnitude
Our estimate for ten leading industrial countries (Group
of Ten and Switzerland) puts their official Eurodollar holdings
at the end of 1969 in a range of $1-1/2 to $2 billion. Most of this
we believe to have been held as dollar deposits with the Bank for
International Settlements. We know that sterling area countries
held $500 million in dollar deposits with the BIS. (Total deposit
liabilities of the BIS in all currencies were well above $3 billion.)
The BIS in turn held dollar assets amounting to $1.3 billion in
the United States and $0.9 billion outside the United States.
DECLASSIFIED
AUTHORITY SeD. Res. System th. 11/16/82;
GERALD R. LIBRARY FORD
BY lala NARA, DATE 9/10/09
=
To: Governor Daane
-2-
STRICTLY CONFIDENTIAL (FR)
(All these figures, except the BIS total deposit liabilities, are
strictly confidential.) We believe that substantial amounts of
Eurodollar deposits were held by other central banks outside the
groups mentioned.
A year later, at the end of 1970, the official Eurodollar
holdings of the 10 countries may have increased to something in the
range of $3-1/2 to $4 billion. Meanwhile, the BIS reduced its
balances in the United States to $0.3 billion and increased its
dollar holdings elsewhere to $3.9 billion.
Thus, the year's increase in central bank Eurodollar
reserves (including their deposits at the BIS) may have been around
$2 billion for the 10 countries -- and, as the tables appended
suggest, may have been more for the world as a whole. During the
year the BIS shifted $1.0 billion from its holdings in the United
States to the Eurodollar market, besides passing on to that market
its funds from other resources. The total increase in funds supplied
to commercial banks in the Eurodollar market (including deposits by
the BIS) almost certainly exceeded the $3.0 billion rise in BIS dollar
assets outside the United States. We think it likely that monetary
authorities outside the Group of Ten (some in Europe, some in the
Middle East, and others in the Far East or Latin America) were placing
FORD is LIBRARY
1/
The International Monetary Fund in its 1970 Annual Report
published a figure of $2.8 billion for the end-of-1969 "official
holdings of Eurodollars" of an undefined group of 38 countries,
based on "Fund staff information and estimates.' " Possibly there
were important omissions of countries. In any case, the figure is
difficult to use, because we are not told how the Fund's computa-
tion treated the dollar assets and dollar deposit liabilities of
the BIS.
To: Governor Daane
-3-
STRICTLY CONFIDENTIAL (FR)
additional amounts of reserves in Eurodollars. The one thing we
know precisely (from our confidential information) is the $3.0
billion increase in BIS dollar holdings outside the United States.
It is evident that the BIS played a key role last year in
the growth of official Eurodollar holdings. The dual role of the
BIS as a semi-official institution and as a money-making bank
complicates any discussion of this matter, from the statistical
foundations up.
Motives
From conversations we and some of the Federal Reserve Bank
of New York officers have had at various times with foreign central
bank officials, we judge that the large placements of reserves in
Eurodollars during 1970 were motivated by relatively narrow and
special considerations, without much attention to general consequences.
Interest earnings were probably a major consideration in most cases.
In two countries (Italy and Britain) the central banks are said to
have had a special reason or justification for seeking high interest
returns: these high yields were in some way to offset high interest
payments on borrowings in the Eurobond or Eurodollar markets by
government-controlled companies (undertaken to help finance the
country's adverse balance of payments). In another country the
central bank lays great store on the liquidity of its assets and
finds very short-term Eurodollars preferable, for their liquidity,
over U.S. Treasury bills of the maturities that would in practice be
purchased; this central bank, however, does not allow its total
uncovered dollar assets to build up much.
FORDO is LIBRARY GERALD
To: Governor Daane
-4-
STRICTLY CONFIDENTIAL (FR)
One central bank is said to have placed funds with the BIS
primarily because the BIS asked it to. There is of course a long
history of international cooperation involving the BIS: the BIS
undertakes operations desired by central banks and the central banks
provide some or all of the finance. The major example in recent
years is the assistance to Britain under the sterling balances
arrangements. It is only a step from the financing of central-
bank-sponsored operations of that kind to the financing of activities
initiated by the BIS.
Eurodollar placements by central banks outside the Group
of Ten are also probably motivated chiefly by a desire for earnings.
One class of placements, however, has a special history. These are
the dollar deposits at the BIS of sterling area central bank holders
who agreed, at the time of the sterling balances arrangement in 1968,
that if they converted some of their sterling reserve holdings into
dollars they would keep the dollars at the BIS. Such deposits
would provide additional finance for reserve assistance to Britain.
Deposits under this arrangement were built up in 1968 and 1969,
and rose moderately further in 1970. As the Bank of England's
liabilities to the BIS have now been paid off, these deposits of
sterling area countries are now financing BIS Eurodollar assets.
FORD 3 LIBRARY GERALD
The decision by the BIS to shift its time deposits from
New York to the Eurodollar market during 1970 was a response to the
easing in U.S. financial markets. Banks in this country had been
paying above-ceiling interest rates to exempted depositors (including
the BIS); these rates were competitive with Eurodollars. When
To: Governor Daane
-5-
STRICTLY CONFIDENTIAL (FR)
issuance of CD's domestically became possible for the U.S. banks,
the BIS could no longer get rates in New York comparable with what
was available in London. The BIS could not continue paying
interest at the Eurodollar rate level to its central bank depositors
without shifting its funds out of New York.
Only one element of the increase from December 31, 1969
to December 31, 1970 in central bank Eurodollar holdings was entirely
free of the earnings motive. At each year-end, the Swiss National
Bank temporarily holds large Eurodollar assets -- more at the end of
1970 than a year earlier -- which it takes over from Swiss commercial
banks through swaps against Swiss francs (spot sales of Swiss francs
to the banks with forward repurchases). Here the motive is to
relieve year-end liquidity pressures in the Swiss money market, and
the motive for putting the dollars into the Eurodollar market -- from
which the Swiss banks withdraw the dollars they swap to the Swiss
National Bank -- is to relieve or prevent pressures in that market.
Year-end interventions in the Eurodollar market were also undertaken
in some years -- not recently -- by the BIS in cooperation with the
Federal Reserve System: the System financed the operation by having
the BIS draw on its dollar-DM swap line.
GERALD FORD LIBRARY
Unlike the Swiss operations mentioned above, central bank
actions intended to influence their domestic market conditions have
sometimes taken the form of drawing on their dollar reserves in the
United States to make swaps at preferential rates with their commer-
cial banks, to induce the banks to shift out of domestic liquid assets
into Eurodollars. At times another important intention was to cut
To: Governor Daane
-6-
STRICTLY CONFIDENTIAL (FR)
down a country's official reserve gains. Though the effects in
the Eurodollar market of such actions might resemble those of a
central bank placement of its own assets in the market, the motives
of the central bank were quite different: when a central bank sub-
sidizes covered dollar placements by the commercial banks it is
giving up earnings, not seeking them. And effects on the magnitude
of the world aggregate of official reserves were of course very
different.
Effects
Central bank placements of reserves in Eurodollars rather
than U.S. Treasury bills tend - - other things being equal -- to
depress Eurodollar interest rates relative to short-term rates in
the United States. Any such change in Eurodollar rates has some
effect on the inflow of deposits and the outflow of loans in Euro-
dollars. To the extent that there is a net increase in the dollar
liabilities of banks doing Eurodollar business, it has to be matched
by an equal increase in their assets (including net assets in other
currencies). Temporary changes may occur in their holdings of non-
interestbearing bank balances in the United States, but if U.S.
financial markets are not willing to absorb excess funds from Euro-
dollar banks at high enough interest rates, those funds will soon
find an outlet in assets elsewhere.
FORD i LIBRARY 07V870
Financial conditions in the various national markets
together with the regulations of the authorities in each country
affecting international flows are the factors that basically determine
To: Governor Daane
-7-
STRICTLY CONFIDENTIAL (FR)
the direction and volume of flows of funds through the Eurodollar
market from certain countries at any given moment to certain others.
When the flows thus determined are supplemented by an injection of
central bank reserves, the prevailing directions of flows through
the market will not be altered, but either the volume of outflows
must increase in some directions or there must be some backing up
and shrinkage of inflows from others.
In 1970 the prevailing direction of flow through the Euro-
dollar market was from the United States to Germany and other
countries in Europe and elsewhere. U.S. banks were reducing their
liabilities to their branches in the market by amounts larger than
the counterflows from the market to the United States such as with-
drawal of Eurodollar deposits by U.S. investors, dollar borrowings
from Europe by U.S. companies, placements of funds by foreign banks
with their branches and agencies in the United States, and so on.
Eurodollar interest rates had fallen off from their
exceptionally high 1969 levels, favoring the generation of counter-
flows such as these. In the second half of 1970, however, the
decline in European rates lagged considerably behind the decline in
U.S. rates. Eurodollar rates did move down, but at levels generally
well above U.S. rates while below many European national rates.
Under these conditions, the addition to supplies of funds in the
Eurodollar market coming from central bank placements of reserves in
Eurodollars in 1970 probably accelerated the net flows from the market
to private borrowers and depositors outside the United States, and
FORD is LIBRARY GERALD
To: Governor Daane
-8-
STRICTLY CONFIDENTIAL (FR)
probably had little if any effect in generating counterflows to the
United States. So far as trans-Atlantic flows were concerned, the
effects of U.S. monetary policy through easing financial market
conditions in the United States almost certainly outweighed the
effects of central bank Eurodollar placements through giving Euro-
dollar rates a downward push. At the same time, the efforts of
European central banks to maintain relatively tight conditions in
their national markets ensured that flows out of the market to
European countries, their own included, (and to other areas) would
increase. Thus the increase in the aggregate of official net
reserves held by the rest of the world outside the United States
exceeded the official settlements deficit of the United States
(i.e. the increase in U.S. net reserve liabilities)
No misrepresentation of the facts was made by any central
bank. From an accountant's point of view a dollar asset is a dollar
asset, whether in the form of a U.S. Treasury bill, a bankers
acceptance, a bank deposit in New York, a deposit at the BIS, or a
bank deposit in London.
Probably few central bank officials were aware of the
effects of their actions (and the actions of the BIS) on aggregate
world reserves.
FORD LIBRARY
As we enter 1971, it becomes a matter of some importance to
judge whether central bank and BIS holdings of Eurodollars are likely
to increase further or decrease, and what effects a change in either
1/
After allowance for additions to total official reserves of gold
and SDRs. Unresolved statistical discrepancies no doubt also contributed
to the extremely large difference that appears in the statistics.
To: Governor Daane
-9-
STRICTLY CONFIDENTIAL (FR)
direction might have on payments balances and reserves. If
central banks and the BIS were to reduce their Eurodollar holdings
in 1971, the aggregate growth in world dollar reserves would tend
to be less than the rise in U.S. reserve liabilities, instead of
exceeding it as in 1970. Net outflows of funds from the Eurodollar
market to European and other countries through the dealings of Euro-
dollar banks with private borrowers and lenders would diminish.
But would the shrinkage in those outflows from the Eurodollar market
match in volume the shrinkage and reversal in central bank placements?
So long as U.S. short-term interest rates remain well below those
prevailing abroad, the prevailing direction of flow of funds through
the Eurodollar market is likely to continue to be outward from the
United States. Might the outflow from the United States to the Euro-
dollar market be stimulated by the firming and rise in Eurodollar
interest rates that might be a consequence of central bank and BIS
withdrawals of deposits? It is certainly conceivable that the change
in relative magnitudes of foreign reserve gains and U.S. official
settlements deficit could occur partly through a rise in the U.S.
deficit -- i.e., not wholly through a diminution of foreign reserve
gains.
Because of these considerations it would probably not be
in the interest of the United States to urge central banks and the
BIS to reduce their Eurodollar deposits rapidly, even if that were
1/
This difference is of course affected also by some statistical
noncomparability.
FORD i LIBRARY GERALD
To: Governor Daane
-10-
STRICTLY CONFIDENTIAL (FR)
thought possible. The first aim might be to check the further
growth of these deposits. Later, as European national interest
rate levels were lowered, there might be less risk of swelling the
U.S. official settlements deficit and more certainty of sharply
slowing the growth of foreign reserves.
The Basle study
The proposed study of Eurocurrency market problems, which
the central bank governors who meet at Basle may plan to undertake,
would come at an opportune time. It is disappointing, however, that
the BIS paper of January 10, 1971 (copy attached), outlining the
possible scope and procedure of a study which might lead to "joint
supervision of the Eurodollar market," fails completely to give any
consideration to questions concerning central bank and BIS placements
of deposits in Eurodollars.
Of the six problems the BIS paper names, three clearly
deserve some study. These relate to the blunting of effectiveness
of national monetary policies by international flows of short-term
capital through the Eurodollar market, to the apparent magnification
of swings in general levels of interest rates caused by the play of
demand and supply in this market (which is free of any official or
GERALD FORD LIBRARY
conventional rate ceilings or other such regulations), and to the
possibilities that a run on the dollar could have extra repercussions
through its effects in the Eurodollar market. In the study of such
questions, it will be important that due consideration be given to
the effects of central bank and BIS placements of dollars. Have these
To: Governor Daane
-11-
STRICTLY CONFIDENTIAL (FR)
helped to create problems? May there be circumstances in which such
placements -- e.g., at yearends -- can alleviate difficulties? But
above all, from the point of view of the United States, and for the
future success of the SDR system, can we allow uncontrolled expan-
sion of world reserves through Eurodollar placements to continue?
Regardless of what is done at Basle, studies of problems
of international capital flows, coexistence of independent national
monetary policies, and the growth of reserves will continue in the
OECD at Paris and in the IMF at Washington. If questions of central
bank and BIS placements of Eurodollars are not studied effectively at
Basle, the United States should move to get them onto the agendas
elsewhere.
The necessary first step in any study of Eurocurrency market
questions is improvement of statistics, as the BIS paper of January 10
suggests. The most serious gap in the present statistics, as Federal
Reserve staff representatives pointed out at the July 1970 meeting of
central bank experts convened by the BIS, is the lack of any compila-
tion of commercial bank Eurodollar liabilities to central banks and
the BIS. Disappointingly, the January 10 paper says nothing about this.
An early step in preparing for a study should, therefore, be an agree-
ment in principle by the central bank governors who meet at Basle
that it is important to have precise knowledge about placements of
Eurodollars by central banks and the BIS.
CC: Chairman Burns
Governor Robertson
FORD & LIBRARY
PUBLISHED DATA
Table 1
BIS Assets and Liabilities
(in millions of dollars)
Change
Dec. 31
Dec. 31
in
1969
1970
1970
Assets:
Gold assets
1,501
1,512
+ 11
Other assets
4,880
6,574
+1,694
Total assets or liabilities
6,381
8,086
+1,705
Liabilities:
Gold deposits
1,981
1,794
- 187
Currency deposits:
Central banks
3,555
5,781
+2,226
Others
385
123
- 262
Notes
273
153
- 120
Other liabilities and
capital accounts
187
235
+ 48
FORD & LIBRARY 074870
STRICTLY CONFIDENTIAL (FR)
Table 2
/
Differences Between Total Official Dollar Holdings
and U.S. Dollar Liabilities to Official Holders 2/
in Ten Countries
(in millions of dollars)
3/
Dec.
Mar.
June
Sept.
Nov.
1969
1970
United Kingdom
86
510
815
331
970
Germany
231
286
516
554
707
Italy
419
405
38
374
597
France
81
227
428
304
359
Switzerland
424
66
302
331
-
154
+1,1004/
Belgium
291
219
260
267
282
Netherlands
72
49
35
50
114
Sweden
52
25
20
20
17
Japan
142
180
212
236
166
Canada
120
38
42
56
65
Total
1,918
2,005
2,668
2,523
3,123
+1,1004/
4,0002
Per BIS multilateral surveillance tables: U.S. dollars convertible
foreign exchange plus dollar components of other items so far as known
to us.
2/
Liquid and nonliquid.
3/
U.S. liability data for December 1970 are not yet available (Feb. 3).
4/
Approximate amount of year-end swaps of Swiss National Bank with
Swiss commercial banks, adding to former's yearend holdings of Eurodollars.
5/
Rounded tentative estimate for yearend. The rounding allows for
some declines in December for U.K. and perhaps others.
Note: To allow for possibility of discrepancies for unknown reasons,
the estimates of Eurodollar holdings in the text are given in
terms of ranges below the yearend figures shown in this table.
FORD
is
GERALD
LIBRARY
STRICTLY CONFIDENTIAL (FR)
Table 3
BIS Deposit Liabilities, With Comparisons
(in millions of dollars)
Dec.
Mar.
June
Sept.
Dec.
1969
1970
Total deposits, all
currencies.
/
3,940
4,264
4,812
4,534
5,903
U.S. (Fed.Res. & Treasury)
holdings at BIS
237
333
287
289
288
Ten Countries' dollars
outside U.S.2/
1,918
2,005
2,668
2,523
4,000 5/
BIS deposit liabilities
to sterling area countries3 /
506
498
557
515
540
Residual 14/
1,279
1,428
1,300
1,207
1,075- 5/
As in Table 1.
2/
As in Table 2.
3/
Under 2nd sterling balances arrangement (strictly confidential).
4/
Understates other deposits to the extent that line 3 overstates
deposits of the ten at BIS.
5/ Rough approximations. See Table 2.
FORD & LIBRARY GERALD
STRICTLY CONFIDENTIAL (FR)
Table 4
BIS Dollar Assets
(in millions of dollars)
Total
In U.S.
Other
Dec. 1967
1,326
487
839
Dec. 1968
1,054
52
1,002
Dec. 1969
2,153
1,262
891
Mar. 1970
2,541
1,653
888
June
3,278
1,205
2,073
Sept.
3,103
504
2,599
Dec.
4,136
286
3,850
FORD & LIBRARY GERALD
11
STRICTLY CONFIDENTIAL (FR)
Table 5
Analysis of Changes in Aggregate Net Official Reserves
(in millions of dollars)
1969
1970
Year
Q-1
Q-2
Q-3
Q-4
Year
Increase in total net
official reserves ex u.s.1/
-0.3
5.9
5.2
3.8
5.9
20.8
Counterparts:
Additions to monetary gold
0.1
0.2
0.0
0.0
0.1
0.3
SDR allocations
--
3.4
0.0
0.0
0.0
3.4
Increase in U.S. reserve
liabilities less reserve assets
-2.7
2.8
2.1
2.6
3.2
10.7
Other2/
2.3
- .6
3.1
1.2
2.7
6.4
Possible composition of "other":
Increase in 10 countries' Eurodollars
0.7
0.1
0.7
-0.2
1.5
2.1
Increase in sterling area dollar
deposits at BIS
0.3
0.0
0.1
-0.1
0.0
0.0
BIS shift out of U.S. (into U.S.,
-)4/
-1.1
-0.4
0.5
0.7
0.2
1.0
Residual, possibly including
increase in other Eurodollars
2.4
-0.3
1.8
0.8
1.0
3.3
Country net reserves. BIS "net reserves" are considered to be zero. IMF
accounts also wash out. "Net" is intended to refer to deduction of inter-
central bank liabilities and use of IMF credit.
2/ Represents increase in liabilities of commercial banks for the Eurodollar
deposits of central banks and BIS, plus other kinds of liabilities to central
banks not netted out in line 1 (e.g., U.K. banking and money market liabilities
in sterling, and French liabilities to franc zone monetary authorities) plus
unresolved statistical discrepancies.
3/ Taking the figures in Table 2 as a rough indication.
If BIS holdings of dollars in the United States rise exactly as much as
central banks' dollar deposits with BIS, obviously no increase occurs in
commercial bank Eurodollar liabilities through those transactions. The U.S.
balance of payments counts liabilities to the BIS as reserve liabilities,
and in this case it provides a full counterpart to the increase in central
banks' "Eurodollar" holdings at the BIS.
FORD & LIBRARY GERALD
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
RESERVE MEDICAL THE OF SYSTEM
WASHINGTON, D.C. 20551
February 8, 1971
STRICTLY CONFIDENTIAL (FR)
To:
Federal Open Market Committee
From: Arthur L. Broida
Enclosed for your information is a copy of the
recent BIS staff memorandum concerning the Euro-dollar
market to which Mr. Coombs made reference at the
January meeting of the Committee.
In view of the sensitive nature of this document
we request that it be held in strict confidence.
Cuther 1 Broide
Arthur L. Broida
Deputy Secretary
Federal Open Market Committee
FORDO i LIBRARY GERALD
Confidential
JOINT SUPERVISION OF THE EURO-CURRENCY MARKET
Developments in the Euro-currency market over the past
several years have caused increasing interest among the cen-
tral banks.
At one time there was some concern over the possibil-
ity of unsound practices by Euro-dollar banks from a purely
banking standpoint, such as excesses of borrowing short and
lending long or overextension of credit to particular borrowers.
But up to the present, at least, experience has shown that
these fears have had little foundation.
Discussion is now centred on the monetary rather than
the purely banking aspects of the market - the sheer momentum
of the market's growth and the size it has reached, the impli-
cations of this growth for monetary inflation, the potential
of the market's large pool of resources for speculative pres-
sures, the influence of the market on interest rates, the com-
plications that arise for domestic monetary policy, the easy
financing of balance-of-payments deficits and the possibility
that the market's resources would add to monetary disturbances
in the event of severe weakness of the dollar.
It is significant that this view was reflected by
former chairman Wm. McChesney Martin in his recent speech in
Basle, in which he said: "At present there is little, if any,
multilateral supervision of these markets. One need raise no
doubt about the soundness of the claims that are created and
exchanged in these markets to suggest that a case can be made
for giving to an international institution some responsibility
for supervising these markets." At the IMF meeting in
Copenhagen, Mr. Giscard d'Estaing expressed a similar view and
Mr. Schweitzer, the Managing Director of the Fund, gave it as
his opinion that "maybe the central bankers could do something"
about the market.
At present, virtually all of the central banks influence
the activities of their own banks in the market from a national
point of view in one way or another, but there is no authority
DECLASSIFIED
AUTHORITY Sed. Res. System the 11/16/82;
BY
fair
state give
NARA,
DATE
9/10/09
GERALD FORD LIBRARY
- 2 -
which concerns itself with the market's impact on world mone-
tary conditions as a whole. It may be said that the rationale
of joint supervision of the market by the major central banks
is rather apparent. This, however, leaves open several questions:
what sorts of situation might call for active supervision of the
market; to what extent might such situations arise in any case
with the existing degree of convertibility and freedom for capi-
tal movement; and how might active joint supervision be exercised?
Growth of the market
The expansion of the Euro-currency market has been with-
out precedent in international monetary history. As measured
by the foreign currency credit outstanding through the banks of
eight reporting European countries, the net size of the market
is estimated to have risen from its beginnings in the mid-1950s
to about $11 milliard at end-1964 and to roughly $50 milliard by
June 1970. To put this growth in perspective, it may be noted
that since end-1964 domestic private-sector credit extended by
banks in all OECD countries taken together went up by about $360
milliard, from $415 to 775 milliard.
Out of the net totals for all currencies given above the
component in dollars was about $9 milliard at end-1964 and $41.5
milliard in mid-1970. Over 40 per cent. of this $32.5 milliard
expansion occurred during the first halves of 1968 and 1969
alone under the impact of tight monetary policy in the United
States. However, even from mid-1969 to mid-1970, when US banks'
Euro-dollar indebtedness showed a slight decline, the Euro-dollar
market expanded by about a further $8 milliard. And, despite
large US bank repayments and the usual seasonal slack, the Euro-
dollar market seems to have been well maintained during the
third quarter of this year also. Hence, it is evident that a
large flow of bank credit is generated through the Euro-market
and that the expansion is continuing.
Sources and uses of funds
As may be seen in the table, the sources of funds for
the growth of Euro-dollar credit have been broadly based and
GERALD
Estimated net amount of Euro-dollar credit
outstanding through banks in eight European countries, 1964-70
1964
1965
1966
1967
1968
1969
1970
Items
June
Dec.
June
Dec.
June
Dec.
June
end of period, in milliards of US dollars
Total
9.0
11.5
14.5
15.0
17.5
22.5
25.0
33.5
37.5
41.5
Sources
Reporting European area
Banks1
2.7
4.5
5.8
5.1
5.7
7.5
8.1
8.6
9.1
10.2
Non-banks
1.8
2.2
2.8
3.6
4.0
4.8
5.2
8.1
9.4
10.0
Total
4.5
6.7
8.6
8.7
9.7
12.3
13.3
16.7
18.5
20.2
Outside area
Other western Europe
0.8
0.8
1.0
1.2
1.4
1.5
1.9
2.1
2.7
2.8
United States
0.7
0.8
1.1
1.1
1.7
2.9
3.2
4.4
3.8
4.3
Canada
0.8
0.5
0.6
0.7
0.9
1.0
1.3
2.3
2.9
3.4
Japan
-
-
-
-
-
-
-
0.2
0.4
0.3
Eastern Europe
0.2
0.3
0.3
0.3
0.4
0.4
0.6
0.6
1.0
0.8
Other
2.0
2.4
2.9
3.0
3.4
4.4
4.7
7.2
8.2
9.7
Total
4.5
4.8
5.9
6.3
7.8
10.2
11.7
16.8
19.0
21.3
Uses
Reporting European area
Banks
2
2.8
3.2
2.8
2.3
2.9
2.6
3.2
3.8
6.1
6.2
Non-banks
2.3
3.2
3.6
4.0
4.1
4.5
4.7
5.1
5.6
7.0
Total
5.1
6.4
6.4
6.3
7.0
7.1
7.9
8.9
11.7
13.2
Outside area
Other western Europe
0.4
0.6
0.9
1.0
1.2
1.4
1.5
1.3
1.6
1.9
United States
1.8
2.1
4.4
4.2
5.2
8.8
9.5
16.7
16.5
16.4
Canada
0.4
0.6
0.6
0.6
0.7
0.9
0.9
1.2
1.3
1.6
Japan
0.4
0.5
0.6
0.8
1.0
1.4
1.6
1.3
1.4
1.8
Eastern Europe
0.4
0.5
0.6
0.7
0.7
0.8
0.9
0.9
1.0
1.2
Other
0.5
0.8
1.0
1.4
1.7
2.1
2.7
3.2
4.0
5.4
Total
3.9
5.1
8.1
8.7
10.5
15.4
17.1
24.6
25.8
28.3
Net positions-
Reporting European area
Banks
0.1
-1.3
-3.0
-2.8
-2.8
-4.9
-4.9
-4.8
-3.0
-4.0
Non-banks
0.5
1.0
0.8
0.4
0.1
-0.3
-0.5
-3.0
-3.8
-3.0
Total
0.6
-0.3
-2.2
-2.4
-2.7
-5.2
-5.4
-7.8
-6.8
-7.0
Outside area
Other western Europe
-0.4
-0.2
-0.1
-0.2
-0.2
-0.1
-0.4
-0.8
-1.1
-0.9
United States
1.1
1.3
3.3
3.1
3.5
5.9
6.3
12.3
12.7
12.1
Canada
-0.4
0.1
I
-0.1
-0.2
-0.1
-0.4
-1.1
-1.6
-1.8
Japan
0.4
0.5
0.6
0.8
1.0
1.4
1.6
1.1
1.0
1.5
Eastern Europe
0.2
0.2
0.3
0.4
0.3
0.4
0.3
0.3
-
0.4
Other
-1.5
-1.6
-1.9
-1.6
-1.7
-2.3
-2.0
-4.0
-4.2
-4.3
Total
-0.6
0.3
2.2
2.4
2.7
5.2
5.4
7.8
6.8
7.0
1 Including conversions by the banks of domestic or third currency funds into dollars, plus dollar deposits by the official
monetary institutions of the reporting area.
2 Including conversions by the banks of dollars into the domestic or third currencies; excluding, however, the Italian
banks' use of Euro-dollars for third-currency loans to residents (included under non-bank uses).
3 A minus sign indicates that the area or grouping in question is a net supplier of Euro-dollar funds, whereas the
absence of a sign indicates that it is a net user.
GERALD R.FORD LIBRAA,
- 3 -
the relative contribution of the various areas has shown little
change. A fairly important exception was the flow of funds to
the market from the United States and Canada which increased
from $1.8 milliard at end-June 1967 to $6.7 milliard at end-
June 1969. Even this figure may be a significant understate-
ment, since substantial US funds have probably entered the
market in indirect ways, such as through trustee and nominee
accounts in Europe. In other words, the figure for funds sup-
plied from within the reporting area is too large and the sup-
plies from the United States too small.
But the growth of Euro-dollars has been much more un-
balanced on the uses side. Nearly two-thirds of the $24.5 mil-
liard expansion between December 1964 and June 1969 was accounted
for by US borrowing, whereas the reporting area's own takings
increased relatively little. The pattern was, of course, mod-
erately reversed in the subsequent twelve months, when well
over half of the new funds were absorbed within the reporting
area, whereas US takings declined somewhat.
The character of the market
The data on net positions of the various areas indicate
more sharply the change in the character of the market over
the past five years. While the United States is shown as a
net taker of funds in 1964 and 1965, this reflected the normal
placements of foreign liquid funds in the New York market;
the real flow of funds between the US and the Euro-dollar mar-
ket at that time was rather from the United States to the
Euro-banks. Starting with the credit squeeze in 1966, however,
the United States became the main borrower from the market and
it has ended up with a very large net debtor position -
probably overstated somewhat as suggested above. In other
words, apart from relatively small net takings by Japan and
eastern Europe, until recently the Euro-dollar market has been
largely a mechanism that on balance channelled short-term funds
from the outside world to the United States.
GERALD ,FORD LIBRARY
- 4 -
In its earlier years the Euro-dollar market was a mar-
ket that emerged among banks in Europe which found that they
could bid successfully for dollars and re-lend them at a nar-
row operating margin. More recently the character of the mar-
ket has changed with the growing dominance of US banks in it.
For example, only nine US banks had branches in London at the
end of 1963, but the number has grown to about thirty-five at
present, motivated essentially by the attraction of Euro-dollars.
The non-sterling liabilities of the London branches of
US banks went up from $1.2 milliard at the end of 1963 to $23.4
milliard at the end of July 1970; and their share in the total
non-sterling liabilities of banks in the United Kingdom in-
creased over the same period from 24 to 50 per cent. The data
available for the other European financial centres indicate
that US banks are less important there; nevertheless, it is
evident that US banks account for a large share of the market
and an even larger share of its growth.
This surge of interest of US banks in the Euro-market
reflects their desire to compete outside the United States for
dollar deposits. even those from their own customers. As
their head offices in the United States were handicapped because
of the cost of reserve requirements and the limitations of
Regulation Q, they put themselves on the same footing as for-
eign banks enjoy by shifting business to branches in foreign
financial centres where dollar deposits are unencumbered by
local regulations. As an official of the Federal Reserve has
put it, 'the United States has been exporting its banking
system'. Thus, the recorded growth of the market is partly
illusory since, to a significant extent, the branches are just
bookkeeping offices for transactions that are arranged in the
United States. That is to say that the reported growth of the
Euro-market has somewhat exaggerated its significance for Europe
and for the world monetary system.
GERALD FORD LIBRARY
- 5 -
Factors underlying the market's growth
Regulations applicable to the use of the dollar itself
by banks in the United States and to domestic currency opera-
tions of other banking systems constitute one key factor that
explains the existence of the Euro-market, which is relatively
free from such regulations. It is often thought that the
existence and growth of the market has been due to the US
balance-of-payments deficit. That explanation is, however,
insufficient: if the dollars flowing from the deficit had all
continued to be held in the United States itself, the market
would not have arisen.
The factors which explain the existence of an active
Euro-dollar market are: (1) the relative absence of regulations
on foreign currency operations, particularly offshore operations,
of banks outside the United States, coupled with the regulations
which hamper banks' domestic currency operations - both in the
United States and elsewhere; (2) the ability of the Euro-banks
(including US banks' foreign branches) to compete effectively,
both because they can operate on narrower margins and because
they are not bound by interest rate conventions and cartel
arrangements; and (3) the willingness of the world to use the
dollar on a large scale, both because of its convenience and
because of the feasibility of doing so.
Where the US external deficit comes into the matter is
in helping to explain the growth and present size of the market.
Without such a continuing deficit the market would have had to
rely for its growth on attracting the foreign-held dollars that
already existed at the time of its creation, plus its own abil-
ity to create dollar deposits; with these limitations it is
hardly conceivable that the market could have reached its
present size.
At the same time, however, it can be demonstrated that
the cumulative US deficit, even if it had gone entirely into
the Euro-dollar market, cannot account for the present net vol-
ume of Euro-dollar credit. In this connection, it is necessary
BERALD FORD (IBRARY
- 6 -
to bear in mind that the US payments deficit, to the extent
that. it is financed by increases in official dollar liabilities
of banks in the United States, cannot statistically account
for the growth of the Euro-dollar market since these liabil-
ities represent, by definition, dollars held in the United
States itself. What counts therefore is the extent to which
the deficit gives rise to increases in non-official dollar
liabilities.
Over the five and a half years (used in the table) from
end-1964 to mid-1970 the US liquidity deficit financed by in-
creases in non-official liquid liabilities of the United States
to foreigners amounted to $14.6 milliard. During the same per-
iod net Euro-dollar credit expanded from $9 to 41.5 milliard,
i.e. by $32.5 milliard. Moreover, even if we add to the in-
crease of private dollar balances during this period the amount
of such balances outstanding at the beginning of the period -
which was $12.5 milliard - it is clear that the total of
privately-held balances outstanding at mid-1970 was less either
than the net growth of the Euro-dollar market between end-1964
and mid-1970 or than the total of Euro-dollar credit outstand-
ing at mid-1970. Furthermore, it is certain that a large
amount of foreign-owned dollars is held directly in the United
States as working balances and money-market investments -
without passing through the Euro-market.
Thus, recent and more remote US payments deficits can
only account for a share of the present volume of Euro-dollars
outstanding. The rest were necessarily brought into being by
the mechanism of the market. Essentially this has happened in
two ways.
Firstly, Euro-dollars get on the books of the banks
through flows of short-term funds outside the United States
that are denominated in dollars as the vehicle currency, either
for the convenience of the banks or the banks' customers, or
because regulations would not have allowed the flows to take
place in the domestic currencies involved.
FORD LIBRARY
- 7 -
Secondly, Euro-dollar assets and liabilities may be
created by the Euro-banks as a group, just as banks create
them in a domestic banking system, that is by making advances
which are used, at least partly, within the Euro-dollar system.
Formerly such credit creation was thought to be quite limited,
as the leakages from the system were believed to be very
considerable. However, with the growing share in the market
of US bank branches, which have a considerable amount of busi-
ness with US corporate branches and affiliates, there is now
greater scope for the process of credit creation to operate.
It seems unnecessary to trace here the dynamic forces
on the demand or the supply side that have stimulated the
growth of the market, particularly as only a few major episodes
could be isolated - such as the intense demand for dollars by
US banks in 1969, which sucked liquidity into the market, or
the flight from the franc in 1968, which supplied funds to
the market. It is worth noting, however, that the part played
by monetary authorities in the market's development has not
been insignificant. In addition to the fact that the forces
acting on the market from the private sector have often been
forces created by central banks, there have also been times at
which central banks have contributed directly, or via their own
banking systems, to the market's supply of funds.
Problems raised by the market
The interest in multilateral supervision of the Euro-
market stems from the problems which are believed to have
arisen from, or to have been aggravated by, the market's
behaviour. The nature of these problems has been suggested
earlier, but some elaborations may be useful.
1) The market is a significant vehicle for the inter-
national expansion of bank credit which may at times be
inflationary. The rapid rate of growth of the market itself
gives substance to this view. The market increases the flow
of credit in various ways: for example, by facilitating
BERALD FORD LIBURAT
- 8 -
international movements of funds from areas where monetary con-
ditions are relatively easy to those where there are unsatis-
fied demands for credit; by credit creation within the market;
by drawing down official reserves for use in private credit
markets; and by increasing the credit multiplier through lower
average reserve requirements. In theory the central banks
could adjust their own objectives for the rate of expansion of
their domestic money supply to allow for the effect of the mar-
ket, but in practice it is difficult for them to do so, parti-
cularly if they have to do so unilaterally.
2) The market increases the international pool of
liquid funds and facilitates their rapid shift from one market
to another. At times this blunts the effectiveness of domestic
monetary policy. Similarly, flows of funds facilitated by the
market can interfere with balance-of-payments, objectives.
3) The use of the market by the banking system in a
particular country, permitted or facilitated by the central
bank in one way or another, can cover up an imbalance in the
balance of payments and can delay corrective action by the
authorities. This is a rather obvious point and need not be
elaborated, except to say that it can apply to surplus as well
as to deficit countries.
4) The Euro-market can have an amplifying effect on
interest rate developments in national markets, as was dramat-
ically illustrated in the 1969-70 episode. The repercussions
of the market in this regard are out of proportion to its mar-
ginal share of world credit flows. In domestic monetary
management many central banks have aimed at controlling the
money supply without changes in interest rates so violent as
to disrupt financial markets. To pursue the same aim in the
Euro-market would require a concerted effort.
5) The market provides a large pool of liquid resources
that may feed speculative excesses. While not without some
substance, it seems to us that this allegation has been
FORD LIBRARY
-- 9 -
exaggerated. If one reviews the major cases of speculative
fever over the past five or six years, one can say first that
where the exchange market was acting against the threat of a
currency devaluation, the Euro-market was of little importance.
It could have aggravated the flight from, say, sterling, the
French franc and the lira at various times, had large Euro-
dollar borrowing in the currencies concerned previously been
built up. Or very attractive rates in the Euro-market could
have added to the outflow of domestic funds. But in fact
neither of these influences seems to have been very signifi-
cant in relation to these countries' total official financing
requirements at the time.
In the case of the 1967-68 gold rush the availability
of the market's funds was more significant. Nonetheless, they
could hardly be called crucial to the total movement.
The rôle of the market was probably largest in the
Deutsche Mark speculation. In the second and third quarters
of 1969 the short-term inflow of funds to Germany outside the
banks was $3.8 milliard and at the same time the German banks
themselves increased their net foreign indebtedness by $1.1
milliard. The inflow outside the banks consisted largely of
foreign firms building up balances with their branches in
Germany, and of changes in the terms of payment (leads and lags).
It is quite likely that both these were to a certain extent fi-
nanced in the Euro-currency market.
Of course, even without the facilities of the Euro-
market, speculative flows would occur when there is threat of
a major monetary upset.
6) A final point may be mentioned, though it is rather
difficult to formulate because it is somewhat nebulous. It is
that the Euro-market has tended to speed up the increasing use
of the dollar as a transactions and financing currency. There
is evident unease at this growing dominance of the dollar and
criticism of the processes which bring it about. Of course,
this has been due not solely to US policies and regulations
GERALD FORD LIBRARY
- 10 -
but also to those of other countries. Obviously, if the compe-
tition of other currencies 'with the dollar is limited by re-
strictions on their use, then, naturally, the dollar will have
only limited competition.
Perhaps more important is the fear, already mentioned,
that the repercussions of a possible run on the dollar have
been considerably increased as a result of the market's growth.
Procedure
In view of this range of problems to which the central
banks may from time to time give joint consideration, what
sorts of initiatives might be contemplated in the exercise of
multilateral supervision of the market? Four sorts can be
envisaged:
1) Obtaining a better and more up-to-date knowledge
of developments in the market, through more regular and speed-
ier reporting of the banks' foreign currency positions. In
this connection, consideration could also be given to more fre-
quent publication of Euro-currency statistics by the BIS.
2) Exchanges of views by central banks on certain
aspects of the permanent regulations and practices in particu-
lar countries.
3) Exchanges of views by central banks on the ad hoc
regulations or arrangements in particular countries.
4) Discussions concerning possible initiatives of the
central banks, as was done in the past for end-of-year
operations.
It hardly needs to be said that the aim of such initia-
tives should be to alleviate specific problems and not to lose
the benefits of the market by stifling it. These benefits in-
clude the stimulation of banking competition, both interna-
tionally and in various domestic credit markets; the speed and
efficiency with which the market is able to handle large trans-
actions; and the advantages which result from the interna-
tionalisation of available liquidity through the market.
GRAALD FORD LIBRARY
- 11 -
As a method of procedure the following suggestions may
be made. Final consideration of any problems raised or pro-
posals for initiatives would take place in a meeting of the
Governors. However, a group of Deputies of the Governors, with
the General Manager of the BIS as Chairman, would be estab-
lished to sift and prepare matters for the Governors'
consideration. Meetings of the Deputies' group would be per-
iodical and would be called on the suggestion of any of the
central banks or of the General Manager of the BIS. The
General Manager would report to the Governors on the Deputies'
discussions.
10th January 1971
GERALD R FORD LIBRARY
DRAFT/JDDaane:gr/2-22-71
Notes on Meeting of BIS Steering Committee
on Eurodollar Market (Amsterdam--February 18)
The meeting of the Steering Committee was held in Amsterdam on
February 18. Those in attendance were Chairman Zijlstra (Netherlands),
Baffi (Italy), Hollom (U.K.), Emminger (Germany), Hay (Switzerland),
Theron (France), Joge (Sweden), de Strycker (Belgium), Gilbert and
Dealtry (BIS), Kessler (Netherlands). Japan was represented by their
new representative in London and Canada had no representative.
Chairman Zijlstra began by summarizing and distributing the attached
note which in effect gave a list of topics for the proposed study. He
then called on a go-round beginning with me and I commented as follows:
(1) I questioned whether the implication of the list of problems
was that these problems were attributable to the Eurodollar market
mechanism per se. In other words, how much of these effects would occur
with or without the Eurodollar market itself?
(2) We generally supported moving forward with the study but I was
troubled a bit by the timetable as to the order of listings of the topics.
Zijlstra had indicated that he thought the topic list in his note was
roughly in order of priority. For my part, I wondered whether the
placements problems merited somewhat more immediate attention, perhaps
by the BIS gold and foreign exchange group.
(3) The outline seemed a bit shy in analyzing the demand factors.
(4) Without prejudging the composition of the group under Item 6(f),
would it be desirable to have a fact-finding group of technicians at a
somewhat lower level ? By fact-finding I meant a group not simply concerned
with statistics but also with market structure, credit quality, matching
maturities, etc.
DECLASSIFIED
AUTHORITY Send. Res System th. 11/16/82
BY ldr NARA, DATE 9/10/09
state girld ms
FORD is LIBRARY 076870
2
Baffi said he was puzzled as to why another group had to be set up
as we already had the BIS gold and foreign exchange group. They had not
had any problems in Italy with respect to the Eurodollar market contributing
to domestic inflation. In fact, their difficulty had been the other way
around. Namely, the existence of an international market with relatively
high rates had led to clandestine capital exports and put pressure on their
central bank reserves at a time when they were not adequate. Basically,
however, he thought it was perhaps necessary to accept some repercussions
of an international money market and an internationally oriented world
economy. Thus, he would not go too far in thinking of terms of
restrictions but would let the market mechanism serve a useful purpose
in allocating international liquidity and control the international
liquidity via SDR creation.
Joge (Sweden) felt we already have sufficient technical material
so saw no necessity for additional technical examination. However, he
felt that central bank placements were not appropriate and that some
policy agreement on this score was needed sooner rather than later.
Hollom supported the broad conclusions of the Zijlstra note but
suggested not prejudging what might be done and raised question as to
whether perhaps flows outside the Eurodollar market might be even less
t
amenable to control.
Emminger made the following observations:
(1) We should not decide on setting up a group or groups till later.
FORD & LIBRARY GERALD
3
(2) There had been a considerable adverse impact on domestic
monetary policy in Germany to the tune of more than $6-1/2 billion in
one year. This had been instrumental in undercutting their domestic
monetary policies. He noted that the inflow to nonbanks was outside
official control and "cannot be undone" by central banks. Once corpora-
tions already have the liquidity, the central banks can only undo the
secondary effects on the liquidity of the banking system. For example,
with respect to new credit needs in Germany, in the July-October period
of 1970 one-half had been supplied by foreign sources and one-half by
their domestic banking system.
(3) The existence of the Euro markets had been responsible for the
problems. Their borrowers had been able to get the money easier from the
Euro market than if there had been no market nearer than a major New York
bank. Furthermore, the huge volume of funds in the Eurodollar market
was the result of the U.S. cumulative deficit creating such a large pool
of money that it did indeed inflate the problem of trying to manage the
domestic economies.
(4) As to implications for the international monetary system, he
would not simply accept the Baffi thesis that because we live in an
international monetary system we have to accept the interest rate
movements of the American monetary system. Instead we have to find
ways of preserving the autonomy of internal monetary policies to be able.
to influence their own situation. He was driven to think whether
maintenance of monetary stability at home necessitated deviations from
the liberalization of capital movements. The problem seemed to become
GERALD FORD LIBRARY
4
one of open inflation vs. convertibility. The problem allegorically
was how to live with the elephant, even a kind elephant (i.e., the U.S.).
Clearly the pool of funds in the Eurodollar market was not always a
stabilizing factor for the international monetary system. Specifically
there was a circular movement or carousel effect when the Bundesbank
tried to rechannel the inflow of funds.
(5) As to central bank placements through the BIS, he felt that we
should re-examine the attitude of central banks toward such placements
which, as Governor Daane had noted, could have a destabilizing effect on
reserves as well.
(6) The Euro market was not always a positive factor in the adjustment
process but rather an "irregular source of international liquidity." Thus
he was glad we were studying the implications of the international monetary
system.
(7) In short, he would go ahead with the study, placing particular
emphasis on 6(a) and (b). As to (b), he felt that central banks could
influence the Eurodollar market in a way to alleviate the destabilizing
effects on the international monetary system. Thus he welcomed the
U.S. Ex-Im offering and said the Germans, too, had attempted to sterilize
inflows, but while they considered it "an internationally justified action,"
it was criticized in the OECD report.
de Strycker said they would stress the two questions of impact on
internal monetary policies and impact on the international monetary
system. However, he felt there was some danger of limiting the study to
Euro currency markets since the problem was one of gradual internationalization
FORD i LIBRARY GERALD
5
of money markets rather than the Euro market per se and on this point
would underscore Governor Daane's initial observation. For example, as
capital inflows into Belgium in 1967 and 1969 were due to
leads and lags and the terms of payments, not the existence of Euro
markets. There was relatively little direct flow between Belgium and
the Euro markets.
His second observation was directed toward including in the study the
possibilities of avoiding the disturbing influence on the international
monetary system. In other words, if they were affected by the elephant,
should the elephant be entirely free to ignore the effects of its own
policies? Specifically, we should study whether the instruments of U.S.
policy can be used in a way to have more or less disturbing effects.
Otherwise the European countries might have to try to find ways to
insulate their markets from international money markets which immediately
lead to the danger of interfering with capital movements.
As a final observation, he noted that there already was a technical
committee functioning in the BIS and was not clear how a new committee
would differ from the present technical committee.
Hay commented that he did not know whether we needed a technical
committee or should simply use the BIS staff. He felt we did need to
know more about the technical problems before reaching any policy
conclusions. For their part, he thought the most important facet of
this study was to look at the question of the multiplier in credit
creation attributable to the Eurodollar market. In Switzerland, when
Eurodollar rates were high, funds (normally long-term funds) were
placed in short-term Eurodollar obligations. Specifically, since the
FORD & LIBRARY GERAID
6
massive U.S. bank repayments of Eurodollars the quality of debtors has
changed from well-known U.S. banks to nonbanks borrowing in the Euro
market. Thus he wondered how liquid the market really was and felt we
need to know more about how the market was constructed. As far as
repercussions on the domestic market, until the U.S. and Eurodollar
rates declined, the Swiss were helped in their own monetary policies,
but now repatriation was undermining restraint.
Theron said that they fully agreed on the need to study markets
a la Giscard d'Estaing. Thus it was necessary both to know more and to
have a policy with respect to the Euro market. Before any policy
conclusion, however, we needed the knowledge both statistical and
structural. He would support Hay's comments on the need to determine
the monetary creation involved. As for impact on their own market,
the French were able to protect themselves through exchange control
which regulated borrowing by nonbanks. He wondered, therefore, whether
in order to regulate it was necessary to rely on exchange controls.
The Japanese representative made generally favorable noises about
going forward with the study. He noted that they had been able to
check the domestic impact of any undue inflows through direct controls
on banks and nonbanks. Most of his comment was devoted to the difficulties
they are currently experiencing in the shift underway from yen borrowing
to dollar borrowing on the New York market. On the import financing
side, there was a potential shift of some $600 million with the present
acceptance rate in New York of 4-1/2 per cent. Similarly, on the export financing
side some significant fraction of the $3 billion of Japanese financing
could be transferred to the U.S. acceptance market. The other problem
FORD : LIBRARY 076839
7
he stressed was that of foreign investment in Japanese equities which
earn both an 8 per cent rate and had the potential gain from a yen
revaluation.
Milton Gilbert discounted the usefulness of a technical committee to
improve the statistics, noting that the experts group which met once a year
had tried to do so but had been unable to do so with no support from the
governors. In any case, there were "limits on improvement" and the
statistics would never serve to answer the policy questions. Re the
framework for a possible policy committee, there were two main approaches:
(1) to look at the growth of the market and what it means and (2) to look
at specific problems and "complaints."
As to the first approach, why do central banks find the growth of the
market itself disturbing? what is it due to? is the market taking on a
life of its own? what is the significance of the growth? As to the
specific problems and complaints, it was obvious that the Euro market
was disturbing to the monetary policies of certain countries. But prior
to the establishment of a policy committee there was no way to get it on
the table, so to speak, for mutual consideration. Therefore, a policy
committee might provide a ready mechanism permitting an exchange of views.
Kessler felt that it would be useful and appropriate to have discussion
among the central banks. Felt they should look at the market in the broad
sense, recognizing that even in the absence of the Euro currency market
the problems were still there and that what we were really studying was
the international money market as de Strycker had suggested. For example,
if the Netherlands banks were not engaged in lending to ***********
nonresidents and foreign banks, they would still have the U.S. deficit to
FORD LIBRARY
8
contend with and would still be experiencing a tendency toward balance-of-
payments surplus in the Netherlands. But in fact they do give enormous
amounts of credits to nonresidents and to nonbanks. He acknowledged
that central bank placements could possibly be inflating the European
reserves independent of a U.S. deficit but' exacerbated by a U.S. deficit."
In any case, we ought to know more about the statistics and the way banks
participate in the market and look at the possibilities of controlling
it or seeing whether we can somehow influence the trend.
Chairman Zijlstra then summed up the morning discussion as follows:
(1) It was agreed that the catalog of items under Point 6 was a good
point of departure for the proposed study.
There
(2) Ef/was also fairly general agreement on the order of priorities
in that list.
(3) There was agreement that the Euro currency market could have
an adverse impact as per both 6(a) and (b). (c) and (d) suggested
going deeper into the problem and looking at whether we could do something,
both on the supply and demand side. On the demand side, there was a
question of deliberalizing. For example, the Germans were completely
free while in the Netherlands despite having good controls there was a
$1 billion inflow of capital in 1970.
(4) As to influencing the supply, it was generally recognized that
theless,
part of the problem would be on our hands with or without a Euro market. Never/
if we broadened the study to look at all aspects of the international
adjustment process, this would be too broad and he would advise against
it.
FORD & 07VN39 LIBRARY
9
(5) It was clear that several of the speakers noted that the Eurodollar
market introduces one or two major multipliers with crédit-creating
potential.
(6) Most would agree that we should not start with point (e) but
rather that we needed 6(a)-(d) first.
(7) As to point 6(f), he had in mind the kind of group a la page 11
of the Milton Gilbert paper distributed at the January Basle meeting,
namely a sort of standing committee to keep the market under surveillance
and report to governors.
At the outset of the afternoon discussion, I once again raised the
question of priorities in terms of not delaying possible work by the gold
and foreign exchange group on the question of central bank placements
and still felt that a fact-finding group in a broader sense might be
worthwhile. Our experts had earlier concluded that we did not have enough
information on commercial bank Eurodollar liabilities to central banks
and the BIS. Finally, I wondered whether it would be useful to think in
terms of several groups or perhaps several papers being assigned on some
of the topics.
Emminger said he wanted to add one addendum as to the structural
change now going on in which there was an increasing inclination of Euro-
dollar banks to grant medium-term loans on the basis of short-term money.
One bank had told him they had made commitments over the last 12 months
totaling $25 billion with only 40 per cent of the commitments used. While
the figure was clearly suspect it was still a significant development.
FORD & GERALD LIBRARY
10
Baffi defended his earlier statement that he was favorably
disposed to the development of an international money market reflecting
his own experience. The Euro market had not had an expansionary effect
in Italy and he still believed that any system of market allocation makes
for better resources allocation. There remained the problem of multiplier
and therefore he was favorably disposed to a research group at a high
level and for providing for some cross-fertilization of ideas by the
BIS. His own feeling was that if there were fixed parities and a free
flow of goods the same results would ensue with or without a Euro market.
Joge reiterated that while it would be useful to have experts
analyze the nominal increase in the market, we really had enough to
look at with the question of central bank diversion of
dollar assets to the Euro market.
Hollom stressed again the need for analyzing very carefully any
possible policy steps to see differences in impact and underscored the
need for "careful exploration before reaching any policy conclusions."
Emminger took issue with Baffi, saying that he could agree with him
if the inflows had been due to substantive attractions (e.g., higher
profits, etc.). But the reason for the 1970 inflow into Germany was simply
a difference in the monetary policies of different countries and
particularly the U.S. Thus, on his basic philosophy he said weneeded
to maintain variety or otherwise would simply be giving in to the
requirements of the American monetary system. He said that Milton
Friedman in a recent visit to Frankfurt had said that any thought of
FORD is LIBRARY 07V839
German monetary policy was "nonsense"; as long as we were on a fixed
rate system, their policy was simply a function of the Federal Reserve
11
Board. His conclusion was that it would be useful to have a standing
committee on policy considerations and before Ferras death had thought
that the chairman should be the managing director of the BIS and that
the group should meet each month in connection with the monthly BIS meeting.
As to work program of such a group, he would:
(1) Ask the group to look immediately at the question of central bank
placements in the Eurodollar market and the effects on the whole system.
Use the group to
(2) Provide a platform for complaints looking toward coordinated
actions. For example, the German problem had been brought to Working
Party 3 but it would be preferable to take it up in a standing group
of central bankers.
(3)
Charge the group
with thinking up rules to assure the
liquidity of the market.
As to composition of the group, he would have a standing committee
on a high level with power to recommend to the governors. He also felt
there was room for a fact-finding "information" committee. He would give
a mandate to such a technical committee, using the existing committee on
gold and foreign exchange operations rather than setting up a new
committee.
de Strycker said he would make four concluding comments:
(1) As to the necessity of limiting the research effort, he agreed
that there was a need to limit but was not sure that it should be just
the
confined to/Euro market which was an "artificial statistical concept."
In lending or borrowing dollars no one cared whether it was from the
"Eurodollar market" or directly from American banks, European banks, etc.
FORD is 07V839 LIBRARY
12
(2) As to the effects on domestic money markets, it was not
necessarily disequilibrating or asource of inflation. In the Belgian
case, any addition of imported funds was offset by the destruction of
domestic liquidity.
(3) As to the elephant, it may be perfectly all right for other
animals to stay close to the elephant when it is in the center, but
not when it is on the side of the boat!
(4) Re the establishment of a standing committee, he had no objection
to "watching developments" but had considerable doubts about "promoting
or mitigating trends." As to who the committee should be, he felt it
basically should be the group around this table who were the "top associates
of their governors" and who could do the preparatory work for consideration
by the governors.
Hay questioned the logic of Zijlstra's order of priorities and
expressed a preference for starting with 6(c). He would also look at
6 (e) and was open-minded as to whether the group should be the BIS or
another group of experts, but probably they should come back to this (today's)
policy group.
Theron expressed complete agreement with Hay. He felt ikkwas there
was a need to start with 6(c) but could study other items at the same time.
He felt that the study should be immediately started by each of us.
The Japanese made no further comment except to once again welcome
the study.
Kessler said that the main problem he saw was that of the multiplier
and to what extent it was increased by the Euro market. He felt it
might be useful to have another round of discussions, particularly
GERALD LIBRARY
on points 6 (a) and (b) as to what was the most important subject matter
for a policy group to explore. As had been pointed out, the central
13
banks were already in the business so to speak and therefore we might
already be at the point where it was desirable to have a holding operation.
Therefore, at the meeting it might be useful to organize a discussion
and to have some figures as to how foreign central banks are engaged in
the business. He felt this could be done.
Milton Gilbert then tried to minimize the central bank placement
question, pointing out that with the total Euro market of $55 billion, central
bank placements could at the most only account for $5 to $6 billion.
I responded that his comparison of the magnitudes was misleading and,
even if one accepted it, it did not mean that $5 to $6 billion of central
bank placements was a minor party of the increase in reserve holdings of
the European countries.
ijlstra finally summed up the day's discussion as follows:
(1) It was agreed that further discussion of the Eurodollar market
could be useful and was even necessary.
(2) Point 4 of his sketch focussed on a real process. Even if one
agreed this could occur without the Eurodollar market it magnified in the
process. Therefore point 4 and point 6 of his outline covered the
problem completely.
(3) Re paragraph 6 of his outline, if one concluded that the effects
of (a) and (b) were negligible, then one would not proceed with (c)-(f).
Today, however, most had indicated the effects were not negligible.
(4) It was clear to him that we needed another round of discussion
by this group before making recommendations to the governors and to enable
the governors to form a mandate for the policy group.
FORD & LIBRARY GERALD
14
(5) Re the composition of such a policy group, we would have to
await the conclusions of the governors- it might be the same composition
of today's group or more or less the same composition. In any case,
the aim of this steering group should be to provide a mandate that the
governors relay to such a standing policy committee.
(6) Therefore, between now and the next meeting of this group at the
time of the Basle meeting in April, he would ask for papers on one or
more of the topics listed in paragraph 6, particularly on (a) and (b)
and possibly (c) and (d). He would invite such papers from anyone
(although he specifically singled out Emminger) and suggested such papers
should be as short as possible. It would be useful to have some experts
look at the market's credit creation potential.
(7) Finally, Zijlstra said that while the question was "delicate,"
he would try to find out more as to BIS activities in connection with
central bank placements.
again the day
After considerable discussion of whether the Steering Group should meet/
before the April BIS meeting (which I opposed because I assume Chairman
Burns would be at the April meeting), it was agreed to meet either the
afternoon of March 25 or the morning of March 26 in Paris since many
if not most of the steering committee would already be in Paris in
connection with meetings of Working Party 3 and G-10 Deputies. In the
meantime, papers were invited and we were asked to think about a possible
mandate which could be prepared after the March 25 meeting, looked at
between then and the April meeting, and put up for governors' review at
the April meeting.
FORD & 07V839 LIBRARY
estra
February 17, 1971
BIS Working Group
(1) There is a growing urge to regulate the Euro-dollar market,
and more generally the Euro-currency market, one way or
another. As the BIS note states:
This view was reflected by former Chairman Wm. McChesney
Martin in his recent speech in Basle, in which he said: "At
present there is little, if any, multilateral supervision of
these markets. One need raise no doubts about the soundness
of the claims that are created and exchanged in these markets
to suggest that a case can be made for giving to an inter-
national institution some responsibility for supervising
these markets. " At the IMF meeting in Copenhagen, Mr. Giscard
d'Estaing expressed a similar view and Mr. Schweitzer, the
Managing Director of the Fund, gave it as his opinion that
"maybe the central bankers could do something" about the
market.
(2) This urge for making regulations clearly stems from more
general monetary considerations. According to the BIS
note (page 1) "Discussion is now centred on the monetary
rather than the purely banking aspects of the market - the
sheer momentum of the market's growth and the size it has
reached, the implications of this growth for monetary inflation
the potential of the market' large pool of resources for
speculative pressures, the influence of the market on inter-
est rates, the complications that arise for domestic monetary
policy, the easy financing of balance-of-payments deficits
and the possibility that the market's resources would add to
monetary disturbances in the event of severe weakness of the
dollar. 11
(3) The problem is twofold and consists of:
GERALD FORD LIBRARY
(a) the impact of the Euro-currency market on the effective-
ness of the monetary policies of the various countries;
(b) the impact of the Euro-currency market on the working
of the international monetary system.
(4) The influence of Euro-currency banks on the effectiveness
of monetary policy and on the working of the international
monetary system mainly rests on their deposit-making and
DECLASSIFIED
AUTHORITY Red. Res. bystem th. 11/16/82
Mr
State guiddres
BY
NARA.
DATE
9/10/09
- 2 -
lending activity vis-à-vis non-residents, both banks and
non-banks. To the extent that deposits are made with banks
the latter's lending potential, both at home and abroad, is
increased and monetary restraint therefore made more diffi-
cult. To the extent that credits are given to non-banks
(end-users) the influence is not just a potential one: these
credits contribute to an increase in the money supply of
the receiving country.
(5) The major policy problem facing us is whether the Euro-
currency market has an adverse impact on the effectiveness
of domestic monetary policy, and if so, to what extent. In
the affirmative, the following problem is how to mitigate or
eliminate such impact. This might be achieved by influencing
supply or demand, or both.
(6), Consequently the following problems need to be studied:
(a) the impact of the Euro-currency market on the effect-
iveness of domestic monetary policy;
(b) the possible implications of such impact on the working
of the international monetary system;
(c). which factors are determining supply on the Euro-
currency market (including the relevant U.S. balance-of-
payments deficit, the market's credit creation potential,
and the central banks' placements of part of their reserves
in this market); possibilities of influencing supply;
good
(d) possibilities of influencing demand on the Euro-
currency market;
(e) improvement of statistical information on the operations
in this market;
(f) possible suggestions from the Working Group might include
the set-up of a standing committee (within the BIS) for the
purpose of watching closely the developments in the Euro-
currency market in order to be able to promote a desired
trend or to prevent or mitigate an undesired one.
GERALD FORD LIBRARA)
CHAIRMAN BURNS
For Information Only
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Date March 22, 1971
Board of Governors
To
Subject: Eurodollar Repayments by
Robert Solomon
From
U.S. Banks.
CONFIDENTIAL (FR)
The attached memorandum by Mr. Robert Bradshaw
analyzes the impact of the special Export-Import Bank issues
on the rate of repayment of Eurodollar liabilities by U.S.
banks. The conclusion is that there was no more than a
temporary pause--probably explained by the announcement
effect of the first EXIM issue--in repayments.
RS
Attachment.
FORD & LIBRARY GERALD
BOARD OF GOVERNORS
OF THE
CONFIDENTIAL (FR)
FEDERAL RESERVE SYSTEM
Office Correspondence
Date March 19, 1971.
To
Mr. Robert Solomon
Subject: Some Observations on Changes in
U.S. Banks' Euro-dollar Borrowings
From
Robert C. Bradshaw
since September 1970.
The purposes of this memorandum are (1) to review the
changes that have occurred from September 1970¹/ to date in U.S.
banks' daily average Euro-dollar borrowings (and foreign branch
holdings of special Ex-Im Bank securities); (2) to compare the
changes in daily average borrowings over this period with changes
in the Wednesday series on gross liabilities to foreign branches
(which appears in Chart 2 of the "International Developments"
materials distributed at weekly Board briefings) to determine
whether these two series give essentially the same picture of the
general trend of U.S. bank Euro-dollar borrowings; (3) to examine
the data available for any indication of the influence that the
Ex-Im security offering may have had on the rate of decline in
the total of borrowings from foreign branches plus foreign branch
Ex-Im security holdings.
Changes in "Overall Euro-dollar Positions" Since the Computation
Period ended September 2, 1970.
As indicated in Table 1, the banks' daily average net
liabilities to foreign branches plus assets sold to foreign branches
and foreign branch holdings of Ex-Im securities -- the total of which
By September 1970 most banks using an historical base had
eliminated reservable borrowings such that further reductions in
borrowings would result in equal losses of reserve-free bases.
FORD & LIBRARY GERALD
Mr. Robert Solomon
-2-
we will simply refer to as the banks' "overall Euro-dollar
positions" -- declined by about $4.1 billion from the computa-
tion period ended September 2, 1970 through the computation
period ended March 17, 1971. Thus, the average decline per
computation period was a little under $0.6 billion.
The most striking deviations from this roughly
$0.6 billion per computation period rate of decline in "overall
Euro-dollar positions" have occurred in the two most recent
computation periods. In the period ended February 17 -- during
which the first Ex-Im security offering was made -- the total
declined by only $287 million; preliminary data for the computation
period ended March 17 indicate a decline of $875 million in the
banks' "overall" Euro-dollar positions. Some possible reasons for
and implications of this (apparently temporary) slowdown in the
rate of reduction in positions in the February 17 period will be
discussed in the third part of this memorandum.
Comparison to Wednesday Series on Gross Liabilities to Foreign Branches
The reason for making this comparison is simply to determine
whether the two series lead us to the same basic conclusions about
the general trend of developments in the banks' Euro-dollar positions.
It is the Wednesday data (outstanding) that are regularly presented
to the Board in chart form; we have not taken the opportunity in the
GERALDO FORD LIBRARY
Mr. Robert Solomon
-3-
past to present the daily average computation period data in
perspective. Although there are definitional differences in
the two series, apart from the fact that one represents averages
for a period and the other outstandings on single dates, 1/ the two
series (in the period covered in the Table) do portray the same
general order of magnitude of changes in the banks' Euro-dollar
positions -- for extended periods of time.
Both series show a decline of about $4.1 billion in the
period covered by Table 1. But, because of the substantial day-to-
day changes that frequently occur in the borrowings data (particularly
around month-ends), the shorter the time period of comparison of the
data the greater the chance that changes in these two measures of
the banks Euro-dollar positions will diverge considerably.
It is important to remember that for purposes of measuring
changes in the banks' Euro-dollar positions as reflected in the U.S.
balance of payments accounts the relevant data are, of course, changes
in outstandings between the terminal dates of weeks, months, quarters,
or whatever. Neither series in Table 1 presents the data on this
basis. But the daily average data are the measure of changes in
"overall Euro-dollar positions" which are probably the most relevant
from the banks' point of view -- reflecting changes in reserve-free
bases and, in combination with Euro-dollar rates and other relevant
1/ In Table 1 the Wednesday data are presented as averages for the
four Wednesdays within the computation periods.
FORD i LIBRARY OFRALD
Mr. Robert Solomon
-4-
rates of interest, the costs of carrying a given "overall Euro-dollar
position.
Observations on the Possible Impact of the Ex-Im Security Offerings
on Recent Changes in "Overall Euro-dollar Positions"
As we noted earlier there was a rather striking decline
in the (absolute) rate of reduction in Euro-dollar positions in
the computation period ended February 17. One interpretation that
can be given to this fact is that the $1 billion Ex-Im security
offering (which had a January 25 payment date) induced the banks
to reduce the rate of decline in their "overall Euro-dollar positions" --
because part of the costs of maintaining these positions in the
February 17 period might be (would probably be?) offset by preferen-
tial rates of return on Ex-Im notes to be issued in future periods
Naturally, there is no way of knowing how much the banks
would have reduced their average Euro-dollar borrowings in the
February 17 computation period in the absence of the Ex-Im offering.
Other factors which may have affected their behavior include such
things as (1) interest rate developments in U.S. money markets and
1/ The Ex-Im issue was allocated in proportion to each banks' share
of total Euro-dollar borrowings in the December 23, 1970 computation
period. Most banks probably concluded that there would be future Ex-Im
issues (or a roll over of the initial issue) allocated on the basis of
their Euro-dollar borrowings in coming periods. If the Ex-Im issued
had been announced as a "once and for all" offering (and a "once and
for all" effort on the part of U.S. authorities to influence the rate of
Euro-dollar repayments) there is little reason to believe that the banks
would have substantially altered the rate of reduction in their overall
positions from what that rate would have been in the absence of the
Ex-Im issue.
FORD & LIBRARY GERALD
Mr. Robert Solomon
-5-
the Euro-dollar market and (2) the banks' attitudes (which need
not be invariant) about the possible benefits to be realized in
future periods from maintaining their reserve-free bases (other
than possible benefits associated with their share of subsequent
Ex-Im offerings). First, we will discuss the possible influence
of the Ex-Im offering.
The first Ex-Im allocation was equal to about 10 per cent
of the banks' Euro-dollar borrowings in the computation period ended
December 23, 1970. The banks found the first issue quite attractive
(it was oversubscribed by about 100 per cent) with a rate of return
of 6 per cent, plus the benefits of tax and loan credit; in effect,
they were able to finance the purchase of the issue in U.S. money
markets rather than in the Euro-dollar market by reducing liabilities
to foreign branches (substituting various domestic sources of funds)
in an amount roughly equal to the branches' acquisition of the Ex-Im
securities.
All other things being equal, how might the Ex-Im offering
have affected the banks' desired rate of reduction in "overall Euro-
dollar positions"? The current cost savings to be realized by
further reductions in Euro-dollar borrowings were unaffected by the
/
Ex-Im issue
However, the banks presumably had to make some estimate
of the future revenues that might be sacrificed on subsequent Ex-Im
issues (and/or a refunding of the first issue) by further reductions
The reference here is to be consolidated (domestic offices --
foreign branches) cost of source of funds.
GERALD FORD LIBRARY
Mr. Robert Solomon
-6-
in Euro-dollar borrowings. In making such an estimate the banks had
to consider: (a) Would there be a subsequent issue (and/or refund-
ing), and if so, in what amount? (b) In what manner would the bank's
share of the issue be tied to future changes in its Euro-dollar
borrowings / (c) What rate of return (net of financing costs) could
be expected on the issue? Beyond these considerations the banks
were also faced with the possibility that some other policy instrument
might be introduced that would only reward banks that kept up their
borrowings.
There is little basis for judgment about how the banks
might have evaluated the probable trade-off between current cost
savings realized and possible future revenues sacrificed by further
reductions in "overall positions". In the February 17 period the
cost differentials between Euro-dollars and domestic sources of
funds averaged roughly one per cent -- a bank could save about one
cent (at an annual rate) in gross interest costs on each dollar of
liabilities to foreign branches repaid and replaced by domestic
sources of funds. Under the assumption that a bank expected its
share of Ex-Im issues outstanding in the future to remain about 10 per cent
of its Euro-dollar borrowings (or its "overall position") the bank
would expect to sacrifice about 10 cents in ability to buy Ex-Im
securities for every dollar of Euro-dollar repayments. If it is
/ That is, the net liabilities to foreign branches plus assets
sold to foreign branches component of its "overall Euro-dollar position".
FORD is LIBRARY GERALD
Mr. Robert Solomon
-7-
assumed further that the bank expected to be able to finance future
Ex-Im holdings with funds obtained in the U.S. money market at a
/
cost about one per cent below the rate of return on new Ex-Im issues
then, under these assumptions, the bank would (a) save one cent (at
an annual rate) in gross interest costs on each dollar of Euro-dollar
borrowings repaid; (b) expect to sacrifice one-tenth of one cent
(annual rate) in net earnings on future Ex-Im holdings. Thus, under
these assumptions, roughly 10 per cent of the current excess costs
of retaining Euro-dollar liabilities would be offset by expected
future net returns- on Ex-Im holdings.
If the expectations assumed above even roughly approxi-
mate those actually held by the banks after the first Ex-Im issue
it seems unlikely that the change in expected cost and return
BERALD FORD LIBRART
calculations (as affected by the Ex-Im issue) would have been
sufficient to induce the sizable reduction in the rate of repayments
that occurred in the February 17 period. The assumptions above are
not, of course, completely arbitrary; but there is no way of discerning
/
how well they approximate the banks' actual expectations
1/ The gross margin on the first issue was about 1-1/4 per cent
(excluding tax and loan benefits) for a bank that financed the Ex-Im
purchase with a 60-89 day CD sale at the time of the Ex-Im issue;
the margin, on the same basis, was only slightly less on the second
Ex-Im issue.
2/ As calculated by the margin expected between future Ex-Im issue
rates and the future cost of financing the acquisition of Ex-Im issues
in domestic money markets. The assumption is made throughout that the
banks expect Euro-dollar rates to be above the cost of funds of com-
parable maturity in domestic markets.
The assumptions made imply "static" expectations on the part of
the banks -- that is, the expectation that allocation ratios and the
margin to be made on future Ex-Im issues would be roughly the same as
on the first Ex-Im issue.
Mr. Robert Solomon
-8-
It was stated earlier that factors other than the Ex-Im
issue could have been important in explaining the (apparently
temporary) reduced rate of decline in "overall Euro-dollar positions"
in the February 17 period. It does not appear, however, that interest
rate developments in the U.S. and in the Euro-dollar market during
the February 17 period were likely a major factor affecting the
slowdown in the repayment rate. There was a marked slowdown in the
rate of decline of the Federal funds rate in the February 17 period;
but there was an acceleration in the rate of decline in CD rates and
flows into time deposits at commercial banks continued at a very high
rate
The cost differential between call Euro-dollars and Federal
funds narrowed by about 40 basis points, on average, from the previous
computation period -- reflecting a decline of about 65 basis points
in the average call Euro-dollar rate and a decline of about 25 basis
points in the average Federal funds rate. However, the excess of one-
and three-month Euro-dollar rates over CD rates for comparable maturities
increased moderately. Unfortunately, there is no a priori basis for
judging how to weight the influence of rate developments among maturities
on the banks' behavior, or for distinguishing between the effects of
changes in the banks' demand and all other influences on the rate
differentials referred to above.
A special factor relevant to the computation periods ending
January 20 and February 17 was the Board's decision to eliminate
See Table 2.
FORD & LIBRARY GERALD
Mr. Robert Solomon
-9-
reserve-free bases equal to three per cent of deposits. In late
November 1970 the Board amended Regulation M to allow the banks then
using a three per cent of deposits base to establish historical reserve-
free bases (not to exceed three per cent of deposits) in the computation
period ended January 20, 1971 -- after which three per cent of deposits
bases would be eliminated and automatic downward adjustment would
apply to the historical bases established in that period. The Board
later extended the period for establishing historical bases (for the
banks not already using an historical base) to the computation period
ended February 17, 1971. (This was done to allow the banks to re-
evaluate their positions in light of the introduction of Ex-Im security
offerings.)
From the computation period ended September 2, 1970 through
the computation period ended December 23, 1970 the banks then using a
three per cent of deposits base reduced their average Euro-dollar
positions by about $370 million (about $90 million per computation
period on average) to a total of about $280 million. But in the
January 20 period these banks raised their average borrowings by
$110 million. There is little doubt that this reversal in the banks'
behavior reflected the Board's amendment to Regulation M discussed above.
Fourteen of these banks increased their borrowings by a total of
$170 million while 11 others reduced borrowings by $60 million.
FORD & LIBRARY GERALD
Mr. Robert Solomon
-10-
Thus, in the absence of this special factor, the banks' aggregate
Euro-dollar positions would certainly have declined by even more than the
$638 million show in Table 1 in the computation period ended January 20,
1970.
In the computation period ended February 17 the 15 banks
using previously established historical bases reduced their "overall
positions" by about $300 million while the other banks raised their
"overall positions" by less than $20 million. / The further increase
in borrowings by the banks not previously using an historical base
probably reflected their desire to share in future Ex-Im issues more
than their desire to establish historical bases above the level already
established in the computation period ended January 20. (The limited
amount of data presently available on an individual bank basis in the
current computation period indicates that the banks previously using
three per cent of deposits bases have reduced their borrowings in the
current period by at least as much as their borrowings rose in the
computation periods ended January 20 and February 17 combined.) On
balance it appears that the Board's decision to allow these banks to
establish historical bases in the January 20 and February 17 periods
had its major impact in the former period and that the influence of
1/ In this period 20 of the banks previously using a three per cent of
deposits base (eight of which had zero positions in the two previous
computation periods) raised their positions (including Ex-Im holdings)
by $118 million while 17 others reduced their positions by about $100
million.
GERALD FORD LIBRARY
Mr. Robert Solomon
-11-
this "special factor" on the rate of reduction in (aggregate) "overall
Euro-dollar positions" in the February 17 period was not substantial.
There seems little reason to believe that the slowdown in
repayments in the February 17 period reflected revised attitudes,
on the part of the banks previously using historical bases, toward
the value of retaining reserve-free bases. It is possible that these
banks' reserve-free bases could reach some "plateau" where further
reductions would be weighted more heavily than before against the
cost savings to be realized from reducing borrowings¹; but the fact
that the reduction in "overall positions" has apparently returned to
previous rates in the current (February 18 -- March 17) computation
period implies that no such "plateau" has yet been reached.
The following comments summarize the discussion to this point
and add a few general observations: (1) A logical case can be made
that the Ex-Im policy should not have been expected to substantially
affect the cost and return calculations relevant to the banks' decisions
regarding the rate of reduction in their "overall Euro-dollar positions";
but the strength or weakness of this case depends upon one's assumptions
about the banks' expectations with respect to future Ex-Im issues. (2)
The major impact of the Ex-Im policy on the rate of reduction in
positions in the February 17 period might have been through its so-
called "announcement effects" -- a signal that U.S. authorities were
Depending upon their expectations about the extent to which
reserve-free bases may be employed in the future.
FORD & LIBRARY GERALD
Mr. Robert Solomon
-12-
apparently prepared to take the steps necessary to prevent any further
substantial reflow of Euro-dollar funds; if the Ex-Im policy proved
insufficient then some other form of "carrot" or "stick" might be:
introduced. The impact of such "announcement effects" may have
diminished with the passage of time and the absence of any further
official action other than an Ex-Im issue half the size of the first
issue. (3) Interest rate developments in the U.S. and the Euro-dollar
market can probably not be given very much weight in explaining the
reduced rate of repayments in the February 17 period (or the return to
a high repayment rate in the current period for that matter). (4)
Certain "special factors" were operating in the January 20 and February 17
periods to affect the behavior of banks previously using three per cent
of deposits bases; but these factors (see pp. 9-10) were probably
rather limited in their impact on the aggregate rate of repayments in
the February 17 period. (5) These is probably no basis for attributing
the reduced rate of repayments in the February 17 period to revised
attitudes toward the future value of reserve-free bases.
On balance, perhaps the most weight should be given to the
"announcement effects" explanation of the banks' behavior in the
February 17 period -- if for no other reason, because the remaining
alternative explanations appear insufficient to explain developments
in that period.
FORD & GERALD LIBRARY
March 19, 1971
Table 1
"Euro-dollar Positions" of U.S. Banks as Measured by Computation
Period Daily Average Data and Weekly (Wednesday) Data
(millions of dollars)
Computation Period Data 1/
Wednesday Data 2/
Computation
Period Ended
Total
Change
Total
Change
1970 -- 9/2
11,854
10,671
9/30
11,408
-446
10,428
-243
10/28
10,706
-702
9,890
-538
11/25
10,056
-650
9,106
-784
12/23
9,555
-501
8,382
-724
1971 -- 1/20
8,917
-638
7,832
-550
2/17
8,630
-287
7,447
-385
3/17P/
7,755
-875
6,500
-947
1/ Daily average net liabilities to foreign branches plus assets sold to
foreign branches plus branch holdings of Ex-Im securities. Data exclude positions
of banks in the Federal Reserve Districts of Atlanta, St. Louis and Kansas City
(consisting of relatively small amounts); data for these Districts are not
reported on a regular basis.
2/ Average for the four Wednesdays within computation periods of gross
liabilities to foreign branches plus branch participation in head office
domestic loans plus branch holdings of Ex-Im securities. Among other
definitional differences in the two series the Wednesday data exclude liabilities
of head offices to branches in U.S. territories and possessions.
p/ Preliminary
BERALD FORD LIBRARY
FORD & LIBRARY 078839
March 19, 1971
Table 2
SELECTED EURO-DOLLAR AND U.S. MONEY MARKET RATES
(1)
(2)
(3)
(4)
(5)
(6)= =
Average in the
Call
(1)-(2)
3-mo.
60-89 day
(4) - (5)
Computation
Euro-$
Federal
Differ-
Euro-$
CD rate
Differ-
Period Ended
Deposit-
1/
27
/
Funds
ential
Deposit
(Adj.)
/
ential
1970 - 9/2
8.08
6.57
1.51
9.08
8.10
0.98
9/30
8.60
6.25
2.35
8.94
7.64
1.30
10/28
6.74
6.22
0.52
7.99
6.97
1.02
11/25
5.97
5.68
0.29
7.25
6.26
0.99
12/23
6.79
5.08
1.71
7.35
5.82
1.53
1971 - 1/20
5.58
4.26
1.32
6.34
5.36
0.98
2/17
4.92
4.01
0.91
5.66
4.48
1.18
3/17
4.43
3.58
0.85
5.15
3.90
1.25
Change from the
previous period
1970 - 9/30
+0.52
-0.32
+0.84
-0.14
-0.46
+0.32
10/28
-1.86
-0.03
-1.83
-0.95
-0.67
-0.28
11/25
-0.77
-0.54
-0.23
-0.74
-0.71
-0.03
12/23
+0.82
-0.60
+1.42
+0.10
-0.44
+0.54
1971 - 1/20
-1.21
-0.82
-0.39
-1.01
-0.46
-0.55
2/17
-0.66
-0.25
-0.41
-0.68
-0.88
+0.20
3/17
-0.49
-0.43
-0.06
-0.51
-0.58
+0.07
1/ A11 Euro-dollar rates are noon bid rates in the London market; adjusted for the 10 per cent marginal
reserve requirement through 9/30/70.
Effective rate.
3/
Offer rates (median, average of Wednesdays) on large denomination CD's by prime banks in New York City;
CD rates adjusted for the cost of required reserves.